INCOME OPPORTUNITY REALTY INVESTORS INC /TX/ - Quarter Report: 2005 June (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTER ENDED JUNE 30, 2005
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 001-14784
INCOME OPPORTUNITY REALTY INVESTORS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada (State or Other Jurisdiction of Incorporation or Organization) |
75-2615944 (I.R.S. Employer Identification No.) |
1755 Wittington Place, Suite 340, Dallas, Texas (Address of Principal Executive Office) |
75234 (Zip Code) |
(214) 750-5800
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes ¨. No x.
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes x. No ¨.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as
of the latest practicable date.
Common Stock, $.01 par value (Class) |
4,168,035 (Outstanding at July 31, 2005) |
TABLE OF CONTENTS
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying Consolidated Financial Statements as of and for the three months ended June 30,
2005, have not been audited by independent certified public accountants, but in the opinion of the
management of Income Opportunity Realty Investors, Inc. (IORI), all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of IORIs consolidated financial
position, consolidated results of operations and consolidated cash flows at the dates and for the
periods indicated, have been included.
INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2005 | 2004 | |||||||
(Restated) | ||||||||
(dollars in thousands, | ||||||||
except per share) | ||||||||
Assets |
||||||||
Real estate held for investment |
$ | 35,068 | $ | 34,988 | ||||
Lessaccumulated depreciation |
(3,969 | ) | (3,620 | ) | ||||
31,099 | 31,368 | |||||||
Related Party Notes and interest receivable |
55,627 | 54,911 | ||||||
Investment in real estate partnerships |
577 | 604 | ||||||
Cash and cash equivalents |
442 | 399 | ||||||
Receivables from affiliates |
-0- | 261 | ||||||
Other assets |
3,016 | 3,905 | ||||||
$ | 90,761 | $ | 90,638 | |||||
Liabilities and Stockholders Equity |
||||||||
Liabilities |
||||||||
Notes and interest payable |
$ | 42,700 | $ | 44,571 | ||||
Payables to affiliates |
2,461 | 1,248 | ||||||
Other liabilities |
1,001 | 1,529 | ||||||
46,162 | $ | 47,348 | ||||||
Commitments and contingencies |
||||||||
Minority Interest |
475 | -0- | ||||||
Stockholders Equity: |
||||||||
Common Stock, $.01 par value; authorized,
10,000,000 shares; issued and outstanding
4,168,035 shares in 2005 and 1,389,345
shares in 2004 |
42 | 14 | ||||||
Paid-in capital |
61,955 | 61,983 | ||||||
Accumulated deficit |
(17,873 | ) | (18,707 | ) | ||||
44,124 | 43,290 | |||||||
$ | 90,761 | $ | 90,638 | |||||
These are the restated numbers which reflect corrections for the discontinued operations, the
issuance of 3-for-1 stock dividends and the accounting error related to a deferral of operating
income and/or expense. See NOTE 1. BASIS OF PRESENTATION.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
(dollars in thousands, except per share) | ||||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
(Restated) | (Restated) | |||||||||||||||
Property revenue: |
||||||||||||||||
Rents |
$ | 1,613 | $ | 1,022 | $ | 3,142 | $ | 2,917 | ||||||||
Property expense: |
||||||||||||||||
Property operations (including $44 in 2005 and $78 in 2004
to
affiliates and related parties) |
825 | 449 | 1,646 | 1,606 | ||||||||||||
Operating income |
788 | 573 | 1,496 | 1,311 | ||||||||||||
Other income (loss): |
||||||||||||||||
Interest |
984 | 605 | 1,958 | 1,203 | ||||||||||||
Recovery of accounts receivable written off |
| | | | ||||||||||||
Equity in income (loss) of equity partnerships |
(19 | ) | 11 | (28 | ) | 10 | ||||||||||
965 | 616 | 1,930 | 1,213 | |||||||||||||
Other expense: |
||||||||||||||||
Interest |
562 | 750 | 1,498 | 1,802 | ||||||||||||
Depreciation |
173 | 116 | 350 | 386 | ||||||||||||
Advisory fee to affiliate |
170 | 201 | 337 | 393 | ||||||||||||
Net income fee to affiliate |
55 | 30 | 67 | 245 | ||||||||||||
General and administrative (including $36 in 2005 and $36 in
2004 to affiliates and related parties) |
199 | 179 | 341 | 446 | ||||||||||||
1,159 | 1,276 | 2,593 | 3,272 | |||||||||||||
Net income (loss) from continuing operations |
594 | (87 | ) | 833 | (748 | ) | ||||||||||
Discontinued operations: |
||||||||||||||||
Income/(loss) from discontinued operations |
| 4 | | (78 | ) | |||||||||||
Gain on sale of operations |
| 417 | | 3,674 | ||||||||||||
| 421 | | 3,596 | |||||||||||||
Net income |
$ | 594 | $ | 334 | $ | 833 | $ | 2,848 | ||||||||
Earnings (loss) per share: |
||||||||||||||||
Net income (loss) from continuing operations |
$ | 0.14 | $ | (0.02 | ) | $ | 0.20 | $ | (0.17 | ) | ||||||
Discontinued operations |
| 0.10 | | 0.83 | ||||||||||||
Net income |
$ | 0.14 | $ | 0.08 | $ | 0.20 | $ | 0.66 | ||||||||
Weighted average common shares used in computing earnings per
share |
4,168,035 | 4,316,835 | 4,168,035 | 4,316,835 | ||||||||||||
These are the restated numbers which reflect corrections for the discontinued operations, the
issuance of 3-for-1 stock dividends and the accounting error related to a deferral of operating
income and/or expense. See NOTE 1. BASIS OF PRESENTATION.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
For the Six Months Ended June 30, 2005
Common Stock | Paid-in | Accumulated | Stockholders' | |||||||||||||||||
Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||
Balance, January 1, 2005 (Restated) |
1,389,345 | $ | 14 | $ | 61,983 | $ | (18,707 | ) | $ | 43,290 | ||||||||||
Common Stock Dividends |
2,778,690 | 28 | (28 | ) | | | ||||||||||||||
Net income |
| | | 833 | 833 | |||||||||||||||
Balance, June 30, 2005 |
4,168,035 | $ | 42 | $ | 61,955 | $ | (17,874 | ) | $ | 44,123 | ||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months | ||||||||
Ended June 30, | ||||||||
2005 | 2004 | |||||||
(Restated) | ||||||||
(dollars in thousands) | ||||||||
Cash Flows from Operating Activities |
||||||||
Net income/(loss) |
$ | 833 | $ | 2,848 | ||||
Reconciliation of net income (loss) to net cash used by operating activities |
||||||||
Adjustments to reconcile net income (loss) to net cash used in operating activities |
||||||||
Depreciation and amortization |
482 | 636 | ||||||
Gain on sale of real estate |
| (3,674 | ) | |||||
Loss (gain) on equity partnerships |
28 | (11 | ) | |||||
Increase in interest receivable |
(543 | ) | (317 | ) | ||||
Decrease (Increase) in other assets |
232 | (1,876 | ) | |||||
Increase in interest payable |
45 | 15 | ||||||
(Decrease) increase in other liabilities |
(553 | ) | 231 | |||||
Net cash provided by (used in) operating activities |
524 | (2,148 | ) | |||||
Cash Flows from Investing Activities |
||||||||
Proceeds from sale of real estate |
| 3,444 | ||||||
Advances from (payments to) advisor and affiliates |
1,436 | (2,057 | ) | |||||
Net cash provided by (used in) investing activities |
1,436 | 1,387 | ||||||
Cash Flows from Financing Activities |
||||||||
Payments on notes payable |
$ | (1,917 | ) | $ | (462 | ) | ||
Proceeds on notes payable |
| 1,193 | ||||||
Deferred financing costs |
| 90 | ||||||
Net cash (used in) provided by financing activities |
(1,917 | ) | 821 | |||||
Net increase in cash and cash equivalents |
$ | 43 | $ | 60 | ||||
Cash and cash equivalents, beginning of period |
399 | 58 | ||||||
Cash and cash equivalents, end of period |
$ | 442 | $ | 118 | ||||
Supplemental Disclosures of Cash Flow Information |
||||||||
Cash paid for interest |
$ | 1,727 | $ | 2,232 | ||||
Note receivable from sale of real estate |
| 2,990 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
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INCOME OPPORTUNITY INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Consolidated Financial Statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete financial statements.
Operating results for the six-month period ended June 30, 2005, are not necessarily indicative of
the results that may be expected for the year ending December 31, 2005. For further information,
refer to the Consolidated Financial Statements and notes thereto included in IORIs Annual Report
on Form 10-K for the year ended December 31, 2004 (the 2004 Form 10-K). Dollar amounts in tables
are in thousands, except per share amounts.
Certain balances for 2004 have been reclassified to conform to the 2005 presentation in order to
properly account for the discontinued operations, the issuance of 3-for-1 stock dividends, and the
correction of the accounting error in the financial statements related to formation of certain
partnerships with Metra Capital LLC in April 2002, which error evolved in the establishment of the
process relating to accounting for a deferral of operating income or expense from the properties in
question until the sale of the applicable property; the error correction necessitates the changes
described below:
| Decrease in interest expense by $15,000 for the three months ended June 30, 2004. | ||
| Decrease in advisory fee by $1,000 for the three months ended June 30, 2004. | ||
| Increase in interest expense by $125,000 for the six months ended June 30, 2004. | ||
| Decrease in advisory fee by $2,000 for the six months ended June 30, 2004. |
NOTE 2. REAL ESTATE
The following tables compare properties sold during the second quarter ended in 2005 and 2004.
For the second quarter ended June 30, 2005, IORI did not sell any properties.
For the second quarter ended June 30, 2004, IORI sold the following properties:
Sales | Net Cash | Debt | Gain | |||||||||||||||||||||
Property | Location | Units/Sq.Ft. | Price | Received | Discharged | on Sale | ||||||||||||||||||
Apartment Building |
||||||||||||||||||||||||
Treehouse (1) |
Irving, TX |
160 Units | $ | 8,017 | ($498 | ) | $ | 5,018 | $ | - | (2) | |||||||||||||
Commercial Building |
||||||||||||||||||||||||
Akard Plaza |
Dallas, TX |
42,258 Sq.Ft. | $ | 3,900 | $ | 2,007 | $ | 1,849 | $ | 417 |
(1) | Property sold to TCI, a related party, for assumption of debt and a note receivable, less $498,000 in cash paid. | |
(2) | Excludes a $56,000 deferred gain from a related party sale. |
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.
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NOTE 4. RECEIVABLE FROM AND PAYABLE TO AFFILIATES
Related Party. On September 19, 2002, IORIs Board of Directors authorized the Chief Financial
Officer of the Company to advance funds either to or from the Company, through the advisor without
interest, 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. From time-to-time, IORI and its affiliates and related
parties have made unsecured advances to each other to fund their respective operations, which
generally have not had specific repayment terms and have been reflected in IORIs financial
statements as other assets. IORI had payables of $2.4 million and $1.3 million to Syntek West,
Inc. (SWI), $22,000 and $-0- to Prime Income Asset Management, Inc. (Prime), and receivables of
$-0- and $261,000 from Transcontinental Realty Investors, Inc. (TCI) at June 30, 2005 and
December 31, 2004, respectively. See also NOTE 6. RELATED PARTY TRANSACTIONS.
NOTE 5. NOTES AND INTEREST PAYABLE
In April 2002, the Company transferred all of its residential properties to partnerships formed
with Metra Capital LLC (Metra). The properties included the 60-unit Brighton Court, the 92-unit
Del Mar, the 68-unit Enclave, the 280-unit Meridian, the 57-unit Signature, and the 114-unit
Sinclair, all 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. A former director of American Realty Investors, Inc.
(ARI), a related party, controlled approximately 11.67% of the outstanding common stock of
Innovo. The transfer constituted 23% of the total assets of the Company as of December 31, 2001.
The transfer price for the properties totaled $26.2 million, of which the Company received $5.3
million in cash after the payment of $15.9 million in debt and various closing costs. Management
determined to account for the transaction as a refinancing transaction (rather than a sale) in
accordance with SFAS 66 Accounting for Sales of Real Estate. At the time of the transaction in
April 2002, ARI was a related party to the Company by virtue of ARIs subsidiaries ownership of
approximately 28.5% of the then outstanding common stock of the Company, and the fact that ARI and
the Company had the same persons as executive officers. The compensation price for the properties
transferred totaled $26.2 million and possible additional contingent consideration depending upon
the sale price of the properties by the Metra partnerships. The Company also received $5.2 million
in value of 8% non-recourse, non-convertible preferred stock of Innovo. Based upon the prospect of
additional consideration, ultimate continued involvement through the preferred stock and the
related-party nature of the former ARI directors involvement, as well as the Company retaining a
right to approve the price of any ultimate sale by a Metra partnership of the properties, and a
process by which the Company effectively guaranteed a preferential return to the Metra investors,
management determined that the transaction must be classified as a financing transaction and not a
sale. The Company continued to be able to exert control over the Metra partnerships, and no sale
was recorded. The Treehouse property was subsequently sold to a non-related party in February
2004, and all of its debts have been repaid to the lenders at the time of the sale. During August
2004, certain entities, including the Company, instituted an action in a Texas state court against
Innovo and Metra and others over the process, as well as distribution questions. During April
2005, a resolution of the litigation occurred settling all liabilities remaining from the original
partnership arrangements which included a return of the Metra investor equity, prepayment of
prospective asset management fees and miscellaneous fees and transaction costs from the Company and
the other plaintiffs as a payment of the Preferential Return along with the delegation of
management to another entity. Of the payment made, the Company has recognized expense of $56,000
and a reduction of $1,476,000 in liabilities during the second quarter of 2005.
NOTE 6. RELATED PARTY TRANSACTIONS
Prior to the time of settlement with Metra in April 2005 as mentioned in NOTE 5. NOTES AND
INTEREST PAYABLE, IORI had been under a contractual agreement to pay a management fee, a
cumulative annual amount of .5% of the average outstanding balance of the mortgage indebtedness
secured by the properties, each to Metra and Innovo. Per the settlement, IORIs obligation to pay
the management fee to Metra has been delegated to Prime. ARI, TCI, and IORI acquired Innovo whose
name was changed to Midland Odessa Properties, Inc. (MOPI). ARI paid $475,000 to acquire from
IORI an additional 9.05% ownership of MOPI, which reduced IORIs ownership interest in MOPI to
19.9%.
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The following table reconciles the beginning and ending balances of Accounts Receivable from
Affiliates as of June 30, 2005.
SWI | Prime | ARI | TCI | |||||||||||||
Balance, December
31, 2004 |
$ | (1,248 | ) | $ | | $ | | $ | 261 | |||||||
Cash transfers |
5,112 | | 475 | | ||||||||||||
Cash repayments |
(5,863 | ) | | | (261 | ) | ||||||||||
Other additions |
| | | | ||||||||||||
Other repayments |
(440 | ) | (22 | ) | (475 | ) | | |||||||||
Balance, June 30, 2005 |
$ | (2,439 | ) | $ | (22 | ) | $ | | $ | | ||||||
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NOTE 7. 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 $965,000
and $1.9 million for the three and six months ended June 30, 2005, and $616,000 and $1.2 million
for the three and six months ended June 30, 2004. Expenses that are not reflected in the segments
are general and administrative expenses, advisory fees, and net income fees totaling $404,000 and
$725,000 for the three and six months ended June 30, 2005, and $411,000 and $1.1 million for the
three and six months ended June 30, 2004. Excluded from operating segment assets are assets of
$59.7 million at June 30, 2005 and $57.4 million at June 30, 2004, 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 and assets of each operating segment.
Three Months Ended | Commercial | |||||||||||
June 30, 2005 | Properties | Apartments | Total | |||||||||
Rents |
$ | 374 | $ | 1,239 | $ | 1,613 | ||||||
Property operating expenses |
215 | 610 | 825 | |||||||||
Operating income (loss) |
$ | 159 | $ | 629 | $ | 788 | ||||||
Depreciation |
$ | 112 | $ | 61 | $ | 173 | ||||||
Interest |
143 | 190 | 562 | |||||||||
Real estate improvements |
36 | | 36 | |||||||||
Assets |
12,952 | 18,147 | 31,099 | |||||||||
Six Months Ended |
||||||||||||
June 30, 2005 |
||||||||||||
Rents |
$ | 696 | $ | 2,446 | $ | 3,142 | ||||||
Property operating expenses |
426 | 1,220 | 1,646 | |||||||||
Operating income (loss) |
$ | 270 | $ | 1,226 | $ | 1,496 | ||||||
Depreciation |
$ | 127 | $ | 223 | $ | 350 | ||||||
Interest |
469 | 579 | 1,498 | |||||||||
Real estate improvements |
| | | |||||||||
Assets |
12,952 | 18,147 | 31,099 |
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Three Months Ended | ||||||||||||||||
June 30, 2004 | Commercial | |||||||||||||||
(Restated) | Land | Properties | Apartments | Total | ||||||||||||
Rents |
$ | | $ | 126 | * | $ | 896 | $ | 1,022 | * | ||||||
Property operating expenses |
| -- | * | 449 | 449 | * | ||||||||||
Operating income (loss) |
$ | | $ | 126 | * | $ | 447 | $ | 573 | * | ||||||
Depreciation |
$ | | $ | 47 | * | $ | 69 | $ | 116 | * | ||||||
Interest |
244 | 173 | * | 333 | * | 750 | * | |||||||||
Real estate improvements |
| | | | ||||||||||||
Assets |
44 | 18,458 | 18,592 | 37,094 | ||||||||||||
Six Months Ended | ||||||||||||||||
June 30, 2004 | ||||||||||||||||
(Restated) | ||||||||||||||||
Rents |
$ | | $ | 607 | * | $ | 2,310 | $ | 2,917 | * | ||||||
Property operating expenses |
| 334 | * | 1,272 | 1,606 | * | ||||||||||
Operating income (loss) |
$ | | $ | 273 | * | $ | 1,038 | $ | 1,311 | * | ||||||
Depreciation |
$ | | $ | 163 | * | $ | 223 | $ | 386 | * | ||||||
Interest |
569 | 431 | * | 802 | * | 1,802 | * | |||||||||
Real estate improvements |
| | | | ||||||||||||
Assets |
44 | 18,458 | 18,592 | 37,094 |
* | These are the restated numbers which reflect corrections for the discontinued operations, the issuance of 3-for-1 stock dividends and the accounting error related to a deferral of operating income and/or expense. See NOTE 1. BASIS OF PRESENTATION. |
NOTE 8. ADVISORY FEES, PROPERTY MANAGEMENT, ETC.
Revenue, fees and cost reimbursements to its advisors and affiliates for the six months ended:
For the Six Months | ||||||||
Ended June 30, | ||||||||
2005 | 2004 | |||||||
(Restated) | ||||||||
Fees |
||||||||
Advisory |
$ | 337 | $ | 393 | ||||
Net income |
67 | 245 | ||||||
Property and construction management and leasing commission |
44 | 78 | ||||||
$ | 448 | $ | 716 | |||||
Cost reimbursements |
$ | 36 | $ | 36 | ||||
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NOTE 9. DISCONTINUED OPERATIONS
Effective January 1, 2002, IORI adopted Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), 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 the properties intended to be sold are to be designated
as held for sale on the balance sheet. In the event of a future asset sale, IORI is required to
reclassify portions of previously reported operations to discontinued operations within the
Statements of Operations. No property was sold during the six months ended June 30, 2005. The
following table summarizes revenue and expense information for the properties sold.
For the Three Months | For the Six Months | |||||||||||||||
Ended June 30, | Ended June 30, | |||||||||||||||
Revenue | 2005 | 2004 | 2005 | 2004 | ||||||||||||
Rental |
$ | | $ | 1,076 | $ | | $ | 1,485 | ||||||||
Property Operations |
| 639 | | 865 | ||||||||||||
Operating income |
| 437 | | 620 | ||||||||||||
Expense |
||||||||||||||||
Interest |
| 262 | | 447 | ||||||||||||
Depreciation |
| 174 | | 251 | ||||||||||||
Total expenses |
| 436 | | 698 | ||||||||||||
Net gain from discontinued
operations before gains on sale of
operations |
| 1 | | (78 | ) | |||||||||||
Gain on sale of operations |
| 417 | | 3,674 | ||||||||||||
Net income/(loss) from discontinued
operations |
$ | | $ | 418 | $ | | $ | 3,596 | ||||||||
Discontinued operations have not been segregated in the consolidated statement of cash flows.
Therefore, amounts for certain captions will not agree with respective consolidated statements of
operations.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Liquidity. Management anticipates that IORI will generate excess cash from operations in 2005 due
to increased rental rates and occupancy at its properties, however, such excess may not be
sufficient to discharge all of IORIs debt obligations as they mature. Management may selectively
sell income producing assets, refinance real estate and/or 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 Companys financial condition, results of operations or liquidity.
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
IORI invests in equity interests in real estate through acquisitions, leases and partnerships and
also invests 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 IORIs
financial condition and results of operations and require managements most difficult, complex or
subjective judgments. IORIs 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. IORIs estimates of cash flow and fair values of the properties are based on
current market conditions and consider 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. IORIs estimates are subject to
revision as market conditions and IORIs assessments of them change.
IORIs 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 IORIs assessment of its ability to meet its lease or interest obligations. IORIs
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.
Typically, IORIs notes receivable are collateralized by income producing real estate. IORI had
notes receivable of $55.6 million at June 30, 2005 and $54.9 million at December 31, 2004.
Liquidity and Capital Resources
Cash and cash equivalents at June 30, 2005 were $442,000, compared with $399,000 at December 31,
2004. IORIs principal sources of cash have been and will continue to be property operations,
proceeds from asset sales, interest earned on notes receivable, financings and refinancings and
partnership distributions. Management anticipates that IORI will generate excess cash from
operations in 2005 due to increased rental receipts at its properties; however, such excess may not
be sufficient to discharge all of IORIs debt obligations as they mature. Management may
selectively sell income producing assets, refinance real estate and/or incur additional borrowings
against real estate to meet its cash requirements.
The Company reported net income of $833,000 for the six months ended June 30, 2005, which included
the following changes: depreciation and amortization of $482,000, decreases in other assets of
$232,000, increases in interest receivable of $543,000, increases in interest payable of $45,000,
loss on equity partnership of $28,000, and decreases in other liabilities of $553,000. Net cash
provided by operating activities amounted to $524,000 for the six months ended June 30, 2005.
During the six months ended June 30, 2005, the decrease in other liabilities was primarily due to a
decrease in accrued property taxes and the decrease in other assets was primarily due to a decrease
in deposits, deferred borrowing costs, and accounts receivable. Net cash provided by investing
activities of $1.2 million was the advances from SWI and the repayments from TCI. Net cash used in
financing activities of $1.9 million was the payments on notes payable.
Management reviews the carrying values of IORIs properties at least annually and whenever events
or a change in circumstances indicate that impairment may exist. Impairment is considered to exist
if, in the case of a property, the future cash flow from the property (undiscounted and without
interest) is less than the carrying amount of the property.
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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, visits to selected properties in the area and a review of the following: (1) the
propertys current rents compared to market rents, (2) the propertys expenses, (3) the propertys
maintenance requirements and (4) the propertys cash flows.
Results of Operations
IORI had net income of $594,000 for the three months ended June 30 2005, and net income of $833,000
for the six months ended June 30, 2005, as compared to net income of $334,000 and $2.8 million for
the corresponding periods in 2004. The net income in 2004 included gains on sale of real estate
totaling $3.7 million whereas no property was sold in 2005. Fluctuations in components of revenue
and expense between the 2005 and 2004 periods are discussed below.
Rents in the three and six months ended June 30, 2005 were $1.6 million and $3.1 million versus
$1.0 million and $2.9 million in the corresponding periods in 2004. Rental income during the
remaining periods of 2005 is expected to increase if IORI purchases more properties.
Property operations expense in the three and six months ended June 30, 2005 were $825,000 and $1.6
million versus $449,000 and $1.6 million in the corresponding periods in 2004. The decreases in
2005 were primarily due to the sale of three properties in 2004. Property operations expense is
expected to increase during the remaining quarters of 2005 if IORI purchases more properties.
Interest income in the three and six months ended June 30, 2005 was $984,000 and $2.0 million
versus $605,000 and $1.2 million in the corresponding periods in 2004. The increase in 2005 from
2004 was due to additional interest earned from the additional notes receivable obtained from
affiliates of IORI. Interest income is expected to exceed the previous year in the remaining
quarters of 2005 due to the increase in notes receivable during 2004.
Interest expense in the three and six months ended June 30, 2005 was $562,000 and $1.5 million
versus $750,000 and $1.8 million in the corresponding periods in 2004. The decrease in 2005 from
2004 was primarily due to the retirement of four notes payable from sale of properties during 2004.
Depreciation expense in the three and six months ended June 30, 2005 was $173,000 and $350,000
versus $116,000 and $386,000 in the corresponding periods in 2004. The decrease in 2005 from 2004
was due to sale of properties and fully depreciated tenant improvements in 2004.
Advisory fee to affiliate in the three and six months ended June 30, 2005 was $170,000 and $337,000
versus $201,000 and $393,000 in the corresponding periods in 2004. The decrease in 2005 from 2004
was due to changes in gross assets, the basis of the fee. See NOTE 8. ADVISORY FEES.
Net income fee to affiliate was $67,000 for the six months ended June 30, 2005. Net income fee is
based on 7.5% of IORIs net income.
General and administrative expense in the three and six months ended June 30, 2005 was $199,000 and
$341,000 versus $179,000 and $446,000 in the corresponding periods in 2004. The decrease in 2005
from 2004 was primarily due to a decrease in property insurance and rental expense.
Related Party Transactions
Historically, IORI, ARI, Regis Realty I, LLC (Regis I), and TCI have each 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, ARI, Regis I, and TCI
as could have been obtained from unrelated third parties.
Taxes
For the tax years prior to 2003, IORI elected and qualified to be treated as a Real Estate
Investment Trust (REIT), as defined in Sections 856 and 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.
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Due to the completion of a 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.
Financial statement income varies from taxable income principally due to the accounting for income
and losses of investees, gains and losses from asset sales, depreciation on owned properties,
amortization of discounts on notes receivable and payable and the difference in the allowance for
estimated losses. IORI had a loss for federal income tax purposes in the second quarter of 2005
and a loss for federal income tax purposes after the use of net operating loss carryforwards in the
second quarter of 2004; therefore, it recorded no provision for income taxes.
At June 30, 2005, IORI had a net deferred tax asset of approximately $1.8 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.
Inflation
The effects of inflation on IORIs operations are not quantifiable. Revenues from apartment
operations tend to fluctuate proportionately with inflationary increases and decreases in housing
costs. Fluctuations in the rate of inflation also affect the sales value of properties and the
ultimate gain to be realized from property sales. To the extent that inflation affects interest
rates, earnings from short-term investments and the cost of new financings, as well as the cost of
variable interest rate debt, will be affected.
Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, IORI may be
potentially liable for removal or 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 IORIs business, assets or results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK
At June 30, 2005, IORIs exposure to a change in interest rates on its debt is as follows:
Weighted | Effect of 1% | |||||||||||
Average | Increase In | |||||||||||
Balance | Interest Rate | Base Rates | ||||||||||
Wholly-owned debt: |
||||||||||||
Variable rate |
$ | 9,425 | 8.23 | % | $ | 94 | ||||||
Total decrease in IORIs annual |
||||||||||||
Net income |
$ | 94 | ||||||||||
Per share |
$ | 0.02 | ||||||||||
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ITEM 4. CONTROLS AND PROCEDURES
Based upon their most recent evaluation, which was completed as of the end of the period covered by
this Report, the Acting Principal Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective at June 30, 2005, to ensure that
information required to be disclosed in reports that the Company files or submits under the
Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time
period specified in Securities and Exchange Commission rules and forms. There were no changes in
the Companys internal controls over financial reporting during the quarter ended June 30, 2005,
except as described in the following paragraph that have materially affected or are reasonably
likely to materially affect the Companys internal controls over financial reporting.
However, the Company and its accountants identified a control deficiency in its internal controls
over financial reporting as of April 2002 which continued undetected through March 2005, which
constituted a material weakness within the meaning of the Public Company Accounting Oversight
Board Auditing Standard No. 2. A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote likelihood that a material misstatement of
annual or interim financial statements will not be prevented or detected. The material weakness
related to the Companys accounting for the Metra transaction in April 2002, which included a
deferral of operating income and/or expense until the time of ultimate sale of a property to an
independent third party purchaser. As a result, an error was discovered that affected the
consolidated balance sheet, consolidated statement of operations, consolidated statements of
stockholders equity, and consolidated statements of cash flows for 2002 and subsequent periods.
The amounts for 2002 were not material, but the amounts for 2003 were material which causes the
need for correction of the 2003 financial statements. Management undertook exhaustive efforts to
obtain relevant financial records to support the correction of error as of June 30, 2005 and
concluded that the financial statements were improperly stated for such periods. In response to
the material weakness, Management
(i) is continuing to re-evaluate its control procedures with the assistance of
an outside consulting firm that specializes in internal control procedures,
(ii) has concluded that at a minimum, Management will, beginning August 1,
2005, review all material historical transactions and supporting documents that
could have a continuing impact upon any current reporting periods,
(iii) will review quarterly on a sampling basis non-material historical
transactions that are included in financial statements for any current reporting
period,
(iv) will continue the process of reviewing all current transactions included
in current reporting period financial statements, and
(v) believes that the transaction involving the error was uniquely complex and
is not likely to be repeated, but Management is working with its outside consultant
for guidance about other possible control procedures to ensure that in the future,
errors will be detected and material misstatement of annual or interim financial
statements will be prevented.
WARNING CONCERNING FORWARD LOOKING STATEMENTS
This quarterly report on Form 10-Q and IORIs 2004 Form 10-K, referred to herein, contain
forward looking statements within the meaning of the Private Securities Litigation Reform Act of
1995 and federal securities laws. These statements concern the intent, belief or expectations of
IORIs officers with respect to IORIs ability to lease its properties, tenants ability to pay
rents, purchase of additional properties, ability to pay interest and debt principal and make
distributions, policies and plans regarding investments and financings, and other matters. Also,
words such as believe, expect, anticipate, intend, plan, estimate, or similar
expressions identify forward looking statements. Actual results may differ materially from those
contained in or implied by the forward looking statements as a result of various factors. Such
factors include, without limitation, the impact of changes in the economy and the capital markets
on IORI and its tenants, competition within the real estate industry or those industries in which
its tenants operate, and changes in federal, state and local legislation. For example: Some of
IORIs tenants may not renew expiring leases and IORI may be unable to locate new tenants to
maintain the historical occupancy rates of the properties; rents which IORI can achieve at its
properties may decline; tenants may experience losses and become unable to pay rents; and IORI may
be unable to identify or to negotiate
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acceptable purchase prices for new properties. These results could occur due to many different
circumstances, some of which, such as changes in IORIs tenants financial conditions or needs for
leased space, or changes in the capital markets or the economy, generally, are beyond IORIs
control. Forward looking statements are only expressions of IORIs present expectations and
intentions. Forward looking statements are not guaranteed to occur, and they may not occur. You
should not place undue reliance upon forward looking statements.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Innovo Realty, Inc. On August 10, 2004, three entities, including the Income Opportunity Realty
Investors, Inc. (the Company), instituted an action in Texas State District Court as Cause No.
2004-60231-393 styled American Realty Investors, Inc., Transcontinental Realty Investors, Inc. and
Income Opportunity Realty Investors, Inc., Plaintiffs v. Innovo Realty, Inc. and Innovo Group,
Inc., Involuntary Plaintiffs v. Innovo Realty, Inc., Metra Capital LLC, Innovo Group, Inc., Joseph
Mizrachi, Simon Mizrachi, Herbert Guez, Third Millennium Partners LLC, Third Millennium Partners,
Inc., Third Millennium Group LLC and Sunridge Management, Inc., Defendants. The Plaintiffs
complaint alleges that a former director of American Realty Investors, Inc. (ARI), and others,
offered a plan to the Plaintiffs to create one or more joint venture arrangements with one or more
of the Plaintiffs to pursue alternative forms of financing or refinancing portions of Plaintiffs
real estate portfolios, which entailed the creation of 22 separate limited partnerships to acquire
28 separate apartment complexes in three states (Texas, Florida and Louisiana), the general
partners of which are affiliates of, or are controlled by, the former director of ARI. During
April 2005, a resolution of the litigation occurred, settling all liabilities remaining from the
original partnership arrangements, which included a return of investor equity, prospective asset
management fees and miscellaneous fees and transaction costs from the Company and the other
Plaintiffs as payment of a Preferred Return, along with the delegation of management to another
entity. Of the payment, the Company has recognized a settlement expense of $56,000, and a
reduction of $1,476,000 in liabilities during the second quarter of 2005.
There have been no material developments in other previously reported items of litigation during
the quarter ended June 30, 2005. The ownership of property and provision of services to the public
as tenants entails an inherent risk of liability, although the Company and its subsidiaries are
involved in various items of litigation incidental to and in the ordinary course of its business,
in the opinion of management, the outcome of such litigation will not have a material adverse
impact upon the Companys financial condition, results of operation or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) During the period of time covered by this Report, the Company did not repurchase any of its
equity securities. The following table sets forth a summary by month for the quarter indicating no
repurchases were made, and that at the end of the period covered by this Report, a specified number
of shares may yet be purchased under the program specified below:
Total Number of | ||||||||||||||||
Shares | Maximum Number | |||||||||||||||
Purchased as | of Shares that May | |||||||||||||||
Total Number of | Average Price | Part of Publicly | Yet be Purchased | |||||||||||||
Shares | Paid per | Announced | Under the | |||||||||||||
Period | Purchased | Share | Program | Program(1) | ||||||||||||
April 1-30, 2005 |
¯ | $ | ¯ | ¯ | ¯ | |||||||||||
May 1-31, 2005 |
¯ | ¯ | ¯ | ¯ | ||||||||||||
June 1-30, 2005 |
¯ | ¯ | ¯ | ¯ | ||||||||||||
Total |
¯ | $ | ¯ | ¯ | 31,596 | |||||||||||
(1) | On September 23, 2000, the IORI Board of Directors approved a share repurchase program for up to 300,000 shares of our common stock. This repurchase program has no termination date. |
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ITEM 6. EXHIBITS
The following exhibits are filed herewith or incorporated by reference as indicated below:
Exhibit No. | Exhibit Designation | |
3.0
|
Articles of Incorporation of Income Opportunity Realty Investors, Inc. (incorporated by reference to Appendix C to the Registrants 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 Registrants Registration Statement on Form S-4 dated February 12, 1996). | |
31.1*
|
Certification pursuant to Rule 13a-14 and 15d-14 under the Securities Exchange Act of 1934 | |
32.1*
|
Certification pursuant to 18 U.S.C. 1350. |
*Filed herewith. |
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SIGNATURE PAGE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
INCOME OPPORTUNITY REALTY INVESTORS, INC. |
||||
Date: August 15, 2005 | By: | /s/ Robert N. Crouch II | ||
Robert N. Crouch II | ||||
Executive Vice President, Chief Financial Officer, and Acting Principal Executive Officer | ||||
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INCOME OPPORTUNITY REALTY INVESTORS, INC.
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended June 30, 2005
EXHIBITS TO
QUARTERLY REPORT ON FORM 10-Q
For the Quarter ended June 30, 2005
Exhibit | Page | |||
Number | Description | Number | ||
31.1
|
Certification Pursuant to Rules 13a-14 and 15d-14 Under the Securities Exchange Act of 1934. | |||
32.1
|
Certification Pursuant to 18 U.S.C. Section 1350. |