<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER: 0-23503
EXCEL LEGACY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0781747
(State of incorporation) (I.R.S. Employer Identification No.)
17140 BERNARDO CENTER DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92128
(Address of principal executive offices) (Zip Code)
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.
<TABLE>
<CAPTION>
Class Outstanding at November 8, 2000
----------------------------------- ---------------------------------------
<S> <C>
Common Stock, $.01 par value 40,401,486
</TABLE>
<PAGE>
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, 2000
December 31, 1999 ................................................................................ 3
Consolidated Statements of Income:
Three Months Ended September 30, 2000
Three Months Ended September 30, 1999
Nine Months Ended September 30, 2000
Nine Months Ended September 30, 1999.............................................................. 4
Consolidated Statements of Changes in Stockholders' Equity:
Nine Months Ended September 30, 2000
Nine Months Ended September 30, 1999.............................................................. 5
Consolidated Statements of Cash Flows:
Nine Months Ended September 30, 2000
Nine Months Ended September 30, 1999.............................................................. 6
Notes to Consolidated Financial Statements........................................................... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................................................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..................................................................23
</TABLE>
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
<S> <C> <C>
Real estate:
Land $ 22,919 $ 27,099
Buildings 30,412 47,664
Construction in progress 27,058 27,380
Leasehold interest 2,351 2,351
Accumulated depreciation (1,958) (2,303)
--------------- --------------
Net real estate 80,782 102,191
Cash 505 1,767
Accounts receivable, less allowance for bad debts of $37
and $55 in 2000 and 1999, respectively 626 739
Notes receivable 36,392 28,380
Investment in securities 136,772 136,570
Investment in partnerships 21,403 18,341
Interest receivable 11,670 8,929
Pre-development costs 11,003 16,783
Other assets 7,282 7,938
Deferred tax asset 4,888 6,515
--------------- --------------
$ 311,323 $ 328,153
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 39,175 $ 70,661
Convertible debentures 33,231 33,243
Senior notes 18,067 18,067
Mortgages payable 8,220 15,835
Accounts payable and accrued liabilities 9,240 9,188
Other liabilities 1,516 151
--------------- --------------
Total Liabilities 109,449 147,145
--------------- --------------
Commitments and contingencies - -
Minority interests 1,103 969
--------------- --------------
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, 41,963,435
and 36,835,921 shares issued and outstanding in 2000 and 1999,
respectively 420 368
Additional paid-in capital 205,794 187,699
Accumulated other comprehensive (loss) income, net of tax (109) 922
Retained earnings 4,212 1,679
Notes receivable from affiliates for common shares (9,759) (10,842)
--------------- --------------
Total stockholders' equity 200,771 180,039
--------------- --------------
$ 311,323 $ 328,153
=============== ==============
</TABLE>
The accompanying notes are an integral part
of the financial statements
3
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------
2000 1999 2000 1999
--------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues
Operating income $ 3,025 $ 2,208 $ 6,280 $ 9,106
Partnership and other income 1,234 207 2,936 508
Interest income 1,063 870 2,873 2,664
Rental income 574 2,141 2,735 8,581
--------------- -------------- -------------- -------------
Total revenue 5,896 5,426 14,824 20,859
--------------- -------------- -------------- -------------
Operating expenses:
Interest 2,435 1,717 8,768 5,671
Other operating expenses 1,814 1,330 4,252 5,146
Property operating expenses 775 432 2,010 1,492
General and administrative 592 1,047 2,424 4,472
Depreciation and amortization 362 636 1,219 2,715
--------------- -------------- -------------- -------------
Total operating expenses 5,978 5,162 18,673 19,496
--------------- -------------- -------------- -------------
Net operating (loss) income (82) 264 (3,849) 1,363
Net gain from real estate sales and write-off of real
estate related costs 5,495 481 8,358 481
--------------- -------------- -------------- -------------
Income before income taxes 5,413 745 4,509 1,844
Provision for income taxes 2,263 410 1,976 823
--------------- -------------- -------------- -------------
Net income $ 3,150 $ 335 $ 2,533 $ 1,021
=============== ============== ============== =============
Basic net income per common share $ 0.08 $ 0.01 $ 0.06 $ 0.03
=============== ============== ============== =============
Diluted net income per common share $ 0.05 $ 0.01 $ 0.04 $ 0.02
=============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part
of the financial statements
4
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
----------
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED
----------------------------- ----------------------------- PAID IN COMPREHENSIVE
NUMBER AMOUNT NUMBER AMOUNT CAPITAL INCOME
-------------- ------------- -------------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
SEPTEMBER 30 2000:
Balance at January 1, 2000 21,281,000 $ 213 36,835,921 $ 368 $ 187,699 $ 922
Conversion of notes payable to common stock
- - 5,102,181 51 18,012 -
Issuance of common shares - - 25,333 1 83 -
Repayment of Notes to affiliates - - - - - -
Comprehensive income;
Net loss - - - - - -
Unrealized loss on marketable
securities, net of tax
Three months ended
March 31, 2000 - - - - - 391
June 30, 2000 - - - - - (1,211)
September 30, 2000 - - - - - (211)
Total comprehensive loss
-------------- ------------- -------------- ------------- -------------- ----------
Balance at September 30, 2000 21,281,000 $ 213 41,963,435 $ 420 $ 205,794 $ (109)
============== ============= ============== ============= ============== ==========
SEPTEMBER 30, 1999:
Balance at January 1, 1999: 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ -
Repayment of notes - - - - - -
Net income - - - - - -
-------------- ------------- -------------- ------------- -------------- ----------
Balance at September 30, 1999 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ -
============== ============= ============== ============= ============== ==========
</TABLE>
<TABLE>
<CAPTION>
TOTAL TOTAL
RETAINED NOTES STOCKHOLDERS
EARNINGS RECEIVABLE EQUITY
------------- -------------- --------------
<S> <C> <C> <C>
SEPTEMBER 30 2000:
Balance at January 1, 2000 $1,679 $ (10,842) $ 180,039
Conversion of notes payable to common stock - - 18,063
Issuance of common shares - - 84
Repayment of Notes to affiliates - 1,083 1,083
Comprehensive income;
Net loss 2,533 - 2,533
Unrealized loss on marketable
securities, net of tax
Three months ended
March 31, 2000 - - 391
June 30, 2000 - - (1,211)
September 30, 2000 - - (211)
--------------
Total comprehensive loss (1,031)
------------- -------------- --------------
Balance at September 30, 2000 $ 4,212 $ (9,759) $ 200,771
============= ============== ==============
SEPTEMBER 30, 1999:
Balance at January 1, 1999: $ 2,456 $ (10,872) $ 166,640
Repayment of notes - 30 30
Net income 1,021 - 1,021
------------- -------------- --------------
Balance at September 30, 1999 $ 3,477 $ (10,842) $ 167,691
============= ============== ==============
</TABLE>
The accompanying notes are an integral part
of the financial statements
5
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,533 $ 1,021
Adjustments to reconcile net income to net cash provided by operations:
Gain from real estate sales net of write-off of real estate
related costs (8,358) (481)
Depreciation and amortization 1,219 2,715
Earnings from equity investments 1,232 150
Minority interests in income of partnerships 133 4
Change in accounts receivable and other assets 3,614 (4,650)
Change in accounts payable and other liabilities 2,645 1,533
---------------- -----------------
Net cash provided by operating activities 3,018 292
---------------- -----------------
Cash flows from investing activities:
Proceeds from real estate sales 44,019 37,858
Real estate acquired and construction costs paid (21,669) (6,383)
Pre-development costs paid (2,679) (14,020)
Investment in partnerships (3,062) (8,504)
Notes receivable issued (7,403) -
---------------- -----------------
Net cash used in investing activities 9,206 8,951
---------------- -----------------
Cash flows from financing activities:
Principal payments of notes and mortgages (40,569) (24,644)
Borrowings from issuance of notes payable 27,083 23,576
---------------- -----------------
Net cash used by financing activities (13,486) (1,068)
---------------- -----------------
Net (decrease) increase in cash (1,262) 8,175
Cash at the beginning of the periods 1,767 1,387
---------------- -----------------
Cash at the end of the periods $ 505 $ 9,562
================ =================
</TABLE>
The accompanying notes are an integral part
of the financial statements
6
<PAGE>
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 December
31, 1999 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 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"). 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.
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. The Company accounts for its interest in Price Enterprises, Inc.
("PEI") (Note 2) under the equity method of accounting however, because the
holders of PEI preferred stock have the right to elect a majority of the
PEI board of directors.
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.
7
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
MANAGEMENT CONTRACTS
Management contracts are recorded at cost and amortized over a period of
seven years.
INCOME TAXES
The Company provides for income taxes under the liability method. A current
tax asset or liability is recognized for the estimated taxes refundable or
payable for the current year. A deferred tax asset or liability is
recognized for the estimated future tax effects attributable to carry
forwards and to temporary differences between the tax and financial
reporting basis of assets and liabilities. The measurement of current and
deferred tax assets and liabilities is based on enacted tax laws and rates.
The measurement of deferred tax assets is reduced, if necessary, by the
amount of any tax benefits that, based on available evidence, are not
expected to be realized.
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 and effective interest 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 contingent rental revenue based upon the
level of sales achieved by the lessee. Contingent rental revenue is
recognized when earned.
COMPREHENSIVE INCOME
In 1999, the Company adopted Statement of Financial Accounting Standard
("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. The components of
comprehensive income for the Company include net income and unrealized
gains on investments.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the consolidated financial
statements at December 31, 1999 and for the periods ended September 30,
1999 to conform with the current period's presentation.
8
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
2. 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 ("PEI").
The exchange offer consisted of per share consideration for PEI 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) and $1.50 in newly issued 10% Senior Redeemable Secured Notes of
the Company due in 2004. Approximately, 12,154,000 shares of PEI common
stock were tendered representing approximately 91% of the outstanding
common stock. Below is summarized financial information as of September 30,
2000 and the periods then ended for PEI (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
BALANCE SHEET SEPTEMBER 30, INCOME STATEMENT: SEPTEMBER 30, SEPTEMBER 30,
2000 2000 2000
----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Real estate, net of accumulated
depreciation $ 559,528 Total revenue $ 18,767 $ 54,488
Other assets 75,967 Operating expenses (4,356) (11,810)
-----------------
Total assets $ 635,495 General and administrative (769) (2,281)
=================
Notes and mortgages payable $ 167,223 Interest expense (2,890) (7,199)
Accounts payable and other 4,805 Depreciation and (2,365) (7,152)
liabilities amortization
-----------------
172,028 Gain on sales of real 249 249
estate
--------------- ----------------
83/4% Series A Preferred stock 353,404 Net income 8,636 26,295
Other stockholders' equity 110,063 Preferred dividends (8,354) (25,005)
----------------- --------------- ----------------
Total liabilities Net income available
and stockholders' equity $ 635,495 for common shares $ 282 $ 1,290
================= =============== ================
</TABLE>
The following unaudited pro forma information for the periods ended
September 30, 1999 have been presented as if the Company acquired
approximately 91% of the common shares of PEI on January 1, 1999. The
unaudited pro forma information makes certain assumptions regarding capital
sources and interest rates and the pro forma information is not necessarily
indicative of what the actual results of operations of the Company would
have been had the acquisition actually occurred on January 1, 1999 (in
thousands).
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
--------------------- --------------------
(PRO FORMA)
<S> <C> <C>
Total revenue $ 5,078 $ 25,364
Operating expenses, excluding interest (3,195) (13,075)
Interest expense (3,854) (10,694)
Net gain on real estate sales 481 481
Income taxes 484 (916)
--------------------- --------------------
Net (loss) income $ (1,006) $ 1,160
===================== ====================
Net income per share
Basic $ (0.02) $ 0.03
===================== ====================
Diluted $ (0.02) $ 0.02
===================== ====================
</TABLE>
9
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
3. MILLENNIA:
The Company has an investment in a joint venture known as Millennia Car
Wash, LLC ("Millennia") which owns 3.75 million shares of common stock and
62,500 common stock purchase warrants of Mace Security International
("MACE") and 250,000 common shares of US Plastic Lumber Corporation
("USPL"). The Company's common shares in MACE and USPL are subject to
certain sale restrictions. One of the Company's senior officers holds a
board seat on MACE.
The Company accounts for Millennia's investment in MACE on the equity
method of accounting. The Company classifies its investment in USPL as
available-for-sale and recognizes changes in the fair value of its
investments in USPL in other comprehensive income.
<TABLE>
<CAPTION>
INVESTMENT IN USPL (IN THOUSANDS): SEPTEMBER 30, 2000 DECEMBER 31, 1999
--------------------- --------------------
<S> <C> <C>
Cost $ 1,000 $ 1,000
Unrealized (loss) gain (109) 922
--------------------- --------------------
Fair value $ 891 $ 1,922
===================== ====================
</TABLE>
4. REAL ESTATE:
In July 2000, the Company sold a property for approximately $28.2 million.
In May 2000, the Company sold land for net proceeds of approximately $5.8
million. In February 2000, the Company sold three properties to PEI for
approximately $24.4 million. Mortgage debt of approximately $14.3 million
was transferred as part the sales. The Company entered into an agreement to
lease one of these properties back from PEI. The sales of the above
properties resulted in a net gain of $9.1 million. The gain was partially
offset by certain real estate under contract for sale which were written
down by $0.7 million to their estimated sales price.
In the nine months ended September 30, 1999, the Company sold eight
properties leased to Wal-mart and a land parcel for a net book gain of $1.9
million. Mortgage debt of $23.6 million was retired in conjunction with
these sales. The Company also wrote-off $1.4 million in costs related to
two development projects.
5. NOTES RECEIVABLE:
The Company had $36.4 million in notes receivable outstanding at September
30, 2000 related to various development projects. The notes bear interest
at 11% to 12% per annum and are secured by the related projects. The notes
mature on various dates between 2000 and the earlier of the sale of the
related projects, or 2003 to 2004.
10
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
6. NOTES AND MORTGAGES PAYABLE:
NOTES PAYABLE
The Company had the following notes payable outstanding at September 30,
2000 and December 31, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------------- ----------------
(IN THOUSANDS)
<S> <C> <C>
Revolving $15.0 million unsecured credit facility bearing
interest at Libor plus 3.75% (10.6% at September 30, 2000)
due June 30, 2001. $ 4,700 $ -
Revolving $40.0 million line of credit facility with PEI
bearing interest at Libor plus 3.75% (10.6% at September 30,
2000) to 12.50% due December 2002. 16,500 -
Note payable to The Sol and Helen Price Trust bearing
interest at Libor plus 1.50% (8.0% at September 30, 2000) due
November 2004. The note is secured by some of the Company's
PEI common shares 9,347 27,347
Note payable to an individual bearing interest at Prime plus
2% (11.5% at September 30, 2000) repaid in October 2000. 5,000 5,000
Note payable outstanding on a $4.7 million facility related to
Newport on the Levee, LLC, bearing interest at Prime plus
0.5% (10.0% at September 30, 2000), due March 2001. 2,098 -
Revolving $35.0 million secured credit facility bearing
interest at Libor plus 3.75% repaid in July 2000. - 32,103
Other 1,530 6,211
---------------- ----------------
Total $ 39,175 $ 70,661
================ ================
</TABLE>
The Company has a 65% interest in Newport on the Levee, LLC ("Newport")
that is developing an entertainment retail project in Newport, KY. In
addition to the $2.1 million note in the above table, the City of Newport
has issued two series of public improvement bonds. The Series 2000a tax
exempt bonds total $44.2 million and are broken down as follows: (i) $18.7
million maturing 2027 with interest at 8.375%; (ii) $20.5 million maturing
2018 with interest at 8.5%; and (iii) $5.0 million maturing 2027 with
interest at 8.375%. The Series 2000b bonds are taxable and have a par
amount of $11.6 million with interest at 11% due 2009. The bonds are
guaranteed by Newport, the Company, and the third party developers of the
project. Newport has drawn on $29.2 million of the bonds at September 30,
2000 from the trustee for construction incurred to date.
The Company also has a 50% interest in a limited liability company that
owns land in Orlando, Florida. The land has a total book basis of $18.5
million at September 30, 2000 and mortgage debt of $8.9 million which is
guaranteed by the Company. The Company also has approximately $21.0 million
of guaranteed debt related to other development projects.
11
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
6. NOTES AND MORTGAGES PAYABLE, CONTINUED:
CONVERTIBLE DEBENTURES
In conjunction with the PEI exchange offer, the Company issued $33.2
million in convertible debentures ("Debentures"). The Debentures bear an
interest rate of 9% per annum and are secured by a first priority security
interest in common shares of PEI. The holders of the Debentures are
entitled at any time before the day prior to the final maturity date,
subject to prior redemption, to convert any Debentures into the Company's
common stock at the conversion price of $5.50 per share. The Debentures
mature in November 2004.
SENIOR NOTES
In conjunction with the PEI exchange offer, the Company issued $18.1
million in senior notes ("Senior Notes"). The Senior Notes bear an interest
rate of 10% per annum and, along with the Debentures, are secured by a
first priority security interest in common shares of PEI. The Senior Notes
rank equal to future senior indebtedness of the Company and senior to the
Debentures. The Senior Notes mature in November 2004.
MORTGAGE PAYABLE
The Company had $8.2 million in mortgage payables outstanding at September
30, 2000 secured by real estate. Of this amount, $2.0 million was
transferred as part of a sale of an office building to PEI in October 2000.
The remaining $6.2 million relates to land acquired in Anaheim, CA. This
note bears interest at 6.0% per annum and is due in September 2002.
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>
2000 (remaining three months) $ 5,792
2001 7,698
2002 22,864
2003 176
2004 60,835
Thereafter 1,328
------------------
$ 98,693
==================
</TABLE>
7. INCOME TAXES:
At September 30, 2000, the Company had a net deferred tax asset of $4.9
million. The deferred tax asset primarily relates to certain assets
written-off for book purposes, but not yet deducted for tax purposes. The
remaining 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 consisted of the following (in
thousands):
12
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
7. INCOME TAXES, CONTINUED:
<TABLE>
<CAPTION>
FEDERAL STATE
--------------------- --------------------
<S> <C> <C>
NINE MONTHS ENDED SEPTEMBER 30, 2000:
Current payable $ 114 $ 236
Deferred tax benefit 1,016 610
--------------------- --------------------
Benefit (provision) for income taxes $ 1,130 $ 846
===================== ====================
NINE MONTHS ENDED SEPTEMBER 30, 1999
Current benefit $ (835) $ (179)
Deferred tax expense 1,483 354
--------------------- --------------------
Provision for income taxes $ 648 $ 175
===================== ====================
</TABLE>
8. CAPITAL STOCK:
In March 2000, $18.0 million of notes payable were converted into 5.1
million shares of the Company's common stock.
9. 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
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
BASIC EPS
Numerator:
Net income $ 3,150 $ 335 $ 2,533 $ 1,021
=============== =============== =============== ===============
Denominator:
Weighted average of common shares
outstanding 41,981 33,458 40,267 33,458
=============== =============== =============== ===============
Earnings Per Share: $ 0.08 $ 0.01 $ 0.06 $ 0.03
=============== =============== =============== ===============
</TABLE>
13
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
9. EARNINGS PER SHARE (EPS), CONTINUED:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
DILUTED EPS
Numerator:
Net income $ 3,150 $ 335 $ 2,533 $ 1,021
=============== =============== =============== ===============
Denominator:
Weighted average of common shares
outstanding 41,981 33,458 40,267 33,458
Effect of diluted securities:
Preferred B shares 21,281 21,281 21,281 21,281
Options - 48 - 47
=============== =============== =============== ===============
63,262 54,787 61,548 54,786
=============== =============== =============== ===============
Earnings Per Share: $ 0.05 $ 0.01 $ 0.04 $ 0.02
=============== =============== =============== ===============
</TABLE>
10. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amounts paid for interest during the nine months ended September 30,
2000 and September 30, 1999 were $8.6 million and $4.7 million,
respectively. The amounts paid for income taxes in the nine months ended
September 30, 2000 and September 30, 1999 were $0.2 million and $0.6
million, respectively.
In 2000, the Company converted $18.1 million of notes payable into 5.1
million common shares. Also in 2000, $13.7 million in mortgage debt was
transferred to PEI in conjunction with asset sales to PEI; and Newport
assumed $2.1 million in debt in conjunction with real estate construction
and acquisitions. In January 2000, the notes receivable from certain
officers were decreased by $1.1 million for salary and bonuses not paid in
cash. This amount was included as a general and administrative expense in
1999. In the nine months ended September 30, 1999, $3.8 million of debt was
assumed related to the construction of an office building.
11. SEGMENT REPORTING:
The Company's primary business segments consist of the Commercial Property
Unit, the Development Unit, and the Investment Unit. The Commercial
Property Unit manages Company held operating properties and includes its
investment in PEI. The Development Unit develops real estate projects and
the Business Unit pursues and invests in public and private real
estate-related companies and/or their securities. Certain revenues and
expenses such as general and administrative not specifically incurred by
specific segments, and corporate income taxes have been grouped with
"General and Administrative" for presentation purposes.
14
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
11. SEGMENT REPORTING, CONTINUED:
<TABLE>
<CAPTION>
COMMERCIAL DEVELOPMENT INVESTMENT GENERAL AND
PROPERTY UNIT UNIT UNIT ADMINISTRATIVE TOTAL
---------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
THREE MONTHS ENDED SEPT. 30, 2000:
Total revenues $ 703 $ 1,331 $ 3,603 $ 259 $ 5,896
---------------- --------------- --------------- --------------- ---------------
Interest 41 2,394 2,435
- -
Depreciation and amortization 38 75 118 131 362
General and administrative - - - 592 592
Operating expenses 398 203 1,988 - 2,589
---------------- --------------- --------------- --------------- ---------------
Total operating expenses 477 278 2,106 3,117 5,978
---------------- --------------- --------------- --------------- ---------------
Net operating income (loss) 226 1,053 1,497 (2,858) (82)
Real estate sales - 5,495 - - 5,495
Provision for income taxes - - - (2,263) (2,263)
---------------- --------------- --------------- --------------- ---------------
Net income $ 226 $ 6,548 $ 1,497 $ (5,121) $ 3,150
================ =============== =============== =============== ===============
Total assets $ 122,841 $ 125,891 $ 52,355 $ 10,236 $ 311,323
================ =============== =============== =============== ===============
THREE MONTHS ENDED SEPT. 30, 1999:
Total revenues $ 1,876 $ 1,040 $ 2,173 $ 337 $ 5,426
---------------- --------------- --------------- --------------- ---------------
Interest 687 - - 1,030 1,717
Depreciation and amortization 257 143 218 18 636
General and administrative - - 37 1,010 1,047
Operating expenses 132 170 1,460 - 1,762
---------------- --------------- --------------- --------------- ---------------
Total operating expenses 1,076 313 1,715 2,058 5,162
---------------- --------------- --------------- --------------- ---------------
Net operating income 800 727 458 (1,721) 264
Real estate sales 813 (332) - - 481
Provision for income taxes - - - (410) (410)
---------------- --------------- --------------- --------------- ---------------
Net income $ 1,613 $ 395 $ 458 $ (2,131) $ 335
================ =============== =============== =============== ===============
Total assets $ 62,302 $ 118,129 $ 59,275 $ 6,572 $ 246,278
================ =============== =============== =============== ===============
NINE MONTHS ENDED SEPT. 30, 2000:
Total revenues $ 2,426 $ 4,473 $ 7,210 $ 715 $ 14,824
---------------- --------------- --------------- --------------- ---------------
Interest 285 - 64 8,419 8,768
Depreciation and amortization 137 360 565 157 1,219
General and administrative - - 42 2,382 2,424
Operating expenses 1,077 713 4,472 - 6,262
---------------- --------------- --------------- --------------- ---------------
Total operating expenses 1,499 1,073 5,143 10,958 18,673
---------------- --------------- --------------- --------------- ---------------
Net operating income 927 3,400 2,067 (10,243) (3,849)
Real estate sales - 5,495 - 2,863 8,358
Provision for income taxes - - - (1,976) (1,976)
---------------- --------------- --------------- --------------- ---------------
Net income $ 927 $ 8,895 $ 2,067 $ (9,356) $ 2,533
================ =============== =============== =============== ===============
NINE MONTHS ENDED SEPT. 30, 1999:
Total revenues $ 7,494 $ 3,226 $ 8,994 $ 1,145 $ 20,859
---------------- --------------- --------------- --------------- ---------------
Interest 3,398 - 419 1,854 5,671
Depreciation and amortization 1,210 428 1,028 49 2,715
General and administrative - - 1,808 2,664 4,472
Operating expenses 317 783 5,538 - 6,638
---------------- --------------- --------------- --------------- ---------------
Total operating expenses 4,925 1,211 8,793 4,567 19,496
---------------- --------------- --------------- --------------- ---------------
Net operating income 2,569 2,015 201 (3,422) 1,363
Real estate sales 813 (332) - - 481
Provision for income taxes - - - (823) (823)
---------------- --------------- --------------- --------------- ---------------
Net income $ 3,382 $ 1,683 $ 201 $ (4,245) $ 1,021
================ =============== =============== =============== ===============
</TABLE>
15
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
12. RELATED PARTY TRANSACTIONS:
In connection with the sale of common stock to certain affiliates in 1998,
the Company issued notes receivable of which $9.8 million was outstanding
at September 30, 2000. The notes bear interest at a fixed rate of 7%, and
are due in March 2003. The total interest receivable at September 30, 2000
from these notes totaled $1.6 million. The notes have been offset against
stockholders' equity on the Company's accompanying Consolidated Balance
Sheets.
In September 2000, the Company entered into agreements with certain
officers to assume $5.1 million in personal debt obligations of the
officers in exchange for their rights in 2.05 million shares of Company
common stock. The effective price of the transaction was $2.50 per share,
tied to the market price on the day of the transaction. The officer debts
were entered into in connection with their original share purchase. By
assuming these third-party debts, the Company also obtained a first lien on
all remaining shares currently held by the officers, which will serve as
security for the officers' notes to the Company. The Company paid $3.9
million of the above personal debt in October 2000, upon which the Company
recorded 1.56 million shares as repurchased.
In 2000, three properties and a joint venture interest were sold to PEI.
The Company leases back one of the properties for a quarterly amount of
$0.1 million. Also, at September 30, 2000, the Company had $16.5 million
payable to PEI on a $40.0 million note. In October 2000, an additional
property was sold to PEI for $9.6 million. Finally, the Company offsets the
general and administrative costs with reimbursements received monthly from
PEI. In the nine months ended September 30, 2000, approximately $2.2
million was received as reimbursements.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
NATURE OF BUSINESS
The Company acquires, sells, develops, manages, invests, finances and operates
real property and related businesses. The Company performs within three business
units: 1) a commercial property unit which manages Company held properties. In
this unit the company has Price Enterprises, Inc., a REIT, 2) a business
investment unit where the Company pursues public and private operating real
estate-related companies and/or their securities, and 3) a development unit
where the Company develops signature projects that have unique locations,
original concepts and significant competitive entry barriers.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto.
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1999
OPERATING INCOME totaled $3.0 million in the three months ended September 30,
2000 compared to $2.2 million in the three months ended September 30, 1999
resulting in an increase of $0.8 million. The increase primarily relates to
operations from The Grand Hotel.
PARTNERSHIP INCOME AND OTHER REVENUES were approximately $1.2 million in the
three months ended September 30, 2000 compared to $0.2 million in the three
months ended September 30, 1999. In 2000, the Company recognized $1.0 million
from a joint venture, which owns land in Orlando, Florida. The gain was
primarily related to 235 acres of land sold in September 2000. In the three
months ended September 30, 2000, the Company also recognized $0.2 million in
income from its equity investment in PEI, which was consummated in November
1999. In 1999, the Company's partnership and other revenue was primarily derived
from its equity investment in a joint venture owning property in Westminster, CO
which was transferred to PEI in 2000.
INTEREST INCOME was $1.0 million in the three months ended September 30, 2000
and $0.9 million in the three months ended September 30, 1999. Interest income
is primarily generated from notes receivable and cash balances. The increase of
$0.1 million was primarily related to additional notes receivable advances in
2000.
RENTAL REVENUE was $0.6 million during the three months ended September 30, 2000
compared to $2.1 million in the three months ended September 30, 1999 resulting
in a decrease of $1.5 million. The sales of twelve properties accounted for a
decrease of $1.5 million. Eight of these properties were leased to Wal-Mart
Stores, Inc. ("Wal-Mart"), two of the properties were leased to Lowe's Home
Centers, Inc. and two were leased to AMC Multi-Cinema. In addition, $0.1 million
of decreased rental revenue related to properties that are planned for sale.
This decrease was offset by $0.1 million related to rental revenue of land from
the Company's project in Newport, KY which did not generate any such income in
1999.
INTEREST EXPENSE was $2.4 million in the three months ended September 30, 2000
compared to $1.7 million in the three months ended September 30, 1999. Debt
assumed in conjunction with the acquisition of PEI in November 1999 accounted
for approximately $1.4 million of interest expense in the three months ended
September 30, 2000. A decrease of $0.7 million relates to mortgage debt on
properties that were sold in 1999 and 2000.
OTHER OPERATING EXPENSES were $1.8 million in the three months ended September
30, 2000 compared to $1.3 million in the three months ended September 30, 1999,
resulting in an increase of $0.5 million. The expenses in both periods primarily
related to the Grand Hotel. In addition to the Grand Hotel, $0.4 million in 2000
related to the Company's project in Daniel's Head, Bermuda that is now partially
operating.
PROPERTY OPERATING EXPENSES were $0.8 million in the three months ended
September 30, 2000 compared to $0.4 million in the three months ended September
30, 1999. Two properties located in Scottsdale, AZ and Palm Springs,
17
<PAGE>
CA accounted for $0.2 million of the increase, primarily related to improving
the properties for sale. The remaining $0.2 million primarily relates to an
office building located in San Diego that the Company master leases from PEI.
GENERAL AND ADMINISTRATIVE EXPENSES were $0.6 million in the three months ended
September 30, 2000 compared to $1.0 million in the three months ended September
30, 1999. The decrease primarily relates to reimbursements from PEI in 2000.
DEPRECIATION AND AMORTIZATION EXPENSE totaled $0.4 million in the three months
ended September 30, 2000 compared to $0.6 million in the three months ended
September 30, 1999. The decrease of $0.2 million primarily relates to properties
sold.
THE NET GAIN FROM REAL ESTATE SALES AND WRITE-OFF OF REAL ESTATE RELATED COSTS
was $5.5 million in the three months ended September 30, 2000 and primarily
related to a $6.2 million gain from the sale of the Galleria in Scottsdale, AZ.
The gain was offset by reserves of $0.7 million to the estimated prices for
properties put under contract for sale in the quarter. In the three months ended
September 30, 1999, the net gain 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
$1.4 million of costs related to development projects in Scottsdale, Arizona and
Indianapolis, Indiana.
The Company recognized a PROVISION FOR INCOME TAXES of $2.3 million in the three
months ended September 30, 2000 compared to $0.4 million in the three months
ended September 30, 1999 related to income before taxes of $5.4 million and $0.7
million, respectively.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999
OPERATING INCOME totaled $6.3 million in the nine months ended September 30,
2000 compared to $9.1 million in the nine months ended September 30, 1999
resulting in a decrease of $2.8 million. In 1999, Millennia, a subsidiary of the
Company, owned car wash properties that generated $4.3 million of operating
income. On March 31, 1999, these properties were sold for common shares in a
publicly traded company, Mace Security International, Inc. This decrease was
offset by a) The Grand Hotel, which was not opened until the second half of
1998, generated $0.9 million of additional operating income in 2000 when
compared to 1999. b) the Company's project in Daniel's Head, Bermuda which
partially opened in the period, contributed $0.1 million, c) the Company's
project in Newport, KY contributed $0.3 million and d) other Company investments
contributed $0.2 million.
PARTNERSHIP INCOME AND OTHER REVENUES were approximately $2.9 million in the
nine months ended September 30, 2000 compared to $0.5 million in the nine months
ended September 30, 1999. In 2000, the Company recognized $1.0 million from a
joint venture that owns land in Orlando, Florida. In 2000, the Company
recognized $1.1 million in income from its equity investment in PEI .
Additionally, the Company recognized $0.3 million related to a forfeited deposit
on a property sale and $0.5 million from its investments in joint ventures.
INTEREST INCOME was $2.9 million in the nine months ended September 30, 2000
compared to $2.7 million in the nine months ended September 30, 1999 and
primarily related to higher average note receivable balances in 2000.
RENTAL REVENUE was $2.7 million during the nine months ended September 30, 2000
compared to $8.6 million in the nine months ended September 30, 1999 resulting
in a decrease of $5.9 million. The sale of twelve properties accounted for a
decrease of $6.6 million. Offsetting this decrease was the Company's project in
Newport, KY which accounted for $0.7 million in 2000 related to a land lease
that did not generate any revenues in 1999.
INTEREST EXPENSE was $8.8 million in the nine months ended September 30, 2000
compared to $5.7 million in the nine months ended September 30, 1999 resulting
in an increase of $3.1 million. Debt assumed in conjunction with the acquisition
of PEI in November 1999 accounted for $4.5 million of interest expense in the
nine months ended September 30, 2000. An increase of $1.8 million relates to
additional amounts borrowed on the Company's credit facilities and short-term
notes, primarily to fund its development projects. A decrease of $3.2 million
relates to mortgage debt on properties that were sold in 1999 and 2000.
18
<PAGE>
OTHER OPERATING EXPENSES were $4.3 million in the nine months ended September
30, 2000 compared to $5.1 million in the nine months ended September 30, 1999,
resulting in a decrease of $0.8 million. In 1999, expenses of $1.8 million
related to Millennia compared to $0 in 2000. The remaining net increase of $1.0
million primarily related to the Grand Hotel and operational costs of the
Company's project in Bermuda that partially opened in the third quarter of 2000.
PROPERTY OPERATING EXPENSES were $2.0 million in the nine months ended September
30, 2000 compared to $1.5 million in the nine months ended September 30, 1999. A
property located in Scottsdale, AZ accounted for $0.2 million of the increase,
primarily related to improving the property for sale. The remaining $0.3 million
primarily relates to an office building located in San Diego that the Company
master leases from PEI.
GENERAL AND ADMINISTRATIVE EXPENSES were $2.4 million in the nine months ended
September 30, 2000 compared to $4.5 million in the nine months ended September
30, 1999. The primary reason for the decrease was a result of expenses incurred
by Millennia in 1999.
DEPRECIATION AND AMORTIZATION EXPENSE totaled $1.2 million in the nine months
ended September 30, 2000 compared to $2.7 million in the nine months ended
September 30, 1999. The decrease of $1.5 million primarily relates to properties
sold and the depreciation of Millennia assets in 1999 of $0.3 million.
THE NET GAIN FROM REAL ESTATE SALES AND WRITE-OFF OF REAL ESTATE RELATED COSTS
was $8.4 million in 2000 compared to $0.5 million in 1999. This gain in 2000
related to the Galleria in Scottsdale, AZ , two properties sold to PEI and land
sold. An additional building was sold to PEI in 2000 of which there was no gain
recorded as the Company is leasing back the building. In 1999, the net gain was
$0.5 million. The Company recognized 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 $1.4 million of costs
related to development projects in Scottsdale, Arizona and Indianapolis,
Indiana.
The Company recognized a PROVISION FOR INCOME TAXES of $2.0 million in the nine
months ended September 30, 2000 compared to $0.8 million in the nine months
ended September 30, 1999 related to income before taxes of $4.5 million and $1.4
million, respectively
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 deferred income taxes. 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
meaningful in evaluating income-producing real estate. The following information
is included to show the items included in the Company's EBDADT for the periods
ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 3,150 $ 335 $ 2,533 $ 1,021
Depreciation and amortization (financial statements) 362 636 1,219 2,715
Proportionate share of depreciation and amortization from
equity investments:
PEI 2,118 - 6,489 -
Other 95 - 440 -
Less depreciation of non-real estate assets (53) (20) (156) (64)
Deferred tax expense 1,948 1,746 1,626 1,837
--------------- --------------- --------------- ---------------
EBDADT $ 7,620 $ 2,697 $ 12,151 $ 5,509
=============== =============== =============== ===============
</TABLE>
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from asset sales and borrowings from debt were the primary source of
capital to fund the Company's development and ongoing operations in the nine
months ended September 30, 2000.
In November 1999, the Company completed an exchange offer for the common stock
of PEI. In the exchange offer, the Company acquired approximately 91.3% of the
PEI common stock. PEI stockholders who tendered their shares of the PEI common
stock in the exchange offer received from the Company a total of $8.50
consisting of $4.25 in cash, $2.75 in principal amount of the Company's 9.0%
Convertible Redeemable Subordinated Secured Debentures ("Debentures") due 2004
and $1.50 in principal amount of the Company's 10.0% Senior Redeemable Secured
Notes ("Senior Notes") due 2004 for each share of PEI common stock. After
expenses, the Company paid approximately $61.0 million in cash and issued
approximately $33.2 million in principal amount of the Debentures and
approximately $18.1 million in principal amount of the Senior Notes to acquire
the PEI common stock in the exchange offer. Of the cash, $27.4 million was
borrowed from The Sol and Helen Price Trust. The remaining $33.6 million was
available cash borrowed from other notes, including the Company's credit
facility, and from asset sales.
In accordance with the stockholders agreement entered into in connection with
the exchange offer, until a certain amount of PEI preferred stock is repurchased
or tendered for, $7.5 million of cash flow, as defined, is required to be
reinvested in PEI before dividends can be paid to its common shareholders. As
such, cash available to service the Company's debt incurred to complete the PEI
exchange offer is subject to this restriction. The Company does, however,
directly benefit from savings in general and administrative expenses from
managing the combined companies, and would receive its portion of PEI common
stock dividends for cash flows in excess of the $7.5 million.
The Company anticipates that cash flow will be generated from existing
properties and from opportunistic trading of assets. In April 2000, the Company
announced its intention to sell a group of assets to repay the Company's
short-term debt. The board of directors also approved the repurchase of up to
10% of the outstanding shares of common stock of the Company with excess
proceeds. At the time, there was $45.1 million of principal debt due in 2000. Of
the $99.7 million of total debt outstanding on September 30, 2000, $6.0 million
was due in 2000 of which $5.0 million was repaid in October 2000. The debt that
was due during the year was repaid from asset sales and debt refinancing. The
ability to continue to fund its development projects is dependent on the
Company's selling of assets, the procurement of equity or joint venture capital,
or the ability to raise additional debt. The Company currently has a $40 million
revolving line of credit due in 2002 with PEI of which $16.5 million was
outstanding at September 30, 2000 and a $15.0 million revolving credit facility
with Fleet National Bank due in June 2001 of which $4.5 million was outstanding
at September 30, 2000.
In addition to using proceeds from asset sales to repay debt and fund
development projects, the Company has on file a $300.0 million shelf
registration statement for the purpose of issuing debt securities, preferred
stock, depositary shares, common stock, warrants or rights. Currently, there
remains $286.5 million of securities available for issuance under this shelf.
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
from existing properties and the completion of current development projects, 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
In October 1999, the Company completed the sale of Millennia's assets to
American Wash Services, Inc. ("AWS"), in exchange for 3,500,000 shares of common
stock of the parent of AWS, Mace Security International, Inc. ("Mace"), a
warrant to acquire an additional 62,500 shares of Mace common stock at an
exercise price of $4.00 per
20
<PAGE>
share, and the assumption by AWS of certain liabilities of Millennia. In
conjunction with this transaction, Millennia had assigned the operations of its
assets to AWS effective April 1, 1999, and thus did not receive cash flow from
operations after April 1, 1999. In addition, Millennia acquired 250,000 common
shares of Mace through a private placement at $2.00 per share and 250,000 common
shares of US Plastic Lumber Corporation ("USPL") at $4.00 per share. The Mace
and USPL common shares are subject to certain restrictions and not currently
available for sale.
The City of Newport has issued two series of public improvement bonds related to
the Newport development project. The Series 2000a tax exempt bonds total $44.2
million and are broken down as follows: (i) $18.7 million maturing 2027 with
interest at 8.375%; (ii) $20.5 million maturing 2018 with interest at 8.5%; and
(iii) $5.0 million maturing 2027 with interest at 8.375%. The Series 2000b bonds
are taxable and have a par amount of $11.6 million with interest at 11% due
2009. The bonds are guaranteed by Newport, the Company, and the third party
developers of the project. Newport has drawn on $29.2 million of the bonds at
September 30, 2000 from the trustee for construction incurred to date.
The Company also has a 50% interest in a limited liability company that owns
land in Orlando, Florida. The land has a remaining land basis at September 30,
2000 of $18.5 million and has mortgage debt of $8.9 million secured by the land
and guaranteed by the Company. The Company had $21.0 million of additional
guaranteed debt related to several development projects at September 30, 2000.
At September 30, 2000, 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 Company or the holders at any time, on a
one-for-one basis, subject to adjustment in certain circumstances.
In September 2000, the Company entered into agreements with certain officers to
assume $5.1 million in personal debt obligations of the officers in exchange for
their rights in 2.05 million shares of Company common stock. The effective price
of the transaction was $2.50 per share, tied to the market price on the day of
the transaction. The officer debts were entered into in connection with their
original share purchase. By assuming these third-party debts, the Company also
obtained a first lien on all remaining shares currently held by the officers,
which will serve as security for the officers' notes to the Company. The Company
paid $3.9 million of the personal debt in October 2000, upon which the Company
recorded 1.56 million shares as repurchased.
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, leverage including
short term obligations, 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 for the year ended December 31, 1999.
21
<PAGE>
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.
At September 30, 2000, the Company had debts totaling $37.6 million in variable
interest rates. If interest rates increased 100 basis points, the annual effect
of such increase to the Company's financial position and cash flows would be
approximately $0.4 million, based on the outstanding balance at September 30,
2000. The actual fluctuation of interest rates is not determinable; accordingly,
actual results from interest rate fluctuation could differ.
The following table 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 existing mortgages payable. Accordingly, the Company
has determined that the carrying value of its financial instruments at September
30, 2000 approximates fair value.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
(DOLLAR AMOUNTS IN THOUSANDS)
--------------------------------------------------------------------------------------------------------------------------
FAIR
2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes Receivable, including $4,013 - - $22,554 $5,518 $1,051 $34,191 $34,200
notes from affiliates 12.00% - - 12.00% 11.00% 10.00% 11.78%
Average interest rate
--------------------------------------------------------------------------------------------------------------------------
$5,992 $7,698 $22,864 $176 $60,835 $1,327 $ 98,892 $ 98,000
Mortgages and Notes Payable 11.16% 10.20% 9.28% 8.25% 9.16% 8.25% 9.38%
Average interest rate
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Form of Stock Purchase Agreement dated as of
September 25, 2000 by and between the Company and
each of Richard B. Muir, Graham R. Bullick, S. Eric
Ottesen and Mark T. Burton.
10.2 Form of Loan Assumption Agreement dated as of
September 25, 2000 by and between the Company and
each of Richard B. Muir, Graham R. Bullick, S. Eric
Ottesen and Mark T. Burton.
10.3 Amended and Restated Revolving Credit Agreement dated
as of October 16, 2000 among the Company and Fleet
National Bank.
10.4 First Amended and Restated Promissory Note and
Revolving Line of Credit dated September 27, 2000 by
and among the Company and PEI.
27.1 Financial Data Schedule
(b) Reports on Form 8-K during the quarter
A Current Report on Form 8-K was filed with the Commission on
July 20, 2000 regarding the Company's sale of a property
located in Scottsdale, AZ to J.E.M.B. Realty Corporation.
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 8, 2000 By: /s/ Gary B. Sabin
----------------------------------
GARY B. SABIN
President and Chief Executive Officer
DATE: November 8, 2000 By: /s/ James Y. Nakagawa
----------------------------------
JAMES Y. NAKAGAWA
Principal Financial Officer
23
