<PAGE>
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 MARCH 31, 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
<PAGE>
PACIFIC REAL ESTATE INVESTMENT TRUST
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
ITEM I - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THREE THREE
MONTHS MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1998 1997
(LIQUIDATION (GOING-
BASIS) CONCERN
BASIS)
<S> <C> <C>
Rental revenues . . . . . . . . . . . . . . . . . . . $ 406,000 $ 1,130,000
---------- -----------
Operating expenses (including related party amounts
of $76,000 and $110,000 in 1998 and 1997
respectively):
Operating . . . . . . . . . . . . . . . . . 187,000 313,000
Property tax . . . . . . . . . . . . . . . . 23,000 105,000
General and administrative . . . . . . . . . 95,000 110,000
Depreciation and amortization . . . . . . . 296,000
Property management fees . . . . . . . . . . 15,000 42,000
Loss on sale of property . . . . . . . . . . 770,000
---------- -----------
Total operating expenses . . . . . 320,000 1,636,000
---------- -----------
Operating income (loss) . . . . . . . . . . . . . 86,000 (506,000)
---------- -----------
Other income/(expense):
Interest income . . . . . . . . . . . . . . 23,000 164,000
Interest expense . . . . . . . . . . . . . . (32,000) (724,000)
Reincorporation/merger expenses . . . . . . (98,000)
---------- -----------
Total other income/(expense) . . . . . (9,000) (658,000)
---------- -----------
Net income (loss) before minority interest . . . 77,000 (1,164,000)
---------- -----------
Minority interest in joint venture . . . . . . . (141,000) (79,000)
---------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . $ (64,000) $(1,243,000)
---------- -----------
---------- -----------
Basic and diluted loss per share of beneficial
interest . . . . . . . . . . . . . . . . . . . . $ (0.02) $ (0.34)
---------- -----------
---------- -----------
</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
MAR 31, 1998 DEC 31, 1997
----------- -----------
<S> <C> <C>
Investment in commercial properties:
Land . . . . . . . . . . . . . . . . . $ 240,000 $ 200,000
Buildings and improvements . . . . . . 10,406,000 11,210,000
Deferral of estimated appreciation
on commercial properties . . . . . . (3,014,000) (3,280,000)
----------- -----------
Commercial properties - net . . . . . 7,632,000 8,130,000
Property in development 980,000 868,000
Notes receivable (net of allowance of
$20,000 in 1998 and $495,000 in 1997) . . 143,000 148,000
Cash . . . . . . . . . . . . . . . . . . . 3,048,000 3,479,000
Accounts receivable (net of allowance of
$43,000 in 1998 and $67,000 in 1997 . . . 30,000 75,000
Other assets . . . . . . . . . . . . . . . 710,000 685,000
----------- -----------
Total . . . . . . . . . . . $12,543,000 $13,385,000
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES
<S> <C> <C>
Liabilities:
Mortgage loans . . . . . . . . . . . . $ 1,262,000 $ 1,271,000
Security deposits . . . . . . . . . . 51,000 52,000
Accounts payable and other liabilities 339,000 630,000
Reserve for estimated costs during the
period of liquidation . . . . . . . 40,000 40,000
----------- -----------
Total liabilities . . . . . 1,692,000 1,993,000
----------- -----------
Minority interest in joint venture . . . . 5,486,000 5,963,000
----------- -----------
Net assets . . . . . . . . . . . . . . . . 5,365,000 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)
For the three months ended March 31,
<TABLE>
<CAPTION>
1998 1997
------------ -------------
(liquidation (going-concern
basis) basis)
<S> <C> <C>
Cash Flow from Operating Activities:
Net loss . . . . . . . . . . . . . . $ (64,000) $ (1,243,000)
Adjustments to reconcile net loss to
net cash provided (used) by
operating activities:
Depreciation . . . . . . . . . 252,000
Amortization of note receivable
discount . . . . . . . . . . . (6,000)
Amortization of deferred cost . 44,000
Minority interest in joint
venture's operations . . . . . 141,000 79,000
Provision for doubtful
receivables . . . . . . . . . . 63,000
Loss on sale of property . . . 770,000
Changes in operating assets and
liabilities:
Accounts payable and other
liabilities . . . . . . . . . . (291,000) (416,000)
Security deposits . . . . . . . (1,000) (11,000)
Accounts receivable . . . . . . 45,000 226,000
Other assets . . . . . . . . . (25,000) 19,000
------------ -------------
Net cash used by operating activities . . (195,000) (241,000)
------------ -------------
Cash Flow from Investing Activities:
Decrease in restricted cash . . 131,000
Construction of properties . . (112,000) (1,000)
Collection of notes receivable 5,000 13,000
------------ -------------
Net cash provided (used) in investing
activities . . . . . . . . . . . . . . . (107,000) 143,000
------------ -------------
Cash Flow from Financing Activities:
Proceeds from short-term notes 140,000
Re-payment of mortgage loans . (9,000) (74,000)
Distributions to joint venture
partner . . . . . . . . . . . . (120,000) (120,000)
------------ -------------
Net cash used by financing activities . . (129,000) (54,000)
------------ -------------
Decrease in cash . . . . . . . . . . (431,000) (152,000)
Cash, January 1 . . . . . . . . 3,479,000 1,011,000
------------ -------------
Cash, March 31 . . . . . . . . $ 3,048,000 $ 859,000
------------ -------------
------------ -------------
</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
In 1997, the Trust entered into a letter of intent to sell its 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 ground lessors of the Kings Court Shopping Center. During
April 1998, the estimated net sales price of Kings Court Shopping Center
was decreased 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 March 31,
1998.
Reclassifications
Certain 1997 amounts have been reclassified to conform with the 1998
presentation.
Related Party Transactions
Fees paid or payable to the Advisor and Menlo Management Company for three
months ended March 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------- --------------
<S> <C> <C>
ADVISOR
Advisory fee - .1% of
Assets . . . . . . . . . . . $ $ 11,000
MENLO MANAGEMENT COMPANY
Property management fees . . 15,000 42,000
Administrative services . . . 17,000 38,000
Lease commissions . . . . . . 44,000
Loan fee . . . . . . . . . . 19,000
------------- --------------
Total . . . . . . . . . $ 76,000 $ 110,000
------------- --------------
------------- --------------
</TABLE>
Page 5 of 9
<PAGE>
Basic and Diluted Loss Per Share of Beneficial Interest
Basic and diluted loss income per share of beneficial interest is computed
by dividing net loss by the weighted average number of shares outstanding
for the three months ended March 31, 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 $195,000 for the three months ended
March 31, 1998 as compared to cash flow used by operating activities of $241,000
for the three months ended March 31, 1997. 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 used by investing activities was $107,000 for the three months ended
March 31, 1998 compared to cash flow provided by investing activities was
$143,000 for the three months ended March 31, 1997. The net change was
primarily the result of a decrease in restricted cash and an increase in
construction costs at one property.
Cash flow used by financing activities was $129,000 for the three months
ended March 31, 1998 as compared to $54,000 for the three months ended
March 31, 1997. The increase in 1998 is primarily due to no proceeds from
short-term notes payable.
The Trust has a letter of intent to sell its 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 ground lessors of
Kings Court Shopping Center. During April 1998, the estimated sale price of
Kings Court Shopping Center was decreased by $850,000. This decrease is
reflected in a reduction of the estimated appreciation of commercial properties
and a reduction of the deferral of estimated appreciation of commercial
properties at March 31, 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 determinable. Accordingly, no adjustment for
these uncertainties has been recorded in the accompanying financial
statements.
(2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR THREE MONTHS ENDED MARCH
31, 1998 VS. 1997:
Net loss for the three months ended March 31, 1998 was $64,000 as compared to a
net loss of $1,243,000 for the three months ended March 31, 1997, a decrease in
the loss of $1,179,000.
During the first three months rental revenues decreased from $1,130,000 in 1997
to $406,000 in 1998, a decrease of $724,000 or 64%. This decrease resulted from
the sale of Monterey Plaza Shopping Center in April 1997 and the vacancies at
Kings Court Shopping Center in anticipation of the construction of a new Longs
Drugs Store in 1998.
Operating expenses decreased from $313,000 in 1997 to $187,000 in 1998, a
decrease of $126,000 or 40%. Property taxes decreased from $105,000 in 1997
to $23,000 in 1998, a decrease of $82,000, or 78%. Property management fees
decreased from $42,000 in 1997 to $15,000 in 1998, a decrease of $27,000, or
64%. Each of these decreases resulted primarily from the sale of Monterey
Plaza Shopping Center in April 1997.
Depreciation and amortization decreased from $296,000 in 1997 to $0 in 1998, a
decrease of $296,000, or 100%, resulting from the change to liquidation basis of
accounting.
General and administrative expense decreased from $110,000 in 1997 to $95,000 in
1998, a decrease of $15,000 or 14% due to cost saving measures.
Loss on the sale of property of $770,000 as of March 31, 1997, represents the
loss on Monterey Plaza Shopping Center and the Trust's five notes receivable.
Interest income decreased by $141,000, or 86%, from $164,000 in 1997 to $23,000
in 1998, as a result of the sale of the Trust's five notes receivable in April
1997.
Page 7 of 9
<PAGE>
Interest expense decreased by $692,000, or 96%, from $724,000 in 1997 to $32,000
in 1998, due to the assumption of mortgage debt by the buyer 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 $98,000
during the quarter ended March 31, 1997.
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: 5/12/95 By: /s/ Robert Ch. Gould
--------------- ---------------------------------
Robert Ch. Gould
VICE PRESIDENT
Date: 5/12/95 By: /s/ Harry E. Kellogg
--------------- ---------------------------------
Harry E. Kellogg
TREASURER
Page 9 of 9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,048,000
<SECURITIES> 0
<RECEIVABLES> 236,000
<ALLOWANCES> 63,000
<INVENTORY> 0
<CURRENT-ASSETS> 3,078,000
<PP&E> 11,626,000
<DEPRECIATION> (3,014,000)
<TOTAL-ASSETS> 12,543,000
<CURRENT-LIABILITIES> 430,000
<BONDS> 1,262,000
0
0
<COMMON> 0
<OTHER-SE> 5,486,000
<TOTAL-LIABILITY-AND-EQUITY> 12,543,000<F1>
<SALES> 0
<TOTAL-REVENUES> 429,000
<CGS> 0
<TOTAL-COSTS> 352,000
<OTHER-EXPENSES> 141,000<F2>
<LOSS-PROVISION> 63,000
<INTEREST-EXPENSE> 32,000
<INCOME-PRETAX> (64,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (64,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (64,000)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)<F3>
<FN>
<F1>Includes $5,486,000 of Minority Interest in Joint Venture.
<F2>Represents Minority Interest Portion of Current Income/Loss.
<F3>No value difference between EPS-Primary & EPS-Diluted.
</FN>
</TABLE>
