<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1995
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
From the transition period from to
------------------ ------------------
Commission file number 0-9097
The Peregrine Real Estate Trust
------------------------------------------------------
(Exact name of registrant as specified in its charter)
California 94-2255677
- --------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1300 Ethan Way, Suite 200, Sacramento, CA
-----------------------------------------
(Address of principal executive offices)
95825
----------
(Zip Code)
(916) 929-8244
----------------------------------------------------
(Registrant's telephone number, including area code)
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
--------- ---------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--------- ---------
<PAGE> 2
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at September 30, 1995
- ------------------------------- ---------------------------------
Shares of Beneficial Interest 4,884,000
Par value one dollar per share
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements. Item 2. Management's Discussion and
Provide the Information required by Rule Analysis of Financial Condition
of Regulation S-X (17 CFR Part 210). and Results of Operations.
Furnish the information required
by Item 303 Regulation S-K
(Section 229.303 of this chapter).
<PAGE> 3
- ------------------------------------------------------------------------------
THE PEREGRINE REAL ESTATE TRUST
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994 1
Consolidated Statements of Operations -
For the Three Months and Nine Months Ended
September 30, 1995 and 1994 2
Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1995
and 1994 3
Notes to Consolidated Financial Statements 4 - 11
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 16
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 17
Item 2: Changes in Securities 17
Item 3: Defaults Upon Senior Securities 17
Item 4: Submission of Matters to a Vote of Security Holders 17
Item 5: Other Information 17
Item 6: Exhibits and Reports on Form 8-K 17
</TABLE>
<PAGE> 4
PART I: FINANCIAL INFORMATION
THE PEREGRINE REAL ESTATE TRUST
AND AFFILIATES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
(UNAUDITED) (AUDITED)
------------- -------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Rental properties, less accumulated depreciation of $5,309,000 and
$2,812,000 at September 30, 1995 and December 31, 1994, respectively,
and valuation allowance of $5,863,000
at September 30, 1995 and December 31, 1994 $ 104,454,000 $ 111,767,000
Partnership interests 4,000,000 4,000,000
Notes receivable, net of valuation allowance and deferred gains
of $7,116,000 and $7,182,000 at September 30, 1995 and
December 31, 1994, respectively 17,789,000 17,049,000
------------- -------------
126,243,000 132,816,000
Cash 4,470,000 5,366,000
Restricted cash 476,000 317,000
Rents and accrued interest receivable, net of valuation allowance of $1,019,000
and $285,000 at September 30, 1995 and December 31, 1994, respectively 1,631,000 1,323,000
Other assets, net of valuation allowance of $310,000 at September 30, 1995
and December 31, 1994 3,039,000 2,434,000
------------- -------------
Total assets $ 135,859,000 $ 142,256,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Long-term notes payable, collateralized by
deeds of trust on rental properties $ 45,103,000 $ 48,277,000
Notes payable to Senior Lender Group 42,928,000 40,869,000
Line of credit 4,462,000 4,469,000
Accounts payable and accrued expenses 7,825,000 9,808,000
------------- -------------
100,318,000 103,423,000
------------- -------------
Minority interests 6,617,000 6,525,000
------------- -------------
Redeemable convertible preferred stock: 25,000,000 shares authorized;
12,411,000 and 11,516,000 shares issued and outstanding at September 30,
1995 and December 31, 1994, respectively; net of unaccreted discount of
$2,095,000 and $2,169,000 at September 30, 1995 and December 31, 1994,
respectively; liquidation preference of $24,822,000 and $23,032,000 at
September 30, 1995 and December 31, 1994, respectively 22,727,000 20,863,000
Shares of beneficial interest: 50,000,000 shares authorized; 4,884,000
shares outstanding 13,339,000 13,339,000
Accumulated deficit (7,142,000) (1,894,000)
Commitments and contingencies
------------- -------------
Total liabilities and shareholders' equity $ 135,859,000 $ 142,256,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 5
THE PEREGRINE REAL ESTATE TRUST
AND AFFILIATES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
--------------- --------------- --------------- ---------------
( Post- ( Pre- ( Post- ( Pre-
Reorganization) Reorganization) Reorganization) Reorganization)
<S> <C> <C> <C> <C>
REVENUES:
Rent $ 2,934,000 $ 3,482,000 $ 9,685,000 $ 10,949,000
Interest 462,000 878,000 1,315,000 1,842,000
Hotel 3,222,000 3,392,000 9,740,000 10,798,000
------------ ------------- ------------ ------------
6,618,000 7,752,000 20,740,000 23,589,000
------------ ------------- ------------ ------------
EXPENSES:
Operating expenses 992,000 3,921,000 3,480,000 7,100,000
Hotel operating expenses 2,822,000 3,503,000 8,072,000 10,162,000
Property management 177,000 94,000 443,000 344,000
Depreciation and amortization 951,000 1,246,000 2,786,000 3,604,000
Interest 2,149,000 3,269,000 6,381,000 9,713,000
General and administrative 1,058,000 866,000 3,016,000 2,594,000
------------ ------------- ------------ ------------
8,149,000 12,899,000 24,178,000 33,517,000
------------ ------------- ------------ ------------
(Loss) before reorganization items, gain
(loss) on foreclosure or sale of investments,
valuation losses, extraordinary item
and minority interest (1,531,000) (5,147,000) (3,438,000) (9,928,000)
Reorganization items -- (4,219,000) -- (7,222,000)
------------ ------------- ------------ ------------
(Loss) before gain (loss) on foreclosure
or sale of investments, valuation losses,
extraordinary item and minority interest (1,531,000) (9,366,000) (3,438,000) (17,150,000)
Gain (loss) on foreclosure or sale of investments -- 728,000 (506,000) 688,000
------------ ------------- ------------ ------------
(Loss) before valuation losses, extra-
ordinary item and minority interest (1,531,000) (8,638,000) (3,944,000) (16,462,000)
Valuation losses -- (2,725,000) -- (2,725,000)
------------ ------------- ------------ ------------
(Loss) before extraordinary item and
minority interest (1,531,000) (11,363,000) (3,944,000) (19,187,000)
Extraordinary item 258,000 -- 652,000 --
------------ ------------- ------------ ------------
(Loss) before minority interest (1,273,000) (11,363,000) (3,292,000) (19,187,000)
Minority interest in net income (23,000) (81,000) (92,000) (7,000)
------------ ------------- ------------ ------------
Net (loss) $ (1,296,000) $ (11,444,000) $ (3,384,000) $(19,194,000)
------------ ------------- ------------ ------------
(Loss) per share before extraordinary item $ (0.32) $ (0.46) $ (0.82) $ (0.76)
------------ ------------- ------------ ------------
Income per share of extraordinary item $ 0.05 $ -- $ 0.13 $ --
------------ ------------- ------------ ------------
Net (loss) per share of beneficial interest $ (0.27) $ (0.46) $ (0.69) $ (0.76)
------------ ------------- ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 6
THE PEREGRINE REAL ESTATE TRUST
AND AFFILIATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1995 1994
--------------------- --------------------
(Post-Reorganization) (Pre-Reorganization)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (3,384,000) $ (19,194,000)
------------ -------------
Adjustments to reconcile net (loss) to net cash
used in operating activities:
Depreciation and amortization 2,786,000 3,604,000
Accretion of discount -- (195,000)
Loss (gain) on foreclosure or sale of investments 506,000 (688,000)
Extinguishment of debt (652,000) --
Minority interest in net income 92,000 7,000
Valuation losses -- 2,725,000
Changes in other assets and liabilities
(Increase) in rents and accrued interest receivable (323,000) (703,000)
(Increase) decrease in other assets (1,136,000) 1,728,000
Increase in accounts payable and accrued expenses 1,922,000 11,643,000
------------ -------------
Total adjustments to net loss 3,195,000 18,121,000
------------ -------------
Net cash used in operating activities (189,000) (1,073,000)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 185,000 441,000
Improvements to investments (1,217,000) (1,078,000)
Principal collections on notes receivable 1,493,000 2,279,000
------------ -------------
Net cash provided by investing activities 461,000 1,642,000
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term notes payable (1,002,000) (133,000)
Distributions paid to minority shareholders -- (195,000)
Payments on line of credit, net (7,000) --
Increase in restricted cash (159,000) --
------------ -------------
Net cash used in financing activities (1,168,000) (328,000)
------------ -------------
Net (decrease) increase in cash (896,000) 241,000
Cash, beginning of period 5,366,000 5,828,000
------------ -------------
Cash, end of period $ 4,470,000 $ 6,069,000
------------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 7
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization, Plan of Reorganization and Basis of Presentation:
Organization
The Peregrine Real Estate Trust (Trust) was organized under the laws of
the State of California pursuant to a Declaration of Trust dated July
31, 1973 and reorganized under a Restated Declaration of Trust dated
October 7, 1994, which gave effect to the reorganization of the Trust
under Chapter 11 of the United States Bankruptcy Code.
Plan of Reorganization Under Chapter 11 Proceeding
On August 2, 1993, the Trust filed a petition for reorganization under
Chapter 11 of the United States Bankruptcy Code, which case was heard
in the United States Bankruptcy Court for the Eastern District of
California, Sacramento Division, as In re Commonwealth Equity Trust
Case No. 93-26727-C-11.
On June 9, 1994, the Trust, the Senior Lender Group (previously
referred to as the PacMutual Group), the Equity Holders Committee and
the Creditors Committee (collectively, Proponents) filed with the Court
the Third Amended Plan of Reorganization. The Third Amended Plan of
Reorganization as modified (Plan) was confirmed in all respects on
August 8, 1994.
The Effective Date of the Plan (the date on which the Trust emerged
from bankruptcy) was October 7, 1994. The Trust is under the
jurisdiction of the United States Bankruptcy Court until entry of a
final decree.
The Plan provided for inter alia: (a) the restructuring of virtually
all of the Trust's secured and unsecured debt; and (b) the reduction in
the number of Shares of Beneficial Interest held by current
shareholders from approximately 25,100,000 (old) shares to 2,334,000
(new) shares (effectively a reverse stock split); and the issuance of
2,550,000 new Shares of Beneficial Interest, as well as a new class of
Redeemable Convertible Preferred Stock, of the Trust to the Senior
Lender Group. The authorized number of new Shares of Beneficial
Interest is 50,000,000. From the Effective Date, the Senior Lender
Group owns a majority of the new Shares of Beneficial Interest and all
of the new Redeemable Convertible Preferred Stock. The Senior Lender
Group also received Restructured Secured Notes in the aggregate
original principal amount of $40,000,000.
4
<PAGE> 8
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization, Plan of Reorganization and Basis of Presentation,
continued:
The Plan provides for the reservation of 150,000 new Shares of
Beneficial Interest for options for trustees who are neither employees
nor management of the Trust. Eighty thousand of these shares have been
reserved for the current independent Trustees. At September 30, 1995,
26,668 shares were under option pursuant to the Plan, all of which were
exercisable.
The Plan also provides that the Trust, at the discretion of the Board
of Trustees, may adopt a stock option plan under which management may
be granted options exercisable into a maximum of five percent of the
Shares of Beneficial Interest, on a fully diluted basis.
The Plan also required that the Trust obtain a $10,000,000 working
capital line of credit (Credit Facility) to which the Senior Lender
Group agreed to subordinate. The Credit Facility, which is
collateralized by certain of the Trust's real property, was obtained
prior to the Effective Date.
Capital Structure
The Trust's obligation of approximately $80,000,000 to the Senior
Lender Group was satisfied in the Plan by the issuance to the Senior
Lender Group of the following securities:
(a) Restructured Notes Payable in the amount of $40,000,000 which bear
interest at 8.5% per annum and which are due on October 1, 2000.
Interest is payable in kind through September 30, 1996, by means of
Interest Deferral Notes issued quarterly; thereafter, interest is
payable monthly in cash.
Interest Deferral Notes accrue interest at 8.5% per annum, from the
date of issuance. Interest payments, both on principal and the interest
accrued through September 30, 1996, shall be payable monthly in cash
commencing on November 1, 1996.
Restructured Notes Payable and Interest Deferral Notes (collectively
Notes) are collateralized generally by all interests of the Trust in
real and personal property and are subordinated only to certain liens
which are specified in the Plan. The Notes contain certain covenants
and restrictions and provide for the prepayment of principal in the
amount of 80% of the net proceeds from the sale of the collateral for
the Notes and from other specified sources.
5
<PAGE> 9
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization, Plan of Reorganization and Basis of Presentation,
continued:
(b) Redeemable Convertible Preferred Stock in the face amount of
$22,500,000 which carries a dividend of 10% per annum. Dividends are
payable in kind through October 1, 1998, by means of additional shares
of Redeemable Convertible Preferred Stock issued quarterly; thereafter,
dividends are payable quarterly in cash. The Redeemable Convertible
Preferred Stock automatically converts into Shares of Beneficial
Interest pursuant to an established formula if any dividend payment is
not made in full when due. If all dividends were paid in kind through
October 1, 1998, no other Shares of Beneficial Interest were issued and
the Redeemable Convertible Preferred Stock were converted to Shares of
Beneficial Interest on October 1, 1998, the Senior Lender Group would,
on account of that conversion, acquire 77% of the total Shares of
Beneficial Interest outstanding after the conversion bringing their
total holdings to 89%.
The Redeemable Convertible Preferred Stock is redeemable in cash (total
redemption amount of $24,822,000 and $23,032,000 at September 30, 1995
and December 31, 1994, respectively) on October 1, 2000, but in certain
circumstances, including the sale of all or substantially all the
assets of Peregrine, may be redeemed earlier.
The Redeemable Convertible Preferred Stock has been recorded at a
discount to its face amount, which face amounts are $24,822,000 and
$23,032,000 at September 30, 1995 and December 31, 1994, respectively,
based on an imputed rate of return of 12%.
(c) Shares of Beneficial Interest equal to approximately 52%
of the total outstanding Shares of Beneficial Interest.
Basis of Presentation
The accompanying financial statements are unaudited; however, they have
been prepared in accordance with generally accepted accounting
principles for interim financial information and in conjunction with
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the disclosures required by
generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting
solely of normal recurring matters) necessary for a fair presentation
of the financial statements for these interim periods have been
included. The results for the interim period ended September 30, 1995
are not necessarily indicative of the results to be obtained for the
full fiscal year and are not comparable to the results for the interim
period ended September 30, 1994 due to the implementation of fresh
start accounting, as discussed below. These financial statements should
be read in
6
<PAGE> 10
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization, Plan of Reorganization and Basis of Presentation,
continued:
conjunction with the December 31, 1994 audited financial statements and
notes thereto, included in The Peregrine Real Estate Trust Transition
Report on Form 10-K.
The accompanying unaudited consolidated financial statements of The
Peregrine Real Estate Trust include the accounts of the Trust and its
majority-owned subsidiary, California Real Estate Investment Trust
(CalREIT), a real estate investment trust in which the Trust owns a 76%
interest.
Fresh Start Accounting
In accounting for the effects of the reorganization, the Trust
implemented Statement of Position 90-7 (SOP 90-7), "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code." Fresh start
accounting, as defined by SOP 90-7, is applicable because
pre-reorganization shareholders received less than 50% of the Trust's
new Shares of Beneficial Interest and the reorganization value of the
assets of the reorganized Trust was less than the total of all
post-petition liabilities and allowed claims.
Under the principles of fresh start accounting, all of the Trust's
assets and liabilities were restated to reflect their reorganization
value which approximated fair value at the date of the reorganization,
October 7, 1994.
As a result of the implementation of fresh start accounting, the
financial statements of the Trust after consummation of the Plan are
not comparable to the Trust's financial statements for prior periods.
The reorganization value of the Trust's assets is primarily the
estimated fair value of the Trust's property and interest in CalREIT.
The aggregate property value was reached through the use of an eleven
year cash flow analysis discounted at rates generally ranging from 12%
to 15% and assuming a ten year holding period. The discounted cash flow
analysis also includes an estimate of terminal value, which was
determined using the discounted value of estimated net operating income
of each of the respective properties beginning in the year following
the holding period. This analysis relies on estimates of future
property performance and the various market factors including the
supply, demand and price of competing product. Estimates were also made
as to property lease-up, required capital expenditures and similar
matters. All of these estimates may vary from the actual future
occurrences.
7
<PAGE> 11
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization, Plan of Reorganization and Basis of Presentation,
continued:
The interest in CalREIT was valued based on an income capitalization
approach, without any control premium being attributed to the Trust's
majority ownership position in CalREIT. The income capitalization
approach was also used to value the assets underlying the notes
receivable to determine the value of each note.
Reclassifications
Certain reclassifications have been made in the presentation of the
1994 financial statements to conform to the 1995 presentation.
2. Income Taxes:
In 1977, the Trust elected to be and was taxed as a real estate
investment trust (REIT) through the year ended September 30, 1992. A
REIT is not taxed on that portion of its taxable income, which is
distributed to shareholders, provided that at least 95% of its real
estate investment trust taxable income is distributed and subject to
certain other requirements.
During the year ended September 30, 1993, the Trust did not qualify to
be taxed as a REIT. The termination of its REIT status was effective as
of October 1, 1992. The Trust may not be eligible to re-elect to be
taxed as a REIT prior to its fifth taxable year ended after September
30, 1993.
At December 31, 1994, the Trust had tax net operating loss
carryforwards (NOL) which may be applied against future taxable income
of $70,866,000 (Federal) and $44,186,000 (California). Pursuant to the
Plan, debt in the amount of $14,395,000 was forgiven. In addition, the
Plan resulted in an ownership change under the Internal Revenue Code.
Because of the forgiveness of debt and the ownership change arising
under the Plan, the Federal and California NOL's to be applied against
future taxable income will be reduced to $56,200,000 and $21,200,000,
respectively.
As required by SOP 90-7, any future benefit realized from NOL's which
arose before the Effective Date of the Plan will be reported as a
direct addition to paid-in capital.
The Trust's alternative minimum tax operating loss carryforwards are
substantially the same as its NOL at December 31, 1994.
8
<PAGE> 12
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. Related-Party Transactions:
The Trust and CalREIT are both self-administered. However, they share
certain costs, including personnel costs, for which CalREIT reimburses
the Trust pursuant to a cost allocation agreement based on each trust's
respective asset values (real property and notes receivable) that is
negotiated annually. During the nine months ended September 30, 1995,
reimbursable costs charged to CalREIT by the Trust approximated
$319,000. This amount was offset against $202,000 (net of valuation
allowance of $141,000) which was due to CalREIT at December 31, 1994.
At September 30, 1995, the Trust had $32,000 due from CalREIT.
4. Cash Flow Information:
Cash paid for interest during the periods reported was as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest $ 1,334,000 $ 890,000 $ 3,244,000 $ 4,171,000
========== ======= ========== =========
</TABLE>
5. Per Share Data:
Per share data for the nine months ended September 30, 1995 and
September 30, 1994 is based on the weighted average number of shares of
beneficial interest, 4,884,000 and 25,093,000, respectively,
outstanding during each period.
9
<PAGE> 13
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
6. Historical Funds from Operations and Funds Available for Distribution:
Equity REIT analysts generally consider Funds From Operations (FFO) an
appropriate measure of performance in comparing the results of
operations of REITs. FFO is defined by the National Association of Real
Estate Investment Trusts as net income computed in accordance with
generally accepted accounting principles before gains and losses on
sales of property and from debt restructuring plus depreciation and
amortization. Funds Available for Distribution (FAD) is defined as FFO
less capital expenditures funded by operations and loan amortization.
The Trust believes that in order to facilitate a clear understanding of
the historical operating results of the Trust, FFO and FAD should be
examined in conjunction with net income (loss) as presented in this
report. FFO and FAD should not be considered as an alternative to net
income (loss) as an indication of the Trust's performance or to cash
flow as a measure of liquidity.
Funds From Operations and Funds Available for Distribution for the
three months and nine months ended September 30, 1995 and 1994 are
summarized as follows:
Calculation of Funds From Operations and Funds Available for Distribution
(Dollars in thousands)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
--------------------- -------------------- --------------------- --------------------
(Post-Reorganization) (Pre-Reorganization) (Post-Reorganization) (Pre-Reorganization)
<S> <C> <C> <C> <C>
(Loss) before reorganization
items, gain (loss) on
foreclosure or sale of
investments, extraordinary
item and minority interest $(1,531) $(5,147) $(3,438) $(9,928)
Depreciation and amortization 951 1,246 2,786 3,604
------- ------- ------- -------
Funds used by operations (580) (3,901) (652) (6,324)
Capital improvements (399) (516) (1,217) (1,078)
Loan principal payments (21) 35 (1,002)(1) (133)
------- ------- ------- -------
Funds available for
distribution $ -- $ -- $ -- $ --
======= ======= ======= =======
</TABLE>
(1) This amount includes only regular principal payments and exclude
the Fulton Square loan payoff of $340,000 which was made in May
1995 from available cash reserves.
10
<PAGE> 14
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
7. (Loss) Gain on Foreclosure or Sale of Investments:
Components of the (loss) gain on foreclosure or sale of investments for
the three and nine months ended September 30, 1995 were as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
Component September 30, 1995 September 30, 1995
--------- ------------------ ------------------
<S> <C> <C>
Sale of Milpitas property $ -- $(508,000)
Foreclosure of 425 University -- (73,000)
Sale of Northridge -- 81,000
Sale of Florin-Perkins lots -- (72,000)
Income recognized from principal
collection on JCL note -- 66,000
----- ---------
$ -- $(506,000)
===== =========
</TABLE>
8. Extraordinary item:
Extraordinary item for three months and nine months ended September 30,
1995 of $258,000 and $652,000, respectively, resulted from
extinguishment of certain debt payable to outside parties resulting
from Chapter 11 proceedings.
11
<PAGE> 15
- ------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- ------------------------------------------------------------------------------
Overview
The following discussion should be read in conjunction with the consolidated
financial statements and notes appearing in the Form 10-Q. Historical results
set forth are not necessarily indicative of the future financial position and
results of operations of the Trust.
During the quarter and nine months ended September 30, 1995, management of the
Trust concentrated on improving property operations while simultaneously
exploring alternative operating strategies for the future. In the near term, the
immediate priority has been to meet the Trust's present and medium term debt
obligations. To accomplish this objective, emphasis has been placed on
maximizing the income stream from the properties by stabilizing the rent rolls
and the disposition of certain assets.
Management of the Trust also continues to explore alternative longer term
strategies to maximize shareholder value, including analysis of current and
expected property valuations, regional and industry market trends and potential
long-term growth opportunities in single and multi-tenant buildings, retail
centers and hotel properties. In addition, during this quarter and nine months
ended September 30, 1995, the Trust has continued to analyze operating,
disposition and other strategies relating to its 76% ownership interest in
California Real Estate Investment Trust (CalREIT). This assessment of long term
strategies, which is expected to continue through the fourth quarter of 1995,
includes alternatives relating to the Trust's approximately $42,900,000 in
long-term secured debt (the Senior Debt) to the Senior Lender Group (a lender
group comprised of Prudential Insurance Company of America, the Pacific Mutual
Life Insurance Company, ORIX USA Corp. and TCW, for which Prudential acts as
agent), as well as approximately $45,000,000 in first mortgage debt which
requires servicing. The note to the Senior Lender Group will accrue interest in
kind through September 1996 and and will require cash interest payments of
approximately $4,000,000 per year commencing October 1996. Approximately
$24,800,000 at face value in Redeemable Convertible Preferred Stock also held by
the Senior Lender Group will accrue dividends in kind through September 1998 and
will require cash dividend payments of approximately $3,300,000 per year
commencing in October 1998.
Results of Operations
Net Loss for the three months and nine months ended September 30, 1995 was
($1,296,000) and ($3,384,000), respectively.
12
<PAGE> 16
Total Revenues for the three months and nine months ended September 30, 1995
were $6,618,000 and $20,740,000, respectively: $2,934,000 and $9,635,000, or
44% and 47%, respectively, of total revenues were earned from rent; $3,222,000
and $9,740,000, or 49% and 47%, respectively, were hotel revenue.
Total Expenses for the three months and nine months ended September 30, 1995
were $8,149,000 and $24,178,000, respectively: $2,822,000 and $8,072,000, or
35% and 33%, respectively, of the total were attributable to hotel operating
expenses; $2,149,000 and $6,381,000, or 26%, were attributable to interest
expense; and $1,169,000 and $3,9230,00 or 14% and 16%, respectively, were
attributable to property operating and property management expenses. The
remaining expenses were depreciation and amortization and general and
administrative.
The Trust believes that to facilitate a clear understanding of the operating
results of the Trust, Funds From (Used By) Operations should be examined in
conjunction with net income (loss). Funds From Operations is defined by the
National Association of Real Estate Investment Trusts as net income computed
in accordance with generally accepted accounting principles before gains and
losses on sales of property and from debt restructuring plus depreciation and
amortization. Funds From Operations should not be considered as a substitute
for net income, as an indication of the Trust's performance or as a substitute
for cash flow as a measure of its liquidity. Funds Used By Operations for the
three months and nine months ended September 30, 1995 were ($580,000) and
($652,000), respectively.
Because the three months and nine months ended September 30, 1995 are not
comparable to the three months and nine months ended September 30, 1994 due to
fresh start accounting, no comparison has been made in the results of
operations between the periods.
At December 31, 1994 and September 30, 1995, overall weighted occupancy levels
by class of property were as follows:
<TABLE>
<CAPTION>
Overall Occupancy
Property Type 12/31/94 9/30/95
- ------------- -------- -------
<S> <C> <C>
Shopping Centers 88% 85%
Office Buildings 80% 59%
Industrial Buildings 38% 71%
Medical Buildings 63% 42%
Mini Storage Facilities 90% 93%
CalREIT Commercial Properties 85% 89%
Hotels (including CalREIT hotel) 54% 57%
</TABLE>
The decline in occupancy at the Trust's office properties is directly
attributable to the vacating of the 90,000 square foot System Integrators
property. Without consideration of this property, the office portfolio remained
80% occupied as of September 30, 1995. The overall weighted average for the
Trust's entire commercial property portfolio as of December 31, 1994 was 78%
compared
13
<PAGE> 17
to 72% at the end of the third quarter 1995 again the result of the System
Integrators property being vacated. Without consideration of the System
Integrators property, the overall weighted average of the Trust's commercial
property portfolio remained at 78% at the end of the third quarter 1995. The
weighted average occupancy is calculated by multiplying the occupancy by its
square footage and dividing by the total square footage in the portfolio.
The Trust expects in the coming months a decline in occupancy levels as a result
of increasingly soft market conditions in the Sacramento metropolitan area where
15 of the Trust's 18 commercial properties are located. During the past four
years, the California economy has experienced a recession and while recovery
appears underway in some markets, Sacramento's economic recovery lags behind.
The area continues to experience the adverse impact of on-going federal and
reductions in spending and employment as well as ongoing defense industry
cutbacks. The announced closing of McClellan Air Force Base in particular has
had a negative effect on the Sacramento economy as it reacts to one of the
area's largest employers shutting down.
During this same period, the Trust's portfolio of commercial properties as a
whole has experienced modest increases in the portfolio's average rental rates
per square foot despite the prevailing soft economic environment. The Trust
believes that this is primarily the result of improving the leasability of
properties through an accelerated improvement schedule plus the implementation
of an aggressive program to collect delinquent rents and evict non-paying
tenants while simultaneously re-leasing space to more stable tenants.
Systems Integrators, Inc. leased and occupied 100% of two Sacramento office
buildings which totaled 90,000 square feet under leases that were scheduled to
expire in April and May 1998. The tenant, having come under the protection of
Chapter 11 this year, rejected its leases with the Trust for the entire 90,000
square feet, vacated the space and ceased paying rent effective May 31, 1995.
Under the original leases, the space produced gross rents of approximately
$75,000 per month. Property operating expenses of the Trust approximated $3,300
per month. Accordingly, the Trust and the Lender agreed to modify the notes to
provide that one-half of the interest accruing under them from June 1, 1995
through June 30, 1996 shall be deferred until July 1, 1996, at which time it
will be added to the principal. The deferred interest will be non-recourse to
the Trust. Although the Trust has been attempting to re-lease this space for
some time, no assurance can be given as to when new leases will be signed for
the subject space. The Trust does, however, hold a contract for the sale of one
of the buildings, a transaction expected to close in the fourth quarter of this
year.
Indications are that a major tenant in the Regency Plaza Shopping Center in the
Sacramento metropolitan area is experiencing operating difficulties and may
cease doing business in the next 60 to 120 days. The tenant occupies 29,650
square feet of space or 21% of the net leasable space at the center and
generates approximately $216,000, or 16% of the center's annual rental revenue.
The Trust is attempting to find a replacement tenant for the space in the event
that it becomes vacant.
14
<PAGE> 18
Throughout the third quarter, substantial attention has been directed at the
Trust's four directly-owned hotel properties. Capital improvement requirements
have been identified and the budgeting process for the hotels is underway. It is
estimated that redeveloping the four hotels to bring them in line with required
Holiday Inn standards and to retain the Holiday Inn flags will cost an estimated
$6,500,000 to $7,000,000. The search for financing to complete the required
improvements has commenced. Holiday Inn has signed a license agreement with the
Trust for the Park Terrace Inn in Redding, California under the condition that
major improvements are completed before July 1, 1996.
During the quarter and nine months ended September 30, 1995, the Trust sold the
Woodland Medical Building in Milpitas, California and a parcel of land in
Southern California. The net loss recognized from the sale of these properties
was ($427,000).
Liquidity and Capital Resources
The Trust's unrestricted cash totaled $4,470,000 at September 30, 1995, down
from $5,366,000 at December 31, 1994.
During the remainder of 1995, the Trust anticipates that is principal sources of
funds will be provided by operating income and by a revolving line of credit in
the maximum amount of $10,000,000 (Line of Credit), which bears interest at
2.25% over prime. It is collateralized by a first lien on certain of the Trust's
properties. At September 30, 1995, $4,462,000 was outstanding under the Line of
Credit. Pursuant to the Senior Debt agreements, with respect to the Restructured
Notes Payable (notes in the original principal amount of $40,000,000 due the
Senior Lender Group which bear interest at 8.5% per annum and which are due on
October 1, 2000; and which are collateralized generally by all interests of the
Trust in real and personal property and subordinated only to certain liens which
are specified in the Plan) and the Line of Credit, the Trust is generally not
permitted to incur or assume additional indebtedness other than trade payables
and certain lease expenses without the consent of the Senior Lender Group and
the Line of Credit lenders unless specified conditions are met.
The Trust anticipates it will be able to meet its debt service obligations
through the next twelve months. However, the Trust has not yet identified
sources for the $6,500,000 to $7,000,000 required capital improvements at its
hotel properties. Without capital improvements, the hotel properties will not be
competitive and will lose their Holiday Inn licenses. The resulting decline in
occupancy and room rental rates would have a material adverse impact on the
Trust's overall financial performance. The Trust is exploring financing
alternatives with banks, savings and loan institutions and other traditional
lenders. Through GIAC, Holiday Inn's own corporate financing arm, the Trust has
applied for a portion of the redevelopment funds it requires. However, it is
likely the Trust will be allocated only a fraction of the requested funds. The
Trust has also approached several mortgage bankers to explore alternative
sources of funding. The Trust may also apply for an increase in its Line of
Credit, although the amount likely to be approved would fund only a portion of
improvements required at the hotels. The Trust has also explored joint-venturing
the redevelopment of its hotels with prospective joint-venture partners
including the
15
<PAGE> 19
hotel management companies now managing the hotels as well as with CalREIT.
Approval of the Senior Lender Group is expected to be a condition to obtain
financing for the redevelopment of the hotels and there is no assurance such
approval, if requested, will be granted.
The Trust's cash outflows for the nine months ended September 30, 1995 totaled
($896,000), comprising cash used in operations of ($189,000), cash provided by
investing activities of $461,000 and cash used in financing activities of
($1,168,000). At September 30, 1995, the Trust had included $2,000,000 in
accrued expenses now pending before the bankruptcy court relating to the
settlement of fee applications from professional firms. The total amount sought
from the Trust under those applications is $3.5 million. It is unknown at this
time when the fee disputes will be resolved.
16
<PAGE> 20
PART II. OTHER INFORMATION
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
None
17
<PAGE> 21
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEREGRINE REAL ESTATE TRUST
November 14, 1995 ------------------------------
Date Frank A. Morrow
President and Chief Executive Officer
November 14, 1995 ------------------------------
Date Arnold E. Brown
Chief Financial Officer
18
<PAGE> 22
EXHIBIT INDEX
Exhibit No. Description
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BHY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<EXCHANGE-RATE> 1
<CASH> 4,946
<SECURITIES> 0
<RECEIVABLES> 30,904
<ALLOWANCES> (14,308)
<INVENTORY> 0
<CURRENT-ASSETS> 21,542
<PP&E> 119,626
<DEPRECIATION> (5,309)
<TOTAL-ASSETS> 130,859
<CURRENT-LIABILITIES> 14,442
<BONDS> 92,493
<COMMON> 13,339
22,727
0
<OTHER-SE> (7,142)
<TOTAL-LIABILITY-AND-EQUITY> 135,859
<SALES> 0
<TOTAL-REVENUES> 6595
<CGS> 0
<TOTAL-COSTS> 3991
<OTHER-EXPENSES> 2,009
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,149
<INCOME-PRETAX> (11,554)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 258
<CHANGES> 0
<NET-INCOME> (1,296)
<EPS-PRIMARY> (0.27)
<EPS-DILUTED> (0.27)
</TABLE>
