UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
Commission file Number 0-20449
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)
(619) 581-4679
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES_X_ NO___
The registrant had 13,288,491 shares of common stock, par value $.0001,
outstanding at October 30, 1998.
1
<PAGE>
PRICE ENTERPRISES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS Page
----
Balance Sheets ................................................... 3
Statements of Income ............................................. 4
Statements of Cash Flows ......................................... 5
Notes to Financial Statements .................................... 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ........................ 12
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ................................................ 17
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS ................................................ 18
ITEM 2 - CHANGES IN SECURITIES ............................................ 18
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES .................................. 18
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS .................................................... 18
ITEM 5 - OTHER INFORMATION ................................................ 18
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K ................................. 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PRICE ENTERPRISES, INC.
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
September 30 December 31
1998 1997
--------- ---------
(unaudited) (Note)
<S> <C> <C>
Real estate assets
Land and land improvements $ 211,882 $ 193,881
Building and improvements 255,907 204,184
Fixtures and equipment 472 242
Construction in progress 1,776 946
--------- ---------
470,037 399,253
Less accumulated depreciation (54,317) (46,197)
--------- ---------
415,720 353,056
Investment in real estate joint venture 3,990 --
Cash and cash equivalents 3,485 27,003
Accounts receivable 1,792 2,360
Income tax receivable 7,615 8,117
Deferred rents 14,399 12,400
Leasing costs, net 4,565 4,774
Prepaid expenses and other assets 450 768
--------- ---------
Total assets $ 452,016 $ 408,478
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Revolving lines of credit and note payable $ 43,928 $ --
Accounts payable and other liabilities 3,609 1,854
--------- ---------
Total liabilities 47,537 1,854
Commitments
Stockholders' equity
Series A preferred stock 353,403 --
Common stock 2 2
Additional paid-in capital 58,691 412,321
Accumulated deficit (7,617) (5,699)
--------- ---------
Total stockholders' equity 404,479 406,624
--------- ---------
Total liabilities and stockholders' equity $ 452,016 $ 408,478
========= =========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
3
<PAGE>
PRICE ENTERPRISES, INC.
STATEMENTS OF INCOME
(unaudited - amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Third Quarter Year-to-Date
Three Months Ended Nine Months Ended
September 30 September 30
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Rental revenues $ 15,915 $ 13,754 $ 45,688 $ 41,926
Expenses
Operating and maintenance 2,002 2,529 5,505 6,711
Property taxes 1,477 1,470 5,639 5,292
Depreciation and amortization 3,345 2,431 8,697 7,343
General and administrative 682 1,425 2,194 4,118
Provision for asset impairments -- 2,000 -- 2,000
-------- -------- -------- --------
Total expenses 7,506 9,855 22,035 25,464
-------- -------- -------- --------
Operating income 8,409 3,899 23,653 16,462
Interest and other
Interest (expense) income, net (1,057) 1,466 (817) 5,623
Gain (loss) on sale of real estate and
investments, net 184 294 184 (179)
-------- -------- -------- --------
Total interest and other (873) 1,760 (633) 5,444
-------- -------- -------- --------
Income before provision for income taxes 7,536 5,659 23,020 21,906
Provision for income taxes -- 1,329 -- 7,992
-------- -------- -------- --------
Income from continuing operations 7,536 4,330 23,020 13,914
Discontinued operations (Note 2):
Net loss from operations of discontinued
merchandising segment -- (540) -- (1,625)
-------- -------- -------- --------
Net income $ 7,536 $ 3,790 $ 23,020 $ 12,289
======== ======== ======== ========
Earnings per common share - basic and diluted
Income from continuing operations $ .32 $ .18 $ .97 $ .59
Net income $ .32 $ .16 $ .97 $ .52
Weighted average common shares outstanding
Basic 23,758 23,543 23,751 23,409
Diluted 23,900 23,543 23,920 23,409
Dividends per common share $ .35 $ .30 $ 1.05 $ .90
</TABLE>
See accompanying notes.
4
<PAGE>
PRICE ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(unaudited - amounts in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
--------------------
1998 1997
-------- --------
<S> <C> <C>
Operating activities
Net income $ 23,020 $ 12,289
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 8,697 7,343
Deferred rents (1,999) (1,596)
Deferred income taxes -- 7,164
Provision for asset impairments -- 2,000
(Gain) loss on sale of real estate and investments, net (184) 179
Changes in operating assets and liabilities:
Accounts receivable and other assets 838 738
Leasing costs (260) (175)
Accounts payable and other liabilities 1,755 (1,189)
Net assets of discontinued segment -- 3,760
-------- --------
Net cash flows provided by operating activities 31,867 30,513
Investing activities
Additions to real estate assets (62,986) (1,818)
Proceeds from sale of real estate assets 1,206 16,045
Contributions to real estate joint venture (3,990) --
Payments of notes receivable -- 45,878
Net investing activities of discontinued segment -- (7,310)
-------- --------
Net cash flows (used in) provided by investing activities (65,770) 52,795
Financing activities
Advances to revolving lines of credit 37,400 --
Repayments to revolving lines of credit (2,400) --
Dividends paid (24,938) (21,050)
Proceeds from exercise of stock options including tax benefits 323 5,002
Cash transferred to PriceSmart -- (58,383)
-------- --------
Net cash flows provided by (used in) financing activities 10,385 (74,431)
-------- --------
Net (decrease) increase in cash (23,518) 8,877
Cash and cash equivalents at beginning of period 27,003 35,831
-------- --------
Cash and cash equivalents at end of period $ 3,485 $ 44,708
======== ========
Supplemental cash flow information:
Cash paid for interest $ 808 $ --
Cash paid for income taxes -- 2,089
Supplemental schedule of noncash operating and financing activities:
Assumption of note payable to acquire real estate assets 8,943 --
Adjustment to special dividend - distribution of PriceSmart 550 --
</TABLE>
See accompanying notes.
5
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 1998
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
Price Enterprises, Inc. ("PEI" or the "Company") became a publicly-traded
company on December 21, 1994 following an exchange offer in which approximately
23.2 million shares of PriceCostco, Inc. were exchanged for shares of PEI. On
August 29, 1997, PEI transferred its merchandising segment and certain other
assets to PriceSmart, Inc. ("PriceSmart") and distributed shares of PriceSmart
common stock to PEI stockholders. Since September 2, 1997, the Company has been
operating as a real estate investment trust ("REIT").
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1998. For further information, refer to the financial
statements and footnotes thereto included in PEI's transition report on Form
10-K for the period from September 1, 1997 to December 31, 1997.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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.
6
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
(continued)
Real Estate Assets and Depreciation
Real estate assets are recorded at PEI's historical cost, as adjusted for
recognition of impairment losses. 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
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.
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 September 30, 1998 and
December 31, 1997 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.
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 third quarter and nine
months ended September 30, 1998.
7
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
(continued)
Prior to September 1997, income taxes were 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 were 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.
Restatement
In order to conform to the current fiscal reporting periods, 1997 has been
restated to a calendar year with quarters ending March 31, June 30, September
30, and December 31.
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 the third quarter and year-to-date
periods of 1997 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.
Summarized results of operations of the discontinued merchandising segment for
the third quarter and year-to-date period of 1997 were as follows (amounts in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Sales $ 9,463 $ 35,580
Other revenues 1,146 3,876
Cost of sales (8,609) (32,677)
Operating expenses (2,930) (9,475)
Minority interest 14 (59)
Income tax benefit 376 1,130
------------- -------------
$ (540) $ (1,625)
============= =============
Discontinued operations loss per share - basic and diluted $ (.02) $ (.07)
============= =============
</TABLE>
8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 3 - Real Estate Acquisitions and Dispositions
Acquisitions
The Company acquired the following properties during the nine months ended
September 30, 1998:
<TABLE>
<CAPTION>
Date Gross Leasable Purchase Price
Location Description Acquired Square Feet (000's)
- -------- ----------- -------- ----------- -------
<S> <C> <C> <C> <C>
Sacramento, CA office complex 5/1/98 300,000 $35,551
San Diego/Murphy Canyon, CA self-storage facility 5/26/98 242,000 17,750
Solana Beach, CA land (future development) 6/22/98 -- 3,450
San Diego/Rancho San Diego, CA retail complex 7/13/98 100,000 11,300
Fresno, CA land (future development) 7/29/98 -- 3,950
</TABLE>
The Company funded these acquisitions through available cash, advances under its
unsecured revolving credit facility, and by assuming a note payable in
conjunction with the San Diego/Murphy Canyon, CA self-storage facility purchase.
There were no acquisitions of properties during the prior year.
On May 28, 1998, the Company announced a joint venture with River Park
Properties to develop a 173,000 square foot retail and commercial center in
Fresno, CA. The Company purchased the land from PriceSmart at an appraised value
of $3.95 million and contributed the land to the joint venture.
Dispositions
During the third quarter of 1998, the Company sold a free-standing restaurant
building at the Azusa, CA site resulting in a $184,000 gain. This building was
considered incidental to the Company's main business. No properties were sold
during the first two quarters of 1998. For 1997 year-to-date, the Company sold
properties located in Gaithersburg, MD, Houston, TX, Sacramento/65th Expwy, CA,
Suitland, MD, Chula Vista/Oxford St., CA and Sacramento/North Highlands, CA. All
remaining properties held for sale in the prior year were transferred to
PriceSmart in August 1997.
Note 4 - 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>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 23,757,628 23,543,347 23,750,703 23,408,918
Effect of dilutive securities:
Employee stock options 142,447 -- 169,477 --
---------- ---------- ---------- ----------
Weighted average shares
outstanding - assuming dilution 23,900,075 23,543,347 23,920,180 23,408,918
========== ========== ========== ==========
</TABLE>
9
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 4 - Net Income Per Share (continued)
On September 16, 1998 the Company announced a self-tender offer to purchase its
common stock at $5.50 per share. Upon completion of the offer on October 21,
1998, approximately 10.5 million shares or 44% of the outstanding shares of
common stock were purchased for $57.6 million. The Company now has approximately
13.3 million shares of its common stock outstanding.
Note 5 - Credit Facilities and Note Payable
The Company has a revolving credit facility with a commercial bank, which was
recently amended. The credit facility, which originally allowed for up to $75
million in unsecured advances, now provides for a maximum principal amount of
$50 million and its term was amended to expire on December 31, 1998. The credit
facility bears interest at LIBOR plus 80 basis points at the Company's leverage
ratio on September 30, 1998. Due to certain financial covenants and
restrictions, upon completion of the common stock buy-back, the credit facility
will have an interest rate of LIBOR plus 90 basis points until its expiration.
As of September 30, 1998, the Company had $10.0 million outstanding under this
credit facility at a weighted average interest rate of 6.4%.
On September 15, 1998, the Company obtained an additional $50 million credit
facility with a financial institution (the "New Credit Facility"). The New
Credit Facility has a term of 12 months and bears interest at LIBOR plus 30
basis points. Sol Price (a significant stockholder of the Company and the father
of Robert Price, the Company's Chairman of the Board), Helen Price (Sol Price's
spouse) and the Sol & Helen Price Trust (the "Trust") have entered into a
Guaranty and Pledge Agreement (the "Guaranty") in which they have agreed to
guaranty the Company's obligations under the New Credit Facility and the Trust
granted the financial institution a continuing security interest in U.S.
Treasury Notes having a value greater than the amount outstanding under the New
Credit Facility to secure their obligations under the Guaranty. As of September
30, 1998, $25.0 million was outstanding under the New Credit Facility at an
interest rate of 5.9%
In conjunction with its purchase of the self storage facility in San
Diego/Murphy Canyon, CA, the Company assumed an $8.9 million note secured by the
property. The note, payable to a financial institution, matures in July 2004 and
bears an interest rate of 9.0%. Prepayment of the note may not occur prior to
July 2001.
10
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 6 - Stockholders' Equity
On August 17, 1998, the Company distributed, to stockholders of record as of
July 30, 1998, one share of newly created 8 3/4% Series A Cumulative Redeemable
Preferred Stock, par value $.0001, for each share of common stock held by them
on the record date. No capital was raised through this transaction. The Series A
Preferred Stock will pay quarterly dividends at a rate of $1.40 per year and
have a liquidation preference of $16.00 per share. Prior to the distribution of
Series A Preferred Stock, dividends were paid on the Company's common stock.
Future dividends will be paid on the Series A Preferred Stock until earnings
required to be distributed as a REIT exceed the $1.40 preferred dividend paid
per year. At that time, any dividends in excess of $1.40 will be paid to the
common stockholders. The Company has an option to redeem the Series A Preferred
Stock anytime after August 16, 2003 at a redemption price of $16.00 per share
plus accrued and unpaid dividends, if any. Holders of the Series A Preferred
Stock have one-tenth of one vote per share, voting together with the Company's
common stock.
The Series A Preferred Stock began trading on The Nasdaq Stock Market under the
symbol "PRENP" on August 18, 1998. The total market value of the Series A
Preferred Stock is based on the closing price on its first day of trading and is
reflected on the balance sheet as Series A Preferred Stock. Additional paid in
capital was reduced by the Series A Preferred Stock's value to reflect the
Company's change in capital structure.
Note 7 - Subsequent Events
Subsequent to September 30, 1998 the Company declared a cash dividend of $0.35
per Series A Preferred share, totaling approximately $8.3 million, payable on
November 16, 1998 to stockholders of record on November 2, 1998.
On October 21, 1998, the Company completed its tender offer and purchased 10.5
million shares of its common stock at a cost of $57.6 million. Funding for this
purchase of common stock was from the two unsecured credit facilities.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a "safe harbor" for these types of statements. To the extent statements
in this Form 10-Q 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 the Company's Annual Report on
Form 10-K for the transition period ended December 31, 1997 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.
The following discussion and analysis compares the results of operations for the
third quarter and year-to-date periods of 1998 to the corresponding periods of
1997, and it should be read in conjunction with the financial statements and the
accompanying notes. Due to the change in fiscal reporting periods, 1997 has been
restated to a calendar year with quarters ending March 31, June 30, September
30, and December 31. Variations in quarterly results may not be indicative of
results for the full fiscal year ending December 31, 1998. The analysis below
reflects the distribution of PriceSmart and the presentation of the
merchandising segment as discontinued operations for the third quarter and
year-to-date periods of 1997. See Note 1 of the notes to the 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 Revenues
Rental Percent
Revenues Change Change
-------- ------ ------
3rd Quarter - 1998 $15,915 $ 2,161 16%
3rd Quarter - 1997 13,754 -- --
Year-to-Date - 1998 45,688 3,762 9%
Year-to-Date - 1997 41,926 -- --
During the third quarter of 1998, revenues increased $2.1 million from
properties acquired subsequent to the third quarter of last year Revenues
generated by the portfolio of properties in place during both periods showed no
material change. This was primarily due to a loss of revenue of approximately
$288,000 from the Dallas, TX property due to the Homeplace bankruptcy, which
offset increases at other properties.
The increase in revenue for the nine month year-to-date period of 1998 compared
to the prior year was primarily due to properties acquired subsequent to the
third quarter of last year which generated $4.1 million in revenues. The
self-storage business expansion generated an additional $1.1 million. This
increase was partially offset by a decrease of $2.0 million from properties sold
or transferred to PriceSmart prior to the third quarter of 1998. Revenues
generated by the portfolio of properties in place during both periods increased
$0.8 million or 2%. This increase was primarily a result of new leases and was
somewhat offset by a decrease in revenues of approximately $369,000 due to the
Homeplace bankruptcy at the Dallas, TX location.
12
<PAGE>
Expenses
Percent
Amount Change Change
------ ------ ------
3rd Quarter - 1998 $ 7,506 $(2,349) -24%
3rd Quarter - 1997 9,855 -- --
Year-to-Date - 1998 22,035 (3,429) -13%
Year-to-Date - 1997 25,464 -- --
Expenses in the third quarter and year-to-date periods of 1998 compared to the
same periods in 1997 decreased primarily due to a $2.0 million asset impairment
charge taken in 1997. In addition, expenses decreased for the third quarter and
year-to-date periods of 1998 compared to the prior year due to a reduction in
general and administrative expenses. General and administrative expenses for the
third quarter of 1997 included $1.0 million of expense and $1.5 million
year-to-date related to the PriceSmart spin-off, consisting of insurance, legal
and accounting fees. A reduction in executive management and related payroll and
benefits related to the PriceSmart distribution provided a decrease of $0.5
million year-to-date.
The combined decrease in operating and maintenance expense and property taxes
during the third quarter and year-to-date periods of 1998 was primarily due to
properties sold or transferred to PriceSmart in the distribution, which reduced
these expenses $0.2 million in the third quarter and $1.1 million year-to-date.
This decrease, plus a slight reduction in expenses from the portfolio of
properties in place during both periods, were partially offset by an increase in
expenses from properties acquired subsequent to third quarter last year of $0.3
million in the third quarter and $0.6 million year-to-date in the current year.
The increase in depreciation compared to the prior year is primarily due to the
properties acquired subsequent to the third quarter of 1997.
Operating Income
Operating Percent
Income Change Change
------ ------ ------
3rd Quarter - 1998 $ 8,409 $ 4,510 116%
3rd Quarter - 1997 3,899 --
Year-to-Date - 1998 23,653 7,191 44%
Year-to-Date - 1997 16,462 -- --
The increase in operating income for the third quarter and year-to-date periods
of 1998 compared to the same periods in the prior year were primarily a result
of the changes in revenues and expenses discussed above.
13
<PAGE>
Interest (Expense) Income, net Percent
Amount Change Change
------ ------ ------
3rd Quarter - 1998 $(1,057) $(2,523) -172%
3rd Quarter - 1997 1,466 -- --
Year-to-Date - 1998 (817) (6,440) -115%
Year-to-Date - 1997 5,623 -- --
The change in net interest for the third quarter and nine months ended September
30, 1998 resulted from a decrease in interest income and an increase in interest
expense compared to the same period in 1997. Prior to the second quarter of
1998, the Company had no debt outstanding. During the third quarter of 1998, the
Company incurred $1.2 million in interest cost related to its unsecured
revolving credit facilities and assumed note payable associated with the
Company's recently acquired self storage facility. Of that amount, approximately
$119,000 was capitalized to real estate assets. At the same time, interest
income for the third quarter and nine months ended September 30, 1998 decreased
compared to the prior year due to the repayment of a $41 million note receivable
and a transfer of cash and certain notes receivable to PriceSmart in August
1997. The Company used remaining cash for property acquisition and development
opportunities.
Gain (loss) on Sale of Real Estate and Investments, net
The Company recognized a gain of $184,000 in the third quarter of 1998 related
to the sale of a free-standing restaurant building in Azusa, CA. During the
third quarter of 1997, the Company recognized a $294,000 gain related primarily
to the sale of property in Gaithersburg, MD. The 1997 year-to-date amount also
includes losses on the sale of properties in Houston, TX and Suitland, MD as
well as a gain related to the sale of the Company's options to purchase stock in
a privately held automobile broker.
Provision for Income Taxes
Because the Company has been operating as a REIT since September 1, 1997, there
is no income tax expense for the third quarter and nine month year-to-date
periods ended September 30, 1998. The provision for income taxes during the
prior year was provided at an effective tax rate of 41% through August 1997,
prior to the Company becoming a REIT for income tax purposes as of September
1997.
<TABLE>
<CAPTION>
Adjusted Funds From Operations Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before provision for income taxes $ 7,536 $ 5,659 $ 23,020 $ 21,906
Depreciation and amortization 3,345 2,431 8,697 7,343
Provision for asset impairments -- 2,000 -- 2,000
(Gain) loss on sale of real estate and investments, net -- (294) -- 179
Other 430 -- 430 --
-------- -------- -------- --------
Funds from operations 11,311 9,796 32,147 31,428
Straight-line rents (751) (654) (2,023) (1,690)
-------- -------- -------- --------
Adjusted funds from operations $ 10,560 $ 9,142 $ 30,124 $ 29,738
======== ======== ======== ========
</TABLE>
14
<PAGE>
Funds from operations ("FFO") during the third quarter of 1998 increased 15%
from $9.8 million to $11.3 million primarily as a result of an increase of $1.8
million generated from properties acquired after the third quarter of 1997 and a
reduction in general and administrative expenses of $0.7 million. Excluding
income earned from assets transferred to PriceSmart, FFO during the third
quarter of 1998 increased 36% compared to the third quarter of 1997 from $8.3
million to $11.3 million. FFO for the nine month period increased 2% from $31.4
million to $32.1 million. Year-to-date FFO excluding income earned from assets
transferred to PriceSmart increased 23% from $26.2 million to $32.1 million.
Real estate industry analysts generally consider 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 certain sales of
property. The Company has historically excluded provisions for asset impairments
and gains (losses) from sale of investments 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.
Liquidity and Capital Resources
Cash flow from operations has been the principal source of capital to fund the
Company's ongoing operations and the payment of dividends, while use of the
company's credit facilities and mortgage financing have been the principal
sources of capital required to fund its growth. While the Company is 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 and through borrowings.
The Company is currently in various stages of negotiations to purchase
additional commercial properties as well as evaluating various properties for
acquisition. To the extent that investment opportunities exceed available cash
flow from the sources mentioned above, the Company believes that it will raise
additional capital through other 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.
From time to time the Company will consider the sale of properties to better
align the portfolio with the Company's geographic and tenant composition
strategies. The Company is under contract to sell a property from the portfolio
for approximately $6 million. The Company is also in various stages of
contractual negotiations for the sale of certain other properties. There can be
no assurance that these sales will be completed due to uncertainties associated
with contract negotiations and buyer due diligence contingencies. Any proceeds
from property sales would most likely be reinvested in other properties which
better meet the Company's portfolio objectives.
On September 15, 1998, the Company announced its intention to purchase
approximately 10 million shares of its common stock for $5.50 per share. To fund
this purchase, the Company obtained a $50 million credit facility with a
financial Institution (the "New Credit Facility"). The New Credit Facility has a
term of twelve months and bears interest at LIBOR plus 30 basis points. Sol
Price (a significant
15
<PAGE>
stockholder of the Company and the father of Robert Price, the Company's
Chairman of the Board), Helen Price (Sol Price's spouse) and the Sol & Helen
Price Trust (the "Trust") have entered into a Guaranty and Pledge Agreement (the
"Guaranty") in which they have agreed to guaranty the Company's obligations
under the New Credit Facility and the Trust granted the financial institution a
continuing security interest in U.S. Treasury Notes having a value greater than
the amount outstanding under the New Credit Facility to secure their obligations
under the Guaranty. As of September 30, 1998, $25.0 million was outstanding
under the New Credit Facility at an interest rate of 5.9%. As of October 31,
1998, $50.0 million was outstanding under the New Credit Facility.
The Company recently amended its existing unsecured revolving credit facility
with a commercial bank. The credit facility, which originally allowed for up to
$75 million in unsecured advances, now provides for a maximum principal amount
of $50 million and its term was amended to expire on December 31, 1998. The
credit facility bears interest at LIBOR plus 80 basis points at the Company's
leverage ratio on September 30, 1998. The agreement requires that the Company
maintain, at all times, certain financial covenants, pay an annual
administration fee and certain fees based on usage of the facility. The Company
also is restricted from certain transactions involving mergers, sales of assets
and acquisitions of minority interests. Based on these financial covenants and
restrictions, upon completion of the common stock buy-back, the credit facility
will have an interest rate of LIBOR plus 90 basis points until its expiration.
As of September 30, 1998, $10.0 million was outstanding under this credit
facility at a weighted average interest rate of 6.4%. As of October 31, 1998,
$40.3 million was outstanding under this credit facility.
The Company currently is in final negotiations with a commercial bank to obtain
another credit facility to refinance the expiring credit facility. The Company
has not yet determined whether it will seek to refinance the New Credit Facility
at the same time it refinances the expiring credit facility.
In conjunction with the purchase of the self storage facility in San
Diego/Murphy Canyon, CA, the Company assumed an $8.9 million note secured by the
property. The note, payable with a financial institution, matures in July 2004
and bears an interest rate of 9.0%. The note does not permit repayment prior to
July 2001.
On August 17, 1998, the Company distributed, to stockholders of record as of
July 30, 1998, one share of newly created 8 3/4% Series A Cumulative Redeemable
Preferred Stock, par value $.0001, for each share of common stock held by them
on the record date. No capital was raised through this transaction. The Series A
Preferred Stock will pay quarterly dividends at a rate of $1.40 per year and
have a liquidation preference of $16.00 per share. Prior to the distribution of
Series A Preferred Stock, dividends were paid on the Company's common stock.
Future dividends will be paid on the Series A Preferred Stock until earnings
required to be distributed as a REIT exceed the $1.40 preferred dividend paid
per year. At that time, any dividends in excess of $1.40 will be paid to the
common stockholders. The Company has an option to redeem the Series A Preferred
Stock anytime after August 16, 2003 at a redemption price of $16.00 per share
plus accrued and unpaid dividends, if any.
Operating income from real estate activities increases as properties are
acquired and/or developed and declines as properties are sold. The Company's
liquidity is primarily affected by the timing and magnitude of rental property
acquisition, development and disposition. In addition, the Company's liquidity
will be affected by the anticipated payment of quarterly cash dividends to
stockholders in the future.
16
<PAGE>
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.
In connection with the Company's operating properties, the Company is evaluating
all systems that contain embedded chips such as security systems, elevators,
lighting, and HVAC systems. The Company will continue to commit the resources
necessary for the management and elimination of Year 2000 risks. Although it is
not possible to quantify the total cost of all corrections at this time, the
Company does not expect that these costs will have a material adverse effect on
its operations or financial condition. The Company expects that all internal
Year 2000 issues will be solved prior to the year 2000.
The Company is currently evaluating the Year 2000 readiness of third parties
such as tenants and vendors, and the impact, if any on the Company. However, the
Company cannot quantify or ensure that these external systems, whether certified
to be Year 2000 compliant or not, would not create difficulties before, on, or
after the year 2000.
The Company intends to develop a contingency plan to handle its most likely
worst case Year 2000 scenario. The Company has not yet identified its most
likely worst case scenerio. The Company will determine its worst case scenario
after it has received and analyzed responses to substantially all of the
inquiries it has made of third parties. Following its analysis, the Company
intends to develop a timetable for completing its contingency plans.
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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 2 - CHANGES IN SECURITIES
None.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(10.1) Revolving Credit Agreement dated as of March 31, 1998 among the
Company, Union Bank of Switzerland and Union Bank of Switzerland, as
Agent (incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998)
(10.2) Amendment No. 1 to Revolving Credit Agreement dated as of August 27,
1998 among the Company, Union Bank of Switzerland and Union Bank of
Switzerland, as Agent (incorporated herein by reference to Exhibit
(b)(2) to Issuer Tender Offer Statement on Schedule 13-E4 of Price
Enterprises, Inc. filed with the Commission on September 17, 1998
(File No. 005-43425))
(10.3) Letter Agreement dated as of September 15, 1998 by and between the
Company and Morgan Guaranty Trust Company of New York (incorporated
herein by reference to Exhibit (b)(3) to Issuer Tender Offer
Statement on Schedule 13-E4 of Price Enterprises, Inc. filed with
the Commission on September 17, 1998 (File No. 005-43425))
(10.4) Guaranty and Pledge Agreement dated as of September 15, 1998 among
Sol Price, Helen Price, The Sol & Helen Price Trust and Morgan
Guaranty Trust Company of New York (incorporated herein by reference
to Exhibit (c)(1) to Issuer Tender Offer Statement on Schedule 13-E4
of Price Enterprises, Inc. filed with the Commission on September
17, 1998 (File No. 005-43425))
(10.5) The Price Enterprises 1995 Combined Stock Grant and Stock Option
Plan (incorporated herein by reference to Exhibit 10.23 to
Registration Statement on Form 10 of Price Enterprises, Inc. filed
with the Commission on December 13, 1994 (File No. 0-20449))
(10.6) First Amendment to The Price Enterprises 1995 Combined Stock Grant
and Stock Option Plan (incorporated herein by reference to Exhibit
4.1 to Registration Statement on Form S-8 of Price Enterprises, Inc.
filed with the Commission on September 2, 1998 (File No. 333-62723))
(10.7) The Price Enterprises Directors' 1995 Stock Option 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))
18
<PAGE>
(10.8) First Amendment to the Price Enterprises Directors' 1995 Stock
Option Plan (incorporated herein by reference to Exhibit 4.7 to
Transition Report on Form 10-K of Price Enterprises, Inc. filed with
the Commission on March 27, 1998))
(10.9) Second Amendment to The Price Enterprises Directors' 1995 Stock
Option Plan (incorporated herein by reference to Exhibit 4.5 to
Registration Statement on Form S-8 of Price Enterprises, Inc. filed
with the Commission on September 2, 1998 (File No. 333-62723))
(10.10) Form of Amended and Restated Non-Qualified Stock Option Agreement
under the 1995 Plan (incorporated herein by reference to Exhibit 4.6
to Registration Statement on Form S-8 of Price Enterprises, Inc.
filed with the Commission on September 2, 1998 (File No. 333-62723))
(10.11) Form of Amended and Restated Non-Qualified Stock Option Agreement
under the Director's Plan (incorporated herein by reference to
Exhibit 4.7 to Registration Statement on Form S-8 of Price
Enterprises, Inc. filed with the Commission on September 2, 1998
(File No. 333-62723))
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
1. On July 23, 1998, the Company filed Amendment No. 1 to the Current
Report on Form 8-K reporting pursuant to Item 2 the acquisition of an
office complex in Sacramento, CA from a related party and the
acquisition of a self storage facility in San Diego, CA. The date of
the earliest event reported was May 1, 1998. The Form 8-K, as amended,
included the pro forma financial information relating to the
acquisitions, as required by Item 7.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PRICE ENTERPRISES, INC.
Registrant
Date: November 11, 1998 /s/ Jack McGrory
---------------------------
Jack McGrory
President & Chief Executive Officer
Date: November 11, 1998 /s/ Gary W. Nielson
---------------------------
Gary W. Nielson
Executive Vice President,
Chief Financial Officer
20
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