<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 DECEMBER 22, 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 23,317,184 common shares, par value $.0001, outstanding at
January 14, 1997.
<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...............................................14
ITEM 2 - CHANGES IN SECURITIES...........................................14
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES.................................14
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............14
ITEM 5 - OTHER INFORMATION...............................................14
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K................................14
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 22, AUGUST 31,
1996 1996
------------ ----------
ASSETS (unaudited) (Note)
Current Assets
Cash and cash equivalents $ 18,983 $ 15,458
Accounts receivable, net 11,740 7,019
Merchandise inventories 4,610 2,011
Prepaid expenses and other current assets 5,889 7,512
------------ ----------
Total current assets 41,222 32,000
Real Estate Assets
Land and land improvements 179,505 179,639
Building and improvements 191,835 190,969
Fixtures and equipment 6,401 5,958
Construction in progress 186 328
------------ ----------
377,927 376,894
Less accumulated depreciation (39,294) (35,831)
------------ ----------
338,633 341,063
Other Assets
Property held for sale, net 53,607 55,951
City notes receivable 28,580 29,091
Atlas and other notes receivable 47,797 48,328
Deferred income taxes 23,064 25,640
Deferred rents and leasing costs, net 16,710 15,867
------------ ----------
169,758 174,877
------------ ----------
Total Assets $ 549,613 $ 547,940
------------ ----------
------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 7,115 $ 3,042
Accrued expenses 5,895 5,197
Payable to PriceCostco, net 807 841
Other current liabilities 5,497 4,216
------------ ----------
Total current liabilities 19,314 13,296
Minority Interest 1,745 1,745
Stockholders' Equity
Common stock 2 2
Additional paid-in capital 534,355 534,004
Retained earnings (deficit) (5,803) (1,107)
------------ ----------
Total stockholders' equity 528,554 532,899
------------ ----------
Total Liabilities and Stockholders' Equity $ 549,613 $ 547,940
------------ ----------
------------ ----------
Note: The balance sheet at August 31, 1996 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 date)
FIRST QUARTER
(16 WEEKS)
-------------------------
DECEMBER 22, DECEMBER 24,
1996 1995
------------ ------------
REVENUES
Real estate $14,337 $13,135
Gain on sale of real estate, net 439 478
Merchandise sales 20,568 17,497
Other revenues 1,389 373
------------ ------------
Total revenues 36,733 31,483
OPERATING EXPENSES
Real estate:
Operating, maintenance and administrative expenses 2,997 2,458
Property taxes 1,935 1,916
Depreciation and amortization 2,485 2,492
Merchandising:
Cost of sales 20,473 15,968
Operating expenses 5,751 6,671
General and administrative 1,103 940
------------ ------------
Total operating expenses 34,744 30,445
------------ ------------
Operating income 1,989 1,038
INTEREST AND OTHER
Interest income, net 1,895 1,688
Minority interest --- 2,023
------------ ------------
Total interest and other 1,895 3,711
------------ ------------
Income before provision for income taxes 3,884 4,749
Provision for income taxes 1,592 2,656
------------ ------------
Net Income $ 2,292 $ 2,093
------------ ------------
------------ ------------
Net Income Per Share $.10 $.09
------------ ------------
------------ ------------
Average number of shares outstanding 23,297 23,235
Dividends per share $.30 $.00
SEE ACCOMPANYING NOTES.
4
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - amounts in thousands)
FIRST QUARTER
(16 WEEKS)
-------------------------
DECEMBER 22, DECEMBER 24,
1996 1995
------------ ------------
OPERATING ACTIVITIES
Net income $2,292 $2,093
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,985 2,992
Gain on sale of real estate assets (439) (478)
Minority interest --- (2,023)
Change in accounts receivable and other assets (3,121) 1,585
Change in accounts payable and other liabilities 6,017 1,720
Deferred rents and leasing costs (842) (862)
------------ ------------
Net cash flows provided by operating activities 6,892 5,027
INVESTING ACTIVITIES
Additions to real estate assets (1,143) (6,736)
Proceeds from sale of real estate assets 3,371 8,246
Additions to notes receivable --- (655)
Payments of notes receivable 1,042 538
------------ ------------
Net cash flows provided by investing activities 3,270 1,393
FINANCING ACTIVITIES
Line of credit repayments --- (1,001)
Proceeds from exercise of stock options including
tax benefit 351 10
Dividends paid (6,988) ---
------------ ------------
Net cash flows used in financing activities (6,637) (991)
------------ ------------
Net increase in cash 3,525 5,429
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 15,458 -
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $18,983 $5,429
------------ ------------
------------ ------------
SEE ACCOMPANYING NOTES.
5
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
December 22, 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 16 weeks ended December 22, 1996 are not necessarily
indicative of the results that may be expected for the year ending August 31,
1997.
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.
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
Leasehold improvements Term of lease
Tenant improvements Term of lease or 10 years
Fixtures and equipment 5 years
Certain MIS assets 3 years
MERCHANDISE INVENTORIES
Merchandise inventories, which include merchandise for resale and display
samples, are valued at the lower of cost (average cost) 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 space to tenants 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 were included
in the consolidated tax returns of PriceCostco. The provision for income taxes
since that date have 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.
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) with a
carrying value of $41.2 million as of December 22, 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% per annum 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.
8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 - COMMITMENTS AND CONTINGENCIES
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 final 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 and an agreement regarding the Company's use of
the mark "PriceSmart" will become effective. 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 4 - 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
December 22, 1996.
NOTE 5 - RESERVE
During the first quarter of fiscal 1997 a reserve of $2.5 million was recorded
primarily associated with writing down the book value of assets of the
kiosk-based electronic shopping business. Of the $2.5 million, $1.8 million was
recorded in merchandising operating expenses and $0.7 was recorded in cost of
sales.
NOTE 6 - SUBSEQUENT EVENT
Subsequent to December 22, 1996 the Company declared a cash dividend of $0.30
per share, totaling approximately $7.0 million, payable on February 14, 1997 to
stockholders of record on January 31, 1997.
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 first quarter of fiscal 1997 ended December 22, 1996 to the first
quarter of fiscal 1996 ended December 24, 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
Revenue Percent Operating Percent
Amount Change Income Change Change
--------- --------- --------- -------- ---------
1st Quarter - FY 1997 $14,337 9% $6,920 $651 10%
1st Quarter - FY 1996 13,135 --- 6,269 --- ---
Each fiscal quarter reflects 3 calendar months of activity for the real
estate segment. 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 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.
The increase in revenue and operating income was due to increases in rental
revenue from various properties including properties located in Dallas (TX), San
Juan Capistrano (CA), and Bensalem (PA). These increases were somewhat offset
by increased operating expenses attributable to the hiring of additional real
estate management and loss of revenue from properties that were sold in the
latter part of fiscal 1996, including Richmond (CA).
ADJUSTED FUNDS FROM OPERATIONS
Less Adjusted
Straight- Add Funds
Operating line Depreciation from Percent
Income Rentals Expense Operations Change
--------- --------- --------- ---------- ---------
1st Quarter - FY 1997 $6,920 $(764) $2,485 $8,641 8%
1st Quarter - FY 1996 6,269 (780) 2,492 7,981 ---
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.
10
<PAGE>
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 reflects many of the factors mentioned in the
revenue and operating income discussion above.
GAINS ON SALE OF REAL ESTATE
Percent
Amount Change Change
---------- -------- --------
1st Quarter - FY 1997 $439 $(39) -8%
1st Quarter - FY 1996 478 --- ---
Gains on the sale of real estate during fiscal 1997 related to the sales of
properties in Colton (CA) and Concord (CA), somewhat offset by a loss on the
sale of property in Riverside/La Sierra (CA).
During fiscal 1996, the gains on the sale of real estate related to the
sales of properties in S.W. Denver (CO), North Highlands (CA), Sunnyvale (CA),
and Palm Harbor (FL), somewhat offset by a loss on the sale of property in West
Palm Beach (FL).
MERCHANDISING OPERATIONS
Sales Percent Gross % of
Amount Change Margin Sales
-------- --------- -------- -------
1st Quarter - FY 1997 $20,568 18% $95 .5%
1st Quarter - FY 1996 17,497 --- 1,529 8.7%
Merchandise sales include the Price Quest and international trading
businesses. Gross margin is defined as merchandise sales less the related
merchandise costs.
In fiscal 1997, the increase in sales is attributed to a 72% increase in
international sales, from $11.6 million in first quarter fiscal 1996 to $20.0
million for the same period in fiscal 1997, primarily as a result of sales of
merchandise associated with the warehouse openings in Panama and Indonesia
subsequent to the first quarter of fiscal 1996. Price Quest sales declined 91%
compared to the prior year due to the discontinuation of the kiosk program in
the PriceCostco warehouses.
The decrease in gross margin as a percent of sales during first quarter
fiscal 1997 was primarily due to the impact of reserves of $.7 million
established for inventory related to electronic merchandising activities. Gross
margin for the international merchandising businesses was 3.6% of sales compared
to 4.1% in the prior year.
11
<PAGE>
MERCHANDISING OPERATING EXPENSES
Percent
Amount Change Change
-------- ---------- ----------
1st Quarter - FY 1997 $5,751 $(920) -14%
1st Quarter - FY 1996 6,671 --- ---
The decrease in merchandising operating expenses was primarily due to a
substantial decrease in operating expenses for Price Quest of $3.0 million
offset by reserves of $1.8 million for fixtures and equipment write-downs and
certain other reserves. The net improvement of $1.2 million for Price Quest was
somewhat offset by increased operating expenses for the international businesses
of $0.3 million over the prior year.
GENERAL AND ADMINISTRATIVE EXPENSES
Percent
Amount Change Change
-------- ---------- ----------
1st Quarter - FY 1997 $1,103 $163 17%
1st Quarter - FY 1996 940 --- ---
The increase in expenses is due to the addition of management as well as
increases in other expenses including legal, somewhat offset by a reduction in
fees paid to PriceCostco for administrative services.
INTEREST INCOME (NET)
Percent
Amount Change Change
-------- ---------- ----------
1st Quarter - FY 1997 $1,895 $207 12%
1st Quarter - FY 1996 1,688 --- ---
The increase in interest income was due to higher interest income on
invested cash balances as well as a reduction in interest expense related to the
PriceCostco note payable that was repaid during the fourth quarter of fiscal
1996. This net improvement was somewhat offset by a reduction in capitalized
interest due to less construction activity in the current fiscal year.
MINORITY INTEREST
Percent
Amount Change Change
-------- ---------- ----------
1st Quarter - FY 1997 $0 $(2,023) -100%
1st Quarter - FY 1996 2,023 --- ---
Minority interest represents the allocation of Price Quest and Price Global
Trading losses to PriceCostco. In fiscal 1997, the decrease in minority
interest was due to the fact that PEI began absorbing 100% of the losses in
these companies during third quarter fiscal 1996 because cumulative allocations
of losses 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.
12
<PAGE>
PROVISION FOR INCOME TAXES
Percent Effective
Amount Change Change Tax Rate
-------- ---------- ---------- ----------
1st Quarter - FY 1997 $1,592 $(1,064) -40% 41%
1st Quarter - FY 1996 2,656 --- --- 56%
During much of the first quarter of fiscal 1996, losses from Price Quest
and Price Global Trading were not deductible for income tax purposes. Prior to
the end of that quarter, these businesses 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.
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
$54 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
December 22, 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 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.
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.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. 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 final 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 and an agreement regarding the Company's use of
the mark "PriceSmart" will become effective. 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.
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 Accountant's Review Report
(15.2) Letter of Ernst & Young LLP re: Unaudited Interim Financial
Information
(27) Financial Data Schedules
(b) No reports on Form 8-K were filed for the 16 weeks ended December 22,
1996.
14
<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: January 27, 1997 /s/ Robert E. Price
-------------------
Robert E. Price
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: January 27, 1997 /s/ Daniel T. Carter
--------------------
Daniel T. Carter
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
15
<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 December 22, 1996, and the related consolidated
statements of income and cash flows for the sixteen week periods ended December
22, 1996 and December 24, 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, 1996, 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 9, 1996, 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, 1996, 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
January 9, 1997
16
<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 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 January 9, 1997 relating to the unaudited consolidated
interim financial statements of Price Enterprises, Inc. which are included in
its Form 10-Q for the quarter ended December 22, 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
January 9, 1997
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-02-1996
<PERIOD-END> DEC-22-1996
<CASH> 18983
<SECURITIES> 0
<RECEIVABLES> 88117
<ALLOWANCES> 0
<INVENTORY> 4610
<CURRENT-ASSETS> 41222
<PP&E> 377927
<DEPRECIATION> 39294
<TOTAL-ASSETS> 549613
<CURRENT-LIABILITIES> 19314
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 528552
<TOTAL-LIABILITY-AND-EQUITY> 549613
<SALES> 20568
<TOTAL-REVENUES> 36733
<CGS> 20473
<TOTAL-COSTS> 34744
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 462
<INCOME-PRETAX> 3884
<INCOME-TAX> 1592
<INCOME-CONTINUING> 2292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2292
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
