<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 JUNE 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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<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, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------- ------------- ------------- -------------
(LIQUIDATION (GOING-CONCERN (LIQUIDATION (GOING-CONCERN
BASIS) BASIS) BASIS) BASIS)
<S> <C> <C> <C> <C>
Rental revenues . . . . . . . . . . . . . . . . . . . . $ 465,000 $ 704,000 $ 871,000 $ 1,834,000
Operating expenses (including related party amounts of ------------- -------------- ------------- ---------------
$32,000 for the three months ended June 30, 1998,
$66,000 for the three months ended June 30, 1997,
$108,000 for the six months ended June 30, 1998 and
$177,000 for the six months ended June 30, 1997)
Operating . . . . . . . . . . . . . . . . . . . . 143,000 200,000 330,000 513,000
Property tax. . . . . . . . . . . . . . . . . . . 23,000 57,000 46,000 162,000
General and administrative . . . . . . . . . . . 78,000 98,000 173,000 208,000
Depreciation and amortization . . . . . . . . . . 179,000 475,000
Property management fees. . . . . . . . . . . . . 16,000 30,000 31,000 72,000
Loss (gain) on property sale . . . . . . . . . . (36,000) (3,000) (36,000) 767,000
------------- -------------- ------------- -------------
Total operating expenses . . . . . . . 224,000 561,000 544,000 2,197,000
------------- -------------- ------------- -------------
Operating income (loss) . . . . . . . . . . . . . . . 241,000 143,000 327,000 (363,000)
------------- -------------- ------------- -------------
Other income/(expense):
Interest income . . . . . . . . . . . . . . . . . 24,000 88,000 47,000 252,000
Interest expense . . . . . . . . . . . . . . . . (33,000) (246,000) (65,000) (970,000)
Reincorporation/merger expenses . . . . . . . . . (49,000) (147,000)
------------- -------------- ------------- -------------
Total other income/(expense) . . . . . . . . (9,000) (207,000) (18,000) (865,000)
------------- -------------- ------------- -------------
Net income (loss) before minority interest . . . . . . 232,000 (64,000) 309,000 (1,228,000)
------------- -------------- ------------- -------------
Minority interest in joint venture . . . . . . . . . . (172,000) (105,000) (313,000) (184,000)
------------- -------------- ------------- ---------------
Net income (loss) . . . . . . . . . . . . . . . . . . $ 60,000 $ (169,000) $ (4,000) $ (1,412,000)
------------- -------------- ------------- ---------------
------------- -------------- ------------- ---------------
Basic and diluted income (loss) per share of
beneficial interest. . . . . . . . . . . . . . . . $ 0.02 $ (0.05) $ (0.00) $ (0.38)
------------- -------------- ------------- ---------------
------------- -------------- ------------- ---------------
</TABLE>
See notes to consolidated financial statements.
Page 2 of 9
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF NET ASSETS
(LIQUIDATION BASIS)
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
JUNE 30,1998 DEC 31, 1997
--------------- ----------------
<S> <C> <C>
Investment in operating commercial properties:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,000 $ 200,000
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . 10,403,000 11,210,000
Deferral of estimated appreciation on commercial
properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,077,000) (3,280,000)
--------------- ---------------
Commercial properties - net. . . . . . . . . . . . . . . . . . . . . . . 7,526,000 8,130,000
Property in development. . . . . . . . . . . . . . . . . . . . . . . . . . 1,331,000 868,000
Notes receivable (net of allowance of $20,000 in 1998
and $28,000 in 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,000 148,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,861,000 3,479,000
Accounts receivable (net of allowance of $43,000 in 1998
and $42,000 in 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000 75,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547,000 685,000
--------------- --------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,427,000 $ 13,385,000
--------------- --------------
--------------- --------------
LIABILITIES
Liabilities:
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,253,000 $ 1,271,000
Security deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000 52,000
Accounts payable and other liabilities . . . . . . . . . . . . . . . . . 165,000 630,000
Reserve for estimated costs during the period of
liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 40,000
--------------- --------------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,512,000 1,993,000
--------------- --------------
Minority interest in joint venture. . . . . . . . . . . . . . . . . . . . 5,490,000 5,963,000
--------------- --------------
Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,425,000 $ 5,429,000
--------------- --------------
--------------- --------------
</TABLE>
See notes to consolidated financial statements.
Page 3 of 9
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
FOR THE SIX MONTHS ENDED JUNE 30,
1998 1997
--------------- ----------------
(liquidation (going-concern
basis) basis)
<S> <C> <C>
Cash Flow from Operating Activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,000) $ (1,412,000)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,000
Amortization of note receivable discount. . . . . . . . . . . . . . (16,000)
Amortization of deferred cost . . . . . . . . . . . . . . . . . . . 68,000
Minority interest in joint venture's operations . . . . . . . . . . 313,000 184,000
Provision for doubtful receivables. . . . . . . . . . . . . . . . . 64,000
Loss (gain) on sale of property . . . . . . . . . . . . . . . . . . (36,000) 767,000
Changes in operating assets and liabilities
Accounts payable and other liabilities. . . . . . . . . . . . . . . (465,000) (1,683,000)
Security deposits . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 (16,000)
Deferred lease commissions. . . . . . . . . . . . . . . . . . . . . (51,000)
Deferred financing costs. . . . . . . . . . . . . . . . . . . . . . (67,000)
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 52,000 313,000
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,000 38,000
---------------- ----------------
Net cash used by operating activities (2,000) (1,404,000)
---------------- ----------------
Cash Flow from Investing Activities:
Decrease in restricted cash . . . . . . . . . . . . . . . . . . . . 1,154,000
Construction of properties. . . . . . . . . . . . . . . . . . . . . (463,000) (1,000)
Property acquisitions . . . . . . . . . . . . . . . . . . . . . . . (200,000)
Collection of notes receivable. . . . . . . . . . . . . . . . . . . 9,000 56,000
Additions to notes receivable . . . . . . . . . . . . . . . . . . . (73,000)
Proceeds from the sale of property. . . . . . . . . . . . . . . . . 36,000 11,006,000
--------------- ------------------
Net cash provided (used) in investing activities . . . . . . . . . . . . (418,000) 11,942,000
--------------- ------------------
Cash Flow from Financing Activities:
Proceeds from short-term notes. . . . . . . . . . . . . . . . . . . 215,000
Re-payment of mortgage loans. . . . . . . . . . . . . . . . . . . . (18,000) (83,000)
Re-payment of short-term notes. . . . . . . . . . . . . . . . . . . (7,915,000)
Distributions of joint venture partner. . . . . . . . . . . . . . . (180,000) (180,000)
--------------- ------------------
Net cash used by financing activities (198,000) (7,963,000)
--------------- ------------------
Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . (618,000) 2,575,000
Cash, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,479,000 1,011,000
--------------- ------------------
Cash, June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,861,000 $ 3,586,000
--------------- ------------------
--------------- ------------------
</TABLE>
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.
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
On May 20, 1998, the Trust entered into a letter of intent 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 buyer with respect to certain property condition
contingencies. During April 1998, the estimated net value of Kings Court
Shopping Center was reduced by $850,000. This decrease is reflected in a
reduction in the estimated appreciation of commercial properties and a
reduction of the deferral of estimated appreciation of commercial
properties at June 30, 1998.
Related Party Transactions
Fees paid or payable to the Advisor and Menlo Management Company for
three months and six months ended 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997
------------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
ADVISOR
Advisory fee - .1% of Assets . . . . . . . . . . . $ $ 5,000 $ $ 17,000
MENLO MANAGEMENT COMPANY
Property management fees . . . . . . . . . . . . . 16,000 30,000 31,000 72,000
Administrative services. . . . . . . . . . . . . . 16,000 25,000 33,000 63,000
Lease commissions. . . . . . . . . . . . . . . . . 51,000 44,000 51,000
Loan fee . . . . . . . . . . . . . . . . . . . . . 6,000 25,000
------------- ------------ ------------- ---------------
Total . . . . . . . . . . . . . . . . . . . . $ 32,000 $ 117,000 $ 108,000 $ 228,000
------------- ------------ ------------- ---------------
------------- ------------ ------------- ---------------
</TABLE>
Page 5 of 9
<PAGE>
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 six months ended June 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
<PAGE>
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 $2,000 for the six months ended
June 30, 1998 as compared to cash flow used by operating activities of
$1,404,000 for the six months ended June 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 sale of
Monterey Plaza Shopping Center in 1997.
Cash flow used by investing activities was $418,000 for the six months ended
June 30, 1998 compared to cash flow provided by investing activities was
$11,942,000 for the six months ended June 30, 1997. The net change is
primarily the result of the sale of Monterey Plaza Shopping Center in 1997.
Cash flow used by financing activities was $198,000 for the six months ended
June 30, 1998 as compared to $7,963,000 for the six months ended June 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.
The Trust entered into a contract 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
buyer with respect to certain property condition contingencies. During April
1998, the estimated net value of Kings Court Shopping Center was reduced by
$850,000. This decrease is reflected in a reduction in the estimated
appreciation of commercial properties and a reduction of the deferral of
estimated appreciation of commercial properties at June 30, 1998.
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 purchase price of the fee estate could
increase above the current negotiated limit. Second, 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. 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 SIX MONTHS ENDED JUNE
30, 1998 COMPARED TO 1997:
Net loss for the six months ended June 30, 1998 was $4,000 as compared to a
net loss of $1,412,000 for the six months ended June 30, 1997.
During the first six months rental revenues decreased from $1,834,000 in 1997
to $871,000 in 1998, a decrease of $963,000 or 53%. This decrease resulted
from the sale of Monterey Plaza Shopping Center in April 1997.
Operating expenses decreased from $513,000 in 1997 to $330,000 in 1998, a
decrease of $183,000 or 36%. Property taxes decreased from $162,000 in 1997
to $46,000 in 1998, a decrease of $116,000, or 72%. Property management fees
decreased from $72,000 in 1997 to $31,000 in 1998, a decrease of $41,000, or
57%. Each of these decreases resulted from the sale of Monterey Plaza
Shopping Center in April 1997.
Depreciation and amortization decreased from $475,000 in 1997 to $0 in 1998,
a decrease of $475,000, or 100%, resulting from the change to liquidation
basis of accounting.
General and administrative expense decreased from $208,000 in 1997 to
$173,000 in 1998, a decrease of $35,000 or 17% due to cost saving measures.
Gain on the sale of property of $36,000 in 1998 represents the gain on the
sale of the El Portal pad. 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 $252,000 in 1997 to $47,000 in 1998, a
decrease of $205,000, or 81%. The net change was primarily the result of the
sale of the Trust's five notes receivable in April 1997.
Page 7 of 9
<PAGE>
Interest expense decreased from $970,000 in 1997 to $65,000 in 1998, a
decrease of $905,000, or 93%. The decrease was primarily due to the
assumption of mortgage debt by the buyers of Monterey Plaza Shopping Center
and the pay-down of short-term debt in 1997.
In connection with a potential merger, the Trust incurred expenses of
$147,000 during the six months ended June 30, 1997.
Material changes for the three months ended June 30, 1998 as compared to 1997
were for the same reason in relative proportionate amounts as those shown for
the six months.
ITEM 6 (b) - Report on Form 8K was filed on February 4, 1998.
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: JULY 31, 1998 By: Robert Ch. Gould
------------- --------------------------
Robert Ch. Gould
VICE PRESIDENT
Date: July 31, 1998 By: Harry E. Kellogg
------------- --------------------------
Harry E. Kellogg
TREASURER
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,861,000
<SECURITIES> 0
<RECEIVABLES> 225,000
<ALLOWANCES> 63,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,884,000
<PP&E> 11,934,000
<DEPRECIATION> (3,077,000)
<TOTAL-ASSETS> 12,427,000
<CURRENT-LIABILITIES> 1,253,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 5,425,000
<TOTAL-LIABILITY-AND-EQUITY> 12,427,000<F1>
<SALES> 0
<TOTAL-REVENUES> 918,000
<CGS> 0
<TOTAL-COSTS> 609,000
<OTHER-EXPENSES> 313,000<F2>
<LOSS-PROVISION> 63,000
<INTEREST-EXPENSE> 65,000
<INCOME-PRETAX> (4,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,000)
<EPS-PRIMARY> 0.00<F3>
<EPS-DILUTED> 0.00<F3>
<FN>
<F1>includes $5,490,000 of Minority Interest in Joint Venture
<F2>represents Minority Interest Portion of Current Income/Loss
<F3>No value difference between EPS-Primary and EPS-Diluted
</FN>
</TABLE>
