10-Q 1 a2029988z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER: 0-23503 EXCEL LEGACY CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 33-0781747 (State of incorporation) (I.R.S. Employer Identification No.) 17140 BERNARDO CENTER DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92128 (Address of principal executive offices) (Zip Code) Registrant's telephone number: (858) 675-9400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Outstanding at November 8, 2000 ----------------------------------- --------------------------------------- Common Stock, $.01 par value 40,401,486
EXCEL LEGACY CORPORATION AND SUBSIDIARIES INDEX FORM 10-Q ----------
PAGE ---- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets: September 30, 2000 December 31, 1999 ................................................................................ 3 Consolidated Statements of Income: Three Months Ended September 30, 2000 Three Months Ended September 30, 1999 Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999.............................................................. 4 Consolidated Statements of Changes in Stockholders' Equity: Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999.............................................................. 5 Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999.............................................................. 6 Notes to Consolidated Financial Statements........................................................... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................17 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................22 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K..................................................................23
EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - UNAUDITED (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ---------- ASSETS
SEPTEMBER 30, DECEMBER 31, 2000 1999 --------------- -------------- Real estate: Land $ 22,919 $ 27,099 Buildings 30,412 47,664 Construction in progress 27,058 27,380 Leasehold interest 2,351 2,351 Accumulated depreciation (1,958) (2,303) --------------- -------------- Net real estate 80,782 102,191 Cash 505 1,767 Accounts receivable, less allowance for bad debts of $37 and $55 in 2000 and 1999, respectively 626 739 Notes receivable 36,392 28,380 Investment in securities 136,772 136,570 Investment in partnerships 21,403 18,341 Interest receivable 11,670 8,929 Pre-development costs 11,003 16,783 Other assets 7,282 7,938 Deferred tax asset 4,888 6,515 --------------- -------------- $ 311,323 $ 328,153 =============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Notes payable $ 39,175 $ 70,661 Convertible debentures 33,231 33,243 Senior notes 18,067 18,067 Mortgages payable 8,220 15,835 Accounts payable and accrued liabilities 9,240 9,188 Other liabilities 1,516 151 --------------- -------------- Total Liabilities 109,449 147,145 --------------- -------------- Commitments and contingencies - - Minority interests 1,103 969 --------------- -------------- Stockholders' equity: Series B Preferred stock, $.01 par value, 50,000,000 shares authorized, 21,281,000 shares issued and outstanding 213 213 Common stock, $.01 par value, 150,000,000 shares authorized, 41,963,435 and 36,835,921 shares issued and outstanding in 2000 and 1999, respectively 420 368 Additional paid-in capital 205,794 187,699 Accumulated other comprehensive (loss) income, net of tax (109) 922 Retained earnings 4,212 1,679 Notes receivable from affiliates for common shares (9,759) (10,842) --------------- -------------- Total stockholders' equity 200,771 180,039 --------------- -------------- $ 311,323 $ 328,153 =============== ==============
The accompanying notes are an integral part of the financial statements 3 EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------ ---------------------------- 2000 1999 2000 1999 --------------- -------------- -------------- ------------- Revenues Operating income $ 3,025 $ 2,208 $ 6,280 $ 9,106 Partnership and other income 1,234 207 2,936 508 Interest income 1,063 870 2,873 2,664 Rental income 574 2,141 2,735 8,581 --------------- -------------- -------------- ------------- Total revenue 5,896 5,426 14,824 20,859 --------------- -------------- -------------- ------------- Operating expenses: Interest 2,435 1,717 8,768 5,671 Other operating expenses 1,814 1,330 4,252 5,146 Property operating expenses 775 432 2,010 1,492 General and administrative 592 1,047 2,424 4,472 Depreciation and amortization 362 636 1,219 2,715 --------------- -------------- -------------- ------------- Total operating expenses 5,978 5,162 18,673 19,496 --------------- -------------- -------------- ------------- Net operating (loss) income (82) 264 (3,849) 1,363 Net gain from real estate sales and write-off of real estate related costs 5,495 481 8,358 481 --------------- -------------- -------------- ------------- Income before income taxes 5,413 745 4,509 1,844 Provision for income taxes 2,263 410 1,976 823 --------------- -------------- -------------- ------------- Net income $ 3,150 $ 335 $ 2,533 $ 1,021 =============== ============== ============== ============= Basic net income per common share $ 0.08 $ 0.01 $ 0.06 $ 0.03 =============== ============== ============== ============= Diluted net income per common share $ 0.05 $ 0.01 $ 0.04 $ 0.02 =============== ============== ============== =============
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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ----------
PREFERRED STOCK COMMON STOCK ADDITIONAL ACCUMULATED ----------------------------- ----------------------------- PAID IN COMPREHENSIVE NUMBER AMOUNT NUMBER AMOUNT CAPITAL INCOME -------------- ------------- -------------- ------------- -------------- ---------- SEPTEMBER 30 2000: Balance at January 1, 2000 21,281,000 $ 213 36,835,921 $ 368 $ 187,699 $ 922 Conversion of notes payable to common stock - - 5,102,181 51 18,012 - Issuance of common shares - - 25,333 1 83 - Repayment of Notes to affiliates - - - - - - Comprehensive income; Net loss - - - - - - Unrealized loss on marketable securities, net of tax Three months ended March 31, 2000 - - - - - 391 June 30, 2000 - - - - - (1,211) September 30, 2000 - - - - - (211) Total comprehensive loss -------------- ------------- -------------- ------------- -------------- ---------- Balance at September 30, 2000 21,281,000 $ 213 41,963,435 $ 420 $ 205,794 $ (109) ============== ============= ============== ============= ============== ========== SEPTEMBER 30, 1999: Balance at January 1, 1999: 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ - Repayment of notes - - - - - - Net income - - - - - - -------------- ------------- -------------- ------------- -------------- ---------- Balance at September 30, 1999 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ - ============== ============= ============== ============= ============== ==========
TOTAL TOTAL RETAINED NOTES STOCKHOLDERS EARNINGS RECEIVABLE EQUITY ------------- -------------- -------------- SEPTEMBER 30 2000: Balance at January 1, 2000 $1,679 $ (10,842) $ 180,039 Conversion of notes payable to common stock - - 18,063 Issuance of common shares - - 84 Repayment of Notes to affiliates - 1,083 1,083 Comprehensive income; Net loss 2,533 - 2,533 Unrealized loss on marketable securities, net of tax Three months ended March 31, 2000 - - 391 June 30, 2000 - - (1,211) September 30, 2000 - - (211) -------------- Total comprehensive loss (1,031) ------------- -------------- -------------- Balance at September 30, 2000 $ 4,212 $ (9,759) $ 200,771 ============= ============== ============== SEPTEMBER 30, 1999: Balance at January 1, 1999: $ 2,456 $ (10,872) $ 166,640 Repayment of notes - 30 30 Net income 1,021 - 1,021 ------------- -------------- -------------- Balance at September 30, 1999 $ 3,477 $ (10,842) $ 167,691 ============= ============== ==============
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) ----------
NINE MONTHS ENDED ------------------------------------- SEPTEMBER 30, SEPTEMBER 30, 2000 1999 ---------------- ----------------- Cash flows from operating activities: Net income $ 2,533 $ 1,021 Adjustments to reconcile net income to net cash provided by operations: Gain from real estate sales net of write-off of real estate related costs (8,358) (481) Depreciation and amortization 1,219 2,715 Earnings from equity investments 1,232 150 Minority interests in income of partnerships 133 4 Change in accounts receivable and other assets 3,614 (4,650) Change in accounts payable and other liabilities 2,645 1,533 ---------------- ----------------- Net cash provided by operating activities 3,018 292 ---------------- ----------------- Cash flows from investing activities: Proceeds from real estate sales 44,019 37,858 Real estate acquired and construction costs paid (21,669) (6,383) Pre-development costs paid (2,679) (14,020) Investment in partnerships (3,062) (8,504) Notes receivable issued (7,403) - ---------------- ----------------- Net cash used in investing activities 9,206 8,951 ---------------- ----------------- Cash flows from financing activities: Principal payments of notes and mortgages (40,569) (24,644) Borrowings from issuance of notes payable 27,083 23,576 ---------------- ----------------- Net cash used by financing activities (13,486) (1,068) ---------------- ----------------- Net (decrease) increase in cash (1,262) 8,175 Cash at the beginning of the periods 1,767 1,387 ---------------- ----------------- Cash at the end of the periods $ 505 $ 9,562 ================ =================
The accompanying notes are an integral part of the financial statements 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 2) under the equity method of accounting however, because the holders of PEI preferred stock have the right to elect a majority of the PEI board of directors. REAL ESTATE Certain real estate assets were transferred to the Company from Excel and recorded at Excel's cost basis. Other real estate assets acquired subsequent to the Spin-off were recorded at the Company's cost. Depreciation is computed using the straight-line method over estimated useful lives of 40 years for buildings. Expenditures for maintenance and repairs are charged to expense as incurred and significant renovations are capitalized. The Company assesses its properties individually for impairment whenever events or changes in circumstances indicate that the carrying amount of the property may not be recoverable. Recoverability of property to be held and used is measured by comparing the carrying amount of the property to future undiscounted net cash flows expected to be generated by the property. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the property, the property is considered to be impaired. If the property is impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property exceeds the fair value of the property. PRE-DEVELOPMENT COSTS Pre-development costs that are directly related to specific construction projects are capitalized as incurred. The Company expenses these costs to the extent they are unrecoverable or it is determined that the related project will not be pursued. 7 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: MANAGEMENT CONTRACTS Management contracts are recorded at cost and amortized over a period of seven years. INCOME TAXES The Company provides for income taxes under the liability method. A current tax asset or liability is recognized for the estimated taxes refundable or payable for the current year. A deferred tax asset or liability is recognized for the estimated future tax effects attributable to carry forwards and to temporary differences between the tax and financial reporting basis of assets and liabilities. The measurement of current and deferred tax assets and liabilities is based on enacted tax laws and rates. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized. DEFERRED LEASING AND LOAN ACQUISITION COSTS Costs incurred in obtaining tenant leases and long-term financing are amortized to other property expense and interest expense, respectively, on the straight-line and effective interest method over the terms of the related leases or debt agreements. REVENUE RECOGNITION Base rental revenue is recognized on the straight-line basis, which averages annual minimum rents over the terms of the leases. Certain of the leases provide for additional contingent rental revenue based upon the level of sales achieved by the lessee. Contingent rental revenue is recognized when earned. COMPREHENSIVE INCOME In 1999, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 130 "Reporting Comprehensive Income." This statement requires that all components of comprehensive income be reported in the financial statements in the period in which they are recognized. The components of comprehensive income for the Company include net income and unrealized gains on investments. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the consolidated financial statements at December 31, 1999 and for the periods ended September 30, 1999 to conform with the current period's presentation. 8 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 2. PRICE ENTERPRISES, INC. In November 1999, the Company completed an exchange offer of $8.50 per share for any and all common shares of Price Enterprises, Inc., a Maryland corporation which is operated as a real estate investment trust ("PEI"). The exchange offer consisted of per share consideration for PEI common stock of $4.25 in cash, $2.75 in principal amount of newly issued 9% Convertible Redeemable Subordinated Secured Debentures of the Company due in 2004 (convertible at any time into the Company's common stock at $5.50 per share) and $1.50 in newly issued 10% Senior Redeemable Secured Notes of the Company due in 2004. Approximately, 12,154,000 shares of PEI common stock were tendered representing approximately 91% of the outstanding common stock. Below is summarized financial information as of September 30, 2000 and the periods then ended for PEI (in thousands):
THREE MONTHS NINE MONTHS ENDED ENDED BALANCE SHEET SEPTEMBER 30, INCOME STATEMENT: SEPTEMBER 30, SEPTEMBER 30, 2000 2000 2000 ----------------- --------------- ---------------- Real estate, net of accumulated depreciation $ 559,528 Total revenue $ 18,767 $ 54,488 Other assets 75,967 Operating expenses (4,356) (11,810) ----------------- Total assets $ 635,495 General and administrative (769) (2,281) ================= Notes and mortgages payable $ 167,223 Interest expense (2,890) (7,199) Accounts payable and other 4,805 Depreciation and (2,365) (7,152) liabilities amortization ----------------- 172,028 Gain on sales of real 249 249 estate --------------- ---------------- 83/4% Series A Preferred stock 353,404 Net income 8,636 26,295 Other stockholders' equity 110,063 Preferred dividends (8,354) (25,005) ----------------- --------------- ---------------- Total liabilities Net income available and stockholders' equity $ 635,495 for common shares $ 282 $ 1,290 ================= =============== ================
The following unaudited pro forma information for the periods ended September 30, 1999 have been presented as if the Company acquired approximately 91% of the common shares of PEI on January 1, 1999. The unaudited pro forma information makes certain assumptions regarding capital sources and interest rates and the pro forma information is not necessarily indicative of what the actual results of operations of the Company would have been had the acquisition actually occurred on January 1, 1999 (in thousands).
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1999 --------------------- -------------------- (PRO FORMA) Total revenue $ 5,078 $ 25,364 Operating expenses, excluding interest (3,195) (13,075) Interest expense (3,854) (10,694) Net gain on real estate sales 481 481 Income taxes 484 (916) --------------------- -------------------- Net (loss) income $ (1,006) $ 1,160 ===================== ==================== Net income per share Basic $ (0.02) $ 0.03 ===================== ==================== Diluted $ (0.02) $ 0.02 ===================== ====================
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): SEPTEMBER 30, 2000 DECEMBER 31, 1999 --------------------- -------------------- Cost $ 1,000 $ 1,000 Unrealized (loss) gain (109) 922 --------------------- -------------------- Fair value $ 891 $ 1,922 ===================== ====================
4. REAL ESTATE: In July 2000, the Company sold a property for approximately $28.2 million. In May 2000, the Company sold land for net proceeds of approximately $5.8 million. In February 2000, the Company sold three properties to PEI for approximately $24.4 million. Mortgage debt of approximately $14.3 million was transferred as part the sales. The Company entered into an agreement to lease one of these properties back from PEI. The sales of the above properties resulted in a net gain of $9.1 million. The gain was partially offset by certain real estate under contract for sale which were written down by $0.7 million to their estimated sales price. In the nine months ended September 30, 1999, the Company sold eight properties leased to Wal-mart and a land parcel for a net book gain of $1.9 million. Mortgage debt of $23.6 million was retired in conjunction with these sales. The Company also wrote-off $1.4 million in costs related to two development projects. 5. NOTES RECEIVABLE: The Company had $36.4 million in notes receivable outstanding at September 30, 2000 related to various development projects. The notes bear interest at 11% to 12% per annum and are secured by the related projects. The notes mature on various dates between 2000 and the earlier of the sale of the related projects, or 2003 to 2004. 10 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 6. NOTES AND MORTGAGES PAYABLE: NOTES PAYABLE The Company had the following notes payable outstanding at September 30, 2000 and December 31, 1999:
SEPTEMBER 30, DECEMBER 31, 2000 1999 ---------------- ---------------- (IN THOUSANDS) Revolving $15.0 million unsecured credit facility bearing interest at Libor plus 3.75% (10.6% at September 30, 2000) due June 30, 2001. $ 4,700 $ - Revolving $40.0 million line of credit facility with PEI bearing interest at Libor plus 3.75% (10.6% at September 30, 2000) to 12.50% due December 2002. 16,500 - Note payable to The Sol and Helen Price Trust bearing interest at Libor plus 1.50% (8.0% at September 30, 2000) due November 2004. The note is secured by some of the Company's PEI common shares 9,347 27,347 Note payable to an individual bearing interest at Prime plus 2% (11.5% at September 30, 2000) repaid in October 2000. 5,000 5,000 Note payable outstanding on a $4.7 million facility related to Newport on the Levee, LLC, bearing interest at Prime plus 0.5% (10.0% at September 30, 2000), due March 2001. 2,098 - Revolving $35.0 million secured credit facility bearing interest at Libor plus 3.75% repaid in July 2000. - 32,103 Other 1,530 6,211 ---------------- ---------------- Total $ 39,175 $ 70,661 ================ ================
The Company has a 65% interest in Newport on the Levee, LLC ("Newport") that is developing an entertainment retail project in Newport, KY. In addition to the $2.1 million note in the above table, the City of Newport has issued two series of public improvement bonds. The Series 2000a tax exempt bonds total $44.2 million and are broken down as follows: (i) $18.7 million maturing 2027 with interest at 8.375%; (ii) $20.5 million maturing 2018 with interest at 8.5%; and (iii) $5.0 million maturing 2027 with interest at 8.375%. The Series 2000b bonds are taxable and have a par amount of $11.6 million with interest at 11% due 2009. The bonds are guaranteed by Newport, the Company, and the third party developers of the project. Newport has drawn on $29.2 million of the bonds at September 30, 2000 from the trustee for construction incurred to date. The Company also has a 50% interest in a limited liability company that owns land in Orlando, Florida. The land has a total book basis of $18.5 million at September 30, 2000 and mortgage debt of $8.9 million which is guaranteed by the Company. The Company also has approximately $21.0 million of guaranteed debt related to other development projects. 11 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 6. NOTES AND MORTGAGES PAYABLE, CONTINUED: CONVERTIBLE DEBENTURES In conjunction with the PEI exchange offer, the Company issued $33.2 million in convertible debentures ("Debentures"). The Debentures bear an interest rate of 9% per annum and are secured by a first priority security interest in common shares of PEI. The holders of the Debentures are entitled at any time before the day prior to the final maturity date, subject to prior redemption, to convert any Debentures into the Company's common stock at the conversion price of $5.50 per share. The Debentures mature in November 2004. SENIOR NOTES In conjunction with the PEI exchange offer, the Company issued $18.1 million in senior notes ("Senior Notes"). The Senior Notes bear an interest rate of 10% per annum and, along with the Debentures, are secured by a first priority security interest in common shares of PEI. The Senior Notes rank equal to future senior indebtedness of the Company and senior to the Debentures. The Senior Notes mature in November 2004. MORTGAGE PAYABLE The Company had $8.2 million in mortgage payables outstanding at September 30, 2000 secured by real estate. Of this amount, $2.0 million was transferred as part of a sale of an office building to PEI in October 2000. The remaining $6.2 million relates to land acquired in Anaheim, CA. This note bears interest at 6.0% per annum and is due in September 2002. The principal payments required to be made on mortgages and notes payable over the next five years are as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------- 2000 (remaining three months) $ 5,792 2001 7,698 2002 22,864 2003 176 2004 60,835 Thereafter 1,328 ------------------ $ 98,693 ==================
7. INCOME TAXES: At September 30, 2000, the Company had a net deferred tax asset of $4.9 million. The deferred tax asset primarily relates to certain assets written-off for book purposes, but not yet deducted for tax purposes. The remaining portion of the deferred asset relates to timing differences in recognizing revenue and expenses for tax purposes through operations of the Company. No valuation allowance has been provided against the deferred tax asset as the Company believes future taxable income is more likely than not. The provision for income taxes consisted of the following (in thousands): 12 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 7. INCOME TAXES, CONTINUED:
FEDERAL STATE --------------------- -------------------- NINE MONTHS ENDED SEPTEMBER 30, 2000: Current payable $ 114 $ 236 Deferred tax benefit 1,016 610 --------------------- -------------------- Benefit (provision) for income taxes $ 1,130 $ 846 ===================== ==================== NINE MONTHS ENDED SEPTEMBER 30, 1999 Current benefit $ (835) $ (179) Deferred tax expense 1,483 354 --------------------- -------------------- Provision for income taxes $ 648 $ 175 ===================== ====================
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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- BASIC EPS Numerator: Net income $ 3,150 $ 335 $ 2,533 $ 1,021 =============== =============== =============== =============== Denominator: Weighted average of common shares outstanding 41,981 33,458 40,267 33,458 =============== =============== =============== =============== Earnings Per Share: $ 0.08 $ 0.01 $ 0.06 $ 0.03 =============== =============== =============== ===============
13 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 9. EARNINGS PER SHARE (EPS), CONTINUED:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- DILUTED EPS Numerator: Net income $ 3,150 $ 335 $ 2,533 $ 1,021 =============== =============== =============== =============== Denominator: Weighted average of common shares outstanding 41,981 33,458 40,267 33,458 Effect of diluted securities: Preferred B shares 21,281 21,281 21,281 21,281 Options - 48 - 47 =============== =============== =============== =============== 63,262 54,787 61,548 54,786 =============== =============== =============== =============== Earnings Per Share: $ 0.05 $ 0.01 $ 0.04 $ 0.02 =============== =============== =============== ===============
10. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE: The amounts paid for interest during the nine months ended September 30, 2000 and September 30, 1999 were $8.6 million and $4.7 million, respectively. The amounts paid for income taxes in the nine months ended September 30, 2000 and September 30, 1999 were $0.2 million and $0.6 million, respectively. In 2000, the Company converted $18.1 million of notes payable into 5.1 million common shares. Also in 2000, $13.7 million in mortgage debt was transferred to PEI in conjunction with asset sales to PEI; and Newport assumed $2.1 million in debt in conjunction with real estate construction and acquisitions. In January 2000, the notes receivable from certain officers were decreased by $1.1 million for salary and bonuses not paid in cash. This amount was included as a general and administrative expense in 1999. In the nine months ended September 30, 1999, $3.8 million of debt was assumed related to the construction of an office building. 11. SEGMENT REPORTING: The Company's primary business segments consist of the Commercial Property Unit, the Development Unit, and the Investment Unit. The Commercial Property Unit manages Company held operating properties and includes its investment in PEI. The Development Unit develops real estate projects and the Business Unit pursues and invests in public and private real estate-related companies and/or their securities. Certain revenues and expenses such as general and administrative not specifically incurred by specific segments, and corporate income taxes have been grouped with "General and Administrative" for presentation purposes. 14 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 11. SEGMENT REPORTING, CONTINUED:
COMMERCIAL DEVELOPMENT INVESTMENT GENERAL AND PROPERTY UNIT UNIT UNIT ADMINISTRATIVE TOTAL ---------------- --------------- --------------- --------------- --------------- THREE MONTHS ENDED SEPT. 30, 2000: Total revenues $ 703 $ 1,331 $ 3,603 $ 259 $ 5,896 ---------------- --------------- --------------- --------------- --------------- Interest 41 2,394 2,435 - - Depreciation and amortization 38 75 118 131 362 General and administrative - - - 592 592 Operating expenses 398 203 1,988 - 2,589 ---------------- --------------- --------------- --------------- --------------- Total operating expenses 477 278 2,106 3,117 5,978 ---------------- --------------- --------------- --------------- --------------- Net operating income (loss) 226 1,053 1,497 (2,858) (82) Real estate sales - 5,495 - - 5,495 Provision for income taxes - - - (2,263) (2,263) ---------------- --------------- --------------- --------------- --------------- Net income $ 226 $ 6,548 $ 1,497 $ (5,121) $ 3,150 ================ =============== =============== =============== =============== Total assets $ 122,841 $ 125,891 $ 52,355 $ 10,236 $ 311,323 ================ =============== =============== =============== =============== THREE MONTHS ENDED SEPT. 30, 1999: Total revenues $ 1,876 $ 1,040 $ 2,173 $ 337 $ 5,426 ---------------- --------------- --------------- --------------- --------------- Interest 687 - - 1,030 1,717 Depreciation and amortization 257 143 218 18 636 General and administrative - - 37 1,010 1,047 Operating expenses 132 170 1,460 - 1,762 ---------------- --------------- --------------- --------------- --------------- Total operating expenses 1,076 313 1,715 2,058 5,162 ---------------- --------------- --------------- --------------- --------------- Net operating income 800 727 458 (1,721) 264 Real estate sales 813 (332) - - 481 Provision for income taxes - - - (410) (410) ---------------- --------------- --------------- --------------- --------------- Net income $ 1,613 $ 395 $ 458 $ (2,131) $ 335 ================ =============== =============== =============== =============== Total assets $ 62,302 $ 118,129 $ 59,275 $ 6,572 $ 246,278 ================ =============== =============== =============== =============== NINE MONTHS ENDED SEPT. 30, 2000: Total revenues $ 2,426 $ 4,473 $ 7,210 $ 715 $ 14,824 ---------------- --------------- --------------- --------------- --------------- Interest 285 - 64 8,419 8,768 Depreciation and amortization 137 360 565 157 1,219 General and administrative - - 42 2,382 2,424 Operating expenses 1,077 713 4,472 - 6,262 ---------------- --------------- --------------- --------------- --------------- Total operating expenses 1,499 1,073 5,143 10,958 18,673 ---------------- --------------- --------------- --------------- --------------- Net operating income 927 3,400 2,067 (10,243) (3,849) Real estate sales - 5,495 - 2,863 8,358 Provision for income taxes - - - (1,976) (1,976) ---------------- --------------- --------------- --------------- --------------- Net income $ 927 $ 8,895 $ 2,067 $ (9,356) $ 2,533 ================ =============== =============== =============== =============== NINE MONTHS ENDED SEPT. 30, 1999: Total revenues $ 7,494 $ 3,226 $ 8,994 $ 1,145 $ 20,859 ---------------- --------------- --------------- --------------- --------------- Interest 3,398 - 419 1,854 5,671 Depreciation and amortization 1,210 428 1,028 49 2,715 General and administrative - - 1,808 2,664 4,472 Operating expenses 317 783 5,538 - 6,638 ---------------- --------------- --------------- --------------- --------------- Total operating expenses 4,925 1,211 8,793 4,567 19,496 ---------------- --------------- --------------- --------------- --------------- Net operating income 2,569 2,015 201 (3,422) 1,363 Real estate sales 813 (332) - - 481 Provision for income taxes - - - (823) (823) ---------------- --------------- --------------- --------------- --------------- Net income $ 3,382 $ 1,683 $ 201 $ (4,245) $ 1,021 ================ =============== =============== =============== ===============
15 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 12. RELATED PARTY TRANSACTIONS: In connection with the sale of common stock to certain affiliates in 1998, the Company issued notes receivable of which $9.8 million was outstanding at September 30, 2000. The notes bear interest at a fixed rate of 7%, and are due in March 2003. The total interest receivable at September 30, 2000 from these notes totaled $1.6 million. The notes have been offset against stockholders' equity on the Company's accompanying Consolidated Balance Sheets. In September 2000, the Company entered into agreements with certain officers to assume $5.1 million in personal debt obligations of the officers in exchange for their rights in 2.05 million shares of Company common stock. The effective price of the transaction was $2.50 per share, tied to the market price on the day of the transaction. The officer debts were entered into in connection with their original share purchase. By assuming these third-party debts, the Company also obtained a first lien on all remaining shares currently held by the officers, which will serve as security for the officers' notes to the Company. The Company paid $3.9 million of the above personal debt in October 2000, upon which the Company recorded 1.56 million shares as repurchased. In 2000, three properties and a joint venture interest were sold to PEI. The Company leases back one of the properties for a quarterly amount of $0.1 million. Also, at September 30, 2000, the Company had $16.5 million payable to PEI on a $40.0 million note. In October 2000, an additional property was sold to PEI for $9.6 million. Finally, the Company offsets the general and administrative costs with reimbursements received monthly from PEI. In the nine months ended September 30, 2000, approximately $2.2 million was received as reimbursements. 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NATURE OF BUSINESS The Company acquires, sells, develops, manages, invests, finances and operates real property and related businesses. The Company performs within three business units: 1) a commercial property unit which manages Company held properties. In this unit the company has Price Enterprises, Inc., a REIT, 2) a business investment unit where the Company pursues public and private operating real estate-related companies and/or their securities, and 3) a development unit where the Company develops signature projects that have unique locations, original concepts and significant competitive entry barriers. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and the Notes thereto. COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2000 TO THE THREE MONTHS ENDED SEPTEMBER 30, 1999 OPERATING INCOME totaled $3.0 million in the three months ended September 30, 2000 compared to $2.2 million in the three months ended September 30, 1999 resulting in an increase of $0.8 million. The increase primarily relates to operations from The Grand Hotel. PARTNERSHIP INCOME AND OTHER REVENUES were approximately $1.2 million in the three months ended September 30, 2000 compared to $0.2 million in the three months ended September 30, 1999. In 2000, the Company recognized $1.0 million from a joint venture, which owns land in Orlando, Florida. The gain was primarily related to 235 acres of land sold in September 2000. In the three months ended September 30, 2000, the Company also recognized $0.2 million in income from its equity investment in PEI, which was consummated in November 1999. In 1999, the Company's partnership and other revenue was primarily derived from its equity investment in a joint venture owning property in Westminster, CO which was transferred to PEI in 2000. INTEREST INCOME was $1.0 million in the three months ended September 30, 2000 and $0.9 million in the three months ended September 30, 1999. Interest income is primarily generated from notes receivable and cash balances. The increase of $0.1 million was primarily related to additional notes receivable advances in 2000. RENTAL REVENUE was $0.6 million during the three months ended September 30, 2000 compared to $2.1 million in the three months ended September 30, 1999 resulting in a decrease of $1.5 million. The sales of twelve properties accounted for a decrease of $1.5 million. Eight of these properties were leased to Wal-Mart Stores, Inc. ("Wal-Mart"), two of the properties were leased to Lowe's Home Centers, Inc. and two were leased to AMC Multi-Cinema. In addition, $0.1 million of decreased rental revenue related to properties that are planned for sale. This decrease was offset by $0.1 million related to rental revenue of land from the Company's project in Newport, KY which did not generate any such income in 1999. INTEREST EXPENSE was $2.4 million in the three months ended September 30, 2000 compared to $1.7 million in the three months ended September 30, 1999. Debt assumed in conjunction with the acquisition of PEI in November 1999 accounted for approximately $1.4 million of interest expense in the three months ended September 30, 2000. A decrease of $0.7 million relates to mortgage debt on properties that were sold in 1999 and 2000. OTHER OPERATING EXPENSES were $1.8 million in the three months ended September 30, 2000 compared to $1.3 million in the three months ended September 30, 1999, resulting in an increase of $0.5 million. The expenses in both periods primarily related to the Grand Hotel. In addition to the Grand Hotel, $0.4 million in 2000 related to the Company's project in Daniel's Head, Bermuda that is now partially operating. PROPERTY OPERATING EXPENSES were $0.8 million in the three months ended September 30, 2000 compared to $0.4 million in the three months ended September 30, 1999. Two properties located in Scottsdale, AZ and Palm Springs, 17 CA accounted for $0.2 million of the increase, primarily related to improving the properties for sale. The remaining $0.2 million primarily relates to an office building located in San Diego that the Company master leases from PEI. GENERAL AND ADMINISTRATIVE EXPENSES were $0.6 million in the three months ended September 30, 2000 compared to $1.0 million in the three months ended September 30, 1999. The decrease primarily relates to reimbursements from PEI in 2000. DEPRECIATION AND AMORTIZATION EXPENSE totaled $0.4 million in the three months ended September 30, 2000 compared to $0.6 million in the three months ended September 30, 1999. The decrease of $0.2 million primarily relates to properties sold. THE NET GAIN FROM REAL ESTATE SALES AND WRITE-OFF OF REAL ESTATE RELATED COSTS was $5.5 million in the three months ended September 30, 2000 and primarily related to a $6.2 million gain from the sale of the Galleria in Scottsdale, AZ. The gain was offset by reserves of $0.7 million to the estimated prices for properties put under contract for sale in the quarter. In the three months ended September 30, 1999, the net gain was $0.5 million. The Company incurred a gain from the sale of the eight properties leased to Wal-Mart of $0.8 million and the sale of a land parcel of $1.1 million. These gains were offset by a write-off of $1.4 million of costs related to development projects in Scottsdale, Arizona and Indianapolis, Indiana. The Company recognized a PROVISION FOR INCOME TAXES of $2.3 million in the three months ended September 30, 2000 compared to $0.4 million in the three months ended September 30, 1999 related to income before taxes of $5.4 million and $0.7 million, respectively. COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2000 TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999 OPERATING INCOME totaled $6.3 million in the nine months ended September 30, 2000 compared to $9.1 million in the nine months ended September 30, 1999 resulting in a decrease of $2.8 million. In 1999, Millennia, a subsidiary of the Company, owned car wash properties that generated $4.3 million of operating income. On March 31, 1999, these properties were sold for common shares in a publicly traded company, Mace Security International, Inc. This decrease was offset by a) The Grand Hotel, which was not opened until the second half of 1998, generated $0.9 million of additional operating income in 2000 when compared to 1999. b) the Company's project in Daniel's Head, Bermuda which partially opened in the period, contributed $0.1 million, c) the Company's project in Newport, KY contributed $0.3 million and d) other Company investments contributed $0.2 million. PARTNERSHIP INCOME AND OTHER REVENUES were approximately $2.9 million in the nine months ended September 30, 2000 compared to $0.5 million in the nine months ended September 30, 1999. In 2000, the Company recognized $1.0 million from a joint venture that owns land in Orlando, Florida. In 2000, the Company recognized $1.1 million in income from its equity investment in PEI . Additionally, the Company recognized $0.3 million related to a forfeited deposit on a property sale and $0.5 million from its investments in joint ventures. INTEREST INCOME was $2.9 million in the nine months ended September 30, 2000 compared to $2.7 million in the nine months ended September 30, 1999 and primarily related to higher average note receivable balances in 2000. RENTAL REVENUE was $2.7 million during the nine months ended September 30, 2000 compared to $8.6 million in the nine months ended September 30, 1999 resulting in a decrease of $5.9 million. The sale of twelve properties accounted for a decrease of $6.6 million. Offsetting this decrease was the Company's project in Newport, KY which accounted for $0.7 million in 2000 related to a land lease that did not generate any revenues in 1999. INTEREST EXPENSE was $8.8 million in the nine months ended September 30, 2000 compared to $5.7 million in the nine months ended September 30, 1999 resulting in an increase of $3.1 million. Debt assumed in conjunction with the acquisition of PEI in November 1999 accounted for $4.5 million of interest expense in the nine months ended September 30, 2000. An increase of $1.8 million relates to additional amounts borrowed on the Company's credit facilities and short-term notes, primarily to fund its development projects. A decrease of $3.2 million relates to mortgage debt on properties that were sold in 1999 and 2000. 18 OTHER OPERATING EXPENSES were $4.3 million in the nine months ended September 30, 2000 compared to $5.1 million in the nine months ended September 30, 1999, resulting in a decrease of $0.8 million. In 1999, expenses of $1.8 million related to Millennia compared to $0 in 2000. The remaining net increase of $1.0 million primarily related to the Grand Hotel and operational costs of the Company's project in Bermuda that partially opened in the third quarter of 2000. PROPERTY OPERATING EXPENSES were $2.0 million in the nine months ended September 30, 2000 compared to $1.5 million in the nine months ended September 30, 1999. A property located in Scottsdale, AZ accounted for $0.2 million of the increase, primarily related to improving the property for sale. The remaining $0.3 million primarily relates to an office building located in San Diego that the Company master leases from PEI. GENERAL AND ADMINISTRATIVE EXPENSES were $2.4 million in the nine months ended September 30, 2000 compared to $4.5 million in the nine months ended September 30, 1999. The primary reason for the decrease was a result of expenses incurred by Millennia in 1999. DEPRECIATION AND AMORTIZATION EXPENSE totaled $1.2 million in the nine months ended September 30, 2000 compared to $2.7 million in the nine months ended September 30, 1999. The decrease of $1.5 million primarily relates to properties sold and the depreciation of Millennia assets in 1999 of $0.3 million. THE NET GAIN FROM REAL ESTATE SALES AND WRITE-OFF OF REAL ESTATE RELATED COSTS was $8.4 million in 2000 compared to $0.5 million in 1999. This gain in 2000 related to the Galleria in Scottsdale, AZ , two properties sold to PEI and land sold. An additional building was sold to PEI in 2000 of which there was no gain recorded as the Company is leasing back the building. In 1999, the net gain was $0.5 million. The Company recognized a gain from the sale of the eight properties leased to Wal-Mart of $0.8 million and the sale of a land parcel of $1.1 million. These gains were offset by a write-off of $1.4 million of costs related to development projects in Scottsdale, Arizona and Indianapolis, Indiana. The Company recognized a PROVISION FOR INCOME TAXES of $2.0 million in the nine months ended September 30, 2000 compared to $0.8 million in the nine months ended September 30, 1999 related to income before taxes of $4.5 million and $1.4 million, respectively The Company calculates EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND DEFERRED TAXES ("EBDADT") as net income, plus depreciation and amortization on real estate and real estate related assets, and deferred income taxes. EBDADT does not represent cash flows from operations as defined by generally accepted accounting principles, and may not be comparable to other similarly titled measures of other companies. The Company believes, however, that to facilitate a clear understanding of its operating results, EBDADT should be examined in conjunction with its net income as reductions for certain items are not meaningful in evaluating income-producing real estate. The following information is included to show the items included in the Company's EBDADT for the periods ended September 30, 2000 and 1999:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Net income $ 3,150 $ 335 $ 2,533 $ 1,021 Depreciation and amortization (financial statements) 362 636 1,219 2,715 Proportionate share of depreciation and amortization from equity investments: PEI 2,118 - 6,489 - Other 95 - 440 - Less depreciation of non-real estate assets (53) (20) (156) (64) Deferred tax expense 1,948 1,746 1,626 1,837 --------------- --------------- --------------- --------------- EBDADT $ 7,620 $ 2,697 $ 12,151 $ 5,509 =============== =============== =============== ===============
19 LIQUIDITY AND CAPITAL RESOURCES Cash flows from asset sales and borrowings from debt were the primary source of capital to fund the Company's development and ongoing operations in the nine months ended September 30, 2000. In November 1999, the Company completed an exchange offer for the common stock of PEI. In the exchange offer, the Company acquired approximately 91.3% of the PEI common stock. PEI stockholders who tendered their shares of the PEI common stock in the exchange offer received from the Company a total of $8.50 consisting of $4.25 in cash, $2.75 in principal amount of the Company's 9.0% Convertible Redeemable Subordinated Secured Debentures ("Debentures") due 2004 and $1.50 in principal amount of the Company's 10.0% Senior Redeemable Secured Notes ("Senior Notes") due 2004 for each share of PEI common stock. After expenses, the Company paid approximately $61.0 million in cash and issued approximately $33.2 million in principal amount of the Debentures and approximately $18.1 million in principal amount of the Senior Notes to acquire the PEI common stock in the exchange offer. Of the cash, $27.4 million was borrowed from The Sol and Helen Price Trust. The remaining $33.6 million was available cash borrowed from other notes, including the Company's credit facility, and from asset sales. In accordance with the stockholders agreement entered into in connection with the exchange offer, until a certain amount of PEI preferred stock is repurchased or tendered for, $7.5 million of cash flow, as defined, is required to be reinvested in PEI before dividends can be paid to its common shareholders. As such, cash available to service the Company's debt incurred to complete the PEI exchange offer is subject to this restriction. The Company does, however, directly benefit from savings in general and administrative expenses from managing the combined companies, and would receive its portion of PEI common stock dividends for cash flows in excess of the $7.5 million. The Company anticipates that cash flow will be generated from existing properties and from opportunistic trading of assets. In April 2000, the Company announced its intention to sell a group of assets to repay the Company's short-term debt. The board of directors also approved the repurchase of up to 10% of the outstanding shares of common stock of the Company with excess proceeds. At the time, there was $45.1 million of principal debt due in 2000. Of the $99.7 million of total debt outstanding on September 30, 2000, $6.0 million was due in 2000 of which $5.0 million was repaid in October 2000. The debt that was due during the year was repaid from asset sales and debt refinancing. The ability to continue to fund its development projects is dependent on the Company's selling of assets, the procurement of equity or joint venture capital, or the ability to raise additional debt. The Company currently has a $40 million revolving line of credit due in 2002 with PEI of which $16.5 million was outstanding at September 30, 2000 and a $15.0 million revolving credit facility with Fleet National Bank due in June 2001 of which $4.5 million was outstanding at September 30, 2000. In addition to using proceeds from asset sales to repay debt and fund development projects, the Company has on file a $300.0 million shelf registration statement for the purpose of issuing debt securities, preferred stock, depositary shares, common stock, warrants or rights. Currently, there remains $286.5 million of securities available for issuance under this shelf. The Company expects to meet its long-term liquidity requirements, such as property acquisitions and development, mortgage debt maturities, and other investment opportunities, through the most advantageous sources of capital available to the Company at the time, which may include operating cash flows from existing properties and the completion of current development projects, the sale of common stock, preferred stock or debt securities through public offerings or private placements, entering into joint venture arrangements with financial partners, the incurrence of indebtedness through secured or unsecured borrowings and the reinvestment of proceeds from the disposition of assets In October 1999, the Company completed the sale of Millennia's assets to American Wash Services, Inc. ("AWS"), in exchange for 3,500,000 shares of common stock of the parent of AWS, Mace Security International, Inc. ("Mace"), a warrant to acquire an additional 62,500 shares of Mace common stock at an exercise price of $4.00 per 20 share, and the assumption by AWS of certain liabilities of Millennia. In conjunction with this transaction, Millennia had assigned the operations of its assets to AWS effective April 1, 1999, and thus did not receive cash flow from operations after April 1, 1999. In addition, Millennia acquired 250,000 common shares of Mace through a private placement at $2.00 per share and 250,000 common shares of US Plastic Lumber Corporation ("USPL") at $4.00 per share. The Mace and USPL common shares are subject to certain restrictions and not currently available for sale. The City of Newport has issued two series of public improvement bonds related to the Newport development project. The Series 2000a tax exempt bonds total $44.2 million and are broken down as follows: (i) $18.7 million maturing 2027 with interest at 8.375%; (ii) $20.5 million maturing 2018 with interest at 8.5%; and (iii) $5.0 million maturing 2027 with interest at 8.375%. The Series 2000b bonds are taxable and have a par amount of $11.6 million with interest at 11% due 2009. The bonds are guaranteed by Newport, the Company, and the third party developers of the project. Newport has drawn on $29.2 million of the bonds at September 30, 2000 from the trustee for construction incurred to date. The Company also has a 50% interest in a limited liability company that owns land in Orlando, Florida. The land has a remaining land basis at September 30, 2000 of $18.5 million and has mortgage debt of $8.9 million secured by the land and guaranteed by the Company. The Company had $21.0 million of additional guaranteed debt related to several development projects at September 30, 2000. At September 30, 2000, the Company had 21,281,000 shares of Series B Preferred Stock outstanding (the "Preferred B Shares"). Holders of the Preferred B Shares are entitled to receive, when, as and if declared by the Board of Directors, cumulative cash dividends payable in an amount per share equal to the cash dividends, if any, on the shares of common stock into which the Preferred B Shares are convertible. Holders of the Preferred B Shares are also entitled to a liquidation preference of $5.00 per share, plus a premium of 7% per annum, in the event of any liquidation, dissolution or other winding up of the affairs of the Company. The Preferred B Shares are convertible into common stock of the Company at the election of the Company or the holders at any time, on a one-for-one basis, subject to adjustment in certain circumstances. In September 2000, the Company entered into agreements with certain officers to assume $5.1 million in personal debt obligations of the officers in exchange for their rights in 2.05 million shares of Company common stock. The effective price of the transaction was $2.50 per share, tied to the market price on the day of the transaction. The officer debts were entered into in connection with their original share purchase. By assuming these third-party debts, the Company also obtained a first lien on all remaining shares currently held by the officers, which will serve as security for the officers' notes to the Company. The Company paid $3.9 million of the personal debt in October 2000, upon which the Company recorded 1.56 million shares as repurchased. CERTAIN CAUTIONARY STATEMENTS Certain statements in this Quarterly Report on Form 10-Q, including, but not limited to, "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not historical facts, but rather reflect current expectations concerning future results and events. The words "believes," "expects," "intends," "plans," "anticipates," "likely," "will" and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond the Company's control that could cause actual results to differ materially from those forecast or anticipated in such forward-looking statements. These factors include, but are not limited to, the Company's development activities, leverage including short term obligations, reliance on major tenants, competition, dependence on regional economic conditions, fluctuations in operating results, integration of acquired businesses, costs of regulatory compliance, dependence on senior management, and possible stock price volatility. These factors are discussed in greater detail under the caption "Certain Cautionary Statements" in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. 21 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk exposure affecting its market risk sensitive financial instruments is interest rate risk. The Company's balance sheet contains financial instruments in the form of interest-earning notes receivable and interest-bearing mortgages payable. The Company manages the risk to its cash flow from changes in interest rates by monitoring its variable rate financial instruments. Although the fair value of its financial instruments may be affected by changes in interest rates, the Company typically does not dispose of them prior to maturity. Thus, the primary effect of changes in interest rates would occur to the extent that financial instruments mature and are replaced with others at different interest rates. At September 30, 2000, the Company had debts totaling $37.6 million in variable interest rates. If interest rates increased 100 basis points, the annual effect of such increase to the Company's financial position and cash flows would be approximately $0.4 million, based on the outstanding balance at September 30, 2000. The actual fluctuation of interest rates is not determinable; accordingly, actual results from interest rate fluctuation could differ. The following table presents (1) the scheduled principal payments on notes receivable, and (2) the scheduled principal repayments on mortgages payable: over the next five years and thereafter. The table also includes the average interest rates of the financial instruments during each respective year and the fair value of the notes receivable and mortgages payable. The Company determines the fair value of financial instruments through the use of discounted cash flow analysis using current interest rates for (1) notes receivable with terms and credit characteristics similar to its existing portfolio and (2) borrowings under terms similar to its existing mortgages payable. Accordingly, the Company has determined that the carrying value of its financial instruments at September 30, 2000 approximates fair value.
EXPECTED MATURITY DATE (DOLLAR AMOUNTS IN THOUSANDS) -------------------------------------------------------------------------------------------------------------------------- FAIR 2000 2001 2002 2003 2004 THEREAFTER TOTAL VALUE -------------------------------------------------------------------------------------------------------------------------- Notes Receivable, including $4,013 - - $22,554 $5,518 $1,051 $34,191 $34,200 notes from affiliates 12.00% - - 12.00% 11.00% 10.00% 11.78% Average interest rate -------------------------------------------------------------------------------------------------------------------------- $5,992 $7,698 $22,864 $176 $60,835 $1,327 $ 98,892 $ 98,000 Mortgages and Notes Payable 11.16% 10.20% 9.28% 8.25% 9.16% 8.25% 9.38% Average interest rate --------------------------------------------------------------------------------------------------------------------------
22 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Form of Stock Purchase Agreement dated as of September 25, 2000 by and between the Company and each of Richard B. Muir, Graham R. Bullick, S. Eric Ottesen and Mark T. Burton. 10.2 Form of Loan Assumption Agreement dated as of September 25, 2000 by and between the Company and each of Richard B. Muir, Graham R. Bullick, S. Eric Ottesen and Mark T. Burton. 10.3 Amended and Restated Revolving Credit Agreement dated as of October 16, 2000 among the Company and Fleet National Bank. 10.4 First Amended and Restated Promissory Note and Revolving Line of Credit dated September 27, 2000 by and among the Company and PEI. 27.1 Financial Data Schedule (b) Reports on Form 8-K during the quarter A Current Report on Form 8-K was filed with the Commission on July 20, 2000 regarding the Company's sale of a property located in Scottsdale, AZ to J.E.M.B. Realty Corporation. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXCEL LEGACY CORPORATION (REGISTRANT) DATE: November 8, 2000 By: /s/ Gary B. Sabin ---------------------------------- GARY B. SABIN President and Chief Executive Officer DATE: November 8, 2000 By: /s/ James Y. Nakagawa ---------------------------------- JAMES Y. NAKAGAWA Principal Financial Officer 23