<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 SEPTEMBER 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 NINE MONTHS ENDED
------------------ -----------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- ------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Rental revenues . . . . . . . . . . . . . . . . . . . . . . $463,000 $1,371,000 $ 2,297,000 $4,698,000
-------- ---------- ----------- ----------
Operating expenses (including related party amounts of
$57,000 three months ended September 30, 1997 and
$113,000 three months ended September 30, 1996,
$290,000 nine months ended September 30, 1997, and
$374,000 nine months ended September 30, 1996)
Operating . . . . . . . . . . . . . . . . . . . . . . . 141,000 468,000 654,000 1,322,000
Property tax. . . . . . . . . . . . . . . . . . . . . . 18,000 127,000 180,000 414,000
General and administrative. . . . . . . . . . . . . . . 72,000 127,000 280,000 386,000
Depreciation and amortization . . . . . . . . . . . . . 126,000 576,000 601,000 1,687,000
Property management fees. . . . . . . . . . . . . . . . 17,000 46,000 89,000 160,000
Loss (gain) on property sale. . . . . . . . . . . . . . 20,000 767,000 (772,000)
-------- ---------- ----------- ----------
Total operating expenses . . . . . . . . . . . . . . 374,000 1,364,000 2,571,000 3,197,000
-------- ---------- ----------- ----------
Operating income (loss) . . . . . . . . . . . . . . . . . . 89,000 7,000 (274,000) 1,501,000
-------- ---------- ----------- ----------
Other income/(expense):
Interest income . . . . . . . . . . . . . . . . . . . . 33,000 153,000 285,000 470,000
Interest expense. . . . . . . . . . . . . . . . . . . . (33,000) (791,000) (1,003,000) (2,686,000)
Merger expenses . . . . . . . . . . . . . . . . . . . . (147,000)
-------- ---------- ----------- ----------
Total other income/(expense) . . . . . . . . . . . . 0 (638,000) (865,000) (2,216,000)
-------- ---------- ----------- ----------
Net income (loss) before minority interest. . . . . . . . . 89,000 (631,000) (1,139,000) (715,000)
-------- ---------- ----------- ----------
Minority interest in joint venture. . . . . . . . . . . . . (96,000) (109,000) (280,000) (313,000)
-------- ---------- ----------- ----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . $ (7,000) $ (740,000) $(1,419,000) $(1,028,000)
-------- ---------- ----------- ----------
-------- ---------- ----------- ----------
Net loss per share of beneficial interest . . . . . . . . . $ (0.00) $ (0.20) $ (0.38) $ (0.28)
-------- ---------- ----------- ----------
-------- ---------- ----------- ----------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 9
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1997 1996
---- ----
Investment in commercial properties:
Operating properties:
Land . . . . . . . . . . . . . . . . . . $ 200,000 $ 10,104,000
Buildings and improvements . . . . . . . 9,915,000 28,187,000
Accumulated depreciation . . . . . . . . (4,448,000) (7,271,000)
----------- ------------
Commercial properties - net. . . . . . . 5,667,000 31,020,000
Property under development . . . . . . . . . . 386,000 175,000
Property in receivership . . . . . . . . . . . 4,438,000 4,438,000
----------- ------------
Total . . . . . . . . . . . . . . . . . . . 10,491,000 35,633,000
Notes receivable (net of allowance of
$28,000 in 1997 and $39,000 in 1996). . . . . . 194,000 6,279,000
Cash . . . . . . . . . . . . . . . . . . . . 3,389,000 1,011,000
Restricted cash. . . . . . . . . . . . . . . . 1,154,000
Accounts receivable (net of allowance of
$79,000 in 1997 and $119,000 in 1996) . . . . . 6,000 489,000
Deferred lease commissions - net . . . . . . . 258,000 425,000
Deferred financing costs - net . . . . . . . . 62,000 154,000
Other assets . . . . . . . . . . . . . . . . . 747,000 1,038,000
----------- ------------
Total. . . . . . . . . . . . . . . . . . $15,147,000 $ 46,183,000
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Mortgage loans. . . . . . . . . . . . . . . $ 5,718,000 $ 25,700,000
Short-term notes. . . . . . . . . . . . . . 7,700,000
Security deposits . . . . . . . . . . . . . 52,000 118,000
Accounts payable and other liabilities. . . 119,000 1,968,000
----------- ------------
Total liabilities. . . . . . . . . . . . 5,889,000 35,486,000
----------- ------------
Commitments and contingencies
Minority interest in joint venture . . . . . . 3,355,000 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. . . . . . . . . . . . . . (42,174,000) (40,755,000)
----------- ------------
Shareholders' equity - net . . . . . . . . . . 5,903,000 7,322,000
----------- ------------
Total. . . . . . . . . . . . . . . . . . $15,147,000 $ 46,183,000
----------- ------------
----------- ------------
See notes to consolidated financial statements.
Page 3 of 9
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine months ended September 30,
1997 1996
-------- --------
Cash Flow from Operating Activities:
Net loss. . . . . . . . . . . . . . . . . . $(1,419,000) $(1,028,000)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Depreciation . . . . . . . . . . . . . . 513,000 1,460,000
Amortization of note receivable discount (17,000) (17,000)
Amortization of deferred cost. . . . . . 88,000 223,000
Minority interest in joint venture's
operations . . . . . . . . . . . . . . . 280,000 313,000
Provision for doubtful receivables . . . 64,000 77,000
Loss (gain) on sale of property. . . . . 767,000 (772,000)
Changes in operating assets and liabilities
Accounts payable and other liabilities . (1,758,000) 513,000
Security deposits. . . . . . . . . . . . (16,000) 29,000
Deferred lease commissions . . . . . . . (74,000) (79,000)
Accounts receivable. . . . . . . . . . . 321,000 339,000
Other assets . . . . . . . . . . . . . . (16,000) 199,000
----------- -----------
Net cash provided (used) by operating activities (1,267,000) 1,257,000
----------- -----------
Cash Flow from Investing Activities:
Decrease (increase) in restricted cash . 1,154,000 (1,194,000)
Construction of properties . . . . . . . (212,000) (220,000)
Property acquisitions. . . . . . . . . . (200,000)
Collection of notes receivable . . . . . 62,000 74,000
Additions to notes receivable. . . . . . (73,000)
Proceeds from the sale of property . . . 11,006,000 4,845,000
----------- -----------
Net cash provided in investing activities . . . 11,737,000 3,505,000
----------- -----------
Cash Flow from Financing Activities:
Proceeds from short-term notes . . . . . 215,000 455,000
Re-payment of mortgage loans . . . . . . (92,000) (315,000)
Re-payment of short-term notes . . . . . (7,915,000) (4,400,000)
Distributions of joint venture partner . (300,000) (300,000)
----------- -----------
Net cash used by financing activities . . . . . (8,092,000) (4,560,000)
----------- -----------
Increase in cash. . . . . . . . . . . . . . 2,378,000 202,000
Cash, January 1. . . . . . . . . . . . . 1,011,000 308,000
----------- -----------
Cash, September 30 . . . . . . . . . . . $ 3,389,000 $ 510,000
----------- -----------
----------- -----------
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.
See notes to consolidated financial statements.
Page 4 of 9
<PAGE>
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 a co-obligor on the Promissory Note secured by a First Deed of Trust
on the leasehold estate at Mt. Shasta Shopping Center. In September 1997,
Pan Pacific paid the note in full and the Deed of Trust has been
reconveyed. As a result the Trust has no further obligation regarding this
loan. 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 Kings 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 Kings 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 and, finally, subject to the ground lessor's right of first refusal.
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 nine months ended 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept 30, 1997 Sept 30, 1996 Sept 30, 1997 Sept 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ADVISOR
Advisory fee - .1% of Assets. . . . . . . . . . $ $ 12,000 $ 17,000 $ 38,000
MENLO MANAGEMENT COMPANY
Property management fees. . . . . . . . . . . . 17,000 46,000 89,000 160,000
Administrative services . . . . . . . . . . . . 17,000 38,000 85,000 113,000
Lease commissions . . . . . . . . . . . . . . . 23,000 29,000 74,000 56,000
Loan fee. . . . . . . . . . . . . . . . . . . . 17,000 25,000 63,000
------------ ---------- ---------- ---------
Total . . . . . . . . . . . . . . . . . . . $ 57,000 $ 142,000 $ 290,000 $ 430,000
------------ ---------- ---------- ---------
------------ ---------- ---------- ---------
</TABLE>
Page 5 of 9
<PAGE>
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 nine months ended September 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
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
(1) LIQUIDITY AND CAPITAL RESOURCES:
Cash flow used by operating activities was $1,267,000 for the nine months
ended September 30, 1997 as compared to cash flow provided by operating
activities of $1,257,000 for the nine months ended September 30, 1996. The
net change is primarily due to the timing differences in the receipt of rents
and payments of trade payables, change in expense levels resulting from
property dispositions and the loss on the sale of Monterey Plaza in 1996
compared to the gain on the sale of Menlo Center in 1996.
Cash flow provided by investing activities was $11,737,000 for the nine
months ended September 30, 1997 compared to $3,505,000 for the nine months
ended September 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 $8,092,000 for the nine months
ended September 30, 1997 as compared to $4,560,000 for the nine months ended
September 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 and, finally, subject
to the ground lessor's right of first refusal.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR NINE MONTHS ENDED
SEPTEMBER 30, 1997 VS. 1996:
Net loss for the nine months ended September 30, 1997 was $1,419,000 as
compared to a net loss of $1,028,000 for the nine months ended September 30,
1996.
During the first nine months rental revenues decreased from $4,698,000 in
1996 to $2,297,000 in 1997, a decrease of $2,401,000 or 51%. 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 $1,322,000 in 1996 to $654,000 in 1997, a
decrease of $668,000 or 51%. Property taxes decreased from $414,000 in 1996
to $180,000 in 1997, a decrease of $234,000, or 57%. Property management
fees decreased from $160,000 in 1996 to $89,000 in 1997, a decrease of
$71,000, or 44%. Depreciation and amortization decreased from $1,687,000 in
1996 to $601,000 in 1997, a decrease of $1,086,000, or 64%. 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 $386,000 in 1996 to
$280,000 in 1997, a decrease of $106,000 or 27% due to reduced administrative
activity and cost savings 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 $772,000 in 1996 represents the gain on the
sale of Menlo Center which was sold in February 1996.
Interest income decreased by $185,000, or 39%, from $470,000 in 1996 to
$285,000 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 $1,683,000, or 63%, from $2,686,000 in 1996 to
$1,003,000 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.
Merger expense of $147,000 in 1997 represents the cost related to the
proposed merger with Pan Pacific Development (U.S.) Inc. that was terminated
in March 1997.
Page 7 of 9
<PAGE>
Material changes for the three months ended September 30, 1997 as compared to
1996 were for the same reason in relative proportionate amounts as those
shown for the nine months.
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
<PAGE>
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: October 30, 1997 By:
---------------- --------------------------------
Robert Ch. Gould
VICE PRESIDENT
Date: October 30, 1997 By:
---------------- --------------------------------
Harry E. Kellogg
TREASURER
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 3,389,000
<SECURITIES> 0
<RECEIVABLES> 307,000
<ALLOWANCES> (107,000)
<INVENTORY> 0
<CURRENT-ASSETS> 3,395,000
<PP&E> 14,939,000
<DEPRECIATION> (4,448,000)
<TOTAL-ASSETS> 15,147,000
<CURRENT-LIABILITIES> 171,000
<BONDS> 5,718,000
37,068,000
0
<COMMON> 0
<OTHER-SE> (31,165,000)
<TOTAL-LIABILITY-AND-EQUITY> 15,147,000<F1>
<SALES> 0
<TOTAL-REVENUES> 2,582,000
<CGS> 0
<TOTAL-COSTS> 3,721,000
<OTHER-EXPENSES> 280,000<F2>
<LOSS-PROVISION> 107,000
<INTEREST-EXPENSE> 1,003,000
<INCOME-PRETAX> (1,419,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,419,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,419,000)
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> (0.38)
<FN>
<F1>Includes $3,355,000 of Minority Interest in Joint Venture
<F2>Represents Minority Interest Portion of Current net Income/(loss)
</FN>
</TABLE>
