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, 1998 -------------------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from TO -------------------------------------------------- Commission file number 0-15880 ---------------------------------------------------------- PROPERTY RESOURCES EQUITY TRUST - - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 95-3959770 - - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) 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 (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, 1998: 1,090,051 Shares of Series B Common Stock Outstanding as of September 30, 1998: 1,000 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PROPERTY RESOURCES EQUITY TRUST BALANCE SHEETS SEPTEMBER 30, 1998 AND DECEMBER 31, 1997 (Unaudited) (Dollars in thousands, except per share amounts) 1998 1997 ----------------------------- ASSETS: Real estate: Land $1,702 $1,702 Buildings and improvements 4,132 4,132 Tenant improvements 160 157 ----------------------------- 5,994 5,991 Less: accumulated depreciation 1,516 1,409 ----------------------------- Real estate, net 4,478 4,582 Cash and cash equivalents 314 461 Deferred rent receivable 72 57 Note receivable - 717 Other assets, net 304 268 ----------------------------- Total assets $5,168 $6,085 ============================= LIABILITIES AND STOCKHOLDERS' EQUITY: Note payable 2,804 2,827 Tenants' deposits and other liabilities 37 24 ----------------------------- Total liabilities 2,841 2,851 ----------------------------- Stockholders' equity: Common stock, Series A, without par value, stated value $10 per share; 10,000,000 shares authorized; 9,384 9,384 1,090,051 shares issued and outstanding in 1998 and 1997 Common stock, Series B, without par value, stated Value $10 per share; 1,000 shares authorized, issued and outstanding in 1998and 1997 10 10 Accumulated distributions in excess of net income (7,067) (6,160) ----------------------------- Total stockholders' equity 2,327 3,234 ----------------------------- Total liabilities and stockholders' equity $5,168 $6,085 ============================= The accompanying notes are an intregal part of these financial statements. PROPERTY RESOURCES EQUITY TRUST CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER 30, 30, 30, 30, (Dollars in thousands, except 1998 1997 1998 1997 per share amounts) -------------------------------------------- REVENUE: Rent $171 $160 $529 $531 Interest - 19 28 66 Dividends 4 - 14 39 -------------------------------------------- Total revenue 175 179 571 636 -------------------------------------------- EXPENSES: Interest 40 70 176 199 Depreciation and amortization 40 39 118 138 Operating 24 31 79 111 Related party 16 19 52 88 General and administrative 5 5 50 39 -------------------------------------------- Total expenses 125 164 475 575 -------------------------------------------- Operating income before gain on 50 15 96 61 sale of property Gain on sale of property - - - 370 ============================================ NET INCOME $50 $15 $96 $431 ============================================ Net income per share of Series A $.05 $.02 $.09 $.40 common stock ============================================ Dividends per share of Series A $.06 $.06 $.92 $2.53 common stock ============================================ The accompanying notes are an integral part of these financial statements. PROPERTY RESOURCES EQUITY TRUST STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited) (Dollars in thousands) 1998 1997 ---------------------------- Cash flows from operating activities: Net income $96 $431 ---------------------------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 106 151 (Increase) decrease in deferred rent (15) 24 receivable Increase in other assets (28) (138) Increase (decrease) in tenants' deposits and 13 (12) other liabilities Gain on sale of rental property - (370) ---------------------------- 76 (345) ---------------------------- Net cash provided by operating activities 172 86 ---------------------------- Cash flow from investing activities: Principal received on note receivable 717 14 Improvements to rental property (3) (5) Leasing Commissions Paid (7) - Proceeds from sale of rental property - 2,093 Disposition of mortgage-backed securities - 38 ---------------------------- Net cash provided by investing activities 707 2,140 ---------------------------- Cash flow from financing activities: Origination of note payable - 2,850 Principal payments on note payable (23) (2,763) Distributions paid (1,003) (2,758) ---------------------------- Net cash used in financing activities (1,026) (2,671) ---------------------------- Net decrease in cash and cash equivalents (147) (445) Cash and cash equivalents, beginning of period 461 772 ============================ Cash and cash equivalents, end of period $314 $327 ============================ The accompanying notes are an integral part of these financial statements. PROPERTY RESOURCES EQUITY TRUST NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1998 NOTE 1- BASIS OF PRESENTATION The accompanying unaudited interim financial statements of Property Resources Equity Trust (the "Fund") have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all appropriate adjustments necessary to a fair presentation of the results of operations have been made for the periods shown. All adjustments are of a normal recurring nature. Certain prior year amounts have been reclassified to conform to current year presentations. These financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Management have decided to sell the Fund's remaining property, Good Guys Shopping Center, and liquidate the Fund. A form 8-K statement announcing this intention was filed on April 22 1998. No sale of the remaining Property had occurred at September 30, 1998, however management is currently actively seeking a buyer of the Property (see Note 5 below). Accordingly it is possible that the Fund will not continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary if the Fund will not continue as a going concern. Management believes that the market value of the Partnership's remaining property is at least equal to its book value. Accordingly management does not expect any material losses to be undertaken in the event of the liquidation of the Fund. However, there can be no assurance that the eventual sales price of the property will not result in a loss or that a sale will be consummated. These financial statements should be read in conjunction with the Fund's audited financial statements for the year ended December 31, 1997. NOTE 2 - NOTE PAYABLE On March 3, 1997, the note payable collateralized by the Good Guys Plaza Shopping Center was repaid from the proceeds of a new note payable. The new note payable, which is also collateralized by the property and matures in 2022, requires monthly payments of principal and interest at 8.8% until 2007, at which time the interest rate increases to at least 13.8% under an adjustment formula defined in the note agreement. NOTE 3 - SALE OF RENTAL PROPERTY On March 4, 1997, the Fund sold the Graham Court Business Park to an unaffiliated buyer for a total sales price of $2,200,000 resulting in net cash proceeds to the Fund of $2,093,000. In connection with the sale, the Fund recognized a gain of $370,000. NOTE 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION For the nine-month period ended September 30, 1998, interest paid amounted to $188,276. NOTE 5 - SUBSEQUENT EVENT: SALE OF PROPERTY On October 21, 1998, pursuant to a contract entered into on July 10, 1998, Management entered sold Good Guys Plaza Shopping Center to an unaffiliated third party for a cash sales price of $5,108,000. A gain on sale of approximately $192,000 was recorded on the sale. 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, 1998 AND 1997 Total revenue for the three and nine-month period ended September 30, 1998 decreased $4,000, or 2%, and $65,000, or 10%, respectively, when compared to the same periods in 1997. The decrease in dividend and interest income was attributable to lower average investment balances in the current periods. Rental income decreased during the nine- month period because of the sale of Graham Court in March 1997 and also a tenant reimbursement made in 1997 was not repeated in the second quarter of 1998. Rental income increased during the three-month period due to various rent increases as provided in the rental agreements. Total expenses for the three and nine-month period ended September 30, 1998 decreased $39,000, or 24%, and $100,000, or 17%, respectively, when compared to the same periods in 1997. The Fund sold the Graham Court property in March 1997. Operating expense, related party, depreciation and general and administrative expenses decreased as a result of the sale. The decreased expenses in the three-month period were principally caused by an adjustment to loan fees amortized which caused a reduction in interest expense of approximately $29,000. Net income for the three and nine-month period ended September 30, 1998 increased $35,000, or 233%, and decreased $335,000, or 78%, respectively, when compared to the same periods in 1997. This was due to changes in revenue and expenses as discussed above and the gain on sale of the Graham Court property in March 1997 as discussed in note 4 to the financial statements. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1998, cash and cash equivalents aggregated $314,000, which the Fund believes is adequate to meet its short-term operating cash requirements. Net cash provided by operating activities increased $86,000 when compared to the same period in 1997. This was primarily due to the results of operations as discussed above. Cash flows provided by investing activities decreased $1,433,000 in 1998 as a result of proceeds received from the sale of Graham Court that occurred in 1997 as reduced by amount received on a note receivable in 1998. PROPERTY RESOURCES EQUITY TRUST ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Continued) Cash flows used in financing activities decreased $1,645,000 primarily due to a decrease in the distribution paid. As of September 30, 1998, the Fund had one remaining property in its portfolio. As discussed in note 1 to the financial statements management is currently marketing the property for sale, and a sale may occur in 1998. The Fund's principal sources of capital for the acquisition and renovation of property and for working capital reserves have been proceeds from the initial offering of its common stock and from cash flow after payment of distributions. On March 3, 1997, the note payable collateralized by the Good Guys Plaza Shopping Center was repaid from the proceeds of a new note payable. The new note payable, which is also collateralized by the property and matures in 2022, requires monthly payments of principal and interest at 8.8% until 2007, at which time the interest rate increases to at least 13.8% under an adjustment formula defined in the note agreement. In the short-term and in the long-term, management believes that the Fund's current sources of capital will continue to be adequate to meet both its operating requirements and the payment of distributions. IMPACT OF INFLATION The Fund's policy of negotiating leases which incorporate operating expense "pass-through" provisions is intended to protect the Fund against increased operating costs resulting from inflation. CASH DISTRIBUTION POLICY Distributions are declared quarterly at the discretion of the Board of Directors. The Fund's present distribution policy is to at least annually evaluate the current distribution rate in light of anticipated tenant turnover over the next two or three years, the estimated level of associated improvements and leasing commissions, planned capital expenditures, any debt service requirements and the Fund's other working capital requirements. After balancing these considerations, and considering the Fund's earnings and cash flow, the level of its liquid reserves and other relevant factors, the Fund seeks to establish a distribution rate which: i) provides a stable distribution which is sustainable despite short term fluctuations in property cash flows; ii) maximizes the amount of cash flow paid out as distributions consistent with the above listed objective; and iii) complies with the Internal Revenue Code requirement that a REIT annually pay out as distributions not less than 95% of its taxable income. During the three-month period ended September 30, 1998, the Fund declared distributions totaling $65,403. YEAR 2000 Management is in the process of assessing the impact of Year 2000 issues on its computer systems and applications. At this time, management believes that the costs associated with resolving these issues will not have a material effect on the Fund's financial statements. PROPERTY RESOURCES EQUITY TRUST PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Not applicable (b) Reports on Form 8-K The Fund filed no forms 8-K during the quarter ended September 30, 1998. 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 16, 1998