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 June 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 1-10902
-------
PARTNERS PREFERRED YIELD, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
California 95-4325987
- -------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
701 Western Avenue
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
June 30, 1996:
3,086,428 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 June 30, 1996
and December 31, 1995 2
Condensed Statements of Income for the three
and six months ended June 30, 1996 and 1995 3
Condensed Statement of Shareholders' Equity for the
six months ended June 30, 1996 4
Condensed Statements of Cash Flows for the
six months ended June 30, 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>
<TABLE>
PARTNERS PREFERRED YIELD, INC.
CONDENSED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1996 1995
------------- --------------
(Unaudited)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents $ 1,090,000 $ 890,000
Rent and other receivables 81,000 50,000
Real estate facilities at cost:
Buildings and equipment 45,425,000 45,138,000
Land 14,361,000 14,361,000
------------- --------------
59,786,000 59,499,000
Less accumulated depreciation (15,098,000) (14,097,000)
------------- --------------
44,688,000 45,402,000
------------- --------------
Other assets 212,000 464,000
------------- --------------
Total assets $46,071,000 $46,806,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Accounts payable $ 649,000 $ 634,000
Dividends payable 947,000 1,508,000
Advance payments from renters 380,000 328,000
Note payable 1,000,000 -
Shareholders' equity:
Series A common, $.01 par value,
4,456,328 shares authorized,
3,086,428 shares issued and
outstanding (3,170,528 shares
issued and outstanding in 1995) 31,000 32,000
Convertible Series B common, $.01 par
value, 420,875 shares authorized,
issued and outstanding 4,000 4,000
Convertible Series C common, $.01 par
value, 247,574 shares authorized,
issued and outstanding 2,000 2,000
Series D common, $.01 par value,
163,036 shares authorized, issued
and outstanding 2,000 2,000
Paid-in-capital 60,678,000 61,997,000
Cumulative income 21,652,000 19,679,000
Cumulative distributions (39,274,000) (37,380,000)
------------- --------------
Total shareholders' equity 43,095,000 44,336,000
------------- --------------
Total liabilities and shareholders' equity $ 46,071,000 $ 46,806,000
============ ==============
</TABLE>
See accompanying notes.
2
<PAGE>
<TABLE>
PARTNERS PREFERRED YIELD, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- ----------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
REVENUES:
<S> <C> <C> <C> <C>
Rental income $2,510,000 $2,409,000 $4,898,000 $4,731,000
Interest income 3,000 7,000 8,000 18,000
------------- ------------- ------------- -------------
2,513,000 2,416,000 4,906,000 4,749,000
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Cost of operations 734,000 656,000 1,491,000 1,308,000
Management fees
paid to affiliate 131,000 145,000 262,000 284,000
Depreciation 504,000 484,000 1,001,000 967,000
Administrative 62,000 68,000 138,000 147,000
Interest expense 22,000 - 41,000 -
------------- ------------- ------------- -------------
1,453,000 1,353,000 2,933,000 2,706,000
------------- ------------- ------------- -------------
NET INCOME $1,060,000 $1,063,000 $1,973,000 $2,043,000
============= ============= ============= =============
Earnings per share:
Primary - Series A $0.30 $0.29 $0.56 $0.55
============= ============= ============= =============
Fully diluted - Series A $0.28 $0.27 $0.52 $0.52
============= ============= ============= =============
Dividends declared per share:
Series A $0.27 $0.27 $0.54 $0.54
============= ============= ============= =============
Series B $0.27 $0.27 $0.54 $0.54
============= ============= ============= =============
Weighted average common shares outstanding:
Primary - Series A 3,086,428 3,238,661 3,102,278 3,263,428
============= ============= ============= =============
Fully diluted - Series A 3,754,877 3,907,110 3,770,727 3,931,877
============= ============= ============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
<TABLE>
Partners Preferred Yield, Inc.
Condensed Statement of Shareholders' Equity
(Unaudited)
<CAPTION>
Convertible Convertible
Series A Series B Series C Series D Paid-in
Shares Amount Shares Amount Shares Amount Shares Amount Capital
------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 3,170,528 $32,000 420,875 $4,000 247,574 $2,000 163,036 $2,000 $61,997,000
Net income - - - - - - - - -
Repurchase of shares (84,100) (1,000) - - - - - - (1,319,000)
Cash distributions declared:
$.54 per share - Series A - - - - - - - - -
$.54 per share - Series B - - - - - - - - -
--------- ------- ------- ------ ------- ------ ------- ------ -----------
Balances at June 30, 1996 3,086,428 $31,000 420,875 $4,000 247,574 $2,000 163,036 $2,000 $60,678,000
========= ======= ======= ====== ======= ====== ======= ====== ===========
</TABLE>
Partners Preferred Yield, Inc.
Condensed Statement of Shareholders' Equity
(Unaudited)
Cumulative Total
Net Cumulative Shareholders'
Income Distributions Equity
------ ------------- ------
Balances at December 31, 1995 $19,679,000 ($37,380,000) $44,336,000
Net income 1,973,000 - 1,973,000
Repurchase of shares - - (1,320,000)
Cash distributions declared:
$.54 per share - Series A - (1,666,000) (1,666,000)
$.54 per share - Series B - (228,000) (228,000)
------ ------------- -----------
Balances at June 30, 1996 $21,652,000 ($39,274,000) $43,095,000
=========== ============= ===========
See accompanying notes.
4
<PAGE>
<TABLE>
PARTNERS PREFERRED YIELD, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1996 1995
-------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income $1,973,000 $2,043,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation 1,001,000 967,000
Increase in rent and other receivables (31,000) (1,000)
Increase in other assets (10,000) (1,000)
Amortization of prepaid management fees 262,000 -
Increase in accounts payable 15,000 17,000
Increase in advance payments from renters 52,000 19,000
-------------- --------------
Total adjustments 1,289,000 1,001,000
-------------- --------------
Net cash provided by operating activities 3,262,000 3,044,000
-------------- --------------
Cash flows from investing activities:
Additions to real estate facilities (287,000) (27,000)
-------------- --------------
Net cash used in investing activities (287,000) (27,000)
-------------- --------------
Cash flows from financing activities:
Distributions paid to shareholders (2,455,000) (2,678,000)
Advances from affiliate - 55,000
Repayment of advances from affiliate - (55,000)
Proceeds from note payable to Bank 1,000,000 -
Purchase of Company Series A common stock (1,320,000) (978,000)
-------------- --------------
Net cash used in financing activities (2,775,000) (3,656,000)
-------------- --------------
Net increase (decrease) in cash
and cash equivalents 200,000 (639,000)
Cash and cash equivalents at
the beginning of the period 890,000 1,927,000
-------------- --------------
Cash and cash equivalents at
the end of the period $1,090,000 $1,288,000
============== ==============
</TABLE>
See accompanying notes.
5
<PAGE>
PARTNERS PREFERRED YIELD, 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
June 30, 1996 and December 31, 1995, the results of its operations for the
three and six months ended June 30, 1996 and 1995 and its cash flows for
the six months then ended.
3. The results of operations for the three and six months ended June 30, 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 $351,000. The Company expensed $262,000 of the 1996 prepaid
management fees for the six months ended June 30, 1996. The balance of
prepaid management fees, $89,000, is included in other assets in the
Balance Sheet at June 30, 1996.
5 In December 1995, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,500,000 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 plus .25% (8.50% at June 30, 1996) or the bank's LIBOR
rate plus 2.25% (7.80% at June 30, 1996). Interest is payable monthly. On
December 31, 1999, all unpaid principal and accrued interest is due and
payable. During the first quarter of 1996, the Company borrowed $1,000,000
on its line of credit facility. During the second quarter of 1996, the
Company borrowed and repaid an additional $450,000 on its line of credit
facility. At June 30, 1996, the outstanding balance on the credit facility
was $1,000,000. The Company is subject to certain covenants including cash
flow coverages and dividend restrictions. As of June 30, 1996, the Company
was in compliance with the covenants of the credit facility.
6
<PAGE>
PARTNERS PREFERRED YIELD, 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 six months ended June 30, 1996 and 1995
was $1,973,000 and $2,043,000, respectively, representing a decrease of $70,000
or 3%. This decrease is primarily due to an increase in interest expense
combined with a decrease in property net operating income (rental income less
cost of operations, management fees paid to affiliate and depreciation expense).
Net income for the three months ended June 30, 1996 and 1995 was $1,060,000 and
$1,063,000, respectively, representing a decrease of $3,000. This decrease is
primarily due to an increase in interest expense partially offset by an increase
in property net operating income.
Rental income for the six months ended June 30, 1996 and 1995 was
$4,898,000 and $4,731,000, respectively, representing an increase of $167,000 or
4%. Rental income for the three months ended June 30, 1996 and 1995 was
$2,510,000 and $2,409,000, respectively, representing an increase of $101,000 or
4%. These increases are primarily due to increased rental rates at a majority of
the Company's properties.
The Company's mini-warehouse operations had weighted average occupancy
levels of 89% for both the six month periods ended June 30, 1996 and 1995.
Cost of operations (including management fees paid to affiliate and
depreciation expense) for the six months ended June 30, 1996 and 1995 was
$2,754,000 and $2,559,000, respectively, representing an increase of $195,000 or
8%. Cost of operations for the three months ended June 30, 1996 and 1995 was
$1,369,000 and $1,285,000, respectively, representing an increase of $84,000 or
7%. These increases are primarily attributable to increases in property tax
expense, advertising and repairs and maintenance costs. Property taxes increased
primarily due to an increase in property tax rates at the Company's Colorado and
Illinois properties. Repairs and maintenance costs increased mainly due to an
increase in snow removal costs associated with higher than normal snow levels
experienced at the Company's properties located in the eastern states.
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 six
month period ended June 30, 1996, the Company expensed $262,000 of prepaid
management fees. The amount is shown as management fees paid to affiliate in the
condensed statements of income. As a result of the prepayment, the Company saved
approximately $32,000 in management fees, based on the management fees that
would have been payable on rental income generated in the six months ended June
30, 1996 compared to the amount prepaid.
During the three and six months ended June 30, 1996, the Company incurred
$22,000 and $41,000, respectively, in interest expense on its line of credit
facility. No such expense was incurred during the same periods in 1995 since the
Company did not have a credit facility.
7
<PAGE>
Liquidity and Capital Resources.
- --------------------------------
Cash flows from operating activities ($3,262,000 in 1996) and cash reserves
were sufficient to meet all current obligations and distributions of the Company
during the six months ended June 30, 1996. Management expects cash flows from
operations will be sufficient to fund capital expenditures and quarterly
distributions.
During the six months ended June 30, 1996, the Company incurred
approximately $225,000 in capital costs related to the expansion of the facility
located in Los Angeles, California.
In December 1995, the Company obtained an unsecured revolving credit
facility with a bank for borrowings up to $2,500,000 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 plus .25% (8.50% at June 30, 1996) or the bank's LIBOR rate plus
2.25% (7.80% at June 30, 1996). Interest is payable monthly. On December 31,
1999, all unpaid principal and accrued interest is due and payable. During the
first quarter of 1996, the Company borrowed $1,000,000 on its line of credit
facility. During the second quarter of 1996, the Company borrowed and repaid an
additional $450,000 on its line of credit facility. At June 30, 1996, the
outstanding balance on the credit facility was $1,000,000. The Company is
subject to certain covenants including cash flow coverages and dividend
restrictions. As of June 30, 1996, the Company was in compliance with the
covenants of the credit facility.
The Company's Board of Directors has authorized the Company to purchase up
to 800,000 shares of Series A common stock. As of June 30, 1996, the Company had
repurchased 701,451 shares of Series A common stock, of which 84,100 were
purchased in the first quarter of 1996. No shares were repurchased in the second
quarter of 1996, however, share repurchases are expected to continue in the
third quarter.
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 $1,517,000.
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.
8
<PAGE>
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 six months ended June 30, 1996 and
1995 was $2,974,000 and $3,010,000, respectively. FFO for the three months ended
June 30, 1996 and 1995 was $1,564,000 and $1,547,000, 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) EXHIBITS: The following exhibit is included herein:
(27) Financial Data Schedule
B) REPORTS ON 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: August 13, 1996
PARTNERS PREFERRED YIELD, INC.
BY: /s/ Ronald L. Havner, Jr.
-------------------------
Ronald L. Havner, Jr.
Senior Vice President and
Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000870825
<NAME> PARTNERS PREFERRED YIELD, INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-1-1996
<PERIOD-END> Jun-30-1996
<EXCHANGE-RATE> 1
<CASH> 1,090,000
<SECURITIES> 0
<RECEIVABLES> 293,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,383,000
<PP&E> 59,786,000
<DEPRECIATION> (15,098,000)
<TOTAL-ASSETS> 46,071,000
<CURRENT-LIABILITIES> 1,976,000
<BONDS> 1,000,000
0
0
<COMMON> 39,000
<OTHER-SE> 43,056,000
<TOTAL-LIABILITY-AND-EQUITY> 46,071,000
<SALES> 0
<TOTAL-REVENUES> 4,906,000
<CGS> 0
<TOTAL-COSTS> 2,754,000
<OTHER-EXPENSES> 138,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 41,000
<INCOME-PRETAX> 1,973,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,973,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,973,000
<EPS-PRIMARY> .56
<EPS-DILUTED> .52
</TABLE>
