SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from TO
Commission file number 0-15880
PROPERTY RESOURCES EQUITY TRUST
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3959770
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer
Identification No.)
P. O. BOX 7777, SAN MATEO, CALIFORNIA 94403-7777
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (650) 312-2000
N/A
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or 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
Shares of Series A Common Stock Outstanding as of June 30, 1998:
1,090,052
Shares of Series B Common Stock Outstanding as of June 30, 1998:
1,000
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROPERTY RESOURCES EQUITY TRUST
BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(Unaudited)
(Dollars in thousands, except per share amounts) 1998 1997
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ASSETS:
Real estate:
Land $1,702 $1,702
Buildings and improvements 4,132 4,132
Tenant improvements 160 157
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5,994 5,991
Less: accumulated depreciation 1,480 1,409
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Real estate, net 4,514 4,582
Cash and cash equivalents 349 461
Deferred rent receivable 68 57
Note receivable - 717
Other assets, net 248 268
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Total assets $5,179 $6,085
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LIABILITIES AND STOCKHOLDERS' EQUITY:
Note payable $2,811 $2,827
Tenants' deposits and other liabilities 26 24
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Total liabilities 2,837 2,851
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Stockholders' equity:
Common stock, Series A, without par value, stated
value $10 per share; 10,000,000 shares
authorized; 9,384 9,384
1,090,052 shares issued and outstanding in
1998 and 1997
Common stock, Series B, without par value, stated
Value $10 per share; 1,000 shares authorized,
issued and outstanding in 1998and 1997 10 10
Accumulated distributions in excess of net income (7,052) (6,160)
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Total stockholders' equity 2,342 3,234
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Total liabilities and stockholders' equity $5,179 $6,085
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The accompanying notes are an intregal part of these financial statements.
PROPERTY RESOURCES EQUITY TRUST
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, June JUNE 30, June 30,
30,
(Dollars in thousands, except 1998 1997 1998 1997
per share amounts)
- --------------------------------------------------------------------------------
REVENUE:
Rent $182 $199 $358 $371
Interest 15 23 28 47
Dividends 4 29 10 39
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Total revenue 201 251 396 457
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EXPENSES:
Interest 68 83 136 129
Depreciation and amortization 39 39 78 99
Operating 25 33 55 80
Related party 20 44 36 69
General and administrative 17 12 45 34
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Total expenses 169 211 350 411
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Operating income before gain on 32 40 14 46
sale of property
Gain on sale of property - - - 370
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NET INCOME $32 $40 $46 $416
================================================================================
Net income per share of Series A $.03 $.04 $.04 $.38
common stock
================================================================================
Dividends per share of Series A $.80 $2.38 $.86 $2.47
common stock
================================================================================
The accompanying notes are an integral part of these financial statements.
PROPERTY RESOURCES EQUITY TRUST
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(Unaudited)
(Dollars in thousands) 1998 1997
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Cash flows from operating activities:
Net income $46 $416
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Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 71 106
(Increase) decrease in deferred rent (11) 30
receivable
Decrease (increase) in other assets 20 (73)
Increase in tenants' deposits and other 2 6
liabilities
Gain on sale of rental property - (370)
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82 (301)
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Net cash provided by operating activities 128 115
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Cash flow from investing activities:
Principal received on note receivable 717 10
Improvements to rental property (3) (5)
Proceeds from sale of rental property - 2,093
Disposition of mortgage-backed securities - 2
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Net cash provided by investing activities 714 2,100
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Cash flow from financing activities:
Origination of note payable - 2,850
Principal payments on note payable (16) (2,757)
Distributions paid (938) (2,692)
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Net cash (used in) provided by financing (954) (2,599)
activities
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Net (decrease) in cash and cash equivalents (112) (384)
Cash and cash equivalents, beginning of period 461 772
===============================================================================
Cash and cash equivalents, end of period $349 $388
===============================================================================
The accompanying notes are an integral part of these financial statements.
PROPERTY RESOURCES EQUITY TRUST
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
NOTE 1- BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Property Resources
Equity Trust (the "Fund") have been prepared in accordance with the
instructions to Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In the opinion of management, all
appropriate adjustments necessary to a fair presentation of the results of
operations have been made for the periods shown. All adjustments are of a
normal recurring nature. Certain prior year amounts have been reclassified
to conform to current year presentations.
These financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Management have decided to sell
the Fund's remaining property, Good Guys Shopping Center, and liquidate the
Fund. A form 8-K statement announcing this intention was filed on April 22
1998. No sale of the remaining Property had occurred at June 30, 1998,
however management is currently actively seeking a buyer of the Property (see
Note 5 below). Accordingly it is possible that the Fund will not continue as
a going concern for a reasonable period of time.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary if
the Fund will not continue as a going concern. Management believes that the
market value of the Partnership's remaining property is at least equal to its
book value. Accordingly management does not expect any material losses to be
undertaken in the event of the liquidation of the Fund. 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.
These financial statements should be read in conjunction with the Fund's
audited financial statements for the year ended December 31, 1997.
NOTE 2 - NOTE PAYABLE
On March 3, 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.
NOTE 3 - SALE OF RENTAL PROPERTY
On March 4, 1997, the Fund sold the Graham Court Business Park to an
unaffiliated buyer for a total sales price of $2,200,000 resulting in net
cash proceeds to the Fund of $2,093,000. In connection with the sale, the
Fund recognized a gain of $370,000.
NOTE 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the six-month period ended June 30, 1998, interest paid amounted to
$124,446.
NOTE 5 - SUBSEQUENT EVENT
On July 10, 1998, Management entered into a contract to sell Good Guys Plaza
Shopping Center to an unaffiliated third party for a sales price of
$5,211,000, subject to contingencies. On July 28, 1998, the majority of
those contingencies were removed and although some remain, the sale may be
finalized before December 31, 1998; however, no assurance can be given that
the sale will be finalized at this price, or that a sale will occur at all.
PROPERTY RESOURCES EQUITY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
Total revenue for the three and six-month period ended June 30, 1998
decreased $50,000, or 20%, and $61,000, or 13%, respectively, when compared
to the same periods in 1997. The decrease in dividend and interest income was
attributable to lower average investment balances in the current periods.
Rental income decreased because of the sale of Graham Court in March 1997 and
also a tenant reimbursement made in 1997 was not repeated in the second
quarter of 1998.
Total expenses for the three and six-month period ended June 30, 1998
decreased $42,000, or 20%, and $61,000, or 15%, respectively, when compared
to the same periods in 1997. The Fund sold the Graham Court property in March
1997. Operating expense, related party, depreciation and general and
administrative expenses decreased as a result of the sale. Interest expense
decreased by $15,000 or 18% for the three-month period ended June 30, 1998
compared to the same period in 1997 primarily as a result of the refinancing
of the Good Guys note in March 1997.
Net income for the three and six-month period ended June 30, 1998 decreased
$8,000, or 20%, and $370,000, or 89%, respectively, when compared to the same
periods in 1997. This was due to changes in revenue and expenses as discussed
above and the gain on sale of the Graham Court property in March 1997 as
discussed in note 4 to the financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, cash and cash equivalents aggregated $349,000, which the
Fund believes is adequate to meet its short-term operating cash requirements.
Net cash provided by operating activities increased $13,000 when compared to
the same period in 1997. This was primarily due to the results of operations
as discussed above.
Cash flows provided by investing activities decreased $1,386,000 in 1998 as a
result of proceeds received from the sale of Graham Court that occurred in
1997 as offset by the principal amount received on a note receivable in 1998.
PROPERTY RESOURCES EQUITY TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Cash flows used in financing activities decreased $1,645,000 primarily due to
a decrease in the distribution paid.
As of June 30, 1998, the Fund had one remaining property in its portfolio. As
discussed in note 1 to the financial statements management is currently
marketing the property for sale, and a sale may occur in 1998.
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 cash flow after payment of
distributions.
On March 3, 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.
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.
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.
CASH DISTRIBUTION POLICY
Distributions are declared quarterly at the discretion of the Board of
Directors. The Fund's present distribution policy is to at least annually
evaluate the current distribution rate in light of anticipated tenant
turnover over the next two or three years, the estimated level of associated
improvements and leasing commissions, planned capital expenditures, any debt
service requirements and the Fund's other working capital requirements.
After balancing these considerations, and considering the Fund's earnings and
cash flow, the level of its liquid reserves and other relevant factors, the
Fund seeks to establish a distribution rate which:
i) provides a stable distribution which is sustainable
despite short term fluctuations in property cash
flows;
ii) maximizes the amount of cash flow paid out as
distributions consistent with the above listed
objective; and
iii) complies with the Internal Revenue Code requirement
that a REIT annually pay out as distributions not less
than 95% of its taxable income.
During the three-month period ended June 30, 1998, the Fund declared
distributions totaling $872,041.
YEAR 2000
Management is in the process of assessing the impact of Year 2000 issues on
its computer systems and applications. At this time, management believes that
the costs associated with resolving these issues will not have a material
effect on the Company's financial statements.
PROPERTY RESOURCES EQUITY TRUST
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Not applicable
(b) Reports on Form 8-K
Current Report on Form 8-K dated April 17, 1998, was filed on April 22, 1998
attaching Registrant's letter to shareholders of the Fund dated April 17,
1998 under Item 5.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PROPERTY RESOURCES EQUITY TRUST
By:
David P. Goss
Chief Executive Officer
Date:, 1998
