<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended June 9, 1996
Commission file Number 0-20449
PRICE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0628740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4649 Morena Boulevard
San Diego, California 92117
(Address of principal executive offices)
(619) 581-4530
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
The registrant had 23,285,851 common shares, par value $.0001, outstanding at
July 9, 1996.
<PAGE>
PRICE ENTERPRISES, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS Page
----
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . .4
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . .5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . .6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 10
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 2 - CHANGES IN SECURITIES . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . 15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 5 - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . . . 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 9, August 31,
1996 1995
-------- --------
ASSETS (unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 28,013 $ ---
Accounts receivable, net 5,895 5,776
Merchandise inventories 1,371 7,385
Prepaid expenses and other current assets 5,002 1,499
-------- --------
Total current assets 40,281 14,660
Real estate assets:
Land and land improvements 180,773 179,794
Building and improvements 178,854 168,808
Fixtures and equipment 7,770 7,928
Construction in progress 3,246 6,457
-------- --------
370,643 362,987
Less accumulated depreciation (34,415) (28,233)
-------- --------
336,228 334,754
Other assets:
Property held for sale, net 78,621 100,035
City notes receivable 29,867 30,835
Atlas and other notes receivable 49,022 45,790
Deferred income taxes 23,244 29,315
Deferred rents and leasing costs, net 14,884 11,932
-------- --------
195,638 217,907
-------- --------
Total assets $572,147 $567,321
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,099 $ 2,592
Accrued expenses 4,981 6,186
Note payable to PriceCostco 15,425 ---
Other current liabilities 7,692 6,095
-------- --------
Total current liabilities 31,197 14,873
Note payable to PriceCostco --- 15,425
Minority interest 1,470 4,938
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 549,376 548,705
Retained earnings (deficit) 5,527 (1,197)
Treasury stock (15,425) (15,425)
-------- --------
539,480 532,085
-------- --------
Total liabilities and stockholders' equity $572,147 $567,321
-------- --------
-------- --------
</TABLE>
Note: The balance sheet at August 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
SEE ACCOMPANYING NOTES.
3
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Third Quarter Year-to-Date
(12 weeks) (40 weeks)
---------------------- ----------------------
June 9, June 4, June 9, June 4,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
REVENUES
Real estate $14,536 $13,344 $41,823 $38,732
Gain (loss) on sale of real estate, net 92 --- 749 (181)
Merchandise sales 6,875 11,467 29,577 55,287
Other revenues 373 (8) 1,166 350
------- ------- ------- -------
Total revenues 21,876 24,803 73,315 94,188
OPERATING EXPENSES
Real estate:
Operating, maintenance and administrative
expenses 3,307 2,682 8,865 7,233
Property taxes 2,097 2,254 6,263 6,943
Depreciation and amortization 2,581 2,823 7,567 7,243
Merchandising:
Cost of sales 6,560 10,584 28,303 51,502
Operating expenses 4,028 5,028 16,055 15,254
General and administrative 890 505 2,673 2,468
Provision for asset impairments --- --- 1,000 ---
------- ------- ------- -------
Total operating expenses 19,463 23,876 70,726 90,643
------- ------- ------- -------
Operating income 2,413 927 2,589 3,545
INTEREST AND OTHER
Interest income, net 1,993 1,660 5,422 4,478
Loss of Price Club Mexico joint venture --- --- --- (5,138)
Minority interest 454 1,610 4,587 5,295
------- ------- ------- -------
Total interest and other 2,447 3,270 10,009 4,635
------- ------- ------- -------
Income before provision for income taxes 4,860 4,197 12,598 8,180
Provision for income taxes (1,993) (3,575) (5,874) (5,258)
------- ------- ------- -------
Net income $ 2,867 $ 622 $ 6,724 $ 2,922
------- ------- ------- -------
------- ------- ------- -------
Net income per share $ .12 $ .03 $ .29 $ .12
------- ------- ------- -------
------- ------- ------- -------
Average number of shares outstanding 23,280 23,224 23,255 25,395
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - amounts in thousands)
<TABLE>
<CAPTION>
Year-to-Date
(40 weeks)
----------------------
June 9, June 4,
1996 1995
------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,724 $ 2,922
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,759 9,260
Loss (gain) on sale of real estate assets (553) 181
Provision for asset impairments 1,000 ---
Equity in losses of Price Club Mexico joint venture --- 2,338
Loss on sale of Price Club Mexico joint venture (net) --- 2,200
Minority interest of PriceCostco (4,587) (5,295)
Change in accounts receivable and other assets 8,112 (33,099)
Change in accounts payable and other liabilities 1,898 20,609
Deferred rents and leasing costs (2,953) (2,497)
------- -------
Net cash flows provided by (used in)
operating activities 18,400 (3,381)
INVESTING ACTIVITIES
Additions to real estate assets (16,445) (19,690)
Proceeds from sale of real estate assets 24,431 10,190
Proceeds from sale of Price Club Mexico joint venture --- 34,500
Investment in Price Club Mexico joint venture --- (3,883)
Additions to notes receivable (1,836) ---
Payments of notes receivable 2,323 4,266
------- -------
Net cash flows provided by investing activities 8,473 25,383
FINANCING ACTIVITIES
Payment of note payable --- (30,500)
Line of credit repayments (1,001) ---
Proceeds from exercise of stock options including
tax benefit 671 ---
Equity adjustment arising from exchange agreement --- (1,693)
Equity contributions to subsidiaries by minority
investors 1,470 10,290
------- -------
Net cash flows provided by (used in)
financing activities 1,140 (21,903)
------- -------
Net increase in cash and cash equivalents 28,013 99
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD --- 1,644
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $28,013 $ 1,743
------- -------
------- -------
SUPPLEMENTAL DISCLOSURE:
Treasury stock acquired for note payable --- $45,925
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 9, 1996
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Price Enterprises, Inc. (PEI or the Company) became a publicly-traded company on
December 21, 1994, following an exchange offer in which approximately 23.2
million shares of PriceCostco, Inc. were exchanged for shares of PEI. However,
since August 31, 1994 PEI has operated as a separate company.
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the 40 weeks ended June 9, 1996 are not necessarily
indicative of the results that may be expected for the year ended August 31,
1996.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
BUSINESS SEGMENTS AND FISCAL YEAR
The Company has investments in two business segments: (1) real estate
operations, and (2) certain merchandising businesses. The Company's real estate
business reports on a fiscal year which ends on August 31; whereas, the
merchandising businesses report on a 52/53 week fiscal year which ends on the
Sunday nearest August 31. For ease of presentation, all fiscal years in this
report are referred to as having ended on August 31.
With respect to the real estate segment, each fiscal quarter includes three
calendar months of operating results; however, the merchandising segment's
fiscal quarters are as follows: first quarter -- 16 weeks, second quarter -- 12
weeks, third quarter -- 12 weeks, fourth quarter -- 12 or 13 weeks, depending
upon whether the fiscal year has 52 or 53 weeks. Fiscal 1995 included 53 weeks.
6
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ASSET IMPAIRMENTS
The Company regularly evaluates the estimated fair value of its assets and
records appropriate provisions for asset impairments. The various notes
receivable are evaluated in accordance with Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan."
Beginning with fiscal 1996, SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," has been adopted
and applied to real estate assets.
REAL ESTATE ASSETS
Real estate assets are recorded at PEI's historical costs as adjusted for
recognition of impairment losses.
Real estate assets are depreciated using the straight-line method over their
estimated useful lives, which are as follows:
Land improvements 15 - 25 years
Buildings and improvements 10 - 25 years
Fixtures and equipment 5 years
Certain Price Quest MIS assets 3 years
Property held for sale is recorded at the lower of cost or management's
estimates of the expected net proceeds to be received from the eventual sale.
MERCHANDISE INVENTORIES
Merchandise inventories, which include merchandise for resale and display
samples, are valued at the lower of cost (first-in, first-out) or market.
REAL ESTATE RENTALS AND DEFERRED RENTS
All leases are classified as operating leases. Rentals are recognized using the
straight-line method over the terms of the leases. Deferred rents represent the
excess of real estate rentals recognized on the straight-line basis over cash
received under the applicable lease provisions. Common area maintenance fees
are included in rental income.
DEFERRED LEASING COSTS
Costs incurred in connection with leasing are deferred and amortized using the
straight-line method over the term of the related lease. Unamortized leasing
costs are charged to expense upon early termination of the lease.
7
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES
Income taxes have been provided for in accordance with Statement of Financial
Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes., SFAS No. 109
requires companies to account for deferred taxes using the asset and liability
method and, accordingly, deferred income taxes are provided to reflect temporary
differences between financial and tax reporting.
The operations of the Company for the first quarter of fiscal 1995 ended
December 18, 1994 are included in the consolidated tax returns of PriceCostco.
The provision for income taxes since that date has been computed for PEI as a
stand-alone entity, therefore, losses incurred by 51% owned subsidiaries were
not accorded any tax benefit. As of November 27, 1995 both Price Quest and
Price Global were restructured as limited liability companies which are treated
as partnerships for income tax purposes. Accordingly, PEI's share of the
operating results of these companies is included in PEI's tax return.
NOTE 2 - NOTES RECEIVABLE
Notes receivable are recorded at PEI's historical cost as adjusted for
recognition of impairment losses. They include amounts loaned to municipalities
and agencies (City Notes) to facilitate real property acquisitions and
improvements. The City Notes bear interest at rates which range from 7% to 10%.
Repayment of the majority of these notes is generally based on that
municipality's allocation of sales tax revenues generated by retail businesses
located on a particular property associated with such City Note.
The Company holds a note receivable from Atlas Hotels, Inc. (Atlas Note) which
is collateralized by hotel property in San Diego, California. On April 3, 1995
the debt obligation was restructured and now requires repayment after five years
of all outstanding indebtedness, with interest accruing on the outstanding
principal at 10% per annum. Interest is payable monthly at a rate equal to the
six month LIBOR rate plus 2.5% per annum (not to exceed 8% per annum through
December 1, 1996), and the interest not currently payable is added to the
principal amount of the loan.
In addition to the Atlas Note, the Company holds $6.6 million of notes
receivable received as partial consideration for the sale of certain real estate
properties. Interest rates for these notes vary from 9.5% to 9.75% and their
maturities extend through March 1999.
8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES
On December 19, 1994 and January 4, 1995 Complaints were filed in the United
States District Court, Western District of Washington (entitled SNYDER V
PRICE/COSTCO, INC. ET. AL., Case #C94-1874 and BALSAM V PRICE/COSTCO, INC. ET.
AL., Case #C95-0009, respectively) against defendants including the Company and
certain of its directors. The two suits have been consolidated for all
purposes. In November 1995, a Second Amended Complaint was filed. The
Complaint alleges violation of certain laws and asserts certain related claims,
arising from the exchange offer transaction. The Company believes that the suit
is without merit and will vigorously defend against the suit. The Company does
not believe that the ultimate outcome of such litigation will have a material
adverse effect on the Company's financial position or results of operations.
NOTE 4 - REVIEW BY INDEPENDENT ACCOUNTANTS
A review of the data presented was made by Ernst & Young LLP, independent
accountants, in accordance with established professional standards and
procedures, and their report is included herein.
NOTE 5 - LINE OF CREDIT FACILITY
The Company has a revolving credit facility with a commercial bank for up to $25
million in unsecured advances through June 29, 1998. Interest is charged at the
bank's base rate, or at rates slightly higher than LIBOR pricing, at the
Company's election. There were no outstanding borrowings on this facility as of
June 9, 1996.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis compares the results of operations
for the third quarter and year-to-date periods of fiscal 1996 ended June 9, 1996
to the third quarter and year-to-date periods of fiscal 1995 ended June 4, 1995.
The Company invests in real estate and related assets, in addition to certain
merchandising businesses which include Price Quest, Price Global Trading and
Price Ventures activities. Where appropriate, the financial results for these
two business segments are discussed separately. In those instances where
changes are attributed to more than one factor, the factors are presented in
descending order of importance. All dollar amounts are in thousands. The
following discussion should be read in conjunction with the consolidated
financial statements and the notes thereto.
REAL ESTATE RENTAL OPERATIONS
<TABLE>
<CAPTION>
Revenue Percent Operation Percent
Amount Change Income Change Change
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
3rd Quarter - FY 1996 $14,536 8.9% $ 6,551 $ 966 17.3%
3rd Quarter - FY 1995 13,344 --- 5,585 --- ---
Year-to-date - FY 1996 $41,823 8.0% $19,128 $ 1,815 10.5%
Year-to-date - FY 1995 38,732 --- 17,313 --- ---
</TABLE>
Each fiscal quarter reflects 3 calendar months of activity for the real
estate segment. Operating income is defined as rental revenue, including common
area expense reimbursements, less the related real estate expenses, including
all unreimburseable expenses associated with unimproved land and certain
developed properties with vacant space. In addition, operating income reflects
depreciation expense, but it does not reflect provisions for asset impairments
or gains (losses) on sale of real estate.
During the third quarter, the increase in revenue was due to additional
lease-up and increased expense reimbursements at various properties, most
significantly Bensalem (PA) and Pentagon City (VA). These increases were
somewhat offset by reduced revenues from the Richmond (CA) property due to its
sale during the quarter. The increase in year-to-date revenues was due to the
same factors mentioned above but was also affected by a reduction in revenues
from the Phoenix (AZ) property, which was sold in March 1995.
During the third quarter, the increase in operating income was due
primarily to increased revenues and reduced expenses at the Dallas (TX) property
during the construction phase and increased expense reimbursements for the Wayne
(NJ) property. These and other increases were somewhat offset by reduced income
from the Richmond (CA) property due to its sale during the quarter. The
increase in year-to-date operating income is primarily attributable to the
Pentagon City (VA) and Dallas (TX) properties somewhat offset by the loss in
income from the Phoenix (AZ) property sale in March 1995.
ADJUSTED FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
Add Less Adjusted
Operation Depreciation Straight-line Funds from Percent
Income Expense Rentals Operations Change
--------- ------------ ------------- ---------- -------
<S> <C> <C> <C> <C> <C>
3rd Quarter - FY 1996 $ 6,551 $2,581 $ (859) $ 8,273 9.0%
3rd Quarter - FY 1995 5,585 2,823 (816) 7,592 ---
Year-to-date - FY 1996 $19,128 $7,567 $(2,306) $24,389 10.7%
Year-to-date - FY 1995 17,313 7,243 (2,518) 22,038 ---
</TABLE>
10
<PAGE>
Real estate industry analysts generally consider funds from operations
(FFO) to be a measure of performance for real estate-oriented companies. As
defined by the National Association for Real Estate Investment Trusts (NAREIT),
it is the pre-tax income determined in accordance with 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 non-cash 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.
The growth in adjusted FFO for the third quarter and the year-to-date
periods reflects the impact of the factors mentioned in the operating income
discussion above. In addition, modifications to certain leases during the
second quarter of fiscal 1996 resulted in reversals of previously accrued
straight-line rent which affected the year-to-date amount.
GAINS (LOSSES) ON SALE OF REAL ESTATE
Gain (Loss) Percent
on Sale Change Change
---------- ------ -------
3rd Quarter - FY 1996 $ 92 $ 92 100%
3rd Quarter - FY 1995 --- --- ---
Year-to-date - FY 1996 $749 $930 514%
Year-to-date - FY 1995 (181) --- ---
During the third quarter of fiscal 1996, gains on the sale of real estate
related primarily to the sale of property in Contra Costa (CA). The fiscal 1996
year-to-date amount also reflects gains on the sales of properties in S.W.
Denver (CO), North Highlands (CA), San Diego (Convoy Ct.) (CA) and Sunnyvale
(CA). These gains were partially offset by a loss on the sale of property in
West Palm Beach (FL) during the first quarter. The loss on the sale of property
during fiscal 1995 was the result of a sale of property located in Phoenix (AZ).
PROVISION FOR ASSET IMPAIRMENTS
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------ -------
<S> <C> <C> <C>
3rd Quarter - FY 1996 --- --- ---
3rd Quarter - FY 1995 --- --- ---
Year-to-date - FY 1996 $1,000 $1,000 100%
Year-to-date - FY 1995 --- --- ---
</TABLE>
During second quarter fiscal 1996, a non-cash charge of $1.0 million was
taken to write down the carrying value of real estate properties which are being
held for sale and which are expected to generate net sales proceeds below their
current book values. On an aggregate basis this adjustment approximated a 1%
write-down to the carrying value of all properties held for sale as of March 17,
1996.
MERCHANDISING OPERATIONS
<TABLE>
<CAPTION>
Sales Percent Gross % of Percent
Amount Change Margin Sales Change
------- ------- ------ ----- -------
<S> <C> <C> <C> <C> <C>
3rd Quarter - FY 1996 $ 6,875 (40%) $ 315 4.6% (64%)
3rd Quarter - FY 1995 11,467 --- 883 7.7% ---
Year-to-date - FY 1996 $29,577 (47%) $1,274 4.3% (66%)
Year-to-date - FY 1995 55,287 --- 3,785 6.8% ---
</TABLE>
11
<PAGE>
Merchandise sales include Price Quest and international exports to
licensees and other international customers. Gross margin is defined as
merchandise sales less the related merchandise costs.
For the 12-week period of the third quarter, the decrease in sales is
attributed to a 59% decline in sales for Price Quest, from $4.2 million in third
quarter fiscal 1995 to $1.7 million in fiscal 1996, primarily as a result of
eliminating merchandise displays. For the 40-week year-to-date period, Price
Quest experienced a 58% decline in sales. Export sales also declined 29%
compared to the prior year due to the discontinuation of sales to certain
international customers. As a result, the majority of sales during fiscal 1996
support the Guam/Saipan licensee's operations. Export sales, when compared to
the prior year, declined 39% for the 40-week year-to-date period.
The decrease in gross margin as a percent of sales during third quarter
fiscal 1996 was primarily due to the impact of additional reserves recorded for
Price Quest related to discontinuing the furniture business. Prior to taking
into account the additional reserves, Price Quest realized a gross margin of
9.3%. As planned, export sales realized a gross margin of 3.9% during the third
quarter of fiscal 1996. During the 40-week year-to-date period gross margins
were likewise adversely affected by Price Quest reserves recorded in the third
and second quarters related to the discontinuation of the furniture business and
disposing of display and central fulfillment inventories which were not sold
during the holiday season.
MERCHANDISING OPERATING EXPENSES
<TABLE>
<CAPTION>
Percent
Amount Change Change
------- ------- -------
<S> <C> <C> <C>
3rd Quarter - FY 1996 $ 4,028 $(1,000) (19.9%)
3rd Quarter - FY 1995 5,028 --- ---
Year-to-date - FY 1996 $16,055 $ 801 5.3%
Year-to-date - FY 1995 15,254 --- ---
</TABLE>
During the third quarter the decrease in expenses was primarily due to
reduced expenses for Price Quest as well as reduced depreciation as a result of
fixed asset write-offs during the past year.
During the year-to-date period, the increase in expenses was primarily due
to Price Ventures and Price Global Trading activities somewhat offset by reduced
expenses for Price Quest. Much of this increase relates to PEI expenses
associated with supporting the Price Club Mexico operations. During fiscal 1995
these expenses were reimbursed by the joint venture. After the sale of PEI's
interest in the joint venture in April 1995, reimbursements were discontinued,
and the Company's expenses rose accordingly. Contributing to the increase in
the fiscal year 1996 year-to-date amount was severance expense of approximately
$0.7 million associated with employee terminations that was recorded during the
second quarter of fiscal 1996.
GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------ -------
<S> <C> <C> <C>
3rd Quarter - FY 1996 $ 890 $385 76%
3rd Quarter - FY 1995 505 --- ---
Year-to-date - FY 1996 $2,673 $205 8.3%
Year-to-date - FY 1995 2,468 --- ---
</TABLE>
The increase in expenses for the third quarter and the year-to-date periods
was primarily due to adjustments in the prior year to reduce accruals of certain
employee benefits and insurance programs to align their year-to-date amounts
with the estimated full year expense. In addition, fiscal 1996 includes
increased legal fees with respect to defense efforts associated with the
stockholder lawsuit.
12
<PAGE>
INTEREST INCOME (NET)
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------ -------
<S> <C> <C> <C>
3rd Quarter - FY 1996 $1,993 $333 20%
3rd Quarter - FY 1995 1,660 --- ---
Year-to-date - FY 1996 $5,422 $944 21%
Year-to-date - FY 1995 4,478 --- ---
</TABLE>
The increase in net interest income during the third quarter was due to
reduced interest expense to PriceCostco as $30.5 million was paid down against
the note payable principal balance during the third quarter of fiscal 1995,
increased interest income from the Atlas note and increased interest income from
invested cash balances. These increases were partially offset by less
capitalized interest than recorded in the prior year. During the year-to-date
period, interest income increased as a result of the factors mentioned above, as
well as additional interest income from two notes receivable that were received
as partial consideration for the sale of certain properties.
OTHER INCOME (NET)
<TABLE>
<CAPTION>
Price Club Minority Total Other Percent
Mexico Interest Income Change Change
---------- -------- ----------- ------- -------
<S> <C> <C> <C> <C> <C>
3rd Quarter - FY 1996 --- $ 454 $ 454 $(1,156) 72%
3rd Quarter - FY 1995 --- 1,610 1,610 --- ---
Year-to-date - FY 1996 --- $4,587 $4,587 $ 4,430 2822%
Year-to-date - FY 1995 $(3,955) 4,112 157 --- ---
</TABLE>
During fiscal 1995, the Price Club Mexico amounts represent the Company's
equity in losses of the joint venture, after taking into account PriceCostco's
49% minority interest in Mexico Clubs, as well as the loss on the sale of the
Company's interest to PriceCostco. Minority interest represents the allocation
of Price Quest and Price Global Trading losses to PriceCostco. Late in the
first quarter of fiscal 1996 Price Quest and Price Global Trading were
restructured as limited liability companies and as of that time minority
interest has been allocated on a pre-tax basis. During the quarter, cumulative
allocations of losses from Price Quest and Price Global Trading to PriceCostco's
minority interest have matched their cumulative capital contributions, such that
the book value of its investment in these businesses is zero. As a result, PEI
has been allocated more than 51% of the losses in these businesses during the
quarter. Until such time that these companies become profitable or that
PriceCostco makes additional capital contributions, events which are not
considered likely in the near future, PEI will absorb 100% of losses from these
companies.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
Percent
Amount Change Change
------ ------- -------
<S> <C> <C> <C>
3rd Quarter - FY 1996 $1,993 $(1,582) 44%
3rd Quarter - FY 1995 3,575 --- ---
Year-to-date - FY 1996 $5,874 $ 616 11.7%
Year-to-date - FY 1995 5,258 --- ---
</TABLE>
During the first quarter of fiscal 1995, losses incurred by the 51%-owned
subsidiaries prior to December 21, 1994 were tax deductible by PriceCostco, and
the corresponding benefits were transferred to these subsidiaries in accordance
with certain tax sharing agreements. Losses after that date were not deductible
until Price Quest and Price Global Trading were restructured as limited
liability companies in the first quarter of fiscal 1996. Subsequent to the
restructuring date, these companies have been treated as partnerships for income
tax purposes, and PEI recognizes tax benefits for its share of any tax losses.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
While the Company is well positioned to finance its business activities
through a variety of sources, it expects to satisfy short-term liquidity
requirements through net cash provided by real estate operations and through
borrowings under the unsecured revolving line of credit facility. Approximately
$79 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 $180 million as of August 31, 1995,
that the Company maintain certain net worth and debt-to-equity ratios, and that
a facility fee of 0.15% of the commitment amount be paid annually. As of June
9, 1996, there was no outstanding balance on the credit facility.
Consistent with historical trends, operating income from real estate
activities increases as properties are developed and fluctuates as properties
are sold. The Company's liquidity is primarily affected by the timing and
magnitude of rental property acquisition, development and disposition.
INFLATION
Because a substantial number of the Company's leases contain provisions for
rent increases based on changes in various consumer price indices, based on
fixed rate increases, or based on percentage rent if tenant sales exceed certain
base amounts, inflation is not expected to have a significant material impact on
future net income or cash flow from developed and operating properties. In
addition, substantially all leases are "triple net," whereby specific operating
expenses and property taxes are passed through to the tenant. For undeveloped
or under-developed properties, inflation could increase the Company's cost of
carrying and developing the properties; however, inflation would likely increase
the future sales value of the properties.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS ---
On December 19, 1994 and January 4, 1995 Complaints were filed in the United
States District Court, Western District of Washington (entitled SNYDER V
PRICE/COSTCO, INC. ET. AL., Case #C94-1874 and BALSAM V PRICE/COSTCO, INC. ET.
AL., Case #C95-0009, respectively) against defendants including the Company and
certain of its directors. The two suits have been consolidated for all
purposes. In November 1995, a Second Amended Complaint was filed. The
Complaint alleges violation of certain laws and asserts certain related claims,
arising from the exchange offer transaction. The Company believes that the suit
is without merit and will vigorously defend against the suit. The Company does
not believe that the ultimate outcome of such litigation will have a material
adverse effect on the Company's financial position or results of operations.
The Company is a party to other routine litigation incident to its business
and to which its property is subject. The Company's management does not believe
that the ultimate resolution of any of these matters will have a material
adverse impact on the financial position of the Company.
ITEM 2. CHANGES IN SECURITIES ---
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES ---
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---
None.
ITEM 5. OTHER INFORMATION ---
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ---
(a) The following exhibits are included herein or incorporated by
reference:
(15.1) Independent Accountants' Review Report
(15.2) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedules
(b) No reports on Form 8-K were filed for the 12 weeks ended June 9, 1996.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRICE ENTERPRISES, INC.
REGISTRANT
Date: July 9, 1996 /s/ Robert E. Price
------------------------------------
Robert E. Price
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: July 9, 1996 /s/ Daniel T. Carter
------------------------------------
Daniel T. Carter
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
16
<PAGE>
EXHIBIT 15.1 - - INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors
Price Enterprises, Inc.
We have reviewed the accompanying consolidated balance sheet of Price
Enterprises, Inc. as of June 9, 1996 and the related consolidated statements of
income for the twelve and forty week periods ended June 9, 1996 and June 4,
1995, and the consolidated statements of cash flows for the forty week periods
ended June 9, 1996 and June 4, 1995. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Price Enterprises, Inc. as of
August 31, 1995, and the related statements of income, stockholders' equity, and
cash flows for the year then ended (not presented herein) and in our report
dated October 10, 1995, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet as of August 31, 1995, is fairly
stated, in all material respects, in relation to the consolidated balance sheet
from which it has been derived.
ERNST & YOUNG LLP
San Diego, California
July 3, 1996
17
<PAGE>
EXHIBIT 15.2 - - LETTER RE: UNAUDITED
INTERIM FINANCIAL INFORMATION
Board of Directors
Price Enterprises, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-60999) pertaining to the Price Enterprises 1995 Combined Stock
Grant and Stock Option Plan and the Price Enterprises Directors' 1995 Stock
Option Plan of our report dated April 10, 1996 relating to the unaudited
consolidated interim financial statements of Price Enterprises, Inc. which are
included in its Form 10-Q for the quarter ended June 9, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of a registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Ernst & Young LLP
San Diego, California
July 3, 1996
18
<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> JUN-09-1996
<CASH> 28013
<SECURITIES> 0
<RECEIVABLES> 84784
<ALLOWANCES> 0
<INVENTORY> 1371
<CURRENT-ASSETS> 40281
<PP&E> 370643
<DEPRECIATION> 34415
<TOTAL-ASSETS> 572147
<CURRENT-LIABILITIES> 31197
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 539478
<TOTAL-LIABILITY-AND-EQUITY> 572147
<SALES> 29577
<TOTAL-REVENUES> 73315
<CGS> 28303
<TOTAL-COSTS> 70726
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1000
<INTEREST-EXPENSE> 616
<INCOME-PRETAX> 6038
<INCOME-TAX> 5874
<INCOME-CONTINUING> 6724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6724
<EPS-PRIMARY> .29
<EPS-DILUTED> .29
</TABLE>
