**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

----

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the quarter ended March 31,2004**

 

**Commission File Number 0-20449**

 

**PRICE LEGACYCORPORATION**

(Exact name ofregistrant 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, Suite300, San Diego, California  92128**

(Address ofprincipal executive offices) (Zip Code)

 

**(858) 675-9400**

(Registrant’stelephone number, including area code)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. YES  ý   NO o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Exchange Act Rule12b-2).  Yes ý   No o

 

The registrant had36,615,994 shares of common stock, par value $.0004 per share, outstanding atMay 4, 2004.

 

** **

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**PRICE LEGACY CORPORATION**

 

**INDEX TO FORM 10-Q**

 
| **PART I - FINANCIAL INFORMATION**                                                                       |   |
|----------------------------------------------------------------------------------------------------------|--------|
|                                                                                                     |   |
| **ITEM 1 - FINANCIAL STATEMENTS**                                                                        |   |
|                                                                                                     |   |
| CONSOLIDATED BALANCE SHEETS                                                                              |   |
|                                                                                                     |   |
| CONSOLIDATED STATEMENTS OF OPERATIONS                                                                    |   |
|                                                                                                     |   |
| CONSOLIDATED STATEMENTS OF STOCKHOLDERS’  EQUITY                                                    |   |
|                                                                                                     |   |
| CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                    |   |
|                                                                                                     |   |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                               |   |
|                                                                                                     |   |
| **ITEM 2 - MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |   |
|                                                                                                     |   |
| **ITEM 3 - QUANTITATIVE AND QUALITATIVE  DISCLOSURES ABOUT MARKET RISK**                                 |   |
|                                                                                                     |   |
| **ITEM 4 – CONTROLS AND PROCEDURES**                                                                |   |
|                                                                                                     |   |
| **PART II - OTHER INFORMATION**                                                                          |   |
|                                                                                                     |   |
| **ITEM 1 – LEGAL PROCEEDINGS**                                                                      |   |
|                                                                                                     |   |
| **ITEM 2 – CHANGES IN SECURITIES, USE OF  PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**      |   |
|                                                                                                     |   |
| **ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS**                                   |   |
|                                                                                                     |   |
| **ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K**                                                            |   |

 

2

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**PART I - FINANCIAL INFORMATION**

#### ** **

# **ITEM 1 - FINANCIALSTATEMENTS**

# ** **

**PRICE LEGACY CORPORATION**

## ***CONSOLIDATEDBALANCE SHEETS***

**(in thousands, except share data)**

 

**ASSETS**

 
|                                                       |   | **March 31  2004** |          | **December 31  2003** |   |
|------------------------------------------------------------|--------|-------------------------|---------------|----------------------------|--------|
|                                                       |   | **(unaudited)**         |          |                       |   |
| Real estate assets                                         |   |                    | ** **    |                       |   |
| Land and land improvements                                 |   | **$**                   | **415,555**   | ** **                 | $      | 410,207 |   |
| Building and improvements                                  |   | **680,073**             | ** **    | 670,050                    |   |
| Construction in progress                                   |   | **3,030**               | ** **    | 582                        |   |
|                                                       |   | **1,098,658**           |          | 1,080,839                  |   |
| Property held for sale                                     |   | **70,461**              | ** **    | 70,988                     |   |
| Less accumulated depreciation                              |   | **(59,825**             | **)**         | (54,836                    | )      |
|                                                       |   | **1,109,294**           |          | 1,096,991                  |   |
|                                                       |   |                    | ** **    |                       |   |
| Investment in unconsolidated real estate joint ventures    |   | **—**              | ** **    | 4,113                      |   |
| Cash and cash equivalents                                  |   | **8,204**               | ** **    | 7,631                      |   |
| Restricted cash                                            |   | **13,214**              | ** **    | 11,288                     |   |
| Accounts receivable, net of allowance of $1,620 and $1,415 |   | **7,545**               | ** **    | 7,440                      |   |
| Notes receivable                                           |   | **10,311**              | ** **    | 10,311                     |   |
| Deferred rents                                             |   | **11,684**              | ** **    | 11,161                     |   |
| Other assets                                               |   | **21,850**              | ** **    | 21,953                     |   |
| Total assets                                               |   | **$**                   | **1,182,102** | ** **                 | $      | 1,170,888 |   |

** **

*See accompanying notes.*

 

3

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**LIABILITIESAND STOCKHOLDERS’ EQUITY**

 
|                                                                                                                                                                                                                                          |   | **March 31  2004** |          | **December 31  2003** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------------|----------------------------|--------|
|                                                                                                                                                                                                                                          |   | **(unaudited)**         |          |                       |   |
| Liabilities                                                                                                                                                                                                                                   |   |                    |          |                       |   |
| Mortgages and notes payable                                                                                                                                                                                                                   |   | **$**                   | **545,895**   | ** **                 | $      | 483,675 |   |
| Capital lease payable on property held for sale                                                                                                                                                                                               |   | **11,706**              | ** **    | 11,706                     |   |
| Revolving line of credit                                                                                                                                                                                                                      |   | **18,860**              | ** **    | 69,100                     |   |
|                                                                                                                                                                                                                                          |   | **576,461**             |          | 564,481                    |   |
| Accounts payable and other liabilities                                                                                                                                                                                                        |   | **30,425**              | ** **    | 29,945                     |   |
| Total liabilities                                                                                                                                                                                                                             |   | **606,886**             | ** **    | 594,426                    |   |
|                                                                                                                                                                                                                                          |   |                    | ** **    |                       |   |
| Commitments and contingencies                                                                                                                                                                                                                 |   |                    | ** **    |                       |   |
|                                                                                                                                                                                                                                          |   |                    | ** **    |                       |   |
| Minority interests                                                                                                                                                                                                                            |   | **1,608**               | ** **    | 1,608                      |   |
|                                                                                                                                                                                                                                          |   |                    | ** **    |                       |   |
| Stockholders’ equity                                                                                                                                                                                                                     |   |                    | ** **    |                       |   |
| Series A Preferred Stock, cumulative, redeemable, $0.0001 par value,  27,849,771 shares authorized, 6,491,494 and 27,434,166 shares issued and  outstanding                                                                                   |   | **94,557**              | ** **    | 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  March 31, 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,  36,283,973 issued and outstanding at  March 31, 2004; $0.0001 par value, 94,691,374 shares authorized,  8,690,414 issued and outstanding at December 31, 2003 |   | **15**                  | ** **    | 3                          |   |
| Additional paid-in capital                                                                                                                                                                                                                    |   | **641,103**             | ** **    | 176,431                    |   |
| Accumulated other comprehensive loss                                                                                                                                                                                                          |   | **(2,234**              | **)**         | (1,479                     | )      |
| Retained deficit                                                                                                                                                                                                                              |   | **(207,060**            | **)**         | (130,739                   | )      |
| Total stockholders’ equity                                                                                                                                                                                                               |   | **573,608**             | ** **    | 574,854                    |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                               |   | **$**                   | **1,182,102** | ** **                 | $      | 1,170,888 |   |

 

*See accompanying notes.*

 

4

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**PRICELEGACY CORPORATION**

## ***CONSOLIDATEDSTATEMENTS OF OPERATIONS***

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

 
|                                                                       |   | **First  Quarter  Three Months Ended  March 31** |        |
|----------------------------------------------------------------------------|--------|-------------------------------------------------------|-------------|
|                                                                       |   | **2004**                                              |        | **2003** |   |
|                                                                       |   |                                                  |        |   |   |
| Rental revenues                                                            |   | **$**                                                 | **31,987**  | ** ** | $ | 31,024 |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Expenses                                                                   |   |                                                  | ** **  |   |   |
| Operating and  maintenance                                                 |   | **5,840**                                             | ** **  | 6,008 |   |
| Property taxes                                                             |   | **4,041**                                             | ** **  | 3,669 |   |
| Depreciation and  amortization                                             |   | **5,629**                                             | ** **  | 4,157 |   |
| General and  administrative                                                |   | **1,485**                                             | ** **  | 1,984 |   |
| Total expenses                                                             |   | **16,995**                                            | ** **  | 15,818 |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Operating income                                                           |   | **14,992**                                            | ** **  | 15,206 |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Interest and  other                                                        |   |                                                  | ** **  |   |   |
| Interest expense                                                           |   | **(6,911**                                            | **)**       | (6,467 | ) |
| Interest income                                                            |   | **45**                                                | ** **  | 812 |   |
| Equity in  earnings of joint ventures                                      |   | **62**                                                | ** **  | 149 |   |
| Total interest  and other                                                  |   | **(6,804**                                            | **)**       | (5,506 | ) |
|                                                                       |   |                                                  | ** **  |   |   |
| Income from  continuing operations                                         |   | **8,188**                                             | ** **  | 9,700 |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Discontinued  operations:                                                  |   |                                                  | ** **  |   |   |
| Income from  operations                                                    |   | **161**                                               | ** **  | 209 |   |
| Net loss on sale  of real estate                                           |   | **—**                                            | ** **  | (211 | ) |
| Gain (loss) on  discontinued operations                                    |   | **161**                                               | ** **  | (2 | ) |
|                                                                       |   |                                                  | ** **  |   |   |
| Net income  before (loss) gain on sale of real estate and investments      |   | **8,349**                                             | ** **  | 9,698 |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Net (loss) gain  on sale of real estate and investments                    |   | **(44**                                               | **)**       | 691 |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Net income                                                                 |   | **$**                                                 | **8,305**   | ** ** | $ | 10,389 |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Dividends to  preferred stockholders                                       |   | **(11,814**                                           | **)**       | (12,360 | ) |
| Preferred stock  conversion                                                |   | **(72,812**                                           | **)**       | — |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Net loss  applicable to common stockholders                                |   | **$**                                                 | **(76,321** | **)** | $ | (1,971 | ) |
|                                                                       |   |                                                  | ** **  |   |   |
| Basic and  diluted net loss per common share                               |   | **$**                                                 | **(5.58**   | **)** | $ | (0.21 | ) |
|                                                                       |   |                                                  | ** **  |   |   |
| Weighted average  common shares outstanding Basic and diluted (see Note 3) |   | **13,668**                                            | ** **  | 9,257 |   |
|                                                                       |   |                                                  | ** **  |   |   |
| Cash dividends  paid per preferred share                                   |   | **$**                                                 | **.35**     | ** ** | $ | .35 |   |

 

*See accompanying notes.*

 

5

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**PRICE LEGACY CORPORATION**

## ***CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY***

** (unaudited – amounts in thousands)**

 
|                                                                                       |   | **Preferred  Stock** |       | **Preferred  Stock** |       | **Preferred  Stock** |       |              |       |
|--------------------------------------------------------------------------------------------|--------|----------------------|------------|----------------------|------------|----------------------|------------|-------------------|------------|
|                                                                                       |   | **Series A**         |       | **Series B**         |       | **Series 1**         |       | **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             |       | — |   | — |   | — |   | — |   |
| Common stock issued in legal settlement                                                    |   | —               |       | —               |       | —               |       | —            |       | — |   | — |   | 160 |   | — |   |
| Common stock and Series 1 Preferred Stock issued in exchange for  Series A Preferred Stock |   | (20,943              | )          | (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                                                             |   | —               |       | —               |       | —               |       | —            |       | — |   | — |   | 12 |   | — |   |
|                                                                                       |   |                 |       |                 |       |                 |       |              |       |   |   |   |   |   |   |   |   |
| **Balance at  March 31, 2004**                                                        |   | **6,491**            | ** ** | **$**                | **94,557** | ** **           | **—** | ** **        | **—** | ** ** | **2,942** | ** ** | **$** | **47,227** | ** ** | **36,284** | ** ** | **$** | **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                                                                                 |   | ––                     |        | —                               |   | 8,305                             |   | 8,305     |         |
| Unrealized loss on marketable securities                                                   |   | ––                     |        | (5                                   | )      |                              |   | (5        | )            |
| Unrealized loss on interest rate caps                                                      |   | ––                     |        | (750                                 | )      |                              |   | (750      | )            |
| Total comprehensive income                                                                 |   |                             |        |                                 |   |                              |   | 7,550     |         |
| Dividends on Series A Preferred Stock                                                      |   | ––                     |        | —                               |   | (9,602                            | )      | (9,602    | )            |
| Dividends on Series B Preferred Stock                                                      |   | ––                     |        | —                               |   | (2,212                            | )      | —    |         |
| 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                                                             |   | 212                              |        | —                               |   | ––                      |   | 212       |         |
|                                                                                       |   |                             |        |                                 |   |                              |   |      |         |
| **Balance at  March 31, 2004**                                                        |   | **$**                            | **641,103** | ** **                           | **$**  | **(2,234**                        | **)**  | **$**     | **(207,060** | **)** | **$** | **573,608** | ** ** |

 

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

 

*See accompanying notes.*

 

6

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**PRICE LEGACY CORPORATION**

## ***CONSOLIDATEDSTATEMENTS OF CASH FLOWS***

**(unaudited - amounts in thousands)**
|                                                                               |   | **First  Quarter  Three Months Ended  March 31** |       |
|------------------------------------------------------------------------------------|--------|-------------------------------------------------------|------------|
|                                                                               |   | **2004**                                              |       | **2003** |   |
| Operating activities                                                               |   |                                                  |       |   |   |
| Net income                                                                         |   | **$**                                                 | **8,305**  | ** ** | $ | 10,389 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |   |                                                  | ** ** |   |   |
| Depreciation and amortization                                                      |   | **5,629**                                             | ** ** | 4,403 |   |
| Deferred rents                                                                     |   | **(523**                                              | **)**      | (909 | ) |
| Equity in earnings of joint ventures                                               |   | **(62**                                               | **)**      | (149 | ) |
| Net loss (gain) on sale of real estate and investments                             |   | **44**                                                | ** ** | (480 | ) |
| Changes in operating assets and liabilities:                                       |   |                                                  | ** ** |   |   |
| Accounts receivable and other assets                                               |   | **167**                                               | ** ** | 2,505 |   |
| Accounts payable and other liabilities                                             |   | **519**                                               | ** ** | (1,099 | ) |
| Net cash provided by operating activities                                          |   | **14,079**                                            | ** ** | 14,660 |   |
|                                                                               |   |                                                  | ** ** |   |   |
| Investing activities                                                               |   |                                                  | ** ** |   |   |
| Deposits to restricted cash                                                        |   | **(1,926**                                            | **)**      | (1,666 | ) |
| Additions to real estate assets                                                    |   | **(4,544**                                            | **)**      | (9,217 | ) |
| Proceeds from the sale of real estate assets                                       |   | **—**                                            | ** ** | 2,902 |   |
| Distributions from real estate joint ventures                                      |   | **119**                                               | ** ** | 87 |   |
| Advances on notes receivable                                                       |   | **—**                                            | ** ** | (14,207 | ) |
| Repayments on notes receivable                                                     |   | **—**                                            | ** ** | 12,553 |   |
| Net cash used in investing activities                                              |   | **(6,351**                                            | **)**      | (9,548 | ) |
|                                                                               |   |                                                  | ** ** |   |   |
| Financing activities                                                               |   |                                                  | ** ** |   |   |
| Advances from revolving line of credit and notes payable                           |   | **74,976**                                            | ** ** | 28,282 |   |
| Repayments of revolving line of credit and notes payable                           |   | **(72,741**                                           | **)**      | (22,945 | ) |
| Dividends paid to preferred stockholders                                           |   | **(9,602**                                            | **)**      | (9,602 | ) |
| Proceeds from exercise of stock options                                            |   | **212**                                               | ** ** | — |   |
| Net cash used in financing activities                                              |   | **(7,155**                                            | **)**      | (4,265 | ) |
|                                                                               |   |                                                  | ** ** |   |   |
| Net increase in cash and cash equivalents                                          |   | **573**                                               | ** ** | 847 |   |
|                                                                               |   |                                                  | ** ** |   |   |
| Cash and cash equivalents at beginning of period                                   |   | **7,631**                                             | ** ** | 11,471 |   |
|                                                                               |   |                                                  | ** ** |   |   |
| Cash and cash equivalents at end of period                                         |   | **$**                                                 | **8,204**  | ** ** | $ | 12,318 |   |
|                                                                               |   |                                                  | ** ** |   |   |
| Supplemental cash flow information:                                                |   |                                                  | ** ** |   |   |
| Cash paid for interest                                                             |   | **$**                                                 | **6,782**  | ** ** | $ | 7,007 |   |
|                                                                               |   |                                                  | ** ** |   |   |
| Supplemental schedule of noncash investing and financing  activities:         |   |                                                  | ** ** |   |   |
| 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

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**PRICELEGACY CORPORATION**

 

## ***NOTESTO CONSOLIDATED FINANCIAL STATEMENTS***

**(UNAUDITED)**

 

**March 31,2004**

 

### **Note 1 –Organization and Significant Accounting Policies**

### ** **

***Organization***

Price LegacyCorporation (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 realproperty, primarily open-air shopping centers.

 

Our subsidiariesinclude Excel Legacy Holdings, Inc., which has elected to be treated as ataxable REIT subsidiary (TRS).  Otherthan some activities related to lodging and health care facilities, a TRS maygenerally engage in any business.  A TRSis subject to federal income tax and state and local income tax, whereapplicable, as a regular C corporation.

 

***Accounting Principles***

We prepared thefinancial statements following the requirements of the Securities and ExchangeCommission (SEC) for interim reporting. As permitted under those rules, certain footnotes or other financialinformation that are normally required by accounting principles generallyaccepted in the United States of America (GAAP) have been omitted.  However, except as disclosed below, therehave been no material changes to the information disclosed in the consolidatedfinancial statements included in the Annual Report on Form 10-K for the yearended December 31, 2003.  Certainprior year data have been reclassified to conform to the 2004 presentation.

 

We are responsiblefor the financial statements included in this document.  The financial statements include all normaland recurring adjustments that are considered necessary for the fairpresentation of our financial position and operating results.  The information in this Quarterly Report onForm 10-Q should be read in conjunction with the consolidated financialstatements and accompanying notes included in our latest Annual Report on Form10-K.

 

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

 

***Real Estate Assets and Depreciation***

We capitalizeinterest incurred during the construction period of certain assets and thisinterest is depreciated over the lives of those assets.  The following table shows interest expenseand the amount capitalized (amounts in thousands):

 

8

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|                  |   | **Three  Months Ended  March 31** |   |
|-----------------------|--------|----------------------------------------|--------|
|                  |   | **2004**                               |   | **2003** |   |
| Interest  incurred    |   | $                                      | 6,929  |   | $ | 7,135 |   |
| Interest  capitalized |   | 18                                     |   | 525 |   |
|                       |        |                                        |        |  |  |  |  |

 

***Cash and Cash Equivalents***

We are required tomaintain reserves with certain lenders for property taxes, insurance andcapital expenditures.  The aggregateamounts of these reserves held by lenders were approximately $13.2 million atMarch 31, 2004 and $11.3 million at December 31, 2003.  These amounts are reflected as restrictedcash on the Consolidated Balance Sheets.

 

Our restricted cashbalances at March 31, 2004 and December 31, 2003 include $2.4 millionof restricted funds which represent the proceeds from the sale of vacant landat our property in Hollywood/Oakwood Plaza, FL.  The funds will be held by the lender until the debt is repaid in2009.

 

***Stock-Based Compensation***

InDecember 2002, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting Standards (SFAS) No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure – an amendment of SFAS No.123.”  SFAS 148 addresses transitionprovisions for a voluntary change to the fair value method of accounting forstock-based employee compensation.  Inaddition, SFAS 148 amends the disclosure requirements of SFAS 123.  This statement has not had a significantimpact on our consolidated financial statements.

 

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

 
|                                                                               |   | **Three  Months Ended March 31** |    |
|------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                               |   | **2004**                              |    | **2003** |   |
| Net loss  applicable to common stockholders:                                       |   |                                  |    |   |   |
| As reported                                                                        |   | $                                     | (76,321 | ) | $ | (1,971 | ) |
| Deduct:  stock based  compensation expense determined under fair value method |   | (36                                   | )       | (154 | ) |
| Pro forma                                                                          |   | $                                     | (76,357 | ) | $ | (2,125 | ) |

 

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|                                                             |   | **Three  Months Ended March 31** |   |
|------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                             |   | **2004**                              |   | **2003** |   |
| Net loss per share – basic and diluted:                     |   |                                  |   |   |   |
| As reported                                                      |   | $                                     | (5.58  | ) | $ | (0.21 | ) |
| Pro forma                                                        |   | $                                     | (5.59  | ) | $ | (0.23 | ) |
| Weighted average fair value of options granted during the period |   | $                                     | 1.63   |   | — |   |

*** ***

The FASB is currently considering amendingSFAS 123 and APB Opinion No. 25, “Accounting for Stock Issued toEmployees.”  The proposed standard willrequire us to record compensation expense for all share based compensationplans.  If adopted, this proposedstandard would have a negative impact on our earnings in future periods.  We discuss our stock option plan further inNote 11.

 

**Note 2 – Recapitalization Transaction**

 

On September 22, 2003, we issued a press release announcing thatwe were pursuing a series of transactions intended to result in a significantsimplification of our capital structure. On or about February 11, 2004, we mailed to our stockholdersdefinitive proxy materials and to our Series A Preferred stockholders exchangeoffer materials related to our previously announced recapitalizationtransaction (the Recapitalization Transaction).

 

The Recapitalization Transaction consisted of:

 

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

•                  exchangetransactions with the holders of all of our outstanding Series B PreferredStock in which we exchanged 8,521,746 shares of our common stock (after givingeffect to the reverse stock split described below) for all of our outstandingshares of Series B Preferred Stock

•                  anamendment and restatement of our charter to, among other things,

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

•                  designate andestablish the terms of our Series 1 Preferred Stock

•                  eliminate theSeries B Preferred Stock following its exchange for common stock

•                  change themanner in which our directors are elected so that the holders of common stockand 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

 

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•                  change ourauthorized capital stock to provide sufficient shares to complete theRecapitalization Transaction

 

Our stockholders approved the Recapitalization Transaction at a specialmeeting of stockholders held on March 11, 2004, and the RecapitalizationTransaction was completed on March 12, 2004.  As a result of the Recapitalization Transaction, we issued atotal of 27,421,965 shares of common stock (on a post 1-for-4 reverse stocksplit basis) and 2,942,463 shares of Series 1 Preferred Stock and we retired20,942,672 shares of Series A Preferred Stock and 24,523,015 shares of Series BPreferred Stock.  After giving effect tothe Recapitalization Transaction, we had outstanding 36,283,973 shares ofcommon stock, 6,491,494 shares of Series A Preferred Stock, and 2,942,463shares of Series 1 Preferred Stock.

 

On March 12, 2004, we filed Articles of Amendment and Restatementin the State Department of Assessments and Taxation of Maryland effecting the1-for-4 reverse stock split of our common stock and the other amendments to ourcharter contemplated by the Recapitalization Transaction.

 

For accounting purposes, Emerging Issue Task Force (EITF) topic D-42governs the effect on the calculation of earnings per share for the redemptionor induced conversion of preferred stock. The exchange of the Series APreferred Stock for either common stock or Series 1 Preferred Stock isbeing treated as a redemption and, accordingly, the excess of the fair value ofthe consideration transferred to the holders of the preferred stock over thecarrying amount of the preferred stock on the balance sheet was subtracted fromnet income to arrive at net loss applicable to common stockholders in thecalculation of earnings per share.  Approximately10.7% of the Series A Preferred Stock was exchanged for Series 1Preferred Stock and 65.6% of the Series A Preferred Stock was exchangedfor common stock, requiring a deduction of approximately $35.5 millionfrom net income to arrive at net loss applicable to common stockholders withthe Series 1 Preferred Stock valued at $16.05 per share.

 

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

 

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**Note 3 – Net Income Per Share**

 

SFAS No. 128, “Earningsper Share,” requires presentation of two calculations of earnings per commonshare.  Basic earnings per common shareequals net income applicable to common stockholders divided by weighted averagecommon shares outstanding during the period. Diluted earnings per common share equals net income applicable to commonstockholders divided by the sum of weighted average common shares outstandingduring the period plus dilutive potential shares.  Dilutive potential shares are shares assumed to be issued ifoutstanding stock options were exercised. All earnings per share amounts have been presented, and whereappropriate, restated to reflect these calculations.  The effect of common stock equivalents of 163,162 shares for thethree months ended March 31, 2004 was antidilutive and therefore notpresented.  We did not have any commonstock equivalents for the quarter ended March 31, 2003.

 

In following the provisionsof SFAS 128, we adjusted the computations of basic and diluted earnings pershare and the number of common shares outstanding retroactively for all periodspresented to reflect our change in capital structure.  The earnings per share for the quarters ended March 31, 2004and 2003 have been restated to reflect the 1-for-4 reverse stock split of ourcommon stock in the first quarter of 2004 as if it occurred at the beginning ofthe period.

 

**Note 4 – Real Estate Assets**

 

Our real estateproperties are generally leased under noncancelable leases with remaining termsranging from 1 to 26 years.  Rentalrevenues include the following (amounts in thousands):

 

|                                  |   | **First  Quarter  Three Months Ended March 31** |   |
|---------------------------------------|--------|------------------------------------------------------|--------|
|                                  |   | **2004**                                             |   | **2003** |   |
| Minimum rent                          |   | $                                                    | 23,222 |   | $ | 22,479 |   |
| Straight-line  accrual of future rent |   | 527                                                  |   | 487 |   |
| Expense  reimbursements               |   | 6,763                                                |   | 6,724 |   |
| Percentage rent                       |   | 288                                                  |   | 319 |   |
| Other revenues                        |   | 1,187                                                |   | 1,015 |   |
| Rental revenues                       |   | $                                                    | 31,987 |   | $ | 31,024 |   |

 

***Acquisitions***

 

During the first threemonths of 2004, we acquired our joint venture partners’ 50% interest in aproperty in Fresno, CA for $2.8 million. The purchase price was allocated to land and buildings and we assumedthe outstanding mortgage of $9.7 million.

 

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We did not acquire anyproperties during the first three months of 2003.

 

***Dispositions***

There were nodispositions during the first three months of 2004.

 

During the first threemonths of 2003, we sold a property in Scottsdale, AZ for $3.0 million,recognizing a net loss of $0.2 million on the sale.  Also during the first three months in 2003, we received paymenton three notes receivable related to the sale of our self storage developmentproperties in 2002.  We recognized again of $0.7 million on the sales.

 

***Variable Interest Entities***

OnJuly 1, 2003, we adopted FASB Interpretation No. 46R, “Consolidation ofVariable Interest Entities—an interpretation of ARB No. 51” (FIN 46R).  This interpretation addresses theconsolidation of business enterprises (variable interest entities) to which theusual condition (ownership of a majority voting interest) of consolidation doesnot apply.  This interpretation focuseson financial interests that indicate control. It concludes that in the absence of clear control through votinginterests, a company’s exposure (variable interest) to the economic risks andpotential reward from the variable interest entity’s assets and activities arethe best evidence of control.  Variableinterests are rights and obligations that convey economic gains or losses fromchanges in the values of the variable interest entity’s assets andliabilities.  Variable interests mayarise from financial instruments, service contracts, nonvoting ownershipinterests and other arrangements.

 

Ifan enterprise holds a majority of the variable interests of an entity, it wouldbe considered the primary beneficiary. The primary beneficiary is required to include assets, liabilities andthe results of operations of the variable interest entity in its financial statements.  Our analysis related to FIN 46R indicates weare the primary beneficiary of two variable interest entities which requireconsolidation in our financial statements (amounts in thousands):

 
|                          |   | **Assets** |   | **Liabilities** |   | **Minority  Interest** |   |
|-------------------------------|--------|------------|--------|-----------------|--------|------------------------|--------|
| 1.Orlando Business Park  LLC  |   | $          | 28,900 |            | $      | 4,645                  |   | $ | 1,013 |   |
| 2.Los Arcos Development,  LLC |   | 22,000     |   | —          |   | —                 |   |
|                               |        |            |        |                 |        |                        |        |  |  |  |

 

1.               Orlando Business Park LLC, previously classified as a joint venture onour balance sheet, owns land in Orlando, FL held for development or sale.  We guarantee the $4.6 million in debt on theproperty.  Beginning December 2003,the debt required monthly principal

 

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repaymentsof $1.5 million.  We have been fundingthese repayments on behalf of the partnership until the loan is paid in full inJune 2004.

 

2.               Los Arcos Development, LLC (an affiliate of Ellman Companies) owns 42acres of land in Scottsdale, AZ. Commencing in 1996, non-recourse loans were made by one of ouraffiliates to Los Arcos Development, LLC to acquire the Scottsdaleproperty.   These loans were previouslyclassified as notes receivable on our balance sheet.  As of January 13, 2004, we entered into loan amendments withLos Arcos Development, LLC to confirm a second priority lien on the Scottsdaleproperty to collateralize the loans and to establish a new maturity date ofDecember 31, 2004.

 

Aseparate note receivable from Los Arcos Development, LLC in the aggregateprincipal amount of $13.0 million was acquired by another affiliate in February 2003.  This note receivable is non-recourse and iscollateralized by a first priority lien on the Scottsdale property.

 

Foraccounting purposes, the cumulative balance of the notes receivable atMarch 31, 2004 a $22.0 million which is net of a $29.5 million impairmentrecorded in the fourth quarter of 2003. This treatment does not affect the amount which Los Arcos Development,LLC owes to us pursuant to the terms of the loan documents.  This balance is classified as land on ourConsolidated Balance Sheets.  Althoughinterest continues to accrue per the terms of the loan documents, we did notaccrue interest on the notes for accounting purposes in 2004 and 2003.

 

Thefirst and second lien loans were further amended in May 2004 to require certainpayments on the notes by July 16, 2004, subject to certain extensionoptions through August 31, 2004. If such payments are timely made, the borrower and its affiliates willreceive releases from further liability under the loans, and the liens will bereleased.  In addition, we grantedEllman Investments, Inc. certain rights to purchase the loans in lieu of makingthe required payments (with the purchase price in such event approximatelyequal to the amount of the required payments).

 

***Property Held for Sale***

*** ***

Includedin the Consolidated Balance Sheets at March 31, 2004 and December 31,2003 are the following properties held for sale, which are carried at fairvalue less costs to sell (amounts in thousands):

 

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|                               |   |            |   | **March 31** |   | **December 31** |   |
|------------------------------------|--------|-----------------|--------|-------------------|--------|----------------------|--------|
| **Location**                       |   | **Description** |   | **2004**          |   | **2003**             |   |
| Anaheim, CA                        |   | Land            |   | $                 | 36,493 |                 | $      | 37,000 |   |
| San Diego/Rancho Bernardo, CA      |   | Office Building |   | 15,141            |   | 15,141               |   |
| Farmington, UT                     |   | Land            |   | 5,880             |   | 5,880                |   |
| Phoenix/One North First Street, AZ |   | Office Building |   | 5,531             |   | 5,551                |   |
| Hampton, VA                        |   | Retail Building |   | 4,629             |   | 4,629                |   |
| Tucson/Marana, AZ                  |   | Land            |   | 2,787             |   | 2,787                |   |
| Total                              |   |            |   | $                 | 70,461 |                 | $      | 70,988 |   |

 

**Note 5 – Discontinued Operations**

 

We report discontinued operations for our propertiesin San Diego/Rancho Bernardo, CA, Hampton, VA, Phoenix/One North First Street,AZ, Anaheim, CA and Farmington, UT which are classified as held for sale.  Also included in the 2003 ConsolidatedStatements of Operations are the discontinued operations of our properties atScottsdale, AZ, Inglewood, CA, New Britain, CT, and Northridge, CA which weresold in 2003.  Discontinued operationsare summarized as follows (amounts in thousands, except per share data):

 

 

|                             |   | **First  Quarter  Three Months Ended  March 31** |   |
|----------------------------------|--------|-------------------------------------------------------|--------|
|                             |   | **2004**                                              |   | **2003** |   |
|                             |   |                                                  |   |   |   |
| Rental revenue                   |   | $                                                     | 466    |   | $ | 953 |   |
| Expenses                         |   |                                                  |   |   |   |
| Operating and  maintenance       |   | 157                                                   |   | 205 |   |
| Property taxes                   |   | 148                                                   |   | 150 |   |
| Depreciation and  amortization   |   | —                                                |   | 246 |   |
| Interest expense                 |   | —                                                |   | 143 |   |
|                             |   | 305                                                   |   | 744 |   |
| Income from  operations          |   | 161                                                   |   | 209 |   |
| Net loss on sale  of real estate |   | —                                                |   | (211 | ) |
|                             |   |                                                  |   |   |   |
| Net income  (loss)               |   | $                                                     | 161    |   | $ | (2 | ) |

 

**Note 6 – Investments in Unconsolidated Real Estate JointVentures**

 

As ofMarch 31, 2004 and December 31, 2003, we had the followinginvestments in unconsolidated joint ventures which we accounted for under theequity method of accounting (amounts in thousands):

 

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|                         |   |           |   | **March 31** |   | **December 31** |   |
|------------------------------|--------|----------------|--------|-------------------|--------|----------------------|--------|
| **Joint Venture**            |   | **Ownership%** |   | **2004**          |   | **2003**             |   |
| 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 topurchase our partners’ 50% share of Blackstone Ventures I.  We assumed the outstanding mortgage of $9.7million.

 

During the first quarter of 2004, we sold ourinvestment in 3017977 Nova Scotia Company to affiliates associated with theEllman Companies.  In consideration, weadded $1.6 million to an existing note receivable due from Los ArcosDevelopment, LLC.  This note receivableis consolidated and recorded as land on our Consolidated Balance Sheet inaccordance with FIN 46R.

 

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

 

**Note 7 – Notes Receivable**

 

Asof March 31, 2004 and December 31, 2003, we had the following notesreceivable outstanding related to various real estate developments and relatedbusinesses (amounts in thousands):

 

|                                       |   | **March 31** |   | **December 31** |   |
|--------------------------------------------|--------|-------------------|--------|----------------------|--------|
| **Note Receivable**                        |   | **2004**          |   | **2003**             |   |
| Arizona Hockey  Management/Ellman Holdings |   | $                 | 9,500  |                 | $      | 9,500 |   |
| Other                                      |   | 811               |   | 811                  |   |
| Total                                      |   | $                 | 10,311 |                 | $      | 10,311 |   |

 

Thenotes generally do not require cash payments of interest until specifiedfutures dates, typically when developments are completed or sold.

 

Ofthe $10.3 million outstanding, the notes receivable from companies owned by oraffiliated with Steven Ellman (the Ellman Affiliates) represented an aggregateoutstanding principal balance, for accounting purposes, of approximately $9.5 million.  The outstanding balance is net of a $12.9million impairment recorded in the fourth quarter of 2003 to reflect the fairvalue of the notes in connection with management’s plan to sell our non-coreassets.  These notes

 

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receivablefrom the Ellman Affiliates are collateralized by a pledge of certain EllmanAffiliates’ distributions from a holding company that owns the Phoenix Coyoteshockey team and other related assets. These loans were made at a time when the Ellman Affiliates intended torelocate the hockey team to an arena that was to be constructed on theScottsdale property owned by Los Arcos Development, LLC.

 

Asa result of delays at the Scottsdale property, the Ellman Affiliates elected topursue an alternative site for the hockey arena in Glendale, AZ.  In December 2002, the Ellman Affiliatesand the other investors involved in the ownership of the Phoenix Coyotesentered into a series of transactions in which the Phoenix Coyotes hockey teamand related real estate development assets were consolidated for the purpose ofassisting in obtaining additional financing. The sale of equity interests in the holding company could generateproceeds to help repay our notes. However, it is unclear at this time the impact the structure will haveon the repayment of our loans made to the Ellman Affiliates in connection withtheir acquisition of the Phoenix Coyotes.  Although interest continues to accrue per the terms of the notes, westopped accruing interest on the loans for accounting purposes when thedevelopment projects were consolidated into the holding company.

 

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

 

InMay 2004, we entered into further agreements with the Ellman Affiliates topermit a release of the Ellman Affiliates from further liability under theloans in exchange for a nominal payment, provided that certain otherobligations of the Ellman Affiliates owed to us, including the obligations tomake the payments arising with respect to the notes receivable described inNote 4 have been satisfied, and provided further that the Ellman Affiliatesdeliver documents satisfactory to us releasing and indemnifying us fromliabilities with respect to our various transactions with the EllmanAffiliates.

 

**Note 8 – Debt**

 

We had the following debtoutstanding at March 31, 2004 and December 31, 2003 (amounts inthousands):

 

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|                                                                                                                                                                                                                                                                                          |   | **March 31  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                                                                              |   | $                       | 158,268 |                       | $      | 158,668 |   |
|                                                                                                                                                                                                                                                                                          |   |                    |    |                       |   |
| Mortgage payable with GMAC Commercial Mortgage Corporation, bearing  interest at LIBOR plus 98 basis points (2.07% at March 31, 2004).  The mortgage is collateralized by five of  our properties and matures July 2004                                                        |   | 121,375                 |    | 121,375                    |   |
|                                                                                                                                                                                                                                                                                          |   |                    |    |                       |   |
| Mortgages and notes payable on seven properties bearing interest  ranging from 2.59% to 8.45%.  The  loans are collateralized by the properties and mature on various dates  between October 2004 and February 2017                                                            |   | 98,097                  |    | 88,779                     |   |
|                                                                                                                                                                                                                                                                                          |   |                    |    |                       |   |
| Mortgage on a property in Pentagon City, VA bearing interest at LIBOR  plus 145 basis points (2.54% at March 31, 2004).  The loan is collateralized by the property  and matures February 2009                                                                                 |   | 60,000                  |    | —                     |   |
|                                                                                                                                                                                                                                                                                          |   |                    |    |                       |   |
| Capital lease arrangements with an individual on two properties.  The capital leases have effective interest  rates of 4.43% and 7.36% and mature in December 2004 and  June 2005.  One lease for $19.3  million was repaid in April 2004                            |   | 31,006                  |    | 31,006                     |   |
|                                                                                                                                                                                                                                                                                          |   |                    |    |                       |   |
| Construction loan outstanding bearing interest at LIBOR plus 310  basis points (4.19% at March 31, 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 (2.39% at March 31, 2004).  The loan is collateralized by the property and matures June 2008                                                                                            |   | 22,100                  |    | 22,100                     |   |
|                                                                                                                                                                                                                                                                                          |   |                    |    |                       |   |
| Construction loan payable to a bank bearing interest at LIBOR plus  150 basis points (2.59% at March 31, 2004).  The loan matures in November 2004 and is collateralized by  the project in Temecula, CA.  This  loan was refinanced with a new lender in April 2004 |   | 21,068                  |    | 20,929                     |   |
|                                                                                                                                                                                                                                                                                               |        |                         |         |                            |        |  |  |

 

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|                                                                                                                                                                                                                                                                             |   | **March 31  2004** | ** ** | **December 31  2003** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|----------------------------|------------|
| Revolving $25.0 million credit facility bearing interest at LIBOR  plus 150 to 200 basis points (2.89% at March 31, 2004), maturing  September 2004 (see below)                                                                                                        |   | 18,860                  |       | 69,100                     |       |
|                                                                                                                                                                                                                                                                             |   |                    |       |                       |       |
| Construction loan payable to a bank bearing interest at LIBOR plus  185 basis points (2.94% at March 31, 2004).  The loan matures in March 2005 and is collateralized by  the project in Orlando, FL                                                              |   | 12,542                  |       | 10,466                     |       |
|                                                                                                                                                                                                                                                                             |   |                    |       |                       |       |
| Note payable to a bank bearing interest at LIBOR plus 375 basis  points (4.84% at March 31, 2004).   Principal and interest is due at a rate of $1.5 million per month  until paid in full in June 2004.   The loan is collateralized by land in Orlando, FL |   | 4,645                   |       | 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                                                                                                                                                                                                                                                                            |   | $                       | 576,461    |                       | $          | 564,481 |   |
|                                                                                                                                                                                                                                                                                  |        |                         |            |                            |            |  |  |

 

Wewere in compliance with all convenants on our credit facility at March 31,2004.  In 2004, we plan to use cash flowfrom operations to fund our recurring debt service obligations.

 

InFebruary 2004, we amended our credit facility, repaid $60.0 million andWells Fargo Bank assumed the amended facility. The amended facility provides for a maximum borrowing of $25.0million.  This amendment was intended toprovide financing through the completion of the Recapitalization Transaction(see Note 2).  In April 2004, weentered into a new $50.0 million credit facility with Wells Fargo Bank.  The new facility has a 3-year term and has acurrent interest rate of LIBOR plus 155 basis points.  The LIBOR rate add-on may vary between 118 and 170 basis pointsbased on our leverage and other financial ratios.  The new facility also can be increased by $25.0 million to allowup to $75.0 million of borrowings.

 

We have a 65% interest in Newport on theLevee, LLC (Newport) that owns a retail project in Newport, KY.  In addition to the $28.5 millionconstruction loan in the above table, the City of Newport has issued two seriesof public improvement bonds.  The Series2000a tax exempt bonds total $44.2 million and are broken down as follows:  (a) $18.7 million maturing 2018 withinterest 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 havea par amount of $11.6 million with interest at 11% due 2009.  The bonds are guaranteed by us, by

 

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Newport, and the third party co-developers ofthe project.  Newport has drawn on $46.8million of the bonds at March 31, 2004.

 

**Note 9 – Financial Instruments:Derivatives and Hedging**

 

Inthe normal course of business, we are exposed to the effect of changes ininterest rates.  We limit these risks byfollowing established risk management policies and procedures including the useof derivatives.  For interest rateexposures, derivatives are used primarily to manage the cost of borrowingobligations.

 

Wehave a policy of only entering into derivative contracts with major financialinstitutions based upon their credit ratings and other factors.  When viewed in conjunction with theunderlying and offsetting exposure that the derivatives are designed to hedge,we have not sustained a material loss from those instruments nor do weanticipate any material adverse effect on our net income,  financial position, or cash flows in thefuture from the use of derivatives.

 

Tomanage interest rate risk, we may employ options, forwards, swaps, caps andfloors, or a combination thereof, depending on the underlying exposure.  We undertake a variety of borrowings fromlines of credit to medium and long-term financings.  To manage overall costs, we currently use derivative instrumentsto cap our exposure to variability in interest rates or to convert a portion ofour variable-rate debt to fixed-rate debt. In July 2002, we paid $3.4 million for forward-starting, LIBOR-basedinterest rate caps with a combined notional value of $152 million and a strikeof 7.0% to cap our exposure to interest rate variability on anticipatedfloating-rate debt.  The interest ratecaps are effective July 1, 2004, and continue through 2009 to 2010.  The interest rate caps areincluded with other assets on the Consolidated Balance Sheets.

 

Wealso use derivatives to protect the fair value of existing or anticipatedfixed-rate debt.  During 2002, we hadfive amortizing swaps with approximately $161 million current notional valueprotecting the fair value of approximately $161 million fixed-rate debt fromchanges in value attributable to interest rate movement.  In October 2002, wesold 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’sremaining life through 2009 to 2010. The remaining deferred gain of $11.3 million is included with accountspayable and other liabilities on the Consolidated Balance Sheets.

 

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Hedgesthat are designated as fair value hedges mitigate risk on changes in the fairvalue of fixed-rate debt.  Theunrealized gains/losses in the fair value of these hedges are reported inearnings with an offsetting adjustment through earnings to the carrying valueof the hedged debt.  Adjustments to thecarrying value of the hedged debt are amortized to earnings beginning no laterthan when the hedged debt ceases to be adjusted for changes in its fair valueattributable to the interest rate risk being hedged.

 

Cashflow hedges hedge the future cash outflows of current or forecasted debt.  The interest rate caps described aboveprotect against variability in interest cash outflows above the cap strikerate.  The changes in the fair value ofthese hedges are reported on the Consolidated Balance Sheets with acorresponding adjustment to either Accumulated Other Comprehensive Income or inearnings, depending on the hedging relationship.  Unrealized gains and losses held in Accumulated OtherComprehensive Income will be reclassified to earnings in the same period orperiods that the hedged cash flows affect earnings.  As of March 31, 2004, the balance in Accumulated OtherComprehensive Loss relating to derivatives was $2.2 million.  Within the next twelve months, we estimatethat approximately $53,000 will be reclassified from Accumulated OtherComprehensive Loss to earnings as additional interest.

 

Wehedge our exposure to the variability in future cash flows for forecastedtransactions other than interest-related cash flows over a maximum period of 12months.  During the forecasted period,unrealized gains and losses in the hedging instrument will be reported in AccumulatedOther Comprehensive Income.  Once thehedged transaction takes place, the hedge gains and losses will be reported inearnings during the same period in which the hedged item is recognized inearnings.  We are not currently hedgingexposure to variability in future cash flows for forecasted transactions otherthan interest-related cash flows on future anticipated debt.

 

**Note 10 – Related Party Transaction**

 

Duringthe first quarter of 2004, Mr. Mark Burton, a former member of our seniormanagement, resigned his position with us effective February 1, 2004.  In connection with his resignation, weentered into a consulting and office services agreement whereby Mr. Burton andother employees formerly with our company provide various acquisition anddisposition services and related due diligence.  The term of the agreement is for one year ending January 31,2005.  In connection with thisagreement, we paid approximately $33,000 in consulting services for the quarterended March 31, 2004.

 

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**Note 11 – Stock Option Plan**

 

Duringthe first quarter of 2004, we granted 80,000 stock options (on a post 1-for-4reverse stock split basis) under our 2001 Stock Option and Incentive Plan (thePlan).  As of March 31, 2004, wehad reserved 998,250 shares for issuance under the Plan.  We issued no stock options during the firstquarter of 2003.

 

Aswe stated in Note 1, we follow the provisions of APB No. 25, “Accounting forStock Issued to Employees.”  In 1997 and2002, we implemented the disclosure provisions required by SFAS No. 123,“Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for

 

Stock-BasedCompensation – 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 shareinformation, which is calculated assuming we had accounted for our stock optionplans under the “fair value” method described in that statement.  We estimated the fair value using theBlack-Scholes option pricing model, modified for dividends and using thefollowing assumptions:

 
|                                   |   | **Three  Months Ended March 31** |   |
|----------------------------------------|--------|---------------------------------------|--------|
|                                   |   | **2004**                              |   | **2003** |   |
| Risk free interest rate                |   | 4.21                                  | %      | — |   |
| Annual dividend rate                   |   | 6.59                                  | %      | — |   |
| Volatility factor of the stock price   |   | 23.11                                 | %      | — |   |
| Weighted average expected life (years) |   | 10                                    |   | — |   |

 

Wedo not record compensation expense for stock option grants.  The table in Note 1 summarizes results as ifwe had recorded compensation expense for options granted in 2004.

 

**Note 12 – Subsequent Events**

 

In April 2004, wesold a property in Hampton, VA for net proceeds of approximately $4.6 million.

 

In April 2004, ourTRS sold approximately 1.9 million shares of common stock of Mace SecurityInternational (MACE) for $10.7 million. We will recognize a gain on the sale of approximately $9.2 million inthe second quarter of 2004.

 

In May 2004, we announcedthat on June 7, 2004, we will redeem 1.0 million shares of our Series APreferred Stock for the redemption price of $16.00 per share.

 

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# **ITEM 2 -MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

# ** **

***Introduction***

 

This report on Form 10-Qcontains certain “forward-looking” statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995 which provides a “safe harbor” forthese types of statements.  You canidentify 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 expressionsin this report on Form 10-Q.  Theseforward-looking statements are subject to a number of risks, uncertainties andassumptions about Price Legacy, including, among other things:

•                  the effect ofeconomic, credit and capital market conditions in general and on real estatecompanies in particular, including changes in interest rates

•                  our ability tocompete effectively

•                  developments inthe retail industry

•                  the financialstability of Price Legacy’s tenants, including our reliance on major tenants

•                  our ability tosuccessfully complete real estate acquisitions, developments and dispositions

•                  the financialperformance of our properties, joint ventures and investments

•                  governmentapprovals, actions and initiatives, including the need for compliance withenvironmental requirements

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

 

The factors identifiedabove are believed to be some, but not all, of the important factors that couldcause actual events and results to be significantly different from those thatmay be expressed or implied in any forward-looking statements.  Any forward-looking statements should alsobe considered in light of the information provided in “Factors That May AffectFuture Performance” located in our Form 10-K filing for the 2003 fiscalyear.  We assume no obligation topublicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

 

In Management’s Discussionand Analysis we explain our general financial condition and results ofoperations including:

•                  whyrevenues, costs and earnings changed from the prior period

•                  fundsfrom operations (FFO)

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

•                  wherewe plan on obtaining cash for future dividend payments and future capitalexpenditures

 

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**CriticalAccounting Policies and Estimates**

 

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States of America (GAAP).  Preparation of our financial statements in accordance with GAAPrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses and the relatednotes.  Refer to our 2003 Annual Reporton Form 10-K for a discussion of our critical accounting policies which includerevenue recognition, valuation of real estate assets and depreciation, and thedisposal or impairment of long-lived assets. There have been no material changes to these policies in 2004.  We believe that our estimates andassumptions are reasonable based upon historical experience, however, actualresults may differ from these estimates under different assumptions orconditions.  For a detailed discussionon the application of these and other accounting policies, see Note 1 in theNotes to the Consolidated Financial Statements in Item 8 of our Annual Reporton Form 10-K for the 2003 fiscal year.

 

###### ***Overview***

We receive incomeprimarily from rental revenue from open-air shopping center properties,including recoveries from tenants, offset by operating and general andadministrative expenses.  During thefourth quarter of 2003, we segregated a number of our non-core assets fordisposal.  During the first quarter of2004, we have continued our efforts to sell our non-core assets and intend toredeploy the proceeds from the disposition of these assets into the acquisitionof income-generating properties, the reduction of debt, or the redemption ofour Series A Preferred Stock.  Alsoduring the first quarter of 2004, we acquired our joint venture partners’ 50%share of a property in Fresno, CA. There were no significant dispositions of properties during the firstquarter of 2004.

 

During the first quarterof 2004, we completed a Recapitalization Transaction that resulted in asignificant simplification of our capital structure.  In accordance with Emerging Issues Task Force (EITF) topic D-42which governed this transaction, approximately $72.8 million was deducted fromnet income to arrive at net loss applicable to common stockholders in thecalculation of earnings per share.

 

###### ***Rental Revenues***

 
|              |   | **Amount****(000’s)** |   | **Change  (000’s)** |   | **Percent  Change** |   |
|-------------------|--------|----------------------------|--------|--------------------------|--------|---------------------|--------|
| 1st  Quarter 2004 |   | $                          | 31,987 |                     | $      | 963                 |   | 3 | % |
| 1st  Quarter 2003 |   | 31,024                     |   |                     |   |                |   |
|                   |        |                            |        |                          |        |                     |        |  |  |

 

Rental revenues increased$1.0 million to $32.0 million in the first quarter of 2004 compared to the sameperiod in 2003 primarily because:

•                  propertieswe owned both years generated $0.9 million of additional revenues, primarilydue to additional leasing activity at our Miami, FL, and Newport, KY propertiesand the opening of our Temecula, CA and Orlando/Millenia II, FL

 

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properties,  partially offset by vacancies at ourWestbury, NY property due to Kmart’s bankruptcy

 

•                  weacquired our joint venture partners' 50% share of a property in Fresno, CA inMarch 2004 which generated $0.1 million of additional revenues

 

###### ***Expenses***

 
|              |   | **Amount****(000’s)** |   | **Change  (000’s)** |   | **Percent  Change** |   |
|-------------------|--------|----------------------------|--------|--------------------------|--------|---------------------|--------|
| 1st  Quarter 2004 |   | $                          | 16,995 |                     | $      | 1,177               |   | 7 | % |
| 1st  Quarter 2003 |   | 15,818                     |   |                     |   |                |   |
|                   |        |                            |        |                          |        |                     |        |  |  |

 

Expenses increased $1.2million to $17.0 million in the first quarter of 2004 compared to 2003primarily because:

•                  expensesfrom properties we owned in both years increased $1.7 million, primarily due toadditional depreciation expense at our Newport, KY property and additionaloperating expenses due to the opening of our Temecula, CA and Orlando/MilleniaII, FL properties 

•                  theseincreases to expenses were partially offset by a decrease in general andadministrative expenses of $0.5 million primarily due to a decrease in salariesand legal expenses

 

***Operating Income***

 

 
|              |   | **Amount****(000’s)** |   | **Change  (000’s)** |   | **Percent  Change** |   |
|-------------------|--------|----------------------------|--------|--------------------------|--------|---------------------|--------|
| 1st  Quarter 2004 |   | $                          | 14,992 |                     | $      | (214                | )      | -1 | % |
| 1st  Quarter 2003 |   | 15,206                     |   |                     |   |                |   |
|                   |        |                            |        |                          |        |                     |        |  |  |

 

Operating incomedecreased for the first quarter of 2004 compared to the same period in theprior year primarily because of the changes in Rental Revenues and Expensesdiscussed above.

 

***Interest Expense***

 
|              |   | **Amount****(000’s)** |   | **Change  (000’s)** |   | **Percent  Change** |   |
|-------------------|--------|----------------------------|--------|--------------------------|--------|---------------------|--------|
| 1st  Quarter 2004 |   | $                          | 6,911  |                     | $      | 444                 |   | 7 | % |
| 1st  Quarter 2003 |   | 6,467                      |   |                     |   |                |   |
|                   |        |                            |        |                          |        |                     |        |  |  |

 

Interest expenseincreased $0.4 million in the first quarter of 2004 compared to 2003 becauseduring the first quarter of 2004 we had an average of $576.5 million of debtoutstanding compared to $547.6 million in the first quarter of 2003.  Our outstanding debt increased mainly due toborrowings on our construction loans. The increase in interest expense due to the amount of debt outstandingwas partially offset by a decrease in interest rates on our variable rate debt.

 

The weightedaverage interest rate on our variable rate debt decreased to 2.6% onMarch 31, 2004 from 3.1% on March 31, 2003.  We discuss our outstanding debt further in “Liquidity and CapitalResources” located elsewhere in this Form 10-Q.

 

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***Interest Income***

 
|              |   | **Amount****(000’s)** |   | **Change  (000’s)** |   | **Percent  Change** |   |
|-------------------|--------|----------------------------|--------|--------------------------|--------|---------------------|--------|
| 1st  Quarter 2004 |   | $                          | 45     |                     | $      | (767                | )      | -94 | % |
| 1st  Quarter 2003 |   | 812                        |   |                     |   |                |   |
|                   |        |                            |        |                          |        |                     |        |  |  |

 

Interest income decreased$0.8 million in the first quarter of 2004 compared to 2003 primarily because:

•                  wehad notes receivable outstanding with other real estate developers which earned$0.7 million in interest income in 2003

•                  interestincome on our outstanding cash balances decreased by $0.1 million, mainly dueto lower interest rates

 

***Discontinued Operations***

We report discontinued operations for our propertiesin San Diego/Rancho Bernardo, CA, Hampton, VA, Phoenix/One North First Street,AZ, Anaheim, CA and Farmington, UT which are classified as held for sale.  Also included in the 2003 ConsolidatedStatements of Operations are the discontinued operations of our properties atScottsdale, AZ, Inglewood, CA, New Britain, CT, and Northridge, CA which weresold in 2003.

 

During the first quarterof 2003 we sold a property in Scottsdale, AZ for $3.0 million and recognized anet loss of $0.2 million.  This loss isrecorded as discontinued operations in the Consolidated Statement of Operationsin accordance with Statement of Financial Accounting Standards No. 144.

 

***Gain/Loss on Sale of Real Estate and Investments***

During the first quarterof 2004 we disposed of a joint venture investment and recognized a loss on thedisposal of $44,100.

 

During the first quarterof 2003, we received payment on the notes receivable related to the sale of ourdevelopment self storage properties and recognized additional gains on thesales of $0.7 million.

 

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***Funds From Operations (amounts inthousands)***

 

|                                                         |   | **Three  Months  Ended March 31** |    |
|--------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                         |   | **2004**                                    |    | **2003** |   |
| Net income                                                   |   | $                                           | 8,305   |   | $ | 10,389 |   |
| Depreciation and  amortization                               |   | 5,629                                       |    | 4,157 |   |
| Depreciation and  amortization of discontinued operations    |   | —                                      |    | 246 |   |
| Price Legacy’s  share of depreciation of joint ventures |   | 26                                          |    | 179 |   |
| Depreciation of  non-real estate assets                      |   | (27                                         | )       | (31 | ) |
| Net loss on sale  of discontinued operations                 |   | —                                      |    | 211 |   |
| Net loss (gain)  on sale of real estate and investments      |   | 44                                          |    | (691 | ) |
| FFO before  preferred dividends                              |   | 13,977                                      |    | 14,460 |   |
| Preferred  dividends                                         |   | (11,814                                     | )       | (12,360 | ) |
| Preferred stock  conversion                                  |   | (72,812                                     | )       | — |   |
| FFO                                                          |   | $                                           | (70,649 | ) | $ | 2,100 |   |
|                                                         |   |                                        |    |   |   |
| Net cash  provided by (used in):                             |   |                                        |    |   |   |
| Operating  activities                                        |   | $                                           | 14,079  |   | $ | 14,660 |   |
| Investing  activities                                        |   | (6,351                                      | )       | (9,548 | ) |
| Financing  activities                                        |   | (7,155                                      | )       | (4,265 | ) |
| Significant  non-cash items:                                 |   |                                        |    |   |   |
| Preferred stock  conversion                                  |   | $                                           | 72,812  |   | $ | — |   |
| Series B  preferred dividends                                |   | 2,212                                       |    | 2,758 |   |
| Deferred rents                                               |   | 531                                         |    | 509 |   |

 

OurCompany, as well as real estate industry analysts, generally considers FFO asanother measurement of economic profitability for real estate-orientedcompanies.  The Board of Governors ofthe National Association for Real Estate Investment Trusts (NAREIT) defines FFOas net income in accordance with GAAP, excluding gains (or losses) from salesof property, plus depreciation and amortization.  We calculate FFO in accordance with the NAREIT definition whichalso excludes gains (losses) from the sale of investments, and adjusts forpreferred dividends.  We believe thatFFO is helpful to investors as a measure of our financial performance because,along with cash flow from operating activities, financing activities andinvesting activities, FFO provides investors with an indication of the abilityof a REIT to incur and service debt, to make capital expenditures and to fundother cash needs.  In addition, webelieve that FFO provides useful information about our performance whencompared to other REITs since FFO is generally recognized as the industrystandard for reporting the operations of REITs.  FFO does not represent the cash flows from operations defined byGAAP, may not be comparable to similarly titled measures of other companies andshould not be considered as an alternative to net income as an indicator of ouroperating performance or to cash flows as a measure of liquidity.  Excluded from FFO are significant componentsin understanding our financial performance.

 

FFO before preferreddividends and preferred stock conversion during the first quarter of 2004decreased $0.5 million or 3.3% to $14.0 million compared to the first quarterof 2003 primarily because:

•                  decreasedinterest income reduced FFO $0.8 million

•                  additionalinterest expense reduced FFO $0.4 million

 

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•                  propertiessold or held for sale contributed $0.4 million to FFO in the prior year

•                  thesedecreases to FFO were partially offset by:

•                  propertieswe owned in both years increased FFO $0.6 million

•                  decreasedgeneral and administrative expenses increased FFO $0.5 million

 

**Liquidity and Capital Resources**

 

Liquidityrefers to our ability to generate sufficient cash flows to meet the short andlong-term cash requirements of our business operations.  Capital resources represent those funds usedor available to be used to support our business operations and consist ofstockholders’ equity and debt.

 

Cashflow from operations has been the principal source of capital to fund ourongoing operations and dividend payments, while asset sales and use of ourcredit facilities and mortgage financing have been the principal sources ofcapital required to fund our growth. While we are positioned to finance our business activities through avariety of sources, we expect to satisfy short-term liquidity requirementsthrough net cash provided by operations and through borrowings.

 

***Dividends***

Asa REIT, we are required to distribute 90% of our taxable income, excludingcapital gains, in dividends.  Our SeriesA Preferred Stock required a quarterly dividend payment of $9.6 million duringthe first quarter of 2004.  Also during2004, we declared and issued a dividend of 397,807 additional shares of SeriesB Preferred Stock.  As of March 31,2004, we have a federal net operating loss (NOL) carry-forward of approximately$17.1 million, which could be used to offset future taxable income.

 

Asa result of our Recapitalization Transaction, our Series B Preferred Stock wasexchanged for shares of common stock. In addition, based on a final report from the exchange agent in theSeries A Exchange Offer, 20,942,672 shares of our Series A Preferred Stock weretendered for exchange in the Series A Exchange Offer for a total of 2,942,463shares of our Series 1 Preferred Stock and 18,900,219 shares of our commonstock (on a post 1-for-4 reverse stock split basis).  In the future, if the dividends we pay to holders of our Series Aand Series 1 Preferred Stock are less than 90% of our taxable income (afterapplying any applicable NOLs), we can declare a dividend to our commonstockholders.  Because theRecapitalization Transaction reduced the amount of dividends payable topreferred holders, in the future it will be more likely that we will berequired to pay a dividend to our common stockholders in order to distribute90% of our taxable income.  OnApril 13, 2004, we announced that our board of directors declared a dividendto our common stockholders of $0.28 per share and we also declared a dividendof $0.35 per share on our Series A Preferred Stock.  We also declared a dividend of $0.16 per share on the Series 1Preferred Stock, which represents a quarterly dividend of $0.29 per shareprorated for the period of March 12, 2004 through April 30, 2004.

 

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Ifour taxable income is less than the dividends we pay to holders of our Series Aand Series 1 Preferred Stock, we are still obligated to pay them.  If we are unable to pay these dividends whendue, they accumulate until paid.

 

In May 2004, we announcedthat on June 7, 2004, we will redeem 1.0 million shares of our Series APreferred Stock for the redemption price of $16.00 per share.

 

***Debt***

InSeptember 2001, we entered into a $100.0 million unsecured credit facilitywith Fleet Bank as agent.  InFebruary 2004, we amended the credit facility, repaid $60.0 million andWells Fargo Bank assumed the amended facility. The amended facility provides for a maximum borrowing of $25.0million.  This amendment was intended toprovide financing through the completion of the RecapitalizationTransaction.  In April 2004, weentered into a new $50.0 million credit facility with Wells Fargo Bank.  The new facility has a 3-year term and aninterest rate of LIBOR plus 155 basis points and the rate will be variable,between 118 and 170 basis points based on our leverage and other financialratios.  We will be able to increase thenew facility by $25.0 million to allow up to $75.0 million of borrowings.

 

Ourcurrent credit facility requires us to comply with specified financialcovenants, the most restrictive of which relate to fixed charge coverage andleverage.  Covenants in some of ourconstruction loans are also tied to our credit facility.  We were in compliance with all covenants inour credit facility at March 31, 2004. To the extent that we violate any of these covenants in the future, wewould need to obtain waivers from our lenders to maintain compliance.  We cannot assure that any such waivers wouldbe forthcoming.

 

In2004 we had or will have the following significant debt financing andmaturities:

•                  In January 2004, we obtained a $60.0million loan secured by our property in Pentagon City, VA.  We used the proceeds to reduce the amountoutstanding on our credit facility

•                  In February 2004, we repaid a $4.7million loan related to our property in Newport, KY.  We repaid the loan through borrowing on our credit facility

•                  In March 2004, a $28.5 millionconstruction loan related to our property in Newport, KY matured.  We extended this loan for one year at thesame terms

•                  In April 2004, we refinanced aconstruction loan related to our property in Temecula, CA with a new lender for$29.0 million

•                  In April 2004, we repaid a $19.3 millioncapital lease obligation on our Greensburg, IN property with proceeds from thesale of our property in Hampton, VA (approximately $4.6 million) with thebalance through a borrowing on our credit facility.  We plan to repay the borrowing on our credit facility with a new$14.2 million loan

•                  In June 2004, a $4.6 million loanrelated to land we own in Orlando, FL matures. This loan is guaranteed by us and by our partner.  The loan requires monthly principal repaymentsof $1.5 million until paid in full.  Wehave been funding these repayments on behalf of the partnership until it isrepaid or we refinance the loan

•                  In July 2004, a $121.4 million loanrelated to five properties matures.  Weplan to refinance this loan

 

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•                  In December 2004, an $11.7 millioncapital lease related to our office building in San Diego/Rancho Bernardo, CAmatures.  We subleased our interest inthis property to former members of our senior management and granted them theright to purchase the property.  Thisright to purchase has been exercised and closing is scheduled for May 2004

 

Wemay also refinance additional debt outstanding to obtain more favorable terms.

 

Thefollowing table summarizes all of our long-term contractual obligations,excluding interest, to pay third parties as of March 31, 2004 (amounts inthousands):

 

|                     |   | **Contractual  Cash Obligations** |    |
|--------------------------|--------|-----------------------------------|---------|
|                     |   | **Total**                         |    | **Less than  1 year** |   | **1-3  years** |   | **3-5  Years** |   | **More  than 5  years** |   |
| Debt                     |   | $                                 | 576,461 |   | $ | 218,567 |   | $ | 68,368 |   | $ | 29,011 |   | $ | 260,515 |   |
| Ground lease obligations |   | 26,412                            |    | 748 |   | 1,994 |   | 1,994 |   | 21,676 |   |
| Total                    |   | $                                 | 602,873 |   | $ | 219,315 |   | $ | 70,362 |   | $ | 31,005 |   | $ | 282,191 |   |

 

In 2004 we plan to use cash flow from operations to fund our recurringdebt service obligations.

 

##### ***Off-Balance Sheet FinancingMatters***

The City of Newport, KY in 1999 issued two series of public improvementbonds related to our project in Newport, KY. The Series 2000a tax exempt bonds total $44.2 million and are broken downas 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 millionmaturing 2027 with interest at 8.375%. The Series 2000b bonds are taxable and have a par amount of $11.6 millionwith interest at 11% due 2009.  Thebonds are guaranteed by the Newport project, Excel Legacy, and the project’sthird party developer.  As ofMarch 31, 2004, Newport had drawn on $46.8 million of the bonds forconstruction incurred prior to that date.

 

***Growth***

Wecontinue to evaluate various properties for acquisition or development andcontinue to evaluate other investment opportunities in a very competitive realestate market.  We anticipate borrowingavailable amounts on our credit facility or mortgages to fund any acquisitionand development opportunities.  We alsoanticipate obtaining construction loans to fund our developmentactivities.  During the first quarter of2004, we paid $2.8 million to purchase our joint venture partners’ 50% interestin a property in Fresno, CA.

 

***Development***

Wehave a significant retail project in Newport, KY.  The majority of the construction was completed inOctober 2001, with all of the primary buildings completed except for oneout parcel yet to be leased.  The projectopened in October 2001.  AtMarch 31, 2004, the project was approximately 73% occupied, excludingground leases.  As the project becomesfully leased, there may be capital required to fund the remaining tenantimprovements.  We spent $200,000 on

 

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tenantimprovements during the first quarter of 2004 and estimate spending anadditional $1.1 million through the remainder of 2004.

 

Wealso have retail development projects in which construction will continuethrough 2004.  The Temecula, CA projectis an open-air retail shopping center with Wal-Mart, Kohl’s and othertenants.  At March 31, 2004, theproject was approximately 98% leased. We plan to develop an historical parcel within this project for approximately$5.0 million.  We spent approximately$200,000 on this development during the first quarter of 2004 and estimatespending an additional $1.0 million through the remainder 2004.  We expect to fund these costs throughavailable cash.

 

InNovember 2002, we purchased land adjacent to our retail property inOrlando, FL to develop an open-air retail center.  At March 31, 2004, the project was approximately 61%occupied.  We estimate the total cost ofthis development to be approximately $19.7 million with an estimated $0.6million remaining to complete construction, which we will fund through anexisting construction loan.

 

LosArcos Development, LLC (an affiliate of the Ellman Companies) owns land inScottsdale, AZ.  Commencing in 1996loans were made to Los Arcos Development, LLC to acquire this real estate, andwe also acquired an additional senior loan secured by the Scottsdale propertyin 2003 (see Note 4).  AtDecember 31, 2003, we wrote down the value of these notes receivable andrecognized an impairment of $29.5 million. As of March 31, 2004, the outstanding principal balance on the notereceivable relating to the Scottsdale property, net of the impairment writedown, was approximately $22.0 million and is classified as land on ourConsolidated Balance Sheets in accordance with FIN 46R.  We contributed $0.9 million in the firstquarter of 2004 for pre-development expenses related to this project, and thissum is included within the indebtedness under the loans.

 

OrlandoBusiness Park, LLC owns approximately 2,400 acres of land in Orlando, FL.  During 2004 we estimate spendingapproximately $1.0 million on re-entitlements and plan on funding this amountthrough a loan or available cash.

 

***Properties Held for Sale***

Fromtime to time we will consider selling properties to better align our portfoliowith our geographic and tenant composition strategies.  We may also participate in tax-deferredexchange transactions, which allow us to dispose of properties and reinvest theproceeds in a tax efficient manner.  Wedid not sell any properties during the first quarter ended March 31, 2004.In April 2004, we sold a property in Hampton, VA for $4.8 million.  When we sell an operating property, weanticipate a temporary reduction in operating income due to the time lagbetween selling a property and reinvesting the proceeds.

 

TheAnaheim GardenWalk project in Anaheim, CA, located adjacent to Disney’s twotheme parks on Harbor Boulevard and Disney’s new proposed theme park on KatellaAvenue, is expected to consist of a 626,000 square foot open-air retail centerand four hotels.  During the

 

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fourthquarter of 2003, we decided to sell the property rather than develop it andwrote down the value by $43.4 million to its estimated fair market value.

 

Wealso own approximately 40 acres of land in Farmington, UT.  During the fourth quarter of 2003, wedecided to sell the property rather than develop it and wrote down the value by$3.6 million to its estimated fair market value.

 

Weare contemplating purchasing various properties and selling certain otherproperties.  As we sell properties, ourcash flows from operations may decrease until the proceeds are reinvested,either into new properties, used to reduce debt, or used for the redemption ofour Series A Preferred Stock.

 

***Notes Receivable***

Wehad $10.3 million in principal amount of third party notes receivableoutstanding as of March 31, 2004 related to various real estatedevelopments and related businesses. The notes generally do not require cash payments of interest untilspecified future dates, typically when developments are completed or sold.  Of the $10.3****million outstanding, notes receivable from companies owned byor affiliated with Steven Ellman (the Ellman Affiliates) represent an aggregateoutstanding principal balance, for accounting purposes, of approximately $9.5million.  The outstanding balance is netof a $12.9 million impairment recorded in the fourth quarter of 2003 to reflectthe fair value of the notes in connection with management’s plan to sell ournon-core assets.  These notes receivablefrom the Ellman Affiliates are collateralized by a pledge of certain EllmanAffiliates’ distributions from a holding company that owns the Phoenix Coyoteshockey team and other related assets.  These loans were made at a time when the Ellman Affiliates intended torelocate the hockey team to an arena that was to be constructed on theScottsdale property owned by Los Arcos Development, LLC.

 

Asa result of delays at the Scottsdale property, the Ellman Affiliates elected topursue an alternative site for the hockey arena in Glendale, AZ.  In December 2002, the Ellman Affiliatesand the other investors involved in the ownership of the Phoenix Coyotesentered into a series of transactions in which the Phoenix Coyotes hockey teamand related real estate development assets were consolidated for the purpose ofassisting in obtaining additional financing. The sale of equity interests inthe holding company could generate proceeds to help repay our notes.  However, it is unclear at this time theimpact the structure will have on the repayment of our loans made to the EllmanAffiliates in connection with their acquisition of the Phoenix Coyotes.   Although interest continues to accrue perthe terms of the notes, we stopped accruing interest on the loans foraccounting purposes when the development projects were consolidated into theholding company.

 

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

 

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InMay 2004, we entered into further agreements with the Ellman Affiliates topermit a release of the Ellman Affiliates from further liability under theloans in exchange for a nominal payment, provided that certain otherobligations of the Ellman Affiliates owed to us, including the obligations tomake the payments arising with respect to the notes receivable described inNote 4 have been satisfied, and provided further that the Ellman Affiliatesdeliver documents satisfactory to us releasing and indemnifying us fromliabilities with respect to our various transactions with the EllmanAffiliates.

 

***Other***

In April 2002, weentered into five Interest Rate Swap Agreements with Fleet Bank that areaccounted for under SFAS No. 133.  Thecombined notional amount was approximately $161 millionand the maturities ranged from 2009 to 2010. We paid monthly interest of LIBOR plus 3.08% to 3.77% and Fleet Bankassumed our fixed rates of 8.18% to 9.00%. These swaps hedged the fair value of fixed-rate debt.  In October 2002, we sold the five swapsback to the counter party for $13.8 million and will amortize the gain over thefixed-rate debt’s remaining life through 2009 to 2010.

 

InJuly 2002, we paid $3.4 million for four Interest Rate Cap Agreements withWells 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 onone month LIBOR interest at 7%.

 

**Inflation**

 

Because a substantialnumber of our leases contain provisions for rent increases based on changes invarious consumer price indices, based on fixed rate increases, or based onpercentage rent if tenant sales exceed certain base amounts, we do not expectinflation to have a material impact on future net income or cash flow fromdeveloped and operating properties.  Inaddition, substantially all retail leases are triple net, which means specificoperating expenses and property taxes are passed through to the tenant.

 

# **ITEM 3 -QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

# ** **

Market risks relating toour operations result primarily from changes in short-term LIBOR interestrates.  We do not have any significantforeign exchange or other material market risk.

 

Our exposure to marketrisk for changes in interest rates relates primarily to our variable interestrate debt.  We enter into variable ratedebt obligations to support general corporate purposes, including acquisitions,capital expenditures and working capital needs.  We continuously evaluate our level of variable rate debt withrespect to total debt and other factors, including our assessment of thecurrent and future economic environment.

 

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We had $311.3 million invariable rate debt outstanding at March 31, 2004.  Based upon these year-end debt levels, ahypothetical increase in interest rates by 100 basis points would increaseinterest expense by approximately $3.1 million on an annual basis, and likewisedecrease our earnings and cash flows. We cannot predict market fluctuations in interest rates and their impacton our variable rate debt, nor can there be any assurance that fixed ratelong-term debt will be available to us at favorable rates, if at all.  Consequently, future results may differmaterially from the estimated adverse changes discussed above.

 

InJuly 2002, in order to mitigate our variable interest rate exposure, weacquired four interest rate caps, which hedge our exposure on $152 million ofvariable rate debt.  The hedges limitour exposure to the one-month LIBOR index associated with certain of ouroutstanding debt at 7%.  To the extentthe one-month LIBOR index exceeds 7%, the counter parties on the hedges willpay us the difference between the actual index and 7%.

 

The following tablepresents the scheduled principal payments on notes receivable and the scheduledprincipal payments on mortgages payable over the next five years andthereafter.  The table also includes theaverage interest rates of the financial instruments during each respective yearand the fair value of the notes receivable and mortgages payable.  We determine the fair value of financialinstruments through the use of discounted cash flows analysis using currentinterest rates for notes receivable with terms and credit characteristicssimilar to our existing portfolio and borrowings under terms similar to ourexisting mortgages payable.

 
|                                              |   | **Expected  Maturity Date as of March 31, 2004** |    |
|---------------------------------------------------|--------|-------------------------------------------------------|---------|
|                                              |   | **(dollar  amounts in thousands)**                    |    |
|                                              |   | **2004**                                              |    | **2005** |   | **2006** |   | **2007** |   | **2008** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
| Notes receivable, including notes from affiliates |   | $                                                     | 10,311  |   | — |   | — |   | — |   | — |   | — |   | $ | 10,311 |   | $ | 10,311 |   |
| Average interest rate                             |   | 12                                                    | %       | — |   | — |   | — |   | — |   | — |   | 12 | % |   |   |
| Debt                                              |   | $                                                     | 218,567 |   | $ | 35,671 |   | $ | 32,697 |   | $ | 3,343 |   | $ | 25,668 |   | $ | 260,515 |   | $ | 576,461 |   | $ | 569,577 |   |
| Average interest rate                             |   | 3                                                     | %       | 6 | % | 4 | % | 8 | % | 3 | % | 7 | % | 5 | % |   |   |
|                                                   |        |                                                       |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

# ** **

# **ITEM 4 – CONTROLSAND PROCEDURES**

# ** **

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our reports filed under the Securities and Exchange Act of1934, as amended, is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the Securities Exchange Commission,and that such information is accumulated and communicated to our management,including our Chief Executive Officer and Chief Financial Officer, asappropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosurecontrols and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

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As required by Securitiesand Exchange Commission Rule 13a-15(b), under the supervision and with theparticipation of management, including our Chief Executive Officer and ChiefFinancial Officer, we carried out an evaluation of the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective at the reasonable assurance level.

 

There have been nochanges in our internal controls over financial reporting during the quartercovered by this report that have materially affected, or are reasonably likelyto materially affect, our internal controls over financial reporting.

 

#### **PART II - OTHER INFORMATION**

#### ** **

# **ITEM 1 – LEGALPROCEEDINGS**

# ** **

Weare not a party to any legal proceedings other than various claims and lawsuitsarising in the ordinary course of business that, in the opinion of ourmanagement, are not individually or in the aggregate material to our financialstatements.

 

# **ITEM 2 – CHANGESIN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES**

# ** **

On March 12, 2004, we completed arecapitalization transaction (the Recapitalization Transaction) in which weoffered to exchange, at the option of the holder, either shares of our commonstock or shares of our newly designated Series 1 Preferred Stock for alloutstanding shares of our Series A Preferred Stock and exchanged shares of ourcommon stock for all of our outstanding shares of Series B Preferred Stock.  As part of the Recapitalization Transaction,we also amended and restated our charter to, among other things:

•                  effect a 1-for-4 reverse stock split of ourcommon stock

•                  designate and establish the terms of ourSeries 1 Preferred Stock issued in exchange for some of our Series A PreferredStock

•                  eliminate the Series B Preferred Stockfollowing its exchange for common stock

•                  change the manner in which our directors areelected so that the holders of common stock and Series A Preferred Stock, butnot 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 toprovide sufficient shares to complete the Recapitalization Transaction

 

# **ITEM 4 – SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

# ** **

We held a special meetingof stockholders on March 11, 2004 at which our stockholders approved theRecapitalization Transaction.  As of therecord date for the meeting, we had 35,427,325 shares of common stock,27,434,166 shares of Series A Preferred Stock and 24,125,207 shares of Series BPreferred Stock outstanding.  Inapproving the Recapitalization

 

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Transaction, ourstockholders approved the following matters, and each matter received the votesindicated:

 

**Proposa1One:**  A proposal toissue common stock and Series 1 Preferred Stock in the Series A Exchange Offerwas approved with the following votes:

 
|         |   | **Votes For** |   | **Votes  Against** |   | **Votes  Abstaining** |   | **Non Votes** |   |
|--------------|--------|---------------|--------|--------------------|--------|-----------------------|--------|---------------|--------|
| Proposal One |   | 53,731,396    |   | 105,921            |   | —                |   | —        |   |

 

**ProposalTwo**:  A proposal toissue common stock in the Series B Exchange Offer was approved with thefollowing votes:

 
|         |   | **Votes For** |   | **Votes  Against** |   | **Votes  Abstaining** |   | **Non Votes** |   |
|--------------|--------|---------------|--------|--------------------|--------|-----------------------|--------|---------------|--------|
| Proposal Two |   | 53,756,296    |   | 120,641            |   | —                |   | —        |   |

 

**ProposalThree:**  A proposal toamend Price Legacy’s charter to effect a 1 for 4 reverse stock split of thecommon stock was approved with the following votes:

 
|           |   | **Votes For** |   | **Votes  Against** |   | **Votes  Abstaining** |   | **Non Votes** |   |
|----------------|--------|---------------|--------|--------------------|--------|-----------------------|--------|---------------|--------|
| Proposal Three |   | 53,428,513    |   | 450,554            |   | 32,383                |   | 8,384,499     |   |

 

**ProposalFour:**  A proposal toamend Price Legacy’s charter to designate and establish the terms of the Series1 Preferred Stock that may be issued in exchange for shares of Series APreferred Stock was approved with the following votes:

 
|          |   | **Votes For** |   | **Votes  Against** |   | **Votes  Abstaining** |   | **Non Votes** |   |
|---------------|--------|---------------|--------|--------------------|--------|-----------------------|--------|---------------|--------|
| Proposal Four |   | 53,472,911    |   | 277,191            |   | 161,348               |   | 8,384,499     |   |

 

**ProposalFive:**  A proposal toamend Price Legacy’s charter to eliminate the Series B Preferred Stockfollowing its exchange for common stock was approved with the following votes:

 
|          |   | **Votes For** |   | **Votes  Against** |   | **Votes  Abstaining** |   | **Non Votes** |   |
|---------------|--------|---------------|--------|--------------------|--------|-----------------------|--------|---------------|--------|
| Proposal Five |   | 53,816,987    |   | 65,447             |   | 29,016                |   | 8,384,499     |   |

 

**ProposalSix:**  A proposal toamend Price Legacy’s charter to change the manner of election of Price Legacy’sboard of directors was approved with the following votes:

 
|         |   | **Votes For** |   | **Votes  Against** |   | **Votes  Abstaining** |   | **Non Votes** |   |
|--------------|--------|---------------|--------|--------------------|--------|-----------------------|--------|---------------|--------|
| Proposal Six |   | 53,757,848    |   | 124,376            |   | 29,226                |   | 8,384,499     |   |

 

**ProposalSeven:**  A proposal toamend Price Legacy’s charter to change the authorized capital stock wasapproved with the following votes:

 

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|           |   | **Votes For** |   | **Votes  Against** |   | **Votes  Abstaining** |   | **Non Votes** |   |
|----------------|--------|---------------|--------|--------------------|--------|-----------------------|--------|---------------|--------|
| Proposal Seven |   | 53,680,689    |   | 200,484            |   | 30,277                |   | 8,384,499     |   |

 

**ProposalEight:**  A proposal to amendand restate Price Legacy’s charter, in substantially the form of theArticles of Amendment and Restatement attached to the proxy statement asAnnex B, which included the foregoing amendments was approved with thefollowing votes:

 
|           |   | **Votes For** |   | **Votes Against** |   | **Votes  Abstaining** |   | **Non Votes** |   |
|----------------|--------|---------------|--------|-------------------|--------|-----------------------|--------|---------------|--------|
| Proposal Eight |   | 53,397,279    |   | 433,988           |   | 80,183                |   | 8,384,499     |   |

 

# **ITEM 6 - EXHIBITSAND REPORTS ON FORM 8-K**

# ** **

(a)          The following exhibitsare included herein or incorporated by reference:

31.1                 CertificationsPursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1                 CertificationsPursuant to 18 U.S.C. Section 1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002

(b)         Reports on Form 8-K

We filed a report on Form8-K on February 9, 2004 reporting under Items 5, 7, and 12 the issuance ofa press release announcing a one-time non-cash charge.

 

 

**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                     | PRICE LEGACY  CORPORATION |
|--------------------------|---------------------------|
|                     | *Registrant*              |
|                     |                      |   |
| Date:  May 10, 2004 | /s/ Jack McGrory          |   |
|                     | Jack McGrory              |   |
|                     | *Chief Executive Officer* |   |
|                     |                      |   |
|                     |                      |   |
| Date:  May 10, 2004 | /s/ Jeffrey R. Fisher     |   |
|                     | Jeffrey R. Fisher         |   |
|                     | *Chief Financial Officer* |   |

 

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