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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 June 30, 2001
Commission File Number: 0-23503
EXCEL LEGACY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State of incorporation) | 33-0781747 (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 Common Stock, $.01 par value | Outstanding at August 13, 2001 61,540,849 |
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
INDEX
FORM 10-Q
| Page | |||
---|---|---|---|---|
PART I.FINANCIAL INFORMATION: | ||||
Item 1. Financial Statements: | ||||
Consolidated Balance Sheets: June 30, 2001 December 31, 2000 | 3 | |||
Consolidated Statements of Operations: Three Months Ended June 30, 2001 Three Months Ended June 30, 2000 Six Months Ended June 30, 2001 Six Months Ended June 30, 2000 | 4 | |||
Consolidated Statements of Changes in Stockholders' Equity: Six Months Ended June 30, 2001 Six Months Ended June 30, 2000 | 5 | |||
Consolidated Statements of Cash Flows: Six Months Ended June 30, 2001 Six Months Ended June 30, 2000 | 6 | |||
Notes to Consolidated Financial Statements | 7 | |||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | 21 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 27 | |||
PART II. OTHER INFORMATION | ||||
Item 5. Other Information | 28 | |||
Item 6. Exhibits and Reports on Form 8-K | 28 |
2
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| June 30, 2001 | December 31, 2000 | |||||||
---|---|---|---|---|---|---|---|---|---|
| (Unaudited) | (Restated) | |||||||
ASSETS | |||||||||
Real estate: | |||||||||
Land | $ | 15,472 | $ | 16,877 | |||||
Buildings | 26,579 | 26,878 | |||||||
Construction in progress | 80,094 | 51,835 | |||||||
Leasehold interest | 2,351 | 2,351 | |||||||
Accumulated depreciation | (2,220 | ) | (1,808 | ) | |||||
Net real estate | 122,276 | 96,133 | |||||||
Cash | 2,219 | 1,469 | |||||||
Accounts receivable, less allowance for bad debts of $32 and $32 in 2001 and 2000, respectively | 624 | 812 | |||||||
Notes receivable | 45,700 | 40,470 | |||||||
Investment in securities | 119,556 | 116,853 | |||||||
Investment in partnerships | 15,405 | 14,855 | |||||||
Interest receivable | 15,547 | 12,875 | |||||||
Pre-development costs | 11,086 | 9,780 | |||||||
Other assets | 7,852 | 7,807 | |||||||
Deferred tax asset | 8,437 | 7,315 | |||||||
$ | 348,702 | $ | 308,369 | ||||||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||||
Liabilities: | |||||||||
Notes payable | $ | 85,397 | $ | 49,061 | |||||
Convertible debentures | 33,240 | 33,240 | |||||||
Senior notes | 18,067 | 18,067 | |||||||
Mortgages payable | 12,014 | 12,021 | |||||||
Accounts payable and accrued liabilities | 20,281 | 15,130 | |||||||
Other liabilities | 364 | 1,364 | |||||||
Total liabilities | 169,363 | 128,883 | |||||||
Commitments and contingencies | |||||||||
Minority interests | 595 | 1,103 | |||||||
Stockholders' equity: | |||||||||
Common stock, $.01 par value, 150,000,000 shares authorized, 61,540,849 and 61,540,849 shares issued and outstanding in 2001 and 2000, respectively | 615 | 615 | |||||||
Additional paid-in capital | 201,471 | 201,471 | |||||||
Accumulated other comprehensive loss, net of tax | (692 | ) | (695 | ) | |||||
Retained earnings | (12,962 | ) | (13,320 | ) | |||||
Notes receivable from affiliates for common shares | (9,688 | ) | (9,688 | ) | |||||
Total stockholders' equity | 178,744 | 178,383 | |||||||
$ | 348,702 | $ | 308,369 | ||||||
The accompanying notes are an integral part of the financial statements.
3
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share amounts)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | |||||||||||
Revenues: | |||||||||||||||
Operating income | $ | 2,587 | $ | 2,217 | $ | 3,777 | $ | 3,255 | |||||||
Partnership and other income | 2,396 | 654 | 2,722 | 1,702 | |||||||||||
Interest income | 1,399 | 881 | 2,702 | 1,810 | |||||||||||
Rental income | 964 | 1,483 | 1,811 | 2,161 | |||||||||||
Total revenue | 7,346 | 5,235 | 11,012 | 8,928 | |||||||||||
Operating expenses: | |||||||||||||||
Interest | 2,147 | 2,982 | 4,145 | 6,333 | |||||||||||
Other operating expenses | 2,166 | 1,460 | 3,438 | 2,438 | |||||||||||
Property operating expenses | 490 | 638 | 1,034 | 1,235 | |||||||||||
Merger related expenses | 780 | — | 780 | — | |||||||||||
General and administrative | 904 | 999 | 1,612 | 1,832 | |||||||||||
Depreciation and amortization | 390 | 446 | 728 | 857 | |||||||||||
Total operating expenses | 6,877 | 6,525 | 11,737 | 12,695 | |||||||||||
Net operating income (loss) | 469 | (1,290 | ) | (725 | ) | (3,767 | ) | ||||||||
Net gain from real estate sales | — | 983 | 114 | 2,863 | |||||||||||
Income (loss) before income taxes | 469 | (307 | ) | (611 | ) | (904 | ) | ||||||||
Benefit for income taxes | 463 | 63 | 969 | 287 | |||||||||||
Net income (loss) | $ | 932 | $ | (244 | ) | $ | 358 | $ | (617 | ) | |||||
Net income (loss) per common share—basic and diluted | $ | 0.02 | $ | (0.01 | ) | $ | 0.01 | $ | (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)
(in thousands, except number of shares)
| Preferred Stock | | | | | | | | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Common Stock | | | | | | ||||||||||||||||||||
| Number | | Additional Paid-in Capital | Accumulated Comprehensive Income (Loss) | Total Retained Earnings | Notes Receivable | Total Stockholders' Equity | |||||||||||||||||||
| Amount | Number | Amount | |||||||||||||||||||||||
Six Months Ended June 30, 2001: | ||||||||||||||||||||||||||
Balance at January 1, 2001 | — | $ | — | 61,540,849 | $ | 615 | $ | 201,471 | $ | (695 | ) | $ | (13,320 | ) | $ | (9,688 | ) | $ | 178,383 | |||||||
Comprehensive income: | ||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | 358 | — | 358 | |||||||||||||||||
Unrealized (loss) gain on marketable securities, net of tax | ||||||||||||||||||||||||||
Three months ended March 31, 2001 | — | — | — | — | ��� | (102 | ) | — | — | (102 | ) | |||||||||||||||
June 30, 2001 | — | — | — | — | — | 105 | — | — | 105 | |||||||||||||||||
Total comprehensive income | 3 | |||||||||||||||||||||||||
Balance at June 30, 2001: | — | $ | — | 61,540,849 | $ | 615 | $ | 201,471 | $ | (692 | ) | $ | (12,962 | ) | $ | (9,688 | ) | $ | 178,744 | |||||||
Six Months Ended June 30, 2000: | ||||||||||||||||||||||||||
Balance at January 1, 2000 | 21,281,000 | $ | 213 | 36,835,921 | $ | 368 | $ | 187,699 | $ | 922 | $ | 1,679 | $ | (10,842 | ) | $ | 180,039 | |||||||||
Conversion of notes payable to common stock | — | — | 5,102,181 | 51 | 18,012 | — | — | — | 18,063 | |||||||||||||||||
Issuance of common shares | — | — | 25,333 | 1 | 83 | — | — | — | 84 | |||||||||||||||||
Repayment of notes to affiliates | — | — | — | — | — | — | — | 1,083 | 1,083 | |||||||||||||||||
Comprehensive income: | ||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | (617 | ) | — | (617 | ) | |||||||||||||||
Unrealized gain (loss) on marketable 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 | 21,281,000 | $ | 213 | 41,963,435 | $ | 420 | $ | 205,794 | $ | 102 | $ | 1,062 | $ | (9,759 | ) | $ | 197,832 | |||||||||
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, | ||||||||
---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | |||||||
Cash flows from operating activities: | |||||||||
Net income (loss) | $ | 358 | $ | (617 | ) | ||||
Adjustments to reconcile net loss to net cash provided by operations: | |||||||||
(Loss) gain from real estate sales | (114 | ) | 2,863 | ||||||
Depreciation and amortization | 728 | 857 | |||||||
(Loss) earnings from equity investments | (2,700 | ) | 914 | ||||||
Change in accounts receivable and other assets | (3,967 | ) | (3,881 | ) | |||||
Change in accounts payable and other liabilities | 5,151 | 6,147 | |||||||
Net cash (used) provided by operating activities | (544 | ) | 6,283 | ||||||
Cash flows from investing activities: | |||||||||
Real estate acquired and construction costs paid | (28,467 | ) | (12,619 | ) | |||||
Notes receivable issued | (5,230 | ) | (5,202 | ) | |||||
Investment in partnerships | (550 | ) | 6,398 | ||||||
Proceeds from real estate sales | 503 | 15,894 | |||||||
Net pre-development costs paid | (1,291 | ) | (10,149 | ) | |||||
Net cash used in investing activities | (35,035 | ) | (5,678 | ) | |||||
Cash flows from financing activities: | |||||||||
Principal payments of notes and mortgages | (5,879 | ) | (15,074 | ) | |||||
Borrowings from issuance of notes payable | 42,208 | 14,299 | |||||||
Net cash provided (used) by financing activities | 36,329 | (775 | ) | ||||||
Net increase (decrease) in cash | 750 | (170 | ) | ||||||
Cash at the beginning of the period | 1,469 | 1,767 | |||||||
Cash at the end of the period | $ | 2,219 | $ | 1,597 | |||||
The accompanying notes are an integral part of the financial statements.
6
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 accounting principles generally accepted in the United States of America 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 Excel Legacy Corporation, Inc.'s December 31, 2000 Form 10-K, as amended.
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.
Restatement of Financial Results
The Company restated the financial statements as of and for the year ended December 31, 2000 to reflect a non-cash charge of $19.0 million related to an impairment of its equity method investment in Mace Security International, Inc. ("MACE") which is considered other than temporary. This impairment was recorded based on MACE's closing stock price at December 29, 2000 of $0.906 per share, compared to the carrying value of the investment. A tax benefit of $2.8 million was also recorded related to the impairment of the investment.
(in thousands) | As previously reported | As restated | ||||
---|---|---|---|---|---|---|
As of December 31, 2000: | ||||||
Total Assets | $ | 324,584 | $ | 308,369 | ||
Total liabilities | 128,883 | 128,883 | ||||
Total stockholders' equity | 194,598 | 178,383 |
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., a Maryland Corporation ("PEI") (Note 2) under the equity method of accounting however, because the holders of PEI preferred stock, which does not include the Company, have the right to elect a majority of the PEI board of directors.
7
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. The Company expenses as incurred ordinary repairs and maintenance costs, which include building painting, parking lot repairs, etc. The Company capitalizes major replacements and betterments, which include HVAC equipment, roofs, etc., and depreciates them over their estimated useful lives.
The Company assesses its wholly owned properties as well as its investments in partnerships 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.
At June 30, 2001, the Company had $15.9 million of real estate assets under contract for sale. In addition, a partnership in which the Company owns a 50% interest also has land for sale. The Company estimates the fair value of these assets after selling expenses are greater than their carrying value at June 30, 2001. These sales may not be completed due to uncertainties associated with contract negotiations and buyer due diligence contingencies. There were no other significant assets for sale. Assessments as to whether there has been an impairment in the value of real estate assets and related investments held for sale are periodically performed by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors.
Investment in Securities
The Company reviews its investments in securities for possible impairment whenever the market value of the securities falls below cost and, in the opinion of the Company, such decline represents an other than temporary impairment. Factors considered in this review include:
- •
- Duration and extent, as well as reasons for which the market value has been less than cost.
- •
- Financial condition and near-term prospects of the investee, which includes consideration of proposed transactions known through Board of Directors participation.
- •
- The ability and intent of the Company to retain its investment for a period of time to allow for a recovery in market value.
When an other than temporary impairment loss on an individual investment is considered to have occurred, the cost basis of the security is written down, and the charge is recorded in earnings.
8
Pre-development Costs
Pre-development costs that are directly related to specific construction projects are capitalized as incurred. The Company expenses these costs to the extent they are unrecoverable or it is determined that the related project will not be pursued.
Management Contracts
Management contracts are recorded at cost and amortized over a period of seven years. At June 30, 2001, the Company had $1.1 million capitalized related to management contracts acquired when the Company bought TenantFirst, a California corporation, related to the management of eight properties. The properties are not owned by PEI.
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
Rental revenues include: (1) minimum annual rentals, adjusted for the straight-line method for recognition of fixed future increases; (2) additional rentals, including recovery of property operating expenses, and certain other expenses which the Company accrues for in the period in which the related expense occurs; and (3) percentage rents which the Company accrues for on the basis of actual sales reported by tenants.
Gain or loss on sale of real estate is recognized when the sales contract is executed, title has passed, payment is received, and the Company no longer has continuing involvement in the asset.
The Company adopted the SEC's Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements effective the fourth quarter of 2000. The adoption of SAB 101 did not have a material effect on the Company's consolidated financial position or results of operations.
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
9
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 accounting principles generally accepted in the United States of America 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, 2000 and for the periods ended June 30, 2000, to conform with the current period's presentation.
New Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities—Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133 and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of FASB Statement No. 133. SFAS No. 133 standardizes the accounting for derivative instruments by requiring that all derivatives be recognized as assets and liabilities and measured at fair value. The Company adopted this standard on January 1, 2001 and has determined that the adoption of SFAS No. 133 does not have a material impact on the Company's financial statements.
In June 2001, the FASB approved FASB Statement No. 141 "Business Combinations" and Statement No. 142 "Goodwill and Other Intangible Assets." FASB Statement No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. FASB Statement No. 142, which will be adopted by the Company on January 1, 2002 as required, provides for the following: 1) goodwill and indefinite lived intangible assets will no longer be amortized, 2) goodwill will be tested for impairment at least annually at the reporting unit level, and 3) intangible assets deemed to have an indefinite life will be tested for impairment at least annually. The company has historically evaluated the realizability of intangible assets annually and amortized them appropriately. The Company is currently evaluating other potential effects implementation of FASB Statement No. 141 and FASB Statement No. 142 may have on its results of operations and financial position.
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 PEI, which is operated as a real estate investment trust. 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, 12.1 million shares of PEI common stock were tendered representing approximately 91% of the
10
outstanding common stock. Below is summarized financial information as of June 30, 2001 and the quarter then ended for PEI (in thousands):
| June 30, 2001 | |||
---|---|---|---|---|
Balance Sheet | ||||
Real estate, net of accumulated depreciation | $ | 624,935 | ||
Other assets | 100,421 | |||
Total assets | $ | 725,356 | ||
Notes and mortgages payable | $ | 251,813 | ||
Accounts payable and other liabilities | 4,645 | |||
83/4% Series A Preferred stock | 353,404 | |||
Other stockholders' equity | 115,494 | |||
Total liabilities and stockholders' equity | $ | 725,356 | ||
| Three Months Ended June 30, 2001 | Six Months Ended June 30, 2001 | |||||
---|---|---|---|---|---|---|---|
Income statement: | |||||||
Total revenue, including interest income and joint venture income | $ | 21,148 | $ | 40,913 | |||
Operating expenses | (4,771 | ) | (9,215 | ) | |||
General and administrative | (823 | ) | (1,690 | ) | |||
Interest expense | (3,532 | ) | (6,930 | ) | |||
Depreciation and amortization | (2,310 | ) | (4,536 | ) | |||
Gain on sale of real estate | 1,250 | 1,159 | |||||
Net income | 10,962 | 19,701 | |||||
Preferred dividends | (8,386 | ) | (16,744 | ) | |||
Net income available for common shares | $ | 2,576 | $ | 2,957 | |||
3. Millennia:
The Company has an investment in a joint venture known as Millennia Car Wash, LLC ("Millennia") which owns approximately 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 is a director on the MACE board of directors.
The Company accounts for Millennia's investment in MACE under the equity method of accounting and owned approximately 15% of MACE at June 30, 2001. The Company classifies its
11
investment in USPL as available-for-sale and recognizes changes in the fair value of its investment in USPL in other comprehensive income.
Investment in USPL (in thousands): | June 30 2001 | December 31 2000 | |||||
---|---|---|---|---|---|---|---|
Cost | $ | 1,000 | $ | 1,000 | |||
Unrealized loss | (692 | ) | (695 | ) | |||
Fair value | $ | 308 | $ | 305 | |||
4. Real Estate:
The Company sold a parcel of land during the six months of 2001 for $0.5 million and recorded a net gain of $0.1 million.
The Company sold the following properties in the first six months of 2000:
Location | Date Sold | Sales Price (000's) | Mortgage Transferred (000's) | |||||
---|---|---|---|---|---|---|---|---|
Middletown, OH (1) | 2/00 | $ | 6,709 | $ | 3,726 | |||
Terre Haute, IN (1) | 2/00 | 5,762 | 3,598 | |||||
San Diego/Rancho Bernardo, CA (1) (2) | 2/00 | 12,381 | 7,381 | |||||
San Diego/4-S Ranch | 5/00 | 6,130 | — |
- (1)
- Property sold to PEI
- (2)
- Property master leased back to the Company
12
The Company had $45.7 million in notes receivable outstanding at June 30, 2001 related to various development projects. The notes bear interest at 10% to 12% per annum and are secured by the related projects. The notes mature on various dates between 2001 and the earlier of the sale of the related projects, or 2003 to 2004.
6. Notes and Mortgages Payable:
Notes Payable
The Company had the following notes payable outstanding at June 30, 2001 and December 31, 2000 (amounts in thousands):
| June 30, 2001 | December 31 2000 | ||||
---|---|---|---|---|---|---|
Revolving $15.0 million credit facility bearing interest at Libor plus 3.75% (7.6% at June 30, 2001) due September 2001. The facility is secured by some of the Company's PEI common shares. | $ | 12,280 | $ | 11,481 | ||
Revolving $40.0 million unsecured line of credit facility with PEI bearing interest at Libor plus 3.75% (7.6% at June 30, 2001) to 12.50% due December 2002. | 39,782 | 25,377 | ||||
Note payable to The Sol and Helen Price Trust bearing interest at Libor plus 1.50% (5.4% at June 30, 2001) due November 2004. The note is secured by some of the Company's PEI common shares. | 9,347 | 9,347 | ||||
Note payable outstanding on a $12.5 million facility related to Newport on the Levee, LLC, bearing interest at Libor plus 3.25% (7.1% at June 30, 2001), due August 2001. | 12,500 | — | ||||
Note payable bearing interest at 12.50% due April 2002. | 6,000 | — | ||||
Note payable outstanding on a $4.7 million facility related to Newport on the Levee, LLC, bearing interest at Prime plus 0.5% (7.3% at June 30, 2001), due March 2002. | 4,738 | 2,106 | ||||
Other | 750 | 750 | ||||
Total | $ | 85,397 | $ | 49,061 | ||
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 $4.7 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: (a) $18.7 million maturing 2027 with interest at 8.375%; (b) $20.5 million maturing 2018 with interest at 8.5%; and (c) $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 $41.1 million of the bonds at June 30, 2001 for construction incurred to date. Newport also has a $46.0 million constructions loan in place, none of which was outstanding as of June 30, 2001. This loan is guaranteed by the Company.
The Company has a 50% interest in a limited liability company that owns land in Orlando, FL. The land has a total book basis of $17.9 million at June 30, 2001 and mortgage debt of $8.9 million which is guaranteed by the Company.
The Company also has guaranteed a $15.0 million note payable related to a development project in Scottsdale, AZ and the Company has a note receivable with a participating interest.
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In April 2001, the Company borrowed an additional $6.0 million from an individual with interest at 12.5%. Proceeds from this note were used to fund certain development projects and pay-down the line of credit. This note is due in April 2002.
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 are senior to the Debentures. The Senior Notes mature in November 2004.
Mortgages Payable
The Company had $12.0 million in mortgages payable outstanding at June 30, 2001 secured by real estate. The mortgage debt has an average maturity of 4 years expiring at various dates to 2009. The monthly payment of principal and interest approximates $80,000 bearing an average interest rate of 7.41% at June 30, 2001.
Maturities
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, | | ||
---|---|---|---|
2001 (remaining six months) | $ | 26,232 | |
2002 | 56,832 | ||
2003 | — | ||
2004 | 60,654 | ||
2005 | — | ||
Thereafter | 5,000 | ||
$ | 148,718 | ||
7. Income Taxes:
At June 30, 2001, the Company had a net deferred tax asset of $8.4 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
14
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, 2001: | ||||||||
Current payable | $ | — | $ | (34 | ) | |||
Deferred tax benefit | 827 | 108 | ||||||
Benefit for income taxes | $ | 827 | $ | 142 | ||||
Six months ended June 30, 2000: | ||||||||
Current payable | $ | — | $ | (35 | ) | |||
Deferred tax benefit | 301 | 21 | ||||||
(Benefit) provision for income taxes | $ | 301 | $ | (14 | ) | |||
8. Capital Stock:
Common Shares
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 June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Basic EPS | ||||||||||||||
2001 | 2000 | 2001 | 2000 | |||||||||||
Numerator: | ||||||||||||||
Net income (loss) | $ | 932 | $ | (244 | ) | $ | 358 | $ | (617 | ) | ||||
Denominator: | ||||||||||||||
Weighted average common shares outstanding | 61,541 | 41,981 | 61,541 | 39,409 | ||||||||||
Earnings Per Share | $ | 0.02 | $ | (0.01 | ) | $ | 0.01 | $ | (0.02 | ) | ||||
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| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Diluted EPS | |||||||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||||||
Numerator: | |||||||||||||||
Net income (loss) | $ | 932 | $ | (244 | ) | $ | 358 | $ | (617 | ) | |||||
Denominator: | |||||||||||||||
Weighted average common shares outstanding | 61,541 | 41,981 | 61,541 | 39,409 | |||||||||||
Effect of diluted securities: | |||||||||||||||
Preferred B shares | — | 21,281 | — | 21,281 | |||||||||||
Common stock options | — | 10 | — | 11 | |||||||||||
Deduct diluted securities for net loss | — | (21,291 | ) | — | (21,292 | ) | |||||||||
61,541 | 41,981 | 61,541 | 39,409 | ||||||||||||
Earnings Per Share | $ | 0.02 | $ | (0.01 | ) | $ | 0.01 | $ | (0.02 | ) | |||||
10. Statement of Cash Flows—Supplemental Disclosure:
| Six Months Ended June 30, | ||||||
---|---|---|---|---|---|---|---|
| 2001 | 2000 | |||||
Supplemental disclosure: | |||||||
Cash paid for interest | $ | 3.6 million | $ | 5.5 million | |||
Net cash paid for income taxes | — | 0.1 million |
- •
- Reduced a liability, due to the city of Scottsdale, AZ, of $1.0 million in connection with the sale of a parcel of land
- •
- Converted $18.1 million of notes payable into 5.1 million shares of common stock
- •
- Reduced $13.7 million in mortgage debt which was assumed by PEI in conjunction with three properties sold to PEI,
- •
- Assumed $1.5 million in debt in conjunction with real estate construction and acquisitions,
- •
- Reduced notes receivable from certain officers by $1.1 million for salary and bonuses not paid in cash. This amount was included as a general and administrative expense in 1999, and
- •
- Assumed $2.9 million in debt related to the construction of an office building
In the six months ended June 30, 2001 the Company:
In the six months ended June 30, 2000 the Company:
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
16
specifically incurred by specific segments, and corporate income taxes have been grouped with "General and Administrative" for presentation purposes.
| Commercial Property Unit | Development Unit | Investment Unit | General and Administrative | Total | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Three months ended June 30, 2001: | |||||||||||||||||
Total revenues | $ | 2,985 | $ | 1,807 | $ | 2,554 | $ | — | $ | 7,346 | |||||||
Interest | 41 | 13 | — | 2,093 | 2,147 | ||||||||||||
Depreciation and amortization | 7 | 69 | 254 | 60 | 390 | ||||||||||||
General and administrative | — | — | — | 904 | 904 | ||||||||||||
Merger related expenses | 780 | — | — | — | 780 | ||||||||||||
Operating expenses | 348 | 196 | 2,112 | — | 2,656 | ||||||||||||
Total operating expenses | 1,716 | 278 | 2,366 | 3,057 | 6,877 | ||||||||||||
Net operating income (loss) | 1,809 | 1,529 | 188 | (3,057 | ) | 469 | |||||||||||
Real estate sales | — | — | — | — | — | ||||||||||||
Benefit for income taxes | — | — | — | 463 | 463 | ||||||||||||
Net income (loss) | $ | 1,809 | $ | 1,529 | $ | 188 | $ | (2,594 | ) | $ | 932 | ||||||
Additions to real estate | — | 15,981 | 495 | — | 16,476 | ||||||||||||
Investment in securities and partnerships | 127,449 | — | 7,512 | — | 134,961 | ||||||||||||
Deferred tax asset | 4,640 | — | 3,797 | — | 8,437 | ||||||||||||
Total assets | $ | 117,954 | $ | 153,917 | $ | 42,847 | $ | 33,984 | $ | 348,702 | |||||||
Three months June 30, 2000: | |||||||||||||||||
Total revenues | $ | 639 | $ | 2,074 | $ | 1,012 | $ | 1,510 | $ | 5,235 | |||||||
Interest | 42 | — | — | — | 2,982 | ||||||||||||
Depreciation and amortization | 38 | 142 | 160 | 106 | 446 | ||||||||||||
General and administrative | — | — | 13 | 986 | 999 | ||||||||||||
Merger related expenses | — | — | — | — | — | ||||||||||||
Operating expenses | 267 | 287 | 1,044 | 500 | 2,098 | ||||||||||||
Total operating expenses | 347 | 429 | 1,217 | 1,592 | 6,525 | ||||||||||||
Net operating income (loss) | 292 | 1,645 | (205 | ) | (82 | ) | (1,290 | ) | |||||||||
Real estate sales | (8 | ) | — | — | — | 983 | |||||||||||
Benefit for income taxes | — | — | — | 63 | 63 | ||||||||||||
Net income (loss) | $ | 284 | $ | 1,645 | $ | (205 | ) | $ | (19 | ) | $ | (244 | ) | ||||
Reductions to real estate | — | (551 | ) | — | — | (551 | ) | ||||||||||
Investment in securities and partnerships | 121,105 | — | 36,017 | — | 157,122 | ||||||||||||
Deferred tax asset | 5,817 | — | 1,019 | — | 6,836 | ||||||||||||
Total assets | $ | 122,514 | $ | 86,571 | $ | 52,820 | $ | 56,500 | $ | 318,405 | |||||||
Six months ended June 30, 2001: | |||||||||||||||||
Total revenues | $ | 3,920 | $ | 3,420 | $ | 3,672 | $ | — | $ | 11,012 | |||||||
Interest | 51 | 28 | — | 4,066 | 4,145 |
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Depreciation and amortization | 13 | 134 | 466 | 115 | 728 | ||||||||||||
General and administrative | — | — | 2 | 1,610 | 1,612 | ||||||||||||
Merger related expenses | — | — | — | 780 | 780 | ||||||||||||
Operating expenses | 600 | 358 | 3,514 | — | 4,472 | ||||||||||||
Total operating expenses | 664 | 520 | 3,982 | 6,571 | 11,737 | ||||||||||||
Net operating income (loss) | 3,256 | 2,900 | (310 | ) | (6,571 | ) | (725 | ) | |||||||||
Real estate sales | — | — | — | — | 114 | ||||||||||||
Benefit for income taxes | — | — | — | 969 | 969 | ||||||||||||
Net income (loss) | $ | 3,256 | $ | 2,900 | $ | (310 | ) | $ | (5,602 | ) | $ | 358 | |||||
Additions to real estate | — | 24,794 | 1,761 | — | 26,555 | ||||||||||||
Investment in securities and partnerships | 127,449 | — | 7,512 | — | 134,961 | ||||||||||||
Deferred tax asset | 4,640 | — | 3,797 | — | 8,437 | ||||||||||||
Total assets | $ | 117,954 | $ | 153,917 | $ | 42,847 | $ | 33,984 | $ | 348,702 | |||||||
Six months ended June 30, 2000: | |||||||||||||||||
Total revenues | $ | 1,906 | $ | 3,309 | $ | 3,388 | $ | 325 | $ | 8,928 | |||||||
Interest | 169 | — | — | — | 6,333 | ||||||||||||
Depreciation and amortization | 98 | 286 | 370 | 103 | 857 | ||||||||||||
General and administrative | — | — | — | 1,832 | 1,832 | ||||||||||||
Merger related expenses | — | — | — | — | — | ||||||||||||
Operating expenses | 560 | 509 | 2,525 | 79 | 3,673 | ||||||||||||
Total operating expenses | 827 | 795 | 2,895 | 2,014 | 12,695 | ||||||||||||
Net operating income (loss) | 1,079 | 2,514 | 493 | (1,689 | ) | (3,767 | ) | ||||||||||
Real estate sales | — | — | — | — | 2,863 | ||||||||||||
Benefit for income taxes | — | — | — | 287 | 287 | ||||||||||||
Net income (loss) | $ | 1,079 | $ | 2,514 | $ | 493 | $ | (1,402 | ) | $ | (617 | ) | |||||
Additions (reductions) to real estate | (19,883 | ) | 530 | — | — | (19,353 | ) | ||||||||||
Investment in securities and partnerships | 121,105 | — | 36,017 | — | 157,122 | ||||||||||||
Deferred tax asset | 5,817 | — | 1,019 | — | 6,836 | ||||||||||||
Total assets | $ | 122,514 | $ | 86,571 | $ | 52,820 | $ | 56,500 | $ | 318,405 | |||||||
12. Related Party Transactions:
At June 30, 2001, the Company had $39.8 million payable to PEI on a $40.0 million note. During the second quarter of 2001, the Company recorded $1.1 million and in the six month year-to-date period of 2001 recorded $2.0 million in expense related to this note, of which $1.6 million was capitalized to real estate assets under construction.
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The Company offsets the general and administrative costs with reimbursements received monthly from PEI. During the second quarter of 2001, the Company received $0.8 million and received $1.7 million in the six month year-to-date period of 2001 as reimbursements.
In February 2001, the Company executed a ground lease with PEI in connection with a development project in Anaheim, CA. The ground lease requires payments of $2.8 million per year and during the second quarter of 2001 the Company capitalized $0.7 million of cost related to this lease, and $1.2 million for the six month year-to-date period of 2001.
In the first quarter of 2000, three properties were sold to PEI. The Company leases back one of the properties for a quarterly amount of $0.2 million.
In connection with the sale of common stock to certain affiliates in 1998, the Company issued notes receivable of which $9.7 million was outstanding at June 30, 2001. The notes bear interest at a fixed rate of 7%, and are due in March 2003. The total interest receivable at June 30, 2001 from these notes totaled $2.1 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 to 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 $4.3 million of the above personal debt in October 2000, upon which the Company recorded 1.71 million shares as repurchased.
Additional related party information is discussed in notes 2, 4, 6 and 13.
13. Significant Events:
On March 21, 2001, PEI, PEI Merger Sub, Inc., a Maryland corporation ("Merger Sub"), and the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, Merger Sub will be merged with and into the Company (the "Merger"), with the Company continuing as a wholly-owned subsidiary of PEI. At the effective time of the Merger, each outstanding share of common stock, will be exchanged for 0.6667 of a share of PEI common stock, and each option to purchase shares of common stock will be exchanged for an option to purchase shares of PEI common stock (with the exercise price and number of shares appropriately adjusted to reflect the exchange ratio). Following the Merger, PEI will continue to operate as a real estate investment trust under the name Price Legacy Corporation ("Price Legacy"). The Merger, which is structured to qualify as a tax-free reorganization, is subject to the approval of the stockholders of both PEI and the Company and other customary closing conditions. Through the first six months of 2001, the Company has expensed $0.8 million in merger related costs.
Also on March 21, 2001, PEI entered into a Securities Purchase Agreement (the "Securities Purchase Agreement") with Warburg, Pincus Equity Partners, L.P. and certain of its affiliates ("Warburg Pincus"), pursuant to which PEI agreed to sell to Warburg Pincus (a) 17,985,612 shares of a new class of preferred stock, 9% Series B Junior Convertible Redeemable Preferred Stock, par value $0.0001 per share (the "Series B Preferred Stock"), and (b) a warrant (the "Warrant") to purchase an aggregate of 2.5 million shares of Price Legacy common stock at an exercise price of $8.25 per share, for an aggregate purchase price of $100,000,000. The Series B Preferred Stock is junior to the Series A Preferred Stock with respect to dividend, liquidation and other rights, and is convertible under certain
19
conditions into Price Legacy common stock at $5.56 per share after 24 months from the date of issuance. The 9% coupon will be paid in kind with additional shares of Series B Preferred Stock for the first 45 months from issuance. Since the Warburg Pincus investment and the Merger are subject to substantially the same conditions, it is expected that the two transactions will close concurrently (assuming they are both completed).
On April 12, 2001, PEI and Sol Price, a significant stockholder of PEI and the Company through various trusts, agreed to convert an existing note payable to a trust controlled by Sol Price of approximately $9.3 million into 1,681,142 shares of the Series B Preferred Stock and a warrant to purchase 233,679 shares of PEI common stock at an exercise price of $8.25 per share concurrently with the closing of the Merger with the Company and the sale of the Series B Preferred Stock to Warburg Pincus. These transactions are subject to stockholder approval and other customary conditions.
The Merger Agreement obligates PEI to commence an exchange offer in which holders of the Company's outstanding debentures and notes will be offered shares of PEI Series A Preferred Stock in exchange for their debt securities valued at par. The exchange offer is conditioned on, and expected to close concurrently with the Merger. On August 10, 2001, PEI commenced the exchange offer.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nature of Business
Excel Legacy Corporation ("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 its investment in Price Enterprises, Inc., a REIT, ("PEI") 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.
The following discussion should be read in conjunction with the financial statements and the notes thereto.
Results of Operations (Comparison of the three months ended June 30, 2001 to the three months ended June 30, 2000)
Operating income totaled $2.6 million in the three months ended June 30, 2001 compared to $2.2 million in the three months ended June 30, 2000, an increase of $0.4 million. This increase of $0.4 million primarily relates to Daniel's Head Village, a hospitality project in Bermuda, which opened in May 2001.
Partnership and other income were approximately $2.4 million in the three months ended June 30, 2001 compared to $0.7 million in the three months ended June 30, 2000, an increase of $1.7 million. In 2001, the Company recognized $2.4 million from its investment in PEI compared to $0.2 million in 2000. The increase of $2.2 million primarily relates to properties PEI purchased in the first quarter of 2001 and a gain on the sale of a property sold in the second quarter of 2001. Partially offsetting this increase was income recorded in the second quarter of 2000 of $0.3 million related to a forfeited deposit on a property sale, and $0.2 million from its investment in Winnipeg, Canada.
Interest income was $1.4 million in the three months ended June 30, 2001 compared to $0.9 million in the three months ended June 30, 2000, which primarily related to higher average note receivable balances in 2001. In the second quarter of 2001, the average notes receivable balance was $45.7 million compared to an average balance of $31.6 million in the second quarter of 2000.
Rental income was $1.0 million during the three months ended June 30, 2001 compared to $1.5 million in the three months ended June 30, 2000, a decrease of $0.5 million. The change relates to a decrease of $0.2 million from properties sold to PEI in the first quarter of 2000 and a decrease of $0.3 million from the Company's project in Newport, KY related to a land lease.
Interest expense was $2.1 million in the three months ended June 30, 2001 compared to $3.0 million in the three months ended June 30, 2000, a decrease of $0.9 million. Of the notes payable outstanding in 2001, the Company capitalized approximately $0.8 million of interest expense related to borrowings directly related to its investment in a joint venture that is constructing an entertainment retail property in Newport, KY. There was no significant interest capitalized in 2000. While the debt related to the development project in Newport, KY increased, average amounts outstanding on the Company's credit facilities and short-term notes decreased, which contributed an additional $0.8 million of the decrease. In March 2000, $18.0 million of debt was converted into common shares of the Company. Interest related to this debt was $0.1 million less in 2001 than in 2000.
Other operating expenses were $2.2 million in the three months ended June 30, 2001 compared to $1.5 million in the three months ended June 30, 2000. The increase of $0.7 million primarily relates to $0.8 million of expenses incurred by the Company's project located in Daniel's Head, Bermuda. The
21
project opened in May 2001 and incurred certain overhead costs during the second quarter of 2001 that it did not incur in 2000.
Property operating expenses were $0.4 million in the three months ended June 30, 2001 compared to $0.6 million in the three months ended June 30, 2000, a decrease of $0.2 million. The decrease primarily relates to properties sold in 2000.
General and administrative expenses did not change significantly and were $0.9 million in the three months ended June 30, 2001 compared to $1.0 million in the three months ended June 30, 2000 a decrease of $0.1 million.
Merger related expenses were $0.8 million in the second quarter of 2001 and related to the proposed merger with PEI.
Depreciation and amortization expense did not change significantly and totaled $0.4 million in the three months ended June 30, 2001 compared to $0.4 million in the three months ended June 30, 2000.
There was nonet gain from real estate sales and write-off of real estate related costs in the three months ended June 30, 2001 compared to $1.0 million in the three months ended June 30, 2000. In 2000, the gain primarily related to the sale of land.
Benefit for income taxes was $0.5 million in the three months ended June 30, 2001 compared to a benefit of $0.1 million in the three months ended June 30, 2000 related to income before taxes of $0.5 million and a loss of $0.3 million, respectively.
Results of Operations (Comparison of the six months ended June 30, 2001 to the six months ended June 30, 2000)
Operating income totaled $3.8 million in the six months ended June 30, 2001 compared to $3.2 million in the six months ended June 30, 2000, an increase of $0.6 million. In May 2001, the Company's hospitality project in Daniel's Head, Bermuda, opened and contributed $0.4 million during the second quarter of 2001. Also, the Grand Hotel contributed an additional $0.2 million in operating income in 2001 compared to 2000.
Partnership income and other revenues were approximately $2.7 million in the six months ended June 30, 2001 compared to $1.7 million in the six months ended June 30, 2000, an increase of $1.0 million. In 2001, the Company recognized $2.7 million from its investment in PEI compared to $0.9 million in 2000. The increase of $1.8 million primarily relates to properties PEI purchased in the first quarter of 2001 and a gain on the sale of a property sold in the second quarter of 2001. Partially offsetting this increase was income recorded in the second quarter of 2000 of $0.3 million related to a forfeited deposit on a property sale, and $0.5 million from its investment in joint ventures.
Interest income was $2.7 million in the six months ended June 30, 2001 compared to $1.8 million in the six months ended June 30, 2000, which primarily related to higher average note receivable balances in 2001. In the first six months of 2001, the average notes receivable balance was $46.5 million compared to an average balance of $29.4 million in the first six months of 2000.
Rental income was $1.8 million during the six months ended June 30, 2001 compared to $2.2 million in the six months ended June 30, 2000, a decrease of $0.4 million. The decrease primarily relates to the Company's project in Newport, KY related to a land lease.
Interest expense was $4.1 million in the six months ended June 30, 2001 compared to $6.3 million in the six months ended June 30, 2000, a decrease of $2.2 million. Of the notes payable outstanding in 2001, the Company capitalized approximately $1.6 million of interest expense related to borrowings directly related to its investment in a joint venture that is constructing an entertainment retail property in Newport, KY. There was no significant interest capitalized in 2000. While the debt related to the
22
development project in Newport, KY increased, average amounts outstanding on the Company's credit facilities and short-term notes decreased, which contributed an additional $1.4 million of the decrease. In March 2000, $18.0 million of debt was converted into common shares of the Company. Interest related to this debt was $0.3 million less in 2001 than in 2000. An additional decrease of $0.1 million relates to mortgage debt on properties that were sold in 2000.
Other operating expenses were $3.4 million in the six months ended June 30, 2001 compared to $2.4 million in the six months ended June 30, 2000, an increase of $1.0 million. The increase primarily relates to $1.0 million of expenses incurred by the Company's project located in Daniel's Head, Bermuda. The project opened in May 2001 and incurred certain overhead costs during the first quarter of 2001 that it did not incur in 2000.
Property operating expenses were $1.0 million in the six months ended June 30, 2001 compared to $1.2 million in the six months ended June 30, 2000, a decrease of $0.2 million. The decrease primarily relates to properties sold in 2000.
General and administrative expenses were $1.6 million in the six months ended June 30, 2001 compared to $1.8 million in the six months ended June 30, 2000, a decrease of $0.2 million. The decrease primarily relates to increased reimbursements received from PEI.
Depreciation and amortization expense totaled $0.7 million in the six months ended June 30, 2001 compared to $0.9 million in the six months ended June 30, 2000. The decrease of $0.2 million relates to properties sold.
The net gain from real estate sales and write-off of real estate related costs was $0.1 million in the six months ended June 30, 2001 compared to $2.9 million in the six months ended June 30, 2000, a decrease of $2.8 million. In 2001, the Company sold a parcel of land located in Scottsdale, AZ for approximately $0.5 million. In 2000, the gain related to the sale of land and two properties sold to PEI. An additional property was also sold to PEI which the Company leases back from PEI.
Benefit for income taxes was $1.0 million in the six months ended June 30, 2001 compared to a benefit of $0.3 million in the six months ended June 30, 2000 related to a loss before taxes of $0.6 million and a loss of $0.9 million, respectively.
The Company calculatesEarnings 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 accounting principles generally accepted in the United States of America, 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
23
real estate. The following information is included to show the items included in the Company's EBDADT for the periods ended June 30, 2001 and 2000:
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2000 | 2001 | 2000 | ||||||||||
Net income (loss) | $ | 931 | $ | (244 | ) | $ | 358 | $ | (617 | ) | ||||
Depreciation and amortization (financial statements) | 390 | 446 | 728 | 857 | ||||||||||
Proportionate share of depreciation and amortization from equity investments: | ||||||||||||||
PEI | 2,109 | 2,281 | 4,141 | 4,371 | ||||||||||
Other | 88 | 151 | 221 | 345 | ||||||||||
Less depreciation of non-real estate assets | (56 | ) | (54 | ) | (111 | ) | (103 | ) | ||||||
Deferred tax expense | (423 | ) | (98 | ) | (935 | ) | (322 | ) | ||||||
EBDADT | $ | 3,039 | $ | 2,482 | $ | 4,403 | $ | 4,531 | ||||||
Cash flows from | ||||||||||||||
Operating activities | $ | 445 | $ | 6,551 | $ | (1,824 | ) | $ | 6,283 | |||||
Investing activities | (16,346 | ) | 740 | (33,755 | ) | (5,678 | ) | |||||||
Financing activities | 17,046 | (8,468 | ) | 36,329 | (775 | ) |
The changes in EBDADT in the second quarter of 2001 compared to the second quarter of 2000 are primarily due to the changes in the Company's results of operations discussed previously.
Liquidity and Capital Resources
Debt borrowings and cash flow from asset sales were the primary sources of capital to fund the Company's development and ongoing operations in the six months ended June 30, 2001. In addition, PEI reimburses the Company for certain general and administrative expenses.
In November 1999, the Company completed an exchange offer for the common stock of PEI. In the exchange offer, the Company acquired approximately 91% 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. In the first quarter of 2000, the Company converted $18.1 million of this note payable into 5.1 million shares of common stock.
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 Legacy's 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. In 2000, PEI cash flows were influenced by four properties sold where replacement properties were not immediately identified and acquired. As such, cash flows, as defined by the stockholders' agreement, did not exceed $7.5 million.
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The Company anticipates that cash flow will be generated from existing properties and from opportunistic trading of assets. 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 $40.0 million revolving line of credit due in 2002 with PEI of which $39.8 million was outstanding at June 30, 2001 and a $15.0 million revolving credit facility with Fleet National Bank due in September 2001, of which $12.3 million was outstanding at June 30, 2001. In April 2001, the Company borrowed an additional $6.0 million from an individual with interest at 12.5%. Proceeds from this note were used to fund certain development projects and pay-down the line of credit. This note is due in April 2002. The Company expects to repay the short-term debt from asset sales or debt refinancing.
The Company has two significant projects currently under development, it's hospitality located in Daniel's Head, Bermuda and its retail project in Newport, Kentucky. The project in Bermuda opened in May 2001. The Company does not anticipate any more significant capital requirements on the Bermuda project, although the project's net loss for the six months ended June 30, 2001 was $0.7 million. The Company anticipates that the remaining required equity in its project in Kentucky will be funded by a $46.0 million construction loan which is in place. The Company has other projects in various stages of pre-development. The total costs of these projects is not known, as their nature, size and certainty are either not yet known or still need to be approved by the Company or various regulatory bodies. The Company spends approximately $0.3 million per month to fund these costs. The Company anticipates continuing to meet these costs both in the short and long terms, from available amounts on its credit facilities and from asset sales. Should the Company not have available funds for these costs, it may postpone further expenditures until funds are available. The Company intends to fund eventual construction costs on these projects through debt, other investors, and through future asset sales. Should the Company not secure the capital when needed for these projects, the Company may sell or delay the projects.
Also related to the Newport project, in 1999 the City of Newport 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: (a) $18.7 million maturing 2027 with interest at 8.375%; (b) $20.5 million maturing 2018 with interest at 8.5%; and (c) $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. As of June 30, 2001 Newport had drawn on $41.2 million of the bonds for construction incurred prior to that 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 June 30, 2001 of $17.9 million and has mortgage debt of $8.9 million secured by the land and guaranteed by the Company. The Company had $15.0 million of additional guaranteed debt related to a development project in Scottsdale, AZ.
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 remain $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.
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The Company owns 3,750,000 shares of common stock of Mace Security International, Inc. ("MACE"), and a warrant to acquire an additional 62,500 shares of Mace common stock at an exercise price of $4.00 per share. In addition, the Company owns 250,000 common shares of US Plastic Lumber Corporation ("USPL"). The Mace and USPL common shares are subject to certain restrictions and not currently available for sale.
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 to 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 $4.3 million of this debt in October 2000, upon which the Company recorded 1.71 million shares as repurchased. The Company also purchased shares from unaffiliated sellers at $2.50 per share and higher pursuant to a previously announced share repurchase program.
On March 21, 2001, PEI, PEI Merger Sub, Inc., a Maryland corporation (Merger Sub), and Legacy entered into an Agreement and Plan of Merger (the Merger Agreement). Pursuant to the Merger Agreement and subject to the terms and conditions set forth therein, Merger Sub will be merged with and into Legacy (the Merger), with Legacy continuing as a wholly-owned subsidiary of PEI. Following the Merger, PEI will continue to operate as a real estate investment trust under the name Price Legacy Corporation (Price Legacy). The Merger, which is structured to qualify as a tax-free reorganization, is subject to the approval of the stockholders of both PEI and Legacy and other customary closing conditions.
Also in conjunction with the Merger, holders of the Company's Debentures and Senior Notes will have the option to exchange their debt securities valued at par into shares of PEI Series A Preferred Stock. The exchange offer is conditioned on, and expected to close concurrently with, the consummation of the Merger.
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, 2000, as amended.
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
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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. In addition, the Company owns 3,750,000 common shares of Mace Security International, Inc. ("MACE") and 250,000 common shares of U.S. Plastic Lumber Corp. ("USPL") whose market value is dependent on the trading prices of the respective security. The Company's investment in MACE common shares has a book value of $3.4 million and a fair value, based upon the closing stock price at June 30, 2001 of $1.03, of $3.9 million. USPL is marked to market each respective reporting period.
At June 30, 2001, the Company had debts totaling $59.6 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 $0.6 million, based on the outstanding balance at June 30, 2001. 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, 2001 approximates fair value.
| Expected Maturity Date (dollar amounts in thousands) | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2001 | 2002 | 2003 | 2004 | 2005 | Thereafter | Total | Fair Value | |||||||||||||||
Notes receivable, including notes from affiliates | $ | 8,059 | — | $ | 31,705 | $ | 5,935 | — | — | $ | 45,700 | $ | 45,700 | ||||||||||
Average interest rate | 11.70 | % | — | 12.00 | % | 12.00 | % | — | — | 11.94 | % | ||||||||||||
Mortgages and notes payable | $ | 26,232 | $ | 56,832 | — | $ | 60,654 | — | $ | 5,000 | $ | 148,718 | $ | 148,720 | |||||||||
Average interest rate | 7.48 | % | 9.45 | % | — | 8.74 | % | — | 8.58 | % | 8.78 | % |
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On or about February 13, 2001, Lewis P. Geyser filed a lawsuit against the Company in Santa Barbara County Superior Court, Anacapa Division, Case No. 01038577. The suit arises out of an Operating Agreement for Destination Villages, LLC, an entity which is owned jointly by the Company and Geyser, under which Destination Villages, LLC would develop certain eco-tourism resorts. Geyser alleges that the Company breached its obligations under the Operating Agreement, by failing to contribute the funding required under the Agreement. Geyser also alleges that the Company misrepresented its intention to provide the funding required under the Agreement. The complaint includes causes of action for breach of contract, breach of fiduciary duty, fraud and negligent misrepresentation. The lawsuit includes a prayer for compensatory and punitive damages. The Company believes the lawsuit is wholly without merit, and was filed for the improper purpose of extracting concessions from the Company in negotiations with Geyser which were underway prior to its filing. The Company intends to vigorously defend the lawsuit. The Company has also filed a cross-complaint against Geyser for breach of contract, fraud, breach of fiduciary duty and other related claims. Discovery is underway as of this date. There is no trial date, nor have there been any significant proceedings in the case of this date.
The Company is not party to any other legal proceedings other than various claims and lawsuits arising in the ordinary course of business which, in the opinion of Company's management, are not individually or in the aggregate material to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
See Note 13 to the Financial Statements and the Liquidity and Capital Resources section of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for discussion regarding the merger with PEI.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- (a)
- Exhibits
- (b)
- Reports on Form 8-K during the quarter
None
The Company did not file any reports on Form 8-K during the quarter ended June 30, 2001.
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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 | ||||
DATE: August 13, 2001 | By: | /s/ GARY B. SABIN GARY B. SABIN President and Chief Executive Officer (Principal Executive Officer) | ||
DATE: August 13, 2001 | By: | /s/ JAMES Y. NAKAGAWA JAMES Y. NAKAGAWA Chief Financial Officer (Principal Financial and Accounting Officer) |
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INDEX
PART I—FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ITEM 1. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K