-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JNeQzmH08RYuRIth24vNYW3BKOwcC0p71M9KjSt1QOOyvHYy5mXCb0WoscS/fxbj oUkXcYWjGr6oM9YYd0ouEA== 0000948524-96-000040.txt : 19960812 0000948524-96-000040.hdr.sgml : 19960812 ACCESSION NUMBER: 0000948524-96-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960809 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: METRIC INCOME TRUST SERIES INC CENTRAL INDEX KEY: 0000846722 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 943087630 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18294 FILM NUMBER: 96606385 BUSINESS ADDRESS: STREET 1: ONE CALIFORNIA STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94111-5415 BUSINESS PHONE: 4156782000 FORMER COMPANY: FORMER CONFORMED NAME: METRIC PARTNERS HIGH INCOME FUND SERIES I INC DATE OF NAME CHANGE: 19890629 10-Q 1 JUNE 30, 1996 10Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES - --- EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR 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 0-18294 METRIC INCOME TRUST SERIES, INC., a California Corporation (Exact name of Registrant as specified in its charter) CALIFORNIA 94-3087630 - ---------------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One California Street San Francisco, California 94111 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 678-2000 (800) 347-6707 in all states 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___ Shares of common stock outstanding as of June 30, 1996: 6,321,641 Page 1 of 17 PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). METRIC INCOME TRUST SERIES, INC., a California Corporation CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1996 1995 ------------ ------------ ASSETS Cash ........................................................... $ 5,820,000 $ 976,000 Accounts and Interest Receivable ............................... 592,000 412,000 Investment in Mortgage-Backed Securities - Net ................. 7,573,000 8,575,000 Rental Properties .............................................. 30,889,000 30,889,000 Accumulated Depreciation ....................................... (3,054,000) (2,784,000) ------------ ------------ Properties and Improvements - Net ......................... 27,835,000 28,105,000 Real Estate Held for Sale ...................................... -- 4,135,000 Prepaid and Other Assets ....................................... 110,000 8,000 ------------ ------------ Total Assets .............................................. $ 41,930,000 $ 42,211,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Dividends Payable .............................................. $ 1,264,000 $ 1,264,000 Payable to Sponsor and Affiliates .............................. 72,000 22,000 Other Accounts Payable and Accrued Liabilities ................. 217,000 308,000 ------------ ------------ Total Liabilities ......................................... 1,553,000 1,594,000 ------------ ------------ Commitments and Contingencies Shareholders' Equity: Common Stock - no par value, stated at $0.001, 12,250,000 shares authorized and 6,321,641 shares issued and outstanding .... 6,000 6,000 Additional Paid-in Capital ..................................... 55,200,000 55,200,000 Accumulated Dividends in Excess of Net Income .................. (14,911,000) (14,947,000) Unrealized Holding Gain on Investment in Mortgage-Backed Securities - Net ....................... 82,000 358,000 ------------ ------------ Total Shareholders' Equity ................................ 40,377,000 40,617,000 ------------ ------------ Total Liabilities and Shareholders' Equity ................ $ 41,930,000 $ 42,211,000 ============ ============
See notes to consolidated financial statements (unaudited). Page 2 of 17 METRIC INCOME TRUST SERIES, INC., a California Corporation CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Six Months Ended June 30, ------------------------- 1996 1995 ---------- ---------- Revenues: Lease income ................................... $2,242,000 $2,016,000 Interest on mortgage-backed securities ......... 318,000 359,000 Interest and other income ...................... 58,000 102,000 Gain on sale of mortgage-backed securities - net -- 16,000 ---------- ---------- Total Revenues .............................. 2,618,000 2,493,000 ---------- ---------- Expenses: Depreciation ................................... 270,000 349,000 General and administrative ..................... 357,000 375,000 ---------- ---------- Total Expenses .............................. 627,000 724,000 ---------- ---------- Income Before Gain on Sale of Property ......... 1,991,000 1,769,000 Gain on Sale of Property ....................... 574,000 127,000 ---------- ---------- Net Income ..................................... $2,565,000 $1,896,000 ========== ========== Net Income per Share: Income before gain on sale of property ......... $ .32 $ .28 Gain on sale of property ....................... .09 .02 ---------- ---------- Net Income per Share ........................ $ .41 $ .30 ========== ========== Dividends per Share ............................ $ .40 $ .86 ========== ========== See notes to consolidated financial statements (unaudited). Page 3 of 17 METRIC INCOME TRUST SERIES, INC., a California Corporation CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended June 30, --------------------------- 1996 1995 ---------- ---------- Revenues: Lease income ................................. $1,116,000 $ 994,000 Interest on mortgage-backed securities ....... 150,000 178,000 Interest and other income .................... 51,000 82,000 ---------- ---------- Total Revenues ............................ 1,317,000 1,254,000 ---------- ---------- Expenses: Depreciation ................................. 135,000 169,000 General and administrative ................... 183,000 204,000 ---------- ---------- Total Expenses ............................ 318,000 373,000 ---------- ---------- Income Before Gain on Sale of Property ....... 999,000 881,000 Gain on Sale of Property ..................... 574,000 -- ---------- ---------- Net Income ................................... $1,573,000 $ 881,000 ========== ========== Net Income per Share: Income before gain on sale of property ....... $ .16 $ .14 Gain on sale of property ..................... .09 -- ---------- ---------- Net Income per Share ...................... $ .25 $ .14 ========== ========== Dividends per Share .......................... $ .20 $ .20 ========== ========== See notes to consolidated financial statements (unaudited). Page 4 of 17 METRIC INCOME TRUST SERIES, INC., a California Corporation CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Six Months Ended June 30, 1996 and 1995
Unrealized Holding Accumulated Gain/(Loss)on Common Stock Additional Dividends in Investment in ------------ Paid-in Excess of Mortgage-Backed Shares Amount Capital Net Income Securities - Net Total ------------ ------------ ------------ ------------ ------------ ------------ Balance, January 1, 1996 ......... 6,321,641 $ 6,000 $ 55,200,000 $(14,947,000) $ 358,000 $ 40,617,000 Unrealized Holding Loss On Investment in Mortgage - Backed Securities - Net ..... (276,000) (276,000) Income Before Gain on Sale of Property .................... 1,991,000 1,991,000 Gain on Sale of Property ......... 574,000 574,000 Dividends Declared ............... (2,529,000) (2,529,000) ------------ ------------ ------------ ------------ ------------ ------------ Balance, June 30, 1996 ........... 6,321,641 $ 6,000 $ 55,200,000 $(14,911,000) $ 82,000 $ 40,377,000 ============ ============ ============ ============ ============ ============ Balance, January 1, 1995 ......... 6,321,641 $ 6,000 $ 55,200,000 $(10,912,000) $ (319,000) $ 43,975,000 Unrealized Holding Gain on Investment in Mortgage-Backed Securities - Net ............ 530,000 530,000 Income Before Gain on Sale of Property .................... 1,769,000 1,769,000 Gain on Sale of Property ......... 127,000 127,000 Dividends Declared ............... (5,437,000) (5,437,000) ------------ ------------ ------------ ------------ ------------ ------------ Balance, June 30, 1995 ........... 6,321,641 $ 6,000 $ 55,200,000 $(14,453,000) $ 211,000 $ 40,964,000 ============ ============ ============ ============ ============ ============
See notes to consolidated financial statements (unaudited). Page 5 of 17 METRIC INCOME TRUST SERIES, INC., a California Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Six Months Ended June 30, ------------------------- 1996 1995 ----------- ----------- Operating Activities Net income ..................................................... $ 2,565,000 $ 1,896,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................ 266,000 344,000 Gain on sale of mortgage-backed securities - net ..... -- (16,000) Gain on sale of property ............................. (574,000) (127,000) Changes in operating assets and liabilities: Accounts and interest receivable ............. (180,000) (35,000) Prepaid and other assets ..................... (102,000) 12,000 Payable to sponsor and affiliates ............ 50,000 3,000 Other accounts payable and accrued liabilities (91,000) (3,000) ----------- ----------- Net cash provided by operating activities ...................... 1,934,000 2,074,000 ----------- ----------- Investing Activities Rental properties acquisitions and additions ................... -- (58,000) Purchase of cash investments ................................... -- (2,855,000) Purchase of mortgage-backed securities ......................... -- (301,000) Proceeds from sale of mortgage-backed securities ............... -- 303,000 Principal payments received on mortgage-backed securities ...... 730,000 248,000 Proceeds from sale of property ................................. 4,910,000 3,050,000 Cash used in sale of property .................................. (201,000) (125,000) ----------- ----------- Net cash provided by investing activities ...................... 5,439,000 262,000 ----------- ----------- Financing Activities Dividends paid to shareholders ................................. (2,529,000) (2,608,000) ----------- ----------- Cash used by financing activities .............................. (2,529,000) (2,608,000) ----------- ----------- Increase (Decrease) in Cash and Cash Equivalents ............... 4,844,000 (272,000) Cash and cash equivalents at beginning of period ............... 976,000 1,339,000 ----------- ----------- Cash and Cash Equivalents at End of Period ..................... $ 5,820,000 $ 1,067,000 =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Unrealized holding gain (loss) on investment in mortgage-backed securities - see Note 8. Sale of rental properties - see Note 5. See notes to consolidated financial statements (unaudited). Page 6 of 17 METRIC INCOME TRUST SERIES, INC., a California Corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Reference to 1995 Audited Consolidated Financial Statements These unaudited consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the 1995 audited consolidated financial statements. The financial information contained herein reflects all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation. 2. Transactions with Advisor and Affiliates In accordance with the Advisory Agreement, the Fund pays the Advisor and affiliates compensation for services provided to the Fund. A ounts earned by the Advisor and its affiliates for the six months ended June 30, 1996 and 1995 were as follows: 1996 1995 -------- -------- Reimbursement of administrative expenses $100,000 $ 80,000 Securities management fee .............. 20,000 22,000 Advisory fee ........................... 125,000 126,000 -------- -------- Total .................................. $245,000 $228,000 ======== ======== The securities management fee is earned by State Street Research and Management Company, an affiliate of Metropolitan Life Insurance Company. The quarterly advisory fees payable to the Advisor under the Advisory Agreement commencing April 1, 1994, are calculated at a rate of 0.75 percent per annum of the appraised value of the properties. Such fees are payable in full only if the Fund makes annualized dividend payments equaling at least 8.5 percent of the shareholders' adjusted capital contribution (current dividends are 9.2% of adjusted shareholder capital). To the extent that the dividend paid for a calendar quarter is less than 8.5 percent on an annualized basis, the advisory fee payable to the Advisor will be proportionately reduced. In March 1996, the Independent Directors approved the extension of the term of the Advisory Agreement to March 31, 1997. 3. Net Income per Share Net income per share is based upon 6,321,641 shares outstanding. 4. Commitments and Contingencies (Major Tenant Developments) The Fund and National Convenience Stores ("NCS") reached a settlement of the Fund's claim which had been filed in conjunction with the bankruptcy and subsequent reorganization of NCS. As payment for the claim the Fund is to receive shares of newly issued NCS common stock in accordance with the terms of the reorganization plan. Through May 1995, the Fund received 17,161 shares of NCS stock which were immediately sold resulting in net proceeds of $230,000. In June 1996, the Fund received $32,000 in lieu of 1,170 shares of NCS common stock from Diamond Shamrock Corporation, the firm which purchased the majority of the outstanding NCS stock in December, 1995. The Fund expects to receive some additional compensation from Diamond Shamrock Corporation as payment for the claim. Page 7 of 17 In April 1992, Wal-Mart, the parent company of Wholesale Club, Inc., the lessee of the Fund's property in Menomonee Falls, Wisconsin, informed the Fund that it had vacated its premises. The lessee remained current in its lease payments to the Fund, and had informed the Fund that it intended to honor the terms of the lease, which expires in 2005. During the fourth quarter of 1994 and the first quarter of 1995, the Fund's Advisor reviewed and approved two subleases presented by the lessee and the building was 100 percent leased. The sublease amounts were less than the rent required under the lease; however, the lessee was paying the full amount to the Fund. The property was subsequently sold in June 1996 (see Note 5). Phar-Mor, a former lessee of the Fund's property in Franklin Township, Ohio, filed for protection under Chapter 11 of the Federal Bankruptcy Code in August 1992. Phar-Mor rejected the Fund's lease effective May 15, 1993, after closing the store at the end of April. The Fund has filed the following claims in the bankruptcy proceeding: (i) an administrative claim for approximately $20,000 for post-petition real estate taxes for the period through May 15, 1993; and (ii) an unsecured claim for $774,000 representing damages for unpaid pre-petition real estate taxes and real estate taxes, rent and insurance for the remainder of the lease term after May 15, 1993. In December 1994, Phar-Mor filed in these proceedings a preference recovery action against several hundred vendors and landlords, including the Fund. The amount of the preferential payments alleged to have been made to the Fund is $90,250 consisting of rent paid to the Fund within 90 days of the filing of the Phar-Mor bankruptcy petitions. This preference action is subject to an indefinite stay pursuant to bankruptcy court order. The Fund believes that the action was filed as a precaution and that Phar-Mor does not intend to pursue the action against the Fund. In any event, the Fund believes that the action is without merit. In February 1995, Phar-Mor filed an objection to the Fund's lease-rejection claim. The objection alleges that the lease-rejection damages were not properly calculated and similar objections were apparently filed against all lease-rejection claims in these proceedings. The Fund has filed materials supporting its lease-rejection claims, now calculated to be $774,000. In November 1995, Phar-Mor also filed an objection to the Fund's administrative claims. The court has directed Phar-Mor to report its progress in resolving all outstanding claim objections, including that relating to the Fund. In August 1995, the Court confirmed Phar-Mor's proposed reorganization plan which calls for unsecured creditors to receive a portion of a pool of the company's new stock, as well as warrants to purchase additional stock at a fixed price. No assurance can be given that the Fund will recover any material amount with respect to these claims. The former Phar-Mor store was subdivided in 1994 and 24,709 square feet of the approximately 56,000 squarefoot store was leased to Superpetz, Inc., which lease commenced November 16, 1994. In the fourth quarter of 1994, the Fund received an unsolicited offer to purchase the building. Following negotiations a purchase and sale agreement was executed. The transaction closed escrow on March 15, 1995 and is discussed below. 5. Sale of Rental Properties In June 1996 the Fund sold the Sam's Club property located in Menomonee Falls, Wisconsin, for $4,910,000 (after credit to seller for a construction holdback of $28,000). After payment of the estimated expenses of sale of $201,000 (including real estate commission of $168,000 paid to an outside broker), the proceeds received by the Fund were approximately $4,709,000. The carrying value at the time of sale was $4,135,000. The gain recognized at the time of sale was $574,000. Of the proceeds received by the Fund, $108,000 was deposited into an escrow account to secure payment for construction work to be completed by the tenant at the property. In March 1995 the Fund sold the former Phar-Mor building located in Franklin Township, Ohio for $3,050,000. After payment of the expenses of sale of $125,000 (including real estate commissions of $91,000 paid to outside brokers), the proceeds received by the Fund were approximately $2,925,000. The carrying value at the time of sale was $2,798,000, net of the $780,000 provision for impairment of value recognized in 1993. The net gain recognized at the time of sale was $127,000. Page 8 of 17 6. Real Estate Held for Sale In the third quarter of 1995, the Fund's Board of Directors approved a plan to market for sale the Sam's Club located in Menomonee Falls, Wisconsin. Subsequently, the Fund received an offer from an unaffiliated party to purchase the property. The Board of Directors approved the sale of the property at a specified price. The property was sold in June 1996 (see Note 5). In accordance with the Fund's accounting policies, the property was classified as real estate held for sale at the time of sale and at December 31, 1995. The lease income from the property for the period January 1, 1996 through the date of sale and the six months ended June 30, 1995 was $284,000 and $255,000, respectively. Depreciation was $67,000 for the six months ended June 30, 1995. No depreciation was provided in 1996. 7. Dividend Reinvestment Plan The Fund established the Dividend Reinvestment Plan ("DRP") which, to the extent of shareholder participation and dividends paid by the Fund, was to purchase newly issued shares from the Fund after the termination of the initial public offering and through June 30, 1992. After June 30, 1992, the DRP, as originally established, would, to the extent of shareholder participation and dividends paid by the Fund, seek to purchase shares from selling shareholders at a formula price, in the absence of market price, and potentially provide a market for the shares (the "Liquidity Option Program"). However, the Board of Directors of the Fund revised the Liquidity Option Program ("LOP") for the period after June 30, 1992 to include a share purchase price based on the appraised value of the properties and the net value of other assets and liabilities rather than the formula price as described in the original Prospectus for the Fund. The LOP was activated and became effective for the dividend paid for the first quarter of 1994. The Fund registered 500,000 shares to be sold by shareholders to the DRP through the LOP. No additional shares will be issued by the Fund and no proceeds from the sale of shares to the DRP will be received by the Fund. In June 1996, the Board of Directors of the Fund voted to terminate the DRP and the LOP effective as to dividend payments made after August 15, 1996. 8. Mortgage-Backed Securities In accordance with FASB statement No. 115 and Management's intentions, the Fund's investment in mortgage-backed securities is classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses excluded from earnings and reported as a net amount in a separate component of shareholders' equity. Mortgage-backed securities at June, 30, 1996 and December 31, 1995 are carried at fair value as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Holding Gains Holding Losses Value ---------- -------- ---------- ---------- 1996: GNMA $5,414,000 $106,000 $ 150,000 $5,370,000 FNMA 1,135,000 68,000 -- 1,203,000 FHLMC 942,000 58,000 -- 1,000,000 ---------- -------- ---------- ---------- $7,491,000 $232,000 $ 150,000 $7,573,000 ========== ======== ========== ========== 1995: GNMA $5,749,000 $198,000 $ 18,000 $5,929,000 FNMA 1,249,000 94,000 -- 1,343,000 FHLMC 1,219,000 84,000 -- 1,303,000 ---------- -------- ---------- ---------- $8,217,000 $376,000 $ 18,000 $8,575,000 ========== ======== ========== ========== Page 9 of 17 The individual securities held are not due at a single maturity date. The repayment periods terminate between 2009 and 2024. The coupon rates range from 7 to 10 percent per annum. Proceeds from the sale of mortgage-backed securities in the six months ended June 30, 1995 were $303,000. The realized gains on the sale were $16,000. Specific identification was used to determine amortized cost in computing the gains and losses. 9. Subsequent Event In July 1996 the Fund sold the Pearle Express Store located in Orland Park, Illinois for $1,069,000. After payment of the estimated expenses of sale of $78,000 (including real estate commissions of $64,000 paid to outside brokers) the proceeds received by the Fund were approximately $991,000. The carrying value at the time of sale was $1,034,000. The loss recognized at the time of sale was $43,000. Page 10 of 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This item should be read in conjunction with Consolidated Financial Statements and other Items contained elsewhere in this Report. Properties A description of the properties in which the Fund or its subsidiary has an ownership interest follows: METRIC INCOME TRUST SERIES, INC., a California Corporation PROPERTY AND OCCUPANCY SUMMARY Occupancy Rate % at June 30, Date of ------------ Size Purchase 1996 1995 ---- -------- ---- ---- Pearle Express Stores(1) .......... (2) 11/89 100 100 National Convenience Stores (3) ... (2) 11/89 100 100 Wickes Furniture Store Torrance, California .......... 51,000 sq.ft. 01/90 100 100 Sam's Club Menomonee Falls, Wisconsin(4) . 108,000 sq.ft. 05/90 -- 100 Haverty's Furniture Store Plano, Texas .................. 55,000 sq. ft. 12/94 100 100 (1) Represents occupancy at both of the Pearle Express Stores. The Pearle Express Store in Orland Park, Illinois was sold in July 1996. See Note 9 to the consolidated financial statements. (2) For details of individual properties see Part I, Item 2 of the Form 10-K Report filed for 1995. (3) As a result of bankruptcy proceedings, three of the Stop N Go stores owned by National Convenience Stores and located in Texas, were closed in 1992 and sold in 1993. One leased store is vacant, but remains current in its lease obligations to the Fund. In April 1994, through a purchase and exchange transaction with NCS, Circle K now operates five of the Fund's stores, four in Southern California and one in Georgia. Although lease payments for these five stores are now received from Circle K, NCS remains financially liable under the terms of the leases. The majority of the outstanding stock of NCS was purchased by Diamond Shamrock effective December 15, 1995. Tosco Corporation acquired Circle K Corporation in May, 1996. (4) Lessee vacated the store in April 1992, but remained current in its lease obligations to the Fund. 100 percent of the store was subleased in 1994 and 1995. The property was sold in June 1996. See Note 5 to the consolidated financial statements. Results of Operations Income before gain on sale of property increased $222,000 and $118,000, respectively, in the first half and second quarter of 1996 compared to the same periods in 1995. Lease income increased primarily due to an increase in lease income from NCS and the Wickes Furniture store as a result of recording deferred lease income of $126,000 and $86,000, respectively, in the first half of 1996, and $63,000 and $43,000, respectively, in the second quarter of 1996. Lease income also increased due to a scheduled rent increase at Sam's Club. The increase in lease income in the first half of 1996 compared to the same period in 1995 was partially offset by a decrease in lease income from the former Phar-Mor building which was sold in March 1995 (see Note 5 to the consolidated financial statements). Page 11 of 17 Interest on the Fund's mortgage-backed securities portfolio declined 11% and 16%, respectively, in the first half and second quarter of 1996 compared to the same periods in 1995 due to the reduction in the amount of securities owned by the Fund. The total of the Fund's mortgage-backed securities portfolio was reduced due to principal repayments. The Fund recognized a $16,000 gain on the sale of mortgage-backed securities in the first half of 1995. Other interest income decreased in the first half and second quarter of 1996 compared to the same periods in 1995. The decrease was primarily due to interest income earned on proceeds from sale of the former Phar-Mor building from March 1995 through June 1995, prior to distribution. General and administrative expenses decreased $18,000 and $21,000, respectively, in the first half and second quarter of 1996, compared to the same periods in 1995. The decrease was primarily due to a decrease in investor reporting costs and reduced legal expenses incurred relating to the Phar-Mor bankruptcy proceedings. The decrease in the first half of 1996 compared to the same period in 1995 was partially offset by higher costs reimbursed to the Fund's Advisor. Depreciation expense decreased $79,000 and $34,000, respectively, in the first half and second quarter of 1996, in comparison to the same periods in 1995 due to depreciation not being provided for Sam's Club for the first half and second quarter of 1996 (see Note 6 to the consolidated financial statements) and the sale of the former Phar-Mor building in March 1995 (see Note 5 to the consolidated financial statements). The Fund's operations are primarily dependent upon the overall financial condition and creditworthiness of the lessees of its real estate properties. The Fund, however, remains subject to competitive conditions in the real estate industry and the net lease market for convenience stores and retail establishments. The Stop N Go, Circle K, Pearle Express, Wickes, and Haverty's Furniture stores continue to experience competition from other similar operations in the markets where the properties are located. The Fund currently owns 16 convenience store properties, 11 operated as Stop N Go and five as Circle K. Although NCS was the original lessee of the properties and remains financially liable for all of the leases, Circle K operates five of the stores and makes payment directly to the Fund as the result of an exchange transaction which was consummated in the second quarter of 1994. In mid-August 1995, Circle K Corporation initiated a hostile tender offer to acquire NCS. This offer as well as another reported unsolicited offer were rejected. NCS subsequently engaged an investment banker to represent the company and accepted an offer of $27 per share from Diamond Shamrock, Inc. ("DSI"), a firm which also operates convenience stores and gas stations. DSI purchased the outstanding stock of NCS effective December 15, 1995 and NCS is now a wholly-owned subsidiary of DSI. Operations have been transferred to the DSI home offices in San Antonio, Texas. During the first quarter of 1996, the Fund's Advisor received information that Tosco Corporation, a refiner and marketer of petroleum products, agreed to purchase Circle K Corporation. This transaction was completed in May 1996. Tosco plans to sell its gasoline through the convenience store outlets and will continue to operate Circle K stores under their current name. At this time, the Fund's Advisor does not anticipate that the acquisition by Tosco of Circle K will have any impact on the Fund's five convenience stores currently operated as Circle K. The Fund's Advisor periodically reviews each of the markets where the real properties are located and identifies potential sale opportunities. During the third quarter of 1995, the Fund's Advisor recommended and the Board of Directors approved, a sale of the following properties: Sam's Club in Menomonee Falls, Wisconsin; Wickes Furniture Store in Torrance, California; and the Pearle Express Stores located in Orland Park, Illinois and Morrow, Georgia. The Sam's Club was sold in June 1996 (see Note 5 to the consolidated financial statements) and the Pearle Express Store in Orland Park, Illinois was sold in July 1996 (see Note 9 to the consolidated financial statements). The Wickes Furniture store has been withdrawn from the market due to weak retail market conditions and lease rates in Southern California. The property will be held until market conditions improve. Page 12 of 17 Fund Liquidity and Capital Resources The Fund intends to meet its cash needs from cash flow generated by properties and securities that it acquires. In order to continue to qualify as a REIT for income tax purposes, the Fund is required, among other things, to distribute 95 percent of its REIT taxable income to its shareholders annually. The current level of cash distributions to shareholders is being sustained by cash provided from net operating activities, from principal repayments on the mortgage-backed securities, and from capital gains. Since inception, the principal source of capital resources has been proceeds from the sale of the Fund's common stock. Through June 30, 1992, proceeds from the sale of common stock totaled $63,054,000, including proceeds raised through the DRP of $2,800,000. The DRP was to have purchased newly issued shares until June 30, 1992, and thereafter, shares from shareholders wishing to sell shares, if any. However, the DRP was suspended effective with the January 15, 1992 distribution to shareholders of record on December 31, 1991 as a result of the Chapter 11 bankruptcy filing by National Convenience Stores. The Board of Directors extended the suspension of the DRP with respect to the dividends paid in 1992, 1993 and January 20, 1994 and all DRP participants received the dividends in cash. In September, 1993, the Board of Directors voted unanimously to reinstate the DRP and activate the LOP. Purchases of shares by the DRP (to the extent of participation in the DRP) commenced with respect to the dividend paid for the first quarter of 1994. Shares have been purchased by the DRP on the dates and at the prices noted below: DRP Purchase Date Share Price Source of Proceeds - ----------------- ----------- ------------------ May 16, 1994 $ 7.41 Quarterly Dividend August 15, 1994 $ 7.21 Quarterly Dividend November 15, 1994 $ 7.10 Quarterly Dividend January 16, 1995 $ 7.04 Quarterly Dividend May 15, 1995 $ 6.93 Quarterly Dividend July 17, 1995 $ 6.53 Special Dividend of Sales Proceeds August 15, 1995 $ 6.53 Quarterly Dividend November 15, 1995 $ 6.54 Quarterly Dividend January 16, 1996 $ 6.51 Quarterly Dividend May 15, 1996 $ 6.59 Quarterly Dividend The initial price of $7.41 was determined pursuant to a formula set forth in the Prospectus regarding the DRP dated March 1, 1994 having as its components independent third-party appraisals of the Fund's properties, the market value of the Fund's mortgage-backed securities and the book value of its other assets and liabilities, all as of December 31, 1993. Appraisals of the real property in the portfolio occur annually and the value of the Fund's mortgage-backed securities and its other assets and liabilities are reassessed on a quarterly basis. Based on December 31, 1995 property appraisals and the December 31, 1995, market value of the Fund's mortgage-backed securities and carrying value of its other assets and liabilities, the Board of Directors established the per share price for shares to be purchased with dividends paid on May 15, 1996 for the first quarter of 1996 to be $6.59 per share. Based on December 31, 1995 property appraisals and the March 31, 1996 market value of the Fund's mortgage-backed securities and carrying value of its other assets and liabilities, the Board of Directors has established the per share purchase price to be $6.52 per share for shares to be purchased by the DRP with dividends to be paid in August 1996 for the second quarter of 1996. The reduction from the share price for the dividend paid on May 15, 1996 reflects the return of original principal to shareholders as a portion of the quarterly dividend and a slight decline in the value of the mortgage-backed securities. Page 13 of 17 In a special communication dated July 15, 1996, all shareholders were informed that at the June 13, 1996 meeting of the Board of Directors, the Board members unanimously voted to proceed with the orderly liquidation of the Fund's assets over the next several years and, accordingly, to terminate the Fund's Dividend Reinvestment Plan and Liquidity Option Program. Per the terms of the Fund's original offering Prospectus dated June 30, 1989 and the Prospectus for the Plan dated March 1, 1994, the Plan may be modified or terminated by the Board of Directors at any time and for any reason upon written notice to shareholders. The Board of Directors believes that with the implementation of a formal disposition strategy, the Plan is no longer a viable investment purchase/liquidation vehicle. The Plan will no longer be operational for any dividends payable after August 15, 1996. The Fund's regular quarterly dividend for the second quarter of 1996 will be the final dividend for which the Plan will be effective. First Half of 1996 The Fund, after taking into account lease income, interest on investments in securities, interest and other income and general and administrative expenses, experienced positive results from operations for the period. In addition, as presented in the Consolidated Statement of Cash Flows, cash was provided by operating activities. Cash was provided by investing activities, from proceeds from sale of property and principal payments received on mortgage-backed securities, and used by investing activities for expenses incurred in the sale of property. Cash was used by financing activities for dividends paid to shareholders. On an ongoing basis, the Fund's Advisor monitors the financial positions of the lessees of the Fund's real properties and periodically reviews each of the markets where the properties are located to identify potential opportunities for the sale of the assets. During the third quarter of 1995, the Fund's Advisor recommended, and the Board of Directors approved, the sale of Sam's Club property in Menomonee Falls, Wisconsin, the Wickes Furniture Store in Torrance, California and the Pearle Express locations in Orland Park, Illinois and Morrow, Georgia. The Fund received several purchase offers for the building formerly occupied by Sam's Club, located in Menomonee Falls, Wisconsin, and negotiated a purchase and sale agreement with one potential buyer which was not affiliated with MITS or the Advisor. A written notification of the waiver by the lessee of its first right of refusal to purchase the property was received by the Advisor. In June 1996 the Fund sold Sam's Club for $4,910,000 (after credit to seller for a construction holdback of $28,000). After payment of the estimated expenses of sale of $201,000 (including a real estate commission of $168,000 paid to an outside broker), the proceeds received by the Fund were approximately $4,709,000. The carrying value at the time of sale was $4,135,000. The gain recognized at the time of sale was $574,000. Of the proceeds received by the Fund, $108,000 was deposited into an escrow account to secure payment for construction work to be completed by the tenant at the property. During the first quarter of 1996 the Fund received an offer to purchase the Pearle Express location in Orland Park, Illinois ("Orland Park") from a buyer which was not affiliated with MITS or the Advisor. During the fourth quarter of 1995, the Fund had successfully negotiated a three year, eight month lease extension, which took effect December 1, 1995. In July 1996 the Fund sold the Orland Park location for $1,069,000. After payment of the estimated expenses of sale of $78,000 (including real estate commissions of $64,000 paid to outside brokers) the proceeds received by the Fund were approximately $991,000. The carrying value at the time of sale was $1,034,000. The loss recognized at the time of sale was $43,000. The Fund received a purchase offer for the Pearle Express location in Morrow, Georgia ("Morrow") in early 1996. The potential buyer was not affiliated with MITS or the Advisor. Due to the relatively short term of the existing lease, which Pearle has not been willing to renegotiate, and since other scenarios, such as re-tenanting, did not appear to be economically justified, the Fund pursued a purchase and sale agreement with the potential buyer. The Fund, however, was unable to reach an acceptable agreement with this particular buyer. The Fund continued to market for sale the Morrow location through the second quarter; however, due to weak market conditions and the short term of the existing lease, it is possible that the property may be removed from the market at some point in the third quarter while other strategies are reviewed. Page 14 of 17 As reported in the special communication to shareholders dated July 15, 1996, the Board of Directors declared a special dividend of these sales proceeds in the amount of $0.88 per original $10.00 share which will be paid on or about August 30, 1996 to shareholders of record as of July 31, 1996. During the latter part of 1995 and early 1996, the Wickes Furniture Store (the "Store") was marketed for sale, in accordance with the Advisor's recommendation and as approved by the Fund's Board of Directors. However, due to weak retail market conditions in Southern California and current lease rates, few prospective buyers expressed interest in purchasing the store at the Fund's asking price. Therefore, the store has been withdrawn from the market and will be held until market conditions improve. As discussed in Note 4 to the consolidated financial statements, Phar-Mor filed for protection under Chapter 11 of the federal Bankruptcy Code in August 1992. The Fund's lease was rejected effective May 15, 1993 following the closure of the store in April. Phar-Mor filed a plan of reorganization in July 1994 and has subsequently amended the plan. In August 1995, the court confirmed the plan. It remains uncertain, however, at this time as to the level of recovery, if any, that the Fund may realize from its two claims filed in the bankruptcy proceeding. On October 12, 1994, the Fund's Advisor finalized a lease with Superpetz, Inc., for 24,709 square feet of the approximately 56,000 square foot former Phar-Mor building. The space was subdivided and the lease commenced November 16, 1994. As discussed in Note 5 to the consolidated financial statements, the building was sold in March 1995 at a sale price of $3,050,000. After estimated expenses of sale of $125,000 (including real estate commissions of $91,000 paid to outside brokers), the proceeds received by the Fund were approximately $2,925,000. At the date of sale, the carrying amount of land, improvements and unamortized leasing commissions, for financial statement purposes, after a $780,000 provision for impairment of value recognized in 1993, was $2,798,000. For tax reporting purposes the carrying value at the date of sale was $3,639,000. The gain on the sale under the accrual method of accounting is $127,000. Under the tax method of accounting the loss on sale is $714,000. A special dividend of substantially all of the net sales proceeds was made to shareholders. In the first half of 1996 the Fund experienced a higher rate of prepayment of its mortgage-backed securities portfolio than in the second half of 1995. Expectations are for a slowdown during the remainder of the year reflecting the rising interest rate environment. Mortgage-backed securities are interest rate sensitive financial investments and, to the extent inflation affects interest rates, their value will generally decrease if market interest rates increase. Conversely, if market interest rates decline, the underlying mortgages may be prepaid and the Fund may not be able to reinvest the proceeds at interest rates as favorable as previously invested. The Fund experienced a net unrealized holding loss of $276,000 on its mortgage-backed securities during the first half of 1996 due to increases in market interest rates. The Fund anticipates a reduction in interest income from mortgage-backed securities as certain proceeds received from the prepayments are used to support dividend payments. The Advisor anticipates that the Fund will have sufficient resources to meet its capital and operating requirements into the foreseeable future. Page 15 of 17 PART II OTHER INFORMATION Item 1. Legal Proceedings. The Fund is a creditor in bankruptcy proceedings filed by Phar-Mor. In December 1994, Phar-Mor filed in these proceedings a preference recovery action against many vendors and landlords, including the Fund. The amount of preferential payments alleged to have been made to the Fund is $90,250 (the rent paid to the Fund within 90 days of the filing of the bankruptcy petitions). In February 1995, Phar-Mor filed an objection to the Fund's lease-rejection claim. The objection alleges that the leaserejection damages were not properly calculated and similar objections were apparently filed against all lease-rejection claims in these proceedings. The Fund has filed materials supporting its lease rejection-claims, calculated to be $774,410. In August 1995, the court confirmed Phar-Mor's proposed reorganization plan. In connection with the confirmation, Phar-Mor dismissed its preference recovery action against most creditors, including the Fund. In September 1995, the Fund filed a separate administrative claim for $19,835, representing pro-rated, post-petition property taxes owed by Phar-Mor under the rejected lease. Phar-Mor has also filed an objection to this claim. The court has directed Phar-Mor to report its progress in resolving all outstanding claim objections, including that relating to the Fund. Item 6. Exhibits and Reports on Form 8-K. a) No reports on Form 8-K were required to be filed during the last quarter of the period covered by this Report. Subsequent to the close of the quarter, Form 8-K Reports were filed on July 9, 1996, and on July 25, 1996, reporting the disposition of assets. Page 16 of 17 SIGNATURE 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. METRIC INCOME TRUST SERIES, INC., a California Corporation By: /s/ Margot M. Giusti ---------------------------- Margot M. Giusti Executive Vice President and Chief Financial Officer; Principal Financial and Accounting Officer Date: August 8, 1996 ---------------------------- Page 17 of 17 EX-27 2 FDS
5 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 5,820,000 7,573,000 592,000 0 0 0 30,889,000 3,054,000 41,930,000 0 0 0 0 6,000 40,371,000 41,930,000 0 2,618,000 0 0 357,000 0 0 1,991,000 0 1,991,000 574,000 0 0 2,565,000 0.41 0.00
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