UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT UNDER SECTION 14(d)(4)
OF THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. ____)
INCOME OPPORTUNITY REALTY INVESTORS, INC.
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(Name of Subject Company)
INCOME OPPORTUNITY REALTY INVESTORS, INC.
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(Names of Persons Filing Statement)
Common Stock, par value $0.01 per share
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(Title of Class of Securities)
452926-10-8
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(CUSIP Number of Class of Securities)
Ted P. Stokely
Member of the Special Committee of the Board of Directors
c/o Steven C. Metzger
Prager, Metzger & Kroemer PLLC
2626 Cole Avenue, Suite 900
Dallas, Texas 75204-1083
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(Name, address and telephone numbers of person authorized to receive
notices and communications on behalf of the persons filing statement)
[ ] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
ITEM 1. SUBJECT COMPANY INFORMATION
The name of the subject company is Income Opportunity Realty Investors,
Inc., a Nevada corporation ("IOT" or the "Company"). The address of the
principal executive offices of IOT is 1800 Valley View Lane, Suite 300, Dallas,
Texas 75234, and its phone number at its principal executive offices is (469)
522-4200.
The title of the class of equity securities to which this Schedule
14D-9 Solicitation/Recommendation Statement (this "Schedule 14D-9") relates is
the Common Stock, par value $0.01 per share of IOT (the "Shares" or the "Common
Stock"). As of October 25, 2002, there were approximately 1,438,945 Shares
issued and outstanding. As of October 25, 2002, American Realty Investors, Inc.,
a Nevada corporation ("ARL") owned directly or indirectly 409,935 Shares
(28.5%), Basic Capital Management, Inc., a Nevada corporation ("BCM"), which is
the contractual adviser to IOT and ARL and Transcontinental Realty Investors,
Inc. ("TCI"), owned directly or indirectly 345,728 Shares (24%), and
non-affiliates owned 576,480 Shares (approximately 40.1% of the outstanding).
ITEM 2. IDENTITY AND BACKGROUND OF FILING PERSON
This Schedule 14D-9 is being filed by the subject company, IOT. The
contact information for IOT is listed in Item 1 above and is incorporated herein
by reference.
This Schedule 14D-9 relates to a tender offer by Income Opportunity
Acquisition Corporation (the "Purchaser"), a wholly-owned subsidiary of ARL, to
purchase up to all outstanding Shares which are not currently owned by
Purchaser, ARL or BCM from the non-affiliates (the "Publicly Held Shares") at a
price of $19 per Share in cash (the "Offer Price"), all net to the Seller in
cash, without interest thereon, less applicable withholding taxes, if any, and
upon the terms and subject to the conditions set forth in the Offer to Purchase
dated November 15, 2002 (the "Offer to Purchase") and in the related Letter of
Transmittal (which, together with the Offer to Purchase, constitutes the
"Offer"). The Purchaser and ARL may sometimes be collectively referred to in
this Schedule 14D-9 as "ARL." The Purchaser filed a Schedule TO Tender Offer
Statement (the "Schedule TO") with the Securities and Exchange Commission (the
"Commission") on November 15, 2002, which incorporates the Offer to Purchase as
an exhibit. The Offer to Purchase is incorporated herein by reference.
The Offer is conditioned upon, among other things, Purchaser obtaining
sufficient financing prior to the expiration of the Offer to enable the
Purchaser to purchase the tendered Shares and pay the fees and expenses of the
Offer. If all of the Publicly-Held Shares were tendered at the Offer Price, the
Purchaser would need approximately $10.95 million to purchase all of the
Publicly-Held Shares and an additional $3,230,799 to pay related expenses. The
Schedule TO advises that ARL expects to obtain this financing through various
sources, and that ARL reasonably expects that it will be able to borrow enough
money to satisfy its obligations with respect to the Offer.
The Offer is subject to a number of other conditions, including
litigation, any event, change, effect or development that would have a material
adverse effect upon ARL, or another tender offer.
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Unless otherwise noted herein, all information contained in this
Schedule 14D-9 is incorporated herein by reference concerning (i) the Purchaser,
ARL, BCM or their affiliates (other than TCI and IOT), and (ii) the Settlement
Agreement from the Olive Litigation and negotiations among the parties therein,
was obtained from reports or statements filed by ARL with the Commission,
including, without limitation, the Schedule TO, and IOT takes no responsibility
for the accuracy of such information.
The Purchaser's and ARL's principal executive offices, as set forth in
its Schedule TO, are located at 1800 Valley View Lane, Suite 300, Dallas, Texas
75234, and its business telephone number is (469) 522-4200.
ITEM 3. PAST CONTACTS, TRANSACTIONS, NEGOTIATIONS AND AGREEMENTS
BCM, is ARL's, IOT's and TCI's contractual advisor. ARL, IOT and TCI
contract with affiliates of BCM for property management services. Triad Realty
Services, Ltd. ("Triad") subcontracts the property-level management and leasing
of 51 of TCI's commercial properties, its four hotels and the commercial
properties owned by a real estate partnership in which TCI and IOT are partners
to Regis Realty, Inc. ("Regis"), a related party. Regis also provides real
estate brokerage services for TCI, on a non-exclusive basis, and receives
brokerage commissions in accordance with the brokerage agreement.
Triad also subcontracts the property-level management and leasing of
IOT's seven office buildings and two commercial properties owned by real estate
partnerships in which IOT and TCI are partners to Regis. Prior to May 1, 2000,
affiliates of BCM provided brokerage services for IOT, on a non-exclusive basis,
and received brokerage commissions in accordance with a brokerage agreement.
Currently, Regis performs such brokerage services for IOT.
At October 25, 2002, ARL indirectly owned 3,994,301 shares, or
approximately 49.5%, of TCI's outstanding common stock and indirectly owned
409,935 shares, or approximately 28.5%, of IOT's outstanding common stock.
At October 25, 2002, TCI owned 345,728 shares, or approximately 24%, of
IOT's outstanding common stock and 746,972 shares, or approximately 6.6%, of
ARL's outstanding common stock.
As of October 25, 2002, BCM owned 6,663,244 shares, or approximately
58.6%, of ARL's outstanding common stock; 1,166,947 shares, or approximately
14.5%, of TCI's outstanding common stock; and 106,802 shares, or approximately
7.4%, of IOT's outstanding common stock.
The executive officers of TCI and IOT also serve as officers of ARL,
and owe fiduciary duties to each of those entities as well as BCM under
applicable law. The directors and officers of IOT also serve as directors and
officers of TCI. Mr. Earl Cecil is a director of ARL, TCI and IOT. The directors
owe fiduciary duties to TCI as well as to IOT under applicable law. IOT and TCI
have the same relationship with BCM as does ARL.
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RELATED PARTY TRANSACTIONS
Historically, ARL, TCI and IOT 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 ARL, TCI and IOT as could have been obtained from unrelated
third parties.
OPERATING RELATIONSHIPS
In October 1997, ARL entered into leases with BCM and Regis, for space
to house BCM's staff at the One Hickory Centre Office Building, construction of
which was completed in December 1998. The BCM leases, effective upon ARL
obtaining permanent financing of the building, were for 75,852 sq. ft.
(approximately 75% of the building), had terms of ten and fifteen years and
provided for annual base rent of $19.25 per sq. ft. for the first year. In
January 2001, both leases were terminated, and ARL entered into a new lease with
BCM, effective October 1, 2000. The new lease is for 59,463 sq. ft.
(approximately 62% of the building), has a term of three years, and provides for
annual base rent of $1.3 million or $21.50 per sq. ft. Effective March 1, 2002,
the lease was amended to 57,879 sq. ft. (approximately 59% of the building),
with an annual base rent of $1.2 million, or $21.50 per sq. ft. In April 2002,
TCI purchased 100% of the common shares of ART One Hickory Corporation ("One
Hickory"), a wholly owned subsidiary of ARL. The lease remains in full force and
effect.
TCI is a 63.7% limited partner and IOT is a 36.3% general partner in
the Tri-City Limited Partnership ("Tri-City") which owns the Chelsea Square
Shopping Center. In February 2000, the Chelsea Square Shopping Center was
financed in the amount of $2.1 million. Tri-City received net cash of $2.0
million after the payment of various closing costs. The mortgage bore interest
at a fixed rate of 10.24% per annum until February 2001, and a variable rate
thereafter, currently 10% per annum, requires monthly payments of principal and
interest of $20,601 and matures in February 2005. TCI received a distribution of
$1.3 million of the net financing proceeds. IOT received a distribution of
$739,000 of the net financing proceeds. The business purpose of the transaction
was to draw equity from the Chelsea Square Shopping Center.
In 2001, TCI received $120,000 in rent from BCM for BCM's lease at
Addison Hanger. BCM owns a corporate jet that is housed at the hanger and TCI
had available space at the hanger.
In 2001, ARL paid BCM, Triad, Carmel and Regis $6.7 million in advisory
fees, $166,000 in net income fees, $3.8 million in incentive fees, $1.2 million
in mortgage brokerage and equity refinancing fees, $92,000 in property
acquisition fees, $5.9 million in real estate brokerage commissions and $3.9
million in property and construction management fees and leasing commissions,
net of property management fees paid to subcontractors, other than Regis. In
addition, as provided in the ARL Advisory Agreement, BCM received cost
reimbursements of $2.8 million. BCM manages ARL's day-to-day operations pursuant
to the ARL Advisory Agreement. ARL contracts with Triad and Carmel for property
management services. BCM is the general partner of Triad. Carmel, which is owned
by First Equity Properties, Inc., a company affiliated with BCM, subcontracts
property management construction services and brokerage services to Regis. Regis
is a company owned by GS Realty, the limited partner of Triad.
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In 2001, IOT paid BCM, Triad and Regis $817,000 in advisory fees and
$312,000 in property and construction management fees and leasing commissions,
net of property management fees paid to subcontractors other than Regis. In
addition, from time-to-time, IOT has made advances to BCM, which generally have
not had specific repayment terms and have been reflected in IOT's financial
statements as other assets or other liabilities from affiliates. At December 31,
2001, BCM advanced IOT $593,000. As of March 2002, IOT has repaid that amount to
BCM. BCM manages IOT's day-to-day operations pursuant to the IOT Advisory
Agreement. IOT contracts with Triad for property management services.
In 2001, TCI paid BCM, Triad and Regis $10.8 million in advisory
incentive and net income fees, $45,000 in mortgage brokerage and equity
refinancing fees, $2.4 million in property acquisition fees, $3.8 million in
real estate brokerage commissions and $2.6 million in property and construction
management fees and leasing commissions, net of property management fees paid to
subcontractors, other than Regis. In addition, as provided in the TCI Advisory
Agreement, BCM received cost reimbursements of $2.6 million. BCM manages TCI's
day-to-day operations pursuant to the TCI Advisory Agreement. TCI contracts with
Triad for property management services.
ADVANCES AND LOANS
From time-to-time, ARL and its affiliates have made advances to each
other, which generally have not had specific repayment terms and have been
reflected in ARL's financial statements as other assets or other liabilities.
These affiliate borrowings are used to fund operating shortfalls or
investment/acquisition cash requirements. Similarly, as properties are sold and
operating cash flow is generated, those advances/borrowings may be repaid. Also,
incentive fees and net income fees payable to BCM for 2001 are accrued
throughout the year and are due by March 31, 2002. At December 31, 2001, ARL
owed $10.1 million ($4.0 million for fees owed for 2001), $980,000 and $257,000
to BCM, TCI and GS Realty, respectively. In January 2002, ARL paid the $257,000
due to GS Realty. At December 31, 2001, TCI had receivables of $11.6 million,
$1.9 million and $608,000 from BCM, GS Realty, and ARL, respectively. Also at
December 31, 2001, TCI owed $1.0 million and $39,000 to GS Realty and BCM,
respectively. In January 2002, TCI paid the $1.0 million due to GS Realty and in
March 2002, TCI paid the $39,000 to BCM. At December 31, 2001, BCM advanced IOT
$593,000. As of March 2002, IOT has repaid that amount to BCM.
PROPERTY TRANSACTIONS
In May 2001, ARL exchanged with TCI two parcels of land, a 10.5 acre
tract of Vista Ridge land and an 8.88 acre tract of Hollywood Casino land, for
the 168 unit Glenwood Apartments. The cost of the Vista Ridge land, the
Hollywood Casino land and the Glenwood Apartments was $1.1 million, $2.1
million, and $3.7 million, respectively. The purchase prices were determined
based on the market values of the properties exchanged, using a market rate
multiple of net operating income. The business purpose of the transaction was
for TCI to construct apartments on the Vista Ridge land and office buildings on
the Hollywood Casino land. No consideration was paid on the transaction.
However, ARL received net cash of $3.2 million on the subsequent sale of the
Glenwood Apartments.
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In December 2001, TCI, purchased 100% of the outstanding common shares
of National Melrose, Inc. ("NM"), a wholly-owned subsidiary of ARL, for $2.0
million. The purchase price was determined based upon the market value of the
property exchanged, using a market rate multiple of net operating income. NM
owns the Executive Court Office Building. ARL has guaranteed that the asset will
produce at least a 12% annual return on the purchase price for a period of three
years from the purchase date. If the asset fails to produce the annual return,
ARL will pay TCI any shortfall. In addition, if the asset fails to produce the
12% return for a calendar year, TCI may require ARL to repurchase the shares of
NM for the purchase price. The business purpose of the transaction was for TCI
to make an equity investment in NM anticipating a profitable return and ARL to
receive cash for its equity investment. Management has classified this related
party transaction as a note payable to TCI. The consideration paid for the
outstanding shares was $2.0 million.
In January 2002, IOT purchased 100% of the outstanding common shares of
Rosedale Corporation ("Rosedale"), a wholly-owned subsidiary of ARL, for $5.1
million. The purchase price was determined based upon the market value of the
property exchanged, using a market rate multiple of net operating income.
Rosedale owns the Rosedale Towers Office Building. ARL has guaranteed that the
asset will produce at least a 12% annual return on the purchase price for a
period of three years from the purchase date. If the asset fails to produce the
12% return, ARL will pay IOT any shortfall. In addition, if the asset fails to
produce the 12% return for a calendar year, IOT may require ARL to repurchase
the shares of Rosedale for the purchase price. The business purpose of the
transaction was for IOT to make an equity investment in Rosedale anticipating a
profitable return and ARL to receive cash for its equity investment. Management
has classified this related party transaction as a note payable to IOT. The
consideration paid for the outstanding shares was $5.1 million.
In January 2002, TCI purchased 100% of the outstanding common shares of
ART Two Hickory Corporation ("Two Hickory"), a wholly-owned subsidiary of ARL,
for $4.4 million. The purchase price was determined based upon the market value
of the property exchanged, using a market rate multiple of net operating income
of 7.0%. Two Hickory owns the Two Hickory Centre Office Building. ARL has
guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the asset
fails to produce the 12% return, ARL will pay TCI any shortfall. In addition, if
the asset fails to produce the 12% return for a calendar year, TCI may require
ARL to repurchase the shares of Two Hickory for the purchase price. The business
purpose of the transaction was for TCI to make an equity investment in Two
Hickory anticipating a profitable return and ARL to receive cash for its equity
investment. Management has classified this related party transaction as a note
payable to TCI. The consideration paid for the outstanding shares was $4.4
million. In June 2002, the first lien on the property was refinanced. TCI
received $1.3 million of the proceeds as a principal reduction on its loan to
ARL.
In February 2002, TCI sold a $2.0 million senior participation interest
in a loan to IOT. The board of directors of IOT and TCI determined that the 16%
interest rate was a good return for IOT's investment and TCI could benefit from
the increase in cash and decrease its notes receivable outstanding portfolio.
TCI received consideration of $2.0 million. In February 2002, the loan was
extended until April 2002. In April 2002, IOT extended the loan until July 2002,
receiving $8,500 as an extension fee. IOT and TCI will receive 57% and 43%,
respectively, on the remaining principal and interest payments. In July 2002,
the note was extended until August 2002. IOT and
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TCI will receive 57% and 43% respectively, on the remaining principal and
interest payments. In August 2002, the loan was paid off, including accrued but
unpaid interest.
In March 2002, ARL received consideration of $600,000 and exchanged
with TCI two parcels of land, a 24.5 acre tract of Rasor land, a 16.89 acre
tract of Lakeshore Villas land, and the 45,623 sq. ft. Oaktree Village Shopping
Center for the 80,278 sq. ft. Plaza on Bachman Creek Shopping Center. The cost
of the Rasor land, the Lakeshore Villas land, the Oaktree Shopping Center, and
the Plaza on Bachman Shopping Center was $1.0 million, $1.3 million, $1.6
million, and $4.1 million, respectively. The purchase prices of the shopping
centers were determined based on the market values of the properties exchanged,
using a market rate multiple of net operating income of 10.5% and the value for
the Rasor land and Lakeshore Villas land was determined on appraised rates of
$3.36 and $1.29 per square foot, respectively. The business purpose of the
transaction was for TCI to construct apartments on the Rasor and Lakeshore
Villas land and to give ample value for the property TCI is exchanging, the
Oaktree Shopping center was added to the transaction. The Plaza on Bachman Creek
Shopping Center was subsequently financed with ARL receiving net cash of $4.4
million.
In April 2002, TCI purchased all of the general and limited partnership
interests in Garden Confederate Point, L.P. ("Confederate Point") from ARL for
$1.9 million. The purchase price was determined based on the market value of the
property exchanged using a market rate multiple of net operating income of
8.41%. Confederate Point owns the Confederate Point Apartments. ARL has
guaranteed that the asset will produce at least a 12% annual return on the
purchase price for a period of three years from the purchase date. If the asset
fails to produce the 12% return, ARL will pay TCI any shortfall. In addition, if
the asset fails to produce the 12% return for a calendar year, TCI may require
ARL to repurchase the interests in Confederate Point for the purchase price. The
business purpose of the transaction was for TCI to make an equity investment in
Confederate Point anticipating a profitable return and ARL is to receive cash
for its equity investment. Management has classified this related party
transaction as a note payable to TCI.
In April 2002, TCI purchased all of the general and limited partnership
interests in Garden Foxwood, L.P. ("Foxwood") from ARL for $1.1 million. The
purchase price was determined based on the market values of the property
exchanged, using a market rate multiple of net operating income of 8.41%.
Foxwood owns the Foxwood Apartments. ARL has guaranteed that the asset will
produce at least a 12% annual return on the purchase price for a period of three
years from the purchase date. If the asset fails to produce the 12% return, ARL
will pay TCI any shortfall. In addition, if the asset fails to produce the 12%
return for a calendar year, TCI may require ARL to repurchase the interests in
Foxwood for the purchase price. The business purpose of the transaction was for
TCI to make an equity investment in Foxwood anticipating a profitable return and
ARL to receive cash for its equity investment. Management has classified this
related party transaction as a note payable to TCI.
In April 2002, TCI purchased all of the general and limited partnership
interests in Garden Woodsong, L.P. ("Woodsong") from ARL for $2.5 million. The
purchase price was determined based on the market values of the property
exchanged, using a market rate multiple of net operating income of 8.41%.
Woodsong owns the Woodsong Apartments. ARL has guaranteed that the asset will
produce at least a 12% annual return on the purchase price for a period of three
years from the
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purchase date. If the asset fails to produce the 12% return, ARL will pay TCI
any shortfall. In addition, if the asset fails to produce the 12% return for a
calendar year, TCI may require ARL to repurchase the interests in Woodsong for
the purchase price. The business purpose of the transaction was for TCI to make
an equity investment in Woodsong anticipating a profitable return and ARL to
receive cash for its equity investment. Management has classified this related
party transaction as a note payable to TCI. In July 2002, the Woodsong
Apartments was sold for $9.1 million. TCI received $2.6 million from the
proceeds of $2.8 million as payment of principal and accrued but unpaid interest
on the loan.
In April 2002, TCI, a related party, purchased 100% of the common
shares of One Hickory, for $4.5 million. The purchase price was determined based
on the market values of the property exchanged, using a market rate multiple of
net operating income of 7.0%. One Hickory owns the One Hickory Centre Office
Building. ARL has guaranteed that the asset will produce at least a 12% annual
return on the purchase price for a period of three years from the purchase date.
If the asset fails to produce the 12% return, ARL will pay TCI any shortfall. In
addition, if the asset fails to produce the 12% return for a calendar year, TCI
may require ARL to repurchase the shares in One Hickory for the purchase price.
The business purpose of the transaction was for TCI to make an equity investment
in One Hickory anticipating a profitable return and ARL to receive cash for its
equity investment. Management has classified this related party transaction as a
note payable to TCI.
In April 2002, TCI sold 12 residential properties to partnerships
controlled by Metra Capital LLC ("Metra"). These properties include: the 75 unit
Apple Lane Apartments in Lawrence, Kansas, the 195 unit Arbor Point Apartments
in Odessa, Texas, the 264 unit Fairway View Estates Apartments in El Paso,
Texas, the 152 unit Fairways Apartments in Longview, Texas, the 166 unit
Fountain Lake Apartments in Texas City, Texas, the 172 unit Fountains of
Waterford Apartments in Midland, Texas, the 122 unit Harper's Ferry Apartments
in Lafayette, Louisiana, the 108 unit Oak Park IV Apartments in Clute, Texas,
the 131 unit Quail Oaks Apartments in Balch Springs, Texas, the 300 unit
Sunchase Apartments in Odessa, Texas, the 180 unit Timbers Apartments in Tyler,
Texas, and the 112 unit Willow Creek Apartments in El Paso, Texas. Innovo is a
limited partner in the partnerships that purchased the properties. Joseph
Mizrachi, a director of ARL, controls approximately 11.67% of the outstanding
common stock of Innovo. Management has determined to treat this sale as a
refinancing transaction. TCI will continue to report the assets and the new debt
incurred by Metra on its financial statements. The sales price for the
properties totaled $37.6 million. TCI received net cash of $10.5 million after
paying off the existing debt of $18.0 million and various closing costs. The new
debt of $30.3 million bears interest at 7.57% per annum, requires monthly
interest only payments of $212,000 and matures in May 2012. TCI also received
$5.7 million of 8% non-recourse, non-convertible Series A preferred stock of
Innovo. The Innovo preferred shares have the terms described above in the
paragraph setting forth ARL's sale of residential properties to Metra.
In April 2002, IOT sold all of its residential properties to
partnerships controlled by Metra. These properties include: the 60 unit Brighton
Court, the 92 unit Del Mar, the 68 unit Enclave, the 280 unit Meridian, the 57
unit Signature, the 114 unit Sinclair, located in Midland, Texas, and the 106
unit Treehouse, located in San Antonio, Texas. Innovo is a limited partner in
the partnerships that purchased the properties. Joseph Mizrachi, a director of
ARL, controls approximately 11.67% of the outstanding common stock of Innovo.
The sale constituted 23.39% of the total assets of IOT
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as of December 31, 2001. The sales price for the properties totaled $26.2
million. IOT received $5.4 million in cash after the payoff of $16.1 million in
debt and various closing costs. Management has determined to treat this sale as
a refinancing transaction. The new debt, funded by Bank of America, on the
properties totals $21.4 million, bears interest at 7.57% per annum, requires
monthly interest only payments of $135,000 and matures in May 2012. IOT also
received $2.9 million of 8% non-recourse, non-convertible Series A preferred
stock of Innovo. The Innovo preferred shares have the terms described above in
the paragraph setting forth ARL's sale of residential properties to Metra.
In June 2002, TCI purchased 42.6 acres of Hollywood Casino land from
ARL for $17.0 million. The purchase price was determined based on the market
value of the property of $9.10 per square foot. The business purpose of this
transaction was to reduce the affiliate payable.
Also in June 2002, TCI purchased four parcels of unimproved land from
ARL, the 54 acre Marine Creek land parcel, the 18 acre Mason Park land parcel,
the 16.57 acre Nashville land parcel and the 61 acre Palm Desert land parcel for
$12.3 million. The purchase price was determined based on the market value of
the properties of $2.00, $3.56, $4.00 and $1.48 per square foot, respectively.
The business purpose of the transactions was for TCI to develop apartment
communities on the four tracts of land and to reduce the affiliate payable from
ARL.
Additionally, in June 2002, TCI purchased the 410,901 sq. ft. Centura
Tower Office Building in Farmers Branch, Texas from ARL for $50.0 million. The
purchase price for the Centura Tower was determined based on estimated
replacement cost. The business purpose of the transaction was for TCI to acquire
a Class A office building with significant upside potential and to reduce the
affiliate payable from ARL.
In June 2002, ARL purchased all the general and limited partnership
interests in Chalet North, L.P. ("Chalet North") from BCM for $3.0 million. The
purchase price was determined based on the market value of the property
exchanged, using a market rate multiple of net operating income. Chalet North
owns the Pinecrest Apartments. The business purpose of this transaction was to
reduce the affiliate payable owed by BCM to ARL.
In June 2002, ARL purchased the Tiberon Trails Apartments from BCM for
$12.0 million. The purchase price was determined based on the market value of
the property exchanged, using a market rate multiple of net operating income.
The business purpose of this transaction was to reduce the affiliate payable
owed by BCM to ARL.
In June 2002, ARL purchased the Alta Mesa Shopping Center from BCM for
$4.0 million. The purchase price was determined based on the market value of the
property exchanged, using a market rate multiple of net operating income. The
business purpose of this transaction was to reduce the affiliate payable owed by
BCM to ARL.
In June 2002, ARL purchased BCM's investment in Realty Advisors-Korea
for $6.0 million. The purchase price was based on the fair value of the
interests, which was determined by management and approved by the respective
boards of directors, based on expected management fees that will be collected.
The business purpose of this transaction was to reduce the affiliate payable
owed by BCM to ARL.
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STOCK-RELATED ITEMS
The directors and officers of TCI also serve as directors and officers
of IOT. The directors owe fiduciary duties to IOT as well as to TCI under
applicable law. IOT has the same relationship with BCM as TCI. At September 23,
2002, TCI owned 746,972 shares of ARL common stock which were primarily
purchased in open market transactions in 1990 and 1991 at a total cost of $1.6
million. The officers of TCI and IOT also serve as officers of ARL. BCM also
serves as advisor to ARL and at September 23, 2002, ARL owned approximately
49.5% of TCI's outstanding common stock. At September 23, 2002, the market value
of the ARL common shares owned by TCI was approximately $7.0 million.
TCI established on April 13, 2000, the Director Stock Option Plan (the
"TCI Director Plan") which became effective upon subsequent approval of the
stockholders of TCI at an Annual Meeting of Stockholders held on October 10,
2000. Under the terms of the TCI Director Plan, successive options covering
5,000 shares of TCI common stock each were automatically granted to each
director on the date of effectiveness of the TCI Director Plan, and on each
January 1 of each subsequent year in which the individual served as a director
of TCI. Pursuant to the TCI Director Plan, two former directors of TCI, Edward
G. Zampa and R. Douglas Leonhard, each held options covering 5,000 shares at an
exercise price of $8.975 per share, and an additional 5,000 shares at an
exercise price of $14.875 per share. On January 30, 2002, TCI entered into
separate agreements with Messrs. Leonhard and Zampa pursuant to which TCI
repurchased all options held by each at a price based upon a $16 per share sale
price of common stock, less the aggregate amount of the exercise price under
each option. As a result of the Purchase Agreements, each of Messrs. Leonhard
and Zampa received an aggregate of $41,225 in settlement, and the outstanding
options previously held by each under the TCI Director Plan have been cancelled.
In July 2002, Ted Stokely and Martin White exercised their options for 15,000
shares. Currently, no options are outstanding.
INDEBTEDNESS OF MANAGEMENT
Currently, no director or executive officer of ARL, TCI or IOT has any
indebtedness to ARL, TCI or IOT.
THE OLIVE SETTLEMENT
The Offer results from a court-approved settlement of a lawsuit styled
Jack Olive, et al. v. National Income Realty Trust, Inc., et al., Case No.
C89-4331-MHP filed in the United States District Court for the Northern District
of California. The defendants in that litigation include, among others, TCI,
IOT, BCM, Gene E. Phillips and American Realty Trust, Inc. ("ART"), a
predecessor and now subsidiary of ARL. TCI and IOT are parties to a 1990
settlement of the litigation known as the Olive Settlement. The Olive Settlement
is a settlement of a federal class and derivative action lawsuit commenced in
1989. The action alleged that the Boards of Directors of TCI and IOT had
breached the governing documents of the companies in 1989 by appointing a new
adviser for the companies. It is also alleged a breach of trust and a breach of
fiduciary duty owed by the boards and boards members to each company by
retaining BCM as the adviser to each company without stockholder approval. The
lawsuit sought the removal of the board members and the appointment of an
interim receiver pending the election of a new board. A Stipulation of
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Settlement was entered into in February 1990 which required (i) cash
distributions to be made to stockholders over the next twelve months; (ii) the
addition of three new independent board members to the Board of each company;
and (iii) the establishment of special board committees to review certain
related party transactions. The original settlement was modified in 1995, and
the modification was amended in 1997. Periodically since 1990, designated
Settlement Counsel, George Donaldson, has challenged the compliance of the
parties under the Olive Settlement, modification and the amendment and has
unsuccessfully sought to remove BCM from its contractual advisory position to
TCI, IOT and other entities. Settlement Counsel also sought to, from time to
time, remove some or all of the directors of TCI and other entities. The boards
of TCI and IOT deny the allegations and believe there has been no breach of any
of the settlement provisions. Although there have been several status
conferences concerning these matters, there has been no court order or action
resolving or affirming the allegations of breaches of the settlement.
The parties to the Olive Litigation acknowledge that further and
substantial expense and time would be necessary to litigate the matters raised
by the pending requests made by Settlement Counsel that the Court exercise its
retained jurisdiction over the parties' prior settlement agreements. Thus, in
order to finally put an end to the Olive Litigation and to avoid the anticipated
expense, inconvenience, distraction and risk of further legal proceedings, the
parties concluded that it was desirable to compromise, settle and discharge all
claims arising from such matters while, at the same time, devising a mechanism
to enable all stockholders of TCI and IOT to convert their common stock in TCI
or IOT into cash.
To that end, after arm's length negotiations, TCI, IOT and ARL, as the
parent corporation of ART, entered into the Second Amendment to the Modification
of Stipulation of Settlement (the "Settlement Agreement"), dated October 17,
2001. Following notice to all stockholders of TCI and IOT, the Settlement
Agreement obtained final approval of the Court on February 12, 2002. The
Settlement Agreement provides that if the stockholders so approve, TCI and IOT
would become subsidiaries of ARL through the mechanism of freeze-out mergers,
and if the SEC review process relating to the proxy solicitation for stockholder
approval was not completed before March 31, 2002, and that day was not extended,
Mr. Phillips, BCM, ARL and ART (collectively the "Affiliated Entities") would be
in default and liable for liquidated damages equal to $5 for each share of TCI
and IOT common stock unless within thirty days of the default, ARL filed tender
offers seeking to purchase the TCI and IOT stock. A Registration Statement on
Form S-4 was filed with the SEC in February 2002 to register the consideration
to be offered to the stockholders in the contemplated freeze-out mergers and
seek approval of those mergers from the ARL, TCI and IOT stockholders. However,
the review process has not been completed. ARL, through the Purchaser, has now
made the Offer for the Publicly-Held Shares. The Settlement Agreement provides
that tender offers must be for all of the shares of TCI and IOT other than those
held by the "Affiliated Entities" or their affiliates and must be on terms equal
to or better than $17.50 per share in cash for the TCI common stock, and $19 per
share in cash for the IOT common stock, which amounts would be reduced by any
dividends paid after January 2, 2002 on the TCI or IOT common stock,
respectively. If the Offers are substantially completed within 120 days
following their commencement, the Affiliated Entities will be deemed to have
fully complied with the Settlement Agreement.
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According to ARL, if the offer is consummated for less than all of the
Publicly Held Shares, ARL currently expects to pursue the merger after the
consummation of the Offer. If ARL is able to complete the registration process
in the future it currently expects to offer to merge with IOT and acquire the
remaining Shares of IOT Common Stock. The merger would be subject to not only
completing the registration process, but also receiving approval of the merger
from at least a majority of the unaffiliated IOT stockholders. ARL is not
legally obligated to pursue the merger, and may, at some time in the future,
abandon its efforts to do so or modify the terms proposed. There can be no
assurance that ARL will be able to take the steps necessary to register the ARL
preferred stock or that it will be able to consummate the merger, if it does.
NEGOTIATIONS OR CONTACTS RELATING TO THE OLIVE SETTLEMENT AND MERGER
On October 31, 2000, Henry W. Simon, Jr., counsel to BCM, Mr. Phillips,
ART and ARL, following conversations with Settlement Counsel, attended a meeting
with Ted P. Stokely, Chairman of the Board of TCI and IOT, and Robert A.
Waldman, General Counsel to ARL, TCI and IOT, to discuss the mechanics leading
toward a possible settlement. Subsequent conversations resulted on November 15,
2000 with Mr. Waldman contacting representatives of Houlihan Lokey Howard &
Zukin ("Houlihan Lokey") to discuss their interest in providing a fairness
opinion which would be necessary in the event the parties reached an agreement
on prices. Houlihan Lokey indicated they would be pleased to work in furtherance
of the transaction and prepare to draft a retainer agreement among IOT, TCI and
Houlihan Lokey and send it to Mr. Waldman.
On November 17, 2000, at meetings of the Boards of Directors of TCI and
IOT, the members were advised that Settlement Counsel had expressed an initial
interest in a buy-out by ARL of all non-affiliated stockholders at $16 per TCI
share and $14 per IOT share, subject to further information and negotiation as
to price. In attendance at the meetings were directors R. Douglas Leonhard*,
Martin L. White, Edward G. Zampa*, and Ted P. Stokely. Also attending the
meetings were Mark W. Branigan, then a director of ARL and Chief Financial
Officer of ARL, TCI and IOT, and Karl L. Blaha, then a director of ARL and
President of ARL, TCI and IOT, and Robert A. Waldman, Senior Vice President,
General Counsel and Secretary of ARL, TCI and IOT.
Subsequent meetings not involving TCI or IOT personnel resulted in
exchanges of financial information, conclusions, preliminary reports and
methodology for valuations, discussions of discounts and comparative values and
their effect upon proposed prices, as well as affirmative elections to
potentially obtain new securities of ARL in any such transaction.
On August 30, 2001, the TCI and IOT directors held special meetings at
which time they approved the terms of the proposed settlement subject to
completion of due diligence and negotiation of a final agreement. In attendance
at the meetings were directors Messrs. Leonhard, White, Zampa
----------
* Messrs. Leonhard and Zampa resigned as directors of TCI and IOT on
December 14, 2001. Messrs. Leonhard and Zampa were directors of both TCI and IOT
but held no other position in any of TCI, IOT or ARL. Mr. Leonhard did not
provide any reason for his resignation; Mr. Zampa advised that his workload had
increased and time no longer permitted him to continue; neither individual
advised of any disagreement with any policies or practices or operations of
either TCI or IOT, nor did either individual furnish TCI or IOT with any letter
describing any disagreement and requesting that the matter be disclosed. See
Also, Current Report on Form 8-K for event occurring December 14, 2001 of TCI
and IOT.
-12-
and Stokely. Also attending the meetings were Messrs. Blaha, Lou Corna
(Executive Vice President - Tax of ARL, TCI, IOT and BCM) and Waldman. The
proposed Settlement Agreement had been drafted by Messrs. Donaldson and Simon in
September 2001, and revised for the concerns of various participants in the
discussions. On October 18, 2001, the written Settlement Agreement was filed
with Judge Patel. On October 23, 2001, a Press Release was issued on behalf of
ARL, TCI and IOT announcing the preliminary agreement with Settlement Counsel
providing for ARL to acquire all of the outstanding common stock of TCI and IOT.
On October 25, 2001, the boards of directors of TCI and IOT held special
meetings with the representatives of Houlihan Lokey. The directors reviewed the
settlement proposal and discussed with Houlihan Lokey the procedures that
Houlihan Lokey would apply in analyzing the fairness of the proposed
transaction.
The Court ultimately signed an Order preliminary approving the
Settlement Agreement on December 18, 2001, and the Court approved a proposed
Notice of Proposed Settlement of Derivative Action which was then mailed to all
stockholders of TCI and IOT. The Notice described the proposed settlement and
advised that a Settlement Hearing would be held on February 4, 2002.
On February 1 and 4, 2002, the TCI and IOT boards of directors (which
consist of the same persons) met by telephone conference to review a draft of
certain presentations prepared by Houlihan Lokey and to make certain
determinations regarding the fairness of the terms of the Settlement Agreement
for the proposed mergers to the stockholders of each other corporation.
On February 12, 2002, the Court signed the Order finally approving the
Settlement Agreement.
The merger consideration was determined through negotiations between
representatives of ARL and Settlement Counsel in the Olive Litigation. The
Boards of Directors of TCI and IOT had no direct part in negotiating the prices
or arriving at the prices to be paid. Pursuant to the Settlement Agreement, at
all times, TCI has essentially received an offer to the holders of the
Publicly-Held Shares of a price of $17.50 per Share in cash, and IOT has
received a similar offer to the holders of its Publicly-Held Shares of $19 per
Share in cash.
INTERESTS OF CERTAIN PERSONS IN THE OFFER
The executive officers of BCM also serve as executive officers of ARL,
TCI and IOT. Each of those individuals as a result of their positions owe
fiduciary duties to the stockholders of each entity. Mr. Earl Cecil is a
director of each of ARL, TCI and IOT. Additionally, TCI and IOT have the same
directors and therefore, the directors owe fiduciary duties to both TCI and IOT.
At times, each of these individuals may be confronted by issues, including a
business combination and the Offer that present them with potentially
conflicting interests and obligations. None of the individual officers and
directors of ARL, TCI, IOT or BCM will receive individual compensation, shares,
forgiveness of debt, options, or severance benefits or earn-outs or any other
amounts that could be considered compensation related to any successful
consummation of either the Offer or any subsequent business combination. It is
currently expected that the directors and officers of ARL, TCI and IOT will each
remain the same as after the conclusion of the Offer.
-13-
No officer or director presently owns any Shares. No member of the
Board of Directors or any executive officer of IOT will receive any compensation
if the Offer is or is not consummated.
Except as discussed herein or incorporated herein by reference, to the
Company's knowledge, as of the date hereof, there are no material agreements,
arrangements or understandings, and no actual or potential conflicts of interest
between the Company or its affiliates and (i) the Company's executive officers,
directors or affiliates, or (ii) the Purchaser, ARL or any of their respective
executive officers, directors or affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
Since Earl Cecil is a director of each of ARL, TCI and IOT, and since
Henry Butler is an employee of BCM, and by virtue of the current or past
affiliations among ARL, TCI and IOT, the Board of Directors of the Company
delegated to a Special Committee consisting of Ted Stokely and Martin White the
authority to consider and make any recommendation regarding the Offer Price to
the holders of the Publicly-Held Shares. The Special Committee has determined,
on behalf of the Company, after taking into account all of the factors described
below, that the Offer Price is fair to the holders of the Publicly-Held Shares,
and the Special Committee recommends on behalf of the Company that the holders
of the Publicly-Held Shares should consider the Offer in light of their own
circumstances. The IOT Board of Directors and the Special Committee do not take
a position recommending or not recommending that holders tender their Shares.
INTENT TO TENDER
No officer or director of the Company holds Shares, and therefore, none
of them will have to make any individual determination of whether to tender
pursuant to the Offer of any or all of the Shares.
BACKGROUND OF THE OFFER
As stated in the Offer to Purchase, ARL is making the Offer through the
Purchaser in order to comply with ARL's obligations under the Court-approved
Settlement Agreement in the Olive Litigation because ARL has been unable to
consummate the merger required by the Settlement Agreement, and ARL might be
liable for liquidated damages of $5 per share of IOT stock held by the holders
of the Publicly-Held Shares unless ARL makes the Offer and consummates it within
120 days. The discussion contained in the Schedule TO entitled "Background of
the Offer" contains information regarding the Offer and is incorporated herein
by reference. On November 7, 2002, ARL issued a news release announcing ARL's
intention to commence a tender offer for the Shares held by holders of the
Publicly-Held Shares.
On November 8, 2002, the Board of Directors of the Company met at the
offices of the Company (Earl D. Cecil attending by telephone) to review, among
other things, matters relating to the Offer and to form the Special Committee
consisting of Ted Stokely and Martin White. The Special Committee was authorized
and directed to prepare the Company's Solicitation/Recommendation Statement on
Schedule 14D-9 to the holders of the Publicly-Held Shares regarding the Offer.
The Company's Board of Directors also authorized the Special
-14-
Committee to investigate such other matters as it determined appropriate, and to
obtain any necessary counsel or financial advisers. The Board and the Special
Committee included in the meeting the Company's counsel, Prager, Metzger &
Kroemer PLLC, and two officers of the Company, Messrs. Waldman and Kimbrough.
At its meeting on November 8, 2002, the Board of Directors of the
Company, the Special Committee reviewed various information and considered the
factors set forth below. Based upon that review and those factors, the Special
Committee and/or the IOT Board concluded the following:
1. Under Article Fourteenth of the Articles of Incorporation,
as amended, of the Company, the material facts as to the relationship
among or financial interest of the relevant individuals or persons, and
as to the transaction are disclosed or are known to the Board of
Directors and the Special Committee, and the Special Committee has
determined that such transaction in the form of the Offer is fair as to
the Company and authorized or approved the fairness of the transaction
by a vote of a majority of the independent directors.
2. Acting by the unanimous vote of three members participating
(Earl D. Cecil having abstained), the Board of Directors of IOT
concluded that the terms and provisions of the Offer for IOT Common
Stock made by ARL and the Offer Price of $19 per Share in cash, were
fair to the holders of the Publicly-Held Shares.
3. The IOT Board of Directors from the standpoint of IOT as an
affiliate of ARL reviewed the various factors each had considered in
the past in their capacities as directors of TCI during February
through September 2002 in connection with the proposed mergers,
reviewed the Houlihan Lokey presentation made to them as TCI directors,
reviewed the Houlihan Lokey fairness opinion to the TCI Board of
Directors in connection with the merger transaction, and reviewed the
market prices of the TCI Common Stock over the period from October 23,
2001 through November 8, 2002. The IOT Board also considered that the
Court in rendering its final approval of the Settlement Agreement on
February 12, 2002, made certain determinations that the merger
consideration was fair, the $5 per Share penalty provision was fair,
and that a tender offer on the same "economic terms" was fair to the
non-affiliated TCI stockholders. The IOT Board also reviewed the market
price of the Shares of TCI Common Stock against the Offer Price, and
the recognition that book value per Share far exceeds both prices, but
the market has not given any additional credence to the book value per
Share for several years. The IOT Board in reaching its conclusion also
noted that during the period from October 23, 2001 through November 8,
2002, no other offers of any kind have been made or suggested by any
person or entity other than ARL, and no communications had been
received from any non-affiliated stockholder of TCI suggesting in any
manner that the price of $17.50 per Share in cash for TCI Common Stock
was inappropriate. The IOT Board in its capacity as an affiliate of ARL
concluded by the unanimous vote of the three members participating
(Earl D. Cecil having abstained) that the terms and provisions of the
tender offer for TCI Common Stock made by ARL and the Offer Price of
$17.50 per Share in cash for TCI Shares were fair to the non-affiliated
TCI stockholders.
-15-
The Special Committee then determined that, based upon consideration of all of
the factors described above and described below that the Offer and the Offer
Price is fair to the holders of the Publicly-Held Shares.
FACTORS CONSIDERED BY THE SPECIAL COMMITTEE
The Special Committee, prior to expressing its position with respect to
the Offer and the Offer Price, received advice from and discussed the Offer with
Prager, Metzger & Kroemer PLLC and the Company's management. In making its
recommendation respecting the Offer, the Special Committee considered a number
of factors, including the following:
o COMPANY OPERATING AND FINANCIAL CONDITION. The Special
Committee took into account the current, recent and historical
financial condition and results of operation of the Company,
as well as the prospects and strategic objectives of the
Company, including the risks involved in achieving those
prospects and objectives, and the current, recent and expected
conditions in the general economy and in the industry in which
the Company operates. The Special Committee noted that the
financial condition of the Company continues at substantially
the same position as in February 2002 when the Board made
prior determinations.
o REIT STATUS. The Special Committee considered that depending
upon the final results of the Offer, the status of IOT as a
"REIT" might be affected depending upon the ownership
concentration of the Shares.
o MARKET PRICE AND PREMIUM. The Special Committee considered
recent and historical price and a low volume of trading
activity of the Shares. The $19 per share Offer Price is the
same as the cash consideration in the merger and represents a
28.7% premium over the average closing price of IOT Common
Stock over the thirty trading days prior to October 23, 2001.
Since that date, the trading price has changed to slightly
below $13 per Share to a high in excess of $19 per Share.
o NET ASSET VALUE. The Special Committee considered that the net
asset value range per Share of IOT Common Stock continues to
be slightly less than one year ago in the range of estimates.
o OFFER PRICE. The Special Committee considered that the premium
of the Offer Price was really established one year ago. The
market price continues substantially the same at that price,
and the book value per Share has never been really considered
by the marketplace. The Special Committee considers that in
the absence of the Offer or the consideration to be paid in
the merger, the $19 per Share price for IOT Common Stock may
not hold in the marketplace.
-16-
o HOULIHAN LOKEY OPINION. The Special Committee considered the
previous financial presentation of Houlihan Lokey and its
opinion to the effect that the consideration to be offered to
the non-affiliated TCI stockholders pursuant to the IOT merger
agreement was fair from a financial point of view to those
holders. Although the consideration in the Offer consists only
of cash and not an opportunity to elect to obtain an ARL
security, it is believed that the voluntary nature of each
holder's decision to tender to be considered to be equivalent
to that holder's opportunity to elect to acquire an ARL
security in the merger.
o COURT ORDER IN THE OLIVE LITIGATION. The Special Committee
also considered that the Court in the Olive Litigation in
rendering its final approval of the Settlement Agreement on
February 12, 2002, made certain determinations that the merger
consideration was fair, the $5 per Share penalty provision was
fair, and that a tender offer on the same "economic terms" was
fair to the non-affiliated IOT stockholders.
o TIMING OF COMPLETION. The Special Committee considered the
anticipated timing for the completion of the Offer, including
the structure of the transaction as a tender offer for all of
the Shares held by the holders of Publicly-Held Shares. The
Offer is being made on November 15, 2002, and will be open for
a minimum of at least twenty (20) business days. The Special
Committee considered that the Offer could allow stockholders
to receive the transaction consideration in cash promptly.
o COMMUNICATIONS FROM HOLDERS OF SHARES REGARDING PRICE. The
Special Committee considered that no communications had been
received from holders of Shares or persons purporting to
represent holders of Shares regarding the Offer Price or any
terms of the proposed merger or any other matter relating to
or involving the transactions pursuant to the Settlement
Agreement.
o NO OTHER OFFERS. The Special Committee considered no other
tender offer or other offer of any kind has been made or
suggested by any person or entity other than ARL. The Special
Committee believes that the Company was hindered in its
ability to function based upon restrictions in the Olive
Litigation. Only three solutions were provided in the
Settlement Agreement, one of which has been elected at this
time by ARL.
o FOLLOW-ON MERGER. The Special Committee considered that ARL
apparently intends to continue following the consummation of
the Offer to propose a merger with IOT whereby non-affiliated
stockholders would receive $19 in cash, or at that
stockholder's option, a share of ARL Preferred Stock for each
IOT Share held. That merger will continue to be subject to
stockholder approval and completing the registration
procedures with the Commission, which ARL has not yet been
able to complete. There can be no
-17-
assurance that ARL will be able to take the steps necessary to
register the ARL Preferred Stock or that ARL will be able to
consummate such merger. ARL, following the making of the
Offer, will not be legally obligated to pursue the merger, and
may at some time in the future abandon efforts to do so or
modify the terms proposed.
o LIQUIDITY FOR STOCKHOLDERS. The Special Committee considered
the historical low volume of trading of the Shares, the
limited liquidity in the Shares as a result thereof, and the
opportunity that the Offer provides the holder of the
Publicly-Held Shares to liquidate their holdings in the
Company.
o POSSIBLE CHANGES IN MARKET PRICE OF COMMON STOCK. The Special
Committee considered the possibility that if a transaction
with ARL were not completed, and the Company remains as a
publicly-owned corporation, it is possible that because of a
decline in the market price of the Shares or the stock market
in general, the price that might be received by the holders of
the Publicly-Held Shares in the open market or in a future
transaction might be less than the per Share price to be
received by the holders of the Publicly-Held Shares in
connection with the Offer. The Special Committee also
considered that if a transaction with ARL was not completed
and the Company remained as a publicly-owned company, it is
also possible that because of an increase in the market price
of the Shares or the stock market in general, the price that
might be received by the holders of the Publicly-Held Shares
in the open market or in a future transaction might be more
than the per Share price to be received by the stockholders in
connection with the Offer.
o FUTURE PROSPECTS OF THE COMPANY. The Special Committee also
considered the fact that, assuming a holder tenders his
Publicly-Held Shares in the Offer or that the proposed merger
is ultimately completed, all holders of the Shares whose
Shares are purchased in the Offer will not participate in any
future growth of the Company. Moreover, the Special Committee
considered the fact that, if the Offer is not consummated in
accordance with its terms, nothing would prevent ARL from
attempting to acquire the Shares at prices higher or lower
than the $19 per Share, attempt to sell its Shares, attempt to
cause the Company to be sold or take other courses of action
that may be more or less desirable to the holders of the
Publicly-Held Shares than accepting the Offer Price. In
addition, the Special Committee considered that there can be
no assurance that the strategic arrangements between the
Company and ARL will continue if the Offer is not consummated.
The description set forth above is not intended to be exhaustive but
summarizes the primary factors considered by the Special Committee. In view of
its many considerations, the Special Committee did not find it practical to, and
did not, quantify or otherwise assign relative weights to the specific factors
considered. After weighing all of these considerations, the Special Committee
-18-
concluded that the Offer and the Offer Price is fair to the holders of the
Publicly-Held Shares. However, the Special Committee did not take a position
recommending or not recommending that holders of Publicly-Held Shares tender
their Shares to ARL.
Neither the Special Committee nor the Board attempted to determine the
liquidation value of the Company and only gave consideration to the book value
of the Company in connection with an analysis of the factors described above and
not as a separate method in valuation. The Special Committee believed, based
upon its general knowledge of the composition of the Company's assets, and the
real estate industry in general, that those measures of asset value were not
appropriate indicators of value of the Company as they could be considerably
more or less than the Offer Price depending upon the methods of liquidation
utilized to determine liquidation value. The Special Committee and the IOT Board
noted that a predecessor trust of IOT was scheduled to liquidate by its terms,
but the Trust was converted into IOT to insure perpetual existence. Accordingly,
neither the Special Committee nor the IOT Board considered liquidation value or
book value to be relevant measures of valuation for the Company.
ITEM 5. PERSON/ASSETS RETAINED, EMPLOYED, COMPENSATED OR USED
Neither the Board of Directors of IOT nor the Special Committee has
entered into any written agreements or understandings with any person that is to
be employed, retained or to be compensated or to make solicitations or
recommendations in connection with the Offer. The Board and the Special
Committee have consulted with its customary counsel, Prager, Metzger & Kroemer
PLLC, and the Company management. The Board of Directors and the Special
Committee had available to them the prior work of Houlihan Lokey, which was
previously retained in connection with the proposed merger transaction in the
Settlement Agreement.
Except as disclosed herein, neither the Company nor any person acting
on its behalf currently intends to employ, retain or compensate any other person
to make solicitations or recommendations to holders of the Publicly-Held Shares
on the Company's behalf concerning the Offer.
ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY
Other than as disclosed in this Schedule 14D-9, during the past sixty
(60) calendar days no transaction in the Shares has been effected by the
Company, or to the best of the Company's knowledge, by any executive officer,
director, affiliate or subsidiary of the Company.
ITEM 7. PURPOSES OF THE TRANSACTION AND PLANS OR PROPOSALS
(a) Except as set forth in this Schedule
14D-9, no negotiations are being undertaken or are
underway by the Company in response to the Offer
which relate to a tender offer or other acquisition
of the Company's securities by the Company, any
subsidiary of the Company or any other person.
-19-
(b) Except as set forth in this Schedule
14D-9, the Company is not engaged in any negotiation
in response to the Offer which relates to or would
result in (i) an extraordinary transaction such as a
merger or reorganization involving the Company or any
subsidiary of the Company; (ii) a purchase, sale or
transfer of a material amount of assets by the
Company or any subsidiary of the Company; (iii) a
tender offer for or other acquisition of securities
by or of the Company; or (iv) any material change in
the present capitalization, indebtedness or dividend
rate or policy of the Company.
(c) Except as set forth in this Schedule
14D-9, there are no transactions, Board resolutions,
agreements in principle or signed contracts in
response to the Offer which relate to or would result
in one or more of the events referred to in
paragraphs (a) and (b) of this Item 7.
ITEM 8. ADDITIONAL INFORMATION
The information contained in the exhibit referred to in Item 9 below is
incorporated herein by reference.
ITEM 9. EXHIBITS
The following exhibits are filed herewith or incorporated herein by
reference as indicated below:
Exhibit Designation Description of Exhibit
------------------- ----------------------
(a)(5).1 Letter to Stockholders dated November 15, 2002
(a)(5).2 Press Release issued by the Company on November 15, 2002
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SIGNATURE
After due inquiry and to the best of my knowledge and believe, I
certify that the information set forth in this Statement is true, complete and
correct.
/s/ Ted P. Stokely
------------------------------------------
Ted P. Stokely, Director and Member of the
Special Committee of the Board of Directors
of Income Opportunity Realty Investors, Inc.
Dated: November 15, 2002.
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INDEX TO EXHIBITS
Exhibit Designation Description of Exhibit
------------------- ----------------------
(a)(5).1 Letter to Stockholders dated November 15, 2002
(a)(5).2 Press Release issued by the Company on November 15, 2002