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, 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 (I.R.S. Employer
of 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 September 30, 1996: 6,321,641
Page 1 of 17
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
<TABLE>
METRIC INCOME TRUST SERIES, INC.,
a California Corporation
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<CAPTION>
September 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
ASSETS
Cash ........................................................... $ 1,040,000 $ 976,000
Accounts and Interest Receivable ............................... 591,000 412,000
Investment in Mortgage-Backed Securities - Net ................. 7,357,000 8,575,000
Rental Properties .............................................. 14,798,000 30,889,000
Accumulated Depreciation ....................................... (1,223,000) (2,784,000)
------------ ------------
Properties and Improvements - Net ......................... 13,575,000 28,105,000
Real Estate Held for Sale ...................................... 13,162,000 4,135,000
Prepaid and Other Assets ....................................... 109,000 8,000
------------ ------------
Total Assets .............................................. $ 35,834,000 $ 42,211,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Dividends Payable .............................................. $ 1,146,000 $ 1,264,000
Payable to Sponsor and Affiliates .............................. 9,000 22,000
Other Accounts Payable and Accrued Liabilities ................. 184,000 308,000
------------ ------------
Total Liabilities ......................................... 1,339,000 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 .................. (20,802,000) (14,947,000)
Unrealized Holding Gain on Investment
in Mortgage-Backed Securities - Net ....................... 91,000 358,000
------------ ------------
Total Shareholders' Equity ................................ 34,495,000 40,617,000
------------ ------------
Total Liabilities and Shareholders' Equity ................ $ 35,834,000 $ 42,211,000
============ ============
</TABLE>
See notes to consolidated financial statements (unaudited).
Page 2 of 17
<PAGE>
METRIC INCOME TRUST SERIES, INC.,
a California Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Nine Months Ended
September 30,
-------------------------
1996 1995
---------- ----------
Revenues:
Lease income ..................................... $3,128,000 $3,010,000
Interest on mortgage-backed securities ........... 465,000 534,000
Interest and other income ........................ 120,000 124,000
Gain on sale of mortgage-backed securities - Net . -- 16,000
---------- ----------
Total Revenues ................................ 3,713,000 3,684,000
---------- ----------
Expenses:
Depreciation ..................................... 334,000 517,000
General and administrative ....................... 524,000 540,000
---------- ----------
Total Expenses ................................ 858,000 1,057,000
---------- ----------
Income Before Gain on Sale of Properties ......... 2,855,000 2,627,000
Gain on Sale of Properties - Net ................. 528,000 127,000
---------- ----------
Net Income ....................................... $3,383,000 $2,754,000
========== ==========
Net Income per Share:
Income before gain on sale of properties ......... $ .45 $ .42
Gain on sale of properties - Net ................. .08 .02
---------- ----------
Net Income per Share .......................... $ .53 $ .44
========== ==========
Dividends per Share .............................. $ 1.46 $ 1.06
========== ==========
See notes to consolidated financial statements (unaudited).
Page 3 of 17
<PAGE>
METRIC INCOME TRUST SERIES, INC.,
a California Corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
For the Three Months Ended
September 30,
------------------------------
1996 1995
----------- -----------
Revenues:
Lease income .............................. $ 886,000 $ 994,000
Interest on mortgage-backed securities .... 147,000 175,000
Interest and other income ................. 62,000 22,000
----------- -----------
Total Revenues ......................... 1,095,000 1,191,000
----------- -----------
Expenses:
Depreciation .............................. 64,000 168,000
General and administrative ................ 167,000 165,000
----------- -----------
Total Expenses ......................... 231,000 333,000
----------- -----------
Income Before Loss on Sale of Property .... 864,000 858,000
Loss on Sale of Property .................. (46,000) --
----------- -----------
Net Income ................................ $ 818,000 $ 858,000
=========== ===========
Net Income per Share:
Income before loss on sale of property .... $ .13 $ .14
Loss on sale of property .................. (.01) --
----------- -----------
Net Income per Share ................... $ .12 $ .14
=========== ===========
Dividends per Share ....................... $ 1.06 $ .20
=========== ===========
See notes to consolidated financial statements (unaudited).
Page 4 of 17
<PAGE>
<TABLE>
METRIC INCOME TRUST SERIES, INC.,
a California Corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1996 and 1995
<CAPTION>
Unrealized
Holding
Gain/(Loss)
Additional Accumulated on Investment in
Common Stock Paid-in Dividends in Excess Mortgage-Backed
Shares Amount Capital of Net Income Securities - Net Total
--------- ------ ----------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
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 Gain on Sale of
Properties.................. 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
========= ====== =========== ============= ========== ===========
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............ 558,000 558,000
Income Before Gain on Sale of
Property.................... 2,627,000 2,627,000
Gain on Sale of Property......... 127,000 127,000
Dividends Declared............... (6,701,000) (6,701,000)
--------- ------ ----------- ------------- --------- ------------
Balance, September 30, 1995...... 6,321,641 $6,000 $55,200,000 $(14,859,000) $ 239,000 $40,586,000
========= ====== =========== ============= ========= ============
</TABLE>
See notes to consolidated financial statements (unaudited).
Page 5 of 17
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<TABLE>
METRIC INCOME TRUST SERIES, INC.,
a California Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
For the Nine Months Ended
September 30,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Operating Activities
Net income ...................................................................... $ 3,383,000 $ 2,754,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ......................................... 329,000 509,000
Gain on sale of mortgage-backed securities - Net ...................... -- (16,000)
Gain on sale of properties - Net ...................................... (528,000) (127,000)
Changes in operating assets and liabilities:
Accounts and interest receivable .............................. (179,000) (5,000)
Prepaid and other assets ...................................... (101,000) 14,000
Payable to sponsor and affiliates ............................. (13,000) 3,000
Other accounts payable and accrued liabilities ................ (124,000) 18,000
----------- -----------
Net cash provided by operating activities ....................................... 2,767,000 3,150,000
----------- -----------
Investing Activities
Rental properties acquisitions and additions .................................... -- (58,000)
Purchase of cash investments .................................................... -- (2,855,000)
Proceeds from 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 ....................... 956,000 401,000
Proceeds from sale of properties ................................................ 5,979,000 3,050,000
Cash used in sale of properties ................................................. (282,000) (125,000)
----------- -----------
Net cash provided by investing activities ....................................... 6,653,000 3,270,000
----------- -----------
Financing Activities
Dividends paid to shareholders .................................................. (9,356,000) (6,780,000)
----------- -----------
Cash used by financing activities ............................................... (9,356,000) (6.780,000)
----------- -----------
Increase (Decrease) in Cash and Cash Equivalents ................................ 64,000 (360,000)
Cash and cash equivalents at beginning of period ................................ 976,000 1,339,000
----------- -----------
Cash and Cash Equivalents at End of Period ...................................... $ 1,040,000 $ 979,000
=========== ===========
</TABLE>
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
<PAGE>
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. Amounts
earned by the Advisor and its affiliates for the nine months ended
September 30, 1996 and 1995 were as follows:
1996 1995
---- ----
Reimbursement of administrative expenses $150,000 $120,000
Securities management fee 29,000 33,000
Advisory fee 178,000 188,000
-------- --------
Total $357,000 $341,000
======== ========
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 9.3% 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
<PAGE>
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 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. In October 1996, the Fund
received approximately $19,000 from Phar-Mor for post-petition real
estate taxes for the period through May 15, 1993. Also in October, the
Fund agreed to settle its remaining outstanding claim. It is
anticipated that the Fund will receive shares of stock with an
estimated value of $8,000 to $10,000.
The former Phar-Mor Store was subdivided in 1994 and 24,709 square
feet of the approximately 56,000 square-foot 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 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 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.
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 $168,000 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
Page 8 of 17
<PAGE>
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.
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. In accordance with the
Fund's accounting policies, the properties were classified as real
estate held for sale at September 30, 1996. The lease income from the
properties for the nine months ended September 30, 1996 was $1,326,000
(including deferred lease income recognized in the first half of 1996
of $126,000). The lease income from the properties for the nine months
ended September 30, 1995 was $1,177,000. Depreciation was $126,000 and
$188,000 for the first half of 1996 and the nine months ended
September 30, 1995, respectively. No depreciation was provided for the
quarter ended September 30, 1996.
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 nine months ended September 30, 1995 was $284,000
and $383,000, respectively. Depreciation was $101,000 for the nine
months ended September 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 were issued by the Fund and no
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 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.
Page 9 of 17
<PAGE>
Mortgage-backed securities at September 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 $5,301,000 $104,000 $ 133,000 $5,272,000
FNMA 1,089,000 63,000 -- 1,152,000
FHLMC 876,000 57,000 -- 933,000
---------- -------- ---------- ----------
$7,266,000 $224,000 $ 133,000 $7,357,000
========== ======== ========== ==========
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
========== ======== ========== ==========
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 nine months ended September 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.
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 17
<PAGE>
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 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, if applicable.
The Pearle Express Store in Orland Park, Illinois was sold in July 1996.
See Note 5 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
operated 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 or loss on sale of properties increased $228,000 and $6,000,
respectively, in the first three quarters and third quarter of 1996 compared to
the same periods in 1995. Lease income increased in the first three quarters of
1996 compared to the same period in 1995 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 $128,000, respectively. The increase was partially
offset by the reduced lease income as a result of the sales of the Pearle
Express store located in Orland Park, Illinois in July 1996, Sam's Club located
in Menomonee Falls, Wisconsin in June 1996 and the former Phar-Mor Store located
in Franklin Township, Ohio in March 1995. Lease income decreased in the third
quarter of 1996 compared to the same period in 1995 due to the sales of the
Pearle Express Store in Orland Park, Illinois and Sam's Club as discussed above.
The decrease was partially offset by an increase in lease income from the Wickes
Furniture Store as a result of recording deferred lease income of $43,000 in the
third quarter of 1996.
Page 11 of 17
<PAGE>
Interest on the Fund's mortgage-backed securities portfolio declined 13% and
16%, respectively, in the first three quarters and third 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 three quarters of
1995. Other interest income decreased in the first three quarters of 1996 and
increased in the third quarter of 1996 compared to the same periods in 1995,
primarily due to the timing of interest income earned on proceeds from sale of
the former Phar-Mor building in March 1995 prior to the distribution in July
1995, compared 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.
General and administrative expenses decreased $16,000 and increased $2,000,
respectively, in the first three quarters and third quarter of 1996 compared to
the same periods in 1995. The decrease is primarily due to a decrease in
advisory fees as a result of the sales of the Pearle Express Store and Sam's
Club as discussed above, reduced legal expenses incurred relating to the
Phar-Mor bankruptcy proceedings, and a decrease in investor reporting costs. The
decrease was partially offset by higher costs reimbursed to the Fund's Advisor.
The increase in general and administrative expenses in the third quarter of 1996
compared to the same period in 1995 was primarily due to higher costs reimbursed
to the Fund's Advisor and an increase in investor reporting costs, which
increase was partially offset by lower advisory fees and legal expenses.
Depreciation expense decreased $183,000 and $104,000, respectively, in the first
three quarters and third quarter of 1996, in comparison to the same periods in
1995 due to depreciation not being provided for Sam's Club for the first three
quarters of 1996 and NCS for the third quarter of 1996 (see Note 6 to the
consolidated financial statements) and the sales of the Pearle Express Store in
July 1996 and 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. Diamond
Shamrock, Inc. ("DSI") purchased the outstanding stock of NCS effective December
15, 1995 and NCS became a wholly-owned subsidiary of DSI. In late September 1996
it was announced that DSI would merge with Ultramar Corporation, a
Connecticut-based refiner and marketer of petroleum products sold primarily in
the Northeastern US and Eastern Canada. The new company will be called Ultramar
Diamond Shamrock Corporation ("UDSC") and will be the nation's third largest
independent oil refining and marketing company, with revenues of over $8
billion. The Fund's Advisor is monitoring the status of the merger activity but
is unable to determine at this time what effect, if any, it will have on the
properties owned by the Fund. Tosco Corporation purchased Circle K Corporation
in May 1996. Tosco currently sells its petroleum products through the
convenience store outlets and will continue to operate Circle K Stores under
their current name. The acquisition by Tosco of Circle K does not appear to have
had 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 5 to the consolidated financial statements). The Wickes Furniture Store was
marketed but subsequently withdrawn from the market due to weak retail market
conditions and
Page 12 of 17
<PAGE>
lease rates in Southern California. The property will be held until market
conditions improve. The Fund's Advisor was unable to obtain an acceptable
purchase offer for the Pearle Express store in Morrow, Georgia; therefore, it
has been temporarily withdrawn from the market while the Advisor works to extend
the lease in an effort to improve its marketability.
On August 29, 1996 in a special meeting, the Advisor recommended, and the Board
of Directors approved, a sales strategy for the Fund's 16 convenience stores.
The Board also approved two independent brokers, who are currently marketing all
of the properties for sale. In late September, the Fund executed a purchase and
sale agreement with a buyer which is not affiliated with the Fund or the Advisor
for the sale of the Circle K store in Rancho Cucamonga, California. If the sale
closes as scheduled, it is anticipated that the proceeds would be distributed
with the regular quarterly dividend in January 1997.
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
August 15, 1996 $ 6.52 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
Page 13 of 17
<PAGE>
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 established a $6.52 per share purchase price for shares which were
purchased by the DRP with dividends 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.
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 (together the "Plan"). 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 was the final dividend for which the
Plan was effective.
It is the intention of the Fund's Advisor to continue to provide, on a quarterly
basis, an estimated net asset value per share for the shares of MITS. Based on
property appraisals as of December 31, 1995, and the value of the Fund's
mortgage-backed securities portfolio as of September 30, 1996, as well as the
carrying value of its other assets and liabilities, the estimated net asset
value per share value as of September 30, 1996 has been established as $5.57.
First Three Quarters 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.
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 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.
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 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,
Page 14 of 17
<PAGE>
1995. In July 1996 the Fund sold the 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.
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 was paid on August 30, 1996
to shareholders of record as of July 31, 1996.
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 had not been willing to renegotiate, and since other scenarios,
such as re-tenanting, did not appear to be economically justified at that time,
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 the short term of the existing lease, no other
viable offers were received and the property was removed from the market while
other strategies are explored.
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 a price
acceptable to the Fund. The property was subsequently 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.
Phar-Mor recently paid $19,321 to satisfy a claim for post-petition real estate
taxes for the period through May 15, 1993. Further, in October, the Fund agreed
to settle its remaining outstanding claim. The Fund will receive shares of stock
with an estimated value of $8,000 to $10,000. 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 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 on July 17, 1995.
In the first three quarters of 1996 the Fund experienced a higher rate of
prepayment on its mortgage-backed securities portfolio than for the same period
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 $267,000 on its mortgage-backed securities during
the first three quarters 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
<PAGE>
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 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, 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, which claim was paid in October
1996. 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 other than the Form
8-K Reports filed on July 9, 1996, and on July 25, 1996,
reporting the disposition of the Sam's Club property and the
Pearle Express-Orland Park location, respectively. On August 23,
1996, the Form 8-K filed July 9, 1996 was amended to include
additional information concerning the disposition of the Sam's
Club property. On October 10, 1996, subsequent to the close of
the quarter, the Report on Form 8-K filed July 25, 1996 was
amended to include additional information concerning the
disposition of the Pearle Express-Orland Park location.
Page 16 of 17
<PAGE>
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: November 11, 1996
----------------------------
Page 17 of 17
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-30-1996
<CASH> 1,040,000
<SECURITIES> 7,357,000
<RECEIVABLES> 591,000
<ALLOWANCES> 0
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<CURRENT-ASSETS> 0
<PP&E> 27,960,000
<DEPRECIATION> 1,223,000
<TOTAL-ASSETS> 35,834,000
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0
0
<COMMON> 6,000
<OTHER-SE> 34,489,000
<TOTAL-LIABILITY-AND-EQUITY> 35,834,000
<SALES> 0
<TOTAL-REVENUES> 3,713,000
<CGS> 0
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<OTHER-EXPENSES> 524,000
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<DISCONTINUED> 528,000
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