1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended: Commission File Number: MARCH 31, 1997 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) 16955 VIA DEL CAMPO, SUITE 110 SAN DIEGO, CALIFORNIA 92127 (Address of principal executive offices and zip code) Registrant's telephone number, including area code: (619) 485-9400 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, 1997 (Unaudited) December 31, 1996......................................... 3 Statements of Income Three Months Ended March 31, 1997 (Unaudited) Three Months Ended March 31, 1996 (Unaudited)............. 4 Statements of Changes in Partners' Equity Three Months Ended March 31, 1997 (Unaudited) Three Months Ended March 31, 1996 (Unaudited)............. 5 Statements of Cash Flows Three Months Ended March 31, 1997 (Unaudited) Three Months Ended March 31, 1996 (Unaudited)............. 6 Notes to Financial Statements................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 10 PART II. OTHER INFORMATION............................................ 12 2 3 EXCEL PROPERTIES, LTD. BALANCE SHEETS ---------- MARCH 31, 1997 DECEMBER 31, (UNAUDITED) 1996 ------------ ------------ ASSETS Real estate: Land $ 2,917,587 $ 2,917,587 Buildings 4,557,955 4,557,955 Less: accumulated depreciation (1,297,878) (1,261,704) ------------ ------------ Net real estate 6,177,664 6,213,838 Cash 1,639,593 1,393,367 Escrow deposits -- 963,968 Accounts receivable, less allowance for bad debts of $68,645 and $51,595 in 1997 and 1996, respectively -- 79,217 Notes receivable 1,007,207 1,009,023 Interest receivable 5,872 5,890 ------------ ------------ Total assets $ 8,830,336 $ 9,665,303 ============ ============ LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable: Affiliates $ 612 $ 864 Other 4,814 935 Property taxes payable 6,716 -- Tenant security deposits 5,000 5,000 Deferred rental income 21,407 39,099 ------------ ------------ Total liabilities 38,549 45,898 ------------ ------------ Partners' Equity: General partner's equity 15,297 23,573 Limited partners' equity, 235,308 units authorized, 135,299 units issued and outstanding in 1997 and 1996, respectively 8,776,490 9,595,832 ------------ ------------ Total partners' equity 8,791,787 9,619,405 ------------ ------------ Total liabilities and partners' equity $ 8,830,336 $ 9,665,303 ============ ============ 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, --------------------- 1997 1996 -------- -------- Revenue: Base rent $213,630 $266,619 -------- -------- Total revenue 213,630 266,619 -------- -------- Operating Expenses: Accounting and legal 5,182 8,897 Administrative 2,700 2,700 Bad debts 61,639 17,050 Management fees 1,635 2,377 Office expenses 4,016 4,931 Depreciation 36,174 47,745 -------- -------- Total operating expenses 111,346 83,700 -------- -------- Operating income 102,284 182,919 Interest income 70,098 47,254 -------- -------- Net income $172,382 $230,173 ======== ======== Net income allocated to: General partner $ 1,724 $ 2,779 Limited partners 170,658 227,394 -------- -------- Total $172,382 $230,173 ======== ======== Net income per weighted average limited partnership unit $ 1.26 $ 1.68 ======== ======== 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, ----------------------------------- 1997 1996 ------------ ------------ Balance at January 1 $ 9,619,405 $ 11,367,654 Net income 172,382 230,173 Partner distributions (1,000,000) (290,002) ------------ ------------ Balance at March 31 $ 8,791,787 $ 11,307,825 ============ ============ 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, ---------------------------- 1997 1996 ----------- ----------- Cash flows from operating activities: Net income $ 172,382 $ 230,173 Adjustments to reconcile net income to net cash provided by operations: Depreciation 36,174 47,745 Allowance for doubtful accounts 61,639 17,050 Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable 17,578 121,284 Interest receivable 18 (756) Increase (decrease) in liabilities: Accounts payable 3,627 223 Property taxes payable 6,716 9,750 Deferred rental income (17,692) 292 ----------- ----------- Net cash provided by operating activities 280,442 425,761 ----------- ----------- Cash flows from investing activities: Proceeds from escrow deposits 963,968 -- Collection of notes receivable 1,816 1,430 ----------- ----------- Net cash provided by investing activities 965,784 1,430 ----------- ----------- Cash flows from financing activities: Cash distributions (1,000,000) (290,002) ----------- ----------- Net cash used by financing activities (1,000,000) (290,002) ----------- ----------- Net increase in cash 246,226 137,189 Cash at January 1 1,393,367 1,817,201 ----------- ----------- Cash at March 31 $ 1,639,593 $ 1,954,390 =========== =========== 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 Partnership's December 31, 1996 Form 10-K. ORGANIZATION Excel Properties, Ltd. 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 the dispositions are reported as income or expense. CASH DEPOSITS At March 31, 1997, the carrying amount of the Partnership's cash deposits total $1,639,593. The bank balances are $1,662,775 of which $200,000 is covered by federal depository insurance. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE There was no interest or taxes paid for the three months ended March 31, 1997 or 1996. The Partnership also had no noncash investing or financing transactions for the three months ended March 31, 1997 or 1996. 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. Continued 7 8 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED, CONTINUED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: ACCOUNTS RECEIVABLE All net accounts receivable are deemed to be collectible within the next 12 months. 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, 1997 and 1996: 1997 1996 ------- ------- Management fees $ 1,635 $ 2,377 Administrative fees 2,700 2,700 Accounting 1,620 1,620 3. NOTES RECEIVABLE The Company had the following notes receivable at March 31, 1997 and December 31, 1996: 1997 1996 --------- --------- Note from sale of building, receipts of $1,390 per month at 9% interest. Secured by building sold. Due July 1997. $ 138,485 $ 139,524 Note from sale of building, interest only receipts of $5,366 per month at 8.5% interest. Secured by building sold. Due November 2003. 757,500 757,500 Note from sale of building, receipts of $1,004 per month at 8% interest. Secured by building sold. Due December 2001. 111,222 111,999 --------- --------- Total notes receivable $1,007,207 $1,009,023 ========= ========= Continued 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, ------------------------ 1997, remaining nine months $ 642,499 1998 847,414 1999 822,445 2000 761,452 2001 638,708 Thereafter 1,975,704 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 long-term investment. The Partnership currently owns twenty properties. The general partners of the Partnership are Excel Realty Trust, Inc., a Maryland corporation, and Gary B. Sabin, an individual. The Partnership was formed on September 19, 1985, and will continue in existence until December 31, 2015, unless dissolved earlier under certain circumstances. 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 being that, under normal circumstances, no expenses will offset the rental payment. 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 receipt of 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 including property sales, some of which may be a return of capital for tax purposes rather than taxable income, (3) distributions of cash from financing the properties, and (4) realization of long-term appreciation in value of the properties. The general partners have selected properties they believe meet certain minimum investment standards and that are most likely to accomplish the investment objectives of the Partnership. Properties were acquired through arms-length negotiations with third parties. LIQUIDITY AND CAPITAL RESOURCES As the Partnership has $1,639,593 at March 31, 1997, with no debt on any of the properties it owns, management believes that the Partnership liquidity remains in a good position. In April 1997, the Partnership distributed accumulated cash to the partners in the amount of $1,400,000. The Partnership has no debt, and currently approximately $71,000 a month from rental revenue. Management anticipates that rental revenue should be enough to cover any Partnership expenses. Also, management does not expect the Partnership to incur any significant operational expenses as the Partnership properties are subject to triple-net leases. Management anticipates that the Partnership's primary source of cash in 1997 will continue to come from rental of the real estate properties currently owned. The Partnership may also, from time to time, sell certain properties which would provide cash for distribution. Management anticipates that rental revenue will be sufficient to cover the operating expenses of the Partnership and allow for cash distributions to be made to the limited partners. 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. Management expects that the liquidity of the Partnership will change if properties are sold and/or excess cash is distributed to the unit holders (partners). The cash of the Partnership increased by $246,226 at March 31, 1997 when compared to the December 31, 1996. This increase was primarily due to $967,497 the Company received from deposits related to a property sold in 1996 for which it received cash in 1997, and due to net income of $172,382. Netted against this increase are distributions 10 11 of $1,000,000 in January 1997. The Partnership has purchased its properties for all cash. The Partnership may finance one or more of its existing properties if, among other conditions: (1) the property is held for at least two years (all properties have been owned by the Partnership for more than two years), (2) the financing proceeds equal or exceed the Partnership's investment in the property, and (3) the Partnership distributes the financing proceeds to the partners. To date, the Partnership has not leveraged any of its properties. 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, 1997 to the three months ended March 31, 1996 Base rent decreased $52,989 or 20% from the previous year. During 1996, four properties were sold which accounted for approximately $55,376 of rents in the first quarter of 1996. Also, a lease expired in 1996 which accounted for $11,340 of rental revenue in 1996 and $0 in 1997. Operating expenses increased by $27,646 from the three months ended March 31, 1996 to the three months ended March 31, 1997. The net increase was primarily due to the $44,589 increase in bad debt expense. Bad debt expense increased $38,186 due to the non-payment by Toddle House Restaurants, which is currently in Chapter 11 Bankruptcy, of rents and finance charges that were billed in 1997. The finance charges of $28,680 is included in interest income. Bad debt expense also increased $23,453 in the anticipation of not collecting certain rents from Ponderosa Restaurant which has vacated its premises. Other expenses and other income varied very little between the two accounting periods, except depreciation expense which decreased $11,571 due to the sale of properties in 1996. Management does not expect inflation to significantly 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 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 income should increase as operating expenses increase due to inflation. CERTAIN CAUTIONARY STATEMENTS Certain statements in this Form 10-Q that are not historical fact and constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the Partnership to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risk, uncertainties and other factors include, but are not limited to, the following risks: Economic Performance and Value of Properties Dependent on Many Factors. Real property investments are subject to varying degrees of risk. The economic performance and values of real estate can be affected by many factors, including changes in the national, regional and local economic climates, local conditions such as an oversupply of space or reductions in demand for real estate in the area, the attractiveness of the properties to tenants, competition from other available space, the ability of the owner to provide adequate maintenance and insurance and increased operating costs. Dependence on Rental Revenue from Real Property. Since substantially all of the Partnership's income is derived from rental revenue from real property, the Partnership's income and funds for distribution would be adversely affected if a significant number of the Partnership's tenants were unable to meet their obligations to the Partnership or if the Partnership were unable to lease a significant amount of space in its buildings on economically favorable lease terms. There can be no assurance that any tenant whose lease expires in the future will renew such lease or that the Partnership will be able to re-lease space on economically advantageous terms. 11 12 Illiquidity of Real Estate Investments. Equity real estate investments are relatively illiquid and therefore tend to limit the ability of the Partnership to vary its portfolio promptly in response to changes in economic or other conditions. Risk of Bankruptcy of Tenants. The bankruptcy or insolvency of a tenant would have an adverse impact on the property affected and on the income produced by such property. Under bankruptcy law, a tenant has the option of assuming (continuing) or rejecting (terminating) any unexpired lease. If the tenant assumes its lease with the Partnership, the tenant must cure all defaults under the lease and provide the Partnership with adequate assurance of its future performance under the lease. If the tenant rejects the lease, the Partnership's claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. The amount of the claim would be capped at the amount owed for unpaid pre-petition lease payments unrelated to the rejection, plus the greater of one years' lease payments or 15% of the remaining lease payments payable under the lease (but not to exceed the amount of three years' lease payments). Environmental Risks. Under various federal, state and local laws, ordinances and regulations, the Partnership may be considered an owner or operator of real property or may have arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property or disposed of by it, as well as certain other potential costs which could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property). Such liability may be imposed whether or not the Partnership knew of, or was responsible for, the presence of such hazardous toxic substances. 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, 1997. 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 13, 1997 EXCEL PROPERTIES, LTD. (Registrant) Excel Realty Trust, Inc. (General Partner) By: /s/ Gary B. Sabin --------------------------- Gary B. Sabin, President By: /s/ David A. Lund --------------------------- David A. Lund, Principal Financial Officer 12