UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended March 31, 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 1-10926
PARTNERS PREFERRED YIELD II, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4325984
- - ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Ave.
Glendale, California 91201-2349
- - ---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 244-8080
--------------
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
-- ---
The number of shares outstanding of the Company's classes of common stock as of
March 31, 1996:
3,138,603 shares of $.01 par value Series A shares
420,875 shares of $.01 par value Series B shares
247,574 shares of $.01 par value Series C shares
163,036 shares of $.01 par value Series D shares
------------------------------------------------
<PAGE>
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Condensed Balance Sheets at March 31, 1996
and December 31, 1995 2
Condensed Statements of Income for the three
months ended March 31, 1996 and 1995 3
Condensed Statement of Shareholders' Equity for the
three months ended March 31, 1996 4
Condensed Statements of Cash Flows for the
three months ended March 31, 1996 and 1995 5
Notes to Condensed Financial Statements 6
Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-9
PART II. OTHER INFORMATION 10
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
CONDENSED BALANCE SHEETS
<TABLE>
March 31, December 31,
1996 1995
------------ -------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 959,000 $ 936,000
Rent and other receivables 53,000 64,000
Prepaid expenses 563,000 702,000
Real estate facilities at cost:
Building, land improvements and equipment 46,389,000 46,345,000
Land 15,060,000 15,060,000
------------- ------------
61,449,000 61,405,000
Less accumulated depreciation (13,880,000) (13,373,000)
------------- ------------
47,569,000 48,032,000
------------- ------------
Total assets $ 49,144,000 $49,734,000
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 436,000 $ 548,000
Dividends payable 997,000 1,404,000
Advance payments from renters 421,000 386,000
Notes payable 300,000 -
Shareholders' equity:
Series A common, $.01 par value,
4,983,165 shares authorized,
3,138,603 shares issued and
outstanding (3,172,303 shares
issued and outstanding in 1995) 31,000 32,000
Convertible Series B common,
$.01 par value, 420,875 shares 4,000 4,000
authorized, issued and outstanding
Convertible Series C common,
$.01 par value, 247,574 shares 2,000 2,000
authorized, issued and outstanding
Series D common, $.01 par value
163,036 shares authorized, issued 2,000 2,000
and outstanding
Paid-in-capital 61,447,000 61,965,000
Cumulative income 21,779,000 20,669,000
Cumulative distributions (36,275,000) (35,278,000)
------------ -------------
Total shareholders' equity 46,990,000 47,396,000
------------ ------------
Total liabilities and shareholders' equity $49,144,000 $ 49,734,000
=========== ============
</TABLE>
See accompanying notes.
2
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
Three Months Ended
March 31,
---------------------------------
1996 1995
------------- ---------------
REVENUES:
<S> <C> <C>
Rental income $2,666,000 $2,527,000
Interest income 4,000 4,000
------------- ---------------
2,670,000 2,531,000
------------- ---------------
COSTS AND EXPENSES:
Cost of operations 835,000 797,000
Management fees paid to an affiliate 139,000 152,000
Depreciation 507,000 495,000
Interest expense 7,000 5,000
Administrative 72,000 82,000
-------------- --------------
1,560,000 1,531,000
------------- ------------
NET INCOME $ 1,110,000 $ 1,000,000
============= ===========
Primary earnings per share - Series A $0.32 $0.27
===== =====
Fully diluted earnings per share - Series A $0.29 $0.26
===== =====
Dividends declared per share:
Series A $0.28 $0.28
===== =====
Series B $0.28 $0.28
===== =====
Weighted average Common shares outstanding:
Primary - Series A 3,145,870 3,237,303
========= =========
Fully diluted - Series A 3,814,319 3,905,752
========= =========
See accompanying notes.
3
</TABLE>
<PAGE>
Partners Preferred Yield II, Inc.
Condensed Statement of Shareholders' Equity
(Unaudited)
<TABLE>
Convertible Convertible Convertible
Series A Series B Series C Series D
Shares Amount Shares Amount Shares Amount Shares Amount
--------- ------- ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at 3,172,303 $32,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
December 31, 1995
Net income - - - - - - - -
Repurchase of shares (33,700) (1,000) - - - - - -
Cash distributions
declared:
$.28 per share - Series A - - - - - - - -
$.28 per share - Series B - - - - - - - -
------- ------- ------- ------- -------- -------- ------ -------
Balances at March 31, 1996 3,138,603 $ 31,000 420,875 $4,000 247,574 $2,000 163,036 $2,000
========= ========= ======= ====== ======= ====== ========= =========
</TABLE>
<TABLE>
Cumulative
Paid-in Net Cumulative Shareholders'
Capital Income Distributions Equity
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Balances at $61,965,000 $20,669,000 ($35,278,000) $47,396,000
December 31, 1995
Net income - 1,110,000 - 1,110,000
Repurchase of shares (518,000) - - (519,000)
Cash distributions
declared:
$.28 per share - Series A - - (879,000) (879,000)
$.28 per share - Series B - - (118,000) (118,000)
------- -------- --------- ---------
Balances at March 31, 1996 $61,447,000 $21,779,000 ($36,275,000) $46,990,000
=========== =========== ============= ===========
</TABLE>
See accompanying notes.
4
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Three Months Ended
March 31,
1996 1995
------------------ ----------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,110,000 $ 1,000,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 507,000 495,000
Decrease in rent and other receivables 11,000 12,000
Amortization of prepaid management fees 139,000 -
Increase in prepaid expenses - (2,000)
Decrease in accounts payable (112,000) (45,000)
Increase in advance payments from renters 35,000 16,000
-------------- --------------
Total adjustments 580,000 476,000
------------- -------------
Net cash provided by operating activities 1,690,000 1,476,000
------------ -----------
Cash flows from investing activities:
Additions to real estate facilities (44,000) (104,000)
------------ ------------
Net cash used in investing activities (44,000) (104,000)
------------- -----------
Cash flows from financing activities:
Distributions paid to shareholders (1,404,000) (1,532,000)
Advance from affiliate - 500,000
Payments of advance from affiliate - (500,000)
Proceeds from Note Payable to bank 300,000 -
Purchase of Company Series A common stock (519,000) (79,000)
------------ -------------
Net cash used in financing activities (1,623,000) (1,611,000)
---------- ----------
Net increase (decrease) in cash
and cash equivalents 23,000 (239,000)
Cash and cash equivalents at
the beginning of the period 936,000 905,000
-------------- --------------
Cash and cash equivalents at
the end of the period $ 959,000 $ 666,000
============== =============
</TABLE>
See accompanying notes.
5
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. The accompanying unaudited condensed financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although management believes
that the disclosures contained herein are adequate to make the
information presented not misleading. These unaudited condensed
financial statements should be read in conjunction with the financial
statements and related notes appearing in the Company's Form 10-K for
the year ended December 31, 1995.
2. In the opinion of management, the accompanying unaudited condensed
financial statements reflect all adjustments, consisting of only normal
accruals, necessary to present fairly the Company's financial position
at March 31, 1996 and December 31, 1995, the results of its operations
for the three months ended March 31, 1996 and 1995 and its cash flows
for the three months then ended.
3. The results of operations for the three months ended March 31, 1996 are
not necessarily indicative of the results expected for the full year.
4. In 1995, the Company prepaid eight months of 1996 management fees at a
total cost of $370,000. The Company expensed $139,000 of the 1996 prepaid
management fees for the three months ended March 31, 1996. The balance of
prepaid management fees, $231,000, is included in other assets in the
Balance Sheet at March 31, 1996.
5. In February 1996, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,000,000 for working capital
purposes and to repurchase the Company's stock. Outstanding borrowings
on the credit facility, at the Company's option, bear interest at either
the bank's Prime Rate (8.50% at March 31, 1996) or the bank's Libor Rate
plus 2.25% (7.75% at March 31, 1996). Interest is payable monthly and on
January 31, 1999, all unpaid principal and accrued interest is due and
payable. On March 31, 1996, the outstanding balance on the credit
facility was $300,000.
As of March 31, 1996, the Company was in compliance with the
covenants of the credit facility.
6
<PAGE>
PARTNERS PREFERRED YIELD II, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors occurring during the periods presented in the accompanying
Condensed Financial Statements.
RESULTS OF OPERATIONS.
- - ----------------------
The Company's net income for the three months ended March 31, 1996 was
$1,110,000 compared to $1,000,000 for the three months ended March 31, 1995,
representing an increase of $110,000 or 11%. This increase is primarily a result
of an increase in property net operating income (rental revenue less cost of
operations, management fees paid to an affiliate and depreciation expense).
Rental income for the three months ended March 31, 1996 and 1995 was
$2,666,000 and $2,527,000, respectively, representing an increase of $139,000 or
6%. This increase is due to an overall increase in rental rates and occupancy
levels at the Company's mini-warehouse properties. The Company's six Florida
properties showed an increase of approximately $32,000 in rental revenues
attributable to an increase in rental rates.
The Company's mini-warehouse operations had weighted average occupancy
levels of 89.7% and 89.4% for the three month periods ended March 31, 1996 and
1995, respectively.
Cost of operations (including management fees paid to affiliates and
depreciation expense) increased to $1,481,000 from $1,444,000 for the three
months ended March 31, 1996 and 1995, respectively, representing an increase of
$37,000. This increase is mainly attributable to an increase in property tax
expense. Property taxes increased primarily due to one-time refunds received in
1995 at several of the Company's facilities.
In 1995, the Company prepaid eight months of 1996 management fees on its
mini-warehouse operations (based on the management fees for the comparable
period during the calendar year immediately preceding the prepayment) discounted
at the rate of 14% per year to compensate for early payment. During the three
month period ended March 31, 1996, the Company expensed $139,000 of prepaid
management fees. The amount is shown as management fees paid to affiliate in the
condensed statement of income. As a result of the prepayment, the Company saved
approximately $21,000 in management fees, based on the management fees that
would have been payable on rental income generated in the three months ended
March 31, 1996 compared to the amount prepaid.
Interest expense increased from $5,000 during the three months ended March
31, 1995 to $7,000 during the same period in 1996. This increase is due to
higher average outstanding borrowings in 1996 compared to 1995.
LIQUIDITY AND CAPITAL RESOURCES.
- - --------------------------------
Cash flows from operating activities ($1,690,000 for the three months ended
March 31, 1996) cash reserves and an advance from a credit facility (see below)
were sufficient to meet all current obligations of the Company including a
regular distribution of $.28 per Series A common share ($997,000 in aggregate
for the three months ended March 31, 1996).
7
<PAGE>
The Company's Board of Directors has authorized the Company to purchase up
to 800,000 shares of Series A common stock. The Company has repurchased 649,276
shares of Series A common stock, of which 33,700 shares were purchased in the
first quarter of 1996.
The bylaws of the Company provide that, during 1999, unless shareholders
have previously approved such a proposal, the shareholders will be presented
with a proposal to approve or disapprove (a) the sale or financing of all or
substantially all of the properties and (b) the distribution of the proceeds
from such transaction and, in the case of a sale, the liquidation of the
Company.
In February 1996, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,000,000 for working capital
purposes and to repurchase the Company's stock. Outstanding borrowings on the
credit facility, at the Company's option, bear interest at either the bank's
Prime Rate (8.50% at March 31, 1996) or the bank's Libor Rate plus 2.25% (7.75%
at March 31, 1996). Interest is payable monthly and on January 31, 1999, all
unpaid principal and accrued interest is due and payable. On March 31, 1996, the
outstanding balance on the credit facility was $300,000. As of March 31, 1996,
the Company was in compliance with the covenants of the credit facility.
During the first quarter of 1995, the Company borrowed and repaid $500,000
from an affiliate for working capital purposes. The advance bore interest at the
prime rate plus 1%.
8
<PAGE>
The Company has elected and intends to continue to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. As a REIT, the
Company must meet, among other tests, sources of income, share ownership, and
certain asset tests. The Company is not taxed on that portion of its taxable
income which is distributed to its shareholders provided that at least 95% of
its taxable income is so distributed to its shareholders prior to filing of the
Company's tax return. The primary difference between book income and taxable
income is depreciation expense. In 1995, the Company's federal tax depreciation
was $1,500,000. Supplemental Information.
The Company's funds from operations ("FFO") is defined generally by the
National Association of Real Estate Investment Trusts as net income before loss
on early extinguishment of debt and gain on disposition of real estate, plus
depreciation and amortization. FFO for the three months ended March 31, 1996 and
1995 was $1,617,000 and $1,495,000, respectively. FFO is a supplemental
performance measure for equity Real Estate Investment Trusts used by industry
analysts. FFO does not take into consideration principal payments on debt,
capital improvements, distributions and other obligations of the Company. The
only depreciation or amortization that is added to income to derive FFO is
depreciation and amortization directly related to physical real estate. All
depreciation and amortization reported by the Company relates to physical real
estate and does not include any depreciation or amortization related to
goodwill, deferred financing costs or other intangibles. FFO is not a substitute
for the Company's net cash provided by operating activities or net income
computed in accordance with generally accepted accounting principles, as a
measure of liquidity or operating performance.
9
<PAGE>
PART II. OTHER INFORMATION
ITEMS 1 through 5 are inapplicable.
ITEM 6 Exhibits and Reports on Form 8-K
(a) The following Exhibit is included herein:
(27) Financial Data Schedule
(b) Form 8 - K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 13, 1996
PARTNERS PREFERRED YIELD II, INC.
BY: /s/ Ronald L. Havner, Jr.
--------------------------------
Ronald L. Havner, Jr.
Vice President and
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000870739
<NAME> PARTNERS PREFERRED YIELD II, INC.
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-01-1996
<PERIOD-END> Mar-31-1996
<CASH> 959,000
<SECURITIES> 0
<RECEIVABLES> 616,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,575,000
<PP&E> 61,449,000
<DEPRECIATION> (13,880,000)
<TOTAL-ASSETS> 49,144,000
<CURRENT-LIABILITIES> 1,854,000
<BONDS> 300,000
0
0
<COMMON> 39,000
<OTHER-SE> 46,951,000
<TOTAL-LIABILITY-AND-EQUITY> 49,144,000
<SALES> 0
<TOTAL-REVENUES> 2,670,000
<CGS> 0
<TOTAL-COSTS> 1,481,000
<OTHER-EXPENSES> 72,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,000
<INCOME-PRETAX> 1,110,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,110,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,110,000
<EPS-PRIMARY> .32
<EPS-DILUTED> .29
</TABLE>
