<PAGE>
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: JUNE 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) (IRS Employer Identification Number)
17140 BERNARDO CENTER DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92128
-------------------------------------------------------------------------------
(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 AUGUST 11, 2000
------------------------------- -----------------------------------
Common Stock, $.01 par value 41,963,435
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
INDEX
FORM 10-Q
----------
<TABLE>
<CAPTION>
PAGE
PART I. FINANCIAL INFORMATION:
<S> <C>
Item 1. Financial Statements (Unaudited):
Consolidated Balance Sheets
June 30, 2000
December 31, 1999 ................................................................................ 3
Consolidated Statements of (Loss) Income
Three Months Ended June 30, 2000
Three Months Ended June 30, 1999
Six Months Ended June 30, 2000
Six Months Ended June 30, 1999.................................................................... 4
Consolidated Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 2000
Six Months Ended June 30, 1999.................................................................... 5
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2000
Six Months Ended June 30, 1999.................................................................... 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........................................20
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...............................................21
Item 6. Exhibits and Reports on Form 8-K..................................................................21
</TABLE>
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
----------------------------------
ASSETS
<S> <C> <C>
Real estate:
Land $ 17,341 $ 27,099
Buildings 43,536 47,664
Construction in progress 21,913 27,380
Leasehold interest 2,351 2,351
Accumulated depreciation (2,521) (2,303)
----------- ----------
Net real estate 82,620 102,191
Cash 1,597 1,767
Accounts receivable, less allowance for bad debts of
$36 and $55 in 2000 and 1999, respectively 499 739
Notes receivable 34,191 28,380
Investment in securities 136,663 136,570
Investment in partnerships 20,459 18,341
Interest receivable 10,657 8,929
Pre-development costs 17,191 16,783
Other assets 7,692 7,938
Deferred tax asset 6,836 6,515
---------- ----------
$ 318,405 $ 328,153
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable $ 51,986 $ 70,661
Convertible debentures 33,231 33,243
Senior notes 18,067 18,067
Mortgages payable 2,052 15,835
Accounts payable and accrued liabilities 10,727 9,188
Other liabilities 3,541 151
--------- ---------
Total liabilities 119,604 147,145
-------- --------
Commitments and contingencies - -
Minority interests 969 969
---------- --------
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 income, net of tax 102 922
Retained earnings 1,062 1,679
Notes receivable from affiliates for common shares (9,759) (10,842)
--------- ---------
Total stockholders' equity 197,832 180,039
-------- --------
$ 318,405 $ 328,153
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements
3
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF (LOSS) INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenue:
Rental $ 1,483 $ 3,128 $ 2,161 $ 6,440
Operating income 2,217 2,002 3,255 6,898
Interest income 881 936 1,810 1,794
Partnership and other income 654 150 1,702 301
--------- -------- -------- --------
Total revenue 5,235 6,216 8,928 15,433
-------- ------- ------- ------
Operating expenses:
Interest 2,982 1,929 6,333 3,954
Depreciation and amortization 446 883 857 2,079
Property operating expenses 638 578 1,235 1,060
Other operating expenses 1,460 1,305 2,438 3,816
General and administrative 999 735 1,832 3,425
--------- -------- ------- -------
Total operating expenses 6,525 5,430 12,695 14,334
-------- ------ ------- ------
Net operating (loss) income (1,290) 786 (3,767) 1,099
Net gain from real estate sales 983 - 2,863 -
--------- ---------- ------- ----------
(Loss) income before income taxes (307) 786 (904) 1,099
Benefit (provision) for income taxes 63 (274) 287 (413)
-------- ------- --------- -------
Net (loss) income $ (244) $ 512 $ (617) $ 686
======== ======= ======== =======
Basic net (loss) income per common share $(0.01) $0.02 $(0.02) $0.02
===== ==== ===== ====
Diluted net (loss) income per common share $(0.01) $0.01 $(0.02) $0.01
===== ==== ===== ====
</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
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
----------
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
------------------------- ----------------------
NUMBER AMOUNT NUMBER AMOUNT CAPITAL
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Six Months Ended June 30, 2000:
Balance at January 1, 2000 21,281,000 $ 213 36,835,921 $ 368 $ 187,699
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 -- -- -- -- --
June 30, 2000 -- -- -- -- --
Total comprehensive loss -- -- -- -- --
---------- ----------
Balance at June 30, 2000 21,281,000 $ 213 41,963,435 $ 420 $ 205,794
========== ========== ========== ========== ==========
Six Months Ended June 30, 1999:
Balance at January 1, 1999: 21,281,000 213 33,457,804 335 174,508
Net income -- -- -- -- --
---------- ---------- ----------
Balance at June 30, 1999 21,281,000 $ 213 33,457,804 $ 335 $ 174,508
========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE RETAINED NOTES STOCKHOLDERS
INCOME EARNINGS RECEIVABLE EQUITY
---------- --------- ------------ ------------
<S> <C> <C> <C> <C>
Six Months Ended June 30, 2000
Balance at January 1, 2000 $ 922 $ 1,679 $ (10,842) $ 180,039
Conversion of notes payable to
common stock -- -- -- 18,063
Issuance of common shares -- -- -- 84
Repayment of notes to affiliat -- -- 1,083 1,083
Comprehensive income;
Net loss -- (617) -- (617)
Unrealized loss on marketabl
securities, net of tax
Three months ended
March 31, 2000 391 -- -- 391
June 30, 2000 (1,211) -- -- (1,211)
----------
Total comprehensive loss -- -- -- (1,437)
---------- ---------- ---------- ----------
Balance at June 30, 2000 $ 102 $ 1,062 $ (9,759) $ 197,832
========== ========== ========== ==========
Six Months Ended June 30, 1999
Balance at January 1, 1999: -- 2,456 (10,872) 166,640
Net income -- 686 -- 686
---------- ---------- ---------- ----------
Balance at June 30, 1999 $ -- $ 3,142 $ (10,872) $ 167,326
========== ========== ========== ==========
</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>
SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (617) $ 686
Adjustments to reconcile net (loss) income to net cash
provided by operations:
Depreciation and amortization 857 2,079
Gain from real estate sales 2,863 -
Earnings from equity investments 914 150
Change in accounts receivable and other assets (3,881) (3,065)
Change in accounts payable and other liabilities 6,147 1,149
--------- ---------
Net cash provided by operating activities 6,283 999
--------- --------
Cash flows from investing activities:
Proceeds from real estate sales 15,894 -
Real estate acquired and construction costs paid (12,619) (1,227)
Pre-development costs paid (10,149) (11,480)
Investment in partnerships 6,398 (6,315)
Notes receivable issued (5,202) -
--------- ------------
Net cash used in investing activities (5,678) (19,022)
--------- -------
Cash flows from financing activities:
Principal payments of notes and mortgages (15,074) (1,593)
Borrowings from issuance of notes payable 14,299 26,299
-------- --------
Net cash (used) provided by financing activities (775) 24,706
---------- --------
Net (decrease) increase in cash (170) 6,683
Cash at the beginning of the periods 1,767 1,387
--------- --------
Cash at the end of the periods $ 1,597 $ 8,070
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statement
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 3) 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.
continued 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 carryforwards 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 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 June 30, 1999 to
conform with the current period's presentation.
continued 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 June 30,
2000 and the periods then ended for PEI (in thousands):
<TABLE>
<CAPTION>
BALANCE SHEET INCOME STATEMENT THREE MONTHS ENDED SIX MONTH ENDED
<S> <C> <C> <C> <C>
Real estate, net of Operating revenue $ 17,831 $ 35,663
accumulated depreciation $ 579,989 Operating expenses (3,546) (7,384)
Other assets 37,698 General and administrative (738) (1,523)
--------- Interest expense (2,561) (4,310)
Total assets $ 617,687 Depreciation and amortization (2,498) (4,787)
======== --------- ---------
Notes and mortgage payable $ 150,554 Net Income 8,488 17,659
Accounts payable and other liabilities 4,494 Preferred dividends (8,327) (16,651)
------- --------- ---------
155,048 Net income available for
8 3/4% Series A Preferred Stock 353,404 common shares $ 161 $ 1,008
========= ========
Other stockholders' equity 109,235
-------
Total liabilities and stockholders' equity $ 617,687
</TABLE>
The following unaudited pro forma information for the periods ended June
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 SIX MONTHS
ENDED ENDED
JUNE 30, 1999 JUNE 30, 1999
--------------- -------------
(PRO FORMA)
<S> <C> <C>
Total revenue $10,875 $ 20,286
Operating expenses, excluding interest (3,751) (10,880)
Interest expense (4,066) (8,227)
Income taxes (1,183) (445)
-------- ---------
Net income $ 1,875 $ 734
======= =========
Net income per share -
Basic $ 0.06 $ 0.02
====== =======
Diluted $ 0.03 $ 0.01
====== =======
</TABLE>
continued 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): JUNE 30, 2000 DECEMBER 31,1999
--------------------------------- ------------- ----------------
<S> <C> <C>
Cost $ 1,000 $ 1,000
Unrealized gain 102 922
------- -------
Fair value $ 1,102 $ 1,922
====== ======
</TABLE>
4. REAL ESTATE:
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 of the three sales. The Company entered into an
agreement to lease one of these properties back from PEI. The sales of the
above five properties resulted in a net gain of $2.9 million.
In July 2000, the Company sold a property for approximately $28 million
resulting in an approximate $5 million gain before taxes in the third
quarter.
5. NOTES RECEIVABLE:
The Company had $34.2 million in notes receivable outstanding at June 30,
2000 related to various development projects. The notes bear interest at
11% to 12% 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.
6. NOTES AND MORTGAGES PAYABLE:
NOTES PAYABLE
The Company had $52.0 million in notes payable outstanding at June 30,
2000. Of this amount, $31.0 million was outstanding under the Company's
revolving credit facility (the "Credit Facility"). The Credit Facility is
secured by various properties and carried an interest rate of 10.5% at
June 30, 2000. The amounts outstanding under the Credit Facility were
reduced by $20.0 million in July 2000 with proceeds from the sale of a
property and $11.0 from a borrowing from PEI. The borrowing from PEI was
made from a $15.0 million credit facility entered into in July 2000.
To facilitate the PEI exchange offer, The Sol and Helen Price Trust loaned
the Company $27.4 million of which $18.0 million was converted into 5.1
million shares of the Company's common stock in March 2000. This note
bears an interest rate of LIBOR plus 1.50% (8.1% at June 30, 2000) and is
due in November 2004. The note is secured by some of the Company's PEI
common shares.
continued 10
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
-----------
6. NOTES AND MORTGAGES PAYABLE, CONTINUED:
The Company had a $5.0 million note outstanding at June 30, 2000 secured
by second trust deeds on two of the Company's investments. The note bears
interest at Prime plus 2% (11.5% at June 30, 2000) and matures October
2000. At June 30, 2000 the Company had outstanding $3.9 million from PEI
under a note payable which was repaid in July 2000 with proceeds from
asset sales. At June 30, 2000, the Company had an additional $1.2 million
in various notes payable.
The Company has a 65% interest in Newport on the Levee, LLC ("Newport")
which has $1.5 million outstanding related to a development project in
Newport, KY. Additionally, 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 $24.0 million of the bonds at June 30, 2000 from the trustee for
construction incurred to date and $1.5 million on a $4.7 million secured
credit facility due March 2001 with interest at Prime plus 0.5% (10.0% at
June 30, 2000). The Company also has a 50% interest in a LLC which owns
land in Orlando, Florida. The land was purchased for $17.8 million and has
mortgage debt of $12.0 million secured by the land and guaranteed by
the Company. The Company also has approximately $19.7 million of
guaranteed debt related to other development projects.
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 $2.1 million in a mortgage payable outstanding at June 30,
2000 secured by real estate. The mortgage debt is due in 2006 and bears
interest at 8.25%.
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 six months) $ 39,947
2001 2,922
2002 162
2003 176
2004 60,835
Thereafter 1,294
----------
$ 105,336
</TABLE>
continued 11
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
7. INCOME TAXES:
At June 30, 2000, the Company had a net deferred tax asset of $6.8
million. 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 and is non-current.
Additionally, $1.4 million relates to an impairment in the Company's
investment in a development project in Indianapolis, Indiana. 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 consisted of the following (in
thousands):
<TABLE>
<CAPTION>
FEDERAL STATE
------- ----------
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 2000:
Current payable $ - $ (35)
Deferred tax benefit 301 21
------- ---------
Benefit (provision) for income taxes $ 301 $ (14)
======= =========
SIX MONTHS ENDED JUNE 30, 1999:
Current payable $ (223) $ (99)
Deferred tax expense (78) (13)
------- --------
Provision for income taxes $ (301) $ (112)
======= ========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
-------- ------ ------- -------
<S> <C> <C> <C> <C>
BASIC EPS
NUMERATOR:
Net (loss) income $ (244) $ 512 $ (617) $ 686
======== ====== ======= =======
DENOMINATOR:
Weighted average of common
shares outstanding 41,981 33,458 39,409 33,458
======== ====== ======= =======
EARNINGS PER SHARE: $ (0.01) $ 0.02 $ (0.02) $ 0.02
======== ====== ======= =======
</TABLE>
continued 12
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
9. EARNINGS PER SHARE (EPS), CONTINUED:
DILUTED EPS
<TABLE>
<CAPTION>
NUMERATOR:
<S> <C> <C> <C> <C>
Net (loss) income $ (244) $ 512 $ (617) $ 686
======== ======== ======== ========
DENOMINATOR:
Weighted average of common
shares outstanding 41,981 33,458 39,409 33,458
Effect of diluted securities:
Preferred B Shares 21,281 21,281 21,281 21,281
Options 10 21 11 16
Deduct diluted securities for net loss (21,291) - (21,292) -
-------- -------- -------- --------
41,981 54,760 39,409 54,755
======== ======== ======== ========
EARNINGS PER SHARE: $ (0.01) $ 0.01 $ (0.02) $ 0.01
======== ======== ======== ========
</TABLE>
10. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amounts paid for interest during the six months ended June 30, 2000
and June 30, 1999 were $5.5 million and $3.5 million, respectively. The
amounts paid for income taxes in the six months ended June 30, 2000 and
June 30, 1999 were $0.1 million and $1.6 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 $1.5 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 six months ended June 30, 1999, $2.9 million of debt was
assumed related to the construction of an office building.
11. SEGMENT REPORTING:
The Company's primary business segment is retail real estate investments.
Other reportable business segments of the Company include hospitality,
operating companies, and office buildings. Below is selected financial
information for each segment (in thousands). The operating companies
segment primarily relates to Millennia in the periods presented. Certain
revenues and expenses such as general and administrative not specifically
incurred by specific segments, and corporate income taxes have been
grouped with "retail & other" for presentation purposes.
continued 13
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
11. SEGMENT REPORTING, CONTINUED:
<TABLE>
<CAPTION>
RETAIL & OPERATING
OTHER HOSPITALITY COMPANIES OFFICE TOTAL
THE THREE MONTHS ENDED JUNE 30, 2000:
<S> <C> <C> <C> <C> <C>
Total revenues $ 2,728 $ 1,957 $ 43 $ 507 $ 5,235
--------- --------- --------- --------- ---------
Interest 2,940 -- -- 42 2,982
Depreciation and amortization 306 108 -- 32 446
General and administrative 971 -- 28 -- 999
Operating expenses 629 1,356 -- 113 2,098
--------- --------- --------- --------- ---------
Total operating expenses 4,846 1,464 28 187 6,525
--------- --------- --------- --------- ---------
Net operating (loss) income (2,118) 493 15 320 (1,290)
Real estate sales 983 -- -- -- 983
Benefit for income taxes 63 -- -- -- 63
--------- --------- --------- --------- ---------
Net (loss) income $ (1,072) $ 493 $ 15 $ 320 $ (244)
========= ========= ========= ========= =========
Total assets $ 250,458 $ 26,156 $ 23,445 $ 18,346 $ 318,405
========= ========= ========= ========= =========
THE THREE MONTHS ENDED JUNE 30, 1999:
Total revenues $ 4,135 $ 1,559 $ 7 $ 515 $ 6,216
--------- --------- --------- --------- ---------
Interest 1,879 -- -- 50 1,929
Depreciation and amortization 679 161 -- 43 883
General and administrative 629 -- 106 -- 735
Operating expenses 466 1,304 -- 113 1,883
--------- --------- --------- --------- ---------
Total operating expenses 3,653 1,465 106 206 5,430
--------- --------- --------- --------- ---------
Net operating income (loss) 482 94 (99) 309 786
Provision for income taxes (274) -- -- -- (274)
--------- --------- --------- --------- ---------
Net (loss) income $ 208 $ 94 $ (99) $ 309 $ 512
========= ========= ========= ========= =========
Total assets $ 210,878 $ 22,758 $ 30,038 $ 27,006 $ 290,680
========= ========= ========= ========= =========
THE SIX MONTHS ENDED JUNE 30, 2000:
Total revenues $ 5,198 $ 2,817 $ 66 $ 847 $ 8,928
--------- --------- --------- --------- ---------
Interest 6,248 -- -- 85 6,333
Depreciation and amortization 576 215 2 64 857
General and administrative 1,790 -- 42 -- 1,832
Operating expenses 1,005 2,338 -- 330 3,673
--------- --------- --------- --------- ---------
Total operating expenses 9,619 2,553 44 479 12,695
--------- --------- --------- --------- ---------
Net operating (loss) income (4,421) 264 22 368 (3,767)
Real estate sales 2,863 -- -- -- 2,863
Benefit for income taxes 287 -- -- -- 287
--------- --------- --------- --------- ---------
Net (loss) income $ (1,271) $ 264 $ 22 $ 368 $ (617)
========= ========= ========= ========= =========
THE SIX MONTHS ENDED JUNE 30, 1999:
Total revenues $ 8,095 $ 2,139 $ 4,311 $ 888 $ 15,433
--------- --------- --------- --------- ---------
Interest 3,435 -- 419 100 3,954
Depreciation and amortization 1,358 322 334 65 2,079
General and administrative 1,410 -- 2,015 -- 3,425
Operating expenses 801 2,007 1,809 259 4,876
--------- --------- --------- --------- ---------
Total operating expenses 7,004 2,329 4,577 424 14,334
--------- --------- --------- --------- ---------
Net operating income(loss) 1,091 (190) (266) 464 1,099
Provision for income taxes (413) -- -- -- (413)
--------- --------- --------- --------- ---------
Net (loss ) income $ 678 $ (190) $ (266) $ 464 $ 686
========= ========= ========= ========= =========
</TABLE>
Continued 14
<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 June 30, 2000. The notes bear interest at a fixed rate of 7%, are
recourse obligations of the note holders, and are due in March 2003. The
total interest receivable at June 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 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 June 30, 2000, the Company had $3.6 million payable
to PEI on a $10.0 million note which was repaid in July 2000. The Company
subsequently entered into a separate $15.0 million credit facility with
PEI of which $11.7 was borrowed to repay other debt. Finally, the Company
offsets the general and administrative costs with reimbursements received
monthly from PEI. In the six months ended June 30, 2000, $1.4 million was
received as reimbursements.
15
<PAGE>
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 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 and 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 JUNE 30, 2000 TO THE THREE MONTHS ENDED
JUNE 30, 1999
RENTAL REVENUE was $1.5 million during the three months ended June 30, 2000
compared to $3.1 million in the three months ended June 30, 1999 resulting in a
decrease of $1.6 million. The sales of twelve properties accounted for a
decrease of $2.3 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. The Company's project in
Newport, KY accounted for $0.5 million in 2000 related to a land lease which did
not generate any revenues in 1999, and an office building the Company began
master leasing and operating in 2000 accounted for $0.2 million in rental
revenue.
OPERATING INCOME totaled $2.2 million in the three months ended June 30, 2000
compared to $2.0 million in the three months ended June 30, 1999 resulting in an
increase of $0.2 million. The increase primarily relates to operations from The
Grand Hotel.
INTEREST INCOME was $0.9 million in both the three months ended June 30, 2000
and 1999. Interest income is primarily generated from notes receivable and cash
balances.
PARTNERSHIP INCOME AND OTHER REVENUES were approximately $0.7 million in the
three months ended June 30, 2000 compared to $0.2 million in the three months
ended June 30, 1999. In 2000, the Company recognized $0.2 million in income from
its equity investment in Price Enterprises, Inc. ("PEI") which was consummated
in November 1999. Additionally, the Company recognized $0.3 million related to a
forfeited deposit on a property sale, and $0.2 million from its investments in
joint ventures related to projects in Westminster, CO and Winnipeg, Canada.
INTEREST EXPENSE was $3.0 million in the three months ended June 30, 2000
compared to $2.0 million in the three months ended June 30, 1999. Debt assumed
in conjunction with the acquisition of PEI in November 1999 accounted for $1.4
million of interest expense in the three months ended June 30, 2000. An increase
of $1.0 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 $1.4 million relates to mortgage debt on properties that were sold
in 1999 and 2000.
DEPRECIATION AND AMORTIZATION EXPENSE totaled $0.4 million in the three months
ended June 30, 2000 compared to $0.9 million in the three months ended June 30,
1999. The decrease of $0.5 million primarily relates to properties sold.
PROPERTY OPERATING EXPENSES were $0.6 million in both the three months ended
June 30, 2000 and June 30, 1999 resulting in no significant change.
OTHER OPERATING EXPENSES were $1.4 million in the three months ended June 30,
2000 compared to $1.3 million in the three months ended June 30, 1999, resulting
in an increase of $0.1 million. Expenses in both periods primarily
16
<PAGE>
related to the Grand Hotel.
GENERAL AND ADMINISTRATIVE EXPENSES were $1.0 million in the three months ended
June 30, 2000 compared to $0.7 million in the three months ended June 30, 2000.
The increase is primarily related to several executives who were working for
another company and whose time was only partially paid by the Company in 1999.
THE NET GAIN FROM REAL ESTATE SALES was $1.0 million in 2000. This gain
primarily related to land sold in 2000.
The Company recognized a benefit for income taxes of $0.1 million in the three
months ended June 30, 2000 related to the net loss before income taxes of $0.3
million. A tax provision of $0.3 million was recognized by the Company in the
three months ended June 30, 1999 related to the income before income taxes of
$0.8 million.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 TO THE SIX MONTHS ENDED JUNE
30, 1999
RENTAL REVENUE was $2.2 million during the six months ended June 30, 2000
compared to $6.4 million in the six months ended June 30, 1999 resulting in a
decrease of $4.2 million. The sale of twelve properties accounted for a decrease
of $5.0 million. The Company's project in Newport, KY accounted for $0.6 million
in 2000 related to a land lease which did not generate any revenues in 1999, and
an office building the Company began master leasing and operating in 2000
accounted for $0.2 million in rental revenue.
OPERATING INCOME totaled $3.3 million in the six months ended June 30, 2000
compared to $6.9 million in the six months ended June 30, 1999 resulting in a
decrease of $3.6 million. In 1999, Millennia, a subsidiary of the Company, owned
19 car wash properties which generated $4.2 million of operating income. On
March 31, 1999, these properties were sold for common shares in a publically
traded company, Mace Security International, Inc. The Grand Hotel, which was not
opened until the second half of 1998, generated $0.6 million of additional
operating income in 2000 when compared to 1999.
INTEREST INCOME was $1.8 million in both the six months ended June 30, 2000 and
1999. Interest income is primarily generated from notes receivable and cash
balances.
PARTNERSHIP INCOME AND OTHER REVENUES were approximately $1.7 million in the six
months ended June 30, 2000 compared to $0.3 million in the six months ended June
30, 1999. In 2000, the Company recognized $0.9 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 EXPENSE was $6.3 million in the six months ended June 30, 2000 compared
to $4.0 million in the six months ended June 30, 1999 resulting in an increase
of $2.3 million. Debt assumed in conjunction with the acquisition of PEI in
November 1999 accounted for $3.1 million of interest expense in the six months
ended June 30, 2000. An increase of $1.7 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 $2.5 million relates to mortgage
debt on properties that were sold in 1999 and 2000.
DEPRECIATION AND AMORTIZATION EXPENSE totaled $0.9 million in the six months
ended June 30, 2000 compared to $2.1 million in the six months ended June 30,
1999. The decrease of $1.2 million primarily relates to properties sold and the
depreciation of Millennia assets in 1999 of $0.3 million.
PROPERTY OPERATING EXPENSES were $1.2 million in the six months ended June 30,
2000 compared to $1.1 million in the six months ended June 30, 1999. The
increase of $0.1 million primarily relates to costs incurred in improving an
office building in Scottsdale, AZ.
OTHER OPERATING EXPENSES were $2.4 million in the six months ended June 30, 2000
compared to $3.8 million in the six months ended June 30, 1999, resulting in a
decrease of $1.4 million. In 1999, expenses of $1.8 million related to Millennia
compared to $0 in 2000. The remaining net increase of $0.4 million primarily
related to the Grand Hotel.
GENERAL AND ADMINISTRATIVE EXPENSES were $1.8 million in the six months ended
June 30, 2000 compared to $3.4
17
<PAGE>
million in the six months ended June 30, 1999. The primary reason for the
decrease was a result of expenses incurred by Millennia in 1999.
THE NET GAIN FROM REAL ESTATE SALES was $2.9 million in 2000. This gain
primarily related to two properties sold to PEI and land sold in 2000. An
additional building was sold to PEI in 2000 of which there was no gain recorded
as the Company is leasing back the building. There were no real estate sales in
the six months ended June 30, 1999.
The Company recognized a benefit for income taxes of $0.3 million in the six
months ended June 30, 2000 related to the net loss before income taxes of $0.9
million. A tax provision of $0.4 million was recognized by the Company in the
six months ended June 30, 1999 related to the income before income taxes of $1.1
million.
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 June 30, 2000 and 1999:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- -------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Net (loss) income $ (244) $ 512 $ (617) $ 686
Depreciation and
amortization (financial statements) 446 883 857 2,079
Proportionate share of depreciation and
amortization from equity investments:
PEI 2,281 -- 4,371 --
Other 151 345 --
Less depreciation of non-real estate assets (54) (22) (103) (44)
Deferred tax (benefit) expense (98) 57 (322) 91
------- ------- ------- -------
EBDADT $ 2,482 $ 1,430 $ 4,531 $ 2,812
======= ======= ======= =======
</TABLE>
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 six
months ended June 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
18
<PAGE>
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 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. The ability to continue to fund its development projects is dependent
on the Company's selling of assets or the procurement of equity or joint venture
capital.
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 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.
At June 30, 2000, the total debt of the Company consisted of the following: (i)
$33.2 million in Debentures due 2004. These Debentures are traded on the
American Stock Exchange and bear interest at 9% payable February 15 and August
15 of each year; (ii) $31.0 million outstanding on the Company's revolving
credit facility. The facility bears interest at 10.1% as of June 30, 2000 and
was repaid in July 2000; (iii) $9.4 million payable to The Sol and Helen Price
Trust due 2004. This note bears interest at LIBOR plus 1.50% (8.1% at June 30,
2000) with interest only due monthly; (iv) $1.5 million related to Newport on
the Levee LLC ("Newport") of which the Company owns 65%. This note bears
interest at 10.0% and is due March 2001. An additional $3.2 million is available
under this note. (v) $18.1 million in Senior Notes due 2004. These notes are
traded on the American Stock Exchange and bear interest at 10% payable February
15 and August 15 of each year; (vi) $5.0 million secured note bearing interest
at prime plus 2% (11.5% at June 30, 2000) due October 2000; (vii) $3.9 million
unsecured note to PEI with an interest rate of 3.75% plus LIBOR. This note was
repaid in July 2000 and a separate credit facility of $15.0 million was issued.
Borrowings of $11.0 million were made to repay the Company's revolving credit
facility noted above; (viii) A $2.1 million mortgage collateralized by an office
building in Scottsdale, Arizona, of which monthly payments are approximately
$25,000 with a balloon payment in 2006. The note bears interest at 8.25%; (ix)
$1.2 million in other notes, primarily related to certain costs on a project in
Anaheim.
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 $24.0 million of the bonds at
June 30, 2000 from the trustee for construction incurred to date. The Company
also has a 50% interest in a LLC which owns land in Orlando, Florida. The land
was purchased for $17.8 million and has mortgage debt of $12.0 million secured
by the land, and guaranteed by the Company.
At June 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,
19
<PAGE>
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.
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.
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 June 30, 2000, the Company had debts totaling $50.8 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 $0.5 million, based on the outstanding balance at June 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 June 30,
2000 approximates fair value.
<TABLE>
<CAPTION>
Expected Maturity Date
(dollar amounts in thousands)
2000 2001 2002 2003 2004 There-
after
------------------------------------- ---------- --------- ------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Notes Receivable, including notes
from affiliates $ 4,013 -- -- $ 23,609 $ 5,518 $ 1,051
Average interest rate 12.00% -- -- 12.00% 11.00% 10.00%
------------------------------------- ---------- --------- ------- ---------- ---------- ---------
Mortgages and NotesPayable $ 39,947 $ 2,922 $ 162 $ 176 $ 60,835 $ 1,294
Average interest rate 10.58% 9.75% 8.25% 8.25% 9.16% 8.25%
------------------------------------- ---------- --------- ------- ---------- ---------- ---------
------------------------------------- ---------- --------- ------- ---------- ---------- ---------
Total Fair
Value
------------------------------------- ----------- --------
Notes Receivable, including notes
from affiliates $ 34,191 $ 34,200
Average interest rate 11.78%
------------------------------------- ----------- --------
Mortgages and NotesPayable $ 105,336 $106,000
Average interest rate 9.33%
------------------------------------- ----------- --------
------------------------------------- ----------- --------
</TABLE>
20
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its Annual Meeting of Stockholders on June 7,
2000.
(b) See paragraph (c) below.
(c) The matters voted upon at the meeting and the votes cast with
respect thereto were as follows:
Election of directors:
<TABLE>
<CAPTION>
FOR WITHHELD
---------- ---------
<S> <C> <C>
Gary B. Sabin 31,622,472 1,044,031
Richard B. Muir 31,496,552 1,169,951
Kelly D. Burt 31,622,472 1,044,031
Jack McGrory 31,621,272 1,045,231
Richard J. Nordlund 31,622,472 1,044,031
Robert E. Parsons, Jr. 31,622,472 1,044,031
Robert S. Talbott 29,647,238 3,019,265
John H. Wilmot 29,734,072 2,932,431
</TABLE>
Approval of the Company's amended and restated stock option plan:
<TABLE>
<CAPTION>
FOR AGAINST ABSTENTIONS
---------- --------- -------------
<S> <C> <C>
21,623,189 4,658,132 73,996
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K during the quarter
None
21
<PAGE>
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: August 11, 2000 By: /s/ Gary B. Sabin
-------------------------------
GARY B. SABIN
President and Chief Executive Officer
DATE: August 11, 2000 By: /s/ James Y. Nakagawa
--------------------------------
JAMES Y. NAKAGAWA
Principal Financial Officer
22
