<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 16, 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 23,347,454 common shares, par value $.0001, outstanding at
April 21, 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............................................15
ITEM 2 - CHANGES IN SECURITIES........................................15
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES..............................15
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS......................................................15
ITEM 5 - OTHER INFORMATION............................................16
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K.............................16
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
MARCH 16, AUGUST 31,
1997 1996
------------ -------------
<S> <C> <C>
ASSETS (unaudited) (Note)
Current Assets
Cash and cash equivalents $ 29,452 $ 15,458
Accounts receivable, net 9,516 7,019
Merchandise inventories 6,190 2,011
Prepaid expenses and other current assets 3,286 7,512
------------ --------------
Total current assets 48,444 32,000
Real Estate Assets
Land and land improvements 182,359 179,639
Building and improvements 193,396 190,969
Fixtures and equipment 7,556 5,958
Construction in progress 562 328
------------ --------------
383,873 376,894
Less accumulated depreciation (40,818) (35,831)
------------ --------------
343,055 341,063
Other Assets
Property held for sale, net 44,582 55,951
City notes receivable 25,076 29,091
Atlas and other notes receivable 47,790 48,328
Deferred income taxes 22,414 25,640
Deferred rents and leasing costs, net 16,831 15,867
------------ --------------
156,693 174,877
------------ --------------
Total Assets $548,192 $547,940
------------ --------------
------------ --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 4,714 $ 3,042
Accrued expenses 5,592 6,038
Other current liabilities 5,521 4,216
------------ --------------
Total current liabilities 15,827 13,296
Minority Interest 5,486 1,745
Stockholders' Equity
Common stock 2 2
Additional paid-in capital 534,668 534,004
Retained earnings (deficit) (7,791) (1,107)
------------ --------------
Total stockholders' equity 526,879 532,899
------------ --------------
Total Liabilities and Stockholders' Equity $548,192 $547,940
------------ --------------
------------ --------------
</TABLE>
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 data)
<TABLE>
<CAPTION>
SECOND QUARTER YEAR-TO-DATE
(12 WEEKS) (28 WEEKS)
------------------------- -------------------------
MARCH 16, MARCH 17, MARCH 16, MARCH 17,
1997 1996 1997 1996
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
REVENUES
Real estate $14,166 $14,152 $28,503 $27,287
Gain on sale of real estate, net 910 179 1,349 657
Merchandise sales 11,604 5,205 32,172 22,702
Other revenues 1,587 420 2,976 793
----------- ------------ ------------ -----------
Total revenues 28,267 19,956 65,000 51,439
OPERATING EXPENSES
Real estate:
Operating, maintenance and administrative expenses 2,486 3,100 5,483 5,558
Property taxes 2,366 2,250 4,301 4,166
Depreciation and amortization 2,444 2,494 4,929 4,986
Merchandising:
Cost of sales 10,578 5,775 31,051 21,743
Operating expenses 3,761 5,356 9,512 12,027
General and administrative 882 843 1,985 1,783
Provision for asset impairments --- 1,000 --- 1,000
----------- ------------ ------------ -----------
Total operating expenses 22,517 20,818 57,261 51,263
----------- ------------ ------------ -----------
Operating income 5,750 (862) 7,739 176
INTEREST AND OTHER
Interest income, net 2,131 1,741 4,026 3,429
Gain on sale of investment 722 --- 722 ---
Minority interest (109) 2,110 (109) 4,133
----------- ------------ ------------ -----------
Total interest and other 2,744 3,851 4,639 7,562
----------- ------------ ------------ -----------
Income before provision for income taxes 8,494 2,989 12,378 7,738
Provision for income taxes 3,483 1,225 5,075 3,881
----------- ------------ ------------ -----------
Net Income $ 5,011 $ 1,764 $ 7,303 $ 3,857
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Net Income Per Share $.21 $.08 $.31 $.17
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Average number of shares outstanding 23,327 23,256 23,310 23,244
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - amounts in thousands)
<TABLE>
<CAPTION>
YEAR-TO-DATE
(28 WEEKS)
----------------------
MARCH 16, MARCH 17,
1997 1996
---------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 7,303 $3,857
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,615 5,926
Gain on sale of real estate assets (1,358) (462)
Provision for asset impairments --- 1,000
Minority interest 109 (4,133)
Change in accounts receivable and other assets 775 6,506
Change in accounts payable and other liabilities 2,531 (138)
Deferred rents and leasing costs (964) (1,579)
---------- ----------
Net cash flows provided by operating activities 14,011 10,977
INVESTING ACTIVITIES
Additions to real estate assets (8,154) (12,728)
Proceeds from sale of real estate assets 13,275 9,953
Additions to notes receivable --- (1,080)
Payments of notes receivable 4,553 1,058
---------- ----------
Net cash flows provided by (used in) 9,674 (2,797)
investing activities
FINANCING ACTIVITIES
Line of credit repayments --- (1,001)
Contributions by Panama joint venture partner 3,632 ---
Proceeds from exercise of stock options including
tax benefit 664 484
Dividends paid (13,987) ---
---------- ----------
Net cash flows used in financing activities (9,691) (517)
---------- ----------
Net increase in cash 13,994 7,663
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
15,458 ---
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $29,452 $7,663
---------- ----------
---------- ----------
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 16, 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 28 weeks ended March 16, 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
<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 March 16, 1997, 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
March 16, 1997.
NOTE 5 - RESERVE
During the first half 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 - SUBSEQUENT EVENT
Subsequent to March 16, 1997 the Company declared a cash dividend of $0.30 per
share, totaling approximately $7.0 million, payable on May 15, 1997 to
stockholders of record on May 1, 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 second quarter and year-to-date periods of fiscal 1997 ended March 16,
1997 to the second quarter and year-to-date periods of fiscal 1996 ended March
17, 1996. 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.
<TABLE>
<CAPTION>
REAL ESTATE RENTAL OPERATIONS
Revenue Percent Operating Percent
Amount Change Income Change Change
---------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
2nd Quarter - FY 1997 $14,166 0% $ 6,870 $ 562 9%
2nd Quarter - FY 1996 14,152 -- 6,308 -- --
Year-to-date - FY 1997 $28,503 4% $ 13,790 $1,213 10%
Year-to-date - FY 1996 27,287 -- 12,577 -- --
</TABLE>
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.
During the second quarter and year-to-date periods, 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.
<TABLE>
<CAPTION>
ADJUSTED FUNDS FROM OPERATIONS
Less Add Adjusted
Operating Straight-line Depreciation Funds from Percent
Income Rentals Expense Operations Change
----------- --------------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
2nd Quarter - FY 1997 $ 6,870 $ (384) $2,444 $ 8,930 10%
2nd Quarter - FY 1996 6,308 (666) 2,494 8,136 --
Year-to-date - FY 1997 $13,790 $(1,148) $4,929 $17,571 9%
Year-to-date - FY 1996 12,577 (1,446) 4,986 16,117 --
</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), it is the pretax income determined in accordance with generally
accepted accounting principles (GAAP), excluding
10
<PAGE>
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.
GAINS ON SALE OF REAL ESTATE
<TABLE>
<CAPTION>
Percent
Amount Change Change
---------- ----------- -----------
<S> <C> <C> <C>
2nd Quarter - FY 1997 $ 910 $731 408%
2nd Quarter - FY 1996 179 --- ---
Year-to-date - FY 1997 $1,349 $692 105%
Year-to-date - FY 1996 657 --- ---
</TABLE>
During the second quarter of fiscal 1997, gains on the sale of real estate
related primarily to the sale of property in Schaumburg (IL). The fiscal 1997
year-to-date amount also reflects gains on the sales of properties in Colton
(CA), and Concord (CA).
During the second quarter of fiscal 1996, gains on the sale of real estate
include a gain on the sale of property in San Diego, (Convoy Ct.) (CA). The
fiscal 1996 year-to-date amount also includes gains on the sales of properties
in S.W. Denver (CO) and North Highlands (CA), partially offset by a loss on the
sale of property in West Palm Beach (FL) during the first quarter.
MERCHANDISING OPERATIONS
<TABLE>
<CAPTION>
Sales Percent Gross % of
Amount Change Margin Sales
--------- --------- --------- -------
<S> <C> <C> <C> <C>
2nd Quarter - FY 1997 $11,604 123% $1,026 8.8%
2nd Quarter - FY 1996 5,205 -- (570) -11.0%
Year-to-date - FY 1997 $32,172 42% $1,121 3.5%
Year-to-date - FY 1996 22,702 -- 959 4.2%
</TABLE>
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 second quarter the increase in sales is
attributed to a 230% increase in international sales, from $3.4 million in
second quarter fiscal 1996 to $11.2 million for the same period in fiscal 1997,
primarily as a result of increased sales to the Saipan and Guam locations as
well as consolidated sales of the 51% owned Panama location which opened during
the first quarter of the current year.
The increase in gross margin as a percent of sales during second quarter
fiscal 1997 was primarily due to consolidating Panama sales which have a gross
margin of approximately 14%,
11
<PAGE>
somewhat offset by negative gross margin at Price Quest due to a mark-down
reserve of $0.2 million taken during the quarter. The negative gross margin in
fiscal year 1996 was due to the impact of reserves related to Price Quest.
During the 28-week year-to-date period the decrease in gross margin was a result
of an additional reserve of $0.7 million taken during first quarter fiscal 1997
for Price Quest inventory.
MERCHANDISING OPERATING EXPENSES
Percent
Amount Change Change
----------- ---------- ----------
2nd Quarter - FY 1997 $ 3,761 $(1,595) -30%
2nd Quarter - FY 1996 5,356 -- --
Year-to-date - FY 1997 $ 9,512 $(2,515) -21%
Year-to-date - FY 1996 12,027 -- --
During the second 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 and reduction in severance expense, of
which $0.7 million was recorded in the prior year second quarter and for which
no comparable amount was recorded in the current year. These decreases were
somewhat offset by increased operating expenses for the international businesses
of $1.3 million over the prior year. The year-to-date decrease was a result of
the same factors as the second quarter.
GENERAL AND ADMINISTRATIVE EXPENSES
Percent
Amount Change Change
----------- --------- -----------
2nd Quarter - FY 1997 $ 882 $ 39 5%
2nd Quarter - FY 1996 843 -- --
Year-to-date - FY 1997 $ 1,985 $ 202 11%
Year-to-date - FY 1996 1,783 -- --
During the second quarter and year-to-date periods, the increase in
expenses is due to an increase in professional fees and the addition of
management, somewhat offset by a reduction in legal fees, insurance costs and
fees paid to PriceCostco for administrative services, compared to the prior
year.
INTEREST INCOME (NET)
Percent
Amount Change Change
----------- --------- ----------
2nd Quarter - FY 1997 $ 2,131 $ 390 22%
2nd Quarter - FY 1996 1,741 -- --
Year-to-date - FY 1997 $ 4,026 $ 597 17%
Year-to-date - FY 1996 3,429 -- --
The increase in interest income for both the second 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 PriceCostco note payable
that was repaid during the fourth quarter of fiscal 1996. This net improvement
was somewhat offset by a reduction in interest income from the City
12
<PAGE>
Notes due to principal reductions of $4.0 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
----------- --------- ----------
2nd Quarter - FY 1997 $ 722 $ 722 100%
2nd Quarter - FY 1996 -- -- --
Year-to-date - FY 1997 $ 722 $ 722 100%
Year-to-date - FY 1996 -- -- --
The gain on sale of investment in second quarter fiscal 1997 relates to the
sale of the Company's preferred stock investment in Sneaker Stadium, a
privately-held specialty retailer.
MINORITY INTEREST
Percent
Amount Change Change
----------- --------- ----------
2nd Quarter - FY 1997 $ (109) $(2,219) -105%
2nd Quarter - FY 1996 2,110 -- --
Year-to-date - FY 1997 $ (109) $(4,242) -103%
Year-to-date - FY 1996 4,133 -- --
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.
PROVISION FOR INCOME TAXES
Percent Effective
Amount Change Change Tax Rate
--------- --------- --------- ------------
2nd Quarter - FY 1997 $3,483 $2,258 184% 41%
2nd Quarter - FY 1996 1,225 -- -- 41%
Year-to-date - FY 1997 $5,075 $1,194 31% 41%
Year-to-date - FY 1996 3,881 -- -- 50%
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.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
While the Company is well positioned to finance its business activities
through a variety of sources, it expects to satisfy short-term liquidity
requirements through net cash provided by real estate operations and through
borrowings under the unsecured revolving line of credit facility. Approximately
$45 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 March
16, 1997, 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.
14
<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 ---
The annual meeting of the Company's stockholders was held on January 14,
1997. As of the record date there were 23,301,294 shares outstanding.
The following Directors were elected at the meeting:
Votes For Votes Withheld
----------------- -------------------
William P. Dickey 21,373,266 17,758
Murray L. Galinson 21,373,428 17,596
Katherine L. Hensley 21,373,166 17,858
Leon C. Janks 21,373,236 17,788
Paul A. Peterson 21,372,968 18,056
Robert E. Price 21,373,268 17,756
15
<PAGE>
ITEM 5. OTHER INFORMATION ---
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ---
(a) The following exhibits are included herein or incorporated by
reference:
(15.1) Independent Accountants' Review Report
(15.2) Letter re: Unaudited Interim Financial Information
(27) Financial Data Schedules
(b) No reports on Form 8-K were filed for the 12 weeks ended March 16,
1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRICE ENTERPRISES, INC.
Registrant
Date: April 24, 1997 /s/ Robert E. Price
-------------------
Robert E. Price
PRESIDENT & CHIEF EXECUTIVE
OFFICER
Date: April 24, 1997 /s/ Daniel T. Carter
--------------------
Daniel T. Carter
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
17
<PAGE>
EXHIBIT 15.1 - - INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors
Price Enterprises, Inc.
We have reviewed the accompanying consolidated balance sheet of Price
Enterprises, Inc. as of March 16, 1997, and the related consolidated statements
of income for the twelve and twenty-eight week periods ended March 16, 1997 and
March 17, 1996, and the consolidated statements of cash flows for the
twenty-eight week periods ended March 16, 1997 and March 17, 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
April 11, 1997
18
<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 April 11, 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 March 16, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part
of a registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
San Diego, California
April 11, 1997
19
<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> MAR-16-1997
<CASH> 29,452
<SECURITIES> 0
<RECEIVABLES> 82,382
<ALLOWANCES> 0
<INVENTORY> 6,190
<CURRENT-ASSETS> 48,444
<PP&E> 383,873
<DEPRECIATION> 40,818
<TOTAL-ASSETS> 548,192
<CURRENT-LIABILITIES> 15,827
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 526,877
<TOTAL-LIABILITY-AND-EQUITY> 548,192
<SALES> 32,172
<TOTAL-REVENUES> 65,000
<CGS> 31,051
<TOTAL-COSTS> 57,261
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 778
<INCOME-PRETAX> 12,378
<INCOME-TAX> 5,075
<INCOME-CONTINUING> 7,303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,303
<EPS-PRIMARY> .31
<EPS-DILUTED> .31
</TABLE>
