ITEM 1 -- BUSINESS
FORMATION OF THE COMPANY AND SUBSEQUENT TRANSACTIONS Price Enterprises, Inc. ("Price Enterprises," "PEI" or "the Company"), a Delaware corporation, was formed in July 1994. The Company began operations effective August 29, 1994 as a wholly owned subsidiary of Price/Costco, Inc. ("PriceCostco") with specific assets received from PriceCostco pursuant to the Amended and Restated Agreement of Transfer and Plan of Exchange ("Exchange Agreement"). PriceCostco offered to exchange 27 million shares of PEI common stock for an equal number of shares of PriceCostco common stock from PriceCostco stockholders on a voluntary basis pursuant to the Offering Circular/Prospectus dated November 21, 1994, as amended on December 7, 1994. Approximately 23.2 million shares were exchanged between PriceCostco and certain of its stockholders, and PEI became a separate publicly traded company on December 21, 1994.
Transferred to PEI were substantially all of the real estate assets which historically formed the non-club real estate business segment of PriceCostco; four existing Price Club warehouses which are adjacent to certain transferred properties, and which have been leased back to PriceCostco effective August 29, 1994; a 51% interest in Price Quest, Inc. ("Price Quest") and a 51% interest in Price Global Trading, Inc. ("Price Global Trading" or "PGT") with PriceCostco retaining the remaining 49% interests; notes receivable from various municipalities and agencies ("City Notes") and a secured note receivable from the owner and operator of a hotel and convention center in San Diego, California ("Atlas Note"); and a 51% interest in Mexico Clubs, LLC ("Mexico Clubs") which prior to April 20, 1995, held a 50% interest in Price Club de Mexico and affiliates ("Price Club Mexico"), a joint venture that develops, owns and operates Price Clubs in Mexico.
For purposes of governing certain of the ongoing relationships between PEI and PriceCostco, the companies entered into certain Operating Agreements, Stockholders' Agreements, and an Advance Agreement. PGT and Price Quest were converted to Limited Liability Companies in November, 1995. PEI and PriceCostco are currently parties to Limited Liability Company Agreements which set forth certain rights and obligations with respect to their investments in Price Quest and PGT. Each Limited Liability Company Agreement provides for an adjustment to the parties' respective percentage ownership interests in the event that a party fails to fund a PRO RATA capital call by the relevant subsidiary's Managing Member. Each Limited Liability Company Agreement sets forth, among other things: (i) transfer restrictions if either PEI or PriceCostco offers to transfer, sell, assign or otherwise dispose of its interest in the company; (ii) certain preemptive rights; and (iii) certain registration rights for PriceCostco. These rights and obligations are subject to change; see Note 12 to the consolidated financial statements.
PriceCostco and Price Quest are currently parties to an Operating Agreement pursuant to which PriceCostco provides for a five-year period, among other things, space in certain PriceCostco warehouse clubs to Price Quest for its electronic shopping kiosks and travel and automobile advertising/referral programs, as well as staffing, cashiering, buying support and other information to Price Quest, in exchange for a fee based on sales. Price Quest also was obligated to make annual purchases of at least $3 million in each of fiscal 1995 and 1996 of advertisements in PriceCostco's membership publications. The Operating Agreement also
contains certain confidentiality and competitive restrictions between the parties. These rights and obligations are subject to change; see Note 12 to the consolidated financial statements.
PriceCostco and PGT are currently parties to an Operating Agreement pursuant to which PriceCostco is obligated to provide certain buying support, merchandising services, training and other information to PGT for a period of five years for PGT's use in certain specified geographical areas, including Central America, Australia, New Zealand, Guam, the Northern Mariana Islands and certain Caribbean islands. The Operating Agreement also contains certain confidentiality and competitive restrictions between the parties. These rights and obligations are subject to change; see Note 12 to the consolidated financial statements.
In accordance with terms of the Exchange Agreement, on February 6, 1995, PEI purchased from PriceCostco approximately 3.8 million shares of its common stock which had not previously been exchanged, for PEI's $45.9 million ($12.16 per share) promissory note due December 1996, which was collateralized by the related shares of PEI common stock.
On April 20, 1995, PEI sold its interest in Mexico Clubs to PriceCostco. PriceCostco purchased PEI's interest in Mexico Clubs by making a $30.5 million reduction to the outstanding balance of the promissory note. In addition, Price Club Mexico paid PEI $4.0 million concurrent with the closing of the transaction with PriceCostco. The sale of the interest in Price Club Mexico resulted in a $2.1 million after-tax loss. During fiscal 1996, the remaining balance of the promissory note of $15.4 million was paid in full and the 1.3 million shares held as treasury stock were released from the collateral arrangement and also retired.
On July 26, 1996 it was announced that PEI had reached a tentative settlement agreement of the class and derivative action pending in the United States District Court, Western District of Washington, entitled IN RE PRICECOSTCO SHAREHOLDER LITIGATION. The settlement agreement is subject to court approval and contains several terms which modify the relationship between PEI, its subsidiaries, and PriceCostco. Once approved, PEI will own 100% of the PGT and Price Quest operating companies and certain obligations, non-compete restrictions, and trademark rights established in connection with the Exchange Agreement will be eliminated. See further discussion in Note 12 to the consolidated financial statements.
OVERVIEW OF THE COMPANY'S BUSINESS The principal business of the Company is to acquire, develop, operate, manage, lease and sell real property. As of August 31, 1996, the Company owned 60 real estate assets which had an aggregate net book value of approximately $393 million. Such properties encompass 672 acres of land and approximately 5 million square feet of gross leasable building space. Most of the real estate assets are commercial rental properties leased to major retail tenants such as Price Club, The Sports Authority, The Home Depot, and PetsMart.
The Company's business strategy is to retain those properties that have high- quality, long-term tenants and that are, or will soon be, fully developed. Properties which do not meet the Company's investment objectives are expected to be sold over the next 1-2 years. Given the nature of these activities, there can be no assurance that the sale of these properties will be completed as expected. During fiscal 1996, 12 properties were sold for combined gross proceeds of $30.1 million. Approximately $56 million of additional properties have been
identified as properties held for sale or redevelopment, and they have been separately classified in the financial statements.
Proceeds from the property sales may be used to complete real estate development projects and to fund additional real estate acquisition and development, as well as funding of the Company's investments in merchandising businesses.
The Company also owns certain other real estate-related assets. As of August 31, 1996, the carrying value of certain notes issued in connection with loans to municipalities and agencies (City Notes) was approximately $29.1 million. The City Notes carry interest rates which range from 7% to 10%. Repayment of each City Note is generally based on that municipality's allocation of sales tax revenues generated by retail businesses located on a particular property associated with such City Note. Under terms of most City Notes, the unpaid balance is forgiven at its maturity date. If actions taken by PriceCostco, such as closure or relocation of a particular Price Club, would entitle the governmental agency to withhold payment, PEI would be entitled to cause PriceCostco to purchase such City Note at an amount equal to 72% of the June 5, 1994 book balance, less any subsequent principal repayments, plus all accrued and unpaid interest from June 5, 1994.
The Company holds certain other notes receivable with a carrying value of approximately $48.3 million as of August 31, 1996, including $41.7 million for the Atlas Note. The Atlas Note is collateralized by a hotel and convention center and its terms were restructured in April 1995 to provide for interest at 10% during a five-year term.
Although most of the Company's net assets, net earnings and cash flows are generated by its real estate activities, PEI's other businesses possess separate and distinct business strategies. Price Quest, currently 51%-owned by PEI, has historically focused on providing PriceCostco members with a wide range of products and services through an interactive electronic interface, while leveraging emerging multi-media technologies to provide goods, services and information to consumers in a cost-efficient manner. As of the beginning of fiscal 1997, Price Quest's operation of the electronic kiosk shopping business at the PriceCostco locations has been discontinued. Price Quest's current objectives are to expand its merchandising and technology know-how to new distribution channels including interactive shopping through on-line services and the Internet, as well as other potential venues for kiosk-based electronic merchandising. In November 1995, Price Quest launched certain on-line shopping programs. In October 1996, a pilot project was begun with Ralphs Grocery Company to operate merchandise departments in four San Diego County Ralphs stores.
During fiscal 1996, in response to a formal request for cash advances from Price Quest stockholders, PEI was informed that PriceCostco did not choose to contribute funds to Price Quest. The cash requirements for the business during the past year were provided by PEI in the form of interest bearing loans. Price Quest expects operating losses to continue throughout fiscal 1997. Management continues to closely monitor Price Quest's activities and evaluate recent and potential changes to its business activities seeking to minimize the impact of Price Quest losses on PEI's financial results.
Price Global Trading, currently 51%-owned by PEI, currently has an exclusive right through August 1999 to conduct club businesses in Central America, most of the Caribbean, the Northern Mariana Islands, Australia and New Zealand, with certain trademark rights to the names Price Club, PriceCostco and Price Club Costco in these markets. PriceCostco has also agreed to provide certain purchasing and technological support for this effort and to refrain from conducting club businesses in the aforementioned geographical areas. There rights and obligations are subject to change; see Note 12 to the consolidated financial statements. As of fiscal 1996 year-end, two PriceCostco locations were operating, one each in Saipan and Guam, under a license arrangement between PGT and its licensee in Saipan. Also during fiscal 1996, PGT entered into a joint venture with a Panamanian company to open PriceCostco locations in Panama. PGT owns 51% of the venture, and the first location opened in October 1996.
During fiscal 1996, in response to a formal request for cash advances from PGT stockholders, PEI was informed that PriceCostco did not choose to contribute funds to PGT. The cash requirements for the business during the past year were provided by PEI in the form of interest bearing loans.
Price Ventures, Inc. ("Price Ventures"), a wholly owned subsidiary of PEI, is primarily focused on developing additional international merchandising businesses in other global markets. Business structures are expected to include licensing arrangements, as well as possible joint venture investments. During fiscal 1996, Price Ventures entered into business arrangements with both an Indonesian distribution company and a Chinese company to develop merchandising in their respective foreign markets. Facilities are expected to range in size up to 70,000 square feet typically in more urbanized markets. Such businesses are expected to operate under the "PriceSmart" trademark name. Price Ventures has filed applications to register the mark PRICESMART in the U. S. Patent and Trademark Office, and in certain foreign countries; however, because of objections by one or more parties (including PriceCostco), there can be no assurance that Price Ventures will obtain such registrations or that Price Ventures has proprietary rights to the mark. Initial locations in Indonesia and China (Beijing) are expected to open during the first half of fiscal 1997, and a second Indonesian location is expected to open by spring of 1997. Merchandising opportunities in other Pacific Rim countries continue to be explored by Price Ventures.
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 for tenants in its retail shopping centers. 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.
The Company's merchandising operations also face competition unique to their businesses. Price Quest competes directly or indirectly with most merchandising businesses, other discount retailers (including PriceCostco warehouse clubs), catalog and other direct marketing sales, on-line shopping, televised home shopping, travel agency services, other affinity buying services and similar interactive kiosks that are or may be operated by other retailers. Price Enterprises believes that, as further advances in computer technology are made and as more interactive computer-based services become available to consumers in the home and retail environments, competitive pressures on Price Quest will intensify. Price Ventures and Price Global Trading compete with exporters, wholesalers and trading companies in various international markets, and foreign- based joint ventures and licensees compete with traditional retail stores and wholesalers in their respective foreign markets.
SIGNIFICANT TENANTS The four largest tenants account for approximately 26% of total gross leasable area and approximately 37% 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):
While none of the Company's four largest tenants have experienced any recent significant financial hardships, it is not uncommon for economic conditions, market surpluses of retail space and competitive pressures to negatively impact financial results of retail operators. Bradlees and Caldor filed for protection under Chapter XI provisions of the federal bankruptcy law. The Company has two leases with Bradlees and one lease with Caldor which aggregate 6.4% of the Company's gross leaseable area and approximately 5.9% of annualized minimum rents as of August 31, 1996. In addition, the current retailing environment suggests that other operators, some of which have leases with the Company, may experience financial difficulties in the coming months or years.
Generally, the bankruptcy or insolvency of a major tenant or a number of smaller tenants may have an adverse impact on the performance of the Company's properties. Under bankruptcy law, a tenant has the option of assuming (continuing) or rejecting (terminating) any unexpired lease. If the tenant assumes its lease, the tenant must cure all defaults under the lease and provide the lessor with adequate assurance of its future performance under the lease. If the tenant rejects the lease, as the Company expects to occur with the Bradlees lease at Seekonk (MA), the lessor's claim for breach of lease would, absent collateral securing the claim, be
treated as a general unsecured claim. The amount of the claim would be limited to the amount owed for unpaid pre-petition lease payments unrelated to the rejection, plus the greater of one years' lease payments or 15% of the remaining lease payments payable under the lease (but not to exceed the amount of three years' lease payments). Ultimate collection of any general unsecured claims is significantly related to the debtor's financial condition and asset strength, results of secured creditor settlements and ratification of proposed transactions by the bankruptcy court.
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. The Company has agreed to indemnify PriceCostco against and hold PriceCostco harmless from all environmental liabilities that relate to or arise out of the real properties which were transferred to the Company by PriceCostco.
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 endangered or threatened species, is designated as critical habitat for an endangered or threatened species or is characterized as wetlands.
In 1994, PriceCostco engaged environmental consultants to conduct Phase I assessments (involving investigation without soil sampling or groundwater analysis) at each of the properties which PriceCostco transferred to the Company. The Company is unaware of any environmental liability or compliance with applicable environmental laws or regulations arising out of its properties that the Company believes 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 PriceCostco, purchased the Azusa site in 1983 from Huffy Corporation ("Huffy"). Huffy operated a bicycle manufacturing facility on the Azusa site from 1959 until 1982. After purchasing the Azusa site, Price converted the bicycle manufacturing facility into a Price Club warehouse and tire center.
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. Volatile organic compounds ("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. While it was operated by Huffy, the Huffy site contained a degreasing facility that allegedly released VOCs into the soil.
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. Price Enterprises 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 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).
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." Since receiving the "no intended action" letter, Price has been in negotiation with EPA to enter into consent decree, which, if successfully negotiated and approved by a court of competent jurisdiction, would provide Price with contribution protection under CERCLA with respect to the current ROD for the BPOU.
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 (as successor to Price) 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.
PHOENIX (FRY'S). The Phoenix (Fry's) site is a 37.1 acre site located in Phoenix, Arizona. The Phoenix (Fry's) site is located within the West Van Buren Study Area (the "WVBSA"). VOCs and petroleum hydrocarbons are present in groundwater in the WVBSA. To date, the Company (as successor to Price) has not been identified as a PRP for the WVBSA. On March 8, 1995, the Company sold the Phoenix (Fry's) site, and retained responsibility for certain environmental matters. Investigations conducted in connection with the sale of the property revealed some hydrocarbon contamination in an area previously occupied by a fuel pump island. Seven underground fuel storage tanks were removed in 1989. The Arizona Department of Environmental Quality is requiring some additional testing prior to granting closure of the site. The Company's prior ownership of the Phoenix (Fry's) site creates the potential of liability for remediation costs associated with groundwater beneath the site. PriceCostco has agreed to indemnify and hold the Company harmless in respect of one-half of all environmental liabilities relating to the Phoenix (Fry's) site. PriceCostco has continued to pay its share of the ongoing investigation costs associated with this site. The Company lacks sufficient information about the activity of WVBSA PRPs to form an estimate of the equitable share of total liability, if any, that could be allocated to the Company for its previous ownership of this site.
Although designated by Arizona law as a "study area," the WVBSA is not a federal CERCLA site and is not listed on the National Priorities List ("NPL"). Immediately to the east of the WVBSA, however, is the East Washington Study Area (the "EWSA"), which is listed on the NPL. VOCs are also present in groundwater in the EWSA. If the contamination plumes from the WVBSA and the EWSA merge, the possibility exists that the two study areas will be merged into one Federal CERCLA site.
MEADOWLANDS. The Meadowlands site is an unimproved, 12.9 acre site located in Meadowlands, New Jersey. A prior owner used this site as a debris disposal area. Elevated levels of heavy metals (including a small area contaminated with polychlorinated byphenyls) and petroleum hydrocarbons are present in soil at the Meadowlands site. The Company, however, has not been notified by any governmental authority and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with the Meadowlands site. The Company sold the Meadowlands site on August 11, 1995. Nevertheless, the Company's previous ownership of the Meadowlands site creates the potential of liability for remediation costs associated with groundwater beneath the site.
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, respectively. 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 with respect to such site through 1996. This indemnity has been transferred to the Company.
OTHER PROPERTIES. Two properties (New Britain and Silver City) contain or have contained petroleum hydrocarbons and/or VOCs in the soil and groundwater. The Company is continuing to remediate the soil and groundwater at these properties under supervision of local authorities. The Company estimates that the total cost of this remediation is not expected to exceed $200,000 in the aggregate over the next three years.
INTELLECTUAL PROPERTY RIGHTS It is the Company's policy to obtain appropriate proprietary rights protection for trademarks and significant new technology acquired or developed by the Company. In addition, the Company relies on copyright and trade secret laws to protect its proprietary rights. The Company attempts to protect its trade secrets and other proprietary information through agreements with employees, consultants and suppliers, and other similar measures. There can be no assurance, however, that the Company will be successful in protecting its proprietary rights. While management believes that the Company's trademarks, copyrights and other proprietary know-how have significant value, changing technology and the competitive marketplace make the Company's future success dependent principally upon its employees' technical competence and creative skills for continuing innovation.
EMPLOYEES The Company employed 204 employees as of August 31, 1996, and provides centralized and comprehensive employee benefit programs for all eligible employees. Most employees are leased to subsidiaries of PEI and associated costs are charged to the entity for which the employees provide their services. The employee count is generally distributed as follows: approximately 75 employees in the Price Quest activities, 91 in the international merchandising businesses, 21 in real estate activities, 6 handling central office duties, and 11 in PEI corporate activities.
SEASONALITY The Company's real estate operations are not generally subject to seasonal fluctuations. The merchandising businesses are subject to traditional retail sales trends associated with the calendar year-end holiday season.
CORPORATE HEADQUARTERS The Company maintains its headquarters in San Diego, California adjacent to the Morena Boulevard Price Club facility and it believes that its current facilities meet its expected requirements over the next 12 months.
ITEM 2
ITEM 2 -- PROPERTIES
OVERVIEW Pursuant to the Exchange Agreement, the 79 real estate properties that were to be transferred to PEI included 18 fully developed and leased properties, 35 properties in various stages of construction and development and 26 unimproved properties. During fiscal 1995, five of the properties were deemed to be not transferable to PEI, and the parties agreed to a substitution of properties. As of November 1995, all of the properties scheduled for transfer from PriceCostco had been conveyed to PEI. Most of the properties are commercial assets leased to national and regional retail tenants under long-term triple net leases. Substantially all properties are held in fee title; however, four properties are held pursuant to terms of lease agreements.
A significant aspect of the Company's general business strategy with respect to existing properties is to retain those properties that have high-quality, long- term tenants and that are, or will soon be, fully developed, and to sell the remaining properties. During fiscal 1996, the Company performed a strategic evaluation of the properties and increased marketing efforts to sell or lease those assets which did not meet management's investment objectives.
As of August 31, 1996, the Company owned 60 real estate properties with an aggregate net book value of $393 million of which $56 million has been classified, for financial reporting purposes, as being held for sale. There are 25 assets classified as investment properties, and the value of these investments is highly concentrated. Of the $337 million of investment property, the five largest completed properties have a carrying value of $210 million, which includes 1.7 million square feet of leasable space on 110 acres that generates annual minimum rent of $23.4 million, based on leases existing as of August 31, 1996.
A total of 35 properties are classified as being held for sale because the Company currently does not view these assets as long-term hold properties. Their aggregate net book value of $56 million reflects 1.7 million square feet of leasable space located on a total of 345 acres of land, with leases for annual minimum rents of $3.5 million as of August 31, 1996. Current occupancy is 56% of gross leasable area, and several properties are generating operating losses such that pretax cash flow from these assets was only approximately $1.9 million in fiscal 1996.
PROPERTY TABLES The tables set forth below describe the Company's portfolio of real estate properties as of August 31, 1996. Amounts shown for annual minimum rents are based on executed leases as of August 31, 1996. 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 these schedules. Classification of assets between the investment category and the held for sale category may change in response to management's recurring evaluation of the properties. During fiscal 1996 the reference name for certain properties was changed, see property name table on page 16.
TABLE OF PROPERTY NAMES
During fiscal 1996 the reference names for certain properties were changed in order to more accurately reflect the city/county in which such properties are located. Below is a table reflecting both the old and the new names.
Previous Name Revised Name - ------------- ------------
Aurora Denver/Aurora, CO Bensalem Philadelphia, PA Carmel Mtn. Ranch San Diego/Carmel Mtn., CA Cheektowaga Buffalo, NY Chesterfield Richmond, VA Chula Vista Chula Vista/Oxford St., CA Coachella Valley Palm Desert, CA Colton/Rialto Colton, CA East Mesa East Mesa/Superstition Springs, AZ Maple Shade Moorestown, NJ Marlow Heights Washington Metro, MD Mesa Mesa/Broadway, AZ North Highlands Sacramento/No. Highlands, CA N.W. Tucson Tucson, AZ Rancho Cordova Sacramento/Rancho Cordova, CA Rancho del Rey Chula Vista/Rancho del Rey, CA Riverside Riverside/La Sierra, CA Riverside (Franklin St.) Riverside/Third St., CA Sacramento Sacramento/65th Expressway, CA S. Sacramento Sacramento/Stockton, CA S.E. San Diego San Diego/Southeast, CA S.W. Denver Denver/Littleton, CO Westminster Denver/Westminster, CO White Marsh Baltimore, MD
PENDING REAL ESTATE TRANSACTIONS As of November 1, 1996 the Company is under contract to sell 10 properties that are expected to generate approximately $23.8 million in aggregate gross proceeds and are expected to be sold during fiscal 1997. Given the nature of these activities, there can be no assurance that these potential sales will be completed by their expected dates or that such proceeds will be fully realized.
As of November 1, 1996 the Company is in various stages of lease negotiations with 5 prospective tenants for leasable space which are expected to generate an aggregate of approximately $0.9 million of additional annualized minimum rental income once all of these various lease payments begin. Given the nature of these activities, there can be no assurance that these potential leases will ultimately be consummated. The development costs necessary to provide appropriate facilities for these potential leases is estimated to be approximately $1.1 million.
ITEM 3
ITEM 3 -- LEGAL PROCEEDINGS
IN RE PRICE/COSTCO SHAREHOLDER LITIGATION, United States District Court for the Western District of Washington, No. C94-1874C: This consolidated action was commenced on December 19, 1994 alleging the violation of certain state and federal laws arising from the spin-off of the Company from PriceCostco, Inc. and the prior merger between The Price Company and Costco Wholesale Corporation. The defendants named in the Second Amended Complaint were the Company, PriceCostco and the members of PriceCostco's Board of Directors at the time of the spin-off transaction. A tentative settlement has been reached, which is subject to court approval. The settlement involves certain agreements between the Company and PriceCostco regarding Price Global Trading, LLC and Price Quest, LLC, including the elimination of certain non-compete and operating agreements and the Company's assumption of sole ownership of those entities. In addition, certain trademark and license agreements between the Company and PriceCostco will be terminated. For Price Global Trading the remaining non-compete restrictions and trademark rights involving the Company and PriceCostco relate to Panama, Guam and the Northern Mariana Islands. For Price Quest the remaining non-compete restrictions and obligations involving the Company and PriceCostco relate to the automobile advertising/referral and travel businesses. Plaintiffs' counsel will seek an award of attorneys' fees of up to $4.25 million, of which the Company has agreed to contribute $1.25 million which was accrued for in fourth quarter fiscal 1996; the Company's payment will be decreased proportionally if the actual award is lower.
ITEM 4
ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1996. The Company's Annual Meeting of Stockholders is scheduled for 10:00 a.m. on January 14, 1997, at the San Diego Hilton Beach and Tennis Resort in San Diego, California. Matters to be voted on will be included in the Company's proxy statement to be filed with the Securities and Exchange Commission and distributed to stockholders prior to the meeting.
ITEM 4A -- EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, positions, and ages of the executive officers of Price Enterprises and other key officers of its subsidiaries:
Name Position With Company Age ----------------- -------------------------------- --- Robert E. Price Chairman of the Board, President 54 and Chief Executive Officer George J. Apostol Executive Vice President, 30 Corporate Development Daniel T. Carter Executive Vice President, Chief 40 Financial Officer and Secretary Robert M. Gans Executive Vice President, 47 General Counsel Joseph J. Tebo President of Price Ventures 60 Theodore Wallace Chief Executive Officer of Price 48 Ventures
Robert E. Price has been Chairman of the Board, President and Chief Executive Officer of Price Enterprises since July 1994. Mr. Price also serves as Chief Executive Officer of Price Real Estate, Price Global Trading, and Price Quest. From October 1993 to July 1994, Mr. Price was Chairman of the Board of PriceCostco. Mr. Price also serves as a director of Price Real Estate, Price Global Trading, Price Quest and Price Ventures. From 1976 to October 1993, he was Chief Executive Officer and a director of The Price Company (TPC). Mr. Price served as Chairman of the Board of TPC from January 1989 to October 1993, and as its President from 1976 until December 1990.
George J. Apostol has been Executive Vice President, Director of Corporate Development since March 1996. Previously, Mr. Apostol spent approximately 5 years with Citicorp Real Estate, Inc. and was responsible for managing, leasing, disposing and strategically repositioning a diverse portfolio of commercial real estate assets. Mr. Apostol graduated from Columbia Business School with an MBA degree, having a dual concentration in Real Estate Finance and Management of Organizations, and from Lehigh University with a BS degree in Business and Economics.
Daniel T. Carter has been Executive Vice President, Chief Financial Officer and Secretary of Price Enterprises since July 1994. From October 1993 to July 1994, Mr. Carter was Senior Vice President of PriceCostco overseeing financial duties for certain international and San Diego-based businesses. He joined TPC in June 1986 and held a variety of financial executive positions including Vice President of Finance. Prior to joining TPC, Mr. Carter held financial management roles with several diverse companies, as well as having worked for three years with the accounting firm of Ernst & Young.
Robert M. Gans has been Executive Vice President, General Counsel for Price Enterprises since October 1994. Mr. Gans graduated from the UCLA School of Law in 1975, and actively practiced law in private practice from 1975 until 1994. From 1988 until October 1994, Mr. Gans was the senior member of the law firm of Gans, Blackmar & Stevens, A.P.C., of San Diego, California.
Joseph J. Tebo has been the President of Price Ventures since November 1994. From May 1994 to November 1994, Mr. Tebo was President of the Tebo Group, an international retail consulting firm. From January 1990 to April 1994 Mr. Tebo was President and Chief Executive Officer of AM/PM International, a wholly owned subsidiary of Atlantic Richfield Company (ARCO), which has developed licensing and joint venture arrangements for AM/PM convenience stores in 10 countries throughout the Pacific Rim and the Americas. Mr. Tebo spent more than 30 years in the Atlantic Richfield domestic and international sales and marketing organizations, and was instrumental in developing the AM/PM Mini-Mart concept and the PayPoint electronic payment system.
Theodore Wallace has been an Executive Vice President of Price Enterprises since November 1994 and serves as Chief Executive Officer of Price Ventures. From October 1993 to November 1994, Mr. Wallace was Executive Vice President of PriceCostco overseeing international expansion into the Pacific Rim and other markets. Mr. Wallace became an Executive Vice President of TPC in 1984 and, from 1988 until Fall 1992, he was Chief Operating Officer (East Coast) of TPC. He was a director of TPC from October 1988 to October 1993. He joined TPC as a warehouse manager in September 1977 and was its Vice President of Operations from 1983 to 1988.
PART II
ITEM 5
ITEM 5 -- MARKET FOR REGISTRANT COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICES The Company's Common Stock was first publicly traded on December 21, 1994, as quoted on the Nasdaq National Market tier of The Nasdaq Stock Market 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 National Market tier of The Nasdaq Stock Market:
High Low ------ ------ Calendar Year --- 1994 Fourth Quarter (beginning 12/21/94) 14 1/2 12 3/4
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 (through 11/1/96) 17 1/4 16
On November 1, 1996, the last reported sales price per share of the Common Stock was $16.625, and the Company had approximately 750 stockholders of record.
DIVIDENDS During fiscal 1995, a $1.7 million cash dividend of $0.075 per share was paid in August 1995 to offset certain adverse tax consequences which would otherwise have occurred. No dividends were declared or paid during fiscal 1996.
Beginning with fiscal 1997, the Company's Board of Directors announced that it anticipates declaring and paying quarterly cash dividends. The first such dividend of $0.30 per share will be paid on November 15, 1996, to holders of record as of November 1, 1996. The Board of Directors believes that current Company cash flows and favorable tax circumstances support the payment of dividends. Future cash flows will be affected by a number of factors including the revenues received from rental properties, operational expenses, capital expenditures, property sales and tax benefits of tax losses arising from property sales. All future dividends by the Company will be at the discretion of the Board of Directors.
ITEM 6
ITEM 6 -- SELECTED FINANCIAL DATA
The following selected data should be read in conjunction with the Company's consolidated financial statements elsewhere in this Form 10-K and "Item 7
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 each of the three fiscal years ended August 31, 1996, and it should be read in conjunction with the consolidated financial statements and the accompanying notes included elsewhere in this report. The Company invests in real estate and related assets, in addition to certain merchandising businesses which include Price Quest, Price Global Trading and Price Ventures activities. Where appropriate, the financial results for these two business segments are discussed separately. 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.
REAL ESTATE RENTAL OPERATIONS
Revenue Percent Operating Percent Amount Change Income Change Change ------- ------- --------- ------ ------
Fiscal 1996 $56,221 8% $26,103 $ 2,781 12% Fiscal 1995 51,897 71% 23,322 10,629 84% Fiscal 1994 30,316 --- 12,693 --- ---
For purposes of this discussion, operating income is defined as rental revenue, including common area expense reimbursements, less the related real estate expenses, including all unreimbursable expenses associated with unimproved land and certain developed properties with vacant space. In addition, operating income reflects depreciation expense and earnings from real estate partnerships, but it does not reflect property write-downs for asset impairment or gain (loss) on sale of real estate.
During fiscal 1996, the increase in revenue was due primarily to increased lease-up of the Pentagon City (VA) property, which was not fully leased until mid-year fiscal 1995. Other factors include additional lease-up of the Bensalem (PA) property as well as the Dallas (TX) property which was under development during fiscal 1995 and began leasing activity during fourth quarter fiscal 1996. These increases were somewhat offset by a decline in revenues from the Phoenix (AZ) property, which was sold in March of 1995.
During fiscal 1995, the increase in revenue was due primarily to the inclusion of the four Price Club properties whose leases began on August 29, 1994, and the inclusion of additional leases at properties located in Pentagon City (VA), Westbury (NY), Seekonk (MA), Philadelphia (PA), Worcester (MA) and Moorestown (NJ). These increases were somewhat offset by a decline due to revenue reductions at Sacramento/65th Expressway (CA) and Phoenix (AZ) properties, as well as the impact of absorbing a full year of expenses in fiscal 1995 for properties that were transferred to the Company in late fiscal 1994. These transfers included the former Price Club in Dallas (TX) and former Costco locations in Florida and Northern California.
ADJUSTED FUNDS FROM OPERATIONS
Less Add Adjusted Operating Straight-line Depreciation Funds From Percent Income Rentals Expense Operations Change --------- ------------- ------------ ---------- -------
Fiscal 1996 $26,103 $(3,150) $10,071 $33,024 9% Fiscal 1995 23,322 (3,332) 10,245 30,235 60% Fiscal 1994 12,693 (872) 7,102 18,923 ---
Real estate industry analysts generally consider funds from operations (FFO) to be a supplemental measure of performance for real estate-oriented companies. As defined by the National Association for Real Estate Investment Trusts (NAREIT), it is the pretax income determined in accordance with generally accepted accounting principles (GAAP), excluding gains (losses) from sales of property, after adding back depreciation and amortization expense. 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.
Adjusted FFO does 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.
For fiscal 1996 and 1995, the growth in adjusted FFO reflects many of the factors mentioned in the revenue and operating income discussion above.
GAIN (LOSS) ON SALE OF REAL ESTATE
Percent Amount Change Change ------ ------ ------
Fiscal 1996 $ 864 $ 1,045 577% Fiscal 1995 (181) (5,655) (103%) Fiscal 1994 5,474 --- ---
During fiscal 1996, the gain on sale of properties related primarily to the sale of properties in Denver/Littleton (CO), Sacramento/No. Highlands (CA), San Diego (Convoy Ct.) (CA), and San Jose (CA). These and other gains were somewhat offset by a loss on the sale of property in West Palm Beach (FL).
During fiscal 1995, the loss on sale of properties related primarily to the sale of the Phoenix (AZ) distribution center. During fiscal 1994, gains recognized on the sale of properties located in Glendale (AZ), San Antonio (TX), and Tempe (AZ), were somewhat offset by a loss on the sale of undeveloped land in Austin (TX).
MERCHANDISING OPERATIONS
Sales Percent Gross Percent Percent of Amount Change Margin Change Sales ------ ------- ------ ------ ----------
Fiscal 1996 $36,211 (46%) $1,567 (59%) 4.33% Fiscal 1995 66,573 26% 3,817 7% 5.73% Fiscal 1994 53,015 --- 3,566 --- 6.73%
Merchandise sales include the Price Quest and international trading businesses. Gross margin is defined as merchandise sales less the related merchandise costs.
During fiscal 1996, the decrease in sales was due to a 61% decrease in Price Quest sales and a 35% decrease in international sales. The Price Quest program, which includes kiosk as well as on-line sales, recorded sales of $10.7 million during fiscal 1996, as compared to $27.2 million during fiscal 1995. Prior to the program's discontinuation on August 31, 1996 there were 36 kiosk locations. The decrease in sales is partly attributed to the elimination of display samples. As of the beginning of fiscal 1997 Price Quest's operation of the electronic kiosk shopping business at the PriceCostco locations has been discontinued. The decrease in international sales is due to the lack of international trading sales during fiscal 1996 which decreased from $33.7 million to $2.2 million, although sales to PGT's Saipan/Guam licensee increased from $5.7 million in fiscal 1995 to $23.4 million in fiscal 1996.
During fiscal 1995, the increase in sales was due primarily to a 40% increase in Price Quest sales and an 11% increase in international trading activities. The Price Quest kiosk program recorded sales of $27.2 million during fiscal 1995, as compared to $19.5 million during fiscal 1994. The number of PriceCostco locations with the kiosk program increased from 27 at the beginning of fiscal 1995 to 37 at year-end. Despite the overall revenue gains during fiscal 1995, both Price Quest and the international trading businesses reported flat or negative year-to-year sales comparisons during the fourth quarter of fiscal 1995.
Gross margins during fiscal 1996 were reduced to 4.3% of sales due primarily to inventory-related reserves recorded by Price Quest of $1.0 million.
Gross margins during fiscal 1995 would have benefited from a shift in sales from the traditionally lower margin international trading business to the relatively higher margins obtained with the Price Quest business; however, $0.9 million of inventory-related reserves were recorded by Price Quest during the fourth quarter of fiscal 1995 that related to merchandise returns and salvage reserves.
MERCHANDISING OPERATING EXPENSES
Percent Amount Change Change ------ ------ -------
Fiscal 1996 $20,294 $(2,702) (12%) Fiscal 1995 22,996 14,448 169% Fiscal 1994 8,548 --- ---
During fiscal 1996, the decrease in operating expenses was due primarily to decreased expenses for Price Quest, as the prior year included significant depreciation expense and loss reserves for fixtures and equipment. Loss reserves in fiscal 1996 were minimal and depreciation expense was greatly reduced due to the prior year write-down of fixed assets. Fiscal 1996 also reflects a reduction in payroll and related expenses for Price Quest due to reduced head counts. The decrease in operating expenses of Price Quest were somewhat offset by increased expenses for the international merchandising activities.
During fiscal 1995, the increase in operating expenses was due to $4.5 million of contractual obligations for Price Quest's marketing and warehouse rent with PriceCostco, higher operating and depreciation expenses associated with the expansion of the Price Quest businesses, $2.3 million of write-downs for expected losses on disposals of fixtures and equipment, as well as approximately $4.0 million of increased expenses associated with the international merchandising activities. The sale of PEI's interest in Price Club Mexico during April 1995 sharply reduced reimbursements of U.S.-based overhead expenses.
GENERAL AND ADMINISTRATIVE EXPENSES
Percent Amount Change Change ------ ----- ------
Fiscal 1996 $4,624 $1,574 52% Fiscal 1995 3,050 1,450 91% Fiscal 1994 1,600 --- ---
During fiscal 1996, the increase in expenses was due primarily to an accrual of $1.25 million pursuant to a tentative agreement to settle the PriceCostco stockholder litigation. Increases were also experienced in the areas of insurance and legal expense.
During fiscal 1995, the increase in expenses reflects the impact of the Company's continued growth and incremental expenses associated with becoming a separate publicly traded company and $0.25 million of contractual obligations to PriceCostco for administrative services. In fiscal 1994 PriceCostco provided services to the Company and charged general and administrative expenses to PEI by specific identification or by allocations based on total assets or total revenues.
INTEREST INCOME (NET)
Percent Amount Change Change ------ ----- ------
Fiscal 1996 $7,442 $1,358 22% Fiscal 1995 6,084 1,287 27% Fiscal 1994 4,797 --- ---
During fiscal 1996, the increase in net interest income was due primarily to increased income from various notes receivable, increased earnings on cash balances as well as reduced interest expense on borrowings, including the note payable to PriceCostco, which was repaid during the fourth quarter of fiscal 1996.
In fiscal 1995, the increase in net interest income was due to increased income from various notes receivable, offset by interest expense incurred on the note payable to PriceCostco and borrowings against the two unsecured line of credit facilities during the year.
OTHER INCOME (NET)
Price Total Club Minority Other Percent Mexico Interest Income Change Change ------ -------- ------ ------ ------
Fiscal 1996 $ --- $4,587 $4,587 $1,388 43% Fiscal 1995 (3,805) 7,004 3,199 (900) (22%) Fiscal 1994 1,948 2,151 4,099 --- ---
Price Club Mexico amounts represent the Company's equity in earnings (losses) of the joint venture, after taking into account PriceCostco's 49% minority interest in Mexico Clubs as well as the loss on the sale of the Company's interest to PriceCostco in fiscal 1995. Minority interest represents the allocation of Price Quest and Price Global Trading losses to PriceCostco.
During fiscal 1996, the increase in other income was due to elimination of the Company's investment in Price Club Mexico partially offset by a reduction in losses allocated to minority interest. PEI began absorbing 100% of the losses in Price Quest and Price Global Trading during third quarter fiscal 1996 because cumulative allocations of losses from these companies to PriceCostco's minority interest had matched PriceCostco's cumulative capital contributions, such that the book value of its investment in these businesses reached zero.
During fiscal 1995, the decrease in other income was due to the $2.65 million pretax loss on the sale of the Company's interest in Mexico Clubs, as well as operating losses reported by the Price Club Mexico venture during the first half of fiscal 1995. The impact of these losses was offset, in part, by having PriceCostco's minority interest absorb 49% of increased losses of Price Quest and Price Global Trading.
PROVISION FOR ASSET IMPAIRMENTS
Percent Amount Change Change ------ ----- ------
Fiscal 1996 $17,000 $12,000 240% Fiscal 1995 5,000 (85,227) (94%) Fiscal 1994 90,227 --- ---
In fiscal 1996 and 1995, noncash charges of $17.0 million and $5.0 million, respectively, were taken to write-down the carrying value of real estate properties which are being held for sale and which are expected to generate net sales proceeds below their current book values. The increase in the reserve reflects management's objective to sell many of the properties held for sale by the end of fiscal 1997. Given the nature of these activities, there can be no assurance that the sale of these properties will be completed during the next fiscal year.
In fiscal 1994, a noncash charge of $90.2 million was taken that generally related to a change in calculating the estimated losses for assets which were considered to be economically impaired. A write-down was taken to reduce an asset's carrying value if its estimated fair value, based on the risk-adjusted discounted cash flow approach, was lower than its book value. Approximately $74.7 million related to real estate properties and $15.5 million related to write-downs of the City Notes.
PROVISION (BENEFIT) FOR INCOME TAXES
Percent Amount Change Change ------ ----- ------
Fiscal 1996 $ 1,264 $(3,925) (76%) Fiscal 1995 5,189 33,456 118% Fiscal 1994 (28,267) --- ---
During the first quarter of fiscal 1996 Price Quest and Price Global Trading were restructured as limited liability companies and subsequent to that date have been treated as partnerships for income tax purposes. Since the restructuring PEI has recognized tax benefits for its share of any tax losses.
During fiscal 1995, the income tax provision was negatively impacted by the nondeductible losses from Price Quest, Price Global Trading, and the Price Club Mexico joint venture. In addition, the $2.65 million loss on sale of the Mexico Clubs interest provided just $0.5 million of tax benefits.
In fiscal 1994, the income tax benefit was the net current tax expense of $8.2 million and deferred tax benefits of $36.5 million. The deferred tax benefit relates primarily to the provision for asset impairments which is not currently deductible.
LIQUIDITY AND CAPITAL RESOURCES 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 real estate operations and through borrowings under the unsecured revolving line of credit facility. Approximately $56 million of the Company's real estate assets are being held for sale, and the cash flow that may ultimately be generated by sales of these properties represents a major source of additional capital resources. To the extent that investment opportunities exceed available cash flow from these sources, the Company's unleveraged balance sheet should enable it to access significant amounts of capital through bank credit facilities and/or securitized debt offerings, or the Company may choose to seek additional funds through future public equity offerings.
The Company has a revolving credit facility with a commercial bank for up to $25 million in unsecured advances through June 29, 1998. Advances bear interest, at the Company's option, at either LIBOR plus 0.40% or the bank's Base Rate, as defined. The agreement requires that the Company not sell or pledge certain property with a net book value of $178 million as of August 31, 1996, that the Company maintain certain net worth and debt-to-equity ratios, and that a facility fee of 0.15% of the commitment amount be paid annually. As of August 31, 1996, there was no outstanding balance on the credit facility and the weighted average interest rate charged during fiscal 1996 was 6.25% on borrowings.
Pursuant to the Advance Agreement between PEI and PriceCostco, PriceCostco agreed to provide an unsecured revolving credit facility for up to a maximum principal amount of $85 million (subject to reduction for proceeds of certain real property sales) as interim financing to satisfy any cash requirements through June 21, 1995. This facility has expired and all borrowings and related interest have been fully repaid. During fiscal 1995, the weighted average interest rate was 6.30% on such borrowings.
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 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 Five--Market for Registrant Common Equity and Related Stockholder Matters."
During fiscal 1997, the Company anticipates investing approximately $15-25 million in commercial real estate development on owned property (a portion of which represents commitments under executed construction contracts), approximately $10-25 million for real estate acquisitions, approximately $3-4 million for investment in Price Global Trading, approximately $3-5 million for investment in Price Quest and approximately $2-3 million for investment in Price Ventures. In addition to cash from operations, the Company expects to generate gross proceeds of approximately $30-40 million from expected sales of real estate. Actual capital expenditures, investment in merchandising businesses and gross proceeds realized from property sales for fiscal 1997 may vary from estimated amounts depending on business conditions and other risks and uncertainties to which the Company and its businesses are subject.
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 significant 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 8
ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SEE ACCOMPANYING NOTES.
SEE ACCOMPANYING NOTES.
PRICE ENTERPRISES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
SEE ACCOMPANYING NOTES.
SEE ACCOMPANYING NOTES.
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
FORMATION OF THE COMPANY Price Enterprises, Inc. ("PEI" or "the Company"), a Delaware corporation, was formed in July 1994. The Company began operations effective August 29, 1994 as a wholly owned subsidiary of Price/Costco, Inc. ("PriceCostco") with specific assets received from PriceCostco pursuant to the Amended and Restated Agreement of Transfer and Plan of Exchange ("Exchange Agreement"). PriceCostco offered to exchange 27 million shares of PEI common stock for an equal number of shares of PriceCostco common stock from PriceCostco stockholders on a voluntary basis, pursuant to the Offering Circular/Prospectus dated November 21, 1994, as amended on December 7, 1994. Approximately 23.2 million shares were exchanged between PriceCostco and certain of its stockholders, and PEI became a separate publicly traded company on December 21, 1994.
The following assets were transferred to PEI:
- Substantially all of the real estate assets which historically formed the non-club real estate business segment of PriceCostco.
- Four existing Price Club warehouses which are adjacent to certain properties included above and which have been leased back to PriceCostco effective August 29, 1994.
- A 51% interest in Price Quest and a 51% interest in Price Global Trading ("PGT"). PriceCostco retained the remaining 49% interest in both companies.
- Notes receivable from various municipalities and agencies ("City Notes") and a secured note receivable from a company which owns and operates a hotel and convention center in San Diego, California ("Atlas Note").
- A 51% interest in Mexico Clubs, LLC ("Mexico Clubs") which, prior to April 20, 1995, held a 50% interest in Price Club de Mexico and affiliates ("Price Club Mexico"), a joint venture that develops, owns and operates Price Clubs in Mexico.
For purposes of governing certain of the ongoing relationships between PEI and PriceCostco, the companies entered into certain Operating Agreements, Stockholders' Agreements, and an Advance Agreement. PGT and Price Quest were converted to Limited Liability Companies in November, 1995. PEI and PriceCostco are currently parties to Limited Liability Company Agreements which set forth certain rights and obligations with respect to their investments in Price Quest and PGT. Each Limited Liability Company Agreement provides for an adjustment to the parties' respective percentage ownership interests in the event
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FORMATION OF THE COMPANY (CONTINUED)
that a party fails to fund a PRO RATA capital call by the relevant subsidiary's Managing Member. Each Limited Liability Company Agreement sets forth, among other things: (i) transfer restrictions if either PEI or PriceCostco offers to transfer, sell, assign or otherwise dispose of its interest in the company; (ii) certain preemptive rights; and (iii) certain registration rights for PriceCostco. These rights and obligations are subject to change; see Note 12.
PriceCostco and Price Quest are currently parties to an Operating Agreement pursuant to which PriceCostco provides for a five-year period, among other things, space in certain PriceCostco warehouse clubs to Price Quest for its electronic shopping kiosks and travel and automobile advertising/referral programs, as well as staffing, cashiering, buying support and other information to Price Quest, in exchange for a fee based on sales. Warehouse rent for the PriceCostco kiosk program was subject to a minimum annual rent requirement of $1.5 million for each of fiscal 1995 and 1996. Price Quest also was obligated to make annual purchases of at least $3 million in each of fiscal 1995 and 1996 of advertisements in PriceCostco's membership publications. The Operating Agreement also contains certain confidentiality and competitive restrictions between the parties. These rights and obligations are subject to change; see Note 12.
PriceCostco and PGT are currently parties to an Operating Agreement pursuant to which PriceCostco is obligated to provide certain buying support, merchandising services, training and other information to PGT for a period of five years for PGT's use in certain specified geographical areas, including Central America, Australia, New Zealand, Guam, the Northern Mariana Islands and certain Caribbean islands. The Operating Agreement also contains certain confidentiality and competitive restrictions between the parties. These rights and obligations are subject to change; see Note 12.
In accordance with terms of the Exchange Agreement, on February 6, 1995, PEI purchased from PriceCostco approximately 3.8 million shares of its common stock which had not previously been exchanged for $45.9 million ($12.16 per share) in return for a promissory note due December 1996, which was collateralized by the related shares of PEI common stock.
On April 20, 1995, PEI sold its interest in Mexico Clubs to PriceCostco. PriceCostco purchased PEI's interest in Mexico Clubs by making a $30.5 million reduction to the outstanding balance of the promissory note. In addition, Price Club Mexico paid PEI $4.0 million concurrent with the closing of the transaction with PriceCostco. As a result of the partial debt repayment, approximately 2.5 million shares of common stock were released from the collateral arrangement and were retired. During fiscal 1996, the remaining balance of the promissory note of $15.4 million was paid in full and the 1.3 million shares held as treasury stock were released from the collateral arrangement and also retired.
On July 26, 1996 it was announced that PEI had reached a tentative settlement agreement of the class and derivative action pending in the United States District Court, Western District of Washington, entitled IN RE PRICECOSTCO SHAREHOLDER LITIGATION. The settlement agreement is subject to court approval and contains several terms which modify the relationship between PEI, its subsidiaries, and PriceCostco. Once approved, PEI will own 100% of the PGT and Price
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FORMATION OF THE COMPANY (CONTINUED) Quest operating companies and certain obligations, non-compete restrictions, and trademark rights established in connection with the Exchange Agreement will be eliminated. See further discussion in Note 12.
CONSOLIDATION The consolidated financial statements include the accounts of the Company and all majority owned subsidiaries; whereas, the Company's investment in less than majority owned businesses are accounted for on the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.
Ownership Basis of Presentation --------- -----------------------------------
Price Real Estate, Inc. 100% Consolidated Price Ventures, Inc. 100% Consolidated Price Quest, LLC 51% Consolidated Price Global Trading, LLC 51% Consolidated PriceCostco Panama 51% Consolidated Mexico Clubs, LLC 51% Consolidated (Sold in fiscal 1995) --Price Club Mexico 50% Equity Method (Sold in fiscal 1995)
BUSINESS SEGMENTS AND FISCAL YEAR The Company has investments in two business segments: (1) real estate operations, and (2) certain merchandising businesses. The Company's real estate business reports on a fiscal year which ends on August 31; whereas, the merchandising businesses report on a 52/53 week fiscal year which ends on the Sunday nearest August 31. For ease of presentation, all fiscal years in this report are referred to as having ended on August 31.
With respect to the real estate segment, each fiscal quarter includes three calendar months of operating results; however, the 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. Fiscal 1995 included 53 weeks while all other years presented in the financial statements reflect only 52 weeks.
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
REAL ESTATE ASSETS AND DEPRECIATION Real estate assets are recorded at PriceCostco's and PEI's historical costs as adjusted for recognition of impairment losses. As more fully explained in "Note 2 -- Provision for Asset Impairments," historical costs for real estate and related assets were reduced by $17.0 million, $5.0 million, and $90.2 million during fiscal 1996, 1995 and 1994, respectively. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments are capitalized and depreciated over their estimated useful lives. Property held for sale is stated net of accumulated depreciation of $11.6 million and $14.2 million at August 31, 1996 and 1995, respectively. Depreciation of real estate assets is computed on a straight-line basis over their estimated useful lives, as follows:
Land improvements 15-25 years Building and improvements 10-25 years Leasehold improvements Term of lease Tenant improvements Term of lease or 10 years Fixtures and equipment 5 years Certain MIS assets 3 years
REAL ESTATE 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 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.
MERCHANDISE INVENTORIES Merchandise inventories, which include merchandise for resale and display samples, are valued at the lower of cost (average cost) or market.
DEFERRED LEASING COSTS AND CAPITALIZED INTEREST Costs incurred in connection with leasing space to tenants are deferred and amortized on the straight-line method over the lives of the related leases. Interest incurred directly by PEI, or indirectly by PriceCostco in fiscal 1994, during the construction period is capitalized and depreciated over the lives of the constructed assets. Total interest incurred was $881,000, $1,261,000 and $1,486,000 for fiscal 1996, 1995, and 1994, respectively; and $361,000, $556,000 and $1,486,000 of such interest, respectively, was capitalized and is included in the property accounts.
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ASSET IMPAIRMENTS The Company regularly evaluates the estimated fair value of its assets and records appropriate provisions for asset impairments. In fiscal 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 fiscal 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 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. No such indicators of impairment were present in fiscal 1996. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. The Company estimated the sales value, net of related selling costs, on its real estate properties which are being held for sale and recorded an impairment loss of $17 million in fiscal 1996. See Note 2.
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 The Company's authorized stock consists 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. 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.
INCOME TAXES 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 (LOSS) PER SHARE Net income (loss) per share is based on the weighted average number of shares outstanding of 23,262,374 and 24,864,000 in fiscal 1996 and 1995, respectively. For fiscal 1994 the Company has assumed that 27 million shares were outstanding.
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECLASSIFICATIONS Certain reclassifications have been reflected in the financial statements in order to conform with the fiscal 1996 presentation. Stockholders' equity has been restated to reflect common stock at par value and the remaining equity as additional paid-in capital, effective at the beginning of fiscal 1994. In addition, in accordance with the Exchange Agreement, PriceCostco retained net current assets of PEI and its subsidiaries as of the beginning of fiscal 1995. The value of these retained assets, net of an adjustment to the carryover deferred income tax amount, is reflected as an adjustment of $1.4 million to additional paid-in capital as of the beginning of fiscal 1995.
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 In October 1995, the Financial Accounting Standards Board issued "Accounting for Stock-Based Compensation" ("Statement No. 123"). The statement is effective for fiscal years beginning after December 1995. Under Statement No. 123, stock- based compensation expense is measured using either the intrinsic-value method as prescribed by Accounting Principle Board Opinion No. 25 or the fair-value method described in Statement No. 123. The Company intends to implement Statement No. 123 in fiscal 1997 using the intrinsic-value method; accordingly, upon adopting Statement No. 123 there will be no effect on the Company's financial position or results of operations.
NOTE 2 -- PROVISIONS FOR ASSET IMPAIRMENTS
In fiscal 1996 and 1995, noncash charges of $17.0 million and $5.0 million, respectively, were taken to write-down the carrying value of real estate properties which are being held for sale or redevelopment, and which are expected to generate net sales proceeds below their current book values.
In fiscal 1994, the provision for asset impairments of $90.2 million pretax was generally related to a change in calculating estimated losses for assets which were considered to be economically impaired. These noncash write-downs were taken based on the estimated fair value of assets received from PriceCostco as determined by appraisals and/or a risk-adjusted discounted cash flow approach. The fair value of the City Notes was determined using a discounted cash flow approach based on each note's stated interest rate. For each asset, a write- down was taken to reduce the asset's carrying value if its estimated fair value was lower than its book value. Approximately $74.7 million of the write-downs related to real property assets and approximately $15.5 million related to the City Notes.
NOTE 3 -- REAL ESTATE PROPERTIES AND PROPERTY SALES
The Company's real estate properties are generally leased under noncancelable leases with remaining terms ranging from one to 23 years. Real estate revenues include the following rental income (in thousands):
1996 1995 1994 ------- ------- -------
Minimum rent $42,529 $39,987 $23,526 Straight-line accrual of future rent 3,150 3,332 872 Additional rent -- CAM and taxes 10,371 8,499 5,063 Percentage rent 171 79 25 ------- ------- ------- Real estate rental revenues. . . . . . $56,221 $51,897 $29,486 ------- ------- ------- ------- ------- -------
Real estate revenues also include earnings from real estate joint ventures of $0.8 million in fiscal 1994.
As of August 31, 1996, future minimum rental income due under the terms of noncancelable operating leases is as follows (in thousands):
1997 $ 43,015 1998 42,624 1999 42,801 2000 43,013 2001 43,272 Thereafter 418,268
During each of the last three years, the Company sold certain significant real estate properties and recognized related gains or losses on dispositions, as shown in the following table (in thousands). In addition, $576,000 of gains were recognized during fiscal 1996 on sales of insignificant real estate properties.
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- NOTES RECEIVABLE
The City Notes include amounts loaned to municipalities and agencies to facilitate real property acquisition and improvements and carry interest rates which range from 7% to 10%. Repayment of the majority of these notes is generally based on that municipality's allocation of sales tax revenues generated by retail businesses located on a particular property associated with such City Note. City Note repayments are calculated in accordance with specific revenue sharing agreements; and, under the terms of most City Notes, the unpaid balance of the note is forgiven at its maturity date.
The City Notes are recorded at PEI's historical cost as adjusted for recognition of impairment losses. As more fully explained in "Note 2 -- Provision for Asset Impairments," historical costs for the City Notes were reduced by $15.5 million in fiscal 1994 after taking into account a discounted cash flow approach to their valuation.
The Company holds the Atlas Note with a carrying value of $41.7 million as of August 31, 1996, which is collateralized by a hotel and convention center located in San Diego, California. On April 3, 1995, the debt obligation was restructured and key provisions included: required repayment of all outstanding indebtedness within five years, accrual of interest at 10% per annum, payment of interest at LIBOR plus 2.5% per annum (not to exceed 8.0% through December 1, 1996), payment of certain minimum annual amounts, and the right for PEI to receive any cash balances in excess of $1.0 million at the end of each fiscal year.
As part of the restructuring, PEI agreed to fund up to $4.1 million to Atlas to retire an existing mortgage held by a lender with a first priority security interest in the hotel and convention center and to fund certain capital expenditures. Approximately $2.1 million and $2.9 million were advanced in fiscal 1996 and fiscal 1995, respectively. PEI received approximately $1.3 million and $1.1 million of principal repayments during fiscal 1996 and 1995, respectively.
NOTE 5 -- UNSECURED LINES OF CREDIT
The Company has a revolving credit facility with a commercial bank for up to $25 million in unsecured advances through June 29, 1998. Advances bear interest, at the Company's option, at either LIBOR plus 0.40%, or the bank's Base Rate, as defined. The agreement requires that the Company not sell or pledge certain property with a net book value of $178 million as of August 31, 1996, that the Company maintain certain net worth and debt-to-equity ratios, and that a facility fee of 0.15% of the commitment amount be paid annually. As of August 31, 1996, there was no outstanding balance on the credit facility. The balance at August 31, 1995 was $1.0 million. The weighted average interest rate charged during fiscal 1996 and 1995 was 6.25% and 6.34%, respectively.
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5 -- UNSECURED LINES OF CREDIT (CONTINUED)
Pursuant to the terms of the Exchange Agreement, PriceCostco agreed to provide an unsecured revolving credit facility for up to a maximum principal amount of $85 million (subject to reduction for proceeds of certain real property sales) as interim financing to satisfy any cash requirements through June 21, 1995. As of August 31, 1995, this facility had expired and all borrowings and related interest had been fully repaid. During fiscal 1995, the weighted average interest rate was 6.30% on such borrowings.
NOTE 6 -- RELATED PARTY TRANSACTIONS
Prior to fiscal 1995, PriceCostco historically provided general and administrative services to PEI. The amount allocated to PEI for fiscal 1994 was $1.6 million, and this amount has been included as general and administrative expenses in the accompanying financial statements. The costs incurred by PriceCostco during fiscal 1994 were charged to PEI by specific identification or allocated based on total assets or sales revenues. This cost allocation fairly represented, in management's opinion, PEI's general and administrative expenses during this prior fiscal year.
In fiscal 1996 and 1995, PEI incurred $4.8 million and $4.5 million, respectively, of operating expenses for marketing and warehouse rent to PriceCostco. Included in real estate revenues in both fiscal 1996 and 1995 is $8.0 million of rental income from PriceCostco.
Joseph Kornwasser, a former director of PriceCostco until July 28, 1994 and an officer and Director of The Price REIT (See Note 3), is a general partner and has a two-thirds ownership interest in Kornwasser and Friedman Shopping Center Properties (K&F). As of August 28, 1994, K&F was a partner with PriceCostco in two partnerships. The assets, liabilities, equity and results of operations of these partnerships have been included in these financial statements through fiscal 1994. As of August 28, 1994, PriceCostco had also entered into a Development Agreement with K&F for the development of four additional properties. Both partnership agreements and the Development Agreement provided for a preferred return to PriceCostco on a varying scale from 9% to 10% on its invested capital. After the preferred returns, plus PriceCostco's invested capital, are distributed to PriceCostco, operating cash flows are distributed 75% to PriceCostco and 25% to K&F. Effective August 28, 1994, PEI purchased the K&F partnership interests and terminated the Development Agreement for $2.5 million.
NOTE 7 -- SALE OF INTEREST IN MEXICO CLUBS
On April 20, 1995, the Company completed the sale of its interest in Mexico Clubs in return for combined proceeds of $34.5 million. PriceCostco purchased PEI's interest in Mexico Clubs by making a $30.5 million reduction to the outstanding balance of the $45.9 million note receivable from PEI. The note related to the 3.8 million share common stock repurchase on February 6, 1995. In addition, Price Club Mexico paid $4.0 million concurrent with the closing of the transaction with PriceCostco. The sale of the interest in Price Club Mexico resulted in a $2.6 million loss ($2.1 million after-tax) which is included in earnings (loss) of Price Club Mexico joint venture.
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- PROFIT SHARING AND 401(k) PLAN
Substantially all of the employees of the Company are participants in a defined contribution profit sharing and 401(k) plan. Profit sharing contributions, if any, are based on a discretionary amount determined by the Board of Directors and are allocated to each participant based on the relative compensation of the participant, subject to certain limitations, to the compensation of all participants. The Company makes a matching 401(k) contribution equal to 50% of the participants contribution up to an annual maximum matching contribution of $250.
During fiscal 1996, the plan year was converted to a calendar year from a fiscal year; therefore, a contribution of $187,000 was made to the profit sharing plan for the period of September 1995 to December 1995. In addition, employer contributions to the 401(k) plan for the 1996 fiscal year were $37,000. All future profit sharing contributions will be made in January for the previous calendar year. Contributions to the plan during fiscal 1995 were $616,000.
NOTE 9 -- STOCK OPTION PLANS
In 1995, the Company established an Employee Stock Option and Stock Grant Plan and a Director Stock Option Plan under which 1,500,000 shares and 150,000 shares, respectively, have been reserved for issuance. Options have been granted to certain employees and directors at prices equal to the market price on the date of grant. Options generally vest over a five year period and expire after six years. The following table summarizes the stock option transactions for fiscal 1995 and 1996 for the employee plan:
Stock Range of Exercise Options Price Per Share --------- ---------------
Outstanding at August 31, 1994 0 --- --- Granted 1,088,900 $11.25 - $12.44 Exercised (10,047) $11.25 - $11.25 Cancelled (116,745) $11.25 - $12.44 --------- Outstanding at August 31, 1995 962,108 $11.25 - $12.44
Granted 183,500 $15.25 - $16.00 Exercised (55,982) $11.25 - $12.44 Cancelled (145,861) $11.25 - $11.25 --------- Outstanding at August 31, 1996 943,765 $11.25 - $16.00 --------- ---------
As of August 31, 1996, options to purchase 143,705 shares were exercisable under the employee plan, and 1,433,971 shares of common stock were reserved for future issuance in connection with this plan. Options for 10,000 and 90,000 shares of PEI common stock were issued to certain non-employee directors of the Company during fiscal 1996 and 1995, respectively, at prices ranging from $12.00 to $15.63 per share that were equal to the market price on the date of grant. As of August 31, 1996, 18,000 options were exercisable under the director plan, and there were 150,000 shares of common stock reserved for future issuance in connection with this plan.
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9 -- STOCK OPTION PLANS (CONTINUED) Certain employees of PEI continue to participate in various PriceCostco stock option plans. Pursuant to terms of the Exchange Agreement, these employees will generally be allowed to continue to hold those vested, but unexercised, PriceCostco stock options as of January 1, 1995, under terms and conditions set forth in the related PriceCostco stock option agreements. As of August 31, 1996, stock options for 375,162 shares of PriceCostco common stock were exercisable by PEI employees at prices ranging from $13.15 to $27.23.
NOTE 10 -- BUSINESS SEGMENTS
The Company has investments in two business segments: (1) real estate operations, and (2) certain merchandising businesses. The real estate segment consists primarily of investment properties, properties held for sale, the Atlas Note and the City Notes. Merchandising activities include Price Quest, Price Global Trading, Price Ventures and Mexico Clubs.
Certain real estate properties are being held for sale and produce little, if any, return on investment. With respect to the merchandising segment, elimination of the Price Club Mexico activities by PEI was significant in that the Company had historically recovered from Price Club Mexico all of its U.S.- based overhead expenses while also recognizing its share of the joint venture's operating profits. In fiscal 1995, however, the Company recorded losses from the Mexico operations through March 1995, a loss was recognized when its interest was sold to PriceCostco, and the Company was not able to fully recover its overhead costs thereafter. The Company's segment information is as follows for the years ended August 31, 1996, 1995 and 1994 (in thousands):
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES
The provision (benefit) for income taxes consists of the following (in thousands):
1996 1995 1994 -------- -------- -------- Current: Federal $(1,285) $ 7,236 $ 7,066 State (513) 1,418 1,126 -------- -------- -------- (1,798) 8,654 8,192
Deferred: Federal 1,887 (3,513) (31,168) State 1,175 48 (5,291) -------- -------- -------- 3,062 (3,465) (36,459) -------- -------- -------- Total provision (benefit) $ 1,264 $ 5,189 $(28,267) -------- -------- -------- -------- -------- --------
A reconciliation between the federal statutory rate and the effective tax rate follows (in thousands):
1996 1995 1994 -------- -------- --------
Federal taxes (benefit) at the statutory rate $ 473 $ 2,007 $(24,411) State taxes, net of federal benefit 81 690 (4,220) Tax losses of 51%-owned subsidiaries 708 1,538 --- Price Club Mexico operations --- 893 --- All other, net 2 61 364 -------- -------- -------- Total provision (benefit) $ 1,264 $ 5,189 $(28,267) -------- -------- -------- -------- -------- --------
The significant components of deferred income taxes are attributable to the following temporary differences (in thousands):
August 31, August 31, 1996 1995 ---------- ----------
Deferred tax assets: Real estate properties $19,521 $21,178 City notes receivable 11,756 11,546 Net operating losses 5,437 4,654 International revenues and expenses 241 836 Inventory and equipment reserves 304 715 All other, net 686 849 ------- ------- 37,945 39,778
Deferred tax liabilities: Deferred rental income (4,345) (2,977) Deferred state income tax (1,261) (1,824) All other, net --- (8) ------- ------- (5,606) (4,809)
Valuation allowance (5,437) (4,654) ------- ------- Net deferred tax assets $26,902 $30,315 ------- ------- ------- -------
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 - INCOME TAXES (CONTINUED)
At August 31, 1996 and 1995 Price Global Trading and Price Quest had combined net operating loss (NOL) carryforwards of approximately $11.5 million and $9.8 million, respectively, for federal income tax purposes which may be applied against future taxable income. A valuation allowance was established for the potential tax benefit of these NOL carryforwards as the certainty of their ultimate utilization is not sufficient to allow for deferred tax assets to be recorded. These NOL carryforwards will expire in 2009 unless previously utilized. A short-term deferred tax asset of $1.3 million and $1.0 million in 1996 and 1995, respectively, is included in current assets. During fiscal 1996 deferred tax assets of $351,000, representing PriceCostco's interest in such assets, was offset against PriceCostco's minority interest in Price Quest.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Price Enterprises is the lessee of four former warehouse club properties with remaining terms ranging from one to 23 years. Aggregate rental expense for fiscal 1996 and 1995 was $2.5 million and $2.4 million, respectively. Future minimum payments during the next five fiscal years and thereafter under these noncancelable leases at August 31, 1996 were as follows (in thousands):
1997 $ 1,915 1998 1,716 1999 1,605 2000 1,272 2001 1,272 Thereafter 13,790 -------- Total minimum payments $ 21,570 -------- --------
The above properties are subleased to others. Included in other current liabilities are amounts which represent future minimum lease payments in excess of expected future sublease receipts of $1.5 million and $2.6 million for fiscal 1996 and 1995, respectively. As of August 31, 1996, total future sublease revenues are $28.4 million, and such amounts are included in future minimum rental income amounts in Note 3 of these financial statements.
IN RE PRICE/COSTCO SHAREHOLDERS' LITIGATION, United States District Court for the Western District of Washington, No. C94-1874C: This consolidated action was commenced on December 19, 1994 alleging the violation of certain state and federal laws arising from the spin-off of the Company from PriceCostco, Inc. and the prior merger between The Price Company and Costco Wholesale Corporation. The defendants named in the Second Amended Complaint were the Company, PriceCostco and the members of PriceCostco's Board of Directors at the time of the spin-off transaction. A tentative settlement has been reached, which is subject to court approval. The settlement involves certain agreements between the Company and PriceCostco regarding
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Price Global Trading, LLC and Price Quest, LLC, including the elimination of certain non-compete and operating agreements and the Company's assumption of sole ownership of those entities. In addition, certain trademark and license agreements between the Company and PriceCostco will be terminated. For Price Global Trading the remaining non-compete restrictions and trademark rights involving the Company and PriceCostco relate to Panama, Guam and the Northern Mariana Islands. For Price Quest the remaining non-compete restrictions and obligations involving the Company and PriceCostco relate to the automobile advertising/referral and travel businesses. Plaintiffs' counsel will seek an award of attorneys' fees of up to $4.25 million, of which the Company has agreed to contribute $1.25 million which was accrued for in fourth quarter fiscal 1996; the Company's payment will be decreased proportionally if the actual award is lower.
NOTE 13 - SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The first quarter includes 16 weeks of merchandising operations, whereas all other quarters include 12 weeks, except for fourth quarter fiscal 1995 which includes 13 weeks. Significant fourth quarter adjustments include $17.0 million and $5.0 million for fiscal years 1996 and 1995, respectively, related to the write-down of real estate properties being held for sale.
NOTE 14 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes, and financing activities not affecting cash, are as follows (in thousands):
Year Ended August 31, 1996 1995 1994 ------ ------ ------
Interest expense paid to PriceCostco $2,911 $ 8,140 $8,192 Income taxes 829 1,261 ---
Treasury stock acquired for note payable --- $45,925 ---
NOTE 15 - SUBSEQUENT EVENT
Subsequent to year-end the Company declared a cash dividend of $0.30 per share, totaling approximately $7.0 million, payable on November 15, 1996 to stockholders of record on November 1, 1996.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors Price Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Price Enterprises, Inc. as of August 31, 1996 and 1995 and the related consolidated statements of income, stockholders' equity and cash flows for the fiscal years ended August 31, 1996 and 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The consolidated financial statements of Price Enterprises, Inc. for the fiscal year ended August 31, 1994, were audited by other auditors whose report dated November 14, 1994, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Price Enterprises, Inc. as of August 31, 1996 and 1995 and the consolidated results of its operations and its cash flows for the fiscal years ended August 31, 1996 and 1995 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
San Diego, California October 9, 1996
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Price Enterprises, Inc.:
We have audited the statements of income, stockholders' equity and cash flows of Price Enterprises, Inc. for the year ended August 31, 1994. These financial statements are the responsibility of Price Enterprises, Inc.'s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements of Price Enterprises, Inc. referred to above present fairly, in all material respects, the results of its operations and its cash flows for the year ended August 31, 1994 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington November 14, 1994
ITEM 9
ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information with respect to the executive officers of the Registrant, see Item 4A -- "Executive Officers of the Registrant" at the end of Part I of this report. The information required by this Item concerning the Directors and nominees for Director of the Company is incorporated herein by reference to Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be held on January 14, 1997, to be filed with the Commission pursuant to Regulation 14A.
ITEM 11
ITEM 11 -- EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be held on January 14, 1997, to be filed with the Commission pursuant to Regulation 14A.
ITEM 12
ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be held on January 14, 1997, to be filed with the Commission pursuant to Regulation 14A.
ITEM 13
ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to Price Enterprises' Proxy Statement for its Annual Meeting of Stockholders, to be held on January 14, 1997, to be filed with the Commission pursuant to Regulation 14A.
PART IV
ITEM 14
ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules: Page ---- (1) (A) Report of Independent Auditors 46 Report of Independent Public Accountants 47 (B) Financial Statements (i) Consolidated Balance Sheets as of August 31, 1995 and 1994 28 (ii) Consolidated Statements of Income for the Years Ended August 31, 1995, 1994 and 1993 29 (iii) Consolidated Statements of Stockholders' Equity for the Years Ended August 31, 1995, 1994 and 1993 30 (iv) Consolidated Statements of Cash Flows for the Years Ended August 31, 1995, 1994 and 1993 31 (v) Notes to Consolidated Financial Statements 32
(2) Financial Statement Schedules:
Schedule III - Real Estate and Accumulated Depreciation 55
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and notes hereto.
(3) For a list of exhibits filed with this annual report, refer to the exhibit index on page 59.
(b) The Company filed a report on Form 8-K on July 31, 1996.
(1) The announcement that a tentative settlement agreement had been reached of the class and derivative action pending in the United States District Court, Western District of Washington, entitled IN RE PRICECOSTCO SHAREHOLDER LITIGATION.
(c) Exhibits: For a list of exhibits filed with this annual report, refer to the exhibit index on page 59.
(1) The aggregate cost for Federal income tax purposes is $487,623.
(2) Provision for asset impairments represents a reserve against essentially all properties held for sale to reduce their net carrying values to the net proceeds expected upon sale.
PRICE ENTERPRISES, INC.
SCHEDULE III (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION (AMOUNTS IN THOUSANDS)
Fiscal Year ---------------------------- Reconciliation to Reported Amounts 1996 1995 1994 - ---------------------------------- ------- -------- -------- PROPERTY AND EQUIPMENT Balance at beginning of year. . . . . . . . . . $469,337 $476,340 $415,236 Additions during the year: Transfers from PriceCostco . . . . . . . . . . --- 2,100 139,097 Purchases. . . . . . . . . . . . . . . . . . . 17,003 18,329 42,367 Deductions during the year: Cost of properties sold. . . . . . . . . . . . (32,668) (22,432) (43,510) Asset impairment loss. . . . . . . . . . . . . (17,000) (5,000) (76,850) -------- -------- -------- Subtotal . . . . . . . . . . . . . . . . . . 436,672 469,337 476,340 -------- -------- -------- -------- -------- -------- Other: Foreign property acquired by PGT joint venture 1,946 --- --- FF&E . . . . . . . . . . . . . . . . . . . . . 5,856 7,928 4,375 -------- -------- -------- Balance at end of year. . . . . . . . . . . . . $444,474 $477,265 $480,715 -------- -------- -------- -------- -------- -------- ACCUMULATED DEPRECIATION Balance at beginning of year. . . . . . . . . . $ 39,282 $ 32,332 $ 29,473 Depreciation expense. . . . . . . . . . . . . . 9,433 9,813 6,752 Accumulated depreciation of properties sold . . (4,724) (2,863) (9,106) Transfers from PriceCostco. . . . . . . . . . . --- --- 11,351 Asset impairment loss . . . . . . . . . . . . . --- --- (6,138) -------- -------- -------- Subtotal. . . . . . . . . . . . . . . . . . . 43,991 39,282 32,332 Other: Accumulated depreciation of foreign property . --- --- --- Accumulated depreciation of FF&E . . . . . . . 3,469 3,194 996 -------- -------- -------- Balance at end of year. . . . . . . . . . . . . $ 47,460 $ 42,476 $ 33,328 -------- -------- -------- -------- -------- --------
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.
PRICE ENTERPRISES, INC.
DATED: November 20, 1996 By: /s/ Robert E. Price ----------------- -------------------------- Robert E. Price President and Chief Executive Officer
DATED: November 20, 1996 By: /s/ Daniel T. Carter ----------------- -------------------------- Daniel T. Carter Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Robert E. Price November 20, 1996 - ------------------------------------------------ ----------------- ROBERT E. PRICE, Chairman of the Board of Date Directors, Chief Executive Officer and President
/s/ Paul A. Peterson November 20, 1996 - ------------------------------------------------ ----------------- PAUL A. PETERSON, Vice Chairman of the Date Board of Directors
/s/ Nancy Y. Bekavac November 20, 1996 - ------------------------------------------------ ----------------- NANCY Y. BEKAVAC, Director Date
/s/ William P. Dickey November 20, 1996 - ------------------------------------------------ ----------------- WILLIAM P. DICKEY, Director Date
/s/ Murray L. Galinson November 20, 1996 - ------------------------------------------------ ----------------- MURRAY L. GALINSON, Director Date
/s/ Katherine L. Hensley November 20, 1996 - ------------------------------------------------ ----------------- KATHERINE L. HENSLEY, Director Date
/s/ Leon C. Janks November 20, 1996 - ------------------------------------------------ ----------------- LEON C. JANKS, Director Date
EXHIBIT INDEX
DESCRIPTION PAGE - --- 2.1 Amended and Restated Agreement of Transfer and Plan of Exchange, dated as of November 14, 1994, by and between Price/Costco, Inc. and Price Enterprises, Inc. (incorporated herein by reference to Exhibit 2.1 to Registration Statement on Form 10 of Price Enterprises, Inc. filed with the Commission on December 13, 1994 (File No. 0-20449)) . . . .
3.1 Certificate of Incorporation of Price Enterprises, Inc. (incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on September 15, 1994 (File No. 33-55481)). . . . . . . . . . . . . . .
3.1(a) Certificate of Amendment to Certificate of Incorporation of Price Enterprises, Inc. (incorporated herein by reference to Exhibit 3.1(a) to Post-Effective Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on December 2, 1994 (File No. 33-55481)). . . . . . . . . . . . . . . .
3.2 Form of Restated Certificate of Incorporation of Price Enterprises, Inc. (incorporated herein by reference to Exhibit 3.2 to Registration Statement on Form 10 of Price Enterprises, Inc. filed with the Commission on December 13, 1994 (File No. 0-20449)). . . . . . . . .
3.3 Bylaws of Price Enterprises, Inc. (incorporated herein by reference to Exhibit 3.3 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on September 15, 1994 (File No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . .
3.4 Form of Amended and Restated Bylaws of Price Enterprises, Inc. (incorporated herein by reference to Exhibit 3.4 to Registration Statement on Form 10 of Price Enterprises, Inc. filed with the Commission on December 13, 1994 (File No. 0-20449)). . . . . . . . .
4.1 Form of Price Enterprises, Inc. Stock Certificate (incorporated herein by reference to Exhibit 4.1 to Amendment No. 2 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 17, 1994 (File No. 33-55481)) . . . . . . . .
4.2 The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan (the "Stock Plan" ) (incorporated herein by reference to Exhibit 10.23 to Registration Statement on Form 10 of Price Enterprises, Inc. filed with the Commission on December 13, 1994 (File No. 0-20449))
4.3 Form of Incentive Stock Option Agreement under the Stock Plan (incorporated herein by reference to Exhibit 4.2 of the Registration Statement on Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13, 1995 (File No. 33-60999)) . . . . . . . . . .
4.4 Form of Non-Qualified Stock Option Agreement under the Stock Plan (incorporated herein by reference to Exhibit 4.3 of the Registration Statement on Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13, 1995 (File No. 33-60999)) . . . . . . . . . .
4.5 The Price Enterprises Directors' 1995 Stock Option Plan (the "Directors' Plan") (incorporated herein by reference to Exhibit 10.24 to Registration Statement on Form 10 of Price Enterprises, Inc. filed with the Commission on December 13, 1994 (File No. 0-20449)) . . . .
4.6 Form of Non-Qualified Stock Option Agreement under the Directors' Plan (incorporated herein by reference to Exhibit 4.5 of the Registration Statement on Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13, 1995 (File No. 33-60999)) . . . . . . . . . .
10.1 Form of Revolving Credit Agreement between Price Enterprises, Inc. and First Interstate Bank of California dated as of May 17, 1995 (incorporated herein by reference to Exhibit 10.1 of the Quarterly Report on Form 10-Q for the period ending June 4, 1995, filed with the Commission on July 18, 1995) . . . . . . . . . . . . . . . . . . . .
10.2 Operating Agreement, dated as of August 28, 1994, by and among Price Global Trading, Inc., Price Enterprises, Inc., Price/Costco, Inc. and The Price Company (incorporated herein by reference to Exhibit 10.7 to Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 3, 1994 (File No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.3 Operating Agreement, dated as of August 28, 1994, by and among Price Quest, Inc., Price Enterprises, Inc., Price/Costco, Inc. and The Price Company (incorporated herein by reference to Exhibit 10.6 to Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 3, 1994 (File No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.4 License Agreement, dated as of August 28, 1994, by and among Price/ Costco, Inc., The Price Company, Price Quest, Inc. and Price Enterprises, Inc. (incorporated herein by reference to Exhibit 10.11 to Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 3, 1994 (File No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.5 License Agreement, dated as of August 28, 1994, by and among Price/ Costco, Inc., The Price Company, Price Global Trading, Inc. and Price Enterprises, Inc. (incorporated herein by reference to Exhibit 10.12 to Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 3, 1994 (File No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.6 Form of lease between Price Enterprises, Inc. and The Price Company with respect to the Price Club at Pentagon Centre, Arlington County, Virginia (incorporated herein by reference to Exhibit 10.1 to Amendment No. 2 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 17, 1994 (File No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.7 Form of lease between Price Enterprises, Inc. and The Price Company with respect to the Price Club at 4605 Morena Boulevard, San Diego, California (incorporated herein by reference to Exhibit 10.18 to Amendment No. 2 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 17, 1994 (File No. 33-55481)) . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.8 Form of lease between Price Enterprises, Inc. and The Price Company with respect to the Price Club at Wayne, New Jersey (incorporated herein by reference to Exhibit 10.19 to Amendment No. 2 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 17, 1994 (File No. 33-55481)). . . .
10.9 Form of lease between Price Enterprises, Inc. and The Price Company with respect to the Price Club at Westbury, New York (incorporated herein by reference to Exhibit 10.20 to Amendment No. 2 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 17, 1994 (File No. 33-55481)). . . .
10.10 Employment Agreement, dated as of September 20, 1994, by and between Price Enterprises, Inc. and Robert M. Gans (incorporated herein by reference to Exhibit 10.14 to Amendment No. 1 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 3, 1994 (File No. 33-55481)). . . . . . . . .
10.11 Employment Agreement, dated as of March 8, 1996, by and between Price Enterprises, Inc. and George J. Apostol. . . . . . . . . . . . . . .
10.12 Form of Indemnity Agreement (incorporated herein by reference to Exhibit 10.17 to Amendment No. 2 to the Registration Statement on Form S-4 of Price Enterprises, Inc. filed with the Commission on November 17, 1994 (File No. 33-55481)). . . . . . . . . . . . . . . . . . . .
10.13 Form of Amended and Restated Loan Agreement between Atlas Hotels, Inc. and Price Enterprises, Inc. dated as of March 31, 1995 (incorporated herein by reference to Exhibit 10.2 of Price Enterprises, Inc.'s Quarterly Report on Form 10-Q for the period ending, June 4, 1995, filed with the Commission on July 18, 1995). . . . . . . . . . . . .
10.14 Form of Amended and Restated Promissory Note Secured by Deed of Trust dated March 31, 1995 made by Atlas Hotels, Inc. in favor of Price Enterprises, Inc. (incorporated herein by reference to Exhibit 10.3 of Price Enterprises, Inc.'s Quarterly Report on Form 10-Q for the period ending June 4, 1995, filed with the Commission on July 18, 1995) . .
10.15 Form of Amended and Restated Deed of Trust with Assignment of Leases and Rents and Fixture Filing made as of March 31, 1995 by and among Atlas Hotels, Inc., Chicago Title Company and Price Enterprises, Inc. (incorporated herein by reference to Exhibit 10.4 of Price Enterprises, Inc.'s Quarterly Report on Form 10-Q for the period ending June 4, 1995, filed with the Commission on July 18,1995). . .
10.16 Form of Amended and Restated Security Agreement made as of March 31, 1995 by Atlas Hotels, Inc. in favor of Price Enterprises, Inc. (incorporated herein by reference to Exhibit 10.5 of Price Enterprises, Inc.'s Quarterly Report on Form 10-Q for the period ending June 4, 1995, filed with the Commission on July 18, 1995.). .
10.17 Form of Capital Reserve Agreement made as of March 31, 1995 by and between Atlas Hotels, Inc. and Price Enterprises, Inc. (incorporated herein by reference to Exhibit 10.6 of Price Enterprises, Inc.'s Quarterly Report on Form 10-Q for the period ending June 4, 1995, filed with the Commission on July 18, 1995). . . . . . . . . . . . .
21.1 List of Subsidiaries of Price Enterprises, Inc . . . . . . . . . . .
23.1 Consent of Arthur Andersen LLP . . . . . . . . . . . . . . . . . . .
23.2 Consent of Ernst & Young LLP . . . . . . . . . . . . . . . . . . . .
27.1 Financial Data Schedule. . . . . . . . . . . . . . . . . . . . . . .