FORM 10-QSB--QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY OR TRANSITIONAL REPORT
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(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, 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 0-9508
PREFERRED PROPERTIES FUND 80
(Exact name of small business issuer as specified in its charter)
California 94-2599964
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Insignia Financial Plaza
Greenville, South Carolina 29602
(Address of principal executive offices)
(864) 239-1000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Exchange Act during the past 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 .
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
a) PREFERRED PROPERTIES FUND 80
CONSOLIDATED BALANCE SHEET
(Unaudited)
(in thousands, except unit data)
June 30, 1997
Assets
Cash and cash equivalents $ 156
Receivables and deposits 158
Other assets 65
Investment property:
Land $ 1,059
Buildings and related personal property 4,286
5,345
Less accumulated depreciation (1,937) 3,408
$ 3,787
Liabilities and Partners' Deficit
Liabilities
Accounts payable $ 4
Tenant security deposits payable 28
Other liabilities 281
Notes payable 5,319
Promissory notes:
Principal 221
Deferred interest payable 161
Partners' Deficit
General partner's $ (910)
Limited partners' (19,997 units issued
and outstanding) (1,317) (2,227)
$ 3,787
See Accompanying Notes to Consolidated Financial Statements
b) PREFERRED PROPERTIES FUND 80
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Rental income $ 249 $ 201 $ 452 $ 414
Interest income 2 20 4 25
Total revenues 251 221 456 439
Expenses:
Operating 34 32 73 61
Interest 159 137 294 274
Depreciation 40 27 80 55
General and administrative 191 117 219 168
Total expenses 424 313 666 558
Net loss $ (173) $ (92) $ (210) $ (119)
Net loss allocated
to general partner (5%) $ (9) $ (5) $ (11) $ (6)
Net loss allocated
to limited partners (95%) (164) (87) (199) (113)
$ (173) $ (92) $ (210) $ (119)
Net loss per limited
partnership unit $(8.20) $(4.35) $(9.95) $(5.65)
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
c) PREFERRED PROPERTIES FUND 80
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' DEFICIT
(Unaudited)
(in thousands, except unit data)
<TABLE>
<CAPTION>
Limited
Partnership General Limited
Units Partner's Partners' Total
<S> <C> <C> <C> <C>
Original capital contributions 19,997 $ 100 $ 19,997 $20,097
Partners' deficit
at December 31, 1996 19,997 $ (899) $ (1,118) $(2,017)
Net loss for the six
months ended June 30, 1997 -- (11) (199) (210)
Partners' deficit
at June 30, 1997 19,997 $ (910) $ (1,317) $(2,227)
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
d) PREFERRED PROPERTIES FUND 80
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss $(210) $(119)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 80 55
Amortization of lease commissions and loan costs 8 9
Change in accounts:
Receivables and deposits (36) (50)
Other assets (17) (2)
Accounts payable (57) 3
Other liabilities 220 63
Net cash used in operating activities (12) (41)
Cash flows from investing activities: -- --
Cash flows from financing activities:
Notes payable principal payments (33) (30)
Retirement of promissory notes (17) (24)
Net cash used in financing activities (50) (54)
Net decrease in cash and cash equivalents (62) (95)
Cash and cash equivalents at beginning of period 218 608
Cash and cash equivalents at end of period $ 156 $ 513
Supplemental disclosure of cash flow information:
Cash paid for interest $ 302 $ 283
<FN>
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
e) PREFERRED PROPERTIES FUND 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Preferred
Properties Fund 80 (the "Partnership") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of NPI Equity Investments II, Inc. ("NPI Equity" or the "Managing
General Partner"), all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended June 30, 1997, are not
necessarily indicative of the results that may be expected for the fiscal year
ending December 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Partnership's annual
report on Form 10-KSB for the year ended December 31, 1996.
Certain reclassifications have been made to the 1996 information to conform to
the 1997 presentation.
NOTE B - TRANSACTIONS WITH AFFILIATED PARTIES
The Partnership has no employees and is dependent on the Managing General
Partner and its affiliates for the management and administration of all
partnership activities. The Partnership Agreement provides for payments to
affiliates for services and as reimbursement of certain expenses incurred by
affiliates on behalf of the Partnership.
The general partner of the Partnership is Montgomery Realty Company - 80 ("MRC-
80"), a limited partnership. The general partner of MRC-80 is Fox Realty
Investors ("FRI").
Pursuant to a series of transactions which closed during 1996, affiliates of
Insignia Financial Group, Inc. ("Insignia") acquired control of NPI Equity, the
managing general partner of FRI, and National Property Investors, Inc. ("NPI").
In connection with these transactions, affiliates of Insignia appointed new
officers and directors of NPI Equity.
The following transactions with affiliates of Insignia, NPI, and affiliates of
NPI were incurred during the six month periods ended June 30, 1997 and 1996 (in
thousands):
For the Six Months Ended
June 30,
1997 1996
Reimbursement for services of affiliates (included
in general and administrative expenses) $19 $76
For the period from January 19, 1996 to June 30, 1997, the Partnership insured
its property under a master policy through an agency and insurer unaffiliated
with the Managing General Partner. An affiliate of the Managing General Partner
acquired, in the acquisition of a business, certain financial obligations from
an insurance agency which was later acquired by the agent who placed the current
year's master policy. The current agent assumed the financial obligations to the
affiliate of the Managing General Partner who received payments on these
obligations from the agent. The amount of the Partnership's insurance premiums
accruing to the benefit of the affiliate of the Managing General Partner by
virtue of the agent's obligations is not significant.
NOTE C - LEGAL PROCEEDINGS - GOING CONCERN
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. In August 1995, a former holder
of the Partnership's Promissory Notes who tendered its Promissory Notes to
Wheatley Ventures, Inc. ("Wheatley") pursuant to Wheatley's tender offer (see
Part II, "Item 1. Legal Proceedings"), brought a purported class action lawsuit
against, among others, the managing general partner of the Partnership. The
ultimate outcome of this litigation and the Partnership's potential liability
cannot be determined at this time. However, this raises substantial doubt about
the Partnership's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The Partnership has one investment property, Creekside Business Park, located in
Milpitas, California. The property has been fully occupied throughout 1997 and
1996. The Partnership's investment property is under contract for sale. The
sale, which is subject to the purchaser's due diligence and other customary
conditions, is expected to close during the third quarter of 1997.
The Partnership's net loss for the six months ended June 30, 1997, was
approximately $210,000 versus a net loss of approximately $119,000 for the same
period of 1996. For the three months ended June 30, 1997, the Partnership
incurred a net loss of approximately $173,000 compared to a net loss of
approximately $92,000 for the three months ended June 30, 1996. The increase in
the net loss for the three and six month periods is primarily attributable to an
increase in general and administrative and depreciation expenses and a decrease
in interest income. The increase in general and administrative expense is
primarily due to an increase in legal costs related to the legal proceedings as
noted in "Item 1. Note C - Legal Proceedings-Going Concern". The increase in
legal costs was partially offset by a decrease in expense reimbursements to the
Managing General Partner. The decrease in expense reimbursements is directly
attributable to costs associated with the transition and relocation of the
administrative offices during the first quarter of 1996. Depreciation expense
increased due to the capitalization and depreciation of the Partnership's basis
in the buyout of the 40% minority interest in the joint venture which owned
Creekside Business Park. Interest income decreased due to lower average cash
balances being held by the Partnership during 1997.
As part of the ongoing business plan of the Partnership, the Managing General
Partner monitors the rental market environment of its investment property to
assess the feasibility of increasing rents, maintaining or increasing occupancy
levels and protecting the Partnership from increases in expense. As part of
this plan, the Managing General Partner attempts to protect the Partnership from
the burden of inflation-related increases in expenses by increasing rents and
maintaining a high overall occupancy level. However, due to changing market
conditions, which can result in the use of rental concessions and rental
reductions to offset softening market conditions, there is no guarantee that the
Managing General Partner will be able to sustain such a plan.
At June 30, 1997, the Partnership had unrestricted cash of $156,000 as compared
to $513,000 at June 30, 1996. The Partnership's cash has been adversely
affected by the lawsuit brought by former promissory note holders of the
Partnership against, among others, the Partnership's general partner, MRC-80
(see discussion of Kaufman et al. v. Northern Trust Bank of California, N.A. et
al. contained in "Part II - Other Information, Item 1. Legal Proceedings"). Net
cash used in operating activities decreased due to an increase in accrued legal
fees incurred in conjunction with the Partnership's litigation involving the
former promissory note holders of the Partnership. This increase was partially
offset by a decrease in accounts payable due to changes in timing of payments.
Net cash used in financing activities decreased due to a decrease in the
retirement of promissory notes payable.
The accompanying consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The first mortgage
indebtedness of approximately $4,019,000 which originally matured on April 1,
1997, was extended until September 30, 1997, through a forbearance agreement, at
which time a balloon payment is due. The Partnership's investment property is
under contract for sale. The sale, which is subject to the purchaser's due
diligence and other customary conditions, is expected to close during the third
quarter of 1997. If the Partnership's property is not sold and the first
mortgage is not refinanced or modified, the Partnership could lose this property
through foreclosure. Also included in the Partnership's notes payable is a
$1,300,000 ground lease obligation. The ground lease is accounted for as a loan
and calls for payments equal to 12 percent interest on the principal until April
1, 1998, when the lease terminates. The ground lease provides an option to
purchase the land at a purchase price of $1,300,000. Future cash distributions
will depend on the levels of net cash generated from operations, a property
sale, the resolution of the Kaufman litigation, as well as the availability of
cash reserves. No cash distributions were made during the six month periods
ended June 30, 1997 and 1996. The Partnership's cash has been adversely affected
by the lawsuit brought by former promissory note holders of the Partnership
against, among others, the Partnership's general partner, MRC-80 (see discussion
of Kaufman et al. v. Northern Trust Bank of California, N.A. et al. contained in
"Part II - Other Information, Item 1. Legal Proceedings").
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Dorothy M. Kaufman and Deanne R. Erickson, Trustees of the Kaufman Family 1981
Trust, dated October 21, 1981, on behalf of themselves and all others similarly
situated v. Northern Trust Bank of California, N.A.; Montgomery Realty Company-
80, a California limited partnership; Fox Realty Investors, a California general
partner, et. al., Superior Court of California, County of Santa Clara (Case No.
CV 51777).
The plaintiff in this action is a former holder of the Partnership's 10 percent
non-recourse Promissory Notes due June 30, 1994, (the "Notes") who tendered its
Notes to Wheatley Ventures Inc. ("Wheatley") pursuant to Wheatley's tender offer
for the Notes in August 1993. The plaintiff purports to represent itself and
all other tendering noteholders. The complaint was filed in August 1995 and
alleges, among other things, that MRC-80 and FRI breached their fiduciary duty
to the tendering noteholders and interfered with their prospective economic
advantage if they continued to hold the Notes.
In February and March 1997, the Partnership and NPI Equity were named as cross-
defendants in this action on cross-complaints filed by several defendants. The
indenture trustee, Northern Trust Bank of California, NA, sued both the
Partnership and NPI Equity on the theories of express contractual indemnity,
implied indemnity, fraud and negligent misrepresentation. Similarly, defendant
Wheatley asserted a cross-complaint against the Partnership alleging implied
indemnity and declaratory relief. Although the former owners of FRI who are
also defendants in the action (the "Fox Defendants") have asserted demands for
express indemnity against the Partnership, they have not, as yet, filed a cross-
complaint.
The Partnership moved to dismiss each of these cross-complaints on various
grounds. The cross-complaint of the Indenture Trustee was dismissed in part with
leave to replead, which the Indenture Trustee has now done. The cross-complaint
of Wheatley withstood the motion to dismiss. The Partnership has now answered
both of these cross-complaints.
This litigation commenced in August 1995, and substantial discovery was
conducted prior to and subsequent to service of the cross-complaints on the
Partnership. The Court has scheduled a trial date in November 1997.
Substantial additional discovery, particularly with respect to trial experts,
remains to be completed.
Given the potential extraordinary expense in defending this case as well as the
potential exposure over and above the costs of defense, the Partnership has
initiated and successfully facilitated a settlement in principle to resolve the
case in its entirety, including all claims which have been asserted in the
complaint, the various cross-complaints, and all claims for indemnity. Under
the terms of the settlement in principle, the Indenture Trustee, Wheatley, and
the Fox Defendants will collectively contribute $1.6 million to the settlement
of the actions and the Partnership will contribute $1,575,000 to the settlement
of the actions. This settlement is subject to the negotiation of definitive
settlement agreements and is contingent upon the closing of the sale of
Creekside Business Park as noted in "Part I - Item 2. Management's Discussion
and Analysis or Plan of Operation". There can be no assurance that a definitive
settlement agreement will be executed or that Creekside Business Park will be
sold. The Partnership believes that this settlement will limit the
Partnership's exposure both for costs of defense and on liability, and
will allow it to make a substantial cash distribution to
the limited partners subsequent to the sale.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit 27, Financial Data Schedule, is filed as an exhibit to this
report.
b) Reports on Form 8-K: None filed during the quarter ended June 30,
1997.
SIGNATURES
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.
PREFERRED PROPERTIES FUND 80
By: MONTGOMERY REALTY COMPANY - 80,
Its General Partner
By: FOX REALTY INVESTORS,
Managing General Partner of the
General Partner
By: NPI EQUITY INVESTMENTS II, INC.,
Its Managing General Partner
By: /s/William H. Jarrard, Jr.
William H. Jarrard, Jr.
President and Director
By: /s/Ronald Uretta
Ronald Uretta
Vice President and Treasurer
Date: August 13, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Preferred
Properties Fund 80 1997 Second Quarter 10-QSB and is qualified in its entirety
by reference to such 10-QSB filing.
</LEGEND>
<CIK> 0000312903
<NAME> PREFERRED PROPERTIES FUND 80
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 156
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0<F1>
<PP&E> 5,345
<DEPRECIATION> (1,937)
<TOTAL-ASSETS> 3,787
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 5,319
0
0
<COMMON> 0
<OTHER-SE> (2,227)
<TOTAL-LIABILITY-AND-EQUITY> 3,787
<SALES> 0
<TOTAL-REVENUES> 456
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 666
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 294
<INCOME-PRETAX> (210)
<INCOME-TAX> 0
<INCOME-CONTINUING> (210)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (210)
<EPS-PRIMARY> (9.95)<F2>
<EPS-DILUTED> 0
<FN>
<F1>Registrant has an unclassified balance sheet.
<F2>Multiplier is 1.
</FN>
</TABLE>
