<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 8, 1997
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 23,405,529 common shares, par value $.0001, outstanding at
July 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..........................11
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK..................................................16
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS............................................16
ITEM 2 - CHANGES IN SECURITIES........................................16
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES..............................16
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS......................................................16
ITEM 5 - OTHER INFORMATION............................................16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.............................17
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
JUNE 8, AUGUST 31,
1997 1996
---------- ----------
(unaudited) (Note)
ASSETS
Current Assets
Cash and cash equivalents $ 82,750 $ 15,458
Accounts receivable, net 8,972 7,019
Merchandise inventories 4,179 2,011
Prepaid expenses and other current assets 11,077 7,512
---------- ----------
Total current assets 106,978 32,000
Real Estate Assets
Land and land improvements 186,996 179,639
Building and improvements 198,047 190,969
Fixtures and equipment 4,847 5,958
Construction in progress 821 328
---------- ----------
390,711 376,894
Less accumulated depreciation (42,906) (35,831)
---------- ----------
347,805 341,063
Other Assets
Property held for sale, net 26,186 55,951
City notes receivable 24,027 29,091
Atlas and other notes receivable 6,598 48,328
Deferred income taxes 13,410 25,640
Deferred rents and leasing costs, net 17,332 15,867
---------- ----------
87,553 174,877
Total Assets $542,336 $547,940
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,720 $ 3,042
Accrued expenses 3,856 6,038
Other current liabilities 3,884 4,216
---------- ----------
Total current liabilities 12,460 13,296
Minority Interest 5,450 1,745
Stockholders' Equity
Common stock 2 2
Additional paid-in capital 534,890 534,004
Retained earnings (deficit) (10,466) (1,107)
---------- ----------
524,426 532,899
---------- ----------
Total Liabilities and Stockholders' Equity $542,336 $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
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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 8, June 9, June 8, June 9,
1997 1996 1997 1996
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
REVENUES
Real estate $14,223 $14,536 $42,726 $41,823
Gain (loss) on sale of real estate, net (450) 92 899 749
Merchandise sales 14,067 6,875 46,239 29,577
Other revenues 1,027 373 4,003 1,166
--------- -------- -------- --------
Total revenues 28,867 21,876 93,867 73,315
OPERATING EXPENSES
Real estate:
Operating, maintenance and administrative expenses 2,546 3,307 8,029 8,865
Property taxes 1,927 2,097 6,228 6,263
Depreciation and amortization 2,454 2,581 7,383 7,567
Merchandising:
Cost of sales 13,058 6,560 44,109 28,303
Operating expenses 2,818 4,028 12,330 16,055
General and administrative 952 890 2,937 2,673
Provision for asset impairments --- --- --- 1,000
--------- -------- -------- --------
Total operating expenses 23,755 19,463 81,016 70,726
--------- -------- -------- --------
Operating income 5,112 2,413 12,851 2,589
INTEREST AND OTHER
Interest income, net 2,130 1,993 6,156 5,422
Gain on sale of investment 60 --- 782 ---
Minority interest 36 454 (73) 4,587
--------- -------- -------- --------
Total interest and other 2,226 2,447 6,865 10,009
--------- -------- -------- --------
Income before provision for income taxes 7,338 4,860 19,716 12,598
Provision for income taxes 3,009 1,993 8,084 5,874
--------- -------- -------- --------
Net Income $ 4,329 $ 2,867 $11,632 $ 6,724
--------- -------- -------- --------
--------- -------- -------- --------
Net Income Per Share $.19 $.12 $.50 $.29
--------- -------- -------- --------
--------- -------- -------- --------
Average number of shares outstanding 23,346 23,280 23,321 23,255
Dividends per share $.30 $.00 $.90 $.00
</TABLE>
SEE ACCOMPANYING NOTES.
4
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PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - amounts in thousands)
YEAR-TO-DATE
(40 WEEKS)
----------------------
JUNE 8, JUNE 9,
1997 1996
--------- --------
OPERATING ACTIVITIES
Net income $11,632 $6,724
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,165 8,759
Gain on sale of real estate assets (899) (553)
Provision for asset impairments --- 1,000
Minority interest 73 (4,587)
Change in accounts receivable and other assets 4,546 8,112
Change in accounts payable and other liabilities 203 1,898
Deferred rents and leasing costs (1,465) (2,953)
--------- --------
Net cash flows provided by operating activities 22,255 18,400
INVESTING ACTIVITIES
Additions to real estate assets (9,460) (16,445)
Proceeds from sale of real estate assets 24,176 24,431
Additions to notes receivable --- (1,836)
Payments of notes receivable 46,794 2,323
--------- --------
Net cash flows provided by investing activities 61,510 8,473
FINANCING ACTIVITIES
Line of credit repayments --- (1,001)
Equity contributions to subsidiaries by minority investors 3,632 1,470
Proceeds from exercise of stock options including
tax benefit 886 671
Dividends paid (20,991) ---
--------- --------
Net cash flows provided by (used in) financing
activities (16,473) 1,140
--------- --------
Net increase in cash 67,292 28,013
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 15,458 ---
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $82,750 $28,013
--------- --------
--------- --------
SEE ACCOMPANYING NOTES.
5
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PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 8, 1997
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 8, 1997 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
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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
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all majority owned subsidiaries. With the commencement of operations in
Panama during first quarter fiscal 1997, the operations of the 51% owned
Panama joint venture have been consolidated. All significant intercompany
accounts and transactions have been eliminated in consolidation.
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.
7
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PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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.
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. A final settlement was reached and approved by the court. 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 Costco have been
terminated and an agreement regarding the Company's use of the mark
"PriceSmart" has become effective. During the third quarter, the Company
contributed $1.25 million to the award of attorneys' fees which was accrued
for in fourth quarter fiscal 1996.
NOTE 4 - LINE OF CREDIT FACILITY
The Company had a revolving credit facility with a commercial bank for up to
$25 million in unsecured advances through June 29, 1998. The Company
communicated its intent to terminate the credit facility prior to the June
1998 date with the bank during the third quarter, effective shortly after the
third quarter of fiscal 1997. Interest was 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 8, 1997.
NOTE 5 - RESERVES
During the year-to-date period of fiscal 1997, reserves of $2.7 million were
recorded primarily associated with writing down the book value of assets of
the kiosk-based electronic shopping business. Of the $2.7 million
year-to-date amount, $1.8 million was recorded in merchandising operating
expenses and $0.9 was recorded in cost of sales.
NOTE 6 - 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.
9
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 7 - SUBSEQUENT EVENT
Subsequent to June 8, 1997 the Company declared a cash dividend of $0.30 per
share, totaling approximately $7.0 million, payable on August 15, 1997 to
stockholders of record on August 1, 1997.
On July 2, 1997 the Company announced a corporate restructuring plan to
separate its real estate and merchandising businesses into two separate
publicly-held companies. A special dividend of one share in PriceSmart (the
merchandising businesses) for every four shares held in PEI is expected to be
distributed on August 29, 1997, or as soon as possible thereafter. Final
approval of the PriceSmart dividend is subject to various conditions and the
Price Enterprises board of directors has reserved the right to abandon, defer
or modify the proposed restructuring at any time prior to the declaration and
distribution of the special dividend. The special dividend is expected to be
a taxable distribution to PEI stockholders.
Upon consummation of the restructuring, the Company's merchandising business
will be classified as a discontinued operation. Merchandising revenues and
operating loss for the third quarter of 1997 were $15.1 million and $.7
million, respectively, and $7.2 million and $2.9 million, respectively, for
the third quarter of 1996. For the 40-week year-to-date period of 1997,
merchandising revenues and operating loss were $50.2 million and $6.3 million
compared to $30.7 million and $9.0 million for the comparable period of 1996.
10
<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 1997 ended June 8,
1997 to the third quarter and year-to-date periods of fiscal 1996 ended June
9, 1996. The Company invests in real estate and related assets, and operates
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
------- ------- --------- ------ -------
3rd Quarter - FY 1997 $14,223 (2%) $7,296 $ 745 11%
3rd Quarter - FY 1996 14,536 --- 6,551 --- ---
Year-to-date - FY 1997 $42,726 2% $21,086 $1,958 10%
Year-to-date - FY 1996 41,823 --- 19,128 --- ---
Each fiscal quarter reflects three 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 slight decrease in revenue during the third quarter of fiscal 1997
was primarily due to the loss of revenue from the Seekonk (MA) property as a
result of the Bradlees bankruptcy during the past year as well as the
write-off of related receivables associated with Bradlees. The decrease was
also a result of loss of revenue from the Richmond (CA) location which was
sold in the latter part of fiscal 1996. These decreases were almost entirely
offset by an increase in revenue from the Dallas (TX) location as a result of
its completion during fourth quarter fiscal 1996 and subsequent lease-up, as
well as increased revenue at the Signal Hill (CA) location and other
properties. During the third quarter the increase in operating income was
primarily due to the completion and lease-up of the Dallas (TX) property.
During the year-to-date period, the increase in revenue and operating
income was primarily due to completion of development and lease-up of the
property located in Dallas (TX). The increase was somewhat offset by the
loss of revenue from the Seekonk (MA) property as a result of the Bradlees
bankruptcy during the past year, as well as the loss of revenue from Richmond
(CA) which was sold in the latter part of fiscal 1996.
11
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ADJUSTED FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
Less Add Adjusted
Operating Straight-line Depreciation Funds from Percent
Income Rentals Expense Operations Change
--------- ------------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
3rd Quarter - FY 1997 $7,296 $(692) $2,454 $9,058 9.5%
3rd Quarter - FY 1996 6,551 (859) 2,581 8,273 ---
Year-to-date - FY 1997 $21,086 $(1,839) $7,383 $26,630 9.2%
Year-to-date - FY 1996 19,128 (2,306) 7,567 24,389 ---
</TABLE>
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), FFO 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.
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
------ ------ -------
3rd Quarter - FY 1997 $(450) $(542) ---
3rd Quarter - FY 1996 92 --- ---
Year-to-date - FY 1997 $899 $150 20%
Year-to-date - FY 1996 749 --- ---
During the third quarter of fiscal 1997, losses on the sale of real
estate related primarily to the sale of property in Houston (TX) and
Washington Metro. (MD). The fiscal 1997 year-to-date amount also reflects
gains on the sales of properties in Schaumburg (IL), Colton (CA), and Concord
(CA).
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 includes gains on the sales of properties in
S.W. Denver (CO), North Highlands (CA), San Diego (Convoy Ct.) (CA) and
Sunnyvale (CA), partially offset by a loss on the sale of property in West
Palm Beach (FL) during the first quarter.
MERCHANDISING OPERATIONS
Sales Percent Gross % of Percent
Amount Change Margin Sales Change
------- ------- ------ ----- -------
3rd Quarter - FY 1997 $14,067 105% $1,009 7.2% 220%
3rd Quarter - FY 1996 6,875 --- 315 4.6% ---
Year-to-date - FY 1997 $46,239 56% $2,130 4.6% 67%
Year-to-date - FY 1996 29,577 --- 1,274 4.3% ---
12
<PAGE>
Merchandise sales include the Price Quest and international trading
businesses. Gross margin is defined as merchandise sales less the related
merchandise costs.
For the 12-week period of the third quarter the increase in sales is
attributed to a 173% increase in international sales, from $5.2 million in
third quarter fiscal 1996 to $14.1 million for the same period in fiscal
1997, primarily as a result of sales from the 51% owned Panama location which
opened during the first quarter of the current year, as well as increased
sales to the Saipan, Guam, Indonesia and China locations. A second Indonesia
location was opened during the quarter, bringing the total number of
international locations to six.
The 40-week year-to-date increase in sales is due to a 125% increase in
international sales partially offset by a decline of 90% in Price Quest sales
due to the discontinuation of the electronic shopping business in January
1997.
The increase in gross margin as a percent of sales during the third
quarter was primarily due to sales from the Panama location which has a gross
margin of approximately 11%. During the year-to-date period the increase in
gross margin was also attributed to a higher gross margin on Panama sales,
but was somewhat offset by negative gross margin for Price Quest due to
reserves of $0.9 million taken during the first two quarters of fiscal 1997
associated with markdowns to sell certain returned and discontinued
merchandise.
MERCHANDISING OPERATING EXPENSES
Percent
Amount Change Change
------- -------- ------
3rd Quarter - FY 1997 $2,818 $(1,210) (30%)
3rd Quarter - FY 1996 4,028 --- ---
Year-to-date - FY 1997 $12,330 $(3,725) (23%)
Year-to-date - FY 1996 16,055 --- ---
During the third quarter of fiscal 1997 the decrease in merchandising
operating expenses was primarily due to a substantial decrease in operating
expenses for Price Quest of $2.2 million somewhat offset by increased
operating expenses for the international businesses of $1.0 million over the
prior year due to the consolidation of the Panama joint venture operating
expenses. The year-to-date decrease was a result of the same factors as the
third quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
Percent
Amount Change Change
------- -------- ------
3rd Quarter - FY 1997 $952 $62 7%
3rd Quarter - FY 1996 890 --- ---
Year-to-date - FY 1997 $2,937 $264 10%
Year-to-date - FY 1996 2,673 --- ---
During the third quarter, the increase in expenses is due to an increase
in professional fees related to strategic corporate matters, somewhat offset
by a reduction in insurance costs, compared to the prior year. During the
year-to-date period, the increase in expense is also due to the increase in
professional fees as well as addition of management, somewhat offset by a
reduction in fees paid to Costco for administrative services.
13
<PAGE>
INTEREST INCOME (NET)
Percent
Amount Change Change
------- -------- ------
3rd Quarter - FY 1997 $2,130 $137 7%
3rd Quarter - FY 1996 1,993 --- ---
Year-to-date - FY 1997 $6,156 $734 14%
Year-to-date - FY 1996 5,422 --- ---
The increase in interest income for both the third quarter and
year-to-date periods, was due to higher interest income on invested cash
balances as well as a reduction in interest expense related to the Costco
note payable that was repaid during the fourth quarter of fiscal 1996. This
net improvement was somewhat offset by reductions in interest income from the
Atlas note due to its repayment during the third quarter as well as the City
Notes due to principal reductions of $4.7 million to various notes, and a
reduction in capitalized interest due to less construction activity in the
current fiscal year.
GAIN ON SALE OF INVESTMENT
Percent
Amount Change Change
------- -------- ------
3rd Quarter - FY 1997 $ 60 $ 60 100%
3rd Quarter - FY 1996 --- --- ---
Year-to-date - FY 1997 $782 $782 100%
Year-to-date - FY 1996 --- --- ---
The gain on sale of investment in third quarter fiscal 1997 relates to
the sale of the Company's options to purchase stock in Car Club. The
year-to-date amount also includes the gain on the sale of the Company's
preferred stock investment in Sneaker Stadium, a privately-held specialty
retailer.
MINORITY INTEREST
Percent
Amount Change Change
------- -------- ------
3rd Quarter - FY 1997 $ 36 $ (418) (92%)
3rd Quarter - FY 1996 454 --- ---
Year-to-date - FY 1997 $ (73) $(4,660) (102%)
Year-to-date - FY 1996 4,587 --- ---
Minority interest in the current year represents the 49% of earnings
allocated to the Panamanian joint venture partner, whereas in the prior year
it represents the allocation of Price Quest and Price Global Trading losses
to PriceCostco. 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, therefore there has been no allocation of losses to PriceCostco
during fiscal 1997.
14
<PAGE>
PROVISION FOR INCOME TAXES
Percent Effective
Amount Change Change Tax Rate
------- -------- ------ ---------
3rd Quarter - FY 1997 $3,009 $1,016 51% 41%
3rd Quarter - FY 1996 1,993 --- --- 41%
Year-to-date - FY 1997 $8,084 $2,210 38% 41%
Year-to-date - FY 1996 5,874 --- --- 47%
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
The Company currently holds cash of $83 million and is well positioned to
finance its business activities through a variety of additional sources. It
expects to satisfy short-term liquidity requirements through net cash
provided by real estate operations.
On July 2, 1997 the Company announced a corporate restructuring plan to
separate its real estate and merchandising businesses into two separate
publicly-held companies. A special dividend of one share in PriceSmart (the
merchandising businesses) for every four shares held in PEI is expected to be
distributed on August 29, 1997, or as soon as possible thereafter. Final
approval of the PriceSmart dividend is subject to various conditions and the
Price Enterprises board of directors has reserved the right to abandon, defer
or modify the proposed restructuring at any time prior to the declaration and
distribution of the special dividend. If the planned restructuring is
consummated, the Company will retain 27 investment properties with a net book
value of approximately $340 million and approximately $40 million in cash.
The unleveraged real estate portfolio should enable it to access significant
amounts of capital through bank credit facilities or debt offerings.
Should the restructuring not occur, the Company will retain $83 million
in cash as well as approximately $26 million of real estate assets which are
currently being held for sale. The cash flow that may ultimately be
generated by sales of these properties represents an additional source of
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 or debt offerings, or the Company may choose to seek
additional funds through future public equity offerings.
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.
15
<PAGE>
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---
None.
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. A final settlement was reached and approved by the
court. 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 Costco have
been terminated and an agreement regarding the Company's use of the mark
"PriceSmart" has become effective. During the third quarter, the Company
contributed $1.25 million to the award of attorneys' fees which was accrued
for in fourth quarter fiscal 1996.
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.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ---
(a) The following exhibits are included herein or incorporated by
reference:
(10.1) Employment Agreement, dated as of June 17, 1997,
by and between Price Enterprises, Inc. and Daniel T. Carter.
(10.2) Employment Agreement, dated as of June 18, 1997, by and between
Price Enterprises, Inc. and Jack McGrory.
(10.3) Employment Agreement, dated as of September 20, 1994, by and
between Price Enterprises, Inc. and Robert M. Gans
(incorporated 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).
(10.4) Amendment to Employment Agreement, dated as of April 28, 1997,
by and between Price Enterprises, Inc. and Robert M. Gans.
(10.5) Agreement Concerning Transfer of Certain Assets dated as of
November ___, 1996 by and among Price Enterprises, Inc., Costco
Companies, Inc. and certain of their respective subsidiaries
(incorporated by reference to Exhibit 10.2 to the Registration
Statement on Form 10 of PriceSmart, Inc. filed with the
Commission on July 3, 1997).
(15.1) Independent Accountants' Review Report.
(15.2) Letter re: Unaudited Interim Financial Information.
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed for the 12 weeks ended June 8, 1997.
17
<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 16, 1997 /S/ ROBERT E. PRICE
-----------------------------------
Robert E. Price
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: July 16, 1997 /S/ DANIEL T. CARTER
-----------------------------------
Daniel T. Carter
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
18
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into as of the 17th day of June, 1997, by and between Price Enterprises,
Inc., a Delaware corporation ("Employer"), and Daniel T. Carter ("Executive").
RECITALS
--------
A. Employer currently employs Executive as Executive Vice
President, Chief Financial Officer and Secretary of Employer, however, no
employment agreement has been memorialized.
B. Employer and Executive now desire to enter into a formal
employment agreement 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 1
EMPLOYMENT AND DUTIES
---------------------
1.1 POSITION AND DUTIES. Executive shall serve as Executive Vice
President, Chief Financial Officer and Secretary 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.
1.2 OUTSIDE BUSINESS ACTIVITIES PRECLUDED. During his employment,
Executive shall devote his full energies, interest, abilities and productive
time to the performance of this Agreement. 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,
1
<PAGE>
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 $182,000 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 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, subject to and on a basis consistent with the terms,
conditions and overall administration of such practices and plans. Executive
shall be entitled to a paid vacation each year, which will accrue and be paid
out in conformity with Employer's
2
<PAGE>
normal vacation pay practices. 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. During the term of his employment hereunder, Executive
shall be entitled to receive prompt reimbursement for all 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.
2.5 STOCK OPTION PLAN. Employer has adopted The Price Enterprises 1995
Combined Stock Grant and Stock Option Plan (the "Stock Plan"), pursuant to
which Executive was granted, on January 11, 1995, options to purchase 75,000
shares of Employer's Common Stock, with such options vesting at the rate of
twenty percent (20%) per year over a period of five (5) years and expiring
six (6) years from the date of grant. Such grant of options was and remains
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 be deemed
to have commenced on April 2, 1997 and shall continue until October 16, 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.
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,
3
<PAGE>
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. For
these purposes, 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;
or (g) conduct authorizing termination under Cal. Labor Code Section 2924.
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.
4
<PAGE>
ARTICLE IV
BENEFITS AFTER TERMINATION OF EMPLOYMENT
----------------------------------------
4.1 BENEFITS UPON TERMINATION. Upon termination of this Agreement
under Section 3.3 (Early Termination by Executive), Section 3.4 (Termination
for Cause) or Section 3.5 (Termination Due to Death or Disability), all
salary and benefits of Executive hereunder shall cease immediately. Upon
termination of this Agreement by Employer for any reason other than those set
forth in Section 3.4 or Section 3.5, Executive shall be entitled to the
continuation of Executive's base salary for the remainder of the Employment
Term, payable in equal installments in conformity with Employer's normal
payroll period. During the period of this severance pay, 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 such information to any person or use any
such information, except as
5
<PAGE>
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 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.
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 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
<PAGE>
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 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 SectionSection 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 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 deposited in the United States mail,
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.
7
<PAGE>
Address for Employer:
Price Enterprises, Inc.
4649 Morena Boulevard
San Diego, CA. 92117
Address for Executive:
Price Enterprises, Inc.
4649 Morena Boulevard
San Diego, CA. 92117
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.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto as of the date first above written.
EXECUTIVE EMPLOYER
- --------- --------
Daniel T. Carter PRICE ENTERPRISES, INC.
/s/ DANIEL T. CARTER By: /s/ ROBERT E. PRICE
- -------------------- -------------------
Name: ROBERT E. PRICE
-------------------
Title: PRESIDENT
-------------------
8
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered
into as of the 18th day of June, 1997, by and between Price Enterprises,
Inc., a Delaware corporation ("Employer"), and Jack McGrory Executive").
RECITALS
--------
A. Employer desires to employ Executive as an Executive Officer
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 of Employer and Chief Operating Officer of Employer's real estate
division and, after an anticipated reorganization of Employer (whereby the
Employer's merchandising businesses will be spun off into a separate public
company), Executive shall serve as the Chief Executive Officer of Employer.
Executive's responsibilities shall include management of Employer's real
estate portfolio. Executive shall have such other duties and authority as
are customary for, and commensurate with, such positions, 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. In addition, it is anticipated that after the aforementioned
reorganization is effectuated, Executive shall serve as a Director of
Employer and as an
1
<PAGE>
Ex-Officio Director of the separate merchandising public company. Executive
shall discharge his duties in a diligent and professional manner.
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. 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 $200,000 during the first year of the
Employment Term and the amount of $250,000 during each of the second and
third 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,
upon completion of the first year of the Employment Term Executive shall
receive a bonus in the amount of $50,000; thereafter, 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, subject to and on a basis consistent with the terms,
conditions and overall administration of such practices and plans. Executive
shall be entitled to a paid vacation each year, which will accrue and be paid
out in conformity with Employer's normal vacation pay practices. 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. During the term of his employment hereunder, Executive
shall be entitled to receive prompt reimbursement for all 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.
2.5 STOCK OPTION PLAN. Employer has adopted The Price Enterprises 1995
Combined Stock Grant and Stock Option Plan (the "Stock Plan"). Effective as
of the first date of the Employment Term, Executive will receive a grant of
options to purchase shares of Employer's Common Stock, the number of such
options equating to 1% of Employer's then-issued and outstanding shares of
Common Stock. Said options will be exercisable at a price equal to the fair
market value of the Common Stock as of the effective date of the grant (i.e.,
the first date of the Employment Term), with such options vesting at twenty
percent (20%) per year over a period of five (5) years and expiring six (6)
years from the effective date of grant. Said grant of options shall provide,
among other things, that in the event of any merger, consolidation or
reorganization of Employer with any other entity or entities not affiliated
with
3
<PAGE>
Employer, where Employer is not the surviving entity, occurring within three
(3) years of the commencement of the Employment Term, 60% of the total
options granted shall be deemed vested and the remaining 40% shall be deemed
cancelled. In addition, such options shall otherwise 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 September 2, 1997 and shall continue until September 1, 2000, 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.
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
4
<PAGE>
termination. For these purposes, termination for "Cause" shall mean
termination because of Executive's (a) personal dishonesty, willful
misconduct, or breach of fiduciary duty involving personal profit; or (b)
intentional failure to perform his stated duties.
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 this Agreement
under Section 3.3 (Early Termination by Executive), Section 3.4 (Termination
for Cause) or Section 3.5 (Termination Due to Death or Disability), all
salary and benefits of Executive hereunder shall cease immediately. Upon
termination of this Agreement by Employer for any reason other than those set
forth in Section 3.4 or Section 3.5, Executive shall be entitled to the
continuation of Executive's base salary for the remainder of the Employment
Term, payable in equal installments in conformity with Employer's normal
payroll period. During the period of this severance pay, 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.
5
<PAGE>
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 such information to any person or use any
such information, except as 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 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
6
<PAGE>
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.
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 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 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 SectionSection 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.
7
<PAGE>
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 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 deposited in the United States mail,
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:
Price Enterprises, Inc.
4649 Morena Boulevard
San Diego, CA. 92117
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.
8
<PAGE>
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.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties hereto as of the date first above written.
EMPLOYER EXECUTIVE
- -------- ---------
PRICE ENTERPRISES, INC. /s/ JACK McGRORY
--------------------
Jack McGrory
By: /s/ ROBERT PRICE
-------------------------
Name: ROBERT E. PRICE
-------------------------
Title: PRESIDENT
-------------------------
9
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement ("Amendment") is made and entered into
as of April 28, 1997, by and between Price Enterprises, Inc., a Delaware
Corporation ("Employer") and Robert M. Gans ("Executive").
RECITALS
--------
A. On September 20, 1994 an Employment Agreement was made and entered into
and between Executive and Employer.
B. On April 11, 1996, Section 2.3 of the Employment Agreement was modified,
such that Executive is entitled to three weeks paid vacation each year.
C. On July 23, 1996, Section 2.1 of the Employment Agreement was modified,
such that Executive's annual base salary was increased to $175,000.
D. Employer and Executive now desire to further amend the Employment
Agreement, as set forth hereinbelow:
AGREEMENT
---------
1. Section 3.1 of the Employment Agreement, which currently provides:
The term of Executive's employment hereunder shall commence on October
17, 1994 and shall continue until October 16, 1997 unless sooner
terminated or extended as hereinafter provided (the "Employment Term").
is hereby amended to provide as follows:
The term of Executive's employment hereunder shall commence on October
17, 1994 and shall continue until October 16, 1998, unless sooner
terminated or extended as hereinafter as provided (the "Employer Term").
<PAGE>
2. All other terms of the Employment Agreement shall remain unaltered and
fully effective.
Date: April 28, 1997
EXECUTIVE EMPLOYER
- --------- --------
PRICE ENTERPRISES, INC.
Robert M. Gans
By: /s/ ROBERT E. PRICE
/s/ ROBERT M. GANS -------------------
- ----------------------- Name: Robert E. Price
-------------------
Title: President
------------------
<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 8, 1997, and the related consolidated statements
of income for the twelve and forty week periods ended June 8, 1997 and June
9, 1996, and the consolidated statements of cash flows for the forty week
periods ended June 8, 1997 and June 9, 1996. 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
July 14, 1997
<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 July 14, 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 June 8, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of the 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 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-02-1996
<PERIOD-END> JUN-08-1997
<CASH> 82,750
<SECURITIES> 0
<RECEIVABLES> 39,597
<ALLOWANCES> 0
<INVENTORY> 4,179
<CURRENT-ASSETS> 106,978
<PP&E> 390,711
<DEPRECIATION> 42,906
<TOTAL-ASSETS> 542,336
<CURRENT-LIABILITIES> 12,460
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 524,424
<TOTAL-LIABILITY-AND-EQUITY> 542,336
<SALES> 46,239
<TOTAL-REVENUES> 93,867
<CGS> 44,109
<TOTAL-COSTS> 81,016
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,132
<INCOME-PRETAX> 19,716
<INCOME-TAX> 8,084
<INCOME-CONTINUING> 11,632
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,632
<EPS-PRIMARY> .50
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