<PAGE>
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 MARCH 31, 1999
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 13,298,421 shares of common stock, par value $.0001 per
share, outstanding at April 28, 1999.
1
<PAGE>
PRICE ENTERPRISES, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED) PAGE
----
<S> <C>
Consolidated Balance Sheets ...................................... 3
Consolidated Statements of Income ................................ 4
Consolidated Statements of Cash Flows ............................ 5
Notes to Consolidated Financial Statements ....................... 6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ............................. 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 ................................ 19
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1999 1998
---------------------- ---------------------
(unaudited) (Note)
<S> <C> <C>
Real estate assets
Land and land improvements $213,785 $210,839
Building and improvements 261,135 260,709
Fixtures and equipment 646 581
Construction in progress 7,310 3,744
---------------------- ---------------------
482,876 475,873
Less accumulated depreciation (60,306) (57,366)
---------------------- ---------------------
422,570 418,507
Investment in real estate joint venture 4,210 4,050
Cash and cash equivalents 338 3,691
Accounts receivable 1,721 2,699
Income tax receivable 7,740 7,615
Deferred rents 15,580 14,921
Other assets 5,620 5,869
---------------------- ---------------------
Total assets $457,779 $457,352
---------------------- ---------------------
---------------------- ---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Revolving lines of credit and note payable $108,895 $108,023
Accounts payable and other liabilities 4,796 4,518
---------------------- ---------------------
Total liabilities 113,691 112,541
Commitments
Stockholders' equity
Series A preferred stock 353,404 353,404
Common stock 1 1
Additional paid-in capital 957 929
Accumulated deficit (10,274) (9,523)
---------------------- ---------------------
Total stockholders' equity 344,088 344,811
---------------------- ---------------------
Total liabilities and stockholders' equity $457,779 $457,352
---------------------- ---------------------
---------------------- ---------------------
</TABLE>
Note: The balance sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
SEE ACCOMPANYING NOTES.
3
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST QUARTER
THREE MONTHS ENDED
MARCH 31
--------------------------------------------
1999 1998
--------------------- ----------------------
<S> <C> <C>
Rental revenues $17,427 $14,486
Expenses
Operating and maintenance 2,144 1,845
Property taxes 2,151 1,955
Depreciation and amortization 3,274 2,489
General and administrative 769 789
--------------------- ----------------------
Total expenses 8,338 7,078
--------------------- ----------------------
Operating income 9,089 7,408
Interest
Interest expense (1,675) -
Interest income 151 387
--------------------- ----------------------
Total interest (1,524) 387
--------------------- ----------------------
Net income 7,565 7,795
Dividends paid to preferred stockholders (8,316) -
--------------------- ----------------------
Net income (loss) applicable to common stockholders $ (751) $ 7,795
--------------------- ----------------------
--------------------- ----------------------
Earnings per common share - basic and diluted
Net income (loss) $(.06) $.33
Weighted average common shares outstanding
Basic 13,294 23,741
Diluted 13,294 23,840
Dividends per preferred share $.35 -
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST QUARTER
THREE MONTHS ENDED
MARCH 31
--------------------------------------------
1999 1998
--------------------- ----------------------
<S> <C> <C>
Operating activities
Net income $7,565 $ 7,795
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,274 2,489
Deferred rents (659) (810)
Changes in operating assets and liabilities:
Accounts receivable and other assets 919 710
Accounts payable and other liabilities 278 1,198
--------------------- ----------------------
Net cash flows provided by operating activities 11,377 11,382
Investing activities
Additions to real estate assets (7,154) (1,321)
Contributions to real estate joint venture (160) -
--------------------- ----------------------
Net cash flows used in investing activities (7,314) (1,321)
Financing activities
Advances from revolving lines of credit 33,300 -
Repayments on revolving lines of credit and note payable (32,428) -
Dividends paid (8,316) (8,308)
Proceeds from exercise of stock options 28 215
--------------------- ----------------------
Net cash flows used in financing activities (7,416) (8,093)
--------------------- ----------------------
Net (decrease) increase in cash (3,353) 1,968
Cash and cash equivalents at beginning of period 3,691 27,003
--------------------- ----------------------
Cash and cash equivalents at end of period $ 338 $28,971
--------------------- ----------------------
--------------------- ----------------------
Supplemental cash flow information:
Cash paid for interest $1,538 -
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 1999
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Price Enterprises, Inc. (PEI) operates as a real estate investment trust
(REIT) incorporated in the state of Maryland. Our principle business is to
own, acquire, operate, manage and lease real property, primarily shopping
centers. We became a REIT in September 1997 after we spun-off our
merchandising segment and certain other assets to PriceSmart, Inc.
ACCOUNTING PRINCIPLES
We prepared the financial statements following the requirements of the
Securities and Exchange Commission (SEC) for interim reporting. As permitted
under those rules, certain footnotes or other financial information that are
normally required by generally accepted accounting principles (GAAP) can be
omitted. Certain prior year data have been reclassified to conform to the
1999 presentation.
We are responsible for the unaudited financial statements included in this
document. The financial statements include all normal and recurring
adjustments that are considered necessary for the fair presentation of our
financial position and operating results. You should also read the financial
statements and notes in our latest Form 10-K.
Revenues, expenses, assets and liabilities can vary during each quarter of
the year. Therefore, the results and trends in these interim financial
statements may not be the same as those for the full year.
CONSOLIDATION
We combine our financial statements with those of our wholly-owned
subsidiaries and present them on a consolidated basis. The consolidated
financial statements do not include the results and transactions between us
and our subsidiaries or among our subsidiaries.
REAL ESTATE ASSETS AND DEPRECIATION
We record real estate assets at historical costs and adjust them for
recognition of impairment losses. We review long-lived assets for impairment
when events or changes in business conditions indicate that their full
carrying value may not be recovered. We determine fair value using the
present value of the expected associated cash flows. Ordinary repairs and
maintenance
6
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are expensed as incurred; major replacements and betterments are capitalized
and depreciated over their estimated useful lives. We compute real estate
asset depreciation on a straight-line basis over their estimated useful
lives, as follows:
<TABLE>
<S> <C>
Land improvements 25 years
Building and improvements 10-25 years
Tenant improvements Term of lease or 10 years
Fixtures and equipment 3-5 years
</TABLE>
We capitalize interest incurred during the construction period of certain
assets and this interest is depreciated over the lives of those assets. The
following table shows interest expense and the amount capitalized (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
--------------------------------
1999 1998
--------------- ----------------
<S> <C> <C>
Interest incurred $1,886 ---
Interest capitalized 211 ---
</TABLE>
INVESTMENTS
We use the "equity method" of accounting for our joint venture, which means
we carry this investment at cost, adjusted for our share of earnings or
losses and any distributions received.
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, including recovery of property operating expenses, and
certain other expenses that we accrue in the period in which the related
expense occurs; and (3) percentage rents that we accrue on the basis of
actual sales reported by tenants.
CASH AND CASH EQUIVALENTS
We consider all highly liquid investments with a maturity of less than three
months when purchased to be cash and cash equivalents.
7
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASING COSTS
We capitalize costs associated with leasing space to tenants and amortize
leasing costs using the straight-line method over the initial terms of the
related tenant leases.
FINANCIAL INSTRUMENTS
The carrying amounts reflected in our balance sheets for cash and cash
equivalents, receivables and all liabilities approximate their fair values.
In making these assessments we used estimates and market rates for similar
instruments.
INCOME TAXES
We intend to continue meeting all conditions necessary to qualify as a REIT
under the Internal Revenue Code. To qualify as a REIT, we are required to pay
dividends of at least 95% of our "REIT taxable income" each year and meet
certain other criteria. As a qualifying REIT, we will not be taxed on income
distributed to our stockholders.
USE OF ESTIMATES
Preparing financial statements in conformity with generally accepted
accounting principles requires we make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. We
continually review our estimates and make adjustments as necessary, but
actual results could differ from what we envisioned when we made these
estimates.
NEW ACCOUNTING STANDARDS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." These statements, which are effective for fiscal years
beginning after December 15, 1997, currently have no impact on our financial
statements.
NOTE 2 - NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share." SFAS No. 128 requires presentation of two calculations
of earnings per common share. Basic earnings per common share equals net
income applicable to common stockholders divided by weighted average common
shares outstanding during the period. Diluted earnings per common share
equals net income applicable to common stockholders divided by the sum of
weighted
8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 - NET INCOME PER SHARE (CONTINUED)
average common shares outstanding during the period plus common stock
equivalents. Common stock equivalents are shares assumed to be issued if
outstanding stock options that are dilutive were exercised. All earnings per
share amounts for all periods have been presented, and where appropriate,
restated to reflect these calculations.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Weighted average shares outstanding 13,293,511 23,740,592
Effect of dilutive securities:
Employee stock options --- 99,656
----------------- ------------------
Weighted average shares outstanding - assuming dilution 13,293,511 23,840,248
----------------- ------------------
----------------- ------------------
</TABLE>
NOTE 3 - PROPERTY ACQUISITIONS
During the first quarter of 1999, we acquired a 15 acre parcel of land in
Tucson, AZ for $2.6 million which we plan to use for future development. We
funded this acquisition through an advance under our unsecured revolving
credit facility. There were no acquisitions during the first quarter of 1998.
NOTE 4 - REVOLVING LINES OF CREDIT AND NOTE PAYABLE
Our revolving credit facility activity consists of the following:
- In January 1999 we repaid $25 million on our credit facility with
Morgan Guaranty Trust Company and amended the facility to reduce our
maximum principal amount from $50.0 million to $25.0 million. We
repaid this amount through an advance on our unsecured credit facility
with Wells Fargo Bank, BankOne and AmSouth Bank (described below). The
Morgan credit facility has a one-year term which expires in September
1999 and bears interest at LIBOR plus 30 basis points. Sol Price (a
significant stockholder of our Company and the father of Robert Price,
our Company's Chairman of the Board), Helen Price (Sol Price's spouse)
and the Sol & Helen Price Trust entered into a Guaranty and Pledge
Agreement in which they agreed to guaranty our obligations under this
credit facility. The Sol and Helen Price Trust also granted the Morgan
Guaranty Trust Company a continuing security interest in U.S. Treasury
Notes worth more than the amount outstanding under this credit
facility to secure their obligations under the guaranty. At March 31,
1999, $25.0 million was outstanding under this credit facility at an
interest rate of 5.24%.
9
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 4 - CREDIT FACILITIES AND NOTE PAYABLE (CONTINUED)
- In December 1998 we obtained a $100 million unsecured credit facility
with Wells Fargo Bank, AmSouth Bank and Bank One. This facility has a
term of three years with an initial interest rate of LIBOR plus 135
basis points. The rate may vary based on our leverage and other
financial ratios. As of March 31, 1999, we owed $75.0 million on this
credit facility at a weighted average interest rate of 6.41%.
In conjunction with the San Diego/Murphy Canyon, CA self storage facility
purchase in May 1998, we assumed an existing $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.
NOTE 5 - SUBSEQUENT EVENTS
On April 1, 1999, we sold a retail property in Buffalo, NY for $6.1 million.
On April 22, 1999, we sold a retail property in Dallas, TX for $26.4 million.
In disposing of these properties we considered their location and long-term
value prospects and decided they did not meet our desired investment profile.
On May 12, 1999, Excel Legacy Corporation (Legacy) announced that it has
entered into an Agreement with Sol Price, as trustee, and other major
stockholders of our Company. Under the terms of the Agreement, Legacy will
offer to all PEI common stockholders $8.50 per share for all shares of our
common stock, comprised, at Legacy's election, of:
- $8.50 per share in cash or
- at least $4.25 in cash, at least $2.75 in principal amount of Legacy's
9% Convertible Subordinated Debentures due 2004 (Debentures), which
will be convertible into shares of Legacy Common Stock at $5.50 per
share, and $1.50 per share in whatever combination Legacy may choose
of cash, Debentures or Legacy's 10% Senior Notes due 2004.
Our Board of Directors has the right to determine whether the transaction
will proceed, and if so whether the transaction will proceed as an exchange
offer for our common stock or a merger with our Company. In either event, our
preferred stock will remain outstanding but we expect to provide additional
protections for it. Our Board is expected to act by June 2, 1999.
Under the agreement executed on May 12, 1999, several major stockholders of
our Company are depositing PEI common stock in escrow. Assuming our Board of
Directors approves the
10
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 - SUBSEQUENT EVENTS (CONTINUED)
transaction on or about June 2, 1999, the transaction will involve either an
exchange offer to stockholders or a merger requiring a vote of stockholders.
At that time, additional shares of PEI common stock will be deposited in
escrow such that the aggregate number of shares in escrow will be
approximately 8,000,000 shares of our common stock representing approximately
51% of the PEI voting power. These shares will be tendered in an exchange
offer or voted in favor of a merger, as the case may be. In either case, the
offering will be made only by means of a prospectus.
The consummation of the transaction is subject to a variety of conditions,
including the execution by our Company of an agreement to take certain
actions to facilitate the transaction.
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Our disclosure and analysis in this report contain "forward-looking
statements." Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact
that they do not relate strictly to historic or current facts. They use words
such as "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," and other words and terms of similar meaning in connection with
any discussion of future operating or financial performance. In particular,
these include statements relating to future actions or the outcome of
financial results. From time to time, we also may provide oral or written
forward-looking statements in other materials we release to the public. Any
or all of our forward-looking statements in this report and in any other
public statements we make may turn out to be incorrect. They can be affected
by inaccurate assumptions we might make or by known or unknown risks and
uncertainties. Consequently, no forward-looking statement can be guaranteed.
Actual results may vary materially.
We undertake no obligation to publicly update any forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related
subjects in our reports on Forms 10-K, 10-Q and 8-K filed with the SEC. Our
Form 10-K filing for the 1998 fiscal year listed various important factors
that could cause actual results to differ materially from expected and
historic results.
We note these factors for investors as permitted by the Private Securities
Litigation Reform Act of 1995. Readers can find them in Part I of our 1998
Form 10-K under the heading "Factors That May Affect Future Performance." We
incorporate our Form 10-K in this filing and investors should refer to it.
You should understand that it is not possible to predict or identify all such
factors. Consequently, you should not consider any such list to be a complete
set of all potential risks or uncertainties.
In Management's Discussion and Analysis we explain our general financial
condition and results of operations including:
- why revenues, costs and earnings changed from the prior period
- funds from operations (FFO)
- how we used cash for capital projects and dividends and how we expect
to use cash in 1999
- where we plan on obtaining cash for future dividend payments and
future capital expenditures
- impact of year 2000 technology issues on our operations
As you read Management's Discussion and Analysis, it may be helpful to refer
to our financial statements and accompanying notes beginning on page 3. In
Management's Discussion and Analysis we explain the changes in specific line
items in the statements of income. Where changes are due to more than one
reason, we list the reasons in order of importance.
12
<PAGE>
RENTAL REVENUES
<TABLE>
<CAPTION>
RENTAL PERCENT
REVENUES CHANGE CHANGE
---------------- --------------- ----------------
<S> <C> <C> <C>
1st Quarter 1999 $17,427 $ 2,941 20%
1st Quarter 1998 14,486 --- ---
</TABLE>
Revenues increased $2.9 million to $17.4 million in the first quarter of 1999
compared to 1998 because:
- properties we acquired after the first quarter of 1998 generated $1.7
million of revenues
- expansion of our self storage business provided an additional $1.1
million of revenue
EXPENSES
<TABLE>
<CAPTION>
PERCENT
AMOUNT CHANGE CHANGE
---------------- --------------- ----------------
<S> <C> <C> <C>
1st Quarter 1999 $ 8,338 $ 1,260 18%
1st Quarter 1998 7,078 --- ---
</TABLE>
Expenses increased $1.3 million to $8.3 million in the first quarter of 1999
compared to 1998 primarily because:
- properties we acquired after the first quarter of 1998 increased
expenses $0.7 million
- expansion of our self storage business increased expenses $0.3 million
in 1999
- expenses from properties we owned in both 1998 and 1999 increased $0.3
million
OPERATING INCOME
<TABLE>
<CAPTION>
PERCENT
AMOUNT CHANGE CHANGE
---------------- --------------- ----------------
<S> <C> <C> <C>
1st Quarter 1999 $9,089 $1,681 23%
1st Quarter 1998 7,408 --- ---
</TABLE>
Operating income increased for the first quarter of 1999 compared to the same
period in the prior year primarily because of the changes in Rental Revenues
and Expenses discussed above.
INTEREST EXPENSE
<TABLE>
<CAPTION>
PERCENT
AMOUNT CHANGE CHANGE
---------------- --------------- ----------------
<S> <C> <C> <C>
1st Quarter 1999 $1,675 $1,675 100%
1st Quarter 1998 --- --- ---
</TABLE>
Interest expense increased $1.7 million in the first quarter of 1999 compared
to 1998 because we had no debt during the first quarter of 1998 and during
the first quarter of 1999 we had an average of $108 million debt outstanding.
We discuss our outstanding debt further in "Liquidity and Capital Resources"
located elsewhere in this Form 10-Q.
13
<PAGE>
INTEREST INCOME
<TABLE>
<CAPTION>
PERCENT
AMOUNT CHANGE CHANGE
---------------- --------------- ----------------
<S> <C> <C> <C>
1st Quarter 1999 $151 $(236) -61%
1st Quarter 1998 387 --- ---
</TABLE>
Interest income decreased $0.2 million in the first quarter of 1999 compared
to 1998 primarily because of lower cash balances.
FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
-------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Net income $ 7,565 $ 7,795
Depreciation and amortization 3,274 2,489
--------------- ---------------
Funds from operations 10,839 10,284
Straight-line rents (659) (571)
--------------- ---------------
Adjusted funds from operations $10,180 $ 9,713
--------------- ---------------
--------------- ---------------
Weighted average common shares outstanding - basic 13,294 23,741
</TABLE>
Real estate industry analysts typically use funds from operations (FFO) as
another measurement 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. The National
Association for Real Estate Investment Trusts (NAREIT), defines FFO as net
income, excluding depreciation and amortization expense, and gains (losses)
from certain sales of property. We also adjust the NAREIT definition to
eliminate straight-line rents to arrive at adjusted FFO because of their
significance in our operations. Straight-line rent accruals are noncash
revenues associated with fixed future minimum rent increases.
FFO during the first quarter of 1999 increased 5.4% to $10.8 million compared
to 1998 because:
- properties acquired after the first quarter of 1998 generated $1.3
million of FFO
- expansion of our self storage business in 1998 generated $0.8 million
of FFO
- partially offsetting these and other increases was the increase in
interest expense of $1.7 million in 1999. Approximately $0.9 million
of this interest expense relates directly to the borrowing of $57.6
million for the common stock repurchase in November 1998
FFO and adjusted FFO do not represent the generally accepted accounting
principles definition of cash flows from operations and should not be
considered as an alternative to net income as an indicator of our operating
performance or to cash flows as a measure of liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to our ability to generate sufficient cash flows to meet the
short and long-term cash requirements of our business operations. Capital
resources represent those funds used or
14
<PAGE>
available to be used to support our business operations and consist of
stockholders' equity and debt.
Cash flow from operations has been the principal source of capital to fund
our ongoing operations and dividend payments, while use of our credit
facilities and mortgage financing have been the principal sources of capital
required to fund our growth as well as stock repurchases. While we are
positioned to finance our business activities through a variety of sources,
we expect to satisfy short-term liquidity requirements through net cash
provided by operations and through borrowings.
Through 1999 we anticipate investing:
- up to $20 million for commercial real estate development on property
we own (a portion of this amount represents commitments under executed
construction contracts)
- up to $10 million for development and expansion of our self storage
business
- up to $40 million for real estate acquisitions and development
opportunities
We cannot guarantee that these estimates will be realized, although we
believe we have been prudent in our plans and assumptions. Business
conditions and other risks and uncertainties could cause our actual results
to differ materially from these estimates, particularly our plan to acquire
real estate which is primarily dependent on the continued attractiveness of
real estate values and the available cost of capital for us.
We are currently in various stages of negotiations to purchase additional
commercial properties and continuing to evaluate various other properties for
acquisition or development. To the extent that investment opportunities
exceed available cash flow from the sources mentioned above, we may raise
additional capital through bank credit facilities and/or secured mortgage
financing. We also may choose to seek additional funds through future public
offerings of debt or equity securities.
From time to time we will consider selling properties to better align our
portfolio with our geographic and tenant composition strategies. We sold two
properties from our portfolio for approximately $32.3 million after the first
quarter of 1999. We are also contemplating selling certain other properties.
These sales may not be completed due to uncertainties associated with
contract negotiations and buyer due diligence contingencies.
In December 1998 we obtained a $100 million unsecured credit facility from
Wells Fargo Bank, AmSouth Bank and Bank One. This facility has a three-year
term with an initial interest rate of LIBOR plus 135 basis points. The rate
may vary based on our leverage and other financial ratios. At March 31, 1999,
there was $75.0 million outstanding on the Wells Fargo facility at a 6.41%
weighted average interest rate.
15
<PAGE>
In September 1998 we announced our intention to purchase approximately 10
million shares of our common stock for $5.50 per share. To fund this
purchase, we obtained a $50 million credit facility from Morgan Guaranty
Trust Company (the Morgan Facility) which was subsequently amended. The
Morgan Facility has a one-year term with an interest rate of LIBOR plus 30
basis points. Sol Price (a significant stockholder of our Company and the
father of Robert Price, our Chairman of the Board), Helen Price (Sol Price's
spouse) and the Sol & Helen Price Trust entered into a Guaranty and Pledge
Agreement (the Guaranty) in which they agreed to guaranty our obligations
under the Morgan Facility. The Sol and Helen Price Trust also granted Morgan
Guaranty Trust Company a continuing security interest in U.S. Treasury Notes
worth more than the amount outstanding under the Morgan Facility to secure
their obligations under the Guaranty. In January we amended the agreement and
reduced our maximum principal amount to $25 million. At March 31, 1999, $25.0
million was outstanding under the Morgan Facility at an interest rate of
5.24%.
In conjunction with the San Diego/Murphy Canyon, CA self storage facility
purchase in May 1998, we assumed an existing $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%. The note does not permit prepayment prior
to July 2001.
YEAR 2000
Many older computer software programs refer to years in terms of their final
two digits only. Such programs may interpret the Year 2000 to mean the year
1900 instead. If not corrected, those programs could cause date-related
transaction failures. We recognize the significance of ensuring our
operations and systems are not adversely impacted by Year 2000 problems.
The upgrade of our existing computer software and information technology is
substantially complete. The project cost was approximately $220,000. We
believe that with modifications to existing software and conversions to new
software, the Year 2000 issue will not pose significant operational problems
for our computer systems.
In connection with our operating properties, we are evaluating all systems
that contain embedded chips such as security systems, elevators, lighting and
HVAC systems. We will continue to commit the resources necessary for the
management and elimination of critical Year 2000 risks. We expect to complete
our evaluation and make necessary changes by June 30, 1999. Although it is
not possible to quantify the total cost of all corrections at this time, we
expect that these costs will not have a material adverse effect on our
operations or financial condition. We expect all critical internal Year 2000
issues will be resolved prior to the year 2000.
We are also currently evaluating the Year 2000 readiness of third parties
that provide services to us and our tenants such as utilities, financial
institutions, governmental agencies, municipalities and the tenants
themselves, and the impact, if any, on our company and the operations of our
properties. However, we cannot quantify or ensure that these external
systems, whether certified
16
<PAGE>
to be Year 2000 compliant or not, would not create difficulties for us
before, on, or after the year 2000.
We intend to develop a contingency plan to handle most likely and worst case
Year 2000 scenarios. We intend to complete our determination of a worst case
scenario after receiving and analyzing responses to substantially all
inquiries we made to third parties. Following our analysis, we intend to
develop a timetable for completing our contingency plans and expect to
complete our contingency plan by September 30, 1999.
INFLATION
Because a substantial number of our 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, we do not expect inflation 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, which means specific operating
expenses and property taxes are passed through to the tenant.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in
short-term LIBOR interest rates. We do not have any foreign exchange or other
significant market risk, nor did we have any derivative financial instruments
at March 31, 1999.
Our exposure to market risk for changes in interest rates relates primarily
to our unsecured lines of credit. We enter into variable rate debt
obligations to support general corporate purposes, including acquisitions,
capital expenditures and working capital needs. We continuously evaluate our
level of variable rate debt with respect to total debt and other factors,
including our assessment of the current and future economic environment.
We had $100.0 million in variable rate debt outstanding at March 31, 1999.
Based upon this debt level, a hypothetical 10% adverse change in interest
rates would increase interest expense by approximately $0.6 million on an
annual basis, and likewise decrease our earnings and cash flows. We cannot
predict market fluctuations in interest rates and their impact on our
variable rate debt, nor can there be any assurance that fixed rate long-term
debt will be available to us at favorable rates, if at all. Consequently,
future results may differ materially from the estimated adverse changes
discussed above.
17
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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
On May 12, 1999, Excel Legacy Corporation (Legacy) announced that it has
entered into an Agreement with Sol Price, as trustee, and other major
stockholders of our Company. Under the terms of the Agreement, Legacy will
offer to all PEI common stockholders $8.50 per share for all shares of our
common stock, comprised, at Legacy's election, of:
- $8.50 per share in cash or
- at least $4.25 in cash, at least $2.75 in principal amount of Legacy's
9% Convertible Subordinated Debentures due 2004 (Debentures), which
will be convertible into shares of Legacy Common Stock at $5.50 per
share, and $1.50 per share in whatever combination Legacy may choose
of cash, Debentures or Legacy's 10% Senior Notes due 2004.
Our Board of Directors has the right to determine whether the transaction
will proceed, and if so whether the transaction will proceed as an exchange
offer for our common stock or a merger with our Company. In either event, our
preferred stock will remain outstanding but we expect to provide additional
protections for it. Our Board is expected to act by June 2, 1999.
Under the agreement executed on May 12, 1999, several major stockholders of
our Company are depositing PEI common stock in escrow. Assuming our Board of
Directors approves the transaction on or about June 2, 1999, the transaction
will involve either an exchange offer to stockholders or a merger requiring a
vote of stockholders. At that time, additional shares of PEI common stock
will be deposited in escrow such that the aggregate number of shares in
escrow will be approximately 8,000,000 shares of our common stock
representing approximately 51% of the PEI voting power. These shares will be
tendered in an exchange offer or voted in favor of a merger, as the case may
be. In either case, the offering will be made only by means of a prospectus.
18
<PAGE>
The consummation of the transaction is subject to a variety of conditions,
including the execution by our Company of an agreement to take certain
actions to facilitate the transaction.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
<TABLE>
<S> <C>
(10.1) Employment Agreement dated June 18, 1997, by and between Price
Enterprises, Inc. and Jack McGrory (incorporated by reference to
Exhibit 10.5 to Transition Report on Form 10-K of Price
Enterprises, Inc. filed with the Commission on March 27, 1998
(File No. 0-20449))
(10.2) Amendment No. 1 to Employment Agreement dated as of August 27,
1997, by and between Price Enterprises, Inc. and Jack McGrory
(incorporated by reference to Exhibit 10.6 to Transition Report
on Form 10-K of Price Enterprises, Inc. filed with the Commission
on March 27, 1998 (File No. 0-20449))
(10.3) Amendment No. 2 to Employment Agreement dated as of February 2,
1999, by and between Price Enterprises, Inc. and Jack McGrory
(incorporated by reference to Exhibit 10.14 to Annual Report on
Form 10-K of Price Enterprises, Inc. filed with the Commission on
March 29, 1999 (File No. 0-20449))
(10.4) Agreement, dated May 12, 1999, by and among Excel Legacy
Corporation and certain shareholders of Price Enterprises, Inc.
listed on the signature pages thereto (including the following
exhibits: Exhibit A - Form of Indenture, Exhibit B - Conditions
to Offer, and Exhibit C - Form of Agreement between Excel Legacy
Corporation and Price Enterprises, Inc.) (incorporated by
reference to Exhibit 10.1 to Current Report on Form 8-K filed May
14, 1999 by Excel Legacy Corporation)
(27.1) Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 31,
1999.
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: May 12, 1999 /s/ Jack McGrory
------------------
Jack McGrory
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: May 12, 1999 /s/ Gary W. Nielson
---------------------
Gary W. Nielson
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
20
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