<PAGE>
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:
APRIL 30, 1998 0-23503
------------------------ -----------------------
EXCEL LEGACY CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 33-0781747
-------------------------------- ------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
16955 VIA DEL CAMPO, SUITE 110 SAN DIEGO, CALIFORNIA 92127
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(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (619) 485-9400
--------------
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 No X
------ -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at June 11, 1998
----------------------------- ----------------------------
Common stock, $.01 par value 33,457,804
<PAGE>
EXCEL LEGACY CORPORATION
INDEX
FORM 10-Q
__________
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Balance Sheet
April 30, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . . . 3
Statements of Income
Three Months Ended April 30, 1998 (Unaudited)
Period from Inception (November 17, 1997)
to April 30, 1998 (Unaudited). . . . . . . . . . . . . . . . . . 4
Statement of Changes in Stockholders' Equity
Period from Inception (November 17, 1997)
to April 30, 1998 (Unaudited) . . . . . . . . . . . . . . . . . 5
Statement of Cash Flows
Period from Inception (November 17, 1997) to
April 30, 1998 (Unaudited) . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements (Unaudited) . . . . . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 19
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 20
</TABLE>
2
<PAGE>
EXCEL LEGACY CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
__________
<TABLE>
<CAPTION>
APRIL 30,
1998
(UNAUDITED)
-----------
<S> <C>
ASSETS
Real estate:
Land $ 40,529
Buildings 88,144
Leasehold interests 1,790
Accumulated depreciation (252)
---------
Net real estate 130,211
Cash 40,018
Notes receivable 23,281
Investment in partnerships 9,240
Interest receivable 2,999
Pre-development costs 1,751
Other assets 874
Deferred tax asset 6,636
---------
$ 215,010
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 36,283
Accounts payable and accrued liabilities 2,615
Other liabilities 14,891
Income taxes payable 227
---------
Total liabilities 54,016
---------
Commitments and contingencies -
Stockholders' equity:
Series A Preferred stock, $.01 par value, 50,000,000 shares
authorized, 21,281,000 shares issued and outstanding 213
Common stock, $.01 par value, 150,000,000 shares authorized,
32,607,804 shares issued and outstanding 326
Additional paid-in capital 170,964
Retained earnings 363
Notes receivable from officers for common shares (10,872)
---------
Total stockholders' equity 160,994
---------
$ 215,010
---------
---------
</TABLE>
The accompanying notes are an integral part
of the financial statements.
3
<PAGE>
EXCEL LEGACY CORPORATION
STATEMENTS OF INCOME - UNAUDITED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
__________
<TABLE>
<CAPTION>
PERIOD FROM
THREE INCEPTION
MONTHS (NOV. 17, 1997)
ENDED TO
APRIL 30, APRIL 30,
1998 1998
-------- --------
<S> <C> <C>
Revenues:
Rental $ 1,034 $ 1,034
Interest income and other revenues 309 309
-------- -------
Total revenue 1,343 1,343
-------- -------
Expenses:
Interest 311 311
Depreciation 262 262
Property operating expenses 108 108
General and administrative 58 58
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Total operating expenses 739 739
-------- -------
Income before income taxes 604 604
Provision for income taxes 241 241
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Net income $ 363 $ 363
-------- -------
-------- -------
Basic net income per share $ 0.03 $0.06
-------- -------
-------- -------
Diluted net income per share $ 0.02 $0.04
-------- -------
-------- -------
</TABLE>
The accompanying notes are an integral part
of the financial statements.
4
<PAGE>
EXCEL LEGACY CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
__________
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL OFFICER TOTAL
---------------------- ----------------------- PAID-IN NOTES RETAINED STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL RECEIVABLE EARNINGS EQUITY
---------- ------- --------- ------- -------- ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERIOD FROM INCEPTION (NOVEMBER 17, 1997) TO APRIL 30, 1998:
Balance at inception - $ - - $ - $ - $ - $ - $ -
Issuance of preferred
stock 21,281,000 213 - - 106,192 - - 106,405
Issuance of common
stock - - 32,607,804 326 67,469 - 67,795
Notes receivable from
officers for common
shares - - - - - (10,872) - (10,872)
Issuance costs - - - - (2,697) - - (2,697)
Net income - - - - - 363 363
---------- ------ ---------- ----- --------- -------- -------- --------
Balance at
April 30, 1998 21,281,000 $ 213 32,607,804 $ 326 $ 170,964 $(10,872) $ 363 $160,994
---------- ------ ---------- ----- --------- -------- -------- --------
---------- ------ ---------- ----- --------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part
of the financial statements.
5
<PAGE>
EXCEL LEGACY CORPORATION
STATEMENT OF CASH FLOWS - UNAUDITED
(IN THOUSANDS)
__________
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(NOV. 17, 1997)
TO
APRIL 30,
1998
--------------
<S> <C>
Cash flows from operating activities:
Net income $ 363
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 263
Changes in other assets 123
Changes in accounts payable 2,615
Changes in other liabilities 159
--------
Net cash provided by operating activities 3,523
--------
Cash flows from investing activities:
Real estate acquisitions and construction costs paid (5,124)
Investment in partnerships (9,240)
Pre-development costs paid (1,751)
Advances for notes receivable (111)
--------
Net cash used in investing activities (16,226)
--------
Cash flows from financing activities:
Issuance of preferred stock 106,405
Principal payments of mortgages and notes payable (62,091)
Issuance of common stock 11,104
Issuance costs (2,697)
--------
Net cash provided by financing activities 52,721
--------
Net increase in cash 40,018
Cash at inception -
--------
Cash at April 30 $ 40,018
--------
--------
</TABLE>
The accompanying notes are an integral part
of the financial statements.
6
<PAGE>
EXCEL LEGACY CORPORATION
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 normal recurring nature.
ORGANIZATION
Excel Legacy Corporation (the "Company"), a Delaware Corporation was formed
on November 17, 1997. The Company was originally a wholly-owned subsidiary
of Excel Realty Trust, Inc. ("Excel"), a Maryland corporation and a self-
administered, self-managed real estate investment rust ("REIT"). On March
31, 1998, Excel effected a spin-off of the Company through a special
dividend to the holders of common stock of Excel of all of the outstanding
common stock of the Company held by Excel (the "Spin-off").
The Company was formed to pursue opportunities available to those investors
that are not restricted by the Federal income tax laws governing REITs or
influenced by Excel's objectives of increasing cash flows and maintaining
certain leverage ratios. In connection with the Spin-off, certain real
properties, notes receivable and related assets and liabilities were
transferred to the Company from Excel (Note 2). Upon completion of the
Spin-off, the Company ceased to be a wholly-owned subsidiary of Excel and
began operating as an independent public company.
REAL ESTATE
Certain real estate assets were transferred to the Company from Excel and
recorded at Excel's cost. Other real estate assets acquired subsequent to
the Spin-off were recorded at the Company's cost. Depreciation is computed
using the straight-line method over estimated useful lives of 40 years for
buildings. Expenditures for maintenance and repairs are charged to expense
as incurred and significant renovations are capitalized.
The Company assesses whether there has been a permanent impairment in the
value of its real estate by considering factors such as expected future
operating income, trends and prospects, as well as the effects of demand,
competition and other economic factors. Such factors include a lessee's
ability to pay rent under the terms of the lease. If a property is leased
at significantly lower rent, the Company may recognize a permanent
impairment loss if the income stream is not sufficient to recover its
investment.
INVESTMENT IN PARTNERSHIPS
The equity method of accounting is used for the Company's investment in
partnerships at April 30, 1998. In May 1998, the Company acquired a
majority interest in a partnership whose accounts will be consolidated
with the Company's accounts (Note 3).
INCOME TAXES
The Company uses the asset and liability method to account for income
taxes. Deferred income tax assets have been recorded to reflect the
future tax benefit of assets acquired from Excel that were recorded at
cost for book purposes and fair market value for tax purposes.
Continued
7
<PAGE>
EXCEL LEGACY CORPORATION
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
__________
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PRE-DEVELOPMENT COSTS
Pre-development costs that are directly related to specific construction
projects are capitalized as incurred. The Company expenses these costs to
the extent they are unrecoverable or it is determined that the related
project will not be pursued.
DEFERRED LEASING AND LOAN ACQUISITION COSTS
Costs incurred in obtaining tenant leases and long-term financing are
amortized to other property expense and interest expense, respectively, on
the straight-line method over the terms of the related leases or debt
agreements.
REVENUE RECOGNITION
Base rental revenue is recognized on the straight-line basis, which
averages annual minimum rents over the terms of the leases. Certain of
the leases provide for additional rental revenue by way of percentage rents
to be paid based upon the level of sales achieved by the lessee. Certain
of the leases also provide for tenant reimbursement of common area
maintenance and other operating expenses. All the above revenue is
included in the accompanying Statements of Income as rental revenue.
NET INCOME PER COMMON SHARE
The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings Per Share effective December 31, 1997.
SFAS No. 128 requires the presentation of basic and diluted earnings per
share (Note 9).
USE OF 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 at
the date of the financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates.
2. SPIN-OFF:
Prior to the Spin-off (Note 1) on March 31, 1998, ERT Development
Corporation ("EDV"), a Delaware Corporation and an affiliate of Excel
transferred four notes receivable, a land parcel, a leasehold interest
in a parcel of land, an office building, a single tenant building, and
certain other assets to Excel for a total consideration of approximately
$38,112,000. Excel contributed to the Company, the above assets from EDV,
together with ten single tenant properties owned by Excel with a book value
of approximately $45,747,000, certain other net assets of approximately
$1,158,000, and a property held for sale with a book value of $14,525,000,
in exchange for 23,412,580 common shares of the Company, assumption of debt
by the Company on the ten single tenant properties of approximately
$33,878,000, and issuance of a note payable to Excel from the Company in
the amount of $26,402,000. This note was repaid in April 1998.
Continued
8
<PAGE>
EXCEL LEGACY CORPORATION
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
__________
2. SPIN-OFF, CONTINUED:
The Spin-off took place through a dividend distribution to Excel's common
stockholders, of all the Company's common stock (23,412,580 shares) held by
Excel. The distribution consisted of one share of the Company's common
stock for each share of Excel's common stock held on the record date of
March 2, 1998. The fair market value of the distribution was approximately
$55,956,000 or $2.39 per share. While the Company has recorded the
acquisition of assets and liabilities at fair market value for tax
purposes, the Company has recorded for book purposes, the assets and
liabilities at Excel's and EDV's original book value. The tax effect of
the difference between fair market value and book value was $6,650,000
and was recorded as a deferred tax asset.
3. REAL ESTATE:
HIGHLANDS RANCH AND WESTMINSTER, COLORADO
In January 1998, the Company acquired two properties under construction
situated on approximately 43.6 acres in Highlands Ranch and Westminster,
Colorado. The acquired properties consist of two 110,000 square foot 24
screen movie theaters that are occupied by AMC Multi-Cinema, Inc. ("AMC")
and were completed on March 20, 1998 and April 3, 1998, respectively. The
Company provided to AMC letters of credit which covered the construction of
the buildings. As of April 30, 1998, there were no outstanding amounts on
the letters of credit. In May 1998, $7,017,000 was drawn on the letters of
credit and an additional $7,588,000 of draws are expected. The $14,605,000
of estimated remaining draws is included in the accompanying Balance Sheet
in other liabilities (Note 6 and 8). The total cost of these properties
is expected to total approximately $50,000,000.
SINGLE TENANT BUILDINGS
The Company acquired ten single tenant buildings from Excel in connection
with the Spin-off. Eight of the buildings are leased to Wal-Mart Stores,
Inc. and are located in Colorado, Illinois, Indiana (2), Michigan,
Pennsylvania, Texas, and Wisconsin. The other two properties are leased to
Lowe's Home Centers, Inc. and are located in Indiana and Ohio. The ten
properties have a total Gross Leasable Area ("GLA") of 981,266 square feet.
The Company acquired these properties for $45,747,000 and assumed
$33,988,000 of mortgage debt (Note 6) and other net liabilities.
SCOTTSDALE GALLERIA
The Company acquired the Scottsdale Galleria ("Galleria") from Excel in
connection with the Spin-off. The Scottsdale Galleria is situated on
approximately 6.3 acres and consists of (i) an enclosed shopping mall
contained in two separate buildings, and (ii) a multi-level parking garage.
The main building is a four level building with a transparent glass roof
and the smaller building contains the "5th Avenue Shops". The Company
acquired this property for $14,525,000. This property substantially vacant
and is under consideration for a mixed use entertainment redevelopment
project.
SCOTTSDALE TOWERS
The Company acquired approximately 3.6 acres of vacant land located in
Scottsdale, Arizona which was originally owned by EDV in connection with
the Spin-off. The land was acquired for approximately $3,724,000 and was
acquired along with other properties located in the Scottsdale area as part
of the Galleria redevelopment plan.
Continued
9
<PAGE>
EXCEL LEGACY CORPORATION
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
__________
3. REAL ESTATE, CONTINUED:
SCOTTSDALE CITY CENTRE
The Company acquired the Scottsdale City Centre, a 64,262 square foot
office building situated on approximately two acres in Scottsdale Arizona
(the "City Centre"). The City Centre was originally owned by EDV and
transferred to Excel and to the Company in connection with the Spin-off.
The City Centre was acquired for $7,885,000 and was encumbered by mortgage
debt of $2,571,000. This property was acquired as a strategic expansion
site for the Galleria redevelopment project.
BRIO LAND
The Company acquired approximately 0.5 acres of land located in Scottsdale,
Arizona which was originally owned by EDV in connection with the Spin-off.
The land currently contains a 3,700 square foot building which is leased to
Brio Restaurant and was acquired for approximately $1,602,000. The
property is expected to be part of the Galleria redevelopment plan along
with the other above properties located in Scottsdale.
RANCHO BERNARDO LAND
In March 1998, the Company acquired approximately 11.1 acres of land
located in the community of Rancho Bernardo in San Diego, California
for approximately $4,072,000. The land was acquired for office or
industrial development.
GRAND CANYON LEASEHOLD
The Company acquired a leasehold interest in approximately 6.5 acres of
land located in Tusayan, Arizona at the entrance to Grand Canyon National
Park. This leasehold interest was originally owned by EDV and acquired in
connection with the Spin-off. The leasehold interest was acquired for
$1,790,000 and is subject to a lease with a term of 50 years and two
ten year renewal options. A development project is currently under
development on the land (Note 5).
TELLURIDE LAND
In January 1998, the Company acquired a parcel of land located at the base
of Telluride mountain in Telluride Mountain Village Ski Resort in
Telluride, Colorado for approximately $763,000. The land was acquired
for future development.
DESERT FASHION PLAZA
In May 1998, the Company acquired a majority interest in Desert Fashion
Plaza, L.L.C., a Delaware limited liability company which owns an urban
mall located in Palm Springs, California (the "Desert Fashion Plaza") for
approximately $13,668,000. Desert Fashion Plaza contains approximately
290,000 square feet of GLA. Presently the mall is anchored by Saks Fifth
Avenue and is adjacent to the Hyatt Regency Hotel. The Company has
acquired this property for redevelopment.
Continued
10
<PAGE>
EXCEL LEGACY CORPORATION
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
__________
4. NOTES RECEIVABLE:
LOS ARCOS
In connection with the Spin-off, the Company acquired a $16,225,000
promissory note payable by Los Arcos Development, LLC, the owner of a
700,000 square foot indoor regional mall located in Scottsdale, Arizona.
The Company also received $2,397,000 of accrued interest in connection
with the Spin-off. Interest on the note accrues at the rate of 12% per
annum. The note matures on the earlier of (i) the sale of the property or
(ii) December 2003. Accrued interest on the Los Arcos loan becomes payable
out of the property's net cash flow once the borrower's development of the
property is completed. The note is secured by a first mortgage on the
property and includes a profit participation upon the property's sale.
FIRST STREET
The Company acquired a $5,518,000 promissory note in connection with the
Spin-off payable by First Street Investments Limited Partnership, the owner
of a 120,000 square foot, eight story building located in downtown Phoenix,
Arizona. The Company also assumed $137,000 of accrued interest in
connection with the Spin-off. The note matures on the earlier of (i) the
sale of the property or (ii) May 2004 and is secured by a subordinated
mortgage on the property and includes a profit participation upon sale of
the property. Until the maturity date, the borrower is to pay interest
only at the rate of 11% per annum. Interest not paid currently accrues at
the rate of 12% per annum.
GRAND CANYON
In connection with the Spin-off, the Company acquired from Excel a
$1,050,000 promissory note payable by Fain Properties Limited Partnership,
the owner of approximately 17 acres of undeveloped land located in Tusayan,
Arizona near the Grand Canyon National Park. The note accrues interest at
10% and is secured by a first mortgage on the property. The note matures
in September 1998.
OTHER
The Company has outstanding two additional notes receivable it obtained in
connection with the Spin-off. These notes total $488,000 at April 30, 1998
and bear interest at 12% per annum.
OFFICERS
In connection with the sale of common stock to certain of the Company's
officers and employees (Note 9), the Company issued $10,872,000 of notes
receivable due from certain of the Company's officers. The notes bear
interest at 7%, are recourse obligations of the note holders, and are due
in March 2003. The notes have been offset against stockholders' equity
on the Company's accompanying Balance Sheet.
Continued
11
<PAGE>
EXCEL LEGACY CORPORATION
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
__________
5. INVESTMENTS:
ENTERCITEMENT
In April 1998, the Company invested $6,000,000 in EnterCitement, LLC
("EnterCitement"), a theme park development company. EnterCitement owns
approximately 510 acres of land in Indianapolis, Indiana, on which it
plans to develop a theme park. The Company currently holds a 23.7%
ownership interest in EnterCitement and an option to acquire an
additional ownership interest of up to 55%.
THE GRAND HOTEL AND CANYON STAR
The Company has invested $3,240,000 in a joint venture arrangement with
Canyon Ventures, LLC for the development of a hotel and dinner theater
and retail shop situated near the south rim entrance to the Grand Canyon
National Park in Tusayan. An additional $3,708,000 has been invested
subsequent to April 30, 1998.
TENANTFIRST
In May 1998, the Company acquired TenantFirst Real Estate Services, Inc.
("TenantFirst"). In connection with the acquisition, the Company paid
$138,000 in cash and issued 850,000 shares of the Company's common
stock. TenantFirst performs property management and development services
for various commercial properties located in San Diego, California.
6. MORTGAGES PAYABLE:
The Company had $36,283,000 in mortgages payable outstanding at April
30, 1998 at 7.625% to 8.528%. The mortgages are due on various dates
through 2014 and monthly payments approximate $405,000. The mortgages
are collateralized by real estate and an assignment of rents.
The principal payments required to be made on mortgages payable over the
next five years are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
<S> <C>
1998, remaining three months $ 1,418
1999 2,185
2000 2,357
2001 2,543
2002 2,752
Thereafter 25,028
-------
$36,283
-------
-------
</TABLE>
Mortgages of $29,982,000 are fully amortizing with the final monthly
payments to be made between the years 2004 and 2018.
In May 1998, the Company borrowed approximately $18,100,000 from a bank
with a fixed interest rate of 7.52%. The note is non-recourse to the
Company and secured by one of the properties leased to AMC (Note 3).
The note is fully amortizing over 20 years and expires in 2018.
Continued
12
<PAGE>
EXCEL LEGACY CORPORATION
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
__________
7. INCOME TAXES:
At April 30, 1998, the Company had a deferred tax asset of $6,636,000.
The deferred tax asset is non-current and relates to the difference
between fair market value and book value of the assets acquired from
Excel in connection with the Spin-off. No valuation allowance has been
provided against the asset as the Company believes the asset will be
realized upon eventual disposition of the related properties. The
provision for income taxes consists of federal expense of $188,000 and
state expense of $53,000 both of which is current.
8. COMMITMENTS AND CONTINGENCIES:
The Company has provided letters of credit to AMC to complete
construction on two properties (Note 3). At April 30, 1998, the total
estimated amounts remaining to be drawn on the letters of credit was
$14,605,000 of which $7,017,000 was drawn in May 1998. The draw was
converted to a bank term loan at LIBOR plus 1.2% due on June 30, 1998.
The total estimated liability of $14,605,000 is included in the
accompanying Balance Sheet in other liabilities.
The Company expects to fund the initial $19,000,000 of capital required
to fund a joint venture, Millennia Car Wash, LLC, which was formed to
acquire car wash properties.
9. CAPITAL STOCK:
COMMON SHARES
In connection with the Spin-off, 23,412,580 shares of common stock were
issued by the Company to its then parent company, Excel, who then
distributed the shares on a one for one basis. The shares had a book
value and estimated fair market value of $1.68 and $2.39 per share,
respectively.
On March 31, 1998, the Company sold 9,195,224 shares of common stock to
certain officers and employees of the Company for $2.39 per share. The
Company received cash of $11,104,000 and issued notes receivable of
$10,872,000 in connection with the sale. The shares issued in exchange
for the notes receivable have been offset against stockholders' equity
on the accompanying balance sheet.
SERIES A PREFERRED SHARES
On March 31, 1998, the Company issued 21,281,000 shares of Series A
Preferred Stock at $5.00 per share (the "Preferred A Shares"). Holders
of the Preferred A Shares are entitled to receive, when and if declared
by the Board of Directors, cumulative cash dividends payable in an
amount per share equal to the cash dividends, if any, on the shares of
common stock, on a one for one basis, subject to certain circumstances.
The Preferred A Shares are also entitled to a liquidation preference of
$5.00 per share plus a premium of 7% per annum in the event of any
liquidation, dissolution or other winding up of the affairs of the
Company. The Preferred A Shares are also convertible into common stock
by the Company if certain circumstances regarding the price of the
common stock are met. Such circumstances were met in May 1998, and on
May 18, 1998, the Company exercised its right to convert all of the
outstanding shares of the Preferred A Shares into common stock, which
conversion is expected to take place on August 18, 1998 with a July 28,
1998 record date.
Continued
13
<PAGE>
EXCEL LEGACY CORPORRATION
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
__________
9. CAPITAL STOCK - CONTINUED:
EARNINGS PER SHARE (EPS)
In accordance with the disclosure requirements of SFAS No. 128 (Note 1),
a reconciliation of the numerator and denominator of basic and diluted
EPS is provided as follows (in thousands, except per share amounts).
<TABLE>
<CAPTION>
INCEPTION
THREE MONTHS (NOV. 17, 1997)
ENDED TO
APRIL 30, APRIL 30,
1998 1998
------------ -------------
<S> <C> <C>
BASIC EPS
NUMERATOR:
Net income $ 363 $ 363
------ ------
------ ------
DENOMINATOR:
Weighted average of common shares outstanding 10,991 5,964
------ ------
------ ------
EARNINGS PER SHARE: $ 0.03 $ 0.06
------ ------
------ ------
DILUTED EPS
NUMERATOR:
Net income $ 363 $ 363
------ ------
------ ------
DENOMINATOR:
Weighted average of common shares outstanding 10,991 5,964
Effect of diluted securities:
Preferred A Shares 7,173 3,893
Options 124 124
------ ------
18,288 9,981
------ ------
------ ------
EARNINGS PER SHARE: $ 0.02 $ 0.04
------ ------
------ ------
</TABLE>
10. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amount paid for interest during the three months ended April 30,
1998 was approximately $339,000 of which approximately $267,000 was
capitalized as construction costs.
On March 31, 1998, Excel spun-off certain assets to the Company in the
form of a dividend and note payable (Notes 1 and 2). Also on March 31,
1998, common shares were issued to certain officers of the Company in
exchange for cash and $10,872,000 in notes receivable (Note 4). During
the three months ended April 30, 1998, the Company borrowed $35,523,000
in notes payable in connection with the construction of the AMC
theaters. The estimated additional amount of construction costs
incurred of $14,605,000 has been accrued for as a non-cash item.
Continued
14
<PAGE>
EXCEL LEGACY CORPORATION
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
__________
11. MINIMUM FUTURE RENTALS:
The Company leases its operating properties under noncancelable
operating leases generally requiring the tenant to pay a minimum rent.
The leases generally either (i) require the tenant to pay all expenses
of operating the property such as insurance, property taxes, and
structural repairs and maintenance, or (ii) require the tenant to
reimburse the Company for the tenant's share of real estate taxes and
other common area maintenance expenses or for the tenant's share of any
increase in expenses over a base year.
Minimum future rental revenue for the next five years for the commercial
real estate owned at April 30, 1998 and subject to noncancelable
operating leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
-----
<S> <C>
1998, remaining three months $ 2,710
1999 10,628
2000 10,418
2001 10,320
2002 10,100
Thereafter 119,752
</TABLE>
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
NATURE OF BUSINESS
Excel Legacy Corporation (the "Company"), a Delaware Corporation, was formed
on November 17, 1997. The Company was organized to create and realize value
by identifying and making opportunistic real estate and other investments
through the direct acquisition, rehabilitation, development, financing and
management of real properties and/or participation in these activities
through the purchase of debt instruments or equity interests of entities
engaged in such businesses.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto. As the Company was not formed until
November 17, 1997, comparison results with 1997 are not provided. The
results of operations for the period from inception to April 30, 1998 are the
same as the results of operations for the three months ended April 30, 1998
as there were no operational results prior to January 31, 1998.
THREE MONTHS ENDED APRIL 30, 1998.
RENTAL REVENUE was $1.0 million during the period. Ten single tenant
properties owned by the Company accounted for $0.4 million of rental revenue.
Additionally, construction on two properties leased to AMC Multi-Cinema, Inc.
("AMC") were completed on March 20, 1998 and April , 3, 1998 and accounted
for $0.5 million of revenue. The remaining $0.1 million of rental revenue
was attributable to three properties located in Scottsdale, Arizona. The ten
single tenant properties and three properties located in Scottsdale, Arizona
were acquired on March 31, 1998 and reflect one month of operations.
INTEREST INCOME was $0.3 million and primarily related to interest earned on
the Company's outstanding notes receivable which were acquired on March 31,
1998.
INTEREST EXPENSE was $0.3 million and primarily related to the $36.3 million
of mortgage debt outstanding at April 30, 1998 in addition to certain
advances made by Excel which were repaid in April 1998. The mortgage debt
was all assumed on March 31, 1998.
DEPRECIATION EXPENSE totaled $0.3 million and related to the $88.1 million of
buildings and the $1.8 million of leasehold interests held by the Company at
April 30, 1998.
PROPERTY OPERATING EXPENSES were $0.1 million and primarily related to the
three properties located in Scottsdale, Arizona.
GENERAL AND ADMINISTRATIVE EXPENSES were $0.1 million in the three months
ended April 30, 1998. The general and administrative expenses include
certain costs charged to the Company in April 1998 by Excel pursuant to
certain agreements providing for the sharing of certain facilities and
services.
PROVISION FOR INCOME TAXES was $0.2 million, all of which is current expense.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of the Company, the
Company received approximately $11.1 million in cash and approximately $10.9
million in notes receivable from the sale of common stock to certain officers
and employees of the Company. In addition, the Company sold 21,281,000 share
of Series A Preferred Stock for total net proceeds (after a placement fee of
$2.4 million) of approximately $104.0 million. At April 30, 1998, the
Company had $40.0 million of cash remaining after the cash requirements of
the Spin-off, and real estate and other investments made prior to April 30,
1998.
At April 30, 1998, the total debt of the Company consisted of the following:
(i) $26.0 million in mortgages on eight properties leased to Wal-Mart Stores,
Inc ("Wal-Mart"). These mortgages are self-amortizing with the
16
<PAGE>
rent being paid by Wal-Mart directly to the mortgage holders. The mortgages
will be entirely repaid when the initial terms of the leases with Wal-Mart
expire. (ii) $7.7 million in mortgages on two properties leased to Lowe's
Home Centers, Inc. ("Lowe's"). These mortgages are also self-amortizing over
the term of the leases with Lowe's and will be repaid when the leases expire.
(iii) A $2.6 million mortgage securing an office building in Scottsdale,
Arizona, monthly payments on which are approximately $25,000 with a balloon
payment in the year 2006.
The Company has provided to AMC letters of credit on the construction of the
properties leased to AMC of which $14.6 was outstanding at April 30, 1998.
In May 1998, $7.0 was borrowed by the Company in connection with the letters
of credit which is due June 30, 1998. Also in May 1998, the Company borrowed
an additional $18.1 million secured by one of the properties leased to AMC.
This mortgage is due in the year 2018 with a fixed interest rate of 7.52% and
is fully amortizing over the lease term of 20 years.
The Company anticipates that cash flow from operations will be adequate to
meet the current cash requirements of its operating properties. The Company
expects to meet its long-term liquidity requirements, such as property
acquisitions and development, mortgage debt maturities, and other investment
opportunities, through the most advantageous sources of capital available to
the Company at the time, which may include the sale of common stock,
preferred stock or debt securities through public offerings or private
placements, entering into joint venture arrangements with financial partners,
the incurrence of indebtedness through secured or unsecured borrowings and
the reinvestment of proceeds from the disposition of assets.
The Company expects to fund the initial $19.0 million of capital required to
fund a joint venture, Millennia Car Wash, LLC which was formed to acquire car
wash properties. The Company may also purchase additional assets and make
such capital expenditures from time to time in the future. Any such
expenditures will be contingent upon securing adequate funding on terms
acceptable to the Company. The Company is not aware of any material
unfavorable trends in either capital resources or the outlook for long-term
cash generation.
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Form 10-Q may be deemed to be "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results of the
Company to be materially different from historical results or from any
results expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors include, but are not limited to, the
following risks:
RECENTLY FORMED ENTITY; LACK OF INDEPENDENT OPERATING HISTORY. The Company
is a recently-formed entity with no prior operating history. There can be no
assurance that the Company will not encounter financial, managerial or other
difficulties as a result of its lack of operating history or inability to
rely on the financial and other resources of Excel. Currently, the Company
has no external source of financing. Although the Company expects to be able
to access capital markets or to seek other financing, there can be no
assurance that it will be able to do so at all or in amounts or on terms
acceptable to the Company.
RELIANCE ON MAJOR TENANTS. As of April 30, 1998, the Company's largest
tenants were AMC, Wal-Mart, and Lowe's which accounted for approximately
45.2%, 34.2% and 11.1% of the Company's annualized scheduled base revenues as
of such date. The financial position of the Company may be adversely
affected by financial difficulties experienced by any of such tenants, or
any other major tenant of the Company, including a bankruptcy, insolvency or
general downturn in business of any such tenant, or in the event any such
tenant does not renew its leases as they expire.
CONTROL BY DIRECTORS AND EXECUTIVE OFFICERS. As of June 11, 1998, executive
officers and directors of the Company beneficially owned approximately 32.9%
of the Company's outstanding common stock. Accordingly, such persons should
continue to have substantial influence over the Company and on the outcome of
matters submitted to the Company's stockholders for approval. In addition,
such ownership could discourage acquisition of the common stock by potential
investors, and could have an anti-takeover effect, possibly depressing the
trading price of the common stock.
17
<PAGE>
DIFFICULTY OF LOCATING SUITABLE INVESTMENTS; COMPETITION. Identifying,
completing and realizing on real estate investments has from time to time
been highly competitive, and involves a high degree of uncertainty. The
Company competes for investments with many public and private real estate
investment vehicles, including financial institutions (such as mortgage
banks, pension funds and REITs) and other institutional investors, as well as
individuals. There can be no assurance that the Company will be able to
locate and complete investments which will be profitable or that it will be
able to fully invest its available capital. Many of those with whom the
Company competes for investments are far larger than the Company, may have
greater financial resources than the Company and may have management
personnel with more experience than the officers of the Company.
ACQUIRED PROPERTIES MAY FAIL TO PERFORM AS EXPECTED AND CAPITAL EXPENDITURES
MAY EXCEED ESTIMATES. The Company intends to acquire existing properties to
the extent they can be acquired on advantageous terms and meet the Company's
investment criteria. Acquisitions of properties entail general investment
risks associated with any real estate investment, including the risk that
investments will fail to perform as expected, that estimates of the costs of
improvements to bring an acquired property up to standards established for
the intended market position may prove inaccurate and the occupancy rates and
rents achieved may be less than anticipated.
UNCERTAINTY OF CASH FLOW FROM DEVELOPMENT, CONSTRUCTION AND RENOVATION
ACTIVITIES. The Company also intends to pursue the selective development,
construction and renovation of properties for its own account or the account
of, or through, entities in which it owns an equity interest as opportunities
arise, including without limitation long-term, higher-risk, mixed-use retail
entertainment projects and hospitality projects. Risks associated with the
Company's development, construction and renovation activities include risks
that: the Company may abandon development opportunities after expending
resources to determine feasibility; construction and renovation costs of a
project may exceed original estimates; occupancy rates and rents at a newly
completed property may not be sufficient to make the property profitable; and
development, construction, renovation and lease-up may not be completed on
schedule (including risks beyond the control of the Company, such as weather
or labor conditions or material shortages) resulting in increased debt
service expense and construction costs. Development, construction and
renovation activities also are subject to risks relating to the inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy and other required governmental permits and authorizations. These
risks could result in substantial unanticipated delays or expenses and, under
certain circumstances, could prevent completion of the project which could
adversely affect the financial condition and results of operations of the
Company.
OPERATING RISKS. If the properties of the Company, the properties of those
entities in which it invests or the properties of those entities to which it
will lend do not generate revenue sufficient to meet operating expenses, the
financial condition and results of operations of the Company may be adversely
affected. The Company's financial condition and results of operations also
may be adversely affected by a number other factors including downturns in
the international or domestic general economic climate or local real estate
conditions.
DEPENDENCE ON RENTAL INCOME FROM REAL PROPERTY. The Company's cash flow,
results of operations and value of its assets would be adversely affected if
a significant number of tenants were unable to meet their lease obligations
or if the Company or the owner of a property were unable to lease a
significant amount of space in its properties 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 Company 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 Company to
vary its portfolio promptly in response to changes in economic or other
conditions. In addition, mortgage payments and, to the extent the properties
are not subject to triple net leases, certain significant expenditures such
as real estate taxes and maintenance costs, are generally not reduced when
circumstances cause a reduction in income from the investment. Should such
events occur, the Company's income and funds for distribution would be
adversely affected. A portion of the Company's properties are mortgaged to
secure payment of indebtedness, and if the Company were unable to meet its
mortgage payments, a loss could be sustained as a result of foreclosure on
such properties by the mortgagee.
RISK OF BANKRUPTCY OF MAJOR TENANTS. The bankruptcy or insolvency of a major
tenant or a number of smaller
18
<PAGE>
tenants may have an adverse impact on the properties affected and on the
income produced by such properties. 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 Company, the tenant must
cure all defaults under the lease and provide the Company with adequate
assurance of its future performance under the lease. If the tenant rejects
the lease, the Company'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).
POTENTIAL ENVIRONMENTAL LIABILITY RELATED TO THE PROPERTIES. Under various
federal, state and local laws, ordinances and regulations, the Company 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 Company knew of,
or was responsible for, the presence of such hazardous or toxic substances.
POSSIBLE CONFLICTS WITH EXCEL. Many of the Company's executive officers and
directors also serve as executive officers and directors with Excel. Other
than Kelly D. Burt, who was recently hired as a director and officer of the
Company, none of the members of senior management of the Company is committed
to spending a particular amount of time on the Company's affairs, nor do any
of them devote his full time to the Company. As a result of dual roles,
there is the potential lack of management attention to the Company which
could have an adverse effect on the Company.
The Company and Excel have entered into certain agreements providing for (i)
the orderly separation of the Company and Excel, (ii) the sharing of certain
facilities and services, and (iii) the allocation of certain tax and other
liabilities. Because of management of both the Company and Excel are largely
the same, conflicts may arise with respect to the operation and effect of
these agreements and relationships which could have an adverse effect on the
Company if not properly resolved.
YEAR 2000. The Company currently uses Management Reports Inc. ("MRI")
software on a Novell local area network. The MRI software will require an
upgrade to make it year 2000 compliant, which the Company intends to install
prior to December 31, 1999. The Company does not believe that additional
costs associated with the software upgrade and additional implementation and
training costs will be material to the Company's financial position or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
19
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In March 1998, upon consummation of the Spin-off, the Company sold
(i) 9,195,224 shares of its common stock in a private placement to
certain of the Company's officers at a price per share of $2.39 for
an aggregate purchase price of approximately $22.0 million, and
(ii) 21,281,000 Preferred A Shares in a private placement to
certain "qualified institutional buyers" as defined in Rule 144A
under the Securities Act of 1933, as amended (the "Securities
Act"), at a price per share of $5.00, for an aggregate purchase
price of approximately $106.4 million. The Company relied upon an
exemption from registration under Rule 506 of Regulation D under
the Securities Act in connection with these private placements.
Holders of the Preferred A Shares have the right, exercisable at
any time and from time to time, to convert all or any of the
Preferred A Shares into shares of the Company's common stock, on a
one-for-one basis, subject to adjustment in certain circumstances.
The Preferred A Shares also are convertible into common stock by
the Company if the closing price of the common stock on the OTC
Bulletin Board is equal to or greater than certain milestones for
30 consecutive trading days. Such price milestones were met in May
1998 and on May 18, 1998, the Company exercised its right to
convert all of the outstanding Preferred A Shares into common
stock, which conversion is expected to take place automatically on
August 18, 1998. The Company has fixed July 28, 1998 as the record
date for such mandatory conversion.
The Company loaned to certain of its officers, in connection with
their purchase of common stock described above, approximately 50%
of the purchase price therefor (an aggregate amount of
approximately $10.9 million). Such loans bear interest at the rate
of 7.0% per annum, mature in March 2003 and are recourse
obligations of such officers.
In May 1998, the Company acquired TenantFirst, which was formed and
operated by Kelly D. Burt. As consideration, the Company issued to
Mr. Burt 850,000 shares of its common stock and approximately
$138,000 in cash. In connection with the acquisition of
TenantFirst, the Company hired Mr. Burt as a director and officer
of the Company. The Company relied upon an exemption from
registration under Section 4(2) of the Securities Act in connection
with this private placement.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K, dated March 24, 1998, was filed with
the Commission regarding the Spin-off of the Company from Excel.
A Current Report on Form 8-K, dated March 31, 1998, was filed with
the Commission regarding the distribution of the Company's stock to
Excel's stockholders and the issuance of Series A Preferred Stock.
20
<PAGE>
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: June 11, 1998 EXCEL LEGACY CORPORATION
(Registrant)
By: /s/ Gary B. Sabin
---------------------------
Gary B. Sabin
President
By: /s/ David A. Lund
---------------------------
David A. Lund
Principal Financial Officer
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 40,018,000
<SECURITIES> 0
<RECEIVABLES> 23,281,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 130,463,000
<DEPRECIATION> (252,000)
<TOTAL-ASSETS> 215,010,000
<CURRENT-LIABILITIES> 0
<BONDS> 36,283,000
213,000
0
<COMMON> 326,000
<OTHER-SE> 160,455,000
<TOTAL-LIABILITY-AND-EQUITY> 215,010,000
<SALES> 0
<TOTAL-REVENUES> 1,343,000
<CGS> 0
<TOTAL-COSTS> 739,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 311,000
<INCOME-PRETAX> 604,000
<INCOME-TAX> 241,000
<INCOME-CONTINUING> 363,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 363,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0.02
</TABLE>
