ITEM 1 - BUSINESS
FORMATION OF THE COMPANY AND SUBSEQUENT TRANSACTIONS Price Enterprises, Inc. is a REIT incorporated in the state of Maryland. Our principal business is to own, acquire, develop, operate, manage and lease real property. We originally incorporated in July 1994 as a Delaware corporation and began operations as a wholly owned subsidiary of Costco Companies, Inc. (Costco), formerly Price/Costco, Inc.
In 1994 Costco spun-off PEI and transferred to PEI the following as part of a voluntary exchange offer: - - substantially all of the real estate assets which historically formed Costco's non club real estate business segment - - four existing Costco warehouses adjacent to certain transferred properties (which we subsequently leased back to Costco in August 1994) - - certain merchandising business entities - - notes receivable from various municipalities and agencies (City Notes) - - certain other assets
In June 1997, our Board of Directors determined that it would be in the best interest of our Company and our stockholders to separate our core real estate business from our merchandising businesses. Accordingly, our board approved a spin-off transaction in which we would continue to conduct our real estate business consisting of an initial asset base of 27 retail properties and $40 million of cash following the spin-off. PEI's merchandising businesses, real estate properties held for sale by PEI, the City Notes and certain secured notes receivable from buyers of properties formerly held by PEI would be spun-off to PriceSmart, Inc. (PriceSmart), a Delaware corporation and a wholly-owned subsidiary of PEI.
On August 29, 1997, we separated ourself from PriceSmart by distributing one share of common stock of PriceSmart for every four shares of common stock held by our stockholders of record on August 15, 1997 pursuant to a distribution agreement between PEI and PriceSmart (the Distribution). Since the Distribution, we engage in a combination of acquiring, developing, owning, managing and/or selling real estate assets, primarily shopping centers.
The Distribution resulted in our Company becoming eligible to elect Federal tax treatment as a REIT. In addition, we distributed an amount of taxable dividends at least equal to our current and accumulated earnings and profits, much of which represented an allocation from Costco as a result of the spin-off by Costco of PEI in December 1994. By qualifying as a REIT, we substantially eliminate our obligation to pay taxes on income.
On June 2, 1999, Excel Legacy Corporation (Legacy), a Delaware corporation, and PEI jointly announced that they entered into an agreement regarding Legacy's acquisition of the outstanding common stock of our Company. This announcement followed the May 12, 1999 announcement of an earlier agreement between Legacy and Sol Price, as trustee of certain trusts, and other stockholders of our Company.
On November 12, 1999, Legacy completed its exchange offer for our common stock. In the exchange offer, Legacy acquired approximately 91.3% of our common stock, which represents approximately 77.5% of PEI's voting power. PEI stockholders who tendered their shares of PEI common stock in the exchange offer received from Legacy a total of $8.50 consisting of $4.25 in cash, $2.75 in principal amount of Legacy's 9.0% Convertible Redeemable Subordinated Secured Debentures due 2004 and $1.50 in principal amount of Legacy's 10.0% Senior Redeemable Secured Notes due 2004 for each share of PEI common stock.
OVERVIEW OF THE COMPANY'S BUSINESS Our current property portfolio substantially consists of shopping centers and "power centers" leased to major retail tenants including Costco, The Sports Authority, The Home
Depot, Kmart, Marshalls, PETsMART and Borders Books and Music. We receive approximately 70% of annual minimum rents from tenants with investment grade credit ratings.
For a description of our properties and of material developments during the year regarding these investments and our Company as a whole please refer to "Item 2
ITEM 2 - PROPERTIES
OVERVIEW At December 31, 1999, we owned 29 commercial real estate properties and held one property with a 20-year ground lease, in addition to land in Tucson, AZ and Temecula, CA held for future development. These properties encompass approximately 4.3 million square feet of GLA and were 94% leased. The five largest properties include 1.7 million square feet of GLA that generate annual minimum rent of $26.2 million, based on leases existing as of December 31, 1999.
Included in the properties we owned at December 31, 1999 are four self storage facilities. Two of these facilities, San Diego, CA and Azusa, CA are located on the same sites as our commercial properties. The other two self storage facilities are stand-alone properties. At year end, these facilities had 0.5 million square feet of GLA and were 96% occupied. We also have a 50% investment in a joint venture which owns a retail center in Fresno, CA.
Here is the geographic concentration of our Company's properties, excluding our joint venture in Fresno:
PROPERTY TABLE Amounts shown for annual minimum rents are based on executed leases as of December 31, 1999. We made no allowances for contractually-based delays to commencement of rental payments. Due to the nature of real estate investments, our actual rental income may differ from amounts shown in this schedule. The following table describes our portfolio of real estate properties as of December 31, 1999. Self storage properties are shown separately from our commercial portfolio.
REAL ESTATE PORTFOLIO
(1) Annual Minimum Rent does not include percentage rents, expense reimbursements, revenue from month-to-month leases, or rents expiring in (2) Price Self Storage is also located at this property.
(3) GLA of this facility is also included in GLA for the San Diego, CA commercial property location listed above. (4) Expansion of this facility is currently under development.
The annual gross potential rent for the four operating self storage facilities is $5.9 million. Gross potential rent equals the GLA times the average rent per square foot.
PENDING REAL ESTATE TRANSACTIONS Since December 31, 1999 we executed five leases for approximately 11,000 square feet of GLA. These new leases will generate $159,000 in annual minimum rents. We also executed a lease with Legacy in connection with the purchase of an office building from them in February 2000, which will generate $450,000 in annual minimum rents. The development costs necessary to provide appropriate facilities for these signed leases is estimated to be approximately $18,000. We are also currently in negotiations to purchase additional commercial properties as well as evaluating various properties for acquisition.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during 1999.
ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers at the date of this report are:
Gary B. Sabin has served as President and Chief Executive Officer and a Director of our Company since November 1999. Mr. Sabin also has served as Chairman of the Board of Directors, President and Chief Executive Officer of Legacy since its formation. Mr. Sabin served as Director and President of New Plan Excel from September 1998 to April 1999 and as Chairman, President and Chief Executive Officer of Excel Realty Trust from January 1989 to September 1998. In addition, Mr. Sabin has served as Chief Executive Officer of various companies since his founding of Excel Realty Trust's predecessor company and its affiliates starting in 1977. He has been active for over 20 years in diverse aspects of the real estate industry, including the evaluation and negotiation of real estate acquisitions, management, financing and dispositions.
Richard B. Muir has served as Executive Vice President, Chief Operating Officer, and a Director of our Company since November 1999. Mr. Muir has served as Director, Executive Vice President and Secretary of Legacy since its formation and has served as Legacy's Chief Operating Officer since November 1999. Mr. Muir served as a Director, Executive Vice President and Co-Chief Operating Officer of New Plan Excel from September 1998 to April 1999 and served as Director, Executive Vice President and Secretary of Excel Realty Trust from January 1989 to September 1998. In addition, Mr. Muir served as an officer and director of various affiliates of Excel Realty Trust since
1978, primarily in administrative and executive capacities, including direct involvement in and supervision of asset acquisitions, management, financing and dispositions.
Kelly D. Burt has served as Executive Vice President - Development of our Company since November 1999 and in the same position with Legacy since May 1998. From 1992 to May 1998, Mr. Burt served as President and founder of TenantFirst, a real estate development company in San Diego, CA that was acquired by Legacy in May 1998. From 1984 to 1992, Mr. Burt was an Industrial/Office Partner at the San Diego division of Trammell Crow Company, a real estate development company headquartered in Dallas, TX.
S. Eric Ottesen has served as Senior Vice President, General Counsel and Secretary of our Company since November 1999. Mr. Ottesen also has served as Senior Vice President, General Counsel and Assistant Secretary of Legacy since its formation. Mr. Ottesen served as Senior Vice President - Legal Affairs and Secretary of New Plan Excel from September 1998 to April 1999. Mr. Ottesen served as Senior Vice President, General Counsel and Assistant Secretary of Excel Realty Trust from September 1996 to September 1998. From 1987 to 1995, Mr. Ottesen was a senior partner in a San Diego law firm.
James Y. Nakagawa has served as Chief Financial Officer of our Company since November 1999. Mr. Nakagawa also has served as Chief Financial Officer and Treasurer of Legacy since October 1998. From March 1998 to October 1998, Mr. Nakagawa served as Controller of Legacy. Mr. Nakagawa served as Controller of Excel Realty Trust and then New Plan Excel from September 1994 to April 1999. Prior to joining Excel Realty Trust, Mr. Nakagawa was a manager at Coopers & Lybrand LLP. Mr. Nakagawa is a certified public accountant.
Graham R. Bullick, Ph.D., has served as Senior Vice President - Capital Markets of our Company since November 1999 and in the same position with Legacy since its formation. Mr. Bullick served as Senior Vice President - Capital Markets of Excel Realty Trust and then New Plan Excel from January 1991 to April 1999. Previously, Mr. Bullick was associated with Excel Realty Trust as a Director from 1991 to 1992. From 1985 to 1991, Mr. Bullick served as Vice President and Chief Operations Officer for a real estate investment firm, where his responsibilities included acquisition and financing of investment real estate projects.
Mark T. Burton has served as Senior Vice President - Acquisitions of our Company since November 1999 and in the same position with Legacy since its formation. Mr. Burton served as Senior Vice President - Acquisitions with Excel Realty Trust and then New Plan Excel from October 1995 to April 1999. He also served as a Vice President of Excel
Realty Trust from January 1989 to October 1995. Mr. Burton was associated with Excel Realty Trust and its affiliates beginning in 1983, primarily in the evaluation and selection of property acquisitions.
John A. Visconsi has served as Senior Vice President - Leasing/Asset Management of our Company since November 1999 and in the same position with Legacy since May 1999. Mr. Visconsi served as Vice President - Leasing with Excel Realty Trust and then New Plan Excel from January 1995 to April 1999. He also served as Senior Vice President of our Company from January 1994 to March 1995. From 1981 to 1994, Mr. Visconsi was Director of Leasing and Land Development of Ernest W. Hahn, Inc.
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
STOCK PRICES Our common stock trades on The Nasdaq Stock Market(R) under the symbol PREN. On August 17, 1998 we distributed one share of 8 3/4% Series A Cumulative Redeemable Preferred Stock (Series A Preferred Stock) for every one share of common stock owned by our stockholders on July 30, 1998. The Series A Preferred Stock began trading on August 18, 1998 under the symbol PRENP. The table below provides the high and low sales prices of our common stock and preferred stock for the period indicated, as reported by The Nasdaq Stock Market(R).
On March 21, 2000, the last reported sales price per share of the common stock was $7.19, and we had approximately 250 common stockholders of record plus those who hold their shares in street name.
In October 1998, we completed a tender offer and purchased approximately 10.5 million shares of our common stock for $5.50 per share totaling $57.6 million. We now have approximately 13.3 million shares of common stock outstanding, including 12.2 million shares held by Legacy as a result of Legacy's exchange offer which was completed in November 1999.
In August 1997 we completed our spin-off distribution of one share of common stock of PriceSmart for every four shares of our Company's common stock held of record. PriceSmart began separate trading on The Nasdaq Stock Market(R) on September 2, 1997.
DIVIDENDS We intend to distribute at least 95% of our taxable earnings to maintain our qualification as a REIT.
During 1999, we declared and paid four quarterly dividends of $0.35 on each share of Series A Preferred Stock for a total of $1.40 per share or $33.3 million. Prior to the distribution of Series A Preferred Stock, we paid dividends on our common stock. Beginning with our November 1998 dividend payment, dividends of $1.40 per year are now paid on the Series A Preferred Stock. Any dividends required to be paid in excess of $1.40 will be paid to our common stockholders.
During 1998, we declared and paid three quarterly dividends of $0.35 on each common share and one quarterly dividend of $0.35 on each share of Series A Preferred Stock for a total of $1.40 per share or $33.3 million.
For the transition period ended December 31, 1997, our Board of Directors declared and paid one dividend of $0.35 per share for a total of $8.3 million. During the year ended August 31, 1997, our Board of Directors declared and paid four quarterly dividends of $0.30 per share for a total of $1.20 per share, or $28.0 million.
It is possible that, from time to time, we may not have sufficient cash or other liquid assets to meet our distribution requirements due to timing differences between (i) the actual receipt of such income and actual payment of deductible expenses and (ii) the inclusion of such income and deduction of such expenses in arriving at our taxable income. In the event that such timing differences occur, in order to meet these distribution requirements, we may find it necessary to arrange for short-term, or possibly long-term borrowings or to pay dividends in the form of taxable stock dividends.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
The following selected data should be read in conjunction with our financial statements located elsewhere in this Form 10-K and "Item 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION In Management's Discussion and Analysis of Financial Conditions and Results of Operations we explain our general financial condition and results of operations including:
- results of operations - why revenues, costs and earnings changed from the prior period - funds from operations (FFO) - how we used cash for capital projects and dividends during 1997 through 1999 and how we expect to use cash in 2000 - where we plan on obtaining cash for future dividend payments and future capital expenditures - impact of year 2000 technology issues on our operations
Because of Legacy's exchange offer for our common stock, we report operating results for the year ended December 31, 1999 divided between the periods of January 1, 1999 to November 11, 1999 and November 12, 1999 to December 31, 1999, due to a new basis of accounting as required by generally accepted accounting principles. For purposes of this discussion however, we combined these two periods of 1999 to make an equivalent twelve month period in order to compare operating results with the year ended December 31, 1998.
In 1997 we changed our fiscal year end from August 31 to December 31, which is required for REITs. Because of this change, the transition period ended December 31,
1997 consisted of only four months. For that reason, we will compare our discussion of the year ended December 31, 1998 with the equivalent recast twelve month period of 1997. Financial information for the year ended December 31, 1997 is unaudited and used for this discussion only.
As you read Management's Discussion and Analysis, it may be helpful to refer to our financial statements and accompanying notes beginning on page 31. In Management's Discussion and Analysis we explain the changes in specific line items in the statements of operations. Where changes are due to more than one reason, we list the reasons in order of importance.
RENTAL REVENUES
Revenues increased $4.2 million to $66.7 million in 1999 compared to 1998 because:
- properties we acquired after the first quarter of 1998 generated $4.3 million of additional revenues - expansion of our self storage business provided an additional $2.1 million of revenues - revenues from properties we owned in both 1998 and 1999 increased $0.8 million - partially offsetting these increases were:
- revenues from two properties which we sold in the second quarter of 1999, which contributed $2.1 million of revenues in the prior year and - a reduction in revenues of $0.8 million due to the Caldors bankruptcy, a former tenant at our Moorestown, NJ location
The impact in 1999 of our new accounting basis for the straight-line accrual of future rental income, due to Legacy's exchange offer for our common stock, was not material.
Revenues increased $6.4 million to $62.5 million in 1998 compared to 1997 because:
- properties we acquired at the end of 1997 and in 1998 generated $6.5 million of revenues in 1998
- expansion of our self storage business provided an additional $1.7 million of revenue - revenues from properties we owned in both 1997 and 1998 generated an additional $0.3 million from new leases generating revenues - revenues from properties sold or transferred to PriceSmart in the distribution contributed $2.0 million of revenues in the prior year - revenues of $0.8 million were lost from the Homeplace bankruptcy, a former tenant at our Dallas, TX location
EXPENSES
Expenses increased $0.4 million to $31.5 million in 1999 compared to 1998 primarily because:
- properties we acquired after the first quarter of 1998 increased expenses $0.6 million - expansion of our self storage business increased expenses $1.1 million - these increases in expenses were partially offset by: - properties we sold in the second quarter of 1999 which reduced expenses by $1.6 million and - by the reduction of bad debt expense of $0.7 million resulting in part from recovery of amounts previously written off related to the Bradlee's bankruptcy, a former tenant at our Seekonk, MA property
The impact in 1999 of our new accounting basis for real estate asset depreciation, due to Legacy's exchange offer for our common stock, was not material.
Expenses decreased $1.7 million to $31.1 million in 1998 compared to 1997 primarily because:
- we wrote off $2.0 million in 1997 for asset impairments on properties held for sale because their book value was higher than what we expected to receive when the properties sold
- we wrote off costs in 1997 related to the PriceSmart distribution, consisting of insurance, legal and accounting fees of $1.5 million which contributed to our decrease in general and administrative expenses in - properties we acquired at the end of 1997 and in 1998 increased 1998 expenses $3.0 million - expansion of our self storage business in 1998 increased expenses an additional $0.6 million - properties sold or transferred to PriceSmart resulted in a decrease in expenses of $1.1 million
OPERATING INCOME
Operating income increased for 1999 and 1998 compared to the same periods in the prior year primarily because of the changes in Rental Revenues and Expenses discussed above.
INTEREST EXPENSE
During 1999, interest expense increased $3.1 million because:
- we recorded $6.3 million in interest expense related to our unsecured revolving credit facilities because our average debt outstanding in 1999 was $90.0 million compared to $21.5 million in 1998, which relates primarily to the borrowing of $57.6 million for our common stock repurchase in November 1998 - we recorded $0.8 million in interest expense related to the note payable associated with our San Diego/Murphy Canyon, CA self storage facility purchase - we capitalized $1.2 million of this $7.1 million interest incurred to real estate assets
During 1998, interest expense increased $2.8 million because:
- we recorded $2.6 million in interest expense related to our unsecured revolving credit facilities because our average debt outstanding in 1998 was $21.5 million and we had no debt in 1997 - we recorded $0.5 million in interest expense related to the note payable associated with our San Diego/Murphy Canyon, CA self storage facility purchase - we capitalized $0.3 million of this $3.1 million interest incurred to real estate assets
We discuss our outstanding debt further in "Liquidity and Capital Resources" located elsewhere in this Form 10-K.
INTEREST INCOME
Interest income decreased $0.2 million to $0.5 million in 1999 compared to 1998 primarily because of lower cash balances in 1999 and we used available cash and began borrowing in the second quarter of 1998 to fund acquisitions.
Interest income decreased $5.6 million to $0.7 million in 1998 compared to 1997 primarily because:
- we received full payment for a $41.2 million interest bearing note receivable in 1997 - we transferred previously invested cash and other interest bearing notes receivable to PriceSmart in August 1997 - we used previously invested cash for acquiring and developing properties
GAIN (LOSS) ON SALE OF REAL ESTATE AND INVESTMENTS (net)
During 1999 we sold the following properties for a gain of $4.7 million:
During 1998 we sold a free-standing restaurant building at our Azusa, CA property and recorded a $184,000 gain. We also sold a free-standing carwash at our Northridge, CA site and recognized no gain or loss. We consider these two parcels incidental to our main business. The loss recorded in the year ended December 31, 1997 relates to the properties and investments sold prior to the PriceSmart distribution.
PROVISION FOR INCOME TAXES
We have no income tax expense for 1999 and 1998 because of our REIT status. Before we became a REIT in September 1997 we recorded income taxes at an effective tax rate of 41%. We recorded an income tax benefit of $7.6 million in the year ended December 31, 1997 that offset the tax expense recorded. The tax benefit related to a previously recorded income tax liability that was presumed no longer payable because of our conversion to a REIT as well as income tax refunds receivable related to Federal tax net operating loss carrybacks.
MERGER RELATED COSTS
In connection with the completion of Legacy's exchange offer in November 1999, we expensed $1.8 million as follows:
Because our transaction with Legacy resulted in a change of control in our Company, we expensed $0.9 million related to the vesting of preferred stock options as required by generally accepted accounting principles.
DISCONTINUED OPERATIONS
Due to the PriceSmart distribution in August 1997, there were no discontinued operations in 1999 and 1998. The discontinued merchandising segment was transferred to PriceSmart in the Distribution.
FUNDS FROM OPERATIONS
Real estate industry analysts generally consider funds from operations (FFO) as another measurement of performance for real estate-oriented companies. In general, FFO adjusts net income for noncash charges such as depreciation, amortization and most non-recurring gains and losses. The National Association for Real Estate Investment Trusts (NAREIT), defines FFO as net income, excluding depreciation and amortization expense, and gains (losses) from certain sales of property. We also exclude provisions for asset impairments and gains (losses) from sale of investments when we calculate FFO. We also adjust the NAREIT definition to eliminate straight-line rents in adjusted FFO because of their significance in our operations. Straight-line rent accruals are noncash revenues associated with fixed future minimum rent increases.
FFO during 1999 decreased 6% to $37.3 million compared to 1998 because:
- interest expense increased $3.1 million, which relates directly to the borrowing of $57.6 million for our common stock repurchase in November - we expensed $1.8 million in merger costs related to our transaction with Legacy - two properties we sold in the second quarter of 1999 reduced FFO $1.5 million - Caldors, a former bankrupt tenant at our Moorestown, NJ location reduced FFO $0.8 million
- these increases in expenses were partially offset by: - properties we acquired in 1998 which increased FFO $3.6 million - expansion of our self storage business which increased FFO $1.0 million excluding intercompany rent
The impact on FFO in 1999 of our new accounting basis due to Legacy's exchange offer for our common stock was not material.
FFO during 1998 increased 2% to $42.4 million compared to 1997 because:
- properties acquired at the end of 1997 and in 1998 generated $5.2 million - we reduced general and administrative expenses $1.9 million primarily related to the PriceSmart distribution - expansion of our self storage business in 1998 generated $1.4 million - the change in net interest of $8.4 million from $6.3 million net interest income in 1997 to $2.1 net interest expense in 1998 offset the increases in net operating income generated from our properties
FFO for 1998, excluding income earned from assets transferred to PriceSmart, increased 17% to $42.4 million in 1998 from $36.3 million in 1997.
FFO and adjusted FFO do not represent the generally accepted accounting principles definition of cash flows from operations and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to our ability to generate sufficient cash flows to meet the short and long-term cash requirements of our business operations. Capital resources represent those funds used or available to be used to support our business operations and consist of stockholders' equity and debt.
Cash flow from operations has been the principal source of capital to fund our ongoing operations and dividend payments, while use of our credit facilities and mortgage financing have been the principal sources of capital required to fund our growth. While we are positioned to finance our business activities through a variety of sources, we expect to satisfy short-term liquidity requirements through net cash provided by operations and through borrowings.
We continue to evaluate various properties for acquisition or development. We purchased two retail properties and one office property from Legacy in February 2000 for $28.5 million. In conjunction with these purchases, we assumed two long-term mortgages secured by the two retail properties totaling $7.3 million and one construction loan for $11.0 million related to the office property. We funded these purchases through advances on our revolving line of credit. To the extent that investment opportunities exceed available cash flow from the sources mentioned above, we may raise additional capital through bank credit facilities and/or secured mortgage financing.
From time to time we will consider selling properties to better align our portfolio with our geographic and tenant composition strategies. We sold two properties from our portfolio for $32.5 million during the second quarter of 1999. We are also contemplating selling certain other properties. We may also participate in like-kind property exchanges which allow us to dispose of properties and reinvest the proceeds in a tax efficient manner. These sales may not be completed due to uncertainties associated with contract negotiations and buyer due diligence contingencies.
In December 1998 we obtained a $100 million unsecured credit facility from Wells Fargo Bank, AmSouth Bank and Bank One. This facility has a three-year term with an initial interest rate of LIBOR plus 135 basis points. The rate may vary based on our leverage and other financial ratios. At December 31, 1999, there was $88.4 million outstanding on the Wells Fargo facility at a 7.85% interest rate. In February 2000 we increased our unsecured credit facility to $125 million. The participating banks are now Wells Fargo Bank, AmSouth Bank, Bank One and Fleet BankBoston. The facility's interest rate is now LIBOR plus 140 basis points.
In November 1998 we purchased 10.5 million shares of our common stock for $5.50 per share. To fund this purchase, we obtained a $50 million credit facility from Morgan Guaranty Trust Company (the Morgan Facility) which was subsequently amended to $25 million. In September 1999 we repaid the remaining $25 million on our Morgan Facility and terminated the facility.
In conjunction with the San Diego/Murphy Canyon, CA self storage facility purchase, we assumed an existing $8.9 million note secured by the property. The note, payable to a financial institution, matures in July 2004 and bears an interest rate of 9.0%. The note does not permit repayment prior to July 2001.
In August 1998 we distributed to stockholders of record one share of newly created Series A Preferred Stock, par value $.0001, for each share of common stock held by them on the record date. We raised no capital through this transaction. The Series A Preferred Stock pays quarterly dividends totaling $1.40 per year with a $16.00 per share liquidation
preference. Prior to the distribution of Series A Preferred Stock, we paid dividends on our common stock. Dividends of $1.40 will be paid on the Series A Preferred Stock and any dividends paid in excess of $1.40, will be paid to our common stockholders. We have the right to redeem the Series A Preferred Stock after August 16, 2003 or after a change of control of our Company, which occurred with Legacy's completion of their exchange offer for our common stock, at a redemption price of $16.00 per share plus accrued and unpaid dividends, if any.
YEAR 2000
In prior years, we discussed the nature and progress of our plans to become Year 2000 ready. In 1999, we completed upgrading our existing computer software and information technology and testing of our systems. As a result of our planning and implementation efforts, we experienced no significant disruptions in information technology and non-information technology systems and we believe those systems successfully responded to the Year 2000 date change. We spent approximately $220,000 in connection with upgrading our information technology systems. We are not aware of any material problems resulting from Year 2000 issues, either with our internal systems or the products and services of third parties. We will continue to monitor our computer systems throughout the year 2000 to ensure that we address any unknown Year 2000 issues that may arise in a prompt manner.
INFLATION
Because a substantial number of our leases contain provisions for rent increases based on changes in various consumer price indices, based on fixed rate increases, or based on percentage rent if tenant sales exceed certain base amounts, we do not expect inflation to have a material impact on future net income or cash flow from developed and operating properties. In addition, substantially all leases are triple net, which means specific operating expenses and property taxes are passed through to the tenant.
ITEM 7A.
ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in short-term LIBOR interest rates. We do not have any foreign exchange or other significant market risk. We did not have any derivative financial instruments at December 31, 1999.
Our exposure to market risk for changes in interest rates relates primarily to our unsecured lines of credit. We enter into variable rate debt obligations to support general corporate purposes, including acquisitions, capital expenditures and working capital needs. We continuously evaluate our level of variable rate debt with respect to total debt
and other factors, including our assessment of the current and future economic environment.
We had $88.4 million in variable rate debt outstanding at December 31, 1999. Based upon these year-end debt levels, a hypothetical 10% adverse change in interest rates would increase interest expense by approximately $0.7 million on an annual basis, and likewise decrease our earnings and cash flows. We cannot predict market fluctuations in interest rates and their impact on our variable rate debt, nor can there be any assurance that fixed rate long-term debt will be available to us at favorable rates, if at all. Consequently, future results may differ materially from the estimated adverse changes discussed above.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PRICE ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
See accompanying notes.
PRICE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes.
PRICE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
See accompanying notes.
(1) $1.05 per share of common stock and $.35 per share of preferred stock
PRICE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PRICE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes
PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND ACQUISITION Price Enterprises, Inc. (PEI) operates as a real estate investment trust (REIT) incorporated in the state of Maryland. Our principle business is to own, acquire, operate, manage and lease real property, primarily shopping centers. We became a REIT in September 1997 after we spun-off our merchandising segment and certain other assets to PriceSmart, Inc.
On June 2, 1999, Excel Legacy Corporation (Legacy) and PEI jointly announced that they entered into an agreement regarding Legacy's acquisition of the outstanding common stock of our Company. This announcement followed the May 12, 1999 announcement of an earlier agreement between Legacy and Sol Price, as trustee of certain trusts, and other stockholders of our Company.
On November 12, 1999 Legacy completed its exchange offer for our common stock. In the exchange offer, Legacy acquired approximately 91.3% of our common stock, which represents approximately 77.5% of PEI's voting power. PEI stockholders who tendered their shares of PEI common stock in the exchange offer received from Legacy a total of $8.50 consisting of $4.25 in cash, $2.75 in principal amount of Legacy's 9.0% Convertible Redeemable Subordinated Secured Debentures due 2004 and $1.50 in principal amount of Legacy's 10.0% Senior Redeemable Secured Notes due 2004 for each share of PEI common stock.
In accounting for this transaction, we followed Accounting Principles Board Opinion No. 16, "Business Combinations" (APB No.16), which requires we treat this transaction as a purchase. In following purchase accounting, we allocated the cost basis of Legacy's investment in our common stock among our assets and liabilities to adjust them to fair value at the time of the completion of the exchange offer. We prepared the consolidated financial statements through November 11, 1999 using PEI's historical basis of accounting and we designated them as the predecessor in our consolidated financial statements. Your comparison of PEI's results of operations prior to completion of the merger with Legacy and after completion of the merger is affected by our purchase accounting adjustments and by adopting Legacy's depreciation policy, discussed elsewhere in this footnote.
ACCOUNTING PRINCIPLES We prepare our financial statements in accordance with generally accepted accounting principles. We follow the accounting standards established by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants.
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONSOLIDATION We combine our financial statements with those of our wholly-owned subsidiaries and present them on a consolidated basis. The consolidated financial statements do not include the results and transactions between us and our subsidiaries or among our subsidiaries.
FISCAL YEAR Effective September 1, 1997 we changed our fiscal year end from August 31 to December 31 as required by the Internal Revenue Code for REITs. The four-month transition period ending December 31, 1997 bridges the gap between our old and new fiscal year ends.
REAL ESTATE ASSETS AND DEPRECIATION Prior to Legacy's exchange offer for our common stock, we recorded real estate assets at historical costs, and adjusted them for recognition of impairment losses. In following purchase accounting, we adjusted the historical costs of our real estate assets to fair value. Our balance sheet at December 31, 1999 reflects the new basis of our real estate assets.
We expense ordinary repairs and maintenance as incurred; we capitalize major replacements and betterments and depreciate them over their estimated useful lives.
Following completion of Legacy's exchange offer for our common stock, we adopted Legacy's accounting policy of depreciating real estate assets. We compute real estate asset depreciation on a straight-line basis over their estimated useful lives, as follows:
We review long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recovered. We consider assets to be impaired and write them down to fair value if their expected associated future undiscounted cash flows are less than their carrying amounts. We reduced historical costs for real estate and related assets $2.0 million during the year ended August 31, 1997. We determined fair value using the present value of the expected associated cash flows.
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We capitalize interest incurred during the construction period of certain assets and this interest is depreciated over the lives of those assets. The following table shows interest expense and the amount capitalized (amounts in thousands):
INVESTMENTS We use the "equity method" of accounting for our joint venture, which means we carry this investment at cost, adjusted for our share of earnings or losses and any distributions received.
RENTAL REVENUE RECOGNITION Rental revenues include: (1) minimum annual rentals, adjusted for the straight-line method for recognition of fixed future increases; (2) additional rentals, including recovery of property operating expenses, and certain other expenses which we accrue in the period in which the related expense occurs; and (3) percentage rents which we accrue on the basis of actual sales reported by tenants.
CASH AND CASH EQUIVALENTS We consider all highly liquid investments with a maturity of less than three months when purchased to be cash and cash equivalents.
LEASING COSTS We capitalize costs associated with leasing space to tenants and amortize leasing costs using the straight-line method over the initial terms of the related tenant leases.
FINANCIAL INSTRUMENTS The carrying amounts reflected in our balance sheets for cash and cash equivalents, receivables and all liabilities approximate their fair values. In making these assessments we used estimates and market rates for similar instruments.
AUTHORIZED STOCK As of December 31, 1999, our Company's authorized stock consisted of 100 million shares of capital stock of which 26 million shares have been designated as 8 3/4% Series A Cumulative Redeemable Preferred Stock, par value $.0001 per share.
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES We intend to continue meeting all conditions necessary to qualify as a REIT under the Internal Revenue Code. To qualify as a REIT, we are required to pay dividends of at least 95% of our "REIT taxable income" each year and meet certain other criteria. Beginning in 2001 this requirement changes to where we will be required to distribute at least 90% of our taxable income to our stockholders to maintain our status as a REIT. As a qualifying REIT, we will not be taxed on income distributed to our stockholders. Also, if we sell properties that would result in a significant tax liability, we intend to use tax deferred exchange transactions so we will not be taxed on potential gains. The reported amounts of our net assets, as of December 31, 1999 and 1998 were more than their tax basis for Federal tax purposes by approximately $159.3 million and $35.9 million, respectively.
The following table shows the tax status of our dividend payments between ordinary income, return of capital and capital gains:
In prior years, we reported income taxes in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." That standard requires companies to account for deferred taxes using the asset and liability method. Accordingly, deferred income taxes are provided to reflect temporary differences between financial and tax reporting, including: asset write-downs of real estate and related assets, deferred gains on sales of real estate, accelerated tax depreciation methods, and accruals for straight-line rents.
NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires presentation of two calculations of earnings per common share. Basic earnings per common share equals net income divided by weighted average common shares outstanding during the period. Diluted earnings per common share equals net income divided by the sum of weighted average common shares outstanding during the period plus common stock equivalents. Common stock equivalents are shares assumed to be issued if outstanding stock options were exercised. All earnings per share
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amounts for all periods have been presented, and where appropriate, restated to reflect these calculations.
In September 1998 we announced a self-tender offer to purchase a portion of our common stock for $5.50 per share and completed the offer on October 21, 1998. We purchased approximately 10.5 million shares, which was 44% of our outstanding shares, for $57.6 million. We now have approximately 13.3 million shares of common stock outstanding, including 12.2 million shares held by Legacy.
RECLASSIFICATIONS Certain reclassifications have been reflected in the financial statements in order to conform with the current year presentation.
USE OF ESTIMATES Preparing financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We continually review our estimates and make adjustments as necessary, but actual results could turn out different than what we envisioned when we made these estimates.
STOCK-BASED COMPENSATION We follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations, in accounting for our employee and non-employee director stock options instead of following SFAS No. 123, "Accounting for Stock- Based Compensation." The alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. As a result, deferred compensation is recorded only in the event that the fair market value of the stock on the date of the option grant exceeds the exercise
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
price of the options. Since the exercise price of our stock options equals the market price of our stock on the day the options are granted there is no related compensation expense.
NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," and in 1999 they voted to delay the effective date of this SFAS by one year. SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities, where all derivatives must be recognized as assets and liabilities and measured at fair value. This statement currently has no impact on our financial statements.
NOTE 2 - PURCHASE ACCOUNTING
On November 12, 1999, Legacy completed its exchange offer for our common stock, acquiring approximately 91.3% of our outstanding common stock. For financial reporting purposes, we revalued our assets as of November 12, 1999 to reflect the price Legacy paid to acquire our common stock. This process is referred to as purchase accounting. Our consolidated financial statements as of December 31, 1999 and for the period of November 12, 1999 through December 31, 1999 reflect the allocation of Legacy's purchase price. The consolidated financial statements through November 11, 1999 reflect our historical cost of assets, liabilities and results of operations and we refer to them as predecessor consolidated financial statements.
The following table summarizes the adjustments made to our assets and liabilities as of November 12, 1999 in following purchase accounting as a result of Legacy's acquisition of our common stock:
The following table summarizes our unaudited pro forma results of operations as if Legacy completed its exchange offer and acquired our common stock on January 1, 1998:
NOTE 2 - PURCHASE ACCOUNTING (CONTINUED)
In arriving at our pro forma results of operations, we made the following adjustments:
- operating results for both years do not include the two properties we sold in 1999 - depreciation and amortization expense reflect the new fair value of properties and our adoption of Legacy's accounting policy of depreciating properties over an estimated useful life of 40 years instead of 25 - net income applicable to common stockholders assumes four quarterly dividends paid to preferred stockholders in 1998 instead of one
We present pro forma information for comparative purposes only and the pro forma information may not be indicative of our actual results of operations had Legacy completed its exchange offer on January 1, 1998.
NOTE 3 - DISCONTINUED OPERATIONS
In August 1997, we completed a distribution of our merchandising segment and certain other assets to PriceSmart. As a result, the financial statements for all periods presented reflect our merchandising segment as a discontinued operation. The results of operations and cash flows of other assets and liabilities transferred to PriceSmart that were not part of the merchandising segment are included in our continuing operations.
Summarized results of operations of the discontinued merchandising segment were as follows (amounts in thousands):
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
NOTE 4 - REAL ESTATE PROPERTIES
Our real estate properties are generally leased under noncancelable leases with remaining terms ranging from one to 21 years. Rental revenues include the following (amounts in thousands):
Costco, our largest tenant, contributes 17.1% of total annual minimum rent from four leases in 1999. Rental revenues generated from Costco were as follows (amounts in thousands):
NOTE 4 - REAL ESTATE PROPERTIES (CONTINUED)
As of December 31, 1999, future minimum rental income due under the terms of all noncancelable tenant leases is as follows (amounts in thousands):
ACQUISITIONS We acquired the following properties during 1999:
We funded these acquisitions through available cash and advances under our unsecured revolving credit facilities.
We acquired the following properties during 1998:
We funded these acquisitions through available cash, advances under our unsecured revolving credit facilities, and by assuming a note payable in conjunction with the San Diego/Murphy Canyon, CA self storage facility purchase.
On May 28, 1998, we announced a joint venture with River Park Properties to develop a 173,000 square foot retail and commercial center in Fresno, CA. We own 50% of this joint venture investment. We purchased the land from PriceSmart at the appraised value of $4.0 million and contributed the land to the joint venture.
In December 1997 we purchased a shopping center in Roseville, CA for $23.6 million.
NOTE 4 - REAL ESTATE PROPERTIES (CONTINUED)
DISPOSITIONS During 1999 we sold the following properties:
We used the net proceeds from the sale of these properties to reduce the amount outstanding on our unsecured revolving credit facility and to purchase land in Temecula, CA.
During 1998 we sold a free-standing restaurant building at our Azusa, CA property and recorded a $184,000 gain on the sale. We also sold a free-standing car wash at our Northridge, CA site and recognized no gain on the sale. We consider both of these parcels incidental to our main business.
We sold no properties during the four months ended December 31, 1997. During the year ended August 31, 1997 we sold certain significant real estate properties to unrelated parties and recognized related gains or losses on dispositions, as shown in the following table. In addition, we recognized $644,000 of net gains during the year ended August 31, 1997 on sales of insignificant real estate properties. In conjunction with the PriceSmart distribution, we transferred all remaining properties held for sale to PriceSmart (amounts in thousands).
NOTE 5 - CREDIT FACILITIES AND NOTE PAYABLE
Our revolving credit facility activity consists of the following:
- - In December 1998 we obtained a $100 million unsecured credit facility with Wells Fargo Bank, AmSouth Bank and Bank One. This facility has a term of three years with an initial interest rate of LIBOR plus 135 basis points. The rate may vary based on our leverage and other financial ratios. As of December 31, 1999, we owed $88.4 million on this credit facility at a weighted average interest rate of 7.85%.
NOTE 5 - CREDIT FACILITIES AND NOTE PAYABLE (CONTINUED)
- - In January 1999 we repaid $25 million on our credit facility with Morgan Guaranty Trust Company and amended the facility to reduce our maximum principal amount of borrowing from $50 million to $25 million. In September 1999 we repaid the remaining $25 million we owed and terminated this facility. We repaid these amounts through advances on our unsecured credit facility with Wells Fargo Bank, AmSouth Bank and Bank One.
In conjunction with the San Diego/Murphy Canyon, CA self storage facility purchase in May 1998, we assumed an existing $8.9 million note secured by the property. The note, payable to a financial institution, matures in July 2004 and bears an interest rate of 9.0%. Prepayment of the note may not occur prior to July 2001.
The amount of secured debt that becomes due in each of the next five years is as follows (amounts in thousands):
NOTE 6 - RELATED PARTY TRANSACTIONS
Following Legacy's completion of its exchange offer, Gary B. Sabin, Chairman, President and Chief Executive Officer of Legacy, became our Company's President and Chief Executive Officer, and certain other Legacy executives became our Company's executives. Legacy also took over daily management of our Company, including property management, finance and administration and our self storage business. We reimburse Legacy for these services. We expensed $249,000 for these services during the period of November 12, 1999 through December 31, 1999 which was based on our historical costs for similar expenses.
Because of the PriceSmart distribution and for the purpose of governing certain of the ongoing relationships between PriceSmart and PEI after the distribution, and to provide for an orderly transition, PriceSmart and PEI entered into various agreements as described below.
NOTE 6 - RELATED PARTY TRANSACTIONS (CONTINUED)
Our Company and PriceSmart entered into an Asset Management and Disposition Agreement in August 1997 for us to provide asset management services for certain properties distributed to PriceSmart. PriceSmart pays us management fees, leasing fees, disposition fees and developer's fees for providing these services. This agreement has a two-year term; provided that either the Company or PriceSmart may terminate the agreement with 60 days written notice. During 1998, we charged PriceSmart $201,000 for asset management services and $43,000 during the four months ending December 31, 1997.
We also entered into a Tax Sharing Agreement with PriceSmart in August 1997 defining rights and obligations with respect to tax returns and tax liabilities for taxable years and other taxable periods ending on or before August 31, 1997. In general, we will be responsible for (i) filing all Federal and state income tax returns of our Company, PriceSmart and any of their subsidiaries for all taxable years ending on or before or including August 31, 1997 and (ii) paying the taxes relating to these returns (or be entitled to tax refunds) to the extent attributable to pre-August 31, 1997 periods.
PriceSmart leases space from us for its corporate offices in San Diego. The lease expires August 31, 2001. In 1999 we recorded $647,000 in revenue related to this lease, $590,000 in 1998 and $158,000 in revenue during the four months ended December 31, 1997.
In July 1998 we acquired approximately 15 acres of land in Fresno, CA from PriceSmart for $4.0 million.
In May 1998, we acquired an office complex in Sacramento, CA for $35.6 million. We acquired the property from Ivanhoe-Bradshaw, L.L.C. (Ivanhoe-Bradshaw), a company controlled by Sol Price. In addition, James F. Cahill, a member of our Board of Directors, served as Manager of Ivanhoe-Bradshaw and previously held membership interests in Ivanhoe-Bradshaw.
NOTE 7 - PROFIT SHARING AND 401(k) PLAN
Substantially all of our employees participate in a defined contribution profit sharing and 401(k) plan. Profit sharing contributions, if any, are based on a discretionary amount determined by our Board of Directors and we allocate contributions to each participant
NOTE 7 - PROFIT SHARING AND 401(k) PLAN (CONTINUED)
based on their relative compensation, subject to certain limitations, to the compensation of all participants. We make these contributions annually. We also make a matching 401(k) contribution equal to 50% of each participant's contribution up to an annual maximum matching contribution of $250.
We contributed the following amounts to our profit sharing and 401(k) plan (amounts in thousands):
NOTE 8 - STOCK OPTION PLANS
In 1995, we established an Employee Stock Option and Stock Grant Plan and a Director Stock Option Plan and we may grant stock options to any employee or director under these two plans. We reserved 1,500,000 shares for issuance under the employee plan and 150,000 for issuance under the director plan. The director plan was amended on October 1, 1997. Options generally vest over five years and expire six years after the grant date. Once exercisable, the employee or director can purchase shares of our stock at the market price on the date we granted the option. Subsequent to August 31, 1997, and as a direct result of the PriceSmart distribution, we adjusted all outstanding options, both in quantity and exercise price, so each optionee remained in the same economic position as before the distribution. We made an equitable adjustment by issuing 54,352 additional stock options to compensate for a reduction in our stock price because of the PriceSmart distribution.
In August 1998 we distributed one share of Series A Preferred Stock for every share of common stock outstanding. Subsequent to this distribution our common stock began trading at a significantly reduced price. In order to put optionees with outstanding stock options in the same position as common stockholders of the Company after the distribution, each optionee was granted the right to receive one share of preferred stock upon the exercise of a share of common stock. This right was granted instead of adjusting the exercise price or quantity of common stock options outstanding. This right is triggered by the exercise of the common stock option and the optionee may not
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
exercise options in the common or preferred stock independently. We amended both stock option plans in August 1998 to allow for this change.
In connection with Legacy's exchange offer for our common stock, all options and rights to purchase our common stock and our preferred stock became fully vested and exercisable upon the closing of the exchange offer. Additionally, all options to purchase our Company's common stock were canceled. Each outstanding option which represents the right to purchase a share of both our common stock and our preferred stock was modified so that the holder:
- was paid by Legacy an amount in cash determined by multiplying:
- the excess, if any, of $8.50 over an amount equal to 22.7% of the applicable exercise price of such option (rounded to the nearest whole cent), by
- the number of shares of common stock subject to the option, and
- received a replacement option to purchase shares of our preferred stock, exercisable on the same terms and conditions as the surrendered right to purchase the same number of shares of our preferred stock at an exercise price equal to 77.3% of the applicable exercise price of the option (rounded to the nearest whole cent); except that the option received in exchange will be fully exercisable and vested and will not expire for a period ending upon the earlier of:
- two years following the closing of the exchange offer or such longer period as may be applicable to holders who remain employed by us or Legacy after the exchange offer, or
- such time as no shares of our preferred stock remain outstanding, at which time the option will represent the right to receive the redemption price for our preferred stock.
You will see in the following table the activity in the common stock options and related weighted average exercise price per share. The quantity of stock options granted, exercised and cancelled reflect only common stock options. In order to make this disclosure more meaningful, we have reflected the weighted average exercise price per share as a prorated price based on the relative value of the common stock and the
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
preferred stock. We used the closing prices on the first day of trading of the preferred stock, where the common stock closed at $4.38, or 22.7%, and the preferred closed at $14.87, or 77.3%, of the total of $19.25.
The following table summarizes the activity for both plans:
As we stated in Note 1, we follow the provisions for APB No. 25, "Accounting for Stock Issued to Employees." In 1997 we implemented the disclosure provisions required by SFAS No. 123, "Accounting for Stock-Based Compensation" for our stock option plans. SFAS No. 123 requires pro forma net income and earnings per share information, which is calculated assuming we had accounted for our stock option plans under the "fair value" method described in that statement. The effect of applying SFAS No. 123's fair value method to our stock-based awards results in net income and earnings per share that are not materially different from amounts reported.
NOTE 8 - STOCK OPTION PLANS (CONTINUED)
Because our transaction with Legacy resulted in the vesting of preferred stock options, we expensed $0.9 million during the period from January 1 through November 11, 1999 as required by generally accepted accounting principles. The amount is included in merger related costs. At year end 669,848 options of preferred stock remained outstanding at a weighted average exercise price of $13.16 per share. The exercise price of the outstanding options of preferred stock ranges from $7.03 to $15.37 per share with an average life of two years.
NOTE 9 - INCOME TAXES
Because we have operated as a REIT since September 1997, there is no Federal income tax expense for 1999, 1998 or the transition period ended December 31, 1997. The income tax benefit recorded in the four months ending December 31, 1997 is a result of our previously deferred tax liability being eliminated because of our conversion to a REIT as well as income tax refunds receivable that are a result of Federal tax net operating loss carrybacks. The provision (benefit) for income taxes for the years prior to our conversion to a REIT consists of the following (amounts in thousands):
A reconciliation between the Federal statutory rate and the effective tax rate follows (amounts in thousands):
NOTE 9 - INCOME TAXES (CONTINUED)
The significant components of deferred income taxes are attributable to the following temporary differences (amounts in thousands):
NOTE 10 - STOCKHOLDERS' EQUITY
On August 17, 1998, we distributed to stockholders of record on July 30, 1998, one share of newly created 8_% Series A Cumulative Redeemable Preferred Stock, par value $.0001, for each share of common stock held by them on the record date. We raised no capital through this transaction. The Series A Preferred Stock pays quarterly dividends at a rate of $1.40 per year and has a $16.00 per share liquidation preference. Prior to the distribution of Series A Preferred Stock, we paid dividends on our common stock. Beginning with our November 1998 dividend payment, annual dividends of $1.40 per share will be paid on the Series A Preferred Stock. Any dividends required to be paid in excess of $1.40 will be paid to our common stockholders. We have the right to redeem the Series A Preferred Stock anytime after August 16, 2003 at a redemption price of $16.00 per share plus accrued and unpaid dividends, if any. Holders of the Series A Preferred Stock have one-tenth of one vote per share, voting together with our common stock.
NOTE 10 - STOCKHOLDERS' EQUITY (CONTINUED)
The total market value of the Series A Preferred Stock is based on the closing price on its first day of trading and is shown on the balance sheet as Series A Preferred Stock. We reduced additional paid in capital by the Series A Preferred Stock's value to reflect our change in capital structure.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Our Company owns a property in New Jersey with a ground lease that has a remaining term of 20 years with three 15-year options to renew. Rent expense related to the ground lease is summarized below (amounts in thousands):
Prior years' rental expense included additional leases which we either transferred to PriceSmart in the distribution or terminated. Future minimum payments during the next five years and thereafter under this noncancelable lease at December 31, 1999 are as follows (amounts in thousands):
The above property is subleased and as of year end total future sublease revenues are $9.3 million, which are included in future minimum rental income amounts in Note 3.
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited summary of our quarterly results for the last two years (amounts in thousands, except per share data):
NOTE 12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
NOTE 13 - SUBSEQUENT EVENTS
In February 2000 we loaned $2.8 million to Barclay Group No. 9, Ltd. The loan, secured by a property in Pueblo, CO, pays 25% interest and matures December 2000.
In February 2000 we purchased a retail building in Middletown, OH from Legacy for $6.7 million, paying $3.0 million cash and assuming a $3.7 million mortgage secured by the property.
In February 2000 we purchased a retail building in Terre Haute, IN from Legacy for $5.8 million, paying $2.2 million cash and assuming a $3.6 million mortgage secured by the property.
In February 2000 we purchased an office building in San Diego, CA from Legacy for $16.0 million, paying $5.0 million cash and assuming an $11.0 million construction loan secured by the property.
In February 2000 we amended our unsecured credit facility with Wells Fargo Bank, BankOne and AmSouth Bank by increasing the facility from $100 million to $125 million by adding BankBoston into the group of banks.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Price Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Price Enterprises, Inc. as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for the period from November 12, 1999 through December 31, 1999, period from January 1, 1999 through November 11, 1999, year ended December 31, 1998, period from September 1, 1997 through December 31, 1997 and for the year ended August 31, 1997. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Price Enterprises, Inc. at December 31, 1999 and 1998 and the consolidated results of their operations and their cash flows for the period from November 12, 1999 through December 31, 1999, period from January 1, 1999 through November 11, 1999, year ended December 31, 1998, period from September 1, 1997 through December 31, 1997, and for the year ended August 31, 1997, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
San Diego, California January 21, 2000, except for Note 13, as to which the date is February 29, 2000
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Note that in this Form 10-K, we "incorporate by reference" certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC allows us to disclose important information by referring to it in that manner. Please refer to such information.
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information about Directors of the Company is incorporated by reference from the discussion under the heading Enterprises' Directors and Officers in our Proxy Statement for the 2000 Annual Meeting of Stockholders. The balance of the response to this item is contained in the discussion entitled Executive Officers of the Company contained in Item 4A of Part I of this report.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
Information about executive compensation is incorporated by reference from the discussion under the heading Executive Compensation in our Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information about security ownership of certain beneficial owners and management is incorporated by reference from the discussion under the heading Securities Ownership of Certain Beneficial Owners and Management in our Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information about certain relationships and transactions with related parties is incorporated by reference from the discussion under the heading certain relationships and related transactions in our proxy statement for the 2000 annual meeting of stockholders.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Financial Statements and Financial Statement Schedules:
The following consolidated financial statements of Price Enterprises, Inc. are included in Item 8
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
(b) Reports on Form 8-K.
We filed a report on Form 8-K with respect to Item 1 thereof on November 15, 1999, relating to the acquisition of approximately 91.3% of our common stock by Legacy as a result of the consummation by Legacy of an exchange offer for our common stock. We did not file any other reports on Form 8-K during the quarter ended December 31, 1999.
(c) Exhibits: For a list of exhibits filed with this annual report, refer to the exhibit index beginning on page 64.
PRICE ENTERPRISES, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 1999 (AMOUNTS IN THOUSANDS)
For periods prior to the one ending December 31, 1997, this calculation is not applicable for our Company
(1) The aggregate cost for Federal income tax purposes is $460,438
(2) Does not include our investment in a joint venture which owns a retail center in Fresno, CA
PRICE ENTERPRISES, INC. SCHEDULE III (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION (IN THOUSANDS)
(1) Combined depreciation expense for the periods January 1 through November 11 and November 12 through December 31, 1999
(2) Adjusted for property and equipment transferred to PriceSmart
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, thereunto duly authorized.
PRICE ENTERPRISES, INC.
DATED: March 28, 2000 By: /s/ Gary B. Sabin -------------- --------------------------------- Gary B. Sabin President and Chief Executive Officer
DATED: March 28, 2000 By: /s/ James Y. Nakagawa -------------- --------------------------------- James Y. Nakagawa 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/ Jack McGrory March 28, 2000 - ---------------- -------------- JACK McGRORY, Chairman of the Board of Date Directors
/s/ Gary B. Sabin March 28, 2000 - ----------------- -------------- GARY B. SABIN, Director, President, Date and Chief Executive Officer
/s/ Richard B. Muir March 28, 2000 - ------------------- -------------- RICHARD B. MUIR, Director, Executive Vice Date President and Chief Operating Officer
/s/ James F. Cahill March 28, 2000 - ------------------- -------------- JAMES F. CAHILL, Director Date
/s/ Simon M. Lorne March 28, 2000 - ------------------ -------------- Simon M. Lorne, Director Date
EXHIBIT INDEX