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, 1999 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) 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, 1999 (Unaudited) December 31, 1998............................................................... 3 Statements of Income Three Months Ended March 31, 1999 (Unaudited) Three Months Ended March 31, 1998 (Unaudited)................................... 4 Statements of Changes in Partners' Equity Three Months Ended March 31, 1999 (Unaudited) Three Months Ended March 31, 1998 (Unaudited)................................... 5 Statements of Cash Flows Three Months Ended March 31, 1999 (Unaudited) Three Months Ended March 31, 1998 (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................................................................... 13 2 3 EXCEL PROPERTIES, LTD. BALANCE SHEETS ---------- MARCH 31, DECEMBER 31, 1999 1998 ------------ ------------ (UNAUDITED) ASSETS Real estate: Land 1,656,512 2,142,112 Buildings 3,129,257 3,510,518 Less: accumulated depreciation (1,123,029) (1,200,084) ------------ ------------ Net real estate 3,662,740 4,452,546 Cash 1,290,815 412,033 Accounts receivable, less allowance for bad debts of $0 in 1999 and 1998 966 8,998 Notes receivable 1,156,944 1,159,104 Interest receivable and other assets 8,200 8,338 ------------ ------------ Total assets $ 6,119,665 $ 6,041,019 ============ ============ LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable: Affiliates $ 925 $ 598 Other 901 2,493 Deferred rental income 15,116 16,278 ------------ ------------ Total liabilities 16,942 19,369 ------------ ------------ Partners' Equity: General partner's equity 42,541 41,464 Limited partners' equity, 235,308 units authorized, 135,199 units issued and outstanding in 1999 and 1998 6,060,182 5,980,186 ------------ ------------ Total partners' equity 6,102,723 6,021,650 ------------ ------------ Total liabilities and partners' equity $ 6,119,665 $ 6,041,019 ============ ============ 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, ------------------------ 1999 1998 -------- -------- Revenue: Base rent $164,812 $175,012 Interest and other income 30,761 27,327 -------- -------- Total revenue 195,573 202,339 -------- -------- Operating Expenses: Depreciation 26,570 35,057 Accounting and legal 13,673 4,920 Office expenses 2,341 3,360 Administrative 2,700 2,700 Management fees 1,721 1,775 Bad debts -- 1,622 -------- -------- Total operating expenses 47,005 49,434 -------- -------- Net income before real estate sales 148,568 152,905 Gain - sale of real estate 105,847 -- -------- -------- Net income $254,415 $152,905 ======== ======== Net income allocated to: General partner $ 2,810 $ 1,880 Limited partners 251,605 151,025 -------- -------- Total $254,415 $152,905 ======== ======== Net income per weighted average limited partnership unit $ 1.86 $ 1.12 ======== ======== 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, -------------------------------- 1999 1998 ------------ ------------ Balance at January 1 $ 6,021,650 $ 7,378,070 Net income 254,414 152,905 Partner distributions (173,341) (200,000) ------------ ------------ Balance at March 31 $ 6,102,723 $ 7,330,975 ============ ============ 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, ------------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities: Net income $ 254,414 $ 152,905 Adjustments to reconcile net income to net cash provided by operations: Depreciation 26,570 35,057 Provision for bad debts -- 1,622 Gain on sale of real estate (105,847) -- Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable 8,031 18,259 Interest receivable and other assets 140 (3,239) Increase (decrease) in liabilities: Accounts payable (1,266) (2,317) Property taxes payable -- (7,011) Deferred rental income (1,162) 2,767 ------------ ------------ Net cash provided by operating activities 180,880 198,043 ------------ ------------ Cash flows from investing activities: Collection of notes receivable 2,160 1,983 Proceeds from real estate sales 869,083 -- ------------ ------------ Net cash provided by investing activities 871,243 1,983 ------------ ------------ Cash flows from financing activities: Cash distributions (173,341) (200,000) ------------ ------------ Net cash used by financing activities (173,341) (200,000) ------------ ------------ Net increase in cash 878,782 26 Cash at January 1 412,033 444,616 ------------ ------------ Cash at March 31 $ 1,290,815 $ 444,642 ============ ============ 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, 1998 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 dispositions are reported as income or expense. CASH DEPOSITS At March 31, 1999, the carrying amount of the Partnership's cash deposits total $1,290,815. The bank balances are $1,323,808 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, 1999 or 1998. The Partnership also had no noncash investing or financing transactions for the three months ended March 31, 1999 or 1998. 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, 1999 and 1998: 1999 1998 ------ ------ Management fees $1,721 $1,775 Administrative fees 2,700 2,700 Accounting 1,620 1,620 Continued 8 9 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED, CONTINUED ---------- 3. NOTES RECEIVABLE The Partnership had the following notes receivable at March 31, 1999 and December 31, 1998: 1999 1998 ---------- ---------- Note from the sale of land, interest at 10%. Due upon the $ 165,750 $ 165,750 occurrence of certain events Note from sale of building, receipts of $1,390 per month at 9% interest. Secured by building sold. Currently Due 129,279 130,522 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 104,415 107,952 ---------- ---------- Total notes receivable $1,156,944 $1,159,104 ========== ========== 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, ------------------------ 1999, remaining nine months $454,125 2000 605,500 2001 541,003 2002 449,228 2003 403,475 Thereafter 713,753 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 ten properties. The general partners of the Partnership are New Plan 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, 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 it plans in the future. LIQUIDITY AND CAPITAL RESOURCES Each of the Partnership's present properties is leased to an operator/lessee on an absolute net basis, whereby the lessee pays all maintenance, repairs, property taxes and insurance. The Partnership's leases typically provide a minimum rental plus a percentage of the lessee's gross revenues from the property operation and/or a cost of living increase and/or a fixed rental increase. The Partnership currently owns and manages ten properties. The Partnership has $1,290,815 at March 31, 1999 with no outstanding debt on any of the properties it owns. In April 1999, the Partnership distributed accumulated cash to the partners in the amount of $1,089,000. The Partnership has income of approximately $51,000 a month from rental revenue which management anticipates would 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. The Partnership's primary source of cash in 1999 is expected to continue to come from the rental of the real estate properties currently owned. The Partnership is attempting to sell its properties which would provide additional cash for distribution. There can be no assurance, however, that the Partnership will be successful in selling its properties. Management anticipates that rental income 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 income 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 Partners. 10 11 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, 1999 to the three months ended March 31, 1998 Base rent decreased $10,200 or 6% from the previous year. The net decrease was primarily due to the sale in May 1998 of a building that was previously leased to Timberlodge Steakhouse. This property accounted for approximately $18,121 of rental revenue in the first quarter of 1998. Offsetting the decrease was an increase in rents of $5,504 for Kindercare in Gahanna, Ohio, in the first quarter of 1999 when compared to 1998. Operating expenses increased by $6,058 or 42% from the three months ended March 31, 1998 to the three months ended March 31, 1999. This net increase is largely due to the $8,753 increase in accounting expenses relating to tax preparation fee. Interest income increased by $3,433 or 13% from the three months ended March 31, 1998 to the three months ended March 31, 1999. This increase was primarily due to larger cash balances from proceeds relating to the sale of Payless Shoes in Plant City, Florida in March 1999 and Toddle House Restaurant in Kenner, Louisiana in February 1999. Cash balances averaged $1,290,815 in 1999 as compared to $444,629 in 1998. Other expenses and other income varied very little between the two accounting periods. 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. YEAR 2000 Some of the Partnership's information technology ("IT") systems were originally written using two digits rather than four to define the applicable year. As a result, those IT systems had time sensitive software that recognizes dates using "00" as the Year 1900 rather than the Year 2000. The Partnership has upgraded its existing computer software and IT systems and believes that they are able to recognize the Year 2000 and that the Year 2000 issue will not have a material impact on the Partnership's operations. The Year 2000 issue affects the Partnership's internal systems, including IT and non-IT systems. The Partnership is reviewing its utility systems (heat, light, telephones, etc.) and other non-IT systems for the impact of Year 2000. The Partnership has solicited assurances from its contractors, vendors and other third parties that their systems (including building management and mechanical systems) are currently Year 2000 compliant or will be made compliant before the advent of the Year 2000. No assurances can be made that all contractors and other third parties will comply with their assurances. The Partnership intends to take continuous steps to identify Year 2000 problems related to its vendors and to formulate a system of working with key third parties, including financial institutions and utility providers, to understand their ability to continue providing services and products through the change to Year 2000. The failure to correct a material Year 2000 problem either within the Partnership or within a vendor or supplier could result in an interruption in, or a failure of, certain normal business activities or operations of the Partnership. Such interruptions or failures could materially adversely affect the Partnership's business, operating results and financial condition. The Partnership's Year 2000 project is expected to be complete by mid-1999, which is prior to any anticipated impact on the Partnership's IT systems. The cost of the Partnership's Year 2000 project, and the target date on which the Partnership expects the Year 2000 modifications to be complete are based upon a variety of assumptions of future events, including the continued availability of certain resources. No assurance can be made that these estimates will be achieved and actual results could materially differ from those anticipated. Specific factors that might cause material differences include, but are not limited to, the availability and costs of personnel trained in this area, the ability to locate and correct relevant computer codes and the timing and compliance by the Partnership's outside vendors and suppliers. A contingency plan has not been developed for dealing with the most reasonably likely worst case scenario, and such scenario has not yet been clearly identified. Since the Partnership has adopted a plan to address these Year 2000 issues, it has not developed a comprehensive contingency plan should Year 2000 issues fail to be addressed successfully or in their 11 12 entirety. However, if the Partnership identifies significant risks or is unable to meet its anticipated time line, the Partnership will develop contingency plans as deemed necessary at that time. This discussion contains forward-looking statements and should be read in conjunction with the Partnership's disclosures under the heading "Certain Cautionary Statements" below. 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 release 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). At March 31, 1999, the Partnership had no tenants under bankruptcy. 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 12 13 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, 1999. 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, 1999 EXCEL PROPERTIES, LTD. (Registrant) New Plan Excel Realty Trust, Inc. (General Partner) By: /s/ Gary B. Sabin ----------------------------------- Gary B. Sabin, President By: /s/ James Y. Nakagawa ----------------------------------- James Y. Nakagawa, Principal Accounting Officer 13