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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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

For the quarter ended June 30, 2002

Commission File Number 0-20449

PRICE LEGACY CORPORATION
(Exact name of registrant as specified in its charter)

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

        The registrant had 40,726,675 shares of common stock, par value $.0001 per share, outstanding at August 9, 2002.

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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		4
		CONSOLIDATED STATEMENTS OF CASH FLOWS		5
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		6
	ITEM 2—MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			21
	ITEM 3—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			31
PART II—OTHER INFORMATION				33
	ITEM 1—LEGAL PROCEEDINGS			33
	ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			33
	ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K			34

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PART I—FINANCIAL INFORMATION

ITEM 1—FINANCIAL STATEMENTS

PRICE LEGACY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

				June 30 2002			December 31 2001
				(unaudited)
ASSETS
Real estate assets
	Land and land improvements			$	422,295		$	419,151
	Building and improvements				650,905			618,222
	Construction in progress				20,501			27,471
					1,093,701			1,064,844
	Less accumulated depreciation				(26,672	)		(19,420	)
					1,067,029			1,045,424
Investment in real estate joint ventures					25,957			24,828
Cash and cash equivalents					16,728			28,042
Accounts receivable, net of allowance of $1,757 and $1,680					3,297			2,706
Notes receivable					63,044			55,167
Deferred rents					8,758			6,427
Other assets					34,144			30,800
		Total assets		$	1,218,957		$	1,193,394
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
	Mortgages and notes payable			$	452,571		$	452,523
	Revolving line of credit				54,400			31,500
	Accounts payable and other liabilities				26,333			19,006
		Total liabilities			533,304			503,029
Commitments
Minority interests					595			595
Stockholders' equity
	Series A preferred stock, cumulative, redeemable, $0.0001 par value, 27,849,771 shares authorized, 27,434,166 and 27,413,467 shares issued and outstanding				399,615			399,615
	Series B preferred stock, junior, convertible, redeemable, $0.0001 par value, 27,458,855 shares authorized, 19,666,754 shares issued and outstanding				106,234			106,234
	Common stock, $0.0001 par value, 94,691,374 shares authorized, 40,726,675 and 40,726,191 issued and outstanding				4			4
	Additional paid-in capital				196,020			195,712
	Accumulated other comprehensive loss				(123	)		(106	)
	Accumulated deficit				(7,327	)		(2,324	)
	Notes receivable from officers for common shares				(9,365	)		(9,365	)
		Total stockholders' equity			685,058			689,770
	Total liabilities and stockholders' equity			$	1,218,957		$	1,193,394

See accompanying notes.

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PRICE LEGACY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited—amounts in thousands, except per share data)

				Second Quarter Three Months Ended June 30						Year-to-Date Six Months Ended June 30
				2002			2001			2002			2001
Rental revenues				$	32,151		$	18,633		$	60,985		$	35,903
Expenses
	Operating and maintenance				5,141			2,501			10,134			4,752
	Property taxes				3,316			2,193			6,488			4,298
	Depreciation and amortization				4,237			2,224			8,576			4,364
	General and administrative				1,652			823			4,457			1,690
	Provision for asset impairment				2,528			—			2,528			—
		Total expenses			16,874			7,741			32,183			15,104
Operating income					15,277			10,892			28,802			20,799
Interest and other
	Interest expense				(5,841	)		(3,532	)		(12,278	)		(6,930	)
	Interest income				1,119			1,796			2,388			3,643
	Equity in earnings of joint ventures				136			204			314			342
		Total interest and other			(4,586	)		(1,532	)		(9,576	)		(2,945	)
Income before gain on sale of real estate					10,691			9,360			19,226			17,854
	Net gain on sale of real estate				3			1,250			291			1,159
Income before discontinued operations					10,694			10,610			19,517			19,013
Discontinued operations:
	Income from operations				293			352			632			688
	Loss on sale of real estate				(843	)		—			(843	)		—
					(550	)		352			(211	)		688
Net income					10,144			10,962			19,306			19,701
Dividends to preferred stockholders					(12,183	)		(8,386	)		(24,308	)		(16,744	)
Net (loss) income applicable to common stockholders				$	(2,039	)	$	2,576		$	(5,002	)	$	2,957
Basic and diluted net (loss) income per common share				$	(.05	)	$	.19		$	(.12	)	$	.22
Weighted average common shares outstanding
	Basic and diluted				40,727			13,309			40,727			13,309
Dividends per preferred share				$	.35		$	.35		$	.70		$	.70

See accompanying notes.

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PRICE LEGACY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited—amounts in thousands)

					Year-to-Date Six Months Ended June 30
					2002			2001
Operating activities
Net income					$	19,306		$	19,701
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				8,748			4,536
		Deferred rents				(2,331	)		(1,203	)
		Provision for asset impairment				2,528			—
		Equity in earnings of joint venture				(314	)		(342	)
		Net loss (gain) on sale of real estate				552			(1,159	)
	Changes in operating assets and liabilities:
		Accounts receivable and other assets				(2,524	)		(2,968	)
		Accounts payable and other liabilities				(2,177	)		358
	Net cash provided by operating activities					23,788			18,923
Investing activities
		Additions to real estate assets				(72,399	)		(53,230	)
		Proceeds from the sale of real estate assets				17,740			6,302
		Contributions to real estate joint ventures				(850	)		(2,353	)
		Distributions from real estate joint ventures				280			—
		Advances on notes receivable				(1,578	)		(18,769	)
		Repayments on notes receivable				3,283			3,040
	Net cash used in investing activities					(53,524	)		(65,010	)
Financing activities
		Advances from revolving line of credit and notes payable				63,213			24,614
		Repayments of revolving line of credit and notes payable				(25,890	)		(3,307	)
		Dividends paid				(19,204	)		(16,744	)
		Proceeds from exercise of stock options				303			2,831
	Net cash provided by financing activities					18,422			7,394
			Net decrease in cash and cash equivalents			(11,314	)		(38,693	)
Cash and cash equivalents at beginning of period						28,042			51,437
Cash and cash equivalents at end of period					$	16,728		$	12,744
Supplemental cash flow information:
		Cash paid for interest			$	13,054		$	6,360
Supplemental schedule of noncash investing and financing activities:
		Assumption of loans to acquire real estate assets				5,787			35,497
		Accrual of Series B Preferred dividends				5,105			—
		Reduction in note receivable to acquire real estate assets				3,543			—
		Change in other assets and accounts payable for fair value of derivative instruments				3,465
		Net adjustment related to disposed real estate asset				733
		Reduction in note receivable to acquire interest in real estate joint venture				—			919

See accompanying notes.

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PRICE LEGACY CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

June 30, 2002

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. 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 combined company operates as a REIT under the name Price Legacy Corporation. 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 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) can be omitted. Certain prior year data have been reclassified to conform to the 2002 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. You should also read the financial statements and notes 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 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 June 30, 2002 and December 31, 2001 reflect the new basis of those real estate assets. See Note 2 for additional information on this transaction.

        We expense ordinary repairs and maintenance costs incurred, 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.

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        We compute real estate asset depreciation on a straight-line basis over their estimated useful lives, as follows:

        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):

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.

        Our cash balances at June 30, 2002 and December 31, 2001 include $0.2 million and $1.5 million of restricted funds, respectively, which represent proceeds from the financing of a construction project. The funds are held in trust and released as work is completed.

        We are required to maintain reserves with certain lenders for capital expenditures, insurance, real estate taxes and debt service. As of June 30, 2002 and December 31, 2001, the aggregate amount of these reserves held by lenders is $10.3 million and $5.2 million, respectively, and is included with cash on the Consolidated Balance Sheets.

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:

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duration and extent, as well as reasons for which the market value has been less than cost



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financial condition and near-term prospects of the investee, which includes consideration of proposed transactions known through Board of Directors participation



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our ability and intent to retain the investment for a period of time to allow for a recovery in market value.

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        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 the charge is recorded in earnings.

        Included in other assets on our consolidated balance sheets is an investment in Millennia Car Wash, LLC (Millennia) which owns approximately 3.8 million shares of common stock, and 62,500 common stock purchase warrants of Mace Security International (MACE) and 250,000 common shares of US Plastic Lumber Corporation (USPL). 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 June 30, 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.

Comprehensive Income

        In 1999, we adopted Statement of Financial Accounting Standard (SFAS) No. 130 "Reporting Comprehensive Income." This statement requires that all components of comprehensive income be reported in the financial statements in the period in which they are recognized. The components of comprehensive income at June 30, 2002 are as follows:

Use of Estimates

        Preparing financial statements in conformity with GAAP requires that we 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 what we envisioned when we made these estimates.

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.

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Because of the high degree of effectiveness 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 instrument, 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 quarter and year-to-date periods ended June 30, 2002 and 2001.

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 rescinds SFAS No. 4, "Reporting Gains and Losses From Extinguishment of Debt", SFAS No. 44, Accounting for Intangible Assets of Motor Carriers", and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." 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 extinguishment of debt as extraordinary items only if they met the criteria of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations." The rescission of SFAS No. 4 is effective January 1, 2003. The amendment of SFAS No. 13 is effective for transactions occurring on or after May 15, 2002. 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 financial statements.

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Note 2—Merger and Significant Event

        On March 21, 2001, PEI, PEI Merger Sub, Inc., a 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 0.6667 shares of PEI common stock. Following the Merger, PEI continues to operate as a REIT under the name Price Legacy Corporation. The Merger was structured to qualify as a tax-free reorganization and was approved by the stockholders of both PEI and Excel Legacy. The results of Excel Legacy are included in operations beginning September 19, 2001.

        The purchase price 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 resulted in an increase in the book value of the Excel Legacy assets acquired of approximately $26.0 million, which was 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

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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)



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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

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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.

        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 closed concurrently with the Merger.

        The exchange of Excel Legacy common stock for Price Legacy common stock in connection with the Merger was accounted for as a purchase of Excel Legacy by Price Legacy. Under purchase accounting, the assets and liabilities of Excel Legacy have been adjusted to fair value.

        The following unaudited pro forma information for the three months and year-to-date period ended June 30, 2001 and unaudited actual results for the three months and year-to-date period ended June 30, 2002, have been presented as if the Merger had been completed on January 1, 2001. 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 (amounts in thousands, except per share data):

			Three Months Ended June 30						Six Months Ended June 30
			2002			2001			2002			2001
			(actual)			(pro forma)			(actual)			(pro forma)
Total revenue			$	32,151		$	24,394		$	60,985		$	44,240
Net income				10,144			11,714			19,306			19,998
Preferred dividends				(12,183	)		(11,988	)		(24,308	)		(23,949	)
Net income (loss) applicable to common stockholders			$	(2,039	)	$	(274	)	$	(5,002	)	$	(3,951	)
Weighted average shared outstanding
	Basic and diluted			40,727			40,726			40,727			40,726
Loss per common share
	Basic and diluted			(.05	)		(.01	)		(.12	)		(.10	)

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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 common stock equivalents. Common stock equivalents are shares assumed to be issued if outstanding stock options and warrants that are dilutive were exercised. All earnings per share amounts have been presented, and where appropriate, restated to reflect these calculations. We did not have any common stock equivalents during the periods presented. There are 19,666,754 shares of Series B Preferred Stock outstanding and 1,424,422 shares payable as a dividend at June 30, 2002, which may be exchanged on a one-to-one basis into common stock, subject to adjustment, after September 18, 2003 if certain events occur.

Note 4—Real Estate Assets

Acquisitions

        During the first six months of 2002, we acquired the following properties:

Location		Description		Date Acquired		Purchase Price (000's)			Mortgage Assumed (000's)
Ocala, FL		Shopping Center		5/3/02		$	7,163		$	—
Fort Lauderdale, FL		Pad		6/4/02			700			—
Phoenix, AZ		Shopping Center		6/6/02			9,816			5,787
Columbia, SC		Shopping Center		6/7/02			8,035			—
Greenville, SC		Shopping Center		6/28/02			29,500			—

        We funded these acquisitions using proceeds from tax-deferred exchange transactions on properties we sold in 2001 and 2002, by borrowing on our unsecured line of credit, and assuming a mortgage.

        During the first six months of 2001, we acquired the following properties:

Location		Description		Date Acquired		Purchase Price (000's)			Mortgage Assumed (000's)
Walnut Creek, CA		Land		1/4/01		$	2,816		$	—
Anaheim, CA		Land		1/29/01			23,288			—
Tempe, AZ		Shopping Center		5/18/01			23,914			14,137
Mesa, AZ		Shopping Center		5/18/01			31,367			21,360
Greensburg, IN (1)		Shopping Center		6/28/01			19,300			18,300

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(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.

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Dispositions

        During the first six months of 2002, we sold the following properties for a net loss of $0.6 million:

Location		Description		Sold Date		Sales Price (000's)
Hollywood, FL		Land		1/31/02		$	1,410
Tucson/Marana, AZ		Land		1/31/02			684
Hollywood, FL		Land		4/19/02			1,028
San Diego/Pacific Beach, CA (1)		Self Storage Development		6/1/02			11,632
Walnut Creek, CA (1)		Self Storage Development		6/1/02			7,708
San Juan Capistrano, CA (1)		Self Storage Development		6/1/02			6,918
Glen Burnie, MD		Shopping Center		6/21/02			15,200

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(1)

Our equity in the development was exchanged for notes receivable with a participating interest

        During the first six months of 2001, we sold the following properties for a net gain of $1.2 million:

Location		Description		Sold Date		Sales Price (000's)
Aurora, CO		Retail Building		1/11/01		$	1,592
Sacramento/Bradshaw, CA		Office Building		6/1/01			5,125

        We used the proceeds from the sale of properties to purchase additional properties in tax-deferred exchange transactions.

Destination Villages LLC

        We own a 55% interest in Destination Villages LLC. Destination Villages, LLC owns a Bermuda limited liability company that 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 $6.0 million loan with a Bermuda bank. In March 2002, we informed the Bermuda bank that we did not intend to reopen 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. There was no impact on operating results for the quarter ended June 30, 2002 from this event. We no longer have involvement in the operations of Daniel's Head.

Note 5—Provision for Asset Impairment

        We record real estate assets at historical costs and adjust them for recognition of impairment losses. During the second quarter ended June 30, 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.

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Note 6—Discontinued Operations

        Included in the Consolidated Statements of Operations are the discontinued operations of our property at Glen Burnie, MD, which was sold on June 21, 2002 and is summarized as follows (amounts in thousands):

			Second Quarter Three Months Ended June 30						Year-to-Date Six Months Ended June 30
			2002			2001			2002			2001
Rental revenue			$	459		$	514		$	998		$	1,024
Expenses
	Operating and maintenance			45			40			118			93
	Property taxes			35			36			76			71
	Depreciation and amortization			86			86			172			172
				166			162			366			336
Operating income				293			352			632			688
Loss on sale of real estate				(843	)		—			(843	)		—
Net income			$	(550	)	$	352		$	(211	)	$	688

Note 7—Investments in Unconsolidated Real Estate Joint Ventures

        As of June 30, 2002 and December 31, 2001, we had the following investments in unconsolidated joint ventures, which we account for under the equity method of accounting (amounts in thousands):

Joint Venture			Ownership %		June 30 2002			December 31 2001
Orlando Business Park LLC			50%		$	16,000		$	16,000
Old Mill District Shops, LLC			50%			4,352			3,340
3017977 Nova Scotia Company			55%			3,135			2,822
Blackstone Ventures I			50%			2,193			2,288
Other			Various			277			378
	Total				$	25,957		$	24,828

        Cash distributions and profits are typically allocated based on the above ownership percentages, adjusted for certain preferred returns for capital contributions which are made in excess of each partners' 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.

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        Summarized unaudited financial information for the joint ventures is as follows (amounts in thousands):

		Total Assets						Debt						Total Equity
As of (Unaudited)		June 30 2002			December 31 2001			June 30 2002			December 31 2001			June 30 2002			December 31 2001
Orlando Business Park LLC (1)		$	26,270		$	26,069		$	10,651		$	10,136		$	15,570		$	15,879
Old Mill District Shops, LLC			24,705			23,300			17,652			17,243			6,955			5,976
3017977 Nova Scotia Company (1)			6,615			6,775			5,383			5,499			1,144			1,115
Blackstone Ventures I			10,481			11,075			8,094			8,153			2,180			2,721
Other (1)			277			378			—			—			277			378
		$	68,348		$	67,597		$	41,780		$	41,031		$	26,126		$	26,069

														Company's Share of Net Income (Loss)
		Total Revenues						Net Income (Loss)
Quarter ended June 30 (Unaudited)
		2002			2001			2002			2001			2002			2001
Orlando Business Park LLC (1)		$	—		$	N/A		$	—		$	N/A		$	—		$	N/A
Old Mill District Shops, LLC			805			131			211			(103	)		114			(42	)
3017977 Nova Scotia Company (1)			372			N/A			(15	)		N/A			(3	)		N/A
Blackstone Ventures I			322			372			50			19			25			71
Other (1)			—			N/A			—			N/A			—			N/A
Westcol Center, LLC (2)			N/A			1,151			N/A			351			N/A			175
		$	1,499		$	1,654		$	246		$	267		$	136		$	204

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1)

Joint ventures acquired from Excel Legacy in the Merger.

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.

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Note 8—Notes Receivable

        We have $50.7 million in notes receivable outstanding at June 30, 2002 related to various projects. The notes bear interest ranging from 10% to 15% per year and are collateralized by the related projects or other real estate. Of these notes, $47.1 million involve entities controlled by one individual. Repayment of the notes is anticipated to occur from the completion of various development projects or other events. The largest note is for approximately $22.8 million related to a development project in Scottsdale, AZ. The remaining notes are each less than $10.0 million. The notes do not require cash payments on the interest until specified future dates, typically when the projects are completed or sold. The notes mature on various dates between 2002 and the earlier of the sale of the related projects, or 2003 to 2004.

        We also have $12.3 million in notes receivable related to the sale of our self storage development properties. These notes bear interest at 12% per year and are due May 31, 2003 or earlier, depending on stabilization of the properties.

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Note 9—Debt

Mortgages and Notes Payable

        We had the following mortgages and notes payable outstanding at June 30, 2002 and December 31, 2001 (amounts in thousands):

		June 30 2002			December 31 2001
Mortgages on five properties in Florida bearing fixed rates of interest ranging from 8.18% to 9.00%. The loans are collateralized by the properties and mature February 2009 and January 2010		$	160,831		$	161,517
Mortgage payable bearing interest at LIBOR plus 98 basis points (2.82% at June 30, 2002). The mortgage is collateralized by five of our properties and matures June 2004			121,375			121,375
Mortgages and notes payable on eight properties bearing interest ranging from 3.93% to 9.00%. The loans are collateralized by the properties and mature on various dates between September 2002 and February 2017			62,110			62,928
Revolving $100.0 million credit facility bearing interest at LIBOR plus 150 to 185 basis points (3.34% at June 30, 2002), maturing September 2004			54,400			31,500
Construction loan outstanding on a $46.0 million facility bearing interest at LIBOR plus 310 basis points (4.94% at June 30, 2002). The loan is due October 2002 and collateralized by a retail center in Newport, KY (see below)			37,019			26,706
Mortgage on a property in Orlando, FL bearing interest at LIBOR plus 225 basis points (4.09% at June 30, 2002). The loan is collateralized by the property and matures April 2003			21,945			21,675
Capital lease arrangement with an individual in conjunction with the Greensburg, IN shopping center. The capital lease has an effective interest rate of 7.36% and matures June 2005			19,300			18,300
Capital lease arrangement with an individual in conjunction with the San Diego/Rancho Bernardo, CA office building. The capital lease has an effective interest rate of 4.43% and matures in December 2004			11,612			11,572
Note payable collateralized by IMAX equipment, without recourse, no interest. The note is due on demand			5,451			5,451
Convertible Debentures and Senior Notes (see below)			5,091			5,095
Note payable outstanding on a $4.7 million facility related to Newport, KY (see below), bearing interest at Prime plus 50 basis points (5.25% at June 30, 2002), due March 2003			4,737			4,737
Capital lease arrangement with an individual in conjunction with the Scottsdale, AZ office building. The capital lease has an effective interest rate of 4.02% and matures in June 2004			3,100			—
Construction loans payable to a bank bearing interest at a 90-day LIBOR rate plus 275 basis points. The developments were sold and the loans were assumed by a third party in May 2002, but we remain a guarantor on the loans			—			7,167
Note payable to an individual bearing interest at 12.50%, repaid April 2002			—			6,000
Total		$	506,971		$	484,023

        We have a 69% interest in Newport on the Levee, LLC (Newport) that is developing a retail project in Newport, KY. In addition to the $37.0 million, $4.7 million and $5.5 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

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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 $43.1 million of the bonds at June 30, 2002.

        Summarized debt information for our unconsolidated joint ventures and the amount guaranteed by us at June 30, 2002 is as follows:

        We also have guaranteed an $12.5 million note payable related to a development project in Scottsdale, AZ in which we have a $22.8 million note receivable with a participating interest.

        In connection with the sale of three self storage development properties in June 2002, we agreed to guarantee $14.2 million of debt the buyer assumed associated with the properties until April 2003, when the debt matures.

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. The debentures bear an interest rate of 9% per year and mature in November 2004. The holders of the debentures are entitled at any time before the day prior to the final maturity date, subject to prior redemption, to convert any debentures into common stock at an $8.25 per share conversion price.

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. The notes bear an interest rate of 10% per year and mature in November 2004. The notes are senior to the debentures.

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 or financial position in the future from the use of derivatives.

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        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 convert a portion of our fixed-rate debt to variable-rate debt. Interest rate differentials that arise under the swap contracts are recognized in interest expense over the life of the contracts.

        We may also use derivative instruments to protect the fair value of existing or anticipated floating-rate debt. We may employ Treasury locks, forward-starting swaps, swaptions, and interest rate swaps to this end. Such derivatives, when entered into, must be expected to effectively hedge the risks they are intended to mitigate. As of June 30, 2002, we had five amortizing swaps with approximately $161 million current notional amount protecting the fair value of approximately $161 million fixed-rate debt from changes in value attributable to interest rate movement.

        The following table summarizes the notional values and fair values of our derivative financial instruments. The notional value at June 30, 2002 provides an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate, or market risk. The fixed rates shown below include spreads of 3.08% for the swaps maturing in 2009 and 3.77% for the swap maturing in 2010.

At June 30, 2002
Hedge Type		Current Notional Value ($000's)			Fixed Rate		Maturity		Fair Value ($000's)
Swap—Fair Value		$	66,383		8.180	%	2/1/2009		$	1,415
Swap—Fair Value			32,203		9.000	%	1/4/2010			723
Swap—Fair Value			28,856		8.180	%	2/1/2009			615
Swap—Fair Value			23,247		8.180	%	2/1/2009			495
Swap—Fair Value			10,142		8.180	%	2/1/2009			216

        On June 30, 2002, the derivative instruments were reported at their fair value as Other Assets of $3.5 million.

        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.

Note 11—Related Party Transactions

        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 our historical costs for similar expenses. We expensed $0.8 million for these services during the second quarter of 2001 and $1.7 million for the six month year-to-date period of 2001.

        Prior to the Merger, we executed a note receivable with Excel Legacy allowing them to borrow up to $40.0 million. During the second quarter of 2001 we recorded $1.1 million in interest income on this note, and $2.0 million for the six month year-to-date period of 2001. As a result of the Merger, interest income is no longer recorded on this note.

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        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 $0.3 million of rental revenue from Excel Legacy in connection with this lease during the second quarter of 2001, and $0.5 million for the six months year-to-date period of 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 the second quarter of 2001, we recorded $0.7 million in rental revenue from Excel Legacy related to this lease, and $1.2 million for the six month year-to-date period of 2001. Due to the Merger, rental revenue is no longer recorded on this lease.

        In connection with the Merger, we acquired notes receivable from certain officers and affiliates of Excel Legacy, of which $9.4 million was outstanding at June 30, 2002. The notes bear interest at a fixed rate of 7%, and are due in March 2003. The total interest receivable at June 30, 2002 from these notes was $2.9 million. The notes were for the purchase of Excel Legacy common stock and have been offset against stockholders' equity on our accompanying Consolidated Balance Sheets.

        We discuss other related party transactions in Note 2.

Note 12—Subsequent Events

        In July 2002, we acquired the following interest rate cap agreements that limit the one-month LIBOR index associated with certain of our outstanding debt at 7%:

Trade Date		Notional Amount			Effective Date		Maturity Date		Price			Counter Party
7/12/02		$	32.0 million		7/1/04		1/1/10		$	899,000		Fleet Bank
7/22/02		$	40.0 million		7/1/04		2/1/09			816,000		Wells Fargo Bank
7/22/02		$	40.0 million		7/1/04		2/1/09			830,000		Fleet Bank
7/23/02		$	40.0 million		7/1/04		2/1/09			808,000		Fleet Bank

        To the extent the one-month LIBOR index exceeds 7% the counter parties on the above instruments will pay us the difference between the actual index and 7%. These instruments are accounted for under SFAS 133. Both the instrument and hedged debts will be adjusted on the Consolidated Balance Sheets.

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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 financial stability of our tenants, including our reliance on major tenants

•

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

•

our ability to achieve the expected benefits of our merger with Excel Legacy Corporation

•

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

        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 2001 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. You are advised, however, to consult any further disclosures we make on related subjects in our reports on Forms 10-K, 10-Q and 8-K filed with the SEC. Our Form 10-K filing for the 2001 fiscal year listed various important factors that could cause actual results to differ materially from expected and historic results.

        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

•

funds from operations (FFO)

•

how we used cash for capital projects and dividends and how we expect to use cash in the remainder of 2002

•

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

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

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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 our Annual Report on Form 10-K for the 2001 fiscal year.

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 June 30, 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 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.

        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.

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Derivative Instruments and Hedging Activities

        As we stated in Note 1, 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 effectiveness 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.

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 quarter and six month period ended June 30, 2002.

Rental Revenues

        Revenues increased $13.5 million to $32.2 million in the second quarter of 2002 compared to the same period in 2001 primarily because:

•

properties we acquired during 2001 and 2002 generated $12.0 million of additional revenues

•

properties we owned both years generated $2.4 million of additional revenues, mainly due to a $2.3 million termination fee received in the second quarter of 2002

•

partially offsetting these increases were:

•

revenues from properties we sold, which contributed $0.8 million of revenues in 2001

•

revenues associated with the self storage facilities, which decreased $0.1 million due to the master lease of our self storage business. In May 2001, we began collecting rent net of expenses when we entered into a master lease arrangement on these properties

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        Revenues increased $25.1 million to $61.0 million in the six month year-to-date period of 2002 compared to the same period in 2001 primarily because:

•

properties we acquired during 2001 and 2002 generated $24.2 million of additional revenues

•

properties we owned both years generated $2.9 million of additional revenues, primarily due to a $2.3 million termination fee received in the second quarter of 2002

•

partially offsetting these increases were:

•

revenues from properties we sold, which contributed $1.8 million of revenues in 2001

•

revenues associated with the self storage facilities, which decreased $0.2 million due to the master lease agreement

Expenses

        Expenses increased $9.1 million to $16.9 million in the second quarter of 2002 compared to 2001 primarily because:

•

expenses on properties we acquired in 2001 and 2002 generated $6.5 million of additional expenses

•

we recognized an impairment loss of $2.5 million on one of our properties in the second quarter of 2002. The loss was based on the assessed fair value of the property

•

general and administrative expense increased $0.8 million, primarily due to additional salaries and benefits. Prior to the Merger, these expenses were paid by Excel Legacy and we reimbursed them for those services based on our historical costs for similar expenses

•

expenses from properties we owned in both years increased by $0.1 million

•

these increases to expenses were partially offset by:

•

a decrease in expenses of $0.5 million related to the master lease agreement for our self storage facilities as noted above

•

expenses from properties we sold, which contributed $0.3 million to expenses in the second quarter of 2001

        Expenses increased $17.1 million to $32.2 million for the year-to-date period ended June 2002 compared to 2001 primarily because:

•

expenses on properties we acquired in 2002 and 2001 generated $13.2 million of additional expenses

•

general and administrative expense increased $2.8 million, primarily due to legal fees and other costs of $1.5 million related to our investment in Destination Villages, LLC. General and administrative expenses also increased $1.1 million related to salaries and benefits

•

we recognized an impairment loss of $2.5 million on one of our properties in the second quarter of 2002, discussed above

•

expenses from properties we owned in both years increased by $0.2 million

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•

these increases to expenses were partially offset by:

•

a decrease in expenses of $1.0 million related to the master lease agreement for our self storage facilities as noted above

•

expenses from properties we sold, which contributed $0.6 million to expenses in the prior year

Operating Income

        Operating income increased for the second quarter and year-to-date periods of 2002 compared to the same periods in the prior year primarily because of the changes in Rental Revenues and Expenses discussed above.

Interest Expense

        Interest expense increased $2.3 million in the second quarter of 2002 and $5.3 million for the year-to-date period compared to 2001 because during the second quarter of 2002 we had an average of $494.4 million debt outstanding compared to $233.4 million in the second quarter of 2001. 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 and by the use of interest rate swap agreements which exchange rates on some of our fixed rate debt for lower variable rates.

        The weighted average interest rate on our variable rate debt decreased to 3.5% on June 30, 2002 from 5.5% on June 30, 2001. We discuss our outstanding debt further in "Liquidity and Capital Resources" located elsewhere in this Form 10-Q.

Interest Income

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        Interest income decreased $0.7 million in the second quarter of 2002 compared to 2001 primarily because:

•

during the second quarter of 2001 we recorded $1.1 million in interest income on our note with Excel Legacy. As a result of the Merger, interest income is no longer recorded on this note

•

partially offsetting this decrease was an increase in interest income of $0.4 million from other developers' notes receivable

        Interest income decreased $1.3 million in the six month year-to-date period ended June 2002 compared to the same period in 2001 primarily because:

•

during the six months ended June 2001 we recorded $2.0 million in interest income on our note with Excel Legacy. As a result of the Merger, interest income is no longer recorded on this note

•

partially offsetting this decrease was an increase in interest income of $0.7 million from other developers' notes receivable

Gain/Loss on Sale of Real Estate

        During the first six months of 2002, we sold the following non-depreciable properties for a net gain of $0.3 million:

Also during the first six months of 2002, we sold the following operating property and recorded a net loss of $0.8 million. This loss is recorded as discontinued operations in the Consolidated Statements of Operations in accordance with SFAS No.144.

        During the first six months of 2001, we sold the following properties for a net gain of $1.2 million:

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Funds From Operations

			Three Months Ended June 30						Six Months Ended June 30
			2002			2001			2002			2001
Net income			$	10,144		$	10,962		$	19,306		$	19,701
Depreciation and amortization				4,237			2,224			8,576			4,364
Depreciation and amortization of discontinued operations				86			86			172			172
Price Legacy's share of joint venture depreciation				152			156			306			304
Depreciation of non-real estate assets				(35	)		(2	)		(68	)		(6	)
Provision for asset impairment				2,528			—			2,528			—
Gain on sale of depreciable real estate				—			(1,250	)		—			(1,159	)
Loss on sale of discontinued operations				843			—			843			—
	FFO before preferred dividends			17,955			12,176			31,663			23,376
Preferred dividends				(12,183	)		(8,386	)		(24,308	)		(16,744	)
	FFO		$	5,772		$	3,790		$	7,355		$	6,632
Net cash provided by (used in):
	Operating activities		$	13,989		$	8,674		$	23,788		$	18,293
	Investing activities			(39,510	)		(21,930	)		(53,524	)		(65,010	)
	Financing activities			11,703			(3,975	)		18,422			7,394
Significant non-cash items:
	Deferred rents		$	(1,048	)	$	(776	)	$	(2,546	)	$	(1,335	)
	Preferred dividends			2,581			—			5,104			—

        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 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 the second quarter of 2002 increased $5.8 million or 47.5% to $18.0 million compared to the second quarter of 2001 primarily because:

•

properties we acquired during 2001 and 2002 contributed an additional $7.3 million to FFO



•

properties we owned in both years contributed an additional $2.5 million to FFO, primarily due to a non-recurring lease termination fee of $2.3 million received in the second quarter of 2002



•

self storage facilities increased FFO by $0.4 million when we entered into the master lease arrangements as previously discussed



•

partially offsetting these increases are decreases to FFO for the following as discussed above:



•

increased interest expense of $2.3 million



•

increased general and administrative expense of $0.8 million



•

decreased interest income of $0.7 million

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•

properties sold, which contributed $0.6 million to FFO in the previous year

        FFO before preferred dividends during the six month year-to-date period of 2002 increased $8.3 million or 35.5% to $31.7 million compared to the second quarter of 2001 primarily because:

•

properties we acquired during 2001 and 2002 contributed an additional $15.3 million to FFO



•

properties we owned in both years contributed an additional $2.8 million to FFO, primarily due to a non-recurring lease termination fee of $2.3 million received in the second quarter of 2002



•

self storage facilities increased FFO by $0.8 million when we entered into the master lease arrangements as previously discussed



•

partially offsetting these increases are decreases to FFO for the following as discussed above:



•

increased interest expense of $5.3 million



•

increased general and administrative expense of $2.8 million



•

decreased interest income of $1.3 million



•

properties sold, which contributed $1.2 million to FFO in the previous year

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 use of our credit facilities and mortgage financing have been the principal sources of capital required to fund our growth. Concurrent with the closing of the Merger, we raised $100 million in equity financing through the sale to Warburg Pincus of 17,985,612 shares of our preferred stock and a warrant to purchase 2.5 million shares of our common stock with an exercise price of $8.25 per share. At the same time, we converted a loan payable to a trust controlled by Sol Price, one of our significant stockholders through various trusts, of approximately $9.3 million into 1,681,142 shares of our preferred stock and an additional warrant to purchase 233,679 shares of our common stock with an exercise price of $8.25 per share. 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.

        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 175 basis points. The rate may vary between 150 and 185 basis points based on our leverage and other financial ratios. At June 30, 2002, we had $54.4 million outstanding on the facility at a 3.3% interest rate.

        In February 2002, we filed a $500.0 million shelf-registration statement pursuant to which we may issue debt securities, preferred stock, depositary shares, common stock, warrants or rights. We have not issued any instruments from this shelf-registration.

        On April 12, 2002, we entered into five Interest Rate Swap Agreements with Fleet Bank that are accounted for under SFAS No. 133. The combined notional amount is approximately $161 million and the maturities range from 2009-2010. We pay interest of LIBOR plus 3.08% to 3.77% (4.92% to 5.61% based upon LIBOR rates at June 30, 2002) and Fleet Bank assumed our fixed rates of 8.18% to 9.00%. These swaps hedge the fair value of fixed-rate debt and as the swaps change in fair value, both the swaps and the hedged debt will be adjusted on the Consolidated Balance Sheets.

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        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%.

        We have $63.0 million in notes receivable at June 30, 2002. These notes are primarily due from developers and are collateralized by the related projects or other real estate. Of these notes, $47.1 million involve entities controlled by one individual. Approximately $52.1 million of these notes do not require cash payments on the interest until specified future dates, typically when the projects are completed or sold. Also included are notes receivable of $12.3 million we obtained from the buyers of our recently completed self storage development properties. These notes are payable on May 31, 2003 or earlier, depending on stabilization of the properties.

        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 to fund these acquisition and development opportunities. We anticipate obtaining construction loans to fund our development activities. During the six months ended June 30, 2002 we purchased five properties for a total of $55.2 million. We used proceeds from tax-deferred exchange transactions on properties sold in 2001 and 2002, borrowings on our unsecured line of credit, and assumed loans of $5.8 million 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 six months ended June 30, 2002 we sold three parcels of land for $3.1 million, three self storage development properties for $26.3 million, and one operating 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.

        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 present the project is approximately 70% occupied, excluding ground leases.

        We also have two significant retail development projects in which construction will continue through 2002. The Temecula, CA project is an open-air retail shopping center with Wal-Mart, Kohl's and other tenants. We estimate $16.0 million remaining to complete construction. We expect to fund the remaining cost through a construction loan. The Anaheim Garden Walk project in Anaheim, CA, located at the corner of Harbor Blvd. and Disney Way will consist of an open-air retail center and three 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 $110 million. We expect to fund construction costs through a construction loan, sales of adjacent land parcels for hotels or potential joint venture investors.

        We own a 55% interest in Destination Villages LLC. Destination Villages, LLC owns a Bermuda limited liability company that 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

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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. We no longer have involvement in the operations of Daniel's Head.

        The following table summarizes all of our long-term contractual obligations, excluding interest, to pay third parties as of June 30, 2002:

		Contractual Cash Obligations
		2002			2003			2004			2005			2006			Thereafter			Total
Mortgages and notes payable		$	50,278		$	32,988		$	207,098		$	22,596		$	4,439		$	189,572		$	506,971
Capital lease obligations			398			796			796			796			796			16,252			19,834
Total		$	50,676		$	33,784		$	207,894		$	23,392		$	5,235		$	205,824		$	526,805

        In 2002, we plan to use cash flow from operations to fund our principal payments due on mortgages and we plan to borrow on our unsecured line of credit or refinance to repay debt maturing in 2002.

Off-Balance Sheet Financing Matters

        Also related to our Newport, KY project discussed previously, the City of Newport, KY 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 June 30, 2002, Newport had drawn on $43.1 million of the bonds for construction incurred prior to that date.

        Summarized debt information for our unconsolidated joint ventures and the amount guaranteed by us at June 30, 2002 is as follows:

        We also have guaranteed a $12.5 million note payable related to a development project in Scottsdale, AZ and have a $22.8 million note receivable with a participating interest.

        In connection with the sale of three self storage development properties in June 2002, we agreed to guarantee $14.2 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.

Transactions with Related and Certain Other Parties

        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

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based on historical costs for similar expenses. We expensed $0.8 million for these services during the second quarter of 2001 and $1.7 million for the six month year-to-date period of 2001.

        Prior to the Merger, we executed a note receivable with Excel Legacy allowing them to borrow up to $40.0 million. During the second quarter of 2001 we recorded $1.1 million in interest income from Excel Legacy on this note and $2.0 million for the six month year-to-date period of 2001. 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 $0.3 million of rental revenue from Excel Legacy in connection with this lease during the second quarter of 2001, and $0.5 million for the six months year-to-date period of 2001. Due to the Merger, rental revenue is no longer recorded on this lease.

        In conjunction 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 the second quarter of 2001 we recorded $0.7 million in rental revenue from Excel Legacy related to this lease and $1.2 million for the six month year-to-date period of 2001. Due to the Merger, rental revenue is no longer recorded on this lease.

        In connection with the Merger, we acquired notes receivable from certain officers and affiliates of Excel Legacy, of which $9.4 million was outstanding at June 30, 2002. The notes bear interest at a fixed rate of 7%, and are due in March 2003. The total interest receivable at June 30, 2002 from these notes was $2.9 million. The notes have been offset against stockholders' equity on our accompanying Consolidated Balance Sheets.

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 retail leases are triple net, which means specific operating expenses and property taxes are passed through to the tenant.

ITEM 3—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 $272.4 million in variable rate debt outstanding at June 30, 2002. Based upon these year-end debt levels, a hypothetical increase in interest rates by 100 basis points would increase interest expense by approximately $2.7 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.

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        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. At June 30, 2002 the fair value of our interest rate swap agreements is approximately $3.5 million.

        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 June 30, 2002 approximated fair value.

		Expected Maturity Date (dollar amounts in thousands)
		2002			2003			2004			2005			2006			Thereafter			Total			Fair Value
Notes receivable, including notes from affiliates		$	19,027		$	38,207		$	4,375			—			—		$	1,435		$	63,044		$	63,044
Average interest rate			13	%		12	%		12	%		—			—			11	%		13	%
Mortgages and notes payable		$	50,278		$	32,988		$	207,098		$	22,596		$	4,439		$	189,572		$	506,971		$	506,971
Average interest rate			5	%		5	%		4	%		7	%		7	%		8	%		6	%

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PART II—OTHER INFORMATION

ITEM 1—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 began February 26, 2002 and 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.

        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 business.

ITEM 4—SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Our annual meeting of stockholders was held on June 13, 2002. As of the record date for the meeting, we had 40,726,191 shares of common stock, 27,413,467 shares of Series A Preferred Stock, and 19,666,754 shares of Series B Preferred Stock outstanding. The matters voted upon at our annual meeting consisted of the election of all eight of our Directors.

        Stockholders elected the Directors at our annual meeting by the following vote:

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ITEM 6—EXHIBITS AND REPORTS ON FORM 8-K

(a)		The following exhibits are included herein or incorporated by reference:
		(10.1	)	International Swap Dealers Association, Inc. Master Agreement dated as of April 12, 2002 between Fleet National Bank and Price Legacy Corporation. (Incorporated by reference to the 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)).
(b)		Reports on Form 8-K
		None

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		PRICE LEGACY CORPORATION Registrant
Date: August 12, 2002		/s/  GARY B. SABIN       Gary B. Sabin Chief Executive Officer
Date: August 12, 2002		/s/  JAMES NAKAGAWA       James Y. Nakagawa Chief Financial Officer

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QuickLinks

INDEX TO FORM 10-Q
PART I—FINANCIAL INFORMATION
PRICE LEGACY CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
PRICE LEGACY CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited—amounts in thousands, except per share data)
PRICE LEGACY CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited—amounts in thousands)
PRICE LEGACY CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 30, 2002
PART II—OTHER INFORMATION
SIGNATURES