- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 SEPTEMBER 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 NINE MONTHS ENDED ------------------ ----------------- SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, ------------- ------------- ------------- ------------- 1998 1997 1998 1997 ---- ---- ---- ---- (LIQUIDATION (GOING-CONCERN (LIQUIDATION (GOING-CONCERN BASIS) BASIS) BASIS) BASIS) Rental revenues........................................... $ 358,000 $ 463,000 $ 1,229,000 $ 2,297,000 ------------- ------------- ------------ -------------- Operating expenses (including related party amounts of $48,000 for the three months ended September 30, 1998, $57,000 for the three months ended September 30, 1997, $156,000 for the nine months ended September 30, 1998 and $290,000 for the nine months ended September 30, 1997) Operating........................................... 183,000 141,000 513,000 654,000 Property tax........................................ 19,000 18,000 65,000 180,000 General and administrative.......................... 82,000 72,000 255,000 280,000 Depreciation and amortization....................... 126,000 601,000 Property management fees............................ 20,000 17,000 51,000 89,000 Loss (gain) on property sale........................ (4,948,000) (4,984,000) 767,000 ------------- ------------- ------------ -------------- Total operating expenses/(income).............. (4,644,000) 374,000 (4,100,000) 2,571,000 ------------- ------------- ------------ -------------- Operating income (loss)................................... 5,002,000 89,000 5,329,000 (274,000) ------------- ------------- ------------ -------------- Other income/(expense): Interest income..................................... 34,000 33,000 81,000 285,000 Interest expense.................................... (20,000) (33,000) (85,000) (1,003,000) Merger expenses..................................... (147,000) ------------- ------------- ------------ -------------- Total other income/(expense)................... 14,000 0 (4,000) (865,000) ------------- ------------- ------------ -------------- Net income (loss) before minority interest................ 5,016,000 89,000 5,325,000 (1,139,000) ------------- ------------- ------------ -------------- Minority interest in joint venture........................ (2,888,000) (96,000) (3,201,000) (280,000) ------------- ------------- ------------ -------------- Net income (loss)......................................... $ 2,128,000 $ (7,000) $ 2,124,000 $ (1,419,000) ------------- ------------- ------------ -------------- ------------- ------------- ------------ -------------- Basic and diluted income (loss) per share of beneficial interest.................................................. $ 0.57 $ 0.00 $ 0.57 $ (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 SEPT 30,1998 DEC 31, 1997 ---------------- ---------------- Investment in operating commercial properties: Land................................................................... $ 1,725,000 $ 200,000 Buildings and improvements............................................. 1,643,000 11,210,000 Deferral of estimated appreciation on commercial properties............ (3,280,000) ---------------- ---------------- Commercial properties - net............................................ 3,368,000 8,130,000 Property in development.................................................... 868,000 Notes receivable (net of allowance of $20,000 in 1998 and $28,000 in 1997)...................................................................... 1,000 148,000 Cash....................................................................... 3,851,000 3,479,000 Accounts receivable (net of allowance of $43,000 in 1998 and $42,000 in 1997)...................................................................... 1,000 75,000 Other assets............................................................... 504,000 685,000 ---------------- ---------------- Total................................................................ $ 7,725,000 $ 13,385,000 ---------------- ---------------- ---------------- ---------------- LIABILITIES Liabilities: Mortgage loans......................................................... $ $ 1,271,000 Security deposits...................................................... 7,000 52,000 Accounts payable and other liabilities................................. 125,000 630,000 Reserve for estimated costs during the period of liquidation........... 40,000 40,000 ---------------- ---------------- Total liabilities 172,000 1,993,000 ---------------- ---------------- Minority interest in joint venture......................................... 5,963,000 ---------------- ---------------- Net assets................................................................ $ 7,553,000 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 ------------ --------------- (liquidation (going-concern basis) basis) Cash Flow from Operating Activities: Net income (loss). . . . . . . . . . . . . . . . . . . $ 2,124,000 $ (1,419,000) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation. . . . . . . . . . . . . . . . . . . . . 513,000 Amortization of note receivable discount. . . . . . . (17,000) Amortization of deferred cost . . . . . . . . . . . . 88,000 Minority interest in joint venture's operations . . . 3,201,000 280,000 Provision for doubtful receivables. . . . . . . . . . 64,000 Loss (gain) on sale of property . . . . . . . . . . . (4,984,000) 767,000 Changes in operating assets and liabilities Accounts payable and other liabilities. . . . . . . . (505,000) (1,758,000) Security deposits . . . . . . . . . . . . . . . . . . (16,000) Deferred lease commissions. . . . . . . . . . . . . . (74,000) Accounts receivable . . . . . . . . . . . . . . . . . 74,000 321,000 Other assets. . . . . . . . . . . . . . . . . . . . . 89,000 (16,000) ------------ --------------- Net cash used by operating activities (1,000) (1,267,000) ------------ --------------- Cash Flow from Investing Activities: Decrease in restricted cash . . . . . . . . . . . . . 1,154,000 Construction of properties. . . . . . . . . . . . . . (560,000) (212,000) Property acquisitions . . . . . . . . . . . . . . . . (1,688,000) (200,000) Collection of notes receivable. . . . . . . . . . . . 147,000 62,000 Additions to notes receivable . . . . . . . . . . . . (73,000) Proceeds from the sale of property. . . . . . . . . . 3,985,000 11,006,000 ------------ --------------- Net cash provided in investing activities . . . . . . . 1,884,000 11,737,000 ------------ --------------- Cash Flow from Financing Activities: Proceeds from short-term notes. . . . . . . . . . . . 300,000 215,000 Re-payment of mortgage loans. . . . . . . . . . . . . (1,271,000) (92,000) Re-payment of short-term notes. . . . . . . . . . . . (300,000) (7,915,000) Distributions of joint venture partner. . . . . . . . (240,000) (300,000) ------------ --------------- Net cash used by financing activities . . . . . . . . . (1,511,000) (8,092,000) ------------ --------------- Increase in cash. . . . . . . . . . . . . . . . . . . . 372,000 2,378,000 Cash, January 1 . . . . . . . . . . . . . . . . . . . 3,479,000 1,011,000 ------------ --------------- Cash, September 30. . . . . . . . . . . . . . . . . . $ 3,851,000 $ 3,389,000 ------------ --------------- ------------ --------------- See notes to consolidated financial statements. NON CASH TRANSACTION On August 24, 1998 the Trust sold Kings Court Shopping Center to Federal Realty Partners L.P., a Delaware limited partnership. The three joint venture partners, other than the Trust, each received 86,721 partnership units in Federal Realty Partners, LP. The Trust received cash for its share of the proceeds from the sale. 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, one Note Receivable and the San Pablo Pad The Trust sold all of its rights, title and interest in Kings Court Shopping Center for $10,650,000 to Federal Realty Partners, L.P., a Delaware limited partnership, on August 24, 1998. The net cash proceeds to the Trust were $4,260,000 less closing costs from the transaction. On August 14, 1998, the Trust assigned to Neptune Investment Company a note receivable for $145,000. The amount was greater than the book carrying value and it was determined based on negotiations between the parties and certain third party valuations. On May 5, 1998, the Trust sold to Edward Margherlo certain real property located in San Pablo, California, the net cash proceeds to the Trust were $36,000. Wanlass Shopping Center On August 18, 1998, the Trust purchased the Wanlass Shopping Center for $1,780,000 (or $1,688,000 after reduction of the security deposit). This purchase was required under the terms of the then existing ground lease between the Trust and the ground lessor. 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 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. Second, the ability to locate a suitable tenant for one of the available retail building pads proposed for the center. 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. Page 5 of 9 Related Party Transactions Fees paid or payable to the Advisor and Menlo Management Company for three months and nine months ended 1998 and 1997 were as follows: Three months ended Nine months ended Sept 30, 1998 Sept 30, 1997 Sept 30, 1998 Sept 30, 1997 ------------- ------------- ------------- ------------- ADVISOR Advisory fee - .1% of Assets . . . . . . . $ $ $ $ 17,000 MENLO MANAGEMENT COMPANY Property management fees . . . . . . . . . 19,000 17,000 50,000 89,000 Administrative services. . . . . . . . . . 16,000 17,000 49,000 85,000 Lease commissions. . . . . . . . . . . . . 13,000 23,000 57,000 74,000 Loan fee . . . . . . . . . . . . . . . . . 25,000 ------------- ------------- ------------- ------------- Total. . . . . . . . . . . . . . . . . $ 48,000 $ 57,000 $ 156,000 $ 290,000 ------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 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 nine months ended September 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 $6,403,000 for the nine months ended September 30, 1998 as compared to cash flow used by operating activities of $1,267,000 for the nine months ended September 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 loss on the sale of Monterey Plaza Shopping Center in 1997 compared to the gain on the sale of the Kings Court Shopping Center in 1998. Cash flow provided by investing activities was $8,286,000 for the nine months ended September 30, 1998 compared to $11,737,000 for the nine months ended September 30, 1997. The net change is primarily the result of the sale of Monterey Plaza Shopping Center in 1997, the sale of Kings Court Shopping Center in 1998 and the acquisition of the Wanlass Shopping Center in 1998. Cash flow used by financing activities was $1,511,000 for the nine months ended September 30, 1998 as compared to $8,092,000 for the nine months ended September 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 and the repayment of the Kings Court mortgage debt in 1998. The Trust sold all of its rights, title and interest in Kings Court Shopping Center for $10,650,000 to Federal Realty Partners, L.P., a Delaware limited partnership, on August 24, 1998. The net cash proceeds to the Trust were $4,260,000 less closing costs from the transaction. On August 14, 1998, the Trust sold to Neptune Investment Company a note receivable for $145,000. The amount was greater than the book carrying value and it was determined based on negotiations between the parties and a certain third party valuations. On May 5, 1998, the Trust sold to Edward Margherlo certain real property located in San Pablo, California, the net cash proceeds to the Trust were $36,000. On August 18, 1998, The Trust purchased the Wanlass Shopping Center for $1,780,000 (or $1,688,000 after reduction of the security deposit). This purchase was required under the terms of the then existing ground lease between the Trust and the ground lessor. 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 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. Second, the ability to locate a suitable tenant for one of the available retail building pads proposed for the center. 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 NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO 1997: Net income for the nine months ended September 30, 1998 was $2,124,000 as compared to a net loss of $1,419,000 for the nine months ended September 30, 1997. During the first nine months rental revenues decreased from $2,297,000 in 1997 to $1,229,000 in 1998, a decrease of $1,068,000 or 46%. This decrease resulted from the sale of Monterey Plaza Shopping Center in April 1997 and Kings Court Shopping Center in August 1998. Operating expenses decreased from $654,000 in 1997 to $513,000 in 1998, a decrease of $141,000 or 22%. Property taxes decreased from $180,000 in 1997 to $65,000 in 1998, a decrease of $115,000, or 64%. Property management fees decreased from $89,000 in 1997 to $51,000 in 1998, a decrease of $38,000, or 43%. Each of these decreases resulted from the sale of Monterey Plaza Shopping Center in April 1997 and Kings Court Shopping Center in August 1998. Page 7 of 9 Depreciation and amortization decreased from $601,000 in 1997 to $0 in 1998, a decrease of $601,000, or 100%, resulting from the change to liquidation basis of accounting. General and administrative expense decreased from $280,000 in 1997 to $255,000 in 1998, a decrease of $25,000 or 9% due to cost saving measures. Gain on the sale of property of $4,984,000 in 1998 represents the gain on the sale of the El Portal pad and the sale of Kings Court Shopping Center. 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 $285,000 in 1997 to $81,000 in 1998, a decrease of $204,000, or 72%. The net change was primarily the result of the sale of the Trust's five notes receivable in April 1997. Interest expense decreased from $1,003,000 in 1997 to $85,000 in 1998, a decrease of $918,000, or 92%. The decrease was primarily due to the assumption of mortgage debt by the buyers of Monterey Plaza Shopping Center, the pay-down of short-term debt in 1997 and the re-payment of the Kings Court mortgage debt. In connection with a potential merger, the Trust incurred expenses of $147,000 during the nine months ended September 30, 1997. Material changes for the three months ended September 30, 1998 as compared to 1997 were for the same reason in relative proportionate amounts as those shown for the nine months. ITEM 6 (b) - Report on Form 8K was filed on February 4, 1998 and September 18, 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: NOVEMBER 6, 1998 By: ROBERT CH. GOULD -------------------------------- Robert Ch. Gould VICE PRESIDENT Date: NOVEMBER 6, 1998 By: HARRY E. KELLOGG -------------------------------- Harry E. Kellogg TREASURER Page 9 of 9