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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 YEAR ENDED DECEMBER 31 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
MARYLAND 33-0628740
(State or other jurisdiction (I.R.S. Employer
of
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 March 15, 1999 was $38,847,455 based on
the last reported sale price of $5.00 per share on March 15, 1999.
The number of outstanding shares of the registrant's common stock as of
March 15, 1999 was 13,293,456.
DOCUMENTS INCORPORATED BY REFERENCE: Certain information called for by Part
III of the Form 10-K will either be filed with the Commission under Regulation
14A under the Securities Exchange Act of 1934 or by amendment to this Form 10-K,
in either case on or before April 30, 1999.
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PRICE ENTERPRISES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
PART I
Item 1. Business........................................... 3
Item 2. Properties......................................... 13
Item 3. Legal Proceedings................................ . 16
Item 4. Submission of Matters to a Vote of Security
Holders.......................................... 16
Item 4A. Executive Officers of the Registrant............... 17
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................. 18
Item 6. Selected Financial Data............................ 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 20
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...................................... 33
Item 8. Financial Statements and Supplementary Data........ 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 69
PART III
Item 10. Directors and Executive Officers of the
Registrant....................................... 69
Item 11. Executive Compensation............................. 69
Item 12. Security Ownership of Certain Beneficial Owners and
Management....................................... 69
Item 13. Certain Relationships and Related Transactions..... 69
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................. 70
2
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995 which provides a "safe harbor" for these types of statements. To the extent
statements in this Form 10-K involve, without limitation, our expectations for
growth, estimates of future revenue, expenses, profit, cash flow, balance sheet
items or any other guidance on future periods, these statements are
forward-looking statements. Forward-looking statements contain risks and
uncertainties which include those identified in this Form 10-K and other risks
identified from time to time in our filings with the Securities and Exchange
Commission (SEC), press releases and other communications. We assume no
obligation to update forward-looking statements.
In this Form 10-K:
- "Company," "we," "our," "PEI," and "us" means Price Enterprises, Inc.
- "REIT" means real estate investment trust
- "GLA" means gross leasable area
- "FFO" means funds from operations
PART I
ITEM 1--BUSINESS
FORMATION OF THE COMPANY AND SUBSEQUENT TRANSACTIONS
Price Enterprises, Inc is a REIT incorporated in the state of Maryland. Our
principal business is to own, acquire, develop, operate, manage and lease real
property. We originally incorporated in July 1994 as a Delaware corporation and
began operations as a wholly owned subsidiary of Costco Companies, Inc.
(Costco), formerly Price/Costco, Inc.
3
In 1994 Costco spun-off PEI and transferred to PEI the following as part of
a voluntary exchange offer:
- substantially all of the real estate assets which historically formed
Costco's non-club real estate business segment
- four existing Costco warehouses adjacent to certain transferred properties
(which we subsequently leased back to Costco in August 1994)
- certain merchandising business entities
- notes receivable from various municipalities and agencies (City Notes)
- certain other assets
In June 1997, our Board of Directors determined that it would be in the best
interest of our Company and our stockholders to separate our core real estate
business from our merchandising businesses. Accordingly, our board approved a
spin-off transaction in which we would continue to conduct our real estate
business consisting of an initial asset base of 27 retail properties and $40
million of cash following the spin-off. 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 would be spun-off to
PriceSmart, Inc. (PriceSmart), a Delaware corporation and a wholly-owned
subsidiary of PEI.
On August 29, 1997, we separated ourself from PriceSmart by distributing one
share of common stock of PriceSmart for every four shares of common stock held
by our stockholders of record on August 15, 1997 pursuant to a distribution
agreement between PEI and PriceSmart (the Distribution). Since the Distribution,
we engage in a combination of acquiring, developing, owning, managing and/or
selling real estate assets, primarily shopping centers.
The Distribution resulted in our Company becoming eligible to elect Federal
tax treatment as a REIT. In addition, we distributed an amount of taxable
dividends at least equal to our current and accumulated earnings and profits,
much of which represented an allocation from Costco as a result of
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the spin-off by Costco of PEI in December 1994. By qualifying as a REIT, we
substantially eliminate our obligation to pay taxes on income.
OVERVIEW OF THE COMPANY'S BUSINESS
Our current property portfolio substantially consists of shopping centers
and "power centers" leased to major retail tenants including Costco, The Sports
Authority, The Home Depot, Kmart, Marshalls, PETsMART and Borders Books and
Music. We receive approximately 60% of annual minimum rents from tenants with
investment grade credit ratings.
For a description of our properties and of material developments during the
year regarding these investments and our Company as a whole please refer to
"Item 2--Properties" and "Item 7--Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Form 10-K.
Our business strategy is to continue to enhance the value and operating
income of our portfolio by, among other things, completing the development and
leasing of existing properties and acquiring new investment properties. In
making new real estate investments, we emphasize acquiring well-located
income-producing commercial properties, principally occupied by credit rated
tenants in the western and northeastern United States, with attractive yields
and potential for increases in income and capital appreciation. We may also take
advantage of particularly attractive investments in other geographic areas and
product types in order to enhance stockholder value. In addition, we will, from
time to time, consider disposing or exchanging existing investments in order to
improve our investment portfolio or increase our funds from operations. We
continuously evaluate our properties and review potential strategies of
repositioning or redeveloping our properties in order to maximize FFO and
enhance property values. Our investment and portfolio management goal is
maximizing FFO and distributions to our stockholders. We also own and operate a
self storage business, "Price Self Storage," with two facilities open in San
Diego, CA at year end. We will continue to expand Price Self Storage on a
limited basis and plan to open two more facilities in the first quarter of 1999.
In addition to the self storage business, our
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portfolio includes one office complex (Sacramento/Bradshaw, CA) and one
multi-use property (San Diego, CA) which includes retail, office and self
storage.
We provide property management for all but one of our properties, which we
will manage directly beginning in July 1999. Self-management enables us to more
closely control leasing and management of our property. Internal property
management also provides opportunities for operating efficiencies by enabling us
to acquire additional properties without proportionate increases in property
management expenses. Our property management program is implemented by property
management and leasing professionals located in offices in San Diego, CA,
Fairfax, VA and White Plains, NY.
Our operating results depend on:
- performance and continuing viability of the existing tenants in our
current real estate investment portfolio
- the existence of new replacement tenants
- competition from other retail centers and other forms of retail shopping,
including internet commerce
Our growth depends on:
- availability of new real estate investment opportunities
- return on investment of new real estate investment opportunities
- cost of capital related to new real estate investments
Real estate industry cycles heavily influence our performance as a REIT. We
discuss this further in "Factors That May Affect Future Performance-- Economic
Performance and Value of Centers Dependent on Many Factors" located elsewhere in
this Form 10-K.
COMPETITION
We compete with a wide variety of corporate and individual real estate
developers and real estate investment trusts which have similar investment
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objectives and may have greater financial resources, larger staffs or longer
operating histories than us.
We compete with other property owners to obtain tenants for our retail
shopping center properties. Our competitive advantages are primarily based on
significant customer traffic generated by our 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. We discuss this further in "Factors That May
Affect Future Performance--Competition for Acquisition of Real Estate" located
elsewhere in this Form 10-K.
SIGNIFICANT TENANTS
Our Company's eight largest tenants account for approximately 44% of total
GLA and approximately 52% of our total annual minimum rent revenues. We show
certain information about these tenants in the following table (dollars in
thousands):
AREA UNDER PERCENT OF ANNUAL PERCENT OF
NUMBER LEASE (SQ. GLA UNDER MINIMUM TOTAL ANNUAL
TENANT OF LEASES FT) LEASE RENT MINIMUM RENT
- -------------------------------- ------------- ------------- ----------- ------------ --------------
Costco.......................... 4 618,192 15.0% $ 8,307.9 17.2%
The Sports Authority............ 8 341,217 8.3% 4,333.5 9.0%
The Home Depot.................. 2 214,173 5.2% 2,550.7 5.3%
AT&T Wireless................... 1 156,576 3.8% 2,240.0 4.6%
Level One Communications........ 1 140,369 3.4% 2,167.7 4.5%
Kmart........................... 1 110,054 2.7% 2,027.2 4.2%
Marshalls....................... 2 87,968 2.1% 1,826.3 3.8%
PETsMART........................ 6 155,785 3.8% 1,603.4 3.3%
--
------------- ----------- ------------ ------
25 1,824,334 44.3% $ 25,056.7 51.9%
--
--
------------- ----------- ------------ ------
------------- ----------- ------------ ------
It is not uncommon for economic conditions, market surpluses of retail
space, internet purchasing and competitive pressures to negatively impact a
retail operator's financial results, especially smaller retail operators.
Caldor, a large retailer, filed for Chapter XI bankruptcy protection and
announced in January 1999 they intend to close their store at our Moorestown, NJ
property. When a tenant files for bankruptcy we assess our alternatives for
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the potentially available space. We are currently evaluating alternative uses
for the space Caldor will be vacating. We discuss this further in "Factors That
May Affect Future Performance--Risk of Bankruptcy of Major Tenants" located
elsewhere in this Form 10-K.
ENVIRONMENTAL MATTERS
Our properties are affected by Federal, state and local environmental laws.
These laws relate to the discharge of materials and protection of the
environment. We have made, and intend to continue to make, necessary
expenditures for compliance with applicable laws. The properties listed below
have required remediation and clean-up of certain past industrial activity:
- Azusa, CA
- Pentagon City, VA
- Signal Hill, CA
- New Britain, CT
Expenses related to monitoring and cleaning up these properties have not
been material to our operations. While we cannot predict with certainty the
future costs of such clean up activities, or operating costs for environmental
compliance, we do not believe they will have a material effect on our capital
expenditures, earnings or competitive position.
We owned additional properties with environmental issues that we sold prior
to the Distribution or that we transferred to PriceSmart in the Distribution.
PriceSmart agreed to indemnify us for environmental liabilities arising out of
these properties.
EMPLOYEES
We employed 45 employees as of December 31, 1998 including 15 responsible
for property management, 19 employed in finance and administration and 11
employed in the self storage business.
8
SEASONALITY
Our real estate operations generally are not subject to seasonal
fluctuations.
CORPORATE HEADQUARTERS
Our headquarters is in San Diego, CA adjacent to the Morena Boulevard Costco
facility, and we believe that our current facilities meet our expected
requirements over the next 12 months.
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
ECONOMIC PERFORMANCE AND VALUE OF CENTERS DEPENDENT ON MANY FACTORS. Real
property investments are subject to varying degrees of risk. The economic
performance and values of real estate can be affected by many factors,
including:
- changes in the national, regional and local economic climates
- local conditions such as an oversupply of space or a reduction in demand
for real estate in the area
- the attractiveness of the properties to tenants
- competition from other available space
- the ability of the owner to provide adequate maintenance and insurance
- increased operating costs
MARKET FORCES IN THE RETAIL INDUSTRY COULD AFFECT OUR ABILITY TO LEASE
SPACE. In recent years, there has been a proliferation of new retailers and a
growing consumer preference for value-oriented shopping alternatives, such as
internet commerce, that have heightened competitive pressures. In certain areas
of the country, there may also be an oversupply of retail space. As a
consequence, many companies in all sectors of the retailing industry have
encountered significant financial difficulties. A substantial portion of our
income comes from rental revenues from retailers in community shopping centers
and power centers. Accordingly, no assurance can be given that our
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financial results will not be adversely affected by these developments in the
retail industry.
DEPENDENCE ON RENTAL INCOME FROM REAL PROPERTY. Substantially all of our
income is derived from rental income from real property. Accordingly, our income
and funds available for distribution would be adversely affected if a
significant number of our tenants were unable to meet their obligations to us or
if we were unable to lease a significant amount of space in our properties on
economically favorable lease terms. There can be no assurance that any tenant
whose lease expires in the future will renew such lease or that we will be able
to re-lease space on economically advantageous terms.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Equity real estate investments are
relatively illiquid and therefore tend to limit our ability to vary our
portfolio promptly in response to changes in economic or other conditions. In
addition, to the extent the properties are not subject to triple net leases,
certain significant expenditures such as real estate taxes and maintenance costs
are generally not reduced when circumstances cause a reduction in income from
the investment. Should such events occur, our income and funds available for
distribution would be adversely affected.
RISK OF BANKRUPTCY OF MAJOR TENANTS. The bankruptcy or insolvency of a
major tenant or a number of smaller tenants may have an adverse impact on the
properties affected and on the income produced by such properties. Under
bankruptcy law, a tenant has the option of assuming (continuing) or rejecting
(terminating) any unexpired lease. If a tenant in bankruptcy assumes its lease
with us, such tenant must cure all defaults under the lease and provide us with
adequate assurance of its future performance under the lease. If a tenant in
bankruptcy rejects the lease, our claim for breach of the lease would (absent
collateral securing the claim) be treated as a general unsecured claim. We may
not receive all amounts owed us under terms of a lease if a tenant rejects a
lease in bankruptcy due to certain limits imposed by bankruptcy laws.
RELIANCE ON MAJOR TENANTS. As of December 31, 1998, our largest tenant was
Costco which accounted for approximately 17.2% of our total
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annual minimum rent revenue. In addition to our four properties where Costco is
the major tenant, Costco warehouses are adjacent to an additional 18 of our
properties. If Costco were to terminate a lease with us or a lease for space
adjacent to our properties, certain of our tenants at such properties would have
rights to reduce their rent or terminate their leases. In addition, tenants at
such properties, including those with termination rights, could elect not to
extend or renew their lease at the end of the lease term. Our financial position
and our ability to make distributions may be adversely affected by financial
difficulties experienced by Costco, or any of our other major tenants, including
a bankruptcy, insolvency or general downturn in business of any major tenant, or
in the event any major tenant does not renew its leases as they expire.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS. Robert E. Price, who is our
Chairman of the Board, and Sol Price, a significant stockholder of PEI and the
father of Robert E. Price, beneficially owned as of December 31, 1998 an
aggregate of approximately 5.1 million shares, or 38% of the outstanding PEI
common stock. See "Item 12--Security Ownership of Certain Beneficial Owners and
Management." Robert Price and Sol Price also beneficially owned as of year end
an aggregate of approximately 8.3 million shares, or 35% of the outstanding
Series A Preferred Stock distributed to stockholders in August 1998. As a
result, these stockholders will effectively control the outcome of all matters
submitted to our stockholders for approval, including the election of directors.
In addition, their ownership could discourage acquisition of our common stock by
potential investors, and could decrease the likelihood of any takeover, possibly
depressing the trading price of our common stock.
COMPETITION FOR ACQUISITION OF REAL ESTATE. We face competition in the
acquisition, operation and sale of our properties. Competition can be expected
from other businesses, individuals, fiduciary accounts and plans and other
entities engaged in real estate investment. Some of our competitors are larger
than us and have greater financial resources available to them. This competition
may result in a higher cost for properties we wish to purchase.
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ENVIRONMENTAL RISKS. Under various Federal, state and local laws,
ordinances and regulations, we may be considered an owner or operator of real
property and, therefore, may become liable for the costs of removal or
remediation of certain hazardous substances released on or in our property, as
well as certain other potential costs which could relate to hazardous or toxic
substances (including governmental fines and injuries to persons and property).
In addition, we may have arranged for the disposal or treatment of hazardous or
toxic substances and may be liable under these environmental laws as a result of
such activity. These environmental liabilities may be imposed whether or not we
knew of, or were responsible for, the presence of such hazardous or toxic
substances. Any such liability, if imposed, could have a material adverse effect
on our business and our funds available for distribution.
TAXATION OF THE COMPANY. We elected to be taxed as a REIT under the
Internal Revenue Code of 1986, as amended (the Code), beginning with the four
months ended December 31, 1997. To maintain our status as a REIT for Federal
income tax purposes, we generally are required each year to distribute to our
stockholders at least 95% of our taxable income. In addition, we are subject to
a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by us with respect to any calendar year are less than the sum
of 85% of our ordinary income for such calendar year, 95% of our capital gain
income for the calendar year and any amount of such taxable income that was not
distributed in prior years. As long as we meet the requirements under the Code
for qualification as a REIT each year, we will be entitled to a deduction when
calculating our taxable income for dividends paid to our stockholders. For us to
qualify as a REIT, however, certain detailed technical requirements must be met
(including certain income, asset and stock ownership tests) under Code
provisions for which, in many cases, there are only limited judicial or
administrative interpretations. Although we intend to operate so that we will
continue to qualify as a REIT, the highly complex nature of the rules governing
REITs, the ongoing importance of factual determinations and the possibility of
future changes in our circumstances preclude any assurance that we will so
qualify in any year.
12
For any taxable year that we fail to qualify as a REIT, we would not be entitled
to a deduction for dividends paid to our stockholders in calculating our taxable
income. Consequently, distributions to our stockholders would be substantially
reduced and could be eliminated because of our increased tax liability. Should
our qualification as a REIT terminate, we may not be able to elect to be treated
as a REIT for the subsequent five-year period, which would substantially reduce
and could eliminate distributions to our stockholders for the years involved.
ITEM 2--PROPERTIES
OVERVIEW
At December 31, 1998, we owned 31 commercial real estate properties and held
one property with a 21-year ground lease. These properties encompass
approximately 4.4 million square feet of GLA and were 94% leased. The five
largest properties include 1.7 million square feet of GLA that generate annual
minimum rent of $25.6 million, based on leases existing as of December 31, 1998.
Included in the properties we owned at December 31, 1998 are four self
storage facilities. Two of these facilities, San Diego, CA (operating) and
Azusa, CA (opened January 1999), are located on the same sites as our commercial
properties. The other two self storage facilities are stand-alone properties. At
year end, these facilities had 0.4 million square feet of GLA and the two
operating facilities were 98% occupied.
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Here is the geographic concentration of our Company's properties:
NUMBER OF PERCENT OF MINIMUM
STATE PROPERTIES ANNUAL RENT
- --------------------------------------------- --------------- -------------------
Northeastern States
New York................................... 3 18%
Virginia................................... 2 14%
New Jersey................................. 2 12%
Pennsylvania............................... 1 5%
Massachusetts.............................. 1 3%
Maryland................................... 1 3%
Connecticut................................ 1 1%
--
------
Total Northeastern........................... 11 56%
California................................. 17 37%
Texas...................................... 1 5%
Arizona.................................... 1 1%
Colorado................................... 2 1%
--
------
Total........................................ 32 100%
--
--
------
------
PROPERTY TABLE
Amounts shown for annual minimum rents are based on executed leases as of
December 31, 1998. We made no allowances for contractually-based delays to
commencement of rental payments. Due to the nature of real estate investments,
our actual rental income may differ from amounts shown in this schedule. The
following table describes our portfolio of real estate properties as of December
31, 1998. Self storage properties are shown separately from our commercial
portfolio.
14
REAL ESTATE PORTFOLIO
LEASES IN EFFECT AS OF
DECEMBER 31, 1998
----------------------------------------------------
NUMBER OF PERCENT % OF G.L.A. LEASE
TENANTS LEASED PRINCIPAL TENANTS (SQ FT) EXPIRES
------------- GROSS ----------- ANNUAL ------------------ ----------- -----------
LEASABLE MINIMUM
AREA (SQ RENT
FT) -----------
----------- ($000'S)
(000'S)
COMMERCIAL PROPERTIES
- ------------------------------
Westbury, NY.................. 8 398.6 100% $ 7,651.4 COSTCO 37% 2009
KMART 28% 2013
MARSHALLS 11% 2009
THE SPORTS 11% 2013
AUTHORITY
BORDERS BOOKS 8% 2019
Pentagon City, VA............. 12 336.8 100% 6,566.1 COSTCO 50% 2009
MARSHALLS 13% 2010
BEST BUY 11% 2010
LINENS'N THINGS 10% 2010
BORDERS BOOKS 10% 2010
Sacramento/Bradshaw, CA....... 2 296.9 100% 4,407.7 AT&T 53% 2006
LEVEL ONE 47% 2006
COMMUNICATIONS
Wayne, NJ..................... 5 348.1 89% 4,258.5 COSTCO 42% 2009
LACKLAND STORAGE 13% 2012
(includes 37,000 sq. ft. of
THE SPORTS 13% 2012
vacant storage space) AUTHORITY
NOBODY BEATS THE 11% 2002
WIZ
Philadelphia, PA.............. 16 304.4 89% 2,733.5 THE HOME DEPOT 37% 2009
BABYS R US 13% 2006
AMC THEATERS 13% 2015
ACME SUPERSAVER 11% 2000
Dallas, TX.................... 5 177.5 93% 2,623.2 BEST BUY, WICKES FURNITURE, OFFICE MAX
San Diego, CA(1).............. 3 443.2 100% 2,282.5 COSTCO, CHARLOTTE RUSSE
Signal Hill, CA............... 14 154.8 100% 2,190.9 THE HOME DEPOT, PETSMART
Roseville, CA................. 9 189.6 90% 2,008.4 THE SPORTS AUTHORITY, LINENS 'N THINGS, ROSS
STORES
Fountain Valley, CA........... 15 119.0 92% 1,680.7 THE SPORTS AUTHORITY, PETSMART,
SOUPLANTATION
Moorestown, NJ (leased
land)....................... 3 172.6 100% 1,632.9 CALDOR, THE SPORTS AUTHORITY
Glen Burnie, MD............... 11 130.6 98% 1,501.4 THE SPORTS AUTHORITY, PETSMART, COMPUTER
CITY
Seekonk, MA................... 9 213.1 48% 1,337.2 THE SPORTS AUTHORITY, CIRCUIT CITY, PIER 1
San Diego/Rancho San Diego,
CA.......................... 16 93.7 97% 1,104.5 RITE AID, ROSS STORES, PETCO
Inglewood, CA................. 1 119.9 100% 847.0 HOMEBASE
San Diego/Carmel Mountain,
CA.......................... 5 35.0 90% 797.7 CLAIM JUMPER, MCMILLIN REALTY, ISLANDS
Northridge, CA................ 2 22.0 100% 734.0 BARNES & NOBLE, FRESH CHOICE
Buffalo, NY................... 1 115.4 100% 733.3 BUILDERS SQUARE
New Britain, CT............... 1 112.4 100% 671.1 WAL-MART
San Juan Capistrano, CA....... 6 56.4 100% 589.9 PETSMART, STAPLES
Smithtown, NY................. 1 55.6 100% 500.7 LEVITZ FURNITURE
Sacramento/Stockton, CA....... 2 49.8 100% 470.2 PETSMART, OFFICE DEPOT
Hampton, VA................... 2 45.6 100% 445.2 THE SPORTS AUTHORITY, COMMERCE BANK
Redwood City, CA.............. 2 49.4 100% 376.6 ORCHARD SUPPLY (GROUND LEASE)
Azusa, CA(1).................. 3 121.4 100% 360.5 S&S FOODS, TACO BELL, CARL'S JR.
Tucson, AZ.................... 9 40.1 100% 293.8 PETSMART
Denver/Littleton, CO.......... 1 26.4 100% 216.1 PETSMART
Denver/Aurora, CO............. 1 7.3 100% 164.3 RED ROBIN
San Diego/Southeast, CA....... 2 8.9 100% 148.1 NAVY FEDERAL C.U., BURGER KING
Chula Vista/Rancho del Rey,
CA.......................... 1 3.2 100% 75.0 BURGER KING (GROUND LEASE)
--- ----------- ----- -----------
TOTAL COMMERCIAL PROPERTIES... 168 4,247.7 94% $49,402.4
--- ----------- ----- -----------
--- ----------- ----- -----------
- ----------------------------------
(1) Price Self Storage is also located at this property.
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AS OF DECEMBER 31,
1998
----------------------
PERCENT
LEASED
GROSS ---------
LEASEABLE
AREA (SQ
FT)
-----------
(000'S)
SELF STORAGE PROPERTIES
- ----------------------------------------------------
San Diego/Murphy Canyon, CA......................... 197.9 97%
San Diego, CA....................................... 89.9(2) 100%
Azusa, CA........................................... -- -- OPENED 1/99
Solana Beach, CA.................................... -- -- UNDER DEVELOPMENT
----- ---------
TOTAL SELF STORAGE PROPERTIES....................... 287.8 98%
----- ---------
----- ---------
- ---------------------
(2) GLA of this facility is also included in GLA for the San Diego, CA
commercial property location listed above.
The annual gross potential rent for the two operating self storage
facilities is $3.4 million. Gross potential rent equals the GLA times the
average rent per square foot.
PENDING REAL ESTATE TRANSACTIONS
Since December 31, 1998 we executed four leases for approximately 24,000
square feet of GLA. These new leases will generate $328,000 in annual minimum
rents. The development costs necessary to provide appropriate facilities for
these signed leases is estimated to be approximately $800,000. We are also
currently in negotiations to purchase additional commercial properties as well
as evaluating various properties for acquisition.
ITEM 3--LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during 1998. Our
annual meeting of stockholders will be held at the San Diego Mission Valley
Hilton in San Diego, CA on May 18, 1999 at 10:00 am. Matters to be voted
16
on will be included in our proxy statement to be filed with the SEC and
distributed to our stockholders prior to the meeting.
ITEM 4A--EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers at the date of this report are:
NAME AGE TITLE
- ----------------------------------- --- -----------------------------------
Jack McGrory....................... 49 President and Chief Executive
Officer
Gary W. Nielson.................... 48 Executive Vice President and Chief
Financial Officer
Joseph R. Satz..................... 57 Executive Vice President, General
Counsel and Secretary
Kathleen M. Hillan................. 40 Senior Vice-President-- Finance
Jack McGrory became a Director of the Company on August 29, 1997. Mr.
McGrory also became President and Chief Executive Office of our Company on
September 2, 1997. Prior to September 2, 1997, Mr. McGrory served as City
Manager of the City of San Diego from March 1991 through August 1997.
Gary W. Nielson became our Executive Vice President and Chief Financial
Officer on February 2, 1998. Prior to February 2, 1998, Mr. Nielson was Senior
Vice President of Finance for Koll Real Estate Services from November 1992
through January 1998. He also previously served as Chief Financial Officer for
Carver Development Corporation and served in various senior financial management
positions at The Hahn Company.
Joseph R. Satz has been Executive Vice President of our Company since
October 16, 1997. He became the Secretary and General Counsel of our Company on
September 16, 1997. Mr. Satz held the position of Vice President and Counsel of
the Company from August 1994 until he assumed his current positions. Mr. Satz
has provided legal counsel for The Price Company and Price/Costco since 1983.
Kathleen M. Hillan became our Senior Vice President--Finance of the Company
on October 16, 1997. Ms. Hillan was Corporate Controller of the Company from
August 1994 until she assumed her current position. Ms. Hillan was International
Finance Manager of the Price Company from 1992 until August 1994.
17
PART II
ITEM 5--MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICES
Our common stock trades on The Nasdaq Stock Market-Registered Trademark-
under the symbol PREN. On August 17, 1998 we distributed one share of 8 3/4%
Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock) for
every one share of common stock owned by our stockholders on July 30, 1998. The
Series A Preferred Stock began trading on August 18, 1998 under the symbol
PRENP. The table below provides the high and low sales prices of our common
stock and preferred stock for the period indicated, as reported by The Nasdaq
Stock Market-Registered Trademark-.
COMMON STOCK PREFERRED STOCK
-------------------- --------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
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.......................... 19 3/8 17 1/8
Calendar Year--1998
First Quarter........................... 20 1/4 18
Second Quarter.......................... 19 1/2 17 3/8
Third Quarter........................... 19 1/4 2 1/4 15 12 7/8
Fourth Quarter.......................... 6 7/32 4 1/4 14 1/4 13
Calendar Year--1999
First Quarter (through 3/15/99)......... 5 9/16 4 3/4 15 1/8 13 1/2
On March 15, 1999, the last reported sales price per share of the common
stock was $5.00, and we had approximately 600 common stockholders of record.
18
In October 1998, we completed a tender offer and purchased approximately
10.5 million shares of our common stock for $5.50 per share totaling $57.6
million. We now have approximately 13.3 million shares of common stock
outstanding.
In August 1997 we completed our spin-off distribution of one share of common
stock of PriceSmart for every four shares of our Company's common stock held of
record. PriceSmart began separate trading on The Nasdaq Stock Market-Registered
Trademark- on September 2, 1997.
DIVIDENDS
We intend to distribute at least 95% of our taxable earnings to maintain our
qualification as a REIT.
During 1998, we declared and paid three quarterly dividends of $0.35 on each
common share and one quarterly dividend of $0.35 on each Series A Preferred
share for a total of $1.40 per share or $33.3 million. Prior to the distribution
of Series A Preferred Stock, we paid dividends on our common stock.
Beginning with our November 1998 dividend payment, dividends of $1.40 per
year will be paid on the Series A Preferred Stock. Any dividends required to be
paid in excess of $1.40 will be paid to our common stockholders.
For the transition period ended December 31, 1997, our Board of Directors
declared and paid one dividend of $0.35 per share for a total of $8.3 million.
During the year ended August 31, 1997, our Board of Directors declared and paid
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 the year ended August
31, 1996.
It is possible that, from time to time, we may not have sufficient cash or
other liquid assets to meet our 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 our taxable income. In the event that such
19
timing differences occur, in order to meet these distribution requirements, we
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.
ITEM 6--SELECTED FINANCIAL DATA
The following selected data should be read in conjunction with our financial
statements located elsewhere in this Form 10-K and "Item 7-- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(amounts in thousands, except per share data)
FOUR MONTHS ENDED
YEAR ENDED
DECEMBER 31 DECEMBER 31 YEAR ENDED AUGUST 31
-------------------- -------------------- ------------------------------------------
1998 1997 1997 1996 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- --------- ---------
Selected Income Statement
Data
Rental revenues........ $ 62,485 $ 56,067 $ 18,170 $ 18,941 $ 56,838 $ 56,221 $ 51,897 $ 30,316
Operating income
(loss)............... 31,393 23,289 9,045 8,178 22,422 5,829 16,635 (74,711)
Income (loss) from
continuing
operations........... 29,429 29,003 17,508 7,590 19,085 8,340 13,297 (40,596)
Discontinued
operations........... -- (1,625) -- (3,235) (4,860) (8,250) (12,751) (883)
Net income (loss) per
share from continuing
operations--basic.... .97 1.23 .74 .33 .82 .36 .53 (1.50)
Cash dividends per
share................ 1.40 1.25 .35 .30 1.20 -- .08 --
AS OF
DECEMBER 31 AS OF AUGUST 31
-------------------- ------------------------------------------
1998 1997 1997 1996 1995 1994
--------- --------- --------- --------- --------- ---------
Selected Balance Sheet Data
Real estate assets, net.............. $ 418,507 $ 353,056 $ 337,139 $ 337,098 $ 330,443 $ 405,966
Total assets......................... 457,352 408,478 403,757 540,325 555,994 591,511
Long-term debt....................... -- -- -- -- 15,425 --
Stockholders' equity and investment
by Costco.......................... 344,811 406,624 396,476 532,899 532,085 578,788
Book value per common share.......... (.65) 17.13 16.78 22.88 22.90 21.44
ITEM 7-- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
In Management's Discussion and Analysis of Financial Conditions and Results
of Operations we explain our general financial condition and results of
operations including:
- results of operations
20
- why revenues, costs and earnings changed from the prior period
- funds from operations (FFO)
- how we used cash for capital projects and dividends in 1996 through 1998
and how we expect to use cash in 1999
- where we plan on obtaining cash for future dividend payments and future
capital expenditures
- impact of year 2000 technology issues on our operations
In 1997 we changed our fiscal year end from August 31 to December 31, which
is required for REITs. Because of this change, the transition period ended
December 31, 1997 consisted of only four months. For that reason, we will
compare our discussion of the year ended December 31, 1998 with the equivalent
recast twelve month period of 1997. Financial information for the year ended
December 31, 1997 is unaudited and used for this discussion only. We will also
compare the two years ending August 31, 1997 and 1996.
As you read Management's Discussion and Analysis, it may be helpful to refer
to our financial statements and accompanying notes beginning on page 27. In
Management's Discussion and Analysis we explain the changes in specific line
items in the statements of income. Where changes are due to more than one
reason, we list the reasons in order of importance.
RENTAL REVENUES
RENTAL PERCENT
REVENUES CHANGE CHANGE
---------- --------- -----------
1998--Year ended December 31................. $ 62,485 $ 6,418 11%
1997--Year ended December 31 (unaudited)..... 56,067 -- --
1997--Year ended August 31................... 56,838 617 1%
1996--Year ended August 31................... 56,221 -- --
21
Revenues increased $6.4 million to $62.5 million in 1998 compared to 1997
because:
- properties we acquired at the end of 1997 and in 1998 generated $6.5
million of revenues in 1998
- expansion of our self storage business provided an additional $1.7 million
of revenue
- revenues from properties we owned in both 1997 and 1998 generated an
additional $0.3 million from new leases generating revenues
- revenues from properties sold or transferred to PriceSmart in the
distribution contributed $2.0 million of revenues in the prior year.
- revenues of $0.8 million were lost from the Homeplace bankruptcy, a former
tenant at our Dallas, TX location
Revenues increased $0.6 million to $56.8 million in the year ended August
31, 1997 compared to 1996 because:
- new leases at our Dallas, TX location generated an additional $2.8 million
of revenues offset by
- revenues lost from the Bradlees bankruptcy, a former tenant at our
Seekonk, MA location
- revenues lost from selling our Richmond, CA location
EXPENSES
PERCENT
AMOUNT CHANGE CHANGE
---------- ----------- ---------
1998--Year ended December 31.................... $ 31,092 $ (1,686) -5%
1997--Year ended December 31 (unaudited)........ 32,778 -- --
1997--Year ended August 31...................... 34,416 (15,976) -32%
1996--Year ended August 31...................... 50,392 -- --
22
Expenses decreased $1.7 million to $31.1 million in 1998 compared to 1997
primarily because:
- we wrote off $2.0 million in 1997 for asset impairments on properties held
for sale because their book value was higher than what we expected to
receive when the properties sold
- we wrote off costs in 1997 related to the PriceSmart distribution,
consisting of insurance, legal and accounting fees of $1.5 million which
contributed to our decrease in general and administrative expenses in 1998
- properties we acquired at the end of 1997 and in 1998 increased 1998
expenses $3.0 million
- expansion of our self storage business in 1998 increased expenses an
additional $0.6 million
- properties sold or transferred to PriceSmart resulted in a decrease in
expenses of $1.1 million
Expenses decreased $16.0 million to $34.4 million in the year ended August
31, 1997 compared to 1996 because:
- we wrote off $17.0 million in 1996 for asset impairments on properties
held for sale
- properties sold and leases terminated in 1996 accounted for $2.2 million
in expense reductions for 1997
- we expensed costs in 1997 related to the PriceSmart distribution,
consisting of insurance, legal and accounting fees of $1.5 million,
partially offsetting expense reductions discussed above
23
OPERATING INCOME
PERCENT
AMOUNT CHANGE CHANGE
---------- ----------- ---------
1998--Year ended December 31.............. $ 31,393 $ 8,104 35%
1997--Year ended December 31
(unaudited)............................. 23,289 -- --
1997--Year ended August 31................ 22,422 16,593 285%
1996--Year ended August 31................ 5,829 -- --
Operating income increased for 1998 and the year ended August 31, 1997
compared to the same periods in the prior year primarily because of the changes
in Rental Revenues and Expenses discussed above.
INTEREST EXPENSE
PERCENT
AMOUNT CHANGE CHANGE
---------- ----------- ------------
1998--Year ended December 31.......... $ 2,811 $ 2,789 12,677%
1997--Year ended December 31
(unaudited)......................... 22 -- --
1997--Year ended August 31............ 180 (342) -65%
1996--Year ended August 31............ 522 -- --
During 1998, interest expense increased $2.8 million because:
- we recorded $2.6 million in interest expense related to our unsecured
revolving credit facilities
- we recorded $0.5 million in interest expense related to the note payable
associated with our San Diego/Murphy Canyon, CA self storage facility
purchase
24
- we capitalized $0.3 million of this $3.1 million interest incurred to real
estate assets
Interest expense decreased $0.3 million to $0.2 million in the year ended
August 31, 1997 compared to 1996 because:
- we repaid a $15.4 million note payable to Costco during the last quarter
of the year ended August 31, 1996
- less construction activity in 1997 reduced capitalized interest over the
prior year
INTEREST INCOME
PERCENT
AMOUNT CHANGE CHANGE
--------- ---------- ---------
1998--Year ended December 31............... $ 663 $ (5,610) -89%
1997--Year ended December 31 (unaudited)... 6,273 -- --
1997--Year ended August 31................. 8,213 249 3%
1996--Year ended August 31................. 7,964 -- --
Interest income decreased $5.6 million to $0.7 million in 1998 compared to
1997 primarily because:
- we received full payment for a $41.2 million interest bearing note
receivable in 1997
- we transferred previously invested cash and other interest bearing notes
receivable to PriceSmart in August 1997
- we used previously invested cash for acquiring and developing properties
Interest income increased $0.2 million to $8.2 million in the year ended
August 31, 1997 compared to 1996 because we earned more interest income on
invested cash balances.
25
GAIN (LOSS) ON SALE OF REAL ESTATE AND INVESTMENTS (NET)
PERCENT
AMOUNT CHANGE CHANGE
---------- ----------- ---------
1998--Year ended December 31.............. $ 184 $ 362 203%
1997--Year ended December 31
(unaudited)............................. (178) -- --
1997--Year ended August 31................ 1,893 1,029 119%
1996--Year ended August 31................ 864 -- --
During 1998 we sold a free-standing restaurant building at our Azusa, CA
property and recorded a $184,000 gain. We also sold a free-standing carwash at
our Northridge, CA site and recognized no gain or loss. We consider these two
parcels incidental to our main business. The loss recorded in the year ended
December 31, 1997 relates to the properties and investments sold prior to the
PriceSmart distribution.
The gain on sale of properties for the year ended August 31, 1997 related to
the sale of properties in Schaumburg, IL, Gaithersburg, MD, Colton, CA, and
Concord, CA. These gains were partially offset by losses on the sale of
properties in Houston, TX and Washington Metro, MD. We recorded a $782,000 gain
during the year ended August 31, 1997 related to the sale of a preferred stock
investment in a privately held specialty retailer and on the sale of options to
purchase stock in a privately held automobile broker.
26
PROVISION FOR INCOME TAXES
PERCENT EFFECTIVE
AMOUNT CHANGE CHANGE TAX RATE
---------- --------- ----------- -----------
1998--Year ended December 31... $ -- $ (359) -100% n/a
1997--Year ended December 31
(unaudited).................. 359 -- -- n/a
1997--Year ended August 31..... 13,263 7,468 129% 41%
1996--Year ended August 31..... 5,795 -- -- 41%
We have no income tax expense for 1998 because of our REIT status. Before we
became a REIT in September 1997 we recorded income taxes at an effective tax
rate of 41%. We recorded an income tax benefit of $7.6 million in the year ended
December 31, 1997 that offset the tax expense recorded. The tax benefit related
to a previously recorded income tax liability that was presumed no longer
payable because of our conversion to a REIT as well as income tax refunds
receivable related to Federal tax net operating loss carrybacks.
DISCONTINUED OPERATIONS
PERCENT
AMOUNT CHANGE CHANGE
---------- ----------- ---------
1998--Year ended December 31.............. $ -- $ 1,625 100%
1997--Year ended December 31.............. (1,625) -- --
1997--Year ended August 31................ (4,860) 3,390 41%
1996--Year ended August 31................ (8,250) -- --
Due to the PriceSmart distribution in August 1997, there were no
discontinued operations in 1998.
27
The decrease in the net loss from operations of the discontinued
merchandising segment for the year ended August, 31 1997 compared to the year
ended August 31, 1996, 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.
FUNDS FROM OPERATIONS
YEAR ENDED DECEMBER 31 YEAR ENDED AUGUST 31
---------------------- ----------------------
1998 1997 1997 1996
---------- ---------- ---------- ----------
Income before provision for income taxes........... $ 29,429 $ 29,362 $ 32,348 $ 14,135
Depreciation and amortization...................... 12,471 9,887 9,860 10,071
Provision for asset impairments.................... -- 2,000 2,000 17,000
(Gain) loss on sale of real estate and investments,
net.............................................. -- 179 (1,893) (864)
Other.............................................. 509 -- -- --
---------- ---------- ---------- ----------
Funds from operations............................ 42,409 41,428 42,315 40,342
Straight-line rents................................ (2,654) (2,305) (2,499) (3,150)
---------- ---------- ---------- ----------
Adjusted funds from operations................... $ 39,755 $ 39,123 $ 39,816 $ 37,192
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding................ 21,688 23,480 23,354 23,262
Real estate industry analysts generally consider funds from operations (FFO)
as another measurement of performance for real estate-oriented companies. In
general, FFO adjusts net income for noncash charges such as depreciation,
amortization and most non-recurring gains and losses. The National Association
for Real Estate Investment Trusts (NAREIT), defines FFO as net income, excluding
depreciation and amortization expense, and gains (losses) from certain sales of
property. We also exclude provisions for asset impairments and gains (losses)
from sale of investments when we calculate FFO. We also adjust the NAREIT
definition to eliminate straight-
28
line rents in adjusted FFO because of their significance in our operations.
Straight-line rent accruals are noncash revenues associated with fixed future
minimum rent increases.
FFO during 1998 increased 2% to $42.4 million compared to 1997 because:
- properties acquired at the end of 1997 and in 1998 generated $5.2 million
- we reduced general and administrative expenses $1.9 million primarily
related to the PriceSmart distribution
- expansion of our self storage business in 1998 generated $1.4 million
- the change in net interest of $8.4 million from $6.3 million net interest
income in 1997 to $2.1 net interest expense in 1998 offset the increases
in net operating income generated from our properties
FFO for 1998, excluding income earned from assets transferred to PriceSmart,
increased 17% to $42.4 million in 1998 from $36.3 million in 1997.
FFO and adjusted FFO do not represent the generally accepted accounting
principles definition of cash flows from operations and should not be considered
as an alternative to net income as an indicator of our operating performance or
to cash flows as a measure of liquidity.
For the years ended August 31, 1997 and 1996, the growth in adjusted FFO
reflects many of the factors mentioned in the rental revenues, expenses and
operating income discussed previously in this section of Item 7.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to our ability to generate sufficient cash flows to meet
the short and long-term cash requirements of our business operations. Capital
resources represent those funds used or available to be used to support our
business operations and consist of stockholders' equity and debt.
Cash flow from operations has been the principal source of capital to fund
our ongoing operations and dividend payments, while use of our credit
29
facilities and mortgage financing have been the principal sources of capital
required to fund our growth. While we are positioned to finance our business
activities through a variety of sources, we expect to satisfy short-term
liquidity requirements through net cash provided by operations and through
borrowings.
Through 1999 we anticipate investing approximately:
- up to $10 million for commercial real estate development on property we
own (a portion of this amount represents commitments under executed
construction contracts)
- up to $10 million for development and expansion of our self storage
business
- up to $50 million for real estate acquisitions and development
opportunities
We cannot guarantee that these estimates will be realized, although we
believe we have been prudent in our plans and assumptions. Business conditions
and other risks and uncertainties could cause our actual results to differ
materially from these estimates, particularly our plan to acquire real estate
which is primarily dependent on the continued attractiveness of real estate
values and the available cost of capital for the Company.
We are currently in various stages of negotiations to purchase additional
commercial properties and continuing to evaluate various other properties for
acquisition or development. To the extent that investment opportunities exceed
available cash flow from the sources mentioned above, we may raise additional
capital through bank credit facilities and/or secured mortgage financing. We
also may choose to seek additional funds through future public offerings of debt
or equity securities.
From time to time we will consider selling properties to better align our
portfolio with our geographic and tenant composition strategies. We are in the
process of selling two properties from our portfolio for approximately $32.3
million. We are also contemplating selling certain other properties.
30
These sales may not be completed due to uncertainties associated with contract
negotiations and buyer due diligence contingencies.
In December 1998 we obtained a $100 million unsecured credit facility from
Wells Fargo Bank, AmSouth Bank and Bank One. This facility has a three-year term
with an initial interest rate of LIBOR plus 135 basis points. The rate may vary
based on our leverage and other financial ratios. At December 31, 1998, there
was $49.1 million outstanding on the Wells Fargo facility at a 6.91% interest
rate.
In September 1998 we announced our intention to purchase approximately 10
million shares of our common stock for $5.50 per share. To fund this purchase,
we obtained a $50 million credit facility with Morgan Guaranty Trust Company
(the Morgan Facility). The Morgan Facility has a one-year term with an interest
rate of LIBOR plus 30 basis points. Sol Price (a significant stockholder of our
Company and the father of Robert Price, our Chairman of the Board), Helen Price
(Sol Price's spouse) and the Sol & Helen Price Trust entered into a Guaranty and
Pledge Agreement (the Guaranty) in which they agreed to guaranty our obligations
under the Morgan Facility. The Sol and Helen Price Trust also granted Morgan
Guaranty Trust Company a continuing security interest in U.S. Treasury Notes
worth more than the amount outstanding under the Morgan Facility to secure their
obligations under the Guaranty. At year end, $50.0 million was outstanding under
the Morgan Facility at a weighted average interest rate of 5.69%.
In conjunction with the San Diego/Murphy Canyon, CA self storage facility
purchase, we assumed an existing $8.9 million note secured by the property. The
note, payable to a financial institution, matures in July 2004 and bears an
interest rate of 9.0%. The note does not permit repayment prior to July 2001.
In August 1998 we distributed to stockholders of record one share of newly
created Series A Preferred Stock, par value $.0001, for each share of common
stock held by them on the record date. We raised no capital through this
transaction. The Series A Preferred Stock pays quarterly
31
dividends totaling $1.40 per year with a $16.00 per share liquidation
preference. Prior to the distribution of Series A Preferred Stock, we paid
dividends on our common stock. Dividends of $1.40 will be paid on the Series A
Preferred Stock and any dividends paid in excess of $1.40, will be paid to our
common stockholders. We have the right to redeem the Series A Preferred Stock
after August 16, 2003 or after a change of control of our Company at a
redemption price of $16.00 per share plus accrued and unpaid dividends, if any.
YEAR 2000
Many older computer software programs refer to years in terms of their final
two digits only. Such programs may interpret the Year 2000 to mean the year 1900
instead. If not corrected, those programs could cause date-related transaction
failures. We recognize the significance of ensuring our operations and systems
are not adversely impacted by Year 2000 problems.
We are in the final phases of upgrading our existing computer software and
information technology. The project cost is approximately $220,000 and we expect
to be substantially finished by June 30, 1999, which is prior to any anticipated
impact on our operating systems. We believe that with modifications to existing
software and conversions to new software, the Year 2000 issue will not pose
significant operational problems for our computer systems.
In connection with our operating properties, we are evaluating all systems
that contain embedded chips such as security systems, elevators, lighting and
HVAC systems. We will continue to commit the resources necessary for the
management and elimination of critical Year 2000 risks. We expect to complete
our evaluation and make necessary changes by June 30, 1999. Although it is not
possible to quantify the total cost of all corrections at this time, we do not
expect that these costs will have a material adverse effect on our operations or
financial condition. We expect all critical internal Year 2000 issues will be
resolved prior to the year 2000.
We are also currently evaluating the Year 2000 readiness of third parties
such as utilities, financial institutions, governmental agencies, municipalities
32
and tenants, and the impact, if any, on our company and the operations of our
properties. However, we cannot quantify or ensure that these external systems,
whether certified to be Year 2000 compliant or not, would not create
difficulties for us before, on, or after the year 2000.
We intend to develop a contingency plan to handle most likely and worst case
Year 2000 scenarios. We intend to complete our determination of a worst case
scenario after receiving and analyzing responses to substantially all inquiries
we made to third parties. Following our analysis, we intend to develop a
timetable for completing our contingency plans and expect to complete our
contingency plan by June 30, 1999.
INFLATION
Because a substantial number of our 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, we do not expect inflation to have a material impact on future net
income or cash flow from developed and operating properties. In addition,
substantially all leases are triple net, which means specific operating expenses
and property taxes are passed through to the tenant.
ITEM 7A.--QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
short-term LIBOR interest rates. We do not have any foreign exchange or other
significant market risk. We did not have any derivative financial instruments at
December 31, 1998.
Our exposure to market risk for changes in interest rates relates primarily
to our unsecured lines of credit. We enter into variable rate debt obligations
to support general corporate purposes, including acquisitions, capital
expenditures and working capital needs. We continuously evaluate our level of
variable rate debt with respect to total debt and other factors, including our
assessment of the current and future economic environment.
We had $99.1 million in variable rate debt outstanding at December 31, 1998.
Based upon these year-end debt levels, a hypothetical 10% adverse
33
change in interest rates would increase interest expense by approximately $0.6
million on an annual basis, and likewise decrease our earnings and cash flows.
We cannot predict market fluctuations in interest rates and their impact on our
variable rate debt, nor can there be any assurance that fixed rate long-term
debt will be available to us at favorable rates, if at all. Consequently, future
results may differ materially from the estimated adverse changes discussed
above.
34
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31
----------------------
1998 1997
---------- ----------
ASSETS
Real estate assets
Land and land improvements.................................................. $ 210,839 $ 193,881
Building and improvements................................................... 260,709 204,184
Fixtures and equipment...................................................... 581 242
Construction in progress.................................................... 3,744 946
---------- ----------
475,873 399,253
Less accumulated depreciation............................................... (57,366) (46,197)
---------- ----------
418,507 353,056
Investment in real estate joint venture....................................... 4,050 --
Cash and cash equivalents..................................................... 3,691 27,003
Accounts receivable........................................................... 2,699 2,360
Income tax receivable......................................................... 7,615 8,117
Deferred rents................................................................ 14,921 12,400
Other assets.................................................................. 5,869 5,542
---------- ----------
Total assets.................................................................. $ 457,352 $ 408,478
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Revolving lines of credit and note payable.................................. $ 108,023 $ --
Accounts payable and other liabilities...................................... 4,518 1,854
---------- ----------
Total liabilities......................................................... 112,541 1,854
Commitments
Stockholders' equity
Series A preferred stock, cumulative, redeemable, $.0001 par value,
26,000,000 shares authorized, 23,758,801 shares issued and outstanding.... 353,404 --
Common stock, $.0001 par value, 74,000,000 shares authorized, 13,293,456 and
23,730,951 shares issued and outstanding.................................. 1 2
Additional paid-in capital.................................................. 929 412,321
Accumulated deficit......................................................... (9,523) (5,699)
---------- ----------
Total stockholders' equity................................................ 344,811 406,624
---------- ----------
Total liabilities and stockholders' equity.................................... $ 457,352 $ 408,478
---------- ----------
---------- ----------
SEE ACCOMPANYING NOTES.
35
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED FOUR MONTHS ENDED YEAR ENDED AUGUST 31
DECEMBER 31 DECEMBER 31
------------ -------------------- --------------------
1998 1997 1996 1997 1996
------------ --------- --------- --------- ---------
(UNAUDITED)
Rental revenues.................................... $ 62,485 $ 18,170 $ 18,941 $ 56,838 $ 56,221
Expenses
Operating and maintenance........................ 7,616 2,392 3,037 9,105 9,591
Property taxes................................... 8,025 2,361 2,789 7,882 8,380
Depreciation and amortization.................... 12,471 3,326 3,299 9,860 10,071
General and administrative....................... 2,980 1,046 1,638 5,569 5,350
Provision for asset impairments.................. -- -- -- 2,000 17,000
------------ --------- --------- --------- ---------
Total expenses................................. 31,092 9,125 10,763 34,416 50,392
------------ --------- --------- --------- ---------
Operating income................................... 31,393 9,045 8,178 22,422 5,829
Interest and other
Interest expense................................. (2,811) -- (158) (180) (522)
Interest income.................................. 663 833 2,773 8,213 7,964
Gain on sale of real estate and
investments, net............................... 184 -- 2,071 1,893 864
------------ --------- --------- --------- ---------
Total interest and other....................... (1,964) 833 4,686 9,926 8,306
------------ --------- --------- --------- ---------
Income before provision (benefit) for income
taxes............................................ 29,429 9,878 12,864 32,348 14,135
Provision (benefit) for income taxes............... -- (7,630) 5,274 13,263 5,795
------------ --------- --------- --------- ---------
Income from continuing operations.................. 29,429 17,508 7,590 19,085 8,340
Discontinued operations (Note 2):
Net loss from operations of discontinued
merchandising segment (less applicable benefit
for income taxes of $2,248, $3,379 and $4,531
respectively).................................. -- -- (3,235) (4,860) (8,250)
------------ --------- --------- --------- ---------
Net income......................................... 29,429 17,508 4,355 14,225 90
Dividends paid to preferred stockholders........... (8,316) -- -- -- --
------------ --------- --------- --------- ---------
Net income applicable to common stockholders....... $ 21,113 $ 17,508 $ 4,355 $ 14,225 $ 90
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
Earnings per common share--basic
Income from continuing operations................ $.97 $.74 $.33 $.82 $.36
Net income....................................... $.97 $.74 $.19 $.61 $.00
Earnings per common share--assuming dilution
Income from continuing operations................ $.96 $.73 $.32 $.82 $.36
Net Income....................................... $.96 $.73 $.18 $.61 $.00
SEE ACCOMPANYING NOTES.
36
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- ---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- --------- ----------- ---------- ------------ ---------
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
Net income..................... -- -- -- -- -- 17,508 17,508
Stock options exercised........ -- -- 98 -- 928 -- 928
Cash dividend, $.35 per share.. -- -- -- -- -- (8,288) (8,288)
--
--------- --------- --------- ---------- ------------ ---------
Balance at December 31, 1997..... -- -- 23,731 2 412,321 (5,699) 406,624
Net income..................... -- -- -- -- -- 29,429 29,429
Stock options exercised and
stock grants................. -- -- 37 -- 350 -- 350
Adjustment to special
dividend--Distribution of
PriceSmart................... -- -- -- -- (550) -- (550)
Cash dividends(1).............. -- -- -- -- -- (33,253) (33,253)
Distribution of 8 3/4% Series A
Preferred Stock.............. 23,759 353,404 -- -- (353,404) -- --
Shares repurchased, including
costs........................ -- -- (10,475) (1) (57,788) -- (57,789)
--
--------- --------- --------- ---------- ------------ ---------
BALANCE AT DECEMBER 31, 1998... 23,759 $ 353,404 13,293 $ 1 $ 929 $ (9,523) $ 344,811
--
--
--------- --------- --------- ---------- ------------ ---------
--------- --------- --------- ---------- ------------ ---------
(1) $1.05 per share of common stock and $.35 per share of preferred stock
SEE ACCOMPANYING NOTES.
37
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOUR MONTHS ENDED
YEAR ENDED YEAR ENDED AUGUST 31
DECEMBER 31 DECEMBER 31
------------ -------------------- --------------------
1998 1997 1996 1997 1996
------------ --------- --------- --------- ---------
(UNAUDITED)
Operating activities
Net income...................................... $ 29,429 $ 17,508 $ 4,355 $ 14,225 $ 90
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............... 12,471 3,326 3,299 9,860 10,071
Deferred rents.............................. (2,521) (590) (1,024) (2,406) (3,150)
Gain on sale of real estate and investments,
net....................................... (184) -- (2,071) (1,893) (864)
Deferred income taxes....................... -- (6,660) 4,267 15,894 3,676
Provision for asset impairments............. -- -- -- 2,000 17,000
Changes in operating assets and liabilities:
Accounts receivable and other assets........ (1,118) (1,536) (359) (4,278) (6,613)
Leasing costs............................... (314) (12) (47) (139) (1,374)
Accounts payable and other liabilities...... 2,664 1,233 (685) (1,123) (56)
Net assets of discontinued segment.......... -- -- 3,112 4,495 3,832
------------ --------- --------- --------- ---------
Net cash flows provided by operating
activities.................................. 40,427 13,269 10,847 36,635 22,612
Investing activities
Additions to real estate assets............. (70,648) (18,906) (919) (2,720) (17,105)
Proceeds from sale of real estate assets.... 2,571 -- 13,234 29,279 26,059
Contributions to real estate joint
venture................................... (4,050) -- -- -- --
Additions to notes receivable............... -- -- -- (200) (1,149)
Payments of notes receivable................ -- -- 4,450 50,526 3,105
Net investing activities of discontinued
segment................................... -- -- (677) (7,987) (2,362)
------------ --------- --------- --------- ---------
Net cash flows (used in) provided by investing
activities.................................. (72,127) (18,906) 16,088 68,898 8,548
Financing activities
Advances to revolving lines of credit....... 181,213 -- -- -- --
Repayments to revolving lines of credit..... (82,133) -- -- -- --
Dividends paid.............................. (33,253) (8,288) (6,988) (28,037) --
Proceeds from exercise of stock options
including tax benefits.................... 350 928 426 5,429 724
Purchase of common stock.................... (57,789) -- -- -- --
Cash transferred to PriceSmart.............. -- -- -- (58,383) --
Repayments of Costco note payable and line
of credit................................. -- -- -- -- (16,426)
------------ --------- --------- --------- ---------
Net cash flows provided by (used in) financing
activities.................................. 8,388 (7,360) (6,562) (80,991) (15,702)
------------ --------- --------- --------- ---------
Net (decrease) increase in cash........... (23,312) (12,997) 20,373 24,542 15,458
Cash and cash equivalents at beginning of
period........................................ 27,003 40,000 15,458 15,458 0
------------ --------- --------- --------- ---------
Cash and cash equivalents at end of period...... $ 3,691 $ 27,003 $ 35,831 $ 40,000 $ 15,458
------------ --------- --------- --------- ---------
------------ --------- --------- --------- ---------
Supplemental disclosure:
Cash paid for interest...................... $ 2,252 $ -- $ 150 $ 150 $ 2,911
Net (refunds received) cash paid for income
taxes..................................... 25 (1,061) (2,723) (717) 829
Supplemental schedule of noncash operating and
financing activities:
Assumption of note payable to acquire real
estate assets............................. 8,943 -- -- -- --
Adjustment to special dividend--distribution
of PriceSmart............................. 550 -- -- -- --
SEE ACCOMPANYING NOTES.
38
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Price Enterprises, Inc. (PEI) operates as a real estate investment trust
(REIT) incorporated in the state of Maryland. Our principle business is to own,
acquire, operate, manage and lease real property, primarily shopping centers. We
became a REIT in September 1997 after we spun-off our merchandising segment and
certain other assets to PriceSmart, Inc.
ACCOUNTING PRINCIPLES
We prepare our financial statements in accordance with generally accepted
accounting principles. We follow the accounting standards established by the
Financial Accounting Standards Board and the American Institute of Certified
Public Accountants.
CONSOLIDATION
We combine our financial statements with those of our wholly-owned
subsidiaries and present them on a consolidated basis. The consolidated
financial statements do not include the results and transactions between us and
our subsidiaries or among our subsidiaries.
FISCAL YEAR
Effective September 1, 1997 we changed our fiscal year end from August 31 to
December 31 as required by the Internal Revenue Service for REITs. The
four-month transition period ending December 31, 1997 bridges the gap between
our old and new fiscal year ends.
REAL ESTATE ASSETS AND DEPRECIATION
We record real estate assets at historical costs, and adjust them for
recognition of impairment losses. We review long-lived assets for impairment
39
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
when events or changes in business conditions indicate that their full carrying
value may not be recovered. We consider assets to be impaired and write them
down to fair value if their expected associated future undiscounted cash flows
are less than their carrying amounts. We reduced historical costs for real
estate and related assets $2.0 million during the year ended August 31, 1997 and
$17.0 million during the year ended August 31, 1996. We determined fair value
using the present value of the expected associated cash flows. Ordinary repairs
and maintenance are expensed as incurred; major replacements and betterments are
capitalized and depreciated over their estimated useful lives. We compute real
estate asset depreciation on a straight-line basis over their estimated useful
lives, as follows:
Land improvements.................... 25 years
Building and improvements............ 10-25 years
Tenant improvements.................. Term of lease or 10 years
Fixtures and equipment............... 3-5 years
We capitalize interest incurred during the construction period of certain
assets and this interest is depreciated over the lives of those assets. The
following table shows interest expense and the amount capitalized (amounts in
thousands):
YEAR ENDED FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 AUGUST 31
------------ ---------------------------- ----------------------------
1998 1997 1996 1997 1996
------------ ------------- ------------- ------------- -------------
Interest incurred.............. $ 3,112 -- $ 165 $ 187 $ 882
Interest capitalized........... 301 -- 7 7 360
40
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
We use the "equity method" of accounting for our joint venture, which means
we carry this investment at cost, adjusted for our share of earnings or losses
and any distributions received.
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, including recovery of property operating expenses, and certain other
expenses which we accrue in the period in which the related expense occurs; and
(3) percentage rents which we accrue on the basis of actual sales reported by
tenants.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of less than three
months when purchased to be cash and cash equivalents.
LEASING COSTS
We capitalize costs associated with leasing space to tenants and amortize
leasing costs using the straight-line method over the initial terms of the
related tenant leases.
FINANCIAL INSTRUMENTS
The carrying amounts reflected in our balance sheets for cash and cash
equivalents, receivables and all liabilities approximate their fair values. In
making these assessments we used estimates and market rates for similar
instruments.
41
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
AUTHORIZED STOCK
As of December 31, 1998, our Company's authorized stock consisted of 100
million shares of capital stock of which 26 million shares have been designated
as 8 3/4% Series A Cumulative Redeemable Preferred Stock, par value $.0001 per
share.
INCOME TAXES
We intend to continue meeting all conditions necessary to qualify as a REIT
under the Internal Revenue Code. To qualify as a REIT, we are required to pay
dividends of at least 95% of our "REIT taxable income" each year and meet
certain other criteria. As a qualifying REIT, we will not be taxed on income
distributed to our stockholders. The reported amounts of our net assets, as of
December 31, 1998 and 1997 were more than their tax basis for Federal tax
purposes by approximately $35.9 million and $29.1 million, respectively.
In prior years, we reported income taxes in accordance with Statement of
Financial Accounting Standards (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
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires presentation of two calculations of
earnings per common share. Basic earnings per common
42
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
share equals net income divided by weighted average common shares outstanding
during the period. Diluted earnings per common share equals net income divided
by the sum of weighted average common shares outstanding during the period plus
common stock equivalents. Common stock equivalents are shares assumed to be
issued if outstanding stock options were exercised. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
reflect these calculations.
YEAR ENDED FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 AUGUST 31
-------------- ------------------------------ ------------------------------
1998 1997 1996 1997 1996
-------------- -------------- -------------- -------------- --------------
(UNAUDITED)
Weighted average shares
outstanding............... 21,687,776 23,675,310 23,298,255 23,353,666 23,262,374
Effect of dilutive
securities:
Employee stock options... 322,335 244,164 321,936 -- 117,797
-------------- -------------- -------------- -------------- --------------
Weighted average shares
outstanding-- assuming
dilution.................. 22,010,111 23,919,474 23,620,191 23,353,666 23,380,171
-------------- -------------- -------------- -------------- --------------
-------------- -------------- -------------- -------------- --------------
In September 1998 we announced a self-tender offer to purchase a portion of
our common stock for $5.50 per share and completed the offer on October 21,
1998. We purchased approximately 10.5 million shares, which was 44% of our
outstanding shares, for $57.6 million. We now have approximately 13.3 million
shares of common stock outstanding.
43
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been reflected in the financial statements in
order to conform with the current year presentation.
USE OF ESTIMATES
Preparing financial statements in conformity with generally accepted
accounting principles requires we make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. We
continually review our estimates and make adjustments as necessary, but actual
results could turn out different than what we envisioned when we made these
estimates.
STOCK-BASED COMPENSATION
We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB No. 25), and related interpretations, in accounting
for our employee and non-employee director stock options instead of following
SFAS No. 123, "Accounting for Stock-Based Compensation." The alternative fair
value accounting provided for under SFAS 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. Since the
exercise price of our stock options equals the market price of our stock on the
day the options are granted there is no related compensation expense.
44
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income,"
and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information." These statements, which are effective for fiscal years beginning
after December 15, 1997, currently have no impact on our financial statements.
NOTE 2--DISCONTINUED OPERATIONS
In August 1997, we completed a distribution of our merchandising segment and
certain other assets to PriceSmart. As a result, the financial statements for
all periods presented reflect our merchandising segment as a discontinued
operation. The results of operations and cash flows of other assets and
liabilities transferred to PriceSmart that were not part of the merchandising
segment are included in our continuing operations.
45
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--DISCONTINUED OPERATIONS (CONTINUED)
Summarized results of operations of the discontinued merchandising segment
were as follows (amounts in thousands):
YEAR ENDED
AUGUST 31
--------------------------
1997 1996
FOUR MONTHS ------------ ------------
ENDED
DECEMBER 31
------------
1996
------------
(UNAUDITED)
Sales...................................... $ 23,462 $ 59,042 $ 36,211
Other revenues............................. 1,611 5,487 2,709
Cost of sales.............................. (23,270) (55,948) (34,644)
Operating expenses......................... (7,286) (16,761) (21,644)
Minority interest.......................... -- (59) 4,587
Income tax benefit......................... 2,248 3,379 4,531
------------ ------------ ------------
$ (3,235) $ (4,860) $ (8,250)
------------ ------------ ------------
------------ ------------ ------------
Discontinued operations loss per
share--basic and diluted.................. $ (.14) $ (.21) $ (.35)
------------ ------------ ------------
------------ ------------ ------------
46
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--REAL ESTATE PROPERTIES
Our real estate properties are generally leased under noncancelable leases
with remaining terms ranging from one to 21 years. Rental revenues include the
following (amounts in thousands):
YEAR ENDED FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 AUGUST 31
------------ -------------------------- --------------------------
1998 1997 1996 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Minimum rent................... $ 48,230 $ 13,727 $ 14,358 $ 42,681 $ 42,529
Straight-line accrual of future
rent.......................... 2,654 828 1,024 2,499 3,150
Additional rent--cost
recoveries.................... 11,388 3,605 3,557 11,467 10,371
Percentage rent................ 213 10 2 191 171
------------ ------------ ------------ ------------ ------------
Rental revenues.............. $ 62,485 $ 18,170 $ 18,941 $ 56,838 $ 56,221
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Costco, our largest tenant, contributes 17.1% of total annual minimum rent
from four leases. Rental revenues generated from Costco were as follows (amounts
in thousands):
YEAR ENDED FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 AUGUST 31
------------ -------------------------- --------------------------
1998 1997 1996 1997 1996
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
Costco rental revenues......... $ 8,300 $ 2,700 $ 2,700 $ 8,100 $ 8,000
47
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--REAL ESTATE PROPERTIES (CONTINUED)
As of December 31, 1998, future minimum rental income due under the terms of
all noncancelable tenant leases is as follows (amounts in thousands):
1999..................................... $ 47,029
2000..................................... 49,829
2001..................................... 50,112
2002..................................... 49,481
2003..................................... 48,588
After 2003............................... 363,674
ACQUISITIONS
We acquired the following properties during 1998:
GROSS
LEASEABLE PURCHASE
DATE AREA PRICE
LOCATION DESCRIPTION ACQUIRED (SQ. FT.) (000'S)
- ----------------- ---------------------------------------------- ---------- ---------- ----------
Sacramento/
Bradshaw, CA.... office complex 5/1/98 296,900 $ 35,551
San Diego/ Murphy
Canyon, CA...... self storage facility 5/26/98 243,600 17,750
Solana Beach,
CA.............. land (future development) 6/22/98 -- 3,450
San Diego/ Rancho
San Diego, CA... retail complex 7/13/98 93,700 11,300
Fresno, CA....... land (contributed to joint venture) 7/29/98 -- 3,950
48
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--REAL ESTATE PROPERTIES (CONTINUED)
We funded these acquisitions through available cash, advances under our
unsecured revolving credit facilities, and by assuming a note payable in
conjunction with the San Diego/Murphy Canyon, CA self storage facility purchase.
On May 28, 1998, we announced a joint venture with River Park Properties to
develop a 173,000 square foot retail and commercial center in Fresno, CA. We own
50% of this joint venture investment. We purchased the land from PriceSmart at
the appraised value of $4.0 million and contributed the land to the joint
venture.
In December 1997 we purchased a shopping center in Roseville, CA for $23.6
million.
DISPOSITIONS
During 1998 we sold a free-standing restaurant building at our Azusa, CA
property and recorded a $184,000 gain on the sale. We also sold a free-standing
car wash at our Northridge, CA site and recognized no gain on the sale. We
consider both of these parcels incidental to our main business.
We sold no properties during the four months ended December 31, 1997. During
each of the two years ended August 31, we sold certain significant real estate
properties to unrelated parties and recognized related gains or losses on
dispositions, as shown in the following table. In addition, we recognized
$644,000 of net gains during the year ended August 31, 1997 on sales of
insignificant real estate properties. In conjunction with the
49
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--REAL ESTATE PROPERTIES (CONTINUED)
PriceSmart distribution, we transferred all remaining properties held for sale
to PriceSmart (amounts in thousands).
SALES PRETAX GAIN
LOCATION DESCRIPTION DATE SOLD PRICE (LOSS)
- ---------------------------------- -------------------------- ----------- ---------- -----------
YEAR ENDED AUGUST 31, 1997
Santee, CA........................ warehouse building 12/6/96 $ 3,187 $ 17
Schaumburg, IL.................... undeveloped land 12/10/96 6,865 802
Houston, TX....................... retail building 5/29/97 6,000 (352)
YEAR ENDED AUGUST 31, 1996
Palm Harbor, FL................... warehouse building 12/22/95 3,483 65
San Diego (Convoy Ct.), CA........ office building 2/9/96 3,500 143
Richmond, CA...................... warehouse building 4/12/96 11,075 80
NOTE 4--CREDIT FACILITIES AND NOTE PAYABLE
Our credit facility activity for 1998 consisted of the following:
- In April we obtained a revolving credit facility with a commercial bank
for up to $75 million in unsecured advances. Since certain financial
covenants and restrictions in the loan agreement were impacted by our
distribution of preferred stock, the credit facility was amended and
expired on December 31, 1998. No amounts remain outstanding on this
facility.
- In September we obtained an additional credit facility for $50 million
with Morgan Guaranty Trust Company. This credit facility has a one-year
term and bears interest at LIBOR plus 30 basis points. Sol Price (a
significant stockholder of our Company and the father of Robert
50
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CREDIT FACILITIES AND NOTE PAYABLE (CONTINUED)
Price, our Company's Chairman of the Board), Helen Price (Sol Price's
spouse) and the Sol & Helen Price Trust entered into a Guaranty and Pledge
Agreement in which they agreed to guaranty our obligations under this
credit facility. The Sol and Helen Price Trust also granted the Morgan
Guaranty Trust Company a continuing security interest in U.S. Treasury
Notes worth more than the amount outstanding under this credit facility to
secure their obligations under the guaranty. At year end, $50.0 million
was outstanding under this credit facility at a weighted average interest
rate of 5.69%.
- In December we obtained a $100 million unsecured credit facility with
Wells Fargo Bank, AmSouth Bank and Bank One. This facility has a term of
three years with an interest rate of LIBOR plus 135 basis points. The rate
may vary based on our leverage and other financial ratios. As of December
31, we owed $49.1 million on this credit facility at an interest rate of
6.91%.
In conjunction with the San Diego/Murphy Canyon, CA self storage facility
purchase, we assumed an existing $8.9 million note secured by the property. The
note, payable to a financial institution, matures in July 2003 and bears an
interest rate of 9.0%. Prepayment of the note may not occur prior to July 2001.
The amount of secured debt that becomes due in each of the next five years
is as follows (amounts in thousands):
1999......................................... $ 70
2000......................................... 76
2001......................................... 84
2002......................................... 91
2003......................................... 100
51
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--RELATED PARTY TRANSACTIONS
Because of the PriceSmart distribution and for the purpose of governing
certain of the ongoing relationships between PriceSmart and PEI after the
distribution, and to provide for an orderly transition, PriceSmart and PEI
entered into various agreements as described below.
Our Company and PriceSmart entered into an Asset Management and Disposition
Agreement in August 1997 for us to provide asset management services for certain
properties distributed to PriceSmart. PriceSmart pays us management fees,
leasing fees, disposition fees and developer's fees for providing these
services. This agreement has a two-year term; provided that either the Company
or PriceSmart may terminate the agreement with 60 days written notice. During
1998, we charged PriceSmart $201,000 for asset management services and $43,000
during the four months ending December 31, 1997.
We also entered into a Tax Sharing Agreement with PriceSmart in August 1997
defining rights and obligations with respect to tax returns and tax liabilities
for taxable years and other taxable periods ending on or before August 31, 1997.
In general, we will be responsible for (i) filing all Federal and state income
tax returns of our Company, PriceSmart and any of their subsidiaries for all
taxable years ending on or before or including August 31, 1997 and (ii) paying
the taxes relating to these returns (or be entitled to tax refunds) to the
extent attributable to pre-August 31, 1997 periods.
PriceSmart leases space from us for its corporate offices in San Diego. The
lease expires August 31, 1999. In 1998 we recorded $590,000 in revenue related
to this lease and $158,000 in revenue during the four months ended December 31,
1997.
In July 1998 we acquired approximately 15 acres of land in Fresno, CA from
PriceSmart for $4.0 million.
52
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--RELATED PARTY TRANSACTIONS (CONTINUED)
In May 1998, we acquired an office complex in Sacramento, CA for $35.6
million. We acquired the property from Ivanhoe-Bradshaw, L.L.C.
(Ivanhoe-Bradshaw), a company controlled by Sol Price. In addition, James F.
Cahill, a member of our Board of Directors, served as Manager of
Ivanhoe-Bradshaw and previously held membership interests in Ivanhoe-Bradshaw.
NOTE 6--PROFIT SHARING AND 401(K) PLAN
Substantially all of our employees participate in a defined contribution
profit sharing and 401(k) plan. Profit sharing contributions, if any, are based
on a discretionary amount determined by our Board of Directors and we allocate
contributions to each participant based on their relative compensation, subject
to certain limitations, to the compensation of all participants. We make these
contributions annually. We also make a matching 401(k) contribution equal to 50%
of each participant's contribution up to an annual maximum matching contribution
of $250.
During the year ended August 31, 1996, the plan year was converted to a
December 31 year-end from an August 31 year-end; therefore, the contribution to
the profit sharing plan in the year ended August 31, 1996 was for the period of
September 1995 to December 1995.
We contributed the following amounts to our profit sharing and 401(k) plan
(amounts in thousands):
YEAR ENDED YEAR ENDED
DECEMBER 31 AUGUST 31
------------- ----------------------------
1998 1997 1996
------------- ------------- -------------
Profit Sharing.............................. $ 117 $ 490 $ 187
401(k)...................................... 7 29 37
53
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS
In 1995, we established an Employee Stock Option and Stock Grant Plan and a
Director Stock Option Plan and we may grant stock options to any employee or
director under these two plans. We reserved 1,500,000 shares for issuance under
the employee plan and 150,000 for issuance under the director plan. The director
plan was amended on October 1, 1997. Options generally vest over five years and
expire six years after the grant date. Once exercisable, the employee or
director can purchase shares of our stock at the market price on the date we
granted the option. Subsequent to August 31, 1997, and as a direct result of the
PriceSmart distribution, we adjusted all outstanding options, both in quantity
and exercise price, so each optionee remained in the same economic position as
before the distribution. We made an equitable adjustment by issuing 54,352
additional stock options to compensate for a reduction in our stock price
because of the PriceSmart distribution.
In August 1998 we distributed one share of Series A Preferred Stock for
every share of common stock outstanding. Subsequent to this distribution our
common stock began trading at a significantly reduced price. In order to put
optionees with outstanding stock options in the same position as common
stockholders of the Company after the distribution, each optionee was granted
the right to receive one share of preferred stock upon the exercise of a share
of common stock. This right was granted instead of adjusting the exercise price
or quantity of common stock options outstanding. This right is triggered by the
exercise of the common stock option and the optionee may not exercise options in
the common or preferred stock independently. We amended both stock options plans
in August 1998 to allow for this change.
You will see in the following table the activity in the common stock options
and related weighted average exercise price per share. The quantity of stock
options granted, exercised and cancelled for 1998 reflect only
54
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS (CONTINUED)
common stock options. In order to make this disclosure more meaningful, we have
reflected the weighted average exercise price per share as a prorated price
based on the relative value of the common stock and the preferred stock. We used
the closing prices on the first day of trading of the preferred stock, where the
common stock closed at $4.38, or 23%, and the preferred closed at $14.87, or
77%, of the total of $19.25.
Since the issuance of the Series A Preferred Stock, we have only granted new
options in common stock at the market value on the date of grant. We do not
intend to issue any preferred stock options in the future.
55
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS (CONTINUED)
The following table summarizes the activity for both plans:
WEIGHTED AVERAGE
STOCK EXERCISE PRICE
OPTIONS PER SHARE
------------ ----------------
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
Adjustment and revaluation resulting from
distribution of PriceSmart.......................... 54,352
------------
Adjusted outstanding at August 31, 1997.............. 320,361 10.25
Granted............................................ 476,329 18.87
Exercised.......................................... (98,383) 9.19
Canceled........................................... (45,312) 11.55
------------
Outstanding at December 31, 1997..................... 652,995 16.60
Granted............................................ 68,750 4.60
Exercised.......................................... (23,397) 10.43
Canceled........................................... (13,500) 18.75
------------
Outstanding at December 31, 1998..................... 684,848 3.89
------------
------------
56
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS (CONTINUED)
As of December 31, 1998, options to purchase 141,680 shares were exercisable
under the Employee Plan and 28,715 shares were exercisable under the Director
Plan. At year end 1,024,840 shares of common stock remained available for future
issuance in connection with the Employee Plan and 91,026 shares remained
available for future issuance under the Director Plan.
The following table summarizes information concerning options outstanding
under both plans as of December 31, 1998.
WEIGHTED AVERAGE
WEIGHTED AVERAGE EXERCISE PRICE OF
RANGE OF OPTIONS WEIGHTED AVERAGE REMAINING LIFE IN OPTIONS OPTIONS
EXERCISE PRICES OUTSTANDING EXERCISE PRICE YEARS EXERCISABLE EXERCISABLE
- --------------- ----------- ----------------- ------------------- ----------- -----------------
$ 2.07 - 2.58 140,911 $ 2.24 2.1 75,359 $ 2.25
4.00 - 4.30 481,437 4.27 4.8 95,036 4.28
4.50 - 5.35 62,500 4.66 5.2 -- --
----------- -----------
684,848 3.89 4.3 170,395 3.38
----------- -----------
----------- -----------
As we stated in Note 1, we follow the provisions for APB No. 25, "Accounting
for Stock Issued to Employees." In 1997 we implemented the disclosure provisions
required by SFAS No. 123, "Accounting for Stock-Based Compensation" for our
stock option plans. SFAS No. 123 requires pro forma net income and earnings per
share information, which is calculated assuming we had accounted for our stock
option plans under the "fair value" method described in that statement. We
estimated the fair value using the Black-
57
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS (CONTINUED)
Scholes option pricing model, modified for dividends and using the following
assumptions:
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 AUGUST 31
------------- ------------- ----------------------------
1998 1997 1997 1996
------------- ------------- ------------- -------------
Risk free interest rate.................. 6% 6% 6% 6%
Annual dividend rate..................... 5.6% 7% 7% 7%
Volatility factor of the stock price..... 23.80% 27.16% 26.54% 26.54%
Weighted average expected life (years)... 3 3 3 3
58
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS (CONTINUED)
We do not record compensation expense for stock option grants. The following
table summarizes results as if we had recorded compensation expense for the
1998, 1997 and 1996 option grants.
FOUR MONTHS
YEAR ENDED ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 AUGUST 31
------------ ------------ ---------------------------
1998 1997 1997 1996
------------ ------------ ------------ -------------
Net income:
As reported............................ $ 21,113 $ 17,508 $ 14,225 $ 90
Pro forma.............................. 21,044 17,454 14,225 33
Net income per share:
As reported............................ .97 .74 .61 .00
Pro forma.............................. .97 .74 .61 .00
Net income per share-- assuming dilution:
As reported............................ .96 .73 .61 .00
Pro forma.............................. .96 .73 .61 .00
Weighted average fair value of options
granted during the year................. .63 2.51 3.19 2.09
NOTE 8--INCOME TAXES
Because we have operated as a REIT since September 1997, there is no Federal
income tax expense for 1998 or the transition period ended December 31, 1997.
The income tax benefit recorded in the four months ending December 31, 1997 is a
result of our previously deferred tax liability being eliminated because of our
conversion to a REIT as well as income tax refunds receivable that are a result
of Federal tax net operating loss
59
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
carrybacks. The provision (benefit) for income taxes for the years prior to our
conversion to a REIT consists of the following (amounts in thousands):
FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31 AUGUST 31
-------------------------- --------------------------
1997 1997 1996
------------ 1996 ------------ ------------
------------
(UNAUDITED)
Current:
Federal.................... $ (970) $ 1,709 $ (655) $ (1,285)
State...................... -- 293 (432) (513)
------------ ------------ ------------ ------------
(970) 2,002 (1,087) (1,798)
Allocated to discontinued
operations.................. -- 835 2,301 1,683
------------ ------------ ------------ ------------
(970) 2,837 1,214 (115)
Deferred:
Federal.................... (5,451) 874 8,509 1,887
State...................... (1,209) 150 2,462 1,175
------------ ------------ ------------ ------------
(6,660) 1,024 10,971 3,062
Allocated to discontinued
operations.................. -- 1,413 1,078 2,848
------------ ------------ ------------ ------------
(6,660) 2,437 12,049 5,910
Provision (benefit) for
income tax-- continuing
operations.................. $ (7,630) $ 5,274 $ 13,263 $ 5,795
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
60
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
A reconciliation between the Federal statutory rate and the effective tax
rate follows (amounts in thousands):
FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31 AUGUST 31
-------------------------- --------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
Federal taxes at the
statutory rate.............. $ 3,457 $ 4,502 $ 11,322 $ 4,947
State taxes, net of Federal
benefit..................... 593 772 1,941 848
------------ ------------ ------------ ------------
4,050 5,274 13,263 5,795
Deduction for dividends
paid........................ (4,050) -- -- --
Adjustment due to change in
tax status.................. (7,630) -- -- --
------------ ------------ ------------ ------------
Total provision
(benefit)................ $ (7,630) $ 5,274 $ 13,263 $ 5,795
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
61
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--INCOME TAXES (CONTINUED)
The significant components of deferred income taxes are attributable to the
following temporary differences (amounts in thousands):
AUGUST 31
--------------------------
1997 1996
------------ ------------
Deferred tax assets:
Real estate properties.................................. $ -- $ 8,086
All other, net.......................................... 1,214 1,006
------------ ------------
1,214 9,092
Deferred tax liabilities:
Deferred rental income.................................. (5,128) (3,703)
Real estate properties.................................. (2,746) --
------------ ------------
(7,874) (3,703)
------------ ------------
Net deferred tax assets (liabilities)..................... $ (6,660) $ 5,389
------------ ------------
------------ ------------
NOTE 9--STOCKHOLDERS' EQUITY
On August 17, 1998, we distributed to stockholders of record on July 30,
1998, one share of newly created 8 3/4% Series A Cumulative Redeemable Preferred
Stock, par value $.0001, for each share of common stock held by them on the
record date. We raised no capital through this transaction. The Series A
Preferred Stock pays quarterly dividends at a rate of $1.40 per year and has a
$16.00 per share liquidation preference. Prior to the distribution of Series A
Preferred Stock, we paid dividends on our common stock. Beginning with our
November 1998 dividend payment, dividends of $1.40 per share will be paid on the
Series A Preferred Stock. Any dividends required to be paid in excess of $1.40
will be paid to our common stockholders. We have the right to redeem the Series
A Preferred Stock anytime after August 16, 2003 at a redemption price of $16.00
per share plus accrued and
62
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
unpaid dividends, if any. Holders of the Series A Preferred Stock have one-tenth
of one vote per share, voting together with our common stock.
The total market value of the Series A Preferred Stock is based on the
closing price on its first day of trading and is shown on the balance sheet as
Series A Preferred Stock. We reduced additional paid in capital by the Series A
Preferred Stock's value to reflect our change in capital structure.
NOTE 10--COMMITMENTS AND CONTINGENCIES
Our company owns a property in New Jersey with a ground lease that has a
remaining term of 21 years with three 15-year options to renew. Rent expense
related to the ground lease is summarized below (amounts in thousands):
YEAR ENDED FOUR MONTHS ENDED YEAR ENDED
DECEMBER 31 DECEMBER 31 AUGUST 31
------------- ---------------------------- --------------------------
1998 1997 1996 1997 1996
------------- ------------- ------------- ------------ ------------
Ground lease rent expense...... $ 800 $ 300 $ 800 $ 1,700 $ 2,500
Prior years' rental expense included additional leases which we either
transferred to PriceSmart in the distribution or terminated. Future minimum
63
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--COMMITMENTS AND CONTINGENCIES (CONTINUED)
payments during the next five years and thereafter under this noncancelable
lease at December 31, 1998 are as follows (amounts in thousands):
1999...................................... $ 754
2000...................................... 754
2001...................................... 754
2002...................................... 754
2003...................................... 754
After 2003................................ 13,138
---------
Total minimum payments.................... $ 16,593
---------
---------
The above property is subleased and as of year end total future sublease
revenues are $28.9 million, which are included in future minimum rental income
amounts in Note 3.
64
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited summary of our quarterly results for the last
two years (amounts in thousands, except per share data):
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
YEAR ENDED DECEMBER 31, 1998
Revenues......................................... $ 14,486 $ 15,287 $ 15,915 $ 16,797
Operating income................................. 7,408 7,836 8,409 7,740
Income from continuing operations................ 7,795 7,689 7,536 6,409
Net income....................................... 7,795 7,689 7,536 6,409
Earnings per common share-- basic & diluted
Income from continuing operations............ 0.33 0.32 0.32 (0.12)
Net income................................... 0.33 0.32 0.32 (0.12)
YEAR ENDED DECEMBER 31, 1997
Revenues......................................... $ 13,363 $ 14,509 $ 13,754 $ 14,141
Operating income................................. 6,390 6,173 3,899 6,827
Income from continuing operations................ 4,930 4,654 4,330 15,089
Net income....................................... 4,495 4,004 3,790 15,089
Earnings per common share
Basic
Income from continuing operations............ 0.21 0.20 0.18 0.64
Net income................................... 0.19 0.17 0.16 0.64
Diluted
Income from continuing operations............ 0.21 0.20 0.18 0.63
Net income................................... 0.19 0.17 0.16 0.63
65
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--SUBSEQUENT EVENTS
Caldor, a tenant at our Moorestown, NJ property, announced in January 1999
they will be closing their store. Caldor closed their store in March and they
indicated to us they intend to continue paying rent through at least April. We
are currently evaluating alternatives for the best possible use of this vacant
space.
In January 1999 we purchased 15 acres of land in Tucson, Arizona for $2.6
million for a proposed shopping center development.
In January 1999 we repaid $25.0 million on our $50.0 million credit facility
with Morgan Guaranty Trust Company and reduced our commitment with them. We
repaid this amount through an advance on our unsecured credit facility with
Wells Fargo Bank, BankOne and AmSouth Bank.
66
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Price Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Price
Enterprises, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of income, stockholders' equity and cash flows for the year ended
December 31, 1998, for the period September 1, 1997 through December 31, 1997
and for each of the two 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 December 31, 1998 and 1997 and the consolidated
results of its operations and its cash flows for the year ended December 31,
1998, for the period September 1, 1997 through December 31, 1997, and for each
of the two 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
67
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
San Diego, California
January 19, 1999, except for Note 12,
as to which the date is January 22, 1999.
68
ITEM 9-- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Note that in this Form 10-K, we "incorporate by reference" certain
information in parts of other documents filed with the Securities and Exchange
Commission (SEC). The SEC allows us to disclose important information by
referring to it in that manner. Please refer to such information.
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about Directors of the Company is incorporated by reference from
the discussion under Item 1 of our Proxy Statement for the 1999 Annual Meeting
of Stockholders. The balance of the response to this item is contained in the
discussion entitled Executive Officers of the Company contained in Item 4A of
Part I of this report.
ITEM 11--EXECUTIVE COMPENSATION
Information about executive compensation is incorporated by reference from
the discussion under the heading Executive Compensation in our Proxy Statement
for the 1999 Annual Meeting of Stockholders.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information about security ownership of certain beneficial owners and
management is incorporated by reference from the discussion under the heading
Security Ownership of Directors and Officers in Item 1 of our Proxy Statement
for the 1999 Annual Meeting of Stockholders.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information about certain relationships and transactions with related
parties is incorporated by reference from the discussion under the heading
Related Transactions in our Proxy Statement for the 1999 Annual Meeting of
Stockholders.
69
PART IV
ITEM 14-- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Financial Statements and Financial Statement Schedules:
The following consolidated financial statements of Price Enterprises, Inc.
are included in Item 8.
PAGE
---------
(1) (A) Report of Independent Auditors................................................... 67
(B) Consolidated Financial Statements
(i) Consolidated Balance Sheets--December 31, 1998 and 1997..................... 35
(ii) Consolidated Statements of Income--Year Ended December 31, 1998, Four
Months Ended December 31, 1997 and 1996 and the Years Ended August 31, 1997
and 1996................................................................... 36
(iii) Consolidated Statements of Stockholders' Equity-- Year Ended December 31,
1998, Four Months Ended December 31, 1997 and the Years Ended August 31,
1997 and 1996.............................................................. 37
(iv) Consolidated Statements of Cash Flows--Year Ended December 31, 1998, Four
Months Ended December 31, 1997 and 1996 and the Years Ended August 31, 1997
and 1996................................................................... 38
(v) Notes to Consolidated Financial Statements-- December 31, 1998.............. 39
(2) Financial Statement Schedules:
The following financial statement schedule of Price Enterprises, Inc. is included in
Item 14(d) Schedule III--Real Estate and Accumulated Depreciation.................... 72
70
PAGE
---------
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
(3) For a list of exhibits filed with this annual report, refer to the exhibit index
beginning on page 77.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended December 31,
1998.
(c) Exhibits: For a list of exhibits filed with this annual report, refer to the
exhibit index beginning on page 77.
(d) Financial Statement Schedules:
72Schedule III--Real Estate and Accumulated Depreciation......................
71
PRICE ENTERPRISES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(AMOUNTS IN THOUSANDS)
GROSS AMOUNT
AT WHICH
CARRIED
AT CLOSE OF
INITIAL COSTS COSTS PERIOD
---------------------------- CAPITALIZED -------------
LAND AND BUILDING AND SUBSEQUENT TO LAND AND
LOCATION DESCRIPTION IMPROVEMENTS IMPROVEMENTS ACQUISITION IMPROVEMENTS
- --------------------------------- ----------------------- ------------- ------------- ------------- -------------
Westbury, NY Shopping Center........ $ 41,784 $ 0 $ 28,329 $ 46,621
Pentagon City, VA Shopping Center........ 24,742 14,473 25,700 26,289
Wayne, NJ Shopping Center........ 19,760 6,912 12,689 22,200
Sacramento/Bradshaw, CA Office Complex......... 4,220 31,403 0 4,220
San Diego, CA Warehouse/Office
Building/Self
Storage.............. 5,244 7,990 13,281 6,284
Philadelphia, PA Shopping Center........ 8,649 4,382 13,339 9,115
Dallas, TX Retail Building........ 10,662 0 13,283 12,453
Seekonk, MA Shopping Center........ 7,636 0 12,698 10,153
Roseville, CA Shopping Center........ 9,173 8,165 4,044 6,877
San Diego/Murphy Canyon, CA Self Storage........... 9,274 8,575 5 9,274
Signal Hill, CA Shopping Center........ 5,872 0 10,223 8,289
Fountain Valley, CA Shopping Center........ 4,551 0 10,677 6,916
San Diego/Rancho San Diego, CA Shopping Center........ 4,424 6,889 0 4,424
Glen Burnie, MD Shopping Center........ 1,795 0 8,847 3,699
Azusa, CA Warehouse/Self
Storage.............. 4,248 896 4,401 3,847
Moorsetown, NJ (leased land) Shopping Center........ Leased 0 8,029 0
San Diego/Carmel Mtn., CA Shopping Center........ 3,464 0 3,431 3,742
Northridge, CA Shopping Center........ 4,029 0 2,183 3,702
Buffalo, NY Retail Building........ 2,503 0 3,724 3,656
Inglewood, CA Warehouse Building..... 1,438 0 3,710 1,666
Sacramento/Stockton, CA Shopping Center........ 1,437 0 3,568 2,436
New Britain, CT Warehouse Building..... 3,640 0 1,118 2,634
San Juan Capistrano, CA Shopping Center........ 3,150 0 1,293 2,042
Solana Beach, CA Self Storage........... 2,324 1,227 362 2,324
Tucson, AZ Shopping Center........ 1,073 0 2,776 1,787
Hampton, VA Retail Building/Bank... 1,132 0 1,826 1,436
Smithtown, NY Retail Building........ 721 0 2,022 1,231
Redwood City, CA Retail Building........ 1,860 0 235 2,095
Denver/Littleton, CO Retail Building........ 607 847 470 584
Denver/Aurora, CO Restaurant............. 105 0 648 173
San Diego/Southeast, CA Restaurant/Bank........ 217 0 388 170
Chula Vista/Rancho del Rey, CA Land................... 915 0 (415) 500
------------- ------------- ------------- -------------
Total Investment Properties............................... $ 190,649 $ 91,759 $ 192,884 $ 210,839
BUILDING AND
LOCATION IMPROVEMENTS TOTAL(1)
- --------------------------------- ------------- ---------
Westbury, NY $ 23,492 $ 70,113
Pentagon City, VA 38,626 64,915
Wayne, NJ 17,161 39,361
Sacramento/Bradshaw, CA 31,403 35,623
San Diego, CA
20,231 26,515
Philadelphia, PA 17,255 26,370
Dallas, TX 11,492 23,945
Seekonk, MA 10,181 20,334
Roseville, CA 14,505 21,382
San Diego/Murphy Canyon, CA 8,580 17,854
Signal Hill, CA 7,806 16,095
Fountain Valley, CA 8,312 15,228
San Diego/Rancho San Diego, CA 6,889 11,313
Glen Burnie, MD 6,943 10,642
Azusa, CA
5,698 9,545
Moorsetown, NJ (leased land) 8,029 8,029
San Diego/Carmel Mtn., CA 3,153 6,895
Northridge, CA 2,510 6,212
Buffalo, NY 2,571 6,227
Inglewood, CA 3,482 5,148
Sacramento/Stockton, CA 2,569 5,005
New Britain, CT 2,124 4,758
San Juan Capistrano, CA 2,401 4,443
Solana Beach, CA 1,589 3,913
Tucson, AZ 2,062 3,849
Hampton, VA 1,522 2,958
Smithtown, NY 1,512 2,743
Redwood City, CA 0 2,095
Denver/Littleton, CO 1,340 1,924
Denver/Aurora, CO 580 753
San Diego/Southeast, CA 435 605
Chula Vista/Rancho del Rey, CA 0 500
------------- ---------
Total Investment Properties...... $ 264,453 $ 475,292
72
DEPRECIABLE LIFE
-------------------
ACCUMULATED DATE OF DATE OF
LOCATION DESCRIPTION DEPRECIATION CONSTRUCTION ACQUISITION LAND IMPROVEMENTS
- --------------------------------- ----------------------- ------------ -------------- ------------- -------------------
Westbury, NY Shopping Center........ (6,865) 1993-94 1993 25
Pentagon City, VA Shopping Center........ $ (6,029) 1992-93 1992 25
Wayne, NJ Shopping Center........ (4,732) 1991-93 1991 25
Sacramento/Bradshaw, CA Office Complex......... (940) 1998 25
San Diego, CA Warehouse/Office
Building/Self
Storage.............. (10,712) 1981 25
Philadelphia, PA Shopping Center........ (3,752) 1992, 1994-95 1991 25
Dallas, TX Retail Building........ (2,536) 1991-92, 96 1991 25
Seekonk, MA Shopping Center........ (2,799) 1991-94 1991 25
Roseville, CA Shopping Center........ (655) 1997 25
San Diego/Murphy Canyon, CA Self Storage........... (266) 1998 25
Signal Hill, CA Shopping Center........ (1,913) 1992-93 1991 25
Fountain Valley, CA Shopping Center........ (2,171) 1990-93 1989 25
San Diego/Rancho San Diego, CA Shopping Center........ (160) 1998 25
Glen Burnie, MD Shopping Center........ (2,102) 1990-92 1985 25
Azusa, CA Warehouse/Self
Storage.............. (761) 1983, 1998 1983 25
Moorsetown, NJ (leased land) Shopping Center........ (2,311) 1989-91 1989 25
San Diego/Carmel Mtn., CA Shopping Center........ (695) 1992-93 1991 25
Northridge, CA Shopping Center........ (485) 1993-94 1988 25
Buffalo, NY Retail Building........ (1,558) 1989-90 1989 25
Inglewood, CA Warehouse Building..... (1,293) 1989 1984 25
Sacramento/Stockton, CA Shopping Center........ (473) 1994-95 1993 25
New Britain, CT Warehouse Building..... (571) 1991 25
San Juan Capistrano, CA Shopping Center........ (604) 1988-89, 94-95 1987 25
Solana Beach, CA Self Storage........... 0 1998 1998 25
Tucson, AZ Shopping Center........ (687) 1989-91 1988 25
Hampton, VA Retail Building/Bank... (447) 1992 1987 25
Smithtown, NY Retail Building........ (858) 1988-89 1985 25
Redwood City, CA Retail Building........ 0 1982 --
Denver/Littleton, CO Retail Building........ (403) 1990 25
Denver/Aurora, CO Restaurant............. (127) 1993 1990 25
San Diego/Southeast, CA Restaurant/Bank........ (269) 1989-90 1989 25
Chula Vista/Rancho del Rey, CA Land................... 0 0 1993
------------
Total Investment Properties............................... $ (57,174)
------------
------------
BUILDING
LOCATION BUILDING IMPROVEMENTS
- --------------------------------- ------------- -------------------
Westbury, NY 25 10
Pentagon City, VA 25 10
Wayne, NJ 25 10
Sacramento/Bradshaw, CA 25 10
San Diego, CA
25 10
Philadelphia, PA 25 10
Dallas, TX 25 10
Seekonk, MA 25 10
Roseville, CA 25 10
San Diego/Murphy Canyon, CA 25 10
Signal Hill, CA 25 10
Fountain Valley, CA 25 10
San Diego/Rancho San Diego, CA 25 10
Glen Burnie, MD 25 10
Azusa, CA
25 10
Moorsetown, NJ (leased land) 25 10
San Diego/Carmel Mtn., CA 25 10
Northridge, CA 25 10
Buffalo, NY 25 10
Inglewood, CA 25 10
Sacramento/Stockton, CA 25 10
New Britain, CT 25 10
San Juan Capistrano, CA 25 10
Solana Beach, CA 25 1
Tucson, AZ 25 10
Hampton, VA 25 10
Smithtown, NY 25 10
Redwood City, CA -- --
Denver/Littleton, CO 25 10
Denver/Aurora, CO 25 10
San Diego/Southeast, CA 25 10
Chula Vista/Rancho del Rey, CA -- --
Total Investment Properties......
- ----------------------------------
(1) The aggregate cost for Federal income tax purposes is $463,363
73
PRICE ENTERPRISES, INC.
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
(IN THOUSANDS)
FOUR MONTHS
YEAR ENDED ENDED
DECEMBER 31 DECEMBER 31 YEAR ENDED AUGUST 31
------------ ------------ --------------------------
RECONCILIATION TO REPORTED AMOUNTS 1998 1997 1997 1996
- ------------------------------------------------ ------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT
Balance at beginning of period................ $ 399,011 $ 380,145(1) $ 436,672 $ 469,337
Additions during the period:
Purchases................................... 78,781 18,866 2,720 17,003
Deductions during the period:
Cost of properties sold..................... (2,500) -- (35,741) (32,668)
Asset impairment loss....................... -- -- (2,000) (17,000)
------------ ------------ ------------ ------------
Subtotal.................................. 475,292 399,011 401,651 436,672
Other:
Property and equipment transferred to
PriceSmart................................ -- -- (21,506) (31,541)
FF&E........................................ 581 242 203 733
------------ ------------ ------------ ------------
Balance at end of period...................... $ 475,873 $ 399,253 $ 380,348 $ 405,864
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
ACCUMULATED DEPRECIATION
Balance at beginning of period................ $ 46,089 $ 43,131(1) $ 43,991 $ 39,282
Depreciation expense.......................... 11,085 2,958 9,347 9,433
Accumulated depreciation of properties sold... -- -- (7,589) (4,724)
------------ ------------ ------------ ------------
Subtotal.................................. 57,174 46,089 45,749 43,991
Other:
Accumulated depreciation of property and
equipment transferred to PriceSmart....... -- -- (2,618) (3,927)
Accumulated depreciation of FF&E............ 192 108 78 365
------------ ------------ ------------ ------------
Balance at end of period...................... $ 57,366 $ 46,197 $ 43,209 $ 40,429
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
- ---------------------
(1) Adjusted for property and equipment transferred to PriceSmart
74
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, thereunto duly authorized.
PRICE ENTERPRISES, INC.
DATED: March 22, 1999 By: /s/ JACK MCGRORY
--------------------------------
Jack McGrory
President and Chief Executive Officer
DATED: March 22, 1999 By: /s/ GARY W. NIELSON
--------------------------------
Gary W. Nielson
Executive Vice President and Chief
Financial Officer
75
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.
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
/s/ ROBERT E. PRICE
- ------------------------------ Chairman of the Board of March 22, 1999
Robert E. Price Directors
/s/ PAUL A. PETERSON
- ------------------------------ Vice Chairman of the Board March 22, 1999
Paul A. Peterson of Directors
/s/ JAMES F. CAHILL
- ------------------------------ Director March 22, 1999
James F. Cahill
/s/ ANNE L. EVANS
- ------------------------------ Director March 22, 1999
Anne L. Evans
/s/ MURRAY L. GALINSON
- ------------------------------ Director March 22, 1999
Murray L. Galinson
/s/ JACK MCGRORY
- ------------------------------ Director, President, and March 22, 1999
Jack McGrory Chief Executive Officer
76
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- --------- -----------------------------------------------------------------------------------
2.1 Distribution Agreement dated as of August 26, 1997 between Price Enterprises, Inc.
and PriceSmart, Inc. (incorporated 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 Articles of Incorporation of Price Enterprises, Inc. (incorporated by reference to
Exhibit 3.1 to Transition Report on Form 10-K of Price Enterprises, Inc. filed
with the Commission on March 27, 1998 (File No. 0-20449))........................
3.2 Articles Supplementary of Price Enterprises, Inc. (incorporated by reference to
Exhibit 3.2 to Registration Statement on Form 8-A of Price Enterprises, Inc.
filed with the Commission on August 7, 1998 (File No. 0-20449))..................
3.3 Bylaws of Price Enterprises, Inc. (incorporated by reference to Exhibit 3.2 to
Transition Report on Form 10-K of Price Enterprises, Inc. filed with the
Commission on March 27, 1998 (File No. 0-20449)).................................
10.1 Employee Benefits and Other Employment Matters Allocation Agreement dated as of
August 26, 1997 between Price Enterprises, Inc. and PriceSmart, Inc.
(incorporated 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))........................................................................
10.2 Tax Sharing Agreement dated as of August 26, 1997 between Price Enterprises, Inc.
and PriceSmart, Inc. (incorporated 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)).........................................................
77
EXHIBIT DESCRIPTION
- --------- -----------------------------------------------------------------------------------
10.3 Asset Management Agreement dated as of August 26, 1997 between Price Enterprises,
Inc. and PriceSmart, Inc. (incorporated 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))...........................................
10.4 Transitional Services Agreement dated as of August 26, 1997 between Price
Enterprises Inc. and PriceSmart, Inc. (incorporated 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)).............................
10.5 Employment Agreement dated June 18, 1997, by and between Price Enterprises, Inc.
and Jack McGrory (incorporated by reference to Exhibit 10.6 to Annual Report on
Form 10-K of Price Enterprises, Inc. filed with the Commission on November 26,
1997 (File No. 0-20449)).........................................................
10.6 Amendment No. 1 to Employment Agreement dated as of August 27, 1997, by and between
Price Enterprises, Inc. and Jack McGrory (incorporated by reference to Exhibit
10.7 to Annual Report on Form 10-K of Price Enterprises, Inc. filed with the
Commission on November 26, 1997 (File No. 0-20449))..............................
10.7 Purchase and Sale Agreement for Stanford Ranch Crossing dated December 31, 1997, by
and between Price Enterprises, Inc. and Opus West Corporation (incorporated by
reference to Exhibit 10.7 to Transition Report on Form 10-K of Price Enterprises,
Inc. filed with the Commission on March 27, 1998 (File No. 0-20449)).............
10.8 Form of Indemnity Agreement (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998
filed with the Commission on May 14, 1998 (File No. 0-20449))....................
78
EXHIBIT DESCRIPTION
- --------- -----------------------------------------------------------------------------------
10.9 Revolving Credit Agreement dated as of December 3, 1998 among the Company, and
Wells Fargo Bank, National Association, as Agent.................................
10.10 Form of Promissory Note Agreement under Revolving Credit Agreement as amended and
schedule of notes signed, dates, banks and amounts...............................
10.11 Form of Guaranty between Price Enterprises, Inc. and Wells Fargo Bank, National
Association......................................................................
10.12 First Amendment to Revolving Credit Agreement and Loan Documents dated as of
December 29, 1998 among the Company, Wells Fargo Bank, National Association, as a
Lender (the "Original Lender"), BankOne, Arizona, NA, AmSouth Bank, and Wells
Fargo Bank, National Association, as Agent.......................................
10.13 Pro rata share of lenders participating in Amended Revolving Credit Agreement dated
as of December 29, 1998 among the Company, Wells Fargo Bank, National
Association, BankOne, Arizona, NA, AmSouth Bank and Wells Fargo Bank, NA, as
agent............................................................................
10.14 Amendment No. 2 to Employment Agreement dated as of February 2, 1999, by and
between Price Enterprises, Inc. and Jack McGrory.................................
10.15 Revolving Credit Agreement dated as of March 31, 1998 among the Company, Union Bank
of Switzerland and Union Bank of Switzerland, as Agent (incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 filed with the Commission on May 14, 1998 (File No.
0-20449))........................................................................
79
EXHIBIT DESCRIPTION
- --------- -----------------------------------------------------------------------------------
10.16 Amendment No. 1 to Revolving Credit Agreement dated as of August 27, 1998 among the
Company, Union Bank of Switzerland and Union Bank of Switzerland, as Agent
(incorporated by reference to Exhibit (b)(2) to Issuer Tender Offer Statement on
Schedule 13-E4 of Price Enterprises, Inc. filed with the Commission on September
17, 1998 (File No. 005-43425))...................................................
10.17 Letter Agreement dated as of September 15, 1998 by and between the Company and
Morgan Guaranty Trust Company of New York (incorporated by reference to Exhibit
(b)(3) to Issuer Tender Offer Statement on Schedule 13-E4 of Price Enterprises,
Inc. filed with the Commission on September 17, 1998 (File No. 005-43425)).......
10.18 Guaranty and Pledge Agreement dated as of September 15, 1998 among Sol Price, Helen
Price, The Sol and Helen Price Trust and Morgan Guaranty Trust Company of New
York (incorporated by reference to Exhibit (c)(1) to Issuer Tender Offer
Statement on Schedule 13-E4 of Price Enterprises, Inc. filed with the Commission
on September 17, 1998 (File No. 005-43425))......................................
10.19 The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan (the "Stock
Plan" ) (incorporated by reference to Exhibit 10.23 to Registration Statement on
Form 10 of Price Enterprises, Inc. filed with the Commission on December 13, 1994
(File No. 0-20449))..............................................................
10.20 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)).......................................................................
80
EXHIBIT DESCRIPTION
- --------- -----------------------------------------------------------------------------------
10.21 Form of Non-Qualified Stock Option Agreement under the Stock Plan (incorporated 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)).............
10.22 The Price Enterprises Directors' 1995 Stock Option Plan (the "Directors' Plan)
(incorporated 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))....................................................................
10.23 Form of Non-Qualified Stock Option Agreement under the Directors' Plan
(incorporated 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)).......................................................................
10.24 First Amendment to the Price Enterprises Directors' 1995 Stock Option Plan
(incorporated by reference to Exhibit 4.7 to Transition Report on Form 10-K of
Price Enterprises, Inc. filed with the Commission on March 27, 1998 (File No.
0-20449))........................................................................
10.25 First Amendment to The Price Enterprises 1995 Combined Stock Grant and Stock Option
Plan (incorporated by reference to Exhibit 4.2 to Registration Statement on Form
S-8 of Price Enterprises, Inc. filed with the Commission on September 2, 1998
(File No. 333-62723))............................................................
10.26 Second Amendment to the Price Enterprises Directors' 1995 Stock Option Plan
(incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-8
of price Enterprises, Inc. filed with the Commission on September 2, 1998 (File
No. 333-62723))..................................................................
81
EXHIBIT DESCRIPTION
- --------- -----------------------------------------------------------------------------------
10.27 Form of Amended and Restated Non-Qualified Stock Option Agreement under the 1995
Plan (incorporated by reference to Exhibit 4.6 to Registration Statement on Form
S-8 of Price Enterprises, Inc. filed with the Commission on September 2, 1998
(File No. 333-62723))............................................................
10.28 Form of Amended and Restated Non-Qualified Stock Option Agreement under the
Director's Plan (incorporated by reference to Exhibit 4.7 to Registration
Statement on Form S-8 of Price Enterprises, Inc. filed with the Commission on
September 2, 1998 (File No. 333-62723))..........................................
10.29 Purchase and Sale Agreement as Amended for Sacramento/ Bradshaw Business Park dated
April 6, 1998, by and between Price Enterprises, Inc. and Ivanhoe-Bradshaw,
L.L.C. (incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998 filed with the Commission
on August 12, 1998 (File No. 0-20449))...........................................
10.30 Employment Agreement dated January 6, 1998 by and between Price Enterprises, Inc.
and Gary W. Nielson (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 filed with the
Commission on May 14, 1998 (File No. 0-20449))...................................
12.1 Computation of ratio of earnings to fixed charges..................................
21.1 Subsidiaries of Price Enterprises, Inc.............................................
23.1 Consent of Independent Auditors....................................................
27.1 Financial Data Schedule............................................................
82