<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
AMENDMENT NO. 1
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For The Fiscal Year Ended: July 31, 1998
COMMISSION FILE NUMBER: 0-23503
EXCEL LEGACY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 33-0781747
(State of other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
16955 VIA DEL CAMPO, SUITE 100, SAN DIEGO, CALIFORNIA 92127
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code: (619) 675-9400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's shares of common stock
held by non-affiliates was $60,839,000 as of October 23, 1998 based on the
$2.71875 closing price on such date.
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 OCTOBER 23, 1998
------ -------------------------------
Common Stock, $.01 par value 33,457,804
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PART II
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
COMBINED FINANCIAL STATEMENTS OF EXCEL LEGACY ASSET GROUP, AUDITED BY
PRICEWATERHOUSECOOPERS LLP, AS OF AND FOR THE YEARS ENDED JULY 31, 1997, 1996
AND 1995.
The combined balance sheets as of July 31, 1997 and 1996 and the related
statements of operations, of changes in investment by Excel Realty Trust, Inc.
and of cash flows for each of the three years in the period ended July 31, 1997
and notes thereto appear elsewhere in this annual report and should be read in
conjunction with this selected financial data.
CONSOLIDATED FINANCIAL STATEMENTS OF EXCEL LEGACY CORPORATION, AUDITED BY
PRICEWATERHOUSECOOPERS LLP, AS OF JULY 31, 1998 AND FOR THE PERIOD FROM
INCEPTION (NOVEMBER 17, 1997) THROUGH JULY 31, 1998.
The consolidated balance sheet as of July 31, 1998 and the related statements of
income, of changes in stockholders' equity and of cash flows for the period from
inception (November 17, 1997) through July 31, 1998 and the notes thereto
appear elsewhere in this annual report and should be read in conjunction with
this selected financial data.
CONDENSED UNAUDITED INTERIM FINANCIAL STATEMENTS OF EXCEL LEGACY ASSET GROUP FOR
THE EIGHT MONTHS ENDED MARCH 31, 1998 AND 1997.
The unaudited interim condensed statements of operations and of cash flows
appear elsewhere in this annual report. They include all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of operations for the unaudited interim period and should be read in
conjunction with this selected financial data.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD
FROM
INCEPTION EIGHT MONTHS YEAR ENDED JULY 31,
(NOVEMBER 17, 1997) ENDED ---------------------------------------
INCOME STATEMENT DATA TO JULY 31, 1998 MARCH 31, 1998 1997 1996 1995
------------------- -------------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Total revenue $ 8,145 3,757 6,395 5,032 5,897
Total operating expenses (5,267) (3,149) (4,565) (4,513) (4,603)
Net income before income taxes 2,878 2,365 1,830 519 1,294
Provision for income taxes (1,143) 946 (729) (207) (515)
Net income 1,735 1,419 1,101 312 779
Net income per share:
Basic $ 0.11 N/A N/A N/A N/A
Diluted $ 0.07 N/A N/A N/A N/A
Weighted average number of shares:
Basic 15,842 N/A N/A N/A N/A
Diluted 25,984 N/A N/A N/A N/A
BALANCE SHEET DATA (AT PERIOD END)
Net real estate $ 175,756 (1) 60,350 61,048 59,184
Total assets 246,916 (1) 83,687 62,169 59,388
Mortgages payable 72,714 (1) 35,115 36,754 38,224
Stockholders' equity 165,919 (1)
Investment by Excel Realty Trust -- (1) 48,344 25,162 20,903
</TABLE>
- -----------------
(1) Not applicable as assets were spun-off to Excel Legacy Corporation at
March 31, 1998.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto. As Excel Legacy Corporation (the "Company) was
not formed until November 17, 1997, comparison results with 1997 are not
provided.
The period from inception (November 17, 1997) to July 31, 1998
RENTAL REVENUE was $4.4 million during the period. Ten single tenant properties
owned by the Company since April 1, 1998 in conjunction with the Spin-off
accounted for $1.6 million of rental revenue and construction on two properties
in Colorado leased to AMC that were completed on March 20, 1998 and April 3,
1998 accounted for $1.8 million of revenue. Additionally, $0.4 million of rental
revenue was attributable to a shopping mall located in Palm Springs, California
which has been owned by the Company since May 1, 1998. The remaining $0.6
million of rental revenue was attributable to three properties located in
Scottsdale, Arizona acquired by the Company in conjunction with the Spin-off.
OTHER OPERATING INCOME totaled $1.7 million in the period. Of this income, $1.2
million related to revenues recognized from Millennia which had acquired nine
operating car washes in June 1998. TenantFirst which was acquired by the Company
in May 1998 accounted for $0.4 million of revenues from various management
contracts. Finally, the Company recognized $0.1 million of revenues from the
Grand Hotel which was completed in July 1998.
INTEREST INCOME AND OTHER REVENUES were $2.0 million and primarily related to
$1.3 million of interest earned on the Company's outstanding notes receivable
which were acquired on March 31, 1998. In addition, the Company earned $0.6
million of interest income from its cash accounts.
INTEREST EXPENSE was $1.5 million and primarily related to the $72.7 million of
mortgage debt outstanding at July 31, 1998. Of the mortgage debt outstanding,
$35.8 million was assumed in connection with the Spin-off on March 31, 1998 and
$36.9 million was assumed in June 1998.
DEPRECIATION AND AMORTIZATION EXPENSE totaled $1.0 million and primarily related
to the $122.7 million of buildings and the $2.4 million of leasehold interests
held by the Company at July 31, 1998.
PROPERTY OPERATING EXPENSES were $0.9 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 $0.9 million in 1998. Expenses of $0.8 million
related to Millennia and $0.1 million related to the Grand Hotel.
GENERAL AND ADMINISTRATIVE EXPENSES were $0.9 million in 1998. The general and
administrative expenses include certain costs charged to the Company by Excel
since April 1998 pursuant to an administrative services agreement providing for
the sharing of certain facilities and services. Additionally, $0.3 million of
the expenses related to Millennia.
PROVISION FOR INCOME TAXES was $1.1 million, of which $0.9 million was current
expense and $0.2 million was deferred expense primarily relating to the
utilization of the deferred tax asset.
Comparison of the Eight Months Ended March 31, 1998 to the Eight Months Ended
March 31, 1997.
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RENTAL REVENUE for the eight months ended March 31, 1998 was approximately $3.8
million, an increase of 15.2% over rental revenue of approximately $3.3 million
for the eight months ended March 31, 1997. The increase relates to an office
building and land leased to a restaurant which were acquired in October 1997.
INTEREST REVENUE for the eight months ended March 31, 1998 was approximately
$1.8 million, an increase of 159.4% over interest revenue of $694,000 in the
comparable period in 1997. The increase was primarily attributable to additional
loans made on the Los Arcos and First Street projects during the corresponding
periods.
INTEREST EXPENSE for the eight months ended March 31, 1998 was approximately
$1.9 million, a decrease of 5.0% over interest expense of approximately $2.0
million in the comparable period in 1997. The decrease is attributable to
recurring principal payments on the mortgages on those properties occupied by
Wal-Mart and Lowe's.
ADMINISTRATIVE EXPENSES for the eight months ended March 31, 1998 were $453,000,
a decrease of 29.7% over administrative expenses of $644,000 in the comparable
period in 1997. The decrease is primarily attributable to bonuses paid in 1997.
PROPERTY EXPENSES of $126,000 in the eight months ended March 31, 1998 related
to properties acquired in October 1997. Property expenses were $0 in the eight
months ended March 31, 1997.
The PROVISION FOR INCOME TAXES for the eight months ended March 31, 1998 was
$946,000, an increase of 210.2% over income tax expense of $305,000 in the
comparable period in 1997. The increase is attributable to the increase in
income before income taxes during the period.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of the Company, the Company
received approximately $11.1 million in cash and approximately $10.9 million in
notes receivable from the sale of common stock to certain officers and employees
of the Company. In addition, the Company sold 21,281,000 shares of Series A
Preferred Stock for total net proceeds (after a placement fee of $2.4 million)
of approximately $104.0 million.
At July 31, 1998, the total mortgage debt of the Company consisted of the
following: (i) $26.0 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. (ii) $7.7 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. (iii) A $2.6 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) $36.9
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. All of the
Company's mortgage debt is non-recourse to the Company.
In August and September 1998, Millennia incurred $14.8 million of debt in
connection with the acquisition of nine car washes. The notes bear interest at
8.5% per annum, amortize over fifteen years and are non-recourse to the Company.
On July 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 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
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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 the
following: (a) six months after the listing of the Company's common
stock on a national securities exchange (including the New York Stock
Exchange, American Stock Exchange or Nasdaq), or (b) 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"), all of which is
available at October 23, 1998. Any amounts borrowed on the Credit Facility carry
an interest rate of LIBOR plus 2.5%. The Credit Facility expires in October
1999.
The Company anticipates that cash flow from operations will be adequate to meet
the current cash requirements of its operating properties. The Company expects
to meet its long-term liquidity requirements, such as property acquisitions and
development, mortgage debt maturities, and other investment opportunities,
through the most advantageous sources of capital available to the Company at the
time, which may include the sale of common stock, preferred stock or debt
securities through public offerings or private placements, entering into joint
venture arrangements with financial partners, the incurrence of indebtedness
through secured or unsecured borrowings and the reinvestment of proceeds from
the disposition of assets.
YEAR 2000
The Company currently uses Management Reports Inc. ("MRI") software on a Novell
local area network. To the extent the Company's software applications contain
source codes that are unable to appropriately interpret the upcoming calendar
Year 2000, some level of modification, or even possible replacement of such
applications may be necessary. 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 before the end of 1999. 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" in this Form 10-K.
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ITEM 7A. 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 July 31, 1998 approximates fair
value.
July 31, 1998
Expected Maturity Date
(dollar amounts in thousands)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 There-after Total Fair Value
------ ------ ------ ------ ------ ----------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes Receivable, including notes from $ -- $ 378 $ -- $ -- $27,097 $ 6,568 $34,043 $34,000
affiliates
Average interest rate -- 11.00% -- -- 9.99% 10.84% 10.03%
Mortgages Payable $2,824 $3,056 $3,306 $3,577 $ 7,152 $52,799 $72,714 $72,700
Average interest rate 8.05% 8.05% 8.05% 8.05% 8.05% 8.05% 7.70%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements required by this item appear with Index to Financial
Statements and Schedules, starting on page F-1 of this report.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below indicates the name, position with the Company and ages
of the Company's Directors, executive officers and other key employees.
<TABLE>
<CAPTION>
NAME POSITION WITH THE COMPANY AGE
- ---- ------------------------- ---
<S> <C> <C>
Gary B. Sabin.............Chairman, President and Chief Executive Officer 45
Richard B. Muir...........Director, Executive Vice President and Secretary 43
Kelly D. Burt.............Director, Executive Vice President--Development 41
Richard J. Nordlund.......Director 53
Robert E. Parsons, Jr.....Director 43
Robert S. Talbott.........Director 45
John H. Wilmot............Director 55
Emmett R. Albergotti......Senior Vice President--Retail Development 56
Graham R. Bullick, Ph.D...Senior Vice President--Capital Markets 48
Mark T. Burton............Senior Vice President--Acquisitions 38
S. Eric Ottesen...........Senior Vice President, General Counsel and 43
Assistant Secretary
James Y. Nakagawa.........Chief Financial Officer 33
</TABLE>
Gary B. Sabin has served as the Company's Chairman of the Board of
Directors (the "Board"), President and Chief Executive Officer since the
Company's formation. Mr. Sabin served as Director and President of New Plan
Excel , Inc. ("New Plan Excel") from September 1998 to April 1999 and as
Chairman, President and Chief Executive Officer of Excel Realty Trust, Inc.
("Excel") from January 1989 to September 1998. In addition, Mr. Sabin has served
as Chief Executive Officer of various companies since his founding of Excel's
predecessor company and its affiliates starting in 1977. He has been active for
over 20 years in diverse aspects of the real estate industry, including the
evaluation and negotiation of real estate acquisitions, management, financing
and dispositions.
Richard B. Muir has served as Director, Executive Vice President and
Secretary since the Company's formation. Mr. Muir served as a Director,
Executive Vice President and Co-Chief Operating Officer of New Plan Excel from
September 1998 to April 1999 and served as Director, Executive Vice President
and Secretary of Excel from January 1989 to September 1998. In addition, Mr.
Muir served as an officer and director of various affiliates of Excel since
1978, primarily in administrative and executive capacities, including direct
involvement in and supervision of asset acquisitions, management, financing and
dispositions.
Kelly D. Burt has served as Director and Executive Vice President --
Development since May 1998. From 1992 to May 1998, Mr. Burt served as President
and founder of TenantFirst, a real estate development company in San Diego,
California that was acquired by us in May 1998. From 1984 to 1992, Mr. Burt was
an Industrial/Office Partner at the San Diego division of Trammell Crow Company,
a real estate development company headquartered in Dallas, Texas.
Richard J. Nordlund has served as a Director since the Company's
formation and as President of RJN Management, a real estate firm in Santa
Barbara, California, since 1985. From 1978 through 1988, Mr. Nordlund served as
President of First Corporate Services, an investment banking firm in
Minneapolis, Minnesota. He is also associated with Miller & Schroeder Financial,
Inc. Mr. Nordlund's business experience includes 28 years in the investment
banking and mortgage banking industries.
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Robert E. Parsons, Jr. has served as a Director since the Company's
formation. He served as a Director of Excel and then New Plan Excel from January
1989 to April 1999. Mr. Parsons is presently Executive Vice President and Chief
Financial Officer of Host Marriott Corporation, a company he joined in 1981. He
also serves as a director and officer of several Host Marriott subsidiaries, and
as a Director of Merrill Financial Corporation, a privately-held real estate
company.
Robert S. Talbott has served as a Director since the Company's
formation. Mr. Talbott is an attorney and has served as President of Holrob
Investments, LLC, a company engaged in the acquisition, development, management
and leasing of real property, since 1997. From 1985 through 1997, Mr. Talbott
served as Executive Vice President and President of Horne Properties, Inc.,
where he was involved in the acquisition and development of over 100 shopping
centers. He also serves as a member of the Public Building Authority of
Knoxville, Tennessee, as a member of the Knoxville Industrial Development Board,
as a Director of the Knoxville Chamber of Commerce and as Chairman of the St.
Mary's Foundation.
John H. Wilmot has served as a Director since the Company's formation.
He served as a Director of Excel and then New Plan Excel from 1989 to April
1999. Mr. Wilmot, individually and through his wholly-owned corporations,
develops and manages real property, including office buildings, shopping centers
and residential projects primarily in the Phoenix/Scottsdale area, and has been
active in such business since 1976.
Emmett R. Albergotti has served as Senior Vice President -- Retail
Development since August 1998. From 1993 to August 1998, Mr. Albergotti served
as Senior Vice President of AMC Realty, Inc., the real estate arm of AMC
Entertainment, Inc., for which he oversaw the acquisition and development of new
theater locations throughout the western United States.
Graham R. Bullick, Ph.D., has served as Senior Vice President -- Capital
Markets since the Company's formation. Mr. Bullick served as Senior Vice
President -- Capital Markets of Excel and then New Plan Excel from January 1991
to April 1999. Previously, Mr. Bullick was associated with Excel as a Director
from 1991 to 1992. From 1985 to 1991, Mr. Bullick served as Vice President and
Chief Operations Officer for a real estate investment firm, where his
responsibilities included acquisition and financing of investment real estate
projects.
Mark T. Burton has served as Senior Vice President -- Acquisitions since
the Company's formation and held the same position with Excel and then New Plan
Excel from October 1995 to April 1999. Mr. Burton also served as a Vice
President of Excel from January 1989 to October 1995. Mr. Burton was associated
with Excel and its affiliates beginning in 1983, primarily in the evaluation and
selection of property acquisitions.
S. Eric Ottesen has served as Senior Vice President, General Counsel and
Assistant Secretary since the Company's formation. Mr. Ottesen served as Senior
Vice President -- Legal Affairs and Secretary of New Plan Excel from September
1998 to April 1999. Mr. Ottesen served as Senior Vice President, General Counsel
and Assistant Secretary of Excel from September 1996 to September 1998. From
1987 to 1995, Mr. Ottesen was a senior partner in a San Diego law firm.
James Y. Nakagawa has served as Chief Financial Officer since October
1998. From March 1998 to October 1998, Mr. Nakagawa served as Controller of the
Company. Mr. Nakagawa served as Controller of Excel and then New Plan Excel from
September 1994 to April 1999. Prior to joining New Plan Excel, Mr. Nakagawa was
a manager at Coopers & Lybrand LLP. Mr. Nakagawa is a certified public
accountant.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Under Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), Directors, executive officers and beneficial owners of ten
percent or more of the Common Stock ("Reporting Persons") are required to report
to the Securities and Exchange Commission (the "SEC") on a timely basis the
initiation of their status as a Reporting Person and any changes with respect to
their
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beneficial ownership of the Common Stock. Regulations promulgated by the SEC
require the Company to disclose in this Proxy Statement any reporting violations
with respect to the 1998 fiscal year which came to the Company's attention based
on a review of the applicable filings required by the SEC to report such status
as an officer or Director or such changes in beneficial ownership as submitted
to the Company. Based solely on its review of such forms received by it, the
Company believes that all filing requirements applicable to its executive
officers, Directors and beneficial owners of more than ten percent of the Common
Stock were complied with during the fiscal year ended July 31, 1998.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF THE BOARD OF DIRECTORS
Each non-employee Director of the Company receives $6,000 per year for
serving on the Board and an additional $500 for each meeting attended (other
than committee meetings). An additional $4,000 is paid to any non-employee
Director who serves on the Executive Committee. Each Director is eligible to
receive stock options pursuant to the 1998 Stock Option Plan of Excel Legacy
Corporation (the "Legacy Stock Option Plan").
Directors also receive reimbursement for travel expenses incurred in
connection with their duties as Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee consists of Messrs. Nordlund,
Parsons and Talbott. During the 1998 fiscal year the Audit Committee held no
meetings. The Audit Committee reviews the annual audits of the Company's
independent public accountants, reviews and evaluates internal accounting
controls, recommends the selection of the Company's independent public
accountants, reviews and passes upon (or ratifies) related party transactions,
and conducts such reviews and examinations as it deems necessary with respect to
the practices and policies of, and the relationship between, the Company and its
independent public accountants.
COMPENSATION COMMITTEE. The Compensation Committee consists of Messrs.
Nordlund, Talbott and Wilmot. During the 1998 fiscal year the Compensation
Committee held no meetings. The Compensation Committee reviews compensation of
senior officers of the Company and administers the Company's executive
compensation policies and stock option plans.
EXECUTIVE COMMITTEE. The Executive Committee consists of Messrs. Sabin,
Muir, Burt and Wilmot. During the 1998 fiscal year the Executive Committee held
one meeting. The Executive Committee has all powers and rights necessary to
exercise the full authority of the Board in the management of the business and
affairs of the Company, except as provided in the Delaware General Corporation
Law or the Company Bylaws.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1998, the Compensation Committee was comprised of Messrs.
Nordlund, Talbott and Wilmot. No interlocking relationship exists between any
member of the Compensation Committee and any member of any other company's board
of directors or compensation committee.
EXECUTIVE COMPENSATION
The Company was recently formed in connection with the spin-off of the
Company from Excel 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"). Other than Mr. Burt, who is the only executive officer of the
Company not affiliated with New Plan Excel, none of the Company's executive
officers received compensation (other than in the form of option grants under
the Legacy Stock Option Plan)
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from or on behalf of the Company from its formation through the fiscal year
ended July 31, 1998. In the 1998 fiscal year, the Company paid to New Plan Excel
a portion of the salary and other compensation for executive officers of the
Company who were shared with New Plan Excel on the basis of an allocation of
their salary and bonus from New Plan Excel. See "Item 13. Certain Relationships
and Related Transactions -- Relationship Between the Company and New Plan Excel
- -- Administrative Services Agreement."
The following table sets forth certain information concerning the
compensation of the Chief Executive Officer and each of the other executive
officers of the Company whose compensation exceeded $100,000 on an annualized
basis for the period from March 31, 1998 (the date of the Spin-off) through the
remainder of the fiscal year ended July 31, 1998 (the "Compensation Period").
SUMMARY COMPENSATION TABLE FOR THE 1998 FISCAL YEAR
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
NAME AND -------------------------- ---------------------
PRINCIPAL OTHER ANNUAL NUMBER OF SECURITIES
POSITION(S) YEAR SALARY($) COMPENSATION UNDERLYING OPTIONS(#)
----------- ---- --------- ------------ ---------------------
<S> <C> <C> <C> <C>
Gary B. Sabin 1998 $ 82,599(1) -- 800,000
Chairman, President
and Chief Executive Officer
Kelly D. Burt 1998 150,000(2) $6,000(3) 300,000
Executive Vice
President -- Development
</TABLE>
- ----------
(1) Represents the amount paid by the Company to New Plan Excel under the
Administrative Services Agreement with respect to Mr. Sabin on an
annualized basis. The Company paid to New Plan Excel $27,533 with
respect to Mr. Sabin during the Compensation Period.
(2) Represents the annualized salary of Mr. Burt. Mr. Burt's salary during
the Compensation Period was $50,000.
(3) Includes car allowance and miscellaneous incentive compensation.
OPTION GRANTS
The following table provides certain information concerning the stock
options which the Company granted to the executive officers named in the Summary
Compensation Table above during the fiscal year ended July 31, 1998. The Company
has not granted any stock appreciation rights.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------
NUMBER OF RATES OF STOCK PRICE
SECURITIES PERCENT OF TOTAL APPRECIATION
UNDERLYING OPTIONS GRANTED TO EXERCISE PRICE FOR OPTION TERM(1)
OPTIONS EMPLOYEES PER SHARE EXPIRATION -------------------------
NAME GRANTED(#) 1998(%) ($/SH) DATE 5%($) 10%($)
---- ------------ ------------------ -------------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gary B. Sabin 400,000 11.6% $ 5.00 3/31/08 $922,608 $2,519,901
400,000 11.6 10.00 3/31/08 0 519,901
Kelly D. Burt 150,000 4.3 5.00 5/1/08 365,190 1,003,488
150,000 4.3 10.00 5/1/08 0 253,488
</TABLE>
10
<PAGE> 11
- ----------
(1) These amounts represent assumed rates of appreciation in the price of
the Common Stock during the terms of the options in accordance with
rates specified in applicable federal securities regulations. Actual
gains, if any, on stock option exercises will depend on the future price
of the Common Stock and overall stock market conditions. There is no
representation that the rates of appreciation reflected in this table
will be achieved.
LEGACY STOCK OPTION PLAN
In March 1998, the Company adopted the Legacy Stock Option Plan. The
principal purposes of the Legacy Stock Option Plan are to provide incentives for
officers, employees and consultants of the Company and its subsidiaries through
the granting of options ("Options"), thereby stimulating their personal and
active interest in the Company's development and financial success, and inducing
them to remain in the Company's employ. In addition to Options granted to
officers, employees and consultants, the Legacy Stock Option Plan provides for
formula grants of Options ("Director Options") to the Company's Directors.
Under the Legacy Stock Option Plan, not more than 5,250,380 shares of
Common Stock (or the equivalent in other equity securities) will be authorized
for issuance upon the exercise of Options. Furthermore, the maximum number of
shares which may be subject to Options granted under the Legacy Stock Option
Plan to any individual in any calendar year may not exceed 525,000.
The Compensation Committee of the Board administers the Legacy Stock
Option Plan with respect to grants to employees or consultants of the Company
and the full Board administers the Legacy Stock Option Plan with respect to
Director Options. Subject to the terms and conditions of the Legacy Stock Option
Plan, the Board or the Compensation Committee has the authority to select the
persons to whom Options are to be granted, to determine the number of shares to
be subject thereto and the terms and conditions thereof, and to make all other
determinations and to take all other actions necessary or advisable for the
administration of the Legacy Stock Option Plan. Similarly, the Board has
discretion to determine the terms and conditions of Director Options and to
interpret and administer the Legacy Stock Option Plan with respect to Director
Options. The Compensation Committee (and the Board) are also authorized to
adopt, amend and rescind rules relating to the administration of the Legacy
Stock Option Plan.
Pursuant to the terms of the Legacy Stock Option Plan, each Director
will be granted an option to purchase 3,000 shares of Common Stock on the date
of each annual meeting of stockholders after initial election at which the
Director is re-elected to the Board.
On March 31, 1998, the Company issued Options to acquire an aggregate of
3,100,000 shares of Common Stock to its executive officers (other than Mr. Burt,
who was not hired until May 1998) under the Legacy Stock Option Plan, 50.0% of
which have an exercise price of $5.00 per share and 50.0% of which have an
exercise price of $10.00 per share. The Options will become exercisable in five
equal annual installments commencing on the first anniversary of the date of
grant. In May 1998, the Company issued options to purchase 300,000 shares of
Common Stock to Mr. Burt on the same terms.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock and
Series A Preferred Stock beneficially owned as of July 1, 1999 by (1) the
executive officers and Directors of the Company, (2) all of the Company's
executive officers and Directors as a group, and (3) all other stockholders
known by the Company to beneficially own more than 5.0% of the Common Stock or
Series A Preferred Stock. Except as otherwise indicated, each individual named
has a business address of 16955 Via Del Campo, Suite 100, San Diego, California
92127, and has sole investment and voting power with respect to the securities
shown.
11
<PAGE> 12
<TABLE>
<CAPTION>
Number of Shares Number of Shares of
of Common Stock Series A Preferred Stock Percent
Name Beneficially Owned Beneficially Owned Beneficially Owned
- ---- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Gary B. Sabin (1) 3,855,072 -- 11.5% of Common Stock
7.0% of Voting Stock
Richard B. Muir 1,097,909 -- 3.3% of Common Stock
2.0% of Voting Stock
Mark T. Burton 1,018,300 -- 3.0% of Common Stock
1.9% of Voting Stock
Graham R. Bullick 1,006,605 -- 3.0% of Common Stock
1.8% of Voting Stock
S. Eric Ottesen 1,000,556 -- 3.0% of Common Stock
1.8% of Voting Stock
Kelly D. Burt 888,700 -- 2.7% of Common Stock
1.6% of Voting Stock
John H. Wilmot (2) 110,336 -- *
Richard J. Nordlund (3) 32,468 -- *
James Y. Nakagawa 26,020 -- *
Robert E. Parsons, Jr. (4) 12,123 -- *
Robert S. Talbott (5) 3,000 -- *
Officers and Directors
as a group (12 persons) 9,051,089 -- 27.1% of Common Stock
16.5% of Voting Stock
Fidelity Management 2,715,790 -- 8.1% of Common Stock
Company (6) 5.0% of Voting Stock
Longleaf Partners 2,280,000 14,600,000 6.8% of Common Stock
Realty Fund (7) 30.8% of Voting Stock
BancBoston Capital Inc. (8) -- 2,681,000 0.0% of Common Stock
4.9% of Voting Stock
The Northwestern Mutual
Life Insurance Company (9) -- 2,000,000 0.0% of Common Stock
3.7% of Voting Stock
Allstate Insurance -- 2,000,000 0.0% of Common Stock
Company (10) 3.7% of Voting Stock
</TABLE>
- -------------
* Represents less than 1.0% of the outstanding shares.
(1) Includes shares of Common Stock held by EIC, of which Gary Sabin is the
controlling stockholder.
(2) Mr. Wilmot's business address is 4455 E. Camelback Rd., Phoenix, Arizona
85018.
(3) Mr. Nordlund's business address is 615 Hot Springs Road, Santa Barbara,
California 93108-1108.
(4) Mr. Parson's business address is Host Marriott Corporation, 10400
Fernwood Road, Washington, D.C. 20058.
(5) Mr. Talbott's business address is 2607 Kingston Pike, Knoxville,
Tennessee 37919.
(6) Fidelity is a group of funds of which no single fund owns more than 5.0%
of the Common Stock. Fidelity's business address is 82 Devonshire
Street, Boston, Massachusetts 02109.
(7) Longleaf Partners Realty Fund's business address is c/o Southeastern
Asset Management, Inc., 6410 Poplar Avenue, 9th Floor, Memphis,
Tennessee 38119.
(8) BancBoston Capital Inc.'s business address is 100 Federal Street,
Boston, Massachusetts 02110. For a discussion of the relationship
between the Company and an affiliate of BancBoston Capital Inc., see
"Certain Relationships and Related Transactions--Private Placements."
(9) The Northwestern Mutual Life Insurance Company's business address is 720
East Wisconsin Avenue, Milwaukee, Wisconsin 53202.
(10) Allstate Insurance Company's business address is Allstate Plaza, 3075
Sanders Road, Suite G5B, Northbrook, Illinois 60062-7127.
12
<PAGE> 13
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP BETWEEN THE COMPANY AND NEW PLAN EXCEL
New Plan Excel was the sole stockholder of the Company prior to the
Spin-off. In connection with the Spin-off, New Plan Excel and EDV transferred to
the Company certain real properties, notes receivable and related assets and
liabilities held by New Plan Excel and EDV.
DISTRIBUTION AGREEMENT. The Company, New Plan Excel and EDV are parties
to a Distribution Agreement, which provides for, among other things, (1) the
division among the Company, New Plan Excel and EDV of certain assets and
liabilities, (2) the Spin-off, and (3) certain other agreements governing the
relationship between the Company, New Plan Excel and EDV following the Spin-off.
Pursuant to the Distribution Agreement, as consideration for the asset
transfers, the Company issued to New Plan Excel (A) 23,412,580 shares of Common
Stock in order to effect the Spin-off, and (B) a promissory note payable to New
Plan Excel in the amount of approximately $26.4 million. Such note bore interest
at the rate of 12.0% per annum, was scheduled to mature in March 2003 and was a
non-recourse obligation secured by a first mortgage on one of the Company's
properties. The note was repaid by the Company in April 1998. In addition, in
connection with the asset transfers, New Plan Excel canceled certain
indebtedness of EDV held by New Plan Excel in the amount of approximately $38.1
million.
ADMINISTRATIVE SERVICES AGREEMENT. The Company and New Plan Excel are
parties to an Administrative Services Agreement, which generally provides that
New Plan Excel will provide management and administrative services to the
Company following the Spin-off, including the ability to use the services of New
Plan Excel's employees in connection with the Company's business. In exchange
for those services, the Company is required to pay New Plan Excel on a monthly
basis the sum of (1) the product of 115.0% of the sum of (A) two-thirds of the
aggregate amount of all wages and salaries paid during the month to New Plan
Excel employees (excluding senior executives) who spend more than 50.0% of their
working time performing services for the Company and are designated in writing
as "Legacy Individuals" for purposes of the Administrative Services Agreement,
and (B) one-third of the aggregate amount of all wages and salaries paid during
the month to New Plan Excel employees (excluding senior executives) that are not
designated as Legacy Individuals and (2) 23.0% of the sum of all current monthly
salaries and one-twelfth of the most recent annual bonuses for the senior
executives of New Plan Excel (who during the 1998 fiscal year included, for
purposes of the Administrative Services Agreement, Gary B. Sabin, Richard B.
Muir, Graham R. Bullick, Mark T. Burton, S. Eric Ottesen, Ronald H. Sabin and
David A. Lund). For the 1998 fiscal year, the Company paid an aggregate of
approximately $170,000 to New Plan Excel under the Administrative Services
Agreement.
Under the Administrative Services Agreement, New Plan Excel is
responsible for continuing to provide employee benefits (other than those
provided under the Legacy Stock Option Plan) to New Plan Excel employees and to
Legacy Individuals. The Administrative Services Agreement may be terminated
either by New Plan Excel or the Company at any time upon 30 days' prior written
notice to the other party. Any individuals independently hired by the Company
after the Spin-off as separate employees of the Company are not subject to the
Administrative Services Agreement.
TAX SHARING AGREEMENT. The Company and New Plan Excel are parties to a
Tax Sharing Agreement defining the parties' rights and obligations with respect
to tax returns and tax liabilities, including, in particular, federal and state
income tax returns and liabilities for taxable years and other taxable periods
ending on or before the date of the Spin-off. In general, New Plan Excel is
responsible for (1) filing all federal and state income tax returns of New Plan
Excel, the Company and any of their subsidiaries for all taxable years ending on
or before the date of the Spin-off, and (2) paying the taxes relating to such
returns (including any deficiencies proposed by applicable taxing authorities).
INTERCOMPANY AGREEMENT. The Company and New Plan Excel are parties to an
Intercompany Agreement which provides both parties with rights to participate in
certain transactions. During the term of the Intercompany Agreement, the Company
has agreed not to engage in activities or make investments that involve
neighborhood and community shopping centers, power centers, malls or other
13
<PAGE> 14
conventional retail properties unless it has first provided written notice to
New Plan Excel of the material terms and conditions of such activities or
investments, and New Plan Excel has determined not to pursue such activities or
investments. The Intercompany Agreement expressly permits the Company to engage
in activities or make investments that involve office and industrial properties,
single tenant retail properties, entertainment/retail/mixed-use development
projects, real estate mortgages, real estate derivatives, or entities that
invest primarily in or have a substantial portion of their assets in such real
estate assets. The term of the Intercompany Agreement commenced on March 31,
1998 and will terminate upon the earlier of (1) the tenth anniversary of such
date, or (2) a change in control of either party.
TRANSITIONAL SERVICES AGREEMENT. In connection with the Spin-off, the
Company and New Plan Excel entered into a Transitional Services Agreement
pursuant to which New Plan Excel was obligated to provide certain property
acquisition, management and other services to the Company on a transitional
basis. The fees for such transitional services were based on hourly rates or a
percentage of revenues designed to reflect the actual costs (including indirect
costs) of providing such services. The Transitional Services Agreement
terminated on December 15, 1998.
PRIVATE PLACEMENTS
Upon consummation of the Spin-off, the Company sold (1) 9,195,224 shares
of Common Stock in a private placement to certain of the Company's officers at a
price of $2.39 per share (the estimated market value of the Common Stock as of
the date of the Spin-off based upon the value of the assets transferred to the
Company), for an aggregate purchase price of approximately $22.0 million, and
(2) 21,281,000 shares of Series A Preferred Stock in a private placement to
certain investors at a price of $5.00 per share, for an aggregate purchase price
of approximately $106.4 million. For a list of the purchasers in the foregoing
private placements and the respective amounts of Common Stock and Series A
Preferred Stock purchased, see "Item 12. Securities Ownership of Certain
Beneficial Owners and Management."
The Company loaned to certain of its officers, in connection with their
purchase of Common Stock described above, approximately 50.0% of the purchase
price therefor (an aggregate amount of approximately $10.9 million). Such loans
bear interest at the rate of 7.0% per annum, mature in March 2003 and are
recourse obligations of such officers.
The Company retained BancBoston Securities Inc. ("BSI"), an affiliate of
BankBoston, N.A., to act as placement agent in connection with the private
placement of Series A Preferred Stock described above. Pursuant to such
engagement, the Company paid to BSI a success fee of approximately $2.3 million
upon consummation of the private placement. As noted in "Securities Ownership of
Certain Beneficial Owners and Management," BancBoston Capital Inc., an affiliate
of BSI, acquired 2,681,000 shares of Series A Preferred Stock in the private
placement.
OTHER MATTERS
In May 1998, the Company acquired TenantFirst, which was formed and
operated by Kelly D. Burt. As consideration the Company issued to Mr. Burt
850,000 shares of Common Stock and $137,500 in cash. In connection with the
acquisition of TenantFirst, the Company hired Mr. Burt as a Director and
Executive Vice President -- Development of the Company.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
(1) Financial Statements of Excel Legacy Corporation F-1
(i) Report of Independent Accountants
(ii) Consolidated Balance Sheet as of July 31, 1998 F-2
(iii) Consolidated Statement of Income for the period from
inception (November 17, 1997) to July 31, 1998 F-3
(iv) Consolidated Statement of Changes In Stockholders'
Equity for the period from inception (November 17,
1997) to July 31, 1998 F-4
(v) Consolidated Statement of Cash Flows for the period
from inception (November 17, 1997) to July 31, 1998 F-5
(vi) Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules of Excel Legacy Corporation
(i) Schedule II; Valuation and Qualifying Accounts; For the
period from inception (November 17, 1997) to July 31,
1998 F-19
(ii) Schedule III; Real Estate and Accumulated Depreciation;
July 31, 1998 F-20
(3) Excel Legacy Corporation Asset Group Financial Statements
(i) Report of Independent Accountants F-21
(ii) Combined Balance Sheets as of July 31, 1997 and July 31,
1996 F-22
(iii) Combined Statements of Operations for each of the three
years in the period ended July 31, 1997 and the eight
months ended March 31, 1998 (unaudited) and March 31,
1997 (unaudited) F-23
(iv) Combined Statements of Changes in Investment by Excel
Realty Trust, Inc. for each of the three years in the
period ended July 31, 1997 F-24
(v) Combined Statements of Cash Flows for each of the three
years in the period ended July 31, 1997 and the eight
months ended March 31, 1998 (unaudited) and March 31,
1997 (unaudited) F-25
(vi) Notes to Combined Financial Statements F-26
(b) Reports on Form 8-K filed during the quarter ended July 31,
1998: None
(c) Exhibits: Refer to Exhibit Index as follows.
</TABLE>
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
DATED: July 27, 1999 By: /s/ RICHARD B. MUIR
------------------------------------
Name: Richard B. Muir
Title: Executive Vice President and
Secretary
DATED: July 27, 1999 By: /s/ JAMES Y. NAKAGAWA
------------------------------------
Name: James Y. Nakagawa
Title: Chief Financial and
Accounting Officer
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<S> <C>
2.1(2) Distribution Agreement, dated as of March 31, 1998, by and among
Excel Realty Trust, Inc., Excel Legacy Corporation and ERT
Development Corporation.
3.1(3) Amended and Restated Certificate of Incorporation of Excel
Legacy Corporation.
3.2(3) Amended and Restated Bylaws of Excel Legacy Corporation.
4.1(4) Form of Common Stock Certificate.
4.2(2) Certificate of Designations of the Series A Preferred Stock of
Excel Legacy Corporation.
4.3(2) Warrant to Purchase Shares of Series A Preferred Stock, dated as
of March 31, 1998, issued by Excel Legacy Corporation to
BankBoston Capital Inc.
4.4(2) Warrant to Purchase Shares of Series A Preferred Stock, dated as
of March 31,1998, issued by Excel Legacy Corporation to
Southeastern Asset Management, Inc.
10.1(4) 1998 Stock Option Plan of Excel Legacy Corporation.
10.2(2) Administrative Services Agreement, dated as of March 31, 1998,
by and between Excel Realty Trust, Inc. and Excel Legacy
Corporation.
10.3(2) Intercompany Agreement, dated as of March 31, 1998, by and
between Excel Realty Trust, Inc. and Excel Legacy Corporation.
10.4(2) Tax Sharing Agreement, dated as of March 31, 1998, by and
between Excel Realty Trust, Inc. and Excel Legacy Corporation.
10.5(2) Transitional Services Agreement, dated as of March 31, 1998, by
and between Excel Realty Trust, Inc. and Excel Legacy
Corporation.
10.6(2) Purchase Agreement, dated as of March 31, 1998, by and among
Excel Legacy Corporation and the purchasers named therein.
10.7(2) Registration Rights Agreement, dated as of March 31, 1998, by
and among Excel Legacy Corporation and the purchasers named
therein.
10.8(4) Form of Indemnity Agreement between Excel Legacy Corporation and
its directors and executive officers.
10.9(5) Lease, dated as of March 26, 1997, between MBK Southern
California/MBK Mountain States Ventures and American-Cinema,
Inc. (including Assignment and Assumption of AMC lease dated as
of December 31, 1997, between MBK Southern California/MBK
Mountain States Ventures and Excel Legacy Corporation).
</TABLE>
<PAGE> 18
<TABLE>
<S> <C>
10.10(5) Lease, dated as of March 26, 1997, between MBK Southern
California/MBK Mountain States Ventures and American
Multi-Cinema, Inc. (including Assignment and Assumption of AMC
lease dated as of December 31, 1997, between MBK Southern
California/MBK Mountain States Ventures and Excel Legacy
Corporation).
10.11(1) Operating Agreement dated as of October 9, 1998 of Grand
Tusayan, LLC, a Delaware limited liability company, as amended.
10.12(1) First Amended and Restated Operating Agreement dated as of July
27, 1998 of Millennia Car Wash, LLC, a Delaware limited
liability company.
10.13(1) First Amended and Restated Operating Agreement dated as of July
29, 1998 of Newport on the Levee, LLC, a Delaware limited
liability company.
21.1(1) Subsidiaries of Excel Legacy Corporation.
23.1(1) Consent of PricewaterhouseCoopers LLP
27.1(1) Financial Data Schedule.
</TABLE>
- -----------
(1) Filed herewith (for other than Exhibits 23.1 and 27.1, refer to Annual
Report on Form 10-K (File No. 0-023503) filed with the Commission on
October 28, 1998).
(2) Incorporated by reference to the Company's Current Report on Form 8-K
(File No. 0-23503) filed with the Commission on April 2, 1998.
(3) Incorporated by reference to the Company's Registration Statement on
Form S-11 (File No. 333-55715) filed with the Commission on June 1,
1998.
(4) Incorporated by reference to Amendment No. 1 to the Company's Registrant
Statement on Form 10 (File No. 0-23503) filed with the Commission on
February 10, 1998.
(5) Incorporated by reference to Amendment No. 2 to the Company's
Registration Statement on Form 10 (File No. 0-23503) filed with the
Commission on March 12, 1998.
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Excel Legacy Corporation
In our opinion, the consolidated financial statements and the financial
statement schedules of Excel Legacy Corporation and subsidiaries as listed in
item 14(a) of this Form 10-K present fairly, in all material respects, the
financial position of Excel Legacy Corporation and subsidiaries at July 31, 1998
and the results of their operations and their cash flows for the period from
Inception (November 17, 1997) to July 31, 1998, in conformity with generally
accepted accounting principles. These financial statements and financial
statement schedules are the responsibility of the Company's management: our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits. We conducted our audit of
these financial statements and financial statement schedules in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Diego, California
October 22, 1998
F-1
<PAGE> 20
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JULY 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
----------
ASSETS
<TABLE>
<S> <C>
Real estate:
Land $ 51,675
Buildings 122,669
Leasehold interests 2,351
Accumulated depreciation (939)
---------
Net real estate 175,756
Cash 11,491
Accounts receivable, less allowance for bad debts of $14 732
Notes receivable 23,171
Investment in partnerships 11,138
Interest receivable 3,889
Pre-development costs 6,662
Other assets 7,757
Deferred tax asset 6,320
---------
$ 246,916
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Mortgages payable $ 72,714
Accounts payable and accrued liabilities 5,680
Other liabilities 816
Income taxes payable 934
---------
Total liabilities 80,144
---------
Commitments and contingencies --
Minority interests 853
---------
Stockholders' equity:
Series A Preferred stock, $.01 par value, 50,000,000 shares
authorized, 21,281,000 shares issued and outstanding 213
Common stock, $.01 par value, 150,000,000 shares authorized,
33,457,804 shares issued and outstanding 335
Additional paid-in capital 174,508
Retained earnings 1,735
Notes receivable from officers for common shares (10,872)
---------
Total stockholders' equity 165,919
---------
$ 246,916
=========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-2
<PAGE> 21
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM INCEPTION (NOVEMBER 17, 1997) TO JULY 31,1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
----------
<TABLE>
<S> <C>
Revenue:
Rental $4,417
Other operating income 1,732
Interest income and other revenues 1,996
------
Total revenue 8,145
------
Operating expenses:
Interest 1,518
Depreciation and amortization 1,057
Property operating expenses 915
Other operating expenses 876
General and administrative 898
Minority interest 3
------
Total operating expenses 5,267
------
Income before income taxes 2,878
Provision for income taxes 1,143
------
Net income $1,735
======
Basic net income per share $ 0.11
Diluted net income per share $ 0.07
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-3
<PAGE> 22
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR
THE PERIOD FROM INCEPTION (NOVEMBER 17, 1997) TO JULY 31, 1998
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
----------
<TABLE>
<CAPTION>
SERIES A
PREFERRED STOCK COMMON STOCK ADDITIONAL OFFICER TOTAL
-------------------- -------------------- PAID-IN NOTES RETAINED STOCKHOLDERS'
NUMBER AMOUNT NUMBER AMOUNT CAPITAL RECEIVABLE EARNINGS EQUITY
---------- ------ ---------- ------ ---------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at inception -- $ -- -- $ -- $ -- $ -- $ -- $ --
Issuance of preferred stock 21,281,000 213 -- -- 106,192 -- -- 106,405
Issuance of common stock -- -- 33,457,804 335 70,831 -- 71,166
Notes receivable from
officers for common shares -- -- -- -- -- (10,872) -- (10,872)
Issuance costs -- -- -- -- (2,515) -- -- (2,515)
Net income -- -- -- -- -- -- 1,735 1,735
---------- ---- ---------- ---- --------- -------- ------- ---------
Balance at July 31, 1998 21,281,000 $213 33,457,804 $335 $ 174,508 $(10,872) $ 1,735 $ 165,919
========== ==== ========== ==== ========= ======== ======= =========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-4
<PAGE> 23
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (NOVEMBER 17, 1997) TO JULY 31,1998
(IN THOUSANDS)
----------
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 1,735
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 1,057
Provision for bad debts 16
Minority interest in partnerships 3
Changes in other assets (6,353)
Changes in accounts payable 5,680
Changes in other liabilities 1,247
---------
Net cash provided by operating activities 3,385
---------
Cash flows from investing activities:
Real estate acquisitions and construction costs paid (98,951)
Investment in partnerships (11,138)
Pre-development costs paid (6,662)
---------
Net cash used in investing activities (116,751)
---------
Cash flows from financing activities:
Issuance of preferred stock 106,405
Proceeds from issuance of mortgages and notes payable 82,367
Principal payments of mortgages and notes payable (72,504)
Issuance of common stock 11,104
Issuance costs (2,515)
---------
Net cash provided by financing activities 124,857
---------
Net increase in cash 11,491
Cash at inception --
---------
Cash at July 31 $ 11,491
=========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-5
<PAGE> 24
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 know 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 objectives of increasing cash
flows and maintaining certain leverage ratios. In connection with the
Spin-off, certain real properties, notes receivable and related assets
and liabilities were transferred to the Company from Excel (Note 2).
Upon completion of the Spin-off, the Company ceased to be a wholly-owned
subsidiary of Excel and began operating as an independent public
company.
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 a ownership greater than 50%. The Company uses the
equity method of accounting to account 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 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.
F-6
<PAGE> 25
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
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
The Company acquired certain management contracts in conjunction with
its acquisition of TenantFirst (Note 5). The 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
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" were issued.
SFAS No. 130 and SFAS No. 131 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. SFAS No. 130 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.
Management is currently evaluating the requirements of SFAS 131.
F-7
<PAGE> 26
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ
from those estimates.
2. SPIN-OFF:
Prior to the Spin-off (Note 1) on March 31, 1998, ERT Development
Corporation ("EDV"), a Delaware Corporation and an affiliate of Excel
transferred four notes receivable, a land parcel, a leasehold interest
in a parcel of land, an office building, a single tenant building, and
certain other assets to Excel for a total consideration of approximately
$38,112,000. Excel contributed to the Company, the above assets from
EDV, together with ten single tenant properties owned by Excel with a
book value of approximately $45,747,000, certain other net assets of
approximately $1,158,000, and a property held for sale with a book value
of $14,525,000, in exchange for 23,412,580 common shares of the Company,
assumption of debt by the Company on the ten single tenant properties of
approximately $33,878,000, and issuance of a note payable to Excel from
the Company in the amount of $26,402,000. This note was repaid in April
1998.
The Spin-off took place through a dividend distribution to Excel's
common stockholders, of all the Company's common stock (23,412,580
shares) held by Excel. The distribution consisted of one share of the
Company's common stock for each share of Excel's common stock held on
the record date of March 2, 1998. The fair market value of the
distribution was approximately $55,956,000 or $2.39 per share. While the
Company has recorded the acquisition of assets and liabilities at fair
market value for tax purposes, the Company has recorded for book
purposes, the assets and liabilities at Excel's and EDV's original book
value in accordance with accounting standards for distributions of
non-monetary assets to owners in a spin-off. 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:
HIGHLANDS RANCH AND WESTMINSTER, COLORADO
In January 1998, the Company acquired two properties under construction
situated on approximately 43.6 acres in Highlands Ranch and Westminster,
Colorado. The acquired properties consist of two 110,000 square foot 24
screen movie theaters that are occupied by AMC Multi-Cinema, Inc.
("AMC") and were completed on March 20, 1998 and April 3, 1998,
respectively. The total cost of these two properties was approximately
$50,047,000. The Company financed these properties with mortgage debt of
$37,000,000 during 1998.
F-8
<PAGE> 27
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. REAL ESTATE, CONTINUED:
SINGLE TENANT BUILDINGS
The Company acquired ten single tenant buildings from Excel in
connection with the Spin-off. Eight of the buildings are leased to
Wal-Mart Stores, Inc. and are located in Colorado, Illinois, Indiana
(2), Michigan, Pennsylvania, Texas, and Wisconsin. The other two
properties are leased to Lowe's Home Centers, Inc. and are located in
Indiana and Ohio. The ten properties have a total Gross Leasable Area
("GLA") of 981,266 square feet. The Company acquired these properties
for $45,747,000 and assumed $33,988,000 of mortgage debt and other net
liabilities.
SCOTTSDALE GALLERIA
The Company acquired the Scottsdale Galleria ("Galleria") from Excel in
connection with the Spin-off. The Scottsdale Galleria is situated on
approximately 6.3 acres and consists of (i) an enclosed shopping mall
contained in two separate buildings, and (ii) a multi-level parking
garage. The main building is a four level building with a transparent
glass roof and the smaller building contains the "5th Avenue Shops".
The property had a fair market value of $25,000,000 at the acquisition
date (Note 2) and acquired the property for $14,525,000 for book
purposes. This property is substantially vacant and is under
consideration for a mixed use entertainment redevelopment project.
SCOTTSDALE LAND
The Company acquired approximately 3.6 acres of vacant land located in
Scottsdale, Arizona which was originally owned by EDV in connection with
the Spin-off. The land was acquired for approximately $3,724,000 and was
acquired along with other properties located in the Scottsdale area as
part of the Galleria redevelopment plan.
SCOTTSDALE CITY CENTRE
The Company acquired the Scottsdale City Centre, a 64,262 square foot
office building situated on approximately two acres in Scottsdale
Arizona (the "City Centre"). The City Centre was originally owned by EDV
and transferred to the Company in connection with the Spin-off. The City
Centre was acquired for $7,886,000 and is encumbered by mortgage debt of
$2,571,000. This property was acquired as a strategic expansion site for
the Galleria redevelopment project.
BRIO LAND
The Company acquired approximately 0.5 acres of land located in
Scottsdale, Arizona which was originally owned by EDV in connection with
the Spin-off. The land currently contains a 3,700 square foot building
which is leased to Brio Restaurant and was acquired for approximately
$1,609,000. The property is expected to be part of the Galleria
redevelopment plan along with the other above properties located in
Scottsdale.
F-9
<PAGE> 28
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
3. REAL ESTATE, CONTINUED:
RANCHO BERNARDO LAND
In March 1998, the Company acquired approximately 11.1 acres of land
located in the community of Rancho Bernardo in San Diego, California for
approximately $4,072,000. The land is currently under consideration for
sale.
TELLURIDE LAND
In January 1998, the Company acquired land located at the base of
Telluride mountain in Telluride Mountain Village Ski Resort in
Telluride, Colorado for approximately $763,000. The land was acquired
for future development.
DESERT FASHION PLAZA
In May 1998, the Company acquired a majority interest in Desert Fashion
Plaza, L.L.C., a Delaware limited liability company which owns an urban
mall located in Palm Springs, California (the "Desert Fashion Plaza")
for approximately $13,588,000. Desert Fashion Plaza contains
approximately 290,000 square feet of GLA. Presently the mall is anchored
by Saks Fifth Avenue and is adjacent to the Hyatt Regency Hotel. The
Company has acquired this property for redevelopment.
4. NOTES RECEIVABLE:
LOS ARCOS
In connection with the Spin-off, the Company acquired a $16,212,000
promissory note payable by Los Arcos Development, LLC, the owner of a
700,000 square foot indoor regional mall located in Scottsdale, Arizona.
The Company also received $2,414,000 of accrued interest in connection
with the Spin-off. Interest on the note accrues at the rate of 12% per
annum. The note matures on the earlier of (i) the sale of the property
or (ii) December 2003. Accrued interest on the Los Arcos loan becomes
payable out of the property's net cash flow once the borrower's
development of the property is completed. The note is secured by a first
mortgage on the property and includes a 50% profit participation upon
the property's sale.
FIRST STREET
The Company acquired a $5,538,000 promissory note in connection with the
Spin-off payable by First Street Investments Limited Partnership, the
owner of a 120,000 square foot, eight story office building located in
downtown Phoenix, Arizona. The Company also assumed $119,000 of accrued
interest in connection with the Spin-off. The note matures on the
earlier of (i) the sale of the property or (ii) May 2004 and is secured
by a subordinated mortgage on the property and includes a 50% profit
participation upon sale of the property. Until the maturity date, the
borrower is to pay interest only at the rate of 11% per annum. Interest
not paid currently accrues at the rate of 12% per annum.
F-10
<PAGE> 29
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
4. NOTES RECEIVABLE, CONTINUED:
GRAND CANYON
In connection with the Spin-off, the Company acquired a $1,050,000
promissory note payable by Fain Properties Limited Partnership, the
owner of approximately 17 acres of undeveloped land located in Tusayan,
Arizona near the Grand Canyon National Park. The note accrues interest
at 10% and is secured by a first mortgage on the property.
OTHER
The Company has outstanding two additional notes receivable it obtained
in connection with the Spin-off. These notes total $371,000 at July 31,
1998 and bear interest at 11% to 12% per annum.
OFFICERS
In connection with the sale of common stock to certain of the Company's
officers and employees (Note 8), 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 July 31, 1998 from
these notes total $254,000. The notes have been offset against
stockholders' equity on the Company's accompanying Balance Sheet.
5. INVESTMENTS:
MILLENNIA CAR WASH, LLC
The Company has invested $19,891,000 in a joint venture arrangement with
Millennia Car Wash, LLC ("Millennia"). In June 1998, Millennia acquired
nine car wash properties in the Phoenix, Arizona metropolitan area. At
July 31, 1998, the Company holds 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. Summary unaudited financial information as of July 31, 1998
and for the period from the acquisition of the car wash properties to
July 31, 1998 is as follows (in thousands):
<TABLE>
BALANCE SHEET
<S> <C>
Land $ 3,117
Buildings, net of accumulated depreciation 13,504
Other assets 3,599
--------
Total assets $ 20,220
========
Accounts payable and other liabilities $ 271
Stockholders' equity 19,949
--------
Total liabilities and stockholders' equity $ 20,220
========
INCOME STATEMENT
Operating revenue $ 1,178
Operating expenses (747)
General and administrative costs (288)
Depreciation and amortization (85)
--------
Net income $ 58
========
</TABLE>
F-11
<PAGE> 30
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
5. INVESTMENTS, CONTINUED:
In August and September 1998, Millennia acquired an additional nine car
wash properties located in Arizona and Texas for approximately $15.2
million. Notes payable of $14.8 million bearing annual interest of 8.5%
were borrowed in connection with these acquisitions.
THE GRAND HOTEL
The Company has invested $13,309,000 in a joint venture, Grand Tusayan,
LLC ("Grand Hotel") for the development of a hotel and dinner theater
and retail shop situated near the south rim entrance to the Grand Canyon
National Park in Tusayan, Arizona. The hotel was opened in July 1998 and
the dinner theater was opened in October 1998. The accounts of the Grand
Hotel are consolidated with the Company's financial statements. At July
31, 1998, the Company ownership in the Grand Hotel was 65% although the
Company was entitled to approximately 97% of the Grand Hotel's
operations based upon its equity contributed. Summary unaudited
financial information as of July 31, 1998 and for the period from the
completion of the hotel to July 31, 1998 is as follows (in thousands):
<TABLE>
<S> <C>
BALANCE SHEET
Leasehold interest in land $ 2,351
Building, net of depreciation 9,986
Other assets 1,380
--------
Total assets $ 13,717
========
Accounts payable and other liabilities $ 114
Stockholders' equity 13,603
--------
Total liabilities and stockholders' equity $ 13,717
========
INCOME STATEMENT
Revenue $ 95
Operating expenses (114)
Depreciation and amortization (38)
--------
Net Loss $ (57)
========
</TABLE>
ENTERCITEMENT
In April 1998, the Company invested $6,000,000 in EnterCitement, LLC
("EnterCitement"), a theme park development company. EnterCitement owns
approximately 510 acres of land in Indianapolis, Indiana, on which it
plans to develop a theme park. The Company currently holds a 23.7%
ownership interest in EnterCitement.
NEWPORT
In May 1998, the Company invested $5,000,000 in 3017977 Nova Scotia
Company ("Nova Scotia Company"), a Nova Scotia unlimited liability
company. Nova Scotia Company used the proceeds to help acquire the
Newport Centre, an office building located in Winnipeg, Canada. The
Company is entitled to a 12% preferred return on its investment from the
eventual disposition of or cash flows from the property in addition to
its 50% interest in Nova Scotia Company. The Company accounts for this
investment on the equity method of accounting.
F-12
<PAGE> 31
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
5. INVESTMENTS, CONTINUED:
TENANTFIRST
On May 1, 1998, the Company acquired TenantFirst Real Estate Services,
Inc. ("TenantFirst"), a California corporation. In connection with the
acquisition, the Company paid $138,000 in cash and issued 850,000 shares
of the Company's common stock. TenantFirst performs property management
and development services for various commercial properties located in
San Diego, California. TenantFirst is a wholly-owned subsidiary of the
Company.
6. MORTGAGES PAYABLE:
The Company had $72,714,000 in mortgages payable outstanding at July 31,
1998 at 7.37% to 8.53%. The mortgages are due on various dates through
2018 and monthly payments approximate $702,000. The mortgages are
collateralized by real estate and an assignment of rents. The principal
payments required to be made on mortgages payable over the next five
years are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
<S> <C>
1999 $ 2,824
2000 3,056
2001 3,306
2002 3,577
2003 7,152
Thereafter 52,799
--------
$ 72,714
========
</TABLE>
Mortgages of $66,890,000 are fully amortizing with the final monthly
payments to be made between the years 2004 and 2018. Notes payable of
$14,800,000 were borrowed by Millennia in August and September of 1998
in connection with the acquisition of certain properties. These notes
bear annual interest of 8.5% and are due in fifteen years.
7. INCOME TAXES:
At July 31, 1998, the Company had a net deferred tax asset of
$6,319,000. The deferred tax asset includes $6,446,000 primarily
relating to the difference between fair market value and book value of
the real estate assets acquired from Excel in connection with the
Spin-off 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:
F-13
<PAGE> 32
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
7. INCOME TAXES, CONTINUED:
<TABLE>
<CAPTION>
FEDERAL STATE
-------- --------
<S> <C> <C>
Current payable $727,000 $207,000
Deferred tax expense 163,000 46,000
-------- --------
Provision for income taxes $890,000 $253,000
======== ========
</TABLE>
8. CAPITAL STOCK:
COMMON SHARES
In connection with the Spin-off, 23,412,580 shares of common stock were
issued by the Company to its then parent company, Excel, who then
distributed the shares on a one for one basis. The shares had a book
value and estimated fair market value of $1.68 and $2.39 per share,
respectively.
On March 31, 1998, the Company sold 9,195,224 shares of common stock to
certain officers and employees of the Company for $2.39 per share. The
Company received cash of $11,104,000 and issued notes receivable of
$10,872,000 in connection with the sale. The shares issued in exchange
for the notes receivable have been offset against stockholders' equity
on the accompanying balance sheet.
SERIES A PREFERRED SHARES
On July 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 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:
F-14
<PAGE> 33
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
8. CAPITAL STOCK, CONTINUED:
1. The new preferred shares will be convertible into common
stock at the election of the Company upon the earlier to occur
of the following: (a) six months after the listing of the
Company's common stock on a national securities exchange
(including the New York Stock Exchange, American Stock Exchange
or Nasdaq), or (b) March 31, 2000.
2. Certain voting rights provided to the holders with
respect to future issuances of common stock will be removed.
OPTIONS
The Company adopted the 1998 Stock Option Plan (the "Option Plan") for
executive officers and other key employees of the Company. The aggregate
number of shares issuable upon exercise of options under the Option Plan
may not exceed 5,250,380 shares and are exercisable for 10 years from
the date of grant. The exercise price of stock options may not be less
than 100% of the fair market value of the stock on the date of grant.
In 1998, 1,900,000 options were granted under the Stock Option plan with
an exercise price of $5.00 and 1,900,000 options were granted with an
exercise price of $10.00. The options vest over five years and expire at
various dates through December 2006. All of the options were issued to
officers or affiliates of the Company.
SFAS No. 123, Accounting for Stock-Based Compensation, requires either
the recording or disclosure of compensation cost for stock-based
employee compensation plans at fair value. The Company has adopted the
disclosure-only provisions of SFAS No. 123. Accordingly, no compensation
costs have been recognized by the Company. Had compensation cost for the
Company's stock option plan been recognized based on the fair value at
the grant date for awards consistent with the provisions of SFAS No.
123, the Company's net income in 1998 would have been reduced by
$5,705,000 from $1,735,000 ($0.11 per share - basic, and $0.07 per share
- diluted) to a net loss of $3,970,000 ($0.25 per share - basic, and
$0.15 per share - diluted).
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used: expected volatility of 36.56%;
risk-free interest rate of 5.54% to 5.70%; expected life of 6 years; and
dividend yield of 0.00%.
EARNINGS PER SHARE (EPS)
In accordance with the disclosure requirements of SFAS No. 128 (Note 1),
a reconciliation of the numerator and denominator of basic and diluted
EPS is provided as follows (in thousands, except per share amounts).
F-15
<PAGE> 34
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
8. CAPITAL STOCK, CONTINUED:
<TABLE>
<CAPTION>
INCEPTION
(NOV. 17, 1997)
TO JULY 31, 1998
----------------
<S> <C>
BASIC EPS
NUMERATOR:
Net income $ 1,735
=======
DENOMINATOR:
Weighted average of common shares outstanding 15,842
=======
EARNINGS PER SHARE: $ 0.11
=======
DILUTED EPS
NUMERATOR:
Net income $ 1,735
=======
DENOMINATOR:
Weighted average of common shares outstanding 15,842
Effect of diluted securities:
Preferred A Shares 10,142
-------
25,984
=======
EARNINGS PER SHARE: $ 0.07
=======
</TABLE>
9. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amount paid for interest in 1998 was approximately $1,648,000 of
which approximately $267,000 was capitalized as construction costs.
On March 31, 1998, Excel spun-off certain assets to the Company in the
form of a dividend and note payable (Notes 1 and 2). Also on March 31,
1998, common shares were issued to certain officers of the Company in
exchange for cash and $10,872,000 in notes receivable (Note 4). During
the period from inception (November 17, 1997) to July 31, 1998, the
Company borrowed $35,523,000 in notes payable in connection with the
construction of the AMC theaters.
In May 1998, the Company issued 850,000 shares of common stock in
connection with the acquisition of TenantFirst (Note 5). The market
value of the shares issued was approximately $3,400,000.
10. FINANCIAL INSTRUMENTS AND CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of risk consist principally of cash, accounts receivable
and notes receivable. From time to time, the Company's cash balances
with any one financial institution may exceed Federal Deposit Insurance
limits. The following fair value disclosure was determined by the
Company, using available market information and discounted cash flow
analyses as of July 31, 1998. However, considerable judgement is
necessary to interpret market data and to develop the related estimates
of fair value. Accordingly,
F-16
<PAGE> 35
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
10. FINANCIAL INSTRUMENTS AND CREDIT RISK, CONTINUED:
the estimates presented are not necessarily indicative of the amounts
that the Company could realize upon disposition. The use of different
estimation methodologies may have a material effect on the estimated
fair value amounts. The Company believes that the carrying values
reflected in the Consolidated Balance Sheet at July 31, 1998
approximates the fair values for cash, accounts receivable and payable,
notes receivable and mortgages payable.
At July 31, 1998 the Company's three largest tenants accounted for
approximately 20%, 15%, and 5%, respectively, of total revenues for the
period ended July 31, 1998. At July 31, 1998, the Company owned 31
properties located in 11 states of which 14 properties were located in
Arizona.
11. RELATED PARTY TRANSACTIONS:
The Company shares certain employees with New Plan Excel Realty
Corporation ("New Plan Excel"), formerly Excel. The shared employees are
paid by New Plan Excel and reimbursed by the Company based upon a
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 period ended
July 31, 1998, approximately $170,000 was paid by the Company for these
services. Additionally, approximately $24,000 was paid by the Company to
New Plan Excel as reimbursement for various operating expenses.
12. MINIMUM FUTURE RENTALS:
The Company leases its operating properties under noncancelable
operating leases generally requiring the tenant to pay a minimum rent.
The leases generally either (i) require the tenant to pay all expenses
of operating the property such as insurance, property taxes, and
structural repairs and maintenance, or (ii) require the tenant to
reimburse the Company for the tenant's share of real estate taxes and
other common area maintenance expenses or for the tenant's share of any
increase in expenses over a base year. Minimum future rental revenue for
the next five years for the retail commercial real estate owned at July
31, 1998 and subject to noncancelable operating leases is as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------
<S> <C>
1999 $ 11,191
2000 11,536
2001 11,425
2002 11,190
2003 10,971
Thereafter 110,590
</TABLE>
F-17
<PAGE> 36
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data is as follows (in thousands except
per share amounts):
<TABLE>
<CAPTION>
TOTAL PER SHARE- PER SHARE-
REVENUES NET INCOME BASIC DILUTED
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
First quarter $ -- $ -- $ -- $ --
Second quarter -- -- -- --
Third quarter 1,343 363 0.03 0.02
Fourth quarter 6,802 1,372 0.04 0.03
</TABLE>
F-18
<PAGE> 37
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE PERIOD FROM INCEPTION (NOVEMBER 17, 1997) TO JULY 31, 1998
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
---------- ----------
ACCOUNTS
BALANCE AT CHARGED TO RECEIVABLE BALANCE AT
BEGINNING BAD DEBT WRITTEN END OF
DESCRIPTION OF YEAR EXPENSE OFF YEAR
----------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Allowance for bad debts: $ -- $ 16 $ 2 $ 14
====== ====== ====== ======
</TABLE>
F-19
<PAGE> 38
EXCEL LEGACY CORPORATION AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
JULY 31, 1998
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
NET COST
CONSOLIDATED (SOLD)
SUBSEQUENT TO
INITIAL COST ACQUISITION
----------------------- -----------------------
BUILDINGS AND BUILDINGS AND
DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS
- ----------- ------------ ---- ------------ ---- ------------
<S> <C> <C> <C> <C> <C>
Scottsdale Galleria
Scottsdale, AZ $ -- $ 1,755 $ 13,077 $ -- $ --
Scottsdale City Centre
Scottsdale, AZ 2,539 2,760 5,126 -- --
Scottsdale Towers Land
Scottsdale, AZ -- 3,743 -- -- --
Brio Restaurant
Scottsdale, AZ -- 563 1,046 -- --
Grand Hotel
Tusayan, AZ -(1) -- 10,021 -- --
Desert Fashion Plaza
Palm Springs, CA -- 3,816 9,772 -- 102
4-S Ranch Land
Rancho Bernardo, CA -- 4,072 -- -- 1,033
Land
Telluride, CO -- 752 -- -- --
Land
Yosemite, -- 600 -- -- --
Land
Rancho Bernardo, CA -- 3,623 -- -- --
Wal-Mart Building
Berlin, MI 1,567 680 1,378 -- --
Wal-Mart Building
Decateur, IN 2,330 1,011 2,050 -- --
Wal-Mart Building
Big Rapids, MI 2,249 1,042 2,133 -- --
Wal-Mart Building
Wysomming. PA 4,528 2,118 4,294 -- --
Wal-Mart Building
Brighton, CO 2,285 1,069 2,167 -- --
Wal-Mart Building
Wabash, IN 2,496 1,168 2,367 -- --
Lowes Building
Terre Haute, IN 3,716 1,855 3,037 -- --
Wal-Mart Building
Orland Hills, IL 5,922 2,631 5,372 -- --
Wal-Mart Building
Temple, TX 4,195 1,563 3,979 -- --
Lowe's Building
Middletown, OH 3,951 2,187 3,646 -- --
Millenia Car Washes (2)
Phoenix, AZ -- 3,117 13,572 -- --
AMC Theater
Highlands Ranch, CO 18,067 5,800 18,736 -- --
AMC Theater
Westminster, CO 18,869 5,750 19,761 -- --
-------- -------- -------- -------- --------
$ 72,714 $ 51,675 $121,534 $ -- $ 1,135
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
LIFE ON WHICH
GROSS AMOUNT AT WHICH DEPRECIATION
CARRIED AT CLOSE OF PERIOD IN LATEST
---------------------------------- ACCUMULATED INCOME
BUILDINGS AND TOTAL DEPRECIATION DATE OF DATE STATEMENTS IS
DESCRIPTION LAND IMPROVEMENTS (a) (b) CONSTRUCTION ACQUIRED COMPUTED
- ----------- ---- ------------ --- --- ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Scottsdale Galleria
Scottsdale, AZ 1,755 $ 13,077 $ 14,832 $ 123 (3) 1998 40 years
Scottsdale City Centre
Scottsdale, AZ 2,760 5,126 7,886 48 1982 1998 40 years
Scottsdale Towers Land
Scottsdale, AZ 3,743 -- 3,743 -- -- 1998 --
Brio Restaurant
Scottsdale, AZ 563 1,046 1,609 10 1975 1998 40 years
Grand Hotel
Tusayan, AZ -- 10,021 10,021 35 1998 1998 40 years
Desert Fashion Plaza
Palm Springs, CA 3,816 9,874 13,690 51 1967 1998 40 years
4-S Ranch Land
Rancho Bernardo, CA 4,072 1,033 5,105 -- (3) 1998 --
Land
Telluride, CO 752 -- 752 -- -- 1998 --
Land
Yosemite, 600 -- 600 -- -- 1998 --
Land
Rancho Bernardo, CA 3,623 -- 3,623 -- -- 1998 --
Wal-Mart Building
Berlin, MI 680 1,378 2,058 13 1992 1998 40 years
Wal-Mart Building
Decateur, IN 1,011 2,050 3,061 19 1992 1998 40 years
Wal-Mart Building
Big Rapids, MI 1,042 2,133 3,175 20 1992 1998 40 years
Wal-Mart Building
Wysomming. PA 2,118 4,294 6,412 40 1992 1998 40 years
Wal-Mart Building
Brighton, CO 1,069 2,167 3,236 20 1992 1998 40 years
Wal-Mart Building
Wabash, IN 1,168 2,367 3,535 22 1992 1998 40 years
Lowes Building
Terre Haute, IN 1,855 3,037 4,892 28 1993 1998 40 years
Wal-Mart Building
Orland Hills, IL 2,631 5,372 8,003 50 1992 1998 40 years
Wal-Mart Building
Temple, TX 1,563 3,979 5,542 37 1992 1998 40 years
Lowe's Building
Middletown, OH 2,187 3,646 5,833 34 1993 1998 40 years
Millenia Car Washes (2)
Phoenix, AZ 3,117 13,572 16,689 68 1976-1990 1998 25 years
AMC Theater
Highlands Ranch, CO 5,800 18,736 24,536 176 1998 1998 40 years
AMC Theater
Westminster, CO 5,750 19,761 25,511 145 1998 1998 40 years
------- -------- -------- -------
51,675 $122,669 $174,344 $ 939
======= ======== ======== =======
</TABLE>
(1) This property is on a land lease with a cost of $2,351 which is not
included above.
(2) These represent nine car washes located in Phoenix, Arizona.
(3) Property is currently being redeveloped.
[a] Reconciliation of total real estate carrying value is as follows:
<TABLE>
<S> <C>
Balance at inception (November 17, 1997): $ --
Acquisitions: 173,209
Improvements and other additions: 1,135
--------
Balance at July 31, 1998: $174,344
========
Total cost for federal income tax purposes
at the end of each year $190,732
========
</TABLE>
[b] Reconciliation of accumulated depreciation is as follows:
<TABLE>
<S> <C>
Balance at inception (November 17, 1997): $ --
Depreciation expense: 939
--------
Balance at July 31, 1998: $ 939
========
</TABLE>
F-20
<PAGE> 39
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Excel Legacy Corporation
We have audited the accompanying combined balance sheets of Excel Legacy
Corporation Asset Group (the "Portfolio"), as defined in Note 1, as of July 31,
1997 and 1996 and the related combined statements of operations, changes in
investment by Excel Realty Trust, Inc. and cash flows for each of the three
years in the period ended July 31, 1997. These financial statements are the
responsibility of the Portfolio's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above
present fairly, in all material respects, the combined financial position of
Excel Legacy Corporation Asset Group as of July 31, 1997 and 1996 and the
combined results of their operations and their cash flows for each of the three
years in the period ended July 31, 1997, in conformity with generally accepted
accounting principles.
As more fully described in Note 1, certain general and administrative
expenses were paid by Excel Realty Trust, Inc. and allocated to the Portfolio
principally based on Excel Realty Trust, Inc.'s specific identification of
individual cost items based upon estimated levels of effort devoted by its
corporate administrative departments. We have reviewed the methods and
documentation used in allocating such amounts and, in the circumstances, we
believe the methods used are reasonable and the documentation appropriate.
However, if the Portfolio had operated as a separate entity, actual expenses
might have been different.
PricewaterhouseCoopers LLP
San Diego, California
November 24, 1997
F-21
<PAGE> 40
EXCEL LEGACY CORPORATION ASSET GROUP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Real estate:
Land ..................................................... $ 15,324 $ 15,324
Buildings ................................................ 34,789 34,789
Real estate under development ............................ 13,888 14,060
Leasehold interest ....................................... -- --
Accumulated depreciation ................................. (2,953) (3,823)
-------- --------
Net real estate ........................................ 61,048 60,350
Notes receivable ........................................... 1,050 21,958
Interest receivable ........................................ 71 1,379
Other assets ............................................... -- --
-------- --------
$ 62,169 $ 83,687
======== ========
LIABILITIES AND INVESTMENT BY EXCEL REALTY TRUST, INC
Liabilities:
Mortgages payable ........................................ $ 36,754 $ 35,115
Interest payable ......................................... 253 228
Other liabilities ........................................ -- --
-------- --------
Total liabilities ...................................... 37,007 35,343
Commitments and contingencies .............................. -- --
Investment by Excel Realty Trust, Inc. ..................... 25,162 48,344
-------- --------
$ 62,169 $ 83,687
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-22
<PAGE> 41
EXCEL LEGACY CORPORATION ASSET GROUP
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEARS ENDED JULY 31, MARCH 31,
---------------------------------- --------------------
1995 1996 1997 1997 1998
------ ------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Rental revenue .................... $5,897 $4,937 $4,937 $3,291 3,757
Interest .......................... -- 95 1,458 694 1,757
------ ------ ------ ------ ------
Total revenue ................... 5,897 5,032 6,395 3,985 5,514
------ ------ ------ ------ ------
Operating expenses:
Interest .......................... 3,185 3,080 2,896 1,999 1,927
Depreciation and amortization ..... 870 870 870 590 643
Administrative expenses ........... 548 563 799 644 453
Property expenses ................. -- -- -- -- 126
------ ------ ------ ------ ------
Total operating expenses ........ 4,603 4,513 4,565 3,223 3,149
------ ------ ------ ------ ------
Income before income taxes .......... 1,294 519 1,830 762 2,365
Provision for income taxes .......... 515 207 729 305 946
------ ------ ------ ------ ------
Net income ........................ $ 779 $ 312 $1,101 $ 457 $1,419
====== ====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-23
<PAGE> 42
EXCEL LEGACY CORPORATION ASSET GROUP
COMBINED STATEMENTS OF CHANGES IN INVESTMENT BY
EXCEL REALTY TRUST, INC.
(IN THOUSANDS)
<TABLE>
<S> <C>
Investment by Excel Realty Trust, Inc. at August 1, 1994 .... $ 17,441
Net income for the year ended July 31, 1995 .............. 779
Net return to Excel Realty Trust, Inc. ................... (276)
--------
Investment by Excel Realty Trust, Inc. at July 31, 1995 ..... 17,944
Net income for the year ended July 31, 1996 .............. 312
Net investment by Excel Realty Trust, Inc. ............... 6,906
--------
Investment by Excel Realty Trust, Inc. at July 31, 1996 ..... 25,162
Net income for the year ended July 31, 1997 .............. 1,101
Net investment by Excel Realty Trust, Inc. ............... 22,081
--------
Investment by Excel Realty Trust, Inc. at July 31, 1997 ..... 48,344
Net income for the eight months ended March 31, 1998 ..... 1,419
Net investment by Excel Realty Trust, Inc. ............... 9,282
--------
Investment by Excel Realty Trust, Inc. at March 31, 1998 .... 59,045
========
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-24
<PAGE> 43
EXCEL LEGACY CORPORATION ASSET GROUP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
EIGHT MONTHS ENDED
YEARS ENDED JULY 31, MARCH 31,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
------- ------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 779 $ 312 $ 1,101 $ 276 $ 1,881
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization .................... 870 870 870 580 643
Change in interest receivable and other
assets ......................................... -- (71) (1,308) (397) (1,676)
Change in interest payable and other
liabilities .................................... (8) (9) (24) (16) 240
------- ------- -------- -------- -------
Net cash provided by operating activities .......... 1,641 1,102 639 443 1,088
------- ------- -------- -------- -------
Cash flows from investing activities:
Net costs paid on real estate held for
development ...................................... -- (5,488) (171) 99 (643)
Cash paid for real estate acquired ................. -- -- -- -- (6,601)
Cash paid for leasehold interest ................... -- -- -- -- (1,790)
Advances for notes receivable ...................... -- (1,050) (20,908) (16,593) (131)
------- ------- -------- -------- -------
Net cash used in investing activities .............. -- (6,538) (21,079) (16,494) (9,165)
------- ------- -------- -------- -------
Cash flows from financing activities:
Principal payments of mortgages payable ............ (1,365) (1,470) (1,641) (776) (1,205)
Net investment by Excel Realty Trust, Inc. ......... (276) 6,906 22,081 16,827 9,282
------- ------- -------- -------- -------
Net cash provided by (used in) financing
activities ....................................... (1,641) 5,436 20,440 16,051 8,077
------- ------- -------- -------- -------
Net increase in cash ................................. -- -- -- -- --
Cash at beginning of period .......................... -- -- -- -- --
------- ------- -------- -------- -------
Cash at end of period ................................ $ -- $ -- $ -- $ -- --
======= ======= ======== ======== =======
</TABLE>
The accompanying notes are an integral part
of the financial statements
F-25
<PAGE> 44
EXCEL LEGACY CORPORATION ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
FORMATION OF THE COMPANY
Excel Legacy Corporation (the "Company"), a Delaware Corporation, was
formed on November 17, 1997 to own, operate and/or develop real estate. Certain
real estate assets ("Excel Legacy Corporation Asset Group") are planned to be
transferred from Excel Realty Trust, Inc. ("Excel") and ERT Development
Corporation ("EDV"), an unconsolidated affiliate of Excel, to the Company. In
September 1997, Excel's Board of Directors approved in principle, a plan for the
distribution (the "Distribution") of Company stock to holders of Excel common
stock. Excel is the sole stockholder of the Company and the Company is currently
considered a qualified REIT subsidiary of Excel.
The following assets were acquired prior to July 31, 1997 and are
scheduled to be transferred to the Company:
- Ten single tenant free-standing buildings with a book value of
$45.8 million and encumbered by mortgages of $35.1 million at
July 31, 1997.
- A 670,000 square foot shopping mall located in Scottsdale,
Arizona which is substantially vacant. The Company intends to
redevelop this property. The book value is $14.7 million at July
31, 1997.
- Four notes receivable related to development projects located
in Arizona (3) and California. The principal amount of the notes
at July 31, 1997 is $22.0 million.
The following additional assets were acquired subsequent to July 31,
1997 and are scheduled to be transferred to the Company:
- A single-tenant free-standing building with a book value of
$1.6 million and unencumbered at July 31, 1997.
- An office building containing 64,000 square feet located in
Scottsdale, Arizona. This building was acquired in October 1997
for $7.9 million. At July 31, 1997 the property has a book value
of approximately $7.9 million and is encumbered by a mortgage of
$2.8 million.
- A leasehold interest in 6.5 acres of land located in Tusayan,
Arizona. The leasehold interest was acquired in November 1997
for approximately $1.8 million and has a term of 50 years with
two 10-year renewal options.
Other assets may be transferred to the Company as the Boards of the
Company and Excel deem appropriate. The Company's authorized stock consists of
150,000,000 shares of $.01 par value common stock and 50,000,000 shares of $.01
par value preferred stock.
BASIS OF PRESENTATION
These financial statements present the financial position, results of
operations, and cash flows for the Excel Legacy Corporation Asset Group,
hereafter referred to as the Company, as if it were a separate entity of Excel
for all periods presented. Excel and EDV's historical basis in the assets and
liabilities has
F-26
<PAGE> 45
EXCEL LEGACY CORPORATION ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND BASIS OF PRESENTATION, CONTINUED:
been carried over. Changes in investment by Excel represent the net income of
the Company plus the net change in cash and non-cash items transferred between
the Company and Excel.
The combined financial statements include assets, liabilities and
operations to be transferred to the Company in connection with the acquisition
of assets from Excel and EDV. All significant intercompany accounts have been
eliminated. Certain general and administrative expenses were paid by Excel and
allocated to the Company, principally based on Excel's specific identification
of individual cost items based upon estimated levels of effort devoted by its
corporate administrative departments. Expense amounts allocated to
administrative expenses were $799,000, $563,000 and $548,000 for each of the
years ended July 31, 1997, 1996 and 1995, respectively. In the opinion of
management, the methods for allocating corporate administrative expenses are
reasonable.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
REAL ESTATE
Land, buildings and real estate under development are recorded at cost.
Depreciation is computed using the straight-line method over estimated useful
lives of 40 years for buildings. The leasehold interest is being amortized over
the initial lease term of 50 years using the straight-line method. Expenditures
for maintenance and repairs are charged to expense as incurred and significant
renovations are capitalized. Direct costs incurred for properties under
development or redevelopment are capitalized and depreciation is not charged to
the property until the project is completed.
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 these factors indicate that there
has been a permanent impairment in the value of its real estate, the Company
estimates the future cash flows expected to result from the operations of the
property and its eventual disposition. If the sum of the expected future cash
flows (undiscounted and without interest charges) is less than the carrying
amount of the property, the Company will recognize a permanent impairment loss,
equal to the amount by which the carrying amount of the property exceeds the
fair value of the property.
INCOME TAXES
The Company's income tax provision is determined as if the Company had
paid income tax on taxable income on a separate company basis. Taxes payable are
charged directly against the investment by Excel. The Company's income tax
provision, all of which is current, is based on income before taxes. Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities of their financial
reporting amounts at each year end based on enacted laws and statutory tax rates
applicable to the years in which the differences are expected to affect taxable
income. There are no significant timing differences between financial reporting
and taxable income and as such, the Company has not recorded any deferred income
tax assets or liabilities.
F-27
<PAGE> 46
EXCEL LEGACY CORPORATION ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
REVENUE RECOGNITION
Base rental revenue is recognized on the straight-line basis, which
averages annual minimum rents over the terms of the leases. The leases also
provide that the tenant directly pay all of the common area maintenance and
other operating expenses.
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.
CONCENTRATION OF CREDIT RISK
As of July 31, 1997, eight of the 12 operating properties held by the
Company are leased to Wal-Mart. Rents from these stores account for
approximately 65% of the Company's scheduled rental revenue. Two of the
operating properties, which account for 21% of scheduled rental revenue, are
leased to Lowe's. While the financial position of the Company may be adversely
affected by financial difficulties experienced by Wal-Mart, the Company has not
experienced any such events. Wal-Mart and Lowe's are publicly-traded companies,
and financial and other information regarding these companies is on file with
the Securities and Exchange Commission.
Additionally, two of the Company's notes receivable which account for
95.0% of the Company's scheduled interest revenue at July 31, 1997 are with the
same developer. EDV is committed to provide up to approximately $9,000,000 in
additional advances related to these notes.
3. REAL ESTATE:
The financial statements include 11 single tenant free-standing
buildings which are located in Arizona, Colorado, Illinois, Indiana (3),
Michigan, Ohio, Pennsylvania, Texas, and Wisconsin and an office building in
Arizona. Eight of the buildings are leased by Wal-Mart and two of the buildings
are leased by Lowe's. The financial statements also include a leasehold interest
in land located in Arizona.
REAL ESTATE UNDER DEVELOPMENT
The financial statements include a property located in Scottsdale,
Arizona that is under redevelopment. The shopping center is substantially vacant
with large amounts of demolition having occurred. Depreciation expense is no
longer being charged to the property and costs incurred during redevelopment are
being capitalized.
F-28
<PAGE> 47
EXCEL LEGACY CORPORATION ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES RECEIVABLE:
The Company holds a $16,593,000 mortgage loan receivable from a
developer and owner of a shopping center located in Scottsdale, Arizona. The
borrower intends to redevelop the property through the acquisition of adjoining
parcels and the construction of certain improvements. The loan was originated in
December 1996, and matures upon the sale of the property and bears interest at
the rate of 12.0%. In addition, the borrower must pay the Company a "profits
participation" equal to 50.0% of the profits generated by the property. The loan
is non-recourse and repayment of the loan is collateralized by a first mortgage
on the property. Interest receivable at July 31, 1997 and July 31, 1996 is
$1,193,000 and $0, respectively.
Summarized unaudited financial statements as of and for the twelve
months ended December 31, 1997 for the shopping center are as follows:
<TABLE>
<CAPTION>
BALANCE SHEET:
<S> <C>
Real estate, net of depreciation ........................ $ 15,445,000
Other assets ............................................ 1,741,000
------------
$ 17,186,000
============
Notes payable to the Company ............................ $ 16,593,000
Other liabilities ....................................... 2,365,000
------------
18,958,000
Partners' deficit ....................................... (1,772,000)
------------
$ 17,186,000
============
STATEMENT OF OPERATIONS:
Total revenues .......................................... $ 3,293,000
Operating expenses:
Property ............................................ (1,737,000)
Interest ............................................ (1,945,000)
Depreciation ........................................ (322,000)
Amortization ........................................ (251,000)
------------
Net operating loss .............................. $ (962,000)
============
</TABLE>
The Company holds a $4,290,000 promissory note receivable from a developer and
owner of an eight story office building in downtown Phoenix, Arizona. The loan
was originated in May 1997 and matures upon the sale of the property by the
borrower. Until maturity, the loan bears interest at 11.0% per annum. In
addition, the borrower must pay the Company a "profits participation" equal to
50.0% of the profits generated by the property. The loan is non-recourse and
repayment of the loan is collateralized by a first mortgage on the property.
Interest receivable was $84,000 and $0 at July 31, 1997 and July 31, 1996,
respectively.
F-29
<PAGE> 48
EXCEL LEGACY CORPORATION ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES RECEIVABLE, CONTINUED:
The Company holds a $1,050,000 promissory note receivable from an owner
of a land parcel located in Arizona. The loan originated in October 1995 and
matures in September 1998. Until the maturity date, the borrower is to pay
interest at the rate of 7.0% per annum. In addition, upon maturity, prepayment
or acceleration of the note, the borrower must pay additional interest from
October 1995 on the principal amount of the note at the rate of 3.0% per annum.
The note is non-recourse and repayment of the loan is collateralized by a first
mortgage on the property.
At July 31, 1997, the Company has approximately $156,000 in notes
receivable from a developer relating to predevelopment expenses of a property
located in San Diego, California. The outstanding amounts related to these
advances bear interest at the rate of 12.0%. EDV is committed to provide up to
$2,500,000 in total advances related to this project.
5. MORTGAGES PAYABLE:
Ten of the Company's single free-standing buildings are encumbered by
mortgages. The Company's office building is encumbered by a 8.125% mortgage due
in 2006. Interest rates on the properties range from 7.625% to 8.75% and mature
on various dates to 2014. Monthly payments at July 31, 1997 total $405,000. The
loans are non-recourse and repayment of the loans by the Company is
collateralized by a first mortgage on the properties.
The principal payments required to be made on mortgages payable are as
follows (in thousands):
<TABLE>
<CAPTION>
Year
----
<S> <C>
1998..........................................................$ 2,026
1999.......................................................... 2,182
2000.......................................................... 2,353
2001.......................................................... 2,538
2002.......................................................... 2,743
Thereafter.................................................... 25,974
</TABLE>
6. MINIMUM FUTURE RENTALS:
The Company leases its properties to tenants 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.
Minimum future rental revenue for the next five years is as follows (in
thousands):
<TABLE>
<CAPTION>
Year
----
<S> <C>
1998..........................................................$ 5,684
1999.......................................................... 5,519
2000.......................................................... 5,411
2001.......................................................... 5,268
2002.......................................................... 5,070
Thereafter.................................................... 62,239
</TABLE>
F-30
<PAGE> 49
EXCEL LEGACY CORPORATION ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
7. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE:
The amounts paid for interest during the years ended July 31, 1997, 1996
and 1995 were $2,920,000, $3,089,000, and $3,193,000, respectively.
8. NEW PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings per Share and SFAS No.
129, Disclosure of Information about Capital Structure, which become effective
for periods after December 15, 1997 and SFAS No. 131, Disclosures about Segments
in an Enterprise and Related Information and SFAS No. 130, Comprehensive Income,
which become effective in 1998. The Company has determined that the adoption of
these SFASs will not have a material effect on the consolidated financial
statements.
9. INTERIM FINANCIAL INFORMATION (UNAUDITED):
The accompanying combined statements of operations of changes in
investment by Excel Realty Trust, Inc. and of cash flows for each of the
eight-month periods ended March 31, 1998 and 1997 are unaudited but include all
adjustments (consisting only of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the operating results and cash
flows of such periods. Interim results are not necessarily indicative of results
for the entire year or future periods.
F-31
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-79673) of our report dated October 22, 1998
relating to the consolidated financial statements and financial statement
schedules of Excel Legacy Corporation, which appear in Excel Legacy
Corporation's annual report on Form 10-K/A for the period from inception
(November 17, 1997) to July 31, 1998. We also consent to the incorporation by
reference in the Registration Statement on Form S-3 (No. 333-79673) of our
report dated November 24, 1997 relating to the combined financial statements of
Excel Legacy Asset Group, which appear in Excel Legacy Corporation's annual
report on Form 10-K/A for the period from inception (November 17, 1997) to July
31, 1998.
/s/ PricewaterhouseCoopers LLP
San Diego, California
July 26, 1999
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