<PAGE> 1
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-06181
J.C. NICHOLS COMPANY
(Exact name of registrant as specified in its charter)
MISSOURI 44-0371610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 WARD PARKWAY, KANSAS CITY, MISSOURI 64112
(Address of principal executive offices (Zip code)
(816) 561-3456
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ x ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
----- -------------------------------
Common Stock, $0.01 par value 4,529,357
================================================================================
<PAGE> 2
J.C. NICHOLS COMPANY
INDEX TO FORM 10-Q FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996 ............................................ 1
Consolidated Statements of Income for the Nine Months Ended
September 30, 1997 and September 30, 1996 .................... 2
Consolidated Statements of Income for the Three Months Ended
September 30, 1997 and September 30, 1996 .................... 3
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1997 and September 30, 1996 .................... 4
Notes to Unaudited Consolidated Financial Statements ......... 5
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ......................... 7
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS ............................................ 14
ITEM 2 CHANGES IN SECURITIES ........................................ 15
ITEM 3 DEFAULTS UPON SENIOR SECURITIES .............................. 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 15
ITEM 5 OTHER INFORMATION ............................................ 15
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ............................. 15
SIGNATURES ................................................... 16
</TABLE>
<PAGE> 3
PART 1 FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.
J.C. NICHOLS COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
(unaudited)
Assets
<S> <C> <C>
Revenue-producing properties ................................................ $162,434,000 $189,011,000
Land and improvement inventories ............................................ 15,211,000 27,368,000
Property held for future development ........................................ 3,717,000 3,754,000
------------ ------------
Total properties ........................................................... 181,362,000 220,133,000
Cash and cash equivalents ................................................... 21,233,000 14,454,000
Temporary investments ....................................................... 43,181,000 45,053,000
Accounts receivable ......................................................... 1,744,000 2,000,000
Prepaid expenses ............................................................ 6,695,000 6,355,000
Notes receivable ............................................................ 28,588,000 21,514,000
Investments in real estate partnerships ..................................... 1,529,000 2,163,000
Minority interest in consolidated partnerships .............................. 4,509,000 4,431,000
Deferred income taxes ....................................................... - 3,456,000
Other assets, net ........................................................... 629,000 768,000
------------ ------------
$289,470,000 $320,327,000
============ ============
Liabilities and Shareholders' Equity (Deficit)
Mortgage indebtedness ....................................................... $283,826,000 $309,188,000
Notes payable to banks and others ........................................... 12,990,000 2,000,000
Accounts payable and tenants' deposits ...................................... 7,094,000 6,633,000
Accrued expenses and other liabilities ...................................... 10,562,000 8,020,000
Deferred income taxes ....................................................... 981,000 -
Income taxes payable ........................................................ 1,532,000 11,525,000
Accrued contribution to Employee Stock Ownership Trust ...................... - 11,050,000
Deferred gains on the sale of property ...................................... 2,027,000 517,000
------------ ------------
319,012,000 348,933,000
------------ ------------
Shareholders' equity (deficit):
Common stock, par value $.01 per share;
10,000,000 shares authorized
(5,696,744 and 5,016,745 shares issued) ................................... 100,000 100,000
Additional paid-in capital ................................................. 19,369,000 8,319,000
Retained earnings .......................................................... 96,256,000 80,402,000
------------ ------------
115,725,000 88,821,000
Less:
Treasury stock, at cost (1,167,387 and 164,345
shares of common stock) (note 3) .......................................... 145,267,000 117,427,000
------------ ------------
Total shareholders' equity (deficit) ..................................... (29,542,000) (28,606,000)
Commitments and contingencies ...............................................
------------ ------------
$289,470,000 $320,327,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
J.C. NICHOLS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996
---- ----
<S> <C> <C>
Sales and revenues:
Rents ...................................................... $ 58,806,000 $ 60,938,000
Property sales ............................................. 5,532,000 5,392,000
Commissions and fees ....................................... 807,000 1,015,000
Dividends and interest ..................................... 3,797,000 3,125,000
Gains on sales of investments and other assets ............. 82,000 33,079,000
Equity in earnings of unconsolidated affiliates ............ 715,000 314,000
Other ...................................................... 1,181,000 4,312,000
------------ ------------
70,920,000 108,175,000
------------ ------------
Costs and expenses:
Selling, general and operating expenses .................... 30,791,000 34,311,000
Cost of property sales ..................................... 4,035,000 4,423,000
Interest ................................................... 17,206,000 17,660,000
Depreciation and amortization .............................. 10,027,000 10,222,000
------------ ------------
62,059,000 66,616,000
------------ ------------
Income before income taxes ................................ 8,861,000 41,559,000
Income tax expense (benefit) ................................ (6,993,000) 15,600,000
------------ ------------
Net income ................................................ $ 15,854,000 $ 25,959,000
============ ============
Net income per share (note 2) ............................... $ 3.76 $ 5.23
============ ============
Average number of shares outstanding (notes 2 and 3) ........ 4,212,206 4,968,034
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
J.C. NICHOLS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
1997 1996
---- ----
<S> <C> <C>
Sales and revenues:
Rents ........................................................... $ 19,075,000 $ 20,788,000
Property sales .................................................. 2,246,000 1,103,000
Commissions and fees ............................................ 338,000 458,000
Dividends and interest .......................................... 1,444,000 1,100,000
Gains (losses) on sales of investments and other assets ......... (154,000) 7,000
Equity in earnings of unconsolidated affiliates ................. 543,000 81,000
Other ........................................................... 745,000 3,838,000
-------------- --------------
24,237,000 27,375,000
-------------- --------------
Costs and expenses:
Selling, general and operating expenses ......................... 11,413,000 11,360,000
Cost of property sales .......................................... 1,204,000 937,000
Interest ........................................................ 5,567,000 5,551,000
Depreciation and amortization ................................... 3,286,000 3,330,000
-------------- --------------
21,470,000 21,178,000
-------------- --------------
Income before income taxes ..................................... 2,767,000 6,197,000
Income tax expense (benefit) ..................................... (9,278,000) 2,375,000
-------------- --------------
Net income ..................................................... $ 12,045,000 $ 3,822,000
============== ==============
Net income per share (note 2) .................................... $ 2.76 $ 0.77
============== ==============
Average number of shares outstanding (notes 2 and 3) ............. 4,361,720 4,976,575
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
J.C. NICHOLS COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income ......................................................................... $ 15,854,000 $ 25,959,000
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation of properties ...................................................... 9,359,000 9,447,000
Amortization of deferred costs ................................................. 668,000 775,000
Deferred income taxes ........................................................... 4,438,000 15,600,000
Equity in earnings of unconsolidated affiliates ................................ (715,000) (314,000)
Earned stock compensation ....................................................... - 1,085,000
Gains on sales of investments and other assets .................................. (82,000) (33,079,000)
Changes in:
Land and improvement inventories .............................................. 2,272,000 2,760,000
Accounts receivable ............................................................ 203,000 3,193,000
Prepaid expenses ............................................................... (1,249,000) 425,000
Minority interest in consolidated partnerships ................................. (216,000) (73,000)
Accounts payable and tenants' deposits ......................................... 612,000 (159,000)
Accrued expenses and other liabilities ......................................... 2,655,000 1,821,000
Income taxes payable ........................................................... (9,993,000) (35,000)
Deferred gain on property sales ................................................ (13,000) (9,000)
Other, net .................................................................... (497,000) (773,000)
--------------- -------------
Net cash provided by operating activities ................................... 23,296,000 26,623,000
--------------- -------------
Investing activities:
Net (increase) decrease in temporary investments ................................... 1,872,000 (32,687,000)
Payments on notes receivable ....................................................... 7,914,000 6,630,000
Issuance of notes receivable ....................................................... (6,125,000) (2,919,000)
Additions to revenue-producing properties .......................................... (6,429,000) (5,691,000)
Proceeds from sales of marketable equity securities ................................ - 38,617,000
Proceeds from sales of capital assets .............................................. 6,497,000 413,000
Return of capital from real estate partnerships .................................... 1,360,000 446,000
Other, net ......................................................................... 180,000 (3,000)
--------------- -------------
Net cash provided by investing activities ................................... 5,269,000 4,806,000
--------------- -------------
Financing activities:
Payments on mortgage indebtedness ................................................. (21,612,000) (19,849,000)
Issuance of mortgage indebtedness ................................................. 14,616,000 6,285,000
Purchase of treasury stock ......................................................... (12,810,000) -
Payments on notes to banks and others ............................................. (2,000,000) (3,658,000)
Capital contributions from minority partners ....................................... 20,000 -
--------------- -------------
Net cash used in financing activities ....................................... (21,786,000) (17,222,000)
--------------- -------------
Net increase in cash and cash equivalents ................................... 6,779,000 14,207,000
Cash and cash equivalents, beginning of period ...................................... 14,454,000 7,209,000
--------------- -------------
Cash and cash equivalents, end of period ............................................ $ 21,233,000 $ 21,416,000
=============== =============
Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Issuance of note receivable in exchange for land and improvement inventories ........ $ 10,845,000 $ -
Issuance of note payable in exchange for treasury stock ............................. $ 12,990,000 $ -
Payment of note receivable in exchange for treasury stock ........................... $ 1,982,000 $ -
Payment of accrued contribution to ESOT by issuance of Company common stock ......... $ 11,050,000 $ -
Sale of revenue-producing property in exchange for assumption of
mortgage indebtedness .................................................... $ 17,566,000 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 7
J.C. NICHOLS COMPANY
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(1) BASIS OF PREPARATION
The consolidated financial statements of J.C. Nichols Company and
subsidiaries (the Company) have been prepared in accordance with the
instructions to Form 10-Q. 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 included in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, such information and footnotes have not been
duplicated herein. The December 31, 1996 consolidated balance sheet has been
derived from the audited consolidated financial statements as of that date. 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 September
30, 1997 are not necessarily indicative of the results expected for the year
ended December 31, 1997. Certain amounts in the consolidated financial
statements have been reclassified to conform with the 1997 presentation.
(2) NET INCOME PER SHARE
Net income per share has been computed based on the average number of
common and common equivalent shares outstanding during the period. All periods
presented reflect retroactive adjustment for the 80-for-1 stock split approved
by the Company on May 29, 1996.
(3) TREASURY STOCK
During January 1997, the Company purchased 948,880 shares of its common
stock from a shareholder 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. Also in January 1997, the J.C. Nichols Company Employee
Stock Ownership Trust transferred 54,162 shares of the Company's common stock
to the Company in repayment of a loan of $1,983,000.
(4) EMPLOYEE STOCK OWNERSHIP TRUST
On August 15, 1997, the Company conveyed to the Company's Employee Stock
Ownership Trust (ESOT) common stock and cash per an August 1, 1997 agreement
with the Internal Revenue Service (IRS). This agreement was a condition to
payment of $2,326,000, plus certain accrued interest, and 680,000 shares of
common stock (collectively, the "conveyance") to the ESOT pursuant to a
settlement agreement dated September 30, 1995 ("Settlement Agreement") between
the Company and a class of participants in the Company's Employee Stock
Ownership Plan (ESOP). The Company also agreed to make a nondeductible
payment of approximately $585,000 to the IRS. The IRS agreed, among other
things, not to assert that the events that were the subject of the Settlement
Agreement disqualified the ESOP or gave rise to liability for prohibited
transaction excise taxes. The IRS also agreed that the Company may deduct in
full the value of the settlement payment to the ESOT and that such payment and
method of allocating it will not adversely affect the tax qualification of the
ESOP. Additionally, the Company agreed to resolve related claims with certain
ESOP participants by reducing the settlement payment by approximately $58,000
and 59,413 shares of the Company's common stock and tendering such amounts to a
court to determine the proper payee or payees.
(Continued)
5
<PAGE> 8
J.C. NICHOLS COMPANY
AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND 1996
(4) EMPLOYEE STOCK OWNERSHIP TRUST - CONTINUED
During 1995, the Company accrued an expense of $11,050,000 representing
the estimated value of the 680,000 shares of the Company's common stock at the
date the Company agreed to the conveyance obligation. The Company also
previously recorded a $2,000,000 note payable, plus accrued interest, and a
$326,000 accrued expense in accordance with the Settlement Agreement.
Accordingly, the actual conveyance of cash and stock resulted in a decrease in
liabilities of $13,376,000, plus certain accrued interest, and a decrease in
stockholders' deficit of $11,050,000. In addition, based on prices established
by recent market trades of the Company's common stock, the conveyance also
created additional net income tax benefit of approximately $10,316,000.
6
<PAGE> 9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL BACKGROUND
The following is a discussion of the historical operating results of the
Company.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1996
SUMMARY. Net income decreased by $10.1 million from $26.0 million for
the nine months ended September 30, 1996 to $15.9 million for the nine months
ended September 30, 1997, primarily as a result of the absence of gains from
disposition of the Company's marketable equity securities portfolio and the
absence of certain other income for the nine months ended September 30, 1997.
This reduction was partially offset by increased income from the lease-up of
two office buildings, increased profit on property sales (due primarily to a
change in accounting method), lower selling, general, and operating expenses,
higher interest income, lower interest expense and lower income tax expense for
the nine months ended September 30, 1997.
RENTS. Rental income decreased by $2.1 million from $60.9 million for
the nine months ended September 30, 1996 to $58.8 million for the nine months
ended September 30, 1997, primarily due to the absence of $3.0 million in
rental income from the Company's leasehold interest in the Raphael Hotel of San
Francisco (as the underlying lease expired in the third quarter of 1996), a
$392,000 decrease in income related to four properties sold (three in the third
quarter of 1997 and one in the fourth quarter of 1996) and $200,000 of certain
nonrecurring items. These decreases were offset by an increase in rental
income of $1.2 million related to two of the Company's office buildings that
were substantially vacant during the first half of 1996 while the Company made
significant tenant improvements for new tenants that are now leasing all of the
vacant space in those buildings. The remainder of the $292,000 increase is due
primarily to improved rents in the Company's office, retail, and apartment
properties.
PROPERTY SALES. Property sales primarily represent sales of
residential lots in subdivisions developed by the Company, sales of
condominiums in the Alameda Towers project, and sales of villas in the Corinth
Place Villas project. The Company had only two villas remaining to be sold as
of September 30, 1997. Property sales increased by $140,000 (2.6%) from $5.4
million for the nine months ended September 30, 1996 to $5.5 million for the
nine months ended September 30, 1997 and included lot sales of $3.2 million
(including $1.2 million that was recognized pursuant to the Company's change in
accounting method from recording lot sales on an "as closed" basis to recording
lot sales on an "as sold" basis), condominium sales of $2.2 million, and villa
sales of $169,000. Property sales of $5.4 million for the nine months ended
September 30, 1996 included lot sales of $1.7 million ($1.9 million using an
"as sold" basis), condominium sales of $2.9 million and villa sales of
$776,000.
DIVIDENDS AND INTEREST INCOME. Dividends were received on the
marketable equity securities that were held for investment purposes prior to
March 31, 1996. Interest income is received on the Company's cash balances
held in banks and on notes receivable. Interest income fluctuates with
interest rates, the level of the Company's excess cash, and the level of notes
receivable. Dividends and interest income increased $672,000 (21.5%) from $3.1
million for the nine months ended September 30, 1996 to $3.8 million for the
nine months ended September 30, 1997. This increase is primarily due to the
higher average balances of cash and notes receivable outstanding during the
nine months ended September 30, 1997.
GAINS ON SALES OF INVESTMENTS AND OTHER ASSETS. Gains on sales of
investments and other assets represent gains associated with the sales of
revenue-producing properties, property held for future development, marketable
equity securities, and other assets used in the business. These gains
fluctuate with the volume of asset dispositions and the magnitude of the
difference between sales proceeds and carrying value. In the first quarter of
1996, the Company liquidated its entire investment in marketable equity
securities for $38.6 million, recognizing a pre-tax gain of $33.0 million.
7
<PAGE> 10
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES. Equity in earnings
of unconsolidated subsidiaries represents the Company's proportionate share of
earnings of subsidiaries in which the Company's ownership is 50% or less. This
amount increased by $401,000 from $314,000 for the nine months ended September
30, 1996 to $715,000 for the nine months ended September 30, 1997 primarily due
to income to the Company of $214,000 from the sale of a pad site by one of the
Company's unconsolidated Iowa subsidiaries.
OTHER. Other represents miscellaneous income of the Company. Other
income decreased by $3.1 million from $4.3 million for the for the nine months
ended September 30, 1996 to $1.2 million for the nine months ended September
30, 1997. This decrease resulted primarily from a $4.6 million payment
recognized as income in 1996 pursuant to a Resolution Agreement with the
Company's prior auditor, reduced by legal expenses and a reserve for potential
subrogation claims totaling $1.4 million. In addition, the Company received
approximately $389,000 and $378,000 in 1997 and 1996, respectively, as a result
of a claim it filed in the National Gypsum bankruptcy proceeding now pending in
the United States Bankruptcy Court.
SELLING, GENERAL AND OPERATING EXPENSES. Selling, general, and
operating expenses (S,G, & O) represent the expenses directly associated with
operating the Company's real estate assets and expenses that are considered to
be overhead. These expenses decreased by $3.5 million (10.3%) from $34.3
million for the nine months ended September 30, 1996 to $30.8 million for the
nine months ended September 30, 1997, principally due to the absence of $1.2
million of costs to secure a new management team and the absence of $2.8
million in expenses related to the operation of the Raphael Hotel of San
Francisco due to the expiration of the underlying lease. Certain S, G, & O
expenses related to the sale of four properties (See Rents) decreased by
$59,000. In addition, certain S, G, & O expenses of a non-recurring nature
decreased by $219,000. The remaining $778,000 increase is due primarily to the
recording of $720,000 in severance expense to outsource certain functions.
COST OF PROPERTY SALES. Cost of property sales represents the
Company's cost basis in residential lots, condominium units, and villas sold
during the year. The cost of property sales is a function of the number of
lots, condominium units, and villas sold and their underlying cost basis. Cost
of property sales decreased by $388,000 (8.8%) from $4.4 million for the nine
months ended September 30, 1996 to $4.0 million for the nine months ended
September 30, 1997 and included lot cost of sales of $1.9 million (including
$696,000 that was recognized pursuant to the Company's change in accounting
method from recording sales on an "as closed" basis to recording sales on an
"as sold" basis), condominium cost of sales of $2.0 million and villa cost of
sales of $154,000. Cost of property sales for the nine months ended September
30, 1996 included lot cost of sales of $1.1 million (also $1.1 million on the
"as sold" basis of recording lot sales), condominium cost of sales of $2.6
million and villa cost of sales of $772,000. The gross margin percentage on
lot sales was 41.6% for the nine months ended September 30, 1997 as compared to
37.2% for the nine months ended September 30, 1996. The increase in gross
margin percentage on lot sales for the nine months ended September 30, 1997
resulted from a change in sales mix, as sales for this period contained a
larger percentage of sales from higher margin subdivisions. The gross margin
percentage on condominium sales was 7.2% for the nine months ended September
30, 1997, as compared to 11.1% for the nine months ended September 30, 1996.
The decrease in gross margin percentage on condominium sales for the nine
months ended September 30, 1997 resulted from the Company incurring greater
finishing costs on condominium sales for the nine months ended September 30,
1997 than for the nine months ended September 30, 1996.
INTEREST EXPENSE. Fluctuations in interest expense occur due to the
level of the Company's interest bearing indebtedness and the effect changes in
interest rates have on the Company's variable rate indebtedness. Interest
expense declined by $454,000 (2.6%) from $17.7 million for the nine months
ended September 30, 1996 to $17.2 million for the nine months ended September
30, 1997 primarily due to the lower average balance of outstanding indebtedness
during the nine months ended September 30, 1997.
INCOME TAX EXPENSE (BENEFIT). The $22.6 million change in income tax
expense (benefit) from the $15.6 million expense for the nine months ended
September 30, 1996 to the income tax benefit of $7.0 million for the nine
months ended September 30, 1997 is due primarily to the decrease in income tax
expense from operations of $12.3 million and the recording of a net $10.3
million income tax benefit relating to the contribution of shares of common
stock to the Company's Employee Stock Ownership Trust and to the Court (see
Part II, Item 1, "Legal Proceedings") pursuant to the Settlement Agreement.
The value of the shares at the August 1997 date of conveyance was substantially
higher than the value of those shares which was accrued at the Settlement
Agreement date in 1995. The higher value is deductible for income tax
purposes.
8
<PAGE> 11
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1997 TO THE THREE MONTHS
ENDED SEPTEMBER 30, 1996
SUMMARY. Net income increased by $8.2 million from $3.8 million for
the three months ended September 30, 1996 to $12.0 million for the three months
ended September 30, 1997, primarily as a result of increased equity in earnings
of unconsolidated affiliates, increased profit on property sales (due primarily
to a change in accounting method) and lower income tax expense for the three
months ended September 30, 1997. These increases were partially offset by the
absence of certain other income for the three months ended September 30, 1997.
RENTS. Rental income decreased by $1.7 million from $20.8 million for
the three months ended September 30, 1996 to $19.1 million for the three months
ended September 30, 1997 primarily due to the absence of $1.2 million in rental
income from the Company's leasehold interest in the Raphael Hotel of San
Francisco (as the underlying lease expired in the third quarter of 1996) and a
$436,000 decrease in income related to four properties sold (three in the
third quarter of 1997 and one in the fourth quarter of 1996).
PROPERTY SALES. Property sales increased by $1.1 million (103.6%)
from $1.1 million for the three months ended September 30, 1996 to $2.2 million
for the three months ended September 30, 1997 and included lot sales of $1.8
million (including $1.1 million that was recognized pursuant to the Company's
change in accounting method from recording sales on an "as closed" basis to
recording sales on an "as sold" basis) and condominium sales of $400,000.
Property sales of $1.1 million for the three months ended September 30, 1996
included lot sales of $635,000 ($652,000 using an "as sold" basis), condominium
sales of $325,000 and villa sales of $143,000.
DIVIDENDS AND INTEREST INCOME. Dividends and interest increased
$344,000 (31.3%) from $1.1 million for the three months ended September 30,
1996 to $1.4 million for the three months ended September 30, 1997. This
increase is primarily due to the higher average balances of cash and notes
receivable outstanding during the three months ended September 30, 1997.
EQUITY IN EARNINGS OF UNCONSOLIDATED SUBSIDIARIES. Equity in earnings
of unconsolidated subsidiaries increased by $462,000 from $81,000 for the three
months ended September 30, 1996 to $543,000 for the three months ended
September 30, 1997 primarily due to income to the Company of $214,000 from the
sale of a pad site by one of the Company's unconsolidated Iowa subsidiaries.
OTHER. Other income decreased by $3.1 million from $3.8 million for
the three months ended September 30, 1996 to $745,000 for the three months
ended September 30, 1997. This decrease resulted primarily from a $4.6 million
payment recognized as income in 1996 pursuant to a Resolution Agreement with
the Company's prior auditor, reduced by legal expenses and a reserve for
potential subrogation claims totaling $1.4 million. In addition, the Company
received approximately $389,000 and $378,000 in 1997 and 1996, respectively, as
a result of a claim it filed in the National Gypsum bankruptcy proceeding now
pending in the United States Bankruptcy Court.
SELLING, GENERAL AND OPERATING EXPENSES. S, G & O increased by
$53,000 (0.5%) from $11.36 million for the three months ended September 30,
1996 to $11.41 million for the three months ended September 30, 1997,
principally due to the absence of $1.06 million in expenses related to the
operation of the Raphael Hotel of San Francisco due to the expiration of the
underlying lease. Certain S, G, & O expenses related to the sale of four
properties (See Rents) decreased by $87,000. The remaining $1.2 million
increase is due primarily to the recording of $720,000 in severance expense to
outsource certain functions and a $370,000 increase in property operating
expenses.
COST OF PROPERTY SALES. Cost of property sales increased by $267,000
(28.5%) from $937,000 for the three months ended September 30, 1996 to $1.2
million for the three months ended September 30, 1997 and included lot cost of
sales of $992,000 (including $608,000 that was recognized pursuant to the
Company's change in accounting method from recording sales on an "as closed"
basis to recording sales on an "as sold" basis), condominium cost of sales of
$212,000 and no villa cost of sales. The cost of lot sales for the three months
ended September 30, 1996 included lot cost of sales of $442,000 ($394,000 on
the "as sold" basis of recording lot sales), condominium cost of sales of
$330,000 and villa cost of sales of $165,000. The gross margin percentage on
lot sales was 45.6% for the three months ended September 30, 1997 as compared
to 30.5% for the three months ended September 30, 1996. The gross margin
percentage on condominium sales was 49.9% for the three months ended September
30, 1997, as compared to (1.6)% for the three months ended September 30, 1996.
The increase in gross
9
<PAGE> 12
margin percentage on lot sales for the three months ended September 30, 1997
resulted from a change in sales mix, as sales for this period contained a
larger percentage of sales from higher margin subdivisions. The increase in
gross margin percentage on condominium sales for the three months ended
September 30, 1997 resulted from the Company incurring lower finishing costs on
condominium sales for the three months ended September 30, 1997 than for the
three months ended September 30, 1996.
INCOME TAX EXPENSE (BENEFIT). The $11.7 million change in income tax
expense (benefit) from the $2.4 million expense for the three months ended
September 30, 1996 to the income tax benefit of $9.3 million for the three
months ended September 30, 1997 is due primarily to the decrease in income tax
expense from operations of $1.4 million and the recording of a net $10.3
million income tax benefit relating to the contribution of shares of common
stock to the Company's Employee Stock Ownership Trust and to the Court (see
Part II, Item 1, "Legal Proceedings") pursuant to the Settlement Agreement.
The value of the shares at the August 1997 date of conveyance was substantially
higher than the value of the shares which was accrued at the Settlement
Agreement date in 1995. The higher value is deductible for income tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities, permanent mortgage
financing, and short term notes payable to banks represent the Company's
primary sources of liquidity to fund recurring capital costs associated with
renewing leases and renovating the Company's properties, payments on the
Company's outstanding indebtedness, and distributions to shareholders. The
Company has a $10 million unsecured line of credit with Commerce Bank, N.A.
(Kansas City, Missouri) bearing interest at the prime rate. At September 30,
1997, there were no outstanding borrowings on this line of credit.
Management anticipates that cash generated before debt payments and
capital expenditures, together with the bank line of credit, will provide
adequate liquidity to conduct the Company's operations, fund its recurring
capital costs and interest expense, and permit normal amortization payments on
outstanding indebtedness.
On January 29, 1997, the Company purchased all outstanding shares of
the Company owned beneficially and of record by AHI Metnall L.P. ("AHI"). The
Company paid consideration of $27.25 per share, or a total of $25.9 million for
the 948,880 shares of the Company's common stock owned by AHI. At the closing,
the Company delivered to AHI $12.8 million in cash (which included
approximately $39,000 of interest) and executed a promissory note in the
amount of $13.0 million (which reflected a $57,500 reduction for certain
expenses), bearing interest at a rate of eight percent (8%) per annum with
interest only payable quarterly. The promissory note is secured by the pledge
of a mortgage receivable and real property, and is due on January 29, 1999.
The purchase by the Company of such stock decreased the number of outstanding
shares of common stock of the Company from 4,852,400 to 3,903,520 shares. The
number of outstanding shares of common stock of the Company was further reduced
to 3,849,358 in January 1997 when the Employee Stock Ownership Trust
transferred 54,162 shares to the Company in repayment of a loan from the
Company of approximately $2.0 million and then the number outstanding was
increased to 4,529,357 in August 1997 when the Company conveyed 679,999 shares
of common stock to the ESOT and to the Court (See Part II, Item 1, "Legal
Proceedings") pursuant to the Settlement Agreement (one share was converted to
cash).
On December 19, 1996, the Company announced a comprehensive plan to
redevelop areas on and around the Country Club Plaza ("Plaza"). The Plaza is a
prestigious shopping, entertainment and office development in Kansas City,
Missouri containing approximately 1,000,000 square feet of retail space
(including basement space) and 125,000 square feet of second floor office
space. The proposed $240 million redevelopment includes 780,000 square feet of
new construction on the Plaza, rehabilitation of 180,000 square feet of
existing structures on the Plaza, and the addition of 350 residential apartment
units near the Plaza. The proposal also includes construction of 3,965 parking
spaces and $5 million of public amenities on the Plaza. The Company filed on
December 20, 1996, 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 on April 17, 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 costs in
excess of the approved tax increment financing.
10
<PAGE> 13
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 TO NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net cash provided by operating activities decreased by $3.3 million
from $26.6 million for the nine months ended September 30, 1996 to $23.3
million for the nine months ended September 30, 1997. The primary reasons for
such increase are discussed above under "Results of Operations."
Net cash flows provided by investing activities increased by $463,000
from $4.8 million for the nine months ended September 30, 1996 to $5.3 million
for the nine months ended September 30, 1997. The $5.3 million in net cash
flows provided by investing activities for the nine months ended September 30,
1997 was principally a result of decreasing temporary investments $1.9 million,
receiving $7.9 million in payments on notes receivable, receiving $6.5 million
from the sale of capital assets and receiving a $1.4 million return of capital
from real estate partnerships. These receipts were partially offset by
investments of $6.4 million for additions to revenue-producing properties and
issuance of an additional $6.1 million of notes receivable. For the nine months
ended September 30, 1996, the Company's net cash provided by investing
activities of $4.8 million was principally a result of the receipt of $6.6
million of payments on notes receivable, proceeds from the sale of marketable
equity securities of $38.6 million, the receipt of $413,000 from the sales of
capital assets and the receipt of $446,000 in return of capital from real
estate partnerships. These receipts were substantially offset by a net increase
in temporary investments of $32.7 million, the issuance of an additional $2.9
million of notes receivable and investments of $5.7 million for additions to
revenue-producing properties.
Net cash used by financing activities increased by $4.6 million from
$17.2 million for the nine months ended September 30, 1996 to $21.8 million for
the nine months ended September 30, 1997. The $21.8 million of net cash used by
financing activities for the nine months ended September 30, 1997 was
principally a result of the $12.8 million cash portion of the purchase price
paid in acquiring 948,880 shares of the Company's stock and from a net
reduction of mortgage and notes payable indebtedness of $9.0 million. For the
nine months ended September 30, 1996, the Company's net cash used in financing
activities of $17.2 million resulted from a net reduction of mortgage and notes
payable indebtedness.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
It is management's intent to apply the majority of the Company's
operating cash flows to reduce indebtedness and to improve and increase the
Company's portfolio of revenue-producing properties. The Company is organized
as a "Subchapter C" corporation and as such pays income taxes on its taxable
income and is generally not subject to distribution requirements based on net
income. Management believes that the Company's core operations are best
measured by its earnings before interest and dividend income, interest expense,
income taxes, depreciation and amortization, gains or losses from debt
restructuring and sales of assets, and valuation allowances, and after
adjustments needed to similarly convert the earnings of minority interests and
unconsolidated partnerships. Earnings, as so computed, are referred to herein
as "EBITDA". This is a supplemental performance measure used along with net
income to report operating results. EBITDA is not a measure of operating
results or cash flows from operating activities as defined by generally
accepted accounting principles. Additionally, EBITDA is not necessarily
indicative of cash available to fund operating needs and should not be
considered as an alternative to cash flow as a measure of liquidity. However,
the Company believes that EBITDA provides relevant information about its
operations and, along with net income (loss), facilitates understanding of its
operating results. The EBITDA and EBITDA, as adjusted, set forth below may not
be comparable to other real estate companies, as each real estate company may
define differently such terms.
11
<PAGE> 14
<TABLE>
<CAPTION>
EBITDA
$(000)
-------------------------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
----- ----
<S> <C> <C>
NET INCOME................................................................ 15,854 $ 25,959
ADJUSTMENTS TO RECONCILE NET INCOME TO EBITDA:
Interest and dividend income........................................... (3,797) (3,125)
Interest expense....................................................... 17,206 17,660
Income tax expense (benefit)........................................... (6,993) 15,600
Depreciation and amortization.......................................... 10,027 10,222
Gains on sales of investments and other assets........................ (82) (33,079)
Minority interest portion of add-backs................................. (2,016) (2,137)
Unconsolidated subsidiaries' portion of add-backs...................... 3,035 2,870
----------- ---------
EBITDA.................................................................... $ 33,234 $ 33,970
=========== =========
</TABLE>
Because of the number and size of non-recurring transactions included
in the Company's consolidated financial statements during the last three years,
management believes it is important to also present a reconciliation of the
foregoing EBITDA to "adjusted" EBITDA, as described below, which represents
EBITDA exclusive of certain non-recurring transactions. Management believes
adjusted EBITDA is more representative of the Company's underlying operations.
<TABLE>
<CAPTION>
ADJUSTED EBITDA
$(000)
-------------------
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1997 1996
---- ----
<S> <C> <C>
EBITDA................................................................... $ 33,234 $ 33,970
NON-RECURRING ITEMS:
Costs of securing new management (including stock options)............ - 1,228
Income from resolution of claims...................................... (389) (3,578)
Subdivision lots, change in accounting method......................... (504) (99)
Severance costs....................................................... 720 -
Professional fees..................................................... 200 -
Other, net............................................................ (419) (25)
--------- ---------
ADJUSTED EBITDA.......................................................... $ 32,842 $ 31,496
========= =========
</TABLE>
The above adjusted EBITDA amounts illustrate the Company's EBITDA if certain
non-recurring items had been eliminated from the Company's statements of
income. These amounts are not necessarily indicative of future performance.
However, management does believe that, when read in conjunction with the
Company's consolidated financial statements, they assist the reader in better
understanding the Company's underlying business operations. The adjustments
made to arrive at adjusted EBITDA are explained as follows: "Costs of securing
new management (including stock options)" reflects the expense to the Company
for the nine months ended September 30, 1996 of obtaining the new members of
its senior management. "Income from resolution of claims" for the nine months
ended September 30, 1997 reflects the income received from claims from the
National Gypsum bankruptcy proceeding. "Income from resolution of claims" for
the nine months ended September 30,
12
<PAGE> 15
1996 reflects the income received from the Company's prior auditor and claims
from the National Gypsum bankruptcy proceeding. "Subdivision lots, change in
accounting method" for the nine months ended September 30, 1997 and 1996
reflects the change in gross margin on residential lot sales resulting from the
Company's change in accounting method from recording sales on an "as closed"
basis to recording sales on an "as sold" basis. "Severance costs" reflects the
expense to the Company for the nine months ended September 30, 1997 of
outsourcing certain functions. "Professional fees" reflects the expense to the
Company for the nine months ended September 30, 1997 of certain non-recurring
consulting expenses. "Other, net" for the nine months ended September 30, 1997
and 1996 reflects the net of other less significant, non-recurring adjustments.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings Per Share" which revises the calculation and
presentation provisions of Accounting Principles Board Opinion 15 and related
interpretations. Statement No. 128 is effective for the Company's fiscal year
ending December 31, 1997. Retroactive application will be required. The
Company believes the adoption of Statement No. 128 will not have a significant
effect on its reported earnings per share.
13
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
On August 15, 1997, the Company paid to the Company's Employee Stock
Ownership Trust and to the United States District Court for the Western
District of Missouri 679,999 shares of the Company's common stock
and $2,326,000, plus certain accrued interest. This payment was made pursuant
to the Settlement Agreement (defined below). The Settlement Agreement and the
litigation giving rise to the Settlement Agreement are more particularly
described in the Company's Form 10-K for the fiscal year ended December 31,
1996, filed with the Securities and Exchange Commission on March 31, 1997.
A description of the agreement entered into by the Company and the Internal
Revenue Service on August 1, 1997, relating to the Settlement Agreement is
contained in the Company's Form 10-Q for the quarterly period ended June 30,
1997, filed with the Securities and Exchange Commission on August 14, 1997.
On September 2, 1997, the Company filed a Complaint for Interpleader and
Declaratory Relief in the United States District Court for the Western District
of Missouri. The Interpleader portion of the complaint seeks the adjudication
of competing interests in 59,413 shares of the Company's common stock and
$58,064 in cash, plus interest, that was in the possession of the Company by
virtue of the Mutual Release and Settlement Agreement dated as of June 30, 1995
("Settlement Agreement") entered into by the Company pursuant to the
consolidated litigation entitled Medina, et al. v. McCarthy, et al. ("Medina")
filed in the United States District Court for the Western District of Missouri
("Court"). The Company has asked the Court to resolve the disagreement among
various parties as to whether, pursuant to the Settlement Agreement, the stock
and cash should be paid by the Company directly to the Company's Employee Stock
Ownership Trust or to the nine individual defendants named in the Interpleader
action.
In the same action, the Company also is seeking a ruling of the Court
regarding whether or not the Settlement Agreement requires that the vesting
provisions of the Company's Employee Stock Ownership Plan documents be amended
to provide that the Medina plaintiff class members be 100% vested in the stock
and money allocated in their ESOP accounts pursuant to the Settlement
Agreement. The Company named as defendants in this proceeding certain ESOP
participants who raised an issue as to vesting of the Settlement Agreement
proceeds. The Company is seeking certification of a defendant sub-class
consisting of those members of the Medina plaintiff class who are not 100%
vested in the Company's ESOP.
In response to such Interpleader action, various defendants in the
Interpleader and Declaratory Relief Action and the original Medina litigation
have filed motions to enforce the Settlement Agreement. On October 3, 1997, a
group of former Company employees who were not 100% vested in the ESOP at the
time their employment was terminated (the "Van Butsel Group") filed a motion to
enforce the Settlement Agreement. In such motion, the Van Butsel Group has
requested that the Court hold that all class members are fully vested in their
share of the settlement proceeds.
The Company's former chief executive officer and his daughter have
also filed a Motion to enforce the Settlement Agreement and requested that the
portion of the shares and cash paid by the Company into the Court Registry that
they claim is allocable to them, be allocated to them in the Company's Employee
Stock Ownership Plan.
Four other ESOP plan participants have filed a separate Motion to
Interpret and Enforce the Settlement Agreement and for Preliminary Injunction
(the "Participant Motion"). The relief sought by the Participant Motion
includes: (i) a request that the Court order the Company to cause an interim
appraisal in order to allocate and distribute stock to eligible ESOP
participants in a manner not provided by the Company ESOP's plan documents at
the time of such motion; (ii) an order enjoining the Company from applying the
provisions of the Company's shareholder rights plan to a sale by the ESOT
Trustee of its stock in the Company to one party; (iii) an order requiring the
59,413 shares and the $58,064 plus accrued interest paid by the Company into
the Registry of the Court be paid into the ESOT Trust and allocated only to
certain ESOP beneficiaries; (iv) an order enjoining the operation of the terms
of the ESOP plan documents which provide that upon the listing by the Company
on an established securities exchange that the Company will no longer have the
obligation to pay cash to ESOP participants in exchange for the Company stock
they may receive from an ESOT distribution.
On August 6, 1997, the Company received approximately $389,000 on its
$3 million proof of claim filed in the National Gypsum Bankruptcy proceeding
pending in the United States Bankruptcy Court, Northern District of Texas.
The Company anticipates receiving one additional payment in the approximate
amount of $400,000 in August 1998.
14
<PAGE> 17
ITEM 2 CHANGES IN SECURITIES
On July 23, 1997, the Company granted to four officers of the Company,
not including the Company's President and Chief Executive Officer, Mr. Barrett
Brady, options to purchase a total of 27,500 shares of the Company's common
stock pursuant to the terms of the Company's 1996 Employee Stock Option Plan.
The grant of the options was exempt from registration under the Securities Act
of 1933, as amended (the "Act"), pursuant to Section 4(2) of the Act. All of
the options have an exercise price of $30.00 per share. On December 31, 1997,
the options will be 20% vested, and on December 31, 1998 and December 31, 1999,
the options will vest an additional 35% and 45%, respectively.
The Company filed a report on Form 8-A on July 29, 1997, announcing
the adoption of a shareholder rights plan, effective July 28, 1997. For
additional information, reference is made to the Form 8-A filed on July 29,
1997, including the exhibits thereto.
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
The Company applied in late 1996 for the listing of the Company's
common stock on the Nasdaq SmallCap Market. The Company subsequently was
notified that it had received conditional approval for listing, and that the
Company would need to cause the listing to become effective within six months
from the date of the application. Following an extension of this six-month
deadline, the Company was notified on October 21, 1997, that its application to
list the Company's common stock on the Nasdaq SmallCap Market had been closed.
This action does not preclude the Company from applying in the future for the
listing of its securities. There are currently no facts or circumstances that
would prevent the Company from successfully obtaining approval for such
listing.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule*
(b) Reports on Form 8-K.
None
* Incorporated by reference to the Company's Form 10-Q filed on November 14,
1997.
15
<PAGE> 18
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.
J.C. NICHOLS COMPANY
Date: May 19, 1998 By: /s/ MARK A. PETERSON
------------------------------------
Mark A. Peterson
Vice President, Chief Financial Officer
and Treasurer
(Authorized officer and principal
financial officer of the registrant)
16
