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, 1997. Commission File 0-15880 - -------------------------------------------------------------------------------- PROPERTY RESOURCES EQUITY TRUST (Exact Name of Registrant as Specified in its Charter) California 94-3959770 - -------------------------------------------------------------------------------- (State or other jurisdiction or (I.R.S. Employer Identification number) incorporation or organization) P.O. Box 7777, San Mateo, CA (650) 312-5824 94403-7777 - -------------------------------------------------------------------------------- (Address of principal and executive Registrant's telephone number, including Office) Area Code Securities registered pursuant to Section 12(b) of Act: None Securities registered pursuant to Section 12(g) of Act: Title of each class Common Stock Series A ------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 12 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ---- ---- ---- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by referenced in Part III of this Form 10-K or any amendment to this Form 10-K. X ---- At March 27,1998, 1,089,472 shares of the registrant's Series A common stock were held by non-affiliates of the registrant. No market for the shares currently exists and therefore a market value cannot be determined. Indicate the number of shares outstanding of each of the issuer's classes of common stock at December 31, 1997: 1,090,052 shares of Series A common stock and 1,000 shares of Series B common stock. Documents Incorporated by Reference - Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1997, and Proxy Statement for use in connection with its Annual Meeting of Stockholders to be held on June 3, 1998, are incorporated by referenced in Parts I, II, III and IV. PART 1 Item 1. BUSINESS In addition to the information set forth below, the information required by this Item is incorporated by reference from Page 4 of the Property Resources Equity Trust's (the "Company's") 1997 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. The Company is subject to the risks generally associated with the ownership of real property, including the possibility that operating expenses, debt service payments and fixed costs may exceed property revenues; economic conditions may adversely change in California and the national market; the real estate investment climate may change; local market conditions may change adversely due to general or local economic conditions and neighborhood characteristics; interest rates may fluctuate and the availability, costs and terms of mortgage financing may change; unanticipated maintenance and renovations may arise; changes in real estate tax rates and other operating expenses may arise; governmental rules and fiscal policies may change; natural disasters, including earthquakes, floods or tornadoes may result in losses beyond the coverage of the Company's policies; the financial condition of the tenants of properties may deteriorate; and other factors which are beyond the control of the Company may occur. The real estate business is competitive, and the Company is in competition with many other entities engaged in real estate investment activities, some of which have greater assets than the Company. The Company's real estate investments in rental properties are subject to the risk of the Company's inability to attract or retain tenants and a consequent decline in rental income. Furthermore, real estate investments tend to be long-term, and under the real estate investment trust ("REIT") provisions of the Internal Revenue Code, might be subject to minimum holding periods to avoid adverse tax consequences; consequently, the Company will have only minimal ability to vary its property portfolio in response to changing economic, financial and investment conditions. To the extent that the Company's rental income is based on a percentage of the gross receipts of retail tenants, its cash flow is dependent on the retail success achieved by such tenants. The opportunities for sale, and the profitability of any sale, of any particular property by the Company will be subject to the risk of adverse changes in real estate market conditions, which may vary depending upon the size, location and type of each property. Item 1. BUSINESS (Continued) Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property. Such laws often impose such liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances, the presence of such substances, or the failure to properly remediate such substances, when released. As part of the investigation of properties prior to acquisition, the Company typically has obtained inspection reports concerning the condition of the property, including specialized environmental inspection reports concerning the presence of hazardous substances on the property. The Company intends to continue this practice. Such inspection reports, however, do not necessarily reveal all hazardous substances or sources thereof, and substances not considered hazardous when a property is acquired may subsequently be classified as such by amendments to local, state, and federal laws, ordinances, and regulations. If it is ever determined that hazardous substances on or in a Company property must be removed or the release of such substances remediated, the Company could be required to pay all costs of any necessary clean-up work, although under certain circumstances, claims against other responsible parties could be made by the Company. The Company could also experience lost revenues during any such cleanup, or lower lease rates, decreased occupancy or difficulty selling or borrowing against the affected property either prior to or following any such clean-up. The Company is not aware of any hazardous substances on or in its properties and it has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with the environmental condition of any of its properties. The Americans with Disabilities Act ("ADA"), which generally requires that buildings be made accessible to people with disabilities, has separate compliance requirements for "public accommodations" and "commercial facilities". If certain uses by tenants of a building constitute a "public accommodation", the ADA imposes liability for non-compliance on both the tenant and the owner/operator of the building. The Company has conducted inspections of its property to determine whether the exterior and common area of such property are in compliance with the ADA and it believes that its properties are in compliance. If, however, it were ever determined that one or more of the Company's properties were not in compliance, the Company may be subjected to unanticipated expenditures incurred to remove access barriers, or to pay fines or damages related to such non-compliance. Item 1. BUSINESS (Continued) The Company's due diligence review of prospective acquisitions of office, industrial and retail property includes an examination of such property's compliance with the ADA, and the cost of remedial work, if any, believed to be required to meet such requirements. The Company's only business consists of the real estate investment activity described above. Therefore, information about industry segments is not applicable. The business is not seasonal. At December 31, 1997, the Company did not have any employees. Item 2. PROPERTIES The information required by this Item is incorporated by reference from Page 3 through 6 of the Registrant's 1997 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. Item 3. LEGAL PROCEEDINGS There are no material legal proceedings pending to which the Company is a party or which any of its property is the subject, required to be reported hereunder. From time to time, the Company may be a party to ordinary routine litigation incidental to its business. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the fiscal year. PART II Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS In addition to the information set forth below, the information required by this Item is incorporated by reference from Page 6 of the Company's 1997 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. There are no restrictions on sales or purchases of the Company's Series A common stock other than those that may be imposed by any applicable federal or state securities laws or by the Company's Articles of Incorporation or Bylaws with respect to maintaining the Company's status as a qualified real estate investment trust under applicable tax rules and regulations. The Company is a REIT and elected REIT status commencing with the 1988 tax year pursuant to the provisions of the Internal Revenue Code (the "Code") and applicable state income tax law. Under those provisions, the Company will not be subject to income tax on that portion of its taxable income, which is distributed annually to Stockholders, if at least 95% of its taxable income (which term excludes capital gains) is distributed and if certain other conditions are met. During such time as the Company qualifies as a REIT, the Company intends to make quarterly cash dividends to the Stockholders aggregating on an annual basis at least 95% of its taxable income. Among other requirements, the Company must, in order to continue its status as a REIT under the Code, not have more than 50% in value of its outstanding shares owned by five or fewer individuals during the last half of a taxable year (the "5/50 Provision"). In order to meet these requirements, the Company has the power to redeem a sufficient number of shares in order to maintain or to bring the ownership of the shares into conformity with these requirements, and to prohibit the transfer of shares to persons whose acquisition would result in a violation of these requirements. Item 6. SELECTED FINANCIAL DATA The information required by this Item is incorporated by reference from Page 3 of the Company's 1997 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this Item is incorporated by reference from Pages 8 through 10 of the Company's 1997 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is incorporated by reference from Pages 12 through 22 of the Company's 1997 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Certain information required by Part III is omitted from this report in that the Company has been subject to the reporting requirements of Section 13 of the Exchange Act for the preceding 12 months, and will file a definitive Proxy Statement, pursuant to Regulation 14a (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report, and the information included therein is incorporated herein by reference. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY AND THE ADVISOR The information required by this Item is incorporated by reference to the Company's Proxy Statement. 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 $9,400 for attending meetings during the year ended December 31, 1997. 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, 1997, 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 1997 amounted to $38,000. 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 $24,000 in 1997. Acquisition and investment advisory fees to exceed in the aggregate, 13% of offering proceeds for services rendered in connection with the investigation, selection or acquisition of property. No such fees were paid in 1997. Subordinated sales commissions of 5% of the gross selling price of Company property. No commissions were paid in 1997. Subordinated disposition fee of 15% of net proceeds, as defined, from the sale or refinancing of Company property. No such fees were paid in 1997. 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 1997. An affiliate of the Advisor is entitled to receive fees for property management and other property related services. In 1997, the affiliate was paid $28,000 for property management services and $5,000 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 1997. 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 $18,000 in 1997 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, 1997, and 1996, cash equivalents included $3,000 and $2,000 invested in Franklin Money Fund and $416,000 and $229,000 invested in Institutional Fiduciary Trust, respectively. Both are managed by an affiliate of the Advisor. For the year ended December 31, 1997, dividends earned on these investments amounted to $44,000. David P. Goss, Richard S. Barone and David N. Popelka who are officers of the Company, are also officers of the Advisor. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K (a) 1. The following financial statements are included on the pages indicated of the 1997 Annual Report and incorporated by reference in Part II, Item 8 and are attached hereto as Exhibit 13. PAGE OF ANNUAL REPORT ------------- Report of Independent Accountants 11 Balance Sheets as of December 1997 and 1996 12 Statements of Income for the years ended 13 December 31, 1997, 1996 and 1995 Statements of Stockholders' Equity for the years ended 14 December 31, 1997, 1996 and 1995 Statements of Cash Flows for the years ended 15 December 31, 1997, 1996 and 1995 Notes to Financial Statements 16-20 2. The supplemental financial statement schedule, Real Estate and Accumulated Depreciation, is incorporated herein by reference on Pages 21 and 22 of the Company's 1997 Annual Report to Stockholders, a copy of which is attached hereto as Exhibit 13. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Exhibits: (3.1) Articles of Incorporation * (3.2) Bylaws * (10.1) Material Contracts - Advisory Agreement * (10.2) Material Contracts - Property Management Agreement (11.) Statement regarding computation of earnings per share. See the Statement of Income included in the Financial Statements. (13.) Annual Report to Stockholders for the fiscal year ended December 31, 1997 (to be deemed filed only to the extent required by the instructions to exhibits for report on Form 10-K). *Documents were filed in the Company's Form S-11 Registration Statement, dated July 16, 1985 (Registration No. 2-96589) and are incorporated herein by reference. (b) Reports filed on Form 8-K. No reports on Form 8-K were filed by the Company for the quarter ended December 31, 1997. 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 - --------- ----- ---- /s/ David P. Goss Chief Executive Officer - ----------------------- ------------------- David P. Goss /s/ David W. Walters Director1 - ----------------------- ------------------- David W. Walters /s/ James A. Niles Director1 - ----------------------- ------------------- James A. Niles - ---------------------------- 1 Independent Director PROPERTY RESOURCES EQUITY TRUST 1997 ANNUAL REPORT - -------------------------------------------------------------------------------- PRESIDENT'S MESSAGE - -------------------------------------------------------------------------------- DEAR STOCKHOLDERS As previously announced, Property Resources Equity Trust has entered its liquidation phase. We have commenced marketing for sale the Company's remaining property, Good Guys Plaza Shopping Center. When the property is sold, a liquidating distribution will be made. The Company's only other significant asset is a $750,000 note carried back from the sale of the Agora Office Building in 1996. We expect that note to be paid in full at maturity in April 1998. Meanwhile, a lease was recently executed at the Good Guys Plaza for the remaining vacant space. The new lease has a four year term. Occupancy at Good Guys Plaza is now 100%. Very truly yours, David P. Goss, President S E L E C T E D F I N A N C I A L I N F O R M A T I O N The following selected financial data for the Company was derived from the audited financial statements of the Company and should be read in conjunction with the financial statements and related notes to follow in this report. - -------------------------------------------------------- ----------- ------------ ----------- ----------- (Dollars in thousands except per share 1997 1996 1995 1994 1993 amounts) - -------------------------------------------------------- ----------- ------------ ----------- ----------- Total revenues $873 $1,158 $1,138 $1,165 $1,186 Gain on sale of rental property 368 86 - - - Net income (loss) 481 449 231 (47) 140 Per share: Net income (loss) .44 .41 .21 (.04) .13 Dividends declared and paid 2.59 .36 .28 .30 .30 Number of shares of Common stock outstanding 1,091,052 1,091,064 1,091,067 1,091,067 1,091,067 Balance sheet data: Total assets 6,085 8,374 8,350 8,396 8,799 Bond payable - - - - 4 Note payable 2,827 2,750 2,750 2,750 2,750 Stockholders' equity 3,234 5,565 5,512 5,568 5,967 Other Data: Funds From Operations 308 611 476 446 421 Cashflows Operating 163 500 530 482 397 Investing 2,272 52 (31) 27 (317) Financing (2,746) (392) (305) (331) (462) Total rentable square footage at the end of period: 33,968 82,328 105,886 105,886 105,886 Number of properties at end of period 1 2 3 3 3 P R O P E R T Y R E S O U R C E S E Q U I T Y T R U S T PROPERTY RESOURCES EQUITY TRUST (the "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 includes providing its stockholders with a professionally managed diversified portfolio of income-producing equity real estate investments in strategic markets, which represent the potential for current cash flow and for capital appreciation. The Company is a self-liquidating REIT with a finite life. The Company has entered into an advisory agreement with Property Resources, Inc. (the "Advisor"). Under the terms of the agreement, which is renewable annually, the Advisor manages the day-to-day operations of the Company subject to overall approval of the Board of Directors. R E A L E S T A T E P O R T F O L I O The Company acquired Graham Court Business Park in August, 1986, the Agora Office Building in September, 1986, and the Good Guys Plaza in July, 1988. The Company sold the Agora Office Building in April 1996 and the Graham Court Business Park in March of 1997. The Company's remaining real estate asset is the Good Guys Plaza. The property is managed by Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, which performs the leasing and management related services for the properties. The Company currently carries earthquake insurance coverage for Good Guys Plaza. The Company intends to continue to carry such earthquake insurance to the extent that it is available at economically reasonable prices, although no assurance can be given that such coverage will be available. However, the Company's earthquake insurance coverage may, from time to time, be subject to substantial deductibles. - -------------------------------------------------------------------------------- GOOD GUYS PLAZA SHOPPING CENTER RETAIL 33,968 SQ. FT. SANTA ROSA, CA - -------------------------------------------------------------------------------- On July 11, 1988, the Company purchased the Good Guys Plaza Shopping Center ("Good Guys Plaza"), which consists of three free standing buildings located at 1301 Guerneville Road, Santa Rosa, Sonoma County, California. Good Guys Plaza is located just off U.S. Highway 101 on the north side of Santa Rosa. San Francisco lies approximately 52 miles south along Highway 101. Santa Rosa is Sonoma County's county seat and largest city with a population of over 120,000. Completed in 1986, Good Guys Plaza has a total of 153 parking spaces. Construction is concrete block and stucco with aluminum/glass store fronts. Santa Rosa serves as the center of government and commerce for the county. The county is an important wine making region and tourist destination. Many of Santa Rosa's workers commute south to employment centers in the inner San Francisco Bay region. Government employment is the largest employer in the county, with manufacturing a close second. The Hewlett Packard Co., which heads up several high-tech firms with facilities in the area, is the largest manufacturing employer in the county. The unemployment rate in Sonoma County fell to 3.1% in December of 1997 from 3.6% a year earlier. A large regional retail center, Coddington Shopping Center, is adjacent to Good Guys Plaza. The property is subject to a promissory note collateralized by a deed of trust in the amount of $2,827,000. The note is payable in fixed monthly installments representing principal and interest payments over a twenty-five year period. The interest rate on the note is fixed 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 intended to result in a dept repayment in 2007. R E A L E S T A T E P O R T F O L I O SIGNIFICANT TENANTS Two tenants provide 10% or more of the Company's current annual base rent at Good Guys Plaza. The Good Guys!, a consumer electronic retailer, located at Good Guys Plaza, leases 10,927 square feet and makes base rental payments of approximately $262,920, or about 45% of current annual base rent at Good Guys Plaza. In December of 1995, the Good Guys! exercised their option to extend the term of their lease five years. Their lease now expires in May of 2001. Wherehouse Entertainment, an audio/video retailer at Good Guys Plaza, leases 7,600 square feet and makes base rental payments of approximately $118,957, or about 20% of current annual base rent at Good Guys Plaza. In July, 1995 their lease was extended and now expires in January of 2001. However, Wherehouse Entertainment filed for protection under Chapter 11 of the Federal Bankruptcy Code (the "Code") on August 2, 1995. Under the Code, Wherehouse Entertainment could have rejected or confirmed its lease with the Company. In December of 1996, Wherehouse Entertainment confirmed and the Bankruptcy Court approved the lease, as amended. Both of these tenants' leases provide for an additional five-year option term and for the tenant to reimburse the Company for an allocated share of property expenses. PORTFOLIO SUMMARY At December 31, 1997, Good Guys Plaza was 96% occupied, with a total of 11 leases. The following schedule lists the lease expiration dates and the related annual base rental income as of December 31, 1997. LEASE EXPIRATIONS - ----------- ------------- ------------- ------------------ ------------------- No. of Current % of Leases Total Annual Current Year Expiring Sq. Ft. Base Rent Annual Rent - ----------- ------------- ------------- ------------------ ------------------- 1998 1 1,010 18,408 3% 1999 0 0 0 0% 2000 5 6,005 103,248 18% 2001 4 23,403 413,998 72% 2003 1 2,080 36,820 6% - ----------- ------------- ------------- ------------------ ------------------- R E A L E S T A T E P O R T F O L I O On December 31, 1997, the Company's portfolio represented 33,968 rentable square feet, compared to 82,328 rentable square feet at December 31, 1996. For the years ended December 31, 1995, 1996 and 1997, the following table shows the number of lease agreements that the Company executed, the rentable square feet covered by the agreements, and the amount of tenant improvements and leasing commissions paid by the Company. The table includes activity at the Agora Office Building and Graham Court during the period owned. LEASING ACTIVITY - ------------------------ ----------------------------------------------------- No. of Tenant Leasing Leases Improvements Commissions Year Executed Sq. Ft. Paid Paid Total - ------------------------ ----------------------------------------------------- 1995 6 15,783 $6,826 $36,226 $43,052 1996 5 14,691 $9,022 $35,022 $44,044 1997 4 4,975 $5,000 $2,241 $7,241 - ------------------------ ----------------------------------------------------- In 1995, three tenants renewed and/or extended their existing leases at Good Guys Plaza. Two new leases were executed at Graham Court and one at Agora. In addition, two tenants occupying 21,467 square feet exercised lease options at Good Guys Plaza in 1995, although this option activity is not reflected in the Sq. Ft. Column above. In 1996, one new lease was executed at Good Guys Plaza and two tenants renewed their leases at Graham Court. Also in 1996, one new lease was executed and one tenant renewed at the Agora Office Building prior to its sale. In 1997, only four tenants renewed and/or extended their existing leases at Good Guys Plaza and, since Graham Court was sold at the beginning of 1997, no leasing activity occurred there. At December 31, 1997, the Company's property was 96% leased, which compares to 98% leased at the end of 1996 reflecting the sale of Graham Court, which was 100% occupied at the time of sale. The following tables indicate the occupancy rates for each of the Company's properties and the average rental rates at December 31 of each year in the past five years that the Company has owned the properties: OCCUPANCY RATES - ------------- ------------- -------------- ----------------- ------------- Agora Office Graham Good Guys Year Building Court Plaza Overall - ------------- ------------- -------------- ----------------- ------------- 23,558 48,360 33,968 105,886 Sq. Ft. Sq. Ft. Sq. Ft. Sq. Ft. - ------------- ------------- -------------- ----------------- ------------- 1993 86% 93% 96% 92% 1994 61% 93% 94% 87% 1995 68% 100% 94% 91% 1996 Sold 100% 96% 98% 1997 Sold Sold 96% 96% - ------------- ------------- -------------- ----------------- ------------- R E A L E S T A T E P O R T F O L I O AVERAGE ANNUAL RENTAL RATES/SQ. FT. - ---------- ------------ -------------- ------------- Agora Good Office Graham Guys Year Building Court Plaza - ---------- ------------ -------------- ------------- 1993 $10.46 $5.32 $17.41 1994 $10.35 $5.47 $17.64 1995 $10.91 $5.45 $17.60 1996 Sold $5.89 $18.02 1997 Sold Sold $18.03 - ---------- ------------ -------------- ------------- T R A D I N G, M A R K E T A N D D I V I D E N D I N F O R M A T I O N No public trading market presently exists for the shares of the Company. Due to the expenses involved and the relatively small size 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, 1997, the Company had 1,090,052 Series A common shares outstanding and 1,000 Series B common shares outstanding, and there were approximately 1,098 Series A Stockholders of record. The Common Stock votes together as one class with each share being entitled to one vote. The Series B shares are owned by Property Resources, Inc., the Advisor. The following table reflects the distributions declared per share of Series A common stock during 1996 and 1997. No distributions have been declared or paid to the Series B shareholder. - --------------- --------------------- Quarter Ended Distributions - --------------- --------------------- March 31, 1996 $0.09 June 30, 1996 $0.09 September 30, $0.09 1996 December 31, $0.09 1996 March 31, 1997 $0.09 June 30, 1997 $2.38 September 30, $0.06 1997 December 31, $0.06 1997 - --------------- --------------------- Dividend distributions to stockholders are currently paid quarterly on approximately the last day of March, June, September and December. Approximately 89% of the 1997 and 100% of the 1996 dividend represented a return of capital for Federal income tax purposes. Return of capital distributions are tax free to the stockholder to the extent such distributions do not exceed a stockholders' adjusted basis. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S INTRODUCTION Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto. COMPARISON OF YEAR ENDED DECEMBER 31, 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 $294,000 (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 $44,000 (6%) 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. COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995 Net income for the year ended December 31, 1996 was $449,000, an increase of $218,000 as compared to net income of $231,000 in 1995. The increase in net income was primarily due to an increase in interest income, gain on sale of rental property and a decrease in operating expenses, as described more fully below. Total revenue for the year ended December 31, 1996, increased $20,000, or 2%, compared to 1995 primarily due to an increase in interest income attributable to the note receivable relating to the sale of the Agora Office Building. Rental revenue at the remaining two properties of the Company increased $74,000 compared to the same period in 1995 but was offset by a decrease of rental revenue due to the sale of the Agora Office Building. The increase in rental revenue at the Company's two remaining properties resulted from an increase in the rental rates at the properties and to an increase in the average occupancy rate at the Good Guys Plaza. The average occupancy rate at the Good Guys Plaza increased from 95% in 1995 to 96% in 1996. Graham Court's occupancy rate remained at 100%. Total expenses for the year ended December 31, 1996, decreased $112,000, or 12%, from $907,000 in 1995 to $795,000 in 1996. The decrease in total expenses in 1996 was primarily attributable to a decrease in operating expenses of $56,000 as a result of the sale of the Agora Office Building and to a refund of $43,000 of prior year property taxes at the Good Guys Plaza. RELATED PARTY EXPENSES The Company has entered into an agreement with the Advisor to administer the day-to-day operations of the Company. For each of the years ended December 31, 1997, 1996 and 1995, the Company recorded $38,000, $21,000 and $16,000, respectively, of advisory fee expense to the Advisor in accordance with the Advisory Agreement. Also for the years ended December 31, 1997, 1996 and 1995, and in respectively, for accounting and data processing, and $18,000, $13,000 and $9,000, respectively, for stockholder services expenses. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S The Company's properties are managed by Continental Property Management Co., ("CPMC"), an affiliate of the Advisor. For each of the years ended December 31, 1997, 1996 and 1995, the Company recorded $28,000, $35,000 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, 1997, 1996 and 1995, and in accordance with the management agreement, the Company paid to CPMC leasing commissions of $5,000, $31,000 and $21,000, respectively, and construction supervision fees of $0, $0 and $1,000, 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, 1997, 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 is intended to protect the Company against increased operating costs resulting from inflation. YEAR 2000 The Company is in the process of assessing the impact of Year 2000 issues on its computer systems and applications. At this time the Company believes that the costs associated with resolving these issues will not have a material effect on the financial statements. LIQUIDITY AND CAPITAL RESOURCES 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 and from funds from operations after payment of dividends. At December 31, 1997, cash and cash equivalents totaled $461,000. As of December 31, 1997, the Company's property was subject to secured financing. The Good Guys Plaza shopping center is subject to a promissory note collateralized by a Deed of Trust in the amount of $2,827,000. The note is payable, in fixed monthly installments 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. The Note is subject to prepayment penalties until 2006. Management currently intends to dispose of the Good Guys Plaza Shopping Center and, in that regard, expects to commence marketing activity in 1998. At December 31, 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. In the short-term and in the long-term, management believes that the Company's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of distributions. M A N A G E M E N T ' S D I S C U S S I O N A N D A N A L Y S I S FUNDS FROM OPERATIONS Funds from Operations ("FFO") for the years ended December 31, 1997, 1996 and 1995 was $308,000, $611,000 and $476,000, respectively. The primary differences between the periods reflect the changes in net income as discussed under "Results of Operations". The Company believes that FFO is helpful in understanding a property portfolio in that such calculation reflects income from operating activities and the properties' ability to support general operating expenses and interest expense before the impact of certain activities such as gains and losses from property sales and changes in the accounts receivable and accounts payable. However, it does not measure whether income is sufficient to fund all of the 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. As defined by the National Association of Real Estate Investment Trusts, FFO is net income (computed in accordance with GAAP), excluding gains and losses from debt restructuring and sales of property plus depreciation and amortization and after adjustment for unconsolidated joint ventures. The measure of FFO as reported by the Company may not be comparable to similarly titled measures of other funds that follow different definitions. FUNDS FROM OPERATIONS (DOLLARS IN THOUSANDS) Year ended December 31 - ---------------------------------------------- --------- -------- ---------- 1997 1996 1995 - ---------------------------------------------- --------- -------- ---------- Net Income 481 449 231 Add Depreciation and amortization 195 248 245 Less Gains on Sale of Property. (368) (86) - Funds from Operations 308 611 476 - ---------------------------------------------- --------- -------- ---------- On March 4, 1997, the Graham Court Business Park was sold to an unrelated party for $2,200,000, resulting in net cash proceeds to the Company of $2,093,000. The Company recognized a gain of $368,000 during the first quarter of 1997. As a result of the sale, FFO was substantially reduced. 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, 1997 and 1996, the Company declared distributions totaling $2,823,000 and $392,000, or $2.59 and $.36 per share each year, respectively. The distributions represented 917% and 64% of the Company's FFO in 1997 and 1996, respectively. R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S Board of Directors and Stockholders Property Resources Equity Trust We have audited the accompanying balance sheets of Property Resources Equity Trust as of December 31, 1997 and 1996, the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997, and the financial statement schedule of Real Estate and Accumulated Depreciation. These financial statements and the financial statement schedule are the responsibility of Property Resources Equity Trust's management. Our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Property Resources Equity Trust as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. San Francisco, California January 26, 1998 B A L A N C E S H E E T S PROPERTY RESOURCES EQUITY TRUST IN THOUSANDS - -------------------------------------------------------------------------------------- ------------- ------------- as of December 31, 1997 and 1996 1997 1996 - -------------------------------------------------------------------------------------- ------------- ------------- ASSETS Real estate: Land $1,702 $2,099 Buildings and improvements 4,132 6,215 Tenant improvements 157 135 ------------- ------------- 5,991 8,449 Less: accumulated depreciation 1,409 1,995 ------------- ------------- Real estate, net 4,582 6,454 Cash and cash equivalents 461 772 Mortgage-backed securities, available-for-sale - 173 Deferred rent receivable 57 77 Note receivable 717 736 Other assets, net 268 162 ------------- ------------- Total assets $6,085 $8,374 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Note payable $2,827 $2,750 Deposits and other liabilities 24 59 ------------- -------------- Total liabilities 2,851 2,809 ------------- -------------- Stockholders' equity: Common stock, Series A, without par value, stated Value $10 per share; 10,000 shares authorized; 1,090 and 1,090 shares issued and outstanding at December 31, 1996 and 1995, respectively 9,384 9,384 Common stock, Series B, without par value, Stated value $10 per share; one thousand shares Authorized, issued and outstanding 10 10 Unrealized loss on mortgage-backed securities - (11) Accumulated distributions in excess of net income (6,160) (3,818) ------------- -------------- Total stockholders' equity 3,234 5,565 ------------- -------------- Total liabilities and stockholders' equity $6,085 $8,374 ============= ============== 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, 1997, 1996 and 1995 1997 1996 1995 - ------------------------------------------------------------ ----------------- ----------------- ----------------- Revenues: Rent $748 $1,076 $1,095 Interest 81 74 40 Dividends 44 8 3 ----------------- ----------------- ----------------- Total revenue 873 1,158 1,138 Expenses: Interest 269 191 194 Depreciation 176 246 243 Property operating 146 209 322 Related party 108 92 96 General and administrative and other 61 57 52 ----------------- ----------------- ----------------- Total expenses 760 795 907 Income before gain on sale of rental property 113 363 231 Gain on sale of rental property 368 86 - ----------------- ----------------- ----------------- Net income $481 $449 $231 ================= ================= ================= Net income per share, based on the weighted average shares outstanding of common stock of 1,091,056, 1,091,066, and 1,091,067, respectively $.44 $.41 $.21 ================= ================= ================= Distributions declared per share of Series A common stock $2.59 $.36 $.28 ================= ================= ================= ----------------- ----------------- ----------------- 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, 1997, 1996 and 1995 Unrealized gain (loss) on Accumulated Common Stock mortgage- distributions Series A Series B backed in excess of Shares Amount Shares Amount securities net income Total - ------------------------------------------------------------------------------ ------------- ------------------- --------------- Balance, January 1, 1995 1,090,067 9,384 1,000 10 (25) (3,801) 5,568 Unrealized gain on mortgage-backed securities - - - - 18 - 18 Net loss - - - - - 231 231 Cash distributions on common stock - - - - - (305) (305) - ------------------------------------ ------------ -------------- ------------- ------------- ------------------- --------------- Balance, December 31, 1995 1,090,067 9,384 1,000 10 (7) (3,875) 5,512 Redemption of Series A common Stock (3) - - - - - - Unrealized loss on mortgage-backed securities (4) (4) Net income - - - - - 449 449 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 ==================================== ============ ============== ============= ============= =================== =============== 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, 1997, 1996 and 1995 1997 1996 1995 - ---------------------------------------------------------------------------------------- ------------- ------------- ------------- Net income $481 $449 $231 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 195 248 245 Gain on sale of assets (360) (86) - Decrease (Increase) in deferred rent receivable 20 (6) 15 (Increase) decrease in other assets (138) (76) 29 (Decrease) increase in deposits and other liabilities (35) (29) 10 ------------- ------------- ------------- Net cash provided by operating activities 163 500 530 ------------- ------------- ------------- Net proceeds from sale of rental property 2,093 60 - Leasing commissions paid (10) (35) (36) Principal received on note receivable 19 14 - Disposition of mortgage-backed securities 175 21 37 Improvements to rental property (5) (8) (32) ------------- ------------- ------------- Net cash provided by (used in) investing activities 2,272 52 (31) Origination of borrowings under note payable 2,850 - - Repayment of note payable (2,773) - - Distributions paid (2,823) (392) (305) ------------- ------------- ------------- Net cash used in financing activities (2,746) (392) (305) ------------- ------------- ------------- (Decrease) increase in cash and cash equivalents (311) 160 194 Cash and cash equivalents, beginning of year 772 612 418 ============= ============= ============= Cash and cash equivalents, end of year $461 $772 $612 ============= ============= ============= SUPPLEMENTAL CASH FLOW AND NON-CASH ACTIVITY - NOTES 4 & 9. 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. The Company's day-to-day operations are managed by Property Resources, Inc. (the "Advisor"), under the terms of an agreement that is renewable annually. The Company acquired Graham Court Business Park in August, 1986, the Agora Office Building in September, 1986, and the Good Guys Plaza in July, 1988. The Company sold the Agora Office Building in April 1996 and Graham Court Business Park in March 1997. 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. 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, evaluates whether rental property has suffered an impairment in value. Such assessments include 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 is performed utilizing a sum of future cash flows methodology that compares the property's operating cash flows and residual value to the net carrying amount. Management currently intends to dispose of the Good Guys Plaza Shopping Center and, in that regard, expects to commence marketing activity in 1998. At December 31, 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. 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. 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 MORTGAGE-BACKED SECURITIES Mortgage-backed securities held by the Company are classified as available-for-sale and are carried at fair value. The resulting 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 deferred and amortized using the straight-line method over the term 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. CONCENTRATION OF CREDIT RISK AND MAJOR TENANTS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of money market mutual funds and other short-term investments. The Company places excess cash in short-term deposits with Franklin Money Fund and Institutional Fiduciary Trust, which are managed by an affiliate of the Advisor. The Company performs ongoing credit evaluations of its tenants and generally does not require collateral for commercial tenants. The Company reserves for potential credit losses, as appropriate. The following tenants provided 10% or more of the Company's total straight-line revenues during 1997, 1996 and 1995: Principal Business Lease Expiration 1997 1996 1995 - --------------------------------- ---------------------------------- --------------- --------------- --------------- Good Guys May 2001 44.6% 28.2% 31.6% Wherehouse January 2001 20.1% 14.7% 17.1% Lawrence Livermore Labs Month to Month - 11.4% 14.4% The Wherehouse filed for protection under Chapter 11 of the Federal Bankruptcy Code (the "Code") in August of 1995. In December 1996, the tenant confirmed and the Bankruptcy Court approved the lease as amended. 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 The Lawrence Livermore Laboratory occupied space at the Graham Court Business Park. The property was sold on March 4, 1997 (see note 8). NOTE 2 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE 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. Mortgage-backed securities, available for sale at December 31, 1996, had a coupon rate of 7.59% and a maturity of 2021. Amortized cost was $184,000 and market value was $173,000, resulting in a gross unrealized loss of $11,000. NOTE 3 - NOTE RECEIVABLE On April 16, 1996, the Agora Office Building was sold to an unaffiliated third party. The terms of the sale included a $750,000 note receivable owed by the buyer to the Company. Monthly principal and interest payments from the buyer of $5,815 commenced May 1, 1996. This loan will mature in April of 1998, at which time all remaining principal will be due and payable. The carrying value of this note approximates its fair market value. NOTE 4 - NOTE PAYABLE On March 4, 1997, the note payable collateralized by the Good Guys Plaza Shopping Center was repaid from the proceeds of a new note payable. The new note payable, which is also collateralized by the property and matures in 2022, requires monthly payments of principal and interest at 8.8% until 2007, at which time the interest rate increases to at least 13.8% under an adjustment formula defined in the note agreement. Aggregate principal payments on the note for future periods are set out below: In thousands 1998 $31 1999 34 2000 38 2001 41 2002 45 Thereafter $2,638 ==================== $2,827 ==================== For the years ended December 31, 1997, 1996 and 1995, interest paid on notes was $263,750, $183,000, and $192,000, respectively. Management estimates that the carrying amount of notes payable approximates fair value. 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. 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 The Company has adopted Statement of Financial Accounting Standard No. 128, "Earnings per share" ("FAS 128"). FAS 128 requires that the Company retroactively restate prior period earnings per share ("EPS") data. Prior period net income per share did not change as a result of this adoption. 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, 1997, 1996 and 1995 were as follows: Ordinary Return of Capital Total Year Paid Income Capital Gain Paid - ---------- ------------------- ------------------ -------------- --------------- 1997 $.13 $2.28 $.18 $.2.59 1996 - $.36 - $.36 1995 $.24 $.04 - $.28 NOTE 7 - RELATED PARTY TRANSACTIONS The Company has entered into 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 has entered into an agreement with Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, to manage the leasing and management related services for the properties. Under the terms of this agreement, CPMC is paid management, leasing and construction supervision fees. The agreements between the Company and the Advisor, or affiliates, provide for certain types of compensation for services rendered for the years ended December 31, 1997, 1996 and 1995: DOLLARS IN THOUSANDS 1997 1996 1995 - -------------------------------------------------------------------------------------- ----------------- ----------------- Management advisory fees, charged to Related party expenses $38 $21 $16 Reimbursement for accounting and data processing Expenses, charged to related party expenses 24 23 36 Property management fee, charged to related party expense 28 35 35 Stockholder services fees, charged to Related party expense 18 13 9 ====================================================================================== ================= ================= Total related party expense $108 $92 $96 ====================================================================================== ================= ================= Construction supervision fees, capitalized and Depreciated over the useful life of the related assets - - $1 Leasing commissions, capitalized and amortized Over the term of the related lease $5 $31 $21 At December 31, 1997 and 1996, cash equivalents included $3,000 and $2,000 invested in Franklin Money Fund and $416,000 and $229,000, respectively, invested in Institutional Fiduciary Trust, both of which are managed by an affiliate of the Advisor. For the years ended December 31, 1997, 1996 and 1995, related dividends earned were $44,000, $8,000 and $3,000, respectively. NOTE 8 - RENTAL INCOME The Company's rental income from commercial property is received principally from tenants under non-cancelable operating leases. The tenant leases typically provide for guaranteed minimum rent plus Minimum future rentals on non-cancelable tenant operating leases at the Good Guys Plaza Shopping Center subsequent to December 31, 1997 are as follows: In thousands 1998 $630 1999 646 2000 614 2001 228 2002 43 Thereafter 37 -------------------- $2,198 ==================== Minimum future rentals do not include contingent rents which represent reimbursements of property operating expenses. Contingent rents were $143,000 in 1997, $150,000 in 1996 and $166,000 in 1995. NOTE 9 - SALE OF REAL ESTATE On March 4, 1997, the Graham Court Business Park was sold to an unrelated third party for $2,200,000, resulting in net cash proceeds to the Company of $2,093,000. The Company recognized a gain of $368,000 on this transaction. R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N PROPERTY RESOURCES EQUITY TRUST As of and for the year ended December 31, 1997 (Dollars in thousands) COL A. COL B. COL C. COL D. COL E. COL F. COL G. COL H. COL I. ------ ------ ------ ------ ------ ------ ------ ------ ------ COST CAPITALIZED INITIAL SUBSEQUENT TO GROSS AMOUNT AT WHICH COST TO COMPANY ACQUISITION CARRIED AT CLOSE OF PERIOD Life on Which Depreciation in Buildings Buildings Accumu- Latest and Tenant and Lated Date of Date Operations Encum- Improve- Improve- Carrying Improve- Deprecia- construc- Ac- Statement is Description brances Land ments ments Costs Land ments Total Tion tion quired Computed Shopping Center Santa Rosa, CA $2,827 $1,702 $4,132 $157 - $1,702 $4,289 $5,991 $1,409 1986 7/88 Note 2 Note 1 Note 4 Note 3 =========================================================================================================================== R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N NOTES: (1) The aggregate cost for federal income tax purposes is $5,991,000. (2) Depreciation is computed using useful lives of 30-35 years for buildings and improvements and the life of the related lease for tenant improvements. (3) RECONCILIATION OF REAL ESTATE In thousands 1997 1996 1995 - ------------------------------------------------------------- --------------- ------------- -------------- Balance at beginning of period $8,449 $9,536 $9,504 Disposition (2,463) (1,095) - Additions during year: Improvements to rental property 5 8 32 Deductions during year: Write-down of rental property - - - - ------------------------------------------------------------- --------------- ------------- -------------- Balance at end of period $5,991 $8,449 $9,536 ============================================================= =============== ============= ============== (4) RECONCILIATION OF ACCUMULATED DEPRECIATION In thousands 1997 1996 1995 - ------------------------------------------------------------- --------------- -------------- ------------- Balance at beginning of period $1,995 $2,145 $1,912 Disposition (740) (371) - Depreciation expense for the period 154 221 233 - ------------------------------------------------------------- --------------- -------------- ------------- Balance at end of period $1,409 $1,995 $2,145 ============================================================= =============== ============== ============= PROPERTY RESOURCES EQUITY TRUST AFFILIATIONS DIRECTORS AND OFFICERS Institute of Real Estate Management David P. Goss Chief Executive Officer, President and Director Building Owners and Managers Association International David W. Walters Independent Director International Council of Shopping Centers James A. Niles National Association of Industrial and Office Parks Independent Director NUMBER OF STOCKHOLDERS Martin L. Flanagan Vice President - Finance and Chief Financial Officer At December 31, 1997, Stockholders of record numbered 1,169. David N. Popelka Vice President - Asset Manager REPORT ON FORM 10-K Richard S. Barone Stockholders may obtain a copy of the Company's Secretary Annual Report on Form 10-K to the Securities and Exchange Commission for the year ended EXECUTIVE OFFICES December 31, 1997, by writing to: Property Resources Equity Trust Property Resources Equity Trust 777 Mariners Island Boulevard P.O. Box 7777 San Mateo, California 94404 San Mateo, CA 94403-7777 (415) 312-3000 INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. San Francisco, California ANNUAL MEETING Stockholders are invited to attend the Annual Stockholders' Meeting which will be held at 3 p.m. on Thursday, June 3, 1998, at the Company's executive offices. PROPERTY RESOURCES EQUITY TRUST P.O. Box 7777 777 Mariners Island Blvd. San Mateo, CA 94403-7777 Fund Information: (800) 342-5236 Shareholder Account Information: (800) 632-2350