-----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, JKVJ3vDLscscHayhRVQ6oMZ6BSZ0y9XiQUvLohmS541qQN8aZZhW20XdY889v/LS tllsO7WJdA75F19TSdqKqw== 0000948524-97-000119.txt : 19971114 0000948524-97-000119.hdr.sgml : 19971114 ACCESSION NUMBER: 0000948524-97-000119 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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: SEC FILE NUMBER: 000-18294 FILM NUMBER: 97713348 BUSINESS ADDRESS: STREET 1: ONE CALIFORNIA ST STREET 2: STE 1400 CITY: SAN FRANCISCO STATE: CA ZIP: 94111-5415 BUSINESS PHONE: 4156782000 MAIL ADDRESS: STREET 1: ONE CALIFORNIA ST STREET 2: SUITE 1400 CITY: SAN FRANCISCO STATE: CA ZIP: 94111-5415 FORMER COMPANY: FORMER CONFORMED NAME: METRIC PARTNERS HIGH INCOME FUND SERIES I INC DATE OF NAME CHANGE: 19890629 10-Q 1 SEPTEMBER 30 , 1997 10-Q ================================================================================ 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 September 30, 1997 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 Identification No.) incorporation or organization) 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 September 30, 1997: 6,321,641 ================================================================================ Page 1 of 16 PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited). METRIC INCOME TRUST SERIES, INC., a California corporation CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30, December 31, 1997 1996 ---- ---- ASSETS Cash ........................................................... $ 6,681,000 $ 3,781,000 Accounts and Interest Receivable ............................... 2,716,000 669,000 Investment in Mortgage-Backed Securities - Net ................. -- 7,251,000 Rental Properties .............................................. -- 14,798,000 Accumulated Depreciation ....................................... -- (1,286,000) ------------ ------------ Properties and Improvements - Net ......................... -- 13,512,000 Real Estate Held for Sale ...................................... 19,420,000 10,612,000 Prepaid and Other Assets ....................................... 149,000 114,000 ------------ ------------ Total Assets .............................................. $ 28,966,000 $ 35,939,000 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Dividends Payable .............................................. $ 8,929,000 $ 3,888,000 Payable to Sponsor and Affiliates .............................. 8,000 9,000 Other Accounts Payable and Accrued Liabilities ................. 182,000 187,000 ------------ ------------ Total Liabilities ......................................... 9,119,000 4,084,000 ------------ ------------ 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 .................. (35,359,000) (23,521,000) Unrealized Holding Gain on Investment in Mortgage-Backed Securities - Net ....................... -- 170,000 ------------ ------------ Total Shareholders' Equity ................................ 19,847,000 31,855,000 ------------ ------------ Total Liabilities and Shareholders' Equity ................ $ 28,966,000 $ 35,939,000 ============ ============
See notes to consolidated financial statements (unaudited). Page 2 of 16 METRIC INCOME TRUST SERIES, INC., a California corporation CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine Months Ended September 30, ------------------------- 1997 1996 ---- ---- Revenues: Lease income ..................................................... $2,409,000 $3,128,000 Interest on mortgage-backed securities ........................... 401,000 465,000 Interest and other income ........................................ 155,000 120,000 Gain on sale of mortgage-backed securities - net ................. 226,000 -- ---------- ---------- Total Revenues ................................................ 3,191,000 3,713,000 ---------- ---------- Expenses: Depreciation ..................................................... 128,000 334,000 General and administrative ....................................... 463,000 524,000 Impairment provision for real estate held for sale ............... 1,647,000 -- ---------- ---------- Total Expenses ................................................ 2,238,000 858,000 ---------- ---------- Income Before Net Gain on Sale of Properties ..................... 953,000 2,855,000 Gain on Sale of Properties - Net ................................. 105,000 528,000 ---------- ---------- Net Income ....................................................... $1,058,000 $3,383,000 ========== ========== Net Income per Share: Income before net gain on sale of properties ..................... $ .15 $ .45 Gain on sale of properties - net ................................. .02 .08 ---------- ---------- Net Income per Share .......................................... $ .17 $ .53 ========== ========== Dividends per Share .............................................. $ 2 .04 $ 1.46 ========== ==========
See notes to consolidated financial statements (unaudited). Page 3 of 16 METRIC INCOME TRUST SERIES, INC., a California corporation CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the Three Months Ended September 30, -------------------------- 1997 1996 ---- ---- Revenues: Lease income ..................................... $ 762,000 $ 886,000 Interest on mortgage-backed securities ........... 130,000 147,000 Interest and other income ........................ 100,000 62,000 Gain on sale of mortgage-backed securities - net . 226,000 -- ----------- ----------- Total Revenues ................................ 1,218,000 1,095,000 ----------- ----------- Expenses: Depreciation ..................................... -- 64,000 General and administrative ....................... 138,000 167,000 Impairment provision for real estate held for sale (695,000) -- ----------- ----------- Total Expenses ................................ (557,000) 231,000 ----------- ----------- Income before Loss on Sale of Properties ......... 1,775,000 864,000 Loss on Sale of Properties ....................... (107,000) (46,000) ----------- ----------- Net Income ....................................... $ 1,668,000 $ 818,000 =========== =========== Net Income per Share: Income before loss on sale of properties ......... $ .28 $ .13 Loss on sale of properties ....................... (.01) (.01) ----------- ----------- Net Income per Share .......................... $ .27 $ .12 =========== =========== Dividends per Share .............................. $ 1.41 $ 1.06 =========== =========== See notes to consolidated financial statements (unaudited). Page 4 of 16 METRIC INCOME TRUST SERIES, INC., a California corporation CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Nine Months Ended September 30, 1997 and 1996
Unrealized Holding Gain/(Loss) Common Stock Additional Accumulated on Investment in ------------ Paid-in Dividends in Excess Mortgage-Backed Shares Amount Capital of Net Income Securities - Net Total ------ ------ ------- ------------- ---------------- ----- Balance, January 1, 1997 ............ 6,321,641 $ 6,000 $55,200,000 $(23,521,000) $170,000 $31,855,000 Realization of Unrealized Holding Gain On Investment in Mortgage - Backed Securities - Net ............. (170,000) (170,000) Income Before Net Gain on Sale of Properties ..................... 953,000 953,000 Gain on Sale of Properties - Net .... 105,000 105,000 Dividends Declared .................. (12,896,000) (12,896,000) ----------- --------- ----------- ------------ -------- ----------- Balance, September 30, 1997 ......... 6,321,641 $ 6,000 $55,200,000 $(35,359,000) -- $19,847,000 =========== ========= =========== ============ -------- =========== 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 ............... (267,000) (267,000) Income Before Net Gain on Sale of Property ....................... 2,855,000 2,855,000 Gain on Sale of Properties - Net .... 528,000 528,000 Dividends Declared .................. (9,238,000) (9,238,000) ----------- --------- ----------- ------------ -------- ----------- Balance, September 30, 1996 ......... 6,321,641 $ 6,000 $55,200,000 $(20,802,000) $ 91,000 $34,495,000 =========== ========= =========== ============ ======== ===========
See notes to consolidated financial statements (unaudited). Page 5 of 16 METRIC INCOME TRUST SERIES, INC., a California corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
For the Nine Months Ended September 30, ------------------------- 1997 1996 ---- ---- Operating Activities Net income ............................................................................ $ 1,058,000 $ 3,383,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............................................... 122,000 329,000 Gain on sale of mortgage-backed securities - net ............................ (226,000) -- Impairment provision for real estate held for sale .......................... 1,647,000 -- Gain on sale of properties - net ............................................ (105,000) (528,000) Changes in operating assets and liabilities: Accounts and interest receivable .................................... (145,000) (179,000) Prepaid and other assets ............................................ 6,000 (101,000) Payable to sponsor and affiliates ................................... (1,000) (13,000) Other accounts payable and accrued liabilities ...................... (5,000) (124,000) ----------- ----------- Net cash provided by operating activities ............................................. 2,351,000 2,767,000 ----------- ----------- Investing Activities Proceeds from sale of mortgage-backed securities ...................................... 4,662,000 -- Principal payments received on mortgage-backed securities ............................. 608,000 956,000 Proceeds from sale of properties ...................................................... 3,469,000 5,979,000 Cash used for selling costs of properties ............................................. (335,000) (282,000) ----------- ----------- Net cash provided by investing activities ............................................. 8,404,000 6,653,000 ----------- ----------- Financing Activities Dividends paid to Shareholders ........................................................ (7,855,000) (9,356,000) ----------- ----------- Cash used by financing activities ..................................................... (7,855,000) (9,356,000) ----------- ----------- Increase in Cash ...................................................................... 2,900,000 64,000 Cash at beginning of period ........................................................... 3,781,000 976,000 ----------- ----------- Cash at End of Period ................................................................. $ 6,681,000 $ 1,040,000 =========== ===========
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. Sale of mortgage-backed securities - see Note 8 See notes to consolidated financial statements (unaudited). Page 6 of 16 METRIC INCOME TRUST SERIES, INC., a California corporation NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Reference to 1996 Audited Consolidated Financial Statements These unaudited consolidated financial statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the 1996 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; except as disclosed in Note 9 below. 2. Transactions with Advisor and Affiliates Effective April 1, 1997, Metric Holdings Inc., the indirect Parent of Metric Realty, the former Advisor, was merged into a newly formed entity known as SSR Realty Advisors, Inc. ("SSR"). SSR was incorporated under the laws of Delaware on February 25, 1997 and is a registered investment advisor in accordance with the Investment Advisors Act of 1940. With the consent of the Fund, the Advisory Agreement was assigned to SSR by Metric Realty on March 27, 1997. SSR is a subsidiary of Metropolitan Life Insurance Company. In accordance with the Advisory Agreement, the Fund pays the Advisor and affiliates compensation for services provided to the Fund. Amounts earned by the Advisor and its affiliates for the nine months ended September 30, 1997 and 1996 were as follows: 1997 1996 ---- ---- Reimbursement of administrative expenses $150,000 $150,000 Securities management fee 25,000 29,000 Advisory fee 131,000 178,000 -------- -------- Total $306,000 $357,000 ======== ======== The securities management fee is earned by State Street Research & 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 8.6% 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 1997, the Independent Directors approved the extension of the term of the Advisory Agreement to March 31, 1998. 3. Net Income per Share Net income per share is based upon 6,321,641 shares outstanding. Page 7 of 16 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 had received cash as well as shares of NCS common stock which were subsequently sold. In August 1997, the Fund received $76,000 in lieu of 2,638 shares of NCS common stock plus accrued interest. Total compensation received to date by the Fund in connection with the settlement approximates $338,000. In the fourth quarter of 1996, Diamond Shamrock Corporation, the firm which purchased the outstanding stock of NCS in December 1995, merged with Ultramar Corporation to form Ultramar Diamond Shamrock Corporation (UDS). In 1996 the Fund sold the convenience stores located in Rancho Cucamonga, California and Houston, Texas; in the first quarter of 1997, the Fund sold the convenience stores located in Clute, Sealy, Dallas and Texas City, Texas, and in the third quarter of 1997, the Fund sold the convenience store located in Arlington (Green Oaks Blvd.), Texas (see Note 5). In April 1992, Sam's Club, a lessee located 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 was to have expired 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 paid the full lease amount. The property was sold in June 1996. Phar-Mor, a former lessee of one property, filed for protection under Chapter 11 of the Federal Bankruptcy Code in August 1992 and rejected the Fund's lease effective May 15, 1993. The Fund filed claims in the bankruptcy proceeding totalling $794,000. In December 1994, Phar-Mor filed in the 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 was $90,250 consisting of rent paid to the Fund within 90 days of the filing of the Phar-Mor bankruptcy petitions. This preference action was dismissed in connection with the confirmation of the reorganization plan of Phar-Mor. In August 1995, the Court confirmed Phar-Mor's proposed reorganization plan which called 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. In October 1996, the Fund received approximately $19,000 from Phar-Mor to satisfy its administrative claim and agreed to settle its remaining outstanding lease rejection claim for approximately $629,000. This settlement was approved by the Bankruptcy Court in January 1997. To satisfy the claim, in March 1997, the Fund received 1,058 shares of stock and 881 warrants which were sold in June 1997, for $7,000. 5. Sale of Rental Properties In July 1997 the Fund's subsidiary, Metric Real Estate, L.P., sold National Convenience Store Stop N Go #2378 located in Arlington, Texas for $1,413,000. After payment of expenses of sale of $110,000 (including a real estate commission of $81,000 paid to an outside broker), the proceeds to the Fund were $1,303,000. The carrying value at the time of sale was $1,408,000 (including $73,000 deferred lease income receivable), resulting in a loss of $105,000. In March 1997 the Fund's subsidiary, Metric Real Estate, L.P., sold National Convenience Store Stop N Go #3571 located in Sealy, Texas for $265,000. After payment of expenses of sale of $28,000 (including real estate commissions of $16,000 paid to outside brokers), the proceeds to the Fund were $237,000. The carrying value at the time of sale was $303,000 (including $9,000 deferred lease income receivable), resulting in a loss of $66,000. In March 1997 the Fund's subsidiary, Metric Real Estate, L.P., sold National Convenience Store Stop N Go #655 located in Dallas, Texas for $1,392,000. After payment of expenses of sale of $103,000 (including a real estate commission of $80,000 paid to an outside broker), the proceeds to the Fund were $1,289,000. The carrying value at the time of sale was $715,000 (including $43,000 deferred lease income receivable), resulting in a gain of $574,000. Page 8 of 16 In March 1997 the Fund's subsidiary, Metric Real Estate, L.P., sold National Convenience Store Stop N Go #3592 located in Texas City, Texas for $135,000. After payment of expenses of sale of $23,000 (including real estate commissions of $8,000 paid to outside brokers), the proceeds to the Fund were $112,000. The carrying value at the time of sale was $272,000 (including $7,000 deferred lease income receivable), resulting in a loss of $160,000. In February 1997 the Fund's subsidiary, Metric Real Estate, L.P., sold National Convenience Store Stop N Go #3583 located in Clute, Texas for $264,000. After payment of expenses of sale of $29,000 (including real estate commissions of $16,000 paid to outside brokers), the proceeds to the Fund were $235,000. The carrying value at the time of sale was $373,000 (including $9,000 deferred lease income receivable), resulting in a loss of $138,000. In July 1996 the Fund sold the Pearle Express Store located in Orland Park, Illinois for $1,069,000. After payment of the expenses of sale of $81,000 (including real estate commissions of $64,000 paid to outside brokers) the proceeds received by the Fund were $988,000. The carrying value at the time of sale was $1,034,000, resulting in a loss of $46,000. 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 expenses of sale of $201,000 (including real estate commission of $168,00 paid to an outside broker), the proceeds received by the Fund were $4,709,000. The carrying value at the time of sale was $4,135,000, resulting in a gain of $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. The tenant subsequently claimed that the work specified was beyond the requirements under the original lease. The tenant will complete the work to the extent required under the lease, and the remainder will be completed and paid for from the escrowed funds. Once the work is completed, any remaining funds from the escrow account will be released to MITS. 6. Real Estate Held for Sale In the third quarter of 1996, the Fund's Board of Directors approved a plan to market for sale the sixteen National Convenience Stores located in California, Georgia and Texas. Two of the stores were sold in the fourth quarter of 1996, four of the stores were sold in the first quarter of 1997, and one store was sold in the third quarter of 1997. The remaining fourteen stores and nine stores were classified as Real Estate Held for Sale at December 31, 1996 and September 30, 1997, respectively. As a result of the Board of Directors' decision to proceed with an orderly liquidation of the Fund, as of June 30, 1997, the remaining Rental Properties owned by the Fund were classified as Real Estate Held for Sale. Pursuant to FAS 121, real estate held for sale is presented at the lower of carrying value or fair market less estimated cost to dispose (See Note 9). No further depreciation is provided after properties are classified as Real Estate Held for Sale. 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 were issued by the Fund and no Page 9 of 16 proceeds from the sale of Shares to the DRP were 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 September 1997, the Fund sold the remainder of its investments in mortgage-backed securities. Net proceeds from the sale were $6,698,000 resulting in gross realized gains of $244,000 and gross realized losses of $18,000. Specific identification was used to determine amortized cost in computing the gains and losses. A portion of the proceeds were not received until October 1997 and are included in Accounts and Interest Receivable. In accordance with FASB statement No. 115 and Management's intentions, the Fund's investment in mortgage-backed securities was classified as "available-for-sale securities" and reported at fair value, with unrealized gains and losses reported as a net amount in a separate component of Shareholders' Equity. Mortgage-backed securities on December 31, 1996 were at fair value as follows: Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Holding Gains Holding Losses Value ---- ------------- -------------- ----- 1996: GNMA $5,227,000 $113,000 $ 82,000 $5,258,000 FNMA 1,049,000 75,000 -- 1,124,000 FHLMC 806,000 63,000 -- 869,000 ---------- -------- ---------- ---------- $7,082,000 $251,000 $ 82,000 $7,251,000 ========== ======== ========== ========== Maturities of the individual securities ranged from 2009 to 2024 and the coupon rates ranged from 7 to 10 percent per annum. 9. Impairment Provision for Real Estate Held for Sale As discussed in Note 6, at June 30, 1997 the Fund classified its remaining properties as Real Estate Held for Sale. In accordance with FAS 121, an impairment provision of $2,342,000 was recorded to reduce the carrying values of the Wickes Furniture Store ($2,300,000) and the Pearle Express Morrow, Georgia location ($42,000) to their estimated fair value less cost to sell. In the third quarter, the Fund increased its estimate of fair value less cost to sell of Wickes Furniture Store by $695,000. 10. Subsequent Event In October 1997, the Fund's subsidiary, Metric Real Estate, L.P., sold Haverty's Furniture Store located in Plano, Texas for $4,425,000. After payment of expenses of sale of $194,000 (including a real estate commission of $155,000 paid to an outside broker), the proceeds to the fund were $4,231,000. The carrying value at the time of the sale was $3,822,000 resulting in a gain of $409,000. 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. Page 10 of 16 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 % Date of at September 30, Size Purchase 1997 1996 ---- -------- ---- ---- Pearle Express Store.............. (1) 11/89 100 100 National Convenience Stores (2)... (1) 11/89 100 100 Wickes Furniture Store Torrance, California.......... 51,000 sq. ft. 01/90 100 100 Haverty's Furniture Store Plano, Texas.................. 55,000 sq. ft. 12/94 100 100 (1) For details of individual properties, see Part I, Item 2 of the Form 10-K Report filed for 1996. (2) In the fourth quarter of 1996, the stores located in Rancho Cucamonga, California and Houston, Texas were sold to unaffiliated buyers. In the first quarter of 1997, the stores located in Clute, Sealy, Dallas and Texas City, Texas were sold to unaffiliated buyers. In the third quarter of 1997, the store located in Arlington, Texas was sold to an unaffiliated buyer. See Note 5 to the consolidated financial statements. Results of Operations Income before net gain or loss on sale of properties decreased $1,902,000 and increased $911,000, respectively, in the first three quarters and third quarter of 1997 compared to the same periods in 1996. The decrease year-to-date was due primarily to an impairment provision for real estate held for sale recorded at $2,342,000 in the second quarter of 1997 and subsequently reduced to $1,647,000 in the third quarter. (See Note 9 to the consolidated financial statements). The increase in the third quarter was due primarily to the $695,000 reduction of the impairment provision for real estate held for sale, $226,000 gain on sale of mortgage-backed securities and by the increase in other income in the third quarter of 1997. Lease income decreased in the first three quarters and third quarter of 1997 compared to the same periods in 1996 primarily due to the sales of the Orland Park, Illinois Pearle Express Store in July 1996, Sam's Club located in Menomonee Falls, Wisconsin in June 1996, the NCS stores located in Rancho Cucamonga, California and Houston, Texas in November and December of 1996, respectively, the NCS store located in Clute, Texas in February 1997, the NCS stores located in Sealy, Dallas, and Texas City, Texas in March 1997, and the NCS store located in Arlington, Texas in July 1997. Interest on the Fund's mortgage-backed securities portfolio declined 14% and 12%, respectively, in the first three quarters and third quarter of 1997 compared to the same periods in 1996 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. Interest and other income increased by $35,000 and $38,000, respectively, in the first three quarters and third quarter of 1997 compared to the same periods in 1996. The decrease in interest income in the first three quarters and third quarter of 1997, primarily due to interest income earned on proceeds from sales of the Pearle Express-Orland Park Store in July, 1996 and Sam's Club in June, 1996 prior to the distribution in August 1996, was more than offset by the increase in other income, primarily due to the receipt in the third quarter of 1997 of $76,000 Page 11 of 16 towards settlement of the Fund's claim filed in conjunction with the bankruptcy and subsequent reorganization of NCS (see Note 4 to the consolidated financial statements). General and administrative expenses decreased by $61,000 and $29,000, respectively, in the first three quarters and third quarter of 1997 compared to the same periods in 1996. The decrease is primarily due to a decrease in advisory fees as a result of the sales of the Pearle Express Store, Sam's Club and the NCS stores, as discussed above, and a decline in appraisal fees incurred. The decrease was partially offset by an increase in investor reporting expenses, resulting from costs associated with responding to unsolicited offers to purchase Shares, and to costs associated with SEC filings relating to the sale of properties. Depreciation expenses decreased $206,000 and $64,000, respectively, in the first three quarters and third quarter of 1997 compared to the same periods in 1996 due to depreciation not being provided for the NCS stores for the first three quarters of 1997, or for any of the remaining properties in the third quarter of 1997 (see Note 6 to the consolidated financial statements) and the sale of the Orland Park Pearle Express Store in July 1996. 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 Fund's Stop N Go and Circle K stores, Pearle Express store, and Wickes Furniture store all experience competition from other similar operations in the markets where the properties are located. The Fund initially owned 19 convenience stores, all leased to National Convenience Stores ("NCS"). Although NCS was the original lessee of the properties and remains financially liable for all of the leases, Circle K currently makes payment directly to the Fund for the stores it operates as the result of an exchange transaction in the second quarter of 1994. Diamond Shamrock, Inc. ("DSI") purchased the outstanding stock of NCS in December 1995 and NCS became a wholly-owned subsidiary of DSI. In late 1996 DSI merged with Ultramar Corporation to form Ultramar Diamond Shamrock Corporation ("UDS"). Three of the stores were sold in 1993 subsequent to the rejection of the leases by NCS in conjunction with its December 1991 bankruptcy filing. In August 1996 the Board of Directors approved a sales strategy for the Fund's remaining convenience stores and in November 1996 the Fund sold the Circle K store in Rancho Cucamonga, California, followed by the Stop N Go Store in Houston, Texas in December. In February 1997 the Stop N Go Store in Clute, Texas was sold, followed by the Stop N Go Stores in Sealy, Dallas, and Texas City, Texas in March 1997, and the Stop N Go Store located in Arlington (Green Oaks Blvd.), Texas in July 1997 (see Note 5 to the consolidated financial statements). The Fund remains the owner of nine convenience store properties, five operated as Stop N Go and four as Circle K. Eight of these stores are currently under contracts for sale, with final closings anticipated to occur in December of this year, subject to clearance of certain title and environmental issues. The Circle K Store in Rubidoux, California had been included in the initial negotiations but was subsequently rejected by the potential purchaser. In connection with the marketing MITS had commissioned Phase I Environmental Site Assessments which revealed that Circle K, the tenant of the Rubidoux property, had reported hydrocarbon contaminants to regulatory authorities in April 1994. Per the terms of the lease, the lessee was required to notify MITS at the time of discovery and to promptly remediate the property but no such action was taken. The Advisor notified Circle K of its default and asserted the rights and remedies under the lease, including indemnification for the Fund. The tenant's most recent tests have indicated that the spill is believed to be confined to the property. The Rubidoux property continues to be marketed for sale. At the recommendation of the Advisor, in the third quarter of 1995 the Board of Directors approved the marketing for sale of the Fund's Sam's Club in Menomonee Falls, Wisconsin; the 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 and the Pearle Express Store in Orland Park, Illinois was sold in July 1996. The Wickes Furniture Store and Pearle Express Store in Morrow, Georgia were offered for sale but subsequently withdrawn from the market due to weak market conditions and lease terms that were unattractive to potential buyers. Page 12 of 16 In the second quarter of 1997 the Board of Directors approved a sales strategy for the Fund's Haverty's Furniture Store in Plano, Texas and the remaining Pearle Express Store in Morrow, Georgia, and in the third quarter approved remarketing the Wickes Furniture Store in Torrance, California. A contract for the sale of Haverty's was entered into in September and the sale completed on October 21, 1997. Several offers for Wickes have been submitted and contract negotiations and due diligence are currently underway. It now appears likely that a sale of Wickes will be consummated by year end. The Pearle Express - Morrow, Georgia location remains actively marketed for sale. As reported in a special communication to Shareholders dated September 25, 1997, the Advisor was instructed by the Board of Directors to liquidate the Fund's mortgage-backed securities portfolio. The sale of the mortgage-backed securities has been completed (see Note 8 to the consolidated financial statements). Fund Liquidity and Capital Resources The Fund intends to meet its cash needs from cash flow generated by properties and securities that it acquires and holds. 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 level of cash distributions to Shareholders through the third quarter was sustained by cash provided from net operating activities, from principal repayments on the mortgage-backed securities, and from capital gains from the sale of securities. 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. The DRP/LOP share purchase price was determined pursuant to a formula set forth in the Prospectus regarding the DRP dated March 1, 1994. The methodology described in the DRP Prospectus had as its components independent third party appraisals of the Fund's properties (undertaken annually and reviewed quarterly), and the market value of the Fund's mortgage-backed securities and the book value of its other assets and liabilities as of each quarter end. Purchases of Shares by the DRP and liquidation of Shares through the LOP commenced with respect to the dividend paid for the first quarter of 1994. In a special communication dated July 15, 1996, all Shareholders were informed that in June 1996 the Board of Directors unanimously voted to proceed with the orderly liquidation of the Fund's assets over the next several years and, accordingly, to terminate the DRP and LOP for dividends payable after August 15, 1996. The Board of Directors believed that with the implementation of a formal disposition strategy, the Plan was no longer a viable investment purchase/liquidation vehicle. The Fund's regular quarterly dividend for the second quarter of 1996 was the final dividend for which the DRP/LOP was effective. The Fund's Advisor has continued to provide, on a quarterly basis, an estimated net asset value per Share for the Shares of MITS, utilizing the methodology previously employed to determine the DRP Share purchase price. However, as all of the Fund's properties are now being marketed for sale, the Advisor utilizes estimations of current market value, or if applicable, contract purchase prices rather than year-end appraisals to calculate the estimated net asset value per Share. Based on current brokers' opinions of value of the Fund's real properties, the estimated net proceeds from the sale of Haverty's, as well as the carrying value of its other assets and liabilities as of September 30, 1997, the estimated net asset value per Share as of September 30, 1997 has been established as $3.34. This value has declined from the previous quarter's estimated net asset value per Share of $4.41 due primarily to the sale of the portfolio of mortgage-backed securities and to the sale of the Arlington (Green Oaks Blvd.), Texas Stop N Go Store. Page 13 of 16 First Three Quarters of 1997 The Fund, after taking into account lease income, interest on investments in securities, other interest income and general and administrative expenses, experienced positive results from operations for the period. As presented in the Consolidated Statement of Cash Flows, cash was provided by operating activities. Cash was provided by investing activities, from proceeds from sales of properties and mortgage-backed securities, principal payments received on mortgage-backed securities, and used by investing activities for expenses incurred in the sales of properties. Cash was used by financing activities for dividends paid to Shareholders. During the third quarter of 1995, the Fund's Advisor recommended, and the Board of Directors approved, the sale of Sam's Club located in Menomonee Falls, Wisconsin, the Wickes Furniture Store in Torrance, California and the Pearle Express locations in Orland Park, Illinois and Morrow, Georgia. 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 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. The tenant subsequently contested the extent of repairs originally agreed upon, claiming that they were beyond the scope of the original lease. The tenant will complete the work to the extent required under the original lease, and the remainder of the work will be completed and paid for from the funds held in the escrow account. Any remaining funds will be released to MITS upon completion of the work to the satisfaction of the new owner. The work is in progress. In July 1996 the Fund sold the Pearle Express Orland Park location for $1,069,000. After payment of the expenses of sale of $81,000 (including real estate commissions of $64,000 paid to outside brokers) the proceeds received by the Fund were approximately $988,000. The carrying value at the time of sale was $1,034,000. The loss recognized at the time of sale was $46,000. A special dividend of the proceeds from the sale of Sam's Club and the Pearle Express was paid on August 30, 1996 to Shareholders of record as of July 31, 1996. The Fund continued to market for sale the Pearle Express location in Morrow, Georgia through the second quarter of 1996; however, due to the short term of the existing lease, no other viable offers were received and the property was removed from the market. Subsequently, the Advisor successfully negotiated an extension to the lease, and in March 1997 Pearle, Inc. signed an amendment providing for an extension of eight years in exchange for a blending of the remaining lease obligations with current market rates. Pursuant to a decision by the Board of Directors, the Advisor has again marketed the property for sale. 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 financial and market considerations, no acceptable offers were received by the Fund and the property was subsequently withdrawn from the market. In light of the Fund's current liquidation strategy and with the approval of the Board of Directors, efforts were initiated in anticipation of again marketing the Store for sale. The Board of Directors has since approved sale parameters, and the Advisor is currently negotiating with several potential purchasers, and it now appears likely that a sale will be consummated by year end. Phar-Mor, the tenant of a property the Fund owned in in Middletown, Ohio, filed for bankruptcy 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 subsequently amended the plan, which the court confirmed in August 1995. In October 1996 Phar-Mor paid $19,321 to satisfy a claim for post-petition real estate taxes for the period through May 15, 1993. Shortly thereafter, the Fund agreed to settle its remaining outstanding claim for an allowed claim of $629,000. The Fund sold the former Phar-Mor building, in March 1995 for $3,050,000. After payment of expenses of sale of $126,000 (including real estate commissions of $91,000), proceeds to MITS were Page 14 of 16 $2,924,000. At the date of sale, the carrying amount of land, improvements and unamortized leasing commissions, after a provision of $780,000 for impairment of value was recognized in 1993, was $2,798,000. The gain was $126,000. The proceeds of the sale were distributed to Shareholders in a special dividend on July 17, 1995. Under the settlement agreement noted above, the Fund received 1,058 shares of Phar-Mor stock and 881 warrants to purchase stock to satisfy its claims. The Fund sold these securities in June 1997 for a total of $7,000. No further compensation under the terms of the bankruptcy settlement is anticipated. In August 1996 the Board of Directors instructed the Advisor to commence marketing the Fund's convenience store properties. In November 1996 the Fund sold the Circle K Store located in Rancho Cucamonga, California, followed by the Stop N Go Store in Houston, Texas in December. The proceeds of these sales were distributed in conjunction with the fourth quarter 1996 dividend, paid to Shareholders of Record as of December 31, 1996, on January 15, 1997. In February 1997, the Fund sold the Stop N Go Store located in Clute, Texas, followed by the sale of the Stop N Go Stores in Sealy, Dallas, and Texas City, Texas, in March 1997. A special dividend resulting from the proceeds of these sales was paid on May 15, 1997 to Shareholders of Record as of March 31, 1997. On July 24, 1997, the Fund sold the Stop N Go Store located in Arlington (Green Oaks Boulevard), Texas, the sales proceeds from which will be distributed in conjunction with the third quarter dividend, scheduled for the week of November 17, 1997. As reported in the September 26, 1997 special communication to Shareholders, on September 25, 1997 the Board of Directors instructed the Advisor to liquidate the portfolio of mortgage-backed securities, and to distribute the proceeds to Shareholders of record as of September 30, 1997, in conjunction with the regular third quarter dividend, and the net proceeds of the sale of the Arlington convenience store, as noted above. Net proceeds of the sale were $6,698,000 resulting in a net gain of $226,000. The Advisor anticipates that the Fund will have sufficient resources to meet its capital and operating requirements into the foreseeable future. PART II OTHER INFORMATION Item 1. Legal Proceedings. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Fund (or any of its subsidiaries) is a party or of which any of their property is the subject. 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 other than the Form 8-K Report filed on September 26, 1997 reporting the decision of the Board of Directors to liquidate the MBS portfolio and the declaration of the special dividend from sales proceeds. Subsequent to the close of the quarter, on October 10, 1997 a report on Form 8-K was filed reporting the sale of the MBS portfolio; on November 3, 1997 a report on Form 8-K was filed reporting the sale of the Haverty's Furniture Store in Plano, Texas; and on November 10, 1997 a report on Form 8-K was filed including the material contract for the sale of the Arlington (Green Oaks Boulevard), Texas NCS store. Page 15 of 16 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/ William A. Finelli ------------------------- William A. Finelli Director, Vice President, Chief Financial Officer, and Treasurer Date: November 12, 1997 ------------------------- Page 16 of 16 EX-27 2 FDS
5 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 6,681,000 0 2,716,000 0 0 0 19,420,000 0 28,966,000 0 0 0 0 6,000 19,841,000 28,966,000 0 3,191,000 0 0 463,000 0 0 953,000 0 953,000 105,000 0 0 1,058,000 0.17 0.00
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