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 March 31, 1996 -------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE CHANGE 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 (I.R.S. Employer Identification No.) of incorporation or organization) P. O. Box 7777, San Mateo, California 94403-7777 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (415) 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 March 31, 1996: 1,090,067 Shares of Series B Common Stock Outstanding as of March 31, 1996: 1,000 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PROPERTY RESOURCES EQUITY TRUST BALANCE SHEETS MARCH 31, 1996 AND DECEMBER 31, 1995 (Unaudited) (Dollars in 000's except per share amounts) 1996 1995 - ------------------------------------------------------------------------------- ASSETS Rental property: Land $2,789 $2,789 Buildings and improvements 6,548 6,548 Tenant improvements 201 194 Furniture and fixtures 5 5 - ------------------------------------------------------------------------------- 9,543 9,536 Less: accumulated depreciation 2,203 2,145 - ------------------------------------------------------------------------------- 7,340 7,391 Cash and cash equivalents 630 612 Mortgage-backed securities, available for sale 194 198 Deferred rent receivable 75 71 Other assets 97 78 - ------------------------------------------------------------------------------- Total assets $8,336 $8,350 =============================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Note and bond payable $2,750 $2,750 Tenants' deposits and other liabilities 111 88 - ------------------------------------------------------------------------------- Total liabilities 2,861 2,838 =============================================================================== Stockholders' equity: Common stock, Series A, without par value, stated value $10 per share; 10,000,000 shares authorized; 1,090,067 shares issued and outstanding in 1996 and 1995 9,384 9,384 Common stock, Series B, without par value, stated value $10 per share; 1,000 shares authorized, issued and outstanding in 1996 and 1995 10 10 Unrealized loss on mortgage-backed securities (10) (7) Retained earnings (deficit) (3,909) (3,875) - ------------------------------------------------------------------------------- Total stockholders' equity 5,475 5,512 - ------------------------------------------------------------------------------- Total liabilities and stockholders' equity $8,336 $8,350 =============================================================================== See notes to financial statements. Item 1. Financial Statements (continued) PROPERTY RESOURCES EQUITY TRUST STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995 (Unaudited) (Dollars in 000's except per share amounts) 1996 1995 - ------------------------------------------------------------------------------- Revenue: Rent $281 $262 Dividends 1 1 Interest 10 9 - ------------------------------------------------------------------------------- Total revenue 292 272 - ------------------------------------------------------------------------------- Expenses: Interest 41 53 Depreciation and amortization 62 62 Operating 86 89 Related party 23 24 General and administrative 16 23 - ------------------------------------------------------------------------------- Total expenses 228 251 - ------------------------------------------------------------------------------- Net income $64 $21 =============================================================================== Net income per share of Series A common stock $ 06 $.02 =============================================================================== Dividends per share of Series A common stock $.09 $.07 =============================================================================== See notes to financial statements. Item 1. Financial Statements (continued) PROPERTY RESOURCES EQUITY TRUST STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1996 (Unaudited) Common Stock ------------------------------------- Series A Series B -------------------- --------------- Unrealized Gain/Loss on Retained Mortgage-BackEarnings (Dollars in 000's) Shares Amount Shares Amount Securities (Deficit) Total - ------------------------------------------------------------------------------------------- Balance, beginning of period 1,090,067 $9,384 1,000 $10 $(7) $(3,875) $5,512 Unrealized loss on mortgage-backed securities - - - - (3) - (3) Net income - - - - - 64 64 Distributions - - - - - (98) (98) declared - ------------------------------------------------------------------------------------------- Balance, end of period 1,090,067 $9,384 1,000 $10 $(10) $(3,909) $5,475 =========================================================================================== See notes to financial statements. Item 1. Financial Statements (continued) PROPERTY RESOURCES EQUITY TRUST STATEMENTS OF CASH FLOWS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 1996 AND 1995 (Unaudited) (Dollars in 000's) 1996 1995 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $64 $21 - -------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 62 62 (Increase) decrease in deferred rent receivable (4) 6 (Increase) decrease in other assets (23) 11 Increase in tenants' deposits and other liabilities 23 51 - -------------------------------------------------------------------------------- 58 130 - -------------------------------------------------------------------------------- Net cash provided by operating activities 122 151 - -------------------------------------------------------------------------------- Cash flows from investing activities: Improvements to rental property (7) - Disposition of mortgage-backed securities 1 1 - -------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (6) 1 - -------------------------------------------------------------------------------- Cash flows from financing activities: Distributions paid (98) (76) - -------------------------------------------------------------------------------- Net cash used in financing activities (98) (76) - -------------------------------------------------------------------------------- Net increase in cash and cash equivalents 18 76 Cash and cash equivalents, beginning of period 612 418 - -------------------------------------------------------------------------------- Cash and cash equivalents, end of period $630 $494 ================================================================================ See notes to financial statements. Item 1. Financial Statements (continued) PROPERTY RESOURCES EQUITY TRUST NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 NOTE 1 - ORGANIZATION 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 offering period for the sale of the Fund's Series A common stock terminated on July 17, 1987 with total proceeds raised of $10,889,000 less offering costs of $1,505,000. As of the close of the offering, Property Resources Inc., (the "Advisor") had purchased 1,000 shares of the Fund's Series B common stock for $10,000 cash. The Fund is a real estate investment trust ("REIT") and elected REIT status for income tax purposes for the tax years commencing 1988. Under the Internal Revenue Code and applicable state income tax law, a qualified REIT is not subject to income tax if at least 95% of its taxable income is currently distributed to its stockholders and other tests are met. The Fund intends to distribute substantially all of its taxable income in the future. Accordingly, no provision is made for income taxes in these financial statements. NOTE 2- BASIS OF PRESENTATION The accompanying unaudited financial statements contain all adjustments (consisting of normal recurring accruals) which are necessary, in the opinion of management, for a fair presentation. The statements, which do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements, should be read in conjunction with the Fund's financial statements for the year ended December 31, 1995. NOTE 3 - RELATED PARTY TRANSACTIONS The Fund has entered into an agreement with the Advisor to administer the day-to-day operations of the Fund. Under the terms of the agreement, which is renewable annually, the Advisor will receive a fee equal to 5% of the total amount distributed to the stockholders. The fee is not payable with regard to distributions from the sale or refinancing of property. At March 31, 1996, cash equivalents included $2,000 invested in Franklin Money Fund which is an investment company managed by an affiliate of the Advisor. For the three month period ended March 31, 1996 dividend income earned amounted to $1,000. The agreements between the Fund and the Advisor, or affiliates, provide for certain types of compensation and payments including but not limited to the types of compensation and payments which were paid or accrued by the Fund for those services rendered for the three month period ended March 31, 1996: Item 1. Financial Statements (continued) PROPERTY RESOURCES EQUITY TRUST NOTES TO FINANCIAL STATEMENTS MARCH 31, 1996 NOTE 3 - RELATED PARTY TRANSACTIONS (Continued) Management advisory fees, charged to related party expense $5,000 Reimbursement for data processing expenses, charged to related party expense 8,000 Property management fees, charged to related party expense 9,000 Shareholder services fees, charged to related party expense 3,000 Leasing commission, capitalized and amortized over the term of the related lease 3,000 NOTE 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION For the three month period ended March 31, 1996, interest paid amounted to $41,000. NOTE 5 - SUBSEQUENT EVENT On April 16, 1996, pursuant to a contract entered into on February 26, 1996 and amended April 15, 1996, the Fund sold the Agora Office Building ( the `Property" ) to an unaffiliated buyer for a total sales price of $850,000. The total sales price included a $750,000 promissory note ( the "Note" ) payable to the Fund, secured by the Property and tenant rents. The terms of the Note include a 7% interest rate, a two year term and monthly principal and interest payments of approximately $6,000. The Note is non-recourse to the other assets of the buyer. PART I - FINANCIAL INFORMATION 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. COMPARISON OF QUARTER ENDED MARCH 31, 1996 TO QUARTER ENDED MARCH 31, 1995 Net income for the quarter ended March 31, 1996 amounted to $64,000, an increase of $43,000 as compared to the same period in 1995. The increase is due to the following factors: an increase in rental revenue of $19,000; an increase in interest and dividends of $1,000; a decrease in interest expense of $12,000; a decrease in operating expenses of $3,000; a decrease in related party expense of $1,000; and a decrease in general and administrative expense of $7,000. Rental revenue for the quarter increased $19,000, or 7%, as a result of an increase in the rental and average occupancy rates at the Fund's properties. The average occupancy rate of net rentable square feet for the quarter ended March 31, 1996 and 1995 at Graham Court Business Park was 100% and 93%; and Agora Office Building was 68% and 63%; respectively. Good Guys Plaza Shopping Center remained unchanged at 94%. Total expenses for the quarter decreased $23,000, or 9%, from $251,000 in 1995 to $228,000. The decrease in total expenses was primarily due to a decrease in interest expense of $12,000, reflecting interest rate changes on the outstanding note payable and to a decrease in general and administrative expense of $7,000, as a result of a decrease in accounting 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 the quarter ended March 31, 1996, the Fund recorded $5,000 of advisory fee expense to the Advisor in accordance with the Advisory Agreement. The Fund's properties are managed by Continental Property Management Co., ("CPMC"), an affiliate of the Advisor. For the quarter ended March 31, 1996, the Fund recorded $9,000 of property management fee expense to CPMC in accordance with the Property Management Agreement. 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 3 to the accompanying financial statements, are fair and reasonable to the Fund. PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations IMPACT OF INFLATION The Fund's management believes that inflation may have a positive effect on the Fund's property portfolio, but this effect generally will not be fully realized until such properties are sold or exchanged. The Fund's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Fund against increased operating costs resulting from inflation. 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 cash flow after payment of distributions. At March 31, 1996, cash and cash equivalents totaled $630,000 and investments in mortgage-backed securities totaled $194,000. As of March 31, 1996, one of the Fund's properties was subject to secured financing with an outstanding balance of $2,750,000. Otherwise, the Fund's properties are owned free of indebtedness. Interest on the note accrues at a variable rate which is based on a certain bond index. The interest rate is not subject to a minimum or maximum rate of interest. On March 31, 1996, the interest rate was 6.00%. In certain circumstances, the payments due may be less than accrued interest. Any resulting accrued interest bears interest at the then current rate. The note is due in full in December, 1996. On April 16, 1996, pursuant to a contract entered into on February 26, 1996 and amended April 15, 1996, the Fund sold the Agora Office Building to an unaffiliated buyer for a total sales price of $850,000. The total sales price included a $750,000 promissory note ( the "Note" ) payable to the Fund, secured by the Property and tenant rents. The terms of the Note include a 7% interest rate, a two year term and monthly principal and interest payments of approximately $6,000. The Note is non-recourse to the other assets of the buyer. 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. 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 quarter ended March 31, 1996, the Fund declared and paid distributions totaling $98,000. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Not applicable (b) Reports on Form 8-K No reports on Form 8-K were filed by the Registrant during the quarter ended March 31, 1996. 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:/s/ David P. Goss David P. Goss Chief Executive Officer Date: May 13, 1996