<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
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<S> <C>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________________
TO____________________
COMMISSION FILE NUMBER: 0-06181
</TABLE>
J.C. NICHOLS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
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)
</TABLE>
Registrant's telephone number, including area code: (816) 561-3456
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(G) of the Act:
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<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
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Common Stock, $.01 par value NOT APPLICABLE
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the Common Stock, par value $.01 per share,
of the registrant held by nonaffiliates of the registrant (2,164,307 shares) as
of March 16, 1998 was $140.7 million, based on actual trading data from March
16, 1998.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 par value, outstanding as of March 16, 1998: 4,542,509
Shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Proxy Statement for the Annual Meeting of
Stockholders, are incorporated by reference into Part III.
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INDEX
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<S> <C> <C>
ITEM 1. BUSINESS.................................................... 1
ITEM 2. PROPERTIES.................................................. 5
ITEM 3. LEGAL PROCEEDINGS........................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 14
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 14
ITEM 6. SELECTED FINANCIAL DATA..................................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 61
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 61
ITEM 11. EXECUTIVE COMPENSATION...................................... 61
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 61
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 61
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 62
</TABLE>
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are subject to future
risks and uncertainties. The Company's actual results may differ significantly
from the results discussed in the forward-looking statements contained herein.
Accordingly, the Company hereby identifies the following important factors,
among other things, that could cause actual results to differ materially from
those projected by the Company in the forward looking statements: (i) changes
from the Company's anticipated levels of rental income or property-related
expenses, whether due to future national or regional economic and competitive
conditions; (ii) an adverse trend in the real estate markets in which the
Company owns properties; (iii) lack of success of any of the Company's
developments, whether due to construction costs exceeding Management's estimates
or unexpected delays in the completion of development projects; (iv) lack of
tenant acceptance of the properties of the Company; (v) unexpected changes in
tax rates or interest rates; (vi) incorrect assessments of (or changes in) the
environmental condition of the Company's properties; and (vii) loss of key
executives. The forward-looking statements do not take into consideration the
pending transaction with Highwoods Properties, Inc. described in this report.
PART I
ITEM 1. BUSINESS
GENERAL
The J. C. Nichols Company (the "Company" or "JCN") is a real estate
operating company engaged in the acquisition, development, ownership, and
management of a diversified portfolio of real estate properties, principally
located in the Kansas City, Missouri metropolitan area. The Company's real
estate development activities were initiated in 1902. The Company was
incorporated in Missouri in 1908 and its principal office has been at 310 Ward
Parkway, Kansas City, Missouri since July 1930.
JCN is best known for its development, ownership, and management of the
Country Club Plaza area (the "Plaza") of Kansas City, a prestigious shopping,
entertainment and office district containing approximately 1,100,000 square feet
of retail space (including basement space) and approximately 940,000 square feet
of office space. The Plaza is surrounded principally by single family
residences, condominiums and upscale apartments, many of which are owned by JCN.
The Plaza is generally regarded as the oldest major suburban shopping center in
the United States.
At December 31, 1997, JCN and its consolidated subsidiaries owned 16 retail
centers consisting of approximately 2,500,000 square feet of retail space
(including basement space) occupied by approximately 400 tenants, 14 apartment
communities (including a majority interest in a partnership owning a Des Moines,
Iowa area apartment complex) representing approximately 2,300 units, 31 office
properties (including majority interests in partnerships owning seven Des
Moines, Iowa area office buildings) consisting of approximately 1,462,000 square
feet of space occupied by over 500 tenants, two industrial and warehouse
properties consisting of approximately 337,000 square feet of space occupied by
48 tenants, three residential developments containing 169 lots available for
sale, and over 1,000 acres available for residential and commercial development,
as well as complete or partial ownership in several other minor properties. JCN
also owns six unsold units in its Alameda Towers condominium project.
JCN also owns an equity interest in eleven active entities whose holdings
are not consolidated with the financial statements of JCN. The largest of these
holdings are JCN's approximately 50% interest in six partnerships which own
properties in the Des Moines, Iowa area. At December 31, 1997, these
partnerships owned fifteen buildings consisting of 936,000 square feet of
offices, 200,000 square feet of industrial space, 26 acres currently under
development or ground lease, and approximately 80 acres to be developed. The 80
acres are located in four separate developments in the Des Moines, Iowa area. Of
the 80 acres, 34 acres are planned for additional industrial buildings in two
industrial parks, 8 acres are planned for office development upon the exercise
of an option by the sole tenant of the adjacent office building, and 38 acres
are planned for development as an office complex with related retail
development. Approximately 52,400 square feet of speculative office space in the
Des Moines, Iowa area was started and completed in 1997 and the entire
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building was leased to a single tenant. In addition, in 1997, approximately
60,000 square feet of speculative office space in the Des Moines, Iowa area was
started and substantially completed and is expected to be fully leased up during
1998. Also in process in the Des Moines, Iowa area is the construction of a
160,000 square foot industrial building and a 35,000 square foot retail center.
Additional speculative industrial space will be constructed in 1998 when the
160,000 square foot building is substantially leased. There are also plans to
construct approximately 47,000 square feet of speculative office space during
1998 in the Des Moines, Iowa area and when it is significantly leased,
additional speculative office space will be constructed. In addition to the Des
Moines, Iowa area properties, one of JCN's eleven unconsolidated affiliates is a
40% interest in J.C. Nichols Real Estate, a residential sales and brokerage
business in Kansas City. J.C. Nichols Real Estate also has an interest in an
entity which owns a mortgage origination company.
BUSINESS STRATEGY
Management strives to increase the equity value of the Company's income
producing portfolio by increasing the net operating income from existing
properties, increasing the number of properties in its portfolio, and by
reducing the amount of debt associated with its existing properties. The number
of properties in the Company's portfolio is expected to increase by both the
acquisition and development of revenue-producing properties, as well as by the
acquisition of land for development and resale principally in the Midwest, and
predominately in the Kansas City metropolitan area.
Management believes the Company's strategy of enhancing its existing
portfolio of properties and focusing initially on acquisitions and developments
in Kansas City and surrounding markets allows the Company to best capitalize on
its reputation for quality and its employees' in-depth knowledge and experience
in those markets. Management also believes that by developing, owning, and
managing a diverse portfolio of properties in a relatively small geographic
area, it can better control the overall character of the Company's developments
and thus create greater value.
RECENT DEVELOPMENTS
In August of 1997, the Company announced the outsourcing of its Kansas City
area apartment management function. Previously, the Company's employees had
provided leasing and management services for all Kansas City area apartment
properties owned by the Company. These functions are now performed by RAM
Partners, Inc., an affiliate of Post Properties, Inc. The Company believes that
this strategic decision will result in improved operating efficiency and
profitability.
In November of 1997, the Company announced an agreement with
Kessinger/Hunter and Company, Inc. ("Kessinger/Hunter"), a long-standing Kansas
City real estate brokerage, management and development firm, to form a limited
liability company ("LLC") in which JCN would initially own a 30% interest. The
LLC will provide services to previous Kessinger/Hunter clients, as well as
management and leasing for JCN's Kansas City area portfolio of office,
industrial, and retail centers, exclusive of the Plaza. The acquisition provides
JCN an immediate platform from which to grow its management, leasing, and
brokerage services to third party property owners and investors.
JCN's comprehensive Plaza redevelopment plan continues to progress. The
projects covered by this plan will be supplemented by tax increment financing.
JCN has begun construction on Valencia Place, a project containing approximately
270,000 square feet of Class A office space and 80,000 square feet of retail
space. JCN has preleased approximately 100,000 square feet of the office space.
JCN has also begun construction to re-position Seville Square on the Plaza. The
new Seville Square will be anchored by a 70,000 square foot theater complex with
15 screens. Plans for JCN's upscale 350 unit Plaza area apartment community
continue to progress and construction is expected to begin in 1998.
On December 23, 1997, JCN announced it had signed a definitive agreement
with Highwoods Properties, Inc., a Raleigh, North Carolina-based real estate
investment trust ("Highwoods") and a wholly-owned subsidiary of Highwoods for
the merger of JCN into that Highwoods subsidiary. Highwoods is a fully-
integrated, self-administered real estate investment trust that provides
leasing, management, development, construction and other tenant-related services
for its properties and for third parties. The agreement, which is
2
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subject to a number of conditions, including approval by two-thirds of the
shareholders of JCN, provides to JCN shareholders the opportunity to elect to
receive 1.84 Highwoods shares or $65 in cash for each share of JCN common stock.
Highwoods may limit the amount of its stock issued to JCN shareholders to no
more than 75% of the total consideration. The cash payment to JCN shareholders
cannot exceed 40% of the total consideration. Management believes that the
proposed strategic transaction permits achievement of the long-term growth plans
of JCN by providing access to the financial resources and management expertise
of one of the largest and most successful REITs in the country. Management of
JCN will deliver to its shareholders additional information about the proposed
merger in the Proxy/Prospectus to be distributed in advance of the special
meeting of shareholders expected to be called in the second quarter of 1998 to
approve such transaction.
COMPETITION
Substantially all of the Company's properties are located in the Kansas
City metropolitan area, except those held in its Iowa investment partnerships.
The Kansas City market area is a highly competitive one for real estate and real
estate services. The Company's retail properties face increasing competition
from newer upscale shopping centers, discount shopping centers, outlet malls,
catalogues, discount shopping clubs, and telemarketing. All of the Company's
retail properties overlap to some degree with the trade area of other shopping
centers. Renovations and expansions at existing competing centers as well as the
development of new centers in the Company's market area could negatively affect
revenues of the Company.
The Company's office building properties compete for tenants principally
with office buildings in the same general geographic location. In many areas
where the Company's office buildings are located, there have been new office
buildings built and planned office building construction which have and will
continue to increase the supply of rentable office space, potentially placing
downward pressure on market rental rates.
The Company's apartment properties compete with numerous other apartment
properties within the same market area. Those other apartment properties could
have a material effect on the rental rates charged by the Company, as well as
the Company's ability to rent its apartment properties.
JCN competes directly with developers and other buyers in the acquisition
of development sites for retail, office, and apartment development and for
financing sources.
With respect to all of its real estate operations, the Company competes for
tenants and property acquisitions with others who may have greater resources
than the Company and whose management may have more experience in operating and
acquiring properties than the Company's management.
REGULATION AND LEGISLATION
Federal, state, and local statutes and regulations relating to
environmental protection have not had a material impact on the businesses of
JCN. However, existing properties and future development of other opportunities
by JCN may require additional capital and other expenditures in order to comply
with such statutes and regulations. It is impossible at this time to predict
with any certainty the magnitude of any such expenditures or the long range
effect, if any, on JCN's operations. JCN is currently not aware of any material
violation of any applicable environmental statute or regulation with respect to
any of its properties owned, managed, or held for development.
The federal government and the states in which JCN operates have adopted
handicapped facilities and energy laws and regulations impacting the use and
development of real estate. These laws and regulations may operate to reduce the
number, attractiveness, and investment potential of properties and developments
available to JCN. JCN has reviewed the properties it owns or in which it has an
interest to determine the extent and amount of capital expenditures necessary to
comply with the aforementioned laws and regulations. These expenditures, which
will be incurred by the Company over the course of the next several years as
modifications to such properties are undertaken, are not expected to be material
in any single year.
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GENERAL CONDITIONS
General economic conditions and trends, including interest rates,
inflation, availability of credit, real estate trends, construction costs,
income tax laws, governmental regulations and legislation, increases or
decreases in operating expenses, zoning laws, population trends, and the ability
of JCN to attract tenants and purchasers for its properties, among other
factors, will affect JCN's success.
Generally, JCN's business and that of the industry is not seasonal in
nature.
RELIANCE ON CUSTOMERS OR TENANTS
None of JCN's business segments depends upon a sole customer or tenant or a
few customers or tenants, the loss of which would materially adversely affect
the business or financial condition of JCN. No single customer or tenant
accounts for 5% or more of the consolidated revenues of JCN.
EMPLOYEES
JCN and consolidated subsidiaries directly employed 159 full or part-time
employees as of December 31, 1997 as compared to 300 at December 31, 1996. The
decrease is primarily a result of outsourcing the management and leasing
functions for the Company's Kansas City area apartment properties and the
agreement with Kessinger/Hunter in which the newly created LLC will perform the
management and leasing functions for the Company's Kansas City area portfolio of
office, industrial, and retail centers, exclusive of the Plaza.
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ITEM 2. PROPERTIES
<TABLE>
<CAPTION>
PERCENT
OWNERSHIP COMPANY'S YEAR YEAR LAND AREA RENTABLE LEASED AT
NAME/LOCATION INTEREST OWNERSHIP DEVELOPED ACQUIRED (ACRES) AREA (SQ. FT) 12/31/97
------------- --------- --------- --------- -------- --------- ------------- ---------
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RETAIL
KANSAS CITY, MISSOURI
Country Club Plaza
(Retail only, includes
basement space)
Millcreek Block........ Fee 100% 1920 1906-1910 0.971 51,114 78%
Triangle Block......... Fee 100 1925 1906-1910 0.435 25,634 100
Balcony Block.......... Fee 100 1925 1906-1910 1.068 38,571 100
Macy Building.......... Fee 100 1926 1906-1910 0.555 71,365 100
Esplanade Block........ Fee 100 1928 1906-1910 1.838 145,694 100
Plaza Central.......... Fee 100 1958 1906-1910 1.478 9,653 88
Theatre Block.......... Fee 100 1928 1906-1910 1.223 99,699 87
Swanson Block.......... Fee 100 1967 1906-1910 1.373 78,020 100
Halls Building......... Fee 100 1964 1906-1910 1.346 73,680 100
Nichols Block.......... Fee 100 1930 1906-1910 1.161 59,085 100
Time Block............. Fee 100 1929 1906-1910 2.859 249,844 100
48th & Penn............ Fee 100 1948 1906-1910 0.560 37,654 76
Seville Shops West..... Fee 100 1980 1906-1910 2.972 19,517 100
Plaza Savings South.... Fee 100 1948 1906-1910 0.853 39,967 100
Court of the
Penguins............. Fee 100 1945 1975 0.678 28,707 92
Seville Square......... Fee 100 1945 1975 0.832 90,838 36
Colonial Shops........... Fee 100 1907 1907 0.517 14,160 100
Crestwood Shops.......... Fee 100 1932 1923 1.079 20,261 100
Brookside Shops (Retail
Only).................. Fee 100 1919 1920 10.000 159,254 100
Romanelli Shops.......... Fee 100 1925 1925 1.500 24,360 98
Red Bridge Shops (Retail
Only).................. Fee 100 1959 1959 21.592 153,015 97
Romanelli Annex (Retail
Only).................. Fee 100 1963 1993 1.000 4,500 100
SHAWNEE MISSION, KANSAS
Westwood Shops........... Fee 100 1926 1926 0.626 5,773 100
Fairway Shops............ Fee 100 1940 1940 3.558 49,582 97
Prairie Village Shops
(Retail Only).......... Fee 100 1948 1948 21.375 363,311 97
Corinth Square Shops..... Fee 100 1962 1955 24.987 231,550 100
Kenilworth Shops......... Fee 100 1965 1972 1.788 13,136 100
Corinth Shops South...... Fee 100 1953 1953 6.880 86,390 93
Trailwood Shops.......... Fee 100 1968 1972 8.855 57,583 100
Trailwood III Shops...... Fee 100 1986 1972 2.946 25,279 72
96th & Nall Shops........ Fee 100 1976 1981 1.027 7,202 100
Shannon Valley Shops..... Fee 100 1988 1988 11.378 98,127 99
Oak Park Mall Land
Lease.................. Fee 100 1959 1959 109.000 N/A 100
Georgetown Market
Place.................. Fee 100 1974 1965 12.191 101,613 98
INDUSTRIAL
KANSAS CITY, MISSOURI
Bannister Business
Center................. Fee 100 1985 1985 4.365 32,346 65
</TABLE>
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<TABLE>
<CAPTION>
PERCENT
OWNERSHIP COMPANY'S YEAR YEAR LAND AREA RENTABLE LEASED AT
NAME/LOCATION INTEREST OWNERSHIP DEVELOPED ACQUIRED (ACRES) AREA (SQ. FT) 12/31/97
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<S> <C> <C> <C> <C> <C> <C> <C>
SHAWNEE MISSION, KANSAS
Quivira Business Park
Building A............. Fee 100% 1975 1973 1.695 20,848 100%
Building B............. Fee 100 1973 1973 2.064 12,960 75
Building C............. Fee 100 1973 1973 1.589 20,778 100
Building D............. Fee 100 1973 1973 1.597 20,798 97
Building E............. Fee 100 1973 1973 2.156 28,797 88
Building F............. Fee 100 1973 1973 2.346 29,876 100
Building G............. Fee 100 1973 1973 1.913 21,136 100
Building H............. Fee 100 1973 1973 2.485 26,060 100
Southwestern Bell...... Fee 100 1973 1973 3.127 58,644 0
Building J............. Fee 100 1973 1973 2.953 46,764 100
Building K............. Fee 100 1985 1965 1.179 9,017 100
Building L............. Fee 100 1985 1965 1.223 8,891 100
URBANDALE, IOWA
Meredith Drive......... Fee 49.5(1) 1986 1985 13.910 200,000 100
OFFICE
KANSAS CITY, MISSOURI
Country Club Plaza
(Office only)
Millcreek Block........ Fee 100 1925 1925 N/A 11,463(2) 74
Balcony Block.......... Fee 100 1928 1928 N/A 10,096(2) 97
Esplanade Block........ Fee 100 1945 1945 N/A 37,133(2) 92
Theatre Block.......... Fee 100 1928 1928 N/A 29,740(2) 100
Nichols Block.......... Fee 100 1938 1938 N/A 13,310(2) 100
Time Block............. Fee 100 1945 1945 N/A 25,964(2) 95
Parkway Building......... Fee 100 1906-1910 1955 0.588 26,365(2) 96
Brookside (Office
Only).................. Fee 100 1919 1919 N/A 6,796(2) 100
Romanelli Annex (Office
Only).................. Fee 100 1963 1993 N/A 7,948 100
Two Brush Creek.......... Fee 100 1983 1983 1.500 63,325 84
One Ward Parkway......... Fee 100 1980 1980 1.500 54,580(2) 97
Red Bridge
Professional........... Fee 100 1972 1976 1.428 40,693(2) 95
Park Plaza............... Fee 100 1983 1983 0.952 80,315 99
4900 Main (includes
vacant commercial
ground)................ Fee 100 1986 1985 5.000 182,153 100
Board of Trade........... Fee 49(1) 1966 1966 3.000 147,642(2) 99
Plaza West (includes
vacant commercial
ground)................ Fee 12.5(1) 1988 1989 4.140 257,932 94
Junior League Building... Fee 12.5(1) 1928 1989 0.368 5,400 100
SHAWNEE MISSION, KANSAS
Prairie Village (Office
Only).................. Fee 100 1956 1956 1.500 9,265(2) 51
Corinth Office
Building............... Fee 100 1960 1984 2.142 45,600(2) 100
Corinth Executive
Building............... Fee 100 1973 1986 3.638 44,441(2) 98
Nichols Building......... Fee 100 1978 1979 3.941 37,964(2) 100
Prairie Village Office
Center................. Fee 100 1960 1981 4.443 69,002(2) 90
Brymar Building.......... Fee 100 1968 1984 1.500 55,890 100
7315 Building............ Fee 100 1978 1975 4.322 44,441(2) 100
Fairway West............. Fee 100(3) 1983 1948 5.483 67,519 84
Fairway North............ Fee 100(3) 1985 1948 4.141 61,225 93
Oak Park Bank Building... Fee 100 1976 1978 4.038 28,555(2) 97
</TABLE>
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<TABLE>
<CAPTION>
PERCENT
OWNERSHIP COMPANY'S YEAR YEAR LAND AREA RENTABLE LEASED AT
NAME/LOCATION INTEREST OWNERSHIP DEVELOPED ACQUIRED (ACRES) AREA (SQ. FT) 12/31/97
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DES MOINES, IOWA
Terrace Place............ Fee 50%(1) 1987 1987 1.500 51,058 63%
WEST DES MOINES, IOWA
Crestwood Building....... Fee 90(1) 1987 1987 3.208 30,128 89
Highland Building........ Fee 90(1) 1987 1987 6.120 72,637 86
Waterford Building....... Fee 60(1) 1990 1988 4.414 53,459 92
Edgewater Building....... Fee 60(1) 1989 1988 8.629 102,400 97
Veridian Building........ Fee 60(1) 1989 1988 7.480 78,115 82
Sunset Building.......... Fee 60(1) 1989 1988 1.763 10,727 100
Norwest Day Care
Center................. Fee 50(1) 1994 1994 1.030 6,500 100
Wedgewood Building....... Fee 50(1) 1994 1994 5.170 50,020 100
Coronado Building........ Fee 50(1) 1994 1994 2.500 25,512 100
Bristol Building......... Fee 50(1) 1992 1992 5.210 51,400 100
Ashford Building I....... Fee 50(1) 1993 1993 3.990 41,400 100
Ashford Building II...... Fee 50(1) 1994 1994 4.110 41,400 100
Augusta Building......... Fee 50(1) 1994 1994 4.930 50,800 70
Neptune Building......... Fee 85(1) 1986 1986 6.530 61,430 100
Norwest Card Services
Building............... Fee 50(1) 1993 1993 35.250 272,490 100
Norwood Building I....... Fee 50(1) 1996 1996 4.420 42,400 90
Norwood Building II...... Fee 50(1) 1996 1996 4.420 42,400 80
Palisade Building........ Fee 50(1) 1983 1996 18.000 147,215 99
Cambridge Building....... Fee 50(1) 1997 1997 5.320 52,400 0
Brookview Building....... Fee 50(1) 1997 1997 6.460 60,640 0
APARTMENTS
KANSAS CITY, MISSOURI
Coach House South........ Fee 100(3) 1986-1987 1986-1987 35.276 489Units 98
Coach House.............. Fee 100(3) 1984 1984 8.930 160Units 96
Coach Lamp............... Fee 100 1961 1962 8.500 158Units 96
Neptune.................. Fee 100 1988 1988 N/A 96Units 98
Regency.................. Fee 100 1960 1976 1.150 131Units 96
Sulgrave................. Fee 100 1967 1976 1.410 144Units 95
Park Lane................ Fee 100 1924 1975 0.300 89Units 100
Plaza North:
Penn Wick.............. Fee 100 1960's 1987 0.150 6Units 100
Cole Gardens........... Fee 100 1960 1986 0.200 8Units 88
Tama................... Fee 100 1960's 1979 0.140 7Units 86
Wornall Road........... Fee 100 1918 1968 0.220 17Units 94
Saint Charles.......... Fee 100 1922 1971 0.150 12Units 100
SHAWNEE MISSION, KANSAS
Corinth Gardens.......... Fee 100 1961 1995 3.722 52Units 100
Kenilworth............... Fee 100 1965 1972 17.219 246Units 97
Corinth Place............ Fee 100(3) 1987 1987 7.888 76Units 94
Mission Valley........... Fee 100 1964 1972 5.300 89Units 95
Corinth Paddock.......... Fee 100 1973 1995 10.128 126Units 95
JOHNSTON, IOWA
Winwood Apartments....... Fee 65(1) 1986-1987 1985 31.237 418Units 90
</TABLE>
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<TABLE>
<CAPTION>
PERCENT
OWNERSHIP COMPANY'S YEAR YEAR LAND AREA RENTABLE LEASED AT
NAME/LOCATION INTEREST OWNERSHIP DEVELOPED ACQUIRED (ACRES) AREA (SQ. FT) 12/31/97
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REAL ESTATE LOTS AND
MISCELLANEOUS
SHAWNEE MISSION, KANSAS
Whitehorse
(Residential).......... Fee 100% 1994 1983 33.000(lots) N/A N/A
Whitehorse (Unplatted)... Fee 100 N/A 1984 76.600 N/A N/A
Whitehorse (Commercial &
Multifamily)........... Fee 100 N/A 1983 26.600 N/A N/A
Green Meadows............ Fee 100 1986-1996 1984 85.000(lots) N/A N/A
Lionsgate (Residential-
under contract)........ Fee 100 N/A 1989 64.000 N/A N/A
Lionsgate (Commercial)... Fee 100 N/A 1989 109.200 N/A N/A
Woodsonia
(Residential).......... Fee 100 1985-1996 1981 51.000(lots) N/A N/A
Woodsonia (Unplatted).... Fee 100 N/A 1981 16.450 N/A N/A
Woodsonia (Commercial and
Residential)........... Fee 100 1985-1996 1981 67.800 N/A N/A
Clear Creek.............. Fee 100 N/A 1981 371.000 N/A N/A
KANSAS CITY, MISSOURI
Alameda Towers (10
condominiums for
sale).................. Fee 100 1988-1996 1988 10Units N/A N/A
54 Rental Houses......... Fee 100 N/A 1928-1989 10.800 N/A 43%
Vacant Commercial Land
and Land Leases........ Fee 100 1974 1954-1972 49.400 N/A 100
Building Lease........... Fee 100 N/A 1929 2.928 1,200 100
LEE'S SUMMIT, MISSOURI
Lakewood Sales Office
(includes vacant
residential land)...... Fee 100 1975 1993 8.738 1,363 100
SHAWNEE MISSION, KANSAS
Vacant Commercial Land
and Land Leases........ Fee 100 1956-1972 1956-1972 237.790 N/A 100
Corinth Place Villas (2
rental condominiums)... Fee 100 1989 1957 0.267 N/A 100
Farm House and
Buildings.............. Fee 100 1940 1981-1983 N/A N/A N/A
OLATHE, KANSAS
Land Leases.............. Fee 100 1960 1995 1.070 N/A 100
OSAGE CITY, KANSAS
Manufactured Homes
Plant.................. Fee 100(4) 1985 1985 29.800 N/A N/A
STONE COUNTY, MISSOURI
Ozark Mountain Village
Lots..................... Fee 100 1986-1995 1986 60.000 N/A N/A
MIAMI COUNTY, KANSAS
810 Acre Farm (Someday,
Inc.).................... Fee 100 N/A 1994 810.000 N/A 100
WEST DES MOINES, IOWA
Vacant Commercial Land... Fee 50(1) N/A 1984-1985 44.370 N/A N/A
Land Lease............... Fee 50(1) N/A 1984 8.000 N/A N/A
URBANDALE, IOWA
Vacant Commercial Land... Fee 49.5%(1) N/A 1985 12.000 N/A N/A
Land Lease............... Fee 50(1) N/A 1997 9.550 N/A 100
Vacant Commercial Land... Fee 50(1) N/A 1997 31.690 N/A N/A
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
PERCENT
OWNERSHIP COMPANY'S YEAR YEAR LAND AREA RENTABLE LEASED AT
NAME/LOCATION INTEREST OWNERSHIP DEVELOPED ACQUIRED (ACRES) AREA (SQ. FT) 12/31/97
------------- --------- --------- --------- -------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ST. PETERSBURG, FLORIDA
Vacant Land.............. Fee 100% N/A 1990 0.100 N/A N/A
Women's Tennis
Association.............. Fee 50(1) 1990 1990 0.750 133,697 99%
</TABLE>
- -------------------------
(1) The indicated percentage interest in the property reflects the interest of
the Company in the entity that owns the property.
(2) This square footage represents useable rather than rentable square footage.
(3) The Company shares 50% of the cash flow from these properties with an
outside company providing credit enhancement support related to the
financing of these properties.
(4) The Company owns a 99% profit-sharing interest and a 100% loss-sharing
interest in the partnership owning this facility.
In the opinion of management, all properties of the Company listed above are
adequately insured.
The Company's only property that provided 10% or more of total 1997 rental
income or 10% or more of the total gross book value of land and building assets
of the Company at December 31, 1997 is the Plaza, when the multiple blocks of
the Plaza are considered to be a single property.
The following table summarizes the principal types of business located on
the Plaza at December 31, 1997, and the percentage of total square footage
occupied by each principal type of business.
<TABLE>
<CAPTION>
TYPE OF BUSINESS % OF TOTAL SQUARE FOOTAGE
---------------- -------------------------
<S> <C>
Anchor (Department Stores)................................. 23%
Miscellaneous Retail....................................... 13
Office Space............................................... 15
Restaurants and Food....................................... 14
Apparel.................................................... 11
Specialty Items............................................ 10
Vacant Space............................................... 6
Bookstores................................................. 3
Home Accessories........................................... 3
Art Galleries.............................................. 2
---
Total................................................. 100%
===
</TABLE>
9
<PAGE> 12
The following table summarizes the Plaza's occupancy rates and average
rental rates per square foot (showing only "minimum" rents or rents excluding
the percentage component and operating expense recoveries) for the last five
years. These figures include both the retail and office portions of the Plaza.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Occupancy Percentage........................... 95% 96% 95% 93% 94%
Average Rental Rate Per Square Foot (Exclusive
of Basement Space)........................... $12.02 $11.45 $11.29 $10.83 $10.20
</TABLE>
The following table sets forth for each of the next ten years and all years
thereafter (i) the number of leases on the Plaza that expire in each period;
(ii) the square feet covered by such expiring leases (excluding basement space);
(iii) the gross annual minimum rent revenue represented by such leases; and (iv)
the percentage of total gross annual minimum rent revenue from such expiring
leases based on December 31, 1997 rents. No single tenant leases more than ten
percent of the total rentable square footage at the Plaza.
<TABLE>
<CAPTION>
% OF TOTAL
ANNUALIZED
NO. OF APPROXIMATE ANNUALIZED MINIMUM MINIMUM RENT
LEASES LEASED AREA RENT UNDER REPRESENTED
DATE EXPIRING IN SQUARE FEET EXPIRING LEASES BY EXPIRING LEASES
---- -------- -------------- ------------------ ------------------
<S> <C> <C> <C> <C>
1998.................................... 68 124,188 $ 1,173,739 10%
1999.................................... 27 130,791 983,971 8
2000.................................... 32 84,799 1,564,752 13
2001.................................... 22 68,752 1,214,220 10
2002.................................... 17 34,976 736,863 6
2003.................................... 10 54,793 1,043,162 9
2004.................................... 9 50,439 859,905 7
2005.................................... 10 42,920 691,964 6
2006.................................... 9 43,050 856,334 7
2007.................................... 10 38,877 512,811 5
Thereafter.............................. 17 235,433 2,217,364 19
--- ------- ----------- ---
Total.............................. 231 909,018 $11,855,085 100%
=== ======= =========== ===
</TABLE>
The following table sets forth tax information for the Plaza.
<TABLE>
<CAPTION>
FEDERAL RATE OF 1997
TAX BASIS DEPRECIATION METHOD LIFE (IN YEARS) PROPERTY TAXES
--------- ------------ ------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Plaza..................... $56,208,876 2%-33% Straight Line 3-40 $1,756,154
</TABLE>
As discussed in Item 1, "Business", the Company is moving forward with
three of the projects included in the comprehensive Plaza redevelopment plan
(which is supplemented by tax increment financing (TIF)).
VALENCIA PLACE
Valencia Place, located on the Country Club Plaza, will include 270,000
square feet of Class A office space, approximately 80,000 square feet of retail
space, and approximately 1,450 new parking spaces. The Company has preleased
approximately 100,000 square feet of the office space. The Company anticipates
that the cost to build the project will be approximately $64 million, excluding
any financing costs. The parking related aspects of the project will be
supplemented by a TIF bond providing net proceeds of approximately $21 million.
Due to the proposed merger with a wholly-owned subsidiary of Highwoods, the
Company has not secured the additional financing necessary to fund expenditures
on this project beyond 1998.
SEVILLE SQUARE
The restoration of the 90,000 square foot Seville Square building and 735
space parking garage on the Country Club Plaza will produce approximately 29,000
additional rentable square feet and an additional 500
10
<PAGE> 13
parking spaces. The building will be anchored by a 70,000 square foot, 15 screen
multiplex theater, a lease for which has been executed. The Company anticipates
that the rehabilitation will cost approximately $28 million and will be
initially financed by the Company's current cash reserves.
LUXURY APARTMENTS
The Company intends to break ground in 1998 on its 350 unit luxury
apartment community located south of the Plaza. The Company anticipates that the
cost to build the project will be approximately $48 million, excluding any
financing costs. Due to the proposed merger with a wholly-owned subsidiary of
Highwoods, the Company has not secured the financing necessary to advance the
project beyond the site preparation phase.
ITEM 3. LEGAL PROCEEDINGS
On April 20, 1995, a shareholder derivative lawsuit was filed in which the
Company, each of the then existing members of the Board of Directors of the
Company, and the Bowser Partnership were named as defendants. Among other
things, the plaintiffs alleged a breach of fiduciary duties by the then existing
directors of the Company and alleged that certain then existing officers of the
Company had engaged in insider transactions from which they benefited personally
at the expense of the Company. Specifically, the plaintiffs alleged that the
former chief executive officer and former chief financial officer of the
Company: (i) acquired in a series of transactions certain real property and
other assets from the Company without paying fair value therefor; (ii) conveyed
real property and other assets to the Company in exchange for assets of far
greater value; (iii) caused the Company to make loans and investments unrelated
to the business of the Company and intended for their personal benefit; and (iv)
failed to disclose to or attempted to conceal certain of the foregoing matters
from the other members of the board of directors. The other members of the board
of directors were named as defendants because of their alleged failure to
identify and prevent the foregoing actions.
This litigation was followed by a lawsuit entitled Medina, et al. v.
McCarthy, et al. ("Medina") and initiated on behalf of the beneficiaries of the
Company's Employee Stock Ownership Trust ("ESOT") against many of those
defendants, including the Company, named in the shareholder derivative lawsuit.
The ESOT beneficiaries alleged that the foregoing transactions resulted in
damages to them because of the significant interest in common stock of the
Company held by the ESOT.
After completion of an internal investigation by a committee of outside
directors of the Company, the Company then filed a lawsuit against many of the
defendants named in the shareholder derivative lawsuit. All of such legal
actions were consolidated in the United States District Court for the Western
District of Missouri (the "Court"), where certain litigants, including the
Company, requested, among other things, that the Court rescind certain
transactions to which individuals who were then officers or directors of the
Company were a party.
The consolidated litigation ended when the Company and the other parties
thereto entered into a Mutual Release and Settlement Agreement dated as of June
30, 1995 ("Settlement Agreement"). The parties to the Settlement Agreement
included the shareholders who had initiated the derivative litigation, the
Company, the ESOT beneficiaries that had initiated the litigation on behalf of
all ESOT participants, all of the individuals who were then directors of the
Company, four former directors of the Company who were on the Board of Directors
of the Company at the time of certain transactions that were, in part, the
subject of the litigation, the individuals who were at various times prior to
the Settlement Agreement the trustees of the ESOT, certain individuals and
entities related to or under the control of the former chief executive officer
and former chief financial officer of the Company, and SunChase Capital, Inc.
and Realty Capital Company, two outside entities that had entered into a
business arrangement with the Company prior to the Settlement Agreement. The
provisions of the Settlement Agreement that are material to the Company, and in
parenthesis, the impact of each such provision on the Company's recognition of
$19.6 million in net litigation settlement expense in 1995 are as follows: (i)
the Company received, in total, $6.6 million in cash from the insurance
companies providing director and officer liability insurance and a fiduciary
policy ($6.6 million income); (ii) the Company agreed to indemnify the then
existing directors and former directors for their litigation expenses and
11
<PAGE> 14
the Company agreed to pay all attorney's fees, costs and expenses incurred on
behalf of the shareholders initiating the shareholder derivative litigation and
on behalf of the ESOT beneficiaries ($8.1 million expense); (iii) the Bowser
Partnership conveyed to the Company 125,242 shares (pre-split) of stock of the
Company acquired by that partnership from the ESOT, and the indebtedness owed by
the Bowser Partnership to the Company was deemed satisfied (no effect); (iv) all
rights of the Bowser Partnership and other entities pursuant to an option
agreement entered into with the ESOT were forfeited (no effect); (v) the former
chief executive officer of the Company conveyed to the Company 5,719 shares
(pre-split) of stock of the Company ($4.3 million income); (vi) the former chief
executive officer of the Company conveyed to the Company 6,508 shares of stock
of the Company that were pledged as collateral for an obligation owed to another
defendant in the litigation ($4.9 million income), and the Company agreed to pay
approximately $6.1 million to acquire such shares ($6.1 million expense); (vii)
the Company agreed to pay $3.6 million to the former chief executive officer of
the Company ($3.6 million expense), indebtedness owed by such individual or
other individuals to the Company or its subsidiaries, in the approximate amount
of $8.1 million, was canceled ($5.6 million expense, net of reserves at December
31, 1994 of $2.5 million), and $1.1 million of obligations of the Company to
such individuals was cancelled ($1.1 million income); (viii) the Company
received title to six properties from an entity controlled by the former chief
executive officer of the Company and indebtedness owed to the Company relating
to such properties was cancelled (no effect); (ix) the Company received a new
secured note in the approximate amount of $1.2 million from an entity affiliated
with the former chief financial officer of the Company in replacement of
accounts receivable of the same amount (no effect); (x) the former chief
financial officer of the Company agreed to provide to the Company the benefits
of stock ownership of certain stock of an entity affiliated with the Company (no
effect); (xi) the Company agreed to transfer 8,500 shares (pre-split) of stock
received from the Bowser Partnership and to pay $2 million to the ESOT or the
beneficiaries of the ESOT ($13.1 million expense); (xii) the Company agreed to
appoint an independent institutional trustee for the ESOT.
A summary of the foregoing litigation settlement expenses is set forth in
note 11 to the consolidated financial statements of the Company.
Except for those involving the ESOT, nearly all transactions, conveyances,
payments, and debt extinguishment required by the Settlement Agreement were
completed by November 30, 1995. As part of the Settlement Agreement, the Company
was given the option to submit to the IRS a request for a private letter ruling
on matters related to the ESOT pursuant to the Settlement Agreement. On August
1, 1997 the Company entered into an agreement with the Internal Revenue Service
(the "Closing Agreement"). In addition to the payment of 680,000 shares and $2.0
million plus interest, the Company agreed to pay approximately $326,000 to the
ESOT as an adjustment to a 1992 dividend allocation. All amounts will be
allocated pursuant to the Settlement Agreement and subject to the decision in
the Interpleader action (discussed below). The Company also agreed to make a
nondeductible payment of $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 Company's Employee Stock Ownership Plan ("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 the method of allocating it will not
adversely affect the tax qualification of the ESOP. Additionally, the Company
agreed to deposit a portion of the settlement payment (59,413 shares and
$58,064, plus accrued interest) with the Court and requested that the Court
determine the proper payee or payees. On August 15, 1997, the Company paid to
the ESOT and to the Court a total of 679,999 shares of the Company's common
stock and $2,326,000, plus certain accrued interest (one share was converted to
cash).
On August 29, 1997, the Company filed a Complaint for Interpleader and
Declaratory Relief with the Court. The interpleader portion of the complaint
seeks the adjudication of competing interests in the 59,413 shares of the
Company's common stock and $58,064, plus interest, discussed above. 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
directly to the ESOT or to nine individual defendants named in the interpleader
action.
12
<PAGE> 15
In the same action, the Company is also seeking a ruling of the Court
regarding whether the Settlement Agreement requires the vesting provisions of
the ESOP plan documents to be amended to provide that the Medina plaintiff class
members be 100% vested in the stock and cash allocated in their ESOP accounts
pursuant to the Settlement Agreement. The Company named as defendants in this
proceeding certain ESOP participants who had raised an issue as to vesting of
the Settlement Agreement proceeds. The Company is seeking certification of a
defendant subclass consisting of those members of the Medina plaintiff class who
are not 100% vested in their participation accounts in the ESOP.
In response to such interpleader and declaratory relief action, various
defendants in the initial 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 with the Company was
terminated (the "Florida Group") filed a motion to enforce the Settlement
Agreement. In such motion, the Florida Group had requested that the Court hold
that all class members are fully vested in the settlement proceeds allocated to
their participation accounts in the ESOP. The Court sustained this motion on
March 24, 1998. The Company's former chief executive officer and his daughter
have also filed a motion to enforce the Settlement Agreement and requested that
a certain portion of the shares and cash deposited by the Company with the Court
be allocated to them in the ESOT or alternatively, be paid to them directly.
Four other ESOP 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 to distribute stock to eligible ESOP participants in a
manner not provided by the ESOP's plan and trust documents at the time of such
motion; (ii) an order enjoining the Company from applying the provisions of its
shareholders' 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, deposited by the Company with the Court to be
paid into the ESOT 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 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's stock that they may receive from an
ESOT distribution.
The Company filed as a plaintiff on December 22, 1995 a petition against
its former attorney, Charles Schleicher, and the law firm of Schleicher Latz,
P.C. alleging certain breaches of fiduciary duties and obligations as an
attorney and the attorneys for the Company, and alleging certain failures in
performance of duties as attorney and attorneys for the Company. The suit
against Mr. Schleicher and his law firm was filed in the Circuit Court of
Jackson County, Missouri. The Settlement Agreement described above limits the
potential recovery realizable by the Company to $2.0 million. The actual amount
recovered by the Company, by settlement or otherwise, may be substantially less
than such amount.
The Company was named as a defendant in a complaint filed by Petula
Associates ("Petula") in December 1996 in the United States District Court for
the Western District of Missouri. The dispute involves an agreement entered into
in 1986 between Petula and the Company for the development of Coach House South
Apartments located in Kansas City, Missouri. Petula is seeking reimbursement of
approximately $3.9 million, plus interest, for its share of the construction
cost overruns which it paid in 1989. Petula has alleged several alternative
theories seeking to recover the payment including theories based in fraud and
contract. The Company believes it has strong statue of limitations' defenses in
addition to other meritorious defenses to the allegations made by Petula. The
Company was granted summary judgment on the contract counts and currently has
pending before the court a motion for summary judgment on the remaining counts.
Trial of the matter is currently scheduled in June, 1998.
A lawsuit was filed on January 8, 1998 by Dennis Wright against the
Company, its Board of Directors, and Highwoods. The lawsuit is pending in the
Circuit Court of Jackson County, Missouri. The plaintiff, a shareholder of the
Company, is bringing this lawsuit on behalf of other shareholders. The relief
sought by the
13
<PAGE> 16
plaintiff includes certification of a class, an injunction preventing the
proposed strategic merger between the Company and a wholly-owned subsidiary of
Highwoods, and unspecified damages.
The Company has a $3.0 million proof of claim in the National Gypsum
bankruptcy proceeding pending in United States Bankruptcy Court, Northern
District of Texas. Pursuant to such claim, the Company has received payments of
$389,000 and $378,000 in 1997 and 1996, respectively. The Company's proof of
claim in the National Gypsum bankruptcy is based on tort liability arising from
claims relating to the quality of certain materials used in the construction of
properties owned by the Company. Total payments received by the Company under
the National Gypsum plan of reorganization will not equal the full amount of the
proof of claim originally filed by the Company. However, counsel for the Company
has advised management that such plan does provide for an additional payment of
approximately $389,000 on the Company's claim in 1998. Such payment, if any,
will be recorded as income when it is received.
The Company and its subsidiaries are parties to certain other legal
proceedings incident to their business. In the opinion of management, none of
these other matters, either individually or in the aggregate, is material to the
Company's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Although there is currently no established trading market for shares of
common stock of the Company, such shares have for many years been traded
over-the-counter very infrequently through inter-broker bulletin board trading
under the symbol "NCJC.BB." The data prior to 1997 is high and low bid
information reflecting inter-dealer bulletin board prices without retail
mark-up, mark-down or commission. These quotations merely reflect the prices at
which transactions were proposed, and do not necessarily represent actual
transactions. The data subsequent to 1996 is derived from actual closed
transactions.
<TABLE>
<CAPTION>
1995 HIGH LOW
---- ---- ---
<S> <C> <C>
1st Quarter........................................... $11.41 $ 9.38
2nd Quarter........................................... 10.31 10.00
3rd Quarter........................................... No Trades No Trades
4th Quarter........................................... 21.88 14.38
1996 HIGH LOW
---- ---- ---
1st Quarter........................................... $21.06 $20.00
2nd Quarter........................................... 36.50 32.00
3rd Quarter........................................... 34.00 28.13
4th Quarter........................................... 31.06 27.00
1997 HIGH LOW
---- ---- ---
1st Quarter........................................... $34.00 $29.00
2nd Quarter........................................... 35.50 28.25
3rd Quarter........................................... 56.00 37.25
4th Quarter........................................... 70.00 51.00
</TABLE>
On March 16, 1998, the last reported sale price of a share of JCN Common on
the over-the-counter market was $65 per share. As of February 20, 1998, JCN had
135 shareholders of record.
14
<PAGE> 17
The Company has 84,500 shares of its common stock that are subject to
vested options held by Mr. Brady, President and Chief Executive Officer (79,000
shares) and other executive officers (5,500).
In the first quarter of 1995, the Company contributed the post-split
equivalent of 110,000 shares of its common stock to the ESOT. Pursuant to the
Settlement Agreement, on August 15, 1997, the Company issued 59,413 shares of
its common stock to the United States District Court for the Western District of
Missouri and issued 620,586 shares to the ESOT. On December 29, 1997, the
Company issued 13,152 shares of its common stock to Mr. Brady upon the exercise
by Mr. Brady of a portion of the options granted to him at the time of his
employment. Each of the foregoing issuances were made pursuant to the exemption
to registration set forth in Section 4(2) of the Securities Act of 1933, as
amended. Other than the 1,035,166 shares of common stock held by the Company's
Employee Stock Ownership Trust, the Court and various other shareholders, the
4,542,509 currently outstanding shares of common stock of the Company may be
sold pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). The Company has entered into no agreements to register any
shares of its common stock pursuant to the Securities Act and is not publicly
offering, and has not publicly proposed to offer, any of its shares of common
stock.
The Operating Agreement entered into between Kessinger/Hunter and the
Company required the Company to make an initial capital contribution of
$4,285,714 in cash. The Operating Agreement provides Kessinger/Hunter the right
to use that cash to buy a call right granting to the LLC the right to require
the Company to issue to the LLC 76,530 shares of common stock of the Company
(the "Call Right"). Kessinger/Hunter provided notice to the Company of its
intention to purchase the Call Right, and that purchase occurred on February 27,
1998. The Operating Agreement grants to Kessinger/Hunter authority to decide
whether to exercise the Call Right and such right was exercised by notice given
to the Company on March 18, 1998. Accordingly, the Company will issue 76,530
shares of its common stock to the LLC.
DIVIDEND POLICY
Prior to 1995, the Company typically declared and paid an annual cash
dividend of $10.00 on each share of its common stock (or approximately $.125 per
post-split share). No dividend was declared on common stock in 1995, 1996 or
1997. The Board of Directors of the Company has not determined if, when or in
what amount future dividends will be declared or paid. The Company is not
currently under any dividend payment prohibition or restriction.
15
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information has been derived from the
Company's audited consolidated financial statements for each of the five
consecutive years ended December 31, 1997. The information set forth below for
1993 is based on the Company's audited financial statements for that year. Note,
however, that the Company's prior auditor qualified its report on the
consolidated financial statements for the year ended December 31, 1993 as a
result of its inability to obtain sufficient evidence to evaluate whether
certain capitalized cost balances for the Company's Bay Plaza assets as of
December 31, 1993 were in excess of recoverable amounts. The Company has since
sold substantially all Bay Plaza assets. Per share amounts for years prior to
1997 have been restated in accordance with Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Sales and revenues........................ $ 97,859 $132,628 $ 99,305 $ 94,213 $ 96,204
Selling, general and operating expenses... 44,654 45,394 45,952 43,203 44,615
Interest expense.......................... 22,333 23,466 27,862 27,049 26,693
Income (loss) before income taxes and
extraordinary gain...................... 12,064 44,652 (16,498) (44,698) 26
Income (loss) before extraordinary gain... 19,386 27,902 (10,752) (43,670) 510
Net income (loss)......................... 19,386 27,902 (10,752) (14,534) 510
Per Share Data (Basic):
Income (loss) before extraordinary
gain................................. 4.63 5.75 (0.74) (2.89) 0.04
Net income (loss)....................... 4.63 5.75 (0.74) (0.96) 0.04
Dividends............................... -- -- -- 0.13 0.13
Per Share Data (Diluted):
Income (loss) before extraordinary
gain................................. 4.47 5.62 (0.74) (2.89) 0.04
Net income (loss)....................... 4.47 5.62 (0.74) (0.96) 0.04
Dividends............................... -- -- -- 0.13 0.13
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION
Total properties.......................... $180,681 $220,133 $229,524 $244,105 $239,008
Total assets.............................. 297,774 320,327 328,695 350,302 362,112
Mortgage indebtedness..................... 288,553 309,188 326,349 339,881 327,354
Treasury stock............................ 145,978 117,427 117,427 14,582 23,058
Total shareholders' equity (deficit)...... (26,173) (28,606) (36,725) (25,821) (31,568)
</TABLE>
16
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company's operating results depend primarily upon income from the
rental of its retail, office, industrial, and residential properties. This
income is substantially influenced by the demand for the Company's rental space
in the Kansas City metropolitan area and, to a lesser degree, the Des Moines,
Iowa metropolitan area. The ability of the Company to increase its rental income
is dependent upon its ability to increase either or both of its occupancy rates
and rental rates, control expenses on its existing properties, and to acquire or
develop additional rental properties.
The Company's operating results are also dependent on the demand for lots
in its residential subdivisions. Demand for these lots is influenced by a number
of factors, including population growth in the Kansas City metropolitan area,
availability of existing housing stock, interest rates, tax rates, and the
number and financial health of home builders in the area.
The Company's primary markets in the Midwest have continued to offer strong
and stable local economies. Management believes this will continue and the
markets will offer attractive acquisition and development opportunities because
of their central location, established business and industrial base, skilled
work force, and moderate labor cost.
At December 31, 1997, the occupancy rate for the Company's retail
properties was 97%, 94% for its office properties, 77% for its industrial
properties (which includes one unoccupied building that represents approximately
17% of the Company's total industrial space) and 97% for its multi-family
residential properties.
RESULTS OF OPERATIONS
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
SUMMARY. Net income decreased by $8.5 million in 1997 to $19.4 million
primarily as a result of the absence of gains from disposition of the Company's
marketable equity securities portfolio, partially offset by lower income tax
expense in 1997. The change in several other income statement line items also
contributed to the $8.5 million decrease as detailed below.
RENTS. Rental income decreased by $1.8 million (2.3%) to $78.1 million in
1997. This decrease was 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) and a
$1.4 million decrease in rental income related to four properties sold (three in
the third quarter of 1997 and one in the fourth quarter of 1996). 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 $1.4 million 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.
Property sales increased by $514,000 (7.8%) to $7.1 million in 1997 and included
lot sales of $4.3 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 $2.6 million, and villa sales of $169,000. Property sales of $6.6 million in
1996 included $2.8 million of lot sales (also $2.8 million using an "as sold"
basis), condominium sales of $2.9 million and villa sales of $945,000.
17
<PAGE> 20
DIVIDENDS AND INTEREST. Dividends were received on marketable equity
securities held for investment purposes prior to March 31, 1996. Interest income
is received on the Company's cash and cash equivalents, temporary investments
and 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 $1.1 million (23.9%) to $5.7 million in 1997. This
increase is primarily due to the higher average balances of cash and notes
receivable outstanding during 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 approximately $33.0 million. The
remainder of the gains in 1996 were primarily due to the sale of an industrial
park. The gains in 1997 were primarily due to the sale of two shopping centers,
one office property (two buildings), the majority of the Bay Plaza properties
and vacant ground.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES. Equity in earnings of
unconsolidated affiliates represents the Company's proportionate share of
earnings of affiliates in which the Company's ownership is 50% or less. This
line item increased $942,000 to $1.6 million in 1997. The increase is primarily
due to increased gains of $613,000 on pad sites sold by the Company's Iowa
partnerships.
OTHER. Other represents miscellaneous revenues of the Company. Other
revenue decreased by $3.1 million in 1997 to $1.6 million. 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
certain expenses totaling $1.4 million (See comments in "Comparison of Year
Ended December 31, 1996 to Year Ended December 31, 1995" for additional
details). 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.
The Company received notice that in 1998 it may receive an additional $389,000
in satisfaction of such claim. The actual amount and date of any such payment is
uncertain and therefore will not be recorded until received. See Item 3, "Legal
Proceedings."
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 $740,000 (1.6%) to $44.7 million in 1997,
principally due to the absence of $1.4 million of costs to secure a new
management team and the absence of $2.9 million in expenses related to the
operation of the Raphael Hotel of San Francisco due to the expiration of the
underlying lease. In addition, S,G & O expenses related to four sold properties
decreased by $373,000. These reductions were partially offset by unusual
expenses in 1997 of $1.3 million for severance costs relating to the outsourcing
of certain functions and $1.9 million in costs related to the proposed merger
with a wholly-owned subsidiary of Highwoods. The remainder of the $733,000
increase over 1996 is due primarily to increased operating costs of Des Moines,
Iowa area properties.
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 increased by $163,000 (3.2%) in 1997 to $5.3 million. Cost of
property sales in 1997 included lot cost of sales of $2.6 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 $2.6 million and villa cost of sales
of $154,000. Cost of property sales for 1996 included lot cost of sales of $1.7
million (also $1.7 million on an "as sold" basis of recording lot sales),
condominium cost of sales of $2.6 million and villa cost of sales of $923,000.
The gross margin percentage on lot sales was 40% for 1997 and 1996. The gross
margin percentage on condominium sales was 3% for 1997 and 11% for 1996. The
decrease in gross margin percentage on condominium sales in 1997 resulted from
the Company incurring greater finishing costs in 1997 than in 1996.
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<PAGE> 21
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 $1.1 million (4.8%) to $22.3 million in 1997 primarily due
to the lower average balance of outstanding indebtedness in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation of the Company's revenue
producing properties is computed using the straight-line method over the
estimated useful lives of the assets, generally seven to thirty-one years.
Depreciation expense fluctuates to some degree as properties are bought and
sold. In addition, certain financing charges and certain lease related costs are
amortized over the term of the associated loan or lease as applicable. The
decrease of $471,000 (3.4%) to $13.5 million in 1997 is primarily due to
property sales and older fixed assets becoming fully depreciated.
INCOME TAX EXPENSE (BENEFIT). The $24.1 million change in income tax
expense (benefit) from the $16.8 million expense in 1996 to the income tax
benefit of $7.3 million in 1997 is due primarily to the decrease in income tax
expense from operations of $12.3 million and the recognition of a net $11.8
million income tax benefit relating to the issuance of shares of common stock to
the ESOT and to a Court (see Item 3, "Legal Proceedings") pursuant to the
Settlement Agreement.
As discussed in Note 7 to the Company's consolidated financial statements,
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.
The IRS may reject all or a portion of such claimed losses, and there is no
assurance the Company will ultimately prevail on all or any portion of such
claimed losses. Accordingly, the Company may not receive all or any portion of
the benefits that result from such claimed losses.
Management of the Company has been advised by counsel that such counsel
believes the claimed losses to be valid. Discussions with respect to the
Company's position have been held with representatives of the IRS, who are
conducting an examination of the Company's returns for the years 1989 through
1995.
To the extent allowed, the loss would be used first to file for a refund of
taxes paid previously after offsetting deficiencies that may be proposed by the
IRS in connection with its examination (the Company believes it has previously
provided sufficient tax reserves for financial reporting purposes to cover any
such deficiencies); second, the balance remaining, if any, could be used to
offset the recognition of gains in future years that had occurred but were
unrecognized prior to a "change in control," as defined in Section 382 of the
Internal Revenue Code; and finally, after such offset, any remaining amount may
be available annually to reduce other taxable income, subject to limitations set
forth in Section 382.
Consistent with the requirements of generally accepted accounting
principles, none of this potential impact is reflected in the Company's
consolidated financial statements due to its uncertainty.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
SUMMARY. Net income increased by $38.7 million in 1996 from a net loss of
$10.8 million in 1995 to net income of $27.9 million primarily as a result of
the gains from disposition of the Company's marketable equity securities
portfolio, the absence of litigation settlement expense in 1996, increased other
income, and lower interest expense.
RENTS. Rental income increased by $60,000 to $79.9 million in 1996. This
increase occurred even though one of the Company's larger office buildings was
substantially vacant during the first half of 1996 while the Company made
significant tenant improvements for a new tenant that is now leasing all of the
vacant space. This vacancy resulted in a $1.8 million reduction in rental income
in 1996. Rental income from the Company's leasehold interest in the Raphael
Hotel of San Francisco decreased by $489,000 due to the expiration of the
underlying lease. As a result of apartment properties obtained pursuant to the
Settlement Agreement, rental income increased by approximately $700,000 in 1996.
The remainder of the $1.6 million increase is due primarily to $200,000 of
certain nonrecurring items and $1.4 million in improved rents on the Company's
office, retail, and apartment properties.
19
<PAGE> 22
PROPERTY SALES. Property sales increased by $576,000 (9.5%) to $6.6 million
in 1996 and included lot sales of $2.8 million, condominium sales of $2.9
million, and villa sales of approximately $945,000. Property sales of $6.0
million in 1995 included $3.5 million of lot sales and condominium sales of $2.5
million.
GAINS ON SALES OF INVESTMENTS AND OTHER ASSETS. In early 1996, the Company
liquidated for $38.6 million its entire investment in marketable equity
securities held at December 31, 1995, recognizing a pre-tax gain of
approximately $33.0 million. The remainder of the gains in 1996 were primarily
due to the sale of an industrial park.
EQUITY IN EARNINGS OF UNCONSOLIDATED AFFILIATES. Equity in earnings of
unconsolidated affiliates increased $540,000 to $697,000 in 1996. The increase
is primarily due to $324,000 of gains on pad sites sold by the Company's Iowa
partnerships in 1996. Earnings from the Company's investment in J.C. Nichols
Real Estate, an entity engaged in residential brokerage and mortgage origination
services, increased by $255,000 in 1996 as a result of a record year in its
sales volume and net income.
OTHER. Other increased by $3.4 million in 1996 to $4.7 million. This
increase resulted primarily from a $4.6 million payment received by the Company
from its prior auditor, Deloitte & Touche LLP, pursuant to an agreement (the
"Resolution Agreement") in which the prior auditor denied any wrongdoing or
fault and agreed to resolve disagreements that arose out of circumstances that
were the subject of the Settlement Agreement. The $4.6 million payment was
reduced by certain expenses to reduce to $3.2 million the amount of income
recognized by the Company as a result of such payment. Furthermore, in the
Resolution Agreement the Company agreed to indemnify its prior auditor and
various affiliates and related persons thereof, in an amount up to $2.5 million,
from a broad range of losses and claims that may be incurred by such prior
auditor as a result of its relationship with the Company. However, management of
the Company currently believes the occurrence of a material reduction to the
$3.2 million in recognized income is remote. In addition, the Company received
approximately $378,000 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 decreased by $558,000 (1.2%) to $45.4 million in 1996, principally due
to a decline of $2.3 million in operating expenses of the discontinued Bay Plaza
project, a decline of $827,000 in expenses related to the operation of the
Raphael Hotel of San Francisco due to the expiration of the underlying lease,
and $400,000 of nonrecurring items. These reductions were partially offset by
additional costs of $1.4 million incurred to secure a new management team, and
additional operating expenses of $255,000 related to apartment properties
obtained in the Settlement Agreement. The remainder of the $1.3 million increase
over 1995 is due primarily to increased overhead (primarily legal and
professional fees) and property operating costs.
COST OF PROPERTY SALES. Cost of property sales increased by $1.2 million
(30.9%) in 1996 to $5.2 million. Cost of property sales in 1996 included lot
cost of sales of $1.7 million, condominium cost of sales of $2.6 million and
villa cost of sales of $923,000. Cost of property sales in 1995 included lot
cost of sales of $2.3 million and condominium cost of sales of $1.6 million. The
gross margin percentage on lot sales was 40% in 1996 as compared to 33% in 1995.
The increase in gross margin percentage on lot sales in 1996 resulted from a
change in sales mix, as 1996 sales contained a larger percentage of sales from
higher margin subdivisions. The gross margin percentage on condominium sales was
11% in 1996, as compared to 37% in 1995. The decrease in gross margin percentage
on condominium sales in 1996 resulted from the Company incurring greater
finishing costs on condominium sales in 1996 than in 1995. The gross margin
percentage on villa sales in 1996 was approximately 2%.
INTEREST EXPENSE. Interest expense declined by $4.4 million (15.8%) to
$23.5 million in 1996. The primary reasons for this decline are the pay-down or
pay-off of certain notes and mortgages during 1996 of approximately $16 million
in addition to normal principal amortization, and the restructuring of a
mortgage note as discussed in Note 5 to the Company's consolidated financial
statements.
EMPLOYEE STOCK OWNERSHIP TRUST CONTRIBUTION. The Company maintains an ESOT
to which it has the right to make annual contributions in amounts determined by
the Board of Directors. The Company made no contributions during 1996.
20
<PAGE> 23
VALUATION ALLOWANCES. The Company's assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying value of
an asset is in excess of its net realizable value. If the carrying value of an
asset is determined, in the opinion of management, to be in excess of its net
realizable value, a charge to expense is recognized in the form of a valuation
allowance. No valuation allowances were recorded in 1996.
LITIGATION SETTLEMENT. In 1995, the Company recorded a one time charge of
$19.6 million as "Litigation Settlement" in its consolidated statement of
operations as a result of the Settlement Agreement. The circumstances leading to
and the impact of the Settlement Agreement are described in Item 3, "Legal
Proceedings" below and in Note 11 "Litigation and Settlements" of the Company's
consolidated financial statements.
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 renovating and
renewing leases of the Company's properties, payments on the Company's
outstanding indebtedness, and distributions to shareholders. In April 1997, the
Company renewed its $10 million unsecured line of credit with Commerce Bank,
N.A. (Kansas City, Missouri) bearing interest at the prime rate. At December 31,
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.
As discussed in Item 1 "Business", the Company is in the process of
developing two of the projects included in the Company's comprehensive Plaza
redevelopment plan. These projects are to be supplemented by tax increment
financing (TIF). The Company will be able to fund the projects through 1998 with
working capital and the proceeds of a TIF bond. However, due to the proposed
merger with a wholly-owned subsidiary of Highwoods, the Company has not secured
the additional financing necessary to fund expenditures on these two projects or
other Plaza redevelopment projects in 1999 and thereafter.
At December 31, 1997, the total of the CompanYs consolidated debt was
$301.5 million. Such amount, with certain exceptions discussed below, bears
interest at rates ranging from 3.9% to 10.5%. Of the Company's consolidated debt
at that date, approximately $13.0 million was a note payable and $288.5 million
was mortgage indebtedness. Approximately $256.7 million of the Company's $288.5
million of mortgage indebtedness at December 31, 1997, was nonrecourse to the
Company. By including the Company's percentage interest in the indebtedness of
unconsolidated subsidiaries and excluding the minority interest percentage in
the indebtedness of consolidated subsidiaries of the Company, the
interest-bearing debt of the Company at December 31, 1997 would be $319.4
million.
Of the Company's $301.5 million in consolidated debt at December 31, 1997,
approximately $224.6 million accrued interest at fixed rates, $72.9 million was
floating rate debt of various types and $4.0 million was non-interest bearing
(see below). Interest expense of the Company in future periods may be expected
to fluctuate with short term interest rates.
As discussed in Note 5 to the Company's consolidated financial statements,
the Company has restructured two debt agreements. At December 31, 1997, the
Company has classified as mortgage indebtedness approximately $10.0 million in
debt that will be forgiven if the Company complies with certain conditions
established by the lenders. The $10.0 million in forgiven debt is being
amortized into income over the life of the mortgages through monthly reductions
to interest expense. This amortization reduces the effective rate to the Company
on restructured debt to approximately 3% for financial reporting purposes. This
treatment is in compliance with generally accepted accounting principles as the
sum of the future undiscounted debt service payments exceeded the face value of
the debt obligations at the time of the restructurings.
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<PAGE> 24
Also, as discussed in Note 5 to the Company's consolidated financial
statements, certain agreements to which the Company is a party provide for a 50%
sharing of positive and negative cash flows from operations and certain capital
expenditures. Interest expense recognized for such sharing arrangements was
$622,000, $929,000, $479,000 for the years ended December 31, 1997, 1996 and
1995, respectively. In addition, at December 31, 1997 and 1996, mortgage
indebtedness includes a non-interest bearing preference item of $4.0 million
related to these agreements. The Company's liability is contingent upon certain
conditions being met upon the sale or refinancing of the mortgaged properties.
The ESOT currently holds 1,390,003 shares of the Company's common stock.
Until such time as shares distributed by the ESOT to its beneficiaries can be
readily traded on an established securities market, the Company is obligated to
repurchase such shares for a specified period of time at a price determined by a
qualified appraiser (the "Put Option"). The most recent appraisal of the common
stock held by the ESOT was made as of October 31, 1997 and established a price
of $61.00 per share.
If the Company remains obligated by the Put Option, the Company's liquidity
could be constrained. Given expected retirement trends, management expects it
can meet anticipated stock repurchase requirements with funds generated from
operations, selling its securities or additional borrowings.
On January 29, 1997, the Company purchased all outstanding shares of the
Company then owned beneficially and of record by AHI Metnall L.P. ("AHI").
Additionally, Mr. John Simon and Mr. James W. Quinn, who are affiliated with
AHI, resigned as directors of the Company.
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. The
purchase price for the stock held by AHI was based on a negotiated price within
the range of trades in the fourth quarter of 1996, which trades were between $27
and $31.06 per share. 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 ("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 Note is secured
by the pledge of a mortgage receivable and real property, and is due on January
29, 1999.
The Operating Agreement entered into between Kessinger/Hunter and the
Company, and by which the LLC was formed, required the Company to make an
initial capital contribution of $4,285,714 in cash. That capital contribution
was made on January 2, 1998. Kessinger/Hunter had the right to determine the use
of such cash, and it decided to pay such cash to the Company in exchange for the
Call Right. As a result, the $4,285,714 was paid back to the Company on February
27, 1998 in exchange for the Call Right.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO YEAR ENDED DECEMBER 31, 1996
Net cash provided by operating activities decreased by $2.9 million to
$26.8 million in 1997. The primary reasons for such decrease are discussed above
under "Results of Operations."
Net cash flows used in investing activities increased by $3.6 million in
1997 to $8.2 million which amount was principally a result of issuing an
additional $19.5 million of notes receivable and investing $11.3 million for
additions to revenue-producing properties. These investments were substantially
offset by the decrease in temporary investments of $2.4 million, the receipt of
$9.1 million of payments on notes receivable, sales of capital assets of $9.6
million and proceeds from the return of capital from unconsolidated affiliates
of $1.4 million. In 1996, the Company's net cash used in investing activities of
approximately $4.6 million was principally a result of increasing temporary
investments a net $40.4 million, issuing an additional $6.6 million of notes
receivable and investing $8.3 million for additions to revenue-producing
properties. These investments were substantially offset by the receipt of $8.8
million of payments on notes receivable, sales of capital assets of $3.1 million
and proceeds from the sale of marketable equity securities of $38.6 million.
Net cash used by financing activities decreased by $785,000 in 1997 to
$17.1 million. The principal uses of cash in financing activities in 1997 were
treasury stock purchases of $13.5 million and a net reduction of mortgage and
notes payable indebtedness of $3.6 million. In 1996 the Company's net cash used
in financing activities of $17.9 million resulted from a net reduction of
mortgage and notes payable indebtedness.
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<PAGE> 25
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO YEAR ENDED DECEMBER 31, 1995
Net cash provided by operating activities increased by $7.7 million to
$29.7 million in 1996. The primary reasons for such increase are discussed above
under "Results of Operations."
Net cash flows used in investing activities increased by $2.8 million in
1996 to $4.6 million which amount was principally a result of increasing
temporary investments a net $40.4 million, issuing an additional $6.6 million of
notes receivable and investing $8.3 million for additions to revenue-producing
properties. These investments were substantially offset by the receipt of $8.8
million of payments on notes receivable, sales of capital assets of $3.1 million
and proceeds from the sale of marketable equity securities of $38.6 million. In
1995, the Company's net cash used in investing activities of approximately $1.7
million was principally a result of issuing an additional $6.2 million of notes
receivable, investing $7.9 million for additions to revenue-producing properties
and purchasing $3.0 million of marketable equity securities. These investments
were substantially offset by the receipt of $6.9 million of payments on notes
receivable, sales of capital assets of $5.3 million, and the maturing of
marketable securities of $2.4 million.
Net cash used by financing activities decreased by $9.4 million in 1996 to
$17.9 million. The principal use of cash in financing activities in 1996 and
1995 was a net reduction of mortgage and notes payable indebtedness of $17.9
million and $22.8 million, respectively.
EARNINGS BEFORE INTEREST, TAXES DEPRECIATION, AND AMORTIZATION
It is management's intent, as described in Item 1 "Business", 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, 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.
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<PAGE> 26
<TABLE>
<CAPTION>
EBITDA
($000)
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
NET INCOME (LOSS)........................................... $19,386 $27,902 $(10,752)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO EBITDA:
Dividends and interest income............................. (5,740) (4,634) (4,806)
Interest expense.......................................... 22,333 23,466 27,862
Income tax expense (benefit).............................. (7,322) 16,750 (5,746)
Depreciation and amortization............................. 13,483 13,954 14,355
Gains on sales of investments and other assets............ (2,628) (34,867) (5,711)
Valuation allowances...................................... -- -- 2,350
Minority interest portion of add-backs.................... (2,420) (2,768) (3,136)
Unconsolidated subsidiaries' portion of add-backs......... 3,642 3,684 3,997
------- ------- --------
EBITDA...................................................... $40,734 $43,487 $ 18,413
======= ======= ========
</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 YEARS ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
EBITDA...................................................... $40,734 $43,487 $ 18,413
NON-RECURRING ITEMS:
Costs related to proposed merger.......................... 1,910 -- --
Severance costs........................................... 1,320 -- --
Subdivision lots, change in accounting method............. (504) -- --
Income from resolution of claims.......................... (389) (3,578) --
Costs of securing new management (including stock
options)............................................... -- 1,362 --
Litigation settlement expense............................. -- -- 19,553
ESOT Contribution......................................... -- -- 1,787
Other, net................................................ (143) (25) 400
------- ------- --------
ADJUSTED EBITDA............................................. $42,928 $41,246 $ 40,153
======= ======= ========
</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
operations. 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 related to
proposed merger" represent costs incurred by the Company in conjunction with the
proposed merger with a wholly-owned subsidiary of Highwoods. "Severance costs"
reflects the expense to the Company in 1997 of outsourcing certain functions.
"Subdivision lots, change in accounting method" in 1997 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 a "as sold" basis. "Income from resolution of claims" reflects the
income to the Company from the resolution of certain claims in 1997 and 1996.
"Costs of securing new management (including stock options)" reflects the
expense to the Company in 1996 of obtaining the new members of its senior
management. "Litigation settlement expense" reflects the expenses incurred by
the Company in 1995 to implement substantially all of its obligations set forth
in the Settlement
24
<PAGE> 27
Agreement and the related legal and other professional expense. "ESOT
contribution" reflects the contribution by the Company to the ESOT of 1,375
shares (or 110,000 post-split) of common stock of the Company in 1995. "Other,
net" reflects the net of other less significant, non-recurring adjustments.
YEAR 2000 COMPLIANCE
The Company has undertaken steps to address the issues and exposures
related to the Year 2000 which may affect key financial, operational, and
information systems. By the end of 1998, the Company intends to have all of its
key systems converted such that only year 2000 compliant, vendor developed
software will be utilized. As the Company is undertaking a complete information
system conversion, virtually all costs incurred in this process will be
capitalized and such costs are not expected to have a material effect on the
Company's consolidated financial statements.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," requires the reporting of comprehensive income and its
components in the fiscal 1998 financial statements. Comprehensive income is
defined as the change in equity from transactions and other events and
circumstances from non-owner sources, and excludes investments by and
distributions to owners. Comprehensive income includes net income and other
items of comprehensive income meeting the above criteria. The Company currently
has no components other than net income which would constitute comprehensive
income and therefore no additional disclosures are anticipated.
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information" requires reporting about operating segments, products and services,
geographic areas, and major customers. The objective of the pronouncement is to
provide information about the different types of business activities and
economic activities in which businesses operate. The adoption of SFAS No. 131 is
not expected to require any additional disclosure during fiscal 1998.
25
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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
26
<PAGE> 29
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
ASSETS
Revenue-producing properties (note 2)....................... $163,097,000 $189,011,000
Land and improvement inventories............................ 9,791,000 24,204,000
Property held for future development........................ 7,793,000 6,918,000
------------ ------------
Total properties....................................... 180,681,000 220,133,000
Cash and cash equivalents................................... 15,968,000 14,454,000
Temporary investments....................................... 42,633,000 45,053,000
Accounts receivable (note 9)................................ 3,061,000 2,000,000
Prepaid expenses............................................ 6,378,000 6,355,000
Notes receivable (notes 3, 9 and 10)........................ 40,757,000 21,514,000
Investments in real estate partnerships (note 4)............ 2,457,000 2,163,000
Minority interest in consolidated partnerships.............. 4,717,000 4,431,000
Income taxes receivable..................................... 383,000 --
Deferred income taxes (note 7).............................. -- 3,456,000
Other assets, net........................................... 739,000 768,000
------------ ------------
$297,774,000 $320,327,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Mortgage indebtedness (note 5).............................. $288,553,000 $309,188,000
Notes payable to banks and others (notes 9 and 14).......... 12,990,000 2,000,000
Accounts payable and tenants' deposits...................... 9,059,000 6,633,000
Accrued expenses and other liabilities...................... 8,613,000 8,020,000
Income taxes payable........................................ -- 11,525,000
Accrued contribution to Employee Stock Ownership Trust (note
10)....................................................... -- 11,050,000
Deferred gains on the sale of property...................... 2,024,000 517,000
Deferred income taxes (note 7).............................. 2,708,000 --
------------ ------------
323,947,000 348,933,000
------------ ------------
Stockholders' equity (deficit):
Common stock, par value $.01 per share; 10,000,000 shares
authorized and 5,721,744 and 5,016,745 shares issued
(note 13).............................................. 100,000 100,000
Additional paid-in capital................................ 19,917,000 8,319,000
Retained earnings......................................... 99,788,000 80,402,000
------------ ------------
119,805,000 88,821,000
Less treasury stock, at cost (1,179,235 and 164,345 shares
of common stock) (note 14)............................. 145,978,000 117,427,000
------------ ------------
Total stockholders' equity (deficit)........................ (26,173,000) (28,606,000)
Commitments and contingencies (notes 2, 8 and 10)...........
------------ ------------
$297,774,000 $320,327,000
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 30
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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)
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE> 31
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Common stock:
Balance at beginning and end of year (note
13)........................................ $ 100,000 $ 100,000 $ 100,000
------------- ------------- -------------
Additional paid-in capital (note 13):
Balance at beginning of year.................. 8,319,000 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)... 11,050,000 -- --
Income tax benefit of options exercised on
25,000 shares.............................. 381,000 -- --
Earned stock compensation (note 12)........... 167,000 1,240,000 --
------------- ------------- -------------
Balance at end of year........................ 19,917,000 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.................. 80,402,000 52,500,000 63,252,000
Net income (loss)............................. 19,386,000 27,902,000 (10,752,000)
------------- ------------- -------------
Balance at end of year........................ 99,788,000 80,402,000 52,500,000
------------- ------------- -------------
Treasury stock:
Balance at beginning of year.................. (117,427,000) (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).......... (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) (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)............ $ (26,173,000) $ (28,606,000) $ (36,725,000)
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 32
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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)
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 year......... 14,454,000 7,209,000 14,186,000
------------ ------------ ------------
Cash and cash equivalents, end of year............... $ 15,968,000 $ 14,454,000 $ 7,209,000
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 33
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.
31
<PAGE> 34
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted average common shares outstanding
for computation of basic income per
share...................................... 4,186,219 4,852,400 14,469,360
Stock options................................ 153,807 116,029 --
--------- --------- ----------
Shares outstanding for computation of diluted
income per share........................... 4,340,026 4,968,429 14,469,360
========= ========= ==========
</TABLE>
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.
32
<PAGE> 35
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
As of December 31, 1997, future minimum lease payments receivable under
noncancelable operating leases, excluding apartments, are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
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
============
</TABLE>
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
33
<PAGE> 36
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
=========== ===========
</TABLE>
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.
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:
<TABLE>
<CAPTION>
PERCENT OWNED
-------------
<S> <C>
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
</TABLE>
34
<PAGE> 37
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Selected aggregate financial data for unconsolidated affiliates for 1997
and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
</TABLE>
(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:
<TABLE>
<S> <C>
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
============
</TABLE>
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.
35
<PAGE> 38
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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)
============ =========== ===========
</TABLE>
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.
Total income tax expense (benefit) differs from expected income tax expense
(benefit) as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
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)
============ =========== ===========
</TABLE>
36
<PAGE> 39
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
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
============ ============
</TABLE>
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 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
37
<PAGE> 40
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$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:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Notes receivable (note 10)........................... $12,497,000 $4,084,000
Accounts receivable.................................. 400,000 737,000
Notes payable........................................ -- 2,000,000
</TABLE>
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.
38
<PAGE> 41
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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:
<TABLE>
<S> <C>
1998........................................................ $11,500,000
1999........................................................ 1,900,000
2000........................................................ 2,900,000
2001........................................................ 4,900,000
2002........................................................ 11,400,000
Thereafter.................................................. 45,800,000
</TABLE>
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
39
<PAGE> 42
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 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:
<TABLE>
<S> <C>
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
===========
</TABLE>
(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.
40
<PAGE> 43
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Transactions involving the 1996 Stock Option Plan are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
NUMBER OF AVERAGE NUMBER OF AVERAGE
SHARES PRICE SHARES PRICE
--------- ------- --------- -------
<S> <C> <C> <C> <C>
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
======= ====== ======= ======
</TABLE>
Options outstanding and exercisable are as follows:
<TABLE>
<CAPTION>
OUTSTANDING AT EXERCISE EXERCISABLE AT AVERAGE
DECEMBER 31, 1997 PRICE DECEMBER 31, 1997 PRICE
- ----------------- -------- ----------------- -------
<S> <C> <C> <C>
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
======= ====== ====== ======
</TABLE>
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
41
<PAGE> 44
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
- 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.
- Temporary investments -- Fair values for temporary investments were based
upon quoted market prices.
- Notes payable to banks and others -- The carrying value of these
financial instruments approximates fair value.
- 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.
- 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:
<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
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
</TABLE>
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
42
<PAGE> 45
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
43
<PAGE> 46
INDEPENDENT AUDITORS' REPORT
Board of Directors
J.C. Nichols Company
Kansas City, Missouri:
Under date of March 6, 1998, we reported on the 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, as contained in the 1997 annual report to stockholders.
These consolidated financial statements and our report thereon are included in
the annual report on Form 10-K for the year 1997. In connection with our audits
of the aforementioned consolidated financial statements, we also have audited
the related consolidated financial statement schedules in the annual report on
Form 10-K. These consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statement schedules based on our audits.
In our opinion, these consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG PEAT MARWICK LLP
Kansas City, Missouri
March 6, 1998
44
<PAGE> 47
J.C. NICHOLS COMPANY AND SUBSIDIARIES
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS
TOTAL CAPITALIZED
INITIAL SUBSEQ. TO
LOCATION/DEVELOPMENT BUILDING BUILDING TYPE ENCUMBRANCES LAND BLDG. COSTS ACQUISITION
-------------------- -------- ------------- ------------ ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
KANSAS CITY, MISSOURI
Country Club Plaza Millcreek Block Office & Retail $ 2,595,435 $ 73,343 $ 82,820 $ 4,731,005
Country Club Plaza Triangle Block Retail 1,709,189 32,857 284,951 651,188
Country Club Plaza Balcony Block Office & Retail 3,734,895 80,670 4,755,506 1,568,643
Country Club Plaza Macy Building Retail -- 41,921 140,668 2,442,558
Country Club Plaza Esplanade Block Office & Retail 7,659,699 138,830 883,230 2,469,596
Country Club Plaza Plaza Central Retail 1,519,279 111,638 818,484 2,615,338
Country Club Plaza Theatre Block Office & Retail 5,507,387 92,377 796,865 1,701,276
Country Club Plaza Swanson Block Retail 3,608,288 103,707 83,720 5,509,830
Country Club Plaza Halls Building Retail 1,645,886 101,668 3,209,723 411,563
Country Club Plaza Nichols Block Office & Retail 3,165,165 87,694 349,267 2,150,060
Country Club Plaza Time Block Office & Retail 11,774,413 215,950 1,907,746 2,749,542
Country Club Plaza 48th & Penn Retail 1,772,492 42,299 177,782 298,215
Country Club Plaza Seville Shops West Retail 2,278,919 224,485 572,084 132,756
Country Club Plaza Plaza Savings South Retail 1,962,402 64,430 1,949,328 182,654
Country Club Plaza Court of the Penguins Retail 2,658,739 51,212 2,744,639 198,019
Country Club Plaza Seville Square Office & Retail 6,013,813 62,844 1,969,500 7,042,257
Country Club Plaza Plaza Parking Parking -- 689,286 204,291 --
Country Club Plaza Common Areas Sidewalks, -- -- 336,922 869,687
Fountains,
Statues
4620 Nichols Parkway Parkway Building Office -- 44,414 858,939 524,327
300-320 East 51st St. Colonial Shops Retail -- 6,805 139,680 90,809
301-337 East 55th St. Crestwood Shops Retail -- 18,205 114,196 85,819
63rd & Brookside Brookside Shops Office & Retail 4,251,989 128,392 521,792 922,710
7100-7126 Wornall Rd. Romanelli Shops Retail -- 4,656 87,629 54,694
Red Bridge & Holmes Red Bridge Shops Retail -- 8,860 1,717,885 1,863,187
7140 Wornall Road Romanelli Annex Office & Retail -- 1,404 8,351 34,369
Two Brush Creek Blvd. Two Brush Creek Plaza Office 6,533,612 6,539 7,327,125 431,593
One Ward Parkway One Ward Parkway Office -- 10,755 5,946,413 228,161
400 East Red
Bridge Rd. Red Bridge Prof. Office 617,578 4,290 1,382,758 342,585
Bldg.
801 West 47th St. Park Plaza Office 5,697,297 132,572 6,769,352 797,119
4900 Main 4900 Main Bldg. Office & Vacant 22,460,327 2,138,451 18,977,120 1,452,477
1.926 Acres
400 East Bannister
Rd. Bannister Business Industrial 1,208,571 5,839 1,553,689 181,583
Center
6310 Troost Retail Shops Land Lease -- 13,764 -- 44,034
664 E. Red
Bridge Road KFC Land Lease -- 604 -- --
11049 Holmes Burger King Land Lease -- 100,465 -- --
135th & Holmes
(18.6 Acres) Golf Driving Range Land Lease -- 5,074 1 --
Bannister &
Raytown Rd. 2.928 Acres Bldg. Lease -- 1,589 1 --
(6)655 East Minor
Drive Coach House South Apartments 20,000,000 54,754 23,400,787 2,988,581
(6)11230 Oak Coach House Apartments 8,000,000 16,285 6,474,535 1,205,966
11209 McGee Drive Coach Lamp Apartments -- 16,374 1,989,363 630,102
<CAPTION>
TOTAL COST
-----------------------------------------
LAND & BUILDINGS/ ACCUM. DATE OF DATE DEPR.
LOCATION/DEVELOPMENT IMPTS. IMPTS. TOTAL DEPR. CONST. ACQUIRED LIFE
-------------------- ------ ---------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
KANSAS CITY, MISSOURI
Country Club Plaza $ 73,343 $ 4,813,825 $ 4,887,168 $ 2,012,051 1920 1906-1910 20-40
Country Club Plaza 32,857 936,139 968,996 397,887 1925 1906-1910 20-50
Country Club Plaza 80,670 6,324,149 6,404,819 2,969,614 1925 1906-1910 20-50
Country Club Plaza 41,921 2,583,226 2,625,147 749,151 1926 1906-1910 20-50
Country Club Plaza 138,830 3,352,826 3,491,656 2,033,551 1928 1906-1910 20-50
Country Club Plaza 111,638 3,433,822 3,545,460 1,959,734 1958 1906-1910 20-40
Country Club Plaza 92,377 2,498,141 2,590,518 1,312,854 1928 1906-1910 20-45
Country Club Plaza 103,707 5,593,550 5,697,257 2,412,931 1967 1906-1910 20-55
Country Club Plaza 101,668 3,621,286 3,722,954 2,605,389 1964 1906-1910 20-60
Country Club Plaza 87,694 2,499,327 2,587,021 2,005,691 1930 1906-1910 20-45
Country Club Plaza 215,950 4,657,288 4,873,238 3,159,581 1929 1906-1910 20-45
Country Club Plaza 42,299 475,997 518,296 316,379 1948 1906-1910 20-40
Country Club Plaza 224,485 704,840 929,325 271,323 1980 1906-1910 20-45
Country Club Plaza 64,430 2,131,982 2,196,412 669,833 1948 1906-1910 20-40
Country Club Plaza 51,212 2,942,658 2,993,870 2,825,831 1945 1975 10-20
Country Club Plaza 62,844 9,011,757 9,074,601 7,098,693 1945 1975 10-39
Country Club Plaza 689,286 204,291 893,577 147,941 1920-1964 1906-1910 15
Country Club Plaza 744,254 462,355 1,206,609 822,251 1920-1964 1906-1910 10-20
4620 Nichols Parkway 44,414 1,383,266 1,427,680 870,970 1955 1906-1910 20-45
300-320 East 51st St. 6,805 230,489 237,294 140,873 1907 1907 20-25
301-337 East 55th St. 36,357 181,863 218,220 145,015 1932 1923 15-50
63rd & Brookside 142,844 1,430,050 1,572,894 937,925 1919 1920 10-50
7100-7126 Wornall Rd. 4,656 142,323 146,979 99,965 1925 1925 10-49
Red Bridge & Holmes 532,623 3,057,309 3,589,932 2,878,549 1959 1959 10-50
7140 Wornall Road 1,404 42,720 44,124 2,770 1963 1993 20
Two Brush Creek Blvd. 6,539 7,758,718 7,765,257 4,625,583 1983 1983 10-45
One Ward Parkway 10,755 6,174,574 6,185,329 3,833,959 1980 1980 10-45
400 East Red
Bridge Rd. 4,290 1,725,343 1,729,633 1,178,019 1972 1976 10-31.5
801 West 47th St. 132,572 7,566,471 7,699,043 3,735,136 1983 1983 10-45
4900 Main 2,138,451 20,429,597 22,568,048 8,429,077 1986 1985 10-50
400 East Bannister
Rd. 177,540 1,563,571 1,741,111 1,093,407 1985 1985 10-40
6310 Troost 57,798 -- 57,798 44,034 1974 1971 20
664 E. Red
Bridge Road 604 -- 604 -- -- 1954 --
11049 Holmes 100,465 -- 100,465 -- -- 1954 --
135th & Holmes
(18.6 Acres) 5,074 1 5,075 -- -- 1972 --
Bannister &
Raytown Rd. 1,589 1 1,590 -- -- 1929 --
(6)655 East Minor
Drive 2,980,304 23,463,818 26,444,122 11,421,626 1986 1986 10-35
(6)11230 Oak 854,240 6,842,546 7,696,786 3,995,979 1984 1984 10-45
11209 McGee Drive 189,645 2,446,194 2,635,839 2,082,989 1961 1963 10-50
</TABLE>
45
<PAGE> 48
J.C. NICHOLS COMPANY AND SUBSIDIARIES
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS
TOTAL CAPITALIZED
INITIAL SUBSEQ. TO
LOCATION/DEVELOPMENT BUILDING BUILDING TYPE ENCUMBRANCES LAND BLDG. COSTS ACQUISITION
-------------------- -------- ------------- ------------ ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
4509 Wornall Rd. Wornall Road Apartments -- 5,188 93,720 14,384
4517 Wornall Rd. St. Charles Apartments -- 4,200 57,600 16,137
221 West 48th St. Regency House Apartments 4,396,430 35,263 3,085,365 3,414,509
121 West 48th St. Sulgrave Apartments 8,164,799 240,000 5,145,373 2,585,132
4600 Nichols Parkway Park Lane Apartments -- 55,960 554,840 319,593
4417 Pennsylvania Penn Wick Apartments -- 4,108 208,509 5,227
4424-4426
Pennsylvania Cole Gardens Apartments -- 4,521 287,844 --
4419 Pennsylvania Tama Apartments -- 15,952 1 9,166
333 West 46th Terr. Neptune Apartments 3,538,739 -- 5,987,040 114,661
4921 Wornall Rd. Wornall Point Apartments -- 18,750 656,250 1,931
Plaza Area 54 Rental Houses Single Family 23,470 177,324 3,339,091 15,032
95th & Noland Road Vacant Lot -- 6,000 -- --
2.72 Acres
72nd & Wyandotte Maintenance Shop -- 1,243 684,964 --
26 Miscellaneous
Vacant Lots, Less
Than 1 Acre Each -- 1,087,843 -- 76,468
46th Terr. &
Pennsylvania Surface Parking Parking -- -- 254,075 --
Various Locations Const. In Progress Development Costs -- 303,966 -- 5,664,412
and Tenant
Improvements
LEE'S SUMMIT, MISSOURI
211 N. E. Lakewood
Blvd. Sales Office Retail -- 267,122 133,333 8,249
SHAWNEE MISSION, KANSAS
5000-5012 State Line Westwood Shops Retail -- 2,470 21,236 116,460
2700-2812 W. 53
Street Fairway Shops Retail 2,874,813 1,099 243,393 1,487,462
Mission Road &
Tomahawk Prairie Village Shops Retail & Office 11,384,100 30,889 2,150,389 3,690,459
83 & Mission Road Corinth Square Shops Retail 6,976,058 43,330 2,033,398 3,832,759
3910-4024 W. 95
Street 95 & Mission Road Retail -- 3,041 110,785 72,142
Shops
9507-9541 Nall Trailwood Shops Retail -- 4,232 567,658 26,924
9555-9563 Nall 96 & Nall Shops Retail -- 509 151,583 22,347
5205-5287 W. 95
Street Trailwood III Shops Retail 856,071 1,459 1,473,877 4,820
4101-4117 W. 83
Street Corinth Shops South Retail 1,967,606 11,931 191,765 2,455,002
75 & I-35 Georgetown Shops Retail -- 11,335 1,548,724 1,173,856
8340 Mission Road Corinth Office Office 954,382 3,715 1,121,970 266,179
Building
4121 W. 83 Street Corinth Executive Office 381,708 6,309 1,117,443 395,038
Building
7315 Frontage Road Hartford Office Office -- 5,004 1,344,996 454,367
Building
4200 Somerset Nichols Building Office 1,011,644 6,834 1,849,885 254,865
11111 W. 95 Street Oak Park Bank Office 430,663 4,912 1,025,676 105,877
Building
7301 Mission Road Prairie Village Office -- 44,254 443,776 440,346
Office Ctr
<CAPTION>
TOTAL COST
-----------------------------------------
LAND & BUILDINGS/ ACCUM. DATE OF DATE DEPR.
LOCATION/DEVELOPMENT IMPTS. IMPTS. TOTAL DEPR. CONST. ACQUIRED LIFE
-------------------- ------ ---------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
4509 Wornall Rd. 5,188 108,104 113,292 107,477 1918 1968 15
4517 Wornall Rd. 4,200 73,737 77,937 59,217 1922 1972 15-27.5
221 West 48th St. 35,263 6,499,874 6,535,137 4,933,662 1960 1961 10-40
121 West 48th St. 240,000 7,730,505 7,970,505 4,513,357 1967 1976 10-31
4600 Nichols Parkway 55,960 874,433 930,393 837,511 1924 1971 8-21
4417 Pennsylvania 4,108 213,736 217,844 209,190 1960 1987 7-31.5
4424-4426
Pennsylvania 4,521 287,844 292,365 287,844 1960 1987 7
4419 Pennsylvania 15,952 9,167 25,119 389 1960 1979 15
333 West 46th Terr. 94,557 6,007,144 6,101,701 2,409,329 1988 1910 10-40
4921 Wornall Rd. 20,681 656,250 676,931 253,211 1950 1987 31.5
Plaza Area 177,324 3,354,123 3,531,447 1,882,222 1920's & 1971-1989 10-31.5
1930's
95th & Noland Road 6,000 -- 6,000 -- -- 1956 --
72nd & Wyandotte 1,243 684,964 686,207 275,421 1986 1983 10-40
26 Miscellaneous
Vacant Lots, Less
Than 1 Acre Each 1,164,311 -- 1,164,311 20,456 -- 1930-1985 --
46th Terr. &
Pennsylvania -- 254,075 254,075 26,819 -- -- 10-40
Various Locations 303,966 5,664,412 5,968,378 -- -- -- --
LEE'S SUMMIT, MISSOUR
211 N. E. Lakewood
Blvd. 275,371 133,333 408,704 23,100 1975 1993 15-31.5
SHAWNEE MISSION, KANS
5000-5012 State Line 2,470 137,696 140,166 22,805 1926 1949 48
2700-2812 W. 53
Street 27,330 1,704,624 1,731,954 391,238 1940 1962 10-39
Mission Road &
Tomahawk 121,092 5,750,645 5,871,737 3,508,640 1948 1962 10-50
83 & Mission Road 519,635 5,389,852 5,909,487 3,830,299 1962 1955 10-50
3910-4024 W. 95
Street 63,254 122,714 185,968 146,476 1965 1972 15-50
9507-9541 Nall 4,232 594,582 598,814 468,212 1968 1972 10-50
9555-9563 Nall 2,358 172,081 174,439 133,632 1976 1981 15-35
5205-5287 W. 95
Street 1,459 1,478,697 1,480,156 781,504 1986 1972 10-40
4101-4117 W. 83
Street 116,999 2,541,699 2,658,698 1,362,619 1953 1953 10-55
75 & I-35 69,784 2,664,131 2,733,915 1,478,208 1974 1965 10-40
8340 Mission Road 3,715 1,388,149 1,391,864 1,101,136 1960 1984 15-20
4121 W. 83 Street 6,309 1,512,481 1,518,790 888,205 1973 1986 10-55
7315 Frontage Road 64,377 1,739,990 1,804,367 1,181,303 1978 1975 10-45
4200 Somerset 25,135 2,086,449 2,111,584 1,327,703 1978 1979 10-45
11111 W. 95 Street 13,202 1,123,263 1,136,465 773,331 1976 1978 15-40
7301 Mission Road 53,430 874,946 928,376 512,727 1960 1981 15-20
</TABLE>
46
<PAGE> 49
J.C. NICHOLS COMPANY AND SUBSIDIARIES
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS
TOTAL CAPITALIZED
INITIAL SUBSEQ. TO
LOCATION/DEVELOPMENT BUILDING BUILDING TYPE ENCUMBRANCES LAND BLDG. COSTS ACQUISITION
-------------------- -------- ------------- ------------ ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(6)4350 Shawnee Msn
Pkway Fairway West Office Office 4,775,000 68,829 3,771,257 572,600
Ctr
2400 W. 75 Street Brymar Building Office -- -- 1,634,058 204,850
(6)4330 Shawnee Msn
Pkway Fairway North Office 4,500,000 109,739 3,809,023 224,819
11836-50 W. 85 Street Quivira Bus Park -- Industrial 18,918 24,605 246,154 156,518
Bldg A
8441-8457 Quivira Quivira Bus Park -- Industrial -- 29,968 284,611 36,816
Bldg B
8419-8433 Quivira Quivira Bus Park -- Industrial 18,918 23,079 235,351 109,159
Bldg C
8403-8417 Quivira Quivira Bus Park -- Industrial 18,918 23,189 256,012 49,929
Bldg D
8347-8363 Quvira Quivira Bus Park -- Industrial 145,159 31,309 304,368 105,019
Bldg E
11835-55 W. 83 Street Quivira Bus Park -- Industrial 150,496 34,061 463,200 130,045
Bldg F
8605-8619 Quivira Quivira Bus Park -- Industrial 106,734 27,279 244,256 4,428
Bldg G
11730-11748 W. 86
Terrace Quivira Bus Park -- Industrial 131,283 36,082 324,805 54,288
Bldg H
11705 W. 83 Terrace Quivira Bus Park -- Industrial 53,237 45,412 516,014 169,830
Bldg WE
11531-11621 W. 83
Terrace Quivira Bus Park -- Industrial 1,396,000 4,962 1,064,467 372,485
Bldg J
11633-11647 W. 83
Terrace Quivira Bus Park -- Industrial 304,000 1,982 364,696 88,880
Bldg K
11505-11517 W. 83
Terrace Quivira Bus Park -- Industrial 300,000 2,056 400,517 88,940
Bldg L
11100-11200 Antioch Shannon Valley Retail 6,738,583 1,800,000 6,307,009 1,830,227
8201 Mission Road Land Lease -- 276,648 -- --
4010 Somerset 1.25 Acres Land Lease -- 2,166 -- --
I-35 & 75th St. (1.1
Acres) Perkins Restaurant Land Lease -- 1,303 -- --
I-35 & 75th St. (.45
Acres) Bank Drive-In Land Lease -- 537 -- --
I-35 & 75th St. (.86
Acres) Convenience Store Land Lease -- 1,020 -- --
I-35 & 75th St. (.64
Acres) Vacant Land -- 390 -- --
5301 West 95th St.
(.31 Acres) Savings & Loan Land Lease -- 155 -- --
<CAPTION>
TOTAL COST
-----------------------------------------
LAND & BUILDINGS/ ACCUM. DATE OF DATE DEPR.
LOCATION/DEVELOPMENT IMPTS. IMPTS. TOTAL DEPR. CONST. ACQUIRED LIFE
-------------------- ------ ---------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(6)4350 Shawnee Msn
Pkway 147,319 4,265,367 4,412,686 2,231,978 1983 1981 15-32
2400 W. 75 Street 5,808 1,833,100 1,838,908 1,600,801 1968 1984 15-20
(6)4330 Shawnee Msn
Pkway 209,651 3,933,930 4,143,581 2,202,673 1985 1985 10-45
11836-50 W. 85 Street 105,801 321,476 427,277 264,513 1973 1973 15-45
8441-8457 Quivira 29,968 321,427 351,395 230,765 1975 1973 15-35
8419-8433 Quivira 23,079 344,510 367,589 187,717 1973 1973 15-45
8403-8417 Quivira 23,189 305,941 329,130 191,804 1973 1973 15-45
8347-8363 Quvira 31,309 409,387 440,696 258,042 1973 1973 10-45
11835-55 W. 83 Street 34,061 593,245 627,306 330,901 1973 1973 15-45
8605-8619 Quivira 27,279 248,684 275,963 153,103 1973 1973 15-45
11730-11748 W. 86
Terrace 36,082 379,093 415,175 209,590 1973 1973 15-45
11705 W. 83 Terrace 45,412 685,844 731,256 381,393 1973 1973 15-45
11531-11621 W. 83
Terrace 355,896 1,086,018 1,441,914 899,994 1983 1965 10-35
11633-11647 W. 83
Terrace 82,510 373,048 455,558 303,951 1985 1965 15-35
11505-11517 W. 83
Terrace 82,559 408,954 491,513 331,005 1985 1965 15-35
11100-11200 Antioch 1,800,000 8,137,236 9,937,236 4,145,178 1988 1988 10-48
8201 Mission Road 276,648 -- 276,648 -- -- 1957 --
4010 Somerset 2,166 -- 2,166 -- -- 1955 --
I-35 & 75th St. (1.1
Acres) 1,303 -- 1,303 -- -- 1953 --
I-35 & 75th St. (.45
Acres) 537 -- 537 -- -- 1953 --
I-35 & 75th St. (.86
Acres) 1,020 -- 1,020 -- -- 1953 --
I-35 & 75th St. (.64
Acres) 390 -- 390 -- -- 1953 --
5301 West 95th St.
(.31 Acres) 155 -- 155 -- -- 1972 --
</TABLE>
47
<PAGE> 50
J.C. NICHOLS COMPANY AND SUBSIDIARIES
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS
TOTAL CAPITALIZED
INITIAL SUBSEQ. TO
LOCATION/DEVELOPMENT BUILDING BUILDING TYPE ENCUMBRANCES LAND BLDG. COSTS ACQUISITION
-------------------- -------- ------------- ------------ ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
75th & Reinhardt Service Station Vacant Building -- 12,825 -- --
and Land
8100-8300 Quivira Vacant Land -- 81,308 -- --
45 Acres
99th & Nieman Road Vacant Land -- 26,830 -- 210,628
22 Acres
3541 Somerset Drive Maintenance Shop -- 850 266,120 --
151st & Nall 11.214 Acres Land -- 32,079 159,770 11,945
Johnson Drive & Hwy.
7 Farm House & Bldgs. -- -- 53,106 --
135th-143rd, Metcalf
to Nall Farm Houses & Bldgs. -- -- 467,987 --
Various Locations Tenant Improvements, Const. In -- -- -- 260,499
Etc. Progress
3617 & 3733 Somerset
Drive Corinth Place Villas 2 Condos -- 541 313,608 --
84th & Mission Road Corinth Gardens Apartments -- 43,000 228,396 31,098
4120 West 94th Terr. Kenilworth Apartments 7,569,683 63,527 4,085,515 2,640,303
(6)3815 Somerset
Drive Corinth Place Apartments 4,500,000 27,101 3,868,982 665,189
3518 West 83rd St. Mission Valley Apartments 1,160,839 38,192 930,039 889,006
8037 Mohawk Corinth Paddock Apartments 307,515 205,500 986,170 308,626
OLATHE, KANSAS
1515 E. Santa Fe Land Lease -- 44,441 -- --
MIAMI COUNTY, KANSAS
250th & Farley 810 Acre Farmland Land Lease -- 1,173,083 357,950 --
OSAGE CITY, KANSAS
(1)East HiWay 31 Manufactured Homes Building Lease 4,800,000 47,840 3,866,625 682,582
Plant
Valuations Reserve -- -- (1,194,800) --
DES MOINES, IOWA
(2)4201 Westown
Parkway Highland Building Office 6,261,065 1,066,243 5,056,684 (213,725)
(2)4200 Corporate
Drive Crestwood Building Office 2,315,737 171,121 2,068,285 --
(3)4344 Corporate
Drive Sunset Building Office 907,993 93,759 834,073 463,315
(3)4601 Westown
Parkway Veridian Building Office 7,220,709 396,387 5,530,003 584,787
(3)4200 University
Ave. Edgewater Building Office 8,928,602 458,901 6,699,069 1,192,112
(3)4445 Corporate
Drive Waterford Building Office 4,561,586 234,529 3,977,761 --
(4)4401 Westown
Parkway Neptune Building Office 6,000,000 624,327 4,363,862 1,812,768
(5)6031 Meadow Crest
Drive Winwood Apartments Apartments 23,000,000 1,299,865 19,103,697 123,227
<CAPTION>
TOTAL COST
-----------------------------------------
LAND & BUILDINGS/ ACCUM. DATE OF DATE DEPR.
LOCATION/DEVELOPMENT IMPTS. IMPTS. TOTAL DEPR. CONST. ACQUIRED LIFE
-------------------- ------ ---------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
75th & Reinhardt 12,825 -- 12,825 -- -- 1950 --
8100-8300 Quivira 81,308 -- 81,308 -- -- 1955 --
99th & Nieman Road 237,458 -- 237,458 177,275 1966-1995 1959 15-20
3541 Somerset Drive 850 266,120 266,970 132,914 1987 1957 10-40
151st & Nall 44,024 159,770 203,794 157,673 1940's 1983 15
Johnson Drive & Hwy.
7 -- 53,106 53,106 53,105 1940's 1981 15
135th-143rd, Metcalf
to Nall -- 467,987 467,987 158,362 1950's 1989 20-27.5
Various Locations -- 260,499 260,499 -- -- 1995 --
3617 & 3733 Somerset
Drive 541 313,608 314,149 37,701 1989 1957 15-27.5
84th & Mission Road 47,979 254,515 302,494 28,365 1961 1995 15-27.5
4120 West 94th Terr. 347,301 6,442,044 6,789,345 4,691,151 1965 1972 10-40
(6)3815 Somerset
Drive 650,565 3,910,707 4,561,272 1,909,772 1987 1987 10-40
3518 West 83rd St. 93,438 1,763,799 1,857,237 1,004,546 1964 1972 10-40
8037 Mohawk 307,897 1,192,399 1,500,296 148,444 1973 1995 15-27.5
OLATHE, KANSAS
1515 E. Santa Fe 44,441 -- 44,441 -- -- 1995 --
MIAMI COUNTY, KANSAS
250th & Farley 1,173,083 357,950 1,531,033 66,407 1940's - 1994 5-30
50's
OSAGE CITY, KANSAS
(1)East HiWay 31 47,840 4,549,207 4,597,047 2,523,665 1985 1985 5-35
-- (1,194,800) (1,194,800) -- -- -- --
DES MOINES, IOWA
(2)4201 Westown
Parkway 1,066,243 4,842,959 5,909,202 2,398,758 1987 1987 10-40
(2)4200 Corporate
Drive 171,121 2,068,285 2,239,406 1,024,439 1987 1987 10-40
(3)4344 Corporate
Drive 93,759 1,297,388 1,391,147 339,493 1989 1988 5-39
(3)4601 Westown
Parkway 396,387 6,114,790 6,511,177 1,600,079 1989 1988 7-39
(3)4200 University
Ave. 683,229 7,666,853 8,350,082 2,006,213 1989 1988 7-39
(3)4445 Corporate
Drive 234,529 3,977,761 4,212,290 1,040,875 1990 1988 7-39
(4)4401 Westown
Parkway 1,161,419 5,639,538 6,800,957 2,874,517 1986 1986 10-50
(5)6031 Meadow Crest
Drive 1,299,865 19,226,924 20,526,789 8,937,493 1986-87 1985 5-28
</TABLE>
48
<PAGE> 51
J.C. NICHOLS COMPANY AND SUBSIDIARIES
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS
TOTAL CAPITALIZED
INITIAL SUBSEQ. TO
LOCATION/DEVELOPMENT BUILDING BUILDING TYPE ENCUMBRANCES LAND BLDG. COSTS ACQUISITION
-------------------- -------- ------------- ------------ ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
ST. PETERSBURG, FLORIDA
135 1st Ave NE Vacant Land -- 156,563 -- --
------------ ---------- ------------ -----------
TOTAL REVENUE -- PRODUCING PROPERTIES.......................... 265,526,833 16,187,648 216,670,401 88,507,300
(7)Preference Item............................................. 4,026,458
------------
TOTAL ENCUMBRANCES -- REVENUE-PRODUCING PROPERTY............ 269,553,291
<CAPTION>
TOTAL COST
-----------------------------------------
LAND & BUILDINGS/ ACCUM. DATE OF DATE DEPR.
LOCATION/DEVELOPMENT IMPTS. IMPTS. TOTAL DEPR. CONST. ACQUIRED LIFE
-------------------- ------ ---------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
ST. PETERSBURG, FLORI
135 1st Ave NE 156,563 -- 156,563 -- 1992 1990
----------- ------------ ------------ ------------
TOTAL REVENUE -- PROD 25,566,667 295,798,682 321,365,349 158,268,459
(7)Preference Item...
TOTAL ENCUMBRANCES
REVENUE PRODUCING
PROPERTY.........
</TABLE>
- -------------------------
(1) The Company owns a 99% profit-sharing interest and a 100% loss-sharing
interest in the partnership owning this facility.
(2) The Company owns a 90% interest in the partnership owning these two office
buildings.
(3) The Company owns a 60% interest in the partnership owning these four office
buildings.
(4) The Company owns an 85% interest in the partnership owning this office
building.
(5) The Company owns a 65% interest in the partnership owning this apartment
building.
(6) The Company shares 50% of the cash flow from these properties with an
outside company providing credit enhancement support related to the financing of
these properties.
(7) See discussion in Note 5 to the 1997 Consolidated Financial Statements and
Management's Discussion and Analysis.
LAND & IMPROVEMENT INVENTORIES
<TABLE>
<CAPTION>
COSTS
TOTAL CAPITALIZED
INITIAL SUBSEQ. TO
LOCATION/DEVELOPMENT BUILDING BUILDING TYPE ENCUMBRANCES LAND BLDG. COSTS ACQUISITION
-------------------- -------- ------------- ------------ ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
KANSAS CITY, MISSOURI
400 West 49th Terr. Alameda Towers 49 Units Sold -- -- 9,066,409 --
Condominium 10 Units
(19-Story Building) Remaining for
Sale
Valuation Reserve -- (5,023,443)
STONE COUNTY, MISSOURI
Table Rock Lake (20 257-Lot Subdivision 148 Lots -- 1,226,379 -- --
Miles West of (104 Acres) Available
Branson, MO) for Sale
Valuation Reserve (425,000) -- --
SHAWNEE MISSION, KANSAS
(1)135th-151st, 64 Acres Vacant Land -- 1,334,040 -- --
Metcalf to Nall
RESIDENTIAL SUBDIVISIONS:
151st & Nall (SW Green Meadows 85 Lots Available -- 162,411 -- 1,310,113
Corner) for Sale
148th & Nall Whitehorse 33 Lots Available -- 3,970 -- 1,222,181
for Sale
<CAPTION>
TOTAL COST
-----------------------------------------
LAND & BUILDINGS/ ACCUM. DATE OF DATE DEPR.
LOCATION/DEVELOPMENT IMPTS. IMPTS. TOTAL DEPR. CONST. ACQUIRED LIFE
-------------------- ------ ---------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
KANSAS CITY, MISSOURI
400 West 49th Terr. -- 9,066,409 9,066,409 -- 1988-1996 1962 --
-- (5,023,443) (5,023,443) -- -- -- --
STONE COUNTY, MISSOUR
Table Rock Lake (20 1,226,379 -- 1,226,379 -- -- 1986 --
Miles West of
Branson, MO)
(425,000) -- (425,000) -- -- -- --
SHAWNEE MISSION, KANS
(1)135th-151st, 1,334,040 -- 1,334,040 -- -- 1989 --
Metcalf to Nall
RESIDENTIAL SUBDIVISI
151st & Nall (SW 1,472,524 -- 1,472,524 -- -- 1984 --
Corner)
148th & Nall 1,226,151 -- 1,226,151 -- -- 1983 --
</TABLE>
49
<PAGE> 52
J.C. NICHOLS COMPANY AND SUBSIDIARIES
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
COSTS
TOTAL CAPITALIZED
INITIAL SUBSEQ. TO
LOCATION/DEVELOPMENT BUILDING BUILDING TYPE ENCUMBRANCES LAND BLDG. COSTS ACQUISITION
-------------------- -------- ------------- ------------ ---- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Johnson Dr. & Hwy K-7 Woodsonia 51 Lots Available -- 107,970 -- 805,542
for Sale
------------ ----------- ------------ -----------
TOTAL LAND & IMPROVEMENT INVENTORIES........................... -- 2,409,770 9,066,409 (1,685,607)
PROPERTY HELD FOR FUTURE DEVELOPMENT
Various Land Parcels Kansas City, Missouri; Johnson County,
Kansas and Miami County, Kansas Held for Future Development... 19,000,000 6,433,337 -- 1,359,245
------------ ----------- ------------ -----------
TOTAL PROPERTIES & MORTGAGE INDEBTEDNESS PER CONSOLIDATED
BALANCE SHEET................................................. $288,553,291 $25,030,755 $225,736,810 $88,180,938
============ =========== ============ ===========
LESS ACCUMULATED DEPRECIATION..................................
TOTAL PROPERTIES, NET OF ACCUMULATED DEPRECIATION..............
<CAPTION>
TOTAL COST
-----------------------------------------
LAND & BUILDINGS/ ACCUM. DATE OF DATE DEPR.
LOCATION/DEVELOPMENT IMPTS. IMPTS. TOTAL DEPR. CONST. ACQUIRED LIFE
-------------------- ------ ---------- ----- ------ ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Johnson Dr. & Hwy K-7 913,512 -- 913,512 -- -- 1981 --
----------- ----------- ------------ ------------
TOTAL LAND & IMPROVEMENT INVENTORIES......... 5,747,606 4,042,966 9,790,572 --
PROPERTY HELD FOR FUTURE DEVELOPMENT
Various Land Parcels Kansas City, Missouri;
Johnson County, Kansas and Miami County,
Kansas Held for Future Development.......... 7,792,582 -- 7,792,582 -- -- 1981 --
----------- ------------ ------------ -----------
TOTAL PROPERTIES & MORTGAGE INDEBTEDNESS PER
CONSOLIDATED BALANCE SHEET....... $39,106,855 $299,841,648 $338,948,503 $158,268,459
=========== ============ ============
LESS ACCUMULATED DEPRECIATION 158,268,459
------------
TOTAL PROPERTIES, NET OF ACCUMULATED
DEPRECIATION................................. $180,680,044
============
</TABLE>
- -------------------------
(1) All of this property is under contract for sale.
50
<PAGE> 53
J.C. NICHOLS COMPANY AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION ROLLFORWARDS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ---------------------------
REAL ESTATE ACCUMULATED REAL ESTATE ACCUMULATED REAL ESTATE ACCUMULATED
ASSETS DEPRECIATION ASSETS DEPRECIATION ASSETS DEPRECIATION
----------- ------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of
year.................. $373,932,917 $153,799,478 $375,972,490 $146,449,317 $381,320,313 $137,215,827
Additions during year:
Acquisitions.......... -- -- -- -- 3,700,609 --
Construction and
tenant
improvements........ 13,846,635 -- 10,717,282 -- 7,449,127 --
Depreciation and
amortization
expense............. (2,509,222) 9,741,447 (2,390,406) 10,391,018 (3,324,818) 9,991,182
Deductions during year:
Cost of real estate
sold................ (46,100,123) (5,272,466) (9,405,299) (3,040,857) (11,055,540) (757,692)
Valuation allowances
and write-offs...... (221,704) -- (961,150) -- (2,117,201) --
------------ ------------ ------------ ------------ ------------ ------------
Balance at end of
year.................. $338,948,503 $158,268,459 $373,932,917 $153,799,478 $375,972,490 $146,449,317
============ ============ ============ ============ ============ ============
</TABLE>
51
<PAGE> 54
J.C. NICHOLS COMPANY
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT OF
LOANS SUBJECT
PERIODIC FACE CARRYING TO DELINQUENT
INTEREST MATURITY PAYMENT PRIOR AMOUNT OF AMOUNT OF PRINCIPAL OR
DESCRIPTION RATE DATE TERM LIENS MORTGAGE MORTGAGE INTEREST
----------- -------- -------- -------- ----- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Landing Ventures..... Prime adj. qtrly 8/15/98 Varying amounts $-- $ 3,255,000 $ 2,907,939 $ --
Shopping Center over life to maturity
Kansas City, MO Balloon at maturity
of $2,861,723
Lemons Descendants... 11% 11/30/01 Level monthly -- 750,000 660,523 --
Shopping Center at $7,741
Kansas City, MO Balloon at maturity
of $564,556
Rayman, Steven M..... 7% 12/1/02 Level monthly -- 11,750,000 10,530,900 --
Apartments at $87,000
Merriam, KS Balloon at maturity
of $8,736,325
Synergy Dev. Interest only,
Alliance........... 7% 5/10/00 -- 10,845,302 10,845,302 --
Land payable every 6 months
Overland Park, KS Balloon at maturity
of $10,845,302
Construction loans... 10% to 10.50% On Demand N/A N/A N/A 3,429,828 --
on single family
residences
Other misc. N/A
mortgages.......... 0% to 9.5% 1/98 to 9/99 N/A N/A 474,073 26,007
----------- ----------- -------
Totals............. $26,600,302 $28,848,565 $26,007
=========== =======
Reserve for uncollectible accounts (749,055)
-----------
$28,099,510
===========
</TABLE>
52
<PAGE> 55
J.C. NICHOLS COMPANY
ROLLFORWARD OF MORTGAGE LOANS ON REAL ESTATE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period........................ $17,916,799 $21,337,384 $24,332,412
Additions during period:
New mortgage loans............................... 16,660,302 4,649,693 4,591,994
Deductions during period:
Collections of principal......................... (5,728,536) (7,918,608) (5,065,068)
Write-offs....................................... -- (151,670) (250,000)
Settlement expense items (see Note 11 to
consolidated financial statements)............. -- -- (2,271,954)
----------- ----------- -----------
Balance at close of period............................ $28,848,565 $17,916,799 $21,337,384
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Gross balance......................................... $28,848,565 $17,916,799 $21,337,384
Reserve for uncollectible accounts.................... (749,055) (905,397) (1,468,218)
----------- ----------- -----------
$28,099,510 $17,011,402 $19,869,166
=========== =========== ===========
</TABLE>
53
<PAGE> 56
J.C. NICHOLS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION YEAR EXPENSES WRITE-OFFS OF YEAR
----------- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
Valuation Reserve:
Revenue-producing property...................... $10,402,332 $(465,818) $ (8,954,932) $ 981,582
Valuation Reserve:
Land and improvements inventory................. 4,983,443 465,000 -- 5,448,443
Valuation Reserve:
Marketable equity securities.................... 85,000 -- (85,000) --
Valuation Reserve:
Notes and accounts receivable................... 3,496,337 639,853 (1,046,740) 3,089,450
Valuation Reserve:
Investments in real estate partnerships......... 1,216,839 -- (647,624) 569,215
----------- --------- ------------ -----------
Totals........................................ $20,183,951 $ 639,035 $(10,734,296) $10,088,690
=========== ========= ============ ===========
</TABLE>
54
<PAGE> 57
J.C. NICHOLS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
DESCRIPTION YEAR EXPENSES WRITE-OFFS OF YEAR
----------- ------------ ---------- ---------- --------------
<S> <C> <C> <C> <C>
Valuation Reserve:
Revenue-producing property..................... $16,715,475 $ (961,489) $(5,351,654) $10,402,332
Valuation Reserve:
Land and improvements inventory................ 4,983,443 -- -- 4,983,443
Valuation Reserve:
Marketable equity securities................... 85,000 -- -- 85,000
Valuation Reserve:
Notes and accounts receivable.................. 5,143,001 (102,833) (1,543,831) 3,496,337
Valuation Reserve:
Investments in real estate partnerships........ 1,216,839 -- -- 1,216,839
----------- ----------- ----------- -----------
Totals....................................... $28,143,758 $(1,064,322) $(6,895,485) $20,183,951
=========== =========== =========== ===========
</TABLE>
55
<PAGE> 58
J.C. NICHOLS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT END
DESCRIPTION YEAR EXPENSES ACCOUNTS* WRITE-OFFS OF YEAR
----------- ------------ ---------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Valuation Reserve:
Revenue-producing property.......... $15,025,400 $1,830,000 $ -- $ (139,925) $16,715,475
Valuation Reserve:
Land and improvements inventory..... 4,696,242 287,201 -- -- 4,983,443
Valuation Reserve:
Property held for future
development....................... 1,327,450 -- (1,327,450) -- --
Valuation Reserve:
Marketable equity securities........ -- 85,000 -- -- 85,000
Valuation Reserve:
Notes and accounts receivable....... 4,259,930 2,380,750 -- (1,497,679) 5,143,001
Valuation Reserve:
Prepaid expenses.................... 1,208,631 -- (1,208,631) -- --
Valuation Reserve:
Investments in real estate
partnerships...................... 1,360,239 -- (68,400) (75,000) 1,216,839
Valuation Reserve:
Minority interest................... 952,474 -- (952,474) -- --
----------- ---------- ----------- ----------- -----------
Totals............................ $28,830,366 $4,582,951 $(3,556,955) $(1,712,604) $28,143,758
=========== ========== =========== =========== ===========
</TABLE>
* These amounts were taken as credits to valuation allowance expense as the
Company was released from the assets and liabilities (net liability position)
of a consolidated affiliate during 1995.
56
<PAGE> 59
J.C. NICHOLS COMPANY AND SUBSIDIARIES
MORTGAGES PAYABLE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE
LENDER ORIGINATION MATURITY OUTSTANDING AS
PROPERTY OR TRUSTEE DATE DATE OF 12/31/97 INTEREST RATE
-------- ---------- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Millcreek Block Principal Mutual 12/15/93 12/13/13 $ 2,595,435 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Swanson Block Principal Mutual 12/15/93 12/13/13 $ 3,608,288 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Hall's Building Principal Mutual 12/15/93 12/13/13 $ 1,645,886 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Theatre Block Principal Mutual 12/15/93 12/13/13 $ 5,507,387 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Triangle Block Principal Mutual 12/15/93 12/13/13 $ 1,709,189 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Balcony Block Principal Mutual 12/15/93 12/13/13 $ 3,734,895 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Plaza Central Principal Mutual 12/15/93 12/13/13 $ 1,519,279 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Nichols Block Principal Mutual 12/15/93 12/13/13 $ 3,165,165 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Time Block Principal Mutual 12/15/93 12/13/13 $ 11,774,413 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Esplanade Block Principal Mutual 12/15/93 12/13/13 $ 7,659,699 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Plaza Savings South Principal Mutual 12/15/93 12/13/13 $ 1,962,402 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
48th & Penn Principal Mutual 12/15/93 12/13/13 $ 1,772,492 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Court of the Penguins Principal Mutual 12/15/93 12/13/13 $ 2,658,739 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Seville Shops West Principal Mutual 12/15/93 12/13/13 $ 2,278,919 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
<CAPTION>
AMORTIZATION BALANCE DUE
PROPERTY PREPAYMENT PROVISIONS PERIOD AT MATURITY
-------- --------------------- ------------ -----------
<S> <C> <C> <C>
Millcreek Block Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Swanson Block Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Hall's Building Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Theatre Block Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Triangle Block Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Balcony Block Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Plaza Central Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Nichols Block Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Time Block Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Esplanade Block Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Plaza Savings South Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
48th & Penn Greater of 1% of principal or 20 years Fully Amortized
a calculated re-investment
yield
Court of the Penguins Greater of 1% of principal or 20 years Fully Amortized
a calculated re-investment
yield
Seville Shops West Greater of 1% of principal or 20 years Fully Amortized
a calculated re-investment
yield
</TABLE>
57
<PAGE> 60
J.C. NICHOLS COMPANY AND SUBSIDIARIES -- (CONTINUED)
MORTGAGES PAYABLE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE
LENDER ORIGINATION MATURITY OUTSTANDING AS
PROPERTY OR TRUSTEE DATE DATE OF 12/31/97 INTEREST RATE
-------- ---------- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Seville Square Principal Mutual 12/15/93 12/13/13 $ 6,013,813 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Park Plaza Principal Mutual 12/15/93 12/13/13 $ 5,697,297 Fixed at 8% until 2004; rate
adjusted by holder, as
defined, at 2004 and 2009
Mission Valley Apartments Royal Neighbors 06/26/96 07/01/11 $ 1,160,839 7.875%
Corinth Office Building Members Life Ins 08/29/96 09/01/06 $ 954,382 7.950%
Nichols Building CUNA Mutual 08/29/96 09/01/06 $ 1,011,644 7.950%
Trailwood III Shops Bank Midwest 05/22/86 05/01/21 $ 856,071 Monthly weighted average
plus 2%
Bannister Business Center Bank Midwest 05/22/86 05/01/21 $ 1,208,571 Monthly weighted average
plus 2%
Regency House Lincoln National 05/23/97 06/10/17 $ 4,396,430 7.560%
Sulgrave Lincoln National 05/23/97 06/10/17 $ 8,164,799 7.560%
Corinth Place Bank of NY 12/31/85 12/01/15 $ 4,500,000 Lower floater, adjusted
monthly
Coach House South Bank of NY 12/31/85 12/01/15 $ 20,000,00 Lower floater, adjusted
monthly
Coach House U. S. Trust 05/01/85 05/01/15 $ 8,000,000 Lower floater, adjusted
monthly
Fairway North U. S. Trust 11/28/84 11/01/14 $ 4,500,000 Lower floater, adjusted
monthly
(1)Two Brush
Creek Plaza Archon Group 05/12/83 01/01/02 $ 6,533,612 8.000%
Brookside Shops Lutheran 12/21/90 01/01/11 $ 4,251,989 10.500%
Prairie Village Shops Lutheran 12/21/90 01/01/11 $ 11,384,100 10.500%
Rental Houses Mages 05/01/89 05/01/04 $ 23,470 8.000%
<CAPTION>
AMORTIZATION BALANCE DUE
PROPERTY PREPAYMENT PROVISIONS PERIOD AT MATURITY
-------- --------------------- ------------ -----------
<S> <C> <C> <C>
Seville Square Greater of 1% of principal or 20 years Fully Amortized
a calculated re-investment
yield
Park Plaza Greater of 1% of principal or 20 years Fully Amortized
a calculated re-investment
yield
Mission Valley Apartments Greater of 1% of principal or 15 years Fully Amortized
a calculated re-investment
yield
Corinth Office Building Greater of 1% of principal or 15 years $ 476,814
a calculated re-investment
yield
Nichols Building Greater of 1% of principal or 15 years $ 505,423
a calculated re-investment
yield
Trailwood III Shops None 35 years Fully Amortized
Bannister Business Center None 35 years Fully Amortized
Regency House Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Sulgrave Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Corinth Place Administrative costs for early Interest Only $ 4,500,000
call
Coach House South Administrative costs for early Interest Only $ 20,000,000
call
Coach House Administrative costs for early Interest Only $ 8,000,000
call
Fairway North Administrative costs for early Interest Only $ 4,500,000
call
(1)Two Brush
Creek Plaza Requires lender's approval and 25 years $ 4,977,066
payment of all contingent
interest
Brookside Shops In the first ten years 20 years Fully Amortized
additional charge at
reinvestment rate. Beginning in
11th year 5% of principal,
declining by 1/2% each year
thereafter
Prairie Village Shops In the first ten years 30 years $ 9,537,790
additional charge at
reinvestment rate. Beginning in
11th year 5% of principal,
declining by 1/2% each year
thereafter
Rental Houses None 15 years Fully Amortized
</TABLE>
58
<PAGE> 61
J.C. NICHOLS COMPANY AND SUBSIDIARIES -- (CONTINUED)
MORTGAGES PAYABLE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE
LENDER ORIGINATION MATURITY OUTSTANDING AS
PROPERTY OR TRUSTEE DATE DATE OF 12/31/97 INTEREST RATE
-------- ---------- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Neptune Apartments Lutheran 12/09/91 01/01/99 $ 3,538,739 9.875%
Quivira Business Park
Buildings J, K and L Commerce Bank 08/01/83 08/01/98 $ 2,000,000 9.800%
Corinth Square Shops Farm Bureau 03/12/92 04/01/02 $ 6,976,058 9.375%
Corinth Shops South Farm Bureau 03/12/92 04/01/02 $ 1,967,606 9.375%
Kenilworth Apartments Aegon 05/07/97 06/01/07 $ 7,569,683 8.070%
Red Bridge Professional
Building NYLIC 04/04/72 07/10/98 $ 617,578 9.125%
Fairway West Office Center Commerce Bank 03/01/83 03/01/03 $ 4,775,000 9.000%
Oak Park Bank Building NYLIC 02/10/78 01/10/03 $ 430,663 8.875%
Quivira Business Park
Buildings A, C, D, and
SWB Northland Financial 12/14/71 01/01/99 $ 109,991 8.875%
Quivira Business Park
Buildings E, F, G and H Northland Financial 09/12/73 11/01/98 $ 533,672 8.750%
Corinth Paddock Apartments NYLIC 05/23/74 04/10/99 $ 307,515 8.500%
(1) 4900 Main Building KPERS 06/09/86(2) 02/01/21 $ 22,460,327 8.000%
Corinth Executive Building NYLIC 09/18/72 10/01/02 $ 381,708 8.000%
Fairway Shops USG Annuity 01/16/96 02/01/06 $ 2,874,813 7.650%
<CAPTION>
AMORTIZATION BALANCE DUE
PROPERTY PREPAYMENT PROVISIONS PERIOD AT MATURITY
-------- --------------------- ------------ -----------
<S> <C> <C> <C>
Neptune Apartments Beginning in 4th year, 5% of 30 years $ 3,500,962
principal and declining 1% each
year to a minimum of 2%
Quivira Business Park
Buildings J, K and L Administrative costs for early Interest Only $ 2,000,000
call
Corinth Square Shops Beginning in 8th year, greater 30 years $ 5,767,975
of 1% of principal or a
calculated reinvestment yield
Corinth Shops South Beginning in 8th year, greater 30 years $ 1,626,865
of 1% of principal or a
calculated reinvestment yield
Kenilworth Apartments Beginning in 37th month, 20 years $ 4,776,930
greater of 1% of principal or a
calculated re-investment yield
Red Bridge Professional
Building Beginning in 14th year, 5% of 25 years $ 617,578
principal declining 1/4% per
year
Fairway West Office Center Redeemable on 3/1/98 and 2000-2003 $ 1,775,000
thereafter on interest payment Sinking Fund
dates declining from 102% to
100% of principal
Oak Park Bank Building Beginning in 11th year, 5% of 25 years Fully Amortized
principal declining 1/4% per
year
Quivira Business Park
Buildings A, C, D, and
SWB Beginning in 11th year, 5% of 27 years Fully Amortized
principal declining 1/2 of 1%
per year to not less than 1%
Quivira Business Park
Buildings E, F, G and H Beginning in 11th year, 5% of 25 years $ 527,720
principal declining 1/2 of 1%
per year to not less than 1%
Corinth Paddock Apartments Beginning in 11th year, 5% of 25 years Fully Amortized
principal declining 1/2% per
year to a minimum of 1%
thereafter
(1) 4900 Main Building None 35 years Fully Amortized
Corinth Executive Building Beginning in 11th year 3% of 30 years Fully Amortized
principal declining 1/2% per
year to 1%
Fairway Shops Greater of 1% of principal or a 20 years $ 2,057,065
calculated re-investment yield
</TABLE>
59
<PAGE> 62
J.C. NICHOLS COMPANY AND SUBSIDIARIES -- (CONTINUED)
MORTGAGES PAYABLE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
BALANCE
LENDER ORIGINATION MATURITY OUTSTANDING AS
PROPERTY OR TRUSTEE DATE DATE OF 12/31/97 INTEREST RATE
-------- ---------- ----------- -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Shannon Valley Shops Ohio National 12/01/97 11/01/17 $ 6,738,583 8.030%
Winwood Apartments Iowa Finance Authority 12/31/83 11/01/15 $ 23,000,000 Lower floater, adjusted
weekly
Neptune Building Iowa Finance Authority 09/01/85 09/01/15 $ 6,000,000 Lower floater, adjusted
weekly
Manufactured Homes Plant Osage City -- IRB 12/01/84 12/01/99 $ 4,800,000 Lower floater, adjusted
weekly
Highland and Crestwood
Buildings Cigna 10/27/89 12/01/02 $ 8,576,802 8.290%
Sunset, Veridian,
Edgewater and Waterford
Buildings Cigna 10/27/89 12/01/02 $ 21,618,890 8.290%
Land under ground lease Cigna 12/13/92 03/01/09 $ 19,000,000 9.050%
(1) Preference Items $ 4,026,458
------------
Total mortgages payable $288,553,291
============
<CAPTION>
AMORTIZATION BALANCE DUE
PROPERTY PREPAYMENT PROVISIONS PERIOD AT MATURITY
-------- --------------------- ------------ -----------
<S> <C> <C> <C>
Shannon Valley Shops Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Winwood Apartments Redeemable at rates declining Interest Only $ 23,000,000
from 102% to 100% of principal
Neptune Building Redeemable at rates declining Interest Only $ 6,000,000
from 102% to 100% of principal
Manufactured Homes Plant Redeemable at rates declining Interest Only $ 4,800,000
from 103% to 100% of principal
Highland and Crestwood
Buildings Greater of 1% of principal or a 25 years $ 7,918,383
calculated re-investment yield
Sunset, Veridian,
Edgewater and Waterford
Buildings Greater of 1% of principal or a 25 years $ 19,737,955
calculated re-investment yield
Land under ground lease Beginning in 9th year, 1% plus 25 years $ 17,429,339
yield maintenance
(1) Preference Items
Total mortgages payable
</TABLE>
- -------------------------
(1) See discussion in Note 5 to the Consolidated Financial Statements and
Management's Discussion and Analysis -- Liquidity and Capital Resources.
(2) This note is callable by the lender on 2/1/06.
60
<PAGE> 63
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information called for by this item is incorporated herein by reference
to the Registrant's Proxy Statement to be distributed in advance of the Annual
Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by this item is incorporated herein by reference
to the Registrant's Proxy Statement to be distributed in advance of the Annual
Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by this item is incorporated herein by reference
to the Registrant's Proxy Statement to be distributed in advance of the Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by this item is incorporated herein by reference
to the Registrant's Proxy Statement to be distributed in advance of the Annual
Meeting of Stockholders.
61
<PAGE> 64
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents list
(1) The following financial statements are included in Part II Item 8:
Independent Auditors' Report
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended December
31, 1997, 1996 and 1995
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
Notes to Consolidated Financial Statements
(2) The following financial statement schedules are included in Part
II, Item 8
Independent Auditors' Report
Schedule of Real Estate and Accumulated Depreciation at December
31, 1997
Schedule of Real Estate and Accumulated Depreciation Rollforwards
for the Years Ended December 31, 1997, 1996 and 1995
Schedule of Mortgage Loans on Real Estate at December 31, 1997
Schedule of Rollforward of Mortgage Loans on Real Estate for the
Years Ended December 31, 1997, 1996 and 1995
Schedule of Valuation and Qualifying Accounts for the Year Ended
December 31, 1997
Schedule of Valuation and Qualifying Accounts for the Year Ended
December 31, 1996
Schedule of Valuation and Qualifying Accounts for the Year Ended
December 31, 1995
Schedule of Mortgages Payable at December 31, 1997
(3) List of Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
3.1 The Articles of Incorporation of the Company*
3.2 The Bylaws of the Company*
4.1 The Articles of Incorporation of the Company (Included in
Exhibit 3.1)*
4.2 The Bylaws of the Company (Included in Exhibit 3.2)*
4.3 Rights Agreement between the Company and American Stock
Transfer & Trust Company**
10.1(a) Amendment to and Restatement of J.C. Nichols Company
Employee Stock Ownership Plan*
10.1(b) First Amendment to the Amended and Restated J.C. Nichols
Company Employee Stock Ownership Plan*
10.1(c) Third Amendment to the Amended and Restated J.C. Nichols
Company Employee Stock Ownership Plan*
10.2(a) Amendment to and Restatement of J.C. Nichols Employee Stock
Ownership Trust*
10.2(b) First Amendment to the Amended and Restated J.C. Nichols
Company Employee Stock Ownership Trust*
10.3(a) Real Estate Contract of Sale (between J.C. Nichols Company
and Synergy Development Alliance, L.C.)*
</TABLE>
62
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<S> <C>
10.3(b) Amendment to Real Estate Contract of Sale*
10.3(c) Second Amendment to Real Estate Contract of Sale*
10.3(d) April 25, 1995 Letter Agreement constituting third amendment
to Real Estate Contract for Sale*
10.3(e) May 11, 1995 Letter Agreement constituting fourth amendment
to Real Estate Contract of Sale*
10.4(a) Secured Promissory Note -- Note A*
10.4(b) Secured Promissory Note -- Note B*
10.4(c) Deed of Trust, Security Agreement and Assignment of Rents*
10.4(d) Assignment of Leases and Rents*
10.6 Restated Joint Venture Agreement*
10.7 J.C. Nichols Company 1996 Stock Option Plan, Amended and
Restated Effective May 30, 1996*
10.8 Form of Indemnification Agreement entered into between the
Company and each of the members of the Board of Directors
and certain Officers*
10.9 Form Employment Agreement between the Company and Certain
Officers*
10.10 Employment Agreement between the Company and Mr. Brady,
President and Chief Executive Officer of the Company*
10.11 Settlement Agreement between the Company and Deloitte &
Touche LLP*
10.12 Stock Purchase Agreement among the Company, AHI Metnall
L.P., John Simon and James W. Quinn*
10.13 Operating Agreement of KH-JCN, L.C. between the Company and
Kessinger/Hunter & Company, Inc., and First Amendment to
Operating Agreement
10.14 Call Right issued by the Company Kessinger/Hunter & Company,
Inc.
10.15 Agreement and Plan of Merger among the Company, Highwoods
Properties, Inc. and Jackson Acquisition Corporation***
16.1 Later re: Change in Certifying Accountant*
21.1 List of Subsidiaries and Affiliates of the Company
27.1 Financial Data Schedule
99.1 Settlement Agreement and Mutual Releases as of June 30,
1995*
</TABLE>
- -------------------------
* Incorporated by reference to the Company's Registration Statement on Form
10.
** Incorporated by reference to the Company's Form 8-A12G/A filed on July 29,
1997.
*** Incorporated by reference to the Company's Form 8-K filed on December 24,
1997.
(b) Reports on Form 8-K
Agreement and Plan of Merger among the Company, Highwoods Properties,
Inc. and Jackson Acquisition Corporation (Form 8-K filed on December
24, 1997).
63
<PAGE> 66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 25, 1998.
J.C. NICHOLS COMPANY
(Registrant)
By: /s/ BARRETT BRADY
------------------------------------
Barrett Brady
Chief Executive Officer and
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ WILLIAM K. HOSKINS Chairman of the Board, and Director March 25, 1998
- ------------------------------------------
William K. Hoskins
/s/ BARRETT BRADY President, Chief Executive Officer and March 25, 1998
- ------------------------------------------ Director
Barrett Brady
/s/ KAY N. CALLISON Director March 25, 1998
- ------------------------------------------
Kay N. Callison
/s/ C.Q. CHANDLER III Director March 25, 1998
- ------------------------------------------
C.Q. Chandler III
/s/ MARK C. DEMETREE Director March 25, 1998
- ------------------------------------------
Mark C. Demetree
/s/ WILLIAM V. MORGAN Director March 25, 1998
- ------------------------------------------
William V. Morgan
/s/ CLARENCE L. ROEDER Director March 25, 1998
- ------------------------------------------
Clarence L. Roeder
Director
- ------------------------------------------
Thomas J. Turner
/s/ MARK A. PETERSON Vice President, Chief Financial Officer March 25, 1998
- ------------------------------------------ and Treasurer (Principal Accounting
Mark A. Peterson Officer)
</TABLE>
64
<PAGE> 1
EXHIBIT 10.13
OPERATING AGREEMENT
OF
KH-JCN, L.C.
THE UNDERSIGNED, desiring to form a limited liability company pursuant
to the Missouri Limited Liability Company Act (the "ACT"), do hereby enter into
this operating agreement (the "OPERATING AGREEMENT") as of this 21st day of
November, 1997.
WHEREAS, the undersigned owners of interests in the limited liability
company to which this Operating Agreement pertains have caused the limited
liability company, KH-JCN, L.C., to be formed under the Act; and
WHEREAS, such Members do hereby adopt this Operating Agreement as the
Operating Agreement of the Company;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements contained herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1
DEFINITIONS
As used herein, the following terms shall have the following meanings,
unless the context otherwise specifies:
1.1 "ACT" means the Missouri Limited Liability Company Act, as amended
from time to time.
1.2 "ACT OF INSOLVENCY" shall be deemed to have occurred in the event a
Member:
1.2.1 Files a voluntary petition under the Bankruptcy Code or there
shall be an order for relief entered against it under the Bankruptcy Code;
1.2.2 Causes or suffers the appointment of a receiver, trustee or
other similar party for or over all or substantially all of its assets;
<PAGE> 2
1.2.3 Makes a general assignment for the benefit of its creditors;
1.2.4 Suffers the attachment or charging of its Interest by any
creditor.
1.3 "ADDITIONAL REQUIRED CONTRIBUTION" means an amount to be paid by
the Members to the capital of the Company upon the call for an additional
capital contribution by the Management Committee approved by all Members
pursuant to Section 3.3. The amount of each Member's share of an Additional
Required Contribution shall be determined in such manner as the Members
unanimously approve in connection with their approval of the call for such
capital.
1.4 "APPRAISED REAL ESTATE VALUE" means the fair market value of any
real estate owned by the Company, as determined by the Real Estate Appraiser.
1.5 "APPRAISED SECURITIES VALUE" means the fair market value of the JCN
Stock or any other Investment Asset owned by the Company, determined by the
Securities Appraiser, and, in the case of the JCN Stock or the Replacement
Securities, as if the JCN Stock or Replacement Securities were immediately and
freely transferable, without restriction, in a Liquid Market on an Established
Exchange.
1.6 "CALL RIGHT" means any one of the Initial Call Right described in
Section 3.1, the First Option Call Right described in Section 3.4.2, and the
Second Option Call Right described in Section 3.4.4, and "CALL RIGHTS" means all
of the foregoing.
1.7 "CAPITAL CONTRIBUTION" means the cash or Gross Asset Value of any
contribution of a Member to the Company as part of (i) the Initial Capital
Contribution or any Additional Required Contribution with respect to such
Member's Interest, or (ii) the contributions made by JCN or KHC upon the
exercise of the First Option and the Second Option as hereinafter set forth.
1.8 "CAPITAL PROCEEDS FROM M&L ASSETS" means the funds received from
the sale (other than in connection with the dissolution and liquidation of the
Company), financing, or refinancing of M&L Assets, after deducting the costs and
expenses of the transaction generating such funds (including any debts being
satisfied in connection therewith and reserves established to acquire additional
or replacement M&L Assets), less, in the case of a sale, so much of such net
funds as does not exceed the "Book Gain" (as defined in Section 5.1(iv) below)
on such sale.
1.9 "CASH FROM M&L OPERATIONS" means the gross cash proceeds from the
M&L Operations and, in the case of a sale of M&L Assets, so much of the net
funds from such sale as does not exceed the Book Gain on such sale, less the
portion of such proceeds or net funds used to pay or establish reserves for the
Company's expenses (operating or
2
<PAGE> 3
capital), debt payments and contingencies, all in respect of M&L Operations
and as determined by the Management Committee to be reasonably necessary
consistent with historical practices, plus any amounts which the Management
Committee determines no longer need to be held as reserves.
1.10 "CHANGE IN CONTROL" shall mean the happening of any of the
following events:
1.10.1 Any Person becomes, after the date of this Agreement, the
"beneficial owner" (within the meaning of Rule 13d-3 promulgated under Section
13 of the Securities Exchange Act of 1934 (the "Exchange Act")), directly or
indirectly, of securities of JCN representing more than 50% of either the then
outstanding shares of common stock of JCN or the Combined Voting Power of JCN's
then outstanding securities;
1.10.2 The following individuals ("Incumbent Directors") cease for
any reason to constitute a majority of the number of directors then serving on
the board of JCN: individuals who, on the date of execution of this Operating
Agreement, constitute the board and any new director (other than a director
whose initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of JCN) whose appointment by the board or
nomination for election by JCN's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
on the date of execution of this Operating Agreement or whose appointment,
election or nomination for election was previously so approved;
1.10.3 The JCN stockholders approve a merger, consolidation,
statutory share exchange or similar form of corporate transaction involving JCN
or any of its subsidiaries that requires the approval of the JCN stockholders,
whether for such transaction or the issuance of securities in the transaction,
unless immediately following such transaction: (i) more than 50% of the total
voting power of (A) the corporation resulting from such transaction (the
"Survivor"), or (B) if applicable, the ultimate parent corporation that directly
or indirectly has beneficial ownership of 100% of the voting securities eligible
to elect directors of the Survivor (the "Parent"), is represented by shares of
JCN Stock that were outstanding immediately prior to the transaction (or, if
applicable, is represented by shares into which the JCN Stock were converted
pursuant to the transaction), and such voting power among the holders thereof is
in substantially the same proportion as the voting power of the JCN Stock among
the holders thereof immediately prior to the transaction; (ii) no person (other
than any employee benefit plan (or related trust) sponsored or maintained by the
Survivor or the Parent or any person which beneficially owned, immediately prior
to such transaction, directly or indirectly, 25% of more of the JCN Stock (a
"JCN 25% Shareholder")) would become the beneficial owner,
3
<PAGE> 4
directly or indirectly, of 50% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent (or, if
there is no Parent, of the Survivor) and no JCN 25% Shareholder would increase
its percentage of such total voting power; and (iii) at least a majority of the
members of the board of directors of the Parent (or, if there is no Parent, the
Survivor) following the consummation of the transaction were Incumbent Directors
at the time of the JCN board's approval of the execution of the initial
agreement providing for such transaction; or
1.10.4 The JCN stockholders approve of a plan of complete
liquidation or dissolution of JCN or a sale of all or substantially all of JCN's
assets.
For purposes of the above definition of Change in Control, "Person"
shall have the meaning set forth in Section 3(a)(9) of the Exchange Act, as
modified and used in Sections 13(d) and 14(d) thereof, except that such term
shall not include (i) JCN or any entity in which JCN directly or indirectly owns
at least a majority interest, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of JCN or any of its subsidiaries,
(iii) an underwriter temporarily holding securities pursuant to an offering of
such securities, or (iv) any entity resulting from a reorganization,
combination, reclassification, or other corporate restructuring where,
immediately thereafter, the interests in JCN are held directly or indirectly in
substantially the same proportions by substantially the same shareholders as
previously held JCN stock.
1.11 "COMBINED VOTING POWER" means the Combined Voting Power of JCN's
then outstanding voting securities generally entitled to vote in the election of
directors.
1.12 "COMPANY" means KH-JCN, L.C., a Missouri limited liability
company.
1.13 "COMPANY PROPERTY" means all properties, assets and interests
(whether real or personal, tangible or intangible) now or hereafter owned or
held by the Company.
1.14 "CURRENT ASSETS" means the Company's cash, accounts receivable and
other cash-equivalent or liquid assets, as reflected from time to time on the
Company's balance sheet (audited or unaudited).
1.15 "EBITDA" means Earnings Before Interest, Taxes, Depreciation and
Amortization, as modified and calculated in accordance with the formula set
forth on Schedule 1.15 attached hereto and incorporated herein by reference.
1.16 "ESTABLISHED EXCHANGE" means the New York Stock Exchange, American
Stock Exchange, or similar established national stock exchange or NASDAQ
Quotation System.
4
<PAGE> 5
1.17 "FAIR MARKET VALUE" means: (i) the average of the closing bid and
asked prices (or the closing price per share if the JCN Stock or any other
Investment Asset is listed on an Established Exchange) of the JCN Stock or any
other Investment Asset, as reported in The Wall Street Journal (or, if not so
reported, as otherwise reported by NASDAQ Quotation System or such other
Established Exchange or the Appraised Securities Value, if the JCN Stock or
other Investment Asset is not listed on an Established Exchange); (ii) the
Appraised Real Estate Value of any real estate owned by the Company (including
real estate acquired in a Permitted Acquisition described in Section 1.47(a)
below); and (iii) for an entire Call Right or partial Call Right, the value of
the JCN Stock or Replacement Securities to be issued upon exercise of such Call
Right, determined as set forth in subsection (i) above.
1.18 "GLOBAL MANAGEMENT AGREEMENT" means the agreement by and between
JCN and the Company, dated as of the date of this Agreement and relating to the
management and listing services to be provided to JCN by the Company.
1.19 "GROSS ASSET VALUE" means the gross fair market value, as
determined by agreement of all of the Members (unless otherwise set forth or
identified in this Agreement), of an asset, other than cash, contributed by a
Member or revalued by the Company pursuant to a Deemed Sale Exercise (as defined
in Section 3.6), as of the time the contribution was made to the Company or the
Deemed Sale Date (as defined in Section 3.6), as the case may be.
1.20 "INITIAL CAPITAL CONTRIBUTION" means the initial contribution by
each Member to the capital of the Company as set forth opposite the Member's
name in Section 3.1.
1.21 "INTEREST" means all of a Member's right and interest in the
Company.
1.22 "INVESTMENT ASSET" means any security, including the JCN Stock,
held by the Company for investment purposes.
1.23 "JCN" means J.C. Nichols Company.
1.24 "JCN MEMORANDUM ACCOUNT" means a memorandum account separate from
the Company's general ledger, which will be maintained, through December 31,
2001, as follows:
(i) There shall be credited to the JCN Memorandum Account (A)
the amount of the JCN Preferred Return accrued to date, (B) the amount
of any "loan" made to offset an NOI Deficiency pursuant to Section
8.2.2(ii), and (C) the amount of any cash recontributed by JCN to the
Company pursuant to Section 4.2.2; and
5
<PAGE> 6
(ii) There shall be debited against the JCN Memorandum Account
(A) the amount of each distribution to JCN pursuant to Section
4.2.1(i), (B) the amount of each distribution to JCN pursuant to
Section 10.3.6, (C) the amount of each distribution to JCN pursuant to
Section 4.2.1(iv) prior to the effective date of JCN's exchange for
the First Additional Interest, (D) 60% of each distribution to JCN
pursuant to Section 4.2.1(iv) on or after the effective date of JCN's
exchange for the First Additional Interest, and (E) the amount of any
"loan" repaid out of NOI Surplus pursuant to Section 8.2.1(i).
Effective on January 1, 2002, the JCN Memorandum Account will be canceled and
will no longer be relevant to the determination of future Company distributions.
The positive balance, if any, of the JCN Memorandum Account immediately prior to
such cancellation shall be referred to as the "JCN CANCELLATION AMOUNT".
1.25 "JCN INTEREST' means the Interest of JCN, as such Interest may be
increased or decreased over time, and as such Interest may be transferred to
others pursuant to the terms hereof.
1.26 "JCN PREFERRED RETURN" means an amount which shall accrue daily
from January 1, 1998, through the earlier of December 31, 2001, or the date the
Manager is removed over KHC's objection, at a rate equal to (i) twelve percent
(12%) per annum, determined on the basis of a year of 365 or 366 days, as the
case may be, of the average daily balance of (ii) the excess, if any, of (A) the
sum of Three Million Dollars ($3,000,000), over (B) all distributions made to
JCN pursuant to Section 4.3.
1.27 "JCN PROPERTIES" means the real property owned by JCN that is
managed or leased by the Company pursuant to the Global Management Agreement.
1.28 "JCN STOCK" means shares of common stock of J.C. Nichols
Company.
1.29 "KHC" means Kessinger/Hunter & Company, Inc.
1.30 "KHC MEMORANDUM ACCOUNT" means a memorandum account separate
from the general ledger, which will be maintained as follows:
(i) There shall be credited to the KHC Memorandum Account (A)
the amount of the KHC Subordinated Return accrued to date and (B) the
amount of any cash recontributed by KHC to the Company pursuant to
Section 4.2.2; and
(ii) There shall be debited against the KHC Memorandum Account
the amount of each distribution to KHC pursuant to Sections 4.2.1(ii),
4.2.1(iv) and 10.3.7.
6
<PAGE> 7
Effective on January 1, 2002, the KHC Memorandum Account will be cancelled and
will no longer be relevant to the determination of future Company distributions.
The positive balance, if any, of the KHC Memorandum Account immediately prior to
such cancellation shall be referred to as the "KHC CANCELLATION AMOUNT".
1.31 "KHC INTEREST" means the Interest of KHC, as such Interest may be
increased or decreased over time, and as such Interest may be transferred to
others pursuant to the terms hereof.
1.32 "KHC SUBORDINATED RETURN" means an amount accruing daily equal to
the product of (i) the JCN Preferred Return accruing for such day, multiplied by
(ii) a fraction, the numerator of which is the KHC Percentage Interest and the
denominator of which is the JCN Percentage Interest, both determined as of the
beginning of such day.
1.33 "LIQUID MARKET" means a market on which there occurs a sufficient
volume of trades of the subject securities to permit the sale of such securities
within a twenty (20) trading day period without depressing the price of such
securities to any measurable extent.
1.34 "MAJOR CAPITAL EVENT" means a Change in Control, a tender offer
for all or part of the JCN Stock, or approval by the JCN Board of Directors of,
or a recommendation by the JCN Board of Directors that the Shareholders approve:
a proposed merger or consolidation in which JCN would not be the surviving
entity; a proposed recapitalization after which the equity ownership now
represented by the JCN Stock no longer would remain outstanding; a proposed sale
of all or substantially all of the assets of JCN; a proposed statutory share
exchange or similar form of corporate transaction involving JCN; or any other
proposal for a transaction which, if consummated, would result in a Change in
Control.
1.35 "MAJORITY IN INTEREST" means any Member or group of Members
holding an aggregate of more than fifty percent (50%) of the Percentage
Interests at the time such Majority in Interest is determined.
1.36 "MANAGER" means a person or an entity designated as a Manager of
the Company in this Operating Agreement or subsequently chosen as a Manager of
the Company pursuant to Section 7.1.
1.37 "MANAGEMENT COMMITTEE" means the committee selected pursuant to
Section 7.1 below. "MANAGEMENT COMMITTEE MEMBER" means each person serving on
the Management Committee.
7
<PAGE> 8
1.38 "MEMBERS" means those persons or entities who are members of the
Company from time to time.
1.39 "M&L ASSETS" means all property owned by the Company and used in
or held for use in the M&L Operations, excluding the Current Assets and the Work
in Process.
1.40 "M&L OPERATIONS" means the property, project, or construction
management and property leasing and sales brokerage efforts of the Company, as
well as the temporary investment of any Company cash generated by such
activities in accordance with this Agreement.
1.41 "NOI" means net operating income from the JCN Properties for the
calendar year, calculated in accordance with accounting principles as set forth
in Schedule 1.41.
1.42 "NOI MEMORANDUM ACCOUNT" means a memorandum account separate from
the general ledger, which will be maintained as follows:
(i) There shall be credited to the NOI Memorandum Account the
amount, if any, determined pursuant to Section 8.2.1(iii) for any year;
and
(ii) There shall be debited against the NOI Memorandum Account
the amount, if any, applied to reduce an NOI Deficiency pursuant to
Section 8.2.2.(i).
1.43 "NON-M&L ASSETS" means all Company Property (including, without
limitation, the Investment Assets) other than M&L Assets, Current Assets and
Work in Process.
1.44 "NON-M&L DISTRIBUTABLE CASH" means all gross cash proceeds from
the Non-M&L Operations and the sale (other than in connection with the
dissolution and liquidation of the Company), financing or refinancing of the
Non-M&L Assets, less the portion thereof used to pay or establish reserves for
the Company's expenses, debt payments, and contingencies, all in respect of
Non-M&L Operations and as determined by the Management Committee to be
reasonably consistent with historical practices, plus any amounts which the
Management Committee determines no longer to be held as such reserves.
1.45 "NON-M&L OPERATIONS" means the ownership and operation of the Non-
M&L Assets, as well as the temporary investment of any Company cash generated by
such activities in accordance with this Agreement.
8
<PAGE> 9
1.46 "PERCENTAGE INTEREST" means, with respect to any Member, such
Member's ownership interest in the Company, as a percentage of all ownership
interests in the Company. KHC's Percentage Interest and JCN's Percentage
Interest shall initially be seventy (70) and thirty (30) percent, respectively.
1.47 "PERMITTED ACQUISITIONS" means (a) investments in commercial real
estate projects in the Greater Kansas City metropolitan area (for the Company's
own use or for rental to others) designated by KHC, (b) the acquisition of one
or more real estate service businesses that would be complementary to the M&L
Operations, as approved by KHC, (c) JCN Stock purchased from persons other than
JCN, (d) cash applied to satisfy working capital needs of the M&L Operations,
(e) an entire Call Right, and (f) a partial Call Right.
1.48 "REAL ESTATE APPRAISER" means an MAI appraiser who shall have been
engaged in the practice of commercial real estate appraisal in the Kansas City,
Missouri area for at least ten (10) years and who shall be selected as follows.
The Members shall work together to agree upon a Real Estate Appraiser, or
failing to reach such agreement within ten (10) days, each Member shall select a
person who meets the qualifications set forth in the first sentence of this
definition, and the persons so selected shall be directed to promptly (and in
any event within ten (10) days after their selection) select a different person
meeting such qualifications to serve as the Real Estate Appraiser. If no Real
Estate Appraiser is selected on a timely basis, any Member may submit a written
request to the President of the Kansas City Board of Realtors, or any successor
organization, to select a person or entity to serve as the Real Estate
Appraiser.
1.49 "REPLACEMENT SECURITIES" means any securities other than JCN
Stock, acquired upon an exercise of a Call Right and any securities distributed
in respect of any such stock or securities.
1.50 "SECURITIES APPRAISER" means a nationally recognized investment
banking firm selected by JCN and reasonably acceptable to KHC.
1.51 "TAXABLE YEAR" means the taxable year of the Company as determined
pursuant to rules of all Taxing Jurisdictions.
1.52 "TAXING JURISDICTION" means any state, local, or foreign
government that collects tax, interest or penalties, however designated, on any
Member's share of the income attributable to the Company.
1.53 "TRANSFER" means both the passage and the act of effecting the
passage of a legal or equitable interest in a Member's Interest pursuant to a
sale, exchange, gift, assignment, pledge, grant of a security interest,
foreclosure, garnishment, or other
9
<PAGE> 10
conveyance, disposition, or encumbrance and includes without limitation the
passage of any such interest by judicial order, bequest, intestate succession,
or other operation of law.
1.54 "TRANSFEREE" means each person who acquires by Transfer all or any
portion of a Member's Interest, but is not admitted to the Company as a
substituted Member pursuant to this Operating Agreement, and each person who
becomes a Transferee pursuant to a specific provision of this Operating
Agreement.
1.55 "UNRETURNED CAPITAL" means, with respect to each Member, the
excess of the aggregate Capital Contributions made by the Member, over the
distributions made to such Member pursuant to Sections 4.2.1(iii), 4.3 and
10.3.4.
1.56 "WORK IN PROCESS" means, as of a given date, (i) rental, lease and
sales contracts signed and other work completed, but for which all fees or
commissions have not yet been received, and (ii) construction, management and
similar service agreements for which a reasonably measurable percentage of the
work has been completed (to the extent of such measurable percentage completed),
but for which payment has not yet been received.
SECTION 2
ORGANIZATION
2.1 ORGANIZATION. The Members hereby organize the Company as a Missouri
limited liability company pursuant to the provisions of the Act. The Members
hereby ratify and accept all acts of the organizers of the Company taken on
behalf of the Company prior to and including the filing of the Articles of
Organization of the Company.
2.2 OPERATING AGREEMENT. The Members executing this Operating Agreement
hereby agree to the terms and conditions of the Operating Agreement, as it may
from time to time be amended according to its terms, except to the extent
inconsistent with, or contrary to, the provisions of the Act or any other law.
2.3 NAME. The name of the company is KH-JCN, L.C. and all business of
the Company shall be conducted under that name; provided that at any time on or
after January 1, 1998, the Manager shall be authorized to cause the Company to
change its name to "Kessinger/Hunter & Company, L.C."
2.4 EFFECTIVE DATE. This Operating Agreement is effective on the date
hereof to bind the Members as set forth herein; provided, however, that Initial
Capital Contributions shall be made to the Company effective as of January 1,
1998, and the
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Company's operation of its business, in accordance with the terms of this
Operating Agreement, shall begin on such date and not before.
2.5 TERM. The Company shall be dissolved and its affairs wound up in
accordance with this Operating Agreement and the Act on December 31, 2057,
unless its term shall be extended by amendment to this Operating Agreement and
the Articles of Organization, or unless the Company shall be sooner dissolved
and its affairs wound up in accordance with the Act or this Operating Agreement.
2.6 PRINCIPAL OFFICE. The principal office of the Company shall be
located at 2600 Grand Avenue, Suite 700, Kansas City, Missouri 64108, or at such
other place as the Manager may determine from time to time.
2.7 REGISTERED OFFICE AND REGISTERED AGENT. The location of the
registered office shall be at such place as the Manager may determine from time
to time. The name of the registered agent of the Company in the State of
Missouri shall be as stated in the Articles of Organization or as shall be
determined from time to time by the Manager and on file in the appropriate
public offices of the State of Missouri pursuant to applicable provisions of
law.
2.8 NATURE OF BUSINESS. The Company shall be engaged in the primary
business of managing and leasing real property and making Permitted Acquisitions
and may engage in any other lawful business permitted by the Act or the laws of
any jurisdiction in which the Company may do business. The Company shall have
the authority to do all things necessary or convenient to accomplish its purpose
and operate its business.
SECTION 3
CAPITAL CONTRIBUTIONS AND ACCOUNTS
3.1 INITIAL CAPITAL CONTRIBUTIONS. On January 1, 1998, each Member
shall transfer and convey to the Company as a contribution to the capital of the
Company (the "Initial Capital Contributions") the assets, and shall receive a
Percentage Interest in the Company, as set forth opposite the Member's
respective name below:
<TABLE>
<CAPTION>
MEMBER: INITIAL CAPITAL CONTRIBUTION: PERCENTAGE
INTEREST:
<S> <C> <C>
JCN $4,285,714, in cash 30%
KHC Assets, as set forth on Schedule 3.1A attached 70%
hereto
</TABLE>
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<PAGE> 12
The Gross Asset Value of the Initial Capital Contribution of KHC shall be
$10,000,000, and such value shall be credited to KHC's Capital Account. JCN
shall receive a credit to its Capital Account equal to its $4,285,714 cash
Initial Capital Contribution. JCN further agrees, as part of its Initial Capital
Contribution (but with no other or further credit to JCN's Capital Account), at
the option of KHC as provided in Section 3.2, to sell to the Company the Initial
Call Right, dated January 1, 1998, in the form attached hereto as Exhibit 3.1B,
at any time prior to March 2, 1998, for a price equal to $4,285,680, or to sell
to the Company a partial Initial Call Right on the terms described
in Section 3.2.2. The number of "Shares Subject to Exercise" under the Initial
Call Right shall be 76,530 shares of JCN Stock, which shall be adjusted in the
manner set forth in the Initial Call Right for adjustments upon changes in
capitalization occurring between the date of this Agreement and the date of the
Initial Call Right. In connection with each of JCN's sales to the Company of a
Call Right, JCN shall cause its regular outside counsel to deliver a legal
opinion to the Company (in form and substance satisfactory to the Company) that
the Call Right or partial Call Right, as the case may be, is enforceable in
accordance with its terms.
3.2 USE OF JCN INITIAL CAPITAL CONTRIBUTION. Prior to March 2, 1998,
KHC shall have the exclusive authority to cause the Company to use JCN's Initial
Capital Contribution to:
3.2.1 Make one or more of the Permitted Acquisitions; and
3.2.2 If KHC shall cause the Company to effect a combination
of such Permitted Acquisitions and purchase a partial Initial Call Right, such
partial Initial Call Right shall be in the form of the Initial Call Right, but
with the number of Shares Subject to Exercise under the Initial Call Right
reduced to a number equal to the quotient of the remaining portion of the JCN
Initial Contribution (determined after the expenditures described in Sections
1.47(a), (b), (c) and (d), divided by $56.00.
3.3 ADDITIONAL CAPITAL CONTRIBUTIONS. If and to the extent that the
Members unanimously determine that additional capital contributions are
appropriate or necessary for the operation of the business of the Company and
unanimously agree on the respective shares of such additional capital
contribution to be contributed by each Member, the Management Committee shall,
by written notice, call for Additional Required Contributions to the capital of
the Company. Within fifteen (15) days following the issuance of such a call,
each Member shall contribute its agreed share of such Additional Required
Contribution to the capital of the Company.
3.4 JCN'S OPTIONS TO ACQUIRE ADDITIONAL INTERESTS.
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<PAGE> 13
3.4.1 First Option. Subject to the restrictions hereinafter
provided, the Company hereby grants JCN an irrevocable option (the "First
Option") to increase its Percentage Interest (which, for purposes of this
Section 3.4.1, shall be deemed to include the Percentage Interest held by any
Transferee of all or part of the JCN Interest [a "JCN Transferee"]) in the
Company to fifty percent (50%) (the "First Additional Interest"), by
contributing additional assets to the Company in accordance with Section 3.4.1.2
below.
3.4.1.1 Exercise of the First Option. The First
Option may be exercised by JCN at any time after January 1, 1999 and
prior to the date (the "First Lapse Date") which is the earlier to
occur of (i) December 15, 1999 or (ii) the date of any breach by JCN
of the restrictions on Transfer of an Interest set forth in this
Operating Agreement, at which time the First Option shall terminate
and become null and void. In the event JCN wishes to exercise the
First Option, JCN shall deliver to the Company and to KHC a written
notice (the "First Exercise Notice") to that effect prior to the First
Lapse Date. The closing of the exchange by JCN for the First
Additional Interest shall occur at a place, on a date and at a time
designated by JCN in the First Exercise Notice that shall be not less
than five (5) days nor more than fifteen (15) days from the date of
the First Exercise Notice. The effective date of the exchange for the
First Additional Interest shall be the closing date of such exchange,
but in no event later than December 31, 1999. Upon the effective date
of the exchange for the First Additional Interest, the aggregate
Percentage Interest or Interests of all Members other than JCN shall
decrease to fifty percent (50%).
3.4.1.2 Contribution for the First Additional
Interest. To determine the contribution to be made by JCN to the
Company as a result of the exercise of the First Option, the Company
shall perform the Deemed Sale Exercise set forth in Section 3.6 below.
Upon completion of any adjustments to the Capital Accounts contemplated
by Section 3.6, the new total value for the Company shall be determined
and shall be equal to the quotient of the adjusted KHC Capital Account
divided by the Percentage Interest to be held by KHC subsequent to the
exercise of the First Option. Fifty percent (50%) of such quotient,
which shall be the required amount of the adjusted JCN Capital Account
immediately after the exercise of the First Option, shall then be
compared to the adjusted JCN Capital Account resulting from the Deemed
Sale Exercise. In the event that the adjusted JCN Capital Account
resulting from such Deemed Sale Exercise is less than the required
amount of the adjusted JCN Capital Account immediately after the
exercise of the First Option, JCN shall contribute cash to the Company
in the amount of such difference. In the event that the adjusted JCN
Capital Account after giving effect to the Deemed Sale Exercise is
greater than the required amount of the adjusted JCN Capital Account
immediately after the exercise of the First Option, KHC shall have the
option of either: (i) causing the Company to distribute
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<PAGE> 14
assets (which shall be selected by unanimous approval of the Members)
to JCN in such an amount as to cause the adjusted JCN Capital Account
to equal the required amount of the adjusted JCN Capital Account
immediately after the exercise of the First Option, or (ii) contribute
cash to the capital of the Company to increase KHC's Capital Account to
a level such that fifty percent (50%) of the new total value of the
Company is equal to the adjusted JCN Capital Account. Any amount
contributed by JCN or KHC shall be referred to herein as the "First
Option Contribution."
3.4.2 Use of the First Option Contribution. JCN further
agrees, as part of its First Option Contribution (but with no other or further
credit to JCN's Capital Account), at the option of KHC as provided below in this
Section 3.4.2, to sell the Company the First Option Call Right, dated as of the
date of JCN's exercise of the First Option, in the form attached hereto as
Exhibit 3.1B, at any time prior to the sixty-first day following the effective
date of the exchange for the First Additional Interest, for a price equal to the
amount of the First Option Contribution, or to sell to the company a partial
First Option Call Right on the terms described in Section 3.4.2.2. The Shares
Subject to Exercise under the First Option Call Right shall be equal to the
quotient of (i) the amount of the First Option Contribution, divided by (ii) the
price per share used to determine the Fair Market Value of the Company's JCN
stock for the Deemed Sale Exercise preceding JCN's receipt of the First
Additional Interest. During the sixty (60) day period immediately following the
date JCN makes the First Option Contribution to the Company, KHC shall have the
exclusive authority to cause the Company to use the First Option Contribution
to:
3.4.2.1 Make one or more Permitted Acquisitions; and
3.4.2.2 If KHC shall cause the Company to effect a
combination of Permitted Acquisitions and purchase a partial
First Option Call Right, such partial First Option Call Right
shall be in the form of the First Option Call Right, but with the
number of Shares Subject to Exercise under the First Option Call
Right reduced to a number equal to the quotient of the remaining
portion of the JCN First Option Contribution (determined after
the expenditures described in Sections 1.47(a), (b), (c) and
(d)), divided by the price per share of JCN Stock set forth in
the First Option Call Right (which shall be the same price per
share used to determine the Fair Market Value of the Company's
JCN stock for the Deemed Sale Exercise preceding JCN's receipt of
the First Additional Interest).
3.4.3 Second Option. Subject to the restrictions hereinafter
provided, the Company hereby grants JCN an irrevocable option (the "Second
Option") to increase its Percentage Interest (which, for purposes of this
Section 3.4.3, shall be deemed to include the Percentage Interest held by any
JCN Transferee) in the Company to sixty-five percent
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<PAGE> 15
(65%) (the "Second Additional Interest") by contributing additional assets to
the Company as set forth in Section 3.4.3.2 below.
3.4.3.1 Exercise of the Second Option. If and only
if JCN timely exercises the First Option pursuant to Section 3.4. 1
above, JCN may exercise the Second Option at any time after January 1,
2001 and prior to the date (the "Second Lapse Date") which is the
earlier to occur of (i) December 15, 2001 or (ii) the date of any
breach by JCN of the restrictions on Transfer of Interest set forth in
this Operating Agreement, at which time the Second Option shall
terminate and become null and void. In the event JCN wishes to exercise
the Second Option, JCN shall deliver to the Company and to KHC a
written notice (the "Second Exercise Notice") to that effect prior to
the Second Lapse Date. The closing of the exchange by JCN for the
Second Additional Interest shall occur at a place, on a date and at a
time designated by JCN in the Second Exercise Notice that shall be not
less than five (5) days nor more than fifteen (15) days from the date
of the Second Exercise Notice. The effective date of the exchange for
the Second Additional Interest shall be the closing date of such
exchange, but in no event later than December 31, 2001. Upon the
effective date of the exchange for the Second Additional Interest, the
aggregate Percentage Interest or Interests of all Members other than
JCN shall decrease to thirty-five percent (35%).
3.4.3.2 Contribution for the Second Additional
Interest. To determine the contribution to be made by JCN to the
Company as a result of the exercise of the Second Option, the Company
shall perform the Deemed Sale Exercise set forth in Section 3.6 below.
Upon completion of such adjustments to the Capital Accounts
contemplated by Section 3.6, the new total value for the Company shall
be determined and shall be equal to the quotient of the adjusted KHC
Capital Account divided by the Percentage Interest to be held by KHC
subsequent to the exercise of the Second Option. Sixty-five percent
(65%) of such quotient, which shall be the required amount of the
adjusted JCN Capital Account immediately after the exercise of the
Second Option, shall then be compared to the adjusted JCN Capital
Account resulting from the Deemed Sale Exercise. In the event that the
adjusted JCN Capital Account resulting from such Deemed Sale Exercise
is less than the required amount of the adjusted JCN Capital Account
immediately after the exercise of the Second Option, JCN shall
contribute cash to the Company in the amount of such difference. In the
event that the adjusted JCN Capital Account after giving effect to the
Deemed Sale Exercise is greater than the required amount of the JCN
Capital Account immediately after the exercise of the Second Option,
KHC shall have the option of either: (i) causing the Company to
distribute assets (which shall be selected by unanimous approval of the
Members) to JCN in such an amount as to cause the adjusted JCN Capital
Account to equal the required amount of the adjusted JCN Capital
Account immediately after the
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<PAGE> 16
exercise of the Second Option, or (ii) contribute cash to the capital
of the Company to increase KHC's Capital Account to a level such that
sixty-five percent (65%) of the new total value of the company is equal
to the adjusted JCN Capital Account. Any amount contributed by JCN or
KHC shall be referred to herein as the "Second Option Contribution".
3.4.4 Use of the Second Option Contribution. JCN further
agrees, as part of its Second Option Contribution (but with no other or further
credit to JCN's Capital Account), at the option of KHC as provided below in this
Section 3.4.4, to sell the Company the Second Option Call Right, dated as of the
date of JCN's exercise of the Second Option, in the form attached hereto as
Exhibit 3.1B, at any time prior to the sixty-first day following the effective
date of the exchange for the Second Additional Interest, for a price equal to
the amount of the Second Option Contribution, or to sell to the Company a
partial Second Option Call right on the terms described in Section 3.4.2.2. The
Shares Subject to Exercise under the Second Option Call Right
shall be equal to the quotient of (i) the amount of the Second Option
Contribution, divided by (ii) the price per share used to determine the Fair
Market Value of the Company's JCN stock for the Deemed Sale Exercise preceding
JCN's receipt of the Second Additional Interest. During the sixty (60) day
period immediately following the date JCN makes the Second Option Contribution
to the Company, KHC shall have the exclusive authority to cause the Company to
use the Second Option Contribution to:
3.4.4.1 Make one or more Permitted Acquisitions; and
3.4.4.2 If KHC shall cause the Company to effect a
combination of Permitted Acquisitions and purchase a partial Second
Option Call Right, such partial Second Option Call Right shall be in
the form of the Second Option Call Right, but with the number of Shares
Subject to Exercise under the Second Option Call Right reduced to a
number equal to the quotient of the remaining portion of the JCN Second
Option Contribution (determined after the expenditures described in
Sections 1.47(a), (b), (c) and (d)), divided by the price per share of
JCN Stock set forth in the Second Option Call Right (which shall be the
same price per share used to determine the Fair Market Value of the
Company's JCN Stock for the Deemed Sale Exercise preceding JCN's
receipt of the Second Additional Interest).
3.5 Maintenance of Capital Accounts. A separate capital account
("Capital Account") shall be maintained for each Member. Each Member's Capital
Account shall be (a) credited with the Member's Initial Capital Contribution and
the Member's share of the Additional Required Contributions when funded and
allocations to such Member of Company income and gain as provided herein
(including "deemed" income and gain upon any Deemed Sale Exercise), and (b)
debited with the amount of cash and the fair market value of Company assets
distributed to the Member and allocations to such Member of
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<PAGE> 17
Company expense and loss as provided herein (including "deemed" loss upon any
Deemed Sale Exercise). JCN and KHC's Capital Accounts shall also be adjusted as
a result of any capital contribution or distribution made in connection with the
exercise of the First Option or Second Option.
3.6 Deemed Sale Exercise. As of the dates of (a) JCN's exercise of the
First Option and the Second Option, (b) the distribution of any assets upon the
dissolution of the Company, (c) any proposed sale of an Interest resulting in
purchase options under Section 9.4 or (d) if, and only if, requested by a Member
who agrees to pay the costs and expenses of such Deemed Sale Exercise
(including, without limitation, all fees and expenses of the Real Estate
Appraiser and Securities Appraiser), any proposed distribution of Capital
Proceeds from M&L Assets (the date of each of the events listed in clauses (a),
(b), (c) and (d) constituting a "Deemed Sale Date"), the Company shall cause the
following exercise (the "Deemed Sale Exercise") to be performed:
3.6.1 Valuation of Investment Assets and Real Estate and Capital
Account Adjustments. First, the Company shall value the Non-M&L Assets owned by
the Company at their Fair Market Value. If the JCN Stock or any of the other
Non-M&L Assets are valued at an amount different from the book value then
reflected on the Company's books, then (i) any excess of the Fair Market Value
of such JCN Stock or other Non-M&L Assets over book value shall be treated as a
gain (with the book value adjusted accordingly) and (ii) any shortfall of the
Fair Market Value of such JCN Stock or other Non-M&L Assets when compared with
book value shall be treated as a loss (with the book value adjusted
accordingly), and any such gain or loss shall be allocated to the Capital
Accounts of JCN and KHC in proportion to their respective Percentage Interests
at such date.
3.6.2 Valuation of the M&L Assets and Capital Account Adjustments.
Next, the M&L Assets shall be valued (i) if the Deemed Sale Date is prior to
January 1, 1999, at $10,000,000 and (ii) if the Deemed Sale Date is on or after
January 1, 1999, in accordance with the following formula:
Fair Market Value of M&L Assets = 6 x "Two-Year EBITDA"
The term "Two Year EBITDA" means the sum of the EBITDA from the
M&L Operations for the two calendar years immediately preceding
the year in which the Deemed Sale Exercise is performed less
$210,000 for calendar year 1998 if considered in the determination
of the "Two-Year EBITDA" and less $250,000 for each calendar year
after 1998 considered in the determination of the "Two-Year
EBITDA", divided by two. If all or any portion of a capital
contribution made by JCN is used to acquire assets or operations
that become a part of the M&L Operations, EBITDA of such
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<PAGE> 18
acquisitions for each of the two years before their purchase by
the Company shall be added to the Company's EBITDA for each such
year.
After the value of the M&L Assets is determined, the book value of the goodwill
shall be adjusted by the difference between the Fair Market Value of M&L Assets
so determined by the EBITDA formula and the previous book value of the M&L
Assets. If the Fair Market Value of the M&L Assets is different from their
previous book value, then (i) any excess of such Fair Market Value over the
previous book value shall be treated as profit from M&L Operations, and (ii) any
shortfall of such Fair Market Value when compared with the previous book value
shall be treated as loss from M&L Operations, and any such gain or loss shall be
allocated to the Members' respective Capital Accounts in the relative amounts in
which such gain or loss would have been allocated between them under Section 5
if recognized upon an actual sale as of the Deemed Sale Date.
3.6.3 Valuation of Work in Process and Capital Account
Adjustments. Any Work in Process (other than the Work in Process that exists at
January 1, 1998) shall be valued at an amount equal to the excess of its full
value (assuming collection of all Work in Process, but with adjustments, as
appropriate, to reflect any uncollectible amount) over the Company's liabilities
and expenses directly associated with such Work in Process which have not
previously been reflected in the Company's books, and any such excess shall be
treated as income to be allocated to the Capital Accounts of JCN and KHC in the
relative amounts in which such income would have been allocated between them
under Section 5 if the amount of the Work in Process had been taken into the
Company's income as of the Deemed Sale Date.
3.6.4 Costs and Expenses. Except as otherwise provided in
clause (d) of Section 3.6, all costs and expenses of a Deemed Sale Exercise
shall be paid by the Members, in proportion to their respective Percentage
Interests; PROVIDED, that the costs and expenses of a Deemed Sale Exercise
incurred in connection with JCN's acquisition of the First Additional Interest
or Second Additional Interest shall be allocated to the Members in proportion to
their respective Percentage Interests after JCN's acquisition of the additional
Interest in question.
3.6.5 Major Capital Expenditures or Real Estate Acquisitions.
If the Company makes a major capital expenditure or acquires real estate, the
Members shall, by unanimous consent, approve of an appropriate adjustment to the
EBITDA formula to give proper credit for such expenditure or real estate.
3.7 CAPITAL WITHDRAWAL RIGHTS; NO INTEREST AND NO PRIORITY. Prior to
the dissolution and termination of the Company, no Member shall be entitled to
withdraw or reduce such Member's Capital Account or to receive any distributions
from the Company, except as expressly set forth in this Operating Agreement.
Except as expressly provided
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herein, no Member shall be entitled to receive or be credited with interest on
the balance in such Member's Capital Account at any time. No Member shall have
any priority over any other Member as to the return of the balance in such
Member's Capital Account, except as expressly set forth in this Agreement.
3.8 LOANS. Any Member may make a loan to the Company in such amounts,
at such times, and on such terms and conditions as may be approved by the
Management Committee; provided, however, that each Member shall receive no less
than five (5) days notice of any such loan and shall be given a preemptive right
to loan that part of the total loans to be made by the Members proportionate to
the Member's Percentage Interest. Loans by any Member to the Company shall not
be considered as contributions to the capital of the Company.
SECTION 4
DISTRIBUTION
4.1 WORK IN PROCESS AT DECEMBER 31, 1997. Any receipts by the Company
with respect to Work in Process existing at the close of KHC's business on
December 31, 1997, shall not be considered part of Cash From M&L Operations, but
rather shall first be applied to pay the Company's liabilities and expenses
directly associated with such Work in Process, and thereafter, shall be
distributed 100% to KHC.
4.2 DISTRIBUTIONS FROM CASH FROM M&L OPERATIONS.
4.2.1 Except as otherwise provided in Section 10.3, for each
calendar year, Cash From M&L Operations shall be distributed in the following
descending order of priority:
(i) First, through December 31, 2001, 100% to JCN until the
positive balance in the JCN Memorandum Account has been reduced to
zero;
(ii) Second, through December 31, 2001, 100% to KHC until the
positive balance in the KHC Memorandum Account has been reduced to
zero;
(iii) Third, to KHC, until aggregate distributions pursuant to
this clause (iii) equal the KHC Catch-Up Amount to the extent that KHC
has been allocated Profits under Section 5.3(iii) through the end of
such calendar year; and
(iv) The balance, if any, between the Members in proportion to
their respective Percentage Interests.
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4.2.2 The Company's distribution of Cash From M&L Operations
shall be made no later than the last day of each calendar quarter; provided,
however, if the Company has distributed to a Member more Cash From M&L
Operations than such Member was entitled to receive (including as a result of
adjustments made pursuant to Section 8.2.1), the Manager shall immediately make
demand upon the Member receiving such excess distribution requesting repayment
of the excess. Such Member shall immediately repay such excess distribution to
the Company, and the Company shall then distribute such repaid amount in the
manner in which it should have been distributed for the calendar year.
4.3 DISTRIBUTIONS OF CAPITAL PROCEEDS FROM M&L ASSETS. Except as
otherwise provided in Section 10.3, Capital Proceeds From M&L Assets shall be
distributed to the Members as follows:
(i) First, to JCN in the amount (if any) necessary to bring its
positive Capital Account balance, among all positive Capital Account
balances, into the ratio of its Percentage Interest, after taking into
account any adjustments to the Capital Accounts of the Members by
reason of a Deemed Sale Exercise effected in accordance with Section
3.6 in connection with such distribution of Capital Proceeds from M&L
Assets (The product of (a) the amount of any distributions made to JCN
under this Section 4.3(i), multiplied by (b) a fraction, the numerator
of which is KHC's Percentage Interest at the time of such distribution
and the denominator of which is JCN's Percentage Interest at such time,
shall be referred to as the "KHC Catch-Up Amount."); and
(ii) The balance, if any, to the Members in proportion to their
respective Percentage Interests at the time of the distribution.
4.4 NON-M&L DISTRIBUTABLE CASH. The Company's distribution of Non- M&L
Distributable Cash shall be made no later than the last day of each calendar
quarter, and shall be made to the Members in proportion to their respective
Percentage Interests.
4.5 AMOUNTS WITHHELD. All amounts withheld pursuant to the Internal
Revenue Code of 1986, as amended (the "Code"), or any provision of any state or
local tax law with respect to any payment, distribution or allocation to the
Company or the Members shall be treated as distributed to the Members pursuant
to this Section 4.5 for all purposes under this Agreement. The Manager is
authorized to withhold from distributions to the Members and to pay over to any
federal, state or local government any amounts required to be so withheld
pursuant to the Code or any provision of any other federal, state or local law
and shall allocate such amounts to the Members with respect to which such amount
was withheld.
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SECTION 5
ALLOCATIONS OF PROFIT AND LOSS
5.1 PROFITS AND LOSSES. "Profits" and "Losses" means, for each calendar
year, an amount equal to the Company's taxable income or loss for such year,
determined in accordance with Code Section 703(a) (for this purpose, all items
of income, gain, loss, or deduction required to be stated separately pursuant to
Code Section 703(a)(1) shall be included in taxable income or loss), with the
following adjustments:
(i) Any income of the Company that is exempt from federal
income tax and not otherwise taken into account in computing Profits
and Losses pursuant to this Section 5.1 shall be added to such taxable
income or loss;
(ii) Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses pursuant to this
Section 5.1, shall be subtracted from such taxable income or loss;
(iii) In the event the Gross Asset Value of any Company
Property is adjusted in a Deemed Sale Exercise pursuant to Section 3.6,
the amount of such adjustment shall be taken into account as gain or
loss from the disposition of such Company Property for purposes of
computing Profits or Losses;
(iv) Gain or loss resulting from any disposition or
realization of Company Property with respect to which gain or loss is
recognized for federal income tax purposes ("Book Gain" or "Book Loss")
shall be computed by reference to the Gross Asset Value of the property
disposed of, notwithstanding that the adjusted tax basis of such
property differs from its Gross Asset Value;
(v) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income
or loss, there shall be taken into account Depreciation for such
calendar year, computed in accordance with Section 5.2 hereof;
(vi) To the extent an adjustment to the adjusted tax basis of
any Company Property pursuant to Code Section 734(b) or Code Section
743(b) is required pursuant to Regulations Section
1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital
Accounts as a result of a distribution other than in liquidation of a
Member's Interest, the amount of such adjustment shall be treated as an
item of gain (if the adjustment increases the basis of the asset) or
loss (if the
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adjustment deceases the basis of the asset) from the disposition of the
Company Property and shall be taken into account for purposes of
computing Profits or Losses; and
(vii) Notwithstanding any other provision of this Section 5.1,
any items which are specially allocated pursuant to Section 5.5 or
Section 8.2.3 shall not be taken into account in computing Profits or
Losses.
The amounts of the items of Company income, gain, loss or deduction available to
be specially allocated pursuant to Section 5.5 hereof shall be determined by
applying rules analogous to those set forth in Sections 5.1(i) through 5.1(vi)
above.
5.2 DEPRECIATION. The term "Depreciation" means, for each calendar
year, an amount equal to the depreciation, amortization or other cost recovery
deduction allowable with respect to an asset for such calendar year, except that
if the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such calendar year, Depreciation shall
be an amount which bears the same ratio to such beginning Gross Asset Value as
the federal income tax depreciation, amortization or other cost recovery
deduction for such calendar year bears to such beginning adjusted tax basis;
provided, however, that if the adjusted basis for federal income tax purposes of
an asset at the beginning of such calendar year is zero, Depreciation shall be
determined with reference to such beginning Gross Asset Value using a reasonable
method selected by the Management Committee.
5.3 PROFITS. After giving effect to the special allocations set forth
in Sections 5.5 and Section 8.2.3, Profits for any calendar year shall be
allocated in the following order and priority:
(i) First, 100% to KHC in an amount equal to the excess, if
any, of (a) the aggregate JCN Preferred Return accrued through the end
of the calendar year, over (b) the cumulative Profits allocated
pursuant to this Section 5.3(i) for all prior calendar years.
(ii) Second, 100% to KHC in an amount equal to the excess, if
any, of (a) the aggregate KHC Subordinated Return accrued through the
end of the calendar year, over (b) the cumulative Profits allocated
pursuant to this Section 5.3(ii) for all prior calendar years.
(iii) To each Member which has been allocated Losses pursuant
to Section 5.4 hereof, in an amount equal to the excess, if any, of (a)
the cumulative Losses allocated to the Member pursuant to Section 5.4
hereof for all prior Fiscal Years, over (b) the cumulative Profits
allocated to the Member pursuant to this
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Section 5.3(iii) for all prior calendar years, such Profits to be
allocated between the Members, pursuant to this Section 5.3(iii), in proportion
to the respective excesses determined in this Section 5.3(iii) for each Member;
and
(iv) The balance, if any, to the Members in proportion to
their respective Percentage Interests.
5.4 LOSSES. After giving effect to the special allocations set forth in
Sections 5.5 and Section 8.2.3, Losses for any calendar year shall be allocated
in the following order and priority:
(i) Until the earlier of January 1, 2002, or the effective
date of JCN's exchange for the First Additional Interest, all Losses
shall be allocated to KHC.
(ii) From and including the earlier of January 1, 2002, or the
effective date of JCN's exchange for the First Additional Interest,
Losses shall be allocated between the Members in proportion to their
respective Percentage Interests.
5.5 SPECIAL ALLOCATIONS. The following special allocations shall
be made in the following order and priority:
(i) For each fiscal year, (A) items of Company income or gain
from the M&L Operations or the disposition of M&L Assets shall be
specially allocated to JCN to the extent of the JCN Preferred Return
accrued during the calendar
year, and (B) items of Company loss or deduction from the M&L
Operations or the disposition of M&L Assets shall be allocated to KHC
in an amount equal to the JCN Preferred Return accrued during the
calendar year.
(ii) On January 1, 2002, JCN shall be allocated items of
Company loss or deduction from the M&L Operations or the disposition of
M&L Assets, during calendar year 2002, in an amount equal to the JCN
Cancellation Amount.
(iii) On January 1, 2002, KHC shall be allocated items of
Company loss or deduction from the M&L Operations or the disposition of
M&L Assets, during calendar year 2002, in an amount equal to the KHC
Cancellation Amount.
(iv) All items of income, gain, loss, deduction, expense or
credit from the ownership, operation or disposition of the Non-M&L
Assets shall be allocated to the Members in proportion to their
respective Percentage Interests.
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(v) For each fiscal year, items of income or gain of the
Company shall be allocated to KHC to the extent of the distributions
made to KHC during such fiscal year pursuant to Section 4.1.
5.6 OTHER ALLOCATION RULES.
5.6.1 Profits, Losses and any other items of income, gain,
loss or deduction shall be allocated to the Members pursuant to this Section 5
as of the last day of each calendar year; provided, that Profits, Losses and
such other items shall also be allocated as of each Deemed Sale Date.
5.6.2 For purposes of determining the Profits, Losses or any
other item allocable to any period, Profits, Losses and any such other items
shall be determined on a daily, monthly or other basis, as determined by the
Management Committee using any permissible method under Code Section 706 and the
Regulations thereunder; provided, however, that if an Interest is Transferred or
acquired (including upon JCN's exercise of the First Option or the Second
Option) in compliance with the provisions of this Agreement, Profits, Losses and
other items shall be allocated based on an interim closing of the Company's
books and records as of the date of such Transfer or acquisition.
5.6.3 The Members are aware of the income tax consequences of
the allocations made by this Section 5 and hereby agree to be bound by the
provisions of this Section 5 in reporting their shares of Company income and
loss for income tax purposes, except to the extent otherwise required by law.
5.7 CODE SECTION 704(C). In accordance with Code Section 704(c) and the
Regulations thereunder, income, gain, loss and deduction with respect to any
property contributed to the capital of the Company shall, solely for tax
purposes, be allocated among the Members so as to take account of any variation
between the adjusted basis of such property to the Company for federal income
tax purposes and its initial Gross Asset Value.
In the event the Gross Asset Value of any Company Property is adjusted
in a Deemed Sale Exercise pursuant to Section 3.6, subsequent allocations of
income, gain, loss and deduction with respect to such asset shall take account
of any variation between the adjusted basis of such Company Property for federal
income tax purposes and its Gross Asset Value in the same manner as under Code
Section 704(c) and the Regulations thereunder. Allocations pursuant to this
Section 5.7 are solely for purposes of federal, state and local taxes and shall
not affect, or in any way be taken into account in computing, any Member's
Capital Account or share of Profits, Losses, other items or distributions
pursuant to any provision of this Agreement.
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SECTION 6
ACCOUNTING AND BANK ACCOUNTS
6.1 ACCOUNTING METHOD. The taxable year of the Company shall be the
calendar year. The Company shall use the accrual method of accounting. The
financial records shall be kept and the financial statements shall be prepared
in accordance with generally accepted accounting principles.
6.2 BOOKS AND RECORDS. The books and records of the Company shall be
maintained at the principal office of the Company. The Company shall keep all
the records required to be kept at its principal place of business in accordance
with the Act. Each Member (or such Member's designated representative) shall
have the right during ordinary business hours, at the reasonable request and
expense of such Member, to inspect and examine all books and records of the
Company required to be kept by the Act.
6.3 REPORTS. As soon as reasonably practicable after the end of each
Taxable Year of the Company, the Company shall cause to be prepared and shall
deliver to all Members a statement of Company operations for the Taxable Year.
Upon the written request of any Member, the Company shall mail to such Member
the most recent financial statements of the Company at the time of such request
showing in reasonable detail the Company's assets and liabilities and the
results of its operations.
6.4 TAX RETURNS. The Company shall cause to be prepared all returns
required by applicable Taxing Jurisdictions (the "Tax Returns") and shall
distribute all necessary information to allow each Member to file timely its
respective returns. The Company shall file all Tax Returns in a timely fashion.
The Company shall make all Tax Returns available to any Member upon request.
6.5 TAX ELECTIONS. The Management Committee shall, in its sole
discretion, determine whether to make any elections available to the Company
pursuant to the rules of any Taxing Jurisdiction; provided, however, that the
Company shall elect the traditional method of making Code Section 704(c)
allocations described in Treas. Reg.
ss. 1.704-3(b)(1).
6.6 TAX MATTERS MEMBER. The Manager is designated hereunder as the "Tax
Matters Member" of the Company under the rules of all Taxing Jurisdictions and
shall serve in that capacity as long as KHC is the Manager of the Company. Upon
a change of Manager, the Management Committee shall designate another Member as
the Tax Matters Member.
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6.7 BANK ACCOUNTS. The Management Committee shall cause all funds of
the Company to be deposited in a bank, money market or similar account(s) in the
name of the Company or to purchase U.S. Government instruments as a temporary
investment pending the Company's use or distribution of such funds. Withdrawals
therefrom shall be made only by persons authorized to do so by the Management
Committee.
SECTION 7
MANAGEMENT AND CONTROL
7.1 MANAGEMENT. The Company shall initially have one (1) Manager,
which shall be KHC; provided, however, that the Members may unanimously agree to
increase the number of Managers, designate additional Managers or remove an
existing Manager. In addition, the Company shall initially have a five (5)
person Management Committee; JCN shall appoint two (2) of the committee members
and KHC shall appoint three (3) of the committee members. Upon the effective
date of receipt by JCN of the First Additional Interest the then committee
members of the Management Committee shall resign and new committee members shall
be appointed: JCN and KHC shall each appoint two (2) of the committee members.
The four committee members so appointed shall then, by majority vote, select the
fifth member. In the event that a dead-lock occurs, the fifth member of the
Management Committee shall be chosen by an arbitrator, who shall be selected by
the four appointed Management Committee members. Upon the effective date of
receipt by JCN of the Second Additional Interest, the then current committee
members of the Management Committee shall resign and new committee members shall
be appointed: JCN shall appoint three (3) of the committee members and KHC shall
appoint two (2) of the committee members. The members of the Management
Committee appointed by JCN shall hereinafter be referred to as "JCN Appointees"
and the members appointed by KHC shall hereinafter be referred to as "KHC"
Appointees."
7.2 GENERAL POWERS OF MANAGER(S), MANAGEMENT COMMITTEE AND MEMBERS.
7.2.1 POWERS OF MANAGER. Except as otherwise provided herein,
the right and authority to manage, direct, control and conduct the day-to-day
business and affairs on behalf of the Company shall be vested exclusively in the
Manager(s). Any decision or act of the Manager(s) within the scope of its power
and authority granted hereunder shall control and shall bind the Company. The
Company may, at the discretion of the Manager, have additional officers,
including, without limitation, one or more Vice-Managers, a Secretary, and one
or more Treasurers. These officers need not be selected from among the Members.
One person may hold two or more offices. When the incumbent of an office is
determined by the incumbent or by the Manager to be unable to perform the duties
thereof, or when there is no incumbent, the duties of such office shall be
performed by the person specified by the Manager.
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7.2.2 POWERS OF MANAGEMENT COMMITTEE. All Major Decisions, as
set forth below, shall be made by the Management Committee and shall be reduced
to writing. Any decision or act of the Management Committee within the scope of
its power and authority granted hereunder shall control and shall bind the
Company. The majority vote of the Management Committee shall be the act of the
Management Committee. The "Major Decisions" are as follows:
7.2.2.1 With the exception of a Permitted Acquisition,
the purchase or other acquisition or the sale or other disposition of,
or the creation of any lien or encumbrance upon, any personal property
with a cost or market value, whichever is greater (or aggregate cost
or market value in the case of related items or transactions), in
excess of $100,000 in any given year;
7.2.2.2 The creation of any single obligation or
commitment of the Company (or the aggregate cost or market value in the
case of related items or transactions) in excess of $100,000;
7.2.2.3 The assignment, transfer, pledge, settlement,
compromise, release or discharge of any claim held by or debt due the
Company, other than in the ordinary course of business; and
7.2.2.4 The replacement of the Manager, provided that
the Management Committee shall have this authority only after January
1, 2000.
The Members may, by unanimous agreement, adjust the dollar limitations, if any,
placed on a Major Decision.
7.2.3 POWERS OF MEMBERS. No Member, except in its capacity as
Manager or as authorized by the Management Committee, shall have any right or
authority to enter into agreements, execute contracts or other instruments,
incur obligations or otherwise bind or act for, in the name and on behalf of the
Company in any manner. Notwithstanding the foregoing, the following actions and
transactions shall require the unanimous agreement of Members:
7.2.3.1 An amendment to this Operating Agreement or the
Articles of Organization of the Company;
7.2.3.2 Any merger or consolidation by the Company
with another entity;
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7.2.3.3 A change in the status of the Company from
one in which management is vested in the Managers to one in which
management is vested in the Members, or vice versa;
7.2.3.4 Any transaction, agreement or action on
behalf of the Company that contravenes this Operating Agreement;
7.2.3.5 Any issuance of additional Interests that
reduces the Percentage Interest held by any Member, except as provided
in Section 3.4;
7.2.3.6 Any borrowing (including without limitation
an installment obligation incurred in connection with a property
purchase or a capital lease) in excess of $50,000; and
7.2.3.7 A change in the compensation formula
applicable to Chuck Hunter, John DeHardt, Ken Nicolay, Bo Conrad, Dan
Jensen or Greg Swetnam (the "Key Individuals").
7.3 RIGHTS CONCERNING CALL RIGHTS. KHC shall at all times have the
exclusive authority to cause the Company to exercise all or a portion of a Call
Right; provided that KHC may take any such action only after the first to occur
of a Major Capital Event or June 1, 1998. If, upon exercise of a Call Right by
the Company, the "Shares Subject to Exercise" (as defined in the Call Right) are
not delivered to the Company within a reasonable period of time after exercise,
then KHC shall have the option to do any of the following:
(i) cause the Company to accept substitute securities that
may be offered by JCN;
(ii) cause the Company to terminate, with KHC receiving back
all of the assets which it has contributed, plus a restoration of any
and all distributions made to JCN out of Cash From M&L Operations and
from any disposition of the Company Property, plus a fee determined
pursuant to Section 10.3.2; or
(iii) cause JCN to pay to the Company cash in an amount equal
to the Fair Market Value of the Shares Subject to Exercise.
7.4 RIGHTS CONCERNING JCN STOCK. KHC shall have the exclusive authority
to cause the Company to distribute to the Members, in proportion to their
respective Percentage Interests, all or a part of any JCN Stock or securities
acquired by the Company pursuant to a Call Right or to cause the Company to
distribute to the Members the unexercised portion of any Call Right on the
following occasions:
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7.4.1 Upon a Major Capital Event;
7.4.2 At any time after the termination of the Global
Management Agreement in accordance with the provisions thereof; or
7.4.3 At any time after January 1, 2000.
7.5 VOTING RIGHTS OF KHC APPOINTEES AND JCN APPOINTEES. All JCN Stock
held by the Company shall be voted in the following manner:
7.5.1 The KHC Appointees shall have the right to vote that
portion of JCN Stock that is in proportion to KHC's Percentage Interest at the
time of such vote; and
7.5.2 The JCN Appointees shall have the right to vote that
portion of JCN Stock that is in proportion to JCN's Percentage Interest at the
time of such vote.
7.6 RIGHTS CONCERNING GLOBAL MANAGEMENT AGREEMENT. All decisions
relating to the Global Management Agreement and any renewal or extension thereof
shall be made by the KHC Appointees, and the Manager shall implement all
decisions made by KHC with respect to the exercise of Company rights or remedies
under the Global Management Agreement and any renewal or extension thereof
(including, without limitation, the right to terminate the Global Management
Agreement in the circumstances described in Sections 10.1.5 and 10.1.6 hereof).
7.7 CERTAIN MATTERS REQUIRING KHC APPROVAL. Notwithstanding anything to
the contrary herein, unless the prior consent of KHC is obtained, no sale or
other disposition of more than 10% (by Fair Market Value) of the M&L Assets
shall be made (in a single transaction or a planned series of transactions)
prior to the latest to occur of (a) January 1,2002 or (b) the date JCN receives
the Second Additional Interest.
7.8 LIABILITY OF MANAGERS. Except in the case where it is guilty of
fraud, gross negligence, willful misconduct or reckless disregard of duty, no
Manager or Management Committee Member shall be liable to the Company or any
Member or other Manager or Management Committee Member for any loss, damage,
liability or expense suffered by the Company or any Member or other Manager or
Management Committee Member on account of any action taken or omitted to be
taken by it as a Manager or Management Committee Member.
7.9 LIABILITY OF MEMBERS. Pursuant to the Act, the Articles of
Organization and this Operating Agreement, no Member shall be liable for the
liabilities of the Company. The failure of the Company to observe any
formalities or requirements relating
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to the exercise of its powers or management of its business or affairs under
this Operating Agreement or the Act shall not be grounds for imposing personal
liability on the Members, Managers or Management Committee Members for
liabilities of the Company.
7.10 INDEMNIFICATION.
7.10.1 Each Member shall indemnify and hold the Company, the
other Members and the Managers harmless from and against any loss or damage
incurred by it or them as a result of any agreement, contract, instrument,
obligation or act legally binding the Company that was incurred or performed by
such Member outside the scope of the authority granted to such Member pursuant
to this Operating Agreement.
7.10.2 Each Manager shall be indemnified by the Company
against any liability, judgment, fine, amount paid in settlement, cost and
expense (including reasonable attorneys' fees) asserted or threatened against
and incurred by such Manager, in its capacity or arising out of his status as a
Manager, if such Manager acted in good faith and in a manner it reasonably
believed to be in the best interests of the Company.
7.11 COMPENSATION. Except as otherwise provided in this Section 6 or as
provided in a separate agreement to which the Company is a party, no Manager or
Member shall be entitled to compensation for services rendered to the Company,
provided, however, that the Company shall reimburse the Manager for reasonable
out-of-pocket expenses properly incurred on behalf of the Company.
7.12 OTHER BUSINESS VENTURES; CONTRACTS WITH AFFILIATES.
7.12.1 Any Member may engage in or possess an interest in
other business ventures of every nature and description, independently or with
others. Neither the Company nor the Members shall have any right by virtue of
this Operating Agreement in or to such other business ventures or the income or
profits derived therefrom. Neither the Members nor the Managers shall be
required to devote all of their time or business efforts to the affairs of the
Company, unless otherwise required to do so by a separate agreement to which the
Company is a party, but shall devote so much of their time and attention as is
reasonably necessary and advisable to manage the affairs of the Company to the
best advantage of the Company.
7.12.2 The Company may enter into agreements with one or more
Members or affiliates of a Member to provide services to the Company, provided,
however, that any such service shall be at a rate at least as favorable to the
Company as those available from unaffiliated parties that are qualified to
provide such services on substantially the same terms. The validity of any
transaction, agreement or payment involving the Company and any Member or
affiliate otherwise permitted by the terms of
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this Operating Agreement shall not be affected by reason of the relationship
between such person and the Company or any of its Members and the Members shall
have the right to enforce such agreements and seek all legal or equitable
remedies on behalf of the Company. Notwithstanding any other provision of this
Agreement to the contrary, the Members do hereby authorize and approve the
execution and performance by the Company of the employment agreements and
independent contractor agreements with the Key Individuals of approximately even
date herewith.
7.13 RIGHT OF SET-OFF. The Management Committee shall have the right to
set off any Company obligation to make payments or distributions to any Member
against any obligation that such Member may have to the Company and the Manager
will implement any set-off so directed by the Management Committee.
SECTION 8
NOI
8.1 NOI PERFORMANCE. For purposes of calculating payments due under
Section 8.2, the Company shall track the NOI from JCN Properties for each
calendar year (the "Actual NOI" for such year) subsequent to 1997 and prior to a
Terminating Event (as defined in Section 8.3) to determine the extent to which
it differs from the sum of the adjusted NOI projected for the year ending
December 31, 1998 as set forth on Schedule 8.1 (which JCN and KHC agree is
Twenty Million Nine Hundred Twenty-Six Thousand Seven Hundred Eighty-Nine
Dollars [$20,926,789]) (subject to adjustment as set forth in Schedule 8.1) plus
$275,000 (the "Baseline NOI"); provided, however, that if JCN sells or there
shall occur an event (including a major fire, explosion or other catastrophic
event, hereafter an "Event") precluding the rental of any one or more of the JCN
Properties that were included in projecting the adjusted NOI for the year ending
December 31, 1998, the Baseline NOI shall be reduced for the year of such sale
or Event and for any future years by an amount equal to the Baseline NOI
multiplied by a fraction, the numerator of which is the adjusted 1998 NOI
projections for the property or properties sold or with respect to which there
shall have occurred an Event, as reflected on Schedule 8.1, and the denominator
of which is $20,926,789 (subject to adjustment as set forth in Schedule 8.1),
and provided further that for the year of any such sale or Event, the reduction
amount for a property sold shall be multiplied by a second fraction, the
numerator of which is the number of days in the year remaining after such sale
or Event and the denominator of which is 365.
8.2 PERFORMANCE PAYMENTS. At the end of each calendar year prior to a
Terminating Event, the Actual NOI shall be compared to the Baseline NOI (as the
same may have been reduced as described in Section 8.1). Any excess of the
Baseline NOI over
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Actual NOI for a year shall be referred to as an "NOI Deficiency" and any excess
of the Actual NOI for a year over Baseline NOI shall be referred to as an "NOI
Surplus."
8.2.1 Any NOI Surplus for a year shall be addressed in
descending order of priority as follows: (i) first, the NOI Surplus shall be
applied to restore any amount "borrowed" from the JCN Memorandum Account as
described in Section 8.2.2(ii); (ii) second, any amount remaining after clause
(i) ("Available Surplus") shall be applied to cause the refund of any Deficiency
Payables pursuant to Section 8.2.3; and (iii) the remainder, shall be applied as
a credit to the NOI Memorandum Account.
8.2.2 Any NOI Deficiency for a year shall be addressed in
descending order or priority, as follows: (i) first, the NOI Deficiency shall be
reduced (but not below zero) by the positive balance, if any, in the NOI
Memorandum Account; (ii) second, any remaining NOI Deficiency shall be reduced
(but not below zero) through "borrowing" from the negative balance, if any, of
the JCN Memorandum Account (which borrowing shall be treated as a credit to the
JCN Memorandum Account); and (iii) thereafter, any remaining NOI Deficiency
shall be treated as a "Deficiency Payable."
8.2.3 If for any calendar year there is a Deficiency Payable,
the Company shall immediately pay to JCN the amount of such Deficiency Payable
and such amount shall not be treated as a distribution (and shall not be debited
against JCN's Capital Account), but shall be treated as a Company loss or
deduction which shall be allocated to, and debited against the Capital Account
of, KHC. If in any subsequent calendar year there is Available Surplus, JCN
shall immediately repay to the Company the amount of such Available Surplus (not
to exceed, in the aggregate, payments previously made to JCN of Deficiency
Payables), which repayment shall not be treated as a capital contribution (and
shall not be credited to JCN's Capital Account), but shall be treated as Company
income which shall be allocated to, and credited to the Capital Account of, KHC.
8.3 TERMINATION OF PERFORMANCE PAYMENTS. The Company's obligation to
make payments under this Section 8 relating to Actual NOI performance and any
other adjustments pursuant to this Section 8.3 shall terminate upon the earliest
to occur of (i) December 31, 2000, (ii) the date the Global Management Agreement
is terminated in accordance with the provisions thereof, (iii) the date of JCN's
material breach of the Global Management Agreement, or (iv) the date the Manager
is removed over KHC's objection (each, a "Terminating Event"), provided that for
the purposes of calculating the NOI Deficiency or NOI Surplus and making
corresponding payments and adjustments in the year that a Terminating Event
occurs, such amounts shall be calculated on a pro rata basis based on the date
of the Terminating Event.
SECTION 9
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TRANSFERS OF INTERESTS AND WITHDRAWAL OF MEMBERS
9.1 TRANSFER OF MEMBER'S RIGHTS WITHOUT CONSENT. No Interest may be
Transferred in any manner voluntarily or involuntarily without prior written
consent of all of the other Members. In the event of a Transfer without consent
in violation of this Operating Agreement, the Transferee shall not become a
Member hereunder, nor shall the Interest involved thereafter be entitled to be
voted unless and until the Transferee agrees to be bound by the provisions of
the Articles of Organization and this Operating Agreement and all of the
remaining Members consent to the Transfer and admission of the Transferee as a
Member. Unless such consent is given, the Transferee shall have no right to
participate in the management of the business and affairs of the Company or
become a Member. In such cases, the Transferee shall be entitled to receive only
the share of profits, losses, distributions or other compensation by way of
income and the return of contributions to which that transferor otherwise would
be entitled.
No Interest shall be Transferred by a Member:
9.1.1 Without an opinion of counsel satisfactory to all of the
Members that such Transfer, alone or when combined with other transactions,
would not result in a termination of the Company within the meaning of the rules
of any Taxing Jurisdiction or impair the classification of the Company as a
partnership under the rules of any Taxing Jurisdiction;
9.1.2 Without an opinion of counsel satisfactory to the
Management Committee that such Transfer is subject to an effective registration
under, or exempt from the registration requirements of, the applicable state and
federal securities laws; and
9.1.3 Unless and until the Company receives from the
Transferee such information and agreements that the Management Committee may
reasonably require, including but not limited to, such Transferee's agreement to
accept such Interest pursuant to this Agreement, tax identification numbers and
any agreement that may be required by any taxing jurisdiction.
9.2 INSOLVENCY OF A MEMBER. If a Member shall at any time commit or
suffer an Act of Insolvency, the Company shall have the right (but not the
obligation), for thirty (30) days from receipt of written notice of such Act of
Insolvency, to purchase some or all of the Interest of such Member for the
price, in the manner, and on the terms and conditions set forth in Section 9.6.
If the Company does not purchase such Interest, the remaining Members shall have
the concurrent right (but not the obligation) for thirty (30) days, commencing
on the earlier of (i) the expiration of the Company's 30-day period to purchase
such Interest, or (ii) receipt of notice from the Company of its decision not to
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purchase all of the remainder of such Interest, to purchase such Interest for
the price, in the manner, and on the terms and conditions set forth in Section
9.6.
9.3 DISSOLUTION OF A MEMBER. In the event of a filing of voluntary
dissolution of a Member or the entry of a court decree of dissolution of a
Member, the Company shall have the right (but not the obligation), for thirty
(30) days from receipt of notice of filing or entry of decree, to purchase some
or all, but not less than all, of the Interest of the Member whose condition or
actions gave rise to such court decree, for the price, in the manner, and on the
terms and conditions set forth in Section 9.6. If the Company does not purchase
such Interest, the remaining Members shall have the concurrent right (but not
the obligation) for thirty (30) days, commencing on the earlier of (i) the
expiration of the Company's 30-day period to purchase such Interest, or OD
receipt of notice from the Company of its decision not to purchase such
Interest, to purchase all or the remainder of such Interest for the price, in
the manner, and on the terms and conditions set forth in Section 9.6.
9.4 SALE OF INTEREST TO COMPANY OR OTHER MEMBERS. In the event that a
Member wishes to sell all or any portion of its Interest and the requisite
consent under Section 9.1 has been obtained, the Company shall have the right
(but not the obligation) for sixty (60) days from receipt of notice from such
Member (the "Selling Member") of its desire to sell, to deliver written notice
of its desire to purchase all, or any portion of the Interest offered by the
Selling Member under the terms and conditions set forth in Section 9.6. If the
Company does not purchase the Selling Member's Interest, the remaining Members
shall then have the concurrent right (but not the obligation) for thirty (30)
days, commencing on the receipt of written notice from the Company of (i) the
expiration of the Company's 60-day period to purchase such interest or (ii) the
Company's decision not to purchase such Interest, whichever occurs first, to
deliver written notice to the Company of its desire to purchase all or any part
of such Interest under the terms and conditions set forth in Section 9.6 ( for
purposes of this Section 9.4, all Members delivering such notice are referred to
as "Purchasing Members"). Each Purchasing Member shall have the right to
purchase an allocable portion of the Selling Member's Interest based on the
ratio that each Purchasing Member's Percentage Interest bears to the total
Percentage Interest of the Purchasing Members.
9.5 OFFERS TO PURCHASE INTERESTS BY OUTSIDERS. In the event that a
Member receives an offer (the "Outside Offer") from any person or entity other
than the Company or another Member (the "Outsider") to purchase all or any
portion of such Member's Interest, the consent requirement of the remaining
Members in Section 9.1, the rights of the Company and the other Members in
Section 9.4 and the procedures governing the disposition of such Interest under
Section 9.6 shall apply and must be satisfied or obtained prior to any sale of
an Interest or any portion thereof to an Outsider, even if the offer price
34
<PAGE> 35
or other terms of the Outside Offer are more favorable to the Selling Member
than the price or other terms pursuant to Section 9.4 or Section 9.6.
9.6 TERMS AND CONDITIONS. The purchase price for any Interest to be
purchased under this Section 9 shall be the amount of the positive balance, if
any, of the Selling Member's Capital Account following performance of the Deemed
Sale Exercise set forth in Section 3.6, as of the Valuation Date. "Valuation
Date" shall mean the date of the Act of Insolvency, court decree of dissolution,
or notice of desire to sell, as the case may be, giving rise to the purchase of
the Interest of the Selling Member pursuant to the provisions of this Section 9.
The Selling Member shall then set the date on which the closing of the purchase
shall occur (the "Closing Date"), which date shall not be less than twenty (20)
days nor more than sixty (60) days from the date the Deemed Sale Exercise is
completed. Those Purchasers that have not yet declined to exercise their rights
under Section 9.4 shall be informed of the results of the Deemed Sale Exercise.
At the closing, the Selling Member shall execute and deliver to the Purchaser
such deeds, bills of sale, assignments and other instruments as shall reasonably
be requested by the Purchaser to effect the transfer, as of the Valuation Date,
of all of the Selling Member's right, title and interest in the Company and its
assets.
9.7 INDEMNIFICATION OF SELLING MEMBER. Upon the purchase of the Selling
Member's Interest in accordance with Section 9.6, Purchaser shall agree to
indemnify and hold the Selling Member harmless from and against any and all
loss, damage, liability or expense that the Selling Member may incur under any
liability, debt or obligation of the Company that was included (but only to the
extent of such inclusion) by the Appraisers as a Company liability, debt or
obligation in determining the purchase price. Should any liability, debt or
obligation arise that was not fully included by the Appraisers in determining
the purchase price, the Selling Member shall remit to the Purchaser, at the
request of the Purchaser within ninety (90) days from the Closing Date, an
amount equal to the amount of such liability, debt or obligation (but only to
the extent it was not so included in the Appraisers' determination) multiplied
by the Selling Member's Percentage Interest so purchased.
9.8 BUY AND SALE OPTION UPON REPLACEMENT OF MANAGER.
9.8.1 Upon a replacement of the Manager over the objection of
KHC Appointees, KHC may make a buy-sell offer (the "Buy-Sell Offer"), in writing
within sixty (60) days after the replacement of the Manager, to JCN stating a
value of all of the Company Property [differentiating Non-M&L Assets from all
other Company Property] (the "Company Value") based upon which KHC is willing
either to (i) purchase JCN's Interest in the Company or (ii) sell its Interest
in the Company to JCN, in either case at a price based on the Company Value and
the other terms being the same for both the purchase and the sale.
35
<PAGE> 36
9.8.2 Within thirty (30) days after receipt by JCN of the
Buy-Sell Offer, JCN shall send to KHC a written notice stating whether JCN
elects (A) to purchase the KHC Interest from KHC at a price based upon the
Company Value, or (B) to sell to the JCN Interest to KHC at a price based upon
the Company Value. Such notification shall, when taken in conjunction with the
Buy-Sell Offer, be deemed to constitute a valid, legally binding and enforceable
agreement for the sale and purchase of the Interest covered thereby.
9.8.3 If JCN shall fail to notify KHC whether it elects to buy
or to sell within the time period specified above, such failure shall be deemed
to be an election to sell all of the JCN Interest to KHC at a price based upon
the Company Value and based upon other terms specified in the Buy-Sell Offer.
KHC shall be entitled to withdraw the Buy-Sell Offer by giving JCN written
notice of the withdrawal prior to the earlier of (A) the date JCN gives KHC
written notice of its election to purchase or to sell pursuant to this provision
("JCN's Election"), or (B) the date on which JCN shall be conclusively deemed to
have elected to sell its Interest to KHC.
9.8.4 The purchase price to be paid by the purchasing Member
(the "Purchaser") to the selling Member (the "Seller") shall be equal to the
amount which the Seller would have received had all of the Company's assets been
sold for a price equal to the Company Value and the Company had then immediately
liquidated pursuant to Section 10.3 (the "Purchase Price").
9.8.5 The Purchaser shall have the option of:
9.8.5.1 Paying cash for the full amount of the
Purchase Price within sixty (60) days of the earlier to occur of (1)
the date of JCN's Election or (2) the date on which JCN shall be
conclusively deemed to have elected to sell its Interest to KHC, or
9.8.5.2 Paying one-third of the Purchase Price in
cash, within sixty (60) days of the earlier to occur of (1) the date of
JCN's Election or (2) the date on which JCN shall be conclusively
deemed to have elected to sell its Interest to KHC, and issuing a
promissory note (the "Note") to the other Member for the remaining
two-thirds of the Purchase Price (the "Balance"). The Balance, with
interest accruing at the rate of ten percent (10%) per annum on the
unpaid principal thereof, shall be payable on the six-month anniversary
of the date of the Note. Payment of the Note shall be secured by a
security interest in assets which have a fair market value, net of any
debt to which such assets may be subject, equal to 100% of the Balance;
provided, however, that a first priority security interest in all
Interests in the Company shall be deemed to satisfy this requirement.
36
<PAGE> 37
9.9 WITHDRAWAL OF MEMBER. No Member shall withdraw from the Company
without the prior written consents of all of the other Members, except as
provided in Section 9.8. A withdrawal by a Member without such prior written
consent shall be in violation of this Operating Agreement and the Company shall
be entitled to any and all remedies provided in the Act or otherwise by law upon
such withdrawal in violation of this Operating Agreement.
9.10 ADJUSTMENT OF PERCENTAGE INTERESTS. Upon the Transfer of a
Member's Interest or a withdrawal by a Member, the Percentage Interests of each
Member shall be adjusted to take into account such Transfer or withdrawal.
SECTION 10
DISSOLUTION AND TERMINATION
10.1 EVENTS CAUSING DISSOLUTION. The Company shall be dissolved upon
the first to occur of the following events:
10.1.1 The expiration of the term of the Company as set forth
in this Operating Agreement and the Articles of Organization;
10.1.2 Any disposition by the Company of all or substantially
all of its interests in Company Property, unless the Company as part of the
consideration for any such disposition acquires a promissory note or other
evidence of indebtedness, in which case the Company shall be dissolved following
the payment or disposition of such note or other evidence of indebtedness;
10.1.3 The unanimous written agreement of the Members to
dissolve;
10.1.4 The entry of a decree of dissolution of the Company
pursuant to the Act;
10.1.5 At the option of KHC, a Change in Control of JCN and
the subsequent termination of the Global Management Agreement pursuant to a
right of the Company to do so set forth in the Global Management Agreement;
10.1.6 At the option of KHC, an aggregate decrease of
thirty-five percent (35%) or more in the square footage of JCN Properties, as
measured from December 31, 1997 to any subsequent date;
10.1.7 At the option of KHC, as described in Section 7.3(ii); or
37
<PAGE> 38
10.1.8 Except as otherwise agreed upon in this Operating Agreement
or the Articles of Organization, any other event causing a dissolution of the
Company under the provisions of the Act, unless there is at least one remaining
Member and the business of the Company is continued with the consent of a
Majority in Interest within ninety (90) days of receipt of written notice of
such event causing dissolution of the Company.
10.2 EFFECT OF DISSOLUTION. Except as otherwise provided herein, upon
the dissolution of the Company, the Management Committee shall proceed to wind
up, liquidate and terminate the business and affairs of the Company. In
connection with such winding up, the Management Committee shall satisfy and
compromise the liabilities of the Company (which may include the establishment
of reasonable cash reserves for any contingent or unforeseen liabilities of the
Company), perform a Deemed Sale Exercise and adjust the Capital Accounts of the
Members accordingly, make distributions in cash or in kind to the Members, and
do any and all acts and things authorized by, and in accordance with, the Act
and other applicable laws for the purpose of winding up.
10.3 APPLICATION OF PROCEEDS. Upon dissolution of the Company, the
Company shall perform a Deemed Sale Exercise and adjust the Capital Accounts of
the Members accordingly. After the Deemed Sale Exercise has been performed, the
assets of the Company shall be distributed to the extent available. The assets
of the Company shall be distributed in the following order of priority, except
to the extent inconsistent with Section 7.3(ii):
10.3.1 First, to the payment of debts and liabilities of the
Company (including those to the Members) and the expenses of liquidation.
10.3.2 Next, but only if the Company is dissolved as a result
of an event described in Section 10.1.5, Section 10.1.6 or Section 10.1.7 above,
to KHC, cash in the amount set forth opposite the appropriate year of
dissolution below:
38
<PAGE> 39
<TABLE>
<CAPTION>
YEAR OF PAYMENT
DISSOLUTION
<S> <C>
1998 $400,000
--------
(PI)
1999 $300,000
--------
(PI)
2000 $200,000
--------
(PI)
2001 $100,000
--------
(PI)
2002 and $0
beyond
</TABLE>
where, "PI" equals the Percentage Interest of JCN at the time of the occurrence
of the event described in Section 10.1.5, Section 10.1.6 or Section 10.1.7
above. The amount paid to KHC pursuant to this Section 10.3.2 shall be treated
as an expense of the Company and such payment shall not be debited against
KHC's Capital Account (except with regard to the extent of KHC's allocable
share of such expense determined pursuant to Section 5).
10.3.3 Next, to the establishment of reserves for any
contingent liabilities or obligations of the Company as deemed necessary by the
Management Committee in its sole discretion.
10.3.4 Next, to the Members, in proportion to their respective
Percentage Interests, an amount equal to the Fair Market Value of the Non-M&L
Assets.
10.3.5 Next, to the Members, pro rata and in pari passu, in
the amount of the excess of each Member's Unreturned Capital over the Losses
allocated to such Member pursuant to Section 5.4 which have not been offset by
Profits allocated to such Member pursuant to Section 5.3(iii).
10.3.6 Next, to JCN to the extent of the positive balance of
the JCN Memorandum Account.
10.3.7 Next, to KHC to the extent of the positive balance of
the KHC Memorandum Account.
10.3.8 Next, to the Members in accordance with and to the
extent of their positive Capital Account balances, but if insufficient, then pro
rata in accordance with the Capital Account balances of the Members.
39
<PAGE> 40
10.3.9 Next, to the Members in proportion to their respective
Percentage Interests.
Such assets of the Company shall be applied and distributed so as, to the extent
possible, return to KHC, in kind, assets contributed by it to the Company and to
JCN, in kind, JCN Stock or Call Rights. The value of such assets shall be
determined in a manner consistent with the manner used to determine the value of
such assets when performing a Deemed Sale Exercise.
10.4 NO NEGATIVE CAPITAL ACCOUNT RESTORATION. In no event shall any
Member be required to contribute capital to restore a negative balance in such
Member's Capital Account upon the liquidation of the Company or such Member's
Interest, or at any other time.
SECTION 11
MISCELLANEOUS
11.1 TITLE TO ASSETS. Title to Company Property shall be held in the
name of the Company. No Member shall individually have any ownership interest or
rights in Company Property, except indirectly by virtue of such Member's
ownership of an Interest. No Member shall have any right to seek or obtain a
partition of Company Property, nor shall any Member have the right to any
Company Property upon the liquidation of or any distribution from the Company.
11.2 NATURE OF INTEREST IN THE COMPANY. A Member's Interest shall be
personal property for all purposes.
11.3 CREDITORS. None of the provisions of this Operating Agreement
shall be for the benefit of or be enforceable by any creditors of the Company.
11.4 ORGANIZATIONAL EXPENSES. Each Member shall pay its own legal and
other fees and expenses incurred in negotiating and documenting this Agreement
and related agreements and in consummating the transactions required to organize
the Company. The Company shall pay all filing and similar fees due upon the
creation and formation of the Company.
11.5 NOTICES AND COPIES FILED DOCUMENTS. Any notice, demand, request,
call, offer or other communication required or permitted to be given by this
Operating Agreement shall be sufficient if in writing and if hand delivered or
sent by mail to the address of the Member as it appears on the records of the
Company. All mailed notices
40
<PAGE> 41
shall be deemed to be given when deposited, in the United States mail, postage
prepaid. Upon the return by the Secretary of State of any articles, notices,
documents or judicial decree of amendment marked "Filed", the person or persons
executing such documents shall promptly deliver or mail a copy thereof to each
Member.
11.6 WAIVER OF DEFAULT. No consent or waiver, express or implied, by
the Company or a Member with respect to any breach or default by another Member
hereunder shall be deemed or construed to be a consent or waiver with respect to
any other breach or default by such Member of the same provision or any other
provision of this Operating Agreement. Failure on the part of the Company or a
Member to complain of any act or failure to act of another Member or to declare
such other Member in default shall not be deemed or constitute a waiver by the
Company or the Member of any rights hereunder.
11.7 WAIVER OF JURY TRIAL. THE PARTIES HERETO WAIVE TRIAL BY
JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY
ANY PARTY OR PARTIES AGAINST ANY OTHER PARTY OR PARTIES ON ANY
MATTER ARISING OUT OF OR IN ANY WAY CONNECTED WITH THIS AGREEMENT OR THE
RELATIONSHIP OF THE PARTIES CREATED HEREUNDER.
11.8 ENTIRE AGREEMENT. This Operating Agreement contains the entire
agreement between the Members and supersedes all prior negotiations among the
parties hereto with respect to the subject matter hereof.
11.9 SEVERABILITY. In the event any provision of this Operating
Agreement is held to be illegal, invalid or unenforceable to any extent, the
legality, validity and enforceability of the remainder of this Operating
Agreement shall not be affected thereby and shall remain in full force and
effect and be enforced to the greatest extent permitted by law.
11.10 BINDING AGREEMENT. Subject to the restrictions on the disposition
of Interests herein contained, the provisions of this Operating Agreement shall
be binding upon, and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors and permitted assigns.
11.11 HEADINGS. The headings of the Sections of this Operating
Agreement are for convenience only and shall not be considered in construing or
interpreting any of the terms or provisions hereof.
11.12 COUNTERPARTS. This Operating Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original and all
of which shall
41
<PAGE> 42
constitute one Operating Agreement that is binding upon all of
the parties hereto, notwithstanding that all parties are not signatories to the
same counterpart.
11.13 AMENDMENT. This Operating Agreement may be amended or modified
from time to time only by a written instrument adopted and executed by all of
the Members. No Member shall have any vested rights in the Operating Agreement
that may not be modified through an amendment to the Operating Agreement.
11.14 GOVERNING LAW: CONSENT TO JURISDICTION: WAIVER. This Operating
Agreement shall be governed by and construed in accordance with the laws of the
State of Missouri, without regard to conflict of laws principles. Any suit,
action or proceeding arising out of or relating to this Operating Agreement can
be brought by the Company or the Members in the federal district court for
Missouri, or in the state district court for Jackson County, Missouri
(collectively, the "Courts"), as the Company or any Member may elect. By
executing and delivering this Operating Agreement, the Members and their
successors and assigns hereby irrevocably and unconditionally submit to the
non-exclusive personal jurisdiction of the Courts, and irrevocably and
unconditionally agree not to assert in any proceeding before the Courts or any
other court or tribunal, by way of motion, as a defense or otherwise, any claim
contesting or challenging the personal
jurisdiction of the Courts. In addition, the Members irrevocably waive, to the
fullest extent permitted by law, (i) any objection that they may now or
hereafter have to the laying of venue in the Courts for any suit, action or
proceeding arising out of or relating to this Operating Agreement or (ii) any
objection that such suit, action or proceeding has been brought in an
inconvenient forum.
11.15 HOLIDAYS, ETC. If any date or the last day of any time period
under this Operating Agreement shall fall on a Saturday, Sunday or holiday, such
date or last day shall be treated as falling on the next business day after such
Saturday, Sunday or holiday.
11.16 INTERPRETATION. Words of the masculine gender shall be deemed to
include the feminine and neuter genders, and vice versa, where applicable. Words
of the singular number shall be deemed to include the plural number, and vice
versa, where applicable.
11.17 PARTNERSHIP TAX TREATMENT. The Members intend that the Company
will be characterized as a partnership for federal and state income tax
treatment. Each Member agrees that it shall not take any action inconsistent
with such partnership tax treatment.
42
<PAGE> 43
IN WITNESS WHEREOF, the parties hereto have executed this Operating
Agreement as of the date first above written.
J. C. NICHOLS COMPANY
By: /s/ Barrett Brady
-------------------------
Name: Barrett Brady
-----------------------
Title: President
----------------------
KESSINGER/HUNTER & COMPANY, INC,
By: /s/ Charles H. Hunter
--------------------------
Name: Charles H. Hunter
------------------------
Title: President
----------------------
43
<PAGE> 44
SCHEDULE 1.15
EBITDA FORMULA
EBITDA shall be calculated in the following manner:
EBITDA shall be defined as revenues less operating expenses consistent with
Generally Accepted Accounting Principles as adjusted by adding back interest
expense, taxes, depreciation and amortization charges and;
There shall be further adjustments as follows:
Add back "extraordinary losses" - extraordinary losses for purposes of
this formula shall mean losses incurred as a result of uninsured
catastrophe or liability claims in excess of $100,000 in any applicable
year.
All revenue described in the Operating Agreement as "Work In Process"
at the end of any calendar year shall be considered to be operating
revenue in that calendar year.
It is understood by the parties that all organizational expenses incurred as
part of this contemplated transaction shall be borne by the party incurring
same. KHC will capitalize its respective organizational expenses and, therefore,
by definition they shall not impact EBITDA.
<PAGE> 45
SCHEDULE 1.41
DEFINITION OF N.O.I.
Net Operating Income shall be effective gross revenue less operating
expenses (including reimbursable and nonreimbursable expenses), consistent with
Generally Accepted Accounting Principles; provided, however, that in no event
shall lease commission expense (or amortization thereof) or tenant improvement
expenditures (or amortization or depreciation thereof) be a deduction in
computing Net Operating Income.
<PAGE> 46
SCHEDULE 3.1A
KHC'S INITIAL CONTRIBUTION
Initial Contribution of KHC:
KHC's Initial Contribution shall consist of the following assets:
All of KHC's fixed assets, tangible personal property, goodwill, work
force in place, other intangible business assets and management, leasing and
related contracts to which KHC is a party except the "Excluded Assets." The
"Excluded Assets" are (a) cash, (b) investments in Merin-Hunter-Codman, a
Florida corporation, and Kessinger- Hunter Canada, a Canadian corporation, (c)
note and accounts receivable, (d) existing life insurance policies and pre-paid
expenses and (e) investment in a building known as the "Lively Building" in
Chicago, Illinois.
Upon receipt of KHC's Initial Contribution, the Company shall assume
KHC's obligations under any and all contracts and other assets contributed to
the Company by KHC and any and all lease obligations and personnel obligations
(such as vacation, sick pay and other employee benefits); provided that the
Company shall not assume all liabilities directly associated with income
received by KHC prior to January 1, 1998.
KHC shall, at the time of its Initial Contribution, make or cause one
or more of its shareholders to make an interest free working capital loan to the
Company. Such loan shall be repaid, without interest, when the funds are no
longer needed by the Company, but prior to distributions to the Members.
<PAGE> 47
SCHEDULE 8.1
Consists of Pages 1, 2 & 3 Following:
PROVIDED THAT:
The parties agree that (i) a prior projection of the 1998 N.O.I. from
the JCN Properties totalled $20,985,000, which exceeds the total of the detailed
breakdown of projected individual building 1998 N.O.I. set forth on this
Schedule 8.1 by $58,211 and (ii) to the extent (if any) that JCN demonstrates to
KHC that all or part of such $58,211 difference in fact corresponds to projected
1998 N.O.I. (a "Disparity"), the projection of aggregate N.O.I. from the JCN
Properties set forth in Section 8.1 shall (in both places it occurs in Section
8.1) be increased accordingly and adjustments to the applicable individual
building N.O.I. projections set forth on this Schedule 8.1 made to reflect a
reconciliation of the Disparity.
<PAGE> 48
FIRST AMENDMENT TO OPERATING AGREEMENT
OF
KH-JCN, L.C.
THIS FIRST AMENDMENT TO OPERATING AGREEMENT (this "Amendment") is made
and entered into as of the 31st day of December, 1998, between J.C. NICHOLS
COMPANY ("JCN") and KESSINGER/HUNTER & COMPANY, INC.("KHC").
RECITALS
WHEREAS, JCN and KHC (the "Members") are all of the members of a
Missouri limited liability company styled "KH-JCN, L.C." (the "Company"),
operating pursuant to that certain "Operating Agreement of KH-JCN, L.C." dated
as of November 21, 1997 (the "Operating Agreement") and capitalized terms used
herein shall, unless the context otherwise requires, have the meaning assigned
such terms in the Operating Agreement;
WHEREAS, the Members have paid and/or incurred certain legal expenses
relating to their taxation and to negotiating and preparing the formation
documents of the Company (the "Company Organizational Expenses");
WHEREAS, KHC has paid and/or incurred certain legal expenses relating
to negotiating and preparing the Global Management Agreement from the Company's
perspective (the "Company Management Agreement Expenses");
WHEREAS, the Members have each paid and/or incurred certain legal
expenses relating to negotiating and documenting employee contracts and
independent contractor agreements between the Company and the "Key Individuals"
as such term is defined in Section 7.2.3.7. of the Operating Agreement (the
"Company Service Agreement Expenses"); and
WHEREAS, the Members desire to amend the Operating Agreement to provide
for the recognition of such payments on their own behalf and on behalf of the
Company for the above-mentioned tax counsel and for the above-mentioned Company
Organizational Expenses, Company Management Agreement Expenses and Company
Service Agreement Expenses (collectively, the "Initial Company Expenses") as
capital contributions and set forth certain
understandings with respect thereto.
NOW, THEREFORE, in consideration of mutual covenants and other good and
valuable consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereto hereby agree as follows:
1. ADDITION OF DEFINED TERMS. The Recitals to this Amendment set forth
above are hereby deemed incorporated in the Operating Agreement as a part
thereof, and the terms
<PAGE> 49
defined therein shall constitute additional defined terms for purposes of the
provisions of the Operating Agreement, including those amended by this
Amendment.
2. AMENDMENT OF SECTION 3. Section 3 of the Operating Agreement is hereby
amended by adding the following new provision after Section 3.8.
3.9 ORGANIZATIONAL EXPENSE CAPITAL CONTRIBUTIONS. Each Member
shall notify the Company of any Initial Company Expenses heretofore or
hereafter paid by such Member. Notwithstanding Section 11.4 hereof,
each such payment of an Initial Company Expense by a Member shall be
deemed to be a contribution to the capital of the Company by such
Member in the amount of such payment and shall be credited to the
Capital Account of such Member (but shall not be treated as a "Capital
Contribution" for purposes of computing Unreturned Capital).
Notwithstanding anything to the contrary in this Agreement, the amount
of any such Capital Contribution and the portion of the Capital Account
balance of each Member applicable to such Member's share of the
unamortized balance of such Initial Company Expenses contributions
shall not be taken into consideration for purposes of determining the
amount of any distribution from the Company, whether or not in
liquidation of the Company, it being understood that, upon the
termination of the Company or upon the cessation of the business of the
Company, each Member shall be entitled to a deduction equal to such
Member's share of the unamortized balance of such Initial Company
Expenses contributions as permitted under the Code and as determined
pursuant to Section 5.5(vi) hereof. It is intended that the Manager
shall cause the Company to amortize such portions of the Initial
Company Expenses as qualify as "organizational expenses" over the
shortest period permitted by Section 709 of the Code.
3. AMENDMENT OF SECTION 5.5. Section 5.5 of the Operating Agreement is
hereby amended by adding the following new provision after Section 5.5(v):
(vi) All deductions attributable to the amortization of the
Initial Company Expenses shall, for book and tax purposes, be allocated
entirely to the Member who paid such Initial Company Expenses (with
such Member's Capital Account accordingly being decreased by the amount
of such deductions allocated to it).
4. AMENDMENT OF SECTION 10.2. Section 10.2 of the Operating Agreement
is hereby amended by adding the following sentence at the end thereof:
Upon a dissolution and termination of the Company, and
notwithstanding anything to the contrary expressed or implied
in any other provision of this Agreement, neither JCN nor any
successor to the JCN Interest or any part thereof shall have
any rights in the name "Kessinger/Hunter & Company", such name
(and/or any name(s) similar thereto) shall not be considered
<PAGE> 50
Company Property (and no value shall be associated therewith
for purposes of determining liquidating distributions) and KHC
shall be permitted to thereafter use such name (and/or any
name(s) similar thereto) without restriction.
5. OPERATING AGREEMENT CONTINUES. The Operating Agreement, as amended
hereby, shall remain in full force and effect in accordance with its terms.
6. COOPERATION ON FUTURE DOCUMENTS AND MATTERS. The parties agree that
at any time, and from time to time, each will, on the request of any other
party, execute, deliver and file with the appropriate authorities such documents
and instruments and do such acts and things as such other party may reasonably
request in order to effectuate fully the purposes of this Amendment.
7. PARAGRAPH AND ARTICLE TITLES. The captions and titles of the various
paragraphs in this Amendment are for convenience and reference only and in no
way define, limit, or describe the scope or intent of this Amendment, nor in any
way affect this Amendment.
8. GOVERNING LAW. This Amendment and the rights of the parties
hereunder shall be governed by and construed in accordance with the laws of the
State of Missouri. This Amendment shall be construed on a parity as between the
parties.
9. SUCCESSORS AND ASSIGNS. Except as herein otherwise specifically
provided, this Amendment shall be binding upon and inure to the benefit of the
parties and their legal representatives, heirs, administrators, executors,
successors and permitted assigns, as applicable.
10. EXECUTION IN COUNTERPARTS. This Amendment may be executed in any
number of counterparts; and each such counterpart hereof shall be deemed to be
an original instrument; but all such counterparts together shall constitute but
one contract.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the date first above written.
J.C. NICHOLS COMPANY,
a Missouri corporation
By:/s/ Barrett Brady
-----------------------
Name: Barrett Brady
---------------------
Title: President
--------------------
(3)
<PAGE> 51
KESSINGER/HUNTER & COMPANY, INC.,
a Missouri corporation
By: /s/ Charles H. Hunter
---------------------------------
Name: Charles H. Hunter
------------------------------
Title: President
-----------------------------
(4)
<PAGE> 1
EXHIBIT 10.14
THIS CALL RIGHT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, AND MAY NOT BE ENCUMBERED, PLEDGED, HYPOTHECATED, SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THIS CALL RIGHT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY
SATISFACTORY IN FORM AND SUBSTANCE TO THE CORPORATION AND ITS COUNSEL TO THE
EFFECT THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SAID ACT.
J.C. NICHOLS COMPANY
CALL RIGHT
Date of Issuance: January 1, 1998 Right to Receive Seventy-Six
Thousand Five Hundred Thirty
(76,530) Shares of Common
Stock at a Price of $56.00 per
Share
For value received, J.C. NICHOLS COMPANY, a Missouri corporation (the
"Company"), hereby grants KESSINGER/HUNTER & COMPANY, L.C., a Missouri limited
liability company or its registered assigns (the "Registered Holder"), the
right, exercisable at the sole discretion of the Registered Holder, to receive
from the Company, subject to the terms and conditions set forth below, Shares
Subject to Exercise (as hereinafter defined).
This Call Right is subject to the following provisions:
1. Definitions. As used in this Call Right, the following terms have
the meanings set forth below:
"Appraiser" means, at the option of the Company, a nationally
recognized investment banking firm retained by the Company and reasonably
acceptable to the Registered Holder. The fees and expenses of the Appraiser
shall be borne by the Company.
"Appraised Value" means the per share value of the Company's
Common Stock, as if the Common Stock is immediately and freely transferable,
without restriction, in a Liquid Market on an Established Exchange, as
determined by the Appraiser.
"Caller" means the Person exercising all or part of the
exercise rights represented by this Call Right.
"Common Stock" means the Company's Common Stock, $.01 par value
per share.
<PAGE> 2
"Date of Issuance" means the date the Company initially issues
this Call Right, regardless of the number of times new certificates representing
the unexpired and unexercised rights formerly represented by this Call Right are
issued.
"Established Exchange" means the New York Stock Exchange,
American Stock Exchange, a similar established national stock exchange or the
NASDAQ Quotation System.
"Exercise Date" shall have the meaning given to that term in
Section 2.2.1.
"Exercised Shares" means that number of Shares Subject to
Exercise that are or could be issued to the Registered Holder upon the exercise
of all or a portion of the rights under this Call Right.
"Liquid Market" means a market on which there occurs a
sufficient volume of trades of Common Stock to permit the sale of then
outstanding Exercised Shares, within a twenty (20) business day period without
depressing the price of the Common Stock to any measurable extent. If the
parties fail to agree upon whether a Liquid Market exists, the Appraiser=s
opinion as to the existence of a Liquid Market shall be binding.
"Person" means an individual, partnership, corporation, trust,
joint venture, limited liability company, unincorporated organization or
government or any department or agency thereof.
"Shares Subject to Exercise" means seventy-six thousand, five
hundred thirty (76,530) fully paid and nonassessable shares of the Company's
authorized Common Stock as such shares may subsequently be adjusted in
accordance with Section 3, or such other type and amount of securities issuable
upon exercise of the Call Right as provided in Section 3.
2. Exercise of Call Right.
2.1 Exercise Period. The Registered Holder may exercise this Call
Right, in whole or in part (but not in increments of less than 1,000 shares,
unless the exercise is for all of the remaining Shares Subject to Exercise, and
not as to a fractional share of Shares Subject to Exercise) at any time and
from time to time after the Date of Issuance.
2.2 Exercise Procedure.
2.2.1 This Call Right will be deemed to have been exercised at
such time (the "Exercise Date") as the Company has received all of the
following items:
(a) A completed Exercise Agreement, as described
below, executed by the Caller;
-2-
<PAGE> 3
(b) This Call Right; and
(c) If this Call Right is not registered in the name of the
Caller, an Assignment in the form set forth in Schedule 2.2 hereto, evidencing
the assignment of this Call Right to the Caller.
2.2.2 Common Stock issuable upon the exercise of this Call Right
will be deemed to have been issued to the Caller on the Exercise Date (to the
extent of the exercise), and the Caller will be deemed for all purposes to have
become the record holder of the Shares Subject to Exercise (to the extent of the
exercise) on the Exercise Date.
2.2.3 The issuance of certificates for shares of Common Stock
upon exercise of this Call Right will be made without charge to the Registered
Holder or the Caller for any issuance tax in respect thereof or any other cost
incurred by the Company in connection with such exercise and the related
issuance of shares of Common Stock.
2.2.4 The Company will not close its books for the transfer of
this Call Right or of any share of Common Stock issued or issuable upon the
exercise of the Call Right in any manner which interferes with the timely
exercise of this Call Right.
2.3 Exercise Agreement. The Exercise Agreement will be substantially
in the form set forth in Schedule 2.3 hereto, except that if Common Stock is not
to be issued to the Registered Holder, the Exercise Agreement will also state
the name(s) of the Person(s) to whom certificates of the Common Stock are to be
issued. If the rights hereunder are not fully exercised, the Exercise Agreement
will also state the name of the Person to whom a new Call Right for the
unexercised portion of the rights hereunder is to be delivered.
2.4 Securities Act Compliance. As a condition of its delivery of the
certificates for the Common Stock, the Company may require the Registered Holder
(including the transferee of the Common Stock in whose name the Common Stock is
to be registered) to deliver to the Company, in writing, representations
regarding the Caller's sophistication, investment intent, acquisition for his
own account and such other matters as are reasonable and customary for
purchasers of securities in an unregistered private offering, provided, however,
that nothing shall prohibit Kessinger/Hunter & Company, L.C. from distributing
the Common Stock to its members, or prohibit the Registered Holder or the
transferee of such shares of Common Stock from (a) exercising the put right
granted pursuant to Section 6, (b) tendering the Common Stock in response to a
tender offer, or (c) disposing of Common Stock in connection with a merger,
consolidation or reorganization involving the Company. The Company may place
conspicuously upon each certificate representing the Common Stock a legend
substantially in the following form, the terms of which are agreed to by the
Registered Holder (including any transferee of either the Registered Holder or a
member of the Registered Holder):
-3-
<PAGE> 4
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED WITHOUT
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES ACT OF 1933 (THE
"ACT") AND THE BLUE SKY LAWS OF ANY JURISDICTION. THESE SECURITIES MAY
NOT BE ENCUMBERED, PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF, BENEFICIALLY OR ON THE RECORDS OF THE
CORPORATION, UNLESS THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE
BEEN REGISTERED OR QUALIFIED UNDER THE ACT AND APPLICABLE BLUE SKY LAWS
OR THERE HAS BEEN DELIVERED TO THE CORPORATION AN OPINION OF COUNSEL,
REASONABLY SATISFACTORY IN FORM AND SUBSTANCE TO THE CORPORATION AND
ITS COUNSEL, TO THE EFFECT THAT SUCH REGISTRATION AND QUALIFICATION ARE
NOT THEN REQUIRED UNDER THE ACT.
3. Adjustment of Number of Shares Subject to Exercise. In order to
prevent dilution of the rights granted under this Call Right, the number of
Shares Subject to Exercise will be subject to adjustment from time to time
pursuant to this Section 3.
3.1 Adjustments Upon Changes in Capitalization. The number of shares
of Common Stock covered by this Call Right shall be proportionately adjusted for
any increase or decrease in the number of issued shares of Common Stock
resulting from a stock split, reverse stock split, stock dividend, or any other
increase or decrease in the number of issued shares of Common Stock effected
without receipt of consideration by the Company the fair market value of which
is reasonably equivalent to the fair market value of the stock being issued;
provided, however, that conversion of any convertible securities and exercise of
any options issued in exchange for consideration received by the Company the
fair market value of which was reasonably equivalent to the fair market value of
the convertible securities or options issued, shall not be deemed to have been
Aeffected without receipt of consideration by the Company the fair market value
of which is reasonably equivalent to the fair market value of the stock being
issued.@ Notwithstanding any provision of this Section 3.1 to the contrary: (i)
any stock received upon exercise of options or other rights issued to, or
exercisable by, the holders of Common Stock upon the acquisition by any person
of a specified level of ownership of stock issued by the Company or as part of
any other takeover defense mechanism of the Company shall be deemed to have been
issued without receipt of consideration by the Company (to the extent of the
difference between the cash consideration actually received by the Company with
respect to the exercise by holders of Common Stock and the then prevailing
market price of such Common Stock), and (ii) issuance of Common Stock by the
Company upon the exercise of those options currently outstanding and options
that may in the future be granted to employees of the Company or any of its
subsidiaries pursuant to the Company's 1996 Stock Option Plan shall be deemed to
result in receipt by the Company of consideration having a fair market value
that is reasonably equivalent to the fair market value of the stock issued.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any
-4-
<PAGE> 5
class, or securities convertible into shares of stock of any class,
which issuance is in exchange for consideration received by the Company the fair
market value of which is reasonably equivalent to the fair market value of the
stock being issued, shall affect, and no adjustment by reason thereof shall be
made with respect to, the number of Shares Subject to Exercise.
3.2 Effect of Reorganization, Reclassification, Consolidation,
Merger or Sale. If at any time while this Call Right is outstanding there shall
be any reorganization, recapitalization or reclassification of the capital stock
of the Company (other than a subdivision or combination of shares) or any
consolidation or merger of the Company with another corporation (other than a
consolidation or merger in which the Company is the surviving entity and which
does not result in any change in the Common Stock), or any sale or other
disposition by the Company of all or substantially all of its assets to any
other entity primarily in exchange for the stock or other equity securities of
such other entity, or any compulsory share exchange, then (a) the resulting
entity of any such reorganization, reclassification, consolidation, merger, sale
or share exchange (the "New Entity") shall assume all obligations pursuant to
this Call Right and (b) the Registered Holder shall be entitled to exercise the
Call Right with respect to whatever securities of the New Entity, cash or other
property would have been issued for the Shares Subject to Exercise if such
shares had been issued to the Holder prior to the transaction giving rise to the
New Entity.
4. Dividends and Distributions. If the Company shall declare a
dividend on its Common Stock payable in cash or in property other than Common
Stock of the Company to the holders of its Common Stock while any rights under
this Call Right are still outstanding, the Registered Holder shall, without
additional cost, be entitled to receive the cash amount or such other property
that such Holder would have been entitled to receive if such Holder had been a
holder of the Shares Subject to Exercise (which had not previously been received
upon partial exercise of this Call Right) on the record date for such dividend.
5. Notice of Adjustments; Notice of Certain Events. Immediately upon
any adjustment of the number of Shares Subject to Exercise or in the identity of
the entity obligated pursuant to this Call Right, the Company will send written
notice thereof to the Registered Holder, stating the adjusted number of Shares
Subject to Exercise or the name of the newly obligated entity. In the event of a
tender offer for the Common Stock or in the event notice is sent to the holders
of Common Stock regarding a shareholders= meeting to vote on a proposed
reorganization or reclassification of the capital stock of the Company, a merger
or consolidation involving the Company, or the sale of all or substantially all
of the Company=s assets, the Company immediately shall send notice of such event
to the Registered Holder.
6. Put Right. Upon the exercise of this Call Right, the Registered
Holder (and any or all transferees of the Exercised Shares, acting separately or
collectively) shall have an option, beginning on the day after the Exercise Date
and continuing until such time as the Common Stock is traded in a Liquid Market
on an Established Exchange, to put all or a portion of the Exercised Shares (but
not in increments of less than 17,500 shares (which number shall be subject to
-5-
<PAGE> 6
adjustment in the same manner as set forth in Section 3.1), unless the exercise
is for all of the remaining Exercised Shares not distributed to or acquired by
the Company) to the Company (the APut Right@) at a per share price equal to the
Appraised Value as of the date notice of the exercise of the Put Right is
provided in writing to the Company; provided, however, that even if the Common
Stock is traded in a Liquid Market on an Established Exchange, if restrictions
imposed by the Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934, as amended, prohibit Caller (other than Kessinger/Hunter & Company,
L.C.) or any transferee of the Exercised Shares from selling (or subject such
transferee to an action under Section 16 of the 1934 Act to disgorge any profit
from selling) a portion of the Exercised Shares on the Established Exchange (the
ARestricted Shares@), then the Caller (other than Kessinger/Hunter & Company,
L.C.) or any transferee of the Exercised Shares shall have the right, subject to
the threshold number of shares set forth above, to put their Restricted Shares
to the Company at a price equal to the Appraised Value of such shares.
7. Reservation of Common Stock. The Company (or any entity assuming
obligations pursuant to the Call Right) will at all times reserve and keep
available for issuance upon the exercise of Call Rights (and any other rights,
options, warrants or other convertible securities or other instruments entitling
the holders to receive Common Stock, except for rights to receive distributions
of Common Stock under the Company=s Rights Plan) such number of its authorized
shares of Common Stock, either in treasury shares or previously unissued shares,
as will be sufficient to permit the exercise in full of all outstanding Call
Rights (and any other rights, options, warrants or other convertible securities
or other instruments entitling the holders to receive Common Stock, except for
rights to receive distributions of Common Stock under the Company=s Rights
Plan), and upon such issuance such shares of Common Stock will be validly
issued, fully paid and nonassessable. The Company shall not distribute Common
Stock under the Company=s Rights Plan in such an amount as to cause the number
of its authorized shares of Common Stock, either in treasury shares or
previously unissued shares, to be fewer than such number as will be sufficient
to permit the exercise in full of all outstanding Call Rights and any other
rights, options, warrants, or other convertible securities or other instruments
entitling the holders to receive Common Stock.
8. No Voting Rights; Limitations of Liability. This Call Right will
not, in and of itself, entitle the holder hereof to any voting rights or other
rights as a shareholder of the Company. No provision of this Call Right, and no
enumeration in this Call Right of the rights or privileges of the Registered
Holder, will give rise to any liability of such Holder.
9. Call Right Transferable.
9.1 Transferability. Subject to the transfer conditions referred to
in Section 9.2 below, this Call Right and all rights hereunder are transferable,
in whole or in part, without charge to the Registered Holder, upon surrender of
this Call Right with a properly executed Assignment Agreement at the principal
office of the Company.
-6-
<PAGE> 7
9.2 Restrictions on Transfer. The Registered Holder acknowledges
that this Call Right has not been registered under the Securities Act of 1933,
as amended (the "Act"), and agrees not to encumber, pledge, hypothecate, sell,
transfer, or otherwise dispose of this Call Right or any Exercised Shares in the
absence of (a) an effective registration statement for this Call Right or such
Exercised Shares under the Act (or any similar statute then in effect), or (b)
an opinion of counsel reasonably satisfactory in form and substance to the
Company and its counsel to the effect that such registration is not, under the
circumstances, required under the Act.
10. Call Right Exchangeable for Different Denominations. This Call
Right is exchangeable, upon the surrender hereof by the Registered Holder at the
principal office of the Company, for new Call Rights of like tenor representing
in the aggregate the purchase rights hereunder, and each of such new Call Rights
will represent such portion of such rights as is designated by the Registered
Holder at the time of such surrender.
11. Miscellaneous.
11.1 Amendment and Waiver. Except as otherwise provided herein,
the provisions of this Call Right may not be amended, and the Company may not
take any action herein prohibited, or omit to perform any act herein required to
be performed by it, without the written consent of the parties hereto.
11.2 Notices. Any notices required to be sent to a Registered
Holder will be delivered to the address of such Registered Holder shown on the
books of the Company. All notices referred to herein will be delivered in person
or sent by first class mail, postage prepaid, and will be deemed to have been
given when so delivered or sent.
11.3 Descriptive Headings. The headings of the Sections of this
Call Right are for convenience only and shall not be considered in construing or
interpreting any of the terms or provisions hereof.
11.4 Governing Law. This Call Right shall be governed by and
construed in accordance with the laws of the State of Missouri, without regard
to conflict of law principles.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the Company has caused this Call Right to be signed
and attested by its duly authorized officers under its corporate seal.
J.C. NICHOLS COMPANY
By: /s/ Barrett Brady
-------------------------
Name: Barrett Brady
----------------------
Title: President
---------------------
[Corporate Seal]
Attest:
/s/ Price Sloan
- ------------------
Secretary
-8-
<PAGE> 9
SCHEDULE 2.2
ASSIGNMENT
----------
FOR VALUE RECEIVED, hereby sells, assigns and transfers all of the
rights of the undersigned under the attached Call Right, with respect to the
cash payment or the number of Shares Subject to Exercise covered thereby set
forth below, unto:
Name of Assignee Address Number of Shares
---------------- ------- ----------------
Date:
--------------------------
Signature:
------------------------------
REGISTERED HOLDER
<PAGE> 10
SCHEDULE 2.3
EXERCISE AGREEMENT
To: J.C. NICHOLS COMPANY Dated: __________________________
The undersigned, pursuant to the provisions set forth in the attached
Call Right, hereby exercises the Call Right for __________ shares of the Shares
Subject to Exercise covered by such Call Right.
The undersigned requests that a certificate for________ ( ) shares
of Shares Subject to Exercise be issued as follows:
Name: ________________________
Address: ________________________
________________________
and, if said number of shares shall not be all shares of Shares Subject to
Exercise receivable hereunder, that a new Call Right for the balance of the
remaining Shares Subject to Exercise receivable under the within Call Right be
registered in the name of, and delivered to, the undersigned at the address
stated below:
Name: ___________________________
Address: _________________________
_________________________
Dated: _______________________
Signature: _________________________
REGISTERED HOLDER
<PAGE> 1
J. C. NICHOLS COMPANY
LIST OF SUBSIDIARIES AND AFFILIATES OF THE COMPANY
EXHIBIT 21.1
<TABLE>
<CAPTION>
DIRECT AND INDIRECT STATE OF ORGANIZATION
WHOLLY-OWNED CORPORATE SUBSIDIARIES D/B/A OR GOVERNANCE
----------------------------------- ----- -------------
<S> <C> <C>
Alameda Towers Development Company Alameda Towers Development Company MO
The Bay Plaza Companies, Inc. N/A FL
Board of Trade Redevelopment Corporation N/A MO
Challenger, Inc. N/A KS
Guardian Management, Inc. N/A KS
The J. C. Nichols Realty Company N/A MO
KC Condor, Inc. N/A MO
Nichols Plaza West, Inc. N/A MO
Ozark Mountain Village, Inc. Ozark Mountain Village MO
Plaza Land Company N/A FL
Someday, Inc. N/A KS
DIRECT AND INDIRECT NON-WHOLLY
OWNED CORPORATE SUBSIDIARIES
---------------------------------
Board of Trade Investment Company N/A MO
Forty-Sixth Street Redevelopment Corporation N/A MO
J. C. Nichols Alliance Corporation J. C. Nichols Alliance KS
Plaza Financial Services, LLC N/A KS
Plaza Mortgage Services, LLC Plaza Mortgage Services KS
AFFILIATES IN WHICH COMPANY HAS
DIRECTLY OR INDIRECTLY AN
INTEREST GREATER THAN 10%
-------------------------
Center Court Partners N/A FL
Corporate Center Associates, L.P. N/A IA
Dallas County Partners N/A IA
Dallas County Partners II N/A IA
Dallas County Partners III, L.C. N/A IA
FHDFT Limited Partnership N/A MO
4600 Madison Associates, L.P. N/A MO
Fountain One N/A IA
Fountain Two N/A IA
Fountain Three N/A IA
J. C. Nichols Iowa Partners N/A IA
J. C. Nichols Real Estate J.C.Nichols Real Estate MO
Kessinger/Hunter & Company, L.C. Kessinger/Hunter & Company MO
Marley Continental Homes of Kansas N/A KS
Meredith Drive Associates, L.P. N/A IA
Neptune Building Partners, L.P. N/A IA
Terrace Place Partners N/A IA
Village Court Associates N/A IA
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 58,601
<SECURITIES> 0
<RECEIVABLES> 46,907
<ALLOWANCES> 3,089
<INVENTORY> 9,791
<CURRENT-ASSETS> 0
<PP&E> 325,230
<DEPRECIATION> 161,393
<TOTAL-ASSETS> 297,774
<CURRENT-LIABILITIES> 0
<BONDS> 301,543
0
0
<COMMON> 100
<OTHER-SE> (26,273)
<TOTAL-LIABILITY-AND-EQUITY> 297,774
<SALES> 7,137
<TOTAL-REVENUES> 97,859
<CGS> 5,325
<TOTAL-COSTS> 85,795
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 639
<INTEREST-EXPENSE> 22,333
<INCOME-PRETAX> 12,064
<INCOME-TAX> (7,322)
<INCOME-CONTINUING> 19,386
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,386
<EPS-PRIMARY> 4.63
<EPS-DILUTED> 4.47
</TABLE>
