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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
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Page 1 of 16
<PAGE>
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,
1997 1996
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
See notes to consolidated financial statements (unaudited).
Page 2 of 16
<PAGE>
<TABLE>
METRIC INCOME TRUST SERIES, INC.,
a California corporation
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
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
========== ==========
</TABLE>
See notes to consolidated financial statements (unaudited).
Page 3 of 16
<PAGE>
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
<PAGE>
<TABLE>
METRIC INCOME TRUST SERIES, INC.,
a California corporation
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1997 and 1996
<CAPTION>
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
------ ------ ------- ------------- ---------------- -----
<S> <C> <C> <C> <C> <C>
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
=========== ========= =========== ============ ======== ===========
</TABLE>
See notes to consolidated financial statements (unaudited).
Page 5 of 16
<PAGE>
<TABLE>
METRIC INCOME TRUST SERIES, INC.,
a California corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1997 1996
---- ----
<S> <C> <C>
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
=========== ===========
</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.
Sale of mortgage-backed securities - see Note 8
See notes to consolidated financial statements (unaudited).
Page 6 of 16
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<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 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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
$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
<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/ William A. Finelli
-------------------------
William A. Finelli
Director, Vice President,
Chief Financial Officer,
and Treasurer
Date: November 12, 1997
-------------------------
Page 16 of 16
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,681,000
<SECURITIES> 0
<RECEIVABLES> 2,716,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 19,420,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,966,000
<CURRENT-LIABILITIES> 0
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0
0
<COMMON> 6,000
<OTHER-SE> 19,841,000
<TOTAL-LIABILITY-AND-EQUITY> 28,966,000
<SALES> 0
<TOTAL-REVENUES> 3,191,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 463,000
<LOSS-PROVISION> 0
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<INCOME-PRETAX> 953,000
<INCOME-TAX> 0
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<DISCONTINUED> 105,000
<EXTRAORDINARY> 0
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<NET-INCOME> 1,058,000
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