-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PuWXhEA7dpny/qqXyOLdJmvOkhA5Lk8OgMcd9hYPVriuoRGP1ZUp89VYGdIeyafR 0RuzWwCOsgeHqILcCetO+g== 0000950149-97-000675.txt : 19970401 0000950149-97-000675.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950149-97-000675 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEREGRINE REAL ESTATE TRUST CENTRAL INDEX KEY: 0000314485 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 942255677 STATE OF INCORPORATION: CA FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-09097 FILM NUMBER: 97568528 BUSINESS ADDRESS: STREET 1: 1300 ETHAN WAY, SUITE 200 CITY: SACRAMENTO STATE: CA ZIP: 95825 BUSINESS PHONE: 916-929-82 MAIL ADDRESS: STREET 1: 1300 EATHAN WAY SUITE 200 STREET 2: 705 UNIVERSITY AVE CITY: SACRAMENTO STATE: CA ZIP: 95825 FORMER COMPANY: FORMER CONFORMED NAME: COMMONWEALTH EQUITY TRUST DATE OF NAME CHANGE: 19920703 10-K405 1 FORM 10-K FOR THE YEAR ENDED 12/31/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the fiscal year ended December 31, 1996 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] For the Transition period from ________________________ 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, CALIFORNIA 95825 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (916) 929-8244 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of Each Class Common Shares of Beneficial Interest 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, and (2) has been subject to the filing requirements for at least the past 90 days. Yes X No --- --- 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] There is no active trading market for Peregrine's Common Shares of Beneficial Interest. Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 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 --- --- As of March 15, 1997, there were 4,881,122 outstanding Common Shares of Beneficial Interest. As of March 15, 1997, there were 2,320,540 outstanding Common Shares of Beneficial Interest held by non-affiliates of the registrant. Since there is no active trading market for the registrant's Common Shares of Beneficial Interest, no aggregate market value may be given with respect to such shares. 3 THE PEREGRINE REAL ESTATE TRUST - --------------------------------------------------------------------------------------------------------- PART I PAGE - --------------------------------------------------------------------------------------------------------- Item 1. Business 1-10 Item 2. Properties 11-12 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 - --------------------------------------------------------------------------------------------------------- PART II - --------------------------------------------------------------------------------------------------------- Item 5. Market for Registrant's Common Shares of Beneficial Interest Equity and Related Security Holder Matters 14 Item 6. Selected Financial Data 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 16-24 Item 8. Financial Statements and Supplementary Data 25-67 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68 - --------------------------------------------------------------------------------------------------------- PART III - --------------------------------------------------------------------------------------------------------- Item 10. Trustees and Executive Officers of the Registrant 69-71 Item 11. Executive Compensation 71-73 Item 12. Security Ownership of Certain Beneficial Owners and Management 74-77 Item 13. Certain Relationships and Related Transactions 78 - --------------------------------------------------------------------------------------------------------- PART IV - --------------------------------------------------------------------------------------------------------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 79-80 - ---------------------------------------------------------------------------------------------------------
(i) 4 PART I Item 1. Business (a) Introduction The Peregrine Real Estate Trust ("Peregrine") is a California business trust headquartered in Sacramento, California. As of December 31, 1996, Peregrine's assets included nineteen commercial properties located primarily in the Sacramento area, three hotel properties located in Northern California, one parcel of vacant land located in the Sacramento area, a partnership interest in a general partnership, three mortgage notes secured by real property, and a 76% stock ownership interest in the California Real Estate Investment Trust ("CalREIT"). At December 31, 1996, CalREIT's assets included two commercial properties (one located in Sacramento, California and one located in Kirkland, Washington), three mortgage notes secured by real property, and a portfolio of diversified, unleveraged pools of U.S. Government Agency mortgage-backed securities. Subsequent to December 31, 1996, Peregrine's interest in CalREIT was sold for $20,222,000 in cash. Peregrine and its subsidiary, CalREIT, are collectively referred to as the "Trust". Peregrine emerged from bankruptcy under a Plan of Reorganization in October 1994. As such, 1996 represented Peregrine's second full year of operations since the application of "fresh start" accounting upon Peregrine's emergence from bankruptcy on October 7, 1994. (b) Background and Summary of Bankruptcy Proceedings Chapter 11 Proceedings. On August 2, 1993, Commonwealth Equity Trust ("CET") filed a petition for reorganization under Chapter 11 of the United States Bankruptcy Code. The 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. Plan of Reorganization. On June 9, 1994, Peregrine, formerly CET; a lender group including the Prudential Insurance Company of America, the Pacific Mutual Life Insurance Company, ORIX USA Corporation, and Trust Company of the West ("TCW"), (collectively the "Senior Lender Group"); the Official Committee of Holders of Equity Interests; and the Official Committee of Creditors Holding Unsecured Claims filed with the Bankruptcy Court the Third Amended Plan of Reorganization (the "Plan") which was confirmed as modified on August 8, 1994. The Effective Date of the Plan (the date on which Peregrine emerged from bankruptcy) was October 7, 1994. Peregrine is under the jurisdiction of the U.S. Bankruptcy Court until entry of a final decree, an event now expected to occur in 1997. The Plan provided for inter alia: (a) the restructuring of virtually all of Peregrine's secured and unsecured debt; (b) the reduction in the number of Common Shares of Beneficial Interest held by current shareholders at the time from approximately 25,100,000 (old) CET shares to approximately 2,334,000 (new) Peregrine shares (effectively a reverse stock split); and the issuance of approximately 2,550,000 new Common Shares of Beneficial Interest plus a new class of Redeemable Convertible Preferred Shares (see Senior Lender Group - Redeemable Convertible Preferred Stock discussed below) of Peregrine to the Senior Lender 1 5 Group. As of the Effective Date, the Senior Lender Group became the owner of a majority of the Common Shares of Beneficial Interest and all of the Redeemable Convertible Preferred Shares. The Senior Lender Group also received Restructured Secured Notes Payable in the aggregate original principal amount of $40,000,000 (see Senior Lender Group - Restructured Notes Payable discussed below). The Plan also required that Peregrine obtain a $10,000,000 working capital line of credit (the "Line of Credit") to which the Senior Lender Group agreed to subordinate. The Line of Credit, which is secured by certain of Peregrine's real property, was obtained prior to the Effective Date (See Line of Credit discussed below). Senior Lender Group. Peregrine'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: (i) Common Shares of Beneficial Interest equal to approximately 52% of the total outstanding Common Shares of Beneficial Interest represented by 2,550,001 shares. Subsequently, pursuant to the Plan, old CET shares that remained unexchanged as of October 7, 1995, were converted to new Peregrine shares and redistributed among Peregrine shareholders of record at December 31, 1995. As a result, as of March 15, 1997, the Senior Lender Group owned directly or indirectly 2,560,582 Common Shares of Beneficial Interest. (ii) Redeemable Convertible Preferred Stock (the "Preferred Shares" or "Preferred Stock") in the original face amount of $22,500,000, represented by 11,250,000 originally issued preferred shares, which carry 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 dividend payment is not made in full when due. If all dividends were paid in kind through October 1, 1998, no additional Common Shares of Beneficial Interest were issued, and the Preferred Stock converted to Common Shares of Beneficial Interest on October 1, 1998, the Senior Lender Group would, as a result of that conversion, acquire 77% of the total number of Common Shares of Beneficial Interest outstanding, thereby bringing its total holdings to approximately 89%. The Preferred Stock is redeemable in cash on October 1, 2000, however it may be redeemed earlier under certain circumstances including the sale of all or substantially all the assets of Peregrine. (iii) 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 was payable in kind through September 30, 1996, by means of Interest Deferral Notes issued quarterly. Since September 30, 1996, interest has been payable monthly in cash, with the first payment commencing November 1, 1996. The Interest Deferral Notes accrue interest at 8.5% per annum from the date of issuance. Interest payments, both on principal and the deferred interest, accrued through September 30, 1996, and have been payable monthly in cash since September 30, 1996, with the first payment commencing November 1, 1996. The Restructured Notes Payable and the Interest Deferral Notes (collectively the "Senior Lender Group Notes Payable" or "Senior Lender Group Notes") are collateralized, generally by all interests of Peregrine in real and personal property and are subordinated only to certain liens which are specified in the Plan and are due October 1, 2000. The Senior Lender Group Notes contain certain covenants and restrictions including the mandatory prepayment of principal in the amount of 80% of any net proceeds 2 6 Peregrine receives from the sale of the collateral for the Senior Lender Group Notes and from other specified sources. Line of Credit. Pursuant to the Plan, a Line of Credit in the original maximum amount of $10,000,000 was arranged. The Line of Credit is collateralized by a first lien on certain of Peregrine's properties. It is a revolving line and bears interest at 2.25% over the prime rate defined in the Agreement. The Line of Credit matures on October 7, 1997. In June 1996, in accordance with the Agreement, the Line of Credit was reduced to a maximum amount of $8,600,000, as a result of the release of certain collateral. Capital Constraints. The post-confirmation financial projections included in the Plan, which were prepared by CET's management in consultation with its financial advisors, included a number of assumptions related to expected future cash inflows which have not been achieved and outflows which have exceeded such projections. Such items include, but are not limited to the following: - Cash inflows from the commercial properties and hotels have been lower than projected due to, among other things, the bankruptcy filings of several tenants and overly aggressive assumptions used in the projections as to the lease-up, occupancy, and rental rates of the Sacarmento market. - The Plan assumed certain property values and levels of capital expenditures which have not been met; for example, since the date of confirmation, the Trust has recorded aggregate valuation allowances on its investment portfolio totaling approximately $14,000,000 (see Note 8 to consolidated financial statements), and has estimated the total capital expenditures required for its hotel portfolio to be more than projected in the Plan. - The financial projections included in the Plan envisioned annual dividend payments from Peregrine's subsidiary, CalREIT; however, no such dividends were paid subsequent to the Effective Date of the Plan. - Payments on pre-petition liabilities and payments to professionals for fees incurred in connection with the bankruptcy have exceeded the amounts included in the financial projections. As discussed above, the capital structure resulting from the Plan limits Peregrine's ability to raise new capital, to incur additional indebtedness, other than the $10,000,000 Line of Credit provided for in the Plan, or to generate sufficient cash flow for future operations from asset dispositions. Both the variances from the financial projections included in the Plan and the capital structure resulting from the Plan (herein referred to as "Capital Constraints") have had an adverse affect on the financial condition, results of operations, and liquidity of Peregrine. In addition, the Capital Constraints have impacted Peregrine's ability to move forward with its plans to maintain and refurbish the commercial and hotel properties in its portfolio. The Senior Lender Group Notes, as restructured by the Plan (as discussed above), provide that 80% of all net proceeds generated from the disposition of assets be paid to the Senior Lender Group to reduce Peregrine's indebtedness on the Senior Lender Group Notes. Although the Plan does not allow Peregrine to retain more than 20% of the net proceeds from asset dispositions, during 1996, Peregrine requested the Senior Lender Group to allow it to retain more than 20% of the net proceeds from certain asset dispositions which were to be used for capital expenditures related to the refurbishment of the Park Terrace Inn in Redding, California, and for the payment of professional fees incurred in connection with the bankruptcy proceedings. The Senior Lender Group did not grant Peregrine's request for additional proceeds to complete the refurbishments at the hotel. Peregrine was allowed to retain approximately $1,700,000 in additional proceeds for payment against the oustanding professional fees related to the bankruptcy proceedings of approximately $2,800,000. 3 7 Organization. Peregrine is governed by a Restated Declaration of Trust dated October 7, 1994. The Restated Declaration of Trust gives the Board of Trustees the power to borrow money on behalf of Peregrine; to make loans to other persons; to invest in the securities of other issuers under certain circumstances; to make investments in property; to purchase outstanding shares of Peregrine for such consideration as they deem advisable; to issue an annual report to shareholders; to issue debt securities; to allocate investments between direct and indirect ownership; and to exercise other powers in connection with Peregrine's operations. The Trustees can also make decisions regarding investment and sales activities without the prior approval of shareholders. CET's status as a qualified REIT for federal income tax purposes was terminated as of the beginning of its fiscal year ended September 30, 1993. Unless Peregrine seeks and is granted a waiver from the Internal Revenue Service, it may not obtain REIT status prior to its fifth taxable year ended after September 30, 1993. Transition Period. For purposes of this report, the Transition Period is defined as the period from October 7, 1994, the Effective Date of the Plan, through December 31, 1994. (c) Business in 1996 Overview. During 1996, Peregrine owned and operated a portfolio of investments that included real property, partnership interests, mortgage notes, and a 76% stock ownership interest in CalREIT. Efforts continued to be placed on improving property operations while simultaneously exploring alternative operating strategies for the future to maximize shareholder value. The immediate priority continued to be to meet Peregrine's debt obligations, including its obligations to make cash interest payments on the Senior Lender Group Notes commmencing November 1, 1996. To achieve this objective, emphasis remained on maximizing the income stream from the commercial and hotel properties and the select disposition of real estate assets with negative cash flows and/or which require significant capital expenditures beyond the resources available to Peregrine. In January 1996, Peregrine retained the services of an investment banking firm to assist management and the Board of Trustees in its review and analysis of strategic operating alternatives. The investment bankers reviewed and analyzed Peregrine's organizational structure and its entire investment portfolio, including its 76% stock ownership interest in CalREIT and CalREIT's strategic growth plans, and presented its findings and recommendations to Peregrine's management and Board of Trustees in March 1996. Following this review, as well as a review of strategic options realistically available to Peregrine, in light of among other things, the factors discussed above under CAPITAL CONSTRAINTS, and the inability to sell assets and reinvest in higher yielding investments or make capital improvements to existing assets under the terms of the Senior Lender Group Notes, the Board of Trustees determined to (1) continue its strategy of disposing of real estate assets with negative cash flows and/or which require significant capital expenditures beyond the resources availiable to Peregrine, (2) seek to dispose of its 76% ownership interest in CalREIT, and (3) commence discussions with the Senior Lender Group, as lender and controlling shareholder, regarding a modification of the terms of the Senior Lender Group Notes to allow for the reinvestment of additional proceeds from the sale of CalREIT or other asset dispositions, into higher yielding investments or capital improvements to existing assets, or for a one time distribution of a portion of such proceeds to Peregrine's public shareholders in connection with a merger, business combination, or other transaction. Pursuant to this strategy, during 1996, Peregrine took the action described in the following section with respect to its property porfolio and also engaged its investment banker to market and sell its 76% ownership interest in CalREIT. On January 3, 1997, Peregrine sold its interest in CalREIT for $20,222,000 in cash, a premium of approximately $1,500,000 over the book value of Peregrine's CalREIT shares. However, except for $1,700,000 in additional proceeds to be used for the payment of professional fees, no agreement or understanding could be reached with the Senior Lender Group as to reinvestment or alternative uses of cash proceeds from the sale of CalREIT, or from other asset dispositions, during 1996, apart from the mandatory paydowns of the Senior Lender Group Notes. Peregrine's Property Portfolio. During 1996, Peregrine sold the following properties: Sierra Oaks Shopping Center in Roseville, California, Timberlake Medical Building in Sacramento, California, and the Park Terrace Inn Hotel in Redding, California. Also during 1996, pursuant to the Plan of Reorganization, Peregrine disposed of three of its four parcels of vacant land located in Sacramento, California, by quit-claim deed to the holders of certain secured bond claims against the parcels. 4 8 During 1996, Peregrine filed a notice of default and commenced foreclosure proceedings against one delinquent mortgage note which was collateralized by three industrial buildings in Corona, California. In September 1996, Peregrine acquired the three properties in a public auction for the value of the outstanding obligations. At the end of 1996, Peregrine's real estate portfolio was comprised of nineteen commercial properties, located primarily in the Sacramento area, three hotels located in Northern California, and one parcel of vacant land in Sacramento. The commercial property portfolio included seven light industrial properties, two mini-storage facilities, six suburban office buildings, and four retail shopping centers encompassing approximately 1,051,000 net rentable square feet in total. Management continued its efforts to improve the physical and operating condition of its commercial properties by completing repairs and deferred maintenance, controlling property expenses, and improving both occupancy levels and collections of rent. The Sacramento metropolitan area, where the majority of Peregrine's commercial properties are located, continued to experience soft market conditions in 1996; however, the market showed improvements over 1995, and continues to show improvements in 1997. Despite improvements in occupancy levels, Peregrine's office building located at 3900 Lennane Drive in Sacramento, California (also known as the System Integrators Building), continued to be vacant during 1996. Management continued its efforts to sell the property and/or restructure the debt related to the property during 1996; however, Peregrine has been unable to sell the property and the lender refused to restructure the debt to a manageable level. In February 1997, after consent from both the Senior Lender Group and Foothill Capital Corporation (the lender on the Line of Credit), Peregrine ceased debt service payments. In March 1997, Peregrine was notified that the lender has initiated foreclosure proceedings against the note. The unpaid balance of the note at the time of default was approximately $2,493,000, of which approximately $2,380,000 is subject to recourse. The carrying value of the property which collateralizes the note was $1,895,000 at December 31, 1996. The weighted average occupancy for Peregrine's commercial property portfolio at the end of 1996 was approximately 83% as compared to approximately 75% at the end of 1995. In 1996, Peregrine's hotels continued to be operated by independent hotel management companies who employ and oversee all staffing, operations and union negotiations at the hotels. In early 1996, following a determination by the Trustees of the strategic importance and growth prospects of its four hotel properties, emphasis was placed on completing the required $6,500,000 in refurbishments necessary to comply with Holiday Inn standards, increasing occupancy, and managing operating expenses. Included in the capital expenditure budget was approximately $3,500,000 for refurbishments at The Park Terrace Inn in Redding, California, which had been closed since late 1995. After management's determination that Peregrine would be unable to complete the refurbishments at the Redding hotel due to the Capital Constraints, Peregrine sought a waiver from its Senior Lender Group to retain greater than 20% of the net proceeds generated from the disposition of certain assets in order to complete the necessary refurbishments; however, the request was denied and, as a result, the property was sold in October 1996. Peregrine's three other hotels, which are licensed Holiday Inn franchises, required a total of $3,000,000 in refurbishments at the beginning of 1996 in order to comply with Holiday Inn standards. During 1996, due to Capital Contraints, Peregrine was only able to complete $1,200,000 of the required $3,000,000 in refurbishments. As a result of not having completed the required refurbishments within the time frame specified by Holiday Inn, Peregrine received a 30-day notice of default under the Holiday Inn License Agreements (the "Notice of Default") for its Chico and Sacramento hotels in February 1997. The terms of the Notice of Default require that Peregrine complete the refurbishment work within 30 days or the License Agreements with Holiday Inn will be terminated and the hotels will be removed from 5 9 the Holiday Inn system. Management has negotiated with Holiday Inn and has obtained a 30-day extension of time to April 15, 1997, in which to review the refurbishment plans and budgets and to develop an action plan to complete the refurbishments required. Should the refurbishment plan not meet Holiday Inn's requirements, or should Holiday Inn decide not to grant an extension of time in which to complete the refurbishments, the License Agreements could be terminated on or after April 15, 1997. Management intends to develop an action plan that is acceptable to Holiday Inn and to seek an extension of time in which to complete the required refurbishments. In addition, as a result of the sale of its 76% ownership interest in CalREIT on January 3, 1997, Peregrine believes it has the necessary resources to complete the required refurbishments and plans to proceed. In the event that management is unable to reach an agreement with Holiday Inn and the License Agreements are terminated, Peregrine could be subject to termination fees estimated at approximately $500,000 and $800,000 for Chico and Sacramento, respectively. In addition, under the terms of its Line of Credit Agreement, the loss of the Holiday Inn License Agreements could constitute an event of default, unless Peregrine is able to replace the Holiday Inn License Agreements with comparable license agreements within 180 days from the date on which the Holiday Inn License Agreements are terminated. The loss of the Holiday Inn License Agreements could also constitute an event of default under the terms of the Senior Lender Group Note Agreement. Peregrine's three Holiday Inns have an aggregate of 552 guestrooms. The weighted average occupancy for the Holiday Inns was approximately 67% during 1996 as compared to approximately 65% during 1995. At December 31, 1996, the book value for Peregrine's real estate portfolio was $68,827,000. On that date, the portfolio was encumbered by $27,094,000 of first mortgage indebtedness, in addition to the Senior Lender Group Notes and the Line of Credit obligation. CalREIT's Property Portfolio. Throughout 1996, CalREIT continued to monetize its assets as part of its strategy to expand and improve shareholder value through merger or acquisition. During 1996, two of CalREIT's four commercial properties, the Redfield Commerce Center in Scottsdale, Arizona, and the Bekins Storage Facility in Pasadena, California, were sold. Despite improvements in operations and the implementation of a lease arrangement financially favorable to CalREIT, the Casa Grande Motor Inn in Arroyo Grande, California was unable to generate sufficient cash flow to cover its debt service requirements. After a refusal by the lender to restructure the terms of the debt, CalREIT allowed the property to be foreclosed upon in the first quarter of 1996. At the end of 1996, CalREIT's real estate portfolio was comprised of two commercial properties, the Fulton Square Shopping Center in Sacramento, California, and Totem Square, a mixed-use retail property located in Kirkland, Washington. A contract for the sale of these two properties was in place at December 31, 1996, and subsequent to year end both properties were sold. The weighted average occupancy for CalREIT's commercial property portfolio at the end of 1996 was approximately 77% as compared to approximately 90% at the end of 1995. At December 31, 1996, the book value for CalREIT's real estate portfolio was $8,585,000. On that date, the portfolio was encumbered by $4,283,000 of first mortgage indebtedness. Partnership Interests. At the beginning of 1996, Peregrine was a partner in Placer Ranch Partners, a limited partnership in which Peregrine owned a 31% limited partnership interest. The partnership owned an 6 10 undeveloped parcel of land in the Stanford Ranch area of Rocklin, California. During the first quarter of 1996, the general partner of the partnership exercised a Put/Call Option, which required that Peregrine sell its interest in the partnership to the general partner or purchase the general partner's interest. In July 1996, after investigation and analysis, and due to Capital Constraints, Peregrine sold its 31% partnership interest to the general partner. Peregrine is also a partner in CR Properties, a general partnership in which it owns a 50% interest. CR Properties is a limited partner in a partnership which owns an office building in Sacramento, California. In 1996, as in previous years, the partnership continued to generate net losses which, in accordance with the partnership agreement, were allocated 100% to the other partner. As a limited partner, CR Properties has no contingent liabilities. At December 31, 1996, Peregrine's investment in CR Properties was carried at a book value of $0 due to previous write-downs. Peregrine's Mortgage Note Portfolio. At the beginning of 1996, Peregrine had five notes in its mortgage note portfolio. During the year, one of the notes was paid in full prior to its maturity date, and one note was foreclosed upon, resulting in the acquisition of three industrial buildings in Corona, California. At year end, Peregrine had three mortgage notes remaining in its portfolio, all of which originated from property dispositions prior to 1996 and represent first and second mortgages collateralized by real property located in California. At the end of 1996, the book value of Peregrine's mortgage note portfolio totaled $720,000. At such time, $385,000 (net of write downs of $275,000) was delinquent. CalREIT's Mortgage Note Portfolio. At the beginning of 1996, CalREIT had seven notes in its mortgage note portfolio. Pursuant to its strategy to monetize assets, during 1996, CalREIT marketed and sold four of the notes. The three remaining mortgage notes, which are classified as "held for sale", are collateralized by mortgages on real property and had a book value of $1,576,000 at December 31, 1996. Marketable Securities. During 1996, CalREIT invested the proceeds generated from the sale of its commercial properties and mortgage notes in diversified, unleveraged pools of U.S. Government Agency mortgage-backed securities which satisfy REIT asset qualification requirements. At December 31, 1996, CalREIT's investment portfolio of marketable securities, which was classified as "held for sale" had a book value of $14,115,000, which approximated fair value at that date. Investment in CalREIT. At December 31, 1996, Peregrine owned 6,959,593, or approximately 76%, of CalREIT's 9,137,335 outstanding common shares of beneficial interest. As discussed above, at December 31, 1996, CalREIT's investment portfolio consisted of two commercial real estate properties with a total book value of $8,585,000, three mortgage notes with a book value of $1,576,000, and a portfolio of diversified, unleveraged pools of U.S. Government Agency mortgage-backed securities with a book value of $14,115,000. At year end, CalREIT was 17% leveraged, reflecting outstanding mortgage debt obligations of $5,169,000. CalREIT's shares, which are traded on the New York Stock Exchange and the Pacific Stock Exchange under the symbol CT, were held by approximately 1,700 shareholders-of-record at December 31, 1996. The net book value of CalREIT totaled $24,471,000, or approximately $2.68 per CalREIT common share of beneficial interest at December 31, 1996. During 1996, CalREIT shares traded between $1.13 and $2.88. On January 3, 1997, Peregrine sold its 76% stock ownership interest in CalREIT for $20,222,000, or approximately $2.91 per share of CalREIT previously held by Peregrine, to a third party, CalREIT Investors Limited Partnership. The decision to sell CalREIT was made by management and the Board of Trustees of Peregrine during 1996, and was based primarily on the following considerations: (1) CalREIT had not paid any dividends during the last two years and had no immediate plans to pay dividends in the near term; therefore, Peregrine's 7 11 investment in CalREIT was not generating cash flow that could be used for other purposes; (2) Peregrine's debt service requirements, including interest on its Senior Lender Group Notes, which beginning on November 1, 1996, was required to be paid in cash, were resulting in severe capital constraints; (3) the extensive analysis performed by its investment banker relating to Peregrine's investment in CalREIT indicated that the shares owned by Peregrine were at their maximum potential value; (4) CalREIT's management had not developed a credible growth plan, and (5) potential buyers would be interested in CalREIT's New York Stock Exchange listing. 1996 Financial Overview - Consolidated Basis. Total revenues for Peregrine and CalREIT on a consolidated basis (the "Trust") in 1996 were $25,582,000 and total operating expenses were $31,329,000. The consolidated net loss in 1996 was ($7,705,000). The net loss attributable to Common Shares of Beneficial Interest for the Trust in 1996 was ($10,576,000) or ($2.17) per Common Share of Beneficial Interest, which includes the net loss plus the effects of Preferred Stock dividends, discounts on Preferred Stock dividends, and the accretion of discounts on Preferred Stock dividends. The Trust ended the year 1996 with $5,972,000 in unrestricted cash, of which $4,698,000 was held by CalREIT and unavailable to Peregrine for operating, working capital, or other purposes. As of December 31, 1996, Peregrine's tax loss carryforward totaled approximately $81,858,000 for federal and $36,368,000 for California. In 1996, interest on the Trust's long-term first mortgage notes totaled $3,454,000, of which $119,000 was deferred and added to the principal balance. Interest and fees on the Line of Credit totaled $918,000 ($844,000 of interest and $74,000 in fees) in 1996, which was satisfied by an increase in the outstanding balance. Interest on the Senior Lender Group Notes totaled $3,814,000 in 1996, of which $2,844,000 was satisfied through the issuance of additional Interest Deferral Notes. At December 31, 1996, total long-term first mortgage notes of the Trust were $32,263,000, the outstanding balance on the Line of Credit was $8,583,000, and total debt obligations to the Senior Lender Group were $44,467,000. Accrued and unpaid interest at December 31, 1996 totaled $19,000 on long-term first mortgages and $325,000 on the Senior Lender Group Notes. In accordance with the Plan, dividends on the Senior Lender Group's Redeemable Convertible Preferred Stock were paid in-kind throughout 1996. During the year, dividends of $2,688,000 were paid in-kind through the issuance of an additional 1,345,000 Preferred Shares, bringing the total number of Preferred Shares held by the Senior Lender Group to 14,073,000 as of December 31, 1996. A more detailed discussion of the Trust's financial performance, results of operations and alternative going-forward operating strategies is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. (d) Management of the Trust's Investments Peregrine is a self-administered business trust. The President and Chief Executive Officer of Peregrine is Joseph M. Mock. On June 1, 1996, Mr. Mock assumed his position from John McMahan (Chairman of the Board of Trustees), who served as Interim Chief Executive Officer from January 15, 1996, when the Board of Trustees terminated the employment of Frank A. Morrow, who had served as both Peregrine's Chief Executive Officer and as a member of the Board of Trustees since October 1994. As a result of the termination of Frank A. Morrow as Peregrine's Chief Executive Officer in January 1996, Peregrine 8 12 utilized the services of certain of its independent Trustees in connection with its analysis of alternative operating strategies, asset dispositions, and day-to-day management activities (see Item 13 - Certain Relationships and Related Transactions). In February 1996, Mr. Morrow resigned as a Trustee of Peregrine but continued to serve as the Chairman of the Board of Trustees and Chief Executive Officer of CalREIT. All management services are provided by employees of Peregrine, professional property management companies, or independent contractors. As of December 31, 1996, Peregrine had seven full-time employees. CalREIT is a self-administered real estate investment trust ("REIT"). During 1996, all strategic and investment decisions for CalREIT were made by the five members of the Board of Trustees of CalREIT. During 1996, Frank A. Morrow served as Chairman of the Board of Trustees and Chief Executive Officer of CalREIT. Simultaneously with the closing of Peregrine's sale of its CalREIT stock on January 3, 1997, John McMahan, who serves as Chairman of the Board of Peregrine, resigned as a Trustee of CalREIT. During 1996, CalREIT had no employees. Management services were provided by professional management companies, independent contractors, and by the employees of Peregrine. Peregrine receives a reimbursement of costs pursuant to a cost-allocation agreement for providing these services. In January 1997, after Peregrine's sale of its 76% stock ownership interest in CalREIT, the cost-allocation agreement was terminated. (e) Uninsured Losses from Seismic Activity All of the Trust's properties are located in areas that are subject to earthquake activity. The Trust's insurance policies for these properties cover losses from fires after an earthquake, but they do not cover damage directly caused by earthquakes or other seismic activity. The Trust has not obtained earthquake insurance for these properties because such policies have been unavailable from insurers. In the event that uninsured losses resulting from earthquake or other seismic activity should occur, the Trust could lose its capital invested in the affected property, as well as the anticipated future revenues from such property, and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss could materially and adversely affect the business of Peregrine and its financial condition and results of operations. (f) Potential Environmental Risks Investments in real property create a potential for environmental liability on the part of the owner of, or any mortgage lender on, such real property. If hazardous substances are discovered on or emanating from any of the Trust's properties, the owner or operator of the property (including the Trust) may be held strictly liable for all costs and liabilities relating to such hazardous substances. The Trust currently carries no insurance for environmental liabilities. 9 13 (g) Executive Officers of the Registrant The Executive Officer of Peregrine is listed below:
Name Age Office ---- --- ------ Joseph M. Mock 57 President, Chief Executive Officer, and Principal Accounting Officer
The principal business experience and affiliations of the Executive Officer are as follows: Joseph M. Mock, President, Chief Executive Officer, and Principal Accounting Officer. Prior to joining Peregrine as President, Chief Executive Officer, and Principal Accounting Officer, in June 1996, Mr. Mock served as Executive Vice President and Chief Operating Officer of Landsing Pacific Fund, Inc., a public REIT, from October 1993 to February 1996. From September 1987 to October 1993, Mr. Mock was a principal in Byron Partners, Inc., a real estate consulting firm specializing in the management and disposition of real estate owned and loan workouts for financial institutions. Prior to forming Byron Partners, Inc., Mr. Mock was a Vice President of Portfolio Management for Eastdil Realty, Inc., providing asset management services to pension funds. Mr. Mock also spent 17 years with Grubb & Ellis Co., a real estate services company, filling a number of roles including tenures as broker, Senior Vice President of Asset Management, Vice President of Administration, and Vice President of Business Development. Mr. Mock graduated from the University of California at Berkeley with a degree in Labor and Industrial Relations. 10 14 - -------------------------------------------------------------------------------- ITEM 2: PROPERTIES - -------------------------------------------------------------------------------- The following table sets forth certain information relating to properties owned by Peregrine and CalREIT at December 31, 1996. All of the properties are suitable for the purpose for which they are designed and are being used.
Date of Ownership Square Total Adjusted Direct Equity Investments Acquisition Percentage Feet Cost (1) Encumbrances(2) - -------------------------------------------------- ----------- ---------- ------ -------------- --------------- RETAIL SHOPPING CENTERS: Regency Plaza, Sacramento, California 5/85 100% 141,965 $11,106,000 $8,846,000 University Village, Sacramento, California 12/86 100% 82,882 7,905,000 7,715,000 TGIF Sunrise Hills, Citrus Heights, California 1/87 100% 8,500 1,536,000 - Sunrise Hills, Citrus Heights, California 1/89 100% 81,499 5,921,000 4,325,000 * Totem Square, Kirkland, Washington 11/90 47% 125,611 7,370,000 4,283,000 * Fulton Square, Sacramento, California (3) 5/91 76% 35,493 1,215,000 - -------------- ----------- Total Retail Shopping Centers 35,053,000 25,169,000 -------------- ----------- OFFICE BUILDINGS: One Sunrise Park, Rancho Cordova, California 8/83 100% 43,747 1,799,000 - 16th and K Streets, Sacramento, California 8/87 100% 39,753 3,127,000 - Town Center Garden Office Park, Signal Hill, California 12/87 100% 93,693 4,605,000 - Hurley Ethan Office Park I, Sacramento, California 4/88 100% 36,645 2,117,000 1,312,000 Hurley Ethan Office Park II, Sacramento, California 6/88 100% 38,683 2,678,000 2,401,000 3900 Lennane Drive, Sacramento, California 5/88 100% 45,000 1,909,000 2,495,000 -------------- ----------- Total Office Buildings 16,235,000 6,208,000 -------------- ----------- INDUSTRIAL BUILDINGS: 11135 Trade Center Drive, Rancho Cordova, California 5/88 100% 144,332 2,867,000 - 11167 Trade Center Drive, Rancho Cordova, California 5/88 100% 57,650 983,000 - Parkway Center, El Dorado Hills, California 1/88 100% 45,332 1,483,000 - Mallory Service Building, Walnut Creek, California 10/88 100% 21,752 1,017,000 - Commerce Street, Corona, California 9/96 100% 11,535 399,000 - Consumer Circle, Corona, California 9/96 100% 11,900 386,000 - Pomona Road, Corona, California 9/96 100% 28,850 966,000 - -------------- ----------- Total Industrial Buildings 8,101,000 - -------------- -----------
11 15 - -------------------------------------------------------------------------------- ITEM 2: PROPERTIES (continued) - --------------------------------------------------------------------------------
Date of Ownership Square Total Adjusted Direct Equity Investments Acquisition Percentage Feet Cost (1) Encumbrances(2) - -------------------------------------------------- ----------- ---------- ------ -------------- --------------- MINI-STORAGE FACILITIES: Burbank Mini-Warehouse, Santa Rosa, California 4/85 100% 72,200 1,479,000 - Downtown Mini Storage, Sacramento, California (3) 3/88 100% 44,825 1,329,000 - ----------- ----------- Total Mini-Storage Facilities 2,808,000 - ----------- ----------- LAND: Florin Perkins, Sacramento, California 6/91 100% 60,026 30,000 - ----------- ----------- Total Land 30,000 - ----------- ----------- HOTELS: Chico Holiday Inn, Chico, California 9/86 100% 87,000 3,199,000 - Sacramento Holiday Inn, Sacramento, California 9/86 100% 139,800 10,255,000 - Walnut Creek Holiday Inn, Walnut Creek, California 3/85 100% 78,470 3,717,000 - ----------- ----------- Total Hotels 17,171,000 - ----------- ----------- $79,398,000 $31,377,000 =========== ===========
(1) Total cost, including reorganization values of Peregrine properties, before accumulated depreciation, adjusted for impairment losses in accordance with Statement of Financial Accounting Standards No. 121. (2) All of the above properties are pledged as collateral, subject to existing liens, for the restructured debt. (3) Land on which asset is constructed is subject to a ground lease. * Denotes CalREIT properties. Ownership perecentage reflects Peregrine's ownership percentage of the property based on its 76% ownership percentage of CalREIT. 12 16 Item 3. Legal Proceedings The shareholder lawsuits and other material litigation to which Peregrine (then known as CET) was a party prior to and during the bankruptcy proceedings were resolved and settled in connection with the Plan of Reorganization, which the Bankruptcy Court confirmed. Nineteen professional firms and companies (the "Professionals") who rendered services to CET or other interested parties during CET's bankruptcy case filed fee applications with the Bankruptcy Court. In September 1996, the Bankruptcy Court issued an order (the "Order") awarding fees to some of those Professionals. Five Professionals appealed the Order; those appeals are pending before the U.S. District Court for the Eastern District of California. One Professional filed a motion for reconsideration, which is pending before the Bankruptcy Court. Peregrine is a defendant in a case filed by MDC REIT Holdings, L.L.C. ("MDC") in California state court on December 24, 1996. MDC alleges that Peregrine breached a certain stock purchase agreement pursuant to which Peregrine was to have sold to MDC certain shares of the common shares of beneficial interest of CalREIT that were owned by Peregrine. MDC is seeking damages it allegedly incurred in excess of $900,000, and recovery of its attorney fees, costs, and interest. Management believes, and has been advised by its counsel, that MDC's claims are without merit. Peregrine has answered the complaint, denying any breach of the stock purchase agreement and asserting numerous affirmative defenses to MDC's claims. The consolidated financial statements do not include an accrual for any losses related to the complaint. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders during 1996. 13 17 PART II Item 5. Market for the Registrant's Common Shares of Beneficial Interest Equity and Related Security Holder Matters Market Peregrine's Common Shares of Beneficial Interest have traded on the Over-the-Counter Bulletin Board market system under the symbol PGRNS since its emergence from bankruptcy in October 1994, and its issuance of new Peregrine Common Shares of Beneficial Interest was completed. Peregrine's Common Shares of Beneficial Interest were not actively traded during 1995 or 1996. The following table sets forth the high and low closing quotations for the shares during the four quarters of 1995 and 1996, as reported by Nasdaq. The Over-the-Counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not necessarily represent actual transactions.
1995 High Low ---- ---- --- First Quarter n/a n/a Second Quarter $1.50 $1.00 Third Quarter 1.00 0.63 Fourth Quarter 0.63 0.13
1996 High Low ---- ---- --- First Quarter $0.50 $0.18 Second Quarter 0.50 0.06 Third Quarter 0.09 0.03 Fourth Quarter 0.10 0.04
Holders As of March 15, 1997, there were approximately 13,400 shareholders-of-record of Peregrine's Common Shares of Beneficial Interest. In addition, there were approximately 2,500 shareholders whose shares were held by depositories in street and nominee names. Dividends Peregrine paid no cash dividends on its Common Shares of Beneficial Interest in 1995 or 1996, and is substantially restricted under the terms of the Senior Lender Group Notes and Line of Credit from making any cash distributions to shareholders in the foreseeable future. 14 18 Item 6. Selected Financial Data The following represents selected financial data for The Peregrine Real Estate Trust and the California Real Estate Investment Trust, on a consolidated basis, for the years ended December 31, 1996 and 1995, the Transition Period, and the years ended September 30, 1994 and 1993. The data should be read in conjunction with other financial statements and related notes included elsewhere herein. Numbers below are shown in the thousands except for per share data.
Commonwealth Equity Trust ---------------------------- Year Ended Year Ended Year Ended Year Ended December 31, December 31, Transition September 30, September 30, 1996 1995 Period 1994 1993 ---- ---- ------ ---- ---- Operating results: Revenue(1) $ 27,162 $ 26,893 $ 6,806 $ 32,858 $ 19,585 Net loss from continuing operations $ (7,892) $ (15,331) $ (1,338) $ (23,000) $ (71,997) Extraordinary item $ 187 $ 598 $ -- $ -- $ -- Net loss(2) $ (7,705) $ (14,733) $ (1,338) $ (23,000) $ (71,997) Net loss attributable to Common Shares of Beneficial Interest(2), (3) $ (10,576) $ (17,264) $ (1,894) $ (23,000) $ (71,997) Net loss per Common Share of Beneficial Interest before extraordinary item $ (2.21) $ (3.66) $ (0.39) $ (0.92) $ (2.87) Extraordinary item per Commmon Share of Beneficial Interest $ 0.04 $ 0.12 $ -- $ -- $ -- Net loss per share attributable to Common Shares of Beneficial Interest(2), (3) $ (2.17) $ (3.54) $ (0.39) $ (0.92) $ (2.87) Financial Position: Total Assets $ 104,726 $ 121,793 $ 142,121 $ 140,186 $ 169,213 Long-term Obligations(4) $ 111,578 $ 115,064 $ 114,478 $ 122,963 $ 140,173
(1) Includes net gains (losses) from foreclosure or sale of investments of $1,580, ($184), $12, $688, and ($7,130), for the years ended December 31, 1996 and 1995, the Transition Period, and the years ended September 30, 1994 and 1993, respectively. (2) Includes valuation losses of ($4,278), ($9,526), ($119), ($3,413), and ($53,089), for the years ended December 31, 1996 and 1995, the Transition Period, and the years ended September 30, 1994 and 1993, respectively. (3) Includes net loss plus the effects of Preferred Stock dividends, discounts on Preferred Stock dividends, and the accretion of discounts on Preferred Stock dividends. (4) Includes long-term notes payable collateralized by deeds of trust on rental properties, Senior Lender Group Notes Payable, the outstanding balance on the Line of Credit, and outstanding Redeemable Convertible Preferred Stock. 15 19 Item 7. 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 appearing elsewhere in the Form 10-K. Peregrine adopted "fresh start" accounting rules as of the beginning of the Transition Period (October 7 through December 31, 1994). Results during 1996, 1995, and the Transition Period serve as benchmark data for all future comparisons but are not comparable to prior periods. In addition to historical information, the Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, 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 below under the heading Overview. 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 twelve months ended December 31, 1996, Peregrine owned and operated a portfolio of investments that included real property, partnership interests, mortgage notes, and a 76% stock ownership interest in CalREIT. In 1996, Peregrine continued to concentrate its efforts on improving property operations, while simultaneously exploring alternative operating strategies for the future. The immediate priority continued to be to meet Peregrine's debt obligations. To achieve this objective, emphasis remained on maximizing the income stream from the commercial and hotel properties and the select disposition of real estate assets with negative cash flows and/or which require significant capital expenditures beyond the resources available to Peregrine. Peregrine's management also continued to explore alternative longer term strategies to maximize shareholder value, including analysis of current and expected property valuations, regional and industry market trends and potential long-term growth opportunities in single and multi-tenant buildings, retail centers and hotel properties. In addition, during 1996, Peregrine continued to analyze operating, disposition and other strategies relating to its 76% stock ownership interest in CalREIT, and on January 3, 1997, Peregrine sold its interest in CalREIT for $20,222,000, or approximately $2.91 per share of CalREIT previously held by Peregrine, which resulted in a gain of $1,012,000 during the first quarter of 1997. The assessment of long-term strategies, which is expected to continue through 1997, includes consideration of financing or restructuring alternatives relating to Peregrine's first mortgage debt and its long-term secured 16 20 debt to the Senior Lender Group. Under the terms of the Senior Lender Group Notes, 80% of the net proceeds from the disposition of assets must be paid to the Senior Lender Group, thus restricting Peregrine from reinvesting in higher yielding investments or making capital improvements to existing assets. The Senior Lender Group Notes accrued interest in-kind through September 1996, and have required cash interest payments since that date. On January 3, 1997, in accordance with the terms of Senior Lender Group Notes, 80% of the net proceeds from the sale of Peregrine's ownership interest in CalREIT was paid to the Senior Lender Group, reducing the balance outstanding from $44,467,000 to $28,889,000. Peregrine's future debt service obligations are approximately $2,903,000 per year on its first mortgage debt (excluding CalREIT's first mortgage debt) and approximately $2,456,000 per year on the Senior Lender Group Notes. In addition, $28,145,000 at face value in 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 $3,353,000 per year commencing in October 1998. It is anticipated, however, that Peregrine will be unable to pay the Preferred Stock dividends in cash commending in October 1998, and as a result the Preferred Stock will automatically convert to Common Shares of Beneficial Interest. Peregrine believes that the following factors have adversely affected, and in the future, could adversely affect its financial condition, results of operations, and liquidity: - - The capital structure of Peregrine resulting from the confirmed Plan of Reorganization, including the leverage resulting from the Senior Lender Group Notes, the first mortgage debt, and the Preferred Stock, plus the associated present and future debt service and dividend obligations; - - The additional $1,800,000 in estimated capital improvements required to complete the refurbishments of Peregrine's hotel properties in accordance with Holiday Inn franchise standards, that, if not completed, will result in the termination of the Holiday Inn License Agreements and will have a material adverse affect on hotel operations; - - Peregrine's general and administrative expenses, including the costs associated with its estimated 16,000 shareholder base and the ongoing costs of being a public company; - - The limited sources and amount of funds currently available to Peregrine from operations, its revolving Line of Credit, which matures on October 7, 1997, and from property dispositions, after payment of associated indebtedness, and the inability of Peregrine to raise capital from third parties in light of, among other things, its debt and capital structure, operating history and contingent liabilities as discussed above; and - - The overall lack of synergy and investment quality of Peregrine's real estate portfolio. For additional information regarding certain of the Trust's financial commitments and contingencies, see Note 13 to consolidated financial statements. The Pro-Forma Financial Statements presented in Note 2 to consolidated financial statements are presented in order to illustrate the possible scope of the change in historical financial position and results of operations resulting from Peregrine's sale of its 76% stock ownership interest in CalREIT and to serve as benchmark data for all future comparisons. 17 21 Liquidity and Capital Resources The Trust's unrestricted cash totaled $5,972,000 on December 31, 1996, up from $5,079,000 at December 1995, of this amount, $4,698,000 was held by CalREIT at December 31, 1996, and unavailable to Peregrine for operating, working capital, or other purposes. In 1996, the Trust's principal source of funds was from operating income, proceeds from the sale of certain investments, proceeds from principal and interest payments on mortgage notes receivable, and borrowings from the revolving Line of Credit in the maximum amount of $8,600,000. At December 31, 1996, $17,000 remained available through the Line of Credit. No dividends were paid by CalREIT in 1996 or 1995. Debt service paid on the Trust's first mortgage notes totaled $3,452,000 in 1996, and $4,902,000 in 1995. Peregrine's debt service requirements on such notes in 1997 are approximately $2,903,000. Interest on the Senior Lender Group Notes was approximately $3,814,000 and $3,596,000, in 1996 and 1995, respectively, of which approximately $2,844,000 and $3,596,000, respectively, was satisfied through the issuance of Interest Deferral Notes. In 1997, the interest on the Senior Lender Group Notes will be required to be paid in cash on a monthly basis, with aggregate interest payable during 1997 currently estimated at $2,456,000 based on $28,889,000 principal outstanding. At December 31, 1996, Peregrine's short and long term cash commitments include approximately $1,800,000 to refurbish its hotel properties in early 1997 in accordance with Holiday Inn franchise standards; the maturity of the Line of Credit in October 1997; debt service payments on its first mortgage notes of approximately $2,903,000 per year; interest on the Senior Lender Group Notes currently estimated at $2,456,000 per year; cash dividend payments of approximately $3,300,000 per year on the Preferred Stock commencing in October 1998; and repayment of principal on the Senior Lender Group Notes Payable in October 2000. Based on cash flows form operations, its revolving Line of Credit, and its 20% share of the net proceeds received from its disposition of its 76% stock ownership interest in CalREIT on January 3, 1997, Peregrine anticipates that it will be able to fund its day-to-day business operaions, and meet its debt service obligations on its first mortgage notes and Senior Lender Group Notes through the next twelve months. Management plans to seek an extension of the maturity date on its Line of Credit, with its current lender; however, if unable to do so, management will seek an alternative source from which to obtain a new operating line of credit. Peregrine's Line of Credit contains a financial covenant, among others, which requires that Peregrine maintain a specific tangible net worth, as defined in the Agreement, measured on a fiscal quarter-end basis. While Peregrine was in compliance with the covenant at December 31, 1996, it is anticipated that during the first half of 1997, Peregrine will be unable to meet the financial covenant due to anticipated net losses, and will require a waiver in relation to the covenant from the lender. Failure to renew or obtain a new operating line of credit would have a material adverse affect on the financial position and operations of Peregrine. Management also expects to be able to fund the $1,800,000 in refurbishments at its hotel properties from existing resources; absent this expenditure or absent an agreement with Holiday Inn for an extension of time to complete the refurbishments, the hotel properties will lose their Holiday Inn licenses, the result of which will be a decline in occupancy levels and room rental rates, which would have a material adverse impact on Peregrine's overall financial performance. To meet its long-term debt service requirements, Peregrine's management is considering numerous alternatives, including asset dispositions, capital restructuring, and debt financing alternatives. However, because of the factors discussed in the OVERVIEW above, including the capital and debt structure and the limited flexibility provided under the terms of the Senior Lender Group Notes, there can be no assurance that sources of funds to meet these requirements, or continue operations over the longer term, can be found. It is presently anticipated that Peregine will be unable to pay the Preferred Stock dividends in cash commencing in October 1998, and as a result the Preferred Stock will automatically convert to Common Shares of Beneficial Interest in accordance with the Preferred Stock Agreement, thereby substantially diluting the ownership interests of current holders of Common Shares of Beneficial Interest. 18 22 Results of Operations Commercial Property Occupancy. At December 31, 1996 and 1995, overall weighted average occupancy levels for the Trust's properties is shown below:
Occupancy at December 31, ------------------------------ Property Type 1996 1995 ------------- ---- ---- Retail Shopping Centers 82% 80% Office Buildings 75% 65% Industrial Buildings 90% 72% Mini-Storage Facilities 94% 93% CalREIT Properties 77% 90%
Note: The weighted average occupancy is calculated by multiplying the occupancy by its square footage and dividing by the total square footage in the portfolio. The overall weighted average for Peregrine's entire commercial property portfolio (excluding CalREIT) as of December 31, 1996, was 83% compared to 75% at the end of 1995. Hotel Occupancy. Overall weighted average occupancy for Peregrine's three Holiday Inn franchises was 67% in 1996 versus 65% in 1995.
Occupancy ------------------------- 1996 1995 ---- ---- Holiday Inn Chico 64% 61% Holiday Inn Sacramento 70% 65% Holiday Inn Walnut Creek 68% 71% Park Terrace Inn - Redding n/a 20% CalREIT's Casa Grande Motor Inn n/a 52%
Note: The Park Terrace Inn was closed in October 1995 when redevelopment work at the property commenced, and CalREIT's Casa Grande Motor Inn was allowed to be foreclosed upon by the lender in February 1996. Peregrine Asset Dispositions. During 1996, Peregrine sold the Sierra Oaks Shopping Center in Roseville, California, the Timberlake Medical Building in Sacramento, California, the Park Terrace Inn Hotel in Redding, California, and its partnership interest in Placer Ranch Partners. Also during 1996, pursuant to the Plan of Reorganization, Peregrine disposed of three of its four parcels of vacant land located in Sacramento, California, by quit-claim deed to the holders of certain secured bond claims against the parcels. One mortgage note held by Peregrine, with a book value of $1,200,000, was foreclosed upon in September 1996, resulting in the acquisition of three industrial buildings in Corona, California. The properties were recorded at their estimated fair market value at the date of foreclosure. Also during 1996, one mortgage note, held by Peregrine, with a face value of $2,240,000, was paid in full prior to its maturity date. 19 23 After the close of the year, on January 3, 1997, Peregrine sold its 76% stock ownership interest in CalREIT to a third party, CalREIT Investors Limited Partnership. The sale price of Peregrine's investment was $20,222,000, or approximately $2.91 per share of CalREIT previously held by Peregrine. CalREIT Asset Dispositions. At the end of 1995, CalREIT's four commercial properties were readied for sale as part of its corporate strategy to reposition the company. Leasing, capital and tenant improvement expenditures were approved as they related to their impact on potential sale prices. As of the end of 1996, the Redfield Commerce Center in Scottsdale, Arizona, and the Bekins Storage Facility in Pasadena, California, had been sold and its two remaining properties, the Fulton Square Shopping Center in Sacramento, California, and the Totem Square Shopping Center in Kirkland, Washington, were under contract for sale. In February 1996, because of its limited financial potential and inability to service its debt, CalREIT transferred ownership of the Casa Grande Motor Inn property back to the lender pursuant to a foreclosure proceeding. Also during 1996, certain of CalREIT's mortgage notes were packaged for sale and disposition. In total, four of CalREIT's seven mortgage notes were sold in 1996. Revenues Total consolidated revenues were $25,582,000 in 1996, down $1,495,000, or 6%, from total consolidated revenues of $27,077,000 in 1995. Hotel Revenues. Consolidated hotel revenues decreased $164,000, or 1%, to $12,652,000 in 1996 from $12,816,000 in 1995. The decrease is attributable to a decrease of $1,006,000, resulting from the close of the Park Terrace Inn in October 1995, and the sale of the hotel in October 1996; and a decrease of $46,000, attributable to the absence of revenue from CalREIT's Casa Grande Motor Inn due to foreclosure by the lender in February 1996; partially offset by an increase of $888,000, attributable to an overall increase in occupancies and room rates at Peregrine's Holiday Inn hotels (Chico, Sacramento, and Walnut Creek). Rental Revenues. Consolidated rental revenues were down $1,000,000, or 8%, from $12,495,000 in 1995, to $11,495,000 in 1996. The decrease is attributable to various increases and decreases in rental revenues at the commercial properties. The most significant decreases were: a decrease of $341,000 at the Regency Plaza Shopping Center, which resulted from the loss of tenants who filed for bankruptcy and terminated their leases; a loss of $388,000, resulting from System Integrators, Inc., who was the sole tenant in one of Peregrine's office buildings, which abandoned its lease; and the combined absence of revenues of $883,000 from the Sierra Oaks Shopping Center, the Timberlake Medical Building, the Woodland Medical Building, the Redfield Commerce Center, and the Bekins Storage Facility, as a result of the sale of these properties in 1996 or 1995. The most significant increases which partially offset the above decreases were: an increase of $144,000 at 11135 Trade Center Drive, resulting from an expansion by the Franchise Tax Board of the office space leased; an increase of $116,000 at the Sunrise Hills Shopping Center, which resulted from a lease buyout by a former tenant; an increase of $59,000 at the Mini-Storage Facilities, resulting from increased occupancies; an increase of $83,000 at Parkway Center, resulting from an expansion by the U.S. Postal Service of the office space leased, and increases in 20 24 rental rates; an increase of $100,000 at University Village Shopping Center due primarily to increased occupancy; and $60,000 in rental revenue at the three properties in Corona, California, which were acquired in September 1996, through foreclosure of a mortgage note. Interest Revenues. Consolidated interest revenues decreased $331,000, or 19%, to $1,435,000 in 1996, down from $1,766,000 in 1995. This decrease is primarily attributable to the loss of interest on CalREIT's mortgage notes, which were sold in 1996; and the loss of interest on Peregrine's mortgage note in the face amount of $2,240,000, which was paid off in 1996; partially offset by interest earned on marketable securities and cash accounts which increased as a result of CalREIT's asset sales during 1996. Expenses Total consolidated expenses were $31,329,000 in 1996, down $1,036,000, or 3%, from total consolidated expenses of $32,365,000 in 1995. The decrease is attributable to a decrease of $952,000 in consolidated operating expenses, a decrease of $832,000 in consolidated depreciation expense, and a decrease of $347,000 in consolidated interest expense; partially offset by an increase of $201,000 in consolidated commercial and hotel property management fees and an increase of $894,000 in consolidated general and administrative expenses. Operating expenses. Consolidated operating expenses for the hotels decreased $540,000, or 5%, from $10,964,000 in 1995, to $10,424,000 in 1996. The decrease is primarily attributable to a decrease of $838,000 in operating expenses at the Park Terrace Inn due to the closure of the hotel for refurbishment in October 1995, and the sale of the hotel in October 1996; partially offset by a net increase in operating expenses of $287,000 at the Chico, Sacramento, and Walnut Creek Holiday Inns attributable primarily to the overall increased occupancy during 1996. Consolidated operating expenses for the commercial properties decreased $412,000, or 10%, in 1996, to $3,874,000, down from $4,286,000 in 1995. The decrease is primarily attributable to decreases at the Sierra Oaks Shopping Center, the Timberlake Medical Building, the Woodland Medical Building, the Redfield Commerce Center, and the Bekins Storage Facility, as a result of the sale of these properties in 1996 or 1995. Commercial and Hotel Property Management Fees. Consolidated commercial and hotel property management fees increased $201,000, or 32%, in 1996, from $634,000 in 1995, to $835,000. The increase is attributable to an increase of $154,000 in management fees at the hotels in 1996, which is primarily the result of contracting with outside management companies in late 1995 to operate the hotels. In addition, management fees at the commercial properties increased $47,000 in 1996, primarily the result of increased cash collections. Property management fees at the commercial properties are based upon cash collections of rents and other charges from the tenants. Property management fees at the hotels are based upon gross revenues generated at the hotels and increases in net operating income from the base year specified in the management agreement. Depreciation and Amortization Expense. Consolidated depreciation and amortization expense decreased $832,000, or 22%, to $2,931,000 in 1996, down from $3,763,000 in 1995. The decrease is attributable to properties sold in 1995, as well as the cessation of depreciation on assets of Peregrine and CalREIT that were classified as held for sale during the year. 21 25 Interest Expense. Consolidated interest expense decreased $347,000, or 4%, from $8,524,000 in 1995, to $8,177,000 in 1996. The decrease is primarily attributable to a decrease of $860,000 on first mortgages, resulting from monthly principal paydowns and payoffs which resulted from the sale of the underlying assets; partially offset by an increase in interest on the Senior Lender Group Notes of $218,000, resulting primarily from an increase in the note balance due to the deferral of interest; and an increase of $326,000 in interest on the Line of Credit due to a higher average balance outstanding during 1996. General and Administrative Expenses. Consolidated general and administrative expenses increased $894,000, or 21%, to $5,088,000 in 1996, up from $4,194,000 in 1995. The increase is due to the net effects of increases and decreases in various expense categories. The most significant increases are: the termination fee paid by Peregrine to Frank A. Morrow pursuant to his personal services contract when he was terminated as Chief Executive Officer in January 1996; fees paid by Peregrine in connection with the analysis of strategic operating alternatives; consulting fees paid to the Trustees of Peregrine related to strategic operating alternatives, asset dispositions, and day-to-day management activities following the termination of Peregrine's Chief Executive Officer in January 1996; additional fees paid by CalREIT to its Trustees in connection with strategic growth activities; costs incurred by CalREIT in connection with the packaging and sale of its mortgage notes; increased legal fees resulting from Peregrine's continuing resolution of the professional fees related to the bankruptcy proceedings; and the on-going administrative costs for both Peregrine and CalREIT associated with being a public company and servicing its shareholders. Many of the administrative costs to service Peregrine's large shareholder base and to meet public company 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. Reorganization Items In September 1996, the Bankruptcy Court issued its Final Memorandum on Fee Applications (the "Memorandum") and an Order on Final Fee Applications (the "Order") which awarded certain amounts to most of the professional fee applicants (the "Professionals") and ordered one of the Professionals to disgorge certain amounts that had previously been paid by CET. In October 1996, some of the Professionals (the "Appellants") filed appeals from the Bankruptcy Court's Order. Peregrine has entered into separate settlement agreements with each of the Appellants which resulted in a forgiveness of debt in some instances and the recording of a receivable in one instance. In 1995, the reorganization expense resulted from an additional accrual in the amount of $1,000,000, which was recorded to increase the total accrued professional fees related to the bankruptcy proceedings from $2,000,000 to $3,000,000, to reflect management's revised estimate of the professional fees owed. The additional accrual in the amount of $1,000,000, increased the total professional fees incurred in connection with the bankruptcy proceedings to $9,500,000. Gain (Loss) on Foreclosure or Sale of Investments In 1996, the Trust recorded consolidated gains (net of losses) on the foreclosure or sale of investments of $1,580,000, as compared to a consolidated loss (net of gains) of $184,000 in 1995. In 1996, the amount is comprised of several gains and losses recorded upon the foreclosure or sale of properties and mortgage notes, and the recognition of a portion of a gain deferred from the sale of a property in a previous period. In July 1996, Peregrine's partnership interest in Placer Ranch Partners was sold for $2,739,000, resulting in a gain of $129,000. In September 1996, Peregrine foreclosed upon a mortgage note collateralized by 22 26 three separate properties located in Corona, California. The properties were recorded at their estimated fair market value at the date of foreclosure which resulted in a gain of $448,000. CalREIT sold the Redfield Commerce Center in March 1996, for $1,118,000, resulting in a gain of $299,000. During the second quarter of 1996, CalREIT sold a mortgage note collateralized by a first deed of trust on an office building/commercial building in Phoenix, Arizona, for $6,735,000, resulting in a gain of $430,000, and sold a mortgage note collateralized by a second deed of trust on a commercial building in Pacheco, California, for $592,000, resulting in a gain of $30,000. In the third quarter of 1996, CalREIT sold two additional mortgage notes, one collateralized by a first deed of trust on an office building in Scottsdale, Arizona, for $753,000, and one collateralized by a second deed of trust on an office/industrial building in Sunnyvale, California, for $2,000,000, resulting in gains of $115,000 and $357,000, respectively. The Sierra Oaks Shopping Center was sold by Peregrine in April 1996, for $6,000,000, and resulted in a loss of $63,000. In August 1996, the Timberlake Medical Building was sold for $550,000, and resulted in a loss of $38,000. The Park Terrace Inn was sold in October 1996, for $2,550,000, and resulted in a loss of $18,000. CalREIT's Bekins Storage Facility was sold in May 1996, for $3,125,000, resulting in a loss of $164,000. During 1996, Peregrine recognized $55,000 in gains, which had been deferred in connection with the sale of a property in a previous period. No gains or losses were recorded upon Peregrine's transfer of the vacant land parcels to the bondholders or upon the foreclosure of CalREIT's Casa Grande Motor Inn, as the value of the respective properties was equal to the value of corresponding debt. In addition, no gain or loss was recorded upon the early payoff of Peregrine's mortgage note in the face value of $2,240,000, as the book value of the note was equal to the face value of the note, which was paid in full. Valuation Losses In 1996, the Trust reported total consolidated valuation losses of $4,278,000, attributable to continued impairments in the value of its assets resulting from current physical conditions of the assets and changed market conditions. A valuation loss of $1,390,000 was recorded during the first quarter to reduce Peregrine's partnership investment in Placer Ranch Partners to its estimated fair value. In addition, a valuation loss of $295,000 was recorded in March 1996, against the Timberlake Medical Building in order to reduce to its book value to estimated fair value. During the fourth quarter, Peregrine recorded valuation losses of $427,000 and $423,000, against Regency Plaza Shopping Center and the Hurley Ethan Office Park I, respectively. During 1996, CalREIT recorded valuation losses of $994,000 and $749,000, against Fulton Square Shopping Center and Totem Square Shopping Center, respectively. If adverse economic conditions continue to impact Peregrine's property operations, particularly in the Sacramento market area, or if the hotel properties do not complete their refurbishing programs, more valuation losses are anticipated. 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 $187,000 and $598,000, in 1996 and 1995, respectively. Dividends Peregrine made no cash distributions during 1996 or 1995. In addition, Peregrine is substantially restricted from and does not anticipate making any cash distributions to shareholders in the foreseeable future. 23 27 Significant Changes in the Economic Environment Changing interest rates are not expected to have a significant effect on Peregrine's operations in 1997, as most of Peregrine's debt obligations are at fixed interest rates. The effect of inflation on Peregrine's operations and properties is varied. In recent years, rental rates and real estate values have decreased which has had a material impact on both revenues and asset values; however, during 1996 and into 1997, 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 1997. 24 28 Item 8. Financial Statements and Supplementary Data
Index Page - ----- ---- Consolidated Financial Statements Report of Independent Accountants 26-27 Consolidated Balance Sheets 28 Consolidated Statements of Operations 29-30 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit) Accounts Attributable to Common Shares of Beneficial Interest 31-33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35-67 Schedule III - Real Estate and Accumulated Depreciation 81-85 Schedule IV - Mortgage Loans on Real Estate 86-87
25 29 COOPERS AND LYBRAND LETTERHEAD REPORT OF INDEPENDENT ACCOUNTANTS The Board of Trustees The Peregrine Real Estate Trust We have audited the consolidated balance sheets of The Peregrine Real Estate Trust (Peregrine) and Subsidiary (Trust) as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in redeemable convertible preferred stock and shareholders' equity (deficit) accounts attributable to common shares of beneficial interest and cash flows for the years ended December 31, 1996 and 1995, and the period from October 7, 1994 to December 31, 1994 (the Transition Period), and the consolidated statement of changes in redeemable convertible preferred stock and shareholders' equity (deficit) accounts attributable to common shares of beneficial interest for the period from October 1, 1994 to October 7, 1994. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1, the Peregrine's plan of reorganization was confirmed on August 8, 1994, and became effective on October 7, 1994. As described in Note 21, Peregrine implemented fresh start accounting as required by Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code," as of October 7, 1994. The implementation of fresh start accounting as a result of the Peregrine's emergence from Chapter 11 materially changed the amounts reported in the consolidated financial statements of the Trust as of and for the periods ended October 7, 1994 and prior. As a result of the reorganization and the implementation of fresh start accounting, assets and liabilities have been recorded at fair values and certain obligations related to the claims of creditors have been reduced or reclassified to reflect their actual settlement amounts as determined by the plan of reorganization. 30 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Peregrine Real Estate Trust and Subsidiary at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for the years ended December 31, 1996 and 1995, the Transition Period, and the period from October 1, 1994 to October 7, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole present fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements and financial statement schedules have been prepared assuming Peregrine will continue as a going concern. As discussed in the last section of Note 13 to the consolidated financial statements, Peregrine has reported continuing losses from operations since emergence from bankruptcy, and must fund interest payable to the Senior Lender Group and certain required hotel improvements. Peregrine believes it will not maintain compliance in 1997 with the tangible net worth covenant arising under its Line of Credit Facility, which is near capacity at December 31, 1996, and matures in October 1997. Additionally, Peregrine has received notices of default under its license agreements related to two of its hotels, which if not cured may result in the loss of the Holiday Inn franchise licenses. Loss of the hotel licenses may lead to defaults under the Line of Credit and Senior Lender Note Agreements, and to substantial losses related to asset impairment and certain license termination costs. Peregrine is also a defendant in a case wherein the plaintiff alleges damages and other costs in excess of $900,000. These matters raise substantial doubt about Peregrine's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 13. The consolidated financial statements and financial statement schedules do not include any adjustments that might result from the outcome of these uncertainties. /s/ COOPERS & LYBRAND L.L.P. Sacramento, California March 19, 1997 31 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995
1996 1995 ------------- ------------- ASSETS Investments: Rental properties, net of accumulated depreciation of $1,986,000 and $6,001,000 at December 31, 1996 and 1995, respectively, and valuation allowance of $12,963,000 at December 31, 1995 $ 77,412,000 $ 94,500,000 Partnership interests -- 4,000,000 Notes receivable, net of deferred gains of $319,000 and $1,237,000 at December 31, 1996, and 1995, respectively, and valuation allowance of $8,229,000 at December 31, 1995 2,296,000 14,627,000 Marketable securities available-for-sale 14,115,000 -- ------------- ------------- 93,823,000 113,127,000 Cash 5,972,000 5,079,000 Restricted cash 986,000 185,000 Rents, accrued interest, and other receivables, net of allowance of $1,153,000 and $1,040,000 at December 31, 1996 and 1995, respectively 1,706,000 1,354,000 Other assets, net of valuation allowance of $310,000 at December 31, 1995 2,239,000 2,048,000 ------------- ------------- Total assets $ 104,726,000 $ 121,793,000 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Liabilities: Long-term notes payable, collateralized by deeds of trust on rental properties $ 32,263,000 $ 42,703,000 Senior Lender Group Notes Payable 44,467,000 43,441,000 Line of credit 8,583,000 5,526,000 Accounts payable and accrued liabilities 3,446,000 6,126,000 Other liabilities 343,000 547,000 ------------- ------------- Total Liabilities 89,102,000 98,343,000 ------------- ------------- Commitments and contingencies (Note 13 to consolidated financial statements.) Minority interest 5,759,000 5,858,000 ------------- ------------- Redeemable Convertible Preferred Stock: 25,000,000 shares authorized; 14,073,000 and 12,728,000 shares issued and outstanding at December 31, 1996 and 1995, respectively; net of unaccreted discount of $1,881,000 and $2,063,000 at December 31, 1996 and 1995, respectively; liquidation preference of $28,146,000 and $25,457,000 at December 31, 1996 and 1995, respectively 26,265,000 23,394,000 ------------- ------------- Common Shares of Beneficial Interest: 50,000,000 shares authorized; 4,881,000 shares outstanding at December 31, 1996 and 1995 13,356,000 13,356,000 Unrealized holding losses on marketable securities available-for-sale (22,000) -- Accumulated deficit (29,734,000) (19,158,000) ------------- ------------- Total liabilities and shareholders' equity (deficit) $ 104,726,000 $ 121,793,000 ============= =============
See accompanying notes to consolidated financial statements. 28 32 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended Year Ended December 31 December 31, Transition 1996 1995 Period ---- ---- ------ Revenues: Hotel $ 12,652,000 $ 12,816,000 $ 3,226,000 Rent 11,495,000 12,495,000 3,230,000 Interest 1,435,000 1,766,000 338,000 ------------ ------------ ----------- 25,582,000 27,077,000 6,794,000 ------------ ------------ ----------- Expenses: Hotel operating expenses 10,424,000 10,964,000 2,728,000 Commercial property operating expenses 3,874,000 4,286,000 1,572,000 Commercial and hotel property management 835,000 634,000 92,000 Depreciation and amortization 2,931,000 3,763,000 831,000 Interest 8,177,000 8,524,000 1,897,000 General and administrative 5,088,000 4,194,000 916,000 ------------ ------------ ----------- 31,329,000 32,365,000 8,036,000 ------------ ------------ ----------- (Loss) before reorganization items, gain (loss) on foreclosure or sale of investments, valuation losses, extraordinary item and minority interest (5,747,000) (5,288,000) (1,242,000) Reorganization items 454,000 (1,000,000) -- ------------ ------------ ----------- (Loss) before gain (loss) on foreclosure or sale of investments, valuation losses, extraordinary item and minority interest (5,293,000) (6,288,000) (1,242,000) Gain (loss) on foreclosure or sale of investments, net 1,580,000 (184,000) 12,000 ------------ ------------ ----------- (Loss) before valuation losses, extraordinary item and minority interest (3,713,000) (6,472,000) (1,230,000) Valuation losses (4,278,000) (9,526,000) (119,000) ------------ ------------ ----------- (Loss) before extraordinary item and minority interest (7,991,000) (15,998,000) (1,349,000) Extraordinary item, forgiveness of debt 187,000 598,000 -- ------------ ------------ ----------- (Loss) before minority interest (7,804,000) (15,400,000) (1,349,000) Minority interest 99,000 667,000 11,000 ------------ ------------ ----------- Net loss $ (7,705,000) $(14,733,000) $(1,338,000) ============ ============ ===========
See accompanying notes to consolidated financial statements. 29 33 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY STATEMENTS OF OPERATIONS (Continued) ---------- Loss per Common Share of Beneficial Interest:
Year Ended Year Ended December 31, December 31, Transition 1996 1995 Period ---- ---- ------ Net loss $ (7,705,000) $(14,733,000) $(1,338,000) Preferred Stock dividends, net of discount (2,516,000) (2,242,000) (488,000) Accretion of discount on Preferred Stock (355,000) (289,000) (68,000) ------------ ------------ ----------- Net loss attributable to Common Shares of Beneficial Interest $(10,576,000) $(17,264,000) $(1,894,000) ============= ============= ============ Loss per Common Share of Beneficial Interest before extraordinary item $ (2.21) $ (3.66) $ (0.39) Extraordinary item per Common Share of Beneficial Interest 0.04 0.12 -- ------------ ------------ ----------- Net loss per share attributable to Common Shares of Beneficial Interest $ (2.17) $ (3.54) $ (0.39) ============= ============= ============ Weighted average number of Common Shares of Beneficial Interest outstanding 4,881,000 4,883,000 4,884,000
See accompanying notes to consolidated financial statements. 30 34
THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) ACCOUNTS ATTRIBUTABLE TO COMMON SHARES OF BENEFICIAL INTEREST PERIOD FROM OCTOBER 1, 1994 TO OCTOBER 7, 1994 ---------- Redeemable Convertible Shareholders' Equity (Deficit) Attributable to Preferred Stock Common Shares of Beneficial Interest ---------------------------- ------------------------------------------------ Shares of Beneficial Interest Pre-Reorganization Number Amount Number Amount ------------- ------------- ------------- ----------- Balance at October 1, 1994* - $ - 25,093,000 $ 25,093,000 Exchange of Pre-Reorganization Common Shares of Beneficial Interest for Post-Reorganization Common Shares of Beneficial Interest - - (25,093,000) (25,093,000) Issuance of Redeemable Convertible Preferred Stock 11,250,000 22,500,000 - - Discount on Redeemable Convertible Preferred Stock - (2,193,000) - - Issuance of Post-Reorganization Common Shares of Beneficial Interest - - - - Net income for the Period October 1 through October 6, 1994 - - - - Fresh start adjustments - - - - ---------------------------- ---------------------------------- Balance at October 7, 1994 11,250,000 $ 20,307,000 - $ - ---------------------------- ----------------------------------
Shareholders' Equity (Deficit) Attributable to Common Shares of Beneficial Interest ----------------------------------------------------------------------------------------- Unrealized Holding Losses on Marketable Accumulated Accumulated Shares of Beneficial Interest Additional Securities Deficit Deficit Post-Reorganization Paid-In Available- Pre- Post- Number Amount Capital For-Sale Reorganization Reorganization -------------- ------------- -------------- ----------- ---------------- --------------- Balance at October 1, 1994* - $ - $219,848,000 $ - $(258,140,000) $ - Exchange of Pre-Reorganization Common Shares of Beneficial Interest for Post-Reorganization Common Shares of Beneficial Interest 2,334,000 6,376,000 18,479,000 - - - Issuance of Redeemable Convertible Preferred Stock - - - - - - Discount on Redeemable Convertible Preferred Stock - - - - - - Issuance of Post-Reorganization Common Shares of Beneficial Interest 2,550,000 6,963,000 - - - - Net income for the Period October 1 through - - - - 19,813,000 - October 6, 1994 Fresh start adjustments - - (238,327,000) - 238,327,000 - ----------------------------------------------------------------------------------------- Balance at October 7, 1994 4,884,000 $13,339,000 $ - $ - $ - $ - -----------------------------------------------------------------------------------------
*Commonwealth Equity Trust (Debtor-In-Possession) 31 35 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) ACCOUNTS ATTRIBUTABLE TO COMMON SHARES OF BENEFICIAL INTEREST PERIOD FROM OCTOBER 7, 1994 TO DECEMBER 31, 1995 ----------
Redeemable Convertible Shareholders' Equity (Deficit) Attributable Preferred Stock to Common Shares of Beneficial Interest ---------------------------------- -------------------------------------------- Shares of Beneficial Interest Pre-Reorganization Number Amount Number Amount -------------- ------------------- -------------- -------------- Balance at October 7, 1994 11,250,000 $20,307,000 - $ - Net loss for the Period October 7 through December 31, 1994 - - - - Issuance of dividend-in-kind on Redeemable Convertible Preferred Stock 266,000 532,000 - - Discount on Redeemable Convertible Preferred Stock dividend-in-kind - (44,000) - - Accretion of discounts on Redeemable Convertible Preferred Stock - 68,000 - - ----------------------------------- ----------------------------- Balance at December 31, 1994 11,516,000 20,863,000 - - Net loss - - - - Adjustments related to the buyout of old CET shares and fractional rounding - - - - Issuance of dividend-in-kind on Redeemable Convertible Preferred Stock 1,212,000 2,425,000 - - Discount on Redeemable Convertible Preferred Stock dividend-in-kind - (183,000) - - Accretion of discounts on Redeemable Convertible Preferred Stock - 289,000 - - ----------------------------------- ----------------------------- Balance at December 31, 1995 12,728,000 $23,394,000 - $ - ----------------------------------- -----------------------------
Shareholders' Equity (Deficit) Attributable to Common Shares of Beneficial Interest -------------------------------------------------------------------------------------- Unrealized Holding Losses on Marketable Accmulated Accumulated Shares of Beneficial Interest Additional Securities Deficit Deficit Post-Reorganization Paid-In Available- Pre- Post- Number Amount Capital For-Sale Reorganization Reorganization ---------- ----------- ----------- ---------- -------------- -------------- Balance at October 7, 1994 4,884,000 $13,339,000 $ - $ - $ - $ - Net loss for the Period October 7 through December 31, 1994 - - - - - (1,338,000) Issuance of dividend-in-kind on Redeemable Convertible Preferred Stock - - - - - (532,000) Discount on Redeemable Convertible Preferred Stock dividend-in-kind - - - - - 44,000 Accretion of discounts on Redeemable Convertible Preferred Stock - - - - - (68,000) ----------------------------------------------------------------------------------------- Balance at December 31, 1994 4,884,000 13,339,000 - - - (1,894,000) Net loss - - - - - (14,733,000) Adjustments related to the buyout of old CET shares and fractional rounding (3,000) 17,000 - - - - Issuance of dividend-in-kind on Redeemable Convertible Preferred Stock - - - - - (2,425,000) Discount on Redeemable Convertible Preferred Stock dividend-in-kind - - - - - 183,000 Accretion of discounts on Redeemable Convertible Preferred Stock - - - - - (289,000) ----------------------------------------------------------------------------------------- Balance at December 31, 1995 4,881,000 $13,356,000 $ - $ - $ - $(19,158,000) -----------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 32 36 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (DEFICIT) ACCOUNTS ATTRIBUTABLE TO COMMON SHARES OF BENEFICIAL INTEREST PERIOD FROM DECEMBER 31, 1995 TO DECEMBER 31, 1996 ----------
Redeemable Convertible Shareholders' Equity (Deficit) Attributable Preferred Stock to Common Shares of Beneficial Interest ------------------------------------ ------------------------------------------------- Shares of Beneficial Interest Pre-Reorganization Number Amount Number Amount --------------- -------------------- -------------- --------------- Balance at December 31, 1995 12,728,000 $23,394,000 - $ - Net loss - - - - Issuance of dividend-in-kind on Redeemable Convertible Preferred Stock 1,345,000 2,690,000 - - Discount on Redeemable Convertible Preferred Stock dividend-in-kind - (174,000) - - Accretion of discounts on Redeemable Convertible Preferred Stock - 355,000 - - Unrealized holding losses on marketable securities available-for-sale - - - - ------------------------------- ------------------------------ Balance at December 31, 1996 14,073,000 $26,265,000 - $ - =============================== ==============================
Shareholders' Equity (Deficit) Attributable to Common Shares of Beneficial Interest ---------------------------------------------------------------------------------------- Unrealized Holding Losses on Marketable Accumulated Accumulated Shares of Beneficial Interest Additional Securities Deficit Deficit Post-Reorganization Paid-In Available- Pre- Post- Number Amount Capital For-Sale Reorganization Reorganization ---------- ----------- ----------- ---------- -------------- -------------- Balance at December 31, 1995 4,881,000 $13,356,000 $ - $ - $ - $(19,158,000) Net loss - - - - - (7,705,000) Issuance of dividend-in-kind on Redeemable Convertible Preferred Stock - - - - - (2,690,000) Discount on Redeemable Convertible Preferred Stock dividend-in-kind - - - - - 174,000 Accretion of discounts on Redeemable Convertible Preferred Stock - - - - - (355,000) Unrealized holding losses on marketable securities available-for-sale - - - (22,000) - - -------------------------------------------------------------------------------------- Balance at December 31, 1996 4,881,000 $13,356,000 $ - $(22,000) $ - $(29,734,000) ======================================================================================
See accompanying notes to consolidated financial statements. 33 37 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY STATEMENTS OF CASH FLOWS ----------
Year Ended Year Ended December 31, December 31, Transition 1996 1995 Period ------------ ------------ ----------- Cash flows from operating activities: Net loss $ (7,705,000) $(14,733,000) $(1,338,000) ------------ ------------ ----------- Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Interest and fees added to principal balance of debt 3,881,000 4,258,000 928,000 Depreciation and amortization 2,931,000 3,763,000 831,000 (Gain) loss on foreclosure or sale of investments, net (1,580,000) 184,000 (12,000) Minority interest in net loss (99,000) (667,000) (11,000) Extraordinary item, forgiveness of debt (187,000) (598,000) -- Valuation losses 4,278,000 9,526,000 119,000 Changes in other assets and liabilities: (Increase) decrease in rents, accrued interest, and other receivables (343,000) (55,000) 58,000 (Increase) decrease in other assets (719,000) (335,000) 640,000 (Decrease) increase in accounts payable and accrued liabilities (2,178,000) (641,000) (5,497,000) (Decrease) increase in other liabilities (190,000) 162,000 (285,000) ------------ ------------ ----------- Total adjustments 5,794,000 15,597,000 (3,229,000) ------------ ------------ ----------- Net cash (used in) provided by operating activities (1,911,000) 864,000 (4,567,000) ------------ ------------ ----------- Cash flows from investing activities: Proceeds from sale of investments 20,062,000 99,000 -- Improvements to rental and hotel properties (2,513,000) (2,353,000) (181,000) Purchase of office equipment (15,000) -- -- Purchase of marketable securities (15,849,000) -- -- Principal collections on notes receivable 54,000 2,030,000 86,000 Principal collections on marketable securities 1,712,000 -- -- Increase in notes receivable -- -- (175,000) ------------ ------------ ----------- Net cash provided by (used in) investing activities 3,451,000 (224,000) (270,000) ------------ ------------ ----------- Cash flows from financing activities: Principal payments on long-term notes payable (166,000) (430,000) (72,000) Principal payments on Senior Lender Group Notes Payable (1,818,000) (1,024,000) -- Borrowings on Line of Credit, net 2,138,000 395,000 4,410,000 (Increase) decrease in restricted cash (801,000) 132,000 (204,000) ------------ ------------ ----------- Net cash (used in) provided by financing activities (647,000) (927,000) 4,134,000 ------------ ------------ ----------- Net increase (decrease) in cash 893,000 (287,000) (703,000) Cash, beginning of period 5,079,000 5,366,000 6,069,000 ------------ ------------ ----------- Cash, end of period $ 5,972,000 $ 5,079,000 $ 5,366,000 ============ ============ ===========
See accompanying notes to consolidated financial statements. 34 38 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings Organization The Peregrine Real Estate Trust ("Peregrine") 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 Peregrine under Chapter 11 of the United States Bankruptcy Code. Commencing September 1, 1993, Peregrine became self-administered. At the end of 1996, Peregrine owned nineteen commercial properties located primarily in the Sacramento area, three hotel properties located in Northern California, one parcel of vacant land located in the Sacramento area, a partnership interest, three mortgage notes secured by real property, and a 76% stock ownership interest in the California Real Estate Investment Trust ("CalREIT"). At the end of 1996, CalREIT's assets included two commercial properties, three mortgage notes secured by real property, and a portfolio of diversified, unleveraged pools of U.S. Government Agency mortgage-backed securities. Subsequent to December 31, 1996, Peregrine's interest in CalREIT was sold for $20,222,000 in cash. Change in Fiscal Year Effective December 31, 1994, Peregrine changed its fiscal year end from September 30 to December 31. Accordingly, after filing its Form 10-K for the year ended September 30, 1994, Peregrine filed a Transition Report for the three months ended December 31, 1994. The Transition Period, for the purposes of these financial statements, is the period from October 7, 1994, through December 31, 1994. Principles of Consolidation For the year ended December 31, 1996 and 1995, and the Transition Period, the consolidated financial statements include the accounts of Peregrine and its majority-owned subsidiary, CalREIT, a real estate investment trust ("REIT") in which Peregrine owns a greater than 50% interest. Herein, Peregrine and its subsidiary CalREIT, on a consolidated basis, are referred to as the "Trust". Plan of Reorganization Under Chapter 11 Proceedings On August 2, 1993, Peregrine 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 Peregrine'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. 35 39 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings, continued Plan of Reorganization Under Chapter 11 Proceedings, continued On June 9, 1994, Peregrine, the lender group, including Prudential Insurance Company of America, Pacific Mutual Life Insurance Company, ORIX USA Corporation, and Trust Company of the West ("TCW"), for which Pacific Mutual Life Insurance Company acted as agent (collectively the "Senior Lender Group"), the Official Committee of Holders of Equity Interests (the "Equity Holders Committee"), and the Official Committee of Creditors Holding Unsecured Claims (the "Creditors Committee"), (collectively, the "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 (the "Plan") was confirmed in all respects on August 8, 1994. The Effective Date of the Plan (the date on which Peregrine emerged from bankruptcy) was October 7, 1994. Peregrine is under the jurisdiction of the United States Bankruptcy Court until entry of a final decree which is expected to occur in 1997. The Plan provided for inter alia: (a) the restructuring of virtually all of the Peregrine's secured and unsecured debt; (b) the reduction in the number of Common Shares of Beneficial Interest held by current shareholders from approximately 25,100,000 ("old") shares to 2,334,000 ("new") shares (effectively a reverse stock split); and the issuance of 2,550,000 new Common 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 Common Shares of Beneficial Interest is 50,000,000. From the Effective Date, the Senior Lender Group owns a majority of the new Common 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 Common Shares of Beneficial Interest for options for Trustees who are neither employees nor management of Peregrine. Presently, 100,000 of these shares are reserved for the current independent Trustees. The Plan also provides that Peregrine, 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 Common Shares of Beneficial Interest, on a fully diluted basis. The Plan also required that Peregrine obtain a $10,000,000 working capital line of credit (the "Line of Credit") to which the Senior Lender Group agreed to subordinate. The Line of Credit, which is collateralized by certain of Peregrine's real property, was obtained prior to the Effective Date. 36 40 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings, continued Senior Lender Group Peregrine'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) Common Shares of Beneficial Interest equal to approximately 52% of the total outstanding Common Shares of Beneficial Interest. (b) Redeemable Convertible Preferred Stock (the "Preferred Shares" or "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 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 dividend payment is not made in full when due. If all dividends were paid in kind through October 1, 1998, no other Common Shares of Beneficial Interest were issued and the Preferred Stock were converted to Common Shares of Beneficial Interest on October 1, 1998, the Senior Lender Group would, on account of that conversion, acquire approximately 77% of the total Common Shares of Beneficial Interest outstanding after the conversion, bringing their total holdings to approximately 89% of the outstanding shares. The Preferred Stock is redeemable in cash (total redemption amount of $28,146,000 at December 31, 1996) 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 $28,146,000, based on an imputed rate of return of 12%. (c) 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 was payable in kind through September 30, 1996, by means of Interest Deferral Notes issued quarterly. Since September 30, 1996, interest has been payable monthly in cash, with the first payment commencing November 1, 1996. The Interest Deferral Notes accrue interest at 8.5% per annum, from the date of issuance. Interest payments, both on principal and the interest accrued through September 30, 1996, and were payable monthly in cash since September 30, 1996, with the first payment commencing November 1, 1996. The Restructured Notes Payable and Interest Deferral Notes (collectively, the "Senior Lender Group Notes Payable" or "Senior Lender Group Notes") are collateralized generally by all interests of Peregrine in real and personal property and are subordinated only to certain liens which are specified in the Plan and are due October 1, 2000. The Senior Lender Group Notes contain certain covenants and restrictions and limit Peregrine's ability to incur additional indebtedness and provide for the mandatory prepayment of principal in the amount of 80% of the net proceeds from the sale of the collateral for the Senior Lender Group Notes and from 37 41 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings, continued Senior Lender Group, continued 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. Line of Credit Pursuant to the Plan, a Line of Credit in the original maximum amount of $10,000,000 was arranged. The Line of Credit, collateralized by a first lien on certain of Peregrine's properties, is a revolving facility and bears interest at 2.25% over the prime rate defined in the Agreement (totaling 10.50% at December 31, 1996). The Line of Credit matures on October 7, 1997. In June 1996, upon the release of certain collateral, the Line of Credit was reduced from an original maximum amount of $10,000,000 to a new maximum amount of $8,600,000, in accordance with the terms of the Agreement. At December 31, 1996 and 1995, $8,583,000 and $5,526,000, respectively, were outstanding on the Line of Credit. The weighted average interest rate on the Line of Credit was approximately 10.52% and 11.08% during 1996 and 1995, respectively. The Line of Credit contains a financial covenant, among other terms customary to such facilities, which requires that Peregrine maintain a Tangible Net Worth, as defined in the Agreement, of at least $8,000,000, measured on a fiscal quarter-end basis. In addition, there are covenants for the Line of Credit related to material impairments of collateral, as defined, and involuntary bankruptcy. At December 31, 1996, Peregrine was in compliance with the Line of Credit's Tangible Net Worth Covenant; however, it is anticipated that during the first half of 1997 Peregrine will be unable to meet the financial covenant due to anticipated net losses and will require a waiver in relation to the covenant from the lender. Management plans to seek an extension of the maturity date on its Line of Credit with its current lender. However, if unable to do so, management will look for an alternative source from which to obtain a new operating line of credit. Any extension of the current Line of Credit or alternative source of funding will be subject to the approval of the Senior Lender Group; however, there can be no assurance that such approval, if requested, will be granted. Fresh Start Accounting In accounting for the effects of the reorganization, Peregrine 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 Peregrine's new Common Shares of Beneficial Interest and the reorganization value of the assets of the reorganized Peregrine was less than the total of all post-petition liabilities and allowed claims. Under the principles of fresh start accounting, all of Peregrine's assets and liabilities were restated to reflect their reorganization value which approximated fair value at the date of the reorganization, October 7, 1994. 38 42 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings, continued Fresh Start Accounting, continued As a result of the implementation of fresh start accounting, the consolidated statements of operations of the Trust after the consummation of the Plan are not comparable to the Trust's consolidated statements of operations for prior periods. The reorganization value of Peregrine's assets was primarily the estimated fair value of Peregrine'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. The interest in CalREIT was valued based on an income capitalization approach, without any control premium being attributed to Peregrine'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. Rental Properties At December 31, 1996 and 1995, the Trust's rental properties are recorded at reorganization value net of accumulated depreciation and impairment losses ("valuation losses") recognized since the Effective Date, unless they are CalREIT assets, in which case they are carried at cost, net of accumulated depreciation and impairment losses recognized. The valuation allowance for possible investment losses at December 31, 1996 and 1995, represents the excess of the carrying value of individual properties over their appraised or estimated fair value (less estimated selling costs if held for sale). In 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for 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 (including certain identifiable intangibles) to their estimated fair value whenever events or changes 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 it new cost. The Trust adopted the provisions of SFAS 121 on January 1, 1996. At that date, all previously recorded valuation losses and accumulated depreciation were combined with the cost of the asset; and the resulting amount is accounted for as its new cost. Generally, fair values are estimated using discounted cash flow, direct capitalization, and market comparison analyses. 39 43 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings, continued Rental Properties, continued Impairment losses (valuation losses) are recorded after consideration of various external factors, particularly overbuilt real estate markets resulting in declining lease rates which adversely affect real estate. A gain or loss will be recorded to the extent that the amounts ultimately realized from property sales differ from those currently estimated. In the event economic conditions for real estate continue to decline, additional valuation losses may be recognized in the near term. The allowance for depreciation and amortization has been calculated under the straight-line method based upon the estimated useful lives of the properties. CalREIT assets lives range from 30 to 40 years. As of the Effective Date, new useful lives were estimated for all Peregrine rental properties. These lives range from 24 to 34 years. Expenditures for maintenance, repairs and betterments which do not materially prolong the normal useful life of an asset are charged to operations as incurred. Expenditures which prolong the useful life of an asset are capitalized and depreciated. Real estate acquired by cancellation of indebtedness or foreclosure is recorded at fair market value at the date of acquisition. No depreciation is taken on assets classified as "held-for-sale". Partnership Interests Partnership investments of 20% to 50% are accounted for by the equity method. Under this method, the investments are recorded at initial cost and increased for partnership income and decreased for partnership losses and distributions. Marketable Securities Statement of Financial Accounting Standards 115, "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 115) 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 consolidated balance sheet. 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 consolidated balance sheet. Securities that are bought and held principally for the purpose of selling them in the near term are to be 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 consolidated shareholders' equity until realized. 40 44 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings, continued Marketable Securities, continued The Trust complies with the provisions of SFAS 115, accordingly, the Trust determines the appropriate classification at the time of purchase and re-evaluates such designation at each balance sheet date. At December 31, 1996, the Trust's marketable securities (which are held by CalREIT) are classified as "available-for-sale" and are measured at fair value in the balance sheet. Unrealized holding gains and losses are excluded from earnings and reported as a separate component of consolidated shareholders' equity (deficit) until realized. Other Assets The Trust amortizes leasing commissions on a straight-line basis over the lives of the leases to which they relate. Financing costs are amortized over the lives of the loans or other financial instruments to which they relate. Corporate furniture, fixtures, and equipment in excess of $500 are capitalized and depreciated on a straight-line basis over their estimated useful lives. Income Taxes In 1977, Peregrine elected to be and was taxed as a 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, Peregrine did not qualify to be taxed as a REIT. The termination of its REIT status is effective as of October 1, 1992. Peregrine 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. Cash The Trust invests its cash and restricted cash in demand deposits with banks with strong credit ratings. Bank balances in excess of federally insured amounts totaled $7,267,000 and $5,500,000 as of December 31, 1996 and 1995, respectively. The Trust has not experienced any losses on these deposits. 41 45 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings, continued Sales of Real Estate The Trust complies with the provisions of Statement of Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate" (SFAS 66). Accordingly, the recognition of gains on certain transactions are deferred until such transactions have complied with the criteria for full profit recognition under the Statement. Interest Income Recognition The Trust recognizes interest income on notes receivable when it is estimated that the fair value of the collateral related to the note is adequate. Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation In 1995, Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation", (SFAS 123) was issued. SFAS 123 requires either recognition or disclosure of a hypothetical charge for stock options. SFAS 123 also establishes fair value-based accounting and reporting standards for stock-based compensation plans. The statement defines a fair value-based method of accounting for employee stock options or similar equity instruments and allows parties to elect to continue to measure compensation costs using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees", (APB Opinion 25). SFAS 123 requires, for those electing to remain with the APB Opinion 25 accounting method, pro forma disclosure of net income (loss) as if the fair value-based method had been applied. Peregrine has elected to continue to account for stock-based compensation under the provisions of APB Opinion 25 and adopt the disclosure-only provisions of SFAS 123. Accordingly, the compensation costs of stock options are measured using the intrinsic value-based method, whereby the excess, if any, of the fair value of Peregrine's stock at the date of the grant over the amount an employee must pay to acquire the stock represents compensation cost. Had compensation costs for Peregrine's stock-based compensation been determined using fair value of the options at the grant date, as prescribed by SFAS 123, Peregrine's net loss would be unchanged for the years ending December 31, 1996 and 1995, and the Transition Period as the fair value of Peregrine's stock options was below the option price. 42 46 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 1. Organization, Summary of Significant Accounting Policies and Chapter 11 Proceedings, continued Net Loss Per Share Net loss per Common Share of Beneficial Interest has been computed based on the weighted-average number of Common Shares of Beneficial Interest outstanding during the years ended December 31, 1996 and 1995, and the Transition Period, of 4,881,000, 4,883,000, and 4,884,000, respectively. For purposes of determining average number of shares outstanding and net loss per Common Share of Beneficial Interest for the Transition Period, October 1, 1994, is treated as the Effective Date. Common Shares of Beneficial Interest equivalents are anti-dilutive for the year ended December 31, 1996 and 1995, and the Transition Period, and are not considered in calculating net loss per Common Share of Beneficial Interest. In February 1997, Statement of Financial Accounting Standard No. 128, "Earnings Per Share", (SFAS 128) was issued. SFAS 128 specifies the computation, presentation, and disclosure requirements for earnings per share ("EPS"). SFAS 128 is designed to improve the EPS information presented in the consolidated financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of EPS data on an international basis. This statement is effective for consolidated financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. The adoption of SFAS 128 is not expected to have a material impact on the financial statements of Peregrine. Reclassifications Certain reclassifications have been made in the presentation of the December 31, 1995, and Transition Period consolidated financial statements to conform to the 1996 presentation. 2. Pro Forma Financial Statements As further discussed in Note 23 to consolidated financial statements, on January 3, 1997, Peregrine sold its 76% stock ownership interest in CalREIT for $20,222,000, or approximately $2.91 per share of CalREIT previously held by Peregrine to a third party, CalREIT Investors Limited Partnership, which resulted in the recognition of a gain of $1,012,000 during the first quarter of 1997. The following Pro-Forma Financial Statements reflect adjustments to the historical consolidated financial statements for the period ending December 31, 1996, to reflect Peregrine's sale of its 76% stock ownership interest in CalREIT as if it had been consummated on January 1, 1996, and are presented in order to illustrate the possible scope of the change in historical financial position and results of operations caused by the transaction: 43 47 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 2. Pro Forma Financial Statements, continued THE PEREGRINE REAL ESTATE TRUST PRO-FORMA BALANCE SHEET December 31, 1996
Consolidated Pro-Forma Historical Adjustments Pro-Forma ------------- ------------- -------------- ASSETS Investments: Rental properties, net of accumulated depreciation $ 77,412,000 $ (8,585,000) (a) $ 68,827,000 Notes receivable, net of deferred gains 2,296,000 (1,576,000) (a) 720,000 Marketable securities available-for-sale 14,115,000 (14,115,000) (a) -- Investment in CalREIT -- 19,049,000 (a) -- (19,049,000) (b) ------------- ------------- ------------- 93,823,000 (24,276,000) 69,547,000 Cash 5,972,000 (4,698,000) (a) 6,105,000 4,591,000 (b) 240,000 (c) Restricted cash 986,000 -- 986,000 Rents, accrued interest, and other receivables, net of allowance 1,706,000 (707,000) (a) 1,030,000 31,000 (a) Other assets 2,239,000 (355,000) (a) 1,424,000 (460,000) (b) ------------- ------------- ------------- Total assets $ 104,726,000 $ (25,634,000) $ 79,092,000 ============= ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Liabilities: Long-term notes payable, collateralized by deeds of trust on rental properties $ 32,263,000 $ (5,169,000) (a) $ 27,094,000 Senior Lender Group Notes Payable 44,467,000 (15,631,000) (b) 27,803,000 (1,033,000) (c) Line of credit 8,583,000 -- 8,583,000 Accounts payable and accrued liabilities 3,446,000 (295,000) (a) 3,029,000 (122,000) (c) Other liabilities 343,000 (70,000) (a) 273,000 ------------- ------------- ------------- Total liabilities 89,102,000 (22,320,000) 66,782,000 Commitments and contingencies (Note 13 to consolidated financial statements.) Minority interest 5,759,000 (5,759,000) (a) -- ------------- ------------- ------------- Redeemable Convertible Preferred Stock, net of unaccreted discounts 26,265,000 -- 26,265,000 ------------- ------------- ------------- Common Shares of Beneficial Interest 13,356,000 -- 13,356,000 Unrealized holding losses on marketable securities (22,000) 22,000 (a) -- Accumulated deficit (29,734,000) 315,000 (a) (27,311,000) 713,000 (b) 1,395,000 (c) ------------- ------------- ------------- Total liabilities and shareholders' equity (deficit) $ 104,726,000 $ (25,634,000) $ 79,092,000 ============= ============= =============
44 48 THE PEREGRINE REAL ESTATE TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 2. Pro Forma Financial Statements, continued THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY PRO-FORMA STATEMENT OF OPERATIONS For the Year Ended December 31, 1996
Consolidated Historical Pro-Forma 1996 Adjustments 1996 ------------- ----------- ------------- Revenues: Hotel $ 12,652,000 $ -- $ 12,652,000 Rent 11,495,000 (2,019,000) (a) 9,476,000 Interest 1,435,000 (1,136,000) (a) 299,000 ------------- ------------- ------------- 25,582,000 (3,155,000) 22,427,000 ------------- ------------- ------------- Expenses: Hotel operating expenses 10,424,000 -- 10,424,000 Commercial property operating expenses 3,874,000 (685,000) (a) 3,189,000 Commercial and hotel property management 835,000 (96,000) (a) 739,000 Depreciation and amortization 2,931,000 (64,000) (a) 2,867,000 Interest 8,177,000 (547,000) (a) 6,235,000 (1,395,000) (c) General and administrative 5,088,000 (1,503,000) (a) 3,585,000 ------------- ------------- ------------- 31,329,000 (4,290,000) 27,039,000 ------------- ------------- ------------- (Loss) before reorganization item, gain (loss) on foreclosure or sale of investments, valuation losses and minority interest (5,747,000) 1,135,000 (4,612,000) Reorganization item 454,000 -- 454,000 ------------- ------------- ------------- (Loss) before gain (loss) on foreclosure or sale of investments, valuation losses, and minority interest (5,293,000) 1,135,000 (4,158,000) Gain (loss) on foreclosure of sale of investments 1,580,000 (1,068,000) (a) 512,000 ------------- ------------- ------------- (Loss) before valuation losses and minority interest (3,713,000) 67,000 (3,646,000) Valuation losses (4,278,000) 1,743,000 (a) (2,535,000) ------------- ------------- ------------- (Loss) before minority interest (7,991,000) 1,810,000 (6,181,000) Minority interest 99,000 (99,000) (a) -- ------------- ------------- ------------- Loss from continuing operations $ (7,892,000) $ 1,711,000 $ (6,181,000) ============= ============= =============
45 49 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 2. Pro Forma Financial Statements, continued THE PEREGRINE REAL ESTATE TRUST PRO-FORMA STATEMENT OF OPERATIONS (Continued) For the Year Ended December 31, 1996
Consolidated Historical Pro-Forma 1996 Adjustments 1996 ------------- ----------- ----------- Loss from continuing operations $ (7,892,000) $1,711,000 $(6,181,000) Preferred Stock dividends, net of discount (2,516,000) -- (2,516,000) Accretion of discount on Preferred Stock (355,000) -- (355,000) ------------ ---------- ----------- Loss from continuing operations attributable to Common Shares of Beneficial Interest $(10,763,000) $1,711,000 $(9,052,000) ============ ========== =========== Loss from continuing operations per Common Share of Beneficial Interest $ (2.21) $ 0.35 $ (1.86) ============ ========== =========== Weighted average number of Common Shares of Beneficial Interest outstanding 4,881,000 4,881,000 4,881,000
(a) Adjustment to eliminate the net assets, income and expenses of CalREIT, eliminate the minority interest investment in CalREIT, to record Peregrine's equity investment in CalREIT, and to record the amount receivable from CalREIT. (b) Adjustment to record the sale of the equity investment in CalREIT. (c) Adjustment to record the interest savings on the Senior Lender Group Notes Payable resulting from the reduction of debt with the application of 80% of the net proceeds from the sale of CalREIT, as required by the Note Agreement. The excess of the total proceeds of $20,222,000, over the related transaction costs of $460,000 and Peregrine's Pro-Forma investment in CalREIT at January 1, 1996, of $19,049,000, totaling $713,000, has not been reflected in the Pro-Forma Statement of Operations. 3. Related-Party Transactions Peregrine and CalREIT are both self-administered. However, they share certain costs, including personnel costs, for which CalREIT reimburses Peregrine pursuant to a cost allocation agreement based on respective asset values. During 1996 and 1995, reimbursable costs charged by Peregrine to CalREIT approximated $247,000 and $435,000, respectively. During the Transition Period, reimbursable costs charged by Peregrine to CalREIT approximated $300,000; $200,000 of which relates to the period prior to October 7, 1994. 46 50 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 3. Related-Party Transactions, continued Such reimbursements have been offset against the amount due to CalREIT and are eliminated in the consolidation. At December 31, 1996 and 1995, Peregrine had amounts due from CalREIT aggregating $31,000 and $45,000, respectively. In January 1997, following Peregrine's sale of its 76% stock ownership interest in CalREIT, the cost allocation agreement between Peregrine and CalREIT was terminated. As a result of the termination of Frank A. Morrow as Peregrine's Chief Executive Officer in January 1996, Peregrine utilized the services of certain of its independent Trustees in connection with its 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 Trustees (or affiliated companies) during 1996, in addition to the quarterly fees and meeting fees paid to the Trustees ("Normal Trustee Fees"): The McMahan Group (John McMahan, Trustee) $69,000 John F. Salmon, Trustee $49,000 The Presidio Group (Kenneth T. Seeger, Trustee) $41,000 Snell&Co (Roger D. Snell, Trustee) $10,000
No amounts were paid to the Peregrine Trustees (or affiliated companies) during 1995 or the Transition Period other than Normal Trustee Fees. During 1996, CalREIT paid $140,000 in compensation to one of its independent Trustees, Elliot G. Steinberg, in connection with CalREIT's strategic growth activities, and accrued $180,000 in deferred compensation for 1996, to Frank A. Morrow, Chairman of the Board and Chief Executive Officer, which was paid in March 1997. No amounts were paid to the CalREIT Trustees during 1995 or the Transition Period other than Normal Trustee Fees. 4. Restricted Cash At December 31, 1996, cash of $986,000 was restricted. Such funds which represent the balance of the net proceeds from the sale of certain assets of Peregrine, are being held in an escrow account for the benefit of the Senior Lender Group. 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. During 1996, 80% of this amount was distributed to the Senior Lender Group in accordance with the agreement, upon resolution of the property tax issue. 47 51 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 5. Rental Properties At December 31, 1996 and 1995, the Trust's consolidated rental property portfolio at reorganization value or adjusted cost included retail shopping centers, $35,053,000 and $47,947,000, respectively; office buildings, $16,235,000 and $18,053,000, respectively; industrial buildings, $8,101,000 and $13,727,000, respectively; mini-storage facilities, $2,808,000 and $2,888,000, respectively; land, $30,000 and $182,000, respectively; and hotels, $17,171,000 and $30,667,000, respectively. Under fresh start accounting, all Peregrine rental properties were adjusted at the Effective Date to reorganization value which is different than tax basis. Peregrine's noncancellable operating leases at December 31, 1996, provide for minimum rental income during each of the next five years of $6,948,000, $6,182,000, $4,939,000, $4,087,000, and $2,599,000, respectively, and $4,401,000 thereafter. Certain of the leases increase periodically based on changes in the Consumer Price Index. Contingent rental income was $28,000, $27,000, and $8,000 during 1996, 1995, and the Transition Period, respectively. At December 31, 1996, 3900 Lennane Drive and CalREIT's two directly owned properties with total carrying values of $1,895,000 and $8,585,000, respectively, were classified as held for sale. 6. Partnership Interests Peregrine is a partner in CR Properties, a general partnership, in which Peregrine owns a 50% interest. CR Properties is a limited partner in a partnership which owns an office building in Sacramento, California. No portion of the CR Properties partnership loss has been recognized in the Trust's consolidated financial statements for the year ended December 31, 1996 and 1995, and the Transition Period as the partnership agreement specifies that net losses shall be allocated 100% to the other partner. As CR Properties has a limited partnership interest, it has no contingent liability with respect to the office building debt. Investment in CR Properties general partnership, at the Peregrine's reorganization value $ -- --------
At the beginning of 1996, Peregrine was a partner in Placer Ranch Partners, a limited partnership in which Peregrine owned a 31% limited partnership interest. The Partnership owned an undeveloped parcel of land in the Stanford Ranch area of Rocklin, California. During the first quarter of 1996 the General Partner exercised a Put/Call Option. In accordance with the terms of the Agreement, the Put/Call Option required that Peregrine sell its interest to the General Partner or purchase the General Partners interest. In July 1996, after investigation and analysis, and due to Capital Constraints, Peregrine sold its 31% interest to the General Partner for $2,739,000, which resulted in the recognition of a $129,000 gain. 48 52 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 7. Notes Receivable In order to facilitate sales of real estate, the Trust has accepted partial payment in the form of notes receivable collateralized by deeds of trust. As of December 31, 1996 and 1995, the Trust had long-term notes receivable collateralized by deeds of trust in the face amounts of $8,778,000 and $24,093,000, respectively. Generally the notes are collateralized by real estate properties in California. The notes are to be repaid from the cash flow of the property or proceeds from the sale or refinancing of the property. At December 31, 1996, Peregrine had two notes totaling $660,000 which were delinquent, against which it had recorded an allowance of $275,000. Interest income recognized by Peregrine on these delinquent notes was $39,000, $43,000 and $11,000 and cash received on the notes was $58,000, $41,000 and $86,000 for the years ended December 31, 1996 and 1995, and the Transition Period, respectively. Contractually scheduled principal collections on Peregrine's note portfolio in the face amount of $1,075,00 over the next five years, excluding delinquent notes, are as follows: 1997 $ 5,000 1998 6,000 1999 6,000 2000 7,000 2001 8,000 Thereafter 383,000 --------- $ 415,000 =========
The Trust's notes bear interest at rates ranging from 7.63% to 11.50% as of December 31, 1996. For 1996, the overall effective rate was approximately 8.50%. At December 31, 1996, all notes receivable directly owned by CalREIT with a carrying value of $1,576,000, were classified as held for sale. 8. Valuation Allowances Based on a review of its investments, the Trust has provided for valuation allowances as set forth below. Adverse economic factors, particularly over-built real estate markets resulting in declining lease renewal rates, were the primary causes of these valuation losses. If such adverse economic factors continue, additional valuation loss provisions may be required in the near term. In the event that Peregrine's License Agreements with Holiday Inn are terminated, additional valuation allowances against the hotels may be necessary in the near term. The Trust adopted the provisions of SFAS 121 on January 1, 1996. At that date, all previously recorded valuation losses (and accumulated depreciation) were combined with the cost of the asset; and the resulting amount is accounted for as its new cost. 49 53 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 8. Valuation Allowances, continued Analysis of changes in the allowance for possible losses on real estate investments, partnership interests, notes receivable, and rents, accrued interest and other receivables for the years ended December 31, 1996 and 1995, and the Transition Period follow. Under fresh start accounting, all separately stated valuation allowances as of the Effective Date were eliminated. Peregrine's assets and liabilities were restated to reflect their reorganization value which approximated fair value at the date of reorganization, October 7, 1994. Therefore, in the "Transition Period" column below, the beginning balances in each of the categories reflect the then cumulative valuation allowances on rental properties, the then cumulative valuation allowances and deferred gains on notes receivable and the then cumulative allowance for bad debt losses on rents and interest receivable for CalREIT only. The detail is set forth below:
Year Ended Year Ended December 31, December 31, Transition 1996 1995 Period ------------ ------------ ----------- Rental Properties Allowance for valuation losses on rental property investments: Beginning balance $ 12,963,000 $ 5,863,000 $ 71,257,000 Fresh start adjustment -- -- (65,463,000) ------------ ----------- ------------ Adjusted beginning balance 12,963,000 5,863,000 5,794,000 Provision for valuation losses 2,888,000 7,100,000 69,000 SFAS 121 adjustments (15,851,000) -- -- ------------ ----------- ------------ Ending balance $ -- $12,963,000 $ 5,863,000 ============ =========== ============ Partnership Investments Allowance for valuation losses on partnership investments: Beginning balance $ -- $ -- $ 17,429,000 Fresh start adjustment -- -- (17,429,000) ------------ ----------- ------------ Adjusted beginning balance -- -- -- Provision for valuation losses 1,390,000 -- -- SFAS 121 adjustments (1,390,000) -- -- ------------ ----------- ------------ Ending balance $ -- $ -- $ -- ============ =========== ============
50 54 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 8. Valuation Allowances, continued
Year Ended Year Ended December 31, December 31, Transition 1996 1995 Period ----------- ----------- ----------- Notes Receivable Allowance for valuation losses, unaccreted discounts and deferred gains on notes receivable: Beginning balance $ 9,466,000 $ 7,317,000 $ 7,773,000 Fresh start adjustment -- -- (579,000) ----------- ----------- ----------- Adjusted beginning balance 9,466,000 7,317,000 7,194,000 Provision for valuation losses -- 2,426,000 -- Deferral of gains -- -- 135,000 Recognition of deferred gains (55,000) (66,000) (12,000) Amounts charged against allowance for losses -- (211,000) -- SFAS 121 adjustments (9,092,000) -- -- ----------- ----------- ----------- Ending balance $ 319,000 $ 9,466,000 $ 7,317,000 =========== =========== =========== Rents, Accrued Interest, and Other Receivables Allowance for bad debt losses on rents, accrued interest, and other receivables: Beginning balance $ 1,040,000 $ 285,000 $ 2,555,000 Fresh start adjustment -- -- (2,434,000) ----------- ----------- ----------- Adjusted beginning balance 1,040,000 285,000 121,000 Provision for losses 841,000 1,391,000 198,000 Recoveries (24,000) Amounts charged against allowance for losses (704,000) (636,000) (34,000) ----------- ----------- ----------- Ending balance $ 1,153,000 $ 1,040,000 $ 285,000 =========== =========== ===========
In addition, the Trust has established an allowance for valuation losses on other assets in the amount of $0 at December 31, 1996 and $310,000 at December 31, 1995. 51 55 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 9. Investment in Marketable Securities At December 31, 1996, CalREIT had $14,115,000 invested in U.S. Government mortgage-backed securities classified as "available-for-sale". In accordance with SFAS 115, the Trust determines the appropriate classification at the time of purchase and re-evaluates such designation at each balance sheet date. At December 31, 1996, CalREIT's "available-for-sale" securities consisted of the following:
(in thousands) Unrealized Estimated Cost Gains Losses Fair Value ---- ----- ------ ---------- Federal National Mortgage Association, adjustable rate interest currently at 7.783%, due April 1, 2024 $ 2,879 $ -- $ (34) $ 2,845 Federal Home Loan Mortgage Corporation, adjustable rate interest currently at 7.625%, due June 1, 2024 967 -- (10) 957 Federal National Mortgage Association, adjustable rate interest currently at 7.292%, due April 1, 2025 732 -- (4) 728 Federal National Mortgage Association, adjustable rate interest currently at 6.144%, due May 1, 2026 3,260 -- (5) 3,255 Federal National Mortgage Association, adjustable rate interest currently at 6.116%, due June 1, 2026 6,299 31 -- 6,330 ------- ---- -------- ------- $14,137 $ 31 $ (53) $14,115 ======= ==== ======== =======
The maturity dates above are not necessarily indicative of expected maturities as principal is often prepaid on such instruments. Interest income recognized during 1996 on CalREIT's marketable securities available-for-sale was $392,000. 52 56 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 10. Long-Term Notes Payable At December 31, 1996 and 1995, the Trust had long-term notes payable, other than the Senior Lender Group Notes Payable and the Line of Credit, most of which were collateralized by first deeds of trust on rental properties, with an aggregate net book value of $38,695,000 and $52,468,000, respectively. Pursuant to the Reorganization Plan, Peregrine's long-term notes payable collateralized by first deeds of trust, with a face value of $27,094,000 at December 31, 1996, are due in installments extending to the year 2008, with interest rates ranging from 8.50% to 10.00%. Contractually scheduled principal payments related to these long-term notes during each of the next five years, are $338,000, $369,000, $405,000, $445,000, $488,000, respectively, and $25,049,000 thereafter. Peregrine's Senior Lender Group Notes Payable totaling $44,467,000 at December 31, 1996, (reduced to $28,889,000 on January 3, 1997, upon the application of the proceeds from the sale of CalREIT), are due October 1, 2000. During 1996, Peregrine's office building at 3900 Lennane Drive, Sacramento, California continued to be vacant despite efforts to lease the property. In addition, management continued its efforts to either sell the property or restructure debt due to the negative cash flow resulting from the required debt service payments (including tax impounds) of approximately $25,000 per month. All efforts to lease or sell the property or restructure the debt to a manageable level failed. In February 1997, after consent from both the Senior Lender Group and Foothill Capital Corporation (the lender on the Line of Credit), Peregrine ceased debt service payments. In March 1997, Peregrine was notified that the lender has initiated foreclosure proceedings against the note. The unpaid balance of the note at the time of default was approximately $2,493,000, of which approximately $2,380,000 is subject to recourse. Under the Plan of Reorganization, the principal amount of Peregrine's long-term notes payable collateralized by first deeds of trust remained undiminished, and in some cases increased by accrued interest and professional fees. Moreover, the terms of the notes were altered, in some cases materially, as to interest rates, due dates and periodic payments. 11. Distributions No cash distributions were made to holders of Common Shares of Beneficial Interest for the years ended December 31, 1996 and 1995, and the Transition Period. Under the terms of the agreement with respect to the Senior Lender Group Notes Payable, Peregrine is substantially restricted from and does not anticipate making any distributions to shareholders in the foreseeable future. 53 57 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 12. Statements of Cash Flows Supplemental Information In connection with the sale or foreclosure of investments, Peregrine entered into various non-cash transactions as follows:
Year Ended Year Ended December 31, December 31, Transition 1996 1995 Period ------------ ------------ ---------- Sales price less selling costs $27,655,000 $ 5,174,000 $ 3,098,000 Notes receivable (20,000) (2,240,000) (1,144,000) Notes payable assumed by buyer or paid through escrow (7,304,000) (2,380,000) -- Other liabilities assumed by buyer or applied to the sale price (187,000) (455,000) (1,954,000) Liabilities incurred in connection with foreclosure of mortgage notes (82,000) -- -- ----------- ------------ ----------- Net cash received $20,062,000 $ 99,000 $ -- ----------- ------------ ----------- Carrying value of property and notes receivable sold $23,754,000 $ 5,150,000 $ 3,023,000 ----------- ------------ ----------- Carrying value of other assets written off at the time of the sale $ 66,000 $ 138,000 $ 18,000 ----------- ------------ ----------- Other liabilities incurred in connection with foreclosure of mortgage notes $ 22,000 $ -- $ -- ----------- ------------ -----------
CalREIT's Casa Grande Motor Inn which was collateralized by notes payable of $3,089,000 was foreclosed upon during the year ended 1996. The carrying value of the assets was equal to the carrying value of the debt; therefore, no gain or loss on foreclosure was recorded. One property which collateralized notes payable of $2,764,000 was foreclosed upon during the year ended December 31, 1995, causing a loss of $73,000. Three parcels of land located in Sacramento with a carrying value of $152,000 were returned to the bond holders in lieu of foreclosure during the year ended December 31, 1996. Sixteen parcels with a carrying value of $1,215,000 were returned to the bond holder in lieu of foreclosure during the year ended December 31, 1995. No gain or loss was recorded on these transactions, as the value of the land was equal to the value of the liabilities. 54 58 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 12. Statements of Cash Flows Supplemental Information, continued During the years ended December 31, 1996 and 1995, and the Transition Period, the outstanding balance on the Line of Credit was increased by $918,000, $662,000, and $59,000, respectively for interest and expenses incurred during the year. Additionally, on March 31, June 30, and September 30, 1996, Peregrine issued Interest Deferral Notes at 8.5% per annum in the principal amount of $933,000, $944,000, and $967,000, respectively, as payment in kind for the interest then due on the Senior Lender Group Notes Payable. On March 31, June 30, September 30, and December 31, 1996, Peregrine also issued Preferred Stock in the face amount of $643,000, $660,000, $684,000, and $703,000, respectively as payment in kind for the dividend then due on the outstanding Preferred Stock. In 1995, Interest Deferral Notes issued as payment in kind were in the principal amounts of $867,000, $885,000, $913,000, and $931,000, on March 31, June 30, September 30, and December 31, respectively. Preferred Stock Dividends issued as payment in kind were in the face amount of $576,000, $597,000, $618,000, and $634,000, respectively, on March 31, June 30, September 30, and December 31, 1995. During the Transition Period ending December 31, 1994, Interest Deferral Notes in the principal amount of $869,000 were issued as interest payment in kind on the Senior Lender Group Notes and Preferred Stock in the face amount of $532,000 was issued as dividends in kind on the outstanding Preferred Stock. During 1996, the long-term first mortgage note on Peregrine's office building at 3900 Lennane Drive was increased by $119,000 of deferred interest. Interest paid for the years ended December 31, 1996 and 1995, and the Transition Period was $4,979,000, $4,472,000, and $2,206,000, respectively. 13. Commitments and Contingencies Unused Line of Credit At December 31, 1996, approximately $17,000 of the Line of Credit, the maximum amount of which is $8,600,000, was unused. Leases Peregrine is obligated under land leases to the year 2019. For each of the next five years the minimum annual payment under the leases is $35,000, and $651,000 thereafter. Total ground lease expense was $38,000, $35,000, and $9,000 during the years ended December 31, 1996 and 1995, and the Transition Period, respectively. 55 59 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 13. Commitments and Contingencies, continued Leases, continued During 1995, CalREIT entered into a three year, non-cancelable operating lease for facilities in San Francisco, California. Rent expense under the operating lease was $40,000 in 1996 and $30,000 in 1995. Litigation At December 31, 1996, Peregrine and CalREIT were a party to a number of lawsuits. Most involved ordinary disputes common in the real property management business and amounts immaterial to the overall financial condition of Peregrine and CalREIT. The shareholder lawsuits and other material litigation to which Peregrine was a party to prior to and during the bankruptcy proceedings were resolved and settled in connection with the Plan of Reorganization; however, claims against Peregrine for the payment of approximately $279,000 in fees for professional services rendered during the bankruptcy proceedings remain pending. At December 31, 1996, Peregrine is a defendant in a case filed by MDC REIT Holdings, L.L.C. ("MDC") in California state court, on December 24, 1996. MDC alleges that Peregrine breached a certain stock purchase agreement pursuant to which Peregrine was to have sold to MDC certain shares of the Common Shares of Beneficial Interest of CalREIT that were owned by Peregrine. MDC is seeking damages it allegedly incurred in excess of $900,000, and recovery of its attorney fees, costs, and interest. Management believes, and has been advised by its counsel, that MDC's claims are without merit. Peregrine has answered the complaint, denying any breach of the stock purchase agreement and asserting numerous affirmative defenses to MDC's claims. The consolidated financial statements do not include an accrual for any losses related to the complaint. Financial Status of The Peregrine Real Estate Trust The following matters raise substantial doubt about Peregrine's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. o Subsequent to its emergence from bankruptcy on October 7, 1994, Peregrine has incurred cumulative losses through December 31, 1996, of approximately $24,000,000, which includes valuation losses against investments of approximately $14,000,000. 56 60 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 13. Commitments and Contingencies, continued Financial Status of The Peregrine Real Estate Trust, continued o At December 31, 1996, Peregrine estimates that additional capital expenditures of approximately $1,800,000 will be required during 1997 to complete the refurbishments of its hotel properties in order to comply with Holiday Inn franchise requirements. As a result of not completing the required refurbishments within the time frame specified by Holiday Inn, Peregrine received a 30-day notice of default under the Holiday Inn License Agreements (the "Notice of Default") for its Chico and Sacramento hotels in February 1997. The terms of the Notice of Default require that Peregrine complete the refurbishment work within 30 days or the License Agreements with Holiday Inn will be terminated and the hotels will be removed from the Holiday Inn system. In the event that management is unable to reach an agreement with Holiday Inn and the License Agreements are terminated, Peregrine could be subject to termination fees estimated at approximately $500,000 and $800,000 for Chico and Sacramento, respectively. In addition, under the terms of its Line of Credit Agreement, the loss of the Holiday Inn License Agreements could constitute an event of default unless Peregrine is able to replace the Holiday Inn License Agreements with comparable license agreements within 180 days from the date on which the Holiday Inn License Agreements are terminated. The loss of the Holiday Inn License Agreements could also constitute an event of default under the terms of the Senior Lender Note Agreement. o Peregrine began paying interest in cash to its Senior Lender Group in November 1996 and estimates that payments in 1997 will be approximately $2,500,000. o The Line of Credit matures on October 7, 1997. o At December 31, 1996, Peregrine was in compliance with the Line of Credit's Tangible Net Worth Covenant; however, it is anticipated that during the first half of 1997, Peregrine will be unable to meet the financial covenant due to anticipated net losses. o At December 31, 1996, Peregrine was a defendant in a case filed by MDC REIT Holdings, L.L.C. ("MDC") in California state court, on December 24, 1996, as described above. 57 61 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 13. Commitments and Contingencies, continued Financial Status of The Peregrine Real Estate Trust, continued Management's plans with respect to the matters noted above are as follows: o Management has developed a plan to meet these near term obligations, which includes maximizing the income stream from the both the commercial properties and hotels and the select disposition of real estate and other assets with negative cash flows and/or which require significant capital expenditures beyond the resources available to Peregrine. Upon the disposition of assets, 80% of any net proceeds realized are required to be distributed to the Senior Lender Group as payment against the Senior Lender Group Notes. On January 3, 1997, Peregrine sold its 76% stock ownership interest in CalREIT for $20,222,000 and in accordance with the terms of the Restructured Note Agreement $15,631,000 was distributed to the Senior Lender Group. The distribution of the net proceeds from the sale of CalREIT was applied first to the unpaid accrued interest of $53,000, the balance of the distribution was applied towards the outstanding debt reducing the balance from $44,467,000 to $28,889,000. The remainder of the net proceeds, $4,591,000 is available to Peregrine for operating and capital improvement needs. o Management has negotiated with Holiday Inn and has obtained a 30-day extension of time to April 15, 1997, in which to review the refurbishment plans and budgets and develop an action plan to complete the refurbishments required. Should the refurbishment plans not meet Holiday Inn's requirements, or should Holiday Inn decide not to grant an extension of time in which to complete the required refurbishments, the License Agreements could be terminated on or after April 15, 1997. Management intends to develop an action plan that is acceptable to Holiday Inn and seek an extension of time in which to complete the required refurbishments. As a result of the sale of its 76% ownership interest in CalREIT on January 3, 1997, Peregrine believes it has the necessary resources to complete the required refurbishments and plans to proceed. o Management plans to seek an extension of the maturity date on its Line of Credit with the current lender. However, if unable to do so, management will look for an alternative source from which to obtain a new operating line of credit. Any extension of the current Line of Credit or alternative source of funding will be subject to the approval of the Senior Lender Group; however, there can be no assurance that such approval, if requested, will be granted. o Management expects it will seek a waiver of the anticipated financial covenant violation on the Line of Credit from its lender. o Management believes, and has been advised by its counsel, that MDC's claims are without merit, as discussed above. 58 62 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 14. Gain (Loss) on Foreclosure or Sale of Investments: Components of the gain (loss) on foreclosure or sale of investments for the years ended December 31, 1996 and 1995, and the Transition Period were as follows:
(in thousands) Year Ended Year Ended December 31, December 31, Transition 1996 1995 Period ------------ ------------ ---------- Components Sale of investment in Placer Ranch Partnership $ 129 $ -- $ -- Sale of Timberlake Medical Building (38) -- -- Sale of Park Terrace Inn (18) -- -- Foreclosure of Java Investments Note 448 -- -- Sale of Fountain View Office Building Note 115 -- -- Sale of Aster Avenue Industrial Complex Note 357 -- -- Sale of Sierra Oaks Shopping Center (63) -- -- Sale of Bekins Storage Facility (164) -- -- Sale of Pavilions at Mesa Note 430 -- -- Sale of Spacesaver Mini-Storage Note 30 -- -- Sale of Redfield Commerce Center 299 -- -- Sale of Milpitas Medical Building -- (508) -- Sale of Northridge Land -- 81 -- Sale of System Integrators Office Building -- 396 -- Sale of Sheri Liou Investments Note -- (74) -- Sale of Alston-Florin Perkins Note -- (72) -- Foreclosure of 425 University Ave. Office Building -- (73) -- Recognition of deferred gains 55 66 12 ------- ------ ------- $ 1,580 $ (184) $ 12 ======= ====== =======
59 63 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 15. Selected Quarterly Financial Data (Unaudited)
Quarter Ended ---------------------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 1996 Revenues $ 6,520,000 $ 6,421,000 $ 6,265,000 $ 6,376,000 ============ ============ ========== ============= Reorganization items $ -- $ -- $ -- $ 454,000 ============ ============ ========== ============= Gain (loss) on foreclosure or sale of investments, net $ 299,000 $ 233,000 $ 608,000 $ 440,000 ============ ============ ========== ============= Loss before extraordinary item $ (3,234,000) $ (1,894,000) $(1,351,000) $ (1,413,000) ============ ============ ========== ============= Net loss $ (3,234,000)(1) $ (1,894,000)(2) $(1,200,000)(3) $ (1,377,000)(4) ============ ============ ========== ============= Net loss attributable to Common Shares of Beneficial Interest(6) $ (3,915,000) $ (2,597,000) $(1,932,000) $ (2,132,000) ============ ============ ========== ============= Loss per Common Share of Beneficial Interest before extraordinary item $ (0.80) $ (0.53) $ (0.43) $ (0.45) Extraordinary item per Common Share of Beneficial Interest -- -- 0.03 0.01 ------------ ------------ ---------- ------------- Net loss per share attributable to Common Shares of Beneficial Interest $ (0.80) $ (0.53) $ (0.40) $ (0.44) ============ ============ ========== =============
60 64 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 15. Selected Quarterly Financial Data (Unaudited), continued
Quarter Ended ------------------------------------------------------------------ March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 1995 Revenues $ 6,853,000 $ 7,269,000 $ 6,618,000 $ 6,337,000 =========== =========== =========== ============ Reorganization items $ -- $ -- $ -- $ (1,000,000) =========== =========== =========== ============ (Loss) gain on foreclosure or sale of investments, net $ (7,000) $ (499,00$ -- $ 322,000 =========== =========== =========== ============ Loss before extraordinary item $ (829,000) $(1,653,000) $(1,554,000) $(11,295,000) =========== =========== =========== ============ Net loss $ (761,000) $(1,327,000) $(1,296,000) $(11,349,000)(5) =========== =========== =========== ============ Net loss attributable to Common Shares of Beneficial Interest(6) $(1,357,000) $(1,947,000) $(1,944,000) $(12,016,000) =========== =========== =========== ============ Loss per Common Share of Beneficial Interest before extraordinary item $ (0.29) $ (0.47) $ (0.45) $ (2.45) Extraordinary item per Common Share of Beneficial Interest 0.01 0.07 0.05 (0.01) ----------- ----------- ----------- ------------ Net loss pershare attributable to Common Shares of Beneficial Interest $ (0.28) $ (0.40) $ (0.40) $ (2.46) =========== =========== =========== ============
(1) Includes ($1,685,000) of valuation losses. (2) Includes ($559,000) of valuation losses. (3) Includes ($1,184,000) of valuation losses. (4) Includes ($850,000) of valuation losses. (5) Includes ($9,526,000) of valuation losses. (6) Includes net loss plus the effects of Preferred Stock dividends, discounts on Preferred Stock dividends, and the accretion of discounts on Preferred Stock dividends. 61 65 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 16. Fair Value of Financial Instruments In 1994, the Trust adopted Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments" (SFAS 107). SFAS 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Trust. The estimated fair value of the Trust's financial instruments including cash, notes receivable, and rents, accrued interest, and other receivables at December 31, 1996 is approximately the same as their carrying amounts. It is not practicable to determine the fair value of Peregrine's Preferred Stock with a face value of $26,265,000 at December 31, 1996, due to the unusual nature of the instrument. It is not practical to determine the fair value of the Trust's long-term notes payable collateralized by deeds of trust on rental properties, Peregrine's Senior Lender Group Notes Payable, or Peregrine's Line of Credit with face values of $32,263,000, $44,467,000, and $8,583,000, respectively at December 31, 1996, due to the Trust's financial condition at December 31, 1996. 17. Stock Option Plan During the Transition Period, Peregrine adopted a stock option plan (the "Stock Option Plan") which provides the members of the Board of Trustees an opportunity to purchase Common Shares of Beneficial Interest. The aggregate number of Common Shares of Beneficial Interest which may be issued upon exercise of all options granted under the Stock Option Plan shall not exceed 150,000. At December 31, 1996, 1995, and 1994, options for the purchase of 80,000, 53,332, and 26,664 shares, respectively, were outstanding under the Stock Option Plan, all of which were exercisable. In February 1997, options for the purchase of 6,666 shares were issued by Peregrine to Roger D. Snell, upon the commencement of his services as a Trustee. 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 Peregrine or any subsidiary of Peregrine. The option price granted under the Stock Option Plan shall be the greater of (1) the fair market value of the Common Shares of Beneficial Interest on the Effective Date, October 7, 1994, or (2) two dollars. Each option which has been granted to date under the Stock Option Plan has been granted at an exercise price of two dollars per share. On the Effective Date, each participant was granted an initial option to purchase 6,667 Common Shares of Beneficial Interest. Thereafter, each participant whose commencement of services is after the Effective Date shall be granted an initial option to purchase 6,666 Common Shares of Beneficial Interest as of the date of 62 66 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 17. Stock Option Plan, continued the participant's commencement of service. Each participant shall also be granted additional options to purchase 6,667 Common Shares of Beneficial Interest on each of the next two anniversaries of the grant date of the initial option. No options were exercised during 1996, 1995 or during the Transition Period. Under the terms of the Stock Option Plan, options expire on the tenth anniversary of their grant date. The weighted average remaining contractual life of options under grant at December 31, 1996, was approximately nine years. The Plan of Reorganization provides that Peregrine, 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 Common Shares of Beneficial Interest, on a fully diluted basis. No such plan has been adopted. 18. Income Taxes The income tax effect of temporary differences between financial and income tax reporting that give rise to a significant portion of the deferred income tax assets under the provision of SFAS 109 is as follows:
Transition 1996 1995 Period ------------ ------------ ------------ NOL carryforward $ 29,956,000 $ 26,760,000 $ 26,813,000 Fixed assets 17,474,000 20,254,000 21,688,000 Investments 15,555,000 18,429,000 17,661,000 Notes receivable 32,000 248,000 232,000 Capital loss carryforward 10,684,000 6,067,000 3,962,000 Other 272,000 832,000 918,000 ----------- ----------- ----------- 73,973,000 72,590,000 71,274,000 Less valuation allowance (Note 1 to consolidated financial statements) (73,973,000) (72,590,000) (71,274,000) ----------- ----------- ----------- Net $ -- $ - $ -- =========== =========== ===========
63 67 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 18. Income Taxes, continued At December 31, 1996, the Trust had tax net operating loss carryforwards ("NOL's") which may be applied against future taxable income and which expire as follows:
Year Federal California ---- ------- ---------- 1997 $ 655,000 $ 313,000 1998 655,000 313,000 1999 655,000 313,000 2000 655,000 9,199,000 2001 -- 6,942,000 2002 -- 11,092,000 2003 -- 8,196,000 2006 5,874,000 -- 2007 30,012,000 -- 2008 16,387,000 -- 2010 13,574,000 -- 2011 13,391,000 -- ----------- ----------- $81,858,000 $36,368,000 =========== ===========
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's at December 31, 1996 19. Reorganization Items For the year ending December 31, 1996, reorganization income represents the accrual of a receivable related to professional fees in connection with the bankruptcy proceedings. For the year ending December 31, 1995, reorganization expense represents an additional accrual to of professional fees related to the Bankruptcy to adjust the amount previously recorded to the total estimated amount due. 20. 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 $187,000 and $598,000, in 1996 and 1995, respectively. 64 68 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 21. Fresh Start Balance Sheet of The Peregrine Real Estate Trust (Peregrine Only) The effect of the Plan of Reorganization on The Peregrine Real Estate Trust's (formerly Commonwealth Equity Trust) balance sheet as of October 7, 1994, is as follows:
The Peregrine Adjustments to Record Real Estate Confirmation of Plan Trust's --------------------------------------------- Reorganized Pre- Debt Exchange Fresh Balance Sheet, Confirmation(1) Discharge(2) of Stock(3) Start(4) October 7, 1994 ------------- ------------ ------------ ------------ -------------- Assets: Investments: Rental properties, net $ 91,823,000 $ -- $ -- $ 5,036,000 $ 96,859,000 Investment in CalREIT 21,196,000 -- -- -- 21,196,000 Other Investments 6,449,000 -- -- -- 6,449,000 ------------- ----------- ------------ ------------ ------------ 119,468,000 -- -- 5,036,000 124,504,000 Cash 2,833,000 -- -- -- 2,833,000 Other assets 2,612,000 -- -- 833,000 3,445,000 ------------- ----------- ------------ ------------ ------------ Total assets $ 124,913,000 $ -- $ -- $ 5,869,000 $130,782,000 ============= =========== =========== ============ ============ Liabilities and Shareholders' Equity (Deficit): Liabilities: Liabilities subject to compromise: Liabilities subject to compromise $ 123,340,000 $(74,402,000) $ -- $(48,938,000) $ -- Due to CalREIT, subject to compromise 623,000 (121,000) -- (502,000) -- ------------- ----------- ------------ ------------ ------------ Total liabilities subject to compromise 123,963,000 (74,523,000) -- (49,440,000) -- ------------- ----------- ------------ ------------ ------------ Liabilities not subject to compromise: Long-term notes payable, collateralized by deeds of trust on rental properties -- -- -- 39,573,000 39,573,000 Senior Lender Group Notes Payable -- 40,000,000 -- -- 40,000,000 Post petition accounts payable and accrued expenses 14,149,000 (7,142,000) 238,000 10,318,000 17,563,000 ------------- ----------- ------------ ------------ ------------ Total liabilities not subject to compromise 14,149,000 32,858,000 238,000 49,891,000 97,136,000 ------------- ----------- ------------ ------------ ------------ 138,112,000 (41,665,000) 238,000 451,000 97,136,000 ------------- ----------- ------------ ------------ ------------ Redeemable Convertible Preferred Stock -- 20,307,000 -- -- 20,307,000 Common Shares of Beneficial Interest - pre-reorganization 25,093,000 -- (25,093,000) -- -- Common Shares of Beneficial Interest - post-reorganization -- 6,963,000 6,376,000 -- 13,339,000 Additional paid-in capital 219,848,000 -- 18,479,000 (238,327,000) -- Accumulated deficit (258,140,000) 14,395,000 -- 243,745,000 -- ------------- ----------- ------------ ------------ ------------ Total liabilities and shareholders' equity $ 124,913,000 $ -- $ -- $ 5,869,000 $130,782,000 ============= =========== =========== ============ ============
65 69 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 21. Fresh Start Balance Sheet of The Peregrine Real Estate Trust (Peregrine Only), continued (1) Amounts as reported as of September 30, 1994, the Trust's previous fiscal year-end. Operations from October 1, 1994 through October 6, 1994, prior to the application of fresh start accounting and prior to the Effective Date, are described in Note 17 to consolidated financial statements. (2) Adjustments to record settlement amounts on pre-petition Lender Group debt and unsecured liabilities, and resulting net forgiveness of debt. (3) Represents amounts exchanged with holders of pre-reorganization Common Shares of Beneficial Interest. (4) Adjustments of accounts to reorganization value, and reclassifications of certain amounts from liabilities subject to compromise to various post-reorganization uncompromised liabilities. 22. Selected Pre-Reorganization Financial Data Selected financial data during the period from October 1, 1994 through October 6, 1994, which was prior to the Effective Date and prior to application of fresh start accounting, is as follows: - - Loss before extraordinary item and minority interest was not material and has been included in the Consolidated Statement of Operations for the Transition Period ended December 31, 1994. - - Extraordinary items amounted to $19,813,000, and included $14,395,000 and $5,418,000 and related to accounting adjustments for forgiveness of debt and fresh start adjustments of accounts to reorganization value, respectively ($0.79 per pre-reorganization share). - - Net income was $19,813,000 ($0.79 per pre-reorganization share). - - Cash flows were not material and have been included in the Consolidated Statement of Cash Flows for the Transition Period ended December 31, 1994. 23. Subsequent Events On January 3, 1997, Peregrine sold its 76% stock ownership interest in CalREIT for $20,222,000 or approximately $2.91 per share of CalREIT previously held by Peregrine to a third party, CalREIT Investors Limited Partnership, which resulted in the recognition of a gain of $1,012,000 during the first quarter of 1997. In accordance with the terms of the Senior Lender Group Note Agreement, $15,631,000 was distributed to the Senior Lender Group. The distribution of the net proceeds from the sale of CalREIT was applied first to the unpaid accrued interest of $53,000; the balance of the distribution was applied towards the outstanding debt 66 70 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------- 23. Subsequent Events, continued reducing the balance from $44,467,000 to $28,889,000. The remainder of the net proceeds, $4,591,000 is available to Peregrine for operating and capital improvement needs. Despite improvements in occupancy levels, the Trust's office building located at 3900 Lennane Drive in Sacramento, California, continued to be vacant during 1996. The Trust continued its efforts to sell the property and/or restructure the debt during 1996, however, the Trust has been unable to sell the property and the lender refused to restructure the debt to a manageable level. In February 1997, after consent from both the Senior Lender Group and Foothill Capital Corporation (the lender on the Line of Credit), Peregrine ceased debt service payments. In March 1997, Peregrine was notified that the lender has initiated foreclosure proceedings against the note. The unpaid balance of the note at the time of default was approximately $2,493,000, of which approximately $2,380,000 is subject to recourse. The carrying value of the property which collateralizes the note was $1,895,000 at December 31, 1996. During 1996, emphasis remained on completing the refurbishments necessary to comply with Holiday Inn standards, however, due to Capital Constraints, Peregrine was only able to complete $1,200,000 of the required $3,000,000 in refurbishments. As a result of not completing the required refurbishments within the time frame specified by Holiday Inn, Peregrine received a 30-day notice of default under the Holiday Inn License Agreements (the "Notice of Default") for its Chico and Sacramento hotels in February 1997. The terms of the Notice of Default require that Peregrine complete the refurbishment work within 30 days or the License Agreements with Holiday Inn will be terminated and the hotels will be removed from the Holiday Inn system. Management has negotiated with Holiday Inn and has obtained a 30-day extension of time to April 15, 1997 in which to review the required. Should the refurbishment plan not meet Holiday Inn's requirements, or Holiday Inn decide not to grant an extension of time in which to complete the refurbishemtns, the License Agreements could be terminated on or after April 15, 1997. However, management believes that it will be able to develop an action plan that is acceptable to Holiday Inn and obtain an extension of time in which to complete the required refurbishments. As a result of the sale of its 76% ownership interest in CalREIT on January 3, 1997, Peregrine believes it has the necessary resources to complete the required refurbishments and plans to proceed. In the event that management is unable to reach an agreement with Holiday Inn and the License Agreements are terminated, Peregrine could be subject to termination fees estimated at approximately $500,000 and $800,000 for Chico and Sacramento, respectively. In addition, under the terms of its Line of Credit Agreement, the loss of the Holiday Inn License Agreements could constitute an event of default unless Peregrine is able to replace the Holiday Inn License Agreements with comparable license agreements within 180 days from the date on which the Holiday Inn License Agreements are terminated. The loss of the Holiday Inn License Agreements could also constitute an event of default under the terms of the Senior Lender Note Agreement. In February 1997, a majority of the holders of Peregrine's Preferred Stock exercised their rights under the Preferred Stock Agreement and elected Roger D. Snell as the fifth member to the Board of Trustees (the "Preferred Designee"), filling the vacancy created when Frank A. Morrow resigned in February 1996. In accordance with the Stock Option Plan, Mr. Snell was granted options to purchase 6,666 Common Shares of Beneficial Interest upon commencement of his services. 67 71 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 68 72 PART III Item 10. Trustees and Executive Officers of the Registrant (a) Executive Officers. See "Executive Officer of the Registrant," in Part I of this report. (a) Trustees. The Restated Declaration of Trust provides that, so long as any Preferred Shares are outstanding, Peregrine is to be managed by a Board of five Trustees, four of whom are to be elected by the holders of Common Shares of Beneficial Interest, and one of whom is to be elected by holders of Preferred Shares. At the time of the reorganization, five Trustees were designated, but due to the resignation of Frank A. Morrow in February 1996, the Board was composed of four Trustees for the remainder of 1996. In February 1997, the holders of the Preferred Shares elected Roger D. Snell as the fifth Trustee. At the next annual shareholders meeting the holders of the Common Shares of Beneficial Interest will have the right to elect four Trustees, to serve until the next annual shareholders meeting or until their successors are elected and qualified. The following table sets forth certain information as of March 15, 1997, with respect to the Trustees of Peregrine:
Name Age Position - ---- --- -------- John McMahan 59 Chairman of the Board of Trustees John F. Salmon 51 Secretary and Trustee E. Lawrence Hill, Jr. 46 Trustee Kenneth T. Seeger 47 Trustee Roger D. Snell 41 Trustee
There are no arrangements or understandings between any Trustee and any other person pursuant to which the Trustee was selected as a Trustee except with respect to Mr. Snell, who was selected by the holders of the Preferred Shares as the Preferred Designee, as permitted in the Plan and the Restated Declaration of Trust. There are no family relationships among any of the Trustees. Mr. McMahan served on the Board of Trustees of CalREIT during 1996, and resigned on January 3, 1997, when Peregrine sold its 76% stock ownership interest in CalREIT. 69 73 The principal occupations and affiliations of the Trustees are as follows: John McMahan, Chairman of the Board. Mr. McMahan has served as a Trustee and Chairman of the Board of Peregrine since September 1994. Mr. McMahan is President of the McMahan Group, a San Francisco-based real estate management firm founded in 1994. Between 1990 and 1994, Mr. McMahan served as the Chief Executive Officer of Mellon/McMahan Real Estate Advisors, Inc., which grew into one of the country's largest real estate investment advisors. Mr. McMahan also served as a Vice President of Booz, Allen & Hamilton, Inc., a management consulting firm from 1970 to 1973. He is a faculty member at the Haas Graduate School of Business at the University of California at Berkeley. Mr. McMahan has published many articles on real estate investment and has been active in several national real estate organizations, including the National Association of Real Estate Investment Trusts. Mr. McMahan graduated from the University of Southern California and received an MBA degree in 1961 from the Harvard Graduate School of Business. He serves on the board of BRE Properties, Inc., has served on the board of California Real Estate Investment Trust, and has been chairman of The National Association of Real Estate Investment Managers. John F. Salmon, Secretary and Trustee. Mr. Salmon, has served as a Trustee since September 1994, and has served as Secretary since January 1996, and has been a San Francisco-based commercial real estate consultant since 1994. From 1989 to 1994, he served in Sacramento as Director of the Governor's Office of Asset Management of the State of California. While in that position, he established procedures for reviewing the state's sizable real estate holdings, developed real property operating and disposition proposals for the Administration and the Legislature, redirected the state's office leasing policies and counseled state government agencies on institutional facility and asset management strategies. Prior to joining the Governor's Office, Mr. Salmon was the Vice President, Property Development and Sales of Santa Fe Pacific Realty Corporation (now Catellus Development Corporation) in San Francisco. There he managed the land planning, building development and property disposition activities of the company's three million acre, 18-state real estate portfolio. Mr. Salmon graduated from the University of Notre Dame in 1967 with a BBA degree in Accounting, and received a JD degree from the University of Illinois in 1971. E. Lawrence Hill, Jr., Trustee. Mr. Hill, who has served as a Trustee since September 1994, is the founder and President of Hickey & Hill, Inc., a 13-year old turnaround and workout specialty firm based in the San Francisco bay area. Mr. Hill's firm has worked with a variety of clients including high-technology, banking and real estate companies requiring near and/or long term rescue. His real estate clients have included hotel, mixed-use light industrial, residential and retail property owners. Successful turnarounds managed by his company have used various restructuring, recapitalization and reorganization strategies. Prior to founding his own company in 1984, Mr. Hill was a Vice President with the Bank of California in its Workout and Restructuring Department. In this capacity, for more than five years, he managed approximately one-third of the bank's non-performing assets implementing appropriate hold/sell plans for each property. Mr. Hill received a BS degree and an MS degree in engineering from Stanford University in 1974. He currently serves as interim Chief Executive Officer of Carlos Murphy's, Inc. Kenneth T. Seeger, Trustee. Mr. Seeger, who has served as a Trustee since September 1994, has been the president of The Presidio Group, Inc., TPG Management, Inc., and Residences, Inc., all of which are real estate asset management and development companies based in the San Francisco Bay Area, since 1994. Between August 1985 and November 1993, Mr. Seeger was responsible for all finance and acquisition activities for Southwest Diversified/Coscan Partners, a major Irvine-based development company. His real estate development projects have included both residential and commercial properties throughout California and in Arizona. Prior to that, from 1979 to 1985, Mr. Seeger was a Senior Vice President with The Fox Group 70 74 of Companies where he was responsible for all project financing and a member of that firm's Investment Advisory Committee. He also has had considerable experience in risk management, income-property operations and new business development. Mr. Seeger graduated from the Wharton School at the University of Pennsylvania in 1972. He is a full member of the Urban Land Institute, is a past member of the Pacific Rim Urban Planning and Development Council and has served on the Advisory Board of the School of Real Estate at the University of California at Berkeley. Roger D. Snell, Trustee. Mr. Snell, who was approved as a Trustee in February 1997, is the founder and principal of Snell&Co, a firm focused on real estate investments, advisory, and development. Prior to founding Snell&Co in 1996, he was President and Chief Executive Officer of Pacific Gateway Properties, from 1992 to 1995, where he led the turnaround of this troubled company listed on the American Stock Exchange. He was also a member of the Board of Directors and acting Chairman. Between 1989 and 1992, Mr. Snell was a Partner with Paragon Group, a national development company. He started Paragon's Northern California operations, directing the development of $275 million worth of projects as well as, the turnaround of 1.3 million square feet of properties on behalf of institutional and private clients. Prior to joining Paragon Group, he served as a project manager for Transpacific Development Company ("TDC"), where he directed $100 million worth of development projects, ranging from high-rise office to high-cube distribution. Before TDC, Mr. Snell acquired investment properties and development opportunities for the Grosvenor Estate of England. Mr. Snell has a BS degree in Business Administration from University of California at Berkeley and an MBA from the Harvard Business School. He is an active member of the Urban Land Institute and the Young Presidents Organization. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires Peregrine's Trustees and executive officers, and persons who own more than ten percent (10%) of a registered class of its equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of certain changes in ownership of all equity securities of Peregrine. To Peregrine's knowledge, based solely on review of the copies of such reports furnished to it and written representations that no other reports were required during the fiscal year ended December 31, 1996, Peregrine's officers, Trustees, and greater than ten percent shareholders complied with the applicable Section 16(a) filing requirements. Item 11. Executive Compensation The following Summary Compensation Table shows compensation paid by Peregrine from the effective date of the reorganization in 1994 until the end of fiscal 1996 to each person serving in the capacity of Chief Executive Officer of Peregrine during 1996. No other executive officer of Peregrine received annual compensation in excess of $100,000 during 1996. Mr. Morrow served as Chief Executive Officer of Peregrine through January 15, 1996, at which time his services were terminated. Mr. McMahan served as Interim Chief Executive Officer from the date of Mr. Morrow's termination through May 31, 1996, when Peregrine hired Mr. Mock to fill the position. 71 75 Summary Compensation Table Annual Compensation Long-Term Compensation ------------ Number of Securities Name and Other Annual Underlying All Other Principal Position Period Salary Bonus Compensation Options Compensation ------------------ ------ ------ ----- ------------ ----------- ------------ Joseph M. Mock June 1, 1996 to Chief Executive Officer December 31, 1996 $105,000 None None None None John McMahan January 16, 1996 to Interim Chief Executive May 31, 1996 $67,500 None None 6,667 Shares(1) $64,000(2) Officer 1995 None None None 6,667 Shares(1) $63,000(3) October 7, 1994 to December 31, 1994 None None None 6,666 Shares(1) $ 7,000(4) Frank A. Morrow(5) January 1, 1996 through Chief Executive Officer January 15, 1996 $192,500(6) None $212,500(7) None None 1995 $300,000 None None None None October 7, 1994 to December 31, 1994 $ 70,000 None None None None
(1) Amount represents options granted by Peregrine. (2) Amount represents compensation received for serving as a Trustee of Peregrine ($34,000) and CalREIT ($30,000) during 1996. (3) Mr. McMahan did not serve as an Executive Officer during 1995. The amount represents compensation received for serving as a Trustee of Peregrine ($35,000) and CalREIT ($28,000) during 1995. (4) Mr. McMahan did not serve as an Executive Officer during the Transition Period October 7, 1994 to December 31, 1994. The amount represents compensation received for serving as a Trustee of Peregrine during the Transition Period. (5) Mr. Morrow was engaged at the time of the Effective Date of the Plan of Reorganization on October 7, 1994 and his employment was terminated on January 15, 1996. Accordingly, compensation information is provided from the date of engagement until the end of fiscal 1996. (6) The amount includes $12,500 in salary paid by Perigrine to Mr. Morrow for his services as Chief Executive Officer of Peregrine. The amount also includes $180,000 in deferred compensation accrued by CalREIT during 1996 for Mr. Morrow in connection with his services as Chief Executive Officer of CalREIT, which was paid in March 1997. (7) Amount represents severance pay paid by Peregrine. Summary Table of Options Granted to Executive Officers in 1996
Percent of Potential Realizable Value Number Total Options at Assumed Annual Rates of of Granted to Stock Price Appreciation Securities Employees in for Option Term* Name and Position Granted Fiscal Year Exercise Price Expiration Date 5% 10% - ----------------- ------- ----------- -------------- --------------- -- --- John McMahan 6,667 100% $2.00/Share October 7, 2006 None None Interim Chief Executive Officer
* The potential realizable value of the options at an assumed 5% and 10% appreciation rate is below the exercise price of $2.00 per share. 72 76 Compensation of Trustees During 1996, 1995, and 1994 (after the Effective Date of the Plan) each independent Trustee (Trustees who are not full-time employees of Peregrine or any subsidiary of Peregrine) was paid $5,000 per quarter, $1,000 for each full-day Board of Trustees meeting attended, and $500 for each half-day meeting, telephone meeting, or special committee meeting attended ("Normal Trustee Fees"). In addition, each Trustee was reimbursed for out-of-pocket expenses. Under the terms of Peregrine's Stock Option Plan, during 1996 each independent Trustee was granted options to purchase 6,667 Common Shares of Beneficial Interest. The exercise price in each case was $2.00 per share. These options vest on their grant date and are exercisable at anytime during the option period, which expires on the tenth anniversary of the option grant date. No outstanding options were exercised under the Stock Option Plan during 1996, 1995, or 1994. Pursuant to the Stock Option Plan, Mr. Snell was granted options to purchase 6,666 Common Shares of Beneficial Interest upon his commencement of service in February 1997. Employment Contracts and Termination of Employment and Change-in-Control Arrangements Joseph M. Mock currently serves as President, Chief Executive Officer, and Principal Accounting Officer of Peregrine. Mr. Mock's employment began on June 1, 1996, and pursuant to an employment agreement he receives a monthly salary of $15,000. If terminated without cause prior to expiration of his employment agreement on May 31, 1997, Mr. Mock is entitled to receive severance pay equal to three months salary. John McMahan served as Peregrine's Interim Chief Executive Officer from January 16, 1996 through May 31, 1996 and received a monthly salary of $15,000 for his services. The Chief Executive Officer of Peregrine during 1995 and the beginning of 1996, Frank A. Morrow, was engaged at the time of the reorganization in October 1994 pursuant to a personal services contract (the "Services Contract") between Peregrine, Mr. Morrow, and a management company of which Mr. Morrow is a principal. The terms of the Services Contract were approved by the Bankruptcy Court. Pursuant to the terms of the Services Contract, Mr. Morrow received a monthly salary of $25,000. The Services Contract was terminated by Peregrine on January 15, 1996, and pursuant to its terms, Mr. Morrow was entitled to and received a severance payment equal to $212,500. 73 77 Item 12. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information as of March 15, 1997 with respect to the beneficial ownership of the outstanding Common Shares of Beneficial Interest and Preferred Shares by (i) all persons known by Peregrine to own more than five percent of either class of shares, or to be a member of a group that owns more than five percent of either class of shares, (ii) by each officer described in the Summary Compensation Table (the "Named Executive Officers"), and (iii) by the Trustees and Named Executive Officers as a group:
Name and Address of Shares Title of Class Beneficial Owner Beneficially Owned Percent of Class -------------- ------------------- ------------------ ---------------- Redeemable Convertible Pacific Mutual Life Insurance Company Preferred Shares c/o Ronn Cornelius 700 Newport Center Drive Newport Beach, CA 92660 3,747,682 26.6% The Prudential Insurance Company of America c/o Richard Greenwood Corporate Finance Group, 9th Floor Four Gateway Center 100 Mulberry Center Newark, NJ 07102-4069 1,143,043 8.1% Gateway Recovery Trust c/o Richard Greenwood The Prudential Insurance Company of America Corporate Finance Group Four Gateway Center 100 Mulberry Center Newark, N.J. 07102-4069 2,604,639 18.5% ORIX USA Corp. c/o Arnold Kawano 780 Third Avenue, Floor #48 New York, NY 10017 562,153 4.0% Weyerhaeuser Company Master Retirement Trust(1) c/o Richard Masson Oaktree Capital Management 550 South Hope Street, Floor #22 541,353 3.8% Los Angeles, CA 90071
74 78
Name and Address of Shares Title of Class Beneficial Owner Beneficially Owned Percent of Class Redeemable Convertible TCW Special Credits Fund IV(1) Preferred Shares c/o Richard Masson Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 1,744,358 12.4% TCW Special Credits Plus Fund(1) c/o Richard Masson Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 1,864,660 13.3% TCW Special Credits Trust IV(1) c/o Richard Masson Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 1,503,758 10.7% TCW Special Credits Trust IVA(1) c/o Richard Masson Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 360,902 2.6% ---------- ----- Total 14,072,548 100.0% ========== =====
(1) Shares held by Sanwa Bank in the street name Salkeld & Co. 75 79
Name and Address of Shares Title of Class Beneficial Owner Beneficially Owned Percent of Class Common Shares of Beneficial Pacific Mutual Life Insurance Company Interest c/o Ronn Cornelius 700 Newport Center Drive Newport Beach, CA 92660 681,913 13.9% The Prudential Insurance Company of America c/o Richard Greenwood Corporate Finance Group, 9th Floor Four Gateway Center 100 Mulberry Center Newark, NJ 07102-4069 207,983 4.2% Gateway Recovery Trust c/o Richard Greenwood The Prudential Insurance Company of America Corporate Finance Group Four Gateway Center 100 Mulberry Center Newark, N.J. 07102-4069 473,929 9.7% ORIX USA Corp. c/o Arnold Kawano 780 Third Avenue, Floor #48 New York, NY 10017 102,287 2.1% Weyerhaeuser Company Master Retirement Trust Richard Masson c/o Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 98,502 2.0% TCW Special Credits Plus Fund Richard Masson c/o Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 339,286 6.9% TCW Special Credits Fund IV Richard Masson c/o Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 317,396 6.5%
76 80
Name and Address of Shares Title of Class Beneficial Owner Beneficially Owned Percent of Class Common Shares of Beneficial TCW Special Credits Trust IV Interest Richard Masson c/o Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 273,618 5.6% TCW Special Credits Fund IVA Richard Masson c/o Oaktree Capital Management 550 South Hope Street, Floor #22 Los Angeles, CA 90071 65,668 1.3% John McMahan 20,000 (1) * John F. Salmon 20,000 (1) * E. Lawrence Hill, Jr. 20,000 (1) * Kenneth T. Seeger 20,000 (1) * Roger D. Snell 6,666 (2) * Named Officers and Trustees as a Group 86,666 (3) 1.7% (7 persons)
* Less than 1%. (1) Includes options to purchase of 20,000 Common Shares of Beneficial Interest held by the respective Trustee, all of which are immediately exercisable. (2) Includes options to purchase 6,666 Common Shares of Beneficial Interest held by Mr. Snell, all of which are immediately exercisable. (3) Includes options to purchase 86,666 Common Shares of Beneficial Interest, all of which are immediately exercisable. No other Named Executive Officers directly or beneficially own Common Shares of Beneficial Interest. 77 81 Item 13. Certain Relationships and Related Transactions As a result of the termination of Frank A. Morrow as Peregrine's Chief Executive Officer in January 1996, Peregrine utilized the services of certain of its independent Trustees in connection with its 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 Trustees (or affiliated companies) during 1996, in addition to Normal Trustee Fees: The McMahan Group (John McMahan, Trustee) $69,000 John F. Salmon, Trustee $49,000 The Presidio Group (Kenneth T. Seeger, Trustee) $41,000 Snell&Co (Roger D. Snell, Trustee) $10,000
During 1996, CalREIT paid $140,000 in compensation to one of its independent Trustees, Elliot G. Steinberg, in connection with CalREIT's strategic growth activities. 78 82 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) (1) Financial Statements Page Included in Part II of this report: Report of Independent Accountants 26-27 Consolidated Balance Sheets 28 Consolidated Statements of Operations 29-30 Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Shareholders' Equity (Deficit) Accounts Attributable to Common Shares of Beneficial Interest 31-33 Consolidated Statements of Cash Flows 34 Notes to Consolidated Financial Statements 35-67 (a) (2) Consolidated Financial Statement Schedules and Exhibits Filed Schedule III Real Estate and Accumulated Depreciation 81-85 Schedule IV Mortgage Loans on Real Estate 86-87
The statements and schedules referred to above should be read in conjunction with the consolidated financial statements with notes thereto included in Part II of this Form 10-K. Schedules not included in this item have been omitted because they are not applicable or because the required information is presented in the consolidated financial statements or notes thereto. (b) Reports on Form 8-K Peregrine filed a Current Report on Form 8-K on September 30, 1996, reporting under Item 5 of such Form, the execution of a Stock Purchase Agreement with MDC REIT Holdings, L.L.C. for the sale of Peregrine's 76% stock ownership interest in the California Real Estate Investment Trust. Peregrine filed a Current Report on Form 8-K on January 17, 1997, reporting under Item 2 of such Form, the execution and consummation of a Stock Purchase Agreement with CalREIT Investors Limited Partnership for the sale of Peregrine's 76% stock ownership interest in the California Real Estate Investment Trust, which occurred on January 3, 1997. 79 83 (c) Exhibits Exhibit Number Description 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 Insurance Company, The Prudental 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 10.10 Employment Agreement between The Peregrine Real Estate Trust and Joseph M. Mock, dated June 1, 1996 10.11 First Amendment to Employment Agreement between The Peregrine Real Estate Trust and Joseph M. Mock, dated December 1, 1996 27 Financial Data Schedule (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 period ended September 30, 1996. 80 84 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 Page 1 Part A
Column A Column B Column C Column D - ------------------------------------- ------------------------------------------------------------------------------------------ Cost Capitalization and Write-Downs Subsequent ..Initial Cost to Trust.. ..to Acquisition.. Buildings, Improvements and Personal Carrying Description Encumbrances Land Property Improvements(1) Cost RETAIL SHOPPING CENTERS: Regency Plaza, Sacramento, California $ 8,846,000 $4,200,000 $ 7,056,000 $(150,000) $ - University Village, Sacramento, California 7,715,000 877,000 6,142,000 886,000 - TGIF Sunrise Hills, Citrus Heights, California - 450,000 1,125,000 (39,000) - Sunrise Hills, Citrus Heights, California 4,325,000 2,316,000 3,192,000 413,000 - * Totem Square, Kirkland, Washington 4,283,000 3,175,000 5,793,000 (1,598,000) - * Fulton Square, Sacramento, California - Leased 3,536,000 (2,321,000) - ------------- ---------- ----------- ----------- ----- Total Retail Shopping Centers 25,169,000 11,018,000 26,844,000 (2,809,000) - ------------- ---------- ----------- ----------- ----- OFFICE BUILDINGS: One Sunrise Park, Rancho Cordova, California - 356,000 1,092,000 351,000 - 16th and K Streets, Sacramento, California - 388,000 2,677,000 62,000 - Town Center Garden Office Park, Signal Hill, California - 1,293,000 3,313,000 (1,000) - Hurley Ethan Office Park I, Sacramento, California 1,312,000 410,000 1,237,000 470,000 - Hurley Ethan Office Park II, Sacramento, California 2,401,000 827,000 1,391,000 460,000 - 3900 Lennane Drive, Sacramento, California 2,495,000 427,000 1,530,000 (48,000) - ------------- ---------- ----------- ----------- ----- Total Office Buildings 6,208,000 3,701,000 11,240,000 1,294,000 - ------------- ---------- ----------- ----------- ----- INDUSTRIAL BUILDINGS: 11135 Trade Center Drive, Rancho Cordova, California - 567,000 1,739,000 561,000 - 11167 Trade Center Drive, Rancho Cordova, California - 402,000 567,000 14,000 - Parkway Center, El Dorado Hills, California - 233,000 1,048,000 202,000 - Mallory Service Building, Walnut Creek, California - 852,000 154,000 11,000 - Commerce Street, Corona, California - 132,000 267,000 - - Consumer Circle, Corona, California - 128,000 258,000 - - Pomona Road, Corona, California - 309,000 657,000 - - ------------- ---------- ----------- ----------- ----- Total Industrial Buildings - 2,623,000 4,690,000 788,000 - ------------- ---------- ----------- ----------- -----
(Continued) 81 85 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 Page 2 Part A
Column A Column B Column C - --------------------------------------------------------------------------------- ------------------- ...Initial Cost to Trust. Buildings, Improvements and Personal Description Encumbrances Land Property MINI-STORAGE FACILITIES: Burbank Mini-Warehouse, Santa Rosa, California - 475,000 980,000 Downtown Mini Storage, Sacramento, California - Leased 1,340,000 -------------- ---------- ---------- Total Mini-Storage Facilities - 475,000 2,320,000 -------------- ---------- ---------- LAND: Florin Perkins, Sacramento, California - 30,000 - -------------- ---------- ---------- Total Land - 30,000 - -------------- ---------- ---------- HOTELS: Chico Holiday Inn, Chico, California - 480,000 4,337,000 Sacramento Holiday Inn, Sacramento, California - 2,297,000 5,719,000 Walnut Creek Holiday Inn, Walnut Creek, California - 1,099,000 1,812,000 -------------- ---------- ---------- Total Hotels - 3,876,000 11,868,000 -------------- ---------- ---------- Total Investment in Real Estate $31,377,000 $21,723,000 $56,962,000 ============= =========== =========== PARTNERSHIPS: CR Properties, Sacramento, California $ - $ - $ - ============= =========== =========== Total Investment in Partnerships - - $ - ============= =========== =========== Total Investment in Real Estate and Partnerships $31,377,000 $21,723,000 $56,962,000 ============= =========== ===========
Column D ------------------------------------------------- Cost Capitalization and Write-Downs Subsequent ....to Acquisition.... Improvements (1) Carrying Cost MINI-STORAGE FACILITIES: Burbank Mini-Warehouse, Santa Rosa, California 24,000 - Downtown Mini Storage, Sacramento, California (11,000) - ---------- ------ Total Mini-Storage Facilities 13,000 - ---------- ------ LAND: Florin Perkins, Sacramento, California - - ---------- ------ Total Land - - ---------- ------ HOTELS: Chico Holiday Inn, Chico, California (1,618,000) - Sacramento Holiday Inn, Sacramento, California 2,239,000 - Walnut Creek Holiday Inn, Walnut Creek, California 806,000 - ---------- ------ Total Hotels 1,427,000 - ---------- ------ Total Investment in Real Estate $ 713,000 $ - ========== ====== PARTNERSHIPS: CR Properties, Sacramento, California $ - $ - ========== ====== Total Investment in Partnerships $ - $ - ========== ====== Total Investment in Real Estate and Partnerships $ 713,000 $ - ========== ======
82 86 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 Page 1 Part B
Column A Column E - ------------------------------------------------------------------- ------------------------------------------------- Gross Amount at Which ............Carried at Close of Period........ Buildings and Description Land Improvements Total (2) ----------- ---- ------------ --------- RETAIL SHOPPING CENTERS: Regency Plaza, Sacramento, California $4,200,000 $ 6,906,000 $11,106,000 University Village, Sacramento, California 877,000 7,028,000 7,905,000 TGIF Sunrise Hills, Citrus Heights, California 450,000 1,086,000 1,536,000 Sunrise Hills, Citrus Heights, California 2,316,000 3,605,000 5,921,000 * Totem Square, Kirkland, Washington 3,175,000 4,195,000 7,370,000 * Fulton Square, Sacramento, California Leased 1,215,000 1,215,000 ---------- ----------- ---------- Total Retail Shopping Centers 1,018,000 24,035,000 35,053,000 ---------- ----------- ---------- OFFICE BUILDINGS: One Sunrise Park, Rancho Cordova, California 356,000 1,443,000 1,799,000 16th and K Streets, Sacramento, California 388,000 2,739,000 3,127,000 Town Center Garden Office Park, Signal Hill, California 1,293,000 3,312,000 4,605,000 Hurley Ethan Office Park I, Sacramento, California 410,000 1,707,000 2,117,000 Hurley Ethan Office Park II, Sacramento, California 827,000 1,851,000 2,678,000 3900 Lennane Drive, Sacramento, California 427,000 1,482,000 1,909,000 ---------- ----------- ---------- Total Office Buildings 3,701,000 12,534,000 16,235,000 ---------- ----------- ---------- INDUSTRIAL BUILDINGS: 11135 Trade Center Drive, Rancho Cordova, California 567,000 2,300,000 2,867,000 11167 Trade Center Drive, Rancho Cordova, California 402,000 581,000 983,000 Parkway Center, El Dorado Hills, California 233,000 1,250,000 1,483,000 Mallory Service Building, Walnut Creek, California 852,000 165,000 1,017,000 Commerce Street, Corona, California 132,000 267,000 399,000 Consumer Circle, Corona, California 128,000 258,000 386,000 Pomona Road, Corona, California 309,000 657,000 966,000 ---------- ----------- ---------- Total Industrial Buildings 2,623,000 5,478,000 8,101,000 ---------- ----------- ----------
Column F Column G Column H Column I --------------- ------------- ----------- -------------- Life on Which Depreciation in Latest Income Accumulated Date of Date Statement is Description Depreciation (3) Construction Acquired Computed ----------- ---------------- ------------ -------- -------- RETAIL SHOPPING CENTERS: Regency Plaza, Sacramento, California $ - 1986 5/85 31 Years University Village, Sacramento, California 21,000 1975 12/86 32 Years TGIF Sunrise Hills, Citrus Heights, California 35,000 1984 1/87 32 Years Sunrise Hills, Citrus Heights, California 139,000 1981 1/89 34 Years * Totem Square, Kirkland, Washington - 1981 11/90 40 Years * Fulton Square, Sacramento, California - 1980 5/91 40 Years --------- Total Retail Shopping Centers 195,000 --------- OFFICE BUILDINGS: One Sunrise Park, Rancho Cordova, California 103,000 1982 8/83 24 Years 16th and K Streets, Sacramento, California 90,000 1987 8/87 33 Years Town Center Garden Office Park, Signal Hill, California 130,000 1983 12/87 33 Years Hurley Ethan Office Park I, Sacramento, California - 1978 4/88 34 Years Hurley Ethan Office Park II, Sacramento, California 137,000 1981 6/88 34 Years 3900 Lenane Drive, Sacramento, California 14,000 1984 5/88 34 Years --------- Total Office Buildings 474,000 --------- INDUSTRIAL BUILDINGS: 11135 Trade Center Drive, Rancho Cordova, California 195,000 1984 5/88 34 Years 11167 Trade Center Drive, Rancho Cordova, California 23,000 1984 5/88 34 Years Parkway Center, El Dorado Hills, California 80,000 1985 1/88 33 Years Mallory Service Building, Walnut Creek, California 5,000 1970 10/88 34 Years Commerce Street, Corona, California 3,000 1982 9/96 30 Years Consumer Circle, Corona, California 3,000 1981 9/96 30 Years Pomona Road, Corona, California 7,000 1981 9/96 30 Years --------- Total Industrial Buildings 316,000 ---------
(Continued) 83 87 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 Page 2 Part B
Column A Column E - ---------------------------------------------------------------------------------------------------------------- Gross Amount at Which .................Carried at Close of Period.................... Buildings and Description Land Improvements Total (2) - ----------- ---- ------------ --------- MINI-STORAGE FACILITIES: Burbank Mini-Warehouse, Santa Rosa, California 475,000 1,004,000 1,479,000 Downtown Mini Storage, Sacramento, California Leased 1,329,000 1,329,000 ------------- ------------- ------------- Total Mini-Storage Facilities 475,000 2,333,000 2,808,000 ------------- ------------- ------------- LAND: Florin Perkins, Sacramento, California 30,000 - 30,000 ------------- ------------- ------------- Total Land 30,000 - 30,000 ------------- ------------- ------------- HOTELS: Chico Holiday Inn, Chico, california 480,000 2,719,000 3,199,000 Sacramento Holiday Inn, Sacramento, California 2,297,000 7,958,000 10,255,000 Walnut Creek Holiday Inn, Walnut Creek, California 1,099,000 2,618,000 3,717,000 ------------- ------------- ------------- Total Hotels 3,876,000 13,295,000 17,171,000 ------------- ------------- ------------- Total Investment in Real Estate $ 21,723,000 $ 57,675,000 $ 79,398,000 ============= ============= ============= PARTNERSHIPS: CR Properties, Sacramento, California $ - $ - $ - ------------- ------------- ------------- Total Investment in Partnerships $ - $ - $ - ============= ============= ============= Total Investment in Real Estate and Partnerships $ 21,723,000 $ 57,675,000 $ 79,398,000 ============= ============= =============
Column F Column G Column H Column I ------------------- ------------- -------------- -------------- Life on Which Depreciation in Latest Income Accumulated Date of Date Statement is Description Depreciation (3) Construction Acquired Computed - ----------- ------------------- ------------- -------------- -------------- MINI-STORAGE FACILITIES: Burbank Mini-Warehouse, Santa Rosa, California 42,000 1984 4/85 30 Years Downtown Mini Storage, Sacramento, California 44,000 1980 3/88 33 Years ---------- Total Mini-Storage Facilities 86,000 ---------- LAND: Florin Perkins, Sacramento, California - n/a 6/91 n/a ---------- Total Land - ---------- HOTELS: Chico Holiday Inn, Chico, California 305,000 1972/1979 9/86 32 Years Sacramento Holiday Inn, Sacramento, California 432,000 1978 9/86 32 Years Walnut Creek Holiday Inn, Walnut Creek, California 178,000 1987 3/85 33 Years ---------- Total Hotels 915,000 ---------- Total Investment in Real Estate $1,986,000 ========== PARTNERSHIPS: CR Properties, Sacramento, California $ - ---------- Total Investment in Partnerships $ - ========== Total Investment in Real Estate and Partnerships $1,986,000 ==========
(1) The Trust records impairment losses which represent the excess of the carrying value of individual properties over their estimated fair value. Various external factors, particularly the lack of credit available to purchasers of real estate and overbuilt real estate markets have adversely affected real estate and necessitated the adjustments. Improvements are shown net of impairment losses recognized to date. (2) Represents total cost of assets after impairment losses recognized to date. (3) The Trust adopted the provisions of SFAS 121 on January 1, 1996. At that date all recorded valuation losses and accumulated depreciation were combined with the cost of the assets; the resulting amount is accounted for as the new cost of the asset which is being depreciated over its new estimated useful life. * Denotes properties owned by CalREIT. 84 88 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION Reconciliation of total real estate carrying values for the year ended December 31, 1996 and 1995, and the Transition Period are as follows:
Year Ended Year Ended December 31, December 31, Transition 1996 1995 Period ------------ ------------ ---------- ASSET RECONCILIATION: Balance, beginning of period $100,501,000 $114,579,000 $142,183,000 Fresh start adjustment - - (24,691,000) ------------ ------------ ------------ Adjusted balance, beginning of period 100,501,000 114,579,000 117,492,000 Additions: Fair market value of assets acquired through foreclosure 1,751,000 - - Improvements 2,514,000 2,465,000 181,000 Reclassification from other assets 7,000 - - Deductions: Real estate sold (12,920,000) (6,476,000) (3,025,000) Foreclosures/insubstance foreclosures (3,181,000) (2,967,000) - Valuation losses (2,888,000) (7,100,000) (69,000) SFAS 121 adjustments (1) (6,386,000) - - ------------ ------------ ------------ Balance, end of period $ 79,398,000 $100,501,000 $114,579,000 ============= ============ ============ ACCUMULATED DEPRECIATION RECONCILIATION: Balance, beginning of period $ 6,001,000 $ 2,812,000 $ 31,746,000 Fresh start adjustment - - (29,728,000) ------------- ------------ ------------ Adjusted beginning balance 6,001,000 2,812,000 2,018,000 Additions: Depreciation 2,439,000 3,292,000 807,000 Deductions: Accumulated depreciation on real estate sold (68,000) (103,000) (13,000) SFAS 121 adjustments (1) (6,386,000) - - ------------- ------------ ------------ Balance, end of period $ 1,986,000 $ 6,001,000 $ 2,812,000 ============= ============ ============
(1) The Trust adopted the provisions of SFAS 121 on January 1, 1996. At that date all recorded valuation losses and accumulated depreciation were combined with the cost of the assets; the resulting amount is accounted for as the new cost of the asset. 85 89 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE (Notes Receivable Collateralized by Deeds of Trust) DECEMBER 31, 1996
Column A Column B Column C Column D -------- -------- -------- -------- Final Interest Maturity Description Rate Date Periodic Payment Terms -------------- ---------- -------- ---------------------- FIRST DEEDS OF TRUST: Office/Retail Building, Fullerton, California 9.50% 2004 Monthly principal and interest payments of $3,713 * Retail Building, Tempe, Arizona 9.50% 2012 Monthly principal and interest payments of $9,249 SECOND DEEDS OF TRUST: Industrial Building, Corona, California 11.00% 1993 Monthly interest only payments Commercial Office Building, San Francisco, California 11.50% 1996 Monthly interest only payments * Commercial Building, Tempe, Arizona 8.00% 2000 Monthly 4% interest only payments * Office/Retail Complex, Fountain 50% of excess cash flows applied to Valley, California 7.63% 2014 interest and then principal
Column E Column F Column G Column H -------- -------- ------------------------------- ------------------ Valuation Write Carrying Principal Amount of Face Amount Downs and Amount of Loans Subject to Prior of Notes Deferred Notes Delinquent Principal Liens Receivable Gains(2) Receivable(1) or Interest -------- ---------- --------------- ------------- ------------------ FIRST DEEDS OF TRUST: Office/Retail Building, Fullerton, California N/A $ 415,000 $80,000 $335,000 None * Retail Building, Tempe, Arizona N/A 889,000 - 889,000 None SECOND DEEDS OF TRUST: Industrial Building, Corona, California $1,293,000 275,000 275,000 - $ 275,000 Commercial Office Building, San Francisco, California 2,660,000 385,000 - 385,000 385,000 * Commercial Building, Tempe, Arizona 913,000 360,000 239,000 121,000 None * Office/Retail Complex, Fountain Valley, California 6,623,000 6,454,000 5,888,000 566,000 None --------------------------------------------------------------------------------- $11,489,000 $8,778,000 $6,482,000 $2,296,000 $ 660,000 =================================================================================
(1) Represents carrying amount of notes after valuation allowance and deferred gains. (2) The Trust establishes allowances for possible investment losses which represent the excess of the face amount of the note over the estimated fair value of the property collateralizing the note. In addition, deferred gains have been recorded against notes receivable when required under SFAS 66 (Note 1). Such write downs in no way limit the obligation of the borrower to comply with the terms of the note. * Denotes mortgages owned by CalREIT. 86 90 THE PEREGRINE REAL ESTATE TRUST AND SUBSIDIARY SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE A summary of activity for note receivable collateralized by deeds of trust for the years ended December 31, 1996 and 1995, and the Transition Period are as follows:
Year Ended Year Ended December 31, December 31, Transition 1996 1995 Period ------------ ------------ ---------- Balance, beginning of period $ 14,627,000 $ 16,914,000 $ 15,804,000 Additions: New loans - 2,240,000 1,319,000 Recognition of deferred gain 55,000 66,000 12,000 Deductions: Collections of principal (54,000) (2,030,000) (86,000) Collections of principal from prepayments (2,240,000) - - Book value of notes receivable sold (8,892,000) - - Book value of notes receivable foreclosed upon (1,200,000) - - Deductions from loss on prepayment of notes receivable - (137,000) - Deductions from valuation losses and deferred gains on notes receivable - (2,426,000) (135,000) ------------ ------------ ------------ Balance, end of period $ 2,296,000 $ 14,627,000 $ 16,914,000 ============ ============ ============
87 91 Signatures Pursuant to the requirements of Section 13 or Section 15(d) 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. March 31, 1997 /s/ Joseph M. Mock - ------------- -------------------------- Date Joseph M. Mock President, Chief Executive Officer and Principal Accounting Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. March 31, 1997 /s/ John McMahan - -------------- -------------------------- Date John McMahan Chairman of the Board March 31, 1997 /s/ John F. Salmon - -------------- -------------------------- Date John F. Salmon Secretary and Trustee March 31, 1997 /s/ E. Lawrence Hill, Jr. - -------------- -------------------------- Date E. Lawrence Hill, Jr. Trustee March 31, 1997 /s/ Kenneth T. Seeger - -------------- -------------------------- Date Kenneth T. Seeger Trustee March 31, 1997 /s/ Roger D. Snell - -------------- -------------------------- Date Roger D. Snell Trustee 88 EX-10.9 2 TRUSTEE STOCK OPTION PLAN 1 EXHIBIT 10.9 THE PEREGRINE REAL ESTATE TRUST TRUSTEE STOCK OPTION PLAN, 1994 1. PURPOSE The purpose of this The Peregrine Real Estate Trust Trustee Stock Option Plan, 1994 is to promote the interests of PRET and its shareholders by providing additional incentive to the members of PRET's Board of Trustees whose judgment, initiative and efforts contribute to PRET's successful operation. By encouraging ownership of its Common Stock, PRET seeks to motivate eligible members of the Board by giving them an increased proprietary interest in PRET and its success. This Plan is intended to enable PRET to attract and compete with other enterprises for the services of the best possible members of the Board. The Plan provides eligible Board members an opportunity to purchase shares of Common Stock pursuant to Options. Options granted pursuant to the Plan shall not constitute "incentive stock options" within the meaning of Section 422 of the Code. This Plan is intended to constitute a "formula plan" and Participants are intended to be "disinterested administrators" of other plans maintained by PRET for purposes of Rule 16b-3 of the Exchange Act. 2. CERTAIN DEFINITIONS The following terms used in this Plan are defined as follows: 2.1 "ADDITIONAL OPTION" means any Option other than an Initial Option. 2.2 "ADMINISTRATOR" means PRET's chief financial officer or such other person as is appointed by the Board to serve as Administrator. 2.3 "BANKRUPTCY COURT" means the United States Bankruptcy Court, Eastern District of California (Sacramento Division). 2.4 "BOARD" means PRET's Board of Trustees as elected and constituted from time to time. 2.5 "CODE" means the Internal Revenue Code of 1986, as amended, or any successor statute. 2.6 "COMMENCEMENT OF SERVICE" means the date of election of each Participant to his or her first term as a Trustee. 2.7 "COMMON STOCK" means PRET's common stock. 2 2.8 "EFFECTIVE DATE" means the date on which this Plan becomes effective pursuant to Section 8.1 hereof. 2.9 "EFFECTIVE DATE OF REORGANIZATION" means the date on which PRET's Third Amended Plan of Reorganization, as Modified, becomes effective, i.e. October 1, 1994, pursuant to the order of the Bankruptcy Court. 2.10 "EXCHANGE ACT" means the Securities Exchange Act of 1934, as now in effect or hereafter amended. 2.11 "EXERCISE PRICE" means the Option Price multiplied by the number of shares of Common Stock purchased pursuant to exercise of an Option. 2.12 "EXPIRATION DATE" means the 10th anniversary of the Grant Date or, if earlier, the termination of an Option pursuant to Section 6.4 or 7.2 hereof. 2.13 "FAIR MARKET VALUE" means (a) if the Common Stock is then listed on an established stock exchange or exchanges, the last reported sales price per share prior to the date on which an Option is granted on the principal exchange on which the Common Stock is traded, as reported in The Wall Street Journal; or (b) if the Common Stock is not then listed on an exchange, the average of the last reported closing bid and asked prices per share for the Common Stock in the over-the-counter market as quoted on NASDAQ prior to the date of grant; or (c) if the Common Stock is not then listed on an exchange or listed on NASDAQ, an amount determined in good faith by the Administrator. 2.14 "GRANT DATE" means the date on which an Option grant takes effect pursuant to Section 6.2 hereof. 2.15 "INITIAL OPTION" means an Option received by a Participant as of the Effective Date or thereafter as of a Participant's Commencement of Service. 2.16 "NON-QUALIFIED STOCK OPTION" means an Option to purchase shares of PRET's Common Stock which is not an "incentive stock option" as defined in Section 422A of the Code. 2.17 "OPTION" or "OPTIONS" means a Non-Qualified Stock Option or Options granted pursuant to this Plan. 2.18 "OPTION AGREEMENT" means the written Stock Option Agreement which evidences the terms and conditions of each Option granted to a Participant. 2.19 "OPTION PERIOD" means the period during which an Option may be exercised as defined in Section 6.3 hereof. 2 3 2.20 "OPTION PRICE" means the purchase price for each share of Common Stock subject to an Option. 2.21 "PARTICIPANT" means a member of PRET's Board of Trustees who is not a full-time employee or officer of PRET or any subsidiary of PRET, and therefor is eligible pursuant to Article 5 hereof to receive Options under this Plan. 2.22 "PERMANENT DISABILITY" or "PERMANENTLY DISABLED" means a physical or mental impairment as defined in Section 22(e)(3) of the Code. 2.23 "PLAN" means this The Peregrine Real Estate Trust Trustee Stock Option Plan, 1994. 2.24 "PRET" means The Peregrine Real Estate Trust, a California real estate investment trust, formerly known as Commonwealth Equity Trust. 2.25 "SECURITIES ACT" means the Securities Act of 1933, as now in effect or hereafter amended. 2.26 "TRUSTEE" means each member of the Board. 3. ADMINISTRATION This Plan shall be administered by the Administrator. The Administrator's responsibilities under this Plan shall be limited to taking all legal actions necessary to document the Options provided for herein, to maintain appropriate records and reports regarding such Options, and to take all acts authorized or required by this Plan. 4. SHARES OF STOCK SUBJECT TO THE PLAN The stock available for grant of Options under this Plan shall be shares of PRET's authorized but unissued Common Stock. Subject to adjustment as provided in Article 7 hereof, the aggregate number of shares of Common Stock which may be issued upon the exercise of all Options granted under this Plan shall not exceed one hundred fifty thousand (150,000) shares of Common Stock. If any Option granted under this Plan expires or terminates for any reason, the unpurchased or unissued shares subject to such expired or terminated Option shall again be available for the grant of Options under this Plan, as if no Option previously had been granted with respect to such shares. 5. ELIGIBILITY Eligibility under the Plan is limited to members of PRET's Board of Trustees who are not full-time employees or officers of PRET or any subsidiary of PRET. 3 4 6. TERMS AND CONDITIONS APPLICABLE TO ALL OPTIONS 6.1 Option Price. The Option Price of the Common Stock covered by each Option granted under this Plan shall be the greater of (1) the fair market value of the Common Stock on the Effective Date, or (2) Two Dollars ($2.00) per share. 6.2 Number of Shares and Grant Dates. On the Effective Date, each Participant shall be granted an Initial Option to purchase 6,666 shares of Common Stock. Thereafter, each Participant whose Commencement of Services is after the Plan Effective Date shall be granted an Initial Option to Purchase 6,666 shares of Common Stock 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 Common Stock on each of the next two anniversaries of the Grant Date of the Initial Option. The Initial Options and the Additional Options shall be vested upon their respective Grant Dates. 6.3 Option Periods. An Option shall be exercisable only during the Option Period. Each Option Period shall commence on the Grant Date and shall end at the close of business on the Expiration Date. Each Option granted to a Participant will terminate on the earlier of (i) the date on which a Participant ceases to be a Participant, subject to the provisions of Section 6.4, or, (i) the Expiration Date. 6.4 Disability or Death. If a Participant dies or becomes Permanently Disabled while he or she is a Participant, any Option or unexercised portion thereof granted to such Participant, to the extend exercisable by such Participant on the date of death or Permanent Disability, may be exercised by the Participant, or if the Participant is then deceased, by the Participant's personal representative, heirs, or legatees, at any time prior to the expiration of one (1) year from the date on which the Participant ceases to be a Participant, at which time any such Option or Options shall expire and terminate. 6.5 Exercise of Option. Subject to the provisions of this Article 6, the Participant may, at any time, exercise an Option with respect to all or any part o the shares of Common Stock then subject to such Option by giving PRET written notice of exercise, specifying the number of shares as to which the Option is being exercised. Such notice shall be addressed to the Administrator at PRET's principal office, and shall be effective when actually received (by personal delivery, fax or other delivery) by the Administrator. Such notice shall be accompanied by an amount equal to the Exercise Price of such shares, in the form of any one or combination of the following: cash or cash equivalents, or shares of Common Stock valued at the Fair Market Value of such shares. Shares of Common Stock acquired by the Participant through exercise of an Option may be surrendered in payment of the Exercise Price of Options; provided, however, that any Common Stock surrendered in payment must have been (a) held by the Participant for more than six (6) months at the time of surrender or (b) acquired under an Option granted not less than six (6) months prior to the time of surrender. Payment in full of the Exercise Price need not accompany the written notice of 4 5 exercise if the notice directs that the stock certificate or certificates for the shares for which the Option is exercised be delivered to a licensed broker acceptable to PRET as the agent for the individual exercising the Option and, at the time such stock certificate or certificates are delivered, the broker tenders cash (or cash equivalent acceptable to PRET) equal to the Exercise Price to PRET. 6.6 No Stockholder Rights Under Option. Neither a Participant nor any person entitled to exercise a Participant's rights in the event of a Participant's death shall have any of the rights of a stockholder with respect to the shares of Common Stock subject to an Option unless and until the certificates for such shares have been issued by PRET upon the exercise of the Option. 6.7 Continuation of Service. Nothing in this Plan shall confer upon any person any right to continue as a Trustee or interfere in any way with PRET's right to terminate such relationship. 6.8 Withholding. PRET shall have the right to withhold, or require a Participant to remit to PRET, an amount sufficient to satisfy any applicable federal, state or local withholding tax requirement imposed with respect to exercise of the Option or Options. To the extent permissible under applicable tax, securities and other laws, the Participant may satisfy a tax withholding requirement by directing PRET to apply shares of Common Stock to which the Participant is entitled as a result of the exercise of an Option to satisfy withholding requirements under this Section 6.8. 6.9 Fractional Shares. PRET shall not be required to issue fractional shares upon the exercise of an Option under any circumstances. 7. ADJUSTMENT UPON CHANGES IN CAPITALIZATION OR REORGANIZATION OF PRET 7.1 Adjustment Upon Changes in Capitalization. If the number of issued and outstanding shares of Common Stock of PRET changes as a result of a stock split, reverse stock split, payment of a stock dividend, recapitalization, or any other change in the capital structure of PRET, PRET may appropriately adjust (a) the maximum number of shares which may be issued under this Plan, (b) the number of shares subject to each outstanding Option, and (c) the price per share of each Option (but not the total price thereof), so that upon exercise of the Option the Participant will receive the same number of shares he or she would have received had the Participant been the holder of all shares subject to his or her outstanding Options immediately before the effective date of such change in the number of issued shares of PRET's Common Stock. Such adjustment shall not result in the issuance of fractional shares. 7.2 Adjustment Upon Reorganization. In the event of a complete liquidation of PRET, or a merger, reorganization or consolidation of PRET with any other corporation in which PRET is not the surviving corporation, or PRET becomes a wholly-owned subsidiary of another corporation, any unexercised Option theretofore granted under this Plan shall be 5 6 deemed cancelled unless the surviving corporation in any such merger, reorganization or consolidation elects to assume the Options under the Plan or to issue substitute Options in place thereof; provided, however, that notwithstanding the foregoing, if such Options otherwise were to be cancelled in accordance with the foregoing, each Participant shall have the right, exercisable during a thirty (30) day period, ending on the fifth day prior to such liquidation, merger, or consolidation, to exercise the Participant's Options in whole or in part. 7.3 Authority to Adjust; Effect of Adjustments. The foregoing adjustments may be made by PRET and transacted by the Administrator. The grant of an Option pursuant to this Plan shall not affect in any way the right or power of PRET to make adjustments, reclassifications, reorganizations or changes in its capital structure; to merge, consolidate or dissolve to change its business structure; or to liquidate, sell or transfer all or any part of its business or assets. 8. ADOPTION, AMENDMENT, SUSPENSION AND TERMINATION. 8.1 Adoption. This Plan shall be effective as of the date on which PRET's Restated Declaration of Trust is recorded in the official records of Sacramento County. The Board may seek shareholder approval of this Plan if it deems it necessary. 8.2 Amendment. Subject to the limitation of Section 8.4 below, the Board may at any time suspend or terminate this Plan, or may amend it from time to time in such respects as the Board may deem advisable; provided, however, that the Board shall not amend this Plan in the following respects without the approval of shareholders then sufficient to approve this Plan in the first instance; (a) to materially increase the benefits provided hereunder; (b) to increase the maximum number of shares which may be granted; (c) to change the designation or class of persons eligible to receive Options under this Plan. 8.3 Suspension or Termination of Plan. No Option may be granted during any suspension or after the termination of this Plan, and no amendment, suspension or termination of this Plan shall, without the Participant's consent, alter or impair any rights or obligations under any Option Agreement previously entered into under this Plan. This Plan shall terminate ten (10) years after the Effective Date unless previously terminated pursuant to Section 7.2 above or by the Board pursuant to this Article 8. 8.4 Restriction on Amendment. Notwithstanding the provisions of Section 8.2 above, this Plan shall not be amended more than once in any six (6) month period other than to comport with the changes in the Code, the Employee Retirement Income Security Act of 1974, or the rules promulgated thereunder. 9. SECURITIES LAWS 9.1 Compliance with Securities Laws. The granting of Options and the issuance of shares upon exercise thereof shall be subject to compliance with all of the applicable 6 7 requirements of Federal and State laws with respect to the issuance and sale of Securities, including without limitation, compliance with the requirements of the Securities Act of 1933, as amended, and any rules and regulations adopted thereunder. At the time of exercise of any Option, PRET will require the Participant to execute any documents or take any action which may be then necessary to comply with the Securities Act of 1933 and the rules and regulations adopted thereunder, or any other applicable Federal or State laws for the purpose of regulating the sale and issuance of securities, and PRET may, if it deems it necessary, include provisions in any Option Agreement to ensure such compliance. PRET may, from time to time, change its requirements with respect to enforcing compliance with Federal and State securities laws, including the request for, and enforcement of, letters of investment intent, such requirements to be determined by PRET in its judgment as necessary to ensure compliance with said laws. These changes may be made with respect to any particular Option or shares issued upon the exercise thereof prior to or after the exercise of such Option. PRET shall not be obligated to issue any shares upon the exercise of any Option unless such issuance, in the judgment of the board, is in full compliance with all applicable laws, governmental rules and regulations. 9.2 Exemption. The intent of this Plan is to qualify for the exemption provided for by Rule 16b-3 under the Exchange Act. To the extent any provision of this Plan does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative and shall not affect the validity of this Plan. In the event Rule 16b-3 is revised or replaced, the Administrator may exercise discretion in modifying this Plan in any respect necessary to satisfy the requirements of the revised exemption or its replacement. 10. INDEMNIFICATION. 10.1 Indemnification of Administrator. To the extent permitted by applicable law, the Administrator shall be indemnified and held harmless by PRET against and from any and all costs, laws, liabilities or expenses that may be imposed upon or reasonably incurred by the Administrator in connection with or resulting from any claim, action, suit or proceeding to which the Administrator may be a party or in which the Administrator may be involved by reason of any action taken or failure to act under this Plan, and against and from any and all amounts paid by the Administrator (with PRET's written approval) and the settlement thereof, or paid by the Administrator in satisfaction of a judgment in any such action, suit or proceeding except a judgment in favor of PRET; subject, however, to the conditions upon the institution of any claim, action, suit or proceeding against the Administrator, that the Administrator shall give PRET an opportunity in writing, at its own expense, to handle and defend the same before the Administrator undertakes to handle and defend it on the Administrator's own behalf. The foregoing right of indemnification shall not be exclusive of any other right to which the Administrator may be entitled as a matter of law or otherwise, or any other power PRET may have to indemnify the Administrator or hold the Administrator harmless. 10.2 No Liability. The Administrator and each officer and employee of PRET shall be fully justified in reasonably relying or acting upon any information furnished in connection 7 8 with the administration of this Plan by PRET or any employee of PRET. In no event shall any person who is or shall have been the Administrator, or an officer or employee of PRET, be liable for any determination made or other action taken or any omission to act in reliance upon any such information, or for any information (including furnishing of information) taken or any failure to act, if in good faith. 8 EX-10.10 3 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.10 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of June 1, 1996 by and between THE PEREGRINE REAL ESTATE TRUST ("Company"), and JOSEPH M. MOCK ("Executive"). WHEREAS, Executive has extensive experience in the management of commercial real estate and has been an executive manager of one or more real estate trusts. WHEREAS, Company is a California real estate trust. WHEREAS, Company desires to employ Executive, and Executive desires to be employed by Company, on the terms and subject to the conditions of this Agreement. NOW, THEREFORE, in consideration of the covenants, duties, terms, and conditions set forth in this Agreement and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties agree as follows: 1. Term. The "Term" of Executive's employment shall commence on June 1, 1996 and shall terminate pursuant to Section 7 of this Agreement. 2. Duties. Executive shall be employed by Company as its President and Chief Executive Officer. Executive shall report to the Company's Board of Trustees (the "Board") and perform the duties specified in the job description attached hereto as Exhibit A, together with such other duties, consistent with duties customarily assigned a President and Chief Executive Officer, that the Board may from time to time direct. Executive shall devote Executive's full business time and best efforts to Company and to the performance of Executive's employment duties under this Agreement. Executive shall be based in Company's offices in Sacramento, California. During the Term, Executive shall not, except for management of Executive's personal financial affairs, engage in any other business, nor serve in any position with any other corporation or entity, without the prior written consent of the Board. 3. Salary. During the Term, Executive shall receive a salary of Fifteen Thousand Dollars ($15,000) per month ("Salary"). Salary shall be paid twice monthly on Company's customary payroll dates. 4. Benefits. During the Term, Executive shall be entitled to receive insurance and such other benefits as are generally provided by Company to its executive employees. Executive shall accrue vacation at the rate of one and one half (1 1/2) days per month of employment, commencing June 1, 1996. 2 5. Expenses. During the Term, Company shall pay or reimburse Executive for reasonable expenses incurred by Executive in performing Executive's duties under this Agreement in accordance with Company policy. Expenses for travel from Executive's home to Company's offices in Sacramento, and Executive's lodging expenses in Sacramento, shall not be reimbursable. 6. Taxes; Withholdings. All compensation payable by Company to Executive under this Agreement which is or may become subject to withholding under the Internal Revenue Code of 1986, as amended, or other pertinent laws or regulations, shall be reduced for all applicable income and employment taxes required to be withheld. 7. Termination of Employment. 7.1 Termination by Either Party Without Cause. Executive's employment may be terminated at any time, with or without cause, during the Term by either Executive or Company, by notice delivered to the other party. In the event of termination by Company, termination shall be effective upon the date specified in a notice delivered to Executive. In the event of termination by Executive, termination shall be effective upon the date specified in a notice delivered to Company at least one month prior to such date; provided, that Company, upon receipt of notice from Executive, may elect to terminate Executive's employment at an earlier time. 7.2 Termination by Company for Good Cause. Notwithstanding any other provision of this Agreement, Company may terminate Executive's employment at any time, with or without prior notice, for Good Cause. Termination for Good Cause shall be effective upon the date specified in a notice of termination delivered to Executive. "Good Cause" means (a) any act or omission of gross negligence, willful misconduct, dishonesty, or fraud by Executive in the performance of Executive's duties hereunder, (b) the failure or refusal of Executive, after the receipt of written notice by Executive, to perform the duties or to render the services assigned to Executive from time to time by the Board, (c) the charging or indictment of Executive in connection with a felony or any misdemeanor involving dishonesty or moral turpitude, (d) the material breach by Executive of this Agreement or the breach of Executive's fiduciary duty or duty of trust to Company, or (e) any other act or omission by Executive either in disregard of Company's policies or conduct which may, in the Board's sole discretion, cause material loss, damage or injury to Company, its property, reputation or employees. 7.3 Termination Upon Death or Disability. Executive's employment shall automatically be terminated upon Executive's death or total disability. 8. Compensation Upon Termination. 8.1 Upon Termination Without Cause. In the event of termination by Company pursuant to Section 7.1 of this Agreement, Executive shall receive Salary through the period ending on the later of (a) the date of termination specified in Company's termination notice, (b) the date which is one month after the date of delivery of Company's termination 2 3 notice or (c) August 31, 1996. In the event of termination by Executive pursuant to Section 7.1 of this Agreement, Executive shall receive Salary through the period ending on the date which is one month after the date of delivery of Executive's termination notice, whether or not Company elects to continue Executive's employment through that period. 8.2 Upon Termination With Good Cause or Upon Death or Disability. In the event of termination of Executive's employment pursuant to either Section 7.2 or Section 7.3 of this Agreement, Company shall not be obligated, from and after the date of termination, to provide to Executive any compensation or other benefits, except for unpaid Salary earned by Executive for service through the date of termination. 9. Arbitration. In the event any dispute, controversy or claim arises under this Agreement (a "Dispute"), the Dispute shall be settled by arbitration in San Francisco, California, by an arbitration conducted in accordance with the Rules of Commercial Arbitration of the American Arbitration Association (the "AAA") or its successor. There shall be one arbitrator, familiar with executive employment issues, appointed pursuant to the Rules of the AAA. Reasonable attorneys' fees, costs, and expenses, together with expert witness fees and costs, are to be awarded by the arbitrator to the prevailing party. The decision of the arbitrator shall be conclusive and binding upon the parties, and judgment upon the award rendered by the arbitrator may be entered in any court of competent jurisdiction. 10. Miscellaneous. 10.1 All notices and any other communications permitted or required under this Agreement must be in writing and shall be effective (a) on the first business day after delivery in person, or (b) on the first business day after prepaid deposit with a commercial courier or delivery service for overnight delivery. All notices must be properly addressed and delivered to the parties at the addresses set forth below: If to Company: John McMahan The McMahan Group, Inc. One Embarcadero Center, Suite 2930 San Francisco, CA 94111 If to Executive: Joseph M. Mock 200 Camellia Lane Lafayette, CA 94549 or at such other addresses as either party may subsequently designate by written notice given in the manner provided in this Section 10.1. 3 . 4 10.2 This Agreement contains the full and complete understanding of the parties with respect to the subject matter hereof and supersedes all prior representations, promises, agreements, and warranties, whether oral or written, regarding such subject matter. 10.3 This Agreement shall be governed by and interpreted according to the laws of the State of California, without regard to choice of laws provisions. 10.4 This Agreement shall inure to the benefit of and be binding upon any successors or assigns of Company. This Agreement shall not be assignable by Executive. 10.5 The captions of the various sections of this Agreement are inserted only for convenience and shall not be considered in construing this Agreement. 10.6 This Agreement can be modified, amended, or any of its terms waived only by a writing signed by both parties. 10.7 If any provision of this Agreement shall be held invalid, illegal, or unenforceable, the remaining provisions of the Agreement shall remain in full force and effect, and the invalid, illegal, or unenforceable provision(s) shall be limited or eliminated only to the extent necessary to remove such invalidity, illegality, or unenforceability in accordance with the applicable law at that time. 10.8 No remedy made available to Company by any of the provisions of this Agreement is intended to be exclusive of any other remedy. Each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder as well as those remedies existing at law, in equity, by statute, or otherwise. 10.9 This Agreement may be executed in one or more counterparts. Any copy of this Agreement with the original signatures of all parties approved shall constitute an original. 10.10 Executive understands that this Agreement has been drafted by counsel for Company, and Executive represents that he has had the opportunity to consult independent counsel with respect to the terms of this Agreement. 4 5 IN WITNESS WHEREOF, this Agreement has been executed as of the date specified in the first paragraph. COMPANY: THE PEREGRINE REAL ESTATE TRUST By:____________________________ Name:__________________________ Its:___________________________ EXECUTIVE: JOSEPH M. MOCK _______________________________ 5 6 Exhibit A Executive's Job Description Peregrine Real Estate Trust President and Chief Executive Officer The CEO will refine and implement Company's strategic plan as defined by the Board. This will include (1) developing operating plans and budgets for each property, (2) negotiating and supervising the liquidation of assets as it becomes desirable to do so, (3) providing the internal staff with the support and direction necessary for their success and (4) maintaining and enhancing relationships with Company's shareholders, lender group, the bankruptcy court, and the Sacramento community. Inherent in this responsibility is recommending modifications to Company's strategy to the Board, when appropriate. The CEO will be available to attend all Board meetings, at the request of the Board. EX-10.11 4 EMPLOYMENT AGREEMENT/AMENDMENT 1 1 EXHIBIT 10.11 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "First Amendment") is made and entered into as of December 1, 1996 by and between THE PEREGRINE REAL ESTATE TRUST ("Company") and JOSEPH M. MOCK ("Executive"). WHEREAS, the Company and Executive are parties to an Employment Agreement dated as of June 1, 1996 (the "Employment Agreement"). WHEREAS, the parties desire to amend the Employment Agreement as it relates to compensation payable by the Company to Executive upon termination of employment without cause. NOW, THEREFORE, the parties agree as follows: 1. Section 8.1 of the Employment Agreement is hereby amended and restated to read in its entirety as follows: "8.1 Upon Termination Without Cause. In the event of termination by Company pursuant to Section 7.1 of this Agreement ("Termination by Either Party Without Cause"), the Executive shall be entitled to receive Salary (a) through the period ending on the date which is three months after the date of termination specified in the Company's termination notice, provided that such date of termination occurs on or before May 31, 1997 or (b) through the date of termination specified in the Company's termination notice, if such date of termination occurs after May 31, 1997. In the event of termination by Executive pursuant to Section 7.1 of this Agreement, Executive shall receive Salary through the effective date of such termination." 2. As amended hereby, the Employment Agreement shall remain in full force in effect. 2 IN WITNESS WHEREOF, this First Amendment has been executed as of the date specified in the first paragraph. COMPANY: THE PEREGRINE REAL ESTATE TRUST - ------- By: ______________________ Name: ______________________ Its: ______________________ EXECUTIVE: JOSEPH M. MOCK - --------- _______________________________ EX-27 5 FINANCIAL DATA SCHEDULE
5 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 CONSOLIDATED FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 6,958 14,115 5,474 (1,472) 0 27,314 79,398 (1,986) 104,726 9,548 85,313 26,265 0 13,356 (29,756) 104,726 0 27,715 0 (15,133) (8,019) (4,278) (8,177) (7,892) 0 (7,892) 0 187 0 (7,705) (2.17) (2.17) COMMON 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 REDEEMABLE CONVERTIBLE PREFERRED STOCK.
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