UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from September 1, 1997 to December 31, 1997.
Commission file number 0-20449
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PRICE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0628740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4649 Morena Boulevard, San Diego, California 92117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 619-581-4530
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.0001 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ or No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant as of January 31, 1998 was $242,862,144 based
on the last reported sale of $19.63 per share on January 31, 1998.
The number of outstanding shares of the registrant's common stock as of
January 31, 1998 was 23,738,181.
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PRICE ENTERPRISES, INC.
Annual Report on Form 10-K
for the Transition Period Ended December 31, 1997
TABLE OF CONTENTS
PART
Item 1. Business .................................................... 3
Item 2. Properties ..................................................11
Item 3. Legal Proceedings ...........................................14
Item 4. Submission of Matters to a Vote of Security Holders .........14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ....................................15
Item 6. Selected Financial Data .....................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk ...................................................23
Item 8. Financial Statements and Supplementary Data .................24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ....................42
PART III
Item 10. Directors and Executive Officers of the Registrant ..........42
Item 11. Executive Compensation ......................................45
Item 12. Security Ownership of Certain Beneficial Owners
and Management .........................................49
Item 13. Certain Relationships and Related Transactions...............51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.....................................54
<PAGE>
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a new "safe harbor" for these types of statements. To the extent
statements in this Form 10-K involve, without limitation, the Company's
expectations for growth, estimates of future revenue, expenses, profit, cash
flow, balance sheet items or any other guidance on future periods, these
statements are forward-looking statements. Forward-looking statements contain
risks and uncertainties which include those identified in this Form 10-K and
other risks identified from time to time in the Company's filings with the
Securities and Exchange Commission, press releases and other communications. The
Company assumes no obligation to update forward-looking statements.
PART I
ITEM 1 - Business
Formation of the Company and Subsequent Transactions
Price Enterprises, Inc. ("Price Enterprises," "PEI" or "the Company"), was
incorporated in July 1994 as a Delaware corporation. The Company began
operations effective August 29, 1994 as a wholly owned subsidiary of Costco
Companies, Inc. ("Costco"), formerly Price/Costco, Inc., with specific assets
received from Costco pursuant to the Amended and Restated Agreement of Transfer
and Plan of Exchange ("Exchange Agreement"). PEI became a separate publicly
traded Company on December 21, 1994 upon completion of the voluntary exchange
offer made by Costco to its stockholders whereby such stockholders were given
the choice to either continue to own shares of Costco or exchange all or a
portion of their holdings into an equal number of shares of PEI.
Prior to consummation of the exchange offer, Costco transferred to PEI
substantially all of the real estate assets which historically formed the
non-club real estate business segment of Costco; four existing Costco warehouses
which are adjacent to certain transferred properties, and which have been leased
back to Costco effective August 29, 1994; a 51% interest in Price Quest, Inc.
("PQI") and a 51% interest in Price Global Trading, Inc. ("PGT"), with Costco
initially retaining the remaining 49% interests. The Company's interests in both
PQI and PGT were subsequently increased to 100%. Also transferred to the Company
were notes receivable from various municipalities and agencies ("City Notes")
and certain other assets no longer owned by the Company.
On June 27, 1997, the Board of Directors of PEI determined that it would be in
the best interest of PEI and its stockholders to separate PEI's core real estate
business from its merchandising businesses. Accordingly, the PEI board approved
a spin-off transaction pursuant to which PEI would continue to conduct its real
estate business consisting of an initial asset base of 27 retail properties and
$40 million of cash following the spin-off. PEI's merchandising businesses, real
estate properties held for sale by PEI, the City Notes and certain secured notes
receivable from
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buyers of properties formerly held by PEI (the "Other Notes") would be spun-off
to PriceSmart, Inc. ("PriceSmart"), a Delaware corporation and wholly-owned
subsidiary of PEI.
On August 29, 1997, PEI separated itself from PriceSmart by distributing one
share of common stock of PriceSmart for every four shares of Common Stock held
by PEI's stockholders of record on August 15, 1997 pursuant to a distribution
agreement dated as of August 26, 1997 between PEI and PriceSmart (the
"Distribution"). Since the Distribution, PEI has engaged in a combination of
acquiring, developing, owning, managing and/or selling real estate assets.
The Company believes that the Distribution has resulted in PEI becoming eligible
to elect Federal tax treatment as a real estate investment trust ("REIT"). In
order to qualify as a REIT, PEI was required to (i) divest certain assets not
related to its real estate business, such as the merchandising businesses, and
(ii) distribute an amount of taxable dividends at least equal to its current and
accumulated earnings and profits, much of which represents an allocation from
Costco as a result of the spin-off by Costco of PEI in December 1994. The
Distribution satisfied these two requirements. By qualifying as a REIT, PEI will
substantially eliminate the taxation on corporate income from the real estate
business. Effective January 2, 1998, the Company was reincorporated in the State
of Maryland.
Overview of the Company's Business
The Company's principal business is acquiring, developing, operating, managing
and leasing real property. The Company's current portfolio is substantially
comprised of commercial rental properties including shopping centers and "power
centers" leased to major retail tenants such as Costco, The Sports Authority,
The Home Depot, Kmart, Marshalls, PetsMart and Borders Books. Approximately 59%
of annual minimum rents are derived from tenants with investment grade credit
ratings.
For a description of the Company's properties and of material developments
during the year regarding these investments and the Company as a whole,
reference is made to "Item 2 -- Properties" and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations"
hereof.
The Company's business strategy is to continue to enhance the value and
operating income of the Company's portfolio by, among other things, completing
the development and leasing of existing properties and acquiring new investment
properties. In making new real estate investments, the Company intends to
continue to place emphasis on acquiring well-located income-producing commercial
properties, principally occupied by credit rated tenants in the Western and
Northeastern United States, with attractive yields and potential for increases
in income and capital appreciation. The Company may also take advantage of
particularly attractive investments in other geographic areas and product types
in order to enhance stockholder value. The Company also may participate in
public-private partnerships to acquire and develop or redevelop properties in
major cities. In addition, the Company will from time to time consider the
disposition or exchange of existing investments in order to improve its
investment portfolio or increase its funds from operations. The Company's
management continuously reviews the Company's properties and attempts to develop
appropriate programs to renovate and modernize its properties in order to
improve funds from operations and property values. The Company's
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investment and portfolio management objective is to maximize funds from
operations and distributions to shareholders. The Company also currently owns
and operates a self storage business, "Price Self Storage," with one facility
open in San Diego, CA. The Company has decided to expand the self storage
business on a limited basis.
The Company directly provides property management for all of its properties.
Self-management enables the Company to more closely control leasing and property
management. Internal property management also provides the Company opportunities
for operating efficiencies by enabling it to acquire additional properties
without proportionate increases in property management expenses. The Company's
property management program is implemented by property management and leasing
professionals located in offices in San Diego, CA, Fairfax, VA and White Plains,
NY.
The results of the Company's operations depend upon the performance of its
existing real estate investment portfolio, the availability of suitable
opportunities for new real estate investments and the yields then available on
such investments, as well as the cost of capital related to these investments.
Such yields will vary with the type of investment involved, the condition of the
financial and real estate markets, the nature and geographic location of the
property, competition and other factors. The performance of a real estate
investment company is strongly influenced by the cycles of the real estate
industry. See "Factors That May Affect Future Performance - Economic Performance
and Value of Centers Dependent on Many Factors."
Competition
The Company competes with a wide variety of corporate and individual real estate
developers and real estate investment trusts which have investment objectives
similar to those of PEI and which may have greater financial resources, larger
staffs or longer operating histories than PEI.
The Company competes with other property owners to obtain tenants for its retail
shopping center properties. The Company's competitive advantages are primarily
based on significant customer traffic generated by its national and regional
tenants, competitive lease terms and relatively high occupancy rates. The
closing or relocation of any anchor tenant could have a material adverse effect
on the operation of a shopping center. See "Factors That May Affect Future
Performance - Competition for Acquisition of Real Estate."
Significant Tenants
The Company's seven largest tenants account for approximately 41% of total gross
leasable area ("GLA") and approximately 50% of the Company's total annual
minimum rent revenues. Certain information with respect to these tenants is set
forth in the following table (dollars in thousands):
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<TABLE>
<CAPTION>
Percent of Annual Percent of
Number Area Under GLA Under Minimum Total Annual
Tenant of Leases Lease (sq ft) Lease Rent Minimum Rent
-------------- ----------------- ---------------- --------------- -----------------------
<S> <C> <C> <C> <C> <C>
Costco 4 612,675 16.0% $ 8,219.5 19.1%
The Sports Authority 8 341,217 8.9% 4,152.2 9.7%
The Home Depot 2 214,173 5.6% 2,550.7 5.9%
Kmart 1 110,054 2.9% 1,842.9 4.3%
Marshalls 2 87,968 2.3% 1,734.6 4.0%
PetsMart 6 155,278 4.0% 1,583.8 3.7%
Borders Books 2 62,950 1.6% 1,505.0 3.5%
-------------- ----------------- ---------------- --------------- -----------------------
25 1,584,315 41.3% $21,588.7 50.2%
============== ================= ================ =============== =======================
</TABLE>
While none of the Company's largest tenants has experienced any recent
significant financial hardships of which the Company is aware, it is not
uncommon for economic conditions, market surpluses of retail space and
competitive pressures to negatively impact financial results of retail
operators. Homeplace, Caldor, Today's Man, Levitz Furniture, Wurlitzer, Lauriat
Books and Country Harvest Buffet have filed for protection under Chapter XI
provisions of the Federal bankruptcy law. The Company has one lease with each of
these tenants which together comprise 7.3% of the Company's gross leaseable area
and approximately 8.0% of annualized minimum rents as of December 31, 1997. See
"Factors That May Affect Future Performance - Risk of Bankruptcy of Major
Tenants."
Environmental Matters
The Company's ownership of real properties could subject it to certain
environmental liabilities. As discussed below, certain of the Company's
properties have known environmental liabilities, and certain other properties
are located in areas of current or former industrial activity, where
environmental contamination may have occurred. In conjunction with the spin-off
of the Company from Costco, the Company has agreed to indemnify Costco against
and hold Costco harmless from all environmental liabilities that relate to or
arise out of the real properties which were transferred to the Company by Costco
in 1994.
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and remediate releases or threatened releases of
hazardous or toxic substances or petroleum products located at such property,
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and remediation costs incurred by such parties in
connection with the contamination. Under certain of these laws, liability may be
imposed without regard to whether the owner knew of or caused the presence of
the contaminants. These costs may be substantial, and the presence of such
substances, or the failure to remediate properly the contamination on such
property, may adversely affect the owner's ability to sell or lease such
property or to borrow money using such property as collateral. Certain Federal
and state laws require the removal or encapsulation of asbestos-containing
material in poor condition in the event of remodeling or renovation. Other
Federal, state and local laws have been enacted to protect sensitive
environmental resources, including threatened and endangered species and
wetlands. Such laws may restrict the development and diminish the value of
property which is inhabited by an
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endangered or threatened species, is designated as critical habitat for an
endangered or threatened species or is characterized as wetlands.
In 1994, Costco engaged environmental consultants to conduct Phase I assessments
(involving investigation without soil sampling or groundwater analysis) at each
of the properties that Costco transferred to the Company. The Company is not
aware of any environmental liability or noncompliance with applicable
environmental laws or regulations, revealed by the Phase I assessments or
otherwise, that would have a material adverse effect on its business, assets or
results of operations. Nevertheless, there can be no assurance that the
Company's knowledge is complete with regard to, or that the Phase I assessments
have identified, all material environmental liabilities. Set forth below are
summaries of certain environmental matters relating to certain of the Company's
properties.
Azusa. The Azusa site is a 17.4 acre site located in Azusa, California. The
Price Company ("Price"), a subsidiary of Costco, purchased the Azusa site in
1983 from Huffy Corporation ("Huffy"). Huffy operated a bicycle manufacturing
facility on the Azusa site from 1959 until 1982. While it was operated by Huffy,
the Huffy site contained a degreasing facility that allegedly released Volatile
Organic Compounds ("VOCs"), into the soil. After purchasing the Azusa site,
Price converted the bicycle manufacturing facility into a Price Club warehouse
and tire center. In 1989, Price Club relocated to a new building on an adjacent
property.
The Azusa site currently is located within the Baldwin Park Operable Unit
("BPOU") of the San Gabriel Valley Area 2 Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA") site. The BPOU
addresses a large area of groundwater contamination in the San Gabriel Valley.
VOCs, including trichloroethylene and perchloroethylene, are present in the
groundwater throughout a several mile long area, extending beneath the cities of
Azusa, Irwindale and Baldwin Park, California. Price received a general notice
of potential liability letter from the United States Environmental Protection
Agency (the "EPA") for the BPOU dated August 4, 1993, and is one of
approximately 110 potentially responsible parties ("PRPs"), representing 20-25
contaminated parcels, to have received such notice for the BPOU.
In March 1994, the EPA published a Record of Decision ("ROD") which documents
the selection of remedial alternatives for the BPOU. The EPA estimates that its
preferred remedy, as outlined in the ROD, will cost between $100 and $130
million. The San Gabriel Basin Water Quality Authority ("SGBWQA") has proposed
an alternative remedy for the BPOU, which will cost an estimated $25 to $30
million. A group of PRPs, including Huffy, the SGBWQA and the EPA currently are
negotiating the final remedy for the BPOU. The Company lacks sufficient
information regarding the activity of other PRPs to form an estimate of the
equitable share of total costs that could be allocated to its Azusa site.
To date, Price and Huffy have spent an aggregate of approximately $250,000 in
investigation and monitoring costs. Approximately $225,000 of those costs were
shared equally by Price and Huffy under an informal cost sharing agreement.
Under their current cost sharing agreement, however, Huffy is paying 85% of
site-related costs (except for certain limited costs associated with quarterly
water monitoring and monthly water level gauging).
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Also, on January 11, 1995, the EPA wrote Price a "no intended action" letter
stating, "This letter is to inform you that USEPA does not plan to ask you or
your company to participate in the clean-up of the regional groundwater
contamination."
To the extent that there is any liability associated with the Azusa site, the
Company believes such liability should be attributed to Huffy. However, the
Company and Huffy have not negotiated a final allocation of costs as between
themselves. There can be no assurance that Huffy will contribute to any further
costs. Based upon a number of factors, including the EPA "no intended action"
letter, the current status of negotiations regarding the alternative remedy, the
cost of the final remedy, and the Company's allocated equitable share of that
cost as between it, Huffy and/or other PRPs, the Company believes its liability
associated with the Azusa site would not have a material adverse effect on the
financial condition and results of operations of the Company.
Pentagon City. The Pentagon City site is a 16.8 acre site in Arlington,
Virginia. Elevated levels of heavy metals are present in groundwater beneath the
Pentagon City site. Also, petroleum hydrocarbons are present in soil at the
site. By letters dated January 31, 1995 and March 22, 1994, the Virginia
Department of Environmental Quality is requiring no further action at the site
with regard to the heavy metals and petroleum hydrocarbon contamination. The
Company has not been notified by any governmental authority, and is not
otherwise aware, of any other material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with the Pentagon City site. Nevertheless, the Company's ownership of the
Pentagon City site creates the potential of liability for remediation costs
associated with groundwater beneath, and soils at, the site.
Signal Hill. The Signal Hill site is a 15.0 acre site in Signal Hill,
California. This site, and the adjoining properties, historically have been used
for oil and gas extraction activities, and the site currently has several active
and abandoned oil and gas production and injection wells. Prior to development
in the early 1990s, the prior owner excavated and treated over 100,000 cubic
yards of petroleum hydrocarbon contaminated soil. However, in 1992, certain
areas of the site were known to be still contaminated with petroleum
hydrocarbons and certain solvents in varying concentrations. The City of Signal
Hill Redevelopment Agency has indemnified the prior owner for environmental
expenses incurred through 1999 with respect to hazardous materials in the soil
and through 2001 with respect to hazardous materials in the groundwater. This
indemnity has been transferred to the Company.
New Britain. The New Britain site is a 17.8 acre site in New Britain,
Connecticut. The site previously contained a dry cleaning establishment and a
gas station. The site contains low levels of petroleum hydrocarbons and VOCs in
the soil and groundwater. The Company is continuing to remediate the soil and
groundwater at this property under the supervision of local authorities. The
Company estimates that the total cost of this remediation is not expected to
exceed $50,000 in the aggregate over the next three years.
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PEI owned additional properties with environmental issues that were sold by PEI
prior to the Distribution or that were transferred to PriceSmart in the
Distribution. PriceSmart has agreed to indemnify the Company for environmental
liabilities arising out of such properties.
Employees
The Company employed 32 employees as of December 31, 1997 including 15
responsible for property management, 13 employed in finance and administration
and 4 employed in the self storage business. The Company provides centralized
and comprehensive employee benefit programs for all eligible employees.
Seasonality
The Company's real estate operations generally are not subject to seasonal
fluctuations.
Corporate Headquarters
The Company maintains its headquarters in San Diego, California adjacent to the
Morena Boulevard Costco facility, and it believes that its current facilities
meet its expected requirements over the next 12 months.
Factors That May Affect Future Performance
Economic Performance and Value of Centers Dependent on Many Factors. Real
property investments are subject to varying degrees of risk. The economic
performance and values of real estate can be affected by many factors, including
changes in the national, regional and local economic climates, local conditions
such as an oversupply of space or a reduction in demand for real estate in the
area, the attractiveness of the properties to tenants, competition from other
available space, the ability of the owner to provide adequate maintenance and
insurance, and increased operating costs. In recent years, there has been a
proliferation of new retailers and a growing consumer preference for
value-oriented shopping alternatives that have, among other factors, heightened
competitive pressures. In certain areas of the country, there may also be an
oversupply of retail space. As a consequence, many companies in all sectors of
the retailing industry have encountered significant financial difficulties. A
substantial portion of the Company's income is derived from rental revenues from
retailers in community shopping centers and power centers. Accordingly, no
assurance can be given that the Company's financial results will not be
adversely affected by these developments in the retail industry.
Dependence on Rental Income from Real Property. Since substantially all of the
Company's income is derived from rental income from real property, the Company's
income and funds available for distribution would be adversely affected if a
significant number of the Company's tenants were unable to meet their
obligations to the Company or if the Company were unable to lease a significant
amount of space in its properties on economically favorable lease terms. There
can be no assurance that any tenant whose lease expires in the future will renew
such lease or that the Company will be able to re-lease space on economically
advantageous terms.
Illiquidity of Real Estate Investments. Equity real estate investments are
relatively illiquid and therefore tend to limit the ability of the Company to
vary its portfolio promptly in response to changes in economic or other
conditions. In addition, to the extent the properties are not subject to triple
net leases, certain significant expenditures such as real estate taxes and
maintenance
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costs are generally not reduced when circumstances cause a reduction in income
from the investment. Should such events occur, the Company's income and funds
available for distribution would be adversely affected.
Risk of Bankruptcy of Major Tenants. The bankruptcy or insolvency of a major
tenant or a number of smaller tenants may have an adverse impact on the
properties affected and on the income produced by such properties. Under
bankruptcy law, a tenant has the option of assuming (continuing) or rejecting
(terminating) any unexpired lease. If the tenant assumes its lease with the
Company, the tenant must cure all defaults under the lease and provide the
Company with adequate assurance of its future performance under the lease. If
the tenant rejects the lease, the Company's claim for breach of the lease would
(absent collateral securing the claim) be treated as a general unsecured claim.
The amount of the claim would be capped at the amount owed for unpaid
pre-petition lease payments unrelated to the rejection, plus the greater of one
year's lease payments or 15% of the remaining lease payments payable under the
lease (but not to exceed the amount of three years' lease payments).
Reliance on Major Tenants. As of December 31, 1997, the Company's largest tenant
was Costco which accounted for approximately 19.1% of the Company's total annual
minimum rent revenue as of such date. The financial position of the Company and
its ability to make distributions may be adversely affected by financial
difficulties experienced by such tenant, or any other major tenant of the
Company, including a bankruptcy, insolvency or general downturn in business of
any such tenant or in the event any such tenant does not renew its leases as
they expire.
Control by Directors and Executive Officers. Robert E. Price, who is Chairman of
the Board, and Sol Price, a significant stockholder of PEI and the father of
Robert E. Price, beneficially owned as of December 31, 1997 an aggregate of
approximately 11.2 million shares, or 47.1% of the outstanding PEI Common Stock.
See "Item 12 Security Ownership of Certain Beneficial Owners and Management." As
a result, these stockholders will effectively control the outcome of all matters
submitted to the Company's stockholders for approval, including the election of
directors. In addition, such ownership could discourage acquisition of Company
Common Stock by potential investors, and could have an anti-takeover effect,
possibly depressing the trading price of Company Common Stock.
Competition for Acquisition of Real Estate. The Company faces competition in the
acquisition, operation and sale of its properties. Such competition can be
expected from other businesses, individuals, fiduciary accounts and plans and
other entities engaged in real estate investment. Some of the Company's
competitors are larger and have greater financial resources than the Company.
This competition may result in a higher cost for properties the Company wishes
to purchase. The tenants leasing the Company's properties generally face
significant competition from other operators. This may result in an adverse
impact on that portion, if any, of the rental stream to be paid to the Company
based on a tenant's revenues and may also adversely impact the tenants' results
of operations or financial condition.
Environmental Risks. Under various Federal, state and local laws, ordinances and
regulations, the Company may be considered an owner or operator of real
property, or may have arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may become liable for
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the costs of removal or remediation of certain hazardous substances released on
or in its property or disposed of by it, as well as certain other potential
costs which could relate to hazardous or toxic substances (including
governmental fines and injuries to persons and property). Such liability may be
imposed whether or not the Company knew of, or was responsible for, the presence
of such hazardous or toxic substances.
Taxation of the Company. The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986 as Amended (the "Code"), commencing with the four
months ended December 31, 1997. To maintain its status as a REIT for Federal
income tax purposes, the Company generally is required each year to distribute
to its stockholders at least 95% of its taxable income. In addition, the Company
is subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income for such calendar year, 95% of its capital
gain income for the calendar year and any amount of such taxable income that was
not distributed in prior years. As long as the Company meets the requirements
under the Code, for qualification as a REIT each year, the Company will be
entitled to a deduction when calculating its taxable income for dividends paid
to its stockholders. For the Company to qualify as a REIT, however, certain
detailed technical requirements must be met (including certain income, asset and
stock ownership tests) under Code provisions for which, in many cases, there are
only limited judicial or administrative interpretations. Although the Company
intends to operate so that it will continue to qualify as a REIT, the highly
complex nature of the rules governing REITs, the ongoing importance of factual
determinations and the possibility of future changes in the Company's
circumstances preclude any assurance that the Company will so qualify in any
year. For any taxable year that the Company fails to qualify as a REIT, it would
not be entitled to a deduction for dividends paid to its stockholders in
calculating its taxable income. Consequently, distributions to stockholders
would be substantially reduced and could be eliminated because of the Company's
increased tax liability. Should the Company's qualification as a REIT terminate,
the Company may not be able to elect to be treated as a REIT for the subsequent
five-year period, which would substantially reduce and could eliminate
distributions to stockholders for the years involved.
ITEM 2 - Properties
Overview
As of December 31, 1997, the Company owned 27 real estate properties and held
one property pursuant to a 22 year ground lease, which have an aggregate net
book value of $353 million. Such properties encompass 378 acres of land and
approximately 3.8 million square feet of gross leasable building space and were
92% leased. The five largest properties have a carrying value of $205 million,
or 58% of the total portfolio, which includes 1.6 million square feet of
leasable space on 110 acres that generates annual minimum rent of $23.0 million,
based on leases existing as of December 31, 1997.
The Company's properties are geographically concentrated in the Northeastern
states of New York (3), Virginia (2), New Jersey (2), Pennsylvania (1),
Massachusetts (1), Maryland (1) and Connecticut (1) which comprise a total of
65% of the net book value of the portfolio. California
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(13) accounts for 28% of the net book value, with the remaining properties
located in Texas (1), Arizona (1) and Colorado (2).
On December 31, 1997, the Company acquired Stanford Ranch Crossing, a power
center in Roseville, California, for $23.6 million. The Company paid $17.3
million of the purchase price on December 31, 1997 and is obligated to pay the
remaining portion upon completion of construction in 1998. The 20 acre center
will eventually comprise 190,000 square feet and is expected to generate minimum
annual rents of $2.3 million when construction is complete.
Property Table
Amounts shown for annual minimum rents are based on executed leases as of
December 31, 1997. No allowances have been made for contractually-based delays
to commencement of rental payments. Due to the nature of real estate
investments, actual rental income may differ from amounts shown in this
schedule. The table set forth below describes the Company's portfolio of real
estate properties as of December 31, 1997.
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<TABLE>
<CAPTION>
Real Estate Portfolio Leases in Effect as of December 31, 1997
-----------------------------------------------------------------------
Number Gross Net Book Annual % of
of Land Leasable Percent Value Minimum G.L.A. Lease
Tenants Acreage Area (sq ft) Leased 12/31/97 Rent Principal Tenants (sq ft)Expires
-------- -------- ------------ --------- ----------- ----------- ----------------------------------
(000's) ($000's) ($000's)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Westbury, NY 8 30.4 398.6 100% $65,188 $ 7,223 Costco 37% 2009
Kmart 28% 2013
Marshalls 11% 2009
The Sports Authority 11% 2013
Borders Books 8% 2019
Pentagon City, VA 12 16.8 336.8 100% 59,598 6,490 Costco 50% 2009
Marshalls 13% 2010
Best Buy 11% 2010
Linens'n Things 10% 2010
Borders Books 10% 2010
Wayne, NJ 5 19.2 348.0 89% 35,338 4,173 Costco 42% 2009
(includes 37,000 sq. Lackland Storage 13% 2012
ft. of The Sports Authority 13% 2012
vacant storage space) Nobody Beats the Wiz 11% 2002
Dallas, TX 5 14.6 177.5 100% 22,278 2,855 Homeplace 33% 2016
Wickes Furniture 24% 2011
OfficeMax 17% 2011
Comp USA 17% 2011
Just For Feet 9% 2011
Philadelphia, PA 10 29.3 300.9 79% 22,276 2,292 The Home Depot 37% 2009
Babys R Us 13% 2006
AMC Theatres 13% 2015
ACME Supersaver 11% 2000
Seekonk, MA 9 43.1 213.1 48% 17,875 1,233 The Sports Authority, Circuit City
Roseville, CA 9 20.3 170.7 90% 17,338 1,720 The Sports Authority, Linens `n Things,
Ross Stores
San Diego, CA 4 28.8 429.1 100% 16,298 2,224 Costco, Price Self Storage, Charlotte
Russe
Signal Hill, CA 13 15.0 154.8 99% 14,565 2,129 The Home Depot, PetsMart
Fountain Valley, CA 15 12.6 119.2 95% 13,094 1,661 The Sports Authority, PetsMart,
Souplantation
Glen Burnie, MD 11 18.7 130.6 100% 8,802 1,570 The Sports Authority, PetsMart,
Computer City
Northridge, CA 3 4.4 30.0 100% 7,229 828 Barnes & Noble, Fresh Choice
Azusa, CA 4 17.4 131.3 35% 6,765 550 Costco Business Delivery
San Diego/Carmel Mtn., 7 5.9 35.0 100% 6,336 906 Claim Jumper, McMillin Realty, Islands
CA
Moorsetown, NJ (leased 3 18.3 172.6 100% 6,040 1,591 Caldor, The Sports Authority
land)
Buffalo, NY 1 16.1 115.4 100% 4,849 733 Builders Square
Sacramento/Stockton, CA 2 5.7 49.8 100% 4,673 470 PetsMart, Office Depot
Inglewood, CA 1 8.1 119.9 100% 3,994 847 HomeBase
San Juan Capistrano, CA 5 5.5 56.4 100% 3,953 577 PetsMart, Staples
New Britain, CT 1 17.8 112.4 100% 3,474 671 Wal-Mart
Tucson, AZ 9 7.7 40.1 98% 3,270 395 PetsMart
Hampton, VA 2 3.5 45.6 100% 2,582 445 The Sports Authority, Commerce Bank
Redwood City, CA 2 6.4 49.4 100% 2,095 392 Orchard Supply (ground lease)
Smithtown, NY 1 5.9 55.6 100% 1,957 455 Levitz Furniture
Denver/Littleton, CO 1 3.1 26.4 100% 1,555 216 PetsMart
Denver/Aurora, CO 1 .8 7.3 100% 650 146 Red Robin
Chula Vista/Rancho del 1 1.0 0.0 0% 500 75 Burger King (ground lease)
Rey, CA
San Diego/Southeast, CA 2 1.9 8.9 100% 350 138 Navy Federal C.U., Burger King
--- ----- ------- ---- -------- -------
Total................... 147 378.3 3,835.4 92% $352,922 $43,005
=== ===== ======= ==== ======== =======
</TABLE>
13
<PAGE>
Pending Real Estate Transactions
Since December 31, 1997 five leases have been consummated for approximately
144,000 square feet of leasable area. These new leases will generate $950,000 in
annual minimum rents. The development costs necessary to provide appropriate
facilities for these signed leases is estimated to be approximately $2.8
million. The Company is also currently in negotiations to purchase additional
commercial properties as well as evaluating various properties for acquisition.
ITEM 3 - Legal Proceedings
The Company is not a party to any material legal proceedings.
ITEM 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of the Company's stockholders was held on December 16, 1997.
As of the record date for the meeting, there were 23,681,025 shares outstanding.
The following Directors were elected at the meeting:
Votes For Votes Withheld
--------- --------------
James F. Cahill 21,715,236 31,739
Anne L. Evans 21,714,070 32,905
Murray L. Galinson 21,716,636 30,339
Jack McGrory 21,710,036 36,939
Paul A. Peterson 21,715,986 30,989
Robert E. Price 21,712,632 34,343
A proposal for reincorporation of the Company as a Maryland corporation,
pursuant to a merger of the Company into a newly formed wholly-owned Maryland
subsidiary and the conversion of each outstanding share of Common Stock of the
Company into one share of Common Stock of the surviving corporation (the
"Reincorporation") was approved as follows:
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
Reincorporation of the Company
in Maryland 17,562,230 131,628 168,190
14
<PAGE>
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
Stock Prices
The Company's Common Stock trades on The Nasdaq Stock MarketSM under the symbol
"PREN." The table set forth below provides the high and low sales prices of the
Common Stock for the period indicated, as reported by The Nasdaq Stock MarketSM:
High Low
------------- -------------
Calendar Year --- 1995
First Quarter 13 3/4 10 1/2
Second Quarter 14 11 1/2
Third Quarter 16 13 1/2
Fourth Quarter 16 14 1/4
Calendar Year --- 1996
First Quarter 16 1/8 15
Second Quarter 16 1/2 15 1/4
Third Quarter 16 1/2 14 3/4
Fourth Quarter 17 5/8 16
Calendar Year --- 1997
First Quarter 19 16 3/4
Second Quarter 19 5/8 17 3/8
Third Quarter 23 17 5/8
Fourth Quarter 19 3/8 17 1/8
Calendar Year --- 1998
First Quarter (through 3/17/98) 20 1/8 18
On March 17, 1998, the last reported sales price per share of the Common Stock
was $19.00, and the Company had approximately 670 stockholders of record.
On August 29, 1997 the Company completed its spin-off distribution of one share
of Common Stock of PriceSmart for every four shares of the Company's Common
Stock held of record as of August 15, 1997. PriceSmart began separate trading on
The Nasdaq Stock MarketSM on September 2, 1997.
Dividends
For the transition period ended December 31, 1997, the Company's Board of
Directors declared one dividend of $0.35 per share for a total of $8.3 million.
During the year ended August 31, 1997, the Company's Board of Directors declared
four quarterly dividends of $0.30 per share for a total of $1.20 per share, or
$28.0 million. No dividends were declared or paid during the year ended August
31, 1996. During the year ended August 31, 1995, a $1.7 million cash dividend of
$0.075 per share was paid in August 1995 to offset certain adverse tax
consequences which otherwise would have occurred.
15
<PAGE>
PEI, in order to qualify as a REIT, is required to distribute dividends (other
than capital gain dividends) to its stockholders in an amount at least equal to
(A) the sum of (i) 95% of PEI's "REIT taxable income" (computed without regard
to the dividends paid deduction and PEI's net capital gain) and (ii) 95% of the
net income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of noncash income. In addition, if PEI disposes of any asset
during the 10-year period beginning on the first day of the first taxable year
for which PEI qualified as a REIT, PEI will be required, pursuant to Treasury
Regulations which have not yet been promulgated, to pay a corporate level tax
equal to the highest corporate tax rate multiplied by the lesser of the built-in
gain at the time PEI elected REIT status, or the actual taxable gain recognized
on the disposition of the asset. In addition, PEI will be required to distribute
at least 95% of the gain (after tax), recognized on the disposition of the
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before PEI timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that PEI does not distribute all of its
net capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gain corporate tax rates. Stockholders may be required to
include amounts designated by PEI as distributed capital gains. In such case,
stockholders will be treated as having paid the capital gains tax imposed on the
real estate investment designated amounts and will be allowed a corresponding
stock basis adjustment and a credit or refund for the tax deemed paid.
Furthermore, if PEI should fail to distribute, during each calendar year, at
least the sum of (i) 85% of its real estate investment trust ordinary income for
such year, (ii) 95% of its real estate investment trust capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, PEI
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. PEI intends to make timely distributions
sufficient to satisfy these annual distribution requirements.
It is possible that PEI, from time to time, may not have sufficient cash or
other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of such income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of PEI. In the event that such timing
differences occur, in order to meet these distribution requirements, PEI may
find it necessary to arrange for short-term, or possibly long-term, borrowings
or to pay dividends in the form of taxable stock dividends.
Under certain circumstances, PEI may be able to rectify a failure to meet the
distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in PEI's deduction for
dividends paid for the earlier year. Thus, PEI may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, PEI will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
16
<PAGE>
ITEM 6 - Selected Financial Data
The following selected data should be read in conjunction with the Company's
financial statements elsewhere in this Form 10-K and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Four Months Ended
December 31 Year Ended August 31
------------------------- -----------------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
----------- ------------ ----------- ----------- ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Income Statement Data
Rental revenues $18,170 $18,941 $56,838 $56,221 $51,897 $30,316 $25,793
Operating income (loss) 9,045 8,178 22,422 5,829 16,635 (74,711) 28,874
Net income (loss) from
continuing operations 17,508 7,590 19,085 8,340 13,297 (40,596) 20,987
Discontinued operations -- (3,235) (4,860) (8,250) (12,751) (883) (436)
Net income (loss) per share
from continuing .74 .33 .82 .36 .53 (1.50) .78
operations
Cash dividends per share .35 .30 1.20 -- .08 -- --
<CAPTION>
As of
December 31 As of August 31
------------------ -----------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------------ ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet Data
Real estate assets, net $353,056 $337,139 $337,098 $330,443 $405,966 $356,720
Total assets 408,478 403,757 540,325 555,994 591,511 470,950
Long-term debt -- -- -- 15,425 -- --
Stockholders' equity and
investment by Costco 406,624 396,476 532,899 532,085 578,788 454,357
Book value per share 17.13 16.78 22.88 22.90 21.44 16.83
</TABLE>
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis compares the results of operations for the
four months ended December 31, 1997 and 1996 and each of the three years ended
August 31, 1997, and it should be read in conjunction with the financial
statements and the accompanying notes included in "Item 8 - Financial Statements
and Supplementary Data." The analysis below reflects the Distribution of
PriceSmart and the presentation of the merchandising segment as discontinued
operations for all years presented. See Note 1 of notes to financial statements.
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.
Rental Operations
<TABLE>
<CAPTION>
Rental Percent Operating Percent
Revenues Change Income Change Change
----------- ---------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997 - Four months ended December 31 $18,170 4% $ 9,045 $ 867 11%
1996 - Four months ended December 31 18,941 -- 8,178 -- --
(unaudited)
1997 - Year ended August 31 56,838 1% 24,422 1,593 7%
1996 - Year ended August 31 56,221 8% 22,829 1,194 6%
1995 - Year ended August 31 51,897 -- 21,635 -- --
</TABLE>
17
<PAGE>
For purposes of this discussion, operating income is defined as rental revenues,
including common area expense reimbursements, less expenses, including expenses
associated with unimproved land and certain developed properties with vacant
space. Operating income excludes provision for asset impairments, which is
discussed separately.
The decrease in revenue for the four months ended December 31, 1997, was
primarily due to $1.6 million of revenue included in the four months ended
December 31, 1996 which was generated by properties sold prior to August 31,
1997 or transferred to PriceSmart in the Distribution. Revenues generated by the
current portfolio of properties in place during both periods increased $0.8
million or 4.7% compared to the prior year.
The $0.6 million increase in revenue for the year ended August 31, 1997 compared
to the year ended August 31, 1996 was due primarily to increased lease-up of the
Dallas, TX property which began leasing activity during the fourth quarter of
the year ended August 31, 1996. Other factors include additional lease-up at
properties located in Bakersfield, CA and Philadelphia, PA. These increases were
offset by loss of revenue from the Seekonk, MA property as a result of the
bankruptcy of the anchor tenant, Bradlees during the past year as well as the
write-off of related receivables associated with Bradlees. There also was a loss
of revenue due to the sale of the Richmond, CA location in the latter part of
the year ended August 31, 1996.
The increase in revenue for the year ended August 31, 1996 compared to the year
ended August 31, 1995 was due primarily to increased lease-up of the Pentagon
City, VA property, which was not fully leased until mid-year of the year ended
August 31, 1995. Other factors include additional lease-up of the Philadelphia,
PA property as well as the Dallas, TX property which was under development
during the year ended August 31, 1995 and began leasing activity during the
fourth quarter of the year ended August 31, 1996. These increases were partially
offset by a decline in revenues from the Phoenix, AZ property, which was sold in
March 1995.
General and Administrative Expenses
Percent
Amount Change Change
------- ------- -------
1997 - Four months ended December 31 $1,046 $ (592) -36%
1996 - Four months ended December 31 1,638 --- ---
(unaudited)
1997 - Year ended August 31 5,569 219 4%
1996 - Year ended August 31 5,350 1,759 49%
1995 - Year ended August 31 3,591 --- ---
The decrease in expenses for the four months ended December 31, 1997 compared to
the four months ended December 31, 1996 was primarily due to a reduction in
executive management and related payroll and benefits.
The increase in expenses for the year ended August 31, 1997 compared to the year
ended August 31, 1996 was due primarily to expenses of $1.1 million related to
the Distribution of PriceSmart, consisting of insurance, legal and accounting
fees. Additional increases are attributed to severance expense for executive
officers that left the Company during the year for which no comparable expense
was recorded in the prior year. The increase was partially offset by a decrease
in expense, compared to the prior year, of $1.25 million related to the
settlement of a litigation matter.
18
<PAGE>
The increase in expenses for the year ended August 31, 1996 compared to the year
ended August 31, 1995 was due primarily to the establishment of a reserve of
$1.25 million for a potential settlement payment pursuant to a tentative
agreement regarding a litigation matter. Insurance and legal expenses also
increased.
Provision for Asset Impairments
For the current portfolio of investment properties, no such indicators of
impairment were present in the four months ended December 31, 1997 and 1996.
In the years ended August 31, 1997, 1996 and 1995, noncash charges of $2.0
million, $17.0 million and $5.0 million, respectively, were taken to write-down
the carrying value of real properties which were being held for sale and which
were expected to generate net sales proceeds below their then current book
values.
Interest Income (net)
Percent
Amount Change Change
------- ------- -------
1997 - Four months ended December 31 $ 833 $(1,782) -68%
1996 - Four months ended December 31 2,615 -- --
(unaudited)
1997 - Year ended August 31 8,033 591 8%
1996 - Year ended August 31 7,442 1,358 22%
1995 - Year ended August 31 6,084 -- --
The decrease in net interest income for the four months ended December 31, 1997
compared to the four months ended December 31, 1996 was due to repayment of a
$41.2 million note receivable and transfer of certain other notes receivable to
PriceSmart in the Distribution.
The increase in net interest income for the year ended August 31, 1997 compared
to the year ended August 31, 1996 was due primarily to higher interest income on
invested cash balances as well as a reduction in interest expense related to a
$15.4 million note payable to Costco that was repaid during the fourth quarter
of the year ended August 31, 1996. This net improvement was somewhat offset by
reductions in interest income from notes receivable repaid during the third
quarter and a reduction in capitalized interest due to less construction
activity in the year ended August 31, 1997.
The increase in net interest income for the year ended August 31, 1996 compared
to the year ended August 31, 1995 was due primarily to increased income from
various notes receivable, increased earnings on cash balances as well as reduced
interest expense on borrowings, including a note payable to Costco, which was
repaid during the fourth quarter of the year ended August 31, 1996.
19
<PAGE>
Gain (Loss) on Sale of Real Estate
Percent
Amount Change Change
------- ------- -------
1997 - Four months ended December 31 $ -- $(1,349) -100%
1996 - Four months ended December 31 1,349 --
(unaudited)
1997 - Year ended August 31 1,111 247 29%
1996 - Year ended August 31 864 1,045 577%
1995 - Year ended August 31 (181) -- --
There were no property sales in the four months ended December 31, 1997. During
the same period of the prior year, the gain recognized related to the sale of
properties in Schaumburg, IL, Colton, CA, and Concord, CA.
The gain on sale of properties for the year ended August 31, 1997 related to the
sale of properties in Schaumburg, IL, Gaithersburg, MD, Colton, CA, and Concord,
CA. These gains were somewhat offset by losses on the sale of properties in
Houston, TX and Washington Metro, MD.
The gain on sale of properties for the year ended August 31, 1996 related
primarily to the sale of properties in Denver/Littleton, CO, Sacramento/No.
Highlands, CA, San Diego, CA (Convoy Ct.), and San Jose, CA. These and other
gains were somewhat offset by a loss on the sale of property in West Palm Beach,
FL.
Gain on Sale of Investment
The gain on sale of investment of $722,000 recorded during the four months ended
December 31, 1996 related to the sale of the Company's preferred stock
investment in a privately held specialty retailer. The gain on sale of
investment of $782,000 recorded during the year ended August 31, 1997 included
the gain mentioned above as well as a gain on the sale of the Company's options
to purchase stock in a privately held automobile broker.
Provision (Benefit) for Income Taxes
<TABLE>
<CAPTION>
Percent Effective
Amount Change Change Tax Rate
------- ------ ------- ---------
<S> <C> <C> <C> <C>
1997 - Four months ended December 31 $(7,630) $(12,904) -245% n/a
1996 - Four months ended December 31 5,274 -- -- 41%
(unaudited)
1997 - Year ended August 31 13,263 7,468 129% 41%
1996 - Year ended August 31 5,795 (3,446) -37% 41%
1995 - Year ended August 31 9,241 -- -- 41%
</TABLE>
Because the Company has been operating as a REIT since September 1, 1997, there
is no income tax expense for the transition period ended December 31, 1997. The
income tax benefit for this period is a result of the Company's previously
deferred tax liability being eliminated because of the Company's conversion to a
REIT as well as accrued income tax refunds that are a result of Federal tax net
operating loss carrybacks.
20
<PAGE>
Discontinued Operations
Percent
Amount Change Change
------- ------- -------
1997 - Four months ended December 31 $ -- $3,235 100%
1996 - Four months ended December 31 (3,235) -- --
(unaudited)
1997 - Year ended August 31 (4,860) 3,390 41%
1996 - Year ended August 31 (8,250) 4,501 35%
1995 - Year ended August 31 (12,751) -- --
Due to the Distribution of PriceSmart at August 29, 1997, there were no
discontinued operations during the four months ended December 31, 1997.
The decrease in the net loss from operations of the discontinued merchandising
segment for the year ended August, 31 1997 compared to the year ended August 31,
1996, was primarily a result of decreased expenses upon the expiration of
certain contractual obligations to pay Costco $4.5 million per year for
marketing-related activities, as well as increases in sales and gross margin due
to the opening of the Panama City location in October 1996 and increases in
sales of U.S.-sourced products to licensees. The discontinued merchandising
segment was transferred to PriceSmart in the Distribution.
The decrease in the net loss from operations of the discontinued merchandising
segment during the year ended August 31, 1996 compared to the year ended August
31, 1995 was primarily a result of cost savings realized by discontinuing
display samples and in-store staffing at Costco locations related to the
electronic shopping program, and a reduction of central office staffing. In
addition, other revenues increased primarily as a result of royalties from the
newly established licensee operations as well as certain fees for license
arrangements.
Adjusted Funds From Operations
<TABLE>
<CAPTION>
Four Months Ended
December 31 Year Ended August 31
-------------------- --------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited) ($000's)
<S> <C> <C> <C> <C> <C>
Income before provision for income taxes $ 9,878 $ 12,864 $ 32,348 $ 14,135 $ 22,538
Depreciation and amortization 3,326 3,299 9,860 10,071 10,245
Provision for asset impairments -- -- 2,000 17,000 5,000
(Gain) loss on sale of real estate, net -- (1,349) (1,111) (864) 181
(Gain) loss on sale of investment -- (722) (782) -- --
-------- -------- -------- -------- --------
Funds from operations 13,204 14,092 42,315 40,342 37,964
Straight-line rents (829) (1,024) (2,499) (3,150) (3,332)
-------- -------- -------- -------- --------
Adjusted funds from operations $ 12,375 $ 13,068 $ 39,816 $ 37,192 $ 34,632
======== ======== ======== ======== ========
Weighted average shares outstanding 23,675 23,298 23,354 23,262 24,864
</TABLE>
Real estate industry analysts generally consider funds from operations ("FFO")
to be a supplemental measure of performance for real estate-oriented companies.
In general, FFO adjusts net income for noncash charges such as depreciation,
amortization and most non-recurring gains and losses. As defined by the National
Association for Real Estate Investment Trusts ("NAREIT"), FFO is net income
determined in accordance with generally accepted accounting principles ("GAAP"),
excluding depreciation and amortization expense, and gains (losses) from sales
of property. The Company has historically excluded provisions for asset
21
<PAGE>
impairment and gains (losses) from sale of investment in determining FFO. In
addition, 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.
FFO and adjusted FFO do 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 following table illustrates the changes in adjusted FFO for the four months
ended December 31, 1997 and 1996.
Four Months Ended
December 31
-------------------- Percent
1997 1996 Change Change
-------- -------- -------- ------
Existing portfolio NOI $ 12,588 $ 11,774 $ 814 7%
NOI from properties transferred to
PriceSmart or sold -- 317 (317) -100%
General and administrative expenses (1,046) (1,638) 592 36%
Interest income 833 2,615 (1,782) -68%
-------- -------- -------- -----
Adjusted funds from operations $ 12,375 $ 13,068 $ (693) -5%
======== ======== ======== =====
Net operating income ("NOI") is defined as rental revenues excluding
straight-line rent accruals, less operating expenses before depreciation.
Although NOI from the current portfolio of properties increased by 7%, the
Company experienced a decrease in adjusted FFO for the four months ended
December 31, 1997 compared to the four months ended December 31, 1996. This
decrease was primarily a result of a reduction in net interest income due to the
repayment of a $41.2 million note receivable and the transfer of certain other
notes receivable to PriceSmart in the Distribution. The decrease in adjusted FFO
was partially offset by a reduction in general and administrative expenses,
primarily due to the reduction in executive management and related payroll and
benefits. A further reduction to adjusted FFO compared to the prior year was the
loss of NOI from properties transferred to PriceSmart in the Distribution or
sold prior to August 31, 1997.
For the years ended August 31, 1997 and 1996, the growth in adjusted FFO
reflects many of the factors mentioned in the rental revenue and operating
income discussion under "Rental Operations" in this Item 7.
Liquidity and Capital Resources
As of December 31, 1997 the Company had $27 million in cash. 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 operations. To the extent that investment opportunities exceed
available cash flow from operations, the Company believes that its unleveraged
balance sheet will enable it to raise additional capital through bank credit
facilities and/or securitized debt offerings. The Company also may choose to
seek additional funds through future public offerings of debt or equity
securities.
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
22
<PAGE>
disposition. In addition, the Company's liquidity may be affected by the
anticipated payment of quarterly cash dividends to stockholders in the future.
See "Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters."
On December 31, 1997, the Company acquired Stanford Ranch Crossing, a power
center in Roseville, California, for $23.6 million. The Company paid $17.3
million of the purchase price on December 31, 1997 and is obligated to pay the
remaining portion upon completion of construction in 1998. Through calendar
1998, the Company anticipates investing approximately $8.0 million in commercial
real estate development on owned property (a portion of which represents
commitments under executed construction contracts) and approximately $100
million - $150 million for real estate acquisitions and development
opportunities. Actual capital expenditures may vary from estimated amounts
depending on business conditions and other risks and uncertainties to which the
Company and its business are subject.
The Company is also currently in negotiations to purchase additional commercial
properties as well as evaluating various properties for acquisition. It is
anticipated that any completed acquisitions will be funded by a portion of the
Company's existing cash balances with the remainder, if needed, provided by
proceeds from an advance under an unsecured revolving credit facility the
Company is currently negotiating with a major institution.
Year 2000
The Company is in the process of upgrading its existing computer software and
information technology and recognizes the need to ensure its operations will not
be adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The project cost is approximately $220,000 and is expected to
be completed not later than December 31, 1998, which is prior to any anticipated
impact on the Company's operating systems. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 issue will not pose significant operational problems for its computer
systems.
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 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 7A. - Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
23
<PAGE>
ITEM 8 - Financial Statements and Supplementary Data
PRICE ENTERPRISES, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
ASSETS
December 31 August 31
--------- ----------------------
1997 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Real estate assets
Land and land improvements $ 193,881 $ 184,702 $ 179,639
Building and improvements 204,184 195,208 189,125
Fixtures and equipment 242 203 733
Construction in progress 946 235 328
--------- --------- ---------
399,253 380,348 369,825
Less accumulated depreciation (46,197) (43,209) (32,727)
--------- --------- ---------
353,056 337,139 337,098
Cash and cash equivalents 27,003 40,000 15,458
Accounts receivable 2,360 1,374 3,653
Income tax receivable 8,117 8,076 --
Deferred rents 12,400 11,810 9,458
Leasing costs, net 4,774 5,099 5,516
Prepaid expenses and other assets 768 259 5,912
Property held for sale, net -- -- 28,337
Atlas note receivable -- -- 41,711
Deferred income taxes -- -- 5,389
Net assets of discontinued segment
and assets transferred to PriceSmart -- -- 87,793
--------- --------- ---------
Total assets $ 408,478 $ 403,757 $ 540,325
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 1,854 $ 621 $ 7,426
Deferred income taxes -- 6,660 --
--------- --------- ---------
Total liabilities 1,854 7,281 7,426
Commitments
Stockholders' equity
Common stock, $.0001 par value,
60,000,000 shares authorized, 23,730,951, 23,632,937 and
23,290,057 shares issued and outstanding 2 2 2
Additional paid-in capital 412,321 411,393 534,004
Accumulated deficit (5,699) (14,919) (1,107)
--------- --------- ---------
Total stockholders' equity 406,624 396,476 532,899
--------- --------- ---------
Total liabilities and stockholders' equity $ 408,478 $ 403,757 $ 540,325
========= ========= =========
</TABLE>
See accompanying notes.
24
<PAGE>
PRICE ENTERPRISES, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
Four Months
Ended December 31 Year Ended August 31
-------------------- --------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Rental revenues $ 18,170 $ 18,941 $ 56,838 $ 56,221 $ 51,897
Expenses
Operating and maintenance 2,392 3,037 9,105 9,591 7,890
Property taxes 2,361 2,789 7,882 8,380 8,536
Depreciation and amortization 3,326 3,299 9,860 10,071 10,245
General and administrative 1,046 1,638 5,569 5,350 3,591
Provision for asset impairments -- -- 2,000 17,000 5,000
-------- -------- -------- -------- --------
Total expenses 9,125 10,763 34,416 50,392 35,262
-------- -------- -------- -------- --------
Operating income 9,045 8,178 22,422 5,829 16,635
Interest and other
Interest income, net 833 2,615 8,033 7,442 6,084
Gain (loss) on sale of real estate, net -- 1,349 1,111 864 (181)
Gain on sale of investment -- 722 782 -- --
-------- -------- -------- -------- --------
Total interest and other 833 4,686 9,926 8,306 5,903
-------- -------- -------- -------- --------
Income before provision (benefit)
for income taxes 9,878 12,864 32,348 14,135 22,538
Provision (benefit) for income taxes (7,630) 5,274 13,263 5,795 9,241
-------- -------- -------- -------- --------
Net income from continuing operations 17,508 7,590 19,085 8,340 13,297
Discontinued operations (Note 2):
Net loss from operations of
discontinued merchandising
segment (less applicable benefit
for income taxes of $2,248,
$3,379, $4,531 and $4,052
respectively) -- (3,235) (4,860) (8,250) (12,751)
-------- -------- -------- -------- --------
Net income $ 17,508 $ 4,355 $ 14,225 $ 90 $ 546
======== ======== ======== ======== ========
Net income per share from continuing
operations $ .74 $ .33 $ .82 $ .36 $ .53
======== ======== ======== ======== ========
Net income per share $ .74 $ .19 $ .61 $ .00 $ .02
======== ======== ======== ======== ========
Net income per share from continuing
operations - assuming dilution $ .73 $ .32 $ .82 $ .36 $ .52
======== ======== ======== ======== ========
Net income per share - assuming dilution $ .73 $ .18 $ .61 $ .00 $ .02
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
25
<PAGE>
PRICE ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
<TABLE>
<CAPTION>
Accumulated
Additional Foreign
Common Stock Paid-In Currency Accumulated
Shares Amount Capital Translation Deficit Total
--------- --------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investment by Costco at
August 31, 1994 27,000 $ 3 $ 580,468 $ (1,683) $ -- $ 578,788
Net income -- -- -- -- 546 546
Adjustment to investment by
Costco -- -- (1,389) -- -- (1,389)
Stock options exercised including
income tax benefits 10 -- 126 -- -- 126
Shares repurchased (3,776) (1) (45,925) -- -- (45,926)
Foreign currency translation
adjustment -- -- -- 1,683 -- 1,683
Cash dividend, $.075 per share -- -- -- -- (1,743) (1,743)
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1995 23,234 2 533,280 -- (1,197) 532,085
Net income -- -- -- -- 90 90
Stock options exercised including
income tax benefits 56 -- 724 -- -- 724
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1996 23,290 2 534,004 -- (1,107) 532,899
Net income -- -- -- -- 14,225 14,225
Stock options exercised including
income tax benefits 343 -- 5,429 -- -- 5,429
Cash dividends, $1.20 per share -- -- -- -- (28,037) (28,037)
Special dividend - Distribution
of PriceSmart -- -- (128,040) -- -- (128,040)
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1997 23,633 2 411,393 -- (14,919) 396,476
Net income -- -- -- -- 17,508 17,508
Stock options exercised 98 -- 928 -- -- 928
Cash dividend, $.35 per share -- -- -- -- (8,288) (8,288)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 23,731 $ 2 $ 412,321 $ -- $ (5,699) $ 406,624
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
26
<PAGE>
PRICE ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Four Months
Ended December 31 Year Ended August 31
-------------------- --------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net income $ 17,508 $ 4,355 $ 14,225 $ 90 $ 546
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,326 3,299 9,860 10,071 10,245
Deferred rents (590) (1,024) (2,406) (3,150) (3,527)
Deferred income taxes (6,660) 4,267 15,894 3,676 (2,466)
(Gain) loss on sale of real estate, net -- (1,349) (1,111) (864) 1,430
Provision for asset impairments -- -- 2,000 17,000 5,000
Changes in operating assets and liabilities:
Accounts receivable and other assets (1,536) (1,081) (5,060) (6,613) (5,057)
Accounts payable and other liabilities 491 (44) (302) (698) 3,396
Leasing costs (12) (47) (139) (1,374) (541)
Unearned rent and security deposits 742 (641) (821) 642 1,176
Net assets of discontinued segment -- 3,112 4,495 3,832 (4,463)
-------- -------- -------- -------- --------
Net cash flows provided by operating activities 13,269 10,847 36,635 22,612 5,739
Investing activities
Additions to real estate assets (18,906) (919) (2,720) (17,105) (18,861)
Proceeds from sale of real estate assets -- 13,234 29,279 26,059 12,836
Additions to notes receivable -- -- (200) (1,149) (2,949)
Payments of notes receivable -- 4,450 50,526 3,105 4,947
Net investing activities of discontinued segment -- (677) (7,987) (2,362) (5,793)
-------- -------- -------- -------- --------
Net cash flows (used in) provided by investing activities (18,906) 16,088 68,898 8,548 (9,820)
Financing activities
Dividends paid (8,288) (6,988) (28,037) -- (1,743)
Proceeds from exercise of stock options including tax
benefits 928 426 5,429 724 126
Cash transferred to PriceSmart -- -- (58,383) -- --
Repayments of Costco note payable and line of credit -- -- -- (16,426) (13,236)
Costco line of credit advances -- -- -- -- 6,439
Decrease in equity resulting from
cash not transferred in Costco spin-off -- -- -- -- (1,644)
Net financing activities of discontinued segment -- -- -- -- 12,495
-------- -------- -------- -------- --------
Net cash flows (used in) provided by financing activities (7,360) (6,562) (80,991) (15,702) 2,437
-------- -------- -------- -------- --------
Net (decrease) increase in cash (12,997) 20,373 24,542 15,458 (1,644)
Cash and cash equivalents at beginning of period 40,000 15,458 15,458 0 1,644
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 27,003 $ 35,831 $ 40,000 $ 15,458 $ 0
======== ======== ======== ======== ========
Supplemental disclosure:
Cash paid for interest $ -- $ 150 $ 150 $ 2,911 $ 8,140
Net (refunds received) cash paid for income taxes (1,061) (2,723) (717) 829 1,261
Treasury stock acquired for note payable -- -- -- -- 45,925
</TABLE>
See accompanying notes
27
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and Significant Accounting Policies
Formation of the Company
Price Enterprises, Inc. ("PEI" or "the Company"), was formed in July 1994 as a
Delaware corporation. The Company began operations effective August 29, 1994 as
a wholly owned subsidiary of Costco Companies, Inc. ("Costco") with specific
assets received from Costco pursuant to the Amended and Restated Agreement of
Transfer and Plan of Exchange ("Exchange Agreement"). Transferred to PEI were
substantially all of the real estate assets which historically formed the
non-club real estate business of Costco; four existing Costco warehouses which
are adjacent to certain transferred properties; certain domestic and
international retail operations; notes receivable from various municipalities
and agencies ("City Notes") and certain other notes receivable. PEI became a
separate publicly traded Company on December 21, 1994 upon completion of the
voluntary exchange offer made by Costco to its stockholders whereby such
stockholders were given the choice to either continue to own shares of Costco or
exchange all or a portion of their holdings into an equal number of shares of
PEI.
On August 1, 1997, the Board of Directors of PEI approved a plan for the
distribution (the "Distribution") to holders of PEI's Common Stock of 100% of
the outstanding shares of Common Stock of PriceSmart, Inc. ("PriceSmart"), a
wholly-owned subsidiary of PEI. Prior to the Distribution, the following assets
were transferred to PriceSmart from PEI: all businesses which historically
formed the merchandising business segment of PEI, the international
merchandising activities, the Costco auto referral program and the Costco travel
program; certain real estate properties held for sale which, as of August 29,
1997, had not yet been sold; the City Notes and certain secured notes receivable
from buyers of properties formerly owned by PEI; cash and cash equivalents held
by PEI as of August 29, 1997, less $40 million kept by PEI for use in its real
estate business; and all other assets and liabilities not specifically
associated with PEI's portfolio of 27 investment properties, except for current
corporate income tax assets and liabilities. On August 29, 1997, PEI distributed
to its stockholders one share of PriceSmart common stock for every four shares
of PEI common stock held by PEI's stockholders of record on August 15, 1997. The
distribution was recorded as a special noncash dividend by PEI based on
historical cost for all assets and liabilities transferred to PriceSmart, and
the operations of the merchandising segment have been reported as discontinued
operations. See Note 2.
Following the Distribution, PEI retained its core real estate portfolio of 27
investment properties and all related assets and liabilities as well as income
tax assets and liabilities, $40 million in cash, and assets and liabilities
related to the self storage business. PEI intends to qualify for Federal tax
treatment as a real estate investment trust ("REIT"). Effective January 2, 1998,
the Company was reincorporated in the State of Maryland.
The principal business of the Company is to acquire, develop, operate, manage
and lease real property. The Company's current portfolio is substantially
comprised of commercial rental properties which are leased to major retail
tenants.
28
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Fiscal Year
Effective September 1, 1997, the Company changed its fiscal year end from August
31 to December 31 as required by the Internal Revenue Service for REITs. The
four-month transition period bridges the gap between the Company's old and new
fiscal year ends. Prior to the Distribution, with respect to the real estate
business, each fiscal quarter includes three calendar months of operating
results; however, the discontinued 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.
Real Estate Assets and Depreciation
Real estate assets are recorded at Costco's and PEI's historical costs, as
adjusted for recognition of impairment losses. Historical costs for real estate
and related assets were reduced by $2.0 million, $17.0 million and $5.0 million
during the years ended August 31, 1997, 1996 and 1995, respectively. Ordinary
repairs and maintenance are expensed as incurred; major replacements and
betterments are capitalized and depreciated over their estimated useful lives.
Depreciation of real estate assets is computed on a straight-line basis over
their estimated useful lives, as follows:
Land improvements 25 years
Building and improvements 10-25 years
Tenant improvements Term of lease or 10 years
Fixtures and equipment 3-5 years
Interest incurred during the construction period is capitalized and depreciated
over the lives of the related assets. No interest was incurred or capitalized
during the four months ended December 31, 1997. Total interest incurred was
$165,000, $187,000, $881,000 and $1,261,000 for the four months ended December
31, 1996 and for the years ended August 31, 1997, 1996 and 1995, respectively;
and $7,000, $7,000, $361,000 and $556,000 of such interest, respectively, was
capitalized and is included in the property accounts.
Rental Revenue Recognition
Rental revenues include: (1) minimum annual rentals, adjusted for the
straight-line method for recognition of fixed future increases; (2) additional
rentals, based on common area maintenance , ("CAM") expenses and certain other
expenses, which are accrued in the period in which the related expense is
incurred; and (3) percentage rents which are accrued on the basis of reported
tenant sales.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash and cash equivalents.
Deferred Leasing Costs
Costs incurred in connection with leasing space to tenants are deferred and
amortized using the straight-line method over the lives of the related leases.
Asset Impairments
In conjunction with the Distribution of PriceSmart at August 29, 1997,
properties held for sale and their related provisions for asset impairment as
well as various notes receivable were transferred to PriceSmart.
29
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company regularly evaluates the estimated fair value of its assets and
records appropriate provisions for asset impairments. In the year ended August
31, 1994, the Company changed its accounting estimates for impairment losses to
adopt a risk-adjusted discounted cash flow approach to estimating asset fair
values. The various notes receivable are evaluated in accordance with Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan."
Beginning with the year ended August 31, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, or "investment properties," when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
SFAS No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of, or "properties held for sale," and requires that
such assets be carried at the lower of cost or estimated fair value less costs
to sell. For properties held for sale, noncash impairment charges of $2.0
million, $17.0 million and $5.0 million were recorded in the years ended August
31, 1997, 1996 and 1995, respectively. These charges were recorded to write-down
the carrying value of real properties which were being held for sale or
redevelopment, and which were expected to generate net sales proceeds below
their book values.
For the current portfolio of investment properties, no such indicators of
impairment were present in the transition periods ended December 31, 1997 and
1996.
Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires that the Company disclose estimated
fair values for its financial instruments, as well as the methods and
significant assumptions used to estimate fair values. The Company believes that
the carrying values reflected in the balance sheets at December 31, 1997, August
31, 1997 and 1996 reasonably approximate the fair values for cash and cash
equivalents, receivables and all liabilities. In making such assessments, the
Company used estimates and market rates for similar instruments.
Foreign Currency Translation
The accumulated foreign currency translation was related to the Company's
investment in Price Club Mexico and was determined by application of the current
rate method. Resulting translation adjustments were made directly to a separate
component of stockholders' equity.
Authorized Stock
As of December 31, 1997, the Company's authorized stock consisted of 60 million
shares of $0.0001 par value Common Stock and 10 million shares of $0.0001 par
value Preferred Stock. No Preferred Stock has been issued. See Note 9 regarding
the reincorporation of the Company to Maryland and authorization of 100 million
shares of undesignated Capital Stock. At August 31, 1995, 1,268,264 shares of
Common Stock were issued and held as treasury stock. During fiscal 1996 these
treasury shares were retired.
30
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company intends to meet all conditions necessary to qualify as a real estate
investment trust under the Internal Revenue Code. To qualify as a real estate
investment trust, the Company is required to pay dividends of at least 95% of
its "REIT taxable income" each year and meet certain other criteria. As a
qualifying real estate investment trust, the Company will not be taxed on income
distributed to its stockholders. As a result, the accompanying financial
statements contain no provision for income taxes for the four months ended
December 31, 1997. The income tax benefit for the four months ended December 31,
1997 is a result of the Company's previously deferred tax liability being
eliminated because of the Company's conversion to a REIT as well as accrued
income tax refunds that are a result of Federal tax net operating loss
carrybacks. The reported amounts of the Company's net assets, excluding
properties held for sale, as of December 31, 1997, August 31, 1997 and 1996 were
more than its tax basis for Federal tax purposes by approximately $29.1 million,
$17.0 million and $14.9 million, respectively.
In prior years, income taxes have been provided for in accordance with SFAS No.
109, "Accounting for Income Taxes." That standard requires companies to account
for deferred taxes using the asset and liability method. Accordingly, deferred
income taxes are provided to reflect temporary differences between financial and
tax reporting, including: asset write-downs of real estate and related assets,
deferred gains on sales of real estate, accelerated tax depreciation methods,
and accruals for straight-line rents.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previous fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS No.128 requirements.
<TABLE>
<CAPTION>
Four Months
Ended December 31 Year Ended August 31
--------------------------- --------------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Weighted average shares
outstanding 23,675,310 23,298,255 23,353,666 23,262,374 24,864,000
Effect of dilutive securities:
Employee stock options 244,164 321,936 -- 117,797 551,937
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding
- assuming dilution 23,919,474 23,620,191 23,353,666 23,380,171 25,415,937
========== ========== ========== ========== ==========
</TABLE>
Reclassifications
Certain reclassifications have been reflected in the financial statements in
order to conform with the presentation of the transition period.
31
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), and related
Interpretations, in accounting for its employee and non-employee director stock
options because the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. As a result, deferred compensation is recorded only in the event that
the fair market value of the stock on the date of the option grant exceeds the
exercise price of the options. No deferred compensation expense has been
recognized.
Note 2 - Discontinued Operations
As discussed in Note 1, on August 29, 1997, Price Enterprises completed a
distribution of its merchandising segment and certain other assets. Accordingly,
results of operations and cash flows of the Company's merchandising segment have
been reported as a discontinued segment for all periods presented in the
financial statements. The results of operations and cash flows of other assets
and liabilities transferred to PriceSmart that were not part of the
merchandising segment are included in the Company's continuing operations. The
balance sheet, as of August 31, 1996, reflects the assets and liabilities of the
Company's merchandising segment as a discontinued segment and are included with
other net assets transferred to PriceSmart in the Distribution. As a result of
the Distribution, the Company recorded additional reserves during the fourth
quarter of $1.0 million consisting of additional insurance, legal and accounting
fees related to the transaction.
32
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Net assets of the discontinued merchandising segment and other assets
transferred to PriceSmart were as follows at August 31, 1996 (amounts in
thousands):
August 31
1996
---------
Assets:
Accounts receivable $ 3,366
Inventories 2,011
Other assets 1,600
Property, plant and equipment, net 3,965
Property held for sale, net 27,614
City notes receivable 29,091
Other notes receivable 6,617
Deferred rents and leasing costs, net 893
Deferred income taxes 20,251
Liabilities:
Accounts payable and accrued expenses (4,893)
Other liabilities (977)
Minority interest (1,745)
--------
$ 87,793
========
Summarized results of operations of the discontinued merchandising segment were
as follows (amounts in thousands):
<TABLE>
<CAPTION>
Four Months
Ended
December 31 Year Ended August 31
----------- ----------------------------------------
1996 1997 1996 1995
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Sales $ 23,462 $ 59,042 $ 36,211 $ 66,573
Other revenues 1,611 5,487 2,709 540
Cost of sales (23,270) (55,948) (34,644) (62,756)
Operating expenses (7,286) (16,761) (21,644) (24,359)
Minority interest -- (59) 4,587 8,187
Loss related to Price Club Mexico -- -- -- (4,988)
Income tax benefit 2,248 3,379 4,531 4,052
-------- -------- -------- --------
$ (3,235) $ (4,860) $ (8,250) $(12,751)
======== ======== ======== ========
Discontinued operations loss per share $ (.14) $ (.21) $ (.35) $ (.51)
======== ======== ======== ========
Discontinued operations loss per share -
assuming dilution $ (.14) $ (.21) $ (.35) $ (.51)
======== ======== ======== ========
</TABLE>
33
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 3 - Real Estate Properties and Property Sales
The Company's real estate properties are generally leased under noncancelable
leases with remaining terms ranging from one to 23 years. Rental revenues
include the following (amounts in thousands):
<TABLE>
<CAPTION>
Four Months
Ended December 31 Year Ended August 31
------------------- -------------------------------
1997 1996 1997 1996 1995
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Minimum rent $13,727 $14,358 $42,681 $42,529 $39,987
Straight-line accrual of future rent 828 1,024 2,499 3,150 3,332
Additional rent -- CAM and taxes 3,605 3,557 11,467 10,371 8,499
Percentage rent 10 2 191 171 79
------- ------- ------- ------- -------
Rental revenues $18,170 $18,941 $56,838 $56,221 $51,897
======= ======= ======= ======= =======
</TABLE>
The Company has one tenant, Costco, which comprises 19.1% of total annual
minimum rent with four leases. Rental revenue generated from Costco was $2.7
million, $2.7 million, $8.1 million, $8.0 million and $8.0 million for the four
months ended December 31, 1997 and 1996 and the years ended August 31, 1997,
1996 and 1995, respectively.
As of December 31, 1997, future minimum rental income due under the terms of
noncancelable operating leases is as follows (amounts in thousands):
1998 $ 42,585
1999 43,193
2000 43,329
2001 43,637
2002 42,934
Thereafter 370,539
During each of the last three years ended August 31, the Company sold certain
significant real estate properties to unrelated parties and recognized related
gains or losses on dispositions, as shown in the following table (amounts in
thousands). In addition, $644,000 of net gains were recognized during the year
ended August 31, 1997 on sales of insignificant real estate properties. In
conjunction with the Distribution, all remaining properties held for sale as of
August 29, 1997 were transferred to PriceSmart. No properties were sold during
the four months ended December 31, 1997.
34
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Sales Pretax
Date Price Gain (Loss)
-------- ------- -----------
Year ended August 31, 1997
Warehouse Building 12/6/96 $ 3,187 $ 17
Santee, CA
Undeveloped Land 12/10/96 6,865 802
Schaumburg, IL
Retail Building 5/29/97 6,000 (352)
Houston, TX
Year ended August 31, 1996
Warehouse Building 12/22/95 3,483 65
Palm Harbor, FL
Office Building 2/9/96 3,500 143
San Diego (Convoy Ct.), CA
Warehouse Building 4/12/96 11,075 80
Richmond, CA
Year Ended August 31, 1995
Fry's Distribution Center 3/8/95 9,598 (181)
Phoenix, AZ
Undeveloped Land 3/27/95 4,440 (6)
Fairfax, VA
Note 4 - Related Party Transactions
As a result of the Distribution to stockholders of PriceSmart and for the
purpose of governing certain of the ongoing relationships between PriceSmart and
the Company after the Distribution, and to provide mechanisms for an orderly
transition, PriceSmart and the Company have entered into the various agreements
as described below.
The Company and PriceSmart have entered into an Asset Management and Disposition
Agreement dated as of August 26, 1997 calling for the Company to provide asset
management services with respect to certain properties distributed to
PriceSmart. As consideration for such services, PriceSmart will pay the Company
management fees, leasing fees, disposition fees and developer's fees. Such
agreement has a two-year term; provided that either the Company or PriceSmart
may terminate the agreement upon 60 days written notice. During the four months
ended December 31, 1997, PEI charged PriceSmart $43,000 for such services.
PriceSmart and the Company have entered into a Transitional Services Agreement
dated as of August 26, 1997 pursuant to which the Company and PriceSmart will
provide certain services to one another. Fees for such transitional services
(which shall not include real estate management services) will reflect the costs
of providing such services, which may include cash management services, certain
accounting services, litigation management or any other similar services that
PriceSmart or the Company may require. The Transitional Services Agreement will
terminate on June 30, 1998 unless extended in writing by the parties. During the
four months ended December 31, 1997, amounts incurred for transitional services
were not material.
35
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company and PriceSmart have entered into a Tax Sharing Agreement dated as of
August 26, 1997 defining the parties' rights and obligations with respect to tax
returns and tax liabilities for taxable years and other taxable periods ending
on or before August 31, 1997. In general, the Company will be responsible for
(i) filing all Federal and state income tax returns of the Company, PriceSmart
and any of their subsidiaries for all taxable years ending on or before or
including August 31, 1997 and (ii) paying the taxes relating to such returns (or
be entitled to tax refunds) to the extent attributable to pre-August 31, 1997
periods.
PriceSmart leases space for its corporate offices in San Diego from the Company.
The lease expires August 31, 1999. During the four months ended December 31,
1997, the Company recorded $158,000 in revenue related to this lease.
Note 5 - Profit Sharing and 401(k) Plan
Substantially all of the employees of the Company are participants in a defined
contribution profit sharing and 401(k) plan. Profit sharing contributions, if
any, are based on a discretionary amount determined by the Board of Directors
and are allocated to each participant based on the relative compensation of the
participant, subject to certain limitations, to the compensation of all
participants. The Company makes a matching 401(k) contribution equal to 50% of
the participant's contribution up to an annual maximum matching contribution of
$250.
No profit sharing or employer 401(k) contributions were made during the four
months ended December 31, 1997 and 1996.
Profit sharing contributions of approximately $490,000, $187,000 and $580,000
were made during the years ended August 31, 1997, 1996 and 1995, respectively.
Employer contributions to the 401(k) plan were approximately $29,000, $37,000
and $36,000 during the years ended August 31, 1997, 1996 and 1995, respectively.
During the year ended August 31, 1996, the plan year was converted to a December
31 year-end from an August 31 year-end; therefore, the contribution to the
profit sharing plan in the year ended August 31, 1996 was for the period of
September 1995 to December 1995.
Note 6 - Stock Option Plans
In 1995, the Company established an Employee Stock Option and Stock Grant Plan
(the "Employee Plan") and a Director Stock Option Plan (the "Director Plan")
under which 1,500,000 shares and 150,000 shares, respectively, have been
reserved for issuance. The Director Plan was amended on October 1, 1997. Options
have been granted to certain employees and non-employee directors at prices
equal to the market price on the date of grant. Options generally vest over a
five year period and expire after six years from date of grant. Subsequent to
August 31, 1997, and as a direct result of the Distribution of PriceSmart, all
outstanding options were adjusted, both in quantity and exercise price, such
that each optionee remained in the same economic position as before the
Distribution. An equitable adjustment was made by issuing 54,352 additional
stock options to compensate for a reduction in the PEI stock price as a result
of the Distribution. A total of 320,361 options were outstanding as of August
31, 1997 with an
36
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6 - Stock Option Plans (continued)
adjusted weighted-average exercise price of $10.25 per share. The following
table summarizes the stock option transactions for the four months ended
December 31, 1997 and for the years ended August 31, 1997, 1996 and 1995 for
both plans:
Weighted Average
Stock Exercise Price
Options Per Share
--------- ----------------
Outstanding at August 31, 1994 0 --
Granted 1,178,900 $11.51
Exercised (10,047) 11.25
Canceled (116,745) 11.28
---------
Outstanding at August 31, 1995 1,052,108 11.53
Granted 193,500 15.65
Exercised (55,982) 11.27
Canceled (145,861) 11.25
---------
Outstanding at August 31, 1996 1,043,765 12.35
Granted 11,900 21.67
Exercised (342,880) 12.12
Canceled (446,776) 12.78
---------
Outstanding at August 31, 1997 266,009 12.34
Adjustment and revaluation resulting
from distribution
of PriceSmart 54,352
---------
Adjusted outstanding at August 31, 1997 320,361 10.25
Granted 476,329 18.87
Exercised 98,383 9.19
Canceled 45,312 11.55
---------
Outstanding at December 31, 1997 652,995 16.60
=========
As of December 31, 1997, options to purchase 36,328 shares and 22,242 shares
were exercisable under the Employee Plan and Director Plan, respectively. As of
December 31, 1997, there were 1,024,840 and 117,868 shares of Common Stock
reserved for future issuance in connection with the Employee Plan and Director
Plan, respectively.
Following is a summary of the options outstanding as of December 31, 1997:
37
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 6 - Stock Option Plans (continued)
<TABLE>
<CAPTION>
Weighted
Average
Weighted Weighted Exercise
Average Average Price of
Range of Options Exercise Remaining Options Options
Exercise Prices Outstanding Price Life in Years Exercisable Exercisable
- --------------- ----------- ----- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 9.10 - $10.07 112,406 $ 9.28 3.0 36,328 $ 9.25
11.33 - 12.65 51,902 11.39 3.0 22,242 11.48
17.90 - 19.00 488,687 18.84 5.8 0 --
------- ------
652,995 16.60 5.1 58,570 10.10
======= ======
</TABLE>
Pro forma information regarding net income is required by SFAS No. 123, and has
been determined as if the Company had accounted for its employee stock options
under the fair value method prescribed by SFAS No. 123. The fair value of these
options was estimated at the date of grant using the "Black-Scholes" method with
the following weighted average assumptions for the four months ended December
31, 1997 and the years ended August 31, 1997 and 1996. No options were granted
during the four months ended December 31, 1996.
Four Months Year Ended
Ended December 31 August 31
----------------- -----------------
1997 1997 1996
----- ----- -----
Risk free interest rate 6% 6% 6%
Annual dividend rate 7% 7% 7%
Volatility factor of the stock price 27.16% 26.54% 26.54%
Weighted average expected life (years) 3 3 3
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net income and net income per share were as follows (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
Four Months Year Ended
Ended December 31 August 31
----------------- -----------------
1997 1997 1996
----- ----- -----
<S> <C> <C> <C>
Net income:
As reported $17,508 $14,225 $ 90
Pro forma 17,454 14,225 33
Net income per share:
As reported .74 .61 .00
Pro forma .74 .61 .00
Net income per share -
assuming dilution:
As reported .73 .61 .00
Pro forma .73 .61 .00
Weighted average fair
value of options
granted during the year 2.51 3.19 2.09
</TABLE>
38
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Note 7 - Income Taxes
Because the Company has been operating as a REIT since September 1, 1997, there
is no income tax expense for the transition period ended December 31, 1997. The
income tax benefit is a result of the Company's previously deferred tax
liability being eliminated because of the Company's conversion to a REIT as well
as accrued income tax refunds that are a result of Federal tax net operating
loss carrybacks. The provision (benefit) for income taxes consists of the
following (amounts in thousands):
<TABLE>
<CAPTION>
Four Months Ended
December 31 Year Ended August 31
------------------------- ------------------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ (970) $ 1,709 $ (655) $ (1,285) $ 7,236
State -- 293 (432) (513) 1,418
-------- -------- -------- -------- --------
(970) 2,002 (1,087) (1,798) 8,654
Allocated to
discontinued operations -- 835 2,301 1,683 1,499
-------- -------- -------- -------- --------
(970) 2,837 1,214 (115) 10,153
Deferred:
Federal (5,451) 874 8,509 1,887 (3,513)
State (1,209) 150 2,462 1,175 48
-------- -------- -------- -------- --------
(6,660) 1,024 10,971 3,062 (3,465)
Allocated to
discontinued operations -- 1,413 1,078 2,848 2,553
-------- -------- -------- -------- --------
(6,660) 2,437 12,049 5,910 (912)
-------- -------- -------- -------- --------
Provision (benefit) for income tax-
continuing operations $ (7,630) $ 5,274 $ 13,263 $ 5,795 $ 9,241
======== ======== ======== ======== ========
</TABLE>
A reconciliation between the Federal statutory rate and the effective tax rate
follows (amounts in thousands):
<TABLE>
<CAPTION>
Four Months Ended
December 31 Year Ended August 31
----------------------- -------------------------------------
1997 1996 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Federal taxes at the statutory rate $ 3,457 $ 4,502 $11,322 $ 4,947 $ 7,888
State taxes, net of Federal benefit 593 772 1,941 848 1,353
------- ------- ------- ------- -------
4,050 5,274 13,263 5,795 9,241
Deduction for dividends paid (4,050) -- -- -- --
Adjustment due to change in tax status (7,630) -- -- -- --
------- ------- ------- ------- -------
Total provision (benefit) $(7,630) $ 5,274 $13,263 $ 5,795 $ 9,241
======= ======= ======= ======= =======
</TABLE>
39
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The significant components of deferred income taxes are attributable to the
following temporary differences (amounts in thousands):
<TABLE>
<CAPTION>
December 31 August 31
----------- --------------------------------
1997 1997 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Deferred tax assets:
Real estate properties $ -- $ -- $ 8,086 $ 12,754
All other, net -- 1,214 1,006 1,210
-------- -------- -------- --------
-- 1,214 9,092 13,964
Deferred tax liabilities:
Deferred rental income -- (5,128) (3,703) (2,665)
Real estate properties -- (2,746) -- --
-------- -------- -------- --------
-- (7,874) (3,703) (2,665)
-------- -------- -------- --------
Net deferred tax assets (liabilities) $ -- $ (6,660) $ 5,389 $ 11,299
======== ======== ======== ========
</TABLE>
Note 8 - Commitments and Contingencies
Price Enterprises owns a property in New Jersey subject to a ground lease with a
remaining term of 21 years. Rental expense related to the ground lease for the
four month periods ended December 31, 1997 and 1996 and the years ended August
31, 1997, 1996 and 1995 was $0.3 million, $0.8 million, $1.7 million, $2.5
million and $2.4 million, respectively. Prior years rental expense included
additional leases which were either transferred to PriceSmart in the
Distribution or terminated. Future minimum payments during the next five years
and thereafter under this noncancelable lease at December 31, 1997 are as
follows (amounts in thousands):
1998 $ 754
1999 754
2000 754
2001 754
2002 754
Thereafter 12,823
----------
Total minimum payments $16,593
==========
The above property is subleased and as of December 31, 1997, total future
sublease revenues are $28.4 million, which are included in future minimum rental
income amounts in Note 3.
Note 9 - Subsequent Events
On January 14, 1998 the Company declared a cash dividend of $0.35 per share,
totaling approximately $8.3 million, payable on February 13, 1998 to
stockholders of record on January 30, 1998.
At the annual meeting held on December 16, 1997, stockholders approved a
reincorporation of the Company as a Maryland corporation. The reincorporation
was completed and became effective January 2, 1998.
40
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Price Enterprises, Inc.
We have audited the accompanying balance sheets of Price Enterprises, Inc. as of
December 31, 1997 and August 31, 1997 and 1996 and the related statements of
income, stockholders' equity and cash flows for the period September 1, 1997
through December 31, 1997 and for each of the three years in the period ended
August 31, 1997. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Price Enterprises, Inc. at
December 31, 1997 and August 31, 1997 and 1996 and the results of its operations
and its cash flows for the period September 1, 1997 through December 31, 1997
and for each of the three years in the period ended August 31, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Diego, California
January 16, 1998
41
<PAGE>
ITEM 9 -
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
PART III
ITEM 10 - Directors and Executive Officers of the Registrant
Board of Directors and Committees of the Board
The table below indicates the name and position with the Company (if any) and
age of each Director:
Name Age Title
- ---- --- -----
Robert E. Price ................... 55 Chairman of the Board
Jack McGrory ...................... 48 President, Chief Executive Officer
and Director
Paul A. Peterson................... 69 Vice Chairman of the Board
Murray L. Galinson................. 60 Director
James F. Cahill.................... 42 Director
Anne L. Evans...................... 65 Director
Robert E. Price has been Chairman of the Board of the Company since July 28,
1994. Mr. Price was President and Chief Executive Officer of the Company from
July 28, 1994 to August 29, 1997. Mr. Price was Chairman of the Board of
Price/Costco, Inc. from October 1993 to December 1994. From 1976 to October
1993, he was Chief Executive Officer and a Director of The Price Company. Mr.
Price served as Chairman of the Board of The Price Company from January 1989 to
October 1993, and as its President from 1976 until December 1990. In addition to
his role in Price Enterprises, Mr. Price serves as Chairman of the Board of
PriceSmart, Inc.
Jack McGrory became a Director of the Company on August 29, 1997. Mr. McGrory
also became President and Chief Executive Office of the Company on September 2,
1997. Prior to September 2, 1997, Mr. McGrory served as City Manager of the City
of San Diego from March 1991 through August 1997.
Paul A. Peterson has served as a Vice Chairman of the Board of the Company since
July 28, 1994. Mr. Peterson is a lawyer and is of counsel to the law firm of
Peterson & Price in San Diego. He was a Director of Price/Costco, Inc. from
October 1993 until December 1994. From 1976 to October 1993, he was Secretary,
and except for a period of eleven months in 1982, a Director of The Price
Company.
Murray L. Galinson has served as a Director of the Company since August 28,
1994. Mr. Galinson has been Chairman of the Board of San Diego National Bank and
SDNB Financial Corp. since May 1996 and a Director of both entities since their
inception in 1981. Mr. Galinson served as President of both entities from
September 1984 until May 1996 and as Chief Executive Officer of both entities
from September 1984 to September 1997.
42
<PAGE>
James F. Cahill has been a director of the Company since August 29, 1997. Mr.
Cahill has been Executive Vice President of Price Entities since January 1987.
In this position he has been responsible for the oversight and investment
activities of the financial portfolio of Sol Price, founder of The Price
Company, and related entities. He is currently a Director of Neighborhood
National Bank, located in San Diego. Prior to his current position, Mr. Cahill
was employed at The Price Company for ten years with his last position being
Vice President of Operations.
Anne L. Evans has been a director of the Company since October 16, 1997. Ms.
Evans has been the Chairman of Evans Hotels since April 1984. Ms. Evans also
served as its President from April 1984 until March 1993. She has served as a
member of the Board of Directors of the Los Angeles Branch of the Federal
Reserve Bank of San Francisco since 1993 and is presently the Chairman.
Compensation of the Company's Directors
Each outside Director of Price Enterprises (other than Mr. Peterson) receives
one thousand (1,000) shares of Company stock per year for serving on the Board
of Directors in lieu of cash as annual compensation for services. In addition,
each outside Director will receive an additional $5,000 per year for serving as
chairman of any committee of the Board. Mr. Peterson receives two thousand five
hundred (2,500) shares of Company stock per year for his services as Vice
Chairman of the Board and as chairman or member of any committee of the Board in
lieu of cash as annual compensation for services. In addition, outside Directors
(other than Mr. Peterson) who serve on committees of the Board (in a capacity
other than chairman of a committee) receive $500 for each meeting attended. The
chairman or vice chairman of any committee may receive additional compensation
to be fixed by the Board. Each non-employee Director is eligible to receive
stock grants and stock options pursuant to the Price Enterprises Directors' 1995
Stock Option Plan as Amended. Employee Directors are eligible to receive stock
grants and stock options pursuant to The Price Enterprises 1995 Combined Stock
Grant and Stock Option Plan. Robert E. Price, who became eligible for the
foregoing non-employee Director compensation on August 29, 1997 upon his
resignation as President and Chief Executive Officer of the Company, has
declined annual compensation for services as a Director and stock options for
fiscal 1998.
Executive Officers
The table below indicates the names, positions and ages of the Company's
executive officers:
Name Age Title
- ---- --- -----
Jack McGrory ................... 48 President and Chief Executive Officer
Joseph R. Satz.................. 56 Executive Vice President, General
Counsel and Secretary
Gary W. Nielson................. 47 Executive Vice President and Chief
Financial Officer
Kathleen M. Hillan ............. 39 Senior Vice President - Finance
43
<PAGE>
Jack McGrory became a Director of the Company on August 29, 1997. Mr. McGrory
also became President and Chief Executive Office of the Company on September 2,
1997. Prior to September 2, 1997, Mr. McGrory served as City Manager of the City
of San Diego from March 1991 through August 1997.
Joseph R. Satz has been Executive Vice President of the Company since October
16, 1997. He became the Secretary and General Counsel of the Company on
September 16, 1997. Mr. Satz held the position of Vice President and Counsel of
the Company from August 1994 until he assumed his current positions. Mr. Satz
has provided legal counsel for The Price Company and Price/Costco since 1983.
Gary W. Nielson became Executive Vice President and Chief Financial Officer on
February 2, 1998. Prior to February 2, 1998, Mr. Nielson was Senior Vice
President of Finance for Koll Real Estate Services from November 1992 to January
1998. He also previously served as Chief Financial Officer for Carver
Development Corporation and served in various senior financial management
positions at The Hahn Company.
Kathleen M. Hillan became Senior Vice President - Finance of the Company on
October 16, 1997. Ms. Hillan was Corporate Controller of the Company from August
1994 until she assumed her current position. Ms. Hillan was International
Finance Manager of The Price Company from 1992 until August 1994.
44
<PAGE>
ITEM 11 - Executive Compensation
The following table shows, for the 12 months ended December 31, 1997 and the
years ended August 31, 1997, 1996 and 1995, the compensation earned by the
Company's current and former Chief Executive Officers and the four most highly
compensated executive officers of the Company and its subsidiaries (the "Named
Executive Officers") at the end of 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
Awards
------------
Annual Compensation Securities
--------------------------------------------- Underlying
Other Annual Options/ All Other
Name and Principal Position Year Salary ($) Bonus ($) Compensation($)(3) SARs (#) Compensation ($)(4)
- ---------------------------- -------- ---------- --------- ------------------ ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Price (5) 1997 (1) 155,769 0 0 0 9,750
President and Chief 1997 (2) 225,000 0 0 0 9,750
Executive Officer 1996 225,000 0 0 0 4,422
1995 243,340 0 0 0 9,500
Jack McGrory (6) 1997 (1) 57,778 0 0 236,329 0
President and Chief
Executive Officer
Joseph R. Satz (7) 1997 (1) 130,288 25,000 0 36,244 9,312
Executive Vice President,
General Counsel and
Secretary
Kathleen M. Hillan (8) 1997 (1) 81,090 20,000 0 41,358 4,994
Senior Vice President -
Finance
Theodore Wallace (9) 1997 (1) 138,461 0 0 6,533 9,750
Executive Vice President 1997 (2) 200,000 0 0 0 9,750
1996 200,000 0 0 0 3,960
1995 215,191 0 100,000 (11) 100,000 9,500
Daniel T. Carter (10) 1997 (1) 126,700 40,000 0 2,257 29,264
Executive Vice President, 1997 (2) 182,700 40,000 0 0 29,264
CFO and Secretary 1996 175,000 35,000 0 0 5,598
1995 179,361 35,000 0 75,000 9,280
</TABLE>
45
<PAGE>
(1) Year ended December 31, 1997.
(2) Year ended August 31, 1997.
(3) Except as otherwise indicated, perquisites to each officer did not exceed
the lesser of $50,000 or 10% of the total salary and bonus for such
officer.
(4) The amounts shown for the years ended August 31 and December 31, 1997
constitute contributions to The Price Enterprises Profit Sharing and 401(k)
Plan and the Company's 401(k) matching contribution for 1997 on behalf of
each Named Executive Officer. The amounts shown for fiscal 1996 constitute
contributions to The Price Enterprises Profit Sharing and 401(k) Plan for
the period of September 4, 1995 through December 31, 1995, and the
Company's 401(k) matching contribution of $250 for the year ended August
31, 1996 on behalf of each Named Executive Officer. During the year ended
August 31, 1996, the "plan year" for The Price Enterprises Profit Sharing
and 401(k) Plan was converted to a fiscal year ended December 31 from a
fiscal year ended August 31.
(5) Mr. Price resigned as President and Chief Executive Officer of the Company
on August 29, 1997 and became an officer of PriceSmart. Mr. Price remains
Chairman of the Board of the Company.
(6) Mr. McGrory became President and Chief Executive Officer of the Company on
September 2, 1997. Annual compensation for the year ended December 31, 1997
reflects Mr. McGrory's partial year of employment.
(7) Mr. Satz became Executive Vice President, General Counsel and Secretary on
October 16, 1997.
(8) Ms. Hillan became Senior Vice President - Finance on October 16, 1997.
(9) Mr. Wallace resigned as Executive Vice President of the Company on August
29, 1997 and became an officer of PriceSmart.
(10) Mr. Carter resigned from the Company on September 2, 1997.
(11) Amount constitutes a retention bonus paid to Mr. Wallace for agreeing to
transfer employment from Price/Costco, Inc. to the Company in the year
ended August 31, 1995.
Stock Options
The following table sets forth information regarding the grant of stock options
during the 12 months ended December 31, 1997 to the Named Executive Officers.
46
<PAGE>
<TABLE>
<CAPTION>
OPTION GRANTS IN THE YEAR ENDED DECEMBER 31, 1997
Potential
Individual Grants Realizable Value at
-------------------------------------------------------------- Assumed Annual
Number of Percent of Total Rates of Stock Price
Securities Options Granted Exercise Appreciation
Underlying to Employees in Price for Option Term (1)
Options Calendar 1997 Per Share Expiration ---------------------
Name Granted (#) (2) (%) ($/SH) Date (3) 5% ($) 10% ($)
- ------------------ ----------- ---------------- --------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Price 0 N/A N/A N/A N/A N/A
Jack McGrory 236,329 50.46 18.96 10/7/03 1,523,900 3,457,209
Joseph R. Satz 32,000 6.83 18.96 10/7/03 206,343 468,121
Kathleen M. Hillan 40,000 8.54 18.75 12/17/03 255,072 578,671
Theodore Wallace 0 N/A N/A N/A N/A N/A
Daniel T. Carter 0 N/A N/A N/A N/A N/A
</TABLE>
(1) The dollar amounts under these columns are the result of calculations at
the assumed compounded market appreciation rates of 5% and 10% as required
by the Securities and Exchange Commission over a six-year term and,
therefore, are not intended to forecast possible future appreciation, if
any, of the stock price.
(2) No stock appreciation rights were granted to any of the Named Executive
Officers or other Company employees during the twelve months ended December
31, 1997.
(3) The options become exercisable at 20% per year over a period of five years
from the date of grant and expire six years from the date of grant.
The following table sets forth information with respect to the Named Executive
Officers concerning the exercise of options during the year ended December 31,
1997 and unexercised options held as of December 31, 1997.
OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 1997
AND DECEMBER 31, 1997 OPTION VALUES
<TABLE>
<CAPTION>
Value of Unexercised
Number of In-the-Money
Unexercised Options Options at
at December 31, 1997
December 31, 1997 (#) ($)(1)
Number of --------------------- --------------------
Shares Acquired Exercisable/ Exercisable/
Name on Exercise (#) Value Realized ($) Unexercisable Unexercisable
- ------------------ ---------------- ----------------- --------------------- --------------------
<S> <C> <C> <C> <C>
Robert E. Price N/A N/A N/A N/A
Jack McGrory 0 0 0/236,329 0/0
Joseph R. Satz 0 0 8,897/45,347 81,408/122,125
Kathleen M. Hillan 1,920 10,823 0/47,118 0/59,736
Theodore Wallace 59,245 569,345 0/0 0/0
Daniel T. Carter 41,832 429,763 0/0 0/0
</TABLE>
(1) Based on a price of $18.25 per share, the last reported sales price of the
Company's Common Stock on December 31, 1997, as listed on The Nasdaq Stock
MarketSM.
47
<PAGE>
Profit Sharing and 401(k) Plan
The Board of Directors of Price Enterprises adopted The Price Enterprises, Inc.
Profit Sharing and 401(k) Plan (the "Plan") in January 1995.
The Plan is a profit-sharing plan designed to be a "qualified" plan under
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), covering all non-union employees who have completed one year of
service, as that term is defined in the Plan. Under the Plan, the Company may,
in its discretion, make annual contributions which shall not exceed for each
participant the lesser of: (a) 25% of the participant's compensation for such
year, or (b) the greater of (i) 25% of the defined benefit dollar limitation
then in effect under section 415(b)(1) of the Code or (ii) $30,000. In addition,
participants may make voluntary contributions. The Plan also permits employees
to defer (in accordance with section 401(k) of the Code) a portion of their
salary and contribute those deferrals to the Plan.
All participants in the Plan are fully vested in their voluntary contributions
and earnings thereon. Vesting in the remainder of a participant's account is
based upon his or her years of service with the Company. A participant initially
is 20% vested after the completion of two years of service with the Company, an
additional 20% vested after the completion of three years of service, and an
additional 20% vested after the completion of each of his or her next three
years of service, so that the participant is 100% vested after the completion of
six years of service.
Regardless of years of service, a participant becomes fully vested in his or her
entire account upon retirement due to permanent disability, attainment of age 65
or death. In addition, the Plan provides that the Board of Directors of the
Company may at any time declare the Plan partially or completely terminated, in
which event the account of each participant with respect to whom the Plan is
terminated will become fully vested.
The Board of Directors also has the right at any time to discontinue
contributions to the Plan. If the Company fails to make one or more substantial
contributions to the Plan for any period of three consecutive years in each year
of which the Company realized substantial current earnings, such failure will
automatically be deemed a complete discontinuance of contributions. In the event
of such a complete discontinuance of contributions, the account of each
participant will become fully vested.
During the year ended August 31, 1996, the "plan year" for The Price Enterprises
Profit Sharing and 401(k) Plan was converted to a fiscal year ended December 31
from a fiscal year ended August 31.
Employment Contracts
Jack McGrory became Chief Executive Officer of the Company on September 2, 1997.
Mr. McGrory entered into an employment agreement with the Company for a term of
three years commencing September 2, 1997. Pursuant to this agreement Mr. McGrory
receives a base annual salary of $200,000 and a bonus in the amount of $50,000
for his first year of employment. During Mr. McGrory's second and third years of
employment, he will receive a base annual salary of $250,000 and will be
eligible to participate in the Company's bonus plan. In addition,
48
<PAGE>
pursuant to this agreement, Mr. McGrory received a stock option grant for
236,329 shares of the Company's Common Stock, which represented 1% of the
Company's outstanding Common Stock as of his employment date. Such stock option
grant is exercisable at a price equal to the fair market value of the Company's
Common Stock on October 6, 1997 and vests at 20% per year over a five year
period. All such stock options expire on October 7, 2023. Mr. McGrory may not
engage in any activities, with or without compensation, that would interfere
with the performance of his duties or that would be adverse to the Company's
interests, without the prior written consent of the Company. The agreement
provides that Mr. McGrory will receive all other benefits offered to officers
under the Company's standard company benefits practices and plans. Mr. McGrory
may terminate the agreement at any time on 90 days' prior written notice. The
Company may terminate the agreement for cause upon immediate notice thereof, or
upon the death or disability of Mr. McGrory. In the event that the Company
terminates the agreement for any reason other than cause, Mr. McGrory shall be
entitled for the remainder of the term of the agreement to the continuation of
his base salary payable in conformity with the Company's normal payroll period.
The foregoing severance benefits are the exclusive benefits that would be
payable to Mr. McGrory by reason of his termination, and the Company is not
obligated to segregate any assets or procure any investment in order to fund
such severance benefits. The agreement also contains confidentiality provisions
and other terms and conditions customary to executive employment agreements.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding beneficial
ownership of shares of the Company's Common Stock as of January 31, 1998 (unless
described otherwise) by (i) the Company's Named Executive Officers (as
hereinafter defined) and Directors, (ii) all of the Company's executive officers
and Directors as a group and (iii) all other stockholders known by the Company
to own beneficially more than five percent of the Common Stock. Beneficial
ownership of Directors, officers and stockholders owning 5% or more of the
Company's Common Stock includes both outstanding Common Stock and shares of
Common Stock issuable upon exercise of options that are currently exercisable or
will become exercisable within 60 days after the date of this table.
<TABLE>
<CAPTION>
Amount and Nature Percent
of Beneficial Beneficially
Name and Address (2) Ownership (1) Owned
- ----------------------------------------------------------- ----------------- ------------
<S> <C> <C>
Robert E. Price ........................................... 5,249,698(3) 22.1%
Paul A. Peterson .......................................... 230,261(4) 1.0%
James F. Cahill ........................................... 2,750,370(5) 11.6%
Anne L. Evans ............................................. 250(6) *
Murray L. Galinson ........................................ 10,664(7) *
Jack McGrory .............................................. 2,000(8) *
Kathleen M. Hillan ........................................ 2,372(9) *
Joseph R. Satz ............................................ 56,206(10) *
Sol Price ................................................. 8,549,090(11) 36.0%
The Price Family Charitable Fund .......................... 2,622,580(12) 10.6%
Jeffery S. Halis .......................................... 1,174,000(13) 5.0%
All executive officers and Directors as a group (8 persons) 5,637,881(14) 23.8%
</TABLE>
* Less than 1% beneficially owned.
49
<PAGE>
(1) Robert E. Price, James F. Cahill and Sol Price are directors of The Price
Family Charitable Fund ("the Fund"). As such, for purposes of this table,
they are each deemed to beneficially own the 2,622,580 shares held by the
Fund. Each of Robert E. Price, James F. Cahill and Sol Price has shared
voting and dispositive powers with respect to, and disclaims beneficial
ownership of, the shares held by the Fund. If the percent of the Company's
Common Stock beneficially owned by Robert E. Price, James F. Cahill and Sol
Price were calculated without regard to the shares held by the Fund, they
would own 11.1%, 0.5% and 25.0%, respectively, of the Company's Common
Stock.
(2) The address for all persons listed, other than Sol Price and Jeffrey S.
Halis, is c/o the Company, 4649 Morena Boulevard, San Diego, California
92117. The address for Sol Price is c/o The Price Entities, 7979 Ivanhoe
Avenue, Suite 520, La Jolla, California 92037. The address for Jeffrey S.
Halis is 500 Park Avenue, Fifth Floor, New York, New York 10022.
(3) Includes 1,351,270 shares held by trusts of which Mr. Price is a trustee.
Mr. Price has shared voting and dispositive power with respect to such
shares. Also includes 5,112 shares held by Mr. Price as custodian of his
minor children under the California Uniform Transfers to Minors Act
("CUTMA"). Also includes 2,622,580 shares held by the Fund. Mr. Price
disclaims beneficial ownership of such shares.
(4) Includes 12,357 shares subject to non-qualified stock options. Excludes
24,176 shares subject to non-qualified stock options which are not
presently exercisable.
(5) Includes 2,000 shares held by Mr. Cahill as custodian for his minor
children under CUTMA. Also includes 110,040 shares held by trusts of which
Mr. Cahill is a trustee. Mr. Cahill has shared voting and dispositive power
with respect to, and disclaims beneficial ownership of such shares.
Excludes 12,358 shares subject to non-qualified stock options which are not
presently exercisable. Also includes 2,622,580 shares held by the Fund. Mr.
Cahill disclaims beneficial ownership of such shares.
(6) Excludes 10,000 shares subject to non-qualified stock options which are not
presently exercisable.
(7) Includes 7,414 shares subject to non-qualified stock options. Also includes
1,500 shares held by a partnership for the benefit of Mr. Galinson's adult
children, over which Mr. Galinson exercises sole investment power. Mr.
Galinson disclaims beneficial ownership over such 1,500 shares. Excludes
4,944 shares subject to non-qualified stock options which are not presently
exercisable.
(8) Includes 2,000 shares held by Mr. McGrory as custodian for his minor
children under CUTMA. Mr. McGrory disclaims beneficial ownership of such
shares. Excludes 236,329 shares subject to non-qualified stock options
which are not presently exercisable.
(9) Includes 2,372 shares subject to non-qualified stock options. Excludes
44,726 shares subject to non-qualified stock options which are not
presently exercisable.
(10) Includes 41,360 shares held by trusts of which Mr. Satz is a trustee. Mr.
Satz has shared voting and dispositive power with respect to, and disclaims
beneficial ownership of such
50
<PAGE>
shares. Includes 13,346 shares subject to non-qualified stock options.
Excludes 40,898 shares subject to non-qualified stock options which are not
presently exercisable.
(11) Includes 5,926,510 shares held by trusts of which Mr. Price is a trustee.
Of such shares, Mr. Price has sole voting and dispositive power with
respect to 5,775,660 shares and shared voting and dispositive power with
respect to 150,850 shares held by trusts of which Mr. Price is a trustee.
Mr. Price disclaims beneficial ownership of such 150,850 shares. Also
includes 2,622,580 shares held by the Fund. Mr. Price disclaims beneficial
ownership of such shares.
(12) The Fund is a private foundation. The Directors of the Fund are Sol Price,
Robert Price, Helen Price wife of Sol Price, Allison Price wife of Robert
Price, and James Cahill. Each of the foregoing individuals disclaims
membership in a group with the Fund.
(13) Includes 836,200 shares owned by Tyndall Partners, L.P., a Delaware limited
partnership, 56,900 shares owned by Madison Avenue Partners, L.P., a
Delaware limited partnership and 280,900 shares owned by Tyndall
Institutional Partners, L.P., a Delaware limited partnership. Pursuant to
the Agreement of Limited Partnership of each of Tyndall Partners, L.P.,
Madison Avenue Partners, L.P. and Tyndall Institutional Partners, L.P.,
Jeffrey S. Halis possesses sole voting and investment control over all
securities owned by such entities, respectively. All information concerning
Mr. Halis, Tyndall Partners, L.P., Madison Avenue Partners, L.P. and
Tyndall Institutional Partners, L.P. is based upon information contained in
Schedule 13D filed with the Securities and Exchange Commission on behalf of
Mr. Halis on July 22, 1997.
(14) See notes (1) and (3) - (11)
ITEM 13 - Certain Relationships and Related Transactions
Relationship with PriceSmart, Inc.
On August 29, 1997 (the "Distribution Date"), the Company separated its core
real estate business and its merchandising businesses pursuant to a spin-off in
which the stockholders of the Company received Common Stock of PriceSmart
through a distribution. Pursuant to the Distribution, PriceSmart acquired the
merchandising businesses and the Company retained the real estate business. Sol
Price beneficially owns approximately 36% of the Company's outstanding Common
Stock and beneficially owns approximately 36% of PriceSmart's outstanding Common
Stock. Robert E. Price, who beneficially owns approximately 22% of the Company's
outstanding Common Stock and is the Chairman of the Board of the Company (and
President and Chief Executive Officer of the Company during the year ended
August 31, 1997) also beneficially owns approximately 22% of PriceSmart's Common
Stock and is PriceSmart's Chairman of the Board.
For the purpose of governing certain of the ongoing relationships between
PriceSmart and the Company after the Distribution and to provide mechanisms for
an orderly transition, PriceSmart and the Company have entered into the various
agreements, and will adopt policies, as described in this section.
51
<PAGE>
PriceSmart and the Company have entered into the Distribution Agreement, which
provides for, among other things (i) the division between PriceSmart and the
Company of certain assets and liabilities; (ii) the Distribution; and (iii)
certain other agreements governing the relationship between PriceSmart and the
Company following the Distribution.
The Company and PriceSmart have entered into an Asset Management and Disposition
Agreement dated as of August 26, 1997 calling for the Company to provide asset
management services with respect to certain properties owned by PriceSmart.
Among other things, the Company will collect rents and pay operating expenses,
maintain and repair such properties, prepare month-end financial statements,
hire brokers and prepare brokers' agreements, lease available space within such
properties and dispose of such properties. As consideration for such services,
PriceSmart will pay the Company management fees based on annual rents from such
properties, leasing fees based on the gross leasable floor areas of each such
properties, disposition fees based on percentages of the sales prices for
properties that are sold and a developer's fee of 3% of all "hard" construction
costs managed by the Company on behalf of PriceSmart. Such agreement has a
two-year term; provided that either the Company or PriceSmart may terminate the
agreement upon 60 days written notice.
PriceSmart and the Company have entered into a Transitional Services Agreement
dated as of August 26, 1997 pursuant to which the Company and PriceSmart will
provide certain services to one another. The fees for such transitional services
(which shall not include real estate management services) will be based on
hourly rates designed to reflect the costs (including indirect costs) of
providing such services. The transitional services to be provided to PriceSmart
and to the Company pursuant to such agreement may include cash management
services, certain accounting services, litigation management or any other
similar services that PriceSmart or the Company may require. The Transitional
Services Agreement has been extended from December 31, 1997 and will terminate
on June 30, 1998 unless extended in writing by the parties.
The Company and PriceSmart have entered into a Tax Sharing Agreement dated as of
August 26, 1997 defining the parties' rights and obligations with respect to tax
returns and tax liabilities, including, in particular, Federal and state income
tax returns and liabilities, for taxable years and other taxable periods ending
on or before the Distribution Date. In general, the Company will be responsible
for (i) filing all Federal and state income tax returns of the Company,
PriceSmart and any of their subsidiaries for all taxable years ending on or
before or including the Distribution Date and (ii) paying the taxes relating to
such returns (including any deficiencies proposed by applicable taxing
authorities), to the extent attributable to pre-Distribution Date periods. The
Company and PriceSmart will each be responsible for filing its own returns and
paying its own taxes for post-Distribution Date periods.
The on-going relationships between PriceSmart and the Company may present
certain conflict situations for Robert E. Price who serves as Chairman of the
Board of PriceSmart and Chairman of the Board of the Company. Mr. Price and
other executive officers and directors of the Company and PriceSmart also own
(or have options or other rights to acquire) a significant number of shares of
Common Stock in PriceSmart and the Company. The Company and PriceSmart have
adopted appropriate policies and procedures to be followed by the Board of
Directors of each company to limit the involvement of Mr. Price (or such
executive officers and other directors having a significant ownership interest
in the companies) in conflict situations,
52
<PAGE>
including matters relating to contractual relationships or litigation between
PriceSmart and the Company. Such procedures include requiring Mr. Price (or such
executive officers or other directors having a significant ownership interest in
the companies) to abstain from voting as a director of both companies with
respect to matters that present a significant conflict of interest between the
companies.
53
<PAGE>
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedules:
The following financial statements of Price Enterprises, Inc. are
included in Item 8
Page
----
(1) (A) Report of Independent Auditors 41
(B) Financial Statements
(i) Balance Sheets - December 31, 1997 and August
31, 1997 and 1996 24
(ii) Statements of Income - Four Months Ended
December 31, 1997 and 1996 and the Years
Ended August 31, 1997, 1996 and 1995 25
(iii) Statements of Stockholders' Equity Four
Months Ended December 31, 1997 and - Years
Ended August 31, 1997, 1996 and 1995 26
(iv) Statements of Cash Flows - Four Months Ended
December 31, 1997 and 1996 and the Years
Ended August 31, 1997, 1996 and 1995 27
(v) Notes to Financial Statements - December 31,
1997 28
(2) Financial Statement Schedules:
The following financial statement schedule of Price
Enterprises, Inc. is included in Item 14(d)
Schedule III - Real Estate and Accumulated Depreciation 56
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and therefore have been omitted.
(3) For a list of exhibits filed with this annual report, refer to
the exhibit index beginning on page 59.
(b) Reports on Form 8-K.
(1) On September 12, 1997, the Company filed a Current Report on Form
8-K relating to the PriceSmart Distribution and the Company's
intention to make a REIT election. The date of the earliest event
reported was August 29, 1997. The Form 8-K included the following
items:
54
<PAGE>
(i) Item 2. Acquisition or Disposition of Assets. The
Company disclosed the PriceSmart Distribution.
(ii) Item 5. Other Matters. The Company disclosed its
intention to make a REIT election and the effects
thereof on stockholders.
(iii) Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits. The Company filed as exhibits
a number of documents relating to the PriceSmart
Distribution.
(iv) Item 8. Change in Fiscal Year. The Company disclosed
its change in fiscal year end from August 31 to
December 31.
(2) On October 14, 1997, the Company filed Amendment No. 1 to the
above referenced Form 8-K. The Form 8-K, as amended, included the
pro forma financial information relating to the Distribution, as
required by Item 7.
(c) Exhibits: For a list of exhibits filed with this annual report, refer
to the exhibit index beginning on page 59.
(d) Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation 56
55
<PAGE>
PRICE ENTERPRISES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(amounts in thousands)
<TABLE>
<CAPTION>
Costs Gross amount at which carried
Initial Costs Capitalized at close of period
--------------------------- Subsequent -----------------------------------
Land and Building and to Land and Building and Total
Location Description Improvements Improvements Acquisition Improvements Improvements (1)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Westbury, NY Shopping Center $ 41,784 $ 0 $ 28,329 $ 46,621 $ 23,492 $ 70,113
Pentagon City, VA Shopping Center 24,742 14,473 25,656 26,289 38,582 64,871
Wayne, NJ Shopping Center 19,760 6,912 12,689 22,200 17,161 39,361
San Diego, CA Warehouse/Office 5,244 7,990 10,529 5,709 20,493 26,202
Building
Philadelphia, PA Shopping Center 8,649 4,382 12,150 9,115 16,066 25,181
Dallas, TX Retail Building 10,662 0 13,529 12,453 11,738 24,191
Seekonk, MA Shopping Center 7,636 0 12,561 10,153 10,044 20,197
Roseville, CA Shopping Center 9,173 8,165 0 9,173 8,165 17,338
Signal Hill, CA Shopping Center 5,872 0 10,224 8,285 7,811 16,096
Fountain Valley, CA Shopping Center 4,551 0 10,356 6,595 8,312 14,907
Glen Burnie, MD Shopping Center 1,795 0 8,735 3,699 6,831 10,530
Moorsetown, NJ (leased land) Shopping Center Leased 0 8,028 0 8,028 8,028
Northridge, CA Shopping Center 4,029 0 3,586 5,105 2,510 7,615
Azusa, CA Warehouse/Rest. Pads 4,248 896 2,315 4,359 3,100 7,459
San Diego/Carmel Mtn., CA Shopping Center 3,464 0 3,431 3,742 3,153 6,895
Buffalo, NY Retail Building 2,503 0 3,724 3,656 2,571 6,227
Inglewood, CA Warehouse Building 1,438 0 3,710 1,666 3,482 5,148
Sacramento/Stockton, CA Shopping Center 1,437 0 3,567 2,436 2,568 5,004
San Juan Capistrano, CA Shopping Center 3,150 0 1,285 2,034 2,401 4,435
Tucson, AZ Shopping Center 1,073 0 2,777 1,788 2,062 3,850
New Britain, CT Warehouse Building 3,640 0 193 2,614 1,219 3,833
Hampton, VA Retail Building/Bank 1,132 0 1,826 1,436 1,522 2,958
Smithtown, NY Retail Building 721 0 2,021 1,231 1,511 2,742
Redwood City, CA Retail Building 1,860 0 235 2,095 0 2,095
Denver/Littleton, CO Retail Building 607 847 424 584 1,294 1,878
Denver/Aurora, CO Restaurant 105 0 648 173 580 753
San Diego/Southeast, CA Restaurant/Bank 217 0 387 170 434 604
Chula Vista/Rancho del Rey, CA Land 915 0 (415) 500 0 500
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Properties $170,407 $43,665 $182,500 $193,881 $205,130 $399,011
====================================================================================================================================
<CAPTION>
Depreciable Life
------------------------------------
Accumulated Date of Date of Land Building
Location Description Depreciation Construction Acquisition Improvements Building Improvements
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Westbury, NY Shopping Center $ (4,925) 1992-93 1992 25 25 10
Pentagon City, VA Shopping Center (5,273) 1993-94 1993 25 25 10
Wayne, NJ Shopping Center (4,023) 1991-93 1991 25 25 10
San Diego, CA Warehouse/Office (9,904) 1981 25 25 10
Building
Philadelphia, PA Shopping Center (2,905) 1992,1994-95 1991 25 25 10
Dallas, TX Retail Building (1,913) 1991-92, 96 1991 25 25 10
Seekonk, MA Shopping Center (2,322) 1991-94 1991 25 25 10
Roseville, CA Shopping Center 0 1997 25 25 10
Signal Hill, CA Shopping Center (1,531) 1992-93 1991 25 25 10
Fountain Valley, CA Shopping Center (1,813) 1990-93 1989 25 25 10
Glen Burnie, MD Shopping Center (1,728) 1990-92 1985 25 25 10
Moorsetown, NJ (leased land) Shopping Center (1,988) 1989-91 1989 25 25 10
Northridge, CA Shopping Center (386) 1993-94 1988 25 25 10
Azusa, CA Warehouse/Rest. Pads (694) 1983 1983 25 25 10
San Diego/Carmel Mtn., CA Shopping Center (559) 1992-93 1991 25 25 10
Buffalo, NY Retail Building (1,378) 1989-90 1989 25 25 10
Inglewood, CA Warehouse Building (1,154) 1989 1984 25 25 10
Sacramento/Stockton, CA Shopping Center (331) 1994-95 1993 25 25 10
San Juan Capistrano, CA Shopping Center (482) 1988-89, 1987 25 25 10
94-95
Tucson, AZ Shopping Center (580) 1989-91 1988 25 25 10
New Britain, CT Warehouse Building (359) 1991 25 25 10
Hampton, VA Retail Building/Bank (376) 1992 1987 25 25 10
Smithtown, NY Retail Building (785) 1988-89 1985 25 25 10
Redwood City, CA Retail Building 0 1982 -- -- --
Denver/Littleton, CO Retail Building (323) 1990 25 25 10
Denver/Aurora, CO Restaurant (103) 1993 1990 25 25 10
San Diego/Southeast, CA Restaurant/Bank (254) 1989-90 1989 25 25 10
Chula Vista/Rancho del Rey, CA Land 0 1993 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total Investment Properties $(46,089)
====================================================================================================================================
</TABLE>
(1) The aggregate cost for Federal income tax purposes is $391,050.
56
<PAGE>
PRICE ENTERPRISES, INC.
SCHEDULE III (Continued)
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Four Months
Ended
December 31 Year Ended August 31
--------- -------------------------------------------
Reconciliation to Reported Amounts 1997 1997 1996 1995
- -------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
PROPERTY AND EQUIPMENT
Balance at beginning of period: ......................... $ 380,145(1) $ 436,672 $ 469,337 $ 476,340
Additions during the period:
Transfers from Costco ............................... -- -- -- 2,100
Purchases ........................................... 18,866 2,720 17,003 18,329
Deductions during the period:
Cost of properties sold ............................ -- (35,741) (32,668) (22,432)
Asset impairment loss ............................... -- (2,000) (17,000) (5,000)
--------- --------- --------- ---------
Subtotal .......................................... 399,011 401,651 436,672 469,337
Other:
Property and equipment transferred
to PriceSmart ............................... -- (21,506) (31,541) (40,746)
FF&E ................................................ 242 203 733 604
--------- --------- --------- ---------
Balance at end of period ................................ $ 399,253 $ 380,348 $ 405,864 $ 429,195
========= ========= ========= =========
ACCUMULATED DEPRECIATION
Balance at beginning of period .......................... $ 43,131(1) $ 43,991 $ 39,282 $ 32,332
Depreciation expense .................................... 2,958 9,347 9,433 9,813
Accumulated depreciation of properties sold ............. -- (7,589) (4,724) (2,863)
--------- --------- --------- ---------
Subtotal ............................................ 46,089 45,749 43,991 39,282
Other:
Accumulated depreciation of property and
equipment transferred to PriceSmart ................ -- (2,618) (3,927) (5,073)
Accumulated depreciation of FF&E .................... 108 78 365 181
--------- --------- --------- ---------
Balance at end of period ................................ $ 46,197 $ 43,209 $ 40,429 $ 34,390
========= ========= ========= =========
</TABLE>
(1) Adjusted for property and equipment transferred to PriceSmart
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PRICE ENTERPRISES, INC.
DATED: March 24, 1998 By: /s/ Jack McGrory
-------------- -------------------
Jack McGrory
President and
Chief Executive Officer
DATED: March 24, 1998 By: /s/ Kathleen M. Hillan
-------------- -------------------------
Kathleen M. Hillan
Senior Vice President - Finance
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Robert E. Price March 24, 1998
- ----------------------------------------- --------------
ROBERT E. PRICE, Chairman of the Board of Date
Directors
/s/ Paul A. Peterson March 24, 1998
- ----------------------------------------- --------------
PAUL A. PETERSON, Vice Chairman of the Date
Board of Directors
/s/ James F. Cahill March 24, 1998
- ----------------------------------------- --------------
JAMES F. CAHILL, Director Date
/s/ Anne L. Evans March 24, 1998
- ----------------------------------------- --------------
ANNE L. EVANS, Director Date
/s/ Murray L. Galinson March 24, 1998
- ----------------------------------------- --------------
MURRAY L. GALINSON, Director Date
/s/ Jack McGrory March 24, 1998
- ----------------------------------------- --------------
JACK McGRORY, Director, President, Date
and Chief Executive Officer
58
<PAGE>
EXHIBIT INDEX
Description
Page
- ----
2.1 Distribution Agreement dated as of August 26, 1997 between Price
Enterprises, Inc. and PriceSmart, Inc. (incorporated herein by reference
to Exhibit 2.1 to Current Report on Form 8-K of Price Enterprises, Inc.
filed with the Commission on September 12, 1997 (File No. 0-20449)) .....
3.1 Articles of Incorporation of Price Enterprises, Inc. ....................
3.2 Bylaws of Price Enterprises, Inc. .......................................
4.1 Form of Price Enterprises, Inc. Stock Certificate .......................
4.2 The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan
(the "Stock Plan" ) (incorporated herein by reference to Exhibit 10.23 to
Current Report on Form 10 of Price Enterprises, Inc. filed with the
Commission on December 13, 1994 (File No. 0-20449)) .....................
4.3 Form of Incentive Stock Option Agreement under the Stock Plan
(incorporated herein by reference to Exhibit 4.2 of the Current Report on
Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13,
1995 (File No. 33-60999)) ...............................................
4.4 Form of Non-Qualified Stock Option Agreement under the Stock Plan
(incorporated herein by reference to Exhibit 4.3 of the Current Report on
Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13,
1995 (File No. 33-60999)) ...............................................
4.5 The Price Enterprises Directors' 1995 Stock Option Plan (the "Directors'
Plan) (incorporated herein by reference to Exhibit 10.24 to Registration
Statement on Form 10 of Price Enterprises, Inc. filed with the Commission
on December 13, 1994 (File No. 0-20449)) ................................
4.6 Form of Non-Qualified Stock Option Agreement under the Directors' Plan
(incorporated herein by reference to Exhibit 4.5 of the Current Report on
Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13,
1995 (File No. 33-60999)) ...............................................
4.7 First Amendment to the Price Enterprises Directors' 1995 Stock Option
Plan ....................................................................
10.1 Employee Benefits and Other Employment Matters Allocation Agreement dated
as of August 26, 1997 between Price Enterprises, Inc. and PriceSmart,
Inc. (incorporated herein by reference to Exhibit 10.1 to Current Report
on Form 8-K of Price Enterprises, Inc. filed with the Commission on
September 12, 1997 (File No. 0-20449)) ..................................
10.2 Tax Sharing Agreement dated as of August 26, 1997 between Price
Enterprises, Inc. and PriceSmart, Inc. (incorporated herein by reference
to Exhibit 10.2 to Current Report on Form 8-K of Price Enterprises, Inc.
filed with the Commission on September 12, 1997 (File No. 0-20449)) .....
10.3 Asset Management Agreement dated as of August 26, 1997 between Price
Enterprises, Inc. and PriceSmart, Inc. (incorporated herein by reference
to Exhibit 10.3 to Current Report on Form 8-K of Price Enterprises, Inc.
filed with the Commission on September 12, 1997 (File No. 0-20449)) .....
10.4 Transitional Services Agreement dated as of August 26, 1997 between Price
Enterprises Inc. and PriceSmart, Inc. (incorporated herein by reference
to Exhibit 10.4 to Current Report on Form 8-K of Price Enterprises, Inc.
filed with the Commission on September 12, 1997 (File No. 0-20449)) .....
10.5 Employment agreement dated June 18, 1997, by and between Price
Enterprises, Inc. and Jack McGrory ......................................
59
<PAGE>
10.6 Amendment No. 1 to Employment Agreement dated as of August 27, 1997, by
and between Price Enterprises, Inc. and Jack McGrory ....................
10.7 Purchase and Sale Agreement for Stanford Ranch Crossing dated December
31, 1997, by and between Price Enterprises, Inc. and Opus West
Corporation .............................................................
23.1 Consent of Ernst & Young LLP ............................................
27.1 Financial Data Schedule .................................................
60
<PAGE>
DIRECTORS CORPORATE OFFICES
Robert Price Price Enterprises, Inc.
Chairman of the Board of Directors 4649 Morena Blvd.
Chairman of the Board of Directors of San Diego, California 92117
PriceSmart, Inc. Telephone: (619) 581-4530
FAX: (619) 581-4964
Paul A. Peterson
Vice Chairman of the Board of Directors STOCKHOLDER/INVESTOR
Lawyer RELATIONS
Peterson & Price
Gary W. Nielson
James F. Cahill 4649 Morena Blvd.
Executive Vice President of San Diego, California 92117
Price Entities (619) 581-4477
Anne L. Evans STOCK MARKET LISTING
Chairman of the Board of Directors of
Evans Hotels NASDAQ symbol "PREN"
Murray L. Galinson INDEPENDENT AUDITORS
Chairman of the Board of Directors of
San Diego National Bank Ernst & Young LLP
501 West Broadway, Suite 1200
Jack McGrory San Diego, California 92101
President and CEO of
Price Enterprises, Inc.
COUNSEL
EXECUTIVE OFFICERS
Latham & Watkins
Jack McGrory 701 "B" Street, Suite 2100
President and San Diego, California 92101
Chief Executive Officer
TRANSFER AGENT
Joseph R. Satz
Executive Vice President, ChaseMellon Shareholder Services
General Counsel and Stock Transfer Department
Secretary P.O. Box 54261
Terminal Annex
Gary W. Nielson Los Angeles, California 90054
Executive Vice President and (800) 522-6645
Chief Financial Officer
Kathleen M. Hillan
Senior Vice President - Finance
VICE PRESIDENTS
William J. Hamilton
Price Self Storage
Lois L. Miller
Robert M. Siordia
James D. Villars
62
PRICE ENTERPRISES, INC.
ARTICLES OF INCORPORATION
FIRST: THE UNDERSIGNED, James J. Winn, Jr., whose address is 36 South
Charles Street, Baltimore, Maryland 21201, being at least eighteen years of age,
acting as incorporator, does hereby form a corporation under the General Laws of
the State of Maryland.
SECOND: The name of the corporation (which is hereinafter called the
"Corporation") is:
Price Enterprises, Inc.
THIRD: (a) The purposes for which and any of which the Corporation is
formed and the business and objects to be carried on and promoted by it are:
(1) To engage in any lawful act or activity (including, without
limitation or obligation, engaging in business as a real estate investment
trust under the Internal Revenue Code of 1986, as amended, or any successor
statute (the "Code")) for which corporations may be organized under the
general laws of the State of Maryland as now or hereafter in force. For
purposes of the Charter, "REIT" means a real estate investment trust under
Sections 856 through 860 of the Code.
(2) To engage in any one or more businesses or transactions, or to
acquire all or any portion of any entity engaged in any one or more
businesses or transactions which the Board of Directors may from time to
time authorize or approve, whether or not related to the business described
elsewhere in this Article or to any other business at the time or
theretofore engaged in by the Corporation.
(b) The foregoing enumerated purposes and objects shall be in no way
limited or restricted by reference to, or inference from, the terms of any other
clause of this or any other Article of the Charter of the Corporation, and each
shall be regarded as independent; and they are intended to be and shall be
construed as powers as well as purposes and objects of the Corporation and shall
be in addition to and not in limitation of the general powers of corporations
under the General Laws of the State of Maryland.
FOURTH: The present address of the principal office of the Corporation in
this State is c/o The Corporation Trust Incorporated, 300 East Lombard Street,
Baltimore, Maryland 21202.
FIFTH: The name and address of the resident agent of the Corporation in
this State are The Corporation Trust Incorporated, 300 East Lombard Street,
Baltimore, Maryland 21202. Said resident agent is a Maryland corporation.
SIXTH: (a) The total number of shares of stock of all classes which the
Corporation has authority to issue is 100,000,000 shares of capital stock (par
value $.0001 per share), amounting in aggregate par value to $10,000.00. All of
such shares are initially classified as "Common Stock". The Board of Directors
may classify and reclassify any unissued shares of capital stock by setting or
changing in any one or more respects the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such shares of capital stock.
<PAGE>
(b) Subject to the provisions of Article TENTH, the following is a
description of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the Common Stock of the Corporation:
(1) Each share of Common Stock shall have one vote, and, except as
otherwise provided in respect of any class of stock hereafter classified or
reclassified, the exclusive voting power for all purposes shall be vested
in the holders of the Common Stock. Shares of Common Stock shall not have
cumulative voting rights.
(2) Subject to the provisions of law and any preferences of any class
of stock hereafter classified or reclassified, dividends, including
dividends payable in shares of another class of the Corporation's stock,
may be paid ratably on the Common Stock at such time and in such amounts as
the Board of Directors may deem advisable.
(3) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Common
Stock shall be entitled, together with the holders of any other class of
stock hereafter classified or reclassified not having a preference on
distributions in the liquidation, dissolution or winding up of the
Corporation, to share ratably in the net assets of the Corporation
remaining, after payment or provision for payment of the debts and other
liabilities of the Corporation and the amount to which the holders of any
class of stock hereafter classified or reclassified having a preference on
distributions in the liquidation, dissolution or winding up of the
Corporation shall be entitled.
(c) Subject to the foregoing and to the provisions or Article TENTH, the
power of the Board of Directors to classify and reclassify any of the shares of
capital stock shall include, without limitation, subject to the provisions of
the Charter, authority to classify or reclassify any unissued shares of such
stock into a class or classes of preferred stock, preference stock, special
stock or other stock, and to divide and classify shares of any class into one or
more series of such class, by determining, fixing, or altering one or more of
the following:
(1) The distinctive designation of such class or series and the number
of shares to constitute such class or series; provided that, unless
otherwise prohibited by the terms of such or any other class or series, the
number of shares of any class or series may be decreased by the Board of
Directors in connection with any classification or reclassification of
unissued shares and the number of shares of such class or series may be
increased by the Board of Directors in connection with any such
classification or reclassification, and any shares of any class or series
which have been redeemed, purchased, otherwise acquired or converted into
shares of Common Stock or any other class or series shall become part of
the authorized capital stock and be subject to classification and
reclassification as provided in this sub-paragraph.
(2) Whether or not and, if so, the rates, amounts and times at which,
and the conditions under which, dividends shall be payable on shares of
such class or series, whether any such dividends shall rank senior or
junior to or on a parity with the dividends payable on any other class or
series of stock, and the status of any such dividends as cumulative,
cumulative to a limited extent or non-cumulative and as participating or
non-participating.
<PAGE>
(3) Whether or not shares of such class or series shall have voting
rights, in addition to any voting rights provided by law and, if so, the
terms of such voting rights.
(4) Whether or not shares of such class or series shall have
conversion or exchange privileges and, if so, the terms and conditions
thereof, including provision for adjustment of the conversion or exchange
rate in such events or at such times as the Board of Directors shall
determine.
(5) Whether or not shares of such class or series shall be subject to
redemption and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be redeemable
and the amount per share payable in case of redemption, which amount may
vary under different conditions and at different redemption dates; and
whether or not there shall be any sinking fund or purchase account in
respect thereof, and if so, the terms thereof.
(6) The rights of the holders of shares of such class or series upon
the liquidation, dissolution or winding up of the affairs of, or upon any
distribution of the assets of, the Corporation, which rights may vary
depending upon whether such liquidation, dissolution or winding up is
voluntary or involuntary and, if voluntary, may vary at different dates,
and whether such rights shall rank senior or junior to or on a parity with
such rights of any other class or series of stock.
(7) Whether or not there shall be any limitations applicable, while
shares of such class or series are outstanding, upon the payment of
dividends or making of distributions on, or the acquisition of, or the use
of moneys for purchase or redemption of, any stock of the Corporation, or
upon any other action of the Corporation, including action under this
sub-paragraph, and, if so, the terms and conditions thereof.
(8) Any other preferences, rights, restrictions, including
restrictions on transferability, and qualifications of shares of such class
or series, not inconsistent with law and the Charter of the Corporation.
(d) For the purposes hereof and of any articles supplementary to the
Charter providing for the classification or reclassification of any shares of
capital stock or of any other Charter document of the Corporation (unless
otherwise provided in any such articles or document), any class or series of
stock of the Corporation shall be deemed to rank:
(1) prior to another class or series either as to dividends or upon
liquidation, if the holders of such class or series shall be entitled to
the receipt of dividends or of amounts distributable on liquidation,
dissolution or winding up, as the case may be, in preference or priority to
holders of such other class or series;
(2) on a parity with another class or series either as to dividends or
upon liquidation, whether or not the dividend rates, dividend payment dates
or redemption or liquidation price per share thereof be different from
those of such others, if the holders of such class or series of stock shall
be entitled to receipt of dividends or amounts distributable upon
liquidation, dissolution or winding up, as the case may be, in proportion
to their respective dividend rates or redemption or liquidation prices,
without preference or priority over
<PAGE>
the holders of such other class or series; and
(3) junior to another class or series either as to dividends or upon
liquidation, if the rights of the holders of such class or series shall be
subject or subordinate to the rights of the holders of such other class or
series in respect of the receipt of dividends or the amounts distributable
upon liquidation, dissolution or winding up, as the case may be.
SEVENTH: (a) The number of directors of the Corporation shall be six, which
number may be increased or decreased pursuant to the By-Laws of the Corporation,
but shall never be less than the minimum number permitted by the General Laws of
the State of Maryland now or hereafter in force. The names of the directors who
will serve until the first annual meeting of stockholders and until their
successors are elected and qualify are as follows:
Robert E. Price
Jack McGrory
Paul A. Peterson
Murray L. Galinson
James F. Cahill
Anne L. Evans
(b) Subject to the rights of one or more classes or series of preferred
stock to elect or remove one or more directors, any director, or the entire
Board of Directors, may be removed from office at any time, but only for cause,
by the affirmative vote of the holders of a majority of the outstanding shares
entitled to vote, voting as a class, in the election of directors. For the
purpose of this paragraph, "cause" shall mean with respect to any particular
director a final judgment of a court of competent jurisdiction holding that such
director caused demonstrable, material harm to the Corporation through bad faith
or active and deliberate dishonesty.
EIGHTH: (a) The following provisions are hereby adopted for the purpose of
defining, limiting, and regulating the powers of the Corporation and of the
directors and the stockholders:
(1) The Board of Directors is hereby empowered to authorize the
issuance from time to time of shares of its stock of any class, whether now
or hereafter authorized, or securities convertible into shares of its stock
of any class or classes, whether now or hereafter authorized, for such
consideration as may be deemed advisable by the Board of Directors and
without any action by the stockholders.
(2) No holder of any stock or any other securities of the Corporation,
whether now or hereafter authorized, shall have any preemptive right to
subscribe for or purchase any stock or any other securities of the
Corporation other than such, if any, as the Board of Directors, in its sole
discretion, may determine and at such price or prices and upon such other
terms as the Board of Directors, in its sole discretion, may fix; and any
stock or other securities which the Board of Directors may determine to
offer for subscription may, as the Board of Directors in its sole
discretion shall determine, be offered to the holders of any class, series
or type of stock or other securities at the
<PAGE>
time outstanding to the exclusion of the holders of any or all other
classes, series or types of stock or other securities at the time
outstanding.
(3) The Board of Directors of the Corporation shall, consistent with
applicable law, have power in its sole discretion to determine from time to
time in accordance with sound accounting practice or other reasonable
valuation methods what constitutes annual or other net profits, earnings,
surplus or net assets in excess of capital; to fix and vary from time to
time the amount to be reserved as working capital, or determine that
retained earnings or surplus shall remain in the hands of the Corporation;
to set apart out of any funds of the Corporation such reserve or reserves
in such amount or amounts and for such proper purpose or purposes as it
shall determine and to abolish any such reserve or any part thereof; to
redeem or purchase its stock or to distribute and pay distributions or
dividends in stock, cash or other securities or property, out of surplus or
any other funds or amounts legally available therefor, at such times and to
the stockholders of record on such dates as it may, from time to time,
determine; to determine the amount, purpose, time of creation, increase or
decrease, alteration or cancellation of any reserves or charges and the
propriety thereof (whether or not any obligation or liability for which
such reserves or charges shall have been created shall have been paid or
discharged); to determine the fair value and any matters relating to the
acquisition, holding and disposition of any assets by the Corporation; and
to determine whether and to what extent and at what times and places and
under what conditions and regulations the books, accounts and documents of
the Corporation, or any of them, shall be open to the inspection of
stockholders, except as otherwise provided by statute or by the By-Laws,
and, except as so provided, no stockholder shall have any right to inspect
any book, account or document of the Corporation unless authorized so to do
by resolution of the Board of Directors.
(4) Notwithstanding any provision of law requiring the authorization
of any action by a greater proportion than a majority of the total number
of shares of all classes of capital stock or of the total number of shares
of any class of capital stock, such action shall be valid and effective if
authorized by the affirmative vote of the holders of a majority of the
total number of shares of all classes outstanding and entitled to vote
thereon, except as otherwise provided in the Charter.
(5) The Corporation shall indemnify (A) its directors and officers,
whether serving the Corporation or at its request any other entity, to the
full extent required or permitted by the General Laws of the State of
Maryland now or hereafter in force, including the advance of expenses under
the procedures and to the full extent permitted by law and (B) other
employees and agents to such extent as shall be authorized by the Board of
Directors or the Corporation's By-Laws and be permitted by law. The
foregoing rights of indemnification shall not be exclusive of any other
rights to which those seeking indemnification may be entitled. The Board of
Directors may take such action as is necessary to carry out these
indemnification provisions and is expressly empowered to adopt, approve and
amend from time to time such by-laws, resolutions or contracts implementing
such provisions or such further indemnification arrangements as may be
permitted by law. No amendment of the Charter of the Corporation or repeal
of any of its provisions shall limit or eliminate the right to
indemnification provided hereunder with respect to acts or omissions
occurring prior to such amendment or repeal.
<PAGE>
(6) To the fullest extent permitted by Maryland statutory or
decisional law, as amended or interpreted, no director or officer of the
Corporation shall be personally liable to the Corporation or its
stockholders for money damages. No amendment of the Charter of the
Corporation or repeal of any of its provisions shall limit or eliminate the
limitation on liability provided to directors and officers hereunder with
respect to any act or omission occurring prior to such amendment or repeal.
(7) The Corporation reserves the right from time to time to make any
amendments of the Charter which may now or hereafter be authorized by law,
including any amendments changing the terms or contract rights, as
expressly set forth in the Charter, of any of its outstanding stock by
classification, reclassification or otherwise.
(8) The Board of Directors shall use its reasonable best efforts to
take such actions as are necessary or appropriate to preserve the status of
the Corporation as a REIT; however, if the Board of Directors determines
that it is no longer in the best interests of the Corporation to qualify or
continue to be qualified as a REIT, the Board of Directors may revoke or
otherwise terminate the Corporation's REIT election pursuant to Section
856(g) of the Code.
(9) Subject to such conditions, if any, as may be required by any
applicable statute, rule or regulation, the Board of Directors may
authorize the execution and performance by the Corporation of one or more
agreements with any person, corporation, association, company, trust,
partnership (limited or general) or other organization whereby, subject to
the supervision and control of the Board of Directors, any such other
person, corporation, association, company, trust, partnership (limited or
general) or other organization shall render or make available to the
Corporation managerial, investment, advisory and/or related services,
office space and other services and facilities (including, if deemed
advisable by the Board of Directors, the management or supervision of the
investments of the Corporation) upon such terms and conditions as may be
provided in such agreement or agreements (including, if deemed fair and
equitable by the Board of Directors, the compensation payable thereunder by
the Corporation).
(b) The enumeration and definition of particular powers of the Board of
Directors included in the foregoing shall in no way be limited or restricted by
reference to or inference from the terms of any other clause of this or any
other Article of the Charter of the Corporation, or construed as or deemed by
inference or otherwise in any manner to exclude or limit any powers conferred
upon the Board of Directors under the General Laws of the State of Maryland now
or hereafter in force.
NINTH: The duration of the Corporation shall be perpetual.
TENTH: (a) Definitions. For the purposes of this Article, the following
terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Capital Shares by a Person
who is or would be treated as an owner of such Capital Shares either actually or
constructively through the application of Section 544 of the Code, as modified
by Section 856(h)(1)(B) of the Code. The terms "Beneficial Owner," "Beneficially
Own," "Beneficially Owns" and "Beneficially Owned" shall have the correlative
meanings.
<PAGE>
"Capital Shares" shall mean shares of the Corporation's capital stock,
whether common, preferred, preference, special or other stock, or a combination
thereof.
"Charitable Beneficiary" shall mean one or more beneficiaries of the Trust
as determined pursuant to Section (c)(6) of this Article.
"Constructive Ownership" shall mean ownership of Capital Shares by a Person
who is or would be treated as an owner of such Capital Shares either actually or
constructively through the application of Section 318 of the Code, as modified
by Section 856(d)(5) of the Code. The terms "Constructive Owner,"
"Constructively Own," "Constructively Owns" and "Constructively Owned" shall
have the correlative meanings.
"IRS" means the United States Internal Revenue Service.
"Market Price" shall mean the last reported sales price reported on The
Nasdaq Stock Market's National Market System (the "Nasdaq National Market") of
the applicable Capital Shares on the trading day immediately preceding the
relevant date, or if not then traded on the Nasdaq National Market, the last
reported sales price of the applicable Capital Shares on the trading day
immediately preceding the relevant date as reported on any exchange or quotation
system over which the applicable Capital Shares may be traded, or if not then
traded over any exchange or quotation system, then the market price of the
applicable Capital Shares on the relevant date as determined in good faith by
the Board of Directors of the Corporation.
"Ownership Limit" shall mean 5% (by value or by number of shares, whichever
is more restrictive) of the outstanding Capital Shares of the Corporation. The
number and value of the outstanding Capital Shares of the Corporation shall be
determined by the Board of Directors in good faith, which determination shall be
conclusive for all purposes hereof.
"Person" shall mean an individual, corporation, partnership, limited
liability company, estate, trust (including a trust qualified under Section
401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside
for or to be used exclusively for the purposes described in Section 642(c) of
the Code, association, private foundation within the meaning of Section 509(a)
of the Code, joint stock company or other entity; but does not include an
underwriter acting in a capacity as such in a public offering of any Capital
Shares provided that the ownership of Capital Shares by such underwriter would
not result in the Corporation being "closely held" within the meaning of Section
856(h) of the Code, or otherwise result in the Corporation failing to qualify as
a REIT.
"Purported Beneficial Transferee" shall mean, with respect to any purported
Transfer which results in a transfer to a Trust, as provided in Section (b)(2)
of this Article, the purported beneficial transferee or owner for whom the
Purported Record Transferee would have acquired or owned any Capital Shares, if
such Transfer had been valid under Section (b)(1) of this Article.
"Purported Record Transferee" shall mean, with respect to any purported
Transfer which results in a transfer to a Trust, as provided in Section (b)(2)
of this Article, the record holder of the Capital Shares if such Transfer had
been valid under Section (b)(1) of this Article.
"Reincorporation" shall mean the merger of Price Enterprises, Inc., a
Delaware corporation, into its wholly-owned subsidiary, Price Enterprises of
Maryland, Inc., a Maryland corporation.
<PAGE>
"Restriction Termination Date" shall mean the first day after the date of
the Reincorporation on which the Board of Directors of the Corporation
determines that it is no longer in the best interests of the Corporation to
attempt to, or continue to, qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or other
disposition of Capital Shares, including (i) the granting of any option or
entering into any agreement for the sale, transfer or other disposition of
Capital Shares or (ii) the sale, transfer, assignment or other disposition of
any securities (or rights convertible into or exchangeable for Capital Shares),
whether voluntary or involuntary, whether of record or beneficially or
Beneficially or Constructively (including but not limited to transfers of
interests in other entities which result in changes in Beneficial or
Constructive Ownership of Capital Shares), and whether by operation of law or
otherwise. The terms "Transfers" and "Transferred" shall have correlative
meanings.
"Trust" shall mean each of the trusts provided for in Section (c) of this
Article.
"Trustee" shall mean the Person unaffiliated with the Corporation, the
Purported Beneficial Transferee, and the Purported Record Transferee, that is
appointed by the Corporation to serve as trustee of the Trust, and any successor
trustee appointed by the Corporation.
(b) Restriction on Ownership and Transfers.
(1) From the date of Reincorporation and prior to the Restriction
Termination Date:
a. except as provided in Section (i) of this Article, no Person
shall Beneficially Own Capital Shares in excess of the Ownership
Limit;
b. except as provided in Section (i) of this Article, no Person
shall Constructively Own in excess of 9.8% (by value or by number of
shares, whichever is more restrictive) of the outstanding Capital
Shares of the Corporation; and
c. no Person shall Beneficially or Constructively Own Capital
Shares to the extent that such Beneficial or Constructive Ownership
would result in the Corporation being "closely held" within the
meaning of Section 856(h) of the Code, or otherwise failing to qualify
as a REIT (including but not limited to ownership that would result in
the Corporation owning (actually or Constructively) an interest in a
tenant that is described in Section 856(d)(2)(B) of the Code if the
income derived by the Corporation (either directly or indirectly
through one or more partnerships) from such tenant would cause the
Corporation to fail to satisfy any of the gross income requirements of
Section 856(c) of the Code).
(2) If, during the period commencing on the date of the
Reincorporation and prior to the Restriction Termination Date, any Transfer
(whether or not such Transfer is the result of a transaction entered into
through the facilities of the Nasdaq National Market) or other event occurs
that, if effective, would result in any Person Beneficially or
Constructively Owning Capital Shares in violation of
<PAGE>
Section (b)(1) of this Article, (1) then that number of Capital Shares that
otherwise would cause such Person to violate Section (b)(1) of this Article
(rounded up to the nearest whole share) shall be automatically transferred
to a Trust for the benefit of a Charitable Beneficiary, as described in
Section (c) of this Article, effective as of the close of business on the
business day prior to the date of such Transfer or other event, and each of
the Purported Beneficial Transferee and the Purported Record Transferee
shall thereafter have no rights in such Capital Shares or (2) if, for any
reason, the transfer to the Trust described in clause (1) of this sentence
is not automatically effective as provided therein to prevent any Person
from Beneficially or Constructively Owning Capital Shares in violation of
Section (b)(1) of this Article, then the Transfer of that number of Capital
Shares that otherwise would cause any Person to violate Section (b)(1) of
this Article shall be void ab initio, and each of the Purported Beneficial
Transferee and the Purported Record Transferee shall have no rights in such
Capital Shares.
(3) Notwithstanding any other provisions contained herein, during the
period commencing on the date of the Reincorporation and prior to the
Restriction Termination Date, any Transfer (whether or not such Transfer is
the result of a transaction entered into through the facilities of the
Nasdaq National Market) that, if effective, would result in the capital
stock of the Corporation being beneficially owned by less than 100 Persons
(determined without reference to any rules of attribution) shall be void ab
initio, and the intended transferee shall acquire no rights in such Capital
Shares.
(c) Transfers of Capital Shares in Trust
(1) Upon any purported Transfer or other event described in Section
(b)(2) of this Article, such Capital Shares shall be deemed to have been
transferred to the Trustee in his capacity as trustee of a Trust for the
exclusive benefit of one or more Charitable Beneficiaries. Such transfer to
the Trustee shall be deemed to be effective as of the close of business on
the business day prior to the purported Transfer or other event that
results in a transfer to the Trust pursuant to Section (b)(2) of this
Article. The Trustee shall be appointed by the Corporation and shall be a
Person unaffiliated with the Corporation, any Purported Beneficial
Transferee, and any Purported Record Transferee. Each Charitable
Beneficiary shall be designated by the Corporation as provided in Section
(c)(6) of this Article.
(2) Capital Shares held by the Trustee shall be issued and outstanding
shares of capital stock of the Corporation. The Purported Beneficial
Transferee or Purported Record Transferee shall not benefit economically
from ownership of any Capital Shares held in trust by the Trustee, shall
have no rights to dividends and shall not possess any rights to vote or
other rights attributable to the Capital Shares held in the Trust.
(3) The Trustee shall have all voting rights and rights to dividends
with respect to Capital Shares held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any
dividend or distribution paid prior to the discovery by the Corporation
that the Capital Shares have been transferred to the Trustee shall be paid
to the Trustee upon demand, and any dividend or distribution declared but
unpaid shall be paid when due to the Trustee with respect to such Capital
Shares. Any dividends or distributions so paid over to the Trustee shall be
held in trust for the Charitable Beneficiary. The Purported Record
Transferee and Purported Beneficial Transferee shall have no voting rights
with respect to the Capital Shares held in the Trust and, subject to
Maryland law, effective as of the date the Capital Shares have been
transferred to the Trustee, the Trustee shall have the authority (at the
Trustee's sole discretion) (i) to rescind as void any vote cast by a
Purported Record Transferee prior to the discovery by the Corporation that
the Capital Shares have been transferred to the Trustee and (ii) to recast
such vote in accordance with the desires of the Trustee acting for the
benefit of the Charitable
<PAGE>
Beneficiary; provided, however, that if the Corporation has already taken
irreversible corporate action, then the Trustee shall not have the
authority to rescind and recast such vote. Notwithstanding the provisions
of this Article, until the Corporation has received notification that the
Capital Shares have been transferred into a Trust, the Corporation shall be
entitled to rely on its share transfer and other stockholder records for
purposes of preparing lists of stockholders entitled to vote at meetings,
determining the validity and authority of proxies and otherwise conducting
votes of stockholders.
(4) Within 20 days of receiving notice from the Corporation that
Capital Shares have been transferred to the Trust, the Trustee of the Trust
shall sell the Capital Shares held in the Trust to a person, designated by
the Trustee, whose ownership of the Capital Shares will not violate the
ownership limitations set forth in Section (b)(1) of this Article. Upon
such sale, the interest of the Charitable Beneficiary in the Capital Shares
sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Purported Record Transferee and to the Charitable
Beneficiary as provided in this Section (c)(4). The Purported Record
Transferee shall receive the lesser of (1) the price paid by the Purported
Record Transferee for the Capital Shares in the transaction that resulted
in such transfer to the Trust (or, if the event which resulted in the
transfer to the Trust did not involve a purchase of such Capital Shares at
Market Price, the Market Price of such Capital Shares on the day of the
event which resulted in the transfer of the Capital Shares to the Trust)
and (2) the price per share received by the Trustee (net of any commissions
and other expenses of sale) from the sale or other disposition of the
Capital Shares held in the Trust. Any net sales proceeds in excess of the
amount payable to the Purported Record Transferee shall be immediately paid
to the Charitable Beneficiary together with any dividends or other
distributions thereon. If, prior to the discovery by the Corporation that
such Capital Shares have been transferred to the Trustee, such Capital
Shares are sold by a Purported Record Transferee then (i) such Capital
Shares shall be deemed to have been sold on behalf of the Trust and (ii) to
the extent that the Purported Record Transferee received an amount for such
Capital Shares that exceeds the amount that such Purported Record
Transferee was entitled to receive pursuant to this Section (c)(4), such
excess shall be paid to the Trustee upon demand.
(5) Capital Shares transferred to the Trustee shall be deemed to have
been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price paid by the Purported Record
Transferee for the Capital Shares in the transaction that resulted in such
transfer to the Trust (or, if the event which resulted in the transfer to
the Trust did not involve a purchase of such Capital Shares at Market
Price, the Market Price of such Capital Shares on the day of the event
which resulted in the transfer of the Capital Shares to the Trust) and (ii)
the Market Price on the date the Corporation, or its designee, accepts such
offer. The Corporation shall have the right to accept such offer until the
Trustee has sold the
<PAGE>
Capital Shares held in the Trust pursuant to Section (c)(4) of this
Article. Upon such a sale to the Corporation, the interest of the
Charitable Beneficiary in the Capital Shares sold shall terminate and the
Trustee shall distribute the net proceeds of the sale to the Purported
Record Transferee and any dividends or other distributions held by the
Trustee with respect to such Capital Shares shall thereupon be paid to the
Charitable Beneficiary.
(6) By written notice to the Trustee, the Corporation shall designate
one or more nonprofit organizations to be the Charitable Beneficiary of the
interest in the Trust such that (i) the Capital Shares held in the Trust
would not violate the restrictions set forth in Section (b)(1) of this
Article in the hands of such Charitable Beneficiary and (ii) each
Charitable Beneficiary is an organization described in Sections
170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code.
(d) Remedies For Breach. If the Board of Directors, or a committee thereof
(or other designees if permitted by Maryland law) shall at any time determine in
good faith that a Transfer or other event has taken place in violation of
Section (b) of this Article or that a Person intends to acquire, has attempted
to acquire or may acquire beneficial ownership (determined without reference to
any rules of attribution), Beneficial Ownership or Constructive Ownership of any
Capital Shares of the Corporation in violation of Section (b) of this Article,
the Board of Directors, or a committee thereof (or other designees if permitted
by Maryland law) shall take such action as it deems advisable to refuse to give
effect or to prevent such Transfer, including, but not limited to, causing the
Corporation to redeem Capital Shares, refusing to give effect to such Transfer
on the books of the Corporation or instituting proceedings to enjoin such
Transfer; provided, however, that any Transfers (or, in the case of events other
than a Transfer, ownership or Constructive Ownership or Beneficial Ownership) in
violation of Section (b)(1) of this Article, shall automatically result in the
transfer to a Trust or be void ab initio as described in Section (b)(2) of this
Article and any Transfer in violation of Section (b)(3) of this Article shall
automatically be void ab initio irrespective of any action (or non-action) by
the Board of Directors.
(e) Notice of Restricted Transfer. Any Person who acquires or attempts to
acquire Capital Shares in violation of Section (b) of this Article or any Person
who is a Purported Transferee such that an automatic transfer to a Trust results
under Section (b)(2) of this Article, shall immediately give written notice to
the Corporation of such event and shall provide to the Corporation such other
information as the Corporation may request in order to determine the effect, if
any, of such Transfer or attempted Transfer on the Corporation's status as a
REIT.
(f) Owners Required To Provide Information. From the date of the
Reincorporation and prior to the Restriction Termination Date, each Person who
is a beneficial owner or Beneficial Owner or Constructive Owner of Capital
Shares and each Person (including the shareholder of record) who is holding
Capital Shares for a Beneficial Owner or Constructive Owner shall provide to the
Corporation such information that the Corporation may request, in good faith, in
order to determine the Corporation's status as a REIT.
(g) Remedies Not Limited. Nothing contained in this Article (but subject to
Section (l) of this Article and Section (a)(8) of Article EIGHTH) shall limit
the authority of the Board of Directors to take such other action as it deems
necessary or advisable to protect the Corporation and the interests of its
<PAGE>
shareholders by preservation of the Corporation's status as a REIT.
(h) Ambiguity. In the case of an ambiguity in the application of any of the
provisions of Sections (b) through (i) of this Article, including any definition
contained in Section (a) of this Article, the Board of Directors shall have the
power to determine the application of the provisions of Sections (b) through (i)
of this Article with respect to any situation based on the facts known to it
(subject, however, to the provisions of Section (l) of this Article). In the
event any of Sections (b) through (i) of this Article requires an action by the
Board of Directors and the Charter fails to provide specific guidance with
respect to such action, the Board of Directors shall have the power to determine
the action to be taken so long as such action is not contrary to the provisions
of such Sections (b) through (i) of this Article. Absent a decision to the
contrary by the Board of Directors (which the Board may make in its sole and
absolute discretion), if a Person would have (but for the remedies set forth in
Section (b)(2) of this Article) acquired Beneficial or Constructive Ownership of
Capital Shares in violation of Section (b)(1) of this Article such remedies (as
applicable) shall apply first to the Capital Shares which, but for such
remedies, would have been actually owned by such Person, and second to Capital
Shares which, but for such remedies, would have been Beneficially Owned or
Constructively Owned (but not actually owned) by such Person, pro rata among the
Persons who actually own such Capital Shares based upon the relative number of
the Capital Shares held by each such Person.
(i) Exceptions.
(1) Subject to Section (b)(1)c of this Article, the Board of
Directors, in its sole discretion, may exempt a Person from the limitation
on a Person Beneficially Owning Capital Shares in excess of the Ownership
Limit if the Board of Directors obtains such representations and
undertakings from such Person as are reasonably necessary to ascertain that
no individual's Beneficial Ownership of such Capital Shares will violate
the Ownership Limit or that any such violation will not cause the
Corporation to fail to qualify as a REIT under the Code, and agrees that
any violation of such representations or undertakings (or other action
which is contrary to the restrictions contained in Section (b) of this
Article) or attempted violation will result in such Capital Shares being
transferred to a Trust in accordance with Section (b)(2) of this Article.
(2) Subject to Section (b)(1)c of this Article, the Board of
Directors, in its sole discretion, may exempt a Person from the limitation
on a Person Constructively Owning Capital Shares in excess of 9.8% (by
value or by number of Capital Shares, whichever is more restrictive) of the
outstanding Capital Shares of the Corporation, if such Person does not and
represents that it will not own, actually or Constructively, an interest in
a tenant of the Corporation (or a tenant of any entity owned in whole or in
part by the Corporation) that would cause the Corporation to own, actually
or Constructively more than a 9.8% interest (as set forth in Section
856(d)(2)(B) of the Code) in such tenant and the Corporation obtains such
representations and undertakings from such Person as are reasonably
necessary to ascertain this fact and agrees that any violation or attempted
violation will result in such Capital Shares being transferred to a Trust
in accordance with Section (b)(2) of this Article. Notwithstanding the
foregoing, the inability of a Person to make the certification described in
this Section (i)(2) shall not prevent the Board of Directors, in its sole
discretion, from exempting such Person from the limitation on a Person
<PAGE>
Constructively Owning in excess of 9.8% of the outstanding Capital Shares
if the Board of Directors determines that the resulting application of
Section 856(d)(2)(B) of the Code would affect the characterization of less
than 0.5% of the gross income (as such term is used in Section 856(c)(2) of
the Code) of the Corporation in any taxable year, after taking into account
the effect of this sentence with respect to all other Capital Shares to
which this sentence applies.
(3) Prior to granting any exception pursuant to Section (i)(1) or (2)
of this Article, the Board of Directors may require a ruling from the IRS,
or an opinion of counsel, in either case in form and substance satisfactory
to the Board of Directors in its sole discretion, as it may deem necessary
or advisable in order to determine or ensure the Corporation's status as a
REIT.
(4) During the period commencing on the date of the Reincorporation
and prior to the Restriction Termination Date, the Board of Directors may
from time to time increase or decrease the Ownership Limit provided:
a. After giving effect to any such increase, five Beneficial
Owners of Capital Shares could not (taking into account the Ownership
Limit and any exceptions granted to such limit pursuant to this
Section (i) of this Article) Beneficially Own, in the aggregate, more
than 49% of the Capital Shares;
b. The Ownership Limit may not be increased to a percentage which
is greater than 9.8%; and
c. Any such increase or decrease will not adversely affect the
Corporation's ability to qualify as a REIT.
(j) Legend. Each certificate for Capital Shares shall bear substantially
the following legend:
"The shares represented by this certificate are subject to restrictions on
Beneficial and Constructive Ownership and Transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate Investment Trust
under the Internal Revenue Code of 1986, as amended (the "Code"). Subject
to certain further restrictions and except as expressly provided in the
Corporation's Charter, (i) no Person may Beneficially Own in excess of 5%
of the outstanding Capital Shares of the Corporation (by value or by number
of shares whichever is more restrictive); (ii) no Person may Constructively
Own in excess of 9.8% of the outstanding Capital Shares of the Corporation
(by value or by number of shares, whichever is more restrictive); (iii) no
Person may Beneficially or Constructively Own Capital Shares that would
result in the Corporation being "closely held" under Section 856(h) of the
Code or otherwise cause the Corporation to fail to qualify as a REIT; and
(iv) no Person may Transfer Capital Shares if such Transfer would result in
the capital stock of the Corporation being owned by fewer than 100 Persons.
Any Person who Beneficially or Constructively Owns or attempts to
Beneficially or Constructively Own Capital Shares which causes or will
cause a Person to Beneficially or Constructively Own Capital Shares in
excess of the above limitations must immediately notify the Corporation. If
any of the restrictions on transfer or ownership are violated, the Capital
Shares represented hereby will be automatically transferred
<PAGE>
to a Trustee of a Trust for the benefit of one or more Charitable
Beneficiaries. In addition, the Corporation may redeem shares upon the
terms and conditions specified by the Board of Directors in its sole
discretion if the Board of Directors determines that ownership or a
Transfer or other event may violate the restrictions described above.
Furthermore, upon the occurrence of certain events, attempted Transfers in
violation of the restrictions described above may be void ab initio. All
capitalized terms in this legend have the meanings defined in the Charter
of the Corporation, as the same may be amended from time to time, a copy of
which, including the restrictions on transfer and ownership, will be
furnished to each holder of Capital Shares on request and without charge.
Requests for such a copy may be directed to the Secretary of the Company,
at the Company's principal office."
(k) Severability. If any provision of this Article or any application of
any such provision is determined to be invalid by any Federal or state court
having jurisdiction over the issues, the validity of the remaining provisions
shall not be affected and other applications of such provision shall be affected
only to the extent necessary to comply with the determination of such court.
(l) The Nasdaq National Market. Nothing in this Article shall preclude the
settlement of any transaction entered into through the facilities of the Nasdaq
National Market or any other automated inter-dealer quotation system or national
securities exchange. The fact that the settlement of any transaction is so
permitted shall not negate the effect of any other provision of this Article and
any transferee in such a transaction shall be subject to all the provisions and
limitations of this Article.
/s/ James J. Winn, Jr
-------------------------------
JAMES J. WINN, JR, Incorporator
PRICE ENTERPRISES, INC.
BY-LAWS
ARTICLE I.
STOCKHOLDERS
SECTION 1.01. Annual Meeting. The Corporation shall hold an annual meeting of
its stockholders to elect directors and transact any other business within its
powers for 1998 on the first day of January, 1998, and for 1999 and thereafter
either at 10:00 a.m. on the third Tuesday of May in each year if not a legal
holiday, or at such other time on such other day falling on or before the 30th
day thereafter as shall be set by the Board of Directors. Except as the Charter
or statute provides otherwise, any business may be considered at an annual
meeting without the purpose of the meeting having been specified in the notice.
Failure to hold an annual meeting does not invalidate the Corporation's
existence or affect any otherwise valid corporate acts.
SECTION 1.02. Special Meeting. At any time in the interval between annual
meetings, a special meeting of the stockholders may be called by the Chairman of
the Board or the President or by a majority of the Board of Directors by vote at
a meeting or in writing (addressed to the Secretary of the Corporation) with or
without a meeting. Special meetings of the stockholders shall be called by the
Secretary at the request of stockholders only on the written request of
stockholders entitled to cast at least a majority of all the votes entitled to
be cast at the meeting. A request for a special meeting shall state the purpose
of the meeting and the matters proposed to be acted on at it. The Secretary
shall inform the stockholders who make the request of the reasonably estimated
costs of preparing and mailing a notice of the meeting and, on payment of these
costs to the Corporation, notify each stockholder entitled to notice of the
meeting.
SECTION 1.03. Place of Meetings. Meetings of stockholders shall be held at such
place in the United States as is set from time to time by the Board of
Directors.
SECTION 1.04. Notice of Meetings; Waiver of Notice. Not less than ten nor more
than 90 days before each stockholders' meeting, the Secretary shall give written
notice of the meeting to each stockholder entitled to vote at the meeting and
each other stockholder entitled to notice of the meeting. The notice shall state
the time and place of the meeting and, if the meeting is a special meeting or
notice of the purpose is required by statute, the purpose of the meeting. Notice
is given to a stockholder when it is personally delivered to him or her, left at
his or her residence or usual place of business, or mailed to him or her at his
or her address as it appears on the records of the Corporation. Notwithstanding
the foregoing provisions, each person who is entitled to notice waives notice if
he or she before or after the meeting signs a waiver of the notice which is
filed with the records of stockholders' meetings, or is present at the meeting
in person or by proxy.
SECTION 1.05. Quorum; Voting. Unless any statute or the Charter provides
otherwise, at a meeting of stockholders the presence in person or by proxy of
stockholders entitled to cast
<PAGE>
a majority of all the votes entitled to be cast at the meeting constitutes a
quorum, and a majority of all the votes cast at a meeting at which a quorum is
present is sufficient to approve any matter which properly comes before the
meeting, except that a plurality of all the votes cast at a meeting at which a
quorum is present is sufficient to elect a director.
SECTION 1.06. Adjournments. Whether or not a quorum is present, a meeting of
stockholders convened on the date for which it was called may be adjourned from
time to time without further notice by a majority vote of the stockholders
present in person or by proxy to a date not more than 120 days after the
original record date. Any business which might have been transacted at the
meeting as originally notified may be deferred and transacted at any such
adjourned meeting at which a quorum shall be present.
SECTION 1.07. General Right to Vote; Proxies. Unless the Charter provides for a
greater or lesser number of votes per share or limits or denies voting rights,
each outstanding share of stock, regardless of class, is entitled to one vote on
each matter submitted to a vote at a meeting of stockholders. In all elections
for directors, each share of stock may be voted for as many individuals as there
are directors to be elected and for whose election the share is entitled to be
voted. A stockholder may vote the stock the stockholder owns of record either in
person or by proxy. A stockholder may sign a writing authorizing another person
to act as proxy. Signing may be accomplished by the stockholder or the
stockholder's authorized agent signing the writing or causing the stockholder's
signature to be affixed to the writing by any reasonable means, including
facsimile signature. A stockholder may authorize another person to act as proxy
by transmitting, or authorizing the transmission of, a telegram, cablegram,
datagram, or other means of electronic transmission to the person authorized to
act as proxy or to a proxy solicitation firm, proxy support service
organization, or other person authorized by the person who will act as proxy to
receive the transmission. Unless a proxy provides otherwise, it is not valid
more than 11 months after its date. A proxy is revocable by a stockholder at any
time without condition or qualification unless the proxy states that it is
irrevocable and the proxy is coupled with an interest. A proxy may be made
irrevocable for so long as it is coupled with an interest. The interest with
which a proxy may be coupled includes an interest in the stock to be voted under
the proxy or another general interest in the Corporation or its assets or
liabilities.
SECTION 1.08. List of Stockholders. At each meeting of stockholders, a full,
true and complete list of all stockholders entitled to vote at such meeting,
showing the number and class of shares held by each and certified by the
transfer agent for such class or by the Secretary, shall be furnished by the
Secretary.
SECTION 1.09. Conduct of Business. Nominations of persons for election to the
Board of Directors and the proposal of business to be considered by the
stockholders may be made at an annual meeting of stockholders (a) pursuant to
the Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a stockholder of
record at the time of giving notice provided for in Section 1.11, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in Section 1.11. The chairman of the meeting shall have the power and duty
to determine whether a nomination or any business proposed to be brought before
the meeting was made in accordance with the procedures set forth in this Section
and Section 1.11 and, if any proposed nomination or business is not in
compliance with this Section and Section 1.11, to declare that such defective
nomination or proposal be disregarded.
<PAGE>
SECTION 1.10. Conduct of Voting. At all meetings of stockholders, unless the
voting is conducted by inspectors, the proxies and ballots shall be received,
and all questions touching the qualification of voters and the validity of
proxies, the acceptance or rejection of votes and procedures for the conduct of
business not otherwise specified by these By-Laws, the Charter or law, shall be
decided or determined by the chairman of the meeting. If demanded by
stockholders, present in person or by proxy, entitled to cast 10% in number of
votes entitled to be cast, or if ordered by the chairman, the vote upon any
election or question shall be taken by ballot and, upon like demand or order,
the voting shall be conducted by two inspectors, in which event the proxies and
ballots shall be received, and all questions touching the qualification of
voters and the validity of proxies and the acceptance or rejection of votes
shall be decided, by such inspectors. Unless so demanded or ordered, no vote
need be by ballot and voting need not be conducted by inspectors. The
stockholders at any meeting may choose an inspector or inspectors to act at such
meeting, and in default of such election the chairman of the meeting may appoint
an inspector or inspectors. No candidate for election as a director at a meeting
shall serve as an inspector thereat.
SECTION 1.11. Stockholder Proposals. For any stockholder proposal to be
presented in connection with an annual meeting of stockholders of the
Corporation (other than proposals made under Rule 14a-8 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), including any proposal
relating to the nomination of a director to be elected to the Board of Directors
of the Corporation, the stockholders must have given timely notice thereof in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to the Secretary at the principal executive offices of
the Corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that in
the event that the date of the annual meeting is advanced by more than 30 days
or delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and of the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made, (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of stock of the
Corporation which are owned beneficially and of record by such stockholders and
such beneficial owner. For the 1999 annual meeting the previous year's meeting
shall be deemed to have take place on May 19, 1998; provided that this sentence
shall cease to be a part of the By-Laws after the holding of the 1999 annual
meeting and any adjournments thereof.
SECTION 1.12. Informal Action by Stockholders. Any action required or permitted
to be taken at a meeting of stockholders may be taken without a
<PAGE>
meeting if there is filed with the records of stockholders meetings an unanimous
written consent which sets forth the action and is signed by each stockholder
entitled to vote on the matter and a written waiver of any right to dissent
signed by each stockholder entitled to notice of the meeting but not entitled to
vote at it.
SECTION 1.13. Meeting by Conference Telephone. Stockholders may participate in a
meeting by means of a conference telephone or similar communications equipment
if all persons participating in the meeting can hear each other at the same
time. Participation in a meeting by these means constitutes presence in person
at a meeting.
ARTICLE II.
BOARD OF DIRECTORS
SECTION 2.01. Function of Directors. The business and affairs of the Corporation
shall be managed under the direction of its Board of Directors. All powers of
the Corporation may be exercised by or under authority of the Board of
Directors, except as conferred on or reserved to the stockholders by statute or
by the Charter or By-Laws.
SECTION 2.02. Number of Directors. The Corporation shall have at least three
directors; provided that, if there is no stock outstanding, the number of
Directors may be less than three but not less than one, and, if there is stock
outstanding and so long as there are less than three stockholders, the number of
Directors may be less than three but not less than the number of stockholders.
The Corporation shall have the number of directors provided in the Charter until
changed as herein provided. A majority of the entire Board of Directors may
alter the number of directors set by the Charter to not exceeding 25 nor less
than the minimum number then permitted herein, but the action may not affect the
tenure of office of any director.
SECTION 2.03. Election and Tenure of Directors. Subject to the rights of the
holders of any class of stock separately entitled to elect one or more
directors, at each annual meeting, the stockholders shall elect directors to
hold office until the next annual meeting and until their successors are elected
and qualify.
SECTION 2.04. Removal of Director. Any director or the entire Board of Directors
may be removed only in accordance with the provisions of the Charter.
SECTION 2.05. Vacancy on Board. Subject to the rights of the holders of any
class of stock separately entitled to elect one or more directors, the
stockholders may elect a successor to fill a vacancy on the Board of Directors
which results from the removal of a director. A director elected by the
stockholders to fill a vacancy which results from the removal of a director
serves for the balance of the term of the removed director. Subject to the
rights of the holders of any class of stock separately entitled to elect one or
more directors, a majority of the remaining directors, whether or not sufficient
to constitute a quorum, may fill a vacancy on the Board of Directors which
results from any cause except an increase in the number of directors, and a
majority of the entire Board of Directors may fill a vacancy which results from
an increase in the number of directors. A director elected by the Board of
Directors to fill a vacancy serves until the next annual meeting of stockholders
and until his or her successor is elected and
<PAGE>
qualifies.
SECTION 2.06. Regular Meetings. After each meeting of stockholders at which
directors shall have been elected, the Board of Directors shall meet as soon as
practicable for the purpose of organization and the transaction of other
business. In the event that no other time and place are specified by resolution
of the Board, the President or the Chairman, with notice in accordance with
Section 2.08, the Board of Directors shall meet immediately following the close
of, and at the place of, such stockholders' meeting. Any other regular meeting
of the Board of Directors shall be held on such date and at any place as may be
designated from time to time by the Board of Directors.
SECTION 2.07. Special Meetings. Special meetings of the Board of Directors may
be called at any time by the Chairman of the Board or the President or by a
majority of the Board of Directors by vote at a meeting, or in writing with or
without a meeting. A special meeting of the Board of Directors shall be held on
such date and at any place as may be designated from time to time by the Board
of Directors. In the absence of designation such meeting shall be held at such
place as may be designated in the call.
SECTION 2.08. Notice of Meeting. Except as provided in Section 2.06, the
Secretary shall give notice to each director of each regular and special meeting
of the Board of Directors. The notice shall state the time and place of the
meeting. Notice is given to a director when it is delivered personally to him or
her, left at his or her residence or usual place of business, or sent by
telegraph, facsimile transmission or telephone, at least 24 hours before the
time of the meeting or, in the alternative by mail to his or her address as it
shall appear on the records of the Corporation, at least 72 hours before the
time of the meeting. Unless these By-Laws or a resolution of the Board of
Directors provides otherwise, the notice need not state the business to be
transacted at or the purposes of any regular or special meeting of the Board of
Directors. No notice of any meeting of the Board of Directors need be given to
any director who attends except where a director attends a meeting for the
express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened, or to any director who, in writing
executed and filed with the records of the meeting either before or after the
holding thereof, waives such notice. Any meeting of the Board of Directors,
regular or special, may adjourn from time to time to reconvene at the same or
some other place, and no notice need be given of any such adjourned meeting
other than by announcement.
SECTION 2.09. Quorum; Action by Directors. A majority of the entire Board of
Directors shall constitute a quorum for the transaction of business. In the
absence of a quorum, the directors present by majority vote and without notice
other than by announcement may adjourn the meeting from time to time until a
quorum shall attend. At any such adjourned meeting at which a quorum shall be
present, any business may be transacted which might have been transacted at the
meeting as originally notified. Unless statute or the Charter or By-Laws
requires a greater proportion, the action of a majority of the directors present
at a meeting at which a quorum is present is action of the Board of Directors.
Any action required or permitted to be taken at a meeting of the Board of
Directors may be taken without a meeting, if an unanimous written consent which
sets forth the action is signed by each member of the Board and filed with the
minutes of proceedings of the Board.
SECTION 2.10. Meeting by Conference Telephone. Members of the Board of Directors
may participate in a meeting by means of a conference telephone or similar
communications equipment if all persons participating in the meeting
<PAGE>
can hear each other at the same time. Participation in a meeting by these means
constitutes presence in person at a meeting.
SECTION 2.11. Compensation. By resolution of the Board of Directors a fixed sum
and expenses, if any, for attendance at each regular or special meeting of the
Board of Directors or of committees thereof, and other compensation for their
services as such or on committees of the Board of Directors, may be paid to
directors. Directors who are full-time employees of the Corporation need not be
paid for attendance at meetings of the board or committees thereof for which
fees are paid to other directors. A director who serves the Corporation in any
other capacity also may receive compensation for such other services, pursuant
to a resolution of the directors.
SECTION 2.12. Resignation. Any director may resign at any time by sending a
written notice of such resignation to the home office of the Corporation
addressed to the Chairman of the Board or the President. Unless otherwise
specified therein such resignation shall take effect upon receipt thereof by the
Chairman of the Board or the President.
SECTION 2.13. Presumption of Assent. A director of the Corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his or her dissent or abstention shall be entered in the minutes of the meeting
or unless he or she shall file his or her written dissent to such action with
the person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the Secretary of the
Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who votes in favor of such action.
SECTION 2.14. Advisory Directors. The Board of Directors may by resolution
appoint advisory directors to the Board, who may also serve as directors
emeriti, and shall have such authority and receive such compensation and
reimbursement as the Board of Directors shall provide. Advisory directors or
directors emeriti shall not have the authority to participate by vote in the
transaction of business.
ARTICLE III.
COMMITTEES
SECTION 3.01. Committees. The Board of Directors may appoint from among its
members an Executive Committee and one or more additional committees composed of
one or more directors and delegate to these committees any of the powers of the
Board of Directors, except the power to authorize dividends on stock, elect
directors, issue stock other than as provided in the next sentence, recommend to
the stockholders any action which requires stockholder approval, amend these
By-Laws, or approve any merger or share exchange which does not require
stockholder approval. If the Board of Directors has given general authorization
for the issuance of stock providing for or establishing a method or procedure
for determining the maximum number of shares to be issued, a committee of the
Board, in accordance with that general authorization or any stock option or
other plan or program adopted by the Board of Directors, may authorize or fix
the terms of stock subject to classification or reclassification and the terms
on which any stock may be issued, including all terms and conditions required or
permitted to be established or authorized by the Board of Directors.
<PAGE>
SECTION 3.02. Committee Procedure. Each committee may fix rules of procedure for
its business. A majority of the members of a committee shall constitute a quorum
for the transaction of business and the act of a majority of those present at a
meeting at which a quorum is present shall be the act of the committee. The
members of a committee present at any meeting, whether or not they constitute a
quorum, may appoint a director to act in the place of an absent member. Any
action required or permitted to be taken at a meeting of a committee may be
taken without a meeting, if an unanimous written consent which sets forth the
action is signed by each member of the committee and filed with the minutes of
the committee. The members of a committee may conduct any meeting thereof by
conference telephone in accordance with the provisions of Section 2.10.
SECTION 3.03. Emergency. In the event of a state of disaster of sufficient
severity to prevent the conduct and management of the affairs and business of
the Corporation by its directors and officers as contemplated by the Charter and
these By-Laws, any two or more available members of the then incumbent Executive
Committee shall constitute a quorum of that Committee for the full conduct and
management of the affairs and business of the Corporation in accordance with the
provisions of Section 3.01. In the event of the unavailability, at such time, of
a minimum of two members of the then incumbent Executive Committee, the
available directors shall elect an Executive Committee consisting of any two
members of the Board of Directors, whether or not they be officers of the
Corporation, which two members shall constitute the Executive Committee for the
full conduct and management of the affairs of the Corporation in accordance with
the foregoing provisions of this Section. This Section shall be subject to
implementation by resolution of the Board of Directors passed from time to time
for that purpose, and any provisions of these By-Laws (other than this Section)
and any resolutions which are contrary to the provisions of this Section or to
the provisions of any such implementary resolutions shall be suspended until it
shall be determined by any interim Executive Committee acting under this Section
that it shall be to the advantage of the Corporation to resume the conduct and
management of its affairs and business under all the other provisions of these
By-Laws.
ARTICLE IV.
OFFICERS
SECTION 4.01. Executive and Other Officers. The Corporation shall have a
President, a Secretary, and a Treasurer. It may also have a Chairman of the
Board. The Board of Directors shall designate who shall serve as chief executive
officer, who shall have general supervision of the business and affairs of the
Corporation, and may designate a chief operating officer, who shall have
supervision of the operations of the Corporation. In the absence of any
designation the Chairman of the Board, if there be one, shall serve as chief
executive officer and the President shall serve as chief operating officer. In
the absence of the Chairman of the Board, or if there be none, the President
shall be the chief executive officer. The same person may hold both offices. The
Corporation may also have one or more Vice-Presidents, assistant officers, and
subordinate officers as may be established by the Board of Directors. A person
may hold more than one office in the Corporation except that no person may serve
concurrently as both President and Vice-President of the Corporation. The
Chairman of the Board shall be a director, and the other officers may be
directors.
<PAGE>
SECTION 4.02. Chairman of the Board. The Chairman of the Board, if one be
elected, shall preside at all meetings of the Board of Directors and of the
stockholders at which he or she shall be present. Unless otherwise designated,
he or she shall be the chief executive officer of the Corporation. In general,
he or she shall perform such duties as are customarily performed by the chief
executive officer of a corporation and may perform any duties of the President
and shall perform such other duties and have such other powers as are from time
to time assigned to him or her by the Board of Directors.
SECTION 4.03. President. Unless otherwise provided by resolution of the Board of
Directors, the President, in the absence of the Chairman of the Board, shall
preside at all meetings of the Board of Directors and of the stockholders at
which he or she shall be present. Unless otherwise specified by the Board of
Directors, the President shall be the chief operating officer of the Corporation
and perform the duties customarily performed by chief operating officers. He or
she may execute, in the name of the Corporation, all authorized deeds,
mortgages, bonds, contracts or other instruments, except in cases in which the
signing and execution thereof shall have been expressly delegated to some other
officer or agent of the Corporation. In general, he or she shall perform such
other duties customarily performed by a president of a corporation and shall
perform such other duties and have such other powers as are from time to time
assigned to him or her by the Board of Directors or the chief executive officer
of the Corporation.
SECTION 4.04. Vice-Presidents. The Vice-President or Vice-Presidents, at the
request of the chief executive officer or the President, or in the President's
absence or during his or her inability to act, shall perform the duties and
exercise the functions of the President, and when so acting shall have the
powers of the President. If there be more than one Vice-President, the Board of
Directors may determine which one or more of the Vice-Presidents shall perform
any of such duties or exercise any of such functions, or if such determination
is not made by the Board of Directors, the chief executive officer, or the
President may make such determination; otherwise any of the Vice-Presidents may
perform any of such duties or exercise any of such functions. Each
Vice-President shall perform such other duties and have such other powers, and
have such additional descriptive designations in their titles (if any), as are
from time to time assigned to them by the Board of Directors, the chief
executive officer, or the President.
SECTION 4.05. Secretary. The Secretary shall keep the minutes of the meetings of
the stockholders, of the Board of Directors and of any committees, in books
provided for the purpose; he or she shall see that all notices are duly given in
accordance with the provisions of these By-Laws or as required by law; he or she
shall be custodian of the records of the Corporation; he or she may witness any
document on behalf of the Corporation, the execution of which is duly
authorized, see that the corporate seal is affixed where such document is
required or desired to be under its seal, and, when so affixed, may attest the
same. In general, he or she shall perform such other duties customarily
performed by a secretary of a corporation, and shall perform such other duties
and have such other powers as are from time to time assigned to him or her by
the Board of Directors, the chief executive officer, or the President.
SECTION 4.06. Treasurer. The Treasurer shall have charge of and be responsible
for all funds, securities, receipts and disbursements of the Corporation, and
shall deposit, or cause to be deposited, in the name of the Corporation, all
moneys or other valuable effects in such banks, trust
<PAGE>
companies or other depositories as shall, from time to time, be selected by the
Board of Directors; he or she shall render to the President and to the Board of
Directors, whenever requested, an account of the financial condition of the
Corporation. In general, he or she shall perform such other duties customarily
performed by a treasurer of a corporation, and shall perform such other duties
and have such other powers as are from time to time assigned to him or her by
the Board of Directors, the chief executive officer, or the President.
SECTION 4.07. Assistant and Subordinate Officers. The assistant and subordinate
officers of the Corporation are all officers below the office of Vice-President,
Secretary, or Treasurer. The assistant or subordinate officers shall have such
duties as are from time to time assigned to them by the Board of Directors, the
chief executive officer, or the President.
SECTION 4.08. Election, Tenure and Removal of Officers. The Board of Directors
shall elect the officers of the Corporation. The Board of Directors may from
time to time authorize any committee or officer to appoint assistant and
subordinate officers. Election or appointment of an officer, employee or agent
shall not of itself create contract rights. All officers shall be appointed to
hold their offices, respectively, during the pleasure of the Board. The Board of
Directors (or, as to any assistant or subordinate officer, any committee or
officer authorized by the Board) may remove an officer at any time. The removal
of an officer does not prejudice any of his or her contract rights. The Board of
Directors (or, as to any assistant or subordinate officer, any committee or
officer authorized by the Board) may fill a vacancy which occurs in any office
for the unexpired portion of the term.
SECTION 4.09. Compensation. The Board of Directors shall have power to fix the
salaries and other compensation and remuneration, of whatever kind, of all
officers of the Corporation. No officer shall be prevented from receiving such
salary by reason of the fact that he or she is also a director of the
Corporation. The Board of Directors may authorize any committee or officer, upon
whom the power of appointing assistant and subordinate officers may have been
conferred, to fix the salaries, compensation and remuneration of such assistant
and subordinate officers.
ARTICLE V.
DIVISIONAL TITLES
SECTION 5.01. Conferring Divisional Titles. The Board of Directors may from time
to time confer upon any employee of a division of the Corporation the title of
President, Vice President, Treasurer or Controller of such division or any other
title or titles deemed appropriate, or may authorize the Chairman of the Board
or the President to do so. Any such titles so conferred may be discontinued and
withdrawn at any time by the Board of Directors, or by the Chairman of the Board
or the President if so authorized by the Board of Directors. Any employee of a
division designated by such a divisional title shall have the powers and duties
with respect to such division as shall be prescribed by the Board of Directors,
the Chairman of the Board or the President.
SECTION 5.02. Effect of Divisional Titles. The conferring of divisional titles
shall not create an office of the Corporation under Article IV unless
specifically designated as such by the Board of Directors; but any person who
<PAGE>
is an officer of the Corporation may also have a divisional title.
ARTICLE VI.
STOCK
SECTION 6.01. Certificates for Stock. Each stockholder is entitled to
certificates which represent and certify the shares of stock he or she holds in
the Corporation. Each stock certificate shall include on its face the name of
the Corporation, the name of the stockholder or other person to whom it is
issued, and the class of stock and number of shares it represents. It shall also
include on its face or back (a) a statement of any restrictions on
transferability and (b) a statement which provides in substance that the
Corporation will furnish to any stockholder on request and without charge a full
statement of the designations and any preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, and
terms and conditions of redemption of the stock of each class which the
Corporation is authorized to issue, of the differences in the relative rights
and preferences between the shares of each series of a preferred or special
class in series which the Corporation is authorized to issue, to the extent they
have been set, and of the authority of the Board of Directors to set the
relative rights and preferences of subsequent series of a preferred or special
class of stock and any restrictions on transferability. Such request may be made
to the Secretary or to its transfer agent. It shall be in such form, not
inconsistent with law or with the Charter, as shall be approved by the Board of
Directors or any officer or officers designated for such purpose by resolution
of the Board of Directors. Each stock certificate shall be signed by the
Chairman of the Board, the President, or a Vice-President, and countersigned by
the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer.
Each certificate may be sealed with the actual corporate seal or a facsimile of
it or in any other form and the signatures may be either manual or facsimile
signatures. A certificate is valid and may be issued whether or not an officer
who signed it is still an officer when it is issued. A certificate may not be
issued until the stock represented by it is fully paid.
SECTION 6.02. Transfers. The Board of Directors shall have power and authority
to make such rules and regulations as it may deem expedient concerning the
issue, transfer and registration of certificates of stock; and may appoint
transfer agents and registrars thereof. The duties of transfer agent and
registrar may be combined.
SECTION 6.03. Record Dates or Closing of Transfer Books. The Board of Directors
may set a record date or direct that the stock transfer books be closed for a
stated period for the purpose of making any proper determination with respect to
stockholders, including which stockholders are entitled to notice of a meeting,
vote at a meeting, receive a dividend, or be allotted other rights. The record
date may not be prior to the close of business on the day the record date is
fixed nor, subject to Section 1.06, more than 90 days before the date on which
the action requiring the determination will be taken; the transfer books may not
be closed for a period longer than 20 days; and, in the case of a meeting of
stockholders, the record date or the closing of the transfer books shall be at
least ten days before the date of the meeting.
SECTION 6.04. Stock Ledger. The Corporation shall maintain a stock ledger which
contains the name and address of each stockholder and the number of
<PAGE>
shares of stock of each class which the stockholder holds. The stock ledger may
be in written form or in any other form which can be converted within a
reasonable time into written form for visual inspection. The original or a
duplicate of the stock ledger shall be kept at the offices of a transfer agent
for the particular class of stock, or, if none, at the principal office in the
State of Maryland or the principal executive offices of the Corporation.
SECTION 6.05. Certification of Beneficial Owners. The Board of Directors may
adopt by resolution a procedure by which a stockholder of the Corporation may
certify in writing to the Corporation that any shares of stock registered in the
name of the stockholder are held for the account of a specified person other
than the stockholder. The resolution shall set forth the class of stockholders
who may certify; the purpose for which the certification may be made; the form
of certification and the information to be contained in it; if the certification
is with respect to a record date or closing of the stock transfer books, the
time after the record date or closing of the stock transfer books within which
the certification must be received by the Corporation; and any other provisions
with respect to the procedure which the Board considers necessary or desirable.
On receipt of a certification which complies with the procedure adopted by the
Board in accordance with this Section, the person specified in the certification
is, for the purpose set forth in the certification, the holder of record of the
specified stock in place of the stockholder who makes the certification.
SECTION 6.06. Lost Stock Certificates. The Board of Directors of the Corporation
may determine the conditions for issuing a new stock certificate in place of one
which is alleged to have been lost, stolen, or destroyed, or the Board of
Directors may delegate such power to any officer or officers of the Corporation.
In their discretion, the Board of Directors or such officer or officers may
require the owner of the certificate to give bond, with sufficient surety, to
indemnify the Corporation against any loss or claim arising as a result of the
issuance of a new certificate. In their discretion, the Board of Directors or
such officer or officers may refuse to issue such new certificate save upon the
order of some court having jurisdiction in the premises.
SECTION 6.07. Exemption from Control Share Acquisition Statute. The provisions
of Sections 3-701 to 3-709 of the Corporations and Associations Article of the
Annotated Code of Maryland shall not apply to any share of the capital stock of
the Corporation. Such shares of capital stock are exempted from such Sections to
the fullest extent permitted by Maryland law.
ARTICLE VII.
FINANCE
SECTION 7.01. Checks, Drafts, Etc. All checks, drafts and orders for the payment
of money, notes and other evidences of indebtedness, issued in the name of the
Corporation, shall be signed by such officer or agent of the Corporation in such
manner as shall from time to time be determined by the Board.
SECTION 7.02. Annual Statement of Affairs. The President or chief accounting
officer shall prepare annually a full and correct statement of the affairs of
the Corporation, to include a balance sheet and a financial statement of
operations for the preceding fiscal year. The statement of
<PAGE>
affairs shall be submitted at the annual meeting of the stockholders and, within
20 days after the meeting, placed on file at the Corporation's principal office.
SECTION 7.03. Fiscal Year. The fiscal year of the Corporation shall be the 12
calendar months period ending on the 31st day of December in each year, unless
otherwise provided by the Board of Directors.
SECTION 7.04. Dividends. If declared by the Board of Directors at any meeting
thereof, the Corporation may pay dividends on its shares in cash, property, or
in shares of the capital stock of the Corporation, unless such dividend is
contrary to law or to a restriction contained in the Charter.
SECTION 7.05 Deposits. All funds of the Corporation not otherwise employed shall
be deposited from time to time to the credit of the Corporation in such banks,
trust companies or other depositories as the Board may designate.
ARTICLE VIII.
INDEMNIFICATION
SECTION 8.01. Procedure. Any indemnification, or payment of expenses in advance
of the final disposition of any proceeding, shall be made promptly, and in any
event within 60 days, upon the written request of the director or officer
entitled to seek indemnification (the "Indemnified Party"). The right to
indemnification and advances hereunder shall be enforceable by the Indemnified
Party in any court of competent jurisdiction, if (i) the Corporation denies such
request, in whole or in part, or (ii) no disposition thereof is made within 60
days. The Indemnified Party's costs and expenses incurred in connection with
successfully establishing his or her right to indemnification, in whole or in
part, in any such action shall also be reimbursed by the Corporation. It shall
be a defense to any action for advance for expenses that (a) a determination has
been made that the facts then known to those making the determination would
preclude indemnification or (b) the Corporation has not received both (i) an
undertaking as required by law to repay such advances in the event it shall
ultimately be determined that the standard of conduct has not been met and (ii)
a written affirmation by the Indemnified Party of such Indemnified Party's good
faith belief that the standard of conduct necessary for indemnification by the
Corporation has been met.
SECTION 8.02. Exclusivity, Etc. The indemnification and advance of expenses
provided by the Charter and these By-Laws shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advance of expenses
may be entitled under any law (common or statutory), or any agreement, vote of
stockholders or disinterested directors or other provision that is consistent
with law, both as to action in his or her official capacity and as to action in
another capacity while holding office or while employed by or acting as agent
for the Corporation, shall continue in respect of all events occurring while a
person was a director or officer after such person has ceased to be a director
or officer, and shall inure to the benefit of the estate, heirs, executors and
administrators of such person. The Corporation shall not be liable for any
payment under this By-Law in connection with a claim made by a director or
officer to the extent such director or officer has otherwise actually received
payment under insurance policy, agreement, vote or otherwise, of the amounts
otherwise indemnifiable hereunder. All rights to indemnification and advance of
expenses under the
<PAGE>
Charter of the Corporation and hereunder shall be deemed to be a contract
between the Corporation and each director or officer of the Corporation who
serves or served in such capacity at any time while this By-Law is in effect.
Nothing herein shall prevent the amendment of this By-Law, provided that no such
amendment shall diminish the rights of any person hereunder with respect to
events occurring or claims made before its adoption or as to claims made after
its adoption in respect of events occurring before its adoption. Any repeal or
modification of this By-Law shall not in any way diminish any rights to
indemnification or advance of expenses of such director or officer or the
obligations of the Corporation arising hereunder with respect to events
occurring, or claims made, while this By-Law or any provision hereof is in
force.
SECTION 8.03. Severability; Definitions. The invalidity or unenforceability of
any provision of this Article VIII shall not affect the validity or
enforceability of any other provision hereof. The phrase "this By-Law" in this
Article VIII means this Article VIII in its entirety.
ARTICLE IX.
INVESTMENT POLICY
Subject to the provisions of the Charter of the Corporation, the Board of
Directors may from time to time adopt, amend, revise or terminate any policy or
policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.
ARTICLE X.
SUNDRY PROVISIONS
SECTION 10.01. Books and Records. The Corporation shall keep correct and
complete books and records of its accounts and transactions and minutes of the
proceedings of its stockholders and Board of Directors and of any executive or
other committee when exercising any of the powers of the Board of Directors. The
books and records of the Corporation may be in written form or in any other form
which can be converted within a reasonable time into written form for visual
inspection. Minutes shall be recorded in written form but may be maintained in
the form of a reproduction. The original or a certified copy of these By-Laws
shall be kept at the principal office of the Corporation.
SECTION 10.02. Corporate Seal. The Board of Directors shall provide a suitable
seal, bearing the name of the Corporation, which shall be in the charge of the
Secretary. The Board of Directors may authorize one or more duplicate seals and
provide for the custody thereof. If the Corporation is required to place its
corporate seal to a document, it is sufficient to meet the requirement of any
law, rule, or regulation relating to a corporate seal to place the word "(seal)"
adjacent to the signature of the person authorized to sign the document on
behalf of the Corporation.
SECTION 10.03. Bonds. The Board of Directors may require any officer, agent or
employee of the Corporation to give a bond to the Corporation, conditioned upon
the faithful discharge of his or her duties, with one or more sureties and in
such amount as may be satisfactory to the Board of Directors.
<PAGE>
SECTION 10.04. Voting Stock in Other Corporations. Stock of other corporations
or associations, registered in the name of the Corporation, may be voted by the
President, a Vice-President, or a proxy appointed by either of them. The Board
of Directors, however, may by resolution appoint some other person to vote such
shares, in which case such person shall be entitled to vote such shares upon the
production of a certified copy of such resolution.
SECTION 10.05. Mail. Any notice or other document which is required by these
By-Laws to be mailed shall be deposited in the United States mails, postage
prepaid.
SECTION 10.06. Execution of Documents. A person who holds more than one office
in the Corporation may not act in more than one capacity to execute,
acknowledge, or verify an instrument required by law to be executed,
acknowledged, or verified by more than one officer.
SECTION 10.07. Amendments. (a) Any and all provisions of these By-Laws may be
altered or repealed and new by-laws may be adopted at any annual meeting of the
stockholders, or at any special meeting called for that purpose, and (b) the
Board of Directors shall have the power, at any regular or special meeting
thereof, to make and adopt new by-laws, or to amend, alter or repeal any of
these By-Laws of the Corporation.
SECTION 10.08. Contracts and Agreements. To the extent permitted by applicable
law, and except as otherwise prescribed by the Charter or these By-Laws, the
Board of Directors may authorize any officer, employee or agent of the
Corporation to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the Corporation. Such authority may be general or
confined to specific instances. A person who holds more than one office in the
Corporation may not act in more than one capacity to execute, acknowledge, or
verify an instrument required by law to be executed, acknowledged, or verified
by more than one officer. Any such document executed by one or more Directors or
by an authorized person shall be valid and binding upon the Board and upon the
Corporation when authorized or ratified by action of the Board.
SECTION 10.09. Reliance. Each director, officer, employee and agent of the
Corporation shall, in the performance of his or her duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the adviser, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
SECTION 10.10. Certain Rights of Directors, Officers, Employees and Agents. The
directors shall have no responsibility to devote their full time to the affairs
of the Corporation. Any director or officer, employee or agent of the
Corporation, in his or her personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to those
of or relating to the Corporation.
================================================================================
COMMON STOCK [LOGO] COMMON STOCK
P E I
- ------------ ------------
NUMBER SHARES
- ------------ ------------
PRICE ENTERPRISES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
CUSIP 741444 20 2
- --------------------------------------------------------------------------------
This CERTIFIES that
SPECIMEN
Is the owner of
- --------------------------------------------------------------------------------
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE OF $.0001 PER SHARE, OF
PRICE ENTERPRISES, INC., transferable on the books of the Corporation by said
holder in person, or by duly authorized attorney, upon surrender of this
certificate properly endorsed. This certificate and the shares represented
hereby are subject to all the terms, conditions and limitations of the
Certificate of Incorporation and By-laws and all amendments thereto and
supplements thereof, and the restrictive legends included on the back hereof.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
----------------------
/s/ JOSEPH R. SATZ PRICE ENTERPRISES, INC. /s/ Jack McGrory
CORPORATE
Executive Vice President [SEAL] President and Chief
and Secretary NOV. 18 Executive Officer
1997
MARYLAND
----------------------
COUNTERSIGNED AND REGISTERED:
ChaseMellon Shareholder Services, L.L.C.
Transfer Agent and Registrar
By
Authorized Officer
<PAGE>
================================================================================
PRICE ENTERPRISES, INC.
The Corporation will furnish to any stockholder on request and without
charge a full statement of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of the stock of each class
which the Corporation is authorized to issue, of the differences in the relative
rights and preferences between the shares of each series of a preferred or
special class in series which the Corporation is authorized to issue, to the
extent they have been set, and of the authority of the Board of Directors to set
the relative rights and preferences of subsequent series of a preferred or
special class of stock. Such request may be made to the secretary of the
Corporation or to its transfer agent.
The shares represented by this certificate are subject to restrictions on
Beneficial and Constructive Ownership and Transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate Investment Trust under
the Internal Revenue Code of 1986, as amended (the "Code"). Subject to certain
further restrictions and except as expressly provided in the Corporation's
Charter, (i) no Person may Beneficially Own in excess of 5% of the outstanding
Capital Shares of the Corporation (by value or by number of shares, whichever is
more restrictive), (ii) no Person may Constructively Own in excess of 9.8% of
the outstanding Capital Shares of the Corporation (by value or by number of
shares, whichever is more restrictive); (iii) no Person may Beneficially or
Constructively Own Capital Shares that would result in the Corporation being
"closely held" under Section 856(h) of the Code or otherwise cause the
Corporation to fail to qualify as a REIT; and (iv) no Person may Transfer
Capital Shares if such Transfer would result in the capital stock of the
Corporation being owned by fewer than 100 Persons. Any Person who Beneficially
or Constructively Owns or attempts to Beneficially or Constructively Own Capital
Shares which causes or will cause a Person to Beneficially or Constructively Own
Capital Shares in excess of the above limitations must immediately notify the
Corporation. If any of the restrictions on transfer or ownership are violated,
the Capital Shares represented hereby will be automatically transferred to a
Trustee of a Trust for the benefit of one or more Charitable Beneficiaries. In
addition, the Corporation may redeem shares upon the terms and conditions
specified by the Board of Directors in its sole discretion if the Board of
Directors determines that ownership or a Transfer or other event may violate the
restrictions described above. Furthermore, upon the occurrence of certain
events, attempted Transfers in violation of the restrictions described above may
be void ab initio. All capitalized terms in this legend have the meanings
defined in the Charter of the Corporation, as the same may be amended from time
to time, a copy of which, including the restrictions on transfer and ownership,
will be furnished to each holder of Capital Shares on request and without
charge. Requests for such a copy may be directed to the Secretary of the
Company, at the Company's principal office.
Keep this certificate in a safe place. If it is lost, stolen or destroyed,
the Corporation will require a bond of indemnity as a condition to the issuance
of a replacement certificate.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT - Custodian
---------- -------------
(Cust) (Minor)
under Uniform Gifts to Minors
Act
-----------------------------
(State)
UNIF TRF MIN ACT - Custodian (until age )
------- -----
(Cust)
under Uniform Transfers to
------- Minors Act
(Minor) -----------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
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to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------------------------------
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NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
By
-------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15
FIRST AMENDMENT TO THE PRICE ENTERPRISES
DIRECTORS' 1995 STOCK OPTION PLAN
Price Enterprises, Inc., a Delaware corporation (the "Company"), by
resolution of its Board of Directors (the "Board"), adopted The Price
Enterprises Directors' 1995 Stock Option Plan (the "Plan") for the benefit of
the members of its Board who are not employees of the Company or any of its
subsidiaries at the time they receive grants of options to purchase shares of
the Company's Common Stock, par value $.0001 per share ("Common Stock")
thereunder.
In order to provide for the grant of shares of Common Stock to certain
eligible directors under the Plan, this First Amendment to the Plan has been
adopted by the Board, effective as of October 1, 1997. This First Amendment,
together with the Plan, constitute the Plan in its entirety.
Appendix I is hereby added to the Plan to read in its entirety as follows.
APPENDIX I
AWARDS OF COMMON STOCK
1. Definitions. Except as expressly provided in this Section 1, words and
phrases defined in the Plan shall have the same meanings in this Appendix I as
they do elsewhere in the Plan. Whenever the following terms are used in this
Appendix I with the first letter capitalized, they shall have the meanings
specified below unless the context clearly indicates to the contrary.
(a) "Director" shall mean any member of the Board who is not, at the
time he or she receives an award of Common Stock hereunder, an employee of
the Company or any of its subsidiaries, specifically including the Chairman
of the Board and the Vice Chairman of the Board if they are not employees
of the Company or any of its subsidiaries.
(b) "Stockholder" shall mean a Director granted an award of Common
Stock hereunder.
2. Stock Subject to Appendix I. A maximum of 150,000 shares of Common Stock may
be granted hereunder; provided, however, that at any given time, the number of
shares of Common Stock which may be granted hereunder shall be reduced by an
amount equal to the number of shares of Common Stock subject to options granted
under the Plan.
3. Award of Stock.
(a) The Committee may from time to time, in its absolute discretion:
(i) Select from among the Directors (including Directors who have
previously received other awards under this Plan) such of them as in its
opinion should be awarded Common Stock; and
<PAGE>
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Common Stock, consistent with this Appendix
I.
(b) The Committee shall establish the purchase price, if any, and form of
payment, if any, for Common Stock; provided, however, that any such purchase
price shall be no less than the par value of the Common Stock to be purchased,
unless otherwise permitted by applicable state law. In all cases, legal
consideration shall be required for each issuance of Common Stock. It is
specifically acknowledged that Common Stock may be granted without the grantee
being required to pay any monetary consideration therefore.
(c) Upon the selection of a Director to be awarded Common Stock, the
Committee shall instruct the Secretary of the Company to issue such Common Stock
and may impose such conditions on the issuance of such Common Stock as it deems
appropriate.
4. Restriction. All shares of Common Stock issued under this Plan (including any
shares received by holders thereof with respect to Common Stock as a result of
stock dividends, stock splits or any other form of recapitalization) shall be
subject to such restrictions as the Committee shall provide, which restrictions
may include, without limitation, restrictions concerning voting rights and
transferability, restrictions based on duration of service as a Director,
Company performance and individual performance; provided, however, that by
action taken after the Common Stock is issued, the Committee may, on such terms
and conditions as it may determine to be appropriate, remove any or all of the
restrictions imposed by the Committee. Common Stock may not be sold or
encumbered until all restrictions are terminated or expire.
5. Adjustments. The number of shares of Common Stock subject to grants to
Directors hereunder shall be adjusted as follows:
(a) in the event that the outstanding shares of Common Stock are
changed by any stock dividend, stock split or combination of shares, the
number of shares of Common Stock subject to this Appendix I shall be
proportionately adjusted;
(b) except as provided in subsection 5(d), in the event of any merger,
consolidation or reorganization of the Company with any other corporation
or corporations, there may be substituted on an equitable basis as
determined by the Committee, for each share of Common Stock then subject to
this Appendix I, the number and kind of shares of stock or other securities
or other property (including cash) to which the holders of shares of Common
Stock of the Company will be entitled pursuant to such transaction;
(c) in the event of any other relevant change in the capitalization of
the Company, the Committee shall provide for an equitable adjustment in the
number of shares of Common Stock then subject to this Appendix I.
(d) notwithstanding the foregoing provisions of this Section 5, upon
the dissolution of the Company or upon any merger or consolidation of the
Company;
2
<PAGE>
(i) all vesting schedules, repurchase rights and obligations, and
other terms and conditions applicable to shares of Common Stock
granted hereunder shall be eliminated; or
(ii) the Committee shall make such other arrangements as the
Board or Committee may at the time deem fair and equitable in its
discretion.
6. Legend. In order to enforce the restrictions imposed upon shares of Common
Stock granted hereunder, the Committee shall cause a legend or legends to be
placed on certificates representing all shares of Common Stock that are still
subject to restrictions, which legend or legends shall make appropriate
reference to the conditions imposed thereby.
7. Compliance With Applicable Law. The Plan, this Appendix I and the issuance of
Common Stock hereunder are or may be subject to compliance with various
applicable laws and the rules, regulations and policies of various regulatory
bodies and agencies, including, without limitation, the Securities and Exchange
Commission and the California Department of Corporations, as now in effect or as
may hereafter be adopted or amended. The grant of shares of Common Stock
hereunder is expressly conditioned upon compliance with all such laws, rules,
regulations and policies. In the event that the Company, after making reasonable
efforts to do so, shall be unable to obtain any necessary authorization or
permit required in order to implement the Plan or this Appendix I or to issue
shares of Common Stock granted hereunder, or is otherwise unable to comply with
any such applicable law, rule, regulation or policy, the Company may decline to
allow the issuance of shares of Common Stock granted hereunder until all such
permits or authorizations are issued or until it can effect such compliance, or
may make such grants, options and exercises subject to such considerations and
limitations as the Committee may deem reasonable under the circumstances in its
discretion. If it is ultimately determined, in the sole judgment of the
Committee, that the Company cannot reasonably obtain any such permit or
authorization or effect such compliance, the grants to Directors of unissued
shares of Common Stock granted hereunder affected thereby shall be canceled upon
notice to such grantees, without liability whatsoever of the Company to any
grantee of shares of Common Stock.
Executed at San Diego, California.
PRICE ENTERPRISES, INC.
By: /s/ Jack McGrory
------------------------------
Title: CEO
Date: 12-2-97
3
AGREEMENT OF PURCHASE AND SALE AND ESCROW INSTRUCTIONS
(STANFORD RANCH CROSSING - ROSEVILLE, CALIFORNIA)
AGREEMENT made this 31st day of December, 1997, by and between PRICE
ENTERPRISES, INC., a Delaware corporation (referred to herein as "Purchaser")
and OPUS WEST CORPORATION, a Minnesota corporation (referred to herein as
"Seller").
ARTICLE I
TERMS OF SALE
1.01 Definitions.
The following terms are used in this Agreement.
A) "Capitalization Rate" shall mean nine and 929/1000 percent
(9.929%).
B) "Closing" shall mean the date that a deed is recorded transferring
title to the Real Property from the Seller to the Purchaser or Purchaser's
nominee and the Phase I Amount is paid to the Seller.
C) "Closing Date" shall mean the date the Closing occurs.
C1) "Cost Plus Lease" is defined in Section 1.03(D)(1).
D) "Deed" shall mean a Grant Deed, in the form attached hereto as
Exhibit I.
E) "Effective Date" is defined in Section 6.18.
F) "Escrow Agent" shall mean:
Chicago Title Insurance Company
Attn: Ms. Maggie G. Watson
700 South Flower Street, Suite 900
Los Angeles, CA 90017
Phone: (213) 488-4315
Fax: (213) 488-4388
G) "Escrow Deposit" shall mean all amounts deposited by the Purchaser
with the Escrow Agent, plus all interest accumulated thereon.
H) "Fixed First Year Annual Rent" shall mean the fixed pre-determined
rent payable for the one-year period, beginning on the date the first
monthly installment is due. Excluded from the term Fixed First Year Annual
Rent are all contingent and/or
<PAGE>
variable amounts which may become payable by a tenant under a Phase I Lease
or Phase II Lease, including, but not limited to percentage rent, Triple
Net Charges and other amounts.
I) "Fixed Monthly Rent" shall mean the fixed pre-determined monthly
rent payable during the lease term, including cost of living or scheduled
increases. Excluded from the term Fixed Monthly Rent are all contingent
and/or variable amounts which may become payable by a tenant, including,
but not limited to percentage rent, Triple Net Charges, and other amounts.
J) "Improvements" is defined in Section 1.02(A).
K) "Land" is defined in Section 1.02(A).
L) "Landlord" shall mean the landlord of a Phase I Lease or a Phase II
Lease, as the case may be.
M) "Law" shall mean any federal, state or municipal statute regulation
or ordinance which has jurisdiction over the Property.
N) "Leases" is defined in Section 1.02(C).
O) "Monetary Liens" are defined in Section 1.08(A).
P) "Personal Property" is defined in Section 1.02(B).
Q) "Purchase Price" is defined in Section 1.03(A).
R) "Permits" is defined in Section 1.02(D).
S) "Real Property" is defined in Section 1.02(A).
T) "Phase I Amount" is defined in Section 1.03(C)(2).
U) "Phase I Carry Lease" is defined in Section 1.05(A)(1).
V) "Phase I Carry Cost" is defined in Section 1.05(A)(2).
W) "Phase I Improvements" shall mean any Improvements existing as of
the Closing Date, or otherwise required to be made by the landlord pursuant
to a Phase I Lease.
X) "Phase I Lease" is defined in Section 1.03(C)(1)(a).
Y) "Phase II Amount" is defined in Section 1.03(D)(1)(a).
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<PAGE>
Z) "Phase II Carry Cost" is defined in Section 1.03(D)(1)(d).
AA) "Phase II Expiration Date" is defined in Section 1.03(D)(1)(b).
BB) "Phase II Improvements" is defined in Section 1.03(D)(1)(g).
CC) "Phase II Lease" is defined in Section 1.03(D)(1)(c).
CC1) "Phase II Lease Conditions" is defined in Section 1.03(D)(1)(h).
DD) "Phase II Payment Conditions" is defined in Section 1.03(D)(1)(f).
EE) "Plans" are defined in Section 1.02(F).
FF) "Qualified Phase II Lease" is defined in Section 1.03(D)(1)(h).
GG) "Real Property" is defined in Section 1.02(A).
HH) "Rent Commencement Date" is the date by which a tenant under a
Phase I Lease or Phase II Lease is required to begin paying both its Fixed
Monthly Rent and its share of Triple Net Charges.
II) "Staples Lease" is defined in Section 1.03 (C)(1)(a).
JJ) "Subject Property" is defined in Section 1.02.
KK) "Tenant" shall mean a tenant under one of the Leases.
LL) "Title Commitment" is defined in Section 1.09(A).
MM) "Title Company" shall mean Chicago Title Insurance Company.
NN) "Title Documents" is defined in Section 1.09(A).
OO) "Title Insurance Policy" shall mean an ALTA Owner's Title Policy
(10/17/92) with extended coverage.
PP) "Triple Net Charges" shall mean taxes, insurance and common area
maintenance costs required to be paid directly or indirectly by a tenant
under a Phase I Lease or a Phase II Lease.
-3-
<PAGE>
QQ) "Vacant Space" is defined in Section 1.03(D)(1)(e).
RR) "Warranties" are defined in Section 1.02(E).
1.02 Sale of Property. Seller agrees to sell to Purchaser, and Purchaser
agrees to buy from Seller, the following property (collectively, "Subject
Property"):
(A) Real Property. Fee simple interest in certain real estate
consisting of approximately 20.2896 acres of land located in the City of
Roseville, County of Placer, State of California, legally described on
Exhibit A attached hereto and depicted on the Site Plan attached hereto as
Exhibit B ("Land"), together with (i) all building structures, improvements
and fixtures (other than fixtures or other improvements owned by Tenants or
utility providers) and currently located on the Land, and the buildings,
fixtures and improvements required herein to be constructed and completed
by Seller ("Improvements'), and (ii) all rights, privileges, servitudes,
easements and appurtenances thereunto belonging or appertaining, including
all right, title and interest of Seller, if any, in and to the streets,
alleys and rights-of-way adjacent to the Land and Improvements
(collectively, "Real Property").
(B) Personal Property. All fixtures, furniture, equipment and other
personal property located upon the Real Property, if any, now or hereafter
owned by Seller and used in connection with the operation and or
maintenance of the Improvements (the "Personal Property").
(C) Leases. All rights of Seller under the leases described on Exhibit
C attached hereto, together with all amendments or modifications thereto
and the Staples Lease if fully executed and delivered by the landlord and
tenant therein prior to the Closing ("Leases").
(D) Permits. Seller's interests in any and all licenses, permits,
certificates of occupancy and franchises affecting the Subject Property, to
the extent such permits are assignable ("Permits").
(E) Warranties. Seller's interests in all warranties and guaranties
given to, assigned to or benefiting Seller or the Real Property regarding
the acquisition, construction, design, use, operation, management or
maintenance of the Real Property ("Warranties").
(F) Plans. Seller's interest in and to all final plans and
specifications, including but not limited to "As Built" plans
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<PAGE>
(excluding shop drawings) relating to the construction of the Improvements
("Plans").
(G) Declaration. All rights, obligations, duties and interests of
Seller as Declarant under that certain Declaration of Covenants, Conditions
and Restrictions for Stanford Ranch Crossing recorded March 26, 1996, in
the Official Records of Placer County, California, in Instrument No.
96-016332 (the "Declaration"), accruing on and after the Closing Date.
Notwithstanding anything to the contrary in this Agreement or any of the
Seller's Closing Documents, it is understood and agreed that Seller is not
selling or transferring to Purchaser any right, title or interest of Seller to
receive payments of any kind, pursuant to that certain Supplemental Development
Agreement Parcels 21, 24, 25, 34, 40, 42, 43, 48 and 49 NORTH CENTRAL ROSEVILLE
Specific Plan Area dated June 14, 1991, and recorded June 18, 1991, Official
Records of Placer County, California, as Instrument No. 91-035023, as amended by
that certain Amendment of Supplemental Development Agreement Parcels 21, 24, 25,
34, 40, 42, 43, 48 and 49 NORTH CENTRAL ROSEVILLE Specific Plan Area dated
October 20, 1995, and recorded November 7, 1995, in the Official Records of
Placer County, California, in Instrument No. 95-059718 (as amended, the
"Development Agreement"). Seller shall retain all rights in and to the
Development Agreement, to receive future payments to be made thereunder. Under
no circumstances shall the Subject Property or any assets conveyed pursuant to
the Seller's Closing Documents include Seller's interest in the Development
Agreement to receive future payments.
1.03 Purchase Price.
A) Aggregate Purchase Price. Purchaser shall pay Seller a "Purchase
Price" for the Subject Property in an amount equal to the sum of the "Phase
I Amount" as provided in paragraph (C) below, plus the "Phase II Amount" as
provided in paragraph (D) below, provided, however, that the aggregate
amount of the Purchase Price shall in no event exceed Twenty Three Million
Nine Hundred Seventy-Five Thousand Dollars ($23,975,000.00).
B) Payment. The Purchase Price shall be payable by the Purchaser as
follows:
1. Purchaser shall deposit Five Hundred Thousand Dollars
($500,000) with Escrow Agent by cash or check within one (1) business
days after the date of this Agreement.
2. Purchaser shall pay the Phase I Amount subject to closing
adjustments as provided herein, through escrow, at the time of
Closing.
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<PAGE>
3. Purchaser shall pay the Phase II Amount as provided in
paragraph (D)(2) and (3) below herein.
4. The Escrow Deposit referred to in Section 1.03(B)(1) shall
serve to secure Purchaser's obligation to pay certain amounts required
of it after the Closing Date, and the parties agree that in absence of
a default by Purchaser, the Escrow Deposit shall be released to
Purchaser upon the first to occur of the following conditions:
a. If the Staples Lease is a Phase I Lease, the Escrow
Deposit shall be released in full to Purchaser upon the
occurrence of the Rent Commencement Date under the Staples Lease;
b. If the Staples Lease is a Phase II Lease, the Escrow
Deposit shall be credited against the Phase II Amount due to
Seller relating to the Staples Lease and such amount credited
shall be paid to Seller upon the Phase II Payment Conditions
being satisfied with respect to the Staples Lease; or
c. If the Escrow Deposit is not either released to Purchaser
under paragraph a. above, or credited against the Phase II Amount
as provided in paragraph b. above, by January 1, 1999, for any
reason whatsoever (other than Purchaser's default hereunder),
then the Escrow Deposit shall be released in full to Purchaser.
C) Phase I Amount.
1) For purposes of this Agreement, including, but not limited to this
paragraph (C), the following definitions shall apply:
a) "Phase I Lease" shall mean only: (i) those leases listed on Exhibit
C attached hereto; (ii) a certain lease to Staples, Inc. (the "Staples
Lease"), in the form and substance, which has been approved by Purchaser
and Seller as evidenced by their approval signatures on the first (1st)
page of such form lease, provided such lease has been executed and
delivered by both Staples, Inc. and the Seller and a copy of such signed
lease has been delivered to Purchaser prior to the date of Closing. No
other leases, including, but not limited to a lease to Cost Plus, even if
executed prior to the Closing Date shall be treated as a Phase I Lease.
b) "Phase I Tenant" shall mean the tenant under a Phase I Lease.
2) The "Phase I Amount" shall mean the aggregate amount of Fixed First Year
Annual Rent for all Phase I Leases, divided by the "Capitalization Rate".
However, in the event that after the Closing Date, the Fixed First Year Annual
Rent of one (1) or more Phase I Leases
-6-
<PAGE>
is adjusted upward or downward based upon a determination of the actual floor
area of the premises under such lease, then the Phase I Amount shall be
increased or decreased, as the case may be, in which case the Purchaser shall
pay to the Seller the amount of any increase in the Phase I Amount and the
Seller shall pay to Purchaser the amount of any decrease in the Phase I amount,
no later than thirty (30) days after the actual floor area with respect to the
particular Phase I Lease is determined.
D) Phase II Amount.
1) For purposes of this Lease, including this paragraph (D), the following
definitions shall apply:
a) "Phase II Amount" shall mean the amounts payable to Seller under
paragraph (D)(2) below.
b) "Phase II Expiration Date" shall mean June 30, 1999.
c) "Phase II Lease" shall mean all leases with respect to the Subject
Property which are not Phase I Leases and which are executed and delivered
between landlord and the tenant of such leases, no later than the Phase II
Expiration Date; excluded from the term Phase II Leases are leases of any
premises which were covered by Phase I Leases, and which thereafter become
available for lease.
d) "Phase II Carry Cost" shall mean, with respect to each Phase II
Lease, the aggregate amount of monthly installments of Triple Net Charges
for the period beginning on the Closing Date (assuming for this purpose,
that the Rent Commencement Date of each such Phase II Lease had occurred on
the Closing Date, even though the Rent Commencement Date does not in fact
occur on the Closing Date), until the date the tenant under such Phase II
Lease is required to begin paying Triple Net Charges.
e) "Vacant Space" shall mean that portion of an existing building
which has not been leased during the period from the date of Closing until
the Phase II Expiration Date (or if leased during such period, such lease
was terminated prior to the Rent Commencement Date), and for which no
Qualified Phase II Lease was rejected by Purchaser, pursuant to Section
1.03(D)(2)(b).
f) "Phase II Payment Conditions", with respect to each Phase II Lease,
shall mean:
i. Phase II Improvements as defined in paragraph g below has been
substantially completed;
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<PAGE>
ii. a certificate of occupancy with respect to the Phase II
Improvements has been delivered to Purchaser;
iii. the Rent Commencement Date has occurred;
iv. a Tenant Phase II Estoppel Certificate substantially in the
form attached hereto as Exhibit O (with no material or adverse
deviations or disclosures) has been delivered by the Tenant (subject
to the right of Seller to execute certain Seller Estoppel
Certificates, as contemplated under Section 2.02(C), below, but in the
form attached as Exhibit O-1);
v. (a) The Title Company has provided to Purchaser appropriate
written endorsements to Purchaser's title Insurance Policy, which
assures that the Phase II Improvements relating to such Phase II Lease
are not subject to any mechanics' or materialmen's liens resulting
from Seller's construction of such Phase II Improvements (which
endorsements shall be subject to any additional title exceptions
created or approved by the act or omission of Purchaser, and the
premium for which endorsements shall be paid by Seller (to the extent
required in Section 3.08, i.e., Seller shall be required to pay the
portion of the premium attributable to the CLTA Standard Policy amount
only) and (b) Seller has provided to the Title Company an updated
survey or new survey to the extent required, if at all, by the Title
Company to issue the endorsements described in this paragraph vii.
vi. Seller has made all payments to the tenant under the Phase II
Lease (or to Purchaser if such payments are not yet due) required to
be paid by the landlord under such lease for tenant improvements and
other purposes.
g) "Phase II Improvements" shall mean all construction, alterations,
changes and improvements required to be made by the landlord under a Phase
II Lease.
h) "Qualified Phase II Lease" shall mean a Phase II Lease duly
executed by a tenant and delivered to Purchaser, which meets all of the
following standards and conditions (collectively, the "Phase II Lease
Conditions"):
1. Tenant must have a minimum tangible net worth of Five Hundred
Thousand Dollars ($500,000), as evidenced by reasonable documentation.
2. Tenant must have at least five (5) existing store locations.
3. Tenant must have been in the business for which the premises are
being leased for at least five (5) years.
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<PAGE>
4. The term of the lease, excluding options, must be for a minimum of
five (5) years, computed from the date rent commences and a maximum of
fifteen (15) years.
5. There may be options to extend the lease term, provided there may
only be two (2) extensions, each of which may not be more than five (5)
years.
6. Maximum payment by the landlord for tenant improvements and any and
all other costs shall not exceed Ten Dollars ($10.00) per square foot of
floor area of the Premises.
7. The lease must prohibit the tenant from: (i) violating exclusive
uses given to other tenants of the Subject Property, (ii) violating
restrictions contained in the leases of other tenants of the Subject
Property, and (iii) violating any instruments of record which encumber the
Real Property.
8. The lease must not grant "exclusive use" rights (i) other than as
against shop space tenants in Retail A, B or D, as shown on the Site Plan
attached as Exhibit B, and (ii) other than in regard to the actual business
activities of a Tenant as of the date the Tenant commences business from
its premises.
9. The Fixed Annual Rent (which shall mean the Fixed Monthly Rent
multiplied by 12) for the first year, beginning on the Rent Commencement
Date (the "First Lease Year"), shall not be less than Sixteen Dollars
($16.00) per square foot of floor area for Retail B; Twenty Dollars
($20.00) per square foot of floor area for Retail D tenants; Eighteen
Dollars ($18.00) per square foot of floor area for Retail A tenants; and
not more than Twenty-Four Dollars ($24.00) per square foot of floor area of
the premises. The Fixed Annual Rent shall increase by a minimum of ten
percent (10%) every five (5) Lease Years, during the balance of the lease
term including option periods.
10. After the first lease year, the Fixed Annual Rent for a lease year
shall never be less than the Fixed Annual Rent for the previous lease year.
("Lease Year" shall mean each consecutive period of twelve (12) calendar
months following the first leased year.)
11. Tenant must pay for its pro-rata share (based upon a ratio of the
floor area of the Tenant's premises to the floor area of the buildings
within the Real Property) of all common area expenses (including, but not
limited to so-called capital expenditures), taxes and insurance, with no
maximum ceiling.
12. The lease must be subject to all matters of record.
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<PAGE>
13. There shall be no co-tenancy provision.
14. The tenant shall have no termination rights (other than in the
event of casualty, condemnation or similar event as provided in the
Standard Lease, referenced in subparagraph 17, below).
15. The tenant must commence paying Fixed Annual Rent and all other
charges no later than four (4) months after the date Phase II Improvements
have been substantially completed.
16. Any warranty or guaranty with respect to Phase II Improvements
shall be limited for a period not to exceed one (1) year from the date such
Phase II Improvements are substantially completed.
17. The Lease must substantially conform to the lease form attached
hereto as Exhibit J (the "Standard Lease"), subject to the matters set
forth in items set forth in this paragraph A), sub-paragraphs 1-16.
In the event the Purchaser, at its option, elects to waive any of the above
standards or conditions with respect to a particular lease, such waiver shall
not be deemed a waiver with respect to any other lease. If any such proposed
tenant satisfies the requirements for a tenant of a Qualified Phase II Lease,
Seller shall notify Purchaser, within ten (10) days of commencing negotiations
with such proposed tenant, of the identity of the proposed tenant. In the event
a prospective Phase II Tenant offers to enter into a lease with Purchaser by
delivery to Purchaser of a written lease duly executed by such prospective
tenant and one or more of the Phase II Lease Conditions are not satisfied,
nonetheless the Phase II Conditions shall be deemed satisfied with respect to
such lease, provided the failure to satisfy one or more of the Phase II Lease
Conditions is not a material deviation with respect to the overall Phase II
Lease Conditions as they apply to this prospective tenant and the Subject
Property. Purchaser approves the Staples Lease and the Cost Plus Lease as
Qualified Phase II Leases, notwithstanding the deviations from the foregoing
criteria.
In the event Staples, Inc. does not execute the Staples Lease or Cost Plus,
Inc. does not execute the Cost Plus Lease, for the premises designated on the
Site Plan, then replacement tenants and the leases for such replacement tenants
shall not be subject to the criteria for the Qualified Phase II Lease; however,
such replacement tenants may be (x) one of the tenants listed on Exhibit P
hereto, or (y) subject to Purchaser's sole, absolute and unrestricted
discretion, another national or regional tenant, suitable for comparable "retail
power centers"; and in either event, subject to a lease agreement with terms and
conditions in
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<PAGE>
such leases satisfactory to Purchaser in its sole, absolute and unrestricted
discretion. "Cost Plus Lease" shall mean a certain lease to Cost Plus, Inc. in
the form and substance which has been approved by Purchaser and Seller as
evidenced by their approval signatures on the first page of such form lease.
Seller agrees to consider in good faith any tenants proposed by Purchaser,
and if acceptable to Seller, Purchaser may participate in the commission
arrangement, provided Seller shall not be required to pay any commission in
excess of the amounts stated in the applicable Seller listing agreements.
Purchaser and Seller shall cooperate and communicate with each other in the
development and leasing of the undeveloped space and the Vacant Space, with the
intent to procure suitable Tenants to lease all available space. Seller shall
inform each prospective Phase II Tenant, that Purchaser is the owner of the
Subject Property, and Purchaser must execute any lease in order to make it
binding, however, Seller shall negotiate the terms of the proposed lease
agreements with each prospective Phase II Tenant. Purchaser shall receive from
Seller copies (as and when distributed to each tenant), of all correspondence,
draft agreements and other information. Seller shall obtain Purchaser's approval
of each letter of intent with a prospective Phase II Tenant, before proceeding
to negotiate a lease agreement. Purchaser agrees to respond to any request of
Seller to approve a leasehold letter of intent, within three (3) days of
Purchaser's receipt. Except for Seller's limited authority to discuss
non-binding lease terms and conditions as aforementioned, Seller is not an agent
of the Purchaser nor may Seller hold itself out as an agent. Seller has no
authority on or after the Closing Date to enter into any lease or other
agreement with respect to the Real Property on behalf of the Purchaser or on its
own behalf; provided, however, Seller may enter into contracts on its own behalf
with respect to construction of improvements for Phase I and Phase II Leases,
pursuant to Section 1.04 herein.
2) Subject to the limitations and conditions of paragraphs (3) and (4)
below, Purchaser shall make the following Phase II Amount payments to Seller:
a) Provided all Phase II Payment Conditions with respect to a Phase II
Lease have been satisfied, Purchaser shall pay Seller within ten (10) days
after the date all such conditions are satisfied, an amount equal to the
Fixed First Year Annual Rent for such lease,divided by the Capitalization
Rate, reduced by the Phase II Carry Cost for each such lease. In the event
the Phase II Lease is terminated for any reason, prior to all of the Phase
II Payment Conditions being satisfied and after the Phase II Expiration
Date, then within thirty (30) days after such termination, Purchaser shall
pay Seller the amount for Vacant Space as provided in Section
1.03(D)(2)(c). If a Phase II Lease terminates prior to its Rent
Commencement Date and prior to the Phase II Lease Expiration Date, then
Seller shall have an
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opportunity to re-lease such space prior to the Phase II Lease Expiration
Date.
b) In the event two (2) counterparts of the Qualified Phase II Lease
executed by the Tenant therein are submitted to Purchaser and Purchaser at
its option elects not to execute such lease within ten (10) days after
receipt of same, then Purchaser shall pay the Seller an amount equal to the
Fixed First Year Annual Rent for such Lease, divided by the Capitalization
Rate, reduced by the Phase II Carry Cost for each such lease, not later
than sixty (60) days after such Qualified Phase II Lease was submitted to
Purchaser.
c) Purchaser shall pay to Seller within thirty (30) days after the
Phase II Expiration Date, a sum equal to One Hundred Ten Dollars ($110.00),
multiplied by the floor area of the Vacant Space which Seller must have put
in "Vanilla Shell" condition as defined in Exhibit K.
d) In the event the Staples Lease is not executed prior to Closing and
the Purchaser does not execute a lease with Staples, Inc. (or a tenant
permitted herein as a replacement) after the date of Closing and prior to
the Phase II Expiration Date, with respect to the premises referred to in
the Staples Lease, then the Purchaser shall pay the Seller within thirty
(30) days after the Phase II Expiration Date, the sum of $912,000.00 (i.e.,
24,000 square feet multiplied by $38.00).
e) In the event the Cost Plus Lease is not executed prior to Closing
and the Purchaser does not execute a lease with Cost Plus (or a tenant
herein permitted as a replacement) after the date of Closing and prior to
the Phase II Expiration Date, with respect to the Cost Plus Pad Area,
designated on the Site Plan attached hereto as Exhibit B, then the
Purchaser shall pay the Seller within thirty (30) days after the Phase II
Expiration Date, the sum of $718,200.00 (i.e., 18,900 square feet
multiplied by $38.00).
3) No premises or lease shall be considered more than once in determination
of the "Phase II Amount."
4) In the event the Staples Lease is deemed a Phase I Lease, Purchaser's
obligation to make any of the payments provided in Section 1.03(D)(2) above
shall be suspended until the earlier of the Rent Commencement Date under the
Staples Lease or the Phase II Expiration Date. During such period the obligation
is suspended, Seller shall be entitled to be paid all Fixed Monthly Rent paid
under any Phase II Lease, and Purchaser shall retain the Triple Net Charges.
Further, if as of the Phase II Expiration Date, the Rent Commencement Date under
the Staples Lease has not occurred, then the parties, no later than July 15,
1999, shall adjust the Purchase Price, and make payments to the other, based
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upon consideration of the following items: (i) a credit to Purchaser for the
portion of the Purchase Price attributable to the Staples Lease (i.e., paid at
Closing, based upon its Fixed First Year Annual Rent and the Capitalization
Rate); and (ii) a credit to Seller for the amounts contemplated under
subparagraphs 2.a), 2.b), 2.c), 2.d), and (if applicable) 2.e) above.
1.04 Seller's Development Duties.
A) Seller shall, at its sole cost and expense, cause the design and
construction of all buildings and other improvements required to the be
performed by the landlord, pursuant to the terms and conditions of any and all
Phase I Leases and Phase II Leases, in accordance with the terms of such leases.
B) Seller shall, at its sole cost and expense, complete the construction of
the buildings and other improvements currently under construction shown on the
Site Plan attached hereto as Exhibit B as Retail A, Retail B and Retail D
pursuant to the Vanilla Shell specifications set forth on Exhibit K attached
hereto, no later than the Phase II Lease Expiration Date, or sooner as may be
required by a Phase II Lease.
C) After Closing, Purchaser shall execute promptly all applications for
building permits or other third party approvals, at Seller's cost and expense,
which may be required in connection therewith.
D) After execution of a Phase II Lease by the Purchaser and the tenant
thereunder, Seller shall diligently pursue obtaining the tenant's agreement on
final plans and specifications for Phase II Improvements as provided in such
lease, which must also be approved by the Purchaser. In any situation where the
landlord under a Phase II Lease has the right to approve changes proposed to the
final plans and specifications for Phase II Improvements, then both Seller and
Purchaser shall have the right to approve such proposed changes, such approval
not to be unreasonably withheld or delayed. If so approved, then in addition to
the sums required to be paid by the Purchaser to Seller with respect to such
lease under Section 1.03(D)(2), Purchaser shall pay to Seller an additional sum
equal to the cost to Seller of making such changes plus Seller's overhead and
profit thereon, as such costs, overhead and profit were quoted to the tenant and
approved by Purchaser and agreed to in writing by Purchaser and such tenant, to
the extent the landlord under such lease has a right to be reimbursed for such
costs, on the earlier of (x) 10 days after receipt of such amount from the
tenant, or (y) in conjunction with the payment of the Phase II Amount to Seller
for such tenant.
E) In the event any mechanics' liens are filed against the Subject Property
due to Phase II Improvements which Seller does not discharge (by payment,
bonding or otherwise) within ten (10)
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business days after Purchaser gives Seller written notice of same, then
Purchaser may pay or discharge any such liens and the costs so incurred by
Purchaser shall be immediately reimbursed by Seller and in addition, Purchaser
may off-set such costs against any sum which may be due or become due the
Seller.
F) Upon substantial completion of Phase I Improvements or Phase II
Improvements, as the case may be, with respect to a particular lease, Seller
warrants to Purchaser such improvements against defective workmanship and/or
materials for a period of one (1) year after the date of substantial completion
and Seller shall promptly, at its sole cost and expense, repair or replace any
defective item occasioned by poor workmanship and/or materials discovered during
said one-year period. Performance of such one (1) year warranty shall be
Seller's sole and exclusive obligation with respect to defective workmanship
and/or materials and Purchaser's rights to enforce such one (1) year warranty
shall be Purchaser's sole and exclusive remedy to such defective workmanship
and/or materials in limitation of any contract, warranty or other rights,
whether expressed or implied, that Purchaser may otherwise have under applicable
law. The reference above to "one (1) year" shall be increased to the warranty
period in excess thereof, if so provided in any Phase II Lease.
G) Seller shall, at its sole cost and expense, use reasonable efforts to
negotiate for, procure and maintain all required governmental approvals (the
"Governmental Approvals") necessary for the commencement and completion of the
construction of Phase I Improvements and Phase II Improvements in accordance
with the terms and provisions of each Phase I Lease and Phase II Lease (the
"Work"). Such Governmental Approvals shall include, but not be limited to, any
and all zoning approvals (preliminary and final), plat approvals (preliminary
and final), approval of all site plans and specifications, approval of all
dedications, acceptance of all components of the Work by the applicable
governmental authorities as evidenced by a certificate of occupancy, and any
other approvals reasonably appropriate for the performance of the Work. In this
connection, Purchaser shall reasonably cooperate with and assist Seller, but
Purchaser shall not be required to pay or incur any out-of-pocket costs or
expenses in so doing. Seller may not consent to any restrictions or limitations
on the future uses or development of the Real Property. The Work shall be
performed by Seller (i) in a good and workmanlike manner; (ii) in accordance
with the applicable lease and the final plans and specifications prepared in
connection therewith; (iii) at Seller's sole cost and expense (except as
otherwise provided herein with respect to change orders); and (iv) in accordance
with any and all applicable laws, codes, ordinances and regulations, as then
presently interpreted and enforced, and the Declaration.
H) Seller shall promptly pay for all Work in a timely manner before any
such payments are delinquent. Seller shall
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deliver to Purchaser on a timely basis such information as is reasonably
requested by Purchaser in order to ensure the payment by Seller when due of all
amounts so owing. Seller, throughout the term of the construction of the Work,
shall not permit any mechanics' liens, materialmen's liens, construction liens
and other liens for labor, services or materials furnished or alleged to have
been furnished and/or charged to or for Seller or any contractor or
subcontractor of Seller, or any of them, which may be recorded against or
otherwise the Subject Property, to attach to or remain against the Subject
Property, or any portion thereof, and, within fifteen (15) days of receipt of
written notice from Purchaser or any third party of any claim for any such lien,
Seller shall cause any and all such liens or claims of lien to be paid,
satisfied, released, cancelled, discharged (by bond or otherwise) or vacated. In
absence of Seller's cure or release of any such third party lien, then Purchaser
shall have the rights set forth in paragraph (E) above.
I) Upon commencement of any Work and continuing until substantial
completion of such Work, Seller shall keep that portion of the Real Property on
which such Work is being performed in a reasonably neat, clean and orderly
condition, free of waste, debris, trash and rubbish. Seller shall perform such
Work so as to prevent injury to, or so as to minimize interference with,
Purchaser or the tenants of the Real Subject Property or their respective
employees, agents, suppliers, customers or invitees to the extent reasonably
practicable. Upon commencement of the Work and continuing until substantial
completion of the Work, Seller shall maintain, at its sole cost and expense,
fire and extended coverage insurance, on an "All-Risk/Builder's Risk" basis, on
the Work, for one hundred percent (100%) of the replacement cost thereof with a
carrier holding an AM Best rating of "A". Each policy shall include a waiver of
subrogation in favor of Purchaser and shall be the primary policy. In addition,
Seller shall procure and maintain, at its sole cost and expense, a policy or
policies of liability insurance with limits of liability not less than as set
forth below:
A. Worker's Compensation Statutory
Employer's Liability Statutory
B. Commercial General $2,000,000 with respect
Liability to any one occurrence and
Bodily Injury $1,000,000.00 with respect
Property Damage to the annual policy
aggregate
C. Excess Indemnity $5,000,000.00
(Umbrella) Coverage
Each policy referred to in this paragraph (I) shall name Purchaser as an
additional insured. Evidence of the foregoing
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coverages (either represented by certificates of insurance issued by the
applicable insurance carrier(s) or by filing a copy of all policies with
Purchaser) must be furnished to Purchaser. Such certificates of insurance shall
state that Purchaser will be notified, in writing, thirty (30) days prior to
cancellation. If Seller fails to procure the required insurance within ten (10)
days notice from Purchaser, then Purchaser shall have the right to procure
comparable insurance coverage and the costs so incurred by Purchaser must be
immediately reimbursed to Purchaser by Seller.
J) Seller hereby agrees to indemnify, defend and hold harmless Purchaser
from and against any and all claims, demands, liabilities, damages, costs,
losses and expenses (including, without limitation, reasonably attorneys' fees)
(excepting therefrom any claims, damages, costs, losses or expenses to the
extent caused by negligence of Purchaser, or the tenants under the Leases or any
of its or their employees or agents) paid, suffered or incurred by Purchaser
arising out of or resulting from the performance of the Work, provided that any
such claim, damage, cost, loss or expense is (i) attributable to bodily injury,
sickness, disease or death, or to injury to or destruction of tangible property
(other than the Work itself); and (ii) caused by any negligent act or omission
or any wrongful intentional act of Seller, its contractors, subcontractors,
suppliers, laborers, agents or employees on or about the Real Subject Property.
1.05 Seller's Payment of Rent and Carry Costs - Phase I Leases.
A) For purposes of this Section 1.05, the following definitions shall
apply:
1. "Phase I Carry Lease" is a Phase I Lease whose Rent Commencement
Date has not occurred by the date of Closing.
2. "Phase I Carry Cost" shall mean, with respect to each Phase I Carry
Lease, the sum of monthly installments of Fixed Monthly Rent and Triple Net
Charges beginning on the Rent Commencement Date, payable during the term of
such lease beginning on the Rent Commencement Date.
B) Beginning on the Closing Date and continuing on the first day of each
calendar month thereafter, Seller shall pay to Purchaser an amount equal to the
Phase I Carry Cost which would have been required to be paid under each Phase I
Carry Lease, assuming, for this purpose, that the Rent Commencement Date of each
of such Phase I Carry Lease had occurred on the Closing Date (even though the
Rent Commencement Date does not in fact occur on the Closing Date), provided
such payments by the Seller to the Purchaser shall terminate on the earlier of
(i) the actual Rent Commencement Date of each of such Phase II Leases or (ii)
the Phase II Lease Expiration Date. If the actual Rent Commencement Date is
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other than the first day of a calendar month, the Phase I Carry Cost for such
month shall be pro-rated on a daily basis.
C) On the Closing Date, Purchaser shall receive as a credit
against the Phase I Amount, a sum equal to the Phase I Carry Cost which will
accrue on and after the Closing Date through the month of January, 1998, and
accordingly, such credited amounts shall not be paid subsequently.
1.06 Broker's Fees.
Seller shall at its sole cost pay for all broker's fees and commissions and
broker's expenses relating to Phase I Leases and Phase II Leases, heretofore or
hereafter incurred by Seller or Purchaser.
1.07 Phase II Leases - Exclusive Leasing Rights.
Subject to the provisions of Section 1.03(D), Seller shall have the
exclusive right to procure leases for that portion of the Real Property, which
is not subject to a Lease as of the Closing Date. The foregoing exclusive right
of Seller shall not include any right to execute any agreements, including
Leases, on behalf of Purchaser, or to otherwise bind Purchaser. Purchaser
approves the engagement by Seller, on its own behalf, of Petrovich and
Associates as the leasing agent for the Subject Property, however, Purchaser
shall have no liability for the commissions payable to such broker.
1.08 Title.
A) At Closing, Seller shall deliver through escrow the Deed, conveying to
the Purchaser (or its nominee) title to the Real Property in fee simple, free of
all mortgages, deeds of trust, mechanic's liens and other monetary liens and
encumbrances disclosed in the Title Commitment or by the Title Company prior to
Closing, or otherwise known by Seller or imposed upon the Real Property by
Seller (referred to herein as "Monetary Liens"), but subject to:
(i) current real estate taxes and assessments, which are a lien not
yet delinquent;
(ii) the lien of supplemental taxes assessed pursuant to Chapter 3.5
commencing with Section 75 of the California Revenue and Taxation Code
("Code"), but only to the extent that such supplemental taxes are
attributable to the transaction contemplated by this Agreement. Seller
shall be responsible for, and hereby indemnifies Purchaser and the Subject
Property against, any supplemental taxes assessed pursuant to the Code, to
the extent that such taxes relate to events (including,
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without limitation, any changes in ownership and/or new construction)
occurring prior to the Closing; and
(iii) recorded covenants, conditions, restrictions and easements,
matters that an accurate survey would disclose (subject to the Purchaser's
right of approval pursuant to Section 2.01.A)), and rights of parties in
possession, pursuant to the Leases, as approved by Purchaser pursuant to
Section 2.01.C).
Notwithstanding the retention by Seller of the liability for the taxes described
in subpart (ii) above, Seller shall have the right to collect any such amount
from the Tenants, to the extent allowed under the applicable Leases.
B) Except for Monetary Liens, and Seller's obligations with respect to
supplemental taxes as aforementioned in paragraph A) above, the Seller shall
have no obligation to remove any title exceptions of record which exist on the
Effective Date.
C) Unless and until this Agreement is terminated, Seller shall not cause or
permit any liens, covenants, conditions, restrictions, easements or any other
matter to encumber the title to the Real Property by record or otherwise, except
for real estate taxes and assessments which are not delinquent.
1.09 Title Commitment - Survey.
A) Seller shall, at its expense, order a title commitment (the "Title
Commitment") with respect to the Property, including all appurtenant easements,
with complete and legible copies of all exception instruments referred to
therein (referred to collectively as "Title Documents") within one (1) business
day after the Effective Date and cause same to be delivered to Purchaser.
B) Purchaser may, within one (1) business days after the Effective Date,
instruct the Escrow Agent to order a Uniform Commercial Code Financing Statement
Search covering the Property, the Seller's name and any other possible debtors.
C) Prior to execution of this Agreement, Seller has delivered to Purchaser
a copy of that certain ALTA survey of the Real Property dated May 9, 1996,
prepared by Kier & Wright (the "Survey"). Prior to the Contingency Date, Seller
shall, at its cost and expense, cause the Survey to be updated (or a new Survey
to be prepared) and delivered to Purchaser and the title company. The updated or
new Survey shall:
1) Set forth an accurate description of the Real Property and locate
all of the then Improvements;
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2) Locate all the exceptions disclosed in the Title Commitment
(setting forth the book and page or document number of the recorded
instruments creating the same), alleys, streets and roads;
3) Show any encroachments upon or by the Real Property;
4) Contain a surveyor's certification in favor of Purchaser and the
title company and which shall allow the title company to delete or amend
any survey exception to be contained in Purchaser's title policy;
5) Show all dedicated public streets providing access to the Real
Property and the municipal address of the Improvements;
6) Be prepared in conformity with minimum standard detail requirements
for land title surveys of the American Land Title Association and the
American Congress on Surveying and Mapping; and
7) Address ALTA/ACSM Table A optional items numbers 1, 2, 3, 6, 7(a),
7(b)(1), 8, 9 and 11.
1.10 Violations.
In the event that prior to Closing, Seller becomes aware of any toxic,
hazardous waste materials or contaminants on the Property or any other matter
affecting the Property which violates any applicable Law, Seller shall within
forty-eight (48) hours, but in no event, later than Closing, give Purchaser
written notice of such matter.
1.11 Eminent Domain.
In the event that prior to Closing proceedings in eminent domain are
contemplated, threatened or instituted by any governmental agency, Seller shall
give Purchaser written notice of same within forty-eight (48) hours after Seller
becomes aware of same, but no later than the time of Closing.
1.12 Right of Entry.
Until Closing or termination of this Agreement, whichever occurs first,
Purchaser and its agents and designees shall have the right to enter upon the
Subject Property at any time and from time to time to perform any and all test
and studies Purchaser deems appropriate, including, but not limited to, soils
tests. Purchaser hereby agrees to indemnify, defend, and hold Seller completely
harmless against any loss, damage, liability, or expense, including reasonable
attorneys' fees, arising out of the acts or omissions,
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or intentionally wrongful acts of the Purchaser or its agents or independent
contractors under this Section, or in enforcing this indemnity. If Purchaser
does not acquire the Subject Property, Purchaser agrees to promptly repair any
damage it causes to the Subject Property.
1.13 Delivery of Documents.
Seller has delivered to Purchaser copies of the following documents and
materials pertaining to the Real Property:
A) Leases. All Leases (including all amendments thereto) and
guarantees of Leases.
B) Building Plans. A complete set of building plans.
C) Rent Roll. A schedule ("Rent Roll") prepared by Seller as of the
first day of the month in which this Agreement is executed, which shall
reflect:
1) the name of each of the Tenants under the Leases;
2) the amount of any prepaid rent received and held by Seller
from each Tenant, the amount of rent and reimbursable expenses payable
by each Tenant, and delinquencies, if any; and
3) the approximate total of square footage occupied by each
Tenant.
D) Tenant Deposits. A list of Tenant deposits held by Seller.
E) Sales Reports. If in Seller's possession, sales reports of tenant
for the period beginning on the date the first tenant opened for business
until November 30, 1997.
F) Tax Statements. The most recent real property tax bills for the
Property.
G) Schedule of Expenses. A schedule reflecting any and all expenses
for the ownership, operation, maintenance and repair of the Subject
Property by Seller for calendar year 1997, which schedule shall include,
without limitation, the following:
1) annual insurance premiums for all forms of coverage;
2) real property taxes and assessments;
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3) utility charges, management fees, maintenance and repair
costs; and
4) any and all other costs and expenses incurred in connection
with the ownership, operation, maintenance and repair of the Property.
H) Personal Property List. A detailed list of all Personal Property,
if any, to be assigned to Purchaser at Closing, together with a copy of all
warranties and guaranties applicable thereto.
I) Soils and Engineering Reports. All environmental reports, soils
reports and engineering reports pertaining to the Property or any portion
thereof in the possession of the Seller or its agents.
J) Maps. Any and all tentative, parcel and/or final maps, certificates
of occupancy or any other governmental approved or processed documents
relative to the subdivision or occupancy of the Property ("Maps").
K) Certificates of Occupancy. Copies of all Certificates of Occupancy
issued as of the Effective Date.
L) Warranties. All warranties within Seller's possession or control
which will survive Closing.
1.14 Future Leases.
After the date of this Agreement and until the earlier of the Closing Date
or the termination of this Agreement, Seller will not: (i) enter into any new
leases or options to lease with respect to the Real Property; (ii) negotiate
extensions or modifications of any Leases with respect to the Real Property;
(iii) accept a voluntary cancellation of any Lease; or (iv) consent to any
assignment of a Lease by a tenant, except as otherwise specifically provided
herein.
1.15 Operation of Real Property Prior to Closing.
Prior to the Closing, Seller shall maintain and operate the Real Property
as follows:
A) Seller, at its sole cost and expense, shall provide or cause to be
provided all such services with respect to the Leases that are required to
be provided by the Landlord under the Leases.
B) Seller will not make or permit to be made any material alteration
to the Real Property or remove any Personal Property therefrom (unless the
Personal Property so removed is
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simultaneously replaced with new Personal Property of similar quality and
utility).
C) Seller, at its sole cost and expense, will maintain and keep the
Subject Property in the same condition and repair as exists on the date of
this Agreement, reasonable wear and tear excepted.
D) Seller shall not commit any act or omission which would cause any
of the representations or warranties of Seller contained herein, to become
inaccurate or any of the covenants of Seller herein to be breached.
E) Seller shall not amend, terminate, grant concessions, or enter into
any contract that would be an obligation affecting the Real Property or be
binding on Purchaser after Closing.
ARTICLE II
CONDITIONS OF SALE
2.01 Initial Conditions.
Purchaser's obligation to purchase the Subject Property is subject to all
of the following conditions being either approved or waived by the Purchaser;
any approvals, disapprovals or waivers being made at Purchaser's option, in its
sole, absolute and unrestricted discretion:
A) Title Conditions. Purchaser's obligation to purchase the Property
is subject to Purchaser approving (or waiving) all title exceptions (other
than printed general exceptions) in the Title Commitment obtained by
Purchaser (referred to as "Title Matters") prior to Closing (the "Title
Period"). If Purchaser does not notify Seller of its approval or waiver of
the Title Matters within the Title Period, this condition shall be deemed
failed. Notwithstanding anything herein to the contrary, Seller shall cure
all Monetary Liens prior to Closing.
B) Physical Condition. Purchaser's obligation to purchase the Property
is conditioned upon Purchaser approving (or waiving) the physical condition
of the Property (including, but not limited to environmental matters). If
Purchaser does not notify Seller of its approval or waiver of the physical
condition, or notifies Seller of its disapproval prior to Closing, this
condition shall be deemed failed.
C) Lease Approvals. Purchaser's obligation to purchase the Property is
conditioned upon Purchaser approving all Tenant Leases, including, but not
limited to all terms and conditions thereof. If Purchaser does not notify
Seller of its
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approval or waiver of the Leases or notifies Seller of disapproval prior to
Closing, this condition shall be deemed failed.
D) Miscellaneous. Purchaser's obligation to purchase the Property is
conditioned upon the Purchaser being satisfied with respect to all other
matters pertaining to the Property, including, but not limited to physical
condition, all documents delivered by Seller to Purchaser pertaining to the
Property, zoning and economics of owning and operating the Property (the
"Miscellaneous Conditions"). If Purchaser does not notify Seller of its
approval or waiver of the Miscellaneous Condition or notifies Seller of its
disapproval prior to Closing, such condition shall be deemed failed.
2.02 Purchaser's Closing Conditions.
Purchaser's obligation to purchase the Subject Property is subject to the
following conditions being satisfied at the Closing, each of which is for the
benefit of Purchaser and any or all of which may be waived by Purchaser:
A) The Seller is not in breach of any covenants, warranties, or
representations under this Agreement.
B) At Closing, the Title Company is ready, willing, and able to issue
The Title Insurance Policy, in the amount of Twenty-three Million Nine
Hundred Seventy-five ($23,975,000) Dollars, insuring that fee title to the
Property is vested in the Purchaser (or its nominee) in such condition as
provided in Section 1.08(A); with the printed general exceptions of
Schedule B being deleted and containing the following endorsements:
(i) an endorsement regarding creditors rights in a form
acceptable to Purchaser;
(ii) an endorsement regarding mechanics liens in a form
acceptable to Purchaser;
(iii) CLTA Form 100 (modified for an owner) or its equivalent for
the State in which the Property is located;
(iv) CLTA Form 116 and 116.1 (referred to the ALTA Survey of the
Property) or its equivalent for the State in which the Property is
located;
(v) CLTA Form 103.7 (referring to access to public street) or its
equivalent for the State in which the Property is located; and
(vi) CLTA Form 116.4 (referred to contiguous parcels) or its
equivalent for the State in which the Property is located.
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(vii) CLTA Form 101.4 (regarding mechanic's liens for work in
progress).
C) Seller has delivered to Purchaser prior to the Closing, an original
Tenant's Estoppel Certificate in the form attached hereto as Exhibit D; with all
exhibits referred to therein duly attached; with no changes, additions or
modifications thereto, except for the insertion of missing information; and
dated no earlier than thirty (30) days prior to the Closing for each Lease, duly
executed by the Tenants under the Leases. Notwithstanding the foregoing, with
respect to any tenant leasing 10,000 square feet of space or less, if after
commercially reasonable efforts Seller is unable to obtain an Estoppel
Certificate from such a tenant, Seller shall have the right (without obligation)
to execute a Seller's Certificate, in the form attached hereto as Exhibit D-1,
and substitute the Seller Certificate in lieu of the required tenant Estoppel
Certificate. Further, if Seller or Purchaser subsequently obtains a
Tenant-executed Estoppel Certificate, then provided no material deviations or
discrepancies are disclosed thereon, it shall be substituted for the Seller
Certificate, which shall be returned to Seller. A breach of the Seller
Certificate shall entitle Purchaser to avail itself to the rights and remedies
provided in this Agreement.
D) By Closing, Purchaser shall be deemed to have waived any of the
conditions of Sections 2.01 and 2.02 or other conditions in this Agreement, not
otherwise satisfied.
2.03 No Waiver of Seller's Representations and Warranties.
Purchaser's waiver or approval of any conditions under Section 2.01 or 2.02
shall not alter or diminish Seller's express representations and warranties
herein, and Purchaser is nevertheless relying on Seller's representations and
warranties contained herein, unless such representation or warranty is
specifically waived in a written instrument executed by Purchaser.
2.04 Consideration - Satisfaction of Conditions.
In consideration of giving Purchaser the option to (a) approve or waive, or
(b) disapprove the conditions set forth in Section 2.01 and Section 2.02,
Purchaser shall pay to Seller the sum of One Hundred Dollars ($100.00). Such sum
shall be paid upon Closing and credited against the Purchase Price if this
transaction closes. If this transaction does not close, such sum shall be paid
to Seller from the Escrow Deposit upon termination of the escrow.
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ARTICLE III
ESCROW - CLOSING MATTERS
3.01 Escrow Holder.
This Agreement constitutes joint escrow instructions to the Escrow Agent,
instructing it to consummate this sale upon the terms and conditions set forth
in this Agreement.
3.02 Opening of Escrow.
As soon as practicable after the Effective Date, Seller and Purchaser shall
open an escrow with Escrow Agent and shall deposit with Escrow Agent a fully
executed counterpart of this Agreement for use as escrow instructions.
3.03 Purchaser's Funds - Interest-Bearing.
All Escrow Deposits shall be held in a federally insured interest-bearing
account, with all accrued interest credited to the account of the Purchaser
until Closing or termination of this Agreement, as the case may be. On any
occasion when Escrow Agent is required to pay funds from the Escrow Deposit to
either the Seller or Purchaser, it shall transmit such funds by check by United
States overnight express mail or, if so instructed by the party entitled to the
funds, by federal wire transfer.
3.04 Purchaser's Deliveries to Escrow.
Purchaser shall, on or before the Closing, deliver to Escrow Agent:
A) the balance of the Purchase Price pursuant to Section
1.03(B)(2) by wire transfer of U.S. Federal Funds, to be received in
Escrow Agent's trust account prior to 10:00 a.m., P.S.T. on the
Closing Date.
B) a signed list of title exceptions which Purchaser approves
pursuant to Section 2.01(A).
C) a signed statement from Purchaser that all conditions
precedent to Closing, as provided in Article II herein, either have
been satisfied or waived by Purchaser.
D) counterpart original of Assignment and Assumption of Leases,
duly signed and acknowledged by Purchaser in a form attached hereto as
Exhibit E.
E) Title Documents. Such affidavits of Purchaser, certificates of
value or other documents as may be reasonably
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required by Title Company in order to record the Seller's Closing
Documents and issue the Title Policy required by this Agreement.
F) Assumption of Declarant's Rights in the Declaration. An
Assumption of Declarant's Rights in the Declaration, in the form
attached hereto as Exhibit Q (the "Assignment of Declarant's
Interest").
3.05 Seller's Deliveries to Escrow.
Seller shall, on or before the Closing, deliver to Escrow Agent the
following documents (collectively, the "Seller's Closing Documents"):
A) the Deed, in the form attached hereto as Exhibit I, executed
and duly acknowledged by Seller and acceptable for recording.
B) the Bill of Sale and Assignment, duly executed by the Seller
in the form attached hereto as Exhibit F conveying all of Seller's
right, title and interest in and to any and all Personal Property,
Intangible Personal Property and any assignable warranties or permits
(however, any assignment of warranties shall nonetheless reserve for
Seller's benefit the right to enforce such warranties, in conjunction
with the limited construction warranty provided herein by Seller).
C) the original Leases (including all amendments), permits,
warranties and Building Plans.
D) a counterpart original of Assignment and Assumption of Leases,
duly signed and acknowledged by Seller in a form attached hereto as
Exhibit E.
E) such evidence or documents as may be reasonably required by
the title company evidencing the status and capacity of Seller and the
authority of the person or persons who are executing the various
documents on behalf of the Seller in connection with the sale of the
Property.
F) a copy of the Certification of Non-Foreign Status in the form
attached hereto as Exhibit H, executed by Seller.
G) a letter to all Tenants in the form attached hereto as Exhibit
G (the "Tenant Notification Letter") duly executed by Seller (which
shall be dated by the Escrow Agent as of the date of Closing).
H) original Certificates of Occupancy for all buildings which are
part of the Real Property.
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I) a proposed settlement statement (for Purchaser's review and
approval) which allocates rental income and any expenses to be
prorated.
J) a written statement from Seller disclosing the amount of
security deposits, the date for which rent has been paid by each
Tenant, and any rent or other receivables due from each Tenant.
3.06 Closing.
A) Closing under this Agreement shall take place on or before December 31,
1997 provided all of the conditions of Section 2.01 have been satisfied or
waived, subject to the Purchaser's closing conditions of Section 2.02.
B) Upon Closing, the Escrow Agent shall:
1) cause the Deed and Assumption of Leases to be recorded in the
County where the Property is located.
2) deliver to Purchaser the following documents:
(a) Title Insurance Policy.
(b) Assignment and Assumption of Leases.
(c) Bill of Sale.
(d) Original Leases.
(e) Assignment of Intangible Personal Property.
(f) Copy of signed Tenant Notification Letter.
(g) Certificates of Occupancy.
(h) Assignment of Declarant's Interest in the Declaration.
3) deliver to Seller originals of all documents of Closing, including:
(a) Assignment and Assumption of Leases.
(b) Non-Foreign Affidavit.
4) after all necessary prorations, adjustments, deductions, and
credits, as provided herein, disburse to Seller the balance of the Purchase
Price.
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3.07 Prorations.
A) Real Estate Taxes and Assessments.
1) All real and personal property taxes and current installments of special
assessments for the tax year in which the Closing occurs, levied or assessed
against the Property shall be prorated between Purchaser and Seller in a manner
to be mutually approved at Closing, based upon the latest tax bills, on a daily
basis as of the Closing Date. Seller shall remain liable for any supplemental
taxes, as contemplated pursuant to Section 1.08.A).
2) If, on the Closing Date, the Property or any part thereof shall be or
shall have been affected by an assessment or assessments which are or may be
payable in annual or more frequent installments of which the first installment
is then a charge or lien, or has been paid, then for the purpose of this
Agreement, all unpaid installments of any such assessment, which are to become
due and payable after Closing, shall be the obligation of the Purchaser, subject
to pro-rations under paragraph 1) above for the tax year in which the date of
Closing occurs.
B) Payments Under Leases.
1) Definitions. The following definitions shall apply under this paragraph
B).
(a) "Rentals" shall mean fixed monthly or other periodic rent
payments, percentage rent payments, rent increases, operating cost pass
throughs (including, but not limited to Triple Net Charges and all other
sums and charges payable by a tenant under a lease.
(b) "Delinquents Rentals" are rentals due on or before the Closing
Date, but not yet paid by Tenant.
(c) "Prepaid Rentals" shall mean Rental payments paid by Tenant on or
before the Closing Date to the extent attributable to periods after the
Closing Date.
(d) "Retroactive Rentals" shall mean operating cost pass throughs,
percentage rent and other charges accrued but not yet payable by the Tenant
to the extent attributable to periods prior to the Closing Date.
(e) "Security Deposits" shall mean all security deposits held by
Landlord under the Lease.
2) Pro-ration of Rentals and Tenant's Expenses.
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(a) Seller shall be entitled to all Rentals which accrue up to, but not
including the Closing Date (the "Seller's Share"). Purchaser shall be entitled
to all Rentals which accrue as of the date of Closing and thereafter (the
"Purchaser's Share").
(b) Purchaser shall receive a credit, at Closing, for all Prepaid Rentals
In calculating the prorations under sub-paragraphs (a) and (b) above, the
following shall apply:
(i) If a tenant has paid Seller Rentals for the cost of insurance
which insurance covers a period which includes the period beginning on the
date of Closing and thereafter, the Purchaser shall be entitled to a credit
for the pro rata portion of such Rentals computed on a daily basis for the
period beginning on the date of Closing and thereafter.
(ii) If a tenant has paid Seller Rentals for estimated common area
expenses during the year in which the Closing occurs and such tenant's
actual share of such expenses for such year up to and including the date
before the Closing is less than the Rental payments for estimated common
area expenses, then the Purchaser shall be entitled to a credit in the
amount of the difference. However, if such tenant's actual share of such
expenses for such year up to and including the day before the Closing is
more than the Rental payments for estimated common area expenses, the
Purchaser shall pay the Seller the amount of such difference, as a
Retroactive Rental under subparagraph (d) below.
(iii) If a tenant has paid Seller Rentals for real estate taxes,
assessments and similar charges (collectively the "Taxes"), during the year
in which the Closing occurs which Taxes cover a period which includes the
period beginning on the date of Closing and thereafter, the Purchaser shall
be entitled to a credit for a pro-rata portion of such Rentals computed on
a daily basis for the period beginning on the date of Closing and
thereafter.
(c) Seller shall not receive a credit, at Closing, for Seller's Share of
Delinquent Rentals. However, Purchaser shall pay to Seller, immediately,
Seller's Share of Delinquent Rentals, if and when collected by the Purchaser.
Purchaser shall have no liability or obligation to Seller with respect to
Seller's Share of Delinquent Rentals, unless same is collected by the Purchaser.
Seller is entitled to collect directly form the delinquent tenant, the Seller's
Share of Delinquent Rentals. Purchaser shall not compromise any of Seller's
rights to collect Seller's Share of Delinquent Rentals. Both Seller and
Purchaser shall cooperate in the collection of Delinquent Rentals.
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(d) Seller shall not receive a credit, at Closing, for Seller's Share of
Retroactive Rentals. However, Purchaser shall pay to Seller, immediately,
Seller's share of Retroactive Rentals, if and when collected by the Purchaser.
Purchaser shall have no liability or obligation to Seller with respect to
Seller's Share of Retroactive Rentals, unless same is collected by the
Purchaser. Seller is entitled to collect directly from the Tenant the Seller's
Share of Retroactive Rentals. Purchaser shall not compromise any of Seller's
rights to collect Seller's share of Retroactive Rentals. Both Seller and
Purchaser shall cooperate in the collection of Retroactive Rentals.
(e) Purchaser shall receive a credit, at Closing, for all Security
Deposits.
(f) Notwithstanding anything to the contrary in this Section 3.07.B)2), all
prorations of Triple Net Charges required as of the Closing Date shall be
reconciled by Seller and Purchaser outside of escrow within forty-five (45) days
after the Closing Date.
C) Utility Expenses. All utility charges for electricity, gas, sewer and
water, not directly metered to a tenant shall be pro-rated as of the Closing on
an accrual basis. Seller shall pay all such expenses which accrue up to and
including the day prior to the Closing and Purchaser shall pay all such expenses
on the day of Closing and thereafter. To the extent possible, Seller and
Purchaser shall obtain billings and meter readings for the Closing to aid in
such pro-rations.
3.08 Seller's Closing Costs.
Escrow Agent shall charge the Seller out of the Purchase Price: (a) the
cost of transfer taxes; (b) any amount due Purchaser resulting from prorations;
(c) release fees on any encumbrances; (d) one-half (1/2) of any escrow fee or
escrow termination charge; and (e) title insurance premiums for a CLTA title
insurance policy.
3.09 Purchaser's Closing Costs.
Purchaser shall pay for the following: (a) any amount due Seller resulting
from prorations; (b) one-half (1/2) of any escrow fee or escrow termination
charge; (c) deed recording fees; and (d) the amount by which the cost of an ALTA
extended coverage title insurance policy exceeds the cost of a CLTA title
insurance policy plus endorsements.
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3.10 Termination of Escrow.
In the event this Agreement is terminated, for any reason, Escrow Agent
shall deliver all documents and materials deposited by Seller, to the Seller,
and deliver to Purchaser all documents, materials, and funds deposited by
Purchaser; provided, however, Seller shall be paid from the Escrow Deposit, any
amount due under Section 1.12 and, in the event of Purchaser's default, Section
5.01.B) herein. The return of documents, materials, and funds, as
aforementioned, shall not affect the right of either party to seek such legal or
equitable remedies as such party may have with respect to the enforcement of
this Agreement. Upon failure of any condition under Section 2.01 or Section 2.02
herein, this Agreement shall be deemed terminated.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
4.01 Seller's Representations and Warranties.
A) In consideration of Purchaser's entering into this Agreement and as an
inducement to Purchaser to purchase the Property, Seller makes the following
representations and warranties, each of which is material and is being relied
upon by Purchaser (and the continued truth and accuracy of which shall
constitute a condition precedent to Purchaser's obligations hereunder):
1) Authority. Seller is a duly formed Minnesota corporation, formerly
known as Opus Southwest Corporation; Seller is duly qualified to transact
business in the State of California; Seller has the requisite power and
authority to enter into this Agreement and to execute and deliver Seller's
Closing Documents; this Agreement and Seller's Closing Documents shall have
been duly authorized by all necessary corporate action on the part of
Seller and shall have been duly executed and delivered as of the Closing
Date; the execution, delivery and performance by Seller of this Agreement
and Seller's Closing Documents will not conflict with or result in a
violation of Seller's articles of incorporation or by-laws or any judgment,
order, or decree of any court or arbiter to which Seller is a party; and
this Agreement and Seller's Closing Documents shall be valid and binding
obligations of Seller and enforceable in accordance with their terms.
2) Title to Subject Property. Based solely on Seller's existing policy
of title insurance for the Real Property, to the best of Seller's knowledge
Seller has good and marketable title to the Real Property.
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3) FIRPTA. Seller is not a "foreign person," "foreign partnership,"
"foreign trust" or "foreign estate" as those terms are defined in Section
1445 of the Internal Revenue Code.
4) Proceedings. To Seller's knowledge, there is no action, litigation,
investigation, condemnation or proceeding of any kind pending or to the
knowledge of Seller threatened against any portion of the Subject Property.
5) Contracts and Warranties. Except as provided herein, there are no
contracts for any service or maintenance, equipment leases or other
contracts for the operation of the Subject Property, entered into by Seller
("Contracts") affecting the Subject Property after the Closing, except the
Leases. There are no warranties affecting the Subject Property other than
Seller's warranty contained in Section 1.04(F) hereof, the Warranties
contained in the Leases and the Contracts, and third party warranties
received by Seller relating to the Subject Property. To Seller's knowledge,
there are no agreements with any third parties in connection with the
construction of the Subject Property, or the related offsite improvements,
which shall be binding upon Purchaser after Closing, or which shall
otherwise encumber the Subject Property.
6) Governmental Approvals. To Seller's knowledge, all Permits,
including, without limitation, all licenses, permits, approvals and
consents required in connection with the commencement of construction of
the Improvements to be constructed under the Leases and the construction
thereon performed to date, have been duly issued by the appropriate
governmental authorities.
7) Notices of Violation of Laws. To Seller's knowledge, Seller has not
received any written notice of any violation of any law, ordinance or
regulation at the Subject Property and Seller has not reason to believe
that any authority has issued or contemplates issuing any such written
notice.
8) Condemnation Proceedings. To Seller's knowledge, Seller has not
received any written notice of any condemnation or eminent domain
proceedings affecting the Real Subject Property, nor has Seller engaged in
any negotiations for the purchase of any of the Real Property in lieu of
condemnation, and no condemnation or eminent domain proceedings or
negotiations have been commenced or threatened in connection with the
Subject Property.
9) Violations of Encumbrances. To Seller's knowledge, Seller is not in
default of any of the terms or conditions of the documents listed on the
Title Commitment.
10) Compliance with Building Code. Seller has no knowledge of any
violation at the Subject Property of any
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applicable building codes as interpreted and enforced, as of December 28,
1997, by the governmental bodies having jurisdiction thereof.
11) Assessments. Except for increases in taxes due to construction of
the Improvements or items shown on the Title Commitment, Seller has not
received written notice and has no knowledge of any pending improvements,
liens, special assessments or special ad valorem taxes or evaluations to be
made against the Real Property by any governmental authority which are not
the obligations of the tenants, to the extent of such tenants' pro-rata
share thereof, under the Leases.
12) Environmental. Except as set forth in that Phase I Environmental
Site Assessment dated April, 1995, prepared by Wallace-Kuhl & Associates,
or any other written third party report received by Purchaser, to Seller's
knowledge, there is no violation of Environmental Laws related to the Real
Property or the presence or release of Hazardous Materials on or from the
Real Property. Seller has not manufactured, introduced, released or
discharged from or onto the Real Property any Hazardous Materials or any
toxic wastes, substances or materials (including, without limitation,
asbestos) in violation of any Environmental Laws, and Seller has not used
the Property or any part thereof for the generation, treatment, storage,
handling or disposal of any Hazardous Materials in violation of any
Environmental Laws. The term "Environmental Laws" includes without
limitation the Resource Conservation and Recovery Act and the Comprehensive
Environmental Response Compensation and Liability Act and other federal
laws governing the environment as in effect on the Date of this Agreement
together with their implementing regulations and guidelines as of the Date
of this Agreement, and all state, regional, county, municipal and other
local laws, regulations and ordinances that are equivalent or similar to
the federal laws recited above or that purport to regulate Hazardous
Materials. The term "Hazardous Materials" includes petroleum, including
crude oil or any fraction thereof, natural gas, natural gas-liquids,
liquidated natural gas, or synthetic gas usable for fuel (or mixtures of
natural gas or such synthetic gas), and any substance, material waste,
pollutant or contaminant listed or defined as hazardous or toxins under any
Environmental Law.
13) Utilities. Seller has received no written notice of actual or
threatened reduction or curtailment of any utility service now supplied to
the Real Property. The utilities reasonably required to satisfy the
obligations of "landlord" in each of the Leases are available and connected
to the Real Property.
14) Leases. To Seller's actual knowledge, no tenants have asserted,
nor are there any, defenses or offsets to
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rent currently accruing. Seller has not received any notice of default or
breach on the part of the landlord under any Lease.
B) Seller's Knowledge. For purposes of the foregoing representations
and warranties, Seller's knowledge shall be limited to the actual knowledge
without inquiry or independent investigation of any one of the following
persons: Thomas W. Roberts, Charles J. Vogel, John T. Greer, Robert J.
O'Gorman and Anne Loff, each of whom has been employed continuously with
the Seller (or an affiliate thereof) since Seller first acquired the Real
Property.
C) Change in Representations. The representations of Seller set forth
above in paragraph (A) are made as of the date of execution of this
Agreement and are intended to be true and correct as of the Closing. If,
subsequent to the date of this Agreement and prior to the date of Closing,
either Purchaser or Seller determines that, as a result of facts or
subsequent events discovered or arising after execution of this Agreement,
any of such representations are no longer true and correct as of such
subsequent date, Seller shall not be in breach of this Agreement, provided
that the determining party shall promptly and at least one (1) business day
prior to Closing deliver notice to the other party in writing ("Change
Notice") of such facts or subsequent events and the effect on the
applicable representation. Seller shall have the option, but not the
obligation, to take steps to cure or correct the situation so that the
affected representation will be true and correct as of the Closing, and, if
Seller exercises such option, Seller shall identify the corrective action
in the Change Notice. If Seller elects to undertake corrective action such
that the affected representation will be true and correct as of the
Closing, the parties shall proceed with performance under this Agreement
and the Closing, provided Seller completes such corrective action prior to
the Closing. If Seller does not elect in the Change Notice to undertake
such corrective action, then, within one (1) day after Purchaser's receipt
of the Change Notice, but in no event later than the Closing Date,
Purchaser shall elect, by delivering written notice to the Seller either
to: (1) proceed with performance of this Agreement and the Closing; or (2)
terminate this Agreement and the Escrow for non-satisfaction of a
condition. In the event of termination pursuant to this Section, the Escrow
Deposit shall be returned to Purchaser and neither party shall have any
further obligation hereunder. For purposes of the foregoing, Purchaser
shall not be deemed to have discovered a fact, unless Bob Siordia, Lois
Miller or Joe Satz have knowledge of such fact.
D) Limitation of Seller's Warranties. Seller does not, by the
execution and delivery of this Agreement and Seller shall not, by the
execution and delivery of any document or instrument executed and delivered
in connection with the Closing, make any warranty, express or implied, of
any kind or any nature whatsoever, with respect to the Subject Property,
and all such warranties are
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hereby disclaimed, except as set forth in this Agreement, the Grant Deed,
the Seller's Certificates, the Seller's Phase II Certificates, and the
Seller's Closing Documents. Subject to the foregoing, Seller makes, and
shall make, no express or implied warranty of suitability or fitness of the
Subject Property for any purpose, or as to the merchantability, title,
value, quality, condition or salability of any of the Subject Property. The
sale of the Subject Property by Seller to Purchaser shall be "AS IS" and
"WHERE IS" and, except as otherwise provided in this Agreement, the Grant
Deed, the Seller's Certificates, the Seller's Phase II Certificates, and
the Seller's Closing documents, Purchaser is relying solely on the Title
Policy as to title matters and the results of its tests and inspections as
to the physical condition of the Real Property. Seller will indemnify
Purchaser, its successors and assigns, against, and will hold Purchaser,
its successors and assigns, harmless from, any expenses or damages,
including reasonable attorneys' fees, that Purchaser incurs because of the
breach of any of the above representations and warranties, as such
representations and warranties may be changed or amended pursuant to
paragraph (C) above, whether discovered before or after Closing. Purchaser
acknowledges that the Project is within the City of Roseville North Central
Community Facilities District No. 1 (the "CFD") and agrees that the
property will be acquired subject to the CFD and the lien of special taxes
that may be levied by the CFD now or in the future. Purchaser acknowledges
receipt of a Notice of Special Tax in the form required by the California
Government Code Section 53341.5 at least three (3) days prior to the date
of this Agreement.
PURCHASER HEREBY ACKNOWLEDGES THAT IT HAS READ AND IS FAMILIAR WITH THE
PROVISIONS OF CALIFORNIA CIVIL CODE SECTION 1542 ("SECTION 1542"), WHICH IS SET
FORTH BELOW:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE WHICH IS KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR."
BY INITIALING BELOW, PURCHASER HEREBY WAIVES THE PROVISIONS OF SECTION 1542
SOLELY IN CONNECTION WITH THE MATTERS WHICH ARE THE SUBJECT OF THE WAIVERS AND
RELEASES SET FORTH IN THIS PARAGRAPH (D).
PURCHASER'S INITIALS: /s/ JM SELLER'S INITIALS: /s/ TWR
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Seller makes no representation or warranty concerning the accuracy or
completeness of any existing reports relating to the Subject Property and
delivered to Purchaser (collectively the "Existing Reports"). Purchaser hereby
releases Seller from any liability whatsoever with respect to the Existing
Reports, including, without limitation, the matters set forth in the
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Existing Reports and the accuracy and/or completeness of the Existing Reports.
Purchaser acknowledges that it will be purchasing the Property with all faults
disclosed in the Existing Reports.
4.02 Representations and Warranties by Purchaser. Purchaser represents and
warrants to Seller that Purchaser is duly incorporated and is in good standing
under the laws of the State of Delaware, and is qualified to do business and is
in good standing in the State of California; Purchaser has the requisite
corporate power and authority to enter into this Agreement and to execute and
deliver Purchaser's Closing Documents; such documents shall have been duly
authorized by all necessary corporate action on the part of Purchaser and shall
have been duly executed and delivered as of the Closing Date; the execution,
delivery and performance by Purchaser of such documents shall not conflict with
or result in violation of Purchaser's articles of incorporation or bylaws or any
judgment, order or decree of any court or arbiter to which Purchaser is a party;
and such documents shall be valid and binding obligations of Purchaser and
enforceable in accordance with their terms. Purchaser will indemnify Seller, its
successors and assigns, against, and will hold Seller, its successors and
assigns harmless from, any expenses or damages, including reasonable attorney's
fees, that Seller incurs because of the breach of any of the above
representations and warranties, whether such breach is discovered before or
after Closing.
ARTICLE V
REMEDIES
5.01 Failure to Close Escrow Due to Default.
A) Default by Seller. IF THIS SALE IS NOT COMPLETED BECAUSE OF SELLER'S
DEFAULT, PURCHASER'S SOLE REMEDY SHALL BE THE RETURN OF THE ESCROW DEPOSIT
TOGETHER WITH ANY INTEREST ACCRUED THEREON. THIS AGREEMENT SHALL THEN BECOME
NULL AND VOID AND OF NO EFFECT AND THE PARTIES SHALL HAVE NO FURTHER LIABILITY
OR OBLIGATIONS HEREUNDER EXCEPT FOR PURCHASER'S OBLIGATIONS TO INDEMNIFY SELLER
AND RESTORE THE PROPERTY AS MORE FULLY SET FORTH IN SECTION 1.12.
NOTWITHSTANDING ANYTHING CONTAINED HEREIN TO THE CONTRARY, IF SELLER'S DEFAULT
IS ITS REFUSAL TO DELIVER THE SELLER'S CLOSING DOCUMENTS, THEN PURCHASER WILL BE
ENTITLED TO SUE FOR SPECIFIC PERFORMANCE. NOTWITHSTANDING THE FOREGOING, IN THE
EVENT SELLER REFUSES TO DELIVER SELLER'S CLOSING DOCUMENTS TO CONSUMMATE THE
SALE, THEN SELLER SHALL BE LIABLE TO PURCHASER FOR ITS REASONABLE AND NECESSARY
DUE DILIGENCE EXPENSES, WHICH THE PARTIES AGREE SHALL BE FIXED IN AMOUNT AS
LIQUIDATED DAMAGES AT FIFTY THOUSAND AND 00/100 DOLLARS ($50,000.00).
PURCHASER'S INITIALS: /s/ JM SELLER'S INITIALS: /s/ TWR
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B) Default by Purchaser. IN THE EVENT OF A DEFAULT OF THE PURCHASER TO
CLOSE UNDER THE PROVISIONS OF THIS AGREEMENT, SELLER SHALL RETAIN OUT OF THE
ESCROW DEPOSIT AN AMOUNT EQUAL TO ITS REASONABLE AND NECESSARY OUT-OF-POCKET
EXPENSES INCURRED IN REGARD TO THIS AGREEMENT, WHICH THE PARTIES HEREBY AGREE
SHALL BE FIXED AS LIQUIDATED DAMAGES AT FIFTY THOUSAND AND 00/100 DOLLARS
($50,000.00), AS SELLER'S SOLE RIGHT TO DAMAGES OR ANY OTHER REMEDY, EXCEPT FOR
PURCHASER'S OBLIGATIONS TO INDEMNIFY SELLER PURSUANT TO SECTION 1.12 HEREOF. THE
PARTIES HAVE AGREED THAT SELLER'S ACTUAL DAMAGES, IN THE EVENT OF A DEFAULT BY
PURCHASER, WOULD BE EXTREMELY DIFFICULT OR IMPRACTICAL TO DETERMINE. THEREFORE,
BY PLACING THEIR INITIALS BELOW, THE PARTIES ACKNOWLEDGE THAT THE FIFTY THOUSAND
AND 00/100 DOLLARS ($50,000.00) LIQUIDATED DAMAGES HAS BEEN AGREED UPON, AFTER
NEGOTIATION, AS THE PARTIES' REASONABLE ESTIMATE OF SELLER'S DAMAGES.
PURCHASER'S INITIALS: /s/ JM SELLER'S INITIALS: /s/ TWR
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5.02 Defaults - Other Than Failure to Close Escrow.
A) In the event Seller defaults with respect to any of its covenants,
representations or warranties contained in this Agreement and any instruments
delivered by Seller to Purchaser, other than a default in failing to close
escrow, for which remedy is provided in Section 5.01(A) herein, the Purchaser
shall be entitled to all rights and remedies, at law and equity as provided
under law.
B) In the event Purchaser defaults with respect to any of its covenants,
representations, or warranties contained in this Agreement or any documents
delivered by Purchaser to Seller, other than a default in failing to close
escrow, for which a remedy is provided in Section 5.01(B) the Seller shall be
entitled to all rights and remedies, at law and equity as provided under law.
5.03 Curing Default.
In the event of a default by either party, the other party shall not be
entitled to exercise any remedy for such default unless a notice of default is
sent to the defaulting party and the defaulting party fails to cure such default
within seven (7) days after receipt of such notice of default.
5.04 Indemnity.
Each party agrees to indemnify and hold harmless the other for expenses,
liabilities, costs, claims, damages and attorneys' fees (collectively, a
"Claim") asserted by a third party against the other party, arising (x) from
such indemnifying party's negligent acts or omissions, (y) during the period of
ownership of the Subject Property, by the indemnifying party, or (z) from a
breach of this Agreement (including the representations and
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warranties herein) by the indemnifying party. Notwithstanding the foregoing, no
party shall have any obligation to indemnify the other for any contingent,
speculative or consequential damages, or for defaults under this Agreement for
which a specific remedy is provided (including, without limitation, under
Sections 1.04.F), and 5.01). Further, Seller shall have no obligation or
liability to Purchaser as contemplated under the first sentence of this Section
5.04, for any Claim which is based on the condition of title or the condition of
the Subject Property, including in regard to Hazardous Materials or workmanship
or design of the Improvements, except to the extent of a breach of the
applicable covenants, representations or warranties herein.
ARTICLE VI
MISCELLANEOUS
6.01 Damage to Property. Until Closing, the risk of loss or damage to the
Real Property or any portions thereof by fire, casualty, or any other cause, is
assumed by Seller. If, prior to the Closing, all or any part of the Real
Property is substantially damaged by fire, casualty, the elements or any other
cause, Seller shall immediately give notice to Purchaser of such fact and at
Purchaser's option (to be exercised within thirty (30) days after Seller's
notice), this Agreement shall terminate, in which event neither party will have
any further obligations under this Agreement and the Escrow Deposit shall be
refunded to Purchaser. If Purchaser fails to elect to terminate despite such
damage, or if the Subject Property is damaged but not substantially, Seller
shall promptly commence to repair such damage or destruction and return the
Subject Property to its condition prior to such damage. If such damage shall be
completely repaired prior to Closing then there shall be no reduction in the
Purchase Price and Seller shall retain the proceeds of all insurance related to
such damage. If such damage shall not be completely repaired prior to the
Closing but Seller is diligently proceeding to repair, then Seller shall
complete the repair after the Closing and shall be entitled to receive the
proceeds of all insurance related to such damage after repair is completed;
provided, however, Purchaser shall have the right to delay the Closing until
repair is completed. If Seller shall fail to diligently proceed to repair such
damage, then Purchaser shall have the right to require the Closing to occur and
the Purchase price shall be reduced by the cost of such repair, or at
Purchaser's option, Seller shall assign to Purchaser all right to receive the
proceeds of all insurance related to such damage and the Purchase Price shall
remain the same. For purposes of this Section, the words "substantially damaged"
means damage that would cost Thirty Five Thousand ($35,000.00) Dollars or more
to repair.
6.02 Condemnation. If, prior to the Closing Date, eminent domain
proceedings are commenced against all or any part of the Subject Property,
Seller shall immediately give notice to Purchaser
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of such fact and at Purchaser's option (to be exercised within 30 days after
Seller's notice), this Agreement shall terminate, in which event neither party
will have further obligations under this Agreement and the earnest money,
together with any accrued interest, shall be refunded to Purchaser. If Purchaser
shall fail to give such notice, then there shall be no reduction in the Purchase
Price and Seller shall assign to Purchaser at the Closing Date all of Seller's
right, title and interest in and to any award made or to be made in the
condemnation proceedings. Prior to the Closing Date, Seller shall not designate
counsel, appear in, or otherwise act with respect to the condemnation
proceedings without Purchaser's prior written consent.
6.03 Notices.
All waivers, elections, options, notices, demands, and consents which
either party may be required or may desire to give under this Agreement
("Notice") shall be in writing and shall be effective when telecopied to the fax
numbers indicated below, when personally delivered, or when deposited in an
official United States Postal Service office or branch or official depository
maintained by the United States Postal Service, by certified or registered mail,
postage prepaid, return receipt requested, addressed as follows:
To Purchase at: PRICE ENTERPRISES, INC.
Attn: Joseph R. Satz, Esq.
4649 Morena Blvd.
San Diego, CA 92117
FAX (619) 581-4964
With a copy to: Price Enterprises, Inc.
Attn: Robert Siordia
4649 Morena Blvd.
San Diego, CA 92117
FAX (619) 581-4964
To Purchaser at: OPUS WEST CORPORATION
Attn: Thomas W. Roberts &
Charles J. Vogel
2415 East Camelback, Suite 800
Phoenix, AZ 85016
FAX (602) 468-7045
with a copy to: OPUS PROPERTIES, L.L.C.
Attn: Anne E. Loff
700 Opus Center
9900 Brown Road East
Minnetonka, MN 55343
FAX (612) 936-9808
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<PAGE>
with a copy to: OPUS U.S. CORPORATION
Attn: Daniel T. Haug, Esq.
2415 East Camelback, Suite 800
Phoenix, AZ 85016
FAX (602) 468-7045
with a copy to: GALLAGHER & KENNEDY, P.A.
Attn: James B. Connor
2600 North Central Avenue
Phoenix, AZ 85004-3020
FAX (602) 257-9459
or such other address as either party may hereafter indicate by written notice
to the other.
Notice also may be given by Fed Ex or other overnight courier service, in
which event such Notice shall be deemed given on delivery to such courier
service.
6.04 Certification of Non-Foreign Status.
Before Closing, Seller shall deliver to Escrow Agent a Non-Foreign
Affidavit duly executed in the form attached hereto as Exhibit H.
6.05 Attorneys' Fees.
If either party hereto files any action or brings any proceeding against
the other arising out of this Agreement, or is made a party to any action or
proceeding brought by the Escrow Agent, then as between Purchaser and Seller,
the prevailing party shall be entitled to recover as an element of its costs of
suit, and not as damages, reasonable attorneys' fees to be fixed by the court.
The "prevailing party" shall be the party who is entitled to recover its costs
of suit, whether or not suit proceeds to final judgment. A party not entitled to
recover costs shall not be entitled to recover attorneys' fees.
6.06 Brokers.
Seller and Purchaser each represent to the other that neither has nor shall
have any obligation to any broker or finder in connection with this transaction,
and that no fee or commission is due any broker, finder, or similar person in
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<PAGE>
connection herewith other than Petrovich & Associates (the "Broker"). The
Purchaser shall pay any fee due the Broker pursuant to a separate agreement
between Seller and Broker. Seller and Purchaser each indemnifies the other and
agrees to hold the other harmless from and against any and all claims, demands,
liabilities, lawsuits, costs, and expenses (including reasonable attorneys'
fees) for any fee or commission due to any other broker, finder, or similar
person in connection with this transaction and arising out of the act of the
indemnifying party.
6.07 Integration.
This Agreement and the exhibits attached hereto shall constitute the entire
Agreement between Seller and Purchaser and supersede any and all prior written
or oral agreements, representations, and warranties between and among the
parties and their agents, all of which are merged into or revoked by this
Agreement, with respect to its subject matter.
6.08 Modification.
No modification, waiver, amendment, discharge, or change of this Agreement
shall be valid unless the same is in writing and signed by the party against
which the enforcement of such modification, waiver, amendment, discharge, or
change is or may be sought.
6.09 Severability.
In the event any term, covenant, condition, provision, or agreement
contained herein is held to be invalid, void, or otherwise unenforceable, by any
court of competent jurisdiction, such holding shall in no way affect the
validity or enforceability of any other term, covenant, condition, provision, or
agreement contained herein.
6.10 Governing Law.
This Agreement and the obligation of the parties hereunder shall be
interpreted, construed, and enforced in accordance with the laws of the State of
California.
6.11 Terminology.
All personal pronouns used in this Agreement, whether used in the
masculine, feminine, or neuter gender, shall include all other genders; the
singular shall include the plural and vice versa. "Business Day" means other
than Saturday, Sunday, or holiday. In the event that the time for performance of
an act under this Agreement falls on a Saturday, Sunday, or holiday, the date
for performance of such act shall be extended to the next business day.
6.12 Counterparts.
This Agreement may be executed in multiple counterparts, each of which
shall be deemed to be an original agreement, and all of which shall constitute
one agreement by each of the parties hereto to be effective as of the Effective
Date.
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<PAGE>
6.13 Binding Effect.
Except as otherwise herein provided, this Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns.
6.14 Assignment.
Either Seller or the Purchaser may at any time, prior to Closing, assign
its rights and obligations under this Agreement, provided such assignment shall
not relieve the assignor of its obligations herein and no assignment shall be
effective, unless notice is given to the other party herein.
6.15 Survival of Provisions.
All covenants, representations and warranties herein are specifically
intended to survive Closing.
6.16 Captions.
Article and section titles or captions contained herein are inserted as a
matter of convenience and for reference, and in no way define, limit, extend, or
describe the scope of this Agreement or any provisions hereof. All reference to
section numbers herein shall mean the sections of this Agreement.
6.17 Exhibits.
The following exhibits are attached hereto:
Exhibit A - Legal Description of Property
Exhibit B - Site Plan of Real Property
Exhibit C - List of Current Leases
Exhibit D - Form of Tenant Estoppel Certificate
Exhibit D-1 - Seller's Certificate
Exhibit E - Form of Agreement for Assignment and
Assumption of Leases
Exhibit F - Form of Bill of Sale and Assignment
Exhibit G - Form of Tenant Notification Letter
Exhibit H - Form of Non-Foreign Affidavit
Exhibit I - Form of Deed
Exhibit J - Form of Standard Lease
Exhibit K - Outline Specifications for Vanilla
Shell
Exhibit L - Notice of Special Tax
Exhibit M - [Intentionally Omitted]
Exhibit N - Access Easement Agreement
Exhibit O - Tenant Phase II Estoppel Certificate
Exhibit O-1 - Seller's Phase II Estoppel Certificate
Exhibit P - List of Replacement Tenants
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<PAGE>
Exhibit Q - Form of Assignment of Declarant's Interest
6.18 Offer and Acceptance.
Seller's signature on this instrument constitutes an offer to sell the
Property to the Purchaser on the terms and conditions set forth herein. This
Agreement shall be binding upon the parties only upon the mutual execution
hereof, and the date of such execution shall be referred to herein as the
"Effective Date".
6.19 Access Easement.
Upon request from Seller given no later than 5 years after the Closing
Date, Purchaser agrees, as long as it owns the Subject Property, to execute and
grant a reciprocal, non-exclusive access easement (the "Access Easement") to
traverse Five Star Boulevard for the benefit of Seller, its affiliates, and
their respective agents, tenants, invitees and guests of the Adjacent Parcel
located west of, and immediately adjacent to, the Land, provided Seller is the
fee owner of such Adjacent Parcel. The form and substance of the Access Easement
is attached as Exhibit N. The foregoing shall not be deemed to restrict
Purchaser from entering into easement agreements with any other adjacent
property owner.
6.20 Mello-Roos Notice.
Attached as Exhibit "L" hereto is a Notice of Special Tax, regarding the
community facilities district affecting the Subject Property. No less than three
(3) days prior to Closing, Purchaser shall execute two (2) original copies of
said Notice and deliver same to Seller.
6.21 Copies of Agreement.
A photocopy or facsimile copy of this Agreement duly executed by both
parties shall be valid and binding upon the parties and shall be treated as if
the document was an original executed counterpart. The parties shall promptly
forward executed originals to the other party.
[Signatures appear on next page]
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<PAGE>
Executed as of the date first written above.
SELLER PURCHASER
PRICE ENTERPRISES, INC. OPUS WEST CORPORATION
By: /s/ Jack McGroroy By: /s/ Thomas W. Roberts
----------------------- -------------------------
Jack McGroroy Thomas W. Roberts
Its: CEO Its: President
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CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-60999) pertaining to the Price Enterprises 1995 Combined Stock Grant
and Stock Option Plan and the Price Enterprises Directors' 1995 Stock Option
Plan of our report dated January 16, 1998, with respect to the financial
statements and schedule of Price Enterprises, Inc. included in the Transition
Report (Form 10-K) for the transition period from September 1, 1997 to December
31, 1997.
/s/ ERNST & YOUNG LLP
San Diego, California
March 23, 1998
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