<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 17, 1996
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 23,278,611 common shares, par value $.0001, outstanding at
April 9, 1996.
<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 Income..............................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...........................10
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)
<TABLE>
<CAPTION>
MARCH 17, AUGUST 31,
1996 1995
---------- ---------
ASSETS (unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,663 $ ---
Accounts receivable, net 5,508 5,776
Merchandise inventories 1,807 7,385
Prepaid expenses and other current
assets 4,690 1,499
--------- --------
Total current assets 19,668 14,660
Real estate assets:
Land and land improvements 179,817 179,794
Building and improvements 176,457 168,808
Fixtures and equipment 7,169 7,928
Construction in progress 4,201 6,457
--------- --------
367,644 362,987
Less accumulated depreciation (32,217) (28,233)
--------- --------
335,427 334,754
Other assets:
Property held for sale, net 92,922 100,035
City notes receivable 30,126 30,835
Atlas and other notes receivable 49,271 45,790
Deferred income taxes 25,114 29,315
Deferred rents and leasing costs, net 13,511 11,932
--------- --------
210,944 217,907
--------- --------
Total assets $566,039 $567,321
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,800 $ 2,592
Accrued expenses 3,277 6,186
Note payable to PriceCostco 15,425 ---
Other current liabilities 7,657 6,095
--------- --------
Total current liabilities 29,159 14,873
Note payable to PriceCostco --- 15,425
Minority interest of PriceCostco 454 4,938
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 549,189 548,705
Retained earnings (deficit) 2,660 (1,197)
Treasury stock (15,425) (15,425)
--------- --------
536,426 532,085
--------- --------
Total liabilities and stockholders'
equity $566,039 $567,321
--------- --------
--------- --------
</TABLE>
Note: The balance sheet at August 31, 1995 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.
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 17, MARCH 12, MARCH 17, MARCH 12,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
REVENUES
Real estate $14,152 $13,617 $27,287 $25,388
Gain (loss) on sale of real estate, net 179 (181) 657 (181)
Merchandise sales 5,205 13,912 22,702 43,820
Other revenues 420 (48) 793 358
------- ------- ------- --------
Total revenues 19,956 27,300 51,439 69,385
OPERATING EXPENSES
Real estate:
Operating, maintenance and administrative
expenses 3,100 2,510 5,558 4,551
Property taxes 2,250 2,595 4,166 4,689
Depreciation and amortization 2,494 2,437 4,986 4,420
Merchandising:
Cost of sales 5,775 12,960 21,743 40,918
Operating expenses 5,356 4,614 12,027 10,226
General and administrative 843 992 1,783 1,963
Provision for asset impairments 1,000 --- 1,000 ---
------- ------- ------- --------
Total operating expenses 20,818 26,108 51,263 66,767
------- ------- ------- --------
Operating income (loss) (862) 1,192 176 2,618
INTEREST AND OTHER
Interest income, net 1,741 1,356 3,429 2,818
Loss of Price Club Mexico joint venture --- (5,514) --- (5,138)
Minority interest 2,110 2,935 4,133 3,685
------- ------- ------- --------
Total interest and other 3,851 (1,223) 7,562 1,365
------- ------- ------- --------
Income (loss) before provision for income 2,989 (31) 7,738 3,983
taxes
Provision for income taxes (1,225) (345) (3,881) (1,683)
------- ------- ------- --------
Net income (loss) $ 1,764 $ (376) $ 3,857 $ 2,300
------- ------- ------- --------
------- ------- ------- --------
Net income (loss) per share $ .08 $ (.01) $ .17 $ .09
------- ------- ------- --------
------- ------- ------- --------
Average number of shares outstanding 23,256 25,427 23,244 26,326
</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 17, MARCH 12,
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $3,857 $2,300
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 5,926 5,853
Loss (gain) on sale of real estate assets (462) 181
Provision for asset impairments 1,000 ---
Equity in losses of Price Club Mexico joint
venture --- 2,338
Loss on sale of Price Club Mexico joint
venture (net) --- 2,200
Minority interest of PriceCostco (4,133) (3,685)
Change in accounts receivable and other
assets 6,506 (32,831)
Change in accounts payable and other
liabilities (138) 32,653
Deferred rents and leasing costs (1,579) (1,754)
------- -------
Net cash flows provided by operating
activities 10,977 7,255
INVESTING ACTIVITIES
Additions to real estate assets (12,728) (12,932)
Proceeds from sale of real estate assets 9,953 5,758
Investment in Price Club Mexico joint venture --- (3,883)
Additions to notes receivable (1,080) ---
Payments of notes receivable 1,058 3,473
------- -------
Net cash flows used in investing activities (2,797) (7,584)
FINANCING ACTIVITIES
Line of credit repayments (1,001) ---
Proceeds from exercise of stock options
including tax benefit 484 ---
Equity adjustment arising from exchange agreement --- (1,693)
PriceCostco equity contributions to subsidiaries --- 3,430
------- -------
Net cash flows provided by (used in)
financing activities (517) 1,737
------- -------
Net increase in cash and cash equivalents 7,663 1,408
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD --- 1,644
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $7,663 $3,052
------- -------
------- -------
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 17, 1996
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Price Enterprises, Inc. (PEI or the Company) became a 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. However,
since August 31, 1994 PEI has operated as a separate company.
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 17, 1996 are not necessarily
indicative of the results that may be expected for the year ended August 31,
1996.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BUSINESS SEGMENTS AND FISCAL YEAR
The Company has investments in two business segments: (1) real estate
operations, and (2) certain merchandising businesses. The Company's real
estate business reports on a fiscal year which ends on August 31; whereas,
the merchandising businesses report on a 52/53 week fiscal year which ends on
the Sunday nearest August 31. For ease of presentation, all fiscal years in
this report are referred to as having ended on August 31.
With respect to the real estate segment, each fiscal quarter includes three
calendar months of operating results; however, the merchandising segment's
fiscal quarters are as follows: first quarter -- 16 weeks, second quarter --
12 weeks, third quarter -- 12 weeks, fourth quarter -- 12 or 13 weeks,
depending upon whether the fiscal year has 52 or 53 weeks. Fiscal 1995
included 53 weeks.
6
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ASSET IMPAIRMENTS
The Company regularly evaluates the estimated fair value of its assets and
records appropriate provisions for asset impairments. The various notes
receivable are evaluated in accordance with Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan."
Beginning with fiscal 1996, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," has been adopted
and applied to real estate assets.
REAL ESTATE ASSETS
Real estate assets are recorded at PEI's historical costs as adjusted for
recognition of impairment losses.
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
Fixtures and equipment 5 years
Certain Price Quest MIS assets 3 years
Property held for sale is recorded at the lower of cost or management's
estimates of the expected net proceeds to be received from the eventual sale.
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.
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.
7
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 companies to account for deferred taxes using 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 of fiscal 1995 ended
December 18, 1994 are included in the consolidated tax returns of PriceCostco.
The provision for income taxes since that date has been computed for PEI as a
stand-alone entity, therefore, losses incurred by 51% owned subsidiaries were
not accorded any tax benefit. As of November 27, 1995 both Price Quest and
Price Global were restructured as limited liability companies which are treated
as partnerships for income tax purposes. Accordingly, PEI's share of the
operating results of these companies is included in PEI's tax return.
NOTE 2 - NOTES RECEIVABLE
Notes receivable are recorded at PEI's historical cost as adjusted for
recognition of impairment losses. 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
range 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 Note)
which is collateralized by hotel property in San Diego, California. On April
3, 1995 the debt obligation was restructured and now requires repayment after
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 currently payable
is added to the principal amount of the loan.
In addition to the Atlas Note, the Company holds $6.6 million of notes
receivables received as partial consideration for the sale of certain real
estate properties. Interest rates for these notes vary from 9.5% to 9.75% and
their maturities extend through March 1999.
8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES
On December 19, 1994 and January 4, 1995 Complaints were filed in the 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 defendants including the Company and
certain of its directors. The two suits have been consolidated for all
purposes. In November 1995, a Second Amended Complaint was filed. The
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.
NOTE 4 - REVIEW BY INDEPENDENT ACCOUNTANTS
A review of the data presented was made by Ernst & Young LLP, independent
accountants, in accordance with established professional standards and
procedures, and their report is included herein.
NOTE 5 - LINE OF CREDIT FACILITY
The Company has a revolving credit facility with a commercial bank for up to $25
million in unsecured advances through June 29, 1997. Interest is charged at the
bank's base rate, or at rates slightly higher than LIBOR pricing, at the
Company's election. There were no outstanding borrowings on this facility as of
March 17, 1996.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis compares the results of operations
for the second quarter and year-to-date periods of fiscal 1996 ended March 17,
1996 to the second quarter and year-to-date periods of fiscal 1995 ended March
12, 1995. The Company invests in real estate and related assets, in addition to
certain merchandising businesses which include Price Quest, Price Global Trading
and Price Ventures activities. Where appropriate, the financial results for
these two business segments are discussed separately. In those instances where
changes are attributed to more than one factor, the factors are presented in
descending order of importance. All dollar amounts are in thousands. The
following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto.
REAL ESTATE RENTAL OPERATIONS
<TABLE>
<CAPTION>
Revenue Percent Operating Percent
Amount Change Income Change Change
------- ------- --------- ------ -------
<S> <C> <C> <C> <C> <C>
2nd Quarter - FY 1996 $14,152 3.9% $ 6,308 $233 3.8%
2nd Quarter - FY 1995 13,617 --- 6,075 --- ---
Year-to-date - FY 1996 $27,287 7.5% $12,577 $849 7.2%
Year-to-date - FY 1995 25,388 --- 11,728 --- ---
</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
all unreimburseable expenses associated with unimproved land and certain
developed properties with vacant space. In addition, operating income reflects
depreciation expense, but it does not reflect provisions for asset impairments
or gain (loss) on sale of real estate.
During the second quarter and year-to-date periods, the increase in revenue
and operating income was primarily due to increased revenues from the Pentagon
City (VA) center which was not operational during much of the first quarter of
fiscal 1995. In addition, there were increased expense reimbursements and
additional lease-up of various properties during fiscal 1996. These increases
were somewhat offset by the loss of income due to the sale of the Phoenix (AZ)
property in March 1995.
ADJUSTED FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
Add Less Adjusted
Operating Depreciation Straight-line Funds from Percent
Income Expense Rentals Operations Change
--------- ------------ ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
2nd Quarter - FY 1996 $ 6,308 $2,494 $ (666) $ 8,136 6.9%
2nd Quarter - FY 1995 6,075 2,437 (902) 7,610 ---
Year-to-date - FY 1996 $12,577 $4,986 $(1,446) $16,117 11.6%
Year-to-date - FY 1995 11,728 4,420 (1,702) 14,446 ---
</TABLE>
Real estate industry analysts generally consider funds from operations
(FFO) to be a measure of performance for real estate-oriented companies. As
defined by the National Association for Real Estate Investment Trusts (NAREIT),
it is the pre-tax income determined in accordance with GAAP, excluding gains
(losses) from sales of property, after adding back depreciation and amortization
expense. Due to the significance of straight-line rent accruals, which
represent noncash revenues associated with fixed future minimum rent increases,
the Company has adjusted the NAREIT definition to eliminate straight-line rents
when computing its adjusted FFO.
10
<PAGE>
Adjusted FFO does not represent cash flows from operations as defined by
generally accepted accounting principles and should not be considered as an
alternative to net income as an indicator of the Company's operating performance
or to cash flows as a measure of liquidity.
The growth in adjusted FFO for the second quarter and the year-to-date
periods reflects the impact of the factors mentioned in the operating income
discussion above. In addition, modifications to certain leases during the
second quarter of fiscal 1996 resulted in reversals of previously accrued
straight-line rent.
GAIN (LOSS) ON SALE OF REAL ESTATE
<TABLE>
<CAPTION>
Gain (Loss) Percent
on Sale Change Change
----------- ------ -------
<S> <C> <C> <C>
2nd Quarter - FY 1996 $179 $360 199%
2nd Quarter - FY 1995 (181) --- ---
Year-to-date - FY 1996 $657 $838 463%
Year-to-date - FY 1995 (181) --- ---
</TABLE>
During the second quarter of fiscal 1996, gains on the sale of real estate
related to the sales of properties in San Diego (Convoy Ct.) and Fremont (CA).
The fiscal 1996 year-to-date amount also reflects gains on the sales of
properties in S.W. Denver (CO), North Highlands (CA), Sunnyvale (CA), and Palm
Harbor (FL). These gains were partially offset by a loss on the sale of
property in West Palm Beach (FL) during the first quarter. The loss on the sale
of property during fiscal 1995 was the result of a sale of property located in
Phoenix (AZ).
PROVISION FOR ASSET IMPAIRMENTS
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------ -------
<S> <C> <C> <C>
2nd Quarter - FY 1996 $1,000 $1,000 ---
2nd Quarter - FY 1995 --- --- ---
Year-to-date - FY 1996 $1,000 $1,000 ---
Year-to-date - FY 1995 --- --- ---
</TABLE>
During second quarter fiscal 1996, a non-cash charge of $1.0 million was
taken to write down the carrying value of real estate properties which are being
held for sale and which are expected to generate net sales proceeds below their
current book values. On an aggregate basis this adjustment approximated a 1%
write-down to the carrying value of all properties held for sale as of March 17,
1996.
MERCHANDISING OPERATIONS
<TABLE>
<CAPTION>
Sales Percent Gross % of Percent
Amount Change Margin Sales Change
------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
2nd Quarter - FY 1996 $ 5,205 (63%) $ (570) (11.0%) (160%)
2nd Quarter - FY 1995 13,912 --- 952 6.8% ---
Year-to-date - FY 1996 $22,702 (48%) $ 959 4.2% (67%)
Year-to-date - FY 1995 43,820 --- 2,902 6.6% ---
</TABLE>
11
<PAGE>
Merchandise sales include Price Quest and international exports to
licensees and other international customers. Gross margin is defined as
merchandise sales less the related merchandise costs.
For the 12-week period of the second quarter, the decrease in sales is
attributed to a 70% decline in sales for Price Quest, from $6.1 million in
second quarter fiscal 1995 to $1.8 million in fiscal 1996, primarily as a
result of eliminating merchandise displays. Export sales declined 57%
compared to the prior year due to the discontinuation of sales to certain
international customers. As a result, the majority of sales during fiscal
1996 support the Guam/Saipan licensee's operations. For the 28-week
year-to-date period, Price Quest experienced a 58% decline in sales and
export sales declined 41%.
The decrease in gross margin as a percent of sales during second quarter
fiscal 1996 was primarily due to the impact of reserves established for Price
Quest related to discontinuing the furniture business, disposing of display
and central fulfillment inventories which were not sold during the holiday
season, and disposing of certain kiosk fixtures and equipment. Prior to
taking into account the reserves, Price Quest realized a gross margin of 9.6%
and export sales realized a gross margin of 3.2% during the second quarter of
fiscal 1996. During the 28-week year-to-date period gross margins were
likewise adversely affected by the Price Quest reserves.
MERCHANDISING OPERATING EXPENSES
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------ -------
<S> <C> <C> <C>
2nd Quarter - FY 1996 $ 5,356 $ 742 16.1%
2nd Quarter - FY 1995 4,614 --- ---
Year-to-date - FY 1996 $12,027 $1,801 17.6%
Year-to-date - FY 1995 10,226 --- ---
</TABLE>
During the second quarter and the year-to-date periods, the increase in
expenses was primarily due to Price Ventures and Price Global Trading
activities. Much of this increase relates to PEI expenses associated with
supporting the Price Club Mexico operations during early fiscal 1995 which
were reimbursed by the joint venture. After the sale of PEI's interest in
the joint venture in April 1995, reimbursements were discontinued, and the
Company's expenses rose accordingly. In addition, severance expense of
approximately $0.7 million associated with employee terminations was recorded
during the second quarter of fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------ -------
<S> <C> <C> <C>
2nd Quarter - FY 1996 $ 843 $(149) (15.0%)
2nd Quarter - FY 1995 992 --- ---
Year-to-date - FY 1996 $1,783 $(180) (9.2%)
Year-to-date - FY 1995 1,963 --- ---
</TABLE>
The decrease in expenses for the second quarter and the year-to-date
periods was due to the inclusion of an accrual for certain employee incentive
benefit programs in the second quarter of fiscal 1995 for which a less
significant accrual was made in the current year. The declines were somewhat
offset by legal fees incurred during fiscal 1996 with respect to defense
efforts associated with the stockholder lawsuit.
12
<PAGE>
INTEREST INCOME (NET)
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------ -------
<S> <C> <C> <C>
2nd Quarter - FY 1996 $1,741 $385 28%
2nd Quarter - FY 1995 1,356 --- ---
Year-to-date - FY 1996 $3,429 $611 22%
Year-to-date - FY 1995 2,818 --- ---
</TABLE>
The increase in net interest income during the second quarter was due
to the addition of two notes receivable that were received as partial
consideration for the sale of certain properties, reduced interest expense to
PriceCostco and increased interest income on invested cash balances. During
the year-to-date period, interest income increased as a result of the factors
mentioned above, as well as higher interest income on the Atlas Note and
increased amounts of capitalized interest associated with construction
projects.
OTHER INCOME (NET)
<TABLE>
<CAPTION>
Price Club Minority Total Other Percent
Mexico Interest Income Change Change
---------- -------- ----------- ------ -------
<S> <C> <C> <C> <C> <C>
2nd Quarter - FY 1996 --- $2,110 $2,110 $4,689 182%
2nd Quarter - FY 1995 $(4,183) 1,604 (2,579) --- ---
Year-to-date - FY 1996 --- $4,133 $4,133 $5,586 384%
Year-to-date - FY 1995 $(3,955) 2,502 (1,453) --- ---
</TABLE>
During fiscal 1995, the Price Club Mexico amounts represent the
Company's equity in losses of the joint venture, after taking into account
PriceCostco's 49% minority interest in Mexico Clubs, as well as the loss on
the sale of the Company's interest to PriceCostco. Minority interest
represents the allocation of Price Quest and Price Global Trading losses to
PriceCostco. Late in the first quarter of fiscal 1996 Price Quest and Price
Global Trading were restructured as limited liability companies and as of
that time minority interest has been allocated on a pre-tax basis. The
increase in minority interest for the second quarter and year-to-date periods
was a result of increased losses of Price Quest and Price Global Trading
during fiscal 1996 being allocated to PriceCostco's 49% minority interest.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------ -------
<S> <C> <C> <C>
2nd Quarter - FY 1996 $1,225 $ 880 255%
2nd Quarter - FY 1995 345 --- ---
Year-to-date - FY 1996 $3,881 $2,198 131%
Year-to-date - FY 1995 1,683 --- ---
</TABLE>
During the first quarter of fiscal 1995, losses incurred by the
51%-owned subsidiaries prior to December 21, 1994 were tax deductible by
PriceCostco, and the corresponding benefits were transferred to these
subsidiaries in accordance with certain tax sharing agreements. Losses after
that date were not deductible until Price Quest and Price Global Trading were
restructured as limited liability companies in the first quarter of fiscal
1996. Subsequent to the restructuring date, these companies have been
treated as partnerships for income tax purposes, and PEI recognizes tax
benefits for its share of any tax losses.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
While the Company is well positioned to finance its business
activities through a variety of sources, it expects to satisfy short-term
liquidity requirements through net cash provided by real estate operations
and through borrowings under the unsecured revolving line of credit facility.
Approximately $93 million of the Company's real estate assets are being held
for sale, and the cash flow that may ultimately be generated by sales of
these properties represents a major source of additional capital resources.
To the extent that investment opportunities exceed available cash flow from
these sources, the Company's unleveraged balance sheet should enable it to
access significant amounts of capital through bank credit facilities and/or
securitized debt offerings, or the Company may choose to seek additional
funds through future public equity offerings.
The Company has a revolving credit facility with a commercial bank for
up to $25 million in unsecured advances through June 29, 1997. Advances bear
interest, at the Company's option, at either LIBOR plus 0.40% or the bank's
Base Rate, as defined. The agreement requires that the Company not sell or
pledge certain property with a net book value of $180 million as of August
31, 1995, that the Company maintain certain net worth and debt-to-equity
ratios, and that a facility fee of 0.15% of the commitment amount be paid
annually. As of March 17, 1996, there was no outstanding balance on the
credit facility.
Consistent with historical trends, operating income from real estate
activities increases as properties are developed and fluctuates as properties
are sold. The Company's liquidity is primarily affected by the timing and
magnitude of rental property acquisition, development and disposition.
INFLATION
Because a substantial number of the Company's leases contain
provisions for rent increases based on changes in various consumer price
indices, based on fixed rate increases, or based on percentage rent if tenant
sales exceed certain base amounts, inflation is not expected to have a
significant material impact on future net income or cash flow from developed
and operating properties. In addition, substantially all leases are "triple
net," whereby specific operating expenses and property taxes are passed
through to the tenant. For undeveloped or under-developed properties,
inflation could increase the Company's cost of carrying and developing the
properties; however, inflation would likely increase the future sales value
of the properties.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ---
On December 19, 1994 and January 4, 1995 Complaints were filed in the
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 defendants including the
Company and certain of its directors. The two suits have been consolidated
for all purposes. In November 1995, a Second Amended Complaint was filed.
The 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 ---
The annual meeting of the Company's stockholders was held on January
16, 1996. As of the record date there were 23,234,866 shares outstanding.
The following Directors were elected at the meeting:
<TABLE>
<CAPTION>
Votes For Votes Withheld
---------- --------------
<S> <C> <C>
Nancy Y. Bekavac 21,196,922 17,912
William P. Dickey 21,197,717 17,117
Murray L. Galinson 21,198,557 16,277
Katherine L. Hensley 21,198,032 16,802
Leon C. Janks 21,196,792 18,042
Paul A. Peterson 21,199,270 15,564
Robert E. Price 21,197,043 17,791
</TABLE>
No other matters were voted on or approved.
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:
(15.1) Independent Accountants' Review Report
(15.2) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedules
(b) No reports on Form 8-K were filed for the 12 weeks ended March
17, 1996.
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 10, 1996 /s/ Robert E. Price
-----------------------------
Robert E. Price
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: April 10, 1996 /s/ Daniel T. Carter
-----------------------------
Daniel T. Carter
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
16
<PAGE>
EXHIBIT 15.1 -- 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 17, 1996 and the related consolidated
statements of income for the twelve and twenty-eight week periods ended March
17, 1996 and March 12, 1995, and the consolidated statements of cash flows
for the twenty-eight week periods ended March 17, 1996 and March 12, 1995.
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, which
will be performed for the full year with the objective of expressing an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Price Enterprises, Inc. as of
August 31, 1995, and the related statements of income, stockholders' equity,
and cash flows for the year then ended (not presented herein) and in our
report dated October 10, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying consolidated balance sheet as of August 31, 1995, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
ERNST & YOUNG LLP
San Diego, California
April 10, 1996
17
<PAGE>
EXHIBIT 15.2 -- LETTER RE: UNAUDITED
INTERIM FINANCIAL INFORMATION
Board of Directors
Price Enterprises, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-60999) pertaining to the Price Enterprises 1995 Combined
Stock Grant and Stock Option Plan and the Price Enterprises Directors' 1995
Stock Option Plan of our report dated April 10, 1996 relating to the
unaudited consolidated interim financial statements of Price Enterprises,
Inc. which are included in its Form 10-Q for the quarter ended March 17, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a
part of a registration statement prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
Ernst & Young LLP
San Diego, California
April 10, 1996
18
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<PERIOD-START> SEP-04-1995
<PERIOD-END> MAR-17-1996
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0
0
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