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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from September 1, 1997 to December 31, 1997.
Commission file number 0-20449
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PRICE ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Maryland 33-0628740
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4649 Morena Boulevard, San Diego, California 92117
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 619-581-4530
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.0001 Par Value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ or No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant as of January 31, 1998 was $242,862,144 based
on the last reported sale of $19.63 per share on January 31, 1998.
The number of outstanding shares of the registrant's common stock as of
January 31, 1998 was 23,738,181.
================================================================================
PRICE ENTERPRISES, INC.
Annual Report on Form 10-K
for the Transition Period Ended December 31, 1997
TABLE OF CONTENTS
PART
Item 1. Business .................................................... 3
Item 2. Properties ..................................................11
Item 3. Legal Proceedings ...........................................14
Item 4. Submission of Matters to a Vote of Security Holders .........14
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ....................................15
Item 6. Selected Financial Data .....................................17
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk ...................................................23
Item 8. Financial Statements and Supplementary Data .................24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ....................42
PART III
Item 10. Directors and Executive Officers of the Registrant ..........42
Item 11. Executive Compensation ......................................45
Item 12. Security Ownership of Certain Beneficial Owners
and Management .........................................49
Item 13. Certain Relationships and Related Transactions...............51
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.....................................54
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain "forward-looking" statements
within the meaning of the Private Securities Litigation Reform Act of 1995 which
provides a new "safe harbor" for these types of statements. To the extent
statements in this Form 10-K involve, without limitation, the Company's
expectations for growth, estimates of future revenue, expenses, profit, cash
flow, balance sheet items or any other guidance on future periods, these
statements are forward-looking statements. Forward-looking statements contain
risks and uncertainties which include those identified in this Form 10-K and
other risks identified from time to time in the Company's filings with the
Securities and Exchange Commission, press releases and other communications. The
Company assumes no obligation to update forward-looking statements.
PART I
ITEM 1 - Business
Formation of the Company and Subsequent Transactions
Price Enterprises, Inc. ("Price Enterprises," "PEI" or "the Company"), was
incorporated in July 1994 as a Delaware corporation. The Company began
operations effective August 29, 1994 as a wholly owned subsidiary of Costco
Companies, Inc. ("Costco"), formerly Price/Costco, Inc., with specific assets
received from Costco pursuant to the Amended and Restated Agreement of Transfer
and Plan of Exchange ("Exchange Agreement"). PEI became a separate publicly
traded Company on December 21, 1994 upon completion of the voluntary exchange
offer made by Costco to its stockholders whereby such stockholders were given
the choice to either continue to own shares of Costco or exchange all or a
portion of their holdings into an equal number of shares of PEI.
Prior to consummation of the exchange offer, Costco transferred to PEI
substantially all of the real estate assets which historically formed the
non-club real estate business segment of Costco; four existing Costco warehouses
which are adjacent to certain transferred properties, and which have been leased
back to Costco effective August 29, 1994; a 51% interest in Price Quest, Inc.
("PQI") and a 51% interest in Price Global Trading, Inc. ("PGT"), with Costco
initially retaining the remaining 49% interests. The Company's interests in both
PQI and PGT were subsequently increased to 100%. Also transferred to the Company
were notes receivable from various municipalities and agencies ("City Notes")
and certain other assets no longer owned by the Company.
On June 27, 1997, the Board of Directors of PEI determined that it would be in
the best interest of PEI and its stockholders to separate PEI's core real estate
business from its merchandising businesses. Accordingly, the PEI board approved
a spin-off transaction pursuant to which PEI would continue to conduct its real
estate business consisting of an initial asset base of 27 retail properties and
$40 million of cash following the spin-off. PEI's merchandising businesses, real
estate properties held for sale by PEI, the City Notes and certain secured notes
receivable from
3
buyers of properties formerly held by PEI (the "Other Notes") would be spun-off
to PriceSmart, Inc. ("PriceSmart"), a Delaware corporation and wholly-owned
subsidiary of PEI.
On August 29, 1997, PEI separated itself from PriceSmart by distributing one
share of common stock of PriceSmart for every four shares of Common Stock held
by PEI's stockholders of record on August 15, 1997 pursuant to a distribution
agreement dated as of August 26, 1997 between PEI and PriceSmart (the
"Distribution"). Since the Distribution, PEI has engaged in a combination of
acquiring, developing, owning, managing and/or selling real estate assets.
The Company believes that the Distribution has resulted in PEI becoming eligible
to elect Federal tax treatment as a real estate investment trust ("REIT"). In
order to qualify as a REIT, PEI was required to (i) divest certain assets not
related to its real estate business, such as the merchandising businesses, and
(ii) distribute an amount of taxable dividends at least equal to its current and
accumulated earnings and profits, much of which represents an allocation from
Costco as a result of the spin-off by Costco of PEI in December 1994. The
Distribution satisfied these two requirements. By qualifying as a REIT, PEI will
substantially eliminate the taxation on corporate income from the real estate
business. Effective January 2, 1998, the Company was reincorporated in the State
of Maryland.
Overview of the Company's Business
The Company's principal business is acquiring, developing, operating, managing
and leasing real property. The Company's current portfolio is substantially
comprised of commercial rental properties including shopping centers and "power
centers" leased to major retail tenants such as Costco, The Sports Authority,
The Home Depot, Kmart, Marshalls, PetsMart and Borders Books. Approximately 59%
of annual minimum rents are derived from tenants with investment grade credit
ratings.
For a description of the Company's properties and of material developments
during the year regarding these investments and the Company as a whole,
reference is made to "Item 2 -- Properties" and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations"
hereof.
The Company's business strategy is to continue to enhance the value and
operating income of the Company's portfolio by, among other things, completing
the development and leasing of existing properties and acquiring new investment
properties. In making new real estate investments, the Company intends to
continue to place emphasis on acquiring well-located income-producing commercial
properties, principally occupied by credit rated tenants in the Western and
Northeastern United States, with attractive yields and potential for increases
in income and capital appreciation. The Company may also take advantage of
particularly attractive investments in other geographic areas and product types
in order to enhance stockholder value. The Company also may participate in
public-private partnerships to acquire and develop or redevelop properties in
major cities. In addition, the Company will from time to time consider the
disposition or exchange of existing investments in order to improve its
investment portfolio or increase its funds from operations. The Company's
management continuously reviews the Company's properties and attempts to develop
appropriate programs to renovate and modernize its properties in order to
improve funds from operations and property values. The Company's
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investment and portfolio management objective is to maximize funds from
operations and distributions to shareholders. The Company also currently owns
and operates a self storage business, "Price Self Storage," with one facility
open in San Diego, CA. The Company has decided to expand the self storage
business on a limited basis.
The Company directly provides property management for all of its properties.
Self-management enables the Company to more closely control leasing and property
management. Internal property management also provides the Company opportunities
for operating efficiencies by enabling it to acquire additional properties
without proportionate increases in property management expenses. The Company's
property management program is implemented by property management and leasing
professionals located in offices in San Diego, CA, Fairfax, VA and White Plains,
NY.
The results of the Company's operations depend upon the performance of its
existing real estate investment portfolio, the availability of suitable
opportunities for new real estate investments and the yields then available on
such investments, as well as the cost of capital related to these investments.
Such yields will vary with the type of investment involved, the condition of the
financial and real estate markets, the nature and geographic location of the
property, competition and other factors. The performance of a real estate
investment company is strongly influenced by the cycles of the real estate
industry. See "Factors That May Affect Future Performance - Economic Performance
and Value of Centers Dependent on Many Factors."
Competition
The Company competes with a wide variety of corporate and individual real estate
developers and real estate investment trusts which have investment objectives
similar to those of PEI and which may have greater financial resources, larger
staffs or longer operating histories than PEI.
The Company competes with other property owners to obtain tenants for its retail
shopping center properties. The Company's competitive advantages are primarily
based on significant customer traffic generated by its national and regional
tenants, competitive lease terms and relatively high occupancy rates. The
closing or relocation of any anchor tenant could have a material adverse effect
on the operation of a shopping center. See "Factors That May Affect Future
Performance - Competition for Acquisition of Real Estate."
Significant Tenants
The Company's seven largest tenants account for approximately 41% of total gross
leasable area ("GLA") and approximately 50% of the Company's total annual
minimum rent revenues. Certain information with respect to these tenants is set
forth in the following table (dollars in thousands):
5
Percent of Annual Percent of
Number Area Under GLA Under Minimum Total Annual
Tenant of Leases Lease (sq ft) Lease Rent Minimum Rent
-------------- ----------------- ---------------- --------------- -----------------------
Costco 4 612,675 16.0% $ 8,219.5 19.1%
The Sports Authority 8 341,217 8.9% 4,152.2 9.7%
The Home Depot 2 214,173 5.6% 2,550.7 5.9%
Kmart 1 110,054 2.9% 1,842.9 4.3%
Marshalls 2 87,968 2.3% 1,734.6 4.0%
PetsMart 6 155,278 4.0% 1,583.8 3.7%
Borders Books 2 62,950 1.6% 1,505.0 3.5%
-------------- ----------------- ---------------- --------------- -----------------------
25 1,584,315 41.3% $21,588.7 50.2%
============== ================= ================ =============== =======================
While none of the Company's largest tenants has experienced any recent
significant financial hardships of which the Company is aware, it is not
uncommon for economic conditions, market surpluses of retail space and
competitive pressures to negatively impact financial results of retail
operators. Homeplace, Caldor, Today's Man, Levitz Furniture, Wurlitzer, Lauriat
Books and Country Harvest Buffet have filed for protection under Chapter XI
provisions of the Federal bankruptcy law. The Company has one lease with each of
these tenants which together comprise 7.3% of the Company's gross leaseable area
and approximately 8.0% of annualized minimum rents as of December 31, 1997. See
"Factors That May Affect Future Performance - Risk of Bankruptcy of Major
Tenants."
Environmental Matters
The Company's ownership of real properties could subject it to certain
environmental liabilities. As discussed below, certain of the Company's
properties have known environmental liabilities, and certain other properties
are located in areas of current or former industrial activity, where
environmental contamination may have occurred. In conjunction with the spin-off
of the Company from Costco, the Company has agreed to indemnify Costco against
and hold Costco harmless from all environmental liabilities that relate to or
arise out of the real properties which were transferred to the Company by Costco
in 1994.
Under various Federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real estate may be
required to investigate and remediate releases or threatened releases of
hazardous or toxic substances or petroleum products located at such property,
and may be held liable to a governmental entity or to third parties for property
damage and for investigation and remediation costs incurred by such parties in
connection with the contamination. Under certain of these laws, liability may be
imposed without regard to whether the owner knew of or caused the presence of
the contaminants. These costs may be substantial, and the presence of such
substances, or the failure to remediate properly the contamination on such
property, may adversely affect the owner's ability to sell or lease such
property or to borrow money using such property as collateral. Certain Federal
and state laws require the removal or encapsulation of asbestos-containing
material in poor condition in the event of remodeling or renovation. Other
Federal, state and local laws have been enacted to protect sensitive
environmental resources, including threatened and endangered species and
wetlands. Such laws may restrict the development and diminish the value of
property which is inhabited by an
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endangered or threatened species, is designated as critical habitat for an
endangered or threatened species or is characterized as wetlands.
In 1994, Costco engaged environmental consultants to conduct Phase I assessments
(involving investigation without soil sampling or groundwater analysis) at each
of the properties that Costco transferred to the Company. The Company is not
aware of any environmental liability or noncompliance with applicable
environmental laws or regulations, revealed by the Phase I assessments or
otherwise, that would have a material adverse effect on its business, assets or
results of operations. Nevertheless, there can be no assurance that the
Company's knowledge is complete with regard to, or that the Phase I assessments
have identified, all material environmental liabilities. Set forth below are
summaries of certain environmental matters relating to certain of the Company's
properties.
Azusa. The Azusa site is a 17.4 acre site located in Azusa, California. The
Price Company ("Price"), a subsidiary of Costco, purchased the Azusa site in
1983 from Huffy Corporation ("Huffy"). Huffy operated a bicycle manufacturing
facility on the Azusa site from 1959 until 1982. While it was operated by Huffy,
the Huffy site contained a degreasing facility that allegedly released Volatile
Organic Compounds ("VOCs"), into the soil. After purchasing the Azusa site,
Price converted the bicycle manufacturing facility into a Price Club warehouse
and tire center. In 1989, Price Club relocated to a new building on an adjacent
property.
The Azusa site currently is located within the Baldwin Park Operable Unit
("BPOU") of the San Gabriel Valley Area 2 Federal Comprehensive Environmental
Response, Compensation and Liability Act of 1980 ("CERCLA") site. The BPOU
addresses a large area of groundwater contamination in the San Gabriel Valley.
VOCs, including trichloroethylene and perchloroethylene, are present in the
groundwater throughout a several mile long area, extending beneath the cities of
Azusa, Irwindale and Baldwin Park, California. Price received a general notice
of potential liability letter from the United States Environmental Protection
Agency (the "EPA") for the BPOU dated August 4, 1993, and is one of
approximately 110 potentially responsible parties ("PRPs"), representing 20-25
contaminated parcels, to have received such notice for the BPOU.
In March 1994, the EPA published a Record of Decision ("ROD") which documents
the selection of remedial alternatives for the BPOU. The EPA estimates that its
preferred remedy, as outlined in the ROD, will cost between $100 and $130
million. The San Gabriel Basin Water Quality Authority ("SGBWQA") has proposed
an alternative remedy for the BPOU, which will cost an estimated $25 to $30
million. A group of PRPs, including Huffy, the SGBWQA and the EPA currently are
negotiating the final remedy for the BPOU. The Company lacks sufficient
information regarding the activity of other PRPs to form an estimate of the
equitable share of total costs that could be allocated to its Azusa site.
To date, Price and Huffy have spent an aggregate of approximately $250,000 in
investigation and monitoring costs. Approximately $225,000 of those costs were
shared equally by Price and Huffy under an informal cost sharing agreement.
Under their current cost sharing agreement, however, Huffy is paying 85% of
site-related costs (except for certain limited costs associated with quarterly
water monitoring and monthly water level gauging).
7
Also, on January 11, 1995, the EPA wrote Price a "no intended action" letter
stating, "This letter is to inform you that USEPA does not plan to ask you or
your company to participate in the clean-up of the regional groundwater
contamination."
To the extent that there is any liability associated with the Azusa site, the
Company believes such liability should be attributed to Huffy. However, the
Company and Huffy have not negotiated a final allocation of costs as between
themselves. There can be no assurance that Huffy will contribute to any further
costs. Based upon a number of factors, including the EPA "no intended action"
letter, the current status of negotiations regarding the alternative remedy, the
cost of the final remedy, and the Company's allocated equitable share of that
cost as between it, Huffy and/or other PRPs, the Company believes its liability
associated with the Azusa site would not have a material adverse effect on the
financial condition and results of operations of the Company.
Pentagon City. The Pentagon City site is a 16.8 acre site in Arlington,
Virginia. Elevated levels of heavy metals are present in groundwater beneath the
Pentagon City site. Also, petroleum hydrocarbons are present in soil at the
site. By letters dated January 31, 1995 and March 22, 1994, the Virginia
Department of Environmental Quality is requiring no further action at the site
with regard to the heavy metals and petroleum hydrocarbon contamination. The
Company has not been notified by any governmental authority, and is not
otherwise aware, of any other material noncompliance, liability or claim
relating to hazardous or toxic substances or petroleum products in connection
with the Pentagon City site. Nevertheless, the Company's ownership of the
Pentagon City site creates the potential of liability for remediation costs
associated with groundwater beneath, and soils at, the site.
Signal Hill. The Signal Hill site is a 15.0 acre site in Signal Hill,
California. This site, and the adjoining properties, historically have been used
for oil and gas extraction activities, and the site currently has several active
and abandoned oil and gas production and injection wells. Prior to development
in the early 1990s, the prior owner excavated and treated over 100,000 cubic
yards of petroleum hydrocarbon contaminated soil. However, in 1992, certain
areas of the site were known to be still contaminated with petroleum
hydrocarbons and certain solvents in varying concentrations. The City of Signal
Hill Redevelopment Agency has indemnified the prior owner for environmental
expenses incurred through 1999 with respect to hazardous materials in the soil
and through 2001 with respect to hazardous materials in the groundwater. This
indemnity has been transferred to the Company.
New Britain. The New Britain site is a 17.8 acre site in New Britain,
Connecticut. The site previously contained a dry cleaning establishment and a
gas station. The site contains low levels of petroleum hydrocarbons and VOCs in
the soil and groundwater. The Company is continuing to remediate the soil and
groundwater at this property under the supervision of local authorities. The
Company estimates that the total cost of this remediation is not expected to
exceed $50,000 in the aggregate over the next three years.
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PEI owned additional properties with environmental issues that were sold by PEI
prior to the Distribution or that were transferred to PriceSmart in the
Distribution. PriceSmart has agreed to indemnify the Company for environmental
liabilities arising out of such properties.
Employees
The Company employed 32 employees as of December 31, 1997 including 15
responsible for property management, 13 employed in finance and administration
and 4 employed in the self storage business. The Company provides centralized
and comprehensive employee benefit programs for all eligible employees.
Seasonality
The Company's real estate operations generally are not subject to seasonal
fluctuations.
Corporate Headquarters
The Company maintains its headquarters in San Diego, California adjacent to the
Morena Boulevard Costco facility, and it believes that its current facilities
meet its expected requirements over the next 12 months.
Factors That May Affect Future Performance
Economic Performance and Value of Centers Dependent on Many Factors. Real
property investments are subject to varying degrees of risk. The economic
performance and values of real estate can be affected by many factors, including
changes in the national, regional and local economic climates, local conditions
such as an oversupply of space or a reduction in demand for real estate in the
area, the attractiveness of the properties to tenants, competition from other
available space, the ability of the owner to provide adequate maintenance and
insurance, and increased operating costs. In recent years, there has been a
proliferation of new retailers and a growing consumer preference for
value-oriented shopping alternatives that have, among other factors, heightened
competitive pressures. In certain areas of the country, there may also be an
oversupply of retail space. As a consequence, many companies in all sectors of
the retailing industry have encountered significant financial difficulties. A
substantial portion of the Company's income is derived from rental revenues from
retailers in community shopping centers and power centers. Accordingly, no
assurance can be given that the Company's financial results will not be
adversely affected by these developments in the retail industry.
Dependence on Rental Income from Real Property. Since substantially all of the
Company's income is derived from rental income from real property, the Company's
income and funds available for distribution would be adversely affected if a
significant number of the Company's tenants were unable to meet their
obligations to the Company or if the Company were unable to lease a significant
amount of space in its properties on economically favorable lease terms. There
can be no assurance that any tenant whose lease expires in the future will renew
such lease or that the Company will be able to re-lease space on economically
advantageous terms.
Illiquidity of Real Estate Investments. Equity real estate investments are
relatively illiquid and therefore tend to limit the ability of the Company to
vary its portfolio promptly in response to changes in economic or other
conditions. In addition, to the extent the properties are not subject to triple
net leases, certain significant expenditures such as real estate taxes and
maintenance
9
costs are generally not reduced when circumstances cause a reduction in income
from the investment. Should such events occur, the Company's income and funds
available for distribution would be adversely affected.
Risk of Bankruptcy of Major Tenants. The bankruptcy or insolvency of a major
tenant or a number of smaller tenants may have an adverse impact on the
properties affected and on the income produced by such properties. Under
bankruptcy law, a tenant has the option of assuming (continuing) or rejecting
(terminating) any unexpired lease. If the tenant assumes its lease with the
Company, the tenant must cure all defaults under the lease and provide the
Company with adequate assurance of its future performance under the lease. If
the tenant rejects the lease, the Company's claim for breach of the lease would
(absent collateral securing the claim) be treated as a general unsecured claim.
The amount of the claim would be capped at the amount owed for unpaid
pre-petition lease payments unrelated to the rejection, plus the greater of one
year's lease payments or 15% of the remaining lease payments payable under the
lease (but not to exceed the amount of three years' lease payments).
Reliance on Major Tenants. As of December 31, 1997, the Company's largest tenant
was Costco which accounted for approximately 19.1% of the Company's total annual
minimum rent revenue as of such date. The financial position of the Company and
its ability to make distributions may be adversely affected by financial
difficulties experienced by such tenant, or any other major tenant of the
Company, including a bankruptcy, insolvency or general downturn in business of
any such tenant or in the event any such tenant does not renew its leases as
they expire.
Control by Directors and Executive Officers. Robert E. Price, who is Chairman of
the Board, and Sol Price, a significant stockholder of PEI and the father of
Robert E. Price, beneficially owned as of December 31, 1997 an aggregate of
approximately 11.2 million shares, or 47.1% of the outstanding PEI Common Stock.
See "Item 12 Security Ownership of Certain Beneficial Owners and Management." As
a result, these stockholders will effectively control the outcome of all matters
submitted to the Company's stockholders for approval, including the election of
directors. In addition, such ownership could discourage acquisition of Company
Common Stock by potential investors, and could have an anti-takeover effect,
possibly depressing the trading price of Company Common Stock.
Competition for Acquisition of Real Estate. The Company faces competition in the
acquisition, operation and sale of its properties. Such competition can be
expected from other businesses, individuals, fiduciary accounts and plans and
other entities engaged in real estate investment. Some of the Company's
competitors are larger and have greater financial resources than the Company.
This competition may result in a higher cost for properties the Company wishes
to purchase. The tenants leasing the Company's properties generally face
significant competition from other operators. This may result in an adverse
impact on that portion, if any, of the rental stream to be paid to the Company
based on a tenant's revenues and may also adversely impact the tenants' results
of operations or financial condition.
Environmental Risks. Under various Federal, state and local laws, ordinances and
regulations, the Company may be considered an owner or operator of real
property, or may have arranged for the disposal or treatment of hazardous or
toxic substances and, therefore, may become liable for
10
the costs of removal or remediation of certain hazardous substances released on
or in its property or disposed of by it, as well as certain other potential
costs which could relate to hazardous or toxic substances (including
governmental fines and injuries to persons and property). Such liability may be
imposed whether or not the Company knew of, or was responsible for, the presence
of such hazardous or toxic substances.
Taxation of the Company. The Company has elected to be taxed as a REIT under the
Internal Revenue Code of 1986 as Amended (the "Code"), commencing with the four
months ended December 31, 1997. To maintain its status as a REIT for Federal
income tax purposes, the Company generally is required each year to distribute
to its stockholders at least 95% of its taxable income. In addition, the Company
is subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less than
the sum of 85% of its ordinary income for such calendar year, 95% of its capital
gain income for the calendar year and any amount of such taxable income that was
not distributed in prior years. As long as the Company meets the requirements
under the Code, for qualification as a REIT each year, the Company will be
entitled to a deduction when calculating its taxable income for dividends paid
to its stockholders. For the Company to qualify as a REIT, however, certain
detailed technical requirements must be met (including certain income, asset and
stock ownership tests) under Code provisions for which, in many cases, there are
only limited judicial or administrative interpretations. Although the Company
intends to operate so that it will continue to qualify as a REIT, the highly
complex nature of the rules governing REITs, the ongoing importance of factual
determinations and the possibility of future changes in the Company's
circumstances preclude any assurance that the Company will so qualify in any
year. For any taxable year that the Company fails to qualify as a REIT, it would
not be entitled to a deduction for dividends paid to its stockholders in
calculating its taxable income. Consequently, distributions to stockholders
would be substantially reduced and could be eliminated because of the Company's
increased tax liability. Should the Company's qualification as a REIT terminate,
the Company may not be able to elect to be treated as a REIT for the subsequent
five-year period, which would substantially reduce and could eliminate
distributions to stockholders for the years involved.
ITEM 2 - Properties
Overview
As of December 31, 1997, the Company owned 27 real estate properties and held
one property pursuant to a 22 year ground lease, which have an aggregate net
book value of $353 million. Such properties encompass 378 acres of land and
approximately 3.8 million square feet of gross leasable building space and were
92% leased. The five largest properties have a carrying value of $205 million,
or 58% of the total portfolio, which includes 1.6 million square feet of
leasable space on 110 acres that generates annual minimum rent of $23.0 million,
based on leases existing as of December 31, 1997.
The Company's properties are geographically concentrated in the Northeastern
states of New York (3), Virginia (2), New Jersey (2), Pennsylvania (1),
Massachusetts (1), Maryland (1) and Connecticut (1) which comprise a total of
65% of the net book value of the portfolio. California
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(13) accounts for 28% of the net book value, with the remaining properties
located in Texas (1), Arizona (1) and Colorado (2).
On December 31, 1997, the Company acquired Stanford Ranch Crossing, a power
center in Roseville, California, for $23.6 million. The Company paid $17.3
million of the purchase price on December 31, 1997 and is obligated to pay the
remaining portion upon completion of construction in 1998. The 20 acre center
will eventually comprise 190,000 square feet and is expected to generate minimum
annual rents of $2.3 million when construction is complete.
Property Table
Amounts shown for annual minimum rents are based on executed leases as of
December 31, 1997. No allowances have been made for contractually-based delays
to commencement of rental payments. Due to the nature of real estate
investments, actual rental income may differ from amounts shown in this
schedule. The table set forth below describes the Company's portfolio of real
estate properties as of December 31, 1997.
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Real Estate Portfolio Leases in Effect as of December 31, 1997
-----------------------------------------------------------------------
Number Gross Net Book Annual % of
of Land Leasable Percent Value Minimum G.L.A. Lease
Tenants Acreage Area (sq ft) Leased 12/31/97 Rent Principal Tenants (sq ft)Expires
-------- -------- ------------ --------- ----------- ----------- ----------------------------------
(000's) ($000's) ($000's)
Westbury, NY 8 30.4 398.6 100% $65,188 $ 7,223 Costco 37% 2009
Kmart 28% 2013
Marshalls 11% 2009
The Sports Authority 11% 2013
Borders Books 8% 2019
Pentagon City, VA 12 16.8 336.8 100% 59,598 6,490 Costco 50% 2009
Marshalls 13% 2010
Best Buy 11% 2010
Linens'n Things 10% 2010
Borders Books 10% 2010
Wayne, NJ 5 19.2 348.0 89% 35,338 4,173 Costco 42% 2009
(includes 37,000 sq. Lackland Storage 13% 2012
ft. of The Sports Authority 13% 2012
vacant storage space) Nobody Beats the Wiz 11% 2002
Dallas, TX 5 14.6 177.5 100% 22,278 2,855 Homeplace 33% 2016
Wickes Furniture 24% 2011
OfficeMax 17% 2011
Comp USA 17% 2011
Just For Feet 9% 2011
Philadelphia, PA 10 29.3 300.9 79% 22,276 2,292 The Home Depot 37% 2009
Babys R Us 13% 2006
AMC Theatres 13% 2015
ACME Supersaver 11% 2000
Seekonk, MA 9 43.1 213.1 48% 17,875 1,233 The Sports Authority, Circuit City
Roseville, CA 9 20.3 170.7 90% 17,338 1,720 The Sports Authority, Linens `n Things,
Ross Stores
San Diego, CA 4 28.8 429.1 100% 16,298 2,224 Costco, Price Self Storage, Charlotte
Russe
Signal Hill, CA 13 15.0 154.8 99% 14,565 2,129 The Home Depot, PetsMart
Fountain Valley, CA 15 12.6 119.2 95% 13,094 1,661 The Sports Authority, PetsMart,
Souplantation
Glen Burnie, MD 11 18.7 130.6 100% 8,802 1,570 The Sports Authority, PetsMart,
Computer City
Northridge, CA 3 4.4 30.0 100% 7,229 828 Barnes & Noble, Fresh Choice
Azusa, CA 4 17.4 131.3 35% 6,765 550 Costco Business Delivery
San Diego/Carmel Mtn., 7 5.9 35.0 100% 6,336 906 Claim Jumper, McMillin Realty, Islands
CA
Moorsetown, NJ (leased 3 18.3 172.6 100% 6,040 1,591 Caldor, The Sports Authority
land)
Buffalo, NY 1 16.1 115.4 100% 4,849 733 Builders Square
Sacramento/Stockton, CA 2 5.7 49.8 100% 4,673 470 PetsMart, Office Depot
Inglewood, CA 1 8.1 119.9 100% 3,994 847 HomeBase
San Juan Capistrano, CA 5 5.5 56.4 100% 3,953 577 PetsMart, Staples
New Britain, CT 1 17.8 112.4 100% 3,474 671 Wal-Mart
Tucson, AZ 9 7.7 40.1 98% 3,270 395 PetsMart
Hampton, VA 2 3.5 45.6 100% 2,582 445 The Sports Authority, Commerce Bank
Redwood City, CA 2 6.4 49.4 100% 2,095 392 Orchard Supply (ground lease)
Smithtown, NY 1 5.9 55.6 100% 1,957 455 Levitz Furniture
Denver/Littleton, CO 1 3.1 26.4 100% 1,555 216 PetsMart
Denver/Aurora, CO 1 .8 7.3 100% 650 146 Red Robin
Chula Vista/Rancho del 1 1.0 0.0 0% 500 75 Burger King (ground lease)
Rey, CA
San Diego/Southeast, CA 2 1.9 8.9 100% 350 138 Navy Federal C.U., Burger King
--- ----- ------- ---- -------- -------
Total................... 147 378.3 3,835.4 92% $352,922 $43,005
=== ===== ======= ==== ======== =======
13
Pending Real Estate Transactions
Since December 31, 1997 five leases have been consummated for approximately
144,000 square feet of leasable area. These new leases will generate $950,000 in
annual minimum rents. The development costs necessary to provide appropriate
facilities for these signed leases is estimated to be approximately $2.8
million. The Company is also currently in negotiations to purchase additional
commercial properties as well as evaluating various properties for acquisition.
ITEM 3 - Legal Proceedings
The Company is not a party to any material legal proceedings.
ITEM 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of the Company's stockholders was held on December 16, 1997.
As of the record date for the meeting, there were 23,681,025 shares outstanding.
The following Directors were elected at the meeting:
Votes For Votes Withheld
--------- --------------
James F. Cahill 21,715,236 31,739
Anne L. Evans 21,714,070 32,905
Murray L. Galinson 21,716,636 30,339
Jack McGrory 21,710,036 36,939
Paul A. Peterson 21,715,986 30,989
Robert E. Price 21,712,632 34,343
A proposal for reincorporation of the Company as a Maryland corporation,
pursuant to a merger of the Company into a newly formed wholly-owned Maryland
subsidiary and the conversion of each outstanding share of Common Stock of the
Company into one share of Common Stock of the surviving corporation (the
"Reincorporation") was approved as follows:
Votes For Votes Against Votes Abstaining
--------- ------------- ----------------
Reincorporation of the Company
in Maryland 17,562,230 131,628 168,190
14
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
Stock Prices
The Company's Common Stock trades on The Nasdaq Stock MarketSM under the symbol
"PREN." The table set forth below provides the high and low sales prices of the
Common Stock for the period indicated, as reported by The Nasdaq Stock MarketSM:
High Low
------------- -------------
Calendar Year --- 1995
First Quarter 13 3/4 10 1/2
Second Quarter 14 11 1/2
Third Quarter 16 13 1/2
Fourth Quarter 16 14 1/4
Calendar Year --- 1996
First Quarter 16 1/8 15
Second Quarter 16 1/2 15 1/4
Third Quarter 16 1/2 14 3/4
Fourth Quarter 17 5/8 16
Calendar Year --- 1997
First Quarter 19 16 3/4
Second Quarter 19 5/8 17 3/8
Third Quarter 23 17 5/8
Fourth Quarter 19 3/8 17 1/8
Calendar Year --- 1998
First Quarter (through 3/17/98) 20 1/8 18
On March 17, 1998, the last reported sales price per share of the Common Stock
was $19.00, and the Company had approximately 670 stockholders of record.
On August 29, 1997 the Company completed its spin-off distribution of one share
of Common Stock of PriceSmart for every four shares of the Company's Common
Stock held of record as of August 15, 1997. PriceSmart began separate trading on
The Nasdaq Stock MarketSM on September 2, 1997.
Dividends
For the transition period ended December 31, 1997, the Company's Board of
Directors declared one dividend of $0.35 per share for a total of $8.3 million.
During the year ended August 31, 1997, the Company's Board of Directors declared
four quarterly dividends of $0.30 per share for a total of $1.20 per share, or
$28.0 million. No dividends were declared or paid during the year ended August
31, 1996. During the year ended August 31, 1995, a $1.7 million cash dividend of
$0.075 per share was paid in August 1995 to offset certain adverse tax
consequences which otherwise would have occurred.
15
PEI, in order to qualify as a REIT, is required to distribute dividends (other
than capital gain dividends) to its stockholders in an amount at least equal to
(A) the sum of (i) 95% of PEI's "REIT taxable income" (computed without regard
to the dividends paid deduction and PEI's net capital gain) and (ii) 95% of the
net income (after tax), if any, from foreclosure property, minus (B) the sum of
certain items of noncash income. In addition, if PEI disposes of any asset
during the 10-year period beginning on the first day of the first taxable year
for which PEI qualified as a REIT, PEI will be required, pursuant to Treasury
Regulations which have not yet been promulgated, to pay a corporate level tax
equal to the highest corporate tax rate multiplied by the lesser of the built-in
gain at the time PEI elected REIT status, or the actual taxable gain recognized
on the disposition of the asset. In addition, PEI will be required to distribute
at least 95% of the gain (after tax), recognized on the disposition of the
asset. Such distributions must be paid in the taxable year to which they relate,
or in the following taxable year if declared before PEI timely files its tax
return for such year and if paid on or before the first regular dividend payment
after such declaration. To the extent that PEI does not distribute all of its
net capital gain or distributes at least 95%, but less than 100%, of its "REIT
taxable income," as adjusted, it will be subject to tax thereon at regular
ordinary and capital gain corporate tax rates. Stockholders may be required to
include amounts designated by PEI as distributed capital gains. In such case,
stockholders will be treated as having paid the capital gains tax imposed on the
real estate investment designated amounts and will be allowed a corresponding
stock basis adjustment and a credit or refund for the tax deemed paid.
Furthermore, if PEI should fail to distribute, during each calendar year, at
least the sum of (i) 85% of its real estate investment trust ordinary income for
such year, (ii) 95% of its real estate investment trust capital gain income for
such year, and (iii) any undistributed taxable income from prior periods, PEI
would be subject to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed. PEI intends to make timely distributions
sufficient to satisfy these annual distribution requirements.
It is possible that PEI, from time to time, may not have sufficient cash or
other liquid assets to meet these distribution requirements due to timing
differences between (i) the actual receipt of such income and actual payment of
deductible expenses and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of PEI. In the event that such timing
differences occur, in order to meet these distribution requirements, PEI may
find it necessary to arrange for short-term, or possibly long-term, borrowings
or to pay dividends in the form of taxable stock dividends.
Under certain circumstances, PEI may be able to rectify a failure to meet the
distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in PEI's deduction for
dividends paid for the earlier year. Thus, PEI may be able to avoid being taxed
on amounts distributed as deficiency dividends; however, PEI will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends.
16
ITEM 6 - Selected Financial Data
The following selected data should be read in conjunction with the Company's
financial statements elsewhere in this Form 10-K and "Item 7 - Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(amounts in thousands, except per share data)
Four Months Ended
December 31 Year Ended August 31
------------------------- -----------------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
----------- ------------ ----------- ----------- ------------ ------------ ------------
(unaudited)
Selected Income Statement Data
Rental revenues $18,170 $18,941 $56,838 $56,221 $51,897 $30,316 $25,793
Operating income (loss) 9,045 8,178 22,422 5,829 16,635 (74,711) 28,874
Net income (loss) from
continuing operations 17,508 7,590 19,085 8,340 13,297 (40,596) 20,987
Discontinued operations -- (3,235) (4,860) (8,250) (12,751) (883) (436)
Net income (loss) per share
from continuing .74 .33 .82 .36 .53 (1.50) .78
operations
Cash dividends per share .35 .30 1.20 -- .08 -- --
As of
December 31 As of August 31
------------------ -----------------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------------ ----------- ----------- ------------ ----------- ------------
Selected Balance Sheet Data
Real estate assets, net $353,056 $337,139 $337,098 $330,443 $405,966 $356,720
Total assets 408,478 403,757 540,325 555,994 591,511 470,950
Long-term debt -- -- -- 15,425 -- --
Stockholders' equity and
investment by Costco 406,624 396,476 532,899 532,085 578,788 454,357
Book value per share 17.13 16.78 22.88 22.90 21.44 16.83
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis compares the results of operations for the
four months ended December 31, 1997 and 1996 and each of the three years ended
August 31, 1997, and it should be read in conjunction with the financial
statements and the accompanying notes included in "Item 8 - Financial Statements
and Supplementary Data." The analysis below reflects the Distribution of
PriceSmart and the presentation of the merchandising segment as discontinued
operations for all years presented. See Note 1 of notes to financial statements.
In those instances where changes are attributed to more than one factor, the
factors are presented in descending order of importance. All dollar amounts are
in thousands.
Rental Operations
Rental Percent Operating Percent
Revenues Change Income Change Change
----------- ---------- ----------- ---------- ---------
1997 - Four months ended December 31 $18,170 4% $ 9,045 $ 867 11%
1996 - Four months ended December 31 18,941 -- 8,178 -- --
(unaudited)
1997 - Year ended August 31 56,838 1% 24,422 1,593 7%
1996 - Year ended August 31 56,221 8% 22,829 1,194 6%
1995 - Year ended August 31 51,897 -- 21,635 -- --
17
For purposes of this discussion, operating income is defined as rental revenues,
including common area expense reimbursements, less expenses, including expenses
associated with unimproved land and certain developed properties with vacant
space. Operating income excludes provision for asset impairments, which is
discussed separately.
The decrease in revenue for the four months ended December 31, 1997, was
primarily due to $1.6 million of revenue included in the four months ended
December 31, 1996 which was generated by properties sold prior to August 31,
1997 or transferred to PriceSmart in the Distribution. Revenues generated by the
current portfolio of properties in place during both periods increased $0.8
million or 4.7% compared to the prior year.
The $0.6 million increase in revenue for the year ended August 31, 1997 compared
to the year ended August 31, 1996 was due primarily to increased lease-up of the
Dallas, TX property which began leasing activity during the fourth quarter of
the year ended August 31, 1996. Other factors include additional lease-up at
properties located in Bakersfield, CA and Philadelphia, PA. These increases were
offset by loss of revenue from the Seekonk, MA property as a result of the
bankruptcy of the anchor tenant, Bradlees during the past year as well as the
write-off of related receivables associated with Bradlees. There also was a loss
of revenue due to the sale of the Richmond, CA location in the latter part of
the year ended August 31, 1996.
The increase in revenue for the year ended August 31, 1996 compared to the year
ended August 31, 1995 was due primarily to increased lease-up of the Pentagon
City, VA property, which was not fully leased until mid-year of the year ended
August 31, 1995. Other factors include additional lease-up of the Philadelphia,
PA property as well as the Dallas, TX property which was under development
during the year ended August 31, 1995 and began leasing activity during the
fourth quarter of the year ended August 31, 1996. These increases were partially
offset by a decline in revenues from the Phoenix, AZ property, which was sold in
March 1995.
General and Administrative Expenses
Percent
Amount Change Change
------- ------- -------
1997 - Four months ended December 31 $1,046 $ (592) -36%
1996 - Four months ended December 31 1,638 --- ---
(unaudited)
1997 - Year ended August 31 5,569 219 4%
1996 - Year ended August 31 5,350 1,759 49%
1995 - Year ended August 31 3,591 --- ---
The decrease in expenses for the four months ended December 31, 1997 compared to
the four months ended December 31, 1996 was primarily due to a reduction in
executive management and related payroll and benefits.
The increase in expenses for the year ended August 31, 1997 compared to the year
ended August 31, 1996 was due primarily to expenses of $1.1 million related to
the Distribution of PriceSmart, consisting of insurance, legal and accounting
fees. Additional increases are attributed to severance expense for executive
officers that left the Company during the year for which no comparable expense
was recorded in the prior year. The increase was partially offset by a decrease
in expense, compared to the prior year, of $1.25 million related to the
settlement of a litigation matter.
18
The increase in expenses for the year ended August 31, 1996 compared to the year
ended August 31, 1995 was due primarily to the establishment of a reserve of
$1.25 million for a potential settlement payment pursuant to a tentative
agreement regarding a litigation matter. Insurance and legal expenses also
increased.
Provision for Asset Impairments
For the current portfolio of investment properties, no such indicators of
impairment were present in the four months ended December 31, 1997 and 1996.
In the years ended August 31, 1997, 1996 and 1995, noncash charges of $2.0
million, $17.0 million and $5.0 million, respectively, were taken to write-down
the carrying value of real properties which were being held for sale and which
were expected to generate net sales proceeds below their then current book
values.
Interest Income (net)
Percent
Amount Change Change
------- ------- -------
1997 - Four months ended December 31 $ 833 $(1,782) -68%
1996 - Four months ended December 31 2,615 -- --
(unaudited)
1997 - Year ended August 31 8,033 591 8%
1996 - Year ended August 31 7,442 1,358 22%
1995 - Year ended August 31 6,084 -- --
The decrease in net interest income for the four months ended December 31, 1997
compared to the four months ended December 31, 1996 was due to repayment of a
$41.2 million note receivable and transfer of certain other notes receivable to
PriceSmart in the Distribution.
The increase in net interest income for the year ended August 31, 1997 compared
to the year ended August 31, 1996 was due primarily to higher interest income on
invested cash balances as well as a reduction in interest expense related to a
$15.4 million note payable to Costco that was repaid during the fourth quarter
of the year ended August 31, 1996. This net improvement was somewhat offset by
reductions in interest income from notes receivable repaid during the third
quarter and a reduction in capitalized interest due to less construction
activity in the year ended August 31, 1997.
The increase in net interest income for the year ended August 31, 1996 compared
to the year ended August 31, 1995 was due primarily to increased income from
various notes receivable, increased earnings on cash balances as well as reduced
interest expense on borrowings, including a note payable to Costco, which was
repaid during the fourth quarter of the year ended August 31, 1996.
19
Gain (Loss) on Sale of Real Estate
Percent
Amount Change Change
------- ------- -------
1997 - Four months ended December 31 $ -- $(1,349) -100%
1996 - Four months ended December 31 1,349 --
(unaudited)
1997 - Year ended August 31 1,111 247 29%
1996 - Year ended August 31 864 1,045 577%
1995 - Year ended August 31 (181) -- --
There were no property sales in the four months ended December 31, 1997. During
the same period of the prior year, the gain recognized related to the sale of
properties in Schaumburg, IL, Colton, CA, and Concord, CA.
The gain on sale of properties for the year ended August 31, 1997 related to the
sale of properties in Schaumburg, IL, Gaithersburg, MD, Colton, CA, and Concord,
CA. These gains were somewhat offset by losses on the sale of properties in
Houston, TX and Washington Metro, MD.
The gain on sale of properties for the year ended August 31, 1996 related
primarily to the sale of properties in Denver/Littleton, CO, Sacramento/No.
Highlands, CA, San Diego, CA (Convoy Ct.), and San Jose, CA. These and other
gains were somewhat offset by a loss on the sale of property in West Palm Beach,
FL.
Gain on Sale of Investment
The gain on sale of investment of $722,000 recorded during the four months ended
December 31, 1996 related to the sale of the Company's preferred stock
investment in a privately held specialty retailer. The gain on sale of
investment of $782,000 recorded during the year ended August 31, 1997 included
the gain mentioned above as well as a gain on the sale of the Company's options
to purchase stock in a privately held automobile broker.
Provision (Benefit) for Income Taxes
Percent Effective
Amount Change Change Tax Rate
------- ------ ------- ---------
1997 - Four months ended December 31 $(7,630) $(12,904) -245% n/a
1996 - Four months ended December 31 5,274 -- -- 41%
(unaudited)
1997 - Year ended August 31 13,263 7,468 129% 41%
1996 - Year ended August 31 5,795 (3,446) -37% 41%
1995 - Year ended August 31 9,241 -- -- 41%
Because the Company has been operating as a REIT since September 1, 1997, there
is no income tax expense for the transition period ended December 31, 1997. The
income tax benefit for this period is a result of the Company's previously
deferred tax liability being eliminated because of the Company's conversion to a
REIT as well as accrued income tax refunds that are a result of Federal tax net
operating loss carrybacks.
20
Discontinued Operations
Percent
Amount Change Change
------- ------- -------
1997 - Four months ended December 31 $ -- $3,235 100%
1996 - Four months ended December 31 (3,235) -- --
(unaudited)
1997 - Year ended August 31 (4,860) 3,390 41%
1996 - Year ended August 31 (8,250) 4,501 35%
1995 - Year ended August 31 (12,751) -- --
Due to the Distribution of PriceSmart at August 29, 1997, there were no
discontinued operations during the four months ended December 31, 1997.
The decrease in the net loss from operations of the discontinued merchandising
segment for the year ended August, 31 1997 compared to the year ended August 31,
1996, was primarily a result of decreased expenses upon the expiration of
certain contractual obligations to pay Costco $4.5 million per year for
marketing-related activities, as well as increases in sales and gross margin due
to the opening of the Panama City location in October 1996 and increases in
sales of U.S.-sourced products to licensees. The discontinued merchandising
segment was transferred to PriceSmart in the Distribution.
The decrease in the net loss from operations of the discontinued merchandising
segment during the year ended August 31, 1996 compared to the year ended August
31, 1995 was primarily a result of cost savings realized by discontinuing
display samples and in-store staffing at Costco locations related to the
electronic shopping program, and a reduction of central office staffing. In
addition, other revenues increased primarily as a result of royalties from the
newly established licensee operations as well as certain fees for license
arrangements.
Adjusted Funds From Operations
Four Months Ended
December 31 Year Ended August 31
-------------------- --------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited) ($000's)
Income before provision for income taxes $ 9,878 $ 12,864 $ 32,348 $ 14,135 $ 22,538
Depreciation and amortization 3,326 3,299 9,860 10,071 10,245
Provision for asset impairments -- -- 2,000 17,000 5,000
(Gain) loss on sale of real estate, net -- (1,349) (1,111) (864) 181
(Gain) loss on sale of investment -- (722) (782) -- --
-------- -------- -------- -------- --------
Funds from operations 13,204 14,092 42,315 40,342 37,964
Straight-line rents (829) (1,024) (2,499) (3,150) (3,332)
-------- -------- -------- -------- --------
Adjusted funds from operations $ 12,375 $ 13,068 $ 39,816 $ 37,192 $ 34,632
======== ======== ======== ======== ========
Weighted average shares outstanding 23,675 23,298 23,354 23,262 24,864
Real estate industry analysts generally consider funds from operations ("FFO")
to be a supplemental measure of performance for real estate-oriented companies.
In general, FFO adjusts net income for noncash charges such as depreciation,
amortization and most non-recurring gains and losses. As defined by the National
Association for Real Estate Investment Trusts ("NAREIT"), FFO is net income
determined in accordance with generally accepted accounting principles ("GAAP"),
excluding depreciation and amortization expense, and gains (losses) from sales
of property. The Company has historically excluded provisions for asset
21
impairment and gains (losses) from sale of investment in determining FFO. In
addition, due to the significance of straight-line rent accruals, which
represent noncash revenues associated with fixed future minimum rent increases,
the Company has adjusted the NAREIT definition to eliminate straight-line rents
when computing its adjusted FFO.
FFO and adjusted FFO do not represent cash flows from operations as defined by
GAAP and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or to cash flows as a measure
of liquidity.
The following table illustrates the changes in adjusted FFO for the four months
ended December 31, 1997 and 1996.
Four Months Ended
December 31
-------------------- Percent
1997 1996 Change Change
-------- -------- -------- ------
Existing portfolio NOI $ 12,588 $ 11,774 $ 814 7%
NOI from properties transferred to
PriceSmart or sold -- 317 (317) -100%
General and administrative expenses (1,046) (1,638) 592 36%
Interest income 833 2,615 (1,782) -68%
-------- -------- -------- -----
Adjusted funds from operations $ 12,375 $ 13,068 $ (693) -5%
======== ======== ======== =====
Net operating income ("NOI") is defined as rental revenues excluding
straight-line rent accruals, less operating expenses before depreciation.
Although NOI from the current portfolio of properties increased by 7%, the
Company experienced a decrease in adjusted FFO for the four months ended
December 31, 1997 compared to the four months ended December 31, 1996. This
decrease was primarily a result of a reduction in net interest income due to the
repayment of a $41.2 million note receivable and the transfer of certain other
notes receivable to PriceSmart in the Distribution. The decrease in adjusted FFO
was partially offset by a reduction in general and administrative expenses,
primarily due to the reduction in executive management and related payroll and
benefits. A further reduction to adjusted FFO compared to the prior year was the
loss of NOI from properties transferred to PriceSmart in the Distribution or
sold prior to August 31, 1997.
For the years ended August 31, 1997 and 1996, the growth in adjusted FFO
reflects many of the factors mentioned in the rental revenue and operating
income discussion under "Rental Operations" in this Item 7.
Liquidity and Capital Resources
As of December 31, 1997 the Company had $27 million in cash. While the Company
is well positioned to finance its business activities through a variety of
sources, it expects to satisfy short-term liquidity requirements through net
cash provided by operations. To the extent that investment opportunities exceed
available cash flow from operations, the Company believes that its unleveraged
balance sheet will enable it to raise additional capital through bank credit
facilities and/or securitized debt offerings. The Company also may choose to
seek additional funds through future public offerings of debt or equity
securities.
Consistent with historical trends, operating income from real estate activities
increases as properties are developed and declines as properties are sold. The
Company's liquidity is primarily affected by the timing and magnitude of rental
property acquisition, development and
22
disposition. In addition, the Company's liquidity may be affected by the
anticipated payment of quarterly cash dividends to stockholders in the future.
See "Item 5 - Market for Registrant's Common Equity and Related Stockholder
Matters."
On December 31, 1997, the Company acquired Stanford Ranch Crossing, a power
center in Roseville, California, for $23.6 million. The Company paid $17.3
million of the purchase price on December 31, 1997 and is obligated to pay the
remaining portion upon completion of construction in 1998. Through calendar
1998, the Company anticipates investing approximately $8.0 million in commercial
real estate development on owned property (a portion of which represents
commitments under executed construction contracts) and approximately $100
million - $150 million for real estate acquisitions and development
opportunities. Actual capital expenditures may vary from estimated amounts
depending on business conditions and other risks and uncertainties to which the
Company and its business are subject.
The Company is also currently in negotiations to purchase additional commercial
properties as well as evaluating various properties for acquisition. It is
anticipated that any completed acquisitions will be funded by a portion of the
Company's existing cash balances with the remainder, if needed, provided by
proceeds from an advance under an unsecured revolving credit facility the
Company is currently negotiating with a major institution.
Year 2000
The Company is in the process of upgrading its existing computer software and
information technology and recognizes the need to ensure its operations will not
be adversely impacted by Year 2000 software failures. Software failures due to
processing errors potentially arising from calculations using the Year 2000 date
are a known risk. The project cost is approximately $220,000 and is expected to
be completed not later than December 31, 1998, which is prior to any anticipated
impact on the Company's operating systems. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 issue will not pose significant operational problems for its computer
systems.
Inflation
Because a substantial number of the Company's leases contain provisions for rent
increases based on changes in various consumer price indices, based on fixed
rate increases, or based on percentage rent if tenant sales exceed certain base
amounts, inflation is not expected to have a material impact on future net
income or cash flow from developed and operating properties. In addition,
substantially all leases are "triple net," whereby specific operating expenses
and property taxes are passed through to the tenant. For undeveloped or
under-developed properties, inflation could increase the Company's cost of
carrying and developing the properties; however, inflation would likely increase
the future sales value of the properties.
ITEM 7A. - Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
23
ITEM 8 - Financial Statements and Supplementary Data
PRICE ENTERPRISES, INC.
BALANCE SHEETS
(in thousands, except share data)
ASSETS
December 31 August 31
--------- ----------------------
1997 1997 1996
--------- --------- ---------
Real estate assets
Land and land improvements $ 193,881 $ 184,702 $ 179,639
Building and improvements 204,184 195,208 189,125
Fixtures and equipment 242 203 733
Construction in progress 946 235 328
--------- --------- ---------
399,253 380,348 369,825
Less accumulated depreciation (46,197) (43,209) (32,727)
--------- --------- ---------
353,056 337,139 337,098
Cash and cash equivalents 27,003 40,000 15,458
Accounts receivable 2,360 1,374 3,653
Income tax receivable 8,117 8,076 --
Deferred rents 12,400 11,810 9,458
Leasing costs, net 4,774 5,099 5,516
Prepaid expenses and other assets 768 259 5,912
Property held for sale, net -- -- 28,337
Atlas note receivable -- -- 41,711
Deferred income taxes -- -- 5,389
Net assets of discontinued segment
and assets transferred to PriceSmart -- -- 87,793
--------- --------- ---------
Total assets $ 408,478 $ 403,757 $ 540,325
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accounts payable and other liabilities $ 1,854 $ 621 $ 7,426
Deferred income taxes -- 6,660 --
--------- --------- ---------
Total liabilities 1,854 7,281 7,426
Commitments
Stockholders' equity
Common stock, $.0001 par value,
60,000,000 shares authorized, 23,730,951, 23,632,937 and
23,290,057 shares issued and outstanding 2 2 2
Additional paid-in capital 412,321 411,393 534,004
Accumulated deficit (5,699) (14,919) (1,107)
--------- --------- ---------
Total stockholders' equity 406,624 396,476 532,899
--------- --------- ---------
Total liabilities and stockholders' equity $ 408,478 $ 403,757 $ 540,325
========= ========= =========
See accompanying notes.
24
PRICE ENTERPRISES, INC.
STATEMENTS OF INCOME
(in thousands, except per share data)
Four Months
Ended December 31 Year Ended August 31
-------------------- --------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited)
Rental revenues $ 18,170 $ 18,941 $ 56,838 $ 56,221 $ 51,897
Expenses
Operating and maintenance 2,392 3,037 9,105 9,591 7,890
Property taxes 2,361 2,789 7,882 8,380 8,536
Depreciation and amortization 3,326 3,299 9,860 10,071 10,245
General and administrative 1,046 1,638 5,569 5,350 3,591
Provision for asset impairments -- -- 2,000 17,000 5,000
-------- -------- -------- -------- --------
Total expenses 9,125 10,763 34,416 50,392 35,262
-------- -------- -------- -------- --------
Operating income 9,045 8,178 22,422 5,829 16,635
Interest and other
Interest income, net 833 2,615 8,033 7,442 6,084
Gain (loss) on sale of real estate, net -- 1,349 1,111 864 (181)
Gain on sale of investment -- 722 782 -- --
-------- -------- -------- -------- --------
Total interest and other 833 4,686 9,926 8,306 5,903
-------- -------- -------- -------- --------
Income before provision (benefit)
for income taxes 9,878 12,864 32,348 14,135 22,538
Provision (benefit) for income taxes (7,630) 5,274 13,263 5,795 9,241
-------- -------- -------- -------- --------
Net income from continuing operations 17,508 7,590 19,085 8,340 13,297
Discontinued operations (Note 2):
Net loss from operations of
discontinued merchandising
segment (less applicable benefit
for income taxes of $2,248,
$3,379, $4,531 and $4,052
respectively) -- (3,235) (4,860) (8,250) (12,751)
-------- -------- -------- -------- --------
Net income $ 17,508 $ 4,355 $ 14,225 $ 90 $ 546
======== ======== ======== ======== ========
Net income per share from continuing
operations $ .74 $ .33 $ .82 $ .36 $ .53
======== ======== ======== ======== ========
Net income per share $ .74 $ .19 $ .61 $ .00 $ .02
======== ======== ======== ======== ========
Net income per share from continuing
operations - assuming dilution $ .73 $ .32 $ .82 $ .36 $ .52
======== ======== ======== ======== ========
Net income per share - assuming dilution $ .73 $ .18 $ .61 $ .00 $ .02
======== ======== ======== ======== ========
See accompanying notes.
25
PRICE ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except per share data)
Accumulated
Additional Foreign
Common Stock Paid-In Currency Accumulated
Shares Amount Capital Translation Deficit Total
--------- --------- ---------- ----------- ----------- ---------
Investment by Costco at
August 31, 1994 27,000 $ 3 $ 580,468 $ (1,683) $ -- $ 578,788
Net income -- -- -- -- 546 546
Adjustment to investment by
Costco -- -- (1,389) -- -- (1,389)
Stock options exercised including
income tax benefits 10 -- 126 -- -- 126
Shares repurchased (3,776) (1) (45,925) -- -- (45,926)
Foreign currency translation
adjustment -- -- -- 1,683 -- 1,683
Cash dividend, $.075 per share -- -- -- -- (1,743) (1,743)
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1995 23,234 2 533,280 -- (1,197) 532,085
Net income -- -- -- -- 90 90
Stock options exercised including
income tax benefits 56 -- 724 -- -- 724
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1996 23,290 2 534,004 -- (1,107) 532,899
Net income -- -- -- -- 14,225 14,225
Stock options exercised including
income tax benefits 343 -- 5,429 -- -- 5,429
Cash dividends, $1.20 per share -- -- -- -- (28,037) (28,037)
Special dividend - Distribution
of PriceSmart -- -- (128,040) -- -- (128,040)
--------- --------- --------- --------- --------- ---------
Balance at August 31, 1997 23,633 2 411,393 -- (14,919) 396,476
Net income -- -- -- -- 17,508 17,508
Stock options exercised 98 -- 928 -- -- 928
Cash dividend, $.35 per share -- -- -- -- (8,288) (8,288)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 23,731 $ 2 $ 412,321 $ -- $ (5,699) $ 406,624
========= ========= ========= ========= ========= =========
See accompanying notes.
26
PRICE ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Four Months
Ended December 31 Year Ended August 31
-------------------- --------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(unaudited)
Operating activities
Net income $ 17,508 $ 4,355 $ 14,225 $ 90 $ 546
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 3,326 3,299 9,860 10,071 10,245
Deferred rents (590) (1,024) (2,406) (3,150) (3,527)
Deferred income taxes (6,660) 4,267 15,894 3,676 (2,466)
(Gain) loss on sale of real estate, net -- (1,349) (1,111) (864) 1,430
Provision for asset impairments -- -- 2,000 17,000 5,000
Changes in operating assets and liabilities:
Accounts receivable and other assets (1,536) (1,081) (5,060) (6,613) (5,057)
Accounts payable and other liabilities 491 (44) (302) (698) 3,396
Leasing costs (12) (47) (139) (1,374) (541)
Unearned rent and security deposits 742 (641) (821) 642 1,176
Net assets of discontinued segment -- 3,112 4,495 3,832 (4,463)
-------- -------- -------- -------- --------
Net cash flows provided by operating activities 13,269 10,847 36,635 22,612 5,739
Investing activities
Additions to real estate assets (18,906) (919) (2,720) (17,105) (18,861)
Proceeds from sale of real estate assets -- 13,234 29,279 26,059 12,836
Additions to notes receivable -- -- (200) (1,149) (2,949)
Payments of notes receivable -- 4,450 50,526 3,105 4,947
Net investing activities of discontinued segment -- (677) (7,987) (2,362) (5,793)
-------- -------- -------- -------- --------
Net cash flows (used in) provided by investing activities (18,906) 16,088 68,898 8,548 (9,820)
Financing activities
Dividends paid (8,288) (6,988) (28,037) -- (1,743)
Proceeds from exercise of stock options including tax
benefits 928 426 5,429 724 126
Cash transferred to PriceSmart -- -- (58,383) -- --
Repayments of Costco note payable and line of credit -- -- -- (16,426) (13,236)
Costco line of credit advances -- -- -- -- 6,439
Decrease in equity resulting from
cash not transferred in Costco spin-off -- -- -- -- (1,644)
Net financing activities of discontinued segment -- -- -- -- 12,495
-------- -------- -------- -------- --------
Net cash flows (used in) provided by financing activities (7,360) (6,562) (80,991) (15,702) 2,437
-------- -------- -------- -------- --------
Net (decrease) increase in cash (12,997) 20,373 24,542 15,458 (1,644)
Cash and cash equivalents at beginning of period 40,000 15,458 15,458 0 1,644
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 27,003 $ 35,831 $ 40,000 $ 15,458 $ 0
======== ======== ======== ======== ========
Supplemental disclosure:
Cash paid for interest $ -- $ 150 $ 150 $ 2,911 $ 8,140
Net (refunds received) cash paid for income taxes (1,061) (2,723) (717) 829 1,261
Treasury stock acquired for note payable -- -- -- -- 45,925
See accompanying notes
27
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
Note 1 - Organization and Significant Accounting Policies
Formation of the Company
Price Enterprises, Inc. ("PEI" or "the Company"), was formed in July 1994 as a
Delaware corporation. The Company began operations effective August 29, 1994 as
a wholly owned subsidiary of Costco Companies, Inc. ("Costco") with specific
assets received from Costco pursuant to the Amended and Restated Agreement of
Transfer and Plan of Exchange ("Exchange Agreement"). Transferred to PEI were
substantially all of the real estate assets which historically formed the
non-club real estate business of Costco; four existing Costco warehouses which
are adjacent to certain transferred properties; certain domestic and
international retail operations; notes receivable from various municipalities
and agencies ("City Notes") and certain other notes receivable. PEI became a
separate publicly traded Company on December 21, 1994 upon completion of the
voluntary exchange offer made by Costco to its stockholders whereby such
stockholders were given the choice to either continue to own shares of Costco or
exchange all or a portion of their holdings into an equal number of shares of
PEI.
On August 1, 1997, the Board of Directors of PEI approved a plan for the
distribution (the "Distribution") to holders of PEI's Common Stock of 100% of
the outstanding shares of Common Stock of PriceSmart, Inc. ("PriceSmart"), a
wholly-owned subsidiary of PEI. Prior to the Distribution, the following assets
were transferred to PriceSmart from PEI: all businesses which historically
formed the merchandising business segment of PEI, the international
merchandising activities, the Costco auto referral program and the Costco travel
program; certain real estate properties held for sale which, as of August 29,
1997, had not yet been sold; the City Notes and certain secured notes receivable
from buyers of properties formerly owned by PEI; cash and cash equivalents held
by PEI as of August 29, 1997, less $40 million kept by PEI for use in its real
estate business; and all other assets and liabilities not specifically
associated with PEI's portfolio of 27 investment properties, except for current
corporate income tax assets and liabilities. On August 29, 1997, PEI distributed
to its stockholders one share of PriceSmart common stock for every four shares
of PEI common stock held by PEI's stockholders of record on August 15, 1997. The
distribution was recorded as a special noncash dividend by PEI based on
historical cost for all assets and liabilities transferred to PriceSmart, and
the operations of the merchandising segment have been reported as discontinued
operations. See Note 2.
Following the Distribution, PEI retained its core real estate portfolio of 27
investment properties and all related assets and liabilities as well as income
tax assets and liabilities, $40 million in cash, and assets and liabilities
related to the self storage business. PEI intends to qualify for Federal tax
treatment as a real estate investment trust ("REIT"). Effective January 2, 1998,
the Company was reincorporated in the State of Maryland.
The principal business of the Company is to acquire, develop, operate, manage
and lease real property. The Company's current portfolio is substantially
comprised of commercial rental properties which are leased to major retail
tenants.
28
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Fiscal Year
Effective September 1, 1997, the Company changed its fiscal year end from August
31 to December 31 as required by the Internal Revenue Service for REITs. The
four-month transition period bridges the gap between the Company's old and new
fiscal year ends. Prior to the Distribution, with respect to the real estate
business, each fiscal quarter includes three calendar months of operating
results; however, the discontinued merchandising segment's fiscal quarters are
as follows: first quarter - 16 weeks, second quarter - 12 weeks, third quarter -
12 weeks, fourth quarter - 12 or 13 weeks, depending upon whether the fiscal
year has 52 or 53 weeks.
Real Estate Assets and Depreciation
Real estate assets are recorded at Costco's and PEI's historical costs, as
adjusted for recognition of impairment losses. Historical costs for real estate
and related assets were reduced by $2.0 million, $17.0 million and $5.0 million
during the years ended August 31, 1997, 1996 and 1995, respectively. Ordinary
repairs and maintenance are expensed as incurred; major replacements and
betterments are capitalized and depreciated over their estimated useful lives.
Depreciation of real estate assets is computed on a straight-line basis over
their estimated useful lives, as follows:
Land improvements 25 years
Building and improvements 10-25 years
Tenant improvements Term of lease or 10 years
Fixtures and equipment 3-5 years
Interest incurred during the construction period is capitalized and depreciated
over the lives of the related assets. No interest was incurred or capitalized
during the four months ended December 31, 1997. Total interest incurred was
$165,000, $187,000, $881,000 and $1,261,000 for the four months ended December
31, 1996 and for the years ended August 31, 1997, 1996 and 1995, respectively;
and $7,000, $7,000, $361,000 and $556,000 of such interest, respectively, was
capitalized and is included in the property accounts.
Rental Revenue Recognition
Rental revenues include: (1) minimum annual rentals, adjusted for the
straight-line method for recognition of fixed future increases; (2) additional
rentals, based on common area maintenance , ("CAM") expenses and certain other
expenses, which are accrued in the period in which the related expense is
incurred; and (3) percentage rents which are accrued on the basis of reported
tenant sales.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash and cash equivalents.
Deferred Leasing Costs
Costs incurred in connection with leasing space to tenants are deferred and
amortized using the straight-line method over the lives of the related leases.
Asset Impairments
In conjunction with the Distribution of PriceSmart at August 29, 1997,
properties held for sale and their related provisions for asset impairment as
well as various notes receivable were transferred to PriceSmart.
29
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
The Company regularly evaluates the estimated fair value of its assets and
records appropriate provisions for asset impairments. In the year ended August
31, 1994, the Company changed its accounting estimates for impairment losses to
adopt a risk-adjusted discounted cash flow approach to estimating asset fair
values. The various notes receivable are evaluated in accordance with Statement
of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan."
Beginning with the year ended August 31, 1996, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." SFAS No. 121 requires impairment losses to be recorded on
long-lived assets used in operations, or "investment properties," when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets' carrying amount.
SFAS No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of, or "properties held for sale," and requires that
such assets be carried at the lower of cost or estimated fair value less costs
to sell. For properties held for sale, noncash impairment charges of $2.0
million, $17.0 million and $5.0 million were recorded in the years ended August
31, 1997, 1996 and 1995, respectively. These charges were recorded to write-down
the carrying value of real properties which were being held for sale or
redevelopment, and which were expected to generate net sales proceeds below
their book values.
For the current portfolio of investment properties, no such indicators of
impairment were present in the transition periods ended December 31, 1997 and
1996.
Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure about Fair
Value of Financial Instruments," requires that the Company disclose estimated
fair values for its financial instruments, as well as the methods and
significant assumptions used to estimate fair values. The Company believes that
the carrying values reflected in the balance sheets at December 31, 1997, August
31, 1997 and 1996 reasonably approximate the fair values for cash and cash
equivalents, receivables and all liabilities. In making such assessments, the
Company used estimates and market rates for similar instruments.
Foreign Currency Translation
The accumulated foreign currency translation was related to the Company's
investment in Price Club Mexico and was determined by application of the current
rate method. Resulting translation adjustments were made directly to a separate
component of stockholders' equity.
Authorized Stock
As of December 31, 1997, the Company's authorized stock consisted of 60 million
shares of $0.0001 par value Common Stock and 10 million shares of $0.0001 par
value Preferred Stock. No Preferred Stock has been issued. See Note 9 regarding
the reincorporation of the Company to Maryland and authorization of 100 million
shares of undesignated Capital Stock. At August 31, 1995, 1,268,264 shares of
Common Stock were issued and held as treasury stock. During fiscal 1996 these
treasury shares were retired.
30
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Income Taxes
The Company intends to meet all conditions necessary to qualify as a real estate
investment trust under the Internal Revenue Code. To qualify as a real estate
investment trust, the Company is required to pay dividends of at least 95% of
its "REIT taxable income" each year and meet certain other criteria. As a
qualifying real estate investment trust, the Company will not be taxed on income
distributed to its stockholders. As a result, the accompanying financial
statements contain no provision for income taxes for the four months ended
December 31, 1997. The income tax benefit for the four months ended December 31,
1997 is a result of the Company's previously deferred tax liability being
eliminated because of the Company's conversion to a REIT as well as accrued
income tax refunds that are a result of Federal tax net operating loss
carrybacks. The reported amounts of the Company's net assets, excluding
properties held for sale, as of December 31, 1997, August 31, 1997 and 1996 were
more than its tax basis for Federal tax purposes by approximately $29.1 million,
$17.0 million and $14.9 million, respectively.
In prior years, income taxes have been provided for in accordance with SFAS No.
109, "Accounting for Income Taxes." That standard requires companies to account
for deferred taxes using the asset and liability method. Accordingly, deferred
income taxes are provided to reflect temporary differences between financial and
tax reporting, including: asset write-downs of real estate and related assets,
deferred gains on sales of real estate, accelerated tax depreciation methods,
and accruals for straight-line rents.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings
Per Share." SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previous fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the SFAS No.128 requirements.
Four Months
Ended December 31 Year Ended August 31
--------------------------- --------------------------------------------
1997 1996 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(unaudited)
Weighted average shares
outstanding 23,675,310 23,298,255 23,353,666 23,262,374 24,864,000
Effect of dilutive securities:
Employee stock options 244,164 321,936 -- 117,797 551,937
---------- ---------- ---------- ---------- ----------
Weighted average shares outstanding
- assuming dilution 23,919,474 23,620,191 23,353,666 23,380,171 25,415,937
========== ========== ========== ========== ==========
Reclassifications
Certain reclassifications have been reflected in the financial statements in
order to conform with the presentation of the transition period.
31
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB No. 25), and related
Interpretations, in accounting for its employee and non-employee director stock
options because the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. As a result, deferred compensation is recorded only in the event that
the fair market value of the stock on the date of the option grant exceeds the
exercise price of the options. No deferred compensation expense has been
recognized.
Note 2 - Discontinued Operations
As discussed in Note 1, on August 29, 1997, Price Enterprises completed a
distribution of its merchandising segment and certain other assets. Accordingly,
results of operations and cash flows of the Company's merchandising segment have
been reported as a discontinued segment for all periods presented in the
financial statements. The results of operations and cash flows of other assets
and liabilities transferred to PriceSmart that were not part of the
merchandising segment are included in the Company's continuing operations. The
balance sheet, as of August 31, 1996, reflects the assets and liabilities of the
Company's merchandising segment as a discontinued segment and are included with
other net assets transferred to PriceSmart in the Distribution. As a result of
the Distribution, the Company recorded additional reserves during the fourth
quarter of $1.0 million consisting of additional insurance, legal and accounting
fees related to the transaction.
32
PRICE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Net assets of the discontinued merchandising segment and other assets
transferred to PriceSmart were as follows at August 31, 1996 (amounts in
thousands):
August 31
1996
---------
Assets:
Accounts receivable $ 3,366
Inventories 2,011
Other assets 1,600
Property, plant and equipment, net 3,965
Property held for sale, net 27,614
City notes receivable 29,091
Other notes receivable 6,617
Deferred rents and leasing costs, net 893
Deferred income taxes 20,251
Liabilities:
Accounts payable and accr