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: JUNE 30, 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: (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 June 30, 1999 (Unaudited) December 31, 1998...............................................................3 Statements of Income Three Months Ended June 30, 1999 (Unaudited) Three Months Ended June 30, 1998 (Unaudited) Six Months Ended June 30, 1999 (Unaudited) Six Months Ended June 30, 1998 (Unaudited)......................................4 Statements of Changes in Partners' Equity Six Months Ended June 30, 1999 (Unaudited) Six Months Ended June 30, 1998 (Unaudited)......................................5 Statements of Cash Flows Six Months Ended June 30, 1999 (Unaudited) Six Months Ended June 30, 1998 (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................................................................13 2 3 EXCEL PROPERTIES, LTD. BALANCE SHEETS ---------- JUNE 30, 1999 DECEMBER 31, (UNAUDITED) 1998 ------------ ------------ ASSETS Real estate: Land 1,656,512 2,142,112 Buildings 3,129,257 3,510,518 Less: accumulated depreciation (1,148,011) (1,200,084) ------------ ------------ Net real estate 3,637,758 4,452,546 Cash 346,509 412,033 Accounts receivable, less allowance for bad debts of $0 and $0 in 1999 and 1998, respectively 9,103 8,998 Notes receivable 1,154,737 1,159,104 Interest receivable and other assets 8,485 8,338 ------------ ------------ Total assets $ 5,156,592 $ 6,041,019 ============ ============ LIABILITIES AND PARTNERS' EQUITY Liabilities: Accounts payable: Affiliates $ - $ 598 Other 2,531 2,493 Property taxes payable 4,106 - Deferred rental income 13,855 16,278 ------------ ------------ Total liabilities 20,492 19,369 ------------ ------------ Partners' Equity: General partner's equity 34,201 41,464 Limited partners' equity, 235,308 units authorized, 135,199 units issued and outstanding in 1999 and 135,299 units issued and outstanding in 1998, respectively 5,101,899 5,980,186 ------------ ------------ Total partners' equity 5,136,100 6,021,650 ------------ ------------ Total liabilities and partners' equity $ 5,156,592 $ 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 SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenue: Base rent $ 153,015 $ 164,087 $ 317,827 $ 339,099 Interest income 30,949 34,301 61,710 61,629 ---------- ---------- ---------- ---------- Total revenue 183,964 198,388 379,537 400,728 ---------- ---------- ---------- ---------- Expenses: Depreciation 24,982 32,550 51,552 67,607 Bad debts - 4,423 - 6,045 Office expenses 2,395 2,754 4,521 6,115 Administrative 2,700 2,700 5,400 5,400 Accounting and legal 7,234 2,385 20,907 7,305 Management fees 1,457 1,736 3,178 3,511 Property tax expenses 12,318 - 12,534 - Other property expenses 706 617 706 617 ---------- ---------- ---------- ---------- Total expenses 51,792 47,165 98,798 96,600 ---------- ---------- ---------- ---------- Income before real estate sales 132,172 151,223 280,739 304,128 Gain - sale of real estate - 100,094 105,847 100,094 ---------- ---------- ---------- ---------- Net income $ 132,172 $ 251,317 $ 386,586 $ 404,222 ========== ========== ========== ========== Net income allocated to: General partner $ 1,572 $ 2,513 $ 4,381 $ 4,042 Limited partners 130,600 248,804 382,205 400,180 ---------- ---------- ---------- ---------- Total $ 132,172 $ 251,317 $ 386,586 $ 404,222 ========== ========== ========== ========== Net income per weighted average limited partnership unit $ 0.97 $ 1.84 $ 2.83 $ 2.96 ========== ========== ========== ========== The accompanying notes are an integral part of the financial statements. 4 5 EXCEL PROPERTIES, LTD. STATEMENTS OF CHANGES IN PARTNERS' EQUITY - UNAUDITED ---------- SIX MONTHS ENDED JUNE 30 ---------------------------------- 1999 1998 ------------ ------------ Balance at January 1 $ 6,021,650 $ 7,378,070 Net income 386,586 404,222 Partner distributions (1,272,136) (385,000) ------------ ------------ Balance at June 30 $ 5,136,100 $ 7,397,292 ============ ============ The accompanying notes are an integral part of the financial statements. 5 6 EXCEL PROPERTIES, LTD. STATEMENTS OF CASH FLOWS - UNAUDITED ---------- SIX MONTHS ENDED JUNE 30, ---------------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities: Net income $ 386,586 $ 404,222 Adjustments to reconcile net income to net cash provided by operations: Depreciation 51,552 67,607 Provision for bad debts - 6,045 Gain on sale of real estate (105,847) (100,094) Changes in operating assets and liabilities: (Increase) decrease in assets: Accounts receivable (106) 13,852 Interest receivable and other assets (145) (2,776) Increase (decrease) in liabilities: Accounts payable (560) (11,279) Property taxes payable 4,106 (7,011) Deferred rental income (2,423) 4,601 ------------ ------------ Net cash provided by operating activities 333,163 375,167 ------------ ------------ Cash flows from investing activities: Collection of notes receivable 4,366 4,009 Proceeds from real estate sales 869,083 689,760 ------------ ------------ Net cash provided by investing activities 873,449 693,769 ------------ ------------ Cash flows from financing activities: Cash distributions (1,272,136) (385,000) ------------ ------------ Net cash used by financing activities (1,272,136) (385,000) ------------ ------------ Net (decrease) increase in cash (65,524) 683,936 Cash at January 1 412,033 444,616 ------------ ------------ Cash at June 30 $ 346,509 $ 1,128,552 ============ ============ 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 June 30, 1999, the carrying amount of the Partnership's cash deposits total $346,509. The bank balances are $399,364 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 six months ended June 30, 1999 or 1998. The Partnership also had no noncash investing or financing transactions for the six months ended June 30, 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. 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 six months ended June 30, 1999 and 1998: 1999 1998 ------- ------- Management fees $ 2,674 $ 3,511 Administrative fees 5,400 5,400 Accounting 3,240 3,240 3. SALE OF PROPERTY In February 1999, the Partnership sold a vacant building in Kenner, Louisiana that was formerly on lease to Toddle House Restaurant. The sale price for the building was $237,500. The Partnership recognized a gain of $34,534 on the sale. In March 1999, the Partnership sold a building in Plant City, Florida that was on lease to Payless Shoe Store. The sale price for the building was $670,000. The Partnership recognized a gain of $71,313 on the sale. In 1998, the Partnership sold a property leased by Timberlodge Steakhouse in Burnsville, Minnesota. The net proceeds for the building were $689,760 and a gain of $100,094 was recognized. 8 9 EXCEL PROPERTIES, LTD. NOTES TO FINANCIAL STATEMENTS - UNAUDITED, CONTINUED ---------- 4. NOTES RECEIVABLE The Company had the following notes receivable at June 30, 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 128,007 130,522 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. 103,480 105,332 ---------- ---------- Total notes receivable $1,154,737 $1,159,104 ========== ========== 5. 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, ------------------------ 1999, remaining six months $ 305,759 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, (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. LIQUIDITY AND CAPITAL RESOURCES The Partnership has $346,509 at June 30, 1999, with no debt on any of the properties it owns. In July 1999, the Partnership distributed accumulated cash to the partners in the amount of $250,000. The Partnership currently recognizes approximately $51,000 a month from rental revenue. Management anticipates that rental revenue should be enough to cover any Partnership and operating 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 1999 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 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. 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 June 30, 1999 to the three months ended June 30, 1998 Base rent decreased $11,072 or 7% from the previous year. The net decrease was primarily due to the sale in March 1999 of a building that was previously leased to Payless Shoe Store. This property accounted for approximately $17,696 of rental revenue in the second quarter of 1998. Interest income decreased $3,352 or 10% over 1998. This decrease was largely due to cash balances from proceeds relating to the 1998 property sales before the funds were distributed to the partners. In 1998, the company recognized a gain of $100,094 relating to the sale of a building in Burnsville, Minnesota that was on lease to Timberlodge. There were no property sales in the three months ended June 30, 1999. Operating expenses increased by $4,627 or 10% from the three months ended June 30, 1998 to the three months ended June 30, 1999. The net increase was largely due to the $4,849 increase in accounting expense. This increase is primarily due to $4,932 paid for tax preparation and audit fees . Depreciation expense decreased by $7,568 or 23% due to property sales in 1998 and in the first quarter in 1999. Bad debt expense decreased by $4,423 or 100% as compared to 1998. In 1999, the Company did not record any bad debt expense. Property taxes increased by $12,318 or 100%. The increase is attributable to the Company paying for the property taxes on behalf of Kindercare in Columbus, Ohio. Kindercare is to reimburse the Company for the expense. Other expenses and other income varied very little between the two accounting periods. Comparison of the six months ended June 30, 1999 to the six months ended June 30, 1998 Base rent decreased $21,272 or 6% from the previous year. The decrease was primarily due to the sale in February 1999 of a building previously leased to Payless Shoe Store, in Plant City, Florida. This property accounted for approximately $35,393 in the first half of 1998. Operating expenses increased by $2,198 or 2%. Accounting expense increased by $13,602 over 1998. This increase is primarily due to accounting fees paid for tax preparation and audit fees. Depreciation expense decreased by $16,055 or 24% due to property sales in 1998 and in the first quarter in 1999. Bad debt expense decreased by $4,423 or 100% as compared to 1998. In 1999, the Company did not record any bad debt expense. Property tax expense increased by $12,534 or 100%. The increase is attributable to the Company paying for the property taxes on behalf of Kindercare in Columbus, Ohio. Kindercare is to reimburse the Company for these expenses. 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 The Partnership uses the information technology ("IT") systems of the general partner. Some of the general partners' 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 general partner 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 11 12 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 Company. Such interruptions or failures could materially adversely affect the Partnership's business, operating results and financial condition. The Partnership's Year 2000 project is substantially completed. As of June 30, 1999, the general partner had expended less than $60,000 and does not expect to expend any significant additional costs in connection with its Year 2000 project, including the cost of identification, assessment, remediation and testing efforts. The cost of the 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 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, along with all other forward-looking statements herein, 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 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 12 13 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 June 30, 1999, the Company had no tenants under bankruptcy. The Company is attempting to sell or lease this property. 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 June 30, 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: August 16, 1999 EXCEL PROPERTIES, LTD. (Registrant) New Plan Excel Realty Trust, Inc. (General Partner) By: /s/ Gary B. Sabin ------------------------------------------- Gary B. Sabin, General Partner By: /s/ James Y. Nakagawa ------------------------------------------- James Y. Nakagawa, Principal Accounting Officer 13