<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 ENDED SEPTEMBER 30, 1998
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: (650) 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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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,
------------- ------------- ------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(LIQUIDATION (GOING-CONCERN (LIQUIDATION (GOING-CONCERN
BASIS) BASIS) BASIS) BASIS)
<S> <C> <C> <C> <C>
Rental revenues........................................... $ 358,000 $ 463,000 $ 1,229,000 $ 2,297,000
------------- ------------- ------------ --------------
Operating expenses (including related party amounts of
$48,000 for the three months ended September 30, 1998,
$57,000 for the three months ended September 30, 1997,
$156,000 for the nine months ended September 30, 1998 and
$290,000 for the nine months ended September 30, 1997)
Operating........................................... 183,000 141,000 513,000 654,000
Property tax........................................ 19,000 18,000 65,000 180,000
General and administrative.......................... 82,000 72,000 255,000 280,000
Depreciation and amortization....................... 126,000 601,000
Property management fees............................ 20,000 17,000 51,000 89,000
Loss (gain) on property sale........................ (4,948,000) (4,984,000) 767,000
------------- ------------- ------------ --------------
Total operating expenses/(income).............. (4,644,000) 374,000 (4,100,000) 2,571,000
------------- ------------- ------------ --------------
Operating income (loss)................................... 5,002,000 89,000 5,329,000 (274,000)
------------- ------------- ------------ --------------
Other income/(expense):
Interest income..................................... 34,000 33,000 81,000 285,000
Interest expense.................................... (20,000) (33,000) (85,000) (1,003,000)
Merger expenses..................................... (147,000)
------------- ------------- ------------ --------------
Total other income/(expense)................... 14,000 0 (4,000) (865,000)
------------- ------------- ------------ --------------
Net income (loss) before minority interest................ 5,016,000 89,000 5,325,000 (1,139,000)
------------- ------------- ------------ --------------
Minority interest in joint venture........................ (2,888,000) (96,000) (3,201,000) (280,000)
------------- ------------- ------------ --------------
Net income (loss)......................................... $ 2,128,000 $ (7,000) $ 2,124,000 $ (1,419,000)
------------- ------------- ------------ --------------
------------- ------------- ------------ --------------
Basic and diluted income (loss) per share of beneficial
interest.................................................. $ 0.57 $ 0.00 $ 0.57 $ (0.38)
------------- ------------- ------------ --------------
------------- ------------- ------------ --------------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 9
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PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF NET ASSETS
(LIQUIDATION BASIS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
SEPT 30,1998 DEC 31, 1997
---------------- ----------------
<S> <C> <C>
Investment in operating commercial properties:
Land................................................................... $ 1,725,000 $ 200,000
Buildings and improvements............................................. 1,643,000 11,210,000
Deferral of estimated appreciation on commercial properties............ (3,280,000)
---------------- ----------------
Commercial properties - net............................................ 3,368,000 8,130,000
Property in development.................................................... 868,000
Notes receivable (net of allowance of $20,000 in 1998 and $28,000 in
1997)...................................................................... 1,000 148,000
Cash....................................................................... 3,851,000 3,479,000
Accounts receivable (net of allowance of $43,000 in 1998 and $42,000 in
1997)...................................................................... 1,000 75,000
Other assets............................................................... 504,000 685,000
---------------- ----------------
Total................................................................ $ 7,725,000 $ 13,385,000
---------------- ----------------
---------------- ----------------
LIABILITIES
Liabilities:
Mortgage loans......................................................... $ $ 1,271,000
Security deposits...................................................... 7,000 52,000
Accounts payable and other liabilities................................. 125,000 630,000
Reserve for estimated costs during the period of liquidation........... 40,000 40,000
---------------- ----------------
Total liabilities 172,000 1,993,000
---------------- ----------------
Minority interest in joint venture......................................... 5,963,000
---------------- ----------------
Net assets................................................................ $ 7,553,000 $ 5,429,000
---------------- ----------------
---------------- ----------------
</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 NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ---------------
(liquidation (going-concern
basis) basis)
<S> <C> <C>
Cash Flow from Operating Activities:
Net income (loss). . . . . . . . . . . . . . . . . . . $ 2,124,000 $ (1,419,000)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . 513,000
Amortization of note receivable discount. . . . . . . (17,000)
Amortization of deferred cost . . . . . . . . . . . . 88,000
Minority interest in joint venture's operations . . . 3,201,000 280,000
Provision for doubtful receivables. . . . . . . . . . 64,000
Loss (gain) on sale of property . . . . . . . . . . . (4,984,000) 767,000
Changes in operating assets and liabilities
Accounts payable and other liabilities. . . . . . . . (505,000) (1,758,000)
Security deposits . . . . . . . . . . . . . . . . . . (16,000)
Deferred lease commissions. . . . . . . . . . . . . . (74,000)
Accounts receivable . . . . . . . . . . . . . . . . . 74,000 321,000
Other assets. . . . . . . . . . . . . . . . . . . . . 89,000 (16,000)
------------ ---------------
Net cash used by operating activities (1,000) (1,267,000)
------------ ---------------
Cash Flow from Investing Activities:
Decrease in restricted cash . . . . . . . . . . . . . 1,154,000
Construction of properties. . . . . . . . . . . . . . (560,000) (212,000)
Property acquisitions . . . . . . . . . . . . . . . . (1,688,000) (200,000)
Collection of notes receivable. . . . . . . . . . . . 147,000 62,000
Additions to notes receivable . . . . . . . . . . . . (73,000)
Proceeds from the sale of property. . . . . . . . . . 3,985,000 11,006,000
------------ ---------------
Net cash provided in investing activities . . . . . . . 1,884,000 11,737,000
------------ ---------------
Cash Flow from Financing Activities:
Proceeds from short-term notes. . . . . . . . . . . . 300,000 215,000
Re-payment of mortgage loans. . . . . . . . . . . . . (1,271,000) (92,000)
Re-payment of short-term notes. . . . . . . . . . . . (300,000) (7,915,000)
Distributions of joint venture partner. . . . . . . . (240,000) (300,000)
------------ ---------------
Net cash used by financing activities . . . . . . . . . (1,511,000) (8,092,000)
------------ ---------------
Increase in cash. . . . . . . . . . . . . . . . . . . . 372,000 2,378,000
Cash, January 1 . . . . . . . . . . . . . . . . . . . 3,479,000 1,011,000
------------ ---------------
Cash, September 30. . . . . . . . . . . . . . . . . . $ 3,851,000 $ 3,389,000
------------ ---------------
------------ ---------------
</TABLE>
See notes to consolidated financial statements.
NON CASH TRANSACTION
On August 24, 1998 the Trust sold Kings Court Shopping Center to Federal
Realty Partners L.P., a Delaware limited partnership. The three joint
venture partners, other than the Trust, each received 86,721 partnership
units in Federal Realty Partners, LP. The Trust received cash for its share
of the proceeds from the sale.
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.
Plan of Liquidation
On February 4, 1998, the Trust's shareholders approved a Plan of
Dissolution. As a result, the Trust's financial statements as of December
31, 1997 and thereafter have been prepared on a liquidation basis.
Accordingly, assets have been valued at estimated net realizable value and
liabilities include estimated costs associated with carrying out the plan
of liquidation.
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 Kings Court Shopping Center, one Note Receivable and the San Pablo Pad
The Trust sold all of its rights, title and interest in Kings Court
Shopping Center for $10,650,000 to Federal Realty Partners, L.P., a
Delaware limited partnership, on August 24, 1998. The net cash proceeds to
the Trust were $4,260,000 less closing costs from the transaction.
On August 14, 1998, the Trust assigned to Neptune Investment Company a
note receivable for $145,000. The amount was greater than the book
carrying value and it was determined based on negotiations between the
parties and certain third party valuations.
On May 5, 1998, the Trust sold to Edward Margherlo certain real property
located in San Pablo, California, the net cash proceeds to the Trust were
$36,000.
Wanlass Shopping Center
On August 18, 1998, the Trust purchased the Wanlass Shopping Center for
$1,780,000 (or $1,688,000 after reduction of the security deposit).
This purchase was required under the terms of the then existing ground
lease between the Trust and the ground lessor. In connection with the
completion of the development of the Wanlass Shopping Center, there are
two factors which could adversely affect the net realizable value of the
property. First, the necessary site plan approvals could be withheld by
the City of San Pablo, thereby reducing the amount of leasable area and
rent revenues for the overall project. Second, the ability to locate a
suitable tenant for one of the available retail building pads proposed
for the center. The ultimate outcome of these factors and the impact,
if any, on the net realizable value is not yet determined. Accordingly,
no adjustment for these uncertainties has been recorded in the
accompanying financial statements.
Page 5 of 9
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Related Party Transactions
Fees paid or payable to the Advisor and Menlo Management Company for three
months and nine months ended 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept 30, 1998 Sept 30, 1997 Sept 30, 1998 Sept 30, 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
ADVISOR
Advisory fee - .1% of Assets . . . . . . . $ $ $ $ 17,000
MENLO MANAGEMENT COMPANY
Property management fees . . . . . . . . . 19,000 17,000 50,000 89,000
Administrative services. . . . . . . . . . 16,000 17,000 49,000 85,000
Lease commissions. . . . . . . . . . . . . 13,000 23,000 57,000 74,000
Loan fee . . . . . . . . . . . . . . . . . 25,000
------------- ------------- ------------- -------------
Total. . . . . . . . . . . . . . . . . $ 48,000 $ 57,000 $ 156,000 $ 290,000
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
Basic and Diluted Income (Loss) Per Share of Beneficial Interest
Basic and diluted income (loss) per share of beneficial interest is
computed by dividing net income (loss) by the weighted average number of
shares outstanding for the three months and nine months ended September 30,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average number of shares outstanding 3,706,845 3,706,845
</TABLE>
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 $6,403,000 for the nine months
ended September 30, 1998 as compared to cash flow used by operating
activities of $1,267,000 for the nine months ended September 30, 1997. The
net change is primarily due to the timing differences in the receipt of rents
and payments of trade payables and the change in expense levels resulting
from the loss on the sale of Monterey Plaza Shopping Center in 1997 compared
to the gain on the sale of the Kings Court Shopping Center in 1998.
Cash flow provided by investing activities was $8,286,000 for the nine months
ended September 30, 1998 compared to $11,737,000 for the nine months ended
September 30, 1997. The net change is primarily the result of the sale of
Monterey Plaza Shopping Center in 1997, the sale of Kings Court Shopping
Center in 1998 and the acquisition of the Wanlass Shopping Center in 1998.
Cash flow used by financing activities was $1,511,000 for the nine months
ended September 30, 1998 as compared to $8,092,000 for the nine months ended
September 30, 1997. The decrease from 1997 is primarily due to the repayment
of short term notes payable as the result of the sale of Monterey Plaza
Shopping Center in 1997 and the repayment of the Kings Court mortgage debt in
1998.
The Trust sold all of its rights, title and interest in Kings Court Shopping
Center for $10,650,000 to Federal Realty Partners, L.P., a Delaware limited
partnership, on August 24, 1998. The net cash proceeds to the Trust were
$4,260,000 less closing costs from the transaction.
On August 14, 1998, the Trust sold to Neptune Investment Company a note
receivable for $145,000. The amount was greater than the book carrying value
and it was determined based on negotiations between the parties and a certain
third party valuations.
On May 5, 1998, the Trust sold to Edward Margherlo certain real property
located in San Pablo, California, the net cash proceeds to the Trust were
$36,000.
On August 18, 1998, The Trust purchased the Wanlass Shopping Center for
$1,780,000 (or $1,688,000 after reduction of the security deposit). This
purchase was required under the terms of the then existing ground lease
between the Trust and the ground lessor. In connection with the completion
of the development of the Wanlass Shopping Center, there are two factors
which could adversely affect the net realizable value of the property.
First, the necessary site plan approvals could be withheld by the City of San
Pablo, thereby reducing the amount of leasable area and rent revenues for the
overall project. Second, the ability to locate a suitable tenant for one of
the available retail building pads proposed for the center. The ultimate
outcome of these factors and the impact, if any, on the net realizable value
is not yet determined. Accordingly, no adjustment for these uncertainties
has been recorded in the accompanying financial statements.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR NINE MONTHS ENDED
SEPTEMBER 30, 1998 COMPARED TO 1997:
Net income for the nine months ended September 30, 1998 was $2,124,000 as
compared to a net loss of $1,419,000 for the nine months ended September 30,
1997.
During the first nine months rental revenues decreased from $2,297,000 in
1997 to $1,229,000 in 1998, a decrease of $1,068,000 or 46%. This decrease
resulted from the sale of Monterey Plaza Shopping Center in April 1997 and
Kings Court Shopping Center in August 1998.
Operating expenses decreased from $654,000 in 1997 to $513,000 in 1998, a
decrease of $141,000 or 22%. Property taxes decreased from $180,000 in 1997
to $65,000 in 1998, a decrease of $115,000, or 64%. Property management fees
decreased from $89,000 in 1997 to $51,000 in 1998, a decrease of $38,000, or
43%. Each of these decreases resulted from the sale of Monterey Plaza
Shopping Center in April 1997 and Kings Court Shopping Center in August 1998.
Page 7 of 9
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Depreciation and amortization decreased from $601,000 in 1997 to $0 in 1998,
a decrease of $601,000, or 100%, resulting from the change to liquidation
basis of accounting.
General and administrative expense decreased from $280,000 in 1997 to
$255,000 in 1998, a decrease of $25,000 or 9% due to cost saving measures.
Gain on the sale of property of $4,984,000 in 1998 represents the gain on the
sale of the El Portal pad and the sale of Kings Court Shopping Center. 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.
Interest income decreased from $285,000 in 1997 to $81,000 in 1998, a
decrease of $204,000, or 72%. The net change was primarily the result of the
sale of the Trust's five notes receivable in April 1997.
Interest expense decreased from $1,003,000 in 1997 to $85,000 in 1998, a
decrease of $918,000, or 92%. The decrease was primarily due to the
assumption of mortgage debt by the buyers of Monterey Plaza Shopping Center,
the pay-down of short-term debt in 1997 and the re-payment of the Kings Court
mortgage debt.
In connection with a potential merger, the Trust incurred expenses of
$147,000 during the nine months ended September 30, 1997.
Material changes for the three months ended September 30, 1998 as compared to
1997 were for the same reason in relative proportionate amounts as those
shown for the nine months.
ITEM 6 (b) - Report on Form 8K was filed on February 4, 1998 and September
18, 1998.
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
<TABLE>
<S> <C>
Date: NOVEMBER 6, 1998 By: ROBERT CH. GOULD
--------------------------------
Robert Ch. Gould
VICE PRESIDENT
Date: NOVEMBER 6, 1998 By: HARRY E. KELLOGG
--------------------------------
Harry E. Kellogg
TREASURER
</TABLE>
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,851,000
<SECURITIES> 0
<RECEIVABLES> 65,000
<ALLOWANCES> 63,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,853,000
<PP&E> 3,368,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,725,000
<CURRENT-LIABILITIES> 172,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,553,000
<SALES> 0
<TOTAL-REVENUES> 1,310,000
<CGS> 0
<TOTAL-COSTS> 969,000
<OTHER-EXPENSES> 4,984,000<F1>
<LOSS-PROVISION> 63,000
<INTEREST-EXPENSE> 85,000
<INCOME-PRETAX> 2,124,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,124,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,124,000
<EPS-PRIMARY> 0.00<F2>
<EPS-DILUTED> 0.00<F2>
<FN>
<F1>REPRESENTS THE GAIN ON PROPERTY SOLD
<F2>NO VALUE DIFFERENCE BETWEEN EPS-PRIMARY AND EPS-DILUTED
</FN>
</TABLE>
