<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 1, 1997
REGISTRATION NO. 333-39803
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
BODDIE-NOELL PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
MARYLAND 6021 56-1574675
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
3710 ONE FIRST UNION CENTER
CHARLOTTE, NORTH CAROLINA 28202-6032
(704) 333-1367
(Address of principal executive offices)
D. SCOTT WILKERSON, PRESIDENT
BODDIE-NOELL PROPERTIES, INC.
3710 ONE FIRST UNION CENTER
CHARLOTTE, NORTH CAROLINA 28202-6032
(704) 333-1367
(Name and address for agent for service of process)
WITH COPIES TO:
<TABLE>
<S> <C>
BRAD S. MARKOFF, ESQ. JAY BERNSTEIN, ESQ.
ALSTON & BIRD LLP ROGERS & WELLS
3605 GLENWOOD AVENUE 200 PARK AVENUE
RALEIGH, NORTH CAROLINA 27612 NEW YORK, NEW YORK 10166
(919) 420-2200 (212) 878-8000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1) of
this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
[CAPTION]
<TABLE>
<S> <C> <C> <C>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE OFFER-
BE REGISTERED REGISTERED PER SHARE(1) ING PRICE
<S> <C> <C> <C>
Common Stock, par value
$0.01 per share....................... 2,800,000 $15.00 per share $42,000,000
<CAPTION>
TITLE OF EACH CLASS AMOUNT OF
OF SECURITIES TO REGISTRATION
BE REGISTERED FEE
<S> <C>
Common Stock, par value
$0.01 per share....................... $12,728
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(c) under the Securities Act of 1933, as amended.
The fee was computed on the basis of the market price of the Company's
Common Stock as of November 4, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
(A redherring appears on the left-hand side of this page, rotated 90 degrees.
Text follows.)
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE AMENDED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE SEC DECLARES OUR REGISTRATION STATEMENT
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT SEEKING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 1, 1997
PROSPECTUS
2,800,000 SHARES
(Boddie-Noell Properties, Inc. logo)
COMMON STOCK
------------------------
Boddie-Noell Properties, Inc. is a real estate investment trust focused
on owning and operating apartment communities. We currently own nine apartment
communities containing 2,208 apartment units and have the right to acquire an
additional 476 apartment units in three apartment communities currently under
construction. We also own 47 restaurant properties and manage seven other
apartment communities and two shopping centers owned by other parties.
We are offering and selling 2,800,000 shares of common stock with this
prospectus. The company's shares are listed for trading on the American Stock
Exchange under the symbol "BNP." On November 25, 1997, the last reported sale
price of our common stock on the American Stock Exchange was $14.625 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS THAT YOU SHOULD CONSIDER BEFORE YOU INVEST IN THE COMMON STOCK BEING
SOLD WITH THIS PROSPECTUS.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public Price................................................................ $ $
Underwriting Discounts...................................................... $ $
Proceeds to the Company..................................................... $ $
</TABLE>
------------------------
CIBC OPPENHEIMER
J.C. BRADFORD & CO.
INTERSTATE/JOHNSON LANE
CORPORATION
DAVENPORT & COMPANY LLC
------------------------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED OF THESE
SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. NEITHER
HAS ANY STATE SECURITIES COMMISSION APPROVED OR DISAPPROVED OF THESE SECURITIES,
OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY
PERSON TO TELL YOU OTHERWISE.
This Prospectus is dated December , 1997.
<PAGE>
Inside Front Cover contains a map of Virginia and North Carolina showing
locations of owned and managed properties and three charts that show historical:
1. Number of apartment units owned;
2. Breakdown of revenues between restaurants and apartments; and
3. Cost of properties (excluding accumulated depreciation).
Inside Back Cover contains pictures of properties.
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IN CONNECTION WITH AN UNDERWRITTEN OFFERING, THE SEC RULES PERMIT THE
UNDERWRITERS TO ENGAGE IN TRANSACTIONS THAT STABILIZE THE PRICE OF OUR COMMON
STOCK. THESE TRANSACTIONS MAY INCLUDE PURCHASES FOR THE PURPOSE OF FIXING OR
MAINTAINING THE PRICE OF THE COMMON STOCK AT A LEVEL THAT IS HIGHER THAN THE
MARKET WOULD DICTATE IN THE ABSENCE OF SUCH TRANSACTIONS.
<PAGE>
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IMPORTANT NOTE TO READERS
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Before you read any further we want to tell you about our approach and
some of the conventions we used in writing this prospectus.
(Bullet) We wrote this prospectus using the Securities and Exchange
Commission's proposed "Plain English" rule. This rule requires
that we write without the "legalese" typically found in most
documents filed with the SEC in order to provide you with a
more meaningful and understandable document. Although the tone
and wording may differ from what you are familiar with, we are
not alone in adopting this progressive approach. Other
well-known companies, including Detroit Diesel Corporation,
Ford Motor Company and Honeywell Inc., have started preparing
their documents using plain English. We voluntarily followed
the plain English initiative because we are very committed to
providing you with useful and understandable information.
(Bullet) We have conditioned the closing of this offering on two
transactions: our conversion to an UPREIT structure and the
acquisition of a portfolio of four apartment communities.
Accordingly, we wrote this prospectus as if those two
transactions have already occurred. We discuss these
transactions more fully under "History and Formation of the
Company -- Conversion to UPREIT" and " -- Chrysson Acquisition"
on page 23.
(Bullet) For purposes of calculating pro forma information appearing
throughout this prospectus, we assumed we would issue 2,800,000
shares in this offering at an assumed offering price of $14 5/8
per share and that we would receive $37.6 million of net
proceeds after deductions for underwriting discounts and
offering expenses. The actual number of shares and net proceeds
may differ. The pro forma information reflects the acquisition
of a portfolio of four apartment communities by adjusting
historical operating amounts for activities of the "stabilized"
apartment communities acquired. The pro forma information does
not, therefore, represent the entire portfolio of four
apartment communities. We consider "stabilized" properties to
be those properties or phases of properties which have achieved
occupancy levels of 90% or greater for 90 consecutive days.
Applying the definition of "stabilized" properties, we have
excluded one apartment community and the second phase of
another apartment community from our pro forma information for
1996 and the nine month period ended September 30, 1997. These
properties have since achieved "stabilization."
Our mailing address and telephone number are:
Boddie-Noell Properties, Inc.
3710 One First Union Center
Charlotte, North Carolina 28202-6032
(704) 333-1367
<PAGE>
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TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 7
Boddie-Noell Properties, Inc............. 7
Our Strategy............................. 7
Dividends................................ 9
The Offering............................. 9
Summary Financial Information............ 10
Risk Factors............................... 11
Possible Inability to Meet and Manage
Growth Objectives..................... 11
Uncertainty with Respect to Restaurant
Properties............................ 11
Real Estate Investment Risks............. 12
General Risks......................... 12
Lack of Geographic Diversification.... 13
Financing Risks.......................... 13
Risks Associated with Debt
Financing........................... 13
Variable Interest Rates............... 14
Possible Inability to Refinance
Debt................................ 14
Regulatory Matters....................... 14
Environmental Matters................. 14
Americans with Disabilities Act
Compliance.......................... 15
Conflicts of Interest.................... 16
Enterprises' Option to Close Poorly
Performing Restaurants................ 16
Tax Risks................................ 17
Consequences of the Failure to Qualify
as a REIT........................... 17
Effect of Distribution Requirements... 17
Other Tax Liabilities................. 17
Possible Adverse Consequences of Limits
on Ownership of Shares................ 18
Limitations on Acquisition and Change in
Control............................... 18
Ownership Limit....................... 18
Required Consent of the Operating
Partnership for Significant
Corporate Action.................... 19
Operating Partnership Agreement....... 19
Preferred Stock....................... 19
Maryland Business Combination
Statute............................. 19
Maryland Control Share Acquisition
Statute............................. 20
Dependence on Key Personnel.............. 21
History and Formation of the Company....... 21
Early History............................ 21
Acquisition of BT Venture Corporation.... 22
Formation of BNP Management, Inc......... 22
Renegotiation of Master Lease............ 22
Other Activity........................... 23
Conversion to UPREIT..................... 23
Chrysson Acquisition..................... 23
The Company................................ 24
<CAPTION>
PAGE
----
<S> <C>
Current Operations....................... 24
Principal Investment Objectives.......... 25
Operating Philosophy..................... 25
Market Focus.......................... 26
Intensive Management Focus............ 26
Dedication to Customer Service........ 26
Flat Operational Structure............ 27
Our Growth Strategy...................... 27
Internal Growth Strategy.............. 27
External Growth Strategy.............. 30
Financing Strategy....................... 31
Use of Proceeds............................ 32
Market Price of the Company's Common Stock,
Distributions and Related Shareholder
Matters.................................. 33
Capitalization............................. 35
Selected Financial Data.................... 36
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 39
Overview................................. 39
Results of Operations.................... 41
Nine Months Ended September 30, 1997
Compared to 1996.................... 41
1996 Compared to 1995................. 44
1995 Compared to 1994................. 46
Funds From Operations.................... 48
Capital Resources and Liquidity.......... 49
Capital Resources..................... 49
Cash Flows and Liquidity.............. 51
Short- and Long-term Liquidity
Requirements........................ 52
Inflation............................. 53
Environmental Matters................. 53
Our Properties............................. 54
General.................................. 54
Market Information....................... 54
Greensboro and Winston-Salem, North
Carolina............................ 55
Charlotte, North Carolina............. 56
Virginia Beach, Virginia.............. 57
Growth in our Company's Principal
Markets............................. 59
Apartment Communities.................... 59
Restaurant Properties.................... 62
Other Information About Our Properties... 62
Certain Policies........................... 62
Short-term Investments................... 62
Investments in Other Real Estate
Entities.............................. 63
Loans to Other Persons................... 63
Borrowings............................... 63
Policies on Certain Investments And
Activities............................ 64
Conflicts of Interest.................... 65
Policy Changes........................... 66
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
Directors and Executive Officers........... 67
<S> <C>
Certain Relationships and Related
Transactions............................. 69
Boddie-Noell Properties and B. Mayo
Boddie and Nicholas B. Boddie......... 69
Boddie-Noell Properties and Boddie-Noell
Enterprises........................... 70
Boddie-Noell Properties and Boddie
Investment Company.................... 71
Chrysson Acquisition..................... 72
Transactions with Management............. 73
Employment Contracts and Termination
of Employment and Change-in-Control
Arrangements........................ 73
Loans to Officers..................... 74
Security Ownership of Certain Beneficial
Owners and Management.................... 74
Description of Capital Stock............... 75
General.................................. 75
Common Stock............................. 75
Preferred Stock.......................... 76
Ownership Limitations and Restrictions on
Transfers............................. 76
Limitations of Liability and
Indemnification of Directors and
Officers.............................. 77
Shares Available For Future Sale......... 78
Partnership Agreement of the Operating
Partnership.............................. 80
General.................................. 80
Allocation of Distributions, Profits and
Losses................................ 80
Transferability of Interests............. 81
Additional Capital Contributions;
Issuance of Additional Partnership
Interests............................. 81
Redemption of Operating Partnership
Units................................. 81
Indemnifications and Fiduciary
Standards............................. 82
Tax Matters Partner...................... 82
Operations............................... 82
<CAPTION>
PAGE
----
<S> <C>
Term..................................... 83
Exercises of Stock Options............... 83
Other.................................... 83
Federal Income Tax Considerations.......... 83
General.................................. 84
Federal Income Taxation of Boddie-Noell
Properties, Inc....................... 85
Requirements for Qualification........... 86
Organizational Requirements........... 86
Income Tests.......................... 87
Asset Tests........................... 89
Annual Distribution Requirements......... 90
Earnings and Profits..................... 91
Failure to Qualify....................... 92
Taxation of U.S. Shareholders............ 93
Distributions Generally............... 93
Capital Gain Distributions............ 93
Certain Dispositions of Shares........ 94
Passive Activity Loss and Investment
Interest Limitations................ 94
Treatment of Tax-Exempt
Shareholders........................ 94
Special Tax Considerations for Non-U.S.
Shareholders.......................... 95
Information Reporting Requirements and
Requirements and Backup Withholding
Tax................................... 97
Other Tax Considerations................. 97
General............................... 97
Tax Allocations With Respect to Our
Properties.......................... 98
BNP Management, Inc................... 99
Recent Legislation....................... 99
State and Local Tax...................... 100
Legal Proceedings.......................... 101
Underwriting............................... 102
Experts.................................... 104
Legal Opinions............................. 104
Available Information...................... 104
Incorporation of Certain Documents By
Reference................................ 105
Index to the Financial Statements.......... F-1
</TABLE>
6
<PAGE>
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PROSPECTUS SUMMARY
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- --------------------------------------------------------------------------------
This summary highlights some information from this prospectus. It may not
contain all of the information that is important to you. To understand this
offering fully, you should read the entire prospectus carefully, including the
risk factors and the financial statements.
BODDIE-NOELL PROPERTIES, INC.
Boddie-Noell Properties, Inc. is a self-administered and self-managed
REIT which owns and operates apartment communities in North Carolina and
Virginia. We own nine apartment communities containing 2,208 apartment units and
have the right to acquire three additional apartment communities, containing 476
apartment units, that are currently under construction. We also manage seven
other apartment communities, containing 1,713 apartment units, and two shopping
centers that are owned by other parties.
We manage these apartment communities and shopping centers through an
unconsolidated subsidiary, BNP Management, Inc. To avoid confusion with the
Company, whose initials are BNP, we refer to BNP Management, Inc. in this
prospectus as the Management Company.
We also own 47 Hardee's restaurant properties, which we lease to Boddie-
Noell Enterprises, Inc. Because the name of this company is similar to our own,
we refer to it simply as Enterprises throughout this prospectus.
OUR STRATEGY
Our goal is to provide our shareholders with current income and capital
appreciation by increasing funds from operations and funds available for
distribution on a per share basis. To accomplish these goals, we have refocused
our business on the acquisition, ownership and operation of apartment
communities. As a consequence, we may elect to sell our restaurant properties
and reinvest the proceeds in additional apartment communities. However, no sale
of the restaurants is pending, and management only intends to divest the
restaurants when we believe such a transaction will enhance shareholder value.
We intend to become a leading operator of mid- to high-end apartment
communities in Virginia and the Carolinas. Since 1993, we have been acquiring
apartment communities, and we now intend to accelerate the pace of our
acquisitions. The following table sets forth certain apartment operating data
for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1993 1994 1995 1996 1997
----- ----- ------ ------ -------------
<S> <C> <C> <C> <C> <C>
Apartment units owned at end of period......... 336 946 1,130 1,328 1,328
Average monthly rental per unit................ $576 $624 $657 $684 $692
Average economic occupancy..................... 94.4% 94.6% 95.3% 94.1% 95.5%
</TABLE>
7
<PAGE>
We recently signed an agreement with Paul and James Chrysson and certain
of their affiliates, all of whom together we refer to as the Chrysson Parties.
Under this acquisition agreement, we have acquired the first four of seven
apartment communities, all of which are located in North Carolina; we refer to
the acquisition of these Chrysson properties as the Chrysson acquisition, and we
refer to the acquisition of the first four properties as Phase I of the Chrysson
acquisition. When we acquire the remaining Chrysson properties, which are still
under construction, we will have doubled the number of apartment units we own.
Concurrent with Phase I of the Chrysson acquisition, we reorganized to an
UPREIT structure, a structure which many REITs currently use. UPREIT stands for
"Umbrella Partnership Real Estate Investment Trust." An UPREIT is a real estate
investment trust that controls and holds most of its properties through an
umbrella limited partnership. The umbrella limited partnership in our UPREIT is
Boddie-Noell Properties Limited Partnership.
Prior to the reorganization, most property owners who sold us properties
recognized gain on their sale. However, through our UPREIT structure we can
acquire properties in exchange for the limited partnership interests in
Boddie-Noell Properties Limited Partnership and trigger no immediate tax
obligations for certain sellers. We believe that our conversion to an UPREIT
will therefore enable us to acquire properties not otherwise available or at
lower prices because of the tax advantages to certain property sellers of
receiving limited partnership interests instead of cash as consideration.
An UPREIT's limited partnership interests are generally referred to as
"Units," and the limited partnership in an UPREIT is generally referred to as
the "Operating Partnership." In keeping with industry convention and to help
avoid confusion between Boddie-Noell Properties, Inc. and Boddie-Noell
Properties Limited Partnerhsip, we have adopted those terms for use in this
prospectus. Unless the context indicates otherwise, when we write about the
Company, we are including the Operating Partnership and the Management Company.
We intend to continue to grow primarily through the acquisition of
income-producing apartment communities located in secondary markets throughout
the southeastern United States. When evaluating potential acquisitions, our
primary consideration will be a property's ability to increase our current and
future ability to pay dividends. We will generally only acquire properties that
immediately increase our funds from operations and funds available for
distribution on a per share basis. We also may utilize our development expertise
to develop properties ourselves or invest in properties being developed by other
parties. Members of our management team have directed over $114 million of
development or redevelopment projects, including 13 apartment communities
containing over 2,500 apartment units.
We seek to enhance the value of our apartment communities through
superior property management. To do so, we strongly emphasize autonomy at the
property level and delegate significant property management responsibilities to
our on-site managers. We believe that they are in the best position to increase
rents, offer leasing incentives or alter our marketing strategy in order to
maintain high occupancy levels and rental rates. We also expect our on-site
managers to provide superior customer service to our residents and to achieve
consistently high levels of customer
8
<PAGE>
satisfaction. Our commitment to customer service is evidenced by our resident
service guarantees and on-site maintenance personnel who are available to our
residents 24 hours a day.
DIVIDENDS
We are currently paying a dividend of $0.31 per quarter, or $1.24 per
year. Historically, a portion of our dividend has been treated as a return of
capital for Federal income tax purposes and, therefore, has been excluded from
taxable income. In 1996, 43.7% of our dividend was treated as a return of
capital. We expect a portion of future distributions to continue to be treated
as a return of capital for tax purposes, although we cannot predict what portion
will be so treated.
THE OFFERING
<TABLE>
<S> <C>
Securities offered.................................... 2,800,000 shares of our common stock
Over-allotment option................................. Up to 420,000 shares; if the over-
allotment option is exercised in full by
the underwriters, the total public price,
underwriting discounts, and net proceeds
to the Company will be $ , $ and $ ,
respectively.
Shares to be outstanding after the offering........... 5,930,776. This does not include an
aggregate of 950,032 shares of common
stock issuable upon redemption of
outstanding Operating Partnership Units.
This figure also assumes that the
underwriters do not exercise their
over-allotment option.
Use of Proceeds....................................... Repayment of debt.
RISK FACTORS.......................................... YOU SHOULD READ THE "RISK FACTORS"
SECTION, BEGINNING ON PAGE 11, AS WELL AS
THE OTHER CAUTIONARY STATEMENTS THROUGHOUT
THE ENTIRE PROSPECTUS, TO ENSURE YOU
UNDERSTAND THE RISKS ASSOCIATED WITH AN
INVESTMENT IN OUR STOCK.
</TABLE>
9
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------------------ -----------------------------
PRO PRO
HISTORICAL FORMA (3) HISTORICAL FORMA (3)
------------------------------------------- --------- ------------------ ---------
1992 1993 1994 1995 1996 1996 1996 1997 1997
------- ------- ------- ------- ------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PROPERTY DATA)
OPERATING DATA:
Revenue:
Apartment rental income..... $ -- $ 1,245 $ 3,889 $ 8,476 $ 9,791 $14,222 $ 7,209 $ 7,898 $ 11,128
Restaurant rental income.... 5,333 5,165 5,047 4,649 4,500 4,500 3,375 3,375 3,375
Equity and other income..... 40 16 322 600 217 225 160 336 348
------- ------- ------- ------- ------- --------- -------- -------- ---------
Total revenue................. 5,373 6,426 9,258 13,726 14,508 18,947 10,745 11,609 14,851
Expenses:
Depreciation and
amortization.............. 798 1,065 1,648 2,609 2,975 3,936 2,181 2,362 3,081
Other operating expenses.... 381 862 1,988 3,767 3,871 5,157 2,892 3,271 4,282
Interest expense............ 1,035 1,442 2,802 5,362 5,946 5,202 4,395 4,684 4,017
Minority interest in Operating
Partnership................. -- -- -- -- -- 415 -- -- 306
Net income before
extraordinary item.......... 3,159 2,455 2,302 1,628 1,716 4,237 1,278 1,292 3,165
Net Income.................... $ 3,159 $ 2,455 $ 2,302 $ 1,628 $ 1,716 N/A $ 1,278 $ 1,292 N/A
------- ------- ------- ------- ------- --------- -------- -------- ---------
------- ------- ------- ------- ------- --------- -------- -------- ---------
Funds from operations (1)..... 3,943 4,029 4,291 4,450 4,472 8,504 3,295 3,391 6,391
Funds available for
distribution (1)............ 3,957 4,055 4,253 3,961 3,835 7,621 2,825 2,986 5,811
BALANCE SHEET DATA:
Real estate assets
Apartment communities....... $ -- $14,352 $54,724 $55,316 $66,610 -- $ 66,458 $ 67,141 $128,001
Restaurant properties....... 43,205 43,205 43,205 43,205 43,205 -- 43,205 43,205 43,205
Total assets.................. 40,465 54,643 95,954 94,352 103,436 -- 104,183 104,206 166,355
Total debt.................... 12,000 26,894 66,884 67,162 77,352 -- 77,471 78,397 87,670
Shareholders' equity.......... $28,331 $27,252 $27,968 $26,200 $24,902 -- $ 24,778 $ 23,950 $ 61,286
APARTMENT PROPERTY DATA:
Apartment communities
owned (2)................... -- 1 3 4 5 8 5 5 9
Apartment units owned (2)..... -- 336 946 1,130 1,328 1,848 1,328 1,328 2,208
Average apartment economic
occupancy................... -- 94.4% 94.6% 95.3% 94.1% -- 94.3% 95.5% --
Average monthly revenue/unit.. -- $576 $624 $657 $684 -- $684 $692 --
</TABLE>
- ---------------
(1) Funds from operations is defined by the National Association of Real Estate
Investment Trusts as "net income (computed in accordance with generally
accepted accounting principles), excluding gains (losses) from debt
restructuring and sales of property, plus depreciation and amortization, and
after adjustments for unconsolidated partnerships and joint ventures." We
define funds available for distribution as funds from operations plus
non-cash expense for amortization of loan costs, less scheduled principal
payments on our debt and less recurring capital expenditures.
(2) At period end.
(3) Pro forma amounts on an as-converted basis, as if 571,000 Operating
Partnership Units had been issued for contribution of three stabilized
apartment communities.
10
<PAGE>
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RISK FACTORS
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BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE THAT THERE ARE
VARIOUS RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CONSIDER CAREFULLY
THESE RISK FACTORS TOGETHER WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS
PROSPECTUS BEFORE YOU DECIDE TO PURCHASE SHARES OF OUR COMMON STOCK.
SOME OF THE INFORMATION IN THIS PROSPECTUS MAY CONTAIN FORWARD-LOOKING
STATEMENTS. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE,"
"CONTINUE" OR OTHER SIMILAR WORDS. THESE STATEMENTS DISCUSS FUTURE EXPECTATIONS,
CONTAIN PROJECTIONS OF RESULTS OF OPERATIONS OR OF FINANCIAL CONDITION OR STATE
OTHER "FORWARD-LOOKING" INFORMATION. WHEN CONSIDERING SUCH FORWARD-LOOKING
STATEMENTS, YOU SHOULD KEEP IN MIND THE RISK FACTORS AND OTHER CAUTIONARY
STATEMENTS IN THIS PROSPECTUS. THE RISK FACTORS NOTED IN THIS SECTION AND OTHER
FACTORS NOTED THROUGHOUT THIS PROSPECTUS, INCLUDING CERTAIN RISKS AND
UNCERTAINTIES, COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
CONTAINED IN ANY FORWARD-LOOKING STATEMENT.
POSSIBLE INABILITY TO MEET AND MANAGE GROWTH OBJECTIVES
Our conversion to an UPREIT (as discussed more fully under the heading
"History and Formation of the Company -- Conversion to UPREIT" on page 23) may
allow us to grow more rapidly. Our ability to successfully integrate a large
number of new properties into our portfolio depends upon our ability to:
(Bullet) identify, acquire and finance new properties;
(Bullet) effectively manage properties;
(Bullet) attract and retain quality personnel;
(Bullet) develop procedures and practices necessary to generate high
occupancy levels and rental rates; and
(Bullet) operate such new properties in a cost effective manner.
We can provide no assurances that we will be able to accomplish these
necessary prerequisites for the successful integration of any acquired
properties.
UNCERTAINTY WITH RESPECT TO RESTAURANT PROPERTIES
Since our inception in 1987, we have had a large portion of our assets
invested in 47 Hardee's restaurant properties that are leased to Enterprises.
Under the
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master lease for these properties, we are paid annual rent equal to the greater
of $4.5 million or 9.875% of food sales. From 1987 through 1995, Enterprises
paid us more than $4.5 million per year. However, restaurant sales have declined
each year since 1992 when our restaurant related revenues peaked at $5.3
million. Accordingly, the revenue we have received from them has declined since
that time as well. In 1996, the revenues of those Hardee's restaurants fell
below the level requiring payments in excess of the minimum.
In order to protect our shareholders from these declining revenues, in
1993 we began to acquire apartment communities. We believe that we can more
effectively enhance the value of our common stock by acquiring and operating
apartment communities. Accordingly, we have decided to focus our business
primarily on the ownership and operation of apartment communities.
As a consequence of this refocused strategy, we may elect to sell our
restaurant properties and reinvest the proceeds in additional apartment
communities. No sale of the restaurants is pending, and we will only divest the
restaurants if we believe doing so will enhance shareholder value.
If we do dispose of the restaurant properties, it is possible that we may
incur a loss on the disposition of the properties. It is also possible that we
may invest such sale proceeds in properties that yield significantly less than
the $4.5 million we received from Enterprises in 1996.
Further, in the event we were to find a buyer, Enterprises has the right
to purchase the restaurants from us on the same terms as that offer. This right
may make it more difficult to find a suitable buyer or could adversely affect
the price we might realize on any such sale.
For 1996, the restaurant properties accounted for 31.0% of our total
revenues and 42.3% of net operating income on a historical basis. All of the
restaurant property revenue comes from Enterprises. The inability of Enterprises
to pay us rent would adversely affect funds from operations and funds available
for distribution. Until we are able to significantly increase our apartment
portfolio or dispose of the restaurant properties, they will continue to account
for a sizeable portion of our revenues. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Capital Resources
and Liquidity -- SHORT- AND LONG-TERM LIQUIDITY REQUIREMENTS" on page 52.
REAL ESTATE INVESTMENT RISKS
GENERAL RISKS
Our ability to make distributions to you depends on our ability to
generate funds from operations in excess of scheduled principal payments on debt
and capital expenditure requirements. Funds from operations and the value of our
properties may
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be adversely affected by events or conditions which are beyond our control. Such
events or conditions could include:
(Bullet) competition from other apartment communities and alternative
housing due in part to low interest rates, both nationally and
in our principal markets, which may make home purchasing an
attractive alternative to renting;
(Bullet) new construction of comparable properties which might adversely
affect apartment occupancy or rental rates;
(Bullet) increases in operating costs (including real estate taxes) due
to inflation and other factors, which may not necessarily be
offset by increased rents;
(Bullet) the inability to rent properties on favorable economic terms;
(Bullet) changes in governmental regulations and the related costs of
compliance;
(Bullet) changes in tax laws and housing laws including the enactment of
rent control laws or other laws regulating multifamily housing;
(Bullet) changes in interest rate levels and the availability of
financing; and
(Bullet) the relative illiquidity of real estate investments.
LACK OF GEOGRAPHIC DIVERSIFICATION
All of our properties are located in Virginia and North Carolina. Adverse
economic developments in these states could adversely impact the operations of
our properties and therefore our profitability. The concentration of properties
in a limited number of markets may expose us to risks of adverse economic
developments which are greater than the risks of owning properties in more
markets.
FINANCING RISKS
RISKS ASSOCIATED WITH DEBT FINANCING
At the conclusion of this offering, we will have a significant level of
debt. Payments of principal and interest on borrowings may leave us with
insufficient cash resources to operate the apartment communities or pay
distributions required to be paid in order for us to maintain our qualification
as a REIT.
Further, a high debt level creates an increased risk that we may default
on our obligations. If we default, the banks who lent us funds could foreclose
on the properties securing their loans. As we discuss on page 32 in the "Use of
Proceeds" section, we plan to use the net proceeds of this offering to reduce
our debt. As the pro forma balance sheet appearing on page F-21 indicates, had
this offering and the Chrysson acquisition occurred on September 30, 1997, our
debt-to-total market
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capitalization ratio (I.E., debt divided by the sum of debt and the market value
of our outstanding Units and shares of common stock) would have been 46.6%.
While not required by our Articles of Incorporation or bylaws, we intend to keep
our debt-to-total market capitalization ratio below 60% following the offering,
although circumstances may cause us to exceed that target from time to time.
VARIABLE INTEREST RATES
At September 30, 1997, $18.4 million of our debt bore interest at a
variable rate. We expect to repay approximately $4.9 million of this amount with
the net proceeds from this offering. In addition, we may incur additional debt
in the future that also bears interest at variable rates. Variable-rate debt
creates higher debt service requirements if market interest rates increase,
which would adversely affect our cash flow and the amounts available to pay
dividends.
POSSIBLE INABILITY TO REFINANCE DEBT
We may obtain financing with "due-on-encumbrance" or "due-on-sale"
clauses in which future refinancing or sale of properties could cause the
maturity dates of the mortgages to accelerate and the financing to become due
immediately. Thus, we could be required to sell properties on an all-cash basis,
or the purchaser might be required to obtain new financing in connection with a
sale. Alternatively or additionally, we may obtain mortgages that have balloon
payments. Such mortgages involve greater risks than mortgages with principal
amounts amortized over the term of the loan since our ability to repay the
outstanding principal amount at maturity may depend on obtaining adequate
refinancing or selling the property. The efficacy of either option would depend
on economic conditions in general and the value of the underlying properties in
particular. We cannot guarantee that we could refinance or repay any such
mortgages at maturity. Further, a significant decline in the value of the
underlying property could result in a loss of the property through foreclosure.
REGULATORY MATTERS
ENVIRONMENTAL MATTERS
Various Federal, state and local laws subject property owners or
operators to liability for the costs of removal or remediation of certain
hazardous substances released on a property. Such laws often impose liability
without regard to whether the
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owner or operator knew of, or was responsible for, the release of the hazardous
substances. The presence of, or the failure to properly remediate, hazardous
substances may adversely affect occupancy of any contaminated apartment
communities, the ability of Enterprises to operate restaurants, and our ability
to sell or borrow against contaminated properties. In addition to the costs
associated with investigation and remediation actions brought by governmental
agencies, the presence of hazardous wastes on a property could result in
personal injury or similar claims by private plaintiffs.
Various laws also impose, on persons who arrange for the disposal or
treatment of hazardous or toxic substances, liability for the cost of removal or
remediation of hazardous substances at the disposal or treatment facility. These
laws often impose liability whether or not the person arranging for the disposal
ever owned or operated the disposal facility.
Enterprises has agreed to pay for the costs of complying with applicable
environmental laws, ordinances and regulations on the restaurant properties.
However, the obligation to pay for such costs with respect to our other
properties, or Enterprises' inability to pay for such costs on the restaurant
properties, may adversely affect our operating costs and the value of our
properties.
Phase I environmental site assessments have been obtained on all of our
owned apartment communities. The purpose of Phase I environmental site
assessments is to identify potential sources of contamination for which a
company may be responsible and to assess the status of environmental regulatory
compliance. All of the restaurant properties were subjected to transaction
screens in December 1995. A transaction screen involves a review of a property
for the purpose of recommending whether we should perform a Phase I
environmental site assessment. A transaction screen is significantly less
thorough in scope than a Phase I environmental site assessment.
Neither the transaction screens nor the environmental site assessments
revealed any environmental condition, liability or compliance concern that we
believe would have a material adverse affect on our business, assets or results
of operations. Nor are we aware of any such condition, liability or concern by
any other means. However, it is possible that the transaction screens and the
environmental site assessments relating to any one of the properties did not
reveal all environmental conditions, liabilities or compliance concerns. It is
also possible that there are material environmental conditions, liabilities or
compliance concerns that arose at a property after the related review was
completed.
AMERICANS WITH DISABILITIES ACT COMPLIANCE
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations and commercial facilities must meet certain Federal requirements
related to access and use by disabled persons. Compliance with the ADA
requirements could require removal of access barriers, and non-compliance could
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result in the U.S. government imposing fines or private litigants winning
damages. We believe that our properties are substantially in compliance with
these requirements. Further, under the terms of the master lease agreement with
Enterprises, Enterprises is financially responsible for upgrading the restaurant
properties should such properties not be in compliance with the ADA. However, in
the event Enterprises fails to properly upgrade the restaurants and there is a
determination that the restaurant properties are not in compliance with the ADA,
we could still face the imposition of fines or an award of damages to private
litigants. If we were required to make unanticipated expenditures to comply with
the ADA, our cash flow and the amounts available for distributions to you may be
adversely affected.
CONFLICTS OF INTEREST
We have been, and continue to be, involved in various transactions with a
number of our affiliates, including executive officers, directors, major
shareholders and entities sharing common ownership with us. We describe such
relationships and transactions beginning on page 69 under the heading "Certain
Relationships and Related Transactions."
ENTERPRISES' OPTION TO CLOSE POORLY PERFORMING RESTAURANTS
Under certain agreements with Enterprises and the bank holding the
mortgage on the restaurant properties, Enterprises has the option to close
restaurants that are performing poorly, as defined in such agreements.
Under the master lease, Enterprises has the option to close a poorly
performing location by offering us a choice of three of its own restaurants that
meet certain performance criteria as a substitute for the restaurant Enterprises
wishes to close. In our sole discretion, we may accept or reject any one of the
three alternatives they propose. If we reject all three, at our option, we may
(i) keep the property and cancel the portion of the master lease relating to
that property or (ii) sell the property to Enterprises for $920,000. Beginning
on January 1, 2008, Enterprises may close up to five poorly performing locations
per year. We will have the option to keep the property and cancel the portion of
the master lease relating to that property or sell the property to Enterprises
for cash equal in amount to the property's net book value (I.E., our original
cost of $920,000 less the depreciation we have recorded since 1987).
Under the terms of a tri-party agreement among the Company, Enterprises
and the bank holding the mortgage on the restaurant properties, beginning on
January 1, 1998, Enterprises can close up to seven poorly performing locations
(but no more than five in any year) under the same terms and conditions
available to Enterprises beginning on January 1, 2008 under the master lease. If
the mortgage is canceled, the tri-party agreement terminates, and Enterprises
can only close restaurants in accordance with the provisions of the master
lease.
We cannot predict whether Enterprises will exercise its option to close
restaurants in accordance with the master lease and the tri-party agreement, and
we
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cannot accurately predict what impact such closures would have on our financial
condition or results of operations.
TAX RISKS
CONSEQUENCES OF THE FAILURE TO QUALIFY AS A REIT
We believe that we operate in a manner that enables us to meet the
requirements for qualification as a REIT for Federal income tax purposes. We
have not requested, and do not plan to request, a ruling from the Internal
Revenue Service that we qualify as a REIT. We have, however, received an opinion
from the law firm of Alston & Bird LLP that we met the requirements for
qualification as a REIT for the taxable years ended December 31, 1987 through
1996, and that we are in a position to continue such qualification.
You should be aware that opinions of counsel are not binding on the IRS
or any court. Furthermore, the conclusions stated in the opinion are conditioned
on, and our continued qualification as a REIT will depend on, our meeting
various requirements. Such requirements are discussed in more detail under the
heading "Federal Income Tax Considerations -- Requirements for Qualification"
beginning on page 86.
If we fail to qualify as a REIT, we would not be allowed a deduction for
distributions to shareholders in computing our taxable income and would be
subject to Federal income tax at regular corporate rates. We also could be
subject to the Federal alternative minimum tax. Unless we are entitled to relief
under specific statutory provisions, we could not elect to be taxed as a REIT
for four taxable years following the year during which we were disqualified.
Therefore, if we lose our REIT status, the funds available for distribution to
you would be reduced substantially for each of the years involved. See "Federal
Income Tax Considerations -- Failure to Qualify," on page 92.
EFFECT OF DISTRIBUTION REQUIREMENTS
As a REIT, we are subject to annual distribution requirements, which
limit the amount of cash we have available for other business purposes,
including amounts to fund our growth. See "Federal Income Tax
Considerations -- Annual Distribution Requirements" on page 90.
OTHER TAX LIABILITIES
Even if we qualify as a REIT, we and our subsidiaries may be subject to
certain Federal, state, and local taxes on our income and property that could
reduce operating cash flow.
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POSSIBLE ADVERSE CONSEQUENCES OF LIMITS ON OWNERSHIP OF SHARES
Our Articles of Incorporation limit ownership of our capital stock by any
single shareholder to 9.8% of the outstanding shares. The Articles also prohibit
anyone from buying shares if the purchase would result in us losing our REIT
status. This could happen if a share transaction results in fewer than 100
persons owning all of our shares or in five or fewer persons, applying certain
broad attribution rules of the Internal Revenue Code, owning 50% or more of our
shares. If you or anyone else acquires shares in excess of the ownership limit
or in violation of the ownership requirements of the Internal Revenue Code for
REITs, we:
(Bullet) will consider the transfer to be null and void;
(Bullet) will not reflect the transaction on our books;
(Bullet) may institute legal action to enjoin the transaction;
(Bullet) will not pay dividends or other distributions with respect to
those shares;
(Bullet) will not recognize any voting rights for those shares;
(Bullet) will consider the shares held in trust for the benefit of the
Company; and
(Bullet) will either direct the affected person to sell the shares and
turn over any profit to us, or we will redeem the shares. If we
redeem the shares, it will be at a price equal to the lesser
of:
(a) the price paid by the transferee of the shares or
(b) the average of the last reported sales prices on the American
Stock Exchange on the ten trading days immediately preceding
the date fixed for redemption by our Board of Directors.
An individual who acquires shares that violate the above rules bears the risk
that (i) he may lose control over the power to dispose of the shares, (ii) he
may not recognize profit from the sale of such shares if the market price of the
shares increases and (iii) he may be required to recognize a loss from the sale
of such shares if the market price decreases.
LIMITATIONS ON ACQUISITION AND CHANGE IN CONTROL
OWNERSHIP LIMIT
The 9.8% ownership limit discussed above may have the effect of
precluding acquisition of control of us by a third party without the consent of
our Board of Directors. See "Description of Capital Stock -- Ownership
Limitations and Restrictions on Transfer" on page 76.
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REQUIRED CONSENT OF THE OPERATING PARTNERSHIP FOR SIGNIFICANT CORPORATE ACTION
A provision in the Operating Partnership agreement prohibits us from
engaging in certain transactions which could result in a change of control
without the approval of the holders of a majority of the outstanding Units,
including Units that we own. While we expect that we will always hold a majority
of the outstanding Units, we cannot guarantee that this will be the case. If we
ever own less than a majority of the outstanding Units, this voting requirement
might limit the possibility for an acquisition or change in control of the
Company, even if such acquisition or change in control would be in your (the
shareholders') best interests. At the closing of this offering, we will own
approximately 86.2% of the Operating Partnership Units, and following completion
of the acquisition of the remaining Chrysson properties, we will own
approximately 77.8% of the Operating Partnership Units.
OPERATING PARTNERSHIP AGREEMENT
The Operating Partnership agreement contains provisions relating to
limited partners' redemption rights in the event of certain changes of control
of the Company. These provisions require an acquiror to maintain the Operating
Partnership structure and to maintain a limited partner's right to continue to
hold Units with future redemption rights. Such provision could have the effect
of discouraging a third party from making an acquisition proposal, even if such
proposal were in our shareholders' best interests.
PREFERRED STOCK
Our Articles of Incorporation authorize our Board of Directors to issue
up to 10.0 million shares of preferred stock. The Board of Directors may
establish the preferences and rights of any preferred shares issued. The
issuance of preferred stock could have the effect of delaying or preventing
someone from taking control of us, even if a change in control were in our
shareholders' best interests. As of the date of this offering, we have not yet
issued any preferred stock. See "Description of Capital Stock -- Preferred
Stock" on page 76.
MARYLAND BUSINESS COMBINATION STATUTE
The Maryland General Corporation Law establishes special requirements for
"business combinations" between a Maryland corporation and "interested
shareholders" unless exemptions are applicable. An interested shareholder is any
person who beneficially owns ten percent or more of the voting power of our
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between us and an
interested shareholder unless the Board approved the transaction prior to the
party becoming an interested shareholder. The five year period runs from the
most recent date on which the interested shareholder became an interested
shareholder. The law also requires a
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supermajority shareholder vote for such transactions after the end of the five
year period. This means that the transaction must be approved by at least:
(Bullet) 80% of the votes entitled to be cast by holders of outstanding
voting shares and
(Bullet) 66% of the votes entitled to be cast by holders of outstanding
voting shares other than shares held by the interested
shareholder with whom the business combination is to be
effected.
The business combination statute could have the effect of discouraging
offers to acquire us and of increasing the difficulty of consummating any such
offers, even if our acquisition would be in our shareholders' best interests.
MARYLAND CONTROL SHARE ACQUISITION STATUTE
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a shareholder vote. Two-thirds of the shares eligible to vote
must vote in favor of granting the "control shares" voting rights. "Control
shares" are shares of stock that, taken together with all other shares of stock
the acquiror previously acquired, would entitle the acquiror to exercise at
least 20% of the voting power in electing directors. Control shares do not
include shares of stock the acquiring person is entitled to vote as a result of
having previously obtained shareholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
If a person who has made (or proposes to make) a control share
acquisition satisfies certain conditions (including agreeing to pay expenses),
he may compel the Board of Directors to call a special meeting of shareholders
to be held within 50 days to consider the voting rights of the shares. If such a
person makes no request for a meeting, we have the option to present the
question at any shareholders' meeting.
If voting rights are not approved at a meeting of shareholders, then we
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value. We will determine the fair
value of the shares, without regard to voting rights, as of the date of either:
(Bullet) the last control share acquisition or
(Bullet) any meeting where shareholders considered and did not approve
voting rights of the control shares.
If voting rights for control shares are approved at a shareholders'
meeting and the acquiror becomes entitled to vote a majority of the shares of
stock entitled to vote, all other shareholders may exercise appraisal rights.
This means that you would be able to redeem your stock back to us for fair
value. Under Maryland law, the fair value may not be less than the highest price
per share paid in the control share
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acquisition. Furthermore, certain limitations otherwise applicable to the
exercise of dissenters' rights would not apply in the context of a control share
acquisition.
The control share acquisition statute would not apply to shares acquired
in a merger, consolidation or share exchange if we were a party to the
transaction.
The control share acquisition statute could have the effect of
discouraging offers to acquire us and of increasing the difficulty of
consummating any such offers, even if our acquisition would be in our
shareholders' best interests.
DEPENDENCE ON KEY PERSONNEL
We are dependent on the efforts of our executive officers, particularly
Mr. Wilkerson, Mr. Payne and Ms. Novak. While we believe that we could find
replacements for these key personnel, if necessary, the loss of their services
could have an adverse effect on our operations. Messrs. Wilkerson and Payne and
Ms. Novak have entered into employment contracts with us. We tell you more about
these employment contracts under the heading "Certain Relationships and Related
Transactions -- Transactions with Management -- EMPLOYMENT CONTRACTS AND
TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS" appearing on page
73.
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HISTORY AND FORMATION OF THE COMPANY
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EARLY HISTORY
In 1987 we purchased 47 existing Hardee's restaurant properties from BNE
Realty Partners, Limited Partnership, an affiliate of Enterprises, for an
aggregate purchase price of $43.2 million. From 1987 through 1992, our
investment strategy was limited to the ownership of these 47 restaurant
properties leased to Enterprises, a Hardee's franchisee. During this period we
operated as an externally administered and externally managed REIT, with an
affiliate of Enterprises performing all management and administrative functions
under an advisory contract. We leased the restaurants to Enterprises under a
master lease on a triple-net basis. A master lease is a single lease that covers
multiple properties, while a triple-net lease is one where the lessee pays all
operating expenses, maintenance, property insurance and real estate taxes. In
order to provide for growth in funds from operations and enhance shareholder
value, we began in 1993 to diversify our investments into apartment communities
by first purchasing the 336-unit Paces Commons in June 1993 followed by the
162-unit Oakbrook in June 1994. Both of these apartment communities are located
in Charlotte, North Carolina.
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ACQUISITION OF BT VENTURE CORPORATION
We continued our diversification with our acquisition in October 1994 of
BT Venture Corporation, an integrated real estate management, development and
acquisition company, which we acquired from two of our affiliates, B. Mayo
Boddie and Nicholas B. Boddie. With this acquisition, we became a
self-administered and self-managed REIT. BT Venture Corporation owned the
448-unit Latitudes in Virginia Beach, Virginia and managed 12 apartment
communities (including Latitudes and the two that we owned) and three retail
shopping centers. See also "Certain Relationships and Related
Transactions -- Boddie-Noell Properties and B. Mayo Boddie and Nicholas B.
Boddie" on page 69. After the acquisition of BT Venture Corporation, we also
acquired the 184-unit Harris Hill in Charlotte in December 1994.
FORMATION OF BNP MANAGEMENT, INC.
In May 1995, we reorganized our third-party management operations to
better enable us to comply with certain provisions of the Internal Revenue Code
that limit the amount of revenues that a REIT can earn from third-party property
management contracts. In the reorganization we transferred all of our
third-party management contracts, which we assumed when we acquired BT Venture
Corporation, to our newly formed management company, BNP Management, Inc. an
unconsolidated taxable subsidiary of the Company. In exchange we received a 95%
economic interest in the Management Company (represented by 100% of the
non-voting equity and one percent of the voting equity of the Management
Company). Officers of the Management Company, who are also officers of the
Company or its affiliates, own the remaining equity interests. Rules regarding
the ownership of assets by REITs keep the Company (in this case we are referring
to the REIT only, as opposed to the REIT, the Operating Partnership and the
Management Company) from owning stock or securities of corporations in certain
ways. These rules could adversely affect the Company, causing it to fail to be a
REIT. See "Federal Income Tax Considerations -- Requirements for
Qualification -- ASSET TESTS" on page 89 and " -- Other Tax
Considerations -- BNP MANAGEMENT, INC." on page 99.
The Management Company employs the on-site personnel at each of our
managed properties and pays all the related expenses of operating the managed
properties. The property owners generally pay a management fee of five percent
of a property's gross revenues and reimburse the Management Company for all
operating expenses, including the salaries and benefits of employees performing
work on behalf of such properties.
RENEGOTIATION OF MASTER LEASE
We renegotiated and amended the lease agreement with Enterprises in
December 1995. It now has a primary term expiring in December 2007 but grants
Enterprises three five-year renewal options. Under the amended lease,
Enterprises pays annual rent equal to the greater of $4.5 million or 9.875% of
food sales from the restaurants.
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OTHER ACTIVITY
Following the acquisition of Harris Hill, we continued to seek attractive
acquisition opportunities, and, in April 1996, we purchased Paces Village, a
198-unit apartment community located in Greensboro, North Carolina.
On February 27, 1997, we entered into a participating loan agreement with
The Villages of Chapel Hill Limited Partnership, whose primary asset is The
Villages of Chapel Hill, a 264-unit apartment community in Chapel Hill, North
Carolina. The Villages of Chapel Hill Limited Partnership is a North Carolina
limited partnership managed by the Management Company. The general partner of
this limited partnership is Boddie Investment Company, which is one of our
affiliates. We describe this transaction in greater detail under the heading
"Certain Relationships and Related Transactions -- Boddie-Noell Properties and
Boddie Investment Company" on page 71.
CONVERSION TO UPREIT
As previously noted, we recently converted to an UPREIT structure where
the Company is the Operating Partnership's sole general partner. We contributed
our presently owned properties and all other assets and liabilities to a limited
liability company wholly-owned by the Operating Partnership in exchange for
Units. We currently own a majority of the Units. With the exception of the
general partner (us), Unitholders will generally be able to redeem their Units
for cash or, at our option as general partner, for shares of common stock of the
Company on a one-for-one basis. UPREITs are structured so that distributions of
cash from the Operating Partnership are allocated between the REIT (I.E., the
Company) and the other limited partners based upon their respective Unit
ownership. The Operating Partnership was organized as a Delaware limited
partnership on September 18, 1997.
CHRYSSON ACQUISITION
On September 22 of this year, we signed an agreement to acquire a
portfolio of seven apartment communities containing 1,356 apartment units
located in North Carolina. All of these properties were owned by the Chrysson
Parties, developers of mid- to high-end apartment communities based in
Winston-Salem, North Carolina.
Under the terms of the Chrysson acquisition agreement, we will issue up
to 1.7 million Units in the Operating Partnership. Of the approximately 1.2
million Units attributable to Phase I of the acquisition, 950,032 Units have
already been issued, 100,000 Units will not be issued until one year after the
closing of Phase I, and 100,000 will not be issued until two years after the
closing. We will issue the remaining Units upon the acquisition of each of the
remaining three apartment communities. The Chrysson properties are currently
encumbered by approximately $70.3 million of debt. We intend to refinance this
debt as we acquire each of the Chrysson properties. We expect the acquisition to
be immediately accretive to our funds from operations and funds available for
distribution per share.
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Phase I of the acquisition consists of 880 apartment units in four
apartment communities. The Chrysson Parties are still developing the other three
apartment communities containing 476 apartment units. We will acquire them for
Units only when they are completed and achieve predetermined occupancy and
rental levels. The number of Units we will issue is based on those predetermined
measures, which are specified for each property in the acquisition agreement.
All have estimated completion dates within the next 12 months.
Additionally, under the terms of the acquisition agreement, we will have
a right of first refusal to purchase any project developed in the future by the
development entity owned by the Chrysson Parties. Any such acquisition must be
approved, however, by a majority of the directors who are disinterested with
respect to the proposed transaction. As a further condition of the acquisition
agreement, the Chrysson Parties have agreed to refrain from developing any
apartment communities within a three mile radius of any apartment community we
own now or in the future.
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THE COMPANY
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CURRENT OPERATIONS
Boddie-Noell Properties, Inc. is a corporation organized under the laws
of the State of Maryland. It was incorporated on April 1, 1987 under the laws of
Delaware, and it was reincorporated in Maryland on July 31, 1997.
We currently operate as a self-administered and self-managed REIT in
accordance with the provisions of Sections 856 through 860 of the Internal
Revenue Code. Qualifying as a real estate investment trust for federal income
tax purposes means that we substantially eliminate the federal "double taxation"
that usually results from investment in a corporation. The impact of failing to
qualify as a REIT is discussed in the "Risk Factors -- Tax Risks -- Consequences
of the Failure to Qualify as a REIT" section beginning on page 17. See also,
"Federal Income Tax Considerations" beginning on page 83.
We currently own nine apartment communities in Charlotte, Greensboro and
Winston-Salem, North Carolina and Virginia Beach, Virginia, containing a total
of 2,208 apartment units. Upon completion of our acquisition of all of the
Chrysson properties (discussed under "History and Formation of
Company -- Chrysson Acquisition" on page 23), we will also own an additional
three apartment communities with 476 apartment units in Greensboro,
Winston-Salem and Burlington, North Carolina. Our apartments' rental rates are
in the moderate to moderately high range for apartments available within these
markets. Despite a substantial amount of new construction, especially in
Charlotte and Greensboro, apartment occupancies and rental rates in these
markets have remained relatively strong. This strength is
24
<PAGE>
primarily attributable to demand for apartments created by continued population
and job growth. See "Our Properties -- Market Information" on page 54.
We own 95% of the economic interest of the Management Company. As we
discuss under "History and Formation of the Company -- Formation of BNP
Management, Inc." on page 22, we do not consolidate the Management Company for
financial statement purposes. The Management Company manages an additional seven
apartment communities containing a total of 1,713 apartment units and two
shopping centers containing a total of 113,800 square feet. All of the managed
properties are located in North Carolina and Virginia.
We also own the 47 restaurant properties which we lease to Enterprises
under a triple-net master lease. In addition to all operating expenses,
Enterprises is responsible for the cost of any improvement, expansion,
remodeling or replacement required to keep the properties competitive or in
conformity with Hardee's Food Systems, Inc.'s building standards. The decision
to modify a particular restaurant property is based on a number of factors,
including the date of its last modification and the number, age and design
features of competing restaurants located in the market area of the particular
property. Enterprises is required to make any renovations at its own expense.
As of September 30, 1997, we employed 86 persons, including management,
accounting, legal, acquisitions, development, property management, leasing,
maintenance and administrative personnel.
PRINCIPAL INVESTMENT OBJECTIVES
Our principal investment objectives are to provide our shareholders with
current income and to increase the value of the Company's shares of common
stock. To accomplish these goals, we will focus on increasing long-term growth
in funds from operations and funds available for distribution per share and on
increasing the value of our portfolio through effective management, growth,
financing and investment strategies. We expect to implement our strategies
primarily through the acquisition, operation, leasing and management of
apartment communities.
OPERATING PHILOSOPHY
We have developed an operating philosophy to assist us in achieving our
goals. We focus on identifying our market (both geographic and consumer), on
effectively managing our properties, on offering the highest possible level of
customer service to our residents and on streamlining our management structure.
This philosophy defines how we position ourselves in the apartment rental
market.
25
<PAGE>
MARKET FOCUS
We seek to acquire properties in areas within the southeastern United
States exhibiting substantial economic growth and a rapidly expanding job base
in which we can establish a significant market presence in the apartment
community marketplace. We believe apartment communities in these markets offer
attractive long-term investment returns. We also believe there are attractive
opportunities both within and beyond the markets in which we currently operate.
Our residents are typically high-end "residents by
necessity" -- individuals or families with moderate to high levels of income
that live in apartments by necessity. They typically include retirees, young
professionals, manager-level white collar workers, medical personnel, teachers,
members of the military and young families. This category of "residents by
necessity" includes older residents who choose not to live in an assisted living
facility and younger residents who cannot afford to move into a house until they
accumulate enough money for a down payment. These residents generally prefer,
and our apartment units typically offer:
(Bullet) good locations relative to shopping, job corridors and health
care providers;
(Bullet) modern and well-maintained amenities;
(Bullet) a sense of community;
(Bullet) a number of external amenities (such as a clubhouse, tennis
courts, a swimming pool and well-maintained lawns);
(Bullet) reasonable prices in relation to similar apartment communities
in the same geographical area; and
(Bullet) a high square footage to cost ratio.
INTENSIVE MANAGEMENT FOCUS
We strongly emphasize on-site property management. We seek opportunities
to increase rents, reduce resident turnover, raise average occupancy rates and
control costs. On-site community managers have responsibility for monitoring
market trends and, together with our regional property managers, have the
discretion to react to such trends.
DEDICATION TO CUSTOMER SERVICE
Our experience is that maintaining a consistently high level of customer
satisfaction leads to greater demand for our apartment units, higher occupancy
and rental rates, reduced turnover and increased long-term profitability.
Accordingly, we strive to attain the highest levels of customer service by
properly training our
26
<PAGE>
personnel, personalizing relations with our residents and quickly responding to
residents' requests.
FLAT OPERATIONAL STRUCTURE
Each apartment community is operated by an on-site community manager
assisted by staff trained in marketing, management, accounting, maintenance and
other procedures. On-site community managers report directly to regional
property managers who are based at one of the locations for which they have
responsibility but who regularly visit each of the apartment communities in
their region. Our property managers have overall operating responsibility for
their specific communities. We believe that our "flat" operating structure
allows us to:
(Bullet) capitalize on the benefits of a decentralized structure (I.E.,
specific market knowledge and increased personal
accountability);
(Bullet) efficiently staff our operations;
(Bullet) achieve a cohesive corporate culture; and
(Bullet) reduce costs through operating efficiencies and economies of
scale inherent in the management of a large portfolio of
properties in a limited geographic region.
OUR GROWTH STRATEGY
We seek to increase earnings, funds from operations and funds available
for distribution per share to maximize shareholder value through a balanced
strategy of internal and external growth.
INTERNAL GROWTH STRATEGY
Our goal is to maximize our return on investment in each apartment
community by maximizing rental revenues through careful attention to both rental
rates and occupancy levels while reducing or controlling operating expenses. We
(i) seek higher net rental revenues by physically enhancing and maintaining the
competitiveness of our communities and (ii) manage expenses through our system
of detailed management reporting and accountability in order to achieve
increases in operating cash flow. We have adopted several programs and policies
to achieve these ends.
In an attempt to achieve the optimal balance between rental rates and
occupancy, we have authorized our community managers, acting in concert with our
regional property managers, to adjust rents in response to local market
conditions and to concentrate resident turnover in peak rental demand months.
The community
27
<PAGE>
managers are also responsible for developing and implementing marketing plans
for their communities.
We have also invested heavily in training programs for our property-level
personnel. We believe that a comprehensive program for the continued training of
all employees, a commitment to "promoting from within" and the development of
professional, long-term career paths for our employees enhance the performance
of our personnel and reduce employee turnover. Our "corporate office" personnel
also spend time at our communities because we believe doing so fosters a sense
of cohesiveness and a uniform corporate culture and provides valuable
information and experience for employees throughout our organization.
We compensate all on-site employees in part through performance-based
compensation programs. These include monthly bonuses based on resident renewals
and quarterly bonuses tied to both net operating income for the employee's
respective community(ies) and our overall performance. Our senior management is
eligible for discretionary bonuses and incentive stock options as determined by
the Board of Directors.
Our on-site personnel are charged with the task of making residents
comfortable in their communities through personal attention, which includes
organizing social functions and activities as well as responding promptly to any
resident problems that may arise in conjunction with an apartment unit or the
community. We believe social functions foster a sense of community by
encouraging residents to meet one another and that this sense of community helps
reduce turnover (discussed below) and increases the effectiveness of community
watch programs.
We also try to enhance the living experience in our communities by
guaranteeing that we will respond to maintenance calls within 24 hours. If we do
not respond within that time frame, we will rebate rent for that day. We believe
this puts our on-site personnel in a customer-service frame of mind. We also
conduct frequent resident surveys in order to measure customer satisfaction, and
we use residents' responses to form our annual plans for each community,
evaluate personnel and measure property performance.
For the first several years we operated apartment communities, we
experienced approximately a two-thirds turnover rate, which we believe is about
average in our markets. The turnover rate is the rate at which residents move
out of apartment units during the year. For example, if we had 100 apartment
units and the residents of 75 of them moved out during the year, then we would
have a 75% turnover rate. If we had 100 apartment units and the residents of 50
of them moved out, and then, in the same year, 25 of the new residents also
moved out, we would still have a 75% turnover rate even though there was
activity only in 50% of the apartment units.
When a resident leaves, we incur two major costs. First, we must clean,
paint and sometimes replace carpeting or appliances to prepare the apartment
unit for a new resident. Second, until a new resident moves in, the apartment
unit is vacant, and we
28
<PAGE>
will not collect rent. We estimate that each apartment unit that turns over
costs us the equivalent of five weeks' rent.
In partial response to this turnover issue, we initiated the
above-described monthly bonus program based on resident renewals. We are also
reducing turnover rates by offering longer term leases. We were one of the first
companies in our industry to offer 24 month leases on apartment units. As of
September 30, 1997, over one-third of our apartment units were leased for 13 or
more months. Further, to induce residents to remain in our communities, we offer
them incentives to renew their leases. We provide them with a list of options,
and they can select the options they would like, with the number of options they
can select based on the length of their renewal. For example, if a resident
renews for a six month term, he may choose one free upgrade, such as a free
carpet cleaning, paint touch-up or shelving. A 24 month renewal provides the
resident with two options from a more extensive list that includes a porcelain
bath sink with a designer fixture, a wallpaper change or a decorative border. In
addition to helping to reduce turnover, these upgrades enhance the value of our
properties. Through programs such as these, as well as our commitment to
customer service and our attempt to foster a sense of community, we believe we
have begun to reduce turnover and its associated costs.
In an effort to reduce long-term operating costs, we annually review each
apartment community and promptly attend to maintenance and recurring capital
needs. In addition, we conduct a periodic program of preventive maintenance in
each apartment unit, whereby our personnel inspect, clean, service or repair
appliances, heating and cooling systems, smoke alarms and apartment interiors on
a regularly scheduled basis. Our Senior Service Supervisor oversees all aspects
of our maintenance procedures and is responsible for the implementation of all
capital projects, training of new service personnel, troubleshooting and
monitoring our preventive maintenance programs and personnel. We anticipate we
will spend between $275 and $300 per apartment unit in 1997 for recurring
capital expenditures. We believe that these programs lower operating costs over
the life of the communities, increase the long-term value of the communities and
contribute to maintaining the higher-end market position of our communities.
We maintain a hands-on management style and "flat" organizational
structure that emphasizes our senior management's continued close contact with
the markets and employees. Our flat organizational structure enables us to keep
abreast of local market trends and allows us to quickly respond to the needs of
residents and on-site employees and to control overhead costs.
We have also implemented programs to control expenses. For example, we
have contracted with one roofing contractor and one paving contractor to perform
all roof maintenance, repairs and replacements and all parking lot maintenance
at most of our communities. This approach allows us to take advantage of
economies of scale in negotiating contracts and to focus on managing our
properties instead of having to make multiple calls to a contractor in order to
ensure a job is completed in a timely and satisfactory manner.
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<PAGE>
EXTERNAL GROWTH STRATEGY
We intend to build upon the acquisition of the five initial apartment
communities, BT Venture Corporation and the Chrysson properties. Our goal is to
continue to invest in additional apartment communities in secondary markets
throughout the southeastern United States. Through our UPREIT structure, we have
the ability to acquire apartment communities by issuing Units in tax-deferred
exchanges with owners of such properties. We expect that we will finance future
acquisitions of apartment communities principally with such Units as well as
loans and funds from additional offerings of common stock, preferred stock or
debt.
Upon the acquisition of an apartment community, we seek to improve both
operating results and the physical property through a preventive maintenance
policy and selective improvements which may include new roofs, new exterior
siding, exterior painting, clubhouse renovation and/or interior refurbishment.
We believe that such renovations have permitted us to increase rental rates and
improve occupancy rates at our properties after we have completed such
renovations.
In evaluating properties for potential acquisition, our primary
consideration is a property's current and anticipated cash flow, particularly
with respect to the cash flow's adequacy to meet operational needs and other
obligations, and its impact on our ability to pay dividends. We also put
emphasis on the geographic area in which the apartment community is located and
the demographic profile of the residents. We obtain this information from market
studies and discussions with brokers, other owners and developers of apartment
communities located in the apartment market and the publishers of apartment
rental guide books. Within a geographic area, we also look for apartment
communities with locations close to where people work, shop and receive
healthcare. Other factors we consider include:
(Bullet) the construction quality, condition and design of the property;
(Bullet) the potential for increasing cash flow by means of increasing
rental rates and occupancies, as well as reducing operating
expenses;
(Bullet) the potential for capital appreciation of the property;
(Bullet) the growth, tax and regulatory environment of the community in
which the property is located;
(Bullet) occupancy and demand for the property; and
(Bullet) prospects for future sale or refinancing.
Generally we will acquire an apartment community only where its operating
history indicates that it will contribute immediately to our cash flow and there
is a strong likelihood that its cash flow will increase.
We will selectively consider opportunities to develop new apartment
communities and to acquire and rehabilitate older apartment communities. Members
30
<PAGE>
of our management team have directed over $114 million of development or
redevelopment projects, including 13 apartment communities containing over 2,500
apartment units. This development and redevelopment experience will enable us to
build additional apartment communities and to rehabilitate existing communities
when economic conditions and available capital make such opportunities
attractive.
While many of our competitors prefer not to purchase apartment
communities that are more than ten years old, we will consider doing so if such
communities are well located and otherwise meet our quality standards and
operating model. We believe we can purchase such apartment communities at fair
prices and make necessary capital expenditures to bring them up to our high
standards.
FINANCING STRATEGY
Consistent with our stated policy of maintaining a ratio of debt-to-total
market capitalization (total debt divided by the sum of our total debt and the
market value of our outstanding shares of common stock and Operating Partnership
Units) of 60% or less, we intend to pursue our growth strategy through the
utilization of our flexible capital structure -- this may include the issuance
of Units, common stock and/or preferred stock and the incurrence of additional
debt. We may use our line of credit or fixed-rate, long-term debt to acquire
apartment communities. While the debt we incur to finance each of the Phase I
Chrysson properties will all be due at the same time, we will, in the future,
attempt to vary the maturities of our debt, thereby avoiding a significant
portion of our debt coming due in any given year. After this offering closes and
we apply the net cash proceeds, as we describe on page 32 under the heading "Use
of Proceeds," we will have approximately $13.5 million in variable rate debt
(with an effective annual interest rate of 7.4% based on interest rates in
effect on September 30, 1997) and $74.2 million of fixed-rate debt (with a
weighted average annual interest rate of 7.6% based on interest rates in effect
on September 30, 1997). At the close of this offering, we will have a
debt-to-total market capitalization ratio of approximately 46.6%.
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
USE OF PROCEEDS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We estimate the net cash proceeds from the sale of the 2,800,000 shares
of common stock we are offering to be approximately $37.6 million. "Net cash
proceeds" is what we will receive after payment of all underwriting discounts
(approximately $2.9 million) and the expenses of the offering (such as legal,
accounting and printing costs, which we estimate will total approximately
$500,000). If the underwriters' over-allotment option is exercised in full, the
net cash proceeds will be approximately $43.3 million, which we calculated as
3,220,000 shares times the estimated offering price, or gross proceeds of $47.1
million, less underwriting discounts and commissions of approximately $3.3
million and offering expenses of $500,000. We will contribute the net cash
proceeds to the Operating Partnership in exchange for Units in the Operating
Partnership. The Operating Partnership will use the net cash proceeds to repay
certain mortgage indebtedness secured by our apartment communities and
restaurant properties and our line of credit as follows:
<TABLE>
<CAPTION>
PRINCIPAL PRO FORMA
BALANCE PRINCIPAL BALANCE INTEREST RATE
PROPERTY/DEBT AS OF 9/30/97 PAYMENT 9/30/97 AT 9/30/97 MATURITY DATE
- -------------------------------- ------------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Chrysson Phase I acquisition
debt.......................... $ 0 $ 8,785 $ 0 7.7% May 1999(1)
Line of credit.................. 23,900 23,900 0 8.0% Dec. 1999
Paces Village, 2nd mortgage..... 1,400 1,400 0 8.0% April 1999(1)
Paces Village, 1st mortgage..... 8,496 3,498 4,998 7.5% April 2003
------------- --------- ---------
Total...................... $33,796 $ 37,583 $ 4,998
</TABLE>
- ---------------
(1) Due on the earlier of a public offering of equity or the maturity date
shown.
If the underwriters' over-allotment option to purchase 420,000 shares is
exercised in full, we expect to use the additional net cash proceeds of
approximately $5.7 million to repay additional debt or to establish working
capital reserves. Pending such application of the net cash proceeds, we will
invest the net cash proceeds in interest-bearing accounts and short-term,
interest-bearing securities, which are consistent with our policies disclosed on
page 62 under the heading "Certain Policies -- Short-term Investments."
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARKET PRICE OF THE COMPANY'S COMMON STOCK,
DISTRIBUTIONS AND RELATED SHAREHOLDER MATTERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Our common stock is traded on the American Stock Exchange under the
symbol "BNP". There were approximately 1,650 shareholders of record at November
25, 1997. The table below shows, for the periods indicated, the range of high,
low and closing sale prices of our common stock as reported by the American
Stock Exchange and the dividends paid per share. As of November 25, 1997, the
closing price of the Company's Common Stock was $14.625 per share.
<TABLE>
<CAPTION>
STOCK PRICE DIVIDENDS
----------------------------------------- PAID
HIGH LOW CLOSE PER SHARE
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
1997
Fourth quarter*.................... $ 17 1/8 $ 14 1/2 $ 14 5/8 $0.31**
Third quarter...................... 16 1/2 12 1/2 16 1/2 0.31
Second quarter..................... 13 11 7/8 12 7/8 0.31
First quarter...................... 13 1/8 12 3/8 12 5/8 0.31
1996
Fourth quarter..................... 13 1/4 12 1/8 12 1/2 0.31
Third quarter...................... 13 1/4 12 3/8 12 7/8 0.31
Second quarter..................... 13 3/8 11 1/2 12 5/8 0.31
First quarter...................... 13 3/4 12 1/4 13 1/4 0.31
1995
Fourth quarter..................... 13 1/8 12 1/8 12 1/2 0.31
Third quarter...................... 13 5/8 12 1/4 12 7/8 0.31
Second quarter..................... 13 5/8 11 1/4 12 7/8 0.31
First quarter...................... 13 7/8 12 1/8 13 3/8 0.31
</TABLE>
- ---------------
* October 1, 1997 through November 25, 1997.
** Declared on October 17, 1997 and paid on November 14, 1997 to shareholders of
record as of October 31, 1997.
As of September 30, 1997, we had reserved 280,000 shares to be issued
upon exercise of stock options we granted to some of our key employees.
We have paid regular quarterly dividends to holders of our common stock
since our inception, and we intend to continue to do so. We anticipate that we
will pay all dividends from current funds from operations. We expect to continue
to pay a dividend of $0.31 per share per quarter. On an annualized basis, this
would be $1.24 per share, which is approximately 8.5% of the current stock
price. We do not intend to change our estimated distribution per share if the
underwriters exercise their over-allotment option. We expect distributions to
substantially exceed the 95% annual distribution requirement for a REIT,
however, all future dividends are at the discretion of our Board of Directors.
See "Federal Income Tax Considerations -- Annual Distribution Requirements" on
page 90.
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<PAGE>
Historically, a portion of the dividends has been considered a "return of
capital" for Federal income tax purposes. In 1996, 43.7% of the $1.24 dividend
per share was treated as a return of capital, while the percentage was 51.8% in
1995 and was 49.3% in 1994. We anticipate that we will continue making
distributions in excess of earnings and profits and, therefore, a portion of
future distributions also would be considered a "return of capital." If that is
the case, the portion of such distributions that is a return of capital should
not be subject to Federal income taxes. See "Federal Income Tax
Considerations -- Taxation of U.S. Shareholders" on page 93.
We have a dividend reinvestment plan which is available to you if you
become a shareholder. Under this plan, as amended in July 1996, the plan
administrator, First Union National Bank of North Carolina, reinvests dividends
on behalf of plan participants in our common stock. First Union will either
issue new shares or purchase shares on the open market, at our direction. In
addition, shareholders who participate in the plan may elect to make direct cash
investments or supplement their reinvestment program with additional cash
investments of any amount from $25 to $10,000 per quarter. If you participate,
you will not need to pay any commissions on stock purchased under the plan.
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CAPITALIZATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following table sets forth:
(Bullet) the capitalization of the Company as of September 30, 1997
(unaudited) and
(Bullet) the capitalization of the Company on a pro forma basis as of
September 30, 1997 assuming the completion of this offering,
the use of the net proceeds as described under the heading "Use
of Proceeds" on page 32, the completion of Phase I of the
Chrysson acquisition and our restructuring to an UPREIT.
You should read the information in the following table in conjunction with:
(Bullet) the financial statements and notes to the financial statements
beginning on page F-1;
(Bullet) the pro forma financial information and notes to the pro forma
financial information beginning on page F-20; and
(Bullet) the discussion set forth in "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity" beginning on
page 49.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
COMPANY
HISTORICAL PRO FORMA (1)
---------- -------------
<S> <C> <C>
(IN THOUSANDS)
Debt:
Mortgages and other notes payable.................................... $ 71,341 $ 80,614
Notes payable to affiliates.......................................... 7,056 7,056
---------- -------------
Total debt........................................................ $ 78,397 $ 87,670
Minority Interest In Operating Partnership............................. -- 12,350
Shareholders' Equity:
Common Stock, $0.01 par value, 100,000,000 authorized, 3,123,741
outstanding before the offering and 5,923,741 outstanding after
the offering...................................................... 31 59
Additional paid-in capital........................................... 35,163 72,718
Dividend distributions in excess of net income....................... (11,244) (11,491)
---------- -------------
Total shareholders' equity........................................ 23,950 61,286
---------- -------------
Total capitalization.............................................. $ 102,347 $ 161,306
---------- -------------
---------- -------------
</TABLE>
- ---------------
(1) Pro forma reflects this offering, the application of the proceeds of this
offering, our conversion to an UPREIT and Phase I of the Chrysson
acquisition, including the deferred issuance of 200,000 Units, as described
under the heading "History and Formation of the Company -- Chrysson
Acquisition" beginning on page 23.
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<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We present below selected historical financial information. We encourage
you to read the financial statements and the notes accompanying the financial
statements; this information is not intended to be a replacement for the
financial statements. We derived the historical financial and balance sheet data
for the five years ended December 31, 1996 from the audited historical financial
statements of the Company and the financial and balance sheet data for the nine
month periods ended September 30, 1996 and 1997 from unaudited historical
financial statements of the Company. Our management believes that the unaudited
historical financial statements contain all adjustments needed to present fairly
the information included in such statements, and that the adjustments made
consist only of normal recurring adjustments.
Historical financial and operating information includes all restaurant
properties and apartment communities we owned. While the number of restaurant
properties has remained constant, you should note in reviewing this information
that we acquired apartment properties throughout the periods presented.
Therefore, the information is not comparable between periods. See "History and
Formation of the Company" beginning on page 21. You should also recognize that
historical operating results may not be comparable to future operating results.
We have also provided pro forma financial information. Pro forma
financial information is derived by adjusting the historical financial
statements to give retroactive effect to the Chrysson acquisition, this
offering, the application of the net cash proceeds from this offering and our
conversion to an UPREIT, and assumes all such transactions occurred as of the
beginning of the period (for operating statement purposes) or the end of the
period (for balance sheet purposes).
The pro forma adjustments related to Phase I of the Chrysson acquisition
represent only activities of the "stabilized" Chrysson properties and do not
reflect the impact of the entire Phase I portfolio. We consider "stabilized"
properties to be those properties or phases of properties which have achieved
occupancy levels of 90% or greater for 90 consecutive days. Applying this
definition of "stabilized" properties, we have excluded one apartment community
and the second phase of another apartment community from our pro forma
information for 1996 and the nine month period ended September 30, 1997. For a
more detailed description of how we derived the pro forma information, you
should refer to the description of the unaudited pro forma condensed
consolidated financial information on page F-20.
No one has audited this pro forma information, and it may not represent
how we would have performed and what our financial position would have been had
the Chrysson acquisition, the UPREIT conversion and this offering really
occurred at the times assumed for purposes of deriving the pro forma
information. We encourage you to read the unaudited pro forma information in
conjunction with the unaudited pro forma financial statements that begin on page
F-21 of this prospectus.
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<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30
------------------------------------------------------- -----------------------------
HISTORICAL PRO HISTORICAL PRO
-------------------------------------------- FORMA (3) ------------------ FORMA (3)
1992 1993 1994 1995 1996 1996 1996 1997 1997
------- ------- ------- ------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AND PROPERTY DATA)
OPERATING DATA:
Revenue:
Apartment rental
income................ $ -- $ 1,245 $ 3,889 $ 8,476 $ 9,791 $14,222 $ 7,209 $ 7,898 $ 11,128
Restaurant rental
income................ 5,333 5,165 5,047 4,649 4,500 4,500 3,375 3,375 3,375
Equity and other
income................ 40 16 322 600 217 225 160 336 348
------- ------- ------- ------- -------- --------- -------- -------- ---------
Total revenue............. 5,373 6,426 9,258 13,726 14,508 18,947 10,745 11,609 14,851
Expenses:
Depreciation............ 778 973 1,415 2,204 2,440 3,536 1,787 1,923 2,745
Amortization............ 20 92 233 405 535 400 394 439 336
Apartment operations.... -- 360 1,101 2,481 2,977 4,182 2,190 2,537 3,473
Corporate
administration........ 381 502 887 1,286 894 975 702 734 809
Interest................ 1,035 1,442 2,802 5,362 5,946 5,202 4,395 4,684 4,017
Write-off of deferred
costs................. -- 600 518 359 -- -- -- -- --
------- ------- ------- ------- -------- --------- -------- -------- ---------
Total expenses............ 2,215 3,970 6,956 12,097 12,792 14,295 9,467 10,317 11,380
------- ------- ------- ------- -------- --------- -------- -------- ---------
Income before minority
interest of
Unitholders............. 3,159 2,455 2,302 1,628 1,716 4,652 1,278 1,292 3,471
Minority interest in
Operating Partnership... -- -- -- -- -- 415 -- -- 306
------- ------- ------- ------- -------- --------- -------- -------- ---------
Net income before
extraordinary item...... $ 3,159 $ 2,455 $ 2,302 $ 1,628 $ 1,716 $ 4,237 $ 1,278 $ 1,292 $ 3,165
------- ------- ------- ------- -------- --------- -------- -------- ---------
Net Income................ $ 3,159 $ 2,455 $ 2,302 $ 1,628 $ 1,716 N/A $ 1,278 $ 1,292 N/A
------- ------- ------- ------- -------- --------- -------- -------- ---------
------- ------- ------- ------- -------- --------- -------- -------- ---------
Net income per share...... $ 1.11 $ 0.86 $ 0.80 $ 0.54 $ 0.57 $ 0.73 $ 0.42 $ 0.42 $ 0.54
------- ------- ------- ------- -------- --------- -------- -------- ---------
------- ------- ------- ------- -------- --------- -------- -------- ---------
BALANCE SHEET DATA:
Real estate assets (before
accumulated
depreciation)
Apartment communities... $ -- $14,352 $54,724 $55,316 $ 66,610 -- $ 66,458 $ 67,141 $128,001
Restaurant properties... 43,205 43,205 43,205 43,205 43,205 -- 43,205 43,205 43,205
Real estate assets, net... 38,762 52,140 91,101 89,500 98,354 -- 98,856 96,962 157,822
Total assets.............. 40,465 54,643 95,954 94,352 103,436 -- 104,183 104,206 166,355
Total debt................ 12,000 26,894 66,884 67,162 77,352 -- 77,471 78,397 87,670
Minority interest......... -- -- -- -- -- -- -- -- 12,350
Shareholders' equity...... $28,331 $27,252 $27,968 $26,200 $ 24,902 -- $ 24,778 $ 23,950 $ 61,286
APARTMENT PROPERTY DATA:
Apartment communities
owned (1)............... -- 1 3 4 5 8 5 5 9
Apartment units owned
(1)..................... -- 336 946 1,130 1,328 1,848 1,328 1,328 2,208
Average apartment economic
occupancy............... -- 94.4% 94.6% 95.3% 94.1% -- 94.3% 95.5% --
Average monthly
revenue/unit............ -- $ 576 $ 624 $ 657 $ 684 -- $ 684 $ 692 --
OTHER DATA:
EBITDA.................... $ 4,992 $ 4,963 $ 6,751 $ 9,600 $ 10,637 $13,790 $ 7,853 $ 8,339 $ 10,569
Funds from operations
(2)..................... 3,943 4,029 4,291 4,450 4,472 8,504 3,295 3,391 6,391
Funds available for
distribution (2)........ 3,957 4,055 4,253 3,961 3,835 7,621 2,825 2,986 5,811
Net cash provided by (used
in):
Operating activities.... 3,854 4,066 4,496 4,476 4,800 -- 3,929 3,711 --
Investing activities.... (134) (16,157) (18,729) (832) (11,020) -- (10,966) (1,696) --
Financing activities.... $(3,534) $11,152 $15,063 $(3,895) $ 6,361 -- $ 7,288 $ (1,451) --
Weighted average number of
shares outstanding...... 2,850 2,850 2,855 3,006 3,027 6,397 3,018 3,107 6,477
</TABLE>
37
<PAGE>
- ---------------
(1) At period end.
(2) Funds from operations is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") as "net income (computed in accordance with
generally accepted accounting principles), excluding gains (losses) from
debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships and
joint ventures."
We define funds available for distribution as funds from operations
plus non-cash expense for amortization of loan costs, less scheduled
principal payments on our debt and less recurring capital expenditures.
We consider funds from operations and funds available for
distribution to be useful in evaluating potential property acquisitions and
measuring the operating performance of an equity REIT because, together with
net income and cash flows, funds from operations and funds available for
distribution provide investors with additional measures to evaluate the
ability of the REIT to incur and service debt and to fund acquisitions and
other capital expenditures. Funds from operations and funds available for
distribution do not represent net income or cash flows from operations as
defined by generally accepted accounting principles. You should not consider
funds from operations or funds available for distribution:
(Bullet) to be alternatives to net income as reliable measures of
the Company's operating performance or
(Bullet) to be alternatives to cash flows as measures of liquidity.
Funds from operations and funds available for distribution do not
measure whether cash flow is sufficient to fund all of our cash needs,
including principal amortization, capital improvements and distributions
to shareholders. Funds from operations and funds available for distribution
do not represent cash flows from operating, investing or financing
activities as defined by generally accepted accounting principles. Further,
funds from operations and funds available for distribution as disclosed by
other REITs may not be comparable to our calculation of funds from
operations or funds available for distribution.
(3) Pro forma amounts on an as-converted basis, as if 571,000 Operating
Partnership Units had been issued for contribution of three stabilized
apartment communities.
38
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF FEDERAL SECURITIES LAW. SUCH STATEMENTS CAN BE IDENTIFIED BY THE USE
OF FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE," "CONTINUE" OR OTHER SIMILAR WORDS. THESE STATEMENTS DISCUSS FUTURE
EXPECTATIONS, CONTAIN PROJECTIONS OF RESULTS OF OPERATIONS OR OF FINANCIAL
CONDITION OR STATE OTHER "FORWARD-LOOKING" INFORMATION. WHEN CONSIDERING SUCH
FORWARD-LOOKING STATEMENTS, YOU SHOULD KEEP IN MIND THE RISK FACTORS AND OTHER
CAUTIONARY STATEMENTS IN THIS PROSPECTUS. ALTHOUGH MANAGEMENT BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE BASED ON
REASONABLE ASSUMPTIONS, THERE ARE CERTAIN FACTORS SUCH AS GENERAL ECONOMIC
CONDITIONS, LOCAL REAL ESTATE CONDITIONS, OR WEATHER CONDITIONS THAT MIGHT CAUSE
A DIFFERENCE BETWEEN ACTUAL RESULTS AND THOSE FORWARD-LOOKING STATEMENTS. THIS
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE BALANCE SHEETS, STATEMENTS OF
OPERATIONS, STATEMENTS OF CASH FLOWS, NOTES TO THE FINANCIAL STATEMENTS, PRO
FORMA FINANCIAL INFORMATION AND NOTES TO PRO FORMA FINANCIAL INFORMATION
INCLUDED IN THIS PROSPECTUS BEGINNING ON PAGE F-1.
OVERVIEW
This discussion analyzes our operations for the full years of 1994, 1995
and 1996 and for the nine month periods ending September 30, 1997 and 1996. We
did not complete our acquisition of Phase I of the Chrysson properties until
December 1997 and have not included its impact in this discussion. Information
concerning the Chrysson acquisition can be found on page 23.
During the time period covered by this discussion, we have undergone a
number of significant changes. These changes have resulted in a marked increase
in our total assets, revenues, expenses and debt. In reading this discussion, it
will help if you keep certain key events and general trends in mind:
(Bullet) From our inception in 1987 to 1992, our assets primarily
consisted of 47 restaurant properties. In 1993, we changed our
focus from restaurant properties to apartment communities. We
purchased our first apartment community in 1993 and purchased a
total of four more apartment communities during 1994, 1995 and
1996. As of September 30, 1997, we owned five apartment
communities and the original 47 restaurant properties.
(Bullet) Prior to 1994, we operated as an externally administered and
externally managed REIT. Day to day management and operations
were provided by a paid advisor. We had no paid employees and
minimal corporate overhead
39
<PAGE>
expenses. Essentially, our only management or operating expense
was the fee paid to the advisor. In October 1994, we purchased
BT Venture Corporation (see page 22) and its apartment
management business. We terminated our relationship with the
advisor, thus becoming self-administered and self-managed. As
of September 30, 1997, we had 86 employees to oversee all
aspects of our operations.
(Bullet) As part of the purchase of BT Venture Corporation in 1994, we
acquired its apartment management business. We began to receive
management fee income from, and incur the expenses associated
with, the property management business. In May 1995, we formed
the Management Company (see page 22) and transferred all of the
apartment management business we had acquired from BT Venture
Corporation to the Management Company. All of our property
management activities are now conducted through the Management
Company. The Management Company currently manages seven
apartment communities and two shopping centers owned by other
parties.
As a result of the creation of the Management Company, we no
longer receive property management fees nor do we incur the
expenses associated with providing these services. Because we
do not control the voting stock of the Management Company, we
account for our investment in the Management Company using the
equity method of accounting. This means that instead of adding
the Management Company's revenues, expenses, assets and
liabilities to our revenues, expenses, assets and liabilities,
we show our portion of the net income of the Management Company
as a line item on our income statement and the amount we have
invested in the Management Company as a line item on our
balance sheet. Because of our substantial economic ownership
interest, our portion of the net income of the Management
Company represents substantially all of the Management
Company's net income.
(Bullet) Restaurant sales and restaurant rental income have been
declining since 1992. The decline in restaurant sales appears
to be the result of increasing competition and widespread price
discounting in the fast food industry. Also contributing to the
decline has been the lack of a strong hamburger product on the
Hardee's menu. Enterprises, the restaurant operator, and
Hardee's Food Systems, Inc., the restaurant franchisor, are
taking steps to improve restaurant sales. These steps include a
new advertising campaign, the introduction of several new food
items and a return to the charbroil cooking method. To date, we
have not seen improvement in restaurant sales. In August 1997,
CKE Restaurants, Inc. purchased Hardee's Food Systems. CKE is
the owner and operator of "Carl's Jr.," a fast food hamburger
chain with approximately 680 restaurants.
(Bullet) The acquisition of Phase I of the Chrysson properties and the
offering will have a significant impact on our operations and
operating results. The pro forma operating statements included
in this prospectus were derived by adjusting historical
operations to reflect only the activity of the Phase I
40
<PAGE>
Chrysson properties for which construction and lease up had
been completed during the time period covered by the
statements. As a result, the pro forma statements do not
include all of the Phase I Chrysson properties and, therefore,
understate the increased revenues and expenses associated with
these properties now that all of the Phase I Chrysson
properties are complete and operating. In reading the pro forma
statements you should keep in mind that they do not fully
reflect the impact of Phase I of the Chrysson acquisition on
the Company.
Summary amounts related to apartment properties occupancy and revenue per
<TABLE>
<CAPTION>
occupied unit are as follows:
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------
1997
----------------------------------------------------------- 1996
HARRIS PACES PACES -------
HILL LATITUDES OAKBROOK COMMONS VILLAGE OVERALL OVERALL
------ --------- -------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of units....................... 184 448 162 336 198 1,328 1,328
Average physical occupancy............ 94.0% 94.6% 94.2% 97.1% 94.3% 95.0% 93.9%
Average economic occupancy............ 95.2% 94.8% 95.1% 97.3% 94.3% 95.5% 94.3%
Average monthly revenue/unit.......... $710 $655 $768 $702 $682 $692 $684
</TABLE>
We receive revenues from two principal sources -- apartment rents and
restaurant rents. In addition, we have other income which consists primarily of
revenue from the Management Company and interest income. As a result of our
apartment acquisitions, our total revenue has increased significantly. In
addition, the percentage of our total revenue which comes from apartments has
increased. The following table shows our total revenue for each period and the
percentage of revenue which comes from each source.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997 YEAR ENDED DECEMBER 31,
----------------------------------- -------------------------------------------------------------------
PRO 1996 PRO
FORMA % HISTORICAL % FORMA % 1996 % 1995 % 1994 %
------- ------ ---------- ------ -------- ------ ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
Apartment
revenues.. $11,128 75.0% $ 7,898 68.0% $14,222 75.1% $ 9,791 67.5% $ 8,476 61.8% $ 3,889 42.0%
Restaurant
revenues.. $ 3,375 22.7% $ 3,375 29.1% $ 4,500 23.8% $ 4,500 31.0% $ 4,649 33.9% $ 5,047 54.5%
Other
revenues.. $ 348 2.3% $ 336 2.9% $ 225 1.1% $ 217 1.5% $ 600 4.3% $ 322 3.5%
------- ------ ---------- ------ -------- ------ ------- ------ ------- ------ ------- ------
Total
revenues.. $14,851 100.0% $ 11,609 100.0% $18,947 100.0% $14,508 100.0% $13,726 100.0% $ 9,258 100.0%
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO 1996
Revenues
Revenue increased by 8.0% to $11.6 million for the nine months ended
September 30, 1997, as compared to the same period in 1996. The increase in
41
<PAGE>
revenue was due to improved apartment operations and the effect of the
acquisition of Paces Village in April 1996.
Apartment rental income for the first nine months of 1997 increased to
$7.9 million, a 9.6% increase over the same period in 1996. For apartment
properties held throughout the entire nine month periods of both 1997 and 1996,
apartment rental income increased by 3.0%.
On a same-units basis, average economic occupancy improved by 1.3% for
the first nine months of 1997 as compared to the first nine months of 1996 while
average monthly revenue per unit improved by 1.3% for the first nine months of
1997 as compared to the same period in 1996. For the first nine months of 1997,
average economic occupancy at our apartment communities was 95.5% and average
monthly revenue per unit was $692.
As of September 30, 1997, we owned apartment properties in Charlotte and
Greensboro, North Carolina and Virginia Beach, Virginia. Our apartments are
priced in the moderate to moderately high range for apartments available within
these markets. Despite a substantial amount of new construction, especially in
Charlotte and Greensboro, we believe these markets have remained relatively
strong. This strength is primarily attributable to demand for apartments created
by continued population and job growth. While we experienced a nominal reduction
in our average economic occupancy during 1996, we have successfully maintained a
slight increase in average monthly revenue per unit, and we have increased
physical occupancy to 95.0% for the first nine months of 1997 as compared to
93.9% in the same period in 1996.
We have utilized three techniques to achieve these results: (i)
monitoring and managing lease expiration dates; (ii) encouraging residents to
sign longer term leases, up to 24 months; and (iii) providing incentives for
residents who renew their leases. At September 30, 1997, approximately one-third
of our leases in effect were for a duration of 13 months or more. While we
expect some competitive pressure in our markets through 1997, we do not expect
this will have a material adverse effect on our operations or cash flows.
Restaurant rental income was the minimum rent for the first nine months
of 1997. This was unchanged from the same period in 1996. Under the terms of the
lease agreement, restaurant rental income is the greater of the minimum rent of
$4.5 million per year or 9.875% of food sales. For the first nine months of
1997, sales at our restaurant properties totaled $33.4 million, a decrease of
1.5% compared to the same period in 1996. For rent payments based on the
percentage of sales to resume, restaurant sales would have to increase by 1.3%
over 1996 sales levels.
Our interest in the net income of the Management Company increased by
64.0% to $183,000 for the first nine months of 1997 as compared to the same
period in 1996. This increase was primarily due to the Management Company's
receipt during the first quarter of 1997 of refinancing fees from two managed
properties and certain one-time sales commissions from two managed properties.
Also contributing to the increase were fees the Management Company received for
its planning and
42
<PAGE>
supervision of a substantial rehabilitation project at The Villages of Chapel
Hill, one of its managed properties (see "History and Formation of the
Company -- Other Activity" on page 23). We do not expect the operation of the
Management Company to have a significant effect on our financial position,
operating results or cash flows in future periods.
Interest and other income increased by 214.1% to $153,000 for the first
nine months of 1997 as compared to the same period in 1996 and was primarily due
to interest and fees earned on loans made to facilitate the rehabilitation of
The Villages of Chapel Hill, on which we earned interest income of approximately
$68,000 on advances of approximately $1.4 million through September 30, 1997.
During this period, we incurred interest expense of approximately $37,000 on the
borrowings we used to fund these advances.
Expenses
Total expenses for the first nine months of 1997 were $10.3 million, an
increase of 9.0% over the same period in 1996. This increase was due to the
acquisition of Paces Village in April 1996 and an overall increase in apartment
operations expense.
Apartment operations expense increased by 15.8% to $2.5 million for the
first nine months of 1997 as compared to the same period in 1996. These
increases reflect the impact of the Paces Village acquisition in April 1996, as
well as increased costs associated with attracting and retaining residents in a
more competitive apartment market. In order to increase the visibility of our
apartment communities, we have substantially increased the amount we spend on
advertising. We have also increased our spending on preventive maintenance. We
believe that, in order to preserve our competitive position, it is essential to
maintain our apartment communities in the best possible condition. Apartment
operations expense totaled 32.1% of related income during the first nine months
of 1997 as compared to 30.4% during the comparable period in 1996.
Depreciation expense increased by 7.6% to $1.9 million for the first nine
months of 1997 as compared to the same period in 1996. The increase in
depreciation reflects the acquisition of Paces Village in April 1996, along with
capital improvements to other apartment communities. Amortization expense
increased by 11.5% to $439,000 for the first nine months of 1997 as compared to
the same period in 1996. The increase in amortization expense is primarily
attributable to quarterly additions to the intangible asset related to the
earn-out provision of the 1994 BT Venture Corporation acquisition agreement.
Operating expenses relating to restaurant properties are insignificant
because of the restaurant properties' triple net lease arrangement that requires
Enterprises to pay virtually all of the expenses associated with the restaurant
properties.
43
<PAGE>
Interest expense for the first nine months of 1997 compared to the same
period in 1996 increased by 6.6% to $4.7 million. The increase in interest
expense is primarily due to the addition of $10.7 million of debt related to the
acquisition of Paces Village in the second quarter of 1996. Weighted average
interest rates were 8.0% for the nine month periods ending September 30, 1997
and 1996. At September 30, 1997, we had $60.0 million of long-term, fixed-rate
debt with an average interest rate of 8.2% and $18.4 million of long-term,
variable-rate debt with an average interest rate of 7.5%.
Net Income
Net income for the first nine months of 1997 increased by 1.1% over the
first nine months of 1996 to $1.3 million. The increase was primarily the result
of improved apartment revenues and the substantial increase in equity and other
income.
1996 COMPARED TO 1995
Revenues
Total revenue for 1996 was $14.5 million, an increase of 5.7% over 1995.
This increase was primarily due to the acquisition of Paces Village in April
1996 and continued improvement in apartment operations. Apartment rents
accounted for 67.5% of our total revenue in 1996 as compared to 61.8% in 1995.
Income from our apartments increased by 15.5% to $9.8 million in 1996
compared to 1995. While these increases are primarily the result of the
acquisition of Paces Village in April 1996, apartment operations also showed
improvement. Income from apartments owned for the full year in both 1996 and
1995 increased by 3.3% in 1996, reflecting a 4.1% increase in average monthly
rental revenue per occupied unit that was offset by a 1.1% decline in average
occupancy at these apartments. Average economic occupancy for the four
properties owned for the full year in both 1996 and 1995 was 94.2% for 1996 and
95.3% for 1995; average rental revenue per occupied unit was $684 in 1996 and
$657 in 1995. From its acquisition in April 1996 through year end, Paces Village
had average economic occupancy of 93.5% and average revenue per occupied unit of
$693 per month.
Increases in income attributable to apartment operations for 1996 were
partially offset by the creation of the Management Company in 1995. As a result
of the creation of the Management Company, we did not receive any property
management fees in 1996 as compared to $515,000 in 1995. We did, however,
receive equity income from the Management Company of approximately $149,000 in
1996 as compared to $48,000 for 1995.
Also offsetting the increase in apartment rental income was a decline in
restaurant rental income. In 1996, restaurant rental income declined by 3.2% as
compared to 1995. Related restaurant food sales declined by 4.4% to $45.0
million in
44
<PAGE>
1996 compared to 1995. All of the restaurants were open throughout 1996 and
1995. The decline in restaurant sales appeared to be a continuation of the trend
which began in 1993. Severe weather in January 1996 also contributed to the
decline. The difference in restaurant rental revenue and related sales was the
result of the minimum rent provision of the restaurant lease. Under the
restaurant lease, annual restaurant rent is the greater of the $4.5 million or
9.875% of food sales. In December 1995, we entered into a modification of the
lease with Enterprises which increased the minimum rent from $3.46 million per
year to $4.5 million per year. For 1996, the restaurant rent was the $4.5
million minimum rent.
Expenses
Total expenses in 1996 were $12.8 million, an increase of 5.7% over 1995.
This increase was primarily due to the acquisition of Paces Village in April
1996.
Apartment operating expenses increased by 20.0% to $3.0 million in 1996
compared to 1995. Apartment operating expenses equaled 30.4% of apartment rental
income in 1996, as compared to 29.3% in 1995. The increases in apartment
operating expenses in 1996 were primarily attributable to increased costs
associated with attracting and retaining residents in a softening apartment
market as well as an increased emphasis on preventative maintenance.
Operating expenses associated with our restaurant properties are
insignificant, because the restaurant properties' lease requires that
Enterprises pay virtually all of the expenses associated with the restaurant
properties.
Administrative expense declined by 30.4% to $894,000 in 1996 as compared
to 1995. This decrease reflects the transfer of our property management
activities to the Management Company in 1995.
Depreciation expense for 1996 was $2.4 million, an increase of 10.7% over
1995. This increase was due to the acquisition of Paces Village in 1996.
Depreciation expense associated with our restaurant properties was $778,000 in
both 1996 and 1995. Depreciation expense associated with apartment communities
was approximately $1,662,000 compared to $1,426,000 in 1995.
Amortization expense for 1996 increased by 32.0% over 1995 to $535,000.
This increase was related to the acquisition of Paces Village and an intangible
asset recorded in conjunction with the acquisition of BT Venture Corporation in
October 1994. Amortization of the intangible asset related to management
operations increased 22.1% in 1996 to $315,000 compared to $258,000 in 1995. The
balance of amortization expense relates to loan costs.
Interest expense increased by 10.9% to $5.9 million in 1996 as compared
to 1995. This increase was primarily due to an additional $10.7 million of
indebtedness incurred in connection with the acquisition of Paces Village in
1996.
45
<PAGE>
Net Income
Net income for 1996 was $1.7 million, an increase of 5.4% over 1995. This
increase was due to the write-off of $359,000 in deferred costs in 1995 (I.E.,
we reduced our assets on the balance sheet and increased expenses on the income
statement). If the write-off had not occurred in 1995, our net income for 1996
as compared to 1995 would have declined primarily as the result of increased
depreciation and amortization related to apartment property acquisitions.
1995 COMPARED TO 1994
Revenues
Our total revenue in 1995 was $13.7 million. This was a 48.3% increase
over 1994 and was primarily due to the acquisition of Oakbrook, Latitudes and
Harris Hill in 1994. Improvements in apartment operations also contributed to
the increase.
Apartment rental income increased to $8.5 million, a 117.9% increase over
1994. Apartment rents accounted for 61.8% of our total revenue in 1995 as
compared to 42.0% in 1994.
Management fee income earned after the acquisition of BT Venture
Corporation in October 1994, but before the formation of the Management Company
in May 1995, was $515,000 in 1995 and $276,000 in 1994. After formation of the
Management Company, we received net income distributions (equity income) of
$48,000 for 1995.
In 1995, restaurant rental income declined by 7.9% to $4.6 million as
compared to 1994. "Same-store" restaurant sales for locations open for the full
periods in both years declined by 9.1% for the year. The slight difference in
the trends for rental income and "same-store" sales was due to several
restaurants being closed for brief periods of time for scheduled remodeling
during 1994. All of the restaurants were open throughout 1995.
Expenses
Total expenses in 1995 were $12.1 million, an increase of 73.9% over
1994. This increase reflects a full year's operations of four apartment
communities, three of which were acquired in 1994. Also contributing to the
increase was our conversion to a self-administered and self-managed REIT and the
assumption of the property management functions of BT Venture Corporation.
While apartment operating expenses increased by 125.3% to $2.5 million,
the increase was principally due to the increased number of properties owned by
us in 1995 as compared to 1994. As a percentage of apartment rental income,
apartment operating expense increased to 29.3% in 1995 from 28.3% in 1994. This
increase was primarily due to an increased emphasis on attracting and retaining
residents.
46
<PAGE>
Operating expenses associated with our restaurant properties are
insignificant, because the restaurant properties' lease requires that the
restaurant operator pay virtually all of the expenses associated with the
restaurant properties.
Administrative expense for 1995 increased by 44.9% over 1994 to $1.3
million. This increase was the result of our conversion to a self-administered
and self-managed REIT and the assumption of the property management activities
of BT Venture Corporation. Through the third quarter of 1994, we paid property
management fees (five percent of rental revenues collected) to BT Venture
Corporation for management of our apartment properties and advisory fees (4.65%
of net cash available for distribution as defined by the advisory agreement) to
an affiliate of Enterprises. With the acquisition of BT Venture Corporation, we
terminated our advisory contract and became self-administered, thereby
eliminating property management and advisory fees.
Depreciation expense for 1995 increased by 55.8% over 1994 to $2.2
million. This increase was due to the acquisition of three apartment communities
in 1994. Depreciation expense for the restaurant properties in both 1995 and
1994 was $778,000. Depreciation expense for apartment properties was
approximately $1,426,000 in 1995 and $637,000 in 1994.
Amortization expense for 1995 increased by 74.0% over 1994 to $405,000.
This increase was related to the acquisition of the three apartment communities
in 1994 and an intangible asset recorded in conjunction with the acquisition of
BT Venture Corporation in October 1994. The balance of amortization expense
relates to loan costs.
Interest expense for 1995 was $5.4 million. This 91.4% increase in
interest expense for 1995 over 1994 was primarily due to the $40 million
increase in outstanding indebtedness incurred in connection with the 1994
acquisitions of BT Venture Corporation and Oakbrook, Latitudes, and Harris Hill.
During the fourth quarters of 1995 and 1994 we recorded non-cash
write-offs of $321,000 and $377,000, respectively, related to deferred
acquisition costs. Significantly all of these costs arose in 1992 and 1993 in
conjunction with a restructuring transaction we began in 1993 and ultimately
abandoned in December 1995.
Net Income
Net income for 1995 declined by 29.3% from 1994 to $1.6 million. This
decline reflected the effect of non-cash charges for depreciation and
amortization related to apartment community acquisitions in 1993 and 1994.
47
<PAGE>
FUNDS FROM OPERATIONS
Funds from operations is defined in footnote 2 on page 38. A
reconciliation of net income to funds from operations follows (all amounts in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------------
1996 1997
1994 1995 1996 PRO FORMA 1996 1997 PRO FORMA
------ ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (before
minority interest)..... $2,302 $1,628 $1,716 $ 4,652 $1,278 $1,292 $ 3,471
Depreciation............. 1,415 2,204 2,440 3,536 1,787 1,923 2,745
Amortization of
management
intangible............. 56 258 315 316 231 279 278
Non-recurring equity
income items........... 519 359 -- -- -- (103) (103)
------ ------ ------ --------- ------ ------ ---------
Funds from operations.... $4,291 $4,450 $4,472 $ 8,504 $3,295 $3,391 $ 6,391
------ ------ ------ --------- ------ ------ ---------
------ ------ ------ --------- ------ ------ ---------
</TABLE>
We define funds available for distribution as funds from operations plus
non-cash expense for amortization of loan costs, less payments for scheduled
amortization of debt principal and recurring capital expenditures.
A reconciliation of funds from operations to funds available for
distribution follows (all amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
------ ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Funds from operations.... $4,291 $4,450 $4,472 $ 8,504 $3,295 $3,391 $ 6,391
Amortization of loan
costs.................. 177 147 219 84 163 161 58
Scheduled debt principal
payments............... (167) (397) (460) (441) (341) (368) (344)
Recurring capital
expenditures........... (49) (239) (396) (526)* (293) (300) (398)*
Non-recurring equity
income items........... -- -- -- -- -- 103 103
------ ------ ------ --------- ------ ------ ---------
Funds available for
distribution........... $4,253 $3,961 $3,835 $ 7,621 $2,825 $2,986 $ 5,811
------ ------ ------ --------- ------ ------ ---------
------ ------ ------ --------- ------ ------ ---------
</TABLE>
- ---------------
* Assumes an annual expenditure of $250 per unit for stabilized acquired
properties.
48
<PAGE>
Other information about our historical cash flows follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
-------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities...................... $ 4,496 $ 4,476 $ 4,800 $ 3,929 $ 3,711
Investing activities...................... (18,729) (832) (11,020) (10,966) (1,696)
Financing activities...................... 15,063 (3,895) 6,361 7,288 (1,451)
Dividends and distributions paid to
shareholders............................ $ 3,578 $ 3,729 $ 3,751 $ 2,806 $ 2,885
Non-recurring capital expenditures:
Acquisition improvements and
replacements............................ $ 113 $ 285 $ 143 $ 122 $ 57
Other apartment property improvements..... -- 2 22 11 124
</TABLE>
The addition of apartment communities and improvement in apartment
operations have more than offset the decline in restaurant rental income,
producing increases in funds from operations. For the first nine months of 1997,
funds from operations increased by 2.9% over the first nine months of 1996 to
$3.4 million. Funds from operations for 1996 increased by 0.5% over 1995 to
$4.47 million. For 1995, funds from operations increased by 3.7% over 1994 to
$4.45 million.
CAPITAL RESOURCES AND LIQUIDITY
CAPITAL RESOURCES
Prior to acquiring our first apartment community, our capital
requirements were minimal, as all capital expenses related to the restaurant
properties were borne by Enterprises under the terms of the master lease. In
order to acquire Paces Commons, Oakbrook, BT Venture Corporation, Latitudes,
Harris Hill and Paces Village, we incurred additional debt and issued additional
common stock. The additional debt consists of first and second mortgages,
secured by the acquired apartment communities, and draws against our credit
lines. As we continue to acquire apartment communities, it is likely that we
will incur additional long-term debt and seek additional equity capital.
Consistent with our plan to reduce our exposure to variable-rate debt,
during the fourth quarter of 1994 and the second quarter of 1995, we refinanced
$37.6 million in variable-rate debt related to apartment communities to fixed
rate loans with maturities ranging from 2000 through 2020. In December 1995, we
established a credit line with SouthTrust Bank of Alabama in the amount of $25.5
million at a fixed rate of 8.0% for a term of three years (recently modified to
extend maturity to December 1999). We used an initial draw of $23.3 million to
retire our existing short-term, variable-rate credit facility. During 1996, we
financed the purchase of Paces Village through variable-rate debt totaling $10
million along with a draw of $650,000 from our existing credit facility. In
addition, deeds of trust related to two apartment properties were modified to
extend the terms of each note by five years. The balance of the credit line is
available for general corporate purposes. As of September 30,
49
<PAGE>
1997, $23.9 million was outstanding on this line, but we anticipate repaying the
entire balance with the proceeds of this offering. Any balances outstanding will
be due in December 1999.
We are currently negotiating to increase our line of credit and to
convert the loan to a revolving line of credit. The current line of credit
agreement contains the following restrictions:
(Bullet) Each quarter, income available for service on the line of
credit must be at least $4.7 million. Income available for
service on the line of credit is defined as net income plus
depreciation and amortization and interest expense on the line
of credit for the previous 12 months.
(Bullet) Each quarter, the adjusted leverage ratio must not exceed
66.7%. The adjusted leverage ratio is defined as the ratio of
(a) $25.5 million plus all debt other than the balance
outstanding under the line of credit and notes payable to
affiliates to (b) total assets plus accumulated deprecation and
amortization.
(Bullet) At each quarter's end, our net worth must not be less than
$20.5 million in 1997 and $18.1 million in 1998.
To date, we have met all applicable requirements.
During the first nine months of 1997, we advanced approximately $1.4
million to The Villages of Chapel Hill under the participating loan agreement
(see "History and Formation of the Company -- Other Activity" on page 23), which
provides for interest at the greater of 12.5% or the 30-day London Interbank
Offer Rate ("LIBOR") plus 6.125% plus shared income interest and shared
appreciation interest. These advances were funded by draws under the Company's
1996 credit facility with a bank for borrowings at 30-day LIBOR plus 2.25%,
secured by second deeds of trust on three apartment properties.
At September 30, 1997, the weighted average interest rate on outstanding
debt was 8.0%, with long-term debt comprised of $60.0 million at fixed interest
rates and $18.4 million at variable rates indexed on 30-day LIBOR rates. A one
percent increase in variable rates would increase annual interest expense by
approximately $167,000, while a one percent decrease in variable rates would
decrease annual interest expense by approximately $185,000.
From our inception in 1987 through September 1994, we had 2.9 million
shares of common stock outstanding. On October 1, 1994, an additional 140,990
shares were issued in conjunction with the acquisition of BT Venture
Corporation. Between March 1995 and January 1997, the Company issued a total of
80,750 shares of common stock to the former BT Venture Corporation shareholders
in conjunction with an earn-out provision of that acquisition agreement. At
September 30, 1997, the former BT Venture Corporation shareholders were due
additional consideration totaling approximately $572,000, payable at our option
in up to 43,438 shares of
50
<PAGE>
common stock or in cash. The earn-out period ended on September 30, 1997. By
agreement, we are prohibited from issuing the earn-out shares if such issuance
would cause us to become disqualified as a REIT. See "Certain Relationships and
Related Transactions -- Boddie-Noell Properties" and " -- Mayo Boddie and
Nicholas B. Boddie" on page 69.
In July 1996, we amended our Dividend Reinvestment and Stock Purchase
Plan ("DRIP Plan") to give us the option of issuing new shares directly to Plan
participants. The Plan allows shareholders to reinvest their dividends in
additional shares of our stock and to make additional investments of $25 to
$10,000 per quarter directly with us. During 1996 we issued 19,207 shares
through the DRIP Plan, including 11,151 shares for reinvested dividends and
8,056 shares for optional additional investment. During the first nine months of
1997, we issued 32,794 shares through the DRIP Plan, including 17,492 shares for
reinvested dividends and 15,302 shares for optional additional investment.
At September 30, 1997, we had 3,123,741 shares of common stock
outstanding.
CASH FLOWS AND LIQUIDITY
We will capitalize expenditures if we make them to acquire a new asset,
to materially enhance the value of an existing asset, or to substantially extend
the useful life of an existing asset. In 1996 and 1995 we capitalized all carpet
and vinyl replacements (including $29,000 in 1996 and $120,000 in 1995 included
in acquisition improvements and replacements). In 1994, we generally expensed as
incurred apartment carpet and vinyl replacements ($23,000 expensed in 1994),
except when we made those replacements in conjunction with an acquisition
($91,000 in 1994 included in acquisition improvements and replacements). We
generally funded additions to apartment properties from cash provided by
operating activities and proceeds of common stock issued through our Dividend
Reinvestment and Stock Purchase Plan.
We paid dividends of $0.31 per share per quarter in each quarter of 1994,
1995, 1996 and 1997. The following table shows the total dividends and our
dividend payout ratio (the ratio of dividends paid to funds from operations) for
1994, 1995, 1996 and the first nine months of 1997.
<TABLE>
<CAPTION>
PERIOD DIVIDEND PAYOUT RATIO
- ---------------------------------------------------- ---------------------
<S> <C>
Twelve months ended September 30, 1997.............. 83.9%
Year ended December 31, 1996........................ 83.9%
Year ended December 31, 1995........................ 83.8%
Year ended December 31, 1994........................ 83.4%
</TABLE>
We intend to pay dividends quarterly, expect that these dividends will
substantially exceed the 95% distribution requirement as discussed on page 90,
and anticipate that all dividends will be paid from current funds from
operations.
51
<PAGE>
In February 1997 the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which they require we adopt on December
31, 1997. At that time, we will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. We do not expect the impact of Statement 128 on
the calculation of primary and fully diluted earnings per share to be material.
SHORT- AND LONG-TERM LIQUIDITY REQUIREMENTS
A summary of scheduled principal payments on long-term debt is included
in the Notes to the Financial Statements. Significant scheduled balloon payments
include maturities of:
(Bullet) two loans payable to affiliates in May 1999 ($7.1 million);
(Bullet) our credit line in December 1999 ($23.9 million outstanding at
September 30, 1997); and
(Bullet) the note payable secured by a deed of trust on Latitudes in
January 2000 (balloon of approximately $12.5 million).
We continue to produce sufficient cash flow to fund our regular dividend
and have positioned the Company for future growth. We generally expect to meet
our short-term liquidity requirements through net cash provided by operations
and utilization of credit facilities. We believe that net cash provided by
operations is, and will continue to be, adequate to meet the REIT operating
requirements in both the short- and the long-term. We anticipate funding our
future acquisition activities, if any, primarily by using short-term credit
facilities as an interim measure to be replaced by funds from equity offerings
or long-term debt. We expect to meet our long-term liquidity requirements, such
as scheduled debt maturities and repayment of short-term financing of possible
property acquisitions, through long-term secured and unsecured borrowings and
the issuance of debt securities or additional equity securities. We believe we
have sufficient resources to meet our short-term liquidity requirements.
Approximately 29.1% of our revenue for the first nine months of 1997 was
derived from Enterprises' payment of rent for the use of our restaurant
properties. In addition, Enterprises is responsible for all of the costs
associated with the maintenance and operations of these properties.
While we expect our reliance on Enterprises to decrease over time, it is
likely that Enterprises' rent payments will still represent a significant
portion of our revenue. On a pro forma basis, giving effect to the completion of
Phase I of the Chrysson acquisition (discussed in more detail on page 23 under
the heading "History and Formation of the Company -- Chrysson Acquisition"), the
restaurant properties accounted for approximately 23.8% of our total revenues
and 32.6% of our net operating income. We expect Enterprises' rent payments to
represent approximately 20% of our revenue on a going forward basis. As a
result, until we are able to
52
<PAGE>
significantly increase our apartment portfolio or dispose of the restaurant
properties, the financial well being of the Company will be, to a large extent,
dependent on Enterprises' ability to meet its obligations under the terms of the
master lease. The ability of Enterprises to satisfy the requirements of the
master lease depends on its liquidity and capital resources. Historically,
Enterprises has been able to meet its liquidity needs through cash flow
generated from operations and through reliance on its credit facility.
Enterprises' principal line of business is the operation of approximately
360 Hardee's restaurants, 47 of which are owned by the Company. The continued
decline in its restaurant sales (discussed above) has had a material negative
impact on Enterprises' operating cash flow. We have had extensive discussions
with management of Enterprises and have reviewed Enterprises' financial
statements, cash flow analysis, restaurant contribution analysis, sales trend
analysis and projections, and believe that Enterprises will have sufficient
liquidity and capital resources to meet its obligations under the master lease
and credit facility as well as its general corporate operating needs.
The table below sets forth certain information with respect to the
liquidity and capital resources of Enterprises. The information is derived from
Enterprises' audited financial statements for the fiscal year ended December 31,
1996. Enterprises is an S Corporation for Federal and state income tax purposes;
therefore, its cash flow generated from operations does not include a deduction
for corporate income tax payments.
<TABLE>
<S> <C>
Current assets............................................ $ 10,312,000
Total assets.............................................. 269,524,000
Current liabilities....................................... 37,467,000
Total debt, including current portion of $8,232,000....... 117,116,000
Shareholders' equity...................................... 87,682,000
Net cash provided by operating activities................. 12,391,000
</TABLE>
INFLATION
We do not believe that inflation poses a material risk to the Company.
The leases at our apartment properties are short-term in nature. None are longer
than two years. The restaurant properties are leased on a triple-net basis,
which places the risk of rising operating and maintenance costs on the lessee.
ENVIRONMENTAL MATTERS
Phase I environmental studies performed on the apartment communities did
not identify any problems that we believe would have a material adverse effect
on our results of operations, liquidity or capital resources. Environmental
transaction screens we obtained for each of the restaurant properties in 1995
did not indicate existence of any environmental problems that warranted further
investigation. Enterprises has indemnified us for environmental problems
associated with the restaurant properties under the master lease.
53
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OUR PROPERTIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
GENERAL
We own nine apartment communities containing 2,208 apartment units. Our
apartment communities are located in Charlotte, North Carolina (three
communities), Greensboro, North Carolina (four communities), Winston-Salem,
North Carolina (one community) and Virginia Beach, Virginia (one community).
We believe that resident demand for our properties is primarily dependant
on the general condition of each market's economy and employment climate, as
well as the rate of household formation and the number of available apartment
units in that market. Accordingly, prior to any acquisition, we become familiar
with a market's demographics and historic and projected employment and
population growth rates.
MARKET INFORMATION
We believe that the demographic and economic trends and conditions in our
principal markets indicate a potential for long-term growth in funds from
operations and funds available for distribution from our apartment communities.
Based on information obtained from The Carolinas Real Data and the Tidewater
Multifamily Housing Council, the average physical occupancy rate for apartment
communities in our existing markets approximates 95.1% compared to 94.4% for our
apartment communities. The following table illustrates our presence in each of
our current markets for the time periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF TOTAL APARTMENT
COMPANY OWNED UNITS IN
NUMBER OF APARTMENT MARKET OWNED COMPANY MARKET
METROPOLITAN AREA COMMUNITIES UNITS BY THE COMPANY OCCUPANCY(1) OCCUPANCY
- --------------------- ----------- ------------- --------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Charlotte, NC........ 3 682 1.2% 96.0% 94.7%(2)
Greensboro, NC....... 4 906 4.4% 93.7% 94.3%(3)
Virginia Beach, VA... 1 448 1.2% 91.1% 95.6%(4)
Winston-Salem, NC.... 1 172 1.4% 96.8% 95.8%(3)
-
------------- --- ------------ ---------
Total/Average...... 9 2,208 1.8% 94.4% 95.1%
</TABLE>
- ---------------
(1) Economic occupancy, defined as gross potential rents less vacancy divided by
gross potential rent, for the month ended September 30, 1997.
(2) Carolinas Real Data, CHARLOTTE APARTMENT REPORT, September 1997.
(3) Carolinas Real Data, GREENSBORO WINSTON-SALEM APARTMENT REPORT, October
1997.
(4) Tidewater Multifamily Housing Council, VACANCY SURVEY, September 1997.
These cities fall into three metropolitan statistical areas, each of
which is characterized by a diverse economic base. We believe that the economies
of these
54
<PAGE>
areas will result in continued job growth and therefore increased demand for
apartments.
GREENSBORO AND WINSTON-SALEM, NORTH CAROLINA
Greensboro and Winston-Salem, each a point of North Carolina's tri-city
metropolitan area known as the Triad, are located in the central Piedmont area
of North Carolina. Originally known as a center of heavy industry, the job base
has expanded to include higher-paying, higher-skilled jobs in the government,
services, healthcare, retail, distribution and technical fields. The
non-manufacturing work force currently comprises approximately three-quarters of
the total work force (National Decision Systems, Inc., 1997), and those
manufacturers in the area are generally high technology operations paying wages
to their employees that are above average for the local market. Unemployment has
remained consistently below four (and frequently below three) percent
(Employment Security Commission of North Carolina).
The Triad's population has been increasing in recent years at nearly 1.5%
per year and is second in North Carolina only to Charlotte. (Carolinas Real
Data, GREENSBORO WINSTON-SALEM APARTMENT REPORT, October 1997). The 1997
population is estimated to be 1.15 million and is projected to increase to 1.22
million in five years, for an average annual increase of 1.1% (based on
information provided by National Decision Systems), compared to a historical
increase of 1.0% from 1980 to 1990 (based on the U.S. Census). Household
formation is projected to increase over the next five years by 1.4% annually
compared to 1.9% annually from 1980 to 1990.
The relatively strong economy in Greensboro and its surrounding areas has
resulted in increased construction of new apartment units. From April through
September of this year, 1,255 new apartment units were placed in service in the
Triad, 1,666 new apartment units are currently under construction and there are
an additional 1,869 apartment units proposed to be built (Carolinas Real Data).
Despite this high level of new construction, however, absorption has been strong
(1,445 units during the six months ending September 1997).
However, economic growth is moderating, and we expect new construction
will begin to slow down until the units currently under and planned for
construction are absorbed into the market. Since 1994, the Triad's employment
has increased by approximately 1.8% annually, which has resulted in
approximately 900 apartment units per year being absorbed into the market,
although, as noted above, 1,445 apartment units were absorbed into the market
during the six months ended September 30, 1997 alone (Carolinas Real Data).
Average monthly rental rates have increased at a 5.5% annual rate since
1993 and currently average $543 (Carolinas Real Data). Despite these increases,
the area maintains a favorable cost of living, which, in combination with the
business-friendly environment, location and transportation options, we believe
will result in continued, albeit moderate, expansion of the Triad's economic
base and therefore a stable, long-term outlook for apartment demand.
55
<PAGE>
CHARLOTTE, NORTH CAROLINA
Charlotte and surrounding Mecklenburg County are located in the southwest
Piedmont region of North Carolina on the South Carolina border. Charlotte is
best known as a major banking center; it is the second largest in the country
with over $450 billion in total assets and is home to NationsBank and First
Union. Charlotte is also the sixth largest wholesale center and the 11th largest
distribution center in the United States (Carolinas Real Data, CHARLOTTE
APARTMENT REPORT, September 1997). Charlotte and the surrounding seven counties
are the largest metropolitan statistical area in North Carolina and the 43rd
largest in the United States.
Throughout the 1990's, the economy in the Charlotte metropolitan
statistical area has been strong and remains on the upswing, inspired by a
strong pro-business attitude among city and business leaders. In the past six
months alone, this attitude has led the Vanguard Group, a Pennsylvania based
financial institution, to announce the opening of a customer service center in
Charlotte, the Metropolitan Property & Casualty Insurance company to open a
field claims office, and several smaller companies to open, relocate or expand
in Charlotte, such as Alydaar Software Corp., a software company focusing on
solving the Year 2000 problem, which recently announced plans to hire 250 more
people in Charlotte before the end of 1997.
The job base has increased at an annual rate of 3.7% from 619,000 in 1991
to 742,000 in 1996. (U.S. Housing Markets Research Report, 1997) Unemployment
has remained low and was 4.3% as of September 1997 according to the Employment
Security Commission of North Carolina.
The Charlotte area's population has increased by nearly 20% since 1990.
Mecklenburg County's population has increased by approximately 14,000 per year
since 1990, and the Charlotte area's job growth has averaged 7,000 to 9,000 per
year (Carolinas Real Data). The 1997 population has been estimated to be 1.3
million and is projected to increase to 1.5 million in five years, for an
average annual increase of 1.9% (based on information provided by National
Decision Systems), compared to a historical average annual increase of 1.8% from
1980 to 1990 (based on the U.S. Census). Household formation is projected to
increase even faster over the next five years by 2.1% annually, although this is
slightly lower than the 2.6% historical annual rate from 1980 to 1990 (National
Decision Systems).
Historically, approximately 2,000 to 2,400 apartment units per year have
been absorbed into the Charlotte apartment market, although 1996 and 1997 saw a
much higher rate of approximately 3,100 units absorbed into the market annually.
From February through August of this year, despite 2,240 new apartment units
being placed into service in the Charlotte-Mecklenburg area, the area enjoyed
net absorption with approximately 2,700 units being absorbed into the market
(Carolinas Real Data). Given that economic growth remains strong, we do not
expect market absorption to lag significantly behind current and planned
construction.
Average monthly rental rates increased by 5% for the 12 month period
ended September 30, 1997, and currently average $629 (Carolinas Real Data). This
56
<PAGE>
somewhat sharp upswing in rents, however, followed a three year period in the
early 1990s when rental rates increased slower than the overall inflation rate.
Based on the continued expansion of the financial services sector, the
business-friendly environment, and Charlotte's location and transportation
options, we believe the Charlotte area's economy has the underpinnings for
stable, long-term growth. If this is the case, the long-term demand for
apartment units should remain healthy.
VIRGINIA BEACH, VIRGINIA
Virginia Beach, Virginia is one of Virginia's largest and fastest growing
cities. Located in the southeast corner of the state, it is the largest
municipality comprising the Hampton Roads Metropolitan Statistical Area.
Virginia Beach is bordered on the south by North Carolina, on the east by the
Atlantic Ocean, on the north by Hampton Roads and on the west by the cities of
Norfolk and Chesapeake. Dominant industries in the area have been
shipbuilding/repair, the military, port activities and tourism, but the last
decade has seen financial firms, distribution companies, telemarketing and
customer service operations make their way to the Hampton Roads area.
One of the area's most important industries is rail transport. Shippers
can reach every major distribution center east of the Mississippi via a one-line
haul. Norfolk is the eastern terminus for the Norfolk Southern Railroad, running
east-west through Virginia and connecting the industrial centers of the Midwest
to international trade. Norfolk Southern, which is headquartered in Norfolk,
also owns North American Van Lines, Inc. CSX Transportation, Inc., headquartered
in Richmond, has its eastern terminus in Newport News.
Claiming to be the largest resort city in the world, Virginia Beach is
best known for its 30 miles of Atlantic oceanfront and resort strip; the Hampton
Roads area in general, however, is best known for the high concentration of
military establishments including the Norfolk Naval Base, the world's largest
naval base.
This concentration of military establishments, and the resulting
dependence on Federal defense spending to fuel growth in the area, has long been
recognized as contributing to volatility in the region's economy. Through
economic development initiatives, area leaders responded in an effort to
minimize this reliance on defense spending, and the region's economy has
diversified substantially (Hampton Roads Chamber of Commerce).
Recent years have seen Virginia Beach emerge as a national distribution
and customer service center. For example, Lillian Vernon, a mail order company,
relocated there in 1988 and expanded in 1994 to include substantially all of its
non-manufacturing operations there. CIGNA Corporation, a national financial
services firm, opened its customer service center in Virginia Beach in 1991.
Avis, the second largest car rental company in the world, also has its customer
service center in Virginia Beach. And Capital Research and Management Company, a
Los Angeles mutual funds company, moved its service center to neighboring
Norfolk in 1992. Ford Motor Company also has a truck vehicle assembly plant in
Norfolk, and Newport
57
<PAGE>
News Shipbuilding, the state's largest private employer, is the country's
largest ship design and construction company and has produced over 800 ships
over the past 111 years (Hampton Roads Chamber of Commerce).
The 1997 population of the metropolitan statistical area that includes
Virginia Beach has been estimated to be 1.56 million and is projected to
increase to 1.64 million in five years, for an average annual increase of nearly
one percent (based on information provided by National Decision Systems). This
compares to a historical average annual increase of 1.9% from 1980 to 1990
(based on the U.S. Census). Household formation is projected to increase over
the next five years by 1.6% annually, compared to a 2.5% historical rate from
1980 to 1990.
Since the 1980s, most new development has been institutionally or
municipally related. It is a stated goal in Virginia Beach's comprehensive plan
to increase the current level of office and industrial uses to supplement the
tax base. We believe that the efforts of economic development officials will
likely result in a continuation of employer relocations into the city and the
area. The area continues to have a low unemployment rate. The metropolitan
statistical area's unemployment rate for 1996 was 5.0% and for 1997 is projected
to be 4.9% (Virginia Employment Security Commission). Virginia Beach's
unemployment rate is even lower, with a 4.3% rate in 1996 and a 3.9% rate
projected for 1997.
According to the Hampton Roads Statistical Digest, the area offers
reasonable wage rates, a large labor pool, inexpensive land, the Port of Hampton
Roads and the limited influence of labor unions (Virginia is a right to work
state). The number of company relocations and the emergence of the port of
Hampton Roads into one of the most important shipping centers on the East Coast
attest to these factors. We expect Virginia Beach and the Hampton Roads area to
experience slow but continued growth into the future. Local government attitudes
toward expanding commerce and luring tourism should act as a vehicle for
attracting businesses to the area and provide a steady demand for apartment
units.
58
<PAGE>
<TABLE>
<CAPTION>
GROWTH IN OUR COMPANY'S PRINCIPAL MARKETS
1997-2002(2)
1991-1996(1) -----------------------
----------------------- PROJECTED
HOUSEHOLD PROJECTED HOUSEHOLD
POPULATION FORMATION POPULATION FORMATION
METROPOLITAN AREA GROWTH GROWTH GROWTH GROWTH
- -------------------------------------------------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Charlotte, NC..................................... 11.3% 11.1% 9.7% 11.2%
Greensboro/Winston-Salem, NC...................... 7.3% 7.0% 5.8% 7.2%
Virginia Beach, VA................................ 4.1% 4.5% 4.8% 8.0%
Company's principal markets....................... 7.6% 7.5% 6.8% 8.8%
United States..................................... 5.1% 6.2% 4.3% 5.7%
</TABLE>
- ---------------
(1) U.S. Housing Markets -- Research Report, November 1997
(2) National Decision Systems -- Fall Data Report -- October 1997
We believe that the trends illustrated above will increase demand for
apartment units in the markets in which we own apartment communities. However,
we can provide no assurances that such projected future conditions or projected
growth rates will materialize.
APARTMENT COMMUNITIES
Through the Operating Partnership, we own and manage nine apartment
communities consisting of 2,208 apartment units. The average age of the
apartment communities is approximately 6.7 years. The average economic occupancy
rate for all 2,208 apartment units for the month of September 1997 was 94.4%.
The buildings in our apartment communities are generally wood-framed,
vinyl-sided two- and three-story buildings, with exterior entrances,
individually metered gas and electric service and individual heating and cooling
systems. Our combined apartment units are comprised of 37.2% one bedroom units,
55.3% two bedroom units and 7.5% three bedroom units. The units average 996
square feet in area and are well equipped with modern appliances and other
conveniences. All include swimming pools, tennis courts and club rooms, and most
have exercise facilities.
The tables on the following pages summarize information about each of our
apartment communities.
59
<PAGE>
INFORMATION ABOUT APARTMENT COMMUNITIES
<TABLE>
<CAPTION>
APARTMENT UNIT WEIGHTED
TOTAL AVERAGE
RENTABLE TYPE APT.
NO. OF AREA ----------------- SIZE
APT. YEAR DATE TOTAL (SQ. 1 2 3 (SQ.
PROPERTY LOCATION UNITS COMPLETED ACQUIRED ACREAGE FT.) BR BR BR FT.)
- --------------------- ------------------ ------ --------- -------- ------- -------- --- --- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXISTING COMMUNITIES
Harris Hill........ Charlotte, NC 184 1988 12/94 18.4 167,920 67 117 -- 912
Latitudes.......... Virginia Beach, VA 448 1989 10/94 24.9 358,700 269 159 20 800
Oakbrook........... Charlotte, NC 162 1985 6/94 16.4 178,668 32 120 10 1,100
Paces Commons...... Charlotte, NC 336 1988 6/93 24.8 322,046 154 142 40 958
Paces Village...... Greensboro, NC 198 1988 4/96 15.5 167,886 88 110 -- 848
CHRYSSON COMMUNITIES
ACQUIRED
Abbington Place
(1)................ Greensboro, NC 360 1994(5) 12/97 37.4 400,728 96 216 48 1,113
Pepperstone (1).... Greensboro, NC 108 1992 12/97 10.1 113,076 -- 108 -- 1,047
Savannah Place
(1)................ Winston-Salem, NC 172 1991 12/97 15.4 182,196 44 128 -- 1,059
Waterford Place
(1)................ Greensboro, NC 240 1997 12/97 20.6 277,296 72 120 48 1,155
CHRYSSON COMMUNITIES
UNDER CONSTRUCTION
Allerton Place
(2)................ Greensboro, NC 228 -- -- 19.2 241,530 54 126 48 1,064
Summerlyn Place
(2)................ Burlington, NC 140 -- -- 12.1 154,116 48 84 8 1,101
Brookford Place
(2)................ Winston-Salem, NC 108 -- -- 6.3 103,392 36 72 -- 957
<CAPTION>
MONTHLY RENT
----------------------------
ECONOMIC AVERAGE ECONOMIC PERCENTAGE AVERAGE
OCCUPANCY OCCUPANCY(3) TURNOVER(4) AS OF ANNUAL AVERAGE
SEPTEMBER -------------------- ------------------- SEPT. 30 ------------------
PROPERTY 1997 1996 1995 1994 1997 1996 1995 1997 1996 1995 1994
- --------------------- -------------- ---- ---- ---- ---- ---- ---- -------- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXISTING COMMUNITIES
Harris Hill........ 96% 93% 96% -- 72% 71% 65% $710 $717 $683 --
Latitudes.......... 91% 94% 95% 93% 64% 59% 64% $655 $637 $613 $606
Oakbrook........... 94% 94% 98% 98% 59% 65% 59% $768 $780 $750 $712
Paces Commons...... 98% 95% 94% 95% 51% 55% 68% $702 $685 $655 $614
Paces Village...... 92% 94% -- -- 55% 60% -- $682 $693 -- --
CHRYSSON COMMUNITIES
ACQUIRED
Abbington Place
(1)................ 96% 97% (5) 62% (5) -- 62% (5) 70% (5) -- $767(5) $770(5) -- --
Pepperstone (1).... 97% 98% 98% 98% 67% 53% 64% $653 $660 -- --
Savannah Place
(1)................ 97% 98% 98% 98% 62% 80% 63% $734 $717 -- --
Waterford Place
(1)................ 91% -- -- -- -- -- -- -- -- -- --
CHRYSSON COMMUNITIES
UNDER CONSTRUCTION
Allerton Place
(2)................ -- -- -- -- -- -- -- -- -- -- --
Summerlyn Place
(2)................ -- -- -- -- -- -- -- -- -- -- --
Brookford Place
(2)................ -- -- -- -- -- -- -- -- -- -- --
</TABLE>
---------------------------
(1) Added as part of Phase I of the Chrysson acquisition. For the
Phase I Chrysson properties, the "Monthly Rent" reflects the
weighted average rent, taking into account the dates on which
individual apartment units within a community were placed in
service.
(2) To be acquired upon completion and lease up.
(3) "Average Economic Occupancy" is calculated as gross potential
rent less vacancy divided by gross potential rent.
(4) "Percentage Turnover" reflects, on an annual basis, the number
of residents who move out of the property. Percentage Turnover
for 1997 reflects turnover through September 30, 1997 on an
annualized basis.
(5) Phase I of Abbington Place only.
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<PAGE>
SUMMARY OF APARTMENT UNIT AMENITIES
<TABLE>
<CAPTION>
LARGE PATIO
STORAGE DECK,
WASHER & OR CABLE BALCONY
MINI- REFRIG. & DRYER VAULTED WALK- IN TV OR
PROPERTY BLINDS CARPETING DISHWASHER HOOK-UPS CEILINGS FIREPLACES CLOSET READY SUNROOM
- --------------------- ------- ---------- ----------- --------- --------- ----------- -------- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EXISTING COMMUNITIES
Harris Hill........ All All All All Select Select All All All
Latitudes.......... All All All All Select Select All All All
Oakbrook........... All All All All Select All All All All
Paces Commons...... All All All All Select Select All All All
Paces Village...... All All All All Select Select All All All
CHRYSSON COMMUNITIES
ACQUIRED
Abbington Place.... All All All All Select Select All All All
Pepperstone........ All All All All Select Select All All All
Savannah Place..... All All All All Select Select All All All
Waterford Place.... All All All All Select Select All All All
CHRYSSON COMMUNITIES
UNDER CONSTRUCTION
Allerton Place..... All All All All Select Select All All All
Summerlyn Place.... All All All All Select Select All All All
Brookford Place.... All All All All Select Select All All All
</TABLE>
SUMMARY OF RECREATIONAL AMENITIES
<TABLE>
<CAPTION>
FITNESS TENNIS TOT LOT/ SAUNA OR
PROPERTY CLUBHOUSE CENTER POOL COURT(S) TOT POOL WHIRLPOOL OTHER
- ------------------------- ---------- -------- ----- --------- --------- ---------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
EXISTING COMMUNITIES
Harris Hill............ Yes Yes Yes Yes Yes Yes Basketball court; car
wash
Latitudes.............. Yes Yes Yes Yes Yes Yes Basketball court; sand
volleyball court; car
wash
Oakbrook............... Yes No Yes Yes No Yes Carports; car wash
Paces Commons.......... Yes Yes Yes Yes Yes Yes Two pools; car wash;
exercise trail
Paces Village.......... Yes Yes Yes Yes No Yes Car wash
CHRYSSON COMMUNITIES
ACQUIRED
Abbington Place........ Yes Yes Yes Yes Yes No Garages; putting green
Pepperstone............ Yes Yes Yes Yes Yes No
Savannah Place......... Yes Yes Yes Yes Yes No Garages; putting green
Waterford Place........ Yes Yes Yes Yes Yes No Garages; putting green
CHRYSSON COMMUNITIES
UNDER CONSTRUCTION
Allerton Place......... Yes Yes Yes Yes Yes No Garages; mini storage
facility available
Summerlyn Place........ Yes Yes Yes Yes Yes No Garages; putting green
Brookford Place........ Yes Yes Yes Yes Yes No Garages
</TABLE>
61
<PAGE>
RESTAURANT PROPERTIES
Our 47 restaurant properties are listed in Schedule III to the financial
statements on page F-17. We paid an average of $920,000 for each restaurant
property. The details of our lease arrangement with Enterprises is discussed
under "History and Formation of the Company -- Early History" on page 21 and
" -- Renegotiation of Master Lease" on page 22.
The restaurant properties are operated by Enterprises as Hardee's
restaurants pursuant to franchise agreements with Hardee's Food Systems, Inc.
These agreements require that the properties conform to a standard design
specified by Hardee's. The current design consists of a one-story brick, stucco
or wood building that embodies a contemporary style with substantial plate glass
window areas. The buildings average 3,300 square feet and are located on sites
ranging from 1 to 1.3 acres. The buildings are suitable for conversion to a
number of uses, but the interiors would have to be substantially modified prior
to their use in non-restaurant applications. Hardee's owns a design patent on
certain elements of the building and requires franchisees to make certain
exterior modifications if the location is discontinued as a Hardee's restaurant.
OTHER INFORMATION ABOUT OUR PROPERTIES
We present information concerning the location of all 47 restaurant
properties, as well as information regarding the encumbrances, cost and
depreciation on all of our properties on Schedule III to the financial
statements appearing on page F-17 of this prospectus.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CERTAIN POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS
Prior to making any acquisitions and during the periods between the
receipt of revenues and their distribution to you, we will invest our liquid
assets in certain short-term investments. These may include:
(Bullet) interest-bearing bank accounts;
(Bullet) certificates of deposit;
(Bullet) short-term money-market securities;
(Bullet) short-term government securities;
(Bullet) mortgage-backed securities guaranteed by the Government
National Mortgage Association;
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<PAGE>
(Bullet) mortgages insured by the Federal Housing Administration or
guaranteed by the Veterans Administration; or
(Bullet) mortgage loan participations purchased from banks or other
financial institutions.
We may also invest in other similar types of instruments. While we reserve the
right to invest in these types of securities, we have no immediate plans to do
so.
The yield on such interim investments may be higher or lower than the
yield we receive on our real estate properties.
INVESTMENTS IN OTHER REAL ESTATE ENTITIES
As we have discussed earlier, we recently converted our organizational
structure to an UPREIT. In doing so, we contributed our net assets to the
Operating Partnership in exchange for Units in the Operating Partnership. See
the discussion under "History and Formation of the Company -- Other Activity" on
page 23. We also own 95% of the economic interest of the Management Company.
We have no other ownership interests in entities primarily engaged in
real estate activities. We have no immediate plans to make any such investments,
other than investments in wholly owned subsidiaries of the Operating
Partnership, which may own certain of our assets. If economically attractive
opportunities arise, we may also invest in joint venture or "DownREIT"
partnerships or other entities in order to acquire interests in specific
apartment communities.
LOANS TO OTHER PERSONS
We do not generally make loans to third parties. However, we did make a
participating loan to the limited partnership that owns one of our managed
apartment communities. See "History and Formation of the Company -- Other
Activity" on page 23.
BORROWINGS
We have the authority to negotiate lines of credit and arrange for other
short-term or long-term borrowings from commercial lenders. In addition, we may
also:
(Bullet) obtain credit through the public issuance of debt;
(Bullet) obtain credit through the private placement of debt securities
with institutional investors;
(Bullet) incur mortgage indebtedness on real estate which we acquire;
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<PAGE>
(Bullet) invest in properties subject to existing secured loans;
(Bullet) obtain other mortgage financing for unleveraged properties in
our portfolio; and
(Bullet) refinance properties acquired on a leveraged basis.
There is no limitation on the number of mortgages which may be placed on
any one property. Our bylaws prohibit us from incurring debt in excess of 300%
of our net assets. For these purposes, net assets are defined as total assets at
cost, excluding intangible assets, before deducting depreciation or other
non-cash reserves, less total liabilities. However, the bylaws allow us to
exceed this limit if we obtain approval from a majority of our directors,
including a majority of the independent directors. We must also disclose to you
in our next quarterly report that we exceeded this limit and provide a
justification for doing so. Further, we intend to maintain a ratio of
debt-to-total market capitalization of 60% or less, even though none of our
governing documents provide such a restriction.
POLICIES ON CERTAIN INVESTMENTS AND ACTIVITIES
While we expect to acquire other apartment communities in North Carolina,
South Carolina and Virginia, we may make future investments outside of these
states. We will not have any limit on the amount or percentage of our assets
invested in any single apartment community or group of related properties. While
we intend to invest primarily in existing income-producing properties, we may
develop properties ourselves or invest in properties being developed by others
if we believe that the risk-adjusted return on such an investment would exceed
returns available from the acquisition of existing apartment communities.
Our bylaws impose certain prohibitions and restrictions on various
investment practices and activities. We cannot:
(Bullet) invest in mortgage loans unless an appraisal is obtained
concerning the underlying property;
(Bullet) invest in commodity or commodity future contracts other than
interest rate futures used solely for hedging purposes;
(Bullet) issue debt securities unless the historical debt service
coverage for the most recently completed fiscal year is
sufficient to service the higher level of debt (without regard
to any applicable balloon principal payments);
(Bullet) invest in real estate contracts for sale, unless such real
estate contracts are recordable in the chain of title; or
(Bullet) act in any way that would disqualify us from being a real
estate investment trust under the Internal Revenue Code, unless
we obtain proper shareholder approval.
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<PAGE>
The bylaws contain a provision noting that "the Company does not intend
to" do the following:
(Bullet) invest in the securities of issuers for the purpose of
exercising control (except with respect to wholly-owned
subsidiaries);
(Bullet) engage in the trading of securities of other issuers;
(Bullet) underwrite securities of other issuers;
(Bullet) engage in the purchase and sale (or turnover) of investments
other than as described in the Registration Statement; or
(Bullet) offer securities in exchange for property unless deemed prudent
by a majority of our directors.
However, we believe that the above-noted provision does not prohibit us from
engaging in any of these activities if performing these activities would benefit
us and would not disqualify us from qualifying as a REIT. Of the items that "the
Company does not intend to" do, we have made an investment in the Management
Company (described under "History and Formation of the Company -- Formation of
BNP Management, Inc." on page 22) for the purpose of helping to maintain our
REIT status. We own 95% of the economic interest, which includes 1% of the
voting interest, of the Management Company.
The only other item in which we have engaged or intend to engage is the
issuance of securities in exchange for property. As described under the heading
"Certain Relationships and Related Transactions -- Boddie-Noell Properties and
B. Mayo Boddie and Nicholas B. Boddie" on page 69, the earn-out consideration
for the acquisition of BT Venture Corporation could be paid in the form of cash
or, at our option, shares of our common stock. We have elected to make such
payments with common stock. Additionally, we will issue Units in exchange for
property as part of the Chrysson acquisition and for future apartment community
acquisitions. We tell you about this on page 30 under the heading "The
Company -- Our Growth Strategy -- EXTERNAL GROWTH STRATEGY."
CONFLICTS OF INTEREST
The Boddies have significant ownership or control positions in the
Company, Enterprises and Boddie Investment Company. As we note under "Certain
Relationships and Related Transactions -- Boddie-Noell Properties and
Boddie-Noell Enterprises" on page 70, Enterprises has a right of first refusal
to purchase the restaurant properties. If we negotiate the sale of the
restaurant properties to a third party, Enterprises has the right to purchase
the restaurants on the same terms and conditions as the third party. Boddie
Investment Company is the general partner of the limited partnerships owning the
properties we manage. It is also the general partner of the limited partnership
to which we have made a loan (see "History and Formation of the Company -- Other
Activity" on page 23). Accordingly, there are
65
<PAGE>
inherent conflicts of interest in our relationship with Enterprises and in our
management of the properties owned by those limited partnerships.
In addition, the bylaws specify that any contract or transaction between
us and one or more of our directors or officers, or between us and any affiliate
of any of those persons, must be approved by a majority of both the board of
directors and the independent directors who are independent of the transaction.
Our bylaws specify the criteria that the independent directors must use.
Generally, the independent directors must determine that:
(Bullet) the transaction is fair and reasonable to us and on terms as
favorable to us as those available from unaffiliated third
parties;
(Bullet) if an acquisition of property other than mortgage loans is
involved, the total consideration we will pay for the property
must be less than or equal to the appraised or fair value of
such property. If the price exceeds the cost of the asset to
the seller, the independent directors must justify such excess;
and
(Bullet) if the transaction involves the making of loans or the
borrowing of money, the transaction must be fair, competitive,
and commercially reasonable when compared to transactions
between unaffiliated lenders and borrowers under the same
circumstances.
Maryland law contains similar restrictions on a director or officer's ability to
transact business with us. However, our bylaw provisions are more restrictive.
Under Maryland law:
(Bullet) either the independent directors or independent shareholders
can approve a related-party transaction. Our bylaws do not
provide for disinterested shareholder approval; and
(Bullet) a transaction need either be fair and reasonable or otherwise
approved as described in the preceding point. Our bylaws
require that the transaction be both fair and reasonable and be
approved by a majority of the independent directors.
POLICY CHANGES
The prohibitions and restrictions described under " -- Policies on
Certain Investments and Activities" are contained in our bylaws and cannot be
changed without shareholder approval. Our directors can change, without
shareholder approval, all of the other policies we told you about above.
66
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
We currently have five members on our Board of Directors. Upon completion
of the Chrysson acquisition, two of our previous board members -- Nicholas B.
Boddie and Richard A. Urquhart, Jr. -- resigned as directors. As required by the
agreement with the Chrysson Parties, they have appointed two directors to
replace Messrs. Boddie and Urquhart. The initial appointees are Paul G. Chrysson
and W. Michael Gilley. Upon completion of the offering, our Board will be
expanded to seven members and will include D. Scott Wilkerson and Philip S.
Payne, our two most senior executive officers. Under the agreement with the
Chrysson Parties, after the Board is expanded to seven, the Chrysson Parties
have the right to require the resignation of another Board member and to
nominate another person unaffiliated with them, subject to our Board's approval.
Initially, the Chrysson Parties have agreed to have Donald R. Pesta, Jr., a
current board member, fill this independent director position. In the future,
they may choose to nominate someone else, subject again to our Board's approval.
We have set forth below a listing and brief biography of each person who
will be a Director or Executive Officer following completion of the offering.
<TABLE>
<CAPTION>
DIRECTOR/OFFICER
NAME AGE POSITION SINCE
- -------------------- --- --------------------------------------------- ----------------
<S> <C> <C> <C>
B. Mayo Boddie 67 Chairman of the Board, Director April 1987
D. Scott Wilkerson 40 Director, President and Chief Executive
Officer October 1994
Philip S. Payne 46 Director, Executive Vice President, Treasurer
and Chief Financial Officer October 1994
William H. Stanley 72 Director April 1987
Donald R. Pesta, Jr. 44 Director January 1996
Paul G. Chrysson 42 Director December 1997
W. Michael Gilley 42 Director December 1997
Pamela B. Novak 44 Vice President, Controller and Chief
Accounting Officer October 1994
Douglas E. Anderson 50 Vice President, Secretary April 1987
</TABLE>
B. Mayo Boddie -- Chairman of the Board of Directors. Mr. Boddie was one
of our founders and a co-founder of Enterprises in 1961. He serves as Chairman
of the Board of Directors of both companies. Mr. Boddie served as chief
executive officer of the Company from its inception until April 1995. Mr. Boddie
serves as a director of First Union National Bank of North Carolina.
D. Scott Wilkerson -- Director, President and Chief Executive Officer.
Mr. Wilkerson joined BT Venture Corporation in 1987 and served in various
officer level positions, including Vice President of Administration and Finance
and Vice President for Acquisitions and Development before becoming President in
January 1994. He was named Chief Executive Officer in April 1995. From 1980 to
1986,
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<PAGE>
Mr. Wilkerson was with Arthur Andersen LLP, in Charlotte, North Carolina,
serving as tax manager from 1985 to 1986. His specialization was in the
representation of real estate syndicators, developers and management companies.
Mr. Wilkerson received a B.S. degree in accounting from the University of North
Carolina at Charlotte in 1980. He is a licensed certified public accountant and
licensed real estate broker. He is a member of the Board of Directors of the
Apartment Association of North Carolina and the Charlotte Apartment Association.
He is active in various professional, civic and charitable activities.
Philip S. Payne -- Director, Executive Vice President, Treasurer and
Chief Financial Officer. Mr. Payne joined BT Venture Corporation in 1990 as Vice
President of Capital Market Activities and became Executive Vice President and
Chief Financial Officer in January 1993. He was named Treasurer in April 1995.
From 1987 to 1990 he was a principal in Payne Knowles Investment Group, a
financial planning firm. From 1983 to 1987 he was a registered representative
with Legg Mason Wood Walker. From 1978 to 1983, Mr. Payne practiced law, and he
currently maintains his license to practice law in Virginia. He received a B.S.
degree from the College of William and Mary in 1973 and a J.D. degree in 1978
from the same institution.
William H. Stanley -- Director. Mr. Stanley is retired from the positions
of Chairman of the Board of Directors and Chief Executive Officer of Peoples
Bank and Trust Company. Mr. Stanley serves as a director of Ellett Bros., Inc.
Donald R. Pesta, Jr. -- Director. Mr. Pesta is a certified public
accountant with extensive experience in real estate related matters. Mr. Pesta
is the founding partner of the accounting firm of Pesta, Finnie & Associates. He
is a former partner of Arthur Andersen & Co.
Paul G. Chrysson -- Director. Mr. Chrysson is President of C.B.
Development Company, Inc., a developer of single family and multi-family
residential properties. Mr. Chrysson is on the Board of Directors of Amos
Cottage Children's Hospital and Greenbriar Corporation. He is also on the Board
of Advisors of Wachovia Bank (Forsyth County). He is a former director of Triad
Bank and United Carolina Bank (North Carolina). He has also served on the boards
of various other charitable organizations. He has been a licensed real estate
broker since 1974 and a licensed contractor since 1978.
W. Michael Gilley -- Director. Mr. Gilley is President of Bartram
Investment Properties, Inc., a position he has held for over five years. From
January 1995 to January 1997 he was Executive Vice President of Greenbriar
Corporation. He also served on their Board of Directors from September 1994 to
September 1996. He has been a licensed real estate broker since 1984.
Pamela B. Novak -- Vice President and Controller. A licensed certified
public accountant, Ms. Novak joined BT Venture Corporation in 1993 as
controller. From 1984 to 1993, she was employed by Ernst & Young, LLP and served
as an audit manager from 1987 through 1993. She received a B.S. in accounting
from the University of North Carolina at Charlotte in 1984.
68
<PAGE>
Douglas E. Anderson -- Vice President and Secretary. Mr. Anderson has
served as Vice President and Secretary since our inception in 1987. He has been
with Enterprises since 1977 and is currently a director, Executive Vice
President and Secretary of Enterprises. Mr. Anderson is also president of BNE
Land and Development Company, the real estate development division of
Enterprises. He serves as a director of Wachovia Bank of Rocky Mount, North
Carolina. He received a B.S. degree in finance and accounting from the
University of North Carolina at Chapel Hill in 1970.
Under our Articles of Incorporation, a majority of the directors must be
independent. Our Articles define an independent director as a director who is
not:
(Bullet) an officer or employee of the Company or one of its
subsidiaries;
(Bullet) a spouse, parent, child or relative living in the same
household of a principal executive officer of the Company; or
(Bullet) an individual member of an organization that acts as an
advisor, consultant, legal counsel or in some similar capacity
and that receives compensation on a continuing basis from the
Company, other than director's fees.
Upon completion of the offering, Mr. Boddie, Mr. Stanley, Mr. Pesta, Mr.
Chrysson and Mr. Gilley will be our independent directors.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BODDIE-NOELL PROPERTIES AND B. MAYO BODDIE AND NICHOLAS B. BODDIE
B. Mayo Boddie, Chairman of our Board of Directors, is Chairman of the
Board of Directors and Chief Executive Officer of Enterprises. Nicholas B.
Boddie is his brother and was a former Vice Chairman and a director of the
Company prior to his resignation concurrent with the closing of Phase I of the
Chrysson acquisition. He is also the Vice President and a director of
Enterprises. The Boddies and certain of their family members are the sole owners
of Enterprises. We lease our 47 restaurant properties to Enterprises. See
" -- Boddie-Noell Properties and Boddie-Noell Enterprises" below.
The Boddies are the sole shareholders and directors of Boddie Investment
Company. See " -- Boddie-Noell Properties and Boddie Investment Company" below.
The Boddies were the sole shareholders and directors of BT Venture
Corporation. On October 1, 1994, we acquired BT Venture Corporation. As a result
of the acquisition, the Boddies received consideration comprised of cash, shares
of our common stock and relief from certain debt and contractual and contingent
obligations. The contract purchase price for BT Venture Corporation was $23.2
million. This
69
<PAGE>
consideration consisted of a cash payment of $91,000, the issuance of 134,610
shares of our common stock and the assumption of $21.3 million in debt and other
payables. In addition, the Boddies were entitled to receive additional
compensation valued at up to $1.7 million, based on whether we met certain
performance criteria. We refer to this latter consideration as "earn-out
consideration."
At our election, we may pay the earn-out consideration by issuing shares
of common stock or by paying cash. Through October 1, 1997, we issued a total of
80,750 shares of common stock to the Boddies in payment of the earn-out
consideration. Under the terms of the acquisition agreement, the Boddies are due
earn-out consideration of approximately $572,000, which we can pay in cash or
43,438 shares of common stock, if permitted under the Internal Revenue Code. We
have not issued these remaining earn-out shares because of certain ownership
limitations in the Internal Revenue Code; however, as a result of a change in
the tax laws governing affiliated ownership, which will become effective on
January 1, 1998, we intend to issue these shares at that time.
As part of the acquisition, the Boddies have indemnified the Company,
subject to certain limitations, against any claim against us which we assume as
a result of our being the successor-in-interest to BT Venture Corporation.
B. Mayo Boddie and Nicholas B. Boddie have not received any compensation
for their services as Chairman and Vice Chairman, respectively, or as Directors
of the Company.
BODDIE-NOELL PROPERTIES AND BODDIE-NOELL ENTERPRISES
As we noted under the heading "History and Formation of the Company --
Early History" on page 21, we purchased 47 existing Hardee's restaurant
properties from BNE Realty Partners, Limited Partnership, an affiliate of
Enterprises, in 1987. We discussed the franchise agreement between Enterprises
and Hardee's Food Systems, Inc. under the heading "Our Properties -- Restaurant
Properties" on page 62 and the terms of our triple-net, master lease agreement
with Enterprises under the heading "History and Formation of the
Company -- Early History" on page 21. Further, Enterprises has a right of first
refusal to purchase the 47 restaurant properties. This means that if we
negotiate the sale of the restaurant properties to a third party, Enterprises
has the right to purchase the restaurants on the same terms and conditions. This
may make it more difficult to sell the restaurants.
For the year ended December 31, 1996, the master lease with Enterprises
resulted in rental income of $4.5 million, or approximately 31.0% of total
revenues. For the nine months ended September 30, 1997 such revenues accounted
for approximately 29.1% of total revenues on a historical basis and 22.7% on a
pro forma basis. We expect such percentages to decline on a going forward basis.
Enterprises is responsible for all property insurance, real estate taxes,
utilities, maintenance, and alteration expenses relating to the operation of the
restaurant properties.
70
<PAGE>
In connection with the acquisition of BT Venture Corporation, we assumed
a note payable to Enterprises in the amount of $6.1 million. The note bears
interest at a floating rate equal to the 30-day LIBOR rate plus 150 basis points
capped at 8.0%. Payments are interest only and paid quarterly. The note is due
in full on May 1, 1999. During 1996, we recorded interest on this note to
Enterprises in the amount of $432,000, and during the first nine months of 1997
we recorded interest of $329,000. At September 30, 1997, the effective interest
rate on this note was 7.3%.
BODDIE-NOELL PROPERTIES AND BODDIE INVESTMENT COMPANY
With the acquisition of BT Venture Corporation in October 1994, we
assumed fee management of nine apartment properties and three shopping centers
of which we currently manage seven apartment communities and two shopping
centers. Boddie Investment Company is the general partner of the limited
partnerships that own the apartment properties and shopping centers we manage
but do not own. The Boddies are the sole shareholders of Boddie Investment
Company. The Boddies may determine that Boddie Investment Company's interests
would be better served by the sale of Boddie Investment Company's apartment or
shopping center properties or the renegotiation of the management contracts. The
sale of the properties could result in the Management Company's loss of the
management contracts. We recognized $149,000 of revenue from the Management
Company during 1996 and $183,000 through the first nine months of 1997. Any
renegotiated management contract would have to be approved by a majority of the
directors of the Management Company (currently Philip S. Payne and D. Scott
Wilkerson). The Boddies' positions within our Company and within Boddie
Investment Company may provide them with information they could use to their
advantage in such contract negotiations. The Boddies, however, have stated that
they have no intentions of canceling the existing management contracts.
In connection with the acquisition of BT Venture Corporation, we assumed
a note payable to Boddie Investment Company in the amount of $956,000. The note
bears interest at a floating rate equal to the 30-day LIBOR rate plus 150 basis
points capped at 8.0%. Payments are interest only and paid quarterly. The note
is due in full on May 1, 1999. During 1996, we recorded interest on this note to
Boddie Investment Company in the amount of $68,000, and during the first nine
months of 1997 we recorded interest of $52,000. On September 30, 1997, the
effective interest rate on this note was 7.3%.
On February 27, 1997, we entered into a participating loan agreement with
The Villages of Chapel Hill Limited Partnership, a limited partnership whose
general partner is Boddie Investment Company. Under the terms of the agreement,
we have committed to loaning The Villages up to $2.6 million to fund a
substantial rehabilitation of the apartment community. We also guaranteed a $1.5
million bank loan. In exchange, we received or will receive the following:
(Bullet) control over selection of the property management provider
(which currently is the Management Company);
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<PAGE>
(Bullet) interest on our loan at the greater of 12.5% or the 30 day
LIBOR rate plus 6.125%;
(Bullet) 25% of the increase in gross revenue in excess of $146,333 per
month from the property over the next seven years; and
(Bullet) 25% of the value of the property in excess of $10 million at
the earlier of the end of seven years or upon its sale.
We will fund advances to The Villages through draws on an existing credit
facility, which currently bears interest at the 30 day LIBOR rate plus 2.25% and
is secured by deeds of trust on three of our apartment properties. Through
September 30, 1997, we had advanced The Villages $1.4 million. Under this
arrangement, we will earn interest at a rate higher than we could otherwise
obtain from the investment of funds in the ownership of apartment communities
and at a rate in excess of our borrowing rate under our credit facility.
Under our bylaws, transactions with Enterprises or Boddie Investment
Company must be approved by directors who are independent of the transactions.
B. Mayo Boddie and Nicholas B. Boddie, the owners of Enterprises and Boddie
Investment Company, have been directors of the Company. B. Mayo Boddie will
continue to be a director and our Chairman of the Board after completion of the
offering. As such, he may be able to influence the Board's actions to the
benefit of Enterprises or Boddie Investment Company.
CHRYSSON ACQUISITION
We described the Chrysson acquisition to you in detail on page 23 under
the heading "History and Formation of the Company -- Chrysson Acquisition." The
owners of the Chrysson properties received Units as partial consideration for
the sale of their properties. As part of the acquisition agreement, the Chrysson
Parties appointed two members to our Board of Directors following the
resignation of two of our then current directors. Upon closing of this offering,
the size of our Board will be increased from five to seven members and (i) D.
Scott Wilkerson and Philip S. Payne, executive officers of the Company, will be
appointed to the Board, (ii) an additional current director will resign and
(iii) the Chrysson Parties will have the right to nominate another director, who
may not be an affiliate of the Chrysson Parties, for appointment subject to our
Board's approval. These Chrysson directors, due to their ownership of Units, as
opposed to shares of our common stock, will suffer different and more adverse
tax consequences than shareholders of the Company upon the sale of any of the
Chrysson properties or upon the repayment or refinancing of associated
indebtedness. As a result they may have objectives that are different from those
of the other directors with respect to property sales or the appropriate pricing
and timing of any refinancing or prepayment of indebtedness. Similar conflicts
may develop in the future as we acquire more properties.
In addition, assuming completion of this offering, the Chrysson Parties
will initially own 13.8% of the Units of the Operating Partnership. We have also
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contracted for, and our Board of Directors has already approved, the
acquisition, subject to certain preconditions, of three additional apartment
communities from the Chrysson Parties. These properties are currently under
development, and we expect that they will be completed and acquired within the
next twelve months. Assuming completion of this offering and the second phase of
the Chrysson acquisition, the Chrysson Parties will own 22.2% of the Units of
the Operating Partnership.
Further, we did not seek an independent third party appraisal of the
Chrysson properties prior to purchase. While no assurances can be given that the
price we paid for the Chrysson properties represents their fair market value,
based on our management's experience, we believe that the agreed-upon price for
the Chrysson properties does reflect their fair market value.
As noted on page 24 under the heading "History and Formation of the
Company -- Chrysson Acquisition," we have a right of first refusal to acquire
any properties that the Chrysson Parties may develop in the future. We may
acquire such properties, but only if a majority of the members of our Board of
Directors who have no interest in the transaction approve such an acquisition.
TRANSACTIONS WITH MANAGEMENT
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In July 1997, we entered into substantially identical employment
agreements with D. Scott Wilkerson (President) and Philip S. Payne (Executive
Vice President and Chief Financial Officer). These four year agreements, subject
to automatic annual renewal for additional one year periods extending the term
to a maximum of ten years, provide for initial annual base salaries of $139,920,
annual discretionary bonuses as determined by the Board of Directors, and
participation in an incentive compensation plan we intend to establish, along
with specified death and disability benefits. The agreements provide for
severance payments equal to base salary for the remaining term of the contract
(excluding any unexercised renewal periods) in the event of termination without
cause. Alternatively, in the event of a change in control of the Company, the
agreements provide for payments of three times base salary, discretionary bonus
and annual bonus, along with a lump sum cash payment of the benefit the
executive would otherwise have received had all stock options and other stock
based compensation been fully vested, been exercised and become due and payable.
Also in July 1997, we entered into an employment agreement with Pamela B.
Novak, Vice President, Controller and Chief Accounting Officer of the Company.
The two year agreement is substantially identical to the agreements signed by
Messrs. Wilkerson and Payne, except that such agreement provides for a base
salary of $90,000 and limits severance payments to no more than the greater of
the then remaining term of the agreement or one year's total compensation.
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LOANS TO OFFICERS
The Company loaned $27,000 each to two executive officers to enable them
to purchase shares of our common stock. These amounts are outstanding as of
September 30, 1997.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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The following table sets forth certain information regarding beneficial
ownership of our common stock as of November 25, 1997, (i) by each person who we
know to own beneficially more than 5% of our common stock (none), (ii) by each
of our directors as of the close of this offering, (iii) by each of the Named
Executive Officers (D. Scott Wilkerson and Philip S. Payne) and (iv) by all
directors and executive officers as a group as of the close of this offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------
BEFORE OFFERING AFTER OFFERING
DIRECTORS, OFFICERS AND ------------------ ------------------
FIVE PERCENT SHAREHOLDERS NUMBER PERCENT NUMBER PERCENT
- ---------------------------------------------------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
B. Mayo Boddie............................................ 88,930 2.8% 88,930 1.5%
D. Scott Wilkerson (1).................................... 77,070 2.4% 77,070 1.3%
Philip S. Payne (1)....................................... 77,070 2.4% 77,070 1.3%
William H. Stanley........................................ 3,000 ** 3,000 **
Donald R. Pesta, Jr....................................... 500 ** 500 **
Paul G. Chrysson (2)...................................... -- ** -- **
W. Michael Gilley (2)..................................... 1,100 ** 1,100 **
All directors and executive officers as a group (9
persons) (3)............................................ 296,351 9.2% 296,351 4.9%
</TABLE>
- ---------------
** Less than 1%.
(1) Number and percent of shares beneficially owned includes exercisable options
for 37,500 shares. Messrs. Payne and Wilkerson each own 41 shares
(representing in the aggregate a 2.5% economic interest) of the Class A
(voting) stock of BNP Management, Inc., our unconsolidated subsidiary.
(2) Number and percent of shares beneficially owned excludes 173,360 Units owned
by Mr. Chrysson and 156,466 Units owned by Mr. Gilley, which are convertible
at the option of the holder into shares of common stock following the
expiration of a one year lock-up period. Also excludes the Units that will
be issued to Mr. Chrysson and Mr. Gilley in December 1998 and December 1999,
all of which will be issued subject to a one year lock-up period.
(3) Number and percent of shares beneficially owned includes exercisable options
for 105,000 shares, of which 82,500 are held by directors and officers.
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DESCRIPTION OF CAPITAL STOCK
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GENERAL
Our Articles of Incorporation give us the authority to issue up to 100.0
million shares of common stock and 10.0 million shares of preferred stock. The
par value of both the common and preferred stock is $.01 per share. Under
Maryland law, shareholders generally are not responsible for a corporation's
debts or obligations. Upon completion of this offering, we will have 5,930,776
shares of common stock issued and outstanding (6,350,776 shares if the
underwriters exercise their over-allotment option in full). This does not
include shares issuable upon the redemption of any Units or shares issuable
under currently outstanding options or warrants held by officers and directors
or shares which may be issued under our Dividend Reinvestment and Stock Purchase
Plan. No shares of preferred stock are issued or outstanding.
COMMON STOCK
Our Board of Directors previously authorized us to issue all of the
currently outstanding common stock. The Board has also authorized the issuance
of the stock we are now selling. The common stock we have previously sold has
been fully paid for and is nonassessable. When we issue the stock in this
offering and you pay for it, we will also consider the common stock you are
buying to be fully paid for and nonassessable. Nonassessable means that we
cannot ask you for more money for the stock after you have purchased it.
As a holder of common stock, you will be entitled to receive
distributions based on common stock if our Board of Directors declares such
distributions. However, because we have the authority under our Articles of
Incorporation to issue preferred stock, your rights to receive distributions may
be subordinated to the rights of any preferred stock we issue in the future. In
any liquidation, each outstanding common share entitles its holder to share
(based on the percentage of shares held) in the assets that remain after we pay
our liabilities and any preferential distributions owed to preferred
shareholders. We have paid quarterly distributions on our common stock since the
period ending June 30, 1987, and we intend to continue to pay quarterly
distributions.
Holders of common stock are entitled to one vote for each share on all
matters submitted to a shareholder vote. Unless a law requires otherwise, or as
our Articles of Incorporation may provide with respect to preferred stock, the
holders of common stock will possess exclusive voting power. See " -- Ownership
Limitations and Restrictions on Transfers." There is no cumulative voting in the
election of directors. This means that the holders of a majority of the common
stock can elect all of the directors and the holders of the remaining common
stock could not elect any director.
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As a common shareholder in the Company, you will have no conversion,
sinking fund or redemption rights, or preemptive rights. A conversion feature is
one where a shareholder has the option to convert his shares to a different
security, such as debt or preferred stock. A sinking fund or redemption right is
one where a shareholder will have the right to redeem his shares (for cash or
other securities) at some point in the future. Sometimes a redemption right is
paired with an obligation of the company to create an account into which such
company must deposit money into to fund the redemption (I.E., a sinking fund).
Preemptive rights are rights granted to shareholders to subscribe for a
percentage of any other securities we may offer in the future based on the
percentage of shares owned.
We will furnish you with annual reports containing audited consolidated
financial statements. The financial statements will contain an opinion of our
independent public accountants. We will also furnish you quarterly reports for
the first three quarters of each year. These reports will contain unaudited
financial information.
All common stock will have equal distribution, liquidation and voting
rights.
The Maryland General Corporate Law generally prohibits us from merging
with another corporation if we will not be the surviving entity in the merger.
Maryland law also generally prohibits us from selling all or most of our assets.
We can enter into these transactions, however, if our Board of Directors adopts
a resolution declaring the proposed transaction advisable and a majority of
shareholders entitled to vote approves the transaction.
The common stock is listed on the American Stock Exchange. The transfer
agent and registrar for the common stock is First Union National Bank of North
Carolina.
PREFERRED STOCK
Under our Articles of Incorporation, our Board of Directors has the
authority to issue one or more series of preferred stock. Prior to issuing
shares of each series, the Maryland General Corporate Law and our Articles of
Incorporation require the Board of Directors to fix the terms for each series.
Such terms could include the right to receive distributions and liquidation
payments before such can be made on the common stock. The Board of Directors
could authorize terms that could discourage a takeover or other transaction that
might be in the common shareholders' best interests. As of the date of this
prospectus, we have not issued any preferred stock, and we have no present plans
to do so.
OWNERSHIP LIMITATIONS AND RESTRICTIONS ON TRANSFERS
To maintain our REIT qualification, no less than six persons can own 50%
or more in value of our outstanding common stock during the last half of a
taxable year. Additionally, at least 100 persons must own the common stock
during at least 335 days per year. See "Federal Income Tax
Considerations -- Requirements for
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Qualification" beginning on page 86. To help ensure we meet these tests, our
Articles of Incorporation provide that no person may own more than 9.8% of our
issued and outstanding capital stock. For purposes of this provision, the
Company treats corporations, partnerships, groups within Section 13(d)(3) of the
Securities Exchange Act of 1934 and other entities as single persons. The Board
of Directors has discretion to waive this ownership limit if they receive
evidence that the changes in ownership will not jeopardize our REIT status. The
consequences of violating these limits are spelled out under the heading "Risk
Factors -- Possible Adverse Consequences of Limits on Ownership of Shares" on
page 18.
The restrictions on transferability and ownership will not apply if the
Board of Directors and the shareholders holding two-thirds of our outstanding
shares of capital stock determine that it is no longer in our best interest to
be a REIT. We have no intention to seek to change our REIT status.
All certificates representing shares of common stock bear a legend
referring to the restrictions described above.
If you own more than 5% of our common stock or preferred stock, you must
file a written notice with us no later than January 30 of each year. This notice
should contain your name and address, the number of shares of common stock or
preferred stock you own and a description of how you hold the shares. In
addition, you will be required, if we ask, to disclose to us in writing any
information we need in order to determine the effect of your ownership of such
shares on our status as a REIT.
These ownership limitations could have the effect of precluding a third
party from obtaining control over the Company unless the Board of Directors and
the shareholders determine that maintaining REIT status is no longer desirable.
LIMITATIONS OF LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Maryland corporation law and our Articles of Incorporation exculpate each
director and officer in actions by the Company or by shareholders in derivative
actions from liability unless the director or officer has received an improper
personal benefit in money, property or service or he has acted dishonestly, as
established by a final judgment of a court.
The Articles of Incorporation also provide that we will indemnify a
present or former director or officer against expense or liability in an action
to the fullest extent permitted by Maryland law. Maryland law permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
they incur in connection with any proceeding to which they are a party because
of their service as an officer, director or other similar capacity. However,
Maryland law prohibits indemnification if it is established that:
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(Bullet) the act or omission of the director or officer was material to
the matter giving rise to the proceeding and was committed in
bad faith or was the result of active and deliberate
dishonesty;
(Bullet) the director or officer actually received an improper personal
benefit in money, property or services; or
(Bullet) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the act or omission was
unlawful.
In addition, under Maryland law, to indemnify a director or officer we would
also have to obtain (i) a written affirmation by the director or officer of his
or her good faith belief that he or she has met the standard of conduct
necessary for indemnification and (ii) a written statement that he will repay
the amounts we advance if it shall ultimately be determined that the standard of
conduct was not met.
The exculpation and indemnification provisions in the Articles of
Incorporation have been adopted to help induce qualified individuals to agree to
serve on behalf of the Company by providing a degree of protection from
liability for alleged mistakes in making decisions and taking actions. Such
exculpation and indemnification provisions have been adopted, in part, in
response to a perceived increase in shareholders' litigation alleging director
and officer misconduct. You should be aware, however, that these provisions in
our Articles of Incorporation and Maryland law give you a more limited right of
action than you otherwise would have in the absence of such provisions.
The above indemnification provisions could operate to indemnify
directors, officers or other persons who exert control over us against
liabilities arising under the Securities Act of 1933. Insofar as the above
provisions may allow that type of indemnification, the Securities and Exchange
Commission has informed us that, in their opinion, such indemnification is
against public policy as expressed in the Securities Act of 1933 and is
therefore unenforceable.
SHARES AVAILABLE FOR FUTURE SALE
As of November 25, 1997, we had 3,130,776 shares of our common stock
issued and outstanding. After we issue all of the shares we sell in this
offering, we will have 5,930,776 shares of common stock issued and outstanding.
If the underwriters exercise their over-allotment in full, that figure will be
6,350,776. An additional 280,000 shares of common stock are subject to options
granted to some of our employees and directors. Furthermore, we have reserved
241,000 shares for issuance under the Dividend Reinvestment and Stock Purchase
Plan and 43,438 shares pursuant to the earn-out provision relating to the
purchase of BT Venture Corporation. We expect to issue these 43,438 shares on
January 2, 1998. We have also reserved 1,150,032 shares for issuance upon the
redemption of Units issued in Phase I of the Chrysson acquisition.
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After the close of this offering, all of our outstanding common stock
will be freely tradeable except for restricted shares and shares owned by
affiliates. A restricted share is one issued pursuant to an exemption from the
registration requirements of the Securities Act. An affiliate is any person who
directly or indirectly controls, is controlled by, or is under common control
with, an issuer. Boddie-Noell Properties' affiliates may include our directors,
executive officers and persons directly or indirectly owning 10% or more of our
outstanding common stock. Holders of restricted stock may sell their shares only
pursuant to an effective registration statement or an exemption from the
Securities Act's registration requirements and from applicable state securities
laws.
Absent an effective registration statement, resales by our affiliates of
restricted and unrestricted common stock, and sales by non-affiliates of
restricted stock, are subject to the SEC's Rule 144. Rule 144 contains:
(Bullet) volume limitations;
(Bullet) rules concerning the aggregation of shares for purposes of the
volume limitations;
(Bullet) a requirement that transactions occur through a broker;
(Bullet) a requirement that restricted shares be held for a certain
period;
(Bullet) notice filing requirements; and
(Bullet) requirements concerning publicly available information about
Boddie-Noell Properties.
Rule 144 provides that restricted shares must be held for at least one year
before a holder of restricted securities can sell his shares using the safe
harbor provided by Rule 144. The volume limitations provide that a person (or
persons who must aggregate their sales) cannot, within any three month period,
sell more than the greater of:
(i) one percent of the issuer's then outstanding shares or
(ii) the average weekly reported trading volume during the four calendar
weeks preceding each sale.
A person who is not deemed an "affiliate" of the Company and who has
beneficially owned shares for at least two years would be entitled to sell such
shares under Rule 144 without regard to the above requirements. An affiliate,
however, must always comply with the restrictions of Rule 144, unless a
registration statement registering the offering by such affiliate is current and
in effect.
We are unable to predict the effect that sales made under Rule 144 may
have on the prevailing market price of our the common stock. Sales of
substantial amounts
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of restricted stock in the public market (or the perception that such sales
could occur) might adversely affect prevailing market prices for the common
stock.
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PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
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WE ORGANIZED THE OPERATING PARTNERSHIP UNDER THE DELAWARE REVISED UNIFORM
LIMITED PARTNERSHIP ACT, AS AMENDED. THE FOLLOWING SUMMARY OF THE PARTNERSHIP
AGREEMENT IS QUALIFIED BY REFERENCE TO THE ACTUAL PARTNERSHIP AGREEMENT. WE HAVE
FILED A COPY OF THE PARTNERSHIP AGREEMENT AS AN EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
GENERAL
Previously, on page 23, we told you about our conversion to an UPREIT
form of organization. We will conduct substantially all of our activities
through the Operating Partnership. The Operating Partnership is a Delaware
limited partnership. Boddie-Noell Properties, as the sole general partner, has
the exclusive power to manage and conduct the business of the Operating
Partnership, and has the rights and powers permitted to the general partner of a
Delaware limited partnership. In addition to other rights, investors who hold
Units in the Operating Partnership have such rights and powers as are reserved
to limited partners under Delaware law, but have no authority to transact
business for, or participate in the management activities or decisions of, the
Operating Partnership. The limited partners do not have the right to remove us
as the general partner.
The Operating Partnership agreement provides that we shall not, without
the consent of a majority of the holders of Units, engage in any transaction
that would cause it to terminate the Operating Partnership. Nor can we, in our
capacity as the general partner, authorize the partnership to make a general
assignment for the benefit of creditors. We cannot institute any proceeding for
bankruptcy or cause the Company to be dissolved or liquidated. We must hold
substantially all of our property through the Operating Partnership.
ALLOCATION OF DISTRIBUTIONS, PROFITS AND LOSSES
The Operating Partnership agreement provides, except as noted below, that
the net operating cash of the Operating Partnership available for distribution,
as well as net sales and refinancing proceeds, will be distributed from time to
time as determined by the Company (but not less frequently than quarterly), pro
rata in accordance with the partners' percentage interests. Profits and losses
for tax purposes will also generally be allocated among the partners in
accordance with their percentage interests, subject to compliance with
applicable laws, such as those noted
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under "Federal Income Tax Considerations -- Other Tax Considerations -- TAX
ALLOCATIONS WITH RESPECT TO OUR PROPERTIES" on page 98.
TRANSFERABILITY OF INTERESTS
The proposed Operating Partnership agreement generally provides that we
may not withdraw from the Operating Partnership, or transfer or assign our
interest in the Operating Partnership. The limited partners, on the other hand,
generally may transfer all or a portion of their interests in the Operating
Partnership to a transferee. No person receiving such a transfer, however, will
be admitted to the Operating Partnership as a substitute limited partner having
the rights of a limited partner without our consent. Additionally, the
transferee must meet certain other conditions, including agreeing to be bound by
the terms and conditions of the Operating Partnership agreement.
ADDITIONAL CAPITAL CONTRIBUTIONS; ISSUANCE OF ADDITIONAL PARTNERSHIP INTERESTS
The Operating Partnership agreement does not require any limited partner
to make additional capital contributions to the Operating Partnership. We,
however, will be obligated to make certain additional capital contributions to
the Operating Partnership in connection with the issuance of additional Units to
the Company.
The proposed Operating Partnership agreement authorizes us to issue
additional Units for any partnership purpose and for such capital contributions
and other considerations as we shall determine. The issuance of additional Units
to us, however, is subject to certain limitations. First, we may not issue
additional Units to ourselves unless we issue the additional Units to all
partners in proportion to their respective partnership interests. Alternatively,
we may issue additional Units to ourselves in connection with our issuing
capital stock, provided that the proceeds of the capital stock issuance are
contributed to the Operating Partnership as an additional capital contribution.
If we issue additional capital stock and make a capital contribution to
the Operating Partnership, the capital contribution must be in an amount equal
to the proceeds we receive from the issuance of the additional capital stock.
The Operating Partnership will then issue additional Units with similar
designations, preferences and rights to the capital stock we issued. For
example, if we issue 6% preferred stock, the Operating Partnership must issue 6%
preferred Units. If additional partnership interests are issued, the partnership
interests of all existing partners of the Operating Partnership will be diluted
proportionately.
REDEMPTION OF OPERATING PARTNERSHIP UNITS
The Operating Partnership will be obligated to redeem each Unit at the
request of the holder after a period of at least one year from issuance for cash
equal
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to the then fair market value of each share of common stock at the time of such
redemption. The Company may, however, elect to acquire such Unit for one share
of common stock or an amount of cash of the same value. We presently anticipate
that we will elect to issue common stock in connection with each such
redemption, rather than having the Company or the Operating Partnership pay
cash. If, however, Units are redeemed for cash, such redemption will be at the
fair market value of the Units. With each such redemption, our percentage
ownership interest in the Operating Partnership will increase.
INDEMNIFICATIONS AND FIDUCIARY STANDARDS
The Operating Partnership agreement provides that the general partner,
and each person designated or delegated by the general partner, will discharge
his duties in a manner reasonably believed to be in the best interests of the
Operating Partnership. The agreement also provides that all such individuals
will be indemnified and held harmless by the Operating Partnership for any act
performed for or on behalf of the Operating Partnership, or in furtherance of
the Operating Partnership's business. However, such individual must have acted
in a manner which he believed to be in the best interests of the Operating
Partnership, and with respect to any criminal action, the individual must have
had no reasonable cause to believe his conduct was unlawful. No indemnification
will be made if such individual is adjudged liable to the Operating Partnership
unless a court shall determine that such individual is nevertheless entitled to
indemnity. The Operating Partnership agreement also provides that no such
individual will have personal liability to the Operating Partnership and its
partners for monetary damages for breach of a fiduciary duty except (i) for a
breach of a duty of loyalty or (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law.
TAX MATTERS PARTNER
As provided in the Operating Partnership agreement, the Company is the
tax matters partner of the Operating Partnership. This means that we make
whatever tax elections must be made under the Internal Revenue Code.
OPERATIONS
The Operating Partnership agreement requires the partnership to be
operated in a manner that will enable us to satisfy the requirements for being
classified as a REIT and to avoid any Federal income tax liability.
Under the Operating Partnership agreement, the Operating Partnership will
assume and pay, or reimburse us for payment of, all expenses incurred relating
to the ownership and operation of, or for the benefit of, the Operating
Partnership. The Operating Partnership will also be responsible for all costs
and expenses relating to the formation, continuity of existence and operations
of Boddie-Noell Properties.
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TERM
The term of the Operating Partnership continues until December 31, 2097,
or until sooner dissolved pursuant to the terms of the Operating Partnership
agreement.
EXERCISES OF STOCK OPTIONS
If options that we have granted are exercised, the Operating Partnership
Agreement requires us to contribute to the Operating Partnership as an
additional contribution the exercise price we receive. For any given number of
shares, we will thus receive less than their fair value (assuming the option
holder exercises when the fair value exceeds the option price). We will receive
from the Operating Partnership, in exchange for the proceeds we contribute,
additional Units equal to the number of shares we issued, even though we will
not be paying the full fair value for those Units. Under the terms of the
Operating Partnership agreement, we will be deemed to have contributed the fair
value of the Units.
OTHER
The Operating Partnership agreement provides that substantially all of
our business activities must be conducted through the Operating Partnership or
subsidiary partnerships or corporations.
The Operating Partnership is authorized to enter into transactions with
partners or their affiliates, as long as the terms of such transactions are fair
and reasonable, and no less favorable to the Operating Partnership than would be
obtained from an unaffiliated third party.
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FEDERAL INCOME TAX CONSIDERATIONS
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The following summary of material federal income tax considerations to
Boddie-Noell Properties, Inc. and its shareholders relating to this Registration
Statement and the treatment of Boddie-Noell Properties, Inc. as a REIT is based
on current law, is for general purposes only, and is not tax advice. The summary
is not intended to represent a detailed description of the federal income tax
consequences applicable to a particular shareholder in view of such
shareholder's particular circumstances nor is it intended to represent a
detailed description of the federal income tax consequences applicable to
certain types of shareholders subject to special treatment under the federal
income tax laws (such as insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, foreign corporations, and persons who
are not citizens or residents of the United States). The summary is based on
current provisions of the Internal Revenue Code (the "Code"), current and
proposed
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Treasury Regulations, court decisions, and other administrative rulings and
interpretations. All of these sources are subject to change, and these changes
may be applied retroactively. We cannot provide any assurance that any such
change, future provisions of the Code or other legal authorities will not alter
significantly the tax considerations we describe in this summary.
FOR PURPOSES OF READING THIS SECTION ONLY, WHEN WE REFER TO BODDIE-NOELL
PROPERTIES, INC. OR TO OURSELVES IN THE FIRST PERSON, WE ARE REFERRING TO THE
REIT ENTITY INCORPORATED IN MARYLAND AND NOT THE OPERATING PARTNERSHIP AND THE
MANAGEMENT COMPANY.
EACH INVESTOR IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR REGARDING
THE TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE, OWNERSHIP, AND SALE OF THE
OFFERED STOCK, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, OR SALE AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
GENERAL
Beginning with our taxable year ended December 31, 1987, we have elected
to be taxed as a REIT under Sections 856 through 860 of the Code. We believe
that beginning with such taxable year we have been organized and have operated
in a manner to qualify for taxation as a REIT under the Code, and we intend to
continue to operate in such a manner, though no assurance can be given that we
have operated or will operate in a manner so as to qualify or remain qualified
as a REIT.
The sections of the Code relating to the qualification and operation as a
REIT are highly technical and complex. The following discussion sets forth the
material aspects of the Code sections that govern the federal income tax
treatment of a REIT and its shareholders. This summary is qualified in its
entirety by the applicable Code provisions, relevant rules and regulations, and
administrative and judicial interpretations of Code provisions and regulations.
We have not requested a ruling from the Internal Revenue Service ("IRS") with
respect to any issues relating to our qualification as a REIT, and therefore, we
can provide no assurance that the IRS will not challenge our REIT status.
Alston & Bird LLP has acted as tax counsel to us in connection with this
offering and our election to be taxed as a REIT. Alston & Bird LLP is of the
opinion that we have been organized and operated in conformity with the
requirements for qualification and taxation as a REIT under the Code for our
taxable years ended December 31, 1987 through 1996, and that, based on our
proposed method of operation, we are in a position to continue our qualification
and taxation as a REIT within the definition of Section 856(a) of the Code for
the taxable year that will end December 31, 1997, and for each of our subsequent
taxable years. This opinion is based solely on (i) our factual representations,
which were made based on our best knowledge and belief, to Alston & Bird LLP
concerning our business operations and our properties and (ii) other due
diligence identified in their opinion. In addition, our
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qualification as a REIT at any time during 1997 and each subsequent year is
dependent, among other things, upon our meeting the requirements of Section
856(a) of the Code throughout the year and for the year as a whole. Accordingly,
no assurance can be given that our actual results of operations for any
particular taxable year will satisfy the REIT requirements.
FEDERAL INCOME TAXATION OF BODDIE-NOELL PROPERTIES, INC.
If we qualify for taxation as a REIT, we generally will not be subject to
federal corporate income tax on that portion of our ordinary income or capital
gain that is currently distributed to our shareholders. The REIT provisions of
the Code generally allow a REIT to deduct distributions paid to its
shareholders, substantially eliminating the federal "double taxation" on
earnings (once at the corporate level when earned and once again at the
shareholder level when distributed) that usually results from investments in a
corporation. Nevertheless, we will be subject to federal income tax as follows:
First, we will be taxed at regular corporate rates on our undistributed
REIT taxable income, including undistributed net capital gains.
Second, we may be subject to the "alternative minimum tax" as a
consequence of our items of tax preference under certain circumstances.
Third, if we have net income from "foreclosure property" held primarily
for sale to customers in the ordinary course of business, including income from
the sale or other disposition of such property, we will be subject to tax at the
highest corporate rate on such income to the extent that it does not constitute
qualifying income for purposes of the 75% income test (discussed below).
Fourth, if we have net income from prohibited transactions (which are, in
general, certain sales or other dispositions of property that is held primarily
for sale to customers in the ordinary course of business but that is not
foreclosure property), we will be subject to a 100% tax on such income.
Fifth, if we fail to satisfy either the 75% or 95% gross income test
(discussed below) but have nonetheless maintained our qualification as a REIT
because certain other safe harbor requirements have been met, we will be subject
to a 100% tax on the net income attributable to the greater of the amount by
which we fail either the 75% or 95% test multiplied by a fraction intended to
reflect our profitability.
Sixth, if we fail to distribute each year at least the sum of:
(i) 85% of our ordinary income for such year;
(ii) 95% of our capital gain net income for such year; and
(iii) any undistributed taxable income from prior periods, then
we will be subject to a 4% excise tax on the excess of the
required
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distribution over the "distributed amount" (I.E., the sum
of the deduction for dividends paid (computed without
regard to that portion of such deduction that is
attributable to the net income from foreclosure property)
and the amount of any tax imposed on our taxable income or
net capital gains).
Seventh, if we acquire any asset from a corporation generally subject to
full corporate-level tax in a carryover-basis transaction and we subsequently
recognize gain on the disposition of such asset during the 10-year period
beginning on the date on which we acquired the asset, then to the extent of the
excess of (i) the fair market value of the asset at the time we acquired it over
(ii) our adjusted basis in the asset at the time we acquired it, we will be
subject to tax at the highest regular corporate rate and will be required to
distribute to our shareholders at least 95% of the after-tax gain pursuant to
guidelines issued by the IRS.
REQUIREMENTS FOR QUALIFICATION
To qualify as a REIT, we must elect to be treated as a REIT and must meet
the requirements, discussed below, relating to our organization, sources of
income, and nature of assets.
ORGANIZATIONAL REQUIREMENTS
The Code defines a REIT as a corporation, trust or association that:
(i) is managed by one or more trustees or directors;
(ii) uses transferable shares or transferable certificates to
evidence beneficial ownership;
(iii) would be taxable as a domestic corporation but for
Sections 856 through 860 of the Code;
(iv) is neither a financial institution nor an insurance company
within the meaning of the applicable provisions of the
Code;
(v) has at least 100 persons as beneficial owners;
(vi) during the last half of each taxable year, is not closely
held, I.E., not more than 50% of the value of the
outstanding stock is owned, directly or indirectly, by five
or fewer shareholders;
(vii) files an election to be taxed as a REIT on its return for
each taxable year; and
(viii) satisfies the 95%, 75% and 30% income assets and the 75%,
25%, 10% and 5% asset tests, all of which are described
below.
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The Code provides that conditions (i) through (iv) must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of 12 months, or during a proportionate part of a taxable year of
less than 12 months. For purposes of condition (v), certain pension funds and
other tax-exempt entities are treated as persons. For purposes of condition
(vi), on the other hand, the beneficiaries of a pension or profit-sharing trust
under Section 401(a) of the Code are treated as REIT shareholders. In addition,
our Articles of Incorporation currently include certain restrictions regarding
transfer of our common stock, which are intended (among other things) to assist
us in continuing to satisfy conditions (v) and (vi) noted above.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the income
of the partnership attributable to such share. In addition, the character of the
assets and gross income of the partnership retain the same character in the
hands of the REIT for purposes of satisfying the REIT criteria of Section 856 of
the Code, including the gross income tests and asset tests. Thus, after we
convert to an UPREIT, our proportionate share of the assets, liabilities, and
items of income of the Operating Partnership will be treated as our assets,
liabilities, and items of income for purposes of applying and meeting the
various REIT requirements. In addition, the Operating Partnership's
proportionate share of the assets, liabilities, and items of income with respect
to any partnership in which it holds an interest would be considered assets,
liabilities, and items of income of the Operating Partnership.
INCOME TESTS
To maintain qualification as a REIT, we must meet three gross income
requirements annually. First, we must derive directly or indirectly at least 75%
of our gross income (excluding gross income from prohibited transactions) from
investments relating to real property, including investments in other REITs or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest). Second, we must derive at least 95% of our gross
income (excluding gross income from prohibited transactions) from the real
property investments described in the preceding sentence or from dividends,
interest, or gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). Third, short term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
from the sale or other disposition of real property held for less than four
years (other than involuntary conversions and sales of foreclosure property)
must represent less than 30% of our gross income (including gain from prohibited
transactions). The Taxpayer Relief Act of 1997, enacted August 5, 1997 (the
"Taxpayer Relief Act"), repeals the 30% gross income test for taxable years
beginning after August 5, 1997. Accordingly, the 30% gross income test will not
apply to us beginning with our taxable year ending December 31, 1998.
Rents we receive or that we are deemed to receive will qualify as "rents
from real property" in satisfying the gross income requirements for a REIT
described above
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only if several conditions are met. First, the amount of rent must not be based
in whole or in part on the income or profits of any person from the property but
can be based on a fixed percentage of gross receipts or gross sales. Second, the
Code provides that "rents from real property" excludes any amount received
directly or indirectly from any corporation in which we own 10% or more of the
total combined voting power of all classes of voting stock or 10% or more of the
total number of shares of all classes of stock and from any other person in
which we own an interest of 10% or more in the assets or net profits of such
person. Third, rent attributable to personal property is generally excluded from
"rents from real property," except where such personal property is leased in
connection with such real property and the rent attributable to such personal
property is less than or equal to 15% of the total rent received under the
lease. Finally, amounts that are attributable to services furnished or rendered
in connection with the rental of real property, whether or not separately
stated, will not constitute "rents from real property" unless such services are
customarily provided in the geographic area. Customary services that are not
provided to a particular tenant (E.G., furnishing heat and light, the cleaning
of public entrances, and the collection of trash) can be provided directly by
the REIT. Where, however, such services are provided primarily for the
convenience of the tenants and are provided to such tenants, such services must
be provided by an independent contractor. However, pursuant to the Taxpayer
Relief Act, beginning with our taxable year ending December 31, 1998, if we
directly perform services to tenants of a property that are not usually and
customarily provided or are considered rendered to the occupant and the value of
such services (valued at not less than 150% of our direct cost of performing
such services) is less than 1% of the total income derived from such property,
then all rental income from such property other than such service income will
qualify as rents from real property. In the event that an independent contractor
provides such services, the REIT must adequately compensate any such independent
contractor. Furthermore, the REIT must not derive any income from the
independent contractor, and neither the independent contractor nor certain of
its shareholders may, directly or indirectly, own more than 35% of the REIT,
taking into consideration the applicable ownership rules.
We do not anticipate deriving rent attributable to personal property
leased in connection with real property that exceeds 15% of the total rent
attributable to such lease or receiving rent from related party tenants.
We currently provide certain services with respect to our properties.
Upon conversion to an UPREIT, we anticipate that the Operating Partnership will
provide these same services. We believe that the services are usually or
customarily rendered in connection with the rental of space for occupancy only
and are not otherwise rendered to the tenants. Therefore, we believe that the
provision of such customary services will not cause rents received with respect
to our properties to fail to qualify as "rents from real property." Services
provided to the tenants primarily for their convenience will be provided by an
independent contractor to avoid jeopardizing the qualification of rent as "rents
from real property."
Fees to perform property management services for apartment properties
that we do not own will not qualify under the 75% or the 95% gross income tests.
BNP
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Management, Inc., our unconsolidated subsidiary, receives these fees. In
addition, we (or the Operating Partnership) may receive certain other types of
income with respect to our properties that will not qualify for either of these
tests. We believe, however, that the aggregate amount of such fees and other
non-qualifying income in any taxable year will not cause us to exceed the limits
for non-qualifying income under the 75% and 95% gross income tests.
If we fail one or both of the 75% or 95% gross income tests for any
taxable year, we may nevertheless qualify as a REIT for that year if we are
eligible for relief under a certain provision of the Code. This relief provision
generally will be available if: (i) our failure to meet such gross income tests
is due to reasonable cause and not due to willful neglect; (ii) we attach a
schedule of the nature and amount of each item of income to our federal income
tax return; and (iii) the inclusion of any incorrect information on such
schedule is not due to fraud with the intent to evade tax. We, however, cannot
state whether in all circumstances we would be entitled to the benefit of this
relief provision. For example, if we fail to satisfy the gross income tests
because non-qualifying income that we intentionally receive exceeds the limits
on such income, the IRS could conclude that our failure to satisfy the tests was
not due to reasonable cause. As discussed above in "Federal Income Taxation of
Boddie-Noell Properties, Inc.," even if this relief provision applies, a 100%
tax would be imposed with respect to the part of our taxable income that fails
the 75% or 95% tests. No similar mitigation provision provides relief if we fail
the 30% gross income test for taxable years ending on or prior to December 31,
1997. The 30% gross income test has been repealed for taxable years beginning
after August 5, 1997 (our taxable year ending December 31, 1998).
ASSET TESTS
At the close of each quarter of our taxable year, we also must satisfy
four tests relating to the nature and diversification of our assets. First, at
least 75% of the value of our total assets must be represented by real estate
assets, cash and cash items (including receivables), and government securities.
Second, not more than 25% of the value of our total assets may consist of
securities (other than those securities includible in the 75% asset test).
Third, not more than 5% of the value of our total assets may consist of
securities of any one issuer (other than those securities includible in the 75%
asset test). Fourth, not more than 10% of the outstanding voting securities of
any one issuer may be held by us (other than those securities includible under
the 75% asset test).
Based on the foregoing, the 5% asset test generally must be met for any
quarter in which we acquire securities of an issuer. Thus, this requirement must
be satisfied not only on the date we acquire securities of BNP Management, Inc.,
but also each time we increase our ownership of securities of BNP Management,
Inc. (including as a result of increasing our interest in the Operating
Partnership as limited partners exercise their redemption rights).
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The Operating Partnership owns all of the nonvoting stock and 1% of the
voting stock of BNP Management, Inc., which represents 95% of the equity of BNP
Management, Inc. with the remaining equity interests currently owned by certain
officers of Boddie-Noell Properties, Inc. or affiliates thereof. We are
considered to own our pro rata share of the assets of the Operating Partnership,
including the securities of BNP Management, Inc. The Operating Partnership will
not own more than 10% of the voting securities of BNP Management, Inc. and,
therefore, we will not own more than 10% of the voting securities of BNP
Management, Inc. In addition, we believe that our pro rata share of the value of
the securities of BNP Management, Inc. will not exceed 5% of the total value of
our assets. Our belief is based in part upon our analysis of the anticipated
operating cash flows of BNP Management, Inc. No independent appraisals will be
obtained to support this conclusion, and Alston & Bird LLP, in rendering its
opinion regarding our qualification as a REIT, will rely on a representation by
us with respect to the value of BNP Management, Inc. There, however, can be no
assurance that the IRS will not contend that the value of the securities of BNP
Management, Inc. exceeds the 5% value limitation.
As noted above, the 5% value requirement must be satisfied at or within
30 days after the end of each quarter during which we increase our direct or
indirect ownership of securities of BNP Management, Inc. (including as a result
of increasing our interest in the Operating Partnership). Although we plan to
take steps to ensure that we will satisfy the 5% value test for any quarter with
respect to which retesting is to occur, there can be no assurance that such
steps always will be successful or will not require a reduction in the Operating
Partnership's overall interest in BNP Management, Inc.
After initially meeting the asset tests at the close of each quarter, we
will not lose our REIT status if we fail to satisfy the asset tests at the end
of a later quarter solely because of changes in the market values of our assets.
If we fail to satisfy the asset tests because of an acquisition of securities or
other property during a quarter, we have the opportunity to cure the failure by
disposition of sufficient securities (other than those securities includible in
the 75% asset test) within 30 days after the close of that quarter. We intend to
maintain adequate records of the value of our assets to ensure compliance with
the asset tests. We also will take any other actions within 30 days after the
close of any quarter as may be required to cure any noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS
To qualify for taxation as a REIT, we must meet the following annual
distribution requirement. We must make distributions (other than capital gain
distributions) to our shareholders in an amount at least equal to (a) the sum of
(i) 95% of our "REIT taxable income" (computed without regard to the dividends
paid deduction and by excluding our net capital gain) and (ii) 95% of the net
income, if any, from foreclosure property in excess of the excise tax on income
from foreclosure property, minus (b) the sum of certain items of non-cash
income. We must
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pay these distributions in the taxable year to which they relate. Dividends paid
in the subsequent year, however, will be treated as if paid in the prior year
for purposes of such prior year's 95% distribution requirement if one of the
following two sets of criteria are satisfied: (i) the dividends were declared in
October, November, or December, the dividends were payable to shareholders of
record on a specified date in such a month, and the dividends were actually paid
during January of the subsequent year; or (ii) the dividends were declared
before we timely file our federal income tax return for such year, the dividends
were distributed in the twelve month period following the close of the prior
year and not later than the first regular dividend payment after such
declaration, and we elected on our tax return for the prior year to have a
specified amount of the subsequent dividend treated as if paid in the prior
year. Even if we satisfy this annual distribution requirement, we will be
subject to tax at regular capital gains or ordinary corporate tax rates to the
extent that we do not distribute all of our net capital gain or "REIT taxable
income" as adjusted.
We intend to make timely distributions sufficient to satisfy the 95%
annual distribution requirement. In this regard, the Operating Partnership
Agreement authorizes us, as general partner, to take such steps as may be
necessary to cause the Operating Partnership to distribute to its partners an
amount sufficient to permit us to meet these distribution requirements.
We expect that our REIT taxable income will be less than our cash flow
due to the allowance of depreciation and other non-cash charges in computing
REIT taxable income. Accordingly, we anticipate that we generally will have
sufficient cash or liquid assets to enable us to satisfy the 95% distribution
requirement. It is possible, however, that we may not have sufficient cash or
other liquid assets to meet the 95% distribution requirement or to distribute
such greater amount as may be necessary to avoid income and excise taxation. In
such event, we may find it necessary to borrow funds to pay the required
distribution or, if possible, pay taxable stock dividends in order to meet the
distribution requirement.
EARNINGS AND PROFITS
Throughout the remainder of this discussion, we frequently will refer to
"earnings and profits." Earnings and profits is a concept used extensively
throughout corporate tax law, but it is undefined in the Code. Each corporation
maintains an "earnings and profits" account that helps to measure whether a
distribution originates from corporate earnings or from other sources.
Distributions generally decrease the earnings and profits while income generally
increases earnings and profits. If a corporation has positive earnings and
profits, the distributions generally will be considered to come from corporate
earnings. If a corporation has no earnings and profits, distributions generally
will be considered a return of capital and then capital gain.
There are current earnings and profits and accumulated earnings and
profits. Current earnings and profits are based on current year items of income
and expense. Accumulated earnings and profits generally represents the sum of
all current and prior
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earnings and profits less distributions. To the extent that a corporation has
both accumulated and current earnings and profits, distributions are deemed to
come first from the current earnings and profits. To the extent that a
corporation has a positive balance in current earnings and profits but not
accumulated earnings and profits, or vice versa, any distributions will be
deemed to reduce the positive earnings and profits balance.
A corporation's current earnings and profits and its taxable income
normally will not coincide. Generally, there are three main types of differences
in the computation of earnings and profits and taxable income. First, some items
that are excluded from taxable income are included in the earnings and profits
account because they represent an accretion to the corporation which can be
distributed without impairing the corporation's capital. For example, tax-free
interest on municipal securities excluded from taxable income by a corporation
is still available for distribution to shareholders and, therefore, increases a
corporation's earnings and profits account. Second, there are some items that
are deductible for purposes of computing taxable income but are not deductible
in computing earnings and profits. For example, accelerated methods of
depreciating property are available to many corporations. However, for purposes
of computing earnings and profits, a corporation must use the straight-line
depreciation method over an extended period of time. Third, some items that
cannot be deducted in computing taxable income are deductible for purposes of
determining earnings and profits. For example, a corporation may not deduct
fines and kickbacks, but may nevertheless deduct them in computing earnings and
profits because they impair a corporation's ability to make distributions.
A REIT cannot have, at the close of any taxable year, accumulated
earnings and profits attributable to any non-REIT year and remain qualified as a
REIT. Therefore, in rendering their opinion regarding our qualification as a
REIT, Alston & Bird LLP is relying on our representation that, when we acquired
BT Venture Corporation in October 1994, BT Venture Corporation did not have any
accumulated earnings and profits. In the event that BT Venture Corporation did
have accumulated earnings and profits and such earnings and profits were not
distributed in accordance with the applicable REIT provisions, we would have
ceased to qualify as a REIT upon our acquisition of BT Venture Corporation.
FAILURE TO QUALIFY
If we fail to qualify as a REIT in any year and the relief provisions do
not apply, we will be subject to tax (including any applicable alternative
minimum tax) on our taxable income at regular corporate rates. Distributions to
shareholders in any year in which we fail to qualify will not be deductible by
us nor will they be required to be made. In such event, to the extent of current
or accumulated earnings and profits, all distributions to shareholders will be
dividends, taxable as ordinary income, except that, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless we are entitled to relief under specific
statutory provisions, we also will be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not
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possible to state whether in all circumstances we would be entitled to such
statutory relief.
TAXATION OF U.S. SHAREHOLDERS
When we use the term "U.S. Shareholder," we mean a holder of common stock
that, for federal income tax purposes: (i) is a citizen or resident of the
United States; (ii) is a corporation, partnership or other entity created or
organized in or under the laws of the United States or of any of its political
subdivisions; or (iii) is an estate or, subject to certain limitations, a trust,
the income of which is subject to federal income taxation regardless of its
source. For any taxable year for which we qualify for taxation as a REIT,
amounts distributed to taxable U.S. Shareholders will be taxed as discussed
below.
DISTRIBUTIONS GENERALLY
Distributions to U.S. Shareholders, other than capital gain dividends
discussed below, will constitute dividends up to the amount of our current or
accumulated earnings and profits and, to that extent, will be taxable to
shareholders as ordinary income. Because a REIT is not subject to tax on income
distributed to its shareholders, the distributions made to corporate
shareholders are not eligible for the dividends-received deduction. To the
extent that we make a distribution in excess of our positive current and
accumulated earnings and profits, the distribution will be treated first as a
tax-free return of capital, reducing the tax basis in the U.S. Shareholder's
shares of common stock, and then the distribution in excess of the tax basis
will be taxable as gain realized from the sale of the common stock. Dividends we
declare in October, November, or December of any year payable to a shareholder
of record on a specified date in any such month shall be treated as both paid by
us and received by the shareholders on December 31 of the year, provided that we
actually pay the dividends during January of the following calendar year.
Shareholders are not allowed to include on their own federal income tax returns
any of our tax losses.
We will be treated as having sufficient earnings and profits to treat as
a dividend any distribution we make up to the amount required to be distributed
in order to avoid imposition of the 4% excise tax discussed in " -- Federal
Income Taxation of Boddie-Noell Properties, Inc." above.
CAPITAL GAIN DISTRIBUTIONS
Distributions to U.S. Shareholders that we properly designated as capital
gain distributions will be treated as capital gains from the sale or exchange of
a capital asset (to the extent they do not exceed our actual net capital gain)
for the taxable year without regard to the period for which the shareholder has
held his stock (see " -- Recent Legislation"). However, corporate shareholders
may be required to treat up to 20% of certain capital gain dividends as ordinary
income. Capital gain dividends are
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not eligible for the dividends-received deduction for corporations. Beginning
with our taxable year ending December 31, 1998, we may elect to retain and pay
income tax on any net long-term capital gain, in which case U.S. Shareholders
would include in their income as long-term capital gain their proportionate
share of such net long-term capital gain. A U.S. Shareholder also would receive
a refundable tax credit for such shareholder's proportionate share of the tax
paid by us on such retained capital gains and an increase in the basis of his or
her common stock in an amount equal to the difference between the undistributed
long-term capital gain and the amount of tax paid by us.
CERTAIN DISPOSITIONS OF SHARES
In general, you will realize capital gain or loss on the disposition of
common stock equal to the difference between (i) the amount of cash and the fair
market value of any property received on such disposition, and (ii) your
adjusted basis of such common stock. If you receive a capital gain dividend on
shares of our common stock that you held for less than six months prior to the
sale of such shares, any loss on the sale of such shares must be treated as a
long-term capital loss to the extent of such capital gain dividend. See
" -- Recent Legislation."
PASSIVE ACTIVITY LOSS AND INVESTMENT INTEREST LIMITATIONS
You may not treat distributions we make to you or any gain from disposing
of our common stock as passive activity income. Therefore, you will not be able
to apply any "passive losses" against such income. Dividends we pay (to the
extent they do not constitute a return of capital) generally will be treated as
investment income for purposes of the investment interest limitation. Net
capital gain from the disposition of our common stock (or capital gain
dividends) generally will be excluded from investment income unless you elect to
have such gain taxed at ordinary income rates.
TREATMENT OF TAX-EXEMPT SHAREHOLDERS
Distributions we make to a tax-exempt employee pension trust or other
domestic tax-exempt shareholder generally will not constitute "unrelated
business taxable income" ("UBTI") unless the shareholder has borrowed to acquire
or carry our shares of common stock. Qualified trusts that hold more than 10%
(by value) of the shares of pension-held REITs may be required to treat a
certain percentage of such REIT's distributions as UBTI. This requirement will
apply only if: (i) the REIT would not qualify as such for federal income tax
purposes but for the application of a "look-through" for qualified trusts in the
closely-held determination (see "Requirements for
Qualification -- ORGANIZATIONAL REQUIREMENTS"); and (ii) the REIT is
"predominantly held" by qualified trusts. For purposes of the preceding
sentence, a REIT is predominantly held by qualified trusts if either: (i) at
least one qualified trust holds more than 25% by value of the REIT interests; or
(ii) one or more qualified
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trusts, each owning more than 10% by value of the REIT interests, hold in the
aggregate more than 50% by value of the REIT interests. The percentage of any
REIT dividend treated as UBTI would equal the ratio of: (i) the gross income
(less certain expenses) of the REIT derived from unrelated trades or businesses
(treating the REIT as if it were a qualified trust and therefore subject to tax
on UBTI) to (ii) the gross income (less certain direct expenses) of the REIT. In
the event that this ratio is less than 5% for any year, then the qualified trust
will not treated as having received UBTI as a result of the REIT dividend. For
these purposes, a qualified trust is any trust described in Section 401(a) of
the Code and exempt from tax under Section 501(a) of the Code. The restriction
on ownership of common stock in our Articles of Incorporation generally will
prevent application of the provisions treating a portion of REIT distributions
as UBTI to tax-exempt entities purchasing common stock.
SPECIAL TAX CONSIDERATIONS FOR NON-U.S. SHAREHOLDERS
The rules governing United States income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates (collectively, "Non-U.S. Shareholders") are complex. We only intend the
following discussion to be a summary of these rules. This discussion is based on
current law, which is subject to change, and assumes we will qualify for
taxation as a REIT. Prospective Non-U.S. Shareholders should consult with their
own tax advisors to determine the impact of federal, state, local and foreign
income tax laws on an investment in our common stock, including any reporting
requirements.
If we make a distribution that is not attributable to gain from the sale
or exchange by us of a United States real property interest and that we do not
designate as a capital gain distribution, then a Non-U.S. Shareholder must treat
the distribution as an ordinary income dividend to the extent that it is made
out of current or accumulated earnings and profits. Generally, any ordinary
income dividend will be subject to a federal income tax equal to 30% of the
gross amount of the dividend unless this tax is reduced by an applicable tax
treaty. Such a distribution in excess of our earnings and profits will be
treated first as a return of capital that will reduce a Non-U.S. Shareholder's
basis in its common stock (but not below zero) and then as gain from the
disposition of such shares, the tax treatment of which is described under the
rules discussed below with respect to dispositions of common stock.
Distributions by us that are attributable to gain from the sale or
exchange of a United States real property interest will be taxed to a Non-U.S.
Shareholder under the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, such distributions are taxed to a Non-U.S. Shareholder
as if the distributions were gains "effectively connected" with a United States
trade or business. Accordingly, a Non-U.S. Shareholder will be taxed at the
normal capital gain rates applicable to a U.S. Shareholder (subject to any
applicable alternative minimum tax and a special alternative minimum tax in the
case of nonresident alien individuals). Distributions that are taxable under
FIRPTA also may be subject to a 30% branch profits tax when made to a foreign
corporation that is not entitled to an exemption or reduced branch profits tax
under an income tax treaty.
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Although tax treaties may reduce our withholding obligations, we
generally will be required to withhold from distributions to Non-U.S.
Shareholders, and remit to the IRS, (i) 35% of designated capital gain dividends
(or, if greater, 35% of the amount of any distributions that could be designated
as capital gain dividends) and (ii) 30% of ordinary dividends paid out of
earnings and profits. In addition, if we designate prior distributions as
capital gain dividends, subsequent distributions, up to the amount of such prior
distributions that were designated as capital gains dividends, will be treated
as capital gain dividends for withholding purposes. A distribution in excess of
our earnings and profits may be subject to 30% dividend withholding (unless such
Non-U.S. Shareholder is entitled to a lower rate under an income tax treaty) or
10% FIRPTA withholding. If the amount of tax withheld by us with respect to a
distribution to a Non-U.S. Shareholder exceeds the shareholder's United States
tax liability with respect to such distribution, the Non-U.S. Shareholder may
file for a refund of the excess from the IRS.
Unless the common stock constitutes a "United States real property
interest" within the meaning of FIRPTA, a sale of common stock by a Non-U.S.
Shareholder generally will not be subject to federal income taxation. The common
stock will not constitute a United States real property interest if we are a
"domestically controlled REIT." A domestically-controlled REIT is a REIT in
which at all times during a specified testing period Non-U.S. Shareholders held,
directly or indirectly, less than 50% in value of the REIT's shares. We
anticipate that we will be a domestically-controlled REIT and therefore that a
sale of common stock will not be subject to taxation under FIRPTA. However,
because the common stock will be publicly traded, we cannot give assurance that
we will continue to be a domestically-controlled REIT. If we were not a
domestically-controlled REIT, a Non-U.S. Shareholder's sale of our common stock
would be subject to tax under FIRPTA as a sale of a United States real property
interest unless the common stock were "regularly traded" on an established
securities market (such as the American Stock Exchange) on which the common
stock will be listed and the seller owned no more than 5% of the common stock
throughout the applicable testing period. If the gain on the sale of common
stock were subject to taxation under FIRPTA, the Non-U.S. Shareholder would be
subject to the same treatment as a U.S. Shareholder with respect to the gain
(subject to applicable alternative minimum tax or a special alternative minimum
tax in the case of nonresident alien individuals). Notwithstanding the
foregoing, capital gains not subject to FIRPTA will be taxable to a nonresident
alien individual who is present in the United States for 183 days or more during
the taxable year and if certain other conditions apply, in which case the
nonresident alien individual will be subject to a 30% tax on his or her U.S.
source capital gains.
A purchaser of common stock from a Non-U.S. Shareholder will not be
required to withhold under FIRPTA on the purchase price if our common stock is
"regularly traded" on an established securities market or if we are a
domestically-controlled REIT. Otherwise, a purchaser of common stock from a
Non-U.S. Shareholder may be required to withhold 10% of the purchase price and
remit this amount to the IRS. Our common stock is currently a "regularly traded"
security on the American Stock Exchange. We believe that we qualify under both
the "regularly
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traded" and the domestically-controlled REIT exceptions to withholding but
cannot provide any assurance to that effect.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
Under certain circumstances, U.S. Shareholders may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, our common stock. Backup withholding will apply only
if: (i) the payee fails to furnish his or her taxpayer identification number
(which, for an individual, would be his or her Social Security Number) to the
payor as required; (ii) the IRS notifies the payor that the taxpayer
identification number furnished by the payee is incorrect; (iii) the IRS has
notified the payee that such payee has failed to properly include reportable
interest and dividends in the payee's return or has failed to file the
appropriate return and the IRS has assessed a deficiency with respect to such
underreporting; or (iv) the payee has failed to certify to the payor, under
penalties of perjury, that the payee is not subject to withholding. In addition,
backup withholding will not apply with respect to payments made to certain
exempt recipients, such as corporations and tax-exempt organizations. Backup
withholding is not an additional tax. Rather, the amount of any backup
withholding with respect to a payment to a U.S. Shareholder will be allowed as a
credit against the U.S. Shareholder's federal income tax liability.
U.S. Shareholders should consult their own tax advisors regarding their
qualifications for exemption from backup withholding and the procedure for
obtaining such an exemption.
Additional issues may arise pertaining to information reporting and
backup withholding for Non-U.S. Shareholders. Non-U.S. Shareholders should
consult their tax advisors with regard to U.S. information reporting and backup
withholding.
OTHER TAX CONSIDERATIONS
GENERAL
We will make substantially all of our investments through the Operating
Partnership. The Operating Partnership may involve special tax considerations.
Such considerations include: (i) the allocations of income and expense items of
the Operating Partnership, which could affect the computation of our taxable
income; (ii) the status of the Operating Partnership as a partnership (as
opposed to an association taxable as a corporation) for income tax purposes; and
(iii) the taking of actions by the Operating Partnership that could adversely
affect our qualification as a REIT.
We intend for the Operating Partnership to be treated for federal income
tax purposes as a partnership (and not as an association taxable as a
corporation). Under recent regulations issued by the Treasury Department, an
unincorporated entity can elect to be taxed as a corporation or a partnership.
These regulations are referred to as
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the "check the box" regulations. We believe that the Operating Partnership will
be classified and taxed as a partnership. In the event that the Operating
Partnership were treated as an association taxable as a corporation, we would
fail to qualify as a REIT.
If the Operating Partnership qualifies as a partnership for federal
income tax purposes, the partners will be allocated their proportionate shares
of the items of income, gain, loss, deduction, and credit of a partnership and
are potentially subject to tax thereon without regard to whether the partners
receive a distribution from the partnership. Accordingly, we will include our
proportionate share of the foregoing Operating Partnership items in the various
REIT income tests and in the computation of our REIT taxable income. In
addition, we will include our proportionate share of assets held by the
Operating Partnership in the various REIT asset tests.
TAX ALLOCATIONS WITH RESPECT TO OUR PROPERTIES
When property is contributed to a partnership in exchange for an interest
in the partnership, the partnership generally takes a carryover basis in that
property for tax purposes. That carryover basis is equal to the adjusted basis
of the contributing partner in the property rather than a basis equal to the
fair market value of the property at the time of contribution. Pursuant to
Section 704(c) of the Code, income, gain, loss and deduction attributable to
such contributed property must be allocated in a manner such that the
contributing partner is charged with, or benefits from, respectively, the
unrealized gain or unrealized loss associated with the property at the time of
the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax difference"). Such
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. Book capital accounts are those maintained under Section 704(b), which
requires that allocations among partners have substantial economic effect.
The Operating Partnership has been formed by way of contributions of
appreciated property. We expect that future contributions to the Operating
Partnership in exchange for Units will take the form of appreciated property, as
well. Consequently, the proposed Operating Partnership Agreement requires tax
allocations to be made in a manner consistent with Section 704(c) of the Code.
Treasury Regulations under Section 704(c) of the Code provide
partnerships with a choice of several methods of accounting for Book-Tax
Differences. We plan to utilize the "traditional method" of determining Section
704(c) allocations. The Operating Partnership's Book-Tax Difference may be
substantial. With respect to properties contributed by partners other than us,
these Book-Tax Differences and the use of the traditional method may cause us to
recognize more taxable income each year than we would if transactions such as
the Chrysson acquisition were structured as purchases. This additional income
would equal the reduction in the annual depreciation deduction caused by the
Book-Tax Difference. In addition, if the
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Operating Partnership sells any property that has a Book-Tax Difference for an
amount less than its adjusted book value, any tax loss allocated to us may be
less than our economic loss. This could result in taxable income for us in
excess of our economic income. This may cause us to recognize taxable income in
excess of cash proceeds, which might adversely affect our ability to comply with
REIT distribution requirements. See " -- Requirements for Qualification" and
" -- Annual Distribution Requirements." The foregoing rules also apply with
respect to our computation of earnings and profits. The result of such rules
over time may result in a higher portion of our distributions being taxed as
dividend income.
BNP MANAGEMENT, INC.
We expect a portion of the amounts we will use to fund distributions to
come from distributions on the stock of BNP Management, Inc. BNP Management,
Inc. does not qualify as a REIT, and it will pay federal, state, and local
income taxes on its taxable income at normal corporate rates. Any federal,
state, or local income taxes that BNP Management, Inc. pays will reduce the cash
available for distribution.
As described above, the value of the stock of BNP Management, Inc. that
is attributed to us cannot exceed 5% of the value of our assets at any time when
a Unit holder in the Operating Partnership exercises his or her redemption
right. See " -- Requirements for Qualification -- ASSET TESTS." We believe that
we currently satisfy this limit though this limitation may restrict the ability
of BNP Management, Inc. to increase the size of its business unless the value of
our assets is also increasing.
RECENT LEGISLATION
You should be aware that the recently enacted Taxpayer Relief Act made
numerous changes to the Internal Revenue Code, including reducing the maximum
tax imposed on net capital gains from the sale of assets held for more than 18
months by individuals, trusts, and estates. As we have mentioned above, the
Taxpayer Relief Act also makes certain changes to the requirements to qualify as
a REIT and to the taxation of REITs and their shareholders.
For gains realized after July 28, 1997, and subject to certain
exceptions, the maximum rate of tax on net capital gains on individuals, trusts
and estates from the sale or exchange of assets held for more than 18 months has
been reduced to 20%, and such maximum rate is further reduced to 18% for assets
acquired after December 31, 2000 and held for more than five years. For 15%
bracket taxpayers, the maximum rate on net capital gains is reduced to 10%, and
such maximum rate is further reduced to 8% for assets acquired and sold after
December 31, 2000 and held for more than five years. The maximum rate for net
capital gains attributable to the sale of depreciable real property held for
more than 18 months is 25% to the extent of the deductions for depreciation with
respect to such property. Long-term capital gain allocated to a shareholder by
Boddie-Noell Properties, Inc. will be subject to the 25% rate to the extent that
the gain does not exceed depreciation on real property sold by
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Boddie-Noell Properties, Inc. The maximum rate of capital gains tax for capital
assets held more than one year but not more than 18 months remains at 28%. The
taxation of capital gains of corporations was not changed by the Taxpayer Relief
Act.
As a result of these changes to the capital gains rates, the IRS recently
issued Notice 97-64 outlining (i) when a REIT may designate its dividends as
either a 20% rate gain distribution, an unrecaptured section 1250 gain
distribution (taxed at 25% as noted in the preceding paragraph), or a 28% rate
gain distribution and (ii) how to calculate the amount of such distributions,
which may be subject to certain deferral or bifurcation adjustments. Where a
REIT designates a distribution as a capital gain dividend, which is attributable
to a taxable year ending after May 7, 1997, for purposes of the annual
distribution requirement, the REIT also may designate such dividend as a 20%
rate gain distribution, an unrecaptured section 1250 gain distribution, or a 28%
rate gain distribution. Where no such designation is provided, the dividend will
be treated as a 28% rate gain distribution. These additional designations by the
REIT are effective only to the extent that they do not exceed certain
limitations. For example, the maximum amount of each distribution that can be
classified as either a 20% rate gain distribution, an unrecaptured section 1250
gain distribution, or a 28% rate gain distribution must be calculated in
accordance with the Code and the IRS Notice. SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISORS WITH RESPECT TO THE IMPLICATIONS OF THE TAXPAYER RELIEF ACT.
STATE AND LOCAL TAX
We may be subject to state and local tax in various states and
localities. Our shareholders also may be subject to state and local tax in
various states and localities. The tax treatment to us and to our shareholders
in such jurisdictions may differ from the federal income tax treatment described
above. Consequently, before you buy our common stock, you should consult your
own tax advisor regarding the effect of state and local tax laws on an
investment in our common stock.
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LEGAL PROCEEDINGS
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We are a party to a variety of legal proceedings arising in the ordinary
course of business. In addition, we have become a successor party-in-interest to
certain legal proceedings as a result of our acquisition of BT Venture
Corporation. These matters arose in the ordinary course of BT Venture
Corporation's business either as an owner of an apartment community or as a
property management company. All of these matters, individually and in
aggregate, are not expected to have a material adverse impact on the Company.
In the event a claim were successful, we believe that we are adequately
covered by insurance and indemnification agreements. We have insurance coverage
on each of our apartment properties. Our restaurant properties are subject to an
indemnification agreement whereby Enterprises, the lessee, is responsible for
all claims arising from a restaurant property; in addition, Enterprises is
required to provide insurance, which identifies the Company as a named insured,
on each restaurant property. Each apartment property which is managed but not
owned by us is covered by an insurance policy under which we are a named
insured. As to claims to which we have become a successor party-in-interest to
BT Venture Corporation, we received, as part of the acquisition of BT Venture
Corporation, an indemnification agreement from the shareholders of BT Venture
Corporation whereby we are, subject to certain limitations, indemnified from
loss arising out of a claim against BT Venture Corporation.
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UNDERWRITING
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Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") among the Company and the underwriters
(the "Underwriters"), each Underwriter named below has severally agreed to
purchase from the Company, and the Company has agreed to sell to each of the
Underwriters, the respective number of shares of common stock set forth opposite
its name.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- -------------------------------------------------------- ----------------
<S> <C>
CIBC Oppenheimer Corp...................................
J.C. Bradford & Co......................................
Interstate/Johnson Lane Corporation.....................
Davenport & Company LLC.................................
----------------
Total................................................. 2,800,000
----------------
----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligations is such that they are committed to purchase and pay for all of the
above shares of common stock if any are purchased.
The Underwriters propose to offer the shares of common stock directly to
the public at the public offering price set forth on the cover page of this
prospectus, and at such price less a concession not in excess of $ per share
of common stock to certain other dealers who are members of the National
Association of Securities Dealers, Inc. The Underwriters may allow, and such
selected dealers may reallow, concessions not in excess of $ per share to
certain other dealers.
The Underwriters have been granted a 30-day over-allotment option to
purchase from the Company up to an aggregate of 420,000 additional shares of
common stock, exercisable at the public offering price less the underwriting
discount. If the Underwriters exercise such over-allotment option, then each of
the Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage thereof as the number of shares of
common stock to be purchased by it as shown on the above table bears to the
total number of shares of common stock offered hereby. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of common stock offered hereby.
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Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters to
bid for and purchase shares of common stock. As an exception to these rules, the
Underwriters are permitted to engage in certain transactions that stabilize the
price of the common stock. Such transactions may consist of bids or purchases
for the purpose of pegging, fixing or maintaining the price of the common stock.
If the Underwriters create a short position in the common stock in
connection with the offering (I.E., if they sell more shares of common stock
than are set forth on the cover page of this prospectus), the Underwriters may
reduce the short position by purchasing common stock in the open market. The
Underwriters also may elect to reduce any short position by exercising all or
part of the over-allotment option described herein. In general, purchases of a
security for the purpose of stabilization or to reduce a syndicate short
position could cause the price of the security to be higher than it might
otherwise be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock or that
such transactions, once commenced, will not be discontinued without notice.
Subject to certain exceptions, the Company and its executive officers and
directors have agreed that for a period of 180 days after the date hereof they
will not sell, or otherwise dispose of, directly or indirectly, any common
stock, any securities convertible into or exchangeable for common stock or any
rights to purchase or acquire common stock without the prior written consent of
the Underwriters.
The Underwriters have agreed, however, that the Company does not need the
consent of the Underwriters to issue stock options under stock option plans,
common stock upon the exercise of stock options, warrants and SAR's previously
granted, common stock pursuant to our dividend reinvestment and stock purchase
plan and Units, exchangeable into shares of common stock, in connection with our
acquiring a property.
The Company has agreed to indemnify the Underwriters against certain
liabilities, losses and expenses, including those under the Securities Act of
1933, as amended, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
CIBC Oppenheimer Corp. served as our financial advisor for the Chrysson
acquisition. We paid them fees of approximately $600,000 for their work on this
matter.
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EXPERTS
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The financial statements of Boddie-Noell Properties, Inc., at December
31, 1996 and for the year then ended and the Combined Statement of Revenue and
Certain Operating Expenses of Acquired Properties for the year ended December
31, 1996, appearing in this prospectus and registration statement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
The Balance Sheet of Boddie-Noell Properties, Inc. at December 31, 1995
and the statements of operations and of cash flows for the years ended December
31, 1995 and 1994 appearing in this prospectus and registration statement have
been audited by Arthur Andersen LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
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LEGAL OPINIONS
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Alston & Bird LLP, Raleigh, North Carolina will issue an opinion to us
regarding certain legal matters. Rogers & Wells, New York, New York will issue
an opinion as to certain legal matters for the underwriters. Rogers & Wells will
rely upon the opinion of Alston & Bird LLP as to certain matters of Maryland
law.
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AVAILABLE INFORMATION
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Our company files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy the reports,
statements or other information we file at the SEC's public reference room in
Washington, D.C. You can request copies of these documents, upon payment of
photocopying fees, by writing to the SEC. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference rooms. Our SEC
filings are also available to the public on the SEC's internet site
(http://www.sec.gov). These documents are also available for viewing at the
offices of the American Stock Exchange in New York. For more information, you
may call the viewing room of the American Stock Exchange at (212) 306-1292.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
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We have filed certain documents with the SEC, as required by the
Securities Exchange Act of 1934, and are incorporating them by reference into
this prospectus. Incorporating by reference means that we are making the
documents listed below a part of this prospectus by referring to these documents
and declaring that you should consider them to be part of this prospectus as if
they were fully copied in this prospectus.
A. Our Annual Report on Form 10-K for the year ended December 31,
1996 and
B. Our Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997.
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BODDIE-NOELL PROPERTIES, INC.
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BODDIE-NOELL PROPERTIES INC.
Report of Independent Auditors.................................................................................... F-2
Balance Sheets as of December 31, 1995 and 1996 and September 30, 1997 (Unaudited)................................ F-4
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1996 and 1997 (Unaudited).......................................................................... F-5
Statements of Shareholders' Equity for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months
Ended September 30, 1997 (Unaudited)............................................................................. F-6
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 and for the Nine Months Ended
September 30, 1996 and 1997 (Unaudited).......................................................................... F-7
Notes to Financial Statements..................................................................................... F-8
Schedule III -- Real Estate amd Accumulated Depreciation.......................................................... F-17
BODDIE-NOELL PROPERTIES, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Unaudited Pro Forma Condensed Consolidated Financial Information.................................................. F-20
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1997................................. F-21
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 1996........... F-24
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Nine Months Ended September 30, 1997... F-25
ACQUIRED PROPERTIES
Report of Independent Auditors.................................................................................... F-28
Combined Statements of Revenue and Certain Operating Expenses for the Year Ended December 31, 1996 and for the
Nine Months Ended September 30, 1996 and 1997 (Unaudited)........................................................ F-29
Notes to Combined Statements of Revenue and Certain Operating Expenses............................................ F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
BODDIE-NOELL PROPERTIES, INC.
We have audited the accompanying balance sheet of Boddie-Noell Properties,
Inc. as of December 31, 1996, and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. Our audit also
includes the financial statement schedule as of and for the year ended December
31, 1996 included on pages F-17-F-19. These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Boddie-Noell Properties,
Inc. at December 31, 1996, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule as of
and for the year ended December 31, 1996 when considered in relation to the
basic 1996 financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Ernst & Young LLP
Charlotte, North Carolina
January 9, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF
BODDIE-NOELL PROPERTIES, INC.:
We have audited the accompanying balance sheet of Boddie-Noell Properties,
Inc. (a Delaware corporation) as of December 31, 1995, and the related
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1995 and 1994. Our audits also include the financial schedule
as of and for the years ended December 31, 1995 and 1994 included on page F-19.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 financial statements referred to above present fairly,
in all material respects, the financial position of Boddie-Noell Properties,
Inc. as of December 31, 1995, and the results of its operation and its cash
flows for the years ended December 31, 1995 and 1994, in conformity with
generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The data on page F-19 is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic 1995
and 1994 financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Charlotte, North Carolina,
January 31, 1996.
F-3
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------- SEPTEMBER 30
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Real estate investments at cost:
Apartment properties....................................................... $55,315,686 $ 66,610,048 $ 67,140,687
Restaurant properties...................................................... 43,205,075 43,205,075 43,205,075
----------- ------------ ------------
98,520,761 109,815,123 110,345,762
Less accumulated depreciation.............................................. (9,020,948) (11,461,365) (13,383,980)
----------- ------------ ------------
89,499,813 98,353,758 96,961,782
Cash and cash equivalents.................................................... 700,863 842,604 1,406,892
Rent and other receivables................................................... 244,817 12,695 34,734
Prepaid expenses and other assets............................................ 293,549 392,302 595,188
Investment in and advances to Management Company............................. 326,767 261,598 243,262
Notes receivable............................................................. -- -- 1,412,508
Other assets, net of applicable amortization:
Intangible related to acquisition of management operations................. 2,560,254 2,744,912 2,841,438
Deferred financing costs................................................... 725,713 828,113 709,794
----------- ------------ ------------
Total assets................................................................. $94,351,776 $103,435,982 $104,205,598
----------- ------------ ------------
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LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable............................................. $60,105,485 $ 70,295,957 71,340,252
Notes payable to affiliates.................................................. 7,056,300 7,056,300 7,056,300
Accounts payable and accrued expenses........................................ 129,908 15,549 556,475
Accrued interest on mortgages and other notes payable........................ 269,373 335,871 337,273
Accrued interest on notes payable to affiliates.............................. 132,231 125,518 128,933
Additional consideration due to former BTVC shareholders..................... 283,334 355,570 572,136
Escrowed security deposits and deferred revenue.............................. 175,207 348,779 263,929
----------- ------------ ------------
68,151,838 78,533,544 80,255,298
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized, shares issued
and outstanding: 3,123,741 at September 30, 1997; 3,074,647 at December 31,
1996; 3,016,740 at December 31, 1995....................................... 30,167 30,746 31,237
Additional paid-in capital................................................... 33,785,335 34,522,816 35,163,033
Dividend distributions in excess of net income............................... (7,615,564) (9,651,124) (11,243,970)
----------- ------------ ------------
Total shareholders' equity................................................... 26,199,938 24,902,438 23,950,300
----------- ------------ ------------
Total liabilities and shareholders' equity................................... $94,351,776 $103,435,982 $104,205,598
----------- ------------ ------------
----------- ------------ ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
---------------------------------------- --------------------------
1994 1995 1996 1996 1997
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES
Apartment rental income........................... $3,889,277 $ 8,476,268 $ 9,790,713 7,209,401 $ 7,897,982
Restaurant rental income.......................... 5,046,837 4,649,250 4,500,000 3,375,000 3,375,000
Management fees................................... 276,157 514,872 -- -- --
Equity in income of Management Company............ -- 48,063 149,298 111,432 182,747
Interest and other income......................... 45,975 37,185 67,813 48,875 153,526
---------- ----------- ----------- ----------- -----------
9,258,246 13,725,638 14,507,824 10,744,708 11,609,255
EXPENSES
Depreciation...................................... 1,414,800 2,204,199 2,440,417 1,786,771 1,922,765
Amortization...................................... 232,856 405,182 534,663 394,014 439,289
Apartment operations.............................. 1,101,370 2,480,920 2,976,876 2,189,679 2,536,564
Administrative.................................... 622,605 1,285,509 894,360 701,577 733,911
Property management and advisory fees............. 264,322 -- -- -- --
Interest on notes payable to affiliates........... 139,973 540,572 499,676 374,485 380,461
Interest -- other................................. 2,661,921 4,821,865 5,446,017 4,020,652 4,303,795
Write-off of deferred loan costs upon
refinancing..................................... 141,582 37,723 -- -- --
Write-off of deferred acquisition costs........... 376,898 321,400 -- -- --
---------- ----------- ----------- ----------- -----------
6,956,327 12,097,370 12,792,009 9,467,178 10,316,785
---------- ----------- ----------- ----------- -----------
NET INCOME........................................ $2,301,919 $ 1,628,268 $ 1,715,815 $ 1,277,530 $ 1,292,470
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
PER SHARE DATA:
NET INCOME...................................... $ 0.80 $ 0.54 $ 0.57 $ 0.42 $ 0.42
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
DIVIDENDS DECLARED.............................. $ 1.24 $ 1.24 $ 1.24 $ 0.93 $ 0.93
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING............. 2,885,248 3,005,809 3,026,901 3,018,155 3,106,503
---------- ----------- ----------- ----------- -----------
---------- ----------- ----------- ----------- -----------
</TABLE>
See accompanying notes.
F-5
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
DIVIDEND
COMMON STOCK ADDITIONAL DISTRIBUTIONS
--------------------- PAID-IN IN EXCESS OF
SHARES AMOUNT CAPITAL NET INCOME TOTAL
---------- ------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993.......................... 2,850,000 $28,500 $31,462,322 $ (4,238,826) $27,251,996
Common stock issued................................... 140,990 1,410 1,990,289 -- 1,991,699
Dividends paid........................................ -- -- -- (3,577,705) (3,577,705)
Net income............................................ -- -- -- 2,301,919 2,301,919
---------- ------- ----------- ------------- -----------
Balance at December 31, 1994.......................... 2,990,990 29,910 33,452,611 (5,514,612) 27,967,909
Common stock issued................................... 25,750 257 332,724 -- 332,981
Dividends paid........................................ -- -- -- (3,729,220) (3,729,220)
Net income............................................ -- -- -- 1,628,268 1,628,268
---------- ------- ----------- ------------- -----------
Balance at December 31, 1995.......................... 3,016,740 30,167 33,785,335 (7,615,564) 26,199,938
Common stock issued................................... 57,907 579 737,481 -- 738,060
Dividends paid........................................ -- -- -- (3,751,375) (3,751,375)
Net income............................................ -- -- -- 1,715,815 1,715,815
---------- ------- ----------- ------------- -----------
Balance at December 31, 1996.......................... 3,074,647 30,746 34,522,816 (9,651,124) 24,902,438
Common stock issued (unaudited)....................... 49,094 491 640,217 -- 640,708
Dividends paid (unaudited)............................ -- -- -- (2,885,316) (2,885,316)
Net income (unaudited)................................ -- -- -- 1,292,470 1,292,470
---------- ------- ----------- ------------- -----------
Balance at September 30, 1997 (unaudited)............. 3,123,741 $31,237 $35,163,033 $ (11,243,970) $23,950,300
---------- ------- ----------- ------------- -----------
---------- ------- ----------- ------------- -----------
</TABLE>
See accompanying notes.
F-6
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31 SEPTEMBER 30
-------------------------------------------- ---------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES
Net income.................................... $ 2,301,919 $ 1,628,268 $ 1,715,815 $ 1,277,530 $ 1,292,470
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in income of Management Company...... -- (48,063) (149,298) (111,432) (182,747)
Depreciation and amortization............... 1,647,656 2,609,381 2,975,080 2,180,785 2,362,054
Write-off of deferred costs................. 518,480 359,123 -- -- --
Changes in operating assets and liabilities:
Rent and other receivables............... (78,046) 248,489 232,122 237,345 (22,039)
Prepaid expenses and other assets........ (5,584) (66,088) (58,783) (130,466) (197,941)
Accounts payable and accrued expenses.... 150,443 (204,726) (54,574) 378,354 545,744
Security deposits and deferred revenue... (38,407) (50,656) 139,941 97,377 (86,396)
------------ ------------ ------------ ------------ -----------
Net cash provided by operating activities..... 4,496,461 4,475,728 4,800,303 3,929,493 3,711,145
INVESTING ACTIVITIES
Acquisitions of apartment properties.......... (18,055,659) -- (10,666,580) (10,666,580) --
Acquisition of BT Venture Corp.,net........... 164,838 -- -- -- --
Additions to apartment properties............. (161,294) (525,516) (561,114) (426,035) (480,788)
Payment of deferred acquisition costs......... (677,006) (156,401) -- -- --
Investment in Management Company.............. -- -- (165) (165) --
Dividends received from Management Company.... -- -- 158,293 126,977 97,687
Repayment from (advances to) Management
Company..................................... -- (150,000) 50,000 -- 100,000
Investment in notes receivable................ -- -- -- -- (1,412,508)
------------ ------------ ------------ ------------ -----------
Net cash used in investing activities......... (18,729,121) (831,917) (11,019,566) (10,965,803) (1,695,609)
FINANCING ACTIVITIES
Proceeds from common stock issued through
dividend reinvestment plan.................. -- -- 243,628 106,026 432,269
Payment of dividends.......................... (3,577,705) (3,729,220) (3,751,375) (2,805,568) (2,885,316)
Proceeds from notes payable................... 53,600,000 33,925,000 10,650,000 10,650,000 1,412,508
Principal payments on notes payable........... (34,449,203) (33,646,771) (459,528) (340,978) (368,213)
Payment of deferred financing costs........... (509,599) (444,320) (321,721) (321,721) (42,496)
------------ ------------ ------------ ------------ -----------
Net cash provided by (used in) financing
activities.................................. 15,063,493 (3,895,311) 6,361,004 7,287,759 (1,451,248)
------------ ------------ ------------ ------------ -----------
Net increase (decrease) in cash and cash
equivalents................................. 830,833 (251,500) 141,741 251,449 564,288
Cash and cash equivalents at beginning of
period...................................... 121,530 952,363 700,863 700,863 842,604
------------ ------------ ------------ ------------ -----------
Cash and cash equivalents at end of period.... $ 952,363 $ 700,863 $ 842,604 $ 952,312 $ 1,406,892
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
</TABLE>
See accompanying notes.
F-7
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES
ORGANIZATION AND HISTORY. Boddie-Noell Restaurant Properties, Inc. (the
"Company") was incorporated on April 1, 1987. On October 1, 1994, the Company
changed its name to Boddie-Noell Properties, Inc.
In April 1987, the Company acquired 47 existing Hardee's restaurant
properties located in Virginia and North Carolina, operated by Boddie-Noell
Enterprises, Inc. ("Enterprises") under franchise agreements with Hardee's Food
Systems, Inc. Simultaneously with their purchase, the properties were leased to
Enterprises under a master lease agreement.
In June 1993 the Company acquired Paces Commons Apartments, a 336-unit
apartment property in Charlotte, North Carolina. In June 1994 the Company
acquired Oakbrook Apartments, a 162-unit apartment property in Charlotte, North
Carolina. Effective October 1, 1994, the Company acquired by merger BT Venture
Corporation ("BTVC"), an integrated real estate management, development and
acquisition company and owner of the Latitudes Apartments, a 448-unit apartment
property in Virginia Beach, Virginia. As of October 1, 1994, the Company
succeeded to BTVC's third-party management business, terminated its advisory
agreement with BNE Advisory Group, Inc., and began operations as a
self-administered and self-managed real estate investment trust. In December
1994 the Company acquired Harris Hill Apartments, a 184-unit apartment property
in Charlotte, North Carolina. In June 1996 the Company acquired Paces Village
Apartments, a 198-unit apartment property in Greensboro, North Carolina.
In May 1995 the Company formed BNP Management, Inc. (the "Management
Company"). The Company has a 1 percent voting interest and 95 percent economic
interest. This investment is recorded using the equity method of accounting.
CAPITAL STOCK. In June 1995 the Company's shareholders approved amendments
to the Company's bylaws and certificate of incorporation to allow the Board of
Directors to authorize the issuance of up to an additional 90,000,000 shares of
Common Stock and 10,000,000 shares of Preferred Stock, issuable in series the
characteristics of which would be set by the Board of Directors. As of December
31, 1996, no such shares have been authorized or issued.
As of December 31, 1996, approximately 655,000 authorized shares of Common
Stock are reserved for future issuance under the Company's Stock Option and
Incentive Plan, Dividend Reinvestment and Stock Purchase Plan, and for
contingent purchase price payments related to the acquisition of BTVC.
REAL ESTATE INVESTMENTS. Apartment properties are carried at cost. Ordinary
repairs and maintenance costs are expensed as incurred while significant
improvements, renovations and replacements are capitalized. Depreciation is
computed using the straight-line method over the estimated useful lives of the
related assets, which are 40 years for buildings, 20 years for land
improvements, 10 years for fixtures and equipment, and five years for carpet,
vinyl, and wallpaper replacements. Restaurant properties, which include only
real property, are carried at cost. Cost of repairs and maintenance and capital
improvements are borne by Enterprises. Depreciation of the buildings is computed
using the straight-line method over the estimated useful lives (40 years) of the
respective properties.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
investments with maturities of three months or less when purchased to be cash
equivalents.
DEFERRED COSTS. The intangible asset related to the acquisition of
management operations acquired by merger is amortized using the straight-line
method over a period of ten years. Accumulated amortization on this asset
totaled $314,000 and $630,000 at December 31, 1995 and 1996, respectively.
Deferred acquisition costs represent costs incurred in connection with the
proposed acquisition of properties and the associated offering costs. Such costs
are deferred until the acquisition is consummated. Upon completion of the
acquisition, the costs will be capitalized to the underlying assets and/or
charged to shareholders' equity. When an acquisition is deemed not probable, the
costs are charged to expense.
Financing costs are deferred and amortized using the straight-line method
over the terms of the related notes. Accumulated amortization on these assets
totaled $61,000 and $280,000 at December 31, 1995 and 1996, respectively.
F-8
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING
POLICIES -- Continued
INCOME TAXES. The Company operates as and elects to be taxed as a Real
Estate Investment Trust ("REIT") under the Internal Revenue Code. Accordingly,
the Company will not be subject to federal or state income taxes on amounts
distributed to shareholders, provided it distributes at least 95 percent of its
REIT taxable income and meets certain other requirements for qualifying as a
REIT. Accordingly, no provision has been made for federal or state income taxes.
NET INCOME PER SHARE. Net income per share is calculated based on the
weighted average number of shares outstanding during each year. The potential
dilutive effect of stock options in the computation of earnings per share is not
material.
FAIR VALUES OF FINANCIAL INSTRUMENTS. The following methods and assumptions
are used by the Company in estimating its fair value disclosures for financial
instruments.
Cash and cash equivalents: The carrying amount reported on the balance
sheet for cash and cash equivalents approximates fair value.
Notes payable: The fair value of the Company's fixed rate mortgage notes
and variable rate notes payable is estimated using discounted cash flow
analysis, based on the Company's current incremental borrowing rates. The
carrying amounts of the Company's borrowings under notes payable approximate
fair value.
USE OF ESTIMATES. The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Depreciation amounts included in these
financial statements reflect management's estimate of the life and related
depreciation rates for rental properties. In addition, the carrying amount of
the intangible asset related to acquisition of management operations reflects
management's evaluation of the continuing value and useful life of this asset.
Actual results could differ from these estimates.
RECLASSIFICATIONS. Certain amounts in the 1994 and 1995 financial
statements have been reclassified to conform to the 1996 presentation. These
reclassifications had no effect on net income or shareholders' equity as
previously reported.
INTERIM FINANCIAL DATA. The unaudited financial statements for the nine
months ended September 30, 1996 and 1997 include all adjustments (consisting of
normal recurring adjustments) that are, in the opinion of management, necessary
for a fair presentation of the balance sheet and income statement for such
interim periods. Operating results for the nine months ended September 30, 1997
are not necessarily indicative of the results to be expected for the entire year
ending December 31, 1997.
NOTE 2. REAL ESTATE INVESTMENTS
Real estate investments consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Apartment properties
Land......................................................................................... $ 6,642,291 $ 7,892,291
Buildings and land improvements.............................................................. 46,517,150 56,152,512
Fixtures, equipment and other personal property.............................................. 2,156,245 2,565,245
Less accumulated depreciation................................................................ (2,242,344) (3,904,353)
----------- -----------
53,073,342 62,705,695
Restaurant properties
Land......................................................................................... 12,068,737 12,068,737
Buildings and land improvements.............................................................. 31,136,338 31,136,338
Less accumulated depreciation................................................................ (6,778,604) (7,557,012)
----------- -----------
36,426,471 35,648,063
----------- -----------
$89,499,813 $98,353,758
----------- -----------
----------- -----------
</TABLE>
F-9
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 2. REAL ESTATE INVESTMENTS -- Continued
The Company's policy is to capitalize those expenditures relating to
acquiring new assets, materially enhancing the value of an existing asset, or
substantially extending the useful life of an existing asset. Capitalized
apartment property additions, replacements and improvements are summarized as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
----------- -------- -----------
<S> <C> <C> <C>
Property acquisitions through purchase..................... $18,243,374 $ -- $10,666,580
Property acquisitions through merger....................... 21,950,000 -- --
Allocation of additional consideration for property
acquisitions through merger.............................. 16,667 66,668 66,668
Capitalized carpet, vinyl and wallpaper.................... 91,434 210,430 201,776
Other property additions and improvements.................. 53,193 315,085 359,338
----------- -------- -----------
$40,354,668 $592,183 $11,294,362
----------- -------- -----------
----------- -------- -----------
</TABLE>
NOTE 3. INVESTMENT IN AND ADVANCES TO MANAGEMENT COMPANY
In May 1995 the Management Company was formed to provide management
services to non-Company owned properties. The Company contributed approximately
$119,000, primarily in office equipment, to the formation of the Management
Company, and transferred the rights to certain third-party property leasing and
management contracts to the Management Company for a 1 percent voting interest
and 95 percent economic interest. The remaining interest in the Management
Company is held by certain officers of the Company. Because the Company
exercises significant influence over, but does not control the financial and
operating policies of, the Management Company, the investment and related income
are reflected in the accompanying financial statements using the equity method.
At December 31, 1996, the Management Company provides leasing and property
management services to nine apartment properties and two shopping centers owned
by limited partnerships of which Boddie Investment Company ("BIC") is the
general partner.
During 1995 the Company advanced a total of $150,000 to the Management
Company, of which $50,000 was repaid in 1996. These advances accrue interest at
12 percent. Interest on these advances totaled $9,700 and $16,900 in 1995 and
1996, respectively.
Summary financial information of the Management Company at December 31 and
for the eight months and twelve months ended December 31, 1995 and 1996,
respectively, is as follows:
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Current assets................................................................ $221,758 $181,583
Property and equipment, net................................................... 122,430 98,139
Other assets.................................................................. 7,028 5,432
-------- --------
Total assets.................................................................. $351,216 $285,154
-------- --------
-------- --------
Current liabilities........................................................... $ 21,919 $ 13,168
Advances and accrued interest due to the Company.............................. 159,736 103,397
Shareholders' equity.......................................................... 169,561 168,589
-------- --------
Total liabilities and shareholders' equity.................................... $351,216 $285,154
-------- --------
-------- --------
Revenues...................................................................... $327,488 $862,368
Operating expenses............................................................ (254,659) (588,815)
Interest...................................................................... (9,736) (16,897)
-------- --------
Net income before income taxes................................................ 63,093 256,656
Provision for income taxes.................................................... (12,500) (99,500)
-------- --------
Net income.................................................................... $ 50,593 $157,156
-------- --------
-------- --------
</TABLE>
F-10
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 4. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Note payable to a bank in the principal sum of up to $25,500,000 due December 1998, interest on
the outstanding principal balance payable monthly at an effective rate of 8.11%, secured by
deeds of trust on 47 restaurant properties and assignment of rents under the Amended and
Restated Master Lease Agreement for those restaurants. The principal balance of the loan may
be prepaid, in whole or part, subject to certain restrictions and penalties.................. $23,250,000 $23,900,000
Fixed rate notes payable comprised of four loans, payable in monthly installments totaling
approximately $287,000 including principal and interest at rates ranging from 7.86% to 8.55%,
with maturities in 2000 (balloon of approximately $12,500,000) through 2025. The notes are
secured by deeds of trust and assignments of rents of four apartment properties.............. 36,855,485 36,441,534
Variable rate notes payable comprised of two loans ($8,600,000 and $1,400,000, respectively),
payable in monthly installments of $6,511 applied to the principal balance of the $8,600,000
loan and interest at 30-day LIBOR plus 1.75% and 2.25% (7.3% and 7.8% at December 31, 1996),
respectively, with maturities in 2002 and 1999, respectively. The notes are secured by deeds
of trust and assignment of rents of three apartment properties............................... -- 9,954,423
Variable rate notes payable to affiliates comprised of two loans due May 1999, interest at the
lower of 30-day LIBOR plus 1.5% (7.1% at December 31, 1996) or 8%, payable quarterly.
Liability for these notes was assumed at the acquisition of BTVC............................. 7,056,300 7,056,300
----------- -----------
$67,161,785 $77,352,257
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1996, scheduled principal payments are approximately as
follows: 1997 -- $495,000; 1998 -- $24,431,000; 1999 -- $9,026,000;
2000 -- $12,858,000; 2001 -- $389,000; thereafter -- $30,153,000.
The loan agreement related to the $25,500,000 note payable to a bank
includes covenants and restrictions relating to, among other things, specified
levels of debt service coverage, leverage and net worth.
During December, 1995, the Company applied $29,425,000 proceeds from fixed
rate loans to retire a fixed rate mortgage note and pay off variable rate notes
payable and a variable rate revolving line of credit totaling approximately
$29,250,000. In conjunction with these refinancing transactions, unamortized
loan costs of approximately $38,000 were charged to expense. In conjunction with
these transactions the Company paid and recorded $266,000 and $183,000 in
deferred loan costs in 1995 and 1996, respectively.
During 1996 the Company financed the purchase of Paces Village Apartments
through first and second deed of trust loans totaling $10,000,000 along with a
draw of $650,000 from the Company's existing credit facility. In addition, deeds
of trust related to Paces Commons Apartments and Oakbrook Apartments were
modified to extend the terms of each note by five years. In conjunction with
these transactions the Company paid and recorded $139,000 in deferred loan costs
in 1996.
Interest payments were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Payments to affiliates...................................... $ 17,581 $ 530,733 $ 506,389
Payments to other lenders................................... 2,539,445 4,810,067 5,379,519
---------- ---------- ----------
$2,557,026 $5,340,800 $5,885,908
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-11
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 5. DIVIDEND DISTRIBUTIONS
Dividend distributions totaling $1.24 per share were paid during 1994, 1995
and 1996. The allocation between non-taxable return of capital and taxable
ordinary dividend income to shareholders was as follows.
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Non-taxable return of capital............................................. 49.3% 51.8% 43.7%
Taxable ordinary dividend income.......................................... 50.7% 48.2% 56.3%
</TABLE>
A regular quarterly dividend of $.31 per share was declared by the Board of
Directors on January 14, 1997, payable on February 14, 1997, to shareholders of
record on January 31, 1997.
NOTE 6. RENTAL OPERATIONS
APARTMENT PROPERTIES. The Company leases its residential apartments under
operating leases with monthly payments due in advance. The majority of the
apartment leases are for terms of one year or less, with none longer than two
years. Rental and other revenues are recorded as earned.
RESTAURANT PROPERTIES -- MASTER LEASE AGREEMENT. In conjunction with the
$25,500,000 loan agreement with a bank, in December 1995 the Company entered
into an Amended and Restated Master Lease Agreement with Enterprises which
extended the term of the original lease to an initial term ending in December
2007 and increased minimum annual rent to $4,500,000. Prior to amendment, the
master lease required the lessee to pay minimum annual rent equal to an
annualized rate of 8.0 percent of the aggregate purchase price of the properties
($3,459,433 in 1994 and 1995, respectively), and percentage rent of 9.875
percent of the quarterly aggregate net sales from restaurant operations on the
properties less the aggregate minimum rent payable for such calendar quarter.
As amended, the lease requires Enterprises to pay monthly installments of
minimum annual rent equal to $4,500,000 and percentage rent at 9.875 percent of
quarterly aggregate net sales from restaurant operations on the properties less
minimum rent paid for such calendar quarter, subject to an annual calculation of
the greater of minimum or percentage rent. In 1996 the Company received
approximately $122,000 of excess rental payments, which have been recorded as
deferred revenue at December 31, 1996.
Enterprises is responsible for all taxes, utilities, renovations, insurance
and maintenance expenses relating to the operation of the restaurant properties.
The lessee may extend the lease for a maximum of three five-year renewal terms.
Under certain conditions as defined in the agreement, Enterprises and the
Company each have the right to substitute another restaurant property for a
property covered by the lease. The master lease provides that after December 31,
2007 (the beginning of the first renewal period), Enterprises has the right to
terminate the lease on up to five restaurant properties per year by offering to
purchase them under specified terms. In addition, the Company and Enterprises
have entered into a separate agreement which, after December 31, 1997, allows
Enterprises to purchase under specified terms up to seven restaurant properties
deemed to be uneconomic.
The components of restaurant rental income were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Minimum rent................................................ $3,459,433 $3,459,433 $4,500,000
Percentage rent............................................. 1,587,404 1,189,817 --
---------- ---------- ----------
$5,046,837 $4,649,250 $4,500,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Future minimum rental payments to be received by the Company under the
master lease agreement are $4,500,000 per year through 2007. This annual amount
does not include percentage rent which may be earned in addition to minimum
rent.
Approximately 31 percent of the Company's revenue in 1996 was derived from
Enterprises' payment of rent for the use of the Company's restaurant properties.
In addition, Enterprises is responsible for all of the costs associated with the
maintenance and operation of these properties. As a result, the financial well
being of the Company is, to a large extent, dependent on Enterprises' ability to
meet its obligations under the terms of the master lease. The ability of
Enterprises to satisfy the
F-12
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 6. RENTAL OPERATIONS -- Continued
requirements of the master lease depends on its liquidity and capital resources.
Historically, Enterprises has been able to meet its liquidity needs through cash
flow generated from operations and through reliance on its credit facility.
Enterprises' principal line of business is the operation of approximately
360 Hardee's restaurants, 47 of which are owned by the Company. The continued
decline in its restaurant sales has had a material negative impact on
Enterprises' operating cash flow. Management has reviewed Enterprises' unaudited
financial statements, cash flow analysis, restaurant contribution analysis,
sales trend analysis and projections, and believes that Enterprises will have
sufficient liquidity and capital resources to meet its obligations under the
master lease and credit facility as well as its general corporate operating
needs.
NOTE 7. RELATED PARTY TRANSACTIONS
Certain directors and officers of the Company hold similar positions with
Enterprises and BNE Advisory Group, Inc. (an affiliate of Enterprises), and held
similar positions with BTVC.
The Company purchased the 47 Hardee's restaurant properties from BNE Realty
Partners, Limited Partnership (an affiliate of Enterprises) for $43,243,000 in
1987.
The Company had an agreement through September 30, 1994, under which BNE
Advisory Group, Inc. provided all administrative services and was responsible
for the day-to-day operations of the Company. The agreement provided for
compensation to BNE Advisory Group, Inc. at an annual fee equal to 4.65 percent
of the Company's net cash available for distribution (as defined in the
agreement) before the advisory fee. Advisory fee expense totaled $153,000 in
1994. Effective with the merger of BTVC on October 1, 1994, the agreement with
BNE Advisory Group, Inc. was terminated.
Prior to the Company's acquisition of BTVC, the Company paid BTVC $112,000
for property management services in 1994.
Enterprises had extended to the Company an unsecured revolving line of
credit up to $2,000,000. Draws totaling $1,100,000 were made and repaid in full
during 1994. At December 31, 1994, there was no obligation outstanding. In
conjunction with modification of the master lease agreement (see Note 6), this
line of credit was terminated in December 1995.
NOTE 8. ACQUISITIONS
On June 7, 1994, the Company acquired Oakbrook Apartments, a residential
apartment community located in Charlotte, North Carolina for a total purchase
cost of $9,372,000. The purchase was financed primarily through bank and
mortgage borrowings. The results of operations of Oakbrook are included in the
financial statements from June 7, 1994.
On October 1, 1994, the Company acquired by merger BTVC, including
Latitudes Apartments, for an initial purchase price including $91,000 in cash,
$21,251,000 through assumption of liabilities, and 134,610 shares of the
Company's common stock valued at $1,899,000. The acquisition agreement provides
for contingent purchase price payments ("additional consideration") of up to
$1,700,000 if certain future financial targets are attained. The additional
consideration is payable in shares of common stock or cash, at the option of the
Company, on a quarterly basis over a period of up to 14 quarters commencing with
the quarter ended December 31, 1994. The acquisition was accounted for by the
purchase method of accounting, and the total acquisition cost of $26,326,000
(assuming full earn-out of additional consideration and including approximately
$1,385,000 in acquisition costs) approximates the fair value of assets acquired.
Significant assets acquired include the Latitudes Apartments and an intangible
related to management operations, initially recorded at $21,950,000 and
$2,250,000, respectively. Additional consideration payments will be allocated
primarily to the intangible related to management operations and amortized over
ten years. The results of operations of Latitudes and management operations are
included in the financial statements from October 1, 1994.
On December 28, 1994, the Company acquired Harris Hill Apartments, a
residential apartment community located in Charlotte, North Carolina for a total
purchase cost of $8,871,000. The purchase was financed primarily through bank
and
F-13
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 8. ACQUISITIONS -- Continued
mortgage borrowings. The results of operations of Harris Hill are included in
the financial statements from December 28, 1994.
On April 29, 1996, the Company acquired Paces Village Apartments, a
residential apartment community located in Greensboro, North Carolina for a
total purchase cost of $10,667,000. The purchase was financed primarily through
bank and mortgage borrowings. The results of operations of Paces Village are
included in the financial statements from April 29, 1996.
In conjunction with the BTVC acquisition and based on an earlier estimate,
the Company issued 140,990 shares, including 6,380 "excess shares" to the BTVC
shareholders in October 1994. During the fourth quarter of 1994 and in each
quarter of 1995 and 1996 the financial targets for additional consideration were
met; the Company recorded additional consideration totaling approximately
$1,275,000, paid in part by issuance of 81,129 shares of common stock. At
December 31, 1996, the BTVC shareholders are due additional consideration
totaling approximately $356,000.
At December 31, 1996, assuming the full contingent purchase price is earned
and paid in common stock, it is anticipated that the Company would issue
approximately 62,000 additional shares of common stock in conjunction with the
acquisition.
The following unaudited pro forma summary presents the results of
operations as if the acquisition of Paces Village Apartments in 1996 had
occurred at the beginning of periods presented and does not purport to be
indicative of what would have occurred had the acquisitions been made as of
those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Total revenue.......................................................... $15,193,000 $15,006,000
Net income............................................................. 1,489,000 1,690,000
Net income per common share............................................ 0.50 0.56
</TABLE>
NOTE 9. PROFIT SHARING PLAN
The employees of the Company are participants in a profit sharing plan
pursuant to Section 401 of the Internal Revenue Code. The Company makes limited
matching contributions based on the level of employee participation as defined.
NOTE 10. STOCK OPTION AND INCENTIVE PLAN
In 1994 the Company established an employee Stock Option and Incentive Plan
("Stock Option Plan") under which 280,000 shares of the Company's common stock
are reserved for issuance. On October 17, 1994, options to purchase 160,000
shares were granted to certain eligible employees at $13.75 per share, the fair
value of the Company's stock on the date the options were granted. The options
vest and are exercisable one-fourth per year beginning October 17, 1995, and
expire October 17, 2004. During 1996 options for 10,000 shares were forfeited.
In January 1996 the options were repriced at $12.50, the fair value of the
Company's common stock on the date of repricing. At December 31, 1996, options
for 75,000 shares have vested, and no options have been exercised. The remaining
contractual life of all options outstanding is 8.75 years.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation" ("FAS 123"), which establishes
financial accounting and reporting standards for stock-based compensation plans.
FAS 123 defines a fair value based method of accounting for an employee stock
option or similar equity instrument and encourages the adoption of that method
of accounting. However, FAS 123 also allows entities to continue to account for
such plans under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Entities electing to remain with the
accounting in APB 25 must make pro forma disclosures of net income and earnings
per share as if the fair value based method of accounting defined in FAS 123 had
been applied.
The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of repricing, no compensation expense is recognized.
F-14
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 10. STOCK OPTION AND INCENTIVE PLAN -- Continued
Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value of these options was estimated at the date of repricing using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996: risk-free interest rate of 6.5 percent; dividend yield of
9.9 percent; volatility factor of the expected market price of the Company's
common stock of .09; and a weighted-average expected life of the option of 8.75
years. The weighted average fair value of options as repriced in 1996 was $.06.
No options were granted in 1995.
The effect of applying the FAS 123 fair value method to the Company's
stock-based compensation results in net income and net income per share that is
not materially different from the amounts reported.
NOTE 11. DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
In July 1996 the Company's Dividend Reinvestment and Stock Purchase Plan
("DRIP Plan") was amended to allow the Company, at its option, to issue shares
directly to Plan participants. During 1996 the Company issued 19,207 shares
through the DRIP Plan.
NOTE 12. COMMITMENTS AND CONTINGENCIES
The Company has agreements with two of its executive officers which provide
for cash compensation and other benefits in the event that a change in control
of the Company occurs.
The Company is a party to a variety of legal proceedings arising in the
ordinary course of its business. Management believes that such matters will not
have a material effect on the financial position of the Company.
On December 29, 1996, the Company experienced a fire which destroyed 20
units at the Latitudes Apartments. The Company believes that it has adequate
insurance coverage and does not expect this event to have a material adverse
effect on the Company's financial condition, results of operations, or cash
flows.
NOTE 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Set forth below is selected financial data (unaudited) for the years ended
December 31, 1995 and 1996:
<TABLE>
<CAPTION>
NET INCOME
REVENUES NET INCOME PER SHARE
----------- ---------- ----------
<S> <C> <C> <C>
1995
First quarter................................... $ 3,353,182 $ 388,106 $ 0.13
Second quarter.................................. 3,528,028 526,125 0.18
Third quarter................................... 3,530,374 467,140 0.16
Fourth quarter (1).............................. 3,314,054 246,897 0.08
----------- ---------- ----------
$13,725,638 $1,628,268 $ 0.54
----------- ---------- ----------
----------- ---------- ----------
1996
First quarter................................... $ 3,307,505 $ 379,174 $ 0.13
Second quarter.................................. 3,623,992 435,338 0.14
Third quarter................................... 3,813,211 463,018 0.15
Fourth quarter.................................. 3,763,116 438,285 0.14
----------- ---------- ----------
$14,507,824 $1,715,815 $ 0.57
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
- ---------------
(1) Net income includes a special charge of $321,000 to write off certain
deferred acquisition costs and an adjustment to capitalize approximately
$85,000 of expenditures for carpet, vinyl and wallpaper previously charged
to expense in the first three quarters.
F-15
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
NOTE 14. SUBSEQUENT EVENTS (UNAUDITED)
The Company has entered into an agreement to acquire a portfolio of seven
apartment communities containing 1,356 apartment units located in North
Carolina.
The Company currently plans to issue approximately 2,800,000 shares of its
Common Stock at an estimated price of $15.00 during the fourth quarter of 1997.
The Company is also in the process of converting to an umbrella partnership
real estate investment trust ("UPREIT"). An UPREIT is a real estate investment
trust that controls and holds most of its properties through an umbrella limited
partnership.
F-16
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
INITIAL COSTS COSTS (2)
--------------------------- CAPITALIZED ---------------------------
BUILDINGS & SUBSEQUENT BUILDINGS &
DESCRIPTION ENCUMB. LAND IMPROVEMN'TS TO ACQUISITION LAND IMPROVEMN'TS
- ---------------------------------- ----------- ----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
APARTMENT PROPERTIES:
NORTH CAROLINA:
Paces Commons, Charlotte.......... $10,717,740 $ 1,430,157 $12,871,424 $ 435,611 $ 1,430,157 $13,307,035
Oakbrook, Charlotte............... 6,496,448 848,835 8,523,384 262,909 848,835 8,786,293
Harris Hill, Charlotte............ 6,104,161 1,003,298 7,867,857 291,284 1,003,298 8,159,141
Paces Village, Greensboro......... 9,954,423 1,250,000 9,416,580 56,408 1,250,000 9,472,988
----------- ------------- -------------- ----------- -------------
4,532,290 38,679,245 1,046,212 4,532,290 39,725,457
VIRGINIA:
Latitudes, Virginia Beach......... 13,123,185 3,360,000 18,606,667 385,634 3,360,000 18,992,301
----------- ----------- ------------- -------------- ----------- -------------
TOTAL APARTMENT PROPERTIES........ 46,395,957 7,892,290 57,285,912 1,431,846 7,892,290 58,717,758
HARDEE'S RESTAURANT PROPERTIES:
NORTH CAROLINA:
Bessemer City..................... (1) 152,079 391,060 -- 152,079 391,060
Burlington........................ (1) 162,411 417,629 -- 162,411 417,629
Chapel Hill....................... (1) 273,556 703,430 -- 273,556 703,430
Denver............................ (1) 275,484 708,387 -- 275,484 708,387
Eden.............................. (1) 253,282 651,296 -- 253,282 651,296
Fayetteville (Ramsey)............. (1) 260,135 668,919 -- 260,135 668,919
Fayetteville (N. Eastern)......... (1) 308,271 792,696 -- 308,271 792,696
Fayetteville (Bragg).............. (1) 235,951 606,730 -- 235,951 606,730
Gastonia (E. Franklin)............ (1) 230,421 592,511 -- 230,421 592,511
Gastonia (N. Chester)............. (1) 199,133 512,055 -- 199,133 512,055
Hillsborough...................... (1) 290,868 747,948 -- 290,868 747,948
Kinston (W. Vernon)............... (1) 237,135 609,777 -- 237,135 609,777
Kinston (Richlands)............... (1) 231,678 595,743 -- 231,678 595,743
Mt. Airy.......................... (1) 272,205 699,955 -- 272,205 699,955
Newton............................ (1) 223,453 574,594 -- 223,453 574,594
Siler City........................ (1) 268,312 689,945 -- 268,312 689,945
Spring Lake....................... (1) 218,925 562,949 -- 218,925 562,949
Thomasville (E. Main)............. (1) 253,716 652,411 -- 253,716 652,411
Thomasville (Randolph)............ (1) 327,727 842,726 -- 327,727 842,726
----------- ------------- -------------- ----------- -------------
4,674,742 12,020,761 -- 4,674,742 12,020,761
VIRGINIA:
Ashland........................... (1) 296,509 762,452 -- 296,509 762,452
Blackstone........................ (1) 275,565 708,596 -- 275,565 708,596
Bluefield......................... (1) 205,700 528,947 -- 205,700 528,947
Chester........................... (1) 300,165 771,852 -- 300,165 771,852
Clarksville....................... (1) 211,545 543,972 -- 211,545 543,972
Clintwood......................... (1) 222,673 572,588 -- 222,673 572,588
Dublin............................ (1) 364,065 936,168 -- 364,065 936,168
Franklin.......................... (1) 287,867 740,230 -- 287,867 740,230
Galax............................. (1) 309,578 796,057 -- 309,578 796,057
Hopewell.......................... (1) 263,939 678,701 -- 263,939 678,701
Lebanon........................... (1) 266,340 684,876 -- 266,340 684,876
Lynchburg (Langhorne)............. (1) 249,865 642,509 -- 249,865 642,509
Lynchburg (Timberlake)............ (1) 276,153 710,107 -- 276,153 710,107
Norfolk........................... (1) 325,822 837,829 -- 325,822 837,829
Orange............................ (1) 244,883 629,699 -- 244,883 629,699
Petersburg........................ (1) 357,984 920,531 -- 357,984 920,531
<CAPTION>
ACCUMULATED DATE OF DATE LIFE
DESCRIPTION TOTAL DEPRECIATION CONSTR. ACQUIRED (YEARS)
- ---------------------------------- ------------ ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
APARTMENT PROPERTIES:
NORTH CAROLINA:
Paces Commons, Charlotte.......... $ 14,737,192 $1,285,494 1988 Jun-93 40
Oakbrook, Charlotte............... 9,635,128 614,332 1985 Jun-94 40
Harris Hill, Charlotte............ 9,162,439 499,924 1988 Dec-94 40
Paces Village, Greensboro......... 10,722,988 193,187 1988 Apr-96 40
------------ -----------
44,257,747 2,592,937
VIRGINIA:
Latitudes, Virginia Beach......... 22,352,301 1,311,416 1989 Oct-94 38
------------ -----------
TOTAL APARTMENT PROPERTIES........ 66,610,048 3,904,353
HARDEE'S RESTAURANT PROPERTIES:
NORTH CAROLINA:
Bessemer City..................... 543,139 94,914 Nov-77 Apr-87 40
Burlington........................ 580,040 101,361 Oct-85 Apr-87 40
Chapel Hill....................... 976,986 170,728 Aug-64 Apr-87 40
Denver............................ 983,871 171,931 Jul-83 Apr-87 40
Eden.............................. 904,578 158,074 Jun-73 Apr-87 40
Fayetteville (Ramsey)............. 929,054 162,352 Oct-73 Apr-87 40
Fayetteville (N. Eastern)......... 1,100,967 192,393 Sep-83 Apr-87 40
Fayetteville (Bragg).............. 842,681 147,258 Jan-85 Apr-87 40
Gastonia (E. Franklin)............ 822,932 143,807 Apr-63 Apr-87 40
Gastonia (N. Chester)............. 711,188 124,279 Jan-78 Apr-87 40
Hillsborough...................... 1,038,816 181,532 Mar-78 Apr-87 40
Kinston (W. Vernon)............... 846,912 147,997 Jul-62 Apr-87 40
Kinston (Richlands)............... 827,421 144,591 Dec-81 Apr-87 40
Mt. Airy.......................... 972,160 169,884 May-73 Apr-87 40
Newton............................ 798,047 139,459 Mar-76 Apr-87 40
Siler City........................ 958,257 167,455 May-79 Apr-87 40
Spring Lake....................... 781,874 136,632 Mar-76 Apr-87 40
Thomasville (E. Main)............. 906,127 158,345 Feb-66 Apr-87 40
Thomasville (Randolph)............ 1,170,453 204,535 Apr-74 Apr-87 40
------------ -----------
16,695,503 2,917,526
VIRGINIA:
Ashland........................... 1,058,961 185,053 Apr-87 Apr-87 40
Blackstone........................ 984,161 171,982 Sep-79 Apr-87 40
Bluefield......................... 734,647 128,379 Feb-85 Apr-87 40
Chester........................... 1,072,017 187,334 May-73 Apr-87 40
Clarksville....................... 755,517 132,026 Oct-85 Apr-87 40
Clintwood......................... 795,261 138,971 Jan-81 Apr-87 40
Dublin............................ 1,300,233 227,214 Jul-83 Apr-87 40
Franklin.......................... 1,028,097 179,660 Feb-75 Apr-87 40
Galax............................. 1,105,635 193,208 Jun-74 Apr-87 40
Hopewell.......................... 942,640 164,726 Jun-78 Apr-87 40
Lebanon........................... 951,216 166,225 Jun-83 Apr-87 40
Lynchburg (Langhorne)............. 892,374 155,941 Sep-82 Apr-87 40
Lynchburg (Timberlake)............ 986,260 172,348 Aug-83 Apr-87 40
Norfolk........................... 1,163,651 203,347 Aug-84 Apr-87 40
Orange............................ 874,582 152,832 Aug-74 Apr-87 40
Petersburg........................ 1,278,515 223,420 Mar-74 Apr-87 40
</TABLE>
F-17
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
YEAR ENDED DECEMBER 31, 1996 -- (CONTINUED)
<TABLE>
<CAPTION>
GROSS AMOUNT AT WHICH
CARRIED AT CLOSE OF PERIOD
INITIAL COSTS COSTS (2)
--------------------------- CAPITALIZED ---------------------------
BUILDINGS & SUBSEQUENT BUILDINGS &
DESCRIPTION ENCUMB. LAND IMPROVEMN'TS TO ACQUISITION LAND IMPROVEMN'TS
- ---------------------------------- ----------- ----------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richmond (Forest Hill)............ (1) 196,084 504,216 -- 196,084 504,216
Richmond (Midlothian)............. (1) 270,736 696,179 -- 270,736 696,179
Richmond (Myers).................. (1) 321,946 827,861 -- 321,946 827,861
Roanoke (Hollins)................. (1) 257,863 663,076 -- 257,863 663,076
Roanoke (Abenham)................. (1) 235,864 606,507 -- 235,864 606,507
Rocky Mount....................... (1) 248,434 638,829 -- 248,434 638,829
Smithfield........................ (1) 223,070 573,608 -- 223,070 573,608
Staunton.......................... (1) 260,569 670,035 -- 260,569 670,035
Verona............................ (1) 191,631 492,765 -- 191,631 492,765
Virginia Beach (Lynnhaven)........ (1) 271,570 698,322 -- 231,731 698,322
Virginia Beach (Holland).......... (1) 277,943 714,710 -- 277,943 714,710
Wise.............................. (1) 219,471 564,355 -- 219,471 564,355
----------- ------------- -------------- ----------- -------------
7,433,834 19,115,577 -- 7,393,995 19,115,577
----------- ----------- ------------- -------------- ----------- -------------
TOTAL RESTAURANT PROPERTIES....... 23,900,000 12,108,576 31,136,338 -- 12,068,737 31,136,338
----------- ----------- ------------- -------------- ----------- -------------
TOTAL REAL ESTATE................. $70,295,957 $20,000,866 $88,422,250 $1,431,846 $19,961,027 $89,854,096
----------- ----------- ------------- -------------- ----------- -------------
----------- ----------- ------------- -------------- ----------- -------------
<CAPTION>
ACCUMULATED DATE OF DATE LIFE
DESCRIPTION TOTAL DEPRECIATION CONSTR. ACQUIRED (YEARS)
- ---------------------------------- ------------ ----------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Richmond (Forest Hill)............ 700,300 122,377 Nov-74 Apr-87 40
Richmond (Midlothian)............. 966,915 168,967 Jan-74 Apr-87 40
Richmond (Myers).................. 1,149,807 200,928 Apr-83 Apr-87 40
Roanoke (Hollins)................. 920,939 160,934 Feb-73 Apr-87 40
Roanoke (Abenham)................. 842,371 147,204 Nov-82 Apr-87 40
Rocky Mount....................... 887,263 155,048 May-80 Apr-87 40
Smithfield........................ 796,678 139,218 Apr-77 Apr-87 40
Staunton.......................... 930,604 162,623 Sep-83 Apr-87 40
Verona............................ 684,396 119,597 Jan-85 Apr-87 40
Virginia Beach (Lynnhaven)........ 930,053 169,488 Jun-80 Apr-87 40
Virginia Beach (Holland).......... 992,653 173,466 Aug-83 Apr-87 40
Wise.............................. 783,826 136,971 Jun-80 Apr-87 40
------------ -----------
26,509,572 4,639,486
------------ -----------
TOTAL RESTAURANT PROPERTIES....... 43,205,075 7,557,012
------------ -----------
TOTAL REAL ESTATE................. $109,815,123 $11,461,365
------------ -----------
------------ -----------
</TABLE>
- ---------------
(1) Indicates the 47 restaurants encumbered by the bank term loan of
up to $25,500,000; $23,900,000 outstanding at 12/31/96
(2) Aggregate cost at December 31, 1996, for Federal income tax
purposes was $106,878,323
F-18
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
--------------------------------------------
1994 1995 1996
------------- ------------ -------------
<S> <C> <C> <C>
Real estate investments:
Balance at beginning of year............................................... $ 57,557,243 $ 97,928,578 $ 98,520,761
Additions during year
Acquisitions by merger.................................................. 21,966,667 -- --
Other acquisitions...................................................... 18,243,374 -- 10,666,580
Improvements, etc....................................................... 161,294 592,183 627,782
Deductions during year..................................................... -- -- --
------------- ------------ -------------
Balance at close of year................................................... $ 97,928,578 $ 98,520,761 $ 109,815,123
------------- ------------ -------------
------------- ------------ -------------
Accumulated depreciation:
Balance at beginning of year............................................... $ 5,416,818 $ 6,827,337 $ 9,020,948
Provision for depreciation................................................. 1,410,519 2,193,611 2,440,417
Deductions during year..................................................... -- -- --
------------- ------------ -------------
Balance at close of year................................................... $ 6,827,337 $ 9,020,948 $ 11,461,365
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
F-19
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma condensed consolidated balance sheet as of
September 30, 1997, is presented as if the acquisition of the four Initial
Properties to be acquired under the Master Agreement of Merger and Acquisition
related to the Chrysson Properties, the Offering, and the application of the net
proceeds of the Offering all had occurred on September 30, 1997.
The unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 1996, and for the nine months ended September 30,
1997, are presented as if the acquisition of the three Stabilized Properties,
the Offering, and the application of the net proceeds of the Offering all had
occurred on January 1 of each period presented.
You should read these unaudited statements in conjunction with our audited
financial statements and notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Prospectus. We
believe the pro forma condensed consolidated financial information provides all
adjustments necessary to reflect the effects of the above transactions.
No one has audited these pro forma condensed consolidated financial
statements. These pro forma statements may not represent what our financial
position would have been if the purchase of the Initial Properties and the
Offering really occurred on September 30, 1997, or how we would have performed
if the purchase of the Stabilized Properties and the Offering had really
occurred at the beginning of the periods presented. In addition, they do not
purport to project our financial position or results of operations at any future
date or for any future period.
The unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 1996, and for the nine months ended September 30,
1997, do not include operations, depreciation, or financing expense for one
apartment community and the second phase of another apartment community because
these properties had not reached "stabilized" status prior to September 30,
1997. An apartment community is considered stabilized when construction of all
buildings has been completed and the community has attained 90% occupancy for 90
days. Under the terms of the Master Agreement of Merger and Acquisition and the
expected financing for the purchase, these conditions must be met before
purchase of the property. These two properties reached stabilized status in
October, 1997.
F-20
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------
CHRYSSON PROCEEDS OTHER
INITIAL FROM THE PRO FORMA
HISTORICAL ACQUISITION OFFERING ADJUSTMENTS
(A) (B) (C) (D)
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
ASSETS
Real estate assets, net....................................... $ 96,962 $60,860 -- --
Cash and cash equivalents..................................... 1,407 498 $ 37,583 $ (37,554)
Rent and other receivables.................................... 35 -- --
Prepaid expenses and other assets............................. 595 590 -- --
Investment in and advances to Management Company.............. 243 -- -- --
Notes receivable.............................................. 1,413 -- -- --
Intangible related to acquisition of mgmt operations, net..... 2,841 -- -- --
Deferred financing costs, net................................. 710 448 -- (276)
---------- ----------- -------- -----------
Total assets.................................................. $ 104,206 $62,396 $ 37,583 $ (37,830)
---------- ----------- -------- -----------
---------- ----------- -------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.............................. $ 78,397 $46,856 $ -- $ (37,583)
Accounts payable and accrued expenses......................... 557 405 -- --
Accrued interest on mortgages and other notes payable......... 466 -- -- --
Consideration due for acquisitions............................ 572 2,600 -- --
Escrowed security deposits and deferred revenue............... 264 185 -- --
---------- ----------- -------- -----------
80,256 50,046 -- (37,583)
Minority interest in operating partnership.................... -- 12,350 -- --
Shareholders' equity:
Common stock.................................................. 31 -- 28 --
Additional paid-in capital.................................... 35,163 -- 37,555 --
Dividend distributions in excess of net income................ (11,244) -- -- (247)
---------- ----------- -------- -----------
Total shareholders' equity.................................... 23,950 -- 37,583 (247)
---------- ----------- -------- -----------
Total liabilities and shareholders' equity.................... $ 104,206 $62,396 $ 37,583 $ (37,830)
---------- ----------- -------- -----------
---------- ----------- -------- -----------
<CAPTION>
CONSOLIDATED
PRO FORMA
------------
<S> <C>
ASSETS
Real estate assets, net....................................... $157,822
Cash and cash equivalents..................................... 1,934
Rent and other receivables.................................... 35
Prepaid expenses and other assets............................. 1,185
Investment in and advances to Management Company.............. 243
Notes receivable.............................................. 1,413
Intangible related to acquisition of mgmt operations, net..... 2,841
Deferred financing costs, net................................. 882
------------
Total assets.................................................. $166,355
------------
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage and other notes payable.............................. $ 87,670
Accounts payable and accrued expenses......................... 962
Accrued interest on mortgages and other notes payable......... 466
Consideration due for acquisitions............................ 3,172
Escrowed security deposits and deferred revenue............... 449
------------
92,719
Minority interest in operating partnership.................... 12,350
Shareholders' equity:
Common stock.................................................. 59
Additional paid-in capital.................................... 72,718
Dividend distributions in excess of net income................ (11,491)
------------
Total shareholders' equity.................................... 61,286
------------
Total liabilities and shareholders' equity.................... $166,355
------------
------------
</TABLE>
See accompanying notes.
F-21
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(A) Reflects our historical balance sheet contained in our Quarterly Report
on Form 10-Q for the quarter ended September 30, 1997.
(B) Reflects the acquisition of the Initial Properties specified in the
Master Agreement of Merger and Acquisition related to the Chrysson properties,
which we expect to complete by December 31, 1997.
The Initial Properties are:
<TABLE>
<CAPTION>
PROPERTY LOCATION # UNITS COMPLETED STABILIZED
- ------------------ ----------------- ------- ------------ -------------
<S> <C> <C> <C> <C>
Abbington Phase I Greensboro, NC 240 1995 1995
Pepperstone Greensboro, NC 108 1992 1992
Savannah Place Greensboro, NC 172 1991 1991
Abbington Phase II Greensboro, NC 120 June, 1997 October, 1997
Waterford Place Winston-Salem, NC 240 August, 1997 October, 1997
</TABLE>
We expect this acquisition to cost approximately:
<TABLE>
<S> <C>
Contract price:
Issue of 950,032 operating partnership units at $13.00 per unit at closing........... $12,350,000
Issue of 100,000 operating partnership units at $13.00 per unit, due one year after
closing........................................................................... 1,300,000
Issue of 100,000 operating partnership units at $13.00 per unit, due two years after
closing........................................................................... 1,300,000
Cash payments to retire existing debt................................................ 44,941,000
-----------
59,891,000
Other costs............................................................................ 969,000
-----------
$60,860,000
-----------
-----------
</TABLE>
We expect to finance this purchase with net proceeds from mortgage
financing. We have obtained a loan commitment for first mortgages for 65% of
value, with interest fixed at 6.97%, for a term of ten years, with payments of
interest only; and for second mortgages for 15% of value, with variable interest
at the 30-day LIBOR rate plus 2.00% for the first six months, for a term of 18
months, with payments of interest only.
<TABLE>
<S> <C>
First mortgages on initial properties.................................................. $38,070,500
Second mortgages on initial properties................................................. 8,785,500
-----------
$46,856,000
-----------
-----------
</TABLE>
We expect loan fees and other costs related to obtaining the mortgages to
be approximately:
<TABLE>
<S> <C>
Loan fees.............................................................................. $ 300,000
Legal and other costs.................................................................. 148,000
-----------
$ 448,000
-----------
-----------
</TABLE>
F-22
<PAGE>
We will assume liability for payment of real property taxes and resident
security deposits held in trust at closing.
We expect to receive cash at closing for the contributors' portion of
prorated real property taxes, resident security deposits held in trust, and the
excess of mortgage proceeds over cash payments made to retire contributors' debt
on the Initial Properties. Amounts received for the contributor's portion of
prorated real property taxes will be placed in escrow with the mortgage lender.
(C) Reflects estimated proceeds from sale of common stock in the Offering:
<TABLE>
<S> <C>
Proceeds from sale of 2,800,000 shares based on initial price of $14.625 per share..... $40,950,000
Less estimated costs associated with the Offering...................................... 3,367,000
-----------
$37,583,000
-----------
-----------
</TABLE>
(D) Reflects expected application of proceeds from the Offering to repay
certain mortgages and notes payable, and write-off of deferred financing costs
related to those notes payable.
F-23
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
STABILIZED OTHER
CHRYSSON PRO FORMA
HISTORICAL PROPERTIES ADJUSTMENTS
(E) (G) (H)
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES
Apartment rental income.................................................... $ 9,791 $4,431 $ --
Restaurant rental income................................................... 4,500 -- --
Equity in income of Management Company..................................... 149 -- --
Interest and other income.................................................. 68 8 --
---------- ---------- -----------
14,508 4,439 --
EXPENSES
Depreciation............................................................... 2,440 -- 1,096(a)
Amortization -- mgmt intangible............................................ 316 -- --
Amortization -- finance costs.............................................. 219 -- (135)(b)
Apartment operations....................................................... 2,977 1,177 28(c)
Administrative............................................................. 894 -- 81(d)
Interest................................................................... 5,946 -- (744)(e)
---------- ---------- -----------
12,792 1,177 326
---------- ---------- -----------
INCOME BEFORE MINORITY INTEREST............................................ 1,716 3,262 (326)
Minority interest in operating partnership................................. -- -- 415(f)
---------- ---------- -----------
INCOME BEFORE EXTRAORDINARY ITEM........................................... $ 1,716 $3,262 $ (741)
---------- ---------- -----------
---------- ---------- -----------
PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM......................................... $ 0.57 -- --
----------
----------
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 3,027 -- --
----------
----------
<CAPTION>
CONSOLIDATED
PRO FORMA
------------
<S> <C>
REVENUES
Apartment rental income.................................................... $ 14,222
Restaurant rental income................................................... 4,500
Equity in income of Management Company..................................... 149
Interest and other income.................................................. 76
------------
18,947
EXPENSES
Depreciation............................................................... 3,536
Amortization -- mgmt intangible............................................ 316
Amortization -- finance costs.............................................. 84
Apartment operations....................................................... 4,182
Administrative............................................................. 975
Interest................................................................... 5,202
------------
14,295
------------
INCOME BEFORE MINORITY INTEREST............................................ 4,652
Minority interest in operating partnership................................. 415
------------
INCOME BEFORE EXTRAORDINARY ITEM........................................... $ 4,237
------------
------------
PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM......................................... $ 0.73
------------
------------
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 5,827
------------
------------
</TABLE>
See accompanying notes.
F-24
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
-------------------------
STABILIZED OTHER
CHRYSSON PRO FORMA
HISTORICAL PROPERTIES ADJUSTMENTS
(F) (G) (H)
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES
Apartment rental income.................................................... $ 7,898 $3,230 $ --
Restaurant rental income................................................... 3,375 -- --
Equity in income of Management Company..................................... 183 -- --
Interest and other income.................................................. 153 12 --
---------- ---------- -----------
11,609 3,242 --
EXPENSES
Depreciation............................................................... 1,923 -- 822(a)
Amortization -- management intangible...................................... 278 -- --
Amortization -- finance costs.............................................. 161 -- (103)(b)
Apartment operations....................................................... 2,537 911 25(c)
Administrative............................................................. 734 -- 75(d)
Interest................................................................... 4,684 -- (667)(e)
---------- ---------- -----------
10,317 911 152
---------- ---------- -----------
INCOME BEFORE MINORITY INTEREST............................................ 1,292 2,331 (152)
Minority interest in operating partnership................................. -- -- 306(f)
---------- ---------- -----------
INCOME BEFORE EXTRAORDINARY ITEM........................................... $ 1,292 $2,331 $ (458)
---------- ---------- -----------
---------- ---------- -----------
PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM......................................... $ 0.42 -- --
----------
----------
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 3,107 -- --
----------
----------
<CAPTION>
CONSOLIDATED
PRO FORMA
------------
<S> <C>
REVENUES
Apartment rental income.................................................... $ 11,128
Restaurant rental income................................................... 3,375
Equity in income of Management Company..................................... 183
Interest and other income.................................................. 165
------------
14,851
EXPENSES
Depreciation............................................................... 2,745
Amortization -- management intangible...................................... 278
Amortization -- finance costs.............................................. 58
Apartment operations....................................................... 3,473
Administrative............................................................. 809
Interest................................................................... 4,017
------------
11,380
------------
INCOME BEFORE MINORITY INTEREST............................................ 3,471
Minority interest in operating partnership................................. 306
------------
INCOME BEFORE EXTRAORDINARY ITEM........................................... $ 3,165
------------
------------
PER SHARE DATA:
INCOME BEFORE EXTRAORDINARY ITEM......................................... $ 0.54
------------
------------
WEIGHTED AVERAGE SHARES OUTSTANDING...................................... 5,907
------------
------------
</TABLE>
See accompanying notes.
F-25
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(E) Reflects our historical statement of operations contained in our Annual
Report on Form 10-K for the year ended December 31, 1996.
(F) Reflects our historical statement of operations contained in our
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(G) Reflects the revenues and expenses directly related to apartment
operations of three of the five "Initial Properties"specified in the Master
Agreement of Merger and Acquisition related to the Chrysson properties for the
periods presented. We have included only the operations of properties which were
completed and had attained 90% occupancy for at least 90 days during the periods
presented.
<TABLE>
<CAPTION>
SAVANNAH
ABBINGTON I PEPPERSTONE PLACE TOTAL
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended December 31, 1996:
Apartment rental income............................................... $ 2,146,000 $ 837,000 $1,448,000 $4,431,000
Interest and other income............................................. 4,000 2,000 2,000 8,000
----------- ----------- ---------- ----------
2,150,000 839,000 1,450,000 4,439,000
Apartment operations expense.......................................... 558,000 243,000 376,000 1,177,000
----------- ----------- ---------- ----------
Revenue in excess of certain expenses................................. $ 1,592,000 $ 596,000 $1,074,000 $3,262,000
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
Nine Months Ended September 30, 1997:
Apartment rental income............................................... $ 1,519,000 $ 613,000 $1,098,000 $3,230,000
Interest and other income............................................. 6,000 2,000 4,000 12,000
----------- ----------- ---------- ----------
1,525,000 615,000 1,102,000 3,242,000
Apartment operations expense.......................................... 423,000 187,000 301,000 911,000
----------- ----------- ---------- ----------
Revenue in excess of certain expenses................................. $ 1,102,000 $ 428,000 $ 801,000 $2,331,000
----------- ----------- ---------- ----------
----------- ----------- ---------- ----------
</TABLE>
We have not included the operations of Abbington II and Waterford Place in
the pro forma statements of operations for the year ended December 31, 1996, and
for the nine months ended September 30, 1997. Construction of Abbington II was
completed in June, 1997, and 90% occupancy was first attained during August,
1997. Construction of Waterford Place was completed in August, 1997, and 90%
occupancy was first attained during August, 1997. Under the terms of the Master
Agreement of Merger and Acquisition, we would not acquire these properties until
construction was completed and the property was in full operation. Our expected
mortgage lender requires that the properties attain 90% occupancy for at least
90 days before mortgage financing can be completed.
F-26
<PAGE>
(H) Reflects adjustments to our historical statements of operations and the
pro forma revenues and expenses directly related to apartment operations of the
three stabilized Chrysson properties as follows:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE
ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
(a) Estimated depreciation expense for the three stabilized properties using the straight- $ 1,096,000 $ 822,000
line method over the estimated useful lives of the related assets, which are 40 years for
buildings, 20 years for land improvements, 10 years for fixtures and equipment, and 5
years for carpet and vinyl................................................................
------------ -------------
------------ -------------
(b) Estimated net decrease in amortization expense of deferred financing costs, calculated
as follows:
Amortization of approximately $240,000 deferred financing costs related to acquisition of $ 42,000 $ 32,000
the three completed Chrysson properties...................................................
Elimination of amortization of deferred financing costs related to certain existing (177,000 ) (135,000)
mortgages and notes payable and second mortgages related to acquisition of the three
stabilized Chrysson properties that would be repaid with proceeds from the Offering.......
------------ -------------
$ (135,000 ) $ (103,000)
------------ -------------
------------ -------------
(c) Estimated increase in apartment operations expense for property accounting staff and $ 28,000 $ 25,000
supplies..................................................................................
------------ -------------
------------ -------------
(d) Estimated increase in general and administrative expense for management staff and $ 81,000 $ 75,000
supplies..................................................................................
------------ -------------
------------ -------------
(e) Estimated net decrease in interest expense related to mortgages and notes payable,
calculated as follows:
Interest on approximately $25,139,000 debt related to acquisition of the three stabilized $ 1,786,000 $ 1,339,000
Chrysson properties. We calculated interest using rates of 6.97% for the first mortgages
and 7.68% for the second mortgages........................................................
Elimination of interest on certain existing mortgages and notes payable, and second (2,530,000 ) (2,006,000)
mortgages on the three stabilized Chrysson properties that would be repaid with proceeds
from the Offering.........................................................................
------------ -------------
$ (744,000 ) $ (667,000)
------------ -------------
------------ -------------
(f) Estimated minority interest of approximately 9% in net income of the operating
partnership, assuming approximately 571,000 operating partnership units issued to minority
interests related to acquisition of the three stabilized Chrysson properties and
approximately 2,800,000 operating partnership units issued to Boddie-Noell Properties for
net proceeds of the Offering contributed.................................................. $ 415,000 $ 306,000
------------ -------------
------------ -------------
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
BODDIE-NOELL PROPERTIES, INC.
We have audited the accompanying Combined Statement of Revenue and Certain
Operating Expenses of Acquired Properties as described in Note 1 for the year
ended December 31, 1996. This financial statement is the responsibility of
Acquired Properties' management. Our responsibility is to express an opinion on
this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the basis of accounting used and the significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying Combined Statement of Revenue and Certain Operating
Expenses was prepared using the basis of accounting described in Note 1 for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Form 8-K of Boddie-Noell Properties,
Inc. and is not intended to be a complete presentation of Acquired Properties'
revenue and expenses.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the revenue and certain operating expenses described
in Note 1 of Acquired Properties for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Raleigh, North Carolina
September 12, 1997
F-28
<PAGE>
ACQUIRED PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN OPERATING EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31 ------------------------
1996 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
(UNAUDITED)
Rental income....................................................................... $4,641,260 $3,338,845 $4,855,475
Other income........................................................................ 8,143 4,583 14,708
----------- ---------- ----------
4,649,403 3,343,428 4,870,183
Certain operating expenses:
Property operations expense....................................................... 965,963 609,373 945,755
Insurance......................................................................... 33,124 20,964 26,323
Property taxes.................................................................... 370,878 264,000 419,371
----------- ---------- ----------
Total certain operating expenses.................................................... 1,369,965 894,337 1,391,449
----------- ---------- ----------
Revenue in excess of certain operating expenses..................................... $3,279,438 $2,449,091 $3,478,734
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
See accompanying notes.
F-29
<PAGE>
ACQUIRED PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN OPERATING EXPENSES
DECEMBER 31, 1996
1. BASIS OF PRESENTATION
Presented herein are the Combined Statements of Revenue and Certain
Operating Expenses related to the operations of five apartment properties
located in the greater Greensboro, North Carolina metropolitan market (the
"Acquired Properties").
Acquired Properties is not a legal entity but rather a combination of the
operations of certain apartment properties expected to be acquired by
Boddie-Noell Properties, Inc. The accompanying Combined Statements of Revenue
and Certain Operating Expenses includes the accounts of the following apartment
properties, each of which is wholly owned by various parties not affiliated with
Boddie-Noell Properties, Inc. Abbington II and Waterford were in the start up
phase of operations during 1996; therefore, these properties had insignificant
operating activity.
<TABLE>
<CAPTION>
NUMBER OF DATE PLACED
PROPERTY PROPERTIES IN SERVICE OWNER
- --------------- --------- -------------- --------------------------------
<S> <C> <C> <C>
Savannah Place 1 March 1990 Savannah Place Associates, LLC
Pepperstone 1 April 1990 Pepperstone Association, LLC
Abbington I 1 November 1994 Abbington Place Associates, LLC
Abbington II 1 February 1997 Abbington Place Associates, LLC
Waterford 1 July 1996 Waterford Place Associates, LLC
</TABLE>
In accordance with Rule 3-14 of Regulation S-X, the accompanying financial
statement is not representative of the actual operations for the year presented
as certain operating expenses that may not be comparable to the expenses
expected to be incurred by Boddie-Noell Properties, Inc. in the proposed future
operations of the aforementioned properties have been excluded. Expenses
excluded consist of interest, depreciation and general and administrative
expenses not directly related to future operations.
2. SIGNIFICANT ACCOUNTING POLICIES
ADVERTISING EXPENSE
Acquired Properties expenses advertising costs as incurred. Advertising
expense included in leasing expense was $26,000 for the year ended December 31,
1996.
USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those amounts.
INTERIM FINANCIAL DATA
The unaudited financial statements for the nine months ended September 30,
1996 and 1997 include all adjustments (consisting of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the revenues and certain operating expenses for such interim
periods. Operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the entire year ending
December 31, 1997.
3. LEASES
Acquired Properties leases its residential apartments under operating
leases with monthly payments due in advance. The majority of the apartment
leases are for terms of one year or less, with none longer than two years.
Rental and other revenues are recorded as earned.
4. ENVIRONMENTAL MATTERS
All of the Acquired properties have been subjected to Phase I environmental
reviews. Such reviews have not revealed, nor is management aware of, any
environmental liability that management believes would have a material adverse
effect on the accompanying financial statement.
F-30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER TO SELL OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING
SUCH OFFER IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE
HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................................... 7
Risk Factors......................................... 11
History and Formation of the Company................. 21
The Company.......................................... 24
Use of Proceeds...................................... 32
Market Price of the Company's Common Stock,
Distributions and Related Shareholder Matters...... 33
Capitalization....................................... 35
Selected Financial Data.............................. 36
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 39
Our Properties....................................... 54
Certain Policies..................................... 62
Directors and Executive Officers..................... 67
Certain Relationships and Related Transactions....... 69
Security Ownership of Certain Beneficial Owners and
Management......................................... 74
Description of Capital Stock......................... 75
Partnership Agreement of the Operating Partnership... 80
Federal Income Tax Considerations.................... 83
Legal Proceedings.................................... 101
Underwriting......................................... 102
Experts.............................................. 104
Legal Opinions....................................... 104
Available Information................................ 104
Incorporation of Certain Documents By Reference...... 105
Index to the Financial Statements.................... F-1
</TABLE>
2,800,000 SHARES
(Boddie-Noell Properties, Inc. logo)
COMMON STOCK
-----------------
PROSPECTUS
-----------------
CIBC OPPENHEIMER
J.C. BRADFORD & CO.
INTERSTATE/JOHNSON LANE
CORPORATION
DAVENPORT & COMPANY LLC
DECEMBER , 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimates of the various expenses to be paid
by Boddie-Noell Properties, Inc. in connection with the registration of the
common stock offered pursuant to this registration statement.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................................... $ 12,728
Legal Fees................................................................................ 200,000
Accounting Fees........................................................................... 135,000
American Stock Exchange Listing Fee....................................................... 17,500
Printing Costs............................................................................ 20,000
Miscellaneous............................................................................. 114,772
--------
Total................................................................................ $500,000
--------
--------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's officers and directors are and will be indemnified against
certain liabilities in accordance with the Maryland General Corporation Law
("MGCL"), the Articles of Incorporation and bylaws of the Company and the
Operating Partnership Agreement. The Articles of Incorporation require the
Company to indemnify its directors and officers to the fullest extent permitted
from time to time by the MGCL. The MGCL permits a corporation to indemnify its
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reasons of their service in
those or other capacities unless it is established that the act or omission of
the director or officer was material to the matter giving rise to the proceeding
and was committed in bad faith or was the result of active and deliberate
dishonesty, or the director or officer actually received an improper personal
benefit in money, property or services, or in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful.
The Operating Partnership agreement also provides for indemnification of
the Company and its officers and directors to the same extent indemnification is
provided to officers and directors of the Company in its Articles of
Incorporation and limits the liability of the Company and its officers and
directors to the Operating Partnership and its partners to the same extent
liability of officers and directors of the Company to the Company and its
stockholders is limited under the Company's Articles of Incorporation.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------------------------------
<C> <S>
1.1 * Form of Underwriting Agreement
2.1 *** Master Agreement of Merger and Acquisition by and among Boddie-Noell Properties, Inc., Boddie-Noell
Properties Limited Partnership, Paul G. Chrysson, James G. Chrysson, W. Michael Gilley, Matthew G.
Gallins, James D. Yopp, and the partnerships and limited liability companies listed therein, dated
September 22, 1997
2.2 *** Exchange Option Agreement by and among Boddie-Noell Properties Limited Partnership, Boddie-Noell
Properties, Inc., and the owners of the Chrysson affiliates listed therein, dated as of September 22, 1997
2.3 ** Agreement and Plan of Merger between BT Venture Corporation and Boddie-Noell Restaurant Properties, Inc.
(filed as Exhibit (2)-2 to Boddie-Noell Properties, Inc. Current Report on Form 8-K dated October 1, 1994,
and incorporated herein by reference)
3.1 ** Articles of Incorporation of Registrant (incorporated by reference to exhibit B of the Company's
Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934)
3.2 Bylaws of Registrant
5.1 Opinion of Alston & Bird LLP regarding the legality of the shares being registered
8.1 * Opinion of Alston & Bird LLP regarding tax matters
10.1 ** Amended and Restated Master Lease Agreement dated December 21, 1995, between Boddie-Noell Properties, Inc.
and Boddie-Noell Enterprises, Inc. (filed as Exhibit 10.1 to Boddie-Noell Properties, Inc. Annual Report
on Form 10-K dated December 31, 1995, and incorporated herein by reference)
10.2 ** Loan Agreement dated December 27, 1995, between Boddie-Noell Properties, Inc. and SouthTrust Bank of
Alabama, N.A. (filed as Exhibit 10.2 to Boddie-Noell Properties, Inc. Annual Report on Form 10-K dated
December 31, 1995, and incorporated herein by reference)
10.3 ** Acquisition Agreement by and among Boddie-Noell Restaurant Properties, Inc., BT Venture Corporation and
Related Entities dated June 7, 1994 (filed as an exhibit in Schedule 14A of Proxy Statement dated June 15,
1994, and incorporated herein by reference)
10.4 ** Boddie-Noell Restaurant Properties, Inc. 1994 Stock Option and Incentive Plan effective August 4, 1994
(filed as an exhibit in Schedule 14A of Proxy Statement dated June 15, 1994, and incorporated herein by
reference)
10.5 ** Form and description of Incentive Stock Option Agreements dated October 17, 1994 between the Company and
certain officers (filed as Exhibit 10.8 to Boddie-Noell Properties, Inc. Annual Report on Form 10-K dated
December 31, 1994, and incorporated herein by reference)
10.6 ** Form and description of Nonqualified Stock Option Agreements dated October 17, 1994, between the Company
and certain officers (filed as Exhibit 10.9 to Boddie-Noell Properties, Inc. Annual Report on Form 10-K
dated December 31, 1994, and incorporated herein by reference)
10.7 ** Form and description of Employment Agreements dated July 15, 1997 between the Company and certain officers
(filed as Exhibit 10 to Boddie-Noell Properties, Inc. Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 and incorporated herein by reference).
10.8 * Modification to Loan Agreement, dated August 1, 1997, between Boddie-Noell Properties, Inc. and SouthTrust
Bank of Alabama, N.A.
10.9 Form of Agreement of Limited Partnership of Boddie-Noell Properties Limited Partnership
10.10** Loan Agreement as of February 27, 1997, by and between The Villages of Chapel Hill Limited Partnership and
Boddie-Noell Properties, Inc. (filed as Exhibit 10 to Boddie-Noell Properties, Inc. Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 and incorporated herein by reference)
13.1 *** Quarterly Report on Form 10-Q of Registrant for the quarter ended March 31, 1997
13.2 *** Quarterly Report on Form 10-Q of Registrant for the quarter ended June 30, 1997
13.3 Quarterly Report on Form 10-Q of Registrant for the quarter ended September 30, 1997
16.1 ** Letter regarding change in certifying accountant (filed as exhibit 16 to Boddie-Noell Properties, Inc.
Current Report on Form 8-K dated October 17, 1996, and incorporated herein by reference)
23.1 Consent of Alston & Bird LLP (included as part of exhibit 5.1)
23.2 *** Consent of Ernst & Young LLP
23.3 *** Consent of Arthur Andersen LLP
24.1 *** Power of Attorney
27.1 *** Financial Data Schedule (electronic filing)
99.1 * Consent of Paul Chrysson as a person named as about to become a director
99.2 * Consent of Michael Gilley as a person named as about to become a director
99.3 Consent of Philip S. Payne as a person named as about to become a director
99.4 Consent of D. Scott Wilkerson as a person named as about to become a director
</TABLE>
- ---------------
* To be filed by amendment.
** Incorporated herein by reference.
*** Previously filed.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Charlotte, State of North Carolina, on December 1,
1997.
BODDIE-NOELL PROPERTIES, INC.
_ /s/__________D. Scott Wilkerson_________
D. SCOTT WILKERSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following person in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- --------------------------------------------- ------------------------------------------------------ -----------------
<S> <C> <C>
/s/B. MAYO BODDIE* Chairman of the Board, Director December 1, 1997
B. MAYO BODDIE
/s/D. SCOTT WILKERSON President and Chief Executive Officer December 1, 1997
D. SCOTT WILKERSON
/s/PHILIP S. PAYNE Executive Vice President, Treasurer and Chief December 1, 1997
PHILIP S. PAYNE Financial Officer
/s/PAMELA B. NOVAK* Vice President, Controller and Chief Accounting December 1, 1997
PAMELA B. NOVAK Officer
Director December 1, 1997
PAUL G. CHRYSSON
/s/DONALD R. PESTA, JR.* Director December 1, 1997
DONALD R. PESTA, JR.
/s/WILLIAM H. STANLEY* Director December 1, 1997
WILLIAM H. STANLEY
Director December 1, 1997
W. MICHAEL GILLEY
*By /s/ Philip S. Payne
PHILIP S. PAYNE
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
BODDIE-NOELL PROPERTIES, INC.
ARTICLE I
OFFICES
1.01 Registered Office. The Corporation shall maintain a registered
office in the State of Maryland as required by law.
1.02 Other Offices. The Corporation may also have offices at such other
places both within and without the State of Maryland as the Board of Directors
may from time to time determine or the business of the Corporation may require,
including, without limitation, the principal office at 3710 One First Union
Center, Charlotte, North Carolina 28202.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.01 Location. Meetings of shareholders for any purpose may be held at
such time and place, within or without the State of Maryland, as shall be stated
in the notice of the meeting or in a duly executed waiver of notice thereof.
2.02 Annual Meeting. Annual meetings of shareholders shall be held on a
date and a time as may be determined from time to time by the Board of
Directors, at which the shareholders shall elect by plurality vote a Board of
Directors, and transact such other business as may properly be brought before
the meeting in accordance with Section 2.04 herein.
2.03 Director Nominations. Only persons who are nominated in accordance
with the procedures set forth in this Section 2.03 shall be eligible for
election as directors. Prior to each annual meeting of shareholders (or special
meeting of shareholders held for the election of directors), the Board of
Directors shall nominate a slate of persons to stand for election to the Board
of Directors at the annual meeting. The notice to the shareholders of the
meeting shall set forth the names and backgrounds of the persons nominated by
the Board of Directors. Nominations of persons for election to the Board of
Directors of the Corporation may also be made at a meeting of shareholders or by
any shareholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 2.03. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a shareholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation not later than (i) with respect to an election to be
held at an annual meeting of
<PAGE>
shareholders, 90 days prior to the anniversary date of the immediately preceding
annual meeting, and (ii) with respect to an election to be held at a special
meeting of shareholders for the election of directors, the close of business on
the tenth day following the date on which notice of such meeting is first given
to shareholders. Such shareholder's notice shall set forth (a) as to each person
whom the shareholder proposes to nominate for election or reelection as a
director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (including without limitation such
person's written consent to being named in C-1 the proxy statement as a nominee
and to serving as a director if elected); and (b) as to the shareholder giving
the notice, (i) the name and address, as they appear on the Corporation's books,
of such shareholder and (ii) the class and number of shares of the Corporation
which are beneficially owned by such shareholder. At the request of the Board of
Directors, any person nominated by the Board of Directors for election as a
director shall furnish to the Secretary of the Corporation that information
required to be set forth in a shareholder's notice of nomination which pertains
to the nominee. The Chairman of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the procedures prescribed by the Bylaws, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
2.04 Notice and Business to be Conducted. Written notice of the annual
meeting shall be given to each shareholder entitled to vote thereat at least 10
but not more than 60 days before the date of the meeting.
At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors, or (c) otherwise properly brought before
the meeting by a shareholder. For business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation not later than 90 days prior to
the anniversary date of the immediately preceding annual meeting. A
shareholder's notice to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the shareholder proposing such
business, (c) the class and number of shares of the Corporation that are
beneficially owned by the shareholder, and (d) any material interest of the
shareholder in such business. Notwithstanding anything in the Bylaws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section. The Chairman of the
annual meeting shall, if the facts warrant, determine and declare to the meeting
2
<PAGE>
that business was not properly brought before the meeting in accordance with the
provisions of this Section, and if he should so determine, he shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted.
2.05 Stock Ledger. The officer who has charge of the stock ledger of
the Corporation shall prepare and make, at least 10 days before every election
of directors, a complete list of the shareholders entitled to vote at said
election, arranged in alphabetical order, showing the address of and the number
of shares registered in the name of each shareholder. Such list shall be open to
the examination of any shareholder, during ordinary business hours, for a period
of at least ten days prior to the election, either at a place within the city,
town or village where the election is to be held and which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
said meeting is to be held. The list shall also be produced and kept at the time
and place of the meeting during the whole time thereof, and subject to the
inspection of any shareholder who may be present.
2.06 Special Meetings. At any time in the interval between annual
meetings, special meetings of the shareholders, unless otherwise provided by law
or by the Articles of Incorporation, may be called by the Chief Executive
Officer and shall be called by the Chief Executive Officer upon the request in
writing of a majority of the Board of Directors or a majority of the Independent
Directors (as defined in Section 3.01 hereof), or upon the written request of
the holders of shares representing at least 25% of the shares of capital stock
of the Corporation which would be entitled to vote thereat.
2.07 Notice of Special Meeting. A request for a special meeting
pursuant to Section 2.06 hereof shall state the purpose of the meeting and the
matters proposed to be acted on at it. In the event shareholders have requested
a special meeting, the Secretary shall: (a) inform the shareholders who make the
request of the reasonably estimated cost of preparing and mailing a notice of
the meeting; and (b) on payment of these costs to the corporation, notify each
shareholder entitled to notice of the meeting. Notice of the special meeting
shall be given to each shareholder in the same manner as set forth in Section
2.04 hereof.
2.08 Business at Special Meeting. Business transacted at any special
meeting of shareholders shall be limited to the purposes stated in the notice.
Unless requested by shareholders entitled to cast a majority of all the votes
entitled to be cast at the meeting, a special meeting need not be called to
consider any matter which is substantially the same as a C-2 matter voted on at
any special meeting of the shareholders held during the preceding 12 months.
2.09 Quorum. The holders of a majority of the total capital stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
shareholders for the transaction of business except as otherwise provided by
statute or by the Articles of Incorporation. If, however, such quorum shall not
be present or represented at any meeting of the shareholders, the shareholders
entitled to vote thereat, present in
3
<PAGE>
person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented any business may be transacted which
might have been transacted at the meeting as originally notified.
2.10 Vote. When a quorum is present at any meeting, the vote of the
holders of a majority of the shares of capital stock entitled to be voted on a
question brought before such meeting whose holders are present in person or
represented by proxy shall decide such question unless the question is one upon
which, by express provision of statute or of the Articles of Incorporation, a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
2.11 Proxies. At all meetings of shareholders, a shareholder may vote
in person or vote by proxy that is executed in writing by the shareholder or
that is executed by his duly authorized attorney-in-fact. Such proxy shall be
filed with the Secretary of the Corporation or other persons authorized to
tabulate votes before or at the time of the meeting. No proxy shall be valid
after 11 months from the date of its execution unless otherwise provided in the
proxy.
ARTICLE III
DIRECTORS
3.01 Number, Election and Term. The number of directors of the
Corporation that shall constitute the whole Board of Directors shall be fixed
from time to time by resolution by the Board of Directors but shall not be less
than five; provided, however, that the tenure of office of a director shall not
be affected by any decrease or increase in the number of directors so made by
the Board of Directors. At all times that the Corporation intends to be
qualified as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute, a majority of the Board of Directors
shall be Independent Directors (as hereinafter defined). For purposes of these
Bylaws, "Independent Director" shall mean a director of the Corporation who is
not (i) an employee or officer of the Corporation or a subsidiary or division
thereof, (ii) a spouse, parent or child of, or a relative living in the same
household as, a principal executive officer of the Corporation, or (iii) an
individual member of an organization acting as an advisor, consultant, legal
counsel or acting in a similar capacity that receives compensation on a
continuing basis from the Corporation in addition to director's fees. The
directors shall be elected at the annual meeting of the shareholders, except as
provided in Section 3.03 of this Article III, and the directors so elected shall
hold office until the next annual meeting or until their successors are elected
and qualify.
3.02 Powers. The business and affairs of the Corporation shall be
managed in accordance with the Articles of Incorporation and these Bylaws under
the direction of its Board of Directors and
4
<PAGE>
where applicable, the Independent Directors, which may exercise all of the
powers of the Corporation, except such as are by law or by the Corporation's
Articles of Incorporation or by these Bylaws conferred upon or reserved to the
shareholders.
3.03 Vacancies. Any vacancy occurring in the Board of Directors for any
cause may be filled by a majority of the remaining members of the Board of
Directors, although such majority is less than a quorum; provided, however, that
if the Corporation has sought to qualify as a real estate investment trust and
in accordance with Section 3.01 a majority of the Board of Directors are
required to be Independent Directors, then Independent Directors shall nominate
replacements for vacancies among the Independent Directors. If the shareholders
of any class or series are entitled separately to elect one or more directors, a
majority of the remaining directors elected by that class or series or the sole
remaining director elected by that class or series may fill any vacancy among
the number of directors elected by that class or series. A director elected by
the Board of Directors to fill a vacancy shall be elected to hold office until
the next annual meeting of shareholders or until his successor is elected and
qualified.
3.04 Resignations. Any director or member of a committee may resign at
any time. Such resignation shall be made in writing and shall take effect at the
time specified therein, or if no time is specified, at the time of the receipt
by the Chairman of the Board of Directors, the Chief Executive Officer or the
Secretary. The acceptance of a resignation shall not be necessary to make it
effective.
3.05 Committees of the Board of Directors. The Board of Directors may
appoint from among its members one or more committees composed of three or more
directors. A majority of the members of any committee so appointed shall be
Independent Directors (as defined in Section 3.01). The Board of Directors may
delegate to any committee any of the powers of the Board of Directors except the
power to declare dividends or distributions on stock, recommend to the
shareholders any action which requires shareholder approval, amend the Bylaws,
approve any merger or share exchange or issue stock. However, if the Board of
Directors has given general authorization for the issuance of stock, a committee
of the Board of Directors, in accordance with a general formula or method
specified by the Board of Directors by resolution or by adoption of a stock
option plan, may fix the terms of stock subject to classification or
reclassification and the terms on which any stock may be issued.
Notice of committee meetings shall be given in the same manner as
notice for special meetings of the Board of Directors.
One-third, but not less than two, of the members of any committee shall
be present in person or by telephone at any meeting of such committee in order
to constitute a quorum for the transaction of business at such meeting, and the
act of a majority of those present shall be the act of such committee. The Board
of Directors may designate a Chairman of any committee and such Chairman or any
two members of any committee may fix the time and place of its meetings unless
the Board of Directors shall otherwise provide. In the absence or
disqualification of any member of any such committee, the members thereof
present at any meeting and not disqualified from voting, whether
5
<PAGE>
or not they constitute a quorum, may unanimously appoint another director to act
at the meeting in the place of such absent or disqualified members; provided,
however, that in the event of the absence or disqualification of an Independent
Director, such appointee shall be an Independent Director.
Each committee shall keep minutes of its proceedings and shall report
the same to the Board of Directors when required, and any action taken by the
committees shall be subject to revision and alteration by the Board of
Directors, provided that no rights of third persons shall be affected by any
such revision or alteration.
Subject to the provisions hereof, the Board of Directors shall have the
power at any time to change the membership of any committee, to fill all
vacancies, to designate alternate members to replace any absent or disqualified
member, or to dissolve any committee.
3.06 Meetings of the Board of Directors. Meetings of the Board of
Directors, regular or special, may be held at any place in or out of the State
of Maryland as the Board of Directors may from time to time determine or as
shall be specified in the notice of such meeting.
The first meeting of each newly elected Board of Directors shall be
held as soon as practicable after the annual meeting of the shareholders at
which the directors were elected. The meeting may be held at such time and place
as shall be specified in a notice given as hereinafter provided for special
meetings of the Board of Directors, except that no notice shall be necessary if
such meeting is held immediately after the adjournment and at the site of the
annual meeting of the shareholders.
Regular meetings of the Board of Directors may be held with or without
notice at such time and place as shall from time to time be determined by the
Board of Directors.
Special meetings of the Board of Directors may be called at any time by
two or more directors or by the Chairman of the Board of Directors or the Chief
Executive Officer.
Notice of the place and time of every special meeting of the Board of
Directors shall be delivered to each director either personally or by telephone,
facsimile, telegram or telegraph, or by leaving the same at his residence or
usual place of business at least forty-eight hours before the time at which such
meeting is to be held, or by first-class mail, at least three days before the
day on which such meeting is to be held. If mailed, such notice shall be deemed
to be given when deposited in the United States mail addressed to the director
at his post-office address as it appears on the records of the Corporation, with
postage thereon prepaid.
3.07 Quorum and Voting. At all meetings of the Board of Directors, a
majority of the entire Board of Directors shall constitute a quorum for the
transaction of business and the action of a majority of the directors present at
any meeting at which a quorum is present shall be the action of the Board of
Directors unless the concurrence of a greater proportion, or the concurrence of
a majority of the Independent Directors is required for such action by law, the
Corporation's Articles
6
<PAGE>
of Incorporation or these Bylaws. If a quorum shall not be present at any
meeting of directors, the directors present may, by a majority vote, adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Notwithstanding the first paragraph of this Section 3.07, any action
pertaining to a transaction involving the Corporation in which any director or
officer of the Corporation or any affiliate of any of the foregoing persons has
an interest shall specifically be approved with respect to any isolated
transactions or generally be approved with respect to any series of similar
transactions, by a majority of the members of the Board of Directors, including
a majority of the Independent Directors who are not parties to and have no
financial interest in such transaction and so are not affiliates of such
interested party, even if such directors constitute less than a quorum.
In approving any contract, joint venture or other transaction or series
of transactions between the Corporation and any director or officer of the
Corporation or any affiliate of such persons, a majority of the directors
including a majority of the Independent Directors must determine that:
(a) the contract, joint venture or other transaction as contemplated is
fair and reasonable to the Corporation and its shareholders and on
terms and conditions no less favorable to the Corporation than those
available from unaffiliated third parties;
(b) if an acquisition of property other than mortgage loans is
involved, the total consideration (determined at the time the
acquisition is approved by the Independent Directors) for the property
being acquired is not in excess of the (i) appraised value of such
property as stated in an appraisal by a qualified independent appraiser
with experience in appraising assets of the type being acquired or (ii)
fair value of such property as stated in an opinion by a qualified
independent consultant, selected, approved or ratified by the
Independent Directors prior to any such acquisition, and if the price
is in excess of the cost of the asset to such seller thereof, the
Independent Directors shall determine that substantial justification
for such excess exists and that such excess is not unreasonable; and
(c) if the transaction involves the making of loans or the borrowing of
money, the transaction is fair, competitive, and commercially
reasonable and no less favorable to the Corporation than loans between
unaffiliated lenders and borrowers under the same circumstances.
3.08 Organization. The Chairman of the Board of Directors shall preside
at each meeting of the Board of Directors, or in the absence or inability of the
Chairman of the Board of Directors to preside at a meeting, another director
chosen by a majority of the directors present shall act as Chairman of the
meeting and preside thereat. The Secretary (or, in his absence or inability to
act, any person appointed by the Chairman of the meeting) shall act as Secretary
of the meeting and keep the minutes thereof.
3.09 Meeting by Conference Telephone. Unless otherwise restricted by
the Articles of Incorporation, members of the Board of Directors may participate
in a meeting by means of a
7
<PAGE>
conference telephone or similar communications equipment if all persons
participating in the meeting can hear each other at the same time. Participation
in a meeting by these means constitutes presence in person at a meeting.
3.10 Action Without Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or of any committee thereof may
be taken without a meeting, if a written consent to such action is signed by all
members of the Board of Directors or of such committee, as the case may be, and
such written consent is filed with the minutes of proceedings of the Board of
Directors or committee.
3.11 Compensation of Directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of committees of the Board of Directors may be allowed like
compensation for attending committee meetings.
3.12 Investment Policies and Restrictions. It shall be the duty of the
Board of Directors to ensure that the purchase, sale, retention and disposal of
the Corporation's assets, and the investment policies of the Corporation and the
limitations thereon or amendment thereto are at all times in compliance with the
restrictions applicable to real estate investment trusts pursuant to the
Internal Revenue Code of 1986, as amended.
The Corporation shall not:
(a) invest in mortgage loans unless an appraisal is obtained concerning
the underlying property;
(b) invest in commodity or commodity future contracts other than
interest rate futures used solely for hedging purposes;
(c) issue debt securities unless the historical debt service coverage
of the most recently completed fiscal year, as adjusted for known
changes, is sufficient to service the higher level of debt (without
regard to any applicable balloon principal payments);
(d) invest in real estate contracts for sale, unless such real estate
contracts are recordable in the chain of title; or
(e) act in any way that would disqualify the Corporation as a real
estate investment trust under the provisions of the Code.
The Corporation does not intend to invest in the securities of other
issuers for the purposes of exercising control (other than with respect to
wholly owned subsidiaries), to engage in the trading
8
<PAGE>
of or to underwrite securities for other issuers, to engage in the purchase and
sale (or turnover) of investments other than as described in the Registration
Statement or to offer securities in exchange for property unless deemed prudent
by a majority of the directors.
The Independent Directors shall review the investment policies of the
Corporation at least annually to determine that the policies then being followed
by the Corporation are in the best interests of its shareholders. Each such
determination and the basis therefore shall be set forth in the minutes of the
Board of Directors.
The directors shall review the borrowings of the Corporation quarterly
for reasonableness in relation to the Corporation's net assets. The Corporation
shall not incur indebtedness if, after giving effect to the incurrence thereof,
aggregate indebtedness, secured and unsecured, would exceed three hundred
percent (300%) of the Corporation's net assets, on a consolidated basis, unless
approved by a majority of the directors, including a majority of the Independent
Directors, and disclosed to the shareholders in the next quarterly report of the
Corporation, along with justification for such excess. For this purpose, the
term "Net Assets" means the total assets (less intangibles) of the Corporation
at cost, before deducting depreciation or other non-cash reserves, less total
liabilities, as calculated at the end of each quarter on a basis consistently
applied.
The foregoing prohibitions and restrictions set forth in this Section
3.12 shall not be changed without the approval of the shareholders of the
Corporation.
ARTICLE IV
NOTICES
4.01 Writing. Notices to directors and shareholders when in writing or
by telegram as required by provisions of statutes, or by the Articles of
Incorporation, or by these Bylaws, shall be delivered personally or mailed to
the directors or shareholders at their addresses appearing on the books of the
Corporation.
4.02 Waiver. Whenever any notice is required to be given under
provisions of the statutes or of the Articles of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
9
<PAGE>
ARTICLE V
OFFICERS
5.01 Principal Officers. The principal officers of the Corporation
shall be a Chief Executive Officer, a President, one or more Vice Presidents, a
Treasurer and a Secretary. The Corporation may also have such other principal
officers, including one or more Controllers, as the Board of Directors may in
its discretion appoint. One person may hold the offices and perform the duties
of any two or more of said offices, except that no one person shall hold the
offices and perform the duties of President and Secretary.
5.02 Election, Term of Office and Remuneration. The principal officers
of the Corporation shall be elected annually by the Board of Directors at the
annual meeting thereof. Each such officer shall hold office until his successor
is elected and qualified or until his earlier death, resignation or removal. The
remuneration of all officers of the Corporation shall be fixed by the Board of
Directors. Any vacancy in any office shall be filled in such manner as the Board
of Directors shall determine.
5.03 Subordinate Officers. In addition to the principal officers
enumerated in Section 5.01 of this Article V, the Corporation may have one or
more Assistant Treasurers, Assistant Secretaries and Assistant Controllers and
such other subordinate officers, agents and employees as the Board of Directors
may deem necessary, each of whom shall hold office for such period as the Board
of Directors may from time to time determine. The Board of Directors may
delegate to any principal officer the power to appoint and to remove any such
subordinate officer, agents or employees.
5.04 Removal. Except as otherwise permitted with respect to subordinate
officers, any officer may be removed, with or without cause, at any time, by
resolution adopted by the Board of Directors.
5.05 Resignations. Any officer may resign at any time by giving written
notice to the Board of Directors (or to a principal officer if the Board of
Directors has delegated to such principal officer the power to appoint and to
remove such officer). The resignation of any officer shall take effect upon
receipt of notice thereof or at such later time as shall be specified in such
notice; and unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
5.06 Powers and Duties. The officers of the Corporation shall have such
powers and perform such duties incident to each of their respective offices and
such other duties as may from time to time be conferred upon or assigned to them
by the Board of Directors.
10
<PAGE>
ARTICLE VI
CERTIFICATE OF STOCK
6.01 Certificates. Every holder of stock in the Corporation shall be
entitled to have a certificate, signed by, or in the name of the Corporation by,
the Chairman or Vice Chairman of the Board of Directors or the President or a
Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by him in the Corporation. Any or all of the signatures on the certificate
may be a facsimile. In case any officer or officers who have signed, or whose
facsimile signature or signatures have been used on, any such certificate or
certificates shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such certificate or
certificates have been delivered by the Corporation, such certificate or
certificates may nevertheless be adopted by the Corporation and be issued and
delivered as though the person or persons who signed such certificate or
certificates or whose facsimile signature or signatures have been used thereon
had not ceased to be such officer or officers of the Corporation. If the
Corporation shall be authorized to issue more than one class of stock, or more
than one series of any call, the designations, preference and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights shall be set forth in full or summarization on the face or the
back of the certificate which the Corporation shall issue to represent such
class of stock; provided, however, that in lieu of the foregoing requirements,
there may be set forth on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, a statement
that the Corporation will furnish without charge to each shareholder who so
requests, the designations, preferences and relative, participating, option or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
6.02 Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost or
destroyed, upon the making of an affidavit of the fact by the person claiming
the certificate of stock to be lost or destroyed. When authorizing such issue of
a new certificate or certificates, the Board of Directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost or destroyed.
6.03 Transfer of Stock. Subject to restrictions provided in the
Articles of Incorporation, shares of stock of the Corporation shall be
transferable on the books of the Corporation only by the holder of record
thereof, in person or by duly authorized attorney, upon surrender and
cancellation of a certificate or certificates for a like number of shares, with
an assignment or power of transfer endorsed thereon or delivered therewith, duly
executed, and with such proof of the authenticity of
11
<PAGE>
the signature and of authority to transfer, and of payment of transfer taxes, as
the Corporation or its agents may require.
6.04 Setting of Record Date on Transfer Books. The Board of Directors
shall fix in advance a date, not exceeding 60 days preceding the date of any
meeting of shareholders, or the date for the payment of any dividend, or the
date for the allotment of rights, or the date when any change or conversion or
exchange of capital stock shall go into effect, or a date in connection with
obtaining the consent of shareholders for any purpose, as a record date for the
determination of the shareholders entitled to notice of, and to vote at, any
such meeting, and any adjournment thereof, or entitled to receive payment of any
such dividend, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion or exchange of capital stock, or to give
such consent, and in such case such shareholders and only such shareholders as
shall be shareholders of record on the date so fixed shall be entitled to such
notice of, and to vote at, such meeting and any adjournment thereof, or to
receive payment of such dividend, or to receive such allotment of rights, or to
exercise such rights, or to give such consent, as the case may be
notwithstanding any transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid.
6.05 Registered Shareholders. The Corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Maryland.
ARTICLE VII
GENERAL PROVISIONS
7.01 Dividends. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Articles of Incorporation, if any, may be
declared by the Board of Directors at any regular or special meeting, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the capital
stock, subject to the provisions of the Articles of Incorporation.
7.02 Reserves. Before payment of any dividend, there may be set aside
out of any funds of the Corporation available for dividends such sum or sums as
the directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
7.03 Annual Report. The officers of the Corporation shall prepare or
cause to be prepared annually a full and correct report of the affairs of the
Corporation, including financial statements for
12
<PAGE>
the preceding fiscal year, which shall be prepared in accordance with generally
accepted accounting principles, audited and certified by independent certified
public accountants and distributed to shareholders within one hundred twenty
(120) days after the close of the Corporation's fiscal year and a reasonable
period of time (at least 10 days) prior to the annual meeting of shareholders.
Such report shall also be submitted at the annual meeting. The annual report
shall also include full disclosure of all material terms, factors and
circumstances surrounding any transactions between the Corporation and any
director, or any affiliates of such director. The Independent Directors will
comment on the fairness of such transactions in the annual report.
The Corporation shall also publish in the annual report the ratio of
the cost of raising capital during the year to the capital raised.
7.04 Quarterly Report. The officers of the Corporation shall also
prepare or cause to be prepared quarterly for each of the first three quarters
of each fiscal year, a full and correct report of the affairs of the
Corporation, including a balance sheet and financial statement of operations for
the preceding fiscal quarter, which need not be certified by independent
certified public accountants and shall be distributed to shareholders within
forty-five (45) days after the close of the Corporation's preceding fiscal
quarter.
7.05 Books of Account and Records. The Corporation shall maintain at
its office in the City of Charlotte and State of North Carolina correct and
complete books and records of account of all the business and transactions of
the Corporation, such books and records to include, without limitation, current
names and addresses of all shareholders as well as shareholder records. Upon the
request of, and reasonable notice given by, any shareholder, there shall be made
available for inspection such books and records in accordance with the
provisions of Maryland law during regular business hours of the Corporation.
7.06 Checks. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
7.07 Fiscal Year. The fiscal year of the Corporation shall be fixed by
resolution of the Board of Directors.
7.08 Seal. The Board of Directors shall provide a suitable seal,
bearing the name of the Corporation, which shall be in the charge of the
Secretary. The Board of Directors may authorize one or more duplicate seals and
provide for the custody thereof. If the Corporation is required to place its
corporate seal to a document, it is sufficient to meet the requirement of any
law, rule or regulation relating to a corporate seal to place the word "Seal"
adjacent to the signature of the person authorized to sign the document on
behalf of the Corporation.
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<PAGE>
ARTICLE VIII
SECURITIES HELD BY CORPORATION
8.01 Transfer of Securities Owned by the Corporation. All endorsements,
assignments, transfers, share powers or other instruments of transfer of
securities standing in the name of the Corporation shall be executed for and in
the name of the Corporation by the President or by the Executive Vice President,
or by any additional person or persons as may be thereunto authorized by the
Board of Directors.
8.02 Voting Securities Held by the Corporation. The President or the
Executive Vice President, or any other person thereunto authorized by the Board
of Directors, in person or by proxy or proxies appointed by such person or
persons, shall have full power and authority on behalf of the Corporation to
vote, act and execute consents, waivers and releases with respect to any
securities that the Corporation may own and that are issued by other
corporations, partnerships, limited liability companies or other entities.
8.03 Acting on Behalf of Entities that the Corporation Controls. The
President or the Executive Vice President, or any other person thereunto
authorized by the Board of Directors, in person or by proxy or proxies appointed
by such person or persons, shall have full power and authority to sign on behalf
of the Corporation, as general partner, manager, member or security holder of
any entity that the Corporation controls, any instrument or document which has
been authorized to be signed in accordance with the preceding section 8.02.
ARTICLE IX
AMENDMENTS
9.01 Amendments. These Bylaws may be altered or repealed or new bylaws
may be made by the shareholders entitled to vote thereon at any annual or
special meeting thereof or by the Board of Directors.
14
EXHIBIT 5.1
December 1, 1997
Boddie-Noell Properties, Inc.
3710 One First Union Center
Charlotte, North Carolina 28202
Re: Offering of up to 3,220,000 Shares of Common
Stock of Boddie-Noell Properties, Inc.
Ladies and Gentlemen:
We are acting as counsel for Boddie-Noell Properties, Inc., a Maryland
corporation (the "Company"), in connection with the registration by the Company
of up to 3,220,000 shares of the Company's common stock, par value $.01 per
share (the "Common Stock") on Form S-2, file no. 333-39803 (the "Registration
Statement").
In our capacity as your counsel in connection with such registration,
we are familiar with the proceedings taken by the Company in connection with the
authorization and issuance of the Common Stock (the "Resolutions"). In addition,
we have made such legal and factual examinations and inquiries, including an
examination of originals or copies certified or otherwise identified to our
satisfaction of such documents, corporate records and instruments, as we have
deemed necessary or appropriate for purposes of this opinion.
Based upon and subject to the foregoing, it is our opinion that:
The Company has authority pursuant to its Articles of Incorporation to
issue the shares of Common Stock to be registered under the Registration
Statement and (a) upon compliance with the applicable provisions of the
Securities Act of 1933, as amended, and such state "blue sky" or securities laws
as may be applicable and (b) upon issuance and delivery of and payment for such
shares in the manner contemplated by the Resolutions and the Registration
Statement, such shares of Common Stock will be legally issued, fully paid and
nonassessable.
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the prospectus included therein.
Very truly yours,
ALSTON & BIRD LLP
/s/ Robert H. Bergdolt
---------------------------
Robert H. Bergdolt, Partner
EXHIBIT 10.9
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
BODDIE-NOELL PROPERTIES LIMITED PARTNERSHIP
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
ARTICLE 1
DEFINED TERMS............................................................................................1
ARTICLE 2
ORGANIZATIONAL MATTERS..................................................................................11
Section 2.1 Organization and Continuation..............................................................11
Section 2.2 Name.......................................................................................11
Section 2.3 Registered Office and Agent; Principal Office..............................................11
Section 2.4 Power of Attorney..........................................................................12
Section 2.5 Term.......................................................................................13
ARTICLE 3
PURPOSE.................................................................................................13
Section 3.1 Purpose and Business.......................................................................13
Section 3.2 Powers.....................................................................................14
ARTICLE 4
CAPITAL CONTRIBUTIONS...................................................................................14
Section 4.1 Capital Contributions of the Partners......................................................14
Section 4.2 Issuances of Additional Partnership Interests..............................................14
Section 4.3 Contribution of Proceeds of Issuance of REIT Shares........................................16
Section 4.4 No Preemptive Rights.......................................................................16
ARTICLE 5
DISTRIBUTIONS...........................................................................................16
Section 5.1 Requirement and Characterization of Distributions..........................................16
Section 5.2 Amounts Withheld...........................................................................16
Section 5.3 Distributions Upon Liquidation.............................................................17
ARTICLE 6
ALLOCATIONS.............................................................................................17
Section 6.1 Allocations For Capital Account Purposes...................................................17
Section 6.2 Other Allocation Rules.....................................................................17
ARTICLE 7
MANAGEMENT AND OPERATIONS OF BUSINESS...................................................................18
Section 7.1 Management.................................................................................18
Section 7.2 Certificate of Limited Partnership.........................................................21
Section 7.3 Restrictions on General Partner Authority..................................................22
Section 7.4 Reimbursement of the General Partner.......................................................22
<PAGE>
Section 7.5 Outside Activities of the General Partner..................................................23
Section 7.6 Contracts with Affiliates..................................................................23
Section 7.7 Indemnification............................................................................24
Section 7.8 Liability of the General Partner...........................................................26
Section 7.9 Other Matters Concerning the General Partner...............................................27
Section 7.10 Title to Partnership Assets.......................................................28
Section 7.11 Reliance by Third Parties.........................................................28
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNER...............................................................28
Section 8.1 Limitation of Liability....................................................................28
Section 8.2 Management of Business.....................................................................29
Section 8.3 Outside Activities of Limited Partners.....................................................29
Section 8.4 Return of Capital..........................................................................29
Section 8.5 Rights of Limited Partners Relating to the Partnership.....................................29
Section 8.6 Redemption Right...........................................................................30
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS..................................................................32
Section 9.1 Records and Accounting.....................................................................32
Section 9.2 Partnership Year...........................................................................32
Section 9.3 Reports....................................................................................32
ARTICLE 10
TAX MATTERS.............................................................................................33
Section 10.1 Preparation of Tax Returns........................................................33
Section 10.2 Tax Elections.....................................................................33
Section 10.3 Tax Matters Partner...............................................................33
Section 10.4 Organizational Expenses...........................................................34
Section 10.5 Withholding.......................................................................35
ARTICLE 11
TRANSFERS AND WITHDRAWALS...............................................................................35
Section 11.1 Transfer..........................................................................35
Section 11.2 Transfer of General Partner's Partnership Interests...............................36
Section 11.3 Limited Partners' Rights to Transfer..............................................36
Section 11.4 Substituted Limited Partners......................................................37
Section 11.5 Assignees.........................................................................37
Section 11.6 General Provisions................................................................38
ARTICLE 12
ADMISSION OF PARTNERS...................................................................................38
Section 12.1 Admission of Successor General Partner............................................38
Section 12.2 Admission of Additional Limited Partners..........................................39
Section 12.3 Amendment of Agreement and Certificate of Limited Partnership.....................39
ii
<PAGE>
ARTICLE 13
DISSOLUTION, LIQUIDATION AND TERMINATION................................................................40
Section 13.1 Dissolution.......................................................................40
Section 13.2 Winding Up........................................................................40
Section 13.3 Negative Capital Accounts.........................................................42
Section 13.4 Deemed Distribution and Recontribution............................................42
Section 13.5 Rights of Limited Partners........................................................42
Section 13.6 Notice of Dissolution.............................................................42
Section 13.7 Termination of Partnership and Cancellation of Certificate
of Limited Partnership.........................................................43
Section 13.8 Reasonable Time for Winding-Up....................................................43
Section 13.9 Waiver of Partition...............................................................43
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS............................................................43
Section 14.1 Amendments........................................................................43
Section 14.2 Meetings of the Partners..........................................................45
ARTICLE 15
GENERAL PROVISIONS......................................................................................45
Section 15.1 Addresses and Notice..............................................................45
Section 15.2 Titles and Captions...............................................................46
Section 15.3 Pronouns and Plurals..............................................................46
Section 15.4 Further Action....................................................................46
Section 15.5 Binding Effect....................................................................46
Section 15.6 Creditors.........................................................................46
Section 15.7 Waiver............................................................................46
Section 15.8 Counterparts......................................................................46
Section 15.9 Applicable Law....................................................................47
Section 15.10 Invalidity of Provisions..........................................................47
Section 15.11 Entire Agreement..................................................................47
Section 15.12 Withdrawal of Organizational Limited Partner......................................47
ARTICLE 16
CONSOLIDATION, MERGER OR SALE OF ASSETS OF THE
GENERAL PARTNER....................................................................................47
Section 16.1 Triggering Events.................................................................47
Section 16.2 From and After the Occurrence of a Triggering Event...............................47
Section 16.3 Additional Issuer Covenants.......................................................53
Section 16.4 Application to Later Transactions.................................................53
Section 16.5 Waivers and Amendments............................................................54
EXHIBIT A
PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
</TABLE>
iii
<PAGE>
EXHIBIT B
CAPITAL ACCOUNT MAINTENANCE
EXHIBIT C
SPECIAL ALLOCATION RULES
EXHIBIT D
VALUE OF CONTRIBUTED PROPERTY
EXHIBIT E
NOTICE OF REDEMPTION
EXHIBIT F
INDEMNIFICATION UNDER SECTION 7.7(I)
iv
<PAGE>
FIRST AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
BODDIE-NOELL PROPERTIES LIMITED PARTNERSHIP
THIS FIRST AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
BODDIE-NOELL PROPERTIES LIMITED PARTNERSHIP (the "Agreement"), dated as of
________________, 1997, is entered into by and among Boddie-Noell Properties,
Inc., a Maryland corporation, as the General Partner, and the Persons whose
names are set forth on Exhibit A attached hereto, as the Limited Partners,
together with any other Persons who become Partners in the Partnership as
provided herein (as such terms are defined hereinafter).
WHEREAS, the Partnership was organized on September 19, 1997 by
Boddie-Noell Properties, Inc., as general partner, and Philip S. Payne, as
Organizational Limited Partner;
WHEREAS, the Limited Partners are making certain contributions to the
capital of the Partnership;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE
1
DEFINED TERMS
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
"Act" means the Delaware Revised Uniform Limited Partnership Act, as it
may be amended from time to time, and any successor to such statute.
"Additional Limited Partner" means a Person admitted to the Partnership
as a Limited Partner pursuant to Section 12.2 hereof and who is shown as such on
the books and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for
each Partner as of the end of each Partnership Year (i) increased by any amounts
which such Partner is obligated to restore pursuant to any provision of this
Agreement or is deemed to be obligated to restore pursuant to the penultimate
sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), and (ii)
decreased by the items described in Regulations Sections
1.704-1(b)(2)(ii)(d)(4), (5), and (6). The foregoing
<PAGE>
definition of Adjusted Capital Account is intended to comply with the provisions
of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted
consistently therewith.
"Adjusted Capital Account Deficit" means, with respect to any Partner,
the deficit balance, if any, in such Partner's Adjusted Capital Account as of
the end of the relevant Partnership Year.
"Adjusted Property" means any property the Carrying Value of which has
been adjusted pursuant to Exhibit B hereof.
"Affiliate" means, with respect to any Person, (i) any Person directly
or indirectly controlling, controlled by or under common control with such
Person, (ii) any Person owning or controlling ten percent (10%) or more of the
outstanding voting interests of such Person, (iii) any Person of which such
Person owns or controls ten percent (10%) or more of the voting interests, or
(iv) any officer, director, general partner or trustee of such Person or of any
Person referred to in clauses (i), (ii), (iii) above.
"Agreed Value" means (i) in the case of any Contributed Property set
forth in Exhibit D and as of the time of its contribution to the Partnership,
the Agreed Value of such property as set forth in Exhibit D, which value shall
reflect any liabilities either assumed by the Partnership upon such contribution
or to which such property is subject when contributed, (ii) in the case of any
Contributed Property not set forth in Exhibit D and as of the time of its
contribution to the Partnership, the 704(c) Value of such property, reduced by
any liabilities either assumed by the Partnership upon such contribution or to
which such property is subject when contributed, and (iii) in the case of any
property distributed to a Partner by the Partnership, the Partnership's Carrying
Value of such property at the time such property is distributed, reduced by any
indebtedness either assumed by such Partner upon such distribution or to which
such property is subject at the time of distribution as determined under Section
752 of the Code and the Regulations thereunder.
"Agreement" means this First Amended and Restated Agreement of Limited
Partnership, as it may be amended, supplemented or restated from time to time.
"Articles of Incorporation" means the Amended and Restated Articles of
Incorporation of the General Partner filed in the State of Maryland on April 18,
1997 and amended or restated from time to time.
"Assignee" means a Person to whom one or more Partnership Units have
been transferred in a manner permitted under this Agreement, but who has not
become a Substituted Limited Partner, and who has the rights set forth in
Section 11.5.
"Available Cash" means, with respect to any period for which such
calculation is being made, (i) the sum of:
(a) the Partnership's Net Income or Net Loss (as the case may be) for
such period;
2
<PAGE>
(b) Depreciation and all other noncash charges deducted in
determining Net Income or Net Loss for such period;
(c) the amount of any reduction in the reserves of the
Partnership referred to in clause (ii)(f) below (including, without
limitation, reductions resulting because the General Partner determines
such amounts are no longer necessary);
(d) the excess of proceeds from the sale, exchange,
disposition, or refinancing of Partnership property for such period
over the gain, if any, recognized from such sale, exchange,
disposition, or refinancing during such period (excluding Terminating
Capital Transactions); and
(e) all other cash received by the Partnership for such period
that was not included in determining Net Income or Net Loss for such
period;
(ii) less the sum of:
(a) all principal debt payments made by the Partnership during
such period;
(b) capital expenditures made by the Partnership during such
period;
(c) investments in any entity (including loans made thereto)
to the extent that such investments are not otherwise described in
clause (ii)(a) or (ii)(b);
(d) all other expenditures and payments not deducted in
determining Net Income or Net Loss for such period;
(e) any amount included in determining Net Income or Net Loss
for such period that was not received by the Partnership during such
period;
(f) the amount of any increase in reserves during such period
which the General Partner determines to be necessary or appropriate in
its sole and absolute discretion;
(g) the amount of any working capital accounts and other cash
or similar balances which the General Partner determines to be
necessary or appropriate, in its sole and absolute discretion; and
(h) the amount which is not available for distribution due to
regulatory, legal or other restrictions.
Notwithstanding the foregoing, Available Cash shall not include any
cash received or reductions in reserves, or take into account any disbursements
made or reserves established, after commencement of the dissolution and
liquidation of the Partnership.
3
<PAGE>
"Book-Tax Disparities" means, with respect to any item of Contributed
Property or Adjusted Property, as of the date of any determination, the
difference between the Carrying Value of such Contributed Property or Adjusted
Property and the adjusted basis thereof for federal income tax purposes as of
such date. A Partner's share of the Partnership's Book-Tax Disparities in all of
its Contributed Property and Adjusted Property will be reflected by the
difference between such Partner's Capital Account balance as maintained pursuant
to Exhibit B and the hypothetical balance of such Partner's Capital Account
computed as if it had been maintained strictly in accordance with federal income
tax accounting principles.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by law
to close.
"Capital Account" means the Capital Account maintained for a Partner
pursuant to Exhibit B hereof.
"Capital Contribution" means, with respect to any Partner, any cash,
cash equivalents or the Agreed Value of Contributed Property which such Partner
contributes or is deemed to contribute to the Partnership pursuant to Sections
4.1, 4.2, or 4.3 hereof.
"Carrying Value" means (i) with respect to a Contributed Property or
Adjusted Property, the 704(c) Value of such property, reduced (but not below
zero) by all Depreciation with respect to such Property charged to the Partners'
Capital Accounts following the contribution of or adjustment with respect to
such Property, and (ii) with respect to any other Partnership property, the
adjusted basis of such property for federal income tax purposes, all as of the
time of determination. The Carrying Value of any property shall be adjusted from
time to time in accordance with Exhibit B hereof, and to reflect changes,
additions or other adjustments to the Carrying Value for dispositions and
acquisitions of Partnership properties, as deemed appropriate by the General
Partner.
"Cash Amount" means an amount of cash per Partnership Unit equal to the
Value on the Valuation Date of the REIT Shares Amount.
"Certificate" means the Certificate of Limited Partnership relating to
the Partnership filed in the office of the Delaware Secretary of State, as
amended from time to time in accordance with the terms hereof and the Act.
"Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, as interpreted by the applicable regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"Consent" means the consent or approval of a proposed action by a
Partner given in accordance with Section 14.2 hereof.
"Contributed Property" means each property or other asset, in such form
as may be permitted by the Act, but excluding cash, contributed or deemed
contributed to the Partnership (including
4
<PAGE>
deemed contributions to the Partnership on termination and reconstitution
thereof pursuant to Section 708 of the Code). Once the Carrying Value of a
Contributed Property is adjusted pursuant to Exhibit B hereof, such property
shall no longer constitute a Contributed Property for purposes of Exhibit B
hereof, but shall be deemed an Adjusted Property for such purposes.
"Conversion Factor" means 1.0, provided that in the event that the
General Partner (i) declares or pays a dividend on its outstanding REIT Shares
in REIT Shares or makes a distribution to all holders of its outstanding REIT
Shares in REIT Shares; (ii) subdivides its outstanding REIT Shares; or (iii)
combines its outstanding REIT Shares into a smaller number of REIT Shares, the
Conversion Factor shall be adjusted by multiplying the Conversion Factor by a
fraction, the numerator of which shall be the number of REIT Shares issued and
outstanding on the record date for such dividend, distribution, subdivision or
combination assuming for such purpose that such dividend, distribution,
subdivision or combination has occurred as of such time, and the denominator of
which shall be the actual number of REIT Shares (determined without the above
assumption) issued and outstanding on the record date for such dividend,
distribution, subdivision or combination. Any adjustment to the Conversion
Factor shall become effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
"Depreciation" means, for each Partnership Year an amount equal to the
federal income tax depreciation, amortization, or other cost recovery deduction
allowable with respect to an asset for such year, except that if the Carrying
Value of an asset differs from its adjusted basis for federal income tax
purposes at the beginning of such year or other period, Depreciation shall be an
amount which bears the same ratio to such beginning Carrying Value as the
federal income tax depreciation, amortization, or other cost recovery deduction
for such year bears to such beginning adjusted tax basis; provided, however,
that if the federal income tax depreciation, amortization, or other cost
recovery deduction for such year is zero, Depreciation shall be determined with
reference to such beginning Carrying Value using any reasonable method selected
by the General Partner.
"Dissolution Event" has the meaning set forth in Section 13.1.
"General Partner" means Boddie-Noell Properties, Inc., in its capacity
as the general partner of the Partnership, or its successors as general partner
of the Partnership.
"General Partner Interest" means a Partnership Interest held by the
General Partner that is a general partnership interest. A General Partner
Interest may be expressed as a number of Partnership Units.
"IRS" means the Internal Revenue Service, which administers the
internal revenue laws of the United States.
"Immediate Family" means, with respect to any natural Person, such
natural Person's spouse and such natural Person's natural or adoptive parents,
descendants, nephews, nieces, brothers, and sisters.
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"Incapacity" or "Incapacitated" means, (i) as to any individual
Partner, death, total physical disability or entry by a court of competent
jurisdiction adjudicating him incompetent to manage his Person or his estate;
(ii) as to any corporation which is a Partner, the filing of a certificate of
dissolution, or its equivalent, for the corporation or the revocation of its
charter; (iii) as to any partnership which is a Partner, the dissolution and
commencement of winding up of the partnership; (iv) as to any estate which is a
Partner, the distribution by the fiduciary of the estate's entire interest in
the Partnership; (v) as to any trustee of a trust which is a Partner, the
termination of the trust (but not the substitution of a new trustee); or (vi) as
to any Partner, the bankruptcy of such Partner. For purposes of this definition,
bankruptcy of a Partner shall be deemed to have occurred when (a) the Partner
commences a voluntary proceeding seeking liquidation, reorganization or other
relief under any bankruptcy, insolvency or other similar law now or hereafter in
effect, (b) the Partner is adjudged as bankrupt or insolvent, or a final and
nonappealable order for relief under any bankruptcy, insolvency or similar law
now or hereafter in effect has been entered against the Partner, (c) the Partner
executes and delivers a general assignment for the benefit of the Partner's
creditors, (d) the Partner files an answer or other pleading admitting or
failing to contest the material allegations of a petition filed against the
Partner in any proceeding of the nature described in clause (b) above, (e) the
Partner seeks, consents to or acquiesces in the appointment of a trustee,
receiver or liquidator for the Partner or for all or any substantial part of the
Partner's properties, (f) any proceeding seeking liquidation, reorganization or
other relief of or against such Partner under any bankruptcy, insolvency or
other similar law now or hereafter in effect has not been dismissed within one
hundred twenty (120) days after the commencement thereof, (g) the appointment
without the Partner's consent or acquiescence of a trustee, receiver or
liquidator has not been vacated or stayed within ninety (90) days of such
appointment, or (h) an appointment referred to in clause (g) which has been
stayed is not vacated within ninety (90) days after the expiration of any such
stay.
"Indemnitee" means (i) any Person made a party to a proceeding by
reason of (A) his status as the General Partner, or a director or officer of the
Partnership or the General Partner, or (B) his or its liabilities, pursuant to a
loan guarantee or otherwise, for any indebtedness of the Partnership or any
Subsidiary of the Partnership (including, without limitation, any indebtedness
which the Partnership or any Subsidiary of the Partnership has assumed or taken
assets subject to), and (ii) such other Persons (including Affiliates of the
General Partner or the Partnership) as the General Partner may designate from
time to time (whether before or after the event giving rise to potential
liability), in its sole and absolute discretion.
"Limited Partner" means the General Partner and any other Person named
as a Limited Partner in Exhibit A attached hereto, as such Exhibit may be
amended from time to time, or any Substituted Limited Partner or Additional
Limited Partner, in such Person's capacity as a Limited Partner in the
Partnership.
"Limited Partner Interest" means a Partnership Interest of a Limited
Partner in the Partnership representing a fractional part of the Partnership
Interests of all Partners and includes any and all benefits to which the holder
of such a Partnership Interest may be entitled as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement. A Limited Partner Interest may be expressed as a
number of Partnership Units.
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"Liquidator" has the meaning set forth in Section 13.2.
"Net Income" means, for any Partnership Year or any portion of a
Partnership Year, the excess, if any, of the Partnership's items of income and
gain for such Partnership Year over the Partnership's items of loss and
deduction for such Partnership Year. The items included in the calculation of
Net Income shall be determined in accordance with Exhibit B. Once an item of
income, gain, loss or deduction that has been included in the initial
computation of Net Income is subjected to the special allocation rules in
Exhibit C, Net Income or the resulting Net Loss, whichever the case may be,
shall be recomputed without regard to such item.
"Net Loss" means, for any Partnership Year, the excess, if any, of the
Partnership's items of loss and deduction for such Partnership Year over the
Partnership's items of income and gain for such Partnership Year. The items
included in the calculation of Net Loss shall be determined in accordance
Exhibit B. Once an item of income, gain, loss or deduction that has been
included in the initial computation of Net Loss is subjected to the special
allocation rules in Exhibit C, Net Loss or the resulting Net Income, whichever
the case may be, shall be recomputed without regard to such item.
"New Securities" has the meaning set forth in Section 4.2.B.
"Nonrecourse Built-in Gain" means, with respect to any Contributed
Properties or Adjusted Properties that are subject to a mortgage or negative
pledge securing a Nonrecourse Liability, the amount of any taxable gain that
would be allocated to the Partners pursuant to Section 2.B of Exhibit C if such
properties were disposed of in a taxable transaction in full satisfaction of
such liabilities and for no other consideration.
"Nonrecourse Deductions" has the meaning set forth in Regulations
Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a
Partnership Year shall be determined in accordance with the rules of Regulations
Section 1.704-2(c).
"Nonrecourse Liability" has the meaning set forth in Regulations
Section 1.752-l(a)(2).
"Notice of Redemption" means the Notice of Redemption substantially in
the form of Exhibit E to this Agreement.
"Organizational Limited Partner" means Philip S. Payne.
"Original Limited Partner" means a Limited Partner, other than the
General Partner, who is a Partner on the date of this Agreement and who owns one
or more Original Limited Partnership Units on the date action is called for
under any of the provisions hereof.
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"Original Limited Partnership Unit" means a Partnership Unit held by an
Original Limited Partner on the date of this Agreement and held by such Original
Limited Partner on the date action is called for under any of the provisions
hereof.
"Partner" means a General Partner or a Limited Partner, and "Partners"
means the General Partner and the Limited Partners collectively.
"Partner Minimum Gain" means an amount, with respect to each Partner
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"Partner Nonrecourse Debt" has the meaning set forth in Regulations
Section 1.704-2(b)(4).
"Partner Nonrecourse Deductions" has the meaning set forth in
Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for a Partnership Year
shall be determined in accordance with the rules of Regulations Section
1.704-2(i)(2).
"Partnership" means the limited partnership formed under the Act and
pursuant to this Agreement and any successor thereto.
"Partnership Interest" means an ownership interest in the Partnership
representing a Capital Contribution by either a Limited Partner or the General
Partner and includes any and all benefits to which the holder of such a
Partnership Interest may be entitled as provided in this Agreement, together
with all obligations of such Person to comply with the terms and provisions of
this Agreement. A Partnership Interest may be expressed as a number of
Partnership Units.
"Partnership Minimum Gain" has the meaning set forth in Regulations
Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as
any net increase or decrease in a Partnership Minimum Gain, for a Partnership
Year shall be determined in accordance with the rules of Regulations Section
1.704-2(d).
"Partnership Record Date" means the record date established by the
General Partner for the distribution of Available Cash pursuant to Section 5.1
hereof, which record date shall be the same as the record date established by
the General Partner for a distribution to its shareholders of some or all of its
portion of such distribution.
"Partnership Unit" means a fractional, undivided share of the
Partnership Interests of all Partners issued pursuant to Sections 4.1, 4.2 and
4.3. The number of Partnership Units outstanding and the Percentage Interest in
the Partnership represented by such Units are set forth in Exhibit A attached
hereto, as such Exhibit may be amended from time to time. The ownership of
Partnership Units shall be evidenced by such form of certificate for Units as
the General Partner adopts from time to time unless the General Partner
determines that the Partnership Units shall be uncertificated securities.
Fractional Units may be held and counted by the General Partner as necessary to
meet the requirements of Section 4.1.
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"Partnership Year" means the fiscal year of the Partnership, which
shall be the calendar year.
"Percentage Interest" means, as to a Partner, its interest in the
Partnership as determined by dividing the Partnership Units owned by such
Partner by the total number of Partnership Units then outstanding and as
specified in Exhibit A attached hereto, as such Exhibit may be amended from time
to time.
"Person" means an individual or a corporation, partnership, limited
liability company, trust, unincorporated organization, association or other
entity.
"Prior Agreement" means the Agreement of Limited Partnership of
Boddie-Noell Properties Limited Partnership, dated as of September 19, 1997,
between Boddie-Noell Properties, Inc., as the sole general partner, and Philip
S. Payne, as the sole limited partner, which Prior Agreement is amended and
restated in its entirety by this Agreement as of the date hereof.
"Recapture Income" means any gain recognized by the Partnership upon
the disposition of any property or asset of the Partnership, which gain is
characterized for federal income tax purposes as ordinary income because it
represents the recapture of deductions previously taken with respect to such
property or asset.
"Redeeming Partner" has the meaning set forth in Section 8.6 hereof.
"Redemption Right" shall have the meaning set forth in Section 8.6
hereof.
"Regulations" means the Income Tax Regulations promulgated under the
Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"REIT" means a real estate investment trust under Section 856 of the
Code.
"REIT Share" shall mean a share of common stock of the General Partner.
"REIT Shares Amount" shall mean a number of REIT Shares equal to the
product of the number of Partnership Units offered for redemption by a Redeeming
Partner, multiplied by the Conversion Factor, provided that in the event the
General Partner issues to all holders of REIT Shares rights, options, warrants
or convertible or exchangeable securities entitling the shareholders to
subscribe for or purchase REIT Shares, or any other securities or property
(collectively, the "rights"), then the REIT Shares Amount shall also include
such rights that a holder of that number of REIT Shares would be entitled to
receive.
"Residual Gain" or "Residual Loss" means any item of gain or loss, as
the case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of Contributed Property or
Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 2.B.l(a) or 2.B.2(a) of Exhibit C to eliminate Book-Tax
Disparities.
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"704(c) Value" of any Contributed Property means the value of such
property as set forth in Exhibit D or if no value is set forth in Exhibit D, the
fair market value of such property or other consideration at the time of
contribution as determined by the General Partner using such reasonable method
of valuation as it may adopt. Subject to Exhibit B hereof, the General Partner
shall, in its sole and absolute discretion, use such method as it deems
reasonable and appropriate to allocate the aggregate of the 704(c) Values of
Contributed Properties in a single or integrated transaction among the separate
properties on a basis proportional to their respective fair market values.
"Specified Redemption Date" means the tenth (10th) Business Day after
receipt by the General Partner of a Notice of Redemption.
"Subsidiary" means, with respect to any Person, any corporation,
partnership or other entity of which a majority of either (i) the voting power
of the voting equity securities or (ii) the outstanding equity interests is
owned, directly or indirectly, by such Person.
"Substituted Limited Partner" means a Person who is admitted as a
Limited Partner to the Partnership pursuant to Section 11.4.
"Terminating Capital Transaction" means any sale or other disposition
of all or substantially all of the assets of the Partnership or a related series
of transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Partnership.
"Unrealized Gain" attributable to any item of Partnership property
means, as of any date of determination, the excess, if any, of (i) the fair
market value of such property (as determined under Exhibit B hereof) as of such
date, over (ii) the Carrying Value of such property (prior to any adjustment to
be made pursuant to Exhibit B hereof) as of such date.
"Unrealized Loss" attributable to any item of Partnership property
means, as of any date of determination, the excess, if any, of (i) the Carrying
Value of such property (prior to any adjustment to be made pursuant to Exhibit B
hereof) as of such date, over (ii) the fair market value of such property (as
determined under Exhibit B hereof) as of such date.
"Valuation Date" means the date of receipt by the General Partner of a
Notice of Redemption or, if such date is not a Business Day, the first Business
Day thereafter.
"Value" means, with respect to a REIT Share, the average of the daily
market price for the ten (10) consecutive trading days immediately preceding the
Valuation Date. The market price for each such trading day shall be: (i) if the
REIT Shares are listed or admitted to trading on any securities exchange or the
NASDAQ-National Market System, the closing price, regular way, on such day, or
if no such sale takes place on such day, the average of the closing bid and
asked prices on such day; (ii) if the REIT Shares are not listed or admitted to
trading on any securities exchange or the NASDAQ-National Market System, the
last reported sale price on such day or, if no sale takes place on such day, the
average of the closing bid and asked prices on such day, as reported by a
reliable quotation source designated by the General Partner; or (iii) if the
REIT Shares are not listed or admitted to trading on any securities exchange or
the NASDAQ-National Market System and no
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such last reported sale price or closing bid and asked prices are available, the
average of the reported high bid and low asked prices on such day, as reported
by a reliable quotation source designated by the General Partner, or if there
shall be no bid and asked prices on such day, the average of the high bid and
low asked prices, as so reported, on the most recent day (not more than ten (10)
days prior to the date in question) for which prices have been so reported;
provided that if there are no bid and asked prices reported during the ten (10)
days prior to the date in question, the Value of the REIT Shares shall be
determined by the General Partner acting in good faith on the basis of such
quotations and other information as it considers, in its reasonable judgment,
appropriate. In the event the REIT Shares Amount includes rights that a holder
of REIT Shares would be entitled to receive, then the Value of such rights shall
be determined by the General Partner acting in good faith on the basis of such
quotations and other information as it considers, in its reasonable judgment,
appropriate.
ARTICLE 2
ORGANIZATIONAL MATTERS
Section 2.1 Organization and Continuation
The Partnership is a limited partnership organized pursuant to the
provisions of the Act and upon the terms and conditions set forth in the Prior
Agreement. The Partners hereby continue the Partnership and amend and restate
the Prior Agreement in its entirety as of the date hereof. Except as expressly
provided herein to the contrary, the rights and obligations of the Partners and
the administration and termination of the Partnership shall be governed by the
Act. The Partnership Interest of each Partner shall be personal property for all
purposes.
Section 2.2 Name
The name of the Partnership shall be Boddie-Noell Properties Limited
Partnership. The Partnership's business may be conducted under any other name or
names deemed advisable by the General Partner, including the name of the General
Partner or any Affiliate thereof. The words "Limited Partnership," "L.P.,"
"Ltd." or similar words or letters shall be included in the Partnership's name
where necessary for the purposes of complying with the laws of any jurisdiction
that so requires. The General Partner in its sole and absolute discretion may
change the name of the Partnership at any time and from time to time and shall
notify the Limited Partners of such change in the next regular communication to
the Limited Partners.
Section 2.3 Registered Office and Agent; Principal Office
The address of the registered office of the Partnership in the State of
North Carolina is 3710 One First Union Center, Charlotte, North Carolina 28202
and the name and address of the registered agent for service of process on the
Partnership in the State of Delaware is Corporation Trust Center, 1209 Orange
Street, Wilmington County of New Castle. The principal office of the Partnership
shall be located at 3710 One First Union Center, Charlotte, North Carolina
28202, or such other place as the General Partner may from time to time
designate by notice to the Limited Partners. The
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Partnership may maintain offices at such other place or places within or outside
the State of Delaware as the General Partner deems advisable.
Section 2.4 Power of Attorney
A. Each Limited Partner and each Assignee hereby constitutes and
appoints the General Partner, any Liquidator, and authorized officers and
attorneys-in-fact of each, and each of those acting singly, in each case with
full power of substitution, as its true and lawful agent and attorney-in-fact,
with full power and authority in its name, place and stead to:
(1) execute, swear to, acknowledge, deliver, file and
record in the appropriate public offices (a) all
certificates, documents and other instruments
(including, without limitation, this Agreement and
the Certificate and all amendments or restatements
thereof) that the General Partner or the Liquidator
deems appropriate or necessary to form, qualify or
continue the existence or qualification of the
Partnership as a limited partnership (or a
partnership in which the limited partners have
limited liability) in the State of Delaware and in
all other jurisdictions in which the Partnership may
or plans to conduct business or own property; (b) all
instruments that the General Partner deems
appropriate or necessary to reflect any amendment,
change, modification or restatement of this Agreement
in accordance with its terms; (c) all conveyances and
other instruments or documents that the General
Partner or the Liquidator deems appropriate or
necessary to reflect the dissolution and liquidation
of the Partnership pursuant to the terms of this
Agreement, including, without limitation, a
certificate of cancellation; (d) all instruments
relating to the admission, withdrawal, removal or
substitution of any Partner pursuant to, or other
events described in, Articles 11, 12 or 13 hereof or
the Capital Contribution of any Partner; and (e) all
certificates, documents and other instruments
relating to the determination of the rights,
preferences and privileges of a Partnership Interest;
and
(2) execute, swear to, seal, acknowledge and file all
ballots, consents, approvals, waivers, certificates
and other instruments appropriate or necessary, in
the sole and absolute discretion of the General
Partner or any Liquidator, to make, evidence, give,
confirm or ratify any vote, consent, approval,
agreement or other action which is made or given by
the Partners hereunder or is consistent with the
terms of this Agreement or appropriate or necessary,
in the sole discretion of the General Partner or any
Liquidator, to effectuate the terms or intent of this
Agreement.
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Nothing contained herein shall be construed as authorizing the General Partner
or any Liquidator to amend this Agreement except in accordance with Article 14
hereof or as may be otherwise expressly provided for in this Agreement.
B. The foregoing power of attorney is hereby declared to be irrevocable
and a power coupled with an interest, in recognition of the fact that each of
the Partners will be relying upon the power of the General Partner and any
Liquidator to act as contemplated by this Agreement in any filing or other
action by it on behalf of the Partnership, and it shall survive and not be
affected by the subsequent Incapacity of any Limited Partner or Assignee and the
transfer of all or any portion of such Limited Partner's or Assignee's
Partnership Units and shall extend to such Limited Partner's or Assignee's
heirs, successors, assigns and personal representatives. Each such Limited
Partner or Assignee hereby agrees to be bound by any representation made by the
General Partner or any Liquidator, acting in good faith pursuant to such power
of attorney, and each such Limited Partner or Assignee hereby waives any and all
defenses which may be available to contest, negate or disaffirm the action of
the General Partner or any Liquidator, taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or the Liquidator, within fifteen (15) days after receipt of the
General Partner's or Liquidator's request therefor, such further designation,
powers of attorney and other instruments as the General Partner or the
Liquidator, as the case may be, deems necessary to effectuate this Agreement and
the purposes of the Partnership.
Section 2.5 Term
The term of the Partnership commenced on September 18, 1997, the date
the Certificate was filed in the office of the Secretary of State of Delaware in
accordance with the Act, and shall continue until December 31, 2097, unless the
Partnership is dissolved sooner pursuant to the provisions of Article 13 or as
otherwise provided by law.
ARTICLE 3
PURPOSE
Section 3.1 Purpose and Business
The purpose and nature of the business to be conducted by the
Partnership is (i) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act, provided, however, that such
business shall be limited to and conducted in such a manner as to permit the
General Partner at all times to be classified as a REIT, unless the General
Partner ceases to qualify as a REIT for reasons other than the conduct of the
business of the Partnership, (ii) to enter into any partnership, joint venture
or other similar arrangement to engage in any of the foregoing or to own
interests in any entity engaged in any of the foregoing, and (iii) to do
anything necessary or incidental to the foregoing. In connection with the
foregoing, and without limiting the General Partner's right, in its sole
discretion, to cease qualifying as a REIT, the Partners acknowledge the General
Partner's current status as a REIT inures to the benefit of all of the Partners
and not solely the General Partner.
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Section 3.2 Powers
The Partnership is empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described herein and
for the protection and benefit of the Partnership, provided that the Partnership
shall not take, or refrain from taking, any action which, in the judgment of the
General Partner, in its sole and absolute discretion, (i) could adversely affect
the ability of the General Partner to continue to qualify as a REIT, (ii) could
subject the General Partner to any additional taxes under Section 857 or Section
4981 of the Code, or (iii) could violate any law or regulation of any
governmental body or agency having jurisdiction over the General Partner or its
securities, unless such action (or inaction) shall have been specifically
consented to by the General Partner in writing.
ARTICLE 4
CAPITAL CONTRIBUTIONS
Section 4.1 Capital Contributions of the Partners
At the time of the execution of this Agreement, the Partners shall make
Capital Contributions set forth in Exhibit A to this Agreement. The Partners
shall own Partnership Units in the amounts set forth for each such Partner in
Exhibit A and shall have a Percentage Interest in the Partnership as set forth
in Exhibit A, which Percentage Interest shall be adjusted in Exhibit A from time
to time by the General Partner to the extent necessary to reflect accurately
redemptions, Capital Contributions, the issuance of additional Partnership
Units, or similar events having an effect on any Partner's Percentage Interest.
The number of Partnership Units held by the General Partner (equal to one
percent (1%) of all outstanding Partnership Units from time to time) shall be
deemed to be the General Partner Interest. Except as provided in Sections 4.2,
7.7(I) and 10.5, the Partners shall have no obligation to make any additional
Capital Contributions or loans to the Partnership. The General Partner shall
maintain the information set forth in Exhibit A to the Agreement, as such
information shall change from time to time, in such form as the General Partner
deems appropriate for the conduct of the Partnership affairs, and Exhibit A
shall be deemed amended from time to time to reflect the information so
maintained by the General Partner, whether or not a formal amendment to the
Agreement has been executed amending such Exhibit A. Such information shall
reflect (and Exhibit A shall be deemed amended from time to time to reflect) the
issuance of any additional Partnership Units to the General Partner or any other
Person, the transfer of Partnership Units and the redemption of any Partnership
Units, all as contemplated in the Agreement.
Section 4.2 Issuances of Additional Partnership Interests
A. The General Partner is hereby authorized to cause the Partnership
from time to time to issue to the Partners (including the General Partner) or
other Persons additional Partnership Units or other Partnership Interests in one
or more classes, or one or more series of any of such classes, with such
designations, preferences and relative, participating, optional or other special
rights, powers and duties, including rights, powers and duties senior to Limited
Partner Interests, all as shall be determined by the General Partner in its sole
and absolute discretion subject to Delaware law,
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including, without limitation, (i) the allocations of items of Partnership
income, gain, loss, deduction and credit to each such class or series of
Partnership Interests; (ii) the right of each such class or series of
Partnership Interests to share in Partnership distributions; and (iii) the
rights of each such class or series of Partnership Interests upon dissolution
and liquidation of the Partnership; provided that no such additional Partnership
Units or other Partnership Interests shall be issued to the General Partner or
an Affiliate of the General Partner unless either
(a)(1) the additional Partnership Interests are issued in
connection with an issuance of REIT Shares or other shares by the
General Partner, which shares have designations, preferences and other
rights such that the economic interests attributable to such shares are
substantially similar to the designations, preferences and other rights
of the additional Partnership Interests issued to the General Partner
in accordance with this Section 4.2.A, and (2) the General Partner
shall make a Capital Contribution to the Partnership in an amount equal
to the proceeds raised in connection with the issuance of such shares
of the General Partner, or
(b) the additional Partnership Units are issued to all
Partners in proportion to their respective Percentage Interests.
Without limiting the foregoing, the General Partner is expressly authorized to
cause the Partnership to issue Partnership Units for less than fair market
value, so long as the General Partner concludes in good faith that such issuance
is in the best interests of the General Partner and the Partnership (for
example, and not by way of limitation, the issuance of Partnership Units
pursuant to an employee purchase plan providing for employee purchases of
Partnership Units at a discount from fair market value or employee options that
have an exercise price that is less than the fair market value of the
Partnership Units, either at the time of issuance or at the time of exercise).
B. The General Partner shall not issue any additional REIT Shares
(other than REIT Shares issued pursuant to Section 8.6), or rights, options,
warrants or convertible or exchangeable securities containing the right to
subscribe for or purchase REIT Shares (collectively "New Securities") other than
to all holders of REIT Shares unless (i) the General Partner shall cause the
Partnership to issue to the General Partner Partnership Interests or rights,
options, warrants or convertible or exchangeable securities of the Partnership
having designations, preferences and other rights, all such that the economic
interests are substantially similar to those of the New Securities, and (ii) the
General Partner contributes to the Partnership the proceeds from the issuance of
such New Securities and from the exercise of rights contained in such New
Securities. Without limiting the foregoing, the General Partner is expressly
authorized to issue New Securities for less than fair market value, and the
General Partner is expressly authorized to cause the Partnership to issue to the
General Partner corresponding Partnership Interests, so long as (x) the General
Partner concludes in good faith that such issuance is in the best interests of
the General Partner and the Partnership (for example, and not by way of
limitation, the issuance of REIT Shares and corresponding Units pursuant to an
employee stock purchase plan providing for employee purchases of REIT Shares at
a discount from fair market value or employee stock options that have an
exercise price that is less than the fair market value of the REIT Shares,
either at the time of issuance or at the time of
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exercise), and (y) the General Partner contributes all proceeds from such
issuance and exercise to the Partnership.
Section 4.3 Contribution of Proceeds of Issuance of REIT Shares
In connection with any issuance of REIT Shares or New Securities
pursuant to Section 4.2, the General Partner shall contribute to the Partnership
any proceeds (or a portion thereof) raised in connection with such issuance;
provided that if the proceeds actually received by the General Partner are less
than the gross proceeds of such issuance as a result of any underwriter's
discount or other expenses paid or incurred in connection with such issuance,
then the General Partner shall be deemed to have made a Capital Contribution to
the Partnership in the amount equal to the sum of the net proceeds of such
issuance plus the amount of such underwriter's discount and other expenses paid
by the General Partner.
Section 4.4 No Preemptive Rights
No Person shall have any preemptive, preferential or other similar
right with respect to (i) additional Capital Contributions or loans to the
Partnership; or (ii) issuance or sale of any Partnership Units or other
Partnership Interests.
ARTICLE 5
DISTRIBUTIONS
Section 5.1 Requirement and Characterization of Distributions
The General Partner shall distribute at least quarterly an amount equal
to 100% of Available Cash generated by the Partnership during such quarter or
shorter period to the Partners who are Partners on the Partnership Record Date
with respect to such quarter or shorter period in accordance with their
respective Percentage Interests on such Partnership Record Date; provided that
in no event may a Partner receive a distribution of Available Cash with respect
to a Partnership Unit if such Partner is entitled to receive a distribution out
of such Available Cash with respect to a REIT Share for which such Partnership
Unit has been redeemed or exchanged. The General Partner shall take such
reasonable efforts, as determined by it in its sole and absolute discretion and
consistent with its qualification as a REIT, to distribute Available Cash to the
Limited Partners so as to preclude any such distribution or portion thereof from
being treated as part of a sale of property to the Partnership by a Limited
Partner under Section 707 of the Code or the Regulations thereunder; provided
that the General Partner and the Partnership shall not have liability to a
Limited Partner under any circumstances as a result of any distribution to a
Limited Partner being so treated.
Section 5.2 Amounts Withheld
All amounts withheld pursuant to the Code or any provisions of any
state or local tax law and Section 10.5 hereof with respect to any allocation,
payment or distribution to the General Partner, the Limited Partners or
Assignees shall be treated as amounts distributed to the General Partner,
Limited Partners, or Assignees pursuant to Section 5.1 for all purposes under
this Agreement.
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Section 5.3 Distributions Upon Liquidation
Proceeds from a Terminating Capital Transaction and any other cash
received or reductions in reserves made after commencement of the liquidation of
the Partnership shall be distributed to the Partners in accordance with Section
13.2.
ARTICLE 6
ALLOCATIONS
Section 6.1 Allocations For Capital Account Purposes
For purposes of maintaining the Capital Accounts and in determining the
rights of the Partners among themselves, the Partnership's items of income,
gain, loss and deduction (computed in accordance with Exhibit B hereof) shall be
allocated among the Partners in each taxable year (or portion thereof) as
provided hereinbelow.
A. Net Income. After giving effect to the special allocations set forth
in Section 1 of Exhibit C attached hereto, Net Income shall be allocated (i)
first, to the General Partner to the extent that Net Losses previously allocated
to the General Partner pursuant to the last sentence of Section 6.1.B exceed Net
Income previously allocated to the General Partner pursuant to this clause (i)
of Section 6.1.A, and (ii) thereafter, Net Income shall be allocated to the
Partners in accordance with their respective Percentage Interests.
B. Net Losses. After giving effect to the special allocations set forth
in Section 1 of Exhibit C attached hereto, Net Losses shall be allocated to the
Partners in accordance with their respective Percentage Interests; provided,
however, that Net Losses shall not be allocated to any Limited Partner pursuant
to this Section 6.1.B to the extent that such allocation would cause such
Limited Partner to have an Adjusted Capital Account Deficit at the end of such
taxable year (or increase any existing Adjusted Capital Account Deficit). All
Net Losses in excess of the limitations set forth in this Section 6.1.B shall be
allocated to the General Partner.
Section 6.2 Other Allocation Rules.
A. Excess Nonrecourse Liabilities. Solely for purposes of determining a
Partner's proportionate share of the "excess nonrecourse liabilities" of the
Partnership within the meaning of Regulations Section 1.752-3(a)(3), such
"excess nonrecourse liabilities" first shall be allocated to those Partners who
have, and in an amount equal to, such Partners' built-in gain under Regulations
Section 1.704-3(a)(3)(ii) less any Nonrecourse Built-in Gain, and then shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
B. Recapture Income. Recapture Income shall be allocated in accordance
with Regulations Sections 1.1245-1(e) or 1.1250-1(f) as applicable.
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ARTICLE 7
MANAGEMENT AND OPERATIONS OF BUSINESS
Section 7.1 Management
A. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership are and shall
be exclusively vested in the General Partner, and no Limited Partner shall have
any right to participate in or exercise control or management power over the
business and affairs of the Partnership. The General Partner may not be removed
by the Limited Partners with or without cause. In addition to the powers now or
hereafter granted to a general partner of a limited partnership under applicable
law or which are granted to the General Partner under any other provision of
this Agreement, the General Partner, subject to Section 7.3 hereof, shall have
full power and authority to do all things deemed necessary or desirable by it to
conduct the business of the Partnership, to exercise all powers set forth in
Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1
hereof, including, without limitation:
(1) the making of any expenditures, the lending or
borrowing of money (including, without limitation,
making prepayments on loans and borrowing money to
permit the Partnership to make distributions to its
Partners in such amounts as will permit the General
Partner (so long as the General Partner qualifies as
a REIT) to avoid the payment of any federal income
tax (including, for this purpose, any excise tax
pursuant to Section 4981 of the Code) and to make
distributions to the General Partner such that the
General Partner can distribute to its shareholders
amounts sufficient to permit the General Partner to
maintain REIT status), the assumption or guarantee
of, or other contracting for, indebtedness and other
liabilities, the issuance of evidence of indebtedness
(including the securing of same by deed to secure
debt, mortgage, deed of trust or other lien or
encumbrance on the Partnership's assets) and the
incurring of any obligations it deems necessary for
the conduct of the activities of the Partnership;
(2) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to
governmental or other agencies having jurisdiction
over the business or assets of the Partnership;
(3) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any assets
of the Partnership (including the exercise or grant
of any conversion, option, privilege or subscription
right or other right available in connection with any
assets at any time held by the Partnership) or the
combination of the Partnership with or into another
entity (all of the foregoing subject to any prior
approval only to the extent required by Section 7.3
hereof);
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(4) the use of the assets of the Partnership (including,
without limitation, cash on hand) for any purpose
consistent with the terms of this Agreement and on
any terms it sees fit, including, without limitation,
the financing of the conduct of the operations of the
General Partner, the Partnership or any of the
Partnership's Subsidiaries, the lending of funds to
other Persons (including, without limitation, the
Subsidiaries of the Partnership and/or the General
Partner) and the repayment of obligations of the
Partnership and its Subsidiaries and any other Person
in which it has an equity investment, and the making
of capital contributions to its Subsidiaries;
(5) the management, operation, leasing, landscaping,
repair, alteration, demolition or improvement of any
real property or improvements owned by the
Partnership or any Subsidiary of the Partnership;
(6) the negotiation, execution, and performance of any
contracts, conveyances or other instruments that the
General Partner considers useful or necessary to the
conduct of the Partnership's operations or the
implementation of the General Partner's powers under
this Agreement, including contracting with
contractors, developers, consultants, accountants,
legal counsel, other professional advisors and other
agents and the payment of their expenses and
compensation out of the Partnership's assets;
(7) the distribution of Partnership cash or other
Partnership assets in accordance with this Agreement;
(8) holding, managing, investing and reinvesting cash and
other assets of the Partnership;
(9) the collection and receipt of revenues and income of
the Partnership;
(10) the establishment of one or more divisions of the
Partnership, the selection and dismissal of employees
of the Partnership, any division of the Partnership,
or the General Partner (including, without
limitation, employees having titles such as
"president," "vice president," "secretary" and
"treasurer" of the Partnership, any division of the
Partnership, or the General Partner), and agents,
outside attorneys, accountants, consultants and
contractors of the General Partner or the Partnership
or any division of the Partnership, and the
determination of their compensation and other terms
of employment or hiring;
(11) the maintenance of such insurance for the benefit of
the Partnership and the Partners as it deems
necessary or appropriate;
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(12) the formation of, or acquisition of an interest in,
and the contribution of property to, any further
limited or general partnerships, joint ventures or
other relationships that it deems desirable
(including, without limitation, the acquisition of
interests in, and the contributions of property to,
its Subsidiaries and any other Person in which it has
an equity investment from time to time);
(13) the control of any matters affecting the rights and
obligations of the Partnership, including the
settlement, compromise, submission to arbitration or
any other form of dispute resolution, or abandonment
of, any claim, cause of action, liability, debt or
damages, due or owing to or from the Partnership, the
commencement or defense of suits, legal proceedings,
administrative proceedings, arbitration or other
forms of dispute, resolution, and the representation
of the Partnership in all suits or legal proceedings,
administrative proceedings, arbitrations or other
forms of dispute resolution, the incurring of legal
expense, and the indemnification of any Person
against liabilities and contingencies to the extent
permitted by law;
(14) the undertaking of any action in connection with the
Partnership's direct or indirect investment in its
Subsidiaries or any other Person (including, without
limitation, the contribution or loan of funds by the
Partnership to such Persons);
(15) the determination of the fair market value of any
Partnership property distributed in kind using such
reasonable method of valuation as the General Partner
may adopt;
(16) the exercise, directly or indirectly, through any
attorney-in-fact acting under a general or limited
power of attorney, of any right, including the right
to vote, appurtenant to any asset or investment held
by the Partnership;
(17) the exercise of any of the powers of the General
Partner enumerated in this Agreement on behalf of or
in connection with any Subsidiary of the Partnership
or any other Person in which the Partnership has a
direct or indirect interest, or jointly with any such
Subsidiary or other Person;
(18) the exercise of any of the powers of the General
Partner enumerated in this Agreement on behalf of any
Person in which the Partnership does not have an
interest pursuant to contractual or other
arrangements with such Person; and
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(19) the making, execution and delivery of any and all
deeds, leases, notes, deeds to secure debt,
mortgages, deeds of trust, security agreements,
conveyances, contracts, guarantees, warranties,
indemnities, waivers, releases or legal instruments
or agreement in writing necessary or appropriate in
the judgment of the General Partner for the
accomplishment of any of the powers of the General
Partner enumerated in this Agreement.
B. Each of the Limited Partners agrees that the General Partner is
authorized to execute, deliver and perform the above-mentioned agreements and
transactions on behalf of the Partnership without any further act, approval or
vote of the Partners, notwithstanding any other provision of this Agreement
(except as provided in Section 7.3), the Act or any applicable law, rule or
regulation, to the fullest extent permitted under the Act or other applicable
law. The execution, delivery or performance by the General Partner or the
Partnership of any agreement authorized or permitted under this Agreement shall
not constitute a breach by the General Partner of any duty that the General
Partner may owe the Partnership or the Limited Partners or any other Persons
under this Agreement or of any duty stated or implied by law or equity.
C. At all times from and after the date hereof, the General Partner may
cause the Partnership to obtain and maintain (i) casualty, liability and other
insurance on the properties of the Partnership and (ii) liability insurance for
the Indemnities hereunder.
D. At all times from and after the date hereof, the General Partner may
cause the Partnership to establish and maintain at any and all times working
capital accounts and other cash or similar balances in such amounts as the
General Partner, in its sole and absolute discretion, deems appropriate and
reasonable from time to time.
E. In exercising its authority under this Agreement and except as
provided at Section 5.1, the General Partner may, but shall be under no
obligation to, take into account the tax consequences to any Partner of any
action taken by it. The General Partner and the Partnership shall not have
liability to a Limited Partner under any circumstances as a result of an income
tax liability incurred by such Limited Partner as a result of an action (or
inaction) by the General Partner pursuant to its authority under this Agreement.
Section 7.2 Certificate of Limited Partnership
The General Partner has previously filed the Certificate with the
Secretary of State of Delaware as required by the Act. The General Partner shall
use all reasonable efforts to cause to be filed such other certificates or
documents as may be reasonable and necessary or appropriate for the formation,
continuation, qualification and operation of a limited partnership (or a
partnership in which the limited partners have limited liability) in the State
of Delaware and any other state, or the District of Columbia, in which the
Partnership may elect to do business or own property. To the extent that such
action is determined by the General Partner to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate and do all the things to maintain the Partnership as a limited
partnership (or a partnership in which the
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limited partners have limited liability) under the laws of the State of Delaware
and each other state or the District of Columbia in which the Partnership may
elect to do business or own property. Subject to the terms of Section 8.5.A(4)
hereof, the General Partner shall not be required, before or after filing, to
deliver or mail a copy of the Certificate or any amendment thereto to any
Limited Partner.
Section 7.3 Restrictions on General Partner Authority
The General Partner may not sell, exchange, transfer or otherwise
dispose of all or substantially all of the Partnership's assets in a single
transaction or a series of related transactions (including by way of merger,
consolidation or other combination with any other Person) without the Consent of
Partners holding 50% or more of the Partnership Units.
Section 7.4 Reimbursement of the General Partner
A. Except as provided in this Section 7.4 and elsewhere in this
Agreement (including the provisions of Articles 5 and 6 regarding distributions,
payments, and allocations to which it may be entitled), the General Partner
shall not be compensated for its services as general partner of the Partnership.
B. The General Partner shall be reimbursed on a monthly basis, or such
other basis as the General Partner may determine in its sole and absolute
discretion, for all expenses that it incurs relating to the ownership and
operation of, or for the benefit of, the Partnership; provided that the amount
of any such reimbursement shall be reduced by any interest earned by the General
Partner with respect to bank accounts or other instruments or accounts held by
it on behalf of the Partnership as permitted in Section 7.5.A. The Limited
Partners acknowledge that, for purposes of this Section 7.4.B, all expenses of
the General Partner are deemed incurred for the benefit of the Partnership. Such
reimbursements shall be in addition to any reimbursement to the General Partner
as a result of indemnification pursuant to Section 7.7 hereof.
C. As set forth in Section 4.3, the General Partner shall be treated as
having made a Capital Contribution in the amount of all expenses that it incurs
relating to the organization and/or reorganization of the Partnership and the
General Partner, and any other issuance of additional Partnership Interests or
REIT Shares pursuant to Section 4.2 hereof.
D. In the event that the General Partner elects to purchase from the
shareholders of the General Partner REIT Shares for the purpose of delivering
such REIT Shares to satisfy an obligation under any dividend reinvestment
program adopted by the General Partner, any employee stock purchase plan adopted
by the General Partner, or any similar obligation or arrangement undertaken by
the General Partner in the future, the purchase price paid by the General
Partner for such REIT Shares and any other expenses incurred by the General
Partner in connection with such purchase shall be considered expenses of the
Partnership and shall be reimbursed to the General Partner, subject to the
condition that: (i) if such REIT Shares subsequently are to be sold by the
General Partner, the General Partner shall pay to the Partnership any proceeds
received by the General Partner for such REIT Shares (provided that a transfer
of REIT Shares for Units pursuant to Section 8.6
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would not be considered a sale for such purposes); and (ii) if such REIT Shares
are not retransferred by the General Partner within 30 days after the purchase
thereof, the General Partner shall cause the Partnership to cancel a number of
Partnership Units held by the General Partner equal to the product obtained by
multiplying the Conversion Factor by the number of such REIT Shares.
Section 7.5 Outside Activities of the General Partner
A. The General Partner shall not directly or indirectly enter into or
conduct any business other than in connection with the ownership, acquisition
and disposition of Partnership Interests as a General Partner or Limited Partner
and the management of the business of the Partnership, and such activities as
are incidental thereto. The General Partner shall not hold any assets other than
Partnership Interests as a General Partner or Limited Partner, and other than
such bank accounts or similar instruments or accounts as it deems necessary to
carry out its responsibilities contemplated under this Agreement and its
organizational documents; provided, however, that if the General Partner
believes that it is in the best interest of the Partnership, the General Partner
may hold, other than through the Partnership, up to 1% of the economic interests
in another issuer. The General Partner and any Affiliates of the General Partner
may acquire Limited Partner Interests and shall be entitled to exercise all
rights of a Limited Partner relating to such Limited Partner Interests.
B. Except as provided in Section 7.4.D, in the event the General
Partner exercises its rights under Article 6 of its Articles of Incorporation to
purchase REIT Shares, then the General Partner shall cause the Partnership to
purchase from it that number of Partnership Units equal to the product obtained
by multiplying the number of REIT Shares to be purchased by the General Partner
times the Conversion Factor on the same terms and for the same aggregate price
that the General Partner purchased such REIT Shares.
Section 7.6 Contracts with Affiliates
A. The Partnership may lend or contribute funds or other assets to its
Subsidiaries or other Persons in which it has an equity investment and such
Persons may borrow funds from the Partnership, on terms and conditions
established in the sole and absolute discretion of the General Partner. The
foregoing authority shall not create any right or benefit in favor of any
Subsidiary or any other Person.
B. Except as provided in Section 7.5.A, the Partnership may transfer
assets to joint ventures, other partnerships, corporations or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions consistent with this Agreement and applicable law as
the General Partner, in its sole and absolute discretion, believes are
advisable.
C. Except as expressly permitted by this Agreement, neither the General
Partner nor any of its Affiliates shall sell, transfer or convey any property
to, or purchase any property from, the Partnership, directly or indirectly,
except pursuant to transactions that are determined by the General Partner in
good faith to be fair and reasonable and no less favorable to the Partnership
than would be obtained from an unaffiliated third party.
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D. The General Partner, in its sole and absolute discretion and without
the approval of the Limited Partners, may propose and adopt on behalf of the
Partnership employee benefit plans, stock option plans, and similar plans funded
by the Partnership for the benefit of employees of the General Partner, the
Partnership, Subsidiaries of the Partnership or any Affiliate of any of them in
respect of services performed, directly or indirectly, for the benefit of the
Partnership, the General Partner, or any of the Partnership's Subsidiaries.
E. The General Partner is expressly authorized to enter into, in the
name and on behalf of the Partnership, a right of first opportunity arrangement
and other conflict avoidance agreements with various Affiliates of the
Partnership and the General Partner, on such terms as the General Partner, in
its sole and absolute discretion, believes are advisable.
Section 7.7 Indemnification
A. Except as provided at Section 7.7(I), hereof, the Partnership shall
indemnify each Indemnitee from and against any and all losses, claims, damages,
liabilities, joint or several, expenses (including, without limitation,
attorneys fees and other legal fees and expenses), judgments, fines,
settlements, and other amounts arising from any and all claims, demands,
actions, suits or proceedings, civil, criminal, administrative or investigative,
that relate to the operations of the Partnership, the General Partner as set
forth in this Agreement in which such Indemnitee may be involved, or is
threatened to be involved, as a party or otherwise, unless it is established
that: (i) the act or omission of the Indemnitee was material to the matter
giving rise to the proceeding and either was committed in bad faith or was the
result of active and deliberate dishonesty; (ii) the Indemnitee actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the Indemnitee had reasonable cause to
believe that the act or omission was unlawful. Without limitation, the foregoing
indemnity shall extend to any liability of any Indemnitee, pursuant to a loan
guaranty or otherwise for any indebtedness of the Partnership or any Subsidiary
of the Partnership (including without limitation, any indebtedness which the
Partnership or any Subsidiary of the Partnership has assumed or taken subject
to), and the General Partner is hereby authorized and empowered, on behalf of
the Partnership, to enter into one or more indemnity agreements consistent with
the provisions of this Section 7.7 in favor of any Indemnitee having or
potentially having liability for any such indebtedness. The termination of any
proceeding by judgment, order or settlement does not create a presumption that
the Indemnitee did not meet the requisite standard of conduct set forth in this
Section 7.7.A with respect to the subject matter of such proceeding. The
termination of any proceeding by conviction of an Indemnitee or upon a plea of
nolo contendere or its equivalent by an Indemnitee, or an entry of an order of
probation against an Indemnitee prior to judgment, creates a rebuttable
presumption that such Indemnitee acted in a manner contrary to that specified in
this Section 7.7.A. Any indemnification pursuant to this Section 7.7 shall be
made only out of the assets of the Partnership, and neither the General Partner
nor any Limited Partner shall have any obligation to contribute to the capital
of the Partnership or otherwise provide funds, to enable the Partnership to fund
its obligations under this Section 7.7.
B. Reasonable expenses incurred by an Indemnitee who is a party to a
proceeding may be paid or reimbursed by the Partnership in advance of the final
disposition of the proceeding upon receipt by the Partnership of (i) a written
affirmation by the Indemnitee of the Indemnitee's good
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faith belief that the standard of conduct necessary for indemnification by the
Partnership as authorized in Section 7.7.A. has been met, and (ii) a written
undertaking by or on behalf of the Indemnitee to repay the amount if it shall
ultimately be determined that the standard of conduct has not been met.
C. The indemnification provided by this Section 7.7 shall be in
addition to any other rights to which an Indemnitee or any other Person may be
entitled under any agreement, pursuant to any vote of the Partners, as a matter
of law or otherwise, and shall continue as to an Indemnitee who has ceased to
serve in such capacity unless otherwise provided in a written agreement pursuant
to which such Indemnitee is indemnified.
D. The Partnership may, but shall not be obligated to, purchase and
maintain insurance, on behalf of the Indemnities and such other Persons as the
General Partner shall determine, against any liability that may be asserted
against or expenses that may be incurred by such Person in connection with the
Partnership's activities, regardless of whether the Partnership would have the
power to indemnify such Person against such liability under the provisions of
this Agreement.
E. Any liabilities which an Indemnitee incurs as a result of acting on
behalf of the Partnership or the General Partner (whether as a fiduciary or
otherwise) in connection with the operation, administration or maintenance of an
employee benefit plan or any related trust or funding mechanism (whether such
liabilities are in the form of excise taxes assessed by the Internal Revenue
Service, penalties assessed by the Department of Labor, restitutions to such a
plan or trust or other funding mechanism or to a participant or beneficiary of
such plan, trust of other funding mechanism, or otherwise) shall be treated as
liabilities or judgments or fines under this Section 7.7 unless such liabilities
arise as a result of (i) such Indemnitee's intentional misconduct or knowing
violations of the law, or (ii) any transaction in which such Indemnitee received
a personal benefit in violation or breach of any provision of this Agreement or
applicable law.
F. In no event may an Indemnitee subject any of the Partners to
personal liability by reason of the indemnification provisions set forth in this
Agreement.
G. An Indemnitee shall not be denied indemnification in whole or in
part under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
H. The provisions of this Section 7.7 are for the benefit of the
Indemnities, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons. Any
amendment, modification or repeal of this Section 7.7 or any provision hereof
shall be prospective only and shall not in any way affect the limitations on the
Partnership's liability to any Indemnitee under this Section 7.7 as in effect
immediately prior to such amendment, modification, or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when such claims may
arise or be asserted.
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I. The Partners hereby acknowledge that, in conjunction with the
financing and the refinancing of the property owned by the Partnership, the
General Partner may agree to guarantee part or all of such debt. The Partners
understand that, pursuant to Regulations Section 1.752- (2)(b)(3)(i), such
guaranty obligation would, absent the indemnification provided hereinafter,
serve to increase the General Partner's share of such debt pursuant to
Regulations Section 1.752-2(a). Inasmuch as, notwithstanding such guaranty
obligation, each of the Limited Partners desires to increase his share of such
debt and the General Partner desires to decrease its share of such debt (for
purposes of Regulations Section 1.752-2(a)), each of the Limited Partners, to
the extent provided in Exhibit F, attached hereto, hereby agrees to indemnify
the General Partner in the event and to the extent that the General Partner both
is required to make a payment to the lender under any such guaranty obligation
and is unable to sell any or all of the assets of the Partnership for money or
moneys worth to make the General Partner whole on account of such payment. This
indemnification is effective only at the time, in the event and to the extent
that upon a dissolution and liquidation of the Partnership, the General Partner
is a creditor of the Partnership due to its guaranty of Partnership debt and the
proceeds of sale in such dissolution and liquidation are insufficient to
reimburse the General Partner for any amounts paid on such guaranty obligation
as contemplated in this Section 7.7(I). As provided in Exhibit F, this
indemnification is limited on a per Unit basis to Units owned by an indemnifying
Limited Partner at the time an indemnification is due to the General Partner as
provided by this Section 7.7(I), such that each Limited Partner's obligation is
reduced upon a redemption of Units as provided in Section 8.6 or upon any other
transfer or disposition of Units. In addition, any and all indemnification as
provided by this Section 7.7(I) shall terminate in full as to each and every
Limited Partner in the event that both (i) the General Partner receives from tax
counsel an opinion that the Original Limited Partners will be allocated an
amount of excess nonrecourse liabilities under the provisions of Section 6.2(A)
hereof and Regulations Section 1.752- 3(a)(3) equal to or greater than the
amount of the indemnification requirement indicated on Exhibit F, and (ii) upon
a vote of the Original Limited Partners, Units representing more than 50% of the
Original Limited Partnership Units are voted in favor of terminating the
indemnification required by this Section 7.7(I).
Section 7.8 Liability of the General Partner
A. Notwithstanding anything to the contrary set forth in this
Agreement, the General Partner shall not be liable for monetary damages to the
Partnership, any Partners or any Assignees for losses sustained or liabilities
incurred as a result of errors in judgment or of any act or omission if the
General Partner acted in good faith and with due care and loyalty.
B. The Limited Partners expressly acknowledge that the General Partner
is acting on behalf of the Partnership and the General Partner's shareholders
collectively, that the General Partner is under no obligation, except as
provided at Section 5.1, to consider the separate interests of the Limited
Partners (including, without limitation, the tax consequences to Limited
Partners or Assignees) in deciding whether to cause the Partnership to take (or
decline to take) any actions, and that the General Partner shall not be liable
for monetary damages for losses sustained, liabilities incurred, or benefits not
derived by Limited Partners in connection with such decisions, provided that the
General Partner has acted in good faith.
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C. Subject to its obligations and duties as General Partner set forth
in Section 7.1.A hereof, the General Partner may exercise any of the powers
granted to it by this Agreement and perform any of the duties imposed upon it
hereunder either directly or by or through its agents. The General Partner shall
not be responsible for any misconduct or negligence on the part of any such
agent appointed by the General Partner in good faith.
D. Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the General Partner's liability to the Partnership and the
Limited Partners under this Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising from or
relating to matters occurring, in whole or in part, prior to such amendment,
modification or repeal, regardless of when such claims may arise or be asserted.
Section 7.9 Other Matters Concerning the General Partner
A. The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture, or other
paper or document believed by it in good faith to be genuine and to have been
signed or presented by the proper party or parties.
B. The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers, architects, engineers,
environmental consultants and other consultants and advisers selected by it, and
any act taken or omitted to be taken in reliance upon the opinion of such
Persons as to matters which such General Partner reasonably believes to be
within such Person's professional or expert competence shall be conclusively
presumed to have been done or omitted in good faith and in accordance with such
opinion.
C. The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers and a duly appointed attorney or attorneys-in-fact. Each such attorney
shall, to the extent provided by the General Partner in the power of attorney,
have full power and authority to do and perform all and every act and duty which
is permitted or required to be done by the General Partner hereunder.
D. Notwithstanding any other provisions of this Agreement or the Act,
any action of the General Partner on behalf of the Partnership or any decision
of the General Partner to refrain from acting on behalf of the Partnership,
undertaken in the good faith belief that such action or omission is necessary or
advisable in order (i) to protect the ability of the General Partner to continue
to qualify as a REIT or (ii) to avoid the General Partner incurring any taxes
under Section 857 or Section 4981 of the Code, is expressly authorized under
this Agreement and is deemed approved by all of the Limited Partners.
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Section 7.10 Title to Partnership Assets
Title to Partnership assets, whether real, personal or mixed and
whether tangible or intangible, shall be deemed to be owned by the Partnership
as an entity, and no Partner, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner or one or more nominees, as the General Partner may
determine, including Affiliates of the General Partner. The General Partner
hereby declares and warrants that any Partnership assets for which legal title
is held in the name of the General Partner or any nominee or Affiliate of the
General Partner shall be held by the General Partner or such nominee or
Affiliate for the use and benefit of the Partnership in accordance with the
provisions of this Agreement; provided, however, that the General Partner shall
use its best efforts to cause beneficial and record title to such assets to be
vested in the Partnership as soon as reasonably practicable. All Partnership
assets shall be recorded as the property of the Partnership in its books and
records, irrespective of the name in which legal title to such Partnership
assets is held.
Section 7.11 Reliance by Third Parties
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner has full power and authority, without consent or approval of any other
Partner or Person, to encumber, sell or otherwise use in any manner any and all
assets of the Partnership and to enter into any contracts on behalf of the
Partnership, and take any and all actions on behalf of the Partnership and such
Person shall be entitled to deal with the General Partner as if the General
Partner were the Partnership's sole party in interest, both legally and
beneficially. Each Limited Partner hereby waives any and all defenses or other
remedies which may be available against such Person to contest, negate or
disaffirm any action of the General Partner in connection with any such dealing.
In no event shall any Person dealing with the General Partner or its
representatives be obligated to ascertain that the terms of this Agreement have
been complied with or to inquire into the necessity or expedience of any act or
action of the General Partner or its representatives. Each and every
certificate, document or other instrument executed on behalf of the Partnership
by the General Partner or its representatives shall be conclusive evidence in
favor of any and every Person relying thereon or claiming thereunder that (i) at
the time of the execution and delivery of such certificate, document or
instrument, this Agreement was in full force and effect, (ii) the Person
executing and delivering such certificate, document or instrument was duly
authorized and empowered to do so for and on behalf of the Partnership and (iii)
such certificate, document or instrument was duly executed and delivered in
accordance with the terms and provisions of this Agreement and is binding upon
the Partnership.
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 8.1 Limitation of Liability
The Limited Partners shall have no liability under this Agreement
except as expressly provided in this Agreement, including Sections 7.7(I) and
10.5 hereof, or under the Act.
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Section 8.2 Management of Business
No Limited Partner or Assignee (other than the General Partner, any of
its Affiliates or any officer, director, employee, partner, agent or trustee of
the General Partner, the Partnership or any of their Affiliates, in their
capacity as such) shall take part in the operation, management or control
(within the meaning of the Act) of the Partnership's business, transact any
business in the Partnership's name or have the power to sign documents for or
otherwise bind the Partnership. The transaction of any such business by the
General Partner, any of its Affiliates or any officer, director, employee,
partner, agent or trustee of the General Partner, the Partnership or any of
their Affiliates, in their capacity as such, shall not affect, impair or
eliminate the limitations on the liability of the Limited Partners or Assignees
under this Agreement.
Section 8.3 Outside Activities of Limited Partners
Subject to any agreements entered into pursuant to Section 7.6.E hereof
and any other agreements entered into by a Limited Partner or its Affiliates
with the Partnership or a Subsidiary, any Limited Partner (other than the
General Partner) and any officer, director, employee, agent, trustee, Affiliate
or shareholder of any Limited Partner (other than the General Partner) shall be
entitled to and may have business interests and engage in business activities in
addition to those relating to the Partnership, including business interests and
activities that are in direct competition with the Partnership or that are
enhanced by the activities of the Partnership. Neither the Partnership nor any
Partners shall have any rights by virtue of this Agreement in any business
ventures of any Limited Partner or Assignee. None of the Limited Partners (other
than the General Partner) nor any other Person shall have any rights by virtue
of this Agreement or the Partnership relationship established hereby in any
business ventures of any other Person (other than the General Partner to the
extent expressly provided herein) and such Person shall have no obligation
pursuant to this Agreement to offer any interest in any such business ventures
to the Partnership, any Limited Partner or any such other Person, even if such
opportunity is of a character which, if presented to the Partnership, any
Limited Partner or such other Person, could be taken by such Person.
Section 8.4 Return of Capital
Except pursuant to the right of redemption set forth in Section 8.6, no
Limited Partner shall be entitled to the withdrawal or return of its Capital
Contribution, except to the extent of distributions made pursuant to this
Agreement or upon termination of the Partnership as provided herein. Except to
the extent provided by Exhibit C hereof or as permitted by Section 4.2.B, or
otherwise expressly provided in this Agreement, no Limited Partner or Assignee
shall have priority over any other Limited Partner or Assignee either as to the
return of Capital Contributions or as to profits, losses or distributions.
Section 8.5 Rights of Limited Partners Relating to the Partnership
A. In addition to other rights provided by this Agreement or by the
Act, and except as limited by Section 8.5.C hereof, each Limited Partner shall
have the right, for a purpose reasonably related to such Limited Partner's
interest as a limited partner in the Partnership, upon written demand
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with a statement of the purpose of such demand and at such Limited Partner's own
expense (including such copying and administrative charges as the General
Partner may establish from time to time):
(1) to obtain a copy of the most recent annual and
quarterly reports filed with the Securities and
Exchange Commission by the General Partner pursuant
to the Securities Exchange Act of 1934;
(2) to obtain a copy of the Partnership's federal, state
and local income tax returns for each Partnership
Year;
(3) to obtain a current list of the name and last known
business, residence or mailing address of each
Partner;
(4) to obtain a copy of this Agreement and the
Certificate and all amendments thereto, together with
executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate and all
amendments thereto have been executed; and
(5) to obtain true and full information regarding the
amount of cash and a description and statement of any
other property or services contributed by each
Partner and which each Partner has agreed to
contribute in the future, and the date on which each
became a Partner.
B. The Partnership shall notify each Limited Partner upon request of
the then current and applicable Conversion Factor.
C. Notwithstanding any other provision of this Section 8.5, the General
Partner may keep confidential from the Limited Partners, for such period of time
as the General Partner determines in its sole and absolute discretion to be
reasonable, any information that (i) the General Partner reasonably believes to
be in the nature of trade secrets or other information the disclosure of which
the General Partner in good faith believes is not in the best interests of the
Partnership or could damage the Partnership or its business or (ii) the
Partnership is required by law or by agreements with an unaffiliated third party
to keep confidential.
Section 8.6 Redemption Right
A. Subject to Sections 8.6.B and 8.6.C, each Limited Partner, other
than the General Partner, shall have the right (the "Redemption Right") to
require the Partnership to redeem on a Specified Redemption Date all or a
portion of the Partnership Units held by such Limited Partner at a redemption
price equal to and in the form of the Cash Amount to be paid by the Partnership.
The Redemption Right shall be exercised pursuant to a Notice of Redemption
delivered to the Partnership (with a copy to the General Partner) by the Limited
Partner who is exercising the redemption right (the "Redeeming Partner");
provided, however, that the Partnership shall not be obligated to satisfy such
Redemption Right if the General Partner elects to purchase the Partnership
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Units subject to the Notice of Redemption pursuant to Section 8.6.B. A Limited
Partner may not exercise the Redemption Right for less than one thousand (1,000)
Partnership Units or, if such Limited Partner holds less than one thousand
(1,000) Partnership Units, all of the Partnership Units held by such Partner.
The Redeeming Partner shall have no right, with respect to any Partnership Units
so redeemed, to receive any Partnership distributions paid on or after the
Specified Redemption Date. The Assignee of any Limited Partner may exercise the
rights of such Limited Partner pursuant to this Section 8.6, and such Limited
Partner shall be deemed to have assigned such rights to such Assignee and shall
be bound by the exercise of such rights by such Assignee. In connection with any
exercise of such rights by such Assignee on behalf of such Limited Partner, the
Cash Amount shall be paid by the Partnership directly to such Assignee and not
to such Limited Partner.
B. Notwithstanding the provisions of Section 8.6.A, a Limited Partner
that exercises the Redemption Right shall be deemed to have offered to sell the
Partnership Units described in the Notice of Redemption to the General Partner
and the General Partner may, in its sole and absolute discretion, elect to
purchase directly and acquire such Partnership Units by paying to the Redeeming
Partner either the Cash Amount or the REIT Shares Amount, as elected by the
General Partner (in its sole and absolute discretion), on the Specified
Redemption Date, whereupon the General Partner shall acquire the Partnership
Units offered for redemption by the Redeeming Partner and shall be treated for
all purposes of this Agreement as the owner of such Partnership Units. If the
General Partner shall elect to exercise its right to purchase Partnership Units
under this Section 8.6.B with respect to a Notice of Redemption, it shall so
notify the Redeeming Partner within five (5) Business Days after the receipt by
the General Partner of such Notice of Redemption. Unless the General Partner (in
its sole and absolute discretion) shall exercise its right to purchase
Partnership Units from the Redeeming Partner pursuant to its right to purchase
Partnership Units under this Section 8.6.B, the General Partner shall not have
any obligation to the Redeeming Partner or the Partnership with respect to the
Redeeming Partner's exercise of the Redemption Right. In the event the General
Partner shall exercise its right to purchase Partnership Units with respect to
the exercise of a Redemption Right in the manner described in the first sentence
of this Section 8.6.B, the Partnership shall have no obligation to pay any
amount to the Redeeming Partner with respect to such Redeeming Partner's
exercise of such Redemption Right, and each of the Redeeming Partner, the
Partnership, and the General Partner shall treat the transaction between the
General Partner and the Redeeming Partner for federal income tax purposes as a
sale of the Redeeming Partner's Partnership Units to the General Partner. Each
Redeeming Partner agrees to execute such documents as the General Partner may
reasonably require in connection with the issuance of REIT Shares upon exercise
of the Redemption Right.
C. Notwithstanding the provisions of Section 8.6.A and Section 8.6.B, a
Partner shall not be entitled to exercise the Redemption Right pursuant to
Section 8.6.A if the delivery of REIT Shares to such Partner on the Specified
Redemption Date by the General Partner pursuant to Section 8.6.B (regardless of
whether or not the General Partner would in fact exercise its rights under
Section 8.6.B) would be prohibited under the Articles of Incorporation.
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ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.1 Records and Accounting
The General Partner shall keep or cause to be kept at the principal
office of the Partnership those records and documents required to be maintained
by the Act and other books and records deemed by the General Partner to be
appropriate with respect to the Partnership's business, including, without
limitation, all books and records necessary to provide to the Limited Partners
any information, lists and copies of documents required to be provided pursuant
to Sections 8.5.A and 9.3 hereof. Any records maintained by or on behalf of the
Partnership in the regular course of its business may be kept on, or be in the
form of, punch cards, magnetic tape, photographs, micrographics or any other
information storage device, provided that the records so maintained are
convertible into clearly legible written form within a reasonable period of
time. The books of the Partnership shall be maintained, for financial and tax
reporting purposes, on an accrual basis in accordance with generally accepted
accounting principles, or such other basis as the General Partner determines to
be necessary or appropriate.
Section 9.2 Partnership Year
The fiscal year of the Partnership shall be the calendar year.
Section 9.3 Reports
A. As soon as practicable, but in no event later than one hundred five
(105) days after the close of each Partnership Year, the General Partner shall
cause to be mailed to each Limited Partner, as of the close of the Partnership
Year, an annual report containing financial statements of the Partnership, or of
the General Partner if such statements are prepared solely on a consolidated
basis with the General Partner, for such Partnership Year, presented in
accordance with generally accepted accounting principles, such statements to be
audited by a nationally recognized firm of independent public accountants
selected by the General Partner.
B. As soon as practicable, but in no event later than one hundred five
(105) days after the close of each calendar quarter (except the last calendar
quarter of each year), the General Partner shall cause to be mailed to each
Limited Partner, as of the last day of the calendar quarter, a report containing
unaudited financial statements of the Partnership or of the General Partner, if
such statements are prepared solely on a consolidated basis with the General
Partner, and such other information as may be required by applicable law or
regulation, or as the General Partner determines to be appropriate.
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ARTICLE 10
TAX MATTERS
Section 10.1 Preparation of Tax Returns
A. The General Partner shall use its reasonable best efforts to arrange
for the preparation and timely filing of all returns of Partnership income,
gains, deductions, losses and other items required of the Partnership for
federal and state income tax purposes and shall use all reasonable efforts to
furnish, within ninety (90) days of the close of each taxable year, the tax
information reasonably required by Limited Partners for federal and state income
tax reporting purposes.
Section 10.2 Tax Elections
Except as otherwise provided herein, the General Partner shall, in its
sole and absolute discretion, determine whether to make any available election
pursuant to the Code. The General Partner shall have the right to seek to revoke
any such election (including, without limitation, the election under Section 754
of the Code) upon the General Partner's determination in its sole and absolute
discretion that such revocation is in the best interests of the Partners.
Section 10.3 Tax Matters Partner
A. The General Partner shall be the "tax matters partner" of the
Partnership for federal income tax purposes. Pursuant to Section 6230(e) of the
Code, upon receipt of notice from the IRS of the beginning of an administrative
proceeding with respect to the Partnership, the tax matters partner shall
furnish the IRS with the name, address, taxpayer identification number, and
profit interest of each of the Limited Partners and the Assignees; provided,
however, that such information is provided to the Partnership by the Limited
Partners and the Assignees.
B. The tax matters partner is authorized, but not required:
(1) to enter into any settlement with the IRS with
respect to any administrative or judicial proceedings
for the adjustment of Partnership items required to
be taken into account by a Partner for income tax
purposes (such administrative proceedings being
referred to as a "tax audit" and such judicial
proceedings being referred to as "judicial review"),
and in the settlement agreement the tax matters
partner may expressly state that such agreement shall
bind all Partners, except that such settlement
agreement shall not bind any Partner (i) who (within
the time prescribed pursuant to the Code and
Regulations) files a statement with the IRS providing
that the tax matters partner shall not
have the authority to enter into a settlement
agreement on behalf of such Partner or (ii) who is a
"notice partner" (as defined in Section 6231(a)(8) of
the Code) or a member of a "notice group" (as defined
in Section 6223(b)(2) of the Code);
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(2) in the event that a notice of a final administrative
adjustment at the Partnership level of any item
required to be taken into account by a Partner for
tax purposes (a "final adjustment") is mailed to the
tax matters partner, to seek judicial review of such
final adjustment, including the filing of a petition
for readjustment with the Tax Court or the filing of
a complaint for refund with the United States Claims
Court or the District Court of the United States for
the district in which the Partnership's principal
place of business is located;
(3) to intervene in any action brought by any other
Partner for judicial review of a final adjustment;
(4) to file a request for an administrative adjustment
with the IRS and, if any part of such request is not
allowed by the IRS, to file an appropriate pleading
(petition or complaint) for judicial review with
respect to such request;
(5) to enter into an agreement with the IRS to extend the
period for assessing any tax which is attributable to
any item required to be taken into account by a
Partner for tax purposes, or any item affected by
such item; and
(6) to take any other action on behalf of the Partners or
the Partnership in connection with any tax audit or
judicial review proceeding to the extent permitted by
applicable law or regulations.
The taking of any action and the incurring of any expense by the tax
matters partner in connection with any such proceeding, except to the extent
required by law, is a matter in the sole and absolute discretion of the tax
matters partner and the provisions relating to indemnification of the General
Partner set forth in Section 7.7 of this Agreement shall be fully applicable to
the tax matters partner in its capacity as such.
C. The tax matters partner shall receive no compensation for its
services. All third party costs and expenses incurred by the tax matters partner
in performing its duties as such (including legal and accounting fees and
expenses) shall be borne by the Partnership. Nothing herein shall be construed
to restrict the Partnership from engaging an accounting firm to assist the tax
matters partner in discharging its duties hereunder, so long as the compensation
paid by the Partnership for such services is reasonable.
Section 10.4 Organizational Expenses
The Partnership shall elect to deduct expenses, if any, incurred by it
in organizing the Partnership ratably over a sixty (60) month period as provided
in Section 709 of the Code.
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Section 10.5 Withholding
Each Limited Partner hereby authorizes the Partnership to withhold from
or pay on behalf of or with respect to such Limited Partner any amount of
federal, state, local, or foreign taxes that the General Partner determines that
the Partnership is required to withhold or pay with respect to any amount
distributable or allocable to such Limited Partner pursuant to this Agreement,
including, without limitation, any taxes required to be withheld or paid by the
Partnership pursuant to Sections 1441, 1442, 1445, or 1446 of the Code. Any such
amount paid on behalf of or with respect to a Limited Partner shall constitute a
loan by the Partnership to such Limited Partner, which loan shall be repaid by
such Limited Partner within fifteen (15) days after notice from the General
Partner that such repayment must be made, unless (i) the Partnership withholds
such repayment from a distribution which would otherwise be made to the Limited
Partner or (ii) the General Partner determines, in its sole and absolute
discretion, that such repayment may be satisfied out of the available funds of
the Partnership which would, but for such repayment, be distributed to the
Limited Partner. Any amounts withheld pursuant to the foregoing clauses (i) or
(ii) shall be treated as having been distributed to such Limited Partner. Each
Limited Partner hereby unconditionally and irrevocably grants to the Partnership
a security interest in such Limited Partner's Partnership Interest to secure
such Limited Partner's obligation to pay to the Partnership any amounts required
to be paid pursuant to this Section 10.5. In the event that a Limited Partner
fails to pay any amounts owed to the Partnership pursuant to this Section 10.5
when due, the General Partner may, in its sole and absolute discretion, elect to
make the payment to the Partnership on behalf of such defaulting Limited
Partner, and in such event shall be deemed to have loaned such amount to such
defaulting Limited Partner. Without limitation, in such event the General
Partner (i) shall have the right to receive distributions that would otherwise
be distributable to such defaulting Limited Partner until such time as such
loan, together with all interest thereon, has been paid in full, and any such
distributions so received by the General Partner shall be treated as having been
distributed to the defaulting Limited Partner and immediately paid by the
defaulting Limited Partner to the General Partner in repayment of such loan and
(ii) shall succeed to all rights and remedies of the Partnership as against such
defaulting Limited Partner. Any amounts payable by a Limited Partner hereunder
shall bear interest at the lesser of (A) the base rate on corporate loans at
large United States money center commercial banks, as published from time to
time in the Wall Street Journal, plus four (4) percentage points, or (B) the
maximum lawful rate of interest on such obligation, such interest to accrue from
the date such amount is due (i.e., fifteen (15) days after demand) until such
amount is paid in full. Each Limited Partner shall take such actions as the
Partnership or the General Partner shall request in order to perfect or enforce
the security interest created hereunder.
ARTICLE 11
TRANSFERS AND WITHDRAWALS
Section 11.1 Transfer
A. The term "transfer", when used in this Article 11 with respect to a
Partnership Unit, shall be deemed to refer to a transaction by which the General
Partner purports to assign all or any part of its General Partner Interest to
another Person or by which a Limited Partner purports to assign all or any part
of its Limited Partner Interest to another Person, and includes a sale,
assignment, gift,
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pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition
by law or otherwise. The term "transfer" when used in this Article 11 does not
include any redemption of Partnership Interests by the Partnership from a
Limited Partner or any acquisition of Partnership Units from a Limited Partner
by the General Partner or from the General Partner pursuant to Section 8.6.
B. No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article 11.
Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article 11 shall be null and void.
Section 11.2 Transfer of General Partner's Partnership Interests
A. The General Partner may not transfer any of its General Partner
Interest or Limited Partner Interests or withdraw as General Partner except as
provided in Section 11.2.B or Article 16.
B. The General Partner may transfer Limited Partner Interests held by
it either to the Partnership in accordance with Section 7.5.B hereof or to a
purported holder of REIT Shares in accordance with the provisions of Article 5
of the Articles of Incorporation.
C. If the General Partner is the surviving entity of a merger, it shall
contribute substantially all of the assets acquired in the merger to the
Partnership as a Capital Contribution in exchange for Partnership Units with a
fair market value, as reasonably determined by the General Partner, equal to the
704(c) Value of the assets so contributed; provided that this requirement shall
not be applicable if such merger is a Trigger Event as defined in Section 16.
Section 11.3 Limited Partners' Rights to Transfer
A. Subject to the provisions of Sections 11.3.C, 11.3.D, 11.3.E, 11.4
and 11.5, a Limited Partner may transfer, with or without the consent of the
General Partner, all or any portion of its Partnership Interest, or any of such
Limited Partner's economic rights as a Limited Partner.
B. If a Limited Partner is subject to Incapacity, the executor,
administrator, trustee, committee, guardian, conservator or receiver of such
Limited Partner's estate shall have all the rights of a Limited Partner, but not
more rights than those enjoyed by other Limited Partners, for the purpose of
selling or managing the estate and such power as the Incapacitated Limited
Partner possessed to transfer all or any part of his or its interest in the
Partnership. The Incapacity of a Limited Partner, in and of itself, shall not
dissolve or terminate the Partnership.
C. The General Partner may prohibit any transfer by a Limited Partner
of its Partnership Units if, in the opinion of legal counsel to the Partnership,
such transfer would (i) require filing of a registration statement under the
Securities Act of 1933; (ii) otherwise violate any federal or state securities
laws or regulations applicable to the Partnership or the Partnership Unit; or
(iii) cause the Partnership to register the Partnership Units under Section
12(g) of the Securities Exchange Act of 1934, as amended or any successor
provision.
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D. No transfer by a Limited Partner of its Partnership Units may be
made to any Person if (i) in the opinion of legal counsel for the Partnership,
it would result in the Partnership being treated as an association taxable as a
corporation, or (ii) such transfer is effectuated through an "established
securities market" or a "secondary market" (or the substantial equivalent
thereof) within the meaning of Section 7704 of the Code.
E. No transfer of any Partnership Units may be made to a lender to the
Partnership or any Person who is related (within the meaning of Regulations
Section 1.752-4(b)) to any lender to the Partnership whose loan constitutes a
Nonrecourse Liability, without the consent of the General Partner, in its sole
and absolute discretion, provided that as a condition to such consent the lender
will be required to enter into an arrangement with the Partnership and the
General Partner to exchange or redeem for the Cash Amount any Partnership Units
in which a security interest is held simultaneously with the time at which such
lender would be deemed to be a partner in the Partnership for purposes of
allocating liabilities to such lender under Section 752 of the Code.
Section 11.4 Substituted Limited Partners
A. No Limited Partner shall have the right to substitute a transferee
as a Limited Partner in his place. The General Partner shall, however, have the
right to consent to the admission of a transferee of the interest of a Limited
Partner pursuant to this Section 11.4 as a Substituted Limited Partner, which
consent may be given or withheld by the General Partner in its sole and absolute
discretion. The General Partner's failure or refusal to permit a transferee of
any such interests to become a Substituted Limited Partner shall not give rise
to any cause of action against the Partnership or any Partner.
B. A transferee who has been admitted as a Substituted Limited Partner
in accordance with this Article 11 shall have all the rights and powers and be
subject to all the restrictions and liabilities of a Limited Partner under this
Agreement.
C. Upon the admission of a Substituted Limited Partner, the General
Partner shall amend Exhibit A to reflect the name, address, number of
Partnership Units, and Percentage Interest of such Substituted Limited Partner
and to eliminate or adjust, if necessary, the name, address and interest of the
predecessor of such Substituted Limited Partner.
Section 11.5 Assignees
If the General Partner, in its sole and absolute discretion, does not
consent to the admission of any permitted transferee under Section 11.3 as a
Substituted Limited Partner, as described in Section 11.4, such transferee shall
be considered an Assignee for purposes of this Agreement. An Assignee shall be
deemed to have had assigned to it, and shall be entitled to receive
distributions from the Partnership and the share of Net Income, Net Losses,
Recapture Income, and any other items, gain, loss deduction and credit of the
Partnership attributable to the Partnership Units assigned to such transferee,
but shall not be deemed to be a holder of Partnership Units for any other
purpose under this Agreement, and shall not be entitled to vote such Partnership
Units in any matter presented to the Limited Partners for a vote (such
Partnership Units being deemed to have been voted
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on such matter in the same proportion as all other Partnership Units held by
Limited Partners are voted). In the event any such transferee desires to make a
further assignment of any such Partnership Units, such transferee shall be
subject to all the provisions of this Article 11 to the same extent and in the
same manner as any Limited Partner desiring to make an assignment of Partnership
Units.
Section 11.6 General Provisions
A. No Limited Partner may withdraw from the Partnership other than as a
result of a permitted transfer of all of such Limited Partner's Partnership
Units in accordance with this Article 11 or pursuant to redemption of all of its
Partnership Units under Section 8.6.
B. Any Limited Partner who shall transfer all of its Partnership Units
in a transfer permitted pursuant to this Article 11 shall cease to be a Limited
Partner upon the admission of all Assignees of such Partnership Units as
Substituted Limited Partners. Similarly, any Limited Partner who shall transfer
all of its Partnership Units pursuant to a redemption of all of its Partnership
Units under Section 8.6 shall cease to be a Limited Partner.
C. Transfers pursuant to this Article 11 may only be made on the first
day of a fiscal quarter of the Partnership, unless the General Partner otherwise
agrees.
D. If any Partnership Interest is transferred or assigned during any
quarterly segment of the Partnership Year in compliance with the provisions of
this Article 11 or redeemed or transferred pursuant to Section 8.6, on any day
other than the first day of a Partnership Year, then Net Income, Net Losses,
each item thereof and all other items attributable to such interest for such
Partnership Year shall be divided and allocated between the transferor Partner
and the transferee Partner by taking into account their varying interests during
the Partnership Year in accordance with Section 706(d) of the Code, using the
interim closing of the books method. Solely for purposes of making such
allocations, each of such items for the calendar month in which the transfer or
assignment occurs shall be allocated to the transferee Partner, and none of such
items for the calendar month in which a redemption occurs shall be allocated to
the Redeeming Partner. All distributions of Available Cash attributable to such
Partnership Unit with respect to which the Partnership Record Date is before the
date of such transfer, assignment, or redemption shall be made to the transferor
Partner or the Redeeming Partner, as the case may be, and in the case of a
transfer or assignment other than a redemption, all distributions of Available
Cash thereafter attributable to such Partnership Unit shall be made to the
transferee Partner.
ARTICLE 12
ADMISSION OF PARTNERS
Section 12.1 Admission of Successor General Partner
A successor to all of the General Partner Interest pursuant to Section
11.2 hereof who is proposed to be admitted as a successor General Partner shall
be admitted to the Partnership as the General Partner, effective upon such
transfer. Any such transferee shall carry on the business of the Partnership
without dissolution. In each case, the admission shall be subject to the
successor General
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Partner executing and delivering to the Partnership an acceptance of all of the
terms and conditions of this Agreement and such other documents or instruments
as may be required to effect the admission. In the case of such admission on any
day other than the first day of a Partnership Year, all items attributable to
the General Partner Interest for such Partnership year shall be allocated
between the transferring General Partner and such successor as provided in
Section 11.6.D hereof.
Section 12.2 Admission of Additional Limited Partners
A. After the admission to the Partnership of the initial Limited
Partners on the date hereof, a Person who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the General
Partner (i) evidence of acceptance in form satisfactory to the General Partner
of all of the terms and conditions of this Agreement, including, without
limitation, the power of attorney granted in Section 2.4 hereof and (ii) such
other documents or instruments as may be required in the discretion of the
General Partner in order to effect such Person's admission as an Additional
Limited Partner.
B. Notwithstanding anything to the contrary in this Section 12.2, no
Person shall be admitted as an Additional Limited Partner without the consent of
the General Partner, which consent may be given or withheld in the General
Partner's sole and absolute discretion. The admission of any Person as an
Additional Limited Partner shall become effective on the date upon which the
name of such Person is recorded on the books and records of the Partnership,
following the consent of the General Partner to such admission.
C. If any Additional Limited Partner is admitted to the Partnership on
any day other than the first day of a Partnership Year, then Net Income, Net
Losses, each item thereof and all other items allocable among Partners and
Assignees for such Partnership Year shall be allocated among such Additional
Limited Partner and all other Partners and Assignees by taking into account
their varying interests during the Partnership Year in accordance with Section
706(d) of the Code, using the interim closing of the books method. Solely for
purposes of making such allocations, each of such items for the calendar month
in which an admission of any Additional Limited Partner occurs shall be
allocated among all the Partners and Assigns including such Additional Limited
Partner. All distributions of Available Cash with respect to which the
Partnership Record Date is before the date of such admission shall be made
solely to Partners and Assignees other than the Additional Limited Partner and
all distributions of Available Cash thereafter shall be made to all of the
Partners and Assignees including such Additional Limited Partner.
Section 12.3 Amendment of Agreement and Certificate of Limited
Partnership
For the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Act to amend
the records of the Partnership and, if necessary, to prepare as soon as
practical an amendment of this Agreement (including an amendment of Exhibit A)
and, if required by law, shall prepare and file an amendment to the Certificate
and may for this purpose exercise the power of attorney granted pursuant to
Section 2.4 hereof.
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ARTICLE 13
DISSOLUTION, LIQUIDATION AND TERMINATION
Section 13.1 Dissolution
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the withdrawal of the General Partner, any successor General Partner shall
continue the business of the Partnership. The Partnership shall dissolve, and
its affairs shall be wound up, upon the first to occur of any of the following
("Dissolution Events"):
A. the expiration of its term as provided in Section 2.5 hereof.
B. an event of withdrawal of the General Partner, as defined in the Act
(other than an event of bankruptcy), unless within ninety (90) days after such
event of withdrawal a majority in interest of the remaining Partners agree in
writing to continue the business of the Partnership and to the appointment,
effective as of the date of withdrawal, of a successor General Partner;
C. from and after the date of this Agreement through December 31, 2043,
an election to dissolve the Partnership made by the General Partner, unless (i)
at the time of such election, Original Limited Partners hold at least 10% of the
Limited Partnership Units, including such Units held by the General Partner, and
(ii) Original Limited Partners owning a majority of the Original Limited
Partnership Units object in writing to such dissolution within thirty (30) days
of receiving written notice of such election from the General Partner;
D. on or after January 1, 2044 an election to dissolve the Partnership
made by the General Partner, in its sole and absolute discretion;
E. entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Act;
F. the sale of all or substantially all of the assets and properties of
the Partnership; or
G. a final and non-appealable judgment is entered by a court of
competent jurisdiction ruling that the General Partner is bankrupt or insolvent,
or a final and non-appealable order for relief is entered by a court with
appropriate jurisdiction against the General Partner, in each case under any
federal or state bankruptcy or insolvency laws as now or hereafter in effect,
unless prior to the entry of such order or judgment all of the remaining
Partners agree in writing to continue the business of the Partnership and to the
appointment, effective as of a date prior to the date of such order or judgment,
of a substitute General Partner.
Section 13.2 Winding Up
A. Upon the occurrence of a Dissolution Event or a Terminating Capital
Transaction, the Partnership shall continue solely for the purposes of winding
up its affairs in an orderly manner,
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liquidating its assets, and satisfying the claims of its creditors and Partners.
No Partner shall take any action that is inconsistent with, or not necessary to
or appropriate for, the winding up of the Partnership's business and affairs.
The General Partner, or, in the event there is no remaining General Partner, any
Person elected by a majority in interest of the Limited Partners (the General
Partner or such other Person being referred to herein as the "Liquidator"),
shall be responsible for overseeing the winding up and dissolution of the
Partnership and shall take full account of the Partnership's liabilities and
property and the Partnership property shall be liquidated as promptly as is
consistent with obtaining the fair value thereof, and the proceeds therefrom
(which may, to the extent determined by the General Partner, include shares of
stock in the General Partner) shall be applied and distributed in the following
order:
(1) First, to the payment and discharge of all of the
Partnership's debts and liabilities to creditors
other than the Partners;
(2) Second, to the payment and discharge of all of the
Partnership's debts and liabilities to the General
Partner;
(3) Third, to the payment and discharge of all of the
Partnership's debts and liabilities to the other
Partners; and
(4) The balance, if any, after giving effect to all
contributions, distributions, and allocations for all
periods, to those Partners with positive Capital
Account balances, to the extent of such positive
Capital Account balances.
The General Partner shall not receive any additional compensation for any
services performed pursuant to this Article 13.
B. Notwithstanding the provisions of Section 13.2.A hereof which
require liquidation of the assets of the Partnership, but subject to the order
of priorities set forth therein, if prior to or upon dissolution of the
Partnership, the Liquidator determines that an immediate sale of part or all of
the Partnership's assets would be impractical or would cause undue loss to the
Partners, the Liquidator may, in its sole and absolute discretion, defer for a
reasonable time the liquidation of any assets except those necessary to satisfy
liabilities of the Partnership (including those to Partners as creditors) and/or
distribute to the Partners, in lieu of cash, as tenants in common and in
accordance with the provisions of Section 13.2.A hereof, undivided interests in
such Partnership assets as the Liquidator deems not suitable for liquidation.
Any such distributions in kind shall be made only if, in the good faith judgment
of the Liquidator, such distributions in kind are in the best interest of the
Partners, and shall be subject to such conditions relating to the disposition
and management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties at
such time. The Liquidator shall determine the fair market value of any property
distributed in kind using such reasonable method of valuation as it may adopt.
C. In the discretion of the Liquidator, a pro rata portion of the
distributions that would otherwise be made to the General Partner and Limited
Partners pursuant to this Article 13 may be:
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(1) distributed to a trust established for the benefit of
the General Partner and Limited Partners for the
purposes of liquidating Partnership assets,
collecting amounts owed to the Partnership, and
paying any contingent or unforeseen liabilities or
obligations of the Partnership or the General Partner
arising out of or in connection with the Partnership.
The assets of any such trust shall be distributed to
the General Partner and Limited Partners from time to
time, in the reasonable discretion of the Liquidator,
in the same proportions as the amount distributed to
such trust by the Partnership would otherwise have
been distributed to the General Partner and Limited
Partners pursuant to this Agreement; or
(2) withheld or escrowed to provide a reasonable reserve
for Partnership liabilities (contingent or otherwise)
and to reflect the unrealized portion of any
installment obligations owed to the Partnership,
provided that such withheld or escrowed amounts shall
be distributed to the General Partner and Limited
Partners in the manner and order of priority set
forth in Section 13.2.A as soon as practicable.
Section 13.3 Negative Capital Accounts
No Partner, General or Limited, shall be liable to the Partnership or
to any other Partner for any negative balance outstanding in each such Partner's
Capital Account, whether such negative Capital Account results from the
allocation of Net Losses or other items of deduction and loss to such Partner or
from distributions to such Partner.
Section 13.4 Deemed Distribution and Recontribution
Notwithstanding any other provision of this Article 13, in the event
the Partnership is considered liquidated within the meaning of Regulations
Section 1.704-l(b)(2)(ii)(g), but no Dissolution Event has occurred, the
Partnership's property shall not be liquidated, the Partnership's liabilities
shall not be paid or discharged, and the Partnership's affairs shall not be
wound up.
Section 13.5 Rights of Limited Partners
Except as otherwise provided in this Agreement, each Limited Partner
shall look solely to the assets of the Partnership for the return of its Capital
Contributions and shall have no right or power to demand or receive property
other than cash from the Partnership. Except as otherwise provided in this
Agreement, no Limited Partner shall have priority over any other Partner as to
the return of its Capital Contributions, distribution or allocations.
Section 13.6 Notice of Dissolution
In the event a Dissolution Event occurs or an event occurs that would,
but for the provisions of an election or objection by one or more Partners
pursuant to Section 13.1, result in a dissolution
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of the Partnership, the General Partner shall provide within thirty (30) days
thereafter written notice thereof to each of the Partners.
Section 13.7 Termination of Partnership and Cancellation of
Certificate of Limited Partnership
Upon the completion of the liquidation of the Partnership cash and
property as provided in Section 13.2 hereof, the Partnership shall be
terminated, a certificate of cancellation shall be filed, and all qualifications
of the Partnership as a foreign limited partnership in jurisdictions other than
the State of Delaware shall be canceled and such other actions as may be
necessary to terminate the Partnership shall be taken.
Section 13.8 Reasonable Time for Winding-Up
A reasonable time shall be allowed for the orderly winding-up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 13.2 hereof, in order to minimize any losses otherwise
attendant upon such winding-up, and the provisions of this Agreement shall
remain in effect between the Partners during the period of liquidation.
Section 13.9 Waiver of Partition
Each Partner hereby waives any right to partition of the Partnership
property.
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS
Section 14.1 Amendments
A. Amendments to this Agreement may be proposed by the General Partner
or by any Limited Partners holding ten percent (10%) or more of the Partnership
Interests. Following such proposal, the General Partner shall submit any
proposed amendment to the Limited Partners. The General Partner shall seek the
written vote of the Partners on the proposed amendment or shall call a meeting
to vote thereon and to transact any other business that it may deem appropriate.
For purposes of obtaining a written vote, the General Partner may require a
response within a reasonable specified time, but not less than fifteen (15)
days, and failure to respond in such time period shall constitute a vote which
is consistent with the General Partner's recommendation with respect to the
proposal. Except as provided in Section 7.3.A, 13.1.C, 14.1.B, 14.1.C or 14.1.D,
a proposed amendment shall be adopted and be effective as an amendment hereto if
it is approved by the General Partner and it receives the Consent of Partners
holding a majority of the Percentage Interests of the Limited Partners
(including Limited Partner Interests held by the General Partner).
B. Notwithstanding Section 14.1.A, the General Partner shall have the
power, without the consent of the Limited Partners, to amend this Agreement as
may be required to facilitate or implement any of the following purposes:
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(1) to add to the obligations of the General Partner or
surrender any right or power granted to the General
Partner or any Affiliate of the General Partner for
the benefit of the Limited Partners;
(2) to reflect the admission, substitution, termination,
or withdrawal of Partners in accordance with this
Agreement;
(3) to set forth the designations, rights, powers,
duties, and preferences of the holders of any
additional Partnership Interests issued pursuant to
Section 4.2.A hereof;
(4) to reflect a change that is of an inconsequential
nature and does not adversely affect the Limited
Partners in any material respect, or to cure any
ambiguity, correct or supplement any provision in
this Agreement not inconsistent with law or with
other provisions, or make other changes with respect
to matters arising under this Agreement that will not
be inconsistent with law or with the provisions of
this Agreement; and
(5) to satisfy any requirements, conditions, or
guidelines contained in any order, directive,
opinion, ruling or regulation of a federal or state
agency or contained in federal or state law.
The General Partner shall provide notice to the Limited Partners when any action
under this Section 14.1.B is taken.
C. Notwithstanding Section 14.1.A and 14.1.B hereof, this Agreement
shall not be amended without the Consent of each Partner adversely affected if
such amendment would (i) convert a Limited Partner's interest in the Partnership
into a General Partner Interest, (ii) modify the limited liability of a Limited
Partner in a manner adverse to such Limited Partner, (iii) alter rights of the
Partner to receive distributions pursuant to Article 5 or Article 13, or the
allocations specified in Article 6 (except as permitted pursuant to Section 4.2
and Section 14.1.B(3) hereof), (iv) alter or modify the Redemption Right and
REIT Shares Amount as set forth in Section 8.6, and the related definitions, in
a manner adverse to such Partner, (v) cause the termination of the Partnership
prior to the time set forth in Sections 2.5 or 13.1, or (vi) amend this Section
14.1.C. Further, no amendment may alter the restrictions on the General
Partner's authority set forth in Section 7.3 without the Consent specified in
that section.
D. Notwithstanding Section 14.1.A or Section 14.1.B hereof, the General
Partner shall not amend Article 16 or Sections 4.2.A, 7.5, 7.6, 11.2, 14.1.A or
14.2 without the Consent of 75% of the Percentage Interests of the Limited
Partners excluding Limited Partners Interests held by the General Partner.
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Section 14.2 Meetings of the Partners
A. Meetings of the Partners may be called by the General Partner and
shall be called upon the receipt by the General Partner of a written request by
Limited Partners holding twenty percent (20) or more of the Percentage
Interests. The call shall state the nature of the business to be transacted and
notice of any such meeting shall be given to all Partners not less than seven
(7) days nor more than thirty (30) days prior to the date of such meeting.
Partners may vote in person or by proxy at such meeting. Whenever the vote or
Consent of the Partners is permitted or required under this Agreement, such vote
or Consent may be given at a meeting of the Partners or may be given in
accordance with the procedure prescribed in Section 14.1A hereof. Except as
otherwise expressly provided in this Agreement, the Consent of holders of a
majority of the Percentage Interests held by Limited Partners (including Limited
Partnership Interests held by the General Partner) shall control.
B. Any action required or permitted to be taken at a meeting of the
Partners may be taken without a meeting if a written consent setting forth the
action so taken is signed by 75% of the Percentage Interests of the Partners (or
such other percentage as is expressly required by this Agreement). Such consent
may be in one instrument or in several instruments and shall have the same force
and effect as a vote of 75% of the Percentage Interests of the Partners (or such
other percentage as is expressly required by this Agreement). Such consent shall
be filed with the General Partner. An action so taken shall be deemed to have
been taken at a meeting held on the effective date so certified.
C. Each Limited Partner may authorize any Person or Persons to act for
him by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or participating
at a meeting. Every proxy must be signed by the Limited Partner or his
attorney-in-fact. No proxy shall be valid after the expiration of eleven (11)
months from the date thereof unless otherwise provided in the proxy. Every proxy
shall be revocable at the pleasure of the Limited Partner executing it, such
revocation to be effective upon the Partnership's receipt of written notice of
such revocation from the Limited Partner executing such proxy.
D. Each meeting of the Partners shall be conducted by the General
Partner or such other Person as the General Partner may appoint pursuant to such
rules for the conduct of the meeting as the General Partner or such other Person
deems appropriate. Without limitation, meetings of Partners may be conducted in
the same manner as meetings of the shareholders of the General Partner and may
be held at the same time, and as part of, meetings of the shareholders of the
General Partner.
ARTICLE 15
GENERAL PROVISIONS
Section 15.1 Addresses and Notice
Any notice, demand, request or report required or permitted to be given
or made to a Partner or Assignee under this Agreement shall be in writing and
shall be deemed given or made when delivered in person or when sent by first
class United States mail or by other means of written
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communication to the Partner or Assignee at the address set forth in Exhibit A
or such other address of which the Partner shall notify the General Partner in
writing.
Section 15.2 Titles and Captions
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
Section 15.3 Pronouns and Plurals
Whenever the context may require, any pronoun used in this Agreement
shall include the plural and vice versa.
Section 15.4 Further Action
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purpose of this Agreement.
Section 15.5 Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 15.6 Creditors
Other than as expressly set forth herein with respect to the
Indemnities, none of the provisions of this Agreement shall be for the benefit
of, or shall be enforceable by, any creditors of the Partnership.
Section 15.7 Waiver
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of any
such breach or any other covenant, duty, agreement or condition.
Section 15.8 Counterparts
This Agreement may be executed in counterparts, all of which together
shall constitute one agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or the
same counterpart. Each party shall become bound by this Agreement immediately
upon affixing its signature hereto.
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Section 15.9 Applicable Law
This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Delaware, without regard to the principles
of conflicts of law.
Section 15.10 Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 15.11 Entire Agreement
This Agreement contains the entire understanding and agreement among
the Partners with respect to the subject matter hereof and supersedes the Prior
Agreement and any other prior written or oral understandings or agreement among
them with respect thereto.
Section 15.12 Withdrawal of Organizational Limited Partner
Following the admission of the Limited Partners, the Organizational
Limited Partner shall withdraw from the Partnership and shall be entitled to
receive forthwith the return of his capital contribution, without interest or
deduction.
ARTICLE 16
CONSOLIDATION, MERGER OR SALE OF ASSETS OF THE GENERAL PARTNER
Section 16.1 Triggering Events
For the purposes of this Article 16, each of the following events shall
be deemed to be a "Triggering Event": (w) if the General Partner consolidates
with, or merges into, any other Person, and the General Partner is not the
continuing or surviving corporation of such consolidation or merger, (x) if any
Person consolidates with, or merges into, the General Partner, and the General
Partner is the continuing or surviving corporation of such consolidation or
merger and, in connection with such consolidation or merger, all or part of the
outstanding REIT Shares are converted into or exchanged for stock or other
securities of any other Person or cash or any other property, or (y) if the
General Partner sells or otherwise transfers (or one or more of its Subsidiaries
sells or otherwise transfers) to any Person or Persons, in one or more
transactions, substantially all of the assets or earning power of the General
Partner or the Partnership.
Section 16.2 From and After the Occurrence of a Triggering Event
Effective on the date of each Triggering Event, the Redemption Right
shall be adjusted as provided in this Section 16.2.
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A. From and after the occurrence of a Triggering Event (each such
occurrence, a "Trigger Occurrence") and until the occurrence, if any, of a
subsequent Triggering Event (in which case a further adjustment shall be made
pursuant to this Section 16.2), each and every reference contained in this
Agreement to a "REIT Share" or "REIT Shares" shall be deemed to be a reference
to a share or shares, respectively (each, a "Replacement Share"; collectively,
"Replacement Shares"), of: (i) if, as a result of any Triggering Event, all of
the REIT Shares are converted solely into Registered Common Stock (as
hereinafter defined), such Registered Common Stock and (ii) in all other cases,
the common stock, or, if such Person shall have no common stock, the equity
securities or other equity interest having power to control or direct the
management (the "Common Stock") of (a) in the event of a Triggering Event
described in clause (w) or (x) of the first sentence of Section 16.1, (1) the
Person that is the issuer of any securities into which the REIT Shares are
converted in such merger or consolidation, or, if there is more than one such
issuer, the issuer who has the highest Market Capitalization (as hereinafter
defined) and (2) if no securities are so issued, the Person that is the other
party to such merger or consolidation, or if there is more than one such Person,
the Person who has the highest Market Capitalization or (b) in the event of a
Triggering Event described in clause (y) of the first sentence of Section 16.1,
the Person that is the party receiving the largest portion of the assets or
earning power transferred pursuant to such transaction or transactions, or, if
the Person receiving the largest portion of the assets or earning power cannot
be determined, whichever Person has the highest Market Capitalization; provided,
however, that in any such case, (1) if the Common Stock of such Person is not at
such time and has not been continuously over the preceding 12-month period
registered ("Registered Common Stock") under Section 12 of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), or such Person is neither
a corporation nor a real estate investment trust, and such Person is a direct or
indirect Subsidiary of another Person that has Registered Common Stock
outstanding, "Replacement Shares" shall mean shares of the Common Stock of such
other Person; (2) if the Common Stock of such Person is not Registered Common
Stock or such Person is neither a corporation nor a real estate investment
trust, and such Person is a direct or indirect Subsidiary of another Person but
is not a direct or indirect Subsidiary of another Person which has Registered
Common Stock outstanding, "Replacement Shares" shall mean shares of the Common
Stock of the parent entity having the highest Market Capitalization; (3) if the
Common Stock of such Person is not Registered Common Stock or such Person is
neither a corporation nor a real estate investment trust, and such Person is
directly or indirectly controlled by more than one Person, and one of such other
Persons has Registered Common Stock outstanding, "Replacement Shares" shall mean
shares of the Common Stock of whichever of such other Persons is the issuer
having the highest Market Capitalization; and (4) if the Common Stock of such
Person is not Registered Common Stock or such Person is neither a corporation
nor a real estate investment trust, and such Person is directly or indirectly
controlled by more than one Person, and none of such other Persons have
Registered Common Stock outstanding, "Replacement Shares" shall mean shares of
the Common Stock of whichever ultimate parent entity is the corporation or real
estate investment trust having the highest aggregate shareholders' equity or, if
no such ultimate parent entity is a corporation or a real estate investment
trust, shall be deemed to refer to shares of the Common Stock of whichever
ultimate parent entity is the entity having the greatest net assets. Any issuer
of "Replacement Shares" shall be referred to as an "Issuer." "Market
Capitalization" means the dollar figure equal to the product of the number of
shares of Common Stock issued and outstanding on the date of the Trigger
Occurrence in question, on a fully diluted
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basis, not held by Affiliates (as defined under the Exchange Act) multiplied by
the Average Trading Price (as hereinafter defined).
B. From and after a Trigger Occurrence, the "Conversion Factor" shall
be adjusted by multiplying the "Conversion Factor" existing on the day
immediately prior to such Trigger Occurrence as follows: (i) if the REIT Shares,
as a result of the Trigger Occurrence, have been converted solely into the right
to receive Registered Common Stock, by the number of shares of Registered Common
Stock which the holder of a single REIT Share was entitled to receive as a
result of the Trigger Occurrence or (ii) in all other cases, by a fraction, the
numerator of which shall be the Average Trading Price of a REIT Share as of such
Trigger Occurrence and the denominator of which shall be the Average Trading
Price of a Replacement Share as of such Trigger Occurrence. Following a Trigger
Occurrence, the Conversion Factor shall be further adjusted as set forth in the
definition of "Conversion Factor" contained in Article 1 of this Agreement and
as provided in this Section 16.2.
C. For the purpose of any computation hereunder, the "Average Trading
Price" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such shares for the ten consecutive
trading days immediately prior to the third trading day prior to such date;
provided, however, in the event the Triggering Event occurs as part of a series
of related transactions which also includes a tender offer, the ten trading day
period shall be the ten consecutive trading day period immediately prior to the
day REIT Shares are accepted for payment pursuant to such tender offer;
provided, however, further, if prior to the expiration of such requisite ten
trading day period the issuer announces either (A) a dividend or distribution on
such shares payable in such shares or securities convertible into such shares or
(B) any subdivision, combination or reclassification of such shares, then,
following the ex-dividend date for such dividend or the record date for such
subdivision, as the case may be, the "Average Trading Price" shall be properly
adjusted to take into account such event. The closing price for each day shall
be, if the shares are listed and admitted to trading on a national securities
exchange, as reported in the principal consolidated transaction reporting system
with respect to securities listed on the principal national securities exchange
on which such shares are listed or admitted to trading or, if such shares are
not listed or admitted to trading on any national securities exchange, the last
quoted price or, if not so quoted, the high bid price in the over-the-counter
market, as reported by the NASDAQ National Market System or such other system
then in use, or, if on any such date such shares are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in such shares selected by the holders
of a majority of the Partnership Units held by the Limited Partners (excluding
the Partnership Units held by the General Partner and its Affiliates). If such
shares are not publicly held or not so listed or traded or if, for the ten days
prior to such date, no market maker is making a market in such shares, the
Average Trading Price of such shares on such date shall be deemed to be the fair
value of such shares as determined as set forth in Section 16.2.D. The term
"trading day" shall mean, if such shares are listed or admitted to trading on
any national securities exchange, a day on which the principal national
'securities exchange on which such shares are listed or admitted to trading is
open for the transaction of business or, if such shares are not so listed or
admitted, a Business Day.
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D. In the event that on the date of a Trigger Occurrence, the shares of
a Person are not publicly held or not so listed or traded or if, for the ten
days prior to such date, no market maker is making a market in the shares of a
Person, the Average Trading Price of the shares of such Person shall be the fair
value of the shares as determined in good faith by the holders of a majority of
the Partnership Units held by the Limited Partners (excluding the Partnership
Units held by the General Partner and its Affiliates) and the General Partner,
which determination shall be binding on all of the Limited Partners. If the
holders of a majority of the Partnership Units held by the Limited Partners
(excluding the Partnership Units held by the General Partner and its Affiliates)
and the General Partner have not agreed on the fair value of the shares and
executed and delivered between them an agreement setting forth the same within
twenty (20) days after the Trigger Occurrence in question, then either the
General Partner or the holders of a majority of the Partnership Units held by
the Limited Partners (excluding the Partnership Units held by the General
Partner and its Affiliates) may notify the other that they or it desire to
invoke the following arbitration procedure:
(1) Notice of the holders of a majority of the
Partnership Units held by the Limited Partners
(excluding the Partnership Units held by the General
Partner and its Affiliates) or the General Partner of
such parties' intention to seek arbitration shall be
delivered to the other parties within ten (10) days
after which all parties shall, in good faith, attempt
to agree on a single arbitrator to determine the fair
value of the shares (the "Arbitrator"). If the
holders of a majority of the Partnership Units held
by the Limited Partners (excluding the Partnership
Units held by the General Partner and its Affiliates)
and the General Partner have not agreed on the
Arbitrator within ten (10) days after the giving of
the Arbitration Notice, then either, on behalf of
both, may apply to the local office of the American
Arbitration Association or any organization which is
the successor thereof (the "AAA") for appointment of
the Arbitrator, or, if the AAA shall not then exist
or shall fail, refuse or be unable to act such that
the Arbitrator is not appointed by the AAA within ten
(10) days after application therefor, then either
party may apply to any court of competent
jurisdiction in the State of North (the "Court") for
the appointment of the Arbitrator and the other party
shall not raise any question as to the Court's full
power and jurisdiction to entertain the application
and make the appointment. The date on which the
Arbitrator is appointed, by the agreement of the
parties, by appointment by the AAA or by appointment
by the Court, is referred to herein as the
"Appointment Date." If any Arbitrator appointed
hereunder shall be unwilling or unable, for any
reason, to serve, or continue to serve, a replacement
arbitrator shall be appointed in the same manner as
the original Arbitrator.
(2) The arbitration shall be conducted in accordance with
the then prevailing commercial arbitration rules of
the AAA, modified as follows:
(i) To the extent that any statute imposes
requirements different than those of the AAA
in order for the decision of the Arbitrator
to be enforceable in the courts of the State
of
50
<PAGE>
Delaware, such requirements shall be
complied with in the arbitration.
(ii) The Arbitrator shall be disinterested and
impartial, shall not be affiliated with the
Limited Partners or the General Partner and
shall have at least ten (10) years
experience in the market in which the
applicable Person transactions the majority
of its business.
(iii) Before hearing any testimony or receiving
any evidence, the Arbitrator shall be sworn
to hear and decide the controversy
faithfully and fairly by an officer
authorized to administer an oath and a
written copy thereof shall be delivered to
each of the Limited Partners and the General
Partner.
(iv) Within twenty (20) days after the
Appointment Date, the holders of a majority
of the Partnership Units held by the Limited
Partners (excluding the Partnership Units
held by the General Partner and its
Affiliates) and the General Partner shall
deliver to the Arbitrator two (2) copies of
their respective written determinations of
the fair value of the shares (each, a
"Determination") together with such
affidavits, appraisals, reports and other
written evidence relating thereto as the
submitting party deems appropriate. After
the submission of any Determination, the
submitting party may not make any additions
to or deletions from, or otherwise change,
such Determination or the affidavits,
appraisals, reports and other written
evidence delivered therewith. If either
party fails to so deliver its Determination
within such time period, time being of the
essence with respect thereto, such party
shall be deemed to have irrevocably waived
its right to deliver a Determination and the
Arbitrator, without holding a hearing, shall
accept the Determination of the submitting
party as the fair value of the shares. If
each party submits a Determination with
respect to the fair value of the shares
within the twenty (20) day period described
above, the Arbitrator shall, promptly after
its receipt of the second Determination,
deliver a copy of each party's Determination
to the other party.
(v) Not less than ten (10) days nor more than
twenty (20) days after the earlier to occur
of (x) the expiration of the twenty (20) day
period provided for in clause (iv) of this
subparagraph or (y) the Arbitrator's receipt
of both of the Determinations from the
parties (such earlier date is referred
51
<PAGE>
to herein as the "Submission Date") and upon
not less than five (5) days notice to the
parties, the Arbitrator shall hold one or
more hearings with respect to the
determination of the fair value of the
shares. The hearings shall be held in the
Charlotte metropolitan area of North
Carolina at such location and time as shall
be specified by the Arbitrator. Each of the
parties shall be entitled to present all
relevant evidence and to cross-examine
witnesses at the hearings. The Arbitrator
shall have the authority to adjourn any
hearing to such later date as the Arbitrator
shall specify, provided that in all events
all hearings with respect to the
determination of the fair value of the
shares shall be concluded not later than
thirty (30) days after the Submission Date.
(vi) The Arbitrator shall be instructed, and
shall be empowered only, to select as the
fair value of the shares that one of the
Determinations which the Arbitrator believes
is the more accurate determination of the
Average Trading Price of the shares. Without
limiting the generality of the foregoing, in
rendering his or her decision, the
Arbitrator shall not add to, subtract from
or otherwise modify the provisions of this
Agreement or either of the Determinations.
(vii) The Arbitrator shall render his or her
determination as to the selection of a
Determination in a signed and acknowledged
written instrument, original counterparts of
which shall be sent simultaneously to
Limited Partners and the General Partner,
within ten (10) days after the conclusion of
the hearing(s) required by clause (v) of
this Section.
(3) This provision shall constitute a written agreement
to submit any dispute regarding the determination of
the Average Trading Price of the shares of a Person
to arbitration.
(4) The arbitration decision, determined as provided in
this Article, shall be conclusive and binding on the
parties, shall constitute an "award" by the
Arbitrator within the meaning of the AAA rules and
applicable law, and judgment may be entered thereon
in any court of competent jurisdiction.
(5) The Partnership shall pay all fees and expenses
relating to the arbitration (including, without
limitation, the fees and expenses of one counsel
(including local counsel, if required) chosen by the
holders of a majority of the Partnership Units held
by the Limited Partners (excluding the Partnership
Units held by the General Partner
52
<PAGE>
and its Affiliates) and of experts and witnesses
retained or called by the Limited Partners). The
Limited Partners' counsel chosen as set forth in the
preceding sentence shall represent the interests of
all of the Limited Partners and the choice of counsel
shall be binding on all of the Limited Partners.
E. From and after a Trigger Occurrence, each and every reference to the
"General Partner" in Section 8.6 shall be deemed to be a reference to the Issuer
of the Replacement Shares. From and after a Trigger Occurrence, the Issuer shall
assume or unconditionally guaranty the performance of the General Partner's
obligations under this Agreement pursuant to an instrument in form and substance
satisfactory to the holders of a majority of the Partnership Units held by the
Limited Partners (excluding the Partnership Units held by the General Partner
and its Affiliates). From and after a Trigger Occurrence, the "Average Trading
Price" of a REIT Share or a Replacement Share, as applicable shall be
substituted for the "Value" of the same for the purposes of determining the Cash
Amount.
Section 16.3 Additional Issuer Covenants
The General Partner shall (i) not enter in an agreement with any Person
which would result in a Triggering Event unless such agreement provides for each
of the following and (ii) from and after any Trigger Occurrence, comply with
each of the following:
A. If, on the day immediately prior to a Trigger Occurrence, the Issuer
is qualified as a REIT, then, substantially contemporaneously with such Trigger
Occurrence, the General Partner, the Issuer and its Affiliates shall enter into
such mergers, combinations, conveyances or other transactions as shall be
required to cause substantially all of the assets of the General Partner and the
Issuer and its Affiliates to be owned, leased or held directly or indirectly by
a single operating partnership in which the Limited Partners shall hold
partnership units having the rights specified by this Agreement. The agreement
governing the resulting operating partnership shall be in a form substantially
no less favorable to each of the Limited Partners than is this Agreement.
B. From and after a Trigger Occurrence, in the event a dividend or
distribution consisting of cash or property (other than Replacement Shares) or
both is paid by the Issuer in respect of the Replacement Shares, the General
Partner shall cause the Partnership to distribute, in respect of each
Partnership Unit, the same amount of cash or property the holder of a
Partnership Unit would have received had such holder exercised its Redemption
Right and received Replacement Shares prior to such dividend or distribution.
Section 16.4 Application to Later Transactions
This Article 16 shall apply to the initial Triggering Event and shall
continue to apply to each subsequent Triggering Event.
53
<PAGE>
Section 16.5 Waivers and Amendments
This Article 16 shall only be amended as provided in Section 14.1.D of
this Agreement and shall be deemed included in such section for all purposes;
provided that the General Partner may amend this Article 16, without the consent
of the Limited Partners for the purposes set forth at Section 14.1.B(4) prior to
a Trigger Occurrence.
54
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
GENERAL PARTNER:
BODDIE-NOELL PROPERTIES, INC.
By: _____________________________
Title:_____________________________
[CORPORATE SEAL]
WITHDRAWING LIMITED PARTNER
_____________________________
Philip S. Payne
LIMITED PARTNERS:
By: _____________________________
Paul G. Chrysson
By: _____________________________
James G. Chrysson
By: _____________________________
W. Michael Gilley
By: _____________________________
James D. Yopp
By: _____________________________
Matthew G. Gallins
M.G. Gallins Family, LLC
By: _____________________________
M.G. Gallins, Managing Member
55
<PAGE>
EXHIBIT A
PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
<TABLE>
<CAPTION>
Name and Address Cash Agreed Value of Total Partnership Percentage
of Partners Contribution Contributed Property Contribution Units Units Interest
- ------------------------- ------------ -------------------- ------------ ----- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
General Partner
Boddie-Noell Properties, Inc.
3710 One First Union Center
Charlotte, NC 28202
Limited Partners
Paul G. Chrysson
c/o CB Development Company
1045 Burke Street
Winston-Salem, NC 27103
James G. Chrysson
c/o CB Development Company
1045 Burke Street
Winston-Salem, NC 27103
W. Michael Gilley
c/o Bartram Investment Properties
627-B Coliseum Drive
Winston-Salem, NC 27106
James D. Yopp
755 Highland Oaks Drive
Suite 204
Winston-Salem, NC 27103
Matthew G. Gallins
c/o Gallins Vending
715 Stadium Drive
Winston-Salem, NC 27101
M.G. Gallins Family, LLC
c/o Gallins Vending
715 Stadium Drive
Winston-Salem, NC 27101
</TABLE>
<PAGE>
EXHIBIT B
CAPITAL ACCOUNT MAINTENANCE
1. Capital Accounts of the Partners
A. The Partnership shall maintain for each Partner a separate Capital
Account in accordance with the rules of Regulations Section 1.704-l(b)(2)(iv).
Such Capital Account shall be increased by (i) the amount of all Capital
Contributions and any other deemed contributions made by such Partner to the
Partnership pursuant to this Agreement and (ii) all items of Partnership income
and gain (including income and gain exempt from tax) computed in accordance with
Section 1.B hereof and allocated to such Partner pursuant to Section 6.1.A of
the Agreement and Exhibit C hereof, and decreased by (x) the amount of cash or
Agreed Value of all actual and deemed distributions of cash or property made to
such Partner pursuant to this Agreement and (y) all items of Partnership
deduction and loss computed in accordance with Section 1.B hereof and allocated
to such Partner pursuant to Section 6.1.B of the Agreement and Exhibit C hereof.
B. For purposes of computing the amount of any item of income, gain,
deduction or loss to be reflected in the Partners' Capital Accounts, unless
otherwise specified in this Agreement, the determination, recognition and
classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes determined in
accordance with Section 703(a) of the Code (for this purpose all items of
income, gain, loss or deduction required to be stated separately pursuant to
Section 703(a)(1) of the Code shall be included in taxable income or loss), with
the following adjustments:
(1) Except as otherwise provided in Regulations Section
1.704-l(b)(2)(iv)(m), the computation of all items of
income, gain, loss and deduction shall be made
without regard to any election under Section 754 of
the Code which may be made by the Partnership,
provided that the amounts of any adjustments to the
adjusted bases of the assets of the Partnership made
pursuant to Section 734 of the Code as a result of
the distribution of property by the Partnership to a
Partner (to the extent that such adjustments have not
previously been reflected in the Partners' Capital
Accounts) shall be reflected in the Capital Accounts
of the Partners in the manner and subject to the
limitations prescribed in Regulations Section
1.704-1(b)(2)(iv)(m)(4).
(2) The computation of all items of income, gain, and
deduction shall be made without regard to the fact
that items described in Section 705(a)(2)(B) of the
Code are not includible in gross income or are
neither currently deductible nor capitalized for
federal income tax purposes.
(3) Any income, gain or loss attributable to the taxable
disposition of any Partnership property shall be
determined as if the adjusted basis of such property
as of such date of disposition were equal in amount
to the Partnership's Carrying Value with respect to
such property as of such date.
<PAGE>
(4) In lieu of the depreciation, amortization and other
cost recovery deductions taken into account in
computing such taxable income or loss, there shall be
taken into account Depreciation for such fiscal year.
(5) In the event the Carrying Value of any Partnership
Asset is adjusted pursuant to Section 1.D hereof, the
amount of any such adjustment shall be taken into
account as gain or loss from the disposition of such
asset.
(6) Any items specifically allocated under Section 2 of
Exhibit C hereof shall not be taken into account.
C. Generally, a transferee (including an Assignee) of a Partnership
Unit shall succeed to a pro rata portion of the Capital Account of the
transferor.
D. (1) Consistent with the provisions of Regulations Section
1.704-l(b)(2)(iv)(f), and as provided in Section
l.D(2), the Carrying Value of all Partnership assets
shall be adjusted upward or downward to reflect any
Unrealized Gain or Unrealized Loss attributable to
such Partnership property, as of the times of the
adjustments provided in Section l.D(2) hereof, as if
such Unrealized Gain or Unrealized Loss had been
recognized on an actual sale of each such property
and allocated pursuant to Section 6.1 of the
Agreement.
(2) Such adjustments shall be made as of the following
times: (a) immediately prior to the acquisition of an
additional interest in the Partnership by any new or
existing Partner in exchange for more than a de
minimis Capital Contribution; (b) immediately prior
to distribution by the Partnership to a Partner of
more than a de minimis amount of property as
consideration for an interest in the Partnership; and
(c) immediately prior to the liquidation of the
Partnership within the meaning of Regulations Section
1.704-1(b)(2)(ii)(g), provided, however, that
adjustments pursuant to clauses (a) and (b) above
shall be made only if the General Partner determines
that such adjustments are necessary or appropriate to
reflect the relative economic interests of the
Partners in the Partnership.
(3) In accordance with Regulations Section
1.704-l(b)(2)(iv)(e), the Carrying Value of
Partnership assets distributed in kind shall be
adjusted upward or downward to reflect any Unrealized
Gain or Unrealized Loss attributable to such
Partnership property, as of the time any such asset
is distributed.
(4) In determining Unrealized Gain or Unrealized Loss for
purposes of this Exhibit B, the aggregate cash amount
and fair market value of all Partnership assets
(including cash or cash equivalents) shall be
determined by the General Partner using such
reasonable method of valuation as it may adopt, or in
the case of a liquidating distribution pursuant to
Article 13 of the Agreement, shall be determined and
allocated by the Liquidator using such reasonable
2
<PAGE>
methods of valuation as it may adopt. The General
Partner, or the Liquidator, as the case may be, shall
allocate such aggregate value among the assets of the
Partnership (in such manner as it determines in its
sole and absolute discretion to arrive at a fair
market value for individual properties).
E. The provisions of this Agreement (including this Exhibit B and other
Exhibits to this Agreement) relating to the maintenance of Capital Accounts are
intended to comply with Regulations Section 1.704-1(b), and shall be interpreted
and applied in a manner consistent with such Regulations. In the event the
General Partner shall determine that it is prudent to modify the manner in which
the Capital Accounts, or any debits or credits thereto (including, without
limitation, debits or credits relating to liabilities which are secured by
contributed or distributed property or which are assumed by the Partnership, the
General Partner, or the Limited Partners) are computed in order to comply with
such Regulations, the General Partner may make such modification without regard
to Article 14 of the Agreement, provided that it is not likely to have a
material effect on the amounts distributable to any Person pursuant to Article
13 of the Agreement upon the dissolution of the Partnership. The General Partner
also shall (i) make any adjustments that are necessary or appropriate to
maintain equality between the Capital Accounts of the Partners and the amount of
Partnership capital reflected on the Partnership's balance sheet, as computed
for book purposes in accordance with Regulations Section 1.704-1(b)(2)(iv)(q),
and (ii) make any appropriate modifications in the event unanticipated events
might otherwise cause this Agreement not to comply with Regulations Section
1.704-1(b).
2. No Interest
No interest shall be paid by the Partnership on Capital Contributions
or on balances in Partners' Capital Accounts.
3. No Withdrawal
No Partner shall be entitled to withdraw any part of his Capital
Contribution or his Capital Account or to receive any distribution from the
Partnership, except as provided in Articles 4, 5, 7 and 13 of the Agreement.
3
<PAGE>
EXHIBIT C
SPECIAL ALLOCATION RULES
1. Special Allocation Rules
Notwithstanding any other provision of the Agreement or this Exhibit C,
the following special allocations shall be made in the following order:
A. Minimum Gain Chargeback. Notwithstanding the provisions of Section
6.1 of the Agreement or any other provisions of this Exhibit C, if there is a
net decrease in Partnership Minimum Gain during any Partnership Year, each
Partner shall be specially allocated items of Partnership income and gain for
such year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partnership Minimum Gain, as determined
under Regulations Section 1.704-2(g). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Partner pursuant thereto. The items to be so allocated shall
be determined in accordance with Regulations Section 1.704-2(f)(6). This Section
1.A is intended to comply with the minimum gain chargeback requirements in
Regulations Section 1.704-2(f) and shall be interpreted consistently therewith.
Solely for purposes of this Section 1.A, each Partner's Adjusted Capital Account
Deficit shall be determined prior to any other allocations pursuant to Section
6.1 during such Partnership Year.
B. Partner Minimum Gain Chargeback. Notwithstanding any other provision
of Section 6.1 of this Agreement or any other provisions of this Exhibit C
(except Section l.A hereof), if there is a net decrease in Partner Minimum Gain
attributable to a Partner Nonrecourse Debt during any Partnership Year, each
Partner who has a share of the Partner Minimum Gain attributable to such Partner
Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5), shall be specially allocated items of Partnership income and gain
for such year (and, if necessary, subsequent years) in an amount equal to such
Partner's share of the net decrease in Partner Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Partner
pursuant thereto. The items to be so allocated shall be determined in accordance
with Regulations Section 1.704-2(i)(4). This Section 1.B is intended to comply
with the minimum gain chargeback requirement in such Section of the Regulations
and shall be interpreted consistently therewith. Solely for purposes of this
Section l.B, each Partner's Adjusted Capital Account Deficit shall be determined
prior to any other allocations pursuant to Section 6.1 of the Agreement or this
Exhibit with respect to such Partnership Year, other than allocations pursuant
to Section l.A hereof.
C. Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-l(b)(2)(ii)(d)(5) or
1.704-1(b)(2)(ii)(d)(6), and after giving effect to the allocations required
under Sections l.A and l.B hereof, such Partner has an Adjusted Capital Account
Deficit, items of Partnership income and gain (consisting of a pro rata portion
of each item of Partnership income, including gross income and gain for the
Partnership Year) shall be specifically allocated to such
<PAGE>
Partner in an amount and manner sufficient to eliminate, to the extent required
by the Regulations, its Adjusted Capital Account Deficit created by such
adjustments, allocations or distributions as quickly as possible.
D. Nonrecourse Deductions. Nonrecourse Deductions for any Partnership
Year shall be allocated to the Partners in accordance with their respective
Percentage Interests. If the General Partner determines in its good faith
discretion that the Partnership's Nonrecourse Deductions must be allocated in a
different ratio to satisfy the safe harbor requirements of the Regulations
promulgated under Section 704(b) of the Code, the General Partner is authorized,
upon notice to the Limited Partners, to revise the prescribed ratio to the
numerically closest ratio for such Partnership Year which would satisfy such
requirements.
E. Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions
for any Partnership Year shall be specially allocated to the Partner who bears
the economic risk of loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Regulations Section 1.704-2(i).
F. Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or 743(b)
of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner in which their
Capital Accounts are required to be adjusted pursuant to such Section of the
Regulations.
2. Allocations for Tax Purposes
A. Except as otherwise provided in this Section 2, for federal income
tax purposes, each item of income, gain, loss and deduction shall be allocated
among the Partners in the same manner as its correlative item of "book" income,
gain, loss or deduction is allocated pursuant to Section 6.1 of the Agreement
and Section 1 of this Exhibit C.
B. In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss, and
deduction shall be allocated for federal income tax purposes among the Partners
as follows:
(1) (a) In the case of a Contributed Property, such items
attributable thereto shall be allocated among the
Partners consistent with the principles of Section
704(c) of the Code to take into account the variation
between the 704(c) Value of such property and its
adjusted basis at the time of contribution; and
(b) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be
allocated among the Partners in the
2
<PAGE>
same manner as its correlative item of "book" gain or
loss is allocated pursuant to Section 6.1 of the
Agreement and Section 1 of this Exhibit C.
(2) (a) In the case of an Adjusted Property, such items shall
(1) first, be allocated among the Partners in a
manner consistent with the principles of
Section 704(c) of the Code to take into
account the Unrealized Gain or Unrealized
Loss attributable to such property and the
allocations thereof pursuant to Exhibit B,
and
(2) second, in the event such property was
originally a Contributed Property, be
allocated among the Partners in a manner
consistent with Section 2.B(1) of this
Exhibit C; and
(b) any item of Residual Gain or Residual Loss
attributable to an Adjusted Property shall be
allocated among the Partners in the same manner its
correlative item of "book" gain or loss is allocated
pursuant to Section 6.1 of the Agreement and Section
1 of this Exhibit C.
(3) all other items of income, gain loss and deduction shall be
allocated among the Partners the same manner as their
correlative item of "book" gain or loss is allocated pursuant
to Section 6.1 of the Agreement and Section 1 of the Exhibit
C.
C. The Partnership shall use the "Traditional Method" of making Section
704(c) allocations as provided by Regulations Section 1.704-3(b) to eliminate
the disparities between the Carrying Value of property and its adjusted basis.
3. No Withdrawal
No Partner shall be entitled to withdraw any part of his Capital
Contribution or his Capital Account or to receive any distribution from the
Partnership, except as provided in Articles 4, 5, 8 and 13 of the Agreement.
3
<PAGE>
EXHIBIT D
VALUE OF CONTRIBUTED PROPERTY
Underlying Property 704(c) Value Agreed Value
<PAGE>
EXHIBIT E
NOTICE OF REDEMPTION
The undersigned Limited Partner hereby irrevocably (i) redeems Limited
Partnership Units in Boddie-Noell Properties Limited Partnership in accordance
with the terms of the Amended and Restated Agreement of Limited Partnership of
Boddie-Noell Properties Limited Partnership and the Redemption Right referred to
therein, (ii) surrenders such Limited Partnership Units and all right, title and
interest therein, and (iii) directs that the Cash Amount of REIT Shares Amount
(as determined by the General Partner) deliverable upon exercise of the
Redemption Right be delivered to the address specified below, and if REIT Shares
are to be delivered, such REIT Shares be registered or placed in the name(s) and
at the address(es) specified below. The undersigned hereby, represents,
warrants, and certifies that the undersigned (a) has marketable and unencumbered
title to such Limited Partnership Units, free and clear of the rights or
interests of any other person or entity, (b) has the full right, power, and
authority to redeem and surrender such Limited Partnership Units as provided
herein, and (c) has obtained the consent or approval of all person or entities,
if any, having the right to consent or approve such redemption and surrender.
Dated:__________________________
Name of Limited Partner:___________________________________
Please Print
---------------------------------
(Signature of Limited Partner)
---------------------------------
(Street Address)
---------------------------------
(City) (State) (Zip Code)
If REIT Shares are to be issued, issue to:
Name:_____________________________________
Please insert social security or identifying number:____________
<PAGE>
EXHIBIT F
INDEMNIFICATION UNDER SECTION 7.7(I)
Maximum
Indemnification Indemnification
Limited Partner Per Unit Obligation
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<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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: 1-9496
BODDIE-NOELL PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
Maryland 56-1574675
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
3710 One First Union Center, Charlotte, NC 28202-6032
(Address of principal executive offices) (Zip Code)
704/333-1367
(Registrant's telephone number)
State of incorporation changed from Delaware to Maryland
effective July 31, 1997.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of November 10, 1997 (the latest practicable date).
Common Stock, $.01 par value 3,123,741
(Class) (Number of shares)
Index to exhibits at page 16 Total number of pages: 36
1
<PAGE>
TABLE OF CONTENTS
Item No. Page No.
PART I - Financial Information
1 Financial Statements 3
2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II - Other Information
5 Other Information 14
6 Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I - Financial Information
Item 1. Financial Statements.
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Balance Sheets
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
------------------- ------------------
(Unaudited)
<S> <C> <C>
Assets
Real estate investments at cost:
Apartment properties $ 67,140,687 $ 66,610,048
Restaurant properties 43,205,075 43,205,075
------------------- ------------------
110,345,762 109,815,123
Less accumulated depreciation (13,383,980) (11,461,365)
------------------- ------------------
96,961,782 98,353,758
Cash and cash equivalents 1,406,892 842,604
Rent and other receivables 34,734 12,695
Prepaid expenses and other assets 595,188 392,302
Investment in and advances to Management Company 243,262 261,598
Notes receivable 1,412,508 -
Intangible related to acquisition of management operations, net 2,841,438 2,744,912
Deferred financing costs, net 709,794 828,113
=================== ==================
Total assets $ 104,205,598 $ 103,435,982
=================== ==================
Liabilities and Shareholders' Equity
Mortgage and other notes payable $ 71,340,252 $ 70,295,957
Notes payable to affiliates 7,056,300 7,056,300
Accounts payable and accrued expenses 1,022,681 476,938
Additional consideration due to former BTVC shareholders 572,136 355,570
Escrowed security deposits and deferred revenue 263,929 348,779
------------------- ------------------
Total liabilities 80,255,298 78,533,544
Shareholders' equity:
Common stock, $.01 par value, 10,000,000 shares authorized, 3,123,741 shares
issued and outstanding at September 30, 1997,
3,074,647 shares issued and outstanding at December 31, 1996 31,237 30,746
Additional paid-in capital 35,163,033 34,522,816
Dividends distributed in excess of net income (11,243,970) (9,651,124)
------------------- ------------------
Total shareholders' equity 23,950,300 24,902,438
=================== ==================
Total liabilities and shareholders' equity $ 104,205,598 $ 103,435,982
=================== ==================
</TABLE>
3
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues
Apartment rental income $ 2,671,706 $ 2,627,038 $ 7,897,982 $ 7,209,401
Restaurant rental income 1,125,000 1,125,000 3,375,000 3,375,000
Equity in income of Management Company 18,514 35,144 182,747 111,432
Interest and other income 75,081 26,029 153,526 48,875
----------------- ----------------- ---------------- -----------------
3,890,301 3,813,211 11,609,255 10,744,708
Expenses
Depreciation 644,351 627,330 1,922,765 1,786,771
Amortization 145,751 138,507 439,289 394,014
Apartment operations 891,073 829,508 2,536,564 2,189,679
Administrative 190,418 203,497 733,911 701,577
Interest 1,579,826 1,551,351 4,684,256 4,395,137
----------------- ----------------- ---------------- -----------------
3,451,419 3,350,193 10,316,785 9,467,178
================= ================= ================ =================
Net income $ 438,882 $ 463,018 $ 1,292,470 $ 1,277,530
================= ================= ================ =================
Per share data:
Net income $ 0.14 $ 0.15 $ 0.42 $ 0.42
================= ================= ================ =================
Dividends declared $ 0.31 $ 0.31 $ 0.93 $ 0.93
================= ================= ================ =================
Weighted average shares outstanding 3,118,751 3,020,955 3,106,503 3,018,155
================= ================= ================ =================
</TABLE>
4
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Statement of Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Dividends
Additional distributed
Common Stock paid-in in excess of
Shares Amount capital net income Total
--------------- ---------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,074,647 $30,746 $34,522,816 $ (9,651,124) $24,902,438
Net income - - - 470,783 470,783
Common stock issued, DRIP 12,036 121 154,844 - 154,965
Common stock issued, earnout 16,300 163 208,273 - 208,436
Dividends paid ($0.31) - - - (958,194) (958,194)
--------------- ---------------- ---------------- --------------- ----------------
Balance at March 31, 1997 3,102,983 31,030 34,885,933 (10,138,535) 24,778,428
Net income - - - 382,805 382,805
Common stock issued, DRIP 10,557 105 131,203 - 131,308
Dividends paid ($0.31) - - - (961,924) (961,924)
--------------- ---------------- ---------------- --------------- ----------------
Balance at June 30, 1997 3,113,540 $31,135 35,017,136 (10,717,654) 24,330,617
Net income - - - 438,882 438,882
Common stock issued, DRIP 10,201 102 145,897 - 145,999
Dividends paid ($0.31) - - - (965,198) (965,198)
=============== ================ ================ =============== ================
Balance at September 30, 1997 3,123,741 $31,237 $35,163,033 $(11,243,970) $23,950,300
=============== ================ ================ =============== ================
</TABLE>
5
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30
1997 1996
---------------- -----------------
<S> <C> <C>
Operating activities:
Net income $ 1,292,470 $ 1,277,530
Adjustments to reconcile net income to
net cash provided by operations:
Equity in income of Management Company (182,747) (111,432)
Depreciation and amortization 2,362,054 2,180,785
Changes in operating assets and liabilities:
Rent and other receivables (22,039) 237,345
Prepaid expenses and other assets (197,941) (130,466)
Accounts payable and accrued expenses 545,744 378,354
Security deposits and deferred revenue (86,396) 97,377
---------------- -----------------
Net cash provided by operating activities 3,711,145 3,929,493
Investing activities:
Acquisition of apartment property - (10,666,580)
Additions to apartment properties (480,788) (426,035)
Investment in Management Company - (165)
Repayment of advances to Management Company 100,000 -
Dividends received from Management Company 97,687 126,977
Investment in notes receivable (1,412,508) -
---------------- -----------------
Net cash used in investing activities (1,695,609) (10,965,803)
Financing activities:
Proceeds of common stock issued through
dividend reinvestment plan 432,269 106,026
Payment of dividends (2,885,316) (2,805,568)
Proceeds from notes payable 1,412,508 10,650,000
Principal payments on notes payable (368,213) (340,978)
Payment of deferred financing costs (42,496) (321,721)
---------------- -----------------
Net cash provided by (used in) financing activities (1,451,248) 7,287,759
---------------- -----------------
Net increase in cash and cash equivalents 564,288 251,449
Cash and cash equivalents at beginning of period 842,604 700,863
---------------- -----------------
Cash and cash equivalents at end of period $ 1,406,892 $ 952,312
================ =================
</TABLE>
6
<PAGE>
BODDIE-NOELL PROPERTIES, INC.
- -------------------------------------------------------------------------------
Notes to Financial Statements - September 30, 1997
(Unaudited)
Note 1. Interim financial statements
The accompanying financial statements of Boddie-Noell Properties, Inc. (the
"Company") have not been audited by independent accountants, except for the
balance sheet at December 31, 1996, which was derived from the financial
statements included in the Company's 1996 Annual Report on Form 10-K. We believe
that all adjustments (consisting of normal recurring accruals) necessary for a
fair presentation of the financial position and results of operations for the
periods presented have been included.
We have condensed or omitted certain notes and other information from the
interim financial statements presented in this Quarterly Report on Form 10-Q.
These financial statements should be read in conjunction with our 1996 Annual
Report on Form 10-K.
The results of the first nine months of 1997 are not necessarily indicative of
future financial results.
Note 2. Note receivable and related financing
Effective February 27, 1997, we entered into a participating loan agreement with
The Villages of Chapel Hill Limited Partnership ("The Villages"). Under the
terms of this agreement, we will loan up to $2,625,000 to The Villages to fund a
substantial rehabilitation of the 264-unit apartment property owned by The
Villages. In addition, we have provided a guaranty of $1,500,000 to a bank on
its loan to The Villages. We will receive minimum interest on this loan at the
greater of 12.5% or 30-day LIBOR plus 6.125%, shared income interest, shared
appreciation interest, and certain loan and annual guaranty fees. We plan to
fund advances to The Villages through draws under an existing credit facility
with a bank for borrowings at 30-day LIBOR plus 2.25%, secured by deeds of trust
on three apartment properties. The Villages is a North Carolina limited
partnership which is managed by BNP Management, Inc. The general partner in The
Villages is Boddie Investment Company, whose sole shareholders and directors are
Chairman and Vice Chairman of the Company.
Note 3. Modification of loan agreement
Effective August 1, 1997, we modified our note payable to a bank in the
principal sum of up to $25,500,000 ($23,900,000 outstanding) to extend the
maturity of the note, by one year, to December 1999.
Note 4. Common stock issued
On January 29, 1997, we issued 16,300 shares of common stock pursuant to the
earn-out provision of the acquisition agreement for BT Venture Corporation.
During 1997, we also issued common stock through our Dividend Reinvestment and
Stock Purchase Plan as follows: 12,036 shares on February 14, 1997; 10,577
shares on May 15, 1997; and 10,201 shares on August 15, 1997.
Note 5. Subsequent declaration of dividend
On October 17, 1997, we declared a cash dividend of $0.31 per share, which will
be paid on November 14, 1997, to shareholders of record on October 31, 1997.
7
<PAGE>
Note 6. Statement No. 128, "Earnings per Share"
In February 1997 the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted on December 31, 1997.
At that time, we will be required to change the method we currently use to
compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. We do not expect the impact of Statement 128 on
the calculation of primary and fully diluted earnings per share to be material.
Note 7. Subsequent events
We are currently in the process of converting to an umbrella partnership real
estate investment trust ("UPREIT"). An UPREIT is a real estate investment trust
that controls and holds most of its properties through an umbrella limited
partnership.
On September 22, 1997, we signed an agreement to acquire a portfolio of seven
apartment communities containing 1,356 apartment units located in North
Carolina. Phase I of the acquisition consists of 880 apartment units in four
apartment communities. We expect to complete Phase I of the acquisition in late
November 1997. The remaining three properties are currently under development,
with expected completion dates within the next 12 months. We will acquire these
communities when they are completed and achieve predetermined occupancy and
rental levels.
On November 7, 1997, we filed a Registration Statement on Form S-2 under which
we will issue 2,800,000 shares of our common stock. We have granted the
underwriters an over-allotment option; if they choose to exercise such option in
full, we will issue an additional 420,000 shares. The offering will be made only
by means of a prospectus. We anticipate that the Registration Statement will be
declared effective and that we will complete this offering in December 1997.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
The following discussion contains forward-looking statements within the meaning
of Federal securities law. Such statements can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward-looking" information. Although management
believes that the expectations reflected in such forward-looking statements are
based on reasonable assumptions, there are certain factors such as general
economic conditions, local real estate conditions, or weather conditions that
might cause a difference between actual results and those forward-looking
statements. You should read the following discussion in conjunction with the
financial statements and notes thereto included in this Quarterly Report on Form
10-Q and our audited financial statements and notes thereto included in our 1996
Annual Report on Form 10-K.
Overview
Boddie-Noell Properties, Inc. is a self-managed, self-advised real estate
investment trust ("REIT"). As of September 30, 1997, we owned five apartment
communities containing 1,328 apartments and 47 net-lease restaurant properties.
Through our unconsolidated subsidiary, BNP Management, Inc. (the "Management
Company"), we manage an additional seven apartment communities containing 1,495
apartments and two shopping centers. Our headquarters are in Charlotte, North
Carolina, and all of our operations are in the states of North Carolina and
Virginia.
Results of Operations
Revenues. Revenues increased by 2.0% for the quarter ended September 30, 1997,
and 8.0% for the nine months ended September 30, 1997, compared to the same
prior year periods. The increase in revenues for both the three-month and
nine-month periods is attributable to improved apartment operations and the
effect of the acquisition of Paces Village Apartments in April 1996.
Apartment rental income increased by 1.7% in third quarter of 1997 compared to
the third quarter of 1996. This increase was due to improved apartment
operations. During the first nine months of 1997, apartment rental income
increased by 9.6% compared to 1996. The increase for the first nine months of
1997 was the result of improved operations and the acquisition of Paces Village
in April 1996. For apartment communities held throughout the entire nine months
of both 1997 and 1996, apartment rental income increased by 3.0% through nine
months of 1997 compared to 1996.
Summary amounts related to apartment properties' occupancy and revenue per
occupied unit are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------------
Harris Paces Paces
Hill Latitudes Oakbrook Commons Village Overall Overall
<S> <C> <C> <C> <C> <C> <C> <C>
Number of units 184 448 162 336 198 1,328 1,328
Quarter ended September 30
Average physical occupancy 95.1% 93.6% 94.0% 97.5% 93.8% 94.9% 94.8%
Average economic occupancy 96.2% 95.0% 95.8% 98.1% 94.0% 95.9% 95.5%
Average monthly revenue/unit $717 $664 $762 $706 $685 $697 $692
Nine months ended
September 30
Average physical occupancy 94.0% 94.6% 94.2% 97.1% 94.3% 95.0% 93.9%
Average economic occupancy 95.2% 94.8% 95.1% 97.3% 94.3% 95.5% 94.3%
Average monthly revenue/unit $710 $655 $768 $702 $682 $692 $684
</TABLE>
9
<PAGE>
On a same-units basis, average economic occupancy improved by 1.3% through nine
months, and average monthly revenue per unit improved by 1.3% through nine
months of 1997 compared to 1996.
We own apartment communities in Charlotte, North Carolina; Greensboro, North
Carolina; and Virginia Beach, Virginia. Our apartments are priced in the
moderate to moderately high range for apartments available within these markets.
Despite a substantial amount of new construction, especially in Charlotte and
Greensboro, these markets have remained relatively strong. This strength is
primarily attributable to demand for apartments created by continued population
and job growth. The Company experienced a nominal reduction in average economic
occupancy during 1996. We have successfully maintained a slight increase in
average monthly revenue per unit and increased occupancy through the first three
quarters of 1997.
We have utilized three techniques to achieve these results: monitoring and
managing lease expiration dates; encouraging residents to sign longer lease
terms, up to 24 months; and providing incentives for residents who renew their
leases. Approximately one third of our leases in effect are for a duration of 13
months or more. While we expect some continued pressure in our markets through
1997, we do not expect this will have a material adverse effect on the Company's
operations or cash flows.
Restaurant rental income was the minimum rent under the lease agreement with
Boddie-Noell Enterprises, Inc. in the first three quarters of both 1997 and
1996. Under the terms of the lease agreement, restaurant rental income is the
greater of the minimum rent of $4.5 million per year or 9.875% of food sales.
For the third quarter of 1997, sales at the Company's restaurants totaled
$11,564,000, a decrease of 5.0% compared to third quarter of 1996. Through nine
months of 1997, sales at the Company's restaurants totaled $33,364,000, a
decrease of 1.5% compared to the first nine months of 1996. For percentage rent
payments to resume, restaurant sales would have to increase by 1.3 percent over
1996 sales levels.
The Company has a 95% economic interest in the Management Company and received
equity income of $19,000 during the third quarter of 1997 compared to $35,000 in
the third quarter of 1996. Equity in income of the Management Company increased
significantly year-to-date in 1997 compared to 1996, primarily due to the
Management Company's receipt during the first quarter of refinancing fees from
two managed properties and one-time sales commissions from two managed
properties. We do not expect the operation of the Management Company to have a
significant effect on the financial position, operating results, or cash flows
of the Company in future periods.
The increase in interest and other income for the third quarter and through nine
months of 1997 compared to 1996 is primarily attributable to interest and fees
earned on loans made to facilitate the rehabilitation of The Villages. Effective
February 27, 1997, the Company entered into a participating loan agreement with
The Villages, described in detail in our Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997. Through September 30, 1997, we have
advanced approximately $1,413,000 under the loan agreement, and have recorded
interest income of approximately $68,000. Interest expense on related borrowings
totals approximately $37,000 through September 30, 1997.
Expenses. Expenses in the third quarter and through nine months of 1997 were
generally consistent with our expectations. The increase in depreciation
compared to 1996 amounts reflects the acquisition of Paces Village Apartments
($10.7 million in apartment property assets) in April 1996, along with
improvements at other apartment properties. The increase in amortization expense
is primarily attributable to quarterly additions to the intangible asset related
to the earn-out provision of the 1994 BT Venture Corporation ("BTVC")
acquisition agreement.
Apartment operations expense increased by 7.4% in the third quarter and 15.8%
through nine months of 1997 compared to 1996. These increases reflect the impact
of the Paces Village acquisition in April 1996, increased costs associated with
attracting and retaining residents in a more competitive apartment market, and
preventive maintenance expenditures. Apartment operations expense totaled 33.4%
of related income in third quarter 1997 compared to 31.6% in third quarter of
1996, and 32.1% of related income through nine months of 1997 compared to 30.4%
through nine months of 1996.
10
<PAGE>
Operating expenses relating to restaurant properties are insignificant because
of the restaurant properties' triple net lease arrangement.
The increase in interest expense in the third quarter and through nine months of
1997 compared to 1996 is primarily attributable to the addition of $10,650,000
of debt related to the acquisition of Paces Village in the second quarter of
1996. Weighted average interest rates were 8.1% in the third quarter of 1997 and
8.0% through nine months of both 1997 and 1996.
Funds from operations. Funds from operations (frequently referred to as "FFO")
is defined by the National Association of Real Estate Investment Trusts
("NAREIT") as "net income (computed in accordance with generally accepted
accounting principles), excluding gains (losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures." Consistent with NAREIT
guidelines, we have disregarded all one-time fees received by the Management
Company in the first quarter of 1997 in calculating funds from operations.
We consider funds from operations to be useful in evaluating potential property
acquisitions and measuring the operating performance of an equity REIT because,
together with net income and cash flows, funds from operations provides
investors with an additional basis to evaluate the ability of the REIT to incur
and service debt and to fund acquisitions and other capital expenditures. Funds
from operations does not represent net income or cash flows from operations as
defined by generally accepted accounting principles. You should not consider
funds from operations to be an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flows as a measure
of liquidity.
Funds from operations does not measure whether cash flow is sufficient to fund
all of the Company's cash needs, including principal amortization, capital
improvements and distributions to shareholders. Funds from operations does not
represent cash flows from operating, investing or financing activities as
defined by generally accepted accounting principles. Further, funds from
operations as disclosed by other REITs may not be comparable to the Company's
calculation of funds from operations.
A reconciliation of net income to funds from operations is as follows (all
amounts in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 439 $ 463 $1,292 $1,278
Depreciation 644 627 1,923 1,787
Amortization of management intangible 97 81 278 231
Less non-recurring equity income items
excluded from FFO - - (103) -
--------------- --------------- -------------- ---------------
Funds from operations $1,180 $1,171 $3,391 $3,295
=============== =============== ============== ===============
</TABLE>
Funds from operations increased by 0.7% in third quarter of 1997 compared to
1996. Funds from operations increased by 2.9% through nine months of 1997
compared to 1996, primarily attributable to improved operations at apartment
properties and the inclusion of operations of Paces Village for the full period
in 1997.
11
<PAGE>
Liquidity and Capital Resources
Capital resources. At September 30, 1997, the Company's total book
capitalization was $102,347,000, comprised of $23,950,000 shareholders' equity
and $78,397,000 debt.
During the third quarter of 1997, we issued 10,201 shares of common stock under
our Dividend Reinvestment and Stock Purchase Plan ("DRIP") for cash proceeds
totaling approximately $146,000.
During the third quarter of 1997, we recorded liability for additional
consideration of $141,667 to the former BTVC shareholders pursuant to an
earn-out provision in the BTVC acquisition agreement. No shares were issued
pursuant to this earn-out provision during the third quarter of 1997. Under the
terms of the acquisition agreement, at September 30, 1997, the former BTVC
shareholders were due additional consideration totaling approximately $572,000,
payable at the Company's option in up to 43,438 shares of common stock or in
cash. The earn-out period ended with the quarter ended September 30, 1997. By
agreement, the Company is prohibited from issuing such shares of common stock if
such issuance would cause the Company to become disqualified as a REIT.
We expect to issue these shares in January 1998.
Effective August 1, 1997, we modified the Company's note payable to a bank in
the principal sum of up to $25,500,000 ($23,900,000 outstanding) to extend the
maturity of the note, by one year, to December 1999.
During the third quarter of 1997, we advanced approximately $569,000 to The
Villages under the participating loan agreement, which provides for interest at
the greater of 12.5 percent or 30-day LIBOR plus 6.125 percent plus shared
income interest. These advances were funded by draws under the Company's 1996
credit facility with a bank for borrowings at 30-day LIBOR plus 2.25 percent,
secured by second deeds of trust on three apartment properties.
At September 30, 1997, the weighted average interest rate on outstanding debt
was 8.0%, with long-term debt comprised of $60,032,000 at fixed interest rates
and $18,365,000 at variable rates indexed on 30-day LIBOR rates. A 1% increase
in variable rates would increase annual interest expense by approximately
$167,000, while a 1% decrease in variable rates would decrease annual interest
expense by approximately $185,000.
Cash flows and liquidity. We define funds available for distribution as funds
from operations plus non-cash expense for amortization of loan costs, less
payments for scheduled amortization of debt principal and recurring capital
expenditures.
A reconciliation of funds from operations to funds available for distribution,
along with summary cash flow information, is as follows (all amounts in
thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Funds from operations $ 1,180 $ 1,171 $ 3,391 $ 3,295
Amortization of loan costs 49 58 161 163
Scheduled debt principal payments (125) (117) (368) (341)
Recurring capital expenditures (87) (166) (300) (293)
Non-recurring equity income items
excluded from FFO - - 103 -
--------------- --------------- -------------- ---------------
Funds available for distribution $ 1,017 $ 946 $ 2,986 $ 2,825
=============== =============== ============== ===============
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net cash provided by (used in):
Operating activities $ 1,349 $ 1,364 $ 3,711 $ 3,929
Investing activities (736) (140) (1,696) (10,966)
Financing activities (418) (956) (1,451) 7,288
Dividends and distributions paid to shareholders $ 965 $ 935 $ 2,885 $ 2,806
Nonrecurring capital expenditures:
Acquisition improvements and replacements $ 16 $ 19 $ 57 $ 122
Other apartment property improvements 65 6 124 11
</TABLE>
The Company paid dividends of $0.31 per share in each of the first three
quarters of both 1997 and 1996. These dividends were funded from cash provided
by operating activities.
We capitalize expenditures relating to acquiring new assets, materially
enhancing the value of an existing asset, or substantially extending the useful
life of an existing asset. All carpet and vinyl replacements are capitalized.
Additions to apartment properties were funded from cash provided by operating
activities and proceeds of common stock issued through the Company's DRIP.
In February 1997 the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share," which is required to be adopted on December 31, 1997.
At that time, we will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new requirements
for calculating primary earnings per share, the dilutive effect of stock options
will be excluded. The impact of Statement 128 on the calculation of primary and
fully diluted earnings per share is not expected to be material.
Short- and long-term liquidity requirements. We continue to produce sufficient
cash flow to fund our regular dividend. The Company has announced that it will
pay a regular quarterly dividend of $0.31 per share on November 14, 1997, to
shareholders of record on October 31, 1997.
We generally expect to meet short-term liquidity requirements through net cash
provided by operations and utilization of credit facilities. We believe that net
cash provided by operations is, and will continue to be, adequate to meet both
operating requirements and payment of dividends by the Company in accordance
with REIT requirements in both the short term and the long term. We anticipate
funding acquisition activities primarily by using short-term credit facilities
as an interim measure, to be replaced by funds from equity offerings or
long-term debt. We expect to meet our long-term liquidity requirements, such as
scheduled debt maturities and repayment of short-term financing of possible
property acquisitions, through long-term secured and unsecured borrowings and
the issuance of debt securities or additional equity securities. We believe we
have sufficient resources to meet our short-term liquidity requirements.
We do not believe that inflation poses a material risk to the Company. The
leases at our apartment properties are short-term in nature, with none exceeding
two years. The restaurant properties are leased on a triple-net basis, which
places the risk of rising operating and maintenance costs on the lessee.
13
<PAGE>
PART II - Other Information
Item 5. Other Information
Recent developments
Conversion to UPREIT. We are currently in the process of converting to an
umbrella partnership real estate investment trust ("UPREIT"). An UPREIT is a
real estate investment trust that controls and holds most of its properties
through an umbrella limited partnership.
Agreement to acquire seven apartment communities. On September 22, 1997, we
signed an agreement to acquire a portfolio of seven apartment communities
containing 1,356 apartment units located in North Carolina. Phase I of the
acquisition consists of 880 apartment units in four apartment communities. We
expect to complete Phase I of the acquisition in late November 1997. The
remaining three properties are currently under development, with expected
completion dates within the next 12 months. We will acquire these communities
when they are completed and achieve predetermined occupancy and rental levels.
Pending Common Stock offering. On November 7, 1997, we filed a Registration
Statement on Form S-2 under which we will issue 2,800,000 shares of our common
stock. We have granted the underwriters an over-allotment option; if they choose
to exercise such option in full, we will issue an additional 420,000 shares. The
offering will be made only by means of a prospectus. We anticipate that the
Registration Statement will be declared effective and that we will complete this
offering in December 1997.
Executive employment contracts. In July 1997, we entered into substantially
identical employment contracts with D. Scott Wilkerson (President and Chief
Executive Officer) and Philip S. Payne (Executive Vice President and Chief
Financial Officer). These four year agreements, subject to automatic annual
renewal for additional one year periods extending the term to a maximum of ten
years, provide for initial base salaries of $139,920, annual discretionary bonus
as determined by the Board of Directors, and participation in an incentive
compensation plan we intend to establish, along with specified death and
disability benefits. The agreements provide for severance payments equal to base
salary for the remaining term of the contract (excluding any unexercised renewal
periods) in the event of termination without cause. Alternatively, in the event
of change in control of the Company, the agreements provide for payments of
three times base salary, discretionary bonus and annual bonus, along with a lump
sum cash payment of the benefit the executive would otherwise have received had
all stock options and other stock based compensation been fully vested, been
exercised and become due and payable.
Also in July 1997, we entered into an employment agreement with Pamela B. Novak,
Vice President, Controller and Chief Accounting Officer of the Company. The two
year agreement is substantially identical to agreements signed by Messrs.
Wilkerson and Payne, except that such agreement provides for a base salary of
$90,000 and severance payments of the greater of the remaining term of the
agreement or one year's total compensation.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
Exhibit 2 Certificate of Correction to Articles of Merger dated
July 22, 1997, between Boddie-Noell Properties, Inc. and
Boddie-Noell Properties of Maryland, Inc., dated
August 5, 1997
Exhibit 10 Form and description of Employment Agreements dated
July 15, 1997, between Boddie-Noell Properties, Inc. and
certain officers.
Exhibit 27 Financial data schedule (electronic filing)
b) Reports on Form 8-K: None
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BODDIE-NOELL PROPERTIES, INC.
(Registrant)
November 13, 1997 /s/ Philip S. Payne
-----------------------
Philip S. Payne
Executive Vice President and
Chief Financial Officer
(Duly authorized officer)
November 13, 1997 /s/ Pamela B. Novak
-----------------------
Pamela B. Novak
Vice President, Controller and
Chief Accounting Officer
15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Page
<S> <C> <C>
2 Certificate of Correction to Articles of Merger dated July 22, 1997, between
Boddie-Noell Properties, Inc. and Boddie-Noell Properties of Maryland, Inc.,
dated August 5, 1997 17
10 Form and description of Employment Agreements dated July 15, 1997, between
Boddie-Noell Properties, Inc. and certain officers. 21
27 Financial data schedule (electronic filing) -
</TABLE>
The exhibits to this Form 10-Q have been excluded from this Registration
Statement but will be provided by the Registrant upon request.
16
<PAGE>
<PAGE>
Exhibit 99.3
Consent of Philip S. Payne as a Person Named as About to Become a
Director
I, Philip S. Payne, hereby consent to be included as a person named as
about to become a director of Boddie-Noell Properties, Inc. (the "Company")
in the Company's Registration Statement on Form S-2 (Registration No.
333-39803).
/s/ Phillip S. Payne
--------------------------
Phillip S. Payne
<PAGE>
Exhibit 99.4
Consent of D. Scott Wilkerson as a Person Named as About to Become a
Director
I, D. Scott Wilkerson, hereby consent to be included as a person named as
about to become a director of Boddie-Noell Properties, Inc. (the "Company")
in the Company's Registration Statement on Form S-2 (Registration No.
333-39803).
/s/ D. Scott Wilkerson
--------------------------
D. Scott Wilkerson
