<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: OCTOBER 31, 1998 Commission File Number: 0-23503
EXCEL LEGACY CORPORATION
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0781747
------------------------- -----------------------------------
(State of incorporation) (IRS Employer Identification Number)
16955 VIA DEL CAMPO, SUITE 240, SAN DIEGO, CALIFORNIA 92127
- -------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number: (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. Yes X No
----- ------
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Class Outstanding at December 7, 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:
Consolidated Balance Sheets
October 31, 1998 (Unaudited)
July 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Income
Three Months Ended October 31, 1998 (Unaudited) . . . . . . . . .4
Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended October 31, 1998 (Unaudited) . . . . . . . . .5
Consolidated Statements of Cash Flows
Three Months Ended October 31, 1998 (Unaudited) . . . . . . . . .6
Notes to Financial Statements (Unaudited). . . . . . . . . . . . . .7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . 19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 19
</TABLE>
2
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
---------------
<TABLE>
<CAPTION>
OCTOBER 31,
1998 JULY 31,
(UNAUDITED) 1998
----------- ------------
ASSETS
<S> <C> <C>
Real estate:
Land $ 54,926 $ 51,675
Buildings 135,186 122,669
Leasehold interests 2,351 2,351
Accumulated depreciation (1,870) (939)
--------- ---------
Net real estate 190,593 175,756
Cash 3,539 11,491
Accounts receivable, less allowance for bad debts of $24 and
and $14 at October 31 and July 31 1998, respectively 252 732
Notes receivable 23,176 23,171
Investment in partnerships 11,257 11,138
Interest receivable 4,762 3,889
Pre-development costs 8,956 6,662
Other assets 9,433 7,757
Deferred tax asset 6,163 6,320
--------- ---------
$ 258,131 $ 246,916
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage and notes payable $ 87,275 $ 72,714
Accounts payable and accrued liabilities 2,423 5,680
Other liabilities 840 816
Income taxes payable 241 934
--------- ---------
Total liabilities 90,779 80,144
--------- ---------
Commitments and contingencies - -
Minority interests 848 853
--------- ---------
Stockholders' equity:
Series A Preferred stock, $.01 par value, 50,000,000 shares
authorized, 21,281,000 shares issued and outstanding 213 213
Common stock, $.01 par value, 150,000,000 shares authorized,
33,457,804 shares issued and outstanding 335 335
Additional paid-in capital 174,508 174,508
Retained earnings 2,320 1,735
Notes receivable from affiliates for common shares (10,872) (10,872)
--------- ---------
Total stockholders' equity 166,504 165,919
--------- ---------
$ 258,131 $ 246,916
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part
of the financial statements
3
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME - UNAUDITED
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
--------------
<TABLE>
<S> <C>
Revenue:
Rental $ 3,322
Operating income 4,491
Interest income 977
Partnership income and other revenues 156
-------
Total revenue 8,946
-------
Operating expenses:
Interest 1,457
Depreciation and amortization 1,117
Property operating expenses 1,029
Operating expenses 2,900
General and administrative 1,529
-------
Total operating expenses 8,032
-------
Income before income taxes 914
Provision for income taxes 329
-------
Net income $ 585
-------
-------
Basic net income per share $0.02
-------
-------
Diluted net income per share $0.01
-------
-------
</TABLE>
The accompanying notes are an integral part
of the financial statements.
4
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
-----------
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL AFFILIATE TOTAL
--------------------- ------------------- PAID-IN RETAINED NOTES STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL EARNINGS RECEIVABLE EQUITY
---------- ------ --------- ------ ---------- --------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at August 1, 1998 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ 1,735 $ (10,872) $ 165,919
Net income - - - - - 585 - 585
---------- ----- ---------- ----- --------- ------- --------- ---------
Balance at October 31, 1998 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ 2,320 $ (10,872) $ 166,504
---------- ----- ---------- ----- --------- ------- --------- ---------
---------- ----- ---------- ----- --------- ------- --------- ---------
</TABLE>
The accompanying notes are an integral part
of the financial statements.
5
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED
FOR THE THREE MONTHS ENDED OCTOBER 31, 1998
(IN THOUSANDS)
------------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 585
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,117
Provision for bad debts 10
Minority interest in partnerships (5)
Changes in accounts receivable and other assets (2,270)
Changes in accounts payable and other liabilities (3,769)
------
Net cash used by operating activities (4,332)
------
Cash flows from investing activities:
Real estate construction costs paid (968)
Investment in partnerships (119)
Pre-development costs paid (2,294)
------
Net cash used in investing activities (3,381)
------
Cash flows from financing activities:
Principal payments of mortgages and notes payable (239)
------
Net cash used by financing activities (239)
------
Net decrease in cash (7,952)
Cash at August 1, 1998 11,491
------
Cash at October 31, 1998 $3,539
------
------
</TABLE>
The accompanying notes are an integral part
of the financial statements.
6
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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. Certain footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been omitted pursuant to the quarterly
reporting rules of the Securities and Exchange Commission. These financial
statements should be read in conjunction with the consolidated financial
statements and accompanying footnotes included in the Company's July 31,
1998 Form 10-K.
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"), now
known as New Plan Excel Realty Trust, Inc. 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 investment and leverage guidelines. 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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries and all significantly owned
affiliates. The Company uses the equity method of accounting to account
for its investment in a Nova Scotia Company and the Company uses the cost
method to account for its investment in Entercitement LLC.
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.
7
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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.
MANAGEMENT CONTRACTS
Management contracts are recorded at cost and amortized over a period of
seven years.
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 Excel's
cost for book purposes and fair market value for tax purposes.
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.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" are effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income and its components in a
full set of general purpose financial statements and requires restatement
of earlier periods presented and had no effect on the Company's
consolidated financial statements. SFAS No. 131 establishes standards for
the way that a public enterprise reports information about operating
segments in annual financial statements, and requires that those
enterprises report selected information about operating segments in interim
financial reports to shareholders (Note 8).
8
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
-----------
2. SPIN-OFF:
On March 31, 1998, Excel transferred certain real estate assets to the
Company in exchange for 23,412,580 common shares of the Company, assumption
of mortgage debt by the Company, and issuance of a note payable to Excel
from the Company which was subsequently repaid. This 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 original book
value. The tax effect of the difference between fair market value and book
value was $6,528,000 and was recorded as a deferred tax asset.
3. REAL ESTATE:
In the three months ended October 31, 1998, Millennia Car Wash, LLC
("Millennia") acquired nine car wash properties for approximately
$15,200,000. The acquisition was made through the assumption of various
notes payable. There were no other significant acquisitions during the
period.
4. MORTGAGES AND NOTES PAYABLE:
The Company had $87,275,000 in mortgage and notes payable outstanding at
October 31, 1998 at 7.37% to 8.53% with an average interest rate of 7.92%.
The mortgages and notes are due on various dates through 2018 and monthly
payments approximate $857,000. The mortgages and notes 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>
YEAR ENDED JULY 31,
1999 (remaining nine months) $ 2,317
2000 4,149
2001 3,920
2002 4,245
2003 7,879
Thereafter 64,765
--------
$ 87,275
--------
--------
</TABLE>
The Company has an unsecured revolving credit facility of $15,000,000 from
BankBoston, N.A. (the "Credit Facility") which carries an interest rate of
LIBOR plus 2.5% on any outstanding amounts. The Credit Facility expires in
October 1999. Through December 7, 1998, approximately $3,000,000 was
outstanding under the Credit Facility.
9
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
-----------
5. Income Taxes:
At October 31, 1998, the Company had a net deferred tax asset of
$6,163,000. The deferred tax asset primarily relates to the difference
between fair market value and book value of the real estate assets acquired
from Excel in connection with the Spin-off (Note 2) and is non-current.
The offsetting portion of the deferred asset relates to timing differences
in recognizing revenue and expenses for tax purposes through operations of
the Company. No valuation allowance has been provided against the deferred
tax asset as the Company believes future taxable income is more likely than
not. The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE
--------- ---------
<S> <C> <C>
Current payable $ 177,000 $ 6,000
Deferred tax expense 122,000 24,000
--------- ---------
Provision for income taxes $ 299,000 $ 30,000
--------- ---------
--------- ---------
</TABLE>
6. CAPITAL STOCK:
SERIES A PREFERRED SHARES
On October 31, 1998, the Company had 21,281,000 shares of Series A
Preferred Stock outstanding (the "Preferred A Shares"). Holders of the
Preferred A Shares are entitled to receive, when, as 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
into which the Preferred A Shares are convertible. Holders of 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 convertible into common stock of the Company at
the election of the holders at any time, 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
Company's common stock 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 took steps to exercise its right to
convert all of the Preferred A Shares into common stock, which conversion
was expected to take place on August 18, 1998.
On August 17, 1998, the Company withdrew its election to convert the
Preferred A Shares, and instead the holders and the Company agreed to
modify the terms of the Preferred A Shares. The Company decided to effect
such modification through the exchange of the Preferred A Shares for new
preferred shares of the Company, rather than through an amendment to the
Preferred A Shares. The new preferred shares will be substantially similar
to the Preferred A Shares, except in the following respects: 1) The new
preferred shares will be convertible into common stock at the election of
the Company upon the earlier to occur of six months after the listing of
the Company's common stock on a national securities exchange (including the
American Stock Exchange on which the Company began trading on November 17,
1998), or March 31, 2000. 2). Certain voting rights provided to the
holders with respect to future issuances of common stock will be removed.
10
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
-----------
6. CAPITAL STOCK, CONTINUED:
Earnings Per Share (EPS)
A reconciliation of the numerator and denominator of basic and diluted EPS
is provided as follows (in thousands, except per share amounts).
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
OCTOBER 31, 1998
----------------
<S> <C>
BASIC EPS
NUMERATOR:
Net income $ 585
-------
-------
DENOMINATOR:
Weighted average of common shares outstanding 33,458
-------
-------
EARNINGS PER SHARE: $ 0.02
-------
-------
DILUTED EPS
NUMERATOR:
Net income $ 585
-------
-------
DENOMINATOR:
Weighted average of common shares outstanding 33,458
Effect of diluted securities:
Preferred A Shares 21,281
-------
-------
54,739
-------
-------
EARNINGS PER SHARE: $ 0.01
-------
-------
</TABLE>
7. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amount paid for interest in 1998 was approximately $1,648,000. In the
three months ended October 31, 1998, Millennia assumed $15,200,000 of debt
in conjunction with the acquisition of nine car wash properties.
11
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
-----------
8. SEGMENT REPORTING:
The Company has a joint venture arrangement with Millennia. As of October
31, 1998, Millennia owned eighteen car wash properties in Arizona and
Texas. At October 31, 1998, the Company held 100% of the ownership
interest in Millennia. Another party manages the daily operations of
Millennia and can earn up to 50% of the ownership interest in Millennia
based upon operating results exceeding a 35% return on the Company's
investment. The accounts of Millennia are consolidated with the Company's
financial statements.
The Company is a partner in a joint venture, Grand Tusayan, LLC ("Grand
Hotel") for the operation of a hotel and dinner theater and retail shop
situated near the south rim entrance to the Grand Canyon National Park in
Tusayan, Arizona. At October 31, 1998, the Company's ownership in the
Grand Hotel was 65% although the Company was entitled to approximately 98%
of the Grand Hotel's operations based upon its equity contributed. The
accounts of the Grand Hotel are consolidated with the Company's financial
statements.
. SFAS No. 131 establishes standards for the way that a public enterprise
reports information about operating segments in annual financial
statements, and requires that those enterprises report selected information
about operating segments in interim financial reports to shareholders (Note
1). The following unaudited information has been provided in accordance
with SFAS No. 131 for operations related to Millennia, the Grand Hotel, and
all other real estate related activities as of and for the three months
ended October 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Other
Millennia Grand Hotel Real Estate Total
--------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Total revenues $ 3,688 $ 646 $ 4,612 $ 8,946
------- ------- -------- --------
Depreciation and amortization 259 153 705 1,117
General and administrative 873 - 655 1,528
Operating expenses 2,514 559 2,314 5,387
------- ------- -------- --------
Total operating expenses 3,646 712 3,674 8,032
------- ------- -------- --------
Income (loss) before
income taxes $ 42 $ (66) $ 938 $ 914
------- ------- -------- --------
------- ------- -------- --------
Real estate, net $30,179 $14,077 $146,337 $190,593
Other assets 5,506 1,498 60,534 67,538
------- ------- -------- --------
Total assets $35,685 $15,575 $206,871 $258,131
------- ------- -------- --------
------- ------- -------- --------
Mortgages and notes payable $15,235 $ - $ 72,040 $ 87,275
Other liabilities 450 181 2,873 3,504
------- ------- -------- --------
Total liabilities $15,685 $ 181 $ 74,913 $ 90,779
------- ------- -------- --------
------- ------- -------- --------
</TABLE>
12
<PAGE>
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
-----------
9. RELATED PARTY TRANSACTIONS:
In connection with the sale of common stock to certain of the Company's
officers and employees, 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
total interest receivable at October 31, 1998 from these notes totaled
$446,000. The notes have been offset against stockholders' equity on the
Company's accompanying Consolidated Balance Sheet.
The Company shares certain employees with New Plan Excel Realty Trust, Inc.
("New Plan Excel"), formerly Excel. The shared employees are paid by New
Plan Excel and reimbursed by the Company based upon an Administrative
Services Agreement which requires the Company to pay New Plan Excel 23% of
the salary and bonus of the shared employees as compensation for their
services to the Company. For the three months ended October 31, 1998,
approximately $208,000 was paid by the Company for these services.
Additionally, approximately $18,000 was paid by the Company to New Plan Excel
as reimbursement for various operating expenses.
10. MINIMUM FUTURE RENTALS:
The Company leases its operating properties, except the Millenia carwash
properties and the Grand Hotel property, 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 retail commercial real estate
owned at October 31, 1998 and subject to noncancelable operating leases is as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
<S> <C>
1999 (nine months remaining) $ 8,393
2000 11,536
2001 11,425
2002 11,190
2003 10,971
Thereafter 110,590
</TABLE>
13
<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 in
real estate and other 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, comparative results with 1997 are not provided.
THREE MONTHS ENDED OCTOBER 31, 1998
RENTAL REVENUE was $3.3 million during the period. Ten single tenant
properties owned by the Company accounted for $1.2 million of rental revenue.
Eight of these properties are leased to Wal-Mart Stores, Inc. ("Wal-Mart")
and two of these properties are leased to Lowe's Home Centers, Inc.
("Lowe's"). Two properties in Colorado leased to AMC Multi-Cinema, Inc.
("AMC") accounted for $1.3 million of rental revenue. Additionally, $0.4
million of rental revenue was attributable to a shopping mall located in Palm
Springs, California and the remaining $0.4 million of rental revenue was
attributable to three properties which were acquired by the Company in
conjunction with a redevelopment project in Scottsdale, Arizona.
OTHER OPERATING INCOME totaled $4.5 million in the period. Of this income,
$3.7 million related to revenues recognized from Millennia. The Company also
recognized $0.6 million of other operating income from the Grand Hotel.
Finally, TenantFirst Real Estate Service, Inc., which the Company acquired in
May 1998, accounted for $0.2 million of revenues from various management
contracts.
INTEREST INCOME was $1.0 million and primarily related to $0.9 million of
interest earned on the Company's outstanding notes receivable. In addition,
the Company earned $0.1 million of interest income from its cash accounts.
PARTNERSHIP INCOME AND OTHER REVENUES totaled $0.2 million for the three
months ended October 31, 1998 and primarily related to the Company's
interest in a Nova Scotia unlimited liability company which owns an office
building in Canada.
INTEREST EXPENSE was $1.5 million and primarily related to the $87.3 million
of mortgage and notes payable outstanding at October 31, 1998. Of the debt
outstanding, $15.2 million was assumed by Millennia in the three months ended
October 31, 1998.
DEPRECIATION AND AMORTIZATION EXPENSE totaled $1.1 million and primarily
related to the $135.2 million of buildings and the $2.4 million of leasehold
interests held by the Company at October 31, 1998.
PROPERTY OPERATING EXPENSES were $1.0 million and primarily related to the
three properties located in Scottsdale, Arizona and the property located in
Palm Springs, California. The other real estate properties owned by the
Company are subject to triple net leases whereby the Company does not incur
any significant operating expenses.
OTHER OPERATING EXPENSES were $2.9 million in the three months ended October
31, 1998. Expenses of $2.3 million related to Millennia and $0.6 million
related to the Grand Hotel.
14
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES were $1.5 million in the period. The
general and administrative expenses include certain costs charged to the
Company by New Plan Excel pursuant to an administrative services agreement
providing for the sharing of certain facilities and services. In the three
months ended October 31, 1998, such expenses included payment of bonuses paid
to certain officers shared by the Company and New Plan Excel. Additionally,
$0.9 million of the expenses related to Millennia.
PROVISION FOR INCOME TAXES was $0.3 million, of which $0.2 million was
current expense and $0.1 million was deferred expense primarily relating to
the utilization of the deferred tax asset.
The Company calculates EARNINGS BEFORE DEPRECIATION, AMORTIZATION AND
DEFERRED TAXES ("EBDADT") as net income, plus depreciation and amortization
on real estate and real estate related assets, amortized leasing commission
costs and certain non-recurring items. EBDADT does not represent cash flows
from operations as defined by generally accepted accounting principles, and
may not be comparable to other similarly titled measures of other companies.
The Company believes, however, that to facilitate a clear understanding of
its operating results, EBDADT should be examined in conjunction with its net
income as reductions for certain items are not meaningful in evaluating
income-producing real estate. The following information is included to show
the items included in the Company's EBDADT for the three months ended October
31, 1998 (in thousands):
<TABLE>
<S> <C>
Net income $ 585
Depreciation and amortization (financial statements) 1,117
Less depreciation of non-real estate assets (26)
Amortization of leasing commissions (a) 1
Deferred tax expense 146
-------
EBDADT $ 1,823
-------
-------
EBDADT per share - basic $ 0.05
-------
-------
EBDADT per share - diluted $ 0.03
-------
-------
</TABLE>
(a) Only amortization of organizational costs and management contracts are
included as amortization expense in the Consolidated Statements of Income.
Loan cost amortization is classified as interest expense and not added back
to EBDADT. Leasing commission amortization is classified as part of property
operating expenses in the Consolidated Statements of Income.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1998, the total mortgage debt and notes payable of the Company
consisted of the following: (i) $25.1 million in mortgages on eight
properties leased to Wal-Mart which have fixed interest rates of 7.9% to
8.5%. These mortgages are self-amortizing with the 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 (2008 to
2009). (ii) $7.6 million in mortgages on two properties leased to Lowe's
which have fixed interest rates of 7.6% and 8.8%. These mortgages are also
self-amortizing over the term of the leases with Lowe's and will be repaid
when the leases expire (2003 and 2014). (iii) A $2.5 million mortgage
securing an office building in Scottsdale, Arizona, monthly payments of which
are approximately $25,000 with a balloon payment in the year 2006. (iv) $36.8
million in mortgages on two properties leased to AMC. These mortgages
amortize over a period of twenty years which is equivalent to the term of the
leases. The mortgages have fixed rates of 7.48% and 7.52%, respectively and
mature in 2018. (v) $15.2 million in notes related to the Millennia
acquisition of certain car wash properties. Of the notes, $14.8 million have
fixed interest rates of 8.5% and are due in fifteen years and $0.4 million
have fixed interest rates of 8.0% and are due in two years. All of the
Company's mortgage debt and notes payable are non-recourse to the Company.
On October 31, 1998, the Company had 21,281,000 shares of Series A Preferred
Stock outstanding (the "Preferred A Shares"). Holders of the Preferred A Shares
are entitled to receive, when, as and if declared by the Board of Directors,
cumulative cash dividends payable in an amount per share equal to the cash
15
<PAGE>
dividends, if any, on the shares of common stock into which the Preferred A
Shares are convertible. Holders of 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 convertible into common stock of the Company at
the election of the holders at any time, 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
Company's common stock 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 took steps to exercise its right to convert all of
the Preferred A Shares into common stock, which conversion was expected to
take place on August 18, 1998.
On August 17, 1998, the Company withdrew its election to convert the
Preferred A Shares, and instead the holders and the Company agreed to modify
the terms of the Preferred A Shares. The Company decided to effect such
modification through the exchange of the Preferred A Shares for new preferred
shares of the Company, rather than through an amendment to the Preferred A
Shares. The new preferred shares will be substantially similar to the
Preferred A Shares, except in the following respects: 1) The new preferred
shares will be convertible into common stock at the election of the Company
upon the earlier to occur of six months after the listing of the Company's
common stock on a national securities exchange (including the American Stock
Exchange on which the Company began trading on November 17, 1998), or March
31, 2000. 2) Certain voting rights provided to the holders with respect to
future issuances of common stock will be removed.
In October 1998, the Company obtained an unsecured revolving credit facility
of $15.0 million from BankBoston, N.A. (the "Credit Facility"), of which
approximately $3.0 million had been borrowed through December 7, 1998. Any
amounts borrowed on the Credit Facility carry an interest rate of LIBOR plus
2.5%. The Credit Facility expires in October 1999.
Eight of the Company's single tenant properties leased to Wal-Mart do not
generate cash flow as rent payments are directly used to service outstanding
debt obligations. The Company anticipates that existing 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.
YEAR 2000
The Company currently uses Management Reports Inc. ("MRI") software on a
Novell local area network. MRI has been modified to accept four digits as
the year date and is Year 2000 compliant. The Company has made an assessment
of the impact of the Year 2000 issue on its internal operations and has
developed a plan to bring its computer systems into compliance by the Year
2000. The plan addresses the modification or replacement of applications and
operating systems to achieve timely Year 2000 compliance and also includes
communication and analysis with outside vendors with whom the Company
interfaces electronically. Although it is not possible to quantify the
aggregate cost of such modifications, the Company does not anticipate that
the cost will have a material adverse effect on its financial position or
results of operations. The foregoing discussion of Year 2000 issues contains
forward-looking statements and actual compliance may be affected by a number
of factors which include the timing and compliance by the Company's outside
vendors and suppliers. This discussion should be read in conjunction with
the Company's disclosures under the heading "Certain Cautionary Statements"
below.
16
<PAGE>
CERTAIN CAUTIONARY STATEMENTS
Certain statements in this Form 10-Q may be deemed to be "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995 which provides a "safe harbor" for these types of statements.
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 New Plan Excel. 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 October 31, 1998, the Company's largest
tenants were AMC, Wal-Mart, and Lowe's which accounted for approximately 14%,
10% and 4%, respectively, of the Company's total revenues in 1998. 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 October 31, 1998,
executive officers and directors of the Company beneficially owned or had the
right to acquire approximately 30% 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.
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
companies, 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 that 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
17
<PAGE>
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.
DEPENDENCE ON REAL ESTATE CONDITIONS. The Company's financial condition and
results of operations may be adversely affected by a number of factors
affecting the real estate market generally, including downturns in the
international and domestic general economic climate and local real estate
conditions (including oversupply of or reduced demand for space and changes
in market rental rates); energy and supply shortages; and increasing
operating costs (including real estate taxes and utilities) which may not be
passed through to tenants.
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 results of operations 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.
RISK OF BANKRUPTCY OF MAJOR TENANTS. The bankruptcy or insolvency of a major
tenant or a number of smaller 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.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL. The investment, financing,
borrowing and distribution policies of the Company and its policies with respect
to all other activities, growth, debt, capitalization, and operations, are
determined by the Company's Board of Directors. Although it has no present
intention to do
18
<PAGE>
so, the Board of Directors may amend or revise these policies at any time and
from time to time at its discretion without a vote of the stockholders of the
Company. A change in these policies could adversely affect the Company's
financial condition and results of operations.
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its
executive officers and other key personnel. While the Company believes that
it could find replacements for these persons, the loss of their services
could have a temporary adverse effect on the operations of the Company.
There can be no assurance that the Company will be able to retain these
persons or to attract suitable replacements or additional personnel if
required. The Company has not obtained key-man insurance for any of its
executive officers or other key personnel.
POSSIBLE CONFLICTS WITH NEW PLAN EXCEL. Many of the Company's executive
officers and directors also serve as executive officers and directors of New
Plan Excel. Other than four officers, none of the members of management of
the Company is committed to spending a particular amount of time on the
Company's affairs, nor do any of them devote their full time to the Company.
As a result of these 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 New Plan Excel have entered into certain agreements providing
for (i) the orderly separation of the Company and New Plan Excel, (ii) the
sharing of certain facilities and services, and (iii) the allocation of
certain tax and other liabilities. Because the Company and New Plan Excel
share certain members of management, 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. In this regard,
the Company and New Plan Excel have adopted certain policies and procedures
to be followed by the Board of Directors of each company to address potential
conflicts. In addition, the Company's charter contains a specific purpose
clause which identifies at the outset which types of opportunities will be
pursued by the Company. This clause provides that the Company's purpose
includes performing an intercompany agreement between the Company and New
Plan Excel, which prohibits the Company from engaging in certain activities
and making certain investments unless New Plan Excel was first offered the
opportunity and declined to pursue such activities or investments. It is not
anticipated that this first right of refusal will hinder the Company since
its formation was intended to focus on those opportunities which New Plan
Excel would not otherwise be pursuing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
19
<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.
EXCEL LEGACY CORPORATION
(Registrant)
DATE: December 7, 1998 By: /s/ Gary B. Sabin
----------------------------
GARY B. SABIN
President and Chief Executive Officer
DATE: December 7, 1998 By: /s/ James Y. Nakagawa
----------------------------
JAMES Y. NAKAGAWA
Principal Financial Officer
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 3,539,000
<SECURITIES> 0
<RECEIVABLES> 23,452,000
<ALLOWANCES> (24,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 192,463,000
<DEPRECIATION> (1,870,000)
<TOTAL-ASSETS> 258,131,000
<CURRENT-LIABILITIES> 0
<BONDS> 87,275,000
0
213
<COMMON> 335
<OTHER-SE> 165,956,000
<TOTAL-LIABILITY-AND-EQUITY> 258,131,000
<SALES> 0
<TOTAL-REVENUES> 8,946,000
<CGS> 0
<TOTAL-COSTS> 8,032,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,000
<INTEREST-EXPENSE> 1,457,000
<INCOME-PRETAX> 914,000
<INCOME-TAX> 329,000
<INCOME-CONTINUING> 329,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 585,000
<EPS-PRIMARY> .02
<EPS-DILUTED> .01
</TABLE>
