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
<TABLE>
<CAPTION>
(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
<S> <C>
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.
</TABLE>
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.
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------- --------------- ---------------- --------------- ----------------
(Dollars in 000's except
per share amounts) 1996 1995 1994 1993 1992
- ---------------------------------------- ---------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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.
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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
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<CAPTION>
- ------------ --------------- ------------ -------------------- ------------------ -------------
No. of Tenant Leasing
Leases Sq. Improvements Commissions
Year Executed Ft. Paid Paid Total
- ------------ --------------- ------------ -------------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
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
- ------------ --------------- ------------ -------------------- ------------------ -------------
</TABLE>
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
<TABLE>
<CAPTION>
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:
<S> <C> <C>
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
========================================================================== ============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C>
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
==================================================== ============== ============== ===============
</TABLE>
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
<TABLE>
<CAPTION>
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,
<S> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C>
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
=========================================================================== =========== =========== ===========
</TABLE>
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:
<TABLE>
<CAPTION>
Principal Business Lease Expiration 1996 1995 1994
- -------------------------- ----------------------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
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%
</TABLE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
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 -
</TABLE>
- --------------------------------------------------------------------------------
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)
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
</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 $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
<TABLE>
<CAPTION>
In thousands 1996 1995 1994
- -------------------------------------------------------------- ------------ ---------------- --------------
<S> <C> <C> <C>
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
============================================================== ============ ================ ==============
</TABLE>
PROPERTY RESOURCES EQUITY TRUST
<TABLE>
<CAPTION>
DIRECTORS AND OFFICERS AFFILIATIONS
<S> <C>
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
</TABLE>
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
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 772
<SECURITIES> 173
<RECEIVABLES> 736
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 8,449
<DEPRECIATION> 1,995
<TOTAL-ASSETS> 8,374
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 9,394
<OTHER-SE> (3,829)
<TOTAL-LIABILITY-AND-EQUITY> 8,374
<SALES> 0
<TOTAL-REVENUES> 1,158
<CGS> 0
<TOTAL-COSTS> 606
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 189
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 449
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
