J C NICHOLS CO, 10-K405/A, 1998-05-19

J C NICHOLS CO
10-K405/A, 1998-05-19
OPERATORS OF NONRESIDENTIAL BUILDINGS

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM 10-K/A

<TABLE>
<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:

<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
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

None.

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<PAGE> 2

INDEX

<TABLE>
<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
1
<PAGE> 4

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
<PAGE> 5

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 Highwoods. 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.

4
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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
------------- --------- --------- --------- -------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
------------- --------- --------- --------- -------- --------- ------------- ---------
<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
------------- --------- --------- --------- -------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
------------- --------- --------- --------- -------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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

- -------------------------
(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. The transfers made
by the Bowser Partnership pursuant to the Settlement Agreement were deemed
appropriate by the parties thereto because of the benefits derived through that
entity by the former chief executive officer of the Company.

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. This litigation has not progressed, as the parties have been
attempting to settle the matter.

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.

18
<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.
21
<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.
22
<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.

23
<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

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

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

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

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>

- -------------------------

(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

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

49
<PAGE> 52

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..............

----------- ----------- ------------ ------------
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

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%

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)

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)

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 directors of JCN are set forth below.

A. TERM EXPIRING 2000

Barrett Brady - Age 51. Mr. Brady is the President and Chief Executive
Officer of JCN and has been acting in those capacities
since September 1995. Mr. Brady has served as a
director of JCN since December 1995. For more than five
years prior to becoming President and Chief Executive
Officer of JCN, Mr. Brady served as President of Dunn
Industries, Inc., an investment holding company in the
primary business of regional commercial and industrial
general contracting. Mr. Brady is also a director of
North American Savings Bank. Mr. Brady is the
brother-in-law of Mr. John Fox, Vice President of
Special Projects for JCN.

Kay N. Callison - Age 54. Ms. Callison has served as a director of JCN
since 1982. For more than five years, Ms. Callison has
been active in charitable activities in the Kansas City
Metropolitan area.

William V. Morgan - Age 55. Mr. Morgan has been a director of JCN since
1997. He has been the President of Morgan Associates,
Inc., an investment and pipeline management company,
since February 1987, and Cortez Holdings Corporation, a
related pipeline investment company, since October
1992. Mr. Morgan has served as a director of Midland
Loan Services and Kinder Morgan, G.P., Inc. since 1994.
In February 1997, Mr. Morgan was appointed Vice
Chairman of Kinder Morgan, G.P., Inc. Mr. Morgan has
been Vice Chairman of Cortez Pipeline Company since
February 1987. He has held legal and management
positions in the energy industry since 1975, including
the presidencies of three major interstate natural gas
companies: Florida Gas Transmission Company,
Transwestern Pipeline Company and Northern Natural Gas
Company.

B. TERM EXPIRING 1999

William K. Hoskins - Age 63. For more than five years Mr. Hoskins has
served as Vice President, General Counsel, and
Secretary to Hoechst Marion Roussel, Inc., a major
pharmaceutical company. In 1997, Mr. Hoskins was
appointed special counsel to Hoechst Marion Roussel,
the parent company of Hoechst Marion Roussel, Inc. Mr.
Hoskins is currently Chairman of the JCN Board of
Directors and has served in that capacity since May
1996.

Mark C. Demetree - Age 41. Since October 1997, Mr. Demetree has been the
President, Chief Executive Officer and Chairman of the
Board of U.S. Salt Corporation. From February 1993 to
July 1997, Mr. Demetree was the President of North

61
<PAGE> 64

American Salt Company. From 1989 through January 1993,
Mr. Demetree was a Senior Vice President of D.G. Harris
& Associates, Inc. From 1991 through February 1993, Mr.
Demetree was also President of the Trona Railway
Company. Mr. Demetree is also a member of the Board of
Directors of Advanced Radio Telecom Corp.

C. TERM EXPIRING 1998

Clarence L. Roeder - Age 64. Mr. Roeder has served as a director of JCN
since 1974. For more than five years prior to July
1995, Mr. Roeder was Secretary of JCN. For more than
five years prior to January 1993, Mr. Roeder was Vice
President and General Counsel of JCN. Mr. Roeder is
also a member of the Board of Directors of Mercantile
Bank of Kansas and Mercantile Bank of Kansas City.

Thomas J. Turner, III - Age 53. Mr. Turner has served as a director of JCN
since December 1995. For more than five years, Mr.
Turner has served as President of Charter American
Mortgage Company, a business that operates as a
correspondent, and originates and services commercial
loans, for institutional mortgage lenders.

C. Q. Chandler, III Age 71. Mr. Chandler was appointed to the board of
directors of JCN in May 1997 to fill the vacancy
created by the resignation of James W. Quinn. Mr.
Chandler is the Chairman of the Board of INTRUST; a
director of Fidelity State Bank & Trust Co.; a director
of First Newton Bancshares; a director of Kansas
Crippled Children's Society; the Vice President and
Director, First Bank of Newton; and a Trustee of Kansas
State University.

The following are the executive officers of JCN, all of whom serve at
the will of the JCN Board of Directors.

Barrett Brady - Information relating to Mr. Brady is set forth above.

G. Reid Teaney - Age 51. Mr. Teaney is Senior Vice President of JCN and
has served in that capacity since July 1996. For more
than five years prior to becoming Senior Vice President
of JCN, Mr. Teaney served as Senior Vice President and
Executive Managing Officer of the Kansas City office of
CB Commercial Group, a commercial real estate
marketing, sales, leasing and brokerage company. From
January 1988 through March 1996, Mr. Teaney served as a
director of Columbia Trust Company.

Edward A. de Avila - Age 43. Mr. de Avila is Senior Vice President of
Development of JCN and has been acting in that capacity
since August 1996. From November 1993 to July 1996, Mr.
de Avila was Managing Director of Centertainment, Inc.,
an indirect wholly-owned subsidiary of AMC
Entertainment, Inc., one of the largest motion picture
exhibitors in the United States. Centertainment, Inc.
pursued the development of entertainment based retail
centers with AMC Multiscreen Theaters as a major
anchor. From March 1988 through May

<PAGE> 65

1993, Mr. de Avila was Vice President, Director of
Retail for Reston Town Center Associates, a major
developer of retail space in Reston, Virginia.

Mark A. Peterson - Age 34. Mr. Peterson is a Vice President, Treasurer
and Chief Financial Officer of JCN and has been acting
in that capacity since June 1995. For more than five
years prior to that time, Mr. Peterson acted in levels
of increasing responsibility, concluding as senior
audit manager for Donnelly Meiners Jordan Kline, P.C.,
a certified public accounting firm that has provided
services to JCN.

Price A. Sloan - Age 35. Mr. Sloan is the Secretary and General Counsel
of JCN and has been acting in that capacity since March
1996. For more than five years prior to that time, Mr.
Sloan was an attorney with Blackwell Sanders Matheny
Weary & Lombardi LLP, the law firm that has acted and
continues to act as legal counsel to JCN.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Under Section 16(a) of the Exchange Act, JCN's directors and executive
officers and shareholders holding more than ten percent of the outstanding stock
of JCN are required to report their initial ownership of stock and any
subsequent change in such ownership to the Securities and Exchange Commission
and JCN. Specific time deadlines for the Section 16(a) filing requirements have
been established by the Securities and Exchange Commission. To JCN's knowledge,
all Section 16(a) filing requirements applicable to its directors, executive
officers and ten percent holders were satisfied during the fiscal year ended
December 31, 1997.

<PAGE> 66

ITEM 11. EXECUTIVE COMPENSATION

The following tables set forth the compensation of certain executive
officers of the Company for the last three fiscal years.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------------- --------------------------------
NAME AND YEAR SALARY BONUS(a) OTHER ANNUAL SECURITIES ALL OTHER
PRINCIPAL POSITION ($) ($) COMPENSATION UNDERLYING COMPENSATION
($) OPTIONS/SARS ($)
(#)
------------------ ---- ------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Barrett Brady, CEO 1997 232,701 150,000 15,861(b) N/A N/A
1996 225,000 144,000 9,857(c) 224,000 N/A
1995 110,000 N/A N/A N/A N/A

Jack Frost, CEO 1995 61,025 N/A N/A N/A $6,975(d)

Lynn L. McCarthy, 1995 87,667(f) 50,000 1,080(g) N/A 5,388(h)
CEO(e)

Edward A. de Avila, 1997 200,000 64,000 10,796(b) 7,500 N/A
Senior Vice President 1996 78,205 20,000 2,850(g) N/A N/A

G. Reid Teaney, 1997 165,000 90,000 9,196(b) 10,000 N/A
Senior Vice President 1996 74,666 40,000 3,300(g) N/A N/A

Mark A. Peterson, 1997 104,000 45,000 7,970(b) 5,000 N/A
CFO 1996 100,000 25,000 4,800(g) N/A N/A

Price A. Sloan, 1997 104,000 45,000 7,194(b) 5,000 N/A
General Counsel and
Secretary
</TABLE>

(a) The amount reflects bonus in the year it was earned. All or a portion of
the bonus may have been paid in the subsequent year.
(b) Amounts reported as "Other Annual Compensation" in 1997 include (1) the
Company's matching contribution to the Company's 401K savings plan as
follows: Barrett Brady $5,200, Edward de Avila $3,596, G. Reid Teaney
$1,996, Mark Peterson $3,170 and Price Sloan $2,394; (2) automobile
allowances as follows: Edward de Avila $7,200, G. Reid Teaney $7,200,
Mark Peterson $4,800 and Price Sloan $4,800; (3) the personal use of
company automobile for Barrett Brady $5,452; and (4) the cost of a country
club membership for Barrett Brady $5,209.
(c) The amount reported reflects the value of personal automobile use paid to
Mr. Brady by the Company and the cost of a country club membership provided
to Mr. Brady by the Company.
(d) The amount reported includes $6,975 paid to Mr. Frost as director fees.
(e) The amounts reflected for Mr. McCarthy in 1995 do not attempt to adjust
for the value of cash and property received by Mr. McCarthy pursuant to
the Settlement Agreement that resolved the significant shareholder
litigation that occurred in 1995.
(f) The amount reported includes $6,533 deferred by Mr. McCarthy and $4,333
contributed by the Company under the Company's 401(k) savings plan.
(g) The amount reported is an automobile allowance.
(h) The amount reported includes $1,050 paid to Mr. McCarthy as director fees
and $4,338 paid as premiums under supplemental split dollar life insurance
policies for Mr. McCarthy.

OUTSIDE DIRECTOR COMPENSATION

Directors attending, whether by telephone or in person, any regular or
special meeting of the Company's Board of Directors are paid $1,000 per
meeting. Directors who are members of committees of the Company's Board of
Directors attending, whether by telephone or in person, any regular or special
meeting of a

<PAGE> 67

committee of the JCN Board of Directors are paid $500 per meeting. Directors who
are also employees of JCN are not paid directors' fees.

OPTIONS AND STOCK APPRECIATION RIGHTS

<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR

Potential Realizable Value
at Assumed Annual Rates
of Stock Price Appreciation
INDIVIDUAL GRANTS for Option Term
---------------------------------------------------------------------- ------------------------------
PERCENT OF
TOTAL
NUMBER OF OPTIONS MARKET
SECURITIES GRANTED TO PRICE ON
UNDERLYING EMPLOYEES EXERCISE OR DATE OF
OPTIONS IN BASE PRICE GRANT EXPIRATION
NAME GRANTED FISCAL YEAR ($/SHR) ($/SHR) DATE 0% ($) 5% ($) 10%($)
---- ---------- ----------- ----------- -------- ---------- ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
G. Reid Teaney, 10,000 36% 30 46 7/22/07 160,000 449,292 893,122
Senior Vice
President

Edward de 7,500 28% 30 46 7/22/07 120,000 336,969 669,841
Avila, Senior
Vice President

Mark A. 5,000 18% 30 46 7/22/07 80,000 224,646 446,561
Peterson, CFO

Price Sloan,
General Counsel 5,000 18% 30 46 7/22/07 80,000 224,646 446,561
</TABLE>

<PAGE> 68

AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT FISCAL YEAR-END OPTIONS/SARS AT
(#) FISCAL YEAR-END ($)
------------------- --------------------
Shares
Acquired (#) Value Exercisable/ Exercisable/
Name on Exercise Received ($) Unexercisable Unexercisable
---- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Barrett Brady, 25,000 1,500,156 79,000/120,000 4,754,512/6,075,000
CEO

G. Reid Teaney, - 0 - - 0 - 0/10,000 0/400,000
Senior Vice President

Edward de Avila, - 0 - - 0 - 0/7,500 0/300,000
Senior Vice President

Mark A. Peterson, - 0 - - 0 - 0/5,000 0/200,000
CFO

Price Sloan, -0- -0- 0/5,000 0/200,000
General Counsel
</TABLE>

EMPLOYMENT AGREEMENTS

JCN has an employment agreement with its President and Chief Executive
Officer, Mr. Barrett Brady. The principal terms of Mr. Brady's employment
agreement provide that for a period of five years ending on December 31, 2000,
Mr. Brady shall receive a base salary of $225,000 per year subject to annual
review and adjustment at the discretion of the JCN Board of Directors.
Additionally, Mr. Brady shall be entitled to an annual incentive discretionary
bonus based upon achieving goals to be set annually, with an opportunity to earn
up to 80% of his base salary as annual incentive discretionary bonus. Moreover,
Mr. Brady shall be entitled to fixed supplemental retirement benefits of $78,000
per year payable for 15 years commencing upon the earlier of his disability or
reaching the age of 60. Such supplemental retirement benefits vest at a rate of
40% on January 1, 1996, 20% on December 31, 1996, and 10% annually on December
31st for the years 1997, 1998, 1999 and 2000. Mr. Brady has been granted an
option to purchase 64,000 shares of JCN Common Stock, or their equivalent, at a
price of $.0125 per share, which option vested 50% on January 1, 1996 and the
remaining 50% vested on January 1, 1997. Mr. Brady has also been granted an
option to purchase 160,000 shares of JCN Common Stock, or their equivalent, at a
price of $19.375 per share. Such options vest at a rate of 10% on December 31,
1996, 15% on December 31, 1997, and 25% annually on December 31st for the years
1998, 1999 and 2000. Mr. Brady shall be subject to a confidentiality and
non-competition agreement during the term of the agreement and for a period of
one year after termination.

<PAGE> 69

Mr. Brady's employment agreement provides for termination by JCN for
cause, by voluntary resignation of Mr. Brady, or by JCN without cause. The
agreement also provides Mr. Brady the right to terminate the agreement upon a
change in control of JCN, which is defined as the acquisition by any entity or
affiliated group of 35% or more of the combined voting power of the outstanding
securities of JCN. Upon termination of the agreement by either party as a result
of a change of control or by JCN without cause, Mr. Brady shall be entitled to
certain rights, including, but not limited to, immediate vesting of all stock
options and the right to receive his salary and normal employee benefits for the
longer of twenty-four months or the remainder of the agreement's term.

JCN has an employment agreement with its Senior Vice President of
Development, Mr. Edward A. de Avila. The principal terms of Mr. de Avila's
employment agreement provide that for a period of three years ending on August
12, 1999, Mr. de Avila shall receive a base salary of $200,000 per year subject
to annual review and increase at the discretion of JCN's Board of Directors.
Additionally, Mr. de Avila shall be entitled to an annual incentive
discretionary bonus, with an opportunity to receive up to 40% of his base salary
as annual incentive discretionary bonus. Mr. de Avila's employment agreement
provides for termination by JCN for cause, by voluntary resignation of Mr. de
Avila, or by JCN without cause. Upon termination of the Agreement by JCN without
cause, Mr. de Avila shall be entitled to certain rights, including, but not
limited to, the right to receive his annual salary and normal employee benefits
from the date of termination until August 12, 1999.

JCN has an employment agreement with its Senior Vice President, Mr. G.
Reid Teaney. The principal terms of Mr. Teaney's employment agreement provide
that for a period of three years ending on July 14, 1999, Mr. Teaney shall
receive a base salary of $160,000 per year subject to annual review and increase
at the discretion of JCN's Board of Directors. Additionally, Mr. Teaney shall be
entitled to an annual incentive discretionary bonus with an opportunity to
receive up to 60% of his base salary as annual incentive discretionary bonus.
Mr. Teaney's employment agreement provides for termination by JCN for cause, by
voluntary resignation of Mr. Teaney, or by JCN without cause. Upon termination
of the Agreement by JCN without cause, Mr. Teaney shall be entitled to certain
rights, including, but not limited to, the right to receive his annual salary
and normal employee benefits from the date of termination until July 14, 1999.

JCN has an employment agreement with its Chief Financial Officer, Mr.
Mark A. Peterson. The principal terms of Mr. Peterson's employment agreement
provide that for a period of three years ending on December 31, 1998, Mr.
Peterson shall receive a base salary of $100,000 per year subject to annual
review and increase at the discretion of the JCN Board of Directors.
Additionally, Mr. Peterson shall be entitled to an annual incentive
discretionary bonus set by the JCN Board of Directors. Mr. Peterson's employment
agreement provides for termination by JCN for cause, by voluntary resignation of
Mr. Peterson, or by JCN without cause. Upon termination of the Agreement by JCN
without cause, Mr. Peterson shall be entitled to certain rights, including, but
not limited to, the right to receive his annual salary and normal employee
benefits for a period of not less than twelve months following the date of
termination.

JCN has an employment agreement with its General Counsel and Secretary,
Mr. Price A. Sloan. The principal terms of Mr. Sloan's employment agreement
provide that for a period of three years ending on March 19, 1999, Mr. Sloan
shall receive a base salary of $100,000 per year subject to annual review and
increase at the discretion of the JCN Board of Directors. Additionally, Mr.
Sloan shall be entitled to an annual incentive discretionary bonus set by the
JCN Board of Directors. Mr. Sloan's employment

67
<PAGE> 70

agreement provides for termination by JCN for cause, by voluntary resignation of
Mr. Sloan, or by JCN without cause. Upon termination of the Agreement by JCN
without cause, Mr. Sloan shall be entitled to certain rights, including, but not
limited to, the right to receive his annual salary and normal employee benefits
for a period of not less than twelve months following the date of termination.

CHANGE IN CONTROL AGREEMENTS

JCN has entered into change in control agreements with several of its employees
to ensure their continued service and dedication to JCN and their objectivity in
considering on behalf of JCN any transaction which would result in a change in
control of JCN. Under an agreement with Mr. Brady, if Mr. Brady's employment is
terminated or not renewed following a change in control (defined therein to
exclude any transaction approved in advance by Mr. Brady in his capacity as a
member of the Board), JCN must pay to Mr. Brady (i) his base salary and medical,
dental, life, and long-term disability benefits through December 31, 2000 or for
twenty-four months, whichever period is longer, and (ii) cause all stock options
to become immediately vested. Mr. Brady also has the right to voluntarily
terminate employment during the period of six months following a change in
control and receive the same benefits. At his current compensation level, the
resulting benefit to Mr. Brady would be approximately $6,215,783.

Under agreements with Messrs. de Avila, Peterson, Sloan and Teaney, during the
twenty-four month period after a change in control, the employee would be
entitled to receive a lump-sum cash payment and certain insurance benefits if
such employee's employment were terminated by JCN other than for cause or by
such employee for good reason (as defined therein). Upon such termination, JCN
must make a lump-sum cash payment to the employee, in addition to any other
compensation to which the employee is entitled, of (i) three times such
employee's base salary, (ii) an amount equal to the employee's base salary
multiplied by such employee's management incentive bonus target participation
level percentage and (iii) cause all stock options to become immediately
vested. JCN must also maintain medical and dental insurance coverage
for the employee and his or her dependents, on the same or substantially similar
terms and conditions that existed immediately prior to the termination, for
eighteen months. At current compensation levels, the following employees would
receive the following approximate amounts: de Avila, $1,019,610; Peterson,
$618,260; Sloan, $618,260; and Teaney, $1,016,171. JCN must also pay any excise
tax payments required to be withheld under the Internal Revenue Code from any
payments made to the employee.

STOCK OPTION PLAN

The Board of Directors of JCN on March 28, 1996 adopted the 1996 Stock
Option Plan (the "JCN Plan") that allowed the granting of stock options to
eligible plan participants. The JCN Shareholders approved the JCN Plan at their
1996 annual meeting on May 29, 1996. An amendment and restatement of the JCN
Plan was approved subsequently by the Board of Directors to reflect recent
changes in the federal securities regulations relevant to the JCN Plan. The JCN
Plan authorizes the Board to issue up to 480,000 shares of JCN Common Stock. If
an option granted under the JCN Plan expires or is canceled without having been
exercised or vested, the shares subject to the unvested and canceled options
will be

<PAGE> 71

available thereunder for subsequent grants of options. The type, amount, and
conditions of any options granted under the Plan are determined by the
compensation committee, or such other committee as the JCN Board of Directors
determines.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

COMPENSATION PHILOSOPHY: JCN's executive compensation program is
designed to provide fair compensation to executives based on their performance
and contribution to JCN and to provide incentives that attract and retain key
executives, instill a long-term commitment to JCN and develop pride and a sense
of Company ownership, all in a manner consistent with shareholder interests.
Given these objectives, the executive officers' compensation package includes
primarily two elements: (i) base salary, which is reviewed annually; and (ii)
incentive compensation consisting of stock options and bonuses.

Annual adjustments to the base salaries of JCN's executives are based
on JCN's performance during the preceding fiscal year and upon a subjective
evaluation of each executive's individual contribution to that performance. In
evaluating overall performance of JCN, the primary focus is on JCN's financial
performance for the year. Additionally, certain intangible criteria, including
whether JCN achieved strategic goals and conducted its operations in accordance
with the standards of business expected of JCN by its shareholders and the
community in which it operates, may also be considered.

Stock options are likely to be granted annually in the future as
additional compensation in an effort to link each executive's future
compensation to the long-term financial success of JCN, as measured by stock
performance. The total number of options awarded each executive will be based on
an evaluation of the performance of each executive under consideration without
regard to the number of options held by or previously granted to each executive.

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER: For the fiscal year ending
December 31, 1997, Barrett Brady, JCN's Chief Executive Officer, received a
bonus of $150,000. Mr. Brady's bonus was based on a subjective valuation
that considered, in part, JCN's financial performance for the fiscal year as
well as the implementation of business strategies established by the JCN Board
of Directors.

This report has been issued over the names of each member of the
compensation committee, Thomas J. Turner, III, Chairman, and Mark C. Demetree.

PERFORMANCE OF JCN COMMON STOCK

Prior to 1997 JCN did not have a class of stock registered under the
Securities Exchange Act of 1934. Shares of JCN Common have been traded in the
over-the-counter market through inter-broker bulletin board trading under the
symbol "NCJC.BB." Trading prior to March 31, 1996 was very infrequent. The graph
set forth below compares the yearly percentage change in cumulative stockholder
return of JCN's shares of common stock since March 31, 1996 against the
cumulative return of the NASDAQ Stock (U.S.), and the group of publicly held
companies sharing JCN's Standard Industrial Code: 6552 -- Subdividers and
Developers (the "Peer Group Index") covering the same time period. The graph is
based on $100 invested on March 31, 1996, in JCN Common, the NASDAQ Stock
(U.S.), and the Peer Group Index, each assuming dividend reinvestment.

<PAGE> 72

<TABLE>
<CAPTION>
PERIOD ENDING
------------------------------------------------------------------------------------------------------
INDEX 3/31/96 6/30/96 9/30/96 12/31/97 3/31/97 6/30/97 9/30/97 12/31/97
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J.C. Nichols
Company 100 160.00 143.28 143.28 160.00 152.84 243.58 334.33

NASDAQ - Total US 100 96.79 93.61 98.05 85.37 96.70 115.37 104.12

Peer Group Index 100 107.41 110.37 115.56 109.69 129.76 151.30 141.76
</TABLE>

70
<PAGE> 73
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Table A describes the security ownership of certain beneficial owners,
while Table B describes the security ownership by management as of April 27,
1998.

TABLE A - Beneficial ownership of those owning more than five percent of the
outstanding shares of JCN Common

<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENTAGE OF
NAME OF BENEFICIAL OUTSTANDING
BENEFICIAL OWNER ADDRESS OF BENEFICIAL OWNER OWNERSHIP SHARES
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTRUST Bank, N.A., INTRUST Bank, N.A. 1,390,003(a) 30.1%
trustee of the J.C. Nichols Attn: Scott Rankin
Company Employee Stock 4000 Somerset Drive
Ownership Trust Prairie Village, KS 66208

Stephen Feinberg 450 Park Avenue, 28th Floor 660,897(b) 14.3%
New York, NY 10022

The Miller Nichols Living Miller Nichols, Jeannette 567,095(c) 12.3%
Trust Nichols and Clarence Roeder,
Trustees
400 West 49th Terrace
Alameda Towers
Kansas City, MO 64112

Kay N. Callison Kay N. Callison 277,440(d) 6.0%
55 Lemans Court
Shawnee Mission, KS 66208
</TABLE>

(a) All 1,390,003 shares are owned by the ESOT and are held in the record
name of INTRUST's nominee, Transco & Company. INTRUST Bank, N.A. and
Transco & Company disclaim beneficial ownership of all such shares.
(b) 160,957 shares are owned by Cerberus Partners, L.P., a partnership
organized under the laws of Delaware ("Cerberus"). 173,220 shares are
owned by Cerberus International, Ltd., a corporation organized under
the laws of the Bahamas ("International"). 74,500 shares are owned by
Ultra Cerberus Fund, Ltd., a corporation organized under the laws of
the Bahamas ("Ultra"). Mr. Feinberg possesses sole voting and
investment control over all securities owned by Cerberus, International
and Ultra. In addition, 252,220 shares are owned by various other
persons and entities for which Stephen Feinberg possesses certain
investment authority.
(c) Shares reflected include shares beneficially owned by the Miller
Nichols Living Trust. Miller Nichols and Clarence Roeder, Chairman
Emeritus and Director of JCN, respectively, and Ms. Jeanette Nichols
are trustees of the Miller Nichols Living Trust, none of whom have sole
voting or investment powers.
(d) Ms. Callison is a director of JCN. Of the shares reported by Ms.
Callison, 114,040 are held individually by Ms. Callison and she has
sole voting and investment power over such shares. Additionally, 37,640
shares are held in trusts for which Ms. Callison's spouse has sole
voting and dispositive power. Ms. Callison is the trustee and has sole
investment and voting power for a trust for the benefit of her
daughter, Elizabeth Callison. Such trust holds 40,800 shares. Ms.
Callison is the co-trustee with her son, Mark Callison, and shares
investment and voting power for a trust for the benefit of Mark
Callison. Such trust holds 62,480 shares. Ms. Callison is co-trustee
with Ann Nichols and UMB Bank, N.A. of Kansas City of the Nancy Nichols
Lopez Trust, which owns 7,680 shares. Ms. Callison, Ms. Nichols and UMB
Bank share investment and voting power over such shares. Ms. Callison
is the co-trustee with Commerce Bank of the Miller Nichols Trust, which
owns 14, 800 shares for the benefit of Ms. Ann Nichols. Ms. Callison
and Commerce Bank share investment and voting power over such shares.

71
<PAGE> 74
TABLE B - Management Ownership

<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF
OF OUTSTANDING
NAME, TITLE BENEFICIAL OWNERSHIP SHARES
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Barrett Brady, Director, President and Chief
Executive Officer 122,672(a) 2.6%

Price A. Sloan, General Counsel and Secretary 2,550(b) *

G. Reid Teaney, Senior Vice President 2,600(c) *

Mark A. Peterson, Vice President, Treasurer and
Chief Financial Officer 1,300(d) *

Edward A. de Avila, Senior Vice President 1,500(e) *

Clarence Roeder, Director 567,095(f) 12.3%

Kay N. Callison, Director 277,440(g) 6.0%

William K. Hoskins, Director 2,240 *

Thomas J. Turner, III, Director 1,500 *

Beneficial Ownership of Directors and Executive
Officers as a Group 978,897 21.2%
</TABLE>

- --------------------------
* Less than one percent.
- --------------------------

(a) Of the 122,672 shares reported by Mr. Brady, 2,660 shares are held
individually by Mr. Brady's spouse. Mr. Brady disclaims beneficial
ownership of such shares. Additionally, shares reflected as beneficially
owned by Mr. Brady include 8,000 shares held by the Fred Brady Trust dated
December 5, 1985. Mr. Brady is a Trustee of such trust and has sole voting
and investment power over such shares. An additional 79,000 shares reported
by Mr. Brady are attributable to an unexercised but vested stock option
from JCN.
(b) Of the 2,550 shares reported by Mr. Sloan, 750 are held individually by Mr.
Sloan and 300 are held individually by Mr. Sloan's spouse. Additionally,
500 shares are held in a life insurance trust for the benefit of Mr.
Sloan's spouse. Mr. Sloan does not have voting or investment power over the
shares held by the trust and disclaims beneficial ownership of such shares.
An additional 1,000 shares reported by Mr. Sloan are attributable to an
unexercised but vested stock option from JCN.
(c) Of the 2,600 shares reported by Mr. Teaney, 300 are held individually by
Mr. Teaney's spouse. An additional 2,000 shares reported by Mr. Teaney are
attributable to an unexercised but vested stock option from JCN.

(d) Of the 1,300 shares reported by Mr. Peterson, 1,000 shares are attributable
to an unexercised but vested stock option from JCN.

(e) All of the shares reported by Mr. De Avila are attributable to an
unexercised but vested stock option from JCN.
(f) All 567,095 shares reported by Mr. Roeder are held by the Miller Nichols
Living Trust. Mr. Roeder, Ms. Jeannette Nichols and Mr. Miller Nichols,
Chairman Emeritus, are co-trustees of the Miller Nichols Living Trust. Mr.
Roeder does not have sole voting or investment powers for such shares. Mr.
Roeder disclaims all beneficial ownership of such shares.

(g) Ms. Callison is a director of JCN. Of the shares reported by Ms. Callison,
114,040 shares are held individually by Ms. Callison and she has sole
voting and investment power over such shares. Additionally, 37,640 shares
are held in trusts for which Ms. Callison's spouse has sole voting and
dispositive power. Ms. Callison is the trustee and has sole investment and
voting power for a trust for the benefit of her daughter, Elizabeth
Callison. Such trust holds 40,800 shares. Ms. Callison is co-trustee with
her son, Mark Callison, and shares investment and voting power for a trust
for the benefit of Mark Callison. Such trust holds 62,480 shares. Ms.
Callison is co-trustee with Ann Nichols and UMB Bank, N.A. of Kansas City
of the Nancy Nichols Lopez Trust, which owns 7,680 shares. Ms. Callison,
Ms. Nichols and UMB Bank share investment and voting power over such
shares. Ms. Callison is the co-trustee with Commerce Bank of the Miller
Nichols Trust, which owns 14,800 shares for the benefit of Ms. Ann Nichols.
Ms. Callison and Commerce Bank share investment and voting power over such
shares.

72
<PAGE> 75
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Mr. Thomas J. Turner, III is a Director of JCN and is president and
principal shareholder of Charter American Mortgage Company, a business that
prepares and presents mortgage loan applications to institutional mortgage
lenders. Charter American Mortgage Company has from time to time been asked to
provide services to JCN, and JCN has obtained loans as a result of loan
applications taken by Charter American Mortgage Company. Such loans were
obtained by JCN at rates competitive with the rates charged by other mortgage
lenders. Charter American Mortgage Company has earned approximately
$145,875 in the last year in loan origination fees on mortgage financing
obtained by JCN as a result of services provided by Charter American Mortgage
Company.

Mr. C. Q. Chandler, III is a director of JCN and is also chairman of the
board of directors and a significant shareholder of INTRUST. INTRUST received
payments of fees and expenses from the ESOT totaling $114,480 during 1997 for
serving as trustee of the ESOT. The fee was determined based on a percentage of
assets in the ESOT.

On January 29, 1997, JCN purchased all outstanding shares of JCN Common
owned beneficially and of record by AHI. Additionally, Mr. John Simon and Mr.
James W. Quinn, who are affiliated with AHI, resigned as directors of JCN. JCN
paid consideration of $27.25 per share, or a total of $25,856,980 for the
948,880 shares of JCN Common owned by AHI. At the closing, JCN delivered to AHI
$12,809,880 in cash (plus eight percent (8%) interest per annum from January 15,
1997 to January 29, 1997 in an amount totaling $39,307). JCN also executed a
promissory note in the amount of $12,989,600 (which reflects a $57,500 reduction
for certain expenses), bearing interest at a rate of eight percent (8%) per
annum with interest accruing commencing on January 15, 1997. That promissory
note is secured by the pledge of a mortgage receivable and real property. 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
$27.00 and $31.06 per share. The transaction was negotiated on behalf of JCN
over a number of months by management of JCN, with input from the JCN Board of
Directors. The transaction was unanimously approved by the JCN Board of
Directors without the participation of Mr. Simon or Mr. Quinn.

<PAGE> 76

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>

<PAGE> 77

<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.
**** Incorporated by reference to the Company's Form 10-K filed March 31, 1998.

(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).

<PAGE> 78

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 May 18, 1998.

J.C. NICHOLS COMPANY
(Registrant)

By: /s/ Barrett Brady
------------------------------------
Barrett Brady
Chief Executive Officer and
President

We, the undersigned directors and officers of J.C. Nichols Company, do
hereby constitute and appoint Barrett Brady and Mark Peterson, and each of
them, our true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for us and in our name, place and stead, to
sign any and all amendments to this annual report on Form 10-K and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, and we do hereby ratify and
confirm all that said attorneys-in-fact and agents, or their substitutes, may
lawfully do or cause to be done by virtue hereof.

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>

Chairman of the Board, and Director
- ------------------------------------------
William K. Hoskins

/s/ BARRETT BRADY President, Chief Executive Officer and May 18, 1998
- ------------------------------------------ Director
Barrett Brady

/s/ KAY N. CALLISON Director May 18, 1998
- ------------------------------------------
Kay N. Callison

/s/ C.Q. CHANDLER III Director May 18, 1998
- ------------------------------------------
C.Q. Chandler III

/s/ MARK C. DEMETREE Director May 18, 1998
- ------------------------------------------
Mark C. Demetree

/s/ WILLIAM V. MORGAN Director May 18, 1998
- ------------------------------------------
William V. Morgan

/s/ CLARENCE L. ROEDER Director May 18, 1998
- ------------------------------------------
Clarence L. Roeder

/s/ THOMAS TURNER Director May 18, 1998
- ------------------------------------------
Thomas J. Turner

/s/ MARK A. PETERSON Vice President, Chief Financial Officer May 18, 1998
- ------------------------------------------ and Treasurer (Principal Accounting
Mark A. Peterson Officer)
</TABLE>