-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TgjL6Tvrm0D803YNVxe0yM2ZLB6FLRax9EpYy/jdeT8U+8wlTwD6AYMmGjIqig9E vrO2PsrmGt6TEmzY6iVs/Q== 0000950134-95-003081.txt : 19951121 0000950134-95-003081.hdr.sgml : 19951121 ACCESSION NUMBER: 0000950134-95-003081 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19951120 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: INCOME OPPORTUNITY REALTY TRUST CENTRAL INDEX KEY: 0000760730 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 946578120 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-09525 FILM NUMBER: 95595008 BUSINESS ADDRESS: STREET 1: 10670 N CENTRAL EXPRSWY STE 300 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 2146924700 MAIL ADDRESS: STREET 1: 10670 NORTH CENTRAL EXPRESSWAY STREET 2: SUITE 600 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: INCOME OPPORTUNITY REALTY INVESTORS INC DATE OF NAME CHANGE: 19911003 FORMER COMPANY: FORMER CONFORMED NAME: CONSOLIDATED CAPITAL INCOME OPPORTUNITY TRUST 2 DATE OF NAME CHANGE: 19900815 10-K405/A 1 AMENDMENT TO FORM 10-K FOR YEAR ENDED 12/31/94 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1994 Commission File Number 1-9525 ------- INCOME OPPORTUNITY REALTY TRUST ------------------------------------------------------ (Exact Name of Registrant as Specified in Its Charter) California 94-6578120 - ------------------------------- ------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 10670 North Central Expressway, Suite 300, Dallas, Texas 75231 - -------------------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (214) 692-4700 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered - ------------------------------ --------------------------- Shares of Beneficial Interest, no 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] As of March 3, 1995, the Registrant had 791,444 shares of beneficial interest outstanding. Of the total shares outstanding 444,718 were held by other than those who may be deemed to be affiliates, for an aggregate value of $8,728,000 based on the last trade as reported on the American Stock Exchange on March 3, 1995. The basis of this calculation does not constitute a determination by the Registrant that all of such persons or entities are affiliates of the Registrant as defined in Rule 405 of the Securities Act of 1933, as amended. Documents Incorporated by Reference: NONE 1 2 This Form 10-K/A amends the Registrant's annual report on Form 10-K for the fiscal year ended December 31, 1994 as follows: ITEM 3. LEGAL PROCEEDINGS - pages 12 and 13 ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED SHAREHOLDER MATTERS - page 15 ITEM 6. SELECTED FINANCIAL DATA - page 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - page 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - pages 22, 30, 32, 33, 40, 41 and F-1 through F-11 ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K - page 67 3 ITEM 2. PROPERTIES (Continued) Mortgage Loans (Continued) Wraparound Mortgage Loans. A wraparound mortgage loan, sometimes called an all-inclusive loan, is a mortgage loan having an original principal amount equal to the outstanding balance under the prior existing mortgage loan(s) plus the amount actually advanced under the wraparound mortgage loan. As discussed under Real Estate, above, as of December 31, 1994, the Trust recorded the insubstance foreclosure of the Cedars Apartments, the collateral securing a mortgage note receivable. ITEM 3. LEGAL PROCEEDINGS Olive Litigation In February 1990, the Trust, together with CMET, National Income Realty Trust ("NIRT") and TCI, three real estate entities with, at the time, the same officers, directors or trustees and advisor as the Trust, entered into a settlement of a class and derivative action entitled Olive et al. v. National Income Realty Trust et al., pending before the United States District Court for the Northern District of California and relating to the operation and management of each of such entities. The Olive Litigation was originally filed on December 8, 1989 and alleged, among other things, a breach by the Trustees of the Declaration of Trust, and a breach of trust and a breach of fiduciary duty owed by the Trustees to the Trust by, among other things, retaining BCM as the Advisor to the Trust without shareholder approval. The plaintiffs sought injunctive relief and other appropriate relief from the Court. On April 23, 1990, the Court granted final approval of the terms of the settlement. On May 4, 1994, the parties entered into a Modification of Stipulation of Settlement dated April 27, 1994 (the "Modification") which settled subsequent claims of breaches of the settlement which were asserted by the plaintiffs and modified certain provisions of April 1990 settlement. The Modification was preliminarily approved by the court July 1, 1994 and final court approval was entered on December 12, 1994. The effective date of the Modification was January 11, 1995. The Modification, among other things, provided for the addition of three new unaffiliated members to the Trust's Board of Trustees and set forth new requirements for the approval of any transactions with affiliates over the next five years. In addition, BCM, the Trust's advisor, Mr. Phillips and William S. Friedman, who served as President and Trustee of the Trust until February 24, 1994, President of BCM until May 1, 1993 and director of BCM until December 22, 1989, agreed to pay a total of $1.2 million to the Trust, CMET, NIRT and TCI, of which the Trust's share is $150,000. The Trust received $12,300 in May 1994. The remaining $137,000 is to be paid in 18 monthly installments which began February 1, 1995. Under the Modification, the Trust, CMET, NIRT, TCI and their shareholders released the defendants from any claims relating to the plaintiffs' allegations. The Trust, CMET, NIRT and TCI also agreed to waive any demand requirement for the plaintiffs to pursue claims on behalf of each of them against certain persons or entities. The Modification also requires that any shares of the Trust held by Messrs. Phillips, Friedman or their affiliates shall be (i) voted in favor of the reelection of all current members of the Trust's Board of Trustees that stand for reelection during the two calendar years following the effective date of the Modification and (ii) voted in favor of all new 12 4 ITEM 3. LEGAL PROCEEDINGS (Continued) Olive Litigation (Continued) members of the Trust's Board of Trustees appointed pursuant to the terms of the Modification that stand for reelection during the three calendar years following the effective date of the Modification. Pursuant to the terms of the Modification, any related party transaction which the Trust may enter into prior to April 27, 1999, will require the unanimous approval of the Trust's Board of Trustees. In addition, related party transactions may only be entered into in exceptional circumstances and after a determination by the Trust's Board of Trustees that the transaction is in the best interests of the Trust and that no other opportunity exists that is as good as the opportunity presented by such transaction. For purposes of the Modification requirements, the term "related party transaction" means and includes (i) any transaction between or among the Trust or CMET, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any transaction between or among the Trust, its affiliates or subsidiaries and the Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any transaction between or among the Trust or any of its affiliates or subsidiaries and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates has an ongoing or contemplated business or financial transaction or relationship of any kind, whether direct or indirect, or has had such a transaction or relationship in the preceding one year. The Modification requirements for related party transactions do not apply to direct contractual agreements for services between the Trust and the Advisor or one of its affiliates (i.e. the Advisory Agreement, Property Management Contracts, etc.). These agreements require the prior approval by two-thirds of the Trustees of the Trust, and if required, approval by a majority of the shareholders. The Modification requirements for related party transactions also do not apply to joint ventures between or among the Trust and CMET, NIRT or TCI or any of their affiliates or subsidiaries and a third party having no prior or intended future business or financial relationship with Mr. Phillips, Mr. Friedman, the Advisor, or any affiliate of such parties. Such joint ventures may be entered into on the affirmative vote of a majority of the Trustees of the Trust. The Modification also terminated a number of the provisions of the settlement, including the requirement that the Trust, CMET, NIRT and TCI maintain a Related Party Transaction Committee and a Litigation Committee of their respective Boards. The court retained jurisdiction to enforce the Modification. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Trust held its annual meeting of shareholders on March 7, 1995, at which meeting the Trust's shareholders were asked to consider and vote upon (I) the election of Trustees of the Trust and (ii) the renewal of the Trust's advisory agreement with BCM. At such meeting the Trust's shareholders elected the following individuals as Trustees of the Trust:
Shares Voting ------------------------- Withheld Trustee For Authority ------- --------- ----------- Geoffrey C. Etnire 576,092 12,723 Harold Furst, Ph.D. 576,063 12,752 John P. Parsons 576,138 12,677 Bennett B. Sims 575,057 13,758 Ted P. Stokely 575,057 13,758 Martin L. White 576,138 12,677 Edward G. Zampa 576,138 12,677
Also at such meeting the Trust's shareholders approved the renewal of the Trust's advisory agreement with BCM until the next annual meeting of shareholders with 558,305 votes for the proposal, 17,214 votes against the proposal and 13,295 votes abstaining. 13 5 ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF BENEFICIAL INTEREST AND RELATED SHAREHOLDER MATTERS (Continued) On December 5, 1989, the Trust's Board of Trustees approved a share repurchase program. The Trust's Board of Trustees has authorized the Trust to repurchase a total of 100,000 of its shares of beneficial interest pursuant to such program. Through March 3, 1995, the Trust has repurchased 67,952 shares pursuant to such program at a cost to the Trust of $1.2 million. The Trust purchased none of its shares of beneficial interest in 1994 or 1995, through March 3, 1995. On March 24, 1989, the Trust distributed one share purchase right for each outstanding share of beneficial interest of the Trust. On December 10, 1991, the Trust's Board of Trustees voted to redeem the rights having determined that the they were no longer necessary to protect the Trust from coercive tender offers. On February 10, 1992, the rights were redeemed, the Trust's shareholders receiving $.04 for each Right. In connection with such redemption, Messrs. Phillips and Friedman and their affiliates, who owned approximately 12% of the Trust's outstanding shares of beneficial interest at the time, agreed not to acquire more than 40% of the Trust's outstanding shares of beneficial interest without the prior action of the Trust's Board of Trustees to the effect that they do not object to such increased ownership. In August 1994, Mr. Phillips and his affiliates, primarily ART and TCI, owned approximately 39.8% of the Trust's outstanding shares of beneficial interest. This shareholder group desired to purchase additional shares of the Trust and requested that the Trust's Board of Trustees consider the elimination of the limitations on the percentage of shares which may be acquired by the shareholder group. The Board of Trustees reviewed the limitation and determined that, due to the fact that Mr. Friedman is no longer affiliated with the shareholder group, and had disposed of any shares of the Trust which he or his affiliates may have owned, the limitation should no longer apply to Mr. Friedman or his affiliates. The Board of Trustees also determined that there was no reason to object to the purchase of additional shares of the Trust by the shareholder group and on August 23, 1994, the Trust's Board of Trustees adopted a resolution to the effect that they do not object to the acquisition of up to 49% of the Trust's outstanding shares of beneficial interest by Mr. Phillips and his affiliates. In determining total ownership, shares of beneficial interest of the Trust owned by Mr. Friedman, if any, are no longer to be included. Pursuant to this action, Mr. Phillips and his affiliates may not acquire more than 49% of the Trust's outstanding shares of beneficial interest without the prior action of the Trust's Board of Trustees to the effect that they do not object to such increased ownership. At March 3, 1995, Mr. Phillips and his affiliates, primarily ART and TCI, owned approximately 44% of the Trust's outstanding shares of beneficial interest. 15 6 ITEM 6. SELECTED FINANCIAL DATA
For the Years Ended December 31, --------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ------------ ------------- ------------- -------------- -------------- (dollars in thousands, except per share) EARNINGS DATA Income................... $ 6,938 $ 7,316 $ 6,619 $ 5,592 $ 8,463 Expense.................. 7,225 7,247 7,089 14,645 17,552 ------------ ------------- ------------- -------------- -------------- Income (loss) before (loss) on sale of real estate and extraordinary gain...... (287) 69 (470) (9,053) (9,089) (Loss) on sale of real estate.................. - - (81) - - Extraordinary gain....... - 806 - 4,765 - ------------ ------------- ------------- -------------- -------------- Net income (loss)........ $ (287) $ 875 $ (551) $ (4,288) $ (9,089) ============ ============= ============= ============== ============== PER SHARE DATA Income (loss) before extraordinary gain...... $ (.36) $ .09 $ (.64) $ (9.97) $ (9.79) Extraordinary gain....... - 1.00 - 5.25 - ------------ ------------- ------------- -------------- -------------- Net income (loss)........ $ (.36) $ 1.09 $ (.64) $ (4.72) $ (9.79) ============ ============= ============= ============== ============== Distributions per share.. $ .60 $ .50 $ - $ 1.44 $ .88 Weighted average shares outstanding...... 791,444 804,716 864,321 907,665 928,606
December 31, --------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 ------------ ------------- ------------- -------------- -------------- (dollars in thousands, except per share) BALANCE SHEET DATA Notes and interest receivable.............. $ 1,974 $ 2,983 $ 2,922 $ 2,583 $ 28,850 Real estate held for sale.................... 41,035 40,831 41,646 43,779 34,331 Total assets............. 49,035 50,127 51,275 52,401 75,631 Notes and interest payable................. 20,717 21,354 22,447 22,651 40,798 Redeemable shares of beneficial interest..... - - - 6,062 6,062 Shareholders' equity..... 25,572 26,334 26,380 20,904 25,574 Book value per share..... $ 32.31 $ 33.27 $ 30.52 $ 30.14 $ 34.00
Shares and per share data have been restated to give effect to the one-for-four reverse share split effected September 9, 1991. 16 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Liquidity and Capital Resources (Continued) On a quarterly basis, the Trust's management reviews the carrying values of the Trust's mortgage notes receivable and properties. Generally accepted accounting principles require that the carrying value of an investment cannot exceed the lower of its cost or its estimated net realizable value. In those instances in which estimates of net realizable value of the Trust's properties or notes are less than the carrying value thereof, at the time of evaluation, a provision for loss is recorded by a charge against earnings. Estimated net realizable value of mortgage notes receivable is based on management's review and evaluation of the collateral properties securing such notes. The property review generally includes selective property inspections, a review of the property's current rents compared to market rents, a review of the property's expenses, a review of maintenance requirements, discussions with the manager of the property and a review of properties in the surrounding area. Results of Operations 1994 COMPARED TO 1993. For the year 1994, the Trust had a net loss of $287,000, as compared with net income of $875,000 in 1993. The Trust's 1993 net income included an extraordinary gain of $806,000 on the early payoff of mortgage debt. The primary factors contributing to the Trust's 1994 net loss are discussed in the following paragraphs. Net rental income (rental income less expenses applicable to rental income) for 1994 was $3.1 million, as compared to $3.4 million in 1993. A decrease of $242,000 is due to a decline in occupancy at one of the Trust's commercial properties and a decrease of $113,000 is due to a decline in occupancy and an increase in expenses at one of the Trust's apartment complexes. These decreases are partially offset by an increase in net rental income of $108,000 from increases in occupancy and a decrease in expenses at one of the Trust's other apartment complexes. Net rental income is expected to increase in 1995 due to anticipated increases in rental and occupancy rates and from obtaining the Cedars Apartments, the collateral securing a note receivable. The property was recorded as an insubstance foreclosure as of December 31, 1994 with title to the property being received on March 2, 1995. Equity in income of partnerships was $86,000 in 1994, as compared to $203,000 in 1993. The decrease is attributable to an increase in repair expenses representing the deductible portion of a fire loss at one of the Tri-City apartment complexes. Interest income of $294,000 for 1994 approximated the $308,000 in 1993. Interest income in 1995 is expected to decrease due to the insubstance foreclosure as of December 31, 1994, of the Cedars Apartments, the collateral securing one of the Trust's mortgage notes receivable. See NOTE 2. "NOTES AND INTEREST RECEIVABLE." Interest expense of $1.9 million in 1994 approximated the $1.8 million in 1993. 18 8 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ------ INCOME OPPORTUNITY REALTY TRUST ------------------------------- Report of Independent Certified Public Accountants............ 23 Consolidated Balance Sheets - December 31, 1994 and 1993.................................. 24 Consolidated Statements of Operations - Years Ended December 31, 1994, 1993 and 1992................ 25 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1994, 1993 and 1992................ 26 Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992................ 27 Notes to Consolidated Financial Statements.................... 29 Schedule III - Real Estate and Accumulated Depreciation....... 41 Schedule IV - Mortgage Loans on Real Estate.................. 43 TRI-CITY LIMITED PARTNERSHIP ---------------------------- Report of Independent Certified Public Accountants............ F- 1 Balance Sheets - December 31, 1994 and 1993................... F- 2 Statements of Operations - Years ended December 31, 1994, 1993 and 1992................ F- 3 Statements of Partners' Equity - Years ended December 31, 1994, 1993 and 1992................ F- 4 Statements of Cash Flows - Years ended December 31, 1994, 1993 and 1992................ F- 5 Notes to Financial Statements................................. F- 6 Schedule III - Real Estate and Accumulated Depreciation....... F-10
All other schedules are omitted because they are not required, are not applicable or the information required is included in the Consolidated Financial Statements or the notes thereto. 22 9 INCOME OPPORTUNITY REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) complete or improve, hold and dispose. The cost of funds, one of the criteria used in the calculation of estimated net realizable value (approximately 4.8% and 4.1% as of December 31, 1994 and 1993, respectively) is based on the average cost of all capital. The provision for losses is based on estimates, and actual losses may vary from current estimates. Such estimates are reviewed periodically, and any additional provision determined to be necessary is charged against earnings in the period in which it becomes reasonably estimable. Foreclosed real estate held for sale. Foreclosed real estate is initially recorded at new cost, defined as the lower of original cost or fair value minus estimated costs of sale. After foreclosure, the excess of new cost, if any, over fair value minus estimated costs of sale is recognized in a valuation allowance. Subsequent changes in fair value either increase or decrease such valuation allowance. See "Allowance for estimated losses" above. Properties held for sale are depreciated in accordance with the Trust's established depreciation policies. See "Real estate and depreciation" below. Real estate held for sale and depreciation. Real estate is carried at the lower of cost or estimated net realizable value, except for foreclosed properties held for sale, which are recorded initially at the lower of original cost or fair value minus estimated costs of sale. Depreciation is provided for by the straight-line method over the estimated useful lives of the assets, which range from 3 to 40 years. Present value discounts. The Trust provides for present value discounts on notes receivable that have interest rates that differ substantially from prevailing market rates and amortizes such discounts by the interest method over the lives of the related notes. The factors considered in determining a market rate for notes receivable include the borrower's credit standing, nature of the collateral and payment terms of the note. 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. Investment in noncontrolled partnerships. The Trust uses the equity method to account for investments in partnerships which it does not control. Under the equity method, the Trust's initial investment, recorded at cost, is increased by the Trust's proportionate share of the partnership's operating income and additional advances and decreased by the Trust's proportionate share of the partnership's operating losses and distributions received. 30 10 INCOME OPPORTUNITY REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 2. NOTES AND INTEREST RECEIVABLE (Continued) purchase money financing in the form of a wraparound mortgage note for the remainder of the purchase price. The Trust incurred a loss on the sale of $81,000 in excess of the amount previously provided. The mortgage note was non-interest bearing through May 1, 1993 and thereafter bore interest at 10% per annum through May 1, 1994, the maturity date of the note. In November 1993, the Trust placed the $1.1 million wraparound mortgage note on nonperforming, nonaccrual status. In December 1993, the borrower filed for bankruptcy protection. The Trust accepted a deed in lieu of foreclosure on March 2, 1995. The Trust recorded the property as an insubstance foreclosure as of December 31, 1994. The Trust did not incur a loss on foreclosure as the fair value of the property, less estimated costs of sale, exceeds the principal balance of the note receivable. NOTE 3. REAL ESTATE HELD FOR SALE AND DEPRECIATION As further described in NOTE 1. "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Organization and Trust business", the Trust is scheduled, unless and until the shareholders decide on a contrary course of action, to begin liquidation of its assets prior to October 24, 1996 and to distribute to its shareholders the net cash proceeds from the sale or refinancing of equity investments received by the Trust. Accordingly, the Trust has classified all of its properties as held for sale in the accompanying Consolidated Balance Sheets. As discussed in NOTE 2. "NOTES AND INTEREST RECEIVABLE", as of December 31, 1994, the Trust recorded the insubstance foreclosure of the Cedars Apartments. NOTE 4. ALLOWANCE FOR ESTIMATED LOSSES Activity in the allowance for estimated losses was as follows:
1994 1993 1992 --------- --------- -------- Balance January 1,.......... $ 121 $ 121 $ 532 Amounts charged off........ - - (411) --------- --------- -------- Balance December 31,........ $ 121 $ 121 $ 121 ========= ========= ========
NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS The Trust's investments in equity method partnerships consisted of the following:
1994 1993 --------- -------- Tri-City Limited Partnership ("Tri-City")... $ 2,852 $ 3,026 Nakash Income Associates ("NIA")............ 1,128 1,131 --------- -------- $ 3,980 $ 4,157 ========= ========
32 11 INCOME OPPORTUNITY REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 5. INVESTMENT IN EQUITY METHOD PARTNERSHIPS (Continued) The Trust uses the equity method to account for its investment in Tri-City, a 36.3% owned limited partnership, and in NIA, a 40% owned partnership. In June 1989, the Trust issued to F. C. MacArthur, Inc. ("MacArthur"), a wholly-owned subsidiary of Collecting Bank, N.A. (a national bank in liquidation), 170,750 of its shares of beneficial interest with a market value at the date of issuance of $6.1 million, in exchange for a 36.3% general partner interest in Tri-City, which owns and operates five properties in Texas. Transcontinental Realty Investors, Inc. ("TCI") with a 23.6% general partner interest is the other general partner in Tri-City. In November 1992, TCI purchased MacArthur's 40.1% limited partner interest in Tri-City increasing its ownership interest to 63.7%. Also in November 1992, TCI acquired all of the shares of beneficial interest of the Trust owned by MacArthur. As of March 3, 1995, TCI owned approximately 22% of the Trust's outstanding shares of beneficial interest. In September 1989, the Trust acquired a 40% interest in the NIA partnership from Nakash Brothers Realty in exchange for 50,000 of its shares of beneficial interest with a market value at the date of issuance of $1.3 million, cash of $800,000 and a contribution of property and notes with a carrying value of $462,000. In addition, 12,500 of the Trust's shares of beneficial interest were issued to consultants for services provided in connection with the acquisition of the partnership interest. In February 1993, the Trust purchased the 62,500 shares of beneficial interest for a total purchase price of $375,000. TCI owns the remaining 60% interest in NIA. Set forth below are summarized financial data for the partnerships the Trust accounts for using the equity method:
1994 1993 ----------- ---------- Notes receivable............................ $ 4,099 $ 4,099 Real estate, net of accumulated depreciation ($2,586 in 1994 and $1,982 in 1993)................................... 10,757 11,132 Other assets................................ 194 307 Notes payable............................... (2,634) (2,699) Other liabilities........................... (520) (423) ----------- ---------- Partners' capital........................... $ 11,896 $ 12,416 =========== ==========
1994 1993 1992 ---------- ----------- ---------- Rental income................ $ 2,380 $ 2,409 $ 2,369 Interest income.............. 349 397 988 Interest expense............. (283) (317) (904) Property operations.......... (1,656) (1,528) (1,666) Depreciation expense......... (605) (583) (516) Provision for losses......... - - (263) ---------- ----------- ---------- Net income................... $ 185 $ 378 $ 8 ========== =========== ==========
33 12 INCOME OPPORTUNITY REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 15. COMMITMENTS AND CONTINGENCIES (Continued) total of $1.2 million to the Trust, CMET, NIRT and TCI, of which the Trust's share is $150,000. The Trust received $12,300 in May 1994. The remaining $137,700 is to be paid in 18 monthly installments which began February 1, 1995. Under the Modification, the Trust, CMET, NIRT, TCI and their shareholders released the defendants from any claims relating to the plaintiffs' allegations. The Trust, CMET, NIRT and TCI also agreed to waive any demand requirement for the plaintiffs to pursue claims on behalf of each of them against certain persons or entities. The Modification also requires that any shares of the Trust held by Messrs. Phillips, Friedman or their affiliates shall be (i) voted in favor of the reelection of all current members of the Trust's Board of Trustees that stand for reelection during the two calendar years following the effective date of the Modification and (ii) voted in favor of all new members of the Trust's Board of Trustees appointed pursuant to the terms of the Modification that stand for reelection during the three calendar years following the effective date of the Modification. Pursuant to the terms of the Modification, any related party transaction which the Trust may enter into prior to April 27, 1999, will require the unanimous approval of the Trust's Board of Trustees. In addition, related party transactions may only be entered into in exceptional circumstances and after a determination by the Trust's Board of Trustees that the transaction is in the best interests of the Trust and that no other opportunity exists that is as good as the opportunity presented by such transaction. For purposes of the Modification requirements, the term "related party transaction" means and includes (i) any transaction between or among the Trust or CMET, NIRT or TCI or any of their affiliates or subsidiaries; (ii) any transaction between or among the Trust, its affiliates or subsidiaries and the Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates; and (iii) any transaction between or among the Trust or any of its affiliates or subsidiaries and a third party with whom the Advisor, Mr. Phillips, Mr. Friedman or any of their affiliates has an ongoing or contemplated business or financial transaction or relationship of any kind, whether direct or indirect, or has had such a transaction or relationship in the preceding one year. The Modification requirements for related party transactions do not apply to direct contractual agreements for services between the Trust and the Advisor or one of its affiliates (i.e. the Advisory Agreement, Property Management Contracts, etc.). These agreements require the prior approval by two-thirds of the Trustees of the Trust, and if required, approval by a majority of the shareholders. The Modification requirements for related party transactions also do not apply to joint ventures between or among the Trust and CMET, NIRT or TCI or any of their affiliates or subsidiaries and a third party having no prior or intended future business or financial relationship with Mr. Phillips, Mr. Friedman, the Advisor, or any affiliate of such parties. Such joint ventures may be entered into on the affirmative vote of a majority of the Trustees of the Trust. The Modification also terminated a number of the provisions of the settlement, including the requirement that the Trust, CMET, NIRT and TCI maintain a Related Party Transaction Committee and a Litigation Committee of their respective Boards. The court retained jurisdiction to enforce the Modification. Other Litigation. The Trust is also involved in various other lawsuits arising in the ordinary course of business. The Trust's management is of the opinion that the outcome of these lawsuits will have no material impact on the Trust's financial condition or results of operations. 40 13 SCHEDULE III INCOME OPPORTUNITY REALTY TRUST REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994
Cost Capitalized Subsequent to Gross Amounts of Which Carried Initial Cost to Trust Acquisition at End of Year ------------------------ ------------ ------------------------------------- Building & Building & (1) Property/Location Encumbrances Land Improvements Improvements Land Improvements Total - --------------------- ------------ --------- ------------ ------------ ------- ------------ ---------- (dollars in thousands) Properties Held For Sale - ------------------------ APARTMENTS - ---------- Cedars................. $ - $ 198 $ 792 $ - $ 198 $ 792 $ 990(2) Irving, Texas Eastpoint.............. 1,922 1,181 2,749 321 1,181 3,070 4,251 Mesquite, Texas Plumtree............... 5,875 1,751 5,038 824 1,751 5,862 7,613 Martinez, California Treehouse.............. 1,886 375 2,124 185 375 2,309 2,684 San Antonio, Texas Porticos............... 10,084 2,897 11,588 50 2,897 11,638 14,535 Milwaukee, Wisconsin OFFICE BUILDINGS - ---------------- Saratoga............... - 2,577 10,306 388 2,583 10,688 13,271 Saratoga, California Town Center Plaza...... - 554 2,214 99 554 2,313 2,867 Boca Raton, Florida ---------- --------- --------- -------- ------- --------- ---------- $ 19,767 $ 9,533 $ 34,811 $ 1,867 $ 9,539 $ 36,672 46,211 ========== ========= ========= ======== ======= ========= Allowance for estimated losses............... (121) ---------- $ 46,090 ========== Life on Which Depreciation In Latest Statement Accumulated Date of Date of Operation Property/Location Depreciation Construction Acquired is Computed - --------------------- ------------ ------------ -------- ------------ (dollars in thousands) Properties Held For Sale - ------------------------ APARTMENTS - ---------- Cedars................. $ - 1964 12/94 40 years Irving, Texas Eastpoint.............. 998 1985 01/86 5 - 40 years Mesquite, Texas Plumtree............... 1,642 1986 02/86 5 - 40 years Martinez, California Treehouse.............. 358 1975 09/89 5 - 40 years San Antonio, Texas Porticos............... 929 1973 11/91 40 years Milwaukee, Wisconsin OFFICE BUILDINGS - ---------------- Saratoga............... 886 1986 12/91 3 - 40 years Saratoga, California Town Center Plaza...... 242 1985 03/91 5 - 40 years Boca Raton, Florida ------- $ 5,055 ======= Allowance for estimated losses...............
____________________________ (1) The aggregate cost for Federal income tax purposes is $45,587. (2) An allowance for loss has been provided to reduce the carrying value of this property to the Trust's estimate of fair value minus estimated costs of sale. 41 14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Partners of Tri-City Limited Partnership Dallas, Texas We have audited the accompanying balance sheets of Tri-City Limited Partnership as of December 31, 1994 and 1993, and the related statements of operations, partners equity, and cash flows for the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tri-City Limited Partnership at December 31, 1994 and 1993, and the results of its operations and its cash flows for the three years in the period ended December 31, 1994 in conformity with generally accepted accounting principles. BDO Seidman February 28, 1995 Dallas, Texas F-1 15 TRI-CITY LIMITED PARTNERSHIP BALANCE SHEETS ================================================================================
December 31, 1994 1993 - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) ASSETS Real estate held for investment Land $ 2,076 $ 2,076 Building and improvements 11,356 11,077 - -------------------------------------------------------------------------------------------------------------- 13,432 13,153 Less accumulated depreciation (2,788) (2,134) - -------------------------------------------------------------------------------------------------------------- 10,644 11,019 Cash and cash equivalents 19 228 Other assets (including $411 in 1994 and $0 in 1993 due from affiliates) 512 187 - -------------------------------------------------------------------------------------------------------------- Total assets $ 11,175 $ 11,434 ============================================================================================================== LIABILITIES AND PARTNERS EQUITY Accounts payable (including $271 in 1994 and $67 in 1993 due to affiliates) $ 791 $ 490 - -------------------------------------------------------------------------------------------------------------- Commitments and contingencies - -------------------------------------------------------------------------------------------------------------- Partners equity Limited Partners 6,698 6,698 General Partners 3,686 4,246 - -------------------------------------------------------------------------------------------------------------- 10,384 10,944 - -------------------------------------------------------------------------------------------------------------- Total liabilities and partners equity $ 11,175 $ 11,434 ==============================================================================================================
See accompanying notes to financial statements. F-2 16 TRI-CITY LIMITED PARTNERSHIP STATEMENTS OF OPERATIONS ================================================================================
Years ended December 31, 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) INCOME Rentals $ 2,380 $ 2,483 $ 2,386 Other - 100 2 - -------------------------------------------------------------------------------------------------------------- Total revenue 2,380 2,583 2,388 - -------------------------------------------------------------------------------------------------------------- EXPENSES Property operations (including $86 in 1994, $57 in 1993 and $40 in 1992 to affiliates) 1,572 1,661 1,431 Interest (including $27 in 1993 and $56 in 1992 to affiliates) - 27 56 Depreciation 654 632 564 General and administrative 14 28 47 - -------------------------------------------------------------------------------------------------------------- Total expenses 2,240 2,348 2,098 - -------------------------------------------------------------------------------------------------------------- Net income $ 140 $ 235 $ 290 ==============================================================================================================
See accompanying notes to financial statements. F-3 17 TRI-CITY LIMITED PARTNERSHIP STATEMENTS OF PARTNERS EQUITY ================================================================================
Limited General Partner Partners Total - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) Balance January 1, 1992 $ 6,698 $ 4,721 $ 11,419 Net income - 290 290 - -------------------------------------------------------------------------------------------------------------- Balance December 31, 1992 6,698 5,011 11,709 Distributions - (1,000) (1,000) Net income - 235 235 - -------------------------------------------------------------------------------------------------------------- Balance December 31, 1993 6,698 4,246 10,944 Distributions - (700) (700) Net income - 140 140 - -------------------------------------------------------------------------------------------------------------- Balance December 31, 1994 $ 6,698 $ 3,686 $ 10,384 ==============================================================================================================
See accompanying notes to financial statements. F-4 18 TRI-CITY LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS ================================================================================
Years ended December 31, 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------- (dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 140 $ 235 $ 290 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 654 632 564 Increase (decrease) in due to affiliates (207) 153 (104) Decrease (increase) in other assets 86 (19) (39) Increase (decrease) in accrued interest - (6) 1 Increase (decrease) in accounts payable 97 33 (37) - -------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 770 1,060 675 - -------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES - Real estate improvements (279) (274) (328) - -------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable - - 750 Payoffs on notes payable - (778) (46) Distributions (700) (1,000) - - -------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (700) (1,778) 704 - -------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (209) (986) 1,051 Cash and cash equivalents, beginning of period 228 1,214 163 - -------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 19 $ 228 $ 1,214 ==============================================================================================================
See accompanying notes to financial statements. F-5 19 TRI-CITY LIMITED PARTNERSHIP SUMMARY OF ACCOUNTING POLICIES ================================================================================ ORGANIZATION Tri-City Limited Partnership, a Texas partnership was AND PURPOSE organized on June 29, 1989. The purpose of the Partnership is to acquire, hold for investment, improve, lease, operate, and sell or otherwise dispose of real estate, and to engage in any and all activities related or incidental thereto. Income Opportunity Realty Trust (IORT) and Transcontinental Realty Investors (TCI) are partners in the Partnership. IORT is a publicly-held real estate investment trust whose shares are traded on the American Stock Exchange. TCI is a publicly held real estate investment trust whose shares are traded on the New York Stock Exchange. Basic Capital Management, Inc. (BCM) serves as the advisor to IORT and TCI. The percentages of ownership of the Partnership are as follows:
General Limited Partner Partner Total ---------------------------------------------------- TCI 23.59% 40.11% 63.7% IORT 36.30% - 36.3% ---------------------------------------------------- 59.89% 40.11% 100.0% ====================================================
Allocations of profits and distributions are made in accordance with the partnership agreement. REAL ESTATE Land, buildings and improvements are stated at the lower AND of cost or estimated net realizable value. DEPRECIATION Depreciation is provided on buildings and improvements using the straight-line method over the estimated useful lives of forty years for buildings and four to forty years for improvements. Expenditures for renewal and betterments are capitalized and repairs and maintenance are charged against operations as incurred. F-6 20 TRI-CITY LIMITED PARTNERSHIP SUMMARY OF ACCOUNTING POLICIES ================================================================================ CASH AND CASH The Partnership considers all highly liquid debt EQUIVALENTS instruments purchased with a maturity of three months or less to be cash equivalents. INCOME TAXES The Partnership is taxed as such for federal income tax purposes. The Partnership has no current year income tax expense or deferred taxes. Taxable income is included in the respective tax returns of the Partners. F-7 21 TRI-CITY LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS ================================================================================ 1. RELATED PARTY LOAN FROM AFFILIATE - On July 16, 1992, TCI loaned to TRANSACTIONS the Partnership $750,000 bearing interest at a rate of 9.5 percent per annum. The loan was paid down to $704,000 at December 31, 1992. The outstanding loan was paid off during 1993. PROPERTY MANAGEMENT FEES - Carmel Realty Service Ltd. (Carmel), an affiliate of BCM, provides property management services for a fee of 5 percent of the monthly gross rents collected on the properties under its management. Carmel subcontracts with other entities for property level management services to the Partnership's apartments at various rates. LEASING COMMISSIONS - As compensation for providing leasing and rent-up services for a Partnership property, Carmel or its affiliates shall be paid a reasonable leasing commission. CONSTRUCTION SUPERVISION - As compensation for oversight of major renovations and refurbishments, Carmel or its affiliates shall be paid a construction supervision fee. Fees to BCM and its affiliates are as follows:
1994 1993 1992 -------------------------------------------------------------------------------- Property management fees * $ 75,367 $ 39,196 $ 24,670 Leasing commissions 3,346 17,946 15,060 Construction supervision fees 7,780 - - -------------------------------------------------------------------------------- $ 86,493 $ 57,142 $ 39,730 ================================================================================
* Net of property management fees paid to subcontractors, other than Carmel. F-8 22 TRI-CITY LIMITED PARTNERSHIP NOTES TO FINANCIAL STATEMENTS ================================================================================ 2. FUTURE Future minimum rentals on noncancellable operating MINIMUM leases, expiring at various dates, as of December 31, RENTS 1994 are as follows:
Year Amount ----------------------------------------------------- 1995 $ 1,150,377 1996 987,967 1997 696,535 1998 394,647 1999 294,427 Thereafter 931,950 ----------------------------------------------------- $ 4,455,903 =====================================================
F-9 23 TRI-CITY LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1994 ================================================================================ SCHEDULE III
COST CAPITALIZED SUBSEQUENT TO GROSS AMOUNTS AT WHICH CARRIED INITIAL COST ACQUISITION AT END OF YEAR ------------------------- ------------ ------------------------------------ BUILDING & BUILDING & ACCUMULATED PROPERTY DESCRIPTION (1) LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL (2) DEPRECIATION - -------------------------------------------------------------------------------------------------------------------- MacArthur Mills S.C. $ 238,812 $ 1,353,266 $ 1,075,527 $ 264,110 $ 2,403,515 $ 2,667,625 $ 824,085 Oaks of Inwood Apts. 522,157 1,486,137 2,950 522,157 1,344,958 1,867,115 204,743 Inwood Greens Apts. 318,968 956,904 - 318,968 789,947 1,108,915 131,580 Summit at Bridgewood S.C. 408,430 2,314,436 762,027 408,430 3,076,464 3,484,894 854,637 Chelsea Square S.C. 562,019 3,184,774 556,925 562,019 3,741,699 4,303,718 772,948 - -------------------------------------------------------------------------------------------------------------------- $2,050,386 $ 9,295,517 $ 2,397,429 $ 2,075,684 $11,356,583 $13,432,267 $ 2,787,993 ==================================================================================================================== LIFE OF WHICH DEPRECIATION IN LATEST STATEMENT DATE OF DATE OF INCOME PROPERTY DESCRIPTION (1) CONSTRUCTION ACQUIRED IS COMPUTED - --------------------------------------------------------------- MacArthur Mills S.C. 1986 6/89 4-40 years Oaks of Inwood Apts. 1979 6/89 40 years Inwood Greens Apts. 1980 6/89 40 years Summit at Bridgewood S.C. 1985 6/89 5-40 years Chelsea Square S.C. 1985 6/89 5-40 years - --------------------------------------------------------------- ===============================================================
(1) There are no encumbrances on the properties. (2) The aggregate cost for federal income tax purposes is approximately $13,100,000. F-10 24 TRI-CITY LIMITED PARTNERSHIP SCHEDULE III (CONTINUED) ================================================================================
1994 1993 1992 - ------------------------------------------------------------------------------------------------------------- RECONCILIATION OF REAL ESTATE BALANCE at January 1, $ 13,153,708 $ 12,879,047 $ 12,551,048 Additions Improvements 278,558 274,661 327,999 - ------------------------------------------------------------------------------------------------------------- BALANCE at December 31, $ 13,432,260 $ 13,153,708 $ 12,879,047 ============================================================================================================= RECONCILIATION OF ACCUMULATED DEPRECIATION BALANCE at January 1, $ 2,134,465 $ 1,502,14 $ 938,162 Additions Depreciation 653,528 632,318 563,985 - ------------------------------------------------------------------------------------------------------------- BALANCE at December 31, $ 2,787,993 $ 2,134,465 $ 1,502,147 =============================================================================================================
F-11 25 ITEM 14. 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 INCOME OPPORTUNITY REALTY TRUST Report of Independent Certified Public Accountants Consolidated Balance Sheets - December 31, 1994 and 1993 Consolidated Statements of Operations - Years Ended December 31, 1994, 1993 and 1992 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1994, 1993 and 1992 Consolidated Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements TRI-CITY LIMITED PARTNERSHIP Report of Independent Certified Public Accountants Balance Sheets - December 31, 1994 and 1993 Statements of Operations - Years Ended December 31, 1994, 1993 and 1992 Statements of Shareholders' Equity - Years Ended December 31, 1994, 1993 and 1992 Statements of Cash Flows - Years Ended December 31, 1994, 1993 and 1992 Notes to Financial Statements 2. Financial Statement Schedules INCOME OPPORTUNITY REALTY TRUST Schedule III - Real Estate and Accumulated Depreciation Schedule IV - Mortgage Loans on Real Estate TRI-CITY LIMITED PARTNERSHIP 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 Consolidated Financial Statement or the Notes thereto. 3. Exhibits The following documents are filed as Exhibits to this Report:
Exhibit Number Description - ------- --------------------------------------------------------------------- 3.0 Second Amended and Restated Declaration of Trust (incorporated by reference to the Registrant's Current Report on Form 8-K dated August 14, 1987). 3.1 Amendment No. 1 to the Second Amended and Restated Declaration of Trust (incorporated by reference to the Registrant's Current Report on Form 8-K dated September 18, 1991). 3.2 Restated Trustees' Regulations dated as of April 21, 1989 (incorporated by reference to the Registrant's Current Report on Form 8-K dated May 9, 1989).
67 26 EXHIBIT INDEX
Sequentially Exhibit Numbered Number Description Page - ------- --------------------------------------------------------------------- ------------ 3.0 Second Amended and Restated Declaration of Trust (incorporated by reference to the Registrant's Current Report on Form 8-K dated August 14, 1987). 3.1 Amendment No. 1 to the Second Amended and Restated Declaration of Trust (incorporated by reference to the Registrant's Current Report on Form 8-K dated September 18, 1991). 3.2 Restated Trustees' Regulations dated as of April 21, 1989 (incorporated by reference to the Registrant's Current Report on Form 8-K dated May 9, 1989).
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