10-Q 1 a10-q.txt 10Q 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 EXCEL LEGACY CORPORATION AND SUBSIDIARIES INDEX FORM 10-Q ----------
PAGE PART I. FINANCIAL INFORMATION: 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
EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - UNAUDITED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ----------
JUNE 30, DECEMBER 31, 2000 1999 ---------------------------------- ASSETS 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 ======== ========
The accompanying notes are an integral part of the financial statements 3 EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF (LOSS) INCOME - UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------
THREE MONTHS ENDED SIX MONTHS ENDED -------------------------------- ----------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ------------ ----------- ------------ ----------- 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 ===== ==== ===== ====
The accompanying notes are an integral part of the financial statements 4 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) ----------
ADDITIONAL PREFERRED STOCK COMMON STOCK PAID-IN ------------------------- ---------------------- NUMBER AMOUNT NUMBER AMOUNT CAPITAL ------ ------ ------ ------ ------- 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 ========== ========== ========== ========== ==========
ACCUMULATED OTHER TOTAL COMPREHENSIVE RETAINED NOTES STOCKHOLDERS INCOME EARNINGS RECEIVABLE EQUITY ---------- --------- ------------ ------------ 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 ========== ========== ========== ==========
The accompanying notes are an integral part of the financial statements 5 EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED (IN THOUSANDS) -----------
SIX MONTHS ENDED JUNE 30, JUNE 30, 2000 1999 ----------- ----------- 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 ======== ========
The accompanying notes are an integral part of the financial statement 6 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 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 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):
BALANCE SHEET INCOME STATEMENT THREE MONTHS ENDED SIX MONTH ENDED 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
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).
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 1999 JUNE 30, 1999 --------------- ------------- (PRO FORMA) 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 ====== =======
continued 9 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.
INVESTMENT IN USPL(IN THOUSANDS): JUNE 30, 2000 DECEMBER 31,1999 --------------------------------- ------------- ---------------- Cost $ 1,000 $ 1,000 Unrealized gain 102 922 ------- ------- Fair value $ 1,102 $ 1,922 ====== ======
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 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):
YEAR ENDED DECEMBER 31, ------------ 2000 (remaining six months) $ 39,947 2001 2,922 2002 162 2003 176 2004 60,835 Thereafter 1,294 ---------- $ 105,336
continued 11 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):
FEDERAL STATE ------- ---------- 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) ======= ========
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):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 -------- ------ ------- ------- 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 ======== ====== ======= =======
continued 12 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 9. EARNINGS PER SHARE (EPS), CONTINUED: DILUTED EPS
NUMERATOR: 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 ======== ======== ======== ========
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 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 11. SEGMENT REPORTING, CONTINUED:
RETAIL & OPERATING OTHER HOSPITALITY COMPANIES OFFICE TOTAL THE THREE MONTHS ENDED JUNE 30, 2000: 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 ========= ========= ========= ========= =========
Continued 14 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 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 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 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:
THREE MONTHS ENDED SIX MONTHS ENDED ------------------------- ------------------------- JUNE 30, JUNE 30, JUNE 30, JUNE 30, 2000 1999 2000 1999 ------------ ----------- ------------ ----------- 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 ======= ======= ======= =======
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 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 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.
Expected Maturity Date (dollar amounts in thousands) 2000 2001 2002 2003 2004 There- after ------------------------------------- ---------- --------- ------- ---------- ---------- --------- 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% ------------------------------------- ----------- -------- ------------------------------------- ----------- --------
20 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:
FOR WITHHELD ---------- --------- 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
Approval of the Company's amended and restated stock option plan:
FOR AGAINST ABSTENTIONS ---------- --------- ------------- 21,623,189 4,658,132 73,996
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 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