<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended: MARCH 31, 1999 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 100, SAN DIEGO, CALIFORNIA 92127
(Address of principal executive offices)
Registrant's telephone number: (619) 675-9400
<PAGE> 2
EXCEL LEGACY CORPORATION
INDEX
FORM 10-Q
----------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets (Unaudited)
March 31, 1999
December 31, 1998...............................................................3
Consolidated Statements of Income (Unaudited)
Three Months Ended March 31, 1999 and 1998......................................4
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
Three Months Ended March 31, 1999 and 1998......................................5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 1999 and 1998......................................6
Notes to Consolidated 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....................18
</TABLE>
2
<PAGE> 3
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
Real estate:
Land $ 54,915 $ 54,915
Buildings 137,685 136,118
Leasehold interests 2,351 2,351
Accumulated depreciation (3,503) (2,506)
--------- ---------
Net real estate 191,448 190,878
Cash 1,775 1,387
Accounts receivable, less allowance for bad debts of $104 and
and $14 at March 31, 1999 and December 31 1998, respectively 169 204
Notes receivable 23,239 23,204
Investment in partnerships 12,829 11,423
Interest receivable 6,187 5,341
Pre-development costs 19,302 13,569
Other assets 9,043 9,087
Deferred tax asset 6,146 6,203
--------- ---------
$ 270,138 $ 261,296
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgage and notes payable $ 99,694 $ 90,986
Accounts payable and accrued liabilities 2,151 2,604
Other liabilities 631 220
--------- ---------
Total liabilities 102,476 93,810
--------- ---------
Commitments and contingencies -- --
Minority interests 848 846
--------- ---------
Stockholders' equity:
Series B 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 2,630 2,456
Notes receivable from affiliates for common shares (10,872) (10,872)
--------- ---------
Total stockholders' equity 166,814 166,640
--------- ---------
$ 270,138 $ 261,296
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements
3
<PAGE> 4
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Revenue:
Rental $3,312 --
Operating income 4,896 --
Interest income 858 --
Partnership income and other revenues 151 --
------ ------
Total revenue 9,217 --
------ ------
Operating expenses:
Interest 2,025 66
Depreciation and amortization 1,196 47
Property operating expenses 482 --
Operating expenses 2,511 --
General and administrative 2,690 3
------ ------
Total operating expenses 8,904 116
------ ------
Income (loss) before income taxes 313 (116)
Provision (benefit) for income taxes 139 (46)
------ ------
Net income (loss) $ 174 (70)
====== ======
Basic net income per share $ 0.01 $ --
====== ======
Diluted net income per share $ 0.00 $ --
====== ======
</TABLE>
The accompanying notes are an integral part
of the financial statements
4
<PAGE> 5
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
----------
<TABLE>
<CAPTION>
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>
Three Months Ended March 31, 1999:
Balance at January 1, 1999 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ 2,456 $ (10,872) $ 166,640
Net income -- -- -- -- -- 174 -- 174
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999 21,281,000 $ 213 33,457,804 $ 335 $ 174,508 $ 2,630 $ (10,872) $ 166,814
========== ========== ========== ========== ========== ========== ========== ==========
Three Months Ended March 31, 1998:
Balance at January 1, 1998 -- $ -- 100 $ -- $ -- $ -- $ -- $ --
Issuance of preferred stock 21,281,000 213 -- -- 106,192 -- -- 106,405
Issuance of common stock -- -- 32,607,704 326 67,469 -- -- 67,795
Notes receivable from officers
for common shares -- -- -- -- -- -- (10,872) (10,872)
Issuance costs -- -- -- -- (2,697) -- -- (2,697)
Net income -- -- -- -- -- (70) -- (70)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1998 21,281,000 $ 213 32,607,804 $ 326 $ 170,964 $ (70) $ (10,872) $ 160,561
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of the financial statements
5
<PAGE> 6
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 174 $ (70)
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,196 47
Provision for bad debts 72 --
Minority interest in partnerships 2 --
Changes in accounts receivable and other assets (1,073) --
Changes in accounts payable and other liabilities 15 90
--------- ---------
Net provided by operating activities 386 67
--------- ---------
Cash flows from investing activities:
Real estate acquired and construction costs paid (973) (18,571)
Investment in partnership (1,406) --
Pre-development costs paid (5,733) --
--------- ---------
Net cash used in investing activities (8,112) (18,571)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred stock -- 106,405
Proceeds from issuance of common stock -- 11,104
Issuance costs paid -- (2,697)
Principal payments of mortgage payable (736) --
Borrowings from parent company 21,191
Borrowings from notes 8,850 --
--------- ---------
Net cash provided by financing activities 8,114 136,003
--------- ---------
Net increase in cash 388 117,499
Cash at January 1 1,387 --
--------- ---------
Cash at March 31 $ 1,775 $ 117,499
========= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements
6
<PAGE> 7
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 trust ("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.
CHANGE IN FISCAL YEAR
By unanimous consent dated December 11, 1998, the Board of
Directors of the Company adopted a fiscal year-end of December 31,
beginning with a short fiscal year ending on December 31, 1998. The
Company's previous fiscal year-end was July 31.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries and all
affiliates in which the Company has ownership greater than 50%. The
Company uses the equity method of accounting for its investments in
which its ownership is less than 50% but has significant influence
over.
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
Continued
7
<PAGE> 8
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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 its properties individually for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
property may not be recoverable. Recoverability of property to be held and
used is measured by comparing the carrying amount of the property to future
undiscounted net cash flows expected to be generated by the property. If
the sum of the expected undiscounted future cash flows is less than the
carrying amount of the property, the property is considered to be impaired.
If the property is impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the property exceeds the fair
value of the property.
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. Percentage
rents and tenant reimbursements are recognized when they are earned.
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.
Continued
8
<PAGE> 9
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. 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 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. MORTGAGES AND NOTES PAYABLE:
The Company had $99,694,000 in mortgage and notes payable outstanding at
March 31, 1999 at 7.37% to 8.75% with an average interest rate of 7.87% and
average maturity of approximately 12 years. The mortgages and notes are due
on various dates through 2018 and monthly payments approximate $945,000.
Except for the unsecured revolving credit facility below, the mortgages and
notes are collateralized by real estate and an assignment of rents.
The Company has a revolving credit facility of $20,000,000 from BankBoston,
N.A. (the "Credit Facility") which carries an interest rate of LIBOR plus
2.5% (7.5% at March 31, 1999). The Credit Facility expires in October 1999.
Through March 31, 1999, approximately $13,300,000 was outstanding under the
Credit Facility.
The principal payments required to be made on mortgages and notes payable
over the next five years are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------
<S> <C>
1999 (remaining nine months) $15,559
2000 4,889
2001 4,125
2002 4,461
2003 4,826
Thereafter 65,834
-------
$99,694
=======
</TABLE>
Continued
9
<PAGE> 10
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
4. INCOME TAXES:
At March 31, 1999, the Company had a net deferred tax asset of $6,146,000.
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 $ 62,000 $ 20,000
Deferred tax expense 54,000 3,000
-------- --------
Provision for income taxes $116,000 $ 23,000
======== ========
</TABLE>
5. CAPITAL STOCK:
SERIES B PREFERRED SHARES
At March 31, 1999, the Company had 21,281,000 shares of Series B Preferred
Stock outstanding (the "Preferred B Shares"). Holders of the Preferred B
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 B Shares are convertible. Holders of the Preferred B 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 B 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 B Shares also are
convertible into common stock by the Company at any time and from time to
time after the earlier to occur of (i) the date which is six months
following the date on which the Company's common stock becomes listed or
admitted for trading on a national securities exchange or (ii) March 31,
2000. The Company's common stock became listed on the American Stock
Exchange on November 17, 1998. As a result, the Preferred B Shares will be
convertible into common stock at the option of the Company any time after
May 17, 1999.
The Preferred B Shares were issued in March 1999 in exchange for all of the
issued and outstanding shares of Series A Preferred Stock of the Company
(the "Preferred A Shares"). Following such exchange, all Preferred A Shares
were retired and restored to the status of authorized and unissued shares
of preferred stock, without designation as to series, and may be reissued
as shares of any series of preferred stock of the Company.
Continued
10
<PAGE> 11
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
5. 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).
Information regarding the three months ended March 31, 1998 is not provided
as the Spin-off did not occur until March 31, 1998. Prior to the Spin-off,
the Company was a wholly-owned subsidiary of Excel.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
--------------
<S> <C>
BASIC EPS
NUMERATOR:
Net income $ 174
=======
DENOMINATOR:
Weighted average of common shares outstanding 33,458
=======
EARNINGS PER SHARE: $ 0.01
=======
DILUTED EPS
NUMERATOR:
Net income $ 174
=======
DENOMINATOR:
Weighted average of common shares outstanding 33,458
Effect of diluted securities:
Preferred B Shares 21,281
Options 8
-------
54,747
=======
EARNINGS PER SHARE: $ 0.00
=======
</TABLE>
6. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amount paid for interest and income taxes in the three months ended
March 31, 1999 was approximately $2,215,000 and $622,000, respectively.
Additionally, the Company assumed $594,000 in debt related to the
construction of an office building. In the three months ended March 31,
1998, the Company acquired certain assets in conjunction with the Spin-off
(Note 2).
Continued
11
<PAGE> 12
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
7. SEGMENT REPORTING:
The Company has a joint venture arrangement with Millennia. As of March 31,
1999, Millennia owned eighteen car wash properties in Arizona and Texas. At
March 31, 1999, 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. In
March 1999, Millennia entered into an agreement to sell substantially all
of its assets. The sale is subject to the occurrence of certain events, the
receipt of certain approvals, and other customary closing conditions.
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 March 31, 1999, the Company's ownership in the Grand
Hotel was 65% although the Company was entitled to approximately 98% of the
Grand Hotel's net income 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 March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Other
Millennia Grand Hotel Real Estate Total
-------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Total revenues $ 4,274 $ 540 $ 4,403 $ 9,217
-------- -------- -------- --------
Interest 419 -- 1,606 2,025
Depreciation and amortization 334 161 701 1,196
General and administrative 1,909 -- 781 2,690
Operating expenses 1,809 703 481 2,993
-------- -------- -------- --------
Total operating expenses 4,471 864 3,569 8,904
-------- -------- -------- --------
Income (loss) before
income taxes $ (197) $ (324) $ 834 $ 313
======== ======== ======== ========
Real estate, net $ 30,058 $ 13,850 $147,540 $191,448
Other assets 5,617 1,835 71,238 78,690
-------- -------- -------- --------
Total assets $ 35,675 $ 15,685 $218,778 $270,138
======== ======== ======== ========
Mortgages and notes payable $ 15,108 $ -- $ 84,586 $ 99,694
Other liabilities 730 377 1,675 2,782
-------- -------- -------- --------
Total liabilities $ 15,838 $ 377 $ 86,261 $102,476
======== ======== ======== ========
</TABLE>
Continued
12
<PAGE> 13
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
----------
8. RELATED PARTY TRANSACTIONS:
In connection with the sale of common stock to ten of the Company's
officers and employees, the Company issued $10,872,000 of notes receivable
due from certain of these 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 March 31, 1999 from these notes totaled
$755,000. The notes have been offset against stockholders' equity on the
Company's accompanying Consolidated Balance Sheet.
Following the Spin-off, the Company shared certain employees with New Plan
Excel Realty Trust, Inc. ("New Plan Excel"), formerly Excel. The shared
employees were paid by New Plan Excel and reimbursed by the Company based
upon an Administrative Services Agreement. In April 1999 the Administrative
Services Agreement was terminated. See "Item 5. Other Information."
9. MINIMUM FUTURE RENTALS:
The Company leases its operating properties, except the Millennia 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 real
estate owned at March 31, 1999 and subject to noncancelable operating
leases is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C>
1999 (remaining nine months) $ 8,562
2000 11,425
2001 11,331
2002 11,125
2003 10,951
Thereafter 136,840
</TABLE>
13
<PAGE> 14
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. The Company did not own any significant assets
until March 31, 1998 and did not have any significant operating results in the
three months ended March 31, 1998.
Comparison of the three months ended March 31, 1999 to the three months ended
March 31, 1998
RENTAL REVENUE was $3.3 million during the three months ended March 31, 1999.
Twelve single tenant properties owned by the Company accounted for $2.5 million
of rental revenue. Eight of these properties are leased to Wal-Mart Stores, Inc.
("Wal-Mart"), two of these properties are leased to Lowe's Home Centers, Inc.
("Lowe's") and two properties in Colorado are leased to AMC Multi-Cinema, Inc.
("AMC"). Additionally, $0.3 million of rental revenue was attributable to a
shopping mall located in Palm Springs, California and the remaining $0.5 million
of rental revenue was primarily attributable to three properties which were
acquired by the Company in conjunction with a redevelopment project in
Scottsdale, Arizona. There were no rental revenue in the three months ended
March 31, 1998.
OTHER OPERATING INCOME totaled $4.9 million in the three months ended March 31,
1999. Of this income, $4.3 million related to revenues recognized by Millennia
which is under contract to be sold. The Company also recognized $0.5 million of
other operating income by the Grand Hotel. The majority of revenues from this
project is expected to be generated between the months of May and October.
Finally, TenantFirst Real Estate Services, Inc., which the Company acquired in
May 1998, accounted for $0.1 million of revenues from various management
contracts. There was no other operating income in the three months ended March
31, 1998.
INTEREST INCOME was $0.9 million in the three months ended March 31, 1999 and
primarily related to interest earned on the Company's outstanding notes
receivable. There was no interest income in the three months ended March 31,
1998.
PARTNERSHIP INCOME AND OTHER REVENUES totaled $0.2 million for the three months
ended March 31, 1999 and primarily related to the Company's interest in a Nova
Scotia unlimited liability company which owns an office building in Canada.
There was no partnership income in the three months ended March 31, 1998.
INTEREST EXPENSE was $2.0 million in the three months ended March 31, 1999 and
primarily related to the $99.7 million of mortgage and notes payable outstanding
at March 31, 1999. In the three months ended March 31, 1998, interest expense
was $66,000 and related to short-term debt incurred in connection with the
Spin-off of assets to the Company.
DEPRECIATION AND AMORTIZATION EXPENSE totaled $1.2 million and primarily related
to the $137.7 million of buildings and the $2.4 million of leasehold interests
held by the Company at March 31, 1999. In the three months ended March 31, 1998,
depreciation and amortization was $47,000 and related to assets acquired with
the Spin-off on March 31, 1998.
14
<PAGE> 15
PROPERTY OPERATING EXPENSES were $0.5 million in the three months ended March
31, 1999 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. There were no
property operating expenses incurred in the three months ended March 31, 1998.
OTHER OPERATING EXPENSES were $2.5 million in the three months ended March 31,
1999. Expenses of $1.8 million related to Millennia and $0.7 million related to
the Grand Hotel. Both of these investments were acquired subsequent to March 31,
1998 and as such, there were no other operating expenses in the three months
ended March 31, 1998.
GENERAL AND ADMINISTRATIVE EXPENSES were $2.7 million in the three months ended
March 31, 1999. 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 which was
terminated in April 1999. Additionally, $1.9 million of the expenses related to
Millennia.
PROVISION FOR INCOME TAXES was $139,000 in the three months ended March 31, 1999
of which $82,000 was current expense and $57,000 was deferred expense primarily
relating to the change in 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 March 31, 1999 (in thousands):
<TABLE>
<S> <C>
Net income $ 174
Depreciation and amortization (financial statements) 1,196
Less depreciation of non-real estate assets (22)
Deferred tax expense 57
-------
EBDADT $ 1,405
=======
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the total mortgage debt and notes payable of the Company
consisted of the following: (i) $24.4 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) $7.5 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 $2.2 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) $36.4 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) $15.1 million in notes related
to the Millennia acquisition of certain car wash properties. Of the notes, $14.6
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. These notes
will be transferred to the pending buyer for these properties upon closing. (vi)
$0.7 million outstanding on a $11.0 million construction loan related to the
construction of an office building. Interest on the construction loan varies
based upon the Eurodollar and was 7.9% at March 31, 1999. All of the above
mortgage debt and notes payable are non-recourse to the Company.(vii) $13.3
million outstanding on the Company's unsecured $20.0 million
15
<PAGE> 16
credit facility. The facility bears interest at LIBOR plus 2.5% (7.5% at March
31, 1999) and expires in October 1999.
At March 31, 1999, the Company had 21,281,000 shares of Series B Preferred Stock
outstanding (the "Preferred B Shares"). Holders of the Preferred B 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 B
Shares are convertible. Holders of the Preferred B 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 B 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 B Shares also are convertible
into common stock by the Company at any time and from time to time after the
earlier to occur of (i) the date which is six months following the date on which
the Company's common stock becomes listed or admitted for trading on a national
securities exchange or (ii) March 31, 2000. The Company's common stock became
listed on the American Stock Exchange on November 17, 1998. As a result, the
Preferred B Shares will be convertible into common stock at the option of the
Company any time after May 17, 1999.
The Preferred B Shares were issued in March 1999 in exchange for all of the
issued and outstanding shares of Series A Preferred Stock of the Company (the
"Preferred A Shares"). Following such exchange, all Preferred A Shares were
retired and restored to the status of authorized and unissued shares of
preferred stock, without designation as to series, and may be reissued as shares
of any series of preferred stock of the Company.
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
operating cash flows, 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
Some of the Company's information technology ("IT") systems were originally
written using two digits rather than four to define the applicable year. As a
result, those IT systems had time sensitive software that recognizes dates using
"00" as the Year 1900 rather than the Year 2000. The Company has upgraded its
existing computer software and IT systems and believes that they are able to
recognize the Year 2000 and that the Year 2000 issue will not have a material
impact on the Company's operations.
The Year 2000 issue affects the Company's internal systems, including IT and
non-IT systems. The Company is reviewing its utility systems (heat, light,
telephones, etc.) and other non-IT systems for the impact of Year 2000. The
Company has solicited assurances from its contractors, vendors and other third
parties that their systems (including building management and mechanical
systems) are currently Year 2000 compliant or will be made compliant before the
advent of the Year 2000. No assurances can be made that all contractors and
other third parties will comply with their assurances. The Company intends to
take continuous steps to identify Year 2000 problems related to its vendors and
to formulate a system of working with key third parties, including financial
institutions and utility providers, to understand their ability to continue
providing services and products through the change to Year 2000. The failure to
correct a material Year 2000 problem either within the Company or within a
vendor or supplier could result in an interruption in, or a failure of, certain
normal business activities or operations of the Company. Such interruptions or
failures could materially adversely affect the Company's business, operating
results and financial condition.
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<PAGE> 17
The Company's Year 2000 project is expected to be complete by mid-1999, which is
prior to any anticipated impact on the Company's IT systems. As of March 31,
1999, the Company had expended less than $50,000 and expects to expend less than
$10,000 in additional costs in connection with its Year 2000 project, including
the cost of identification, assessment, remediation and testing efforts. The
cost of the Company's Year 2000 project, and the target date on which the
Company expects the Year 2000 modifications to be complete are based upon a
variety of assumptions of future events, including the continued availability of
certain resources. No assurance can be made that these estimates will be
achieved and actual results could materially differ from those anticipated.
Specific factors that might cause material differences include, but are not
limited to, the availability and costs of personnel trained in this area, the
ability to locate and correct relevant computer codes and the timing and
compliance by the Company's outside vendors and suppliers.
A contingency plan has not been developed for dealing with the most reasonably
likely worst case scenario, and such scenario has not yet been clearly
identified. Since the Company has adopted a plan to address these Year 2000
issues, it has not developed a comprehensive contingency plan should Year 2000
issues fail to be addressed successfully or in their entirety. However, if the
Company identifies significant risks or is unable to meet its anticipated time
line, the Company will develop contingency plans as deemed necessary at that
time. This discussion contains forward-looking statements and should be read in
conjunction with the Company's disclosures under the heading "Certain Cautionary
Statements" in this Form 10-Q.
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<PAGE> 18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure affecting its market risk sensitive
financial instruments is interest rate risk. The Company's balance sheet
contains financial instruments in the form of interest-earning notes receivable
and interest-bearing mortgages payable. The Company manages the risk to its cash
flow from changes in interest rates by limiting and monitoring its variable rate
financial instruments. Although the fair value of its financial instruments may
be affected by changes in interest rates, the Company has not disposed of them
prior to maturity. Thus, the primary effect of changes in interest rates would
occur to the extent that financial instruments mature and are replaced with
others at different interest rates. The table below presents (1) the scheduled
principal payments on notes receivable and (2) the scheduled principal
repayments on mortgages payable over the next five years and thereafter. The
table also includes the average interest rates of the financial instruments
during each respective year and the fair value of the notes receivable and
mortgages payable. The Company determines the fair value of financial
instruments through the use of discounted cash flow analysis using current
interest rates for (1) notes receivable with terms and credit characteristics
similar to its existing portfolio and (2) borrowings under terms similar to its
existing mortgages payable. Accordingly, the Company has determined that the
carrying value of its financial instruments at March 31, 1999 approximates fair
value.
March 31, 1999
Expected Maturity Date
(dollar amounts in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes Receivable, including
notes from affiliates ........ $ 445 $ -- $ -- $ 27,097 $ 5,518 $ 1,051 $ 34,111 $ 34,100
Average interest rate ...... 11.00% -- -- 9.99% 11.00% 10.00% 10.03%
- ----------------------------------------------------------------------------------------------------------------------------------
Mortgages Payable .............. $ 2,259 $ 4,889 $ 4,125 $ 4,461 $ 4,826 $ 65,834 $ 86,394 $ 86,400
Average interest rate ...... 8.51% 8.51% 8.51% 8.51% 8.51% 8.51% 7.38%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition to the above table, the company has a Credit Facility due June 2000
subject to variable interest rates of which $13.3 million was outstanding at
March 31, 1999. The Company has an additional $0.7 million of variable rate debt
at March 31, 1999 related to a construction loan.
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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: July 27, 1999 By: /s/ Richard B. Muir
------------------------------------
RICHARD B. MUIR
Executive Vice President and
Secretary
DATE: July 27, 1999 By: /s/ James Y. Nakagawa
------------------------------------
JAMES Y. NAKAGAWA
Principal Financial and Accounting
Officer
