ITEM 1 - Business
Formation of the Company and Subsequent Transactions
Price Legacy was formed in September 2001 from the merger of PEI and Excel Legacy (the Merger). In 1994, PEI spun off from Costco Companies, Inc., formerly Price/Costco, Inc. PEI became a self-administered, self-managed REIT in September 1997, which acquires, operates and develops open-air retail properties throughout the United States. In 1998, Excel Legacy spun off from Excel Realty Trust, Inc., a REIT, to pursue a wider variety of real estate opportunities including acquiring, developing and managing mixed-use and retail properties and real estate related operating companies throughout the United States and Canada. In connection with the Merger, Excel Legacy became a wholly owned subsidiary of PEI, and PEI changed its name to Price Legacy Corporation.
Price Legacy continues to operate as a REIT focused on open-air retail properties throughout the United States. Our current property portfolio mainly consists of open-air shopping centers leased to retail tenants. At December 31, 2002, we owned 42 commercial real estate properties, two of which were held through majority-owned joint ventures, and one property subject to a ground lease. We also owned three parcels of land under development and five parcels of land held for future development or sale. In addition to the above property portfolio, we held 50-55% ownership interests in three joint ventures. In total, we held an interest in 53 properties.
Concurrently with the Merger, Price Legacy issued to Warburg, Pincus Equity Partners, L.P. and certain of its affiliates (Warburg Pincus), for an aggregate purchase price of $100 million (the Warburg Investment):
•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 (Series B Preferred Stock), and
•a warrant to purchase an aggregate of 2.5 million shares of Price Legacy common stock at an exercise price of $8.25 per share.
In addition, Sol Price, a significant stockholder of PEI and Excel Legacy through various trusts, converted an existing Excel Legacy loan payable to a trust controlled by Sol Price of approximately $9.3 million into 1,681,142 shares of Series B Preferred Stock and a warrant to purchase 233,679 shares of common stock at an exercise price of $8.25 per share.
The Series B Preferred Stock is junior to our Series A Preferred Stock with respect to dividend, liquidation and other rights, and is convertible under certain conditions into Price Legacy common stock at a one-to-one ratio, which may be adjusted under certain circumstances, after 24 months from the date of issuance. The 9% coupon will be paid with additional shares of Series B Preferred Stock, at $5.56 per share for the first 45 months from issuance. The Warburg Investment closed concurrently with the Merger.
Holders of our Series A Preferred Stock have the right to elect four of the eight directors of our board of directors and Warburg Pincus has the right to elect two directors to our board. The remaining two directors of our board will be elected by the holders of our common stock and Series A Preferred Stock, voting together as a single class.
Our subsidiaries include Excel Legacy Holdings, Inc. which acquired certain assets of Excel Legacy after the Merger and elected to be treated as a Taxable REIT Subsidiary (TRS). Other than certain activities related to lodging and health care facilities, a TRS may generally engage in any business. As a regular C corporation, a TRS is subject to federal income tax and state and local income taxes, where applicable.
Overview of the Company's Business
Our current property portfolio consists primarily of open-air shopping centers leased to major retail tenants including Costco, The Home Depot, Kmart, The Sports Authority, Lowe's, AMC Theaters, Marshall's and Wal-Mart. We receive approximately 32% of annual minimum rents from tenants with investment grade credit ratings. National tenants, which we define as tenants located in at least three states, contribute approximately 78% of annual minimum rents.
For a description of our properties and of material developments during the year regarding these investments and our Company as a whole please refer to "Item 2
ITEM 2 - Properties
Overview
At December 31, 2002, we owned 42 commercial real estate properties including one property with a 24-year ground lease and one hospitality property. These properties encompass approximately 8.4 million square feet of GLA and were 93% leased. The five largest properties include 2.7 million square feet of GLA that generate annual minimum rent of $36.3 million, based on leases existing as of December 31, 2002. We also have a 50% interest in two joint ventures which own retail properties in Fresno, CA and Bend, OR, as well as a 55% interest in a company which owns a retail and office facility in Winnipeg, Canada. These properties generate annual minimum rent of $4.7 million and are 86% leased. We also own approximately 2,662 acres of land, either under development or held for future development or sale. In total we have an interest in 53 properties.
The table below presents the geographic concentration of our properties at December 31, 2002, including our unconsolidated joint ventures and land held for development or sale.
Property Table
Amounts shown for annual minimum rents are based on current leases as of December 31, 2002. Joint venture partnerships represent 100% of annual minimum rents for the property. We made no allowances for contractually-based delays to commencement of rental payments. Due to the nature of real estate investments, our actual rental income may differ from amounts shown in this schedule. The following table describes our portfolio of real estate properties as of December 31, 2002.
(1)Annual Minimum Rent does not include percentage rents or expense reimbursements.
(2)Represents a 65% ownership interest. The property opened in October 2001.
(3)The property opened in June 2001 and construction is expected to continue through the end of 2003. Not included in the above tables is a 65% interest in Grand Tusayan LLC which owns and operates a 121-room hotel and restaurant in Arizona.
The following table reflects land under development or held for development or sale:
(1)We own 50% of a limited liability company that owns this land
(2)We purchased an additional 12.2 acre parcel of land in 2002
(3)Adjacent to existing open-air retail center we own
Debt Secured by Properties
The following table summarizes outstanding debt secured by our properties as of December 31, 2002:
(1)Monthly payments are interest only
(2)Interest based on LIBOR plus 98 basis points
(3)Capital lease arrangement whereby lease may be paid in full upon six month notice
(4)Interest based on LIBOR plus 310 basis points
(5)Interest based on LIBOR plus 225 basis points
(6)Interest based on LIBOR plus 205 basis points
(7)Interest based on LIBOR plus 150 basis points
(8)Interest based on Prime plus 5 basis points
(9)Balance due at maturity is estimated
(10)Construction loan with a maximum availability of $22.6 million based on certain events
(11)This loan was paid in full in January 2003 Loans to Third Parties Relating to Real Estate Development
We had $62.8 million in principal amount of third party notes receivable outstanding as of December 31, 2002 related to various real estate developments and related businesses. Of this amount, $39.1 million relates to notes we assumed from the Merger with Excel Legacy. The notes bear interest ranging from 9.5% to 15% per annum. The notes generally do not require cash payments of interest until specified future dates, typically when developments are completed or sold. As of December 31,
2002, we had $16.0 million of accrued but unpaid interest on these notes. Of this amount, we assumed $11.5 million from the Merger with Excel Legacy. We typically do not recognize interest income on non-recourse notes receivable related to development projects until the projects begin operations or the notes are repaid.
Of the $62.8 million in notes receivable, as of December 31, 2002, the notes receivable from companies owned by or affiliated with Steven Ellman (the Ellman Companies) had an aggregate outstanding principal balance of approximately $43.9 million and the aggregate outstanding accrued interest on such notes receivable was approximately $14.9 million. Notes receivable of $12.2 million (principal amount and accrued interest) matured in 2002 and have been extended to December 31, 2004. The remainder of the notes receivable mature at various dates in 2003 or 2004 or earlier if the related development is sold. Repayment of the notes depends upon the completion of the various development projects or other events. The notes receivable are generally non-recourse obligations, but are typically collateralized by either real estate liens or pledges of ownership interests in the borrower or affiliated entities.
The largest note receivable was made in 1996 to enable the Ellman Companies to purchase real estate located in Scottsdale, Arizona. The Ellman Companies currently plan to develop a shopping center on the Scottsdale property but have yet to receive, among other things, the necessary government entitlements to commence construction of such shopping center. On February 18, 2003, the Scottsdale City Council voted to direct the staff to negotiate a development agreement with the Ellman Companies on this property. As of December 31, 2002, the outstanding principal balance on the note receivable relating to the Scottsdale property was approximately $22.9 million and the outstanding accrued interest on the note receivable was approximately $11.5 million. We did not accrue interest on this note in 2002. The note receivable matures on the earlier of the sale of the Scottsdale property or December 20, 2003. The note is collateralized by a pledge of the owners' ownership interests in the borrower and a second priority deed of trust on the Scottsdale property. In connection with the development of the Scottsdale property, the borrower under this note receivable obtained an additional loan from a third party lender. The loan is collateralized by a first priority deed of trust on the Scottsdale property and is guaranteed by us. On February 27, 2003, we purchased the loan from the lender for an aggregate purchase price of $13.0 million. On March 10, 2003, we signed a letter agreement with the Ellman Companies which, among other things, governs the Ellman Companies' and our actions with respect to the future development of the Scottsdale property.
We also have three notes receivable from an affiliate of the Ellman Companies relating to the Ellman Companies' ownership in the Phoenix Coyotes hockey team. These loans were made at a time when the Ellman Companies intended to relocate the hockey team to an arena that was to be constructed on the Scottsdale property. As of December 31, 2002, the aggregate outstanding principal balance of these three loans was approximately $19.3 million and the aggregate outstanding accrued interest on these three loans was approximately $3.1 million. Two of the three notes receivable matured in December 2002 and the principal balance and outstanding accrued interest on such loans (approximately $10.4 million and $2.1 million, respectively) have been extended to December 31, 2004. The third note receivable has a maturity date of December 20, 2003.
In February 2001, we entered into a letter agreement to govern the repayment of the loans described above relating to the Scottsdale property and the acquisition of the Phoenix Coyotes by the Ellman Companies. Shortly thereafter and as a result of delays at the Scottsdale property, the Ellman Companies elected to pursue an alternative site for the hockey arena in Glendale, Arizona. In December 2002, the Ellman Companies and the other investors involved in the ownership of the Phoenix Coyotes entered into a series of transactions in which the Phoenix Coyotes hockey team, the proposed arena and related real estate development projects were consolidated into a single holding company for the purpose of assisting the combined entity in obtaining additional financing. It is unclear at this time the impact the structure will have on the repayment of our loans made to the Ellman
Companies in connection with their acquisition of the Phoenix Coyotes. We stopped accruing interest on the loans when the development projects were consolidated into the holding company. The sale of equity interests in the holding company is expected to generate proceeds to help repay our notes.
We also have two notes receivable from the Ellman Companies relating to the Ellman Companies' efforts to acquire and refurbish an office building located in Phoenix, Arizona. On March 10, 2003, we signed an agreement with the Ellman Companies to acquire the Phoenix property via a deed in lieu of foreclosure agreement. In 2002, we wrote down the value of the two notes to $1.0 million, which was the estimated fair value of the office building net of debt. We have not accrued any interest on these notes. One of the two notes receivable matured in December of 2002 and the second note receivable has a maturity date of the earlier of the sale of the Phoenix property and May 28, 2004. These notes receivable are non-recourse obligations, but are secured by a junior deed of trust on the Phoenix property. In connection with the development of the Phoenix property, the borrower under these two notes receivable obtained an additional loan from a third party lender. The outstanding principal amount of the loan is approximately $4.5 million and the loan has a maturity date of April 5, 2004, is secured by a first priority deed of trust on the Phoenix property and is guaranteed by us.
In addition to the loans to the Ellman Companies, we have notes receivable of $12.6 million we obtained from the buyers of our self-storage development properties. These notes bear interest at 12% per annum. The notes are payable on May 31, 2003 or earlier, depending on stabilization of the properties. We have also guaranteed $19.3 million in debt to a third party associated with the self-storage properties that was assumed by the buyers. This debt matures in April 2003. These notes were repaid in full in January 2003, and our guaranteed $19.3 million in debt to a third party associated with the self-storage properties was reduced to $4.6 million.
We also have a note receivable from Zonapar, LLC an Ohio LLC ("Zonapar"). The note bears interest at 11% and is due June 30, 2003. The outstanding amount at December 31, 2002 was $3.6 million and another $0.8 million was loaned in January 2003. The note is guaranteed by Yaromir Steiner, an individual, and Zonapar. Zonapar owns development and land option rights related to a development project in Kansas City, MO.
Pending Real Estate Transactions
Since December 31, 2002, we have executed eleven leases for approximately 38,000 square feet of GLA. These new leases will generate $665,000 in annual minimum rents. We are currently in negotiations to sell additional commercial properties and land as well as evaluating various properties for acquisition.
ITEM 3
ITEM 3 - Legal Proceedings
On or about February 13, 2001, Lewis P. Geyser filed a lawsuit against Excel Legacy in Santa Barbara County Superior Court, Anacapa Division, Case No. 01038577. The suit arose out of an Operating Agreement for Destination Villages, LLC, an entity which is owned jointly by Excel Legacy and Mr. Geyser, under which Destination Villages, LLC would develop certain eco-tourism resorts. The complaint included causes of action for breach of contract, breach of fiduciary duty, fraud and negligent misrepresentation. The lawsuit included a prayer for compensatory and punitive damages. Excel Legacy had also filed a cross-complaint against Mr. Geyser for breach of contract, fraud, breach of fiduciary duty and other related claims.
The trial of this matter concluded on March 19, 2002. The trial judge dismissed both the complaint and cross-complaint, and granted nothing to Mr. Geyser under any of his allegations. On June 5, 2002, Mr. Geyser filed an appeal and Excel Legacy subsequently filed a cross-appeal against Mr. Geyser. These appeals are still pending.
On June 13, 2002 the Bank of NT Butterfield & Sons Limited filed a lawsuit against Price Legacy and Excel Legacy in Bermuda for $6.1 million plus other costs related to a guarantee agreement for a promissory note on the Destination Villages Daniel's Head project in Bermuda. The bank claims that Excel Legacy did not provide sufficient capital for the project to be completed which was required in the guarantee agreement. The bank has currently appointed a receiver who is actively marketing the project for sale to third parties. We believe we were in full compliance with the guarantee and intend to vigorously defend the lawsuit.
We are not party to any other legal proceedings other than various claims and lawsuits arising in the ordinary course of business that, in the opinion of our management, are not individually or in the aggregate material to our financial statements.
ITEM 4
ITEM 4 - Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter of 2002.
PART II
ITEM 5
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
Stock Prices
Prior to the Merger with Excel Legacy, our common stock was traded on the Nasdaq National Market under the symbol PREN. Following the Merger, our common stock is traded on the American Stock Exchange under the symbol XLG. Our Series A Preferred Stock trades on the Nasdaq National Market under the symbol PRENP. The table below provides the high and low sales prices of our common stock and Series A Preferred Stock for the period indicated, as reported by the American Stock Exchange and the Nasdaq National Market.
(1)Common stock symbol PREN for Price Enterprises, Inc.
(2)Common stock symbol XLG for Price Legacy Corporation On March 14, 2003, the last reported sales price per share of our common stock was $2.54, and we had approximately 583 common stockholders of record plus those who hold their shares in street name.
In September 2001 in conjunction with the Merger with Excel Legacy, each outstanding share of Excel Legacy common stock was exchanged for 0.6667 share of PEI common stock. Also under the terms of the Merger Agreement, PEI commenced a tender offer for all outstanding shares of common
stock (other than those held by Excel Legacy and those issued in the Merger) at a cash price of $7.00 per share. In connection with the tender offer, 807,583 shares were purchased at a total cost of $5.7 million. We now have approximately 37.0 million shares of common stock outstanding.
Dividends
We intend to distribute at least 90% of our REIT taxable income (determined without regard to the dividends-paid deduction and by excluding any net capital gain) to maintain our qualification as a REIT.
In connection with the Merger, we assumed a net operating loss of approximately $18.7 million, which can be used to reduce our federal taxable income with certain limitations.
During 2002, we declared and paid four quarterly dividends of $0.35 on each share of Series A Preferred Stock for a total of $1.40 per share or $38.4 million. We accrued $10.4 million in dividends on our Series B Preferred Stock in accordance with its terms, but have not yet declared these dividends. For the first 45 months after issuance, all distributions declared on our Series B Preferred Stock will be payable in additional shares of Series B Preferred Stock. Any dividends required to be paid in excess of dividends paid on our Series A Preferred Stock and our Series B Preferred Stock will be paid to our common stockholders. We did not declare or pay any dividends on our common stock during 2002.
During 2001, we declared and paid four quarterly dividends of $0.35 on each share of Series A Preferred Stock for a total of $1.40 per share or $34.6 million. We accrued $2.8 million in dividends on our Series B Preferred Stock in accordance with its terms, but have not yet declared these dividends. We did not declare or pay any dividends on our common stock during 2001.
During 2000, we declared and paid four quarterly dividends of $0.35 on each share of Series A Preferred Stock for a total of $1.40 per share or $33.4 million and we did not declare or pay any dividends on our common stock.
It is possible that, from time to time, we may not have sufficient cash or other liquid assets to meet our distribution requirements due to timing differences between (i) the actual receipt of such income and actual payment of deductible expenses and (ii) the inclusion of such income and deduction of such expenses in arriving at our taxable income. In the event that such timing differences occur, in order to meet these distribution requirements, we may find it necessary to arrange for short-term, or possibly long-term borrowings or to pay dividends in the form of taxable stock dividends.
ITEM 6
ITEM 6 - Selected Financial Data
The following selected data should be read in conjunction with our financial statements and accompanying notes located elsewhere in this Form 10-K and "Item 7
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
As you read Management's Discussion and Analysis, it may be helpful to refer to our financial statements and accompanying notes beginning on page 45. In Management's Discussion and Analysis we explain the changes in specific line items in the statements of operations. Where changes are due to more than one reason, we list the reasons in order of importance.
Introduction
In Management's Discussion and Analysis of Financial Condition and Results of Operations we explain our general financial condition and results of operations including:
•results of operations
•why revenues, costs and earnings changed from the prior period
•funds from operations (FFO)
•how we used cash for capital projects and dividends during 2000 through 2002 and how we expect to use cash in 2003
•where we plan on obtaining cash for future dividend payments and future capital expenditures
The results of Excel Legacy are included in operations beginning September 19, 2001.
Critical Accounting Policies and Estimates
General
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). Preparation of our financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related notes. We believe that the following accounting policies are critical because they affect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Actual results may differ from these estimates under different assumptions or conditions. For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Consolidation
We combine our financial statements with those of our wholly-owned subsidiaries as well as all affiliates in which we have control and present them on a consolidated basis. The consolidated financial statements do not include the results of transactions between us and our subsidiaries or among our subsidiaries.
Revenue Recognition
Recognition of revenue is dependent upon the quality and ability of our tenants to pay their rent in a timely manner. 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 we accrue in the period in which the related expense occurs; and (3) percentage rents based on the level of sales achieved by the lessee, which we recognize when earned.
Gain or loss on sale of real estate is recognized when the sales contract is executed, title has passed, payment is received, and we no longer have continuing involvement in the asset.
Real Estate Assets and Depreciation
We record real estate assets at historical costs and adjust them for recognition of impairment losses. In following purchase accounting, we adjusted the historical costs of Excel Legacy's real estate assets to fair value at the time of the Merger. Our consolidated balance sheets at December 31, 2002 and December 31, 2001 reflect the new basis of those real estate assets.
We expense as incurred ordinary repairs and maintenance costs, which include building painting, parking lot repairs, etc. We capitalize major replacements and improvements, which include HVAC equipment, roofs, etc., and depreciate them over their estimated useful lives.
We compute real estate asset depreciation on a straight-line basis over their estimated useful lives, as follows:
We review long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recovered. We consider assets to be impaired and write them down to fair value if their expected associated future undiscounted cash flows are less than their carrying amounts.
We capitalize interest incurred during the construction period of certain assets and this interest is depreciated over the lives of those assets.
Pre-development costs that are directly related to specific construction projects are capitalized as incurred. We expense these costs to the extent they are unrecoverable or it is determined that the related project will not be pursued.
Derivative Instruments and Hedging Activities
We follow the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In the normal course of business, we may use derivative financial instruments to manage or hedge interest rate risk. When entered into, we formally designate and document the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions. We assess, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Because of the high degree of correlation between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair value or cash flows of the underlying exposures being hedged. Any ineffective portion of a
financial instrument's change in fair value is immediately recognized in earnings. Virtually all of our derivatives are straightforward over-the-counter instruments with liquid markets.
To determine the fair values of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Notes Receivable
We typically do not recognize interest income on non-recourse notes receivable related to development projects until the projects begin operations or the interest is paid.
Asset Disposal
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting for the impairment or disposal of long-lived assets and is effective in fiscal years beginning after December 15, 2001. We have adopted this statement and report discontinued operations for the years ended December 31, 2002 and 2001.
Results of Operations
Rental Revenues
Revenues increased $45.5 million to $121.2 million in 2002 compared to 2001 because:
•properties we acquired during 2001 and 2002 generated $34.8 million of additional revenues
•properties acquired from Excel Legacy due to the Merger generated an additional $10.0 million in revenues
•revenues from properties we owned in both 2001 and 2002 increased $3.5 million, including a $2.3 million termination fee received during the year
•partially offsetting these increases was the loss of $2.8 million in revenues generated in 2001 from properties sold during 2002
Revenues increased $11.6 million to $75.6 million in 2001 compared to 2000 because:
•properties we acquired during 2000 and 2001 generated $13.3 million of additional revenues
•properties acquired from Excel Legacy due to the Merger generated an additional $2.4 million in revenues
•revenues from properties we owned in both 2000 and 2001 increased $1.4 million, primarily due to additional leasing activity and additional expense reimbursement revenue
•partially offsetting these increases was the loss of $5.5 million in revenues generated in 2000 from properties sold during 2001
Expenses
Expenses increased $36.2 million to $71.5 million in 2002 compared to 2001 primarily due to:
•properties we purchased in 2001 and 2002 generated additional expenses of $13.6 million
•properties acquired from Excel Legacy due to the Merger contributed $10.9 million to expenses
•an increase in general and administrative expenses of $6.1 million, including additional non-cash compensation expense of $2.8 million to record the difference between the officers' notes book value and the market value of the related shares during 2002. General and administrative expenses also increased $1.6 million related to salaries and benefits. Prior to the Merger, Excel Legacy was responsible for our daily management and we reimbursed them for these services based on our historical costs for similar expenses. General and administrative expenses also increased due to legal fees and other costs of $1.1 million related to our investment in Destination Villages, LLC
•we recognized an impairment loss of $3.4 million on one of our notes receivable during 2002 based on the estimated fair value of the collateralized asset
•we recognized an impairment loss of $2.5 million on one of our properties during 2002. The loss was based on the assessed fair value of the property after the property's only tenant declared bankruptcy and vacated
•expenses on properties we owned in 2001 and 2002 increased $0.9 million
•these increases in expenses were partially offset by a decrease in expenses of $1.1 million as a result of properties sold during the 2001
Expenses increased $9.0 million to $35.3 million in 2001 compared to 2000 primarily due to:
•properties we purchased in 2000 and 2001 generated additional expenses of $4.4 million
•properties acquired from Excel Legacy due to the Merger contributed $3.9 million to expenses
•an increase in general and administrative expenses of $1.3 million
•bad debt expense increased $1.1 million, primarily due to a recovery in the prior year of amounts previously written off related to a former tenant
•expenses on properties we owned in 2000 and 2001 increased $0.7 million
•these increases in expenses were partially offset by:
•a decrease in expenses of $1.7 million as a result of properties sold during 2001 and 2000
•a decrease in expenses of $1.0 million for our self storage business as we began collecting rent net of expenses when we entered into a master lease arrangement on these properties
Operating Income
Operating income increased for 2002 and 2001 compared to the same periods in the prior year primarily because of the changes in Rental Revenues and Expenses discussed above.
Interest Expense
During 2002, interest expense increased $9.2 million compared to 2001 because:
•our average debt outstanding in 2002 was $513.8 million compared to $274.0 million in 2001, which relates primarily to additional borrowings and assumptions of loans with the purchase of properties
•the increase in interest expense due to the amount of debt outstanding was partially offset by a decrease in interest rates on our variable rate debt. The weighted average interest rate on our variable rate debt decreased to 3.1% on December 31, 2002 compared to 3.6% at December 31, 2001
•interest expense is net of $2.0 million interest capitalized to real estate assets in 2002 and $1.6 million in 2001
During 2001, interest expense increased $5.9 million compared to 2000 because:
•our average debt outstanding in 2001 was $274.0 million compared to $148.5 million in 2000, which relates primarily to additional borrowings and assumptions of loans with the purchase of properties
•the increase in interest expense due to the amount of debt outstanding was partially offset by a decrease in interest rates on our variable rate debt. The weighted average interest rate on our variable rate debt decreased to 3.6% on December 31, 2001 compared to 7.5% at December 31, 2000
•interest expense is net of $1.6 million interest capitalized to real estate assets in 2001 and $2.1 million in 2000
We discuss our outstanding debt further in "Liquidity and Capital Resources" located elsewhere in this Form 10-K.
Interest Income
Interest income decreased $3.0 million to $4.5 million in 2002 compared to 2001 primarily because:
•we no longer record interest income on our note receivable with Excel Legacy, which earned interest of $2.9 million in 2001
•interest income on our outstanding cash balances decreased by $0.4 million
•these decreases were partially offset by an increase in interest income of $0.3 million on our officers' loans
Interest income increased $4.8 million to $7.5 million in 2001 compared to 2000 primarily because:
•prior to the Merger in September 2001, our note receivable with Excel Legacy earned additional interest of $1.9 million
•our notes receivable with other real estate developers, including interest on notes acquired in the Merger, earned additional interest of $2.9 million
Gain on Sale of Real Estate
During 2002, we sold the following non-depreciable properties for a net gain of $0.3 million:
Also during 2002, we sold the following operating properties and recorded a net gain of $9.3 million. This gain is recorded as discontinued operations in the Consolidated Statements of Operations in accordance with SFAS No.144.
During 2001, we sold the following properties for a net gain of $1.3 million:
(1)Partial sale-one building remains We also sold our 50% ownership interest in a joint venture which owns a retail property in Westminster, CO, on December 14, 2001 for $13.5 million. We recognized no gain or loss on the sale.
Funds From Operations (amounts in thousands)
(1)Includes $10.4 million of non-cash dividends accumulated on our Series B Preferred Stock
(2)Includes $2.8 million of non-cash dividends accumulated on our Series B Preferred Stock Our Company, as well as real estate industry analysts, generally consider FFO as another measurement of economic profitability for real estate-oriented companies. The Board of Governors of the National Association for Real Estate Investment Trusts (NAREIT), defines FFO as net income in accordance with accounting principles generally accepted in the United States of America (GAAP), excluding depreciation and amortization expense and gains (losses) from depreciable operating real estate. We calculate FFO in accordance with the NAREIT definition and also exclude provisions for asset impairments and gains (losses) from the sale of investments when we calculate FFO. FFO does not represent the cash flows from operations defined by GAAP, may not be comparable to similarly titled measures of other companies and should not be considered as an alternative to net income as an indicator of our operating performance or to cash flows as a measure of liquidity. Excluded from FFO are significant components in understanding our financial performance.
FFO before preferred dividends during 2002 increased $10.0 million or 20.6% to $58.7 million compared to 2001 because:
•properties we acquired during 2001 and 2002 increased FFO $29.0 million
•properties we owned in both 2001 and 2002 increased FFO $2.7 million
•gain on non-depreciable land sold during the year contributed $0.3 million to FFO
•joint ventures contributed an additional $0.2 million to FFO in the current year
•these increases to FFO were partially offset by:
•additional interest expense which reduced FFO $9.1 million
•additional general and administrative expenses reduced FFO by $6.1 million
•properties sold which contributed $4.2 million to FFO in the previous year
•decreased interest income, which reduced FFO by $3.0 million
FFO before preferred dividends during 2001 increased $4.7 million or 10.8% to $48.7 million compared to 2000 because:
•properties we acquired during 2000 and 2001 increased FFO $11.2 million
•interest income on our outstanding notes receivable and higher cash balances increased FFO $4.8 million
•a net increase in FFO of $0.8 million for our self storage business as we began collecting rent net of expenses when we entered into a master lease arrangement on these properties
•properties we owned in both 2000 and 2001 increased FFO $0.7 million
•joint venture income contributed an additional $0.1 million to FFO in the current year
•these increases to FFO were partially offset by:
•additional interest expense which reduced FFO $5.9 million
•properties sold during 2001 reduced FFO $4.6 million
•additional bad debt expense and general and administrative expenses reduced FFO by $2.4 million
Liquidity and Capital Resources
Liquidity refers to our ability to generate sufficient cash flows to meet the short and long-term cash requirements of our business operations. Capital resources represent those funds used or available to be used to support our business operations and consist of stockholders' equity and debt.
Cash flow from operations has been the principal source of capital to fund our ongoing operations and dividend payments, while asset sales and use of our credit facilities and mortgage financing have been the principal sources of capital required to fund our growth. While we are positioned to finance our business activities through a variety of sources, we expect to satisfy short-term liquidity requirements through net cash provided by operations and through borrowings.
Dividends
As a REIT, we are required to distribute 90% of our taxable income, excluding capital gains, in dividends. Our Series A Preferred Stock requires a quarterly dividend payment of $9.6 million, an annual total of $38.4 million. In connection with the Merger, we assumed a net operating loss (NOL)
of approximately $18.7 million which could be used to offset federal taxable income. We anticipate that approximately $9.7 million of this NOL will be used to offset taxable income in 2002. The remaining taxable income was distributed in dividends to the Series A Preferred stockholders. In the future, if our Series A Preferred dividend is less than 90% of our taxable income (after applying any applicable NOLs), we have two options to meet the distribution requirement:
1)We can declare a Series B Preferred Stock dividend by issuing additional Series B Preferred shares. The Series B Preferred Stock dividends accumulate at a rate of 9%, compounded quarterly. As of December 31, 2002, the Series B Preferred stockholders were entitled to approximately 2.4 million additional shares.
2)We can declare a dividend to our common stockholders.
If our taxable income is less than the Series A Preferred Stock dividends, we are still obligated to pay them. If we are unable to pay these dividends when due, they accumulate until paid.
Debt
In September 2001, we obtained a $100.0 million unsecured credit facility with Fleet Bank as agent. The facility has a three-year term and has a current interest rate of LIBOR plus 187.5 basis points. The rate may vary between 150 and 187.5 basis points based on our leverage and other financial ratios. At December 31, 2002, we had $60.3 million outstanding on the facility at a 3.3% interest rate. In January 2003, we issued a $6.0 million letter of credit to April 1, 2003, which reduced the total available we can borrow to $94.0 million.
Our credit facility requires us to comply with specified financial covenants, the most restrictive of which relate to fixed charge coverage and leverage. Covenants in some of our construction loans are also tied to our credit facility. We were in compliance with all covenants in our credit facility at December 31, 2002, and are closely monitoring our operating results in 2003 as they relate to compliance with such covenants, in particular fixed charge coverage and leverage. To the extent that we are in violation of any of these covenants, we would need to obtain waivers from our lenders to maintain compliance. We cannot assure that any such waivers would be forthcoming.
In 2003 we have the following significant debt maturities:
•On December 31, 2002, a $38.5 million construction loan related to our project in Newport, Kentucky matured. The lender gave us a 90 day extension. As a condition of this extension, we were required to issue a $6.0 million letter of credit to fund any tenant improvement requirements. We anticipate that the current lender will extend this loan beyond March 31, 2003 although they may require a pay-down on the outstanding amount. If the current lender does not extend this loan, we may not have the capital resources to repay this loan completely without selling assets or incurring other debt.
•On April 4, 2003, a $22 million loan related to our project in Orlando Florida matures. The loan has an option to extend for 21/2 years. We anticipate that we will either exercise this extension or refinance this debt with a new loan.
•On March 1, 2003, a $4.7 million loan related to our property in Newport, KY matured. The lender agreed to extend this loan for another year.
The following table summarizes all of our long-term contractual obligations, excluding interest, to pay third parties as of December 31, 2002:
In 2003 we plan to use cash flow from operations to fund our recurring debt service obligations.
Included in the 2004 mortgage and notes payable obligations is a $3.1 million capital lease obligation whereby the lessor can require us to repay the lease with a 30-day notice. If this occurs, we would replace the obligation with other mortgage debt or borrowing on our credit facility.
Off-Balance Sheet Financing Matters
Related to our Newport, KY project discussed previously, the City of Newport, KY (Newport) in 1999 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 2018 with interest at 8.375%; (b) $20.5 million maturing 2027 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 the Newport project, the Company, and the project's third party developers. As of December 31, 2002, Newport had drawn on $43.7 million of the bonds for construction incurred prior to that date.
We also have guaranteed the following off-balance sheet debt with maturites in 2003:
•On February 28, 2003, a $12.9 million bank loan related to a development project in Scottsdale Arizona matures. We have a note receivable to a developer related to this project and have guaranteed this loan. On February 27, 2003, we purchased the loan from the lender for an aggregate purchase price of $13.0 million, which was funded through borrowing on our credit facility.
•We have an $11.1 million loan related to land we own in Orlando Florida through a joint venture. This loan is guaranteed by us and by our partner. Beginning August 2003, the loan requires monthly principal repayments of $1.1 million. If this land is not refinanced or sold before August 2003, we anticipate funding these repayments on behalf of the partnership.
Summarized debt information for our unconsolidated joint ventures and the amount guaranteed by us at December 31, 2002 is as follows:
(1)These loans have one year extension options
In addition, we have guaranteed a $4.5 million note payable to a third party lender which matures in April 2004 relating to an office building in Phoenix, Arizona on which we have notes receivable of $1.0 million in principal amount.
In connection with the sale of three self storage development properties in September 2002, we agreed to guarantee $19.3 million of debt associated with the properties that was assumed by the buyer in the transaction. In January 2003, the guarantee was reduced to $4.6 million and we guarantee this debt until it matures on April 25, 2003.
Development
We have a significant retail project in Newport, KY. The majority of the construction was completed in October 2001, with all of the primary buildings completed except for one out parcel yet to be leased. The project opened in October 2001. At December 31, 2002, the project was approximately 74% occupied, excluding ground leases. As the project becomes fully leased, there may be capital required to fund the remaining tenant improvements.
The Anaheim GardenWalk project in Anaheim, CA, located between Disney's two Theme Parks on Harbor Boulevard and Disney's new proposed Theme Park on Katella Avenue will consist of a 626,000 square foot open-air retail center and four hotels. Total cost of the retail portion of this project is approximately $250 million with an estimated cost of $200 million remaining to complete construction over the next eight years for all phases. We anticipate that the first phase of the project will cost approximately $125 million, of which approximately $40 million may be spent in 2003. We expect to fund construction costs through a construction loan, sales of hotel land parcels or potential joint venture investors.
We also have retail development projects in which construction will continue through 2004. The Temecula, CA project is an open-air retail shopping center with Wal-Mart, Kohl's and other tenants. We estimate $6.5 million remaining to complete construction. We expect to fund the remaining cost through borrowings on our unsecured line of credit. In December 2002, we purchased additional land adjacent to this development project to develop an additional open-air retail center. We estimate the total cost of this development to be approximately $12.7 million with an estimated $8.3 million remaining to complete construction.
In November 2002, we purchased land adjacent to our property in Orlando, FL to develop an open-air retail center. We estimate the total cost of this development to be approximately $21 million with an estimated $13.4 million remaining to complete construction.
Notes Receivable
We had $62.8 million in principal amount of third party notes receivable outstanding as of December 31, 2002 related to various real estate developments and related businesses. The notes bear interest ranging from 9.5% to 15% per annum. The notes generally do not require cash payments of interest until specified future dates, typically when developments are completed or sold. As of December 31, 2002, we had $16.0 million of accrued but unpaid interest on these notes. Of this amount, we assumed $11.5 from the Merger with Excel Legacy. We typically do not recognize interest income on these notes receivable until development projects begin operations. Of the $62.8 million in notes receivable, as of December 31, 2002, the notes receivable from companies owned by or affiliated with Steven Ellman (the Ellman Companies) had an aggregate outstanding principal balance of approximately $43.9 million and the aggregate outstanding accrued interest on such notes receivable was approximately $14.9 million. Notes receivable of $12.2 million (principal amount and accrued interest) matured in 2002, but were extended to December 31, 2004. The remainder of the notes receivable mature at various dates in 2003 or 2004 or earlier if the related development is sold. Repayment of the notes depends upon the completion of the various development projects or other
events. The notes receivable are generally non-recourse obligations, but are typically collateralized by either real estate liens or pledges of ownership interests in the borrower or affiliated entities.
Growth
We continue to evaluate various properties for acquisition or development and continue to evaluate other investment opportunities. We anticipate borrowing available amounts on our credit facility or mortgages to fund these acquisition and development opportunities. We also anticipate obtaining construction loans to fund our development activities. During the year ended December 31, 2002 we purchased eight properties for a total of $143.2 million. We used proceeds from tax-deferred exchange transactions on properties sold in 2001 and 2002, mortgage financing, borrowings on our unsecured line of credit, and assumed loans to fund these acquisitions.
From time to time we will consider selling properties to better align our portfolio with our geographic and tenant composition strategies. We may also participate in additional tax-deferred exchange transactions, which allow us to dispose of properties and reinvest the proceeds in a tax efficient manner. During the year ended December 31, 2002 we sold three parcels of land for $3.1 million, three self storage development properties for $26.3 million, three self storage operating properties for $52.5 million and one operating retail property for $15.2 million. When we sell an operating property, we anticipate a temporary reduction in operating income due to the time lag between selling a property and reinvesting the proceeds.
We are contemplating purchasing various properties and selling certain other properties. As we sell properties, our cash flows from operations may decrease until the proceeds are reinvested into new properties.
Litigation
We own a 55% interest in Destination Villages LLC, which indirectly owns a hospitality project located in Bermuda, Daniel's Head Village Resort (Daniel's Head). Daniel's Head was closed in the fourth quarter of 2001, primarily due to low occupancy rates as a result of the terrorist events in the United States that occurred on September 11, 2001. The project was encumbered by a $6 million loan with a Bermuda bank. In March 2002, we informed the Bermuda bank that we did not intend to re-open this project due to large projected operating losses and instead intended to sell the project to an identified buyer. This resulted in a default of the loan. On March 27, 2002, the Bermuda bank exercised its rights under Bermuda law and put the project in "receivership," which gives the bank the right to negotiate directly with this buyer as well as other potential buyers. On June 13, 2002 the Bermuda Bank filed a lawsuit against us in Bermuda for $6.1 million plus other costs related to a guarantee agreement for a promissory note on the Destination Villages Daniel's Head project in Bermuda. We believe we were in full compliance with the guarantee and intend to vigorously defend the lawsuit.
Other
In April 2002, we entered into five Interest Rate Swap Agreements with Fleet Bank that are accounted for under SFAS No. 133 and sold them in October 2002. The combined notional amount was approximately $161 million and the maturities ranged from 2009-2010. We paid monthly interest of LIBOR plus 3.08% to 3.77% and Fleet Bank assumed our fixed rates of 8.18% to 9.00%. These swaps hedged the fair value of fixed-rate debt. In October 2002, we sold the five swaps back to the counter party for $13.8 million and will amortize the gain over the fixed-rate debt's remaining life through 2009 to 2010.
In July 2002, we entered into four Interest Rate Cap Agreements with Wells Fargo Bank and Fleet Bank that are also accounted for under SFAS No. 133. The combined notional amount is $152.0 million
and the maturities range from 2009 to 2010. The agreements cap our variable rate risk on one month LIBOR interest at 7%.
In October 2001, our Board of Directors approved the repurchase of up to $10 million of our outstanding common stock. In September 2002, we repurchased 546,900 shares of our common stock on the open market for approximately $1.6 million.
Transactions with Related and Certain Other Parties
We have $12.5 million in notes receivable (including accrued interest) from certain of our current and former officers, which are due March 2003. The notes are primarily non-recourse obligations collateralized by approximately 2.9 million shares of our common stock. As of December 31, 2002, the market value of these shares was less than the amounts due on the notes. The Sarbanes-Oxley Act of 2002 prohibits any material changes to notes receivable from current officers. As a result of discussions related to the eventual disposition of the notes, we have applied Emerging Issues Task Force (EITF) 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44" issued in 2002. EITF 00-23 requires accounting as if the shares had been repurchased and treated as treasury shares, with a corresponding issuance of a new stock option. The impact of EITF 00-23 on our financial statements was as follows:
•we retired the notes receivable from officers and the 2.9 million shares securing the notes at the current market value in the third quarter of 2002. The shares collateralizing the notes are now treated as treasury stock and
•we recorded a one-time non-cash charge of $2.8 million in compensation expense to record the difference between the notes' book value and the value of the shares
The above only impacts our accounting records. Legally, the notes and shares remain outstanding until the notes are repaid or otherwise settled. The 2.9 million shares are treated similar to stock options and are accounted for under variable option plan accounting in accordance with APB No. 25. This valuation had no impact on our financial statements for the year ended December 31, 2002.
Prior to the Merger, Excel Legacy was responsible for the daily management of PEI, including property management, finance and administration. We reimbursed Excel Legacy for these services based on historical costs for similar expenses. We expensed $2.4 million for these services during 2001.
Prior to the Merger, we executed a note receivable with Excel Legacy allowing them to borrow up to $40.0 million. During 2001 we recorded $2.9 million in interest income from Excel Legacy on this note. As a result of the Merger, interest income is no longer recorded on this note.
In connection with the San Diego/Rancho Bernardo, CA office building purchased from Excel Legacy, we leased the building back to Excel Legacy under a 10-year lease agreement. We recorded $1.1 million of rental revenue from Excel Legacy in connection with this lease during 2001. Due to the Merger, rental revenue is no longer recorded on this lease.
In connection with the purchase of the Anaheim land in the first quarter of 2001, we executed a ground lease agreement with Excel Legacy. The lease has a term of 50 years and requires payments of $2.8 million per year in rent. During 2001 we recorded $1.8 million in rental revenue from Excel Legacy related to this lease. Due to the Merger, rental revenue is no longer recorded on this lease.
Inflation
Because a substantial number of our leases contain provisions for rent increases based on changes in various consumer price indices, based on fixed rate increases, or based on percentage rent if tenant sales exceed certain base amounts, we do not expect inflation to have a material impact on future net income or cash flow from developed and operating properties. In addition, substantially all leases are
triple net, which means specific operating expenses and property taxes are passed through to the tenant.
ITEM 7A.
ITEM 7A.-Quantitative and Qualitative Disclosures About Market Risk
Market risks relating to our operations result primarily from changes in short-term LIBOR interest rates. We do not have any significant foreign exchange or other material market risk.
Our exposure to market risk for changes in interest rates relates primarily to our variable interest rate debt. We enter into variable rate debt obligations to support general corporate purposes, including acquisitions, capital expenditures and working capital needs. We continuously evaluate our level of variable rate debt with respect to total debt and other factors, including our assessment of the current and future economic environment.
We had $284.4 million in variable rate debt outstanding at December 31, 2002. Based upon these year-end debt levels, a hypothetical increase in interest rates by 100 basis points would increase interest expense by approximately $2.8 million on an annual basis, and likewise decrease our earnings and cash flows. We cannot predict market fluctuations in interest rates and their impact on our variable rate debt, nor can there be any assurance that fixed rate long-term debt will be available to us at favorable rates, if at all. Consequently, future results may differ materially from the estimated adverse changes discussed above.
Also, as previously discussed, we entered into five fair-value interest rate swap agreements for $161 million in April 2002. These swap agreements effectively convert $161 million of fixed rate loans with interest rates ranging from 8.18% to 9% to variable interest rates. The fair value of these interest rate swap agreements represents the estimated amount we would receive if we terminated the agreements. In October 2002, we sold the five swaps for $13.8 million and will amortize the gain over the fixed-rate debt's remaining life.
In July 2002, in order to mitigate our variable interest rate exposure, we acquired four interest rate caps, which hedge our exposure on $152 million of variable rate debt. The hedges limit our exposure to the one-month LIBOR index associated with certain of our outstanding debt at 7%. To the extent the one-month LIBOR index exceeds 7%, the counter parties on the hedges will pay us the difference between the actual index and 7%.
The following table presents the scheduled principal payments on notes receivable and the scheduled principal payments 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. We determine the fair value of financial instruments through the use of discounted cash flows analysis using current interest rates for notes receivable with terms and credit characteristics similar to our existing portfolio and borrowings under terms similar to our existing mortgages payable. Accordingly, we have determined that the carrying value of our financial instruments at December 31, 2002 approximated fair value.
ITEM 8
ITEM 8 - Financial Statements and Supplementary Data
PRICE LEGACY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See accompanying notes.
PRICE LEGACY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
See accompanying notes.
PRICE LEGACY CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
(1)Additional paid-in capital is net of treasury stock of $11,299 See accompanying notes.
PRICE LEGACY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes.
PRICE LEGACY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1-Organization and Significant Accounting Policies
Organization
Price Legacy Corporation (Price Legacy) operates as a real estate investment trust (REIT) incorporated in the State of Maryland. Our principal business is to operate, acquire, sell, and develop real property, primarily open-air shopping centers. On September 18, 2001, Price Legacy completed a merger between Price Enterprises, Inc. (PEI) and Excel Legacy Corporation (Excel Legacy) resulting in Excel Legacy becoming a wholly owned subsidiary of PEI (the Merger). The results of Excel Legacy are included in our operations beginning September 19, 2001.
Our subsidiaries include Excel Legacy Holdings, Inc. which has elected to be treated as a Taxable REIT Subsidiary (TRS). Other than certain activities related to lodging and health care facilities, a TRS may generally engage in any business. As a regular C corporation, a TRS is subject to federal income tax and state and local income taxes, where applicable.
Accounting Principles
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). We follow the accounting standards established by the Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission (SEC).
Consolidation
We combine our financial statements with those of our wholly-owned subsidiaries as well as all affiliates in which we have significant influence and present them on a consolidated basis. The consolidated financial statements do not include the results of transactions between us and our subsidiaries or among our subsidiaries.
We account for our investment in unconsolidated joint ventures using the equity method of accounting. Under the equity method of accounting, the net equity investment of the joint ventures is reflected on the consolidated balance sheets and the consolidated statements of operations includes our share of net income or loss from the unconsolidated joint ventures.
Real Estate Assets and Depreciation
We record real estate assets at historical cost and adjust them for recognition of impairment losses. In following purchase accounting, we adjusted the historical costs of Excel Legacy's real estate assets to fair value at the time of the Merger. Our consolidated balance sheets at December 31, 2002 and 2001 reflect the new basis of those real estate assets. See Note 2 for additional information on this transaction.
We expense as incurred ordinary repairs and maintenance costs, which include building painting, parking lot repairs, etc. We capitalize major replacements and betterments, which include HVAC equipment, roofs, etc., and depreciate them over their estimated useful lives.
We compute real estate asset depreciation on a straight-line basis over their estimated useful lives, as follows:
We review long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recovered. We consider assets to be impaired and write them down to fair value if their expected associated future undiscounted cash flows are less than their carrying amounts. Generally, we estimate fair value using discounted cash flow, direct capitalization or market comparison analyses. The process of evaluating for impairment requires estimates as to future events and conditions, which are subject to varying market and economic factors.
We capitalize interest incurred during the construction period of certain assets and this interest is depreciated over the lives of those assets. The following table shows interest expense and the amount capitalized (amounts in thousands):
Pre-development costs that are directly related to specific construction projects are capitalized as incurred. We expense these costs to the extent they are unrecoverable or it is determined that the related project will not be pursued.
Investment in Securities
We review our investments in securities for possible impairment whenever the market value of the securities falls below cost and, in our opinion, 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
•our ability and intent to retain the 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, we write down the cost basis of the security, and record the charge in earnings.
Included in other assets on our consolidated balance sheet is an investment in Millennia Car Wash, LLC (Millennia) which owns approximately 1.9 million shares of common stock, and 31,250 common stock purchase warrants of Mace Security International (MACE) and 250,000 common shares of US Plastic Lumber Corporation (USPL). Our common shares in MACE are subject to certain sale
restrictions and one of our senior officers is a member of the MACE board of directors. In following GAAP, we account for Millennia's investment in MACE under the equity method of accounting and owned approximately 15% of MACE at December 31, 2002. We classify our investment in USPL as available-for-sale and recognize changes in the fair value of this investment in other comprehensive income.
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 we accrue in the period in which the related expense occurs; and (3) percentage rents based on the level of sales achieved by the lessee which are recognized when earned.
Gain or loss on sale of real estate is recognized when the sale contract is executed, title has passed, payment is received, and we no longer have continuing involvement in the asset.
We 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 our consolidated financial position or results of operations.
Cash and Cash Equivalents
We consider all highly liquid investments with a maturity of less than three months when purchased to be cash and cash equivalents.
We are required to maintain reserves with certain lenders for property taxes, insurance and capital expenditures. The aggregate amounts of these reserves held by lenders were approximately $8.8 million at December 31, 2002 and $5.2 million at December 31, 2001. These amounts are reflected as cash on the consolidated balance sheets.
Our cash balance at December 31, 2002 includes $2.4 million of restricted funds which represent the proceeds from the sale of vacant land at our property in Hollywood/Oakwood Plaza, FL. The funds are held by the lender until the debt is repaid in 2009.
Our cash balance at December 31, 2001 includes $1.5 million of restricted funds which represent proceeds from the financing of a construction project. Funds are held in trust and released as work is completed.
Leasing Costs
We capitalize costs associated with leasing space to tenants and amortize leasing costs using the straight-line method over the initial terms of the related tenant leases.
Financial Instruments
The carrying amounts reflected in our balance sheets for cash and cash equivalents, receivables and all liabilities including minority interest approximate their fair values. In making these assessments we used estimates and market rates for similar instruments.
Authorized Stock
As of December 31, 2002, our Company's authorized stock consisted of 150 million shares of capital stock of which 94.7 million shares have been designated as common stock, par value $0.0001 per share; 27.8 million shares have been designated as 83/4% Series A Cumulative Redeemable Preferred Stock, par value $.0001 per share; and 27.5 million shares have been designated as 9% Series B Junior Convertible Redeemable Preferred Stock, par value $.0001 per share.
Income Taxes
We intend to continue to meet all conditions necessary to qualify as a REIT under the Internal Revenue Code. To qualify as a REIT, we are required to pay dividends of at least 90% of our REIT taxable income, determined without regard to the dividends-paid deduction and by excluding any net capital gain each year and meet certain other criteria. As a qualifying REIT, we will not be subject to tax on income distributed to our stockholders, but we will be subject to tax on our income to the extent it is not distributed. Also, if we sell properties that would result in a significant tax liability, we intend to use tax deferred exchange transactions so we will not be taxed on potential gains. The reported amounts of our net assets, as of December 31, 2002 and 2001 were more than their tax basis for Federal tax purposes by approximately $137.6 million and $149.6 million, respectively.
The following table shows the tax status of our preferred dividend payments between ordinary income, return of capital and capital gains:
Reclassifications
Certain reclassifications have been reflected in the consolidated financial statements in order to conform with the current year presentation.
Use of Estimates
Preparing financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We continually review our estimates and make adjustments as necessary, but actual results could differ from those envisioned when these estimates were made.
Comprehensive Income
In 1999, we adopted Statement of Financial Accounting Standards (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 us include net income, unrealized gains (losses) on interest rate caps and unrealized gains (losses) on investments.
Derivative Financial Instruments
In January 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In the normal course of business, we may use derivative financial instruments to manage or hedge interest rate risk. When entered into, we formally designate and document the financial instrument as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transactions. We assess, both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposure. Because of the high degree of correlation between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the fair value or cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument's change in fair value is immediately recognized in earnings. Virtually all of our derivatives are straightforward over-the-counter instruments with liquid markets.
To determine the fair value of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date.
For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Asset Disposal
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting for the impairment or disposal of long-lived assets and is effective in fiscal years beginning after December 15, 2001. We have adopted this standard and report operations from properties sold in 2002 as discontinued operations for the years ended December 31, 2002, 2001 and 2000.
Stock-Based Compensation
We follow Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" and related interpretations, in accounting for our employee and non-employee director stock options instead of following SFAS No. 123, "Accounting for Stock-Based Compensation." The alternative fair value accounting provided for under SFAS No. 123 requires use of option valuation models that were not developed for use in valuing employee stock options. As a result, deferred compensation is recorded only in the event that the fair market value of the stock on the date of the option grant exceeds the exercise price of the options. Since the exercise price of our stock options equals the market price of our stock on the day the options are granted there is no related compensation expense.
New Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections." SFAS No. 145 requires, among other things, (i) that the modification of a lease that results in a change of the classification of the lease from capital to operating under the provisions of SFAS No. 13 be accounted for as a sale-leaseback transaction and (ii) the reporting of gains or losses from the early retirement of debt as extraordinary items only if they met the criteria of APB No. 30, "Reporting the Results of Operations." The adoption of this statement did not have a material effect on our financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 replaces current accounting literature and requires the recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective January 1, 2003, and we do not anticipate the adoption of this statement will have a material effect on our consolidated financial statements.
In May 2002, the FASB issued Emerging Issues Task Force (EITF) No. 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44." EITF No. 00-23 requires nonrecourse notes receivable from officers be accounted for as retired and the collateral shares as repurchased at the shares' market value. We have applied EITF No. 00-23 and discuss it further in Note 11 of this Form 10-K.
In July 2002, the FASB issued SFAS 147, "Acquisitions of Certain Financial Institutions." SFAS 147 is effective for acquisitions on or after October 1, 2002. We do not anticipate the adoption of this statement will have an effect on our consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. We have evaluated the effect of this statement and have determined it will not have a material impact on our consolidated financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No. 123." SFAS No. 148 addresses transition provisions for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123. We have evaluated the effect of this statement and have determined it will not have a significant impact on our consolidated financial statements.
We do not record compensation expense for stock option grants. The following table summarizes results as if we had recorded compensation expense under the provisions of SFAS No. 123, as amended by SFAS No. 148, for the 2002 and 2001 option grants.
We discuss our stock option plan further in Note 13.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities-an interpretation of ARB No. 51." FIN 46 addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: 1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; and 2) the equity investors lack an essential characteristic of a controlling financial interest. We have not evaluated the effect FIN 46 will have on our consolidated financial statements.
Note 2-Merger and Significant Event
On March 21, 2001, PEI, PEI Merger Sub, Inc., a wholly-owned Maryland corporation (Merger Sub), and Excel Legacy entered into an Agreement and Plan of Merger (the Merger Agreement). On September 18, 2001, Merger Sub was merged with and into Excel Legacy (the Merger), with Excel Legacy continuing as a wholly-owned subsidiary of PEI. On the effective date of the Merger, each outstanding share of Excel Legacy common stock was exchanged for 0.6667 of a share of PEI common stock, and each option to purchase shares of Excel Legacy common stock was exchanged for an option to purchase shares of PEI common stock. PEI continues to operate as a REIT under the name Price Legacy Corporation. The Merger was structured to qualify as a tax-free reorganization, was approved
by the stockholders of both PEI and Excel Legacy, and was accounted for as a purchase. The results of Excel Legacy are included in operations beginning September 19, 2001.
The purchase price of the Excel Legacy common stock in the Merger was calculated based on $4.89 per share for the PEI common stock, which is equal to the closing price of $5.75 per share on March 21, 2001 (the day immediately prior to the public announcement of the Merger), less a 15% discount to reflect the low trading volume of the PEI stock (amounts in thousands, except per share data):
The purchase price of the Excel Legacy common stock resulted in an increase in the book value of the Excel Legacy assets acquired of approximately $26.0 million which has been primarily allocated to real estate and other assets.
Also on March 21, 2001, PEI entered into a 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 for an aggregate purchase price of $100,000,000
•17,985,612 shares of a new class of preferred stock, 9% Series B Junior Convertible Redeemable Preferred Stock at $5.56 per share, par value $0.0001 per share (the Series B Preferred Stock)
•a warrant to purchase an aggregate of 2.5 million shares of Price Legacy common stock at an exercise price of $8.25 per share (the Warburg Investment)
On April 12, 2001, PEI and Sol Price, a significant stockholder of PEI and Excel Legacy through various trusts, agreed to convert an existing Excel Legacy loan 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 our common stock at an exercise price of $8.25 per share.
Price Legacy issued the Series B Preferred Stock and warrants to Warburg Pincus and Sol Price concurrently with the completion of the Merger.
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 conditions into Price Legacy common stock at a one-to-one ratio, which may be adjusted under certain circumstances, after 24 months from the date of issuance. The 9% coupon will be paid with additional shares of Series B Preferred Stock at $5.56 per share for the first 45 months from issuance. While no additional shares of Series B Preferred Stock have been issued, 1,877,917 shares accumulated during the year ended December 31, 2002 and 507,856 shares accumulated during the year ended December 31, 2001. These shares will be issued in the future.
In addition, under the terms of the Merger Agreement PEI commenced a tender offer for all outstanding shares of our common stock (other than those shares held by Excel Legacy and those
shares issued in the Merger) at a cash price of $7.00 per share. In connection with the tender offer, 807,583 shares were purchased at a total cost of $5.7 million. Under terms of the Merger Agreement we also commenced an exchange offer in which holders of Excel Legacy's outstanding debentures and notes were offered shares of our Series A Preferred Stock in exchange for their debt securities. In connection with the exchange offer, we exchanged approximately $30.4 million in Excel Legacy debentures and $15.8 million in Excel Legacy notes. The tender offer and exchange offer also closed concurrently with the Merger.
The exchange of Excel Legacy common stock for Price Legacy common stock in connection with the Merger is being accounted for as a purchase of Excel Legacy by Price Legacy. Under purchase accounting, the assets and liabilities of Excel Legacy were adjusted to fair value.
The following unaudited pro forma information for the years ended December 31, 2001 and 2000 have been presented as if the Merger had been completed on January 1, 2001 and 2000, respectively. It also reflects the Series B Preferred Stock dividends and exchange of Excel Legacy senior notes and convertible debentures into Series A Preferred Stock. It does not reflect any application of proceeds from the sale of Series B Preferred Stock. We present pro forma information for comparative purposes only and the pro forma information may not be indicative of our actual results of operations had the Merger been completed on January 1, 2001 or 2000 (amounts in thousands, except per share data):
Note 3-Net Income Per Share
SFAS No. 128, "Earnings per Share," requires presentation of two calculations of earnings per common share. Basic earnings per common share equals net income applicable to common stockholders divided by weighted average common shares outstanding during the period. Diluted earnings per common share equals net income applicable to common stockholders divided by the sum of weighted average common shares outstanding during the period plus dilutive potential shares. Dilutive potential shares are shares assumed to be issued if outstanding stock options were exercised.
All earnings per share amounts have been presented, and where appropriate, restated to reflect these calculations.
Not included in the diluted weighted average shares outstanding for the year ended December 31, 2002 are 130,449 shares related to employee stock options, which are anti-dilutive. There were 19,666,754 shares of Series B Preferred Stock outstanding at December 31, 2002 which may be exchanged on a one-to-one basis into common stock, subject to adjustment, after 24 months from issuance if certain events occur. As of December 31, 2002, the Series B Preferred stockholders were entitled to approximately 2.4 million additional shares.
Note 4-Real Estate Properties
Our real estate properties are generally leased under noncancelable leases with remaining terms ranging from 1 to 24 years. Rental revenues include the following (amounts in thousands):
Costco, our largest tenant, contributed 9.6% of minimum rent revenue from four leases in 2002. Rental revenues generated from Costco were as follows (amounts in thousands):
As of December 31, 2002, future minimum rental income due under the terms of all noncancelable tenant leases is as follows (amounts in thousands):
Acquisitions
We acquired the following properties during 2002:
(1)Mortgage assumed
(2)Amount financed with purchase We funded these acquisitions using proceeds from tax-deferred exchange transactions on properties we sold in 2001 and 2002, by mortgage financing, by borrowing on our unsecured line of credit, and assuming mortgages.
We acquired the following properties during 2001:
(1)Capital lease We funded these acquisitions using the proceeds from tax-deferred exchange transactions on properties we sold in 2000 and by assuming mortgages and notes payable.
Dispositions
During 2002 we sold the following properties:
(1)Our equity in the development was exchanged for notes receivable with a participating interest As a result of the sales noted above, we recorded a gain of $9.6 million. We used the proceeds from the sale of the properties to repay debt or to purchase additional properties in tax-deferred exchange transactions.
During 2001 we sold the following properties:
(1)Partial sale-one building remains
(2)We sold our 50% share of this joint venture As a result of the sales noted above, we recorded a gain of $1.3 million. We used the proceeds from the sale of the properties to repay debt or to purchase additional properties in tax-deferred exchange transactions.
Note 5-Asset Impairment
We record real estate assets at historical costs and adjust them for recognition of impairment losses. During the year ended December 31, 2002, we recognized an impairment loss of $2.5 million on our Inglewood, CA property. The tenant, House 2 Home, filed for bankruptcy and vacated, and the property is no longer generating income. The loss was determined based on the estimated fair value of the property.
During the year ended December 31, 2002, we also recognized an impairment of $3.4 million on two notes receivable related to an office building under redevelopment. We wrote down the value of the notes receivable to the building's estimated fair value net of debt. We discuss this transaction further in Note 8.
Note 6-Discontinued Operations
Included in the Consolidated Statements of Operations are the discontinued operations of our property at Glen Burnie, MD, and our self storage properties in San Diego/Murphy Canyon, CA,
Solana Beach, CA and Azusa, CA which were sold during the year. Discontinued operations are summarized as follows (amounts in thousands, except per share data):
Note 7-Investments in Unconsolidated Real Estate Joint Ventures
As of December 31, 2002 and 2001, we had the following investments in unconsolidated joint ventures which we account for under the equity method of accounting:
Cash distributions and profits are typically allocated based on the above ownership percentages. The Orlando Business Park LLC assets consist primarily of land held for sale. The other joint ventures are primarily in the business of operating real estate. Their accounting principles are consistent with ours.
Summarized unaudited financial information for the joint ventures at December 31, 2002 and 2001 is as follows:
(1)Joint ventures acquired from Excel Legacy in the Merger. Net income shown is for the entire year, but we did not recognize our share of net income until the 4th quarter of 2001.
(2)We sold our 50% share of this joint venture in December 2001 for $13.5 million and recognized no gain or loss on the sale. Revenues and net income shown for 2001 are through September.
(3)Our share of net income in 2002 includes adjustments to 2001 and 2000 net income.
(4)Includes our share of net loss in our investment in Millennia discussed in Note 1.
Note 8-Notes Receivable
We had $62.8 million in principal amount of third party notes receivable outstanding as of December 31, 2002 related to various real estate developments and related businesses. Of this amount, $39.1 million relates to notes we assumed from the Merger with Excel Legacy. The notes bear interest ranging from 9.5% to 15% per annum. The notes generally do not require cash payments of interest until specified future dates, typically when developments are completed or sold. As of December 31, 2002, we had $16.0 million of accrued but unpaid interest on these notes. Of this amount, we assumed $11.5 million from the Merger with Excel Legacy. We typically do not recognize interest income on non-recourse notes receivable related to development projects until the projects begin operations or the notes are repaid.
Of the $62.8 million in notes receivable, as of December 31, 2002, the notes receivable from companies owned by or affiliated with Steven Ellman (the Ellman Companies) had an aggregate outstanding principal balance of approximately $43.9 million and the aggregate outstanding accrued interest on such notes receivable was approximately $14.9 million. Notes receivable of $12.2 million (principal amount and accrued interest) matured in 2002 and have been extended to December 31, 2004. The remainder of the notes receivable mature at various dates in 2003 or 2004 or earlier if the related development is sold. Repayment of the notes depends upon the completion of the various development projects or other events. The notes receivable are generally non-recourse obligations, but are typically collateralized by either real estate liens or pledges of ownership interests in the borrower or affiliated entities.
The largest note receivable was made in 1996 to enable the Ellman Companies to purchase real estate located in Scottsdale, Arizona. The Ellman Companies currently plan to develop a shopping center on the Scottsdale property but have yet to receive, among other things, the necessary government entitlements to commence construction of such shopping center. On February 18, 2003, the Scottsdale City Council voted to direct the staff to negotiate a development agreement with the Ellman Companies on this property. As of December 31, 2002, the outstanding principal balance on the note receivable relating to the Scottsdale property was approximately $22.9 million and the outstanding accrued interest on the note receivable was approximately $11.5 million. We did not accrue interest on this note in 2002. The note receivable matures on the earlier of the sale of the Scottsdale property or December 20, 2003. The note is collateralized by a pledge of the owners' ownership interests in the borrower and a second priority deed of trust on the Scottsdale property. In connection with the development of the Scottsdale property, the borrower under this note receivable obtained an additional loan from a third party lender. The loan is collateralized by a first priority deed of trust on the Scottsdale property and is guaranteed by us. On February 27, 2003, we purchased the loan from the lender for an aggregate purchase price of $13.0 million. On March 10, 2003, we signed a letter agreement with the Ellman Companies which, among other things, governs the Ellman Companies' and our actions with respect to the future development of the Scottsdale property.
We also have three notes receivable from an affiliate of the Ellman Companies relating to the Ellman Companies' ownership in the Phoenix Coyotes hockey team. These loans were made at a time when the Ellman Companies intended to relocate the hockey team to an arena that was to be constructed on the Scottsdale property. As of December 31, 2002, the aggregate outstanding principal balance of these three loans was approximately $19.3 million and the aggregate outstanding accrued interest on these three loans was approximately $3.1 million. Two of the three notes receivable matured in December 2002 and the principal balance and outstanding accrued interest on such loans
(approximately $10.4 million and $2.1 million, respectively) have been extended to December 31, 2004. The third note receivable has a maturity date of December 20, 2003.
In February 2001, we entered into a letter agreement to govern the repayment of the loans described above relating to the Scottsdale property and the acquisition of the Phoenix Coyotes by the Ellman Companies. Shortly thereafter and as a result of delays at the Scottsdale property, the Ellman Companies elected to pursue an alternative site for the hockey arena in Glendale, Arizona. In December 2002, the Ellman Companies and the other investors involved in the ownership of the Phoenix Coyotes entered into a series of transactions in which the Phoenix Coyotes hockey team, the proposed arena and related real estate development projects were consolidated into a single holding company for the purpose of assisting the combined entity in obtaining additional financing. It is unclear at this time the impact the structure will have on the repayment of our loans made to the Ellman Companies in connection with their acquisition of the Phoenix Coyotes. We stopped accruing interest on the loans when the development projects were consolidated into the holding company. The sale of equity interests in the holding company is expected to generate proceeds to help repay our notes.
We also have two notes receivable from the Ellman Companies relating to the Ellman Companies' efforts to acquire and refurbish an office building located in Phoenix, Arizona. On March 10, 2003, we signed an agreement with the Ellman Companies to acquire the Phoenix property via a deed in lieu of foreclosure agreement. In 2002 we wrote down the value of the two notes to $1.0 million, which was the estimated fair value of the office building net of debt. We have not accrued any interest on these notes. One of the two notes receivable matured in December of 2002 and the second note receivable has a maturity date of the earlier of the sale of the Phoenix property and May 28, 2004. These notes receivable are non-recourse obligations, but are secured by a junior deed of trust on the Phoenix property. In connection with the development of the Phoenix property, the borrower under these two notes receivable obtained an additional loan from a third party lender. The outstanding principal amount of the loan is approximately $4.5 million and the loan has a maturity date of April 5, 2004, is secured by a first priority deed of trust on the Phoenix property and is guaranteed by us.
In addition to the loans to the Ellman Companies, we have notes receivable of $12.6 million we obtained from the buyers of our self-storage development properties. These notes bear interest at 12% per annum. The notes are payable on May 31, 2003 or earlier, depending on stabilization of the properties. We have also guaranteed $19.3 million in debt to a third party associated with the self-storage properties that was assumed by the buyers. This debt matures in April 2003. These notes were repaid in full in January 2003, and our guaranteed $19.3 million in debt to a third party associated with the self-storage properties was reduced to $4.6 million.
We also have a note receivable from Zonapar, LLC an Ohio LLC ("Zonapar"). The note bears interest at 11% and is due June 30, 2003. The outstanding amount at December 31, 2002 was $3.6 million and another $0.8 million was loaned in January 2003. The note is guaranteed by Yaromir Steiner, an individual, and Zonapar. Zonapar owns development and land option rights related to a development in Kansas City, MO.
Note 9-Debt
We had the following mortgages and notes payable outstanding at December 31, 2002 and December 31, 2001 (amounts in thousands):
We were in compliance with all covenants on our credit facility at December 31, 2002. In 2003 we plan to use cash flow from operations to fund our recurring debt service obligations.
We have a 65% interest in Newport on the Levee, LLC (Newport) that is developing a retail project in Newport, KY. In addition to the $38.5 million and $4.7 million notes 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 2018 with interest at 8.375%; (b) $20.5 million maturing 2027 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 us, by Newport, and the third party co-developers of the project. Newport has drawn on $43.7 million of the bonds at December 31, 2002.
Summarized debt information for our unconsolidated joint ventures and the amount guaranteed by us at December 31, 2002 is as follows:
(1)These loans have one year extension options We have also guaranteed a $12.9 million note payable to a third party lender which matures on February 28, 2003 relating to a development project in Scottsdale, AZ on which we hold a note receivable of $22.9 million in principal amount. We repaid this note in February 2003. In addition, we have guaranteed a $4.5 million note payable to a third party lender which matures in April 2004 relating to an office building in Phoenix, AZ on which we have notes receivable of $1.0 million in principal amount.
In connection with the sale of three self storage development properties in 2002, we agreed to guarantee $19.3 million of debt associated with the properties that was assumed by the buyer in the transaction. We guarantee this debt until it matures in April 2003. These notes were repaid in full in January 2003, and our guaranteed $19.3 million in debt to a third party associated with the self-storage properties was reduced to $4.6 million.
Convertible Debentures
Prior to the Merger, Excel Legacy had $33.2 million in convertible debentures outstanding. As part of the Merger, $30.4 million of the debentures were exchanged for Series A Preferred Stock, with $2.8 million of debentures remaining. We redeemed the remaining debentures in full in October 2002.
Senior Notes
Prior to the Merger, Excel Legacy had $18.1 million in senior notes outstanding. As part of the Merger, $15.8 million of the notes were exchanged for Series A Preferred Stock, with $2.3 million of notes remaining. We redeemed the remaining notes in full in October 2002.
The amount of debt that becomes due in each of the next five years is as follows (amounts in thousands):
Note 10-Financial Instruments: Derivatives and Hedging
In the normal course of business, we are exposed to the effect of changes in interest rates. We limit these risks by following established risk management policies and procedures including the use of derivatives. For interest rate exposures, derivatives are used primarily to manage the cost of borrowing obligations.
We have a policy of only entering into derivative contracts with major financial institutions based upon their credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposure that the derivatives are designed to hedge, we have not sustained a material loss from those instruments nor do we anticipate any material adverse effect on our net income, financial position, or cash flows in the future from the use of derivatives.
To manage interest rate risk, we may employ options, forwards, swaps, caps and floors, or a combination thereof, depending on the underlying exposure. We undertake a variety of borrowings from lines of credit to medium and long-term financings. To manage overall costs, we currently use derivative instruments to cap our exposure to variability in interest rates or to convert a portion of our variable-rate debt to fixed-rate debt. In July 2002, we paid $3.4 million for forward-starting, LIBOR-based interest rate caps with a combined notional value of $152 million and a strike of 7.0% to cap our exposure to interest rate variability on anticipated floating-rate debt. The interest rate caps are effective July 1, 2004, and continue through 2009 to 2010.
We also use derivatives to protect the fair value of existing or anticipated fixed-rate debt. During 2002, we had five amortizing swaps with approximately $161 million current notional value protecting the fair value of approximately $161 million fixed-rate debt from changes in value attributable to interest rate movement. In October 2002, we sold our five Interest Rate Swap Agreements back to the counter party for $13.8 million and will amortize the gain over the fixed-rate debt's remaining life through 2009 to 2010. The interest rate caps are included with other assets on the consolidated balance sheets.
Hedges that are designated as fair value hedges mitigate risk on changes in the fair value of fixed-rate debt. The unrealized gains/losses in the fair value of these hedges are reported in earnings with an offsetting adjustment through earnings to the carrying value of the hedged debt. Adjustments to the carrying value of the hedged debt are amortized to earnings beginning no later than when the hedged debt ceases to be adjusted for changes in its fair value attributable to the interest rate risk being hedged.
Cash flow hedges hedge the future cash outflows of current or forecasted debt. The interest rate caps described above protect against variability in interest cash outflows above the cap strike rate. The changes in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either Accumulated Other Comprehensive Income or in earnings, depending on the hedging relationship. Unrealized gains and losses held in Accumulated Other Comprehensive Income will be reclassified to earnings in the same period or periods that the hedged cash flows affect earnings. As of December 31, 2002, the balance in Accumulated Other Comprehensive Loss relating to derivatives was $0.8 million. Within the next twelve months, we do not expect to reclassify any of this balance to earnings as the caps are forward starting and take effect July 1, 2004.
We hedge our exposure to the variability in future cash flows for forecasted transactions other than interest-related cash flows over a maximum period of 12 months. During the forecasted period, unrealized gains and losses in the hedging instrument will be reported in Accumulated Other Comprehensive Income. Once the hedged transaction takes place, the hedge gains and losses will be reported in earnings during the same period in which the hedged item is recognized in earnings. We are not currently hedging exposure to variability in future cash flows for forecasted transactions other than interest-related cash flows on future anticipated debt.
Note 11-Related Party Transactions
We have $12.5 million in notes receivable (including accrued interest) from certain of our current and former officers, which are due March 2003. The notes are primarily non-recourse obligations collateralized by approximately 2.9 million shares of our common stock. As of December 31, 2002, the market value of these shares was less than the amounts due on the notes. As a result of discussions related to the eventual disposition of the notes, we have applied Emerging Issues Task Force (EITF) 00-23, "Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44" issued in 2002.
EITF 00-23 requires accounting as if the shares had been repurchased and treated as treasury shares, with a corresponding issuance of a new stock option. The impact of EITF 00-23 on our financial statements was as follows:
•we retired the notes receivable from officers and the 2.9 million shares securing the notes at the current market value in the third quarter of 2002. The shares collateralizing the notes are now treated as treasury stock and
•we recorded a one-time non-cash charge of $2.8 million in compensation expense to record the difference between the note's book value and the value of the shares
The above only impacts our accounting records. Legally, the notes and shares remain outstanding until the notes are repaid or otherwise settled. The 2.9 million shares are treated similar to stock options and are accounted for under variable option plan accounting in accordance with APB No. 25. This valuation had no impact on our financial statements for the year ended December 31, 2002.
Prior to the Merger, Excel Legacy was responsible for the daily management of PEI, including property management, finance and administration. We reimbursed Excel Legacy for these services. We expensed $2.4 million during 2001 prior to the Merger and $3.0 million for these services during 2000, which was based on our historical costs for similar expenses.
Prior to the Merger, we executed a note receivable with Excel Legacy allowing them to borrow up to $40.0 million. During 2001 we recorded $2.9 million in interest income on this note prior to the Merger, and $1.0 million for 2000. As a result of the Merger, interest income is no longer recorded on this note.
In conjunction with the purchase of the Anaheim land in the first quarter of 2001, we executed a ground lease agreement with Excel Legacy, which required payments of $2.8 million per year in rent. During 2001 we recorded $1.8 million in rental revenue from Excel Legacy related to this lease for the period of January 1 through September 18, 2001. Due to the Merger, rental revenue will no longer be recorded on this lease.
We discuss other related party transactions in Note 2 and Note 4.
Note 12-Profit Sharing and 401(k) Plan
In 2001, we adopted a new 401(k) Retirement Plan (the 401(k) Plan) covering most of our officers and employees. The 401(k) Plan permits participants to contribute, until termination of employment, up to a maximum of 15% of their compensation to the 401(k) Plan. In addition, we contribute 3% of each eligible employee's compensation. We contributed $127,000 to our 401(k) Plan in 2002 and $62,000 to our 401(k) Plan in 2001. We made no contributions for the year ended December 31, 2000.
Note 13-Stock Option Plan
In 2001, we established a Stock Option and Incentive Plan (the Plan) and we may grant stock options to any employee or director under this plan. As of December 31, 2002, we reserved 3,300,000 shares for issuance under the Plan. Options generally vest over three years and expire ten years after the grant date. Once exercisable, the employee or director can purchase shares of our stock at the market price on the date we granted the option.
In connection with the Merger, each outstanding option to purchase Excel Legacy common stock automatically became an option to purchase our common stock. The number of shares of our common stock, which may be purchased with these options, and the exercise price was adjusted to reflect the exchange ratio. You will see in the following table the activity in the common stock options and related weighted average exercise price per share. The quantity of stock options granted, exercised and cancelled for 2001 reflect only common stock options.
The following table summarizes the activity for the Plan:
As of December 31, 2002, options to purchase 2,286,126 shares were exercisable under the Plan and 160,162 shares of common stock remained available for future issuance in connection with the Plan.
The following table summarizes information concerning options outstanding under the Plan as of December 31, 2002:
As we stated in Note 1, we follow the provisions for APB No. 25, "Accounting for Stock Issued to Employees." In 1997 and 2002, we implemented the disclosure provisions required by SFAS No. 123, "Accounting for Stock-Based Compensation" and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment of SFAS No.123," respectively, for our stock option plans. SFAS No. 123 requires pro forma net income and earnings per share information, which is calculated assuming we had accounted for our stock option plans under the "fair value" method
described in that statement. We estimated the fair value using the Black-Scholes option pricing model, modified for dividends and using the following assumptions:
We do not record compensation expense for stock option grants. The table in Note 1 summarizes results as if we had recorded compensation expense for the 2002 and 2001 option grants.
Note 14-Stockholders' Equity
The Series A Preferred Stock pays quarterly dividends at a rate of $1.40 per year and has a $16.00 per share liquidation preference. We have the right to redeem the Series A Preferred Stock anytime after August 16, 2003 at a redemption price of $16.00 per share plus accrued and unpaid dividends, if any. Holders of the Series A Preferred Stock have one-tenth of one vote per share, voting together with our common stock.
For the first 45 months after issuance, all distributions on the Series B Preferred Stock will be payable in additional shares of Series B Preferred Stock. There were 19,666,754 shares of Series B Preferred Stock outstanding at December 31, 2002 which may be exchanged on a one-to-one basis into common stock, subject to adjustment, after 24 months from issuance if certain events occur. As of December 31, 2002, the Series B Preferred stockholders were entitled to approximately 2.4 million additional shares.
Included in Additional Paid-in Capital at December 31, 2002 are $3.1 million in warrants to purchase common stock at an exercise price of $8.25 per share.
The total market value of the Series A Preferred Stock is based on the closing price on its first day of trading and is shown on the balance sheet as Series A Preferred Stock. We reduced additional paid in capital by the Series A Preferred Stock's value to reflect our change in capital structure.
Note 15-Commitments and Contingencies
We own a property in New Jersey with a ground lease that has a remaining term of 24 years with three 15-year options to renew. Rent expense related to the ground lease is summarized below (amounts in thousands):
Future minimum payments during the next five years and thereafter under this noncancelable lease at December 31, 2002 are as follows (amounts in thousands):
The above property is subleased and as of year end, total future sublease revenues are $26.8 million, which are included in future minimum rental income amounts in Note 4.
On or about February 13, 2001, Lewis P. Geyser filed a lawsuit against Excel Legacy in Santa Barbara County Superior Court, Anacapa Division, Case No. 01038577. The suit arose out of an Operating Agreement for Destination Villages, LLC, an entity which is owned jointly by Excel Legacy and Mr. Geyser, under which Destination Villages, LLC would develop certain eco-tourism resorts. The complaint included causes of action for breach of contract, breach of fiduciary duty, fraud and negligent misrepresentation. The lawsuit included a prayer for compensatory and punitive damages. Excel Legacy had also filed a cross-complaint against Mr. Geyser for breach of contract, fraud, breach of fiduciary duty and other related claims.
The trial of this matter concluded on March 19, 2002. The trial judge dismissed both the complaint and cross-complaint, and granted nothing to Mr. Geyser under any of his allegations.
On June 5, 2002, Mr. Geyser filed an appeal and Excel Legacy subsequently filed a cross-appeal against Mr. Geyser. These appeals are still pending.
On June 13, 2002 the Bank of NT Butterfield & Sons Limited filed a lawsuit against Price Legacy and Excel Legacy in Bermuda for $6.1 million plus other costs related to a guarantee agreement for a promissory note on the Destination Villages Daniel's Head project in Bermuda.
The bank claims that Excel Legacy did not provide sufficient capital for the project to be completed which was required in the guarantee agreement. The bank has currently appointed a receiver who is actively marketing the project for sale to third parties. We believe we were in full compliance with the guarantee and intend to vigorously defend the lawsuit.
We are not party to any other legal proceedings other than various claims and lawsuits arising in the ordinary course of business that, in the opinion of our management, are not individually or in the aggregate material to our financial statements.
Note 16-Quarterly Results of Operations (unaudited)
The following is an unaudited summary of our quarterly results for the last two years (amounts in thousands, except per share data):
Report of Independent Accountants
To the Board of Directors and Shareholders
of Price Legacy Corporation:
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 82 present fairly, in all material respects, the financial position of Price Legacy Corporation and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15(a)(2) on page 82 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The financial statements of the Company for the year ended December 31, 2000 were audited by other independent accountants whose report dated January 19, 2001, except for Note 13, as to which the date is January 26, 2001 expressed an unqualified opinion on those statements.
As discussed in Note 1, effective January 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
On September 18, 2001, Price Enterprises, Inc. acquired Excel Legacy Corporation (see Note 2).
PRICEWATERHOUSECOOPERS LLC
San Diego, California
February 27, 2003
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Price Enterprises, Inc.
We have audited the accompanying consolidated statements of operations, stockholders' equity and cash flows of Price Enterprises, Inc. for the year ended December 31, 2000. Our audit also included the financial data for the year ended December 31, 2000 included in the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements of Price Enterprises, Inc. referred to above present fairly, in all material respects, the consolidated results of its operations and its cash flows for the year ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the financial data for the year ended December 31, 2000 included in the financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Diego, California
January 19, 2001,
except for Note 13, as to which the date is
January 26, 2001
ITEM 9
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Note that in this Form 10-K, we "incorporate by reference" certain information in parts of other documents filed with the Securities and Exchange Commission (SEC). The SEC allows us to disclose important information by referring to it in that manner. Please refer to such information.
ITEM 10
ITEM 10 - Directors and Executive Officers of the Registrant
Information about directors and executive officers is incorporated by reference from the discussion under the headings "Director Nominees and Board Composition" and "Executive Officers" in our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 11
ITEM 11 - Executive Compensation
Information about executive compensation is incorporated by reference from the discussion under the heading "Executive Compensation" in our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 12
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information about security ownership and related stockholder matters is incorporated by reference from the discussion under the headings "Securities Ownership of Certain Beneficial Owners and Management" and "Equity Compensation Plan Information" in our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 13
ITEM 13 - Certain Relationships and Related Transactions
Information about certain relationships and transactions with related parties is incorporated by reference from the discussion under the heading "Certain Relationships and Related Transactions" in our Proxy Statement for the 2003 Annual Meeting of Stockholders.
ITEM 14
ITEM 14 - Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Within 90 days prior to the filing date of this Form 10-K, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the company's disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective.
There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.
PART IV
ITEM 15
ITEM 15 - Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)List of Financial Statements and Financial Statement Schedules:
The following consolidated financial statements of Price Legacy Corporation are included in Item 8
(b)Reports on Form 8-K We did not file any reports on Form 8-K during the quarter ended December 31, 2002.
(c)Exhibits: For a list of exhibits filed with this annual report, refer to the exhibit index beginning on page 91.
PRICE LEGACY CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
December 31, 2002
(amounts in thousands)
PRICE LEGACY CORPORATION
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2002
(amounts in thousands)
(1)The aggregate cost for federal income tax purposes is $948,290
(2)Does not include our investments in unconsolidated joint ventures.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ JACK MCGRORY JACK McGRORY, Chairman of the Board of Date Directors
March 24, 2003 Date
/s/ GARY B. SABIN GARY B. SABIN, Co-Chairman of the Board of Directors and Chief Executive Officer
March 24, 2003 Date
/s/ RICHARD B. MUIR RICHARD B. MUIR, Director and Vice Chairman
March 24, 2003 Date
/s/ JAMES F. CAHILL JAMES F. CAHILL, Director
March 24, 2003 Date
/s/ MURRAY GALINSON MURRAY GALINSON, Director
March 24, 2003 Date
MELVIN L. KEATING, Director
Date
REUBEN S. LEIBOWITZ, Director
Date
/s/ KEENE WOLCOTT KEENE WOLCOTT, Director
March 24, 2003 Date
CERTIFICATIONS
I, Gary B. Sabin, certify that:
1.I have reviewed this annual report on Form 10-K of Price Legacy Corporation;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003
/s/ GARY B. SABIN Gary B. Sabin
Chief Executive Officer
I, James Y. Nakagawa, certify that:
1.I have reviewed this annual report on Form 10-K of Price Legacy Corporation;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 24, 2003
/s/ JAMES Y. NAKAGAWA James Y. Nakagawa
Chief Financial Officer
EXHIBIT INDEX
Description
2.1
(1)
Agreement and Plan of Merger, dated as of March 21, 2001, by and among Price Enterprises, Inc., PEI Merger Sub, Inc. and Excel Legacy Corporation
2.2
(2)
Distribution Agreement dated as of August 26, 1997 between Price Enterprises, Inc. and PriceSmart, Inc.
2.3
(3)
Distribution Agreement, dated as of March 31, 1998, by and among Excel Realty Trust, Inc., Excel Legacy Corporation and ERT Development Corporation
3.1
(4)
Articles of Amendment and Restatement of Price Legacy Corporation
3.2
(5)
Bylaws of Price Legacy Corporation
4.1
(4)
Form of Common Stock Certificate
4.2
(6)
Form of Series A Preferred Stock Certificate
4.3
(7)
Form of Series B Preferred Stock Certificate
4.4
(8)
Indenture, dated as of November 5, 1999, between Excel Legacy Corporation and Norwest Bank Minnesota, National Association, for 9.0% Convertible Redeemable Subordinated Secured Debentures due 2004, including form of Debenture and form of Pledge Agreement
4.5
(9)
First Supplemental Indenture, dated as of September 18, 2001, by and among Excel Legacy Corporation, Price Legacy Corporation and Wells Fargo Bank Minnesota, N.A. with respect to the 9% Convertible Redeemable Subordinated Secured Debentures due 2004 of Excel Legacy Corporation
4.6
(8)
Indenture, dated as of November 5, 1999, between Excel Legacy Corporation and Norwest Bank Minnesota, National Association, for 10.0% Senior Redeemable Secured Notes due 2004, including form of Note and form of Pledge Agreement
4.7
(9)
First Supplemental Indenture, dated as of September 18, 2001, by and between Excel Legacy Corporation and Wells Fargo Bank Minnesota, N.A. with respect to the 10% Senior Redeemable Secured Notes due 2004 of Excel Legacy Corporation
10.1
(19)
Amended and Restated Price Legacy Corporation 2001 Stock Option and Incentive Plan (the 2001 Plan)
10.2
(19)
Form of Incentive Stock Option Agreement under the 2001 Plan
10.3
(10)
The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan (the 1995 Plan)
10.4
(11)
First Amendment to The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan
10.5
(11)
Form of Amended and Restated Non-Qualified Stock Option Agreement under the 1995 Plan, as amended
10.6
(13)
Second Amendment to The Price Enterprises 1995 Combined Stock Grant and Stock Option Plan
10.7
(14)
Loan Agreement dated June 28, 2000 between Price Owner LLC and GMAC Commercial Mortgage Corporation, including form of Promissory Note, Mortgage and Security Agreement, Assignment of Leases and Rents, Guaranty of Recourse Obligations and Environmental Indemnity Agreement
10.8
(1)
Securities Purchase Agreement, dated as of March 21, 2001, by and among Price Enterprises, Inc., and Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V.
10.9
(15)
Conversion Agreement, dated as of April 12, 2001, by and among Price Enterprises, Inc., The Sol and Helen Price Trust, Warburg, Pincus Equity Partners, L.P. and Excel Legacy Corporation
10.10
(4)
Registration Rights Agreement, dated as of September 18, 2001, by and among Price Enterprises, Inc., Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I, C.V., Warburg, Pincus Netherlands Equity Partners II, C.V. and Warburg, Pincus Netherlands Equity Partners III, C.V.
10.11
(1)
Form of Common Stock Purchase Warrant
10.12
(12)
Revolving Credit Agreement dated as of September 19, 2001 among Price Legacy Corporation and Fleet National Bank and the other banks which are party thereto
10.13
(15)
Purchase and Sale Agreement, dated as of May 7, 2001, among SREG Operating Limited Partnership, SREG Oakwood Plaza, Inc., SREG OBC, Inc., SREG Hollywood Hills, Inc., SREG Cypress Creek, Inc., SREG Kendale, Inc., SREG Cross County, Inc., and SREG (Millenia), Inc., and Swerdlow Real Estate Group, Inc. and Price Enterprises, Inc.
10.14
(16)
First Amended and Restated Operating Agreement dated as of July 29, 1998 of Newport on the Levee, LLC
10.15
(17)
Employment Contract, dated as of July 1, 1999, by and between Excel Legacy Corporation and Gary B. Sabin
10.16
(17)
Employment Contract, dated as of July 1, 1999, by and between Excel Legacy Corporation and Richard B. Muir
10.17
(17)
Employment Contract, dated as of July 1, 1999, by and between Excel Legacy Corporation and Graham R. Bullick
10.18
(17)
Employment Contract, dated as of July 1, 1999, by and between Excel Legacy Corporation and S. Eric Ottesen
10.19
(17)
Employment Contract, dated as of July 1, 1999, by and between Excel Legacy Corporation and John Visconsi
10.20
(17)
Employment Contract, dated as of July 1, 1999, by and between Excel Legacy Corporation and James Y. Nakagawa
10.21
(17)
Employment Contract, dated as of July 1, 1999, by and between Excel Legacy Corporation and Mark T. Burton
10.22
(18)
Form of Stock Purchase Agreement dated as of September 25, 2000, by and between Excel Legacy Corporation and each of Richard B. Muir, Graham R. Bullick, S. Eric Ottesen and Mark T. Burton
10.23
(18)
Form of Loan Assumption Agreement dated as of September 25, 2000 by and between Excel Legacy Corporation and each of Richard B. Muir, Graham R. Bullick, S. Eric Ottesen and Mark T. Burton
10.24
(20)
International Swap Dealers Association, Inc. Master Agreement dated as of April 12, 2002 between Fleet National Bank and Price Legacy Corporation
12.1
*
Computation of ratio of earnings to fixed charges
21.1
*
Subsidiaries of Price Legacy Corporation
23.1
*
Consent of PricewaterhouseCoopers LLP
23.2
*
Consent of Ernst & Young LLP
*Filed herewith.
(1)Incorporated by reference to Current Report on Form 8-K filed with the SEC on March 23, 2001 (File No. 0-20449)
(2)Incorporated by reference to Current Report on Form 8-K filed with the SEC on September 12, 1997 (File No. 0-20449)
(3)Incorporated by reference to Excel Legacy Corporation's Current Report on Form 8-K (File No. 0-23503) filed with the SEC on April 2, 1998
(4)Incorporated by reference to Current Report on Form 8-K filed with the SEC on September 19, 2001 (File No. 0-20449)
(5)Incorporated by reference to Transition Report on Form 10-K of Price Enterprises, Inc. filed with the SEC on March 27, 1998 (File No. 0-20449)
(6)Incorporated by reference to Current Report on Form 8-A filed with the SEC on August 7, 1998 (File No. 0-20449)
(7)Incorporated by reference to Registration Statement on Form S-3 of Price Legacy Corporation filed with the SEC on March 1, 2002 (File No. 333-83606)
(8)Incorporated by reference to Excel Legacy Corporation's Current Report on Form 8-K (File No. 0-23503) filed with the SEC on November 12, 1999
(9)Incorporated by reference to Excel Legacy Corporation's Current Report on Form 8-K filed with the SEC on September 19, 2001 (File No. 0-23503)
(10)Incorporated by reference to Registration Statement on Form 10 of Price Enterprises, Inc. filed with the SEC on December 13, 1994 (File No. 0-20449)
(11)Incorporated by reference to Registration Statement on Form S-8 of Price Enterprises, Inc. filed with the SEC on September 2, 1998 (File No. 333-62723)
(12)Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 filed with the SEC on November 14, 2001 (File No. 0-20449)
(13)Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 filed with the SEC on August 4, 1999 (File No. 0-20449)
(14)Incorporated by reference to Current Report on Form 8-K filed with the SEC on July 26, 2000 (File No. 0-20449)
(15)Incorporated by reference to Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2001 filed with the SEC on May 25, 2001 (File No. 0-20449)
(16)Incorporated by reference to Excel Legacy Corporation's Annual Report on Form 10-K (File No. 0-23503) filed with the SEC on October 28, 1998
(17)Incorporated by reference to Excel Legacy Corporation's Annual Report on Form 10-K (File No. 0-23503) filed with the SEC on March 30, 2000
(18)Incorporated by reference to Excel Legacy Corporation's Quarterly Report on Form 10-Q (File No. 0-23503) filed with the SEC on November 9, 2000
(19)Incorporated by reference to the Annual Report on Form 10-K for the year ended December 31, 2001 filed with the SEC on March 20, 2002 (File No. 0-20449)
(20)Incorporated by reference to Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 filed with the SEC on May 13, 2002 (File No. 0-20449)
PRICE LEGACY CORPORATION Annual Report on Form 10-K For the Year Ended December 31, 2002
FORWARD-LOOKING STATEMENTS
PART I
ITEM 1 - Business
ITEM 2 - Properties
ITEM 3 - Legal Proceedings
ITEM 4 - Submission of Matters to a Vote of Security Holders
PART II
ITEM 5 - Market for Registrant's Common Equity and Related Stockholder Matters
ITEM 6 - Selected Financial Data
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 7A.-Quantitative and Qualitative Disclosures About Market Risk
ITEM 8 - Financial Statements and Supplementary Data
PRICE LEGACY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
PRICE LEGACY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
PRICE LEGACY CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
PRICE LEGACY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
PRICE LEGACY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
ITEM 10 - Directors and Executive Officers of the Registrant
ITEM 11 - Executive Compensation
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 13 - Certain Relationships and Related Transactions
ITEM 14 - Controls and Procedures
PART IV
PRICE LEGACY CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS December 31, 2002 (amounts in thousands)
PRICE LEGACY CORPORATION SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 2002 (amounts in thousands)
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX Description