**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

# **WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarter endedSeptember 30, 2003**

 

**Commission File Number 1-16637**

 

**PRICELEGACY CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

| **Maryland**                                                  |   | **33-0628740**                      |
|---------------------------------------------------------------|--------|-------------------------------------|
| (State or other jurisdiction ofincorporation or organization) |   | (I.R.S. EmployerIdentification 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 check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.  YES ý   NO o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2).  YES ý   NO o

 

The registrant had 34,732,157 shares of common stock,par value $.0001 per share, outstanding at November 11, 2003.

 

 

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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 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 6 - EXHIBITS AND REPORTS ON FORM 8-K**                                                            |

 

2

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#### **PART I** -FINANCIAL INFORMATION

 

# **ITEM 1**- FINANCIAL STATEMENTS

 

**PRICELEGACY CORPORATION**

## ***CONSOLIDATEDBALANCE SHEETS***

**(amounts in thousands, except sharedata)**

 
|                                                                                                                                                   |   | **September 30  2003** |          | **December 31  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------------|----------------------------|--------|
|                                                                                                                                                   |   | **(unaudited)**             |          |                       |   |
| **ASSETS**                                                                                                                                             |   |                        |          |                       |   |
|                                                                                                                                                   |   |                        |          |                       |   |
| Real estate assets                                                                                                                                     |   |                        |          |                       |   |
| Land and land improvements                                                                                                                             |   | **$**                       | **487,133**   |                       | $      | 446,331 |   |
| Building and improvements                                                                                                                              |   | **686,536**                 |          | 659,469                    |   |
| Construction in progress                                                                                                                               |   | **52,440**                  |          | 35,235                     |   |
|                                                                                                                                                   |   | **1,226,109**               |          | 1,141,035                  |   |
| Less accumulated depreciation                                                                                                                          |   | **(49,054**                 | **)**         | (34,617                    | )      |
|                                                                                                                                                   |   | **1,177,055**               |          | 1,106,418                  |   |
|                                                                                                                                                   |   |                        |          |                       |   |
| Investment in unconsolidated real estate joint  ventures                                                                                               |   | **9,657**                   |          | 26,019                     |   |
| Cash and cash equivalents                                                                                                                              |   | **11,811**                  |          | 11,471                     |   |
| Restricted cash                                                                                                                                        |   | **13,036**                  |          | 8,787                      |   |
| Accounts receivable, net of allowance of $1,640  and $1,669                                                                                            |   | **6,598**                   |          | 6,036                      |   |
| Notes receivable                                                                                                                                       |   | **20,339**                  |          | 62,788                     |   |
| Interest receivable                                                                                                                                    |   | **3,160**                   |          | 16,032                     |   |
| Deferred rents                                                                                                                                         |   | **10,595**                  |          | 9,460                      |   |
| Other assets                                                                                                                                           |   | **24,827**                  |          | 26,007                     |   |
| Total assets                                                                                                                                           |   | **$**                       | **1,277,078** |                       | $      | 1,273,018 |   |
|                                                                                                                                                   |   |                        |          |                       |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                         |   |                        |          |                       |   |
|                                                                                                                                                   |   |                        |          |                       |   |
| Liabilities                                                                                                                                            |   |                        |          |                       |   |
| Mortgages and notes payable                                                                                                                            |   | **$**                       | **495,050**   |                       | $      | 487,811 |   |
| Revolving line of credit                                                                                                                               |   | **64,700**                  |          | 60,300                     |   |
| Accounts payable and other liabilities                                                                                                                 |   | **32,899**                  |          | 31,341                     |   |
| Total liabilities                                                                                                                                      |   | **592,649**                 |          | 579,452                    |   |
|                                                                                                                                                   |   |                        |          |                       |   |
| Commitments                                                                                                                                            |   |                        |          |                       |   |
|                                                                                                                                                   |   |                        |          |                       |   |
| Minority interests                                                                                                                                     |   | **1,608**                   |          | 595                        |   |
|                                                                                                                                                   |   |                        |          |                       |   |
| Stockholders’ equity                                                                                                                              |   |                        |          |                       |   |
| Series A preferred stock, cumulative, redeemable,  $0.0001 par value, 27,849,771 shares authorized, 27,434,166 shares issued and  outstanding          |   | **399,615**                 |          | 399,615                    |   |
| Series B preferred stock, junior, convertible,  redeemable, $0.0001 par value, 27,458,855 shares authorized, 19,666,754  shares issued and outstanding |   | **106,234**                 |          | 106,234                    |   |
| Common stock, $0.0001 par value, 94,691,374 shares  authorized, 36,999,157 and 37,255,748 issued and outstanding                                       |   | **4**                       |          | 4                          |   |
| Additional paid-in capital                                                                                                                             |   | **183,942**                 |          | 184,720                    |   |
| Accumulated other comprehensive loss                                                                                                                   |   | **(1,648**                  | **)**         | (921                       | )      |
| Retained (deficit) earnings                                                                                                                            |   | **(5,326**                  | **)**         | 3,319                      |   |
| Total stockholders’ equity                                                                                                                        |   | **682,821**                 |          | 692,971                    |   |
| Total liabilities and stockholders’ equity                                                                                                        |   | **$**                       | **1,277,078** |                       | $      | 1,273,018 |   |

 

*See accompanying notes.*

 

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**PRICE LEGACY CORPORATION**

## ***CONSOLIDATED STATEMENTS OF OPERATIONS***

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

 
|                                                    |   | **Third  Quarter  Three Months Ended  September 30** |       | **Year-to-Date  Nine Months Ended  September 30** |   |
|---------------------------------------------------------|--------|-----------------------------------------------------------|------------|--------------------------------------------------------|--------|
|                                                    |   | **2003**                                                  |       | **2002**                                               |   | **2003** |   | **2002** |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Rental  revenues                                        |   | **$**                                                     | **32,193** | ** **                                             | $      | 29,840 |   | **$** | **96,095** | ** ** | $ | 84,698 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Expenses                                                |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Operating  and maintenance                              |   | **6,353**                                                 | ** ** | 5,879                                                  |   | **19,256** | ** ** | 15,902 |   |
| Property  taxes                                         |   | **3,851**                                                 | ** ** | 3,501                                                  |   | **11,475** | ** ** | 9,797 |   |
| Depreciation  and amortization                          |   | **5,426**                                                 | ** ** | 4,453                                                  |   | **15,606** | ** ** | 12,440 |   |
| General  and administrative                             |   | **5,706**                                                 | ** ** | 4,357                                                  |   | **9,519** | ** ** | 8,813 |   |
| Total  expenses                                         |   | **21,336**                                                | ** ** | 18,190                                                 |   | **55,856** | ** ** | 46,952 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Operating  income                                       |   | **10,857**                                                | ** ** | 11,650                                                 |   | **40,239** | ** ** | 37,746 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Interest  and other                                     |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Interest  expense                                       |   | **(6,637**                                                | **)**      | (6,157                                                 | )      | **(19,906** | **)** | (18,045 | ) |
| Interest  income                                        |   | **82**                                                    | ** ** | 1,219                                                  |   | **1,006** | ** ** | 3,607 |   |
| Equity  in earnings of joint ventures                   |   | **4**                                                     | ** ** | 318                                                    |   | **1,168** | ** ** | 632 |   |
| Total  interest and other                               |   | **(6,551**                                                | **)**      | (4,620                                                 | )      | **(17,732** | **)** | (13,806 | ) |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Income  from continuing operations                      |   | **4,306**                                                 | ** ** | 7,030                                                  |   | **22,507** | ** ** | 23,940 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Discontinued  operations:                               |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| (Loss)  income from operations                          |   | **(7**                                                    | **)**      | 735                                                    |   | **159** | ** ** | 6,211 |   |
| Provision  for asset impairment                         |   | **—**                                                | ** ** | —                                                 |   | **—** | ** ** | (2,528 | ) |
| Net  gain (loss) on sale of real estate                 |   | **20**                                                    | ** ** | 9,991                                                  |   | **(2,502** | **)** | 9,148 |   |
| Gain  (loss) on discontinued operations                 |   | **13**                                                    | ** ** | 10,726                                                 |   | **(2,343** | **)** | 12,831 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Net  income before (loss) gain on sale of real estate   |   | **4,319**                                                 | ** ** | 17,756                                                 |   | **20,164** | ** ** | 36,771 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Net  (loss) gain on sale of real estate and investments |   | **(691**                                                  | **)**      | —                                                 |   | **(3** | **)** | 291 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Net  income                                             |   | **3,628**                                                 | ** ** | 17,756                                                 |   | **20,161** | ** ** | 37,062 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Dividends  to preferred stockholders                    |   | **(12,486**                                               | **)**      | (12,241                                                | )      | **(37,270** | **)** | (36,549 | ) |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Net  (loss) income applicable to common stockholders    |   | **$**                                                     | **(8,858** | **)**                                                  | $      | 5,515 |   | **$** | **(17,109** | **)** | $ | 513 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Basic  and diluted net (loss) income per common share   |   | **$**                                                     | **(.24**   | **)**                                                  | $      | .14 |   | **$** | **(.46** | **)** | $ | .01 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Weighted  average common shares outstanding             |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Basic                                                   |   | **36,999**                                                | ** ** | 39,167                                                 |   | **37,009** | ** ** | 40,201 |   |
| Diluted                                                 |   | **36,999**                                                | ** ** | 39,325                                                 |   | **37,009** | ** ** | 40,442 |   |
|                                                    |   |                                                      | ** ** |                                                   |   |   | ** ** |   |   |
| Dividends  per preferred share                          |   | **$**                                                     | **.35**    | ** **                                             | $      | .35 |   | **$** | **1.05** | ** ** | $ | 1.05 |   |

 

*See accompanying notes.*

 

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**PRICE LEGACY CORPORATION**

## ***CONSOLIDATED STATEMENTS OF CASH FLOWS***

**(unaudited - amounts in thousands)**
|                                                                                  |   | **Year-to-Date  Nine Months Ended  September 30** |       |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------|
|                                                                                  |   | **2003**                                               |       | **2002** |   |
| Operating activities                                                                  |   |                                                   | ** ** |   |   |
| Net  income                                                                           |   | **$**                                                  | **20,161** | ** ** | $ | 37,062 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities:    |   |                                                   | ** ** |   |   |
| Depreciation  and amortization                                                        |   | **15,684**                                             | ** ** | 13,415 |   |
| Net  loss (gain) on sale of real estate                                               |   | **2,505**                                              | ** ** | (9,439 | ) |
| Deferred  rents                                                                       |   | **(1,135**                                             | **)**      | (2,175 | ) |
| Equity  in earnings of joint venture                                                  |   | **(1,168**                                             | **)**      | (632 | ) |
| Compensation  expense related to retirement of officers’ notes and common shares |   | **—**                                             | ** ** | 2,836 |   |
| Asset  impairment                                                                     |   | **—**                                             | ** ** | 2,528 |   |
| Changes  in operating assets and liabilities:                                         |   |                                                   | ** ** |   |   |
| Accounts  receivable and other assets                                                 |   | **2,155**                                              | ** ** | (9,430 | ) |
| Accounts  payable and other liabilities                                               |   | **1,651**                                              | ** ** | 1,395 |   |
| Net  cash provided by operating activities                                            |   | **39,853**                                             | ** ** | 35,560 |   |
|                                                                                  |   |                                                   | ** ** |   |   |
| Investing  activities                                                                 |   |                                                   | ** ** |   |   |
| Deposits  to restricted cash                                                          |   | **(4,249**                                             | **)**      | (6,434 | ) |
| Additions  to real estate assets                                                      |   | **(23,749**                                            | **)**      | (154,586 | ) |
| Proceeds  from the sale of real estate assets                                         |   | **16,608**                                             | ** ** | 69,176 |   |
| Contributions  to real estate joint ventures                                          |   | **(6**                                                 | **)**      | (869 | ) |
| Distributions  from real estate joint ventures                                        |   | **326**                                                | ** ** | 1,168 |   |
| Advances  on notes receivable                                                         |   | **(14,677**                                            | **)**      | (2,954 | ) |
| Repayments  on notes receivable                                                       |   | **18,265**                                             | ** ** | 3,436 |   |
| Purchase  of treasury stock                                                           |   | **—**                                             | ** ** | (1,650 | ) |
| Net  cash used in investing activities                                                |   | **(7,482**                                             | **)**      | (92,713 | ) |
|                                                                                  |   |                                                   | ** ** |   |   |
| Financing  activities                                                                 |   |                                                   | ** ** |   |   |
| Advances  from revolving line of credit, mortgages and notes payable                  |   | **72,872**                                             | ** ** | 125,814 |   |
| Repayments  of revolving line of credit, mortgages and notes payable                  |   | **(76,097**                                            | **)**      | (40,199 | ) |
| Dividends  paid                                                                       |   | **(28,806**                                            | **)**      | (28,806 | ) |
| Proceeds  from exercise of stock options                                              |   | **—**                                             | ** ** | 303 |   |
| Net  cash (used) provided by financing activities                                     |   | **(32,031**                                            | **)**      | 57,112 |   |
|                                                                                  |   |                                                   | ** ** |   |   |
| Net  increase (decrease) in cash and cash equivalents                                 |   | **340**                                                | ** ** | (41 | ) |
|                                                                                  |   |                                                   | ** ** |   |   |
| Cash  and cash equivalents at beginning of period                                     |   | **11,471**                                             | ** ** | 22,881 |   |
|                                                                                  |   |                                                   | ** ** |   |   |
| Cash  and cash equivalents at end of period                                           |   | **$**                                                  | **11,811** | ** ** | $ | 22,840 |   |

 

5

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|                                                                                  |   | **Year-to-Date  Nine Months Ended  September 30** |       |
|---------------------------------------------------------------------------------------|--------|--------------------------------------------------------|------------|
|                                                                                  |   | **2003**                                               |       | **2002** |   |
| Supplemental  cash flow information:                                                  |   |                                                   |       |   |   |
| Cash  paid for interest                                                               |   | **$**                                                  | **22,328** |   | $ | 19,652 |   |
|                                                                                  |   |                                                   |       |   |   |
| Supplemental  schedule of noncash investing and financing activities:            |   |                                                   |       |   |   |
| Receipt  of common shares in satisfaction of notes receivable                         |   | **779**                                                |       | — |   |
| Assumption  of existing loans to acquire real estate assets                           |   | **—**                                             |       | 5,787 |   |
| Reduction  in note receivable to acquire real estate assets                           |   | **—**                                             |       | 3,543 |   |
| Change  in other assets and accounts payable for fair value of derivative instruments |   | **—**                                             |       | 10,368 |   |
| Increase  to treasury stock for reduction of officers’ loans                     |   | **—**                                             |       | 9,649 |   |
| Decrease  to officers’ loans and interest receivable                             |   | **—**                                             |       | 12,485 |   |
| Net  adjustment related to disposed real estate asset                                 |   | **—**                                             |       | 733 |   |
|                                                                                       |        |                                                        |            |  |  |  |  |

 

*See accompanying notes.*

 

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**PRICELEGACY CORPORATION**

 

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

**(UNAUDITED)**

 

**September 30,2003**

 

**Note 1 – Organization and SignificantAccounting 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. On September 18, 2001, Price Legacy completed a merger betweenPrice Enterprises, Inc. (PEI) and Excel Legacy Corporation (Excel Legacy)resulting in Excel Legacy becoming a wholly owned subsidiary of PEI (theMerger).  The combined company operatesas a REIT under the name Price Legacy Corporation.

 

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.

 

***AccountingPrinciples***

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) can be omitted.  Certain prior year data have beenreclassified to conform to the 2003 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.  You should also read the financial statementsand notes in our latest Annual Report on Form 10-K, as amended.

 

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.

 

***Consolidation***

We combine our financial statements with those of our wholly-ownedsubsidiaries as well as all affiliates in which we have control and presentthem on a consolidated basis.  Theconsolidated financial statements do not include the results of transactionsbetween us and our subsidiaries or among our subsidiaries.

 

7

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We account for our investment in unconsolidated joint ventures usingthe equity method of accounting.  Underthe equity method of accounting, the net equity investment of the jointventures is reflected on the Consolidated Balance Sheets and the ConsolidatedStatements of Operations include our share of net income or loss from theunconsolidated joint ventures.

 

InJanuary 2003, the Financial Accounting Standards Board (FASB) issued FASBInterpretation No. (FIN) 46, “Consolidation of Variable Interest Entities—aninterpretation of ARB No. 51.”  Thisinterpretation addresses the consolidation of business enterprises (variableinterest entities) to which the usual condition (ownership of a majority votinginterest) of consolidation does not apply, and focuses on financial intereststhat indicate control.  It concludesthat in the absence of clear control through voting interests, a company’sexposure (variable interest) to the economic risks and potential reward fromthe variable interest entity’s assets and activities are the best evidence ofcontrol.  Variable interests are rightsand obligations that convey economic gains or losses from changes in the valuesof the variable interest entity’s assets and liabilities.  Variable interests may arise from financialinstruments, service contracts, nonvoting ownership interests and otherarrangements. If an enterprise holds a majority of the variable interests of anentity, it would be considered the primary beneficiary.  The primary beneficiary would be required toinclude assets, liabilities and the results of operations of the variableinterest entity in its financial statements.  FIN 46 is effective in thefirst fiscal year or interim period beginning after December 15,2003.  We have adopted this standard anddiscuss it further in Note 3.

 

***Real Estate Assets and Depreciation***

We record realestate assets at historical costs and adjust them for recognition of impairmentlosses.  In following purchaseaccounting, we adjusted the historical costs of Excel Legacy’s real estateassets to fair value at the time of the Merger.  Our Consolidated Balance Sheets at September 30, 2003 andDecember 31, 2002 reflect the basis of those real estate assets.

 

We expense ordinaryrepairs and maintenance costs incurred, which include building painting,parking lot repairs, etc.  We capitalizemajor replacements and improvements, which include HVAC equipment, roofs, etc.,and depreciate them over their estimated useful lives.

 

We compute realestate asset depreciation on a straight-line basis over their estimated usefullives, as follows:

 

8

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| Land improvements          |   | 40 years                              |
|----------------------------|--------|---------------------------------------|
| Building and  improvements |   | 20 to 40 years                        |
| Tenant improvements        |   | Lesser of the lease  term or 10 years |
| Fixtures and equipment     |   | 3-7 years                             |

 

We review long-lived assets for impairment when events or changes inbusiness conditions indicate that their full carrying value may not berecovered.  We consider assets to beimpaired and write them down to fair value if their expected associated futureundiscounted cash flows are less than their carrying amounts.  Generally, we estimate fair value usingdiscounted cash flow, direct capitalization or market comparison analyses.  The process of evaluating for impairmentrequires estimates as to future events and conditions, which are subject tovarying market and economic factors.

 

We capitalize interestincurred during the construction period of certain assets and this interest isdepreciated over the lives of those assets. The following table shows interest expense and the amount capitalized(amounts in thousands):

 
|                  |   | **Three Months Ended  September 30** |   | **Nine Months Ended  September 30** |   |
|-----------------------|--------|-------------------------------------------|--------|------------------------------------------|--------|
|                  |   | **2003**                                  |   | **2002**                                 |   | **2003** |   | **2002** |   |
| Interest incurred     |   | $                                         | 7,018  |                                     | $      | 6,710 |   | $ | 21,290 |   | $ | 20,081 |   |
| Interest  capitalized |   | (381                                      | )      | (424                                     | )      | (1,384 | ) | (1,517 | ) |
|                       |        |                                           |        |                                          |        |  |  |  |  |  |  |  |  |

 

Pre-development coststhat are directly related to specific construction projects are capitalized asincurred.  We expense these costs to theextent they are unrecoverable or it is determined that the related project willnot be pursued.

 

***Cash and Cash Equivalents***

We consider all highly liquid investments with a maturity of less thanthree months when purchased to be cash and cash equivalents.

 

We are required tomaintain reserves with certain lenders for capital expenditures, insurance,real estate taxes and debt service.  Theaggregate amount of these reserves held by lenders was $13.0 million atSeptember 30, 2003 and $8.8 million at December 31, 2002, and isshown as restricted cash on the Consolidated Balance Sheets.

 

Our restricted cashbalances at September 30, 2003 and December 31, 2002 also include$2.4 million of funds which represent proceeds from the sale of vacant land atour property in

 

9

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Hollywood/Oakwood Plaza,FL.  The funds will be held by theproperty lender until the debt is repaid in 2009.

 

***Investment in Securities***

We review our investmentsin securities for possible impairment whenever the market value of thesecurities falls below cost and, in our opinion, such decline represents another than temporary impairment. Factors considered in this review include:

 

•                   durationand extent, as well as reasons for which the market value has been less thancost

•                   financialcondition and near-term prospects of the investee

•                   ourability and intent to retain the investment for a period of time to allow for arecovery in market value

 

When an other than temporary impairment loss on an individualinvestment is considered to have occurred, we write down the cost basis of thesecurity, and the charge is recorded in earnings.

 

***Goodwill and Other Intangible Assets***

We follow Statement ofFinancial Accounting Standard (SFAS) No. 142, “Goodwill and Other IntangibleAssets.”  SFAS 142 addresses thefinancial accounting and reporting for acquired goodwill and other intangibleassets other than those acquired in a business combination.  SFAS 142 was effective for the fiscal yearbeginning after December 31, 2001. In applying SFAS 142, we first considered the fair value of the land andimprovements on an “as-if-vacant” basis. In estimating the fair value on an “as-if-vacant” basis, we considered avariety of factors including local market conditions for similar qualityassets, historical occupancy and absorption history for similar assets insimilar markets, and expected future cash flows (including absorptionestimates).  We then considered theimpact of above-market, at-market and below-market operating leases in place atthe property acquired.  As a result ofadopting SFAS 142, we recorded intangible assets in connection with thepurchases of our properties in 2002. Intangible assets represent values of in-place leases at the time ofpurchase and are included in other assets on our Consolidated Balance Sheets atSeptember 30, 2003 and December 31, 2002.

 

***Comprehensive Income***

SFAS No. 130 “ReportingComprehensive Income” requires that all components of comprehensive income bereported in the financial statements in the period in which they arerecognized.  The components ofcomprehensive income at September 30, 2003 and 2002 are as follows (amountsin thousands):

 

10

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|                                                        |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|-------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                        |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Net  income                                                 |   | $                                          | 3,628  |                                      | $      | 17,756 |   | $ | 20,161 |   | $ | 37,062 |   |
| Unrealized  gain (loss) on derivative financial instruments |   | 360                                        |   | (857                                      | )      | (823 | ) | (857 | ) |
| Unrealized  gain (loss) on marketable securities            |   | 100                                        |   | (20                                       | )      | 97 |   | (37 | ) |
| Total  comprehensive income                                 |   | $                                          | 4,088  |                                      | $      | 16,879 |   | $ | 19,435 |   | $ | 36,168 |   |

 

***Use of Estimates***

Preparing financialstatements in conformity with GAAP requires that we make estimates andassumptions that affect the amounts reported in the financial statements andaccompanying notes.  We continuallyreview our estimates and make adjustments as necessary, but actual resultscould differ from what we anticipated when we made these estimates.

 

***Derivative Financial Instruments***

We follow SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities.”  In the normal course of business, we may usederivative financial instruments to manage or hedge interest rate risk.  When entered into, we formally designate anddocument the financial instrument as a hedge of a specific underlying exposure,as well as the risk management objectives and strategies for undertaking thehedge transactions.  We assess, both atthe inception and at least quarterly thereafter, whether the financialinstruments that are used in hedging transactions are effective at offsettingchanges in either the fair value or cash flows of the related underlyingexposure.  Because of the high degree ofcorrelation between the hedging instrument and the underlying exposure beinghedged, fluctuations in the value of the derivative instruments are generallyoffset by changes in the fair value or cash flows of the underlying exposuresbeing hedged.  Any ineffective portionof a financial instrument’s change in fair value is immediately recognized inearnings.  Virtually all of ourderivatives are straightforward over-the-counter instruments with liquidmarkets.

 

To determine the fairvalue of derivative instruments, we use a variety of methods and assumptionsthat are based on market conditions and risks existing at each balance sheetdate.

 

For the majority offinancial instruments including most derivatives, long-term investments andlong-term debt, standard market conventions and techniques such as discountedcash flow analysis, option pricing models, replacement cost, and terminationcost are used to determine fair value. All methods of assessing fair value result in a general approximation ofvalue, and such value may never actually be realized.

 

11

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***Asset Disposal***

We follow SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” whichaddresses financial accounting for the impairment or disposal of long-livedassets, and report operations from properties sold in 2003 and 2002 asdiscontinued operations for the quarter and year-to-date periods endedSeptember 30, 2003 and 2002.

 

***New Accounting Standards***

In December 2002,the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation —Transition and Disclosure — an amendment of SFAS No. 123.”  SFAS 148 addresses transition provisions fora voluntary change to the fair value method of accounting for stock-basedemployee compensation.  In addition,SFAS 148 amends the disclosure

requirements of SFAS123.  This statement has not had asignificant impact on our consolidated financial statements.

 

We do not recordcompensation expense for stock option grants and we granted no options in thefirst nine months of 2003.  Thefollowing table summarizes results as if we had recorded compensation expenseunder the provisions of SFAS 123, as amended by SFAS 148, for the 2002 optiongrants (amounts in thousands, except per share data).

 
|                                                                         |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|------------------------------------------------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                                                         |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Net  loss applicable to common stockholders:                                 |   |                                       |   |                                      |   |   |   |   |   |
| As  reported                                                                 |   | $                                          | (8,858 | )                                         | $      | 5,515 |   | $ | (17,109 | ) | $ | 513 |   |
| Deduct:  stock based compensation expense determined under fair value method |   | (140                                       | )      | (378                                      | )      | (420 | ) | (1,134 | ) |
| Pro  forma                                                                   |   | $                                          | (8,998 | )                                         | $      | 5,137 |   | $ | (17,529 | ) | $ | (621 | ) |
| Net  loss per share – basic and diluted:                                |   |                                       |   |                                      |   |   |   |   |   |
| As  reported                                                                 |   | $                                          | (.24   | )                                         | $      | .14 |   | $ | (.46 | ) | $ | 01 |   |
| Pro  forma                                                                   |   | (.24                                       | )      | .13                                       |   | (.47 | ) | (.02 | ) |

 

We discuss our stock option plan further in Note 10.

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities.”  SFAS 149 amends and clarifies financial accounting and reportingfor derivative instruments and for hedging activities under SFAS 133,“Accounting for Derivative Instruments and Hedging Activities.”  Inparticular, SFAS 149 (1) clarifies under

 

12

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whatcircumstances a contract with an initial net investment meets thecharacteristic of a derivative discussed in paragraph 6(b) of Statement 133,(2) clarifies when a derivative contains a financing component, (3) amends thedefinition of an underlying to conform it to language used in FASBInterpretation No. 45, Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others, and (4)amends certain other existing pronouncements. Those changes will result in moreconsistent reporting of contracts as either derivatives or hybrid instruments. SFAS 149 is effective for contracts entered into or modified afterJune 30, 2003, except for certain provisions, and for hedgingrelationships designated after June 30, 2003.  We have determinedthat SFAS 149 does not have a significant impact on our consolidated financialstatements.

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for CertainFinancial Instruments with Characteristics of both Liabilities andEquity.”  SFAS 150 establishes standardsfor how an issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  Financial instruments that are within the scope of the statement,which previously were often classified as equity, must now be classified asliabilities.  This statement iseffective for financial instruments entered into or modified after May 31,2003, and otherwise shall be effective at the beginning of the first interimperiod beginning after December 15, 2003. We believe SFAS 150 will not have a significant impact on ourconsolidated financial statements.

 

**Note 2 – 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 for the three months andnine months ended September 30, 2003 were antidilutive and therefore notpresented.

 

13

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|                                                          |   | **Three  Months Ended September** |   | **Nine  Months Ended September** |   |
|---------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|
|                                                          |   | **2003**                          |   | **2002**                         |   | **2003** |   | **2002** |   |
|                                                          |   |                              |   |                             |   |   |   |   |   |
| Weighted average shares outstanding                           |   | 36,999,157                        |   | 39,167,431                       |   | 37,008,940 |   | 40,201,106 |   |
| Effect  of dilutive securities:                               |   |                              |   |                             |   |   |   |   |   |
| Employee  stock options                                       |   | —                            |   | 157,399                          |   | — |   | 241,111 |   |
| Weighted  average shares outstanding – assuming dilution |   | 36,999,157                        |   | 39,324,830                       |   | 37,008,940 |   | 40,442,217 |   |

 

There were 19,666,754shares of Series B Preferred Stock outstanding at September 30, 2003 whichmay be exchanged on a one-to-one basis into common stock, subject toadjustment, starting in September 2003. As of September 30, 2003, the Series B Preferred stockholders wereentitled to approximately 3.9 million additional Series B Preferred shares forunpaid dividends.

 

**Note 3 – Real Estate Assets**

 

Our real estate properties are generally leased under noncancelableleases with remaining terms ranging from 1 to 25 years.  Rental revenues include the following(amounts in thousands):

 
|                                  |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|---------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                  |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
| Minimum  rent                         |   | $                                          | 23,362 |                                      | $      | 21,843 |   | $ | 69,509 |   | $ | 60,863 |   |
| Straight-line  accrual of future rent |   | 697                                        |   | 729                                       |   | 1,905 |   | 2,925 |   |
| Expense  reimbursements               |   | 5,820                                      |   | 5,523                                     |   | 18,773 |   | 15,653 |   |
| Percentage  rent                      |   | 181                                        |   | 51                                        |   | 755 |   | 683 |   |
| Other  revenues                       |   | 2,133                                      |   | 1,694                                     |   | 5,153 |   | 4,574 |   |
| Rental  revenues                      |   | $                                          | 32,193 |                                      | $      | 29,840 |   | $ | 96,095 |   | $ | 84,698 |   |

 

***Acquisitions***

During the first ninemonths of 2003 we acquired a parcel of undeveloped land at our Anaheim, CAdevelopment property for $2.7 million.

 

During the first ninemonths of 2002, we acquired the following properties:

 
| **Location**         |   | **Description** |   | **Date  Acquired** |   | **Purchase  Price** |   | **Mortgage**     |   |
|----------------------|--------|-----------------|--------|--------------------|--------|---------------------|--------|------------------|--------|
|                 |   |            |   |               |   | **(000’s)**    |   | **(000’s)** |   |
| Ocala, FL            |   | Shopping Center |   | 5/3/02             |   | $                   | 7,163  |             | $      | — |   |
| Fort  Lauderdale, FL |   | Pad             |   | 6/4/02             |   | 700                 |   | —           |   |
| Phoenix,  AZ         |   | Shopping Center |   | 6/6/02             |   | 9,816               |   | 5,787            | (1)    |
|                      |        |                 |        |                    |        |                     |        |                  |        |  |  |

 

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| **Location**    |   | **Description** |   | **Date  Acquired** |   | **Purchase  Price** |   | **Mortgage**     |   |
|-----------------|--------|-----------------|--------|--------------------|--------|---------------------|--------|------------------|--------|
|            |   |            |   |               |   | **(000’s)**    |   | **(000’s)** |   |
| Columbia,  SC   |   | Shopping Center |   | 6/7/02             |   | 8,035               |   | —           |   |
| Greenville,  SC |   | Shopping Center |   | 6/28/02            |   | 29,500              |   | —           |   |
| Sterling,  VA   |   | Shopping Center |   | 8/30/02            |   | 76,192              |   | 49,500           | (2)    |

 

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(1)*          Mortgage assumed*

(2)*          Amount financed withpurchase*

 

We funded theseacquisitions using proceeds from tax-deferred exchange transactions onproperties we sold in 2001 and 2002, by mortgage financing, by borrowing on ourunsecured line of credit, and assuming mortgages.

 

***Dispositions***

During the first ninemonths of 2003, we sold the following properties for a net loss of $2.4million:

 
| **Location**    |   | **Description**    |   | **Date  Sold** |   | **Sales  Price** |   |
|-----------------|--------|--------------------|--------|----------------|--------|------------------|--------|
|            |   |               |   |           |   | **(000’s)** |   |
| Scottsdale, AZ  |   | Land, Restaurant   |   | 3/31/03        |   | $                | 3,000  |   |
| Inglewood, CA   |   | Warehouse Building |   | 4/29/03        |   | 4,000            |   |
| New Britain, CT |   | Warehouse Building |   | 5/15/03        |   | 3,529            |   |
| Northridge, CA  |   | Shopping Center    |   | 6/27/03        |   | 5,850            |   |
| Tucson, AZ      |   | Land               |   | 8/22/03        |   | 416              |   |
|                 |        |                    |        |                |        |                  |        |  |

 

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

 

During the first ninemonths of 2002, we sold the following properties for a net gain of $9.4million:

 
| **Location**                     |   | **Description**           |   | **Date  Sold** |   | **Sales  Price** |   |
|----------------------------------|--------|---------------------------|--------|----------------|--------|------------------|--------|
|                             |   |                      |   |           |   | **(000’s)** |   |
| Hollywood, FL                    |   | Land                      |   | 1/31/02        |   | $                | 1,410  |   |
| Tucson/Marana,  AZ               |   | Land                      |   | 1/31/02        |   | 684              |   |
| Hollywood,  FL                   |   | Land                      |   | 4/19/02        |   | 1,028            |   |
| San  Diego/Pacific Beach, CA (1) |   | Self Storage  Development |   | 6/1/02         |   | 11,632           |   |
| Walnut  Creek, CA (1)            |   | Self Storage  Development |   | 6/1/02         |   | 7,708            |   |
| San  Juan Capistrano, CA (1)     |   | Self Storage  Development |   | 6/1/02         |   | 6,918            |   |
| Glen  Burnie, MD                 |   | Shopping Center           |   | 6/21/02        |   | 15,200           |   |
| San  Diego/Murphy Canyon, CA     |   | Self Storage              |   | 8/29/02        |   | 29,688           |   |
|                                  |        |                           |        |                |        |                  |        |  |

 

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| **Location**     |   | **Description** |   | **Date  Sold** |   | **Sales  Price** |   |
|------------------|--------|-----------------|--------|----------------|--------|------------------|--------|
|             |   |            |   |           |   | **(000’s)** |   |
| Solana Beach, CA |   | Self Storage    |   | 8/29/02        |   | 16,282           |   |
| Azusa, CA        |   | Self Storage    |   | 9/30/02        |   | 6,537            |   |

 

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(1)*                             Ourequity in the development was exchanged for notes receivable with aparticipating interest*

 

***Variable Interest Entities***

OnJuly 1, 2003, we adopted FASB Interpretation No. 46, “Consolidation ofVariable Interest Entities—an interpretation of ARB No. 51.”  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.  If anenterprise holds a majority of the variable interests of an entity, it would beconsidered the primary beneficiary.  Theprimary beneficiary would be required to include assets, liabilities and theresults of operations of the variable interest entity in its financialstatements.  Our analysis related to FIN 46 indicates we arethe primary beneficiary of three variable interest entities which requireconsolidation in our financial statements (amounts in thousands):

 
|   |   |                       |   | **Assets** |   | **Liabilities** |   | **Minority  Interest** |   |
|--------|--------|----------------------------|--------|------------|--------|-----------------|--------|------------------------|--------|
| 1.     |   | Orlando Business Park  LLC |   | $          | 28,563 |            | $      | 10,476                 |   | $ | 1,013 |   |
| 2.     |   | Los Arcos Development  LLC |   | 48,145     |   | —          |   | —                 |   |
| 3.     |   | First Street  Investments  |   | 5,444      |   | 4,388           |   | —                 |   |
|        |        |                            |        |            |        |                 |        |                        |        |  |  |  |

 

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 $10.5 million in debt onthe property.  BeginningDecember 2003, the debt requires monthly principal repayments of $1.1million.  We anticipate funding theserepayments on behalf of the partnership.

 

2.                Los Arcos Development LLC (an affiliate of the Ellman Companies),previously classified as notes receivable on our balance sheet, owns land inScottsdale, AZ.

 

16

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Commencingin 1996, loans were made to Los Arcos Development, LLC to acquire theScottsdale real property.  These loansare evidenced by a note receivable of approximately $26.5 million and mature onthe earlier of the sale of the Scottsdale property or December 20,2003.  The note receivable iscollateralized by a pledge of the ownership interests in Los Arcos Development,LLC.  We assumed these loans and relatedinterest receivable in the Merger.  Inorder, among other things, to facilitate the development of the Scottsdaleproperty, we are engaged in on-going negotiations with the Ellman Companies undera signed letter agreement to extend the maturity date of this note receivableto December 31, 2004, and in connection therewith to collateralize thenote receivable with a second priority deed of trust on the Scottsdaleproperty.  The Ellman Companiescurrently plan to develop a shopping center on the Scottsdale property.  In July 2003, the City of Scottsdaleentered into a development agreement with the Ellman Companies to govern theparties’ actions going forward with respect to the development of the shoppingcenter on the Scottsdale property, however, the Ellman Companies have yet toresolve some occupancy and purchase agreement issues with the anticipated majortenants of the shopping center.  TheEllman Companies have received the necessary government entitlements but haveyet to receive additional required government approvals to commenceconstruction of the shopping center.  Inaddition, lawsuits have been filed by residents of the City of Scottsdale challengingsome actions by the City in approving and executing the development agreement,and these claims, as a practical matter, will need to be resolved to facilitatethe financing and development of the property. As a consequence of a ruling relating to one of these lawsuits,the development agreement may be subject to a public referendum.  This ruling will be appealed.  We are not in a position to assess themerits of any of the claims filed by the residents of the City of Scottsdale(including the merits of any appeals filed by the City relating to suchclaims).  Further, a note receivable from Los Arcos Development, LLC acquired byone of our affiliates in February 2003 in the aggregate principal amountof $13.0 million matured on July 10, 2003.  This note receivable is collateralized by a first priority deedof trust on the Scottsdale property.  Asof September 30, 2003, the outstanding principal balance on the notesreceivable from Los Arcos Development, LLC relating to the Scottsdale propertywas $36.5 million and the outstanding accrued interest on the note receivablewas approximately $11.5 million.  We didnot accrue interest on these notes in 2003 or 2002.

 

17

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OnMarch 9, 2003, we signed a letter agreement with the Ellman Companieswhich calls for, among other things, the establishment of a schedule andbudget with respect to the future development of the Scottsdale property and,upon our approval of same, the extension of maturity dates of the applicablenotes receivable from the Ellman Companies. We are in on-going negotiations with the Ellman Companies to implementthe terms of this letter agreement.

 

3.               First Street Investments LP (an affiliate of the Ellman Companies),previously classified as notes receivable on our balance sheet, owns an officebuilding in Phoenix, AZ.  Commencing in1997, loans were made to First Street Investments LP to assist in its effortsto acquire and refurbish an office building located in Phoenix, AZ.  On March 9, 2003, we signed anagreement with the Ellman Companies to acquire the Phoenix property via a deedin lieu of foreclosure agreement.  Inthe fourth quarter of 2002 we wrote down the value of the two notes to $1.0million, which was the estimated fair value of the office building net ofdebt.  We have not accrued any intereston these notes.  One of the two notesreceivable matured in December of 2002 and the second note receivable hasa maturity date of the earlier of the sale of the Phoenix property and May 28,2004.  These notes receivable arenon-recourse obligations, but are secured by a junior deed of trust on thePhoenix property.  In connection withthe development of the Phoenix property, the borrower under these two notesreceivable obtained an additional loan from a third party lender.  The outstanding principal amount of the loanis approximately $4.4 million and the loan has a maturity date of April 5,2004, is secured by a first priority deed of trust on the Phoenix property andis guaranteed by us.

 

**Note 4 – Provisions for Asset Impairment**

 

We record real estate assets at historical costs and adjust them forrecognition of impairment losses. During the second quarter ended June 30, 2002, we recognized animpairment loss of $2.5 million on our Inglewood, CA property.  The tenant, House 2 Home, filed forbankruptcy and vacated, and the property no longer generated income.  Theloss was determined based on the estimated fair value of the property.  The property was sold during the secondquarter ended June 30, 2003.

 

18

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**Note 5 – Discontinued Operations**

 

Includedin the Consolidated Statements of Operations are the discontinued operations ofour properties at Scottsdale, AZ, Inglewood, CA, New Britain, CT, andNorthridge, CA sold in 2003; and Glen Burnie, MD, and our self storageproperties in San Diego/Murphy Canyon, CA, Solana Beach, CA and Azusa, CA whichwere sold in 2002.  Discontinuedoperations are summarized as follows (amounts in thousands except per sharedata):

 
|                                   |   | **Three  Months Ended  September 30** |   | **Nine  Months Ended  September 30** |   |
|----------------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
|                                   |   | **2003**                                   |   | **2002**                                  |   | **2003** |   | **2002** |   |
|                                   |   |                                       |   |                                      |   |   |   |   |   |
| Rental  revenue                        |   | $                                          | (5     | )                                         | $      | 1,187 |   | $ | 508 |   | $ | 8,313 |   |
| Expenses                               |   |                                       |   |                                      |   |   |   |   |   |
| Operating and maintenance              |   | 2                                          |   | 47                                        |   | 136 |   | 276 |   |
| Property taxes                         |   | —                                     |   | 62                                        |   | 135 |   | 332 |   |
| Depreciation and amortization          |   | —                                     |   | 214                                       |   | 78 |   | 975 |   |
| Interest expense                       |   | —                                     |   | 129                                       |   | — |   | 519 |   |
|                                   |   | 2                                          |   | 452                                       |   | 349 |   | 2,102 |   |
| (Loss) income from operations          |   | (7                                         | )      | 735                                       |   | 159 |   | 6,211 |   |
| Provision for asset impairment         |   | —                                     |   | —                                    |   | — |   | (2,528 | ) |
| Net gain (loss) on sale of real estate |   | 20                                         |   | 9,991                                     |   | (2,502 | ) | 9,148 |   |
| Net  income (loss)                     |   | $                                          | 13     |                                      | $      | 10,726 |   | $ | (2,343 | ) | $ | 12,831 |   |
|                                   |   |                                       |   |                                      |   |   |   |   |   |
| (Loss)  earnings per common share      |   |                                       |   |                                      |   |   |   |   |   |
| Basic                                  |   | $                                          | 0.00   |                                      | $      | 0.27 |   | $ | (0.06 | ) | $ | 0.32 |   |
| Diluted                                |   | 0.00                                       |   | 0.27                                      |   | (0.06 | ) | 0.32 |   |

 

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

 

As of September 30, 2003 and December 31, 2002, we had thefollowing investments in unconsolidated joint ventures, which we account forunder the equity method of accounting (amounts in thousands):

 
| **Joint  Venture**             |   | **Ownership%** |   | **September 30  2003** |   | **December 31  2002** |   |
|--------------------------------|--------|----------------|--------|-----------------------------|--------|----------------------------|--------|
| Orlando  Business Park LLC (1) |   | 50             | %      | $                           | — |                       | $      | 16,020 |   |
| Old  Mill District Shops, LLC  |   | 50             | %      | 3,941                       |   | 3,999                      |   |
| 3017977  Nova Scotia Company   |   | 50             | %      | 3,163                       |   | 3,148                      |   |
| Blackstone  Ventures I         |   | 50             | %      | 2,509                       |   | 2,546                      |   |
| Other                          |   | Various        |   | 44                          |   | 306                        |   |
| Total                          |   |           |   | $                           | 9,657  |                       | $      | 26,019 |   |

 

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(1)                                  *This joint venture was consolidated as a variableinterest entity at July 1, 2003, under the provisions of FIN 46.*

 

19

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Cash distributions and profits are typically allocated based on theabove ownership percentages, adjusted for certain preferred returns for capitalcontributions which are made in excess of each partners’ ownershippercentages.  The joint ventures areprimarily in the business of operating real estate.  Their accounting principles are consistent with ours.

 

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

** **
|                          |   | **Total  Assets**           |       | **Debt**                   |       | **Total  Equity**           |       |
|-------------------------------|--------|-----------------------------|------------|----------------------------|------------|-----------------------------|------------|
| **As of**                     |   | **September 30  2003** | ** ** | **December 31  2002** | ** ** | **September 30  2003** | ** ** | **December 31  2002** | ** ** | **September 30  2003** | ** ** | **December 31  2002** | ** ** |
|                          |   |                        |       |                       |       |                        |       |   |   |   |   |   |   |
| Orlando  Business Park LLC    |   | $                           | —     |                       | $          | 26,069                      |       | $ | — |   | $ | 11,162 |   | $ | — |   | $ | 16,024 |   |
| Old  Mill District Shops, LLC |   | 23,953                      |       | 23,897                     |       | 17,456                      |       | 17,356 |   | 6,197 |   | 6,314 |   |
| 3017977  Nova Scotia Company  |   | 9,221                       |       | 10,157                     |       | 5,934                       |       | 5,131 |   | 3,163 |   | 3,148 |   |
| Blackstone  Ventures I        |   | 12,182                      |       | 12,369                     |       | 9,919                       |       | 9,982 |   | 2,031 |   | 2,071 |   |
| Other                         |   | 44                          |       | 306                        |       | —                      |       | — |   | 44 |   | 306 |   |
|                          |   | $                           | 45,400     |                       | $          | 71,077                      |       | $ | 33,309 |   | $ | 43,631 |   | $ | 11,435 |   | $ | 27,863 |   |

** **
|                                |   | **Total  Revenues** |   | **Net Income  (Loss)** |   | **Company’s  Share of Net  Income (Loss)** |   |
|-------------------------------------|--------|---------------------|--------|------------------------|--------|-------------------------------------------------|--------|
| **Quarter ended September 30** |   | **2003**            |   | **2002**               |   | **2003**                                        |   | **2002** |   | **2003** |   | **2002** |   |
|                                |   |                |   |                   |   |                                            |   |   |   |   |   |   |   |
| Orlando  Business Park LLC          |   | $                   | — |                   | $      | —                                          |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   |
| Old  Mill District Shops, LLC       |   | 639                 |   | 646                    |   | (76                                             | )      | (338 | ) | (38 | ) | (169 | ) |
| 3017977  Nova Scotia Company        |   | 412                 |   | 387                    |   | (83                                             | )      | 24 |   | (46 | ) | 13 |   |
| Blackstone  Ventures I              |   | 610                 |   | 320                    |   | 245                                             |   | 490 |   | 122 |   | 474 |   |
| Other                               |   |                |   | —                 |   |                                            |   | — |   | (34 | ) | — |   |
|                                |   | $                   | 1,661  |                   | $      | 1,353                                           |   | $ | 86 |   | $ | 176 |   | 4 |   | $ | 318 |   |
|                                     |        |                     |        |                        |        |                                                 |        |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 7 – Notes Receivable**

 

As of September 30,2003 and December 31, 2002, we had the following notes receivable outstanding related tovarious real estate developments and related businesses:

 

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| **Note  Receivable**                       |   | **September 30  2003** |   | **December 31  2002** |   |
|--------------------------------------------|--------|-----------------------------|--------|----------------------------|--------|
| Los  Arcos Development, LLC (1)            |   | $                           | — |                       | $      | 22,854 |   |
| Arizona  Hockey Management/Ellman Holdings |   | 19,300                      |   | 19,300                     |   |
| Price  Self Storage Holdings               |   | —                      |   | 12,565                     |   |
| Zonapar,  LLC                              |   | —                      |   | 3,579                      |   |
| Other                                      |   | 1,039                       |   | 3,490                      |   |
| First  Street Investments (1)              |   | —                      |   | 1,000                      |   |
| Total                                      |   | $                           | 20,339 |                       | $      | 62,788 |   |

 

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(1)                                  *These notes were consolidated as variable interestentities at July 1, 2003, under the provisions of FIN 46.*

 

The notes generally do not require cash payments of interest untilspecified future dates, typically when developments are completed or sold.  As of September 30, 2003, we had $3.2million of accrued but unpaid interest on these notes.  We typically do not recognize interestincome on non-recourse notes receivable related to development projects untilthe projects begin operations or the notes are repaid.

 

Ofthe $20.3****million in notesreceivable, as of September 30, 2003, the notes receivable from companiesowned by or affiliated with Steven Ellman (the Ellman Companies) had anaggregate outstanding principal balance of approximately $19.5 million and theaggregate outstanding accrued interest on such notes receivable wasapproximately $3.2 million.  These threenotes receivable from affiliates of the Ellman Companies relate to the EllmanCompanies’ ownership in the Phoenix Coyotes hockey team.  These loans were made at a time when theEllman Companies intended to relocate the hockey team to an arena that was tobe constructed on the Scottsdale property owned by Los Arcos DevelopmentLLC.  Two of the three notes receivablematured in December 2002 and the principal balance and outstanding accruedinterest on such loans is approximately $10.4 million and $2.1 million,respectively.  The remaining notereceivable matures in December 2003. The notes receivable are generally non-recourse obligations, but aretypically collateralized by pledges of ownership interests in the borrower oraffiliated entities.  We are in on-goingnegotiations with the Ellman Companies to extend the maturity dates of thesenotes receivable to December 31, 2004 under a signed letter agreement.

 

In February 2001, we entered into a letter agreement to govern therepayment of the loans described above relating to the Scottsdale property andthe acquisition of the Phoenix Coyotes by the Ellman Companies.  Shortly thereafter and as a result of delaysat the Scottsdale property (Note 3), the Ellman Companies elected to pursue analternative site for the hockey arena in

 

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Glendale,AZ.  In December 2002, the EllmanCompanies and the other investors involved in the ownership of the PhoenixCoyotes entered into a series of transactions in which the Phoenix Coyoteshockey team, the proposed arena and related real estate development projectswere consolidated into a single holding company for the purpose of assistingthe combined entity in obtaining additional financing.  It is unclear at this time the impact thestructure will have on the repayment of our loans made to the Ellman Companiesin connection with their acquisition of the Phoenix Coyotes.   We stopped accruing interest on the loanswhen the development projects were consolidated into the holding company.  The sale of equity interests in the holdingcompany is expected to generate proceeds to help repay our notes.

 

**Note 8 – Debt**

 

***Mortgages and Notes Payable***

We had the followingmortgages and notes payable outstanding at September 30, 2003 andDecember 31, 2002 (amounts in thousands):

 

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|                                                                                                                                                                                                                                                                   |   | **September 30  2003** |    | **December 31  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|---------|----------------------------|--------|
| Mortgages  on five properties in Florida bearing interest ranging from 8.18% to 9.00%.  The loans are collateralized by the properties and mature February 2009  and January 2010                                                                            |   | $                           | 159,060 |                       | $      | 160,152 |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Mortgage  payable with GMAC Commercial Mortgage Corporation, bearing interest at LIBOR  plus 98 basis points (2.10% at September 30, 2003). The mortgage is  collateralized by five of our properties and matures July 2004                                  |   | 121,375                     |    | 121,375                    |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Mortgages  and notes payable on six properties bearing interest ranging from 3.17% to  8.45%. The loans are collateralized by the properties and mature on various  dates between December 2006 and February 2017                                            |   | 89,331                      |    | 101,948                    |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Revolving  $100.0 million credit facility bearing interest at LIBOR plus 150 to 200  basis points (2.87% at September 30, 2003), maturing September 2004                                                                                                     |   | 64,700                      |    | 60,300                     |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Capital  lease arrangements with an individual on two properties. The capital leases  have effective interest rates of 4.43% and 7.36% and mature on  December 2004 and June 2005                                                                            |   | 31,001                      |    | 34,052                     |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Construction  loan outstanding bearing interest at LIBOR plus 310 basis points (4.22% at  September 30, 2003). The loan is due March 2004 and is  collateralized by a retail center in Newport, KY (see below)                                               |   | 28,500                      |    | 38,500                     |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Mortgage  on a property in Orlando, FL bearing interest at LIBOR plus 130 basis points  (2.42% at September 30, 2003). The loan is collateralized by the  property and matures June 2008                                                                     |   | 22,100                      |    | 21,888                     |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Construction  loan payable to a bank bearing interest at LIBOR plus 150 basis points (2.62%  at September 30, 2003). The loan matures November 2004 and is  collateralized by the project                                                                    |   | 16,465                      |    | 5,159                      |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Note  payable to a bank bearing interest at LIBOR plus 375 basis points. Beginning  in December 2003, principal and interest is due at a rate of $1.1  million per month until paid in full on June 2004. The loan is  collateralized by land in Orlando, FL |   | 10,476                      |    | —                     |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Construction  loan payable to a bank bearing interest at LIBOR plus 185 basis points (2.97%  at September 30, 2003). The loan matures March 2005 and is  collateralized by the project                                                                       |   | 7,617                       |    | —                     |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Note  payable outstanding on a $4.7 million facility related to Newport, KY (see  below), bearing interest at Prime plus 50 basis points (4.50% at  September 30, 2003), matures March 2004                                                                  |   | 4,737                       |    | 4,737                      |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Note  payable to a bank bearing interest at LIBOR (with a floor of 2%) plus 275  (4.75% at September 30, 2003). The note is collateralized by an office  building in Phoenix, AZ and matures in April 2004.                                                  |   | 4,388                       |    | —                     |   |
|                                                                                                                                                                                                                                                                   |   |                        |    |                       |   |
| Total                                                                                                                                                                                                                                                                  |   | $                           | 559,750 |                       | $      | 548,111 |   |

 

Wewere in compliance with all covenants on our credit facility atSeptember 30, 2003.  In 2003 weplan to use cash flow from operations to fund our recurring debt serviceobligations.

 

We have a 65% interest in Newport on the Levee, LLC (Newport) that isdeveloping a retail project in Newport, KY. In addition to the $28.5 million and $4.7 million notes in the abovetable, the City of Newport has issued two series of public improvementbonds.  The Series 2000a tax exemptbonds total $44.2 million and are broken down as follows:  (a) $18.7 million

 

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maturing 2018 with interest at 8.375%; (b) $20.5 million maturing 2027with interest at 8.5%; and (c) $5.0 million maturing 2027 with interest at8.375%.  The Series 2000b bonds aretaxable and have a par amount of $11.6 million with interest at 11% due2009.  The bonds are guaranteed by us,by Newport, and the third party co-developers of the project.  Newport has drawn on $48.6 million of thebonds at September 30, 2003.

 

Summarized debt information for our unconsolidated joint ventures andthe amount guaranteed by us at September 30, 2003 is as follows (amountsin thousands):

 
| **Joint  Venture**            |   | **September 30  2003** |   | **Debt  Guaranteed** |   | **Maturity  Date** |   |
|-------------------------------|--------|-----------------------------|--------|----------------------|--------|--------------------|--------|
|                          |   |                        |   |                 |   |               |   |
| Old  Mill District Shops, LLC |   | $                           | 17,456 |                 | $      | 13,973             |   | 12/22/03 |   |
| Blackstone  Ventures I        |   | 9,919                       |   | 3,098                |   | 10/1/04            |   |
| 3017977  Nova Scotia Company  |   | 5,934                       |   | —               |   | 6/15/04            |   |
|                          |   | $                           | 33,309 |                 | $      | 17,071             |   |   |   |

 

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

 

In the normal course ofbusiness, we are exposed to the effect of changes in interest rates.  We limit these risks by followingestablished risk management policies and procedures including the use ofderivatives.  For interest rate exposures,derivatives are used primarily to manage the cost of borrowing obligations.

 

We have a policy of onlyentering into derivative contracts with major financial institutions based upontheir credit ratings and other factors. When viewed in conjunction with the underlying and offsetting exposurethat the derivatives are designed to hedge, we have not sustained a materialloss from those instruments nor do we anticipate any material adverse effect onour net income or financial position in the future from the use of derivatives.

 

To manage interest raterisk, we may employ options, forwards, swaps, caps and floors, or a combinationthereof, depending on the underlying exposure. We undertake a variety of borrowings from lines of credit to medium andlong-term financings.  To manage overallcosts, we currently use derivative instruments to cap our exposure tovariability in interest rates or to convert a portion of our variable-rate debtto fixed-rate debt.  In July 2002,we paid $3.4 million for forward-starting, LIBOR-based interest rate caps witha combined notional value of $152 million and a strike of 7.0% to cap ourexposure to interest rate variability on anticipated

 

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floating-rate debt.  The interest rate caps are effectiveJuly 1, 2004, and continue through 2009 to 2010.  The interest rate caps are included with other assets on theConsolidated Balance Sheets.

 

We also use derivativesto protect the fair value of existing or anticipated fixed-rate debt.  During 2002, we had five amortizing swaps with approximately $161 millioncurrent notional value protecting the fair value of approximately $161 millionfixed-rate debt from changes in value attributable to interest ratemovement.  In October 2002, wesold our five Interest Rate Swap Agreements back to the counter party for $13.8million and will amortize the gain over the fixed-rate debt’s remaining lifethrough 2009 to 2010.

 

Hedges that aredesignated as fair value hedges mitigate risk on changes in the fair value offixed-rate debt.  The unrealizedgains/losses in the fair value of these hedges are reported in earnings with anoffsetting adjustment through earnings to the carrying value of the hedgeddebt.  Adjustments to the carrying valueof the hedged debt are amortized to earnings beginning no later than when thehedged debt ceases to be adjusted for changes in its fair value attributable tothe interest rate risk being hedged.

 

Cash flow hedges hedgethe future cash outflows of current or forecasted debt.  Interest rate caps protect againstvariability in interest cash outflows above the cap strike rate.  The changes in the fair value of thesehedges are reported on the balance sheet with a corresponding adjustment toeither Accumulated Other Comprehensive Income or in earnings—depending on thehedging relationship.  Unrealized gainsand losses held in Accumulated Other Comprehensive Income will be reclassifiedto earnings in the same period or periods that the hedged cash flows affectearnings.  As of September 30,2003, the balance in Accumulated Other Comprehensive Loss relating toderivatives was $1.6 million.  Withinthe next nine months, we do not expect to reclassify any of this balance toearnings as the caps are forward starting and take effect July 1, 2004.

 

We hedge our exposure tothe variability in future cash flows for forecasted transactions other thaninterest-related cash flows over a maximum period of 12 months.  During the forecasted period, unrealizedgains 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.

 

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**Note 10 – Stock Option Plan**

 

In 2001, we established aStock Option and Incentive Plan (the Plan) and we may grant stock options toany employee or director under this plan. As of September 30, 2003, we reserved 3,630,000 shares for issuanceunder the Plan.  Options generally vestover three years and expire ten years after the grant date.  Once exercisable, the employee or directorcan purchase shares of our stock at the market price on the date we granted theoption.

 

In connection with theMerger, each outstanding option to purchase Excel Legacy common stockautomatically became an option to purchase our common stock.  The number of shares of our common stockwhich may be purchased with these options and the exercise price was adjustedto reflect the exchange ratio.

 

As we stated in Note 1,we follow the provisions for APB No. 25, “Accounting for Stock Issued to Employees.”  We implemented the disclosure provisionsrequired by SFAS 123, “Accounting for Stock-Based Compensation” and SFAS 148,“Accounting for Stock-Based Compensation – Transition and Disclosure – anamendment of SFAS No.123,” respectively, for our stock option plans.  SFAS 123 requires pro forma net income andearnings per share information, which is calculated assuming we had accountedfor our stock option plans under the “fair value” method described in that statement.  We estimated the fair value of the 2002options grants using the Black-Scholes option pricing model, modified fordividends and using the following assumptions:

 

|                                    |   | **2002** |   |
|-----------------------------------------|--------|----------|--------|
| Risk  free interest rate                |   | 3.98     | %      |
| Annual  dividend rate                   |   | 0.00     | %      |
| Volatility  factor of the stock price   |   | 40.15    | %      |
| Weighted  average expected life (years) |   | 10       |   |

 

We do not recordcompensation expense for stock option grants, and no options were granted inthe first nine months of 2003.  Thetable in Note 1 summarizes results as if we had recorded compensation expensefor the 2002 option grants.

 

**Note 11 – Series B Preferred Stock**

 

In 2001, PEI entered into aSecurities Purchase Agreement with Warburg, Pincus Equity Partners, L.P. andcertain of its affiliates (Warburg Pincus), pursuant to which PEI agreed tosell to Warburg Pincus for an aggregate purchase price of $100,000,000:

 

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•             17,985,612 shares of a new class ofpreferred stock, 9% Series B Junior Convertible Redeemable Preferred Stock, parvalue $0.0001 per share (the Series B Preferred Stock) at $5.56 per share

•             a warrant to purchase an aggregate of 2.5million shares of common stock at an exercise price of $8.25 per share (theWarburg Investment)

 

Also in 2001, PEI and SolPrice, a significant stockholder of PEI and Excel Legacy through varioustrusts, agreed to convert an existing Excel Legacy loan payable to a trustcontrolled by Sol Price of approximately $9.3 million into 1,681,142 shares ofthe Series B Preferred Stock and a warrant to purchase 233,679 shares of ourcommon stock at an exercise price of $8.25 per share.

 

Price Legacy issued theSeries B Preferred Stock and warrants to Warburg Pincus and Sol Priceconcurrently with the completion of the Merger.

 

The Series B PreferredStock is junior to the Series A Preferred Stock with respect to dividend,liquidation and other rights, and is convertible under certain conditions intoPrice Legacy common stock at a one-to-one ratio, which may be adjusted undercertain circumstances, starting in September 2003.  The 9% coupon will be paid with additionalshares of Series B Preferred Stock at $5.56 per share for the first 45 monthsfrom issuance (until June 2005), at which time the coupon will increase to10% payable in cash thereafter.  Whileno additional shares of Series B Preferred Stock have been issued, 3,908,061shares have accumulated through September 30, 2003.  These shares will be issued in the future.

 

In September 2003,Warburg Pincus agreed to sell all Price Legacy securities owned by them,including the Series B Preferred Stock, to The Price Group and/or itsassignees.  The sale is expected tooccur on January 5, 2004.

 

**Note 12 – Subsequent Events**

 

Gary B. Sabin, Richard B.Muir, Graham R. Bullick and S. Eric Ottesen, former members of our seniormanagement, resigned their positions with us effective October 15, 2003,including the resignation of Messrs. Sabin and Muir from our board ofdirectors.

 

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In connection with theirresignations, we entered into a master separation agreement with Messrs. Sabin,Muir, Bullick and Ottesen that established certain arrangements between PriceLegacy and the resigning officers, including:

 

•                  the purchase by us of 2.3 millionshares of our common stock held by Mr. Sabin and certain related entities for apurchase price of $4.00 per share, which occurred on October 23, 2003, andthe application of the proceeds to pay the purchase price of the real estatetransactions described below

•                  the sublease of our interest in ourSan Diego/Rancho Bernardo office building and a grant of the right to purchaseall of our rights and interest in the office building for an aggregate purchaseprice equal to $14.7 million

•                  the immediate vesting of all stockoptions held by former management and expiring October 15, 2004

•                  the sale by us of real estate knownas the Redhawk II land, including the assignment of all plans and entitlementsrelated to the Redhawk II land, for an aggregate purchase price equal toapproximately $4.8 million

•                  a lease by us of the office space inthe San Diego/Rancho Bernardo office building that we use for our corporateheadquarters at market rates and other terms mutually agreed by the parties

 

We will record a chargeof $1.5 million in the fourth quarter related to the purchase of our shares ofcommon stock and the acceleration of stock options.  Jack McGrory, chairman of our board, assumed the additionalposition of president and chief executive officer and Robert Siordia became ourchief operating officer.

 

On November 6, 2003,we agreed to pay $4.0 million to settle a lawsuit filed by the Bank of NTButterfield & Sons in June 2002 related to the guarantee agreement fora promissory note on the Destination Villages Daniel’s Head project in Bermuda.  We agreed to settle the matter to mitigateinterest and other carrying costs.  Werecorded the charge in the third quarter of 2003.

 

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# **ITEM2 - 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:

 

•                       theeffect of economic, credit and capital market conditions in general and on realestate companies in particular, including changes in interest rates

•                       ourability to compete effectively

•                       developmentsin the retail industry

•                       thefinancial stability of our tenants, including our reliance on major tenants

•                       ourability to successfully complete real estate acquisitions, developments anddispositions

•                       thefinancial performance of our properties, joint ventures and investments

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

•                       ourability to continue 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 ThatMay Affect Future Performance” located in our Form 10-K filing for the2002 fiscal year.  We assume noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise. You are advised,however, to consult any further disclosures we make on related subjects in ourreports on Forms 10-K, 10-Q and 8-K filed with the SEC.  Our Form 10-K filing for the 2002 fiscalyear listed various important factors that could cause actual results to differmaterially from expected and historic results.

 

In Management’sDiscussion and Analysis we explain our general financial condition and resultsof operations including:

 

•                      why revenues, costs and earningschanged from the prior period

•                      funds from operations (FFO)

•                      how we used cash for capitalprojects and dividends and how we expect to use cash in the remainder of 2003

•                      where we plan on obtaining cashfor future dividend payments and future capital expenditures

 

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**CriticalAccounting Policies and Estimates**

 

***General***

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.  We believe that the followingaccounting policies are critical because they affect the more significantjudgments and estimates used in the preparation of our consolidated financialstatements.  Actual results may differfrom these estimates under different assumptions or conditions.  For a detailed discussion on the applicationof these and other accounting policies, see Note 1 in the Notes to theConsolidated Financial Statements in Item 8 of our Annual Report on Form 10-K,as amended, for the 2002 fiscal year.

 

***Consolidation***

We combine our financialstatements with those of our wholly-owned subsidiaries as well as allaffiliates in which we have control and present them on a consolidatedbasis.  The consolidated financialstatements do not include the results of transactions between us and oursubsidiaries or among our subsidiaries.

 

We account forour investment in unconsolidated joint ventures using the equity method ofaccounting.  Under the equity method ofaccounting, the net equity investment of the joint ventures is reflected on theConsolidated Balance Sheets and the Consolidated Statements of Operationsincludes our share of net income or loss from the unconsolidated jointventures.

 

We also follow theguidelines of FASB Interpretation No. 46, “Consolidation of Variable InterestEntities—an interpretation of ARB No. 51” (FIN 46).  This interpretation addresses the consolidation of businessenterprises (variable interest entities) to which the usual condition(ownership of a majority voting interest) of consolidation does not apply, andfocuses on 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. If an enterprise holds a majority of thevariable interests of an entity, it would be considered the primarybeneficiary.  The primary beneficiarywould be required to include assets, liabilities and the results of operationsof the variable interest entity in its financial statements.

 

***Revenue Recognition***

Recognition of revenue isdependent upon the quality and ability of our tenants to pay their rent in atimely manner.  Rental revenues include:(1) minimum annual rentals, adjusted for the straight-line method forrecognition of fixed future increases; (2) additional rentals, including 

 

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recovery of propertyoperating expenses, and certain other expenses which we accrue in the period inwhich the related expense occurs; and (3) percentage rents based on the levelof sales achieved by the lessee, which we recognize when earned.

 

Gain or loss on sale ofreal estate is recognized when the sales contract is executed, title haspassed, payment is received, and we no longer have continuing involvement inthe asset.

 

***Real Estate Assets and Depreciation***

We record real estateassets at historical costs and adjust them for recognition of impairmentlosses.  In following purchaseaccounting, we adjusted the historical costs of Excel Legacy’s real estateassets to fair value at the time of the Merger.  Our Consolidated Balance Sheets at September 30, 2003 andDecember 31, 2002 reflect the new basis of those real estate assets.

 

We expense as incurredordinary repairs and maintenance costs, which include building painting,parking lot repairs, etc.  We capitalizemajor replacements and betterments, which include HVAC equipment, roofs, etc.,and depreciate them over their estimated useful lives.

 

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

 
| Land  improvements         |   | 40 years                              |   |
|----------------------------|--------|---------------------------------------|--------|
| Building  and improvements |   | 20 to 40 years                        |   |
| Tenant  improvements       |   | Lesser of the lease  term or 10 years |   |
| Fixtures  and equipment    |   | 3-7 years                             |   |

 

We review long-livedassets for impairment when events or changes in business conditions indicatethat their full carrying value may not be recovered.  We consider assets to be impaired and write them down to fairvalue if their expected associated future undiscounted cash flows are less thantheir carrying amounts.

 

We capitalize interestincurred during the construction period of certain assets and this interest isdepreciated over the lives of those assets.

 

Pre-development costs thatare directly related to specific construction projects are capitalized asincurred.  We expense these costs to theextent they are unrecoverable or it is determined that the related project willnot be pursued.

 

***DerivativeInstruments and Hedging Activities***

Wefollow the provisions of SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities.”  In the normalcourse of business, we may use derivative financial instruments to manage orhedge interest rate risk.  When enteredinto, we formally designate and document the financial instrument as a hedge ofa specific underlying exposure, as well as the risk management objectives andstrategies for undertaking the hedge transactions.  We assess, both at the inception and at least quarterlythereafter, whether the financial instruments that are

 

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usedin hedging transactions are effective at offsetting changes in either the fairvalue or cash flows of the related underlying exposure.  Because of the high degree of effectivenessbetween the hedging instrument and the underlying exposure being hedged,fluctuations in the value of the derivative instruments are generally offset bychanges in the fair value or cash flows of the underlying exposures beinghedged.  Any ineffective portion of afinancial instrument’s change in fair value is immediately recognized inearnings. Virtually all of our derivatives are straightforward over-the-counterinstruments with liquid markets.

 

To determine the fairvalues of derivative instruments, we use a variety of methods and assumptionsthat are based on market conditions and risks existing at each balance sheetdate.   For the majority of financial instrumentsincluding most derivatives, long-term investments and long-term debt, standardmarket conventions and techniques such as discounted cash flow analysis, optionpricing models, replacement cost, and termination cost are used to determinefair value. All methods of assessing fair value result in a generalapproximation of value, and such value may never actually be realized.

*** ***

***Asset Disposal***

We follow SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” whichaddresses financial accounting for the impairment or disposal of long-livedassets, and report discontinued operations for the quarter and nine monthperiods ended September 30, 2003 and September 30, 2002.

 

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

 
|               |   | **Amount**       |   | **Change**       |   | **Percent  Change** |   |
|--------------------|--------|------------------|--------|------------------|--------|---------------------|--------|
|               |   | **(000’s)** |   | **(000’s)** |   |                |   |
| 3rd  Quarter 2003  |   | $                | 32,193 |             | $      | 2,353               |   | 8 | % |
| 3rd  Quarter 2002  |   | 29,840           |   | —           |   | —              |   |
|               |   |             |   |             |   |                |   |
| Year-to-Date  2003 |   | 96,095           |   | 11,397           |   | 13                  | %      |
| Year-to-Date  2002 |   | 84,698           |   | —           |   | —              |   |
|                    |        |                  |        |                  |        |                     |        |  |  |

 

Revenues increased $2.4million to $32.2 million in the third quarter of 2003 compared to the sameperiod in 2002 primarily because:

 

•             properties we acquired during 2002generated $1.9 million of additional revenues

•             properties we owned both years generated$0.5 million of additional revenues primarily due to additional leasingactivity at our Newport, KY and Moorestown, NJ properties and the opening ofour Temecula, CA property.  Theseincreases were partially offset by vacancies at our Westbury NY property due toKmart’s bankruptcy and our Wayne, NJ property due to Today’s Man and The Wiz bankruptcies

 

Revenues increased $11.4million to $96.1 million in the nine month year-to-date period of 2003 comparedto the same period in 2002 primarily because:

 

•             properties we acquired during 2002generated $9.6 million of additional revenues

 

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•             properties we owned both years generated$1.8 million of additional revenues primarily due to additional leasingactivity at our Newport, KY and Moorestown, NJ properties and the opening ofour Temecula, CA property.  Theseincreases were partially offset by vacancies at our Westbury NY property due toKmart’s bankruptcy and our Wayne, NJ property due to Today’s Man and The Wizbankruptcies

 

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

 
|               |   | **Amount**       |   | **Change**       |   | **Percent  Change** |   |
|--------------------|--------|------------------|--------|------------------|--------|---------------------|--------|
|               |   | **(000’s)** |   | **(000’s)** |   |                |   |
| 3rd  Quarter 2003  |   | $                | 21,336 |             | $      | 3,146               |   | 8 | % |
| 3rd  Quarter 2002  |   | 18,190           |   | —           |   | —              |   |
|               |   |             |   |             |   |                |   |
| Year-to-Date  2003 |   | 55,856           |   | 8,904            |   | 13                  | %      |
| Year-to-Date  2002 |   | 46,952           |   | —           |   | —              |   |
|                    |        |                  |        |                  |        |                     |        |  |  |

 

Expenses increased $3.1million to $21.3 million in the third quarter of 2003 compared to 2002primarily because:

 

•    general and administrative expensesincreased $1.3 million, primarily due to our agreement to pay $4.0 million to abank as settlement of a lawsuit related to our former Destination VillagesDaniel’s Head project in Bermuda.  Thisincrease was partially offset by additional non-cash compensation expense of$2.8 million in 2002 to record the difference between the officers’ notesreceivable book value and the market value of the related shares as required byEmerging Issues Task Force (EITF) 00-23

•    properties we owned in both years generatedan additional $1.0 million of expenses, primarily due to increased depreciationexpense at our Newport, KY location and increased expenses due to the openingof our Temecula, CA property

•    properties we acquired in 2002 generated$0.8 million of additional expenses

 

Expenses increased $8.9million to $55.9 million for the year-to-date period ended September 2003compared to 2002 primarily because:

 

•             expenses from properties we owned in bothyears increased by $4.7 million, primarily due to additional depreciation atour Newport, KY location, increased bad debt expense at our Wayne, NJ locationdue to the bankruptcies of Today’s Man and The Wiz, and increased expenses dueto the opening of our Temecula, CA property

•             properties we acquired in 2002 generated$3.4 million of additional expenses

•             general and administrative expensesincreased $0.7 million, primarily due to our agreement to pay $4.0 million to abank as settlement of a lawsuit related to our former Destination VillagesDaniel’s Head project in Bermuda.   Thisincrease was partially offset by additional compensation expense in 2002 of$2.8 million to record the difference between the officers’ notes receivablebook value and the value of the related shares.

 

33

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***Operating Income***

 
|               |   | **Amount**       |   | **Change**       |   | **Percent  Change** |   |
|--------------------|--------|------------------|--------|------------------|--------|---------------------|--------|
|               |   | **(000’s)** |   | **(000’s)** |   |                |   |
| 3rd  Quarter 2003  |   | $                | 10,857 |             | $      | (793                | )      | -7 | % |
| 3rd  Quarter 2002  |   | 11,650           |   | —           |   | —              |   |
|               |   |             |   |             |   |                |   |
| Year-to-Date  2003 |   | 40,239           |   | 2,493            |   | 7                   | %      |
| Year-to-Date  2002 |   | 37,746           |   | —           |   | —              |   |
|                    |        |                  |        |                  |        |                     |        |  |  |

 

Operating incomedecreased for the third quarter and increased for the year-to-date periods of2003 compared to the same periods in the prior year primarily because of thechanges in Rental Revenues and Expenses discussed above.

 

***Interest Expense***

 
|               |   | **Amount**       |   | **Change**       |   | **Percent  Change** |   |
|--------------------|--------|------------------|--------|------------------|--------|---------------------|--------|
|               |   | **(000’s)** |   | **(000’s)** |   |                |   |
| 3rd  Quarter 2003  |   | $                | 6,637  |             | $      | 480                 |   | 8 | % |
| 3rd  Quarter 2002  |   | 6,157            |   | —           |   | —              |   |
|               |   |             |   |             |   |                |   |
| Year-to-Date  2003 |   | 19,906           |   | 1,861            |   | 10                  | %      |
| Year-to-Date  2002 |   | 18,045           |   | —           |   | —              |   |
|                    |        |                  |        |                  |        |                     |        |  |  |

 

Interest expenseincreased $0.5 million in the third quarter of 2003 because we had an averageof $549.6 million debt outstanding compared to $524.1 million in the thirdquarter of 2002.  Interest expenseincreased $1.9 million for the year-to-date period compared to 2002 becauseduring the third quarter of 2003 we had an average of $557.8 million debt forthe nine month year-to-date period of 2003 compared to $503.3 million for thesame period in 2002.  The increase in interestexpense due to the amount of debt outstanding was partially offset by adecrease in interest rates on our variable rate debt.

 

The weightedaverage interest rate on our variable rate debt decreased to 2.8% onSeptember 30, 2003 from 3.5 % on September 30, 2002.   We discuss our outstanding debt further in“Liquidity and Capital Resources” located elsewhere in this Form 10-Q.

 

***Interest Income***

 
|               |   | **Amount**       |   | **Change**       |   | **Percent  Change** |   |
|--------------------|--------|------------------|--------|------------------|--------|---------------------|--------|
|               |   | **(000’s)** |   | **(000’s)** |   |                |   |
| 3rd  Quarter 2003  |   | $                | 82     |             | $      | (1,137              | )      | -93 | % |
| 3rd  Quarter 2002  |   | 1,219            |   | —           |   | —              |   |
|               |   |             |   |             |   |                |   |
| Year-to-Date  2003 |   | 1,006            |   | (2,601           | )      | -72                 | %      |
| Year-to-Date  2002 |   | 3,607            |   | —           |   | —              |   |
|                    |        |                  |        |                  |        |                     |        |  |  |

 

Interest income decreased$1.1 million in the third quarter of 2003 compared to 2002 primarily because:

 

34

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•             we stopped accruing interest on certainnotes receivable when development projects were added as collateral in 2002 torepay the notes, which decreased interest income  $0.9 million

•             in the third quarter of 2002, we retiredthe notes receivable from certain of our officers which were collateralized byour common shares.  EITF 00-23 requiredus to account for these loans as being retired and the shares as beingrepurchased.  This decreased interestincome $0.2 million

 

Interest income decreased$2.6 million in the nine month year-to-date period ended September 30,2003 compared to the same period in 2002 primarily because:

 

•             we stopped accruing interest on certainnotes receivable when development projects were added as collateral in 2002 torepay the notes, which decreased interest income  $1.9 million

•             officers’ notes receivable, which weretired in 2002, decreased interest income $0.6 million

•             interest income on our outstanding cashbalances decreased $0.1 million

 

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

 

During the first ninemonths of 2003, we sold the following operating properties for a net loss of$2.5 million.  This loss is recorded asdiscontinued operations in the Consolidated Statements of Operations in accordancewith SFAS No. 144:

 
| **Location**     |   | **Description**    |   | **Date  Sold** |   | **Sales  Price** |   |
|------------------|--------|--------------------|--------|----------------|--------|------------------|--------|
|             |   |               |   |           |   | **(000’s)** |   |
| Scottsdale,  AZ  |   | Land, Restaurant   |   | 3/31/03        |   | $                | 3,000  |   |
| Inglewood,  CA   |   | Warehouse Building |   | 4/29/03        |   | 4,000            |   |
| New  Britain, CT |   | Warehouse Building |   | 5/15/03        |   | 3,529            |   |
| Northridge,  CA  |   | Shopping Center    |   | 6/27/03        |   | 5,850            |   |
|                  |        |                    |        |                |        |                  |        |  |

 

Also during the firstnine months of 2003, we sold the following non-depreciable real estate andinvestments for a net loss of $0.7 million:

 
| **Location** |   | **Description**                   |   | **Date  Sold** |   | **Sales  Price** |   |
|--------------|--------|-----------------------------------|--------|----------------|--------|------------------|--------|
|         |   |                              |   |           |   | **(000’s)** |   |
| N/A          |   | Joint ventures, notes  receivable |   | 8/13/03        |   | $                | 300    |   |
| Tucson,  AZ  |   | Land                              |   | 8/22/03        |   | 416              |   |
| N/A          |   | Stock                             |   | 9/30/03        |   | 35               |   |
|              |        |                                   |        |                |        |                  |        |  |

 

Also during 2003, wereceived payment on three notes receivable related to the sale of our selfstorage development properties in 2002. We recognized a gain of $0.7 million on the sales.

 

During the first ninemonths of 2002, we sold the following operating properties and recorded a netgain of $9.1 million.  This gain isrecorded as discontinued operations in the Consolidated Statements ofOperations in accordance with SFAS No.144.

 

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| **Location**                 |   | **Description** |   | **Date  Sold** |   | **Sales  Price** |   |
|------------------------------|--------|-----------------|--------|----------------|--------|------------------|--------|
|                         |   |            |   |           |   | **(000’s)** |   |
| Glen  Burnie, MD             |   | Shopping Center |   | 6/21/02        |   | $                | 15,200 |   |
| San  Diego/Murphy Canyon, CA |   | Self Storage    |   | 8/29/02        |   | 29,688           |   |
| Solana  Beach, CA            |   | Self Storage    |   | 8/29/02        |   | 16,282           |   |
| Azusa,  CA                   |   | Self Storage    |   | 9/30/02        |   | 6,537            |   |
|                              |        |                 |        |                |        |                  |        |  |

 

Also during the firstnine months of 2002, we sold the following non-depreciable properties for a netgain of $0.3 million:

 
| **Location**                 |   | **Description**           |   | **Date  Sold** |   | **Sales  Price** |   |
|------------------------------|--------|---------------------------|--------|----------------|--------|------------------|--------|
|                         |   |                      |   |           |   | **(000’s)** |   |
| Hollywood,  FL               |   | Land                      |   | 1/31/02        |   | $                | 1,410  |   |
| Tucson/Marana,  AZ           |   | Land                      |   | 1/31/02        |   | 684              |   |
| Hollywood,  FL               |   | Land                      |   | 4/19/02        |   | 1,028            |   |
| San  Diego/Pacific Beach, CA |   | Self Storage  Development |   | 6/1/02         |   | 11,632           |   |
| Walnut  Creek, CA            |   | Self Storage  Development |   | 6/1/02         |   | 7,708            |   |
| San  Juan Capistrano, CA     |   | Self Storage  Development |   | 6/1/02         |   | 6,918            |   |
|                              |        |                           |        |                |        |                  |        |  |

 

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

 
|                                                      |   | **Three Months  Ended September 30** |       | **Nine Months  Ended September 30** |       |
|-----------------------------------------------------------|--------|-------------------------------------------|------------|------------------------------------------|------------|
|                                                      |   | **2003**                                  |       | **2002**                                 |       | **2003** |   | **2002** |   |
|                                                      |   |                                      | ** ** |                                     | ** ** |   | ** ** | **(restated)** | ** ** |
| Net  income                                               |   | $                                         | 3,628      |                                     | $          | 17,756 |   | $ | 20,161 |   | $ | 37,062 |   |
| Depreciation  and amortization                            |   | 5,426                                     |       | 4,453                                    |       | 15,606 |   | 12,440 |   |
| Depreciation  and amortization of discontinued operations |   | —                                    |       | 214                                      |       | 78 |   | 975 |   |
| Price  Legacy’s share of joint venture depreciation  |   | 629                                       |       | 171                                      |       | 1,146 |   | 477 |   |
| Depreciation  of non-real estate assets                   |   | (16                                       | )          | (36                                      | )          | (78 | ) | (120 | ) |
| Net  loss on sale of investments                          |   | 86                                        |       | —                                   |       | 86 |   | — |   |
| Net  loss (gain) on sale of real estate                   |   | 605                                       |       | —                                   |       | (83 | ) | — |   |
| Net  (gain) loss on sale of discontinued operations       |   | (20                                       | )          | (9,991                                   | )          | 2,502 |   | (9,148 | ) |
| FFO before preferred dividends                            |   | 10,338                                    |       | 12,567                                   |       | 39,418 |   | 41,686 |   |
| Preferred  dividends                                      |   | (12,486                                   | )          | (12,241                                  | )          | (37,270 | ) | (36,549 | ) |
| FFO                                                       |   | $                                         | (2,148     | )                                        | $          | 326 |   | $ | 2,148 |   | $ | 5,137 |   |
|                                                      |   |                                      |       |                                     |       |   |   |   |   |
| Net  cash provided by (used in):                          |   |                                      |       |                                     |       |   |   |   |   |
| Operating  activities                                     |   | $                                         | 17,744     |                                     | $          | 11,772 |   | $ | 39,853 |   | $ | 35,560 |   |
| Investing  activities                                     |   | (7,970                                    | )          | (34,074                                  | )          | (7,482 | ) | (92,713 | ) |
| Financing  activities                                     |   | (15,672                                   | )          | 38,690                                   |       | (32,031 | ) | 57,112 |   |
|                                                      |   |                                      |       |                                     |       |   |   |   |   |
| Significant  non-cash items:                              |   |                                      |       |                                     |       |   |   |   |   |
| Deferred  rents                                           |   | $                                         | 698        |                                     | $          | 828 |   | $ | 1,896 |   | $ | 3,403 |   |
| Series  B Preferred dividends                             |   | 2,884                                     |       | 2,639                                    |       | 8,464 |   | 7,743 |   |
| Compensation  expense                                     |   | —                                    |       | 2,836                                    |       | — |   | 2,836 |   |
| Provision  for asset impairment                           |   | —                                    |       | —                                   |       | — |   | 2,528 |   |

 

Our Company, as well asreal estate industry analysts, generally considers FFO as another measurementof economic profitability for real estate-oriented companies.  The Board of Governors of the NationalAssociation for Real Estate Investment Trusts (NAREIT) defines FFO as netincome in accordance with GAAP, excluding depreciation and amortization expenseand

 

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gains (losses) from salesof depreciable operating real estate. We calculate FFO in accordance with the NAREIT definition which alsoexcludes gains (losses) from the sale of investments, and adjust for preferreddividends.  Effective July 1, 2003,we began excluding provisions for asset impairments as an add-back to FFO.  Our FFO for the nine month period endedSeptember 30, 2002 has been restated to reflect this change. We believethat FFO is helpful to investors as a measure of our financial performancebecause, along with cash flow from operating activities, financing activitiesand investing activities, FFO provides investors with an indication of theability of a REIT to incur and service debt, to make capital expenditures andto fund other cash needs.  In addition,we believe 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 during the third quarter of 2003 decreased $2.2 million or 17.7% to$10.3 million compared to the third quarter of 2002 primarily because:

 

•             general and administrative expensesincreased $1.3 million over the prior year, primarily due to our agreement topay $4.0 million to a bank in settlement of a lawsuit related to our formerDestination Villages Daniel’s Head project in Bermuda.  This increase was partially offset by a one-timenon cash charge to compensation expense in 2002 to record the differencebetween the officers’ notes receivable book value and the value of the relatedshares

•             interest income decreased $1.1 million

•             properties sold, which contributed $1.1million to FFO in the previous year

•             interest expense increased $0.5 million

•             partially offsetting these decreases areincreases to FFO for the following:

•             properties we acquired during 2002contributed an additional $1.3 million to FFO

•             properties we owned in both yearscontributed an additional $0.3 million to FFO

•             joint ventures contributed an additional$0.2 million to FFO

 

FFO before preferreddividends during the nine month year-to-date period of 2003 decreased $2.3million or 5.4% to $39.4 million compared to the third quarter of 2002 primarilybecause:

 

•             properties sold, which contributed $7.5million to FFO in the previous year

•             interest income decreased $2.6 million

•             interest expense increased $1.9 million

•             properties owned in both years contributedan additional $0.9 million to FFO in the prior year, primarily due toadditional operating expenses in the current year as previously discussed

 

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•             general and administrative expensesincreased $0.7 million over the prior year, primarily due to our agreement topay $4.0 million to a bank as settlement of a lawsuit related to our formerDestination Villages Daniel’s Head project in Bermuda.  This increase was partially offset by theone-time non cash charge to compensation expense in 2002 to record thedifference between the officers’ notes receivable book value and the value ofthe related shares as previously discussed

•             partially offsetting these decreases areincreases to FFO for the following:

•             properties we acquired during 2002contributed an additional $7.4 million to FFO

•             we recognized an asset impairment loss of$2.5 million in the second quarter of the prior year.  Effective July 1, 2003, we began excluding provisions forasset impairments as an add-back to FFO

•             joint ventures contributed an additional$1.2 million to FFO

 

**Liquidity and Capital Resources**

 

Liquidity refers to ourability to generate sufficient cash flows to meet the short and long-term cashrequirements of our business operations. Capital resources represent those funds used or available to be used tosupport our business operations and consist of stockholders’ equity and debt.

 

Cash flow from operationshas been the principal source of capital to fund our ongoing operations anddividend payments, while asset sales and use of our credit facilities andmortgage financing have been the principal sources of capital required to fundour growth.  While we are positioned tofinance our business activities through a variety of sources, we expect tosatisfy short-term liquidity requirements through net cash provided byoperations and through borrowings.

 

***Dividends***

As a REIT, we arerequired to distribute 90% of our taxable income, excluding capital gains, individends.  Our Series A Preferred Stockrequires a quarterly dividend payment of $9.6 million, an annual total of $38.4million.  In connection with the Merger,we assumed a net operating loss (NOL) of approximately $17.1 million, whichcould be used to offset federal taxable income.  In the future, if our Series A Preferred dividend is less than90% of our taxable income (after applying any applicable NOLs), we have twooptions to meet the distribution requirement:

1)         We can declare a Series B Preferred Stock dividend by issuingadditional Series B Preferred shares. The Series B Preferred Stock dividends accumulate at a rate of 9%,compounded quarterly, payable in additional shares of Series B Preferred Stockuntil June 2005, and 10%, compounded quarterly, payable in cashthereafter.  As of September 30,2003, the Series B Preferred stockholders were entitled to approximately 3.9million additional shares.

2)         Wecan declare a dividend to our common stockholders.

 

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If our taxable income isless than the Series A Preferred Stock dividends, we are still obligated to paythem.  If we are unable to pay thesedividends when due, they accumulate until paid.

 

***Debt***

In September 2001,we obtained a $100.0 million unsecured credit facility with Fleet Bank asagent.  The facility has a three-yearterm and has a current interest rate of LIBOR plus 175 basis points.  The rate may vary between 150 and 200 basispoints based on our leverage and other financial ratios.  At September 30, 2003, we had $64.7million outstanding on the facility at a 2.9% interest rate.

 

Our credit facilityrequires us to comply with specified financial covenants, the most restrictiveof which relate to fixed charge coverage and leverage.  Covenants in some of our construction loansare also tied to our credit facility. We were in compliance with all covenants in our credit facility atSeptember 30, 2003.  To the extentthat we violate any of these covenants in the future, we would need to obtainwaivers from our lenders to maintain compliance.  We cannot assure that any such waivers would be forthcoming.

 

In 2003 we had or willhave the following significant debt maturities:

 

•             In February 2003, a $12.9 millionbank loan related to a development project in Scottsdale, AZ matured.  We have a note receivable to a developerrelated to this project and guaranteed the bank loan.  On February 27, 2003, we purchased the loan from the lenderfor an aggregate purchase price of $13.0 million, which was funded throughborrowing on our credit facility.

•             In April 2003, a $38.5 millionconstruction loan related to our project in Newport, KY matured.  We extended the loan for another year andpaid-down $10.0 million on the outstanding amount.  The current loan balance is $28.5 million.

•             In April 2003, a $22 million loanrelated to our property in Orlando, FL matured.  We refinanced this debt with a new loan which matures inJune 2008.

•             In May 2003, a $4.7 million loanrelated to our property in Newport, KY matured.  The lender extended this loan for another year.

•             In June 2003, a $3.2 million loanrelated to our property in Terre Haute, IN matured.  We repaid this loan with available cash.

•             In August 2003, we repaid a $3.1million capital lease obligation related to our Scottsdale, AZ office buildingat the lessor’s request.  We repaid thisobligation with available cash.

•             In September  2003, a $6.3 millionnote related to our Anaheim project matured. We repaid this note with available cash.

•             We have a $10.3 million loan related toland we own in Orlando, FL.  This loanis guaranteed by us and by our partner. Beginning December 2003, the loan requires monthly principalrepayments of $1.1 million.  Weanticipate funding these repayments on behalf of the partnership.  In April 2003, we repaid $1.0 millionon this loan with funds we received as a non-refundable deposit from apotential buyer.

 

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The following tablesummarizes all of our long-term contractual obligations, excluding interest, topay third parties as of September 30, 2003:

 
|                        |   | **Contractual Cash Obligations** |   |
|-----------------------------|--------|----------------------------------|--------|
|                        |   | **2003**                         |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   |
| Mortgages and notes payable |   | $                                | 731    |   | $ | 265,800 |   | $ | 30,671 |   | $ | 33,011 |   | $ | 3,343 |   | $ | 226,194 |   | $ | 559,750 |   |
| Capital lease obligations   |   | 200                              |   | 796 |   | 796 |   | 796 |   | 796 |   | 15,455 |   | 18,839 |   |
| Total                       |   | $                                | 931    |   | $ | 266,596 |   | $ | 31,467 |   | $ | 33,807 |   | $ | 4,139 |   | $ | 241,649 |   | $ | 578,589 |   |

 

In 2003 we plan to use cashflow from operations to fund our recurring debt service obligations.

 

##### ***Off-Balance Sheet Financing Matters***

The City of Newport, KYin 1999 issued two series of public improvement bonds related to our project inNewport, KY.  The Series 2000a taxexempt bonds total $44.2 million and are broken down as follows: (a) $18.7** **millionmaturing 2018 with interest at 8.375%; (b) $20.5 million maturing 2027 withinterest at 8.5%; and (c) $5.0 million maturing 2027 with interest at8.375%.  The Series 2000b bonds aretaxable and have a par amount of $11.6 million with interest at 11% due 2009.  The bonds are guaranteed by the Newportproject, the Company, and the project’s third party developers.  As of September 30, 2003, Newport haddrawn on $48.6** **million of the bonds for construction incurred prior tothat date.

 

Summarizeddebt information for our unconsolidated joint ventures and the amountguaranteed by us at September 30, 2003 is as follows:

 
| **Joint Venture**             |   | **September 30  2003** | ** ** | **Debt  Guaranteed** | ** ** | **Maturity  Date** | ** ** |
|-------------------------------|--------|-----------------------------|------------|----------------------|------------|--------------------|------------|
|                          |   |                        |       |                 |       |               |       |
| Old  Mill District Shops, LLC |   | $                           | 17,456     |                 | $          | 13,973             |       | 12/22/03 |   |
| Blackstone  Ventures I        |   | 9,919                       |       | 3,098                |       | 10/1/04            |       |
| 3017977  Nova Scotia Company  |   | 5,934                       |       | —               |       | 6/15/04            |       |
|                          |   | $                           | 33,309     |                 | $          | 17,071             |       |   |   |

 

***Development***

We have a significantretail project in Newport, KY.  Themajority of the construction was completed in October 2001, with all ofthe primary buildings completed except for one out parcel yet to beleased.  The project opened inOctober 2001.  AtSeptember 30, 2003, the project was approximately 78% occupied, excludingground leases.  As the project becomesfully leased, there may be capital required to fund the remaining tenantimprovements.

 

The Anaheim GardenWalkproject in Anaheim, CA, located adjacent to Disney’s two Theme Parks on HarborBoulevard and Disney’s new proposed Theme Park on Katella Avenue, is expectedto consist of a 626,000 square foot open-air retail center and fourhotels.  Total cost of the retailportion of this project will be approximately $250 million with an estimatedcost of $200 million remaining to complete construction over the next eightyears for all phases.  We anticipatethat the first phase of the project will cost approximately $125 million.  We are currently evaluating our options onthis project.

 

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We also have retaildevelopment projects in which construction will continue through 2004.  The Temecula, CA project is an open-airretail shopping center with Wal-Mart, Kohl’s and other tenants.  We estimate that there is an additional $0.6million remaining to complete construction. We expect to fund the remaining cost through a construction loan.  In December 2002, we purchasedadditional land adjacent to this development project to develop an additionalopen-air retail center.  InOctober 2003, we sold this additional land to former executives for $4.8million, which is the approximate book value of the land.

 

In November 2002, wepurchased land adjacent to our property in Orlando, FL to develop an open-airretail center.  We estimate the totalcost of this development to be approximately $21 million with an estimated $3.8million remaining to complete construction, which we will fund through aconstruction loan.

 

Los Arcos Development LLC(an affiliate of the Ellman Companies), previously classified as notesreceivable on our balance sheet, owns land in Scottsdale, AZ.  Commencing in 1996 loans were made to LosArcos Development, LLC to acquire real estate located in Scottsdale, AZ.  The Ellman Companies currently plan todevelop a shopping center on the Scottsdale property.  As of September 30, 2003, the outstanding principal balance onthe note receivable relating to the Scottsdale property was approximately $36.5million and the outstanding accrued interest on the note receivable wasapproximately $11.5****million.  We plan to contribute an additional $2.5million during the next six months for pre-development expenses related to thisproject.

 

***Notes Receivable***

We had $20.3 million inprincipal amount of third party notes receivable outstanding as ofSeptember 30, 2003 related to various real estate developments and relatedbusinesses.  The notes bear interestranging from 2.0% to 15% per annum.  Thenotes generally do not require cash payments of interest until specified futuredates, typically when developments are completed or sold.  As of September 30, 2003, we had $3.2million of accrued but unpaid interest on these notes.  Of the $20.3****million in notes receivable, as of September 30, 2003,the notes receivable from companies owned by or affiliated with Steven Ellman(the Ellman Companies) had an aggregate outstanding principal balance ofapproximately $19.5 million and the aggregate outstanding accrued interest onsuch notes receivable was approximately $3.2 million.  These notes receivable from affiliates of the Ellman Companiesrelate to the Ellman Companies’ ownership in the Phoenix Coyotes hockeyteam.  These loans were made at a timewhen the Ellman Companies intended to relocate the hockey team to an arean thatwas to be constructed on the Scottsdale property.  Two of the three notes receivable matured in December 2002and the principal balance and outstanding accrued interest on such loans isapproximately $10.4 million and $2.1 million, respectively.  The remaining note receivable matures inDecember 2003.  The notesreceivable are generally non-recourse obligations, but are typicallycollateralized by pledges of ownership interests in the borrower or affiliatedentities.  On-going negotiations withthe Ellman Companies contemplate an extension of the maturity dates of thesenotes receivable to December 31, 2004.

 

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***Growth***

We continue to evaluatevarious properties for acquisition or development and continue to evaluateother investment opportunities.  Weanticipate borrowing available amounts on our credit facility or mortgages tofund these acquisition and development opportunities.  We also anticipate obtaining construction loans to fund ourdevelopment activities.  During thethird quarter of 2003, we purchased a parcel of land in Anaheim, CA for $2.7million.  We did not purchase anyproperties during the first six months of 2003.

 

From time to time we willconsider selling properties to better align our portfolio with our geographicand tenant composition strategies.  Wemay also participate in additional tax-deferred exchange transactions, whichallow us to dispose of properties and reinvest the proceeds in a tax efficientmanner.  During the nine months endedSeptember 30, 2003 we sold five properties and a land parcel for $16.8 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.

 

We are contemplatingpurchasing various properties and selling certain other properties.  As we sell properties, our cash flows fromoperations may decrease until the proceeds are reinvested into new properties.

 

***Litigation***

On June 13, 2002, the Bank of NT Butterfield& Sons Limited filed a lawsuit against Price Legacy and Excel Legacy inBermuda for $6.1 million plus other costs of approximately $3.0 million relatedto a guarantee agreement for a promissory note on the Destination VillagesDaniel’s Head project in Bermuda.  Thebank claimed that Excel Legacy did not fully complete the project in accordancewith the guarantee agreement.  Thetrial, which commenced in Bermuda in June 2003, was suspended due toillness of counsel and was scheduled to be reset for November 2003.  On November 6, 2003, we agreed to pay$4.0 million to settle the lawsuit.  Weagreed to settle the matter to eliminate our exposure and mitigate interest andother carrying costs.

 

On or about February 13, 2001, Lewis P. Geyserfiled a lawsuit against Excel Legacy in Santa Barbara County Superior Court,Anacapa Division, Case No. 01038577. The suit arose out of an Operating Agreement for Destination Villages,LLC, an entity which is owned jointly by Excel Legacy and Mr. Geyser, underwhich Destination Villages, LLC would develop certain eco-tourism resorts.  The complaint included causes of action forbreach of contract, breach of fiduciary duty, fraud and negligentmisrepresentation.  The lawsuit includeda prayer for compensatory and punitive damages.  Excel Legacy had also filed a cross-complaint against Mr. Geyserfor breach of contract, fraud, breach of fiduciary duty and other relatedclaims.

 

The trial of this matter began February 26, 2002and concluded on March 19, 2002.  The trial judge dismissed both the complaint and cross-complaint, andgranted nothing to Mr. Geyser under any of his allegations.  On June 5, 2002, Mr. Geyser filed anappeal and Excel Legacy subsequently filed a cross-appeal against Mr.Geyser.  On May 12, 2003, theappellate court

 

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reversed the judgment of dismissal on the complaintand cross-complaint and remanded the case for retrial.  The retrial of the matter has been set forApril 2004.

 

***Other***

On October 15, 2003Messrs Sabin, Muir, Bullick and Ottesen resigned as officers and directors ofour Company.  In connection with theseresignations, we also entered into a master separation agreement with Messrs.Sabin, Muir, Bullick and Ottesen that established certain additionalarrangements between Price Legacy and the resigning officers, including:

 

•             the purchase by us of 2.3 million sharesof common stock held by the Mr. Sabin and certain related entities for apurchase price of $4.00 per share, which occurred on October 23, 2003, andthe application of the proceeds to pay the purchase price of the real estatetransactions described below

•             the sublease of our interest in the SanDiego/Rancho Bernardo office building and a grant of the right to purchase allof our rights and interest in the office building for an aggregate purchaseprice equal to $14.7 million

•             the sale by us of real estate known as theRedhawk II land, including the assignment by Price Legacy of all plans andentitlements related to the Redhawk II land, for an aggregate purchase priceequal to $4.7 million

•             a lease by us of the office space in theSan Diego/Rancho Bernardo office building that we use for our corporateheadquarters at market rates and other terms to be mutually agreed by theparties

 

In April 2002, we entered into five Interest RateSwap Agreements with Fleet Bank that are accounted for under SFAS No. 133 andsold them in October 2002.  Thecombined notional amount was approximately $161 million and the maturities rangedfrom 2009 to 2010.  We paid monthlyinterest of LIBOR plus 3.08% to 3.77% and Fleet Bank assumed our fixed rates of8.18% to 9.00%.  These swaps hedged thefair value of fixed-rate debt.  InOctober 2002, we sold the five swaps back to the counter party for $13.8million and will amortize the gain over the fixed-rate debt’s remaining lifethrough 2009 to 2010.

 

In July 2002, weentered into four Interest Rate Cap Agreements with Wells Fargo Bank and FleetBank that are also accounted for under SFAS No. 133.  The combined notional amount is $152.0 million and the maturitiesrange from 2009 to 2010.  The agreementscap our variable rate risk on one 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

 

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impact on future netincome or cash flow from developed and operating properties.  In addition, substantially all retail leasesare triple net, which means specific operating expenses and property taxes arepassed 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.

 

We had $247.5 million invariable rate debt outstanding at September 30, 2003.  Based upon these year-end debt levels, ahypothetical increase in interest rates by 100 basis points would increaseinterest expense by approximately $2.5 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.

 

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|                                              |   | **Expected Maturity Date  (dollar amounts in thousands)** |   |
|---------------------------------------------------|--------|-----------------------------------------------------------|--------|
|                                              |   | **2003**                                                  |   | **2004** |   | **2005** |   | **2006** |   | **2007** |   | **Thereafter** |   | **Total** |   | **Fair  Value** |   |
| Notes receivable, including notes from affiliates |   | $                                                         | 8,868  |   | $ | 11,471 |   | — |   | — |   | — |   | — |   | $ | 20,339 |   | $ | 20,339 |   |
| Average interest rate                             |   | 10                                                        | %      | 14 | % | — |   | — |   | — |   | — |   | 12 | % |   |   |
| Mortgages and notes payable                       |   | $                                                         | 731    |   | $ | 265,800 |   | $ | 30,671 |   | $ | 33,011 |   | $ | 3,343 |   | $ | 226,194 |   | $ | 559,750 |   | $ | 575,721 |   |
| Average interest rate                             |   | 7                                                         | %      | 3 | % | 6 | % | 4 | % | 8 | % | 7 | % | 5 | % |   |   |
|                                                   |        |                                                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

# **ITEM 4**– CONTROLS AND 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 and ExchangeCommission, and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating thedisclosure controls 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.

 

As required by Securitiesand Exchange Commission Rule 13a-15(b), under the supervision and with theparticipation of certain management, including our Chief Executive Officer andChief Financial Officer, we carried out an evaluation of the effectiveness ofthe design and operation of our disclosure controls and procedures as of theend of the 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 no changein our internal controls over financial reporting during the quarter covered bythis report that have materially affected, or is reasonably likely tomaterially affect, our internal controls over financial reporting.

 

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

# ** **

# **ITEM 1 – LEGALPROCEEDINGS**

 

In July 2003, a lawsuit was filed by four membersof our Board of Directors elected by holders of the Series A Preferred Stockagainst a director elected by Warburg, Pincus Equity Partners, L.P., asignificant holder of the Series B Preferred Stock.  The lawsuit sought a declaration that the plaintiff directors arenot required to vote with respect to a proposed redemption of the Series APreferred Stock in a manner that would be detrimental to the interests ofholders of Series A Preferred Stock and are entitled to vote in a manner thatreflects and supports those interests rather than prefer the interests of otherclasses of Price Legacy’s equity securities. The plaintiff

 

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directors also sought a declaration that theirownership of shares of Series A Preferred Stock does not disqualify them fromconsidering, voting or otherwise acting on matters affecting the holders ofSeries A Preferred Stock, including the redemption of that stock.  Price Legacy was not a party to thelawsuit.  This suit was dismissed inSeptember 2003.

 

On or about February 13, 2001, Lewis P. Geyserfiled a lawsuit against Excel Legacy in Santa Barbara County Superior Court,Anacapa Division, Case No. 01038577. The suit arose out of an Operating Agreement for Destination Villages,LLC, an entity which is owned jointly by Excel Legacy and Mr. Geyser, underwhich Destination Villages, LLC would develop certain eco-tourism resorts.  The complaint included causes of action forbreach of contract, breach of fiduciary duty, fraud and negligentmisrepresentation.  The lawsuit includeda prayer for compensatory and punitive damages.  Excel Legacy had also filed a cross-complaint against Mr. Geyserfor breach of contract, fraud, breach of fiduciary duty and other relatedclaims.

 

The trial of this matterbegan February 26, 2002 and concluded on March 19, 2002.   The trial judge dismissed both thecomplaint and cross-complaint, and granted nothing to Mr. Geyser under any ofhis allegations.  On June 5, 2002,Mr. Geyser filed an appeal and Excel Legacy subsequently filed a cross-appealagainst Mr. Geyser.  On May 12,2003, the appellate court reversed the judgment of dismissal on the complaintand cross-complaint and remanded the case for retrial.  The retrial of the matter has been set forApril 2004.

 

On June 13, 2002, the Bank of NT Butterfield& Sons Limited filed a lawsuit against Price Legacy and Excel Legacy inBermuda for $6.1 million plus other costs of approximately $3.0 million relatedto a guarantee agreement for a promissory note on the Destination VillagesDaniel’s Head project in Bermuda.  Thebank claimed that Excel Legacy did not fully complete the project in accordancewith the guarantee agreement.  Thetrial, which commenced in Bermuda in June 2003, was suspended due toillness of counsel and was scheduled to be reset for November 2003.  On November 6, 2003, we agreed to pay$4.0 million to settle the lawsuit.  Weagreed to settle the matter to eliminate our exposure and mitigate interest andother carrying costs.

 

We are not party to anyother legal proceedings other than various claims and lawsuits arising in theordinary course of business that, in the opinion of our management, are notindividually or in the aggregate material to our business.

 

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# **ITEM 6**- EXHIBITS AND REPORTS ON FORM 8-K

(a)   The following exhibits are included herein orincorporated by reference:

 
| 10.1 (1) |   | Master Separation  Agreement dated as of October 15, 2003 among Price Legacy Corporation,  Gary B. Sabin, Richard B. Muir, Graham R. Bullick and S. Eric  Ottesen  |
|----------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2 (1) |   | Common Stock Purchase  Agreement dated as of October 15, 2003 between Price Legacy Corporation  and Gary B. Sabin and the other parties listed on the signature page thereto |
| 10.3 (1) |   | Resignation and Release  Agreement dated as of October 15, 2003 between Price Legacy Corporation  and Gary B. Sabin                                                          |
| 10.4     |   | Resignation and Release  Agreement dated as of October 15, 2003 between Price Legacy Corporation  and Richard B. Muir                                                        |
| 10.5     |   | Resignation and Release  Agreement dated as of October 15, 2003 between Price Legacy Corporation  and Graham R. Bullick                                                      |
| 10.6     |   | Resignation and Release  Agreement dated as of October 15, 2003 between Price Legacy Corporation  and S. Eric Ottesen                                                        |
| 10.7     |   | Letter Agreement dated  October 15, 2003 between Price Legacy Corporation and Mark T. Burton                                                                                 |
| 10.8     |   | Letter Agreement dated  October 15, 2003 between Price Legacy Corporation and James Y. Nakagawa                                                                              |
| 31.1     |   | Certifications Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                    |
| 32.1     |   | Certifications Pursuant  to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                               |

 

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(1)   Incorporated by reference toSchedule 13D/A filed with the Securities and Exchange Commission by GaryB. Sabin on October 24, 2003 (File No. 005-43425)

 

(b)   Reports on Form 8-K

We filed reports on Form8-K on July 23, 2003, September 10, 2003, and September 23,2003.

 

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**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:  November 11, 2003 |                      |
|                               |                      |
|                               | /s/  Jack McGrory    |   |
|                               | Jack McGrory              |
|                               | *Chief Executive Officer* |
|                               |                      |
|                               |                      |
| Date: November 11,  2003      |                      |
|                               |                      |
|                               | /s/ James Nakagawa        |   |
|                               | James Y. Nakagawa         |
|                               | *Chief Financial Officer* |

 

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