-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PgYS0eytdP3pgFq7xbFTeE4hVodf57077JPh6Q0gYt0U0EzqgST0cISV0tij8/Ka fP542sBhTHQLNy6HQUDldA== 0000912057-01-504112.txt : 20010320 0000912057-01-504112.hdr.sgml : 20010320 ACCESSION NUMBER: 0000912057-01-504112 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE ENTERPRISES INC CENTRAL INDEX KEY: 0000929647 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 330628740 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-20449 FILM NUMBER: 1570893 BUSINESS ADDRESS: STREET 1: 4649 MORENA BLVD CITY: SAN DIEGO STATE: CA ZIP: 92117 BUSINESS PHONE: 6195814679 MAIL ADDRESS: STREET 1: 4649 MORENA BLVD CITY: SAN DIEGO STATE: CA ZIP: 92117 10-K405 1 a2041883z10-k405.txt 10-K405 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------- FORM 10-K -------------------------------- (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31 2000 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-20449 -------------------------------- PRICE ENTERPRISES, INC. (Exact name of registrant as specified in its charter) MARYLAND 33-0628740 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 17140 BERNARDO CENTER DRIVE SUITE 300, SAN DIEGO, CALIFORNIA 92128 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 858-675-9400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock $.0001 Par Value 8 3/4% Series A Cumulative Redeemable Preferred Stock $.0001 Par Value ------------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X or No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ The aggregate market value of the voting and non-voting common equity held by nonaffiliates of the registrant as of March 13, 2001 was $6,062,264 based on the last reported sale price of $5.25 per share on March 13, 2001. The number of outstanding shares of the registrant's common stock as of March 13, 2001 was 13,309,006. DOCUMENTS INCORPORATED BY REFERENCE: Certain information called for by Part III of the Form 10-K will either be filed with the Commission under Regulation 14A under the Securities Exchange Act of 1934 or by amendment to this Form 10-K, in either case on or before April 30, 2001. =============================================================================== PRICE ENTERPRISES, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000 TABLE OF CONTENTS PART I...........................................................................................................3 ITEM 1 - BUSINESS..............................................................................................3 ITEM 2 - PROPERTIES...........................................................................................10 ITEM 3 - LEGAL PROCEEDINGS....................................................................................13 ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................................................13 ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT................................................................14 PART II.........................................................................................................17 ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS................................17 ITEM 6 - SELECTED FINANCIAL DATA..............................................................................18 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................19 ITEM 7A. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........................................28 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..........................................................29 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................53 PART III........................................................................................................53 ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................................................53 ITEM 11 - EXECUTIVE COMPENSATION..............................................................................53 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT......................................53 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................................................53 PART IV.........................................................................................................54 ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K....................................54
FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains certain "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a "safe harbor" for these types of statements. To the extent statements in this Form 10-K involve, without limitation, our expectations for growth, estimates of future revenue, expenses, profit, cash flow, balance sheet items or any other guidance on future periods, these statements are forward-looking statements. Forward-looking statements contain risks and uncertainties which include those identified in this Form 10-K and other risks identified from time to time in our filings with the Securities and Exchange Commission (SEC), press releases and other communications. We assume no obligation to update forward-looking statements. In this Form 10-K: - "Company," "we," "our," "PEI," and "us" means Price Enterprises, Inc. - "Legacy" means Excel Legacy Corporation - "REIT" means real estate investment trust - "GLA" means gross leasable area - "FFO" means funds from operations PART I 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 retail 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 including four existing Costco warehouses adjacent to certain transferred properties - - certain merchandising business entities - - notes receivable from various municipalities and agencies (City Notes) - - certain other assets On August 29, 1997, PEI's merchandising businesses, real estate properties held for sale by PEI, the City Notes and certain secured notes receivable from buyers of properties 3 formerly held by PEI were spun-off to PriceSmart, Inc. (PriceSmart), a Delaware corporation and a wholly-owned subsidiary of PEI. Pursuant to a distribution agreement between PEI and PriceSmart (the Distribution) one share of common stock of PriceSmart was distributed for every four shares of common stock held by our stockholders. Since the Distribution, we have engaged 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 and maintaining status as a REIT, we substantially eliminate our obligation to pay taxes on income. 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. Holders of PEI's 8 3/4% Series A Cumulative Reedemable Preferred Stock (Series A Preferred Stock) have the right to elect a majority of our Company's board of directors. OVERVIEW OF THE COMPANY'S BUSINESS Our current property portfolio substantially consists of shopping centers leased to major retail tenants including Costco, The Sports Authority, The Home Depot, Lowe's, Kmart, Marshalls, and Borders Books and Music. We receive approximately 62% 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 - Properties" and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Form 10-K. Our business strategy is to continue to enhance the value and operating income of our portfolio by, among other things, completing the development and leasing of existing properties and acquiring new investment properties. In making new real estate investments, we emphasize acquiring well-located income-producing commercial properties, principally occupied by credit rated tenants with attractive yields and potential for increases in income and capital appreciation. In addition, we will, from time to time, consider disposing or exchanging existing investments in order to improve our 4 investment portfolio or increase our funds from operations. We continuously evaluate our properties and review potential strategies of repositioning or redeveloping our properties in order to maximize FFO and enhance property values. Our investment and portfolio management goal is maximizing long-term FFO. We also own and operate a self storage business, "Price Self Storage," with four facilities open in southern California at year end. In addition to the self storage business, our portfolio includes two office properties (Sacramento/Bradshaw, CA and Scottsdale, AZ) and one multi-use property (San Diego, CA) which includes retail, office and self storage. Our portfolio also includes joint venture investments, notes receivable, and land held for development. Through Legacy's personnel, we provide property management for all but one of our properties. Self-management enables us to more closely control leasing and management of our property. Internal property management also provides opportunities for operating efficiencies by enabling us to acquire additional properties without proportionate increases in property management expenses. Our property management program is implemented by property management and leasing professionals located in offices in San Diego, CA, Fountain Valley, CA and Sterling, VA. We also have an office in Salt Lake City, UT which coordinates the acquisition and disposition of our properties Our operating results depend on: - - performance and continuing viability of the existing tenants in our current real estate investment portfolio - - the existence of new replacement tenants - - competition from other retail centers and other forms of retail shopping, including internet commerce Our growth depends on: - - availability of attractive new real estate investment opportunities - - increased returns from our existing real estate investment properties - - cost of capital related to new real estate investments Real estate industry cycles heavily influence our performance as a REIT. We discuss this further in "Factors That May Affect Future Performance - Economic Performance and Value of Our Centers Depend on Many Factors" located elsewhere in this Form 10-K. COMPETITION We compete with a wide variety of corporate and individual real estate developers and REITs which have similar investment objectives and may have greater financial resources, larger staffs or longer operating histories than us. 5 We also compete with other property owners to obtain tenants for our retail shopping center properties. Our competitive advantages are primarily based on significant customer traffic generated by our 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. We discuss this further in "Factors That May Affect Future Performance - Competition for Acquisition of Real Estate" located elsewhere in this Form 10-K. SIGNIFICANT TENANTS Our Company's eight largest tenants account for approximately 45% of our total GLA and approximately 53% of our total annual minimum rent revenues. We show certain information about these tenants in the following table (dollars in thousands):
PERCENT OF ANNUAL PERCENT OF NUMBER AREA UNDER GLA UNDER MINIMUM TOTAL ANNUAL TENANT OF LEASES LEASE (SQ. FT) LEASE RENT MINIMUM RENT - ------ --------- -------------- ---------- --------- ------------ Costco 4 618,192 15.8% $8,484.7 18.7% The Sports Authority 7 298,217 7.6% 3,720.4 8.2% The Home Depot 2 214,173 5.5% 2,775.2 6.1% AT&T Wireless 1 156,576 4.0% 2,415.7 5.3% Kmart 1 110,054 2.8% 2,027.2 4.5% Marshall's 2 87,968 2.2% 1,889.5 4.2% Borders Books and Music 2 62,999 1.6% 1,655.7 3.7% Lowe's 2 230,659 5.9% 1,207.8 2.7% --------- ------------- ---------- -------- ------------ 21 1,778,838 45.4% $24,176.2 53.4% ========= ============= ========== ========= ============
It is not uncommon for economic conditions, market surpluses of retail space, internet purchasing and competitive pressures to negatively impact a retail operator's financial results, especially smaller retail operators. When a tenant files for bankruptcy we assess our alternatives for the potentially available space. We discuss this further in "Factors That May Affect Future Performance - Risk of Bankruptcy of Major Tenants" located elsewhere in this Form 10-K. ENVIRONMENTAL MATTERS Our properties are affected by Federal, state and local environmental laws. These laws relate to the discharge of materials and protection of the environment. We have made, and intend to continue to make, necessary expenditures for compliance with applicable laws. The properties listed below have required remediation and clean-up of certain past industrial activity: - Azusa, CA - Pentagon City, VA - Signal Hill, CA - New Britain, CT 6 Expenses related to monitoring and cleaning up these properties have not been material to our operations. While we cannot predict with certainty the future costs of such clean up activities, or operating costs for environmental compliance, we do not believe they will have a material effect on our capital expenditures, earnings or competitive position. We owned additional properties with environmental issues that we sold prior to the Distribution or that we transferred to PriceSmart in the Distribution. PriceSmart agreed to indemnify us for environmental liabilities arising out of these properties. EMPLOYEES At the close of our transaction with Legacy, Legacy took over daily management of our Company, including property management, finance and administration and our self storage business. We reimburse Legacy for these services based on our historical costs for similar expenses. SEASONALITY Our real estate operations generally are not subject to seasonal fluctuations. CORPORATE HEADQUARTERS Our headquarters are located at 17140 Bernardo Center Drive Suite 300, San Diego, CA, 92128, and we believe that our current facilities meet our expected requirements over the next 12 months. Our telephone number is (858) 675-9400. FACTORS THAT MAY AFFECT FUTURE PERFORMANCE ECONOMIC PERFORMANCE AND VALUE OF OUR CENTERS DEPEND ON MANY FACTORS. Real property investments are subject to varying degrees of risk. The economic performance and values of real estate can be affected by many factors, including: - changes in the national, regional and local economic climates - local conditions such as an oversupply of space or a reduction in demand for real estate in the area - the attractiveness of the properties to tenants - competition from other available space - the ability of the owner to provide adequate maintenance and insurance - increased operating costs MARKET FORCES IN THE RETAIL INDUSTRY COULD AFFECT OUR ABILITY TO LEASE SPACE. In recent years, there has been a proliferation of new retailers and a growing consumer preference for value-oriented shopping alternatives, such as internet commerce, that have heightened competitive pressures. In certain areas of the country, there may also be an oversupply of 7 retail space. As a consequence, many companies in all sectors of the retailing industry have encountered significant financial difficulties. A substantial portion of our income comes from rental revenues from retailers in shopping centers. Accordingly, no assurance can be given that our financial results will not be adversely affected by these developments in the retail industry. OUR INCOME DEPENDS ON RENTAL INCOME FROM REAL PROPERTY. Substantially all of our income is derived from rental income from real property. Accordingly, our income and funds available for distribution would be adversely affected if a significant number of our tenants were unable to meet their obligations to us or if we were unable to lease a significant amount of space in our properties on economically favorable lease terms. There can be no assurance that any tenant whose lease expires in the future will renew such lease or that we will be able to re-lease space on economically advantageous terms. ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Equity real estate investments are relatively illiquid and therefore tend to limit our ability to vary our portfolio promptly in response to changes in economic or other conditions. In addition, to the extent the properties are not subject to triple net leases, certain significant expenditures such as real estate taxes and maintenance costs are generally not reduced when circumstances cause a reduction in income from the investment. Should such events occur, our income and funds available for distribution would be adversely affected. RISK OF BANKRUPTCY OF MAJOR TENANTS. The bankruptcy or insolvency of a major tenant or a number of smaller tenants may have an adverse impact on the properties affected and on the income produced by such properties. Under bankruptcy law, a tenant has the option of assuming (continuing) or rejecting (terminating) any unexpired lease. If a tenant in bankruptcy assumes its lease with us, such tenant must cure all defaults under the lease and provide us with adequate assurance of its future performance under the lease. If a tenant in bankruptcy rejects the lease, our claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. We may not receive all amounts owed us under terms of a lease if a tenant rejects a lease in bankruptcy due to certain limits imposed by bankruptcy laws. RELIANCE ON MAJOR TENANTS. As of December 31, 2000, our largest tenant was Costco which accounted for approximately 18.7% of our total annual minimum rent revenue. In addition to our four properties where Costco is the major tenant, Costco warehouses are adjacent to an additional 12 of our properties. If Costco were to terminate a lease with us or a lease for space adjacent to our properties, certain of our tenants at such properties would have rights to reduce their rent or terminate their leases. In addition, tenants at such properties, including those with termination rights, could elect not to extend or renew their lease at the end of the lease term. Our financial position, results of operations 8 and our ability to make distributions may be adversely affected by financial difficulties experienced by Costco, or any of our other major tenants, including a bankruptcy, insolvency or general downturn in business of any major tenant, or in the event any major tenant does not renew their leases as they expire. CONTROL BY SERIES A PREFERRED STOCKHOLDERS. Robert E. Price and Sol Price, significant stockholders of PEI, beneficially owned as of December 31, 2000 an aggregate of approximately 11.1 million shares, or 46% of the outstanding Series A Preferred Stock. The holders of PEI's Series A Preferred Stock are entitled to elect a majority of our board of directors until: - less than two million shares of our Series A Preferred Stock remain outstanding, - Legacy makes an offer to purchase any and all outstanding shares of the Series A Preferred Stock at a cash price of $16.00 per share, and purchase all shares duly tendered and not withdrawn, - our directors (1) issue any equity securities without unanimous approval of our board or (2) fail to pay dividends on our common stock in an amount equal to 100% of our taxable income or an amount necessary to maintain our status as a REIT, or in an amount equal to the excess, if any, of our funds from operations, less preferred stock dividends, over $7.5 million, or - our board of directors, by unanimous vote, terminate the rights of the holders of Series A Preferred Stock to elect a majority of the directors As a result, these stockholders could effectively control the outcome of all matters submitted to our preferred stockholders for approval, including the election of a majority of our board of directors. COMPETITION FOR ACQUISITION OF REAL ESTATE. We face competition in the acquisition, operation and sale of our properties. Competition can be expected from other businesses, individuals, fiduciary accounts and plans and other entities engaged in real estate investment. Some of our competitors are larger than us and have greater financial resources available to them. This competition may result in a higher cost for properties we wish to purchase. ENVIRONMENTAL RISKS. Under various Federal, state and local laws, ordinances and regulations, we may be considered an owner or operator of real property and, therefore, may become liable for the costs of removal or remediation of certain hazardous substances released on or in our property, as well as certain other potential costs which could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property). In addition, we may have arranged for the disposal or treatment of hazardous or toxic substances and may be liable under these environmental laws as a 9 result of such activity. These environmental liabilities may be imposed whether or not we knew of, or were responsible for, the presence of such hazardous or toxic substances. Any such liability, if imposed, could have a material adverse effect on our business and our funds available for distribution. TAXATION OF THE COMPANY. We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the Code), beginning with the four months ended December 31, 1997. To maintain our status as a REIT for Federal income tax purposes, we generally are required each year to distribute to our stockholders at least 95% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain). Beginning in 2001 this requirement changes to where we will be required to distribute at least 90% of our REIT taxable income to our stockholders to maintain our status as a REIT. In addition, we are subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by us with respect to any calendar year are less than the sum of 85% of our ordinary income for such calendar year, 95% of our capital gain income for the calendar year and any amount of such taxable income that was not distributed in prior years. As long as we meet the requirements under the Code for qualification as a REIT each year, we will be entitled to a deduction when calculating our taxable income for dividends paid to our stockholders. We will be subject to tax on our income, however, to the extent it is not distributed. For us to qualify as a REIT, certain detailed technical requirements must be met (including certain income, asset and stock ownership tests) under the Code provisions for which, in many cases, there are only limited judicial or administrative interpretations. Although we intend to operate so that we will continue to qualify as a REIT, the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations and the possibility of future changes in our circumstances preclude any assurance that we will so qualify in any year. For any taxable year that we fail to qualify as a REIT, we would not be entitled to a deduction for dividends paid to our stockholders in calculating our taxable income. Consequently, distributions to our stockholders would be substantially reduced and could be eliminated because of our increased tax liability. Should our qualification as a REIT terminate, we may not be able to elect to be treated as a REIT for the subsequent five-year period, which would substantially reduce and could eliminate distributions to our stockholders for the years involved. ITEM 2 - PROPERTIES OVERVIEW At December 31, 2000, we owned 30 commercial real estate properties and held one property with a 19-year ground lease, in addition to land in Tucson, AZ, Temecula, CA, and San Diego/Pacific Beach, CA held for future development. These properties encompass approximately 4.4 million square feet of GLA and were 95% leased. The five 10 largest properties include 1.5 million square feet of GLA that generate annual minimum rent of $24.6 million, based on leases existing as of December 31, 2000. Included in the properties we owned at December 31, 2000 are four self storage facilities. One of these facilities, San Diego, CA, is located on the same site as our commercial property. Our commercial property located in Azusa, CA was sold during the year, but we retained the self storage facility. The other two self storage facilities are stand-alone properties. At year end, these facilities had 0.7 million square feet of GLA and were 96% occupied. We also have a 50% interest in three joint ventures which own retail properties in Fresno, CA, Bend, OR, and Westminster, CO. Here is the geographic concentration of our Company's properties at December 31, 2000, excluding our joint ventures in Fresno, Bend, and Westminster:
NUMBER OF PERCENT OF MINIMUM STATE PROPERTIES ANNUAL RENT ----- ---------- ------------------ Northeastern States New York 2 18% Virginia 2 16% New Jersey 2 11% Pennsylvania 1 7% Massachusetts 1 4% Maryland 1 4% Connecticut 1 2% ---------- ------------------ Total Northeastern 10 62% Midwestern States Indiana 1 1% Ohio 1 1% ---------- ------------------ Total Midwestern 2 2% Western States California 16 32% Arizona 2 3% Colorado 1 1% ---------- ------------------ Total Western 19 36% Total 31 100%
PROPERTY TABLE Amounts shown for annual minimum rents are based on executed leases as of December 31, 2000. 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, 2000. Self storage properties are shown separately from our commercial portfolio. 11
REAL ESTATE PORTFOLIO LEASES IN EFFECT AS OF DECEMBER 31, 2000 -------------------------------------------- NUMBER GROSS ANNUAL % OF OF LEASABLE PERCENT MINIMUM G.L.A. LEASE TENANTS AREA (SQ FT) LEASED RENT (1) PRINCIPAL TENANTS (SQ FT) EXPIRES ------- ------------ ------- -------- ----------------- -------- ------- (000's) ($000's) COMMERCIAL PROPERTIES - --------------------- Westbury, NY 8 398.6 100% $7,765.0 COSTCO 37% 2009 KMART 28% 2013 MARSHALLS 11% 2009 THE SPORTS AUTHORITY 11% 2013 BORDERS BOOKS 8% 2019 Pentagon City, VA 9 336.8 100% 6,928.6 COSTCO 50% 2009 MARSHALLS 13% 2010 BEST BUY 11% 2010 LINENS'N THINGS 10% 2010 BORDERS BOOKS 10% 2010 Wayne, NJ 5 343.9 93% 4,368.7 COSTCO 43% 2009 (includes 23,000 sq. ft. of LACKLAND STORAGE 17% 2012 vacant storage space) THE SPORTS AUTHORITY 13% 2012 NOBODY BEATS THE WIZ 11% 2018 Philadelphia, PA 22 308.7 98% 3,085.6 THE HOME DEPOT 36% 2009 BABYS R US 13% 2006 AMC THEATERS 12% 2015 ACME SUPERSAVER 11% 2000 Sacramento/Bradshaw, CA 1 156.6 100% 2,415.7 AT&T 100% 2006 Roseville, CA 19 188.5 100% 2,415.3 THE SPORTS AUTHORITY, LINENS `N THINGS, ROSS STORES Signal Hill, CA 13 154.8 97% 2,335.7 THE HOME DEPOT, PETSMART Seekonk, MA 12 213.9 98% 1,954.2 DON MAR CREATIONS, THE SPORTS AUTHORITY, CIRCUIT CITY Glen Burnie, MD 10 154.6 87% 1,699.8 THE SPORTS AUTHORITY, PETSMART, COMPUTER CITY, STAPLES San Diego, CA (2) 3 443.2 100% 1,661.7 COSTCO, CHARLOTTE RUSSE San Diego/Rancho San Diego, CA 19 98.4 97% 1,198.9 RITE AID, ROSS STORES, PETCO Scottsdale, AZ 22 68.0 79% 1,072.3 RAS MANAGEMENT, GREATER PHOENIX San Diego/Carmel Mountain, CA 7 35.0 100% 941.7 CLAIM JUMPER, MCMILLIN REALTY, ISLANDS Inglewood, CA 1 119.9 100% 926.6 HOMEBASE Moorestown, NJ (leased land) 3 177.1 37% 738.0 THE SPORTS AUTHORITY Northridge, CA 2 22.0 100% 734.0 BARNES & NOBLE, FRESH CHOICE New Britain, CT 1 112.4 100% 671.1 WAL-MART Middletown, OH 1 126.4 100% 650.0 LOWE'S San Juan Capistrano, CA 6 56.4 100% 610.8 PETSMART, STAPLES Terre Haute, IN 1 104.3 100% 557.8 LOWE'S Smithtown, NY 1 55.6 100% 500.7 LEVITZ FURNITURE Hampton, VA 2 45.6 100% 452.4 THE SPORTS AUTHORITY, COMMERCE BANK San Diego/Rancho Bernardo, CA 1 82.5 100% 450.0 EXCEL LEGACY (MASTER LEASE) Redwood City, CA 2 49.4 100% 418.8 ORCHARD SUPPLY (GROUND LEASE) Tucson, AZ 11 40.1 100% 408.1 PETSMART Denver/Aurora, CO 1 7.3 100% 164.3 RED ROBIN San Diego/Southeast, CA 2 8.9 100% 150.4 NAVY FEDERAL C.U., BURGER KING Chula Vista/Rancho del Rey, CA 1 6.7 100% 75.0 BURGER KING (GROUND LEASE) ------- ------------ ------- -------- TOTAL COMMERCIAL PROPERTIES 186 3,915.6 95% $45,351.2 ------- ------------ ------- --------
(1) Annual Minimum Rent does not include percentage rents, expense reimbursements, revenue from month-to-month leases, or rents expiring in 2001. (2) Price Self Storage is also located at this property. 12
AS OF DECEMBER 31, 2000 --------------------------- GROSS LEASEABLE PERCENT AREA (SQ FT) LEASED --------------- ------- (000'S) SELF STORAGE PROPERTIES - ----------------------- San Diego/Murphy Canyon, CA 250.8 99% San Diego, CA (1) 89.6 99% Azusa, CA 84.3 99% Solana Beach, CA (2) 238.0 91% --------------- ------- TOTAL SELF STORAGE PROPERTIES 662.7 96% --------------- -------
(1) GLA of this facility is also included in GLA for the San Diego, CA commercial property location listed above. (2) Expansion of this facility was completed during the year and includes 100,000 square feet of indoor RV and boat storage. The annual gross potential rent for the four operating self storage facilities is $7.2 million. Gross potential rent equals the GLA times the average rent per square foot. Revenues from our self storage properties contributed 8.7% of total revenues during the year ended December 31, 2000. We also own land in Temecula, CA currently under development with Wal-Mart as a principal tenant. Our 50% interest in three joint ventures located in Fresno, CA, Bend, OR, and Westminster, CO are also under various stages of development. PENDING REAL ESTATE TRANSACTIONS Since December 31, 2000 we executed four leases for approximately 6,000 square feet of GLA. These new leases will generate $133,000 in annual minimum rents. We also sold one property and purchased land for future development. We are also currently in negotiations to sell additional commercial properties as well as evaluating various properties for acquisition. ITEM 3 - LEGAL PROCEEDINGS From time to time we may be involved in litigation arising in the ordinary course of business. We are not currently a party to any material legal proceedings. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 2000. 13 ITEM 4A - EXECUTIVE OFFICERS OF THE REGISTRANT Our executive officers at the date of this report are:
NAME AGE TITLE - ---- --- ----- Gary B. Sabin ........................... 46 President and Chief Executive Officer Richard B. Muir ......................... 45 Executive Vice President, Chief Operating Officer Kelly D. Burt ........................... 43 Executive Vice President - Development S. Eric Ottesen ......................... 45 Senior Vice President, General Counsel and Secretary James Y. Nakagawa ....................... 35 Chief Financial Officer Graham R. Bullick, Ph.D.................. 50 Senior Vice President - Capital Markets Mark T. Burton .......................... 40 Senior Vice President - Acquisitions John A. Visconsi ........................ 56 Senior Vice President - Leasing/Asset Management William J. Hamilton...................... 43 Senior Vice President - Self Storage William J. Stone......................... 57 Senior Vice President - Retail Development Susan M. Wilson.......................... 43 Senior Vice President - Mixed Use/Development
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 14 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 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. 15 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. William J. Hamilton has served as Senior Vice President of our Company and Legacy since November 1999 and as President of Price Self Storage, a unit of our Company since its inception in August 1996. From August 1995 to July 1996, Mr. Hamilton served as Executive Vice President of Price Quest, a subsidiary of PEI that had various retailing divisions. From November 1994 to August 1995, he was a Vice President of PEI. From October 1993 to November 1994, Mr. Hamilton was a Vice President of PriceCostco. Mr. Hamilton is also a Senior Vice President - Self Storage of Legacy. William J. Stone has served as a Senior Vice President - Retail Development of our Company and Legacy since December 1999. From November 1994 to December 1999 Mr. Stone served as the Executive Vice President of DDR/Oliver McMillan, where he oversaw the development of urban retail/entertainment redevelopment projects. Prior to joining DDR/Oliver McMillan and since 1975, Mr. Stone was an executive with several nationally recognized firms in the regional shopping center industry, most recently with TrizecHahn, Inc. Susan M. Wilson has served as Senior Vice President - Mixed Use/Development of our Company and Senior Vice President - Office/Industrial/Hospitality of Legacy since December 1999. Ms. Wilson joined Legacy in May 1998. From May 1992 to May 1998, Ms. Wilson owned and operated her own real estate development and property management firm specializing in office, industrial and multi-family projects. 16 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK PRICES Our common stock and Series A Preferred Stock trades on the Nasdaq National Market under the symbols PREN and PRENP, respectively. 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 Series A Preferred Stock for the period indicated, as reported by the Nasdaq National Market.
Common Stock Preferred Stock ------------------------ ------------------------ High Low High Low -------- ---------- --------- --------- Calendar Year --- 1998 First Quarter 20 1/4 18 --- --- Second Quarter 19 1/2 17 3/8 --- --- Third Quarter 19 1/4 2 1/4 15 12 7/8 Fourth Quarter 6 7/32 4 1/4 14 1/4 13 Calendar Year --- 1999 First Quarter 6 4 11/32 15 1/8 13 1/2 Second Quarter 8 4 7/8 15 1/2 14 5/16 Third Quarter 8 7 1/4 16 1/4 14 5/8 Fourth Quarter 8 3/8 6 13/32 15 11/16 13 3/4 Calendar Year --- 2000 First Quarter 7 5/8 7 1/16 14 5/8 13 1/4 Second Quarter 7 1/2 6 1/2 15 3/8 13 5/8 Third Quarter 6 7/8 4 1/2 15 1/16 14 5/16 Fourth Quarter 5 1/4 3 5/8 14 15/16 14
On March 13, 2001, the last reported sales price per share of our common stock was $5.25, and we had approximately 200 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. 17 DIVIDENDS For years beginning after January 1, 2001, we intend to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) to maintain our qualification as a REIT. During 2000, 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 $33.4 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 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. 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. 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 - SELECTED FINANCIAL DATA The following selected data should be read in conjunction with our financial statements and accompanying notes located elsewhere in this Form 10-K and "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." (amounts in thousands, except per share data) 18
FOUR MONTHS ENDED YEAR ENDED DECEMBER 31 DECEMBER 31 YEAR ENDED AUGUST 31 ------------------------------------------ -------------------- -------------------- 2000 1999 1998 1997 1997 1996 1997 1996 --------- --------- --------- --------- --------- --------- --------- --------- Statement of Operations Data Rental revenues $ 70,771 $ 66,667 $ 62,485 $ 56,067 $ 18,170 $ 18,941 $ 56,838 $ 56,221 Operating income 41,847 35,143 31,393 23,289 9,045 8,178 22,422 5,829 Income from continuing operations 34,292 32,671 29,429 29,003 17,508 7,590 19,085 8,340 Discontinued operations -- -- -- (1,625) -- (3,235) (4,860) (8,250) Net income 34,292 32,671 29,429 27,378 17,508 4,355 14,225 90 Net income (loss) per share from continuing operations - basic .07 (.05) .97 1.23 .74 .33 .82 .36 Cash dividends per share 1.40 1.40 1.40 1.25 .35 .30 1.20 --
AS OF DECEMBER 31 AS OF AUGUST 31 ---------------------------------------------- --------------------- 2000 1999 1998 1997 1997 1996 --------- --------- --------- --------- --------- --------- Balance Sheet Data Real estate assets, net $ 545,800 $ 550,869 $ 418,507 $ 353,056 $ 337,139 $ 337,098 Total assets 662,405 562,558 457,352 408,478 403,757 540,325 Mortgages and notes payable 150,709 8,841 8,911 -- -- -- Series A preferred stock 353,404 353,404 353,404 -- -- -- Total stockholders' equity 463,109 461,260 344,811 406,624 396,476 532,899
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As you read Management's Discussion and Analysis, it may be helpful to refer to our financial statements and accompanying notes beginning on page 29. 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. 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 1998 through 2000 and how we expect to use cash in 2001 - where we plan on obtaining cash for future dividend payments and future capital expenditures 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 19 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 years ended December 31, 2000 and 1998. RESULTS OF OPERATIONS RENTAL REVENUES
RENTAL PERCENT REVENUES CHANGE CHANGE -------- ------ ------ 2000 - Year ended December 31 $70,771 $4,104 6% 1999 - Year ended December 31 66,667 --- --- 1999 - Year ended December 31 66,667 4,182 7% 1998 - Year ended December 31 62,485 --- ---
Revenues increased $4.1 million to $70.8 million in 2000 compared to 1999 because: - revenues from properties we owned in both 1999 and 2000 increased $3.2 million, primarily due to additional leasing activity and additional expense reimbursement revenue - properties we acquired during 2000 generated $2.0 million of additional revenues - expansion of our self storage business provided an additional $1.2 million of revenues - partially offsetting these increases were: - revenues from two properties we sold in the second quarter of 1999, which contributed $1.5 million of revenues in the prior year and - revenues from properties sold during 2000 decreased $0.8 million compared to 1999 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 20 - 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 acquisition of our common stock, was not material. EXPENSES
PERCENT AMOUNT CHANGE CHANGE ------- ------- ------- 2000 - Year ended December 31 $28,924 $(2,600) -8% 1999 - Year ended December 31 31,524 --- --- 1999 - Year ended December 31 31,524 432 1% 1998 - Year ended December 31 31,092 --- ---
Expenses decreased $2.6 million to $28.9 million in 2000 compared to 1999 primarily because: - depreciation expense decreased $2.1 million due to our change to Legacy's accounting policy of depreciating real estate assets and due to properties sold during 1999 and 2000 - bad debt expense decreased $0.6 million, primarily due to a recovery of amounts previously written off related to the Homeplace bankruptcy, a former tenant - properties we sold during 2000 contributed an additional $0.4 million to expenses in the prior year - properties we sold in the second quarter of 1999 contributed $0.6 million of expense in 1999 - these decreases in expenses were partially offset by: - expansion of our self storage business, which increased expenses by $0.4 million - properties we acquired during 2000, which increased expenses by $0.2 million and - general and administrative expenses, which increased $0.3 million over the prior year 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: 21 - 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 acquisition of our common stock, was not material. OPERATING INCOME
PERCENT AMOUNT CHANGE CHANGE ------- ------ ------ 2000 - Year ended December 31 $41,847 $6,704 19% 1999 - Year ended December 31 35,143 --- --- 1999 - Year ended December 31 35,143 3,750 12% 1998 - Year ended December 31 31,393 --- ---
Operating income increased for 2000 and 1999 compared to the same periods in the prior year primarily because of the changes in Rental Revenues and Expenses discussed above. INTEREST EXPENSE
PERCENT AMOUNT CHANGE CHANGE ------- ------ ------ 2000 - Year ended December 31 $10,931 $5,057 86% 1999 - Year ended December 31 5,874 --- --- 1999 - Year ended December 31 5,874 3,063 109% 1998 - Year ended December 31 2,811 --- ---
During 2000, interest expense increased $5.1 mllion compared to 1999 because: - our average debt outstanding in 2000 was $174.5 million compared to $90.0 million in 1999, which relates primarily to additional borrowings which were used to purchase properties and to provide loans to Legacy and other real estate developers - the weighted average interest rate related to our credit facility increased from 7.5% at December 31, 1999 to 8.0% at December 31, 2000 - we recorded $0.5 million of interest expense related to the assumptions of loans on the Terre Haute, IN, Middletown, OH, and Scottsdale, AZ properties purchased in 2000 - interest expense is net of $2.1 million interest capitalized to real estate assets During 1999, interest expense increased $3.1 million compared to 1998 because: 22 - 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 - interest expense is net of $1.2 million interest capitalized to real estate assets We discuss our outstanding debt further in "Liquidity and Capital Resources" located elsewhere in this Form 10-K. INTEREST INCOME
PERCENT AMOUNT CHANGE CHANGE ------ ------ ------ 2000 - Year ended December 31 $2,708 $2,204 437% 1999 - Year ended December 31 504 --- --- 1999 - Year ended December 31 504 (159) -24% 1998 - Year ended December 31 663 --- ---
Interest income increased $2.2 million to $2.7 million in 2000 compared to 1999 primarily because: - our note receivable with Legacy earned interest of $1.0 million - our notes receivable with other real estate developers earned interest of $0.7 million - we recorded $0.5 million in interest income on higher cash balances 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. GAIN ON SALE OF REAL ESTATE AND INVESTMENTS (NET)
PERCENT AMOUNT CHANGE CHANGE ------ ------- ------ 2000 - Year ended December 31 $ 164 $(4,553) -96% 1999 - Year ended December 31 4,717 --- --- 1999 - Year ended December 31 4,717 4,533 2464% 1998 - Year ended December 31 184 --- ---
During 2000, we sold the following properties for a gain of $0.2 million: 23
LOCATION DESCRIPTION DATE SALES PRICE ------------------------------------- -------------------------- --------------- ------------------ Azusa, CA Warehouse (1) 8/25/00 $ 4,200 Sacramento\Bradshaw, CA Office Building (2) 9/18/00 22,100 Littleton, CO Retail Building 11/3/00 2,030 Fountain Valley/Stockton, CA Retail Buildings 11/20/00 22,291
(1) PARTIAL SALE - SELF STORAGE REMAINS (2) PARTIAL SALE - SOLD TWO OF FOUR BUILDINGS IN OFFICE COMPLEX During 1999 we sold the following properties for a gain of $4.7 million:
LOCATION DESCRIPTION DATE SALES PRICE ------------------------------------- -------------------------- --------------- ------------------ Buffalo, NY Retail building (vacant) 4/1/99 $ 6,100 Dallas, TX Shopping center 4/22/99 26,400
MERGER RELATED COSTS In connection with the completion of Legacy's exchange offer in November 1999, we expensed $1.8 million as follows:
AMOUNT ------ Vesting of preferred stock options $ 934 Accounting and legal 327 Other 558 ------ $1,819 ------
Because our transaction with Legacy resulted in a change of control in our Company, we expensed $0.9 million related to the accelerated vesting of preferred stock options as required by generally accepted accounting principles. FUNDS FROM OPERATIONS
YEAR ENDED DECEMBER 31 ---------------------------------- 2000 1999 1998 ------- ------- ------- Net income before provision for income taxes $34,292 $32,671 $29,429 Depreciation and amortization 9,558 11,825 12,471 PEI's share of depreciation of joint ventures 240 --- --- Gain on sale of real estate and investments, net (164) (4,717) --- Other --- --- 509 ------- ------- ------- Funds from operations (FFO) 43,926 39,779 42,409 Straight-line rents (3,064) (2,498) (2,654) ------- ------- ------- Adjusted FFO $40,862 $37,281 $39,755 ======= ======= ======= Net cash provided by operating activities $35,223 $43,660 $40,427
Real estate industry analysts generally consider FFO as another measurement of performance for real estate-oriented companies. In general, FFO adjusts net income for 24 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 2000 increased 10% to $43.9 million compared to 1999 because: - properties we owned in both 1999 and 2000 increased FFO $2.3 million - properties we acquired during 2000 increased FFO $1.6 million - interest income on our outstanding notes receivable and higher cash balances increased FFO $2.2 million - we expensed $1.8 million in merger costs in 1999 related to our transaction with Legacy - expansion of our self storage business increased FFO $0.8 million - joint venture income contributed $0.5 million to FFO in the current year - these increases to FFO were partially offset by: - additional interest expense which reduced FFO $5.1 million 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 1998 - 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 The impact on FFO in 1999 of our new accounting basis due to Legacy's acquisition of our common stock was not material. 25 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, which includes acquiring development properties from Legacy once they are completed. We also continue to evaluate other investment opportunities. In 2001 we anticipate borrowing available amounts on our credit facility to fund these acquisition and development opportunities. We may also choose to seek additional funds through issuing new equity. We anticipate obtaining construction loans to fund our retail and self storage development activities. During the year ended December 31, 2000 we: - purchased five properties for $42.4 million. In conjunction with these purchases, we assumed three long-term mortgages secured by three of the properties totaling $9.3 million and one construction loan for $11.0 million related to the office property - purchased a 50% interest in two real estate joint ventures for $10.0 million - executed a $40.0 million loan facility with Legacy of which Legacy has borrowed $25.4 million from us as of December 31, 2000. Legacy intends to use $25 million of this note to complete development on a retail project which we may purchase, consistent with our plan to acquire development properties from Legacy once they are completed. The note bears interest at LIBOR plus 375 basis points on the first $15.0 million and at a fixed rate of 12.5% for any amount outstanding over $15.0 million. At December 31, 2000 the weighted average interest rate was 11.2% 26 - loaned $13.4 million to developers to complete development projects. The notes receivable earn interest at 12% to 25% per year and are secured by the related projects We funded these activities 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 may also participate in tax deferred exchange transactions, which allow us to dispose of properties and reinvest the proceeds in a tax efficient manner. During the year we sold parts of two properties and three other properties from our portfolio for $50.6 million. We anticipate a temporary reduction in operating income due to the time lag between selling a property and reinvesting the proceeds. We are also under contract to sell and are contemplating selling certain other properties. These potential sales may not be completed due to uncertainties associated with contract negotiations and buyer due diligence contingencies. In June 2000 we borrowed $121.4 million from GMAC Commercial Mortgage Corporation. The GMAC loan is secured by five retail properties located in Westbury, NY; Signal Hill, CA; Philadelphia, PA; Wayne, NY; and Roseville, CA. The GMAC loan bears interest at LIBOR plus 98 basis points, 7.88% at December 31, 2000, and is due on June 2004. We used proceeds of the loan to repay outstanding amounts on our existing revolving credit facility. In connection with our GMAC loan, we reduced the revolving credit facility from $125 million of total availability to $75 million of total availability. In connection with the reduction in the credit facility, we wrote-off loan fees of approximately $300,000. The amended facility has a remaining term of one year with interest rates of LIBOR plus 140 to 185 basis points. The rate varies based on our leverage, amounts loaned to Legacy, and other financial ratios. As of December 31, 2000, we owed $44.3 million on this credit facility at a weighted average interest rate of 8.36%. In March 2001, interest rates on this facility range from 8.09% to 8.73%. In conjunction with the San Diego/Murphy Canyon, CA self storage facility purchase in 1998, we assumed an existing $8.9 million note secured by the property. The note, payable to a financial institution, matures in July 2004 and bears an interest rate of 9.0%. The note does not permit repayment prior to July 2001. 27 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. 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. - 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, 2000. Our exposure to market risk for changes in interest rates relates primarily to our unsecured line of credit and our secured GMAC loan. 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 $165.7 million in variable rate debt outstanding at December 31, 2000. Based upon these year-end debt levels, a hypothetical 10% adverse change in interest rates would increase interest expense by approximately $1.3 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. 28 ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA PRICE ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS DECEMBER 31 DECEMBER 31 2000 1999 ----------- ----------- Real estate assets Land and land improvements $247,470 $248,177 Building and improvements 302,915 293,686 Fixtures and equipment 856 394 Construction in progress 4,436 9,942 ----------- ----------- 555,677 552,199 Less accumulated depreciation (9,877) (1,330) ----------- ----------- 545,800 550,869 Investment in real estate joint ventures 14,515 4,338 Cash and cash equivalents 49,996 2,145 Accounts receivable 3,032 697 Income tax receivable 257 3,171 Note receivable from affiliates 25,377 --- Notes receivable 13,388 --- Deferred rents 3,352 571 Other assets 6,688 767 ----------- ----------- Total assets $662,405 $562,558 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Mortgages and notes payable $150,709 $ 8,841 Revolving line of credit 44,300 88,400 Accounts payable and other liabilities 4,287 4,057 ----------- ----------- Total liabilities 199,296 101,298 Commitments Stockholders' equity Series A preferred stock, cumulative, redeemable, $.0001 par value, 26,000,000 shares authorized, 23,868,808 and 23,759,456 shares issued and outstanding. 353,404 353,404 Common stock, $.0001 par value, 74,000,000 shares authorized, 13,309,006 shares issued and outstanding 1 1 Additional paid-in capital 112,587 111,670 Accumulated deficit (2,883) (3,815) ----------- ----------- Total stockholders' equity 463,109 461,260 ----------- ----------- Total liabilities and stockholders' equity $662,405 $562,558 =========== ===========
SEE ACCOMPANYING NOTES. 29 PRICE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
PREDECESSOR -------------------------- PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ----------- ----------- ----------- 2000 1999 1999 1998 ----------- ----------- ----------- ----------- Rental revenues $70,771 $9,251 $57,416 $62,485 Expenses Operating and maintenance 7,699 962 7,307 7,616 Property taxes 8,582 1,412 7,252 8,025 Depreciation and amortization 9,558 1,086 10,739 12,471 General and administrative 3,085 268 2,498 2,980 ----------- ----------- ----------- ----------- Total expenses 28,924 3,728 27,796 31,092 ----------- ----------- ----------- ----------- Operating income 41,847 5,523 29,620 31,393 Interest and other Interest expense (10,931) (848) (5,026) (2,811) Interest income 2,708 22 482 663 Equity in earnings of joint ventures 504 --- --- --- Merger related costs --- --- (1,819) --- ----------- ----------- ----------- ----------- Total interest and other (7,719) (826) (6,363) (2,148) ----------- ----------- ----------- ----------- Income before gain on sale of real estate and investments, net 34,128 4,697 23,257 29,245 Gain on sale of real estate and investments, net 164 --- 4,717 184 ----------- ----------- ----------- ----------- Net income 34,292 4,697 27,974 29,429 Dividends paid to preferred stockholders (33,360) --- (33,263) (8,316) ----------- ----------- ----------- ----------- Net income (loss) applicable to common stockholders $932 $4,697 $ (5,289) $21,113 ----------- ----------- ----------- ----------- Earnings per common share - basic $.07 $.35 $(.40) $.97 Earnings per common share - assuming dilution $.07 $.35 $(.40) $.96
SEE ACCOMPANYING NOTES. 30 PRICE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT PER SHARE DATA)
ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL ------ ------ ------ ------ ------- ------- ----- Balance at December 31, 1997 --- $ --- 23,731 $2 $412,321 $ (5,699) $406,624 Net income --- --- --- --- --- 29,429 29,429 Stock options exercised and stock grants --- --- 37 --- 350 --- 350 Adjustment to special dividend - Distribution of PriceSmart --- --- --- --- (550) --- (550) Cash dividends (1) --- --- --- --- --- (33,253) (33,253) Distribution of 8 3/4% Series A Preferred Stock 23,759 353,404 --- --- (353,404) --- --- Shares repurchased, including costs --- --- (10,475) (1) (57,788) --- (57,789) ------- -------- -------- ------- --------- ------- -------- Balance at December 31, 1998 23,759 353,404 13,293 1 929 (9,523) 344,811 Net income --- --- --- --- --- 27,974 27,974 Stock options exercised and stock grants --- --- 16 --- 114 --- 114 Vesting of preferred stock options due to merger --- --- --- --- 934 --- 934 Cash dividends on preferred stock (2) --- --- --- --- --- (33,263) (33,263) ------- -------- -------- ------- --------- ------- -------- Balance at November 11, 1999 23,759 353,404 13,309 1 1,977 (14,812) 340,570 Net income --- --- --- --- --- 4,697 4,697 Purchase accounting adjustment --- --- --- --- 109,693 6,300 115,993 ------- -------- -------- ------- --------- ------- -------- Balance at December 31, 1999 23,759 353,404 13,309 1 111,670 (3,815) 461,260 Net income --- --- --- --- --- 34,292 34,292 Series A Preferred Stock options exercised 110 --- --- --- 917 --- 917 Cash dividends on preferred stock (2) --- --- --- --- --- (33,360) (33,360) ------- -------- -------- ------- --------- ------- -------- BALANCE AT DECEMBER 31, 2000 23,869 $353,404 13,309 $1 $112,587 $(2,883) $463,109 ======= ======== ======== ======= ========= ======= ========
SEE ACCOMPANYING NOTES. (1) $1.05 per share of common stock and $.35 per share of preferred stock (2) $1.40 per share of preferred stock 31 PRICE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR ------------------------- PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ----------- ----------- ----------- 2000 1999 1999 1998 ----------- ----------- ----------- ----------- Operating activities Net income $34,292 $4,697 $27,974 $29,429 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,558 1,086 10,739 12,471 Deferred rents (2,781) (571) (1,757) (2,521) Equity in earnings of joint ventures (504) --- --- --- Gain on sale of real estate and investments, net (164) --- (4,717) (184) Merger related costs --- --- 1,440 --- Changes in operating assets and liabilities: Accounts receivable and other assets (5,408) 645 5,036 (1,432) Accounts payable and other liabilities 230 774 (1,686) 2,664 -------- ------- ------- ------- Net cash provided by operating activities 35,223 6,631 37,029 40,427 Investing activities Additions to real estate assets (37,440) (1,511) (29,707) (70,648) Proceeds from sale of real estate assets 49,873 --- 30,385 2,571 Contributions to real estate joint ventures (6,328) (78) (364) (4,050) Distributions from real estate joint ventures 789 --- --- --- Advances on notes receivable (48,642) --- --- --- Payments on notes receivable 5,743 --- --- --- -------- ------- ------- ------- Net cash (used in) provided by investing activities (36,005) (1,589) 314 (72,127) Financing activities Advances from revolving lines of credit and notes payable 217,357 6,000 81,900 181,213 Repayments of revolving lines of credit and notes payable (136,281) (2,012) (96,670) (82,133) Dividends paid (33,360) (8,316) (24,947) (33,253) Proceeds from exercise of stock options including tax benefits 917 --- 114 350 Purchase of common stock --- --- --- (57,789) -------- ------- ------- ------- Net cash provided by (used in) financing activities 48,633 (4,328) (39,603) 8,388 -------- ------- ------- ------- Net increase (decrease) in cash 47,851 714 (2,260) (23,312) Cash and cash equivalents at beginning of period 2,145 1,431 3,691 27,003 -------- ------- ------- ------- Cash and cash equivalents at end of period $49,996 $2,145 $1,431 $3,691 ======== ======= ======= =======
32 PRICE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
PREDECESSOR ------------------------ PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ------------- ----------- ----------- 2000 1999 1999 1998 ----------- ------------- ----------- ----------- Supplemental disclosure: Cash paid for interest $ 8,885 $ 566 $ 5,777 $ 2,252 Net (refunds received) cash paid for income taxes (3,164) -- (3,087) 25 Supplemental schedule of noncash operating and financing activities: Purchase accounting adjustment -- 115,993 -- -- Assumption of notes payable to acquire real estate assets 16,692 -- -- 8,943 Reduction of note receivable from Legacy to acquire interest in real estate joint venture 4,134 -- -- -- Adjustment to special dividend - distribution of PriceSmart -- -- -- 550
SEE ACCOMPANYING NOTES. 33 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 November 12, 1999 Excel Legacy Corporation (Legacy) completed its exchange offer for our common stock. In the exchange offer, Legacy acquired approximately 91.3% of our common stock, which represents approximately 77.5% of PEI's voting power. PEI stockholders who tendered their shares of PEI common stock in the exchange offer received from Legacy for each share of PEI common stock 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. In accounting for this transaction, we followed Accounting Principles Board Opinion No. 16, "Business Combinations" (APB No. 16), which requires that 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 accounting principles generally accepted in the United States. We follow the accounting standards established by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (SEC). 34 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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. REAL ESTATE ASSETS AND DEPRECIATION Prior to Legacy's exchange offer for our common stock, we recorded real estate assets at historical cost, and adjusted them for recognition of impairment losses. In following purchase accounting, we adjusted the historical cost of our real estate assets to fair value. Our balance sheets at December 31, 2000 and 1999 reflect the new basis of our real estate assets. We expense ordinary repairs and maintenance as incurred; we capitalize major replacements and betterments and depreciate them over their estimated useful lives. Following completion of Legacy's exchange offer for our common stock, we adopted Legacy's accounting policy of depreciating real estate assets. We compute real estate asset depreciation on a straight-line basis over their estimated useful lives, as follows:
AFTER NOVEMBER 11, 1999 THROUGH NOVEMBER 11, 1999 ----------------------- ------------------------- Land improvements 40 years 25 years Building and improvements 40 years 10-25 years Tenant improvements Term of lease or 10 years Term of lease or 10 years Fixtures and equipment 3-7 years 3-5 years
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 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): 35 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREDECESSOR ---------------------------- PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ------------ ------------ ------------ 2000 1999 1999 1998 ----------- ------------ ------------ ------------ Interest incurred $13,018 $1,079 $5,971 $3,112 Interest capitalized 2,087 231 944 301
INVESTMENTS We use the "equity method" of accounting for our joint ventures, which means we carry these investments at cost, adjusted for our share of earnings or losses and any distributions received. 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. Gain or loss on sale of real estate is recognized when the sales contract is executed, title has passed, payment is received, and we no longer have continuing involvement in the asset. We adopted the SEC's Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements effective the fourth quarter of 2000. The adoption of SAB 101 did not have a material effect on our consolidated financial position or results of operations. 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. 36 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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, 2000, our Company's authorized stock consisted of 100 million shares of capital stock of which 74 million shares have been designated as common stock, par value $0.0001 per share, and 26 million shares have been designated as 8 3/4% Series A Cumulative Redeemable Preferred Stock, par value $0.0001 per share. 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 (determined without regard to the dividends-paid deduction and by excluding any net capital gain) 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 REIT 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, but we will be subject to tax on our income to the extent it is not distributed. 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, 2000 and 1999 were more than their tax basis for Federal tax purposes by approximately $195.8 million and $159.3 million, respectively. The following table shows the tax status of our dividend payments between ordinary income, return of capital and capital gains:
YEAR ENDED DECEMBER 31 ------------------------------------ 2000 1999 1998 ----- ----- ----- Ordinary income 91.7% 73.7% 94.3% Return of capital 8.3% 12.4% 5.7% Capital gain --- 13.9% ---
NET INCOME PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (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 37 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 amounts for all periods have been presented, and where appropriate, restated to reflect these calculations.
PREDECESSOR --------------------------- PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ----------- ----------- ----------- 2000 1999 1999 1998 ----------- ----------- ----------- ----------- Weighted average shares outstanding 13,309,006 13,309,006 13,300,234 21,687,776 Effect of dilutive securities: Employee stock options --- --- --- 322,335 ----------- ----------- ----------- ----------- Weighted average shares outstanding - assuming dilution 13,309,006 13,309,006 13,300,234 22,010,111 =========== =========== =========== ===========
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 accounting principles generally accepted in the United States 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 APB No. 25, "Accounting for Stock Issued to Employees" 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 38 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) developed for use in valuing employee stock options. As a result, deferred compensation is recorded only in the event that the fair market value of the stock on the date of the option grant exceeds the exercise price of the options. 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. COMPREHENSIVE INCOME We follow the requirements of SFAS No. 130, "Reporting Comprehensive Income." This statement requires that all components of comprehensive income be reported in the financial statements in the period in which they are recognized. Comprehensive income (loss) for all periods presented in the consolidated statements of operations did not differ from the reported net income (loss). NEW ACCOUNTING STANDARDS In 1998, the Financial Accounting Standards Board issued 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. While we are required to implement this standard beginning on January 1, 2001, we do not believe it will have a significant impact on our financial statements. NOTE 2 - PURCHASE ACCOUNTING On November 12, 1999, Legacy completed its exchange offer, 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 for all periods subsequent to November 11, 1999 reflect the allocation of Legacy's purchase price. The consolidated financial statements through November 11, 1999 reflect our historical 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: 39 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - PURCHASE ACCOUNTING (CONTINUED)
PURCHASE ACCOUNTING ADJUSTMENTS ------------------- Fair value adjustments to land and buildings $75,116 Elimination of accumulated depreciation 63,092 Elimination of deferred rents (16,678) Other assets (5,537) -------- Total purchase price allocated $115,993 ========
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:
PRO FORMA YEAR ENDED DECEMBER 31 ----------------------- 1999 1998 -------- -------- Rental revenues $66,057 $58,805 Operating expenses 25,378 23,798 Net income 35,758 33,943 Net income applicable to common stockholders 2,495 679 Earnings per common share, basic and diluted $.19 $.03
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 - REAL ESTATE PROPERTIES Our real estate properties are generally leased under noncancelable leases with remaining terms ranging from one to 19 years. Rental revenues include the following (amounts in thousands): 40 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - REAL ESTATE PROPERTIES (CONTINUED)
PREDECESSOR ------------------------------ PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ------------ ------------ ------------ 2000 1999 1999 1998 ----------- ------------ ------------ ------------ Minimum rent $55,050 $7,088 $44,848 $48,230 Straight-line accrual of future rent 3,064 465 2,033 2,654 Additional rent - cost recoveries 12,276 1,695 10,172 11,388 Percentage rent 381 3 363 213 -------- ------ ------- ------- Rental revenues $70,771 $9,251 $57,416 $62,485 ======== ====== ======= =======
Costco, our largest tenant, contributed 15.3% of total revenues from four leases in 2000. Rental revenues generated from Costco were as follows (amounts in thousands):
PREDECESSOR ------------------------------ PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ------------ ------------ ------------ 2000 1999 1999 1998 ----------- ------------ ------------ ------------ Costco rental revenues $8,400 $1,100 $7,200 $8,300
As of December 31, 2000, future minimum rental income due under the terms of all noncancelable tenant leases is as follows (amounts in thousands): 2001 $45,584 2002 44,729 2003 43,388 2004 42,369 2005 39,738 After 2005 221,142
ACQUISITIONS We acquired the following properties during 2000: 41 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - REAL ESTATE PROPERTIES (CONTINUED)
DATE PURCHASE MORTGAGE LOCATION DESCRIPTION ACQUIRED PRICE (000'S) ASSUMED ( 000'S) - ------------------------------------ -------------------------- -------- ------------- ---------------- Middletown, OH Retail building (1) 2/9/00 $6,709 $3,726 Terre Haute, IN Retail building (1) 2/9/00 5,762 3,598 San Diego/Rancho Bernardo, CA Office building (1) (2) 2/25/00 16,025 11,025 (3) San Diego/Pacific Beach, CA Land (future development) 7/31/00 4,200 --- Scottsdale, AZ Office building (1) 10/23/00 9,663 2,006
(1) PROPERTY PURCHASED FROM LEGACY (2) PROPERTY MASTER LEASED BACK TO LEGACY (3) INDICATES MAXIMUM CONSTRUCTION LOAN BALANCE. BALANCE ASSUMED ON DATE OF ACQUISITION WAS $7.4 MILLION. LOAN WAS REFINANCED IN DECEMBER 2000 We funded these acquisitions through advances on our unsecured revolving credit facility, by assuming mortgages and notes payable, and with the proceeds from a property sold in 2000 in a tax-deferred exchange transaction. We acquired the following properties during 1999:
DATE PURCHASE PRICE LOCATION DESCRIPTION ACQUIRED (000'S) - -------------------------- ------------------------------ -------- -------------- Tucson/Marana, AZ Land (future development) 1/4/99 $2,635 Temecula, CA Land (future development) 7/16/99 12,622
We funded these acquisitions through available cash and advances under our unsecured revolving credit facilities. DISPOSITIONS During 2000 we sold the following properties:
DATE SALES LOCATION DESCRIPTION SOLD PRICE - --------------------------------- ---------------------- -------- ------ Azusa, CA Warehouse (1) 8/25/00 $4,200 Sacramento/Bradshaw Office building (2) 9/18/00 22,100 Littleton, CO Retail building 11/03/00 2,030 Fountain Valley/Stockton CA Retail buildings 11/20/00 22,291
(1) PARTIAL SALE - SELF STORAGE REMAINS (2) PARTIAL SALE - SOLD TWO OF FOUR BUILDINGS IN OFFICE COMPLEX As a result of the sales noted above, we recorded a gain of $0.2 million. We are using the proceeds from the sale of the properties to purchase additional properties in tax-deferred exchange transactions. During 1999 we sold the following properties: 42 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3 - REAL ESTATE PROPERTIES (CONTINUED)
DATE SALES LOCATION DESCRIPTION SOLD PRICE - ------------------------ ----------------------------- ---- ----- Buffalo, NY Retail building (vacant) 4/1/99 $6,100 Dallas, TX Shopping center 4/22/99 6,400
As a result of the sales noted above, we recorded a gain of $4.7 million. 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. NOTE 4 - INVESTMENTS IN REAL ESTATE JOINT VENTURES During 2000 we purchased a 50% interest in a joint venture for $1.9 million to develop a shopping center in Bend, OR. We also purchased a 50% interest in a real estate development joint venture in Westminster, CO from Legacy for an initial payment of $8.1 million. The purchase price was based on the property's existing operating income, with additional payments estimated to be $4.8 million due through the completion of construction. In May 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. Summarized financial information for the joint ventures at December 31, 2000 and 1999 is as follows:
DECEMBER 31 ------------------------- 2000 1999 ------- ------- Real estate assets $65,994 $9,675 Other assets 2,909 494 ------- ------- Total assets $68,903 $10,169 ======= ======= Liabilities $33,717 $6,108 Partners' capital 35,186 4,061 ------- ------- Total liabilities and partners' capital $68,903 $10,169 ======= =======
43 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4 - INVESTMENTS IN REAL ESTATE JOINT VENTURES (CONTINUED)
YEAR ENDED DECEMBER 31 ----------- 2000 ----------- Revenue $3,530 Expenses 2,523 ------ Net income $1,007 ======
Prior to 2000 the joint ventures' results of operations were not significant. NOTE 5 - NOTES RECEIVABLE In March 2000, we executed a $15 million note receivable with Legacy due December 2002. The note was amended in September to allow Legacy to borrow up to $40.0 million on the note. The note bears an interest rate of LIBOR plus 375 basis points (10.23% at December 31, 2000) on the first $15.0 million. Amounts borrowed in excess of $15 million bear interest at a fixed rate of 12.5% per year. As of December 31, 2000 Legacy owed $25.4 million on this note at a weighted average interest rate of 11.2%. We also had $13.4 million in notes receivable outstanding at December 31, 2000 related to various development projects. The notes bear interest at 12% to 25% per year and are secured by the related projects. The notes mature on various dates between March and December 2001. NOTE 6 - DEBT In June 2000, we borrowed $121.4 million from GMAC Commercial Mortgage Corporation. The GMAC loan is secured by five retail properties located in Westbury, NY; Signal Hill, CA; Philadelphia, PA; Wayne, NY; and Roseville, CA. The GMAC loan bears interest at LIBOR plus 98 basis points, 7.9% at December 31, 2000, and is due on June 28, 2004. We used proceeds of the loan to repay outstanding amounts on our existing revolving credit facility. In connection with our GMAC loan, we reduced the revolving credit facility from $125 million of total availability to $75 million of total availability. In connection with the reduction in the credit facility, we wrote-off loan fees of approximately $300,000. The amended facility has a remaining term of one year with current interest rates of LIBOR plus 140 to 185 basis points. The rate varies based on our leverage, amounts loaned to Legacy, and other financial ratios. As of December 31, 2000, we owed $44.3 million on this credit facility at a weighted average interest rate of 8.36%. 44 PRICE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6 - DEBT (CONTINUED) In conjunction with the San Diego/Rancho Bernardo, CA office building purchased from Legacy, we assumed an existing $11.0 million construction loan secured by the property. The loan matured in December 2000 and we refinanced the property under a capital lease arrangement. The new obligation requires monthly payments of $0.3 million. Legacy reimburses us for these payments and rents this property under the terms of a master lease agreement which we discuss further in Note 7. In conjunction with the other three properties purchased from Legacy, we assumed existing mortgages totaling $9.3 million. The loans bear interest ranging from 7.6% to 8.8% and are secured by the properties. The loans mature on various dates ranging from June 2003 to March 2014. In conjunction with the San Diego/Murphy Canyon, CA self storage facility purchased 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): 2001 $488 2002 530 2003 3,811 2004 130,264 2005 431 -------- $135,524 ========
NOTE 7 - 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 $3.0 million for these services for the year ended December 31, 2000, which was based on our historical costs for similar expenses. We expensed $249,000 for these services during the period of November 12, 1999 through December 31, 1999. 45 NOTE 7 - RELATED PARTY TRANSACTIONS (CONTINUED) In conjunction with the San Diego/Rancho Bernardo, CA office building purchased from Legacy discussed in Note 3, we leased the building back to Legacy. This lease has a term of 10 years and pays $450,000 per year in rent, which is based on the $5 million cash portion of the purchase price. We discuss other related party transactions with Legacy in Note 3, Note 5, Note 6 and Note 13. NOTE 8 - PROFIT SHARING AND 401(K) PLAN Prior to the completion of the exchange offer with Legacy, substantially all of our employees participated in a defined contribution profit sharing and 401(k) plan. Profit sharing contributions, if any, were based on a discretionary amount determined by our Board of Directors and were allocated to each participant based on their relative compensation, subject to certain limitations, to the compensation of all participants. We also made a matching 401(k) contribution equal to 50% of each participant's contribution up to an annual maximum contribution of $250. Following completion of its exchange offer, Legacy's employees took over daily management of our Company. Therefore, there were no contributions for the year ended December 31, 2000. In prior years we contributed the following amounts to our profit sharing and 401(k) plan (amounts in thousands):
PREDECESSOR ---------------------------- PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 THROUGH THROUGH YEAR ENDED DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ----------- ----------- 1999 1999 1998 ----------- ----------- ----------- Profit Sharing --- $119 $117 401(k) --- 8 7
NOTE 9- 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 shares 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 46 NOTE 9- STOCK OPTION PLANS (CONTINUED) 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. 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 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 47 NOTE 9- STOCK OPTION PLANS (CONTINUED) - 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 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 stock closed at $14.87, or 77.3%, of the total of $19.25. The following table summarizes the activity for both plans:
WEIGHTED AVERAGE STOCK EXERCISE PRICE OPTIONS PER SHARE ------------ ---------------- Outstanding at December 31, 1997 652,995 $16.60 Granted 68,750 4.60 Exercised (23,397) 10.43 Canceled (13,500) 18.75 ------------ Outstanding at December 31, 1998 684,848 3.89 Granted 0 --- Exercised (655) 4.26 Canceled (684,193) 4.12 ------------ Outstanding at November 11, 1999 --- --- ============
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. Because our transaction with Legacy resulted in the accelerated 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 December 31, 1999, options to purchase 669,848 shares of preferred stock remained outstanding at a weighted average exercise price of 48 NOTE 9- STOCK OPTION PLANS (CONTINUED) $13.16 per share. During 2000, options to purchase 109,352 shares of preferred stock were exercised at a weighted average exercise price of $8.39 per share. At December 31, 2000, options to purchase 560,496 shares of preferred stock remained outstanding at a weighted average exercise price of $14.08 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 one year. NOTE 10- STOCKHOLDERS' EQUITY On August 17, 1998, we distributed to stockholders of record on July 30, 1998, one share of newly created Series A Preferred Stock 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. 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 19 years with three 15-year options to renew. Rent expense related to the ground lease is summarized below (amounts in thousands):
PREDECESSOR ------------------------------ PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ----------- ----------- ----------- 2000 1999 1999 1998 ----------- ----------- ----------- ----------- Ground lease rent expense $754 $103 $652 $800
49 NOTE 11- COMMITMENTS AND CONTINGENCIES (CONTINUED) Future minimum payments during the next five years and thereafter under this noncancelable lease at December 31, 2000 are as follows (amounts in thousands): 2001 $754 2002 754 2003 754 2004 754 2005 754 After 2005 11,630 ------- Total minimum payments $15,400 =======
The above property is subleased and as of year end, total future sublease revenues are $9.6 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):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- YEAR ENDED DECEMBER 31, 2000 Revenues $17,471 $17,455 $17,976 $17,869 Operating income 10,501 10,672 10,486 10,188 Net income 9,171 8,488 8,636 7,997 Earnings (loss) per common share Basic and diluted .06 .01 .02 (.03) PREDECESSOR ----------------------------------------------------- PERIOD FROM PERIOD FROM OCTOBER 1 NOVEMBER 12 FIRST SECOND THIRD THROUGH THROUGH QUARTER QUARTER QUARTER NOVEMBER 11 DECEMBER 31 --------- --------- --------- ------------- ------------- YEAR ENDED DECEMBER 31, 1999 Revenues $17,427 $16,854 $15,603 $7,532 $9,251 Operating income 8,894 8,702 8,031 3,994 5,523 Net income 7,370 12,260 6,777 1,567 4,697 Earnings (loss) per common share Basic (.07) .30 (.12) (.51) .35 Diluted (.07) .29 (.12) (.51) .35
50 NOTE 13 SUBSEQUENT EVENTS In January 2001 we purchased land in Walnut Creek, CA for $2.8 million to be used for the future development of a self storage facility. We used the proceeds from a tax-deferred exchange transaction on a property we sold in 2000 to fund this acquisition. In January 2001 we sold a property in Aurora, CO for $1.6 million. We are using the proceeds from the sale to purchase additional properties in tax-deferred exchange transactions. In January 2001 we purchased land in Anaheim, CA for $23.2 million to be used for future development. In conjunction with the purchase of this land, we executed a ground lease agreement with Legacy. The lease has a term of 50 years and requires payments of $2.8 million per year in rent. We used the proceeds from a tax-deferred exchange transaction on a property we sold in 2000 to fund this acquisition. 51 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, 2000 and 1999 and the related consolidated statements of operations, stockholders' equity and cash flows for the year ended December 31, 2000 and the period from November 12, 1999 through December 31, 1999, period from January 1, 1999 through November 11, 1999, and the year ended December 31, 1998. 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, 2000 and 1999 and the consolidated results of its operations and its cash flows for the year ended December 31, 2000 and the period from November 12, 1999 through December 31, 1999, period from January 1, 1999 through November 11, 1999, and the year ended December 31, 1998, 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 19, 2001, except for Note 13, as to which the date is January 26, 2001 52 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 - 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 2001 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 - EXECUTIVE COMPENSATION Information about executive compensation is incorporated by reference from the discussion under the heading Executive Compensation in our Proxy Statement for the 2001 Annual Meeting of Stockholders. 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 2001 Annual Meeting of Stockholders. 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 2001 Annual Meeting of Stockholders. 53 PART IV 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
Page ---- (1) (A) Report of Independent Auditors 52 (B) Consolidated Financial Statements (i) Consolidated Balance Sheets - December 31, 2000 and 1999 29 (ii) Consolidated Statements of Operations - Year ended December 31, 2000, Period from November 12 through December 31, 1999, Period from January 1 through November 11, 1999, and the Year Ended December 31, 1998 30 (iii) Consolidated Statements of Stockholders' Equity - Year ended December 21, 2000, Period from November 12 through December 31, 1999, Period from January 1 through November 11, 1999, and the Year Ended December 31, 1998 31 (iv) Consolidated Statements of Cash Flows - Year Ended December 31, 2000, Period from November 12 through December 31, 1999, Period from January 1 through November 11, 1999, and the Year Ended December 31, 1998 32 (v) Notes to Consolidated Financial Statements 34 (2) Financial Statement Schedules: The following consolidated financial statement schedules of Price Enterprises, Inc. are included in Item 14(d): Schedule II - Valuation and Qualifying Accounts 56 Schedule III - Real Estate and Accumulated Depreciation 58
54 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 did not file any reports on Form 8-K during the quarter ended December 31, 2000. (c) Exhibits: For a list of exhibits filed with this annual report, refer to the exhibit index beginning on page 60. 55 PRICE ENTERPRISES, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS DECEMBER 31, 2000 (AMOUNTS IN THOUSANDS)
PREDECESSOR -------------------------- PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 ----------- ----------- ----------- ----------- ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS 2000 1999 1999 1998 - ------------------------------------ ----------- ----------- ----------- ----------- Balance at beginning of period $71 $154 $339 $502 Additions Charged to bad debt expense 752 (83) (51) 580 Deductions Accounts receivable written off (38) --- (134) (743) ---------- ----------- ----------- ----------- Balance at end of period $785 $71 $154 $339 ---------- ----------- ----------- -----------
56 PRICE ENTERPRISES, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2000 (AMOUNTS IN THOUSANDS)
COSTS GROSS AMOUNT AT WHICH INITIAL COSTS CAPITALIZED CARRIED AT CLOSE OF PERIOD ------------------------- SUBSEQUENT --------------------------- LAND AND BUILDING AND TO LAND AND BUILDING AND LOCATION (2) DESCRIPTION IMPROVEMENTS IMPROVEMENTS ACQUISITION IMPROVEMENTS IMPROVEMENTS TOTAL(1) - ------------------------------------------------------------------------------------------------------------------------------------ Westbury, NY Shopping Center $41,784 $0 $43,875 $56,956 $28,703 $85,659 Pentagon City, VA Shopping Center 24,742 14,473 33,765 29,576 43,435 73,011 Wayne, NJ Shopping Center 19,760 6,912 20,475 26,524 20,623 47,147 Philadelphia, PA Shopping Center 8,649 4,382 18,558 10,640 20,949 31,589 San Diego, CA Warehouse/Office 5,244 7,990 16,000 6,971 22,263 29,234 Building/Self Storage Signal Hill, CA Shopping Center 5,872 0 21,899 14,267 13,504 27,771 Roseville, CA Shopping Center 9,173 8,165 8,600 7,641 18,297 25,938 San Diego/Murphy Canyon, CA Self Storage 9,274 8,575 6,095 10,422 13,522 23,944 Sacramento/Bradshaw, CA Office Complex 2,186 15,334 3,470 2,468 18,522 20,990 Glen Burnie, MD Shopping Center 1,795 0 14,755 5,248 11,302 16,550 Temecula, CA Land 12,622 0 3,440 12,736 3,326 16,062 Seekonk, MA Shopping Center 7,636 0 7,555 6,550 8,641 15,191 San Diego/Rancho Bernardo, CA Office Complex 2,530 9,851 2,490 2,530 12,341 14,871 Solana Beach, CA Self Storage 2,324 1,227 10,663 2,776 11,438 14,214 San Diego/Rancho San Diego,CA Shopping Center 4,424 6,889 2,554 5,165 8,702 13,867 San Diego/Carmel Mtn., CA Shopping Center 3,464 0 6,721 5,518 4,667 10,185 Scottsdale, AZ Office Complex 3,353 6,310 17 3,353 6,327 9,680 Northridge, CA Shopping Center 4,029 0 3,673 4,590 3,112 7,702 Inglewood, CA Warehouse Building 1,438 0 5,389 2,205 4,622 6,827 Moorsetown, NJ (leased land) Shopping Center Leased 0 6,731 0 6,731 6,731 Middletown, OH Retail Building 2,515 4,181 0 2,515 4,181 6,696 San Juan Capistrano, CA Shopping Center 3,150 0 3,114 2,879 3,385 6,264 Terre Haute, IN Retail Building 2,185 3,572 0 2,185 3,572 5,757 Smithtown, NY Retail Building 721 0 4,646 2,409 2,958 5,367 Azusa, CA Warehouse/Self Storage 1,222 0 3,410 1,913 2,719 4,632 Hampton, VA Retail Building/Bank 1,132 0 3,497 2,248 2,381 4,629 San Diego/Pacific Beach, CA 4,267 0 335 4,267 335 4,602 Tucson, AZ Shopping Center 1,073 0 3,287 1,999 2,361 4,360 Redwood City, CA Retail Building 1,860 0 2,354 4,214 0 4,214 New Britain, CT Warehouse Building 3,640 0 378 2,230 1,788 4,018 Tucson/Marana, AZ Land 2,635 0 296 2,635 296 2,931 Denver/Aurora, CO Restaurant 105 0 1,531 377 1,259 1,636 San Diego/Southeast, CA Restaurant/Bank 217 0 1,299 427 1,089 1,516 Chula Vista/Rancho del Rey,CA Land 915 0 (200) 715 0 715 Fountain Valley, CA Land 321 0 0 321 0 321 - ------------------------------------------------------------------------------------------------------------------------------------ Total Investment Properties $196,257 $97,861 $260,703 $247,470 $307,351 $554,821 ==================================================================================================================================== DEPRECIABLE LIFE ------------------------------ ACCUMULATED DATE OF DATE OF LAND BUILDING LOCATION (2) DESCRIPTION DEPRECIATION CONSTRUCTION ACQUISITION IMPROVEMENTS BUILDING IMPROVEMENTS - ----------------------------------------------------------------------------------------------------------------------------------- Westbury, NY Shopping Center $(958) 1992-93 1992 40 40 10 Pentagon City, VA Shopping Center (1,271) 1993-94 1993 40 40 10 Wayne, NJ Shopping Center (621) 1991-93 1991 40 40 10 Philadelphia, PA Shopping Center (719) 1992,1994-95 1991 40 40 10 San Diego, CA Warehouse/Office (679) 1981 40 40 10 Building/Self Storage Signal Hill, CA Shopping Center (440) 1992-93 1991 40 40 10 Roseville, CA Shopping Center (626) 1997 40 40 10 San Diego/Murphy Canyon, CA Self Storage (443) 1998 40 40 10 Sacramento/Bradshaw, CA Office Complex (567) 1998 40 40 10 Glen Burnie, MD Shopping Center (378) 1990-92 1985 40 40 10 Temecula, CA Land 0 1999 - - - Seekonk, MA Shopping Center (312) 1991-94 1991 40 40 10 San Diego/Rancho Bernardo, CA Office Complex (333) 2000 40 40 10 Solana Beach, CA Self Storage (221) 1998 1998 40 40 10 San Diego/Rancho San Diego,CA Shopping Center (270) 1998 40 40 10 San Diego/Carmel Mtn., CA Shopping Center (143) 1992-93 1991 40 40 10 Scottsdale, AZ Office Complex (26) 2000 40 40 10 Northridge, CA Shopping Center (91) 1993-94 1988 40 40 10 Inglewood, CA Warehouse Building (135) 1989 1984 40 40 10 Moorsetown, NJ (leased land) Shopping Center (343) 1989-91 1989 40 40 10 Middletown, OH Retail Building (96) 2000 40 40 10 San Juan Capistrano, CA Shopping Center (116) 1988-89, 1987 40 40 10 94-95 Terre Haute, IN Retail Building (82) 2000 40 40 10 Smithtown, NY Retail Building (101) 1988-89 1985 40 40 10 Azusa, CA Warehouse/Self Storage (100) 1983, 1998 1983 40 40 10 Hampton, VA Retail Building/Bank (78) 1992 1987 40 40 10 San Diego/Pacific Beach, CA 0 2000 - - - Tucson, AZ Shopping Center (86) 1989-91 1988 40 40 10 Redwood City, CA Retail Building 0 1982 - - - New Britain, CT Warehouse Building (58) 1991 40 40 10 Tucson/Marana, AZ Land 0 1999 - - Denver/Aurora, CO Restaurant (38) 1993 1990 40 40 10 San Diego/Southeast, CA Restaurant/Bank (33) 1989-90 1989 40 40 10 Chula Vista/Rancho del Rey,CA Land 0 1993 - - - Fountain Valley, CA Land 0 1998 - - - - ------------------------------------------------------------------------------------------------------------------------------ Total Investment Properties $(9,364) ==============================================================================================================================
(1) The aggregate cost for Federal income tax purposes is $468,477 (2) Does not include our investment in joint ventures which own retail centers in Fresno, CA; Bend, OR; and Westminster, CO 58 PRICE ENTERPRISES, INC. SCHEDULE III (CONTINUED) REAL ESTATE AND ACCUMULATED DEPRECIATION (IN THOUSANDS)
YEAR ENDED DECEMBER 31 --------------------------------------- Reconciliation To Reported Amounts 2000 1999 1998 - ----------------------------------------------------------------- ------------ -------------- ----------- PROPERTY AND EQUIPMENT Balance at beginning of period $552,199 $475,873 $399,253 Additions during the period: Purchases 53,670 31,218 78,781 Deductions during the period: Cost of properties sold (50,654) (29,721) (2,500) Asset impairment loss --- --- --- ------------ -------------- ----------- Subtotal 555,215 477,370 475,534 Other: Purchase accounting adjustment to fair value --- 75,016 --- Additions (deletions) to FF&E 462 (187) 339 ------------ -------------- ----------- Balance at end of period $555,677 $552,199 $475,873 ============ ============== =========== ACCUMULATED DEPRECIATION Balance at beginning of period $1,330 $57,366 $46,197 Depreciation expense 8,999 11,396(1) 11,085 Accumulated depreciation of properties sold (945) (4,168) --- ------------ -------------- ----------- Subtotal 9,384 64,594 57,282 Other: Purchase accounting adjustment to fair value --- (63,092) --- Change in accumulated depreciation of FF&E 493 (172) 84 ------------ -------------- ----------- Balance at end of period .. $9,877 $1,330 $57,366 ============ ============== ===========
(1) Combined depreciation expense for the periods January 1 through November 11 and November 12 through December 31, 1999 59 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 15, 2001 By: /s/ Gary B. Sabin -------------- ----------------- Gary B. Sabin President and Chief Executive Officer (Principal Executive Officer) DATED: March 15, 2001 By: /s/ James Y. Nakagawa -------------- --------------------- James Y. Nakagawa Chief Financial Officer (Principal Financial and Accounting 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 15, 2001 - ---------------- -------------- JACK McGRORY, Chairman of the Board of Date Directors /s/ Gary B. Sabin March 15, 2001 - ----------------- -------------- GARY B. SABIN, Director, President, Date and Chief Executive Officer /s/ Richard B. Muir March 15, 2001 - ------------------- -------------- RICHARD B. MUIR, Director, Executive Vice Date President and Chief Operating Officer /s/ James F. Cahill March 15, 2001 - ------------------- -------------- JAMES F. CAHILL, Director Date /s/ Murray Galinson March 15, 2001 - ------------------- -------------- MURRAY GALINSON, Director Date 60 EXHIBIT INDEX DESCRIPTION ----------- PAGE - ---- 2.1 Distribution Agreement dated as of August 26, 1997 between Price Enterprises, Inc. and PriceSmart, Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K of Price Enterprises, Inc. filed with the Commission on September 12, 1997 (File No. 0-20449)) 3.1 Articles of Incorporation of Price Enterprises, Inc. (incorporated by reference to Exhibit 3.1 to Transition Report on Form 10-K of Price Enterprises, Inc. filed with the Commission on March 27, 1998 (File No. 0-20449)) 3.2 Articles Supplementary of Price Enterprises, Inc. (incorporated by reference to Exhibit 3.2 to Registration Statement on Form 8-A of Price Enterprises, Inc. filed with the Commission on August 7, 1998 (File No. 0-20449)) 3.3 Bylaws of Price Enterprises, Inc. (incorporated by reference to Exhibit 3.2 to Transition Report on Form 10-K of Price Enterprises, Inc. filed with the Commission on March 27, 1998 (File No. 0-20449)) 3.4 Articles of Amendment of Price Enterprises, Inc. 10.1 Form of Indemnity Agreement (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998 filed with the Commission on May 14, 1998 (File No. 0-20449)) 10.2 Revolving Credit Agreement dated as of December 3, 1998 among the Company, and Wells Fargo Bank, National Association, as Agent (incorporated by reference to Exhibit 10.9 to Annual Report on Form 10-K of Price Enterprises, Inc. filed with the Commission on March 29, 1999 (File No. 0-20449)) 10.3 Form of Promissory Note under Revolving Credit Agreement as amended and schedule of notes signed, dates, banks and amounts (incorporated by reference to Exhibit 10.10 to Annual Report on Form 10-K of Price Enterprises, Inc. filed with the Commission on March 29, 1999 (File No. 0-20449)) 10.4 Form of Guaranty between Price Enterprises, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.11 to Annual Report on Form 10-K of Price Enterprises, Inc. filed with the Commission on March 29, 1999 (File No. 0-20449)) 10.5 First Amendment to Revolving Credit Agreement and Loan Documents dated as of December 29, 1998 among the Company, Wells Fargo Bank, National Association, as a Lender (the "Original Lender"), BankOne, Arizona, NA, AmSouth Bank, and Wells Fargo Bank, National Association, as Agent (incorporated by reference to Exhibit 10.12 to Annual Report on Form 10-K of Price Enterprises, Inc. filed with the Commission on March 29, 1999 (File No. 0-20449)) 10.6 Pro rata share of lenders participating in Amended Revolving Credit Agreement dated as of December 29, 1998 among the Company, Wells Fargo Bank, National Association, BankOne, Arizona, NA, AmSouth Bank and Wells Fargo Bank, NA, as agent (incorporated by reference to Exhibit 10.13 to Annual Report on Form 10-K of Price Enterprises, Inc. filed with the Commission on March 29, 1999 (File No. 0-20449)) 10.7 The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan (the "Stock Plan") (incorporated by reference to Exhibit 10.23 to Registration 61 Statement on Form 10 of Price Enterprises, Inc. filed with the Commission on December 13, 1994 (File No. 0-20449)) 10.8 Form of Incentive Stock Option Agreement under the Stock Plan (incorporated herein by reference to Exhibit 4.2 of the Current Report on Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13, 1995 (File No. 33-60999)) 10.9 Form of Non-Qualified Stock Option Agreement under the Stock Plan (incorporated by reference to Exhibit 4.3 of the Current Report on Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13, 1995 (File No. 33-60999)) 10.10 The Price Enterprises Directors' 1995 Stock Option Plan (the "Directors' Plan) (incorporated 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)) 10.11 Form of Non-Qualified Stock Option Agreement under the Directors' Plan (incorporated by reference to Exhibit 4.5 of the Current Report on Form S-8 of Price Enterprises, Inc. filed with the Commission on July 13, 1995 (File No. 33-60999)) 10.12 First Amendment to the Price Enterprises Directors' 1995 Stock Option Plan (incorporated by reference to Exhibit 4.7 to Transition Report on Form 10-K of Price Enterprises, Inc. filed with the Commission on March 27, 1998 (File No. 0-20449)) 10.13 First Amendment to The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan (incorporated by reference to Exhibit 4.2 to Registration Statement on Form S-8 of Price Enterprises, Inc. filed with the Commission on September 2, 1998 (File No. 333-62723)) 10.14 Second Amendment to the Price Enterprises Directors' 1995 Stock Option Plan (incorporated by reference to Exhibit 4.5 to Registration Statement on Form S-8 of price Enterprises, Inc. filed with the Commission on September 2, 1998 (File No. 333-62723)) 10.15 Form of Amended and Restated Non-Qualified Stock Option Agreement under the 1995 Plan (incorporated by reference to Exhibit 4.6 to Registration Statement on Form S-8 of Price Enterprises, Inc. filed with the Commission on September 2, 1998 (File No. 333-62723)) 10.16 Form of Amended and Restated Non-Qualified Stock Option Agreement under the Director's Plan (incorporated by reference to Exhibit 4.7 to Registration Statement on Form S-8 of Price Enterprises, Inc. filed with the Commission on September 2, 1998 (File No. 333-62723)) 10.17 Agreement, dated May 12, 1999, by and among Excel Legacy Corporation and certain stockholders of Price Enterprises, Inc. listed on the signature pages thereto (incorporated by reference to Annex A to the Offer to Exchange/Prospectus dated October 6, 1999 filed as Exhibit (a)(1) to the Excel Legacy Corporation's Tender Offer Statement on Schedule 14D-1 as filed with the Commission on October 6, 1999 (File No. 005-43425)) (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed May 14, 1999 by Excel Legacy Corporation(File No. 0-23503)) 10.18 Agreement, dated June 2, 1999, as amended, between Excel Legacy Corporation and Price Enterprises, Inc. (incorporated by reference to Annex B to the Offer to Exchange/Prospectus dated October 6, 1999 filed as Exhibit (a)(1) to the Excel Legacy Corporation's Tender Offer Statement on Schedule 14D-1 as filed with the Commission on October 6, 1999 (File No. 005-43425)) 62 10.19 Settlement and Termination Agreement dated May 24, 1999, by and between Price Enterprises, Inc. and Gary W. Nielson (incorporated by reference to Exhibit 10.5 to Quarterly Report on Form 10-Q filed with the Commission on August 4, 1999 (File No. 0-20449)) 10.20 Second Amendment to the Price Enterprises 1995 Combined Stock Grant and Stock Option Plan (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q filed with the Commission on August 4, 1999 (File No. 0-20449)) 10.21 Third Amendment to the Price Enterprises Directors 1995 Stock Option Plan (incorporated by reference to Exhibit 10.7 to Quarterly Report on Form 10-Q filed with the Commission on August 4, 1999 (File No. 0-20449)) 10.22 First Amended and Restated Revolving Credit Agreement dated as of February 14, 2000 among PEI and Wells Fargo Bank, National Association, as Agent (incorporated by reference to Exhibit 10.32 to Annual Report on Form 10-K of PEI filed with the Commission on March 29, 2000 (File No. 0-20449)) 10.23 Pro rata share of lenders participating in First Amended and Restated Revolving Credit Agreement dated as of February 14, 2000 among PEI and Wells Fargo Bank, National Association, Bank One, Arizona, NA, AmSouth Bank, Bank Boston and Wells Fargo Bank, NA, as Agent (incorporated by reference to Exhibit 10.33 to Annual Report on Form 10-K of PEI filed with the Commission on March 29, 2000 (File No. 0-20449)) 10.24 Loan Agreement dated June 28, 2000 between Price Owner LLC and GMAC Commercial Mortgage Corporation, including form of Promissory Note, Mortgage and Security Agreement, Assignment of Leases and Rents, Guaranty of Recourse Obligations and Environmental Indemnity Agreement (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K of PEI filed with the Commission on July 26, 2000 (File No. 0-20449)) 10.25 First Amended and Restated Promissory Note and Revolving Line of Credit dated September 27, 2000 by and among PEI and Excel Legacy (incorporated by reference to Exhibit 10.3 to Excel Legacy Corporation's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 filed with the Commission on November 9, 2000 (File No. 0-23503)) 12.1 Computation of ratio of earnings to fixed charges 21.1 Subsidiaries of Price Enterprises, Inc. 23.1 Consent of Ernst & Young LLP, Independent Auditors 63 EX-3.4 2 a2041883zex-3_4.txt EX-3.4 PRICE ENTERPRISES, INC. ARTICLES OF AMENDMENT Price Enterprises, Inc., a Maryland corporation (the "CORPORATION"), hereby certifies to the State Department of Assessments and Taxation of Maryland (the "Department") that: FIRST: The Corporation hereby amends its Charter as currently in effect by inserting the following two definitional paragraphs in Section 2 of Article THIRD of the Articles Supplementary of the Corporation which were filed with the Department on August 5, 1998 (the "Articles"): "Legacy" shall mean Excel Legacy Corporation, a Delaware corporation and the parent corporation of the Corporation. "Preferred Rights Termination Date" shall mean the earliest to occur of (i) less than 2,000,000 shares of Series A Preferred Stock (adjusted for stock splits, dividends, reverse stock splits, etc.) remain outstanding, (ii) Legacy shall have made an offer to purchase any and all outstanding shares of Series A Preferred Stock at a cash price of $16.00 per share, and shall have purchased all shares duly tendered and not withdrawn, (iii) the Board of Directors of the Corporation shall have (a) issued or agreed to issue any equity securities or securities convertible or exchangeable into or exercisable for equity securities, in any case, without the unanimous approval of the members of the Board of Directors, or (b) failed in any fiscal year to declare or to pay dividends on the Common Stock as and when requested by Legacy (1) to distribute 100% of the Corporation's taxable income for such fiscal year (including dividends on the Series A Preferred Stock) or otherwise to maintain the Corporation's status as a REIT or (2) in an amount equal to the excess, if any, of (x)(A) funds from operations less straight line accrual of future rents (rent smoothing) for such fiscal year, minus (B) the amount required to pay dividends on the Series A Preferred Stock for such fiscal year, over (y) $7,500,000, or (iv) the Board of Directors of the Corporation, by unanimous vote of the members of the Board of Directors, shall have adopted a resolution to terminate the right of the holders of the Series A Preferred Stock to elect a majority of the directors pursuant to paragraph (e) of Section 8 of Article THIRD of these Articles Supplementary. SECOND: The Corporation hereby amends its Charter as currently in effect by inserting the following additional paragraph in Section 8 of Article THIRD of the Articles: (e) In addition to the voting rights set forth elsewhere in the Charter of the Corporation and until the Preferred Rights Termination Date, the holders of Series A Preferred Stock, voting separately as a single class, shall be entitled to elect a majority of the members of the Board of Directors of the Corporation, provided that the holders of the Series A Preferred Stock, voting separately as a single class, shall be entitled to elect no more than one member in excess of the number of members of the Board of Directors of the Corporation that the holders of the Series A Preferred Stock and the holders of the Common Stock, voting together as a single class, are entitled to elect at any time. Such right shall be exercisable at each annual meeting of stockholders or special meeting held in place thereof, or at any special meeting of the holders of the Series A Preferred Stock called for that purpose, at which in each case a quorum of holders of Series A Preferred Stock shall be present. For purposes of this paragraph (e), presence in person or by proxy of stockholders entitled to cast a majority of the votes entitled to be cast by the holders of Series A Preferred Stock shall constitute a quorum. If any vacancy shall occur among the directors entitled to be elected by the Series A Preferred Stock pursuant to the terms of this paragraph (e), a successor shall be elected by the Board of Directors upon the nomination of a majority of the directors elected by the holders of the Series A Preferred Stock voting separately as a class and any successor appointed to fill a vacancy among the directors so elected, to serve for the remainder of the term of the director creating the vacancy; and in the event that such vacancy shall exist and shall not have been filled within sixty (60) days after the occurrence thereof, the Secretary of the Corporation may, and upon the written request of any holders of Series A Preferred Stock (addressed to the Secretary at the principal office of the Corporation) shall, call a special meeting of the holders of the Series A Preferred Stock for the election of one or more directors to fill the vacancy or vacancies then existing, such call to be made by notice similar to that provided in the Bylaws of the Corporation for a special meeting of the stockholders, or as required by law. If any such special meeting required to be called as above provided shall not be called by the Secretary within twenty (20) days after receipt of any such request, then any holder of Series A Preferred Stock may call such meeting, upon the notice above provided, and for that purpose shall have access to the stock books of the Corporation. Except for any action taken by the Board of Directors in furtherance of the intentions embodied by this paragraph (e), that is, that a majority of the members of the Board of Directors be elected by the holders of the Series A Preferred Stock, until the Preferred Rights Termination Date no action shall be taken by the Board of Directors of the Corporation, nor shall any action so taken be effective, if a majority of the persons comprising the Board of Directors of the Corporation at the time such action is to be or was taken are not directors elected by the holders of the Series A Preferred Stock voting separately as a class, or successor directors appointed as hereinabove provided to fill one or more vacancies among the directors so elected. In addition, until the Preferred Rights Termination Date occurs, any shares of Series A Preferred Stock held by Legacy or by any subsidiary or affiliate of Legacy shall not be entitled to be voted in any election of directors of the Corporation, either pursuant to paragraph (e) or pursuant to paragraphs (b) or (c) of this Section 8. The term of office of any director elected pursuant to this paragraph (e) shall terminate upon the occurrence of the Preferred Rights Termination Date. THIRD: The amendments to the charter of the Corporation as set forth above have been duly advised by the board of directors and approved by the stockholders of the Corporation as required by law. FOURTH: The undersigned President acknowledges these Articles of Amendment to be the corporate act of the Corporation and as to all matters or facts required to be verified under oath, the undersigned President acknowledges that to the best of his knowledge, information and belief, these matters and facts are true in all material respects and that this statement is made under the penalties for perjury. [REMAINDER OF PAGE INTENTIONALLY BLANK] IN WITNESS WHEREOF, the Corporation has caused these Articles to be signed in its name and on its behalf by its President and attested to by its Secretary on this 7th day of June, 2000. ATTEST: PRICE ENTERPRISES, INC. /S/ S. Eric Ottesen /S/ Gary B. Sabin - --------------------------- ------------------------ By: S. Eric Ottesen By: Gary B. Sabin Secretary President EX-12.1 3 a2041883zex-12_1.txt EX-12.1 EXHIBIT 12.1 PRICE ENTERPRISES, INC. COMPUTATION OF RATIOS (in thousands, except ratios)
PERIOD FROM PERIOD FROM NOVEMBER 12 JANUARY 1 YEAR ENDED THROUGH THROUGH YEAR ENDED DECEMBER 31 DECEMBER 31 NOVEMBER 11 DECEMBER 31 2000 1999 1999 1998 ----------- ----------- ----------- ----------- EARNINGS Income from continuing operations before income taxes $34,292 $4,697 $27,974 $29,429 Add: fixed charges 13,018 1,079 5,971 3,112 Less: capitalized interest (2,087) (231) (944) (301) ------- ------ ------- ------- Income as adjusted $45,223 $5,545 $33,001 $32,240 ======= ====== ======= ======= FIXED CHARGES AND PREFERRED DIVIDENDS: Fixed charges: Interest costs $10,931 $ 848 $ 5,027 $ 2,811 Capitalized interest 2,087 231 944 301 ------- ------ ------- ------- Total fixed charges 13,018 1,079 5,971 3,112 Preferred stock dividends 33,360 --- 33,263 8,316 ------- ------ ------- ------- Total fixed charges and preferred dividends $46,378 $1,079 $39,234 $11,428 ======= ====== ======= ======= Ratio of earnings to fixed charges 3.47 5.14 5.53 10.36 ======= ====== ======= ======= Ratio of earnings to combined fixed charges and preferred stock dividends 0.98 5.14 0.84 2.82 ======= ====== ======= =======
For periods prior to the one ending December 31, 1998, this calculation is not applicable for our Company EX-21.1 4 a2041883zex-21_1.txt EX-21.1 Exhibit 21.1 SUBSIDIARIES OF PRICE ENTERPRISES, INC. NAME OF SUBSIDIARY (STATE OF INCORPORATION) Price Self Storage, Inc. (Delaware) Price Enterprises - TX, Inc. (Delaware) Price Enterprises - Texas, LP (Delaware) Price Owner LLC (Delaware) Price Owner Corp. (Delaware) EX-23.1 5 a2041883zex-23_1.txt EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-62723) pertaining to the Price Enterprises 1995 Combined Stock Grant and Stock Option Plan, As Amended and the Price Enterprises Directors' 1995 Stock Option Plan, As Amended of our report dated January 19, 2001, (except for Note 13, as to which the date is January 26, 2001) with respect to the consolidated financial statements and schedules of Price Enterprises, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2000. /s/ ERNST & YOUNG LLP San Diego, California March 14, 2000 -----END PRIVACY-ENHANCED MESSAGE-----