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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
_X_ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended August 31, 1997
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from _____________ to _____________.
Commission file number 0-20449
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PRICE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0628740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4649 Morena Boulevard, San Diego, California 92117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 619-581-4530
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.0001 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ or No ___
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. [ ]
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant as of October 31, 1997 was $228,345,515,
based on the last reported sale price of $18.25 per share on October 31, 1997.
The number of shares outstanding of the registrant's common stock as of
October 31, 1997 was 23,681,025.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on December 16, 1997 are incorporated by reference into
Part III of this Form 10-K.
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1
PRICE ENTERPRISES, INC.
Annual Report on Form 10-K
for the Fiscal Year Ended August 31, 1997
TABLE OF CONTENTS
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PART I
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Item 1. Business ......................................................... 3
Item 2. Properties ....................................................... 6
Item 3. Legal Proceedings ................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders .............. 8
Item 4A. Executive Officers of the Registrant ............................. 8
PART II
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Item 5. Market for Registrant Common Equity and Related Stockholder
Matters .......................................................... 9
Item 6. Selected Financial Data .......................................... 10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................ 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ....... 13
Item 8. Financial Statements and Supplementary Data ...................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ......................................... 26
PART III
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Item 10. Directors and Executive Officers of the Registrant ............... 26
Item 11. Executive Compensation ........................................... 26
Item 12. Security Ownership of Certain Beneficial Owners and Management ... 26
Item 13. Certain Relationships and Related Transactions ................... 26
PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ......................................................... 27
2
PART I
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ITEM 1 - Business
- --------------------------------------------------------------------------------
Formation of the Company and Subsequent Transactions
Price Enterprises, Inc. ("Price Enterprises," "PEI" or "the Company"), a
Delaware corporation, was formed in July 1994. The Company began operations
effective August 29, 1994 as a wholly owned subsidiary of Costco Companies, Inc.
("Costco"), formerly Price/Costco, Inc., with specific assets received from
Costco pursuant to the Amended and Restated Agreement of Transfer and Plan of
Exchange ("Exchange Agreement").
Transferred to PEI were substantially all of the real estate assets which
historically formed the non-club real estate business segment of Costco; four
existing Costco warehouses which are adjacent to certain transferred properties,
and which have been leased back to Costco effective August 29, 1994; a 51%
interest in Price Quest, Inc. ("PQI") and a 51% interest in Price Global
Trading, Inc. ("PGT"), with Costco retaining the remaining 49% interests (the
Company's interests in both PQI and PGT were subsequently increased to 100%).
Also transferred were notes receivable from various municipalities and agencies
("City Notes") and certain other assets of which were subsequently disposed.
On June 27, 1997, the Board of Directors of PEI determined that it would be
in the best interest of PEI and its stockholders to separate PEI's core real
estate business and its merchandising businesses. Accordingly, the PEI Board
approved a spin-off transaction pursuant to which PEI would continue to conduct
its real estate business consisting of an initial asset base of 27 retail
properties and $40 million of cash following the spin-off and PEI's
merchandising businesses, real estate properties held for sale by PEI, the City
Notes and certain secured notes receivable from buyers of properties formerly
held by PEI (the "Other Notes") would be spun-off to PriceSmart, Inc.
("PriceSmart"), a Delaware corporation and wholly-owned subsidiary of PEI.
On August 29, 1997, PEI separated itself from PriceSmart by distributing
one share of Common Stock of PriceSmart for every four shares of Common Stock
held by PEI's stockholders of record on August 15, 1997 pursuant to a
distribution agreement dated as of August 26, 1997, between PEI and PriceSmart
(the "Distribution"). Since the Distribution, PEI has engaged in a combination
of acquiring, developing, owning, managing and/or selling real estate assets.
As a result of the Distribution, PEI intends to qualify for Federal tax
treatment as a real estate investment trust ("REIT"). In order to qualify as a
REIT, PEI was required to (i) divest certain assets not related to its real
estate business, such as the merchandising businesses, and (ii) distribute an
amount of taxable dividends at least equal to its current and accumulated
earnings and profits, much of which represents an allocation from Costco as a
result of the spin-off by Costco of PEI in December 1994. PEI expects the
Distribution to satisfy these two requirements. By qualifying as a REIT, PEI
will substantially eliminate the taxation on corporate income from the real
estate business.
Overview of the Company's Business
The principal business of the Company is to acquire, develop, operate,
manage and lease real property. The Company's current portfolio is substantially
comprised of commercial rental properties including shopping centers and "power
centers" leased to major retail tenants such as Costco, The Sports Authority,
The Home Depot, Kmart, Marshalls, PetsMart and Borders Books. Approximately 57%
of annual minimum rents are derived from strong credit tenants with investment
grade ratings.
For a description of the Company's properties and of material developments
during the year regarding these investments and the Company as a whole,
reference is made to Items 2 and 7 hereof.
The Company's business strategy is to continue to lease vacant space in the
current portfolio to its maximum potential, to achieve maximum development of
existing properties and acquire new investment properties. In making new real
estate investments, the Company intends to continue to place primary emphasis on
obtaining equity interests in well-located income-producing retail properties,
principally shopping centers with high credit tenants in the Western and
Northeastern United States, with attractive yields and potential for increases
in income and capital appreciation. The Company may also participate in
public-private partnerships to acquire and develop or redevelop properties in
major cities. The Company also will from time to time consider the disposition
or exchange of existing investments in order to improve its investment portfolio
or increase its funds from operations. The Company's management continuously
reviews the Company's properties and attempts to develop appropriate programs to
renovate and modernize properties in order to improve leasing arrangements,
thereby increasing funds from operations and property values. The Company's
investment and portfolio management philosophy is designed to implement its
overall objective of maximizing funds from operations and distributions to
stockholders. The Company currently owns and operates a self storage business,
"Price Self Storage," with one facility open in San Diego, CA. The Company is
evaluating the possibility of expanding the self storage business on a limited
basis.
3
The Company directly provides property management for all of its operating
properties. Self-management enables the Company to more closely control leasing
and property management. Internal property management also provides the Company
opportunities for operating efficiencies by enabling it to acquire additional
properties without proportionate increases in property management expenses. The
Company's property management program is implemented by property management and
leasing professionals located in offices in San Diego (CA), Fairfax (VA) and
White Plains (NY).
The results of the Company's operations depend upon the performance of its
existing investment portfolio, the availability of suitable opportunities for
new investments and the yields then available on such investments. Such yields
will vary with the type of investment involved, the condition of the financial
and real estate markets, the nature and geographic location of the investment,
competition and other factors. The performance of a real estate investment
company is strongly influenced by the cycles of the real estate industry.
Competition
The Company competes with a wide variety of corporate and individual real
estate developers and real estate investment trusts which have investment
objectives similar to those of PEI and which may have greater financial
resources, larger staffs or longer operating histories than PEI.
The Company competes for tenants in its retail shopping centers. The
Company's competitive advantages are primarily based on significant customer
traffic generated by its national and regional tenants, competitive lease terms
and relatively high occupancy rates. The closing or relocation of any anchor
tenant could have a material adverse effect on the operation of a shopping
center.
Significant Tenants
The seven largest tenants account for approximately 42% of total gross
leasable area and approximately 52% of the Company's total annual minimum rent
revenues. Certain information with respect to these tenants is set forth in the
following table (dollars in thousands):
Percent of Annual Percent of
Number Area Under GLA Under Minimum Total Annual
Tenant of Leases Lease (sq ft) Lease Rent Minimum Rent
- ------ -------- ----------- ---------- ---------- --------------
Costco 4 612,675 16.7% $ 8,131.2 19.9%
The Sports Authority 7 297,844 8.1% 3,633.1 8.9%
The Home Depot 2 214,173 5.8% 2,550.7 6.3%
Kmart 1 110,054 3.0% 1,842.9 4.5%
Marshalls 2 87,968 2.4% 1,734.6 4.3%
PetsMart 6 155,278 4.2% 1,583.8 3.9%
Borders Books 2 62,950 1.7% 1,505.0 3.7%
-------- ----------- ---------- ---------- --------------
24 1,540,942 41.9% $20,981.3 51.5%
======== =========== ========== ========== ==============
While none of the Company's largest tenants has experienced any recent
significant financial hardships, it is not uncommon for economic conditions,
market surpluses of retail space and competitive pressures to negatively impact
financial results of retail operators. Caldor, Today's Man and Levitz Furniture
have filed for protection under Chapter XI provisions of the federal bankruptcy
law. The Company has one lease with each of these tenants which together
comprise 5.4% of the Company's gross leaseable area and approximately 4.9% of
annualized minimum rents as of August 31, 1997.
Generally, the bankruptcy or insolvency of a major tenant or a number of
smaller tenants may have an adverse impact on the performance of the Company's
properties. Under bankruptcy law, a tenant has the option of assuming
(continuing) or rejecting (terminating) any unexpired lease. If the tenant
assumes its lease, the tenant must cure all defaults under the lease and provide
the lessor with adequate assurance of its future performance under the lease. If
the tenant rejects the lease, the lessor's claim for breach of lease would,
absent collateral securing the claim, be treated as a general unsecured claim.
The amount of the claim would be limited to the amount owed for unpaid
pre-petition lease payments unrelated to the rejection, plus the greater of one
years' lease payments or 15% of the remaining lease payments payable under the
lease (but not to exceed the amount of three years' lease payments). Ultimate
collection of any general unsecured claims is significantly related to the
debtor's financial condition and asset strength, results of secured creditor
settlements and ratification of proposed transactions by the bankruptcy court.
Environmental Matters
The Company's ownership of real properties could subject it to certain
environmental liabilities. As discussed below, certain of the Company's
properties have known environmental liabilities, and certain other properties
are located in areas of current or former industrial activity, where
environmental contamination may have occurred. The Company has agreed to
indemnify Costco
4
against and hold Costco harmless from all environmental liabilities that relate
to or arise out of the real properties which were transferred to the Company by
Costco in 1994.
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and remediate releases or threatened releases of
hazardous or toxic substances or petroleum products located at such property,
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and remediation costs incurred by such parties in
connection with the contamination. Under certain of these laws, liability may be
imposed without regard to whether the owner knew of or caused the presence of
the contaminants. These costs may be substantial, and the presence of such
substances, or the failure to remediate properly the contamination on such
property, may adversely affect the owner's ability to sell or lease such
property or to borrow money using such property as collateral. Certain Federal
and state laws require the removal or encapsulation of asbestos-containing
material in poor condition in the event of remodeling or renovation. Other
Federal, state and local laws have been enacted to protect sensitive
environmental resources, including threatened and endangered species and
wetlands. Such laws may restrict the development and diminish the value of
property which is inhabited by an endangered or threatened species, is
designated as critical habitat for an endangered or threatened species or is
characterized as wetlands.
In 1994, Costco engaged environmental consultants to conduct Phase I
assessments (involving investigation without soil sampling or groundwater
analysis) at each of the properties that Costco transferred to the Company. The
Company is unaware of any environmental liability or compliance with applicable
environmental laws or regulations arising out of its properties that the Company
believes would have a material adverse effect on its business, assets or results
of operations. Nevertheless, there can be no assurance that the Company's
knowledge is complete with regard to, or that the Phase I assessments have
identified, all material environmental liabilities. Set forth below are
summaries of certain environmental matters relating to certain of the Company's
properties.
Azusa. The Azusa site is a 17.4 acre site located in Azusa, California. The
Price Company ("Price"), a subsidiary of Costco, purchased the Azusa site in
1983 from Huffy Corporation ("Huffy"). Huffy operated a bicycle manufacturing
facility on the Azusa site from 1959 until 1982. After purchasing the Azusa
site, Price converted the bicycle manufacturing facility into a Price Club
warehouse and tire center. In 1989, Price Club relocated to a new building on an
adjacent property.
The Azusa site currently is located within the Baldwin Park Operable Unit
("BPOU") of the San Gabriel Valley Area 2 Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA") site. The BPOU
addresses a large area of groundwater contamination in the San Gabriel Valley.
Volatile organic compounds ("VOCs"), including trichloroethylene and
perchloroethylene, are present in the groundwater throughout a several mile long
area, extending beneath the cities of Azusa, Irwindale and Baldwin Park,
California. Price received a general notice of potential liability letter from
the United States Environmental Protection Agency (the "EPA") for the BPOU dated
August 4, 1993, and is one of approximately 110 potentially responsible parties
("PRPs"), representing 20-25 contaminated parcels, to have received such notice
for the BPOU. While it was operated by Huffy, the Huffy site contained a
degreasing facility that allegedly released VOCs into the soil.
In March 1994, the EPA published a Record of Decision ("ROD") which
documents the selection of remedial alternatives for the BPOU. The EPA estimates
that its preferred remedy, as outlined in the ROD, will cost between $100 and
$130 million. The San Gabriel Basin Water Quality Authority ("SGBWQA") has
proposed an alternative remedy for the BPOU, which will cost an estimated $25 to
$30 million. A group of PRPs, including Huffy, the SGBWQA and the EPA currently
are negotiating the final remedy for the BPOU. The Company lacks sufficient
information regarding the activity of other PRPs to form an estimate of the
equitable share of total costs that could be allocated to its Azusa site.
To date, Price and Huffy have spent approximately $250,000 in investigation
and monitoring costs. Approximately $225,000 of those costs were shared equally
by Price and Huffy under an informal cost sharing agreement. Under their current
cost sharing agreement, however, Huffy is paying 85% of site-related costs
(except for certain limited costs associated with quarterly water monitoring and
monthly water level gauging).
Also, on January 11, 1995, the EPA wrote Price a "no intended action"
letter stating, "This letter is to inform you that USEPA does not plan to ask
you or your company to participate in the clean-up of the regional groundwater
contamination." Since receiving the "no intended action" letter, PEI, as the
successor to Price has been in negotiation with EPA to enter into a consent
decree, which, if successfully negotiated and approved by a court of competent
jurisdiction, would provide PEI with contribution protection under CERCLA with
respect to the current ROD for the BPOU.
To the extent that there is any liability associated with the Azusa site,
the Company believes such liability should be attributed to Huffy. However, the
Company and Huffy have not negotiated a final allocation of costs as between
themselves. There can be no assurance that Huffy will contribute to any further
costs. Based upon a number of factors, including the EPA "no intended action"
letter, the current status of negotiations regarding the alternative remedy, the
cost of the final remedy, and the Company's allocated equitable share of that
cost as between it, Huffy and/or other PRPs, the Company believes its liability
associated with the Azusa site would not have a material adverse effect on the
financial condition and results of operations of the Company.
5
Pentagon City. The Pentagon City site is a 16.8 acre site in Arlington,
Virginia. Elevated levels of heavy metals are present in groundwater beneath the
Pentagon City site. Also, petroleum hydrocarbons are present in soil at the
site. By letters dated January 31, 1995 and March 22, 1994, the Virginia
Department of Environmental Quality is requiring no further action at the site
with regard to the heavy metals and petroleum hydrocarbon contamination. The
Company has not been notified by any governmental authority, and is not
otherwise aware, of any other material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with the Pentagon City site. Nevertheless, the Company's ownership of the
Pentagon City site creates the potential of liability for remediation costs
associated with groundwater beneath, and soils at, the site.
Signal Hill. The Signal Hill site is a 15.0 acre site in Signal Hill,
California. This site, and the adjoining properties, historically have been used
for oil and gas extraction activities, and the site currently has several active
and abandoned oil and gas production and injection wells. Prior to development
in the early 1990s, the prior owner excavated and treated over 100,000 cubic
yards of petroleum hydrocarbon contaminated soil. However, in 1992, certain
areas of the site were known to be still contaminated with petroleum
hydrocarbons and certain solvents in varying concentrations. The City of Signal
Hill Redevelopment Agency has indemnified the prior owner for environmental
expenses incurred with respect to such site through 1996. This indemnity has
been transferred to the Company.
New Britain. The New Britain site is a 17.8 acre site in New Britain,
Connecticut. The site previously contained a dry cleaning establishment and a
gas station. The site contains low levels of petroleum hydrocarbons and VOCs in
the soil and groundwater. The Company is continuing to remediate the soil and
groundwater at this property under the supervision of local authorities. The
Company estimates that the total cost of this remediation is not expected to
exceed $75,000 in the aggregate over the next three years.
PEI owned additional properties with environmental issues that were sold by
PEI prior to the Distribution or that were transferred to PriceSmart in the
Distribution. PriceSmart has agreed to indemnify the Company for environmental
liabilities arising out of such properties.
Employees
The Company employed approximately 185 employees prior to the Distribution.
In connection with the Distribution, 155 employees were terminated from the
Company and hired by PriceSmart. As a result, the Company currently employs
approximately 30 employees, of which 14 are responsible for property management,
12 are employed in finance and administration and 4 are employed in the self
storage business. The Company provides centralized and comprehensive employee
benefit programs for all eligible employees.
Seasonality
The Company's real estate operations generally are not subject to seasonal
fluctuations.
Corporate Headquarters
The Company maintains its headquarters in San Diego, California adjacent to
the Morena Boulevard Costco facility and it believes that its current facilities
meet its expected requirements over the next 12 months.
ITEM 2 - Properties
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Overview
As of August 31, 1997, the Company owned 26 real estate properties and held
one property pursuant to a 22-year ground lease, which properties have an
aggregate net book value of $337 million. Such properties encompass 358 acres of
land and approximately 3.7 million square feet of gross leasable building space
and were 91% leased. The five largest properties have a carrying value of $206
million, or 61% of the total portfolio, which includes 1.6 million square feet
of leasable space on 110 acres that generates annual minimum rent of $23.0
million, based on leases existing as of August 31, 1997.
The geographic location of the properties is concentrated in the
Northeastern states of New York (3), Virginia (2), New Jersey (2), Pennsylvania
(1), Massachusetts (1), Maryland (1) and Connecticut (1) for a total of 68% of
the net book value of the portfolio. California (12) accounts for 24% of the net
book value, with the remaining properties located in Texas (1), Arizona (1) and
Colorado (2).
Property Table
Amounts shown for annual minimum rents are based on executed leases as of
August 31, 1997. No allowances have been made for contractually-based delays to
commencement of rental payments. Due to the nature of real estate investments,
actual rental income may differ from amounts shown in this schedule. The table
set forth below describes the Company's portfolio of real estate properties as
of August 31, 1997.
6
Real Estate Portfolio
Leases in Effect as of August 31, 1997
-----------------------------------------------------------------
Number Gross Net Book Annual % of
of Land Leasable Percent Value Minimum G.L.A. Lease
Tenants Acreage Area (sq ft) Leased 8/31/97 Rent Principal Tenants (sq ft) Expires
-------- ------- ---------- ------- -------- --------- -------------------------------------
(000's) ($000's) ($000's)
Westbury, NY 8 30.4 398.6 100% $ 65,547 $ 7,195 Costco 37% 2009
Kmart 28% 2013
Marshalls 11% 2009
The Sports Authority 11% 2013
Borders Books 8% 2019
Pentagon City, VA 12 16.8 336.8 100% 59,692 6,456 Costco 50% 2009
Marshalls 12% 2010
Best Buy 11% 2010
Linens N Things 10% 2010
Borders Books 10% 2010
Wayne, NJ 5 19.2 358.4 87% 35,694 4,151 Costco 41% 2009
(includes 46,000 sq. ft. of Lackland Storage 13% 2012
vacant storage space) The Sports Authority 12% 2012
Nobody Beats the Wiz 11% 2018
Philadelphia, PA 10 29.3 300.9 79% 22,557 2,325 The Home Depot 37% 2009
Baby Superstore 13% 2006
AMC Theatres 13% 2015
ACME Supersaver 11% 2000
Dallas, TX 5 14.6 177.5 100% 22,486 2,855 Homeplace 33% 2016
Wickes Furniture 24% 2011
OfficeMax 17% 2011
Comp USA 17% 2011
Just For Feet 9% 2011
Seekonk, MA 9 43.1 213.1 48% 18,034 1,233 The Sports Authority, Circuit City
San Diego, CA 4 28.8 429.1 100% 15,341 1,948 Costco, Price Self Storage,
Charlotte Russe
Signal Hill, CA 13 15.0 154.8 99% 14,688 2,128 The Home Depot, PetsMart
Fountain Valley, CA 15 12.6 119.2 91% 13,213 1,611 The Sports Authority, PetsMart,
Souplantation
Glen Burnie, MD 11 18.7 130.6 100% 8,927 1,522 The Sports Authority, PetsMart
Northridge, CA 3 4.4 30.0 100% 7,262 828 Barnes & Noble, Fresh Choice
Azusa, CA 4 17.4 131.3 35% 6,819 550 Costco Business Delivery
San Diego/Carmel Mtn., CA 7 5.9 35.0 100% 6,381 897 Claim Jumper, McMillin Realty,
Islands
Moorsetown, NJ (leased land) 3 18.3 172.6 100% 6,148 1,591 Caldor, The Sports Authority
Buffalo, NY 1 16.1 115.4 100% 4,909 733 Builders Square
Sacramento/Stockton, CA 2 5.7 49.8 100% 4,720 470 PetsMart, Office Depot
Inglewood, CA 1 8.0 119.9 100% 4,041 847 HomeBase
San Juan Capistrano, CA 5 5.5 56.4 100% 3,993 575 PetsMart, Staples
New Britain, CT 1 17.8 112.4 100% 3,486 671 Wal-Mart
Tucson, AZ 9 7.7 40.1 98% 3,299 394 PetsMart
Hampton, VA 2 3.5 45.6 100% 2,606 424 The Sports Authority, Commerce Bank
Redwood City, CA 2 6.4 49.4 100% 2,095 392 Orchard Supply
Smithtown, NY 1 5.9 55.6 100% 1,982 455 Levitz Furniture
Denver/Littleton, CO 1 3.1 26.4 100% 1,581 216 PetsMart
Denver/Aurora, CO 1 .8 7.3 100% 658 146 Red Robin
Chula Vista/Rancho del Rey, CA 1 1.0 0.0 0% 500 75 Burger King
San Diego/Southeast, CA 2 1.9 8.9 100% 355 138 Navy Federal C.U., Burger King
--- ----- ------ ---- -------- -------
Total 138 357.9 3,675.1 91% $337,014 $40,826
=== ===== ====== ==== ======== =======
Pending Real Estate Transactions
As of November 1, 1997 the Company is in various stages of lease
negotiations with two prospective tenants for leasable space which are expected
to generate an aggregate of approximately $1.2 million of additional annualized
minimum rental income once lease payments begin. Given the nature of these
negotiations, there can be no assurance that these potential leases will
ultimately be consummated. The development costs necessary to provide
appropriate facilities for these potential leases is estimated to be
approximately $2.3 million. The Company is currently evaluating various
properties for acquisition.
7
ITEM 3 - Legal Proceedings
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None.
ITEM 4 - Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997. The Company's Annual Meeting of Stockholders is
scheduled for 10:00 a.m. on December 16, 1997, at the San Diego Hilton Beach and
Tennis Resort in San Diego, California. Matters to be voted on will be included
in the Company's proxy statement to be filed with the Securities and Exchange
Commission and distributed to stockholders prior to the meeting.
ITEM 4A - Executive Officers of the Registrant
- --------------------------------------------------------------------------------
Set forth below are the names, positions, and ages of the executive
officers of Price Enterprises:
Name Position With Company Age
----------------- --------------------------------------------------- ----
Jack McGrory President and Chief Executive Officer 48
Joseph R. Satz Executive Vice President, General Counsel and Secretary 56
Kathleen M. Hillan Senior Vice President - Finance 39
Jack McGrory has been President and Chief Executive Officer of Price
Enterprises since September 1997. From March 1991 through August 1997, Mr.
McGrory served as City Manager of San Diego, responsible for a budget of $1.3
billion and 10,000 employees. One of his responsibilities was to manage a real
estate portfolio valued at $250 million. Mr. McGrory received a Juris Doctorate
from the University of San Diego, a Master's degree in Public Administration
from San Diego State University and a BA degree from Colgate University.
Joseph R. Satz has been Executive Vice President, General Counsel and
Secretary since October 1997. From August 1994 to September 1997, Mr. Satz held
the position of Vice President, Counsel. He joined The Price Company (TPC) in
1983 performing similar legal duties in real estate. Prior to joining TPC, Mr.
Satz was General Counsel for the Weingart Foundation. Mr. Satz received an
L.L.M. (Taxation) from New York University School of Law, a Juris Doctorate from
Brooklyn School of Law, and a BS degree in accounting from University of
Bridgeport.
Kathleen M. Hillan has been Senior Vice President - Finance since October
1997. From PEI's inception in August 1994 to September 1997, Ms. Hillan was Vice
President - Corporate Controller. Ms. Hillan joined TPC in 1990 and held
financial management positions until PEI's spin-off from Costco in August 1994.
Prior to 1990, Ms. Hillan worked with the accounting firm of Ernst & Young. Ms.
Hillan received a BS degree in accounting from San Diego State University.
8
PART II
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ITEM 5 - Market for Registrant Common Equity and Related Stockholder Matters
- --------------------------------------------------------------------------------
Stock Prices
The Company's Common Stock was first publicly traded on December 21, 1994
and quoted on the Nasdaq National Market under the symbol "PREN." The table set
forth below provides the high and low sales prices of the Common Stock for the
period indicated, as reported by the Nasdaq National Market:
High Low
----- ------
Calendar Year -- 1994
Fourth Quarter (beginning 12/21/94) 14 1/2 12 3/4
Calendar Year -- 1995
First Quarter 13 3/4 10 1/2
Second Quarter 14 11 1/2
Third Quarter 16 13 1/2
Fourth Quarter 16 14 1/4
Calendar Year -- 1996
First Quarter 16 1/8 15
Second Quarter 16 1/2 15 1/4
Third Quarter 16 1/2 14 3/4
Fourth Quarter 17 5/8 16
Calendar Year -- 1997
First Quarter 19 16 3/4
Second Quarter 19 5/8 17 3/8
Third Quarter 23 17 5/8
Fourth Quarter (through 10/31/97) 19 1/4 17 1/8
On October 31, 1997, the last reported sales price per share of the Common
Stock was $18.25, and the Company had approximately 700 stockholders of record.
Effective August 29, 1997 the Company completed its spin-off distribution
of one share of Common Stock of PriceSmart for every four shares of the
Company's Common Stock held of record as of August 15, 1997. PriceSmart began
separate trading on the Nasdaq National Market on September 2, 1997.
Dividends
During fiscal 1997, the Company's Board of Directors declared four
quarterly dividends of $0.30 per share for a total of $1.20 per share, or $28.0
million. No dividends were declared or paid during fiscal 1996. During fiscal
1995, a $1.7 million cash dividend of $0.075 per share was paid in August 1995
to offset certain adverse tax consequences that otherwise would have occurred.
PEI, in order to qualify as a REIT, is required to distribute dividends
(other than capital gain dividends) to its stockholders in an amount at least
equal to (A) the sum of (i) 95% of PEI's "REIT taxable income" (computed without
regard to the dividends paid deduction and PEI's net capital gain) and (ii) 95%
of the net income (after tax), if any, from foreclosure property, minus (B) the
sum of certain items of noncash income. In addition, if PEI disposes of any
asset during the 10-year period beginning on the first day of the first taxable
year for which PEI qualified as a REIT, PEI will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at least
95% of PEI's adjusted basis in such asset as of the beginning of such period
(after tax), if any, recognized on the disposition of such asset. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before PEI timely files its tax return for
such year and if paid on or before the first regular dividend payment after such
declaration. To the extent that PEI does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its "REIT taxable
income," as adjusted, it will be subject to tax thereon at regular ordinary and
capital gain corporate tax rates. Stockholders may be required to include
amounts designated by PEI as distributed capital gains. In such case,
stockholders will be treated as having paid the capital gains tax imposed on the
real estate investment designated amounts and will be allowed a corresponding
stock basis adjustment and a credit or refund for the tax deemed paid.
Furthermore, if PEI should fail to distribute, during each calendar year, at
least the sum of (i) 85% of its real estate investment trust ordinary income for
such year,
9
(ii) 95% of its real estate investment trust capital gain income for such year,
and (iii) any undistributed taxable income from prior periods, PEI would be
subject to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. PEI intends to make timely distributions
sufficient to satisfy these annual distribution requirements.
It is possible that PEI, from time to time, may not have sufficient cash or
other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of such income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of PEI. In the event that such timing
differences occur, in order to meet these distribution requirements, PEI may
find it necessary to arrange for short-term, or possibly long-term, borrowings
or to pay dividends in the form of taxable stock dividends.
Under certain circumstances, PEI may be able to rectify a failure to meet
the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in PEI's deduction for
dividends paid for the earlier year. Thus, PEI may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, PEI will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
ITEM 6 - Selected Financial Data
- --------------------------------------------------------------------------------
The following selected data should be read in conjunction with the
Company's consolidated financial statements elsewhere in this Form 10-K and
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FISCAL YEAR
($000's, except per share data)
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Selected Income Statement Data
Rental income $56,838 $56,221 $51,897 $30,316 $25,793
Operating Expenses 28,792 30,118 28,575 17,623 13,310
General and administrative 3,624 3,274 1,687 1,600 1,500
Operating income (loss) 23,533 6,693 16,454 (74,711) 28,874
Net income (loss) from continuing
operations 19,085 8,340 13,297 (40,596) 20,987
Discontinued operations (4,860) (8,250) (12,751) (883) (436)
Net income (loss) per share from
continuing operations .82 .36 .53 (1.50) .78
Cash dividends per share 1.20 -- .08 -- --
As of August 31,
($000's, except per share data)
--------------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
Selected Balance Sheet Data
Real estate assets, net $337,139 $337,098 $330,443 $405,966 $356,720
Total assets 403,757 540,325 555,994 591,511 470,950
Long-term debt -- -- 15,425 -- --
Stockholders' equity and investment
by Costco 396,476 532,899 532,085 578,788 454,357
Book value per share 16.78 22.88 22.90 21.44 16.83
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
The following discussion and analysis compares the results of operations
for each of the three fiscal years ended August 31, 1997, and it should be read
in conjunction with the consolidated financial statements and the accompanying
notes included elsewhere in this report. The analysis below reflects the
distribution of PriceSmart and the presentation of the merchandising segment as
discontinued operations for all years presented, see Note 1. In those instances
where changes are attributed to more than one factor, the factors are presented
in descending order of importance. All dollar amounts are in thousands.
Real Estate Rental Operations
Rental Percent Operating Percent
Income Change Income Change Change
-------- -------- -------- -------- --------
Fiscal 1997 $56,838 1% $28,046 $1,943 7%
Fiscal 1996 56,221 8% 26,103 2,781 12%
Fiscal 1995 51,897 -- 23,322 -- --
10
For purposes of this discussion, operating income is defined as rental
revenue, including common area expense reimbursements, less the related real
estate expenses, including all unreimbursable expenses associated with
unimproved land and certain developed properties with vacant space. In addition,
operating income reflects depreciation expense, but it does not reflect property
write-downs for asset impairment, gain (loss) on sale of real estate or
corporate general and administrative expenses.
During fiscal 1997, the increase in revenue was due primarily to increased
lease-up of the Dallas (TX) property which began leasing activity during fourth
quarter fiscal 1996. Other factors include additional lease-up at properties
located in Bakersfield (CA) and Philadelphia (PA). These increases were almost
entirely offset by loss of revenue from the Seekonk (MA) property as a result of
the Bradlees bankruptcy during the past year as well as the write-off of related
receivables associated with Bradlees. There also was a loss of revenue due to
the sale of the Richmond (CA) location in the latter part of fiscal 1996.
During fiscal 1996, the increase in revenue was due primarily to increased
lease-up of the Pentagon City (VA) property, which was not fully leased until
mid-year fiscal 1995. Other factors include additional lease-up of the Bensalem
(PA) property as well as the Dallas (TX) property which was under development
during fiscal 1995 and began leasing activity during fourth quarter fiscal 1996.
These increases were somewhat offset by a decline in revenues from the Phoenix
(AZ) property, which was sold in March of 1995.
Adjusted Funds From Operations
Less Add Adjusted
Operating Straight-line Depreciation Funds From Percent
Income Rentals Expense Operations Change
-------- -------- -------- -------- --------
Fiscal 1997 $28,046 $(2,499) $ 9,860 $35,407 7%
Fiscal 1996 26,103 (3,150) 10,071 33,024 9%
Fiscal 1995 23,322 (3,332) 10,245 30,235 --
Real estate industry analysts generally consider funds from operations
(FFO) to be a supplemental measure of performance for real estate-oriented
companies. As defined by the National Association for Real Estate Investment
Trusts (NAREIT), FFO is the pretax income determined in accordance with
generally accepted accounting principles (GAAP), excluding gains (losses) from
sales of property, after adding back depreciation and amortization expense. The
Company historically has calculated its adjusted FFO on a segment basis
excluding corporate overhead as well as interest and other income. In addition,
due to the significance of straight-line rent accruals, which represent noncash
revenues associated with fixed future minimum rent increases, the Company has
adjusted the NAREIT definition to eliminate straight-line rents when computing
its adjusted FFO.
Adjusted FFO does not represent cash flows from operations as defined by
GAAP and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity.
For fiscal 1997 and 1996, the growth in adjusted FFO reflects many of the
factors mentioned in the revenue and operating income discussion above.
Gain (Loss) on Sale of Real Estate
Percent
Amount Change Change
-------- -------- --------
Fiscal 1997 $1,111 $ 247 29%
Fiscal 1996 864 1,045 577%
Fiscal 1995 (181) -- --
During fiscal 1997, the gain on sale of properties related to the sale of
properties in Schaumburg (IL), Gaithersburg (MD), Colton (CA), and Concord (CA).
These gains were somewhat offset by losses on the sale of properties in Houston
(TX) and Washington Metro (MD).
During fiscal 1996, the gain on sale of properties related primarily to the
sale of properties in Denver/Littleton (CO), Sacramento/No. Highlands (CA), San
Diego (Convoy Ct.) (CA), and San Jose (CA). These and other gains were somewhat
offset by a loss on the sale of property in West Palm Beach (FL).
11
General and Administrative Expenses
Percent
Amount Change Change
-------- -------- --------
Fiscal 1997 $3,624 $ 350 11%
Fiscal 1996 3,274 1,587 94%
Fiscal 1995 1,687 -- --
During fiscal 1997, the increase in expenses was due primarily to expense
of $1.1 million related to the distribution of PriceSmart, consisting of
insurance, legal and accounting fees. Additional increases are attributed to
severance expense for executive officers that left the Company during the year
for which no comparable expense was recorded in the prior year. The increase was
partially offset by a decrease in expense, compared to the prior year, because
of the $1.25 million expensed in fiscal 1996 related to the settlement of the
Costco stockholder litigation.
During fiscal 1996, the increase in expenses was due primarily to an
accrual of $1.25 million pursuant to a tentative agreement to settle the Costco
stockholder litigation. Increases were also experienced in the areas of
insurance and legal expense.
Provision for Asset Impairments
Percent
Amount Change Change
-------- -------- --------
Fiscal 1997 $ 2,000 $(15,000) -88%
Fiscal 1996 17,000 12,000 240%
Fiscal 1995 5,000 -- --
In fiscal 1997, 1996 and 1995, noncash charges of $2.0 million, $17.0
million and $5.0 million, respectively, were taken to write-down the carrying
value of real estate properties which were being held for sale and which were
expected to generate net sales proceeds below their current book values. The
fiscal 1997 reserve relates primarily to a property in Worcester (MA) the tenant
of which, Bradlees, is currently in bankruptcy. The Bradlees bankruptcy is
expected to reduce the proceeds that will be attained upon sale of the property.
Such property was included in the properties held for sale, net of provision for
asset impairments, that were transferred to PriceSmart in the Distribution.
Interest Income (net)
Percent
Amount Change Change
-------- -------- --------
Fiscal 1997 $8,033 $ 591 8%
Fiscal 1996 7,442 1,358 22%
Fiscal 1995 6,084 -- --
During fiscal 1997, the increase in net interest income was due primarily
to higher interest income on invested cash balances as well as a reduction to
interest expense related to the Costco note payable that was repaid during the
fourth quarter of fiscal 1996. This net improvement was somewhat offset by
reductions in interest income from a note receivable from Atlas Hotels (due to
its repayment during the third quarter) as well as the City and Other Notes (due
to principal reductions of $8.2 million) and a reduction in capitalized interest
due to less construction activity in the current fiscal year. The City and Other
Notes were transferred to PriceSmart in the Distribution.
During fiscal 1996, the increase in net interest income was due primarily
to increased income from various notes receivable, increased earnings on cash
balances as well as reduced interest expense on borrowings, including the note
payable to Costco, which was repaid during the fourth quarter of fiscal 1996.
Gain on Sale of Investment
The gain on sale of investment of $782,000 recorded during fiscal 1997
related to the sale of the Company's preferred stock investment in Sneaker
Stadium, a privately held specialty retailer, as well as a gain on the sale of
the Company's options to purchase stock in Car Club a privately held automobile
broker.
Provision for Income Taxes
Percent Effective
Amount Change Change Tax Rate
-------- -------- -------- --------
Fiscal 1997 $13,263 $ 7,468 129% 41%
Fiscal 1996 5,795 (3,446) -37% 41%
Fiscal 1995 9,241 -- -- 41%
Provision for income taxes has historically been recorded at a rate of 41%
for the non-merchandising segment.
12
Discontinued Operations
Percent
Amount Change Change
-------- -------- --------
Fiscal 1997 $ (4,860) $3,390 41%
Fiscal 1996 (8,250) 4,501 35%
Fiscal 1995 (12,751) -- --
The decrease in the net loss from operations of the discontinued
merchandising segment during fiscal 1997 was primarily a result of decreased
expenses upon the expiration of certain contractual obligations to pay Costco
$4.5 million per year for marketing-related activities, as well as increases in
sales and gross margin due to the opening of the Panama City location in October
1996 and increases in sales of U.S.-sourced products to licensees. The
discontinued merchandising segment was transferred to PriceSmart in the
Distribution.
The decrease in the net loss from operations of the discontinued
merchandising segment during fiscal 1996 was primarily a result of the
electronic shopping program discontinuing display samples and in-store staffing
at Costco locations, and a reduction of central office staffing. In addition,
other revenues increased primarily as a result of royalties from the newly
established licensee operations as well as certain fees for license
arrangements.
Liquidity and Capital Resources
Following the Distribution of PriceSmart at year-end, the Company retained
$40 million in cash. While the Company is well positioned to finance its
business activities through a variety of sources, it expects to satisfy
short-term liquidity requirements through net cash provided by operations. To
the extent that investment opportunities exceed available cash flow from
operations, the Company believes that its unleveraged balance sheet will enable
it to raise additional capital through bank credit facilities and/or securitized
debt offerings. The Company also may choose to seek additional funds through
future public offerings of debt or equity securities.
Consistent with historical trends, operating income from real estate
activities increases as properties are developed and declines as properties are
sold. The Company's liquidity is primarily affected by the timing and magnitude
of rental property acquisition, development and disposition. In addition, the
Company's liquidity may be affected by the anticipated payment of quarterly cash
dividends to stockholders in the future. See "Item Five--Market for Registrant
Common Equity and Related Stockholder Matters."
Through calendar 1998, the Company anticipates investing approximately $3
million in commercial real estate development on owned property (a portion of
which represents commitments under executed construction contracts) and
approximately $125 - $175 million for real estate acquisitions. Actual capital
expenditures may vary from estimated amounts depending on business conditions
and other risks and uncertainties to which the Company and its business are
subject.
On November 17, 1997, the Company announced that Jack McGrory, the
Company's President and Chief Executive Officer, delivered a letter to the
Chairman of Price REIT, Inc. ("Price REIT"), proposing a combination of the two
companies. In the letter and the attached term sheet, the Company proposes to
exchange 11,658,503 shares of the Company's 7 1/2% Series A Cumulative
Convertible Preferred Stock (the "Preferred Stock"), with a liquidation
preference of $42.00, for all outstanding shares of Price REIT Common Stock. The
Preferred Stock would carry a quarterly dividend, would be convertible at the
option of the holder at a conversion price of $21.00 per share and would be
redeemable at the option of the Company five years after issuance. The Preferred
Stock would vote with the Company's Common Stock on an as-converted basis. The
Company's proposal is subject to completion of due diligence, Board of Directors
approval, the execution of a definitive merger agreement, the receipt of a
fairness opinion and stockholder approval, as well as other customary
conditions. On November 18, 1997, Price REIT announced that its Board of
Directors would evaluate the proposal.
Inflation
Because a substantial number of the Company's leases contain provisions for
rent increases based on changes in various consumer price indices, based on
fixed rate increases, or based on percentage rent if tenant sales exceed certain
base amounts, inflation is not expected to have a significant material impact on
future net income or cash flow from developed and operating properties. In
addition, substantially all leases are "triple net," whereby specific operating
expenses and property taxes are passed through to the tenant. For undeveloped or
under-developed properties, inflation could increase the Company's cost of
carrying and developing the properties; however, inflation would likely increase
the future sales value of the properties.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
- --------------------------------------------------------------------------------
Not applicable.
13
ITEM 8 - Financial Statements and Supplementary Data
- --------------------------------------------------------------------------------
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
August 31,
-----------------------
1997 1996
--------- ----------
(restated
- Note 1)
Current Assets
Cash and cash equivalents $ 40,000 $ 15,458
Accounts receivable, net 1,374 3,653
Income tax receivable 8,076 --
Prepaid expenses and other current assets 259 5,912
Net current assets of discontinued segment and
assets transferred to PriceSmart -- 1,107
--------- ---------
Total current assets 49,709 26,130
Real Estate Assets
Land and land improvements 184,702 179,639
Building and improvements 195,208 189,125
Fixtures and equipment 203 733
Construction in progress 235 328
--------- ---------
380,348 369,825
Less accumulated depreciation (43,209) (32,727)
--------- ---------
337,139 337,098
Other Assets
Property held for sale, net -- 28,337
Atlas note receivable -- 41,711
Deferred income taxes -- 5,389
Deferred rents and leasing costs, net 16,909 14,974
Net assets of discontinued segment and assets
transferred to PriceSmart -- 86,686
--------- ---------
16,909 177,097
--------- ---------
Total Assets $ 403,757 $ 540,325
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accrued expenses $ 269 $ 4,187
Other current liabilities 352 3,239
Deferred income taxes 6,660 --
--------- ---------
Total current liabilities 7,281 7,426
Commitments
Stockholders' Equity
Common stock, $.0001 par value, 60,000,000 shares
authorized, 23,632,937 and 23,290,057 shares
issued and outstanding 2 2
Additional paid-in capital 411,393 534,004
Accumulated deficit (14,919) (1,107)
--------- ---------
Total stockholders' equity 396,476 532,899
--------- ---------
Total Liabilities and Stockholders' Equity $ 403,757 $ 540,325
========= =========
See accompanying notes.
14
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended August 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Revenues
Rental income $ 56,838 $ 56,221 $ 51,897
Gain (loss) on sale of real estate, net 1,111 864 (181)
-------- -------- --------
Total revenues 57,949 57,085 51,716
Expenses
Operating and maintenance 11,050 11,667 9,794
Property taxes 7,882 8,380 8,536
Depreciation and amortization 9,860 10,071 10,245
General and administrative 3,624 3,274 1,687
Provision for asset impairments 2,000 17,000 5,000
-------- -------- --------
Total expenses 34,416 50,392 35,262
-------- -------- --------
Operating income 23,533 6,693 16,454
Interest and Other
Interest income, net 8,033 7,442 6,084
Gain on sale of investment 782 -- --
-------- -------- --------
Total interest and other 8,815 7,442 6,084
-------- -------- --------
Income before provision for income taxes 32,348 14,135 22,538
Provision for income taxes 13,263 5,795 9,241
-------- -------- --------
Net income from continuing operations 19,085 8,340 13,297
Discontinued operations (Note 2):
Net loss from operations of discontinued
merchandising segment (less applicable
benefit for income taxes of $3,379, $4,531
and $4,052 respectively) (4,860) (8,250) (12,751)
-------- -------- --------
Net Income $ 14,225 $ 90 $ 546
======== ======== ========
Net Income Per Share from Continuing Operations $ .82 $ .36 $ .53
======== ======== ========
Net Income Per Share $ .61 $ .00 $ .02
======== ======== ========
See accompanying notes.
15
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accumulated
Additional Foreign
Common Stock Paid-In Currency Accumulated
Shares Amount Capital Translation Deficit Total
--------- --------- --------- ----------- ----------- ---------
Investment by Costco at
August 31, 1994 27,000 $ 3 $ 580,468 $ (1,683) $ -- $ 578,788
Net income -- -- -- -- 546 546
Adjustment to investment by
Costco -- -- (1,389) -- -- (1,389)
Stock options exercised including
income tax benefits 10 -- 126 -- -- 126
Shares repurchased (3,776) (1) (45,925) -- -- (45,926)
Foreign currency translation
adjustment -- -- -- 1,683 -- 1,683
Cash dividend, $.075 per share -- -- -- -- (1,743) (1,743)
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1995 23,234 2 533,280 -- (1,197) 532,085
Net income -- -- -- -- 90 90
Stock options exercised including
income tax benefits 56 -- 724 -- -- 724
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1996 23,290 2 534,004 -- (1,107) 532,899
Net income -- -- -- -- 14,225 14,225
Stock options exercised including
income tax benefits 343 -- 5,429 -- -- 5,429
Cash dividends, $1.20 per share -- -- -- -- (28,037) (28,037)
Special dividend - Distribution
of PriceSmart -- -- (128,040) -- -- (128,040)
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1997 23,633 $ 2 $ 411,393 $ -- $ (14,919) $ 396,476
========= ========= ========= ========= ========= =========
See accompanying notes.
16
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended August 31,
----------------------------------------
1997 1996 1995
-------- -------- --------
(restated - Note 1)
Operating Activities
Net income $ 14,225 $ 90 $ 546
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 9,347 9,493 10,563
Loss (gain) on sale of assets (1,111) (864) 1,430
Provision for asset impairments 2,000 17,000 5,000
Deferred income taxes 15,894 3,676 (2,466)
Change in assets and liabilities:
Increase in accounts receivable and other assets (5,026) (6,623) (5,375)
(Decrease)/increase in accounts payable and other liabilities (302) (698) 3,396
Increase in deferred rents and leasing costs (2,066) (3,936) (4,068)
(Decrease)/increase in unearned rent and security deposits (821) 642 1,176
Increase/(decrease) in net assets of discontinued segment 4,495 3,832 (4,463)
-------- -------- --------
Net cash flows provided by operating activities 36,635 22,612 5,739
Investing Activities
Additions to real estate assets (2,720) (17,105) (18,861)
Proceeds from sale of real estate assets 29,279 26,059 12,836
Additions to notes receivable (200) (1,149) (2,949)
Payments of notes receivable 50,526 3,105 4,947
Net investing activities of discontinued segment (7,987) (2,362) (5,793)
-------- -------- --------
Net cash flows provided by (used in) investing activities 68,898 8,548 (9,820)
Financing Activities
Cash transferred to PriceSmart (58,383) -- --
Costco line of credit advances -- -- 6,439
Repayments of Costco note payable and line of credit -- (16,426) (13,236)
Proceeds from exercise of stock options including tax benefit 5,429 724 126
Dividends paid (28,037) -- (1,743)
Decrease in equity resulting from cash not transferred in
Costco spin-off -- -- (1,644)
Net financing activities of discontinued segment -- -- 12,495
-------- -------- --------
Net cash flows provided by (used in) financing activities (80,991) (15,702) 2,437
-------- -------- --------
Net increase (decrease) in cash 24,542 15,458 (1,644)
Cash and Cash Equivalents at Beginning of Year 15,458 0 1,644
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 40,000 $ 15,458 $ 0
======== ======== ========
Supplemental Disclosure:
Cash paid for interest $ 150 $ 2,911 $ 8,140
Net cash paid (refunds received) for income taxes (717) 829 1,261
Treasury stock acquired for note payable -- -- 45,925
See accompanying notes.
17
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1 - Organization and Significant Accounting Policies
- --------------------------------------------------------------------------------
Formation of the Company
Price Enterprises, Inc. ("PEI" or "the Company"), a Delaware corporation,
was formed in July 1994. The Company began operations effective August 29, 1994
as a wholly owned subsidiary of Costco Companies, Inc. ("Costco") with specific
assets received from Costco pursuant to the Amended and Restated Agreement of
Transfer and Plan of Exchange ("Exchange Agreement"). Transferred to PEI were
substantially all of the real estate assets which historically formed the
non-club real estate business of Costco; four existing Costco warehouses which
are adjacent to certain transferred properties; certain domestic and
international retail operations; notes receivable from various municipalities
and agencies ("City Notes") and certain other notes receivable.
The Board of Directors of PEI approved a plan for the distribution (the
"Distribution") to holders of PEI's Common Stock, of 100% of the outstanding
shares of Common Stock of PriceSmart, Inc. ("PriceSmart"). Prior to the
Distribution, the following assets were transferred to PriceSmart: interest in
essentially all businesses which historically formed the merchandising business
segment of PEI, primarily the international merchandising activities, the Costco
auto referral program and the Costco travel program; certain real estate
properties held for sale which, as of August 29, 1997, had not yet been sold;
the City Notes and certain secured notes receivable from buyers of properties
formerly owned by PEI; cash and cash equivalents held by PEI as of August 29,
1997, less $40 million kept by PEI for use in its real estate business; and all
other assets and liabilities not specifically associated with PEI's portfolio of
27 investment properties, except for current corporate income tax assets and
liabilities. On August 29, 1997, PEI distributed to its stockholders one share
of PriceSmart Common Stock for every four shares of PEI Common Stock held by
PEI's stockholders of record on August 15, 1997. The Distribution was recorded
as a special noncash dividend by PEI based on historical cost for all assets and
liabilities transferred to PriceSmart, and the operations of the merchandising
segment have been reported as discontinued operations, see Note 2.
As a result of the Distribution, PEI retained the core real estate
portfolio of 27 investment properties and all related assets and liabilities as
well as income tax assets and liabilities, $40 million in cash, and assets and
liabilities related to the self storage business, "Price Self Storage." PEI
intends to qualify for Federal tax treatment as a real estate investment trust
("REIT").
The principal business of the Company is to acquire, develop, operate,
manage and lease real property. The Company's current portfolio is substantially
comprised of commercial rental properties which are leased to major retail
tenants.
Consolidation
The consolidated financial statements include the accounts of the Company
and all majority owned subsidiaries; whereas, the Company's investment in less
than majority owned businesses are accounted for using the equity method. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year
With respect to the real estate business, each fiscal quarter includes
three calendar months of operating results; however, the discontinued
merchandising segment's fiscal quarters are as follows: first quarter -- 16
weeks, second quarter -- 12 weeks, third quarter -- 12 weeks, fourth quarter --
12 weeks.
Real Estate Assets and Depreciation
Real estate assets are recorded at Costco's and PEI's historical costs as
adjusted for recognition of impairment losses. Historical costs for real estate
and related assets were reduced by $2.0 million, $17.0 million and $5.0 million
during fiscal 1997, 1996 and 1995, respectively. Ordinary repairs and
maintenance are expensed as incurred; major replacements and betterments are
capitalized and depreciated over their estimated useful lives. Depreciation of
real estate assets is computed on a straight-line basis over their estimated
useful lives, as follows:
Land improvements 25 years
Building and improvements 10-25 years
Leasehold improvements Term of lease
Tenant improvements Term of lease or 10 years
Fixtures and equipment 5 years
Certain MIS assets 3 years
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Real Estate Rental Revenue Recognition
Rental revenues include: (1) minimum annual rentals, adjusted for the
straight-line method for recognition of fixed future increases; (2) additional
rentals, based on common area maintenance expenses and certain other expenses,
which are accrued in the period in which the related expense is incurred; and
(3) percentage rents which are accrued on the basis of reported tenant sales.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of less
than three months when purchased to be cash and cash equivalents.
Deferred Leasing Costs and Capitalized Interest
Costs incurred in connection with leasing space to tenants are deferred and
amortized using the straight-line method over the lives of the related leases.
Interest incurred during the construction period is capitalized and depreciated
over the lives of the constructed assets. Total interest incurred was $187,000,
$881,000 and $1,261,000 for fiscal 1997, 1996 and 1995, respectively; and
$7,000, $361,000 and $556,000 of such interest, respectively, was capitalized
and is included in the property accounts.
Asset Impairments
The Company regularly evaluates the estimated fair value of its assets and
records appropriate provisions for asset impairments. In fiscal 1994, the
Company changed its accounting estimates for impairment losses to adopt a
risk-adjusted discounted cash flow approach to estimating asset fair values. The
various notes receivable are evaluated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan."
Beginning with fiscal 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. No such indicators of impairment were present in
fiscal 1997. SFAS No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of, and requires that such assets be carried at
the lower of cost or estimated fair value less costs to sell.
In fiscal 1997, 1996 and 1995, noncash impairment charges of $2.0 million,
$17.0 million and $5.0 million, respectively, were taken to write-down the
carrying value of real estate properties which were being held for sale or
redevelopment, and which were expected to generate net sales proceeds below
their book values.
In conjunction with the spin-off of PriceSmart at August 29, 1997,
properties held for sale and their related provisions for asset impairment were
transferred to PriceSmart.
Foreign Currency Translation
The accumulated foreign currency translation was related to the Company's
investment in Price Club Mexico and was determined by application of the current
rate method. Resulting translation adjustments were made directly to a separate
component of stockholders' equity.
Authorized Stock
The Company's authorized stock consists of 60 million shares of $0.0001 par
value common stock and 10 million shares of $0.0001 par value preferred stock.
No preferred stock has been issued. At August 31, 1995, 1,268,264 shares of
common stock were issued and held as treasury stock. During fiscal 1996 these
treasury shares were retired.
Income Taxes
Income taxes have been provided for in accordance with SFAS No. 109,
"Accounting for Income Taxes." That standard requires companies to account for
deferred taxes using the asset and liability method. Accordingly, deferred
income taxes are provided to reflect temporary differences between financial and
tax reporting, including: asset write-downs of real estate and related assets,
deferred gains on sales of real estate, accelerated tax depreciation methods,
and accruals for straight-line rents.
Net Income Per Share
Net income per share and net income from continuing operations per share is
based on the weighted average number of shares outstanding of 23,353,666,
23,262,374 and 24,864,000 in fiscal 1997, 1996 and 1995, respectively.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Reclassifications
Certain reclassifications have been reflected in the financial statements
in order to conform with the fiscal 1997 presentation. In addition, in
accordance with the Exchange Agreement, Costco retained net current assets of
PEI and its subsidiaries as of the beginning of fiscal 1995. The value of these
retained assets, net of an adjustment to the carryover deferred income tax
amount, is reflected as an adjustment of $1.4 million to additional paid-in
capital as of the beginning of fiscal 1995.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
Interpretations, in accounting for its employee and non-employee director stock
options because the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. As a result, deferred compensation is recorded only in the event
that the fair market value of the stock on the date of the option grant exceeds
the exercise price of the options. No deferred compensation expense has been
recognized.
Note 2 - Discontinued Operations
- --------------------------------------------------------------------------------
As discussed in Note 1, on August 29, 1997, Price Enterprises completed a
distribution of its merchandising segment and certain other assets. Accordingly,
results of operations and cash flows of the Company's merchandising segment have
been reported as a discontinued segment for all periods presented in the
Consolidated Financial Statements. The results of operations and cash flows of
other assets and liabilities transferred to PriceSmart that were not part of the
merchandising segment were included in the Company's continuing operations. The
Consolidated Balance Sheet, as of August 31, 1996, also reflects the assets and
liabilities of the Company's merchandising segment as a discontinued segment and
is included with net assets transferred to PriceSmart in the Distribution. As a
result of the Distribution, the Company recorded additional reserves during the
fourth quarter of $1.0 million consisting of additional insurance, legal and
accounting fees related to the transaction.
Net current assets of the discontinued merchanding segment and other assets
transferred to PriceSmart were as follows at August 31, 1996 (amounts in
thousands):
Current assets:
Accounts receivable $ 3,366
Inventories 2,011
Other current assets 1,600
------
6,977
Current liabilities:
Accounts payable and accrued expenses (4,893)
Other current liabilities (977)
------
(5,870)
------
Net current assets $ 1,107
======
Net assets of the discontinued merchandising segment and other assets
transferred to PriceSmart were as follows at August 31, 1996 (amounts in
thousands):
Discontinued segment:
Property, plant and equipment, net $ 3,965
Minority interest (1,745)
Other assets transferred:
Property held for sale, net 27,614
City notes receivable 29,091
Other notes receivable 6,617
Deferred rents and leasing costs, net 893
Deferred income taxes 20,251
-------
$86,686
=======
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Summarized results of operations of the discontinued merchandising segment
were as follows (amounts in thousands):
Year Ended August 31,
----------------------------------
1997 1996 1995
-------- -------- --------
Sales $ 59,042 $ 36,211 $ 66,573
Other revenues 5,487 2,709 540
Cost of sales (55,948) (34,644) (62,756)
Operating expenses (16,761) (21,644) (24,359)
Minority interest (59) 4,587 8,187
Loss related to Price Club Mexico -- -- (4,988)
Income tax benefit 3,379 4,531 4,052
-------- -------- --------
$ (4,860) $ (8,250) $(12,751)
======== ======== ========
Note 3 - Real Estate Properties and Property Sales
- --------------------------------------------------------------------------------
The Company's real estate properties are generally leased under
noncancelable leases with remaining terms ranging from one to 23 years. Rental
income includes the following (in thousands):
1997 1996 1995
------- ------- -------
Minimum rent $42,681 $42,529 $39,987
Straight-line accrual of future rent 2,499 3,150 3,332
Additional rent-- CAM and taxes 11,467 10,371 8,499
Percentage rent 191 171 79
------- ------- -------
Real estate rental income $56,838 $56,221 $51,897
======= ======= =======
As of August 31, 1997, future minimum rental income due under the terms of
noncancelable operating leases is as follows (in thousands):
1998 $ 40,693
1999 41,443
2000 41,456
2001 41,613
2002 41,587
Thereafter 366,240
During each of the last three years, the Company sold certain significant
real estate properties to unrelated parties and recognized related gains or
losses on dispositions, as shown in the following table (in thousands). In
addition, $644,000 of net gains were recognized during fiscal 1997 on sales of
insignificant real estate properties. In conjunction with the Distribution, all
remaining properties held for sale as of fiscal 1997 were transferred to
PriceSmart.
Date Sales Price Pretax Gain (Loss)
-------- ---------- ----------------
Fiscal 1997
Warehouse Building 12/6/96 $ 3,187 $ 17
Santee, CA
Undeveloped Land 12/10/96 6,865 802
Schaumburg, IL
Retail Building 5/29/97 6,000 (352)
Houston, TX
Fiscal 1996
Warehouse Building 12/22/95 3,483 65
Palm Harbor, FL
Office Building 2/9/96 3,500 143
San Diego (Convoy Ct.), CA
Warehouse Building 4/12/96 11,075 80
Richmond, CA
Fiscal 1995
Fry's Distribution Center 3/8/95 9,598 (181)
Phoenix, AZ
Undeveloped Land 3/27/95 4,440 (6)
Fairfax, VA
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
Note 4 - Related Party Transactions
- --------------------------------------------------------------------------------
As a result of the Distribution to stockholders of PriceSmart and for the
purpose of governing certain of the ongoing relationships between PriceSmart and
the Company after the Distribution, and to provide mechanisms for an orderly
transition, PriceSmart and the Company have entered into various agreements as
described below.
The Company and PriceSmart have entered into an Asset Management and
Disposition Agreement dated as of August 26, 1997 calling for the Company to
provide asset management services with respect to certain properties distributed
to PriceSmart. As consideration for such services, PriceSmart will pay the
Company management fees, leasing fees, disposition fees and developer's fees.
Such agreement has a two-year term; provided that either the Company or
PriceSmart may terminate the agreement upon 60 days written notice.
PriceSmart and the Company have entered into a Transitional Services
Agreement dated as of August 26, 1997 pursuant to which the Company and
PriceSmart will provide certain services to one another. Fees for such
transitional services (which shall not include real estate management services)
will reflect the costs of providing such services, which may include cash
management services, certain accounting services, litigation management or any
other similar servies that PriceSmart or the Company may require. The
Transitional Services Agreement will terminate on December 31, 1997 unless
extended in writing by the parties.
The Company and PriceSmart have entered into a Tax Sharing Agreement dated
as of August 26, 1997 defining the parties' rights and obligations with respect
to tax returns and tax liabilities for taxable years and other taxable periods
ending on or before August 29, 1997. In general, the Company will be responsible
for (i) filing all Federal and state income tax returns of the Company,
PriceSmart and any of their subsidiaries for all taxable years ending on or
before or including August 29, 1997 and (ii) paying the taxes relating to such
returns to the extent attributable to pre-August 29, 1997 periods.
Note 5 - Profit Sharing and 401(k) Plan
- --------------------------------------------------------------------------------
Substantially all of the employees of the Company are participants in a
defined contribution profit sharing and 401(k) plan. Profit sharing
contributions, if any, are based on a discretionary amount determined by the
Board of Directors and are allocated to each participant based on the relative
compensation of the participant, subject to certain limitations, to the
compensation of all participants. The Company makes a matching 401(k)
contribution equal to 50% of the participant's contribution up to an annual
maximum matching contribution of $250.
Profit sharing contributions of approximately $490,000, $187,000 and
$580,000 were made during fiscal 1997, 1996 and 1995, respectively. Employer
contributions to the 401(k) plan were approximately $29,000, $37,000 and $36,000
during fiscal 1997, 1996 and 1995, respectively.
During fiscal 1996, the plan year was converted to a calendar year from a
fiscal year; therefore, the contribution to the profit sharing plan in fiscal
1996 was for the period of September 1995 to December 1995.
Note 6 -- Stock Option Plans
- --------------------------------------------------------------------------------
In 1995, the Company established an Employee Stock Option and Stock Grant
Plan (the "Employee Plan") and a Director Stock Option Plan (the "Director
Plan") under which 1,500,000 shares and 150,000 shares, respectively, have been
reserved for issuance. Options have been granted to certain employees and
non-employee directors at prices equal to the market price on the date of grant.
Options generally vest over a five year period and expire after six years. The
following table summarizes the stock option transactions for fiscal years 1995,
1996 and 1997 for both plans:
Weighted Average
Stock Exercise Price
Options Per Share
---------- --------------
Outstanding at August 31, 1994 0 --
Granted 1,178,900 $11.51
Exercised (10,047) $11.25
Canceled (116,745) $11.28
---------
Outstanding at August 31, 1995 1,052,108 $11.53
Granted 193,500 $15.65
Exercised (55,982) $11.27
Canceled (145,861) $11.25
---------
Outstanding at August 31, 1996 1,043,765 $12.35
Granted 11,900 $21.67
Exercised (342,880) $12.12
Canceled (446,776) $12.78
---------
Outstanding at August 31, 1997 266,009 $12.34
=========
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
As of August 31, 1997, options to purchase 99,449 shares and 6,000 shares
were exercisable under the Employee Plan and Director Plan, respectively. As of
August 31, 1997, there were 1,123,223 and 117,868 shares of Common Stock
reserved for future issuance in connection with the Employee Plan and Director
Plan, respectively.
Following is a summary of the options outstanding as of August 31, 1997:
Weighted
Weighted Average
Weighted Average Exercise
Average Remaining Price of
Range of Options Exercise Life in Options Options
Exercise Prices Outstanding Price Years Exercisable Exercisable
-------------- ------------- ------------- ------------- -------------- -------------
$11.20 - $12.438 204,560 $11.36 1.66 98,000 $11.32
$14.00 - $15.625 51,387 $14.35 2.66 7,387 $14.70
$19.25 - $22.125 10,062 $22.11 5.96 62 $19.25
------- -------
266,009 $12.34 2.01 105,449 $11.57
======= =======
Subsequent to year-end, and as a direct result of the Distribution of
PriceSmart, all outstanding options held by remaining PEI employees and
directors were adjusted, both in quantity and exercise price, such that each
optionee remained in the same economic position as before the Distribution. This
adjustment resulted in remaining PEI employees retaining 113,517 options with an
adjusted exercise price range of $9.10 - $10.07. Non-employee directors options
were adjusted subsequent to the Distribution so that 74,146 were outstanding
with an adjusted exercise price range of $11.33 - $17.90. For the employees
terminated by the Company and hired by PriceSmart the adjusted options
outstanding as of fiscal 1997 were 98,384 with an adjusted price range of $9.10
- - $15.58. These terminated employees were required to exercise their vested
options within 90 days of termination or such options would be canceled.
The weighted-average fair value of the options granted during 1997 and 1996
were $3.19 and $2.09 respectively.
Pro forma information regarding net income is required by SFAS 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by SFAS 123. The fair value of these
options was estimated at the date of grant using the "Black-Scholes" method with
the following weighted average assumptions for 1997 and 1996: risk-free interest
rate of 6%; annual dividend rate of 7%; volatility factor of the expected market
price of the Company's Common Stock of 26.54%; and an expected option life of
three years. The effect of applying the "Black-Scholes" method of SFAS 123 to
options granted in 1997 and 1996 did not result in pro forma net income amounts
that are materially different from amounts reported. Accordingly, such pro forma
information is not presented herein.
Note 7 - Income Taxes
- --------------------------------------------------------------------------------
The provision for income taxes consists of the following (in thousands):
1997 1996 1995
-------- -------- --------
Current:
Federal $ (655) $ (1,285) $ 7,236
State (432) (513) 1,418
-------- -------- --------
(1,087) (1,798) 8,654
Allocated to discontinued operations 2,301 1,683 1,499
-------- -------- --------
1,214 (115) 10,153
Deferred:
Federal 8,509 1,887 (3,513)
State 2,462 1,175 48
-------- -------- --------
10,971 3,062 (3,465)
Allocated to discontinued operations 1,078 2,848 2,553
-------- -------- --------
12,049 5,910 (912)
-------- -------- --------
Provision for income tax
- continuing operations $ 13,263 $ 5,795 $ 9,241
======== ======== ========
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
- --------------------------------------------------------------------------------
A reconciliation between the Federal statutory rate and the effective tax
rate follows (in thousands):
1997 1996 1995
------- ------- -------
Federal taxes at the statutory rate $11,322 $ 4,947 $ 7,888
State taxes, net of Federal benefit 1,941 848 1,353
------- ------- -------
Total provision $13,263 $ 5,795 $ 9,241
======= ======= =======
The significant components of deferred income taxes are attributable to the
following temporary differences (in thousands):
August 31, August 31, August 31,
1997 1996 1995
---------- ---------- ----------
Deferred tax assets:
Real estate properties $ -- $ 8,086 $ 12,754
All other, net 1,214 1,006 1,210
-------- -------- --------
1,214 9,092 13,964
Deferred tax liabilities:
Deferred rental income (5,128) (3,703) (2,665)
Real estate properties (2,746) -- --
-------- -------- --------
(7,874) (3,703) (2,665)
-------- -------- --------
Net deferred tax assets (liabilities) $ (6,660) $ 5,389 $ 11,299
======== ======== ========
Note 8 - Commitments
- --------------------------------------------------------------------------------
Price Enterprises owns a former warehouse club building in New Jersey
subject to a ground lease with a remaining term of 22 years. Rental expense
related to the ground lease for fiscal 1997 and 1996 was $1.7 million and $2.5
million, respectively. Future minimum payments during the next five fiscal years
and thereafter under this noncancelable lease at August 31, 1997 were as follows
(in thousands):
1998 754
1999 754
2000 754
2001 754
2002 754
Thereafter 13,075
-------
Total minimum payments $16,845
=======
The above property is subleased and as of August 31, 1997, total future
sublease revenues are $28.9 million, which are included in future minimum rental
income amounts in Note 3 of these financial statements.
Note 9 - Subsequent Event
- --------------------------------------------------------------------------------
Subsequent to year-end the Company declared a cash dividend of $0.35 per
share, totaling approximately $8.3 million, payable on November 14, 1997 to
stockholders of record on October 31, 1997.
24
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Price Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Price
Enterprises, Inc. as of August 31, 1997 and 1996 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended August 31, 1997. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Price
Enterprises, Inc. at August 31, 1997 and 1996 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended August 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Diego, California
October 16, 1997
25
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------
None.
PART III
--------
ITEM 10 - Directors and Executive Officers of the Registrant
- --------------------------------------------------------------------------------
For information with respect to the executive officers of the Registrant,
see Item 4A -- "Executive Officers of the Registrant" at the end of Part I of
this report. The information required by this Item concerning the Directors and
nominees for Director of the Company is incorporated herein by reference to
Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be
held on December 16, 1997, to be filed with the Commission pursuant to
Regulation 14A.
ITEM 11 - Executive Compensation
- --------------------------------------------------------------------------------
The information required by Item 11 is incorporated herein by reference to
Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be
held on December 16, 1997, to be filed with the Commission pursuant to
Regulation 14A.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
- --------------------------------------------------------------------------------
The information required by Item 12 is incorporated herein by reference to
Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be
held on December 16, 1997, to be filed with the Commission pursuant to
Regulation 14A.
ITEM 13 - Certain Relationships and Related Transactions
- --------------------------------------------------------------------------------
The information required by Item 13 is incorporated herein by reference to
Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be
held on December 16, 1997, to be filed with the Commission pursuant to
Regulation 14A.
26
PART IV
-------
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- --------------------------------------------------------------------------------
(a) Financial Statements and Financial Statement Schedules:
Page
(1) (A) Report of Ernst & Young LLP, Independent Auditors 25
(B) Financial Statements
(i) Consolidated Balance Sheets as of August 31,
1997 and 1996 14
(ii) Consolidated Statements of Income for the
Years Ended August 31, 1997, 1996 and 1995 15
(iii)Consolidated Statements of Stockholders'
Equity for the Years Ended August 31, 1997,
1996 and 1995 16
(iv) Consolidated Statements of Cash Flows for the
Years Ended August 31, 1997, 1996 and 1995 17
(v) Notes to Consolidated Financial Statements 18
(2) Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation 28
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule or because the information required is included in the
consolidated financial statements and notes hereto.
(3) For a list of exhibits filed with this annual report, refer to the
exhibit index on page 32.
(b) The Company filed no Current Report on Form 8-K during the fourth quarter
of fiscal 1997.
(c) Exhibits: For a list of exhibits filed with this annual report, refer to
the exhibit index on page 32.
27
PRICE ENTERPRISES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
August 31, 1997
(amounts in thousands)
Gross amount at which carried
Initial Costs Costs at close of period
--------------------------- Capitalized ----------------------------------
Land and Building and Subsequent to Land and Building and Total
Location Description Improvements Improvements Acquisition Improvements Improvements (1)
- ------------------------------------------------------------------------------------------------------------------------------------
Westbury, NY Shopping Center $ 41,784 $ 0 $ 28,322 $ 46,620 $ 23,486 $ 70,106
Pentagon City, VA Shopping Center 24,742 14,473 25,244 26,289 38,170 64,459
Wayne, NJ Shopping Center 19,760 6,912 12,808 22,200 17,280 39,480
Philadelphia, PA Shopping Center 8,649 4,382 12,150 9,115 16,066 25,181
San Diego, CA Warehouse/Office 5,244 7,990 10,529 5,709 19,281 24,990
Building
Dallas, TX Retail Building 10,662 0 13,529 12,454 11,737 24,191
Seekonk, MA Shopping Center 7,636 0 12,562 10,153 10,045 20,198
Signal Hill, CA Shopping Center 5,872 0 10,219 8,285 7,806 16,091
Fountain Valley, CA Shopping Center 4,551 0 10,356 6,595 8,312 14,907
Glen Burnie, MD Shopping Center 1,795 0 8,736 3,699 6,832 10,531
Moorsetown, NJ (leased land) Shopping Center Leased 0 8,029 0 8,029 8,029
Northridge, CA Shopping Center 4,029 0 3,586 5,105 2,510 7,615
Azusa, CA Warehouse/Rest. Pads 4,248 896 2,315 4,359 3,100 7,459
San Diego/Carmel Mtn., CA Shopping Center 3,464 0 3,431 3,742 3,153 6,895
Buffalo, NY Retail Building 2,503 0 3,724 3,656 2,571 6,227
Inglewood, CA Warehouse Building 1,438 0 3,710 1,666 3,482 5,148
Sacramento/Stockton, CA Shopping Center 1,437 0 3,566 2,436 2,567 5,003
San Juan Capistrano, CA Shopping Center 3,150 0 1,285 2,034 2,401 4,435
Tucson, AZ Shopping Center 1,073 0 2,770 1,788 2,055 3,843
New Britain, CT Warehouse Building 3,640 0 187 2,608 1,219 3,827
Hampton, VA Retail Building/Bank 1,132 0 1,826 1,436 1,522 2,958
Smithtown, NY Retail Building 721 0 2,022 1,231 1,512 2,743
Redwood City, CA Retail Building 1,860 0 235 2,095 0 2,095
Denver/Littleton, CO Retail Building 607 847 424 584 1,294 1,878
Denver/Aurora, CO Restaurant 105 0 647 173 579 752
San Diego/Southeast, CA Restaurant/Bank 217 0 387 170 434 604
Chula Vista/Rancho del Rey, CA Land 915 0 (415) 500 0 500
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Properties $ 161,234 $35,500 $ 182,184 $184,702 $195,443 $380,145
====================================================================================================================================
(1) The aggregate cost for Federal income tax purposes is $372,928.
28
Depreciable Life
-------------------------------------------
Accumulated Date of Date of Land Building
Depreciation Construction Acquisition Improvements Building Improvements
- --------------------------------------------------------------------------------------------------------------------------------
Westbury, NY $ (4,559) 1992-93 1992 25 25 10
Pentagon City, VA (4,767) 1993-94 1993 25 25 10
Wayne, NJ (3,786) 1991-93 1991 25 25 10
Philadelphia, PA (2,624) 1992,1994-95 1991 25 25 10
San Diego, CA (9,649) 1981 25 25 10
Dallas, TX (1,705) 1991-92, 96 1991 25 25 10
Seekonk, MA (2,164) 1991-94 1991 25 25 10
Signal Hill, CA (1,403) 1992-93 1991 25 25 10
Fountain Valley, CA (1,694) 1990-93 1989 25 25 10
Glen Burnie, MD (1,604) 1990-92 1985 25 25 10
Moorsetown, NJ (leased land) (1,881) 1989-91 1989 25 25 10
Northridge, CA (353) 1993-94 1988 25 25 10
Azusa, CA (640) 1983 1983 25 25 10
San Diego/Carmel Mtn., CA (514) 1992-93 1991 25 25 10
Buffalo, NY (1,318) 1989-90 1989 25 25 10
Inglewood, CA (1,107) 1989 1984 25 25 10
Sacramento/Stockton, CA (283) 1994-95 1993 25 25 10
San Juan Capistrano, CA (442) 1988-89,94-95 1987 25 25 10
Tucson, AZ (544) 1989-91 1988 25 25 10
New Britain, CT (341) 1991 25 25 10
Hampton, VA (352) 1992 1987 25 25 10
Smithtown, NY (761) 1988-89 1985 25 25 10
Redwood City, CA 0 1982 -- -- --
Denver/Littleton, CO (297) 1990 25 25 10
Denver/Aurora, CO (94) 1993 1990 25 25 10
San Diego/Southeast, CA (249) 1989-90 1989 25 25 10
Chula Vista/Rancho del Rey, CA 0 1993 -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total Investment Properties $ (43,131)
================================================================================================================================
29
PRICE ENTERPRISES, INC.
SCHEDULE III (Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
(amounts in thousands)
Fiscal Year
-----------------------------------
Reconciliation to Reported Amounts 1997 1996 1995
--------- --------- ---------
PROPERTY AND EQUIPMENT
Balance at beginning of year ............. $ 436,672 $ 469,337 $ 476,340
Additions during the year:
Transfers from Costco .................. -- -- 2,100
Purchases .............................. 2,720 17,003 18,329
Deductions during the year:
Cost of properties sold ................ (35,741) (32,668) (22,432)
Asset impairment loss .................. (2,000) (17,000) (5,000)
--------- --------- ---------
Subtotal ............................. 401,651 436,672 469,337
Other:
Property and equipment transferred
to PriceSmart ........................ (21,506) (31,541) (40,746)
FF&E ................................... 203 733 604
--------- --------- ---------
Balance at end of year ................... $ 380,348 $ 405,864 $ 429,195
========= ========= =========
ACCUMULATED DEPRECIATION
Balance at beginning of year ............. $ 43,991 $ 39,282 $ 32,332
Depreciation expense ..................... 9,347 9,433 9,813
Accumulated depreciation of properties sold (7,589) (4,724) (2,863)
--------- --------- ---------
Subtotal ............................. 45,749 43,991 39,282
Other:
Accumulated depreciation of property and
equipment transferred to PriceSmart .. (2,618) (3,927) (5,073)
Accumulated depreciation of FF&E ....... 78 365 181
--------- --------- ---------
Balance at end of year ................... $ 43,209 $ 40,429 $ 34,390
========= ========= =========
30
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 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 there unto duly authorized.
PRICE ENTERPRISES, INC.
DATED: November 14, 1997 By: /s/ Jack McGrory
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Jack McGrory
President and
Chief Executive Officer
DATED: November 14, 1997 By: /s/ Kathleen M. Hillan
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Kathleen M. Hillan
Senior Vice President -
Finance
Pursuant to the requirements of the Securities 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.
/s/ Robert E. Price November 14, 1997
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ROBERT E. PRICE, Chairman of the Board of Directors Date
/s/ Paul A. Peterson November 14, 1997
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PAUL A. PETERSON, Vice Chairman of the Board of Directors Date
/s/ James F. Cahill November 14, 1997
- --------------------------------------------------------- -----------------
JAMES F. CAHILL, Director Date
/s/ Anne L. Evans November 14, 1997
- --------------------------------------------------------- -----------------
ANNE L. EVANS, Director Date
/s/ Murray L. Galinson November 14, 1997
- --------------------------------------------------------- -----------------
MURRAY L. GALINSON, Director Date
/s/ Jack McGrory November 14, 1997
- --------------------------------------------------------- -----------------
JACK McGRORY, Director, President, and Chief Executive Date
Officer
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EXHIBIT INDEX
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Description
Page
2.1 Distribution Agreement dated as of August 26, 1997 between Price
Enterprises, Inc. and PriceSmart, Inc. (incorporated herein by
reference to Exhibit 2.1 to Current Report on Form 8-K of Price
Enterprises, Inc. filed with the Commission on September 12, 1997
(File No. 0-20449))
3.1 Form of Restated Certificate of Incorporation of Price Enterprises,
Inc. (incorporated herein by reference to Exhibit 3.2 to Current
Report on Form 10 of Price Enterprises, Inc. filed with the Commission
on December 13, 1994 (File No. 0-20449))
3.2 Amended and Restated Bylaws of Price Enterprises, Inc. (incorporated
herein by reference to Exhibit 3.1 to Current Report on Form 8-K of
Price Enterprises, Inc. filed with the Commission on September 12,
1997 (File No. 0-20449))
4.1 Form of Price Enterprises, Inc. Stock Certificate (incorporated herein
by reference to Exhibit 4.1 to Amendment No. 2 to the Current Report
on Form S-4 of Price Enterprises, Inc. filed with the Commission on
November 17, 1994 (File No. 33-55481))
4.2 The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan
(the "Stock Plan" ) (incorporated herein by reference to Exhibit 10.23
to Current Report on Form 10 of Price Enterprises, Inc. filed with the
Commission on December 13, 1994 (File No. 0-20449))
4.3 Form of Incentive Stock Option Agreement under the Stock Plan
(incorporated herein by reference to Exhibit 4.2 of the Current Report
on Form S-8 of Price Enterprises, Inc. filed with the Commission on
July 13, 1995 (File No. 33-60999))
4.4 Form of Non-Qualified Stock Option Agreement under the Stock Plan
(incorporated herein by reference to Exhibit 4.3 of the Current Report
on Form S-8 of Price Enterprises, Inc. filed with the Commission on
July 13, 1995 (File No. 33-60999))
4.5 The Price Enterprises Directors' 1995 Stock Option Plan (the
"Directors' Plan") (incorporated herein by reference to Exhibit 10.24
to Registration Statement on Form 10 of Price Enterprises, Inc. filed
with the Commission on December 13, 1994 (File No. 0-20449))
4.6 Form of Non-Qualified Stock Option Agreement under the Directors' Plan
(incorporated herein by reference to Exhibit 4.5 of the Current Report
on Form S-8 of Price Enterprises, Inc. filed with the Commission on
July 13, 1995 (File No. 33-60999))
10.1 Form of Indemnity Agreement (incorporated herein by reference to
Exhibit 10.17 to Amendment No. 2 to the Current Report on Form S-4 of
Price Enterprises, Inc. filed with the Commission on November 17, 1994
(File No. 33-55481))
10.2 Employee Benefits and Other Employment Matters Allocation Agreement
dated as of August 26, 1997 between Price Enterprises, Inc. and
PriceSmart, Inc. (incorporated herein by reference to Exhibit 10.1 to
Current Report on Form 8-K of Price Enterprises, Inc. filed with the
Commission on September 12, 1997 (File No. 0-20449))
10.3 Tax Sharing Agreement dated as of August 26, 1997 between Price
Enterprises, Inc. and PriceSmart, Inc. (incorporated herein by
reference to Exhibit 10.2 to Current Report on Form 8-K of Price
Enterprises, Inc. filed with the Commission on September 12, 1997
(File No. 0-20449))
10.4 Asset Management Agreement dated as of August 26, 1997 between Price
Enterprises, Inc. and PriceSmart, Inc. (incorporated herein by
reference to Exhibit 10.3 to Current Report on Form 8-K of Price
Enterprises, Inc. filed with the Commission on September 12, 1997
(File No. 0-20449))
10.5 Transitional Services Agreement dated as of August 26, 1997 between
Price Enterprises Inc. and PriceSmart, Inc. (incorporated herein by
reference to Exhibit 10.4 to Current Report on Form 8-K of Price
Enterprises, Inc. filed with the Commission on September 12, 1997
(File No. 0-20449))
10.6 Employment Agreement dated June 18, 1997, by and between Price
Enterprises, Inc. and Jack McGrory
10.7 Amendment No. 1 to Employment Agreement dated as of August 27, 1997,
by and between Price Enterprises, Inc. and Jack McGrory
23.1 Consent of Ernst & Young LLP
27.1 Financial Data Schedule
99.1 Press Release, dated August 29, 1997 issued by Price Enterprises, Inc.
(incorporated herein by reference to Exhibit 99.1 to Current Report on
Form 8-K of Price Enterprises, Inc. filed with the Commission on
September 12, 1997 (File No. 0-20449))
32