---------------------------------------------------------------- ---------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 1998 Commission File Number 0-8725 PACIFIC REAL ESTATE INVESTMENT TRUST A CALIFORNIA TRUST I.R.S. Employer Identification No. 94-1572930 1010 El Camino Real, Suite 210 Menlo Park, CA 94025 Telephone: (650) 327-7147 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. $10 Par Value, 3,706,845 shares ---------------------------------------------------------------- ---------------------------------------------------------------- PACIFIC REAL ESTATE INVESTMENT TRUST PART I - FINANCIAL INFORMATION CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) ITEM I - FINANCIAL STATEMENTS THREE MONTHS ENDED SIX MONTHS ENDED ------------------ ---------------- JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997 ------------- ------------- ------------- ------------- (LIQUIDATION (GOING-CONCERN (LIQUIDATION (GOING-CONCERN BASIS) BASIS) BASIS) BASIS) Rental revenues . . . . . . . . . . . . . . . . . . . . $ 465,000 $ 704,000 $ 871,000 $ 1,834,000 Operating expenses (including related party amounts of ------------- -------------- ------------- --------------- $32,000 for the three months ended June 30, 1998, $66,000 for the three months ended June 30, 1997, $108,000 for the six months ended June 30, 1998 and $177,000 for the six months ended June 30, 1997) Operating . . . . . . . . . . . . . . . . . . . . 143,000 200,000 330,000 513,000 Property tax. . . . . . . . . . . . . . . . . . . 23,000 57,000 46,000 162,000 General and administrative . . . . . . . . . . . 78,000 98,000 173,000 208,000 Depreciation and amortization . . . . . . . . . . 179,000 475,000 Property management fees. . . . . . . . . . . . . 16,000 30,000 31,000 72,000 Loss (gain) on property sale . . . . . . . . . . (36,000) (3,000) (36,000) 767,000 ------------- -------------- ------------- ------------- Total operating expenses . . . . . . . 224,000 561,000 544,000 2,197,000 ------------- -------------- ------------- ------------- Operating income (loss) . . . . . . . . . . . . . . . 241,000 143,000 327,000 (363,000) ------------- -------------- ------------- ------------- Other income/(expense): Interest income . . . . . . . . . . . . . . . . . 24,000 88,000 47,000 252,000 Interest expense . . . . . . . . . . . . . . . . (33,000) (246,000) (65,000) (970,000) Reincorporation/merger expenses . . . . . . . . . (49,000) (147,000) ------------- -------------- ------------- ------------- Total other income/(expense) . . . . . . . . (9,000) (207,000) (18,000) (865,000) ------------- -------------- ------------- ------------- Net income (loss) before minority interest . . . . . . 232,000 (64,000) 309,000 (1,228,000) ------------- -------------- ------------- ------------- Minority interest in joint venture . . . . . . . . . . (172,000) (105,000) (313,000) (184,000) ------------- -------------- ------------- --------------- Net income (loss) . . . . . . . . . . . . . . . . . . $ 60,000 $ (169,000) $ (4,000) $ (1,412,000) ------------- -------------- ------------- --------------- ------------- -------------- ------------- --------------- Basic and diluted income (loss) per share of beneficial interest. . . . . . . . . . . . . . . . $ 0.02 $ (0.05) $ (0.00) $ (0.38) ------------- -------------- ------------- --------------- ------------- -------------- ------------- --------------- See notes to consolidated financial statements. Page 2 of 9 PACIFIC REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF NET ASSETS (LIQUIDATION BASIS) (UNAUDITED) ASSETS JUNE 30,1998 DEC 31, 1997 --------------- ---------------- Investment in operating commercial properties: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 200,000 $ 200,000 Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . 10,403,000 11,210,000 Deferral of estimated appreciation on commercial properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,077,000) (3,280,000) --------------- --------------- Commercial properties - net. . . . . . . . . . . . . . . . . . . . . . . 7,526,000 8,130,000 Property in development. . . . . . . . . . . . . . . . . . . . . . . . . . 1,331,000 868,000 Notes receivable (net of allowance of $20,000 in 1998 and $28,000 in 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,000 148,000 Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,861,000 3,479,000 Accounts receivable (net of allowance of $43,000 in 1998 and $42,000 in 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000 75,000 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 547,000 685,000 --------------- -------------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,427,000 $ 13,385,000 --------------- -------------- --------------- -------------- LIABILITIES Liabilities: Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,253,000 $ 1,271,000 Security deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000 52,000 Accounts payable and other liabilities . . . . . . . . . . . . . . . . . 165,000 630,000 Reserve for estimated costs during the period of liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 40,000 --------------- -------------- Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 1,512,000 1,993,000 --------------- -------------- Minority interest in joint venture. . . . . . . . . . . . . . . . . . . . 5,490,000 5,963,000 --------------- -------------- Net assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,425,000 $ 5,429,000 --------------- -------------- --------------- -------------- See notes to consolidated financial statements. Page 3 of 9 PACIFIC REAL ESTATE INVESTMENT TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE SIX MONTHS ENDED JUNE 30, 1998 1997 --------------- ---------------- (liquidation (going-concern basis) basis) Cash Flow from Operating Activities: Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,000) $ (1,412,000) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 407,000 Amortization of note receivable discount. . . . . . . . . . . . . . (16,000) Amortization of deferred cost . . . . . . . . . . . . . . . . . . . 68,000 Minority interest in joint venture's operations . . . . . . . . . . 313,000 184,000 Provision for doubtful receivables. . . . . . . . . . . . . . . . . 64,000 Loss (gain) on sale of property . . . . . . . . . . . . . . . . . . (36,000) 767,000 Changes in operating assets and liabilities Accounts payable and other liabilities. . . . . . . . . . . . . . . (465,000) (1,683,000) Security deposits . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 (16,000) Deferred lease commissions. . . . . . . . . . . . . . . . . . . . . (51,000) Deferred financing costs. . . . . . . . . . . . . . . . . . . . . . (67,000) Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 52,000 313,000 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 136,000 38,000 ---------------- ---------------- Net cash used by operating activities (2,000) (1,404,000) ---------------- ---------------- Cash Flow from Investing Activities: Decrease in restricted cash . . . . . . . . . . . . . . . . . . . . 1,154,000 Construction of properties. . . . . . . . . . . . . . . . . . . . . (463,000) (1,000) Property acquisitions . . . . . . . . . . . . . . . . . . . . . . . (200,000) Collection of notes receivable. . . . . . . . . . . . . . . . . . . 9,000 56,000 Additions to notes receivable . . . . . . . . . . . . . . . . . . . (73,000) Proceeds from the sale of property. . . . . . . . . . . . . . . . . 36,000 11,006,000 --------------- ------------------ Net cash provided (used) in investing activities . . . . . . . . . . . . (418,000) 11,942,000 --------------- ------------------ Cash Flow from Financing Activities: Proceeds from short-term notes. . . . . . . . . . . . . . . . . . . 215,000 Re-payment of mortgage loans. . . . . . . . . . . . . . . . . . . . (18,000) (83,000) Re-payment of short-term notes. . . . . . . . . . . . . . . . . . . (7,915,000) Distributions of joint venture partner. . . . . . . . . . . . . . . (180,000) (180,000) --------------- ------------------ Net cash used by financing activities (198,000) (7,963,000) --------------- ------------------ Increase (decrease) in cash. . . . . . . . . . . . . . . . . . . . . . (618,000) 2,575,000 Cash, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . 3,479,000 1,011,000 --------------- ------------------ Cash, June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,861,000 $ 3,586,000 --------------- ------------------ --------------- ------------------ See notes to consolidated financial statements. Page 4 of 9 PACIFIC REAL ESTATE INVESTMENT TRUST NOTES TO INTERIM FINANCIAL STATEMENTS (UNAUDITED) Basis of Presentation The accompanying unaudited financial statements include all adjustments which are, in the opinion of management, necessary for fair presentation of the Trust's financial position, including changes therein, and results of operations for the interim period reported upon. Such statements have been prepared from the Trust's accounting records in accordance with the instructions to Form 10-Q. Plan of Liquidation On February 4, 1998, the Trust's shareholders approved a Plan of Dissolution. As a result, the Trust's financial statements as of December 31, 1997 and thereafter have been prepared on a liquidation basis. Accordingly, assets have been valued at estimated net realizable value and liabilities include estimated costs associated with carrying out the plan of liquidation. Income Taxes The Internal Revenue Code provides that a trust qualifies as a real estate investment trust if, among other things, the trust distributes each year at least 95% of its taxable income to shareholders. If the Trust distributes at least 95% of its taxable income to shareholders, such distributions can be treated as deductions for income tax purposes. Because it is the policy of the Trust to distribute amounts approximately equal to its taxable income plus depreciation and amortization, no provision for income taxes has been made in the accompanying financial statements. Sale of Kings Court Shopping Center On May 20, 1998, the Trust entered into a letter of intent to sell it's 40% interest in Kingsco, a General Partnership. Kingsco's sole asset is the Kings Court Shopping Center, in Los Gatos, CA. The sale is contingent upon the approval of the buyer with respect to certain property condition contingencies. During April 1998, the estimated net value of Kings Court Shopping Center was reduced by $850,000. This decrease is reflected in a reduction in the estimated appreciation of commercial properties and a reduction of the deferral of estimated appreciation of commercial properties at June 30, 1998. Related Party Transactions Fees paid or payable to the Advisor and Menlo Management Company for three months and six months ended 1998 and 1997 were as follows: Three months ended Six months ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------ ------------- --------------- ADVISOR Advisory fee - .1% of Assets . . . . . . . . . . . $ $ 5,000 $ $ 17,000 MENLO MANAGEMENT COMPANY Property management fees . . . . . . . . . . . . . 16,000 30,000 31,000 72,000 Administrative services. . . . . . . . . . . . . . 16,000 25,000 33,000 63,000 Lease commissions. . . . . . . . . . . . . . . . . 51,000 44,000 51,000 Loan fee . . . . . . . . . . . . . . . . . . . . . 6,000 25,000 ------------- ------------ ------------- --------------- Total . . . . . . . . . . . . . . . . . . . . $ 32,000 $ 117,000 $ 108,000 $ 228,000 ------------- ------------ ------------- --------------- ------------- ------------ ------------- --------------- Page 5 of 9 Basic and diluted income (loss) Per Share of Beneficial Interest Basic and diluted income (loss) per share of beneficial interest is computed by dividing net income (loss) by the weighted average number of shares outstanding for the three months and six months ended June 30, 1998 and 1997 were as follows: 1998 1997 -------- -------- Weighted average number of shares outstanding 3,706,845 3,706,845 Page 6 of 9 PACIFIC REAL ESTATE INVESTMENT TRUST PART I - FINANCIAL INFORMATION ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OF OPERATIONS. (1) LIQUIDITY AND CAPITAL RESOURCES: Cash flow used by operating activities was $2,000 for the six months ended June 30, 1998 as compared to cash flow used by operating activities of $1,404,000 for the six months ended June 30, 1997. The net change is primarily due to the timing differences in the receipt of rents and payments of trade payables and the change in expense levels resulting from the sale of Monterey Plaza Shopping Center in 1997. Cash flow used by investing activities was $418,000 for the six months ended June 30, 1998 compared to cash flow provided by investing activities was $11,942,000 for the six months ended June 30, 1997. The net change is primarily the result of the sale of Monterey Plaza Shopping Center in 1997. Cash flow used by financing activities was $198,000 for the six months ended June 30, 1998 as compared to $7,963,000 for the six months ended June 30, 1997. The decrease from 1997 is primarily due to the repayment of short term notes payable as the result of the sale of Monterey Plaza Shopping Center in 1997. The Trust entered into a contract to sell it's 40% interest in Kingsco, a General Partnership. Kingsco's sole asset is the King's Court Shopping Center, in Los Gatos, CA. The sale is contingent upon the approval of the buyer with respect to certain property condition contingencies. During April 1998, the estimated net value of Kings Court Shopping Center was reduced by $850,000. This decrease is reflected in a reduction in the estimated appreciation of commercial properties and a reduction of the deferral of estimated appreciation of commercial properties at June 30, 1998. In connection with the completion of the development of the Wanlass Shopping Center, there are two factors which could adversely affect the net realizable value of the property. First, the purchase price of the fee estate could increase above the current negotiated limit. Second, the necessary site plan approvals could be withheld by the City of San Pablo, thereby reducing the amount of leasable area and rent revenues for the overall project. The ultimate outcome of these factors and the impact, if any, on the net realizable value is not yet determined. Accordingly, no adjustment for these uncertainties has been recorded in the accompanying financial statements. (2) MATERIAL CHANGES IN RESULTS OF OPERATIONS FOR SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO 1997: Net loss for the six months ended June 30, 1998 was $4,000 as compared to a net loss of $1,412,000 for the six months ended June 30, 1997. During the first six months rental revenues decreased from $1,834,000 in 1997 to $871,000 in 1998, a decrease of $963,000 or 53%. This decrease resulted from the sale of Monterey Plaza Shopping Center in April 1997. Operating expenses decreased from $513,000 in 1997 to $330,000 in 1998, a decrease of $183,000 or 36%. Property taxes decreased from $162,000 in 1997 to $46,000 in 1998, a decrease of $116,000, or 72%. Property management fees decreased from $72,000 in 1997 to $31,000 in 1998, a decrease of $41,000, or 57%. Each of these decreases resulted from the sale of Monterey Plaza Shopping Center in April 1997. Depreciation and amortization decreased from $475,000 in 1997 to $0 in 1998, a decrease of $475,000, or 100%, resulting from the change to liquidation basis of accounting. General and administrative expense decreased from $208,000 in 1997 to $173,000 in 1998, a decrease of $35,000 or 17% due to cost saving measures. Gain on the sale of property of $36,000 in 1998 represents the gain on the sale of the El Portal pad. Loss on the sale of property of $767,000 in 1997 represents the loss on the sale of Monterey Plaza Shopping Center and the Trust's five notes receivable. Interest income decreased from $252,000 in 1997 to $47,000 in 1998, a decrease of $205,000, or 81%. The net change was primarily the result of the sale of the Trust's five notes receivable in April 1997. Page 7 of 9 Interest expense decreased from $970,000 in 1997 to $65,000 in 1998, a decrease of $905,000, or 93%. The decrease was primarily due to the assumption of mortgage debt by the buyers of Monterey Plaza Shopping Center and the pay-down of short-term debt in 1997. In connection with a potential merger, the Trust incurred expenses of $147,000 during the six months ended June 30, 1997. Material changes for the three months ended June 30, 1998 as compared to 1997 were for the same reason in relative proportionate amounts as those shown for the six months. ITEM 6 (b) - Report on Form 8K was filed on February 4, 1998. Page 8 of 9 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned. PACIFIC REAL ESTATE INVESTMENT TRUST Date: JULY 31, 1998 By: Robert Ch. Gould ------------- -------------------------- Robert Ch. Gould VICE PRESIDENT Date: July 31, 1998 By: Harry E. Kellogg ------------- -------------------------- Harry E. Kellogg TREASURER Page 9 of 9