UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 ------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 1-9496 BNP RESIDENTIAL PROPERTIES, INC. -------------------------------- (Exact name of Registrant as specified in its charter) Maryland 56-1574675 - -------- ---------- State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) 301 S. College Street, Suite 3850, Charlotte, NC 28202-6024 ----------------------------------------------------------- (Address of principal executive offices) (Zip Code) 704/944-0100 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of August 5, 2003 (the latest practicable date). Common Stock, $.01 par value 5,865,392 - ---------------------------- ----------------------- (Class) (Number of shares) Exhibit index: page 25 TABLE OF CONTENTS Item No. Page No. PART I - Financial Information 1 Financial Statements 3 2 Management's Discussion and Analysis of Financial Condition 10 and Results of Operations 3 Quantitative and Qualitative Disclosures 21 About Market Risk 4 Controls and Procedures 21 PART II - Other Information 4 Submission of Matters to a Vote of Security Holders 21 5 Other Information 22 6 Exhibits and Reports on Form 8-K 22 2 PART I - Financial Information Item 1. Financial Statements. BNP RESIDENTIAL PROPERTIES, INC. - ------------------------------------------------------------------------------- Consolidated Balance Sheets June 30 December 31 2003 2002 ------------------ ------------------ (Unaudited) Assets Real estate investments at cost: Apartment properties $282,566,625 $275,712,863 Restaurant properties 38,335,989 39,158,921 ------------------ ------------------ 320,902,614 314,871,784 Less accumulated depreciation (53,915,162) (49,448,825) ------------------ ------------------ 266,987,452 265,422,959 Cash and cash equivalents 613,075 884,316 Other current assets 4,876,655 3,024,683 Notes receivable, net of reserve 100,000 100,000 Intangible assets, net of accumulated amortization: Intangible related to acquisition of management operations 1,115,088 1,115,088 Deferred financing costs 1,143,045 1,175,684 ------------------ ------------------ Total assets $274,835,315 $271,722,730 ================== ================== Liabilities and Shareholders' Equity Deed of trust and other notes payable $217,452,876 $211,584,935 Accounts payable and accrued expenses 2,759,640 1,272,451 Deferred revenue and security deposits 1,300,348 1,313,239 Deferred credit for defeasance of interest, net of accumulated amortization 250,048 333,376 ------------------ ------------------ Total liabilities 221,762,912 214,504,001 Minority interest in Operating Partnership 16,866,921 17,947,493 Shareholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized; issued and outstanding shares-- 454,545 at June 30, 2003, and December 31, 2002 5,000,000 5,000,000 Common stock, $.01 par value, 100,000,000 shares authorized; issued and outstanding shares-- 5,865,392 at June 30, 2003, 5,831,077 at December 31, 2002 58,654 58,311 Additional paid-in capital 71,076,266 70,724,671 Dividend distributions in excess of net income (39,929,438) (36,511,746) ------------------ ------------------ Total shareholders' equity 36,205,482 39,271,236 ------------------ ------------------ Total liabilities and shareholders' equity $274,835,315 $271,722,730 ================== ================== 3 BNP RESIDENTIAL PROPERTIES, INC. - ------------------------------------------------------------------------------- Consolidated Statements of Operations (Unaudited) Three months ended Six months ended June 30 June 30 2003 2002 2003 2002 ----------------- ---------------- ----------------- ---------------- (Restated) Revenues Apartment rental income $ 8,951,665 $ 7,855,562 $17,837,949 $15,344,858 Restaurant rental income 981,383 1,005,319 1,980,709 2,010,638 Management fee income 222,534 286,606 449,894 580,794 Interest and other income 24,538 68,995 154,348 106,194 ----------------- ---------------- ----------------- ---------------- 10,180,120 9,216,482 20,422,900 18,042,484 Expenses Apartment operations 3,851,990 3,043,455 7,325,887 5,735,731 Apartment administration 413,110 293,986 740,170 619,420 Corporate administration 657,275 495,766 1,344,340 1,089,160 Depreciation 2,489,079 2,020,606 4,822,397 3,967,140 Amortization of deferred loan costs 81,812 50,025 154,783 97,950 Interest 3,242,092 2,657,075 6,438,148 5,162,072 Write-off of unamortized loan costs at debt refinance - - - 95,032 ----------------- ---------------- ----------------- ---------------- 10,735,358 8,560,913 20,825,725 16,766,505 ----------------- ---------------- ----------------- ---------------- (Loss) Income before minority interest (555,238) 655,569 (402,825) 1,275,979 Minority interest in Operating Partnership (162,716) 137,641 (156,093) 265,476 ----------------- ---------------- ----------------- ---------------- Net (loss) income (392,522) 517,928 (246,732) 1,010,503 Cumulative preferred dividend 125,000 62,329 250,000 123,973 ----------------- ---------------- ----------------- ---------------- (Loss) Income available to common shareholders $ (517,522) $ 455,599 $ (496,732) $ 886,530 ================= ================ ================= ================ Per share amounts: Basic earnings per share - Net (loss) income $(0.06) $0.09 $(0.04) $0.18 (Loss) Income available to common shareholders (0.08) 0.08 (0.08) 0.15 Diluted earnings per share - Net (loss) income $(0.07) $0.09 $(0.05) $0.17 (Loss) Income available to common shareholders (0.08) 0.07 (0.08) 0.15 Dividends declared $0.25 $0.31 $0.50 $0.62 Weighted average common shares outstanding 5,857,298 5,775,895 5,848,435 5,765,464 4 BNP RESIDENTIAL PROPERTIES, INC. - ------------------------------------------------------------------------------- Consolidated Statement of Shareholders' Equity (Unaudited) Dividend Additional distributions Preferred Stock Common Stock paid-in in excess of Shares Amount Shares Amount capital net income Total --------- ------------ ----------- ---------- ------------- --------------- ------------ Balance December 31, 2002 454,545 $5,000,000 5,831,077 $58,311 $70,724,671 $(36,511,746) $39,271,236 Common stock issued - - 17,575 176 176,996 - 177,172 Dividends paid - preferred - - - - - (126,027) (126,027) Dividends paid - common - - - - - (1,457,770) (1,457,770) Net income - - - - - 145,790 145,790 --------- ------------ ----------- ---------- ------------- --------------- ------------ Balance March 31, 2003 454,545 5,000,000 5,848,652 58,487 70,901,667 (37,949,753) 38,010,401 Common stock issued - - 16,740 167 174,599 - 174,766 Dividends paid - preferred - - - - - (125,000) (125,000) Dividends paid - common - - - - - (1,462,163) (1,462,163) Net loss - - - - - (392,522) (392,522) - ---------------------------- --------- ------------ ----------- ---------- ------------- --------------- ------------ Balance June 30, 2003 454,545 $5,000,000 5,865,392 $58,654 $71,076,266 $(39,929,438) $36,205,482 ============================ ========= ============ =========== ========== ============= =============== ============ 5 BNP RESIDENTIAL PROPERTIES, INC. - ------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) Six months ended June 30 2003 2002 ----------------- ---------------- (Restated) Operating activities: Net (loss) income $ (246,732) $ 1,010,503 Adjustments to reconcile net (loss) income to net cash provided by operations: Minority interest in Operating Partnership (156,093) 265,476 Depreciation and amortization of loan costs 4,977,180 4,065,090 Write-off of unamortized loan costs at debt refinance - 95,032 Amortization of defeasance credit (83,328) (83,328) Changes in operating assets and liabilities: Prepaid expenses and other current assets (1,700,938) (1,574,877) Accounts payable and accrued expenses 1,467,775 841,129 Deferred revenue and security deposits (68,148) (200,283) ----------------- ---------------- Net cash provided by operating activities 4,189,716 4,418,742 Investing activities: Acquisition of apartment property (5,697,761) (9,989,369) Additions to apartment properties, net (1,353,253) (1,243,939) Sale of restaurant property 587,761 - ----------------- ---------------- Net cash used in investing activities (6,463,253) (11,233,308) Financing activities: Costs of issuance of preferred stock - (5,313) Issuance of common stock 351,938 404,001 Distributions to Operating Partnership minority unitholders (924,479) (1,055,931) Dividends paid to preferred shareholder (251,027) (64,384) Dividends paid to common shareholders (2,919,933) (3,568,586) Proceeds from notes payable 7,685,610 24,533,114 Principal payments on notes payable (1,817,669) (14,128,310) Payment of deferred financing costs (122,144) (313,619) ----------------- ---------------- Net cash provided by financing activities 2,002,296 5,800,972 ----------------- ---------------- Net decrease in cash and cash equivalents (271,241) (1,013,594) Cash and cash equivalents at beginning of period 884,316 1,417,616 ----------------- ---------------- Cash and cash equivalents at end of period $ 613,075 $ 404,022 ================= ================ 6 BNP RESIDENTIAL PROPERTIES, INC. - ------------------------------------------------------------------------------- Notes to Consolidated Financial Statements - June 30, 2003 (Unaudited) Note 1. Interim financial statements Our independent accountants have not audited the accompanying financial statements of BNP Residential Properties, Inc., except for the balance sheet at December 31, 2002. We derived the amounts in the balance sheet at December 31, 2002, from the financial statements included in our 2002 Annual Report on Form 10-K. We believe that we have included all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the financial position and results of operations for the periods presented. We have condensed or omitted certain notes and other information from the interim financial statements presented in this Quarterly Report on Form 10-Q. You should read these financial statements in conjunction with our 2002 Annual Report on Form 10-K. Note 2. Basis of Presentation The consolidated financial statements include the accounts of BNP Residential Properties, Inc. (the "company") and BNP Residential Properties Limited Partnership (the "Operating Partnership"). The company is the general partner and owns a majority interest in the Operating Partnership. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements. Stock-Based Compensation The company has one employee Stock Option and Incentive Plan in place. We account for this plan using the intrinsic value method, under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. If we had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation, the effect would be to reduce net income as reported by approximately $240 in 2003 and $5,000 in 2002, with no impact on basic and diluted earnings per share amounts as reported. Reclassifications We adopted Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections," effective January 1, 2003. Statement 145 generally requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations, rather than as extraordinary items as previously required under Statement 4. We have reclassified the extraordinary item for loss on early extinguishment of debt in the first quarter of 2002 to conform to Statement 145. While adoption of Statement 145 has no impact on net income, it reduces income before extraordinary items and eliminates extraordinary items as previously reported. We have adjusted the 2002 comparative amounts in our consolidated financial statements to conform to the 2003 presentation as follows: 7 2002 as 2002 as Currently Previously Presented Adjustments Reported ----------------- ----------------- ----------------- Six months ended June 30, 2002 Revenues $18,042,484 $ - $18,042,484 Expenses 16,766,505 95,032 16,671,473 ----------------- ----------------- ----------------- Income before minority interest and extraordinary item 1,275,979 (95,032) 1,371,011 Minority interest in Operating Partnership 265,476 (21,735) 287,211 ----------------- ----------------- ----------------- Income before extraordinary item 1,010,503 (73,297) 1,083,800 Extraordinary item - loss on early extinguishment of debt - (73,297) 73,297 ----------------- ----------------- ----------------- Net income $ 1,010,503 $ - $ 1,010,503 ================= ================= ================= Note 3. Apartment property acquisition Effective March 13, 2003, we acquired The Place Apartments for a contract price of $5.6 million, paid in cash. Through June 30, 2003, we have incurred and capitalized other direct costs of this acquisition totaling approximately $20,000. We funded this acquisition by the placement of a $4.56 million first deed of trust loan together with draws of approximately $1.1 million on our existing line of credit. In conjunction with this acquisition and financing, we funded repair escrows of approximately $65,000 and paid lender fees and costs totaling approximately $61,000. Note 4. Shareholders' Equity In May 2003, we issued 16,740 shares of our common stock through our Dividend Reinvestment and Stock Purchase Plan for proceeds of approximately $175,000. In February 2003, we issued 17,575 shares of our common stock through our Dividend Reinvestment and Stock Purchase Plan for proceeds of approximately $177,000. We calculated basic and diluted earnings per common share using the following amounts: Three months ended Six months ended June 30 June 30 2003 2002 2003 2002 ----------------- ---------------- ----------------- ----------------- (Restated) Numerators: Numerator for basic earnings per share - Net (loss) income $ (392,522) $ 517,928 $ (246,732) $ 1,010,503 Cumulative preferred dividend (125,000) (62,329) (250,000) (123,973) ----------------- ---------------- ----------------- ----------------- (Loss) Income available to common shareholders $ (517,522) $ 455,599 $ (496,732) $ 886,530 ================= ================ ================= ================= 8 Three months ended Six months ended June 30 June 30 2003 2002 2003 2002 ----------------- ---------------- ----------------- ----------------- (Restated) Numerator for diluted earnings per share - Net (loss) income (1) $ (555,238) $ 655,569 $ (402,825) $ 1,275,979 Cumulative preferred dividend (125,000) (62,329) (250,000) (123,973) ----------------- ---------------- ----------------- ----------------- (loss) Income available to common shareholders (1) $ (680,238) $ 593,240 $ (652,825) $ 1,152,006 ================= ================ ================= ================= Denominators: Denominator for basic earnings per share - weighted average shares outstanding 5,857,298 5,775,895 5,848,435 5,765,464 Effect of dilutive securities: Convertible Operating Partnership units 1,844,264 1,748,785 1,844,264 1,726,507 Stock options (2) 5,360 17,096 4,422 13,274 ----------------- ---------------- ----------------- ----------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 7,706,922 7,541,776 7,697,121 7,505,245 ================= ================ ================= ================= <FN> (1) Assumes conversion of Operating Partnership units to common shares; minority interest in Operating Partnership income has been eliminated. (2) We excluded options to purchase 140,000 shares of common stock at $12.50, 110,000 shares at $12.25, and 120,000 shares at $13.125 from the calculation of diluted earnings per share for the three and six months ended June 30, 2003 and 2002. We also excluded additional options to purchase 60,000 shares of common stock at $11.25 from the calculation of diluted earnings per share for the three and six months ended June 30, 2003. The exercise price of these options was greater than the average market price of the common shares for those periods, and the effect would be anti-dilutive. </FN> Note 5. Subsequent event On July 17, 2003, the Board of Directors declared a regular quarterly cash dividend of $0.25 per share to be paid on August 15, 2003, to common shareholders of record on August 1, 2003. The Board of Directors also authorized the payment of dividends totaling $125,000 to the Series B Preferred shareholder in accordance with the investment agreement for those shares. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This Quarterly Report contains forward-looking statements within the meaning of federal securities law. You can identify such statements by the use of forward-looking terminology, such as "may," "will," "expect," "anticipate," "estimate," "continue" or other similar words. These statements discuss future expectations, contain projections of results of operations or of financial condition or state other "forward-looking" information. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve our plans, intentions or expectations. When you consider such forward-looking statements, you should keep in mind the following important factors that could cause our actual results to differ materially from those contained in any forward-looking statement: o Our markets could suffer unexpected increases in the development of apartment, other rental or competitive housing alternatives; o our markets could suffer unexpected declines in economic growth or an increase in unemployment rates; o general economic conditions could cause the financial condition of a large number of our tenants to deteriorate; o we may not be able to lease or re-lease apartments quickly or on as favorable terms as under existing leases; o revenues from our third-party apartment property management activities could decline, or we could incur unexpected costs in performing these activities; o we may have incorrectly assessed the environmental condition of our properties; o an unexpected increase in interest rates could increase our debt service costs; o we may not be able to meet our long-term liquidity requirements on favorable terms; and o we could lose key executive officers. Given these uncertainties, we caution you not to place undue reliance on forward-looking statements. We undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect any future events or circumstances or to reflect the occurrence of unanticipated events. You should read the discussion in conjunction with the financial statements and notes thereto included in this Quarterly Report and our Annual Report on Form 10-K. Company Profile BNP Residential Properties, Inc. is a self-administered and self-managed real estate investment trust with operations in North Carolina, South Carolina and Virginia. Our primary activity is the ownership and operation of apartment communities. We currently own 19 apartment communities containing 4,571 units and provide third-party management services for 9 communities containing a total of 2,349 units. In addition to our apartment communities, we own 41 properties that we lease on a triple-net basis to a restaurant operator. We are structured as an UpREIT, or umbrella partnership real estate investment trust. The company is the sole general partner and owns a controlling interest in BNP Residential 10 Properties Limited Partnership, through which we conduct all of our operations. We refer to this partnership as the Operating Partnership. We refer to the limited partners of the Operating Partnership as minority unitholders or as the minority interest. Our executive offices are located at 301 South College Street, Suite 3850, Charlotte, North Carolina 28202-6024, telephone 704/944-0100. Results of Operations The operating results for the quarter ended June 30, 2003, were disappointing. The second quarter is generally difficult for us and we had expected that, given the current economic environment, the second quarter of this year would be especially trying. We did not, however, fully anticipate the impact that continued weaknesses in our apartment markets would have on apartment revenue. We believe the key to improving our operating results lies in increasing our apartment revenue and improving the efficiency of our operations. We have put a great deal of effort into controlling expenses, while at the same time maintaining our properties, and do not believe there are significant expense savings available to us. Any significant improvement in operating results will come primarily from improving occupancy at our apartment communities. To this end we are investing significant time and resources in attracting and retaining residents while improving our operating systems. We continue to believe that we will begin to see some signs of strengthening in our apartment markets late in 2003. However, to a large degree, this is dependent upon a general improvement in the economy. Revenues Total revenues in the second quarter of 2003 were $10.2 million, an increase of 10.5% compared to the second quarter of 2002. Total revenues through the first six months of 2003 were $20.4 million, an increase of 13.2% compared to the first six months of 2002. Apartment related income (apartment rental income plus income from apartment management and investment activities) accounted for approximately 90.4% of total revenues in the second quarter of 2003, compared to 89.1% in the second quarter of 2002. Through the first six months of 2003, apartment related income accounted for approximately 90.3% of total revenues compared to 88.9% in the first six months of 2002. Apartment rental income totaled $9.0 million in the second quarter of 2003, an increase of 14.0% compared to the second quarter of 2002. Through the first six months of 2003, apartment rental income totaled $17.8 million, an increase of 16.2% compared to the first six months of 2002. These increases are primarily attributable to the acquisition of three apartment communities in 2002 and one in the first quarter of 2003, which contributed approximately $1.7 million to apartment rental income in the second quarter of 2003 and $3.3 million in the first six months of 2003. For the second quarter of 2003, overall average economic occupancy declined by 1.8% while average revenue per occupied unit declined by 2.5%, compared to the second quarter of 2002. For the first six months of 2003, overall average economic occupancy declined by 1.6% while average revenue per occupied unit declined by 1.5 %, compared to the first six months of 2002. On a "same-units" basis (the 15 apartment communities that we owned throughout the first six months of both years), apartment rental income decreased by 3.2% in the second quarter of 2003 compared to the second quarter of 2002, and by 2.9% for the first six months of 2003 11 compared to the first six months of 2002. This decrease was the result of declines in both average economic occupancy and average revenue per occupied unit. For the second quarter of 2003, same-units average economic occupancy declined by 1.8% while average revenue per occupied unit declined by 1.4%, compared to the second quarter of 2002. For the first six months of 2003, same-units average economic occupancy declined by 1.6% while average revenue per occupied unit declined by 1.2%, compared to the first six months of 2002. Summary amounts for our apartment communities' occupancy and revenue per occupied unit for the second quarter and first six months of 2003 follow: Three months ended Six months ended June 30 June 30 ----------------------- ---------------------- Average Average monthly monthly Number revenue revenue of Average per Average per apartment economic occupied economic occupied units occupancy unit occupancy unit ----------- -------- ----------- ----------- -------- ----------- ----------- Abbington Place 360 88.4% $759 89.2% $759 Allerton Place 228 90.0% 741 91.0% 735 Alta Harbour (2) 290 87.4% 726 87.5% 754 Barrington Place (2) 348 93.4% 720 93.3% 742 Brookford Place (2) 108 95.9% 673 94.9% 666 Chason Ridge 252 96.8% 746 96.0% 746 Harris Hill 184 92.6% 662 91.9% 662 Latitudes 448 95.4% 871 95.3% 857 Madison Hall 128 95.2% 567 96.9% 571 Oakbrook 162 93.1% 688 90.3% 722 Oak Hollow 461 86.4% 606 84.0% 613 Paces Commons 336 88.3% 663 89.8% 665 Paces Village 198 94.5% 639 94.9% 641 Pepperstone 108 92.3% 624 93.4% 642 Savannah Place 172 94.0% 680 93.0% 693 Summerlyn Place 140 93.4% 822 92.6% 829 The Place (1) 144 85.1% 561 85.1% 561 Waterford Place 240 90.5% 825 89.9% 841 Woods Edge 264 91.7% 733 91.1% 737 All apartments (1) 4,571 - 2003 91.4% 715 91.1% 723 - 2002 93.2% 733 92.7% 734 Same units (3) 3,681 - 2003 91.5% 721 91.2% 724 - 2002 93.3% 731 92.8% 733 <FN> (1) We acquired The Place Apartments effective March 13, 2003. (2) We acquired Barrington Place and Brookford Place effective May 31, 2002. We acquired Alta Harbour effective September 18, 2002. (3) Excludes Alta Harbour, Barrington Place, Brookford Place, and The Place. </FN> We remain committed to our markets and our focus on middle-market apartment properties. However, we continue to find ourselves in a very difficult operating environment. Low interest rates continue to fuel near-record levels of single-family home purchases by 12 individuals who traditionally would have been apartment residents. Simultaneously, an anemic economy has resulted in extensive job losses. When you compound these two factors with the continuing uncertainty caused by the threat of terrorism, American military involvements abroad, expanding deficits at all government levels, impending property tax increases, and skyrocketing insurance costs, it is very difficult to form a clear vision of the near-term future. In this environment, we believe the best way to achieve our long-term objectives is to focus our attention on the day-to-day operations of our apartment communities, with the goal of maximizing short-term performance while maintaining and enhancing the long-term potential of our apartment properties. We will also continue to seek opportunities to add to and improve the size and quality of our apartment portfolio. Restaurant rental income was $1.0 million in the second quarters, and $2.0 million in the first six months, of both 2003 and 2002. A slight decline in 2003 restaurant rental income, as compared to 2002, was the result of the sale of one restaurant property late in the first quarter of 2003. Restaurant rental income for both 2003 and 2002 was the minimum rent. "Same-store" (those restaurant properties that operated throughout the first six months of both 2003 and 2002) sales at our restaurant properties decreased by 5.4% in the second quarter and 5.0% in the first six months of 2003 compared to these periods in 2002. Through June 30, 2003, we have sold six of the original 47 restaurants to Boddie-Noell Enterprises, Inc. ("Enterprises"), the lessee, under the non-economic clause of the agreement that allows Enterprises to close up to seven restaurants and buy them back for no less than net carrying value. Under our master lease with Enterprises, restaurant rental income payments are the greater of a specified minimum rent or 9.875% of food sales. The minimum rent is reduced by approximately $8,000 per month, or $96,000 per year, for each restaurant that is sold. During the third quarter of 2003, we expect to sell one additional restaurant to Enterprises at its net book value of approximately $650,000, and apply the proceeds to reduce our line of credit secured by the restaurant properties. Management fee income for the second quarter of 2003 decreased to $223,000, compared to $287,000 in 2002. For the first six months of 2003, management fee income decreased to $450,000 from $581,000 for the same period in 2002. This decrease is attributable to our acquisition of two previously managed properties in May 2002, as well as the termination of management contracts for several smaller properties in the first quarter of 2003. Expenses Effective January 1, 2003, in accordance with current accounting guidance, we report the loss on extinguishment of debt as an operating expense, rather than as an extraordinary item as previously required. We have reclassified the write-off of unamortized loan costs at refinance in the first quarter of 2002 to conform to the 2003 presentation in our financial statements. This reclassification has no impact on net income; however, it reduces income before extraordinary items and eliminates extraordinary items as previously reported. A more detailed description of the reclassification adjustments is included in the notes to the financial statements included in this Quarterly Report. Total expenses, including non-cash charges for depreciation, amortization and write-off of unamortized loan costs, were $10.8 million in the second quarter of 2003, an increase of 25.4% compared to the second quarter of 2002. Through the first six months of 2003, total expenses were $20.8 million, an increase of 24.2% compared to the first six months of 2002. 13 Apartment operations expense (the direct costs of on-site operations at our apartment communities) in the second quarter of 2003 was $3.9 million, a 26.6% increase compared to the second quarter of 2002. In the first six months of 2003, apartment operations expense totaled $7.3 million, a 27.7% increase compared to the first six months of 2002. These increases reflect the addition of three apartment communities during 2002 and one community in the first quarter of 2003, as well as significant increases in compensation, utilities, and property insurance costs. On a same-units basis, apartment operations expense increased by 2.0% in the second quarter and 4.3% in the first six months of 2003 as compared to 2002. Operating expenses for restaurant properties are insignificant because the triple-net lease arrangement requires the lessee to pay virtually all of the expenses associated with the restaurant properties. Apartment administration expense (the costs associated with oversight, accounting and support of our apartment management activities for both owned and third party properties) was $413,000 in the second quarter of 2003, a 40.5% increase compared to the second quarter of 2002. In the first six months of 2003, apartment administration expense totaled $740,000, an increase of 19.5% compared to the first six months of 2002. These increases are primarily attributable to increased compensation and costs arising from implementation of new property management software. Corporate administration expense was $657,000 in the second quarter of 2003, an increase of 32.6% compared to the second quarter of 2002. In the first six months of 2003, corporate administration expense totaled $1.3 million, a 23.4% increase compared to the first six months of 2002. This increase was primarily attributable to increases in compensation and insurance expense. In January 2003, we added an in-house general counsel position to our executive team. Depreciation expense totaled $2.5 million in the second quarter of 2003, a 23.2% increase compared to the second quarter of 2002. In the first six months of 2003, depreciation expense totaled $4.8 million, a 21.6% increase compared to the first six months of 2002. This increase is attributable to the addition of apartment communities, as well as the impact of additions and replacements at other apartment communities. Amortization expense (of deferred loan costs) was $81,000 in the second quarter of 2003, compared to $50,000 in the second quarter of 2002. In the first six months of 2003, amortization expense totaled $155,000, compared to $98,000 in the first six months of 2002. These increases are primarily attributable to the impact of loan costs associated with financing transactions in 2002. Interest expense totaled $3.2 million in the second quarter of 2003, a 22.0% increase compared to the second quarter of 2002. In the first six months of 2003, interest expense totaled $6.4 million, a 24.7% increase compared to the first six months of 2002. This increase reflects the impact of approximately $55 million in new debt related to apartment acquisitions in the second and third quarters of 2002 and the first quarter of 2003, reduced by the effect of lower interest rates on our lines of credit. Overall, weighted average interest rates were 6.0% for the second quarter and first six months of 2003, compared to 6.2% for the second quarter and first six months of 2002. 14 During the first quarter of 2002, we refinanced long-term debt related to Oakbrook Apartments. In conjunction with this transaction, we wrote off unamortized loan costs of $95,000. As discussed above, we have reclassified the write-off of unamortized loan costs at the date of the refinance in the first quarter of 2002 to conform to the 2003 presentation in our financial statements. We previously reflected this write-off, net of minority interests' share, with a charge of $73,000 as an extraordinary item in the financial statements. In late December 2001, we issued 227,273 shares of Series B Cumulative Convertible Preferred Stock. In September 2002, we issued an additional 227,272 shares of this preferred stock. Because preferred shareholders have priority over common shareholders for receipt of dividends, we deduct the amount of net income that will be paid to preferred shareholders in calculating net income available to common shareholders. The dividend on the Series B shares is $1.10 per share per year. The cumulative preferred dividend totaled $125,000 for the second quarter and $250,000 for the first six months of 2003, compared to approximately $62,000 for the second quarter, and $124,000 for the first six months, of 2002. Net income/loss The net loss (before the cumulative preferred dividend) for the second quarter of 2003 was $393,000, compared to net income of $518,000 for the second quarter of 2002. For the first six months of 2003, the net loss was $247,000, compared to $1.0 million net income for the first six months of 2002. These comparisons reflect the impact of decline in apartments operating results. Funds from Operations Funds from operations is frequently referred to as "FFO." FFO is defined by the National Association of Real Estate Investment Trusts ("NAREIT") as "net income (computed in accordance with generally accepted accounting principles), excluding gains (losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures." Our calculation of FFO is consistent with FFO as defined by NAREIT. Because we hold all of our assets in and conduct all of our operations through the Operating Partnership, we measure FFO at the operating partnership level (i.e., before minority interest). Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. In fact, real estate values have historically risen or fallen with market conditions. FFO is intended to be a standard supplemental measure of operating performance that excludes historical cost depreciation from - or "adds it back" to - GAAP net income. We consider FFO to be useful in evaluating potential property acquisitions and measuring operating performance. We calculate funds available for distribution as FFO plus non-cash expense for amortization and write-off of unamortized loan costs, less recurring capital expenditures. We believe that, together with net income and cash flows, funds available for distribution provides investors with an additional measure to evaluate the ability of the Operating Partnership to incur and service debt, to fund acquisitions and other capital expenditures, as well as to fund distributions to shareholders and minority unitholders. 15 Funds from operations and funds available for distribution do not represent net income or cash flows from operations as defined by generally accepted accounting principles. You should not consider funds from operations or funds available for distribution: o to be alternatives to net income as reliable measures of the company's operating performance, or o to be alternatives to cash flows as measures of liquidity. Funds from operations and funds available for distribution do not measure whether cash flow is sufficient to fund all of our cash needs, including principal amortization, capital improvements and distributions to shareholders. Funds from operations and funds available for distribution do not represent cash flows from operating, investing or financing activities as defined by generally accepted accounting principles. Further, funds from operations and funds available for distribution as disclosed by other REITs might not be comparable to our calculation of funds from operations or funds available for distribution. Funds from operations of the Operating Partnership totaled $1.8 million in the second quarter of 2003, a 30.8% decrease compared to the second quarter of 2002. For the first six months of 2003, funds from operations totaled $4.2 million, an 18.5% decrease compared to the first six months of 2002. This comparison reflects the impact of decline in apartment operating results and the increased cumulative preferred dividend. We calculated funds from operations of the Operating Partnership as follows (all amounts in thousands, except per share amounts): Three months ended Six months ended June 30 June 30 2003 2002 2003 2002 --------------- --------------- --------------- --------------- (Restated) (Loss) Income before minority interest $ (555) $ 656 $ (403) $ 1,276 Cumulative preferred dividend (125) (62) (250) (124) Depreciation 2,489 2,021 4,822 3,967 --------------- --------------- --------------- --------------- Funds from operations - Operating Partnership $ 1,809 $ 2,614 $ 4,170 $ 5,119 =============== =============== =============== =============== Per share amounts - diluted*: Net (loss) income $ (0.07) $ 0.09 $ (0.05) $ 0.17 (Loss) Income available to common shareholders (0.08) 0.07 (0.08) 0.15 Funds from operations 0.23 0.34 0.54 0.68 * assumes conversion of Operating Partnership units to common shares; minority interest in the Operating Partnership has been eliminated. Preferred stock is antidilutive for all periods. 16 A reconciliation of funds from operations to funds available for distribution of the Operating Partnership follows (all amounts in thousands): Three months ended Six months ended June 30 June 30 2003 2002 2003 2002 --------------- --------------- --------------- --------------- (Restated) Funds from operations - Operating Partnership $ 1,809 $ 2,614 $ 4,170 $ 5,119 Amortization of loan costs 82 50 155 98 Write-off of unamortized loan costs at refinance - - - 95 Recurring capital expenditures (408) (452) (690) (735) --------------- --------------- --------------- --------------- Funds available for distribution - Operating Partnership $ 1,483 $ 2,212 $ 3,635 $ 4,577 =============== =============== =============== =============== A further reconciliation of funds from operations of the Operating Partnership to funds from operations available to common shareholders follows (all amounts in thousands): Three months ended Six months ended June 30 June 30 2003 2002 2003 2002 --------------- --------------- --------------- --------------- (Restated) Funds from operations - Operating Partnership $ 1,809 $ 2,614 $ 4,170 $ 5,119 Minority interest in funds from operations (433) (608) (1,000) (1,180) --------------- --------------- --------------- --------------- Funds from operations available to common shareholders $ 1,376 $ 2,006 $ 3,170 $ 3,939 =============== =============== =============== =============== Other information about our historical cash flows follows (all amounts in thousands): Three months ended Six months ended June 30 June 30 2003 2002 2003 2002 --------------- --------------- --------------- --------------- Net cash provided by (used in): Operating activities $ 1,971 $ 2,338 $ 4,190 $ 4,419 Investing activities (600) (10,689) (6,463) (11,233) Financing activities (1,171) 8,207 2,002 5,801 Dividends and distributions paid to: Preferred shareholders $ 125 $ 62 $ 251 $ 64 Common shareholders 1,462 1,788 2,920 3,569 Minority unitholders in Operating Partnership 462 527 924 1,056 Scheduled debt principal payments $ 285 $ 72 $ 559 $ 120 Non-recurring capital expenditures 193 247 664 509 17 Three months ended Six months ended June 30 June 30 2003 2002 2003 2002 --------------- --------------- --------------- --------------- Weighted average shares outstanding Preferred shares 455 227 455 227 Common shares 5,857 5,776 5,848 5,765 Weighted average Operating Partnership minority units outstanding 1,844 1,749 1,844 1,727 Capital Resources and Liquidity Capital Resources On March 13, 2003, we acquired The Place Apartments for approximately $5.6 million in cash. We financed this acquisition through issuance of a first deed of trust note in the amount of $4.56 million together with draws of approximately $1.1 million on our line of credit secured by Latitudes Apartments. The fixed-rate deed of trust loan provides for interest at 5.06% and monthly payments including principal and interest of approximately $33,000, with maturity in 2013. In conjunction with this acquisition and financing, we funded repair escrows of approximately $65,000 and paid lender fees and costs totaling approximately $61,000. Through June 30, 2003, we have incurred and capitalized other direct costs of this acquisition totaling approximately $20,000. Effective February 21, 2003, we sold one restaurant property to the lessee for its net carrying value of approximately $588,000. We applied the proceeds from this sale to reduce our line of credit secured by the restaurant properties. We expect to complete the sale of one additional restaurant property with a net carrying value of approximately $650,000 to the lessee during the third quarter, again at net carrying value, and apply the proceeds to reduce our line of credit secured by the restaurant properties. Through the first six months of 2003, we have made draws on our variable-rate lines of credit totaling approximately $1.7 million to fund acquisition activities and capital replacements and improvements. As of June 30, 2003, total long-term debt was $217.5 million, including $168.8 million of notes payable at fixed interest rates ranging from 5.06% to 8.55%, and $48.7 million at variable rates indexed on 30-day LIBOR rates. The weighted average interest rate on debt outstanding was 5.9% at June 30, 2003, down from 6.1% at December 31, 2002. At our current level of variable-rate debt, a 1% fluctuation in variable interest rates would increase or decrease our annual interest expense by approximately $494,000. During the second quarter of 2003, we issued approximately 16,700 shares of our common stock through our Dividend Reinvestment and Stock Purchase Plan for proceeds of approximately $175,000. During the first quarter of 2003, we issued approximately 17,600 shares of our common stock through this plan for proceeds of approximately $177,000. 18 Cash flows and liquidity Net cash flows from operating activities were $2.0 million in the second quarter of 2003, compared to $2.3 million in the second quarter of 2002. Through the first six months of 2003, net cash flows from operating activities were $4.2 million, compared to $4.4 million in the first six months of 2002. Investing and financing activities, other than those described under "Capital Resources" above, consisted of capital expenditures at apartment communities, along with payment of dividends and distributions. We have announced that the company will pay a regular quarterly dividend of $0.25 per share on August 15, 2003, to shareholders of record of our common stock on August 1, 2003. In January 2003, we announced we were reducing our quarterly dividend to $0.25 per share from the $0.31 per share per quarter that had been paid for a number of years. While this was not pleasant, we felt that, given the current operating environment and the uncertain near-term outlook, a reduction in dividend was necessary. You should not view this decision as a sign that we have changed our philosophy concerning the dividend, for we remain committed to paying the highest dividend that is reasonably prudent. While we are not philosophically opposed to paying dividends that temporarily exceed current cash flow after operating expenses, this would occur only when we were confident that we would see significant improvement in operations in a relatively short period of time. We generally expect to meet our short-term liquidity requirements through net cash provided by operations and utilization of credit facilities. We believe that net cash provided by operations is, and will continue to be, adequate to meet our operating requirements for both the short term and the long term. We anticipate funding our future acquisition activities primarily by using short-term credit facilities as an interim measure, to be replaced by funds from equity offerings, long-term debt or joint venture investments. We expect to meet our long-term liquidity requirements, such as scheduled debt maturities and repayment of short-term financing of possible property acquisitions, through long-term secured and unsecured borrowings and the issuance of debt securities or additional equity securities. We believe we have sufficient resources to meet our short-term liquidity requirements. Critical Accounting Policies - Capital expenditures and depreciation Our critical accounting policies are identified and discussed in our Annual Report on Form 10-K under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies." Our policy and practice regarding capital expenditures and depreciation, which may be of particular interest to readers of this Quarterly Report, are further discussed below. In general, for acquired apartment properties, we compute depreciation using the straight-line method over composite estimated useful lives of the related assets, generally 40 years for buildings, 20 years for land improvements, 10 years for fixtures and equipment, and five years for floor coverings. For the acquisitions of Barrington Place, Brookford Place and Alta Harbour Apartments in 2002, we performed detailed analyses of components of the real estate assets acquired. For these properties, we assigned estimated useful lives as follows: land improvements, 7-20 years; short-lived building components, 5-20 years; base building structure, 60 years; and fixtures, 19 equipment and floor coverings, 5-10 years. We expect to complete a detailed analysis of components for The Place Apartments in the near future. We generally complete and capitalize acquisition improvements (expenditures that have been identified at the time the property is acquired, and which are intended to position the property consistent with our physical standards) within one to two years of acquisition. We capitalize non-recurring expenditures for additions and betterments to buildings and land improvements. In addition, we generally capitalize recurring capital expenditures for exterior painting, roofing, and other major maintenance projects that substantially extend the useful life of existing assets. For financial reporting purposes, we depreciate these additions and replacements on a straight-line basis over estimated useful lives of 5-20 years. We retire replaced assets with a charge to depreciation for any remaining carrying value. We capitalize all floor covering, appliance and HVAC replacements, and depreciate them using a straight-line, group method over estimated useful lives of 5-10 years. Capital expenditures at our apartment communities during the second quarter of 2003 totaled approximately $600,000, including $109,000 for acquisition improvements, $83,000 for additions and betterments, and $408,000 for recurring capital expenditures. We expense ordinary repairs and maintenance costs at apartment communities. Repairs and maintenance at our apartment communities during the second quarter of 2003 totaled approximately $1.4 million. Through the first six months of 2003, repairs and maintenance at our apartment communities totaled $2.6 million, including $1.0 million in compensation of service staff and $1.6 million in payments for materials and contracted services. A summary of capital expenditures at our apartment communities through June 30, 2003, in aggregate and per apartment unit, follows: Total Per unit -------------------- ----------------- (000's) Recurring capital expenditures: Floor coverings $331 $ 74 Appliances/HVAC 99 22 Exterior paint 16 4 Computer/support equipment 9 2 Other 235 52 -------------------- ----------------- $690 $153 ==================== ================= Non-recurring capital expenditures: Acquisition improvements $314 Additions and betterments 337 Computer/support equipment 12 -------------------- $664 ==================== Costs of repairs, maintenance, and capital replacements and improvements at restaurant properties are borne by the lessee. 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in information that would be provided under Item 305 of Regulation S-K since December 31, 2002. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Capital Resources and Liquidity" above for a discussion of our exposure to interest rate risks. Item 4. Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our annual and periodic reports filed with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. These disclosure controls and procedures are further designed to ensure that this information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosures. Based on our most recent evaluation, which was completed as of the end of the second quarter of 2003, our chief executive officer and chief financial officer believe that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect the internal controls subsequent to the completion of this evaluation. Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders We held our Annual Meeting of Shareholders on May 28, 2003. Of the 5,848,652 shares of common stock issued, outstanding, and entitled to vote at this meeting, 5,453,132, or 93.2%, were present in person or by proxy. The following proposal was approved: Withheld/ Broker For Against Abstained Non-votes -------------- --------------- -------------- -------------- Election of directors to serve until the 2006 annual meeting: B. Mayo Boddie 5,382,242 -0- 70,890 -0- W. Michael Gilley 5,383,942 -0- 69,190 -0- Election of a Series B director to serve until the 2004 annual meeting: Peter J. Weidhorn (elected by the holders of Series B Cumulative Preferred Stock) 454,545 -0- -0- -0- 21 Other directors, whose terms of office as directors continue after the meeting, are as follows: Serving until the 2004 annual meeting: Stephen R. Blank Philip S. Payne Serving until the 2005 annual meeting: D. Scott Wilkerson Paul G. Chrysson Item 5. Other Information Re-appointment of officers The Company has announced the re-appointment of the following officers: D. Scott Wilkerson President and Chief Executive Officer Philip S. Payne Executive Vice President, Chief Financial Officer, Treasurer, and Assistant Secretary Pamela B. Bruno Vice President, Chief Accounting Officer, and Assistant Secretary Eric S. Rohm Vice President, General Counsel Douglas E. Anderson Vice President and Secretary Teresa Sandman Vice President - Property Management Item 6. Exhibits and Reports on Form 8-K a) Exhibits: Exhibit No. 31.1 Section 302 Certification by Chief Executive Officer 31.2 Section 302 Certification by Chief Financial Officer 32.1 Section 906 Certification by Chief Executive Officer 32.2 Section 906 Certification by Chief Financial Officer b) Reports on Form 8-K: We filed a Current Report on Form 8-K on May 6, 2003, to furnish under Items 9 and 12 a press release announcing the results of operations and financial condition of the company as of and for the quarter ended March 31, 2003. We filed a Current Report on Form 8-K on May 14, 2003, to furnish under Items 9 and 12 a report to shareholders announcing the results of operations and financial condition of the company as of and for the quarter ended March 31, 2003. 22 We filed a Current Report on Form 8-K on June 27, 2003, to respond under Item 5 to a question from the Securities and Exchange Commission regarding our Registration Statement on Form S-3 (333-106090) dated June 13, 2003. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BNP RESIDENTIAL PROPERTIES, INC. (Registrant) August 12, 2003 /s/ Philip S. Payne --------------------------------------------------- Philip S. Payne Executive Vice President and Chief Financial Officer (Duly authorized officer) August 12, 2003 /s/ Pamela B. Bruno --------------------------------------------------- Pamela B. Bruno Vice President, Controller and Chief Accounting Officer 24 INDEX TO EXHIBITS Exhibit No. Page 31.1 Section 302 Certification by Chief Executive Officer 26 31.2 Section 302 Certification by Chief Financial Officer 27 32.1 Section 906 Certification by Chief Executive Officer 28 32.2 Section 906 Certification by Chief Financial Officer 29 25