-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MkWMG7CzpQ6PEKbCUsCDRIZzu0xdx81/65scm26wkKLDMdalg4EYftwD/TwRIQUp iMoIUVj8XbxwqG4/3qAuYQ== 0000765195-97-000002.txt : 19970401 0000765195-97-000002.hdr.sgml : 19970401 ACCESSION NUMBER: 0000765195-97-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROPERTY RESOURCES EQUITY TRUST CENTRAL INDEX KEY: 0000765195 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 953959770 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15880 FILM NUMBER: 97569729 BUSINESS ADDRESS: STREET 1: 1800 GATEWAY DR STREET 2: 3RD FLOOR CITY: SAN MATEO STATE: CA ZIP: 94404 BUSINESS PHONE: 4153125824 MAIL ADDRESS: STREET 1: P O BOX 7777 CITY: SAN MATEO STATE: CA ZIP: 94404-7777 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996. Commission File 0-15880 PROPERTY RESOURCES EQUITY TRUST (Exact Name of Registrant as Specified in its Charter) California 94-3959770 - ---------------------------------------------- --------------------------------- (State or other jurisdiction or (I.R.S. Employer incorporation or organization) Identification number P.O. Box 7777, San Mateo, CA 94403-7777 (415) 312-5824 - ---------------------------------------------- --------------------------------- (Address of principal and executive Office) Registrant's telephone number, including Area Code Securities registered pursuant to Section 12(b) of Act: None Securities registered pursuant to Section 12(g) of Act: Title of each class Common Stock Series A - ------------------------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by referenced in Part III of this Form 10-K or any amendment to this Form 10-K. X At March 24, 1997, 1,090,064 shares of the registrant's Series A common stock were held by non-affiliates of the registrant. No market for the shares currently exists and therefore a market value cannot be determined. Indicate the number of shares outstanding of each of the issuer's classes of common stock at December 31, 1996: 1,090,064 shares of Series A common stock and 1,000 shares of Series B common stock. Documents Incorporated by Reference - Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1996, and Proxy Statement for use in connection with its Annual Meeting of Stockholders to be held on June 5, 1997, are incorporated by referenced in Parts I, II, III and IV. PART 1 Item 1. BUSINESS In addition to the information set forth below, the information required by this Item is incorporated by reference from Page 4 of the Property Resources Equity Trust's (the "Company's") 1996 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. The Company is subject to the risks generally associated with the ownership of real property, including the possibility that operating expenses, debt service payments and fixed costs may exceed property revenues; economic conditions may adversely change in California and the national market; the real estate investment climate may change; local market conditions may change adversely due to general or local economic conditions and neighborhood characteristics; interest rates may fluctuate and the availability, costs and terms of mortgage financing may change; unanticipated maintenance and renovations may arise; changes in real estate tax rates and other operating expenses may arise; governmental rules and fiscal policies may change; natural disasters, including earthquakes, floods or tornadoes may result in losses beyond the coverage of the Company's policies; the financial condition of the tenants of properties may deteriorate; and other factors which are beyond the control of the Company may occur. The real estate business is competitive, and the Company is in competition with many other entities engaged in real estate investment activities, some of which have greater assets than the Company. The Company's real estate investments in rental properties are subject to the risk of the Company's inability to attract or retain tenants and a consequent decline in rental income. Furthermore, real estate investments tend to be long-term, and under the real estate investment trust ("REIT") provisions of the Internal Revenue Code, might be subject to minimum holding periods to avoid adverse tax consequences; consequently, the Company will have only minimal ability to vary its property portfolio in response to changing economic, financial and investment conditions. To the extent that the Company's rental income is based on a percentage of the gross receipts of retail tenants, its cash flow is dependent on the retail success achieved by such tenants. The opportunities for sale, and the profitability of any sale, of any particular property by the Company will be subject to the risk of adverse changes in real estate market conditions, which may vary depending upon the size, location and type of each property. Item 1. BUSINESS (Continued) Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances, the presence of such substances, or the failure to properly remediate such substances, when released. As part of the investigation of properties prior to acquisition, the Company typically has obtained inspection reports concerning the condition of the property, including specialized environmental inspection reports concerning the presence of hazardous substances on the property. The Company intends to continue this practice. Such inspection reports, however, do not necessarily reveal all hazardous substances or sources thereof, and substances not considered hazardous when a property is acquired may subsequently be classified as such by amendments to local, state, and federal laws, ordinances, and regulations. If it is ever determined that hazardous substances on or in a Company property must be removed or the release of such substances remediated, the Company could be required to pay all costs of any necessary cleanup work, although under certain circumstances, claims against other responsible parties could be made by the Company. The Company could also experience lost revenues during any such cleanup, or lower lease rates, decreased occupancy or difficulty selling or borrowing against the affected property either prior to or following any such cleanup. The Company is not aware of any hazardous substances on or in its properties and it has not been notified by any governmental authority of any noncompliance, liability or other claim in connection with the environmental condition of any of its properties. The Americans with Disabilities Act ("ADA"), which generally requires that buildings be made accessible to people with disabilities, has separate compliance requirements for "public accommodations" and "commercial facilities". If certain uses by tenants of a building constitute a "public accommodation", the ADA imposes liability for non-compliance on both the tenant and the owner/operator of the building. The Company has conducted inspections of its property to determine whether the exterior and common area of such property are in compliance with the ADA and it believes that its properties are in compliance. If, however, it were ever determined that one or more of the Company's properties were not in compliance, the Company may be subjected to unanticipated expenditures incurred to remove access barriers, or to pay fines or damages related to such non-compliance. Item 1. BUSINESS (Continued) The Company's due diligence review of prospective acquisitions of office, industrial and retail property includes an examination of such property's compliance with the ADA, and the cost of remedial work, if any, believed to be required to meet such requirements. The Company's only business consists of the real estate investment activity described above. Therefore, information about industry segments is not applicable. The business is not seasonal. At December 31, 1996, the Fund did not have any employees. Item 2. PROPERTIES The information required by this Item is incorporated by reference from Page 4 through 7 of the Registrant's 1996 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. Item 3. LEGAL PROCEEDINGS There are no material legal proceedings pending to which the Company is a party or which any of its property is the subject, required to be reported hereunder. From time to time, the Company may be a party to ordinary routine litigation incidental to its business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year . PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS In addition to the information set forth below, the information required by this Item is incorporated by reference from Page 7 of the Company's 1996 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. There are no restrictions on sales or purchases of the Company's Series A common stock other than those that may be imposed by any applicable federal or state securities laws or by the Company's Articles of Incorporation or Bylaws with respect to maintaining the Company's status as a qualified real estate investment trust under applicable tax rules and regulations. The Company is a REIT and elected REIT status commencing with the 1988 tax year pursuant to the provisions of the Internal Revenue Code (the "Code") and applicable state income tax law. Under those provisions, the Company will not be subject to income tax on that portion of its taxable income which is distributed annually to Stockholders if at least 95% of its taxable income (which term excludes capital gains) is distributed and if certain other conditions are met. During such time as the Company qualifies as a REIT, the Company intends to make quarterly cash dividends to the Stockholders aggregating on an annual basis at least 95% of its taxable income. Among other requirements, the Company must, in order to continue its status as a REIT under the Code, not have more than 50% in value of its outstanding shares owned by five or fewer individuals during the last half of a taxable year (the "5/50 Provision"). In order to meet these requirements, the Company has the power to redeem a sufficient number of shares in order to maintain or to bring the ownership of the shares into conformity with these requirements, and to prohibit the transfer of shares to persons whose acquisition would result in a violation of these requirements. Item 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference from Page 3 of the Company's 1996 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference from Pages 8 through 10 of the Registrant's 1996 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference from Pages 11 through 22 of the Registrant's 1996 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Certain information required by Part III is omitted from this report in that the Registrant has been subject to the reporting requirements of Section 13 of the Exchange Act for the preceding 12 months, and will file a definitive Proxy Statement, pursuant to Regulation 14a (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report, and the information included therein is incorporated herein by reference. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND THE ADVISOR The information required by this Item is incorporated by reference to the Registrant's Proxy Statement. Item 11. EXECUTIVE COMPENSATION No direct compensation has been paid by the Fund to directors and officers of the Fund or the Fund's advisor, Property Resources, Inc. (the "Advisor") except that the Independent Directors received approximately $9,000 for attending meetings during the year ended December 31, 1996. The Fund has no annuity, pension or retirement plans or any existing plans or arrangement under which payments have or would in the future be made to any director or officer. The Fund will pay certain fees to and reimburse certain expenses of the Advisor as described in Item 13. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT No person or group of persons is known by the Fund to beneficially own more than 5% of the outstanding common stock. As of December 31, 1996, no directors or officers of the Fund owned any shares of the Fund. The Fund is unaware of any arrangement which may at a subsequent date result in a change in control of the Fund. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Fund has entered into an agreement with the Advisor to administer the day-to-day operations of the Fund. Under the terms of the agreement, which is renewable annually, the Advisor will receive a fee equal to 5% of the total amount distributed to the Stockholders. The fee is not payable in regard to distributions from the sale or refinancing of property. Management advisory fees for 1996 amounted to $21,000. The agreement also provides for the following compensation and payments to the Advisor: Reimbursement of certain costs and expenses incurred on behalf of the Fund of $23,000 in 1996. Acquisition and investment advisory fees to exceed in the aggregate, 13% of offering proceeds for services rendered in connection with the investigation, selection or acquisition of real property. No such fees were paid in 1996. Subordinated sales commissions of 5% of the gross selling price of Fund real property. No commissions were paid in 1996. Subordinated disposition fee of 15% of net proceeds, as defined, from the sale or refinancing of Fund real property. No such fees were paid in 1996. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (Continued) Subordinated commissions and fees are payable to the Advisor provided the stockholders have received cumulative distributions equal to their original equity plus an 8% per annum cumulative return. No such commissions or fees were paid to the Advisor in 1995. An affiliate of the Advisor is entitled to receive fees for property management and other property related services. The affiliate was paid $66,000 in 1996. An affiliate of the Advisor is entitled to receive underwriting commissions on shares sold to stockholders, net of payments made to unaffiliated broker-dealers. No such commissions were paid in 1996. An affiliate of the Advisor is entitled to receive a stockholder services fee for providing services as the Fund's transfer agent and registrar and for providing other related stockholder services. The affiliate was paid $13,000 in 1996. On July 16, 1993, Franklin/Templeton Investor Services, Inc., an affiliate of the Advisor, assumed responsibility as the Fund's transfer agent and registrar for the Fund's Series A common stock. At December 31, 1996, and 1995, cash equivalents included $2,000 invested in Franklin Money Fund and $229,000 and $101,000 invested in Institutional Fiduciary Trust, respectively. Both are investment companies managed by an affiliate of the Advisor. For the year ended December 31, 1996, dividends earned amounted to $8,000. David P. Goss, Richard S. Barone and David N. Popelka who are officers of the Company, are also officers of the Advisor. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The following financial statements are included on the pages indicated of the 1996 Annual Report and incorporated by reference in Part II, Item 8. PAGE OF ANNUAL REPORT Report of Independent Accountants 11 Balance Sheets as of December 1996 and 1995 12 Statements of Operations for the years ended December 31, 1996, 1995 and 1994 13 Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 14 Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 15 Notes to Financial Statements 16-20 2. The supplemental financial statement schedule, Real Estate and Accumulated Depreciation, is incorporated herein by reference from Pages 21 and 22 of the Company's 1996 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13.
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits: (3.1) Articles of Incorporation * (3.2) Bylaws * (10.1) Material Contracts - Advisory Agreement * (10.2) Material Contracts - Property Management Agreement (11.) Statement regarding computation of earnings per share. See the Statement of Operations included in the Financial Statements. (13.) Annual Report to Stockholders for the fiscal year ended December 31, 1996 (to be deemed filed only to the extent required by the instructions to exhibits for report on Form 10-K). *Documents were filed in the Company's Form S-11 Registration Statement, dated July 16, 1985 (Registration No. 2-96589) and are incorporated herein by reference. (b) Reports filed on Form 8-K. No reports on Form 8-K were filed by the Company for the quarter ended December 31, 1996. SIGNATURE Pursuant to the requirements of Section 13 or 15(d) 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. PROPERTY RESOURCES EQUITY TRUST (Registrant) Date: 3/27/97 By: /S/DAVID P. GOSS David P. Goss Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities and on the dates indicated. SIGNATURE TITLE DATE Chief Executive Officer s/David P. Goss 3/27/97 - -------------------------------- --------------- David P. Goss s/David W. Walters Director1 3/27/97 - -------------------------------- --------------- David W. Walters s/James A. Niles Director1 3/27/97 - -------------------------------- --------------- James A. Niles 1 Independent Director PROPERTY RESOURCES EQUITY TRUST 1996 ANNUAL REPORT - -------------------------------------------------------------------------------- PRESIDENT'S MESSAGE - -------------------------------------------------------------------------------- DEAR STOCKHOLDERS I again welcome this opportunity to report to you on the Fund's progress and its future outlook. In 1996, the Fund entered its liquidation phase with the sale of the Agora Office Building. The terms of the sale included a $750,000 note "carryback", which is scheduled to be fully repaid in April of 1998. Soon after we intend to distribute the full sale proceeds of $810,000, or $.74 per share. On March 4, 1997, the Graham Court Business Park was also sold. We intend to distribute these sale proceeds in the June 30, 1997 distribution. The net sale proceeds are approximately $2,093,000, or $1.92 per share. The Fund's only property is now Good Guys Plaza Shopping Center. We expect to commence marketing that property for sale in 1998. If an acceptable sale price can be achieved at that time, the property will be sold and a final liquidating distribution will be made. In the meantime, since the existing loan expired, we have completed a refinance at the property. The new loan has an initial fixed interest rate of 8.8%, matures in twenty-five years and can be assumed by a buyer of the property. Looking at operations in 1996, funds from operations were $611,000 compared with $476,000 in 1995. This 28% increase was primarily due to reduced expenses as a result of the sale of the Agora Office Building and a successful tax appeal at Good Guys Plaza Shopping Center. Despite the sale of the Agora and the loss of rents from that property, revenues actually rose in 1996. This was primarily the result of higher average occupancy and rental rates at both Good Guys Plaza Shopping Center and the Graham Court Business Park. Very truly yours, David P. Goss, President S E L E C T E D F I N A N C I A L I N F O R M A T I O N The following selected financial data for the Fund was derived from the audited financial statements of the Fund and should be read in conjunction with the financial statements and related notes to follow in this report.
- ---------------------------------------- ---------------- --------------- ---------------- --------------- ---------------- (Dollars in 000's except per share amounts) 1996 1995 1994 1993 1992 - ---------------------------------------- ---------------- --------------- ---------------- --------------- ---------------- Total revenue $1,158 $1,138 $1,165 $1,186 $1,184 Interest expense 189 192 192 180 181 Depreciation and amortization expenses 248 245 267 281 302 Operating expenses 209 322 373 392 328 Related party expenses 92 96 103 112 107 General and administrative expenses 57 52 51 81 77 Loss on write-down of rental property - - 226 - 508 Income (loss) before gain on sale of rental property 363 231 (47) 140 (319) Gain on sale of rental property 86 - - - - Net income (loss) 449 231 (47) 140 (319) Total assets 8,374 8,350 8,396 8,799 9,141 Bond payable - - - 4 8 Note payable 2,750 2,750 2,750 2,750 2,750 Per share: Net income (loss) .41 .21 (.04) .13 (.29) Dividends declared .36 .28 .30 .30 .30 Number of shares of Series A common stock outstanding 1,090,064 1,090,067 1,090,067 1,090,067 1,097,067
P R O P E R T Y R E S O U R C E S E Q U I T Y T R U S T PROPERTY RESOURCES EQUITY TRUST (the "Fund") is a corporation formed on February 20, 1985 under the laws of the State of California. The Fund is a real estate investment trust ("REIT"). The Fund's investment program includes providing its stockholders with a professionally managed diversified portfolio of income-producing equity real estate investments in strategic markets, which represent the potential for current cash flow and for capital appreciation. The Fund is a self-liquidating REIT with a finite life. The Fund has entered into an advisory agreement with Property Resources, Inc. (the "Advisor"). Under the terms of the agreement, which is renewable annually, the Advisor manages the day-to-day operations of the Fund subject to overall approval of the Board of Directors. R E A L E S T A T E P O R T F O L I O The Fund acquired Graham Court Business Park in August, 1986, the Agora Office Building in September, 1986, and the Good Guys Plaza in July, 1988. The Fund sold the Agora Office Building in April 1996 and the Graham Court Business Park in March of 1997. The Fund's remaining real estate asset is the Good Guys Plaza. The property is managed by Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, which performs the leasing and management related services for the properties. The Fund currently carries earthquake insurance coverage for Good Guys Plaza. The Fund intends to continue to carry such earthquake insurance to the extent that it is available at economically reasonable prices, although no assurance can be given that such coverage will be available. However, the Fund's earthquake insurance coverage may, from time to time, be subject to substantial deductibles. - ------------------------------------------------------------------------------- GOOD GUYS PLAZA SHOPPING CENTER RETAIL 33,968 SQ. FT. SANTA ROSA, CA - ------------------------------------------------------------------------------- On July 11, 1988, the Fund purchased the Good Guys Plaza Shopping Center ("Good Guys Plaza"), which consists of three free standing buildings located at 1301 Guerneville Road, Santa Rosa, Sonoma County, California. Good Guys Plaza is located just off U.S. Highway 101 on the north side of Santa Rosa. San Francisco lies approximately 52 miles south along Highway 101. Santa Rosa is Sonoma County's county seat and largest city with a population of over 120,000. Completed in 1986, Good Guys Plaza has a total of 153 parking spaces. Construction is concrete block and stucco with aluminum/glass store fronts. Santa Rosa serves as the center of government and commerce for the county. The county is an important wine making region and tourist destination. Many of Santa Rosa's workers commute south to employment centers in the inner San Francisco Bay region. Government employment is the largest employer in the county, with manufacturing a close second. The Hewlett Packard Co., which heads up several high-tech firms with facilities in the area, is the largest manufacturing employer in the county. The unemployment rate in Sonoma County fell to 3.6% in December of 1996 from 5.6% a year earlier. A large regional retail center, Coddington Shopping Center, is adjacent to Good Guys Plaza. The property is subject to a promissory note collateralized by a deed of trust in the amount of $2,750,000. The note is payable in variable, interest-only installments in a current amount of $14,896, based on a certain bond index. Interest is accrued at a rate which is adjusted quarterly and paid at a rate which is adjusted annually until all deferred interest is paid. Any resulting accrued interest bears interest at the then current rate. The interest rate at December 31, 1996, was 6.5%. The note was due in full in December, 1996, but the maturity date was extended ninety days. On March 4, 1997, the Fund refinanced the collateralized loan with a new 8.8% fixed rate, twenty-five year loan. R E A L E S T A T E P O R T F O L I O SIGNIFICANT TENANTS Two tenants provide 10% or more of the Fund's current annual base rent at Good Guys Plaza. The Good Guys!, a consumer electronic retailer, located at Good Guys Plaza, leases 13,887 square feet and makes base rental payments of approximately $262,918, or about 45% of current annual base rent at Good Guys Plaza. This tenant's lease was scheduled to expire in May of 1996. In December of 1995, the Good Guys! exercised their option to extend the term of their lease five years. Their lease now expires in May of 2001. Wherehouse Entertainment, an audio/video retailer at Good Guys Plaza, leases 7,600 square feet and makes base rental payments of approximately $119,000, or about 20% of current annual base rent at Good Guys Plaza. This tenant's lease was scheduled to expire in January of 1996. In July of 1995, Wherehouse Entertainment exercised their option to extend their lease five years. Their lease now expires in January of 2001. However, Wherehouse Entertainment filed for protection under Chapter 11 of the Federal Bankruptcy Code (the "Code") on August 2, 1995. Under the Code, Wherehouse Entertainment could have rejected or confirmed its lease with the Fund. In December of 1996, Wherehouse Entertainment confirmed and the Bankruptcy Court approved the lease, as amended. Both of these tenants' leases provide for an additional five-year option term and for the tenant to reimburse the Fund for an allocated share of property expenses. PORTFOLIO SUMMARY At December 31, 1996, the Fund's two properties contained a total of 20 leases. The following schedule lists the portfolio's (Good Guys Plaza only) lease expiration dates and the related annual base rental income as of December 31, 1996. LEASE EXPIRATIONS % of No. of Total Current Current Leases Sq. Annual Annual Year Expiring Ft. Base Rent Rent - ------- -------------- ------------ ---------------- ---------------- 1997 3 4,243 85,063 15% 1998 1 1,010 17,697 3% 1999 0 0 0 0% 2000 3 3,698 64,652 11% 2001 2 21,467 381,478 65% 2003 1 2,080 36,820 6% - ------- -------------- ------------ ---------------- ---------------- R E A L E S T A T E P O R T F O L I O On December 31, 1996, the Fund's portfolio represented, in the aggregate, 82,328 rentable square feet. For the years ended December 31, 1994, 1995 and 1996, the following table shows the number of lease agreements that the Fund executed, the rentable square feet covered by the agreements, and the amount of tenant improvements and leasing commissions paid by the Fund. The table includes activity at the Agora Office Building and Graham Court during the period owned. LEASING ACTIVITY
- ------------ --------------- ------------ -------------------- ------------------ ------------- No. of Tenant Leasing Leases Sq. Improvements Commissions Year Executed Ft. Paid Paid Total - ------------ --------------- ------------ -------------------- ------------------ ------------- 1994 4 7,486 1,443 3,306 4,749 1995 6 15,783 6,826 36,226 43,052 1996 5 14,691 9,022 35,022 44,044 - ------------ --------------- ------------ -------------------- ------------------ -------------
In 1994, Good Guys Plaza had few tenants' leases expire or renew and few new leases were signed. However, in 1995, three tenants renewed and/or extended their existing leases at Good Guys Plaza. Two new leases were executed at Graham Court and one at Agora. In addition, two tenants occupying 21,467 square feet exercised lease options at Good Guys Plaza in 1995, although this option activity is not reflected in the Sq. Ft. column above. In 1996, one new lease was executed at Good Guys Plaza and two tenants renewed their leases at Graham Court. Also in 1996, one new lease was executed and one tenant renewed at the Agora Office Building prior to its sale. At December 31, 1996, the Fund's properties were 98% leased, which compares to 91% leased at the end of 1995 reflecting increased occupancy at Good Guys Plaza and the sale of the Agora Office Building, which was only 68% occupied at the end of 1995. The following tables indicate the occupancy rates for each of the Fund's properties and the average rental rates at December 31 of each year that the Fund has owned the properties: OCCUPANCY RATES - ------ --------------- -------------- --------------- ---------------- Agora Office Graham Good Guys Year Building Court Plaza Overall - ------ --------------- -------------- --------------- ---------------- 23,558 48,360 33,968 105,886 Sq. Ft. Sq. Ft. Sq. Ft. Sq. Ft. - ------ --------------- -------------- --------------- ---------------- 1992 81% 100% 100% 96% 1993 86% 93% 96% 92% 1994 61% 93% 94% 87% 1995 68% 100% 94% 91% 1996 Sold 100% 96% 98% - ------ --------------- -------------- --------------- ---------------- R E A L E S T A T E P O R T F O L I O AVERAGE ANNUAL RENTAL RATES/SQ. FT. - ------------------------------------------------------------------------------- Agora Office Graham Good Guys Year Building Court Plaza - ------------------------------------------------------------------------------- 1992 $10.59 $5.43 $16.77 1993 $10.46 $5.32 $17.41 1994 $10.35 $5.47 $17.64 1995 $10.91 $5.45 $17.60 1996 Sold $5.89 $18.02 - ------------------------------------------------------------------------------- T R A D I N G , M A R K E T A N D D I V I D E N D I N F O R M A T I O N No public trading market presently exists for the shares of the Fund. Due to the expenses involved and the relatively small size of the Fund, it is not anticipated that shares of the Fund will be listed on a stock exchange. The Fund has one class of common stock in two series, designated Series A and Series B (the "Common Stock"). As of December 31, 1996, the Fund had 1,090,064 Series A common shares outstanding and 1,000 Series B common shares outstanding, and there were approximately 1,169 Series A Stockholders of record. The Common Stock votes together as one class with each share being entitled to one vote. The Series B shares are owned by Property Resources, Inc., the Advisor. The following table reflects the distributions declared per share of Series A common stock during 1995 and 1996. - ------ ------------------------------------------ Quarter Ended Distributions - ------ ------------------------------------------ March 31, 1995 $.07 June 30, 1996 $.07 September 30, 1995 $.07 December 31, 1995 $.07 March 31, 1996 $.09 June 30, 1996 $.09 September 30, 1996 $.09 December 31, 1996 $.09 - ------ ------------------------------------------ Dividend distributions to stockholders are currently paid quarterly on approximately the last day of March, June, September and December. 100% of the 1996 and 14% of the 1995 dividend represented a return of capital for Federal income tax purposes. Return of capital distributions are tax free to the stockholder to the extent such distributions do not exceed a stockholders' adjusted basis. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S INTRODUCTION Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Net income for the year ended December 31, 1996 was $449,000, an increase of $218,000 as compared to net income of $231,000 in 1995. The increase in net income was primarily due to an increase in interest income, gain on sale of rental property and a decrease in operating expenses, as described more fully below. Total revenue for the year ended December 31, 1996, increased $20,000, or 2%, compared to 1995 primarily due to an increase in interest income attributable to the note receivable relating to the sale of the Agora Office Building. Rental revenue at the remaining two properties of the Fund increased $74,000 compared to the same period in 1995 but was offset by a decrease of rental revenue due to the sale of the Agora Office Building. The increase in rental revenue at the Fund's two remaining properties resulted from an increase in the rental rates at the properties and to an increase in the average occupancy rate at the Good Guys Plaza. The average occupancy rate at the Good Guys Plaza increased from 95% in 1995 to 96% in 1996. Graham Court's occupancy rate remained at 100%. Total expenses for the year ended December 31, 1996, decreased $112,000, or 12%, from $907,000 in 1995 to $795,000 in 1996. The decrease in total expenses in 1996 was primarily attributable to a decrease in operating expenses of $56,000 as a result of the sale of the Agora Office Building and to a refund of $43,000 of prior year property taxes at the Good Guys Plaza. COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO YEAR ENDED DECEMBER 31, 1994 Net income for the year ended December 31, 1995 was $231,000, an increase of $278,000 as compared to net loss of $47,000 in 1994. The Increase is due to the following factors: a decrease in rental revenue of $34,000; an increase in interest and distribution of $7,000; a decrease in depreciation and amortization of $22,000; a decrease in operating expenses of $51,000; a decrease in related party expenses of $7,000; a increase in general and administrative expense of $1,000; and a decrease in loss on write-down of rental property of $226,000. Rental income for 1995 decreased $34,000, or 3%, primarily due to the decline of average annual rental rates per square foot for Graham Court from $5.47 in 1994 to 5.45 in 1995. The average occupancy rate of net rentable square feet for the years ended December 31, 1995 and 1994 at the Agora Office Building was 68% and 61% and at Graham Court Business Park was 93% and 100%, respectively. Interest and dividend income increased $7,000, or 19%, primarily due to higher yields realized on investments in mortgage-backed securities than from short-term money market investments. Total expenses decreased by $305,000, or 25%, from $1,212,000 in 1994 to $907,000 in 1995. The decrease in total expenses is attributable to the following factors: a decrease in depreciation and amortization of $22,000, or 8%; a decrease in operating expenses of $51,000, or 14%; a decrease in related party expense of $7,000, or 7%; an increase in general and administrative expense of $1,000, or 2%; and a decrease in loss on write-down of rental property of $226,000, or 100%. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S Operating expenses decreased $51,000, primarily as a result of a decrease in property taxes of $26,000. Related party expense decreased $7,000, as a result of a decrease in accounting and data processing expenses. RELATED PARTY EXPENSES The Fund has entered into an agreement with the Advisor to administer the day-to-day operations of the Fund. For each of the years ended December 31, 1996, 1995 and 1994, the Fund recorded $21,000, $16,000 and $17,000, respectively, of advisory fee expense to the Advisor in accordance with the Advisory Agreement. Also for the years ended December 31, 1996, 1995 and 1994, and in accordance with the Advisory Agreement, the Fund reimbursed the Advisor or affiliates of the Advisor $23,000, $36,000 and $44,000, respectively, for accounting and data processing, and $13,000, $9,000 and $7,000, respectively, for stockholder services expenses. The Fund's properties are managed by Continental Property Management Co., ("CPMC"), an affiliate of the Advisor. For each of the years ended December 31, 1996, 1995 and 1994, the Fund recorded $35,000 of property management fee expense to CPMC in accordance with the property management agreement. Also for the years ending December 31, 1996, 1995 and 1994, and in accordance with the management agreement, the Fund paid to CPMC leasing commissions of $31,000, $21,000 and $0, respectively, and construction supervision fees of $0, $1,000 and $2,000, respectively. The Fund's by-laws require the Advisor to refund to the Fund the amount, if any, by which the operating expenses as defined (generally such expenses pertain to general and administrative expenses as distinguished from property operating expenses) during any calendar year exceed the greater of (a) 2% of the Average Invested Assets or (b) 25% of Net Income (excluding gain from the sale of the Fund's properties) unless the Independent Directors conclude that a higher level of expenses is justified as set forth in the by-laws. For the year ended December 31, 1996, the Fund's operating expenses, as defined, of $97,000 in the aggregate, classified in general and administrative and related party expenses represented; a) 1.07% of Average Invested Assets and b) 11.84% of Net Income. Therefore, no refund was required. The Fund's Board of Directors (including all of its Independent Directors) have determined, after review, that the compensation paid to the Advisor and to CPMC referenced above, as well as the expense reimbursements made by the Fund to the Advisor reflected in Note 2 to the accompanying financial statements, are fair and reasonable to the Fund. IMPACT OF INFLATION The Fund's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Fund against increased operating costs resulting from inflation. LIQUIDITY AND CAPITAL RESOURCES The Fund's principal sources of capital for the acquisition and renovation of property and for working capital reserves have been proceeds from the initial offering of its common stock and from funds from operations after payment of dividends. At December 31, 1996, cash and cash equivalents totaled $772,000 and investments in mortgage-backed securities, available for sale totaled $173,000. As of December 31, 1996, one of the Fund's properties was subject to secured financing. The Good Guys Plaza shopping center is subject to a promissory note collateralized by a Deed of Trust in the amount of $2,750,000. The note is payable, interest only, at an adjustable rate of interest which is based on a certain bond index. On December 31, 1996, the interest rate was 6.88%. The note was due in full in December, 1996 and was granted a 90 day extension so that management could complete their negotiation of terms of a M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S new loan from an unaffiliated lender to finance the payoff of the current loan. On March 4, 1997, the note was repaid from the proceeds of a new note payable. The new note payable, which is also collateralized by the property and matures in 2022, requires monthly payments of principal and interest at 8.8% until 2007, at which time the interest rate increases to at least 13.8% under an adjustment formula defined in the note agreement. In the short-term and in the long-term, management believes that the Fund's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of distributions. Funds from Operations ("FFO") for the years ended December 31, 1996, 1995 and 1994 were $611,000, $476,000 and $446,000, respectively. The primary differences between the periods reflect the changes in net income as discussed under "Results of Operations". The Fund believes that FFO is helpful in understanding a property portfolio in that such calculation reflects income from operating activities and the properties' ability to support general operating expenses and interest expense before the impact of certain activities such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the Fund's cash needs including principal amortization, capital improvements and distributions to stockholders. FFO should not be considered an alternative to net income, or any other generally accepted accounting principles ("GAAP") measurement of performance, as an indicator of the Fund's operating performance or as a measure of liquidity. As defined by the National Association of Real Estate Investment Trusts, FFO is net income (computed in accordance with GAAP), excluding gains and losses from debt restructuring and sales of property plus depreciation and amortization and after adjustment for unconsolidated joint ventures. The measure of FFO as reported by the Fund may not be comparable to similarly titled measures of other funds that follow direct definitions. On March 4, 1997, the Graham Court Business Park was sold to an unrelated party for $2,200,000, resulting in net cash proceeds to the Fund of $2,093,000. The Fund will recognize a related gain of approximately $363,000 during the first quarter of 1997. As a result of the sale, FFO will, most likely, be substantially reduced. It is probable that the 1996 dividend rate will exceed future FFO and cash flow from operations. As a result, distributions may be reduced to a level that reflects the decrease in FFO and cash flow. Management currently intends to dispose of the Good Guys Plaza Shopping Center and, in that regard, expects to commence marketing activity in 1998. At December 31, 1996, management estimates that the net realizable value of the property approximates its carrying value; however, there can be no assurance that the eventual sales price of the property will not result in a loss or that a sale will be consummated. DISTRIBUTIONS Distributions are paid quarterly at the discretion of the Board of Directors and depend on the Fund's earnings, cash flow, financial condition and other relevant factors. During the years ended December 31, 1996 and 1995, the Fund declared distributions totaling $392,000 and $305,000, or $.36 and $.28 per share each year, respectively. The distributions represented 64% of the Fund's FFO in 1996 and 1995. R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S Board of Directors and Stockholders Property Resources Equity Trust We have audited the accompanying balance sheets of Property Resources Equity Trust as of December 31, 1996 and 1995, the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996, and the financial statement schedule of Real Estate and Accumulated Depreciation. These financial statements and the financial statement schedule are the responsibility of Property Resources Equity Trust's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Property Resources Equity Trust as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Francisco, California March 4, 1997
B A L A N C E S H E E T S PROPERTY RESOURCES EQUITY TRUST - ------------------------------------------------------------------------------------------------------ as of December 31, 1996 and 1995 (dollars in 000's except per share 1996 1995 amounts) - ------------------------------------------------------------------------------------------------------ ASSETS Rental property: Land $2,099 $2,789 Buildings and improvements 6,215 6,548 Tenant improvements 135 194 Furniture and fixtures - 5 - -------------------------------------------------------------------------- ------------- ------------- 8,449 9,536 Less: accumulated depreciation 1,995 2,145 - -------------------------------------------------------------------------- ------------- ------------- 6,454 7,391 Cash and cash equivalents 772 612 Mortgage-backed securities, available for sale 173 198 Deferred rent receivable 77 71 Note receivable 736 - Other assets, net 162 78 - -------------------------------------------------------------------------- ------------- ------------- Total assets 8,374 $8,350 ========================================================================== ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Note payable $2,750 $2,750 Deposits and other liabilities 59 88 - -------------------------------------------------------------------------- ------------- -------------- Total liabilities 2,809 2,838 - -------------------------------------------------------------------------- ------------- -------------- Stockholders' equity: Common stock, Series A, without par value, stated value $10 per share; 10,000,000 shares authorized; 1,090,064 and 1,090,067 shares issued and outstanding at December 31, 1996 and 1995, respectively 9,384 9,384 Common stock, Series B, without par value, stated value $10 per share; 1,000 shares authorized, issued and outstanding 10 10 Unrealized loss on mortgage-backed securities (11) (7) Accumulated distributions in excess of net income (3,818) (3,875) - -------------------------------------------------------------------------- ------------- -------------- Total stockholders' equity 5,565 5,512 - -------------------------------------------------------------------------- ------------- -------------- Total liabilities and stockholders' equity $8,374 $8,350 ========================================================================== ============= ==============
The accompanying notes are an integral part of these financial statements.
S T A T E M E N T S O F O P E R A T I O N S PROPERTY RESOURCES EQUITY TRUST - ---------------------------------------------------- -------------- -------------- --------------- for the years ended December 31, 1996, 1995 and 1994 (Dollars in 000's except per share amounts) 1996 1995 1994 - ---------------------------------------------------- -------------- -------------- --------------- Revenue: Rent $1,076 $1,095 $1,129 Interest 74 40 30 Dividends 8 3 6 - ---------------------------------------------------- -------------- -------------- --------------- Total revenue 1,158 1,138 1,165 - ---------------------------------------------------- -------------- -------------- --------------- Expenses: Interest 189 192 192 Depreciation and amortization 248 245 267 Property operating 209 322 373 Related party 92 96 103 General and administrative 57 52 51 Loss on write-down of rental property - - (226) - ---------------------------------------------------- -------------- -------------- --------------- Total expenses 795 907 1,212 - ---------------------------------------------------- -------------- -------------- --------------- Income (loss) before gain on sale of rental property 363 231 (47) Gain on sale of rental property 86 - - - ---------------------------------------------------- -------------- -------------- --------------- Net income (loss) $449 $231 $(47) ==================================================== ============== ============== =============== Net income (loss) per share, based on the weighted average shares outstanding of Series A common stock of 1,090,066, 1,090,067, and 1,090,067, respectively $.41 $.21 $(.04) ==================================================== ============== ============== =============== Distributions declared per share of Series A common stock $.36 $.28 $.30 ==================================================== ============== ============== ===============
The accompanying notes are an integral part of these financial statements. S T A T E M E N T S O F S T O C K H O L D E R S' EQUITY PROPERTY RESOURCES EQUITY TRUST
for the years ended December 31, 1996, 1995 and 1994 (Dollars in 000's) Unrealized gain (loss) on Accumulated Common Stock mortgage- distributions Series A Series B backed in excess of Shares Amount Shares Amount securities net income Total - ------------------------ ----------------------------------------------- ----------------- --------------------- ------------- Balance, December 31, 1993 1,090,067 $9,384 1,000 $10 $ - $(3,427) $5,967 Unrealized loss on mortgage- backed - securities - - - - (25) (25) Net loss - - - - - (47) (47) Distributions declared - - - - - (327) (327) - ------------------------ --------------- ------------ ---------- ------- ------------ ------------------------- ------------- Balance, December 31, 1994 1,090,067 9,384 1,000 10 (25) (3,801) 5,568 Unrealized gain on mortgage- backed securities - - - - 18 - 18 Net income - - - - - 231 231 Distributions declared - - - - - (305) (305) - ------------------------ --------------- ------------ ---------- ------- ------------ ------------------------- ------------- Balance, December 31, 1995 1,090,067 9,384 1,000 10 (7) (3,875) 5,512 Redemption of Series A common stock (3) - - - - - - Unrealized loss on mortgage- backed securities - - - - (4) - (4) Net income - - - - - 449 449 Distributions declared - - - - - (392) (392) ======================== =============== ============ ========== ======= ============ ========================= ============= Balance, December 31, 1996 1,090,064 $9,384 1,000 $10 $(11) $(3,818) $5,565 ======================== =============== ============ ========== ======= ============ ========================= ============= The accompanying notes are an integral part of these financial statements.
S T A T E M E N T S O F C A S H F L O W S PROPERTY RESOURCES EQUITY TRUST - --------------------------------------------------------------------------------------------------------------- for the years ended December 31, 1996, 1995 and 1994 (Dollars in 000's) 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $449 $231 $(47) - --------------------------------------------------------------------------- ----------- ----------- ----------- Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 248 245 267 (Increase) decrease in deferred rent receivable (6) 15 21 (Increase) decrease in other assets (76) 29 15 (Decrease) increase in deposits and other liabilities (29) 10 - Loss on write-down of rental property - - 226 Gain on sale of rental property (86) - - - --------------------------------------------------------------------------- ----------- ----------- ----------- 51 299 529 - --------------------------------------------------------------------------- ----------- ----------- ----------- Net cash provided by operating activities 500 530 482 - --------------------------------------------------------------------------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net proceeds from sale of rental property 60 - - Leasing commissions paid (35) (36) (3) Principal received on note receivable 14 - - Disposition of mortgage-backed securities 21 37 45 Improvements to rental property (8) (32) (15) - --------------------------------------------------------------------------- ----------- ----------- ----------- Net cash provided by (used in) investing activities 52 (31) 27 - --------------------------------------------------------------------------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions paid (392) (305) (327) Principal payments on debt - - (4) - --------------------------------------------------------------------------- ----------- ----------- ----------- Net cash used in financing activities (392) (305) (331) - --------------------------------------------------------------------------- ----------- ----------- ----------- Increase in cash and cash equivalents 160 194 178 Cash and cash equivalents, beginning of year 612 418 240 =========================================================================== =========== =========== =========== Cash and cash equivalents, end of year $772 $612 $418 =========================================================================== =========== =========== ===========
SUPPLEMENTAL CASH FLOW AND NON-CASH ACTIVITY - NOTES 6 & 8 The accompanying notes are an integral part of these financial statements. N O T E S T O F I N A N C I A L S T A T E M E N T S NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITY Property Resources Equity Trust (the "Fund") is a California corporation formed on February 20, 1985 for the purpose of investing in income-producing real property. The Fund is a real estate investment trust ("REIT") and has qualified as a REIT from inception. Under the Internal Revenue Code and applicable state income tax law, a qualified REIT is not subject to income tax if at least 95% of its taxable income is currently distributed to its stockholders and other tests are met. The Fund intends to distribute substantially all of its taxable income in the future. Accordingly, no provision is made for income taxes in these financial statements. The Fund acquired Graham Court Business Park in August, 1986, the Agora Office Building in September, 1986, and the Good Guys Plaza in July, 1988. The Fund sold the Agora Office Building in April 1996. BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RENTAL PROPERTY Rental property is stated at cost and depreciated using the straight-line method over useful lives of 30 to 35 years for buildings and improvements, 5 years for furniture and fixtures and the life of the related lease for tenant improvements. Significant improvements and betterments are capitalized. Maintenance, repairs and minor renewals are charged to expense when incurred. Pursuant to the Fund's investment objectives, property purchased is generally held for extended periods. During the holding period and as the result of prevailing economic conditions, properties may experience fluctuations in market value. On a periodic basis, but at least annually, management internally assesses the value of all properties held by the Fund. Such assessments include the consideration of the Fund's ability and intent to hold a property as well as an evaluation of that property's future rental potential through the holding period. Generally, management's analysis is performed utilizing a sum of future cash flows methodology which compares the property's operating cash flows and residual value to the net carrying amount. Management currently intends to dispose of the Good Guys Plaza Shopping Center and, in that regard, expects to commence marketing activity in 1998. At December 31, 1996, management estimates that the net realizable value of the property approximates its carrying value; however, there can be no assurance that the eventual sales price of the property will not result in a loss or that a sale will be consummated. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits with banks, debt instruments with original maturities of three months or less and money market funds, which are readily convertible into cash. Due to their relatively short-term nature, the carrying value of these instruments approximates fair value. MORTGAGE-BACKED SECURITIES VALUATION Mortgage-backed securities held by the Fund are classified as available for sale and are carried at market value. The resulting unrealized gains and losses are reported as a separate component of stockholders' equity until realized. Realized gains and losses are recognized on the specific identification method and are included in earnings. OTHER ASSETS Other assets include deferred lease commissions, which are amortized over the lives of the related leases. - ------------------------------------------------------------------------------- N O T E S T O F I N A N C I A L S T A T E M E N T S - ------------------------------------------------------------------------------- RENTAL REVENUE Rental revenue is recorded to reflect scheduled rent increases and free rent periods on the straight-line method over the related lease term. CONCENTRATION OF CREDIT RISK AND MAJOR TENANTS Financial instruments which potentially subject the Fund to concentrations of credit risk consist principally of money market mutual funds and other short term investments and in mortgage backed securities. The Fund places excess cash in short-term deposits with Franklin Money Fund and Institutional Fiduciary Trust, investment companies managed by an affiliate of Property Resources, Inc. (the "Advisor"). The Fund also owns mortgage backed securities guaranteed by an agency of the Federal government. The Fund performs ongoing credit evaluations of its tenants and generally does not require collateral for commercial tenants. The Fund reserves for potential credit losses, as appropriate, and such losses have been within management's expectations. The following tenants provided 10% or more of the Fund's total straight-line revenues during 1996, 1995 and 1994:
Principal Business Lease Expiration 1996 1995 1994 - -------------------------- ----------------------------- ------------ ------------- ------------- Electronics Store May 2001 28.2% 31.6% 28.4% Audio Video Retailer January 2001 14.7% 17.1% 15.4% Research Facility Month to Month 11.4% 14.4% 15.2%
The Audio Video Retailer filed for protection under Chapter 11 of the Federal Bankruptcy Code (the "Code") in August of 1995. In December 1996, the tenant confirmed and the Bankruptcy Court approved the lease as amended. The Research Facility occupied space at the Graham Court Business Park. The property was sold on March 4, 1997, as described in Note 9 of these financial statements. NOTE 2 - RELATED PARTY TRANSACTIONS The Fund has entered into an agreement with the Advisor to administer the day-to-day operations of the Fund for which it pays a fee. On July 16, 1993, Franklin/Templeton Investor Services, Inc. ("FTISI"), an affiliate of the Advisor, assumed responsibility as the Fund's transfer agent and registrar for the Fund's Series A common stock. The Fund has entered into an agreement with Continental Property Management Co. ("CPMC") an affiliate of the Advisor, to manage the leasing and management related services for the properties. Under the terms of this agreement, CPMC is paid management, leasing and construction supervision fees. The agreements between the Fund and the Advisor, or affiliates, provide for certain types of compensation for services rendered for the years ended December 31, 1996, 1995 and 1994:
1996 1995 1994 -------------- ------------- ------------- Management advisory fees, charged to related party expenses $21,000 $16,000 $17,000 Reimbursement for accounting and data processing expenses, charged to related party expenses 23,000 36,000 44,000 Property management fee, charged to related party expense 35,000 35,000 35,000 Stockholder services fees, charged to related party expense 13,000 9,000 7,000 Construction supervision fees, capitalized and depreciated over the useful life of the related assets - 1,000 2,000 Leasing commissions, capitalized and amortized over the term of the related lease 31,000 21,000 -
- -------------------------------------------------------------------------------- N O T E S T O F I N A N C I A L S T A T E M E N T S - -------------------------------------------------------------------------------- At December 31, 1996 and 1995, cash equivalents included $2,000 invested in Franklin Money Fund and $229,000 and $101,000, respectively, invested in Institutional Fiduciary Trust, both of which are investment companies managed by an affiliate of the Advisor. For the years ended December 31, 1996, 1995 and 1994, related dividends earned were $8,000, $3,000 and $6,000, respectively. NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE Mortgage-backed securities, available for sale at December 31, 1996, had a coupon rate of 7.59% and a maturity of 2021. Amortized cost was $184,000 and market value was $173,000, resulting in a gross unrealized loss of $11,000. Mortgage-backed securities, available for sale at December 31, 1995, had a market value of $198,000 and an amortized cost of $205,000, resulting in a gross unrealized loss of $7,000. NOTE 4 - COMMON STOCK Series A and Series B common stock have the same voting, dividend and distribution rights. All dividends are declared at the discretion of the Board of Directors of the Fund. To date, the Board of Directors has not declared any dividends to be payable to any shares of outstanding Series B common stock NOTE 5 - DISTRIBUTIONS The allocations of cash distributions per share for individual stockholders' income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for the years ended December 31, 1996, 1995 and 1994 were as follows: Year Ordinary Return of Total Paid Income Capital Paid - -------- ------------------- ------------------ -------------------- 1996 - $.36 $.36 1995 $.24 $.04 $.28 1994 $.21 $.09 $.30 NOTE 6 - NOTE PAYABLE The note payable, collateralized by a deed of trust on Good Guys Shopping Center, is payable interest only until the extended maturity, in March, 1997, at an adjustable rate based on a certain corporate bond index. For the years ended December 31, 1996, 1995 and 1994, interest paid was $183,000, $192,000 and $192,000, respectively. This note was refinanced subsequent to December 31, 1996 (Note 9). N O T E S T O F I N A N C I A L S T A T E M E N T S NOTE 7 - RENTAL INCOME The Fund's rental income from commercial property is received principally from tenants under non-cancelable operating leases. The tenant leases typically provide for guaranteed minimum rent plus contingent rents. As discussed in Note 9, Graham Court Business Park was sold in March 1997. Minimum future rentals on non-cancelable tenant operating leases at the Good Guys Plaza Shopping Center subsequent to December 31, 1996 are as follows: In thousands 1997 $565 1998 559 1999 572 2000 561 2001 191 Thereafter 80 ----------------------- $2,528 ======================= Minimum future rentals do not include contingent rents. Contingent rents were $150,000 in 1996, $166,000 in 1995 and $156,000 in 1994. NOTE 8 - SALE OF RENTAL PROPERTY On April 16, 1996, the Fund sold the Agora Office Building to an unaffiliated buyer for a total sales price of $850,000. In connection with the sale, the Fund recognized a gain of $86,000. The total sales price included a $750,000 promissory note, collateralized by a deed of trust on the Agora Office Building. Principal and interest payments on the note receivable of $5,815 are due monthly until maturity on April 16, 1998. NOTE 9 - SUBSEQUENT EVENTS On March 4, 1997, the note payable collateralized by the Good Guys Plaza Shopping Center was repaid from the proceeds of a new note payable. The new note payable, which is also collateralized by the property and matures in 2022, requires monthly payments of principal and interest at 8.8% until 2007, at which time the interest rate increases to at least 13.8% under an adjustment formula defined in the note agreement. On March 4, 1997, the Graham Court Business Park was sold to an unrelated party for $2,200,000, resulting in net cash proceeds to the Fund of $2,093,000. The Fund will recognize a related gain of approximately $363,000 during the first quarter of 1997. NOTE 10 - PRO FORMA FINANCIAL INFORMATION (Unaudited) The unaudited condensed pro forma statements of operations set forth below are presented as if: (i) the sales of the Agora Office Building and the Graham Court Business Park and (ii) the refinancing of the loan collateralized by the Good Guys Plaza Shopping Center had occurred on January 1, 1995. The unaudited condensed pro forma balance sheet set forth below is presented as if the sale of the Graham Court Business Park had been consummated December 31,1996. The pro forma financial and operating data are not necessarily indicative of what actual results of operations or the financial position of the Fund would have been, nor does it purport to present the results of operations or financial position for future periods. N O T E S T O F I N A N C I A L S T A T E M E N T S Unaudited Condensed Pro Forma Statements of Operations (in thousands except per share amounts) FOR THE YEAR ENDED DECEMBER 31 1996 1995 Net revenue $837 $796 Net income $193 $73 Net income per share, Series A common stock $0.18 $0.07 The pro forma statements of operations do not include the related gains on sale of rental property. Unaudited Condensed Pro Forma Balance Sheet (in thousands except per share amounts) DECEMBER 31, 1996 Rental property, net of accumulated depreciation $4,721 Other assets 4,083 $8,804 Total liabilities $2,894 Total stockholders' equity 5,910 $8,804 ================================================================================ R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N ================================================================================ PROPERTY RESOURCES EQUITY TRUST for the years ended December 31, 1996, 1995 and 1994 (Dollars in thousands)
COL A. COL B. COL C. COL D. COL E. COL F. COL G. COL H. COL I. ------ ------ ------ ------ ------ ------ ------ ------ ------ COST CAPITALIZED INITIAL SUBSEQUENT TO GROSS AMOUNT AT WHICH COST TO FUND ACQUISITION CARRIED AT CLOSE OF PERIOD Life on Which Deprecia- tion in Latest Build- Build- Accumu- Date Oper- ings ings lated of ations and Tenant Carry- and Depre- cons- Date State- Encum- Improve- Improve- ing Improve- cia- truc- Acqu- ment is Description brances Land ments ments Costs Land ments Total tion tion ired Computed Office Complex Livermore, CA - $397 $2,022 $44 - $397 $2,066 $2,463 $730 1981 8/86 (2) Shopping Center Santa Rosa, CA 2,750 1,702 4,132 151 - 1,702 4,283 5,986 1,265 1986 7/88 (2) ------- ------ ------ ----- ---- ------ ------ ------ ----- $2,750 $2,099 $6,154 $195 $- $2,099 $6,349 $8,449 $1,995 =================================================================================================================================== (1)(3) (4)
=============================================================================== R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N =============================================================================== NOTES: (1) The aggregate cost for federal income tax purposes is $8,449,000. (2) Depreciation is computed using useful lives of 30-35 years for buildings and improvements, 5 years for furniture and fixtures and the life of the related lease for tenant improvements. (3) RECONCILIATION OF REAL ESTATE
In thousands 1996 1995 1994 - -------------------------------------------------------------- ------------ ---------------- -------------- Balance at beginning of period $9,536 $9,504 $9,715 Disposition (1,095) - - Additions during year: Improvements to rental property 8 32 15 Deductions during year: Write-down of rental property - - (226) - -------------------------------------------------------------- ------------ ---------------- -------------- Balance at end of period $8,449 $9,536 $9,504 ============================================================== ============ ================ ============== (4) RECONCILIATION OF ACCUMULATED DEPRECIATION In thousands 1996 1995 1994 - -------------------------------------------------------------- ------------ ---------------- -------------- Balance at beginning of period $2,145 $1,912 $1,668 Disposition (371) - - Depreciation expense for the period 221 233 244 - -------------------------------------------------------------- ------------ ---------------- -------------- Balance at end of period $1,995 $2,145 $1,912 ============================================================== ============ ================ ==============
PROPERTY RESOURCES EQUITY TRUST
DIRECTORS AND OFFICERS AFFILIATIONS David P. Goss National Association of Real Estate Investment Trusts Chief Executive Officer, President and Director Institute of Real Estate Management David W. Walters Independent Director Building Owners and Managers Association International James A. Niles Independent Director International Council of Shopping Centers Michael J. McCulloch National Association of Industrial and Office Parks Executive Vice President NUMBER OF STOCKHOLDERS Martin L. Flanagan Vice President - Finance and Chief Financial At December 31, 1996, Stockholders of record Officer numbered 1,169. Richard S. Barone REPORT ON FORM 10-K Secretary Stockholders may obtain a copy of the Fund's Annual EXECUTIVE OFFICES Report on Form 10-K to the Securities and Exchange Commission for the year ended December 31, 1996, by Property Resources Equity Trust writing to: 777 Mariners Island Boulevard San Mateo, California 94404 Property Resources Equity Trust (415) 312-3000 P.O. Box 7777 San Mateo, CA 94403-7777 INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. San Francisco, California
ANNUAL MEETING Stockholders are invited to attend the Annual Stockholders' Meeting which will be held at 3 p.m. on Thursday, June 5, 1997, at the Fund's executive offices. PROPERTY RESOURCES EQUITY TRUST P.O. Box 7777 777 Mariners Island Blvd. San Mateo, CA 94403-7777 Fund Information: (800) 342-5236 Shareholder Account Information: (800) 632-2350 EX-27 2
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 772 173 736 0 0 0 8,449 1,995 8,374 0 0 0 0 9,394 (3,829) 8,374 0 1,158 0 606 0 0 189 0 0 0 0 0 0 449 0 0
-----END PRIVACY-ENHANCED MESSAGE-----