UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

 

For the quarter ended September 30, 2004

 

Commission File Number 0-20449

 

PRICE LEGACY CORPORATION

(Exact name of registrant as specified in its charter)

 

Maryland

33-0628740

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

17140 Bernardo Center Drive, Suite 300, San Diego, California  92128

(Address of principal executive offices) (Zip Code)

 

(858) 675-9400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  ý    NO  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes ý   No o

 

The registrant had 36,921,206 shares of common stock, par value $.0004 per share, outstanding at November 5, 2004.

 

 



 

PRICE LEGACY CORPORATION

 

INDEX TO FORM 10-Q

 

 

PART I - FINANCIAL INFORMATION

3

 

ITEM 1 - FINANCIAL STATEMENTS

3

 

 

CONSOLIDATED BALANCE SHEETS

3

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

5

 

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

6

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

7

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8

 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

29

 

ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

43

 

ITEM 4 – CONTROLS AND PROCEDURES

44

PART II - OTHER INFORMATION

45

 

ITEM 1 – LEGAL PROCEEDINGS

45

 

ITEM 6 - EXHIBITS

46

 

2



 

PART I - FINANCIAL INFORMATION

 

ITEM 1 - FINANCIAL STATEMENTS

 

PRICE LEGACY CORPORATION

CONSOLIDATED BALANCE SHEETS

(unaudited – amounts in thousands, except share data)

 

ASSETS

 

 

 

September 30

 

December 31

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Real estate assets

 

 

 

 

 

Land and land improvements

 

$

366,305

 

$

410,207

 

Building and improvements

 

663,557

 

670,050

 

Construction in progress

 

655

 

582

 

 

 

1,030,517

 

1,080,839

 

Property held for sale

 

45,191

 

70,988

 

Less accumulated depreciation

 

(67,352

)

(54,836

)

 

 

1,008,356

 

1,096,991

 

 

 

 

 

 

 

Investment in unconsolidated real estate joint ventures

 

 

4,113

 

Cash and cash equivalents

 

54,760

 

7,631

 

Restricted cash

 

11,410

 

11,288

 

Accounts receivable, net of allowance of $1,219 and $1,415

 

5,352

 

7,440

 

Notes receivable

 

811

 

10,311

 

Deferred rents

 

12,039

 

11,161

 

Other assets

 

41,107

 

21,953

 

Total assets

 

$

1,133,835

 

$

1,170,888

 

 

See accompanying notes.

 

3



 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

September 30

 

December 31

 

 

 

2004

 

2003

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Mortgages and notes payable

 

$

540,714

 

$

483,675

 

Capital lease payable on property held for sale

 

 

11,706

 

Revolving line of credit

 

 

69,100

 

 

 

540,714

 

564,481

 

Accounts payable and other liabilities

 

51,489

 

29,945

 

Total liabilities

 

592,203

 

594,426

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Minority interests

 

595

 

1,608

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

Series A Preferred Stock, cumulative, redeemable, $0.0001 par value, 27,849,771 shares authorized, 3,986,994 and 27,434,166 shares issued and outstanding

 

58,116

 

399,615

 

Series 1 Preferred Stock, cumulative, redeemable, $0.0001 par value, 15,218,506 shares authorized, 2,942,463 shares issued and outstanding at September 30, 2004

 

47,227

 

 

Series B Preferred Stock, junior, convertible, redeemable, $0.0001 par value, 27,458,855 shares authorized, 24,125,208 shares issued and outstanding at December 31, 2003

 

 

131,023

 

 

 

 

 

 

 

Common stock, $0.0004 par value, 106,931,723 shares authorized, 36,921,206 issued and outstanding at September 30, 2004; $0.0001 par value, 94,691,374 shares authorized, 8,690,414 issued and outstanding at December 31, 2003

 

15

 

3

 

Additional paid-in capital

 

649,032

 

176,431

 

Accumulated comprehensive loss

 

(2,776

)

(1,479

)

Retained deficit

 

(210,577

)

(130,739

)

Total stockholders’ equity

 

541,037

 

574,854

 

Total liabilities and stockholders’ equity

 

$

1,133,835

 

$

1,170,888

 

 

See accompanying notes.

 

4



 

PRICE LEGACY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited - amounts in thousands, except per share data)

 

 

 

Third Quarter
Three Months Ended
September 30

 

Year-to-Date
Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Rental revenues

 

$

32,149

 

$

29,286

 

$

94,483

 

$

89,174

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Operating and maintenance

 

3,994

 

4,744

 

13,279

 

15,381

 

Property taxes

 

4,193

 

3,786

 

12,315

 

11,280

 

Depreciation and amortization

 

5,525

 

5,051

 

16,436

 

14,379

 

General and administrative

 

1,470

 

5,706

 

4,332

 

9,515

 

Provision for asset impairment

 

 

 

1,225

 

 

Total expenses

 

15,182

 

19,287

 

47,587

 

50,555

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

16,967

 

9,999

 

46,896

 

38,619

 

 

 

 

 

 

 

 

 

 

 

Interest and other

 

 

 

 

 

 

 

 

 

Interest expense

 

(6,849

)

(6,432

)

(20,815

)

(19,412

)

Interest and other income

 

3,055

 

81

 

3,163

 

1,006

 

Equity in (loss) earnings of joint ventures

 

(45

)

4

 

17

 

1,168

 

Total interest and other

 

(3,839

)

(6,347

)

(17,635

)

(17,238

)

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

13,128

 

3,652

 

29,261

 

21,381

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

Income from operations

 

268

 

647

 

850

 

1,285

 

Provision for asset impairment

 

(10,270

)

 

(10,270

)

 

Net gain (loss) on sale of real estate

 

80

 

153

 

2,274

 

(2,368

)

(Loss) gain on discontinued operations

 

(9,922

)

800

 

(7,146

)

(1,083

)

 

 

 

 

 

 

 

 

 

 

Net income before gain on sale of real estate and investments

 

3,206

 

4,452

 

22,115

 

20,298

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on sale of real estate and investments

 

123

 

(824

)

12,744

 

(137

)

 

 

 

 

 

 

 

 

 

 

Net income

 

3,329

 

3,628

 

34,859

 

20,161

 

 

 

 

 

 

 

 

 

 

 

Dividends to preferred stockholders

 

(3,036

)

(12,486

)

(17,736

)

(37,270

)

Preferred stock conversion and redemption

 

(2,136

)

 

(76,370

)

 

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common stockholders

 

$

(1,843

)

$

(8,858

)

$

(59,247

)

$

(17,109

)

 

 

 

 

 

 

 

 

 

 

Net loss per common share

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.05

)

$

(0.96

)

$

(1.77

)

$

(1.85

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic and diluted

 

36,920

 

9,250

 

33,457

 

9,252

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per Series A preferred share

 

$

0.35

 

$

0.35

 

$

1.05

 

$

1.05

 

Cash dividends paid per Series 1 preferred share

 

0.29

 

 

0.45

 

 

Cash dividends paid per common share

 

0.28

 

 

0.56

 

 

 

See accompanying notes.

 

5



 

PRICE LEGACY CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited – amounts in thousands)

 

 

 

Preferred Stock
Series A

 

Preferred Stock
Series 1

 

Preferred Stock
Series B

 

Common Stock

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares*

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

27,434

 

$

399,615

 

 

 

24,125

 

$

131,023

 

8,690

 

$

3

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

Unrealized loss on marketable securities

 

 

 

 

 

 

 

 

 

Unrealized loss on interest rate caps

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on Series A Preferred Stock

 

 

 

 

 

 

 

 

 

Dividends on Series B Preferred Stock

 

 

 

 

 

398

 

2,212

 

 

 

Dividends on Series 1 Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends on common stock

 

 

 

 

 

 

 

 

 

Common stock issued in legal settlement

 

 

 

 

 

 

 

160

 

 

Common stock and Series 1 Preferred Stock issued in exchange for Series A Preferred Stock

 

(20,947

)

(305,058

)

2,942

 

47,227

 

 

 

18,900

 

8

 

Common stock issued in exchange for Series B Preferred Stock

 

 

 

 

 

(24,523

)

(133,235

)

8,522

 

4

 

Issuance costs associated with Recapitalization Transaction

 

 

 

 

 

 

 

 

 

Common stock options exercised

 

 

 

 

 

 

 

649

 

 

Redemption of Series A Preferred Stock

 

(2,500

)

(36,441

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2004

 

3,987

 

$

58,116

 

2,942

 

$

47,227

 

 

 

36,921

 

$

15

 

 

 

 

Additional
Paid-In
Capital

 

Accumulated
Comprehensive
Loss

 

Retained
Earnings
(Deficit)

 

Total

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2003

 

$

176,431

 

$

(1,479

)

$

(130,739

)

$

574,854

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

Net income

 

 

 

34,859

 

34,859

 

Unrealized loss on marketable securities

 

 

(17

)

 

(17

)

Unrealized loss on interest rate caps

 

 

(1,280

)

 

(1,280

)

Total comprehensive income

 

 

 

 

 

 

 

33,562

 

Dividends on Series A Preferred Stock

 

 

 

(14,200

)

(14,200

)

Dividends on Series B Preferred Stock

 

 

 

(2,212

)

 

Dividends on Series 1 Preferred Stock

 

 

 

 

 

(1,324

)

(1,324

)

Dividends on common stock

 

 

 

(20,590

)

(20,590

)

Common stock issued in legal settlement

 

2,099

 

 

 

2,099

 

Common stock and Series 1 Preferred Stock issued in exchange for Series A Preferred Stock

 

293,337

 

 

(35,519

)

(5

)

Common stock issued in exchange for Series B Preferred Stock

 

170,524

 

 

(37,293

)

 

Issuance costs associated with Recapitalization Transaction

 

(1,500

)

 

 

(1,500

)

Common stock options exercised

 

8,141

 

 

 

8,141

 

Redemption of Series A Preferred Stock

 

 

 

(3,559

)

(40,000

)

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2004

 

$

649,032

 

$

(2,776

)

$

(210,577

)

$

541,037

 

 


*Retroactively restated for 1-for-4 reverse stock split

 

See accompanying notes.

 

6



 

PRICE LEGACY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited - amounts in thousands)

 

 

Year to Date
Nine Months Ended
September 30

 

 

 

2004

 

2003

 

Operating activities

 

 

 

 

 

Net income

 

$

34,859

 

$

20,161

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

16,843

 

15,684

 

Deferred rents

 

(1,140

)

(1,135

)

Equity in earnings of joint ventures

 

(17

)

(1,168

)

Net (gain) loss on sale of real estate and investments

 

(15,018

)

2,505

 

Provision for asset impairments

 

11,495

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable and other assets

 

(22,334

)

2,155

 

Accounts payable and other liabilities

 

24,518

 

1,651

 

Net cash provided by operating activities

 

49,206

 

39,853

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Deposits to restricted cash

 

(122

)

(4,249

)

Additions to real estate assets

 

(6,165

)

(23,749

)

Proceeds from the sale of real estate assets and investments

 

85,595

 

16,608

 

Contributions to real estate joint ventures

 

 

(6

)

Distributions from real estate joint ventures

 

119

 

326

 

Advances on notes receivable

 

 

(14,677

)

Repayments on notes receivable

 

8,275

 

18,265

 

Net cash provided by (used in) investing activities

 

87,702

 

(7,482

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Advances from revolving line of credit and notes payable

 

269,755

 

72,872

 

Repayments of revolving line of credit and notes payable

 

(291,561

)

(76,097

)

Dividends paid to stockholders

 

(36,114

)

(28,806

)

Redemption of Series A Preferred Stock

 

(40,000

)

 

Proceeds from exercise of stock options

 

8,141

 

 

Net cash used in financing activities

 

(89,779

)

(32,031

)

Net increase in cash and cash equivalents

 

47,129

 

340

 

Cash and cash equivalents at beginning of period

 

7,631

 

11,471

 

Cash and cash equivalents at end of period

 

$

54,760

 

$

11,811

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

20,257

 

$

22,328

 

 

 

 

 

 

 

Supplemental schedule of noncash investing and financing activities:

 

 

 

 

 

Elimination of capital lease obligation in exchange for property

 

11,706

 

 

Reduction in joint ventures in connection with purchase of real estate

 

4,012

 

 

Assumption of mortgage in connection with purchase of real estate

 

9,745

 

 

Preferred stock conversion

 

72,812

 

 

Increase to treasury stock for reduction in notes receivable

 

 

779

 

 

See accompanying notes.

 

7



 

PRICE LEGACY CORPORATION

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

September 30, 2004

 

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 acquire, operate, and develop real property, primarily open-air shopping centers.

 

Our subsidiaries include Excel Legacy Holdings, Inc., which has elected to be treated as a taxable REIT subsidiary (TRS).  Other than some activities related to lodging and health care facilities, a TRS may generally engage in any business.  A TRS is subject to federal income tax and state and local income tax, where applicable, as a regular C corporation.

 

Accounting Principles

We prepared the financial statements following the requirements of the Securities and Exchange Commission (SEC) for interim reporting.  As permitted under those rules, certain footnotes or other financial information that are normally required by accounting principles generally accepted in the United States of America (GAAP) have been omitted.  However, except as disclosed below, there have been no material changes to the information disclosed in the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2003.  Certain prior year data have been reclassified to conform to the 2004 presentation.

 

We are responsible for the financial statements included in this document.  The financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results.  The information in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and accompanying notes included in our latest Annual Report on Form 10-K.

 

Revenues, expenses, assets and liabilities can vary during each quarter of the year.  Therefore, the results and trends in these interim financial statements may not be the same as those for the full year.

 

Real Estate Assets and Depreciation

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):

 

8



 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

Interest incurred

 

$

6,849

 

$

7,018

 

$

20,833

 

$

21,290

 

Interest capitalized

 

 

(381

)

(18

)

(1,384

)

 

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 $11.4 million at September 30, 2004 and $11.3 million at December 31, 2003.  These amounts are reflected as restricted cash on the Consolidated Balance Sheets.

 

Our restricted cash balances at September 30, 2004 and December 31, 2003 include $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 will be held by the lender until the debt is repaid in 2009.

 

Stock-Based Compensation

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of SFAS No. 123.”  SFAS 148 addresses transition provisions for a voluntary change to the fair value method of accounting for stock-based employee compensation.  In addition, SFAS 148 amends the disclosure requirements of SFAS 123.  This statement has not had a significant impact on our consolidated financial statements.

 

We do not record compensation expense for stock options.  The following table summarizes results as if we had recorded compensation expense under the provisions of SFAS 123, as amended by SFAS 148, for our option grants (amounts in thousands, except per share data).

 

9



 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

Net income (loss) applicable to common stockholders:

 

 

 

 

 

 

 

 

 

As reported

 

$

(1,843

)

$

(8,858

)

$

(59,247

)

$

(17,109

)

Deduct: stock based compensation expense determined under fair value method

 

(58

)

(154

)

(174

)

(462

)

Pro forma

 

$

(1,901

)

$

(9,012

)

$

(59,421

)

$

(17,571

)

Net income (loss) per share – basic:

 

 

 

 

 

 

 

 

 

As reported

 

$

(0.05

)

$

(0.96

)

$

(1.77

)

$

(1.85

)

Pro forma

 

$

(0.05

)

$

(0.96

)

$

(1.78

)

$

(1.90

)

Net income (loss) per share – diluted:

 

 

 

 

 

 

 

 

 

As reported

 

$

(0.05

)

$

(0.96

)

$

(1.77

)

$

(1.85

)

Pro forma

 

$

(0.05

)

$

(0.96

)

$

(1.78

)

$

(1.90

)

Weighted average fair value of options granted during the period

 

 

 

$

3.20

 

 

 

The FASB is currently considering amending SFAS 123 and APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  The proposed standard will require us to record compensation expense for all share based compensation plans.  If adopted, this proposed standard would have a negative impact on our earnings in future periods.  We discuss our stock option plan further in Note 13.

 

Other

In April 2004, our TRS sold approximately 1.9 million shares of common stock of Mace Security International for $10.7 million.  We recognized a gain on the sale of approximately $9.2 million.

 

In September 2004, we sold Kmart stock received as part of the settlement of bankruptcy.  We recognized other income of approximately $2.6 million related to the Kmart settlement.

 

Note 2 – Proposed Merger Transaction with PL Retail LLC

 

On August 24, 2004, we entered into a definitive merger agreement with PL Retail LLC (PL Retail) pursuant to which a wholly-owned subsidiary of PL Retail will merge with and into Price Legacy with Price Legacy continuing as the surviving corporation with all of its common stock

 

10



 

owned by PL Retail.  Under the terms of the merger agreement, our common stockholders will be entitled to receive cash consideration for each outstanding share of our common stock of

 

                  $18.85 per share

                  plus an amount equal to a quarterly common dividend of $0.28 per share prorated from October 1, 2004 through the closing of the merger, which we currently expect to total approximately $9.2 million based upon an estimated closing date of December 21, 2004, less any required withholding for taxes

 

Our existing Series A and Series 1 Preferred Stock will remain issued and outstanding as preferred stock of the surviving corporation.  PL Retail has indicated that it may continue to redeem the Series A and Series 1 Preferred Stock, subject to the availability of financing.

 

The merger is subject to the approval of our stockholders holding at least a majority of the combined voting power of our outstanding common stock and Series A Preferred Stock, voting together as a single class, and the satisfaction or waiver of other closing conditions described in the merger agreement.  In addition, the completion of the merger is conditioned upon The Price Group, LLC (The Price Group), an entity affiliated with Sol Price, a founder and major stockholder of Price Legacy, entering into a put agreement with PL Retail under which PL Retail has the right in its discretion to require The Price Group to purchase certain non-core properties and other Price Legacy assets for approximately $147.7 million concurrently with the closing of the merger.  In the event that any of these properties or other assets are sold prior to the closing of the merger, The Price Group will be entitled to receive the net proceeds from any such sale.  On September 28, 2004, The Price Group entered into the put agreement, satisfying this condition, and PL Retail exercised its right under the put agreement to cause The Price Group to purchase all right, title, and interest in and to two newly formed Price Legacy subsidiaries that will own these non-core properties and other assets as of the closing of the merger.  There can be no assurance that the merger will be consummated.  We have agreed to pay a termination fee of up to $20.0 million if the merger agreement is terminated under certain circumstances.

 

Note 3 – Recapitalization Transaction

 

On September 22, 2003, we issued a press release announcing that we were pursuing a series of transactions intended to result in a significant simplification of our capital structure.  On or about February 11, 2004, we mailed to our stockholders definitive proxy materials and to our Series A

 

11



 

Preferred stockholders exchange offer materials related to our previously announced recapitalization transaction (the Recapitalization Transaction).

 

The Recapitalization Transaction consisted of:

 

                  an exchange offer in which we offered to exchange, at the option of the holder, either shares of our common stock or shares of our newly designated Series 1 Preferred Stock for all outstanding shares of  our Series A Preferred Stock

                  exchange transactions with the holders of all of our outstanding Series B Preferred Stock in which we exchanged 8,521,746 shares of our common stock (after giving effect to the reverse stock split described below) for all of our outstanding shares of Series B Preferred Stock

                  an amendment and restatement of our charter to, among other things,

                  effect a 1-for-4 reverse stock split of our common stock

                  designate and establish the terms of our Series 1 Preferred Stock

                  eliminate the Series B Preferred Stock following its exchange for common stock

                  change the manner in which our directors are elected so that the holders of common stock and Series A Preferred Stock, but not the holders of Series 1 Preferred Stock, voting together as a single class, are entitled to elect all of our directors

                  change our authorized capital stock to provide sufficient shares to complete the Recapitalization Transaction

 

Our stockholders approved the Recapitalization Transaction at a special meeting of stockholders held on March 11, 2004, and the Recapitalization Transaction was completed on March 12, 2004.  As a result of the Recapitalization Transaction, we issued a total of 27,421,965 shares of common stock (on a post 1-for-4 reverse stock split basis) and 2,942,463 shares of Series 1 Preferred Stock and we retired 20,947,172 shares of Series A Preferred Stock and 24,523,015 shares of Series B Preferred Stock.  After giving effect to the Recapitalization Transaction, we had outstanding 36,283,973 shares of common stock, 6,486,994 shares of Series A Preferred Stock, and 2,942,463 shares of Series 1 Preferred Stock.

 

On March 12, 2004, we filed Articles of Amendment and Restatement in the State Department of Assessments and Taxation of Maryland effecting the 1-for-4 reverse stock split of our common stock and the other amendments to our charter contemplated by the Recapitalization Transaction.

 

12



 

For accounting purposes, Emerging Issue Task Force (EITF) topic D-42 governs the effect on the calculation of earnings per share for the redemption or induced conversion of preferred stock. The exchange of the Series A Preferred Stock for either common stock or Series 1 Preferred Stock is being treated as a redemption and, accordingly, the excess of the fair value of the consideration transferred to the holders of the preferred stock over the carrying amount of the preferred stock on the balance sheet was subtracted from net income to arrive at net loss applicable to common stockholders in the calculation of earnings per share.  Approximately 10.7% of the Series A Preferred Stock was exchanged for Series 1 Preferred Stock and 65.6% of the Series A Preferred Stock was exchanged for common stock, requiring a deduction of approximately $35.5 million from net income to arrive at net loss applicable to common stockholders with the Series 1 Preferred Stock valued at $16.05 per share.

 

The exchange of the Series B Preferred Stock for common stock is being treated as an induced conversion in accordance with EITF D-42.  The exchange of the Series B Preferred Stock for common stock at a ratio of 1.39 shares of common stock for each share of Series B Preferred Stock resulted in a deduction of approximately $37.3 million from net income to arrive at net loss applicable to common stockholders.

 

On June 7, 2004, we redeemed 1.0 million shares of our Series A Preferred Stock at the redemption price of $16.00 per share, along with a dividend of $0.145 per share which represented a quarterly dividend of $0.35 per share pro-rated for the period of May 1, 2004 to June 7, 2004.  The redemption price of $16.00 per share was in excess of the carrying value of the stock which resulted in a reduction of $1.4 million from net income to arrive at net income applicable to common stockholders in accordance with EITF D-42.

 

On September 15, 2004, we redeemed 1.5 million shares of our Series A Preferred Stock at the redemption price of $16.00 per share, along with a dividend of $0.175 per share which represented a quarterly dividend of $0.35 per share pro-rated for the period of August 1, 2004 to September 15, 2004.  The redemption price of $16.00 per share was in excess of the carrying value of the stock which resulted in a reduction of $2.1 million from net income to arrive at net income applicable to common stockholders in accordance with EITF D-42 (see Note 14).

 

Note 4 – 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

 

13



 

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 using the treasury stock method.  The effect of common stock equivalents for all periods presented were antidilutive and, therefore, not included in the earnings per share calculations.

 

 

 

Three Months Ended September

 

Nine Months Ended September

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

36,920,047

 

9,249,789

 

33,457,491

 

9,252,235

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

Employee stock options

 

37,715

 

115,357

 

424,398

 

9,322

 

Weighted average shares outstanding – assuming dilution

 

36,957,762

 

9,365,146

 

33,881,889

 

9,261,557

 

 

In following the provisions of SFAS 128, we adjusted the computations of basic and diluted earnings per share and the number of common shares outstanding retroactively for all periods presented to reflect our change in capital structure.  The earnings per share for the three months and nine months ended September 30, 2004 and 2003 have been restated to reflect the 1-for-4 reverse stock split of our common stock in the first quarter of 2004 as if it occurred at the beginning of the period.

 

Note 5 – Real Estate Assets

 

Our real estate properties are generally leased under noncancelable leases with remaining terms ranging from 1 to 26 years.  Rental revenues include the following (amounts in thousands):

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

Minimum rent

 

$

24,665

 

$

22,314

 

$

71,754

 

$

67,068

 

Straight-line accrual of future rent

 

439

 

678

 

1,354

 

1,855

 

Expense reimbursements

 

6,597

 

5,766

 

19,652

 

18,486

 

Percentage rent

 

102

 

181

 

776

 

755

 

Other revenues

 

346

 

347

 

947

 

1,010

 

Rental revenues

 

$

32,149

 

$

29,286

 

$

94,483

 

$

89,174

 

 

14



 

Acquisitions

During the first nine months of 2004, we acquired our joint venture partners’ 50% interest in a property in Fresno, CA for $2.8 million.  We assumed the outstanding mortgage of $9.7 million.

 

During the first nine months of 2003, we acquired a parcel of undeveloped land at our Anaheim, CA development property for $2.7 million.

 

Dispositions

During the first nine months of 2004, we sold the following properties:

 

Location

 

Description

 

Date
Sold

 

Sales Price
(000’s)

 

Hampton, VA

 

Retail Building/Bank

 

4/1/04

 

$

4,850

 

San Diego/Rancho Bernardo, CA (1)

 

Office Building

 

5/12/04

 

14,655

 

Tempe, AZ (2)

 

Land, Building

 

5/13/04

 

1,724

 

Tucson/Marana, AZ (2)

 

Land

 

6/16/04

 

408

 

Orlando, FL (3)

 

Land

 

6/23/04

 

41,500

 

San Diego/Morena, CA (2)

 

Office Building

 

6/28/04

 

4,125

 

Scottsdale, AZ (4)

 

Land

 

8/9/04

 

22,000

 

Farmington, UT (2)

 

Land

 

8/11/04

 

3,078

 

Phoenix/One North First Street, AZ

 

Office Building

 

9/30/04

 

5,900

 

 


(1)       We subleased our interest in this property to former members of our senior management in October 2003.  During the second quarter of 2004, they exercised their right to purchase all of our rights and interest in the building

(2)       Partial sale

(3)       This was a consolidated joint venture investment classified as land on our Consolidated Balance Sheet in accordance with FIN 46R

(4)       This was a consolidated note receivable classified as land on our Consolidated Balance Sheet in accordance with FIN 46R

 

During the first nine months of 2003, we sold the following properties:

 

Location

 

Description

 

Date
Sold

 

Sales Price
(000’s)

 

Scottsdale, AZ

 

Land, Restaurant

 

3/31/03

 

$

3,000

 

Inglewood, CA

 

Warehouse Building

 

4/29/03

 

4,000

 

New Britain, CT

 

Warehouse Building

 

5/15/03

 

3,529

 

Northridge, CA

 

Shopping Center

 

6/27/03

 

5,850

 

Tucson/Marana, AZ

 

Land

 

8/22/03

 

416

 

 

15



 

Also during 2003, we received payment on three notes receivable related to the sale of our self storage development properties in 2002.  We deferred the gain of $0.7 million on the sales until 2003, when we received payment on the notes.

 

Variable Interest Entities

On July 1, 2003, we adopted FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51” (FIN 46R).  This interpretation addresses the consolidation of business enterprises (variable interest entities) to which the usual condition (ownership of a majority voting interest) of consolidation does not apply.  This interpretation

focuses on financial interests that indicate control.  It concludes that in the absence of clear control through voting interests, a company’s exposure (variable interest) to the economic risks and potential reward from the variable interest entity’s assets and activities are the best evidence of control.  Variable interests are rights and obligations that convey economic gains or losses from changes in the values of the variable interest entity’s assets and liabilities.  Variable interests may arise from financial instruments, service contracts, nonvoting ownership interests and other arrangements.

 

If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary.  The primary beneficiary is required to include assets, liabilities and the results of operations of the variable interest entity in its financial statements.  As of September 30, 2004, our analysis related to FIN 46R indicates we are not the primary beneficiary of any variable interest entities which require consolidation in our financial statements.  Prior to September 2004, we had the following variable interest entities:

 

 

 

Assets

 

Liabilities

 

Minority Interest

 

Date Sold

 

Los Arcos Development, LLC

 

$

22,000

 

$

 

$

 

8/9/04

 

Orlando Business Park LLC

 

28,900

 

4,645

 

1,013

 

6/23/04

 

 

Los Arcos Development, LLC (an Ellman Affiliate as defined in Note 9) owned 42 acres of land in Scottsdale, AZ.  Commencing in 1996, non-recourse loans were made by one of our affiliates to Los Arcos Development, LLC to acquire the Scottsdale property.  These loans were previously classified as notes receivable on our balance sheet.  As of January 13, 2004, we entered into loan amendments with Los Arcos Development, LLC to confirm a second priority lien on the Scottsdale property to collateralize the loans and to establish a new maturity date of December 31, 2004.

 

16



 

A separate note receivable from Los Arcos Development, LLC in the aggregate principal amount of $13.0 million was acquired by another affiliate in February 2003.  This note receivable was non-recourse and collateralized by a first priority lien on the Scottsdale property.  This loan was amended as of January 13, 2004 to establish a new maturity date of December 31, 2004.

 

The first and second lien loans were further amended in July 2004 to accelerate the outside maturity date to August 31, 2004 and require certain payments on the notes in the total amount of $30.3 million by July 15, August 2, August 10, and August 16, 2004.  If such payments were timely made, the borrower and its affiliates would have received releases from further liability

under these loans and the related loans described in Note 9, and the liens would have been released.  The required July 15 and August 2 payments were received.  In addition, we granted Ellman Investments, Inc. certain rights to purchase the loans in lieu of making the required payments (with the purchase price in such event approximately equal to the amount of the required payments).  In return, Los Arcos Development, LLC agreed to certain restrictions with respect to the development of the Scottsdale property and also agreed to deliver documents satisfactory to us relasing and indemnifying us from liabilities with respect to our various transactions with the Ellman Affiliates.  Futhermore, the amendment provided us protection against claims from Los Arcos Development, LLC.

 

For accounting purposes, the cumulative balance of the notes receivable thru August 9, 2004 was $22.0 million, which was net of a $29.5 million impairment recorded in the fourth quarter of 2003.  This balance was classified as land on our Consolidated Balance Sheets.  Although interest had continued to accrue per the terms of the loan documents, we did not accrue interest on the notes for accounting purposes in 2004 and 2003.  On August 9, 2004, the loans to Los Arcos Development, LLC, and the related loans described in Note 9 were paid off pursuant to the July 2004 amendment described above for $30.3 million which concluded our existing business association with the Ellman Affiliates, their holdings, the Scottsdale property, and the Phoenix Coyotes (see Note 9).

 

Orlando Business Park, LLC, previously classified as a consolidated joint venture on our balance sheet, owned land in Orlando, FL.  This land was sold in the second quarter of 2004 and we recognized a gain of $2.6 million on the sale.

 

Property Held for Sale

Included in the Consolidated Balance Sheets at September 30, 2004 and December 31, 2003 are the following properties held for sale, which are carried at fair value less costs to sell (amounts in thousands):

 

17



 

 

Location

 

Description

 

September 30
2004

 

December 31
2003

 

Anaheim, CA

 

Land

 

$

29,997

 

$

37,000

 

Tusayan, AZ

 

Hotel

 

9,723

 

 

Farmington, UT

 

Land

 

3,014

 

5,880

 

Tucson/Marana, AZ

 

Land

 

2,457

 

2,787

 

San Diego/Rancho Bernardo, CA

 

Office Building

 

 

15,141

 

Phoenix/One North First Street, AZ

 

Office Building

 

 

5,551

 

Hampton, VA

 

Retail Building

 

 

4,629

 

Total

 

 

 

$

45,191

 

$

70,988

 

 

Note 6 – Provision for Asset Impairments

 

We record real estate assets at historical costs and adjust them for the recognition of impairment losses.  During the third quarter of 2004, we recognized an impairment loss of $3.7 million on our hospitality property at Tusayan, AZ.  The loss was determined based on a contract price to sell the property entered into during the third quarter of 2004.  The property was sold on October 22, 2004 for the contract price of $9.5 million.  Also during the third quarter of 2004, we recognized an impairment loss of $6.6 million on our Anaheim, CA property.  The loss was determined based on revised information as we continue to market the property for sale.  As both properties are classified as held for sale, these losses are recorded as discontinued operations in the Consolidated Statement of Operations in accordance with SFAS No. 144.

 

In the second quarter of 2004, we recorded an impairment of $1.2 million on a note receivable, which we discuss further in Note 9.

 

Note 7 – Discontinued Operations

 

We report discontinued operations for our properties in Anaheim, CA, Tusayan, AZ, Farmington, UT, and Tucson/Marana, AZ which are classified as held for sale.

 

We also report discontinued operations for our properties in San Diego/Rancho Bernardo, CA, Hampton, VA, San Diego, CA, and Phoenix/One North First Street, AZ which were sold during the nine months ended September 30, 2004.  Also included in the Consolidated Statements of Operations for the three and nine months ended September 30, 2003 are the discontinued operations of our properties at Scottsdale, AZ, Inglewood, CA, New Britain, CT, and Northridge, CA which were sold in 2003.  Discontinued operations are summarized as follows (amounts in thousands, except per share data):

 

18



 

 

 

Three Months Ended September 30

 

Nine Months Ended September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

$

2,260

 

$

2,902

 

$

6,068

 

$

7,428

 

Rental revenue

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Operating and maintenance

 

1,654

 

1,610

 

4,287

 

4,015

 

Property taxes

 

211

 

65

 

524

 

330

 

Depreciation and amortization

 

127

 

375

 

407

 

1,305

 

Interest expense

 

 

205

 

 

493

 

 

 

1,992

 

2,255

 

5,218

 

6,143

 

Income from operations

 

268

 

647

 

850

 

1,285

 

Provision for asset impairment

 

(10,270

)

 

(10,270

)

 

Net gain (loss) on sale of real estate

 

80

 

153

 

2,274

 

(2,368

)

Net income (loss)

 

$

(9,922

)

$

800

 

$

(7,146

)

$

(1,083

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$

(0.27

)

$

0.09

 

$

(0.21

)

$

(0.12

)

 

Note 8 – Investments in Unconsolidated Real Estate Joint Ventures

 

As of September 30, 2004 and December 31, 2003, we had the following investments in unconsolidated joint ventures which we accounted for under the equity method of accounting (amounts in thousands):

 

 

 

 

 

September 30

2004

 

December 31

2003

 

Joint Venture

 

Ownership %

 

 

 

Blackstone Ventures I

 

50

%

 

$

2,469

 

3017977 Nova Scotia Company

 

55

%

 

1,600

 

Other

 

Various

 

 

44

 

Total

 

 

 

 

$

4,113

 

 

In March 2004, we paid $2.8 million to purchase our partners’ 50% share of Blackstone

Ventures I and we assumed the outstanding mortgage of $9.7 million.

 

During the first quarter of 2004, we sold our investment in 3017977 Nova Scotia Company to an Ellman Affiliate.  In consideration, we added $1.6 million to an existing note receivable due from Los Arcos Development, LLC.  This note receivable was consolidated and recorded as land on our Consolidated Balance Sheets in accordance with FIN 46R.  The note was paid in August 2004.  See Note 5 for further discussion.

 

19



 

Also in the first quarter of 2004, we disposed of a joint venture investment in an apartment complex and recognized a loss on the disposal of $44,100.

 

Note 9 – Notes Receivable

 

As of September 30, 2004 and December 31, 2003, we had the following notes receivable outstanding related to various real estate developments and related businesses (amounts in thousands):

 

 

 

September 30

2004

 

December 31

2003

 

Note Receivable

 

 

 

Arizona Hockey Management/Ellman Holdings

 

$

 

$

9,500

 

Other

 

811

 

811

 

Total

 

$

811

 

$

10,311

 

 

The notes generally do not require cash payments of interest until specified future dates, typically when developments are completed or sold.

 

Prior to August 9, 2004, the notes receivable from companies owned by or affiliated with Steven Ellman (the Ellman Affiliates) represented an aggregate outstanding principal balance, for accounting purposes, of approximately $8.3 million.  The outstanding balance was net of a $12.9 million impairment recorded in the fourth quarter of 2003 to reflect the fair value of the notes in connection with management’s plan to sell our non-core assets and an additional $1.2 million impairment recorded in the second quarter of 2004 to reflect Ellman Affiliates’ exercise of its option to purchase the loans pursuant to the terms specified below.  These notes receivable from the Ellman Affiliates were collateralized by a pledge of certain Ellman Affiliates’ distributions from a holding company that owns the Phoenix Coyotes hockey team and other related assets.  These loans were made at a time when the Ellman Affiliates intended to relocate the hockey team to an arena that was to be constructed on the Scottsdale property owned by Los Arcos Development, LLC.

 

As a result of delays at the Scottsdale property, the Ellman Affiliates elected to pursue an alternative site for the hockey arena in Glendale, AZ.  In December 2002, the Ellman Affiliates 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 and related real estate development

assets were consolidated for the purpose of assisting in obtaining additional financing.    Although interest continued to accrue per the terms of the notes, we stopped accruing interest on

 

20



 

the loans for accounting purposes when the development projects were consolidated into the holding company.

 

As of January 13, 2004, we entered into loan amendments with the Ellman Affiliates to, among other things, incorporate the pledge of certain Ellman Affiliates’ distributions from the holding company collateralizing the loans and set forth the new maturity date of the loans as December 31, 2004.

 

In August 2004, Ellman Investments, Inc. exercised its right to purchase the loans, provided that certain other obligations of the Ellman Affiliates owed to us, including the obligations to make the payments arising with respect to the notes receivable described in Note 5 have been satisfied, and provided further that the Ellman Affiliates deliver documents satisfactory to us releasing and indemnifying us from liabilities with respect to our various transactions with the Ellman Affiliates.  On August 9, 2004, Ellman Investments, Inc. purchased the loans and other notes receivable described in Note 5 which concluded our existing business association with the Ellman Affiliates, their holdings, the Scottsdale property, and the Phoenix Coyotes.

 

Note 10 – Debt

 

We had the following debt outstanding at September 30, 2004 and December 31, 2003 (amounts in thousands):

 

 

 

September 30

2004

 

December 31

2003

 

 

 

 

 

Mortgages on five properties in Florida bearing interest at fixed rates ranging from 8.18% to 9.00%. The loans are collateralized by the properties and mature February 2009 and January 2010

 

$

157,517

 

$

158,668

 

 

 

 

 

 

 

Mortgage payable with a bank, bearing interest at LIBOR plus 90 basis points (2.74% at September 30, 2004). The mortgage is collateralized by four of our properties and matures July 2005

 

121,375

 

 

 

 

 

 

 

 

Mortgage on a property in Pentagon City, VA bearing interest at LIBOR plus 145 basis points (3.29% at September 30, 2004). The loan is collateralized by the property and matures January 2009

 

60,000

 

 

 

21



 

 

 

September 30

2004

 

December 31

2003

 

 

 

 

 

Mortgages and notes payable on four properties bearing interest at fixed rates ranging from 5.88% to 8.45%. The loans are collateralized by the properties and mature on various dates between October 2011 and February 2017

 

56,503

 

57,271

 

 

 

 

 

 

 

Mortgages on two properties bearing interest at LIBOR plus 205 basis points (3.89% at September 30, 2004). The loans are collateralized by the properties and mature December 2006

 

29,289

 

31,508

 

 

 

 

 

 

 

Mortgage on a property in Temecula, CA bearing interest at 5.20%. The loan is collateralized by the property and matures May 2014

 

28,843

 

 

 

 

 

 

 

 

Construction loan outstanding bearing interest at LIBOR plus 310 basis points (4.94% at September 30, 2004). The loan is due March 2005 and is collateralized by a retail center in Newport, KY (see below)

 

28,500

 

28,500

 

 

 

 

 

 

 

Mortgage on a property in Orlando, FL bearing interest at LIBOR plus 130 basis points (3.14% at September 30, 2004). The loan is collateralized by the property and matures June 2008

 

22,099

 

22,100

 

 

 

 

 

 

 

Mortgage on a property in Greensburg, IN bearing interest at LIBOR plus 155 basis points (3.39% at September 30, 2004). The loan is collateralized by the property and matures May 2009

 

14,200

 

 

 

 

 

 

 

 

Construction loan payable to a bank bearing interest at LIBOR plus 185 basis points (3.69% at September 30, 2004). The loan matures in March 2005 and is collateralized by the project in Orlando, FL

 

12,746

 

10,466

 

 

 

 

 

 

 

Mortgage on a property in Fresno, CA bearing interest at LIBOR plus 175 basis points (3.59% at September 30, 2004). The loan is collateralized by the property and matures October 2004. This loan has been extended for six months at an interest rate of LIBOR plus 150 basis points

 

9,642

 

 

 

 

 

 

 

 

Revolving $50.0 million credit facility bearing interest at LIBOR plus 118 to 170 basis points (3.39% at September 30, 2004), maturing March 2007 (see below)

 

 

 

 

22



 

 

 

September 30

2004

 

December 31

2003

 

 

 

 

 

Mortgage payable with GMAC Commercial Mortgage Corporation, bearing interest at LIBOR plus 98 basis points. The mortgage matured in July 2004 and was refinanced

 

 

121,375

 

 

 

 

 

 

 

Revolving $100.0 million credit facility bearing interest at LIBOR plus 150 to 200 basis points. In February 2004, we repaid $60.0 million and amended our credit facility (see below)

 

 

69,100

 

 

 

 

 

 

 

Capital lease arrangements with an individual on two properties. The capital leases had effective interest rates of 4.43% and 7.36%. Both leases were repaid in 2004

 

 

31,006

 

 

 

 

 

 

 

Construction loan payable to a bank bearing interest at LIBOR plus 150 basis points. This loan was refinanced with a new lender in April 2004

 

 

20,929

 

 

 

 

 

 

 

Note payable to a bank bearing interest at LIBOR plus 375 basis points. This loan was paid in full in June 2004

 

 

8,821

 

 

 

 

 

 

 

Note payable outstanding on a $4.7 million facility related to Newport, KY. This loan was paid in full in March 2004

 

 

4,737

 

 

 

 

 

 

 

Total

 

$

540,714

 

$

564,481

 

 

We were in compliance with all covenants on our credit facility at September 30, 2004.  In 2004, we plan to use cash flow from operations to fund our recurring debt service obligations.

 

In February 2004, we amended our credit facility, repaid $60.0 million and Wells Fargo Bank assumed the amended facility.  The amended facility provided for a maximum borrowing of $25.0 million.  This amendment was intended to provide financing through the completion of the Recapitalization Transaction (see Note 3).  In April 2004, we entered into a new $50.0 million credit facility with Wells Fargo Bank.  The new facility has a 3-year term and has a current interest rate of LIBOR plus 155 basis points.  The LIBOR rate add-on may vary between 118 and 170 basis points based on our leverage and other financial ratios.  The new facility also can be increased by $25.0 million to allow up to $75.0 million of borrowings.

 

23


 

 

 


 

We have a 69% interest in Newport on the Levee, LLC (Newport) that owns a retail project in Newport, KY.  In addition to the $28.5 million construction loan 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 issued and outstanding, a total of $55.8 million, are guaranteed by us, by  Newport, and the third party co-developers of the project.  Newport has drawn on $46.8 million of the bonds at September 30, 2004.

 

On August 2, 2004, we purchased all of the outstanding Newport, KY Series 2000b taxable bonds for $10.2 million (including accrued interest).  Also, on August 18, 2004, we purchased $9.7 million of the 8.5% Series 2000a tax exempt bonds for $10.1 million (including accrued interest).  These bonds are recorded as other assets in the Consolidated Balance Sheet at September 30, 2004.

 

On October 14, 2004, we purchased $27.9 million of the Newport, KY Series 2000a tax exempt bonds for $29.7 million (including accrued interest).

 

Note 11 — 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

 

24



 

 

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.  The interest rate caps had a fair value of $0.6 million at September 30, 2004 and  $1.9 million at December 31, 2004, and are included with other assets on the Consolidated Balance Sheets.

 

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 a $13.8 million gain and will amortize the gain over the fixed-rate debt’s remaining life through 2009 to 2010.  The remaining deferred gain of  $10.4 million is included with accounts payable and other liabilities 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 Consolidated Balance Sheets with a corresponding adjustment to either Accumulated Comprehensive Income or  in earnings, depending on the hedging relationship.  Unrealized gains and losses held in Accumulated Comprehensive Income will be reclassified to earnings in the same period or periods that the hedged cash flows affect earnings.  As of September 30, 2004, the balance in Accumulated Comprehensive Loss relating to derivatives was $2.7 million.  During the third quarter of 2004, we reclassified approximately $18,000 into earnings as additional interest expense.  Within the next twelve months, we estimate that approximately $0.3 million will be reclassified from Accumulated Comprehensive Loss to earnings as additional interest expense.

 

25



 

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  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 12 — Related Party Transaction

 

During the first quarter of 2004, Mr. Mark Burton, a former member of our senior management, resigned his position with us effective February 1, 2004.  In connection with his resignation, we  entered into a consulting and office services agreement whereby Mr. Burton and other employees formerly with our company provide various acquisition and disposition services and related due diligence.  The term of the agreement is for one year ending January 31, 2005.  In connection with this agreement, we paid approximately $50,000 in consulting services for the quarter ended September 30, 2004 and $133,000 for the nine months ended September 30, 2004.

 

Note 13 — Stock Option Plan

 

During the first nine months of 2004, we granted 85,000 stock options (on a post 1-for-4 reverse stock split basis) under our 2001 Stock Option and Incentive Plan (the Plan).  As of September 30, 2004, we had reserved 998,250 shares for issuance under the Plan.  We issued no stock options during the first nine months of 2003.

 

As we stated in Note 1, we follow the provisions of 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 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:

 

26



 

 

 

Nine Months Ended September 30

 

 

 

2004

 

2003

 

Risk free interest rate

 

4.21-4.49

%

 

Annual dividend rate

 

6.06-6.59

%

 

Volatility factor of the stock price

 

38.67-40.98

%

 

Weighted average expected life (years)

 

10

 

 

 

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 options granted in 2004.

 

Note 14 — Commitments and Contingencies

 

On August 25, 2004 and August 26, 2004, two purported class action complaints were filed in the Superior Court of California, County of San Diego, against us and each current member and one past member of our Board of Directors.  The lawsuits, Jeanne M. Calamore v. Price Legacy Corporation, Jack McGrory, James F. Cahill, Murray Galinson, Charles L. Goldberg, Robert N. Goodman, Keene Wolcott, Jacklyn Horton, and Giles H. Bateman (Case No. GIC834768) and Carl E. Atkinson, Jr. v. Price Legacy Corporation, Jack McGrory, James F. Cahill, Murray Galinson, Charles L. Goldberg, Robert N. Goodman, Keene Wolcott, Jacklyn Horton, and Giles H. Bateman (Case No. GIC834830) were consolidated by the court.  The operative complaint alleges the defendants breached their fiduciary duty to our stockholders in connection with the proposed merger pursuant to which we will be acquired by PL Retail LLC.  The complaint challenges the sufficiency of the merger consideration, the adequacy of disclosures and the independence of the directors, and seeks a preliminary and permanent injunction of the merger transaction and unspecified damages from the defendants.  The discovery process has been ongoing.  On October 27, 2004, the defendants filed a demurrer to the plaintiff’s complaint contending that the complaint fails to state a valid cause of action against any of the defendants and is fatally uncertain.  The demurrer is set for hearing on January 14, 2005.  On October 27, 2004, the defendants also filed a motion to stay the action.  The motion to stay is set for hearing on January 21, 2005.

 

On September 23, 2004, a purported class action complaint was filed in the Circuit Court for Baltimore City, Maryland, against us and members of our Board of Directors, as well as The Price Group.  The lawsuit is captioned Robert Allen v. Price Legacy Corporation, Jack McGrory, Murray Galinson, Keene Wolcott, Charles Goldberg, Robert N. Goodman, Giles H. Bateman, Jacklyn Horton, and The Price Group LLC (Case No. 24-C-04-007204 OT).  On

 

27



 

October 21, 2004, an Amended Class Action Complaint was filed, which alleges that the defendants breached their fiduciary duty to our stockholders in connection with the proposed merger pursuant to which we will be acquired by PL Retail LLC.  The amended complaint challenges the sufficiency of the merger consideration, the adequacy of disclosures and the independence of the directors, and seeks a preliminary and permanent injunction of the merger transaction, the imposition of a constructive trust, and unspecified damages from the defendants.The claims have not progressed sufficiently for us to estimate a range of possible exposure, if any.

 

Note 15 — Subsequent Events

 

On October 1, 2004, we redeemed 1.6 million shares of our Series A Preferred Stock at the redemption price of $16.00 per share, along with a dividend of $0.236 per share which represented a quarterly dividend of $0.35 per share pro-rated for the period of August 1, 2004 to October 1, 2004.  The redemption price of $16.00 per share was in excess of the carrying value of the stock will result in a reduction of $2.2 million from net income to arrive at net income applicable to common stockholders for the fourth quarter of 2004 in accordance with EITF topic D-42.

 

We discuss other subsequent events in Note 6 and Note 10.

 

28



 

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

This report on Form 10-Q contains certain “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a “safe harbor” for these types of statements.  You can identify these forward-looking statements by forward-looking words such as “believe,” “may,” “could,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “seek,” “plan,” “expect,” “should,” “would” and similar expressions in this report on Form 10-Q.  These forward-looking statements are subject to a number of risks, uncertainties and assumptions about Price Legacy, including, among other things:

 

                  the effect of economic, credit and capital market conditions in general and on real estate companies in particular, including changes in interest rates

                  our ability to compete effectively

                  developments in the retail industry

                  the possibility that the proposed merger with PL Retail will not be consummated on the terms described in this report, or at all

                  the operating convenants in the merger agreement

                  the diversion of managements’ attention to effectuating the proposed merger

                  costs related to the proposed merger

                  our ability to attract and retain key employees, particularly in light of the proposed merger

                  the lawsuits arising out of the proposed merger

                  the financial stability of Price Legacy’s tenants, including our reliance on major tenants

                  our ability to successfully complete real estate acquisitions, developments and dispositions

                  the financial performance of our properties, joint ventures and investments

                  government approvals, actions and initiatives, including the need for compliance with environmental requirements

                  our ability to continue to qualify as a real estate investment trust, or REIT

                  our ability to realize the value of various assets through negotiated transactions

 

The factors identified above are believed to be some, but not all, of the important factors that could cause actual events and results to be significantly different from those that may be expressed or implied in any forward-looking statements.  Any forward-looking statements should also be considered in light of the information provided in “Factors That May Affect Future Performance” located in our Form 10-K filing for the 2003 fiscal year.  We assume no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

In Management’s Discussion and Analysis we explain our general financial condition and results of operations including:

 

                  why revenues, costs and earnings changed from the prior period

 

29



 

                  funds from operations (FFO)

                  how we used cash for capital projects and dividends and how we expect to use cash for the remainder of 2004

                  where we plan on obtaining cash for future dividend payments and future capital expenditures

 

Critical Accounting Policies and Estimates

 

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.  Refer to our 2003 Annual Report on Form 10-K for a discussion of our critical accounting policies which include revenue recognition, valuation of real estate assets and depreciation, and the disposal or impairment of long-lived assets.  There have been no material changes to these policies in 2004.  We believe that our estimates and assumptions are reasonable based upon historical experience, however, 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 our Annual Report on Form 10-K for the 2003 fiscal year.

 

Overview

 

We receive income primarily from rental revenue from open-air shopping center properties, including recoveries from tenants, offset by operating and general and administrative expenses.  During the fourth quarter of 2003, we segregated a number of our non-core assets for disposal.  During the first nine months of 2004, we have continued our efforts to sell our non-core assets.  We sold our properties in Hampton, VA, San Diego/Rancho Bernardo, CA, and Phoenix/One North First Street, AZ.  We also sold land in Tucson, AZ, land in Orlando, FL, and a partial sale of our land in Farmington, UT.  We completed partial sales of properties in San Diego/Morena, CA and Tempe, AZ.  We sold our investment in Mace Security International stock and recognized a gain of $9.2 million.  Finally, the loans to Los Arcos Development, LLC and the related loans to the Phoenix Coyotes hockey team were paid off for $30.3 million during the third quarter of 2004.  We redeployed the proceeds from the disposition of these assets into the redemption of our Series A Preferred Stock and the reduction of debt.  During the first nine months of 2004, we redeemed 2.5 million shares of Series A Preferred Stock for the redemption price of $16 per share.  The redemption price was in excess of the carrying value of the stock which resulted in a reduction of $3.5 million from net income to arrive at net income applicable to common stockholders in accordance with Emerging Issues Task Force (EITF) topic D-42.  On October 1, 2004, we redeemed an additional 1.6 million shares of Series A Preferred Stock.  During the first nine months of 2004, we acquired our joint venture partners’ 50% share of a property in Fresno, CA.

 

30



 

During the first nine months of 2004, we completed a Recapitalization Transaction that resulted in a significant simplification of our capital structure.  In accordance with EITF D-42 which governed this transaction, approximately $72.8 million was deducted from net income to arrive at net loss applicable to common stockholders in the calculation of earnings per share.

 

On August 24, 2004, we entered into a definitive merger agreement with PL Retail LLC (PL Retail) pursuant to which a wholly-owned subsidiary of PL Retail will merge with and into Price Legacy with Price Legacy continuing as the surviving corporation with all of its common stock owned by PL Retail.  Under the terms of the merger agreement, our common stockholders will be entitled to receive cash consideration for each outstanding share of our common stock of

 

                  $18.85 per share

                  plus an amount equal to a quarterly common dividend of $0.28 per share prorated from October 1, 2004 through the closing of the merger, which we currently expect to total approximately $9.2 million based upon an estimated closing date of December 21, 2004, less any required withholding for taxes

 

Our existing Series A and Series 1 Preferred Stock will remain issued and outstanding as preferred stock of the surviving corporation.  PL Retail has indicated that it may continue to redeem the Series A and Series 1 Preferred Stock, subject to the availability of financing.

 

The merger is subject to the approval of our stockholders holding at least a majority of the combined voting power of our outstanding common stock and Series A Preferred Stock, voting together as a single class, and the satisfaction or waiver of other closing conditions described in the merger agreement.  In addition, the completion of the merger is conditioned upon The Price Group, LLC (The Price Group), an entity affiliated with Sol Price, a founder and major stockholder of Price Legacy, entering into a put agreement with PL Retail under which PL Retail has the right in its discretion to require The Price Group to purchase certain non-core properties and other Price Legacy assets for approximately $147.7 million concurrently with the closing of the merger.  In the event that any of these properties or other assets are sold prior to the closing of the merger, The Price Group will be entitled to receive the net proceeds from any such sale.  On September 28, 2004, The Price Group entered into the put agreement, satisfying this condition, and PL Retail exercised its right under the put agreement to cause The Price Group to purchase all right, title, and interest in and to two newly formed Price Legacy subsidiaries that will own these non-core properties and other assets as of the closing of the merger.  There can be no assurance that the merger will be consummated.  We have agreed to pay a termination fee of up to $20.0 million if the merger agreement is terminated under certain circumstances.

 

Rental Revenues

 

 

 

Amount
(000’s)

 

Change
(000’s)

 

Percent
Change

 

3rd Quarter 2004

 

$

32,149

 

$

2,863

 

10%

 

3rd Quarter 2003

 

29,286

 

 

 

 

 

 

 

 

 

 

 

 

 

Year-to-Date 2004

 

94,483

 

5,309

 

6

%

Year-to-Date 2003

 

89,174

 

 

 

 

 

 

31



 

Rental revenues increased $2.9 million to $32.1 million in the third quarter of 2004 compared to the same period in 2003 primarily because:

 

                  properties we owned both years generated $2.4 million of additional revenues, primarily due to additional leasing activity at our Westbury, NY, Mesa, AZ, and Miami, FL properties and the opening of our Temecula, CA and Orlando/Millenia II, FL properties

                  we acquired our joint venture partners’ 50% share of a property in Fresno, CA in March 2004 which generated $0.5 million of additional revenues

 

Rental revenues increased $5.3 million to $94.5 million in the nine month year-to-date period of 2004 compared to the same period in 2003 primarily because:

 

                  properties we owned both years generated $4.4 million of additional revenues, primarily due to additional leasing activity at our Miami, FL property, the opening of our Temecula, CA and Orlando/Millenia II, FL properties, partially offset by vacancies at our Wayne, NJ property due to Today’s Man and The Wiz bankruptcies

                  we acquired our joint venture partners’ 50% share of a property in Fresno, CA in March 2004 which generated $1.0 million of additional revenues

 

Expenses

 

 

 

Amount (000’s)

 

Change
(000’s)

 

Percent
Change

 

 3rd Quarter 2004

 

$

15,182

 

$

(4,105

)

-21

%

 3rd Quarter 2003

 

19,287

 

 

 

 

 

 

 

 

 

 

 

 

 

Year-to-Date 2004

 

47,587

 

(2,968

)

-6

%

Year-to-Date 2003

 

50,555

 

 

 

 

 

 

Expenses decreased $4.1 million to $15.2 million in the third quarter of 2004 compared to 2003 primarily because:

 

                  general and administrative expenses decreased by $4.2 million primarily due to a $4.0 million lawsuit settlement recorded in the prior year

                  we recovered $0.6 million of amounts written off in the prior year related to final settlement of the Kmart bankruptcy

                  these decreases to expenses were partially offset by

                  expenses from properties we owned in both years increased $0.5 million

                  an increase in expenses of $0.2 million due to the acquisition of our joint venture partners’ 50% share of a property in Fresno, CA

 

Expenses decreased $3.0 million to $47.6 million for the nine month year-to-date period of 2004 compared to 2003 primarily because:

 

                  general and administrative expenses decreased $5.2 million, primarily due to a $4.0 million lawsuit settlement recorded in the prior year and also due to reduced salary and legal expenses in the current year

 

32



 

                  bad debt expense decreased by $0.8 million, primarily due to a recovery of $0.6 million of amounts written off in the prior year due to final settlement of the Kmart bankruptcy

                  these decreases to expenses were partially offset by

                  expenses from properties we owned in both years increased which $1.4 million, primarily due to additional operating expenses due to the openings of our properties in Temecula, CA and Orlando/Millenia II, FL and increased depreciation expense at our Newport, KY property

                  a provision for asset impairment of $1.2 million we recorded related to our notes receivable with the Ellman Affiliates when they exercised their right to purchase the notes

                  an increase in expenses of $0.4 million related to the acquisition of our joint venture partners’ 50% share of a property in Fresno, CA

 

Operating Income

 

 

 

Amount
(000’s)

 

Change
(000’s)

 

Percent
Change

 

3rd Quarter 2004

 

$

16,967

 

$

6,968

 

70

%

3rd Quarter 2003

 

9,999

 

 

 

 

 

 

 

 

 

 

 

 

 

Year-to-Date 2004

 

46,896

 

8,277

 

21

%

Year-to-Date 2003

 

38,619

 

 

 

 

 

 

Operating income increased for the third quarter and year-to-date periods of 2004 compared to the same periods in the prior year primarily because of the changes in Rental Revenues and Expenses discussed above.

 

Interest Expense

 

 

 

Amount
(000’s)

 

Change
(000’s)

 

Percent
Change

 

3rd Quarter 2004

 

$

6,849

 

$

417

 

6

%

3rd Quarter 2003

 

6,432

 

 

 

 

 

 

 

 

 

 

 

 

 

Year-to-Date 2004

 

20,815

 

1,403

 

7

%

Year-to-Date 2003

 

19,412

 

 

 

 

 

 

Interest expense increased $0.4 million in the third quarter of 2004 compared to 2003 primarily due to the increase in interest rates.  The weighted average interest rate on our variable rate debt increased to 3.3% on September 30, 2004 from 2.8% on September 30, 2003.

 

Interest expense increased $1.4 million for the nine month year-to-date period compared to the prior year because our average debt outstanding for 2004 was $560.3 million compared to $557.8 million for the same period of 2003.  Also, the increase in interest expense was due to the increase in variable interest rates as noted above.

 

We discuss our outstanding debt further in “Liquidity and Capital Resources” located elsewhere in this Form 10-Q.

 

33



 

 

Interest and Other Income

 

 

 

Amount
(000’s)

 

Change
(000’s)

 

Percent
Change

 

3rd Quarter 2004

 

$

3,055

 

$

2,974

 

3,672

%

3rd Quarter 2003

 

81

 

 

 

 

 

 

 

 

 

 

 

 

 

Year-to-Date 2004

 

3,163

 

2,157

 

214

%

Year-to-Date 2003

 

1,006

 

 

 

 

 

 

Interest and other income increased $3.0 million in the third quarter of 2004 compared to 2003 primarily because:

 

                  we recognized other income of $2.6 million related to the Kmart stock received as part of the bankruptcy settlement

                  we earned $0.3 million on our investment in Newport bonds

 

Interest and other income increased $2.2 million in the nine month year-to-date period of 2004 compared to 2003 primarily because:

 

                  we recognized other income of $2.6 million related to the Kmart stock received as part of the bankruptcy settlement

                  we earned $0.3 million on our investment in Newport bonds

                  these increases to interest and other income were partially offset by:

                  interest earned on notes receivable outstanding with other real estate developers decreased $0.8 million.  These notes are no longer outstanding

 

Discontinued Operations

 

We report discontinued operations for our properties in Anaheim, CA, Farmington, UT, Tucson/Marana, AZ, and Tusayan, AZ which are classified as held for sale.  We also report discontinued operations for our properties in San Diego/Rancho Bernardo, CA, San Diego, CA, Hampton, VA, and Phoenix/One North First Street, AZ which were sold in 2004.  Also included in the 2003 Consolidated Statements of Operations are the discontinued operations of our properties at Scottsdale, AZ, Inglewood, CA, New Britain, CT, and Northridge, CA which were sold in 2003.

 

During the first nine months of 2004, we sold the following properties and recognized a net gain of $2.3 million.  This gain is recorded as discontinued operations in the Consolidated Statement of Operations in accordance with Statement of Financial Accounting Standards No. 144.

 

Location

 

Description

 

Date
Sold

 

Sales Price
(000’s)

 

Hampton, VA

 

Retail Building/Bank

 

4/1/04

 

$

4,850

 

San Diego/Rancho Bernardo, CA

 

Office Building

 

5/12/04

 

14,655

 

Tucson/Marana, AZ

 

Land

 

6/16/04

 

408

 

San Diego/Morena, CA

 

Office Building

 

6/28/04

 

4,125

 

Farmington, UT

 

Land

 

8/11/04

 

3,078

 

Phoenix/One North First Street, AZ

 

Office Building

 

9/30/04

 

5,900

 

 

34



 

During the first nine months of 2003, we sold the following properties and recognized a net loss of $2.4 million.  This loss is recorded as discontinued operations in the Consolidated Statement of Operations in accordance with Statement of Financial Accounting Standards No. 144.

 

Location

 

Description

 

Date
Sold

 

Sales Price
(000’s)

 

Scottsdale, AZ

 

Land, Restaurant

 

3/31/03

 

$

3,000

 

Inglewood, CA

 

Warehouse Building

 

4/29/03

 

4,000

 

New Britain, CT

 

Warehouse Building

 

5/15/03

 

3,529

 

Northridge, CA

 

Shopping Center

 

6/27/03

 

5,850

 

Tucson/Marana, AZ

 

Land

 

8/22/03

 

416

 

 

During the third quarter of 2004, we recognized an impairment loss of $3.7 million on our hospitality property at Tusayan, AZ.  The loss was determined based on a contract price to sell the property entered into during the third quarter of 2004.  The property was sold on October 22, 2004 for the contract price of $9.5 million.  Also during the third quarter of 2004, we recognized an impairment loss of $6.6 million on our Anaheim, CA property.  The loss was determined based on revised information as we continue to market the property for sale.  As both properties are classified as held for sale, these losses are recorded as discontinued operations in the Consolidated Statement of Operations in accordance with Statement of Financial Accounting Standards No. 144.

 

Gain/Loss on Sale of Real Estate and Investments

 

During the first nine months of 2004, we disposed of a joint venture investment, sold our investment in Mace stock, sold a parcel of land at our property in Tempe, AZ and sold our joint venture investment which owned land in Orlando, FL.   We recognized a net gain of $12.7 million on the sale of these investments.

 

During the first nine months of 2003, we received payment on the notes receivable related to the sale of our development self storage properties and recognized additional gains on the sales of $0.7 million.  We also disposed of a joint venture investment and recognized a loss on the disposal of $0.8 million.

 

35



 

 

Funds From Operations (amounts in thousands)

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2004

 

2003

 

2004

 

2003

 

Net income

 

$

3,329

 

$

3,628

 

$

34,859

 

$

20,161

 

Depreciation and amortization

 

5,525

 

5,051

 

16,436

 

14,379

 

Depreciation and amortization of discontinued operations

 

127

 

375

 

407

 

1,305

 

Price Legacy’s share of joint venture depreciation

 

113

 

629

 

139

 

1,146

 

Depreciation of non-real estate assets

 

(32

)

(16

)

(106

)

(78

)

Net (gain) loss on sale of discontinued operations

 

(80

)

(153

)

(2,274

)

2,368

 

Net (gain) loss on sale of real estate and investments

 

(123

)

824

 

(12,744

)

137

 

FFO before preferred dividends

 

8,859

 

10,338

 

36,717

 

39,418

 

Preferred dividends

 

(3,036

)

(12,486

)

(17,736

)

(37,270

)

Preferred stock conversion and redemption

 

(2,136

)

 

(76,370

)

 

FFO

 

$

3,687

 

$

(2,148

)

$

(57,389

)

$

2,148

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

Operating activities

 

$

24,669

 

$

17,744

 

$

49,206

 

$

39,853

 

Investing activities

 

39,165

 

(7,970

)

87,702

 

(7,482

)

Financing activities

 

(38,300

)

(15,672

)

(89,779

)

(32,031

)

Significant non-cash items:

 

 

 

 

 

 

 

 

 

Provision for asset impairment

 

10,270