<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 12, 1995
COMMISSION FILE NUMBER 0-20449
PRICE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0628740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4649 MORENA BOULEVARD
SAN DIEGO, CALIFORNIA 92117
(Address of principal executive offices)
(619) 581-4530
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
The registrant had 23,224,028 common shares, par value $.0001, outstanding at
April 25, 1995.
<PAGE>
PRICE ENTERPRISES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS PAGE
----
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . .6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 11
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 2 - CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . 15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 5 - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . 15
(2)
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 12, AUGUST 31,
1995 1994
----------- ----------
(UNAUDITED) (NOTE)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................. $ 3,052 $ 1,644
Accounts receivable, net.............................................................. 5,005 20,873
Inventory............................................................................. 8,521 7,895
Prepaid expenses...................................................................... 1,227 551
----------- ----------
Total current assets................................................................ 17,805 30,963
Real estate assets:
Land and land improvements............................................................ 253,436 258,545
Building and improvements............................................................. 202,245 206,374
Fixtures and equipment................................................................ 9,720 4,375
Construction in progress.............................................................. 16,503 11,421
----------- ----------
481,904 480,715
Less accumulated depreciation......................................................... (36,561) (33,328)
----------- ----------
445,343 447,387
Other assets:
City notes receivable................................................................. 31,004 32,023
Atlas and other notes receivable...................................................... 42,901 41,000
Deferred income taxes................................................................. 25,936 23,282
Deferred rents and leasing costs, net................................................. 10,120 8,672
Investment in Price Club Mexico joint venture......................................... 34,500 67,226
----------- ----------
144,461 172,203
----------- ----------
Total assets........................................................................ $ 607,609 $ 650,553
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................................. $ 14,618 $ 20,312
Payable to PriceCostco, net........................................................... 10,768 6,797
Other current liabilities............................................................. 4,031 4,015
----------- ----------
Total current liabilities........................................................... 29,417 31,124
Note payable to PriceCostco............................................................. 45,925 --
Minority interest of PriceCostco........................................................ 375 40,641
Stockholders' Equity:
Common stock.......................................................................... 2 3
Paid-in capital....................................................................... 575,515 580,468
Retained earnings..................................................................... 2,300 --
Accumulated foreign currency translation.............................................. -- (1,683)
Treasury stock, at cost............................................................... (45,925) --
----------- ----------
531,892 578,788
----------- ----------
Total liabilities and stockholders' equity.......................................... $ 607,609 $ 650,553
----------- ----------
----------- ----------
<FN>
Note: The balance sheet at August 31, 1994 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED -- AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SECOND QUARTER YEAR-TO-DATE
(12 WEEKS) (28 WEEKS)
------------------------ ------------------------
MARCH 12, MARCH 13, MARCH 12, MARCH 13,
1995 1994 1995 1994
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Real estate rentals.............................................. $ 13,617 $ 8,135 $ 25,388 $ 14,086
Gain (loss) on sale of real estate, net.......................... (181) (297) (181) 3,930
Merchandise sales................................................ 13,912 13,281 43,820 30,388
Other revenues................................................... (48) 56 358 56
----------- ----------- ----------- -----------
Total revenues............................................... 27,300 21,175 69,385 48,460
OPERATING EXPENSES
Real estate:
Operating, maintenance and administrative...................... 2,510 1,668 4,551 2,590
Property taxes................................................. 2,595 1,202 4,689 2,404
Depreciation................................................... 2,437 1,708 4,420 3,453
Merchandising:
Cost of sales.................................................. 12,960 12,515 40,918 28,411
Operating expenses............................................. 4,614 2,667 10,226 4,361
General and administrative....................................... 992 369 1,963 862
----------- ----------- ----------- -----------
Total operating expenses..................................... 26,108 20,129 66,767 42,081
----------- ----------- ----------- -----------
Operating income................................................... 1,192 1,046 2,618 6,379
INTEREST AND OTHER
Interest income, net............................................. 1,356 1,287 2,818 2,502
Equity in earnings of real estate joint ventures................. -- 279 -- 600
Equity in earnings (loss) of Price Club Mexico joint venture..... (2,714) 1,453 (2,338) 2,329
Loss on sale of investment in Price Club Mexico joint venture.... (2,800) -- (2,800) --
Minority interest, net of tax.................................... 2,935 219 3,685 27
----------- ----------- ----------- -----------
Total interest and other..................................... (1,223) 3,238 1,365 5,458
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes.................... (31) 4,284 3,983 11,837
Provision for income taxes......................................... (345) (1,852) (1,683) (4,870)
----------- ----------- ----------- -----------
Net income (loss).................................................. $ (376) $ 2,432 $ 2,300 $ 6,967
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income (loss) per share........................................ $ (.01) $ .09 $ .09 $ .26
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Average number of shares outstanding............................... 25,427 27,000 26,326 27,000
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED -- AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR-TO-DATE
(28 WEEKS)
----------------------
MARCH 12, MARCH 13,
1995 1994
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................................... $ 2,300 $ 6,967
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.......................................................... 5,853 3,957
Loss (gain) on sale of real estate assets.............................................. 181 (3,930)
Equity in losses (earnings) of Price Club Mexico joint venture......................... 2,338 (2,329)
Loss on sale of Price Club Mexico joint venture (net).................................. 2,200 --
Change in receivables and other assets................................................. (32,831) (4,869)
Change in accounts payable and other liabilities....................................... 32,653 2,993
Deferred rents and leasing costs....................................................... (1,754) (1,369)
Other.................................................................................. -- 251
---------- ----------
Net cash flows provided by operating activities...................................... 10,940 1,671
INVESTING ACTIVITIES
Additions to real estate assets.......................................................... (12,932) (58,115)
Proceeds from sale of real estate assets................................................. 5,758 28,517
Proceeds from real estate joint ventures................................................. -- 683
Investment in Price Club Mexico joint venture............................................ (3,883) (25,000)
Additions to notes receivable............................................................ -- (41,249)
Payments of notes receivable............................................................. 3,473 --
---------- ----------
Net cash flows used in investing activities.......................................... (7,584) (95,164)
FINANCING ACTIVITIES
Minority interest of PriceCostco......................................................... (255) 13,433
Net investment by PriceCostco............................................................ -- 79,661
Decrease in equity resulting from cash not transferred in spin-off transaction........... (1,693) --
---------- ----------
Net cash flows provided by (used in) financing activities.......................... (1,948) 93,094
---------- ----------
Net increase (decrease) in cash.................................................... 1,408 (399)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......................................... 1,644 1,655
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................................... $ 3,052 $ 1,256
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE:
Treasury stock acquired for note payable................................................. $ 45,925
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 12, 1995
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Price Enterprises, Inc. (PEI or the Company) became a separate, publicly-traded
company on December 21, 1994, following an exchange offer in which approximately
23.2 million shares of PriceCostco, Inc. were exchanged for shares of PEI.
Until that date, PEI was a wholly-owned subsidiary of PriceCostco. The
accompanying financial statements have been restated to reflect common stock at
par value and the remaining equity as paid-in capital, effective August 31,
1994. In accordance with the Agreement of Transfer and Plan of Exchange
(exchange agreement), PriceCostco retained net current assets of PEI and its
subsidiaries amounting to approximately $11 million before allocations to
PriceCostco's minority interest. Accordingly, the net amount is reflected as a
reduction of paid-in capital at the beginning of the 1995 fiscal year.
Also in accordance with the exchange agreement, on February 6, 1995, the Company
purchased approximately 3.8 million shares for $45.9 million in return for a
promissory note due December 1996. As mentioned in the subsequent event
footnote, $30.5 million of proceeds from the sale of PEI's interest in Price
Club Mexico has been applied against the outstanding balance of this note
payable.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the 28 weeks ended March 12, 1995 are not necessarily
indicative of the results that may be expected for the year ended September 3,
1995. For further information, refer to the financial statements and footnotes
thereto included in the PriceCostco/Price Enterprises Offering
Circular/Prospectus dated November 21, 1994 as supplemented on December 7, 1994.
FISCAL YEAR
Price Enterprises' fiscal year is on a 52/53 week basis and ends on the Sunday
nearest August 31. Fiscal quarters are as follows: first quarter - 16 weeks;
second and third quarters - 12 weeks and fourth quarter - 12/13 weeks. With
respect to the real estate segment, each quarter includes three calendar months
of operating results. Fiscal 1995 is a 53 week year ending on September 3,
1995.
(6)
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REAL ESTATE ASSETS
Real estate assets are recorded at their carryover basis from PriceCostco.
Those values were at historical cost adjusted for recognition of impairment
losses. Prior to the fourth quarter of fiscal 1994, impairment loss provisions
were determined using undiscounted estimated future cash flows to calculate the
assets' net realizable value. Beginning in the fourth quarter of fiscal 1994,
Price Enterprises concluded that the net realizable value should be determined
using discounted estimated cash flows. Accordingly, a provision for asset
impairment of $90.2 million was recorded in the fourth quarter of fiscal 1994.
The exchange agreement, as amended, provided that in the event PriceCostco was
unable to convey title to the Company of any transferred real estate assets by
February 28, 1995, then the Company and PriceCostco would agree to either (i) a
long term lease of such property for the annual rent of $1.00 per year or (ii)
PriceCostco would convey to the Company other property satisfactory to the
Company or (iii) if either of these alternatives deprive either party of the
benefits of transferring ownership, then PriceCostco shall remit to the Company
cash in the amount of the stated value of such property. Real estate assets
that PriceCostco has been unable to, or does not expect to, legally convey to
the Company is expected to be less than $10 million. However the accompanying
financial statements include all such properties as the Company has the rights
and benefits of ownership of such assets.
Real estate assets are depreciated using the straight-line method over their
estimated useful lives, which are as follows:
Land improvements 15 - 25 years
Buildings and improvements 10 - 25 years
Tenant improvements Term of related lease
Furniture, fixtures and equipment 5 years
WAREHOUSE PROPERTIES
Four existing Price Club warehouses (the Warehouse Properties) which are
adjacent to existing real estate properties have been leased back to PriceCostco
effective August 29, 1994, at an initial annual rental of approximately $8.6
million.
MERCHANDISE INVENTORIES
Merchandise inventories, which include merchandise for resale and display
samples, are valued at the lower of cost (first-in, first-out) or market.
(7)
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
REAL ESTATE RENTALS AND DEFERRED RENTS
All leases are classified as operating leases. Rentals are recognized using the
straight-line method over the terms of the leases. Deferred rents represent the
excess of real estate rentals recognized on the straight-line basis over cash
received under the applicable lease provisions. Common area maintenance fees
are included in rental income.
DEFERRED LEASING COSTS
Costs incurred in connection with leasing are deferred and amortized using the
straight-line method over the term of the related lease. Unamortized leasing
costs are charged to expense upon early termination of the lease.
INCOME TAXES
Income taxes have been provided for in accordance with Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109
requires accounting for income taxes based on the asset and liability method
and, accordingly, deferred income taxes are provided to reflect temporary
differences between financial and tax reporting.
The operations of the Company for the first quarter ended December 18, 1994 were
included in the consolidated tax returns of PriceCostco. Income taxes in the
accompanying financial statements have been computed assuming that PEI was a
stand-alone entity. However, for the period from August 29, 1994 through
December 18, 1994, per agreement with PriceCostco, the Company is including the
tax results of less than 80% owned subsidiaries.
NOTE 2 - RELATED PARTY TRANSACTIONS
Prior to fiscal 1995, PriceCostco provided services to PEI. Amounts allocated
to PEI for general and administrative expenses were $369,000 for the second
quarter of fiscal 1994, and $861,000 for the 28 weeks ended March 13, 1994.
These amounts were charged to PEI by specific identification or allocated based
on total assets or sales revenues.
During the first quarter of fiscal 1994, the Company sold a shopping center to
The Price REIT for $21.7 million, recognizing a pre-tax gain of $4.2 million.
The Price REIT performs certain property management services to the Company, at
a rate which the Company believes approximates the fair value of such services.
(8)
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company has entered into an agreement with K&F Development (K&F), an
affiliate of The Price REIT, under which K&F will provide strategic and
consulting services for the next two years and shall receive $500,000 annually
for such services. The Company intends to terminate this arrangement at the end
of fiscal 1995. In addition, K&F provides real estate development/construction
services to the Company at a rate of 6% of aggregate costs. The Company
believes that these fees approximate the fair value of such services.
NOTE 3 - NOTES RECEIVABLE
Notes receivable are recorded at their carryover basis from PriceCostco. They
include amounts loaned to municipalities and agencies (City Notes) to facilitate
real property acquisitions and improvements. The City Notes bear interest at
rates which vary from 7% to 10%. Repayment of the majority of these notes is
generally based on that municipality's allocation of sales tax revenues
generated by retail businesses located on a particular property associated with
such City Note.
The Company holds a note receivable from Atlas Hotels, Inc. (Atlas) which is
collateralized by their hotel property in San Diego, California. On April 3,
1995 the debt obligation was restructured and now requires repayment within five
years of all outstanding indebtedness, with interest accruing on the outstanding
principal at 10% per annum. Interest is payable monthly at a rate equal to the
six month LIBOR rate plus 2.5% per annum (not to exceed 8% per annum through
December 1, 1996), and the interest not yet payable is added to the principal
amount of the loan.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
On December 19, 1994 and January 4, 1995, complaints were filed in United States
District Court, Western District of Washington (entitled SNYDER V PRICE/COSTCO,
INC. ET. AL, Case #C94-1874 and BALSAM V PRICE/COSTCO, INC. ET. AL. Case #C95-
0009, respectively) against several defendants including the Company and certain
of its directors. The two suits have been consolidated for all purposes, and a
First Amended Complaint has been filed. The First Amended Complaint alleges
violation of certain laws and asserts certain related claims, arising from the
exchange offer transaction. The Company believes that the suit is without merit
and will vigorously defend against the suit. The Company does not believe that
the ultimate outcome of such litigation will have a material adverse effect on
the Company's financial position or results of operations.
(9)
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 - SUBSEQUENT EVENT
As of April 20, 1995, the Company has completed the sale of its 51% interest in
Mexico Clubs, L.L.C. ("Mexico Clubs") to Price/Costco, Inc. ("PriceCostco") as
previously announced. PriceCostco and its Mexico-based joint venture partner,
Controladora Comercial Mexicana, now each own a 50% interest in Price Club
Mexico.
The Company recognized a pre-tax loss of $2.8 million ($2.2 million after-tax or
$0.09 per share) during the second quarter of fiscal 1995 as a result of the
sale of its interest in Mexico Clubs, which includes a provision for its share
of estimated operating losses through the transaction closing date (April 20,
1995).
The balance sheet presented as of March 12, 1995 reflects a net investment in
Mexico Clubs of $34.5 million. This amount represents the net proceeds to be
received upon the closing date net of the $2.8 million loss recorded on the
sale. Subsequent to March 12, 1995, the note payable to PriceCostco has been
reduced by $30.5 million and $4 million has been transferred to the Company from
Price Club Mexico.
NOTE 6 - LIQUIDITY AND CAPITAL RESOURCES
Pursuant to an agreement, PriceCostco has provided an $85 million revolving
credit facility (subject to reduction for proceeds of certain real property
sales) to Price Enterprises as interim financing to satisfy any cash
requirements during the six months ended June 21, 1995. Under such revolving
credit facility, Price Enterprises will pay PriceCostco interest at a rate that
approximates their commercial paper rate or the rate charged to PriceCostco
pursuant to its credit facility. As of March 12, 1995, the outstanding
borrowings were $0.3 million. The Company has recently received a commitment
letter from a commercial bank for an unsecured revolving credit facility of $25
million that will have a two year term. Execution of the required agreements is
expected to occur prior to the June 21 expiration date of the PriceCostco
facility.
(10)
<PAGE>
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Price Enterprises operates in several different businesses. The discussion
and analysis below describes the significant changes in real estate rental
operations as well as gains and losses on sale of real estate. Merchandising
operations consists of the operations of Price Quest, Price Global Trading and
Price Ventures. Interest and other income represents the income from notes
receivable, Price Club Mexico joint venture, certain real estate joint ventures,
and PriceCostco's minority interest in the subsidiaries.
The following discussion compares the results of operations for the second
quarter and year-to-date periods of fiscal 1995 ended March 12, 1995 to the
second quarter and year-to-date periods of fiscal 1994 ended March 13, 1994. In
those instances throughout the following discussion where changes are attributed
to more than one factor, such factors have been presented in descending order of
importance. Amounts are in thousands, except percentages. The following
discussion should be read in conjunction with the consolidated financial
statements and the notes thereto.
<TABLE>
<CAPTION>
REVENUE PERCENT OPERATING PERCENT
REAL ESTATE RENTAL OPERATIONS AMOUNT CHANGE INCOME CHANGE CHANGE
- ------------------------------------------------------------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C>
2nd Quarter -- FY 1995....................................... $ 13,617 67% $ 6,075 $ 2,518 71%
2nd Quarter -- FY 1994....................................... 8,135 -- 3,557 -- --
Year-to-date -- FY 1995...................................... $ 25,388 80% $ 11,728 $ 6,089 108%
Year-to-date -- FY 1994...................................... 14,086 -- 5,639 -- --
</TABLE>
Each fiscal quarter reflects 3 calendar months of activity for the real
estate segment. Operating income is defined as rental revenue, including common
area expense reimbursements, less the related real estate expenses, including
unreimbursable expenses for unimproved land and certain developed properties
with vacant space and depreciation.
During the 2nd quarter and the 6-month year-to-date periods, the increase in
revenue and operating income was due primarily to the inclusion of the four
Price Club properties whose leases began on August 29, 1994, and the inclusion
of rentals from properties located in Pentagon (VA), Westbury (NY), Bensalem
(PA), and Seekonk (MA), offset by declines in rental income due to the sale in
1994 of the Glendale (AZ) property to The Price REIT. Property taxes increased
at a greater rate than the increase in rental revenues primarily due to the
acquisitions mentioned above and the contribution of non-income producing
properties by PriceCostco during the second half of fiscal 1994. Property taxes
have been incurred during the first half of fiscal 1995 for these properties for
which no comparable expense was recorded during the first half of fiscal 1994.
<TABLE>
<CAPTION>
GAINS PERCENT
GAINS (LOSSES) ON SALE OF REAL ESTATE ON SALE CHANGE CHANGE
- --------------------------------------------------------------------------------- --------- --------- ------------
<S> <C> <C> <C>
2nd Quarter -- FY 1995........................................................... $ (181) $ 116 39%
2nd Quarter -- FY 1994........................................................... (297) -- --
Year-to-date -- FY 1995.......................................................... $ (181) $ (4,111) -105%
Year-to-date -- FY 1994.......................................................... 3,930 -- --
</TABLE>
11
<PAGE>
During the 2nd quarter of fiscal 1995, the loss relates to the sale of
property located in Phoenix (AZ). The year-to-date comparison reflects the sale
of the Glendale (AZ) shopping center to The Price REIT during the 1st quarter of
fiscal 1994.
<TABLE>
<CAPTION>
SALES PERCENT GROSS % OF PERCENT
MERCHANDISING OPERATIONS AMOUNT CHANGE MARGIN SALES CHANGE
- ----------------------------------------------------------------- --------- ------------ --------- ----------- ------------
<S> <C> <C> <C> <C> <C>
2nd Quarter -- FY 1995........................................... $ 13,912 4.8% $ 952 6.8% 24%
2nd Quarter -- FY 1994........................................... 13,281 -- 766 5.8% --
Year-to-date -- FY 1995.......................................... $ 43,820 44% $ 2,902 6.6% 47%
Year-to-date -- FY 1994.......................................... 30,388 -- 1,977 6.5% --
</TABLE>
Merchandise sales includes Price Quest and international trading businesses.
Gross margin is defined as merchandise sales less the related merchandise costs.
During the 12-week period of the 2nd quarter, the increase in merchandising
sales was due to expansion of the Price Quest kiosk program from 23 to 40
locations over the past year, which resulted in an increase in sales for the
program of $2.2 million to $6.1 million in fiscal 1995 from $3.9 million in
fiscal 1994. This increase more than offset a 17% decline in sales from the
international trading activities which were significantly impacted by reduced
sales to customers in Mexico and Hong Kong. The Company expects a continuation
of reduced sales to these customers for some time; therefore, future results of
the international trading activities will most likely reflect unfavorable
comparisons to the fiscal 1994 sales levels. The merchandise gross margins
benefited from the shift in sales from the lower margin trading activities to
the relatively higher margins obtained with the Quest business.
During the 28-week year-to-date period of fiscal 1995, the increase in
merchandising sales was due to expansion of the Price Quest kiosk business,
which resulted in an increase in sales for the program of $7.5 million to $18.2
million in fiscal 1995 from $10.7 million in fiscal 1994. The international
trading business sales increased 30% primarily due to higher demand for products
during the 1st quarter of fiscal 1995 from its Hong Kong customer.
<TABLE>
<CAPTION>
PERCENT
MERCHANDISING OPERATING EXPENSES AMOUNT CHANGE CHANGE
- ----------------------------------------------------------------------------------- --------- --------- ------------
<S> <C> <C> <C>
2nd Quarter -- FY 1995............................................................. $ 4,614 $ 1,947 73%
2nd Quarter -- FY 1994............................................................. 2,667 -- --
Year-to-date -- FY 1995............................................................ $ 10,226 $ 5,865 134%
Year-to-date -- FY 1994............................................................ 4,361 -- --
</TABLE>
During the 2nd quarter and the year-to-date periods, the increases in
merchandising operating expenses were primarily due to the expansion of the
Price Quest businesses and increased expenses of the international activities of
Price Global Trading. In addition, Price Ventures has recently begun to develop
certain international merchandising businesses. These activities have resulted
in the recognition of additional operating expenses beginning with the 2nd
quarter of fiscal 1995.
<TABLE>
<CAPTION>
PERCENT
GENERAL AND ADMINISTRATIVE EXPENSES AMOUNT CHANGE CHANGE
- ------------------------------------------------------------------------------------ --------- --------- ------------
<S> <C> <C> <C>
2nd Quarter -- FY 1995.............................................................. $ 992 $ 623 169%
2nd Quarter -- FY 1994.............................................................. 369 -- --
Year-to-date -- FY 1995............................................................. $ 1,963 $ 1,101 128%
Year-to-date -- FY 1994............................................................. 862 -- --
</TABLE>
12
<PAGE>
PriceCostco historically provided services to Price Enterprises and charged
these expenses to Price Enterprises by specific identification or by allocations
based on total assets or sales revenues. During the 2nd quarter and the
year-to-date periods, the increases in expenses reflect the continued growth of
the Company and the incremental expenses associated with becoming a separate
publicly held company. In addition, during the 2nd quarter, an accrual was made
for certain employee incentive benefit programs for which no similar accrual had
been included in the 1st quarter of fiscal 1995.
<TABLE>
<CAPTION>
PERCENT
INTEREST INCOME (NET) AMOUNT CHANGE CHANGE
- ------------------------------------------------------------------------------------- --------- ----------- -----------
<S> <C> <C> <C>
2nd Quarter -- FY 1995............................................................... $ 1,356 $ 69 5.4%
2nd Quarter -- FY 1994............................................................... 1,287 -- --
Year-to-date -- FY 1995.............................................................. $ 2,818 $ 316 12.6%
Year-to-date -- FY 1994.............................................................. 2,502 -- --
</TABLE>
During the 2nd quarter and the year-to-date periods, the increases in
interest income were due to higher interest on the notes receivable, offset by
interest payable to PriceCostco for advances against the $85 million revolving
credit facility and for the $45.9 million note payable associated with the 3.8
million share stock repurchase during the 2nd quarter of fiscal 1995.
<TABLE>
<CAPTION>
PC MEXICO TOTAL
RELATED OTHER OTHER PERCENT
OTHER INCOME INCOME INCOME INCOME CHANGE CHANGE
- --------------------------------------------------------- ----------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
2nd Quarter -- FY 1995................................... $ (4,183) $ 1,604 $ (2,579) $ (4,530) -232%
2nd Quarter -- FY 1994................................... 778 1,173 1,951 -- --
Year-to-date -- FY 1995.................................. $ (3,955) $ 2,502 $ (1,453) $ (4,409) -149%
Year-to-date -- FY 1994.................................. 1,299 1,657 2,956 -- --
</TABLE>
During the 2nd quarter and the year-to-date periods, the decrease in other
income was directly caused by reduced profitability of Price Club Mexico (PCM)
and the $2.8 million estimated loss on the sale of the Company's interest in
PCM. Offsetting this factor was the favorable impact of allocating increased
losses of Price Quest to PriceCostco's minority interest in that business.
<TABLE>
<CAPTION>
EFFECTIVE
PERCENT TAX RATE
PROVISION FOR INCOME TAXES AMOUNT CHANGE CHANGE (NOTE)
- ------------------------------------------------------------------------ --------- --------- ----------- -------------
<S> <C> <C> <C> <C>
2nd Quarter -- FY 1995.................................................. $ 345 $ (1,507) -81% --
2nd Quarter -- FY 1994.................................................. 1,852 -- -- 46%
Year-to-date -- FY 1995................................................. $ 1,683 $ (3,187) -65% 74%
Year-to-date -- FY 1994................................................. 4,870 -- -- 41%
<FN>
Note -- The effective tax rate represents the provision for income taxes divided
by pre-tax earnings (before minority interest), excluding the $2.8
million pre-tax loss from selling the PCM investment and the related
$0.6 million income tax benefit.
</TABLE>
During the 2nd quarter and the year-to-date periods, the provision for
income taxes was significantly impacted by selling the PCM investment. Earnings
from the joint venture increased the investment's book value; however, those
earnings did not change the investment's tax basis. Sale of the investment is
expected to result in a book loss that is significantly higher than the tax
loss, a
13
<PAGE>
difference for which no deferred tax liability has been previously established.
For book purposes, the effective tax benefit associated with the $2.8 million
pre-tax loss was only $0.6 million, or 21% of the loss.
In 1995, the effective tax rate for the 2nd quarter was higher than the rate
used for the 1st quarter in order to bring the year-to-date expense to 74%
(excluding the impact of the sale of the PCM investment) of pre-tax earnings.
This projected tax rate of 74% exceeds the statutory tax rate of approximately
41% due to the non-deductibility of losses from Price Quest, Price Global
Trading and PCM's joint venture in Mexico when computing PEI's income tax
provision. In 1994, the effective tax rate was likewise impacted by these
factors; however, the non-deductible losses were significantly smaller in 1994
and PCM was generating income during 1994 for which no additional tax provision
was required.
<TABLE>
<CAPTION>
PERCENT
NET INCOME PER SHARE AMOUNT CHANGE CHANGE
- ----------------------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
2nd Quarter -- FY 1995............................................................. $ (0.01) $ (0.10) -111%
2nd Quarter -- FY 1994............................................................. 0.09 -- --
Year-to-date -- FY 1995............................................................ $ 0.09 $ (0.17) -65%
Year-to-date -- FY 1994............................................................ 0.26 -- --
</TABLE>
During the 2nd quarter and the year-to-date periods, the decrease in net
income per share was due primarily to the reduced profitability of PCM and the
$2.8 million estimated loss on the sale of the Company's interest in PCM ($0.17
for the quarter and $0.18 for year-to-date). In addition, gains on the sales of
real estate provided $0.09 per share of income in 1994 for which no comparable
income has been provided in fiscal 1995.
In 1995, the number of shares used in the calculation takes into account the
repurchase of 3.8 million shares of common stock as of February 6, 1995. Shares
used in the calculation for the 2nd quarter of fiscal 1995 were 25.4 million,
and the year-to-date calculation reflected 26.3 million shares.
LIQUIDITY AND CAPITAL RESOURCES
Price Enterprises expects to finance its business activities through several
sources. The cash flow generated by its real estate activities, as well as cash
flow that may ultimately be generated by the subsidiaries, is expected to be
reinvested in either additional real estate development efforts or through
capital contributions or loans to the subsidiaries or other business activities.
In the immediate future, pursuant to an agreement, PriceCostco will provide an
$85 million revolving credit facility (subject to reduction for proceeds of
certain real property sales) to Price Enterprises as interim financing to
satisfy any cash requirements during the six months ended June 21, 1995. Under
such revolving credit facility, Price Enterprises will pay PriceCostco interest
at a rate that approximates their commercial paper rate or the rate charged to
PriceCostco pursuant to its credit facility. As of March 12, 1995, the
outstanding borrowings were $0.3 million. The Company has recently received a
commitment letter from a commercial bank for an unsecured revolving credit
facility of $25 million that will have a two year term. Execution of the
required agreements is expected to occur prior to the June 21 expiration date of
the PriceCostco facility.
In connection with the purchase of PriceCostco's remaining ownership of
approximately 3.8 million shares of Price Enterprises, the Company issued a
promissory note for approximately $46 million due December 1996, which was
subsequently reduced by $30.5 million as a result of selling the
14
<PAGE>
Company's investment in Price Club Mexico. In the future, to the extent that
investment opportunities exceed available cash flow from operations, Price
Enterprises will seek additional funds, as appropriate, through bank credit
facilities, securitized debt and/or public equity offerings.
Consistent with historical trends, operating income from real estate
activities increases as properties are developed and declines as properties are
sold. Price Enterprises' liquidity is primarily affected by the timing and
magnitude of rental property acquisition, development and disposition.
INFLATION
Because a substantial number of Price Enterprises' leases contain provisions
for rent increases based on changes in various consumer price indices and
additional rent if sales exceed certain base amounts, inflation is not expected
to have a significant material impact on future net income or cash flow from
developed and operating properties. In addition, substantially all leases are
'triple net' whereby specified operating expenses and property taxes are passed
through to the tenant.
For undeveloped and under-developed properties, inflation could increase
Price Enterprises' cost of carrying and developing the properties; however,
inflation would likely increase the future sales value of the properties.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS --
On December 19, 1994 and January 4, 1995 complaints were filed in United States
District Court, Western District of Washington (entitled SNYDER V PRICE/COSTCO,
INC. ET. AL., Case #C94-1874 and BALSAM V PRICE/COSTCO, INC. ET. AL. Case #C95-
0009, respectively) against several defendants including the Company and certain
of its directors. The two suits have been consolidated for all purposes, and a
First Amended Complaint has been filed. The First Amended Complaint alleges
violation of certain laws and asserts certain related claims, arising from the
exchange offer transaction. The Company believes that the suit is without merit
and will vigorously defend against the suit. The Company does not believe that
the ultimate outcome of such litigation will have a material adverse effect on
the Company's financial position or results of operations.
The Company is a party to other routine litigation incident to its business
and to which its property is subject. The Company's management does not believe
that the ultimate resolution of any of these matters will have a material
adverse impact on the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES ---
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ---
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---
None.
ITEM 5. OTHER INFORMATION ---
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ---
(a) The following exhibits are included herein or incorporated by reference:
(15) Independent Accountant's Review Report
(27) Financial Data Schedules
(b) The Company filed a report on Form 8-K on January 24, 1995.
1. The announcement that the Board of Directors of the Company approved
the change of principal independent accountant to Ernst & Young LLP
from Arthur Andersen LLP.
(15)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRICE ENTERPRISES, INC.
REGISTRANT
Date: April 25, 1995 /s/ Robert E. Price
-------------------
Robert E. Price
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: April 25, 1995 /s/ Daniel T. Carter
--------------------
Daniel T. Carter
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
(16)
<PAGE>
Exhibit 15 -- Independent Accountants' Review Report
Board of Directors
Price Enterprises, Inc.
We have reviewed the accompanying consolidated balance sheet of Price
Enterprises, Inc., as of March 12, 1995 and the related consolidated statements
of income for the twelve and twenty-eight week periods ended March 12, 1995 and
March 13, 1994, and the consolidated statements of cash flows for the twenty-
eight week periods ended March 12, 1995 and March 13, 1994. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
April 5, 1995, except for the first
paragraph of Note 5, as to which
the date is April 20, 1995
(17)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> AUG-31-1995
<PERIOD-START> AUG-29-1994
<PERIOD-END> MAR-12-1995
<CASH> 3,052
<SECURITIES> 0
<RECEIVABLES> 78,910
<ALLOWANCES> 0
<INVENTORY> 8,521
<CURRENT-ASSETS> 17,805
<PP&E> 481,904
<DEPRECIATION> 36,561
<TOTAL-ASSETS> 607,609
<CURRENT-LIABILITIES> 29,417
<BONDS> 0
<COMMON> 2
0
0
<OTHER-SE> 531,890
<TOTAL-LIABILITY-AND-EQUITY> 607,609
<SALES> 43,820
<TOTAL-REVENUES> 69,385
<CGS> 40,918
<TOTAL-COSTS> 66,767
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 502
<INCOME-PRETAX> 3,983
<INCOME-TAX> 1,683
<INCOME-CONTINUING> 2,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,300
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
