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 SEPTEMBER 30, 1997 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 (I.R.S. Employer of incorporation or organization) 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 September 30, 1997: 1,090,052 Shares of Series B Common Stock Outstanding as of September 30, 1997: 1,000 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PROPERTY RESOURCES EQUITY TRUST BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (Unaudited) (Dollars in thousands, except per share amounts) 1997 1996 - -------------------------------------------------------------------------------- ASSETS: Rental property: Land $1,702 $2,099 Buildings and improvements 4,181 6,215 Tenant improvements 107 135 - -------------------------------------------------------------------------------- 5,990 8,449 Less: accumulated depreciation 1,373 1,995 - -------------------------------------------------------------------------------- 4,617 6,454 Cash and cash equivalents 327 772 Mortgage-backed securities, available for sale 138 173 Deferred rent receivable 53 77 Note receivable 722 736 Other assets 268 162 - -------------------------------------------------------------------------------- Total assets $6,125 $8,374 ================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY: Note payable $2,837 $2,750 Tenants' deposits and other liabilities 47 59 - -------------------------------------------------------------------------------- Total liabilities 2,884 2,809 - -------------------------------------------------------------------------------- Stockholders' equity: Common stock, Series A, without par value, stated value $10 per share; 10,000,000 shares authorized; 1,090,052 shares issued and outstanding in 1997 and 1996 9,384 9,384 Common stock, Series B, without par value, stated value $10 per share; 1,000 shares authorized, issued and outstanding in 1997 and 1996 10 10 Unrealized loss on mortgage-backed securities (8) (11) Retained earnings (deficit) (6,145) (3,818) - -------------------------------------------------------------------------------- Total stockholders' equity 3,241 5,565 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $6,125 $8,374 ================================================================================ The accompanying notes are an intregal part of these financial statements. PROPERTY RESOURCES EQUITY TRUST STATEMENTS OF OPERATIONS (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER September SEPTEMBER September 30, 30, 30, 30, (Dollars in thousands, except per share amounts) 1997 1996 1997 1996 - ------------------------------------------------------------------------------- REVENUE: Rent $160 $264 $531 $803 Interest 19 23 66 50 Dividends - 3 39 5 Gain on sale of rental property - - 370 88 - ------------------------------------------------------------------------------- Total revenue 179 290 1,006 946 - ------------------------------------------------------------------------------- EXPENSES: Interest 70 49 199 136 Depreciation and amortization 39 58 138 190 Operating 31 8 111 162 Related party 19 23 88 69 General and administrative 5 5 39 42 - ------------------------------------------------------------------------------- Total expenses 164 143 575 599 - ------------------------------------------------------------------------------- NET INCOME $15 $147 $431 $347 =============================================================================== Net income per share of Series A common stock $.02 $.13 $.40 $.32 =============================================================================== Dividends per share of Series A common stock $.06 $.09 $2.53 $.27 =============================================================================== The accompanying notes are an intregal part of these financial statements. PROPERTY RESOURCES EQUITY TRUST STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited) (Dollars in thousands) 1997 1996 - -------------------------------------------------------------------------------- Cash flows from operating activities: Net income $431 $347 - -------------------------------------------------------------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 151 190 Decrease in deferred rent receivable 24 (2) (Increase) decrease in other assets (138) (30) Increase in tenants' deposits and other liabilities (12) (34) Gain on sale of rental property (370) (88) - -------------------------------------------------------------------------------- (345) 36 - -------------------------------------------------------------------------------- Net cash provided by operating activities 86 383 - -------------------------------------------------------------------------------- Cash flow from investing activities: Origination of note receivable - (750) Principal received on note receivable 14 9 Improvements to rental property (5) (7) Proceeds from sale of rental property 2,093 812 Disposition of mortgage-backed securities 38 3 - -------------------------------------------------------------------------------- Net cash provided by investing activities 2,140 67 - -------------------------------------------------------------------------------- Cash flow from financing activities: Borrowings under notes payable 2,850 - Principal payments on note payable (2,763) - Distributions paid (2,758) (294) - -------------------------------------------------------------------------------- Net cash used in financing activities (2,671) (294) - -------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (445) 156 Cash and cash equivalents, beginning of period 772 612 - -------------------------------------------------------------------------------- Cash and cash equivalents, end of period $327 $768 ================================================================================ The accompanying notes are an intregal part of these financial statements. PROPERTY RESOURCES EQUITY TRUST NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 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 should be read in conjunction with the Fund's audited financial statements for the year ended December 31, 1996. NOTE 2 - BUSINESS ACTIVITY As of September 30, 1997, the Fund had one remaining property in its portfolio, Good Guys Shopping Center. Management currently intends to dispose of the Good Guys Plaza Shopping Center and, in that regard, expects to commence marketing activity in 1998. At September 30, 1997, 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. NOTE 3 - 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 4 - 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 5 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION For the nine month period ended September 30, 1997, interest paid amounted to $186,000. NOTE 6 - SUBSEQUENT EVENTS On November 12, 1997, the board of directors of the Fund held a special meeting to discuss certain offers for the purchase of Good Guys Plaza Shopping Center and an offer to tender for the shares of the Fund. The board of directors voted to commence negotiations with the entity proposing the tender offer. There is no assurance that the negotiations will result in a completed transaction. 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 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 Total revenue for the three-month period decreased $111,000 or 38% primarily as a result of a decrease in rental revenue due to the sale of the Graham Court Business Park in March, 1997. Total revenue for the nine-month period ended September 30, 1997 increased $60,000 or 6% when compared to the same period in 1996 primarily due to the gain on sale of rental property as a result of the sale of the Graham Court Business Park. Interest and dividend revenue for the three-month period ended September 30, 1997 decreased slightly when compared to the same period in 1996 as a result of lower average investment balances for the period. For the nine month period ended September 30, 1997 interest and dividend revenue increased $50,000 compared to the same period in 1996 as a result of interest earned on the note receivable relating to the sale of the Agora Office Building in April 1996 and dividends earned from an increase in the average investment balance as a result of proceeds received from the sale of the Graham Court Business Park in March, 1997. The sale proceeds were subsequently distributed to the shareholders in June 1997. Total expenses for the three-month period increased $21,000, or 15% primarily as a result of an increase in interest as a result of the refinancing of the note payable collateralized by the property Good Guys Shopping Center and an increase in operating expenses due to a refund of prior year property taxes at the Good Guys Plaza in 1996. Total expenses for the nine month period ended September 30, 1997 decreased $24,000, or 4%, from $599,000 in 1996 to $575,000 in 1997. The decrease in total expenses was primarily due to a decrease in operating expenses and depreciation and amortization as a result of the sale of the Agora Office Building and Graham Court Business Park. The decrease was partially offset by an increase in interest expense resulting from the refinancing of the note payable for Good Guys Shopping Center. Net income for the three-month period decreased $132,000 primarily due to a decrease in rental revenue as a result of the sale of Graham Court Business Park in March 1997. Net income for the nine month period ended September 30, 1997 increased $84,000 as compared to the same period in 1996 primarily as a result of the recognized gain on sale of Graham Court Business Park which was partially offset by an increase in interest expense resulting from the refinancing of the note payable for Good Guys Shopping Center. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1997, cash and cash equivalents aggregated $327,000 which the Fund believes is adequate to meet its short-term operating cash requiremnets. Net cash provided by operating activities decreased $297,000 when compared to the same period in 1996. The decrease in cash flow from operating activities is attributable to the Fund having one remaining property in its portfolio after the sale the sale of the Agora Office Building in April 1996 and Graham Court Business Park in March 1997. Cash flows provided by investing activities increased $2,073,000 when compared to the same period in 1996 primarily as a result of proceeds received from the sale of Graham Court Business Park. 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 increased $2,377,000 primarily as a result of cash distributions paid to shareholders from the sale proceeds of Graham Court Business Park. As of September 30, 1997, the Fund had one remaining property in its portfolio. At September 30, 1997, 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. 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 nine-month period ended September 30, 1997, the Fund declared distributions totaling $2,758,000. 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 No reports on Form 8-K were filed by the Registrant during the quarter ended September 30, 1997. 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: NOVEMBER 13, 1997