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, 1998. Commission File No. 2-77330
- ------------------------------------------------------------------------------
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 Identification
incorporation or organization) number)
P.O. Box 7777, San Mateo, CA 94403-7777 (650) 312-5824
- -----------------------------------------------------------------------------
(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 the 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 29,1999, 1,089,472shares 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, 1998: 1,090,052 shares of Series A common stock
and 1,000 shares of Series B common stock.
Documents Incorporated by Reference - None
PART 1
Item 1. BUSINESS
PROPERTY RESOURCES EQUITY TRUST (the "Company") is a corporation formed on
February 20, 1985 under the laws of the State of California. The Company is
a real estate investment trust ("REIT").
The Company's investment program included providing its stockholders with a
professionally managed diversified portfolio of income producing equity real
estate investments in strategic markets, which represented the potential for
current cash flow and for capital appreciation. The Company is a
self-liquidating REIT with a finite life and is currently in its liquidation
phase. As of December 31, 1998, the Company had sold all of its
properties.
Item 2. PROPERTIES
The Company has no properties at December 31, 1998, and is currently in the
process of liqiodation. Continental Property Management Co. ("CPMC"), an
affiliate of the Advisor, performed the leasing and management related
services for the properties.
Acquisitions and sales of the Company's properties were as follows:
- -------------------------------------------------------------------------------
PROPERTY DATE ACQUIRED DATE SOLD
- -------------------------------------------------------------------------------
Graham Court Business Park August 1986 March 1997
Agora Office Building September 1986 April 1996
Good Guys Plaza July 1988 October 1998
- -------------------------------------------------------------------------------
Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company is a
party or which any of its properties 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
On January 26, 1999, a Special Meeting of shareholders of the Company
was held to approve the dissolution, termination and liquidation of the
Company as described in the proposed Plan of Dissolution and
Liquidation. A copy of the Plan is attached as Exhibit A to the Proxy
Statement dated December 18, 1999 and as Exhibit 2. to this Form 10-K.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
No public trading market presently exists for the shares of the Company. Due
to the expenses involved and the expected liquidation of the Company, it is
not anticipated that shares of the Company will be listed on a stock exchange.
The Company has one class of common stock in two series, designated Series A
and Series B (the "Common Stock"). As of December 31, 1998, the Company had
1,090,052 Series A common shares outstanding and 1,000 Series B common shares
outstanding, and there were approximately 1,069 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. No distributions have been declared or paid to the Series
B shareholder. The following table reflects the distributions declared per
share of Series A common stock during 1998 and 1997.
- -------------------------------------------------------------------------------
QUARTER ENDED 1998 1997
- -------------------------------------------------------------------------------
December 31 - $0.06
September 30 $0.06 $0.06
June 30 $0.80 $2.38
March 31 $0.06 $0.09
- -------------------------------------------------------------------------------
The Company paid dividend distributions to stockholders quarterly on
approximately the last day of March, June, September and December. In
December 1998 the distribution was not paid and a liquidating distribution
was made in February 1999. 100% of the 1998 and approximately 89% of the
1997 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.
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands 1998 1997 1996 1995 1994
except per share amounts)
- -------------------------------------------------------------------------------------
Total revenues $647 $873 $1,158 $1,138 $1,165
Gain on sale of rental $187 $368 $86 - -
property
Net income (loss) $273 $481 $449 $231 $ (47)
Per share:
Net income (loss) $.25 $.44 $.41 $.21 $ (.04)
Dividends declared and $.92 $2.59 $.36 $.28 $.30
paid
Number of shares of
common stock outstanding 1,091 1,091 1,091 1,091 1,091
Balance sheet data:
Total assets $2,522 $6,085 $8,374 $8,350 $8,396
Note payable - $2,827 $2,750 $2,750 $2,750
Stockholders' equity $2,504 $3,234 $5,565 $5,512 $5,568
Other Data:
Funds From Operations $217 $289 $609 $476 $446
Cashflows
Operating $287 $163 $500 $530 $482
Investing $5,583 $2,272 $52 $ (31) $27
Financing $ (3,830) $ (2,746) $ (392) $ (305) $ (331)
Total rentable square
footage at the end of - 33,968 82,328 105,886 105,886
period:
Number of properties at end
of period - 1 2 3 3
</TABLE>
Item 7. 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.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Net income for the year ended December 31, 1998, decreased $208,000 (43%)
over the prior year. The main factor affecting the results for the year was
the sales of the Good Guys Plaza in October 1998, and Graham Court Business
Park in March 1997, ("the property sales"), which gave rise to gains on sale,
but which also reduced rental revenues and operating expenses in 1998.
Total revenues for the year ended December 31, 1998, decreased $226,000 (26%)
as compared to the prior year. The decrease is principally attributable to
the property sales. Rental revenues and occupancy rates related to the Good
Guys Plaza in the period prior to its sale remained relatively stable from
the previous year.
Total expenses for the year ended December 31, 1998 decreased $199,000 (26%)
as compared to the prior year. Decreases in property operating costs and
depreciation charges were related to the property sales. Interest expense
decreased $78,000 (29%) as a result of the repayment of the Company's note
payable in 1998.
The Company recorded a gain on sale of $187,000 in 1998 on the sale of the
Good Guys Plaza, which compares to a gain on sale of $368,000 recorded on the
sale of the Graham Court Building in 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Net income for the year ended December 31, 1997, increased $32,000 (7%) over
the prior year. The main factor affecting the results for the year was the
sale of Graham Court in March, 1997, which gave rise to a large gain on sale,
but which also reduced rental revenues and operating expenses in 1997.
Total revenues for the year ended December 31, 1997, decreased $285,000 (25%)
as compared to the year ended December 31, 1996. The decrease is
attributable to the sale of properties in March,1997 and in April, 1996.
Rental revenues and occupancy rates related to the Good Guys Plaza in 1997
remained stable from the previous year.
Total expenses for the year ended December 31, 1997 decreased $35,000 (4%) as
compared to the prior year. Decreases in property operating costs and
depreciation charges were related to the sale of Graham Court, but were
partly offset by an increase in interest expense. Interest expense
increased $78,000 (41%) as a result of the expiration of the loan secured on
Good Guys Plaza in March 1997. A new loan was negotiated in March 1997
which carries a fixed interest rate of 8.8%, compared to the previous
variable rate.
A gain on sale of $368,000 was recorded in 1997 on the sale of Graham Court,
which compares to a gain on sale of $86,000 recorded on the sale of the Agora
Office Building in 1996.
RELATED PARTY EXPENSES
The Company has an agreement with the Advisor to administer the day-to-day
operations of the Company. For each of the years ended December 31, 1998,
1997 and 1996, the Company recorded $10,000, $38,000 and $21,000,
respectively, of advisory fee expense to the Advisor in accordance with the
Advisory Agreement. Also for the years ended December 31, 1998, 1997 and
1996, and in accordance with the Advisory Agreement, the Company reimbursed
the Advisor or affiliates of the Advisor $12,000, $24,000 and $23,000
respectively, for accounting and data processing, and $19,000, $18,000 and
$13,000, respectively, for stockholder services expenses.
The Company's properties were managed by Continental Property Management
Co., ("CPMC"), an affiliate of the Advisor. For each of the years ended
December 31, 1998, 1997 and 1996, the Company recorded $21,000, $28,000 and
$35,000, respectively, of property management fee expense to CPMC in
accordance with the property management agreement. Also for the years ending
December 31, 1998, 1997 and 1996, and in accordance with the management
agreement, the Company paid CPMC leasing commissions of $0, $5,000 and
$31,000, respectively.
The Company's by-laws require the Advisor to refund to the Company 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 Company's properties) unless the Independent
Directors conclude that a higher level of expenses is justified as set forth
in the by-laws. Furthermore, in no event will Operating Expenses exceed 2%
of the total assets under management less cash, cash items and unsecured
indebtedness. For the year ended December 31, 1998, the Company was in
compliance with these limitations.
The Company'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 is fair and reasonable to the Company.
IMPACT OF INFLATION
The Company's policy of negotiating leases which incorporate operating
expense "pass-through" provisions was intended to protect the Company against
increased operating costs resulting from inflation.
YEAR 2000
The Company's management does not expect any material impact to arise from
the year 2000 issue as it is probable that the Company will be liquidated
before 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, cash and cash equivalents totaled $2,501,000.
Management believes that the Company's current sources of capital will be
adequate to successfully liquidate the Company.
The Company'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, funds from operations after payment of
dividends and issuance of debt.
FUNDS FROM OPERATIONS
Funds from operations for each of the years ended December 31, 1998, 1997 and
1996 were as follows.
In thousands 1998 1997 1996
- ---------------------------------------------------------------------------
Net Income 273 481 449
Add Depreciation and amortization 131 176 246
Less Gains on Sale of Property (187) (368) (86)
- ---------------------------------------------------------------------------
Funds from Operations $217 $289 $609
===========================================================================
The primary differences between the periods reflect the changes in net income
as discussed under "Results of Operations".
As defined by the National Association of Real Estate Investment Trusts,
Funds from operations, ("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 Company
may not be comparable to similarly titled measures of other funds that follow
different definitions.
The Company believes that FFO is helpful in understanding a property
portfolio. This is because 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
depreciation and gains and losses from property sales. 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. 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 Company's operating performance or as a
measure of liquidity.
DISTRIBUTIONS
Distributions are paid quarterly at the discretion of the Board of Directors
and depend on the Company's earnings, cash flow, financial condition and
other relevant factors. During the years ended December 31, 1998 and 1997,
the Company declared distributions totaling $1,003,000 and $2,823,000, or
$0.92 and $2.59 per share each year, respectively. The distributions
represented 462% and 977% of the Company's FFO in 1998 and 1997, respectively.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Report of Independent Accountants 9
Balance Sheets as of December 31, 1998 and 1997 10
Statements of Income for the Years 11
Ended December 31, 1998, 1997 and 1996
Statements of Stockholders' Equity for the 12
Years Ended December 31, 1998, 1997 and 1996
Statements of Cash Flows for the Years 13
Ended December 31, 1998, 1997 and 1996
Notes to Financial Statements 14 - 17
Schedule III - Real Estate and Accumulated 18
Depreciation
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.
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
To the Board of Directors and Stockholders of
Property Resources Equity Trust
In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Property
Resources Equity Trust at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
listed in the accompanying index presents fairly, in all material respects,
the information set forth therein when read in conjunction with the related
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company'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 of
these statements in accordance with generally accepted auditing standards
which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As described in Note 10 to the financial statements, the stockholders
approved a plan of dissolution and liquidation. As a result, im subsequent
periods the Company will change its basis of accounting from a going
concern basis to a liquidation basis.
PricewaterhouseCoopers LLP
San Francisco, California
January 18, 1999, except for Note 10, as to which the date is February 16,
1999
B A L A N C E S H E E T S
PROPERTY RESOURCES EQUITY TRUST
IN THOUSANDS (EXCEPT PER SHARE AMOUNTS)
- ------------------------------------------------------------------------------
As of December 31, 1998 and 1997 1998 1997
- ------------------------------------------------------------------------------
ASSETS
Real estate:
Land - $1,702
Buildings and improvements - 4,132
Tenant improvements - 157
- ------------------------------------------------------------------------------
- 5,991
Less: accumulated depreciation - 1,409
- ------------------------------------------------------------------------------
Real estate, net - 4,582
Cash and cash equivalents $2,501 461
Deferred rent receivable - 57
Note receivable - 717
Other assets, net 21 268
- ------------------------------------------------------------------------------
Total assets $2,522 $6,085
==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable - $2,827
Deposits and other liabilities $18 24
- ------------------------------------------------------------------------------
Total liabilities 18 2,851
- ------------------------------------------------------------------------------
Stockholders' equity:
Common stock, Series A, without par value, stated
value $10 per share; 10,000 shares authorized;
1,090 shares issued and outstanding
at December 31, 1998 and 1997 9,384 9,384
Common stock, Series B, without par value,
stated value $10 per share; one thousand shares
authorized, issued and outstanding 10 10
Accumulated distributions in excess of net income (6,890) (6,160)
- ------------------------------------------------------------------------------
Total stockholders' equity 2,504 3,234
- ------------------------------------------------------------------------------
Total liabilities and stockholders' equity $2,522 $6,085
==============================================================================
The accompanying notes are an integral part of these financial statements.
S T A T E M E N T S O F I N C O M E
PROPERTY RESOURCES EQUITY TRUST
IN THOUSANDS, EXCEPT PER SHARE DATA
- ---------------------------------------------------------------------
For the years ended December 31,
1998, 1997 and 1996 1998 1997 1996
- ---------------------------------------------------------------------
Revenues:
Rent $581 $748 $1,076
Interest 51 81 74
Dividends 15 44 8
- ---------------------------------------------------------------------
Total revenues 647 873 1,158
- ---------------------------------------------------------------------
Expenses:
Interest 191 269 191
Depreciation and amortization 131 176 246
Property operating 100 146 209
Related party 62 108 92
General and administrative and 77 61 57
other
- ---------------------------------------------------------------------
Total expenses 561 760 795
- ---------------------------------------------------------------------
Income before gain on sale of rental 86 113 363
property
Gain on sale of rental property 187 368 86
- ---------------------------------------------------------------------
Net income $273 $481 $449
=====================================================================
Unrealized gain on mortgage-backed - 11 (4)
Securities
- ---------------------------------------------------------------------
Total comprehensive income $273 $492 $445
=====================================================================
Net income per share, based on the
weighted average shares
outstanding of common stock of $.25 $.44 $.41
1,091 in all periods
=====================================================================
Distributions declared per share of
Series A common stock $.92 $2.59 $.36
=====================================================================
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
IN THOUSANDS, EXCEPT NUMBER OF SHARES
As of and for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Common Stock Other distributions
Series A Series B Comprehensive in excess of
Shares Amount Shares Amount Income/(loss) net income Total
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,
<S> <C> <C> <C> <C> <C> <C> <C>
January 1, 1996 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
Cash distributions on
common stock - - - - - (392) (392)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 1,090,064 9,384 1,000 10 (11) (3,818) 5,565
Redemption of
Series A common
stock (12) - - - - - -
Unrealized gain on
mortgage-backed
securities 11 11
Net income - - - - - 481 481
Cash distributions on
common stock - - - - - (2,823) (2,823)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 1,090,052 9,384 1,000 10 - (6,160) 3,234
Net income 273 273
Cash distributions on
common stock (1,003) (1,003)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 1,090,052 $9,384 1,000 $10 $- $(6,890) $2,504
=================================================================================================================================
</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
IN THOUSANDS
- -------------------------------------------------------------------------------
For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996
- -------------------------------------------------------------------------------
Net income $273 $481 $449
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 131 195 248
Gain on sale of assets (187) (360) (86)
(Increase) decrease in deferred rent receivable (15) 20 (6)
(Increase) decrease in other assets 103 (138) (76)
(Decrease) increase in deposits and other (18) (35) (29)
liabilities
- -------------------------------------------------------------------------------
Net cash provided by operating activities 287 163 500
- -------------------------------------------------------------------------------
Net proceeds from sale of rental property 4,876 2,093 60
Leasing commissions paid (7) (10) (35)
Principal received on note receivable 717 19 14
Disposition of mortgage-backed securities - 175 21
Improvements to rental property (3) (5) (8)
- -------------------------------------------------------------------------------
Net cash provided by investing activities 5,583 2,272 52
- -------------------------------------------------------------------------------
Origination of borrowings under note payable - 2,850 -
Repayment of note payable (2,827) (2,773) -
Distributions paid (1,003) (2,823) (392)
- -------------------------------------------------------------------------------
Net cash used in financing activities (3,830) (2,746) (392)
- -------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,040 (311) 160
Cash and cash equivalents, beginning of year 461 772 612
===============================================================================
Cash and cash equivalents, end of year $2,501 $461 $772
===============================================================================
Supplemental cash flow and non-cash activity - See notes 4 & 9 to the
financial statements.
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 "Company") is a California corporation
formed on February 20, 1985 for the purpose of investing in income-producing
real property. The Company is a real estate investment trust ("REIT") and
has qualified as a REIT from inception. Property Resources, Inc. (the
"Advisor") manages the Company's day-to-day operations, under the terms of an
agreement that is renewable annually.
Acquisitions and sales of the Company's properties were as follows:
- -------------------------------------------------------------------------------
PROPERTY DATE ACQUIRED DATE SOLD
- -------------------------------------------------------------------------------
Graham Court Business Park August 1986 March 1997
Agora Office Building September 1986 April 1996
Good Guys Plaza July 1988 October 1998
- -------------------------------------------------------------------------------
There is no public market for the Company's common stock and shares are not
freely transferable.
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.
During 1998, the Company completed the sale of the remaining property. As
discussed in Note 10, on January 26, 1999, the shareholders approved the
plan of dissolution and liquidation of the Company.
REAL ESTATE
Rental property is stated at cost and depreciated using the straight-line
method over estimated useful live of 30 to 35 years for buildings and
improvements and the life of the related lease for tenant improvements.
Significant improvements and betterments are capitalized. Maintenance and
repairs are charged to expense when incurred.
Pursuant to the Company's historical investment objectives, property
purchased has been held for extended periods. During the holding period
management periodically, but at least annually, evaluated whether rental
property has suffered an impairment in value. Such assessments included the
consideration of the Company'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 was performed utilizing a
sum of future cash flows methodology that compared the property's operating
cash flows and residual value to the net carrying amount.
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 the relatively
short-term nature of these instruments, the carrying value approximates fair
value.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities held by the Company are classified as
available-for-sale and are carried at fair 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 using
the straight-line method over the terms of the related leases.
RENTAL REVENUES
Rental revenues are recorded using the straight-line method to reflect
scheduled rent increases and free rent periods over the related lease term.
As a result, a deferred rent receivable is created when rental receivables
are less than the amount earned using the straight-line method or when rental
income is recognized during free rent periods of a lease.
INCOME TAXES
The Company is a real estate investment trust ("REIT"), having elected to
qualify as a REIT under the applicable provisions of the Internal Revenue
Code since 1989. 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 REIT
tests are met. The Company is in compliance with these tests. Accordingly,
no provision is made for income taxes in these financial statements.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("FAS 130") establishes the disclosure requirements for reporting
comprehensive income in an entity's annual and interim financial statements.
The Company had no accumulated other comprehensive income at December 31,
1998 or December 31, 1997. The Company has fully implemented the requirements
of FAS 130 in these financial statements.
SEGMENT INFORMATION
The Company has adopted Statement of Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information", ("FAS
131"), which establishes new requirements for reporting segment information.
The Company has determined that it had only one reportable segment under FAS
131.
NOTE 2 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
The Company did not hold any mortgage backed securities, available for sale
at December 31, 1998 or December 31, 1997.
During 1997, proceeds of $175,000 were received in respect of the sale of
mortgage-backed securities with a cost of $184,000, realizing a loss on the
sale of investments of $9,000.
NOTE 3 - NOTE RECEIVABLE
The Company collected all amounts due on the note receivable on its maturity
date in April, 1998. This note was created in April, 1996 when the Agora
Office Building was sold to an unaffiliated third party. The terms of the
sale included the $750,000 note receivable owed by the buyer to the Company.
NOTE 4 - NOTE PAYABLE
During 1998 the Company paid in full a note payable following the sale of the
Good Guys Plaza Shopping Center in October 1998. The amount paid on final
redemption of the loan was $2,803,000 and was financed by the sale proceeds
of the related property.
For the years ended December 31, 1998, 1997 and 1996, interest paid on notes
was $195,000, $264,000, and $183,000, respectively.
NOTE 5 - 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 Company. To date, the Board of Directors has not
declared any dividends on Series B common stock. The Advisor holds 580
shares of Series A common stock and 1,000 shares of Series B common stock.
NOTE 6 - 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, 1998, 1997 and 1996 were as
follows:
Ordinary Return of Capital Total
Year Paid Income Capital Gain Paid
- -----------------------------------------------------
1998 - $.92 - $.92
1997 $.13 $2.28 $.18 $2.59
1996 - $.36 - $.36
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company has an agreement with the Advisor to administer the day-to-day
operations of the Company for which it pays a fee. On July 16, 1993,
Franklin/Templeton Investor Services, Inc., an affiliate of the Advisor,
assumed responsibility as the Company's transfer agent and registrar for the
Company's Series A common stock.
The Company 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 was paid management, leasing and construction supervision
fees.
The agreements between the Company and the Advisor, or affiliates, provided
for certain types of compensation for services rendered for the years ended
December 31, 1998, 1997 and 1996:
DOLLARS IN THOUSANDS 1998 1997 1996
- --------------------------------------------------------------------------------
Related party expenses:
Management advisory fees $10 $38 $21
Reimbursement for accounting and data
processing 12 24 23
expenses
Property management fee 21 28 35
Stockholder services fees 19 18 13
================================================================================
Total related party expense $62 $108 $92
================================================================================
Leasing commissions, capitalized and amortized
over the term of the related lease $- $5 $31
================================================================================
At December 31, 1997, cash equivalents included $3,000 invested in Franklin
Money Fund and $416,000 invested in Franklin Institutional Fiduciary Trust,
both of which are managed by an affiliate of the Advisor.
At December 31, 1998, the Company held no such investments. For the years
ended December 31, 1998, 1997 and 1996, related dividends earned were
$15,000, $44,000 and $8,000, respectively.
NOTE 8 - RENTAL INCOME
At December 31, 1998 the Company has sold all of its properties and thus will
not receive further rental income. The Company's rental income from
commercial property was received principally from tenants under
non-cancelable operating leases.
NOTE 9 - SALE OF REAL ESTATE
On October 21, 1998, the company sold the Good Guys Plaza Shopping Center to
an unrelated third party for $5,108,000, resulting in net cash proceeds to
the Company of $4,876,000. The Company recognized a gain of $187,000 on this
transaction.
NOTE 10 - SUBSEQUENT EVENT
At a special meeting of shareholders, held on January 26, 1999, the
dissolution, termination and liquidation of the Company was approved by a
majority of the Company's outstanding shares, after being approved by the
Board of Directors. An initial liquidating distribution of $2.10 per share
was made on February 16, 1999 and a final distribution is expected in June
1999. Management does not expect that the costs related to the ultimate
liquidation of the Company will be material to the financial statements.
SCHEDULE III - 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
The Company held no real estate at December 31, 1998.
RECONCILIATION OF REAL ESTATE
In thousands 1998 1997 1996
- ---------------------------------------------------------------
Balance at beginning of period $5,991 $8,449 $9,536
Disposition (5,994) (2,463) (1,095)
Additions during year:
Improvements to rental property 3 5 8
===============================================================
Balance at end of period $ - $5,991 $8,449
===============================================================
RECONCILIATION OF ACCUMULATED DEPRECIATION
In thousands 1998 1997 1996
- ---------------------------------------------------------------
Balance at beginning of period $1,409 $1,995 $2,145
Disposition (1,518) (740) (371)
Depreciation expense for the period 119 154 221
- ---------------------------------------------------------------
Balance at end of period $ - $1,409 $1,995
===============================================================
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER AND THE
ADVISOR
The officers and directors of the Company are as follows:
NAME POSITION
David P. Goss Chief Executive Officer, President and a
Director
David W. Walters Independent Director
James A. Niles Independent Director
Richard S. Barone Secretary
Martin L. Flanagan Vice President - Finance and Chief
Financial Officer
David N. Popelka Vice President - Asset Management
David Goss, Richard S. Barone, Martin L. Flanagan and David N. Popelka also
served as directors or officers of the Advisor.
DAVID P. GOSS (51)
Mr. Goss is Chief Executive Officer, President and Director of the Company
(1987 to date). He is also Chief Executive Officer, President and Director
of the Advisor, Franklin Properties, Inc., Franklin Real Estate Income Fund
(1988 to date), Franklin Select Real Estate Income Fund (1989 to date) and
Franklin Advantage Real Estate Income Fund (1990 to date). Mr. Goss has a
B.A. degree from the University of California, Berkeley, and a J.D. degree
from the New York University School of Law.
DAVID W. WALTERS (52)
Mr. Walters is an Independent Director of the Company (1986 to date) and has
been a practicing attorney since 1974, specializing in real estate
acquisitions, finance, securities and taxation. From 1974 to 1976, Mr.
Walters was with the California State Department of Corporations where, as
Corporations Counsel, he was responsible for the administration of
California's Real Estate Securities Qualification Rules. From 1976 to 1978,
Mr. Walters was a member of the Bank of America's legal staff, where he
specialized in commercial and consumer lending problems. Since 1978, Mr.
Walters has been in private practice. Mr. Walters graduated from Stanford
University where he received a B.S. degree. He also received a M.B.A. degree
from the University of California at Berkeley, a J.D. degree from the
University of San Francisco and a Masters degree in Taxation from Golden Gate
University.
JAMES A. NILES (53)
Mr. Niles is an Independent Director of the Company (1985 to date), and is an
independent consultant. Mr. Niles attended the University of California,
Davis, where he received a B.S, M.S. and Ph.D. in Agricultural Economics.
Mr. Niles was a faculty member at the University of Florida from 1973 to
1978, and an Associate Professor at the Institute of Agribusiness at the
University of Santa Clara from 1978 to 1986. Mr. Niles is the owner of
Creekside Investment located in Los Gatos, California.
RICHARD S. BARONE (48)
Mr. Barone is Secretary of the Company (1988 to date). He is also Secretary
of the Advisor, Franklin Properties, Inc., Franklin Real Estate Income Fund
(1988 to date), Franklin Select Real Estate Income Fund (1989 to date) and
Franklin Advantage Real Estate Income Fund (1990 to date). He is also Senior
Vice President - Legal of the Advisor and Franklin Properties, Inc. (1988 to
date) and Corporate Counsel of Franklin Resources, Inc. (1988 to date).
Previously, Mr. Barone was employed by the Robert A. McNeil Corporation as
Corporate Counsel from 1982 until June, 1987, during which period he also
held the positions of Vice President - Legal (1984 to 1987) and Secretary
(1986 to 1987). Prior to 1982, he was in a private law practice in San Mateo,
California. Mr. Barone received a B.A. degree and a J.D. degree from the
University of San Francisco. He is a member of the State Bar of California.
MARTIN L. FLANAGAN (38)
Mr. Flanagan is Vice President - Finance and Chief Financial Officer of the
Company, the Advisor and Franklin Properties, Inc. He is also Senior Vice
President, Chief Financial Officer and Treasurer of Franklin Resources, Inc.;
Senior Vice President and Treasurer of Franklin/Templeton Distributors, Inc.,
Franklin Advisers, Inc., and Franklin Institutional Services Corporation;
Treasurer of Franklin Management, Inc., and Franklin Trust Company; Senior
Vice President of Franklin/Templeton Investor Services, Inc. and Franklin
Agency, Inc.; a Director of Templeton/National Bank of Greece Management
(Luxembourg), Templeton Investment Management (Singapore), Templeton
Investment Management (Hong Kong), Templeton Funds Investment Annuity
Company, Templeton Funds Trust Company, Templeton Funds Management, Inc.,
Templeton Holding Ltd., Templeton/Franklin Investment Services, Inc.,
Templeton Life Assurance Ltd., Templeton Quantitative Advisors, Inc.,
Templeton Emerging Markets, Templeton Management (Luxembourg), Templeton Unit
Trust Managers, Ltd., and Templeton Investment Management, Ltd. (Edinburgh);
Executive Vice President, Chief Operating Officer and a Director of Templeton
Worldwide, Inc. and Templeton International, Inc.; Executive Vice President
and a Director of T.G.H. Holdings, Ltd.; Chairman of the Board of Templeton
Global Strategic Services, Inc.; General Manager of Templeton Financial
Advisory Services, S.A.; Managing Director of Templeton Global Investors,
Ltd.; President and Chief Executive Officer of Templeton Global Investors;
and Executive Vice President and a Director of Templeton, Galbraith &
Hansberger, Ltd. and Templeton Investment Counsel, Inc. From 1982 to 1983,
he was an auditor for Arthur Andersen & Company. Mr. Flanagan received a
B.A. degree from Southern Methodist University and is a Certified Public
Accountant and a Chartered Financial Analyst. He is currently a member of
the American Institute of Certified Public Accountants and the International
Society of Financial Analysts.
DAVID N. POPELKA (46)
David Popelka is Vice President - Asset Management of the Company and Vice
President for the Advisor, Property Resources, Inc. Prior to joining the
General Partner, Mr. Popelka was Vice President - Portfolio Management for
the Glenborough Management Company in Redwood City, California. Mr. Popelka
is a graduate of Illinois State University and received a Masters degree in
Business Administration from the University of Washington Graduate School of
Business. He has been a guest lecturer on real estate investments and
finance at Golden Gate University. Mr. Popelka is a real estate broker
licensed by the State of California.
Item 11. EXECUTIVE COMPENSATION
No direct compensation has been paid by the Company to directors and officers
of the Company or the Company'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, 1998. The
Company 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 Company pays certain fees to and reimburses 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 Company to beneficially own
more than 5% of the outstanding common stock. As of December 31, 1998, no
directors or officers of the Company owned any shares of the Company.
The Company is unaware of any arrangement which may at a subsequent date
result in a change in control of the Company.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into an agreement with the Advisor to administer the
day-to-day operations of the Company. 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 1998 amounted to $10,000. The agreement also provides for
the following compensation and payments to the Advisor and its affiliates:
Reimbursement of certain administrative costs and expenses
incurred on behalf of the Company of $12,000 in 1998.
Acquisition and investment advisory fees not to exceed in the
aggregate, 13% of offering proceeds for services rendered in
connection with the investigation, selection or acquisition of
property. No such fees were paid in 1998.
Subordinated sales commissions of 5% of the gross selling price
of Company property. No commissions were paid in 1998.
Subordinated disposition fee of 15% of net proceeds, as defined,
from the sale or refinancing of Company property. No such fees
were paid in 1998.
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
1998.
An affiliate of the Advisor is entitled to receive fees for
property management and other property related services. In
1998, the affiliate was paid $21,000 for property management
services and $0 for leasing services.
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
1998.
An affiliate of the Advisor is entitled to receive a stockholder
services fee for providing services as the Company's transfer
agent and registrar and for providing other related stockholder
services. The affiliate was paid $19,000 in 1998 for these
services.
On July 16, 1993, Franklin/Templeton Investor Services, Inc., an affiliate of
the Advisor, assumed responsibility as the Company's transfer agent and
registrar for the Company's Series A common stock. At December 31, 1998, and
1997, cash equivalents included $0 and $3,000 invested in Franklin Money Fund
and $0 and $416,000 invested in Institutional Fiduciary Trust, respectively.
Both are managed by an affiliate of the Advisor. For the year ended December
31, 1998, dividends earned on these investments amounted to $15,000.
David P. Goss, Richard S. Barone and David N. Popelka who are officers of the
Company, are also officers of the Advisor.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements and schedules of the Company included in
Item 8 of the report are listed on the index on page 8.
2. The supplemental financial statement schedule of the Company
included in Item 8 of this report is listed on the index on page 8.
3. Exhibits
(2.) Plan of Dissolution and Liquidation (also see Form 8-K
filed on February 1, 1999 and dated January 26, 1999
providing details of the approval of the Plan of
Dissolution and Liquidation)
(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 Income included in the Financial
Statements.
*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 on Form 8-K.
On November 23, 1998 the Company filed form 8-KA. This filing provided
proforma financial information relating to the sale of the Good Guys
Plaza Shopping Center which occurred in October 1998.
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: 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
- ---------------------------- -------------------
David P. Goss
Director1
- ---------------------------- -------------------
David W. Walters
Director1
- ---------------------------- -------------------
James A. Niles
1 Independent Director
EXHIBIT 2.
PLAN OF DISSOLUTION AND LIQUIDATION
This Plan of Dissolution and Liquidation (this "Plan") is for the
purpose of effecting the dissolution and complete liquidation of Property
Resources Equity Trust (the "Company").
1. APPROVAL OF THIS PLAN. In accordance with Section 1900(a) of the
California Corporations Code, this Plan shall be submitted to the
shareholders of the Company for approval at the Special Meeting of
Shareholders to be held for that purpose. This Plan shall become effective
upon the approval of the holders of a majority of the outstanding shares (the
"Effective Date")
2. CESSATION OF BUSINESS. Following approval of this Plan, the
Company shall not engage in any further business activities, except for the
purpose of completing work in process, disposing of its assets, providing for
satisfaction of its obligations, adjusting and winding up its business and
affairs, and distributing the proceeds from the disposition of its assets in
accordance with this Plan. The Board of Directors (the "Directors") then in
office shall continue in office solely for that purpose.
3. CONTINUING EMPLOYEES. For the purpose of effecting the
liquidation of the Company's assets, the Company shall retain, subject to the
pleasure of the Directors, such employees as the Directors deem desirable to
supervise the liquidation.
4. EXPENSES OF LIQUIDATION. The Directors may provide, from the
assets of the Company, reasonable funds for payment of the expenses of the
dissolution and liquidation of the Company, including filing fees and other
expenses relating to the holding of the Special Meeting of Shareholders to
consider this Plan and other documentation required in connection with this
Plan, continuation of employees engaged in the liquidation process,
accounting and attorneys' fees and expenses, and other reasonable fees and
expenses incurred in connection with the liquidation process.
5. PAYMENT OF LEGALLY ENFORCEABLE CLAIMS. The Company shall
satisfy, or provide for the satisfaction of, all legally enforceable claims
and obligations of the Company in an orderly manner.
6. PROVISION FOR CONTINUED INDEMNIFICATION OF DIRECTORS AND
OFFICERS. The Company shall reserve sufficient assets (or obtain such
insurance) as shall be necessary to provide for continued indemnification of
the Directors, officers and agents of the Company to the full extent provided
by the articles of incorporation and bylaws of the Company, any existing
indemnification agreements between the Company and any of such persons, and
applicable law.
7. DISTRIBUTION TO SHAREHOLDERS. After satisfaction of all of the
Company's legally enforceable obligations, remaining assets will be
distributed to the shareholders of the Company in accordance with their
respective shareholdings.
8. TERMINATION OF REIT STATUS. In the course of liquidation, the
Board of Directors, acting in its discretion, shall have the authority to
terminate the Company's election to be taxed as a real estate investment
trust under Sections 856-860 of the Internal Revenue Code of 1986, as
amended, if it determines that such action would be in the best interests of
the shareholders.
9. LIQUIDATING TRUST. If the Company is unable to satisfy its
legally enforceable obligations within 12 months of the Effective Date, the
Board of Directors may cause the Company to create a liquidating trust (the
"Liquidating Trust") and to distribute beneficial interests in the
Liquidating Trust to the shareholders as part of the liquidation process.
The Liquidating Trust shall be constituted pursuant to a liquidating trust
agreement in such form as the Board of Directors may approve, it being
intended that the transfer and assignment to the Liquidating Trust pursuant
hereto and the distribution to shareholders of the beneficial interests
therein shall constitute a part of the final liquidating distribution by the
Company to the shareholders of their pro rata interests in the remaining
amount of cash and other property held by or for the account of the Company.
From and after the date of the Company's transfer of cash and property to the
Liquidating Trust, the Company shall have no interest of any character in and
to any such cash and property and all of such cash and property shall
thereafter be held by the Liquidating Trust solely for the benefit of and
ultimate distribution of the shareholders, subject to any unsatisfied debts,
liabilities and expenses.
10. AUTHORIZATION. The Board of Directors of the Company, or the
trustees of the Liquidating Trust, and such officers of the Company as the
Board of Directors may direct, are hereby authorized to interpret the
provisions of this Plan and are hereby authorized and directed to take such
further actions, to execute such agreements, conveyances, assignments,
transfers, certificates and other documents, as may in their judgment be
necessary or desirable in order to wind up expeditiously the affairs of the
Company and complete the liquidation thereof, including, without limitation,
(i) the execution of any contracts, deeds, assignments or other instruments
necessary or appropriate to sell or otherwise dispose of any and all property
of the Company, whether real or personal, tangible or intangible, (ii) the
appointment of other persons to carry out any aspect of this Plan, (iii) the
temporary investment of funds in such medium as the Board of Directors may
deem appropriate, and (iv) the modification of this Plan as may be necessary
to implement this Plan. The death, resignation or other disability of any
Director or officer of the Company shall not impair the authority of the
surviving or remaining Directors or officers of the Company (or any persons
appointed as substitutes therefor) to exercise any of the powers provided for
in this Plan. Upon such death, resignation or other disability, the
surviving or remaining Directors shall have the authority to fill the vacancy
or vacancies so created, but the failure to fill such vacancy or vacancies
shall not impair the authority of the surviving or remaining Directors or
officers to exercise any of the powers provided for in this Plan.
11. TERMINATION OF THIS PLAN. The Board of Directors may, by vote of
the majority of the Directors then in office, terminate this Plan and revoke
the dissolution of the Company, whether or not a vote of the shareholders has
previously occurred.
