<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 JUNE 30, 2000
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.)
17140 BERNARDO CENTER DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92128
(Address of principal executive offices) (Zip Code)
(858) 675-9400
(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 13,309,006 shares of common stock, par value $.0001 per
share, outstanding at August 9, 2000.
<PAGE>
PRICE ENTERPRISES, INC.
INDEX TO FORM 10-Q
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION.........................................................3
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)............................................3
CONSOLIDATED BALANCE SHEETS........................................................3
CONSOLIDATED STATEMENTS OF INCOME..................................................4
CONSOLIDATED STATEMENTS OF CASH FLOWS..............................................5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.........................................6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS......................................................11
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................16
PART II - OTHER INFORMATION...........................................................17
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................17
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K...........................................17
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS (UNAUDITED)
PRICE ENTERPRISES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
------------------ ------------------
(unaudited) (Note)
<S> <C> <C>
Real estate assets
Land and land improvements $255,521 $248,177
Building and improvements 321,117 293,686
Fixtures and equipment 793 394
Construction in progress 8,666 9,942
------------------ ------------------
586,097 552,199
Less accumulated depreciation (6,108) (1,330)
------------------ ------------------
579,989 550,869
Investment in real estate joint ventures 12,350 4,338
Cash and cash equivalents 3,298 2,145
Accounts receivable 3,661 697
Income tax receivable 3,421 3,171
Notes receivable 6,671 -
Deferred rents 2,182 571
Other assets 6,115 767
------------------ ------------------
Total assets $617,687 $562,558
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Revolving lines of credit $4,000 $88,347
Mortgages and note payable 146,554 8,894
Accounts payable and other liabilities 4,494 4,057
------------------ ------------------
Total liabilities 155,048 101,298
Commitments
Stockholders' equity
Series A preferred stock 353,404 353,404
Common stock 1 1
Additional paid-in capital 112,041 111,670
Accumulated deficit (2,807) (3,815)
------------------ ------------------
Total stockholders' equity 462,639 461,260
================== ==================
Total liabilities and stockholders' equity $617,687 $562,558
================== ==================
</TABLE>
Note: The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
SEE ACCOMPANYING NOTES.
3
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED - AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SECOND QUARTER YEAR-TO-DATE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------- -------------------------------
PREDECESSOR PREDECESSOR
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Rental revenues $17,455 $16,854 $34,926 $34,281
Expenses
Operating and maintenance 1,401 1,926 3,189 4,265
Property taxes 2,146 2,466 4,264 4,617
Depreciation and amortization 2,498 3,084 4,787 6,358
General and administrative 738 676 1,513 1,445
--------------- --------------- --------------- ---------------
Total expenses 6,783 8,152 13,753 16,685
--------------- --------------- --------------- ---------------
Operating income 10,672 8,702 21,173 17,596
Interest and other
Interest expense (2,561) (1,360) (4,310) (3,035)
Interest income 376 201 737 352
Equity in earnings of joint ventures 1 - 59 -
--------------- --------------- --------------- ---------------
Total interest and other (2,184) (1,159) (3,514) (2,683)
--------------- --------------- --------------- ---------------
Income before gain on sale of real estate 8,488 7,543 17,659 14,913
Gain on sale of real estate - 4,717 - 4,717
--------------- --------------- --------------- ---------------
Net income 8,488 12,260 17,659 19,630
Dividends paid to preferred stockholders (8,327) (8,316) (16,651) (16,631)
--------------- --------------- --------------- ---------------
Net income applicable to common stockholders
$161 $3,944 $1,008 $2,999
=============== =============== =============== ===============
Net income per common share
Basic $.01 $.30 $.08 $.23
Diluted .01 .29 .08 .22
Weighted average common shares outstanding
Basic 13,309 13,299 13,309 13,296
Diluted 13,309 13,591 13,309 13,531
Dividends per preferred share $.35 $.35 $.70 $.70
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED - AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR-TO-DATE
SIX MONTHS ENDED
JUNE 30
----------------------------
PREDECESSOR
2000 1999
--------- ---------
<S> <C> <C>
Operating activities
Net income $ 17,659 $ 19,630
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 4,787 6,358
Deferred rents (1,611) (1,089)
Equity in earnings of joint venture (59) -
Gain on sale of real estate - (4,717)
Changes in operating assets and liabilities:
Accounts receivable and other assets (8,571) 1,976
Accounts payable and other liabilities 437 (1,144)
--------- ---------
Net cash flows provided by operating activities 12,642 21,014
Investing activities
Additions to real estate assets (19,212) (12,647)
Contributions to real estate joint ventures (7,953) (220)
Notes receivable (6,671) -
Proceeds from sale of real estate assets - 30,385
--------- ---------
Net cash flows (used in) provided by investing activities (33,836) 17,518
Financing activities
Advances from revolving lines of credit and notes payable 161,842 40,400
Repayments of revolving lines of credit and notes payable (123,215) (65,046)
Dividends paid (16,651) (16,631)
Proceeds from exercise of stock options 371 76
--------- ---------
Net cash flows provided by (used in) financing activities 22,347 (41,201)
--------- ---------
Net decrease in cash and cash equivalents 1,153 (2,669)
Cash and cash equivalents at beginning of period 2,145 3,691
--------- ---------
Cash and cash equivalents at end of period $ 3,298 $ 1,022
========= =========
Supplemental cash flow information:
Cash paid for interest $ 3,863 $ 2,788
Supplemental schedule of noncash financing activities:
Assumption of loans to acquire real estate assets 14,686 -
Receipt of common stock of former tenant in exchange for amounts due PEI
812 -
</TABLE>
SEE ACCOMPANYING NOTES.
5
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. In November 1999 Excel Legacy
Corporation (Legacy) completed its exchange offer for our common stock. In the
exchange offer, Legacy acquired approximately 91.3% of our common stock, which
represents approximately 77.5% of PEI's voting power.
In accounting for this transaction, we followed Accounting Principles Board
Opinion No. 16, "Business Combinations" (APB No.16), which requires we treat
this transaction as a purchase. In following purchase accounting, we allocated
the cost basis of Legacy's investment in our common stock among our assets and
liabilities to adjust them to fair value at the time of the completion of the
exchange offer. We prepared the consolidated financial statements through
November 11, 1999 using PEI's historical basis of accounting and we designated
them as the predecessor in our consolidated financial statements. Comparison of
PEI's results of operations prior to completion of the exchange offer and after
completion of the exchange offer is affected by our purchase accounting
adjustments and by adopting Legacy's depreciation policy, discussed elsewhere in
this footnote.
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 2000
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.
6
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REAL ESTATE ASSETS AND DEPRECIATION
Prior to Legacy's exchange offer for our common stock, we recorded real estate
assets at historical costs, and adjusted them for recognition of impairment
losses. In following purchase accounting, we adjusted the historical costs of
our real estate assets to fair value. Our balance sheets at June 30, 2000 and
December 31, 1999 reflect the new basis of our real estate assets.
We expense ordinary repairs and maintenance as incurred; we capitalize major
replacements and betterments and depreciate them over their estimated useful
lives.
Following completion of Legacy's exchange offer for our common stock, we adopted
Legacy's accounting policy of depreciating real estate assets. We compute real
estate asset depreciation on a straight-line basis over their estimated useful
lives, as follows:
<TABLE>
<CAPTION>
AFTER NOVEMBER 1999 PRIOR TO NOVEMBER 1999
------------------------------- -------------------------------
<S> <C> <C>
Land improvements 40 years 25 years
Building and improvements 40 years 10-25 years
Tenant improvements Term of lease or 10 years Term of lease or 10 years
Fixtures and equipment 3-7 years 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest incurred $3,035 $1,560 $5,228 $3,445
Interest capitalized (474) (200) (918) (410)
</TABLE>
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.
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
7
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 2 - NET INCOME PER SHARE (CONTINUED)
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 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 SIX MONTHS ENDED
JUNE 30 JUNE 30
----------------------------- -----------------------------
2000 1999 2000 1999
--------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Weighted average shares outstanding 13,309,006 13,298,548 13,309,006 13,296,043
Effect of securities:
Employee and Director stock options --- 292,657 --- 235,398
--------------- ------------- -------------- --------------
Weighted average shares outstanding - assuming dilution 13,309,006 13,591,205 13,309,006 13,531,441
=============== ============= ============== ==============
</TABLE>
NOTE 3 - REAL ESTATE PROPERTIES
ACQUISITIONS
During the second quarter of 2000 we purchased a 50% interest in a real estate
development joint venture in Westminister, CO from Legacy for an initial payment
of $8.1 million. The purchase price was based on the property's existing
operating income, with additional payments estimated to be $4.8 million due
through the completion of construction.
During the first quarter of 2000, we acquired the following properties:
<TABLE>
<CAPTION>
DATE PURCHASE MORTGAGE
LOCATION DESCRIPTION ACQUIRED PRICE (000'S) ASSUMED (000'S)
----------------------------------------- ---------------------- ------------- -------------- -----------------
<S> <C> <C> <C> <C>
Middletown, OH Retail building 2/9/00 $6,709 $3,726
Terre Haute, IN Retail building 2/9/00 5,762 3,598
San Diego/Rancho Bernardo, CA Office building (1) 2/25/00 16,025 11,025 (2)
</TABLE>
(1) PROPERTY LEASED BACK TO LEGACY
(2) INDICATES MAXIMUM CONSTRUCTION LOAN BALANCE. $9.1 MILLION WAS
OUTSTANDING AT JUNE 30, 2000
We purchased all three of these properties from Legacy and we funded these
acquisitions through advances on our unsecured revolving credit facility.
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.
8
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 3 - REAL ESTATE PROPERTIES (CONTINUED)
DISPOSITIONS
We sold no properties during the first and second quarters of 2000.
During the second quarter of 1999 we sold two properties in Dallas, TX and
Buffalo, NY for $32.5 million and recorded a $4.7 million gain on the sales.
NOTE 4 - NOTES RECEIVABLE
In February 2000 we loaned $2.8 million to Barclay Group No. 9, Ltd., which
bears interest at 25% and matures in December 2001. The loan, secured by a
property in Pueblo, CO and by a personal guarantee from the developer, is junior
to a construction loan on the property.
On March 31, 2000 we loaned Legacy $5.0 million on a note receivable due July
2000. Legacy may borrow up to $10.0 million on the unsecured note, which bears
an interest rate of LIBOR plus 375 basis points, 9.9% at June 30, 2000. Legacy
owed $3.7 million on this note at June 30, 2000 and the note was repaid in July
2000.
NOTE 5 - DEBT
On June 28, 2000, we borrowed $121.4 million from GMAC Commercial Mortgage
Corporation. The GMAC loan is secured by five retail properties located in
Westbury, NY; Signal Hill, CA; Philadelphia, PA; Wayne, NY; and Roseville, CA.
The GMAC loan bears interest at LIBOR plus 98 basis points, 7.6% at June 30,
2000, and is due on June 28, 2004. We used proceeds of the loan to repay
outstanding amounts on our existing revolving credit facility with Wells Fargo
Bank, AmSouth Bank and Bank One.
In February 2000 we amended our unsecured credit facility with Wells Fargo Bank,
AmSouth Bank and Bank One by increasing the facility from $100 million to $125
million and adding BankBoston into the group of banks. In connection with our
GMAC loan, we reduced the facility from $125 million of total availability to
$75 million of total availability. In connection with the reduction in the
credit facility, we wrote-off loan fees of approximately $300,000. The amended
facility has a remaining term of two 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 June 30, 2000, we owed $4.0 million on this credit
facility at an interest rate of 8.04%.
In conjunction with the Middletown, OH retail building purchase from Legacy, we
assumed an existing $3.7 million mortgage secured by the property. The mortgage
matures in March 2014 and bears an interest rate of 7.63%.
9
<PAGE>
PRICE ENTERPRISES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
NOTE 5 - DEBT (CONTINUED)
In conjunction with the Terre Haute, IN retail building purchase from Legacy, we
assumed an existing $3.6 million mortgage secured by the property. The mortgage
matures in June 2003 and bears an interest rate of 8.34%.
In conjunction with the San Diego/Rancho Bernardo, CA office building purchase
from Legacy, we assumed an existing $11.0 million construction loan secured by
the property. The loan matures in December 2000 and bears an interest rate of
Eurodollar plus 360 basis points. As of June 30, 2000, we owed $9.1 million on
this loan at a weighted average interest rate of 9.7%
NOTE 6 - RELATED PARTY TRANSACTIONS
Following Legacy's completion of its exchange offer, Legacy took over daily
management of PEI, including property management, finance and administration and
our self storage business. We reimburse Legacy for these services. We expensed
$750,000 for these services during the second quarter of 2000 and $698,000 for
these services during the first quarter of 2000, which was based on our
historical costs for similar expenses.
During the second quarter of 2000 we recorded $205,000 in interest income due
from Legacy related to the note receivable discussed in Note 4.
In conjunction with the San Diego/Rancho Bernardo, CA office building purchase
from Legacy discussed in Note 3, we leased the building back to Legacy. This
lease has a term of 10 years and pays $450,000 per year in rent, which is based
on the $5 million cash portion of the purchase price.
We discuss other related party transactions with Legacy in Note 3, Note 4, Note
5 and Note 7.
NOTE 7 - SUBSEQUENT EVENTS
In July 2000 we loaned Legacy $11.7 million on a new note receivable due July
2001. Legacy may borrow up to $15.0 million on the unsecured note, which bears
and interest rate of LIBOR plus375 basis points.
On July 28, 2000 we purchased a 50% interest in a joint venture for $1.9 million
to develop a shopping center in Bend, OR.
On July 31, 2000 we purchased a 2.5 acre parcel of land in San Diego, CA for
$4.2 million to build a self storage facility.
10
<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. 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 1999 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 1999 Form
10-K under the heading "Factors That May Affect Future Performance." 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 2000
- where we plan on obtaining cash for future dividend payments and
future capital expenditures
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 operations. Where changes are due to more than one
reason, we list the reasons in order of importance.
11
<PAGE>
RENTAL REVENUES
<TABLE>
<CAPTION>
PERCENT
AMOUNT CHANGE CHANGE
------------- -------------- -------------
<S> <C> <C> <C>
2nd Quarter 2000 $17,455 $601 4%
2nd Quarter 1999 16,854 --- ---
Year-to-Date 2000 34,926 645 2%
Year-to-Date 1999 34,281 --- ---
</TABLE>
Revenues increased $0.6 million to $17.5 million in the second quarter of 2000
compared to the same period in 1999 primarily because:
- properties we acquired during the first quarter of 2000 generated
$0.4 million of additional revenues
- expansion of our self storage business provided an additional $0.3
million
Revenues increased $0.6 million to $34.9 million in the six month year-to-date
period of 2000 compared to the same period in 1999 primarily because:
- revenues from properties we owned in both 1999 and 2000 increased
$1.2 million
- properties we acquired during the first quarter of 2000 generated
$0.6 million of additional revenues
- expansion of our self storage business provided an additional
$0.4 million
- partially offsetting these increases were revenues from two
properties we sold in the second quarter of 1999, which contributed
$1.5 million of revenues in the first quarter of 1999
EXPENSES
<TABLE>
<CAPTION>
PERCENT
AMOUNT CHANGE CHANGE
-------------- ------------- -------------
<S> <C> <C> <C>
2nd Quarter 2000 $6,783 $(1,369) -17%
2nd Quarter 1999 8,152 --- ---
Year-to-Date 2000 13,753 (2,932) -18%
Year-to-Date 1999 16,685 --- ---
</TABLE>
Expenses decreased $1.4 million to $6.8 million in the second quarter of 2000
compared to 1999 primarily because:
- expenses from properties we owned in both 1999 and 2000 were
reduced by $1.2 million primarily from a reduction in
depreciation expense due to our change to Legacy's accounting
policy of depreciating real estate assets
- we recovered bad debt expense of $0.5 million previously written
off related to the Homeplace bankruptcy, a former tenant
- partially offsetting these decreases was an increase in expenses
of $0.2 million from expansion of our self storage business
12
<PAGE>
Expenses decreased $2.9 million to $13.8 million in the six month year-to-date
period of 2000 compared to the same period in 1999 primarily because:
- expenses from properties we owned in both 1999 and 2000 were
reduced by $1.5 million primarily from a reduction in
depreciation expense due to our change to Legacy's accounting
policy of depreciating real estate assets
- expenses from two properties we sold in the second quarter of
1999, which contributed $0.9 million of expenses in the prior
year
- we recovered bad debt expense of $1.0 million previously written
off related to the Homeplace bankruptcy, a former tenant
- these decreases in expenses were partially offset by:
- expansion of our self storage business which increased
expenses by $0.3 million and
- properties we acquired in 2000 which increased expenses by
$0.2 million
OPERATING INCOME
<TABLE>
<CAPTION>
PERCENT
AMOUNT CHANGE CHANGE
-------------- ------------- -------------
<S> <C> <C> <C>
2nd Quarter 2000 $10,672 $1,970 23%
2nd Quarter 1999 8,702 --- ---
Year-to-Date 2000 21,173 3,577 20%
Year-to-Date 1999 17,596 --- ---
</TABLE>
Operating income increased for the second quarter and year-to-date periods of
2000 compared to the same periods 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>
2nd Quarter 2000 $2,561 $1,201 88%
2nd Quarter 1999 1,360 --- ---
Year-to-Date 2000 4,310 1,275 42%
Year-to-Date 1999 3,035 --- ---
</TABLE>
Interest expense increased $1.2 million in the second quarter of 2000 compared
to 1999 because during the second quarter of 2000 we had an average of $138.4
million debt outstanding compared to $93.6 million in the second quarter of
1999. Interest expense increased $1.3 million in the six month year-to-date
period of 2000 compared to 1999 because during the six month year-to-date period
of 2000 we had an average of $124.8 million debt outstanding compared to $101.1
million for the same period in 1999. 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>
2nd Quarter 2000 $376 $175 87%
2nd Quarter 1999 201 --- ---
Year-to-Date 2000 737 385 109%
Year-to-Date 1999 352 ---
</TABLE>
Interest income increased $0.2 million in the second quarter and $0.4 million in
the six month year-to-date period of 2000 compared to the same periods in 1999
primarily because of our interest-bearing notes receivable.
FUNDS FROM OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
---------------------------- ---------------------------
2000 1999 2000 1999
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net income $8,488 $12,260 $17,659 $19,630
Depreciation and amortization 2,498 3,084 4,787 6,358
Gain on sale of real estate - (4,717) - (4,717)
-------------- ------------- ------------- -------------
Funds from operations 10,986 10,627 22,446 21,271
Straight-line rents (779) (600) (1,611) (1,259)
-------------- ------------- ------------- -------------
Adjusted funds from operations $10,207 $10,027 $20,835 $20,012
============== ============= ============= =============
</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 second quarter of 2000 increased 3.4% to $11.0 million compared
to 1999 primarily because of the changes in revenues and expenses discussed
previously.
FFO during the six month year-to-date period of 2000 increased 5.5% to $22.4
million compared to 1999 primarily because of the changes in revenues and
expenses discussed previously.
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
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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. 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.
We continue to evaluate various properties for acquisition or development, which
includes acquiring development properties from Legacy once they are completed.
We purchased two retail properties and one office property from Legacy in
February 2000 for $28.5 million. In conjunction with these purchases, we assumed
two long-term mortgages secured by the two retail properties totaling $7.3
million and one construction loan for $11.0 million related to the office
property. We funded these purchases through advances on our revolving line of
credit. 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.
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 $32.5 million during the second quarter of
1999. We are also contemplating selling certain other properties. We may also
participate in like-kind property exchanges, which allow us to dispose of
properties and reinvest the proceeds in a tax efficient manner. These potential
sales may not be completed due to uncertainties associated with contract
negotiations and buyer due diligence contingencies.
In June 2000 we borrowed $121.4 million from GMAC Commercial Mortgage
Corporation. The GMAC loan is secured by five retail properties located in
Westbury, NY; Signal Hill, CA; Philadelphia, PA; Wayne, NY; and Roseville, CA.
The GMAC loan bears interest at LIBOR plus 98 basis points, 7.6% at June 30,
2000, and is due on June 2004. We used proceeds of the loan to repay outstanding
amounts on our existing revolving credit facility with Wells Fargo Bank, AmSouth
Bank and Bank One.
In February 2000 we amended our unsecured credit facility with Wells Fargo Bank,
AmSouth Bank and Bank One by increasing the facility from $100 million to $125
million and adding BankBoston into the group of banks. In connection with our
GMAC loan, we reduced the facility from $125 million of total availability to
$75 million of total availability. In connection with the reduction in the
credit facility, we wrote-off loan fees of approximately $300,000. The amended
facility has a remaining term of two 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 June 30, 2000, we owed $4.0 million on this credit
facility at an interest rate of 8.04%.
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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
June 30, 2000.
Our exposure to market risk for changes in interest rates relates primarily to
our unsecured line of credit and GMAC loan. We enter into fixed rate mortgages
and 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 $125.4 million in variable rate debt outstanding at June 30, 2000. Based
upon this debt level, a hypothetical 10% adverse change in interest rates would
increase interest expense by approximately $1.0 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.
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PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was held on June 7, 2000. As of the record
date for the meeting, we had 13,309,006 shares of common stock and 23,791,767
shares of preferred stock outstanding.
A proposal to amend our charter allowing preferred stockholders to elect a
majority of our Board of Directors until specified events take place was
approved as follows:
<TABLE>
<CAPTION>
VOTES BROKER
VOTES FOR VOTES AGAINST ABSTAINING NON VOTES
--------------- --------------- --------------- -- ---------------
<S> <C> <C> <C> <C>
Preferred stockholders elect majority
of directors 14,104,113 88,297 130,676 748,390
</TABLE>
Stockholders elected the following Directors at our annual meeting:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
--------------- ---------------
<S> <C> <C>
COMMON AND PREFERRED STOCK NOMINEES
Richard B. Muir 14,801,018 270,458
Gary B. Sabin 14,860,147 211,329
PREFERRED STOCK NOMINEES
James F. Cahill 19,224,742 613,390
Simon M Lorne 19,234,530 603,602
Jack McGrory 19,220,268 617,864
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herein or incorporated by reference:
(10.1) First Amended and Restated Revolving Credit Agreement dated as
of February 14, 2000 among PEI and Wells Fargo Bank, National
Association, as Agent (incorporated by reference to Exhibit
10.32 to Annual Report on Form 10-K of PEI filed with the SEC
on March 29, 2000 (File No. 0-20449))
(10.2) Pro rata share of lenders participating in First Amended and
Restated Revolving Credit Agreement dated as of February 14,
2000 among PEI and Wells Fargo Bank, National Association,
Bank One, Arizona, NA, AmSouth Bank, Bank Boston and Wells
Fargo Bank, NA, as Agent (incorporated by reference to Exhibit
10.33 to Annual Report on Form 10-K of PEI filed with the SEC
on March 29, 2000 (File No. 0-20449))
(10.3) Loan Agreement dated June 28, 2000 between Price Owner LLC and
GMAC Commercial Mortgage Corporation, including form of
Promissory Note, Mortgage and Security Agreement, Assignment
of Leases and Rents, Guaranty of Recourse Obligations and
Environmental Indemnity Agreement (incorporated by reference
to Exhibit 10.1 to Current Report on Form 8-K of PEI filed
with the SEC on July 26, 2000 (File No. 0-20449))
(27.1) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 30, 2000.
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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: August 10, 2000 /s/ Gary B. Sabin
-----------------
Gary B. Sabin
PRESIDENT & CHIEF EXECUTIVE OFFICER
Date: August 10, 2000 /s/ James Y. Nakagawa
---------------------
James Y. Nakagawa
CHIEF FINANCIAL OFFICER
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