<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 March 31, 1998
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 (I.R.S. Employer
incorporation 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.
Class Outstanding at May 5, 1998
- ------------------------------------ --------------------------
Common Shares of Beneficial Interest 4,881,122
<PAGE> 3
THE PEREGRINE REAL ESTATE TRUST
<TABLE>
<CAPTION>
INDEX PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Balance Sheets -
March 31, 1998 and December 31, 1997 1
Statements of Operations -
For the Three Months Ended
March 31, 1998 and 1997 2-3
Statements of Cash Flows -
For the Three Months Ended
March 31, 1998 and 1997 4
Notes to Financial Statements 5-10
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-17
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 18-19
</TABLE>
<PAGE> 4
PART I: FINANCIAL INFORMATION
THE PEREGRINE REAL ESTATE TRUST
BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
INVESTMENTS:
Commercial and hotel properties, net of accumulated depreciation
of $5,410,000 and $4,684,000 at March 31, 1998 and
December 31, 1997, respectively $ 65,166,000 $ 65,700,000
Notes receivable, net of deferred gains of $79,000 and $79,000
at March 31, 1998 and December 31, 1997, respectively 330,000 332,000
Restricted marketable securities available-for-sale 100,000 117,000
------------ ------------
65,596,000 66,149,000
Cash 1,515,000 1,247,000
Restricted cash 202,000 183,000
Rents, accrued interest and other receivables, net of allowance of $30,000
and $41,000 at March 31, 1998 and December 31, 1997, respectively 568,000 720,000
Other assets 1,832,000 1,584,000
------------ ------------
Total assets $ 69,713,000 $ 69,883,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Long-term notes payable, collateralized by deeds of trust on
commercial properties $ 24,209,000 $ 24,291,000
Senior Lender Group Notes Payable 26,930,000 26,930,000
Line of credit 8,239,000 8,021,000
Accounts payable and accrued liabilities 2,470,000 2,064,000
Other liabilities 266,000 258,000
------------ ------------
Total liabilities 62,114,000 61,564,000
Commitments and contingencies (Note 4 to financial statements)
Redeemable Convertible Preferred Stock: 25,000,000 shares authorized; 15,944,000
and 15,555,000 shares issued and outstanding at March 31, 1998 and December
31, 1997, respectively; net of unaccreted discount of $1,503,000 and
$1,595,000 at March 31, 1998 and December 31, 1997, respectively;
liquidation preference of $31,888,000 and $31,110,000 at
March 31, 1998 and December 31, 1997, respectively 30,384,000 29,515,000
Common Shares of Beneficial Interest: 50,000,000 shares authorized; 4,881,000
shares outstanding 13,356,000 13,356,000
Accumulated deficit (36,141,000) (34,552,000)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 69,713,000 $ 69,883,000
============ ============
</TABLE>
See accompanying notes to financial statements.
1
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THE PEREGRINE REAL ESTATE TRUST
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
REVENUES:
Hotel property $ 3,195,000 $ 3,322,000
Commercial property 2,182,000 2,297,000
Interest 36,000 86,000
Other 15,000 13,000
----------- -----------
5,428,000 5,718,000
----------- -----------
EXPENSES:
Hotel property operating expenses 2,526,000 2,482,000
Commercial property operating expenses 736,000 686,000
Hotel and commercial property management fees -- 148,000
Depreciation and amortization 811,000 760,000
Interest 1,331,000 1,500,000
General and administrative 744,000 708,000
----------- -----------
6,148,000 6,284,000
----------- -----------
Loss before gain on foreclosure or sale
of investments and extraordinary item (720,000) (566,000)
Gain on foreclosure or sale of investments, net -- 1,012,000
----------- -----------
(Loss) income before extraordinary item (720,000) 446,000
Extraordinary item, forgiveness of debt -- 22,000
----------- -----------
Net (loss) income $ (720,000) $ 468,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
2
<PAGE> 6
THE PEREGRINE REAL ESTATE TRUST
STATEMENTS OF OPERATIONS - CONTINUED
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
----------- -----------
<S> <C> <C>
Loss per Common Share of Beneficial Interest:
Net (loss) income $ (720,000) $ 468,000
Preferred Stock dividends, net of discounts (745,000) (664,000)
Accretion of discounts on Preferred Stock (124,000) (101,000)
----------- -----------
Net loss attributable to Common Shares of
Beneficial Interest $(1,589,000) $ (297,000)
=========== ===========
Loss per Common Share of Beneficial Interest
before extraordinary item, basic and diluted $ (0.33) $ (0.07)
Extraordinary item per Common Share of
Beneficial Interest, basic and diluted -- 0.01
----------- -----------
Net loss per share attributable to Common Shares
of Beneficial Interest, basic and diluted $ (0.33) $ (0.06)
=========== ===========
Weighted average number of Common Shares of
Beneficial Interest outstanding, basic and diluted 4,881,000 4,881,000
</TABLE>
See accompanying notes to financial statements.
3
<PAGE> 7
THE PEREGRINE REAL ESTATE TRUST
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (720,000) $ 468,000
------------ ------------
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities:
Interest and fees added to principal balance of debt 218,000 --
Depreciation and amortization 811,000 760,000
Gain on foreclosure or sale of investments -- (1,012,000)
Extraordinary item, forgiveness of debt -- (22,000)
Changes in other assets and liabilities:
Decrease (increase) in rents, accrued interest
and other receivables 152,000 (56,000)
Increase in other assets (284,000) (241,000)
Increase (decrease) in accounts payable and
accrued liabilities 406,000 (181,000)
Increase in other liabilities 8,000 5,000
------------ ------------
Total adjustments to net (loss) income 1,311,000 (747,000)
------------ ------------
Net cash provided by (used in) operating activities 591,000 (279,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (499,000) --
Proceeds from the sale and maturity of marketable
securities 516,000 --
Proceeds from sale of investments, net of $4,698,000 in cash
attributable to CalREIT -- 15,524,000
Improvements to commercial and hotel properties (192,000) (330,000)
Purchase of office equipment (49,000) (16,000)
Principal collections on notes receivable 2,000 2,000
------------ ------------
Net cash (used in) provided by investing activities (222,000) 15,180,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term notes payable (82,000) (77,000)
Principal payments on Line of Credit, net -- (583,000)
Principal payments on Senior Lender Group Notes Payable -- (15,578,000)
Increase in restricted cash (19,000) (1,250,000)
------------ ------------
Net cash used in financing activities (101,000) (16,246,000)
------------ ------------
Net increase (decrease) in unrestricted cash 268,000 (1,345,000)
Unrestricted cash, beginning of period 1,247,000 5,972,000
------------ ------------
Unrestricted cash, end of period $ 1,515,000 $ 4,627,000
============ ============
</TABLE>
See accompanying notes to financial statements.
4
<PAGE> 8
THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation
Organization
The Peregrine Real Estate Trust ("Peregrine" or the "Trust") (fka
Commonwealth Equity Trust) was organized under the laws of the State of
California pursuant to a Declaration of Trust dated July 31, 1973, and pursuant
to a Plan of Reorganization (the "Plan) under Chapter 11 of the United States
Bankruptcy Code was reorganized under a Restated Declaration of Trust dated
October 7, 1994 (the "Effective Date"). Commencing September 1, 1993, Peregrine
became self-administered. Peregrine's obligation of approximately $80,000,000 to
a group of secured lenders (the "Senior Lender Group") was satisfied by the Plan
by the issuance of 52% of the Common Shares of Beneficial Interest, Redeemable
Convertible Preferred Stock ("Preferred Stock") in the original face amount of
$22,500,000, which carries a dividend of 10% per annum and notes payable in the
original face amount of $40,000,000, which bear interest at 8.5% per annum (the
"Senior Lender Group Notes" or "Senior Lender Group Notes Payable").
At March 31, 1998, Peregrine owned eighteen commercial properties
located primarily in the Sacramento area, three hotel properties located in
Northern California, a partnership interest and one mortgage note secured by
real property. Peregrine's 76% stock ownership interest in the California Real
Estate Investment Trust ("CalREIT") was sold on January 3, 1997, for $20,222,000
in cash.
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 March 31, 1998 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,
1997 audited financial statements and notes thereto, included in The Peregrine
Real Estate Trust's Annual Report on Form 10-K.
5
<PAGE> 9
THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
----------
1. Organization and Basis of Presentation, continued
Net Loss Per Share
Net loss per Common Share of Beneficial Interest, basic and diluted,
has been computed and presented in accordance with Statement of Financial
Accounting Standard No. 128, "Earnings Per Share", ("SFAS 128") which was issued
in February 1997. The weighted-average number of Common Shares of Beneficial
Interest outstanding during the three month periods ended March 31, 1998 and
1997, was 4,881,000. Common Shares of Beneficial Interest equivalents are
anti-dilutive for the three month periods ended March 31, 1998 and 1997, and are
not considered in calculating net loss per Common Share of Beneficial Interest.
Comprehensive Net Income
Effective January 1, 1998, the Trust adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income".
This Statement requires that all items recognized under accounting standards as
components of comprehensive income be reported in an annual financial statement
that is displayed with the same prominence as other annual financial statements.
For the quarter ended March 31, 1998, The Trust had no comprehensive income
items.
Reclassifications
Certain reclassifications have been made in the presentation of the
1997 financial statements to conform to the 1998 presentation.
2. Investments in Commercial and Hotel Properties, Notes Receivable and
Partnerships
At March 31, 1998, the commercial properties known as 11167 Trade
Center Drive, Commerce Street, and Consumer Circle, with a combined total
carrying value of $1,704,000 was classified as "held-for-sale". At December 31,
1997, no commercial or hotel properties were classified as "held-for-sale".
6
<PAGE> 10
THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
----------
3. Investments in Marketable Securities "Available-for-Sale"
At March 31, 1998, the Trust had $100,000 invested in marketable
securities, which were restricted. The funds represent a portion of an indemnity
trust fund (the "Indemnity Trust Fund") which was established to fund possible
indemnification obligations with respect to Peregrine's former Trustees and
officers. The Indemnity Trust Fund, which is managed by an independent
third-party trustee, is restricted as to use for a period of three years ending
May 29, 2000, as defined in the Indemnity Trust Agreement. At March 31, 1998,
Peregrine's "available-for-sale" securities consisted of investment grade
commercial paper whose interest rate was 5.350% and whose maturity date was
April 2, 1998. Unrealized gains and losses on marketable securities were not
significant at March 31, 1998. At December 31, 1997, the Trust had $117,000
invested in U.S. Treasury Notes and investment grade commercial paper
classified, all of which were classified as restricted and "available-for-sale".
4. Commitments and Contingencies
Capital Expenditures
At March 31, 1998, Peregrine is required by Holiday Inn, under the
License Agreements, to perform certain refurbishments at the Sacramento and
Walnut Creek hotels in order to comply with Holiday Inn standards. At March 31,
1998, the capital expenditures necessary to complete the required refurbishments
are estimated at approximately $2,700,000 and $750,000 for the Sacramento and
Walnut Creek hotels, respectively. If the required refurbishments are not
completed in a timely manner or should they not meet Holiday Inn's standards,
Holiday Inn may assert that Peregrine is in default of the License Agreement and
Holiday Inn could attempt to terminate the License Agreement. If the License
Agreement is terminated, it could constitute events of default under both the
Line of Credit and Senior Lender Group Notes and could result in termination
fees payable to Holiday Inn of approximately $1,100,000 with respect to the
Sacramento hotel and approximately $900,000 with respect to the Walnut Creek
hotel.
Financial Status of Peregrine
At March 31, 1998, management of Peregrine believes that, because of
the Trust's borrowing capacity and the improving conditions of the economy and
the commercial and hotel industries, it will be able to fund its day-to-day
business operations, meet its debt service obligations on its first mortgage
notes and Senior Lender Group notes, and fund its capital expenditures for the
remainder of 1998.
7
<PAGE> 11
THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
----------
5. Redeemable Convertible Preferred Stock
Peregrine's Redeemable Convertible Preferred Stock in the original face
amount of $22,500,000, carries a dividend of 10% per annum. Dividends are
payable in-kind through October 1, 1998, by means of additional shares of
Preferred Stock issued quarterly; thereafter, dividends are payable quarterly in
cash. The Preferred Stock automatically converts into Common Shares of
Beneficial Interest pursuant to an established formula if any cash dividend
payment is not made in full when due. If all dividends are paid in-kind through
September 30, 1998, no other Common Shares of Beneficial Interest are issued,
and the Preferred Stock dividends payable in cash on December 31, 1998 are not
paid prior to April 10, 1999, the Preferred Stock would convert to Common Shares
of Beneficial Interest on April 10, 1999, and the Senior Lender Group would, on
account of that conversion, acquire approximately 78% of the total Common Shares
of Beneficial Interest outstanding after the conversion, bringing their total
holdings to approximately 90% of the outstanding shares. It is anticipated that
Peregrine will be unable to pay the Preferred Stock dividend in cash commencing
with the December 31, 1998 dividend due to the Line of Credit covenants and
restrictions, and as a result, the Preferred Stock will automatically convert to
Common Shares of Beneficial Interest on April 10, 1999.
The Preferred Stock is redeemable in cash (total redemption value of
$31,888,000 at March 31, 1998) 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 Preferred Stock has been recorded at a discount to its face amount
of $31,888,000, based on an imputed rate of return of 12%.
6. Gain on Foreclosure or Sale of Investments
During the three month period ended March 31, 1998, there were no gains
or losses from the foreclosure or sale of investments. Components of the gain on
foreclosure or sale of investments for the three month period ended March 31,
1997 were as follows:
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31, 1997
--------------
Components
<S> <C>
Sale of Investment in CalREIT $ 1,012,000
=========
</TABLE>
On January 3, 1997, the date on which Peregrine sold its investment in
CalREIT, the book value of Peregrine's investment in CalREIT was $18,733,000.
CalREIT was sold for $20,222,000 in cash, with $477,000 in related selling costs
incurred, resulting in a gain of $1,012,000.
8
<PAGE> 12
THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
----------
7. Extraordinary item, forgiveness of debt
Peregrine benefited from a forgiveness of debt related to the
extinguishment of certain debt related to the bankruptcy proceedings of $22,000
during the three month period ended March 31, 1997.
8. Related Party Transactions
During the three months ended March 31, 1998, Peregrine paid $10,000 to
one of its current officers, Brian Engstrom, for services performed as a
consultant prior to the commencement of his employment as an officer of the
Trust.
During a portion of 1997, Peregrine utilized the services of certain of
its former independent Trustees in connection with an analysis of alternative
operating strategies, asset dispositions, and day-to-day management activities.
In connection with the consulting services performed, the following amounts were
paid to such former Trustees (or affiliated companies) during the three month
periods ended March 31, 1997:
<TABLE>
<CAPTION>
1997
----
<S> <C>
John F. Salmon, former Trustee $ 3,000
The Presidio Group (Kenneth T. Seeger, former Trustee) 50,000
Hickey & Hill, Inc. (E. Lawrence Hill, Jr., former Trustee) 5,000
</TABLE>
9. Statement of Cash Flows Supplemental Information
One parcel of land located in Sacramento with a carrying value of
$30,000 was sold at a county public auction during the three month period ended
March 31, 1997. No gain or loss was recorded on this transaction, as the
carrying value of the land was equal to the carrying value of the liabilities.
Additionally, on March 31, 1998 and 1997, Peregrine issued Redeemable
Convertible Preferred Stock in the face amounts of $778,000 and $702,000,
respectively, as payment in kind for the dividends then due on the outstanding
Preferred Stock. During the three months ended March 31, 1998, increases under
the Line of Credit included $218,000 for interest, fees, and reimbursable
expenses incurred.
Cash paid for interest during the three month periods ended March 31,
1998 and 1997, was $1,107,000 and $1,566,000, respectively.
9
<PAGE> 13
THE PEREGRINE REAL ESTATE TRUST
NOTES TO FINANCIAL STATEMENTS
----------
10. Subsequent Event
On March 23, 1998, Peregrine entered into a purchase and sale agreement
(the "Purchase and Sale Agreement") to purchase a hotel in Northern California
for $9,600,000. On April 21, 1998, the Purchase and Sale Agreement was
terminated by Peregrine. Management is currently negotiating with the seller of
the hotel in Northern California and may enter into a purchase and sale
agreement in the near future; however, there can be no assurance that an
agreement will be entered into, or that, if such agreement is entered into that,
the necessary financing will be available or that any transaction will be
consummated.
10
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this Form 10-Q.
Historical results set forth are not necessarily indicative of the future
financial position and results of operations of Peregrine.
In addition to historical information, the Form 10-Q contains
forward-looking statements such as those pertaining to Peregrine's ability to
fund its operations or otherwise satisfy capital requirements, both in the short
and long term; to undertake property repairs, maintenance, improvements,
refurbishments, or other capital expenditures; and to negotiate satisfactory
terms with creditors, licensors, franchisors, or others. Forward-looking
statements involve numerous risks and uncertainties. The following factors,
among others discussed herein, could cause results and future events to differ
materially from those set forth or contemplated in the forward-looking
statements: increased interest rates and operating costs, deteriorating market
conditions affecting occupancy or lease rates, difficulties in finding buyers
for property dispositions, environmental uncertainties, risks related to natural
disasters, financial market fluctuations, changes in real estate laws, real
property taxes, and governmental regulation, as well as general economic trends
and the factors discussed herein. Readers are cautioned not to place undue
reliance on forward-looking statements, which reflect management's analysis only
as of the date hereof. Peregrine assumes no obligation to update forward-looking
statements. Readers should refer to Peregrine's reports to be filed from time to
time with the Securities and Exchange Commission pursuant to the Exchange Act.
Overview
During the quarter ended March 31, 1998, management of Peregrine
continued to concentrate on the developing and implementing an operating
strategy designed to maximize the income stream from the commercial and hotel
properties and to dispose of real estate assets with negative cash flows and/or
which require significant capital expenditures beyond the resources available.
Pursuant to this strategy, management continued its efforts to improve the
physical and operating condition of its commercial and hotel properties by
completing repairs and deferred maintenance on the commercial properties,
developing and implementing plans to complete the required refurbishments at the
hotel properties, controlling property expenses and improving both occupancy
levels and collections of rent.
11
<PAGE> 15
Due to capital constraints in 1996 and during the first half of 1997,
Peregrine was unable to complete certain refurbishments required by Holiday Inn
with respect to its Chico and Sacramento hotels within the required time frame.
As a result, in February 1997, Peregrine received notices of default on its
Holiday Inn Franchise Agreements with respect to its Chico and Sacramento
hotels. Peregrine was able to obtain an extension of time in which to complete
the necessary refurbishments. The refurbishments were completed at the Chico
hotel in September 1997, and in October 1997, Peregrine received a written
notice from Holiday Inn that the inspection had been completed and the default
had been cured. The refurbishments at the Sacramento hotel are currently
underway and in accordance with a new Holiday Inn License Agreement for
Sacramento, which is dated January 23, 1998 and expires on December 12, 2010,
Peregrine must complete them by September 23, 1998. The total cost of the
required refurbishments at the Sacramento hotel is estimated to be $2,700,000.
Additionally, in accordance with the new Holiday Inn License Agreement for
Walnut Creek, Peregrine is required to complete approximately $750,000 in
refurbishments at the Walnut Creek hotel prior to December 18, 1998. If the
required refurbishments at the Sacramento and Walnut Creek hotels are not
completed in a timely manner or should they not meet Holiday Inn's standards,
Holiday Inn may assert that Peregrine is in default of the License Agreement and
Holiday Inn could attempt to terminate the License Agreement. If the License
Agreement is terminated, it could constitute events of default under both the
line of credit and Senior Lender Group Notes and could result in termination
fees payable to Holiday Inn of approximately $1,100,000 with respect to the
Sacramento hotel and approximately $900,000 with respect to the Walnut Creek
hotel. Currently, Peregrine expects to complete refurbishments at the hotels
above the amounts required by Holiday Inn.
Comparison of the Three Months Ended March 31, 1998 to the Three Months Ended
March 31, 1997
Revenues
Total revenues were $5,428,000 during the three months ended March 31,
1998, down $290,000, or 5%, from total revenues of $5,718,000 during the three
months ended March 31, 1997.
Hotel Property Revenues. Hotel revenue decreased $127,000, or 4%, from
$3,322,000 for the three months ended March 31, 1997, to $3,195,000 for the
three months ended March 31, 1998. The decrease is primarily attributable an
overall decrease in occupancy at the hotels; partially offset by an overall
increase in room rates at the hotels.
Commercial Property Revenues. Commercial property revenue decreased
$115,000, or 5%, to $2,182,000 for the three months ended March 31, 1998, down
from $2,297,000 for the three months ended March 31, 1997. The decrease is
attributable to the absence of revenues from the Pomona Road property, which was
sold in December 1997; and an overall combined decrease in revenues from all
other commercial properties in Peregrine's portfolio due primarily to decreased
occupancy at the retail shopping centers, office buildings, and industrial
buildings; partially offset by an increase in occupancy at the mini-storage
facilities.
12
<PAGE> 16
Interest Revenue. Interest revenue decreased $50,000, or 58%, from
$86,000 for the three months ended March 31, 1997, to $36,000 for the three
months ended March 31, 1998. The decrease is primarily attributable to the
absence of interest revenue from a mortgage note which was paid in full in July
1997; and a decrease in interest revenue on cash accounts resulting from a
decreased cash balance.
Total Expenses
Total expenses were $6,148,000 during the three months ended March 31,
1998, down $136,000, or 2%, from total expenses of $6,284,000 during the three
months ended March 31, 1997.
Hotel Property Operating Expenses. Operating expenses for the hotels
increased $44,000, or 2%, from $2,482,000 during the three months ended March
31, 1997, to $2,526,000 during the three months ended March 31, 1998. The
increase is attributable to increased repair and maintenance expenses, general
and administrative expenses (primarily consulting fees and credit card
commissions), and increased insurance costs.
Commercial Property Operating Expenses. Operating expenses for the
commercial properties increased $50,000, or 7%, to $736,000 during the three
months ended March 31, 1998, up from $686,000 during the three months ended
March 31, 1997. The increase is attributable an overall combined increase in
operating expenses at the commercial properties which was primarily the result
of increased repair and maintenance, landscaping, wages and benefits for
in-house property management, and increased insurance costs; offset by a
decrease resulting from the absence of expenses at the Pomona Road property
which was sold in December 1997.
Hotel and Commercial Property Management Fees. Hotel and commercial
property management fees decreased $148,000, or 100%, from $148,000 for the
three months ended March 31, 1997, to $0 for the three months ended March 31,
1998. The decrease is attributable to absence of management fees at the
commercial properties resulting from the termination of the outside management
the contract in August 1997; and the absence of management fees at the hotels
due to the termination of the outside management contracts in October 1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense increased $51,000, or 7%, to $811,000 for the three months ended March
31, 1998, up from $760,000 for the three months ended March 31, 1997. The
increase is primarily attributable to an increase in depreciation and
amortization at the hotel and commercial properties due to capital improvements,
tenant improvements and lease commissions completed and incurred in 1997 and the
1998; offset by a decrease in depreciation at the Pomona Road property as it was
sold in December 1997.
13
<PAGE> 17
Interest Expense. Interest expense decreased $169,000, or 11%, from
$1,500,000 for the three months ended March 31, 1997, to $1,331,000 for the
three months ended March 31, 1998. The decrease is primarily attributable to the
absence of interest expense on the first mortgage note on the 3900 Lennane Drive
property, which was paid in full in July 1997; a decrease in interest expense on
the Senior Lender Group Notes resulting from a lower principal balance due to
paydowns in 1997; and a decrease in interest expense on the Line of Credit due
to a lower average interest rate which was partially offset by a higher average
balance outstanding under the Line of Credit.
General and Administrative Expenses. General and administrative
expenses increased $36,000, or 5%, from $708,000 for the three months ended
March 31, 1997, to $744,000 for the three months ended March 31, 1998. The
increase is primarily attributable an increase in wages and benefits resulting
from increased staff; and start-up costs for an office in San Francisco;
partially offset by a decrease in audit fees; and a decrease in legal fees.
Many of the administrative costs to service Peregrine's large
shareholder base and to meet public regulatory requirements are fixed costs. As
a result, Peregrine expects its general and administrative expenses to continue
to be disproportionately high compared to the size of its asset base.
Gain on Foreclosure or Sale of Investments
During the three months ended March 31, 1998, Peregrine recorded no
gains or losses on the foreclosure or sale of investments, as compared to total
gains on the foreclosure or sale of investments of $1,012,000 during the three
months ended March 31, 1997. In 1997, the amount is comprised of the gain
recorded upon the sale of CalREIT on January 3, 1997. At the time of the
transaction, the book value of Peregrine's investment in CalREIT was
$18,733,000. CalREIT was sold for $20,222,000 in cash, with $477,000 in related
selling costs incurred, resulting in a gain of $1,012,000.
Extraordinary Item, Forgiveness of Debt
During the three months ended March 31, 1998, Peregrine recorded no
gains from forgiveness of debts, as compared to $22,000 in recorded during the
three months ended March 31, 1997. The 1997 amount represents forgiveness of
debt related to the extinguishment of certain debt related to the bankruptcy
proceedings.
Dividends
Peregrine made no cash distributions during the three months ended
March 31, 1998 or 1997. In addition, Peregrine is substantially restricted from
and does not anticipate making any cash distributions to shareholders in the
foreseeable future.
14
<PAGE> 18
Occupancy
Hotel and Commercial Property Occupancy. At March 31, 1998 and March
31, 1997, overall weighted occupancy levels for the Trust's properties were as
follows:
<TABLE>
<CAPTION>
Overall Weighted Average Occupancy
Property Type March 31, 1998 March 31, 1997
------------- -------------- --------------
<S> <C> <C>
Retail Shopping Centers 75% 82%
Office Buildings 73% 79%
Industrial Buildings 88% 92%
Mini-Storage Facilities 96% 92%
Hotels 58% 67%
</TABLE>
The overall weighted average occupancy level is calculated by
multiplying the occupancy by square footage (or rooms available) and dividing
the total by the total square footage (or rooms available) in the portfolio.
Dispositions
On January 3, 1997, Peregrine sold its 76% stock ownership interest in
CalREIT to a third party, CalREIT Investors Limited Partnership, for $20,222,000
in cash, or $2.91 per share of CalREIT previously held by Peregrine. During the
three months ended March 31, 1998, no properties were sold.
Liquidity and Capital Resources
Peregrine had $1,515,000 in unrestricted cash at March 31, 1998,
compared to $1,247,000 in unrestricted cash at December 31, 1997. During the
three months ended March 31, 1998, Peregrine's principal source of funds was
from operating income, and principal and interest payments on mortgage notes
receivable. At March 31, 1998, $11,761,000 remained available through the Line
of Credit; however pursuant to the Line of Credit Agreement, Peregrine is
subject to certain restrictions and limitations on borrowing.
Debt service paid on Peregrine's first mortgage notes totaled $662,000
during the three months ended March 31, 1998. Total debt service requirements on
first mortgage notes in 1998 are approximately $2,646,000. Interest paid on the
Senior Lender Group Notes during the three months ended March 31, 1998 totaled
$528,000. Interest on the Senior Lender Group Notes is required to be paid in
cash on a monthly basis, with aggregate interest payable during 1998 currently
estimated at $2,321,000, based on $26,930,000 principal outstanding. The face
value of Preferred Stock dividends in-kind issued during the three months ended
March 31, 1998 totaled $778,000. Dividends on the Preferred Stock are payable
in-kind through September 30, 1998, and will be required to be paid in cash
thereafter. It is anticipated, however, that Peregrine will not pay the
Preferred Stock dividends in cash commencing with the December 31, 1998 dividend
due to a restrictive covenant contained in the Line of Credit Agreement, and as
a result the Preferred Stock will automatically convert to Common Shares of
Beneficial Interest on April 10, 1999, thereby
15
<PAGE> 19
substantially diluting the ownership interests of current holders of Common
Shares of Beneficial Interest.
At March 31, 1998, Peregrine's short and long term cash commitments
include approximately $3,450,000 to refurbish the Sacramento and Walnut Creek
hotel properties in accordance with Holiday Inn franchise standards; debt
service payments on it first mortgages of approximately $2,646,000 per year;
interest on its Senior Lender Group Notes currently estimated at $2,321,000 per
year; repayment of its Line of Credit obligations on September 30, 2000; and
repayment of principal on the Senior Lender Group Notes in October 2000. It is
anticipated that the Preferred Stock cash dividend requirement will be
eliminated through the conversion to Common Shares of Beneficial Interest as
discussed above.
Based on cash flows from operations and its revolving Line of Credit,
Peregrine anticipates that it will be able to fund its day-to-day business
operations, meet its debt service obligations on its first mortgage notes and
Senior Lender Group Notes, and fund its capital expenditures through the end of
1998.
On March 23, 1998, Peregrine entered into a purchase and sale agreement
(the "Purchase and Sale Agreement") to purchase a hotel in Northern California
for $9,600,000. On April 21, 1998, the Purchase and Sale Agreement was
terminated by Peregrine. Management is currently negotiating with the seller of
the hotel in Northern California and may enter into a purchase and sale
agreement in the near future; however, there can be no assurance that an
agreement will be entered into, or that, if such agreement is entered into, that
the necessary financing will be available or that any transaction will be
consummated.
Peregrine experienced a net increase in unrestricted cash of $268,000
for the three months ended March 31, 1998 as compared to a net decrease in
unrestricted cash of $1,345,000 for the three months ended March 31, 1997. For
the three months ended March 31, 1998 cash provided by operating activities was
$591,000, up $870,000 from cash used in operating activities of $279,000 during
the comparable period in 1997, which is primarily attributable to decreased cash
interest payments on the Senior Lender Group Notes as a result of principal
paydowns during 1997; a decrease in the payment of interest and fees on the Line
of Credit, resulting from such interest and fees being added to the principal
balance outstanding in 1998 as compared to such amounts being paid in cash in
1997; and a decrease in debt service on the first mortgage obligations due to
the payoff of the 3900 Lennane Drive note in July 1997. Cash used in investing
activities during the three months ended March 31, 1998 was $222,000 compared to
cash provided by investing activities of $15,180,000 during the three months
ended March 31, 1997. The decrease of $15,402,000 is primarily attributable to
proceeds received from the sale of CalREIT in 1997. Cash used in financing
activities was $101,000 during the three months ended March 31, 1998, as
compared to cash used in financing activities of $16,246,000 during the three
months ended March 31, 1997, a decrease in cash used of $16,145,000, which is
primarily attributable to the required payments made on the Senior Lender Group
Notes from the proceeds of CalREIT in 1997; and payments made on the Line of
Credit in 1997.
16
<PAGE> 20
Significant Changes in the Economic Environment
Changing interest rates are not expected to have a significant effect on
Peregrine's operations during the remainder of 1998, as most of Peregrine's debt
obligations are at fixed interest rates. During 1997 and 1998, both rental rates
and real estate values have increased; therefore, the effect of inflation is not
expected to have a significant effect on Peregrine's operations in 1998.
Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of
Peregrine's computer programs or other date sensitive equipment may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations. Peregrine
believes that it has identified all significant computer applications and other
date sensitive equipment that will require modification to ensure Year 2000
compliance. The total cost of the modifications is not expected to be material
to the overall financial statements of Peregrine.
17
<PAGE> 21
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1(a) Restated Declaration of Trust of The Peregrine Real Estate Trust (1)
3.1(b) Bylaws of The Peregrine Real Estate Trust (1)
10.1 Second Amended and Restated Note Agreement dated September 27,
1994, by and among Commonwealth Equity Trust, the Noteholders
named therein, and The Prudential Insurance Company of America
as Agent for the Noteholders (1)
10.2 Loan and Security Agreement dated October 6, 1994, between Commonwealth Equity Trust and
Foothill Capital Corporation (1)
10.3 Redeemable Convertible Preferred Stock Purchase Agreement
dated as of October 1, 1994, by and among The Peregrine Real
Estate Trust, Pacific Mutual Life Insurance Company, The
Prudential Insurance Company of America, PRUCO Life Insurance
Company, ORIX USA Corporation, Weyerhaeuser Company Master
Retirement Trust, TCW Special Credits Fund IV, TCW Special
Credits Plus Fund, TCW Special Credits Trust IV, and TCW
Special Credits Trust IVA (1)
10.4 Registration Rights Agreement dated as of October 1, 1994, by
and among The Peregrine Real Estate Trust, Pacific Mutual Life
Insurance Company, The Prudential Insurance Company of
America, PRUCO Life Insurance Company, ORIX USA Corporation,
Weyerhaeuser Company Master Retirement Trust, TCW Special
Credits Fund IV, TCW Special Credits Plus Fund, TCW Special
Credits Trust IV, and TCW Special Credits Trust IVA (1)
10.5 Services and Confidentiality Agreement dated October 1, 1994, between Commonwealth Equity Trust
and FAMA Management, Inc. (1)
10.6 Third Amended Plan of Reorganization of Commonwealth Equity Trust (2)
10.7 Stock Purchase Agreement, dated as of January 3, 1997, by and
between The Peregrine Real Estate Trust and CalREIT Investors
Limited Partnership (3)
10.8 Form of Indemnification Agreement (4)
10.9 The Peregrine Real Estate Trust Trustee Stock Option Plan (5)
10.10 Employment Agreement between The Peregrine Real Estate Trust and Joseph M. Mock, dated June 1,
1996 (5)
10.11 First Amendment to Employment Agreement between The Peregrine Real Estate Trust and Joseph M.
Mock, dated December 1, 1996 (5)
</TABLE>
18
<PAGE> 22
<TABLE>
<S> <C>
10.12 Second Amendment to Employment Agreement between The Peregrine Real Estate Trust and Joseph M.
Mock, dated April 30, 1997 (6)
10.13 Form of Indemnification Agreement (7)
10.14 Loan and Security Agreement dated December 4, 1997, by and among The Peregrine Real Estate
Trust and Fleet Capital Corporation (8)
10.15 Second Amendment to Second Amended and Restated Note Agreement
dated December 4, 1997, by and among The Peregrine Real Estate
Trust, the Noteholders named therein, and The Prudential
Insurance Company of America as agent for the Noteholders (8)
10.16 Employment Agreement between The Peregrine Real Estate Trust and Roger D. Snell, dated
September 30, 1997 (9)
27 Financial Data Schedule
</TABLE>
(1) Incorporated herein by reference to Peregrine's Report on Form 8-K
dated October 7, 1994.
(2) Incorporated herein by reference to Peregrine's Report on Form 8-K
dated August 25, 1994.
(3) Incorporated herein by reference to Peregrine's Report on Form 8-K
dated January 17, 1997.
(4) Incorporated herein by reference to Peregrine's Report on Form 10-Q for
the period ended September 30, 1996.
(5) Incorporated herein by reference to Peregrine's Report on Form 10-K for
the year ended December 31, 1996.
(6) Incorporated herein by reference to Peregrine's Report on Form 10-Q for
the period ended March 31, 1997.
(7) Incorporated herein by reference to Peregrine's Report on Form 10-Q for
the period ended June 30, 1997.
(8) Incorporated herein by reference to Peregrine's Report on Form 8-K
dated December 23, 1997.
(9) Incorporated herein by reference to Peregrine's Report on Form 10-K for
the year ended December 31, 1997.
(b) Reports on Form 8-K
None.
19
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PEREGRINE REAL ESTATE TRUST
May 15, 1998 /s/ Wendy G. Powell
- ------------ ------------------------------------
Date Wendy G. Powell
Vice President and
Chief Accounting Officer
20
<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1(a) Restated Declaration of Trust of The Peregrine Real Estate Trust (1)
3.1(b) Bylaws of The Peregrine Real Estate Trust (1)
10.1 Second Amended and Restated Note Agreement dated September 27,
1994, by and among Commonwealth Equity Trust, the Noteholders
named therein, and The Prudential Insurance Company of America
as Agent for the Noteholders (1)
10.2 Loan and Security Agreement dated October 6, 1994, between Commonwealth Equity Trust and
Foothill Capital Corporation (1)
10.3 Redeemable Convertible Preferred Stock Purchase Agreement
dated as of October 1, 1994, by and among The Peregrine Real
Estate Trust, Pacific Mutual Life Insurance Company, The
Prudential Insurance Company of America, PRUCO Life Insurance
Company, ORIX USA Corporation, Weyerhaeuser Company Master
Retirement Trust, TCW Special Credits Fund IV, TCW Special
Credits Plus Fund, TCW Special Credits Trust IV, and TCW
Special Credits Trust IVA (1)
10.4 Registration Rights Agreement dated as of October 1, 1994, by
and among The Peregrine Real Estate Trust, Pacific Mutual Life
Insurance Company, The Prudential Insurance Company of
America, PRUCO Life Insurance Company, ORIX USA Corporation,
Weyerhaeuser Company Master Retirement Trust, TCW Special
Credits Fund IV, TCW Special Credits Plus Fund, TCW Special
Credits Trust IV, and TCW Special Credits Trust IVA (1)
10.5 Services and Confidentiality Agreement dated October 1, 1994, between Commonwealth Equity Trust
and FAMA Management, Inc. (1)
10.6 Third Amended Plan of Reorganization of Commonwealth Equity Trust (2)
10.7 Stock Purchase Agreement, dated as of January 3, 1997, by and
between The Peregrine Real Estate Trust and CalREIT Investors
Limited Partnership (3)
10.8 Form of Indemnification Agreement (4)
10.9 The Peregrine Real Estate Trust Trustee Stock Option Plan (5)
10.10 Employment Agreement between The Peregrine Real Estate Trust and Joseph M. Mock, dated June 1,
1996 (5)
10.11 First Amendment to Employment Agreement between The Peregrine Real Estate Trust and Joseph M.
Mock, dated December 1, 1996 (5)
</TABLE>
21
<PAGE> 25
<TABLE>
<S> <C>
10.12 Second Amendment to Employment Agreement between The Peregrine Real Estate Trust and Joseph M.
Mock, dated April 30, 1997 (6)
10.13 Form of Indemnification Agreement (7)
10.14 Loan and Security Agreement dated December 4, 1997, by and among The Peregrine Real Estate
Trust and Fleet Capital Corporation (8)
10.15 Second Amendment to Second Amended and Restated Note Agreement
dated December 4, 1997, by and among The Peregrine Real Estate
Trust, the Noteholders named therein, and The Prudential
Insurance Company of America as agent for the Noteholders (8)
10.16 Employment Agreement between The Peregrine Real Estate Trust and Roger D. Snell, dated
September 30, 1997 (9)
27 Financial Data Schedule
</TABLE>
(1) Incorporated herein by reference to Peregrine's Report on Form 8-K
dated October 7, 1994.
(2) Incorporated herein by reference to Peregrine's Report on Form 8-K
dated August 25, 1994.
(3) Incorporated herein by reference to Peregrine's Report on Form 8-K
dated January 17, 1997.
(4) Incorporated herein by reference to Peregrine's Report on Form 10-Q for
the period ended September 30, 1996.
(5) Incorporated herein by reference to Peregrine's Report on Form 10-K for
the year ended December 31, 1996.
(6) Incorporated herein by reference to Peregrine's Report on Form 10-Q for
the period ended March 31, 1997.
(7) Incorporated herein by reference to Peregrine's Report on Form 10-Q for
the period ended June 30, 1997.
(8) Incorporated herein by reference to Peregrine's Report on Form 8-K
dated December 23, 1997.
(9) Incorporated herein by reference to Peregrine's Report on Form 10-K for
the year ended December 31, 1997.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,717
<SECURITIES> 100
<RECEIVABLES> 1,007
<ALLOWANCES> (109)
<INVENTORY> 0
<CURRENT-ASSETS> 4,547
<PP&E> 70,576
<DEPRECIATION> (5,410)
<TOTAL-ASSETS> 69,713
<CURRENT-LIABILITIES> 2,736
<BONDS> 59,378
30,384
0
<COMMON> 13,356
<OTHER-SE> (36,141)
<TOTAL-LIABILITY-AND-EQUITY> 69,713
<SALES> 0
<TOTAL-REVENUES> 5,428
<CGS> 0
<TOTAL-COSTS> (3,262)
<OTHER-EXPENSES> (1,555)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,331)
<INCOME-PRETAX> (720)
<INCOME-TAX> 0
<INCOME-CONTINUING> (720)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (720)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.33)<F1>
<FN>
<F1>COMMON SHARES OF BENEFICIAL INTEREST EQUIVALENTS WERE ANTI-DILUTIVE. THE EPS
FIGURES PRESENTED ABOVE INCLUDE THE EFFECTS OF STOCK DIVIDENS DISCOUNTS, AND
ACCRETION OF DISCOUNTS ON REDEEMABLE CONVERTIBLE PREFERED STOCK.
</FN>
</TABLE>
