1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended: Commission File Number: MARCH 31, 2000 33-2320 -------------- ------- EXCEL PROPERTIES, LTD. ----------------------------------------------------------------- (Exact name of registrant as specified in its charter) CALIFORNIA 87-0426335 --------------------------------- --------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification Number) 17140 BERNARDO CENTER DRIVE, SUITE 300 SAN DIEGO, CALIFORNIA 92128 - -------------------------------------------------------------------------------- (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (858) 675-9400 --------------- Securities registered pursuant to Section 12(b) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [X] No [ ] (2) Yes [X] No [ ] 2 EXCEL PROPERTIES, LTD. INDEX TO FINANCIAL STATEMENTS ---------- PAGE ---- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Balance Sheets March 31, 2000 (Unaudited) December 31, 1999...............................................................3 Statements of Income Three Months Ended March 31, 2000 (Unaudited) Three Months Ended March 31, 1999 (Unaudited)...................................4 Statements of Changes in Partners' Equity Three Months Ended March 31, 2000 (Unaudited) Three Months Ended March 31, 1999 (Unaudited)...................................5 Statements of Cash Flows Three Months Ended March 31, 2000 (Unaudited) Three Months Ended March 31, 1999 (Unaudited)...................................6 Notes to Financial Statements......................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................12 PART II. OTHER INFORMATION................................................................12 The accompanying notes are an integral part of the financial statements. 2 3 EXCEL PROPERTIES, LTD. BALANCE SHEETS ---------- MARCH 31, 2000 DECEMBER 31, (UNAUDITED) 1999 ------------- ------------- ASSETS Real estate: Land 1,524,764 1,524,764 Buildings 2,821,843 2,821,843 Less: accumulated depreciation (1,097,161) (1,074,766) ------------- ------------- Net real estate 3,249,446 3,271,841 Cash 244,689 289,446 Accounts receivable, less allowance for bad debts of $30,999 in both 2000 and 1999 19,678 2,222 Notes receivable 1,141,479 1,148,629 Interest receivable and other assets 7,492 5,637 ------------- ------------- Total assets $ 4,662,784 $ 4,717,775 ============= ============= LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable: Affiliates $ 569 $ 20,708 Other 871 1,520 Property taxes payable -- 5,174 Deferred rental income 10,062 18,770 ------------- ------------- Total liabilities 11,502 46,172 ------------- ------------- Partners' Equity: General partner's equity 28,971 28,950 Limited partners' equity, 235,308 units authorized, 135,199 units issued and outstanding in 2000 and 1999, respectively 4,622,311 4,642,653 ------------- ------------- Total partners' equity 4,651,282 4,671,603 ------------- ------------- Total liabilities and partners' equity $ 4,662,784 $ 4,717,775 ============= ============= The accompanying notes are an integral part of the financial statements. 3 4 EXCEL PROPERTIES, LTD. STATEMENTS OF INCOME - UNAUDITED ---------- THREE MONTHS ENDED MARCH 31, -------------------------- 2000 1999 ---------- ---------- Revenue: Base rent $ 133,205 $ 164,812 Interest and other income 27,089 30,761 ---------- ---------- Total revenue 160,294 195,573 Operating Expenses: Depreciation 22,396 26,570 Accounting and legal 2,321 13,673 Office expenses 1,586 2,341 Administrative 2,700 2,700 Management fees 1,068 1,721 ---------- ---------- Total operating expenses 30,071 47,005 ---------- ---------- Net income before real estate sales 130,223 148,568 Gain - sale of real estate -- 105,847 ---------- ---------- Net income $ 130,223 $ 254,415 ========== ========== Net income allocated to: General partner $ 1,526 $ 2,810 Limited partners 128,697 251,605 ---------- ---------- Total $ 130,223 $ 254,415 ========== ========== Net income per weighted average limited partnership unit $ 0.96 $ 1.86 ========== ========== The accompanying notes are an integral part of the financial statements. 4 5 EXCEL PROPERTIES, LTD. STATEMENTS OF CHANGES IN PARTNERS' EQUITY - UNAUDITED ---------- THREE MONTHS ENDED MARCH 31, ----------------------------- 2000 1999 ----------- ----------- Balance at January 1 $ 4,671,603 $ 6,021,650 Net income 130,223 254,414 Partner distributions (150,544) (173,341) ----------- ----------- Balance at March 31 $ 4,651,282 $ 6,102,723 =========== =========== The accompanying notes are an integral part of the financial statements. 5 6 EXCEL PROPERTIES, LTD. STATEMENTS OF CASH FLOWS - UNAUDITED ---------- THREE MONTHS ENDED MARCH 31, ----------------------------- 2000 1999 ----------- ----------- Cash flows from operating activities: Net income $ 130,223 $ 254,414 Adjustments to reconcile net income to net cash provided by operations: Depreciation 22,396 26,570 Gain on sale of real estate -- (105,847) Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable (17,456) 8,031 Interest receivable and other assets (1,845) 140 Decrease in liabilities: Accounts payable (20,789) (1,266) Property taxes payable (5,174) -- Deferred rental income (8,708) (1,162) ----------- ----------- Net cash provided by operating activities 98,637 180,880 ----------- ----------- Cash flows from investing activities: Collection of notes receivable 7,150 2,160 Proceeds from real estate sales -- 869,083 ----------- ----------- Net cash provided by investing activities 7,150 871,243 ----------- ----------- Cash flows from financing activities: Cash distributions (150,544) (173,341) ----------- ----------- Net cash used by financing activities (150,544) (173,341) ----------- ----------- Net increase in cash (44,757) 878,782 Cash at January 1 289,446 412,033 ----------- ----------- Cash at March 31 $ 244,689 $ 1,290,815 =========== =========== The accompanying notes are an integral part of the financial statements. 6 7 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements reflect all adjustments of a recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial statements. No adjustments were necessary which were not of a recurring nature. These financial statements should be read in conjunction with the financial statements and accompanying footnotes included in the December 31, 1999 Form 10-K. ORGANIZATION Excel Properties, Ltd. ("the Partnership") was formed in the State of California on September 19, 1985, for the purpose of, but not limited to, acquiring real property and syndicating such property. REAL ESTATE Land and buildings are recorded at cost. Buildings are depreciated using the straight-line method over the tax life of 31.5 years. The tax life does not differ materially from the economic useful life. Expenditures for maintenance and repairs are charged to expense as incurred. Significant renovations are capitalized. The cost and related accumulated depreciation of real estate are removed from the accounts upon disposition. Gains and losses arising from dispositions are reported as income or expense. CASH DEPOSITS At March 31, 2000, the carrying amount of the Partnership's cash deposits total $244,689. The bank balances are $435,914 of which $200,000 is covered by federal depository insurance. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE There was no interest or income taxes paid for the three months ended March 31, 2000 or 1999. The Partnership also had no noncash investing or financing transactions for the three months ended March 31, 2000 or 1999. INCOME TAXES The Partnership is not liable for payment of any income taxes because as a partnership, it is not subject to income taxes. The tax effects of its activities accrue directly to the partners. ACCOUNTS RECEIVABLE All net accounts receivable are deemed to be collectible within the next 12 months. 7 8 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED, CONTINUED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: FINANCIAL STATEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. 2. Fees Paid to General Partner The Partnership has paid the General Partner or its affiliates the following fees for the three months ended March 31, 2000 and 1999: 2000 1999 ---- ---- Management fees $ 1,068 $ 1,721 Administrative fees 2,700 2,700 Accounting 1,620 1,620 3. NOTES RECEIVABLE The Company had the following notes receivable at March 31, 2000 and December 31, 1999: Note from the sale of land, interest at 10%. Secured by $ 165,750 $ 165,750 land sold. Currently due Note from sale of building, receipts of $1,390 per month at 9% interest. Secured by building sold. Currently Due 124,018 125,378 Note from sale of building, receipts of $5,366 per month at 8.5% interest. Secured by building sold. Due November 2003 751,126 755,923 Note from sale of building, receipts of $1,004 per month at 8% interest. Secured by building sold. Due December 2001 100,585 101,578 ---------- ---------- Total notes receivable $1,141,479 $1,148,629 ========== ========== 8 9 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED, CONTINUED ---------- 4. MINIMUM FUTURE RENTALS The Company leases single-tenant buildings to tenants under noncancelable operating leases requiring the greater of fixed or percentage rents. The leases are triple-net, requiring the tenant to pay all expenses of operating the property such as insurance, property taxes, repairs and utilities. Minimum future rental revenue for the next five years for the commercial real estate currently owned and subject to noncancelable operating leases is as follows: YEAR ENDING DECEMBER 31, ------------------------ 2000, remaining nine months $ 394,695 2001 461,763 2002 369,988 2003 348,761 2004 292,800 Thereafter 420,953 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS NATURE OF BUSINESS Excel Properties, Ltd., a California limited partnership (the "Partnership"), was organized to purchase commercial real estate properties for cash and to hold these assets for investment. The general partners of the Partnership are New Plan Excel Realty Trust, Inc., a Maryland corporation ("New Plan"), and Gary B. Sabin. The Partnership was formed on September 19, 1985 and will continue in existence until December 31, 2015, unless dissolved earlier under certain circumstances. In 1999, Excel Legacy Corporation (the "Company") began managing the assets of the Partnership when certain officers of New Plan resigned. The Company has indemnified New Plan of any general partner liability in exchange for an assignment of their partnership interest. Properties that have been acquired by the Partnership are subject to long-term triple-net leases. Such leases require the lessee to pay the prescribed minimum rental plus all costs and expenses associated with the operations and maintenance of the property. These expenses include real property taxes, property insurance, repairs and maintenance and similar expenses. The net effect is that, under normal circumstances, no expenses will offset the rental revenue from the property. Most of the leases also provide some form of inflation hedge which calls for the minimum rent to be increased, based upon adjustments in the consumer price index, fixed rent escalation, or by a percentage of the gross sales of the tenant. Properties have been acquired free and clear of liens and encumbrances. The Partnership may seek to finance one or more of the properties and distribute the financing proceeds to the partners, but only if the financing proceeds equal or exceed 100% of the Partnership's capital invested in the property or properties (including a prorata amount of the Partnership's public offering unit selling commissions and organization expenses). To date, no properties owned by the Partnership have been the subject of any mortgage financing, therefore, at the present time, all properties remain free and clear from any mortgage loan, lien or encumbrance. The principal investment objectives of the Partnership are to provide to its limited partners: (1) preservation, protection and eventual return of the investment, (2) distributions of cash from operations, some of which may be a return of capital for tax purposes rather than taxable income, and (3) realization of long-term appreciation in value of properties. The general partners are currently attempting to sell all of the properties held by the Partnership. The selling of the properties could take several years as the general partners attempt to maximize the sales price of each property. There can be no assurance that the general partners will be successful in selling all of the properties or what price they can obtain. Additionally, the general partners may change its plans in the future. LIQUIDITY AND CAPITAL RESOURCES The Partnership has $244,689 in cash at March 31, 2000, with no debt on any of the properties it owns. In April 2000, the Partnership distributed accumulated cash to the partners in the amount of $152,000. The Partnership currently has approximately $44,402 a month from rental revenue. Management does not expect the Partnership to incur any significant operational expenses as the Partnership properties are subject to triple- net leases. The Partnership's primary source of cash is from rental of the real estate properties currently owned. The Partnership may also sell properties which would provide cash for distribution. Management believes that rental revenue should cover the recurring operating expenses of the Partnership and allow for cash 10 11 distributions to be made to the limited partners unless buildings become vacant. The Partnership has the policy of paying quarterly distributions to the limited partners of the actual cash earned by the Partnership in the preceding quarter. Therefore, if expenses were to increase or revenue were to decrease, the Partnership would decrease the quarterly distributions to the limited partners. It is anticipated that the liquidity of the Partnership will decrease as properties are sold. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and the notes thereto. Comparison of the three months ended March 31, 2000 to the three months ended March 31, 1999 Base rent decreased $31,607 or 19% from the previous year. The net decrease was primarily due to the sale in March 1999 of building previously leased to Payless Shoe Store and to the sales in September 1999. In September 1999, the Partnership sold two buildings that were on lease to Kindercare located in Gahanna, Ohio and in Grove City, Ohio. These properties accounted for approximately $37,503 of rental revenue in the first quarter of 1999. Interest income decreased by $3,672 or 12% due to larger cash balances in 1999 from proceeds relating to sale of Payless Shoes in Plant City, Florida in March 1999 and Toddle House Restaurant in Kenner, Louisiana in February 1999. In the three months ended March 31, 1999 to the three months ended March 31, 2000, operating expenses decreased by $16,934 or 36% from. Depreciation expense decreased by $4,174 or 16% due to property sales in 1999. Accounting expenses decreased by $11,352 or 83% in the first quarter of 2000 as compared to the first quarter of 1999. The decrease in accounting expenses is largely attributable to amounts paid for tax preparation and audit fees in the first quarter of 1999. Overall, other expenses and other income varied very little between the two accounting periods. In 1999, the company recognized a gain of $105,847 relating to the sale of a building in Plant City, Florida, that was on lease to Payless Shoe Store. There were no property sales in the three months ended March 31, 2000. The Partnership has continued to distribute cash flows to the limited partners since 1989. Management anticipates that distributions from cash flows will continue in 2000. The distributions may be supplemented by proceeds from property sales, if any. If additional properties are sold and proceeds are distributed to the partners instead of reinvested, future distributions are expected to decrease. Inflation is not expected to negatively impact the operations of the Partnership due to the structure of its investment portfolio. The leases all provide a minimum rental which the lessee is obligated to pay. Additionally, most leases contain some form of inflation hedge which provides for the rent to be increased. The rent increases may be in the form of scheduled fixed minimum rent increases, Consumer Price Index (CPI) adjustments or by participating in a percentage of the gross sales volume of the tenant. Since the triple-net leases require the lessees to pay for all property operating expenses, the net effect is that the revenue received will not be eroded away as operating expenses increase due to inflation. Should buildings become vacant, however, the Partnership may be responsible for certain expenses, including property taxes which are now being paid by tenants. 11 12 CERTAIN CAUTIONARY STATEMENTS Certain statements in this Quarterly Report on Form 10-Q, including, but not limited to, "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations," contain forward- looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not historical facts, but rather reflect current expectations concerning future results and events. The words "believes," "expects," "intends," "plans," "anticipates," "likely," "will" and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond the Partnership's control that could cause actual results to differ materially from those forecast or anticipated in such forward-looking statements. These factors include, but are not limited to, the Partnership's market effect on property sales, reliance on tenants, and environmental risks. These factors are discussed in greater detail under the caption "Certain Cautionary Statements" in the Partnership's annual Report on Form 10-K for the year ended December 31, 1999. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Partnership's balance sheet contains financial instruments in the form of interest-earning notes receivable. The notes contain fixed interest rates and are thus not subject to changes in market interest rates. The Partnership estimates that the fair value of the notes approximates market value at March 31, 2000. PART II. OTHER INFORMATION Items 1 through 5 have been omitted since no events occurred with respect to these items. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 27.1 - Financial Data Schedule (b) Reports on Form 8-K The Partnership filed no reports on Form 8-K during the quarter ended March 31, 2000. 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: May 12, 2000 EXCEL PROPERTIES, LTD. (Registrant) By /s/ Gary B. Sabin -------------------------------------- Gary B. Sabin General Partner By: /s/ James Y. Nakagawa ------------------------------------- James Y. Nakagawa, Principal Accounting Officer 13