UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997or
[ ] 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 33-15427
RETAIL EQUITY PARTNERS LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
North Carolina 56-1590235
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3850 One First Union Center, Charlotte, NC 28202-6032
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 704/944-0100
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered:
Beneficial Assignment Certificates None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant at March 20, 1998, was not determinable (no active market).
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
Index to exhibits at page 27 Total number of pages 27
1
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RETAIL EQUITY PARTNERS LIMITED PARTNERSHIP
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Item No. Page No.
<S> <C> <C>
PART I
1 Business 3
2 Properties 4
3 Legal Proceedings 4
4 Submission of Matters to a Vote of Security Holders 4
PART II
5 Market for Registrant's Common Equity and Related 5
Stockholder Matters
6 Selected Financial Data 5
7 Management's Discussion and Analysis of Financial 5
Condition and Results of Operation
8 Financial Statements and Supplementary Data 7
9 Changes in and Disagreements With Accountants on 7
Accounting and Financial Disclosure
PART III
10 Directors and Executive Officers of the Registrant 8
11 Executive Compensation 8
12 Security Ownership of Certain Beneficial Owners and 8
Management
13 Certain Relationships and Related Transactions 8
PART IV
14 Exhibits, Financial Statement Schedules, and Reports on 10
Form 8-K
</TABLE>
2
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PART I
ITEM 1. BUSINESS
Retail Equity Partners Limited Partnership (the "Partnership") is a North
Carolina limited partnership, which was organized in 1987 for the purpose of
acquiring, holding, operating and managing three neighborhood shopping centers.
The general partner of the Partnership is Boddie Investment Company ("BIC"), a
North Carolina corporation.
The Partnership offered a minimum of 50,000 and a maximum of 1,000,000
Beneficial Assignment Certificates ("BACs") representing beneficial assignments
of limited partnership interests at $20 per BAC on a best effort basis through
Planned Management Company, the dealer/manager. The Partnership received
aggregate subscription funds of $6,671,543, and the offering closed on April 2,
1990.
The Partnership made cash and leveraged investments in three neighborhood
shopping centers located in Burlington, North Carolina (New Market Square),
Raleigh, North Carolina (Plaza West), and Virginia Beach, Virginia (Cape Henry
Plaza).
In October 1991, the ownership of New Market Square was transferred to New
Market Square Limited Partnership ("NMS"), a newly formed partnership. The
Partnership was the sole general partner holding a 99.99 percent interest in
NMS. In February 1992, NMS filed a voluntary petition for relief under Chapter
11 of the United States Bankruptcy Code. This action was taken after
negotiations to refinance New Market Square's mortgage loan payable of
$6,400,000 failed and alternative financing could not be obtained. NMS received
court approval to continue normal operations. In May 1993, NMS successfully
completed restructuring of the mortgage loan payable with the lender and emerged
from bankruptcy. The principal balance of the mortgage loan was increased to
$6,425,000, the additional $25,000 being attributed to legal fees incurred to
restructure the loan. In May 1993, a $100,000 principal payment was due and
paid.
In August 1994, Rose's Inc., an anchor tenant at New Market Square, renounced
its lease pursuant to a Chapter 11 bankruptcy filing, vacated the rental space,
and ceased making rental payments. Rose's filed a post petition rent claim
against the Partnership, which was settled in February 1995 for $20,000. The
Partnership filed a claim against Rose's for unpaid future rent. An agreement to
fix the claim at $512,808 was reached in January 1995, and the claim was sold in
March 1995 to an unrelated third party for an immediate cash payment of $82,049.
Due to the departure of Rose's, the Partnership was unable to generate
sufficient cash flow to make full payments required under the NMS mortgage loan.
The lender and the Partnership entered into a forbearance agreement under which
NMS remitted to the lender net cash flow, after payment of monthly operating
expenses. In June 1995, the forbearance agreement was terminated and the NMS
mortgage loan was brought current by using substantially all of the
Partnership's cash reserves. During the last half of 1995, BIC advanced the
Partnership sufficient funds to cover operating shortfalls.
In February 1996, the New Market Square land, building and personal property
were sold to an unrelated party for a contract price of $6,558,000, resulting in
a net loss on sale of $499,000.
Cape Henry Plaza and Plaza West are currently held for sale. The general partner
anticipates entering into contracts for sale of both properties in the near
future.
Partnership Business. Following the sale of New Market Square Shopping Center in
February 1996, the Partnership continues to operate two shopping centers, Cape
Henry and Plaza West. Rental revenue is derived from the leasing of shopping
center space to approximately 24 tenants and from a ground lease to a bank for
an out-parcel. The shopping centers are leased subject to net leases. Tenants
reimburse the Partnership for substantially all common area maintenance and
certain other costs incurred.
3
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Historically, a significant portion of rental revenue has been derived from
anchor tenants for which leases extend to 2006. Major tenants (those leasing
greater than 10 percent of total leasable space of 113,800 square feet) are as
follows:
Base Rental Lease
Tenant Shopping Center Square Feet Revenue Expires
- --------------------------------------------------------------------------------
Harris Teeter Plaza West 25,000 $ 143,000 2006
Food Lion Cape Henry 33,000 180,000 2006
The Partnership's two properties are located in cities with strong
economies and rapidly growing populations. The properties have been well
maintained. Cape Henry Plaza was painted in 1995 and roof repairs were completed
in 1996. The parking lot at Plaza West was repaved in 1997. With the completion
of these repairs, the centers are in reasonably good physical condition.
Occupancy remains high at both centers. At December 31, 1997, occupancy was 97%
at Cape Henry Plaza and 98% at Plaza West. Rental rates for local tenant
renewals and new local tenant leases continue to improve at both properties.
This improvement appears to be attributable to the combined effect of an
improving economy, good locations and a lack of new construction of similar type
centers.
As of March 20, 1998, the Partnership had no employees.
ITEM 2. PROPERTIES
Both properties are neighborhood shopping centers held subject to loans. The
centers were constructed in 1986 and acquired by the Partnership in May 1988.
Approx. Sq. Ft.
Shopping Center Name Location Rental Space
- --------------------------------------------------------------------------------
Plaza West Raleigh, North Carolina 63,800
Cape Henry Plaza Virginia Beach, Virginia 50,000
Summary information regarding occupancy rates is as follows:
As of December 31
1997 1996 1995
- --------------------------------------------------------------------------------
Plaza West 98% 100% 100%
Cape Henry Plaza 97% 100% 100%
ITEM 3. LEGAL PROCEEDINGS
The Partnership was not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the fourth
quarter of fiscal year 1997.
4
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PART II
ITEM 5. MARKET FOR REGISTRANT'S BENEFICIAL ASSIGNMENT CERTIFICATES AND RELATED
MATTERS
The Partnership received aggregate subscription funds of $6,671,543 for 333,577
beneficial assignment certificates ("BACs") from approximately 480 investors.
There is currently no established public trading market for the BACs. The
Partnership is unaware of any secondary market for its securities.
During second quarter 1996, the Partnership made a distribution in the amount of
$297,985 to the limited partners. This distribution consisted entirely of return
of capital, and was funded from the net proceeds of the sale of New Market
Square less amounts required to maintain adequate operating reserves. Further
distributions have been suspended until such time that property operations
allow. No distributions were made in 1997 or 1995.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
For the years ended December 31
1997 1996 (1) 1995 (2) 1994 1993
- ------------------------------------- -------------- --------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Data
Rental revenue $1,032,474 $1,095,417 $1,632,519 $1,767,669 $1,811,601
Net loss (76,500) (150,488) (828,548) (269,830) (277,204)
Net loss per BAC (0.23) (0.45) (2.46) (0.80) (0.82)
Distributions per BAC (3) .00 .00 .00 .00 .00
Balance Sheet Data (at year end)
Total assets 6,348,223 6,490,838 13,029,394 14,116,654 14,493,681
Notes payable 6,812,467 6,874,644 12,797,111 13,060,575 13,266,616
<FN>
(1) New Market Square Shopping Center was sold to an unrelated third party in
February 1996.
(2) In 1995 the Partnership recorded a charge of $510,000 to reduce the recorded
basis of the New Market Square Shopping Center property to estimated net
realizable value.
(3) Under generally accepted accounting principles, distributions have consisted
entirely of return of capital.
</FN>
</TABLE>
ITEM 7. 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. This discussion should be read in conjunction with the Financial
Statements and Notes thereto included in Item 14 of this Annual Report.
Results of Operations
Revenues. Rental revenues in 1997 decreased by 6% from 1996, primarily
attributable to the sale of New Market Square in February 1996. Rental revenues
in 1996 decreased by 38% from 1995, again primarily attributable to the
5
<PAGE>
sale of New Market Square in February 1996. Although rental revenues in total
decreased, revenues at the two centers owned throughout the three years, Cape
Henry and Plaza West, were consistent in 1997 compared to 1996, and increased by
4% in 1996 compared to 1995. Occupancy levels at Cape Henry and Plaza West have
remained consistently high.
In 1995 the Partnership recognized approximately $82,000 in other income related
to the sale of its claim against Rose's for unpaid future rent. There were no
other significant income items in 1997, 1996 or 1995.
Expenses. Decreases in operating expenses in 1997 compared to 1996, and in 1996
compared to 1995, generally reflect the impact of the sale of New Market Square.
For the two centers owned throughout the three years, operating expenses
decreased by 10% in 1997 compared to 1996, primarily due to repairs at Plaza
West in 1996. For these two centers, 1996 operating expenses increased
approximately 20% compared to 1995 (this increase also reflects the impact of
repairs at Plaza West in 1996). Depreciation and amortization were generally
unchanged in 1997 compared to 1996. The decrease in depreciation and
amortization in 1996 compared to 1995 reflects the impact of sale of New Market
Square. The decrease in interest expense in 1997 compared to 1996, and the
decrease in 1996 compared to 1995, was again attributable to the sale of New
Market Square.
In late December 1995, the Partnership entered into an agreement to sell New
Market Square Shopping Center which was completed in February 1996. In
conjunction with this sale, the Partnership recorded a provision of $510,000 in
1995 (subsequently reduced by $11,000 in 1996) to reduce the recorded net book
value of New Market Square assets to estimated net realizable value (contract
sale price of $6,558,000 less direct costs of the sale totaling approximately
$214,000). (See discussion of New Market Square in Notes to Financial Statements
included in Item 14 of this Annual Report.)
Summary Results of Operations. The consolidated statements of operations include
the operations of NMS through February 1996. Decreases in revenues and expenses
in 1996 compared to 1995 generally reflect the effect of the sale of New Market
Square Shopping Center in early February. Summary operating results of Cape
Henry Plaza and Plaza West shopping centers are as follows:
1997 1996 1995
----------------- ----------------- -----------------
Revenue
Rental revenue $1,032,474 $1,031,987 $ 993,566
Interest 9,205 8,527 5,903
----------------- ----------------- -----------------
1,041,679 1,040,514 999,469
Expenses
Operating expenses 284,543 314,558 261,708
Depreciation 181,610 177,400 177,534
Amortization 19,194 19,194 19,194
Interest 632,832 638,349 643,379
----------------- ----------------- -----------------
1,118,179 1,149,501 1,101,815
----------------- ----------------- -----------------
Net loss $ (76,500) $ (108,987) $ (102,346)
================= ================= =================
Liquidity and Capital Resources
The two remaining shopping centers continue to generate nominal positive cash
flow from operations. The leases held by the Partnership are generally
long-term, with substantially all increases in operating expenses, taxes and
insurance passed through to, and paid by, tenants. Additionally, most leases
include built-in rent increases based on changes in the consumer price index or
percentage rents based on total sales. Although the Partnership currently
generates sufficient cash flow to meet its immediate operating and capital
needs, virtually any adverse development, such as the loss of a major tenant,
the loss of multiple smaller tenants, or the failure of a significant tenant to
pay
6
<PAGE>
rent, could create a material deficiency in the Partnership's short-term
liquidity. In addition, the Partnership may not generate sufficient cash flow to
make significant repairs, improvements or modifications to the centers should
such needs arise.
In January 1998, Cape Henry Plaza and Plaza West were listed for sale. The
general partner is currently evaluating numerous offers that have been received,
and anticipates entering into contracts for sale of both centers in the near
future. In the event the properties are sold, the general partner does not
believe that the sale will result in sufficient funds, after repayment of the
first mortgage loans, to allow for more than nominal distributions to investors.
The Partnership's two mortgage loans mature in August 1998. In the event the
Partnership's properties have not been sold prior to that date, the Partnership
will be required to refinance these loans. The general partner can offer no
assurance that, at that time, replacement financing will be obtainable.
During 1997 the Partnership made capital repairs to Plaza West totaling
approximately $115,000. A distribution of approximately $298,000 was made to the
limited partners in 1996 from the net proceeds of the sale of New Market Square.
The Partnership made no distributions in 1997 or 1995. Distributions have been
suspended until property operations allow.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data are listed under Item 14(a) and
filed as part of this Annual Report on the pages indicated.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
7
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Partnership has no directors or executive officers. The Partnership
Agreement provides that the management of the affairs of the Partnership and the
administration of its day-to-day operations will be performed solely by the
general partner. From the inception of the Partnership until April 14, 1994, the
general partner was BT Venture Partners ("BTVP"), a North Carolina general
partnership formed in June 1985. The two general partners of BTVP were Boddie
Investment Company ("BIC"), a North Carolina corporation, and Tom G. Thornburg
("Thornburg"). In April 1994 BIC purchased Thornburg's interest in BTVP and
certain affiliated partnerships and corporations. In conjunction with this
transaction, BIC became the general partner of the Partnership as of April 14,
1994.
BIC was formed in June 1985 to engage in the business of real estate investment.
B. Mayo Boddie and Nicholas B. Boddie own all of the outstanding shares of
capital stock of BIC and are its only directors. Biographical information
concerning the officers of BIC is set forth below.
B. Mayo Boddie, age 68, President of BIC, together with his brother, Nicholas B.
Boddie, and their late uncle, Carleton Noell, founded Boddie-Noell Enterprises,
Inc. ("Enterprises") in 1961. Enterprises, which is headquartered in Rocky
Mount, North Carolina, is the largest privately owned, and the second largest,
franchisee of Hardee's Restaurants in the United States. Enterprises owns and
operates approximately 365 Hardee's Restaurants. B. Mayo Boddie is chairman of
the board of Enterprises. Mr. Boddie serves as a director of First Union
National Bank of North Carolina. He attended the University of North Carolina at
Chapel Hill.
Nicholas B. Boddie, age 70, a Vice President of BIC, is vice chairman and a
director of Enterprises. He is a director of First Union National Bank of Rocky
Mount. Mr. Boddie attended the University of North Carolina at Chapel Hill.
Douglas E. Anderson, age 50, a Vice President and Secretary of BIC, has been
with Enterprises since 1977 and is currently executive vice president, secretary
and a director of that company. Mr. Anderson is also president of BNE Land and
Development Company, a division of Enterprises, and is Vice President of
Boddie-Noell Properties, Inc., a real estate investment trust traded on the
American Stock Exchange. He serves as a director of Wachovia Bank of Rocky
Mount, North Carolina. He presently serves on the Executive Committee for the
UNC Educational Foundation at Chapel Hill. Mr. Anderson holds a BS degree from
the University of North Carolina at Chapel Hill.
W. Craig Worthy, age 45, Treasurer of BIC, has been with Enterprises since 1979
and is currently senior vice president and chief financial officer of that
company. He serves as a director of First Union National Bank of Rocky Mount,
North Carolina. He received a BA degree from the University of Virginia in 1974
and a Master of Accountancy and of Business Administration from the University
of South Carolina.
ITEM 11. EXECUTIVE COMPENSATION
During the year ended December 31, 1997, the Partnership paid no compensation to
the general partner or to the executive officers, directors or partners of its
affiliates.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
There are no BAC owners with a 5 percent or greater ownership interest.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The general partner of the Partnership is BIC, a North Carolina corporation. See
Item 10, Directors and Executive Officers of the Registrant for information
concerning BIC.
8
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BNP Management, Inc. is engaged by the Partnership to provide management and
certain leasing services for its shopping centers. Certain officers and
directors of BIC are also officers and directors of BNP Management, Inc.
Management and partnership administration fees totaling approximately $55,000
were paid to BNP Management, Inc. during 1997. In addition, the Partnership
reimbursed BNP Management, Inc. for certain administrative costs in the amount
of approximately $12,000.
The general partner, subject to audit by independent public accountants,
maintains the books and records of the Partnership. Purchasers of BACs have no
right to participate in the management of the Partnership. It is not intended
that there will be annual meetings of investors.
The Partnership relies on BIC and BNP Management, Inc. for day-to-day
management. BIC and BNP Management, Inc. believe they have sufficient personnel
to be fully capable of discharging their responsibility to all partnerships or
groups to which they are responsible. BIC and BNP Management, Inc. have
conflicts of interest in allocating management time, services and other
functions among affiliated publicly held and privately held entities and other
partnerships or ventures that it may organize. The partners, officers, and
directors of BIC and BNP Management, Inc. will devote only such time to the
affairs of the Partnership as they, within their sole discretion exercised in
good faith, determine to be necessary to carry out their obligations under the
Partnership Agreement.
9
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
The financial statements and schedules listed below are filed as part of this
Annual Report on the pages indicated.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
Financial Statements and Notes:
<S> <C>
Reports of Independent Accountants 12
Consolidated Balance Sheets as of December 31, 1997 and 1996 14
Consolidated Statements of Operations for the Years Ended December 31, 1997, 15
1996 and 1995
Consolidated Statements of Partners' Deficit for the Years 16
Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 17
1996 and 1995
Notes to Consolidated Financial Statements 18
Schedules:
Schedule III - Real Estate and Accumulated Depreciation 26
</TABLE>
The financial statements and schedule are filed as part of this Annual Report.
All other schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
(a) 3. Exhibits
The registrant agrees to furnish a copy of all agreements related to long-term
debt upon request of the Commission.
Exhibit No.
2* Plan for Reorganization and Disclosure Statement, a Motion
seeking authority to make post-petition expenditures and
certain other related filings (filed as Exhibit 29(e) to the
Partnership 8-K filing dated February 14, 1992, and incorporated
herein by reference)
4* Retail Equity Partners Limited Partnership Agreement (filed as
Exhibit 4 to the Partnership's Registration Statement
(File No. 33-15427) on Form S-11 and incorporated herein by reference)
27 Financial Data Schedule (electronic filing)
* Incorporated herein by reference
(b) Reports on Form 8-K:
None
10
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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.
RETAIL EQUITY PARTNERS
LIMITED PARTNERSHIP
(Registrant)
By: Boddie Investment Company
General Partner
March 24, 1998 /s/ Philip S. Payne
------------------------
Philip S. Payne
(Duly authorized agent)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ B. Mayo Boddie Director March 24, 1998
- -----------------------------------
B. Mayo Boddie
/s/ Nicholas B. Boddie Director March 24, 1998
- -----------------------------------
Nicholas B. Boddie
11
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Report of Independent Auditors
To the Partners of
Retail Equity Partners Limited Partnership
We have audited the accompanying consolidated balance sheets of Retail Equity
Partners Limited Partnership as of December 31, 1997 and 1996 and the related
consolidated statements of operations, changes in partners' deficit and cash
flows for the years then ended. Our audits also included the financial statement
schedule as of and for the years ended December 31, 1997 and 1996 listed in the
Index at Item 14(a). These financial statements and schedule are the
responsibility of the Partnership'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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Retail Equity
Partners Limited Partnership as of December 31, 1997 and 1996 and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule as of and for the years ended December 31, 1997 and
1996 when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 6 to the financial statements, the Partnership's recurring
losses from operations and net capital deficiency raise substantial doubt about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 6. The 1997 financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Raleigh, North Carolina
February 4, 1998
12
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Report of Independent Public Accountants
To the Retail Equity Partners Limited Partnership:
We have audited the accompanying consolidated statements of operations, changes
in partners' deficit and cash flows of Retail Equity Partners Limited
Partnership (a North Carolina limited partnership) for the year ended December
31, 1995. These financial statements are the responsibility of the managing
general partner. Our responsibility is to express an opinion on those financial
statements 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 results of operations and cash flows of Retail Equity
Partners Limited Partnership for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Charlotte, North Carolina,
February 8, 1996
13
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Retail Equity Partners Limited Partnership
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
1997 1996
------------------ ------------------
<S> <C> <C>
Assets
Investments in shopping centers:
Land $ - $2,094,634
Buildings and improvements - 5,795,381
Personal property - 32,181
Less accumulated depreciation - (1,697,749)
------------------ ------------------
- 6,224,447
Cash and cash equivalents 76,863 119,440
Restricted cash - tenant security deposits 22,243 25,407
Accounts receivable 51,621 63,925
Prepaids and other assets 30,154 28,625
Deferred cost, net of amortization of $182,142 in 1997
and $162,948 in 1996 9,800 28,994
Property held for sale 6,157,542 -
------------------ ------------------
Total assets $6,348,223 $6,490,838
================== ==================
Liabilities and partners' deficit
Mortgage loans payable $6,812,467 $6,874,644
Trade accounts payable and accrued expenses 52,522 52,992
Prepaid rents and tenant security deposits 19,949 23,417
------------------ ------------------
Total liabilities 6,884,938 6,951,053
Partners' deficit:
Limited partners (468,604) (392,869)
General partner (68,111) (67,346)
------------------ ------------------
Total partners' deficit (536,715) (460,215)
------------------ ------------------
Total liabilities and partners' deficit $6,348,223 $6,490,838
================== ==================
</TABLE>
See accompanying notes.
14
<PAGE>
Retail Equity Partners Limited Partnership
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended December 31
1997 1996 1995
------------------ ------------------- ------------------
<S> <C> <C> <C>
Revenue:
Rental revenue $ 1,032,474 $1,095,417 $1,632,519
Interest 9,205 12,934 9,205
Other income - - 82,049
------------------ ------------------- ------------------
1,041,679 1,108,351 1,723,773
Expenses:
Property operations 91,533 153,514 193,793
General and administrative 39,226 31,841 55,496
Property taxes and insurance 98,482 101,743 163,824
Management fees 55,302 58,682 51,330
Depreciation 181,610 177,400 392,188
Amortization 19,194 20,782 31,884
Interest 632,832 696,171 1,153,806
Provision for loss on sale of New Market Square
Shopping Center - (11,457) 510,000
------------------ ------------------- ------------------
1,118,179 1,228,676 2,552,321
------------------ ------------------- ------------------
Loss before extraordinary item (76,500) (120,325) (828,548)
Extraordinary item - loss on extinguishment of debt - (30,163) -
------------------ ------------------- ------------------
Net loss $ (76,500) $ (150,488) $ (828,548)
================== =================== ==================
Net loss allocated to limited partners (99%) $ (75,735) $ (148,983) $ (820,263)
================== =================== ==================
Net loss allocated to general partner (1%) $ (765) $ (1,505) $ (8,285)
================== =================== ==================
Net loss per limited partnership unit $ (0.23) $ (0.45) $ (2.46)
================== =================== ==================
Weighted average number of limited partnership units
outstanding 333,577 333,577 333,577
================== =================== ==================
</TABLE>
See accompanying notes.
15
<PAGE>
Retail Equity Partners Limited Partnership
Consolidated Statements of Partners' Deficit
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
------------------ ------------------- ------------------
<S> <C> <C> <C>
Balance at December 31, 1994 $ 874,362 $(57,556) $ 816,806
Net loss (820,263) (8,285) (828,548)
------------------ ------------------- ------------------
Balance at December 31, 1995 54,099 (65,841) (11,742)
Distribution to limited partners (297,985) - (297,985)
Net loss (148,983) (1,505) (150,488)
------------------ ------------------- ------------------
Balance at December 31, 1996 (392,869) (67,346) (460,215)
Net loss (75,735) (765) (76,500)
================== =================== ==================
Balance at December 31, 1997 $(468,604) $(68,111) $ (536,715)
================== =================== ==================
</TABLE>
See accompanying notes.
16
<PAGE>
Retail Equity Partners Limited Partnership
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ending December 31
1997 1996 1995
----------------- ------------------- -------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (76,500) $ (150,488) $ (828,548)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 200,804 198,182 424,072
Extraordinary item - loss on early extinguishment of debt - 30,163 -
Provision for loss on sale of New Market Square - (11,457) 510,000
Changes in operating assets and liabilities:
Accounts receivable 12,304 49,215 10,295
Prepaids and other assets (1,529) 7,468 15,263
Trade accounts payable and accrued expenses (470) (53,335) (72,302)
Prepaid rent and tenant security deposits (304) (3,147) (9,334)
Accrued interest due to affiliates - (1,846) 1,846
----------------- ------------------- -------------------
Net cash provided by operating activities 134,305 64,755 51,292
Investing activities
Proceeds from sale of New Market Square - 6,363,400 -
Additions to shopping center properties (114,705) (25,730) -
----------------- ------------------- -------------------
Net cash (used in) provided by investing activities (114,705) 6,337,670 -
Financing activities
Payments of long-term debt (62,177) (5,922,467) (263,464)
Distribution to limited partners - (297,985) -
Advances from (repayments to) general partner - (79,000) 79,000
----------------- ------------------- -------------------
Net cash used in financing activities (62,177) (6,299,452) (184,464)
----------------- ------------------- -------------------
Net (decrease) increase in cash and cash equivalents (42,577) 102,973 (133,172)
Cash and cash equivalents at beginning of year 119,440 16,467 149,639
----------------- ------------------- -------------------
Cash and cash equivalents at end of year $ 76,863 $ 119,440 $ 16,467
================= =================== ===================
</TABLE>
See accompanying notes.
17
<PAGE>
Retail Equity Partners Limited Partnership
Notes to Consolidated Financial Statements
December 31, 1997
1. Organization and Summary of Significant Accounting Policies
Retail Equity Partners Limited Partnership (the "Partnership") is a North
Carolina limited partnership formed to acquire, hold, operate and manage three
neighborhood shopping centers. In October 1991 the ownership of one of the
shopping centers was transferred to a newly formed partnership, New Market
Square Limited Partnership ("NMS"), which was 99.99 percent owned by the
Partnership. In 1996, NMS was sold to an unrelated third party (see Note 5). The
financial statements for the two years ended December 31, 1996 include the
accounts of NMS, and all significant intercompany accounts and transactions have
been eliminated.
Under the terms of the partnership agreement, net income (loss) and cash
distributions from operations are allocated 99 percent to the limited partners
and 1 percent to the general partner. When the limited partners have received
distributions equal to their equity contributions plus a priority return (as
defined), any further taxable income, losses or distributions will be allocated
90 percent to the limited partners and 10 percent to the general partner. Upon
the sale or refinancing of the Partnership property, the partnership agreement
specifies certain allocations of net proceeds.
Rental Revenue and Expenses
Rental revenue is derived from the leasing of shopping center space and from a
ground lease for an out-parcel. Fixed rental amounts are recorded as they accrue
under the terms of each lease. Contingent rents based on tenants' sales or
future changes in the Consumer Price Index are recorded at the time such amounts
are both determinable and due under the terms of related leases. There was no
contingent rental income earned in 1997, 1996 or 1995. The shopping centers are
leased subject to net leases. Tenants reimburse the Partnership for common area
maintenance and certain other expenses incurred.
Property
All property to be held and used is stated at cost. Buildings are depreciated on
a straight-line basis over the estimated useful life of 33 years. Capitalized
building improvements and personal property are depreciated using an accelerated
method over 15 years and 7 years, respectively. Repairs and maintenance costs
are expensed as incurred. Property held for sale is stated at the lower of cost
or fair value.
18
<PAGE>
Retail Equity Partners Limited Partnership
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
New Market Square Shopping Center
The New Market Square Shopping Center land, building and personal property were
sold to an unrelated party in February 1996.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents.
Deferred Costs
Financing costs have been capitalized and are amortized over the term of the
related mortgages. Leasing commissions are capitalized and amortized over
related lease terms.
Syndication and Offering Costs
Fees related to the sale of limited partnership units were charged against
partners' equity. These fees included various legal and accounting services and
sales commissions.
Income Taxes
Under current income tax laws, income or loss of the Partnership is included in
the income tax returns of the partners. Accordingly, no provision has been made
for federal or state income taxes in the accompanying financial statements. The
tax returns of the Partnership are subject to examination by federal and state
taxing authorities. If such examinations occur and result in changes with
respect to the partnership qualification or in changes to partnership income or
loss, the tax liability of the partners would be changed accordingly.
19
<PAGE>
Retail Equity Partners Limited Partnership
Notes to Consolidated Financial Statements (continued)
1. Organization and Summary of Significant Accounting Policies (continued)
Fair Values of Financial Instruments
The following methods and assumptions are used by the Partnership 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 Partnership's fixed rate mortgage notes is
estimated using discounted cash flow analysis based on estimated incremental
borrowing rates. The carrying amounts of the Partnership's borrowings under
notes payable approximate fair value at December 31, 1997.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Depreciation amounts included in these
financial statements reflect management's estimate of the life and related
depreciation rates for rental properties. Actual results could differ from those
estimates.
Reclassifications
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1997 and 1996 presentation. These reclassifications had no effect
on net income or partners' deficit as previously reported.
Impact of Recently Issued Accounting Standards
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income"
("SFAS 130") and No. 131, "Disclosures About Segments of an Enterprise and
Related Information" ("SFAS 131"), which are both effective for fiscal years
beginning after December 15, 1997. SFAS 130 addresses reporting amounts of other
comprehensive income and SFAS 131 addresses reporting segment information. The
Partnership does not believe that the adoption of these new standards will have
a material impact on its financial statements.
20
<PAGE>
Retail Equity Partners Limited Partnership
Notes to Consolidated Financial Statements (continued)
2. Property Held for Sale
In 1997, the Partnership transferred all investments in shopping centers to
property held for sale (see Note 6). Property held for sale at December 31,
1997, includes the following:
Approximate
Square Feet
Shopping Center Name Location Rental Space
- ------------------------- -------------------------------- --------------------
Cape Henry Plaza Virginia Beach, Virginia 50,000
Plaza West Raleigh, North Carolina 63,800
Approximately 35 percent of rental revenue at these two properties is derived
from two anchor tenants for which leases extend to 2006. Annual base rental
revenue from these two major tenants was approximately $180,000 and $143,000,
respectively in 1997, 1996 and 1995.
Minimum future rentals on noncancelable operating leases, excluding
reimbursement of operating expenses and contingent rent, in effect as of
December 31, 1997, are as follows:
1998 $ 862,100
1999 817,400
2000 795,000
2001 682,400
2002 459,700
Thereafter 1,638,600
---------------------
$ 5,255,200
=====================
21
<PAGE>
Retail Equity Partners Limited Partnership
Notes to Consolidated Financial Statements (continued)
3. Mortgage Loans Payable
Mortgage loans payable at December 31 consist of the following:
<TABLE>
<CAPTION>
1997 1996
------------------- ------------------
<S> <C> <C>
Mortgage loan payable to a financial institution, collateralized by Cape Henry
Plaza assets; principal and interest at 9.25% payable in monthly installments
of $29,370 with outstanding balance due August 1998. Prepayment penalty is
the greater of 1% of outstanding principal balance or an amount calculated
based on annual yield of U.S. government securities, as defined. $ 3,452,165 $ 3,483,673
Mortgage loan payable to a financial institution, collateralized by Plaza West
assets; principal and interest at 9.25% payable in monthly installments of
$28,588 with outstanding balance due August 1998. Prepayment penalty is the
greater of 1% of outstanding principal balance or an amount calculated based
on annual yield of U.S. government securities, as defined. 3,360,302 3,390,971
------------------- ------------------
$ 6,812,467 $ 6,874,644
=================== ==================
Scheduled principal payments on mortgage loans are as follows:
1998 $ 6,812,467
===================
$ 6,812,467
===================
</TABLE>
Interest payments totaled approximately $633,300, $742,400, and $1,203,300, in
1997, 1996, and 1995, respectively.
22
<PAGE>
Retail Equity Partners Limited Partnership
Notes to Consolidated Financial Statements (continued)
4. Transactions with Affiliates
The general partner in the Partnership is Boddie Investment Company ("BIC"). BNP
Management, Inc. serves as management agent of the rental property and
Partnership matters. Certain officers of BIC are also officers of BNP
Management, Inc.
During 1995, BIC made advances to the Partnership totaling $79,000, which were
repaid in 1996. Such advances accrued interest at the prime rate.
The Partnership is charged a property management fee of 3 percent of gross
collections, as defined. In 1997 and 1996 the Partnership was also charged a
partnership administration fee of $24,000. In addition, the management agent
allocates certain costs to the Partnership totaling $12,000 in 1997, 1996 and
1995. Operating expenses paid on behalf of the Partnership are reimbursed on a
monthly basis.
5. New Market Square Limited Partnership
In February 1992 NMS filed a voluntary petition for relief under Chapter 11 of
the United States Bankruptcy Code. NMS received court approval to continue
normal operations. In May 1993 NMS successfully completed its restructuring of
the mortgage loan payable with the lender and emerged from bankruptcy.
During August 1994 a major tenant at NMS, Rose's Inc., renounced its lease
pursuant to its Chapter 11 bankruptcy filing, vacated the rental space and
ceased making rental payments. Rose's filed a claim against the Partnership in
the amount of $45,743 for rent which it claimed was paid improperly after the
filing of its bankruptcy petition. In February 1995 the Partnership paid Rose's
$20,000 in settlement of the claim for payment of post petition rent. In
addition, the Partnership settled and sold its claim against Rose's for unpaid
future rent for the net amount of $82,000, with proceeds paid to the mortgage
lender applied against principal and interest in arrears.
Subsequent to Rose's vacating its rental space, NMS was unable to fund the
required debt service on the mortgage loan secured by its assets. As a result,
the lender and general partner entered into a forbearance agreement under which
NMS paid the lender net cash flow, as defined, in lieu of the principal and
interest requirement of the original note. In June 1995 the forbearance
agreement was terminated and the NMS mortgage loan was brought current by using
substantially all of the Partnership's cash reserves.
23
<PAGE>
Retail Equity Partners Limited Partnership
Notes to Consolidated Financial Statements (continued)
5. New Market Square Limited Partnership (continued)
New Market Square Shopping Center was subsequently sold to an unrelated third
party on February 8, 1996, for a contract price of $6,558,000. Direct costs of
the sale totaled approximately $214,000.
Proceeds from the sale were used to pay off the mortgage loan secured by the
assets of New Market Square Shopping Center. The Partnership also recorded an
extraordinary loss of $30,163 consisting of the write-off of deferred financing
costs related to that mortgage loan.
NMS was dissolved effective July 31, 1996. During 1996 the partnership made a
distribution to the limited partners totaling $297,985 from proceeds of the sale
of New Market Square Shopping Center.
Results of operations of NMS were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------ ----------------
<S> <C> <C>
Revenue:
Rental revenue $ 63,430 $ 638,953
Interest 4,407 3,302
Net proceeds, sale of Rose's claim - 82,049
------------------ ----------------
67,837 724,304
Expenses:
Property operations 18,571 84,944
General and administrative 1,665 24,169
Property taxes and insurance 7,155 72,253
Management fees 3,831 21,369
Depreciation - 214,654
Amortization 1,588 12,690
Interest 57,822 510,427
Provision for loss on sale of New Market
Square Shopping Center (11,457) 510,000
------------------ ----------------
79,175 1,450,506
------------------ ----------------
Loss before extraordinary item (11,338) (726,202)
Extraordinary item - loss on extinguishment of debt (30,163) -
------------------ ----------------
Net loss $ (41,501) $ (726,202)
================== ================
</TABLE>
24
<PAGE>
Retail Equity Partners Limited Partnership
Notes to Consolidated Financial Statements (continued)
6. Liquidity
The accompanying financial statements have been prepared assuming the
Partnership will continue as a going concern. The Partnership's mortgage loans
totaling $6.8 million mature in August 1998. In light of the Partnership's
current projected earnings and cash flow, management believes the Partnership
has the financial resources to maintain its current level of operations until
the August 1998 mortgage loans are due. However, cash generated from operations
alone will not be sufficient to repay the $6.8 million in August 1998, without
proceeds from the sale of assets or a refinancing or restructuring of the
mortgage loans prior to such date.
The properties are held for sale, and it is the intent of the general partner to
consummate a sale of the properties to the highest bidder prior to the maturity
date of the mortgage loans. Proceeds from the sale will be used to repay the
mortgage loans and liquidate the Partnership. The net proceeds from the
disposition are expected to exceed the current carrying value. If the
Partnership does not make the August 1998 mortgage loan payment, it will be
unable to continue its normal operations, and will be required to file
bankruptcy.
25
<PAGE>
RETAIL EQUITY PARTNERS LIMITED PARTNERSHIP
- -------------------------------------------------------------------------------
Schedule III - Real Estate and Accumulated Depreciation
Year Ended December 31, 1997
<TABLE>
<CAPTION>
Costs Gross Amount at Which
Description Encumb. Initial Costs Capitalized Carried at Close of Period
----------- ------- ------------- --------------------------
Buildings & Subsequent Buildings &
Land Improvem'ts to Acquisition Land Improvem'ts Total
<S> <C> <C> <C> <C> <C> <C> <C>
Cape Henry Plaza Shopping
Center, Virginia Beach, VA $ 3,452,165 $ 1,140,332 $ 3,596,694 $ 46,733 $ 1,021,855 $ 3,268,072 $ 4,289,927
Plaza West Shopping Center,
Raleigh, NC 3,360,302 1,422,557 3,307,336 199,857 1,072,779 2,674,195 3,746,974
=====================================================================================================
$ 6,812,467 $ 2,562,889 $ 6,904,030 $ 246,590 $ 2,094,634 $ 5,942,267 $ 8,036,901
=====================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Description
-----------
Accumulated Date of Date Life
Depreciation Constr. Acquired(Years)
<S> <C> <C> <C> <C>
Cape Henry Plaza Shopping
Center, Virginia Beach, VA $ 998,343 1986 May-88 33
Plaza West Shopping Center,
Raleigh, NC 881,016 1986 May-88 33
==============
$ 1,879,359
==============
</TABLE>
<TABLE>
<CAPTION>
Years ended December 31,
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Real estate investments:
Balance at beginning of year $ 7,922,196 $16,407,921 $16,407,921
Additions during year
Acquisitions by merger
- - -
Other acquisitions
- - -
Improvements, etc.
114,705 25,730 -
Deductions during year
Cost of real estate sold
- (8,511,455) -
-------------------------------------------
Balance at close of year $ 8,036,901 $ 7,922,196 $16,407,921
===========================================
Accumulated depreciation:
Balance at beginning of year $ 1,697,749 $ 3,668,274 $ 2,766,086
Reserve for depreciation 181,610 177,400 392,188
Reserve for write-down to
estimated net realizable value - 18,706 510,000
Deductions during year
Accumulated depreciation on
real estate sold - (2,166,631) -
------------------------------------------
Balance at close of year $ 1,879,359 $ 1,697,749 $ 3,668,274
===========================================
<FN>
Notes: In 1993 the Partnership recorded writedowns to net realizable value of
$493,832 and $1,182,776 for Cape Henry and Plaza West, respectively.
Aggregate cost at December 31, 1997, for Federal income tax purposes was
$9,713,509.
</FN>
</TABLE>
26
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Page
<S> <C> <C>
2* Plan for Reorganization and Disclosure Statement, a Motion -
seeking authority to make post-petition expenditures and
certain other related filings (filed as Exhibit 29(e) to the
Partnership 8-K filing dated February 14, 1992, and
incorporated herein by reference)
4* Retail Equity Partners Limited Partnership Agreement (filed as -
Exhibit 4 to the Partnership's Registration Statement
(File No. 33-15427) on Form S-11 and incorporated herein by reference)
27 Financial Data Schedule (electronic filing) -
* Incorporated herein by reference
</TABLE>
27
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RETAIL EQUITY
PARTNERS LIMITED PARTNERSHIP FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 76,863
<SECURITIES> 0
<RECEIVABLES> 51,621
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 180,881
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,348,223
<CURRENT-LIABILITIES> 72,471
<BONDS> 6,812,467
0
0
<COMMON> 0
<OTHER-SE> (536,715)
<TOTAL-LIABILITY-AND-EQUITY> 6,348,223
<SALES> 0
<TOTAL-REVENUES> 1,041,679
<CGS> 0
<TOTAL-COSTS> 426,927
<OTHER-EXPENSES> 58,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 632,832
<INCOME-PRETAX> (76,500)
<INCOME-TAX> 0
<INCOME-CONTINUING> (76,500)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (76,500)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> 0
</TABLE>
