- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
---------------
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JULY 3, 1998
HIGHWOODS PROPERTIES, INC.
(Exact name of registrant specified in its charter)
MARYLAND 1-13100 56-1871668
(State of Incorporation) (Commission File Number) (IRS Employer Identification No.)
---------------
3100 SMOKETREE COURT, SUITE 600, RALEIGH, NORTH CAROLINA 27604
(Address of principal executive offices, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (919) 872-4924
- --------------------------------------------------------------------------------
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of businesses acquired
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1997 and 1996 and at June 30, 1998 (unaudited)
Consolidated Statements of Operations For the Years Ended December 31, 1997, 1996 and
1995 and For the Six Months Ended June 30, 1998 and 1997 (unaudited)
Consolidated Statements of Stockholders' Equity (Deficit) For the Years Ended December 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995
and For the Six Months Ended June 30, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements
(b) Pro forma financial information
Pro Forma Condensed Consolidated Balance Sheet (unaudited) as of June 30, 1998
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited)
Pro Forma Condensed Consolidated Statement of Operations (unaudited) For the Six Months
Ended June 30, 1998
Notes to Pro Forma Condensed Consolidated Statement of Operations (unaudited)
Pro Forma Condensed Consolidated Statement of Operations (unaudited) For the Year Ended
December 31, 1997
Notes to Pro Forma Condensed Consolidated Statement of Operations (unaudited)
(c) Exhibits
10.1 Credit Agreement among Highwoods Realty Limited Partnership, Highwoods Properties,
Inc., the Subsidiaries named therein and the Lenders named therein, dated as of July 3, 1998
(previously filed)
23 Consent of KPMG Peat Marwick LLP (previously filed)
2
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.
HIGHWOODS PROPERTIES, INC.
By: /s/ CARMAN J. LIUZZO
------------------------------------
CARMAN J. LIUZZO
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Date: September 30, 1998
3
INDEX TO THE FINANCIAL STATEMENTS
PAGE
-----
PRO FORMA FINANCIAL STATEMENTS OF HIGHWOODS
Pro Forma Condensed Consolidated Balance Sheet (unaudited) as of June 30, 1998 ......... F-2
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited) .................... F-3
Pro Forma Condensed Consolidated Statement of Operations (unaudited) For the Six Months
Ended June 30, 1998 ................................................................... F-4
Notes to Pro Forma Condensed Consolidated Statement of Operations (unaudited) .......... F-5
Pro Forma Condensed Consolidated Statement of Operations (unaudited) For the Year Ended
December 31, 1997 ..................................................................... F-6
Notes to Pro Forma Condensed Consolidated Statement of Operations (unaudited) .......... F-8
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES OF J.C. NICHOLS
COMPANY AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
FINANCIAL STATEMENTS:
Independent Auditors' Report ............................................................ F-11
Consolidated Balance Sheets at December 31, 1997 and 1996 and at June 30, 1998
(Unaudited) ......................................................................... F-12
Consolidated Statements of Operations For the Years Ended December 31, 1997, 1996 and
1995 and For the Six Months Ended June 30, 1998 and 1997 (Unaudited) ................ F-13
Consolidated Statements of Stockholders' Equity (Deficit) For the Years Ended December
31, 1997, 1996 and 1995 ............................................................. F-14
Consolidated Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and
1995 and For the Six Months Ended June 30, 1998 and 1997 (Unaudited) ................ F-15
Notes to Consolidated Financial Statements ............................................ F-16
F-1
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1998
(IN THOUSANDS)
PRO FORMA
HISTORICAL (A) J.C. NICHOLS (B) ADJUSTMENTS (C) PRO FORMA
---------------- ------------------ ----------------- -------------
ASSETS
Real estate assets, net ............................ $3,341,444 $ 181,831 $ 304,140 $3,827,415
Cash and cash equivalents .......................... 18,758 58,670 -- 77,428
Accounts and notes receivables ..................... 32,422 32,517 -- 64,939
Accrued straight line rent receivable .............. 19,205 -- -- 19,205
Minority interest in consolidated partnerships ..... -- 4,962 (4,962) --
Investment in real estate partnerships ............. -- 9,166 14,422 23,588
Other assets ....................................... 57,095 9,417 -- 66,512
---------- ---------- ---------- ----------
$3,468,924 $ 296,563 $ 313,600 $4,079,087
========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable ........................ $1,408,700 $ 288,170 $ 120,095 $1,816,965
Accounts payable, accrued expenses and other ....... 69,164 26,044 (6,134) 89,074
---------- ---------- ---------- ----------
Total liabilities .................................. 1,477,864 314,214 113,961 1,906,039
Minority interest .................................. 295,422 -- 1,846 297,268
Preferred stock:
Series A ......................................... 125,000 -- -- 125,000
Series B ......................................... 172,500 -- -- 172,500
Series D ......................................... 100,000 -- -- 100,000
Stockholders' equity:
Common stock ..................................... 529 100 (44) 585
Additional paid in capital ....................... 1,332,853 24,298 155,788 1,512,939
Treasury stock ................................... -- (145,978) 145,978 --
Distributions in excess of net earnings .......... (35,244) 103,929 (103,929) (35,244)
---------- ---------- ---------- ----------
Total stockholders' equity ......................... 1,695,638 (17,651) 197,793 1,875,780
---------- ---------- ---------- ----------
$3,468,924 $ 296,563 $ 313,600 $4,079,087
========== ========== ========== ==========
F-2
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated balance sheet
of Highwoods Properties, Inc. (the "Company") is presented as if the completion
of the acquisition of J.C. Nichols Company, a publicly traded Kansas City real
estate operating company ("J.C. Nichols") owning or having an ownership
interest in 48 office properties, 14 industrial properties, 33 retail
properties and 18 multi-family communities (the "JCN Transaction") had been
consummated on June 30, 1998.
The acquisition has been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values, which may be subject to further
refinement, including appraisals and other analyses.
This unaudited pro forma condensed consolidated balance sheet should be
read in conjunction with the pro forma condensed consolidated statement of
operations of the Company for the six months ended June 30, 1998 and for the
year ended December 31, 1997, the consolidated financial statements and related
notes of the Company included in its Annual Report on Form 10-K for the year
ended December 31, 1997, the unaudited financial statements and related notes
of the Company included in its Quarterly Reports on Form 10-Q for the quarters
ended June 30, 1998 and March 31, 1998 and the consolidated financial
statements and related notes of J.C. Nichols Company and Subsidiaries as of and
for the six months ended June 30, 1998 included herein.
The pro forma condensed consolidated balance sheet is unaudited and not
necessarily indicative of what the actual financial position would have been
had the aforementioned transactions actually occurred on June 30, 1998, nor
does it purport to represent the future financial position of the Company.
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a.) Represents the Company's historical consolidated balance sheet
contained in the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998.
(b.) Represents J.C. Nichols Company and Subsidiaries' historical
consolidated balance sheet as of June 30, 1998 included herein.
(c.) Reflects the allocation of the $564.1 million purchase price to the
fair value of the net assets acquired in the JCN Transaction. The purchase
price consists of the issuance of approximately $180.1 million in equity
or 5,625,990 shares of the Company's Common Stock (valued at $32.0197 per
share), the assumption of approximately $308.1 million of liabilities, and
net cash paid of $75.9 million (net of $58.7 million cash assumed as of
June 30, 1998 from J.C. Nichols and $14.5 million in transaction costs).
F-3
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL (A)
----------------
REVENUE:
Rental property ....................................................... $213,410
Residential sales ..................................................... --
Other Income .......................................................... 4,719
--------
218,129
OPERATING EXPENSES:
Rental property ....................................................... 65,559
Residential cost of sales ............................................. --
Depreciation and amortization ......................................... 37,501
INTEREST EXPENSE:
Contractual .......................................................... 34,383
Amortization of deferred financing costs ............................. 1,232
--------
35,615
General and administrative ............................................ 8,170
--------
Income before minority interest ....................................... 71,288
Minority interest ..................................................... (11,874)
--------
Income before extraordinary item and dividends on preferred shares..... 59,414
Extraordinary item-loss on extinguishment of debt ..................... (46)
--------
59,368
Dividends on preferred shares ......................................... (13,801)
--------
Net income available for common shareholders .......................... $ 45,567
========
Net income per common share-basic ..................................... $ 0.90
========
Net income per common share-diluted ................................... $ 0.89
========
Weighted average shares-basic ......................................... 50,714
========
Weighted average shares-diluted ....................................... 51,221
========
PRO FORMA
J.C. NICHOLS (B) ADJUSTMENTS PRO FORMA
------------------ ----------------- ------------
REVENUE:
Rental property ....................................................... $38,558 $ -- $251,968
Residential sales ..................................................... 7,886 (7,886)(d) --
Other Income .......................................................... 7,876 178 (d) 12,773
------- ---------- --------
54,320 (7,708) 264,741
OPERATING EXPENSES:
Rental property ....................................................... 24,348 (5,198)(e) 84,705
Residential cost of sales ............................................. 7,708 (7,708)(d) --
Depreciation and amortization ......................................... 5,848 (974)(f) 42,375
INTEREST EXPENSE:
Contractual .......................................................... 10,142 -- 44,525
Amortization of deferred financing costs ............................. -- -- 1,232
------- ---------- --------
10,142 -- 45,757
General and administrative ............................................ -- 5,198 (e) 13,368
------- ---------- --------
Income before minority interest ....................................... 6,274 974 78,536
Minority interest ..................................................... -- (299)(c) (12,173)
------- ---------- --------
Income before extraordinary item and dividends on preferred shares..... 6,274 675 66,363
Extraordinary item-loss on extinguishment of debt ..................... -- -- (46)
------- ---------- --------
6,274 675 66,317
Dividends on preferred shares ......................................... -- -- (13,801)
------- ---------- --------
Net income available for common shareholders .......................... $ 6,274 $ 675 $ 52,516
======= ========== ========
Net income per common share-basic ..................................... $ 0.93
========
Net income per common share-diluted ................................... $ 0.92
========
Weighted average shares-basic ......................................... 56,340
========
Weighted average shares-diluted ....................................... 56,847
========
F-4
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated statement of
operations is presented as if the JCN Transaction had been consummated on
January 1, 1998.
This unaudited pro forma condensed consolidated statement of operations
should be read in conjunction with the pro forma condensed consolidated balance
sheet of the Company as of June 30, 1998, the consolidated financial statements
and related notes of the Company included in its Annual Report on Form 10-K for
the year ended December 31, 1997, the unaudited financial statements and
related notes of the Company included in its Quarterly Report on Form 10-Q for
the quarters ended June 30, 1998 and March 31, 1998, and the consolidated
financial statements and related notes of J.C. Nichols Company and Subsidiaries
for the year ended December 31, 1997 and for the six months ended June 30,
1998, both of which are included herein.
The pro forma condensed consolidated statement of operations is unaudited
and is not necessarily indicative of what the Company's actual results would
have been had the aforementioned transactions actually occurred on January 1,
1998 nor does it purport to represent the future operating results of the
Company.
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
(a.) Represents the Company's historical consolidated statement of
operations contained in its Quarterly Report on Form 10-Q for the six
months ended June 30, 1998.
(b.) Represents the J.C. Nichols Company and Subsidiaries' historical
statement of operations (pre-tax) contained in its consolidated financial
statements and related notes for the six months ended June 30, 1998
included herein.
(c.) Represents the net adjustment to minority interest to reflect the pro
forma minority interest percentage of 15.5%.
(d.) Represents the reclassification of the historical gross profit of the
residential business to other income as this has been accounted for in a
separate business entity under the equity method of accounting following
acquisition. J.C. Nichols consolidated the residential business; however,
subsequent to the merger, the Company will not have majority ownership or
control of the entity which conducts the residential business and
accordingly uses the equity method of accounting.
(e.) Represents a reclass of certain operating expenses to general and
administrative expense ($5,198) for comparative purposes.
(f.) Represents the reduction in historical depreciation expense on the
properties acquired in the JCN Transaction based on an 80% allocation to
buildings and a 20% allocation to land for net assets acquired. Amounts
recorded as tenant improvements on J.C. Nichols' general ledger
depreciated as buildings over 40 years after the combination, account for
the decrease.
F-5
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CENTURY CENTER 1997
AND ANDERSON OTHER ACP PENDING
HISTORICAL (A) TRANSACTIONS (B) OFFERINGS (C) PORTFOLIO (D) ACQUISITIONS (E)
---------------- ------------------ ------------- ------------- ------------------
REVENUE:
Rental property ..................... $ 266,933 $ 1,047 $ -- $ 52,411 $10,560
Residential sales ................... -- -- -- -- --
Other Income ........................ 7,537 -- -- 1,880 123
--------- -------- --------- -------- -------
274,470 1,047 -- 54,291 10,683
OPERATING EXPENSES:
Rental property ..................... 76,743 317 -- 23,956 4,396
Residential cost of sales ........... -- -- -- -- --
Depreciation and amortization ....... 47,533 715 -- 9,019 --
INTEREST EXPENSE:
Contractual ........................ 45,138 1,358 (1,077) 25,215 --
Amortization of deferred
financing costs ................... 2,256 -- -- -- --
--------- -------- --------- -------- -------
47,394 1,358 (1,077) 25,215 --
General and administrative .......... 10,216 -- -- -- --
--------- -------- --------- -------- -------
Income before minority interest ..... 92,584 (1,343) 1,077 (3,899) 6,287
Minority interest ................... (15,106) -- -- -- --
--------- -------- --------- -------- -------
Income before extraordinary item
and dividends on preferred
shares ............................. 77,478 (1,343) 1,077 (3,899) 6,287
Extraordinary item-loss on
extinguishment of debt ............. (5,799)
---------
71,679 (1,343) 1,077 (3,899) 6,287
Dividends on preferred shares ....... (13,117) -- (1,289) -- --
--------- -------- --------- -------- -------
Net income available for common
shareholders ....................... $ 58,562 $ (1,343) $ (212) $ (3,899) $ 6,287
========= ======== ========= ======== =======
Net income per common
share-basic ........................ $ 1.51
=========
Net income per common-basic
share-diluted ...................... $ 1.50
=========
Weighted average shares-basic ....... 38,770
=========
Weighted average shares-diluted ..... 39,161
=========
USE OF
PREFERRED
STOCK COMMON OTHER PRO FORMA
OFFERING STOCK ACQUIRED ACQUIRED ACQUIRED PROPERTIES
PROCEEDS OFFERING PROPERTIES (J) PROPERTIES (K) ADJUSTMENTS
----------------- ------------------ ---------------- ---------------- --------------------
REVENUE:
Rental property ..................... $ -- $ -- $9,332 $ 13,255 $ --
Residential sales ................... -- -- -- -- --
Other Income ........................ -- -- -- -- --
----------- ----------- ------ -------- ---------
-- -- 9,332 13,255 --
OPERATING EXPENSES:
Rental property ..................... -- -- 1,727 6,474 188(l)
Residential cost of sales ........... -- -- -- -- --
Depreciation and amortization ....... -- -- -- -- 3,369(m)
INTEREST EXPENSE:
Contractual ........................ (8,378)(f) (13,704)(i) -- -- 12,947(n)
Amortization of deferred
financing costs ................... -- -- -- -- --
----------- ----------- ------ -------- ---------
(8,378) (13,704) -- -- 12,947
General and administrative .......... -- -- -- -- --
----------- ----------- ------ -------- ---------
Income before minority interest ..... 8,378 13,704 7,605 6,781 (16,504)
Minority interest ................... (1,257)(g) (2,056)(g) -- -- --
----------- ----------- ------ -------- ---------
Income before extraordinary item
and dividends on preferred
shares ............................. 7,121 11,648 7,605 6,781 (16,504)
Extraordinary item-loss on
extinguishment of debt .............
7,121 11,648 7,605 6,781 (16,504)
Dividends on preferred shares ....... (10,175)(h) -- -- -- --
----------- ----------- ------ -------- ---------
Net income available for common
shareholders ....................... $ (3,054) $ 11,648 $7,605 $ 6,781 $ (16,504)
=========== =========== ====== ======== =========
Net income per common
share-basic ........................
Net income per common-basic
share-diluted ......................
Weighted average shares-basic .......
Weighted average shares-diluted .....
F-6
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) --
(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MOPPRS 1998 SERIES D
AND DEBT COMMON STOCK PREFERRED SHARE
OFFERING OFFERING OFFERING
------------ --------------- ----------------
REVENUE:
Rental property ........................................................ $ -- $ -- $ --
Residential sales ...................................................... -- -- --
Other Income ........................................................... -- -- --
------ -------- ----------
-- -- --
OPERATING EXPENSES:
Rental property ........................................................ -- -- --
Cost of residential sales .............................................. -- -- --
Depreciation and amortization .......................................... -- -- --
INTEREST EXPENSE:
Contractual ........................................................... 285(o) (415)(q) --
Amortization of deferred financing costs .............................. 108(p) -- --
------ -------- ----------
393 (415) --
General and administrative ............................................. -- -- --
------ -------- ----------
Income before minority interest ........................................ (393) 415 --
Minority interest ...................................................... 59(g) (62)(g) --
------ -------- ----------
Income before extraordinary item and dividends on preferred shares ..... (334) 353 --
Extraordinary item -- loss on extinguishment of debt ...................
(334) 353 --
Dividends on preferred shares .......................................... -- -- (8,000)(r)
------ -------- ----------
Net income available for common shareholders ........................... $ (334) $ 353 $ (8,000)
====== ======== ==========
Net income per common share -- basic ...................................
Net income per common share -- diluted .................................
Weighted average shares-basic ..........................................
Weighted average shares-diluted ........................................
$200 MILLION JCN
DEBT JCN PRO FORMA
OFFERING HISTORICAL (U) ADJUSTMENTS
------------- ---------------- -----------------
REVENUE:
Rental property ........................................................ $ -- $78,076 $ --
Residential sales ...................................................... -- 7,137 (7,137)(v)
Other Income ........................................................... -- 12,646 1,812 (v)
-------- ------- ----------
-- 97,859 (5,325)
OPERATING EXPENSES:
Rental property ........................................................ -- 44,654 (7,476)(w)
Cost of residential sales .............................................. -- 5,325 (5,325)(v)
Depreciation and amortization .......................................... 13,483 (3,287)(x)
INTEREST EXPENSE:
Contractual ........................................................... 2,078(s) 22,333 --
Amortization of deferred financing costs .............................. 449(t) -- --
-------- ------- ----------
2,527 22,333 --
General and administrative ............................................. -- 7,476(w)
-------- ----------
Income before minority interest ........................................ (2,527) 12,064 3,287
Minority interest ...................................................... 379(g) -- (1,085)(g)
-------- ------- ----------
Income before extraordinary item and dividends on preferred shares ..... (2,148) 12,064 2,202
Extraordinary item -- loss on extinguishment of debt ...................
(2,148) 12,064 2,202
Dividends on preferred shares .......................................... -- -- --
-------- ------- ----------
Net income available for common shareholders ........................... $ (2,148) $12,064 $ 2,202
======== ======= ==========
Net income per common share -- basic ...................................
Net income per common share -- diluted .................................
Weighted average shares-basic ..........................................
Weighted average shares-diluted ........................................
PRO FORMA
------------
REVENUE:
Rental property ........................................................ $ 431,614
Residential sales ...................................................... --
Other Income ........................................................... 23,998
---------
455,612
OPERATING EXPENSES:
Rental property ........................................................ 150,979
Cost of residential sales .............................................. --
Depreciation and amortization .......................................... 70,832
INTEREST EXPENSE:
Contractual ........................................................... 85,780
Amortization of deferred financing costs .............................. 2,813
---------
88,593
General and administrative ............................................. 17,692
---------
Income before minority interest ........................................ 127,516
Minority interest ...................................................... (19,128)
---------
Income before extraordinary item and dividends on preferred shares ..... 108,388
Extraordinary item -- loss on extinguishment of debt ................... (5,799)
---------
102,589
Dividends on preferred shares .......................................... (32,581)
---------
Net income available for common shareholders ........................... $ 70,008
=========
Net income per common share -- basic ................................... $ 1.15
=========
Net income per common share -- diluted ................................. $ 1.14
=========
Weighted average shares-basic .......................................... 60,897
=========
Weighted average shares-diluted ........................................ 61,534
=========
F-7
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated statement of
operations is presented as if the following transactions had been consummated
on January 1, 1997: (a) the completion of the business combination with
Anderson Properties, Inc. ("Anderson Properties") and the purchase of a
portfolio of properties from affiliates of Anderson Properties (the "Anderson
Transaction") and the purchase of Century Center Office Park and an affiliated
property portfolio (the "Century Center Transaction"), (b) the issuance of
125,000 8 5/8% Series A Cumulative Redeemable Preferred Shares (the "Series A
Preferred Shares") and of $100,000,000 of Exercisable Put Option Notes
(collectively the "Other Offerings"), (c) the completion of a business
combination with Associated Capital Properties, Inc. ("ACP") (d) the completion
of the acquisition of the seven properties that ACP had under contract to
purchase (the "1997 Pending Acquisitions"), (e) the issuance of 6.9 million 8%
Series B Cumulative Redeemable Preferred Shares (the "Series B Preferred
Shares") (the "Preferred Stock Offering"), (f) the issuance of 8.5 million
shares of Common Stock (the "Common Stock Offering"), (g) the completion of the
business combination with Riparius Development Corporation and the acquisition
of seven properties in Winston-Salem, NC and one property in Nashville, TN
(collectively, the "Acquired Properties"), (h) the completion of the Garcia
acquisition consisting of fourteen properties, six service center properties an
66 acres of development land and the completion of four other acquisitions of
seven properties (collectively, the "Other Acquired Properties"), (i) the
issuance by Highwoods Realty Limited Partnership (the "Operating Partnership")
of $125 million of 6.835% MandatOry Par Put Remarketed Securities(SM)
("MOPPRS(SM)") due 2013 and $100 million of 7 1/8% notes due 2008 (the "MOPPRS
and Debt Offering") (j) the issuance of 2 million shares of Common Stock at a
price of $36 per share ("the 1998 Common Stock Offering), (k) the issuance of
400,000 8% Series D Cumulative Redeemable Preferred Shares (the "Series D
Preferred Share Offering"), (l) the issuance by the Operating Partnership of
$200 million of 7 1/2% notes due 2018 (the "April 1998 Debt Offering") and (m)
the completion of the JCN Transaction.
This unaudited pro forma condensed consolidated statement of operations
should be read in conjunction with the pro forma condensed consolidated balance
sheet of the Company as of June 30, 1998, the consolidated financial statements
and related notes of the Company included in its Annual Report on Form 10-K for
the year ended December 31, 1997, the unaudited financial statements and
related notes of the Company included in its Quarterly Reports on Form 10-Q for
the quarters ended March 31, 1998 and June 30, 1998, the financial statements
and related notes of Associated Capital Properties Portfolio and 1997 Pending
Acquisitions included in the Company's Current Report on Form 8-K dated October
1, 1997 (as filed with the Securities and Exchange Commission on October 16,
1997), the statements of revenues and certain expenses of Riparius Properties,
Shelton Properties and Winners Circle for the year ended December 31, 1996
included in the Company's Form 8-K dated November 17, 1997 (as filed with the
Securities and Exchange Commission on February 3, 1998), and the consolidated
financial statements and related notes of J.C. Nichols Company and Subsidiaries
for the year ended December 31, 1997 and for the six months ended June 30,
1998, both of which are included herein.
The pro forma condensed consolidated statement of operations is unaudited
and is not necessarily indicative of what the Company's actual results would
have been had the aforementioned transactions actually occurred on January 1,
1997 nor does it purport to represent the future operating results of the
Company.
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
(a.) Represents the Company's historical consolidated statement of
operations contained in its Annual Report on Form 10-K for the year ended
December 31, 1997.
(b.) Reflects the historical statement of operations of Century Center
Office Park and an affiliated portfolio ("Century Center") and the
properties acquired in the Anderson Transaction for the period from
January 1, 1997 through the respective dates of their acquisition,
adjusted on a pro forma basis for interest expense and depreciation
expense. Interest expense reflects the reduction in mortgage interest rate
costs based on the average rate of assumed debt (7.15% and 8.78% for
Century Center and Anderson Properties, respectively) at the date of
acquisition. Depreciation expense has been adjusted to reflect a 40 year
depreciable life for buildings on a straight line basis at the date of
acquisition.
F-8
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) -- CONTINUED
(c.) Reflects the estimated interest expense savings on $127.5 million of
the Company's $430 million unsecured revolving lines of credit (the "Lines
of Credit") at an interest rate of 7.60% (6.25% interest rate cap plus 135
basis points) and $63.1 million of other loans repaid with the proceeds of
the Other Offerings at an average interest rate of 8.50% and the dividends
incurred on the Company's Series A Preferred Shares from January 1, 1997
through the date of the offering of the Series A Preferred Shares.
(d.) Represents the historical revenues and operating expenses of the ACP
Portfolio through the date of acquisition and the historical operations of
properties acquired by ACP during 1997 from January 1, 1997 to the
respective dates of their acquisition adjusted on a pro forma basis for
incremental revenue related to owner-occupied buildings, interest expense
and depreciation expense related to the ACP Portfolio and the 1997 Pending
Acquisitions. Interest expense reflects the reduction in mortgage interest
costs based on the average interest rate of assumed debt (8.27%) and the
interest rate on debt drawn on the line of credit (6.69%) at the date of
acquisition. Depreciation expense had been adjusted to reflect a 40 year
depreciable life for buildings on a straight line basis at the date of
acquisition.
(e.) Reflects the historical revenues and operating expenses of the 1997
Pending Acquisitions through the date of acquisition.
(f.) Reflects the estimated interest expense savings on $166.9 million of the
Lines of Credit at an average interest rate of 6.69% repaid with the
proceeds of the Preferred Stock Offering.
(g.) Represents the net adjustment to minority interest to reflect the pro
forma minority interest percentage of 15.0%.
(h.) Represents the 8% dividend on the Series B Preferred Shares issued in
the Preferred Stock Offering.
(i.) Represents the estimated interest expense savings on $273.1 million of
the Lines of Credit at an average interest rate of 6.69% repaid with the
proceeds of the Common Stock Offering.
(j.) Reflects the historical revenues and operating expenses of Acquired
Properties through the date of acquisition.
(k.) Reflects the historical revenues and operating expenses of Other
Acquired Properties through the date of acquisition.
(l.) Represents the incremental operating expenses related to salary expense
of property management incurred by the Company upon completion of the
Acquired Properties and the Other Acquired Properties.
(m.) Represents the net adjustment of depreciation expense for Acquired
Properties and the Other Acquired Properties based upon an assumed
allocation of the purchase price to land, buildings and development in
process. Building depreciation is computed on a straight-line basis using
an estimated life of 40 years.
(n.) Represents the net adjustment to interest expense to reflect interest
costs on $219.4 million in borrowings under the Lines of Credit at an
assumed rate of 6.87% (the capped interest rate based on a 30-day LIBOR
rate of 5.87% plus 100 basis points) and $31.0 million in assumed debt at a
weighted average interest rate of 8.33%.
(o.) Represents the estimated interest expense on $125 million of MOPPRS due
2013 at an interest rate of 6.835% and $100 million in debt securities due
2008 (at a rate of 7.125%) offset by the interest expense savings on the
$226.3 million of the Lines of Credit at an average interest rate of 6.69%
repaid with the proceeds of the MOPPRS and Debt Offering.
(p.) Represents the amortization of the deferred financing costs associated
with the MOPPRS and Debt Offering, straight-line over the terms of the
securities offset by the amortization of the $3.5 million MOPPRS premium
paid by the remarketing dealer, using the effective interest method over
the term of the securities.
(q.) Represents the estimated interest expense savings on $30.8 million of
the Lines of Credit at an average interest rate of 6.69% repaid with a
portion of the net proceeds of the 1998 Common Stock Offering.
(r.) Represents the 8% dividend on the Series D Preferred Shares issued in
the Series D Preferred Share Offering.
F-9
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) -- CONTINUED
(s.) Represents the estimated interest expense on $200 million of notes due
2018 at a discount of .361% with an interest rate of 7.5% offset by the
interest expense savings on $170.9 million of the Lines of Credit at an
average interest rate of 6.95% repaid with the proceeds of the notes.
(t.) Represents the amortization of the deferred financing costs (including
the $6.4 million paid to terminate the related treasury lock agreement)
associated with the $200 million notes using the effective interest rate
method for the hedge instrument and underwriters discount and the straight
line basis for the financing costs.
(u.) Represents the J.C. Nichols Company and Subsidiaries' historical
statement of operations (pre-tax) contained in the consolidated financial
statements and related notes of J.C. Nichols Company and Subsidiaries as
of and for the year ended December 31, 1997 included herein.
(v.) Represents the reclassification of the historical gross profit of the
residential business to other income as this has been accounted for in a
separate business entity under the equity method of accounting following
acquisition. J.C. Nichols Company consolidated the residential business;
however, subsequent to the merger, the Company does not have majority
ownership or control of the entity which conducts the residential business
and accordingly uses the equity method of accounting.
(w.) Represents a reclass of certain operating expenses to general and
administrative expense ($7,476) for comparative purposes.
(x.) Represents the reduction in historical depreciation expense on the
properties acquired in the JCN Transaction based on an 80% allocation to
buildings and a 20% allocation to land for net assets acquired. Amounts
recorded as tenant improvements on J.C. Nichols' general ledger and
depreciated as buildings over 40 years after the combination, account for
the decrease.
F-10
INDEPENDENT AUDITORS' REPORT
Board of Directors
J.C. Nichols Company
Kansas City, Missouri:
We have audited the accompanying consolidated balance sheets of J.C.
Nichols Company and subsidiaries (the Company) as of December 31, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Kansas City, Missouri
March 6, 1998
F-11
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
--------------------------------- ---------------
1997 1996 1998
---------------- ---------------- ---------------
(UNAUDITED)
ASSETS
Revenue-producing properties (note 2) ................................. $ 163,097,000 $ 189,011,000 $ 165,996,000
Land and improvement inventories ...................................... 9,791,000 24,204,000 8,597,000
Property held for future development .................................. 7,793,000 6,918,000 7,238,000
------------- ------------- -------------
Total properties .................................................... 180,681,000 220,133,000 181,831,000
Cash and cash equivalents ............................................. 15,968,000 14,454,000 26,255,000
Temporary investments ................................................. 42,633,000 45,053,000 32,415,000
Accounts receivable (note 9) .......................................... 3,061,000 2,000,000 2,214,000
Prepaid expenses ...................................................... 6,378,000 6,355,000 6,837,000
Notes receivable (notes 3, 9 and 10) .................................. 40,757,000 21,514,000 30,303,000
Investments in real estate partnerships (note 4) ...................... 2,457,000 2,163,000 9,166,000
Minority interest in consolidated partnerships ........................ 4,717,000 4,431,000 4,962,000
Income taxes receivable ............................................... 383,000 -- --
Deferred income taxes (note 7) ........................................ -- 3,456,000 368,000
Other assets, net ..................................................... 739,000 768,000 2,212,000
------------- ------------- -------------
$ 297,774,000 $ 320,327,000 $ 296,563,000
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Mortgage indebtedness (note 5) ........................................ $ 288,553,000 $ 309,188,000 $ 285,682,000
Notes payable to banks and others (notes 9 and 14) .................... 12,990,000 2,000,000 2,488,000
Accounts payable and tenants' deposits ................................ 9,059,000 6,633,000 7,358,000
Accrued expenses and other liabilities ................................ 8,613,000 8,020,000 8,397,000
Income taxes payable .................................................. -- 11,525,000 2,133,000
Accrued contribution to Employee Stock Ownership Trust (note 10) ...... -- 11,050,000 --
Deferred gains on the sale of property ................................ 2,024,000 517,000 2,022,000
Deferred income taxes (note 7) ........................................ 2,708,000 -- 6,134,000
------------- ------------- -------------
323,947,000 348,933,000 314,214,000
------------- ------------- -------------
Stockholders' equity (deficit):
Common stock, par value $.01 per share; 10,000,000 shares
authorized and 5,721,744, 5,016,745 and 4,619,039 shares
issued (note 13) .................................................. 100,000 100,000 100,000
Additional paid-in capital .......................................... 19,917,000 8,319,000 24,298,000
Retained earnings ................................................... 99,788,000 80,402,000 103,929,000
------------- ------------- -------------
119,805,000 88,821,000 128,327,000
Less treasury stock, at cost (1,179,235, 164,345 and 1,179,235
shares of common stock) (note 14)................................... 145,978,000 117,427,000 145,978,000
------------- ------------- -------------
Total stockholders' equity (deficit) .................................. (26,173,000) (28,606,000) (17,651,000)
Commitments and contingencies (notes 2, 8 and 10) .....................
$ 297,774,000 $ 320,327,000 $ 296,563,000
============= ============= =============
See accompanying notes to consolidated financial statements.
F-12
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
--------------- ----------------- -----------------
Sales and revenues:
Rents ....................................... $ 78,076,000 $ 79,878,000 $ 79,818,000
Property sales .............................. 7,137,000 6,623,000 6,047,000
Commissions and fees ........................ 1,057,000 1,232,000 1,459,000
Dividends and interest ...................... 5,740,000 4,634,000 4,806,000
Gains on sales of investments and other
assets .................................... 2,628,000 34,867,000 5,711,000
Equity in earnings of unconsolidated
affiliates ................................ 1,639,000 697,000 157,000
Other ....................................... 1,582,000 4,697,000 1,307,000
------------ ------------- -------------
97,859,000 132,628,000 99,305,000
------------ ------------- -------------
Costs and expenses:
Selling, general and operating expenses ..... 44,654,000 45,394,000 45,952,000
Cost of property sales ...................... 5,325,000 5,162,000 3,944,000
Interest .................................... 22,333,000 23,466,000 27,862,000
Depreciation and amortization ............... 13,483,000 13,954,000 14,355,000
Employee Stock Ownership Trust
contribution (note 10) .................... -- -- 1,787,000
Valuation allowances ........................ -- -- 2,350,000
Litigation settlement (note 11) ............. -- -- 19,553,000
------------ ------------- -------------
85,795,000 87,976,000 115,803,000
------------ ------------- -------------
Income (loss) before income taxes ............ 12,064,000 44,652,000 (16,498,000)
Income tax expense (benefit) (note 7) ........ (7,322,000) 16,750,000 (5,746,000)
------------ ------------- -------------
Net income (loss) ............................ $ 19,386,000 $ 27,902,000 $ (10,752,000)
============ ============= =============
Basic income (loss) per share ................ $ 4.63 $ 5.75 $ (0.74)
============ ============= =============
Diluted income (loss) per share .............. $ 4.47 $ 5.62 $ (0.74)
============ ============= =============
SIX MONTHS ENDED JUNE 30,
---------------------------------
1998 1997
---------------- ----------------
(UNAUDITED)
Sales and revenues:
Rents ....................................... $ 38,558,000 $ 39,731,000
Property sales .............................. 7,886,000 3,286,000
Commissions and fees ........................ -- 469,000
Dividends and interest ...................... 2,402,000 2,353,000
Gains on sales of investments and other
assets .................................... 1,375,000 236,000
Equity in earnings of unconsolidated
affiliates ................................ 3,737,000 172,000
Other ....................................... 362,000 436,000
------------ ------------
54,320,000 46,683,000
------------ ------------
Costs and expenses:
Selling, general and operating expenses ..... 24,348,000 19,378,000
Cost of property sales ...................... 7,708,000 2,831,000
Interest .................................... 10,142,000 11,639,000
Depreciation and amortization ............... 5,848,000 6,741,000
Employee Stock Ownership Trust
contribution (note 10) .................... -- --
Valuation allowances ........................ -- --
Litigation settlement (note 11) ............. -- --
------------ ------------
48,046,000 40,589,000
------------ ------------
Income (loss) before income taxes ............ 6,274,000 6,094,000
Income tax expense (benefit) (note 7) ........ 2,133,000 2,285,000
------------ ------------
Net income (loss) ............................ $ 4,141,000 $ 3,809,000
============ ============
Basic income (loss) per share ................ $ 0.90 $ 0.95
============ ============
Diluted income (loss) per share .............. $ 0.87 $ 0.92
============ ============
See accompanying notes to consolidated financial statements.
F-13
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED
DECEMBER 31,
-----------------
1997
-----------------
Common stock:
Balance at beginning and end of year (note 13) ........................... $ 100,000
--------------
Additional paid-in capital (note 13):
Balance at beginning of year ............................................. 8,319,000
Contribution of 110,000 shares to Employee Stock Ownership Trust
(note 10) .............................................................. --
Conveyance of 679,999 shares to Employee Stock Ownership Trust
and to a Court (note 10) ............................................... 11,050,000
Income tax benefit of options exercised on 25,000 shares ................. 381,000
Earned stock compensation (note 12) ...................................... 167,000
--------------
Balance at end of year ................................................... 19,917,000
--------------
Unrealized gain on marketable equity securities available-for-sale, net
of income taxes:
Balance at beginning of year ............................................. --
Unrealized gain, net of income taxes of $184,000 and $4,165,000 .......... --
Realized loss from sale of securities, net of income taxes of
$23,000 ................................................................ --
Realized gain from sale of securities, net of income taxes of
$11,636,000 and $208,000 ............................................... --
--------------
Balance at end of year ................................................... --
--------------
Retained earnings:
Balance at beginning of year ............................................. 80,402,000
Net income (loss) ........................................................ 19,386,000
--------------
Balance at end of year ................................................... 99,788,000
--------------
Treasury stock:
Balance at beginning of year ............................................. (117,427,000)
Contribution of 110,000 shares to Employee Stock Ownership Trust
(notes 10 and 13) ...................................................... --
Receipt of 12,227 shares in litigation settlement (note 11) .............. --
Receipt of 125,242 shares previously securing note receivable
(note 11) .............................................................. --
Purchase of 948,880 shares (note 14) ..................................... (25,857,000)
Receipt of 54,162 shares from Employee Stock Ownership Trust in
payment of note receivable (note 10) ................................... (1,983,000)
Purchase of 11,848 shares ................................................ (711,000)
--------------
Balance at end of year ................................................... (145,978,000)
--------------
Note receivable secured by the Company's common stock:
Balance at beginning of year ............................................. --
Transfer of 125,242 shares to treasury stock in settlement of note
receivable (note 11) ................................................... --
Balance at end of year ................................................... --
--------------
Total stockholders' equity (deficit) ...................................... $ (26,173,000)
==============
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1995
------------------ ------------------
Common stock:
Balance at beginning and end of year (note 13) ........................... $ 100,000 $ 100,000
-------------- --------------
Additional paid-in capital (note 13):
Balance at beginning of year ............................................. 7,079,000 6,002,000
Contribution of 110,000 shares to Employee Stock Ownership Trust
(note 10) .............................................................. -- 1,077,000
Conveyance of 679,999 shares to Employee Stock Ownership Trust
and to a Court (note 10) ............................................... -- --
Income tax benefit of options exercised on 25,000 shares ................. -- --
Earned stock compensation (note 12) ...................................... 1,240,000 --
-------------- --------------
Balance at end of year ................................................... 8,319,000 7,079,000
-------------- --------------
Unrealized gain on marketable equity securities available-for-sale, net
of income taxes:
Balance at beginning of year ............................................. 21,023,000 13,755,000
Unrealized gain, net of income taxes of $184,000 and $4,165,000 .......... 320,000 7,612,000
Realized loss from sale of securities, net of income taxes of
$23,000 ................................................................ -- 42,000
Realized gain from sale of securities, net of income taxes of
$11,636,000 and $208,000 ............................................... (21,343,000) (386,000)
-------------- --------------
Balance at end of year ................................................... -- 21,023,000
-------------- --------------
Retained earnings:
Balance at beginning of year ............................................. 52,500,000 63,252,000
Net income (loss) ........................................................ 27,902,000 (10,752,000)
-------------- --------------
Balance at end of year ................................................... 80,402,000 52,500,000
-------------- --------------
Treasury stock:
Balance at beginning of year ............................................. (117,427,000) (14,582,000)
Contribution of 110,000 shares to Employee Stock Ownership Trust
(notes 10 and 13) ...................................................... -- 710,000
Receipt of 12,227 shares in litigation settlement (note 11) .............. -- (9,207,000)
Receipt of 125,242 shares previously securing note receivable
(note 11) .............................................................. -- (94,348,000)
Purchase of 948,880 shares (note 14) ..................................... -- --
Receipt of 54,162 shares from Employee Stock Ownership Trust in
payment of note receivable (note 10) ................................... -- --
Purchase of 11,848 shares ................................................ -- --
-------------- --------------
Balance at end of year ................................................... (117,427,000) (117,427,000)
-------------- --------------
Note receivable secured by the Company's common stock:
Balance at beginning of year ............................................. -- (94,348,000)
Transfer of 125,242 shares to treasury stock in settlement of note
receivable (note 11) ................................................... -- 94,348,000
Balance at end of year ................................................... -- --
-------------- --------------
Total stockholders' equity (deficit) ...................................... $ (28,606,000) $ (36,725,000)
============== ==============
See accompanying notes to consolidated financial statements.
F-14
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995
---------------- ---------------- -----------------
Operating activities:
Net income (loss) ....................................... $ 19,386,000 $ 27,902,000 $ (10,752,000)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .......................... 13,483,000 13,954,000 14,355,000
Valuation allowances ................................... -- -- 2,350,000
Earned stock compensation .............................. 167,000 1,240,000 --
Noncash portion of litigation settlement ............... -- -- 13,588,000
Deferred income taxes .................................. 6,164,000 2,062,000 (2,597,000)
Equity in earnings of unconsolidated affiliates ........ (1,639,000) (697,000) (157,000)
Employee Stock Ownership Trust contribution ............ -- -- 1,787,000
Gains on sales of investments and other assets ......... (2,628,000) (34,867,000) (5,711,000)
Changes in:
Land and improvement inventories ..................... 3,604,000 2,714,000 7,280,000
Accounts receivable .................................. (1,114,000) 2,165,000 577,000
Minority interest in consolidated partnerships ....... (424,000) (147,000) (430,000)
Accounts payable and tenants' deposits ............... 2,577,000 (153,000) (539,000)
Accrued expenses and other liabilities ............... 707,000 (577,000) (640,000)
Current income taxes ................................. (11,528,000) 15,717,000 1,437,000
Other, net ........................................... (1,954,000) 400,000 1,469,000
------------- ------------- -------------
Net cash provided by operating activities ................ 26,801,000 29,713,000 22,017,000
------------- ------------- -------------
Investing activities:
Net (increase) decrease in temporary investments ........ 2,420,000 (40,447,000) (202,000)
Payments on notes receivable ............................ 9,086,000 8,773,000 6,927,000
Issuance of notes receivable ............................ (19,466,000) (6,632,000) (6,174,000)
Additions to revenue-producing properties ............... (11,327,000) (8,317,000) (7,862,000)
Purchase of marketable equity securities ................ -- -- (3,021,000)
Proceeds from sales of capital assets ................... 9,577,000 3,056,000 5,269,000
Return of capital from unconsolidated affiliates ........ 1,360,000 400,000 420,000
Proceeds from sales of marketable equity securities ..... -- 38,617,000 925,000
Maturities of marketable securities ..................... -- -- 2,359,000
Investments in and advances to unconsolidated
affiliates ............................................. (15,000) (14,000) (394,000)
Other, net .............................................. 191,000 (6,000) 30,000
------------- ------------- -------------
Net cash used in investing activities .................... (8,174,000) (4,570,000) (1,723,000)
------------- ------------- -------------
Financing activities:
Payments on mortgage indebtedness ....................... (22,978,000) (20,593,000) (11,825,000)
Issuance of mortgage indebtedness ....................... 21,366,000 6,353,000 --
Purchases of treasury stock ............................. (13,521,000) -- (4,901,000)
Issuance of notes to banks and others ................... -- -- 11,356,000
Payments on notes to banks and others ................... (2,000,000) (3,658,000) (22,362,000)
Issuance of common stock ................................ -- -- --
Dividends paid .......................................... -- -- (1,180,000)
Capital contributions from minority partners ............ 20,000 -- 1,641,000
------------- ------------- -------------
Net cash used in financing activities .................... (17,113,000) (17,898,000) (27,271,000)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ..... 1,514,000 7,245,000 (6,977,000)
Cash and cash equivalents, beginning of period ........... 14,454,000 7,209,000 14,186,000
------------- ------------- -------------
Cash and cash equivalents, end of period ................. $ 15,968,000 $ 14,454,000 $ 7,209,000
============= ============= =============
SIX MONTHS ENDED JUNE 30,
---------------------------------
1998 1997
---------------- ----------------
(UNAUDITED)
Operating activities:
Net income (loss) ....................................... $ 4,141,000 $ 3,809,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .......................... 5,848,000 6,741,000
Valuation allowances ................................... -- --
Earned stock compensation .............................. 95,000 --
Noncash portion of litigation settlement ............... -- --
Deferred income taxes .................................. 3,426,000 2,285,000
Equity in earnings of unconsolidated affiliates ........ (3,737,000) (172,000)
Employee Stock Ownership Trust contribution ............ -- --
Gains on sales of investments and other assets ......... (1,375,000) (236,000)
Changes in:
Land and improvement inventories ..................... 2,542,000 1,691,000
Accounts receivable .................................. 240,000 654,000
Minority interest in consolidated partnerships ....... (122,000) (76,000)
Accounts payable and tenants' deposits ............... (1,701,000) (413,000)
Accrued expenses and other liabilities ............... 2,616,000 1,520,000
Current income taxes ................................. 15,000 2,072,000
Other, net ........................................... (2,842,000) (1,703,000)
-------------- --------------
Net cash provided by operating activities ................ 9,146,000 16,172,000
-------------- --------------
Investing activities:
Net (increase) decrease in temporary investments ........ 10,218,000 6,045,000
Payments on notes receivable ............................ 16,346,000 4,858,000
Issuance of notes receivable ............................ (5,892,000) (3,760,000)
Additions to revenue-producing properties ............... (10,196,000) (2,968,000)
Purchase of marketable equity securities ................ -- --
Proceeds from sales of capital assets ................... 2,832,000 932,000
Return of capital from unconsolidated affiliates ........ 1,332,000 800,000
Proceeds from sales of marketable equity securities ..... -- --
Maturities of marketable securities ..................... -- --
Investments in and advances to unconsolidated
affiliates ............................................. (4,289,000) --
Other, net .............................................. -- 184,000
-------------- --------------
Net cash used in investing activities .................... 10,351,000 6,091,000
-------------- --------------
Financing activities:
Payments on mortgage indebtedness ....................... (2,871,000) (20,231,000)
Issuance of mortgage indebtedness ....................... -- 14,616,000
Purchases of treasury stock ............................. -- (12,810,000)
Issuance of notes to banks and others ................... -- --
Payments on notes to banks and others ................... (10,502,000) --
Issuance of common stock ................................ 4,286,000 --
Dividends paid .......................................... -- --
Capital contributions from minority partners ............ (123,000) 20,000
-------------- --------------
Net cash used in financing activities .................... (9,210,000) (18,405,000)
-------------- --------------
Net increase (decrease) in cash and cash equivalents ..... 10,287,000 3,858,000
Cash and cash equivalents, beginning period .............. 15,968,000 14,454,000
-------------- --------------
Cash and cash equivalents, end of period ................. $ 26,255,000 $ 18,312,000
============== ==============
See accompanying notes to consolidated financial statements.
F-15
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of J.C. Nichols
Company and its majority controlled affiliates (the Company). Significant
intercompany profits, transactions and balances have been eliminated.
Minority interest in consolidated partnerships represents the cumulative
losses, after capital contributions, attributable to minority interests in
consolidated general partnership investments of the Company.
REVENUE-PRODUCING PROPERTIES
Revenue-producing properties are carried at cost less accumulated
depreciation. All direct and indirect costs clearly associated with the
acquisition and development of real estate projects are capitalized. Interest
and certain indirect costs are capitalized during periods in which activities
necessary to ready the property for its intended use are in progress.
Depreciation is generally computed using the straight-line method over the
estimated useful lives of the assets, generally seven to thirty-one years.
Real estate projects are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If the sum of the expected future cash flows (undiscounted and
without interest changes) of the asset is less than the carrying amount of the
asset, an impairment loss is recognized. The amount of the impairment loss is
calculated based on an evaluation of discounted cash flows.
Leases for office and warehouse space provide for fixed monthly rents and
may contain provisions for rent escalations, utility charges and other
adjustments. Retail leases generally provide for minimum annual rents,
contingent rentals based on a percentage of the lessee's sales and, in many
instances, the tenant's proportionate share of real estate taxes, insurance and
maintenance. These leases generally have a term of three to five years or
longer in the case of most major tenants. Apartment leases provide for a fixed
monthly rental primarily for a term of one year. All leases are accounted for
as operating leases.
LAND AND IMPROVEMENT INVENTORIES
Land and improvement inventories includes residentially zoned land, land
improvements and building improvements, and are carried at the lower of average
cost or market. Revenues from property sales are recorded when sufficient funds
are received from the buyer and all conditions precedent to the sale are
completed, generally when the property is deeded to the buyer. Improvement
costs are allocated to the parcels benefited on the basis of estimated relative
sales value.
DEFERRED GAINS ON THE SALE OF PROPERTY
Gains on the sale of property are deferred until such time as the Company
is no longer required to perform significant activities related to the property
sold, has no continuing involvement and has transferred the risks and rewards
of ownership. Additionally, the buyer must have evidenced a substantial initial
and continuing investment in the property.
Gains on the sale of property to unconsolidated affiliates are deferred to
the extent of the Company's ownership interest in such affiliates.
INVESTMENTS IN REAL ESTATE PARTNERSHIPS
Investments in real estate partnerships primarily consist of investments
in and advances to unconsolidated affiliates. Investments in real estate
partnerships are accounted for on the equity method and reflect the Company's
share of income or loss of the partnerships, reduced by distributions received
and increased by contributions made.
TEMPORARY INVESTMENTS AND CASH EQUIVALENTS
Temporary investments are marketable securities which are callable within
30 to 180 days of purchase and are carried at the lower of amortized cost or
market value. Cash equivalents include money market funds, certificates of
deposit and debt securities acquired with an original maturity of three months
or less.
F-16
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
INCOME TAXES
Deferred tax assets and liabilities are recognized for temporary
differences between the financial reporting basis and the income tax basis of
the Company's assets and liabilities. The impact on deferred taxes of changes
in tax rates and laws is reflected in the financial statements in the period of
change.
TREASURY STOCK
Treasury stock purchases have been recorded at cost. Other receipts of
treasury stock have been recorded at estimated fair value.
INCOME (LOSS) PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 128 EARNINGS PER SHARE, which established new standards for
computing and presenting income per share. Basic income per share is computed
using the weighted average number of common shares outstanding during each
year. Diluted income per share includes the effect of all dilutive potential
common shares (primarily stock options) outstanding during each year. All
income per share data has been restated to reflect the adoption of SFAS No. 128
and retroactive adjustment of the 1996 stock split (see note 13).
The shares used in the calculation of basic and diluted income per share
are shown below:
JUNE 30,
------------------------
1997 1996 1995 1998 1997
----------- ----------- ------------ ----------- ------------
(UNAUDITED)
Weighted average common shares outstanding for
computation of basic income per share ............. 4,186,219 4,852,400 14,469,360 4,595,361 4,005,387
Stock options ...................................... 153,807 116,029 -- 166,824 125,468
--------- --------- ---------- --------- ---------
Shares outstanding for computation of diluted income
per share ......................................... 4,340,026 4,968,429 14,469,360 4,762,185 4,130,855
========= ========= ========== ========= =========
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported balances of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain amounts in the consolidated financial statements have been
reclassified to conform with the 1997 presentation.
(2) REVENUE-PRODUCING PROPERTIES
Revenue-producing properties at December 31, 1997 and 1996 consisted of:
1997 1996
--------------- ---------------
Land and improvements ................. $ 25,567,000 $ 29,355,000
Buildings and improvements ............ 284,423,000 308,667,000
Furnishings and equipment ............. 5,450,000 4,163,000
Construction in progress .............. 5,925,000 625,000
------------- -------------
321,365,000 342,810,000
Less accumulated depreciation ......... 158,268,000 153,799,000
------------- -------------
$ 163,097,000 $ 189,011,000
============= =============
F-17
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) REVENUE-PRODUCING PROPERTIES -- Continued
As of December 31, 1997, future minimum lease payments receivable under
noncancelable operating leases, excluding apartments, are as follows:
YEAR AMOUNT
- -------------------------------------------- ---------------
1998 ..................................... $ 37,333,000
1999 ..................................... 32,294,000
2000 ..................................... 25,810,000
2001 ..................................... 21,574,000
2002 ..................................... 18,194,000
Thereafter ............................... 136,483,000
-------------
Total future minimum lease payments ...... $ 271,688,000
=============
Contingent rents amounted to $3,395,000, $3,713,000 and $4,162,000 for
1997, 1996 and 1995, respectively. Apartment rentals under leases of one year
or less aggregated $19,793,000, $19,735,000 and $18,681,000 for 1997, 1996 and
1995, respectively.
In 1987, a subsidiary of the Company entered into various contracts with
the City of St. Petersburg, Florida (the City) for the redevelopment and
construction of certain parking, commercial and retail facilities known as Bay
Plaza. Due to a delay in significant development activities, the Company ceased
capitalization of interest, property taxes, insurance and other development
costs on December 31, 1990.
Based on its assessment of the feasibility of developing Bay Plaza under
the existing cost structure, management determined in 1994 that the value of
Bay Plaza had declined and reduced its carrying value to $3,000,000 at December
31, 1994. During 1996, the Company disposed of certain Bay Plaza assets with a
book value of $7,300,000 and was released from related mortgages payable in the
amount of $2,200,000. In December 1997, the Company sold substantially all of
its remaining Bay Plaza assets for $4,000,000, realizing a gain of $2,500,000.
In December 1996, the Company announced a $240,000,000 plan to redevelop
areas on and around the Country Club Plaza in Kansas City, Missouri. The
Company filed an application with the Tax Increment Financing Commission of
Kansas City seeking to use funds generated from tax increment financing to fund
approximately 25% of the proposed redevelopment. The application was approved
by the Tax Increment Financing Commission, and the City Council of Kansas City,
Missouri gave final approval in April 1997. The Plan is to be executed over the
next ten years and is contingent on market demand. The Company is currently
exploring various options for funding development cost in excess of the
approved tax increment financing. At December 31, 1997, the Company had
capitalized approximately $5,100,000 in costs relating to the redevelopment.
(3) NOTES RECEIVABLE
Notes receivable at December 31, 1997 and 1996 consisted of:
1997 1996
--------------- ---------------
Promissory notes, collateralized by real estate, due
1998 to 2013, 7% to 11% .................. $ 24,682,000 $ 14,116,000
Notes receivable -- ESOT (note 10) ........ 12,000,000 1,926,000
Notes receivable -- miscellaneous, 8% to 10% 657,000 2,577,000
First mortgage and construction loans on residential
property, 10% to 10.5% ................... 3,418,000 2,895,000
------------ ------------
$ 40,757,000 $ 21,514,000
============ ============
In 1997, the Company sold a parcel of real estate in exchange for a
$10,845,000 promissory note receivable bearing interest at 7% and maturing on
May 10, 2000. The resulting gain of $1,523,000 was deferred at December 31,
1997 and will be recognized upon collection of the note.
F-18
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) NOTES RECEIVABLE -- Continued
The Company has valuation reserves of $1,954,000 and $3,799,000 related to
notes receivable at December 31, 1997 and 1996, respectively.
(4) INVESTMENTS IN REAL ESTATE PARTNERSHIPS
In November, 1997, the Company entered into an agreement with
Kessinger/Hunter & Company, Inc. (Kessinger/
Hunter) to form a limited liability company (LLC) to provide services to
previous Kessinger/Hunter clients as well as management and leasing for the
Company's portfolio of office, industrial and retail properties, excluding the
Country Club Plaza in Kansas City, Missouri. On January 2, 1998, the Company
made an initial investment in the LLC of $4,286,000, which represents a 30%
equity interest. The Company has the option of increasing its equity interest
to 65% by 2001. In addition, the agreement provides to the LLC a call right
which enables it to purchase up to 76,530 shares of common stock of the Company
at a price of $56 per share. In February 1998, the LLC returned to the Company
the $4,286,000 to permit it to exercise this call right. Accordingly, the
Company will issue 76,530 shares of its common stock to the LLC.
At December 31, 1997, the Company had an equity interest in the following
unconsolidated entities:
PERCENT OWNED
--------------
Center Court Partners ..................... 50.0%
Dallas County Partners .................... 50.0
Dallas County Partners II ................. 50.0
Dallas County Partners III L.C ............ 50.0
Fountain Three ............................ 50.0
Terrace Place Partners .................... 50.0
Meredith Drive Associates L.P ............. 49.5
Board of Trade Investment Company ......... 49.0
J.C. Nichols Real Estate .................. 40.0
4600 Madison Associates L.P ............... 12.5
Raphael Hotel Group L.P ................... 5.0
Selected aggregate financial data for unconsolidated affiliates for 1997 and
1996 is presented below:
1997 1996
---------------- ----------------
Total assets ....................... $ 131,341,000 $ 125,076,000
Total liabilities (note 8) ......... $ 141,526,000 $ 137,870,000
Net income ......................... $ 3,714,000 $ 2,189,000
(5) MORTGAGE INDEBTEDNESS
Mortgage indebtedness consists principally of first mortgage notes on
revenue-producing properties. These obligations bear annual interest at rates
ranging from 3.9% to 10.5% and mature from 1998 to 2021. Substantially all of
the Company's revenue-producing properties are pledged to secure this debt.
Aggregate annual principal payments applicable to mortgage indebtedness
subsequent to December 31, 1997 are:
1998 ............... $ 8,723,000
1999 ............... 13,968,000
2000 ............... 6,982,000
2001 ............... 7,419,000
2002 ............... 15,540,000
Thereafter ......... 235,921,000
-------------
$ 288,553,000
=============
F-19
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(5) MORTGAGE INDEBTEDNESS -- Continued
As a result of the bankruptcy of a primary tenant, the Company ceased
making debt service payments on the underlying loan in 1991 and began
negotiations with the lender to restructure the debt agreement. As of December
31, 1993, this nonrecourse debt had a principal balance of $7,149,000 and
accrued interest of $1,818,000. In March 1994, the Company and the lender
agreed to restructure the loan which required a cash payment of $1,649,000 to
reduce the loan balance to $5,500,000. Accrued interest through February 1994
was waived under the agreement. The restructuring reduced the effective
interest rate for financial statement purposes from 12% to approximately 3%.
Due to the loss of a primary tenant in an office building that had an
underlying mortgage, the Company began negotiations in 1995 with the lender to
restructure the debt agreement. As of December 31, 1995, this nonrecourse debt
had a principal balance of $22,500,000 and accrued interest of $3,720,000. In
January 1996, the Company and the lender agreed to restructure the loan, which
required a cash payment by the Company of $2,500,000. In addition, the Company
has the option to retire the outstanding indebtedness prior to maturity for
$14,000,000 less future principal payments thereon. The restructuring reduced
the effective interest rate beginning in 1996, for financial statement
purposes, from 10.5% to approximately 3%.
In 1997, the Company relinquished certain partnership interests, the
primary assets of which were revenue-producing properties, in exchange for the
acquiror assuming $18,223,000 of related mortgage indebtedness. As a result of
this transaction, the Company recognized a gain of $128,000.
Certain debt agreements provide for a 50% sharing of positive and negative
cash flows from operations and capital expenditures as defined between the
parties. Interest expense recognized for such sharing was $622,000, $929,000
and $479,000 for 1997, 1996 and 1995, respectively. Additionally, as of
December 31, 1997 and 1996, mortgage indebtedness includes a $4,026,000
preference item related to these agreements. The Company's liability is
contingent upon certain conditions being met upon the sale or refinancing of
the mortgaged properties.
Interest payments (net of capitalized interest of $31,000, $14,000 and
$121,000, respectively) aggregated $22,533,000, $22,898,000 and $28,417,000 for
1997, 1996 and 1995, respectively.
The Company has a $10,000,000 unsecured line of credit with a bank.
Interest on outstanding borrowings are at the prime rate and are due on demand.
There were no borrowings on this line of credit at December 31, 1997 or 1996.
(6) DEFERRED COMPENSATION
Prior to 1995, the Company accrued deferred compensation for certain key
personnel to be paid over a five or ten-year period following retirement or
death, including interest. Interest expense related to these agreements
amounted to $126,000, $229,000 and $275,000 for 1997, 1996 and 1995,
respectively, with the accrued liability as of December 31, 1997 and 1996
aggregating $2,113,000 and $2,910,000, respectively.
(7) INCOME TAXES
Income tax expense (benefit) is comprised of the following:
1997 1996 1995
------------------ --------------- -----------------
Current ........................... $ (13,486,000) $ 14,688,000 $ (3,149,000)
Deferred .......................... 6,164,000 2,062,000 (2,597,000)
-------------- ------------ -------------
Total income tax expense (benefit) $ (7,322,000) $ 16,750,000 $ (5,746,000)
============== ============ =============
In 1997, the Company recognized $11,846,000 in additional income tax
benefit after the conveyance of 679,999 common shares to the Employee Stock
Option Trust (ESOT) and to a Court was determined to be fully deductible by the
Internal Revenue Service (IRS), as described in note 10. The deduction for the
contribution of those shares is based on the market value at the date of the
conveyance, with no limitations.
F-20
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(7) INCOME TAXES -- Continued
Total income tax expense (benefit) differs from expected income tax
expense (benefit) as follows:
1997 1996 1995
---------------- --------------- -----------------
Expected income tax expense (benefit) at 34% ..... $ 4,102,000 $ 15,182,000 $ (5,609,000)
ESOT contribution ................................ (11,846,000) -- --
Tax-exempt income ................................ -- -- (26,000)
State income taxes, exclusive of ESOT contribution 422,000 1,455,000 --
Dividend exclusion ............................... -- (7,000) (170,000)
Other, net ....................................... -- 120,000 59,000
------------- ------------ -------------
Total income tax expense (benefit) ............... $ (7,322,000) $ 16,750,000 $ (5,746,000)
============= ============ =============
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting and such
amounts measured by tax laws and regulations. Deferred income taxes are
comprised of the following:
1997 1996
---------------- ---------------
Deferred tax assets:
Property and receivable allowances ........................... $ 3,430,000 $ 10,590,000
Note receivable extinguished in settlement (note 11) ......... 15,715,000 15,715,000
Alternative minimum tax credits .............................. 6,162,000 --
Gains recognized for tax reporting, deferred for financial
reporting .................................................. 4,024,000 3,654,000
Net operating loss carryforward .............................. 2,066,000 --
Deferred compensation ........................................ 718,000 990,000
ESOT contributions ........................................... -- 4,437,000
Other ........................................................ -- 106,000
------------- -------------
Total gross deferred tax assets ............................... 32,115,000 35,492,000
Less valuation allowance ...................................... (15,715,000) (15,715,000)
------------- -------------
Total deferred tax assets ..................................... 16,400,000 19,777,000
------------- -------------
Deferred tax liabilities:
Accelerated depreciation ..................................... (12,601,000) (11,845,000)
Gains recognized for financial reporting, deferred for tax
reporting .................................................. (5,696,000) (4,476,000)
State taxes .................................................. (804,000) --
Other ........................................................ (7,000) --
------------- -------------
Total deferred tax liabilities ................................ (19,108,000) (16,321,000)
------------- -------------
Net deferred tax assets (liabilities) ......................... $ (2,708,000) $ 3,456,000
============= =============
The Company filed its 1996 income tax returns reflecting a net operating
loss primarily attributable to a $103 million deduction for losses of principal
and accrued interest arising from notes and accounts receivable to the Company
from its ESOT and from a limited partnership, owned by the Company's former
president, which could result in immediate tax benefits of up to $7,400,000 and
additional deferred tax benefits of up to $39 million. Due to the uncertainty
surrounding these issues, the Company has not recognized these tax benefits in
the accompanying consolidated financial statements.
Net cash refunds for income taxes during 1997, 1996 and 1995 were
$2,543,000, $955,000 and $4,588,000, respectively.
(8) CONCENTRATION OF CREDIT RISK
Several of the Company's consolidated general partnerships and
subsidiaries have revenue-producing real estate. During the initial lease-up
phase, this real estate generated net operating losses, which upon
consolidation resulted in minority
F-21
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(8) CONCENTRATION OF CREDIT RISK -- Continued
obligations to the Company of $4,717,000 and $4,431,000 at December 31, 1997
and 1996, respectively. If the outside partners fail to perform their
obligations, such amounts may not be realized by the Company. Based on its
evaluation of the outside partners, the Company has determined that the outside
partners have the financial ability to perform their obligations.
As of December 31, 1997 and 1996, the aggregate of the liabilities of
unconsolidated partnerships in which the Company is a general partner,
excluding nonrecourse debt, is approximately $10,477,000 and $12,534,000,
respectively. The Company could become liable for such amounts in the event of
default by the various partnerships and nonperformance by the outside partners.
The collection of principal and interest balances secured by
revenue-producing properties and real estate under development is dependent
upon sufficient cash flows from operations of the properties, refinancing,
capital infusions from outside parties or the sale of the related property. All
such property is principally located in the metropolitan Kansas City, Missouri
area.
(9) AFFILIATED PARTY BALANCES AND TRANSACTIONS
Included in the consolidated financial statements are the following
affiliated party balances:
1997 1996
--------------- --------------
Notes receivable (note 10) ......... $ 12,497,000 $ 4,084,000
Accounts receivable ................ 400,000 737,000
Notes payable ...................... -- 2,000,000
The Company established a valuation allowance of $2,467,000 at December
31, 1994 related to notes and accounts receivable from former executive
officers and directors of the Company who were removed from their positions on
May 26, 1995 by action of the Board of Directors. The Company entered
settlement agreements in August 1995 with certain former executive officers and
directors (see note 11).
(10) EMPLOYEE STOCK OWNERSHIP TRUST (ESOT)
The Company has an Employee Stock Ownership Plan (ESOP) related to the
ESOT. All nonunion employees of the Company qualify for participation in the
ESOP after one year of continuous service (1,000 hours) and upon reaching age
twenty-one. Under the terms of the ESOP, the Company makes voluntary
contributions, as determined by the Board of Directors and not to exceed IRS
limitations, that are allocated to participants using a formula based on
compensation. Compensation is defined as total salary and wages paid by the
Company subject to certain limitations. Noncash contributions to the ESOT are
recorded at fair market value.
As of December 31, 1997 and 1996, the ESOT held 1,390,233 shares and
825,280 shares, respectively, of common stock of the Company.
In 1995, the Company contributed 110,000 shares of the Company's common
stock to the ESOT which were valued at $1,787,500.
On August 15, 1997, as part of the 1995 settlement described in note 11,
the Company conveyed to the Company's ESOT 620,586 shares of common stock and
$2,326,000 plus accrued interest of $226,000. Additionally, the Company agreed
to resolve related claims with certain ESOP participants by reducing the
settlement payment otherwise due to the ESOT by approximately $67,000 and
59,413 shares of the Company's common stock, which were delivered to a Court to
determine the proper payee or payees. The Company also agreed to make a
nondeductible payment of approximately $585,000 to the IRS. The IRS agreed,
among other things, that the Company may deduct in full the value of the
settlement payments to the ESOT and a Court and that such payments and methods
of allocating the payments will not adversely affect the tax qualification of
the ESOP.
The conveyance of cash and stock resulted in a decrease in liabilities of
$13,602,000, an increase in additional paid-in capital of $11,050,000 and a
decrease in income tax expense of $11,846,000.
F-22
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(10) EMPLOYEE STOCK OWNERSHIP TRUST (ESOT) -- Continued
ESOP participants may request their distributions from the ESOT in cash or
Company common stock that is held by the ESOT. Future distributions to ESOP
participants for the next five years based on December 31, 1997 market values
of Company common stock could be as much as:
1998 ............... $ 11,500,000
1999 ............... 1,900,000
2000 ............... 2,900,000
2001 ............... 4,900,000
2002 ............... 11,400,000
Thereafter ......... 45,800,000
In the absence of a liquid trading market for the Company's common stock,
the Company may be obligated to repurchase shares of the Company's common stock
from ESOP participants in future years in the amounts detailed above. The ESOT
has sufficient assets to meet its obligations, and the Company has recorded no
additional liability beyond its contributions to the ESOT.
In 1997 and 1996, the Company provided short-term advances to the ESOT to
assist in funding distributions and expenses. All advances to the ESOT are
unsecured and noninterest bearing. At December 31, 1997 and 1996, the Company
had advanced $12,000,000 and $1,926,000, respectively. The amount due at
December 31, 1996, from the ESOT, along with an additional advance of $56,000,
was repaid by the ESOT during January 1997 by transferring 54,162 shares of the
Company's common stock to the Company.
(11) LITIGATION AND SETTLEMENTS
In 1995, the Company was involved in various legal actions as plaintiff
and defendant against former officers and directors, representatives of the
ESOT, minority shareholders and others. The Company had requested, among other
things, that the District Court rescind certain transactions (including the
1992 transactions described below) between the Company and former executive
officers, the ESOP and others.
The Company and various other parties entered settlement agreements in
August 1995 which required conveyance of Company common stock, payment of cash
and extinguishment of amounts due to and from the Company in consideration of
releases from all present and future claims by, among and between the parties
to the settlements.
During 1992, the Company entered into a transaction with the Company's
former president, whereby properties with aggregate carrying values of
$2,592,000 and marketable equity securities with aggregate carrying values of
$1,103,000 were exchanged for 517,920 shares of common stock of the Company and
a note receivable for $2,700,000. The fair values of the properties received,
based on current appraisals, aggregated $5,907,000. The quoted market values of
the marketable equity securities aggregated $2,781,000. The purchase price of
the common stock was equivalent to the former president's basis in such shares.
The Company recognized a gain on the transaction of $4,993,000 in 1992. As part
of the 1995 settlement, the common stock was retained by the Company, the
properties were returned to the Company and the note receivable was canceled.
Management of the Company determined the canceled note receivable did not
exceed the fair value of the properties received. This portion of the
settlement had no net impact on the 1995 consolidated statement of operations.
In May 1992, a limited partnership owned in part by the Company's former
president, acquired 125,242 unallocated shares of common stock of the Company
from the ESOT. These shares were acquired for $124,529,000 through the
assumption of existing principal indebtedness from the ESOT of $94,348,000 and
accrued interest and other advances of $30,181,000. The Company had previously
recorded, as contribution expense, the accrued interest and other advances to
the ESOT. At the time the shares were sold, the $30,181,000 was deferred and
recorded as a reduction of the contractual note receivable from the limited
partnership. The $94,348,000 note receivable, secured by Company stock as of
December 31, 1994, was comprised of the contractual note receivable from the
limited partnership of $124,529,000 net of the $30,181,000 deferrals.
Contractual interest of $12,291,000 on the note receivable from the limited
partnership was deferred as of December 31, 1993. Pursuant to a Pledge
Agreement, the shares of common stock were pledged as collateral to secure the
note receivable from the limited partnership. The related note receivable was
due in ten annual equal installments beginning December 31,
F-23
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(11) LITIGATION AND SETTLEMENTS -- Continued
1994 and had a stated interest rate of prime (6.0% as of December 31, 1993)
payable annually beginning December 31, 1994. As part of the 1995 settlement,
the unallocated 125,242 shares were conveyed to the Company as treasury stock
in exchange for extinguishment of the $94,348,000 note receivable and all
related deferred amounts. This portion of the settlement had no impact on the
1995 consolidated statement of operations.
In 1994, the Company provided valuation allowances of $2,502,000 on notes
and accounts receivable that were part of the 1995 litigation settlement. The
impact of the litigation settlement included in the 1995 statement of
operations was as follows:
ESOT contribution (8,500 shares and $2,000,000)................................. $ 13,050,000
Settlement of notes and accounts receivable ($5,619,000) and cash paid
($9,665,000), net of related obligations ($1,064,000) and receipt of 12,227
shares of Company common stock ($9,207,000) ................................... 5,013,000
Legal expenses ($8,117,000), net of insurance reimbursement ($6,627,000) ....... 1,490,000
------------
$ 19,553,000
============
(12) EARNED STOCK COMPENSATION
In March 1996, the Company approved the 1996 Stock Option Plan (the Plan)
enabling the Company to grant stock options to eligible plan participants. The
options vest immediately upon a change in control, as defined, of the Company.
Pursuant to this Plan, the Company in 1996 granted to an executive officer a
nonstatutory stock option to purchase 64,000 shares at a price of $.0125 per
share, which option vested 50% on January 1, 1996 and the remaining 50% vested
on January 1, 1997. The Company recorded compensation expense and additional
paid-in capital relating to this stock option during the year ended December
31, 1996 of $1,240,000. An incentive stock option was also granted to this
executive officer to purchase 160,000 shares of common stock of the Company at
a price of $19.375 per share, which option vests at a rate of 10% on December
31, 1996, 15% on December 31, 1997 and 25% annually on December 31 for the
years ended 1998, 1999 and 2000. The fair market value of the Company's common
stock was $19.375 per share at the date this incentive stock option was
granted.
In July 1997, the Company granted to key executives nonstatutory stock
options to purchase 27,500 shares of the Company's common stock at a price of
$30 per share. The options vest 20% on January 1, 1998, 35% on January 1, 1999,
and 45% on January 1, 2000. At the date of grant, the estimated fair market
value of the stock was approximately $46 per share. In 1997, the Company
recorded compensation expense and additional paid-in capital relating to these
options of $167,000.
Transactions involving the 1996 Stock Option Plan are as follows:
1997 1996
------------------------- ---------------------
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES PRICE SHARES PRICE
------------ ------------ ---------- ----------
Stock options:
Outstanding, beginning of year ..... 224,000 $ 13.84 -- $ --
Granted during the year ............ 27,500 30.00 224,000 13.84
Exercised during the year .......... (25,000) 0.01 -- --
------- --------- ------- -------
Outstanding, end of year ........... 226,500 $ 17.33 224,000 $ 13.84
======= ========= ======= ========
F-24
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(12) EARNED STOCK COMPENSATION -- Continued
Options outstanding and exercisable are as follows:
OUTSTANDING AT EXERCISE EXERCISABLE AT AVERAGE
DECEMBER 31, 1997 PRICE DECEMBER 31, 1997 PRICE
- ------------------- ----------- ------------------- -----------
39,000 $ 0.01 39,000 $ 0.01
160,000 19.38 40,000 19.38
27,500 30.00 5,500 30.00
------- -------- ------ --------
226,500 $ 17.33 84,500 $ 11.13
======= ======== ====== ========
On January 1, 1996, the Company adopted SFAS 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 allows entities to disclose pro forma net income
and income per share as if the fair value-based method defined in SFAS 123 had
been applied, while continuing to apply the provisions of Accounting Principles
Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, under
which compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price.
The Company has elected to apply the recognition provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS 123. Had
compensation expense for the Company's incentive and nonstatutory stock options
been determined based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS 123, the Company's net income and diluted
earnings per share would have been reduced by approximately $501,000, or $.12
per share in 1997 and $367,000, or $.07 per share in 1996. The weighted average
fair value of all options granted during 1997 and 1996 is estimated as $36.38
and $12.34 per share, respectively, on the date of grant using an
option-pricing model with the following assumptions: expected dividend yield of
0.0%, risk-free interest rate of 7.0%, and an average expected life of ten
years in 1997 and 11.4 years in 1996. The stock price volatility was 52.7% in
1997.
Pro forma net income reflects only options granted and vested by the end
of the respective year. Therefore, the full impact of calculating compensation
expense for stock options under SFAS 123 is not reflected in the pro forma net
income amounts presented above because compensation expense is reflected over
the options' vesting period.
(13) STOCK SPLIT
On May 29, 1996, the Company approved an increase from 225,000 to
10,000,000 in the number of shares of common stock authorized for issuance by
the Company and a decrease in the par value per share of common stock from
$20.00 to $.01. Additionally, the Company approved an 80-for-1 stock split of
the Company's common stock for all issued and outstanding shares not then held
in the Company's treasury. Accordingly, the common stock par value decreased
from $4,500,000 to $100,000 with an off-setting increase in additional paid-in
capital from $2,679,000 to $7,079,000. All periods presented have been restated
to reflect the effect of the Company's stock split.
(14) TREASURY STOCK
Included in treasury stock transactions during 1997 is the purchase by the
Company of 948,880 shares of its common stock from a shareholder in January
1997 for $25,857,000, payable in cash of $12,849,000 (which included
approximately $39,000 of interest) and a note payable of $12,990,000 (net of
expenses totaling approximately $57,000), bearing interest at 8% and due
January 29, 1999.
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The estimated fair value
amounts have been determined by the Company, using available market information
and appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company might realize in a current market exchange. The
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
F-25
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS -- Continued
o NOTES RECEIVABLE -- Fair value for notes receivable was estimated
utilizing discounted cash flow calculations based on interest rates
currently offered for notes with similar terms and credit risk.
o TEMPORARY INVESTMENTS -- Fair values for temporary investments were
based upon quoted market prices.
o NOTES PAYABLE TO BANKS AND OTHERS -- The carrying value of these
financial instruments approximates fair value.
o MORTGAGE INDEBTEDNESS -- The carrying value of variable rate mortgages
approximates fair value. Fair value for fixed rate mortgage indebtedness
was estimated utilizing discounted cash flow calculations based on the
Company's incremental borrowing rates for similar types of borrowing
arrangements.
o OFF-BALANCE SHEET INSTRUMENTS -- Fair value of commitments to extend
credit, guarantees of debt and letters of credit is based on the estimated
fees which would be charged for similar arrangements or the estimated cost
to terminate or otherwise settle the obligations with the counterparties at
the reporting date. The aggregate amount of these fees is not material to
the consolidated financial statements.
The estimated fair values of the Company's financial instruments were as
follows:
1997 1996
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
--------------- --------------- --------------- ---------------
Financial assets:
Temporary investments ............ $ 42,633,000 $ 42,633,000 $ 45,053,000 $ 45,053,000
Notes receivable ................. 40,757,000 39,861,000 21,514,000 20,900,000
Financial liabilities:
Notes payable to banks and others 12,990,000 12,990,000 2,000,000 2,000,000
Mortgage indebtedness ............ 288,553,000 279,341,000 309,188,000 300,234,000
The fair value estimates presented are based on information available to
management as of December 31, 1997 and 1996. Although management is not aware
of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been revalued for purposes of these consolidated
financial statements since the balance sheet date, and current estimates may
differ significantly from the amounts presented above.
(16) POTENTIAL SALE OF COMPANY
In December 1997, with the approval of the Board of Directors, the Company
entered into a definitive agreement to merge with a wholly-owned subsidiary of
Highwoods Properties, Inc. (Highwoods), a real estate investment trust based in
North Carolina for consideration of $65 per common share of the Company to be
received as a combination of cash and Highwood's common stock, subject to
certain limitations. The potential merger is conditional upon the approval of
two-thirds of the Company's shareholders. Under certain conditions, if the
Highwoods transaction is not consummated because the Board of Directors
withdraws its support for the transaction, the Company may be required to pay a
breakup fee ranging from $2,500,000 to $17,200,000 to Highwoods.
(17) INTERIM FINANCIAL STATEMENTS (UNAUDITED)
The consolidated financial statements of J.C. Nichols Company and
subsidiaries (the Company) have been prepared in accordance with the
instructions to interim financial statements. To the extent that information
and footnotes required by generally accepted accounting principles for complete
financial statements are contained in or consistent with the audited
consolidated financial statements, such information and footnotes have not been
duplicated herein. In the opinion of management, all adjustments, including
normal recurring accruals, considered necessary for a fair presentation of
financial statements have been reflected herein. The results of the interim
period ended June 30, 1998 are not necessarily indicative of the results
expected for the year ended December 31, 1998. Certain amounts in the
consolidated financial statements have been reclassified to conform with the
1998 presentation.
F-26