<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-K
------------
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _____________ TO _____________.
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) (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
--------------------------------
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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of November 1, 1996 was $201,627,518, based on the last reported
sale of $16.625 per share on November 1, 1996.
The number of shares outstanding of the registrant's common stock as of
November 1, 1996 was 23,291,294.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the Annual Meeting of
Stockholders to be held on January 14, 1997 are incorporated by reference into
Part III of this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PRICE ENTERPRISES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED AUGUST 31, 1996
TABLE OF CONTENTS
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . 17
Item 4. Submission of Matters to a Vote of Security Holders . . . 17
PART II
Item 5. Market for Registrant Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . 20
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . 21
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . 21
Item 8. Financial Statements and Supplementary Data . . . . . . . 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . 52
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . 53
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . 53
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . 53
Item 13. Certain Relationships and Related Transactions. . . . . . 53
PART IV
Item 14 Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . 54
<PAGE>
PART I
ITEM 1 -- BUSINESS
FORMATION OF THE COMPANY AND SUBSEQUENT TRANSACTIONS
Price Enterprises, Inc. ("Price Enterprises," "PEI" or "the Company"), a
Delaware corporation, was formed in July 1994. The Company began operations
effective August 29, 1994 as a wholly owned subsidiary of Price/Costco, Inc.
("PriceCostco") with specific assets received from PriceCostco pursuant to the
Amended and Restated Agreement of Transfer and Plan of Exchange ("Exchange
Agreement"). PriceCostco offered to exchange 27 million shares of PEI common
stock for an equal number of shares of PriceCostco common stock from PriceCostco
stockholders on a voluntary basis pursuant to the Offering Circular/Prospectus
dated November 21, 1994, as amended on December 7, 1994. Approximately 23.2
million shares were exchanged between PriceCostco and certain of its
stockholders, and PEI became a separate publicly traded company on December 21,
1994.
Transferred to PEI were substantially all of the real estate assets which
historically formed the non-club real estate business segment of PriceCostco;
four existing Price Club warehouses which are adjacent to certain transferred
properties, and which have been leased back to PriceCostco effective August 29,
1994; a 51% interest in Price Quest, Inc. ("Price Quest") and a 51% interest in
Price Global Trading, Inc. ("Price Global Trading" or "PGT") with PriceCostco
retaining the remaining 49% interests; notes receivable from various
municipalities and agencies ("City Notes") and a secured note receivable from
the owner and operator of a hotel and convention center in San Diego, California
("Atlas Note"); and a 51% interest in Mexico Clubs, LLC ("Mexico Clubs") which
prior to April 20, 1995, held a 50% interest in Price Club de Mexico and
affiliates ("Price Club Mexico"), a joint venture that develops, owns and
operates Price Clubs in Mexico.
For purposes of governing certain of the ongoing relationships between PEI and
PriceCostco, the companies entered into certain Operating Agreements,
Stockholders' Agreements, and an Advance Agreement. PGT and Price Quest were
converted to Limited Liability Companies in November, 1995. PEI and PriceCostco
are currently parties to Limited Liability Company Agreements which set forth
certain rights and obligations with respect to their investments in Price Quest
and PGT. Each Limited Liability Company Agreement provides for an adjustment to
the parties' respective percentage ownership interests in the event that a party
fails to fund a PRO RATA capital call by the relevant subsidiary's Managing
Member. Each Limited Liability Company Agreement sets forth, among other
things: (i) transfer restrictions if either PEI or PriceCostco offers to
transfer, sell, assign or otherwise dispose of its interest in the company; (ii)
certain preemptive rights; and (iii) certain registration rights for
PriceCostco. These rights and obligations are subject to change; see Note 12 to
the consolidated financial statements.
PriceCostco and Price Quest are currently parties to an Operating Agreement
pursuant to which PriceCostco provides for a five-year period, among other
things, space in certain PriceCostco warehouse clubs to Price Quest for its
electronic shopping kiosks and travel and automobile advertising/referral
programs, as well as staffing, cashiering, buying support and other information
to Price Quest, in exchange for a fee based on sales. Price Quest also was
obligated to make annual purchases of at least $3 million in each of fiscal 1995
and 1996 of advertisements in PriceCostco's membership publications. The
Operating Agreement also
3
<PAGE>
contains certain confidentiality and competitive restrictions between the
parties. These rights and obligations are subject to change; see Note 12 to the
consolidated financial statements.
PriceCostco and PGT are currently parties to an Operating Agreement pursuant to
which PriceCostco is obligated to provide certain buying support, merchandising
services, training and other information to PGT for a period of five years for
PGT's use in certain specified geographical areas, including Central America,
Australia, New Zealand, Guam, the Northern Mariana Islands and certain Caribbean
islands. The Operating Agreement also contains certain confidentiality and
competitive restrictions between the parties. These rights and obligations are
subject to change; see Note 12 to the consolidated financial statements.
In accordance with terms of the Exchange Agreement, on February 6, 1995, PEI
purchased from PriceCostco approximately 3.8 million shares of its common stock
which had not previously been exchanged, for PEI's $45.9 million ($12.16 per
share) promissory note due December 1996, which was collateralized by the
related shares of PEI common stock.
On April 20, 1995, PEI sold its interest in Mexico Clubs to PriceCostco.
PriceCostco purchased PEI's interest in Mexico Clubs by making a $30.5 million
reduction to the outstanding balance of the promissory note. In addition, Price
Club Mexico paid PEI $4.0 million concurrent with the closing of the transaction
with PriceCostco. The sale of the interest in Price Club Mexico resulted in a
$2.1 million after-tax loss. During fiscal 1996, the remaining balance of the
promissory note of $15.4 million was paid in full and the 1.3 million shares
held as treasury stock were released from the collateral arrangement and also
retired.
On July 26, 1996 it was announced that PEI had reached a tentative settlement
agreement of the class and derivative action pending in the United States
District Court, Western District of Washington, entitled IN RE PRICECOSTCO
SHAREHOLDER LITIGATION. The settlement agreement is subject to court approval
and contains several terms which modify the relationship between PEI, its
subsidiaries, and PriceCostco. Once approved, PEI will own 100% of the PGT and
Price Quest operating companies and certain obligations, non-compete
restrictions, and trademark rights established in connection with the Exchange
Agreement will be eliminated. See further discussion in Note 12 to the
consolidated financial statements.
OVERVIEW OF THE COMPANY'S BUSINESS
The principal business of the Company is to acquire, develop, operate, manage,
lease and sell real property. As of August 31, 1996, the Company owned 60 real
estate assets which had an aggregate net book value of approximately $393
million. Such properties encompass 672 acres of land and approximately 5
million square feet of gross leasable building space. Most of the real estate
assets are commercial rental properties leased to major retail tenants such as
Price Club, The Sports Authority, The Home Depot, and PetsMart.
The Company's business strategy is to retain those properties that have high-
quality, long-term tenants and that are, or will soon be, fully developed.
Properties which do not meet the Company's investment objectives are expected to
be sold over the next 1-2 years. Given the nature of these activities, there
can be no assurance that the sale of these properties will be completed as
expected. During fiscal 1996, 12 properties were sold for combined gross
proceeds of $30.1 million. Approximately $56 million of additional properties
have been
4
<PAGE>
identified as properties held for sale or redevelopment, and they have been
separately classified in the financial statements.
Proceeds from the property sales may be used to complete real estate development
projects and to fund additional real estate acquisition and development, as well
as funding of the Company's investments in merchandising businesses.
The Company also owns certain other real estate-related assets. As of August
31, 1996, the carrying value of certain notes issued in connection with loans to
municipalities and agencies (City Notes) was approximately $29.1 million. The
City Notes carry interest rates which range from 7% to 10%. Repayment of each
City Note 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. Under terms of most City Notes, the unpaid
balance is forgiven at its maturity date. If actions taken by PriceCostco, such
as closure or relocation of a particular Price Club, would entitle the
governmental agency to withhold payment, PEI would be entitled to cause
PriceCostco to purchase such City Note at an amount equal to 72% of the June 5,
1994 book balance, less any subsequent principal repayments, plus all accrued
and unpaid interest from June 5, 1994.
The Company holds certain other notes receivable with a carrying value of
approximately $48.3 million as of August 31, 1996, including $41.7 million for
the Atlas Note. The Atlas Note is collateralized by a hotel and convention
center and its terms were restructured in April 1995 to provide for interest at
10% during a five-year term.
Although most of the Company's net assets, net earnings and cash flows are
generated by its real estate activities, PEI's other businesses possess separate
and distinct business strategies. Price Quest, currently 51%-owned by PEI, has
historically focused on providing PriceCostco members with a wide range of
products and services through an interactive electronic interface, while
leveraging emerging multi-media technologies to provide goods, services and
information to consumers in a cost-efficient manner. As of the beginning of
fiscal 1997, Price Quest's operation of the electronic kiosk shopping business
at the PriceCostco locations has been discontinued. Price Quest's current
objectives are to expand its merchandising and technology know-how to new
distribution channels including interactive shopping through on-line services
and the Internet, as well as other potential venues for kiosk-based electronic
merchandising. In November 1995, Price Quest launched certain on-line shopping
programs. In October 1996, a pilot project was begun with Ralphs Grocery
Company to operate merchandise departments in four San Diego County Ralphs
stores.
During fiscal 1996, in response to a formal request for cash advances from Price
Quest stockholders, PEI was informed that PriceCostco did not choose to
contribute funds to Price Quest. The cash requirements for the business during
the past year were provided by PEI in the form of interest bearing loans. Price
Quest expects operating losses to continue throughout fiscal 1997. Management
continues to closely monitor Price Quest's activities and evaluate recent and
potential changes to its business activities seeking to minimize the impact of
Price Quest losses on PEI's financial results.
5
<PAGE>
Price Global Trading, currently 51%-owned by PEI, currently has an exclusive
right through August 1999 to conduct club businesses in Central America, most of
the Caribbean, the Northern Mariana Islands, Australia and New Zealand, with
certain trademark rights to the names Price Club, PriceCostco and Price Club
Costco in these markets. PriceCostco has also agreed to provide certain
purchasing and technological support for this effort and to refrain from
conducting club businesses in the aforementioned geographical areas. There
rights and obligations are subject to change; see Note 12 to the consolidated
financial statements. As of fiscal 1996 year-end, two PriceCostco locations
were operating, one each in Saipan and Guam, under a license arrangement between
PGT and its licensee in Saipan. Also during fiscal 1996, PGT entered into a
joint venture with a Panamanian company to open PriceCostco locations in Panama.
PGT owns 51% of the venture, and the first location opened in October 1996.
During fiscal 1996, in response to a formal request for cash advances from PGT
stockholders, PEI was informed that PriceCostco did not choose to contribute
funds to PGT. The cash requirements for the business during the past year were
provided by PEI in the form of interest bearing loans.
Price Ventures, Inc. ("Price Ventures"), a wholly owned subsidiary of PEI, is
primarily focused on developing additional international merchandising
businesses in other global markets. Business structures are expected to include
licensing arrangements, as well as possible joint venture investments. During
fiscal 1996, Price Ventures entered into business arrangements with both an
Indonesian distribution company and a Chinese company to develop merchandising
in their respective foreign markets. Facilities are expected to range in size
up to 70,000 square feet typically in more urbanized markets. Such businesses
are expected to operate under the "PriceSmart" trademark name. Price Ventures
has filed applications to register the mark PRICESMART in the U. S. Patent and
Trademark Office, and in certain foreign countries; however, because of
objections by one or more parties (including PriceCostco), there can be no
assurance that Price Ventures will obtain such registrations or that Price
Ventures has proprietary rights to the mark. Initial locations in Indonesia and
China (Beijing) are expected to open during the first half of fiscal 1997, and a
second Indonesian location is expected to open by spring of 1997. Merchandising
opportunities in other Pacific Rim countries continue to be explored by Price
Ventures.
COMPETITION
The Company competes with a wide variety of corporate and individual real estate
developers and real estate investment trusts which have investment objectives
similar to those of PEI and which may have greater financial resources, larger
staffs or longer operating histories than PEI.
The Company competes for tenants in its retail shopping centers. The Company's
competitive advantages are primarily based on significant customer traffic
generated by its national and regional tenants, competitive lease terms and
relatively high occupancy rates. The closing or relocation of any anchor tenant
could have a material adverse effect on the operation of a shopping center.
6
<PAGE>
The Company's merchandising operations also face competition unique to their
businesses. Price Quest competes directly or indirectly with most merchandising
businesses, other discount retailers (including PriceCostco warehouse clubs),
catalog and other direct marketing sales, on-line shopping, televised home
shopping, travel agency services, other affinity buying services and similar
interactive kiosks that are or may be operated by other retailers. Price
Enterprises believes that, as further advances in computer technology are made
and as more interactive computer-based services become available to consumers in
the home and retail environments, competitive pressures on Price Quest will
intensify. Price Ventures and Price Global Trading compete with exporters,
wholesalers and trading companies in various international markets, and foreign-
based joint ventures and licensees compete with traditional retail stores and
wholesalers in their respective foreign markets.
SIGNIFICANT TENANTS
The four largest tenants account for approximately 26% of total gross leasable
area and approximately 37% of the Company's total annual minimum rent revenues.
Certain information with respect to these tenants is set forth in the following
table (dollars in thousands):
<TABLE>
<CAPTION>
Percent of Annual Percent of
Number Area Under GLA Under Minimum Total Annual
of Leases Lease (sq ft) Lease Rent Minimum Rent
--------- ------------- ---------- ------- ------------
<S> <C> <C> <C> <C> <C>
Tenant
Price Club 4 612,675 11.8% $ 8,042.8 18.5%
The Sports Authority 7 297,844 5.8% 3,565.8 8.2%
The Home Depot 2 214,173 4.1% 2,550.7 5.9%
PetsMart 8 206,529 4.0% 2,106.7 4.8%
21 1,331,221 25.7% $ 16,266.0 37.4%
</TABLE>
While none of the Company's four largest tenants have experienced any recent
significant financial hardships, it is not uncommon for economic conditions,
market surpluses of retail space and competitive pressures to negatively impact
financial results of retail operators. Bradlees and Caldor filed for protection
under Chapter XI provisions of the federal bankruptcy law. The Company has two
leases with Bradlees and one lease with Caldor which aggregate 6.4% of the
Company's gross leaseable area and approximately 5.9% of annualized minimum
rents as of August 31, 1996. In addition, the current retailing environment
suggests that other operators, some of which have leases with the Company, may
experience financial difficulties in the coming months or years.
Generally, the bankruptcy or insolvency of a major tenant or a number of smaller
tenants may have an adverse impact on the performance of the Company's
properties. Under bankruptcy law, a tenant has the option of assuming
(continuing) or rejecting (terminating) any unexpired lease. If the tenant
assumes its lease, the tenant must cure all defaults under the lease and provide
the lessor with adequate assurance of its future performance under the lease.
If the tenant rejects the lease, as the Company expects to occur with the
Bradlees lease at Seekonk (MA), the lessor's claim for breach of lease would,
absent collateral securing the claim, be
7
<PAGE>
treated as a general unsecured claim. The amount of the claim would be limited
to the amount owed for unpaid pre-petition lease payments unrelated to the
rejection, plus the greater of one years' lease payments or 15% of the remaining
lease payments payable under the lease (but not to exceed the amount of three
years' lease payments). Ultimate collection of any general unsecured claims is
significantly related to the debtor's financial condition and asset strength,
results of secured creditor settlements and ratification of proposed
transactions by the bankruptcy court.
ENVIRONMENTAL MATTERS
The Company's ownership of real properties could subject it to certain
environmental liabilities. As discussed below, certain of the Company's
properties have known environmental liabilities, and certain other properties
are located in areas of current or former industrial activity, where
environmental contamination may have occurred. The Company has agreed to
indemnify PriceCostco against and hold PriceCostco harmless from all
environmental liabilities that relate to or arise out of the real properties
which were transferred to the Company by PriceCostco.
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and remediate releases or threatened releases of
hazardous or toxic substances or petroleum products located at such property,
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and remediation costs incurred by such parties in
connection with the contamination. Under certain of these laws, liability may
be imposed without regard to whether the owner knew of or caused the presence of
the contaminants. These costs may be substantial, and the presence of such
substances, or the failure to remediate properly the contamination on such
property, may adversely affect the owner's ability to sell or lease such
property or to borrow money using such property as collateral. Certain Federal
and state laws require the removal or encapsulation of asbestos-containing
material in poor condition in the event of remodeling or renovation. Other
Federal, state and local laws have been enacted to protect sensitive
environmental resources, including threatened and endangered species and
wetlands. Such laws may restrict the development and diminish the value of
property which is inhabited by an endangered or threatened species, is
designated as critical habitat for an endangered or threatened species or is
characterized as wetlands.
In 1994, PriceCostco engaged environmental consultants to conduct Phase I
assessments (involving investigation without soil sampling or groundwater
analysis) at each of the properties which PriceCostco transferred to the
Company. The Company is unaware of any environmental liability or compliance
with applicable environmental laws or regulations arising out of its properties
that the Company believes would have a material adverse effect on its business,
assets or results of operations. Nevertheless, there can be no assurance that
the Company's knowledge is complete with regard to, or that the Phase I
assessments have identified, all material environmental liabilities. Set forth
below are summaries of certain environmental matters relating to certain of the
Company's properties.
8
<PAGE>
AZUSA. The Azusa site is a 17.4 acre site located in Azusa, California. The
Price Company ("Price"), a subsidiary of PriceCostco, purchased the Azusa site
in 1983 from Huffy Corporation ("Huffy"). Huffy operated a bicycle
manufacturing facility on the Azusa site from 1959 until 1982. After purchasing
the Azusa site, Price converted the bicycle manufacturing facility into a Price
Club warehouse and tire center.
The Azusa site currently is located within the Baldwin Park Operable Unit
("BPOU") of the San Gabriel Valley Area 2 Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA) site. The BPOU
addresses a large area of groundwater contamination in the San Gabriel Valley.
Volatile organic compounds ("VOCs"), including trichloroethylene and
perchloroethylene, are present in the groundwater throughout a several mile long
area, extending beneath the cities of Azusa, Irwindale, and Baldwin Park,
California. Price received a general notice of potential liability letter from
the United States Environmental Protection Agency (the "EPA") for the BPOU dated
August 4, 1993, and is one of approximately 110 potentially responsible parties
("PRPs"), representing 20-25 contaminated parcels, to have received such notice
for the BPOU. While it was operated by Huffy, the Huffy site contained a
degreasing facility that allegedly released VOCs into the soil.
In March 1994, the EPA published a Record of Decision ("ROD") which documents
the selection of remedial alternatives for the BPOU. The EPA estimates that its
preferred remedy, as outlined in the ROD, will cost between $100 and $130
million. The San Gabriel Basin Water Quality Authority ("SGBWQA") has proposed
an alternative remedy for the BPOU, which will cost an estimated $25 to $30
million. A group of PRPs, including Huffy, the SGBWQA and the EPA currently are
negotiating the final remedy for the BPOU. Price Enterprises lacks sufficient
information regarding the activity of other PRPs to form an estimate of the
equitable share of total costs that could be allocated to its Azusa site.
To date, Price and Huffy have spent approximately $250,000 in investigation and
monitoring costs. Approximately $225,000 of those costs were shared equally by
Price and Huffy under an informal cost sharing agreement. Under their current
cost sharing agreement, however, Huffy is paying 85% of site-related costs
(except for certain limited costs associated with quarterly water monitoring and
monthly water level gauging).
Also, on January 11, 1995, the EPA wrote Price a "no intended action" letter
stating "This letter is to inform you that USEPA DOES NOT plan to ask you or
your company to participate in the clean-up of the regional groundwater
contamination." Since receiving the "no intended action" letter, Price has been
in negotiation with EPA to enter into consent decree, which, if successfully
negotiated and approved by a court of competent jurisdiction, would provide
Price with contribution protection under CERCLA with respect to the current ROD
for the BPOU.
To the extent that there is any liability associated with the Azusa site, the
Company believes such liability should be attributed to Huffy. However, the
Company (as successor to Price) and Huffy have not negotiated a final allocation
of costs as between themselves. There can be no assurance that Huffy will
contribute to any further costs. Based upon a number of factors, including the
EPA "no intended action" letter, the current status of negotiations regarding
the alternative remedy, the cost of the final remedy, and the Company's
allocated equitable share of that cost as between it, Huffy and/or other PRPs,
the Company believes its liability associated
9
<PAGE>
with the Azusa site would not have a material adverse effect on the financial
condition and results of operations of the Company.
PHOENIX (FRY'S). The Phoenix (Fry's) site is a 37.1 acre site located in
Phoenix, Arizona. The Phoenix (Fry's) site is located within the West Van Buren
Study Area (the "WVBSA"). VOCs and petroleum hydrocarbons are present in
groundwater in the WVBSA. To date, the Company (as successor to Price) has not
been identified as a PRP for the WVBSA. On March 8, 1995, the Company sold the
Phoenix (Fry's) site, and retained responsibility for certain environmental
matters. Investigations conducted in connection with the sale of the property
revealed some hydrocarbon contamination in an area previously occupied by a fuel
pump island. Seven underground fuel storage tanks were removed in 1989. The
Arizona Department of Environmental Quality is requiring some additional testing
prior to granting closure of the site. The Company's prior ownership of the
Phoenix (Fry's) site creates the potential of liability for remediation costs
associated with groundwater beneath the site. PriceCostco has agreed to
indemnify and hold the Company harmless in respect of one-half of all
environmental liabilities relating to the Phoenix (Fry's) site. PriceCostco has
continued to pay its share of the ongoing investigation costs associated with
this site. The Company lacks sufficient information about the activity of WVBSA
PRPs to form an estimate of the equitable share of total liability, if any, that
could be allocated to the Company for its previous ownership of this site.
Although designated by Arizona law as a "study area," the WVBSA is not a federal
CERCLA site and is not listed on the National Priorities List ("NPL").
Immediately to the east of the WVBSA, however, is the East Washington Study Area
(the "EWSA"), which is listed on the NPL. VOCs are also present in groundwater
in the EWSA. If the contamination plumes from the WVBSA and the EWSA merge, the
possibility exists that the two study areas will be merged into one Federal
CERCLA site.
MEADOWLANDS. The Meadowlands site is an unimproved, 12.9 acre site located in
Meadowlands, New Jersey. A prior owner used this site as a debris disposal area.
Elevated levels of heavy metals (including a small area contaminated with
polychlorinated byphenyls) and petroleum hydrocarbons are present in soil at the
Meadowlands site. The Company, however, has not been notified by any
governmental authority and is not otherwise aware, of any material
noncompliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with the Meadowlands site. The Company sold
the Meadowlands site on August 11, 1995. Nevertheless, the Company's previous
ownership of the Meadowlands site creates the potential of liability for
remediation costs associated with groundwater beneath the site.
PENTAGON CITY. The Pentagon City site is a 16.8 acre site in Arlington,
Virginia. Elevated levels of heavy metals are present in groundwater beneath
the Pentagon City site. Also, petroleum hydrocarbons are present in soil at the
site. By letters dated January 31, 1995, and March 22, 1994, the Virginia
Department of Environmental Quality is requiring no further action at the site
with regard to the heavy metals and petroleum hydrocarbon contamination,
respectively. The Company has not been notified by any governmental authority,
and is not otherwise aware, of any other material noncompliance, liability or
claim relating to hazardous or toxic substances or petroleum products in
connection with the Pentagon City site. Nevertheless, the Company's ownership
of the Pentagon City site creates the potential of liability for remediation
costs associated with groundwater beneath, and soils at, the site.
10
<PAGE>
SIGNAL HILL. The Signal Hill site is a 15.0 acre site in Signal Hill,
California. This site, and the adjoining properties, historically have been
used for oil and gas extraction activities, and the site currently has several
active and abandoned oil and gas production and injection wells. Prior to
development in the early 1990s, the prior owner excavated and treated over
100,000 cubic yards of petroleum hydrocarbon contaminated soil. However, in
1992, certain areas of the site were known to be still contaminated with
petroleum hydrocarbons and certain solvents in varying concentrations. The City
of Signal Hill Redevelopment Agency has indemnified the prior owner for
environmental expenses incurred with respect to such site through 1996. This
indemnity has been transferred to the Company.
OTHER PROPERTIES. Two properties (New Britain and Silver City) contain or have
contained petroleum hydrocarbons and/or VOCs in the soil and groundwater. The
Company is continuing to remediate the soil and groundwater at these properties
under supervision of local authorities. The Company estimates that the total
cost of this remediation is not expected to exceed $200,000 in the aggregate
over the next three years.
INTELLECTUAL PROPERTY RIGHTS
It is the Company's policy to obtain appropriate proprietary rights protection
for trademarks and significant new technology acquired or developed by the
Company. In addition, the Company relies on copyright and trade secret laws to
protect its proprietary rights. The Company attempts to protect its trade
secrets and other proprietary information through agreements with employees,
consultants and suppliers, and other similar measures. There can be no
assurance, however, that the Company will be successful in protecting its
proprietary rights. While management believes that the Company's trademarks,
copyrights and other proprietary know-how have significant value, changing
technology and the competitive marketplace make the Company's future success
dependent principally upon its employees' technical competence and creative
skills for continuing innovation.
EMPLOYEES
The Company employed 204 employees as of August 31, 1996, and provides
centralized and comprehensive employee benefit programs for all eligible
employees. Most employees are leased to subsidiaries of PEI and associated
costs are charged to the entity for which the employees provide their services.
The employee count is generally distributed as follows: approximately 75
employees in the Price Quest activities, 91 in the international merchandising
businesses, 21 in real estate activities, 6 handling central office duties, and
11 in PEI corporate activities.
SEASONALITY
The Company's real estate operations are not generally subject to seasonal
fluctuations. The merchandising businesses are subject to traditional retail
sales trends associated with the calendar year-end holiday season.
11
<PAGE>
CORPORATE HEADQUARTERS
The Company maintains its headquarters in San Diego, California adjacent to the
Morena Boulevard Price Club facility and it believes that its current facilities
meet its expected requirements over the next 12 months.
ITEM 2 -- PROPERTIES
OVERVIEW
Pursuant to the Exchange Agreement, the 79 real estate properties that were to
be transferred to PEI included 18 fully developed and leased properties, 35
properties in various stages of construction and development and 26 unimproved
properties. During fiscal 1995, five of the properties were deemed to be not
transferable to PEI, and the parties agreed to a substitution of properties. As
of November 1995, all of the properties scheduled for transfer from PriceCostco
had been conveyed to PEI. Most of the properties are commercial assets leased
to national and regional retail tenants under long-term triple net leases.
Substantially all properties are held in fee title; however, four properties are
held pursuant to terms of lease agreements.
A significant aspect of the Company's general business strategy with respect to
existing properties is to retain those properties that have high-quality, long-
term tenants and that are, or will soon be, fully developed, and to sell the
remaining properties. During fiscal 1996, the Company performed a strategic
evaluation of the properties and increased marketing efforts to sell or lease
those assets which did not meet management's investment objectives.
As of August 31, 1996, the Company owned 60 real estate properties with an
aggregate net book value of $393 million of which $56 million has been
classified, for financial reporting purposes, as being held for sale. There are
25 assets classified as investment properties, and the value of these
investments is highly concentrated. Of the $337 million of investment property,
the five largest completed properties have a carrying value of $210 million,
which includes 1.7 million square feet of leasable space on 110 acres that
generates annual minimum rent of $23.4 million, based on leases existing as of
August 31, 1996.
A total of 35 properties are classified as being held for sale because the
Company currently does not view these assets as long-term hold properties.
Their aggregate net book value of $56 million reflects 1.7 million square feet
of leasable space located on a total of 345 acres of land, with leases for
annual minimum rents of $3.5 million as of August 31, 1996. Current occupancy
is 56% of gross leasable area, and several properties are generating operating
losses such that pretax cash flow from these assets was only approximately $1.9
million in fiscal 1996.
12
<PAGE>
PROPERTY TABLES
The tables set forth below describe the Company's portfolio of real estate
properties as of August 31, 1996. Amounts shown for annual minimum rents are
based on executed leases as of August 31, 1996. No allowances have been made
for contractually-based delays to commencement of rental payments. Due to the
nature of real estate investments, actual rental income may differ from amounts
shown in these schedules. Classification of assets between the investment
category and the held for sale category may change in response to management's
recurring evaluation of the properties. During fiscal 1996 the reference name
for certain properties was changed, see property name table on page 16.
13
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT PROPERTIES
Leases in Effect as of August 31, 1996
--------------------------------------------------------
Gross
Number Leasable Net Book Annual % OF
of Land Area Percent Value Minimum G.L.A. LEASE
Tenants Acreage (sq ft) Leased 8/31/96 Rent PRINCIPAL TENANTS (SQ FT) EXPIRES
------- ------- -------- ------- --------- ------- ------------------------------------
(000's) ($000's) ($000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Westbury, NY 8 30.4 398.6 100% $66,650 $7,167 PRICE CLUB 37% 2009
KMART 28% 2013
MARSHALLS 11% 2009
THE SPORTS AUTHORITY 11% 2013
BORDERS BOOKS 8% 2019
Pentagon City, VA 9 16.8 336.4 100% 61,123 6,336 PRICE CLUB 50% 2009
MARSHALLS 12% 2010
BEST BUY 11% 2010
LINENS N THINGS 10% 2010
BORDERS BOOKS 10% 2010
Wayne, NJ 5 19.2 442.4 70% 35,825 4,740 PRICE CLUB 33% 2009
(includes 130,000 sq. ft. of LACKLAND STORAGE 11% 2012
vacant storage space) THE SPORTS AUTHORITY 10% 2012
NOBODY BEATS THE WIZ 9% 2002
Philadelphia, PA 10 29.3 300.9 79% 23,457 2,328 THE HOME DEPOT 37% 2009
BABY SUPERSTORE 13% 2006
AMC THEATRES 13% 2015
ACME SUPERSAVER 11% 2000
Dallas, TX 5 14.6 177.5 100% 22,908 2,839 HOMEPLACE 33% 2016
WICKES FURNITURE 24% 2011
OFFICEMAX 17% 2011
COMP USA 17% 2011
JUST FOR FEET 9% 2011
Seekonk, MA 10 43.1 208.9 100% 18,512 2,093 BRADLEES,
THE SPORTS AUTHORITY,
CIRCUIT CITY
Signal Hill, CA 13 15.0 154.8 99% 15,067 2,190 THE HOME DEPOT,
PETSMART
San Diego, CA 4 28.8 429.1 100% 14,657 1,589 PRICE CLUB,
ARA DISTRIBUTION,
ROSE CANYON STORAGE
Fountain Valley, CA 14 12.6 119.2 86% 13,561 1,549 THE SPORTS AUTHORITY,
PETSMART,
SOUPLANTATION
Glen Burnie, MD 11 18.7 130.6 100% 9,412 1,520 THE SPORTS AUTHORITY,
PETSMART,
COMPUTER CITY
Northridge, CA 3 4.4 30.0 100% 7,360 828 BARNES & NOBLE,
FRESH CHOICE
Azusa, CA 4 17.4 127.2 37% 6,880 546 PRICECOSTCO BUSINESS DELIVERY
San Diego/Carmel Mtn., CA 7 5.9 35.0 100% 6,517 886 CLAIM JUMPER,
MCMILLIN REALTY,
ISLANDS
Moorsetown, NJ (leased land) 3 18.3 173.3 100% 6,421 1,591 CALDOR,
THE SPORTS AUTHORITY
Worcester, MA 1 11.4 115.0 100% 5,931 690 BRADLEES
Sacramento/Stockton, CA 2 5.7 50.4 100% 4,908 470 PETSMART,
OFFICE DEPOT
San Juan Capistrano, CA 5 5.5 56.2 97% 4,115 540 PETSMART,
STAPLES
Tucson, AZ 8 7.7 40.0 96% 3,389 362 PETSMART
Hampton, VA 2 3.5 45.6 100% 2,677 424 THE SPORTS AUTHORITY,
COMMERCE BANK
Redwood City, CA 2 6.4 49.4 100% 2,095 392 ORCHARD SUPPLY
Smithtown, NY 1 5.9 55.6 100% 2,055 455 LEVITZ FURNITURE
Denver/Littleton, CO 1 3.1 26.4 100% 1,659 216 PETSMART
Denver/Aurora, CO 1 .8 7.3 100% 682 146 RED ROBIN
Chula Vista/Rancho del Rey, CA 0 1.0 0.0 0% 500 0 NONE
San Diego/Southeast, CA 2 1.9 8.9 100% 369 135 NAVY FEDERAL C.U.,
BURGER KING
--- ----- ------- -- -------- -------
Total........................... 131 327.4 3,518.7 92% $336,730 $40,032
--- ----- ------- -- -------- -------
--- ----- ------- -- -------- -------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Leases in Effect as of August 31, 1996
--------------------------------------------------------------------
Gross Net Book Annual
PROPERTIES HELD FOR Sale Land Leasable Percent Value Minimum
Acreage Area (sq ft) Leased 8/31/96 Rent
------- ------------ ------- -------- --------
(000's) ($000's) ($000's)
<S> <C> <C> <C> <C> <C>
PROPERTIES WITH BUILDINGS
Buffalo, NY 16.1 115.4 100% $ 5,498 $ 733
Sacramento/65th Expressway, CA 13.6 139.7 0% 5,149 ---
Inglewood, CA 8.1 119.9 100% 4,180 847
Riverside/La Sierra, CA 9.5 106.5 0% 3,314 ---
Santee, CA 9.2 106.7 75% 2,994 454
Colton, CA 25.5 125.8 100% 2,497 250
Richmond, VA 13.7 5.2 100% 2,017 55
Mesa/Broadway, AZ 6.5 24.2 100% 1,325 183
Riverside/Third St., CA 4.9 17.9 100% 410 141
Milwaukee, WI (leased) 8.8 115.0 100% --- ---
San Jose, CA (leased) 7.9 105.6 100% --- ---
Tacoma, WA (leased) 7.3 105.2 100% --- ---
----- ------- ---- -------- ------
Subtotal. . . . . . . . . . . . . . . . . . . 131.1 1,087.1 75% 27,384 2,663
DEVELOPMENTAL PROPERTIES
Houston, TX 25.2 191.4 12% 9,656 110
Bakersfield, CA 15.7 152.0 65% 6,541 716
Fresno, CA 15.0 --- --- 3,680 ---
New Britain, CT 17.8 112.4 0% 3,466 ---
Washington Metro, MD 13.3 113.7 0% 2,817 ---
Sterling, VA 9.0 --- --- 1,434 ---
Fountain Valley, CA 2.5 --- --- 475 ---
----- ------- ---- -------- ------
Subtotal. . . . . . . . . . . . . . . . . . . 98.5 569.5 21% 28,069 826
UNIMPROVED LAND
Schaumburg, IL 22.5 --- --- 5,750 ---
Sacramento/Ranch Cordova, CA 9.4 --- --- 1,900 ---
Gaithersburg, MD 5.2 --- --- 1,504 ---
Chula Vista/Oxford St., CA 13.0 --- --- 1,339 ---
Carlsbad, CA 5.1 --- --- 1,332 ---
East Mesa/Superstition Springs, AZ 18.7 --- --- 981 ---
Concord, CA 3.7 --- --- 925 ---
Santa Clarita, CA 2.2 --- --- 900 ---
Sacramento/No. Highlands, CA 2.6 --- --- 633 ---
Palm Desert, CA 2.0 --- --- 500 ---
Rancho Cucamonga, CA .9 --- --- 405 ---
Tucson, AZ 7.6 --- --- 400 ---
Denver/Westminster, CO 3.3 --- --- 305 ---
Rohnert Park, CA .7 --- --- 300 ---
Baltimore, MD 17.1 --- --- 212 ---
Denver/Aurora, CO 1.0 --- --- 112 ---
----- ------- ---- -------- ------
Subtotal. . . . . . . . . . . . . . . . . . . 115.0 --- --- 17,498 ---
----- ------- ---- -------- ------
Provision for Asset Impairments. . . . . . . . . --- --- --- (17,000) ---
----- ------- ---- -------- ------
Total. . . . . . . . . . . . . . . . . . . . . . . 344.6 1,656.6 56% $ 55,951 $3,489
----- ------- ---- -------- ------
----- ------- ---- -------- ------
</TABLE>
15
<PAGE>
TABLE OF PROPERTY NAMES
During fiscal 1996 the reference names for certain properties were changed
in order to more accurately reflect the city/county in which such properties are
located. Below is a table reflecting both the old and the new names.
Previous Name Revised Name
- ------------- ------------
Aurora Denver/Aurora, CO
Bensalem Philadelphia, PA
Carmel Mtn. Ranch San Diego/Carmel Mtn., CA
Cheektowaga Buffalo, NY
Chesterfield Richmond, VA
Chula Vista Chula Vista/Oxford St., CA
Coachella Valley Palm Desert, CA
Colton/Rialto Colton, CA
East Mesa East Mesa/Superstition Springs, AZ
Maple Shade Moorestown, NJ
Marlow Heights Washington Metro, MD
Mesa Mesa/Broadway, AZ
North Highlands Sacramento/No. Highlands, CA
N.W. Tucson Tucson, AZ
Rancho Cordova Sacramento/Rancho Cordova, CA
Rancho del Rey Chula Vista/Rancho del Rey, CA
Riverside Riverside/La Sierra, CA
Riverside (Franklin St.) Riverside/Third St., CA
Sacramento Sacramento/65th Expressway, CA
S. Sacramento Sacramento/Stockton, CA
S.E. San Diego San Diego/Southeast, CA
S.W. Denver Denver/Littleton, CO
Westminster Denver/Westminster, CO
White Marsh Baltimore, MD
16
<PAGE>
PENDING REAL ESTATE TRANSACTIONS
As of November 1, 1996 the Company is under contract to sell 10 properties that
are expected to generate approximately $23.8 million in aggregate gross proceeds
and are expected to be sold during fiscal 1997. Given the nature of these
activities, there can be no assurance that these potential sales will be
completed by their expected dates or that such proceeds will be fully realized.
As of November 1, 1996 the Company is in various stages of lease negotiations
with 5 prospective tenants for leasable space which are expected to generate an
aggregate of approximately $0.9 million of additional annualized minimum rental
income once all of these various lease payments begin. Given the nature of
these activities, there can be no assurance that these potential leases will
ultimately be consummated. The development costs necessary to provide
appropriate facilities for these potential leases is estimated to be
approximately $1.1 million.
ITEM 3 -- LEGAL PROCEEDINGS
IN RE PRICE/COSTCO SHAREHOLDER LITIGATION, United States District Court for the
Western District of Washington, No. C94-1874C: This consolidated action was
commenced on December 19, 1994 alleging the violation of certain state and
federal laws arising from the spin-off of the Company from PriceCostco, Inc. and
the prior merger between The Price Company and Costco Wholesale Corporation.
The defendants named in the Second Amended Complaint were the Company,
PriceCostco and the members of PriceCostco's Board of Directors at the time of
the spin-off transaction. A tentative settlement has been reached, which is
subject to court approval. The settlement involves certain agreements between
the Company and PriceCostco regarding Price Global Trading, LLC and Price Quest,
LLC, including the elimination of certain non-compete and operating agreements
and the Company's assumption of sole ownership of those entities. In addition,
certain trademark and license agreements between the Company and PriceCostco
will be terminated. For Price Global Trading the remaining non-compete
restrictions and trademark rights involving the Company and PriceCostco relate
to Panama, Guam and the Northern Mariana Islands. For Price Quest the remaining
non-compete restrictions and obligations involving the Company and PriceCostco
relate to the automobile advertising/referral and travel businesses.
Plaintiffs' counsel will seek an award of attorneys' fees of up to $4.25
million, of which the Company has agreed to contribute $1.25 million which was
accrued for in fourth quarter fiscal 1996; the Company's payment will be
decreased proportionally if the actual award is lower.
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1996. The Company's Annual Meeting of Stockholders is
scheduled for 10:00 a.m. on January 14, 1997, at the San Diego Hilton Beach
and Tennis Resort in San Diego, California. Matters to be voted on will be
included in the Company's proxy statement to be filed with the Securities and
Exchange Commission and distributed to stockholders prior to the meeting.
17
<PAGE>
ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, positions, and ages of the executive officers of
Price Enterprises and other key officers of its subsidiaries:
Name Position With Company Age
----------------- -------------------------------- ---
Robert E. Price Chairman of the Board, President 54
and Chief Executive Officer
George J. Apostol Executive Vice President, 30
Corporate Development
Daniel T. Carter Executive Vice President, Chief 40
Financial Officer and Secretary
Robert M. Gans Executive Vice President, 47
General Counsel
Joseph J. Tebo President of Price Ventures 60
Theodore Wallace Chief Executive Officer of Price 48
Ventures
Robert E. Price has been Chairman of the Board, President and Chief Executive
Officer of Price Enterprises since July 1994. Mr. Price also serves as Chief
Executive Officer of Price Real Estate, Price Global Trading, and Price Quest.
From October 1993 to July 1994, Mr. Price was Chairman of the Board of
PriceCostco. Mr. Price also serves as a director of Price Real Estate, Price
Global Trading, Price Quest and Price Ventures. From 1976 to October 1993, he
was Chief Executive Officer and a director of The Price Company (TPC). Mr.
Price served as Chairman of the Board of TPC from January 1989 to October 1993,
and as its President from 1976 until December 1990.
George J. Apostol has been Executive Vice President, Director of Corporate
Development since March 1996. Previously, Mr. Apostol spent approximately 5
years with Citicorp Real Estate, Inc. and was responsible for managing, leasing,
disposing and strategically repositioning a diverse portfolio of commercial real
estate assets. Mr. Apostol graduated from Columbia Business School with an MBA
degree, having a dual concentration in Real Estate Finance and Management of
Organizations, and from Lehigh University with a BS degree in Business and
Economics.
Daniel T. Carter has been Executive Vice President, Chief Financial Officer and
Secretary of Price Enterprises since July 1994. From October 1993 to July 1994,
Mr. Carter was Senior Vice President of PriceCostco overseeing financial duties
for certain international and San Diego-based businesses. He joined TPC in June
1986 and held a variety of financial executive positions including Vice
President of Finance. Prior to joining TPC, Mr. Carter held financial
management roles with several diverse companies, as well as having worked for
three years with the accounting firm of Ernst & Young.
18
<PAGE>
Robert M. Gans has been Executive Vice President, General Counsel for Price
Enterprises since October 1994. Mr. Gans graduated from the UCLA School of Law
in 1975, and actively practiced law in private practice from 1975 until 1994.
From 1988 until October 1994, Mr. Gans was the senior member of the law firm of
Gans, Blackmar & Stevens, A.P.C., of San Diego, California.
Joseph J. Tebo has been the President of Price Ventures since November 1994.
From May 1994 to November 1994, Mr. Tebo was President of the Tebo Group, an
international retail consulting firm. From January 1990 to April 1994 Mr. Tebo
was President and Chief Executive Officer of AM/PM International, a wholly owned
subsidiary of Atlantic Richfield Company (ARCO), which has developed licensing
and joint venture arrangements for AM/PM convenience stores in 10 countries
throughout the Pacific Rim and the Americas. Mr. Tebo spent more than 30 years
in the Atlantic Richfield domestic and international sales and marketing
organizations, and was instrumental in developing the AM/PM Mini-Mart concept
and the PayPoint electronic payment system.
Theodore Wallace has been an Executive Vice President of Price Enterprises since
November 1994 and serves as Chief Executive Officer of Price Ventures. From
October 1993 to November 1994, Mr. Wallace was Executive Vice President of
PriceCostco overseeing international expansion into the Pacific Rim and other
markets. Mr. Wallace became an Executive Vice President of TPC in 1984 and,
from 1988 until Fall 1992, he was Chief Operating Officer (East Coast) of TPC.
He was a director of TPC from October 1988 to October 1993. He joined TPC as a
warehouse manager in September 1977 and was its Vice President of Operations
from 1983 to 1988.
19
<PAGE>
PART II
ITEM 5 -- MARKET FOR REGISTRANT COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICES
The Company's Common Stock was first publicly traded on December 21, 1994, as
quoted on the Nasdaq National Market tier of The Nasdaq Stock Market under the
symbol "PREN." The table set forth below provides the high and low sales prices
of the Common Stock for the period indicated, as reported by the Nasdaq National
Market tier of The Nasdaq Stock Market:
High Low
------ ------
Calendar Year --- 1994
Fourth Quarter (beginning 12/21/94) 14 1/2 12 3/4
Calendar Year --- 1995
First Quarter 13 3/4 10 1/2
Second Quarter 14 11 1/2
Third Quarter 16 13 1/2
Fourth Quarter 16 14 1/4
Calendar Year --- 1996
First Quarter 16 1/8 15
Second Quarter 16 1/2 15 1/4
Third Quarter 16 1/2 14 3/4
Fourth Quarter (through 11/1/96) 17 1/4 16
On November 1, 1996, the last reported sales price per share of the Common Stock
was $16.625, and the Company had approximately 750 stockholders of record.
DIVIDENDS
During fiscal 1995, a $1.7 million cash dividend of $0.075 per share was paid in
August 1995 to offset certain adverse tax consequences which would otherwise
have occurred. No dividends were declared or paid during fiscal 1996.
Beginning with fiscal 1997, the Company's Board of Directors announced that it
anticipates declaring and paying quarterly cash dividends. The first such
dividend of $0.30 per share will be paid on November 15, 1996, to holders of
record as of November 1, 1996. The Board of Directors believes that current
Company cash flows and favorable tax circumstances support the payment of
dividends. Future cash flows will be affected by a number of factors including
the revenues received from rental properties, operational expenses, capital
expenditures, property sales and tax benefits of tax losses arising from
property sales. All future dividends by the Company will be at the discretion
of the Board of Directors.
20
<PAGE>
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected data should be read in conjunction with the Company's
consolidated financial statements elsewhere in this Form 10-K and "Item 7 --
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
FISCAL YEAR
($000's, except per share data)
-------------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Selected Income Statement Data
Real estate revenues $56,221 $51,897 $30,316 $25,793 $30,672
Gain (loss) on sale of real estate 864 (181) 5,474 21,540 15,078
Merchandise sales 36,211 66,573 53,015 28,671 8,212
Real estate expenses 30,118 28,575 17,623 13,310 13,855
Merchandise cost of sales
and operating expenses 54,938 85,752 57,997 30,882 9,102
General and administrative 4,624 3,050 1,600 1,500 1,300
Provision for asset impairments 17,000 5,000 90,227 --- ---
Operating income (loss) (10,675) (3,548) (78,642) 30,517 29,910
Interest and other 12,029 9,283 8,896 4,649 2,961
Income (loss) before tax provision 1,354 5,735 (69,746) 35,166 32,871
Net income (loss) 90 546 (41,479) 20,551 19,361
Net income (loss) per share .00 .02 (1.54) .76 .72
Cash dividend per share --- .08 --- --- ---
<CAPTION>
As of August 31,
($000's, except per share data)
--------------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Selected Balance Sheet Data
Real estate assets, net $341,063 $334,754 $447,387 $387,475 $337,258
Property held for sale 55,951 100,035 --- --- ---
Total assets 547,940 567,321 650,553 499,867 454,063
Long-term debt --- 15,425 --- --- ---
Investment by PriceCostco and
stockholders' equity 532,899 532,085 578,788 454,357 429,672
Book value per share 22.88 22.90 21.44 16.83 15.91
</TABLE>
ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis compares the results of operations
for each of the three fiscal years ended August 31, 1996, and it should be read
in conjunction with the consolidated financial statements and the accompanying
notes included elsewhere in this report. 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.
21
<PAGE>
REAL ESTATE RENTAL OPERATIONS
Revenue Percent Operating Percent
Amount Change Income Change Change
------- ------- --------- ------ ------
Fiscal 1996 $56,221 8% $26,103 $ 2,781 12%
Fiscal 1995 51,897 71% 23,322 10,629 84%
Fiscal 1994 30,316 --- 12,693 --- ---
For purposes of this discussion, operating income is defined as rental
revenue, including common area expense reimbursements, less the related real
estate expenses, including all unreimbursable expenses associated with
unimproved land and certain developed properties with vacant space. In addition,
operating income reflects depreciation expense and earnings from real estate
partnerships, but it does not reflect property write-downs for asset impairment
or gain (loss) on sale of real estate.
During fiscal 1996, the increase in revenue was due primarily to increased
lease-up of the Pentagon City (VA) property, which was not fully leased until
mid-year fiscal 1995. Other factors include additional lease-up of the Bensalem
(PA) property as well as the Dallas (TX) property which was under development
during fiscal 1995 and began leasing activity during fourth quarter fiscal 1996.
These increases were somewhat offset by a decline in revenues from the Phoenix
(AZ) property, which was sold in March of 1995.
During fiscal 1995, the increase in revenue was due primarily to the
inclusion of the four Price Club properties whose leases began on August 29,
1994, and the inclusion of additional leases at properties located in Pentagon
City (VA), Westbury (NY), Seekonk (MA), Philadelphia (PA), Worcester (MA) and
Moorestown (NJ). These increases were somewhat offset by a decline due to
revenue reductions at Sacramento/65th Expressway (CA) and Phoenix (AZ)
properties, as well as the impact of absorbing a full year of expenses in fiscal
1995 for properties that were transferred to the Company in late fiscal 1994.
These transfers included the former Price Club in Dallas (TX) and former Costco
locations in Florida and Northern California.
ADJUSTED FUNDS FROM OPERATIONS
Less Add Adjusted
Operating Straight-line Depreciation Funds From Percent
Income Rentals Expense Operations Change
--------- ------------- ------------ ---------- -------
Fiscal 1996 $26,103 $(3,150) $10,071 $33,024 9%
Fiscal 1995 23,322 (3,332) 10,245 30,235 60%
Fiscal 1994 12,693 (872) 7,102 18,923 ---
Real estate industry analysts generally consider funds from operations
(FFO) to be a supplemental measure of performance for real estate-oriented
companies. As defined by the National Association for Real Estate Investment
Trusts (NAREIT), it is the pretax income determined in accordance with generally
accepted accounting principles (GAAP), excluding gains (losses) from sales of
property, after adding back depreciation and amortization expense. Due to the
significance of straight-line rent accruals, which represent noncash revenues
associated with fixed future minimum rent increases, the Company has adjusted
the NAREIT definition to eliminate straight-line rents when computing its
adjusted FFO.
Adjusted FFO does not represent cash flows from operations as defined by
GAAP and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity.
22
<PAGE>
For fiscal 1996 and 1995, the growth in adjusted FFO reflects many of the
factors mentioned in the revenue and operating income discussion above.
GAIN (LOSS) ON SALE OF REAL ESTATE
Percent
Amount Change Change
------ ------ ------
Fiscal 1996 $ 864 $ 1,045 577%
Fiscal 1995 (181) (5,655) (103%)
Fiscal 1994 5,474 --- ---
During fiscal 1996, the gain on sale of properties related primarily to the
sale of properties in Denver/Littleton (CO), Sacramento/No. Highlands (CA), San
Diego (Convoy Ct.) (CA), and San Jose (CA). These and other gains were somewhat
offset by a loss on the sale of property in West Palm Beach (FL).
During fiscal 1995, the loss on sale of properties related primarily to the
sale of the Phoenix (AZ) distribution center. During fiscal 1994, gains
recognized on the sale of properties located in Glendale (AZ), San Antonio (TX),
and Tempe (AZ), were somewhat offset by a loss on the sale of undeveloped land
in Austin (TX).
MERCHANDISING OPERATIONS
Sales Percent Gross Percent Percent of
Amount Change Margin Change Sales
------ ------- ------ ------ ----------
Fiscal 1996 $36,211 (46%) $1,567 (59%) 4.33%
Fiscal 1995 66,573 26% 3,817 7% 5.73%
Fiscal 1994 53,015 --- 3,566 --- 6.73%
Merchandise sales include the Price Quest and international trading
businesses. Gross margin is defined as merchandise sales less the related
merchandise costs.
During fiscal 1996, the decrease in sales was due to a 61% decrease in
Price Quest sales and a 35% decrease in international sales. The Price Quest
program, which includes kiosk as well as on-line sales, recorded sales of $10.7
million during fiscal 1996, as compared to $27.2 million during fiscal 1995.
Prior to the program's discontinuation on August 31, 1996 there were 36 kiosk
locations. The decrease in sales is partly attributed to the elimination of
display samples. As of the beginning of fiscal 1997 Price Quest's operation of
the electronic kiosk shopping business at the PriceCostco locations has been
discontinued. The decrease in international sales is due to the lack of
international trading sales during fiscal 1996 which decreased from $33.7
million to $2.2 million, although sales to PGT's Saipan/Guam licensee increased
from $5.7 million in fiscal 1995 to $23.4 million in fiscal 1996.
During fiscal 1995, the increase in sales was due primarily to a 40%
increase in Price Quest sales and an 11% increase in international trading
activities. The Price Quest kiosk program recorded sales of $27.2 million
during fiscal 1995, as compared to $19.5 million during fiscal 1994. The number
of PriceCostco locations with the kiosk program increased from 27 at the
beginning of fiscal 1995 to 37 at year-end. Despite the overall revenue gains
during fiscal 1995, both Price Quest and the international trading businesses
reported flat or negative year-to-year sales comparisons during the fourth
quarter of fiscal 1995.
23
<PAGE>
Gross margins during fiscal 1996 were reduced to 4.3% of sales due
primarily to inventory-related reserves recorded by Price Quest of $1.0 million.
Gross margins during fiscal 1995 would have benefited from a shift in sales
from the traditionally lower margin international trading business to the
relatively higher margins obtained with the Price Quest business; however, $0.9
million of inventory-related reserves were recorded by Price Quest during the
fourth quarter of fiscal 1995 that related to merchandise returns and salvage
reserves.
MERCHANDISING OPERATING EXPENSES
Percent
Amount Change Change
------ ------ -------
Fiscal 1996 $20,294 $(2,702) (12%)
Fiscal 1995 22,996 14,448 169%
Fiscal 1994 8,548 --- ---
During fiscal 1996, the decrease in operating expenses was due primarily to
decreased expenses for Price Quest, as the prior year included significant
depreciation expense and loss reserves for fixtures and equipment. Loss
reserves in fiscal 1996 were minimal and depreciation expense was greatly
reduced due to the prior year write-down of fixed assets. Fiscal 1996 also
reflects a reduction in payroll and related expenses for Price Quest due to
reduced head counts. The decrease in operating expenses of Price Quest were
somewhat offset by increased expenses for the international merchandising
activities.
During fiscal 1995, the increase in operating expenses was due to $4.5
million of contractual obligations for Price Quest's marketing and warehouse
rent with PriceCostco, higher operating and depreciation expenses associated
with the expansion of the Price Quest businesses, $2.3 million of write-downs
for expected losses on disposals of fixtures and equipment, as well as
approximately $4.0 million of increased expenses associated with the
international merchandising activities. The sale of PEI's interest in Price
Club Mexico during April 1995 sharply reduced reimbursements of U.S.-based
overhead expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
Percent
Amount Change Change
------ ----- ------
Fiscal 1996 $4,624 $1,574 52%
Fiscal 1995 3,050 1,450 91%
Fiscal 1994 1,600 --- ---
During fiscal 1996, the increase in expenses was due primarily to an
accrual of $1.25 million pursuant to a tentative agreement to settle the
PriceCostco stockholder litigation. Increases were also experienced in the areas
of insurance and legal expense.
During fiscal 1995, the increase in expenses reflects the impact of the
Company's continued growth and incremental expenses associated with becoming a
separate publicly traded company and $0.25 million of contractual obligations to
PriceCostco for administrative services. In fiscal 1994 PriceCostco provided
services to the Company and charged general and administrative expenses to PEI
by specific identification or by allocations based on total assets or total
revenues.
24
<PAGE>
INTEREST INCOME (NET)
Percent
Amount Change Change
------ ----- ------
Fiscal 1996 $7,442 $1,358 22%
Fiscal 1995 6,084 1,287 27%
Fiscal 1994 4,797 --- ---
During fiscal 1996, the increase in net interest income was due primarily
to increased income from various notes receivable, increased earnings on cash
balances as well as reduced interest expense on borrowings, including the note
payable to PriceCostco, which was repaid during the fourth quarter of fiscal
1996.
In fiscal 1995, the increase in net interest income was due to increased
income from various notes receivable, offset by interest expense incurred on the
note payable to PriceCostco and borrowings against the two unsecured line of
credit facilities during the year.
OTHER INCOME (NET)
Price Total
Club Minority Other Percent
Mexico Interest Income Change Change
------ -------- ------ ------ ------
Fiscal 1996 $ --- $4,587 $4,587 $1,388 43%
Fiscal 1995 (3,805) 7,004 3,199 (900) (22%)
Fiscal 1994 1,948 2,151 4,099 --- ---
Price Club Mexico amounts represent the Company's equity in earnings
(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 in fiscal 1995. Minority interest represents
the allocation of Price Quest and Price Global Trading losses to PriceCostco.
During fiscal 1996, the increase in other income was due to elimination of
the Company's investment in Price Club Mexico partially offset by a reduction in
losses allocated to minority interest. PEI began absorbing 100% of the losses
in Price Quest and Price Global Trading during third quarter fiscal 1996 because
cumulative allocations of losses from these companies to PriceCostco's minority
interest had matched PriceCostco's cumulative capital contributions, such that
the book value of its investment in these businesses reached zero.
During fiscal 1995, the decrease in other income was due to the $2.65
million pretax loss on the sale of the Company's interest in Mexico Clubs, as
well as operating losses reported by the Price Club Mexico venture during the
first half of fiscal 1995. The impact of these losses was offset, in part, by
having PriceCostco's minority interest absorb 49% of increased losses of Price
Quest and Price Global Trading.
25
<PAGE>
PROVISION FOR ASSET IMPAIRMENTS
Percent
Amount Change Change
------ ----- ------
Fiscal 1996 $17,000 $12,000 240%
Fiscal 1995 5,000 (85,227) (94%)
Fiscal 1994 90,227 --- ---
In fiscal 1996 and 1995, noncash charges of $17.0 million and $5.0 million,
respectively, were 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. The increase in the reserve
reflects management's objective to sell many of the properties held for sale by
the end of fiscal 1997. Given the nature of these activities, there can be no
assurance that the sale of these properties will be completed during the next
fiscal year.
In fiscal 1994, a noncash charge of $90.2 million was taken that generally
related to a change in calculating the estimated losses for assets which were
considered to be economically impaired. A write-down was taken to reduce an
asset's carrying value if its estimated fair value, based on the risk-adjusted
discounted cash flow approach, was lower than its book value. Approximately
$74.7 million related to real estate properties and $15.5 million related to
write-downs of the City Notes.
PROVISION (BENEFIT) FOR INCOME TAXES
Percent
Amount Change Change
------ ----- ------
Fiscal 1996 $ 1,264 $(3,925) (76%)
Fiscal 1995 5,189 33,456 118%
Fiscal 1994 (28,267) --- ---
During the first quarter of fiscal 1996 Price Quest and Price Global
Trading were restructured as limited liability companies and subsequent to that
date have been treated as partnerships for income tax purposes. Since the
restructuring PEI has recognized tax benefits for its share of any tax losses.
During fiscal 1995, the income tax provision was negatively impacted by the
nondeductible losses from Price Quest, Price Global Trading, and the Price Club
Mexico joint venture. In addition, the $2.65 million loss on sale of the Mexico
Clubs interest provided just $0.5 million of tax benefits.
In fiscal 1994, the income tax benefit was the net current tax expense of
$8.2 million and deferred tax benefits of $36.5 million. The deferred tax
benefit relates primarily to the provision for asset impairments which is not
currently deductible.
26
<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 $56 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, 1998. 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 $178 million as of August 31, 1996, 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 August
31, 1996, there was no outstanding balance on the credit facility and the
weighted average interest rate charged during fiscal 1996 was 6.25% on
borrowings.
Pursuant to the Advance Agreement between PEI and PriceCostco, PriceCostco
agreed to provide an unsecured revolving credit facility for up to a maximum
principal amount of $85 million (subject to reduction for proceeds of certain
real property sales) as interim financing to satisfy any cash requirements
through June 21, 1995. This facility has expired and all borrowings and related
interest have been fully repaid. During fiscal 1995, the weighted average
interest rate was 6.30% on such borrowings.
Consistent with historical trends, operating income from real estate activities
increases as properties are developed and declines as properties are sold. The
Company's liquidity is primarily affected by the timing and magnitude of rental
property acquisition, development and disposition. In addition, the Company's
liquidity may be affected by the anticipated payment of quarterly cash dividends
to stockholders in the future. See "Item Five--Market for Registrant Common
Equity and Related Stockholder Matters."
During fiscal 1997, the Company anticipates investing approximately $15-25
million in commercial real estate development on owned property (a portion of
which represents commitments under executed construction contracts),
approximately $10-25 million for real estate acquisitions, approximately $3-4
million for investment in Price Global Trading, approximately $3-5 million for
investment in Price Quest and approximately $2-3 million for investment in Price
Ventures. In addition to cash from operations, the Company expects to generate
gross proceeds of approximately $30-40 million from expected sales of real
estate. Actual capital expenditures, investment in merchandising businesses and
gross proceeds realized from property sales for fiscal 1997 may vary from
estimated amounts depending on business conditions and other risks and
uncertainties to which the Company and its businesses are subject.
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
27
<PAGE>
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.
28
<PAGE>
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
August 31,
1996 1995
--------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 15,458 $ ---
Accounts receivable, net 7,019 5,776
Merchandise inventories 2,011 7,385
Prepaid expenses and other current assets 7,512 1,499
-------- --------
Total current assets 32,000 14,660
Real Estate Assets
Land and land improvements 179,639 179,794
Building and improvements 190,969 168,808
Fixtures and equipment 5,958 7,928
Construction in progress 328 6,457
-------- --------
376,894 362,987
Less accumulated depreciation (35,831) (28,233)
-------- --------
341,063 334,754
Other Assets
Property held for sale, net 55,951 100,035
City notes receivable 29,091 30,835
Atlas and other notes receivable 48,328 45,790
Deferred income taxes 25,640 29,315
Deferred rents and leasing costs, net 15,867 11,932
-------- --------
174,877 217,907
-------- --------
Total Assets $547,940 $567,321
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 3,042 $ 2,592
Accrued expenses 5,197 4,569
Payable to PriceCostco, net 841 1,617
Other current liabilities 4,216 6,095
-------- --------
Total current liabilities 13,296 14,873
Note Payable to PriceCostco --- 15,425
Minority Interest 1,745 4,938
Commitments and Contingencies (Note 12)
Stockholders' Equity
Common stock, $.0001 par value,
60,000,000 shares authorized, 23,290,057 and 23,234,075
shares issued and outstanding 2 2
Additional paid-in capital 534,004 548,705
Retained earnings (deficit) (1,107) (1,197)
Treasury stock --- (15,425)
-------- --------
Total stockholders' equity 532,899 532,085
-------- --------
Total Liabilities and Stockholders' Equity $547,940 $567,321
-------- --------
-------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
29
<PAGE>
<TABLE>
<CAPTION>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
Year Ended August 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues
Real estate $ 56,221 $ 51,897 $ 30,316
Gain (loss) on sale of real estate, net 864 (181) 5,474
Merchandise sales 36,211 66,573 53,015
Other revenues 2,709 540 ---
-------- -------- --------
Total revenues 96,005 118,829 88,805
Operating Expenses
Real estate:
Operating, maintenance and administrative 11,667 9,794 5,713
Property taxes 8,380 8,536 4,808
Depreciation and amortization 10,071 10,245 7,102
Merchandising:
Cost of sales 34,644 62,756 49,449
Operating expenses 20,294 22,996 8,548
General and administrative 4,624 3,050 1,600
Provision for asset impairments 17,000 5,000 90,227
-------- -------- --------
Total operating expenses 106,680 122,377 167,447
-------- -------- --------
Operating loss (10,675) (3,548) (78,642)
Interest and Other
Interest income, net 7,442 6,084 4,797
Earnings (loss) of Price Club Mexico joint venture --- (4,988) 3,359
Minority interest 4,587 8,187 740
-------- -------- --------
Total interest and other 12,029 9,283 8,896
-------- -------- --------
Income (loss) before provision (benefit) for income taxes 1,354 5,735 (69,746)
Provision (benefit) for income taxes 1,264 5,189 (28,267)
-------- -------- --------
Net Income (Loss) $ 90 $ 546 $(41,479)
-------- -------- --------
-------- -------- --------
Net Income (Loss) Per Share $ .00 $ .02 $ (1.54)
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
30
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Foreign Retained
Common Stock Paid-In Currency Earnings
Shares Amount Capital Translation (Deficit) Total
------ ------- ---------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Investment by PriceCostco at
August 31, 1993 27,000 $ 3 $454,354 $ --- $ --- $454,357
Net income (loss) --- --- (41,479) --- --- (41,479)
Net investment by PriceCostco --- --- 167,593 --- --- 167,593
Foreign currency translation
adjustment --- --- --- (1,683) --- (1,683)
------ ---- -------- ------ ------- --------
Investment by PriceCostco at
August 31, 1994 27,000 3 580,468 (1,683) --- 578,788
Net income --- --- --- --- 546 546
Adjustment to investment by
PriceCostco --- --- (1,389) --- --- (1,389)
Stock options exercised including
income tax benefits 10 --- 126 --- --- 126
Shares repurchased (3,776) (1) (45,925) --- --- (45,926)
Foreign currency translation
adjustment --- --- --- 1,683 --- 1,683
Cash dividend, $.075 per share --- --- --- --- (1,743) (1,743)
------ ---- -------- ------ ------- --------
Balance at August 31, 1995 23,234 2 533,280 --- (1,197) 532,085
Net income --- --- --- --- 90 90
Stock options exercised including
income tax benefits 56 --- 724 --- --- 724
------ ---- -------- ------ ------- --------
Balance at August 31, 1996 23,290 $ 2 $534,004 $ --- $(1,107) $532,899
------ ---- -------- ------ ------- --------
------ ---- -------- ------ ------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
31
<PAGE>
<TABLE>
<CAPTION>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended August 31,
---------------------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Operating Activities
Net income (loss) $ 90 $ 546 $(41,479)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 11,743 13,432 7,693
Loss (gain) on sale of assets (310) 1,430 (5,474)
Provision for asset impairments 17,000 5,000 90,227
Equity in losses (earnings) of joint ventures --- 2,338 (4,188)
Deferred income taxes 3,676 (2,466) (36,459)
Loss on sale of Price Club Mexico joint venture --- 2,650 ---
Minority interest (3,194) (8,187) ---
Change in accounts receivable and other assets (1,882) (30,086) (8,773)
Change in accounts payable and other liabilities (1,217) 23,974 10,740
Deferred rents and leasing costs (3,936) (4,068) (3,738)
Unearned rent and security deposits 642 1,176 353
Other --- --- 213
-------- -------- --------
Net cash flows provided by operating activities 22,612 5,739 9,115
Investing Activities
Additions to real estate assets (19,614) (24,771) (44,628)
Proceeds from sale of real estate assets 26,206 12,836 39,878
Proceeds from real estate joint ventures --- --- 12,029
Proceeds from Price Club Mexico joint venture --- 4,000 ---
Investment in Price Club Mexico joint venture --- (3,883) (39,795)
Additions to notes receivable (1,149) (2,949) (41,000)
Payments of notes receivable 3,105 4,947 1,902
-------- -------- --------
Net cash flows provided by (used in) investing activities 8,548 (9,820) (71,614)
Financing Activities
Net investment by PriceCostco --- --- 38,660
PriceCostco equity contributions to subsidiaries --- 12,495 23,828
PriceCostco line of credit advances --- 6,439 ---
Repayments of PriceCostco note payable and line of credit (16,426) (13,236) ---
Proceeds from exercise of stock options including tax benefit 724 126 ---
Dividends paid --- (1,743) ---
Decrease in equity resulting from cash not transferred in
spin-off transaction --- (1,644) ---
-------- -------- --------
Net cash flows provided by (used in) financing activities (15,702) 2,437 62,488
-------- -------- --------
Net increase (decrease) in cash 15,458 (1,644) (11)
Cash and Cash Equivalents at Beginning of Year 0 1,644 1,655
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 15,458 $ 0 $ 1,644
-------- -------- --------
-------- -------- --------
</TABLE>
SEE ACCOMPANYING NOTES.
32
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF THE COMPANY
Price Enterprises, Inc. ("PEI" or "the Company"), a Delaware corporation, was
formed in July 1994. The Company began operations effective August 29, 1994 as
a wholly owned subsidiary of Price/Costco, Inc. ("PriceCostco") with specific
assets received from PriceCostco pursuant to the Amended and Restated Agreement
of Transfer and Plan of Exchange ("Exchange Agreement"). PriceCostco offered to
exchange 27 million shares of PEI common stock for an equal number of shares of
PriceCostco common stock from PriceCostco stockholders on a voluntary basis,
pursuant to the Offering Circular/Prospectus dated November 21, 1994, as amended
on December 7, 1994. Approximately 23.2 million shares were exchanged between
PriceCostco and certain of its stockholders, and PEI became a separate publicly
traded company on December 21, 1994.
The following assets were transferred to PEI:
- Substantially all of the real estate assets which historically formed
the non-club real estate business segment of PriceCostco.
- Four existing Price Club warehouses which are adjacent to certain
properties included above and which have been leased back to
PriceCostco effective August 29, 1994.
- A 51% interest in Price Quest and a 51% interest in Price Global
Trading ("PGT"). PriceCostco retained the remaining 49% interest
in both companies.
- Notes receivable from various municipalities and agencies ("City
Notes") and a secured note receivable from a company which owns
and operates a hotel and convention center in San Diego,
California ("Atlas Note").
- A 51% interest in Mexico Clubs, LLC ("Mexico Clubs") which, prior
to April 20, 1995, held a 50% interest in Price Club de Mexico
and affiliates ("Price Club Mexico"), a joint venture that
develops, owns and operates Price Clubs in Mexico.
For purposes of governing certain of the ongoing relationships between PEI and
PriceCostco, the companies entered into certain Operating Agreements,
Stockholders' Agreements, and an Advance Agreement. PGT and Price Quest were
converted to Limited Liability Companies in November, 1995. PEI and PriceCostco
are currently parties to Limited Liability Company Agreements which set forth
certain rights and obligations with respect to their investments in Price Quest
and PGT. Each Limited Liability Company Agreement provides for an adjustment to
the parties' respective percentage ownership interests in the event
33
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FORMATION OF THE COMPANY (CONTINUED)
that a party fails to fund a PRO RATA capital call by the relevant subsidiary's
Managing Member. Each Limited Liability Company Agreement sets forth, among
other things: (i) transfer restrictions if either PEI or PriceCostco offers to
transfer, sell, assign or otherwise dispose of its interest in the company; (ii)
certain preemptive rights; and (iii) certain registration rights for
PriceCostco. These rights and obligations are subject to change; see Note 12.
PriceCostco and Price Quest are currently parties to an Operating Agreement
pursuant to which PriceCostco provides for a five-year period, among other
things, space in certain PriceCostco warehouse clubs to Price Quest for its
electronic shopping kiosks and travel and automobile advertising/referral
programs, as well as staffing, cashiering, buying support and other information
to Price Quest, in exchange for a fee based on sales. Warehouse rent for the
PriceCostco kiosk program was subject to a minimum annual rent requirement of
$1.5 million for each of fiscal 1995 and 1996. Price Quest also was obligated
to make annual purchases of at least $3 million in each of fiscal 1995 and 1996
of advertisements in PriceCostco's membership publications. The Operating
Agreement also contains certain confidentiality and competitive restrictions
between the parties. These rights and obligations are subject to change; see
Note 12.
PriceCostco and PGT are currently parties to an Operating Agreement pursuant to
which PriceCostco is obligated to provide certain buying support, merchandising
services, training and other information to PGT for a period of five years for
PGT's use in certain specified geographical areas, including Central America,
Australia, New Zealand, Guam, the Northern Mariana Islands and certain Caribbean
islands. The Operating Agreement also contains certain confidentiality and
competitive restrictions between the parties. These rights and obligations are
subject to change; see Note 12.
In accordance with terms of the Exchange Agreement, on February 6, 1995, PEI
purchased from PriceCostco approximately 3.8 million shares of its common stock
which had not previously been exchanged for $45.9 million ($12.16 per share) in
return for a promissory note due December 1996, which was collateralized by the
related shares of PEI common stock.
On April 20, 1995, PEI sold its interest in Mexico Clubs to PriceCostco.
PriceCostco purchased PEI's interest in Mexico Clubs by making a $30.5 million
reduction to the outstanding balance of the promissory note. In addition, Price
Club Mexico paid PEI $4.0 million concurrent with the closing of the transaction
with PriceCostco. As a result of the partial debt repayment, approximately 2.5
million shares of common stock were released from the collateral arrangement and
were retired. During fiscal 1996, the remaining balance of the promissory note
of $15.4 million was paid in full and the 1.3 million shares held as treasury
stock were released from the collateral arrangement and also retired.
On July 26, 1996 it was announced that PEI had reached a tentative settlement
agreement of the class and derivative action pending in the United States
District Court, Western District of Washington, entitled IN RE PRICECOSTCO
SHAREHOLDER LITIGATION. The settlement agreement is subject to court approval
and contains several terms which modify the relationship between PEI, its
subsidiaries, and PriceCostco. Once approved, PEI will own 100% of the PGT and
Price
34
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FORMATION OF THE COMPANY (CONTINUED)
Quest operating companies and certain obligations, non-compete restrictions, and
trademark rights established in connection with the Exchange Agreement will be
eliminated. See further discussion in Note 12.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all majority owned subsidiaries; whereas, the Company's investment in less than
majority owned businesses are accounted for on the equity method. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Ownership Basis of Presentation
--------- -----------------------------------
Price Real Estate, Inc. 100% Consolidated
Price Ventures, Inc. 100% Consolidated
Price Quest, LLC 51% Consolidated
Price Global Trading, LLC 51% Consolidated
PriceCostco Panama 51% Consolidated
Mexico Clubs, LLC 51% Consolidated (Sold in fiscal 1995)
--Price Club Mexico 50% Equity Method (Sold in fiscal 1995)
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
while all other years presented in the financial statements reflect only 52
weeks.
35
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REAL ESTATE ASSETS AND DEPRECIATION
Real estate assets are recorded at PriceCostco's and PEI's historical costs as
adjusted for recognition of impairment losses. As more fully explained in "Note
2 -- Provision for Asset Impairments," historical costs for real estate and
related assets were reduced by $17.0 million, $5.0 million, and $90.2 million
during fiscal 1996, 1995 and 1994, respectively. Ordinary repairs and
maintenance are expensed as incurred; major replacements and betterments are
capitalized and depreciated over their estimated useful lives. Property held
for sale is stated net of accumulated depreciation of $11.6 million and $14.2
million at August 31, 1996 and 1995, respectively. Depreciation of real estate
assets is computed on a straight-line basis over their estimated useful lives,
as follows:
Land improvements 15-25 years
Building and improvements 10-25 years
Leasehold improvements Term of lease
Tenant improvements Term of lease or 10 years
Fixtures and equipment 5 years
Certain MIS assets 3 years
REAL ESTATE RENTAL REVENUE RECOGNITION
Rental revenues include: (1) minimum annual rentals, adjusted for the straight-
line method for recognition of fixed future increases; (2) additional rentals,
based on common area maintenance expenses and certain other expenses, which are
accrued in the period in which the related expense is incurred; and (3)
percentage rents which are accrued on the basis of reported tenant sales.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash and cash equivalents.
MERCHANDISE INVENTORIES
Merchandise inventories, which include merchandise for resale and display
samples, are valued at the lower of cost (average cost) or market.
DEFERRED LEASING COSTS AND CAPITALIZED INTEREST
Costs incurred in connection with leasing space to tenants are deferred and
amortized on the straight-line method over the lives of the related leases.
Interest incurred directly by PEI, or indirectly by PriceCostco in fiscal 1994,
during the construction period is capitalized and depreciated over the lives of
the constructed assets. Total interest incurred was $881,000, $1,261,000 and
$1,486,000 for fiscal 1996, 1995, and 1994, respectively; and $361,000, $556,000
and $1,486,000 of such interest, respectively, was capitalized and is included
in the property accounts.
36
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ASSET IMPAIRMENTS
The Company regularly evaluates the estimated fair value of its assets and
records appropriate provisions for asset impairments. In fiscal 1994, the
Company changed its accounting estimates for impairment losses to adopt a risk-
adjusted discounted cash flow approach to estimating asset fair values. The
various notes receivable are evaluated in accordance with Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of
a Loan."
Beginning with fiscal 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. No such indicators of impairment were present in
fiscal 1996. SFAS No. 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. The Company estimated the sales value, net
of related selling costs, on its real estate properties which are being held for
sale and recorded an impairment loss of $17 million in fiscal 1996. See Note 2.
FOREIGN CURRENCY TRANSLATION
The accumulated foreign currency translation was related to the Company's
investment in Price Club Mexico and was determined by application of the current
rate method. Resulting translation adjustments were made directly to a separate
component of stockholders' equity.
AUTHORIZED STOCK
The Company's authorized stock consists of 60 million shares of $0.0001 par
value common stock and 10 million shares of $0.0001 par value preferred stock.
No preferred stock has been issued. At August 31, 1995, 1,268,264 shares of
common stock were issued and held as treasury stock. During fiscal 1996 these
treasury shares were retired.
INCOME TAXES
Income taxes have been provided for in accordance with SFAS No. 109, "Accounting
for Income Taxes." That standard requires companies to account for deferred
taxes using the asset and liability method. Accordingly, deferred income taxes
are provided to reflect temporary differences between financial and tax
reporting, including: asset write-downs of real estate and related assets,
deferred gains on sales of real estate, accelerated tax depreciation methods,
and accruals for straight-line rents.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on the weighted average number of shares
outstanding of 23,262,374 and 24,864,000 in fiscal 1996 and 1995, respectively.
For fiscal 1994 the Company has assumed that 27 million shares were outstanding.
37
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been reflected in the financial statements in
order to conform with the fiscal 1996 presentation. Stockholders' equity has
been restated to reflect common stock at par value and the remaining equity as
additional paid-in capital, effective at the beginning of fiscal 1994. In
addition, in accordance with the Exchange Agreement, PriceCostco retained net
current assets of PEI and its subsidiaries as of the beginning of fiscal 1995.
The value of these retained assets, net of an adjustment to the carryover
deferred income tax amount, is reflected as an adjustment of $1.4 million to
additional paid-in capital as of the beginning of fiscal 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued "Accounting for
Stock-Based Compensation" ("Statement No. 123"). The statement is effective for
fiscal years beginning after December 1995. Under Statement No. 123, stock-
based compensation expense is measured using either the intrinsic-value method
as prescribed by Accounting Principle Board Opinion No. 25 or the fair-value
method described in Statement No. 123. The Company intends to implement
Statement No. 123 in fiscal 1997 using the intrinsic-value method; accordingly,
upon adopting Statement No. 123 there will be no effect on the Company's
financial position or results of operations.
NOTE 2 -- PROVISIONS FOR ASSET IMPAIRMENTS
In fiscal 1996 and 1995, noncash charges of $17.0 million and $5.0 million,
respectively, were taken to write-down the carrying value of real estate
properties which are being held for sale or redevelopment, and which are
expected to generate net sales proceeds below their current book values.
In fiscal 1994, the provision for asset impairments of $90.2 million pretax was
generally related to a change in calculating estimated losses for assets which
were considered to be economically impaired. These noncash write-downs were
taken based on the estimated fair value of assets received from PriceCostco as
determined by appraisals and/or a risk-adjusted discounted cash flow approach.
The fair value of the City Notes was determined using a discounted cash flow
approach based on each note's stated interest rate. For each asset, a write-
down was taken to reduce the asset's carrying value if its estimated fair value
was lower than its book value. Approximately $74.7 million of the write-downs
related to real property assets and approximately $15.5 million related to the
City Notes.
38
<PAGE>
NOTE 3 -- REAL ESTATE PROPERTIES AND PROPERTY SALES
The Company's real estate properties are generally leased under noncancelable
leases with remaining terms ranging from one to 23 years. Real estate revenues
include the following rental income (in thousands):
1996 1995 1994
------- ------- -------
Minimum rent $42,529 $39,987 $23,526
Straight-line accrual of future rent 3,150 3,332 872
Additional rent -- CAM and taxes 10,371 8,499 5,063
Percentage rent 171 79 25
------- ------- -------
Real estate rental revenues. . . . . . $56,221 $51,897 $29,486
------- ------- -------
------- ------- -------
Real estate revenues also include earnings from real estate joint ventures of
$0.8 million in fiscal 1994.
As of August 31, 1996, future minimum rental income due under the terms of
noncancelable operating leases is as follows (in thousands):
1997 $ 43,015
1998 42,624
1999 42,801
2000 43,013
2001 43,272
Thereafter 418,268
During each of the last three years, the Company sold certain significant real
estate properties and recognized related gains or losses on dispositions, as
shown in the following table (in thousands). In addition, $576,000 of gains
were recognized during fiscal 1996 on sales of insignificant real estate
properties.
<TABLE>
<CAPTION>
Buyer of Sales Pretax
Date Property Price Gain (Loss)
-------- --------------- -------- -----------
<S> <C> <C> <C> <C>
FISCAL 1996
Warehouse Building 12/22/95 Unrelated Party $ 3,483 $ 65
PALM HARBOR, FL
Office Building 2/9/96 Unrelated Party 3,500 143
SAN DIEGO (CONVOY CT.), CA
Warehouse Building 4/12/96 Unrelated Party 11,075 80
RICHMOND, CA
FISCAL 1995
Fry's Distribution Center 3/8/95 Unrelated Party 9,598 (181)
PHOENIX, AZ
Undeveloped Land 3/27/95 Unrelated Party 4,440 (6)
FAIRFAX, VA
FISCAL 1994
Shopping Center 10/1/93 The Price REIT 21,700 4,211
GLENDALE, AZ
50% of Shopping Center 4/15/94 The Price REIT 11,400 935
TEMPE, AZ
39
<PAGE>
Undeveloped Land 4/29/94 Unrelated Party 5,600 (879)
AUSTIN, TX
Undeveloped Land 6/16/94 Unrelated Party 10,200 1,358
SAN ANTONIO, TX
</TABLE>
40
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- NOTES RECEIVABLE
The City Notes include amounts loaned to municipalities and agencies to
facilitate real property acquisition and improvements and carry interest 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. City Note repayments are calculated in accordance with specific
revenue sharing agreements; and, under the terms of most City Notes, the unpaid
balance of the note is forgiven at its maturity date.
The City Notes are recorded at PEI's historical cost as adjusted for recognition
of impairment losses. As more fully explained in "Note 2 -- Provision for Asset
Impairments," historical costs for the City Notes were reduced by $15.5 million
in fiscal 1994 after taking into account a discounted cash flow approach to
their valuation.
The Company holds the Atlas Note with a carrying value of $41.7 million as of
August 31, 1996, which is collateralized by a hotel and convention center
located in San Diego, California. On April 3, 1995, the debt obligation was
restructured and key provisions included: required repayment of all outstanding
indebtedness within five years, accrual of interest at 10% per annum, payment of
interest at LIBOR plus 2.5% per annum (not to exceed 8.0% through December 1,
1996), payment of certain minimum annual amounts, and the right for PEI to
receive any cash balances in excess of $1.0 million at the end of each fiscal
year.
As part of the restructuring, PEI agreed to fund up to $4.1 million to Atlas to
retire an existing mortgage held by a lender with a first priority security
interest in the hotel and convention center and to fund certain capital
expenditures. Approximately $2.1 million and $2.9 million were advanced in
fiscal 1996 and fiscal 1995, respectively. PEI received approximately $1.3
million and $1.1 million of principal repayments during fiscal 1996 and 1995,
respectively.
NOTE 5 -- UNSECURED LINES OF CREDIT
The Company has a revolving credit facility with a commercial bank for up to $25
million in unsecured advances through June 29, 1998. 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 $178 million as of August 31, 1996, 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 August
31, 1996, there was no outstanding balance on the credit facility. The balance
at August 31, 1995 was $1.0 million. The weighted average interest rate charged
during fiscal 1996 and 1995 was 6.25% and 6.34%, respectively.
41
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- UNSECURED LINES OF CREDIT (CONTINUED)
Pursuant to the terms of the Exchange Agreement, PriceCostco agreed to provide
an unsecured revolving credit facility for up to a maximum principal amount of
$85 million (subject to reduction for proceeds of certain real property sales)
as interim financing to satisfy any cash requirements through June 21, 1995. As
of August 31, 1995, this facility had expired and all borrowings and related
interest had been fully repaid. During fiscal 1995, the weighted average
interest rate was 6.30% on such borrowings.
NOTE 6 -- RELATED PARTY TRANSACTIONS
Prior to fiscal 1995, PriceCostco historically provided general and
administrative services to PEI. The amount allocated to PEI for fiscal 1994 was
$1.6 million, and this amount has been included as general and administrative
expenses in the accompanying financial statements. The costs incurred by
PriceCostco during fiscal 1994 were charged to PEI by specific identification or
allocated based on total assets or sales revenues. This cost allocation fairly
represented, in management's opinion, PEI's general and administrative expenses
during this prior fiscal year.
In fiscal 1996 and 1995, PEI incurred $4.8 million and $4.5 million,
respectively, of operating expenses for marketing and warehouse rent to
PriceCostco. Included in real estate revenues in both fiscal 1996 and 1995 is
$8.0 million of rental income from PriceCostco.
Joseph Kornwasser, a former director of PriceCostco until July 28, 1994 and an
officer and Director of The Price REIT (See Note 3), is a general partner and
has a two-thirds ownership interest in Kornwasser and Friedman Shopping Center
Properties (K&F). As of August 28, 1994, K&F was a partner with PriceCostco in
two partnerships. The assets, liabilities, equity and results of operations of
these partnerships have been included in these financial statements through
fiscal 1994. As of August 28, 1994, PriceCostco had also entered into a
Development Agreement with K&F for the development of four additional
properties. Both partnership agreements and the Development Agreement provided
for a preferred return to PriceCostco on a varying scale from 9% to 10% on its
invested capital. After the preferred returns, plus PriceCostco's invested
capital, are distributed to PriceCostco, operating cash flows are distributed
75% to PriceCostco and 25% to K&F. Effective August 28, 1994, PEI purchased the
K&F partnership interests and terminated the Development Agreement for $2.5
million.
NOTE 7 -- SALE OF INTEREST IN MEXICO CLUBS
On April 20, 1995, the Company completed the sale of its interest in Mexico
Clubs in return for combined proceeds of $34.5 million. PriceCostco purchased
PEI's interest in Mexico Clubs by making a $30.5 million reduction to the
outstanding balance of the $45.9 million note receivable from PEI. The note
related to the 3.8 million share common stock repurchase on February 6, 1995.
In addition, Price Club Mexico paid $4.0 million concurrent with the closing of
the transaction with PriceCostco. The sale of the interest in Price Club Mexico
resulted in a $2.6 million loss ($2.1 million after-tax) which is included in
earnings (loss) of Price Club Mexico joint venture.
42
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFIT SHARING AND 401(k) PLAN
Substantially all of the employees of the Company are participants in a defined
contribution profit sharing and 401(k) plan. Profit sharing contributions, if
any, are based on a discretionary amount determined by the Board of Directors
and are allocated to each participant based on the relative compensation of the
participant, subject to certain limitations, to the compensation of all
participants. The Company makes a matching 401(k) contribution equal to 50% of
the participants contribution up to an annual maximum matching contribution of
$250.
During fiscal 1996, the plan year was converted to a calendar year from a
fiscal year; therefore, a contribution of $187,000 was made to the profit
sharing plan for the period of September 1995 to December 1995. In addition,
employer contributions to the 401(k) plan for the 1996 fiscal year were $37,000.
All future profit sharing contributions will be made in January for the previous
calendar year. Contributions to the plan during fiscal 1995 were $616,000.
NOTE 9 -- STOCK OPTION PLANS
In 1995, the Company established an Employee Stock Option and Stock Grant Plan
and a Director Stock Option Plan under which 1,500,000 shares and 150,000
shares, respectively, have been reserved for issuance. Options have been
granted to certain employees and directors at prices equal to the market price
on the date of grant. Options generally vest over a five year period and expire
after six years. The following table summarizes the stock option transactions
for fiscal 1995 and 1996 for the employee plan:
Stock Range of Exercise
Options Price Per Share
--------- ---------------
Outstanding at August 31, 1994 0 --- ---
Granted 1,088,900 $11.25 - $12.44
Exercised (10,047) $11.25 - $11.25
Cancelled (116,745) $11.25 - $12.44
---------
Outstanding at August 31, 1995 962,108 $11.25 - $12.44
Granted 183,500 $15.25 - $16.00
Exercised (55,982) $11.25 - $12.44
Cancelled (145,861) $11.25 - $11.25
---------
Outstanding at August 31, 1996 943,765 $11.25 - $16.00
---------
---------
As of August 31, 1996, options to purchase 143,705 shares were exercisable under
the employee plan, and 1,433,971 shares of common stock were reserved for future
issuance in connection with this plan. Options for 10,000 and 90,000 shares of
PEI common stock were issued to certain non-employee directors of the Company
during fiscal 1996 and 1995, respectively, at prices ranging from $12.00 to
$15.63 per share that were equal to the market price on the date of grant. As
of August 31, 1996, 18,000 options were exercisable under the director plan, and
there were 150,000 shares of common stock reserved for future issuance in
connection with this plan.
43
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- STOCK OPTION PLANS (CONTINUED)
Certain employees of PEI continue to participate in various PriceCostco stock
option plans. Pursuant to terms of the Exchange Agreement, these employees will
generally be allowed to continue to hold those vested, but unexercised,
PriceCostco stock options as of January 1, 1995, under terms and conditions set
forth in the related PriceCostco stock option agreements. As of August 31,
1996, stock options for 375,162 shares of PriceCostco common stock were
exercisable by PEI employees at prices ranging from $13.15 to $27.23.
NOTE 10 -- BUSINESS SEGMENTS
The Company has investments in two business segments: (1) real estate
operations, and (2) certain merchandising businesses. The real estate segment
consists primarily of investment properties, properties held for sale, the Atlas
Note and the City Notes. Merchandising activities include Price Quest, Price
Global Trading, Price Ventures and Mexico Clubs.
Certain real estate properties are being held for sale and produce little, if
any, return on investment. With respect to the merchandising segment,
elimination of the Price Club Mexico activities by PEI was significant in that
the Company had historically recovered from Price Club Mexico all of its U.S.-
based overhead expenses while also recognizing its share of the joint venture's
operating profits. In fiscal 1995, however, the Company recorded losses from
the Mexico operations through March 1995, a loss was recognized when its
interest was sold to PriceCostco, and the Company was not able to fully recover
its overhead costs thereafter. The Company's segment information is as follows
for the years ended August 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Real estate $ 57,085 $ 51,716 $ 35,790
Merchandising 38,920 67,113 53,015
-------- -------- --------
Total revenues $ 96,005 $118,829 $ 88,805
-------- -------- --------
-------- -------- --------
Income (loss) before income taxes:
Real estate $ 17,283 $ 24,701 $(67,263)
Merchandising, net of minority interest (11,431) (15,440) (883)
General and administrative, interest and other expenses (4,498) (3,526) (1,600)
-------- -------- --------
Total income (loss) before income taxes $ 1,354 $ 5,735 $(69,746)
-------- -------- --------
-------- -------- --------
Identifiable assets:
Real estate $541,345 $551,838 $550,086
Merchandising 6,595 15,483 100,467
-------- -------- --------
Total identifiable assets $547,940 $567,321 $650,553
-------- -------- --------
-------- -------- --------
Depreciation and amortization:
Real estate $ 10,071 $ 10,245 $ 7,102
Merchandising 1,672 3,187 591
-------- -------- --------
Total depreciation and amortization $ 11,743 $ 13,432 $ 7,693
-------- -------- --------
-------- -------- --------
Capital expenditures:
Real estate $ 17,053 $ 18,529 $ 41,717
44
<PAGE>
Merchandising 2,561 6,242 2,911
-------- -------- --------
Total capital expenditures $ 19,614 $ 24,771 $ 44,628
-------- -------- --------
-------- -------- --------
</TABLE>
45
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
1996 1995 1994
-------- -------- --------
Current:
Federal $(1,285) $ 7,236 $ 7,066
State (513) 1,418 1,126
-------- -------- --------
(1,798) 8,654 8,192
Deferred:
Federal 1,887 (3,513) (31,168)
State 1,175 48 (5,291)
-------- -------- --------
3,062 (3,465) (36,459)
-------- -------- --------
Total provision (benefit) $ 1,264 $ 5,189 $(28,267)
-------- -------- --------
-------- -------- --------
A reconciliation between the federal statutory rate and the effective tax rate
follows (in thousands):
1996 1995 1994
-------- -------- --------
Federal taxes (benefit) at the statutory rate $ 473 $ 2,007 $(24,411)
State taxes, net of federal benefit 81 690 (4,220)
Tax losses of 51%-owned subsidiaries 708 1,538 ---
Price Club Mexico operations --- 893 ---
All other, net 2 61 364
-------- -------- --------
Total provision (benefit) $ 1,264 $ 5,189 $(28,267)
-------- -------- --------
-------- -------- --------
The significant components of deferred income taxes are attributable to the
following temporary differences (in thousands):
August 31, August 31,
1996 1995
---------- ----------
Deferred tax assets:
Real estate properties $19,521 $21,178
City notes receivable 11,756 11,546
Net operating losses 5,437 4,654
International revenues and expenses 241 836
Inventory and equipment reserves 304 715
All other, net 686 849
------- -------
37,945 39,778
Deferred tax liabilities:
Deferred rental income (4,345) (2,977)
Deferred state income tax (1,261) (1,824)
All other, net --- (8)
------- -------
(5,606) (4,809)
Valuation allowance (5,437) (4,654)
------- -------
Net deferred tax assets $26,902 $30,315
------- -------
------- -------
46
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
At August 31, 1996 and 1995 Price Global Trading and Price Quest had combined
net operating loss (NOL) carryforwards of approximately $11.5 million and $9.8
million, respectively, for federal income tax purposes which may be applied
against future taxable income. A valuation allowance was established for the
potential tax benefit of these NOL carryforwards as the certainty of their
ultimate utilization is not sufficient to allow for deferred tax assets to be
recorded. These NOL carryforwards will expire in 2009 unless previously
utilized. A short-term deferred tax asset of $1.3 million and $1.0 million in
1996 and 1995, respectively, is included in current assets. During fiscal 1996
deferred tax assets of $351,000, representing PriceCostco's interest in such
assets, was offset against PriceCostco's minority interest in Price Quest.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Price Enterprises is the lessee of four former warehouse club properties with
remaining terms ranging from one to 23 years. Aggregate rental expense for
fiscal 1996 and 1995 was $2.5 million and $2.4 million, respectively. Future
minimum payments during the next five fiscal years and thereafter under these
noncancelable leases at August 31, 1996 were as follows (in thousands):
1997 $ 1,915
1998 1,716
1999 1,605
2000 1,272
2001 1,272
Thereafter 13,790
--------
Total minimum payments $ 21,570
--------
--------
The above properties are subleased to others. Included in other current
liabilities are amounts which represent future minimum lease payments in excess
of expected future sublease receipts of $1.5 million and $2.6 million for fiscal
1996 and 1995, respectively. As of August 31, 1996, total future sublease
revenues are $28.4 million, and such amounts are included in future minimum
rental income amounts in Note 3 of these financial statements.
IN RE PRICE/COSTCO SHAREHOLDERS' LITIGATION, United States District Court for
the Western District of Washington, No. C94-1874C: This consolidated action was
commenced on December 19, 1994 alleging the violation of certain state and
federal laws arising from the spin-off of the Company from PriceCostco, Inc. and
the prior merger between The Price Company and Costco Wholesale Corporation.
The defendants named in the Second Amended Complaint were the Company,
PriceCostco and the members of PriceCostco's Board of Directors at the time of
the spin-off transaction. A tentative settlement has been reached, which is
subject to court approval. The settlement involves certain agreements between
the Company and PriceCostco regarding
47
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Price Global Trading, LLC and Price Quest, LLC, including the elimination of
certain non-compete and operating agreements and the Company's assumption of
sole ownership of those entities. In addition, certain trademark and license
agreements between the Company and PriceCostco will be terminated. For Price
Global Trading the remaining non-compete restrictions and trademark rights
involving the Company and PriceCostco relate to Panama, Guam and the Northern
Mariana Islands. For Price Quest the remaining non-compete restrictions and
obligations involving the Company and PriceCostco relate to the automobile
advertising/referral and travel businesses. Plaintiffs' counsel will seek an
award of attorneys' fees of up to $4.25 million, of which the Company has agreed
to contribute $1.25 million which was accrued for in fourth quarter fiscal 1996;
the Company's payment will be decreased proportionally if the actual award is
lower.
NOTE 13 - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal 1995
Revenues $42,085 $27,300 $24,803 $24,641
Operating expenses 40,659 26,108 23,876 31,734
Operating income (loss) 1,426 1,192 927 (7,093)
Net income (loss) 2,676 (376) 622 (2,376)
Net income (loss) per share .10 (.01) .03 (.10)
Fiscal 1996
Revenues $31,483 $19,956 $21,876 $22,690
Operating expenses 30,445 20,818 19,463 35,954
Operating income (loss) 1,038 (862) 2,413 (13,264)
Net income (loss) 2,093 1,764 2,867 (6,634)
Net income (loss) per share .09 .08 .12 (.28)
</TABLE>
The first quarter includes 16 weeks of merchandising operations, whereas all
other quarters include 12 weeks, except for fourth quarter fiscal 1995 which
includes 13 weeks. Significant fourth quarter adjustments include $17.0 million
and $5.0 million for fiscal years 1996 and 1995, respectively, related to the
write-down of real estate properties being held for sale.
48
<PAGE>
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes, and financing activities not
affecting cash, are as follows (in thousands):
Year Ended August 31,
1996 1995 1994
------ ------ ------
Interest expense paid to PriceCostco $2,911 $ 8,140 $8,192
Income taxes 829 1,261 ---
Treasury stock acquired for note payable --- $45,925 ---
NOTE 15 - SUBSEQUENT EVENT
Subsequent to year-end the Company declared a cash dividend of $0.30 per share,
totaling approximately $7.0 million, payable on November 15, 1996 to
stockholders of record on November 1, 1996.
49
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Price Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Price
Enterprises, Inc. as of August 31, 1996 and 1995 and the related consolidated
statements of income, stockholders' equity and cash flows for the fiscal years
ended August 31, 1996 and 1995. 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. The consolidated financial statements of Price
Enterprises, Inc. for the fiscal year ended August 31, 1994, were audited by
other auditors whose report dated November 14, 1994, expressed an unqualified
opinion on those statements.
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. as of August 31, 1996 and 1995 and the consolidated results of
its operations and its cash flows for the fiscal years ended August 31, 1996 and
1995 in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California
October 9, 1996
50
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Price Enterprises, Inc.:
We have audited the statements of income, stockholders' equity and cash flows of
Price Enterprises, Inc. for the year ended August 31, 1994. These financial
statements are the responsibility of Price Enterprises, Inc.'s management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements of Price Enterprises, Inc. referred
to above present fairly, in all material respects, the results of its
operations and its cash flows for the year ended August 31, 1994 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington
November 14, 1994
51
<PAGE>
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
52
<PAGE>
PART III
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Registrant, see
Item 4A -- "Executive Officers of the Registrant" at the end of Part I of this
report. The information required by this Item concerning the Directors and
nominees for Director of the Company is incorporated herein by reference to
Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be
held on January 14, 1997, to be filed with the Commission pursuant to Regulation
14A.
ITEM 11 -- EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to Price
Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be held
on January 14, 1997, to be filed with the Commission pursuant to Regulation 14A.
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to Price
Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be held
on January 14, 1997, to be filed with the Commission pursuant to Regulation 14A.
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to Price
Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be held
on January 14, 1997, to be filed with the Commission pursuant to Regulation 14A.
53
<PAGE>
PART IV
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
Page
----
(1) (A) Report of Independent Auditors 46
Report of Independent Public Accountants 47
(B) Financial Statements
(i) Consolidated Balance Sheets as of
August 31, 1995 and 1994 28
(ii) Consolidated Statements of Income for the
Years Ended August 31, 1995, 1994 and 1993 29
(iii) Consolidated Statements of Stockholders'
Equity for the Years Ended August 31, 1995,
1994 and 1993 30
(iv) Consolidated Statements of Cash Flows for
the Years Ended August 31, 1995, 1994 and 1993 31
(v) Notes to Consolidated Financial Statements 32
(2) Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation 55
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission
of the schedule or because the information required is included in the
consolidated financial statements and notes hereto.
(3) For a list of exhibits filed with this annual report, refer to the
exhibit index on page 59.
(b) The Company filed a report on Form 8-K on July 31, 1996.
(1) The announcement that a tentative settlement agreement had been
reached of the class and derivative action pending in the United
States District Court, Western District of Washington, entitled IN RE
PRICECOSTCO SHAREHOLDER LITIGATION.
(c) Exhibits: For a list of exhibits filed with this annual report, refer to
the exhibit index on page 59.
54
<PAGE>
<TABLE>
<CAPTION>
PRICE ENTERPRISES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
AUGUST 31, 1996
(AMOUNTS IN THOUSANDS)
Gross amount at which carried
Initial Costs Costs at close of period
-------------------------- Capitalized ---------------------------------
Land and Building and Subsequent Land and Building and
Location Description Improvements Improvements to Acquisition Improvements Improvements Total (1)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Westbury, NY Shopping Center $ 41,784 $ 0 $ 28,323 $ 46,620 $ 23,487 $ 70,107
Pentagon City, VA Shopping Center 24,742 14,473 25,125 26,290 38,050 64,340
Wayne, NJ Shopping Center 19,760 6,912 12,249 22,200 16,721 38,921
Philadelphia, PA Shopping Center 8,649 4,382 12,204 9,086 16,149 25,235
Dallas, TX Retail Building 10,662 0 13,329 12,447 11,544 23,991
San Diego, CA Warehouse/
Office Building 5,244 7,990 10,529 5,710 17,874 23,584
Seekonk, MA Shopping Center 7,636 0 12,564 10,088 10,112 20,200
Signal Hill, CA Shopping Center 5,872 0 10,216 8,285 7,803 16,088
Fountain Valley, CA Shopping Center 4,551 0 10,347 6,595 8,303 14,898
Glen Burnie, MD Shopping Center 1,795 0 8,845 3,808 6,832 10,640
Moorsetown, NJ
(leased land) Shopping Center Leased 0 7,984 0 7,984 7,984
Northridge, CA Shopping Center 4,029 0 3,586 5,105 2,510 7,615
Azusa, CA Warehouse/
Rest. Pads 4,248 896 2,212 4,336 3,020 7,356
San Diego/Carmel Mtn., CA Shopping Center 3,464 0 3,431 3,742 3,153 6,895
Worcester, MA Retail Building 5,154 0 1,245 2,835 3,564 6,399
Sacramento/Stockton, CA Shopping Center 1,437 0 3,611 2,481 2,567 5,048
San Juan Capistrano, CA Shopping Center 3,150 0 1,285 2,034 2,401 4,435
Tucson, AZ Shopping Center 1,073 0 2,753 1,788 2,038 3,826
Hampton, VA Shopping Center 1,132 0 1,826 1,436 1,522 2,958
Smithtown, NY Retail Building 721 0 2,022 1,231 1,512 2,743
Redwood City, CA Retail Building 1,860 0 235 2,095 0 2,095
Denver/Littleton, CO Retail Building 607 847 424 584 1,294 1,878
Denver/Aurora, CO Restaurant 105 0 647 173 579 752
San Diego/Southeast, CA Restaurant/Bank 217 0 387 170 434 604
Chula Vista/
Rancho del Rey, CA Land 915 0 (415) 500 0 500
- ------------------------------------------------------------------------------------------------------------------------------
Total Investment
Properties 158,807 35,500 174,964 179,639 189,453 369,092
- ------------------------------------------------------------------------------------------------------------------------------
Houston, TX Retail Building 10,089 0 163 7,009 3,243 10,252
Bakersfield, CA Shopping Center 1,957 2,484 3,257 2,648 5,050 7,698
Sacramento/
65th Expressway, CA Shopping Center 1,719 5,636 258 1,382 6,231 7,613
Buffalo, NY Retail Building 2,503 0 4,133 3,656 2,980 6,636
Schaumburg, IL Land 6,221 0 (471) 5,750 0 5,750
Inglewood, CA Warehouse Building 1,438 0 3,709 1,666 3,481 5,147
Riverside/La Sierra, CA Warehouse Building 3,301 0 641 1,874 2,068 3,942
New Britain, CT Warehouse Building 3,640 0 158 2,579 1,219 3,798
Colton, CA Retail Building 2,002 926 844 1,978 1,794 3,772
Washington Metro, MD Industrial Building 3,192 0 511 1,398 2,305 3,703
Fresno, CA Land 3,866 0 (186) 3,680 0 3,680
Santee, CA Warehouse Building 643 2,249 656 526 3,022 3,548
Richmond, VA Land 2,751 0 (694) 2,057 0 2,057
Sacramento/
Rancho Cordova, CA Land 2,382 0 (482) 1,900 0 1,900
Mesa/Broadway, AZ Retail Building 175 0 1,363 325 1,213 1,538
Gaithersburg, MD Land 3,000 0 (1,496) 1,500 4 1,504
Sterling, VA Land 2,021 0 (586) 1,430 5 1,435
Carlsbad, CA Land 300 0 1,100 1,400 0 1,400
Chula Vista/Oxford St., CA Land 3,104 0 (1,765) 1,339 0 1,339
East Mesa/
Superstition Springs, AZ Land 2,086 0 (1,105) 981 0 981
San Jose, CA Industrial Building Leased 0 942 0 942 942
Concord, CA Land 1,735 0 (810) 925 0 925
Santa Clarita, CA Land 1,115 0 (215) 900 0 900
Sacramento/
No. Highlands, CA Land 374 0 259 633 0 633
Riverside/Third St., CA Industrial Building 78 493 27 77 521 598
Palm Desert, CA Land 500 0 0 500 0 500
Fountain Valley, CA Land 475 0 0 475 0 475
Rancho Cucamonga, CA Land 805 0 (400) 405 0 405
Tucson, AZ Land 400 0 0 400 0 400
Denver/Westminster, CO Land 305 0 0 305 0 305
Rohnert Park, CA Land 300 0 0 300 0 300
Baltimore, MD Land 585 115 (488) 202 10 212
Tacoma, WA Warehouse Building Leased 0 139 0 139 139
Denver/Aurora, CO Land 90 0 22 112 0 112
Milwaukee, WI Retail Building Leased 0 41 0 41 41
- ------------------------------------------------------------------------------------------------------------------------------
Total properties held
for sale 63,152 11,903 9,525 50,312 34,268 84,580
- ------------------------------------------------------------------------------------------------------------------------------
Provision for asset
impairments (17,000) (2)
- ------------------------------------------------------------------------------------------------------------------------------
Total properties $221,959 $47,403 $184,489 $229,951 $223,721 $436,672
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Depreciable Life
---------------------------------------------------
Accumulated Date of Date of Land Building
Location Description Depreciation Construction Acquisition Improvements Building Improvements
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Westbury, NY Shopping Center $ (3,457) 1992-93 1992 25 25 10
Pentagon City, VA Shopping Center (3,217) 1993-94 1993 25 25 10
Wayne, NJ Shopping Center (3,096) 1991-93 1991 25 25 10
Philadelphia, PA Shopping Center (1,778) 1992,1994-95 1991 25 25 10
Dallas, TX Retail Building (1,083) 1991-92 1991 25 25 10
San Diego, CA Warehouse/
Office Building (8,927) 1981 25 25 10
Seekonk, MA Shopping Center (1,688) 1991-94 1991 25 25 10
Signal Hill, CA Shopping Center (1,021) 1992-93 1991 25 25 10
Fountain Valley, CA Shopping Center (1,337) 1990-93 1989 25 25 10
Glen Burnie, MD Shopping Center (1,228) 1990-92 1985 25 25 10
Moorsetown, NJ
(leased land) Shopping Center (1,563) 1989-91 1989 25 25 10
Northridge, CA Shopping Center (255) 1993-94 1988 25 25 10
Azusa, CA Warehouse/
Rest. Pads (476) 1983 1983 25 25 10
San Diego/Carmel Mtn., CA Shopping Center (378) 1992-93 1991 25 25 10
Worcester, MA Retail Building (468) 1992 1992 25 25 10
Sacramento/Stockton, CA Shopping Center (140) 1994-95 1993 25 25 10
San Juan Capistrano, CA Shopping Center (320) 1988-89,94-95 1987 25 25 10
Tucson, AZ Shopping Center (437) 1989-91 1988 25 25 10
Hampton, VA Shopping Center (281) 1992 1987 25 25 10
Smithtown, NY Retail Building (688) 1988-89 1985 25 25 10
Redwood City, CA Retail Building 0 1982 - - -
Denver/Littleton, CO Retail Building (219) 1990 25 25 10
Denver/Aurora, CO Restaurant (70) 1993 1990 25 25 10
San Diego/Southeast, CA Restaurant/Bank (235) 1989-90 1989 25 25 10
Chula Vista/
Rancho del Rey, CA Land 0 1993 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total Investment
Properties (32,362)
- ----------------------------------------------------------------------------------------------------------------------------------
Houston, TX Retail Building (596) 1991 25 25 10
Bakersfield, CA Shopping Center (1,157) 1990 25 25 10
Sacramento/
65th Expressway, CA Shopping Center (2,464) 1987 25 25 10
Buffalo, NY Retail Building (1,138) 1989-90 1989 25 25 10
Schaumburg, IL Land 0 1992 - - -
Inglewood, CA Warehouse Building (967) 1989 1984 25 25 10
Riverside/La Sierra, CA Warehouse Building (628) 1986 1986 25 25 10
New Britain, CT Warehouse Building (332) 1991 25 25 10
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
Depreciable Life
---------------------------------------------------
Accumulated Date of Date of Land Building
Location Description Depreciation Construction Acquisition Improvements Building Improvements
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Colton, CA Retail Building (1,275) 1981 25 25 10
Washington Metro, MD Industrial Building (886) 1986 25 25 10
Fresno, CA Land 0 1992 - - -
Santee, CA Warehouse Building (554) 1988 25 25 10
Richmond, VA Land (40) 1990 - - -
Sacramento/
Rancho Cordova, CA Land 0 1989 - - -
Mesa/Broadway, AZ Retail Building (213) 1993 1979 25 25 10
Gaithersburg, MD Land 0 1989 - - -
Sterling, VA Land (1) 1990 - - -
Carlsbad, CA Land (68) 1989 25 - -
Chula Vista/
Oxford St., CA Land 0 1985 25 25 10
East Mesa/
Superstition Springs, AZ Land 0 1988 - - -
San Jose, CA Industrial Building (942) 1986 - - -
Concord, CA Land 0 1988 - - -
Santa Clarita, CA Land 0 1991 - - -
Sacramento/
No. Highlands, CA Land 0 1988 1986 - - -
Riverside/Third St., CA Industrial Building (188) 1988 25 25 10
Palm Desert, CA Land 0 1990 - - -
Fountain Valley, CA Land 0 1989 - - -
Rancho Cucamonga, CA Land 0 1992 - - -
Tucson, AZ Land 0 1988 - - -
Denver/Westminster, CO Land 0 1990 - - -
Rohnert Park, CA Land 0 1991 - - -
Baltimore, MD Land 0 1986 - - -
Tacoma, WA Warehouse Building (139) 1979 - - -
Denver/Aurora, CO Land 0 1990 - - -
Milwaukee, WI Retail Building (41) 1986 - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total properties held
for sale (11,629)
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for asset impairments
Total properties $(43,991)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The aggregate cost for Federal income tax purposes is $487,623.
(2) Provision for asset impairments represents a reserve against essentially
all properties held for sale to reduce their net carrying values to the net
proceeds expected upon sale.
56
<PAGE>
PRICE ENTERPRISES, INC.
SCHEDULE III (CONTINUED)
REAL ESTATE AND ACCUMULATED DEPRECIATION
(AMOUNTS IN THOUSANDS)
Fiscal Year
----------------------------
Reconciliation to Reported Amounts 1996 1995 1994
- ---------------------------------- ------- -------- --------
PROPERTY AND EQUIPMENT
Balance at beginning of year. . . . . . . . . . $469,337 $476,340 $415,236
Additions during the year:
Transfers from PriceCostco . . . . . . . . . . --- 2,100 139,097
Purchases. . . . . . . . . . . . . . . . . . . 17,003 18,329 42,367
Deductions during the year:
Cost of properties sold. . . . . . . . . . . . (32,668) (22,432) (43,510)
Asset impairment loss. . . . . . . . . . . . . (17,000) (5,000) (76,850)
-------- -------- --------
Subtotal . . . . . . . . . . . . . . . . . . 436,672 469,337 476,340
-------- -------- --------
-------- -------- --------
Other:
Foreign property acquired by PGT joint venture 1,946 --- ---
FF&E . . . . . . . . . . . . . . . . . . . . . 5,856 7,928 4,375
-------- -------- --------
Balance at end of year. . . . . . . . . . . . . $444,474 $477,265 $480,715
-------- -------- --------
-------- -------- --------
ACCUMULATED DEPRECIATION
Balance at beginning of year. . . . . . . . . . $ 39,282 $ 32,332 $ 29,473
Depreciation expense. . . . . . . . . . . . . . 9,433 9,813 6,752
Accumulated depreciation of properties sold . . (4,724) (2,863) (9,106)
Transfers from PriceCostco. . . . . . . . . . . --- --- 11,351
Asset impairment loss . . . . . . . . . . . . . --- --- (6,138)
-------- -------- --------
Subtotal. . . . . . . . . . . . . . . . . . . 43,991 39,282 32,332
Other:
Accumulated depreciation of foreign property . --- --- ---
Accumulated depreciation of FF&E . . . . . . . 3,469 3,194 996
-------- -------- --------
Balance at end of year. . . . . . . . . . . . . $ 47,460 $ 42,476 $ 33,328
-------- -------- --------
-------- -------- --------
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned there unto duly authorized.
PRICE ENTERPRISES, INC.
DATED: November 20, 1996 By: /s/ Robert E. Price
----------------- --------------------------
Robert E. Price
President and
Chief Executive Officer
DATED: November 20, 1996 By: /s/ Daniel T. Carter
----------------- --------------------------
Daniel T. Carter
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Robert E. Price November 20, 1996
- ------------------------------------------------ -----------------
ROBERT E. PRICE, Chairman of the Board of Date
Directors, Chief Executive Officer and President
/s/ Paul A. Peterson November 20, 1996
- ------------------------------------------------ -----------------
PAUL A. PETERSON, Vice Chairman of the Date
Board of Directors
/s/ Nancy Y. Bekavac November 20, 1996
- ------------------------------------------------ -----------------
NANCY Y. BEKAVAC, Director Date
/s/ William P. Dickey November 20, 1996
- ------------------------------------------------ -----------------
WILLIAM P. DICKEY, Director Date
/s/ Murray L. Galinson November 20, 1996
- ------------------------------------------------ -----------------
MURRAY L. GALINSON, Director Date
/s/ Katherine L. Hensley November 20, 1996
- ------------------------------------------------ -----------------
KATHERINE L. HENSLEY, Director Date
/s/ Leon C. Janks November 20, 1996
- ------------------------------------------------ -----------------
LEON C. JANKS, Director Date
58
<PAGE>
EXHIBIT INDEX
DESCRIPTION
PAGE
- ---
2.1 Amended and Restated Agreement of Transfer and Plan of Exchange, dated
as of November 14, 1994, by and between Price/Costco, Inc. and Price
Enterprises, Inc. (incorporated herein by reference to Exhibit 2.1 to
Registration Statement on Form 10 of Price Enterprises, Inc. filed
with the Commission on December 13, 1994 (File No. 0-20449)) . . . .
3.1 Certificate of Incorporation of Price Enterprises, Inc. (incorporated
herein by reference to Exhibit 3.1 to the Registration Statement on
Form S-4 of Price Enterprises, Inc. filed with the Commission on
September 15, 1994 (File No. 33-55481)). . . . . . . . . . . . . . .
3.1(a) Certificate of Amendment to Certificate of Incorporation of Price
Enterprises, Inc. (incorporated herein by reference to Exhibit 3.1(a)
to Post-Effective Amendment No. 1 to the Registration Statement on
Form S-4 of Price Enterprises, Inc. filed with the Commission on
December 2, 1994 (File No. 33-55481)). . . . . . . . . . . . . . . .
3.2 Form of Restated Certificate of Incorporation of Price Enterprises,
Inc. (incorporated herein by reference to Exhibit 3.2 to Registration
Statement on Form 10 of Price Enterprises, Inc. filed with the
Commission on December 13, 1994 (File No. 0-20449)). . . . . . . . .
3.3 Bylaws of Price Enterprises, Inc. (incorporated herein by reference to
Exhibit 3.3 to the Registration Statement on Form S-4 of Price
Enterprises, Inc. filed with the Commission on September 15, 1994
(File No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . .
3.4 Form of Amended and Restated Bylaws of Price Enterprises, Inc.
(incorporated herein by reference to Exhibit 3.4 to Registration
Statement on Form 10 of Price Enterprises, Inc. filed with the
Commission on December 13, 1994 (File No. 0-20449)). . . . . . . . .
4.1 Form of Price Enterprises, Inc. Stock Certificate (incorporated herein
by reference to Exhibit 4.1 to Amendment No. 2 to the Registration
Statement on Form S-4 of Price Enterprises, Inc. filed with the
Commission on November 17, 1994 (File No. 33-55481)) . . . . . . . .
4.2 The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan
(the "Stock Plan" ) (incorporated herein by reference to Exhibit 10.23
to Registration Statement on Form 10 of Price Enterprises, Inc. filed
with the Commission on December 13, 1994 (File No. 0-20449))
4.3 Form of Incentive Stock Option Agreement under the Stock Plan
(incorporated herein by reference to Exhibit 4.2 of the Registration
Statement on Form S-8 of Price Enterprises, Inc. filed with the
Commission on July 13, 1995 (File No. 33-60999)) . . . . . . . . . .
4.4 Form of Non-Qualified Stock Option Agreement under the Stock Plan
(incorporated herein by reference to Exhibit 4.3 of the Registration
Statement on Form S-8 of Price Enterprises, Inc. filed with the
Commission on July 13, 1995 (File No. 33-60999)) . . . . . . . . . .
59
<PAGE>
4.5 The Price Enterprises Directors' 1995 Stock Option Plan (the
"Directors' Plan") (incorporated herein by reference to Exhibit 10.24
to Registration Statement on Form 10 of Price Enterprises, Inc. filed
with the Commission on December 13, 1994 (File No. 0-20449)) . . . .
4.6 Form of Non-Qualified Stock Option Agreement under the Directors' Plan
(incorporated herein by reference to Exhibit 4.5 of the Registration
Statement on Form S-8 of Price Enterprises, Inc. filed with the
Commission on July 13, 1995 (File No. 33-60999)) . . . . . . . . . .
10.1 Form of Revolving Credit Agreement between Price Enterprises, Inc. and
First Interstate Bank of California dated as of May 17, 1995
(incorporated herein by reference to Exhibit 10.1 of the Quarterly
Report on Form 10-Q for the period ending June 4, 1995, filed with the
Commission on July 18, 1995) . . . . . . . . . . . . . . . . . . . .
10.2 Operating Agreement, dated as of August 28, 1994, by and among Price
Global Trading, Inc., Price Enterprises, Inc., Price/Costco, Inc. and
The Price Company (incorporated herein by reference to Exhibit 10.7 to
Amendment No. 1 to the Registration Statement on Form S-4 of Price
Enterprises, Inc. filed with the Commission on November 3, 1994 (File
No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3 Operating Agreement, dated as of August 28, 1994, by and among Price
Quest, Inc., Price Enterprises, Inc., Price/Costco, Inc. and The Price
Company (incorporated herein by reference to Exhibit 10.6 to Amendment
No. 1 to the Registration Statement on Form S-4 of Price Enterprises,
Inc. filed with the Commission on November 3, 1994 (File No.
33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.4 License Agreement, dated as of August 28, 1994, by and among Price/
Costco, Inc., The Price Company, Price Quest, Inc. and Price
Enterprises, Inc. (incorporated herein by reference to Exhibit 10.11
to Amendment No. 1 to the Registration Statement on Form S-4 of Price
Enterprises, Inc. filed with the Commission on November 3, 1994 (File
No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.5 License Agreement, dated as of August 28, 1994, by and among Price/
Costco, Inc., The Price Company, Price Global Trading, Inc. and Price
Enterprises, Inc. (incorporated herein by reference to Exhibit 10.12
to Amendment No. 1 to the Registration Statement on Form S-4 of Price
Enterprises, Inc. filed with the Commission on November 3, 1994 (File
No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.6 Form of lease between Price Enterprises, Inc. and The Price Company
with respect to the Price Club at Pentagon Centre, Arlington County,
Virginia (incorporated herein by reference to Exhibit 10.1 to
Amendment No. 2 to the Registration Statement on Form S-4 of Price
Enterprises, Inc. filed with the Commission on November 17, 1994 (File
No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.7 Form of lease between Price Enterprises, Inc. and The Price Company
with respect to the Price Club at 4605 Morena Boulevard, San Diego,
California (incorporated herein by reference to Exhibit 10.18 to
Amendment No. 2 to the Registration Statement on Form S-4 of Price
Enterprises, Inc. filed with the Commission on November 17, 1994 (File
No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.8 Form of lease between Price Enterprises, Inc. and The Price Company
with respect to the Price Club at Wayne, New Jersey (incorporated
herein by reference to Exhibit 10.19 to Amendment No. 2 to the
Registration Statement on Form S-4 of Price Enterprises, Inc. filed
with the Commission on November 17, 1994 (File No. 33-55481)). . . .
60
<PAGE>
10.9 Form of lease between Price Enterprises, Inc. and The Price Company
with respect to the Price Club at Westbury, New York (incorporated
herein by reference to Exhibit 10.20 to Amendment No. 2 to the
Registration Statement on Form S-4 of Price Enterprises, Inc. filed
with the Commission on November 17, 1994 (File No. 33-55481)). . . .
10.10 Employment Agreement, dated as of September 20, 1994, by and between
Price Enterprises, Inc. and Robert M. Gans (incorporated herein by
reference to Exhibit 10.14 to Amendment No. 1 to the Registration
Statement on Form S-4 of Price Enterprises, Inc. filed with the
Commission on November 3, 1994 (File No. 33-55481)). . . . . . . . .
10.11 Employment Agreement, dated as of March 8, 1996, by and between Price
Enterprises, Inc. and George J. Apostol. . . . . . . . . . . . . . .
10.12 Form of Indemnity Agreement (incorporated herein by reference to
Exhibit 10.17 to Amendment No. 2 to the Registration Statement on Form
S-4 of Price Enterprises, Inc. filed with the Commission on November
17, 1994 (File No. 33-55481)). . . . . . . . . . . . . . . . . . . .
10.13 Form of Amended and Restated Loan Agreement between Atlas Hotels, Inc.
and Price Enterprises, Inc. dated as of March 31, 1995 (incorporated
herein by reference to Exhibit 10.2 of Price Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the period ending, June 4, 1995,
filed with the Commission on July 18, 1995). . . . . . . . . . . . .
10.14 Form of Amended and Restated Promissory Note Secured by Deed of Trust
dated March 31, 1995 made by Atlas Hotels, Inc. in favor of Price
Enterprises, Inc. (incorporated herein by reference to Exhibit 10.3 of
Price Enterprises, Inc.'s Quarterly Report on Form 10-Q for the period
ending June 4, 1995, filed with the Commission on July 18, 1995) . .
10.15 Form of Amended and Restated Deed of Trust with Assignment of Leases
and Rents and Fixture Filing made as of March 31, 1995 by and among
Atlas Hotels, Inc., Chicago Title Company and Price Enterprises, Inc.
(incorporated herein by reference to Exhibit 10.4 of Price
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the period
ending June 4, 1995, filed with the Commission on July 18,1995). . .
10.16 Form of Amended and Restated Security Agreement made as of March 31,
1995 by Atlas Hotels, Inc. in favor of Price Enterprises, Inc.
(incorporated herein by reference to Exhibit 10.5 of Price
Enterprises, Inc.'s Quarterly Report on Form 10-Q for the period
ending June 4, 1995, filed with the Commission on July 18, 1995.). .
10.17 Form of Capital Reserve Agreement made as of March 31, 1995 by and
between Atlas Hotels, Inc. and Price Enterprises, Inc. (incorporated
herein by reference to Exhibit 10.6 of Price Enterprises, Inc.'s
Quarterly Report on Form 10-Q for the period ending June 4, 1995,
filed with the Commission on July 18, 1995). . . . . . . . . . . . .
21.1 List of Subsidiaries of Price Enterprises, Inc . . . . . . . . . . .
23.1 Consent of Arthur Andersen LLP . . . . . . . . . . . . . . . . . . .
23.2 Consent of Ernst & Young LLP . . . . . . . . . . . . . . . . . . . .
27.1 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . . .
61
<PAGE>
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into
as of March 8, 1996, by and between Price Enterprises, Inc., a Delaware
corporation ("Employer"), and George Apostol ("Executive").
RECITALS
A. Employer desires to employ Executive as Executive Vice President,
Corporate Development, of Employer.
B. Executive desires to accept such position upon the terms and
subject to the conditions herein provided.
TERMS AND CONDITIONS
NOW, THEREFORE, in consideration of the foregoing premises and mutual
covenants and conditions hereinafter set forth, and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE I
EMPLOYMENT AND DUTIES
1.1 POSITION AND DUTIES. Executive shall serve as Executive Vice
President, Corporate Development, of Employer. Executive shall have such duties
and authority as are customary for, and commensurate with, such position, and
such other related duties and authority as may from time to time be delegated or
assigned to him by the Chief Executive Officer or the Board of Directors of
Employer. Executive shall discharge his duties in a diligent and professional
manner.
1
<PAGE>
1.2 OUTSIDE BUSINESS ACTIVITIES PRECLUDED. During his employment,
Executive shall devote his full energies, interest, abilities and productive
time to the performance of this Agreement, consistent with the practices of
other executives of Employer. Executive shall not, without the prior written
consent of Employer, perform other services of any kind or engage in any other
business activity, with or without compensation, that would interfere with the
performance of his duties under this Agreement. Executive shall not, without
the prior written consent of Employer, engage in any activity adverse to
Employer's interests.
1.3 PLACE OF EMPLOYMENT. Unless the parties agree otherwise in
writing, during the Employment Term (as defined in Section 3.1 below) Executive
shall perform the services he is required to perform under this Agreement at
Employer's offices located in San Diego, California; provided, however, that
Employer may from time to time require Executive to travel temporarily to other
locations on Employer's business.
ARTICLE II
COMPENSATION
2.1 SALARY. For Executive's services hereunder, Employer shall pay
as base salary to Executive the amount of $150,000 during each year of the
Employment Term. Said salary shall be payable in equal installments in
conformity with Employer's normal payroll period. Executive's salary shall be
reviewed by Employer's Board of Directors from time to time at its discretion,
and Executive shall receive such salary increases, if any, as Employer's Board
of Directors, in its sole discretion, shall determine.
2.2 BONUS. In addition to the salary set forth in Section 2.1 above,
during the Employment Term, Executive shall participate in Employer's bonus plan
for executive
2
<PAGE>
management personnel. All decisions regarding said bonus plan shall be made in
the sole discretion of Employer's Board of Directors, or the Compensation
Committee thereof.
2.3 OTHER BENEFITS. Executive shall be entitled to participate in
and receive benefits under Employer's standard company benefits practices and
plans for officers of Employer, including medical insurance, long-term
disability, life insurance, profit sharing and retirement plan, and Employer's
other plans (as well as Employer's standard indemnification agreement), subject
to and on a basis consistent with the terms, conditions and overall
administration of such practices and plans. In addition, Executive shall be
entitled to four (4) weeks' paid vacation each year, which if not used (in whole
or in part) in the year accrued will be deemed forfeited. Employer may in its
sole discretion grant such additional compensation or benefits to Executive from
time to time as Employer deems proper and desirable.
2.4 EXPENSES. Executive will receive a stipend in the amount of
$5,000 per month to defray Executive's out-of-pocket expenses, including
Executive's housing and transportation costs, related to his employment at
Employer's offices in San Diego, California (while Executive maintains another
residence in Los Angeles, California). In addition, during the term of his
employment hereunder, Executive shall be entitled to receive prompt
reimbursement for all other reasonable business-related expenses incurred by
him, in accordance with the policies and procedures from time to time adopted by
Employer, provided that Executive properly accounts for such business expenses
in accordance with Employer policy.
3
<PAGE>
2.5 STOCK OPTION PLAN. Employer has adopted The Price Enterprises
1995 Combined Stock Grant and Stock Option Plan (the "Stock Plan"). Executive
will receive options to purchase 75,000 shares of Employer's Common Stock,
exercisable at a price equal to the fair market value of the Common Stock at the
time of grant (which shall be five business days after the commencement of
Executive's term of employment), with such options vesting at twenty percent
(20%) per year over a period of five (5) years and expiring six (6) years from
the date of grant. Such anticipated grant of options to purchase 75,000 shares
of Common Stock shall be subject in all respects to the sole discretion of the
Compensation Committee of Employer's Board of Directors, as set forth in the
Stock Plan. In addition, such options shall be granted in accordance with and
subject to all other terms, conditions and restrictions set forth in the Stock
Plan.
2.6 DEDUCTIONS AND WITHHOLDINGS. All amounts payable or which
become payable under any provision of this Agreement shall be subject to any
deductions authorized by Executive and any deductions and withholdings required
by law.
ARTICLE III
TERM OF EMPLOYMENT
3.1 TERM. The term of Executive's employment hereunder shall
commence on March 11, 1996 and shall continue until March 10, 1998, unless
sooner terminated or extended as hereinafter provided (the "Employment Term").
3.2 EXTENSION OF TERM. The Employment Term may be extended by
written amendment to this Agreement signed by both parties.
4
<PAGE>
3.3 EARLY TERMINATION BY EXECUTIVE. Executive may terminate this
Agreement at any time by giving Employer written notice of his resignation
ninety (90) days in advance; provided, however, that the Board of Directors may
determine upon receipt of such notice that the effective date of such
resignation shall be immediate or some time prior to the expiration of the
ninety-day notice period. Executive's employment shall terminate as of the
effective date of his resignation as determined by the Board of Directors.
3.4 TERMINATION FOR CAUSE. Prior to the expiration of the Employment
Term, Executive's employment may be terminated for Cause by the Board of
Directors of Employer, immediately upon delivery of notice thereof. In such
event, Executive will be informed in writing as to the basis for such
termination and will be given an opportunity to address the Board of Directors
of Employer and request an opportunity to remedy such basis for termination.
Termination for "Cause" shall mean termination because of Executive's
(a) repeated and habitual failure to perform his duties or obligations
hereunder; (b) engaging in any act that has a direct, substantial and adverse
effect on Employer's interests; (c) personal dishonesty, willful misconduct, or
breach of fiduciary duty involving personal profit; (d) intentional failure to
perform his stated duties; (e) willful violation of any law, rule or regulation
which materially adversely affects his ability to discharge his duties or has a
direct, substantial and adverse effect on Employer's interests; (f) any material
breach of this contract by Executive; (g) conduct authorizing termination under
Cal. Labor Code Section 2924; or (h) inability to effectively perform his duties
in San Diego, California, due to Executive maintaining another residence (and
related personal obligations) in Los Angeles, California, resulting in a direct,
substantial and adverse effect on Employer's interests.
5
<PAGE>
3.5 TERMINATION DUE TO DEATH OR DISABILITY. Executive's
employment hereunder shall terminate immediately upon his death. In the
event that by reason of injury, illness or other physical or mental
impairment Executive shall be: (a) completely unable to perform his services
hereunder for more than three (3) consecutive months, or (b) unable to
perform his services hereunder for fifty percent (50%) or more of the normal
working days throughout six (6) consecutive months, then Employer may
terminate Executive's employment hereunder immediately upon delivery of
notice thereof. Executive's beneficiaries, estate, heirs, representatives, or
assigns, as appropriate, shall be entitled to the proceeds, if any, due under
any Employer-paid life insurance policy held by Executive, as determined by
and in accordance with the terms of any such policy, as well as any vested
benefits and accrued vacation benefits.
ARTICLE IV
BENEFITS AFTER TERMINATION OF EMPLOYMENT
4.1 BENEFITS UPON TERMINATION. Upon termination of the Agreement
for any reason, all salary and benefits of Executive hereunder shall cease
immediately, except as follows. Executive shall be entitled to the
continuation of Executive's base salary for a period of six (6) months following
termination (payable in equal installments in conformity with Employer's normal
payroll period) upon termination of this Agreement by Employer pursuant to
Section 3.4 (h).
Executive shall be entitled to a sum equal to all unpaid base salary
payable to Executive under Section 2.1, plus the sum of $150,000 (said sums to
be paid to Executive in equal installments through March 10, 1998, in conformity
with Employer's normal payroll period) provided, however, that the total of said
two sums shall not exceed $300,000 and that said sums
6
<PAGE>
shall be due only upon the following circumstances:
(i) termination of this Agreement by Employer for any reason other
than those set forth in Section 3.4 or Section 3.5, or,
(ii) in the event Robert Price no longer maintains his position as
Chief Executive Officer of Employer and within fifteen (15) days of such event
Executive gives Employer written notice of Executive's resignation, pursuant to
Section 3.3.
During the period of any such severance payments, Executive shall cooperate
with Employer in providing for the orderly transition of Executive's duties and
responsibilities to other individuals, as reasonably requested by Employer.
4.2 RIGHTS AGAINST EMPLOYER. The benefits payable under this Article
IV are exclusive, and no amount shall become payable to any person (including
the Executive) by reason of termination of employment for any reason, with or
without Cause, except as provided in this Article IV. Employer shall not be
obligated to segregate any of its assets or procure any investment in order to
fund the benefits payable under this Article IV.
ARTICLE V
CONFIDENTIAL INFORMATION
5.1 Executive acknowledges that Employer holds as confidential, and
Executive may have access to during the Employment Term, certain information and
knowledge respecting the intimate and confidential affairs of Employer in the
various phases of its business, including, but not limited to, trade secrets,
data and know-how, improvements, inventions, techniques, marketing plans,
strategies, forecasts, pricing information, and customer lists. During his
employment by Employer and thereafter, Executive shall not directly or
indirectly disclose
7
<PAGE>
such information to any person or use any such information, except as legally
required or as otherwise required in the course of his employment during the
Employment Term. All records, files, keys, documents, and the like relating to
Employer's business, which Executive shall prepare, copy or use, or come into
contact with, shall be and remain Employer's sole property, shall not be removed
from Employer's premises (other than in the ordinary course of business) without
its written consent, and shall be returned to Employer upon the termination of
this Agreement.
ARTICLE VI
GENERAL PROVISIONS
6.1 ENTIRE AGREEMENT. This Agreement contains the entire understanding
and sole and entire agreement between the parties with respect to the subject
matter hereof, and supersedes any and all prior agreements, negotiations and
discussions between the parties hereto with respect to the subject matter
covered hereby. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, oral or otherwise, have
been made by any party, or anyone acting on behalf of any party, which are not
embodied herein, and that no other agreement, statement or promise not contained
in this Agreement shall be valid or binding. This Agreement may not be modified
or amended by oral agreement, but rather only by an agreement in writing signed
by Employer and by Executive which specifically states the intent of the parties
to amend this Agreement.
6.2 ASSIGNMENT AND BINDING EFFECT. Neither this Agreement nor the rights
or obligations hereunder shall be assignable by the Executive (except as set
forth in Section 3.5). Employer may assign this Agreement to any successor or
affiliate of Employer, and upon such assignment any such successor or affiliate
shall be deemed substituted for Employer upon the terms and subject to the
conditions hereof. In the event of any merger of Employer or the transfer
8
<PAGE>
of all (or substantially all) of Employer's assets, the provisions of this
Agreement shall be binding upon, and inure to the benefit of, the surviving
business entity or the business entity to which such assets shall be
transferred.
6.3 ARBITRATION. The parties hereto agree that any and all disputes
(contract, tort, or statutory, whether under federal, state or local law)
between Executive and Employer (including Employer's employees, officers,
directors, stockholders, members, managers and representatives) arising out of
Executive's employment with Employer, the termination of that employment, or
this Agreement, shall be submitted exclusively to final and binding arbitration.
Such arbitration shall take place in the County of San Diego, and may be
compelled and enforced according to the California Arbitration Act (Code of
Civil Procedure Sections 1280 ET SEQ.). Unless the parties mutually agree
otherwise, such arbitration shall be conducted before the American Arbitration
Association, according to its Commercial Arbitration Rules. Judgment on the
award the arbitrator renders may be entered in any court having jurisdiction
over the parties. Arbitration shall be initiated in accordance with the
Commercial Arbitration Rules of the American Arbitration Association.
6.4 NO WAIVER. No waiver of any term, provision or condition of this
Agreement, whether by conduct or otherwise, in any one or more instances shall
be deemed or be construed as a further or continuing waiver of any such term,
provision or condition, or as a waiver of any other term, provision or condition
of this Agreement.
6.5 GOVERNING LAW; RULES OF CONSTRUCTION. This Agreement has been
negotiated and executed in, and shall be governed by and construed in accordance
with the laws of, the State of California. Captions of the several Articles and
Sections of this Agreement are for
9
<PAGE>
convenience of reference only, and shall not be considered or referred to in
resolving questions of interpretation with respect to this Agreement.
6.6 NOTICES. Any notice, request, demand or other communication
required or permitted hereunder shall be deemed to be properly given when
personally served in writing, or when transmitted via certified United States
mail, return receipt requested, postage pre-paid, addressed to Employer or
Executive at his last known address. Each party may change its address by
written notice in accordance with this Section.
Address for Employer:
Price Enterprises, Inc.
4649 Morena Boulevard
San Diego, CA. 92117
Address for Executive:
555 S. Barrington Avenue
Apartment 101
Los Angeles, CA. 90049
6.7 SEVERABILITY. The provisions of this Agreement are severable.
If any provision of this Agreement shall be held to be invalid or otherwise
unenforceable, in whole or in part, the remainder of the provisions or
enforceable parts hereof shall not be affected thereby and shall be enforced to
the fullest extent permitted by law.
6.8 ATTORNEYS' FEES. In the event of any arbitration or litigation
brought to enforce or interpret any part of this Agreement, the prevailing party
shall be entitled to recover reasonable attorneys' fees, as well as all other
litigation costs and expenses as an element of damages.
10
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto as of the date first above written.
PRICE ENTERPRISES, INC.
By: /s/ Robert E. Price
-----------------------------------
Name: Robert E. Price
---------------------------------
Title: President
--------------------------------
/s/ George Apostol
----------------------------------------
GEORGE APOSTOL
11
<PAGE>
Exhibit 21.1
PRICE ENTERPRISES, INC. SUBSIDIARIES
AS OF SEPTEMBER 1, 1996
PRICE VENTURES, INC., a Delaware corporation, wholly-owned by Price Enterprises,
Inc.
PRICE REAL ESTATE, INC., a Delaware corporation, wholly-owned by Price
Enterprises, Inc.
PGT, INC. (FORMERLY PRICE GLOBAL TRADING, INC.), a Delaware corporation, wholly-
owned by Price Enterprises, Inc.
PRICE GLOBAL TRADING, LLC, a Delaware limited liability company, 51% owned by
PGT, Inc.
PQI, INC., (FORMERLY PRICE QUEST, INC.), a Delaware corporation, wholly-owned by
Price Enterprises, Inc.
PRICE QUEST, LLC, a Delaware limited liability company, 51% owned by PQI, Inc.
62
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report as of and for the year ended August 31, 1994 included in this Form 10-K,
into the Price Enterprises, Inc.'s previously filed Registration Statement File
No. 33-60999.
AUTHUR ANDERSEN LLP
Seattle, Washington
November 19, 1996
63
<PAGE>
Exhibit 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to 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 October 9, 1996, with respect to the
consolidated financial statements and schedule of Price Enterprises, Inc.
included in the Annual Report (Form 10-K) for the years ended August 31, 1996
and August 31, 1995.
ERNST & YOUNG LLP
San Diego, California
November 19, 1996
64
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> SEP-01-1996
<PERIOD-START> SEP-04-1995
<PERIOD-END> SEP-01-1996
<CASH> 15458
<SECURITIES> 0
<RECEIVABLES> 84438
<ALLOWANCES> 0
<INVENTORY> 2011
<CURRENT-ASSETS> 32000
<PP&E> 376894
<DEPRECIATION> 35831
<TOTAL-ASSETS> 547940
<CURRENT-LIABILITIES> 13296
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 532897
<TOTAL-LIABILITY-AND-EQUITY> 547940
<SALES> 36211
<TOTAL-REVENUES> 96005
<CGS> 34644
<TOTAL-COSTS> 106680
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 17000
<INTEREST-EXPENSE> 786
<INCOME-PRETAX> 1354
<INCOME-TAX> 1264
<INCOME-CONTINUING> 90
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
