UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2003
COMMISSION FILE NUMBER 1-14784
INCOME OPPORTUNITY REALTY INVESTORS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 75-2615944
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1755 WITTINGTON PLACE, SUITE 340
DALLAS, TEXAS 75234
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(214) 750-5800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
Common Stock, $.01 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes |X| No | |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes | | No |X|
The aggregate market value of the shares of voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing sales price of the Common Stock on the American Stock Exchange as of June 30, 2003 (the last business day of the Registrant's most recently completed second fiscal quarter) was $4,198,758 based upon a total of 298,844 shares held as of June 30, 2003 by persons believed to be non-affiliates of the Registrant. The basis of the calculation does not constitute a determination by the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended, such calculation, if made as of a date within sixty days of this filing would yield a different value. As of March 19, 2004, there were 1,438,945 shares of common stock outstanding.
Documents Incorporated by Reference:
NONE
INDEX TO
ANNUAL REPORT ON FORM 10-K
Page
PART I ----
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 7
Item 3. Legal Proceedings...................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders.................................... 14
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters......................................................... 15
Item 6. Selected Financial Data................................................................ 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 17
Item 7A. Quantitative and Qualitative Disclosures Regarding Market Risk......................... 23
Item 8. Financial Statements and Supplementary Data............................................ 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 60
Item 9A. Controls and Procedures ............................................................... 60
PART III
Item 10. Directors, Executive Officers and Advisor of the Registrant............................ 60
Item 11. Executive Compensation................................................................. 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................................................... 71
Item 13. Certain Relationships and Related Transactions......................................... 73
PART IV
Item 14. Principal Accountant Fees and Services ................................................ 76
Item 15. Exhibits, Consolidated Financial Statements, Schedules and Reports on Form 8-K ........ 77
Signature Page.................................................................................. 79
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PART I
ITEM 1. BUSINESS
Income Opportunity Realty Investors, Inc. ("IORI"), a Nevada corporation, is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 15, 1985. Prior to January 1, 2003, IORI elected to be treated as a Real Estate Investment Trust ("REIT") under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). Due to the completion of the tender offer by American Realty Investors, Inc. ("ARI"), an affiliate, on March 19, 2003, as discussed below, and the resulting concentration of ownership, IORI no longer met the requirement as of January 1, 2003 for tax treatment as a REIT. IORI cannot re-qualify for REIT tax status for at least five years.
At December 31, 2003, IORI's real estate consisted of 15 properties held for
investment. In addition, IORI owns an interest in one partnership, which owns
real property and a second partnership which holds a wraparound mortgage note
receivable. IORI's real estate portfolio is more fully discussed in ITEM 2.
"PROPERTIES."
Acquisition by Syntek West, Inc. - Change of Control
On June 2, 2003, Syntek West, Inc. ("SWI") purchased 106,802 shares and 674,971 shares of IORI Common Stock (a total of 781,773 shares, or approximately 55.2% of the outstanding shares) as a "block" from Basic Capital Management, Inc. ("BCM") at a price of $18.45 per share for a total price of $14,423,711. SWI is also a contractual advisor to IORI. As of March 19, 2003, Transcontinental Realty Investors, Inc. ("TCI") owned approximately 24.0% of IORI's outstanding shares of Common Stock.
Tender Offer - Conclusion of Olive Litigation
On October 23, 2001, IORI, TCI and ARI jointly announced a preliminary agreement with the plaintiff's legal counsel of the derivative action entitled Olive et al. v. National Income Realty Trust, et al. for complete settlement of all disputes in the lawsuit (the "Olive Litigation"). In February 2002, the court granted final approval of the proposed settlement (the "Olive Settlement"). Under the Olive Settlement, ARI agreed to either (i) acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for all of the outstanding shares of IORI and TCI not currently owned by ARI. On November 15, 2002, ARI commenced the tender offer for the IORI and TCI shares. The tender offer was completed on March 19, 2003. ARI paid $19.00 cash per IORI share and $17.50 cash per TCI share for the stock held by non-affiliated stockholders. Pursuant to the tender offers, ARI acquired 265,036 IORI shares and 1,213,226 TCI shares. The completion of the tender offers fulfilled the obligations under the Olive Settlement and the Olive Litigation, originally filed in February 1990,
was dismissed with prejudice. During 2003, three of the directors of IORI and TCI also served as directors of ARI.
Business Plan
IORI's business is investing in equity interests in real estate through direct equity investments and partnerships, and financing real estate and real estate related activities through investments in mortgage loans. IORI's real estate is located in the Southeast and Southwest regions of the continental United States. Information regarding IORI's real estate portfolio is set forth in ITEM 2. "PROPERTIES," and in Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." IORI has three operating segments, Apartments, Commercial Properties and land ownership. See Note 14 to the Financial Statements.
IORI's business is not seasonal. Management has determined to pursue a balanced investment strategy, seeking both current income and capital appreciation. With respect to new investments, management's plan of operation is to acquire higher class apartment and commercial properties in keeping with the current class of properties in IORI's real estate portfolio. In 2004, management intends to focus on income producing property acquisitions to maintain a balance between income producing and non-income producing properties. Management does not expect that IORI will seek to fund or acquire additional mortgage loans. IORI may, however, originate mortgage loans in conjunction with providing purchase money financing of a property sale. Management also intends to continue its strategy of maximizing each property's operating income by aggressive property management through closely monitoring expenses while at the same time making property renovations and/or improvements where appropriate. While renovation and/or improvement expenditures increase the amount of revenue required to cover operating expenses, management believes that such expenditures are necessary to maintain or enhance the value of IORI's properties.
The Board of Directors currently intends to continue its policy of prohibiting IORI from incurring aggregate secured and unsecured indebtedness in excess of 300% of IORI's net asset value (defined as the book value of all assets of IORI minus all of its liabilities); however, the Board may alter such policy at any time.
Management of the Company
Although the Board of Directors is directly responsible for managing the affairs of IORI and for setting the policies which guide it, the day-to-day operations of IORI are performed by Syntek West, Inc. ("SWI"), a contractual advisor under the supervision of the Board. SWI's duties include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment, acquisitions, and sales opportunities, as well as financing and refinancing sources. SWI also serves as a consultant in connection with IORI's business plan and investment decisions made by the Board.
All of the issued and outstanding common stock of SWI is owned by Gene E. Phillips. Mr. Phillips is Chairman, President, Chief Executive Officer, and Director, and he is involved in daily consultation with the officers of SWI and has significant influence over the conduct of SWI's business, including the rendering of advisory services and the making of investment decisions for itself and for IORI. SWI is more fully described in ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The Advisor."
Effective June 30, 2003 IORI terminated its Advisory Agreement with BCM. BCM had served as IORI's advisor from 1989 to June 30, 2003. On July 1, 2003 IORI entered into an Advisory Agreement with SWI, the beneficial owner and holder of approximately 55.2% of IORI's common stock. The new advisory agreement with SWI contains the same terms as the old one with BCM.
Since February 1, 1990, affiliates of BCM have provided property management
services to IORI. Currently Triad Realty Services, Ltd. ("Triad") provides such
property management services. Triad subcontracts with other entities for the
provision of property-level management services to IORI. The general partner of
Triad is BCM. The limited partner of Triad is Highland Realty Services, Inc.
("Highland"), a related party. Triad subcontracted the property-level management
and leasing of IORI's five office buildings and the commercial property owned by
a real estate partnership in which IORI and TCI are partners to Regis Realty,
Inc. ("Regis"), a related party, which is a company also owned by Highland,
until December 2002. Regis was entitled to receive property and construction
management fees and leasing commissions in accordance with the terms of its
property-level management agreement with Triad, until December 2002. Regis also
was entitled to receive real estate brokerage commissions in accordance with the
terms of a non-exclusive brokerage agreement. Since January 1, 2003, Regis
Realty I, LLC ("Regis I") has provided these services. Regis I is also owned by
Highland. See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE
REGISTRANT-The Advisor."
IORI has no employees. Employees of SWI render services to IORI.
Competition
The real estate business is highly competitive and IORI competes with numerous entities engaged in real estate activities (including certain entities described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions"), some of which have greater financial resources than those of IORI. Management believes that success against such competition is dependent upon the geographic location of the property, the performance of the property-level managers in areas such as marketing, collection and control of operating expenses, the amount of new construction in the area and the maintenance and appearance of the property. Additional competitive factors with respect to commercial properties are the ease of access to the property, the
adequacy of related facilities, such as parking, and sensitivity to market conditions in setting rent levels. With respect to apartments, competition is also based upon the design and mix of units and IORI's ability to provide a community atmosphere for the tenants. Management believes that beyond general economic circumstances and trends, the rate at which properties are renovated or the rate new properties are developed in the vicinity of each of IORI's properties also are competitive factors.
To the extent that IORI seeks to sell any of its properties, the sales prices for such properties may be affected by competition from other real estate entities and financial institutions also attempting to sell their properties located in the same areas as well as aggressive buyers attempting to penetrate or dominate a particular market.
As described above and in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Related Party Transactions," the officers and certain Directors of IORI also serve as officers or directors of certain other entities, such as BCM, Prime Income Asset Management, Inc. ("PIAMI"), ARI and TCI, some of which have business objectives similar to those of IORI. IORI's Directors, officers and advisor owe fiduciary duties to such other entities as well as to IORI under applicable law. In determining to which entity a particular investment opportunity will be allocated, the officers, Directors and contractual advisors consider the respective investment objectives of each entity and the appropriateness of a particular investment in light of each entity's existing real estate and mortgage notes receivable portfolios. To the extent that any particular investment opportunity is appropriate to more than one of the entities, the investment opportunity will be allocated to the entity which has these funds available for investment for the longest period of time, or, if appropriate, the investment may be shared among all or some of such entities.
In addition, as described in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain Business Relationships," IORI also competes with other entities which are affiliates of Syntek West, Inc. ("SWI"), which may have investment objectives similar to IORI's and that may compete with it in the acquisition, sale, leasing and financing of real estate. In resolving any potential conflicts of interest which may arise, SWI has informed management that it intends to continue to exercise its best judgment as to what is fair and reasonable under the circumstances in accordance with applicable law.
Certain Factors Associated with Real Estate and Related Investments
IORI is subject to all the risks incident to ownership and financing of real estate and interests therein, many of which relate to the general illiquidity of real estate investments. These risks include, but are not limited to, changes in general or local economic conditions, changes in interest rates and the availability of permanent mortgage financing which may render the acquisition, sale or refinancing of a property
difficult or unattractive and which may make debt service burdensome, changes in real estate and zoning laws, increases in real estate taxes, federal or local economic or rent controls, floods, earthquakes, hurricanes and other acts of God and other factors beyond the control of management or SWI. The illiquidity of real estate investments also may impair the ability of management to respond promptly to changing circumstances. Management believes that such risks are partially mitigated by the diversification by geographic region and property type of IORI's real estate portfolio. However, to the extent property acquisitions are concentrated in any particular geographic region or property type, the advantages of diversification may be mitigated.
ITEM 2. PROPERTIES
IORI's principal offices are located at 1755 Wittington Place, Suite 340, Dallas, Texas 75234 and are, in the opinion of management, suitable and adequate for IORI's present operations.
IORI's real estate portfolio at December 31, 2003, is set forth in Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA." The discussions set forth below under the headings "Real Estate" provide certain summary information concerning IORI's real estate portfolio.
IORI's real estate portfolio consists of 15 owned properties and an investment in a partnership which owns commercial property. Of the 15 properties, seven apartments were sold to partnerships controlled by Metra Capital, LLC ("Metra"). See NOTE 5. "NOTES AND INTEREST PAYABLE." Since that transaction was accounted for as a financing transaction, IORI continues to account for those properties as owned properties. IORI is a partner in a partnership in which it is a 40% general partner that holds a wraparound mortgage note. The discussion set forth below under the heading "Real Estate" provides certain summary information concerning IORI's real estate and further summary information with respect to its owned properties and its partnership investments.
IORI's real estate is geographically diverse. At December 31, 2003, IORI held equity investments in apartments and office buildings in the Southwest and Southeast regions of the continental United States, as shown more specifically in the table under "Real Estate," below. However, the majority of IORI's properties are located in Texas.
At December 31, 2003, 50% of IORI's assets consisted of investment in owned real properties on a leveraged basis, in the Southeast and Southwest regions of the continental United States and less than 1% consisted of investments in partnerships. The remaining 49% of IORI's assets were cash, cash equivalents and other assets. The percentage of IORI's assets invested in any one category is subject to change and no assurance can be given that the composition of IORI's assets in the future will approximate the percentages listed above. See ITEM 1. "BUSINESS--Business Plan."
Geographic Regions
IORI has divided the continental United States into the following geographic regions.
[U.S. MAP REPRESENTATION]
Real Estate
Types of Real Estate Investments. IORI's real estate consists of apartments and commercial properties (office buildings) with established income-producing capabilities. In selecting real estate for investment, the location, age and type of property; gross rents; lease terms; financial and business standing of tenants; operating expenses; fixed charges; land values and physical condition are considered. IORI
EDGAR ONLY
INSERT IN LIEU OF MAP ON
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Northeast region comprised of the states of Connecticut, Delaware, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island and Vermont, and the District of Columbia. IORI has no properties in this region.
Southeast region comprised of the states of Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee and Virginia. IORI has 1 commercial property in this region.
Southwest region comprised of the states of Arizona, Arkansas, Louisiana, New Mexico, Oklahoma and Texas. IORI has 8 apartments, 4 commercial properties, and 2 land properties in this region.
Midwest region comprised of the states of Illinois, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota, West Virginia and Wisconsin. IORI has no properties in this region.
Mountain region comprised of the states of Colorado, Idaho, Montana, Nevada, Utah and Wyoming. IORI has no properties in this region.
Pacific region comprised of the states of California, Oregon and Washington. IORI has no commercial properties in this region.
may acquire properties subject to, or assume, existing debt and may mortgage, pledge or otherwise obtain financing. The IORI Board may alter the types of and criteria for selecting new real estate investments and for obtaining financing. IORI has typically invested in developed real estate, although it also may invest in new construction or development either directly or in partnership with nonaffiliated parties or affiliates (subject to approval by the Board). To the extent that IORI invests in construction and development projects, it will be subject to business risks, such as cost overruns and construction delays, associated with such higher risk projects.
In the opinion of management, IORI's properties are adequately covered by insurance.
The following table sets forth the percentages, by property type and geographic region, of IORI's owned real estate at December 31, 2003.
Commercial
Region Apartments Properties
------ ---------- ----------
Southwest ............................................ 100% 80%
Southeast ............................................ -- 20%
--- ---
100% 100%
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The foregoing table is based solely on the number of apartment units and commercial square footage owned and does not reflect the value of IORI's investment in each region. IORI owns two parcels of unimproved land in the Southwest region. See Schedule III to the Consolidated Financial Statements included at ITEM 8. "FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA" for a detailed description of IORI's real estate.
During 2003, the activity in IORI's owned real estate portfolio was:
Owned properties at January 1, 2003...................................... 15
Properties purchased..................................................... 4
Properties sold.......................................................... (4)
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Owned properties at December 31, 2003 15
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Properties Held for Investment. Set forth below are IORI's owned properties at December 31, 2003, all of which were held for investment and the monthly rental rate for apartments and the average annual rental rate for office buildings and occupancy thereof at December 31, 2003, 2002 and 2001:
Rent Per
Square Foot Occupancy %
Units/ ------------------------ ------------------
Property Location Square Footage/Acres 2003 2002 2001 2003 2002 2001
----------------------- ------------------ ------------------------ ------ ------ ------ ---- ---- ----
Apartments
Brighton Court ........ Midland, TX 60 Units/90,672 Sq.Ft. $ .56 $ .55 $ .54 $ 94 99 93
Del Mar ............... Midland, TX 92 Units/105,348 Sq.Ft. .54 .53 .50 94 95 98
Enclave ............... Midland, TX 68 Units/89,734 Sq.Ft. .61 .59 .57 99 97 93
Meridian .............. Midland, TX 280 Units/264,000 Sq.Ft. .49 .46 .45 95 91 95
Signature Place ....... Midland, TX 57 Units/72,480 Sq.Ft. .59 .59 .57 93 93 86
Sinclair Place ........ Midland, TX 114 Units/91,529 Sq.Ft. .56 .54 .50 90 92 96
Treehouse ............. San Antonio, TX 106 Units/88,957 Sq.Ft. .88 .88 .84 95 89 95
Treehouse ............. Irving, TX 160 Units/153,072 Sq.Ft. .79 .80 .78 89 94 94
Office Buildings
2010 Valley View ...... Farmers Branch, TX 40,066 Sq. Ft. 18.26 18.56 17.98 72 92 87
Akard Plaza ........... Dallas, TX 42,258 Sq. Ft. 17.97 18.23 16.95 67 70 90
Chuck Yeager .......... Chantilly, VA 60,060 Sq. Ft. 14.23 13.71 13.02 100 100 100
Shopping Center
Parkway Centre ........ Dallas, TX 28,374 Sq. Ft. 17.49 15.98 15.08 64 73 86
Industrial Warehouse
Eagle Crest ........... Farmers Branch, TX 133,000 Sq. Ft. 2.36 3.60 3.52 100 98 98
Land
Frankel ............... Midland County, TX 1 Acre
Three Hickory Centre .. Farmers Branch, TX 9 Acres
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Partnership Properties. Set forth below is the commercial property owned by each of the two partnerships in which IORI is an equity investor and the average annual rental rate and occupancy thereof at December 31, 2003, 2002 and 2001:
Rent Per
Sq. Foot Occupancy %
--------------------- ------------------
Property Location Square Footage 2003 2002 2001 2003 2002 2001
----------------------- --------- -------------------- ----- ----- ----- ---- ---- ----
Office Building
Eton Square............ Tulsa, OK 222,654 Sq. Ft. 11.60 11.35 11.27 38 42 85
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IORI owns a 10% limited partner interest and TCI owns a 90% general partner interest in TCI Eton Square, L.P., which owns the Eton Square Building in Tulsa, Oklahoma.
IORI owned a 36.3% general partner interest and TCI owned a 63.7% limited partner interest in Tri-City Limited Partnership ("Tri-City") which in turn owned Chelsea Square Shopping Center. In February 2000, Tri-City obtained mortgage financing of $2.1 million secured by the previously unencumbered shopping center. Tri-City received net cash of $2.0 million after the funding of required escrows and the payment of various closing costs. The mortgage bore interest at a fixed rate of 10.24% per annum until February 2001 and a variable rate thereafter,
required monthly payments of principal and interest of $20,601 and matured in February 2005. IORI received a distribution of $739,000 of the net financing proceeds. In November 2002, Tri-City sold the Chelsea Square Shopping Center. Tri-City received net cash of $1.9 million after the payment of debt and closing costs. IORI received a distribution of $704,000 of the sale proceeds. Tri-City recognized a gain of $1.1 million of which $383,000 was IORI's equity share.
Mortgage Loans
Prior to 1991, a substantial portion of IORI's assets had been invested in mortgage notes secured by income-producing real estate. IORI's mortgage notes had included first, wraparound and junior mortgage loans. Prior to the third quarter of 2000, management had not sought to fund or acquire new mortgage loans, other than those which may have originated in conjunction with purchase money financing of a property sale provided by IORI. See ITEM 1. "BUSINESS."
Junior Mortgage Loans. Junior mortgage loans are loans secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on the loans ordinarily includes the real estate which secures the loan, other collateral and personal guarantees of the borrower.
The following discussion briefly describes the junior mortgage loans that IORI originated as well as events that affected previously funded junior mortgage loans during 2002 and 2003.
During October 2003, the Registrant acquired and disposed of a significant amount of assets otherwise than in the ordinary course of business. Both transactions described occurred as a part of a deferred tax free exchange for Encino Executive Plaza, Ltd., a California limited partnership ("Encino"). ART Encino, Inc. is the sole general partner of Encino Executive Plaza, Ltd. (the "Partnership") and American Realty Trust, Inc. ("ART") is a limited partner in such partnership. Both ART Encino, Inc. and ART are subsidiaries of ARI. The Partnership sold its principal asset consisting of certain real property and an office building located thereon in Encino, California for cash, the net proceeds of which were the subject of a forward-exchange utilized together with certain all inclusive wrap-around notes to acquire from IORI substituted property in a like-kind property exchange.
On October 14, 2003, IORI acquired from ART One Hickory Corporation, a wholly owned subsidiary of TCI, a 120,615 square foot office building in Farmers Branch, Texas known as One Hickory Centre located at 1800 Valley View Lane, Farmers Branch, Texas 75234 for a purchase price of $12,200,000. IORI executed an all inclusive wrap-around promissory note in the amount of $11,973,025 payable to ART One Hickory Corporation secured by a wraparound Deed of Trust covering the office building. The amount of the note is less than the purchase price as a result of adjustments for prorations for taxes, income and expenses of the building. The principal followed in determining the amount of such
consideration was what a willing buyer would pay and what a willing seller would take.
Also on October 14, 2003, IORI sold and conveyed the office building known as One Hickory Centre and 202 acres of unimproved real property known as the "Travelers Land" in Dallas County, Texas to Encino as the "substituted property." The sale price for One Hickory Centre was $12,200,000 and Encino Executive Plaza, Ltd. executed a wrap-around promissory note in the amount of $11,973,025 payable to the order of IORI secured by a Deed of Trust encumbering One Hickory Centre. As with the prior transaction, the difference between the purchase price and the promissory note represented adjustments for various prorations. The sale price for the Travelers Land was $25,000,000. Encino executed an all inclusive wrap-around promissory note payable to the order of IORI in the principal amount of $22,801,987 secured by a Deed of Trust covering the Travelers Land sold and delivered cash to IORI in the amount of $1,946,715, the remaining difference of which was as a result of prorations and various expenses paid by IORI in connection with the closing of the transaction. Subsequently, IORI made a loan to Encino in the amount of $1,567,232 payable upon demand or if no demand is made prior thereto on June 30, 2006 with a market rate of interest. Encino executed and delivered a promissory note payable to the order of IORI in the stated principal amount of $1,567,232.
On December 30, 2003, a Promissory Note in the amount of $6,363,360 given by Housing for Seniors of Humble ("Housing"), LLC to NLP Lakeshore Villas, LLC ("NLP") was assigned from American Realty Investors, Inc. ("ARI"), a related party, to IORI. Also, on December 30, 2003, a Promissory Note in the amount of $2,000,000 given by Housing to NLP was assigned from ARI to IORI. These assignments were payments on certain intercompany receivables due to IORI.
In January 2002, IORI purchased 100% of the outstanding common shares of Rosedale Corporation ("Rosedale"), a then wholly-owned subsidiary of ARI for $5.1 million cash. Rosedale owned the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI guaranteed that the asset would produce at least a 12% return annually of the purchase price for a period of three years from the purchase date; or if the asset failed to produce the 12% return, ARI will pay IORI any shortfall. Management classified this related party transaction as a note receivable from ARI. In the first quarter of 2002, after reviewing the property's fair value after costs to sell, even though ARI guaranteed the 12% return, IORI recognized a provision for loss on the note receivable of $767,000. In December 2002, the Rosedale Towers Office Building was sold for $7.2 million. ARI received $3.5 million of the proceeds after the payment of the first lien debt and various closing costs and IORI recognized an additional loss of $801,000 on its note. The $3.5 million received by ARI is included within other assets in the accompanying December 31, 2002 Consolidated Balance Sheet. In the second quarter of 2003, IORI received a $2.0 million paydown from ARI on the receivable. In the third quarter of 2003, the remaining $1.5 million was collected.
Partnership mortgage loans. IORI owns a 40% general partner interest and TCI owns a 60% general partner interest in Nakash Income Associates ("NIA"), which holds a wraparound mortgage note receivable secured by a building occupied by a Wal-Mart in Maulden, Missouri.
ITEM 3. LEGAL PROCEEDINGS
During May 2003, the class and derivative action originally filed in February 1990 entitled Olive et al. v. National Income Realty Trust et al. (the "Olive Litigation"), relating to the operation and management of five entities (including IORI) was dismissed with prejudice. The Olive Litigation had been the subject of a settlement on April 23, 1990, various amendments to and modifications and amendments to the modifications.
Although during the course and progress of the Olive Litigation, over some 13 years, several status conferences were held, there were no court orders or findings on any of the plaintiffs' allegations in its original complaint or any amendments. In October 2000, plaintiffs' counsel asserted that the stock option agreement to purchase TCI shares, which was entered into by IORI and ARI, an affiliate of IORI, in October 2000 with an investment fund, breached a provision of the Modification. As a result of this assertion, IORI assigned all of its rights to purchase the TCI shares under this stock option agreement to ARI.
On October 23, 2001, TCI, IORI and ARI jointly announced a preliminary agreement with the plaintiff's legal counsel for complete settlement of all disputes in the lawsuit. For further information, refer to ITEM 1. "LEGAL PROCEEDINGS" included in IORI's Second Quarter Report on Form 10-Q for the six months ended June 30, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF COMMON STOCK AND RELATED
SHAREHOLDER MATTERS
IORI's Common Stock is traded on the American Stock Exchange ("AMEX") under the symbol "IOT". The following table sets forth the high and low prices for IOT's Common Stock as reported on the AMEX.
QUARTER ENDED HIGH LOW ------------- ------ ------ March 31, 2004 (through March 22, 2004)..... $16.50 $15.25 March 31, 2003.............................. 18.81 17.00 June 30, 2003............................... 18.60 12.55 September 30, 2003.......................... 15.05 10.65 December 31, 2003........................... 15.75 12.00 March 31, 2002.............................. 18.30 17.20 June 30, 2002............................... 18.40 17.95 September 30, 2002.......................... 18.05 12.00 December 31, 2002........................... 20.25 12.90 |
As of March 1, 2004, the closing price of IORI's Common Stock on the AMEX was $16.50 per share.
As of March 1, 2004, IORI's Common Stock was held by 851 holders of record.
No dividends on the IORI Common Stock were declared or paid in 2003 or 2002. Although no express intention with respect to the future declaration or payment of dividends has been adopted by the Board of Directors, it is unlikely that any dividends on the IORI Common Stock will be declared or paid in 2004. See also ITEM 7. "MANAGEMENT DISCUSSION AND ANALYSIS - Liquidity and Capital Resources."
On December 5, 1989, the Board of Directors approved a share repurchase program, authorizing the repurchase of a total of 200,000 shares of IORI's Common Stock. In June 2000, the Board increased this authorization to 300,000 shares. In September 2001, the Board approved separately a private block purchase of 75,100 shares of IORI Common Stock for a total cost of $1.3 million. Through December 31, 2002, a total of 218,804 shares had been repurchased at a cost of $1.9 million. No shares were repurchased in 2003.
ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31,
--------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(dollars in thousands, except per share)
EARNINGS DATA
Rents ................................... $ 7,814 $ 7,739 $ 7,322 $ 10,737 $ 15,968
Property expense ........................ 4,560 3,819 3,701 5,605 6,768
---------- ---------- ---------- ---------- ----------
Operating income ..................... 3,254 3,920 3,621 5,132 9,200
Interest income ......................... 626 270 194 319 29
Gain on sale of real estate ............. -- -- 1,525
Income (loss) from equity partnerships .. (7) 862 (9) (61) 148
Recovery of A/R written off 1,569 -- -- -- --
Other expense ........................... 5,486 6,983 5,273 9,569 9,580
---------- ---------- ---------- ---------- ----------
Net income (loss) from continuing
operations ........................... (44) (1,931) (1,467) (4,179) 1,322
---------- ---------- ---------- ---------- ----------
Discontinued operations ................. 1,826 4,016 (1,995) 20,973 --
---------- ---------- ---------- ---------- ----------
Net income (loss) ....................... $ 1,782 $ 2,085 $ (3,462) $ 16,794 $ 1,322
========== ========== ========== ========== ==========
PER SHARE DATA
Net income (loss) ....................... $ 1.24 $ 1.45 $ (2.32) $ 11.03 $ .87
========== ========== ========== ========== ==========
Dividends per share ..................... $ -- $ -- $ -- $ .45 $ .60
Weighted average common shares
outstanding .......................... 1,438,945 1,438,945 1,493,675 1,522,510 1,527,386
|
As of Ended December 31,
------------------------------------------------
2003 2002 2001 2000 1999
-------- ------- ------- ------- -------
(dollars in thousands, except per share)
BALANCE SHEET DATA
Real estate held for investment, net..... $ 50,365 $74,750 $87,315 $86,277 $86,542
Notes and interest receivable, net....... 45,531 -- 505 1,500 --
Total assets............................. 101,144 90,185 91,833 96,519 91,185
Notes and interest payable............... 60,825 51,432 54,426 54,206 62,852
Stockholders' equity..................... 39,089 37,307 35,222 39,998 23,991
Book value per share..................... $ 27.17 $ 25.93 $ 24.48 $ 26.42 $ 15.69
|
IORI purchased four properties for a total of $21.0 million in 2003, nine
properties for a total of $46.5 million in 2000, and one property for $5.4
million in 1999. IORI sold four properties for a total of $55.7 million in 2003,
two properties for a total of $19.2 million in 2002, seven properties for a
total of $66.6 million in 2000, and one property for $3.2 million in 1999. See
ITEM 2. "PROPERTIES - Real Estate" and ITEM 8. "FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
IORI invests in equity interests in real estate through acquisitions, leases, partnerships and in mortgage loans. IORI is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 10, 1985.
Critical Accounting Policies
Critical accounting policies are those that are both important to the presentation of IORI's financial condition and results of operations and require management's most difficult, complex or subjective judgments. IORI's critical accounting policies relate to the evaluation of impairment of long-lived assets and the evaluation of the collectibility of accounts and notes receivable.
If events or changes in circumstances indicate that the carrying value of a rental property to be held and used or land held for development may be impaired, management performs a recoverability analysis based on estimated undiscounted cash flows to be generated from the property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. If management decides to sell rental properties or land held for development, management evaluates the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell and an impairment loss is recognized within income from continuing operations. IORI's estimates of cash flow and fair values of the properties are based on current market conditions and considers matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. IORI's estimates are subject to revision as market conditions and IORI's assessments of them change.
IORI's allowance for doubtful accounts receivable and notes receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past due accounts. Management considers such information as the nature and age of the receivable, the payment history of the tenant or other debtor, the financial condition of the tenant or other debtor and IORI's assessment of its ability to meet its lease or interest obligations. IORI's estimate of the required allowance, which is reviewed on a quarterly basis, is subject to revision as these factors change and is sensitive to the effects of economic and market conditions.
Obligations and Commitments
IORI has contractual obligations and commitments primarily with regards to the payment of mortgages.
The following table aggregates IORI's expected contractual obligations and commitments subsequent to December 31, 2003. (Dollars in thousands.)
PAYMENTS DUE BY PERIOD
(in thousands)
2004 2005 2006 2007 2008 Thereafter Total
------ ------ ------- ------ ------ ---------- -------
Variable interest rate notes
Instrument's maturities .... $6,272 $ -- $ 8,553 $ -- $ -- $ -- $14,825
Instrument's amortization .. 556 513 540 -- -- -- 1,609
Interest ................ 880 814 722 -- -- -- 2,416
Fixed interest rate notes
Instrument's maturities .... -- -- 1,228 -- 2,078 35,910 39,216
Instrument's amortization .. 566 606 565 510 523 2,006 4,776
Interest ................ 2,398 1,970 1,936 1,903 1,835 5,798 15,840
Principal payments ............ 7,394 1,119 10,886 510 2,601 37,916 60,426
|
Liquidity and Capital Resources
Cash and cash equivalents totaled $58,000, $10,000 and $66,000 at December 31, 2003, 2002 and 2001. IORI's principal sources of cash have been and will continue to be property operations, proceeds from property sales and refinancings and partnership distributions. Management anticipates that IORI will generate excess cash from operations in 2004 due to increased rental rates and occupancy at its properties, however, if such excess does not prove to be sufficient to satisfy all IORI's obligations as they mature, when necessary, management also may selectively sell income producing real estate, refinance real estate and incur additional borrowings secured by real estate to meet cash requirements.
Net cash provided (used) by operating activities was $92,000 in 2003, ($2.5) million in 2002, and ($2.0) million in 2001. The primary factors affecting cash flow from operating activities are discussed in the following paragraphs.
Cash flow from property operations (rents collected less payments for property operating expenses) was $4.8 million in 2003, $3.4 million in 2002, and $6.0 million in 2001. In 2003, the increase of $1.4 million was primarily due to a decrease in property operating expenses. Of the decrease in 2002 from 2001, $1.7 million was due to the sale of two
office buildings in 2002 and $900,000 was due to decreased occupancies at IORI's commercial properties.
Interest collected was $262,000 in 2003, $291,000 in 2002, and $148,000 in 2001. The decrease in 2003 was due to the reduction of two notes from 2002, offset by funding of a new note in 2003. The increase in 2002 from 2001 was due to the funding of two notes in 2002.
Interest paid on notes payable was $3.7 million in 2003, $4.3 million in 2002, and $5.5 million in 2001. Of the decrease in 2003 from 2002, $300,000 was due to the sale of three commercial properties and one land property in 2003 and the sale of two commercial properties in 2002, and $300,000 was the effects of Metra refinancing in 2002 and the payments to Metra for its return on capital. Of the decrease in 2002 from 2001, $600,000 was due to the sale of two commercial properties, $600,000 was due to the refinancing of Travelers land, $200,000 was due to decreased variable rates and principal reductions and a $200,000 increase was due to the refinancing of apartments.
Advisory and net income fee paid to affiliate was $451,000 in 2003, $868,000 in
2002, and $1.1 million in 2001. The decrease in 2003 from 2002 was due to a
lower advisory fee charged by a new advisor (SWI) and a lower net income fee
incurred. The decrease in 2002 from 2001 was due to a decrease in gross assets.
See NOTE 8. "ADVISORY AGREEMENT."
General and administrative expenses paid was $785,000 in 2003, $1.0 million in 2002, and $1.6 million in 2001. The decrease in 2003 from 2002 was primarily due to a decrease in director insurance expense. The decrease in 2002 from 2001 was due to decreases in franchise taxes paid.
IORI made improvements to its properties totaling $0 in 2003, $365,000 in 2002, and $3.5 million in 2001.
IORI received cash of $1.5 million in 2003, $500,000 in 2002, and $1.0 million from mortgage receivable principal payments, and net cash of $547,000 in 2003, $22.9 million in 2002, and $14.1 million from refinancings in 2001. In 2003, $603 thousand was expended in principal payments on mortgage debt, $26.3 million was expended in 2002, and $14.8 million was expended in 2001.
Liquidity and Capital Resources
Scheduled principal payments on notes payable of $7.4 million are due in 2004. For those mortgages that come due in 2004, it is management's intent to either seek an extension of the due dates by one or more years, or refinance the debt on a long-term basis, or pay off the debt at maturity, or selectively sell income producing real estate. Management believes it will continue to be successful in obtaining loan extensions and/or refinancings.
Management expects that funds from existing cash resources, selective sales of income producing properties, refinancing of real estate, and additional borrowings against real estate will be sufficient to meet IORI's cash requirements associated with its current and anticipated level of operations, maturing debt obligations and existing commitments. To the extent that IORI's liquidity permits or financing sources are available, management intends to make new real estate investments.
IORI owned a 36.3% general partner interest in the Tri-City partnership. IORI
received a distribution of $25,000 in 2002, $18,000 in 2001, and $25,000 in 2000
from Tri-City's operating cash flow. In 2002, IORI received $752,000 as a
distribution from the sales proceeds. IORI owns a 40% general partner interest
in the NIA partnership. In 2002 and 2001, IORI received no distributions from
NIA and made a $24,000 contribution in 2001 to the partnership. IORI owns a 10%
limited partnership interest in the TCI Eton Square partnership. IORI received
no distributions and made no contributions to the partnership in 2003 or 2002.
See NOTE 4. "INVESTMENT IN EQUITY METHOD PARTNERSHIPS."
IORI paid no dividends in 2003 and 2002. In December 2000, the Board of Directors determined not to pay a fourth quarter dividend to holders of IORI's Common Stock. The non-payment decision was based on the Board determining that IORI needed to retain cash for acquisitions that were anticipated in 2001 and that IORI had no REIT taxable income that required a distribution. It is unlikely that IORI will pay any quarterly dividends for 2004.
In 2001, IORI repurchased 75,100 shares of Common Stock in a private block purchase for a total of $1.3 million.
Management reviews the carrying values of IORI's properties at least annually and whenever events or a change in circumstances indicate that impairment may exist. Impairment is considered to exist if the future cash flow from a property (undiscounted and without interest) is less than the carrying amount of the property. If impairment is found to exist, a provision for loss is recorded by a charge against earnings. The property review generally includes selective property inspections, discussions with the manager of the property and visits to selected properties in the area and a review of (1) the property's current rents compared to market rents, (2) the property's expenses, (3) the property's maintenance requirements and (4) the property's cash flows.
Results of Operations
IORI reported net income of $1.8 million in 2003, a net income of $2.1 million in 2002 and net loss of $3.5 million in 2001. Fluctuations in these and the other components of revenue and expense are discussed in the following paragraphs.
Rents were $7.8 million in 2003, $7.7 million in 2002 and $7.3 million in 2001. Rents in 2004 are expected to decrease if IORI selectively sells properties.
Property operations expense was $4.6 million in 2003, $3.8 million in 2002, and $3.7 million in 2001. The increase in 2003 from 2002 was due to an overall increase in various operating expenses including property taxes. Of the increase in 2002 from 2001, $100,000 was due to an increase in property taxes for IORI's land and $100,000 was due to increased utility and insurance expenses. Property operations expense is expected to decrease in 2004 as IORI selectively sells properties.
Interest income was $626,000 in 2003, $270,000 in 2002, and $194,000 in 2001. The increase in 2003 from 2002 was due to interest income earned from the payment of the notes receivable on Rosedale Towers. The increase in 2002 from 2001 was due to an increase in short term notes receivable which were paid off by the end of 2002.
Interest expense was $2.1 million in 2003, $2.3 million in 2002, and $2.1 million in 2001. The decrease in 2003 from 2002 was due to sale of Travelers Land to Encino and two commercial properties. Of the increase in 2002 from 2001, $300,000 was due to the refinancing of apartments. Interest expense in 2004 is expected to remain constant or decrease as IORI selectively sells properties.
Depreciation expense was $1.2 million in 2003, $1.2 million in 2002, and $1.6 million in 2001. The decrease in 2003 from 2002 was due to sale of two commercial properties and fully depreciated tenant improvements. The decrease in 2002 from 2001 was due to fully depreciated tenant improvements.
Depreciation expense in 2004 is expected to approximate 2003.
Advisory fee to affiliate was $425,000 in 2003, $714,000 in 2002, and $817,000
in 2001. The change was due to changes in gross assets, the basis of the fee.
See NOTE 8. "ADVISORY AGREEMENT."
IORI paid a net income fee of $130,000 in 2003 as compared to $169,000 in 2002. IORI paid no net income fee in 2001. The net income fee is based on 7.5% of IORI's net income.
General and administrative expense was $779,000 in 2003, $1.0 million in 2002, and $739,000 in 2001. The decrease in 2003 resulted from reduced director and officers insurance.
Equity losses in partnership were $7,000 in 2003, equity gains were $862,000 in 2002, and equity losses were $9,000 in 2001. The Tri-City partnership was dissolved in 2002, which resulted in equity gain in that year.
IORI realized gains on the sale of real estate of $3.8 million in 2003 and $7.1 million in 2002. In 2003, the gains on sale of real estate
represent the gain on the sale of Mowry and La Mesa, commercial properties. In 2002, the gains represent the gain on the sale of Daley Corporate Center.
IORI realized a loss on discontinued operations of $1.9 million, $3.1 million, and $1.9 million in 2003, 2002 and 2001. The loss relates to operating losses on two commercial properties that IORI sold during 2003. The following table summarizes revenue and expense information for the properties sold.
2003 2002 2001
------- ------- -------
Revenue
Rental Revenue ................................... $ 1,991 $ 2,660 $ 5,679
Property operations .............................. 1,858 2,511 2,890
------- ------- -------
133 149 2,789
Interest Income .................................. 462 -- --
Expenses
Interest ......................................... 2,236 2,635 3,925
Depreciation ..................................... 357 650 859
------- ------- -------
2,593 3,285 4,784
Net loss from discontinued operations ............... (1,998) (3,136) (1,995)
Gain on sale of real estate ...................... 3,824 6,769 --
Equity in gain on sale of real estate by equity
investees ..................................... -- 383 --
------- ------- -------
Net income (loss) from discontinued operations ...... $ 1,826 $ 4,016 $(1,995)
======= ======= =======
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Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, IORI may be potentially liable for removal or remediation costs, as well as certain other potential costs, relating to hazardous or toxic substances (including governmental fines and injuries to persons and property) where property-level managers have arranged for the removal, disposal or treatment of hazardous or toxic substances. In addition, certain environmental laws impose liability for release of asbestos-containing materials into the air, and third parties may seek recovery for personal injury associated with such materials.
Management is not aware of any environmental liability relating to the above matters that would have a material adverse effect on IORI's business, assets or results of operations.
Inflation
The effects of inflation on IORI's operations are not quantifiable. Revenues from property operations tend to fluctuate proportionately with inflationary increases and decreases in housing costs. Fluctuations in the rate of inflation also affect the sales values of properties and the ultimate gain to be realized from property sales. To the extent that inflation affects interest rates, earnings from short-term investments
and the cost of new financings as well as the cost of variable interest rate debt will be affected.
Taxes
For the years 2002 and 2001, IORI elected and in the opinion of management qualified to be taxed as a REIT as defined under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. To continue to qualify for federal taxation as a REIT, IORI was required to hold at least 75% of the value of its total assets in real estate assets, government securities, cash and cash equivalents at the close of each quarter of each taxable year. As a REIT, IORI was also required to distribute at least 90% (95% in 2000) of its REIT taxable income plus 90% (95% in 2000) of its net income from foreclosure property on an annual basis to stockholders.
Due to the completion of the tender offer by ARI on March 19, 2003, and the resulting concentration of ownership, IORI no longer met the requirement for tax treatment as a REIT as of January 1, 2003. IORI cannot re-qualify for tax treatment as a REIT for at least five years.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
IORI's future operations, cash flow and fair values of financial instruments are partially dependent upon the then existing market interest rates and market equity prices. Market risk is the changes in the market rates and prices and the affect of the changes on future operations. Market risk is managed by matching the property's anticipated net operating income to an appropriate financing.
IORI is exposed to interest rate risk associated with variable rate notes payable and maturing debt that has to be refinanced. IORI does not hold financial instruments for trading or other speculative purposes, but rather issues these financial instruments to finance its portfolio of real estate assets. IORI's interest rate sensitivity position is managed by IORI's finance department. Interest rate sensitivity is the relationship between changes in market interest rates and the fair value of market rate sensitive assets and liabilities. IORI's earnings are affected as changes in short-term interest rates impact its cost of variable rate debt and maturing fixed rate debt. A large portion of IORI's market risk is exposure to short-term interest rates from variable rate borrowings. The impact on IORI's financial statements of refinancing fixed debt that matured during 2003 was not material. If market interest rates for variable rate debt average 100 basis points more in 2004 than they did during 2003, IORI's interest expense would increase and income would decrease by $164,000. This amount is determined by considering the impact of hypothetical interest rates on IORI's borrowing cost. This analysis did not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no change in IORI's financial structure.
The following table contains only those exposures that existed at December 31, 2003. Anticipation of exposures or risk on positions that could possibly arise was not considered. IORI's ultimate interest rate risk and its affect on operations will depend on future capital market exposures, which cannot be anticipated with a probable assurance level. (Dollars in thousands.)
Liabilities
Variable interest rate-fair value $14,576 |
2004 2005 2006 2007 2008 Thereafter Total
------ ---- ------ ---- ---- ---------- -------
Instrument's maturities ..... $6,272 $ -- $8,553 $-- $-- $-- $14,825
Instrument's amortization ... 556 513 540 -- -- -- 1,609
Interest ................. 880 814 722 -- -- -- 2,416
Average rate ............. 8.9% 9.1% 9.2% -- -- --
Fixed interest rate-fair value $48,457
|
2004 2005 2006 2007 2008 Thereafter Total
----- ----- ----- ----- ----- ---------- ------
Instrument's maturities ..... -- -- 1,228 -- 2,078 35,910 39,216
Instrument's amortization ... 566 606 565 510 523 2,006 4,776
Interest ................. 2,398 1,970 1,936 1,903 1,835 5,798 15,840
Average rate ............. 6.7% 7.1% 7.2% 7.2% 7.2% 7.1%
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Financial Statements
Report of Independent Certified Public Accountants....................... 26
Consolidated Balance Sheets--December 31, 2003 and 2002.................. 28
Consolidated Statements of Operations--Years Ended December 31,
2003, 2002 and 2001................................................... 29
Consolidated Statements of Stockholders' Equity--Years Ended
December 31, 2003, 2002 and 2001...................................... 31
Consolidated Statements of Cash Flows--Years Ended December 31,
2003, 2002 and 2001................................................... 32
Notes to Consolidated Financial Statements............................... 34
Financial Statement Schedules
Schedule III--Real Estate and Accumulated Depreciation................... 57
Schedule IV--Mortgage Loans on Real Estate............................... 59
|
All other schedules are omitted because they are not required, are not applicable or the information required is included in the Financial Statements or the notes thereto.
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors of
Income Opportunity Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Income Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 2003, and the related consolidated statements of operations, stockholders' equity and cash flows for year ended December 31, 2003. We have also audited the schedules listed in the accompanying index. These financial statements and the schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Income Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 2003 and the consolidated results of their operations and their cash flows for year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedules referred to above presents fairly, in all material respects, the information set forth therein.
Farmer, Fuqua, & Huff, P.C.
Plano, Texas
March 12, 2004
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors of
Income Opportunity Realty Investors, Inc.
We have audited the accompanying consolidated balance sheets of Income Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. We have also audited the schedules listed in the accompanying index. These financial statements and the schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe our audits provide a reasonable basis for our opinion.
As described in Note 17, Income Opportunity Realty Investors, Inc.'s management has indicated its intent to both sell income producing properties and refinance or extend debt secured by real estate, to meet its liquidity needs.
As discussed in Note 1, IORI adopted the provisions of SFAS 144, Accounting for Impairment of Long Lived Assets, in 2001.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Income Opportunity Realty Investors, Inc. and Subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the schedules referred to above presents fairly, in all material respects, the information set forth therein.
BDO SEIDMAN, LLP
Dallas, Texas
March 21, 2003
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------
2003 2002
-------- --------
(dollars in thousands,
except per share)
Assets
Real estate held for investment ...................... $ 56,367 $ 82,252
Less - accumulated depreciation ...................... (6,002) (7,502)
-------- --------
50,365 74,750
Notes and interest receivable ........................ 45,531 --
Investment in real estate partnerships ............... 607 609
Cash and cash equivalents ............................ 58 10
Receivables from affiliates .......................... 457 10,497
Other assets ......................................... 4,126 4,319
-------- --------
$101,144 $ 90,185
======== ========
Liabilities and Stockholders' Equity
Liabilities
Notes and interest payable ........................... $ 60,825 $ 51,432
Other liabilities .................................... 1,230 1,446
-------- --------
62,055 52,878
Commitments and contingencies
Stockholders' equity
Common Stock, $.01 par value; authorized
10,000,000 shares; issued and outstanding
1,438,945 shares in 2003 and 2002 ................. 14 14
Paid-in capital ...................................... 62,774 62,774
Accumulated deficit .................................. (23,699) (25,481)
-------- --------
39,089 37,307
-------- --------
$101,144 $ 90,185
======== ========
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
--------------------------------
2003 2002 2001
------- ------- -------
(dollars in thousands, except
per share)
Property revenue
Rents .................................... $ 7,814 $ 7,739 $ 7,322
Property expense
Property operations ...................... 4,560 3,819 3,701
------- ------- -------
Operating income ............................ 3,254 3,920 3,621
Other income
Interest ................................. 626 270 194
Equity in income (loss) of equity
partnerships .......................... (7) 862 (9)
Recovery of loss provision on
receivable from related party ......... 1,569 -- --
------- ------- -------
2,188 1,132 185
Other expense
Interest ................................. 2,105 2,279 2,149
Depreciation ............................. 1,199 1,216 1,568
Advisory fee to affiliate ................ 425 714 817
Net income fee to affiliate .............. 130 169 --
Provision for loss on receivable
from related party .................... -- 1,568 --
Provision for Asset Impairment ........... 848 -- --
General and administrative ............... 779 1,037 739
------- ------- -------
5,486 6,983 5,273
Net income (loss) from continuing
operations ............................... (44) (1,931) (1,467)
------- ------- -------
Discontinued operations:
Income (loss) from operations ............ (1,998) (3,136) (1,995)
Gain on sale of real estate by
equity investees ...................... -- 383 --
Gain on sale of operations ............... 3,824 6,769 --
------- ------- -------
Net income (loss) from discontinued
operations ............................... 1,826 4,016 (1,995)
------- ------- -------
Net income (loss) ........................... $ 1,782 $ 2,085 $(3,462)
======= ======= =======
|
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (cont.)
Earnings per share
Net income (loss) from continuing
operations....................... $ (0.03) $ (1.34) $ (0.98)
Discontinued operations............. 1.27 2.79 (1.34)
---------- ---------- ----------
Net income (loss)................... $ 1.24 $ 1.45 $ (2.32)
========== ========== ==========
Weighted average shares of Common
Stock used in computing
earnings per share.................. 1,438,945 1,438,945 1,493,675
========== ========== ==========
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
---------- ------ ------- ----------- -------------
(dollars in thousands, except shares)
BALANCE, JANUARY 1, 2001............... 1,514,045 15 64,087 (24,104) 39,998
Repurchase of Common Stock............. (75,100) (1) (1,313) -- (1,314)
Net (loss)............................. -- -- -- (3,462) (3,462)
--------- --- ------- -------- -------
BALANCE, DECEMBER 31, 2001............. 1,438,945 14 62,774 (27,566) 35,222
Net income............................. -- -- -- 2,085 2,085
--------- --- ------- -------- -------
BALANCE, DECEMBER 31, 2002............. 1,438,945 14 62,774 (25,481) 37,307
Net income -- -- -- 1,782 1,782
--------- --- ------- -------- -------
BALANCE, DECEMBER 31, 2003 1,438,945 $14 $62,774 $(23,699) $39,089
========= === ======= ======== =======
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
--------------------------------
2003 2002 2001
------- -------- --------
(dollars in thousands)
Cash Flows from Operating Activities
Rents collected ................................................... $10,671 $ 10,554 $ 12,966
Payments for property operations .................................. (5,903) (7,131) (6,981)
Interest collected ................................................ 262 291 148
Interest paid ..................................................... (3,702) (4,339) (5,528)
Advisory and net income fee paid to affiliate ..................... (451) (868) (1,054)
General and administrative expenses paid .......................... (785) (1,029) (1,618)
Distributions from equity partnerships' operating cash flow ....... -- 25 18
Other ............................................................. -- -- 20
------- -------- --------
Net cash provided by (used in) operating activities ............ 92 (2,497) (2,029)
Cash Flows from Investing Activities
Funding of equity partnerships .................................... -- -- (28)
Real estate improvements .......................................... -- (365) (3,466)
Deposits on pending purchases and financings ...................... -- -- (25)
Proceeds from sale of real estate ................................. 9,582 19,230 --
Distributions from equity partnership's investing cash flow ....... -- 752 --
Funding of note receivable (including $5,109 in 2002 to
related party) ................................................. (1,567) (7,109) --
Collection of note receivable ..................................... -- 500 1,000
Payments from (to) advisor and affiliates ......................... (7,955) (6,244) 4,635
------- -------- --------
Net cash provided by investing activities ...................... 60 6,764 2,116
Cash Flows from Financing Activities
Proceeds from notes payable ....................................... 917 23,152 14,900
Payments on notes payable ......................................... (603) (26,308) (14,783)
Deferred financing costs .......................................... (418) (1,167) (911)
Repurchase of Common Stock ........................................ -- -- (1,314)
------- -------- --------
Net cash used in financing activities .......................... (104) (4,323) (2,108)
------- -------- --------
Net increase (decrease) in cash and cash equivalents ................. 48 (56) (2,021)
Cash and cash equivalents, beginning of year ......................... 10 66 2,087
------- -------- --------
Cash and cash equivalents, end of year ............................... $ 58 $ 10 $ 66
======= ======== ========
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For the Years Ended December 31,
--------------------------------
2002 2001 2000
------- ------- -------
(dollars in thousands)
Reconciliation of net income (loss) to net cash used in operating activities
Net income (loss) ........................................................ $ 1,782 $ 2,085 $(3,462)
Adjustments to reconcile net income (loss) to net cash used in
operating activities Depreciation and amortization .................... 2,165 1,867 2,930
Gain on sale of real estate ........................................... (3,824) (7,152) --
Impairment of asset ................................................... 848
Equity in (income) loss of partnerships ............................... 2 (862) 9
Distributions from equity partnerships' operating cash flow ........... -- 25 18
Provision for loss .................................................... -- 1,568 --
Decrease in interest receivable ....................................... (826) 5 --
(Increase) decrease in other assets ................................... 1 774 (1,554)
Decrease in interest payable .......................................... 29 (9) (103)
Increase (decrease) in other liabilities .............................. (85) (798) 133
------- ------- -------
Net cash provided by operating activities .......................... $ 92 $(2,497) $(2,029)
======= ======= =======
Schedule of noncash investing and financing activities
Notes payable from purchase of real estate .................................. $18,687 $ -- $ --
Notes payable assumed by buyer on sale of real estate ....................... 9,637 -- --
Notes receivable collected by affiliates .................................... 8,760 5,541 --
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements of Income Opportunity Realty Investors, Inc. and consolidated entities were prepared in conformity with accounting principles generally accepted in the United States of America, the most significant of which are described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES." The Notes to Consolidated Financial Statements are an integral part of these Consolidated Financial Statements. The data presented in the Notes to Consolidated Financial Statements are as of December 31 of each year and for the year then ended, unless otherwise indicated. Dollar amounts in tables are in thousands, except per share amounts.
Certain balances for 2002 and 2001 have been reclassified to conform to the 2003 presentation.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and business. Income Opportunity Realty Investors, Inc. ("IORI") is the successor to a California business trust organized on December 14, 1984, which commenced operations on April 10, 1985. IORI invests in real estate through direct ownership, leases and partnerships and it also may invest in mortgage loans on real estate.
In October 2001, IORI announced a preliminary agreement for the acquisition of
IORI by American Realty Investors, Inc. ("ARI"), a related party. See NOTE 17.
"COMMITMENTS AND CONTINGENCIES AND LIQUIDITY."
Basis of consolidation. The Consolidated Financial Statements include the accounts of IORI and controlled subsidiaries and partnerships. All significant intercompany transactions and balances have been eliminated.
Accounting estimates. In the preparation of the Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, it is necessary for management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses for the year then ended. Actual results could differ from those estimates.
Recent accounting pronouncements. In April 2002, the FASB issued Statement 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Correction" ("SFAS No. 145"). Statement 4, "Reporting Gains and Losses from Extinguishment of Debt" ("SFAS No. 4"), required that gains and losses from the extinguishment of debt that were included in the determination of net income be aggregated and, if material, classified as an extraordinary items. The provisions of
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS No. 145 related to the rescission of SFAS No. 4 will require IORI to reclassify prior period items that do not meet the extraordinary classification. The provisions of SFAS No. 145 that relates to the rescission of SFAS No. 4 become effective in fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 is not expected to have a material impact on the consolidated financial position or results of operations of IORI.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses accounting for restructuring and similar costs. SFAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force ("EITF") Issue No. 94-3. IORI will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. SFAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company's commitment to an exit plan. SFAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, SFAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, Interim Financial Reporting, to require disclosure about those effects in interim financial information. Management currently believes that the adoption of SFAS No. 148 will not have a material impact on the financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which disclosures are effective for financial statements issued after December 15, 2002. While IORI has various guarantees included in contracts in the normal course of business, these guarantees do not represent significant commitments or contingent liabilities of the indebtedness of entities outside of the consolidated company.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46") which requires the consolidation of variable interest entities, as defined. FIN 46 is applicable to financial statements to be issued by IORI after 2002, however, disclosures are required currently if IORI expects to consolidate any variable interest entities. IORI does not currently believe that any entities will be consolidated as a result of FIN 46.
Real estate held for investment and depreciation. Real estate held for
investment is carried at cost. Statement of Financial Accounting Standards No.
144 ("SFAS No. 144") requires that a property be considered impaired, if the sum
of the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the property. If impairment exists, an
impairment loss is recognized by a charge against earnings equal to the amount
by which the carrying amount of the property exceeds the fair value of the
property. If impairment of a property is recognized, the carrying amount of the
property is reduced by the amount of the impairment and a new cost for the
property is established. Such new cost is depreciated over the property's
remaining useful life. Depreciation is provided by the straight-line method over
estimated useful lives, which range from 2 to 40 years.
Revenue recognition on the sale of real estate. Sales of real estate are
recognized when and to the extent permitted by Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate" ("SFAS No. 66"). Until
the requirements of SFAS No. 66 for full profit recognition have been met,
transactions are accounted for using either the deposit, the installment sale,
the cost recovery or the financing method, whichever is appropriate. See NOTE 2.
"REAL ESTATE."
Investment in noncontrolled partnerships. The equity method is used to account for investments in partnerships which IORI does not control. Under the equity method, an initial investment, recorded at cost, is increased by a proportionate share of the partnership's operating income and any additional advances and decreased by a proportionate share of the partnership's operating losses and distributions received.
Operating segments. Management has determined reportable operating segments to be those that are used for internal reporting purposes which disaggregates operations by type of real estate.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair value of financial instruments. The following assumptions were used in estimating the fair value of notes receivable and payable. For notes receivable the fair value was estimated by discounting future cash flows using current interest rates for similar loans. For notes payable the fair value was estimated using year end interest rates for mortgages with similar terms and maturities.
Cash equivalents. For purposes of the Consolidated Statements of Cash Flows, all highly liquid investments purchased with an original maturity of three months or less are considered cash equivalents.
Earnings per share. Income (loss) per share is presented in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Income
(loss) per share is computed based upon the weighted average number of shares of
Common Stock outstanding during each year.
NOTE 2. REAL ESTATE
In 2003, IORI sold the following properties:
Sales Net Cash Debt Gain/(Loss)
Property Location Sq.Ft. Price Received Discharged on Sale
------------------ ------------------ ------------- ------- -------- ---------- -----------
Office Building
Mowry Building Newark, CA 58,758 Sq.Ft. $ 5,000 $1,113 $4,057 --
La Mesa Building La Mesa, CA 90,105 Sq.Ft. $13,500 $6,521 $5,468 $3,824
One Hickory Centre Farmers Branch, TX 97,361 Sq.Ft. $12,200 $ 227 -- --
Land
Travelers Land Farmers Branch, TX 1.01 Acres $25,000 $2,198 -- --
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The Mowry building, located at 5600 Mowry School Road, Newark, California, was sold on July 1, 2003 at the sales price of $5.0 million. Prior to the sale, IORI wrote down the carrying value of the property to its fair value, and an impairment loss of $848,000 was recognized.
Concentration of investment risk. IORI has a high concentration of investment risk on properties in the Southwest region of the United States. This risk includes, but is not limited to changes in local economic conditions, changes in real estate and zoning laws, increases in real estate taxes, floods, tornados and other acts of God and other factors beyond the control of management.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Concentration of investment risk (continued). In the opinion of management, this investment risk is partially mitigated by the diversification of property types in other geographical regions of the United States, management's review of additional investments, acquisitions in other areas and by insurance.
NOTE 3. NOTES AND INTEREST RECEIVABLE
Junior Mortgage Loans. Junior mortgage loans are loans secured by mortgages that are subordinate to one or more prior liens either on the fee or a leasehold interest in real estate. Recourse on the loans ordinarily includes the real estate which secures the loan, other collateral and personal guarantees of the borrower.
In January 2002, IORI purchased 100% of the outstanding common shares of Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of American Realty Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owned the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI guaranteed that the asset would produce at least a 12% return annually of the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return, ARI agreed to pay IORI any shortfall. Management recorded this related party transaction as a note receivable from ARI. In the first quarter of 2002, after reviewing the property's fair value after costs to sell, even though ARI has guaranteed the 12% return, IORI recognized a provision for loss on the note receivable of $767,000. In December 2002, the Rosedale Towers Office Building was sold for $7.2 million. ARI received $3.5 million of the proceeds after the payment of the first lien debt and various closing costs, and IORI recognized an additional loss of $801,000 on this note. The $3.5 million received by ARI is included within other assets in the accompanying Consolidated Balance Sheet. In the second quarter of 2003, IORI received a $2.0 million paydown from ARI on the receivable. In the third quarter of 2003, the remaining $1.5 million was collected.
In February 2002, IORI funded a $2.0 million mortgage loan as a participation agreement with Transcontinental Realty Investors, Inc. ("TCI"), a related party. The loan was secured by a second lien on a retail center in Montgomery County, Texas. The note receivable bore interest at 16.0% per annum, required monthly interest only payments of $47,000 and matured in February 2002. In February 2002, the loan was extended until April 2002. In April 2002, IORI extended the loan until July 2002, receiving $8,500 as an extension fee. In July 2002, the loan was extended until September 2002, with IORI receiving $8,500 as an extension fee. Of the $2.0 million in principal payments, $1.5 million was received by TCI and $500,000 was received by Basic Capital Management, Inc. ("BCM"), an affiliate and the advisor to IORI, until July 1, 2003. These amounts are included within receivables from affiliates in the accompanying Consolidated Balance Sheet.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 3. NOTES AND INTEREST RECEIVABLE (Continued)
On October 14, 2003, IORI sold and conveyed the office building known as One Hickory Centre and 202 acres of unimproved real property known as the Travelers Land in Dallas County, Texas to Encino Executive Plaza, Ltd. The sale price for One Hickory Centre was $12,200,000 and Encino Executive Plaza, Ltd. executed a wrap-around promissory note in the amount of $11,973,025 payable to the order of IORI secured by a Deed of Trust encumbering One Hickory Centre. The note bore interest at 6.7% per annum. As with the prior transaction, the difference between the purchase price and the promissory note represented adjustments for various prorations. The sale price for the Travelers Land was $25,000,000. At closing, Encino Executive Plaza, Ltd. executed an all inclusive wrap-around promissory note payable to the order of IORI in the principal amount of $22,801,987 secured by a Deed of Trust covering the Travelers Land sold and delivered cash to IORI in the amount of $1,946,715, the remaining difference of which was as a result of prorations and various expenses paid by IORI in connection with the closing of the transaction. The note bore interest at 6.7% per annum. Subsequently, IORI made a loan to Encino Executive Plaza, Ltd. in the amount of $1,567,232 payable upon demand or if no demand is made prior thereto on June 30, 2006 with a market rate of interest. Encino Executive Plaza, Ltd. executed and delivered a promissory note payable to the order of IORI in the stated principal amount of $1,567,232. The note bore interest at 6.7% per annum.
On December 30, 2003, a Promissory Note in the amount of $6,363,360 given by Housing for Seniors of Humble ("Housing"), LLC to NLP Lakeshore Villas, LLC ("NLP") was assigned from ARI to IORI as a paydown of certain intercompany receivables.
On December 30, 2003, a Promissory Note in the amount of $2,000,000 given by Housing for Seniors of Humble ("Housing"), LLC to NLP Lakeshore Villas, LLC ("NLP") was assigned from ARI to IORI as additional paydown of certain intercompany receivables.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS
Investments in equity method partnerships consisted of the following:
2003 2002
---- ----
Nakash Income Associates ("NIA") ................................. 341 275
TCI Eton Square, L.P. ("Eton Square") ............................ 266 334
---- ----
$607 $609
==== ====
|
IORI owned a 36.3% general partner interest in Tri-City, which in turn owned a shopping center in Houston, Texas. TCI owned a 63.7% limited partner interest in Tri-City. In November 2002, the shopping center was sold for $4.2 million. Tri-City received net cash of $1.9 million after the payment of various closing costs. IORI received a distribution of $704,000 of the net proceeds and recognized a gain of $1.3 million on its investment in Tri-City.
IORI also owns a 40% general partner interest in NIA. NIA's only asset is a wraparound mortgage note receivable secured by a shopping center in Maulden, Missouri. TCI owns the remaining 60% general partner interest in NIA.
IORI further owns a 10% limited partner interest in Eton Square, which at December 31, 2003, owned the Eton Square Building in Tulsa, Oklahoma. TCI owns a 90% general partner interest in Eton Square.
Set forth below are summarized financial data for the partnerships accounted for using the equity method:
2003 2002
-------- --------
Notes receivable ........................................ $ 902 $ 902
Real estate, net of accumulated depreciation
($1,631 in 2003 and $1,230 in 2002) .................. 13,753 14,152
(262) --
Other assets ............................................ (10,206) (10,362)
Notes payable ........................................... (677) (559)
Other liabilities ....................................... -- --
-------- --------
$ 3,510 $ 4,133
Partners' capital ....................................... ======== ========
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 4. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued)
2003 2002 2001
------ ------- -------
Rents ............................................ $1,233 $ 2,981 $ 2,579
Interest income .................................. 156 156 80
Interest expense ................................. (685) (1,119) (1,131)
Property operations expense ...................... (802) (1,453) (1,230)
Depreciation ..................................... (400) (628) (586)
------ ------- -------
Loss before gains on sale of real
estate......................................... (498) (63) (288)
Gain on sale .................................. -- 1,054 --
------ ------- -------
Net income (loss) ................................ $ (498) $ 991 $ (288)
====== ======= =======
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IORI's equity share of:
2003 2002 2001
---- ------ ----
Income (loss) before gains on sale of
real estate .......................................... $(7) $ 862* $(9)
Gain on sale of real estate ............................. -- 383 --
--- ------ ---
Net income (loss) ....................................... $(7) $1,245 $(9)
=== ====== ===
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* Includes the $1.3 million gain from the sale of IORI's investment in Tri-City.
NOTE 5. NOTES AND INTEREST PAYABLE
Notes and interest payable consisted of the following:
2003 2002
------------------- --------------------
Estimated Estimated
Fair Book Fair Book
Value Value Value Value
--------- ------- --------- --------
Notes payable...................... $63,033 $60,427 $50,402 $51,063
======= =======
Interest payable................... 398 369
------- --------
$60,825 $51,432
======= ========
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
Scheduled notes payable principal payments are due as follows:
2004.................................................................. $ 7,394
2005.................................................................. 1,119
2006.................................................................. 10,886
2007.................................................................. 510
2008.................................................................. 2,601
Thereafter............................................................ 37,916
-------
$60,426
=======
|
Notes payable at December 31, 2003, bear interest at rates ranging from 4.47% to 10.5% and mature between 2003 and 2025. The mortgages are collateralized by deeds of trust on real estate with a net carrying value of $50.4 million.
In April 2002, IORI sold all of its residential properties to partnerships controlled by Metra Capital, LLC ("Metra"). These properties include: the 60 unit Brighton Court, the 92 unit Del Mar, the 68 unit Enclave, the 280 unit Meridian, the 57 unit Signature, the 114 unit Sinclair, located in Midland, Texas, and the 106 unit Treehouse, located in San Antonio, Texas. Innovo Realty, Inc., a subsidiary of Innovo Group, Inc. ("Innovo") is a limited partner in the partnerships that purchased the properties. Joseph Mizrachi, a director of ARI, a related party, controls approximately 11.67% of the outstanding common stock of Innovo. The sale constituted 23% of the total assets of IORI as of December 31, 2001. The sales price for the properties totaled $26.2 million. IORI received $5.4 million in cash after the payoff of $16.1 million in debt and various closing costs. Management has determined to account for this sale as a refinancing transaction, in accordance with SFAS No. 66, "Accounting for Sales of Real Estate." IORI will continue to report the assets and the new debt incurred by the Metra partnerships on the IORI financial statements. The new debt on the properties totals $21.4 million, bears interest at 7.57% per annum, requires monthly interest only payments of $135,000 and matures in May 2012. IORI also received $5.2 million of 8% non-recourse, non-convertible Series A Preferred Stock ("Preferred Shares") of Innovo.
The dividend on the Preferred Shares will be funded entirely and solely through member distributions from cash flows generated by the operation and subsequent sale of the sold properties. In the event the cash flows for the properties are insufficient to cover the 8% annual dividend, Innovo will have no obligation to cover any shortfall.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 5. NOTES AND INTEREST PAYABLE (Continued)
The Preferred Shares have a mandatory redemption feature and are redeemable from the cash proceeds received by Innovo from the operation and sale of the properties. All member distributions that are in excess of current and accrued 8% dividends must be used by Innovo to redeem the Preferred Shares. Since redemption of these shares is subject to the above future events, management has not recorded any basis in the Preferred Shares.
In 2003, IORI refinanced the following properties:
Net Cash
Debt Debt Received/ Interest Maturity
Property Location Sq.Ft./Acrs Incurred Discharged (Paid) Rate Date
----------- ---------- ------------- -------- ---------- --------- -------- --------
Office
Building
2010 Farmers 40,066 Sq.Ft. $2,436 1,778 547 6.25% 10/08
Valley View Branch, TX
Travelers Farmers 97,361 Sq.Ft. $5,000 $4,225 -- 6.00%(1) 12/06
Land Branch, TX
|
(1) Variable rate.
NOTE 6. RELATED PARTY TRANSACTIONS
In January 2002, IORI purchased 100% of the outstanding common shares of Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of American Realty Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owned the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI guaranteed that the asset would produce at least a 12% return annually of the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return, ARI agreed to pay IORI any shortfall. Management recorded this related party transaction as a note receivable from ARI. In the first quarter of 2002, after reviewing the property's fair value after costs to sell, even though ARI has guaranteed the 12% return, IORI recognized a provision for loss on the note receivable of $767,000. In December 2002, the Rosedale Towers Office Building was sold for $7.2 million. ARI received $3.5 million of the proceeds after the payment of the first lien debt and various closing costs, and IORI recognized an additional loss of $801,000 on this note. The $3.5 million received by ARI is included within other assets in the accompanying Consolidated Balance Sheet. In the second quarter of 2003, IORI received a $2.0 million paydown from ARI on the receivable. In the third quarter of 2003, the remaining $1.5 million was collected.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. RELATED PARTY TRANSACTIONS (Continued)
On December 30, 2003, a Promissory Note in the amount of $6.3 million given by Housing to NLP was assigned from ARI to IORI. On December 30, 2003, a Promissory Note in the amount of $2.0 million given by Housing to NLP was assigned from ARI to IORI. These assignments were payments on certain intercompany receivables due to IORI.
On December 18, 2003, IORI purchased 100% of the outstanding common shares of Transcontinental Brewery Corporation ("Brewery"), a wholly-owned subsidiary of TCI, a related party, for $4.0 million for a reduction of intercompany debt in the same amount. Brewery owns the 19.96 acres of land and the 133,000 sq. ft. Eagle Crest Warehouse Building in Farmers Branch, Texas.
On December 18, 2003, IORI purchased 100% of the outstanding common shares of Transcontinental Treehouse Corporation ("Treehouse-IR"), a wholly-owned subsidiary of TCI, for $7.5 million for a reduction of intercompany debt in the amount of $2.4 million subject to mortgage lien in the amount of $5.1 million. Treehouse-IR owns the 153,072 sq. ft. Treehouse Apartments Building in Irving, Texas.
On December 18, 2003, IORI purchased 100% of the outstanding common shares of Transcontinental Parkway Corporation ("Parkway"), a wholly-owned subsidiary of TCI, for $4.0 million for reduction of intercompany debt in the amount of $2.4 million subject to mortgage lien in the amount of $1.6 million. Parkway owns the 28,374 sq. ft. Parkway Shopping Center in Dallas, Texas.
On September 19, 2002, IORI's Board of Directors authorized the Chief Financial Officer of the Company to advance funds either to or from the Company, through the advisor, in an amount up to $5.0 million on the condition that such advances shall be repaid in cash or transfers of assets within 90 days.
The following table reconciles the beginning and ending balances of Accounts Receivable from Affiliates as of December 31, 2003.
SWI BCM ARI TCI
------- ------- ------- -------
Balance, December 31, 2002 ............ -- $ 1,696 $ 3,541 $ 5,260
Cash transfers ..................... 15,209 5,017 -- --
Cash repayments .................... (3,881) (3,937) (3,494) (1,000)
Other additions .................... 2,904 784 367 1
Other repayments ................... (13,930) (3,560) (47) (4,000)
------- ------- ------- -------
Balance, December 31, 2003 ............ 302 $ -- $ 367 $ 261
======= ======= ======= =======
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 6. RELATED PARTY TRANSACTIONS (Continued)
Returns on Metra Properties. As described more fully in Note 5, IORI sold all of its residential properties during 2002 to partnerships controlled by Metra. The partnership agreement for each of these partnerships states that the Metra Partners, as defined, receive cash flow distributions at least quarterly in an amount sufficient to provide them with a fifteen percent cumulative compounded annual rate of return on their invested capital, as well as a cumulative annual amount of 0.50% of the average outstanding balance of the mortgage indebtedness secured by any of these residential properties. These distributions to the Metra Partners have priority over distributions to any of the other partners.
NOTE 7. DIVIDENDS
Dividends of $685,000 ($.45 per share) were paid in 2000.
It was reported to the Internal Revenue Service that 100% of the dividends paid in 2000 represented capital gains.
In December 2000, the Board of Directors determined not to pay a fourth quarter dividend to holders of IORI's Common Stock. The non-payment decision was based on the Board determining that IORI needed to retain cash for acquisitions that were anticipated in 2001 and that IORI had no REIT taxable income that required a distribution.
No dividends were declared or paid in 2003 or 2002. Management expects to pay no dividends in 2004.
NOTE 8. RENTS UNDER OPERATING LEASES
Operations include the leasing of office buildings. The leases thereon expire at various dates through 2011. The following is a schedule of minimum future rents on non-cancelable operating leases as of December 31, 2003:
2004.................................................................. $ 2,354
2005.................................................................. 2,298
2006.................................................................. 1,762
2007.................................................................. 1,389
2008.................................................................. 1,182
Thereafter............................................................ 1,888
-------
$10,873
=======
|
NOTE 9. ADVISORY AGREEMENT
SWI is 100% owned by Gene E. Phillips. Mr. Phillips is a Chairman, a President, a Chief Executive Officer, and a Director, and is involved in daily consultation with the officers of SWI and has significant influence over the conduct of SWI/BCM's business, including the rendering of advisory services and the making of investment decisions for itself and for IORI.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 9. ADVISORY AGREEMENT (Continued)
Under the Advisory Agreement, SWI is required to annually formulate and submit for Board approval a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, borrowing activity and other investments. SWI is required to report quarterly to the Board on IORI's performance against the business plan. In addition, all transactions require prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to SWI by the Board.
The Advisory Agreement also requires prior Board approval for the retention of all consultants and third party professionals other than legal counsel. The Advisory Agreement provides that SWI shall be deemed to be in a fiduciary relationship to the stockholders and contains a broad standard governing SWI's liability for losses incurred by IORI.
The Advisory Agreement provides for SWI to be responsible for IORI's day-to-day operations and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% per annum of net income.
The Advisory Agreement also provides for SWI to receive an annual incentive sales fee. SWI or an affiliate of SWI is to receive an acquisition commission for supervising the purchase or long-term lease of real estate. SWI or an affiliate of SWI is to receive a mortgage or loan acquisition fee with respect to the purchase of any existing mortgage loan. SWI or an affiliate of SWI also is to receive a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing of IORI's properties. In addition, SWI receives reimbursement of certain expenses incurred by it, in the performance of advisory services for IORI.
The Advisory Agreement requires SWI or any affiliate of SWI to pay to IORI one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by IORI.
Under the Advisory Agreement all or a portion of the annual advisory fee must be refunded by SWI if the Operating Expenses of IORI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement. The effect of this limitation was to require SWI to refund $226,000 of the 2003 annual advisory fee, $68,000 of the 2002 annual advisory fee, and $256,000 of the 2001 annual advisory fee.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 9. ADVISORY AGREEMENT (Continued)
Additionally, if management was to request that SWI render services other than those required by the Advisory Agreement, SWI or an affiliate of BCM would be separately compensated for such additional services on terms to be agreed upon from time to time. As discussed in NOTE 9. "PROPERTY MANAGEMENT," Triad Realty Services, Ltd. ("Triad"), an affiliate of SWI, provides property management services and, as discussed in NOTE 11. "REAL ESTATE BROKERAGE," Regis Realty, Inc. ("Regis"), a related party, provided, on a non-exclusive basis, brokerage services.
SWI may assign the Advisory Agreement only with the prior consent of IORI.
NOTE 10. PROPERTY MANAGEMENT
Triad provides property management services for a fee of 5% or less of the monthly gross rents collected on residential properties and 3% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for property-level management services at various rates. The general partner of Triad is BCM. The limited partner of Triad is Highland Realty Services, Inc. ("Highland"), a related party. Triad subcontracted to Regis, which is owned by Highland, the property-level management and leasing of IORI's five office buildings and the commercial property owned by Eton Square, until December 2002. Since January 1, 2003, Regis Realty I, LLC, which is owned by Highland, provided property management services. Regis was and Regis Realty I, LLC is entitled to receive property and construction management fees and leasing commissions in accordance with the terms of its property-level management agreement with Triad.
NOTE 11. REAL ESTATE BROKERAGE
Regis also provided brokerage services on a non-exclusive basis until December 2003. Regis was and Regis Realty I, LLC is entitled to receive a commission for property purchases and sales in accordance with a sliding scale of total brokerage fees to be paid by IORI.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 12. ADVISORY FEES, PROPERTY MANAGEMENT FEES, ETC.
Fees and cost reimbursements to SWI/BCM and its affiliates:
2003 2002 2001
------ ------ ----
Fees
Advisory .............................................. $ 425 $ 714 $817
Net income ............................................ 130 169 --
Property acquisition .................................. -- -- --
Mortgage brokerage and equity refinancing ............. 547 262 99
Property & Construction Mgt. & Leasing Comm ........... 323 0 0
------ ------ ----
$1,425 $1,145 $916
====== ====== ====
Cost reimbursements ................................... $ 173 $ 246 $323
====== ====== ====
|
NOTE 13. INCOME TAXES
For the years 2002 and 2001, IORI elected and qualified to be treated as a Real Estate Investment Trust ("REIT"), as defined in Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), and as such, was not taxed for federal income tax purposes on that portion of its taxable income which is distributed to stockholders. Due to the completion of the tender offer by ARI, an affiliate, and the resulting concentration of ownership, IORI no longer met the requirements for tax treatment as a REIT under the Code as of January 1, 2003, and is prohibited for re-qualifying for REIT status for at least five years.
IORI had net income for federal income tax purposes before the application of operating loss carryforwards in 2003 and 2002 and had a net loss for federal income tax purposes in 2001. Therefore, IORI recorded no provision for income taxes. IORI's tax basis in its net assets differs from the amount at which its net assets are reported for financial statement purposes, principally due to the accounting for gains and losses on property sales, depreciation on owned properties and investments in joint venture partnerships. At December 31, 2003, IORI's tax basis in its net assets was exceeded by their net basis for financial statement purposes by approximately $14.4 million and IORI's tax basis in its net mortgage liabilities was exceeded by their net basis for financial statement purposes by approximately $21.3 million. As a result, aggregate future income for income tax purposes will be less than such amount for financial statement purposes by approximately $6.9 million. Additionally, at December 31, 2003, IORI has current and prior tax net operating loss carryforwards of $2.3 million expiring through the year 2021.
As a result of IORI's election to be treated as a REIT for income tax purposes for years 2002 and 2001 and its then intention to distribute
its REIT taxable income, if any, in future years, no deferred tax asset, liability or valuation allowance was recorded. At December 31, 2003, IORI had a net deferred tax asset of $3.5 million due to tax deductions available to it in future years. However, as management cannot determine that it is more likely than not that IORI will realize the benefit of the deferred tax asset, a 100% valuation allowance has been established.
NOTE 14. OPERATING SEGMENTS
Significant differences among the accounting policies of the operating segments as compared to the Consolidated Financial Statements principally involve the calculation and allocation of general and administrative expenses. Management evaluates the performance of the operating segments and allocates resources to each of them based on their operating income and cash flow. Items of income that are not reflected in the segments are interest, and equity in partnerships totaling $619,000, $1.1 million, $185,000 for 2003, 2002 and 2001, respectively. Expenses/(Gains) that are not reflected in the segments are general and administrative expenses, advisory and net income fees, provision for loss, and provision for asset impairment totaling $2.2 million, $3.5 million, and $1.6 million for 2003, 2002 and 2001, respectively. Excluded from operating segment assets are assets of $50.8 million at December 31, 2003, $15.4 million at December 31, 2002, and $4.4 million at December 31, 2001, which are not identifiable with an operating segment. There are no intersegment revenues and expenses and all business is conducted in the United States.
Presented below is the operating income of each operating segment.
Commercial
Land Properties Apartments Total
---- ---------- ---------- -------
2003
Rents ............................ $-- $ 2,456 $ 5,358 $ 7,814
Property operating expenses ...... -- 1,091 3,471 4,560
--- ------- ------- -------
Operating income (loss) .......... $-- $ 1,365 $ 1,887 $ 3,254
=== ======= ======= =======
Depreciation ................. ... $-- $ 794 $ 405 $ 1,199
Interest ......................... -- 623 1,482 2,105
Real estate improvements ......... -- 494 -- 494
Assets ........................... 44 22,105 28,216 50,365
|
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 14. OPERATING SEGMENTS (Continued)
Commercial
Properties Total
---------- -------
Property Sales
Sales price ............................................. $55,700 $55,700
Cost of sale ............................................ 51,874 51,874
------- -------
Gain on sale ............................................ $ 3,824 $ 3,824
======= =======
|
Commercial
Land Properties Apartments Total
------ ---------- ---------- -------
2002
Rents ................................ $ -- $ 2,394 $ 5,345 $ 7,739
Property operating expenses .......... -- 1,030 2,789 3,819
------ ------- ------- -------
Operating income ..................... $ -- $ 1,364 $ 2,556 $ 3,920
====== ======= ======= =======
Depreciation ......................... $ -- $ 739 $ 477 $ 1,216
Interest ............................. -- 605 1,674 2,279
Real estate improvements ............. -- 240 -- 240
Assets ............................... 24,929 28,688 21,133 74,750
|
Commercial
Properties Total
---------- -------
Property Sales
Sales price ............................................. $19,230 $19,230
Cost of sale ............................................ 12,461 12,461
------- -------
Gain on sale ............................................ $ 6,769 $ 6,769
======= =======
|
Commercial
Land Properties Apartments Total
------- ---------- ---------- -------
2001
Rents ............................ $ -- $ 2,277 $ 5,045 $ 7,322
Property operating expenses ...... -- 1,034 2,667 3,701
------- ------- ------- -------
Operating income ................. $ -- $ 1,243 $ 2,378 $ 3,621
======= ======= ======= =======
Depreciation ..................... $ -- $ 1,056 $ 512 $ 1,568
Interest ......................... -- 788 1,361 2,149
Real estate improvements ......... 2,404 1,062 3,466
Assets ........................... 24,492 41,213 21,610 87,315
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 15. DISCONTINUED OPERATIONS
Effective January 1, 2002, IORI adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which established a single accounting model for the impairment or disposal of long-lived assets, including discontinued operations. This statement requires that the operations related to properties that have been sold or properties that are intended to be sold be presented as discontinued operations in the statement of operations for all periods presented, and properties intended to be sold are to be designated as "held-for-sale" on the balance sheet.
For 2003, 2002, and 2001, income (loss) from discontinued operations relates to two properties that IORI sold during 2002 and four properties sold during 2003. The following table summarizes revenue and expense information for these properties sold.
2003 2002 2001
------- ------- -------
Revenue
Rental ........................................... $ 1,991 $ 2,660 $ 5,679
Property operations .............................. 1,858 2,511 2,890
------- ------- -------
133 149 2,789
Interest Income .................................. 462 -- --
Expenses
Interest ......................................... 2,236 2,635 3,925
Depreciation ..................................... 357 650 859
------- ------- -------
2,593 3,285 4,784
Net income (loss) from discontinued operations ...... (1,998) (3,136) (1,995)
Gain on sale of real estate ...................... 3,824 6,769 --
Equity in gain on sale of real estate by equity
investees ..................................... -- 383 --
------- ------- -------
Net income (loss) from discontinued operations ...... $ 1,826 $ 4,016 $(1,995)
======= ======= =======
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 16. QUARTERLY DATA
The following is a tabulation of quarterly results of operations for the years 2003, 2002 and 2001 (unaudited).
Three Months Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2003
Rents .................................. $1,942 $1,958 $1,970 $1,944
Property expense ....................... 966 1,012 1,182 1,400
------ ------ ------ ------
Operating income .................... 976 946 788 544
Interest income ........................ -- 614 12 --
Income (loss) in equity
partnerships ........................ (15) -- (13) 21
Recovery of A/R written off ............ -- 1,569 -- --
Other expense .......................... 1,371 2,006 1,223 886
------ ------ ------ ------
Net loss from continuing
operations .......................... (410) 1,123 (436) (321)
Discontinued operations ................ (588) (491) (541) 3,446
------ ------ ------ ------
Net income (loss) ...................... $ (998) $ 632 $ (977) $3,125
====== ====== ====== ======
Earnings per share
Net income (loss) ...................... $(0.69) $ 0.44 $ (.68) $ 2.17
====== ====== ====== ======
|
Three Months Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2002
Rents .................................. $ 1,892 $1,888 $ 2,061 $1,898
Property expense ....................... 801 896 1,137 985
------- ------ ------- ------
Operating income .................... 1,091 992 924 913
Interest income ........................ 37 310 185 (262)
Income (loss) in equity
partnerships ........................ (17) 48 60 771
Other expense .......................... 2,393 1,519 1,055 2,016
------- ------ ------- ------
Net loss from continuing
operations .......................... (1,282) (169) 114 (594)
Discontinued operations ................ 6,355 (718) (1,355) (266)
------- ------ ------- ------
Net income (loss) ...................... $ 5,073 $ (887) $(1,241) $ (860)
======= ====== ======= ======
Earnings per share
Net income (loss) ...................... $ 3.53 $ (.62) $ (.86) $ (.60)
======= ====== ======= ======
|
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 16. QUARTERLY DATA (Continued)
Three Months Ended
-----------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
2001
Rents ......................................... $1,814 $1,806 $ 1,802 $1,900
Property expense .............................. 907 889 1,013 892
------ ------ ------- ------
Operating income ........................... 907 917 789 1,008
Interest income ............................... 72 62 8 52
Income (loss) in equity
partnerships ............................... 9 (6) (30) 18
Other expense ................................. 1,328 1,327 1,406 1,212
------ ------ ------- ------
Net income (loss) from continuing
operations................................... (340) (354) (639) (134)
(377) (378) (1,110) (130)
Discontinued operations ....................... ------ ------ ------- ------
$ (717) $ (732) $(1,749) $ (264)
Net income (loss) ............................. ====== ====== ======= ======
Earnings per share $ (.47) $ (.49) $ (1.16) $ (.18)
Net income (loss) ............................. ====== ====== ======= ======
|
In the third quarter of 2003, the Mowry Building was sold, and an impairment loss on sale of real estate of 848,000 was recognized. In the fourth quarter of 2003, La Mesa Village, Travelers Land, and One Hickory Centre were sold. $3.8 million gain was recognized on the sale of La Mesa Village. Travelers Land had $59,000 deferred capital loss on sale.
NOTE 17. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY
Olive Litigation. In February 1990, IORI, together with National Income Realty Trust, Continental Mortgage and Equity Trust ("CMET") and TCI, three real estate entities with, at the time, the same officers, directors or trustees and advisor as IORI, entered into a settlement (the "Settlement") of a class and derivative action entitled Olive et al. v. National Income Realty Trust Et al. (the "Olive Litigation"), relating to the operation and management of each of the entities. On April 23, 1990, the Court granted final approval of the terms of the Settlement. The Settlement was modified in 1994 (the "Modification"), which was amended on January 27, 1997 by Amendment to the Modification effective January 9, 1994 (the "First Amendment").
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 17. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY (Continued)
In October 2000, plaintiffs' counsel asserted that the stock option agreement to purchase TCI shares, which was entered into by IORI and an affiliate of IORI, American Realty Investors, Inc. ("ARI"), in October 2000 with an investment fund, breached a provision of the Modification. As a result of this assertion, IORI assigned all of its rights to purchase the TCI shares under this stock option agreement to ARI.
The Board believes that all provisions of the Settlement, the Modification and First Amendment terminated on April 28, 1999. However, in September 2000, the Court ruled that certain provisions of the Modification continue to be effective after the termination date. This ruling was appealed to the United States Court of Appeals for the Ninth Circuit by IORI and TCI.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 17. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY (Continued)
On October 23, 2001, IORI, TCI and ARI jointly announced a preliminary agreement with the plaintiff's legal counsel for complete settlement of all disputes in the lawsuit. In February 2002, the court granted final approval of the proposed settlement (the "Second Amendment"). Under the Second Amendment, the appeal was dismissed and ARI agreed to either (i) acquire all of the outstanding shares of IORI and TCI not currently owned by ARI for a cash payment or shares of ARI preferred stock or (ii) make a tender offer for all of the outstanding common shares of IORI and TCI not currently owned by ARI. At the time, IORI had the same board as TCI and the same advisor as TCI and ARI. Earl D. Cecil and Ted P. Stokely who served as Directors of IORI and TCI, were also directors of ARI.
On November 15, 2002, ARI commenced, through subsidiaries, a tender offer for shares of common stock of TCI and IORI. The price per share was $17.50 for TCI shares and $19.00 for IORI shares. The tender offers were completed on March 19, 2003. ARI acquired 265,036 shares of IORI and 1,213,226 TCI shares. The completion of the tender offer fulfilled the obligations under the Second Amendment and the Olive Litigation was dismissed with prejudice.
Liquidity. Management anticipates that IORI will generate excess cash from operations in 2003 due to increased rental rates and occupancy
INCOME OPPORTUNITY REALTY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
NOTE 17. COMMITMENTS AND CONTINGENCIES AND LIQUIDITY (Continued)
at its properties, however, such excess may not be sufficient to discharge all of IORI's debt obligations as they mature. Management intends to selectively sell income producing real estate, refinance real estate and incur additional borrowings against real estate to meet its cash requirements.
Other Litigation. IORI is also involved in various other lawsuits arising in the ordinary course of business. Management is of the opinion that the outcome of these lawsuits will have no material impact on the Company's financial condition, results of operations or liquidity.
SCHEDULE III
INCOME OPPORTUNITY REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2003
Initial Cost Cost
---------------------- Capitalized
Encum- Building & Subsequent to
Property/Location brances Land Improvements Acquisition
----------------- ------- ------- ------------ -------------
Properties Held For Investment
Apartments
Brighton Court, Midland, TX......... $ 2,843 $ 339 $ 3,051 $ --
Del Mar, Midland, TX................ 2,725 324 2,919 --
Enclave, Midland, TX................ 2,882 324 2,919 --
Meridian, Midland, TX............... 4,502 1,138 4,552 --
Signature Place, Midland, TX........ 2,410 265 2,388 --
Sinclair Place, Midland, TX......... 2,054 221 1,990 --
Treehouse, San Antonio, TX.......... 3,752 375 2,124 259
Treehouse, Irving, TX............... 5,083 716 6,771 --
Office Buildings
2010 Valley View, Farmers
Branch, TX....................... 2,425 120 479 2,979
Akard Plaza, Dallas, TX............. 1,966 734 2,936 454
Chuck Yeager, Chantilly, VA......... 4,336 1,080 4,321 1,566
Parkway Ctr, Farmers Branch, TX..... 1,631 333 3,511 --
Industrial Warehouse
Eagle Crest, Farmers Branch, TX..... 2,129 1,906 --
Land
Frankel, Midland County, TX......... -- 44 -- --
3 HickoryCtr, FarmersBranch, TX..... -- 2,804 -- 296
------- ------- ------- ------
$36,609 $10,946 $39,867 $5,554
======= ======= ======= ======
|
Gross Amount
Carried at End of Year (1) Accumu-
-------------------------------- lated
Building & Depreci-
Property/Location Land Improvements Total ation
----------------- ------- ------------ ------- --------
(dollars in thousands)
Properties Held For Investment
Apartments
Brighton Court, Midland, TX......... $ 339 $ 3,051 $ 3,390 $ 267
Del Mar, Midland, TX................ 324 2,919 3,243 255
Enclave, Midland, TX................ 324 2,919 3,243 255
Meridian, Midland, TX............... 1,138 4,552 5,690 455
Signature Place, Midland, TX........ 265 2,388 2,653 174
Sinclair Place, Midland, TX......... 221 1,990 2,211 209
Treehouse, San Antonio, TX.......... 375 2,383 2,758 844
Treehouse, Irving, TX............... 716 6,771 7,487 --
Office Buildings
2010 Valley View, Farmers
Branch, TX....................... 120 3,458 3,578 1,264
Akard Plaza, Dallas, TX............. 734 3,390 4,124 785
Chuck Yeager, Chantilly, VA......... 1,080 5,887 6,967 1,494
Parkway Ctr, Farmers Branch, TX..... 333 3,511 3,844 --
Industrial Warehouse
Eagle Crest, Farmers Branch, TX.... 2,129 1,906 4,035 --
Land
Frankel, Midland County, TX......... 44 -- 44 --
3 HickoryCtr, FarmersBranch, TX..... 3,100 -- 3,100 --
------- ------- ------- ------
$11,242 $45,125 $56,367 $6,002
======= ======= ======= ======
|
Life on
Which
Depreciation
in Latest
Date of Statement
Construc- Date of Operation
Property/Location tion Acquired is Computed
----------------- --------- -------- ------------
Properties Held For Investment
Apartments
Brighton Court, Midland, TX......... 1983 06/00 40 years
Del Mar, Midland, TX................ 1983 06/00 40 years
Enclave, Midland, TX................ 1983 06/00 40 years
Meridian, Midland, TX............... 1983 12/99 40 years
Signature Place, Midland, TX........ 1983 06/00 40 years
Sinclair Place, Midland, TX......... 1983 06/00 40 years
Treehouse, San Antonio, TX.......... 1975 09/89 5-40 years
Treehouse, Irving, TX............... 1974 12/03 5-40 years
Office Buildings
2010 Valley View, Farmers
Branch, TX....................... 1998 09/97 5-40 years
Akard Plaza, Dallas, TX............. 1984 12/97 5-40 years
Chuck Yeager, Chantilly, VA......... 1991 01/97 5-40 years
Parkway Ctr, Farmers Branch, TX..... 1979 12/03 5-40 years
Industrial Warehouse
Eagle Crest, Farmers Branch, TX.... -- 12/03 5-40 years
Land
Frankel, Midland County, TX......... -- 06/00
3 HickoryCtr, FarmersBranch, TX..... --
|
(1) The aggregate cost for Federal income tax purposes is $34.7 million.
SCHEDULE III
(Continued)
INCOME OPPORTUNITY REALTY INVESTORS, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
2003 2002 2001
-------- -------- -------
(dollars in thousands)
Reconciliation of Real Estate
Balance at January 1, ....................... $ 82,252 $ 95,190 $91,837
Additions
Acquisitions and Improvements ......... 15,365 677 3,466
Deductions
Retirements ........................... -- (462) (113)
Sale of real estate ................... (41,250) (13,153) --
-------- -------- -------
Balance at December 31, ..................... $ 56,367 $ 82,252 $95,190
======== ======== =======
Reconciliation of Accumulated Depreciation
Balance at January 1, ....................... $ 7,502 $ 7,875 $ 5,560
Additions
Depreciation ....................... 1,552 1,867 2,427
Deductions
Retirements ........................ -- -- (112)
Sale of real estate ................ (3,052) (2,240) --
-------- -------- -------
Balance at December 31, ..................... $ 6,002 $ 7,502 $ 7,875
======== ======== =======
|
SCHEDULE IV
(Continued)
INCOME OPPORTUNITY REALTY INVESTORS, INC.
MORTGAGE LOANS ON REAL ESTATE
2003 2002 2001
------- ------- -------
(dollars in thousands)
Balance at January 1, ....................... $ -- $ 500 $ 1,500
Additions
New mortgage loans ....................... 45,531 7,109 --
Deductions
Amounts charged off ...................... -- (1,568) --
Collections of principal by IORI ......... -- (500) --
Collections of principal by affiliates ... -- (5,541) (1,000)
------- ------- -------
Balance at December 31, ..................... $45,531 $ -- $ 500
======= ======= =======
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Effective July 1, 2003, the Board of Directors of Income Opportunity Realty Investors, Inc. ("IOT") engaged the Plano, Texas firm of Farmer, Fuqua & Huff, P.C. as the independent accountant to audit IOT's financial statements. During the Registrant's two most recent fiscal years, and any subsequent interim period, IOT did not consult with Farmer, Fuqua & Huff, PC. or any of its members about the application of accounting principles to any specified transaction or any other matter.
The engagement effective July 1, 2003, of Farmer, Fuqua & Huff, P.C. as a new independent accountant for IOT necessarily results in the termination or dismissal of the principal accountant which audited IOT's financial statements in the past two fiscal years ended December 31, 2001 and 2002, BDO Seidman. During the Registrant's two most recent fiscal years and any subsequent interim period, BDO Seidman's report on IOT's financial statements for those two years did not contain an adverse opinion or disclaimer of opinion, nor was such opinion qualified or modified as to uncertainty, audit scope or accounting principles, and no disagreement existed between the Registrant and BDO Seidman concerning any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. The decision to change accountants was approved by the Audit Committee of the Board of Directors of IOT consisting of Messrs. Ted P. Stokely, Earl D. Cecil and Martin L. White.
ITEM 9A. CONTROLS AND PROCEDURES
IORI, under the supervision and with the participation of its management, including IORI's Acting Principal Executive Officer and Principal Accounting Officer, evaluated the effectiveness of the design and operation of IORI's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act) as of the end of the period covered by this report. Based on that evaluation, IORI's Acting Principal Executive Officer and Principal Accounting Officer concluded that IORI's disclosure controls and procedures are effective and timely making known to him material information relating to IORI and its consolidated subsidiaries required to be disclosed in IORI's reports filed or submitted under the Exchange Act. There has been no change in IORI's internal control over financial reporting during the quarter ended December 31, 2003, that has materially affected or is reasonably likely to materially affect IORI's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT
Directors
The affairs of IORI are managed by a Board of Directors. The Directors are elected at the annual meeting of stockholders or appointed by the incumbent Board and serve until the next annual meeting of stockholders or until a successor has been elected or approved.
After December 31, 2003, a number of changes occurred in the composition of the Board of Directors of IORI, the creation of certain Board committees, the adoption of Committee charters, the adoption of a Code of Ethics for Senior Financial Officers, and the adoption of Guidelines for Director Independence. Also, the composition of the members of the Board of Directors changed with the resignations of Henry A. Butler (July 1, 2003), Earl D. Cecil (on February 29, 2004) and Martin L. White (March 15, 2004), as well as the election of Ken L. Joines as a director in July 2003, and independent directors, David E. Allard and Peter L. Larsen on February 20, 2004, and Robert A. Jakuszewski on March 16, 2004.
It is the Board's objective that a majority of the Board consist of independent directors. For a director to be considered independent, the Board must determine that the Director does not have any direct or indirect material relationship with IORI. The Board has established
guidelines to assist it in determining director independence which conform to, or are more exacting than, the independence requirements in the American Stock Exchange listing rules. The independence guidelines are set forth in IORI's "Corporate Governance Guidelines." The text of this document has been posted on IORI's internet website at http://www.incomeopp-realty.com and is available in print to any shareholder who requests it. In addition to applying these guidelines, the Board will consider all relevant facts and circumstances in making an independent determination.
All members of the Audit Committee and Nominating and Corporate Governance
Committee must be independent directors. Members of the Audit Committee must
also satisfy additional independence requirements, which provide (i) that they
may not accept, directly or indirectly, any consulting, advisory, or
compensatory fee from IORI or any of its subsidiaries other than their
Director's compensation (other than in their capacity as a member of the Audit
Committee, the Board of Directors, or any other committee of the Board), and
(ii) no member of the Audit Committee may be an "affiliated person" of IORI or
any of its subsidiaries, as defined by the Securities and Exchange Commission.
The current Directors of IORI are listed below, together with their ages, terms
of service, all positions and offices with IORI or its advisor, SWI, their
principal occupations, business experience and directorships with other
companies during the last five years or more. The designation "Affiliated", when
used below with respect to a Director, means that the Director is an officer,
director or employee of SWI or an officer of IORI. The designation "Independent"
when used below with respect to a Director, means that the Director is neither
an officer of IORI nor a director, officer or employee of SWI, although IORI may
have certain business or professional relationships with the Director as
discussed in ITEM 13. "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Certain
Business Relationships."
TED P. STOKELY: Age 70, Director (Affiliated) (since April 1990) and Chairman of the Board (since January 1995).
General Manager (since January 1995) of ECF Senior Housing Corporation, a
nonprofit corporation; General Manager (since January 1993) of Housing
Assistance Foundation, Inc., a nonprofit corporation; Part-time unpaid
consultant (since January 1993) of Eldercare Housing Foundation
("Eldercare"), a nonprofit corporation; General Manager (since April 2002)
of Unified Housing Foundation, Inc., a nonprofit corporation; Director and
Chairman of the Board of ARI (since November 2002); and Director (since
April 1990) and Chairman of the Board (since January 1995) of TCI.
DAVID E. ALLARD: Age 45, Director (Independent) (Elected on February 20, 2004)
Executive Vice President (since 2003) of Internet America, Inc.; Chief Operating Officer (2000 to 2002) of Primedia Workplace Learning; Executive Vice President and Chief Financial Officer (1999 to 2000) of E-Train; Special Advisor (1998 to 1999) of Thayer Capital Partners; Chief Operating Officer (1997 to 1998) of Careertrack, Inc. (TCI Subsidiary); Senior Vice President and Vice President - Business Development (1995 to 1996) of Westcott Communications, Inc.; Partner (1985 to 1992) of Farmer and Allard (CPA firm); Audit Manager/CPA (1983 to 1985) of Grant Thornton (CPA firm); Audit Senior/CPA of Laventhol & Horwath (CPA firm).
ROBERT A. JAKUSZEWSKI: Age 41, Director (Independent) (Elected March 22, 2004)
Vice President - Sales & Marketing of New Horizons Communications (since September 1998); Consultant for New Horizons Communications (January 1998 to August 1998); Regional Sales Manager of Continental Funding (May 1996 to July 1998); Territory Manager of Sigvaris Inc. (August 1992 to April 1996); Senior Sales Representative (Mead Johnson Nutritional Division, USPNG (January 1998 to July 1992); Sales Representative of Muro Pharmaceutical, Inc. (April 1986 to December 1987).
KEN L. JOINES: Age 36, Director (Affiliated) (since July 2003)
General Manager, Vice President, Secretary and Treasurer (since March 2001) of SWI, an administrative services company. Owner/Operator of Joines & Associates, a financial consulting company, subcontractor of Whitson Management Group (since September 1998). Financial consultant with Whitson Financial/Whitson Management Group (July 1996 - September 1998).
PETER L. LARSEN: Age 62, Director (Independent) (Elected on February 20, 2004).
Senior Vice President - Acquisitions (1996 to 2002) of Tarragon Realty Investors. Director of four non-profit corporations that own 545 apartment units and are overseeing the development of a Catholic Retirement Center in Coppell, Texas
Board Committees
The Board of Directors held 6 meetings during 2003. For such year, no incumbent Director attended fewer than 75% of the aggregate of (1) the total number of meetings held by the Board during the period for which he had been a Director and (2) the total number of meetings held by all committees of the Board on which he served during the period that he served.
The Board of Directors has standing Audit, Compensation and Governance and Nominating Committees. The Audit Committee was formed on February 20, 2003, and its function is to review IORI's operating and accounting procedures. A Charter of the Audit Committee has also been adopted by the Board. The current members of the Audit Committee, all of whom are independent within the meaning of the SEC Regulations, the listing standards of the American Stock Exchange, Inc. and IORI's Corporate Governance Guidelines, are Messrs. Allard, Jakuszewski and Larsen. Mr. David E. Allard, a member of the Committee is qualified as an Audit Committee financial expert within the meaning of SEC Regulations, and the Board has determined that he has accounting and related financial management expertise within the meaning of the listing standards of the American Stock Exchange, Inc. The predecessor Audit Committee met four times during 2003.
The Governance and Nominating Committee is responsible for developing and implementing policies and practices relating to corporate governance, including reviewing and monitoring implementation of IORI's Corporate Governance Guidelines. In addition, the Committee develops and reviews background information on candidates for the Board and makes recommendations to the Board regarding such candidates. The Committee also prepares and supervises the Board's annual review of director independence and the Board's performance self-evaluation. The Charter of the Governance and Nominating Committee was adopted on March 22, 2004. The members of the Committee are Messrs. Larsen (Chairman), Allard and Jakuszewski.
The Board has also formed a Compensation Committee of the Board of Directors, adopted a Charter for the Compensation Committee on March 22, 2004, and selected Messrs. Larsen (Chairman), Allard and Jakuszewski as the members of such Committee.
The members of the Board of Directors on the date of this Report and the Committees of the Board on which they serve are identified below:
Governance and Nominating Nominating
Audit Committee Committee Committee
Ted P. Stokley
David E. Allard X X X
Robert A. Jakuszewsk X X X
Ken L. Joines
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Governance and Nominating Nominating
Audit Committee Committee Committee
Peter L. Larsen X X X
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During February 2004, the Board adopted its Corporate Governance Guidelines. The Guidelines adopted by the Board meet or exceed the new listing standards adopted during the year by the American Stock Exchange, Inc. Pursuant to the Guidelines, the Board undertook its annual review of director independence, and during this review, the Board considered transactions and relationships between each director or any member of his or her immediate family and IORI and its subsidiaries and affiliates, including those reported under Certain Relationships and Related Transactions below. The Board also examined transactions and relationship between directors or their affiliates and members of IORI's senior management or their affiliates. As provided in the Guidelines, the purpose of such review was to determine whether such relationships or transactions were inconsistent with the determination that the director is independent.
Executive Officers
The following persons currently serve as executive officers of IORI: Mark Branigan, Executive Vice President - Residential; Louis J. Corna Executive Vice President - General Counsel/Tax Counsel and Secretary; and Ronald E. Kimbrough, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer. Their positions with IORI are not subject to a vote of stockholders. Their ages, terms of service, all positions and offices with IORI or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more are set forth below.
MARK W. BRANIGAN: Age 49, Executive Vice President - Residential (since June 2001); Executive Vice President and Chief Financial Officer (August 2000 to June 2001), Vice President - Director of Construction (August 1999 to August 2000) and Executive Vice President - Residential Asset Management (January 1992 to October 1997).
Executive Vice President - Residential (since June 2001), Executive Vice President and Chief Financial Officer (August 2000 to June 2001), Vice President - Director of Construction (August 1999 to August 2000) and Executive Vice President - Residential Management (January 1992 to October 1997) of BCM, American Realty Trust, Inc, ("ART") and TCI; Executive Vice President and Chief Financial Officer (August 2000 to June 2001) and Director (September 2000 to June 2001) of ARI; and real estate consultant (November 1997 to July 1999).
LOUIS J. CORNA: Age 56, Executive Vice President - General Counsel/Tax Counsel and Secretary (as of February 2004), Executive Vice President - Tax (since October 2001), Executive Vice President and Chief Financial
Officer (June 2001 to October 2001), and Senior Vice President - Tax (December 2001 to June 2001).
Executive Vice President - General Counsel/Tax Counsel and Secretary (as of February 2004), Executive Vice President - Tax (since October 2001), Executive Vice President and Chief Financial Officer (June 2001 to October 2001), and Senior Vice President - Tax (December 2000 to June 2001) of BCM, ARI and TCI; Private Attorney (January 2000 to December 2000); Vice President - Taxes and Assistant Treasurer (March 1998 to January 2000) of IMC Global, Inc.; and Vice President - Taxes (July 1991 to February 1998) of Whitman Corporation.
RONALD E. KIMBROUGH: Age 51, Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer (since January 2002).
Acting Principal Executive Officer, Executive Vice President and Chief Financial Officer (since January 2002) of PIAMI, ARI, and TCI; Executive Vice President and Chief Financial Officer (since January 2002) of BCM, Controller (from September 2000 to January 2002) of BCM; Vice President and Treasurer (from January 1998 to September 2000) of SWI and One Realco Corporation; and Consultant (1997).
Officers
Although not an executive officer, Robert A. Waldman served as Senior Vice President, Secretary and General Counsel until February 2004. His position with IORI was not subject to a vote of stockholders. His age, term of service, all positions and offices with IORI or BCM, other principal occupations, business experience and directorships with other companies during the last five years or more is set forth below.
ROBERT A. WALDMAN: Age 51, (Resigned on February 5, 2004) Senior Vice President and General Counsel (since January 1995); Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997 and since June 1999).
Senior Vice President and General Counsel (since January 1995), Vice President (December 1990 to January 1995) and Secretary (December 1993 to February 1997 and since June 1999 ) of TCI; Senior Vice President and General Counsel (since January 1995), Vice President (January 1993 to January 1995) and Secretary (since December 1989) of ART; Senior Vice President and General Counsel (since November 1994), Vice President and Corporate Counsel (November 1989 to November 1994), and Secretary (since November 1989) of BCM; and Senior Vice President, Secretary and General Counsel (since August 2000) of ARI.
In addition to the foregoing officers, IORI has several vice presidents and assistant secretaries who are not listed herein.
Code of Ethics
IORI has adopted a code of ethics entitled "Code of Business Conduct and Ethics" that applies to all directors, officers, and employees (including those of the contractual Advisor to IORI. In addition, IORI has adopted a code of ethics entitled "Code of Ethics for Senior Financial Officers" that applies to the principal executive officer, president, principal financial officer, chief financial officer, principal accounting officer, and controller.
The text of these documents has been posted on IORI's internet website at http://www.incomeopp-realty.com and are available in print to any shareholder who requests them.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Under the securities laws of the United States, IORI's Directors, executive officers, and any persons holding more than ten percent of IORI's shares of Common Stock are required to report their share ownership and any changes in that ownership to the Securities and Exchange Commission (the "Commission"). Specific due dates for these reports have been established and IORI is required to report any failure to file by these dates during 2002. All of these filing requirements were satisfied by IORI's Directors and executive officers and ten percent holders. In making these statements, IORI has relied on the written representations of its incumbent Directors and executive officers and its ten percent holders and copies of the reports that they have filed with the Commission.
The Advisor
Although the Board of Directors is directly responsible for managing the affairs of IORI and for setting the policies which guide it, day-to-day operations are performed by a contractual advisor under the supervision of the Board. The duties of the advisor include, among other things, locating, investigating, evaluating and recommending real estate and mortgage note investment and sales opportunities as well as financing and refinancing sources. The advisor also serves as a consultant to the Board in connection with the business plan and investment decisions made by the Board.
SWI has served as IORI's advisor since June 2003. SWI is 100% owned by Gene E. Phillips. Mr. Phillips is a Chairman, a President, a Chief Executive Officer, and a Director, and is involved in daily consultation with the officers of SWI and has significant influence over the conduct of SWI's business, including the rendering of advisory services and the making of investment decisions for itself and for IORI.
Under the Advisory Agreement, SWI is required to annually formulate and
submit for Board approval a budget and business plan containing a twelve-month forecast of operations and cash flow, a general plan for asset sales and purchases, borrowing activity, and other investments. SWI is required to report quarterly to the Board on IORI's performance against the business plan. In addition, all transactions require prior Board approval, unless they are explicitly provided for in the approved business plan or are made pursuant to authority expressly delegated to SWI by the Board.
The Advisory Agreement also requires prior approval of the Board for the retention of all consultants and third party professionals, other than legal counsel. The Advisory Agreement provides that SWI shall be deemed to be in a fiduciary relationship to the stockholders; contains a broad standard governing SWI's liability for losses by IORI; and contains guidelines for SWI's allocation of investment opportunities as among itself, IORI and other entities it advises.
The Advisory Agreement provides for SWI to be responsible for the day-to-day operations of IORI and to receive an advisory fee comprised of a gross asset fee of .0625% per month (.75% per annum) of the average of the gross asset value (total assets less allowance for amortization, depreciation or depletion and valuation reserves) and an annual net income fee equal to 7.5% of IORI's net income.
The Advisory Agreement also provides for SWI to receive an annual incentive
sales fee equal to 10% of the amount, if any, by which the aggregate sales
consideration for all real estate sold by IORI during the fiscal year exceeds
the sum of: (1) the cost of each property as originally recorded in IORI's books
for tax purposes (without deduction for depreciation, amortization or reserve
for losses), (2) capital improvements made to such assets during the period
owned, and (3) all closing costs, (including real estate commissions) incurred
in the sale of such real estate. However, no incentive fee shall be paid unless
(a) such real estate sold in such fiscal year, in the aggregate, has produced an
8% simple annual return on the net investment, including capital improvements,
calculated over the holding period before depreciation and inclusive of
operating income and sales consideration and (b) the aggregate net operating
income from all real estate owned for each of the prior and current fiscal years
shall be at least 5% higher in the current fiscal year than in the prior fiscal
year.
Additionally, pursuant to the Advisory Agreement, SWI or an affiliate of SWI is to receive an acquisition commission for supervising the acquisition, purchase or long-term lease of real estate equal to the lesser of (1) up to 1% of the cost of acquisition, inclusive of commissions, if any, paid to nonaffiliated brokers, or (2) the compensation customarily charged in arm's-length transactions by others rendering similar property acquisition services as an ongoing public activity in the same geographical location and for comparable property, provided that the aggregate purchase price of each property (including acquisition fees and real estate brokerage commissions) may not exceed such property's appraised value at acquisition.
The Advisory Agreement requires SWI or any affiliate of SWI to pay IORI one-half of any compensation received from third parties with respect to the origination, placement or brokerage of any loan made by IORI. However, the compensation retained by SWI or any affiliate of SWI shall not exceed the lesser of (1) 2% of the amount of the loan commitment or (2) a loan brokerage and commitment fee which is reasonable and fair under the circumstances.
The Advisory Agreement also provides that SWI or an affiliate of SWI is to receive a mortgage or loan acquisition fee with respect to the purchase of any existing mortgage loan equal to the lesser of (1) 1% of the amount of the loan purchased or (2) a brokerage or commitment fee which is reasonable and fair under the circumstances. Such fee will not be paid in connection with the origination or funding of any mortgage loan by IORI.
Under the Advisory Agreement, SWI or an affiliate of SWI also is to receive a mortgage brokerage and equity refinancing fee for obtaining loans or refinancing on properties equal to the lesser of (1) 1% of the amount of the loan or the amount refinanced or (2) a brokerage or refinancing fee which is reasonable and fair under the circumstances. However, no such fee shall be paid on loans from SWI or an affiliate of SWI without the approval of the Board of Directors. No fee shall be paid on loan extensions.
Under the Advisory Agreement, SWI is to receive reimbursement of certain expenses incurred by it, in the performance of advisory services to IORI.
Under the Advisory Agreement all or a portion of the annual advisory fee must be refunded by SWI if the Operating Expenses of IORI (as defined in the Advisory Agreement) exceed certain limits specified in the Advisory Agreement based on the book value, net asset value and net income of IORI during the fiscal year. SWI was required to refund $226,000 of the 2003 advisory fee under this provision.
Additionally, if management were to request that SWI render services other than those required by the Advisory Agreement, SWI or an affiliate of SWI is separately compensated for such additional services on terms to be agreed upon from time to time. As discussed below, under Property Management, IORI has hired Triad Realty Services, Ltd. ("Triad"), an affiliate of BCM, to provide management for IORI's properties and, as discussed below, under Real Estate Brokerage IORI has engaged Regis Realty I, LLC, a related party, on a non-exclusive basis to provide brokerage services for IORI.
SWI may assign the Advisory Agreement only with the prior consent of IORI.
The directors and principal officers of SWI are set forth below.
Gene E. Philips: Chairman, President, Chief Executive Officer, and Director
Ken L. Joines: Vice President, Treasurer, Secretary, and Director
Property Management
Since February 1, 1990, affiliates of BCM have provided property management services. Currently, Triad provides such property management services for a fee of 5% or less of the monthly gross rents collected on residential properties and 3% or less of the monthly gross rents collected on commercial properties under its management. Triad subcontracts with other entities for the provision of the property-level management services to IORI at various rates. The general partner of Triad is BCM. The limited partner of Triad is Highland Realty Services, Inc. ("Highland"), a related party. Triad subcontracted the property-level management and leasing of 5 of IORI's commercial properties to Regis, a related party, which is a company owned by Highland, until December 2002. Regis was entitled to receive property and construction management fees and leasing commissions in accordance with its property-level management agreement with Triad, until December 2002. Beginning January 1, 2003, Regis Realty I, LLC ("Regis I") provides these services. The sole member of Regis I is Highland.
Real Estate Brokerage
Regis also provided real estate brokerage services to IORI (on a non-exclusive basis), until December 2002. Regis was entitled to receive a real estate commission for property purchases and sales in accordance with the following sliding scale of total fees to be paid: (1) maximum fee of 4.5% on the first $2.0 million of any purchase or sale transaction of which no more than 3.5% would be paid to Regis or affiliates; (2) maximum fee of 3.5% on transaction amounts between $2.0 million-$5.0 million of which no more than 3% would be paid to Regis or affiliates; (3) maximum fee of 2.5% on transaction amounts between $5.0 million-$10.0 million of which no more than 2% would be paid to Regis or affiliates; and (4) maximum fee of 2% on transaction amounts in excess of $10.0 million of which no more than 1.5% would be paid to Regis or affiliates. Beginning January 1, 2003, Regis I provides these services. The sole member of Regis I is Highland.
ITEM 11. EXECUTIVE COMPENSATION
IORI has no employees, payroll or benefit plans and pays no compensation to its executive officers. The executive officers of IORI, who are also officers or employees of PIAMI, a related party, are compensated by PIAMI. Such executive officers perform a variety of services for PIAMI and the amount of their compensation is determined solely by PIAMI. See
ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The
Advisor" for a more detailed discussion of the compensation payable to
SWI/PIAMI.
ITEM 11. EXECUTIVE COMPENSATION (Continued)
The only remuneration paid by IORI is to the Directors who are not officers or directors of SWI or its related companies. The Independent Directors (1) review the business plan of IORI to determine that it is in the best interest of the stockholders, (2) review the advisory contract, (3) supervise the performance of IORI's advisor and review the reasonableness of the compensation paid to the advisor in terms of the nature and quality of services performed, (4) reviews the reasonableness of the total fees and expenses of IORI and (5) select, when necessary, a qualified independent real estate appraiser to appraise properties acquired.
Each Independent Director receives compensation in the amount of $15,000 per year, plus reimbursement for expenses. The Chairman of the Board receives an additional fee of $1,500 per year. The members of the Audit Committee receive a fee of $250 for each committee meeting attended. In addition, each Independent Director receives an additional fee of $1,000 per day for any special services rendered by him to IORI outside of his ordinary duties as Director, plus reimbursement of expenses.
During 2003, $53,000 was paid to the Independent Directors in total Directors' fees for all services including the annual fee for service during the period January 1, 2003, through December 31, 2003. Those fees by directors are as follows: Earl D. Cecil, $17,250; Ted P. Stokely, $18,750; and Martin L. White, $17,000.
Performance Graph
The following performance graph compares the cumulative total stockholder return on IORI's shares of Common Stock with the Dow Jones US Total Market Index ("DJ Total Market Index") and the Dow Jones Real Estate Investment Index ("DJ Real Estate Index"). The comparison assumes that $100 was invested on December 31, 1998, in IORI's shares of Common Stock and in each of the indices and further assumes the reinvestment of all distributions. Past performance is not necessarily an indicator of future performance.
[PERFORMANCE GRAPH]
12/31/98 12/31/99 12/31/00 12/31/01 12/31/02 12/31/03
-------- -------- -------- -------- -------- --------
Income Opportunity Reality Investors 100 95 152 339 351 289
Dow Jones US Real Estate Index 100 95 121 135 140 192
Dow Jones US Total Market Index 100 123 111 98 76 100
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following table sets forth the ownership of IORI's shares of Common Stock, both beneficially and of record, both individually and in the aggregate for those persons or entities known by IORI to be beneficial owners of more than 5% of its shares of Common Stock as of the close of business on February 28, 2004.
Amount and
Nature of Approximate
Beneficial Percent of
Name and Address of Beneficial Owner Ownership Class (1)
----------------------------------------- ---------- -----------
Syntek West, Inc. ...................... 794,373 55.2%
1755 Wittington Place
Suite 340
Dallas, Texas 75234
Transcontinental Realty Investors, Inc... 345,728 24.0
1800 Valley View Lane
Suite 300
Dallas, Texas 75234
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(1) Percentages are based upon 1,438,945 shares of Common Stock outstanding at March 23, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(Continued)
Security Ownership of Management. The following table sets forth the ownership of IORI's shares of Common Stock, both beneficially and of record, both individually and in the aggregate, for the Directors and executive officers of IORI as of the close of business on March 23, 2004.
Amount and
Nature of Approximate
Beneficial Percent of
Name of Beneficial Owner Ownership Class (1)
----------------------------------------- ---------- -----------
Ken L. Joines............................ 794,373(2) 55.2%
Mark W. Branigan......................... 345,728(3) 24.0%
Louis J. Corna........................... 345,728(3) 24.0%
Ronald E. Kimbrough...................... 345,728(3) 24.0%
Ted P. Stokely........................... 345,728(3) 24.0%
All Directors and Executive Officers as
a group (9 individuals)............... 1,140,101(2)(3) 79.2%
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(2) Includes 794,373 shares owned by SWI of which the directors and executive officers of SWI may be deemed to be the beneficial owners by virtue of their positions as directors and executive officers of SWI.
(2) Includes 345,728 shares owned by TCI of which the directors and executive officers of TCI may be deemed to be the beneficial owners by virtue of their positions as directors and executive officers of TCI.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Business Relationships
In February 1989, the Board of Directors voted to retain BCM as IORI's advisor.
See ITEM 10. "DIRECTORS, EXECUTIVE OFFICERS AND ADVISOR OF THE REGISTRANT--The
Advisor." BCM is a company of which Messrs. Branigan, Corna and Kimbrough serve
as executive officers. BCM is indirectly owned by a trust for the children of
Gene E. Phillips. Mr. Phillips is not an officer or director of BCM, but serves
as a representative of trust, is indirectly involved in daily consultation with
the officers of BCM and has significant influence over the conduct of BCM's
business, including the rendering of advisory services and the making of
investment decisions for itself and for IORI. On June 2003, BCM ended its
advisory agreement with IORI. SWI has served as IORI's advisor since July 2003.
SWI is 100% owned by Gene E. Phillips. Mr. Phillips is a Chairman, a President,
a Chief Executive Officer, and a Director, and is involved in daily consultation
with the officers of SWI and has significant influence over the conduct of SWI's
business, including the rendering of advisory services and the making of
investment decisions for itself and for IORI.
Since February 1, 1991, affiliates of BCM have provided property management services to IORI. Currently, Triad provides such property management services. The general partner of Triad is BCM. The limited partner of Triad is Highland, a related party. Triad subcontracted the property-level management and leasing of five of IORI's commercial properties to Regis, a related party, which is a company owned by Highland, until December 2002. Since January 1, 2003, Regis I provided this service.
Regis also provides real estate brokerage services for IORI, on a non-exclusive basis, and receives brokerage commissions in accordance with the brokerage agreement, until December 2002. Since January 1, 2003, Regis I provided this service.
Ted Stokely who also serves as a director of ARI and TCI owes fiduciary duties to TCI and ARI as well as IORI under applicable law. BCM/PIAMI also serves as advisor to ARI and TCI. Messrs. Branigan, Corna and Kimbrough serve as executive officers of ARI, TCI and IORI.
Related Party Transactions
Historically, IORI has engaged in and may continue to engage in business transactions, including real estate partnerships, with related parties. Management believes that all of the related party transactions represented the best investments available at the time and were at least as advantageous to IORI as could have been obtained from unrelated third parties.
In January 2002, IORI purchased 100% of the outstanding common shares of Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of American Realty Investors, Inc. ("ARI"), a related party, for $5.1 million cash. Rosedale owned the 83,331 sq. ft. Rosedale Towers Office Building in Roseville, Minnesota. ARI guaranteed that the asset would produce at least a 12% return annually of the purchase price for a period of three years from the purchase date. If the asset failed to produce the 12% return, ARI shall pay IORI any shortfall. Management has classified this related party transaction as a note receivable from ARI. In the first quarter of 2002, after reviewing the property's fair value after costs to sell, even though ARI has guaranteed the 12% return, IORI recognized a provision for loss on the note receivable of $767,000. In December 2002, the Rosedale Towers Office Building was sold for $7.2 million. IORI received $3.5 million of the proceeds after the payment of the first lien debt and various closing costs. IORI recognized an additional loss of $801,000 on its note.
In February 2002, IORI funded a $2.0 million mortgage loan as a participation agreement with TCI, a related party. The loan was secured by a second lien on a retail center in Montgomery County, Texas. The note receivable bore interest at 16.0% per annum, required monthly interest only payments of $47,000 and matured in February 2002. In February 2002, the loan was extended until April 2002. In April 2002, IORI extended the loan until July 2002, receiving $8,500 as an extension fee. In July 2002, the loan was extended until September 2002, with IORI receiving $8,500 as an extension fee. Also in July 2002, IORI received a $500,000 principal paydown on the note. In August 2002, the note was paid off including accrued but unpaid interest.
On December 30, 2003, a Promissory Note in the amount of $6.3 million given by Housing to NLP was assigned from ARI to IORI. On December 30, 2003, a Promissory Note in the amount of $2.0 million given by Housing to NLP was assigned from ARI to IORI. These assignments were payments on certain intercompany receivables due to IORI.
On December 18, 2003, IORI purchased 100% of the outstanding common shares of Transcontinental Brewery Corporation ("Brewery"), a wholly-owned subsidiary of TCI, a related party, for $4.0 million for a reduction of intercompany debt in the same amount. Brewery owns the 19.96 acres of land and the 133,000 sq. ft. Eagle Crest Warehouse Building in Farmers Branch, Texas.
On December 18, 2003, IORI purchased 100% of the outstanding common shares of Transcontinental Treehouse Corporation ("Treehouse-IR"), a wholly-owned subsidiary of TCI, for $7.5 million for a reduction of intercompany debt in the amount of $2.4 million subject to mortgage lien in the amount of $5.1 million. Treehouse-IR owns the 153,072 sq. ft. Treehouse Apartments Building in Irving, Texas.
On December 18, 2003, IORI purchased 100% of the outstanding common shares of Transcontinental Parkway Corporation ("Parkway"), a wholly-owned subsidiary of TCI, for $4.0 million for reduction of intercompany debt in the amount of $2.4 million subject to mortgage lien in the amount of $1.6 million. Parkway owns the 28,374 sq. ft. Parkway Shopping Center in Dallas, Texas.
As more fully described in ITEM 2. "PROPERTIES--Real Estate," IORI is a partner with TCI in Nakash Income Associates and TCI Eton Square, L.P.
In 2003, IORI paid SWI and its affiliates and related parties $425,000 in advisory fees $130,000 in net income fees, $547,000 in mortgage brokerage and equity refinancing fees, and $325,000 in property and construction management fees and leasing commissions, net of property management fees paid to subcontractors other than Regis. In addition, from time-to-time, IORI has made advances to SWI which generally have not had specific repayment terms and have been reflected in IORI's financial statements as other assets or other liabilities from affiliates. At December 31, 2003, IORI had advanced SWI $432,000, ARI and TCI, $367,000, $261,000, respectively.
Restrictions on Related Party Transactions
Article FOURTEENTH of IORI's Articles of Incorporation provides that IORI shall not, directly or indirectly, contract or engage in any transaction with (1) any director, officer or employee of IORI, (2) any director, officer or employee of the advisor, (3) the advisor or (4) any affiliate or associate (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of any of the aforementioned persons, unless (a) the material facts as to the relationship among or financial interest of the relevant individuals or persons and as to the contract or transaction are disclosed to or are known by IORI's Board of Directors or the appropriate committee thereof and (b) IORI's Board of Directors or committee thereof determines that such contract or transaction is fair to IORI and simultaneously authorizes or ratifies such contract or transaction by the affirmative vote of a majority of independent directors of IORI entitled to vote thereon.
Article FOURTEENTH defines an "Independent Director" as one who is neither an officer or employee of IORI, nor a director, officer or employee of IORI's advisor.
PART IV
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees for professional services rendered to IORI for the years 2003 and 2002 by IORI's principal accounting firm, BDO Seidman, LLP (January 2002 to May 2003), and Farmer, Fuqua, & Huff, P.C. (since June 2003).
Type of Fees 2003 2002
------------------ ------- -------
Audit Fees $31,180 $54,269
Audit-Related Fees
Tax Fees (1) 2,000 3,800
All Other Fees
------- -------
$33,180 $58,069
======= =======
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(1) Tax fees include fees for tax planning, tax consultation, return preparation, and review of tax returns.
Under the Sarbanes-Oxley Act of 2002 (the "SO Act"), and the rules of the Securities and Exchange Commission (the "SEC"), the Audit Committee of the Board of Directors is responsible for the appointment, compensation and oversight of the work of the independent auditor. The purpose of the provisions of the SO Act and the SEC rules for the Audit Committee role in retaining the independent auditor is two-fold. First, the authority and responsibility for the appointment, compensation and oversight of the auditors should be with directors who are independent of management. Second, any non-audit work performed by the auditors should be reviewed and approved by these same independent directors to ensure that any non-audit services performed by the auditor do not impair the independence of the independent auditor. To implement the provisions of the SO Act, the SEC issued rules specifying the types of services that an independent may not provide to its audit client, and governing the Audit Committee's administration of the engagement of the independent auditor. As part of this responsibility, the Audit Committee is required to preapprove the audit and non-audit services performed by the independent auditor in order to assure that they do not impair the auditor's independence. Accordingly, the Audit Committee has adopted a preapproval policy of audit and non-audit services (the "Policy"), which sets forth the procedures and conditions pursuant to which services to be performed by the independent auditor are to be preapproved. Consistent with the SEC rules establishing two different approaches to preapproving non-prohibited services, the Policy of the Audit Committee covers Preapproval of audit services, audit-related services, international administration tax services, non-U.S. income tax compliance services, pension and benefit plan consulting and
compliance services, and U.S. tax compliance and planning. At the beginning of each fiscal year, the Audit Committee will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and to approve or reject each service, taking into account whether services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor's independence from management. Typically, in addition to the generally preapproved services, other services would include due diligence for an acquisition that may or may not have been known at the beginning of the year. The Audit Committee has also delegated to any member of the Audit Committee designated by the Board or the financial expert member of the Audit Committee responsibilities to preapprove services to be performed by the independent auditor not exceeding $25,000 in value or cost per engagement of audit and non-audit services, and such authority may only be exercised when the Audit Committee is not in session.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
1. Consolidated Financial Statements
Report of Independent Certified Public Accountants
Consolidated Balance Sheets-December 31, 2003 and 2002
Consolidated Statements of Operations-Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Stockholders' Equity-Years Ended December 31, 2003, 2002 and 2001
Consolidated Statements of Cash Flows-Years Ended December 31, 2003, 2002 and 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules ` Schedule III--Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or because the required information is shown in the Financial Statements or the Notes thereto.
3. Exhibits
The following documents are filed as Exhibits to this Report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.0 Articles of Incorporation of Income Opportunity Realty Investors, Inc.
(incorporated by reference to Appendix C to the Registrant's
Registration Statement on Form S-4 dated February 12, 1996).
3.1 Bylaws of Income Opportunity Realty Investors, Inc. (incorporated by
reference to Appendix D to the Registrant's Registration Statement on
Form S-4 dated February 12, 1996).
10.0 Advisory Agreement dated as of October 15, 1998, between Income
Opportunity Realty Investors, Inc. and Basic Capital Management, Inc.,
(incorporated by reference to Exhibit 10.0 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1998).
21.0* Subsidiaries of the Registrant.
31.0* Rule 13a-14(a) Certification by Acting Principal Executive Officer and
Chief Financial Officer.
32.0* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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(b) Reports on Form 8-K. During the last quarter of the period covered by this report, following current reports on Form 8-K were filed on the dates indicated reporting the items set forth below:
- Current Report on Form 8-K for event occurring on October 14, 2003 (dated November 14, 2003) reporting under Item 2 "Acquisition or Disposition of Assets" and Item 7 "Financial Statements and Exhibits."
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Income Opportunity Realty Investors, Inc.
Dated: March 30, 2004 By: /s/ Ronald E. Kimbrough
-----------------------------------
Ronald E. Kimbrough
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer
and
Acting Principal Executive Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title Date
----------------------------- --------------------------- --------------
/s/ Ted P. Stokely Chairman of the Board March 30, 2004
----------------------------- and Director
Ted P. Stokely
/s/ David E. Allard Director March 30, 2004
-----------------------------
David E. Allard
/s/ Robert A. Jakuszewski Director March 30, 2004
-----------------------------
Robert A. Jakuszewski
/s/ Ken L. Joines Director March 30, 2004
-----------------------------
Ken L. Joines
/s/ Peter L. Larsen Director March 30, 2004
-----------------------------
Peter L. Larsen
/s/ Ronald E. Kimbrough Executive Vice President March 30, 2004
----------------------------- and Chief Financial Officer
Ronald E. Kimbrough (Principal Financial and
Accounting Officer and
Acting Principal Executive
Officer)
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ANNUAL REPORT ON FORM 10-K
EXHIBIT INDEX
For the Year Ended December 31, 2003
EXHIBIT
NUMBER DESCRIPTION
3.0 Articles of Incorporation of Income Opportunity Realty Investors,
Inc. (incorporated by reference to Appendix C to the Registrant's
Registration Statement on Form S-4 dated February 12, 1996).
3.1 Bylaws of Income Opportunity Realty Investors, Inc. (incorporated
by reference to Appendix D to the Registrant's Registration
Statement on Form S-4 dated February 12, 1996).
10.0 Advisory Agreement dated as of October 15, 1998, between Income
Opportunity Realty Investors, Inc. and Basic Capital Management,
Inc., (incorporated by reference to Exhibit 10.0 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998).
21.0* Subsidiaries of the Registrant.
31.0* Rule 13a-14(a) Certification by Acting Principal Executive
Officer and Chief Financial Officer.
32.0* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
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* Filed Herewith
EXHIBIT 21.0
INCOME OPPORTUNITY REALTY INVESTORS, INC.
SUBSIDIARIES OF THE REGISTRANT
The following is a list of all subsidiaries and partnership interests of Income Opportunity Realty Investors, Inc. and the state or other jurisdiction of organization or incorporation:
JURISDICTION OF ORGANIATION
NAME OF ENTITY OR INCORPORATION
Corporations
Income Opportunity La Mesa Corporation Nevada
Income Opportunity Yeager Corp. Nevada
IORI Akard Corporation Nevada
IORI Enclave 5, Inc. Nevada
La Mesa Village Plaza Commercial Association California
Transcontinental Brewery, Inc. Nevada
Transcontinental Parkway Corporation Nevada
Transcontinental Treehouse Corporation Nevada
Partnerships
Nakash Income Associates Georgia
TCI Eaton Square LP Texas
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EXHIBIT 31.0
CERTIFICATION
I, Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer and Acting Principal Executive Officer) of Income Opportunity Realty Investors, Inc. ("IORI"), certify that:
1. I have reviewed this annual report on Form 10-K of IORI;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. I have disclosed, based upon my most recent evaluation of internal control over financial reporting, to IORI's auditors and Audit Committee of the Board of Directors (or persons fulfilling the equivalent function):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect IORI's ability to record, process, summarize, and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in IORI's internal controls over financial reporting.
Dated: March 31, 2004 /s/ Ronald E. Kimbrough
----------------------------------
Ronald E. Kimbrough
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer
and Acting Principal Executive
Officer)
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EXHIBIT 32.0
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Annual Report of Income Opportunity Realty Investors, Inc. (the "Company"), on Form 10-K for the period ended December 31, 2003, as filed with Securities Exchange Commission on the date hereof (the "Report"), I, Ronald E. Kimbrough, Executive Vice President and Chief Financial Officer, Principal Financial and Accounting Officer and Acting Principal Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
Date: March 31, 2004 /s/ Ronald E. Kimbrough
-----------------------------------
Ronald E. Kimbrough
Executive Vice President and Chief
Financial Officer (Principal
Financial and Accounting Officer
and Acting Principal Executive
Officer)
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