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: SEPTEMBER 30, 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 September 30, 1997 (Unaudited) December 31, 1996 ...................................... 3 Statements of Income Three Months Ended September 30, 1997 (Unaudited) Three Months Ended September 30, 1996 (Unaudited) Nine Months Ended September 30, 1997 (Unaudited) Nine Months Ended September 30, 1996 (Unaudited)........ 4 Statements of Changes in Partners' Equity Nine Months Ended September 30, 1997 (Unaudited) Nine Months Ended September 30, 1996 (Unaudited)........ 5 Statements of Cash Flows Nine Months Ended September 30, 1997 (Unaudited) Nine Months Ended September 30, 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 ---------- SEPTEMBER 30, 1997 DECEMBER 31, (UNAUDITED) 1996 ------------- ------------ ASSETS Real estate: Land $ 2,857,264 $ 2,917,587 Buildings 4,417,199 4,557,955 Less: accumulated depreciation (1,332,692) (1,261,704) ------------- ------------ Net real estate 5,941,771 6,213,838 Cash 653,418 1,393,367 Escrow deposits -- 963,968 Accounts receivable, less allowance for bad debts of $182,106 and $181,019 in 1997 and 1996, respectively 20,195 79,217 Notes receivable 1,003,458 1,009,023 Interest receivable and other assets 7,707 5,890 ------------- ------------ Total assets $ 7,626,549 $ 9,665,303 ============= ============ LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable: Affiliates $ 7,387 $ 864 Other 1,371 935 Tenant security deposits 5,000 5,000 Deferred rental income 10,408 39,099 ------------- ------------ Total liabilities 24,166 45,898 ------------- ------------ Partners' Equity: General partner's equity 3,402 23,573 Limited partners' equity, 235,308 units authorized, 135,299 units issued and outstanding in 1997 and 1996, respectively 7,598,981 9,595,832 ------------- ------------ Total partners' equity 7,602,383 9,619,405 ------------- ------------ Total liabilities and partners' equity $ 7,626,549 $ 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 NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------ ----------------------- 1997 1996 1997 1996 --------- --------- --------- --------- Revenue: Base rent $ 213,659 $ 250,142 $ 643,686 $ 764,457 Percentage rents -- 44,344 -- 44,344 Interest income 22,330 46,900 123,135 147,884 --------- --------- --------- --------- Total revenue 235,989 341,386 766,821 956,685 --------- --------- --------- --------- Expenses: Accounting and legal 13,650 10,372 56,105 32,148 Administrative 2,700 2,700 8,100 8,100 Bad debts (52,042) 44,612 39,777 129,425 Management fees 2,464 2,870 5,842 7,319 Office expenses 4,536 1,455 12,082 9,865 Property taxes -- 6,100 -- -- Depreciation 35,503 43,677 107,852 135,099 --------- --------- --------- --------- Total expenses 6,811 111,786 229,758 321,956 --------- --------- --------- --------- Income before real estate sales 229,178 229,600 537,063 634,729 Gain - sale of real estate 17,593 -- 17,593 206,761 --------- --------- --------- --------- Net income $ 246,771 $ 229,600 $ 554,656 $ 841,490 ========= ========= ========= ========= Net income allocated to: General partner $ 2,468 $ 2,733 $ 5,547 $ 27,707 Limited partners 244,303 226,867 549,109 813,783 --------- --------- --------- --------- Total $ 246,771 $ 229,600 $ 554,656 $ 841,490 ========= ========= ========= ========= Net income per weighted average limited partnership unit $ 1.81 $ 1.68 $ 4.06 $ 6.01 ========= ========= ========= ========= The accompanying notes are an integral part of the financial statements. 4 5 EXCEL PROPERTIES, LTD. STATEMENTS OF CHANGES IN PARTNERS' EQUITY - UNAUDITED ---------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ 1997 1996 ------------ ------------ Balance at January 1 $ 9,619,405 $ 11,367,654 Net income 554,656 841,490 Partner distributions (2,571,678) (3,192,056) ------------ ------------ Balance at September 30 $ 7,602,383 $ 9,017,088 ============ ============ The accompanying notes are an integral part of the financial statements. 5 6 EXCEL PROPERTIES, LTD. STATEMENTS OF CASH FLOWS - UNAUDITED ---------- NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1997 1996 ----------- ----------- Cash flows from operating activities: Net income $ 554,656 $ 841,490 Adjustments to reconcile net income to net cash provided by operations: Depreciation 107,852 135,099 Allowance for doubtful accounts 39,777 129,425 Gain on sale of real estate (17,593) (206,761) Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable 19,245 35,117 Interest receivable and other assets (1,816) (64) Increase (decrease) in liabilities:, Accounts payable 6,959 1,997 Property taxes payable -- 8,656 Deferred rental income (28,691) 2,812 ----------- ----------- Net cash provided by operating activities 680,389 947,771 ----------- ----------- Cash flows from investing activities: Proceeds from escrow deposits 963,968 -- Proceeds from real estate sales 181,807 901,187 Collection of notes receivable 5,565 4,622 ----------- ----------- Net cash provided by investing activities 1,151,340 905,809 ----------- ----------- Cash flows from financing activities: Cash distributions (2,571,678) (3,192,056) ----------- ----------- Net cash used by financing activities (2,571,678) (3,192,056) ----------- ----------- Net decrease in cash (739,949) (1,338,476) Cash at January 1 1,393,367 1,817,201 ----------- ----------- Cash at September 30 $ 653,418 $ 478,725 =========== =========== 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 and operating commercial real estate. 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 September 30, 1997, the carrying amount of the Partnership's cash deposits total $653,418. The bank balances are $675,494 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 nine months ended September 30, 1997 or 1996. Also, the Partnership had no noncash investing or financing transactions for the nine months ended September 30, 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. ACCOUNTS RECEIVABLE All net accounts receivable are deemed to be collectible within the next 12 months. Continued 7 8 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED ---------- 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 nine months ended September 30, 1997 and 1996: 1997 1996 --------- --------- Management fees $ 5,842 $ 7,319 Administrative fees 8,100 8,100 Accounting 4,860 14,460 3. NOTES RECEIVABLE The Partnership had the following notes receivable at September 30, 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. Currently due. $ 136,336 $ 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. 109,622 111,999 ---------- ---------- Total notes receivable $1,003,458 $1,009,023 ========== ========== Continued 8 9 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED ---------- 4. MINIMUM FUTURE RENTALS The Partnership leases single-tenant buildings to tenants under noncancellable 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 noncancellable operating leases is as follows: YEAR ENDING DECEMBER 31, ------------------------ 1997, remaining three months $ 185,640 1998 732,002 1999 707,032 2000 646,040 2001 544,895 Thereafter 1,809,010 5. SALE OF PROPERTY In 1997, the Partnership sold a property leased by Kindercare in Indianapolis, Indiana. The net proceeds for the building were $181,807 and a gain of $17,593 was recognized on the sale. In 1996 the Partnership sold two buildings in Coon Rapids, Minnesota that were on lease to Kentucky Fried Chicken and Wendy's. The proceeds on the sale of the two buildings which were sold together were $901,187. The Partnership recognized a gain of $206,761 on the sale. 9 10 EXCEL PROPERTIES, LTD. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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 fifteen 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 $653,418 at September 30, 1997, with no debt on any of the properties it owns, management believes that the Partnership liquidity remains in a good position. In October 1997, the Partnership distributed accumulated cash to the partners in the amount of $430,000. The Partnership has no debt and approximately $59,000 a month from rental revenue, net of bad debts as of September 30, 1997. 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). Continued 10 11 The cash of the Partnership decreased by $739,949 at September 30, 1997 when compared to December 31, 1996. This decrease was partly due to payments of $2,571,678 in distributions to the partners during 1997. The partnership received cash in 1997 from deposits related to a property sold in 1996 and $181,807 in August 1997 related to the sale of a building leased to Kindercare in Indianapolis, Indiana. Also, operations have provided $680,389 of cash. 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 September 30, 1997 to the three months ended September 30, 1996 Base rent decreased $36,483 or 15% from the previous year. During 1996, four properties were sold which accounted for approximately $36,853 of rents in the third quarter of 1996. Percentage rents decreased $44,344 due to the sale of Denny's building in 1996 that generated all the percentage rents in 1996. Interest income decreased $24,570 or 52% over 1996 due to finance charges to Ponderosa Restaurant and Toddle House, charged in 1996 but not in 1997, and larger cash balances in 1996 than 1997 from proceeds relating to property sales before the funds were distributed to the partners. Operating expenses decreased by $104,975 from the three months ended September 30, 1996 to the three months ended September 30, 1997. The net decrease was primarily due to the $96,654 decrease in bad debt expense. The bad debt reserve is from the Ponderosa Restaurant, who has vacated one of its premises and has not been paying rent in accordance with the lease, and Toddle House, a tenant in bankruptcy. In September 1997, Ponderosa paid $85,000 to settle outstanding amounts which were reversed against the bad debt expense. Other expenses and other income varied very little between the two accounting periods, except depreciation expense which decreased $8,174 due to the sale of properties in 1996. In 1997, the company recognized a gain of $17,593 relating to the sale of the building leased to Kindercare in Indianapolis, Indiana. There were no sales in the three months ended September 30, 1996. Comparison of the nine months ended September 30, 1997 to the nine months ended September 30, 1996 Base rent decreased $120,771 or 16% from the previous year. Four properties were sold in 1996 which accounted for approximately $133,622 of rents in the first nine months of 1996 and none in 1997. Percentage rents decreased $44,344 due to the sale of Denny's building in 1996 that generated all the percentage rents in 1996. Operating expenses decreased by $92,198 from the nine months ended September 30, 1996 to the nine months ended September 30, 1997. The net decrease was primarily due to the $89,648 decrease in bad debt expense as discussed above. Accounting and legal expenses increased by $23,957. The partnership paid $44,914 in legal fees relating to Ponderosa Restaurant. Other expenses and other income varied very little between the two accounting periods, except depreciation expense which decreased $27,247 due to the sale of properties in 1996 and the sale of the Kindercare property in 1997. In 1996, the company recognized a gain of $206,761 relating to the sale of two properties. In 1997, the company recognized a gain of $17,593 relating to the sale of the Kindercare property. 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, Continued 11 12 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 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. 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 Continued 12 13 (b) Reports on Form 8-K The Partnership filed no reports on Form 8-K during the quarter ended September 30, 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: November 11, 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 13