ITEM 1 - BUSINESS
GENERAL
Ultrafit Centers, Inc., (formerly D.S.S., Inc.), a Colorado corporation was formed May, 1987 (the "Company" or "Ultrafit") to primarily engage in the sale and distribution of dental, medical, pharmaceutical and related supplies and equipment. Prior to October 27, 1995 nor in any of its previous fiscal years, the Company did not have meaningful business operations. On October 27, 1995, the Company exchanged 6,600,000 shares of its Common Shares for 100% of Ultrafit Centers, Inc., a Texas Corporation; thereafter, the Company's name was changed from D.S.S., Inc. to Ultrafit Centers, Inc.
Ultrafit is a management company that manages and develops the Ultrafit Preventive Medicine Centers concept through the operation of individual Ultrafit Preventive Medicine Centers (the "Ultrafit Center(s)") and Nutritional Biosciences, Inc. ("Nutritional Biosciences"), the Company's sole provider of certain dietary supplements. An Ultrafit Center represents an alternative model for health care which takes a preventive approach versus repair approach to medicine through combining a physician-staffed medical clinic with a state-of-the-art fitness and nutrition center. The Ultrafit program is designed to recognize most patients have never exercised before and a majority have one or more pre-existing illnesses such as high blood pressure, coronary artery disease, diabetes, degenerative arthritis, rheumatoid arthritis and osteoporosis. Therefore, at the outset, a customized patient program is developed with appropriate exercise and diet regimen suited to the particular patient's abilities. Each customized patient program is developed based on a medical evaluation performed by an on-site physician. The Company has developed a proprietary specific step-by-step enrollment process.
The Company currently operates six (6) Ultrafit Centers in the State of Texas. As of March 1, 1996, these six (6) Centers had a combined membership of approximately 10,000 patients. On December 1, 1995, the Company entered into an agreement to commence operations in an Ultrafit Preventive Medicine Center in Phoenix, Arizona.
ITEM 1 - BUSINESS (CONT'D.)
In June 1995, the Company opened a new Ultrafit Center pursuant to a joint venture agreement with Davlin Corporation. Pursuant to the terms of the Agreement, the Company retains a 49% ownership interest in the center. The Company is also entitled to franchise royalties of 7% of gross revenues.
The Company also operates Nutritional Biosciences, Ultrafit's sole provider of certain dietary supplements. Nutritional Biosciences was formed on January 30, 1986, primarily as a wholesaler of vitamins and dietary supplements. For the twelve-month period ending December 31, 1995, Nutritional Biosciences derived approximately sixty-six percent (66%) of its revenues from supplying Ultrafit Centers with certain dietary supplements.
THE DEVELOPMENT OF THE ULTRAFIT STATE
The Ultrafit concept and system of preventive medicine was developed by Dr. Joseph E. Davis, founder, Chairman of the Board of Directors and Chief Medical Officer of the Company. During his tenure at the Heart and Lung Institute at Bethesda, Maryland, Dr. Davis developed a keen interest in nutritional biochemistry. The goal of Dr. Davis' work was to develop a dietary and exercise program designed to form a preventive versus repair approach to health care. Dr. Davis coined the term "Ultrafit State" to characterize his approach to preventive healthcare.
In 1978, Dr. Davis opened a private practice in Nacogdoches, Texas and began to apply his concepts in his work of rehabilitating cardiac and orthopedic patients. In 1990, Dr. Davis published a book entitled "ULTRAFIT" describing his program. Subsequently, Dr. Davis relocated to Edinburgh, Texas and with John Russell, an executive of a health club group, established the first Ultrafit Center.
AN ULTRAFIT PREVENTIVE MEDICINE FACILITY
The Company delivers its products and services to consumers through the management operation of Ultrafit Centers. Members of each Ultrafit Center pay an initial fee and small monthly charge to have created a customized program incorporating matters relating to physical health, exercise and diet under the direction of a staff physician and a team of exercise and nutrition personnel. Each center houses facilities for patient use of various exercise equipment including stationary bikes, weights, treadmills and other exercise equipment necessary for the Ultrafit program.
The non-discounted initial charge to become a patient of an Ultrafit Center is $498.00. The fee covers an initial medical evaluation which includes a cardiac stress test, blood profile, resting electrocardiogram, urinalysis, complete chemistry analysis and physical. Thereafter, each patient is charged a $60.00 monthly fee for use of the Center's facilities, equipment and services. The monthly fee is collected on a pre-authorized bank draft of the patients bank account or credit card. A patient may cancel membership by providing 60 days notice or may move a membership to another Center by providing 30 days notice. Patients have reciprocity at all Ultrafit Centers.
ITEM 1 - BUSINESS (CONT'D.)
PATIENT ENROLLMENT
Upon acceptance and prior to the first appointment, each new patient is provided with a copy of the book entitled "Ultrafit", a health review form and the rules of the Ultrafit Center. Patients are instructed to read the book, complete the health review and refrain from foods for 12 hours before the first appointment because of the physical exam. Patients are also encouraged to wear clothing appropriate for exercise and, if desired, a change of clothes.
During this evaluation portion of the Company's enrollment process, the patient provides a blood and urine sample followed by a medical exam performed by the on-site physician. This exam typically takes approximately one-hour and includes treadmill evaluation. The first visit concludes with arrangements for the second visit.
The second visit is a review of the lab results and doctors physical examination and stress test evaluation. Using these results, the doctor can structure the patients dietary and exercise program and scrutinize same in light of any medical considerations. In some cases, the doctor may prescribe dietary supplements or regimens. The second visit concludes with arranging for the third visit.
During this phase of the enrollment process, a customized training program is developed for the patient taking into account the factors of age, physical limitation, weight and medical exam results and medical history. Within these parameters, the exercise physiologist can develop a program based on goals to lower body fat, lose inches or to develop body tone.
Patients are provided a program card and a complete demonstration of the exercise equipment by a personal trainer employed by the Ultrafit Center. The personal trainer will work with the patient for at least the next ten visits to ensure a smooth and consistent transition into the Ultrafit program. During this time, patients are taught to monitor their heart rate and technique on how to control heart rate.
Thirty to sixty days after the initial visit, each patient is measured and weighed. In some cases, the exercise program is graduated or decreased to keep pace with the patient.
DIETARY PROGRAMS
In certain cases, an individual patient program includes a dietary regimen in conjunction with a consistent exercise program. The Ultrafit program recommends one of three diets depending upon the needs and medical condition of each patient. Basically, the Ultrafit Diet plans allow different people to eat the same foods, but at different calorie levels.
THE ULTRAFIT AMINO ACID DIET provides predigested amino acid tablets and vitamin/mineral supplements for people with serious weight problems who need help with hunger control. Predigested means that the protein has been broken down to its most basic building blocks.
ITEM 1 - BUSINESS (CONT'D.)
THE ULTRAFIT REDUCING DIET helps people lose weight more gradually. Just as does the Ultrafit Amino Acid Diet, the Ultrafit Reducing Diet protects the patient's muscle and reduces the fat in the patient's diet and on the patient's body. This diet does not use amino acid tablets. It does require that the patient takes vitamin/mineral supplements.
THE ULTRAFIT MAINTENANCE DIET helps people of normal weight who have health problems achieve that Ultrafit State. It protects the patient's muscle as the patient reduces the fat in his/her diet and on the patient's body. This diet includes a weekly "pig-out meal."
THE BODY WARRANTY
The Company provides qualified members free limited outpatient care including:
(1) Routine Outpatient care for illness that can be appropriately treated by a general practitioner or internist during posted office hours.
(2) All lab work completed at cost plus a nominal drawing and handling fee.
(3) All medical fees will be posted.
Conditions of eligibility for the Company's free limited outpatient care state: "This Body Warranty remains in effect as long as the terms heretofore mentioned are honored and the member is in good standing; members must exercise a minimum of ten (10) times per month; members must be 14 years in age or older; and, must be current on premiums."
The Company previously obtained its supply of Amino Acid tablets offered by the Company to certain of its patients from Nutritional Biosciences. The Company acquired the assets of Nutritional Biosciences on April 3, 1995, thereby relieving dependence on an outside party for supplies of Amino Acid tablets.
COMPETITION
Management believes its competition arises primarily from health clubs and diet centers. Although the Company believes its approach to preventive medicine through providing a physician-staffed medical clinic with a state-of-the-art fitness and nutrition center allows it a competitive advantage, the majority of health clubs and diet centers have substantially greater financial and marketing resources than the Company. Moreover, there can be no assurance that competitors that more closely parallel the Company's method of operation might not enter markets in which the Company has a presence at some time in the future.
ITEM 1 - BUSINESS (CONT'D.)
INDUSTRY - PREVENTIVE MEDICINE
Although the Company shares the characteristics of a fitness center or gym as well as the characteristics of a diet center, management considers its industry segment is better defined as "preventive medicine."
The Company's founder developed the Ultrafit series of programs in the course of providing services as a practicing physician. As such, while an Ultrafit Center offers all the amenities standard to other fitness centers such as exercise equipment, weight machines, etc., the Company's use of an on-site physician, exercise physiologist and nutrition expert substantially differentiate it from either health clubs or diet centers. The Company defines preventive medicine in the same manner as the Centers for Disease Control, i.e. "preventive" medicine are programs able to "reduce the incidence, prevalence and burden of disease and injury and enhance health by improving physical social and mental well-being."
Management believes there is a general growing trend of acceptance for a preventive approach to medicine versus a repair approach. According to a survey by the U.S. Department of Health and Human Services, approximately 81 percent of private work-sites with at least 50 employees offered some type of health promotion activities in 1992, compared with 66 percent in 1985. An October 1993 William M. Mercer Inc. survey showed the main motivation for establishing such programs was to reduce health care costs (83 percent). Others cited employee interest (36 percent) and absenteeism/productivity issues (17 percent). Fourteen percent mentioned other reasons, the most common being a concern for employee welfare.
Among the published studies which management believes demonstrate growth in the popularity of a preventive approach to medicine include Johnson & Johnson's Live For Life program showed cost savings of about $180 a year for each employee. Stanford University School of Medicine's Healthtrac program showed a reduction of $300 in medical claims for each $30 spent on guiding individuals into healthier lifestyles. Stratus Computer Inc. of Marlborough, Mass., is saving about $50,000 a year on medication and diabetic treatment for its employees who completed the HealthMatters program during 1992 and 1993.
MARKETING
The Company intends to market and develop its locations through franchising and jointly-owned Ultrafit Centers. The rationale for franchising the Ultrafit is based, in part, upon management's belief that new Centers can best be developed if owned by physicians practicing preventive medicine. Additionally, Company-owned locations require significant capital and management estimates that expansion would be restricted to the availability of capital.
ITEM 1 - BUSINESS (CONT'D.)
The Company has not conducted any marketing studies which would indicate a demand or lack of demand for its approach to preventive medicine or its approach to marketing through offering for sale jointly-owned or franchised Ultrafit Centers. Accordingly, the Company is relying solely on the opinion of management that a need exists in the marketplace for preventive medicine in general and for the Ultrafit approach to preventive medicine in particular. As such, there can be no assurance that any market exists or, if a market exists, that it would be receptive to preventive medicine as delivered according to the Ultrafit approach.
FRANCHISING AND JOINTLY-OWNED ULTRAFIT CENTERS.
The Company intends to develop the Ultrafit concept, in part, through obtaining qualified franchisees, which franchisees may include, as equity participants, physicians practicing preventive medicine. The Company is also seeking to extend and develop its Ultrafit concept through joint venture or joint development agreements.
Under the jointly-owned approach, the Company licenses its system for center operation, together with its name and other materials. The Company retains 40% to 50% ownership of each center and the purchaser provides funding to establish a particular center. The Company envisions it will market the jointly-owned approach exclusively to physicians who practice a preventive form of medicine and agree to act as or provide for a full-time, on-site physician.
DEVELOPMENT OF JOINTLY-OWNED ULTRAFIT CENTERS
The Company intends to market the jointly-owned approach exclusively to physicians who practice a preventive form of medicine and agree to act as or provide for a full-time, on-site physician.
SALES OF FRANCHISE ULTRAFIT CENTERS
On September 21, 1994, the Company entered its first franchise agreement with Princeton Medical Group ("PMG") for the San Antonio, Texas, area. Said area contains two existing Ultrafit Centers which PMG continues to operate. The Company intends to offer franchises to qualified individuals, primarily physicians. Franchises will be awarded for an initial fee of $50,000 and a monthly royalty of between seven percent (7%) and nine percent (9%) of gross sales.
During the term of a franchise agreement, a franchisee must pay the Company a continuing monthly royalty fee between seven and nine percent (7-9%) of the gross sales of the Ultrafit Center. The Company, in its sole discretion, may modify the royalty fee for a specific franchise under certain limited circumstances. Such circumstances include an evaluation of market conditions, including the degree of market penetration of the Ultrafit Centers in the area to be developed and the demographics of the area; the number of Ultrafit Centers to be developed; the time period for such development and the location of the Ultrafit Center; the financial strength and experience of the franchisee and related factors.
ITEM 1 - BUSINESS (CONT'D.)
REGULATORY COMPLIANCE
In connection with its franchise operations and with respect to the provisioning of medical services through the physician employees of the particular Centers, the Company is subject to state, federal and professional medical practice requirements.
TRADEMARKS AND COPYRIGHTS
Although the Company does not have any registered trademarks or copyrights, the Company believes that it has proprietary rights with respect to certain of its trademarks and copyrights.
EMPLOYEES
None of the Company's employees are subject to collective bargaining agreements. The Company's employees have never been on strike while in the employ of the Company. As of December 31, 1995, The Company employed individuals in the following capacities: The following table sets forth the Company's employees by category as of December 31, 1995:
CURRENT CATEGORY EMPLOYEES -------- ---------
Corporate/Administration 2 Sales and Marketing Office/Customer Service 1
Total 3
ITEM 2

ITEM 2 - PROPERTIES
The Company leases its facilities under various operating leases. Reference is made to Note 12 of the Company's Notes to Consolidated Financial Statements with respect to current and future lease obligations.
ITEM 3

ITEM 3 - LEGAL PROCEEDINGS
The Company's property is subject to a pending legal proceeding filed in 1994 in the U.S. Banruptcy Court for the Western District of Texas. Such action is an outcome of the Chapter 7 bankruptcy case filed by John and Patty Russell. In such proceeding, the Bankruptcy Trustee is seeking recovery from Dr. Davis "the true value of the stock in DPJ" [Inc.], which company was acquired by Dr. Davis from John Russell in 1992. The Trustee in such action is alleging, among other matters, that the Company has liability, as a subsequent transferee of Dr. Davis, due to the fact that, as alleged by the Trustee, DPJ was purchased by Ultrafit for a price below its market value. The Company was named as a party in this litigation in December 1995.
Reference is made to Note 13 to the Company's Notes to Consolidated Financial Statements for the year ended December 31, 1995.
ITEM 4

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In the final quarter of the year, no matters were submitted to a vote of security holders.
PART II
ITEM 5

ITEM 5 - MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
Commencing October 27, 1995, the Company's Common Stock is traded on the electronic bulletin board. The high and low bid price during such period was, as follows:
HIGH LOW ---- ---
3-1/4 2
There are currently 300,000 outstanding Warrants for the purchase of Common Shares, in prices ranging from $1.00 to $1.50. The Warrants are effective for a period of two years from date of issuance and would, if unexercised, expire at midnight on December 19, 1997. There are no other options, warrants or securities convertible into common equity of the Registrant. None of the Registrant's securities may be sold pursuant to Rule 144. However, the Company has undertaken to register approximately three million (3,000,000) of its Common Shares for certain unaffiliated Shareholders of Record. The Company currently plans to register such Common shares in the Summer of 1996.
Since inception the Company has never paid dividends on any class of its equity. The Company does not intend to pay dividends in the future.
As of December 31, 1995, there were 288 Shareholders of Record.
ITEM 6

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company believes that it has effectively limited the amount of debt incurred in opening new Centers by utilizing internal financial and off the balance sheet financing. With these factors in mind, the Company has improved its ratio of total assets to total liabilities from 1.88 to 1 as of December 31, 1995, and 5.7 to 1 as of March 31, 1996.
Capital is derived from the operation of the Ultrafit Centers and from the sale of franchises and subsequent franchise royalties. As of March 1, 1996, the Company had six (6) Centers in operation. The fee to acquire a franchise is $50,000 with franchise royalties ranging between 7-9% of gross sales. Additionally, capital is derived from the sale of certain dietary and vitamin supplements through Nutritional Biosciences. Distribution is currently through sales at the Centers and also through advertisements in a state-wide publication.
CAPITAL REQUIREMENTS AND SOURCE OF FUNDS
Each new center requires approximately $500,000 of capital for hard assets and an additional $100,000 of short term working capital.
1. Ultrafit has a $1,000,000 line of credit with Mission State Bank of Mission, Texas, (currently not utilized).
2. Ultrafit has an on-going loan/debt relationship with NationsBank. Ultrafit has a $340,000 loan outstanding to NationsBank that is collateralized by shares of Ultrafit's stock.
3. Ultrafit's Board of Directors has authorized Warrants for a total of 700,000 shares of Ultrafit's stock for a total value of $1,400,000.
EFFECT OF INFLATION
Ultrafit is affected by inflation or deflation in the areas of labor cost (which makes up in excess of 50% of operation cost, supply cost and cost of construction). As a result, Ultrafit uses the C.P.I. guide for project increases in costs on an annual basis.
RESULTS OF OPERATIONS
Typically, during the first 12 months of operation, all short term working capital is repaid. Centers are projected to be posting cash flow. At the 18-month marker, Centers are projected to be profitable.
Mature Centers (those Centers with 1,500 or more patients) produce approximately $20,000 in excess cash, and approximately $12,000 in profit each month.
Nutritional Biosciences has a 100% gross profit margin in all of its products. Currently 2/3 of these products sold by Nutritional Biosciences are sold to Ultrafit Centers. One-third of Nutritional Biosciences sales are sold directly to the consumer via the telephone and Internet sales. By January 1, 1997, Ultrafit projects that 50% of Nutritional Biosciences sales will be via the Internet and telephone sales.
FINANCIAL CONDITION
For the year ended December 31, 1995, Ultrafit reflected a loss in operations. However, management is optimistic about future financial results, due to the following factors:
o Limited use of debt and the utilization of off-the-balance-sheet financing, when possible, in opening new Centers.
o Continued strong performance by the McAllen centers.
o Change in ownership of a San Antonio franchise.
o Opening of Victoria center - expected break-even by June 1997, profit margin of $5,000 in July 1997 with continued growth of approximately 5% per month.
o Change in management of Harlingen center - expected break-even by June 1996, profit margin of $5,000 in July 1996 with continued growth of approximately 5% per month.
o Opening of the first out-of-state franchise in the Phoenix, Arizona, area. Expected opening in June 1996, with six (6) Centers expected to follow.
o Addition of two (2) corporate-owned centers and four (4) franchised centers.
o Entrance of Nutritional Biosciences into the national distribution market via the Internet. Increase in the number of Centers operating will lead to greatly increased sales ratios, while increases in retail sales will lead to a greater profit margin.
Management believes all of the above factors will have a positive impact on the financial condition of the Company.
ITEM 7

ITEM 7 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Financial Statements attached hereto, commencing on page.
ITEM 8

ITEM 8 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements between the Company and its accountants and auditors with respect to accounting and financial disclosure.
PART III
ITEM 9

ITEM 9 - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The following table sets forth certain information with the respect to the Company's Officers, Directors and Key Personnel:
NAME AGE POSITIONS WITH THE COMPANY - - ---- --- --------------------------
Joseph Davis 50 Chairman of the Board of Directors, Chief Medical Officer
Wendell Porth 42 President, Chief Executive Officer, Director
John Russell 50 Consultant, Director
Daniel Boone 42 Director
All Directors hold office until the next annual meeting of Shareholders of the Company or until their successors are elected and qualified. Officers hold office until their successors are chosen or qualified, subject to earlier removal by the Board of Directors. The Company does not have an Executive, Nominating, Compensation or Audit Committee.
Set forth below is a biographical description of each Officer listed above and of each Director:
Joseph E. Davis, M.D., is the Chairman of the Board of Directors and the founder of the Ultrafit concept. Dr. Davis obtained his Doctor of Medicine at the University of Texas, Southwestern Medical School in 1972, graduating Magna Cum Laude. Dr. Davis completed his internship and medical residency in Massachusetts General Hospital, Boston Massachusetts. Dr. Davis established his initial practice in Nacogdoches, Texas, specializing in internal medicine and continued that practice until July 1989. Dr. Davis then concentrated his efforts on the Ultrafit Preventive Medicine concept. The New American Library published Dr. Davis' book entitled "Ultrafit" in 1992. Dr. Davis has been the recipient of numerous awards, including the Phi Kappa Phi National Scholastic Honorary Society, the Alpha Omega Alpha National Medical Honor Society. Dr. Davis has also received numerous body building awards including the Texas Timberland Championship, South Central U. S. A. Middleweight and Mr. Mid-America Novice, North Texas Body Building Championship.
Wendell A. Porth has served as a member of the Board of Directors and as the Chief Executive Officer of the Company since October 27, 1995. Mr. Porth is responsible for the formulation of corporate strategy and for corporate development. Mr. Porth has been employed in various executive level positions within the health care industry for the past twelve years. Mr. Porth's prior executive level positions include associations with Humana Women's and Children's Hospital, San Antonio, St. Luke's Lutheran Hospital, San Antonio and Memorial Hospital, El Campo, Texas. Mr. Porth holds an MBA and BS in Finance.
John Russell has been a director of the Company since March 1992. Since March 1992, Mr. Russell has been self-employed as a consultant in the health and fitness industry. Mr. Russell has been a consultant to Ultrafit since March 1992. His background includes one time part- owner of International Fitness Centers. In May 1994, Mr. Russell filed Chapter 7 petition under the bankruptcy code.
Daniel Boone, M.D., was admitted to practice in Texas. From 1991 to 1993, Dr. Boone managed and operated a private medical practice. From 1993 to 1995, Dr. Boone has been employed by the Company, and has provided medical services for the Ultrafit Center in Kerrville, Texas.
ITEM 10

ITEM 10 - EXECUTIVE COMPENSATION
The following summary compensation table sets forth the aggregate cash compensation paid, accrued or deferred to the Chief Executive Officer of the Company and to each officer of the Company who earned in excess of $100,000 for services rendered in all capacities to the Company during the fiscal year ended December 31, 1995:
SUMMARY COMPENSATION TABLE
NAME AND ANNUAL ANNUAL OTHER ANNUAL ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION - - ------------------ ---- ------ ------ ------------ ------------
Joseph Davis 1995 $120,000 $0 $0 $45,000(1) Wendell Porth 1995 $ 65,625 $0 $0 $45,000(1) John Russell* 1995 $120,000 $0 $0 $45,000(1)
* John Russell was paid as a consultant to the corporation, not as an employee. (See Item 12 below).
(1) Paid in 50,000 Shares of restricted common stock at a per share price of $1.50 per share, discounted 40% due to two-year resale restriction.
The Company's Directors do not receive compensation for acting in their respective capacities as such.
ITEM 11

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the holdings of Common Stock by each person who, as of December 31, 1995, held of record or was known by the Company to own beneficially more than five percent of the outstanding Common Stock of the Company, by each Director and Officer of the Company and by all Directors and Officers of the Company as a group.
No. of Shares and Name and Address of Nature of Beneficial Percentage of Common Beneficial Owner Ownership Shares Outstanding
Hartvale Holdings Ltd. 444,000 5.4% 14A Eddelston Street London, England
Lomax Co. Limited 695,000 8.55% P. O. Box 1792 Grand Cayman Office Georgetown, Grand Cayman
OTC Capital Corp. 647,000 8% P. O. Box 669 Palm Beach, Florida 33480
Joseph Davis 2,939,646 36% 500 Thompson Dr. Kerrville, TX 78028
Daniel Boone 495,530 6% 236 Wesley Kerrville, Texas 78028
Wendell Porth 50,000 .50% 105 Painted Post San Antonio, Texas 78231
John Russell 50,000 .50% 13750 U.S. 281 North, Suite 610 San Antonio, Texas 78232
All Directors and Officers as a group (4 persons) 3,535,176 43%
ITEM 12

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTION
Daniel Boone purchased 100,000 shares of additional stock in February 1996 for $100,000.00.
From March 1992 through the present, John Russell, a director of the Company, has served as a consultant to the Company. For the fiscal year ended December 31, 1995, Mr. Russell received consulting fees of $120,000. In the Company's opinion, the terms of Mr. Russell's consulting agreement with the Company are on terms no less favorable than could have been obtained from unaffiliated third parties.
PART IV
ITEM 13

ITEM 13 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements are included in Part II, Item 8:
PAGE ----
Independent Auditor's Report
Balance Sheet as of December 31, 1995 and 1994
State of Operations for the years ended December 31, 1995, 1994, 1993
Statement of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993
Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993
Notes to Financial Statements
(b) Reports of Form 8-K
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.
Ultrafit Centers, Inc. a Colorado corporation
By: ------------------------------ Wendell A. Porth, President
Dated: __________________ , 1996
Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
------------------------------ Joseph Davis, M.D., Chairman of the Board of Directors
Date: July 15, 1996 ---------------------------
---------------------------------, Wendell A. Porth, Director
Date: July 15, 1996 ----------------------------
---------------------------------- John Russell, Director
Date: July 15, 1996 -----------------------------
---------------------------------- Daniel Boone, M.D., Director
Date: July 15, 1996
ANGEL E. LANA, P.A. CERTIFIED PUBLIC ACCOUNTANT [LETTERHEAD]
Board of Directors Ultrafit Centers, Inc. and Subsidiaries
INDEPENDENT AUDITOR'S REPORT
I have audited the accompanying balance sheets of Ultrafit Centers, Inc. (formerly D.S.S., Inc.) and subsidiaries as of December 31, 1995 and 1994, and the related statements of operations, shareholders' equity and cash flows for the years ended December 31, 1995, 1994 and 1993. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I did not audit the 1994 financial information contained in Note 2 relating to the financial position and results of operations of acquired subsidiaries. The 1994 financial statements of the acquired subsidiaries were audited by other auditors whose reports have been furnished to me, and my opinion, insofar as it relates to the 1994 financial information included in Note 2, is based solely on the report of the other auditors.
I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I 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. I believe that my audits and the report of other auditors provide a reasonable basis for my opinion.
In my opinion, based on my audits and the report of other auditors, the financial statements referred to above present fairly, in all materials respect, the financial position of Ultrafit Centers, Inc. (formerly D.S.S., Inc.) and subsidiaries as of December 31 1995 and 1994, and the results of its operations, changes in its shareholders' equity and its cash flows for the years ended December 31, 1995, 1994 and 1993 in conformity with generally accepted accounting principles.
/s/ ANGEL E. LANA, P.A. ------------------------------ Angel E. Lana, P.A. CERTIFIED PUBLIC ACCOUNTANT
April 18, 1996 Fort Lauderdale, Florida
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
ASSETS ------
1995 1994 -------- ------ Current Assets: Cash $ 48,776 $ -0- Accounts Receivable-Trade 24,729 -0- Accounts Receivable-Other 13,181 -0- Note Receivable-current portion 100,000 -0- Prepaid Expense 21,000 -0- Inventory 37,496 -0- -------- -------
Total Current Assets 245,182 -0- -------- ------- Property and Equipment, net of depreciation 215,875 -0- -------- ------- Other Assets: Note Receivable, net 115,000 -0- Security Deposits 16,506 -0- Development Costs, net of amortization 242,083 -0- Joint Venture Investment-at equity 20,927 -0- Pre-opening Costs-new center 73,597 -0- Goodwill, net of amortization 271,614 -0- -------- ------- Total Other Assets 739,727 -0- -------- ------- Total Assets $1,200,784 $ -0- ========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------
Current Liabilities: Accrued Expenses $ 30,283 $ -0- Note Payable-Bank 43,364 -0- Notes Payable-Other 500,000 -0- -------- -------
Total Current Liabilities 573,647 -0-
Other Liabilities: Deferred Revenue 66,642 -0- -------- ------- Total Liabilities 640,289 -0- -------- ------- Commitments and Contingencies
Shareholders' Equity: Preferred Stock, $.50 par value; 3,000,000 shares authorized, none issued -0- -0- Class A, Non-Voting Common Stock, $.001 par value; 2,000,000 shares authorized, none issued -0- -0- Common Stock, $.001 par value; 20,000,000 shares authorized, issued and outstanding shares- 8,100,000 in 1995; 650,000 in 1994 8,100 650 Additional Paid-In Capital 1,030,238 49,289 Accumulated Deficit (477,843) (49,939) ----------- --------- Total Shareholders' Equity 560,495 -0- ----------- --------- Total Liabilities and Shareholders' Equity $1,200,784 $ -0- =========== =========
The accompanying notes are an integral part of these financial statements.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ----------- -------- ---------- Net Revenues $ 267,010 $ -0- $ -0- Cost of goods sold 16,299 -0- -0- ----------- -------- ---------- Gross Profit 250,711 -0- -0- ----------- -------- ---------- Operating Expenses: Personnel 138,530 -0- -0- Marketing 16,378 -0- -0- General and administrative 188,244 -0- 31,768 Physician services 46,500 -0- -0- Depreciation and amortization 17,466 -0- -0- Loss-equity investment, net of royalties of $3,681 10,887 -0- -0- Loss-note receivable write-down 260,000 -0- -0- ----------- -------- ---------- Total Operating Expenses 678,005 -0- 31,768 ----------- -------- ---------- Other income (expense): Interest income 284 -0- -0- Interest expense (894) -0- -0- ----------- -------- ---------- Total Other Income (Expense) (610) -0- -0- ----------- -------- ---------- Net Loss $ (427,904) $ -0- $ (31,768) =========== ======== ========== Loss Per Common Share $ (0.20) $ -0- $ (0.05) =========== ======== ========== Weighted average number of shares outstanding 2,092,466 650,000 650,000 =========== ======== ==========
The accompanying notes are an integral part of these financial statements.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Ultrafit Centers, Inc. (the Company), formerly D.S.S., Inc., was organized under the laws of the State of Colorado on May 27, 1987 to engage in the business of the sale and distribution of dental, medical, pharmaceutical and other related supplies and equipment. The Company was a development stage entity until October 27, 1995, at which time it acquired the assets and assumed the liabilities of Ultrafit Centers, Inc. (UCI), a Texas corporation. The assets of UCI included two wholly-owned subsidiaries. Prior to the acquisition of UCI, the Company had no assets and no significant operating activities other than transactions related to its formation and organization.
The acquired corporation, Ultrafit Centers, Inc. (UCI), is a management company. It was formed on February 3, 1993, to operate and expand the Ultrafit Preventive Medicine Centers concept which represents an alternative model for health care. It utilizes a preventive approach to medicine by combining a physician-staffed medical clinic providing customized patient exercise and diet programs with a state-of-the-art fitness and nutrition center. UCI plans to franchise Ultrafit Centers throughout the United States. UCI has two wholly-owned subsidiaries, Ultrafit Fitness Centers, Inc. (UFCI) and Nutritional Biosciences, Inc. (NBI). Both subsidiaries were acquired by UCI on April 3, 1995. As more fully explained in Note 14, subsequent to December 31, 1995 UFCI ceased being a subsidiary of the Company.
The Company issued 6,600,000 shares of common stock upon its acquisition of UCI. The shares were valued at $903,399, representing the net book value of UCI. Accordingly, no goodwill was recorded as a result of the acquisition.The goodwill reflected in these financial statements represents excess of cost over net assets acquired resulting from the acquisition by UCI of one of its subsidiaries on April 3, 1995. The acquisition of UCI by the Company was accounted for by the purchase method of accounting. The results of operations of UCI and its subsidiaries is included in the accompanying financial statements only from the date of acquisition (October 27, 1995) through December 31, 1995. Pro forma financial information on the Company, UCI and subsidiaries is presented in Note 2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated. Operations for the subsidiaries acquired during the year ended December 31, 1995 (described above and in Note 2) are included in the consolidated results of operations since the date of acquisition.
PER SHARE DATA - Per share data have been computed by dividing net loss by the weighted average number of common and common equivalent shares outstanding during the period.
REVENUE AND EXPENSE RECOGNITION - Revenue is recognized when products and services are delivered, irrespective of when payments are received. Expenses are recorded as liabilities are incurred, regardless of when they are paid.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PROVISION FOR ESTIMATED UNCOLLECTIBLE ACCOUNTS - The Company records a provision for estimated uncollectible accounts for the portion of recognized revenues which it estimates may not be ultimately collected. The provision and related allowance are adjusted periodically, based upon the Company's evaluation of historical collection experience. As of the balance sheet date no allowance for bad debts on trade accounts receivable was deemed necessary.
INVENTORY - Inventory consists of books, vitamins and dietary supplements. It is stated at the lower of cost or market and is determined using the first-in, first-out method.
DEVELOPMENT COSTS - Development costs are being amortized using the straight-line method over the estimated benefit periods, ranging from 3 to 7 years. They primarily consist of direct franchise development costs. Other costs include software and video development costs.
GOODWILL - Goodwill represents the excess of the purchase price over the fair value of net assets acquired by UCI, Inc., prior to its acquisition by the Company on October 27, 1995. Goodwill is being amortized on a straight-line basis over the expected benefit period, 15 years. For the year ended December 31, 1995, the Company recorded amortization expense of $14,295, $3,176 of which occurred after October 27, 1995 and is included in the statement of operations.
PRE-OPENING COSTS - Pre-opening costs represent direct costs incurred in the process of readying the Company's Ultrafit Centers for operations. The costs remain capitalized and not subject to amortization until the Center opens for business. Once the Center commences operations the costs are amortized over the expected useful life.
INCOME TAXES - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes". SFAS 109 requires an asset and liability approach to financial accounting and reporting for income taxes.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation is computed using straight-line and accelerated methods over their estimated useful lives ranging from 3 to 7 years.
Property and equipment are summarized as follows:
Furniture and fixtures $ 35,322 Medical and exercise equipment 267,430 --------- 302,752 Less accumulated depreciation 86,877 --------- $215,875
For the year ended December 31, 1995, the Company recorded depreciation expense of $68,262, $14,290 of which occurred after October 27, 1995 and is included in the statement of operations.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BUSINESS ACQUISITION AND PRO FORMA INFORMATION As more fully discussed in Note 1, the Company acquired Ultrafit Centers, Inc.(UCI) on October 27, 1995, a business combination accounted for as a purchase.Pro forma financial position and results of operations of the Company for the periods presented below assume the Company acquired UCI as of January 1, 1994.
The adjustments for 1995 reflects additional amortization of goodwill of $23,826 as if the acquired company, UCI, had acquired its two subsidiaries as of the beginning of the period. The adjustments also reflect additional amortization of $19,061 from 1994. The 1994 adjustments include net goodwill, amortization and debt incurred by UCI in the acquisition. A subsidiary included above ceased being part of the Company after December 31, 1995 (see Note 14).
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - NOTE RECEIVABLE
Effective October 1, 1994, UCI sold, as the franchisor, two Ultrafit Centers located in San Antonio, Texas for $475,000. The franchisee was required to pay the $475,000 from available profits derived from the centers. As of December 31, 1995, the Company had not received any payments from the franchisee. Subsequent to December 31, 1995, the Company took possession of the centers. One center was sold for $100,000, the other was closed. The net book value of the equipment the Company has repossessed is approximately $73,000. The Company was liable as lessee of the two facilities sublet to the franchisee. To release itself from any obligations relating thereto, the Company paid the landlord $20,000.
The statement of operations for the year ended December 31, 1995, includes a charge to operations of $260,000 reflecting the write-down deemed necessary to reflect the net realizable value of the note receivable. The note receivable is shown on the Company's 1995 balance sheet as follows:
Note Receivable $ 475,000 Less: Allowance for uncollectibility (260,000) ---------- 215,000 Less: Current portion $(100,000) ---------- 115,000 =========
NOTE 4 - DEVELOPMENT COSTS Development costs, net of amortization, are summarized as follows:
Amortization AMOUNT PERIOD (YEARS) ------ -------------- Franchise development $220,200 7 Software development 7,190 5 Video development 14,693 3 -------- $242,083 ========
NOTE 5 - JOINT VENTURE INVESTMENT UCI opened a new Ultrafit Center in June 1995 pursuant to a joint venture arrangement with Davlin Corporation (Davlin). As a 49% owner, the Company is accounting for the investment under the equity method. Accordingly, the investment is adjusted for dividends and 49% of earnings or losses. As of December 31, 1995, the net investment amount is $20,927. The Company is entitled to franchise royalties of 7% of gross revenues. The royalties totalled $19,738 as of December 31, 1995, of which $3,681 was earned after October 27, 1995 and is reflected in the statement of operations. The Company's share of the joint venture loss as of December 31, 1995 was $39,960, of which $14,568 occurred after October 27, 1995 and is reflected in the statement of operations.
At December 31, 1995, the investment in Davlin exceeded the Company's share of the underlying net assets by $36,575. The excess relates to property and equipment and will be amortized against the Company's share of Davlin's net income or loss on the straight-line method over the estimated useful lives of the property and equipment beginning in 1996. Amortization is not charged to operations in 1995 due to immateriality.
NOTE 6 - GOODWILL On April 3, 1995, UCI acquired 100% of UFCI as follows: ACQUISITION NET ASSETS PRICE ACQUIRED GOODWILL ----------- ---------- -------- UFCI Acquisition $440,732 $154,823 $285,909 Less accumulated amortization 14,295 -------- $271,614
UFCI ceased being part of the Company after December 31, 1995, as more fully discussed in Note 14.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - NOTE PAYABLE-BANK
Note payable to bank represents a loan made to UCI in the original amount of $110,756. Principal is payable on demand. Monthly payments of principal and interest in the amount of $3,000 is required. The loan has a stated interest rate of 11% annually and matured on April 4,1996. The loan is collateralized primarily by the equipment located at two of UCI's Ultrafit Centers. As of December 31, 1995 the outstanding principal balance is $43,364.
The note was not paid in full at maturity, a balance of approximately $36,000 remained. The note was refinanced by way of a personal assumption of $25,000 by the Company's principal shareholder (see Note 14). The remaining balance will be paid by the Company over a period of six months from the original date of maturity.
NOTE 8 - NOTES PAYABLE-OTHER
Notes payable-other consists of the following:
A. Upon the acquisition of UFCI by UCI, see Note 6, UFCI was issued a $440,732 note payable. The note has no stated interest rate and was scheduled to be paid in full upon its maturity date of April 3, 1996. The note is collateralized by all the common stock of UCI, which shares are held in escrow until the note is paid. The note is payable to related parties (see Note 10A). The note obligation was settled subsequent to December 31, 1995 as more fully discussed in Note 14. $440,732
B. On April 3, 1995, UCI acquired the assets of an Ultrafit Center for a total consideration price of $59,268 in the form of a note payable. The note has no stated interest rate or collateralization and was scheduled to be paid in full on April 3, 1996. The note obligation was settled subsequent to December 31, 1995 as more fully discussed in Note 14.
59,268 -------- $500,000 ========
NOTE 9 - INCOME TAXES
At December 31, 1995, the Company and its subsidiaries had net operating loss carryforwards (subject to certain tax code limitations) of approximately $575,000 available to offset future taxable income, if any, expiring in the years 2008 through 2010. The effect of the future tax benefit, if any, has not been recognized because of the Company's limited operating history.
NOTE 10 - RELATED PARTY TRANSACTIONS
Related party transactions are summarized as follows:
A. A principal officer and a director of the Company were the owners of UFCI, acquired by UCI on April 3, 1995. Goodwill in the amount of $285,909 related to the acquisition has been recorded. A note payable in the amount of $440,732, referred to in Note 8A, is payable to the aforementioned officer and the director.
B. A principal officer of the Company was the owner of NBI, acquired by UCI on April 3, 1995 for $98,802. No goodwill related to the acquisition has been recorded.
ULTRAFIT CENTERS, INC. (FORMERLY D.D.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIUDATED FINANCIAL STATEMENTS
NOTE 10 - RELATED PARTYB TRANSACTIONS (Continued)
C. Effective April 3, 1995, UCI entered into two service agreements, one with its principal shareholder and one with a director of the Company. Each will receive an annual compensation of $120,000 in exchange for management services. The agreements terminated on April 3, 1996, at which time only one was renewed for a period of two years at the same compensation rate. The Company's president was also under contract to manage operations through March, 1995. Total management fees paid by the Company for year ended December 31, 1995 totaled $175,000, $40,000 of which occurred after October 27, 1995 and is included in the statement of operations.
D. On April 17, 1995, in an effort to stimulate franchise growth and demonstrate a long-term commitment to the Company and the Ultrafit concept, the Board of Directors approved a proposal entitling four Board members to be eligible to each own single franchise center at a location of their choice. The center would have to be operated within the guidelines of the Franchise Agreement but no francise fees or royalties would be paid to the Company. This option is a one-time opportunity only, expiring on April 30, 2005.
NOTE 11 - SHAREHOLDERS' EQUITY The Company is authorized to issue 3,000,000 shares of $.50 par value Preferred Stock in one or more series. The Board of Directors can fix or alter the rights, preferences, privileges and restrictions relating to dividends, conversion, voting, redemption and liquidation without any further vote or action by the shareholders. None has been issued to date.
The Company is also authorized to issue 2,000,000 shares of Class A, $.001 par value, non-voting common stock having no voting, preemptive or conversion rights. No such shares have been issued.
The Company is authorized to issue 20,000,000 shares of common stock, with a per share par value of $.001. Holders of common stock do not have any rights of redemption or conversion or preemptive rights to subscribe to additional shares if issued by the Company. In the event of liquidation of the company, the common shareholders are to share ratably in any distribution of the Company's assets after payment of all liabilities, subject to the rights of the holders of preferred stock.
During the Company's third quarter, a reverse stock split of 1 share for each 10 outstanding was effectuated. Total capitalization was unchanged.
On September 1, 1995, the Company entered into four consulting agreements whereby in exchange for services to be rendered the consultants were issued 500,000 shares of common stock. The shares were registered on October 31, 1995 pursuant to a Form S-8 filing.
On October 26, 1995, the Company issued 350,000 shares of common stock in exchange for services rendered.
The value of the services to be rendered for the 850,000 shares referred to above is $85,000, said amount is reflected in the Statements of Sharenholders' Equity. Services rendered through the year end was $64,000.
NOTE 12 - COMMITMENTS AND CONTINGENCIES The Company leases its facilities under various operating leases. The monthly lease obligations total $16,824. One of the leases requiring monthly payments of $5,440 became effective after December 31, 1995. For the year ended December 31, 1995, the Company recorded rent expense of $116,396, $22,071 of which occurred after October 27, 1995 and is included in the statement of operations.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - COMMITMENTS AND CONTINGENCIES (Continued)
At December 31, 1995 the aggregate future minimum lease payments are as follows:
1996 $ 163,811 1997 201,891 1998 140,955 1999 75,160 2000 65,280 Thereafter 413,440 ----------- $1,060,537 ===========
On August 8, 1995, the Company entered into a consulting agreement for the purpose of establishing a franchise financing program to include Company and franchisee locations. The agreement also includes a product support package whereby the consultant will supervise construction, attend tradeshows and develop vendor relations. The consultant was paid a $5,000 consulting fee and shall receive a fee of 3% of funds obtained for the Company. The Company has the option of paying a flat fee of $10,000 in lieu of the 3% fee. The consultant shall be paid $500 per day, plus expenses, for work performed under the product support package.
On December 4, 1995, the Company entered into three Executive Search Contracts. The contracts obligate the Company to pay a recruiting fee of $25,000 for each of three physicians which the Company hires through the efforts of the employment agency. The contract term is for ninety days.
On December 20, 1995, the Company entered into a nine month agreement with an organization that was to provide a broad range of services pertaining to investor relations at a cost of $4,000 per month. The Company paid for one month of service after which the agreement was terminated by the company for lack of performance.
On December 26, 1995, the Company entered into a six month agreement whereby in exchange for management consulting services the Company granted the consultant warrants to purchase 700,000 shares of common stock. The warrants may be exercised during a period of two years from the date of the agreementas follows
# OF COMMON SHARES UNDERLYING WARRANTS PRICE PER SHARE ------------------- --------------- 200,000 $ 1.00 100,000 1.50 100,000 2.00 100,000 2.50 200,000 3.00 --------- 700,000 =========
Subsequent to December 31, 1995, 300,000 shares were issued to the consultant to have available for the exercise of the warrants of which 85,000 were exercised.
The Company adopted a bonus plan for its officers and directors, 10% of net profits, if any, will be distributed annually. The Board of Directors will determine individual bonuses payable equally between cash and common stock.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - LEGAL PROCEEDING
The Company was named as a defendant in a lawsuit in December 1995. The claim alleges that in April 1995, a subsidiary of the Company (UCI) acquired the assets and assumed certain liabilities of DPJ, Inc. (the entity referred to in Note 8B) for a price far below its market value. The Company denies the allegations and intends to vigorously defend its position. The Company believes a judgment against it is highly doubtful and that it will prevail in the litigation.
NOTE 14 - SUBSEQUENT EVENTS
Subsequent to December 31, 1995, the Company repossessed the assets collateralizing a note receivable in the amount of $475,000. See Note 3.
Subsequent to December 31, 1995, the Company issued 300,000 shares of common stock to the consulting group referred to in Note 12.
On January 25, 1996, the Company filed a Form S-8 Registration Statement registering 705,000 shares of common stock which included the 700,000 shares referred to in Note 12 and 5,000 shares issued subsequent to December 31, 1995 in exchange for legal services rendered.
On February 1, 1996, the Company entered into a consulting agreement for a period of six months. In exchange for financial public relations services the Company agreed to pay the consultant as follows:
$ WORTH OF FREE - $ AMOUNT TRADING COMMON STOCK -------- --------------------
Upon signing of contract $10,000 $ -0- Within two weeks of contract date -0- 15,000 (7000 shares) 1st day of month two 10,000 15,000 1st day of month three 10,000 15,000 1st day of month four 10,000 10,000 1st day of month five 10,000 5,000 1st day of month six 10,000 5,000 -------- -------- $60,000 $65,000
The number of shares to be issued is determined by the average bid price for five days prior to the beginning of the new contract month.
The agreement may be terminated by either party by providing written notice at least five business days prior to the expiration of the current contract month.
On March 28, 1996, the Company issued 18,500 shares of common stock pursuant to the consulting agreement.
On February 21, 1996, the Board of Directors approved a Directors Stock Option Plan granting directors the option to acquire 110,000 shares of restricted common stock, in the aggregate, at $1 per share. The plan is to remain in effect for a period of two years.
On February 29, 1996, the Company issued 100,000 shares of restricted common stock to a company Director in exchange for $100,000.
ULTRAFIT CENTERS, INC. (FORMERLY D.S.S., INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 SUBSEQUENT EVENTS (Continued)
On March 1, 1996, the Company entered into an equipment leasing contract which requires sixty monthly payments of $706 each and contains a purchase option.
On March 4, 1996, 625,000 shares of common stock were issued to the company's President. The shares were pledged as collateral on a $340,000 bank loan dated March 5, 1996. The principal portion of the proceeds were used to make operational a new fitness center located in Victoria, Texas. The loan is payable in sixty monthly installments of $6,983 each through March 19, 2001 at an annual interest rate of 8.25%.
On February 20, 1996, an agreement was reached between the Company and its principal shareholder and one of its directors'. The agreement stipulates that the Company exchange UFCI, which operates a fitness center located in Kerrville, Texas (See Note 6), for the forgiveness of the two notes payable in the amount of $500,000 referred to in Note 8. The principal shareholder,who will retain the 639,724 shares of restricted common stock issued to him as a result of the Company's acquisition of UFCI, also agrees to assume $25,000 of the bank note payable referred to in Note 7. Financial data relating to UFCI, the Kerrville Center, (without the recognition of goodwill)as of December 31, 1995 and for the year then ended is as follows:
AFTER DATE OF ACQUISITION (10/27/95) AS OF YEAR ENDED THROUGH 12/31/95 12/31/95 12/31/95 ---------- ---------- ---------------------- Balance Sheet: Assets $177,923
Liabilities $ 31,969 Shareholders' Equity $145,954 -------- $177,923 ========
Statement of Operations: Net Revenue $640,839 $132,611 Cost of Revenue 33,541 6,959 --------- --------- Gross Profit 607,298 125,652 Total Operating Expenses 616,166 164,413 --------- --------- Net Loss from operations $(8,868) $(38,761) ========= ========= Net Loss per common share NIL $ (0.02) Weighted average number of ========= ========= shares outstanding 2,092,466 2,092,466 ========= =========


ITEM 1. DESCRIPTION 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 long-term investment.
The general partners of the Partnership are Excel Realty Trust, Inc., a Maryland corporation, 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.
Properties that have been acquired by the Partnership are 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, the net effect being that, under normal circumstances, no expenses will offset the rental payment. Most of the 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.
Properties have been acquired free and clear of liens and encumbrances. The Partnership may seek to finance one or more of the properties and distribute the financing proceeds to the partners, but only if the financing proceeds equal or exceed 100% of the Partnership's capital invested in the property or properties (including a prorata amount of the Partnership's public offering unit selling commissions and organization expenses). To date, no properties owned by the Partnership have been the subject of any mortgage financing, therefore, at the present time, all properties remain free and clear from any mortgage loan, lien or encumbrance.
The principal investment objectives of the Partnership are 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, (3) distributions of cash from financing the properties, and (4) realization of long-term appreciation in value of properties.
The general partners have selected properties they believe meet certain minimum investment standards and that are most likely to accomplish the investment objectives of the Partnership. Properties were acquired through arms-length negotiations with third parties.
ITEM 2.

ITEM 2. PROPERTIES
The Partnership presently owns twenty properties. These properties are briefly described on the following pages:
KINDER-CARE LEARNING CENTERS
The Partnership owns seven properties on lease to Kinder-Care, Inc., the nation's largest provider of day care centers.
KINDER-CARE LEARNING CENTER - GAHANNA, OHIO
Date of purchase: May 28, 1987
Purchase price: $216,822
Property description: This property is located approximately fifteen miles northeast of Columbus, Ohio in the suburb of Gahanna. The building is located on .551 acres and contains 4,528 square feet.
The current lease expires June 30, 1998 with gross rents of $21,000 per year.
KINDER-CARE LEARNING CENTER - GROVE CITY, OHIO
Date of purchase: May 28, 1987
Purchase price: $222,340
Property description: This property is located in Grove City, Ohio, seven miles south of Columbus, Ohio. The building is located on .8939 acres and contains 4,528 square feet.
The current lease expires November 30, 1998 with gross rents of $21,000 per year.
KINDER-CARE LEARNING CENTER - WEST CARROLLTON, OHIO
Date of purchase: May 28, 1987
Purchase price: $190,337
Property description: This property is located approximately eight miles southwest of Dayton, Ohio in the suburb of West Carrollton. The building contains 4,560 square feet and is situated on .55 acres of land.
The current lease expires December 31, 2001. The annual rent over the remainder of the lease is as follows:
January 1, 1996 to December 31, 1998 $ 33,202 January 1, 1999 to December 31, 2001 $ 35,526
KINDER-CARE LEARNING CENTER - COLUMBUS, OHIO
Date of purchase: May 28, 1987
Purchase price: $190,337
Property description: This property is located in Columbus, Ohio. The building is situated on .538 acres and contains 4,650 square feet. The property has been sublet by Kinder-Care to Children Today, another child-care provider.
The property is on lease until December 31, 2001. The annual rent over the remainder of the lease is as follows:
January 1, 1996 to December 31, 1998 $ 33,202 January 1, 1999 to December 31, 2001 $ 35,526
KINDER-CARE LEARNING CENTER - DAYTON, OHIO
Date of purchase: May 28, 1987
Purchase price: $190,337
Property description: This property is located approximately thirty miles northeast of Dayton, Ohio in the Mud River Township. The building is situated on .645 acres and contains 4,650 square feet.
The current lease expires December 31, 2001. The annual base rent over the remaining term of the lease is as follows:
January 1, 1996 to December 31, 1998 $ 33,202 January 1, 1999 to December 31, 2001 $ 35,526
KINDER-CARE LEARNING CENTER - INDIANAPOLIS, INDIANA
Date of purchase: May 2, 1989
Purchase price: $201,079
Property description: This property is located at 1034 N. Whitcomb Ave. in Indianapolis, Indiana. The building contains 4,487 square feet and is situated on .598 acres.
The current lease expires December 31, 2000 with gross rents of $49,694 per year.
KINDER-CARE LEARNING CENTER - INDIANAPOLIS, INDIANA
Date of purchase: May 2, 1989
Purchase price: $201,079
Property description: This property is located at 29 N. Coronado in Indianapolis, Indiana. The building contains 4,487 square feet and is situated on 1.106 acres. The gross rents are $18,000 per year and the lease expires December 31, 2000.
PARAGON RESTAURANT GROUP, INC.
The Partnership owns two properties operated as Mountain Jack's Restaurants, on lease to Paragon Steakhouse Restaurants, Inc. The company, headquartered in San Diego, California, is one of the nation's premier specialty restaurant chain operators. Their trade names include Mountain Jacks's and Hungry Hunter.
MOUNTAIN JACK'S RESTAURANT - MIDDLEBURG HEIGHTS, OHIO
Date of purchase: July 21, 1987
Purchase price: $1,046,222
Property description: The property, situated on 1.72 acres and containing 6,331 square feet, is an upscale steak and seafood restaurant located in Middleburg Heights, Ohio, a suburb of Cleveland. It has seating for approximately 163 persons and parking for approximately 115 cars.
The annual lease payment is the greater of $104,500 or 5% of the gross sales. The lease expires on July 20, 2005.
MOUNTAIN JACK'S RESTAURANT - LAFAYETTE, INDIANA
Date of purchase: September 29, 1987
Purchase price: $1,080,097
Property description: This property is located at 2411 State Road 26 East, Lafayette, Indiana. Lafayette is strategically located between Chicago, Illinois to the north and Indianapolis, Indiana to the south. It is the home of Purdue University. The property is situated on 1.72 acres, contains 8,112 gross square feet, and has seating for approximately 294 persons. The site is ideally located along a main commercial artery and is surrounded by seven hotels.
The annual lease payment is the greater of $107,800 or 5% of the gross sales. The lease expires on September 28, 2005.
KENTUCKY FRIED CHICKEN - BLAINE, MINNESOTA
Date of purchase: May 6, 1988
Purchase price: $424,762
Property description: This property is located at 8770 University Avenue N.E., Blaine, Minnesota. It contains 3,090 square feet, and has seating for 92 persons. The surrounding area is predominantly commercial and includes such major retail stores as K-Mart and Club Food stores, in addition to the Northtown Shopping Center.
The lease in guaranteed by Kentucky Fried Chicken. The annual lease payment is the greater of $48,240 or 5% of the gross sales. The lease expires on February 29, 2000.
WENDY'S - BLAINE, MINNESOTA
Date of Purchase: May 6, 1988
Purchase price: $398,478
Property description: The property is located at 8780 University Avenue N.E., Blaine, Minnesota. Blaine is located eight miles north of Minneapolis. The property is across the street from a major regional shopping mall. The building contains 2,474 square feet and has seating for 92 persons.
The lease is guaranteed by Wendy's International, Inc., the parent corporation. The annual lease payment is the greater of $45,360 or 5% of the gross sales. The lease expires on February 29, 2000.
NORTHERN AUTOMOTIVE CORPORATION
The Partnership owns two auto parts stores leased to Northern Automotive Corporation, the nation's largest auto parts chain. Northern Automotive markets its specialty automotive parts and accessories through its retail outlets located throughout the country under the trade names of Checker, Kragen, and Schuck's Autoworks stores. Northern Automotive operates over 475 retail outlets. The company caters to the do-it-yourself market and maintains a broad product line of both private label and national brand names.
AUTOWORKS - BELLEVUE, NEBRASKA
Date of purchase: July 5, 1988
Purchase price: $688,579
Property description: The property is located at a major shopping center at 915 Fort Crook Road, Bellevue, Nebraska, a suburb of Omaha, Nebraska. Bellevue is the home of the Strategic Air Command (SAC) which contributes largely to the area economy. The improvements consist of a free standing concrete block and glass building containing 4,870 square feet.
The base minimum annual rent is $80,484 per year with scheduled rental increases occurring every third year of the lease based on increases in the Consumer Price Index not to exceed a 10% increase. The lease expires on July 5, 2008.
AUTOWORKS - LITTLETON, COLORADO
Date of purchase: July 5, 1988
Purchase price: $715,925
Property description: This property is located at 8219 South Holly in Littleton, Colorado and is surrounded by new commercial complexes and extensive single and multi-family developments. The property is situated on approximately .75 acres and contains 4,960 square feet.
The base minimum annual rent is $83,720 per year with scheduled rental increases occurring every third year of the lease based on increases in the Consumer Price Index not to exceed a 10% increase. The lease expires on July 6, 2008.
DENNY'S RESTAURANT - LAKEWOOD, COLORADO
Date of purchase: July 27, 1988
Purchase price: $603,992
Property description: The property is located at 565 Union Blvd., Lakewood, Colorado. The area is extensively developed in commercial, retail and office uses. The property, located on approximately .75 acres, contains improvements of 4,489 square feet.
The lease is guaranteed by Denny's Inc. and calls for minimum rent of $47,420 to be paid annually or 6% of the tenant's gross sales, whichever is greater. The Partnership received $36,994 in percentage rent from this property in 1995. The lease expires on July 23, 1996 and calls for a full CPI increase from the inception of the lease upon exercise of a 10-year lease option.
PONDEROSA RESTAURANT - ANN ARBOR, MICHIGAN
Date of purchase: January 20, 1989
Purchase price: $759,619
Property description: The property, containing 5,033 square feet, is situated on approximately one acre located at 3354 East Washtenaw Street, Ann Arbor, Michigan. The property is surrounded by numerous commercial enterprises including the Arbor Land enclosed shopping mall.
The lease calls for a minimum rent of $77,400 plus 6.5% of the annual gross sales in excess of the average annual sales for the years 1989 and 1990. The lease expires September 22, 2003.
PONDEROSA RESTAURANT - ALTON, ILLINOIS
Date of purchase: January 31, 1989
Purchase price: $924,379
Description of property: The building, containing 5,587 square feet, is situated on approximately one acre at 3354 Homer-Adams Parkway along Highway 111, which is the major east/west road system through the city. Alton, Illinois is situated across the Mississippi River from St. Louis, Missouri. The property is in the center of one of the city's prime commercial areas.
The lease calls for a minimum annual rent of $94,070 plus 6.5% of the gross sales generated by the property in excess of the average annual sales for the year 1989 and 1990. The lease expires September 22, 2003. The tenant has vacated the premises but continues to pay the monthly base rent.
PAYLESS SHOE STORE - PLANT CITY, FLORIDA
Date of purchase: December 1, 1989
Purchase price: $648,123
Property description: The property is located at 1801 Jim Redman Parkway, Plant City, Florida. Plant City is located approximately 18 miles northeast of the central business district of Tampa, Florida. The property is situated on .89 acres and contains 2,989 square feet.
The lease is guaranteed by the May Department Store Co. which has a net worth in excess of $3 billion. The property is on lease until November 30, 1999 with four additional 5-year options. The minimum rent is $70,785 per year. The rent would be $82,682, $94,578, $106,495 and $118,372 for each option period should the options be exercised by the tenant.
TIMBER LODGE STEAKHOUSE - BURNSVILLE, MINNESOTA
Date of purchase: February 12, 1990
Purchase price: $722,040
Property description: This family restaurant is located at 13050 Aldrich Avenue South. Burnsville is a suburb approximately 11 miles south of Minneapolis. The property contains 6,916 square feet and is situated on 1.43 acres. The current rent is $60,000 per year and the lease expires on July 14, 2001.
TODDLE HOUSE RESTAURANT - KENNER, LOUISIANA
Date of purchase: November 26, 1991
Purchase price: $218,738
Property description: Toddle House Restaurants is a national restaurant chain. It features 24-hour service with a cook-to-order menu. Toddle House Restaurants, Inc. is a wholly owned subsidiary of Diversified Hospitality Group, Inc. (DHG) which also operates the Steak 'N' Eggs Kitchen restaurants. The property is located at 2841 Loyola, Kenner, Louisiana and contains 2,175 square feet. The land on which the restaurant is located is 16,800 square feet.
The current annual rent is $34,998 and the lease expires on November 25, 2011. Toddle House is currently in Chapter 11 Bankruptcy and did not pay any rent in 1995. The Partnership has been in negotiations with the company to begin collecting rent again. The Partnership collected $3,168 in rent in February 1996.
LAND - LAS VEGAS, NEVADA
Date of purchase: March 9, 1995
Purchase price: $195,152
Property description: A 39% undivided interest in two parcels of land located on Sahara Avenue in Las Vegas, Nevada. The land is not currently generating any rental income. The parcels are being held for sale which is expected to happen in 1996.
ITEM 3.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S LIMITED PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS
A) A public market for the Partnership's units does not exist and is not likely to develop.
B) As of December 31, 1995, there were 1,633 investors holding 135,299 units.
C) The Partnership made its first cash flow distribution from operations in May 1987. Since that date, consistent cash distributions have been made at the end of each calendar quarter through December 31, 1995. The Partnership expects to continue to make cash distributions on a quarterly basis in the future.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The following information has been selected from the financial statements of the Partnership.
INCOME STATEMENT DATA
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial statements and the notes thereto as noted in Item 8

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Partnership is filing as part of this report, its financial statements which contain the following:
ITEM 9.

ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Partnership had no disagreements with its independent public accountants over accounting or financial disclosure.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP
The general partners of the Partnership are Excel Realty Trust, Inc., a Maryland corporation, and Gary B. Sabin.
Neither Gary B. Sabin, nor the executive officers of Excel Realty Trust, Inc. receive compensation from the Partnership. The General Partner and the officers and employees of Excel Realty Trust, Inc. spend such time in the administration of Partnership affairs to the extent deemed necessary.
The names, ages and positions of responsibility held by the executive officers and directors of Excel Realty Trust, Inc. are as follows:
FAMILY RELATIONSHIPS
Gary B. Sabin and Ronald H. Sabin are brothers.
BUSINESS EXPERIENCE
The following is a brief background of the directors and executive officers of Excel Realty Trust, Inc.
GARY B. SABIN has served as Chief Executive Officer, President and Chairman of the Board of Directors since January 1989. He is a graduate of Brigham Young University and Stanford University's Graduate School of Business where he received a master's degree as a Sloan Fellow. Mr. Sabin has extensive experience in the financial services industry with emphasis in the areas of commercial real estate and marketable securities.
RICHARD B. MUIR has served as Executive Vice President, Secretary and Director of the Company since January 1989. Mr. Muir has worked extensively in the field of commercial real estate, developing expertise in real estate acquisition, property management, leasing and project financing. He has also been actively involved in the securities brokerage industry. He is a general and financial and operations principal with the National Association of Securities Dealers.
DAVID A. LUND, CPA has served as Chief Financial Officer of the Company since June 1994. He previously served from 1989 to 1994 in various capacities with the Company, including Vice President and Vice President of Finance. From 1983 to 1989 he worked for various affiliated companies. Prior to 1983, Mr. Lund was a partner in a CPA firm.
RONALD H. SABIN has served as Senior Vice President of the Company in charge of property management since January 1989. Mr. Sabin has also served in various similar capacities with other affiliated companies since 1979.
GRAHAM R. BULLICK, Ph.D. has served as Senior Vice President of the Company since January 1991. Prior to joining the company, Mr. Bullick served for four years as an account manager of a company specializing in organizational development and service/quality systems.
MARK T. BURTON has served as Vice President of the Company since January 1989 and was recently promoted to Senior Vice President. Mr. Burton's duties for the Company primarily consist of the evaluation and selection of property acquisitions and dispositions. Mr. Burton has served in various capacities with other affiliated companies since 1984.
S. ERIC OTTESEN has served as General Counsel of the Company since January 1995. Prior to 1995, Mr. Ottesen worked as a partner in a law firm based in San Diego, California.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no executive officers and has not paid nor proposes to pay any compensation or retirement benefits to the directors or executive officers of Excel Realty Trust, Inc. See ITEM 13 for compensation to the general partner.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
No person is known by the Partnership to be the beneficial owner of more than 5% of the limited partner units.
The following information sets forth the number of units owned directly or indirectly by each general partner.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The table below reflects compensation paid to the general partner or their affiliates during the year ended December 31, 1995:
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) Documents filed as part of this report:
(1) (2) Financial statements under Item 8 in Part II hereof.
(3) Exhibits:
None
(B) Reports on Form 8-K
No reports on Form 8-K have been filed during the past year.
SIGNATURES
Pursuant to the requirement 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.
Date: March 22, 1996 Excel Properties, Ltd. (Registrant)
Excel Realty Trust, Inc. (General Partner)
By: /s/ Gary B. Sabin --------------------------- Gary B. Sabin President
By: /s/ David A. Lund --------------------------- David A. Lund Principal Financial Officer
EXCEL PROPERTIES, LTD.
----------
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners Excel Properties, Ltd.
We have audited the accompanying balance sheets of Excel Properties, Ltd., as of December 31, 1995 and 1994, and the related statements of income, changes in partners' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the partnership'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 audits 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 financial statements referred to above present fairly, in all material respects, the financial position of Excel Properties, Ltd., as of December 31, 1995 and 1994, and the results of operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principals.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Financial statement Schedules II and III are presented for the purpose of additional analysis and are not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
SQUIRE & CO.
February 9, 1996 Poway, California
EXCEL PROPERTIES, LTD.
BALANCE SHEETS DECEMBER 31, 1995 AND 1994
----------
The accompanying notes are an integral part of the financial statements.
EXCEL PROPERTIES, LTD.
STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------
The accompanying notes are an integral part of the financial statements.
EXCEL PROPERTIES, LTD.
STATEMENTS OF CHANGES IN PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------
The accompanying notes are an integral part of the financial statements.
EXCEL PROPERTIES, LTD.
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
----------
The accompanying notes are an integral part of the financial statements.
EXCEL PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Excel Properties, Ltd. 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 the dispositions are reported as income or expense.
CASH DEPOSITS
At December 31, 1995, the carrying amount of the Partnership's cash deposits total $1,817,201. The bank balances are $1,855,566 of which $200,000 is covered by federal depository insurance.
STATEMENT OF CASH FLOWS - SUPPLEMENTAL DISCLOSURE
There was no interest or taxes paid for the years ended December 31, 1995, 1994 or 1993. The Partnership had no noncash investing or financing transactions in 1995 or 1994. The Partnership received notes receivable of $877,500 in 1993 from the sale of two buildings.
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.
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 reporting period. Actual results could differ from those estimates.
Continued EXCEL PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------
2. FINANCIAL STATEMENT AND TAX RETURN DIFFERENCES
The Partnership had the following differences between the financial statements and the Partnership tax return.
3. FEES PAID TO GENERAL PARTNER:
The Partnership has paid the General Partner or its affiliates the following fees:
Continued EXCEL PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------
4. NOTES RECEIVABLE:
The Company had the following notes receivable at December 31, 1995 and 1994:
5. MINIMUM FUTURE RENTALS:
The Company leases single-tenant buildings to tenants under noncancelable operating leases requiring the greater of fixed or percentage rents. The leases are either: (1) triple-net, requiring the tenant to pay all expenses of operating the property such as insurance, property taxes, repairs and utilities, or (2) requiring the tenant to reimburse the Company for substantially all of the tenant's share of real estate taxes and other common area maintenance expenses.
Minimum future rental revenue for the next five years for the commercial real estate currently owned and subject to noncancelable operating leases is as follows:
Continued EXCEL PROPERTIES, LTD.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
----------
6. PURCHASE OF PROPERTY:
In March 1995, the Partnership purchased a 39% undivided interest in a parcel of ground in Las Vegas, Nevada for $1,410,233. The ground was leased with the Partnership's share of rent equaling $169,228 per year. The ground was subdivided into three building lots and the lessee constructed a building on one of the three lots. The building was sold in November 1995 as described in Note 7 below. The Partnership still has a 39% undivided interest in the remaining two parcels of land.
7. SALES OF PROPERTIES:
In November 1995, the Partnership sold part of the ground that had been purchased in February 1995. The sales price was $1,566,234 which included an equity participation with the builder/lessee. The Partnership recognized a $351,152 gain on the sale.
In February 1995, the Partnership sold a building in Phoenix, Arizona that was on lease to Childrens World. The sales price was $1,135,000 less $28,729 in selling expenses. The Partnership recognized a gain of $99,141.
In November 1993, the Partnership sold a building in Tucson, Arizona, that was on lease to Fuddruckers. The sales price was $937,500 less $39,267 in selling expenses. The Partnership recognized a gain of $358,155 on the sale. As part of the sale, the Partnership received a note receivable of $757,500 from the purchaser as mentioned in Note 4.
In November 1993, the Partnership sold a building in Eagan, Minnesota, that was on lease to Rax Restaurant. The sales price was $150,000 less $16,539 in selling expenses. The Partnership recognized a loss of $84,903 on the sale. As part of the sale, the Partnership received a note receivable of $120,000 from the purchaser as mentioned in Note 4.
EXCEL PROPERTIES, LTD. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
EXCEL PROPERTIES, LTD. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995
EXCEL PROPERTIES, LTD. SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995 (Continued)
(a) Also represents cost for federal income tax purposes. (b) Reconciliation of total real estate carrying value for the three years ended December 31, 1995 is as follows:
(c) Reconciliation of accumulated depreciation for the three years ended December 31, 1995 is as follows:


Item 1. Business
	 (a) General Development of Business.
	 Registrant is a holding company organized under the laws of 	 Pennsylvania. Registrant has conducted virtually no business operations 	 in the past four years, other than its efforts to seek merger partners. 	 Subsequent to year end the Registrant entered into an agreement to 	 exchange approximately 83.5% of its no par value common stock for 	 approximately 60% of the common stock of Communications/USA, Inc. 	 (Comm/USA).
	Comm/USA owns and operates interactive voice messaging franchises in 	the Voice-Tel system. Voice -Tel is the largest interactive voice 	messaging company in the United States, operating a digital 	telecommunications network through independently owned franchises. 	The system operates on proprietary software which was created by 	Centigram Communications Corporation. Comm/USA operates in the 	following sales territories: (i)the cities of Tampa, St. 	Petersburg, Clearwater, Largo, Bradenton, and Sarasota; and 	(ii) the Metropolitan Statistical Areas of Lakeland-Winter Haven, 	Melbourne-Titusville-Palm Bay, Fort Pierce, Fort Myers-Cape Coral, 	and Naples.
	After the merger, the Registrant expects to change its name to 	NET LNNX, Inc., to more closely identify with the high technology 	nature of its future business. Besides the above mentioned 	interactive voice messaging, the Registrant expects to form and 	operate an Internet Service Provider, and Comm/USA expects to 	provide additional services including ,long distance debit or 	prepaid cards, long distance re-selling, as well as purchasing 	its own paging company.
Item 2.

Item 2. Properties.
The executive and business office of the Registrant consist of office space located at 2240 Woolbright Rd. Suite 336, Boynton Beach, FL 33426.
Item 3.

Item 3. Legal Proceedings.
There were no material legal proceedings pending or known to be threatened or contemplated to which registrant is a party.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
	No matter was submitted to a vote of holders of Registrant's Common 	Stock during 1995.
PART II
Item 5.

Item 5. Market for Registrant's Common Stock and Related Stockholders Matters.
Registrant's Common Stock has been traded on the over-the-counter market since May 1989. The following table sets forth the range of high and low bid quotations for each quarterly period in the fiscal year ended
December 31, 1995 as reported by brokers making a market in the Company's stock. The quotations shown do not include commissions and therefore do not reflect actual transactions.
As of March 29, 1996, there were approximately 2,300 holders of record of Common Stock. No cash dividends were paid in the last 4 years.
Item 6.

Item 6. Selected Financial Data.
	None
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results 	of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Registrant has projected that it will incur only minor operating costs during 1996. After the merger with Comm/USA, some working capital will flow from the subsidiary to the Registrant in the form of management fees. The company expects these fees to be in the vicinity of $10,000 per month which more than adequately cover any expected expenses that may occur. The Registrant ended the year with $2,164 of cash, which was used to pay for expenses of the merger.
RESULTS OF OPERATIONS
There was a loss of $186 for the year which is a result of stock transfer fee income and associated miscellaneous operating expenses. The company expects that its revenues will approximate $1,000,000 from its interactive voice messaging services. The company's subsidiary Comm/USA expects to have a net income of 10%-12% of revenues for the 1996 year.
Item 8.

Item 8. Financial Statements and Supplementary Data.
Financial Statements of Registrant and Financial Statement schedules are attached as Appendix A (following Exhibits) and included as part of this Form 10-K Report. A list of said Financial Statements and Financial Statement Schedules is provided in response to Item 14 (a).
Item 9.

Item 9. Changes in and Disagreements with Accountants on 	Accounting and Financial Disclosure.
Not applicable
PART III
Item 10.

Item 10. Directors and Executive Officers of the Registrant.
	 (A) Identification of Directors
			 Age Director Since
Robert C. Hackney 45 December 1995
Each director is elected until the next Annual Meeting of shareholders and until his successor is qualified.
	 (B) Identification of Executive Officers
Name Office Age When Elected
Robert C. Hackney President 45 December 1995
Each officer is elected until the next Annual Meeting of Directors is held and until his successor is qualified
	 (C) Not required as Registrant was subject to Section 13(a) of 		Securities Act of 1934
	 (D) Business experience
Robert C. Hackney: Has been a Director of the Company since December 1995. He will be in charge of implementing the Company's acquisition strategy. For nearly two decades his corporate and securities law practice has included public and private securities offerings, mergers and acquisitions, tender offers, and complex corporate structures. From 1988 until 1995, Mr. Hackney was a partner in the law firm of DeSantis, Gaskill & Hunston P.A., in North Palm Beach, Florida. He is a former securities fraud prosecutor and state securities regulator. He also serves on the Board of Directors of Micro Typing Systems, Inc., a company in the medical products industry. Mr. Hackney is a member of the Florida Bar, the United States District Court, Middle District of Florida, the United States Court of Appeals for the Eleventh Circuit. He has lectured and authored several books in the area of corporate securities law, including "The Complete Guide to Mergers and Acquisitions", (1989), " An Insiders Guide to Non-Bank Business Financing" (1990), and "Firesale! Advice on Buying Financially Distressed Companies" (1991). Mr. Hackney is a member of United States Senator Connie Mack's Senate Roundtable and is listed in the Who' Who Registry.
Item 11.

Item 11. Executive Compensation.
	No officer or Director received any cash compensation during the fiscal 	year ended December 31, 1995.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management
	The following table identifies the only persons known by the Company 	who owned beneficially as of March 28, 1995, more than five percent of 	any class of the Company's voting securities, after giving effect to a 1 	for 20 reverse split which was anounced by the Company on January 3, 	1996.
Title Name and Address Amount & Nature of Percent of Class of Beneficial Owner Beneficial Ownership of Class _______ _________________ ____________________ ________ 			 Common Robert C. Hackney No par value Palm Beach Gardens, Fl 835,000 83.5%
Item 13.

Item 13. Certain Relationships and Related Transactions.
No related transactions have taken place during 1995
				 PART IV
Item 14.

Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) (1) Financial Statements.
The following Financial Statements of Registrant are filed as part of this Form 10-K Report:
	1. Audited Balance Sheet as of December 31, 1995 and Unaudited 		Balance Sheet as December 31, 1994.
	2. Audited Statement of Operation for the Year ended December 31, 		1995 and Unaudited Statements of Operations for the years ended 		December 31, 1994 and 1993. 	3. Audited Statement of Cash Flows for the year ended December 31, 		 1995 and Unaudited Statements of Cash Flows for the Years ended 		December 31, 1994 and 1993. 	4. Notes to Financial Statements
All schedules are omitted because they are not required, are not applicable or the required information is given in the financial statements or notes thereto.
(a) (3) Exhibits
(3) (A) Articles of Incorporation (incorporated by reference to Registrant's 	Form 10-K Report for the year ended December 31, 1983, Exhibit (3) (A), 	File No. 0-6553)
(3) (B) By-Laws(incorporated by reference to Registrant's Form 10-K report for 	the year ended Decenber 31, 1983, Exhibit (3) (B) , File No. 0-6503)
(11) Earnings per share
(b) Reports on Form 8-K
	 During the year ended December 31, 1995 no reports on Form 8-K were 	 filed by Registrant.
SIGNATURES
Pursuant to the requirements of Secetion 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
CHESTER COUNTY SECURITY FUND, INC.
By:/S/ Robert C. Hackney Robert C. Hackney, President and Director
Date: March 29,1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following on behalf of the Registrant and in the capacities and on the dates indicated.
By: /S/Robert C. Hackney Robert C. Hackney, President and Director
Date: March 29,1996