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, 1995. Commission File 0-15880
PROPERTY RESOURCES EQUITY TRUST
(Exact Name of Registrant as Specified in its Charter)
California 94-3959770
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(State or other jurisdiction or (I.R.S. Employer Identification
incorporation or organization) number)
P.O. Box 7777, San Mateo, CA (415) 312-5824
94403-7777
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(Address of principal and executive Registrant's telephone number,
Office) 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
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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 December 31, 1995, 1,090,067 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, 1995: 1,090,067 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, 1995, and Proxy Statement
for use in connection with its Annual Meeting of Stockholders to be held on June
6, 1996, 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 Registrant's 1995 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, Arizona 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 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, 1995, the Fund did not
have any employees.
Item 2. Properties
The information required by this Item is incorporated by reference from Page 4
through 8 of the Registrant's 1995 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 8 of the Registrant's 1995 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 real estate investment trust ("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 Registrant's 1995 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 9
through 11 of the Registrant's 1995 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 12
through 22 of the Registrant's 1995 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 preceeding 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 Advisor except that the Independent Directors received
approximately $8,000 for attending meetings during the year ended December 31,
1995. 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, 1995, 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 1995 amounted to $16,000. 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 $36,000 in 1995.
Acquisition and investment advisory fees to 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 1995.
Subordinated sales commissions of 5% of the gross selling price of Fund
real property. No commissions were paid in 1995.
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 1995.
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 $57,000 in 1995.
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 1995.
An affiliate of the Advisor is entitled to receive a shareholder services
fee for providing services as the Fund's transfer agent and registrar and
for providing other related shareholder services. The affiliate was paid
$9,000 in 1995.
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, 1995, and 1994, cash
equivalents included $2,000 invested in Franklin Money Fund and $101,000 and
$396,000 invested in Institutional Fiduciary Trust, respectively. Both are
investment companies managed by an affiliate of the Advisor. For the year ended
December 31, 1995, dividends earned amounted to $3,000.
David P. Goss, Michael J. McCulloch, and Richard S. Barone, 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 1995 Annual Report and incorporated by reference in
Part II, Item 8.
Page of
Annual Report
Report of Independent Accountants 20
Balance Sheets as of December 1995 and 1994 12
Statements of Operations for the years ended
December 31, 1995, 1994 and 1993 13
Statements of Stockholders' Equity for the years ended
December 31, 1995, 1994 and 1993 14
Statements of Cash Flows for the years ended
December 31, 1995, 1994 and 1993 15
Notes to Financial Statements 16-19
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 1995 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, 1995 (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, 1994.
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: March 14, 1996 By: /s/ David P. Goss
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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
/s/ David P. Goss Officer March 14, 1996
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David P. Goss
/s/ David W. Walters Director1 March 14, 1996
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David W. Walters
/s/ James A. Niles Director1 March 14, 1996
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James A. Niles
1 Independent Director
PROPERTY RESOURCES EQUITY TRUST
1995
ANNUAL REPORT
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PRESIDENT'S MESSAGE
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DEAR STOCKHOLDERS
I welcome this opportunity to report to you on the Fund's progress over the last
year and its outlook for the future. FFO was $476,000 in 1995 compared with
$446,000 in 1994 and $421,000 in 1993. The increase in FFO in 1995 was the
result of lower operating expenses which fell $51,000. The largest component of
this decrease was reduced property taxes resulting from successful appeals at
Agora and Graham Court. We will continue to make every effort to reduce the cost
of operating the Fund while maintaining the highest level of professional
management.
In response to the Fund's improved cash flow in 1995, at its recent meeting, the
Board of Directors raised the annual dividend rate from 28 cents to 36 cents per
share. With reserves of over $800,000, the Fund's new dividend rate should be
sustainable into the near future.
The Fund's 1995 revenues declined 2% as a result of increased vacancy at the
Agora Office Building and at Good Guys Plaza. However, by year end the Agora`s
vacancy had risen to 68% from 54% earlier in the year. Graham Court's occupancy
reached 100% by year end after falling to as low as 82% in April of 1995.
Unfortunately, the two vacant spaces at Good Guys Plaza have remained vacant
with no outstanding lease offers. We continue every effort to secure tenants in
the vacant spaces and to renew current tenants at the most favorable terms.
Although average occupancy for the year declined, our year end occupancy
increased to 91% from 87% at the end of 1994. We anticipate this improvement
will be reflected in increased revenues in 1996.
We are frequently asked by investors about the expected termination date of the
Fund. We are in the process of taking the first step towards a liquidation with
the sale of the Agora. On February 26, the Fund entered into an Agreement of
Purchase and Sale (the "Agreement") with an unrelated potential buyer. The
Agreement calls for a sale price of $850,000 with $150,000 down and a $700,000
seller carryback accepted by the Fund. At this time, the potential buyer retains
certain contingencies, therefore no assurance can be given that the sale will be
completed per the terms of the Agreement or at all.
If the sale of the Agora is completed, the Fund will next consider whether to
sell the two remaining properties. A sale of Good Guys Plaza is dependent upon a
resolution of the lease situation at the property. As we mentioned in previous
reports, The Good Guys exercised their option to remain at their space for an
additional five years, solving the largest issue at the property. However, the
other large tenant at Good Guys Plaza, Wherehouse Entertainment, made a motion
in bankruptcy court to extend the "confirmation period" for our lease into May
of 1996. As you may recall, Wherehouse Entertainment filed for bankruptcy last
year. Although we continue to believe that Wherehouse Entertainment will
ultimately confirm our lease, we are left with no choice but to await the
court's decision. Until Wherehouse Entertainment's lease situation is resolved,
any attempt at a sale of the property would not be justified. However, assuming
the lease is confirmed in May, we will make a final decision regarding the sale
in June. We intend to dispose of Graham Court at the same time or soon after the
sale of Good Guys Plaza. With occupancy at 100%, a sale of Graham Court is
certainly feasible, although the ultimate sale price is impossible to predict.
We are optimistic that market conditions have begun to show signs of improvement
in California. We look forward to serving your investment needs in the future.
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.
<TABLE>
<CAPTION>
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(Dollars in 000's except 1995 1994 1993 1992 1991
per share amounts)
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<S> <C> <C> <C> <C> <C>
Total revenue $1,138 $1,165 $1,186 $1,184 $1,170
Interest expense 192 192 180 181 237
Depreciation and
amortization expenses 245 267 281 302 300
Operating expenses 322 373 392 328 362
Related party expenses 96 103 112 107 102
General and
administrative 52 51 81 77 77
expenses
Net income before
loss on write-down 231 179 140 189 92
of rental property
Loss on write-down
of rental property - 226 - 508 -
Gain (loss) - - - - 840
on litigation
Income (loss) 231 (47) 140 (319) 932
Total assets 8,350 8,396 8,799 9,141 9,807
Bond payable - - 4 8 11
Note payable 2,750 2,750 2,750 2,750 2,750
Per share:
Net income (loss) 1 .21 (.04) .13 (.29) .86
Distributions .28 .30 .30 .30 .32
declared
Number of shares of
Series A common stock
outstanding 1,090,067 1,090,067 1,090,067 1,090,067 1,090,067
</TABLE>
1Based on the weighted average shares outstanding of Series A common stock.
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 will manage 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
As of December 31, 1995, the Fund's real estate portfolio consisted of the
Graham Court Business Park in Livermore, California, the Agora Office Building
in Phoenix, Arizona, and Good Guys Plaza Shopping Center in Santa Rosa,
California. Good Guys Plaza is subject to a lien on the property as more fully
described under the respective property description which follows.
The properties are managed by Continental Property Management Co. ("CPMC"), an
affiliate of the Advisor, which performs the leasing, re-leasing and management
related services for the properties. Certain management functions at Agora
Office Building are performed by Commercial Properties, Inc., an unaffiliated
property management company, under the supervision of CPMC.
The Fund currently carries earthquake insurance coverage only for the properties
located in California. 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.
PORTFOLIO SUMMARY
At December 31, 1995, the Fund's three properties contained a total of 25
leases. The following schedule lists the portfolio's lease expiration dates and
the related annual base rental income as of December 31, 1995.
LEASE EXPIRATIONS
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No. of Current % of
Leases Total Annual Current
Yea Expiring Sq. Ft. Base Rent Annual
Rent
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1996 11 42,002 326,976 33%
1997 1 1,575 26,460 3%
1998 4 13,095 99,798 10%
2000 5 15,934 134,472 13%
2001 3 21,467 373,914 37%
2003 1 2,080 35,748 4%
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R E A L E S T A T E P O R T F O L I O
The Fund's portfolio represents in the aggregate, 105,886 rentable square feet.
For the years ended December 31, 1993, 1994 and 1995, 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.
Leasing Activity
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No. of Tenant Leasing
Leases % of Improvements Commissions
Year Executed Sq. Ft. Portfolio Paid Paid Total
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1993 10 17,593 17% 12,699 12,804 25,503
1994 4 7,486 7% 1,443 3,306 4,749
1995 6 15,783 15% 6,826 36,226 43,052
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Extensive renewal and new leasing activity at the Agora Office Building in 1993
declined in 1994 as several tenants converted to month-to-month tenancy and
several other tenants vacated their spaces. Moreover, in both 1993 and 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 Leasing Activity table above.
At December 31, 1995, the Fund's properties were 91% leased, which compares to
87% leased at the end of 1994 reflecting increased occupancy at Agora and Graham
Court. 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
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Agora
Office Graham Good Guys
Year Building Court Plaza Overall
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23,558 48,360 33,968 105,886
Sq. Ft. Sq. Ft. Sq. Ft. Sq. Ft.
- --------------------------------------------
1991 60% 90% 95% 85%
1992 81% 100% 100% 96%
1993 86% 93% 96% 92%
1994 61% 93% 94% 87%
1995 68% 100% 94% 91%
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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 Good Guys
Office Graham Plaza
Year Building Court
- ---------------------------------
1991 $10.33 $5.30 $16.84
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
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SIGNIFICANT TENANTS
Two tenants provide 10% or more of the Fund's current annual base rent at
December 31, 1995. The Good Guys!, a consumer electronic retailer, located at
Good Guys Plaza, leases 13,887 square feet and makes base rental payments of
approximately $243,000, or about 25% of the Fund's revenues. This tenant's lease
was schedule 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 $130,000, or about 14% of the Fund's revenues. 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 may reject or confirm
its lease with the Company. We expect Wherehouse Entertainment will confirm our
lease. 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.
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GRAHAM COURT BUSINESS PARK INDUSTRIAL 48,360 SQ. FT.
LIVERMORE, CA
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On August 12, 1986, the Fund purchased the Graham Court Business Park ("Graham
Court"), which consists of four buildings located at 5981, 5963, 5937 and 5915
Graham Court, Livermore, Alameda County, California. Combined office and
warehouse space aggregated 48,360 leasable square feet on a 2.2 acre site.
Graham Court is located approximately one mile south of Interstate Highway 580
within the Livermore/Amador Valley. Livermore is the seventh largest city in
Alameda County, which is one of the nine counties in the San Francisco Bay area.
Livermore is located approximately seven miles east of the major north/south
thoroughfare in the area, Interstate Highway 680. Downtown Oakland lies
approximately 30 miles west of Livermore along Interstate 580, while San Jose
lies approximately 30 miles to the south along Interstate 680.
The property is located on the east side of Livermore within one quarter mile of
the city's largest employer, Lawrence Livermore Laboratories. This research
facility, which has a major influence on the region's economy, leases 37% of the
leasable space at Graham Court.
R E A L E S T A T E P O R T F O L I O
Rental rates on properties of Graham Court's type have remained flat for many
years. The average lease rate at the property was $5.56 per square foot per year
in 1986, while in 1995 it had fallen slightly to $5.45. Although expenses have
not increased substantially during this period and occupancy has remained
relatively high, the yield investors require from this type of property has
risen.
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AGORA OFFICE BUILDING OFFICE 23,558 SQ. FT. PHOENIX, AZ
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On September 15, 1986, the Fund purchased the Agora Office Building ("Agora"),
which consists of a three-story office building located at 4205 North Seventh
Avenue, Phoenix, Maricopa County, Arizona. The Agora Office Building is located
approximately one-half mile west and three miles north of the downtown Phoenix
high-rise business district on North Seventh Avenue, which is one of the city's
primary north/south arterials and near the boundary of an area of commercial
offices and retail centers, commonly referred to as "midtown".
The area surrounding the Agora Building is generally commercial, with a number
of office and commercial properties close by. Both Camelback and Indian School
Roads provide access to Scottsdale to the east as well as access to Interstate
Highway 17 to the west.
Phoenix, Arizona's capital and largest city, serves as the commercial and
governmental center of the state. Arizona State University, with over 38,000
students, is located in nearby Tempe.
Completed in 1986, the building has two floors of office space built over one
level of parking (24 covered spaces). Additional uncovered parking is included
around the building for a total of 82 parking spaces. The building construction
is steel frame with a stucco exterior. Common interior hallways allow for
multi-tenanting. The property is not subject to any mortgage, lien or
encumbrances other than liens for taxes and assessments, or utility easements or
other immaterial liens or encumbrances.
The Agora Building has been marketed for sale since 1994. At December 31, 1995,
the Company was not under contract for sale. On February 27, 1996, the Company
entered into an Agreement of Purchase and Sale (the "Agreement") with an
unaffiliated potential buyer. According to the terms of the Agreement, the
potential buyer will purchase the property for $850,000, with the Company
receiving a $700,000 three-year secured promissory note at 7% interest from the
buyer with the remaining net proceeds paid in cash. Several contingencies remain
under which the buyer could cancel the Agreement. Therefore, no assurance can be
given that the sale will be completed at the current terms or at all.
- --------------------------------------------------------------------------------
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.
R E A L E S T A T E P O R T F O L I O
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 5.6% in August of 1995
from 6.2% a year earlier. The largest retail center in Sonoma County is the
Coddington Mall, which 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, 1995, was 6.5%. The note is due in full in December, 1996.
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, 1995, the Fund had 1,090,067
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 paid per share of capitalized Series
A common stock during 1995.
- --------------------
Quarter
Ended Distributions
- --------------------
03/31/95 $.07
06/30/95 $.07
09/30/95 $.07
12/31/95 $.07
- --------------------
Dividend distributions to Stockholders are currently paid quarterly on
approximately the last day of March, June, September and December. Approximately
14% of the Fund's 1995 dividend represented a return of capital for Federal
income tax purposes. Return of capital distributions are tax free to the
shareholder 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, 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 distributions 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; an 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 a decline in
the average occupancy rate at two of the Fund's properties. The average
occupancy rate of net rentable square feet for the years ended December 31, 1995
and 1994 at the Agora Office Building was 64% and 70%; and at the Good Guys
Plaza was 94% and 96%, 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. 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%.
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.
COMPARISON OF YEAR ENDED DECEMBER 31, 1994 TO YEAR ENDED DECEMBER 31, 1993
Net loss for the year ended December 31, 1994 was $47,000, a decrease of
$187,000 as compared to net income of $140,000 in 1993. The decrease is due to
the following factors: a decrease in rental revenue of $40,000; an increase in
interest and distributions of $19,000; an increase in interest expense of
$12,000; a decrease in depreciation and amortization of $14,000; a decrease in
operating expenses of $19,000; a decrease in related party expenses of $9,000; a
decrease in general and administrative expense of $30,000; and an increase in
loss on write-down of rental property of $226,000.
Rental income for 1994 decreased $40,000, or 3%, primarily due to a decrease in
the average occupancy rate at two of the Fund's properties. The average
occupancy rate of net rentable square feet for the years ended December 31, 1994
and 1993 at the Agora Office Building was 70% and 84%; and at Graham Court
Business Park was 91% and 94%, respectively.
Interest and dividend income increased $19,000, or 112%, primarily due to higher
yields realized on investments in mortgage-backed securities than from
short-term money market investments.
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
Total expenses increased by $166,000, or 16%, from $1,046,000 in 1993 to
$1,212,000. The increase in total expenses is attributable to the following
factors: an increase in interest expense of $12,000, or 7%; a decrease in
depreciation and amortization of $14,000, or 5%; a decrease in operating
expenses of $19,000, or 5%; a decrease in related party expense of $9,000, or
8%; a decrease in general and administrative expense of $30,000, or 37%; and an
increase in loss on write-down of rental property of $226,000.
Interest expense increased $12,000, reflecting rate changes on the outstanding
note payable.
Operating expenses decreased $19,000, as a result of a decrease in bad debt
expense.
Related party expense decreased $9,000, as a result of a decrease in management
fees impacted by a change in management fee charged from 5% in 1993 to 3.5% in
1994 at the Graham Court Business Park and the Good Guys Shopping Center.
General and administrative expense decreased $30,000 due to a decrease in
outside fees and services as a result of Franklin/Templeton Investor Services,
Inc. ("FTISI"), an affiliate of the Advisor, assuming responsibility as the
Fund's transfer agent and registrar for the Fund's Series A common stock on July
16,1993.
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,
1995, 1994 and 1993, the Fund recorded $16,000, $17,000 and $17,000,
respectively, of advisory fee expense to the Advisor in accordance with the
Advisory Agreement.
The Fund's properties are managed by Continental Property Management Co.,
("CPMC"), an affiliate of the Advisor. For the years ended December 31, 1995,
1994 and 1993, the Fund recorded $35,000, $35,000 and $46,000, respectively, of
property management fee expense to CPMC in accordance with the Property
Management Agreement.
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 (as defined) (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, 1995, the Fund's operating expenses, as defined, of $92,000
in the aggregate, classified in general and administrative and related party
expenses represented; a) .96% of Average Invested Assets and b) 16.14% 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 management believes that inflation may have a positive effect on the
Fund's property portfolio, but this effect generally will not be fully realized
until such properties are sold or exchanged. 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.
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
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
distributions.
At December 31, 1995, cash and cash equivalents totaled $612,000 and investments
in mortgage-backed securities, available for sale totaled $198,000.
As of December 31, 1995, one of the Fund's properties were 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. The interest rate is not subject to a minimum or maximum
rate of interest. On December 31, 1995, the interest rate was 6.5%. In certain
circumstances, the payments due may be less than accrued interest. Any resulting
accrued interest bears interest at the then current rate. The note is due in
full in December, 1996.
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 for the years ended December 31, 1995, 1994 and 1993 were
$476,000, $446,000 and $421,000, respectively. The primary differences between
the periods reflect the changes in net income as discussed under "Results of
Operations". The Company believes that Funds from Operations 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 Company's cash needs including principal amortization, capital
improvements and distributions to Stockholders. Funds from Operations should not
be considered an alternative to net income, or any other GAAP measurement of
performance, as an indicator of the Company's operating performance or as a
measure of liquidity. As defined by the National Association of Real Estate
Investment Trusts, Funds from Operations is net income (computed in accordance
with GAAP), excluding gains or losses from debt restructuring and sales of
property plus depreciation and amortization and after adjustment for
unconsolidated joint ventures. The Company reports Funds from Operations in
accordance with the NAREIT definition. For the periods presented, Funds from
Operations represents net income plus depreciation and amortization. The measure
of Funds from Operations as reported by the Company may not be comparable to
similarly titled measures of other companies that follow direct definitions.
If the sale of the Agora Office Building, as described in the Real Estate
Portfolio section, is completed, the Fund will commence consideration of a sale
of the remaining two properties and a liquidation of the Fund.
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, 1995 and 1994, the Fund declared
distributions totaling $305,000 and $327,000, or $.28 and $.30 per share each
year. The distributions represented 64% and 73% of the Fund's funds from
operations in 1995 and 1994, respectively. By vote of the Board of Directors,
the distribution rate was increased to 9(cent) per quarter per share beginning
with the first quarter 1996 distribution.
B A L A N C E S H E E T S
Property Resources Equity Trust
- -------------------------------------------------------------------
as of December 31, 1995 and 1994 (dollars in 1995 1994
000's except per share amounts)
- -------------------------------------------------------------------
ASSETS
Rental property:
Land $2,789 $2,789
Buildings and improvements 6,548 6,523
Tenant improvements 194 187
Furniture and fixtures 5 5
-------------------
9,536 9,504
Less: accumulated depreciation 2,145 1,912
-------------------
7,391 7,592
Cash and cash equivalents 612 418
Mortgage-backed securities, available for sale 198 217
Deferred rent receivable 71 86
Other assets 78 83
-------------------
Total assets $8,350 $8,396
===================
- --------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $2,750 $2,750
Tenants' deposits and other liabilities 88 78
--------------------
Total liabilities 2,838 2,828
--------------------
Stockholders' equity:
Common stock, Series A, without par value, stated value $10 per share;
10,000,000 shares
authorized;1,090,067 shares issued and 9,384 9,384
outstanding
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 (7) (25)
Accumulated Distributions in Excess of Net (3,875) (3,801)
Income
--------------------
Total Stockholders' equity 5,512 5,568
--------------------
Total liabilities and Stockholders' $8,350 $8,396
equity
====================
- --------------------------------------------------------------------
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,
1995, 1994 and 1993 1995 1994 1993
(Dollars in 000's except
per share amounts)
- -------------------------------------------------------------------
Revenue:
Rent $1,095 $1,129 $1,169
Interest 40 30 3
Distributions 3 6 14
---------------------------------
Total revenue 1,138 1,165 1,186
---------------------------------
Expenses:
Interest 192 192 180
Depreciation and amortization 245 267 281
Operating 322 373 392
Related party 96 103 112
General and administrative 52 51 81
---------------------------------
Total expenses excluding
loss on write-down of
rental property 907 986 1,046
---------------------------------
Income before loss on
write-down of rental property 231 179 140
Loss on write-down of rental
property - (226) -
---------------------------------
Net income (loss) $231 $(47) $140
=================================
Net income (loss) per share,
based on the shares outstanding
of Series A common stock of
1,090,067 $.21 $(.04) $.13
=================================
Distributions per share,
based on the shares outstanding
of Series A common stock of
1,090,067 $.28 $.30 $.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' E Q U I T Y
Property Resources Equity Trust
for the years ended December 31, 1995, 1994 and 1993 (Dollars in 000's)
<TABLE>
<CAPTION>
Common Stock
Series A Series B
Unrealized
Gain/Loss Accumulated
on Depreciation
Mortgage- in Excess of
Shares Amount Shares Amount Backed Net Income Total
Securities
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1992 1,090,067 $9,384 1,000 $10 - $(3,240) $6,154
Income - - - - - 140 140
Distributions
declared - - - - - (327) (327)
- ----------------------------------------------------------------------------------------
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
========================================================================================
</TABLE>
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, 1995, 1995 1994 1993
1994 and 1993 (Dollars in 000's)
- --------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $231 $(47) $140
------------------------
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and amortization 245 267 281
(Increase) decrease in deferred rent
receivable 15 21 (41)
(Increase) decrease in other assets (7) 12 23
Increase (decrease) in tenants' deposits
and other liabilities 10 - (20)
Loss on write-down of rental property - 226 -
------------------------
263 526 243
------------------------
Net cash provided by operating activities 494 479 383
------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in mortgage-backed securities - - (287)
Disposition of mortgage-backed securities 37 45 -
Improvements to rental property (32) (15) (16)
------------------------
Net cash provided by (used in ) investing
activities 5 30 (303)
------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid (305) (327) (458)
Principal payments on note and bond - (4) (4)
payable
------------------------
Net cash used in financing activities (305) (331) (462)
------------------------
Net increase (decrease) in cash and cash
equivalents 194 178 (382)
Cash and cash equivalents, beginning of 418 240 622
year
------------------------
Cash and cash equivalents, end of year $612 $418 $240
========================
- --------------------------------------------------------------------
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.
Subsequent to formation, 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 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 Company's investment objectives, property purchased is generally
held for extended periods. During the holding period, management periodically,
but at least annually, evaluates whether rental property has suffered an
impairment in value. Management's analysis includes consideration of estimated
undiscounted future cash flows during the expected holding period in comparison
with carrying values, prevailing market conditions and other economic matters.
If the current carrying value of an individual property exceeds estimated future
undiscounted cash flows, the Company would reduce the carrying value of the
asset to fair value. In 1994, the Agora Office Building's carrying value was
reduced by $226,000.
CASH AND CASH EQUIVALENTS
The Fund classifies all highly liquid investments with original maturities of
three months or less from the date acquired as cash equivalents.
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. For 1993, prior to the adoption of Statement of
Financial Accounting Standards No.115, the Fund valued mortgage-backed
securities at amortized cost. The impact of this change on stockholders' equity
at January 1, 1994, was immaterial.
RENTAL REVENUES
Rental revenues are recorded on the straight-line method to reflect scheduled
rent increases over the related lease term. As a result, a deferred rent
receivable is created when rental receivables vary from the straight-line basis
or when rental income is recognized during free rent periods of a lease.
CONCENTRATION OF CREDIT RISK AND MAJOR TENANTS
Financial instruments which potentially subject the Fund to concentrations of
credit risk consist principally of money market securities.
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
The Fund places excess cash in short-term deposits with Franklin Money Fund, an
investment Fund managed by an affiliate of the Advisor. 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 for the years 1995, 1994 and 1993:
Percent of Straight-Line
Rental Revenue
Principal Lease Expiration 1995 1994 1993
Business
- ------------------------------------------------------------------
Electronics 5/01 31.6% 28.4% 25.1%
Store
Audio Video 1/01 17.1% 15.4% 13.5%
Retailer
Research 1/96 14.4% 15.2% 13.4%
Facility
On August 2, 1995, the Audio Video Retailer filed for protection from creditors
under Chapter 11 of the U.S. Bankruptcy Code. Under the terms of the Bankruptcy
Code, the tenant may confirm or reject its lease. The period for confirmation or
rejection ends in May of 1996, although it may be extended by court order.
Although there can be no assurance that the Audio Video Retailer will confirm
the lease, it is management's expectation that the lease will be confirmed.
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. 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 with regard to
distributions from the sale or refinancing of property.
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 agreements between the Fund and the Advisor, or affiliates, provide for
certain types of compensation and payments including but not limited to the
types of compensation and payments which were paid or accrued by the Fund for
services rendered for the years ended December 31, 1995, 1994 and 1993:
1995 1994 1993
--------------------------------
Management advisory fees, charged
to $16,000 $17,000 $17,000
related party expenses
Reimbursement for accounting and
data
processing expenses, charged to 36,000 44,000 46,000
related party expenses
Property management fee, charged to
related party expense 35,000 35,000 46,000
Shareholder services fees, charged
to 9,000 7,000 3,000
related party expense
Construction supervision fee,
capitalized to rental property 1,000 2,000 -
Leasing commission, capitalized and
amortized over the term of the
related lease 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, 1995 and 1994, cash equivalents included $2,000, invested in
Franklin Money Fund and $101,000 and $396,000, invested in Institutional
Fiduciary Trust, respectively, both of which are investment companies managed by
an affiliate of the Advisor. For the years ended December 31, 1995, 1994 and
1993 distributions earned amounted to $3,000, $6,000 and $14,000, respectively.
NOTE 3 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
Mortgage-backed securities, available for sale at December 31, 1995, had a
coupon rate of 8.0% and mature in 2021. Amortized cost was $205,000 and market
value was $198,000, resulting in a gross unrealized loss of $7,000.
Mortgage-backed securities, available for sale at December 31, 1994, had a
market value of $217,000 and an amortized cost of $242,000, resulting in a gross
unrealized loss of $25,000.
NOTE 4 - COMMON STOCK
Series A and Series B common stock have the same voting, dividend and
distribution rights. All distributions are declared at the discretion of the
Board of Directors of the Fund. To date, the Board of Directors has not declared
any distributions 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, 1995, 1994 and 1993 were as follows:
Ordinary Return of Total
Year Paid Income Capital Paid
- -------------------------------------------
1995 $.24 $.04 $.28
1994 $.21 $.09 $.30
1993 $.12 $.18 $.30
The Fund is a real estate investment trust ("REIT") and elected REIT status for
income tax purposes for the tax years commencing 1988. 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.
NOTE 6 - NOTE AND BOND PAYABLE
The note payable, collateralized by a deed of trust on Good Guys Shopping Center
is payable interest-only, until maturity in December, 1996, at an adjustable
rate based on a certain corporate 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 has been paid.
For the years ended December 31, 1995, 1994 and 1993, interest paid amounted to
$192,000, $192,000 and $180,000, respectively.
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. Minimum future
rentals on non-cancelable tenant operating leases at December 31, 1995 are as
follows:
1996 $ 618,000
1997 467,000
1998 446,000
1999 360,000
2000 330,000
Thereafter 147,000
------------
$ 2,368,000
============
Minimum future rentals do not include contingent rents. Contingent rents
amounted to $166,000 in 1995, $156,000 in 1994 and $140,000 in 1993.
NOTE 8 - SUBSEQUENT EVENTS
On February 26, 1996, the Company entered into an agreement for the sale of the
Agora Office Building to an unaffiliated third party. The purchase price of
$850,000 is to be composed of a $150,000 cash payment and a $700,000 note
receivable due in three years with an interest rate of 7% and monthly principal
and interest payments based on a 25-year amortization schedule. Certain
contingencies remain in effect under which the agreement can be canceled by the
buyer without recourse to either party. Therefore, no assurance can be given
that the Agora will be sold under these terms, if at all.
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, 1995 and 1994, the related statements of operations,
Stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995, 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, 1995 and 1994, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, 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 above 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
February 27, 1996
===============================================================================
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
as of, and for the years ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Cost Capitalized
Initial Subsequent To Gross Amount at Which
Cost to Fund Acquisition Carried at Close of Period
Life on
Which
Depreciation
in
Buildings Buildings Accumu- Latest
and Tenant and lated Date of Date Operations
Encum- Improve- Improve- Carrying Improve- Deprecia- const- Acqu- Statement
Description brances Land ments ments Costs Land ments Total tion ruction irec is Computed
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Complex
Livermore, CA $ - $397,000 $2,018,000 $44,000 $4,000 $397,000 $2,066,000 $2,463,000 $659,000 1981 8/86 (2)
Office Complex
Phoenix,
Arizona - 690,000 1,063,000 65,000 4,000 690,000 398,000 1,088,000 368,000 1986 9/86 (2)
Shopping Center
Santa Rosa, CA 2,750,000 1,702,000 4,132,000 151,000 - 1,702,000 4,283,000 5,985,000 1,118,000 1986 7/88 (2)
- ----------------------------------------------------------------------------------------------------------------------------------
$2,750,000 $2,789,000 $7,213,000 $260,000 $8,000 $2,789,000 $6,747,000 $9,536,000$2,145,000
==================================================================================================================================
(1)(3)(4) (5)
</TABLE>
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 $11,020,000.
(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) The total cost carried at the close of period has been adjusted to reflect
the Fund's reduction in the carrying value for the office complex located in
Phoenix, Arizona.
(4) Reconciliation of Real Estate
1995 1994 1993
---- ---- ----
Balance at beginning of period $9,504,000 $9,715,000 $9,699,000
Additions during year:
Improvements to rental
property 32,000 15,000 16,000
Deductions during year:
Write-down of rental property - (226,000) -
----------------------------------------------------------------------
Balance at end of period $9,536,000 $9,504,000 $9,715,000
======================================================================
(5) Reconciliation of Accumulated Depreciation
1995 1994 1993
---- ---- ----
Balance at beginning of period $1,912,000 $1,668,000 $1,415,000
Depreciation expense for the
period 233,000 244,000 253,000
----------------------------------------------------------------------
Balance at end of period $2,145,000 $1,912,000 $1,668,000
======================================================================
PROPERTY RESOURCES EQUITY TRUST
DIRECTORS AND OFFICERS AFFILIATIONS
David P. Goss National Association of Real
Chief Executive Officer, Estate Investment Trusts
President and Director
David W. Walters Institute of Real Estate
Independent Director Management
James A. Niles Building Owners and Managers
Independent Director Association
International
Michael J. McCulloch
Executive Vice President International Council of Shopping
Centers
Martin L. Flanagan
Vice President - Finance National Association of
and Chief Financial Officer Industrial and Office Parks
Richard S. Barone NUMBER OF STOCKHOLDERS
Secretary
At December 31, 1995,
EXECUTIVE OFFICES Stockholders of record numbered
1,169.
Property Resources Equity Trust
777 Mariners Island Boulevard REPORT ON FORM 10-K
San Mateo, California 94404
(415) 312-3000 Stockholders may obtain a copy of
the Fund's Annual Report on Form
AUDITORS 10-K to the Securities and
Exchange Commission for the year
Coopers & Lybrand L.L.P. ended December 31, 1995, by
San Francisco, California writing to:
ANNUAL MEETING Property Resources Equity Trust
P.O. Box 7777
Stockholders are invited to San Mateo, CA 94403-7777
attend the Annual
Stockholders' Meeting which will
be held at 3 p.m. on Thursday,
June 6, 1996, 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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 612
<SECURITIES> 198
<RECEIVABLES> 71
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 9,536
<DEPRECIATION> 2,145
<TOTAL-ASSETS> 8,350
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 9,394
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,350
<SALES> 0
<TOTAL-REVENUES> 1,138
<CGS> 0
<TOTAL-COSTS> 715
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 231
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
