<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER JUNE 30, 1997
Commission File Number 0-8725
PACIFIC REAL ESTATE INVESTMENT TRUST
A CALIFORNIA TRUST
I.R.S. Employer Identification No. 94-1572930
1010 El Camino Real, Suite 210
Menlo Park, CA 94025
Telephone: (415) 327-7147
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------- --------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the close of the period covered by this report.
$10 Par Value, 3,706,845 shares
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<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
ITEM I - FINANCIAL STATEMENTS THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental revenues.................................. $ 704,000 $ 1,468,000 $ 1,834,000 $ 3,327,000
------------- ------------- ------------- -------------
Operating expenses (including related party
amounts of $66,000 three months ended
June 30, 1997 and $177,000 six months ended
June 30, 1997, $117,000 three months ended
June 30, 1996 and $261,000 six months ended
June 30, 1996)
Operating...................................... 200,000 375,000 513,000 854,000
Property tax................................... 57,000 126,000 162,000 287,000
General and administrative..................... 98,000 136,000 208,000 259,000
Depreciation and amortization.................. 179,000 503,000 475,000 1,111,000
Property management fees....................... 30,000 50,000 72,000 114,000
Loss (gain) on property sale................... (3,000) 160,000 767,000 (792,000)
------------- ------------- ------------- -------------
Total operating expenses..................... 561,000 1,350,000 2,197,000 1,833,000
------------- ------------- ------------- -------------
Operating income (loss) 143,000 118,000 (363,000) 1,494,000
------------- ------------- ------------- -------------
Other income/(expense):
Interest income................................ 88,000 161,000 252,000 317,000
Interest expense............................... (246,000) (825,000) (970,000) (1,895,000)
Merger expenses................................ (49,000) (147,000)
------------- ------------- ------------- -------------
Total other income/(expense)................. (207,000) (664,000) (865,000) (1,578,000)
------------- ------------- ------------- -------------
Net loss before minority interest................ (64,000) (546,000) (1,228,000) (84,000)
------------- ------------- ------------- -------------
Minority interest in joint venture............... (105,000) (105,000) (184,000) (204,000)
------------- ------------- ------------- -------------
Net loss......................................... $ (169,000) (651,000) $ (1,412,000) $ (288,000)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Net loss per share of beneficial interest........ $ (0.05) $ (0.18) $ (0.38) $ (0.08)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 9
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PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
ASSETS
JUNE 30,1997 DEC 31, 1996
------------- -------------
<S> <C> <C>
Investment in commercial properties:
Operating properties:
Land.......................................... $ 200,000 $ 10,104,000
Buildings and improvements.................... 9,915,000 28,187,000
Accumulated depreciation...................... (4,342,000) (7,271,000)
------------- -------------
Commercial properties - net................... 5,773,000 31,020,000
Property in receivership....................... 4,438,000 4,438,000
Notes receivable (net of allowance of $28,000
in 1997 and $507,000 in 1996).................. 199,000 6,279,000
Cash........................................... 3,586,000 1,011,000
Restricted cash................................ 1,154,000
Accounts receivable (net of allowance of $79,000
in 1997 and $143,000 in 1996).................. 14,000 489,000
Deferred lease commissions - net............... 246,000 425,000
Deferred financing costs - net................. 313,000 329,000
Other assets................................... 693,000 1,038,000
------------- -------------
Total........................................ $ 15,262,000 $ 46,183,000
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans................................. $ 5,727,000 $ 25,700,000
Short-term notes............................... 7,700,000
Security deposits.............................. 52,000 118,000
Accounts payable and other liabilities......... 194,000 1,968,000
------------- -------------
Total liabilities............................ 5,973,000 35,486,000
------------- -------------
Commitments and contingencies
Minority interest in joint venture.............. 3,379,000 3,375,000
Shareholders' Equity:
Shares of beneficial interest, $10 par value,
authorized: 1997 and 1996, 10,611,863;
shares issued and outstanding: 1997 and
1996, 3,706,845.............................. 37,068,000 37,068,000
Additional paid-in capital...................... 11,009,000 11,009,000
Accumulated deficit............................. (42,167,000) (40,755,000)
------------- -------------
Shareholders' equity - net...................... 5,910,000 7,322,000
------------- -------------
Total........................................ $ 15,262,000 $ 46,183,000
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 9
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PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the six months ended June 30,
1997 1996
------------- --------------
<S> <C> <C>
Cash Flow from Operating Activities:
Net loss......................................... $ (1,412,000) $ (288,000)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation.................................... 407,000 999,000
Amortization of note receivable discount........ (16,000) (11,000)
Amortization of deferred cost................... 68,000 110,000
Minority interest in joint venture's operations. 184,000 204,000
Provision for doubtful receivables.............. 64,000 52,000
Loss (gain) on sale of property................. 767,000 (792,000)
Changes in operating assets and liabilities
Accounts payable and other liabilities.......... (1,683,000) (380,000)
Security deposits............................... (16,000) 31,000
Deferred lease commissions...................... (51,000) (50,000)
Deferred financing costs........................ (67,000)
Accounts receivable............................. 313,000 (241,000)
Other assets.................................... 38,000 125,000
------------- -----------
Net cash used by operating activities............. (1,404,000) (241,000)
------------- -----------
Cash Flow from Investing Activities:
Decrease in restricted cash..................... 1,154,000
Construction of properties...................... (1,000) (69,000)
Property acquisitions........................... (200,000)
Collection of notes receivable.................. 56,000 32,000
Additions to notes receivable................... (73,000)
Proceeds from the sale of property.............. 11,006,000 4,865,000
------------- -----------
Net cash provided in investing activities......... 11,942,000 4,828,000
------------- -----------
Cash Flow from Financing Activities:
Proceeds from short-term notes.................. 215,000
Re-payment of mortgage loans.................... (83,000) (219,000)
Re-payment of short-term notes.................. (7,915,000) (4,100,000)
Distributions of joint venture partner.......... (180,000) (180,000)
------------- -----------
Net cash used by financing activities............. (7,963,000) (4,499,000)
------------- -----------
Increase in cash.................................. 2,575,000 88,000
Cash, January 1................................. 1,011,000 308,000
------------- -----------
Cash, June 30................................... $ 3,586,000 $ 396,000
------------- -----------
------------- -----------
NON CASH TRANSACTIONS
Assumption of mortgage notes payable by the buyers of Menlo Center for $10,730,000
in 1996 and Monterey Plaza Shopping Center for $18,371,000 in 1997.
</TABLE>
See notes to consolidated financial statements.
Page 4 of 9
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PACIFIC REAL ESTATE INVESTMENT TRUST
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
Basis of Presentation
The accompanying unaudited financial statements include all adjustments which
are, in the opinion of management, necessary for fair presentation of the
Trust's financial position, including changes therein, and results of
operations for the interim period reported upon. Such statements have been
prepared from the Trust's accounting records in accordance with the
instructions to Form 10-Q.
Income Taxes
The Internal Revenue Code provides that a trust qualifies as a real estate
investment trust if, among other things, the trust distributes each year at
least 95% of its taxable income to shareholders. If the Trust distributes at
least 95% of its taxable income to shareholders, such distributions can be
treated as deductions for income tax purposes. Because it is the policy of
the Trust to distribute amounts approximately equal to its taxable income
plus depreciation and amortization, no provision for income taxes has been
made in the accompanying financial statements.
Sale of Monterey Plaza Shopping Center and Five Notes Receivable
The Trust sold Monterey Plaza Shopping Center for $24,957,000 and the Trust's
five notes receivable for $4,606,000 to Pan Pacific Development (U.S.) Inc.
("Pan Pacific") on April 25, 1997. After assumption of the existing loan
balance of approximately $18,371,000, the net cash proceeds to the Trust were
$11,192,000 less closing costs from the transaction and repayment of short
term debt. As part of this transaction, Pan Pacific has become the primary
obligor on the First Deed of Trust secured by Mt. Shasta Shopping Center with
a remaining principal balance of $1,519,000. In the event of a default by
Pan Pacific, the Trust remains liable on the First Deed of Trust. In
connection with the sale of Monterey Plaza Shopping Center, a loss of $767,000
was recorded. In addition, Pan Pacific assumed responsibility for an impound
account totaling approximately $975,000 which was previously shown in
restricted cash and accounts payable and other liabilities.
Offer on King's Court Shopping Center
The Trust has entered into an agreement to sell it's 40% interest in Kingsco,
a General Partnership. Kingsco's sole asset is the King's Court Shopping
Center, in Los Gatos, CA. The sale is contingent upon the approval of the
other General Partners in the Kingsco Partnership, the approval of the ground
lessor which owns the fee estate at the shopping center, subject to the ground
lessor's right of first refusal and, finally, subject to the approval of the
shareholders of Pacific Real Estate Investment Trust. A proxy is presently
being prepared for mailing to the Trust's shareholders for this purpose.
Reclassification
Certain 1996 amounts have been reclassified to conform with the 1997
presentation.
Related Party Transactions
Fees paid or payable to the Advisor and Menlo Management Company for three
months and six months ended 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ADVISOR
Advisory fee - .1% of Assets ...................... $ 5,000 $ 12,000 $ 17,000 $ 26,000
MENLO MANAGEMENT COMPANY
Property management fees........................... 30,000 50,000 72,000 114,000
Administrative services............................ 25,000 37,000 63,000 75,000
Lease commissions.................................. 51,000 4,000 51,000 27,000
Loan fee........................................... 6,000 18,000 25,000 46,000
---------- ---------- ---------- ----------
Total........................................... $ 117,000 $ 121,000 $ 228,000 $ 288,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
Page 5 of 9
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Net Income Per Share of Beneficial Interest
Net income per share of beneficial interest is computed by dividing net income
by the weighted average number of shares outstanding for the three months and
six months ended June 30, 1997 and 1996 were as follows:
1997 1996
---- ----
Weighted average number of shares outstanding 3,706,845 3,706,845
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." This statement establishes and simplifies standards for computing and
presenting earnings per share. SFAS 128 will be effective for the Trust's
fourth quarter of 1997, and requires restatement of all previously reported
earnings per share data that are presented. Early adoption of this Statement
is not permitted. SFAS 128 replaces primary and fully diluted earnings per
share with basic and diluted earnings per share. The Trust expects that basic
and diluted earnings per share amounts will not be materially different from
the Trust's primary and fully diluted earnings per share amounts.
Page 6 of 9
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PACIFIC REAL ESTATE INVESTMENT TRUST
PART I - FINANCIAL INFORMATION
ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OF
OPERATIONS.
(1) LIQUIDITY AND CAPITAL RESOURCES:
Cash flow used by operating activities was $1,404,000 for the six months ended
June 30, 1997 as compared to cash flow used by operating activities of $241,000
for the six months ended June 30, 1996. The net change is primarily due to the
timing differences in the receipt of rents and payments of trade payables and
change in expense levels resulting from property dispositions.
Cash flow provided by investing activities was $11,942,000 for the six months
ended June 30, 1997 compared to $4,828,000 for the six months ended June 30,
1996. The net change is primarily the result of the sale of Monterey Plaza
Shopping Center in 1997 and the sale of Menlo Center in 1996.
Cash flow used by financing activities was $7,963,000 for the six months ended
June 30, 1997 as compared to $4,499,000 for the six months ended June 30, 1996.
The increase in 1997 is primarily due to the repayment of short term notes
payable as the result of the sale of Monterey Plaza as compared to the sale of
Menlo Center in 1996.
The Trust has entered into an agreement to sell it's 40% interest in Kingsco,
a General Partnership. Kingsco's sole asset is the King's Court Shopping
Center, in Los Gatos, CA. The sale is contingent upon the approval of the
other General Partners in the Kingsco Partnership, the approval of the ground
lessor which owns the fee estate at the shopping center, subject to the
ground lessor's right of first refusal and, finally, subject to the approval
of the shareholders of Pacific Real Estate Investment Trust. A proxy is
presently being prepared for mailing to the Trust's shareholders for this
purpose.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR SIX MONTHS ENDED
JUNE 30, 1997 VS. 1996:
Net loss for the six months ended June 30, 1997 was $1,412,000 as compared to a
net loss of $288,000 for the six months ended June 30, 1996.
During the first six months rental revenues decreased from $3,327,000 in 1996
to $1,834,000 in 1997, a decrease of $1,493,000 or 45%. This decrease resulted
from the sale of Monterey Plaza in April 1997, the sale of Menlo Center in
February 1996 and the placement of El Portal Shopping Center into receivership
in October 1996.
Operating expenses decreased from $854,000 in 1996 to $513,000 in 1997, a
decrease of $341,000 or 40%. Property taxes decreased from $287,000 in 1996 to
$162,000 in 1997, a decrease of $125,000, or 44%. Property management fees
decreased from $114,000 in 1996 to $72,000 in 1997, a decrease of $42,000, or
37%. Depreciation and amortization decreased from $1,111,000 in 1996 to
$475,000 in 1997, a decrease of $636,000, or 57%. Each of these decreases
resulted from the sale of Monterey Plaza Shopping Center in April 1997, Menlo
Center in February 1996 and the placement of El Portal Shopping Center into
receivership in October 1996.
General and administrative expense decreased from $259,000 in 1996 to $208,000
in 1997, a decrease of $51,000 or 20% due to cost saving measures.
Loss on the sale of property of $767,000 in 1997 represents the loss on the
sale of Monterey Plaza Shopping Center and the Trust's five notes receivable.
Gain on the sale of property of $792,000 in 1996 represents the gain on the
sale of Menlo Center which was sold in February 1996.
Interest income decreased by $65,000, or 21%, from $317,000 in 1996 to $252,000
in 1997, the net change was primarily the result of the sale of the Trust's
five notes receivable in April 1997.
Interest expense decreased by $925,000, or 49%, from $1,895,000 in 1996 to
$970,000 in 1997, the decrease was primarily due to the assumption of related
mortgage debt by the buyers of Monterey Plaza Shopping Center in 1997 and Menlo
Center in 1996 and the pay-down of short-term debt, as well as the placement of
El Portal Shopping Center in receivership in October 1996.
Material changes for the three months ended June 30, 1997 as compared to 1996
were for the same reason in relative proportionate amounts as those shown for
the six months.
Page 7 of 9
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EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (SFAS 128), "Earnings per
Share." This statement establishes and simplifies standards for computing and
presenting earnings per share. SFAS 128 will be effective for the Trust's
fourth quarter of 1997, and requires restatement of all previously reported
earnings per share data that are presented. Early adoption of this Statement
is not permitted. SFAS 128 replaces primary and fully diluted earnings per
share with basic and diluted earnings per share. The Trust expects that basic
and diluted earnings per share amounts will not be materially different from
the Trust's primary and fully diluted earnings per share amounts.
ITEM 6 (b) - Report on Form 8K was filed on April 1, 1997 and July 9, 1997.
Page 8 of 9
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
PACIFIC REAL ESTATE INVESTMENT TRUST
Date: July 25, 1997 By:
-------------------------------------
Robert Ch. Gould
VICE PRESIDENT
Date: July 25, 1997 By:
-------------------------------------
Harry E. Kellogg
TREASURER
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 3,586,000
<SECURITIES> 0
<RECEIVABLES> 306,000
<ALLOWANCES> (107,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,870,000
<PP&E> 24,478,000
<DEPRECIATION> (14,267,000)
<TOTAL-ASSETS> 15,262,000
<CURRENT-LIABILITIES> 246,000
<BONDS> 5,727,000
0
0
<COMMON> 37,068,000
<OTHER-SE> (31,158,000)
<TOTAL-LIABILITY-AND-EQUITY> 15,262,000<F1>
<SALES> 0
<TOTAL-REVENUES> 2,086,000
<CGS> 0
<TOTAL-COSTS> 3,314,000
<OTHER-EXPENSES> 184,000<F2>
<LOSS-PROVISION> 107,000
<INTEREST-EXPENSE> 970,000
<INCOME-PRETAX> (1,412,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,412,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,412,000)
<EPS-PRIMARY> (.38)
<EPS-DILUTED> (.38)
<FN>
<F1>Includes $3,379,000 of Minority Interest in Joint Venture.
<F2>Represents Minority Interest Portion of Current Net Loss.
</FN>
</TABLE>
