Item 1. BUSINESS
PROPERTY RESOURCES EQUITY TRUST (the "Company") is a corporation formed on February 20, 1985 under the laws of the State of California. The Company is a real estate investment trust ("REIT").
The Company's investment program included providing its stockholders with a professionally managed diversified portfolio of income producing equity real estate investments in strategic markets, which represented the potential for current cash flow and for capital appreciation. The Company is a self-liquidating REIT with a finite life and is currently in its liquidation phase. As of December 31, 1998, the Company had sold all of its properties.
Item 2.
Item 2. PROPERTIES
The Company has no properties at December 31, 1998, and is currently in the process of liqiodation. Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, performed the leasing and management related services for the properties.
Acquisitions and sales of the Company's properties were as follows:
- ------------------------------------------------------------------------------- PROPERTY DATE ACQUIRED DATE SOLD - ------------------------------------------------------------------------------- Graham Court Business Park August 1986 March 1997 Agora Office Building September 1986 April 1996 Good Guys Plaza July 1988 October 1998 - -------------------------------------------------------------------------------
Item 3.
Item 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company is a party or which any of its properties is the subject, required to be reported hereunder. From time to time, the Company may be a party to ordinary routine litigation incidental to its business.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 26, 1999, a Special Meeting of shareholders of the Company was held to approve the dissolution, termination and liquidation of the Company as described in the proposed Plan of Dissolution and Liquidation. A copy of the Plan is attached as Exhibit A to the Proxy Statement dated December 18, 1999 and as Exhibit 2. to this Form 10-K.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS No public trading market presently exists for the shares of the Company. Due to the expenses involved and the expected liquidation of the Company, it is not anticipated that shares of the Company will be listed on a stock exchange.
The Company has one class of common stock in two series, designated Series A and Series B (the "Common Stock"). As of December 31, 1998, the Company had 1,090,052 Series A common shares outstanding and 1,000 Series B common shares outstanding, and there were approximately 1,069 Series A Stockholders of record. The Common Stock votes together as one class with each share being entitled to one vote. The Series B shares are owned by Property Resources, Inc., the Advisor. No distributions have been declared or paid to the Series B shareholder. The following table reflects the distributions declared per share of Series A common stock during 1998 and 1997.
- ------------------------------------------------------------------------------- QUARTER ENDED 1998 1997 - -------------------------------------------------------------------------------
December 31 - $0.06 September 30 $0.06 $0.06 June 30 $0.80 $2.38 March 31 $0.06 $0.09 - -------------------------------------------------------------------------------
The Company paid dividend distributions to stockholders quarterly on approximately the last day of March, June, September and December. In December 1998 the distribution was not paid and a liquidating distribution was made in February 1999. 100% of the 1998 and approximately 89% of the 1997 dividend represented a return of capital for Federal income tax purposes. Return of capital distributions are tax free to the stockholder to the extent such distributions do not exceed a stockholders' adjusted basis.
Item 6.
Item 6. SELECTED FINANCIAL DATA
Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Management's discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements and notes thereto.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO YEAR ENDED DECEMBER 31, 1997
Net income for the year ended December 31, 1998, decreased $208,000 (43%) over the prior year. The main factor affecting the results for the year was the sales of the Good Guys Plaza in October 1998, and Graham Court Business Park in March 1997, ("the property sales"), which gave rise to gains on sale, but which also reduced rental revenues and operating expenses in 1998.
Total revenues for the year ended December 31, 1998, decreased $226,000 (26%) as compared to the prior year. The decrease is principally attributable to the property sales. Rental revenues and occupancy rates related to the Good Guys Plaza in the period prior to its sale remained relatively stable from the previous year.
Total expenses for the year ended December 31, 1998 decreased $199,000 (26%) as compared to the prior year. Decreases in property operating costs and depreciation charges were related to the property sales. Interest expense decreased $78,000 (29%) as a result of the repayment of the Company's note payable in 1998.
The Company recorded a gain on sale of $187,000 in 1998 on the sale of the Good Guys Plaza, which compares to a gain on sale of $368,000 recorded on the sale of the Graham Court Building in 1997.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Net income for the year ended December 31, 1997, increased $32,000 (7%) over the prior year. The main factor affecting the results for the year was the sale of Graham Court in March, 1997, which gave rise to a large gain on sale, but which also reduced rental revenues and operating expenses in 1997.
Total revenues for the year ended December 31, 1997, decreased $285,000 (25%) as compared to the year ended December 31, 1996. The decrease is attributable to the sale of properties in March,1997 and in April, 1996. Rental revenues and occupancy rates related to the Good Guys Plaza in 1997 remained stable from the previous year.
Total expenses for the year ended December 31, 1997 decreased $35,000 (4%) as compared to the prior year. Decreases in property operating costs and depreciation charges were related to the sale of Graham Court, but were partly offset by an increase in interest expense. Interest expense increased $78,000 (41%) as a result of the expiration of the loan secured on Good Guys Plaza in March 1997. A new loan was negotiated in March 1997 which carries a fixed interest rate of 8.8%, compared to the previous variable rate.
A gain on sale of $368,000 was recorded in 1997 on the sale of Graham Court, which compares to a gain on sale of $86,000 recorded on the sale of the Agora Office Building in 1996.
RELATED PARTY EXPENSES
The Company has an agreement with the Advisor to administer the day-to-day operations of the Company. For each of the years ended December 31, 1998, 1997 and 1996, the Company recorded $10,000, $38,000 and $21,000, respectively, of advisory fee expense to the Advisor in accordance with the Advisory Agreement. Also for the years ended December 31, 1998, 1997 and 1996, and in accordance with the Advisory Agreement, the Company reimbursed the Advisor or affiliates of the Advisor $12,000, $24,000 and $23,000 respectively, for accounting and data processing, and $19,000, $18,000 and $13,000, respectively, for stockholder services expenses.
The Company's properties were managed by Continental Property Management Co., ("CPMC"), an affiliate of the Advisor. For each of the years ended December 31, 1998, 1997 and 1996, the Company recorded $21,000, $28,000 and $35,000, respectively, of property management fee expense to CPMC in accordance with the property management agreement. Also for the years ending December 31, 1998, 1997 and 1996, and in accordance with the management agreement, the Company paid CPMC leasing commissions of $0, $5,000 and $31,000, respectively.
The Company's by-laws require the Advisor to refund to the Company the amount, if any, by which the operating expenses as defined (generally such expenses pertain to general and administrative expenses as distinguished from property operating expenses) during any calendar year exceed the greater of (a) 2% of the Average Invested Assets or (b) 25% of Net Income (excluding gain from the sale of the Company's properties) unless the Independent Directors conclude that a higher level of expenses is justified as set forth in the by-laws. Furthermore, in no event will Operating Expenses exceed 2% of the total assets under management less cash, cash items and unsecured indebtedness. For the year ended December 31, 1998, the Company was in compliance with these limitations.
The Company's Board of Directors (including all of its Independent Directors) have determined, after review, that the compensation paid to the Advisor and to CPMC referenced above is fair and reasonable to the Company.
IMPACT OF INFLATION
The Company's policy of negotiating leases which incorporate operating expense "pass-through" provisions was intended to protect the Company against increased operating costs resulting from inflation.
YEAR 2000
The Company's management does not expect any material impact to arise from the year 2000 issue as it is probable that the Company will be liquidated before 2000.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, cash and cash equivalents totaled $2,501,000. Management believes that the Company's current sources of capital will be adequate to successfully liquidate the Company.
The Company's principal sources of capital for the acquisition and renovation of property and for working capital reserves have been proceeds from the initial offering of its common stock, funds from operations after payment of dividends and issuance of debt.
FUNDS FROM OPERATIONS
Funds from operations for each of the years ended December 31, 1998, 1997 and 1996 were as follows.
In thousands 1998 1997 1996 - --------------------------------------------------------------------------- Net Income 273 481 449 Add Depreciation and amortization 131 176 246 Less Gains on Sale of Property (187) (368) (86)
- --------------------------------------------------------------------------- Funds from Operations $217 $289 $609 ===========================================================================
The primary differences between the periods reflect the changes in net income as discussed under "Results of Operations".
As defined by the National Association of Real Estate Investment Trusts, Funds from operations, ("FFO") is net income (computed in accordance with GAAP), excluding gains and losses from debt restructuring and sales of property plus depreciation and amortization and after adjustment for unconsolidated joint ventures. The measure of FFO as reported by the Company may not be comparable to similarly titled measures of other funds that follow different definitions.
The Company believes that FFO is helpful in understanding a property portfolio. This is because such calculation reflects income from operating activities and the properties' ability to support general operating expenses and interest expense before the impact of certain activities such as depreciation and gains and losses from property sales. However, it does not measure whether income is sufficient to fund all of the Company's cash needs including principal amortization, capital improvements and distributions to stockholders. FFO should not be considered an alternative to net income, or any other generally accepted accounting principles ("GAAP") measurement of performance, as an indicator of the Company's operating performance or as a measure of liquidity.
DISTRIBUTIONS
Distributions are paid quarterly at the discretion of the Board of Directors and depend on the Company's earnings, cash flow, financial condition and other relevant factors. During the years ended December 31, 1998 and 1997, the Company declared distributions totaling $1,003,000 and $2,823,000, or $0.92 and $2.59 per share each year, respectively. The distributions represented 462% and 977% of the Company's FFO in 1998 and 1997, respectively.
Item 8.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE
Report of Independent Accountants 9
Balance Sheets as of December 31, 1998 and 1997 10
Statements of Income for the Years 11 Ended December 31, 1998, 1997 and 1996
Statements of Stockholders' Equity for the 12 Years Ended December 31, 1998, 1997 and 1996
Statements of Cash Flows for the Years 13 Ended December 31, 1998, 1997 and 1996
Notes to Financial Statements 14 - 17
Schedule III - Real Estate and Accumulated 18 Depreciation
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
R E P O R T O F I N D E P E N D E N T A C C O U N T A N T S
To the Board of Directors and Stockholders of Property Resources Equity Trust
In our opinion, the financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Property Resources Equity Trust at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. These financial statements and the financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and the financial statement schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As described in Note 10 to the financial statements, the stockholders approved a plan of dissolution and liquidation. As a result, im subsequent periods the Company will change its basis of accounting from a going concern basis to a liquidation basis.
PricewaterhouseCoopers LLP San Francisco, California January 18, 1999, except for Note 10, as to which the date is February 16,
B A L A N C E S H E E T S
PROPERTY RESOURCES EQUITY TRUST IN THOUSANDS (EXCEPT PER SHARE AMOUNTS) - ------------------------------------------------------------------------------ As of December 31, 1998 and 1997 1998 1997 - ------------------------------------------------------------------------------
ASSETS
Real estate: Land - $1,702 Buildings and improvements - 4,132 Tenant improvements - 157 - ------------------------------------------------------------------------------ - 5,991 Less: accumulated depreciation - 1,409 - ------------------------------------------------------------------------------ Real estate, net - 4,582
Cash and cash equivalents $2,501 461 Deferred rent receivable - 57 Note receivable - 717 Other assets, net 21 268 - ------------------------------------------------------------------------------ Total assets $2,522 $6,085 ==============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable - $2,827 Deposits and other liabilities $18 24 - ------------------------------------------------------------------------------ Total liabilities 18 2,851 - ------------------------------------------------------------------------------
Stockholders' equity: Common stock, Series A, without par value, stated value $10 per share; 10,000 shares authorized; 1,090 shares issued and outstanding at December 31, 1998 and 1997 9,384 9,384
Common stock, Series B, without par value, stated value $10 per share; one thousand shares authorized, issued and outstanding 10 10
Accumulated distributions in excess of net income (6,890) (6,160) - ------------------------------------------------------------------------------ Total stockholders' equity 2,504 3,234 - ------------------------------------------------------------------------------ Total liabilities and stockholders' equity $2,522 $6,085 ==============================================================================
The accompanying notes are an integral part of these financial statements.
S T A T E M E N T S O F I N C O M E
PROPERTY RESOURCES EQUITY TRUST IN THOUSANDS, EXCEPT PER SHARE DATA - --------------------------------------------------------------------- For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996
- --------------------------------------------------------------------- Revenues: Rent $581 $748 $1,076 Interest 51 81 74 Dividends 15 44 8 - --------------------------------------------------------------------- Total revenues 647 873 1,158 - ---------------------------------------------------------------------
Expenses: Interest 191 269 191 Depreciation and amortization 131 176 246 Property operating 100 146 209 Related party 62 108 92 General and administrative and 77 61 57 other - --------------------------------------------------------------------- Total expenses 561 760 795 - ---------------------------------------------------------------------
Income before gain on sale of rental 86 113 363 property
Gain on sale of rental property 187 368 86 - --------------------------------------------------------------------- Net income $273 $481 $449 =====================================================================
Unrealized gain on mortgage-backed - 11 (4) Securities - --------------------------------------------------------------------- Total comprehensive income $273 $492 $445 =====================================================================
Net income per share, based on the weighted average shares outstanding of common stock of $.25 $.44 $.41 1,091 in all periods =====================================================================
Distributions declared per share of Series A common stock $.92 $2.59 $.36 =====================================================================
The accompanying notes are an integral part of these financial statements.
S T A T E M E N T S O F S T O C K H O L D E R S' E Q U I T Y
PROPERTY RESOURCES EQUITY TRUST IN THOUSANDS, EXCEPT NUMBER OF SHARES As of and for the years ended December 31, 1998, 1997 and 1996
The accompanying notes are an integral part of these financial statements.
S T A T E M E N T S O F C A S H F L O W S
PROPERTY RESOURCES EQUITY TRUST IN THOUSANDS - ------------------------------------------------------------------------------- For the years ended December 31, 1998, 1997 and 1996 1998 1997 1996 - -------------------------------------------------------------------------------
Net income $273 $481 $449
Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 131 195 248 Gain on sale of assets (187) (360) (86) (Increase) decrease in deferred rent receivable (15) 20 (6) (Increase) decrease in other assets 103 (138) (76) (Decrease) increase in deposits and other (18) (35) (29) liabilities - ------------------------------------------------------------------------------- Net cash provided by operating activities 287 163 500 - -------------------------------------------------------------------------------
Net proceeds from sale of rental property 4,876 2,093 60 Leasing commissions paid (7) (10) (35) Principal received on note receivable 717 19 14 Disposition of mortgage-backed securities - 175 21 Improvements to rental property (3) (5) (8) - ------------------------------------------------------------------------------- Net cash provided by investing activities 5,583 2,272 52 - -------------------------------------------------------------------------------
Origination of borrowings under note payable - 2,850 - Repayment of note payable (2,827) (2,773) - Distributions paid (1,003) (2,823) (392) - ------------------------------------------------------------------------------- Net cash used in financing activities (3,830) (2,746) (392) - -------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 2,040 (311) 160 Cash and cash equivalents, beginning of year 461 772 612 =============================================================================== Cash and cash equivalents, end of year $2,501 $461 $772 ===============================================================================
Supplemental cash flow and non-cash activity - See notes 4 & 9 to the financial statements.
The accompanying notes are an integral part of these financial statements.
N O T E S T O F I N A N C I A L S T A T E M E N T S
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY Property Resources Equity Trust (the "Company") is a California corporation formed on February 20, 1985 for the purpose of investing in income-producing real property. The Company is a real estate investment trust ("REIT") and has qualified as a REIT from inception. Property Resources, Inc. (the "Advisor") manages the Company's day-to-day operations, under the terms of an agreement that is renewable annually.
Acquisitions and sales of the Company's properties were as follows:
- ------------------------------------------------------------------------------- PROPERTY DATE ACQUIRED DATE SOLD - ------------------------------------------------------------------------------- Graham Court Business Park August 1986 March 1997 Agora Office Building September 1986 April 1996 Good Guys Plaza July 1988 October 1998 - -------------------------------------------------------------------------------
There is no public market for the Company's common stock and shares are not freely transferable.
BASIS OF PRESENTATION The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
During 1998, the Company completed the sale of the remaining property. As discussed in Note 10, on January 26, 1999, the shareholders approved the plan of dissolution and liquidation of the Company.
REAL ESTATE Rental property is stated at cost and depreciated using the straight-line method over estimated useful live of 30 to 35 years for buildings and improvements and the life of the related lease for tenant improvements. Significant improvements and betterments are capitalized. Maintenance and repairs are charged to expense when incurred.
Pursuant to the Company's historical investment objectives, property purchased has been held for extended periods. During the holding period management periodically, but at least annually, evaluated whether rental property has suffered an impairment in value. Such assessments included the consideration of the Company's ability and intent to hold a property as well as an evaluation of that property's future rental potential through the holding period. Generally, management's analysis was performed utilizing a sum of future cash flows methodology that compared the property's operating cash flows and residual value to the net carrying amount.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash on hand, demand deposits with banks, debt instruments with original maturities of three months or less and money market funds, which are readily convertible into cash. Due to the relatively short-term nature of these instruments, the carrying value approximates fair value.
MORTGAGE-BACKED SECURITIES Mortgage-backed securities held by the Company are classified as available-for-sale and are carried at fair value. The resulting unrealized gains and losses are reported as a separate component of stockholders' equity until realized. Realized gains and losses are recognized on the specific identification method and are included in earnings.
OTHER ASSETS Other assets include deferred lease commissions, which are amortized using the straight-line method over the terms of the related leases.
RENTAL REVENUES Rental revenues are recorded using the straight-line method to reflect scheduled rent increases and free rent periods over the related lease term. As a result, a deferred rent receivable is created when rental receivables are less than the amount earned using the straight-line method or when rental income is recognized during free rent periods of a lease.
INCOME TAXES The Company is a real estate investment trust ("REIT"), having elected to qualify as a REIT under the applicable provisions of the Internal Revenue Code since 1989. Under the Internal Revenue Code and applicable state income tax law, a qualified REIT is not subject to income tax if at least 95% of its taxable income is currently distributed to its stockholders and other REIT tests are met. The Company is in compliance with these tests. Accordingly, no provision is made for income taxes in these financial statements.
COMPREHENSIVE INCOME Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130") establishes the disclosure requirements for reporting comprehensive income in an entity's annual and interim financial statements. The Company had no accumulated other comprehensive income at December 31, 1998 or December 31, 1997. The Company has fully implemented the requirements of FAS 130 in these financial statements.
SEGMENT INFORMATION The Company has adopted Statement of Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information", ("FAS 131"), which establishes new requirements for reporting segment information. The Company has determined that it had only one reportable segment under FAS 131.
NOTE 2 - MORTGAGE-BACKED SECURITIES, AVAILABLE FOR SALE
The Company did not hold any mortgage backed securities, available for sale at December 31, 1998 or December 31, 1997.
During 1997, proceeds of $175,000 were received in respect of the sale of mortgage-backed securities with a cost of $184,000, realizing a loss on the sale of investments of $9,000.
NOTE 3 - NOTE RECEIVABLE
The Company collected all amounts due on the note receivable on its maturity date in April, 1998. This note was created in April, 1996 when the Agora Office Building was sold to an unaffiliated third party. The terms of the sale included the $750,000 note receivable owed by the buyer to the Company.
NOTE 4 - NOTE PAYABLE
During 1998 the Company paid in full a note payable following the sale of the Good Guys Plaza Shopping Center in October 1998. The amount paid on final redemption of the loan was $2,803,000 and was financed by the sale proceeds of the related property.
For the years ended December 31, 1998, 1997 and 1996, interest paid on notes was $195,000, $264,000, and $183,000, respectively.
NOTE 5 - COMMON STOCK
Series A and Series B common stock have the same voting, dividend and distribution rights. All dividends are declared at the discretion of the Board of Directors of the Company. To date, the Board of Directors has not declared any dividends on Series B common stock. The Advisor holds 580 shares of Series A common stock and 1,000 shares of Series B common stock.
NOTE 6 - DISTRIBUTIONS
The allocations of cash distributions per share for individual stockholders' income tax purposes, as reported on Internal Revenue Service Form 1099-DIV, for the years ended December 31, 1998, 1997 and 1996 were as follows:
Ordinary Return of Capital Total Year Paid Income Capital Gain Paid - ----------------------------------------------------- 1998 - $.92 - $.92 1997 $.13 $2.28 $.18 $2.59 1996 - $.36 - $.36
NOTE 7 - RELATED PARTY TRANSACTIONS
The Company has an agreement with the Advisor to administer the day-to-day operations of the Company for which it pays a fee. On July 16, 1993, Franklin/Templeton Investor Services, Inc., an affiliate of the Advisor, assumed responsibility as the Company's transfer agent and registrar for the Company's Series A common stock.
The Company entered into an agreement with Continental Property Management Co. ("CPMC"), an affiliate of the Advisor, to manage the leasing and management related services for the properties. Under the terms of this agreement, CPMC was paid management, leasing and construction supervision fees.
The agreements between the Company and the Advisor, or affiliates, provided for certain types of compensation for services rendered for the years ended December 31, 1998, 1997 and 1996:
DOLLARS IN THOUSANDS 1998 1997 1996 - -------------------------------------------------------------------------------- Related party expenses: Management advisory fees $10 $38 $21 Reimbursement for accounting and data processing 12 24 23 expenses Property management fee 21 28 35 Stockholder services fees 19 18 13 ================================================================================ Total related party expense $62 $108 $92 ================================================================================
Leasing commissions, capitalized and amortized over the term of the related lease $- $5 $31 ================================================================================
At December 31, 1997, cash equivalents included $3,000 invested in Franklin Money Fund and $416,000 invested in Franklin Institutional Fiduciary Trust, both of which are managed by an affiliate of the Advisor. At December 31, 1998, the Company held no such investments. For the years ended December 31, 1998, 1997 and 1996, related dividends earned were $15,000, $44,000 and $8,000, respectively.
NOTE 8 - RENTAL INCOME
At December 31, 1998 the Company has sold all of its properties and thus will not receive further rental income. The Company's rental income from commercial property was received principally from tenants under non-cancelable operating leases.
NOTE 9 - SALE OF REAL ESTATE
On October 21, 1998, the company sold the Good Guys Plaza Shopping Center to an unrelated third party for $5,108,000, resulting in net cash proceeds to the Company of $4,876,000. The Company recognized a gain of $187,000 on this transaction.
NOTE 10 - SUBSEQUENT EVENT
At a special meeting of shareholders, held on January 26, 1999, the dissolution, termination and liquidation of the Company was approved by a majority of the Company's outstanding shares, after being approved by the Board of Directors. An initial liquidating distribution of $2.10 per share was made on February 16, 1999 and a final distribution is expected in June 1999. Management does not expect that the costs related to the ultimate liquidation of the Company will be material to the financial statements.
SCHEDULE III - R E A L E S T A T E A N D A C C U M U L A T E D D E P R E C I A T I O N
The Company held no real estate at December 31, 1998.
RECONCILIATION OF REAL ESTATE
In thousands 1998 1997 1996 - ---------------------------------------------------------------
Balance at beginning of period $5,991 $8,449 $9,536 Disposition (5,994) (2,463) (1,095) Additions during year: Improvements to rental property 3 5 8 =============================================================== Balance at end of period $ - $5,991 $8,449 ===============================================================
RECONCILIATION OF ACCUMULATED DEPRECIATION
In thousands 1998 1997 1996 - ---------------------------------------------------------------
Balance at beginning of period $1,409 $1,995 $2,145 Disposition (1,518) (740) (371) Depreciation expense for the period 119 154 221 - --------------------------------------------------------------- Balance at end of period $ - $1,409 $1,995 ===============================================================
Item 9.
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER AND THE ADVISOR
The officers and directors of the Company are as follows:
NAME POSITION David P. Goss Chief Executive Officer, President and a Director David W. Walters Independent Director James A. Niles Independent Director Richard S. Barone Secretary Martin L. Flanagan Vice President - Finance and Chief Financial Officer David N. Popelka Vice President - Asset Management
David Goss, Richard S. Barone, Martin L. Flanagan and David N. Popelka also served as directors or officers of the Advisor.
DAVID P. GOSS (51) Mr. Goss is Chief Executive Officer, President and Director of the Company (1987 to date). He is also Chief Executive Officer, President and Director of the Advisor, Franklin Properties, Inc., Franklin Real Estate Income Fund (1988 to date), Franklin Select Real Estate Income Fund (1989 to date) and Franklin Advantage Real Estate Income Fund (1990 to date). Mr. Goss has a B.A. degree from the University of California, Berkeley, and a J.D. degree from the New York University School of Law.
DAVID W. WALTERS (52) Mr. Walters is an Independent Director of the Company (1986 to date) and has been a practicing attorney since 1974, specializing in real estate acquisitions, finance, securities and taxation. From 1974 to 1976, Mr. Walters was with the California State Department of Corporations where, as Corporations Counsel, he was responsible for the administration of California's Real Estate Securities Qualification Rules. From 1976 to 1978, Mr. Walters was a member of the Bank of America's legal staff, where he specialized in commercial and consumer lending problems. Since 1978, Mr. Walters has been in private practice. Mr. Walters graduated from Stanford University where he received a B.S. degree. He also received a M.B.A. degree from the University of California at Berkeley, a J.D. degree from the University of San Francisco and a Masters degree in Taxation from Golden Gate University.
JAMES A. NILES (53) Mr. Niles is an Independent Director of the Company (1985 to date), and is an independent consultant. Mr. Niles attended the University of California, Davis, where he received a B.S, M.S. and Ph.D. in Agricultural Economics. Mr. Niles was a faculty member at the University of Florida from 1973 to 1978, and an Associate Professor at the Institute of Agribusiness at the University of Santa Clara from 1978 to 1986. Mr. Niles is the owner of Creekside Investment located in Los Gatos, California.
RICHARD S. BARONE (48) Mr. Barone is Secretary of the Company (1988 to date). He is also Secretary of the Advisor, Franklin Properties, Inc., Franklin Real Estate Income Fund (1988 to date), Franklin Select Real Estate Income Fund (1989 to date) and Franklin Advantage Real Estate Income Fund (1990 to date). He is also Senior Vice President - Legal of the Advisor and Franklin Properties, Inc. (1988 to date) and Corporate Counsel of Franklin Resources, Inc. (1988 to date). Previously, Mr. Barone was employed by the Robert A. McNeil Corporation as Corporate Counsel from 1982 until June, 1987, during which period he also held the positions of Vice President - Legal (1984 to 1987) and Secretary (1986 to 1987). Prior to 1982, he was in a private law practice in San Mateo, California. Mr. Barone received a B.A. degree and a J.D. degree from the University of San Francisco. He is a member of the State Bar of California.
MARTIN L. FLANAGAN (38) Mr. Flanagan is Vice President - Finance and Chief Financial Officer of the Company, the Advisor and Franklin Properties, Inc. He is also Senior Vice President, Chief Financial Officer and Treasurer of Franklin Resources, Inc.; Senior Vice President and Treasurer of Franklin/Templeton Distributors, Inc., Franklin Advisers, Inc., and Franklin Institutional Services Corporation; Treasurer of Franklin Management, Inc., and Franklin Trust Company; Senior Vice President of Franklin/Templeton Investor Services, Inc. and Franklin Agency, Inc.; a Director of Templeton/National Bank of Greece Management (Luxembourg), Templeton Investment Management (Singapore), Templeton Investment Management (Hong Kong), Templeton Funds Investment Annuity Company, Templeton Funds Trust Company, Templeton Funds Management, Inc., Templeton Holding Ltd., Templeton/Franklin Investment Services, Inc., Templeton Life Assurance Ltd., Templeton Quantitative Advisors, Inc., Templeton Emerging Markets, Templeton Management (Luxembourg), Templeton Unit Trust Managers, Ltd., and Templeton Investment Management, Ltd. (Edinburgh); Executive Vice President, Chief Operating Officer and a Director of Templeton Worldwide, Inc. and Templeton International, Inc.; Executive Vice President and a Director of T.G.H. Holdings, Ltd.; Chairman of the Board of Templeton Global Strategic Services, Inc.; General Manager of Templeton Financial Advisory Services, S.A.; Managing Director of Templeton Global Investors, Ltd.; President and Chief Executive Officer of Templeton Global Investors; and Executive Vice President and a Director of Templeton, Galbraith & Hansberger, Ltd. and Templeton Investment Counsel, Inc. From 1982 to 1983, he was an auditor for Arthur Andersen & Company. Mr. Flanagan received a B.A. degree from Southern Methodist University and is a Certified Public Accountant and a Chartered Financial Analyst. He is currently a member of the American Institute of Certified Public Accountants and the International Society of Financial Analysts.
DAVID N. POPELKA (46) David Popelka is Vice President - Asset Management of the Company and Vice President for the Advisor, Property Resources, Inc. Prior to joining the General Partner, Mr. Popelka was Vice President - Portfolio Management for the Glenborough Management Company in Redwood City, California. Mr. Popelka is a graduate of Illinois State University and received a Masters degree in Business Administration from the University of Washington Graduate School of Business. He has been a guest lecturer on real estate investments and finance at Golden Gate University. Mr. Popelka is a real estate broker licensed by the State of California.
Item 11.
Item 11. EXECUTIVE COMPENSATION
No direct compensation has been paid by the Company to directors and officers of the Company or the Company's advisor, Property Resources, Inc. (the "Advisor") except that the Independent Directors received approximately $9,000 for attending meetings during the year ended December 31, 1998. The Company has no annuity, pension or retirement plans or any existing plans or arrangement under which payments have or would in the future be made to any director or officer. The Company pays certain fees to and reimburses certain expenses of the Advisor as described in Item 13.
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
No person or group of persons is known by the Company to beneficially own more than 5% of the outstanding common stock. As of December 31, 1998, no directors or officers of the Company owned any shares of the Company.
The Company is unaware of any arrangement which may at a subsequent date result in a change in control of the Company.
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into an agreement with the Advisor to administer the day-to-day operations of the Company. Under the terms of the agreement, which is renewable annually, the Advisor will receive a fee equal to 5% of the total amount distributed to the Stockholders. The fee is not payable in regard to distributions from the sale or refinancing of property. Management advisory fees for 1998 amounted to $10,000. The agreement also provides for the following compensation and payments to the Advisor and its affiliates:
Reimbursement of certain administrative costs and expenses incurred on behalf of the Company of $12,000 in 1998.
Acquisition and investment advisory fees not to exceed in the aggregate, 13% of offering proceeds for services rendered in connection with the investigation, selection or acquisition of property. No such fees were paid in 1998.
Subordinated sales commissions of 5% of the gross selling price of Company property. No commissions were paid in 1998.
Subordinated disposition fee of 15% of net proceeds, as defined, from the sale or refinancing of Company property. No such fees were paid in 1998.
Subordinated commissions and fees are payable to the Advisor provided the stockholders have received cumulative distributions equal to their original equity plus an 8% per annum cumulative return. No such commissions or fees were paid to the Advisor in 1998.
An affiliate of the Advisor is entitled to receive fees for property management and other property related services. In 1998, the affiliate was paid $21,000 for property management services and $0 for leasing services.
An affiliate of the Advisor is entitled to receive underwriting commissions on shares sold to stockholders, net of payments made to unaffiliated broker-dealers. No such commissions were paid in 1998.
An affiliate of the Advisor is entitled to receive a stockholder services fee for providing services as the Company's transfer agent and registrar and for providing other related stockholder services. The affiliate was paid $19,000 in 1998 for these services.
On July 16, 1993, Franklin/Templeton Investor Services, Inc., an affiliate of the Advisor, assumed responsibility as the Company's transfer agent and registrar for the Company's Series A common stock. At December 31, 1998, and 1997, cash equivalents included $0 and $3,000 invested in Franklin Money Fund and $0 and $416,000 invested in Institutional Fiduciary Trust, respectively. Both are managed by an affiliate of the Advisor. For the year ended December 31, 1998, dividends earned on these investments amounted to $15,000.
David P. Goss, Richard S. Barone and David N. Popelka who are officers of the Company, are also officers of the Advisor.
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. The financial statements and schedules of the Company included in Item 8 of the report are listed on the index on page 8.
2. The supplemental financial statement schedule of the Company included in Item 8 of this report is listed on the index on page 8.
3. Exhibits
(2.) Plan of Dissolution and Liquidation (also see Form 8-K filed on February 1, 1999 and dated January 26, 1999 providing details of the approval of the Plan of Dissolution and Liquidation) (3.1) Articles of Incorporation * (3.2) Bylaws * (10.1) Material Contracts - Advisory Agreement * (10.2) Material Contracts - Property Management Agreement (11.) Statement regarding computation of earnings per share. See the Statement of Income included in the Financial Statements.
*Documents were filed in the Company's Form S-11 Registration Statement, dated July 16, 1985 (Registration No. 2-96589) and are incorporated herein by reference.
(b) Reports on Form 8-K.
On November 23, 1998 the Company filed form 8-KA. This filing provided proforma financial information relating to the sale of the Good Guys Plaza Shopping Center which occurred in October 1998.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
PROPERTY RESOURCES EQUITY TRUST (Registrant)
Date: By: S/DAVID P. GOSS David P. Goss Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
Chief Executive Officer - ---------------------------- ------------------- David P. Goss
Director1 - ---------------------------- ------------------- David W. Walters
Director1 - ---------------------------- ------------------- James A. Niles
1 Independent Director
EXHIBIT 2. PLAN OF DISSOLUTION AND LIQUIDATION
This Plan of Dissolution and Liquidation (this "Plan") is for the purpose of effecting the dissolution and complete liquidation of Property Resources Equity Trust (the "Company").
1. APPROVAL OF THIS PLAN. In accordance with Section 1900(a) of the California Corporations Code, this Plan shall be submitted to the shareholders of the Company for approval at the Special Meeting of Shareholders to be held for that purpose. This Plan shall become effective upon the approval of the holders of a majority of the outstanding shares (the "Effective Date")
2. CESSATION OF BUSINESS. Following approval of this Plan, the Company shall not engage in any further business activities, except for the purpose of completing work in process, disposing of its assets, providing for satisfaction of its obligations, adjusting and winding up its business and affairs, and distributing the proceeds from the disposition of its assets in accordance with this Plan. The Board of Directors (the "Directors") then in office shall continue in office solely for that purpose.
3. CONTINUING EMPLOYEES. For the purpose of effecting the liquidation of the Company's assets, the Company shall retain, subject to the pleasure of the Directors, such employees as the Directors deem desirable to supervise the liquidation.
4. EXPENSES OF LIQUIDATION. The Directors may provide, from the assets of the Company, reasonable funds for payment of the expenses of the dissolution and liquidation of the Company, including filing fees and other expenses relating to the holding of the Special Meeting of Shareholders to consider this Plan and other documentation required in connection with this Plan, continuation of employees engaged in the liquidation process, accounting and attorneys' fees and expenses, and other reasonable fees and expenses incurred in connection with the liquidation process.
5. PAYMENT OF LEGALLY ENFORCEABLE CLAIMS. The Company shall satisfy, or provide for the satisfaction of, all legally enforceable claims and obligations of the Company in an orderly manner.
6. PROVISION FOR CONTINUED INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Company shall reserve sufficient assets (or obtain such insurance) as shall be necessary to provide for continued indemnification of the Directors, officers and agents of the Company to the full extent provided by the articles of incorporation and bylaws of the Company, any existing indemnification agreements between the Company and any of such persons, and applicable law.
7. DISTRIBUTION TO SHAREHOLDERS. After satisfaction of all of the Company's legally enforceable obligations, remaining assets will be distributed to the shareholders of the Company in accordance with their respective shareholdings.
8. TERMINATION OF REIT STATUS. In the course of liquidation, the Board of Directors, acting in its discretion, shall have the authority to terminate the Company's election to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code of 1986, as amended, if it determines that such action would be in the best interests of the shareholders.
9. LIQUIDATING TRUST. If the Company is unable to satisfy its legally enforceable obligations within 12 months of the Effective Date, the Board of Directors may cause the Company to create a liquidating trust (the "Liquidating Trust") and to distribute beneficial interests in the Liquidating Trust to the shareholders as part of the liquidation process. The Liquidating Trust shall be constituted pursuant to a liquidating trust agreement in such form as the Board of Directors may approve, it being intended that the transfer and assignment to the Liquidating Trust pursuant hereto and the distribution to shareholders of the beneficial interests therein shall constitute a part of the final liquidating distribution by the Company to the shareholders of their pro rata interests in the remaining amount of cash and other property held by or for the account of the Company. From and after the date of the Company's transfer of cash and property to the Liquidating Trust, the Company shall have no interest of any character in and to any such cash and property and all of such cash and property shall thereafter be held by the Liquidating Trust solely for the benefit of and ultimate distribution of the shareholders, subject to any unsatisfied debts, liabilities and expenses.
10. AUTHORIZATION. The Board of Directors of the Company, or the trustees of the Liquidating Trust, and such officers of the Company as the Board of Directors may direct, are hereby authorized to interpret the provisions of this Plan and are hereby authorized and directed to take such further actions, to execute such agreements, conveyances, assignments, transfers, certificates and other documents, as may in their judgment be necessary or desirable in order to wind up expeditiously the affairs of the Company and complete the liquidation thereof, including, without limitation, (i) the execution of any contracts, deeds, assignments or other instruments necessary or appropriate to sell or otherwise dispose of any and all property of the Company, whether real or personal, tangible or intangible, (ii) the appointment of other persons to carry out any aspect of this Plan, (iii) the temporary investment of funds in such medium as the Board of Directors may deem appropriate, and (iv) the modification of this Plan as may be necessary to implement this Plan. The death, resignation or other disability of any Director or officer of the Company shall not impair the authority of the surviving or remaining Directors or officers of the Company (or any persons appointed as substitutes therefor) to exercise any of the powers provided for in this Plan. Upon such death, resignation or other disability, the surviving or remaining Directors shall have the authority to fill the vacancy or vacancies so created, but the failure to fill such vacancy or vacancies shall not impair the authority of the surviving or remaining Directors or officers to exercise any of the powers provided for in this Plan.
11. TERMINATION OF THIS PLAN. The Board of Directors may, by vote of the majority of the Directors then in office, terminate this Plan and revoke the dissolution of the Company, whether or not a vote of the shareholders has previously occurred.