-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, B0UOvvsW4SwPmkbELEoe/hYpYxuT7eUDF84NqQL0xuo3RZbfhKo5l2CmKnFwZKZk Ffxo3S7XVxNht9ehDfJdMA== 0000936392-99-000168.txt : 19990215 0000936392-99-000168.hdr.sgml : 19990215 ACCESSION NUMBER: 0000936392-99-000168 CONFORMED SUBMISSION TYPE: 10-QT PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXCEL LEGACY CORP CENTRAL INDEX KEY: 0001050671 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE DEALERS (FOR THEIR OWN ACCOUNT) [6532] IRS NUMBER: 330781747 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-QT SEC ACT: SEC FILE NUMBER: 001-14609 FILM NUMBER: 99536698 BUSINESS ADDRESS: STREET 1: 16955 VIA DEL CAMPO STREET 2: SUITE 100 CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 6194859400 MAIL ADDRESS: STREET 1: 16955 VIA DEL CAMPO STREET 2: 16955 VIA DEL CAMPO CITY: SAN DIEGO STATE: CA ZIP: 92127 10-QT 1 FORM 10-Q TRANSITION REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM AUGUST 1, 1998 TO DECEMBER 31, 1998 Commission File Number: 0-23503 EXCEL LEGACY CORPORATION (Exact name of registrant as specified in its charter)
DELAWARE 33-0781747 (State of incorporation) (IRS Employer Identification Number)
16955 VIA DEL CAMPO, SUITE 240, SAN DIEGO, CALIFORNIA 92127 (Address of principal executive offices) Registrant's telephone number: (619) 485-9400 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. Class Outstanding at February 11, 1999 - ------------------------------------- --------------------------------- Common Stock, $.01 par value 33,457,804 2 EXCEL LEGACY CORPORATION INDEX FORM 10-Q ----------
PAGE ---- PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Balance Sheets December 31, 1998 (Unaudited) July 31, 1998......................................................................................3 Consolidated Statements of Income (Unaudited) Five Months Ended December 31, 1998................................................................4 Consolidated Statements of Changes in Stockholders' Equity (Unaudited) Five Months Ended December 31, 1998................................................................5 Consolidated Statements of Cash Flows (Unaudited) Five Months Ended December 31, 1998................................................................6 Notes to Financial Statements (Unaudited).............................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................................14 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................................................19
2 3 EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts) ----------
DECEMBER 31, 1998 JULY 31, (UNAUDITED) 1998 --------- --------- ASSETS Real estate: Land $ 54,915 $ 51,675 Buildings 136,118 122,669 Leasehold interests 2,351 2,351 Accumulated depreciation (2,506) (939) --------- --------- Net real estate 190,878 175,756 Cash 1,387 11,491 Accounts receivable, less allowance for bad debts of $34 and and $14 at December 31 and July 31 1998, respectively 204 732 Notes receivable 23,204 23,171 Investment in partnerships 11,423 11,138 Interest receivable 5,341 3,889 Pre-development costs 13,569 6,662 Other assets 9,087 7,757 Deferred tax asset 6,203 6,320 --------- --------- $ 261,296 $ 246,916 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Mortgage and notes payable $ 90,986 $ 72,714 Accounts payable and accrued liabilities 2,604 5,680 Other liabilities 220 1,750 --------- --------- Total liabilities 93,810 80,144 --------- --------- Commitments and contingencies -- -- Minority interests 846 853 --------- --------- Stockholders' equity: Series A Preferred stock, $.01 par value, 50,000,000 shares authorized, 21,281,000 shares issued and outstanding 213 213 Common stock, $.01 par value, 150,000,000 shares authorized, 33,457,804 shares issued and outstanding 335 335 Additional paid-in capital 174,508 174,508 Retained earnings 2,456 1,735 Notes receivable from affiliates for common shares (10,872) (10,872) --------- --------- Total stockholders' equity 166,640 165,919 --------- --------- $ 261,296 $ 246,916 ========= =========
The accompanying notes are an integral part of the financial statements 3 4 EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME - UNAUDITED FIVE MONTHS ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ----------
Revenue: Rental $ 5,515 Operating income 7,670 Interest income 1,573 Partnership income and other revenues 252 ------- Total revenue 15,010 ------- Operating expenses: Interest 2,645 Depreciation and amortization 1,918 Property operating expenses 1,646 Operating expenses 4,904 General and administrative 2,641 ------- Total operating expenses 13,754 ------- Income before income taxes 1,256 Provision for income taxes 535 ------- Net income $ 721 ======= Basic net income per share $ 0.02 ======= Diluted net income per share $ 0.01 =======
The accompanying notes are an integral part of the financial statements 4 5 EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED FIVE MONTHS ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT NUMBER OF SHARES) ----------
SERIES A PREFERRED STOCK COMMON STOCK NUMBER AMOUNT NUMBER AMOUNT ----------- ----------- ----------- ----------- Balance at August 1, 1998 21,281,000 $ 213 33,457,804 $ 335 Net income -- -- -- -- ----------- ----------- ----------- ----------- Balance at December 31, 1998 21,281,000 $ 213 33,457,804 $ 335 =========== =========== =========== ===========
ADDITIONAL AFFILIATE TOTAL PAID-IN RETAINED NOTES STOCKHOLDERS' CAPITAL EARNINGS RECEIVABLE EQUITY ----------- ----------- ----------- ----------- Balance at August 1, 1998 $ 174,508 $ 1,735 $ (10,872) $ 165,919 Net income -- 721 -- 721 ----------- ----------- ----------- ----------- Balance at December 31, 1998 $ 174,508 $ 2,456 $ (10,872) $ 166,640 =========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements 5 6 EXCEL LEGACY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - UNAUDITED FIVE MONTHS ENDED DECEMBER 31, 1998 (IN THOUSANDS) ---------- Cash flows from operating activities: Net income $ 721 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 1,918 Provision for bad debts 20 Minority interest in partnerships (7) Changes in accounts receivable and other assets (2,208) Changes in accounts payable and other liabilities (4,489) -------- Net cash used by operating activities (4,045) -------- Cash flows from investing activities: Real estate construction costs paid (1,489) Investment in partnerships (285) Pre-development costs paid (6,907) -------- Net cash used in investing activities (8,681) -------- Cash flows from financing activities: Principal payments of mortgages payable (1,378) Borrowings from credit facility 4,000 Net cash provided by financing activities 2,622 -------- Net decrease in cash (10,104) Cash at August 1, 1998 11,491 -------- Cash at December 31, 1998 $ 1,387 ========
The accompanying notes are an integral part of the financial statements 6 7 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The financial statements reflect all adjustments of a recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial statements. No adjustments were necessary which were not of a normal recurring nature. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to the quarterly reporting rules of the Securities and Exchange Commission. Certain reclassifications have been made to the consolidated financial statements at July 31, 1998 to conform with current period's presentation. These financial statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company's July 31, 1998 Form 10-K. ORGANIZATION Excel Legacy Corporation (the "Company"), a Delaware corporation was formed on November 17, 1997. The Company was originally a wholly-owned subsidiary of Excel Realty Trust, Inc. ("Excel"), a Maryland corporation and a self-administered, self-managed real estate investment trust ("REIT"), now known as New Plan Excel Realty Trust, Inc. On March 31, 1998, Excel effected a spin-off of the Company through a special dividend to the holders of common stock of Excel of all of the outstanding common stock of the Company held by Excel (the "Spin-off"). The Company was formed to pursue opportunities available to those investors that are not restricted by the federal income tax laws governing REITs or influenced by Excel's investment and leverage guidelines. In connection with the Spin-off, certain real properties, notes receivable and related assets and liabilities were transferred to the Company from Excel (Note 2). Upon completion of the Spin-off, the Company ceased to be a wholly-owned subsidiary of Excel and began operating as an independent public company. CHANGE IN FISCAL YEAR By unanimous consent dated December 11, 1998, the Board of Directors of the Company adopted a fiscal year-end of December 31, beginning with a short fiscal year ending on December 31, 1998. The Company's previous fiscal year-end was July 31. Accordingly, a transition report for the period from August 1, 1998 through December 31, 1998 is being filed in this Form 10-Q. Although the Company was formed on November 17, 1997, there were no operational results from inception through December 31, 1997 and as such, prior period comparison results have not been presented. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and all significantly owned affiliates. The Company uses the equity method of accounting to account for its investment in a Nova Scotia Company and the Company uses the cost method to account for its investment in Entercitement LLC. REAL ESTATE Certain real estate assets were transferred to the Company from Excel and recorded at Excel's cost. Other real estate assets acquired subsequent to the Spin-off were recorded at the Company's cost. Depreciation is computed using the straight-line method over estimated useful lives of 40 years for Continued 7 8 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: buildings. Expenditures for maintenance and repairs are charged to expense as incurred and significant renovations are capitalized. The Company assesses whether there has been a permanent impairment in the value of its real estate by considering factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include a lessee's ability to pay rent under the terms of the lease. If a property is leased at significantly lower rent, the Company may recognize an impairment loss if the income stream is not sufficient to recover its investment. PRE-DEVELOPMENT COSTS Pre-development costs that are directly related to specific construction projects are capitalized as incurred. The Company expenses these costs to the extent they are unrecoverable or it is determined that the related project will not be pursued. MANAGEMENT CONTRACTS Management contracts are recorded at cost and amortized over a period of seven years. INCOME TAXES The Company uses the asset and liability method to account for income taxes. Deferred income tax assets have been recorded to reflect the future tax benefit of assets acquired from Excel that were recorded at Excel's cost for book purposes and fair market value for tax purposes. DEFERRED LEASING AND LOAN ACQUISITION COSTS Costs incurred in obtaining tenant leases and long-term financing are amortized to other property expense and interest expense, respectively, on the straight-line method over the terms of the related leases or debt agreements. REVENUE RECOGNITION Base rental revenue is recognized on the straight-line basis, which averages annual minimum rents over the terms of the leases. Certain of the leases provide for additional rental revenue by way of percentage rents to be paid based upon the level of sales achieved by the lessee. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Continued 8 9 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" are effective for fiscal years beginning after December 15, 1997. SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and requires restatement of earlier periods presented and had no effect on the Company's consolidated financial statements. SFAS No. 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders (Note 8). 2. SPIN-OFF: On March 31, 1998, Excel transferred certain real estate assets to the Company in exchange for 23,412,580 common shares of the Company, assumption of mortgage debt by the Company, and issuance of a note payable to Excel from the Company which was subsequently repaid. This Spin-off took place through a dividend distribution to Excel's common stockholders, of all the Company's common stock (23,412,580 shares) held by Excel. The distribution consisted of one share of the Company's common stock for each share of Excel's common stock held on the record date of March 2, 1998. The fair market value of the distribution was approximately $55,956,000 or $2.39 per share. While the Company has recorded the acquisition of assets and liabilities at fair market value for tax purposes, the Company has recorded for book purposes, the assets and liabilities at Excel's original book value. The tax effect of the difference between fair market value and book value was $6,528,000 and was recorded as a deferred tax asset. 3. REAL ESTATE: In the five months ended December 31, 1998, Millennia Car Wash, LLC ("Millennia") acquired nine car wash properties for approximately $15,200,000. The acquisition was made through the assumption of various notes payable. There were no other significant acquisitions during the period. 4. MORTGAGES AND NOTES PAYABLE: The Company had $90,986,000 in mortgage and notes payable outstanding at December 31, 1998 at 7.37% to 8.53% with an average interest rate of 7.92%. The mortgages and notes are due on various dates through 2018 and monthly payments approximate $888,000. The mortgages and notes are collateralized by real estate and an assignment of rents. The Company has an unsecured revolving credit facility of $15,000,000 from BankBoston, N.A. (the "Credit Facility") which carries an interest rate of LIBOR plus 2.5% (8.1% at December 31, 1998). The Credit Facility expires in October 1999. Through December 31, 1998, approximately $4,450,000 was outstanding under the Credit Facility. Continued 9 10 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 4. MORTGAGES AND NOTES PAYABLE, CONTINUED: The principal payments required to be made on mortgages and notes payable over the next five years are as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------ 1999 $ 7,445 2000 4,295 2001 4,125 2002 4,461 2003 4,826 Thereafter 65,834 --------- $ 90,986 =========
5. INCOME TAXES: At December 31, 1998, the Company had a net deferred tax asset of $6,203,000. The deferred tax asset primarily relates to the difference between fair market value and book value of the real estate assets acquired from Excel in connection with the Spin-off (Note 2) and is non-current. The offsetting portion of the deferred asset relates to timing differences in recognizing revenue and expenses for tax purposes through operations of the Company. No valuation allowance has been provided against the deferred tax asset as the Company believes future taxable income is more likely than not. The provision for income taxes consists of the following:
FEDERAL STATE ------- ----- Current payable $ 312,000 $ 107,000 Deferred tax expense 82,000 34,000 --------- --------- Provision for income taxes $ 394,000 $ 141,000 ========= =========
6. CAPITAL STOCK: SERIES A PREFERRED SHARES At December 31, 1998, the Company had 21,281,000 shares of Series A Preferred Stock outstanding (the "Preferred A Shares"). Holders of the Preferred A Shares are entitled to receive, when, as and if declared by the Board of Directors, cumulative cash dividends payable in an amount per share equal to the cash dividends, if any, on the shares of common stock into which the Preferred A Shares are convertible. Holders of the Preferred A Shares are also entitled to a liquidation preference of $5.00 per share, plus a premium of 7% per annum, in the event of any liquidation, dissolution or other winding up of the affairs of the Company. Continued 10 11 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 6. CAPITAL STOCK, CONTINUED: The Preferred A Shares are convertible into common stock of the Company at the election of the holders at any time, on a one-for-one basis, subject to adjustment in certain circumstances. The Preferred A Shares also are convertible into common stock by the Company if the closing price of the Company's common stock is equal to or greater than certain milestones for 30 consecutive trading days. Such price milestones were met in May 1998 and on May 18, 1998, the Company took steps to exercise its right to convert all of the Preferred A Shares into common stock, which conversion was expected to take place on August 18, 1998. On August 17, 1998, the Company withdrew its election to convert the Preferred A Shares, and instead the holders and the Company agreed to modify the terms of the Preferred A Shares. The Company decided to effect such modification through the exchange of the Preferred A Shares for new preferred shares of the Company, rather than through an amendment to the Preferred A Shares. The new preferred shares will be substantially similar to the Preferred A Shares, except in the following respects: 1) The new preferred shares will be convertible into common stock at the election of the Company upon the earlier to occur of six months after the listing of the Company's common stock on a national securities exchange (including the American Stock Exchange on which the Company began trading on November 17, 1998), or March 31, 2000. 2) Certain voting rights provided to the holders with respect to future issuances of common stock will be removed. EARNINGS PER SHARE (EPS) A reconciliation of the numerator and denominator of basic and diluted EPS is provided as follows (in thousands, except per share amounts).
FIVE MONTHS ENDED DECEMBER 31, 1998 ----------------- BASIC EPS NUMERATOR: Net income $ 721 ======= DENOMINATOR: Weighted average of common shares outstanding 33,458 ======= EARNINGS PER SHARE: $ 0.02 ======= DILUTED EPS NUMERATOR: Net income $ 721 ======= DENOMINATOR: Weighted average of common shares outstanding 33,458 Effect of diluted securities: Preferred A Shares 21,281 Options 29 ------- 54,768 ======= EARNINGS PER SHARE: $ 0.01 =======
Continued 11 12 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 7. STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE: The amount paid for interest in the five months ended December 31, 1998 was approximately $2,215,000. In the same period, Millennia assumed $15,200,000 of debt in conjunction with the acquisition of nine car wash properties. 8. SEGMENT REPORTING: The Company has a joint venture arrangement with Millennia. As of December 31, 1998, Millennia owned eighteen car wash properties in Arizona and Texas. At December 31, 1998, the Company held 100% of the ownership interest in Millennia. Another party manages the daily operations of Millennia and can earn up to 50% of the ownership interest in Millennia based upon operating results exceeding a 35% return on the Company's investment. The accounts of Millennia are consolidated with the Company's financial statements. The Company is a partner in a joint venture, Grand Tusayan, LLC ("Grand Hotel") for the operation of a hotel and dinner theater and retail shop situated near the south rim entrance to the Grand Canyon National Park in Tusayan, Arizona. At December 31, 1998, the Company's ownership in the Grand Hotel was 65% although the Company was entitled to approximately 98% of the Grand Hotel's operations based upon its equity contributed. The accounts of the Grand Hotel are consolidated with the Company's financial statements. . SFAS No. 131 establishes standards for the way that a public enterprise reports information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports to shareholders (Note 1). The following unaudited information has been provided in accordance with SFAS No. 131 for operations related to Millennia, the Grand Hotel, and all other real estate related activities as of and for the five months ended December 31, 1998 (in thousands):
Other Millennia Grand Hotel Real Estate Total --------- ----------- ----------- ----- Total revenues $ 6,593 $ 833 $ 7,584 $ 15,010 -------- -------- -------- -------- Interest 348 -- 2,297 2,645 Depreciation and amortization 466 260 1,192 1,918 General and administrative 1,705 -- 936 2,641 Operating expenses 3,998 911 1,641 6,550 -------- -------- -------- -------- Total operating expenses 6,517 1,171 6,066 13,754 -------- -------- -------- -------- Income (loss) before income taxes $ 76 $ (338) $ 1,518 $ 1,256 ======== ======== ======== ======== Real estate, net $ 30,038 $ 13,940 $146,900 $190,878 Other assets 5,545 1,736 63,137 70,418 -------- -------- -------- -------- Total assets $ 35,583 $ 15,676 $210,037 $261,296 ======== ======== ======== ======== Mortgages and notes payable $ 15,108 $ -- $ 75,878 $ 90,986 Other liabilities 442 176 2,206 2,824 -------- -------- -------- -------- Total liabilities $ 15,550 $ 176 $ 78,084 $ 93,810 ======== ======== ======== ========
Continued 12 13 EXCEL LEGACY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ---------- 9. RELATED PARTY TRANSACTIONS: In connection with the sale of common stock to certain of the Company's officers and employees, the Company issued $10,872,000 of notes receivable due from certain of the Company's officers. The notes bear interest at 7%, are recourse obligations of the note holders, and are due in March 2003. The total interest receivable at December 31, 1998 from these notes totaled $509,000. The notes have been offset against stockholders' equity on the Company's accompanying Consolidated Balance Sheet. The Company shares certain employees with New Plan Excel Realty Trust, Inc. ("New Plan Excel"), formerly Excel. The shared employees are paid by New Plan Excel and reimbursed by the Company based upon an Administrative Services Agreement which requires the Company to pay New Plan Excel 23% of the salary and bonus of the shared employees as compensation for their services to the Company. For the five months ended December 31, 1998, approximately $261,000 was paid by the Company for these services. Additionally, approximately $29,000 was paid by the Company to New Plan Excel as reimbursement for various operating expenses. 10. MINIMUM FUTURE RENTALS: The Company leases its operating properties, except the Millennia carwash properties and the Grand Hotel property, under noncancelable operating leases generally requiring the tenant to pay a minimum rent. The leases generally either (i) require the tenant to pay all expenses of operating the property such as insurance, property taxes, and structural repairs and maintenance, or (ii) require the tenant to reimburse the Company for the tenant's share of real estate taxes and other common area maintenance expenses or for the tenant's share of any increase in expenses over a base year. Minimum future rental revenue for the next five years for the retail commercial real estate owned at December 31, 1998 and subject to noncancelable operating leases is as follows (in thousands):
YEAR ENDED DECEMBER 31, ----------------------- 1999 $ 11,341 2000 11,417 2001 11,331 2002 11,125 2003 10,951 Thereafter 141,540
13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NATURE OF BUSINESS Excel Legacy Corporation (the "Company"), a Delaware Corporation, was formed on November 17, 1997. The Company was organized to create and realize value by identifying and making opportunistic real estate and other investments through the direct acquisition, rehabilitation, development, financing and management of real properties and/or participation in these activities through the purchase of debt instruments or equity interests of entities in real estate and other businesses. RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Financial Statements and the Notes thereto. The Company was not formed until November 17, 1997 and had no operating results in 1997. As such, comparative results with 1997 are not provided. Five months ended December 31, 1998 Rental revenue was $5.5 million during the period. Ten single tenant properties owned by the Company accounted for $2.1 million of rental revenue. Eight of these properties are leased to Wal-Mart Stores, Inc. ("Wal-Mart") and two of these properties are leased to Lowe's Home Centers, Inc. ("Lowe's"). Two properties in Colorado leased to AMC Multi-Cinema, Inc. ("AMC") accounted for $2.2 million of rental revenue. Additionally, $0.5 million of rental revenue was attributable to a shopping mall located in Palm Springs, California and the remaining $0.7 million of rental revenue was attributable to three properties which were acquired by the Company in conjunction with a redevelopment project in Scottsdale, Arizona. Other operating income totaled $7.7 million in the period. Of this income, $6.6 million related to revenues recognized by Millennia. The Company also recognized $0.8 million of other operating income by the Grand Hotel. Finally, TenantFirst Real Estate Service, Inc., which the Company acquired in May 1998, accounted for $0.3 million of revenues from various management contracts. Interest income was $1.6 million and primarily related to $1.5 million of interest earned on the Company's outstanding notes receivable. In addition, the Company earned $0.1 million of interest income from its cash accounts. Partnership income and other revenues totaled $0.3 million for the five months ended December 31, 1998 and primarily related to the Company's interest in a Nova Scotia unlimited liability company which owns an office building in Canada. Interest expense was $2.6 million and primarily related to the $91.0 million of mortgage and notes payable outstanding at December 31, 1998. Depreciation and amortization expense totaled $1.9 million and primarily related to the $136.1 million of buildings and the $2.4 million of leasehold interests held by the Company at December 31, 1998. Property operating expenses were $1.6 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 $4.9 million in the five months ended December 31, 1998. Expenses of $4.0 million related to Millennia and $0.9 million related to the Grand Hotel. General and administrative expenses were $2.6 million in the period. The general and administrative 14 15 expenses include certain costs charged to the Company by New Plan Excel pursuant to an administrative services agreement providing for the sharing of certain facilities and services. In the five months ended December 31, 1998, such expenses included payment of bonuses to certain officers shared by the Company and New Plan Excel. Additionally, $1.7 million of the expenses related to Millennia. Provision for income taxes was $0.5 million, of which $0.4 million was current expense and $0.1 million was deferred expense primarily relating to the change in the deferred tax asset. The Company calculates Earnings Before Depreciation, Amortization and Deferred Taxes ("EBDADT") as net income, plus depreciation and amortization on real estate and real estate related assets, amortized leasing commission costs and certain non-recurring items. EBDADT does not represent cash flows from operations as defined by generally accepted accounting principles, and may not be comparable to other similarly titled measures of other companies. The Company believes, however, that to facilitate a clear understanding of its operating results, EBDADT should be examined in conjunction with its net income as reductions for certain items are not meaningful in evaluating income-producing real estate. The following information is included to show the items included in the Company's EBDADT for the five months ended December 31, 1998 (in thousands): Net income $ 721 Depreciation and amortization (financial statements) 1,918 Less depreciation of non-real estate assets (43) Deferred tax expense 116 ------- EBDADT $ 2,712 ======= EBDADT per share - basic $ 0.08 ======= EBDADT per share - diluted $ 0.05 =======
LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the total mortgage debt and notes payable of the Company consisted of the following: (i) $24.8 million in mortgages on eight properties leased to Wal-Mart which have fixed interest rates of 7.9% to 8.5%. These mortgages are self-amortizing with the rent being paid by Wal-Mart directly to the mortgage holders. The mortgages will be entirely repaid when the initial terms of the leases with Wal-Mart expire (2008 to 2009). (ii) $7.6 million in mortgages on two properties leased to Lowe's which have fixed interest rates of 7.6% and 8.8%. These mortgages are also self-amortizing over the term of the leases with Lowe's and will be repaid when the leases expire (2003 and 2014). (iii) A $2.3 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) $36.6 million in mortgages on two properties leased to AMC. These mortgages amortize over a period of twenty years which is equivalent to the term of the leases. The mortgages have fixed rates of 7.48% and 7.52%, respectively and mature in 2018. (v) $15.1 million in notes related to the Millennia acquisition of certain car wash properties. Of the notes, $14.8 million have fixed interest rates of 8.5% and are due in fifteen years and $0.4 million have fixed interest rates of 8.0% and are due in two years. All of the Company's mortgage debt and notes payable are non-recourse to the Company. (vi) $4.4 million outstanding on the Company's unsecured $15.0 million credit facility. The facility bears interest at LIBOR plus 2.5% (8.1% at December 31, 1998) and expires in October 1999. (vii) $0.1 million outstanding on a $11.0 million construction loan related to the construction of an office building. Interest on the construction loan varies based upon the Eurodollar and was 8.6% at December 31, 1998. On December 31, 1998, the Company had 21,281,000 shares of Series A Preferred Stock outstanding (the "Preferred A Shares"). Holders of the Preferred A Shares are entitled to receive, when, as and if declared by the Board of Directors, cumulative cash dividends payable in an amount per share equal to the cash dividends, if any, on the shares of common stock into which the Preferred A Shares are convertible. Holders of the Preferred A Shares are also entitled to a liquidation preference of $5.00 per share, plus a premium of 7% per annum, in the event of any liquidation, dissolution or other winding up of the affairs of the Company. 15 16 The Preferred A Shares are convertible into common stock of the Company at the election of the holders at any time, on a one-for-one basis, subject to adjustment in certain circumstances. The Preferred A Shares also are convertible into common stock by the Company if the closing price of the Company's common stock is equal to or greater than certain milestones for 30 consecutive trading days. Such price milestones were met in May 1998 and on May 18, 1998, the Company took steps to exercise its right to convert all of the Preferred A Shares into common stock, which conversion was expected to take place on August 18, 1998. On August 17, 1998, the Company withdrew its election to convert the Preferred A Shares, and instead the holders and the Company agreed to modify the terms of the Preferred A Shares. The Company decided to effect such modification through the exchange of the Preferred A Shares for new preferred shares of the Company, rather than through an amendment to the Preferred A Shares. The new preferred shares will be substantially similar to the Preferred A Shares, except in the following respects: 1) The new preferred shares will be convertible into common stock at the election of the Company upon the earlier to occur of six months after the listing of the Company's common stock on a national securities exchange (including the American Stock Exchange on which the Company began trading on November 17, 1998), or March 31, 2000. 2) Certain voting rights provided to the holders with respect to future issuances of common stock will be removed. Eight of the Company's single tenant properties leased to Wal-Mart do not generate cash flow as rent payments are directly used to service outstanding debt obligations. The Company anticipates that existing cash flow from operations will be adequate to meet the current cash requirements of its operating properties. The Company expects to meet its long-term liquidity requirements, such as property acquisitions and development, mortgage debt maturities, and other investment opportunities, through the most advantageous sources of capital available to the Company at the time, which may include the sale of common stock, preferred stock or debt securities through public offerings or private placements, entering into joint venture arrangements with financial partners, the incurrence of indebtedness through secured or unsecured borrowings and the reinvestment of proceeds from the disposition of assets. YEAR 2000 The Company currently uses Management Reports Inc. ("MRI") software on a Novell local area network. MRI has been modified to accept four digits as the year date and is Year 2000 compliant. The Company has made an assessment of the impact of the Year 2000 issue on its internal operations and has developed a plan to bring its computer systems into compliance by the Year 2000. The plan addresses the modification or replacement of applications and operating systems to achieve timely Year 2000 compliance and also includes communication and analysis with outside vendors with whom the Company interfaces electronically. Although it is not possible to quantify the aggregate cost of such modifications, the Company does not anticipate that the cost will have a material adverse effect on its financial position or results of operations. The foregoing discussion of Year 2000 issues contains forward-looking statements and actual compliance may be affected by a number of factors which include the timing and compliance by the Company's outside vendors and suppliers. This discussion should be read in conjunction with the Company's disclosures under the heading "Certain Cautionary Statements" below. CERTAIN CAUTIONARY STATEMENTS Certain statements in this Form 10-Q may be deemed to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a "safe harbor" for these types of statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results of the Company to be materially different from historical results or from any results expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, the following risks: 16 17 Recently Formed Entity; Lack of Independent Operating History. The Company is a recently-formed entity with no prior operating history. There can be no assurance that the Company will not encounter financial, managerial or other difficulties as a result of its lack of operating history or inability to rely on the financial and other resources of New Plan Excel. Although the Company expects to be able to access capital markets or to seek other financing, there can be no assurance that it will be able to do so at all or in amounts or on terms acceptable to the Company. Reliance on Major Tenants. As of December 31, 1998, the Company's largest tenants were AMC, Wal-Mart, and Lowe's which accounted for approximately 15%, 10% and 3%, respectively, of the Company's total revenues in 1998. The financial position of the Company may be adversely affected by financial difficulties experienced by any of such tenants, or any other major tenant of the Company, including a bankruptcy, insolvency or general downturn in business of any such tenant, or in the event any such tenant does not renew its leases as they expire. Control by Directors and Executive Officers. As of December 31, 1998, executive officers and directors of the Company beneficially owned or had the right to acquire approximately 30% of the Company's outstanding common stock. Accordingly, such persons should continue to have substantial influence over the Company and on the outcome of matters submitted to the Company's stockholders for approval. In addition, such ownership could discourage acquisition of the common stock by potential investors, and could have an anti-takeover effect, possibly depressing the trading price of the common stock. Difficulty of Locating Suitable Investments; Competition. Identifying, completing and realizing on real estate investments has from time to time been highly competitive, and involves a high degree of uncertainty. The Company competes for investments with many public and private real estate companies, including financial institutions (such as mortgage banks, pension funds and REITs) and other institutional investors, as well as individuals. There can be no assurance that the Company will be able to locate and complete investments which will be profitable or that it will be able to fully invest its available capital. Many of those with whom the Company competes for investments are far larger than the Company, may have greater financial resources than the Company and may have management personnel with more experience than the officers of the Company. Acquired Properties May Fail to Perform as Expected and Capital Expenditures May Exceed Estimates. The Company intends to acquire existing properties to the extent they can be acquired on advantageous terms meet the Company's investment criteria. Acquisitions of properties entail general investment risks associated with any real estate investment, including the risk that investments will fail to perform as expected, that estimates of the costs of improvements to bring an acquired property up to standards established for the intended market position may prove inaccurate and that occupancy rates and rents achieved may be less than anticipated. Uncertainty of Cash Flow from Development, Construction and Renovation Activities. The Company also intends to pursue the selective development, construction and renovation of properties for its own account or the account of, or through, entities in which it owns an equity interest as opportunities arise, including without limitation long-term, higher-risk, mixed-use retail entertainment projects and hospitality projects. Risks associated with the Company's development, construction and renovation activities include risks that: the Company may abandon development opportunities after expending resources to determine feasibility; construction and renovation costs of a project may exceed original estimates; occupancy rates and rents at a newly completed property may not be sufficient to make the property profitable; and development, construction, renovation and lease-up may not be completed on schedule (including risks beyond the control of the Company, such as weather or labor conditions or material shortages) resulting in increased debt service expense and construction costs. Development, construction and renovation activities also are subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations. These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could prevent completion of the project which could adversely affect the financial condition and results of operations of the Company. 17 18 Dependence on Real Estate Conditions. The Company's financial condition and results of operations may be adversely affected by a number of factors affecting the real estate market generally, including downturns in the international and domestic general economic climate and local real estate conditions (including oversupply of or reduced demand for space and changes in market rental rates); energy and supply shortages; and increasing operating costs (including real estate taxes and utilities) which may not be passed through to tenants. Dependence on Rental Income from Real Property. The Company's cash flow, results of operations and value of its assets would be adversely affected if a significant number of tenants were unable to meet their lease obligations or if the Company or the owner of a property were unable to lease a significant amount of space in its properties on economically favorable lease terms. There can be no assurance that any tenant whose lease expires in the future will renew such lease or that the Company will be able to re-lease space on economically advantageous terms. Illiquidity of Real Estate Investments. Equity real estate investments are relatively illiquid and therefore tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. In addition, mortgage payments and, to the extent the properties are not subject to triple net leases, certain significant expenditures such as real estate taxes and maintenance costs, are generally not reduced when circumstances cause a reduction in income from the investment. Should such events occur, the Company's results of operations would be adversely affected. A portion of the Company's properties are mortgaged to secure payment of indebtedness, and if the Company were unable to meet its mortgage payments, a loss could be sustained as a result of foreclosure on such properties. Risk of Bankruptcy of Major Tenants. The bankruptcy or insolvency of a major tenant or a number of smaller tenants may have an adverse impact on the properties affected and on the income produced by such properties. Under bankruptcy law, a tenant has the option of assuming (continuing) or rejecting (terminating) any unexpired lease. If the tenant assumes its lease with the Company, the tenant must cure all defaults under the lease and provide the Company with adequate assurance of its future performance under the lease. If the tenant rejects the lease, the Company's claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. The amount of the claim would be capped at the amount owed for unpaid pre-petition lease payments unrelated to the rejection, plus the greater of one years' lease payments or 15% of the remaining lease payments payable under the lease (but not to exceed the amount of three years' lease payments). Potential Environmental Liability Related to the Properties. Under various federal, state and local laws, ordinances and regulations, the Company may be considered an owner or operator of real property or may have arranged for the disposal or treatment of hazardous or toxic substances and, therefore, may become liable for the costs of removal or remediation of certain hazardous substances released on or in its property or disposed of by it, as well as certain other potential costs which could relate to hazardous or toxic substances (including governmental fines and injuries to persons and property). Such liability may be imposed whether or not the Company knew of, or was responsible for, the presence of such hazardous or toxic substances. Changes in Policies Without Stockholder Approval. The investment, financing, borrowing and distribution policies of the Company and its policies with respect to all other activities, growth, debt, capitalization, and operations, are determined by the Company's Board of Directors. Although it has no present intention to do so, the Board of Directors may amend or revise these policies at any time and from time to time at its discretion without a vote of the stockholders of the Company. A change in these policies could adversely affect the Company's financial condition and results of operations. Dependence on Key Personnel. The Company is dependent on the efforts of its executive officers and other key personnel. While the Company believes that it could find replacements for these persons, the loss of their services could have a temporary adverse effect on the operations of the Company. There can be no assurance that the Company will be able to retain these persons or to attract suitable replacements or additional personnel if required. The Company has not obtained key-man insurance for any of its executive 18 19 officers or other key personnel. Possible Conflicts with New Plan Excel. Certain of the Company's executive officers and directors also serve as executive officers and directors of New Plan Excel. None of these members of management is committed to spending a particular amount of time on the Company's affairs, nor do any of them devote their full time to the Company. As a result of these dual roles, there is the potential lack of management attention to the Company which could have an adverse effect on the Company. The Company and New Plan Excel have entered into certain agreements providing for (i) the orderly separation of the Company and New Plan Excel, (ii) the sharing of certain facilities and services, and (iii) the allocation of certain tax and other liabilities. Because the Company and New Plan Excel share certain members of management, conflicts may arise with respect to the operation and effect of these agreements and relationships which could have an adverse effect on the Company if not properly resolved. In this regard, the Company and New Plan Excel have adopted certain policies and procedures to be followed by the Board of Directors of each company to address potential conflicts. In addition, the Company's charter contains a specific purpose clause which identifies at the outset which types of opportunities will be pursued by the Company. This clause provides that the Company's purpose includes performing an intercompany agreement between the Company and New Plan Excel, which prohibits the Company from engaging in certain activities and making certain investments unless New Plan Excel was first offered the opportunity and declined to pursue such activities or investments. It is not anticipated that this first right of refusal will hinder the Company's operations because its formation was intended to focus on those opportunities which New Plan Excel would not otherwise be pursuing. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27.1 Financial Data Schedule (b) Reports on Form 8-K A Current Report on Form 8-K dated December 18, 1998 was filed with the Commission regarding the Company's change in fiscal year. 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EXCEL LEGACY CORPORATION (Registrant) DATE: February 11, 1999 By: /s/ Gary B. Sabin -------------------------------------- GARY B. SABIN President and Chief Executive Officer DATE: February 11, 1999 By: /s/ James Y. Nakagawa -------------------------------------- JAMES Y. NAKAGAWA Principal Financial Officer 20 EX-27.1 2 EXHIBIT 27.1
5 3-MOS DEC-31-1998 AUG-01-1998 DEC-31-1998 1,387,000 0 238,000 (34,000) 0 0 193,384,000 (2,506,000) 261,296,000 0 90,986,000 0 213,000 335,000 166,092,000 261,296,000 0 15,010,000 0 13,754,000 0 20,000 2,645,000 1,256,000 535,000 721,000 0 0 0 721,000 0.02 0.01
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