<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: SEPTEMBER 30, 1999 Commission File Number: 0-23503
EXCEL LEGACY CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0781747
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(State of incorporation) (IRS Employer Identification Number)
16955 VIA DEL CAMPO, SUITE 100 SAN DIEGO, CALIFORNIA 92127
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(Address of principal executive offices)
Registrant's telephone number: (858) 675-9400
-------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1999
---------------------------- --------------------------------
Common Stock, $.01 par value 36,835,921
<PAGE> 2
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
INDEX
FORM 10-Q
----------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets
September 30, 1999
December 31, 1998 ......................................... 3
Consolidated Statements of Income
Three Months Ended September 30, 1999
Three Months Ended October 31, 1998
Nine Months Ended September 30, 1999
Nine Months Ended October 31, 1998 ........................ 4
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1999
Nine Months Ended October 31, 1998 ........................ 5
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999
Nine Months Ended October 31, 1998 ........................ 6
Notes to Consolidated Financial Statements ................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...................... 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ......................... 22
</TABLE>
2
<PAGE> 3
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Real estate:
Land $ 39,256 $ 54,915
Buildings 99,201 136,118
Leasehold interest 2,351 2,351
Accumulated depreciation (3,070) (2,506)
--------- ---------
Net real estate 137,738 190,878
Cash 9,562 1,387
Accounts receivable, less allowance for bad debts of
$151 and $14 in 1999 and 1998, respectively 631 204
Notes receivable 23,305 23,204
Investment in partnerships 25,833 11,423
Interest receivable 7,901 5,341
Pre-development costs 26,689 13,569
Other assets 10,253 9,087
Deferred tax asset 4,366 6,203
--------- ---------
$ 246,278 $ 261,296
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages and notes payable $ 75,217 $ 90,986
Accounts payable and accrued liabilities 1,324 2,604
Other liabilities 1,196 220
--------- ---------
Total liabilities 77,737 93,810
--------- ---------
Commitments and contingencies -- --
Minority interests 850 846
--------- ---------
Stockholders' equity:
Series B Preferred stock, $.01 par value, 50,000,000 shares
authorized, 21,281,000 shares issued and outstanding 213 213
Common stock, $.01 par value, 150,000,000 shares authorized,
33,457,804 shares issued and outstanding 335 335
Additional paid-in capital 174,508 174,508
Retained earnings 3,477 2,456
Notes receivable from affiliates for common shares (10,842) (10,872)
--------- ---------
Total stockholders' equity 167,691 166,640
--------- ---------
$ 246,278 $ 261,296
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements
3
<PAGE> 4
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPT. 30, OCT. 31, SEPT. 30, OCT. 31,
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 2,141 $ 3,322 $ 8,581 $ 7,739
Operating income 2,208 4,491 9,106 6,223
Interest income 870 977 2,664 2,973
Partnership income 207 156 508 156
------- ------- ------- -------
Total revenue 5,426 8,946 20,859 17,091
------- ------- ------- -------
Operating expenses:
Interest 1,717 1,457 5,671 2,975
Depreciation and amortization 636 1,117 2,715 2,174
Property operating expenses 432 1,029 1,492 1,947
Other operating expenses 1,330 2,900 5,146 3,776
General and administrative 1,047 1,529 4,472 2,427
------- ------- ------- -------
Total operating expenses 5,162 8,032 19,496 13,299
------- ------- ------- -------
Net operating income 264 914 1,363 3,792
Net gain from real estate sales and write-off
of real estate related costs 481 -- 481 --
------- ------- ------- -------
Income before income taxes 745 914 1,844 3,792
Provision for income taxes 410 329 823 1,472
------- ------- ------- -------
Net income $ 335 $ 585 $ 1,021 $ 2,320
======= ======= ======= =======
Basic net income per common share $ 0.01 $ 0.02 $ 0.03 $ 0.09
======= ======= ======= =======
Diluted net income per common share $ 0.01 $ 0.01 $ 0.02 $ 0.05
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part
of the financial statements
4
<PAGE> 5
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
----------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL AFFILIATE TOTAL
--------------------- --------------------- PAID-IN RETAINED NOTES STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL EARNINGS RECEIVABLE EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nine Months Ended September 30, 1999:
Balance at January 1, 1999 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ 2,456 $ (10,872) $ 166,640
Repayment of notes -- -- -- -- -- -- 30 30
Net income -- -- -- -- -- 1,021 -- 1,021
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at Sept. 30, 1999 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ 3,477 $ (10,842) $ 167,691
========== ========== ========== ========== ========== ========== ========== ==========
Nine Months Ended October 31, 1998:
Balance at February 1, 1998 -- $ -- 100 $ -- $ -- $ -- $ -- $ --
Issuance of preferred stock 21,281,000 213 -- -- 106,192 -- -- 106,405
Issuance of common stock -- -- 33,457,704 335 71,013 -- -- 71,348
Notes receivable from affiliates
for common shares -- -- -- -- -- -- (10,872) (10,872)
Issuance costs -- -- -- -- (2,697 -- -- (2,697)
Net income -- -- -- -- -- 2,320 -- 2,320
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at October 31, 1998 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ 2,320 $ (10,872) $ 166,504
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements
5
<PAGE> 6
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
---------------------------
SEPT. 30, OCT. 31,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,021 $ 2,320
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 2,715 2,174
Gain from real estate sales (1,881) --
Write-off of real estate related costs 1,400 --
Provision for bad debts 164 26
Minority interests in income of partnerships 4 (2)
Change in accounts receivable and other assets (4,664) (8,623)
Change in accounts payable and other liabilities 1,533 3,158
--------- ---------
Net cash provided (used) by operating activities 292 (947)
--------- ---------
Cash flows from investing activities:
Proceeds from real estate sales 37,858 --
Real estate acquired and construction costs paid (6,383) (99,919)
Investment in partnerships (8,504) (11,257)
Pre-development costs paid (14,020) (8,956)
--------- ---------
Net cash provided (used) in investing activities 8,951 (120,132)
--------- ---------
Cashflows from financing activities:
Proceeds from issuance of preferred stock -- 106,405
Proceeds from issuance of common stock -- 11,104
Issuance costs paid -- (2,515)
Principal payments of mortgages (24,644) (72,743)
Borrowings from issuance of notes 23,576 82,367
--------- ---------
Net cash provided by financing activities (1,068) 124,618
--------- ---------
Net increase in cash 8,175 3,539
Cash at the beginning of the period 1,387 --
--------- ---------
Cash at the end of the period $ 9,562 $ 3,539
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements
6
<PAGE> 7
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The financial statements reflect all adjustments of a recurring nature
which are, in the opinion of management, necessary for a fair presentation
of the financial statements. No adjustments were necessary which were not
of a normal recurring nature. Certain footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the quarterly
reporting rules of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the consolidated financial
statements and accompanying footnotes included in the Company's July 31,
1998 Form 10-K.
ORGANIZATION
Excel Legacy Corporation (the "Company"), a Delaware corporation was formed
on November 17, 1997. The Company was originally a wholly-owned subsidiary
of Excel Realty Trust, Inc. ("Excel"), a Maryland corporation and a
self-administered, self-managed real estate investment trust ("REIT"), now
known as New Plan Excel Realty Trust, Inc. On March 31, 1998, Excel
effected a spin-off of the Company through a special dividend to the
holders of common stock of Excel of all of the outstanding common stock of
the Company held by Excel (the "Spin-off").
In connection with the Spin-off, certain real properties, notes receivable
and related assets and liabilities were transferred to the Company from
Excel (Note 2). Upon completion of the Spin-off, the Company ceased to be a
wholly-owned subsidiary of Excel and began operating as an independent
public real estate operating company.
CHANGE IN FISCAL YEAR
By unanimous consent dated December 11, 1998, the Board of Directors of the
Company adopted a fiscal year-end of December 31, beginning with a short
fiscal year ending on December 31, 1998. The Company's previous fiscal
year-end was July 31, and accordingly, comparative information reported in
the Form 10-Q for 1998 represents information previously reported by the
Company for the periods ended October 31, 1998.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries and all affiliates in which the
Company has an ownership interest greater than 50%. The Company uses the
equity method of accounting to account for its investments in which its
ownership interest is 50% or less, but in which it has significant
influence.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of less
than three months when purchased to be cash and cash equivalents. At
September 30, 1999, the cash balance includes $9,500,000 which was on
deposit for the acquisition of Common Shares of Price Enterprises, Inc., a
Maryland corporation (Note 3).
Continued 7
<PAGE> 8
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REAL ESTATE
Certain real estate assets were transferred to the Company from Excel and
recorded at Excel's cost basis. Other real estate assets acquired
subsequent to the Spin-off were recorded at the Company's cost.
Depreciation is computed using the straight-line method over estimated
useful lives of 40 years for buildings. Expenditures for maintenance and
repairs are charged to expense as incurred and significant renovations are
capitalized.
The Company assesses its properties individually for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
property may not be recoverable. Recoverability of property to be held and
used is measured by comparing the carrying amount of the property to future
undiscounted net cash flows expected to be generated by the property. If
the sum of the expected undiscounted future cash flows is less than the
carrying amount of the property, the property is considered to be impaired.
If the property is impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the property exceeds the fair
value of the property.
PRE-DEVELOPMENT COSTS
Pre-development costs that are directly related to specific construction
projects are capitalized as incurred. The Company expenses these costs to
the extent they are unrecoverable or it is determined that the related
project will not be pursued.
MANAGEMENT CONTRACTS
Management contracts are recorded at cost and amortized over a period of
seven years.
INCOME TAXES
The Company uses the liability method to account for income taxes. Deferred
income tax assets have been recorded to reflect the future tax benefit of
assets acquired from Excel that were recorded at Excel's cost for book
purposes and fair market value for tax purposes.
DEFERRED LEASING AND LOAN ACQUISITION COSTS
Costs incurred in obtaining tenant leases and long-term financing are
amortized to other property expense and interest expense, respectively, on
the straight-line method over the terms of the related leases or debt
agreements.
REVENUE RECOGNITION
Base rental revenue is recognized on the straight-line basis, which
averages annual minimum rents over the terms of the leases. Certain of the
leases provide for additional rental revenue by way of percentage rents to
be paid based upon the level of sales achieved by the lessee. Percentage
rents and tenant reimbursements are recognized when they are earned.
Continued 8
<PAGE> 9
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
2. SPIN-OFF:
On March 31, 1998, Excel transferred certain real estate assets to the
Company in exchange for 23,412,580 common shares of the Company, assumption
of mortgage debt by the Company, and issuance of a note payable to Excel
from the Company which was subsequently repaid. The Spin-off took place
through a dividend distribution to Excel's common stockholders of all the
Company's common stock (23,412,580 shares) held by Excel. The distribution
consisted of one share of the Company's common stock for each share of
Excel's common stock held on the record date of March 2, 1998. The fair
market value of the distribution was approximately $55,956,000 or $2.39 per
share. While the Company has recorded the acquisition of assets and
liabilities at fair market value for tax purposes, the Company has recorded
for book purposes, the assets and liabilities at Excel's original book
value in accordance with accounting standards for distributions of
non-monetary assets to owners in a spin-off. The tax effect of the
difference between fair market value and book value was $6,528,000 and was
recorded as a deferred tax asset.
3. PRICE ENTERPRISES, INC.
In November 1999, the Company completed an exchange offer of $8.50 per
share for any and all common shares of Price Enterprises, Inc., a Maryland
corporation which is operated as a real estate investment trust ("PREN").
The exchange offer consisted of per share consideration for PREN Common
Stock of $4.25 in cash, $2.75 in principal amount of newly issued 9%
Convertible Redeemable Subordinated Secured Debentures of the Company due
in 2004 (convertible at any time into the Company's common stock at $5.50
per share) ("Debentures"), and $1.50 in newly issued 10% Senior Redeemable
Secured Notes of the Company due in 2004. Approximately, 12,154,000 shares
of PREN common stock were tendered representing approximately 91% of the
outstanding common stock.
4. MILLENNIA:
The Company has an investment in a joint venture known as Millennia Car
Wash, LLC ("Millennia"). Millennia owned interests in 19 car wash
properties in Arizona and Texas. Millennia entered into an agreement to
sell its assets in exchange for approximately 3.5 million shares of common
stock and 62,500 common stock purchase warrants of Mace Security
International ("MSI"), which sale was consummated in October 1999. In
connection with the agreement, Millennia had assigned the operations of its
car wash properties to MSI effective April 1, 1999. As such, the Company
has not included any operations of Millennia since that date. Millennia,
however, had retained ownership of the car wash properties until October
1999. As part of the agreement, the Company acquired 250,000 common shares
of MSI through a private placement at $2 per share and 250,000 common
shares of US Plastic Lumber Corporation at $4 per share.
Continued 9
<PAGE> 10
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
5. REAL ESTATE:
During the third quarter of 1999, the Company sold eight properties leased
to Wal-mart and a land parcel in Rancho Bernardo, California. The combined
book value of these assets was $36,977,000. Mortgage debt of $23,613,000
was retired in conjunction with the sales which resulted in a net book gain
of $1,881,000. In October 1999, the Company sold an additional property
located in Highlands Ranch, Colorado for approximately $25,358,000. The
property had mortgage debt of $17,581,000 and a book basis of approximately
$23,822,000.
In the three month period ended September 30, 1999, the Company wrote-off
$900,000 in non-recurring costs related to a development project in
Scottsdale, Arizona. The Company also incurred a charge of $500,000 related
to an investment in a development project in Indianapolis, Indiana which
has been delayed.
6. MORTGAGES AND NOTES PAYABLE:
The Company had $75,217,000 in mortgages and notes payable outstanding at
September 30, 1999 with an average interest rate of 8.58% and average
maturity of approximately 8 years. The mortgages and notes are due on
various dates through 2018, have monthly payments of approximately
$637,000, and are collateralized by real estate and an assignment of rents.
The Company has a revolving credit facility of $35,000,000 from BankBoston,
N.A. (the "Credit Facility") which carries an interest rate of LIBOR plus
3.75% (9.1% at September 30, 1999). The Credit Facility expires in June
2000. Through September 30, 1999, $27,277,000 was outstanding under the
Credit Facility. The principal payments required to be made on mortgages
and notes payable over the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1999 (remaining three months) $ 678
2000 34,601
2001 1,493
2002 1,618
2003 1,754
Thereafter 35,073
--------
$ 75,217
========
</TABLE>
In October 1999, the Company borrowed $5,000,000 secured by second trust
deeds on two of the Company's investments. The note bears interest at Prime
Rate plus 2% and matures in October 2000. In connection with the exchange
offer for PREN common shares, the Company also borrowed $27,347,000 secured
by PREN common shares. The five-year note bears interest at LIBOR plus
1.5%.
7. INCOME TAXES:
At September 30, 1999, the Company had a net deferred tax asset of
$4,366,000. The deferred tax asset primarily relates to the difference
between the tax basis and cost basis of the real estate assets acquired
from Excel in connection with the Spin-off (Note 2) and is non-current. The
offsetting portion of the deferred asset relates to timing differences in
recognizing revenue and expenses for tax purposes through operations of the
Company. No valuation allowance has been provided against the deferred tax
asset as the Company believes future taxable income is more likely than
not. The provision for income taxes for the nine months ended September 30,
1999 consists of the following:
Continued 10
<PAGE> 11
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
7. INCOME TAXES, CONTINUED:
<TABLE>
<CAPTION>
FEDERAL STATE
---------- ---------
<S> <C> <C>
Current payable (benefit) $ (835,000) $(179,000)
Deferred tax expense 1,483,000 354,000
---------- ---------
Provision for income taxes $ 648,000 $ 175,000
========== =========
</TABLE>
8. CAPITAL STOCK:
PRIVATE PLACEMENT
In October 1999, the Company sold 3,378,117 shares of common stock to a
group of investors. Proceeds of approximately $13,512,000 were used for
general corporate purposes, to fund certain development costs and to repay
outstanding amounts on the Company's credit facility.
SERIES B PREFERRED SHARES
At September 30, 1999, the Company had 21,281,000 shares of Series B
Preferred Stock outstanding (the "Preferred B Shares"). Holders of the
Preferred B Shares are entitled to receive, when, as and if declared by the
Board of Directors, cumulative cash dividends payable in an amount per
share equal to the cash dividends, if any, on the shares of common stock
into which the Preferred B Shares are convertible. Holders of the Preferred
B Shares are also entitled to a liquidation preference of $5.00 per share,
plus a premium of 7% per annum, in the event of any liquidation,
dissolution or other winding up of the affairs of the Company.
The Preferred B Shares are convertible into common stock of the Company at
the election of the holders at any time, on a one-for-one basis, subject to
adjustment in certain circumstances. The Preferred B Shares also are
convertible into common stock by the Company at any time and from time to
time after the earlier to occur of (i) the date which is six months
following the date on which the Company's common stock becomes listed or
admitted for trading on a national securities exchange or (ii) March 31,
2000. The Company's common stock became listed on the American Stock
Exchange on November 17, 1998. As a result, the Preferred B Shares are
convertible into common stock at the option of the Company at any time.
The Preferred B Shares were issued in March 1999 in exchange for all of the
issued and outstanding shares of Series A Preferred Stock of the Company
(the "Preferred A Shares"). Following such exchange, all Preferred A Shares
were retired and restored to the status of authorized and unissued shares
of preferred stock, without designation as to series, and may be reissued
as shares of any series of preferred stock of the Company.
Continued 11
<PAGE> 12
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
8. CAPITAL STOCK, CONTINUED:
EARNINGS PER SHARE (EPS)
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT. 30 OCT. 31, SEPT. 30, OCT. 31,
1999 1998 1999 1998
-------- -------- --------- --------
<S> <C> <C> <C> <C>
BASIC EPS
NUMERATOR:
Net income $ 335 $ 585 $ 1,021 $ 2,320
======= ======= ======= =======
DENOMINATOR:
Weighted average of common
shares outstanding 33,458 33,458 33,458 26,131
======= ======= ======= =======
EARNINGS PER SHARE: $ 0.01 $ 0.02 $ 0.03 $ 0.09
======= ======= ======= =======
DILUTED EPS
NUMERATOR:
Net income $ 335 $ 585 $ 1,021 $ 2,320
======= ======= ======= =======
DENOMINATOR:
Weighted average of common
shares outstanding 33,458 33,458 33,458 26,131
Effect of diluted securities:
Preferred B Shares 21,281 21,281 21,281 16,682
Options 48 -- 47 --
------- ------- ------- -------
54,787 54,739 54,786 42,813
======= ======= ======= =======
EARNINGS PER SHARE: $ 0.01 $ 0.01 $ 0.02 $ 0.05
======= ======= ======= =======
</TABLE>
Continued 12
<PAGE> 13
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
9. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amounts paid for interest and income taxes in the nine months ended
September 30, 1999 were approximately $4,689,000 and $622,000,
respectively. Additionally, the Company assumed $3,826,000 in debt related
to the construction of an office building. In the nine months ended
October 31, 1998, the amounts paid for interest and income taxes were
approximately $3,296,000 and $0, respectively. Additionally in 1998, the
Company acquired certain assets in conjunction with the Spin-off (Note 2)
and assumed $15,200,000 in conjunction with Millennia's acquisition of
nine car wash properties.
10. SEGMENT REPORTING:
The Company is a partner in a joint venture, Grand Tusayan, LLC ("Grand
Hotel") for the operation of a hotel and dinner theater and retail shop
situated near the south rim entrance to the Grand Canyon National Park in
Tusayan, Arizona. At September 30, 1999, the Company's ownership in the
Grand Hotel was 65% although the Company was entitled to approximately 98%
of the Grand Hotel's net income based upon its equity contributed. The
accounts of the Grand Hotel are consolidated in the Company's financial
statements. SFAS No. 131 establishes standards for the way that a public
enterprise reports information about operating segments in annual financial
statements, and requires that those enterprises report selected information
about operating segments in interim financial reports to shareholders (Note
1). The following unaudited information has been provided in accordance
with SFAS No. 131 for operations related to Millennia, the Grand Hotel, and
all other real estate related activities as of September 30, 1999 and
October 31, 1998 and for periods then ended (in thousands):
<TABLE>
<CAPTION>
Other
Millennia Grand Hotel Real Estate Total
--------- ----------- ----------- --------
<S> <C> <C> <C> <C>
The three months ended September 30, 1999:
Total revenues $ 2 $ 1,938 $ 3,486 $ 5,426
-------- -------- -------- --------
Interest -- -- 1,717 1,717
Depreciation and amortization - -- 148 488 636
General and administrative 37 -- 1,010 1,047
Operating expenses -- 1,330 432 1,762
-------- -------- -------- --------
Total operating expenses 37 1,478 3,647 5,162
-------- -------- -------- --------
Net operating income (loss) $ (35) $ 460 $ (161) $ 264
======== ======== ======== ========
The nine months ended September 30, 1999:
Total revenues $ 4,313 $ 4,077 $ 12,469 $ 20,859
-------- -------- -------- --------
Interest 419 -- 5,252 5,671
Depreciation and amortization 327 470 1,918 2,715
General and administrative 2,052 -- 2,420 4,472
Operating expenses 1,809 3,337 1,492 6,638
-------- -------- -------- --------
Total operating expenses 4,607 3,807 11,082 19,496
-------- -------- -------- --------
Net operating income (loss) $ (294) $ 270 $ 1,387 $ 1,363
======== ======== ======== ========
Real estate, net $ 30,038 $ 13,628 $ 94,072 $137,738
======== ======== ======== ========
</TABLE>
Continued 13
<PAGE> 14
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
10. SEGMENT REPORTING, CONTINUED:
<TABLE>
<CAPTION>
Other
Millennia Grand Hotel Real Estate Total
--------- ----------- ----------- --------
<S> <C> <C> <C> <C>
The three months ended October 31, 1998:
Total revenues $ 3,688 $ 646 $ 4,612 $ 8,946
-------- -------- -------- --------
Interest 173 -- 1,284 1,457
Depreciation and amortization 259 153 705 1,117
General and administrative 873 -- 656 1,529
Operating expenses 2,341 559 1,029 3,929
-------- -------- -------- --------
Total operating expenses 3,646 712 3,674 8,032
-------- -------- -------- --------
Net operating income (loss) $ 42 $ (66) $ 938 $ 914
======== ======== ======== ========
The nine months ended October 31, 1998:
Total revenues $ 4,866 $ 741 $ 11,484 $ 17,091
-------- -------- -------- --------
Interest 173 -- 2,802 2,975
Depreciation and amortization 344 191 1,639 2,174
General and administrative 1,161 -- 1,266 2,427
Operating expenses 3,088 673 1,962 5,723
-------- -------- -------- --------
Total operating expenses 4,766 864 7,669 13,299
-------- -------- -------- --------
Net operating income (loss) $ 100 $ (123) $ 3,815 $ 3,792
======== ======== ======== ========
Real estate, net $ 30,179 $ 14,077 $146,337 $190,593
======== ======== ======== ========
</TABLE>
11. RELATED PARTY TRANSACTIONS:
In connection with the sale of common stock to certain affiliates in March
1998, the Company issued $10,872,000 of notes receivable of which
$10,842,000 is outstanding at September 30, 1999. The notes bear interest
at 7%, are recourse obligations of the note holders, and are due in March
2003. The total interest receivable at September 30, 1999 from these notes
totaled $1,106,000. The notes have been offset against stockholders'
equity on the Company's accompanying Consolidated Balance Sheet.
Continued 14
<PAGE> 15
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
12. MINIMUM FUTURE RENTALS:
The Company leases its operating properties, except the Millennia carwash
properties and the Grand Hotel property, under noncancelable operating
leases generally requiring the tenant to pay a minimum rent. The leases
generally either (i) require the tenant to pay all expenses of operating
the property such as insurance, property taxes, and structural repairs and
maintenance, or (ii) require the tenant to reimburse the Company for the
tenant's share of real estate taxes and other common area maintenance
expenses or for the tenant's share of any increase in expenses over a base
year. Minimum future rental revenue for the next five years for the real
estate owned at September 30, 1999 and subject to noncancelable operating
leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1999 (remaining three months) $ 1,393
2000 3,399
2001 3,230
2002 3,040
2003 2,844
Thereafter 34,106
</TABLE>
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NATURE OF BUSINESS
Excel Legacy Corporation (the "Company"), a Delaware Corporation, was formed on
November 17, 1997. The Company was organized to create and realize value by
identifying and making opportunistic real estate and other investments through
the direct acquisition, rehabilitation, development, financing and management of
real properties and/or participation in these activities through the purchase of
debt instruments or equity interests of entities in real estate and other
businesses.
RESULTS OF OPERATIONS
The Company has an investment in a joint venture known as Millennia Car Wash,
LLC ("Millennia"). Millennia had interests in 19 car wash properties in Arizona
and Texas. In October 1999, Millennia sold its assets in exchange for
approximately 3.5 million shares of common stock and 62,500 common stock
purchase warrants of Mace Security International ("MSI"). In connection with the
agreement, Millennia had assigned the operations of its car wash properties to
MSI effective April 1, 1999. As such, the Company has not included any
operations of Millennia since that date. As part of the agreement, the Company
acquired 250,000 common shares of MSI through a private placement at $2 per
share and 250,000 common shares of US Plastic Lumber Corporation at $4 per
share. The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto.
Comparison of the three months ended September 30, 1999 to the three months
ended October 31, 1998
Rental revenue was $2.1 million during the three months ended September 30, 1999
compared to $3.3 million in the three months ended October 31, 1998 resulting in
a decrease of $1.2 million. Of this decrease $0.4 million related to eight
properties leased to Wal-Mart Stores, Inc. ("Wal-Mart"), which were sold in
August 1999. An additional decrease of $0.6 million related to a property which
was leased to AMC Multi- Cinema, Inc. ("AMC") which was contributed in July 1999
to a partnership for an approximate 50% interest in a development project.
Finally, a $0.2 million decrease was related to a shopping mall located in Palm
Springs, California which is beginning redevelopment. In 1999, eleven single
tenant properties owned by the Company accounted for $1.5 million of rental
revenue. Eight of these properties were leased to Wal- Mart and sold in August
1999, two of these properties are leased to Lowe's Home Centers, Inc. ("Lowe's")
and one property in Colorado is leased to AMC. Approximately $0.3 related to the
shopping mall located in Palm Springs, California and the remaining $0.3 million
of rental revenue was primarily attributable to three properties located in
Scottsdale, Arizona.
Operating income totaled $2.2 million in the three months ended September 30,
1999 compared to $4.5 million in the three months ended October 31, 1998. In
1999, $1.6 million related to operations from the Grand Hotel. The remaining
$0.6 million related to income from TenantFirst Real Estate Services and
revenues from various management contracts. In 1998, $3.7 million related to
operations from Millennia, $0.6 million related to operations from the Grand
Hotel, and $0.2 million related to income from TenantFirst Real Estate Services
and revenues from various management contracts. Income from the Grand Hotel
increased as the Hotel was opened in July 1998 and thus had only partial
operations in 1998 due to start-up time. Income related to Millennia was $0 in
the three months ended September 30, 1999 as noted above.
Interest income was $0.9 million in the three months ended September 30, 1999
compared to $1.0 million in the three months ended October 31, 1998. The
decrease primarily relates to an average decrease in cash balances in 1999
compared to 1998.
Partnership income and other revenues was approximately $0.2 million in both the
three months ended September 30, 1999 and October 31, 1998, and primarily
related to the Company's interest in a Nova Scotia unlimited liability company
which owns an office building in Canada.
16
<PAGE> 17
Interest expense was $1.7 million in the three months ended September 30, 1999
and primarily related to the $75.2 million of mortgages and notes payable
outstanding at September 30, 1999 and $23.6 million of mortgage debt that was
repaid in August 1999 related to the sale of certain properties. In the three
months ended October 31, 1998, interest expense was $1.5 million. The increase
in interest expense in 1999 compared to 1998 relates to an overall increase in
mortgages and notes payable outstanding which totaled $87.2 million at October
31, 1998.
Depreciation and amortization expense totaled $0.6 million in the three months
ended September 30, 1999 compared to $1.1 million in the three months ended
October 31, 1998. The decrease of $0.5 million primarily relates to the
depreciation of Millennia real estate assets in 1998 of $0.3 million, and the
sale of eight properties leased to Wal-mart and a building leased to AMC which
was contributed to a partnership which accounted for a decrease in depreciation
of $0.2 million.
Property operating expenses were $0.4 million in the three months ended
September 30, 1999 compared to $1.0 million in the three months ended October
31, 1998. The decrease of $0.6 million relates to certain non-incremental
expenses that were capitalized in 1999 on properties in Scottsdale, Arizona and
Palm Springs, California that the Company intends to redevelop.
Other operating expenses were $1.3 million in the three months ended September
30, 1999 compared to $2.9 million in the three months ended October 31, 1998. In
1999, expenses of $1.3 million related to the Grand Hotel compared to $0.6
million in 1998. Millennia had no operating expenses in the three months ended
September 30, 1999 compared to $2.3 in the three months ended October 31, 1998.
General and administrative expenses were $1.0 million in the three months ended
September 30, 1999 compared to $1.5 million in the three months ended October
31, 1998. The decrease of $0.5 million primarily relates to Millennia which
ceased operations of its car wash properties effective April 1, 1999.
The net gain from real estate sales and write-off of real estate related costs
was $0.5 million. The Company incurred a gain from the sale of the eight
properties leased to Wal-mart of $0.8 million and the sale of a land parcel of
$1.1 million. These gains were offset by a write-off of $0.9 million in campaign
costs for a redevelopment project in Scottsdale, Arizona and a $0.5 million
reserve against an investment in a partnership which owns land in Indianapolis,
Indiana. The campaign costs related to a public election held in Scottsdale,
Arizona, whereby the Company's redevelopment project in Scottsdale would be
allocated a portion of the sales taxes generated by the project upon completion.
When the vote was defeated, the Company wrote-off costs related to the campaign.
The land in Indianapolis owned by a partnership which the Company owns a
minority interest in was to be developed into a theme park. The project is
currently delayed and the Company has reserved $0.5 million against its
investment.
Provision for income taxes was $0.4 million in the three months ended September
30, 1999 compared to $0.3 million in the three months ended October 31, 1998. In
1999, the provision consisted of a deferred tax expense of $1.7 million which
was offset by a current tax benefit of $1.3 million. These amounts primarily
relate to the difference in basis between book and tax costs of the properties
sold during the period. The assets sold accounted for a tax loss of
approximately $2.4 million but a book gain of $1.9 million.
Comparison of the nine months ended September 30, 1999 to the nine months ended
October 31, 1998
Rental revenue was $8.6 million during the nine months ended September 30, 1999
compared to $7.7 million in the nine months ended October 31, 1998 . Increases
of $2.1 million were due to operations from real estate properties which were
not owned by the Company until April 1, 1998 and only reflected seven months of
activity in 1998. This was offset by a decrease of $1.2 million in 1999 from
asset dispositions noted above.
Operating income totaled $9.1 million in the nine months ended September 30,
1999 compared to $6.2 million in the nine months ended October 31, 1998. In
1999, $4.3 million related to operations from Millennia and $4.1 million related
to operations from the Grand Hotel. The remaining $0.7 million related to income
17
<PAGE> 18
from TenantFirst Real Estate Services and revenues from various management
contracts. In 1998, $4.9 million related to operations from Millennia, $0.7
million related to operations from the Grand Hotel, and $0.6 million related to
income from TenantFirst Real Estate Services and revenues from various
management contracts.
Interest income was $2.7 million in the nine months ended September 30, 1999
compared to $3.0 million in the nine months ended October 31, 1998. The decrease
of $0.3 million is primarily related to larger cash balances on hand in 1998
when compared to 1999.
Partnership income and other revenues totaled $0.5 million for the nine months
ended September 30, 1999 and $0.2 million in the nine months ended October 31,
1998. This income is primarily related to the Company's interest in a Nova
Scotia unlimited liability company which owns an office building in Canada.
Interest expense was $5.7 million in the nine months ended September 30, 1999
and primarily related to the $75.2 million of mortgages and notes payable
outstanding at September 30, 1999 and $23.6 million of mortgage debt that was
repaid in August 1999 related to the sale of certain properties. In the nine
months ended October 31, 1998, interest expense was $3.0 million. The increase
in interest expense in 1999 compared to 1998 primarily relates to an increase in
the average balance outstanding during the period which was influenced in part
by 1998 debt which was only outstanding from April 1, 1998.
Depreciation and amortization expense totaled $2.7 million in the nine months
ended September 30, 1999 compared to $2.2 million in the nine months ended
October 31, 1998. The increase of $0.5 million primarily relates to depreciation
of the Company's assets which the Company did not own until April 1, 1998.
Property operating expenses were $1.5 million in the nine months ended September
30, 1999 compared to $1.9 million in the nine months ended October 31, 1998. The
decrease of $0.4 million relates to certain non-incremental expenses that were
capitalized in 1999 on properties in Scottsdale, Arizona and Palm Springs,
California that the Company intends to redevelop. These decreases were offset in
part by expenses in 1998 on properties owned by the Company after March 31,
1998.
Other operating expenses were $5.1 million in the nine months ended September
30, 1999 compared to $3.8 million in the nine months ended October 31, 1998. In
1999, expenses of $3.3 million related to the Grand Hotel compared to $0.7
million in 1998. Millennia had expenses of $1.8 million in the nine months ended
September 30, 1999 compared to $3.1 million in the nine months ended October 31,
1998.
General and administrative expenses were $4.5 million in the nine months ended
September 30, 1999 compared to $2.4 million in the nine months ended October 31,
1998. Of the $2.1 million increase, $0.9 million related to Millennia. The
remaining increase is primarily due to the Company not having any significant
expenses until April 1, 1998.
The net gain from real estate sales and write-off of real estate related costs
of $0.5 million was attributable to the same transactions as discussed above in
the three month comparisons.
Provision for income taxes was $0.8 million in the nine months ended September
30, 1999 compared to $1.5 million in the nine months ended October 31, 1998. In
1999, the provision consisted of a deferred tax expense of $1.8 million which
was offset by a current tax benefit of $1.0 million. These amounts primarily
relate to the difference in basis between book and tax costs of the properties
sold during the period.
The Company calculates Earnings Before Depreciation, Amortization and Deferred
Taxes ("EBDADT") as net income, plus depreciation and amortization on real
estate and real estate related assets, and amortized leasing commission costs.
EBDADT does not represent cash flows from operations as defined by generally
accepted accounting principles, and may not be comparable to other similarly
titled measures of other companies. The Company believes, however, that to
facilitate a clear understanding of its operating results, EBDADT should be
examined in conjunction with its net income as reductions for certain items are
not
18
<PAGE> 19
meaningful in evaluating income-producing real estate. The following information
is included to show the items included in the Company's EBDADT:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ------------------------
SEPT. 30, OCT. 31, SEPT. 30, OCT. 31,
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net income $ 335 $ 585 $ 1,021 $ 2,320
Depreciation and
amortization (financial statements) 636 1,117 2,715 2,174
Less depreciation of non-real estate assets (20) (25) (64) (47)
Deferred tax expense 1,746 146 1,837 355
------- ------- ------- -------
EBDADT $ 2,697 $ 1,823 $ 5,509 $ 4,802
======= ======= ======= =======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
In May 1999, the Company entered into an agreement whereby it agreed to make an
exchange offer at $8.50 per share for any and all Common Shares of Price
Enterprises, Inc., a Maryland corporation which is operated as a real estate
investment trust ("PREN"). On November 4, 1999, the exchange offer was closed
and 12,154,289 shares of PREN common stock were tendered representing
approximately 91% of the outstanding common stock. The exchange offer consisted
of per share consideration for PREN Common Stock of $4.25 in cash, $2.75 in
principal amount of newly issued 9% Convertible Redeemable Subordinated Secured
Debentures of the Company due in 2004 (convertible at any time into the
Company's Common Stock at $5.50 per share) ("Debentures"), and $1.50 in newly
issued 10% Senior Redeemable Secured Notes of the Company due in 2004. In
connection with the exchange offer for PREN common shares, the Company also
borrowed $27,347,000 secured by PREN common shares. The five-year note bears
interest at LIBOR plus 1.5%.
In March 1999, the Company entered into a Real Estate and Asset Purchase
Agreement with American Wash Services, Inc. ("AWS"), pursuant to which the
Company has agreed to sell substantially all of the assets of Millennia, in
exchange for 3,500,000 shares of common stock of the parent of AWS, Mace
Security International, Inc. ("MSI"), a warrant to acquire an additional 62,500
shares of MSI common stock at an exercise price of $4.00 per share, and the
assumption by AWS of certain liabilities of Millennia. Although the transaction
is subject to various conditions, Millennia has assigned the operations of its
assets to AWS effective April 1, 1999. In addition, the Company acquired 250,000
common shares of MSI through a private placement at $2 per share and 250,000
common shares of US Plastic Lumber Corporation at $4 per share.
This transaction was finalized on October 29, 1999.
At September 30, 1999, the total mortgage debt and notes payable of the Company
consisted of the following: (i) $7.4 million in mortgages on two properties
leased to Lowe's which have fixed interest rates of 7.6% and 8.8%. These
mortgages are also self-amortizing over the term of the leases with Lowe's and
will be repaid when the leases expire (2003 and 2014). (ii) A $2.2 million
mortgage secured by an office building in Scottsdale, Arizona, monthly payments
of which are approximately $25,000 with a balloon payment in the year 2006.
(iii) $17.6 million in mortgages on a property leased to AMC. This mortgage
amortizes over a period of twenty years which is equivalent to the term of the
leases. The mortgage has a fixed interest rate of 7.52% and matures in 2018.
The property was sold in October 1999. (iv) $15.1 million in notes related to
Millennia's car wash assets. Of the notes, $14.6 million have fixed interest
rates of 8.5% and are due in fifteen years and $0.4 million have fixed interest
rates of 8.0% and are due in two years. These notes were transferred to AWS in
October 1999. (v) $4.9 million outstanding on a $11.0 million construction loan
related to the construction of an office building. Interest on the construction
loan varies based upon the Eurodollar and was 8.4% at September 30, 1999. (vi)
$0.7 million outstanding related to certain costs on a project in Anaheim. This
note bears interest at 10% and is due January 2000. All of the above mortgage
debt and notes payable are non-recourse to the Company.(vii) $27.3 million
outstanding on the Company's $35.0 million credit facility. The facility bears
interest at LIBOR plus 3.75% (9.1% at
19
<PAGE> 20
September 30, 1999) and expires in June 2000. In October 1999, the Company
borrowed $5.0 million secured by second trust deeds on two of the Company's
investments. The note bears interest at Prime Rate plus 2% and matures in
October 2000.
In October 1999, the Company sold 3,378,117 shares of common stock to a group of
investors. Proceeds of approximately $13,512,000 were used for general corporate
purposes, to fund certain development costs and to repay outstanding amounts on
the Company's credit facility.
At September 30, 1999, the Company had 21,281,000 shares of Series B Preferred
Stock outstanding (the "Preferred B Shares"). Holders of the Preferred B Shares
are entitled to receive, when, as and if declared by the Board of Directors,
cumulative cash dividends payable in an amount per share equal to the cash
dividends, if any, on the shares of common stock into which the Preferred B
Shares are convertible. Holders of the Preferred B Shares are also entitled to a
liquidation preference of $5.00 per share, plus a premium of 7% per annum, in
the event of any liquidation, dissolution or other winding up of the affairs of
the Company.
The Preferred B Shares are convertible into common stock of the Company at the
election of the holders at any time, on a one-for-one basis, subject to
adjustment in certain circumstances. The Preferred B Shares also are convertible
into common stock by the Company at any time and from time to time after the
earlier to occur of (i) the date which is six months following the date on which
the Company's common stock becomes listed or admitted for trading on a national
securities exchange or (ii) March 31, 2000. The Company's common stock became
listed on the American Stock Exchange on November 17, 1998. As a result, the
Preferred B Shares are convertible into common stock at the option of the
Company at any time.
The Preferred B Shares were issued in March 1999 in exchange for all of the
issued and outstanding shares of Series A Preferred Stock of the Company (the
"Preferred A Shares"). Following such exchange, all Preferred A Shares were
retired and restored to the status of authorized and unissued shares of
preferred stock, without designation as to series, and may be reissued as shares
of any series of preferred stock of the Company.
The Company expects to meet its long-term liquidity requirements, such as
property acquisitions and development, mortgage debt maturities, and other
investment opportunities, through the most advantageous sources of capital
available to the Company at the time, which may include operating cash flows,
the sale of common stock, preferred stock or debt securities through public
offerings or private placements, entering into joint venture arrangements with
financial partners, the incurrence of indebtedness through secured or unsecured
borrowings and the reinvestment of proceeds from the disposition of assets.
YEAR 2000
Some of the Company's information technology ("IT") systems were originally
written using two digits rather than four to define the applicable year. As a
result, those IT systems had time sensitive software that recognizes dates using
"00" as the Year 1900 rather than the Year 2000. The Company has upgraded its
existing computer software and IT systems and believes that they are able to
recognize the Year 2000 and that the Year 2000 issue will not have a material
impact on the Company's operations.
The Year 2000 issue affects the Company's internal systems, including IT and
non-IT systems. The Company is reviewing its utility systems (heat, light,
telephones, etc.) and other non-IT systems for the impact of Year 2000. The
Company has solicited assurances from its contractors, vendors and other third
parties that their systems (including building management and mechanical
systems) are currently Year 2000 compliant or will be made compliant before the
advent of the Year 2000. No assurances can be made that all contractors and
other third parties will comply with their assurances. The Company intends to
take continuous steps to identify Year 2000 problems related to its vendors and
to formulate a system of working with key third parties, including financial
institutions and utility providers, to understand their ability to continue
providing services and products through the change to Year 2000. The failure to
correct a material Year 2000 problem either within the Company or within a
vendor or supplier could result in an interruption
20
<PAGE> 21
in, or a failure of, certain normal business activities or operations of the
Company. Such interruptions or failures could materially adversely affect the
Company's business, operating results and financial condition.
The Company's Year 2000 project is substantially completed. As of September 30,
1999, the Company had expended less than $60,000 and does not expect to expend
any significant additional costs in connection with its Year 2000 project,
including the cost of identification, assessment, remediation and testing
efforts. The cost of the Company's Year 2000 project, and the target date on
which the Company expects the Year 2000 modifications to be complete are based
upon a variety of assumptions of future events, including the continued
availability of certain resources. No assurance can be made that these estimates
will be achieved and actual results could materially differ from those
anticipated. Specific factors that might cause material differences include, but
are not limited to, the availability and costs of personnel trained in this
area, the ability to locate and correct relevant computer codes and the timing
and compliance by the Company's outside vendors and suppliers.
A contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. Since the Company has adopted a plan to address these Year 2000
issues, it has not developed a comprehensive contingency plan should Year 2000
issues fail to be addressed successfully or in their entirety. However, if the
Company identifies significant risks or is unable to meet its anticipated time
line, the Company will develop contingency plans as deemed necessary at that
time. This discussion contains forward-looking statements and should be read,
along with all other forward-looking statements herein, in conjunction with the
Company's disclosures under the heading "Certain Cautionary Statements" below.
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, including, but not
limited to, "Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations," contain forward- looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, that are not historical
facts, but rather reflect current expectations concerning future results and
events. The words "believes," "expects," "intends," "plans," "anticipates,"
"likely," "will" and similar expressions identify such forward-looking
statements. These forward-looking statements are subject to risks, uncertainties
and other factors, some of which are beyond the Company's control that could
cause actual results to differ materially from those forecast or anticipated in
such forward-looking statements. These factors include, but are not limited to,
the Company's development activities, reliance on major tenants, competition,
dependence on regional economic conditions, fluctuations in operating results,
integration of acquired businesses, costs of regulatory compliance, dependence
on senior management, and possible stock price volatility. These factors are
discussed in greater detail under the caption "Certain Cautionary Statements" in
the Company's annual Report on Form 10-K, as amended, for the fiscal year ended
July 31, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure affecting its market risk sensitive
financial instruments is interest rate risk. The Company's balance sheet
contains financial instruments in the form of interest-earning notes receivable
and interest-bearing mortgages payable. The Company manages the risk to its cash
flow from changes in interest rates by monitoring its variable rate financial
instruments. Although the fair value of its financial instruments may be
affected by changes in interest rates, the Company typically does not dispose of
them prior to maturity. Thus, the primary effect of changes in interest rates
would occur to the extent that financial instruments mature and are replaced
with others at different interest rates. The table below presents (1) the
scheduled principal payments on notes receivable, and (2) the scheduled
principal repayments on mortgages payable: over the next five years and
thereafter. The table also includes the average interest rates of the financial
instruments during each respective year and the fair value of the notes
receivable and mortgages payable. The Company determines the fair value of
financial instruments through the use of discounted cash flow analysis using
current interest rates for (1) notes receivable with terms and credit
characteristics similar to its existing portfolio and (2) borrowings under terms
similar to its
21
<PAGE> 22
existing mortgages payable. Accordingly, the Company has determined that the
carrying value of its financial instruments at September 30, 1999 approximates
fair value.
Expected Maturity Date
(dollar amounts in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
There- Fair
2000 2001 2002 2003 2004 after Total Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes Receivable, including notes
from affiliates $ 445 -- -- $ 27,133 $ 5,518 $ 1,051 $ 34,147 $ 34,100
Average interest rate 11.00% -- -- 9.99% 11.00% 10.00% 10.03%
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgages and Notes payable $ 35,279 $ 1,493 $ 1,618 $ 1,754 $ 4,957 $ 30,116 $ 75,217 $ 75,200
Average interest rate 8.97% 8.09% 8.09% 8.10% 8.50% 7.84% 8.47%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated August 23, 1999, was filed
with the Commission under Item 2 (including financial
statements), regarding the Company's sale of eight properties
to Wal-Mart Real Estate Business Trust.
A Current Report on Form 8-K dated November 12, 1999, was filed
with the Commission regarding our exchange offer for the Price
Enterprises, Inc. (Enterprises) common stock whereby we
acquired 12,154,289 shares, representing approximately 91.3% of
the outstanding shares of the Enterprises common stock and
approximately 77.5% of the Enterprises voting power.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EXCEL LEGACY CORPORATION
(Registrant)
DATE: November 12, 1999 By: /s/ Gary B. Sabin
------------------------------------
GARY B. SABIN
President and Chief Executive Officer
DATE: November 12, 1999 By: /s/ James Y. Nakagawa
------------------------------------
JAMES Y. NAKAGAWA
Principal Financial Officer
23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 9,562,000
<SECURITIES> 0
<RECEIVABLES> 782,000
<ALLOWANCES> (151,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 140,808,000
<DEPRECIATION> (3,070,000)
<TOTAL-ASSETS> 246,278,000
<CURRENT-LIABILITIES> 0
<BONDS> 75,217,000
0
213,000
<COMMON> 335,000
<OTHER-SE> 167,143,000
<TOTAL-LIABILITY-AND-EQUITY> 246,278,000
<SALES> 0
<TOTAL-REVENUES> 20,859,000
<CGS> 0
<TOTAL-COSTS> 19,496,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 164,000
<INTEREST-EXPENSE> 5,671,000
<INCOME-PRETAX> 1,844,000
<INCOME-TAX> 823,000
<INCOME-CONTINUING> 1,021,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,021,000
<EPS-BASIC> 0.03
<EPS-DILUTED> 0.02
</TABLE>
