<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1995
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the Transition period from
Commission File Number 1-8063
CALIFORNIA REAL ESTATE INVESTMENT TRUST
(Exact Name of Registrant as Specified in its Charter)
CALIFORNIA 94-6181186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
131 STEUART STREET, SUITE 200, SAN FRANCISCO, CALIFORNIA 94105
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (415) 905-0288
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Shares of Beneficial Interest New York Stock Exchange
$1.00 par value ("Common Shares") Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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, and (2) has been subject to the filing requirements for
at least the past 90 days.
Yes X No
--- ---
Sequential Page: 01 of
Exhibit Index: Page
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[ X ]
MARKET VALUE
Based on the closing sales price of $1.38 per share, the aggregate market value
of the outstanding Shares of Beneficial Interest held by non-affiliates of the
Registrant as of March 22, 1996 was $3,007,643.
OUTSTANDING SHARES
As of March 31, 1996 there were 9,156,970 outstanding Shares of Beneficial
Interest. The Shares Of Beneficial Interest are listed on the New York and
Pacific Stock Exchanges (trading symbol "CT"). Trading is reported in many
newspapers as "Cal RE" (CUSIP No. 130559107).
<PAGE> 3
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CALIFORNIA REAL ESTATE INVESTMENT TRUST
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<TABLE>
<CAPTION>
PART I PAGE
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Item 1. Business 1-4
Item 2. Properties 5
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Securities Holders 6
- ----------------------------------------------------------------------------------------------
PART II
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Item 5. Market for the Registrant's Common Equity and Related Security
Holder Matters 7-8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9-15
Item 8. Financial Statements and Supplementary Data 16-37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 38
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PART III
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Item 10. Trustees and Executive Officers of the Registrant 39-40
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management 41
Item 13. Certain Relationships and Related Transactions 42
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PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 43-48
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</TABLE>
(i)
<PAGE> 4
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PART I
==============================================================================
Item 1. Business
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General
California Real Estate Investment Trust (the "Trust" or "CalREIT") is a
self-administered real estate investment trust ("REIT") formed in 1966 in
California as a real estate trust. CalREIT has engaged primarily in the
acquisition, management, and disposition of commercial property and mortgage
investments for 30 years.
CalREIT's Shares of Beneficial Interest are traded on the New York Stock
Exchange and the Pacific Stock Exchange under the ticker symbol "CT".
At the end of 1995, the Trust's investment portfolio included both fee title
ownership of five real properties as well as seven mortgage notes. Its real
estate portfolio, with a book value of $17,215,000 as of December 31, 1995,
included the Redfield Commerce Center in Scottsdale, Arizona; the Bekins Storage
Facility in Pasadena, California; Fulton Square Shopping Center in Sacramento,
California; a 60% interest in Totem Square, a mixed-use property in the Seattle,
Washington metropolitan area; and the 113-room Casa Grande Motor Inn near San
Luis Obispo, California. Together the commercial properties encompass
approximately 273,000 net rentable square feet.
The Trust's mortgage note portfolio, with a book value of $10,502,000 as of
December 31, 1995, consisted of seven loans which bear interest at an overall
effective rate of approximately 8% and are collateralized by mortgages on real
property. Most of the investments in the seven loans were done in connection
with the disposition of Trust properties prior to 1995.
In 1995, total income to the Trust came from the following sources: 59% from
rental income, 39% from interest income and 2% from gain on foreclosure or sale
of investments. As of year-end, the Trust had $4,778,000 in cash. The Trust is
not currently involved in any foreign operations, nor does it derive any income
from foreign sources. At year-end, the Trust was 25% leveraged reflecting
outstanding mortgage debt obligations of $8,335,000; its debt-to-equity ratio
was approximately 1:3.
The Trust has operated and intends to continue to operate to qualify as a REIT
under the Internal Revenue Code, thereby preserving certain tax benefits for its
shareholders that are available through such qualification.
1
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Current Developments
Since the beginning of 1995, CalREIT's Board of Trustees has explored
alternative strategies to grow the Trust through acquisitions, joint-venture
arrangements and possibly through the infusion of new capital. The Board
explored growth opportunities in single and multi-tenant industrial buildings,
retail centers, hotel properties and other uses compatible with REIT status.
Early research indicated that given its relationship with The Peregrine Real
Estate Trust, which owned four hotels, that there were favorable prospects for
growth within the lodging industry and that there could be benefit to developing
CalREIT into a hotel real estate investment trust.
As part of its hotel REIT business plan, the Trust also examined the current and
prospective value of its 113-room Casa Grande Motor Inn in Arroyo Grande,
California. Despite significant improvements in operations under a third-party
hotel management company, the hotel's current and projected financial
performance was insufficient to cover its debt service requirements. In the
second quarter of 1995, the Trust suspended debt service payments and contacted
the lender on the property with a proposal to renegotiate the debt structure.
This proposal was rejected and in February of 1996, the Casa Grande Motor Inn
was returned to the lender through foreclosure.
To implement the plan, in 1995 the Board instructed management to begin to
reposition the Trust's assets and initiate a search for hotel properties.
Significant progress was made towards repositioning the Trust's assets during
this past year with completion expected by the second or third quarter of
1996. A contract to sell the Redfield Commerce Center was signed in the latter
part of 1995 and is expected to close in the first quarter of 1996. An offer to
purchase the Bekins Storage Facility was approved by the Board of Trustees in
February 1996. Both Fulton Square Shopping Center and Totem Square have been
listed with commercial property brokerage firms. In addition, the Trust has
retained Secured Capital Corp. to sell a portion of its portfolio of mortgage
notes which is expected to be completed in the first half of 1996.
The search to acquire additional hotel properties included discussions with
several independent hotel owners, operators and management companies as well as
with The Peregrine Real Estate Trust (CalREIT's parent company) which owns four
hotel properties. Initially the Board contemplated an exchange of assets between
CalREIT and The Peregrine Real Estate Trust ("Peregrine"), however this
transaction proved too cumbersome, time consuming and costly to pursue. The
Trust also explored acquiring Peregrine's hotel assets directly; however, as of
year-end no transaction had occurred.
Simultaneous with the search for merger or acquisition candidates, the Trust
pursued discussions with outside financing sources, including investment banking
companies, to provide either debt or equity financing for CalREIT's potential
expansion. At this time, the Trust believes if a potential transaction were to
enter the final stages of negotiation such financing would be available.
2
<PAGE> 6
By repositioning or changing its portfolio mix, the Trust will be
well-positioned to entertain other business opportunities and alternative
courses of action.
Other Information
In 1994, The Peregrine Real Estate Trust as majority shareholder, which owns 76%
of CalREIT's outstanding Shares of Beneficial Interest, voted its shares to
elect a new Board of Trustees, all of whom were key management personnel of
Peregrine. In 1995, the Board was expanded and is now comprised of five
Trustees, two of whom are independent Trustees. Of the three remaining Trustees,
one is the Chairman and Chief Executive Officer of CalREIT and was Chief
Executive Officer of Peregrine until January 1996, one is Chairman of the Board
of Trustees and interim Chief Executive Officer of Peregrine, and one is a
former officer of CalREIT and Peregrine.
Peregrine emerged from the bankruptcy of Commonwealth Equity Trust on October 7,
1994 pursuant to a Plan of Reorganization (the "Plan") which was confirmed by
the U.S. Bankruptcy Court on August 8, 1994. The Plan provided for the
restructuring of virtually all of Peregrine's secured and unsecured debt. The
primary lenders (the "Senior Lender Group") received 52% of the Shares of
Beneficial Interest and 100% of the Preferred Stock of The Peregrine Real Estate
Trust; it also received Restructured Secured Notes from Peregrine in the
original amount of $40,000,000. Under the Note Agreement, Peregrine cannot vote
on major corporate transactions (i.e., merger with or acquisition of assets of
any outside company, etc.) entered into by CalREIT without the approval of the
Senior Lender Group. No such transaction has been presented to or proposed to
the CalREIT shareholders for approval.
In August 1995, the Trust terminated its Dividend Reinvestment Plan because of
minimal participation and escalating costs of administering the plan.
Management of the Trust's Investments
All strategic and investment decisions are made by the Board of Trustees. Frank
A. Morrow is Chairman of the Board of Trustees and Chief Executive Officer of
the Trust. The Trust is self-administered with services provided by employees of
The Peregrine Real Estate Trust (for whom Peregrine receives a reimbursement of
costs pursuant to a cost allocation agreement) or by independent contractors.
The Board of Trustees of CalREIT made the decision in September 1995 not to
renew the contract of Arnold Brown as Chief Financial Officer of CalREIT.
In January 1996, the independent Trustees of Peregrine's Board made the decision
to terminate Mr. Morrow's contract as Peregrine's Chief Executive Officer.
Subsequently, Mr. Morrow resigned from Peregrine's Board of Trustees on
February 1, 1996.
United Property Services, Inc. ("UPSI"), with an office in Sacramento, is the
property manager for the Trust's commercial property assets. UPSI operates under
an agreement signed in 1994 that runs for consecutive month-to-month terms, but
is terminable by either the Trust or UPSI upon 30 days notice. The Trust's
agreement with CapStar, the hotel management company signed to
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lease the Casa Grande Motor Inn in 1994, terminated upon the foreclosure of
the hotel in 1996. Other agreements are in place with commercial property
leasing firms in the Trust's various market areas with a charge to increase
occupancy and rental income to maximize potential sales prices. As of year-end,
the average weighted occupancy level for the commercial property portfolio was
90% and for the hotel was 52%.
In addition, with respect to the Trust's note portfolio, in 1995 foreclosure
proceedings were initiated against one delinquent noteholder with other
delinquency issues resolved as well. It is the Trust's intention to continue to
pursue any and all delinquencies in either rent or note payments.
The rules and regulations adopted by various federal, state and local government
agencies concerning environmental controls in the operation of real property may
adversely affect existing property operations or reduce future investment
opportunities. While the Trust does not believe that environmental controls have
had a material impact on its activities to date, there can be no assurance that
the Trust will not be adversely affected in the future.
During the last three fiscal years, the Trust has been involved in only one
industry segment: acquiring, operating and holding for investment
income-producing properties and making mortgage loans secured by real property.
The Trust's financial and operating performance information is set forth in the
accompanying financial statements.
4
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ITEM 2: PROPERTIES
- -------------------------------------------------------------------------------
The following table sets forth certain information relating to properties owned
by the Trust at December 31, 1995. All of the properties are suitable for the
purpose for which they are designed and are being used.
<TABLE>
<CAPTION>
Date of Ownership Square Total
Direct Equity Investments Acquisition Percentage Feet Cost (1) Encumbrances
- -------------------------------------------------- ----------- ---------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C>
SHOPPING CENTERS:
Fulton Square, Sacramento, California 5/91 100% 35,493 $ 3,618,000 -
Totem Square, Kirkland, Washington 11/90 60% 126,623 9,400,000 4,334,000
----------- ----------
Total shopping centers 13,018,000 4,334,000
----------- ----------
INDUSTRIAL BUILDINGS:
Redfield Commerce Center, Scottsdale, Arizona 5/88 100% 27,900 1,650,000 -
Bekins Storage Facility, Pasadena, California 7/88 100% 83,000 5,745,000 -
---------- ----------
Total industrial buildings 7,395,000 0
---------- ----------
HOTELS:
Casa Grande Motor Inn, Arroyo Grande, California (2) 9/92 100% 64,200 6,477,000 3,089,000
----------- ----------
Total hotels 6,477,000 3,089,000
----------- ----------
$26,890,000 7,423,000
=========== ===========
</TABLE>
(1) Total cost before any reduction for valuation allowance related to
investments and accumulated depreciation.
(2) Property was returned to the lender due to foreclosure in February 1996.
5
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Item 3. Legal Proceedings
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None.
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Item 4. Submission of Matters to a Vote of Securities Holders
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No matter was submitted to a vote of security holders during the fourth quarter
of 1995.
6
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PART II
==============================================================================
Item 5. Market for the Registrant's Common Equity and Related Security Holder
Matters
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CalREIT's Shares are listed on the New York Stock Exchange ("NYSE") and the
Pacific Stock Exchange ("PSE"). The trading symbol for CalREIT's Shares of
Beneficial Interest is "CT". The Trust had approximately 1,960
shareholders-of-record at March 31, 1996.
The following tables set forth the high and low sales prices of CalREIT shares
on the NYSE during the last two years. Distributions per share during this time
period also are set forth.
MARKET PRICE AND DISTRIBUTIONS DECLARED
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Quarter Ended
-----------------------------------------------------
<S> <C> <C> <C> <C>
3/31/95 6/30/95 9/30/95 12/31/95
High 1-5/8 1-7/8 1-5/8 1-1/2
Low 1-5/8 1-3/4 1-1/2 1-3/8
Distributions $ - - - -
- ------------------------------------------------------------------------------
3/31/94 6/30/94 9/30/94 12/31/94
High 2-1/8 2-1/8 2-1/8 2
Low 2-1/8 2 1-5/8 1-5/8
Distributions $ - 0.05 0.05 -
- ------------------------------------------------------------------------------
</TABLE>
7
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The following table sets forth the character for tax purposes of CalREIT's
distributions per Share of Beneficial Interest during the last five fiscal
years.
CHARACTER OF DISTRIBUTIONS
FOR TAX PURPOSES
<TABLE>
<CAPTION>
For Tax Purposes
Characterized as
----------------------------------------
<S> <C> <C> <C> <C>
Total
Years Ended Per Share Ordinary Capital Return of
December 31 Distributions Income Gains Capital
- ----------- ------------- ------ ----- -------
1991 $ .25 $ .25 - -
1992 $ .20 - - $ .20
1993 $ .23 - - $ .23
1994 $ .10 - - $ .10
1995 $ .00 - - -
</TABLE>
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Item 6. Selected Financial Data
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The following represents selected financial data for California Real Estate
Investment Trust for the years ended December 31, 1995, 1994, 1993, 1992 and
1991. The data should be read in conjunction with other financial statements and
related notes included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating results:
Revenue $ 3,535 $ 4,898 $ 5,453 $ 5,889 $ 7,182
Operating
Income (loss) 437 301 (340) 823 2,111
Net loss(1) (2,778) (36) (8,111) (10,279) (3,571)
Per Share of Beneficial Interest:
Net income (loss) $ (0.30) $ (0.00) $ (.89) $ (1.13) $ (.39)
Distributions - .10 .23 .20 .25
Financial Position:
Total assets $ 33,532 $ 36,540 $ 42,194 $ 55,477 $ 66,159
Long-term obligations 8,335 8,740 13,360 15,682 14,650
</TABLE>
(1) Includes valuation losses of $3,281; $119; $8,146; $11,609 and $5,483 for
1995, 1994, 1993, 1992 and 1991, respectively. See Note 5 of the Notes to
Consolidated Financial Statements for further discussion.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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Overview
Following is a discussion and analysis on the operations and financial results
of 1995 compared with the operations and financial results of 1994 and 1993. For
comparison purposes, it should be noted that the CalREIT property portfolio
underwent a significant reduction in size between 1993 and 1994. At the
beginning of 1993, CalREIT owned thirteen properties; however by the end of the
year, with seven properties sold, the Trust owned a total of six properties. In
1994, with the sale of the Imperial Canyon Shopping Center, the number of
properties owned by the
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Trust was further reduced. Throughout 1995, CalREIT owned four commercial
properties, one hotel and a portfolio of seven mortgage notes.
In 1994, the majority shareholder, now Peregrine, voted its shares to replace
the Board of Trustees. The new Board terminated the contracts of CalREIT's then
outside advisor and property manager and appointed new management. During 1994,
management concentrated on stabilizing property operations and bringing note
payments current. A new property management company was selected to oversee
operations at the Trust's commercial properties and a hotel management company
was signed to lease the hotel property. The lease arrangement had a significant
impact on the reporting of income and expenses for the property. In 1995, the
Board of Trustees was expanded to include the addition of two independent
Trustees.
During 1995, California Real Estate Investment Trust began to implement its
strategy to grow the Trust to enhance both share value and increase cash
available for distribution. Management began to monetize or reposition the
Trust's assets to facilitate a growth strategy through merger or acquisitions.
As part of this strategy, the Trust's four commercial properties were readied
for sale. Leasing, capital and tenant improvement expenditures were approved as
they related to their impact on potential sales prices. As of the end of the
fiscal year 1995, Redfield Shopping Center was in escrow and the other three
commercial properties were listed with real estate brokerage firms. In the first
quarter of 1996, a contract for the sale of the Bekins Storage Facility was
approved by the Board of Trustees. A portion of the Trust's portfolio of
mortgage notes were packaged for sale, an event expected to be completed in
early 1996. Because of the hotel property's limited potential and inability to
service its debt, the Trust allowed foreclosure in February 1996.
Simultaneous to the activity to reposition or change the portfolio mix of its
assets, the Trust attempted to acquire Peregrine's hotel portfolio. An earlier
plan to swap certain assets with Peregrine did not occur, nor did the offer to
purchase Peregrine's four Holiday Inns directly. As a result, management focused
its efforts towards third party companies and entered into discussions with a
group of hotel management companies regarding mergers and acquisitions. Should
the hotel REIT concept not come to fruition, the monetization of CalREIT's
assets opens up new possibilities with respect to alternative courses of action.
The Trust is well-positioned to entertain any number of business opportunities.
As discussed earlier in Item 1, any recapitalization or significant transaction
proposed by CalREIT will require the approval of the Board of Trustees of The
Peregrine Real Estate Trust and Peregrine's Senior Lender Group.
Liquidity and Capital Resources
The Trust's liquidity and capital resources include its cash and short-term
investments, long-term first and second mortgage notes and funds available
through bank borrowings. At December 31, 1995, the Trust had $4,778,000 in cash;
its five properties had a net book value of $17,215,000 with collateralized
indebtedness against them totaling $8,335,000 or 48%. CalREIT's
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$19,653,000 note portfolio is carried at a book value of $10,502,000, due to
cumulative valuation write-downs of $8,048,000 and deferred gains of $1,103,000.
The primary sources of liquidity for the Trust in 1996 will be its cash on hand,
cash generated from operations, interest payments on its notes, and proceeds
from sales of assets. The primary demands on the Trust's capital resources will
be debt service payments and funding the implementation of the hotel REIT or
alternative business plan.
Management believes that its liquidity and financial resources are sufficient to
meet anticipated cash requirements. The Trust's debt-to-equity ratio was 1:3 at
December 31, 1995; the Trust's current ratio (cash, accounts receivable in the
next 12 months and prepaid expenses divided by accounts payable and other
liabilities due within the next 12 months) was in excess of 5:1.
Results of Operations
Equity REIT analysts generally consider Funds From Operations (FFO) an
appropriate measure of performance in comparing the results of operations of
REITs. FFO is defined by the National Association of Real Estate Investment
Trusts as net income computed in accordance with generally accepted accounting
principles before gains and losses on sales of property and from debt
restructuring plus depreciation and amortization. Funds Available for
Distribution ("FAD") is defined as FFO less capital expenditures funded by
operations and loan amortization. The Trust believes that in order to facilitate
a clear understanding of the historical operating results of the Trust, FFO and
FAD should be examined in conjunction with net income (loss) as presented in
this report. FFO and FAD should not be considered as an alternative to net
income (loss) as an indication of the Trust's performance or to cash flow as a
measure of liquidity.
Funds From Operations and Funds Available for Distribution for the years ended
December 31, 1995, 1994 and 1993 are summarized as follows:
Calculation of Funds From Operations and Funds Available for Distribution
(Dollars in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net income (loss) before gain (loss)
on foreclosure or sale of investments, valuation
losses and extraordinary items $ 437 $ 301 (340)
Depreciation and amortization 662 595 847
------ ------ -------
Funds From Operations 1,099 896 507
Capital Improvements (321) (106) (1,510)
Loan principal payments (405) (94) (91)
------ ------ -------
Funds Available for Distribution $ 373 $ 696 $ --
====== ====== =======
</TABLE>
11
<PAGE> 15
Funds from Operations totaled $1,099,000 in 1995, up 23% from $896,000 in 1994,
which was up 77% from $507,000 in 1993. The increases in 1995 and 1994 were a
result of significant reductions in total expenses due primarily to the sales of
properties and leasing the hotel to a third party. There were no cash
distributions paid to shareholders in 1995 as the Trust continued to build its
reserves for a potential expansion transaction; distributions paid to
shareholders were $890,000 in 1994 and $2,016,000 in 1993.
Net Loss
Net loss for 1995 was $2,778,000, a substantial increase over the net loss of
$36,000 for 1994. The 1994 loss was down 99% from the net loss of $8,111,000
reported in 1993. The increase in net loss in 1995 was a result of significant
valuation losses recognized on the Trust's properties and mortgage notes. The
reduction in net loss in 1994 from 1993 was due primarily to a substantial
difference in valuation losses charged in 1994 as compared to those charged in
1993.
Operating income was $437,000 in 1995, up 45% from $301,000 in 1994, which was
up 189% from a loss of $340,000 in 1993. The $136,000 increase in operating
income in 1995 was primarily the result of a reduction in expenses. Early in
1994, the Imperial Canyon Shopping Center was sold at a gain to the Trust of
$114,000. Recognition of deferred gain from a partial principal payment on one
of the Trust's mortgage notes resulted in an additional $12,000 gain to the
Trust in 1994. The total gain of $126,000 was offset by a $344,000 loss from the
release of and default on two of the Trust's mortgage notes, resulting in a
total loss on the sale of assets of $218,000 for 1994. In 1993, the Trust
experienced an operating loss of $340,000 despite a net gain of $131,000 on the
sale of three assets and the recognition of a deferred gain from a partial
principal payment received on one of its mortgage notes.
Income (loss) before valuation losses and extraordinary items was $503,000 in
1995 as compared to $83,000 in 1994 and ($209,000) in 1993. In 1995, the Trust
recognized a deferred gain from a partial principal payment received on one of
its mortgage notes. During the first five months of 1994, the Trust's hotel
property experienced an average operating loss after debt service of $107,000
per month. With the execution of a lease with CapStar, a professional hotel
management company, this amount was reduced to approximately $8,600 per month,
the difference between the monthly lease payment of $20,000 and the property's
monthly debt service requirement of $28,600. The lease with CapStar was
renegotiated in June 1995, reducing the monthly lease payments from $20,000 to
approximately $9,000; therefore, increasing the loss recorded by the Trust. In
1994 the Trust experienced a gain of $114,000 on the sale of one property and
the recognition of a deferred gain from the partial principal payment on one of
its mortgage notes. This was offset by a $344,000 loss from the release of and
default on two of the Trust's mortgage notes. In 1995, valuation losses of
$3,281,000 resulted from the write down in value of two properties and five
mortgage notes. In 1994, valuation losses of $119,000 resulted from the write
down of value on two properties. In 1993, the write down of value on five
properties and four mortgage notes resulted in a total valuation loss of
$8,146,000 for the year. In 1995 and 1994 there were no extraordinary items.
During 1993, the Trust owned a property with a carrying value of $2,056,000
which was foreclosed upon by its lender which held a note
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<PAGE> 16
for $2,300,000. As a result of this transaction, the Trust recognized a $244,000
gain on the foreclosure as an extraordinary item.
Revenue
Total revenues were $3,535,000 in 1995, down 26% from $4,787,000 in 1994, which
was down 12% from $5,453,000 in 1993. The decrease reported in 1995 was the
result of one less property contributing to the Trust's revenue pool, plus a
decrease in collected rental revenues and interest earned. In 1994, there were
eight fewer properties contributing to the Trust's revenue pool which resulted
in the decrease in total revenues to the Trust from 1993 to 1994.
Rental revenue at the Trust's commercial properties was $2,093,000 in 1995, down
19% from $2,593,000 in 1994, which was down 26% from $3,501,000 in 1993. The
decrease in 1995 is attributable to the absence of $196,000 in rent collected in
1994 at the Imperial Canyon Shopping Center prior to its sale, as well as a
decrease of $305,000 in rents collected at Fulton Square Shopping Center and
Totem Square. Virtually all of the decline in rental revenue in 1994 from 1993
is attributable to the absence of rents from seven properties that were sold in
1993 and one property sold in 1994.
Because of a change in the status of the hotel from direct management to a lease
arrangement, a comparison of 1995 to 1994 revenues is not relevant. The 1995
revenues are comprised of lease revenues net of any bad debt from CapStar, the
hotel management company which leased the Casa Grande Motor Inn. Prior to June
1994, the hotel property was managed directly by the Trust and all revenues and
expenses were accounted for directly.
Despite improvements in operations and the implementation of a lease arrangement
financially favorable to the Trust, the hotel was unable to generate sufficient
revenue to cover its debt service requirements. The lease agreement was
renegotiated in June 1995 and any rent receivables relating to the first five
months of 1995 were written off in the third quarter. The Trust and CapStar
negotiated lower rent payments due to the fact that the hotel was not generating
sufficient revenues. The Trust suspended debt payments in 1995 and after a
refusal by the lender to restructure debt terms, it allowed the property to be
foreclosed upon in the first quarter of 1996.
As of December 31, 1995, 1994, and 1993 overall weighted occupancy levels by
class of property were as follows:
<TABLE>
<CAPTION>
Property Type 1995 1994 1993
------------- ---- ---- ----
<S> <C> <C> <C>
Shopping Centers 83% 77% 85%
Industrial Buildings 100% 98% 98%
Hotel 52% 42% 35%
</TABLE>
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The weighted average occupancy is calculated by multiplying the occupancy for
each property by its square footage and dividing by the square footage in the
portfolio.
Revenues from interest were $1,396,000 in 1995, down 17% from 1994. However,
1994 revenues were up 87% from 1993 revenues of $898,000. In 1994, the Trust
recognized an additional $735,000 in interest income on one of its mortgage
notes. In September 1994, this note was modified and $491,000 of accrued
interest, the recognition of which had been deferred, was paid in consideration
for releasing an asset from the pool of properties collateralizing the note.
This event is the primary cause of the decrease of interest income in 1995 from
1994 and the increase in interest income over that of 1993.
Expenses
Total expenses were $3,098,000 in 1995, down 31% from 1994, which was down 23%
from $5,793,000 in 1993.
As noted above, due to the change in the management of hotel operations a direct
comparison of 1995 to 1994 results is not relevant. In 1995, hotel operating
expenses decreased $763,000 attributable to the leasing of the property to a
third party hotel management company. There was a decrease of $156,000 in
property management fees paid by the Trust that was attributable to a change in
property management companies and the lowering of the monthly property
management fee from 5% to 3% of collected rents; to the absence of an additional
management fee paid in 1994 to the Trust's former advisor; and to a savings of
$207,000 in expenses caused by the sale of the Imperial Canyon Shopping Center.
The reduction in expenses of $1,307,000 in 1994 over those of 1993 is primarily
the result of the downsizing of the Trust's portfolio from thirteen to five
properties.
Interest expense was $815,000 in 1995, down 22% from 1994, which was down 30%
from 1993. The decrease in 1995 reflects the sale of the Imperial Canyon
Shopping Center and the payoff of the note on the Fulton Square Shopping Center.
The decline in 1994 from 1993 is attributable to the absence of debt on the
seven properties sold in 1993 and one sold in 1994.
The non-cash depreciation charge increased 11% from 1994, which decreased 30%
from 1993. The slight increase in 1995 includes amortization of certain property
specific expenses. The decrease in 1994 from 1993 is attributable to the absence
of seven properties sold during 1993 and one sold in 1994.
General and administrative expenses were $933,000 in 1995, up 15% from $813,000
in 1994, which were up 31% from $622,000 in 1993. CalREIT continues to be
negatively impacted by its small size with respect to general and administrative
expenses. As a result of certain fixed costs required to operate a public
company, a disproportionate amount is currently being spent on overhead expenses
and administration of the Trust. A significant benefit to an expansion of the
Trust is expected to be a reduction in the percentage of revenues required to
support overhead and administrative activities. While the Trust was able to
lower a number of office and administrative expenses, a net increase occurred in
1995 due to the increase in certain shared
14
<PAGE> 18
administrative costs such as insurance, utilities, etc. with The Peregrine Real
Estate Trust, as well as from proxy, annual report and annual meeting costs
which had not been incurred in the prior year. The increase in general and
administrative costs in 1994 over those of 1993 were primarily due to legal fees
incurred in the election of a new Board of Trustees and to the termination of
B&B Property Investment, Development and Management Company, Inc., B&B Property
Investment, Inc., and North Main Street Company, asset and property management
firms.
Significant Changes in the Economic Environment
Changing interest rates would not have a significant effect on the Trust's
current debt obligations as they are all in place at fixed rates. However,
should the Trust desire to increase its debt level or to raise equity capital in
the future, an increase in interest rates would make either debt or equity
capital more costly.
15
<PAGE> 19
- ------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
- ------------------------------------------------------------------------------
Index Page
- ------------------------------------------------------------------------------
Consolidated Financial Statements
Reports of Independent Accountants 17-18
Consolidated Balance Sheets 19
Consolidated Statements of Operations 20
Consolidated Statements of Changes in Shareholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 23-37
Schedule III - Real Estate and Accumulated Depreciation 44-46
Schedule IV - Mortgage Loans on Real Estate 47-48
16
<PAGE> 20
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Trustees
California Real Estate Investment Trust
We have audited the accompanying consolidated balance sheets of California Real
Estate Investment Trust and Subsidiary Trust) as of December 31, 1995 and 1994,
and the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the years then ended. In connection with our audits
of the consolidated financial statements, we have also audited the financial
statement schedules as listed in the accompanying index. These consolidated
financial statements and financial statement schedules are the responsibility of
the Trust's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
California Real Estate Investment Trust and Subsidiary at December 31, 1995 and
1994, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects, the information set forth therein.
/s/ Coopers & Lybrand L.L.P.
Sacramento, California
March 27, 1996
<PAGE> 21
[BURNETT UMPHRESS+KILGOUR LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
California Real Estate Investment Trust
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity and cash flows for the year ended December 31, 1993. In
connection with our audit of the consolidated financial statements, we also
have audited the financial statement schedules for the year ended December 31,
1993, in the accompanying index. These consolidated financial statements and
financial statement schedules are the responsibility of the Trust's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of the operations and the
cash flows of California Real Estate Investment Trust and subsidiary for the
year ended December 31, 1993, in conformity with generally accepted accounting
principles. Also, in our opinion, the related statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
/s/ Burnett, Umphress & Kilgour
Rancho Cordova, California
March 11, 1994
<PAGE> 22
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
----------
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
ASSETS
Investments, Generally Held for Sale (1995):
Rental properties, less accumulated depreciation of
$2,777,000 and $2,229,000 in 1995 and 1994,
respectively, and valuation allowances of
$6,898,000 and $5,863,000 in 1995 and 1994,
respectively $ 17,215,000 $ 18,391,000
Notes receivable, net of valuation allowances and
deferred gains of $9,151,000 and $7,182,000 in
1995 and 1994, respectively 10,502,000 13,532,000
------------ ------------
27,717,000 31,923,000
Cash 4,778,000 3,366,000
Receivables, net of allowance of $700,000 and $323,000
in 1995 and 1994, respectively 680,000 974,000
Other assets, net of valuation allowance of
$310,000 in 1995 and 1994 357,000 277,000
------------ ------------
Total Assets $ 33,532,000 $ 36,540,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term notes payable, collateralized by deeds of trust
on rental properties $ 8,335,000 $ 8,740,000
Accounts payable and accrued expenses 209,000 43,000
Other liabilities 81,000 72,000
------------ ------------
Total Liabilities 8,625,000 8,855,000
------------ ------------
Shareholders' Equity:
Shares of beneficial interest, par value $1 a share; unlimited
authorization, 9,157,000 shares outstanding in 1995 and 1994 9,157,000 9,157,000
Additional paid-in capital 55,098,000 55,098,000
Accumulated deficit (39,348,000) (36,570,000)
------------ ------------
Total Shareholders' Equity 24,907,000 27,685,000
------------ ------------
Commitments (Note 10)
Total Liabilities and Shareholders' Equity $ 33,532,000 $ 36,540,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 23
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
----------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rent $ 2,093,000 $ 2,593,000 $ 3,501,000
Interest 1,396,000 1,675,000 898,000
Hotel 46,000 519,000 1,054,000
----------- ----------- -----------
3,535,000 4,787,000 5,453,000
----------- ----------- -----------
Expenses:
Operating expenses 584,000 1,011,000 1,281,000
Hotel operating expenses 8,000 771,000 896,000
Property management 96,000 252,000 620,000
Depreciation and amortization 662,000 595,000 847,000
Interest 815,000 1,044,000 1,487,000
General and administrative 933,000 813,000 662,000
----------- ----------- -----------
3,098,000 4,486,000 5,793,000
----------- ----------- -----------
Income (loss) before gain (loss) on
foreclosure or sale of investments
valuation losses and extraordinary item 437,000 301,000 (340,000)
Net gain (loss) on foreclosure or sale of
investments 66,000 (218,000) 131,000
----------- ----------- -----------
Income (loss) before valuation losses
and extraordinary item 503,000 83,000 (209,000)
Valuation losses 3,281,000 119,000 8,146,000
----------- ----------- -----------
Loss before extraordinary
item (2,778,000) (36,000) (8,355,000)
Extraordinary item -- -- 244,000
----------- ----------- -----------
Net loss $ 2,778,000) $ (36,000) $ 8,111,000)
=========== =========== ===========
Net loss per share of beneficial interest $ (0.30) $ (0.00 $ (0.89)
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 24
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
----------
<TABLE>
<CAPTION>
Shares of Additional Total
Beneficial Interest Paid-in Accumulated Shareholders'
Number Amount Capital Deficit Equity
------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 9,128,000 $9,128,000 $55,064,000 $(25,454,000) $38,738,000
Net loss -- -- -- (8,111,000) (8,111,000)
Proceeds from shares issued 17,000 17,000 22,000 -- 39,000
Distributions -- -- -- (2,055,000) (2,055,000)
--------- ---------- ----------- ------------ -----------
Balance at December 31, 1993 9,145,000 9,145,000 55,086,000 (35,620,000) 28,611,000
--------- ---------- ----------- ------------ -----------
Net loss -- -- -- (36,000) (36,000)
Proceeds from shares issued 12,000 12,000 12,000 -- 24,000
Distributions -- -- -- (914,000) (914,000)
--------- ---------- ----------- ------------ -----------
Balance at December 31, 1994 9,157,000 9,157,000 55,098,000 (36,570,000) 27,685,000
--------- ---------- ----------- ------------ -----------
Net loss -- -- -- (2,778,000) (2,778,000)
--------- ---------- ----------- ------------ -----------
Balance at December 31, 1995 9,157,000 $9,157,000 $55,098,000 $(39,348,000) $24,907,000
========= ========== =========== ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 25
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993
----------
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) $(2,778,000) $ (36,000) $(8,111,000)
----------- ---------- -----------
Adjustments to reconcile net (loss) to net
cash provided by operating activities:
Depreciation and amortization 662,000 595,000 847,000
(Gain) loss on foreclosure or sale of
investments (66,000) 218,000 (375,000)
Valuation losses 3,281,000 119,000 8,146,000
Changes in assets and liabilities:
Decrease in receivables 294,000 107,000 386,000
(Increase) decrease in other assets (282,000) 82,000 155,000
Increase (decrease) in accounts payable
and accrued expenses 166,000 (45,000) (609,000)
Increase (decrease) in other liabilities 11,000 (106,000) (225,000)
----------- ---------- -----------
Total adjustments to net (loss) 4,066,000 970,000 8,325,000
----------- ---------- -----------
Net cash provided by operating activities 1,288,000 934,000 214,000
----------- ---------- -----------
Cash flows from investing activities:
Payments related to sales of rental properties -- (100,000) --
Proceeds from sale of rental properties -- -- 848,000
Improvements to rental properties (321,000) (106,000) (1,510,000)
Collections on notes receivable 850,000 346,000 5,575,000
Increase in notes receivable -- (175,000) --
----------- ---------- -----------
Net cash provided by (used in) investing activities 529,000 (35,000) 4,913,000
----------- ---------- -----------
Cash flows from financing activities:
Principal payments on long-term notes payable (405,000) (94,000) (91,000)
Distributions paid -- (890,000) (2,016,000)
----------- ---------- -----------
Net cash used in financing activities (405,000) (984,000) (2,107,000)
----------- ---------- -----------
Net increase (decrease) in cash 1,412,000 (85,000) 3,020,000
Cash, beginning of year 3,366,000 3,451,000 431,000
----------- ---------- -----------
Cash, end of year $ 4,778,000 $3,366,000 $ 3,451,000
=========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 26
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies:
Organization
California Real Estate Investment Trust (the Trust or CalREIT) was
organized under the laws of the State of California pursuant to a
Declaration of Trust dated September 15, 1966.
The Trust became a partner of Totem Square, L. P. (Totem), a Washington
Limited Partnership in which the Trust owns a 59% interest, on November
30, 1990. The Trust also formed CalREIT Totem Square, Inc. (Cal-CORP)
to act as general partner of Totem. Cal-CORP has a 1% interest in
Totem, and Totem Square Associates, an unrelated party, has the
remaining 40%.
On April 14, 1994, The Peregrine Real Estate Trust (formerly
Commonwealth Equity Trust) as majority shareholder owning 76% of the
Trust's outstanding Shares of Beneficial Interest, voted its shares to
replace the Board of Trustees. At that time, the Trust elected a new
Board of Trustees all of whom were key management personnel of The
Peregrine Real Estate Trust (Peregrine). Subsequently, the Board has
grown to five Trustees of which two are independent. Of the three
remaining Trustees, one is the Chief Executive Officer of CalREIT and
was the Chief Executive Officer of Peregrine until January 1996; one is
Chairman of the Board of Trustees and interim Chief Executive Officer
of Peregrine and one is a former officer of CalREIT and Peregrine.
At the end of 1995, the Trust owned a hotel and four commercial
properties located in five market areas in the Western United States.
The Trust also owned a mortgage note portfolio comprised of $19,653,000
in loans, with an aggregate book value of $10,502,000, bearing interest
at an overall effective rate of approximately 8%. The mortgaged notes
are collateralized by mortgages on real property. Most of the
investments in the seven loans were originated by the Trust in
connection with the disposition of Trust properties prior to 1995.
Principles of Consolidation
For 1995, 1994 and 1993, the consolidated financial statements include
the accounts of the Trust, Cal-CORP and Totem.
23
<PAGE> 27
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Rental Properties
At December 31, 1995 and 1994, rental properties are carried at cost,
net of accumulated depreciation and less a valuation allowance for
possible investment losses. The Trust's valuation allowance for
possible investment losses represents the excess of the carrying value
of individual properties over their appraised or estimated fair value
less estimated selling costs.
The additions to the valuation allowance for possible investment losses
are recorded after consideration of various external factors,
particularly overbuilding in real estate markets which has a negative
impact on achievable rental rates. A loss will be recorded to the
extent that the amounts ultimately realized from property sales differ
from those currently estimated. In the event economic conditions for
real estate continue to decline, additional valuation losses may be
recognized in the near term.
The allowance for depreciation and amortization has been calculated
under the straight-line method, based upon the estimated useful lives
of the properties which lives range from 30 to 40 years. Expenditures
for maintenance, repairs and improvements which do not materially
prolong the normal useful life of an asset are charged to operations as
incurred.
Real estate acquired by cancellation of indebtedness or foreclosure is
recorded at fair market value at the date of acquisition but not in
excess of the unpaid balance of the related loan plus costs of securing
title to and possession of the property.
Other Assets
The Trust amortizes leasing commissions on a straight-line basis over
the lives of the leases to which they relate. Financing costs are
amortized over the lives of the loans or other financial instruments to
which they relate.
Income Taxes
The trust has elected to be taxed as a real estate investment trust and
as such, is not taxed on that portion of its taxable income which is
distributed to shareholders, provided that at least 95% of its real
estate trust taxable income is distributed and that the Trust meets
certain other REIT requirements. Due to federal and California tax net
operating loss
24
<PAGE> 28
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Income Taxes, continued
carryforwards (NOLs), the Trust does not have taxable income for the
year ended December 31, 1995. The Trust has federal and California NOLs
as of December 31, 1995 of approximately $11,375,000 and $2,009,000,
respectively. Such NOLs expire through 2009 for federal and 2004 for
California.
Due to prior year ownership change related to Peregrine's bankruptcy,
NOLs are limited for both federal and California to approximately
$1,700,000 annually. Any unutilized portion of such annual limitation
can be carried forward to future periods.
Cash
The Trust invests its cash in demand deposits with banks with strong
credit ratings. Bank balances in excess of federally insured amounts
totaled $4,577,000 and $4,299,000 as of December 31, 1995 and 1994,
respectively. The Trust has not experienced any losses on these
deposits.
Sales of Real Estate
The Trust complies with the provisions of Statement of Financial
Accounting Standards No. 66 (SFAS 66), "Accounting for Sales of Real
Estate." Accordingly, the recognition of gains on certain transactions
are deferred until such transactions have complied with the criteria
for full profit recognition under the Statement. The Trust had deferred
gains of $1,103,000 and $1,169,000 at December 31, 1995 and 1994,
respectively.
Interest Income Recognition
The Trust recognizes interest income on notes receivable when it is
estimated that the fair value of the collateral related to the note is
adequate.
Risks and Uncertainties
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
25
<PAGE> 29
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Risks and Uncertainties, continued
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.
Impairment of Long-Lived Assets
In 1995, Statement of Financial Accounting Standards No. 121 (SFAS
121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" was issued. This statement
requires that companies review long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If the carrying amount of the asset exceeds the fair value
of the asset, the company must recognize an impairment loss. After an
impairment is recognized, the reduced carrying amount of the asset
shall be accounted for as its new cost. For a depreciable asset, the
new cost shall be depreciated over the asset's remaining useful life.
Long-lived assets to be disposed of shall be reported at the lower of
carrying amount or fair value less cost to sell. SFAS 121 is effective
for financial statements for fiscal years beginning after December 15,
1995. The Trust has elected to implement SFAS 121 in 1996 and expects
that the pronouncement will have no material effect on financial
position or results of operations.
Stock-Based Compensation
In 1995, Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation" was issued. This
statement requires either recognition or disclosure of a hypothetical
charge for stock options. SFAS 123 also establishes fair value as the
measurement basis for transactions in which an entity acquires goods or
services from nonemployees in exchange for equity instruments. This
statement is effective for transactions entered into after December 15,
1995. The Trust does not intend to record this hypothetical charge for
stock options, but will instead provide required disclosure in 1996.
26
<PAGE> 30
1
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization and Summary of Significant Accounting Policies, continued:
Net Loss Per Share
Net loss per share of beneficial interest is based upon the
weighted-average number of shares of beneficial interest outstanding.
Shares of beneficial interest equivalents were anti-dilutive for the
three years ended December 31, 1995. The weighted average number of
shares of beneficial interest and earnings per share of beneficial
interest are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Weighted average shares of
beneficial interest 9,156,970 9,150,596 9,138,480
============= ============= =============
Loss per share of beneficial interest
before extraordinary item $ (0.30) $ (0.00) $ (.92)
Extraordinary item -- -- .03
------------- ------------- -------------
Total $ (0.30) $ (0.00) $ (.89)
============ ============= =============
</TABLE>
Reclassifications
Certain reclassifications have been made in the presentation of the
1994 and 1993 financial statements to conform to the 1995 presentation.
2. Related-Party Transactions:
Until April 14, 1994, administrative services were provided to the
Trust by B & B Property Investment, Development and Management Company,
Inc. (B & B). B & B's compensation consisted of an advisory fee based
on the real estate investments and real estate commissions in
connection with purchases, sales and leasing of Trust properties as
well as a reimbursement of certain expenses incurred in performing
services for the Trust.
Until April 14, 1994, property management responsibilities of the Trust
were assigned to B & B Property Investment, Inc. (B & B Property). The
compensation for property management services was computed at 5% of the
gross receipts of each property managed and each note receivable
serviced.
27
<PAGE> 31
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
2. Related-Party Transactions, continued:
Compensation to B & B and B & B Property was $156,000, and $1,042,000
during 1994 and 1993 respectively. Certain disputes between the Trust,
B & B and B & B Property arising from the Trust's termination of B &
B's and B & B Property's advisory and management agreements were
settled in May 1994 for $60,000. No payments were made to B & B and B &
B Property in 1995.
Prior to 1994, the Trust entered into a management agreement with North
Main Street Company (North Main), a company owned by the President and
Chairman of the Board of the Trust's former advisor, B & B, to manage
the Trust's hotel. Pursuant to that agreement, the Trust incurred
management fees of $16,000 in 1994. The Trust also terminated that
agreement with North Main in 1994 and leased the hotel property to an
unrelated third party, a professional hotel management company which
operates lodging facilities nationally.
The Trust and Peregrine are both self-administered. However, they share
certain costs, including personnel costs, for which the Trust
reimburses Peregrine pursuant to a cost allocation agreement based on
each Trust's respective asset values (real property and notes
receivable) that is negotiated annually. During 1995, reimbursable
costs charged to the Trust by Peregrine approximated $435,000. This
amount was partially offset against $202,000 (net of valuation
allowances of $141,000) which was recorded as due from Peregrine at
December 31, 1994.
At December 31, 1995, the Trust had $45,000 due to Peregrine pursuant
to the cost allocation agreement.
3. Rental Properties:
At December 31, 1995 and 1994, the Trust's rental property portfolio at
cost included shopping centers, $13,018,000 and $12,705,000; industrial
buildings, $7,395,000 and $7,326,000; and hotel property of $6,477,000
and $6,452,000, respectively.
Noncancellable operating leases at December 31, 1995, provide for
minimum rental income during each of the next five years of $1,683,000,
$1,389,000, $779,000, $663,000 and $369,000, respectively, and $450,000
thereafter. Certain of the leases increase periodically based on
changes in the Consumer Price Index.
28
<PAGE> 32
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. Rental Properties, continued:
One rental property with a carrying value of $3,104,000 at December 31,
1995 is subject to a purchase option exercisable in 1997 on the part of
the lessee. Exercise price as determined by the related agreement is
greater than the carrying value of the property as of December 31,
1995.
The Trust's hotel property, with a carrying value of $3,182,000 at
December 31, 1995, was returned to the lender through foreclosure
proceedings in February 1996. No gain or loss was recorded on the
foreclosure of the Casa Grande Motor Inn.
4. Notes Receivable:
In order to facilitate sales of real estate, the Trust has accepted
partial payment in the form of notes receivable collateralized by deeds
of trust. As of December 31, 1995 and 1994, the Trust had long-term
notes receivable, collateralized by deeds of trust, of (before
valuation allowances and deferred gains) $19,653,000 and $20,714,000,
respectively. Generally the notes are collateralized by real estate
properties in California and Arizona.
The notes are to be repaid from the cash flow of the property or
proceeds from the sale or refinancing of the properties. At December
31, 1995, one note of $2,071,000 was delinquent, against which the
Trust had recorded an allowance of $496,000. Interest income recognized
by the Trust on the delinquent note was $245,000, $212,000 and $0 for
the years ended December 31, 1995, 1994 and 1993, respectively. Cash
received on the note was $245,000, $212,000 and $135,000 for the years
ended December 31, 1995, 1994 and 1993, respectively. Contractually
scheduled principal collections over the next five years, excluding
delinquent notes, are as follows:
<TABLE>
<S> <C>
1996 $ 908,000
1997 51,000
1998 731,000
1999 34,000
2000 37,000
Thereafter 15,821,000
----------
$17,582,000
===========
</TABLE>
The notes bear interest at rates ranging from 7.63% to 16% as of
December 31, 1995. For the year ended December 31, 1995, the overall
effective rate was approximately 8%.
29
<PAGE> 33
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
5. Valuation Allowances:
Based on a review of its investments, the Trust has provided for
valuation allowances as set forth below. Adverse economic factors,
particularly overbuilt real estate markets which caused a decline in
lease renewal rates, were the primary causes of these valuation losses.
If such adverse economic factors continue, additional valuation loss
provisions may be required in the near term.
At December 31, 1995, the Trust is monetizing its assets, principally
investments, and accordingly, has written down such assets to fair
value, less estimated selling costs, as generally all investments are
held for sale.
Analysis of changes in the allowance for possible losses on real estate
investments, notes receivable, and rents and interest receivable for
1995, 1994 and 1993 follow:
30
<PAGE> 34
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
5. Valuation Allowances, continued:
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Rental Properties
Allowance for valuation losses
on rental property investments:
Beginning balance $ 5,863,000 $8,674,000 $11,274,000
Provision for valuation losses 1,035,000 69,000 4,330,000
Amounts charged against allowance
for valuation losses -- (2,880,000) (6,930,000)
----------- ---------- ----------
Ending balance $ 6,898,000 $5,863,000 $ 8,674,000
========== ========= =========
Notes Receivable
Allowance for valuation losses and deferred gains on notes
receivable:
Beginning balance $7,182,000 $7,442,000 $ 4,377,000
Provision for valuation losses 2,246,000 -- 2,859,000
Deferred gains on notes and other, net (66,000) (12,000) 1,181,000
Amounts charged against allowance
for valuation losses (211,000) (248,000) (975,000)
--------- --------- ---------
Ending balance $9,151,000 $7,182,000 $ 7,442,000
========== ========= =========
Rents and Interest Receivable
Allowance for bad debt losses on rents and interest receivable:
Beginning balance $ 323,000 $ 233,000 $ 349,000
Provision for losses 873,000 183,000 233,000
Amounts charged against allowance
for losses (496,000) (93,000) (349,000)
------------ ------------ -----------
Ending balance $ 700,000 $ 323,000 $ 233,000
============ ============ =============
</TABLE>
In addition, the Trust has established an allowance for valuation
losses on other assets in the amount of $310,000 at December 31, 1995
and 1994.
31
<PAGE> 35
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
6. Long-Term Notes Payable:
As of December 31, 1995 and 1994, the Trust had long-term notes payable
(Notes) of $8,335,000 and $8,740,000 respectively, most of which were
collateralized by deeds of trust on rental properties with an aggregate
net book value of $11,181,000 and $14,321,000 at December 31, 1995 and
1994, respectively. These notes are due in installments extending to
the year 2012 with interest rates ranging from 8% to 10.75%. At
December 31, 1995, $3,089,000 of such notes bearing interest at a
default rate of 18%, related to the Casa Grande Motor Inn which was
foreclosed upon in February 1996 was delinquent. Contractually
scheduled principal payments during each of the next five years,
excluding delinquent notes, are $4,331,000, $35,000, $39,000, $43,000
and $38,000, respectively, and $760,000 thereafter. The note on the
Totem Square Shopping Center of $4,294,000 is due April 1, 1996. The
Trust has received a one month extension from the lender under the same
terms and conditions as the existing agreement. The Trust anticipates
receiving a twelve month extension of this loan in the near future.
7. Distributions:
Cash distributions were made per share of beneficial interest in 1994
and 1993 were classified for Federal income tax purposes as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Ordinary income - % - % - %
Capital gains income - % - % - %
Return of capital - % 100% 100%
--- --- ---
- % 100% 100%
==== === ===
Total distributions per share $0.00 $0.10 $0.23
===== ===== =====
</TABLE>
8. Stock Option Plans:
In November of 1995, the Board of Trustees approved two stock option
plans (Plans) which may be submitted to shareholders for ratification
at the 1996 Annual Meeting of Shareholders. Options may not be granted
until the plans are approved by the Shareholders.
32
<PAGE> 36
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
8. Stock Option Plans, continued:
The Plans provide the members of the Board of Trustees (Plan I) and
certain employees and independent contractors (Plan II) an opportunity
to purchase Shares of Beneficial Interest. The aggregate number of
Shares of Beneficial Interest which may be issued upon exercise of all
Options granted under Plan I and Plan II shall not exceed 500,000 and
500,000, respectively.
Under the terms of Plan I, options may be granted to members of the
Board of Trustees who are not full time employees or officers of the
Trust or Peregrine. The option price granted under Plan I shall be the
fair market value of the Shares of Beneficial Interest on the Grant
Date. On the effective date, each participant shall be granted an
initial option to purchase 100,000 Shares of Beneficial Interest.
Thereafter, each participant whose commencement of service is after the
Effective Date shall be granted an initial option to purchase 100,000
Shares of Beneficial Interest as of the date of the participant's
commencement of service. Each participant shall also be granted
additional options to purchase 10,000 Shares of Beneficial Interest on
each anniversary of the grant date of the initial option.
Under the terms of Plan II, options may be granted to certain key
employees of the Trust and Peregrine, including officers and trustees
who are employees of Peregrine, Trustees who are also Trustees of
Peregrine, and consultants and advisors to the Trust. Options may be
granted in any of the following forms: Incentive Stock Options,
Nonqualified Stock Options or any combination of Incentive Stock
Options and Nonqualified Stock Options. The Stock Option Committee has
the authority and discretion in fixing the option price for
Nonqualified Stock Options. The option price for Incentive Stock
Options shall be not less than 100% of the Fair Market Value of the
shares on the date of grant. Each option agreement shall state the
number of shares and the option price.
33
<PAGE> 37
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
9. Statements of Cash Flows Supplemental Information:
In connection with the sale of property, the Trust entered into various
non-cash transactions as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C> <C>
Sales price $ -- 4,423,000 $ 12,515,000
Notes receivable -- -- (9,367,000)
Notes payable assumed by buyer and
other liabilities applied to sales
price -- (4,523,000) (2,300,000)
---------------- ---------- ----------
Cash (paid) received $ -- $ (100,000) $ 848,000
=============== ========== ============
Cost of property sold $ -- $ 8,084,000 $ 21,631,000
=============== ========= ==========
In 1993, the Trust allowed foreclosure on a note payable secured by a
deed of trust. The sales price of $2,300,000 represents the value of
the note payable relieved in connection with this foreclosure in 1993.
Distributions were made as follows:
1995 1994 1993
---- ---- ----
Total distributions $ -- $ 914,000 $ 2,055,000
Distributions reinvested -- (24,000) (39,000)
-------------- ------- -------------
Distributions paid in cash $ -- $ 890,000 $ 2,016,000
=============== ======= =========
</TABLE>
In 1993, the Trust modified the terms of its note receivable on Redfield
Commerce Center, 7950 E. Redfield Road in Scottsdale, Arizona. As a
provision of the modification, $48,000 of accrued interest was added to
the principal amount of the note.
Interest paid on the Trust's outstanding debt for 1995, 1994, and 1993
was $730,000, $1,121,000 and $920,000 respectively.
34
<PAGE> 38
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
10. Commitments:
The Trust is obligated under a land lease to the year 2033. The minimum
annual payment under the lease for each of the next five years is
$69,000, and, in the aggregate, $2,277,000, thereafter. Total ground
lease expense was $57,000, $75,000 and $63,000 for 1995, 1994 and 1993,
respectively.
During 1995, the Trust entered into a three year non-cancellable
operating lease for office facilities. At December 31, 1995, future
minimum lease payments under the non-cancellable operating lease are
$35,000, $40,000 and $10,000. Rent expense under the operating lease
was $30,000 in 1995.
11. Fair Value of Financial Instruments:
SFAS 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which
it is practicable to estimate that value. In cases where quoted market
prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived
fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. SFAS 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Trust.
The estimated fair value of the Trust's financial instruments,
including cash, notes receivable, rents and other receivables and
long-term notes payable, at December 31, 1995, is approximately the
same as their carrying amounts.
12. Minority Interest:
The Trust has a 60% ownership interest in Totem, its subsidiary.
Totem's net losses have exhausted the minority shareholder's equity
interest. On the consolidated statement of operations, no minority
interest in the subsidiary's net loss is recorded for 1995, 1994 or
1993. In the event that future income is generated from the subsidiary,
the Trust will have first rights to the income to the extent of the
minority shareholder's accumulated deficit in the subsidiary.
35
<PAGE> 39
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
13. Extraordinary Item:
During 1993, the Trust owned a rental property with a carrying value of
$2,056,000 that was foreclosed upon by the lender of $2,300,000 of
long-term term debt which the property collateralized. Consequently,
the Trust recognized a $244,000 gain on the foreclosure as an
extraordinary item.
14. Selected Quarterly Financial Data (Unaudited):
<TABLE>
<CAPTION>
Quarter Ended
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1995
<S> <C> <C> <C> <C>
Revenues $ 879,000 $ 836,000 $ 942,000 $ 878,000
Gain on fore-
closure or sale of
investments, net $ 66,000 $ - $ - $ -
Net income (loss) $ 242,000 $ 44,000 $ 100,000 $ (3,164,000)(1)
Net income (loss) per share $ 0.03 $ 0.00 $ 0.01 $ (0.34)
1994
Revenues $ 1,131,000 $ 780,000 $ 1,353,000 $ 1,523,000
Gain (loss) on fore-
closure or sale of
investments, net $ - $ 114,000 $ (344,000) $ 12,000
Net income (loss) $ (1,000) $ (328,000) $ 341,000 $ ( 48,000)(2)
Net income (loss) per share $ (0.00) $ (0.04) $ 0.04 $ (0.00)
</TABLE>
36
<PAGE> 40
CALIFORNIA REAL ESTATE INVESTMENT TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
14. Selected Quarterly Financial Data (Unaudited), continued:
<TABLE>
<CAPTION>
1993
<S> <C> <C> <C> <C>
Revenues $ 1,604,000 $1,163,000 $ 1,154,000 $ 1,532,000
Gain (loss) on fore-
closure or sale of
investments, net $ 19,000 $ 244,000 $ 46,000 $ (178,000)
Net income (loss) $ (5,000) $ 480,000 $ 116,000 $ (8,702,000)(3)
Net income (loss) per share $ (0.00) $ 0.05 $ 0.01 $ (0.95)
</TABLE>
(1) Includes $3,281,000 in valuation losses.
(2) Includes $119,000 in valuation losses.
(3) Includes $8,146,000 in valuation losses.
37
<PAGE> 41
- ------------------------------------------------------------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
- ------------------------------------------------------------------------------
As of December 21, 1994, Burnett, Umphress & Kilgour was terminated as the
Trust's independent accountant, and Coopers & Lybrand L.L.P. ("C & L") was
appointed the Trust's independent accountant. Because the Trust is 76% owned by
Peregrine, which is also currently audited by C & L, cost savings will arise
from C & L's auditing of both trusts. These changes of accountants were
appropriately reported by the Trust on Form 8-K.
During the Trust's two most recent fiscal years and the interim period ending
December 21, 1994, there were no disagreements with either former accountant on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure. Any disagreement(s), if not resolved
to the satisfaction of either former accountant, would have caused them to make
reference to the subject matter of the disagreement(s) in connection with their
reports.
38
<PAGE> 42
- ------------------------------------------------------------------------------
PART III
==============================================================================
Item 10. Trustees and Executive Officers
- ------------------------------------------------------------------------------
The Board of Trustees consists of five persons:
<TABLE>
<S> <C> <C>
Name Age Office
Frank A. Morrow 56 Chairman of the Board of Trustees and CEO
Juliana Bancroft 47 Trustee
Arnold E. Brown 48 Trustee
John McMahan 58 Trustee
Elliot G. Steinberg 58 Trustee
</TABLE>
Arnold Brown is a former officer of the Trust. John McMahan serves as Chairman
of the Board of Trustees and interim Chief Executive Officer of Peregrine.
Juliana Bancroft and Elliot G. Steinberg are independent Trustees.
There were no arrangements or understandings between any Trustee and any other
person pursuant to which the Trustee was selected as a Trustee. There are no
family relationships among any of the Trustees. The five Trustees will be
candidates for re-election at the Annual Meeting of Shareholders when their term
expires in June 1996.
The principal occupations and affiliations of the Trustees are as follows:
Frank A. Morrow, Chairman and Chief Executive Officer. Mr. Morrow has been
active in the real estate industry for over 25 years. As an independent advisor
and business consultant, he has worked for several real estate companies as a
turnaround specialist and workout expert. Other assignments have included due
diligence investigations, stepping in as senior management in times of crisis,
and multi-site real estate portfolio management. Mr. Morrow has had considerable
experience in the acquisition, financing, leasing, management and sale of single
as well as multiple assets. For a number of years, he served as the Managing
Director of Real Estate for Stanford University and as Senior Vice President for
the Boise Cascade Urban Development Corporation. Prior to his business career,
Mr. Morrow served nine years in the U.S. Navy as an aviator and test pilot. He
graduated from the U.S. Naval Academy and in 1971 received an MBA degree from
Stanford University.
Juliana Bancroft, Independent Trustee. Ms. Bancroft is an independent consultant
to the hospitality industry. Prior to this she served as a vice president and a
regional director with Kimpton Hotel and Restaurant Group headquartered in San
Francisco. The Kimpton Group is the largest developer and operator of
independent hotels and restaurants on the West Coast. During this period, among
other responsibilities, Ms. Bancroft worked as a project manager on seven
39
<PAGE> 43
construction and redevelopment projects. She also has owned and operated her own
firm in which she acquired, financed, rehabilitated and sold residential
properties in Southern California. She has also been a principal in the
investment banking firm of Bancroft, Garcia & Lavell, Inc. which secured more
than $2 billion in real estate financing through the tax-exempt bond markets.
Ms. Bancroft graduated from the University of Wisconsin with a B.S. degree in
1971 and from the University of Oregon with an M.S. degree in 1975.
Arnold E. Brown, Trustee. Mr. Brown has over 20 years experience in real estate
finance and investment. He is a Certified Public Accountant and previously
served as a partner of the international accounting and consulting firm of Grant
Thornton, where he was one of eight members of that firm's U. S. Real Estate
Task Force. Since 1983, Mr. Brown has been in the private real estate investment
and advisory service. Through his company, Brown Partners Ltd., he has acted as
a principal or intermediary in numerous real estate transactions and has advised
real estate investment companies on financial restructuring and real estate
securities valuation matters. Mr. Brown served as the Chief Financial Officer of
CalREIT from April 1994 through September 1995. He graduated from the Wharton
School of the University of Pennsylvania in 1969 and received an MBA degree from
Stanford University in 1971.
John McMahan, Trustee. Mr. McMahan is President of The McMahan Group, a San
Francisco-based real estate management consulting firm founded in 1994. Mr.
McMahan also served as the Chief Executive Officer of Mellon/McMahan Real Estate
Advisors, Inc. which grew into one of the country's largest real estate
investment advisors. He also teaches advanced real estate courses at the Haas
Graduate School of Business at the University of California at Berkeley. Mr.
McMahan has published many articles on real estate investment and has been
active in several national real estate organizations including the National
Association of Real Estate Investment Trusts. Mr. McMahan graduated from the
University of Southern California and received an MBA degree in 1961 from the
Harvard Graduate School of Business. He serves on the boards of two other real
estate companies and was the former chairman of the National Association of Real
Estate Investment Managers.
Elliot G. Steinberg, Independent Trustee. Mr. Steinberg is a managing partner of
Sunrise Creek, a company engaged in real estate development, and a managing
partner of W.S. Ventures, a private investment partnership in emerging growth
companies. Mr. Steinberg has also served as corporate vice president and general
counsel to Itel Corporation and was a founder and senior partner of the San
Francisco law firm of Flynn & Steinberg specializing in real estate, banking,
taxation and business planning. He was an editor of the Journal of Taxation of
Investments and is the co-author of several books. Mr. Steinberg received his
undergraduate degree at the University of California Berkeley in 1961, attended
the London School of Economics through 1961, and, in 1964 received his JD degree
from the Boalt Hall School of Law at the University of California at Berkeley.
Mr. Steinberg serves on the Boards of Directors of BioFactors, Inc., Ganson Ltd.
and Cege Co. Ltd. He was formerly a director of Kimco Hotel Management Company.
40
<PAGE> 44
- ------------------------------------------------------------------------------
Item 11. Executive Compensation
- ------------------------------------------------------------------------------
The Trust has no employees. Pursuant to a cost allocation agreement discussed in
Item 13, Frank A. Morrow, the Chairman and CEO of the Trust, indirectly received
cash compensation of approximately $72,000 during 1995 and $64,000 during 1994.
Arnold E. Brown, former CFO of the Trust, received cash compensation of
approximately $32,000 during 1995 and $20,400 during 1994.
The following table lists the cash compensation of the Trustees of the Trust for
1995:
<TABLE>
<S> <C> <C>
Name of Individual or Capacities in Cash
Number of Persons in Group which served Compensation
-------------------------- ------------- ------------
Current Trustees Trustees $74,000
non-management
as a group (three people)
</TABLE>
Each non-management Trustee is paid $5,000 per quarter; $1,000 for each
in-person Trustee meeting; and $500 per conference call. The two members of the
Nominating Committee and the Compensation Committee each receive $500 per
special meeting.
- ------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------------
Listed below are those shareholders known to the Trust as of March 1996 to be
the beneficial owner or the member of a group which is the beneficial owner of
more than five percent of the Trust's shares of beneficial interest (9,156,970
total), as well as shares owned by Trustees.
<TABLE>
Name and Address Amount and Nature Percent
Title of Class of Beneficial Owner of Beneficial Ownership of Class
- -------------- ------------------ ----------------------- --------
<S> <C> <C> <C>
Shares of The Peregrine Real Estate Trust
Beneficial Interest 1300 Ethan Way, Suite 200
Sacramento, CA 95825 6,959,593 76.0%
John McMahan, Trustee 10,000 --
</TABLE>
41
<PAGE> 45
- ------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
- ------------------------------------------------------------------------------
Peregrine owns 76% of the shares of the Trust. John McMahan, Chairman and
Interim Chief Executive Officer and Trustee of Peregrine, is also a Trustee of
CalREIT. Both the Trust and Peregrine are self-administered; however, they share
certain costs, including personnel costs, for which the Trust reimburses
Peregrine pursuant to a cost allocation agreement based on each trust's
respective asset values (real property and notes receivable).
42
<PAGE> 46
- ------------------------------------------------------------------------------
PART IV
==============================================================================
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(a) (1) Financial Statements Page
- ------- -------------------- ----
<S> <C> <C>
Included in Part II of this report:
Reports of Independent Accountants 17-18
Consolidated Balance Sheets at December 31, 1995 and 1994 19
Consolidated Statements of Operations, Years Ended December 31,
1995, 1994 and 1993 20
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1995, 1994 and 1993 21
Consolidated Statements of Cash Flows, Years Ended
December 31, 1995, 1994 and 1993 22
Notes to Consolidated Financial Statements 23-27
(a) (2) Consolidated Financial Statement Schedules and Exhibits
- ------- -------------------------------------------------------
Schedule III - Real Estate and Accumulated Depreciation 44-46
Schedule IV - Mortgage Loans on Real Estate 47-48
</TABLE>
The statements and schedules referred to above should be read in conjunction
with the consolidated financial statements and notes thereto included in Part II
of this Form 10-K. Schedules not included in this section have been omitted
because they are not applicable or because the required information is shown in
the consolidated financial statements or notes thereto.
(a) (3) List of Exhibits
(a) (4) Report on Form 8-K
The Trust filed no reports on Form 8-K during the quarter ended December 31,
1995.
43
<PAGE> 47
- --------------------------------------------------------------------------------
CALIFORNIA REAL ESTAT INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995 Page 1 Part A
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- ------------------------------------------------ ------------ --------------------------- ------------------------------
Cost Capitalization Subsequent
...Initial Cost to Trust... .......to Acquisition.......
Buildings,
Improvements
and Personal
Description Encumbrances Land Property Improvements Carrying Cost
----------- ------------ ---- -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
SHOPPING CENTERS:
Fulton Square, Sacramento, California $ -- Leased 3,536,000 82,000 None
Totem Square, Kirkland, Washington 4,334,000 3,175,000 5,793,000 432,000 None
---------- --------- ---------- ---------
Total shopping centers 4,334,000 3,175,000 9,329,000 514,000
---------- --------- ---------- ---------
INDUSTRIAL BUILDINGS:
Redfield Commerce Center, Scottsdale, Arizona -- 580,000 899,000 171,000 None
Bekins Storage Facility, Pasadena, California -- 1,410,000 4,305,000 30,000 None
---------- --------- ---------- ---------
Total industrial buildings -- 1,990,000 5,204,000 201,000
---------- --------- ---------- ---------
HOTELS:
Casa Grande Motor Inn, Aroyo Grande, California 3,089,000 1,289,000 3,911,000 1,277,000 None
---------- --------- ---------- ---------
Total hotels 3,089,000 1,289,000 3,911,000 1,277,000
---------- --------- ---------- ---------
Total Investment in Real Estate $7,423,000 6,454,000 18,444,000 1,992,000
========== ========= ========== =========
</TABLE>
44
<PAGE> 48
- --------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1995 Page 1 Part B
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column E Column F
------------------------------------------------ ------------
Gross Amount at Which
....Carried at Close of Period....
Valuation
Buildings and Write Accumulated
Description Land Improvements Down (2) Total (1) Depreciation
----------- ---- ------------ -------- --------- ------------
<S> <C> <C> <C> <C> <C>
SHOPPING CENTERS:
Fulton Square, Sacramento, California $ Leased 3,618,000 944,000 2,674,000 467,000
Totem Square, Kirkland, Washington 3,175,000 6,225,000 604,000 8,796,000 797,000
---------- ---------- --------- ---------- ---------
Total shopping centers 3,175,000 9,843,000 1,548,000 11,470,000 1,264,000
---------- ---------- --------- ---------- ---------
INDUSTRIAL BUILDINGS:
Redfield Commerce Center, Scottsdale, Arizona 580,000 1,070,000 542,000 1,108,000 385,000
Bekins Storage Facility, Pasadena, California 1,410,000 4,335,000 1,838,000 3,907,000 803,000
---------- ---------- --------- ---------- ---------
Total industrial buildings 1,990,000 5,405,000 2,380,000 5,015,000 1,188,000
---------- ---------- --------- ---------- ---------
HOTELS:
Casa Grande Motor Inn, Aroyo Grande, California (3) 1,289,000 5,188,000 2,970,000 3,507,000 325,000
---------- ---------- --------- ---------- ---------
Total hotels 1,289,000 5,188,000 2,970,000 3,507,000 325,000
---------- ---------- --------- ---------- ---------
Total Investment in Real Estate $6,454,000 20,436,000 6,898,000 19,992,000 2,777,000
========== ========== ========= ========== =========
<CAPTION>
Column A Column G Column H Column I
------------ -------- ---------------
Life on Which
Depreciation in
Latest Income
Date of Date Statement is
Description Construction Acquired Computed
----------- ------------ -------- --------
<S> <C> <C> <C>
SHOPPING CENTERS:
Fulton Square, Sacramento, California 1980 5/91 40 Years
Totem Square, Kirkland, Washington 1981 11/90 40 Years
Total shopping centers
INDUSTRIAL BUILDINGS:
Redfield Commerce Center, Scottsdale, Arizona 1983 5/88 30 Years
Bekins Storage Facility, Pasadena, California 1915/1988 7/88 40 Years
Total industrial buildings
HOTELS:
Casa Grande Motor Inn, Aroyo Grande, California (3) 1984 9/92 40 Years
Total hotels
Total Investment in Real Estate
</TABLE>
(1) Represents total cost of assets after valuation allowance.
(2) The Trust establishes allowances for possible investment losses which
represent the excess of the carrying value of individual properties over
their appraised or estimated fair value less costs to sell. Adverse economic
factors, particularly overbuilt real estate markets resulting in declining
lease renewal rates, were the primary causes of valuation allowances.
(3) Property was returned to the lender due to foreclosure in February 1996.
45
<PAGE> 49
- --------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
- --------------------------------------------------------------------------------
Reconciliation of total real estate carrying values for the three years ended
December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
ASSET RECONCILIATION:
Balance, beginning of year $20,620,000 25,787,000 43,308,000
Additions:
Improvements 407,000 106,000 1,510,000
Valuation losses on properties sold -- 2,880,000 6,930,000
Deductions:
Cost of property sold/disposed -- (8,084,000) (17,456,000)
Cost of property surrendered
in foreclosure -- -- (4,175,000)
Valuation losses (1,035,000) (69,000) (4,330,000)
----------- ---------- ----------
Balance, end of year $19,992,000 20,620,000 25,787,000
=========== ========== ==========
ACCUMULATED DEPRECIATION
RECONCILIATION:
Balance, beginning of year $ 2,229,000 2,520,000 3,875,000
Additions:
Depreciation 548,000 593,000 841,000
Deductions:
Accumulated depreciation on
real estate sold -- (884,000) (1,615,000)
Accumulated depreciation on
property surrendered in foreclosure -- -- (581,000)
----------- ---------- ----------
Balance, end of year $ 2,777,000 2,229,000 2,520,000
=========== ========== ==========
</TABLE>
46
<PAGE> 50
- --------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Notes Receivable Collateralized by
Deeds of Trust)
DECEMBER 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Final
Interest Maturity Prior
Description Rate Date Periodic Payment Terms Liens
----------- ---- ---- ---------------------- -----
<S> <C> <C> <C> <C>
FIRST DEEDS OF TRUST:
Office Building, Phoenix,
Arizona 8.00% 1996 Monthly interest only payments N/A
Office/Commercial Building,
Phoenix, Arizona 8.00% 2000 Monthly 5% interest only payments N/A
Retail Building, Tempe
Arizona 9.50% 2012 Monthly principal and interest
payments of $9,249 N/A
SECOND DEEDS OF TRUST:
Commercial Building, Pacheco,
California 9.25% 1998 Monthly interest only payments 2,190,000
Office/retail complex, Fountain 50% of excess cash flows applied to
Valley, California 7.63% 2014 interest and then principal 6,623,000
Office/warehouse complex, 10.00% to
Sunnyvale, California 16.00% 1989 Monthly interest only payments 850,000
Commercial Building, Tempe
Arizona 8.00% 2000 Monthly 4% interest only payments 913,000
-----------
$10,576,000
===========
<CAPTION>
Column A Column F Column G Column H
-------- -------- ------------------------------- --------
Valuation Write Carrying Principal Amount of
Face Amount Downs and Amount of Loans Subject to
of Notes Deferred Notes Delinquent Principal
Description Receivable Gains (2) Receivable (1) or Interest
----------- ---------- --------- -------------- -----------
<S> <C> <C> <C> <C>
FIRST DEEDS OF TRUST:
Office Building, Phoenix,
Arizona 861,000 254,000 607,000 None
Office/Commercial Building,
Phoenix, Arizona 8,248,000 2,084,000 6,164,000 None
Retail Building, Tempe
Arizona
913,000 913,000 None
SECOND DEEDS OF TRUST:
Commercial Building, Pacheco,
California 746,000 190,000 556,000 None
Office/retail complex, Fountain
Valley, California 6,454,000 5,888,000 566,000 None
Office/warehouse complex,
Sunnyvale, California 2,071,000 496,000 1,575,000 2,071,000
Commercial Building, Tempe
Arizona 360,000 239,000 121,000 None
----------- ---------- -----------
$19,653,000 $9,151,000 $10,502,000
=========== ========== ===========
</TABLE>
(1) Represents carrying amount of notes after valuation allowance and deferred
gains.
(2) The Trust establishes allowances for possible investment losses which
represent the excess of the face amount of the note over the appraised or
estimated fair value less costs to sell of the note. In addition, deferred
gains have been recorded against notes receivable when required under SFAS
66 (Note 1). Such write downs in no way limit the obligation of the borrower
to comply with the terms of the note.
47
<PAGE> 51
- -------------------------------------------------------------------------------
CALIFORNIA REAL ESTATE INVESTMENT TRUST AND SUBSIDIARY
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
- -------------------------------------------------------------------------------
A summary of activity for note receivable collateralized by deeds of trust for
the years ended December 31, 1995, 1994 and 1993 are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of year $ 13,532,000 14,036,000 13,024,000
Additions:
New loans -- 175,000 10,578,000
Deferred interest added to
principal balance -- -- 49,000
Recognition of deferred gain 66,000 12,000 26,000
Deductions:
Collections from notes receivable (850,000) (346,000) (5,575,000)
Deferred gain on notes
receivable -- -- (1,207,000)
Write off of notes receivable -- (345,000) --
Valuation losses on notes
receivable (2,246,000) -- (2,859,000)
------------ ------------ ------------
Balance, end of year $ 10,502,000 13,532,000 14,036,000
============ ============ ============
</TABLE>
48
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or Section 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.
March 31, 1996 /s/Frank A. Morrow
- -------------- -----------------------
Date Frank A. Morrow
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.
March 31, 1996 /s/Frank A. Morrow
- -------------- -----------------------
Date Frank A. Morrow
Chairman of the Board
March 31, 1996 /s/Juliana Bancroft
- -------------- -----------------------
Date Juliana Bancroft
Trustee
March 31, 1996 /s/Arnold E. Brown
- -------------- -----------------------
Date Arnold E. Brown
Trustee
March 31, 1996 /s/John McMahan
- -------------- -----------------------
Date John McMahan
Trustee
March 31, 1996 /s/Elliot G. Steinberg
- -------------- -----------------------
Date Elliot G. Steinberg
Trustee
<PAGE> 53
INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBITS
- -------------- --------
Exhibit-27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 4,778
<SECURITIES> 0
<RECEIVABLES> 21,700
<ALLOWANCES> (17,059)
<INVENTORY> 0
<CURRENT-ASSETS> 9,419
<PP&E> 26,890
<DEPRECIATION> (2,777)
<TOTAL-ASSETS> 33,532
<CURRENT-LIABILITIES> 290
<BONDS> 8,335
0
0
<COMMON> 64,255
<OTHER-SE> (39,348)
<TOTAL-LIABILITY-AND-EQUITY> 33,532
<SALES> 0
<TOTAL-REVENUES> 3,601
<CGS> 0
<TOTAL-COSTS> (688)
<OTHER-EXPENSES> (1,595)
<LOSS-PROVISION> (3,281)
<INTEREST-EXPENSE> (815)
<INCOME-PRETAX> (2,778)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,778)
<EPS-PRIMARY> (0.30)
<EPS-DILUTED> (0.30)<F1>
<FN>
<F1>SHARES OF BENEFICIAL INTEREST EQUIVALENTS WERE ANTI-DILUTIVE. THE FIGURES
PRESENTED ABOVE ARE SIMPLE EPS.
</FN>
</TABLE>
