SECURITIES AND EXCHANGE COMMISSION

 

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTIONS 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

 

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, and (3) is an accelerated filer (as defined in Exchange Act Rule 12 b-2).

 

(1)           Yes ý    No o

 

(2)           Yes ý    No o

 

(3)           Yes o    No ý

 

 

EXCEL PROPERTIES, LTD.

 

INDEX TO FINANCIAL STATEMENTS

 

PART I.  FINANCIAL INFORMATION:
Item 1.  Financial Statements:
Balance Sheets June 30, 2003 (Unaudited) December 31, 2002	3
Statements of Income Three Months Ended June 30, 2003 (Unaudited) Three Months Ended June 30, 2002 (Unaudited) Six Months Ended June 30, 2003 (Unaudited) Six Months Ended June 30, 2002 (Unaudited)	4
Statements of Changes in Partners’ Equity Six Months Ended June 30, 2003 (Unaudited) Six Months Ended June 30, 2002 (Unaudited)	5
Statements of Cash Flows Six Months Ended June 30, 2003 (Unaudited) Six Months Ended June 30, 2002 (Unaudited)	6
Notes to Financial Statements	7
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
PART II.  OTHER INFORMATION	14

 

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EXCEL PROPERTIES, LTD.

 

BALANCE SHEETS

 

		June 30, 2003			December 31, 2002
		(Unaudited)
ASSETS
Real estate:
Land		324,029			599,460
Buildings		756,068			1,169,216
Less:  accumulated depreciation		(396,247		)	(556,664		)
Net real estate		683,850			1,212,012
Cash		367,121			1,181,015
Accounts receivable, less allowance for bad debts of $0 in both 2003 and 2002		8,983			8,983
Notes receivable, net of allowance of $50,000 in both 2003 and 2002		845,162			856,817
Interest receivable and other assets		5,107			5,314
Total assets		$	1,910,223		$	3,264,141
LIABILITIES AND PARTNERS’ EQUITY
Liabilities:
Accounts payable:
Affiliates		$	405		$	466
Total liabilities		405			466
Partners’ equity:
General partner’s equity		17,251			17,035
Limited partners’ equity, 235,308 units authorized, 135,199 units issued and outstanding in 2003 and 2002, respectively.		1,892,567			3,246,640
Total partners’ equity		1,909,818			3,263,675
Total liabilities and partners’ equity		$	1,910,223		$	3,264,141

 

The accompanying notes are an integral part
of the financial statements.

 

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EXCEL PROPERTIES, LTD.

 

STATEMENTS OF INCOME - UNAUDITED

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2003			2002			2003			2002
Revenue:
Rental income		$	14,610		$	70,629		$	68,749		$	137,661
Interest income		17,006			17,783			34,728			37,013
Total revenue		31,616			88,412			103,477			174,674
Expenses:
Depreciation		5,961			12,284			14,734			24,588
Administrative		2,700			2,700			5,400			5,400
Accounting and legal		3,722			2,849			27,180			27,527
Other property and office expenses		3,441			730			5,280			3,193
Management fees		179			706			683			1,413
Total expenses		16,003			19,269			53,277			62,121
Income before real estate sales		15,613			69,143			50,200			112,553
Gain on sale of real estate		—			—			30,505			—
Net income		$	15,613		$	69,143		$	80,705		$	112,553
Net income allocated to:
General partner		$	216		$	814		$	954		$	1,371
Limited partners		15,397			68,329			79,751			111,182
Total		$	15,613		$	69,143		$	80,705		$	112,553
Net income per weighted average limited partnership unit		$	0.12		$	0.51		$	0.48		$	0.83

 

The accompanying notes are an integral part
of the financial statements.

 

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EXCEL PROPERTIES, LTD.

 

STATEMENTS OF CHANGES IN PARTNERS’ EQUITY - UNAUDITED

 

		Six Months Ended June 30
		2003			2002
Balance at January 1		$	3,263,675		$	3,700,201
Net income		80,705			112,553
Partner distributions		(1,434,562		)	(750,002		)
Balance at June 30		$	1,909,818		$	3,062,752

 

The accompanying notes are an integral part
of the financial statements.

 

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EXCEL PROPERTIES, LTD.

 

STATEMENTS OF CASH FLOWS - UNAUDITED

 

		Six Months Ended June 30
		2003			2002
Cash flows from operating activities:
Net income		$	80,705		$	112,553
Adjustments to reconcile net income to net cash provided by operations:
Depreciation		14,734			24,588
Gain on sale of real estate		(30,505		)	—
Changes in operating assets and liabilities:
Decrease in assets:
Accounts receivable		—			3,596
Interest receivable and other assets		247			(844		)
Increase (decrease) in liabilities:
Accounts payable		(61		)	(19,108		)
Net cash provided by operating activities		65,120			120,785
Cash flows from investing activities:
Collection of notes receivable		11,655			11,488
Proceeds from real estate sales		543,893			—
Net cash provided by investing activities		555,548			11,488
Cash flows from financing activities:
Cash distributions		(1,434,562		)	(750,002		)
Net cash used by financing activities		(1,434,562		)	(750,002		)
Net decrease in cash		(813,894		)	(617,729		)
Cash at January 1		1,181,015			917,409
Cash at June 30		$	367,121		$	299,680

 

The accompanying notes are an integral part
of the financial statements.

 

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EXCEL PROPERTIES, LTD.

 

NOTES TO FINANCIAL STATEMENTS - UNAUDITED

 

1.                   Summary of Significant Accounting Policies:

 

The financial statements reflect all adjustments of a recurring nature which are, in the opinion of management, necessary for a fair presentation of the financial statements.  No adjustments were necessary which were not of a recurring nature.  These financial statements should be read in conjunction with the financial statements and accompanying footnotes included in the Partnership’s December 31, 2002 Form 10-K.

 

Organization

 

Excel Properties, Ltd. (“the Partnership”) was formed in the State of California on September 19, 1985, for the purpose of, but not limited to, acquiring real property and syndicating such property.

 

Real Estate

 

Land and buildings are recorded at cost.  Buildings are depreciated using the straight-line method over the tax life of 31.5 years.  The tax life does not differ materially from the economic useful life. Expenditures for maintenance and repairs are charged to expense as incurred.  Significant renovations are capitalized.  The cost and related accumulated depreciation of real estate are removed from the accounts upon disposition.  Gains and losses arising from dispositions are reported as income or expense.

 

The Partnership assesses whether there has been an 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 the 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 a significantly lower rent, the Partnership may recognize a permanent impairment loss if the income stream is not sufficient to recover its investment.

 

Cash Deposits

 

At June 30, 2003, the carrying amount of the Partnership’s cash deposits total $367,121 of which $200,000 was covered by federal depository insurance.

 

Statement of Cash Flows - Supplemental Disclosure

 

There was no interest or taxes paid for the six months ended June 30, 2003 or 2002.  The Partnership also had no non-cash investing or financing transactions for the six months ended June 30, 2003 or 2002.

 

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Income Taxes

 

The Partnership is not liable for payment of any income taxes because as a partnership, it is not subject to income taxes.  The tax effects of its activities accrue directly to the partners.

 

Accounts Receivable

 

All net accounts receivable are deemed to be collectible within the next 12 months.  A note receivable of $50,000 was deemed uncollectible during the year ended December 31, 2002, as the debtor has filed for bankruptcy.  An allowance for bad debts of $50,000 has been established at June 30, 2003 and December 31, 2002 related to this note.

 

Financial Statement 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 and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.

 

Recognition of revenue is dependent upon the quality and ability of the tenants to pay their rent in a timely manner.  Rental revenues include minimum annual rentals, adjusted for the straight-line method for recognition of fixed future increases.  Gain or loss on sale of real estate is recognized when the sales contract is executed, title has passed, payment is received, and the Partnership no longer has continuing involvement in the asset.

 

Derivative Instruments and Hedging Activities

 

The Financial Accounting Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.  SFAS No. 133 establishes a new model for accounting for derivatives and hedging activities, where all derivatives must be recognized as assets and liabilities and measured at fair value.  The Partnership adopted this standard on January 1, 2001 and it did not have a significant impact on the financial statements.

 

Asset Disposal

 

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  SFAS No. 144 addresses financial accounting for the impairment or disposal of long-lived assets and is effective in fiscal years beginning after December 15, 2001. The Partnership’s remaining property is held for sale.  Since there are no other real estate properties, operations from discontinued operations have not been separately identified.

 

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2.                   Fees Paid to General Partner

 

The Partnership has paid the General Partner or its affiliates the following fees for the six  months ended June 30, 2003 and 2002:

 

		2003			2002
Management fees		$	683		$	1,413
Administrative fees		5,400			5,400
Accounting		3,240			3,240

 

 3.                Sale of Property

 

In March 2003, the Partnership sold a property leased to Autoworks, which was located in Bellevue, Nebraska.  The net sale price for the building was $543,893 and a gain of $30,505 was recognized on the sale.

 

There were no property sales in the six months ended June 30, 2002.

 

The following unaudited Pro Forma Condensed Statements of Income have been presented as if the property dispositions that occurred since January 1, 2002 had occurred on January 1, 2002.  This information is presented for comparative purposes only and may not be indicative of the actual results had the property dispositions occurred on January 1, 2002.

 

		Three Months Ended
		June 30, 2003 Actual			June 30, 2003 Proforma			June 30, 2002 Actual			June 30, 2002 Proforma
Rental Revenue:		$	14,610		$	14,610		$	70,629		$	26,950
Other revenue:		17,006			17,006			17,783			17,783
Operating expenses:		(16,003		)	(16,003		)	(19,269		)	(12,419		)
Net Income before real estate sales:		$	15,613		$	15,613		$	69,143		$	32,314

 

		Six  Months Ended
		June 30, 2003 Actual			June 30, 2003 Proforma			June 30, 2002 Actual			June 30, 2002 Proforma
Rental Revenue:		$	68,749		$	41,560		$	137,661		$	53,900
Other revenue:		34,728			34,728			37,013			37,013
Operating expenses:		(53,277		)	(50,140		)	(62,121		)	(48,400		)
Net Income before real estate sales:		$	50,200		$	26,148		$	112,553		$	42,513

 

 

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4.                   Notes Receivable

 

The Company had the following notes receivable at June 30, 2003 and December 31, 2002:

 

		2003			2002
Note from the sale of land, interest at 10%.  Due upon the occurrence of certain events.		$	165,750		$	165,750
Note from sale of building, interest only receipts of $5,366 per month at 8.5% interest.  Secured by building sold.  Due November 2003.		679,412			691,067
$ 50,000 note from sale of building, payable in two installments of $25,000 plus 10% interest.  Fully reserved for.		50,000			50,000
Total notes receivable		895,162			906,817
Allowance for bad debts		(50,000		)	(50,000		)
		$	845,162		$	856,817

 

5.                   Minimum Future Rentals

 

The Partnership has one remaining single-tenant building leased to a tenant under a noncancelable operating lease.  The lease is triple-net, requiring the tenant to pay all expenses of operating the property such as insurance, property taxes, repairs and utilities.

 

Minimum future rental revenue for the remaining years on the property is as follows:

 

 

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Item 2.    Management’s Discussion and Analysis of Financial Conditions and Results of Operations

 

Nature of Business

 

Excel Properties, Ltd., a California limited partnership (the Partnership”), was organized to purchase commercial real estate properties for cash and to hold these assets for investment.  The general partners of the Partnership are New Plan Excel Realty Trust, Inc., a Maryland corporation (“New Plan”), formerly known as Excel Realty Trust and Gary B. Sabin, an individual.  The Partnership was formed on September 19, 1985 and will continue in existence until December 31, 2015, unless dissolved earlier under certain circumstances.  In 1999, Excel Legacy Corporation, now known as Price Legacy Corporation,  (the “Company”) began managing the assets of the Partnership when certain officers of New Plan resigned.  The Company has indemnified New Plan of any general partner liability in exchange for an assignment of their partnership interest.

 

Properties that have been acquired by the Partnership have been primarily subject to long-term triple-net leases.  Such leases require the lessee to pay the prescribed minimum rental plus all costs and expenses associated with the operations and maintenance of the property.  These expenses include real property taxes, property insurance, repairs and maintenance and similar expenses.  Certain leases also provide some form of inflation hedge which calls for the minimum rent to be increased, based upon adjustments in the consumer price index, fixed rent escalation, or by receipt of a percentage of the gross sales of the tenant.

 

The principal investment objectives of the Partnership were originally to provide to its limited partners: (1) preservation, protection and eventual return of the investment, (2) distributions of cash from operations, some of which may be a return of capital for tax purposes rather than taxable income, and  (3) realization of long-term appreciation in value of properties. In recent years, the Partnership has been attempting to sell its properties.  As of June 30, 2003, the Partnership had one remaining property and three notes receivables.  The disposition of  the remaining assets could take several years as the Partnership attempts to maximize the sales price of each property.  There can be no assurance that the general partners will be successful in selling the remaining assets or what price they can obtain. Additionally, the plans of the Partnership may change in the future.

 

Critical Accounting Policies and Estimates

 

General

 

The financial statements including in this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).  Preparation of our financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the related notes.  The Partnership believes that the following accounting policies are critical because they affect the more significant judgments and estimates used in the preparation of our financial statements.  Actual results may differ from these estimates under different assumptions or conditions.  For a detailed discussion on the application of these and other accounting policies, see Note 1 in the Notes to the Financial Statements in the Form 10-K for 2002 and this Form 10-Q.

 

Revenue Recognition

 

Recognition of revenue is dependent upon the quality and ability of the tenants to pay their rent in a timely manner.  Rental revenues include minimum annual rentals, adjusted for the straight-line

 

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method for the recognition of fixed future increases.  Gain or loss on sale of real estate is recognized when the sales contract is executed, title has passed, payment is received, and the Partnership no longer has continuing involvement in the asset.

 

Real Estate Assets

 

Real estate assets are recorded at historical costs and adjusted for recognition of impairment losses.  Buildings are depreciated using the straight-line method over the tax life of 31.5 years.  The tax life does not differ materially from the economic useful life.  Expenditures for maintenance and repairs are charged to expense as incurred.  Significant renovations are capitalized.  The cost and related accumulated depreciation of real estate are removed from the accounts upon disposition.  Gains and losses arising from dispositions are reported as income or expense.

 

The Partnership reviews long-lived assets for impairment when events or changes in business conditions indicate that their full carrying value may not be recovered.  We consider assets to be impaired and write them down to fair value if their expected associated future undiscounted cash flows are less than their carrying amounts.

 

Asset Disposal

 

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.  SFAS No. 144 addresses financial accounting for the impairment or disposal of long-lived assets and is effective in fiscal years beginning after December 15, 2001.  The Partnership adopted this statement but had no discontinued operations in 2002.  The Partnership’s remaining property is held for sale.  Since there are no other real estate properties, operations from discontinued operations have not been separately identified.

 

Liquidity and Capital Resources

 

The Partnership has  $367,121 in cash at June 30, 2003 and no debt.  The Partnership currently recognizes approximately $8,983 a month in rental revenue from its remaining property, which is subject to a triple-net lease.  The property, however, is leased to Paragon Steakhouse (“Paragon”).  In 2002, Paragon filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code.  Should Paragon be released from this lease, the Partnership would be responsible for operating costs such as property taxes and insurance.

 

At June 30, 2003, the Partnership had $895,162 outstanding in notes receivable.  One note has a balance due of $165,750 and is secured by land.  Although the note bears interest at 10%, the Partnership has not recognized any interest income from the note since no interest payments have been made.  It is the intent of the Partnership is to cause the property to be marketed for sale in order to receive payment per the terms of the note.  Another note has a balance outstanding of $50,000 Steakhouse Partners, Inc. The obligor has stopped making interest payments on this note and has filed bankruptcy.  The Partnership has reserved against the collectibility of this note.  The Partnership’s sole tenant, Paragon, is a subsidiary of Steakhouse Partners.

 

The Partnership’s primary source of cash will be from rental from the one remaining real estate property currently owned and payments from the notes receivables described above.  Management believes that rental revenue should cover the recurring operating expenses of the Partnership and allow for cash distributions to be made to the limited partners unless the remaining building becomes vacant.  The Partnership is attempting to sell this property, which would provide cash for distribution although rental revenues would cease.  Prior to 2002, the Partnership has paid quarterly distributions to

 

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the limited partners of the actual cash earned by the Partnership in the preceding quarter.  In 2002, the Partnership adopted a policy of paying distributions from operating cash flows annually instead of quarterly, as only one property remains.  The Partnership may pay additional distributions if it receives cash from a significant capital event.  As assets are sold, cash flows available for distribution will decrease.  Once all the assets are sold, there will no longer be any cash flows for distributions.

 

Inflation is not expected to negatively impact the operations of the Partnership due to the structure of its investment portfolio as these are minimal operational expenses.

 

Results of Operations

 

The following discussion should be read in conjunction with the financial statements and the notes thereto.

 

Comparison of the three months ended June 30, 2003 to the three months ended June 30, 2002

 

Rental income decreased $56,019 or 79.3% from the previous year.  The net decrease was due to the property sales in 2003 and 2002.  These properties accounted for approximately $43,680 in rental revenue in 2002.   The Partnership also reversed some percentage rents recognized in the first quarter of 2003 related to property sold.  Excluding the properties sold and the percentage rent adjustment, rental revenue would have been $26,950 in both quarters.

 

Overall operating expenses decreased by $3,266 to the three months ended June 30, 2003 from the three months ended June 30, 2002. Depreciation expense decreased $6,323 or 51% and management fee expenses decreased $527 or 75%.  These decreases are attributable to the property sales in 2003 and 2002.  Other expenses and other income did not vary significantly between the two accounting periods.

 

Comparison of the six months ended June 30, 2003 to the six months ended June 30, 2002

 

Base rent decreased $68,912 or 50% from the previous year.  The net decrease was due to the property sales in 2003 and 2002.

 

In March 2003, the company recognized a gain of $30,505  relating to the sale of a building leased to Autoworks, in Bellevue, Nebraska.   There were no sales in the six months ended June 30,2002.

 

Operating expenses decreased by $8,844 or 14%.  Depreciation expense decreased $9,854 or 40% and management fee expenses decreased $730 or 52% from six months ended June 30, 2003 to the six months ended June 30, 2002.  These decreases are attributable to the property sales in 2002.  Other expenses and other income did not vary significantly between the two accounting periods.

 

Management does not expect inflation to significantly impact the operations of the Partnership due to the structure of its investment portfolio.  The leases all provide a minimum rental which the lessee is obligated to pay.  Additionally, most leases contain some form of inflation hedge which provides for the rent to be increased.  The rent increases may be in the form of scheduled fixed minimum rent increases, Consumer Price Index adjustments, or by participating in a percentage of the gross sales volume of the tenant.  Since the triple-net leases require the lessees to pay for all property operating expenses, the net effect is that the income should increase as operating expenses increase due to inflation.

 

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Certain Cautionary Statements

 

Certain statements in this Quarterly Report on Form 10-Q, including, but not limited to, “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that are not historical facts, but rather reflect current expectations concerning future results and events.  The words “believes,”  “expects,” “intends,” “plans,”  “anticipates,”  “likely,” “will” and similar expressions identify such forward-looking statements.  These forward-looking statements are subject to risks, uncertainties and other factors, some of which are beyond the Partnership’s control that could cause actual results to differ materially from those forecast or anticipated in such forward-looking statements.  These factors include, but are not limited to, the Partnership’s market effect on property sales, reliance on tenants, and environmental risks.  These factors are discussed in greater detail under the caption “Certain Cautionary Statements” in the Partnership’s annual Report on Form 10-K for the year ended December 31, 2002.

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

The Partnership’s balance sheet contains financial instruments in the form of interest-earning notes receivable.  The notes contain fixed interest rates and are thus not subject to changes in market interest rates.  The Partnership estimates that the fair value of the notes approximates market value at June 30, 2003.

 

Item 4.    Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our management, including our General Partner and Principal Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

Within 90 days prior to the date of this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our General Partner and Principal Accounting Officer, of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures.  Based on the foregoing, our General Partner and Principal Accounting Officer concluded that the Partnership’s disclosure controls and procedures were effective.

 

There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the date we completed our evaluation.

 

PART II.  OTHER INFORMATION

 

Items 1 through 5 have been omitted since no events occurred with respect to these items.

 

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Item 6.    Exhibits and Reports on Form 8-K

 

(a)		Exhibit 31.1	Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		Exhibit 31.2	Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
		Exhibit 32.1	Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		Exhibit 32.2	Certification of Principal Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b)		Reports on Form 8-K

 

The Partnership filed no reports on Form 8-K during the quarter ended June 30, 2003.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Dated: July 23, 2003	EXCEL PROPERTIES, LTD.
	(Registrant)
	By:	/s/ Gary B. Sabin
		Gary B. Sabin
		General Partner
	By:	/s/ James Y. Nakagawa
		James Y. Nakagawa
		Principal Accounting Officer

 

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