<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 June 30, 1996
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 95825
(Address of principal executive offices) (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
------ ------
<PAGE> 2
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
----- -----
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.
<TABLE>
<CAPTION>
Class Outstanding at June 30, 1996
<S> <C>
Shares of Beneficial Interest 4,881,055
Par value one dollar per share
</TABLE>
<PAGE> 3
- ------------------------------------------------------------------------------
THE PEREGRINE REAL ESTATE TRUST
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 1
Consolidated Statements of Operations -
For the Three Months and Six Months Ended
June 30, 1996 and 1995 2-3
Consolidated Statements of Cash Flows -
For the Six Months Ended
June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5 - 17
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 18 - 24
PART II. OTHER INFORMATION
Item 1: Legal Proceedings 25
Item 2: Changes in Securities 25
Item 3: Defaults Upon Senior Securities 25
Item 4: Submission of Matters to a Vote of Security Holders 25
Item 5: Other Information 25
Item 6: Exhibits and Reports on Form 8-K 25
</TABLE>
<PAGE> 4
PART I: FINANCIAL INFORMATION
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
(UNAUDITED) (AUDITED)
------------- -------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Rental properties, net of accumulated depreciation of $1,211,000
and $6,001,000 at June 30, 1996 and December 31, 1995,
respectively, and valuation allowance of $12,963,000 at
December 31, 1995 $ 80,979,000 $ 94,500,000
Partnership interests 2,610,000 4,000,000
Notes receivable, net of deferred gains of $373,000 and
$1,237,000 at June 30, 1996 and December 31, 1995,
respectively, and valuation allowance of $8,229,000 at
December 31, 1995 5,646,000 14,627,000
Marketable securities available-for-sale 11,993,000 --
------------- -------------
101,228,000 113,127,000
Cash 4,917,000 5,079,000
Restricted cash 3,025,000 185,000
Rents and accrued interest receivable, net of allowance of $1,398,000 and
$1,040,000 at June 30, 1996 and December 31, 1995, respectively 1,227,000 1,354,000
Other assets, net of valuation allowance of $310,000 at December 31, 1995 2,269,000 2,048,000
------------- -------------
Total assets $ 112,666,000 $ 121,793,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Long-term notes payable, collateralized by deeds of trust on
rental properties $ 34,585,000 $ 42,703,000
Notes payable to Senior Lender Group 44,733,000 43,441,000
Line of credit 8,294,000 5,526,000
Accounts payable and accrued expenses 6,113,000 6,126,000
Other liabilities 565,000 547,000
------------- -------------
94,290,000 98,343,000
------------- -------------
Minority interest 5,912,000 5,858,000
------------- -------------
Redeemable convertible preferred stock: 25,000,000 shares authorized;
13,380,000 and 12,728,000 shares issued and outstanding at June
30, 1996 and December 31, 1995, respectively; net of unaccreted
discount of $1,982,000 and $2,063,000 at June 30, 1996 and
December 31, 1995, respectively; liquidation preference of
$26,760,000 and $25,457,000 at June 30, 1996 and December 31,
1995, respectively 24,778,000 23,394,000
------------- -------------
Shares of beneficial interest: 50,000,000 shares authorized; 4,881,000
shares outstanding 13,356,000 13,356,000
Accumulated deficit (25,670,000) (19,158,000)
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 112,666,000 $ 121,793,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 5
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Hotel $ 3,180,000 $ 3,461,000 $ 6,367,000 $ 6,518,000
Rent 2,896,000 3,315,000 5,850,000 6,631,000
Interest 345,000 433,000 724,000 853,000
------------ ------------ ------------ ------------
6,421,000 7,209,000 12,941,000 14,002,000
------------ ------------ ------------ ------------
EXPENSES:
Hotel operating expenses 2,593,000 2,773,000 5,217,000 5,386,000
Operating expenses 1,027,000 1,122,000 2,020,000 2,221,000
Property management 196,000 166,000 414,000 277,000
Depreciation and amortization 655,000 981,000 1,435,000 1,835,000
Interest 2,096,000 2,136,000 4,129,000 4,232,000
General and administrative 1,473,000 1,174,000 3,088,000 1,958,000
------------ ------------ ------------ ------------
8,040,000 8,352,000 16,303,000 15,909,000
------------ ------------ ------------ ------------
Loss before gain (loss) on foreclosure
or sale of investments, valuation losses,
extraordinary item and minority interest (1,619,000) (1,143,000) (3,362,000) (1,907,000)
Gain (loss) on foreclosure or sale of investments 233,000 (499,000) 532,000 (506,000)
------------ ------------ ------------ ------------
Loss before valuation losses,
extraordinary item and minority interest (1,386,000) (1,642,000) (2,830,000) (2,413,000)
Valuation losses (559,000) -- (2,244,000) --
------------ ------------ ------------ ------------
Loss before extraordinary item and
minority interest (1,945,000) (1,642,000) (5,074,000) (2,413,000)
Extraordinary item -- 326,000 -- 394,000
------------ ------------ ------------ ------------
Loss before minority interest (1,945,000) (1,316,000) (5,074,000) (2,019,000)
Minority interest 51,000 (11,000) (54,000) (69,000)
------------ ------------ ------------ ------------
Net loss $ (1,894,000) $ (1,327,000) $ (5,128,000) $ (2,088,000)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 6
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss per share of beneficial interest:
Net loss $(1,894,000) $(1,327,000) $(5,128,000) $(2,088,000)
Preferred stock dividends, net of discounts (616,000) (551,000) (1,216,000) (1,081,000)
Accretion of discounts on preferred stock (87,000) (69,000) (168,000) (135,000)
----------- ----------- ----------- -----------
Net loss attributable to shares of beneficial interest $(2,597,000) $(1,947,000) $(6,512,000) $(3,304,000)
=========== =========== =========== ===========
Loss per share of beneficial interest before
extraordinary item $ (0.53) $ (0.47) $ (1.33) $ (0.76)
Extraordinary item per share of beneficial interest 0.00 .07 0.00 .08
----------- ----------- ----------- -----------
Net loss per share attributable to shares
of beneficial interest $ (0.53) $ (0.40) $ (1.33) $ (0.68)
=========== =========== =========== ===========
Weighted average number of shares of beneficial
interest outstanding 4,881,000 4,884,000 4,881,000 4,884,000
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 7
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,128,000) $ (2,088,000)
------------ ------------
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 1,435,000 1,835,000
(Gain) loss on foreclosure or sale of investments (532,000) 506,000
Minority interest in net income 54,000 69,000
Extinguishment of debt -- (394,000)
Valuation losses 2,244,000 --
Changes in other assets and liabilities
Decrease (increase) in rents and accrued interest receivable 115,000 (309,000)
Increase in other assets (450,000) (692,000)
Increase in accounts payable and accrued expenses 2,504,000 1,320,000
Decrease in other liabilities 50,000 --
------------ ------------
Total adjustments to net loss 5,420,000 2,335,000
------------ ------------
Net cash provided by operating activities 292,000 247,000
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of investments 14,125,000 185,000
Purchase of marketable securities (11,993,000) --
Improvements to rental properties (1,477,000) (818,000)
Principal collections on notes receivable 31,000 1,480,000
------------ ------------
Net cash provided by investing activities 686,000 847,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term notes payable (53,000) (981,000)
Principal borrowings (payments) on line of credit, net 2,338,000 (465,000)
Principal payments on notes to Senior Lender Group (585,000) --
Increase in restricted cash (2,840,000) (157,000)
------------ ------------
Net cash used in financing activities (1,140,000) (1,603,000)
------------ ------------
Net decrease in cash (162,000) (509,000)
Cash, beginning of period 5,079,000 5,366,000
------------ ------------
Cash, end of period $ 4,917,000 $ 4,857,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 8
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. The proximate cause of the Trust's filing a
petition for reorganization was its falling out of compliance with a
restructuring agreement entered into on July 17, 1992 with a lender
group for which Pacific Mutual Life Insurance Company acted as agent.
CalREIT did not file for protection under Chapter 11.
On June 9, 1994, the Trust, the lender group including Prudential
Insurance Company of America, Pacific Mutual Life Insurance Company,
ORIX USA Corp. and Trust Company of the West for which Pacific Mutual
Life Insurance Company acted as agent (Senior Lender Group), the
Official Committee of Holders of Equity Interests (Equity Holders
Committee) and the Official Committee of Creditors Holding Unsecured
Claims (Creditors Committee) (collectively, Proponents) filed with the
Court the Third Amended Plan of Reorganization which was subsequently
modified by the First, Second, Third and Fourth Set of Plan
Modifications, filed on July 13, 1994, July 20, 1994, July 29, 1994 and
August 2, 1994, respectively. 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 which is expected to occur in 1996.
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:
The Plan provided for inter alia: (a) the restructuring of virtually
all of the Trust's secured and unsecured debt; (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 (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.
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.
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. At June 30,
1996, 53,336 shares were under option pursuant to the Plan, all of
which were exercisable.
The Plan also required that the Trust obtain a $10,000,000 working
capital line of credit (Credit Facility or Line of Credit) to which the
Senior Lender Group agreed to subordinate. The Line of Credit, which is
collateralized by certain of the Trust's real property, was obtained
prior to the Effective Date. In June 1996, in accordance with the
Agreement, the Line of Credit was reduced to a maximum $8,600,000 upon
the release of certain collateral.
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.
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:
Interest Deferral Notes accrue interest at 8.5% per annum, from the
date of issuance. Interest payments on the original principal notes and
on interest deferral notes issued since the Effective Date 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 limit the Trust's ability to incur additional
indebtedness 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. In addition, there are
covenants related to events or conditions which could have or result in
a material adverse effect as defined in the applicable agreement.
(b) Redeemable Convertible Preferred Stock in the original 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 approximately 89% of the outstanding shares.
The Redeemable Convertible Preferred Stock is redeemable in cash (total
redemption amount of $26,760,000 and $25,457,000 at June 30, 1996 and
December 31, 1995, respectively) on October 1, 2000, but in certain
circumstances, including the sale of all or substantially all the
assets of the Trust, may be redeemed earlier.
The Redeemable Convertible Preferred Stock has been recorded at a
discount to its face amount, which face amounts are $26,760,000 and
$25,457,000 at June 30, 1996 and December 31, 1995, 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.
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:
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 June 30, 1996 are
not necessarily indicative of the results to be obtained for the full
fiscal year. These financial statements should be read in conjunction
with the December 31, 1995 audited financial statements and notes
thereto, included in The Peregrine Real Estate Trust Annual Report on
Form 10-K and amendments filed on Forms 10-K/A.
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), 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 was 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.
8
<PAGE> 12
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization, Plan of Reorganization and Basis of Presentation,
continued:
As a result of the implementation of fresh start accounting, the
statements of operations of the Trust after the consummation of the
Plan are not comparable to the Trust's statements of operations for
prior periods.
The reorganization value of the Trust's assets was 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 included 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 relied 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 in the near term from the
actual future occurrences.
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.
Stock-Based Compensation
In 1995, Statement of Financial Accounting Standards No. 123 (SFAS
123), "Accounting for Stock-Based Compensation" was issued. This
statement requires either recognition or disclosure of a hypothetical
charge for stock options. SFAS 123 also establishes fair value as the
measurement basis for transactions in which an entity acquires goods or
services from nonemployees in exchange for equity instruments. This
statement is effective for transactions entered into after December 15,
1995. The Trust does not intend to record this hypothetical charge for
stock options, but will instead provide required disclosures beginning
with the Form 10-K for the year ending December 31, 1996.
9
<PAGE> 13
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. Organization, Plan of Reorganization and Basis of Presentation,
continued:
Reclassifications
Certain reclassifications have been made in the presentation of the
1995 financial statements to conform to the 1996 presentation.
2. Investments in Rental Properties and Notes Receivable:
At June 30, 1996, University Village Shopping Center, Timberlake
Medical Building, the System Integrators Office Building, and CalREIT's
two properties, with total carrying values of $19,989,000, were
classified as held for sale. At December 31, 1995, properties with
total carrying values of $30,749,000, were classified as held for sale.
At June 30, 1996 and December 31, 1995, all notes receivable owned by
CalREIT with carrying values of $3,770,000 and $10,502,000,
respectively, were classified as held for sale.
In 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of",
(SFAS 121) was issued. SFAS 121, requires that an impairment be
recognized to reduce the carrying amount of long-lived assets to their
estimated fair value whenever events or changes in circumstances
indicate that such carrying amount may not be recoverable. After an
impairment is recognized, the reduced carrying amount of the asset is
accounted for as its new cost. The Trust adopted the provisions of SFAS
121 during 1996. Generally, fair values are estimated using discounted
cash flow, direct capitalization, and market comparison analyses.
As of the end of the second quarter of 1996, the Trust reported total
valuation losses of $2,244,000. The total valuation losses are
attributable to a $559,000 impairment in the value of CalREIT's Fulton
Square Shopping Center in Sacramento, California, and a $295,000
impairment in the value of the Timberlake Medical Building in
Sacramento, California, both of which are a reflection of the
properties current physical conditions and changed market conditions.
Additionally, the Trust recorded a valuation loss of $1,390,000 on its
Placer Ranch partnership investment when a Put/Call Option was
exercised by the General Partner, and the Trust was obligated to sell
its interest.
10
<PAGE> 14
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. Investments in Marketable Securities:
At June 30, 1996, the Trust had $11,993,000 invested in U.S. Government
Agency mortgage-backed securities classified as "available-for-sale".
Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", (SFAS 115) issued
in May 1993, requires that at the date of acquisition and at each
reporting date, debt and equity securities be classified as
"held-to-maturity", "trading", or "available for sale". Investments in
debt securities in which the Trust has the positive intent and ability
to hold to maturity are required to be classified as
"held-to-maturity". "Held-to-maturity" securities are required to be
stated at cost and adjusted for amortization of premiums and discounts
to maturity in the statement of financial position. Investments in debt
and equity securities that are not classified as "held-to-maturity" and
equity securities that have readily determinable fair values are to be
classified as "trading" or "available-for-sale" and are measured at
fair value in the statement of financial position. Securities that are
bought and held principally for the purpose of selling them in the near
term are classified as "trading". Unrealized holding gains and losses
for "trading" securities are included in earnings. Investments that are
not classified as "held-to-maturity" or "trading" "securities are
classified as "available-for-sale". Unrealized holding gains and losses
for "available-for-sale" securities are excluded from earnings and
reported as a separate component of shareholders' equity until
realized.
In accordance with SFAS 115, the Trust determines the appropriate
classification at the time of purchase and reevaluates such designation
as of each balance sheet.
11
<PAGE> 15
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. Investments in Marketable Securities, continued:
At June 30, 1996, the Trust's "available-for-sale" securities consisted
of the following:
<TABLE>
<CAPTION>
(In thousands)
Unrealized Estimated
Cost Gains Losses Fair Value
---- ----- ------ ----------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation, interest at 7.585%,
due June 1, 2024 $ 1,079 $ -- $ -- $ 1,079
Federal National Mortgage
Association, interest at 5.155%,
due May 1, 2026 3,792 -- -- 3,792
Federal National Mortgage
Association, interest at 5.145%,
due June 1, 2026 7,122 -- -- 7,122
------- ------- ------- -------
$11,993 $ -- $ -- $11,993
======= ======= ======= =======
</TABLE>
The maturity dates above are not necessarily indicative of expected
maturities as principal is often prepaid on such instruments.
4. Restricted Cash:
At June 30, 1996, cash of $3,025,000 is restricted to be used for the
payment of bankruptcy related professional fees, payments to the Senior
Lender Group, and Phase I hotel capital improvements. At December 31,
1995, cash of $185,000, was restricted pending final settlement of
property taxes owed to the county relating to the sale of the Woodland
Medical Office Building in Milpitas, California.
12
<PAGE> 16
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
5. 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.
The Trust has adopted Statement of Financial Accounting Standards No.
109 (SFAS 109) "Accounting for Income Taxes". SFAS 109 requires the use
of the liability method of accounting for income taxes. Deferred taxes
are recorded based on the differences between financial statement and
income tax bases of assets and liabilities and available loss or credit
carryforwards. A "Valuation Allowance" is recorded against deferred tax
assets unless it is more likely than not that the asset will be
realized in the future.
At December 31, 1995, the Trust had tax net operating loss
carryforwards (NOL) which may be applied against future taxable income
of $72,796,000 (Federal) and $31,888,000 (California).
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, 1995.
At the time of the prior change in ownership, when the Trust emerged
from bankruptcy, it elected to be governed by tax provisions permitting
the unlimited future use of NOL carryforwards. Under these same tax
provisions, the amount of the NOL carryforward was reduced by
$12,963,000 at the time of this election. If another ownership change,
as defined by the Internal Revenue Code, occurs within two years after
the ownership change of October 7, 1994, all NOL carryforwards as of
the date of the second ownership change will be eliminated.
13
<PAGE> 17
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
6. 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
subject to negotiation annually. During the six month periods ended
June 30, 1996 and 1995, reimbursable costs charged to CalREIT by the
Trust approximated $130,000 and $222,000, respectively.
At June 30, 1996 and December 31, 1995, respectively, the Trust had
$28,000 and $45,000, due from CalREIT.
7. Statement of Cash Flows Supplemental Information:
In connection with the sale and foreclosure of properties and notes
receivable the Trust entered into various non-cash transactions as
follows:
<TABLE>
<CAPTION>
(In thousands)
For the Six Months Ended
June 30, June 30,
1996 1995
---- ----
<S> <C> <C>
Sales price less selling costs $ 19,220 $ 2,768
Notes receivable -- (2,240)
Notes payable assumed by buyer and
other liabilities applied to sales price (5,095) (343)
-------- ---------
Net cash received $ 14,125 $ 185
======== =========
</TABLE>
One property which collateralized notes payable of $3,089,000 was
foreclosed upon during the quarter ended March 31, 1996, resulting in
no gain or loss as the net book value of the property was equal to its
debt.
One property which collateralized notes payable of $2,764,000 was
foreclosed upon during the quarter ended March 31, 1995, resulting in a
loss of $73,000.
14
<PAGE> 18
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
7. Statement of Cash Flows Supplemental Information, continued:
Additionally, on March 31, and June 30, 1996, and March 31, and June
30, 1995, the Trust issued Interest Deferral Notes at 8.5% per annum in
the principal amount of $933,000 and $944,000, and $868,000 and
$884,000, respectively, as payment in kind for the interest then due on
the Restructured Notes Payable issued; and Redeemable Convertible
Preferred Stock in the face amount of $643,000 and $660,000, and
$576,000 and $597,000, respectively, as payment in kind for the
dividend then due on the outstanding Redeemable Convertible Preferred
Stock.
During the three month periods ended June 30, 1996 and 1995, the
outstanding balance on the Line of Credit was increased by $260,000 and
$177,000, respectively, for interest and expenses incurred. During the
six month periods ended June 30, 1996 and 1995, the outstanding balance
on the Line of Credit was increased by $429,000 and $315,000,
respectively, for interest and expenses incurred.
Cash paid for interest during the three month periods ended June 30,
1996 and 1995, was $860,000 and $976,000, respectively. Cash paid for
interest during the six month periods ended June 30, 1996 and 1995 was
$1,822,000 and $1,910,000, respectively.
8. Per Share Data:
Per share data for the three and six month periods ended June 30, 1996,
and June 30, 1995, were computed in conformity with the provisions of
Accounting Principles Board Opinion 15 (APB 15). Earnings per share
includes all dilutive beneficial interest equivalents, based on stock
options outstanding during the period (using the treasury stock
method). There were 26,668 and 53,336 stock options outstanding during
the three and six month periods ended June 30, 1995, and June 30, 1996,
respectively; however, stock options had an antidultive effect on
earnings per share and accordingly were excluded from consideration as
beneficial interest equivalents in all earnings per share computations.
The weighted average number of shares used in the computation was
4,884,000 during the three and six month periods ended June 30, 1995,
and the 4,881,000 during the three and six month periods ended June 30,
1996.
15
<PAGE> 19
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
9. Gain (Loss) on Foreclosure or Sale of Investments:
Components of the gain (loss) on foreclosure or sale of investments for
the three and six months ended June 30, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(In thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Component
Sale of Sierra Oaks $ (63) $ -- $ (63) $ --
Sale of Bekins (164) -- (164) --
Sale of Pavilions at Mesa Note 430 -- 430 --
Sale of Spacesaver Mini-Storage Note 30 -- 30 --
Sale of Redfield -- -- 299 --
Sale of Milpitas -- (508) -- (508)
Sale of Northridge land -- 81 -- 81
Sale of Florin Perkins lots -- (72) -- (72)
Foreclosure of 425 University -- -- -- (73)
Recognition of deferred gains -- -- -- 66
------- ------- ------- -------
$ 233 $ (499) $ 532 $ (506)
======= ======= ======= =======
</TABLE>
10. Extraordinary item:
Extraordinary item for three and six months periods ended June 30, 1995
of $326,000 and $394,000, respectively, resulted from extinguishment of
certain debt payable to outside parties.
11. Stock Options Plans:
On October 7, 1994 (the effective date), the Trust adopted a stock
option plan (Plan) which provides the members of the Board of Trustees
an opportunity to purchase Shares of Beneficial Interest. The aggregate
number of Shares of Beneficial Interest which may be issued upon
exercise of all Options granted under the plan shall not exceed
150,000.
16
<PAGE> 20
THE PEREGRINE REAL ESTATE TRUST
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
11. Stock Options Plans, continued:
Under the terms of the stock option plan, options may be granted to
members of the Board of Trustees who are not full time employees or
officers of the Trust or any subsidiary of the Trust, on a fully
diluted basis. The option price granted under the plan shall be the
greater of (1) the Fair Market Value of the Shares of Beneficial
Interest on the effective date, or (2) two dollars. The option price
granted under the Plan was two dollars per share. On the effective
date, each participant was granted an Initial Option to purchase 6,667
Shares of Beneficial Interest. Thereafter, each participant whose
commencement of services is after the effective date shall be granted
an Initial Option to purchase 6,667 Shares of Beneficial Interest as of
the date of the participant's commencement of service. Each participant
shall also be granted additional options to purchase 6,667 Shares of
Beneficial Interest on each of the next two anniversaries of the grant
date of the Initial Option. On the effective date of the Plan, options
for the purchase of 26,668 Shares of Beneficial Interest were granted
under the Plan. On the one year anniversary of the effective date of
the Plan, options for the purchase of an additional 26,668 Shares of
Beneficial Interest were granted under the Plan. All options granted
are exercisable, however, no options have been exercised.
The Plan of Reorganization 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.
No such plan has been adopted.
17
<PAGE> 21
- ------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------------------------------------------------------------------------------
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-Q. In
addition, unless otherwise noted, operating and financial results are reported
for the Trust and its subsidiary CalREIT on a consolidated basis. Historical
results set forth are not necessarily indicative of the future financial
position and results of operations of the Trust.
Overview
During the quarter ended June 30, 1996, management of the Trust continued to
concentrate on improving property operations while simultaneously exploring
alternative operating strategies for the future. In the near term, the immediate
priority continued to be to meet the Trust's present and medium term debt
obligations. To accomplish this objective, emphasis remained on maximizing the
income stream from the Trust's hotel and commercial properties and the select
disposition of real estate assets. In addition, during the quarter, the Trust
continued to assess disposition and other strategy relating to its 76% ownership
interest in CalREIT.
The assessment of longer-term operating strategies includes alternatives
relating to the Trust's $44,733,000 in long-term collateralized debt to the
Senior Lender Group, as well as $34,585,000 in first mortgage debt which
requires servicing. The note to the Senior Lender Group will accrue interest in
kind through September 1996 and will require cash interest payments of
approximately $4,000,000 per year commencing November 1996. Approximately
$26,760,000 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.
The Trust believes the following factors continue to adversely affect, and in
the future could adversely affect, the Trust's financial condition, results of
operations and liquidity:
- - The capital structure of the Trust resulting from the confirmed Plan of
Reorganization, including approximately $79,000,000 in senior and first
mortgage debt and approximately $27,000,000 at face value of Preferred
Stock at June 30, 1996, plus the associated present and future debt service
and dividend obligations.
18
<PAGE> 22
- - The estimated $6,500,000 to $7,000,000 in capital improvements required to
renovate and refurbish the Trust's hotel properties in accordance with
Holiday Inn franchise standards; and up to $4,500,000 in fees for
professional services being assessed against the Trust in connection with
the Bankruptcy Court proceedings.
- - The Trust's general and administrative expenses, including costs
associated with its 17,800 shareholder base and the expenses resulting from
the Trust's ongoing evaluation of its business strategies and asset
valuations;
- - The limited sources and amount of funds currently available to the Trust
from operations, its revolving line of credit and from property
dispositions after payment of associated indebtedness; and the inability of
the Trust to raise capital from third parties in light of, among other
things, its debt and capital structure, operating history and contingent
liabilities discussed above; and
- - The overall lack of synergy and investment quality of the Trust's real
estate portfolio, the present and expected softness in the Sacramento or
other California markets where most of the properties are located, and the
related declines in lease up and lease rates which adversely affect real
estate values.
Comparison of the Six Months and Three Months Ended June 30, 1996 to the Six
Months and Three Months Ended June 30, 1995
Net Loss of $5,128,000 was reported by the Trust for the six months ended June
30, 1996, an increase in loss of $3,040,000, or 146%, from the six months ended
June 30, 1995. Net loss of $1,894,000 was reported by the Trust for the three
months ended June 30, 1996, an increase in loss of $567,000, or 43%, from the
three months ended June 30, 1995. These increases were primarily the result of
increased general and administrative expenses and valuation losses offset by
decreased depreciation and amortization and increased gains on the foreclosure
or sale of investments.
Total Revenues decreased $1,061,000, or 8%, to $12,941,000 for the six months
ended June 30, 1996. Total revenues decreased $788,000, or 11%, to $6,421,000
for the three months ended June 30, 1996. This was down from $14,002,000 and
$7,209,000 for the six and three months ended June 30, 1995, respectively. These
decreases are attributable to decreases in hotel revenue, rent revenue, and
interest revenue.
Hotel revenue decreased $151,000, or 2%, to $6,367,000 for the six months ended
June 30, 1996 and $281,000, or 8%, to $3,180,000 for the three months June 30,
1996. This was down from $6,518,000 and $3,461,000 for the six and three months
ended June 30, 1995, respectively. These decreases were primarily attributable
to the closure of the room division at the Holiday Inn Redding in October 1995
for renovation, offset slightly by increased revenue at the Trust's three other
Holiday Inns.
19
<PAGE> 23
Rent revenue decreased $781,000, or 12%, to $5,850,000 for the six months ended
June 30, 1996 and $419,000, or 13%, to $2,896,000 for the three months ended
June 30, 1996. This was down from $6,631,000 and $3,315,000 for the six and
three months ended June 30, 1995. These decreases were primarily attributable to
the loss of rental revenue at the Trust's System Integrators Building and
Regency Plaza Shopping Center, resulting from a loss of tenants, combined with
the absence of rental revenue at the Milpitas Medical Building and the Sierra
Oaks Shopping Center, resulting from the sale of the properties in May 1995 and
April 1996, respectively.
Interest revenue decreased $129,000, or 15%, to $724,000 for the six months
ended June 30, 1996 and $88,000, or 20%, to $345,000 for the three months ended
June 30, 1996. This was down from $853,000 and $433,000 for the six and three
months ended June 30, 1995, respectively. These decreases were primarily due to
the decrease in interest received from one mortgage noteholder offset by an
increase in interest earned on cash accounts.
Total Expenses increased $394,000, or 2%, to $16,303,000 for the six months
ended June 30, 1996. Total expenses decreased $312,000, or 4%, to $8,040,000 for
the three months ended June 30, 1996. This was up from $15,909,000 and down from
$8,352,000 for the six and three months ended June 30, 1995, respectively. The
increase of $394,000 for the six months ended June 30, 1996 and the decrease of
$312,000 for the three months ended June 30, 1996 are primarily attributable to
increased general and administrative expense and property management expense,
offset by decreased hotel and rental property operating expenses, depreciation
and amortization expense, and interest expense.
Real estate expenses which include all hotel and rental property operating
expenses and property management fees decreased $233,000, or 3%, to $7,651,000
for the six months ended June 30, 1996 and decreased $245,000, or 6% to
$3,816,000 for the three months ended June 30, 1996. This was down from
$7,884,000 and $4,061,000 for the six and three months ended June 30, 1995,
respectively. These decreases were primarily attributable to decreased operating
expenses at the Holiday Inn Redding resulting from the closure of the room
division at the Holiday Inn in October 1995 for renovation, decreased operating
expenses at Milpitas and Sierra Oaks resulting from the sale of the properties,
offset by increased property management fees on the hotel properties as a result
of the Trust contracting with outside hotel management companies in late 1995 to
operate the hotels.
Depreciation and amortization expense decreased $400,000, or 22%, to $1,435,000
for the six months ended June 30, 1996 and decreased $326,000, or 33%, to
$655,000 for the three months ended June 30, 1996. This was down from $1,835,000
and $981,000 for the six and three months ended June 30, 1995, respectively.
These decreases are attributable to properties sold in 1995 and early 1996, as
well as the cessation of depreciation on the Trust's and CalREIT's assets held
for sale.
20
<PAGE> 24
Interest expense decreased $103,000, or 2%, to $4,129,000 for the six months
ended June 30, 1996. Interest expense decreased $40,000, or 2%, for the three
months ended June 30, 1996. This was down from $4,232,000 and $2,136,000 for the
six and three months ended June 30, 1995, respectively. These decreases are
attributable to decreased interest on notes collateralized by first mortgages
resulting from the payment of such notes in connection with the sale of
properties, offset by increased interest on the notes payable to the Senior
Lender Group (satisfied through the issuance of Interest Deferral Notes).
General and administrative expenses increased $1,130,000, or 58%, to $3,088,000
for the six months ended June 30, 1996 and increased $299,000, or 25%, to
$1,473,000 for the three months ended June 30, 1996. This was up from $1,958,000
and $1,174,000 for the six and three months ended June 30, 1995, respectively.
These increases were due to the net effect of increases and decreases in various
expense categories. The largest increases were generated by additional fees
payable to CalREIT Trustees related to CalREIT's strategic growth activities;
and consulting fees related to CalREIT's packaging and disposition of mortgage
notes; financial advisory fees; the retirement of certain personal service
contracts with a former officer of the Trust; ongoing costs associated with the
Bankruptcy Court; and administrative costs to service the Trust's approximately
17,800 shareholders-of-record. Many of the administrative costs to service the
Trust's large shareholder base and to meet public regulatory requirements are
fixed costs. As a result, the Trust expects its general and administrative
expenses to continue to be disproportionately high compared to the size of its
asset base.
Valuation Losses. As of the end of the second quarter of 1996, the Trust
reported total valuation losses of $2,244,000. The total valuation losses are
attributable to a $559,000 impairment in the value of CalREIT's Fulton Square
Shopping Center in Sacramento, California, and a $295,000 impairment in the
value of the Timberlake Medical Building in Sacramento, California, both of
which are a reflection of the properties current physical conditions and changed
market conditions. Additionally, the Trust recorded a valuation loss of
$1,390,000 on its Placer Ranch partnership investment when a Put/Call Option was
exercised by the General Partner, and the Trust was obligated to sell its
interest.
21
<PAGE> 25
Property Operations
Commercial Property Operations. At June 30, 1996 and June 30, 1995, overall
weighted occupancy levels by commercial property type were as follows:
<TABLE>
<CAPTION>
Overall Occupancy
Property Type June 30, 1996 June 30, 1995
- ------------- ------------- -------------
<S> <C> <C>
Shopping Centers 83% 85%
Office Buildings 69% 56%
Industrial Buildings 88% 65%
Medical Buildings 24% 52%
Mini Storage Facilities 93% 95%
</TABLE>
The weighted average occupancy level is calculated by multiplying the occupancy
by square footage and dividing the total by the total square footage in the
portfolio. The overall weighted average occupancy for the Trust's commercial
portfolio (including the CalREIT properties) as of both June 30, 1996 and June
30, 1995 was 76%.
The changes in occupancies and corresponding rental revenue within the Trust's
commercial property portfolio is attributable to a number of factors. The Trust
sold one medical office building in 1995 and the remaining medical office
building is only 24% occupied at June 30, 1996, despite ongoing leasing efforts.
Two 45,000 square foot office buildings in Sacramento were vacated in May 1995
by System Integrators, Inc. while operating under the protection of Chapter 11.
Under the original lease, the space produced gross rents of approximately
$75,000 per month, while property operating expenses were approximately $3,000.
One of the buildings was sold in the fourth quarter of 1995 and the other
remains vacant despite re-leasing efforts. Without consideration of this
property, the Trust's office portfolio was approximately 82% occupied as of June
30, 1996, as compared to approximately 77% as of June 30, 1995.
A major tenant in the Regency Plaza Shopping Center in the Sacramento
metropolitan area has ceased paying rent and vacated its space. The tenant
occupied 29,650 square feet of space, or 21% of the net leasable space at the
center and generated approximately $216,000, or 14% of the shopping center's
annual rental revenue. Another major tenant, occupying 14,255 square feet of
space, or 10% of the net leasable space at the shopping center, ceased paying
rent in March 1996 and subsequently vacated the space. This tenant generated
approximately $145,400, or 12% of the center's annual revenue.
A major tenant at the Hurley-Ethan I suburban office property was acquired by
another firm and vacated its space in June 1996, approximately 5,800 square
feet, or 16% of the net leasable space at the property. This tenant generated
approximately $99,500 in annual revenue, or 26% of that property's total revenue
in 1995.
22
<PAGE> 26
Hotel Operations. Throughout the second quarter, substantial attention was
directed at the Trust's four directly-owned hotel properties. Remodeling and
refurbishing requirements were identified and in the first two quarters of 1996
initial improvements commenced. The Holiday Inn Redding continued to be closed
throughout the second quarter. Without consideration of the Redding hotel, the
average weighted occupancy for the remaining three Holiday Inns was 70% and 73%
during the six month period and three month period ended June 30, 1996,
respectively, compared to 67% and 62% during the same period in 1995,
respectively.
Dispositions. During the first two quarters of 1996, certain of the Trust's
directly-owned retail and commercial properties and all of CalREIT's properties
were marketed for sale. One property, Sierra Oaks Shopping Center in Roseville,
California was sold in April 1996 resulting in a loss of $63,000. CalREIT sold
the Redfield Commerce Center, an office/warehouse property in Scottsdale,
Arizona in March 1996 and the Bekins Storage Facility in Pasadena, California in
May 1996, resulting in a gain of $299,000 and a loss of $164,000, respectively.
In addition, CalREIT's only hotel property in Arroyo Grande, California, (Casa
Grande Motor Inn) was allowed to be foreclosed upon in February 1996 after the
lender refused a proposal to restructure the debt terms. There was no gain or
loss upon the foreclosure of the Casa Grande Motor Inn as the net book value of
the property was equal to its debt.
During the second quarter of 1996, CalREIT sold two of its seven mortgage notes.
A gain of $430,000 was recognized upon the sale of the mortgage note which was
collateralized by a first deed of trust on an office/commercial building in
Phoenix, Arizona, and a gain of $30,000 was recognized upon the sale of a
mortgage note which was collateralized by a second deed of trust on a commercial
building in Pacheco, California. In addition, the Trust allowed the Milpitas
mortgage noteholder to refinance its mortgage note and payoff the note prior to
its scheduled maturity date. There was no gain or loss on this transaction as
the note was paid in full and the noteholder paid all closing costs associated
with the transaction.
Liquidity and Capital Resources
The Trust had $4,917,000 in unrestricted cash at June 30, 1996, of which
$4,158,000 was held by CalREIT, compared to $5,079,000 at December 31, 1995, of
which $4,778,000 was held by CalREIT. During the remainder of 1996, the Trust
anticipates that its principal sources of funds will be provided by operating
income; a revolving line of credit in the maximum amount of $8,600,000, which
bears interest at 2.25% over prime; and disposition of assets. The line of
credit is collateralized by a first lien on certain of the Trust's properties.
At June 30, 1996, $306,000 was available under the Line of Credit. Under the
terms of the notes payable to the Senior Lender Group, 80% of the net proceeds
received from the disposition of the Trust's assets must be used to prepay
principal under the notes.
23
<PAGE> 27
The Trust anticipates, that subject to approval from the Senior Lender Group, a
portion of the net proceeds received from certain asset dispositions may be used
for the payment of the bankruptcy related professional fees described earlier.
However, the Trust has not yet obtained a source for the capital improvements at
its hotel properties. Without capital improvements, the hotel properties will
not be competitive. The resulting decline in occupancy and room rental rates
could have a material adverse impact on the Trust's overall financial
performance. In the first quarter of 1996, the Trust allocated approximately
$1,300,000 from its Line of Credit to begin Phase I of the redevelopment of the
hotel properties.
To meet its financial obligations, the Trust continues to pursue alternative
funding sources, including disposition of assets, as well as restructuring and
debt financing with banks, savings and loan institutions and other traditional
lenders. Approval of the Senior Lender Group is expected to be a condition to
obtaining financing for the redevelopment of the hotel properties and there is
no assurance such approval, if requested, will be granted.
The Trust experienced a net decrease in cash of $162,000 for the six months
ended June 30, 1996 as compared to a net decrease in cash of $509,000 for the
six months ended June 30, 1995, a difference of $347,000. For the six months
ended June 30, 1996, cash provided by operating activities was $292,000, up
$45,000 from $247,000 during the comparable period in 1995. Cash provided by
investing activities during the six months ended June 30, 1996 was $686,000 down
from $847,000 provided during the six months ended June 30, 1995; and cash used
in financing activities decreased $463,000 from $1,603,000 for the six months
ended June 30, 1995 to $1,140,000 for the six months ended June 30, 1996.
At June 30, 1996, the Trust had included $3,000,000 in accrued expenses now
pending before the Bankruptcy Court relating to the Professional Fee Claims. In
early May 1996, a settlement agreement between the Trust and certain of the
professional firms was filed with the Bankruptcy Court, however, it is unknown
at this time if the agreement will be approved by the Court.
The note on CalREIT's Totem Square Shopping Center of $4,275,000 was originally
scheduled to mature on April 1, 1996. CalREIT has received an extension from the
lender to June 18, 1996, under the same terms and conditions as the existing
agreement. Further extension on this note to May 1997 is currently being
negotiated.
24
<PAGE> 28
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 - 27, Financial Data Schedule
Reports on Form 8-K - None
25
<PAGE> 29
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
August 13, 1996 /s/John McMahan
- --------------- ---------------
Date John McMahan
Chairman
August 13, 1996 /s/Joseph M. Mock
- --------------- -----------------
Date Joseph M. Mock
Chief Executive Officer
26
<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 BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 7,942
<SECURITIES> 11,993
<RECEIVABLES> 8,644
<ALLOWANCES> (1,771)
<INVENTORY> 0
<CURRENT-ASSETS> 31,687
<PP&E> 82,190
<DEPRECIATION> (1,211)
<TOTAL-ASSETS> 112,666
<CURRENT-LIABILITIES> 12,590
<BONDS> 87,612
24,778
0
<COMMON> 13,356
<OTHER-SE> (25,670)
<TOTAL-LIABILITY-AND-EQUITY> 112,666
<SALES> 0
<TOTAL-REVENUES> 6,705
<CGS> 0
<TOTAL-COSTS> (3,816)
<OTHER-EXPENSES> (2,128)
<LOSS-PROVISION> (559)
<INTEREST-EXPENSE> (2,096)
<INCOME-PRETAX> (1,894)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,894)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)<F1>
<FN>
<F1>SHARES OF BENEFICIAL INTEREST EQUIVALENTS WERE ANTI-DILUTIVE. THE FIGURES
PRESENTED ABOVE ARE SIMPLE EPS AND INCLUDE THE EFFECTS OF STOCK DIVIDENDS,
DISCOUNTS, AND ACCRETION OF DISCOUNTS ON PREFERRED STOCK.
</FN>
</TABLE>
