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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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Highwoods Properties, Inc.
(Exact Name of Registrant as Specified in its Charter)
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<CAPTION>
Maryland 6798 56-1871668
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(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
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3100 Smoketree Court, Suite 600
Raleigh, North Carolina 27604
(919) 872-4924
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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With Copies to:
RONALD P. GIBSON, President BRAD S. MARKOFF, Esq.
Highwoods Properties, Inc. Alston & Bird LLP
3100 Smoketree Court, Suite 600 3605 Glenwood Avenue, Suite 310
Raleigh, North Carolina 27604 Raleigh, North Carolina 27612
(919) 872-4924 (919) 420-2210
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(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Approximate date of commencement of proposed sale to the public: As soon
as practicable after the Effective Date of the Registration Statement
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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, 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. [ ]
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum
Title of Each Class of Amount to Be Offering Price Aggregate Amount of
Securities to be Registered Registered (1) Per Unit (2) Offering Price Registration Fee (3)
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Common Stock ................... 9,860,496 $ 31.78 $313,366,563 $37,121
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(1) Represents the maximum number of shares of common stock, par value $.01 per
share ("Highwoods Common"), issuable by the registrant upon consummation
of the merger of J.C. Nichols Company ("JCN") with and into a subsidiary
of registrant.
(2) Pursuant to Rules 457(f)(1) and 457(c), the registration fee was computed
on the basis of the average of the high and low prices of a share of
common stock, par value $.01, of JCN as of May 29, 1998.
(3) Excludes a registration fee of $57,839 paid in connection with the filing
by JCN of a preliminary proxy statement on Schedule 14A, which is a part
of this Registration Statement.
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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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CROSS REFERENCE SHEET
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Item Number/Caption Headings in Proxy Statement/Prospectus
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A. Information About the Transaction
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus .......... Facing Page of the Registration Statement; Cross Reference Sheet;
Outside Front Cover Page of Proxy Statement/Prospectus.
2. Inside Front and Outside Back Cover Pages
of Prospectus ................................... Available Information; Incorporation of Certain Documents by
Reference; Table of Contents.
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information ................... Summary; Risk Factors; Comparative Per Share Data;
Comparative Share Prices; Incorporation of Certain Documents by
Reference.
4. Terms of the Transaction ........................ Summary; The Merger.
5. Pro Forma Financial Information ................. Highwoods Pro Forma Combined Financial Information;
Incorporation of Certain Documents by Reference.
6. Material Contracts With the Company
Being Acquired .................................. Summary; Risk Factors; The Merger; Incorporation of Certain
Documents by Reference
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters .............................. Not applicable.
8. Interests of Named Experts and Counsel .......... Experts; Legal Matters.
9. Disclosure of Commission Position on
Indemnification ................................. The Merger.
B. Information About the Registrant
10. Information With Respect to S-3
Registrants ..................................... Summary; The Merger; Highwoods Pro Forma Combined
Financial Information; Incorporation of Certain Documents by
Reference; Available Information.
11. Incorporation of Certain Information by
Reference ....................................... Experts; Highwoods Pro Forma Combined Financial Information;
Incorporation of Certain Documents by Reference.
12. Information With Respect to S-2 or S-3
Registrants ..................................... Not applicable.
13. Incorporation of Certain Information by
Reference ....................................... Not applicable.
14. Information With Respect to Registrants
Other than S-2 or S-3 Registrants ............... Not applicable.
C. Information about the Company Being Acquired
15. Information With Respect to S-3
Companies ....................................... Summary; The Merger; Experts; Highwoods Pro Forma Combined
Financial Information; Incorporation of Certain Documents by
Reference; Available Information.
16. Information With Respect to S-2 or S-3
Companies ....................................... Not applicable.
17. Information With Respect to Companies
Other than S-2 or S-3 Companies ................. Not applicable.
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations are to be Solicited .............. Summary; The Special Meeting; The Merger; Management and
Operation of Highwoods after the Merger; Comparison of Rights
of Stockholders; Incorporation of Certain Documents by
Reference; Available Information.
19. Information if Proxies, Consents or
Authorizations are not to be Solicited, or in
an Exchange Offer ............................... Not applicable.
</TABLE>
<PAGE>
(J.C. NICHOLS COMPANY LOGO)
June 1, 1998
Dear Fellow Shareholder:
You are cordially invited to attend a special meeting of the shareholders
of the J.C. Nichols Company ("JCN"), to be held at The Ritz-Carlton Hotel,
Kansas City, Missouri, on July 1, 1998, at 10:00 a.m. Central Time (the
"Special Meeting"). At this important meeting, you will be asked to approve a
strategic business combination involving JCN and Highwoods Properties, Inc.
("Highwoods").
Under the terms of the proposed Agreement and Plan of Merger (as amended,
the "Merger Agreement"), for each JCN share you own, you will have the
opportunity to receive: (i) $65 in cash, or (ii) shares of Highwoods common
stock, or (iii) a combination of the two. If you elect to receive Highwoods
common stock, you will receive between 1.84 and 2.03 shares of Highwoods common
stock for each share of JCN common stock you own. The number of shares of
Highwoods common stock you will receive will be determined by its trading price
during the 20 trading days prior to the closing of the proposed transaction
(the "Merger"). The exact number of shares you will receive will not be known
until the closing date. The enclosed Proxy Statement/Prospectus details the
terms and background of the Merger. We urge you to read these materials
carefully.
YOUR BOARD OF DIRECTORS HAS CAREFULLY REVIEWED AND CONSIDERED THE TERMS
AND CONDITIONS OF THE MERGER AGREEMENT AND BELIEVES THAT THE MERGER IS FAIR TO
AND IN THE BEST INTERESTS OF JCN AND ITS SHAREHOLDERS.
THE BOARD RECOMMENDS THAT YOU VOTE "FOR" ADOPTION OF THE MERGER AGREEMENT.
Because the affirmative vote of two-thirds of the outstanding shares of
JCN's common stock is required to approve the Merger Agreement, your vote is
important, no matter how many shares you hold. Under Missouri law, failure to
vote will have the same effect as a vote cast against approval of the Merger
Agreement.
To ensure that your vote is counted, I urge you to sign, date and return
your proxy card in the enclosed postage-paid envelope. If you attend the
Special Meeting, you may vote in person if you wish, even though you previously
have returned your proxy card. The JCN Board of Directors will not use any
proxies voted against the Merger for any adjournment or postponement of the
Special Meeting intended to permit further solicitation.
You are also being asked to indicate on a separate form whether you would
prefer to receive Highwoods' common stock or cash after adoption of the Merger
Agreement. Please complete the enclosed green Form of Election and return it as
instructed.
Please do not send your share certificates with your proxy card. After
adoption of the Merger Agreement by JCN's shareholders, you will receive a
transmittal form and instructions for the delivery and exchange of your shares.
On Behalf of the Board of Directors,
/s/ William K. Hoskins
WILLIAM K. HOSKINS
Chairman of the Board
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THE J.C. NICHOLS COMPANY
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To Be Held on July 1, 1998
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Notice is hereby given that a special meeting of the shareholders (the
"Special Meeting") of the J.C. Nichols Company, a Missouri corporation ("JCN"),
will be held at The Ritz-Carlton Hotel, Kansas City, Missouri, on July 1, 1998,
at 10:00 a.m. Central Time, for the following purposes:
1. To consider and vote upon an Agreement and Plan of Merger (as amended,
the "Merger Agreement"), providing for the merger of JCN into Jackson
Acquisition Corp., a wholly owned subsidiary of Highwoods Properties, Inc.
("Highwoods"), pursuant to which each outstanding share of JCN's common stock
will be converted into the right to receive between 1.84 and 2.03 shares of
Highwoods common stock or $65 in cash or a combination of the two, at the
election of the holder thereof (subject to the limitations described in the
Merger Agreement); and
2. To transact such other business as may properly come before the Special
Meeting or any adjournments or postponements thereof. The JCN Board of
Directors will not use any proxies voted against the Merger for adjournment or
postponement of the Special Meeting intended to permit further solicitation.
Shareholders of record as of the close of business on April 27, 1998 are
entitled to notice of, and to vote at, the Special Meeting and any adjournments
or postponements thereof. You are requested to complete, sign and mail the
enclosed form of proxy in the enclosed envelope, whether or not you plan to
attend the Special Meeting. The proxy will not be used if you attend and vote
at the Special Meeting in person.
Shareholders are entitled to assert dissenters' rights under the General
and Business Corporation Law of Missouri. A copy of the relevant section of the
Missouri statute is attached to and described in the enclosed Proxy
Statement/Prospectus.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Price A. Sloan
PRICE A. SLOAN
Secretary
Dated: June 1, 1998
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(A redherring appears on the left-hand side of this page, rotated 90 degrees.
Text follows.)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securiteis
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
SUBJECT TO COMPLETION DATED JUNE 1, 1998
J.C. NICHOLS COMPANY
PROXY STATEMENT
---------------
HIGHWOODS PROPERTIES, INC.
PROSPECTUS
---------------
This Proxy Statement/Prospectus is being furnished to the shareholders of
J.C. Nichols Company, a Missouri real estate operating company ("JCN"), in
connection with the solicitation of proxies on behalf of the Board of Directors
of JCN ("JCN Board of Directors") for use at a special meeting of the holders
of common stock, $.01 par value per share, of JCN ("JCN Common") to be held on
July 1, 1998 and at any adjournments or postponements thereof (the "Special
Meeting"). The JCN Board of Directors will not use any proxies voted against
the Merger for adjournment or postponement of the Special Meeting intended to
permit further solicitation. At the Special Meeting, holders of JCN Common
("JCN Shareholders") will be asked to approve the merger (the "Merger") of JCN
into Jackson Acquisition Corp. ("Jackson"), a wholly owned subsidiary of
Highwoods Properties, Inc., a Maryland corporation ("Highwoods"), formed for
the sole purpose of effecting the Merger, pursuant to an Agreement and Plan of
Merger dated as of December 22, 1997 (as amended as of April 29, 1998) by and
among JCN, Jackson and Highwoods (as amended, the "Merger Agreement"). A JCN
Shareholder who elects to receive stock pursuant to the Merger will not know,
at the time the shareholder votes on the Merger, or at the time by which such
election must be made, the value of the Highwoods common stock to be received
for his shares of JCN Common. Cash consideration paid to JCN Shareholders
pursuant to the Merger will be limited to 40% of the aggregate consideration
paid to all JCN Shareholders. As a result, a JCN Shareholder electing to
receive cash with respect to some or all of his or her shares of JCN Common may
instead receive some Highwoods common stock for such shares. A copy of the
Merger Agreement, including the amendment, is attached hereto as Appendix A.
In considering whether to approve the Merger, JCN Shareholders should
consider, in addition to the other information in the Proxy
Statement/Prospectus, the matters discussed under "Risk Factors" beginning on
page 20.
This Proxy Statement/Prospectus also relates to a maximum of up to
9,860,496 shares of Highwoods common stock, par value $.01 per share ("Highwoods
Common"), that may be issued to the JCN Shareholders upon consummation of the
Merger. Based on the last reported sales price of a share of Highwoods Common on
the New York Stock Exchange (the "NYSE") on May 29, 1998, up to approximately
9.57 million shares of Highwoods Common (valued at approximately $315.8 million)
may be issued to JCN Shareholders upon consummation of the Merger. As of May 29,
1998, the last reported sales price of a share of JCN Common on the
over-the-counter market was $64.50.
This Proxy Statement/Prospectus and the form of proxy are first being
mailed to all JCN Shareholders on or about June , 1998.
---------------
THE SECURITIES TO WHICH THIS PROXY STATEMENT/PROSPECTUS RELATE HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR BY ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is June , 1998.
<PAGE>
AVAILABLE INFORMATION
Highwoods has filed a registration statement on Form S-4 (the
"Registration Statement") under the Securities Act of 1933, as amended
("Securities Act"), with the Securities and Exchange Commission (the
"Commission") covering the shares of Highwoods Common to be issued in
connection with the Merger. As permitted by the rules and regulations of the
Commission, this Proxy Statement/Prospectus omits certain information, exhibits
and undertakings contained in the Registration Statement. For further
information pertaining to the securities offered hereby, reference is made to
the Registration Statement, including the exhibits filed as a part thereof.
Highwoods and JCN are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, file reports, proxy statements and other information with
the Commission. Highwoods/Forsyth Limited Partnership, a North Carolina limited
partnership through which Highwoods conducts substantially all of its business,
is also subject to the informational requirements of the Exchange Act and, in
accordance therewith, files reports and other information with the Commission.
Such reports, proxy statements and other information can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549; and at its Regional Offices located
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven
World Trade Center, Suite 1300, New York, New York 10048. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and other
information regarding registrants that file electronically with the Commission.
The address of the Commission's Web site is: http://www.sec.gov. Highwoods
Common is currently listed on the NYSE and such reports, proxy statements and
other information concerning Highwoods can be inspected at the offices of the
NYSE, 20 Broad Street, New York, New York 10005.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/
Prospectus, or incorporated in it by reference, and, if given or made, such
information or representation should not be relied upon as having been
authorized. This Proxy Statement/Prospectus does not constitute an offer to
sell, or a solicitation of an offer to purchase, the securities offered by this
Proxy Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction
where or from any person to whom it is unlawful to make such offer, or
solicitation of an offer, or proxy solicitation. Neither the delivery of this
Proxy Statement/Prospectus nor any distribution of the securities offered
pursuant to this Proxy Statement/Prospectus shall, under any circumstances,
create an implication that there has been no change in the affairs of Highwoods
or JCN since the date of this Proxy Statement/Prospectus.
This Proxy Statement/Prospectus incorporates documents by reference which
are not presented herein or delivered herewith. All documents that are
incorporated by reference in this Proxy Statement/Prospectus but which are not
delivered herewith are available without charge (other than exhibits to such
documents that are not specifically incorporated by reference therein) upon
request from 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604,
Attention: Mack D. Pridgen, III, telephone (919) 872-4924. In order to insure
timely delivery of the documents, any request should be made by June 20, 1998.
Documents will be sent by first class mail within one business day upon receipt
of a request.
2
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Highwoods pursuant to
the Exchange Act are hereby incorporated in this Proxy Statement/Prospectus by
reference:
a. Highwoods' annual report on Form 10-K for the year ended December 31,
1997 (as amended on April 29, 1998 and May 19, 1998);
b. Highwoods' quarterly report on Form 10-Q for the quarter ended March
31, 1998;
c. Highwoods' current reports on Form 8-K, dated January 9, 1997 (as
amended on February 7, 1997, March 10, 1997 and April 28, 1998), August
27, 1997 (as amended on September 23, 1997), October 1, 1997, November
17, 1997, January 22, 1998, February 2, 1998, April 20, 1998 and April
29, 1998;
d. Highwoods' definitive Proxy Statement relating to its Annual Meeting
of Shareholders dated May 14, 1998; and
e. The description of Highwoods Common included in Highwoods' registration
statement on Form 8-A dated May 16, 1994.
All other documents filed by Highwoods pursuant to Section 13(a), 14 or
15(a) of the Exchange Act subsequent to the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed incorporated by reference herein and made a part hereof from the dates
of filing such reports and documents. Any statement contained herein or in a
document incorporated by reference or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained in this Proxy
Statement/Prospectus or in any other subsequently filed document that also is
or is deemed to be incorporated by reference in this Proxy Statement/Prospectus
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
3
<PAGE>
TABLE OF CONTENTS
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SUMMARY ................................................................................. 7
Parties to the Merger .................................................................. 7
Summary Risk Factors ................................................................... 10
Consideration to be Received in the Merger ............................................. 10
Reasons for the Merger; Recommendations of the JCN Board of Directors .................. 11
Opinion of Financial Advisor ........................................................... 11
Correspondence from Intell Management and Investment Company ........................... 12
Interests of Certain Persons ........................................................... 12
Effective Time of the Merger and Closing Date .......................................... 12
Conditions to the Merger ............................................................... 12
Regulatory Matters ..................................................................... 13
Appraisal Rights ....................................................................... 13
Federal Income Tax Consequences of Merger .............................................. 13
Termination ............................................................................ 13
Termination Fees and Expenses .......................................................... 13
Anticipated Accounting Treatment ....................................................... 13
No Solicitation of Other Transactions .................................................. 14
Terms of the Merger; Exchange of Certificates .......................................... 14
The Special Meeting .................................................................... 14
HIGHWOODS PRO FORMA COMBINED FINANCIAL INFORMATION ...................................... 16
COMPARATIVE PER SHARE DATA .............................................................. 17
COMPARATIVE SHARE PRICES ................................................................ 18
Highwoods .............................................................................. 18
JCN .................................................................................... 19
RISK FACTORS ............................................................................ 20
Possible Reduction in Consideration Received by JCN Shareholders ....................... 20
Limit on Cash Consideration ............................................................ 20
Conflicts of Interest of Certain JCN Officers and Directors ............................ 20
Potential Decrease in Price of Highwoods Common Resulting from Future Highwoods 21
Offerings
Dilution of the Ownership Percentage of Holders of JCN Common .......................... 21
Potential Adverse Effects of Combining the Companies ................................... 21
Dependence of Highwoods Operating Performance on Southeastern Markets .................. 21
Potential Adverse Effects of Expanding into New Geographic Areas and Property Types .... 21
Conflicts of Interest in the Business of Highwoods ..................................... 22
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and
Highwoods' Governing Documents ....................................................... 22
Adverse Consequences on Distributions of Highwoods' Failure to Qualify as a REIT ....... 22
Factors that Could Cause Poor Operating Performance of the Highwoods Properties ........ 23
Potential Problems in Development, Construction and Acquisition Activities ............. 24
Potential Adverse Effect of Incurrence of Debt ......................................... 24
Possible Environmental Liabilities ..................................................... 24
Rights of Holders of Highwoods Common may be Less Favorable than Rights of JCN 25
Shareholders
THE SPECIAL MEETING ..................................................................... 26
Purpose ................................................................................ 26
Record Date; Vote Required ............................................................. 26
Solicitation and Revocation of Proxies ................................................. 26
THE MERGER .............................................................................. 26
Terms of the Merger .................................................................... 26
Background of the Merger ............................................................... 27
Reasons for the Merger; Recommendation of the JCN Board of Directors ................... 31
</TABLE>
4
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<TABLE>
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Opinion of Financial Advisor ...................................... 34
Effective Time of the Merger ...................................... 37
Representations and Warranties; Conditions to the Merger .......... 37
Appraisal Rights .................................................. 38
Regulatory Matters ................................................ 39
No Solicitation of Other Transactions ............................. 39
Termination Provisions ............................................ 39
Termination Fee and Expenses ...................................... 39
Conversion of Shares .............................................. 40
Cash Election ..................................................... 40
Appointment of Exchange Agent ..................................... 41
Exchange of Certificates .......................................... 41
Conduct of Business Pending the Merger ............................ 42
Waiver and Amendment .............................................. 42
Stock Exchange Listing ............................................ 43
Extraordinary Dividend ............................................ 43
Indemnification ................................................... 43
Continued Activities .............................................. 44
Interests of Certain Persons ...................................... 44
Anticipated Accounting Treatment .................................. 45
Shares Available for Resale ....................................... 45
FEDERAL INCOME TAX CONSIDERATIONS .................................. 45
Federal Income Tax Consequences of Merger ......................... 45
Taxation of Highwoods as a REIT ................................... 46
Federal Income Taxation of Highwoods .............................. 47
Requirements for Qualification .................................... 47
Annual Distribution Requirements .................................. 50
Failure to Qualify ................................................ 51
Taxation of U.S. Shareholders ..................................... 51
Special Tax Considerations for Non-U.S. Shareholders .............. 53
Information Reporting Requirements and Backup Withholding Tax ..... 54
Tax Aspects of the Highwoods Operating Partnership ................ 54
Other Tax Considerations .......................................... 55
State and Local Tax ............................................... 56
Proposed Legislation .............................................. 56
DESCRIPTION OF HIGHWOODS ........................................... 57
General ........................................................... 57
Operating Strategy ................................................ 57
DESCRIPTION OF JCN ................................................. 59
General ........................................................... 59
Business Strategy ................................................. 60
Recent Developments ............................................... 60
Competition ....................................................... 60
Regulation and Legislation ........................................ 61
General Conditions ................................................ 61
Reliance on Customers or Tenants .................................. 61
Employees ......................................................... 61
Properties ........................................................ 61
Valencia Place .................................................... 67
Seville Square .................................................... 67
Luxury Apartments ................................................. 67
Legal Proceedings ................................................. 67
Submission of Matters to a Vote of Security Holders ............... 69
</TABLE>
5
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<TABLE>
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Market for JCN Common and Related Shareholder Matters .................................. 70
Issuances of JCN Common ................................................................ 70
Dividend Policy ........................................................................ 70
Selected Financial Data ................................................................ 71
Management's Discussion and Analysis of Financial Condition and Results of Operations .. 71
Results of Operations .................................................................. 72
Liquidity and Capital Resources ........................................................ 76
Earnings Before Interest, Taxes Depreciation and Amortization .......................... 78
Year 2000 Compliance ................................................................... 80
Impact of Recently Issued Accounting Standards ......................................... 80
Directors and Executive Officers ....................................................... 81
Section 16(a) Beneficial Ownership Reporting Compliance ................................ 82
Officer Compensation ................................................................... 83
Outside Director Compensation .......................................................... 84
Options and Stock Appreciation Rights .................................................. 84
Employment Agreements .................................................................. 84
Change in Control Agreements ........................................................... 85
Stock Option Plan ...................................................................... 86
Compensation Committee Report on Executive Compensation ................................ 86
Performance of JCN Common .............................................................. 87
Security Ownership of Certain Beneficial Owners and Management ......................... 88
Certain Relationships and Related Transactions ......................................... 89
MANAGEMENT AND OPERATION OF HIGHWOODS AFTER THE MERGER .................................. 90
ANTICIPATED EFFECTS OF THE MERGER ON RESULTS OF OPERATIONS, LIQUIDITY AND
CAPITAL RESOURCES ...................................................................... 90
COMPARISON OF RIGHTS OF SHAREHOLDERS .................................................... 91
Election of Directors .................................................................. 91
Removal of Directors ................................................................... 91
Indemnification and Liability of Directors and Officers ................................ 91
General Provisions Affecting Change of Control ......................................... 92
Voting Rights of Control Shares ........................................................ 92
Business Combinations with Interested Shareholders ..................................... 93
Ownership Limitations and Restrictions on Transfers .................................... 93
Operating Partnership Agreement ........................................................ 94
Shareholders' Rights Plan .............................................................. 95
Dissenters' Rights of Appraisal ........................................................ 95
Dividends .............................................................................. 95
Special Meetings ....................................................................... 95
Amendment of Articles of Incorporation ................................................. 96
Shareholder Proposal Procedures ........................................................ 96
LEGAL MATTERS ........................................................................... 96
EXPERTS ................................................................................. 96
AUDITORS ................................................................................ 97
SHAREHOLDER PROPOSALS ................................................................... 97
GLOSSARY ................................................................................ 97
INDEX TO THE FINANCIAL STATEMENTS ....................................................... F-1
APPENDIX A -- AGREEMENT AND PLAN OF MERGER .............................................. A-1
APPENDIX A-1 -- AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER ......................... A-41
APPENDIX B -- OPINION OF MORGAN STANLEY ................................................. B-1
APPENDIX C -- GBCL SEC. 351.455 APPRAISAL RIGHTS ........................................ C-1
</TABLE>
6
<PAGE>
Unless the context otherwise requires, the terms (i) "Highwoods" shall
mean Highwoods Properties, Inc., predecessors of Highwoods Properties, Inc.,
and those entities owned or controlled by Highwoods Properties, Inc., including
Highwoods/ Forsyth Limited Partnership (the "Highwoods Operating Partnership")
and (ii) "Highwoods Properties" shall mean the 382 office and 148 industrial
(including 80 service center) properties owned by Highwoods as of March 31,
1998.
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus. Reference is made to, and this summary is
qualified in its entirety by, the more detailed information and financial
statements contained in this Proxy Statement/Prospectus, the Appendices hereto
and the documents incorporated by reference herein.
Parties to the Merger
Highwoods. Highwoods is a self-administered and self-managed real estate
investment trust ("REIT") that began operations through a predecessor in 1978.
As of March 31, 1998, Highwoods owned, through its interest in the Highwoods
Operating Partnership, a portfolio of 382 office and 148 industrial (including
80 service center) properties. The Highwoods Properties encompass an aggregate
of approximately 33.9 million rentable square feet and were 93% leased to
approximately 3,400 tenants at March 31, 1998. An additional 32 properties (the
"Highwoods Development Projects"), which will encompass approximately 3.6
million rentable square feet, were under development as of March 31, 1998.
Highwoods also owned as of March 31, 1998, 895 acres (and has agreed to
purchase an additional 395 acres) of land for future development (collectively,
the "Highwoods Development Land"). The Highwoods Properties are located in 19
markets in North Carolina, Florida, Tennessee, Georgia, Virginia, South
Carolina, Maryland and Alabama.
Highwoods conducts substantially all of its activities through, and
substantially all of its interests in its properties are held directly or
indirectly by the Highwoods Operating Partnership. Highwoods is the sole
general partner of the Highwoods Operating Partnership and as of March 31,
1998, owned approximately 83% of the common partnership interests (the "Common
Units") in the Highwoods Operating Partnership. The remaining Common Units are
owned by limited partners (including certain officers and directors of
Highwoods). Each Common Unit may be redeemed by the holder thereof for the cash
value of one share of Highwoods Common or, at Highwoods' option, one share
(subject to certain adjustments) of Highwoods Common. With each such exchange,
the number of Common Units owned by Highwoods and, therefore, Highwoods'
percentage interest in the Highwoods Operating Partnership, will increase.
7
<PAGE>
The following chart illustrates the relationship between Highwoods and the
Highwoods Operating Partnership and their significant subsidiaries as of March
31, 1998:
A large box in the upper left hand corner entitled "HIGHWOODS" has four
arrows radiating from it. The first leads to an oval entitled "Highwoods
Operating Partnership (312 Properties)," and along the arrow are two legends,
"82% LP(1)" and "1% GP." The words "Limited Partners" are to the right of the
oval, and an arrow leads them to the oval. Along the arrow is the legend "17%."
The second arrow radiating from the "HIGHWOODS" box bears the legend ".01%(3)
GP" and leads to an oval entitled "AP Southeast Portfolio Partners, L.P.
(46 Properties)." This oval has another arrow leading to it emanating from
the "Highwoods Operating Partnership (312 Properties)" oval which bears
the legend "99.99%(4) LP."
The third arrow radiating from the "HIGHWOODS" box bears the legend ".01%(2)
GP" and leads to an oval entitled "Highwoods/Florida Holdings, L.P. (148
Properties)". This oval has another arrow leading to it emanating from the
"Highwoods Operating Partnership (312 Properties)" oval which bears the
legend "99.99% LP."
The fourth arrow radiating from the "HIGHWOODS" box bears the legend ".01%(2)
GP" and leads to an oval entitled "Highwoods/Tennessee Holdings, L.P. (24
Properties)." This oval has another arrow leading to it emanating from the
"Highwoods Operating Partnership (312 Properties)" oval bearing the legend
"99.99% LP."
(1) In addition, Highwoods owns preferred partnership interests in the
Highwoods Operating Partnership with economic terms similar to those of
Highwoods' outstanding preferred stock.
(2) Interest is held indirectly through a wholly owned subsidiary of Highwoods.
(3) Interest is held indirectly through a wholly owned subsidiary of Highwoods,
which holds a 1% general partner interest in a limited partnership that
has a 1% general partner interest in AP Southeast Portfolio Partners, L.P.
(4) Ownership interests consist of a 99% limited partner interest in AP
Southeast Portfolio Partners, L.P. and a 99% limited partnership interest
in the 1% general partner of AP Southeast Portfolio Partners, L.P. (see
footnote 3 above).
8
<PAGE>
Highwoods is a Maryland corporation; the Highwoods Operating Partnership
is a North Carolina limited partnership. Their executive offices are located at
3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604, and their
telephone number is (919) 872-4924.
JCN. JCN is a Missouri corporation headquartered in Kansas City, Missouri.
JCN is engaged in the acquisition, development, ownership and management of
income-producing properties located primarily in the Kansas City, Missouri
metropolitan area. These properties include retail centers, apartments, office
buildings, industrial properties and mixed-use projects. JCN is also engaged in
the development and sale of land for residential and commercial use. As of
December 31, 1997, JCN and its consolidated subsidiaries owned 16 retail
centers consisting of approximately 2,500,000 square feet of retail space
(including basement space) occupied by approximately 400 tenants, 14 apartment
communities (including a majority interest in a partnership owning a Des
Moines, Iowa area apartment complex) with approximately 2,300 residential
apartment units, 31 office properties (including majority interests in
partnerships owning seven Des Moines, Iowa area office buildings) consisting of
approximately 1,462,000 square feet of office space occupied by over 500
tenants, two industrial and warehouse properties consisting of approximately
337,000 square feet of space occupied by 48 tenants, three residential
developments containing approximately 168 lots available for sale, and over
1,000 acres available for residential and commercial development, as well as
complete or partial ownership in several other minor properties. JCN also owns
six unsold units of its Alameda Towers condominium project in Kansas City.
JCN also owns an equity interest in 11 active entities whose holdings are
not consolidated with the financial statements of JCN. The largest of these
holdings are JCN's approximately 50% interest in six partnerships that own
properties in the Des Moines, Iowa area. At December 31, 1997, these
partnerships owned 15 buildings consisting of 936,000 square feet of offices,
200,000 square feet of industrial space, 26 acres currently under development
or ground lease, and approximately 80 acres to be developed. In addition to the
Des Moines, Iowa area properties, one of JCN's 11 unconsolidated affiliates is
a 40% interest in J.C. Nichols Real Estate, a residential sales and brokerage
business in Kansas City. J.C. Nichols Real Estate also has an interest in an
entity that owns a mortgage origination company. The principal executive
offices of JCN are located at 310 Ward Parkway, Kansas City, Missouri 64112,
and its telephone number is (816) 561-3456.
Jackson. Jackson is a wholly owned subsidiary of Highwoods. Jackson was
incorporated in Maryland for the sole purpose of effecting the Merger and the
transactions contemplated by the Merger Agreement. Jackson has engaged in no
other business activities. Pursuant to the Merger Agreement, JCN will be merged
into Jackson.
Merger Structure. The following chart summarizes the transactions that
would be effected to consummate the Merger:
A rectangle in the lower right hand corner is entitled "J.C. Nichols Company,"
and it has an arrow leading from it to, and an arrow leading to it from, a
rectangle on the left-hand side of the chart entitled "Jackson Acquisition
Corp." The arrow leading to "Jackson Acquisition Corp." bears the legend "JCN
assets and liabilities," and the other bears the legend "Combination of
Highwoods Common and cash." Beneath these arrows a large legend in bold reads
"STEP ONE."
Above the rectangle entitled Jackson Acquisition Corp. is a rectangle entitled
"Highwoods Properties, Inc.," and an arrow pointing at "Highwoods Properties,
Inc." links the two. This arrow bears a legend to its right reading "JCN
assets and liabilities" and a large, bold legend to its left reading "STEP
TWO."
To the right of, and slightly below, the "Highwoods Properties, Inc."
rectangle is a rectangle entitled "Highwoods/Forsyth Limited Partnership."
Two arrows link the rectangles, one pointing towards each. The arrow pointing
at the "Highwoods Properties, Inc." rectangle bears the legend "Common Units,"
and the arrow pointing towards the "Highwoods/Forsyth Limited Partnership"
rectangle bears the legend "JCN assets and liabilities." Above and to the
right of these arrows is the large, bold legend "STEP THREE."
9
<PAGE>
In Step One, as a result of the merger of JCN with and into Jackson,
Jackson will receive all of the assets and liabilities of JCN in exchange for
shares of Highwoods Common and cash. See "The Merger -- Terms of the Merger."
In Step Two, Jackson will merge with and into Highwoods. Lastly, in Step Three,
Highwoods will contribute to the Highwoods Operating Partnership all of the
assets and liabilities of JCN that were acquired from Jackson in exchange for
the number of Common Units equal to (i) the number of shares of Highwoods
Common issued in the Merger and (ii) the number of Common Units obtained by
dividing the cash component of the Merger consideration by the value of a share
of Highwoods Common as of the effective date of the Merger.
Summary Risk Factors
In considering whether to approve the Merger, JCN Shareholders should
consider, in addition to the other information in this Proxy
Statement/Prospectus, the matters discussed under "Risk Factors." Such matters
include:
o The possible change in share prices of Highwoods Common and JCN Common prior
to the time the Merger becomes effective so that at the time of the Merger
the value of a share of Highwoods Common compared with a share of JCN Common
may be less than such value at the time a JCN Shareholder votes on the
Merger or makes his or her election as to the form of the consideration to
be received in the Merger.
o The risk that a JCN Shareholder who elects to receive cash in the Merger with
respect to some or all of his or her shares of JCN Common ("Cash Election
Shares") may instead receive shares of Highwoods Common with respect to some
Cash Election Shares.
o Certain officers and directors of JCN have interests in the Merger and
related transactions that conflict with the interests of JCN Shareholders
generally.
o The potential adverse impact on the share price of Highwoods Common resulting
from subsequent Highwoods offerings.
o Dilution of the ownership percentage of a JCN Shareholder who receives
Highwoods Common in the Merger.
o Possible difficulty of successfully integrating Highwoods and JCN.
o Dependence of Highwoods after the Merger on southeastern economic and real
estate conditions.
o Highwoods' unfamiliarity with JCN's geographic markets, retail and
multifamily properties and single-family subdivisions.
o Members of Highwoods' management and its board of directors have different
interests than its stockholders regarding the sale or refinancing of a
property.
o Differences in governing law and organizational documents of Highwoods and
JCN which may make a change of control of Highwoods more difficult than a
change of control of JCN.
o Possible failure of Highwoods to qualify as a REIT.
o Environmental liabilities at the Highwoods Properties.
o Rights of holders of Highwoods Common being less favorable than those of JCN
Shareholders as a result of differences in governing law and the
organizational documents of the respective companies.
Consideration to be Received in the Merger
The Merger Agreement provides that, upon satisfaction or waiver of the
conditions set forth therein, JCN will be merged into Jackson, a wholly owned
subsidiary of Highwoods formed for the sole purpose of effecting the Merger.
The board of directors of Highwoods (the "Highwoods Board of Directors") and
the JCN Board of Directors have each approved the Merger upon the terms and
conditions set forth in the Merger Agreement.
JCN Shareholders may elect to receive, upon consummation of the Merger
(the "Effective Time"), between 1.84 and 2.03 shares of Highwoods Common or $65
in cash or a combination of the two for each share of JCN Common. A JCN
Shareholder who elects to receive Highwoods Common pursuant to the Merger will
not know at the time such shareholder votes on the Merger or at the time by
which such election must be made the value of the Highwoods Common to be
received for such shareholder's shares of JCN Common. Moreover, although a JCN
Shareholder may elect to receive cash pursuant to the Merger for some or all of
his or her shares of JCN Common, such shareholder may receive shares of
Highwoods Common with respect to some of such Cash Election Shares. Cash
consideration paid to JCN Shareholders pursuant to the Merger will be limited
to 40% of the aggregate consideration paid to all JCN Shareholders. JCN
Shareholders electing to
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<PAGE>
receive Highwoods Common in the Merger may, under certain circumstances,
receive Highwoods Common valued at a price different than $65 per share. To the
extent the average of the daily average of the high and low sale price for the
20 trading days preceding the Effective Time (the "Value") of a share of
Highwoods Common is $35.36 or higher, JCN Shareholders may receive Highwoods
Common worth more than $65 per share of JCN Common; to the extent the Value of
a share of Highwoods Common is under $32.00, JCN Shareholders may receive
Highwoods Common worth less than $65 per share of JCN Common transferred in the
Merger. Assuming a Value of a share of Highwoods Common of $33 (the closing
price on the NYSE on May 29, 1998), a JCN Shareholder electing to receive
shares of Highwoods Common would receive 1.97 shares of Highwoods Common for
each share of JCN Common. See "The Merger -- Conversion of Shares" and "The
Merger -- Cash Election."
At the Effective Time, approximately one percent of the outstanding shares
of Highwoods Common will be beneficially owned by affiliates of Highwoods
(assuming that no outstanding options to purchase shares of Highwoods Common
are exercised and that no Common Units are redeemed for shares of Highwoods
Common).
Reasons for the Merger; Recommendations of the JCN Board of Directors
The JCN Board of Directors believes that the Merger is fair to, and in the
best interests of, JCN and the JCN Shareholders. The JCN Board of Directors
approved the Merger, and the transactions contemplated thereby, and recommends
that the JCN Shareholders vote FOR the Merger.
JCN has begun an ambitious plan to redevelop its most significant retail
and office development, which consists currently of approximately 1.1 million
square feet of retail space in Kansas City, Missouri and is known as the Country
Club Plaza (the "Plaza"). As a result of the anticipated expense of redeveloping
the Plaza, JCN management currently projects that it does not have sufficient
cash on hand to meet its anticipated cash requirements beyond 1998. Accordingly,
if the Merger is not approved, JCN will have to move quickly to raise capital or
borrow the funds necessary to facilitate redevelopment of the Plaza and finance
other cash needs of JCN. In the event JCN were to sell JCN Common to generate
cash, it may be forced to do so at a price below $65 per share.
In making its determination with respect to the Merger, the JCN Board of
Directors considered, among other things, the following advantages: (a) the
amount of consideration offered to JCN Shareholders, which represented a
premium over prior closing prices of JCN; (b) Highwoods' regular quarterly
dividend and the liquidity of Highwoods Common; (c) the ability of JCN
Shareholders to participate in the future growth of Highwoods (including the
growth resulting from acquisition of JCN); (d) the financial condition and
business reputation of Highwoods; (e) the companies' respective financial
condition, results of operations and anticipated future results; (f) Highwoods'
significant resources and lower cost of capital, which may enable more rapid
implementation of JCN's long-term growth plans; and (g) that the Merger is
structured to qualify as a tax-free reorganization under the Internal Revenue
Code of 1986, as amended (the "Code"). The JCN Board of Directors also received
the written opinions of Morgan Stanley & Co. Incorporated ("Morgan Stanley"),
dated December 22, 1997 and May 15, 1998, to the effect that, as of such dates
and based upon certain assumptions and considerations set forth therein, the
consideration to be received by JCN Shareholders pursuant to the Merger was
fair from a financial point of view to such holders.
The JCN Board of Directors also considered (a) the possible change in
share prices of Highwoods Common and JCN Common prior to the time the Merger
becomes effective; (b) the risk that some JCN Shareholders will not receive the
form of consideration that they elected for their shares of JCN Common; (c) the
potential adverse tax consequences of the Merger for those JCN Shareholders
receiving cash; (d) the potential adverse impact on the share price of
Highwoods Common resulting from subsequent Highwoods offerings; (e) the
dilution of the ownership percentage of a JCN Shareholder who receives
Highwoods Common in the Merger; (f) the possible failure of Highwoods to
qualify in the future as a REIT; (g) that proposed Federal legislation
affecting REITs could limit Highwoods' ability to expand certain business
activities; (h) the possibility that Highwoods will not maintain the growth
rate that it has experienced since 1994; (i) the possible difficulty of
successfully integrating Highwoods and JCN; (j) the dependence of Highwoods
after the Merger on southeastern economic and real estate conditions; and (k)
Highwoods' unfamiliarity with JCN's markets and with retail and multifamily
properties and single-family subdivisions. See "Risk Factors," "The Merger --
Reasons for the Merger; Recommendation of the JCN Board of Directors" and "The
Merger -- Opinion of Financial Advisor."
Opinion of Financial Advisor
At the meeting of the JCN Board of Directors on December 21, 1997, Morgan
Stanley delivered its written opinion to the JCN Board of Directors, which was
subsequently updated and confirmed in writing on December 22, 1997, that as of
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<PAGE>
such date and based upon the assumptions made, matters considered and the
limits of its review, as set forth in such opinion, the proposed consideration
to be received by JCN Shareholders pursuant to the Merger was fair to such
shareholders from a financial point of view. Morgan Stanley delivered a May 15,
1998 update to its prior opinion, confirming that as of such date and based
upon the assumptions made, matters considered and the limits of its review, as
set forth in such opinion, the proposed consideration to be received by JCN
Shareholders pursuant to the Merger, as such consideration was amended pursuant
to the amendment to the Merger Agreement, was fair to such shareholders from a
financial point of view. No limitations were imposed by the JCN Board of
Directors upon Morgan Stanley with respect to the investigations made or
procedures followed by it in rendering its opinions. See "The Merger -- Opinion
of Financial Advisor."
Correspondence from Intell Management and Investment Company
On January 28, 1998, Intell Management and Investment Company ("Intell")
expressed an interest in a merger with JCN pursuant to which JCN Shareholders
would receive $75 per share in cash. In a February 11, 1998 letter to JCN,
Intell indicated that it did not feel it appropriate to pursue a transaction
with JCN until such time as JCN Shareholders had an opportunity to vote on the
Merger. Intell further indicated its then-current intention, in the event the
Merger was not approved by JCN Shareholders and subject to a number of
conditions, to pursue an acquisition of JCN that would provide to JCN
Shareholders $75 per share in cash, less an adjustment that would include any
amounts due to Highwoods pursuant to the Merger Agreement. Although this
information was not available to the JCN Board of Directors when the Original
Merger Agreement was approved, this information was subsequently considered by
the JCN Board of Directors.
Interests of Certain Persons
Certain officers and directors of JCN have interests in the Merger and
related transactions that conflict with the interests of JCN Shareholders
generally. From January 1996 through September 1997, JCN entered into
employment agreements with its executive officers to permit JCN to attract and
retain talented managers capable of providing continuity to, and enhancing the
operations of, JCN. One such agreement provides Mr. Brady with certain benefits
upon the occurrence of a change of control not supported by Mr. Brady and other
agreements would provide several other officers with certain benefits upon the
occurrence of a change of control and upon the occurrence of various triggering
events subsequent to a transaction such as the Merger. Accordingly, Messrs.
Brady, Cook, de Avila, Dixon, Fox, Peterson, Sloan, Stephenson, and Teaney and
Ms. Marietti may be entitled to the accelerated receipt of cash, stock, or
combined cash and stock consideration from Highwoods, in approximate amounts of
$6,215,783, $222,721, $1,019,610, $218,005, $214,210, $618,260, $618,260,
$326,814, $1,016,171 and $196,231, respectively, which totals in the aggregate
approximately $10.7 million (not taking into account obligations related to
certain of such individuals' personal taxes), a portion of which may or may not
be deductible to JCN or Highwoods. A full explanation of the triggering events
for such payments is set forth under "Description of JCN -- Change in Control
Agreements." As of the date of this Proxy Statement/Prospectus, Highwoods has
not entered into any agreement with such officers that would avoid or reduce
the amount of any consideration to which they might otherwise be entitled.
Effective Time of the Merger and Closing Date
The closing of the Merger will take place at 10:00 a.m. on the date to be
specified by Highwoods and JCN, which will be no later than the second business
day after satisfaction or waiver of the conditions set forth in the Merger
Agreement (the "Closing Date"), at the offices of Alston & Bird LLP, 3605
Glenwood Avenue, Suite 310, Raleigh, North Carolina 27612, unless another date
or place is agreed to in writing by the parties. The Merger will become
effective when the Articles of Merger have been accepted for filing by the
appropriate authorities in Missouri and Maryland, or at such other time as
Highwoods and JCN agree should be specified in the Articles of Merger. It is
currently anticipated that the Merger will become effective upon filing of the
Articles of Merger, which Articles are expected to be filed promptly following
approval of the Merger by the JCN Shareholders.
Conditions to the Merger
The obligations of Highwoods and JCN to consummate the Merger are subject
to the satisfaction or waiver of certain conditions, including, among others,
(i) obtaining the requisite approval of the JCN Shareholders, (ii) the absence
of any material adverse change in the financial condition, business or
operations of JCN or Highwoods, (iii) the receipt of certain legal opinions,
including opinions with respect to the tax consequences of the Merger and (iv)
the receipt of certain consents, orders and approvals of a governmental agency
and third parties. Each of Highwoods and JCN has the right to waive certain
conditions to its obligations to consummate the Merger. See "The Merger --
Representations and Warranties; Conditions to the Merger."
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<PAGE>
Regulatory Matters
Except for the registration of Highwoods Common under the Securities Act,
Highwoods and JCN believe that the Merger is not subject to any governmental or
regulatory approvals. See "The Merger -- Regulatory Matters."
Appraisal Rights
JCN Shareholders are entitled to dissenting shareholders' appraisal rights
under Missouri law with respect to the Merger. A copy of the appropriate
section of Missouri law is included herein as Appendix C. If a JCN Shareholder
files with JCN a written objection to the Merger Agreement prior to or at the
Special Meeting and does not vote in favor of the Merger Agreement, the
shareholder is entitled to the fair value of his shares from Highwoods. If the
dissenting shareholder and Highwoods do not agree on the fair value of the
dissenting shareholder's shares of JCN Common, the dissenting shareholder may
file a petition with the court of Jackson County, Missouri, asking for a
finding and determination of the fair value of his or her shares. Because
dissenting shareholders must comply with all applicable statutory procedures to
receive the value of their shares, any JCN Shareholder considering exercising
appraisal rights is encouraged to read "The Merger -- Appraisal Rights."
Federal Income Tax Consequences of Merger
Consummation of the Merger is conditioned on the receipt by JCN of an
opinion of Blackwell Sanders Peper Martin LLP that the Merger will qualify as a
tax-free reorganization within the meaning of Section 368(a) of the Code and as
to the tax consequences of the Merger to the JCN Shareholders. A copy of such
opinion is included as Exhibit 8.1 to the Registration Statement. If the Merger
does so qualify, no gain or loss will be recognized by Highwoods, JCN or
Jackson as a consequence of the Merger. No gain or loss will be recognized by
any JCN Shareholder upon the receipt of Highwoods Common in exchange for shares
of JCN Common. Gain recognition, if any, will not be in excess of the amount of
cash received. Subject to the provisions and limitations of Section 302 of the
Code, gain or loss will be recognized by a JCN Shareholder upon the receipt of
cash in lieu of fractional shares, upon exercise of appraisal rights relating
to the transaction, or pursuant to an election by the JCN Shareholder to
receive cash with respect to any of such holder's JCN Common. Subject to the
provisions and limitations of Section 302 of the Code, gain (but not loss) will
be recognized by a JCN Shareholder upon the receipt of cash and Highwoods
Common pursuant to an election by the JCN Shareholder to receive cash with
respect to only a portion of such holder's JCN Common. See "Federal Income Tax
Considerations."
EACH HOLDER OF JCN COMMON IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE MERGER IN LIGHT OF
HIS OR HER PARTICULAR CIRCUMSTANCES, INCLUDING THE EFFECT OF STATE, LOCAL AND
FOREIGN TAX LAWS, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
Termination
The Merger Agreement provides that it may be terminated under a number of
circumstances at any time prior to the Effective Time, whether before or after
the approval of the Merger by JCN Shareholders. See "The Merger -- Termination
Provisions."
Termination Fees and Expenses
The Merger Agreement provides for payment by JCN of a termination fee and
expenses of up to $17.2 million if JCN enters into an acquisition proposal
other than the Merger Agreement and certain other conditions are met. JCN
Shareholders are urged to read the description of the termination fee
provisions at "The Merger -- Termination Fees and Expenses." The failure of the
JCN Shareholders to approve the Merger, however, will not trigger the payment
of a termination fee, except for a fee of $2.5 million if, among other things,
JCN completes another acquisition proposal before December 22, 1998.
Anticipated Accounting Treatment
The Merger will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16.
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No Solicitation of Other Transactions
JCN has agreed that it (and its subsidiaries) will not permit its
officers, directors, agents or financial advisors to solicit or encourage any
inquiries or the making or implementation of any proposal or offer (including,
without limitation, any proposal or offer to its shareholders) with respect to
a merger, acquisition, tender offer, exchange offer, consolidation, sale of
assets or similar transaction involving all or any significant portion of the
assets or any equity securities of JCN or any of its subsidiaries, other than
the transactions contemplated by the Merger Agreement. The Merger Agreement
does not, however, prohibit JCN from entering into discussions with respect to
an unsolicited proposal if the JCN Board of Directors determines in good faith
that the failure to take such action would constitute a breach of its fiduciary
duties to JCN Shareholders under applicable law.
Terms of the Merger; Exchange of Certificates
The Merger Agreement provides that, upon satisfaction or waiver of certain
conditions, JCN will be merged into Jackson, a wholly owned subsidiary of
Highwoods formed for the sole purpose of effecting the Merger.
As a result of the Merger, each JCN Shareholder will receive, at his or
her election, between 1.84 and 2.03 shares of Highwoods Common (the "Per Share
Stock Consideration") or $65 in cash (the "Per Share Cash Consideration") or a
combination of the two, subject to the limitation that Highwoods will not pay
more than 40% of the total Merger consideration in cash. A JCN Shareholder may
elect to receive shares of Highwoods Common for all or some of his or her
shares of JCN Common.
With respect to each share of JCN Common for which its holder has elected
to receive shares of Highwoods Common, the number of shares of Highwoods Common
to be received in the Merger will vary depending on the Value of a share of
Highwoods Common as follows:
<TABLE>
<CAPTION>
Value of a share Consideration to be received
of Highwoods Common per share of JCN Common
- --------------------------------------- ------------------------------------------
<S> <C>
equal to or greater than $35.36 1.84 shares of Highwoods Common
between $35.36 and $32.00 that number of shares of Highwoods Common
determined by dividing $65 by the Value
of a share of Highwoods Common
equal to or under $32.00 2.03 shares of Highwoods Common
</TABLE>
With respect to those shares of JCN Common for which its holder (or the
beneficial owner, as the case may be) has elected to receive cash and does not
dissent (the "Cash Election Shares"), the Merger consideration will be $65 in
cash. To the extent, however, that the number of Cash Election Shares and the
shares of JCN Common as to which the holder thereof seeks to exercise appraisal
rights (the "Dissenting Shares") exceeds 40% of the outstanding shares of JCN
Common, then a portion of the Cash Election Shares (spread proportionately
among all of such shares) will be converted into a right to receive Highwoods
Common as specified above. The number of Cash Election Shares to be so
converted will be the minimum necessary to ensure that the cash component of
the total Merger consideration does not exceed 40%.
All shares of JCN Common, when converted pursuant to the Merger, will no
longer be outstanding and will automatically be canceled and retired and each
holder of a certificate representing shares of JCN Common will cease to have
any rights with respect thereto, except the right to receive certificates
representing shares of Highwoods Common or cash, as applicable, as well as any
distributions declared with respect thereto with a record date after the
Effective Time. JCN Shareholders should not tender their certificates
representing shares of JCN Common with their proxies. As promptly as
practicable after the Effective Time, First Union National Bank, as the
exchange agent ("Exchange Agent"), will mail to the JCN Shareholders
transmittal materials for use in exchanging certificates representing shares of
JCN Common for certificates evidencing shares of Highwoods Common or cash. See
"The Merger -- Exchange of Certificates."
The Special Meeting
A special meeting of the JCN Shareholders will be held at The Ritz-Carlton
Hotel, Kansas City, Missouri, on July 1, 1998, at 10:00 a.m. Central Time (the
"Special Meeting"), for the purpose of considering and voting upon the Merger
Agreement.
Only holders of record of JCN Common at the close of business on April 27,
1998 will be entitled to notice of and to vote at the Special Meeting. At the
Special Meeting, each holder of JCN Common will be entitled to one vote for
each share
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<PAGE>
held, and the affirmative vote of at least two-thirds of the outstanding shares
of JCN entitled to vote is required to approve the Merger Agreement.
Abstentions and failures to vote will have the same effect as votes cast
against approval of the Merger Agreement.
On April 16, 1998, directors and executive officers of JCN beneficially
owned 411,802 shares of JCN Common, or approximately 8.9% of the shares of JCN
Common outstanding. The directors and executive officers of JCN have indicated
that they intend to vote the JCN Common they own "FOR" approval of the Merger
and the Merger Agreement. Shares of JCN Common held by the J.C. Nichols Company
Employee Stock Ownership Trust are excluded from both of the foregoing
statements.
If the Merger is completed, Jackson will acquire all of the assets and
liabilities of JCN, and each outstanding share of JCN Common will be converted,
at the election of the holder thereof, into the right to receive between 1.84
and 2.03 shares of Highwoods Common or $65 in cash or a combination of the two,
subject to the limitations described herein.
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HIGHWOODS PRO FORMA COMBINED FINANCIAL INFORMATION
The following table sets forth the summary unaudited pro forma combined
financial data for Highwoods, assuming the Merger had occurred on the dates
indicated herein, and reflecting the pro forma adjustments described in the
notes to the unaudited pro forma financial statements included elsewhere in the
Proxy Statement/Prospectus.
The summary unaudited pro forma combined operating data are presented as
if the Merger had been consummated at the beginning of the period presented.
The summary unaudited pro forma combined balance sheet is presented as if
the Merger had occurred on March 31, 1998. The Merger has been accounted for
under the purchase method of accounting in accordance with Accounting
Principles Board Opinion No. 16. In the opinion of Highwoods' management, all
significant adjustments necessary to reflect the effects of the Merger have
been made.
The summary pro forma financial information should be read in conjunction
with, and is qualified in its entirety by, the historical financial statements
and notes thereto for Highwoods incorporated by reference into the Proxy
Statement/ Prospectus, and for JCN set forth elsewhere in this Proxy
Statement/Prospectus and the unaudited pro forma financial statements and notes
thereto included elsewhere in the Proxy Statement/Prospectus.
The summary unaudited pro forma operating and balance sheet data are
presented for comparative purposes only and are not necessarily indicative of
what the actual combined results of Highwoods and JCN would have been for the
periods and dates presented. Nor does such data purport to represent the
results of future periods.
<TABLE>
<CAPTION>
Pro Forma Three Months Ended
-------------- March 31,
Three Months
Ended
March 31,
1998 1998 1997
-------------- --------------- --------------
(dollars in thousands except per share
amounts)
Operating Data:
<S> <C> <C> <C>
Total revenue: $ 124,580 $ 102,488 $ 58,321
Rental property operating
expenses(1) .......................... 38,290 29,728 15,342
General and administration ............ 5,629 3,784 2,080
Interest expense ...................... 23,391 17,778 12,035
Depreciation and amortization ......... 19,710 17,161 9,310
----------- ----------- -----------
Income before minority interest ....... 37,560 34,037 19,554
Minority interest ..................... (5,634) (5,608) (3,129)
----------- ----------- -----------
Income before extraordinary item ...... 31,926 28,429 16,425
Extraordinary item -- loss on early
extinguishment of debt ............... (46) (46) (3,337)
----------- ----------- -----------
Net income ............................ 31,880 28,383 13,088
Dividends on preferred stock .......... (8,145) (6,145) (1,407)
----------- ----------- -----------
Net income available for common
shareholders ......................... $ 23,735 $ 22,238 $ 11,681
=========== =========== ===========
Net income per common
share -- basic ....................... $ .39 $ .45 $ .33
=========== =========== ===========
Net income per common
share -- diluted ..................... $ .39 $ .45 $ .33
=========== =========== ===========
Balance Sheet Data
(at the end of period):
Real estate, net of accumulated
depreciation ......................... $ 3,508,345 $ 2,998,539 $ 1,598,747
Total assets .......................... 3,774,631 3,131,732 1,666,113
Total mortgages and notes payable ..... 1,443,503 1,231,099 589,053
Other Data:
FFO(2) ................................ 49,125 45,043 27,457
Cash flow provided by (used in):
Operating activities ............... 57,270 51,971 28,851
Investing activities ............... (283,077) (325,844) (34,162)
Financing activities(3) ............ 295,977 295,977 2,487
Number of in-service properties ....... 643 530 345
Total rentable square feet ............ 39,805,000 33,930,000 21,002,000
<CAPTION>
Pro Forma
--------------
Year
Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1997 1996
-------------- --------------- ---------------
(dollars in thousands except per share amounts)
Operating Data:
<S> <C> <C> <C>
Total revenue: $ 455,612 $ 274,470 $ 137,926
Rental property operating
expenses(1) .......................... 150,979 76,743 35,313
General and administration ............ 17,692 10,216 5,666
Interest expense ...................... 88,593 47,394 26,610
Depreciation and amortization ......... 70,832 47,533 22,095
------------ ----------- -----------
Income before minority interest ....... 127,516 92,584 48,242
Minority interest ..................... (19,128) (15,106) (6,782)
------------ ----------- -----------
Income before extraordinary item ...... 108,388 77,478 41,460
Extraordinary item -- loss on early
extinguishment of debt ............... (5,799) (5,799) (2,140)
------------ ----------- -----------
Net income ............................ 102,589 71,679 39,320
Dividends on preferred stock .......... (32,581) (13,117) --
------------ ----------- -----------
Net income available for common
shareholders ......................... $ 70,008 $ 58,562 $ 39,320
============ =========== ===========
Net income per common
share -- basic ....................... $ 1.15 $ 1.51 $ 1.51
============ =========== ===========
Net income per common
share -- diluted ..................... $ 1.14 $ 1.50 $ 1.50
============ =========== ===========
Balance Sheet Data
(at the end of period):
Real estate, net of accumulated
depreciation ......................... $ -- $ 2,614,654 $ 1,377,874
Total assets .......................... -- 2,722,306 1,443,440
Total mortgages and notes payable ..... -- 978,558 555,876
Other Data:
FFO(2) ................................ 165,767 127,000 70,620
Cash flow provided by (used in):
Operating activities .................. -- 130,192 71,317
Investing activities .................. -- (524,283) 419,782
Financing activities(3) ............... -- 393,167 (486,867)
Number of in-service properties ....... 643 481 292
Total rentable square feet ............ 39,805,000 30,721,000 17,455,000
</TABLE>
16
<PAGE>
- ---------
(1) Rental property operating expenses include salaries, real estate taxes,
insurance, repairs and maintenance, property management, security,
utilities, leasing, development, and construction expenses.
(2) Funds From Operations ("FFO") is defined as net income, computed in
accordance with generally accepted accounting principles ("GAAP"),
excluding gains (losses) from debt restructuring and sales of property,
plus depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures. Management of Highwoods
generally considers FFO to be a useful financial performance measurement
because, together with net income and cash flows, FFO provides investors
with an additional basis to evaluate its ability to incur and service debt
and to fund acquisitions and other capital expenditures. FFO does not
represent net income or cash flows from operating, investing or financing
activities as defined by GAAP. It should not be considered as an
alternative to net income as an indicator of Highwoods' operating
performance or to cash flows as a measure of liquidity. FFO does not
measure whether cash flow is sufficient to fund all cash needs including
principal amortization, capital improvements and distributions to
shareholders. Further, funds from operations statistics as disclosed by
other REITs may not be comparable to Highwoods' calculation of FFO.
(3) Reflects Highwoods' cash flows and pro forma cash flows from operating,
investing and financing activities. Pro forma cash flows from operating
activities represents net income plus depreciation of rental properties
and amortization of deferred expenses, line of credit fees and the cost of
unwinding certain interest rate swap agreements. There are no pro forma
adjustments for changes in working capital items. This pro forma cash flow
data is not necessarily indicative of what actual cash flows would have
been assuming the transactions described in the introduction to the table
had been completed as of the beginning of each of the periods presented,
nor does it purport to represent cash flows from operating, investing and
financing activities for future periods.
COMPARATIVE PER SHARE DATA
The following summary presents selected comparative unaudited per share
information for Highwoods and JCN on a historical basis and for Highwoods and
JCN on a pro forma combined basis assuming the combination had been effective
throughout the periods presented. JCN pro forma equivalent per share amounts
reflected below show the amount of net income, cash distribution and
shareholders' equity that would have been allocable to one share of JCN Common,
multiplied by 2.03 which is the number of shares of Highwoods Common that would
be received for each share of JCN Common assuming a Value of a share of
Highwoods Common of $32.0197.
<TABLE>
<CAPTION>
HIGHWOODS JCN
----------------------- -------------------------------------
Historical Proforma Historical Equivalent Proforma
------------ ---------- ---------------- --------------------
<S> <C> <C> <C> <C>
Book value per share:
March 31, 1998 ...................................... $ 30.13 $ 32.03 $ (4.27) $ 65.02
December 31, 1997 ................................... 29.92 -- (5.76) --
Basic income per share from continuing operations:
Three Months Ended March 31, 1998 ................... .45 .39 .46 (1) .79
Twelve Months Ending December 31, 1997 .............. 1.51 1.15 4.63 (1) 2.33
Cash dividends per share:
Three Months Ended March 31, 1998 ................... .51 .41 -- .83
Twelve Months Ending December 31, 1997 .............. 1.98 1.26 -- 2.56
</TABLE>
- ---------
(1) JCN Historical column reflects basic income per share from continuing
operations after income tax expense (benefit).
17
<PAGE>
COMPARATIVE SHARE PRICES
Highwoods
The Highwoods Common has been traded on the NYSE under the symbol "HIW"
since June 7, 1994. The following table sets forth the quarterly high and low
sales prices per share of Highwoods Common reported on the NYSE, the average
daily trading volume on the NYSE during the quarter and the quarterly
distributions declared per share of Highwoods Common, from June 7, 1994 through
May 29, 1998.
<TABLE>
<CAPTION>
Closing Price Average Daily Distributions
Per Share Trading Volume Per Share
------------------------ ---------------- --------------
Period or Quarter High Low
- ---------------------------------------------- ----------- ----------
<S> <C> <C> <C> <C>
June 7, 1994 through June 30, 1994 ......... $ 21 1/2 $ 19 7/8 192,453 .075(1)
Third Quarter 1994 ......................... 21 20 16,922 .425
Fourth Quarter 1994 ........................ 21 5/8 18 3/4 17,931 .425
First Quarter 1995 ......................... 22 20 58,080 .425
Second Quarter 1995 ........................ 25 1/2 21 1/4 41,335 .450
Third Quarter 1995 ......................... 26 7/8 23 7/8 75,770 .450
Fourth Quarter 1995 ........................ 28 3/8 25 1/2 38,523 .450
First Quarter 1996 ......................... 30 1/2 27 3/4 45,319 .450
Second Quarter 1996 ........................ 30 1/4 26 7/8 131,286 .480
Third Quarter 1996 ......................... 30 3/8 27 72,058 .480
Fourth Quarter 1996 ........................ 33 3/4 28 1/2 129,931 .480
First Quarter 1997 ......................... 35 1/2 33 98,025 .480
Second Quarter 1997. ....................... 33 1/2 30 107,450 .510
Third Quarter 1997 ......................... 35 13/16 31 1/16 156,188 .510
Fourth Quarter 1997 ........................ 37 3/8 33 204,803 .510
First Quarter 1998 ......................... 37 7/16 32 1/4 174,520 .510
April 1, 1998 through May 29, 1998 ......... 35 5/16 32 3/8 200,176 --
</TABLE>
- ---------
(1) No distribution was paid during this period. The accrued distribution of
$.075 per share was paid on November 16, 1994 at the time Highwoods paid
its initial distribution for the period from inception to September 30,
1994.
On May 29, 1998, the last reported sale price of a share of Highwoods
Common on the NYSE was $33 per share. On December 22, 1997, the last full
trading day prior to the public announcement of the Merger, the last reported
sales price of a share of Highwoods Common on the NYSE was $34 1/16 per share.
As of May 29, 1998, Highwoods had 1,063 shareholders of record.
Highwoods intends to continue to declare quarterly distributions on the
Highwoods Common. However, no assurances can be given as to the amounts of
future distributions as such distributions are subject to Highwoods' cash flow
from operations, earnings, financial condition, capital requirements and such
other factors as the Highwoods Board of Directors deems relevant. Highwoods has
determined that 100% of the per share distribution for 1994, 93% of the per
share distribution for 1995, 81% of the per share distribution for 1996 and 70%
of the per share distribution for 1997 represented ordinary income to its
shareholders for income tax purposes. The remaining distributions constituted a
return of capital. No assurance can be given that such percentage will not
change in future years.
18
<PAGE>
JCN
The JCN Common has been traded over-the-counter under the symbol "NCJC."
The following table sets forth the quarterly high and low sales prices per
share of JCN Common reported on the over-the-counter market, the average daily
trading volume on the over-the-counter market during the quarter and the
quarterly distributions declared per share of JCN Common, from January 1, 1996
through May 29, 1998.
<TABLE>
<CAPTION>
Closing Price Average Daily Distributions
Per Share Trading Volume Per Share
------------------------- ---------------- --------------
Period or Quarter High Low
- --------------------------------------------- ----------- -----------
<S> <C> <C> <C> <C>
First Quarter 1996 ......................... $ 21.06 $ 20.00 186 --
Second Quarter 1996 ........................ 36.50 32.00 266 --
Third Quarter 1996 ......................... 34.00 28.13 77 --
Fourth Quarter 1996 ........................ 31.06 27.00 376 --
First Quarter 1997 ......................... 34.00 29.00 307 --
Second Quarter 1997 ........................ 35.50 28.25 5,313 --
Third Quarter 1997 ......................... 56.00 37.25 18,756 --
Fourth Quarter 1997 ........................ 70.00 51.00 160 --
First Quarter 1998 ......................... 74.00 62.00 281 --
April 1, 1998 through May 29, 1998 ......... 66.00 64.00 340 --
</TABLE>
On May 29, 1998, the last reported sale price of a share of JCN Common on
the over-the-counter market was $64.50 per share. On December 22, 1997, the
last full trading day prior to the public announcement of the Merger, the last
reported sale price of a share of JCN Common on the over-the-counter market was
$52. As of May 29, 1998, JCN had 148 shareholders of record.
BECAUSE THE EXCHANGE RATIO IS FIXED WITHIN A SPECIFIED RANGE AND THE
MARKET PRICE OF HIGHWOODS COMMON IS SUBJECT TO FLUCTUATION, THE MARKET VALUE OF
HIGHWOODS COMMON THAT JCN SHAREHOLDERS WILL RECEIVE IN THE MERGER MAY INCREASE
OR DECREASE PRIOR TO AND FOLLOWING THE MERGER. JCN SHAREHOLDERS ARE URGED TO
OBTAIN CURRENT MARKET QUOTATIONS FOR HIGHWOODS COMMON.
19
<PAGE>
RISK FACTORS
Certain statements in the Summary and under captions "Risk Factors," "The
Merger -- Reasons for the Merger; Recommendation of the JCN Board of
Directors," "The Merger -- Opinion of Financial Advisor" and elsewhere in this
Proxy Statement/Prospectus (including the documents incorporated by reference
herein) constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of Highwoods or
JCN to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, those discussed below.
In considering whether to approve the Merger, JCN Shareholders should
consider, in addition to the other information in this Proxy
Statement/Prospectus, the matters described below.
Possible Reduction in Consideration Received by JCN Shareholders
In considering whether to approve the Merger, JCN Shareholders should
consider the risks associated with a potential change in the relative prices of
Highwoods Common and JCN Common prior to the Effective Time due to changes in
the business, operations and prospects of Highwoods or JCN, market assessments
of the likelihood that the Merger will be consummated and the timing thereof,
general market and economic conditions and other factors. At the time of the
Merger, the value of a share of Highwoods Common as compared with a share of
JCN Common may be less than such value at the time a JCN Shareholder votes on
the Merger or makes his or her election as to the form of the consideration to
be received in the Merger. Any decrease in the Value of a share of Highwoods
Common below $32.00 will result in a decrease in the value of the non-cash
component of the Merger consideration.
Limit on Cash Consideration
Although a JCN Shareholder may elect to receive cash pursuant to the
Merger with respect to some or all of his or her shares of JCN Common, such
shareholders may instead receive shares of Highwoods Common with respect to
some of such Cash Election Shares. Cash consideration paid to JCN Shareholders
pursuant to the Merger will be limited to 40% of the aggregate consideration
paid to all JCN Shareholders. See "The Merger -- Terms of the Merger."
Conflicts of Interest of Certain JCN Officers and Directors
Certain officers and directors of JCN have interests in the Merger and
related transactions that conflict with the interests of JCN Shareholders
generally. From January 1996 through September 1997, JCN entered into
employment agreements with its executive officers to permit JCN to attract and
retain talented managers capable of providing continuity to, and enhancing the
operations of, JCN. One such agreement provides Mr. Brady with certain benefits
upon the occurrence of a change of control not supported by Mr. Brady, and
other agreements would provide several other officers with certain benefits
upon the occurrence of a change of control and upon the occurrence of various
triggering events subsequent to a transaction such as the Merger. Accordingly,
Messrs. Brady, Cook, de Avila, Dixon, Fox, Peterson, Sloan, Stephenson and
Teaney and Ms. Marietti may be entitled to the accelerated receipt of cash,
stock, or combined cash and stock consideration from Highwoods, in approximate
amounts of $6,215,783, $222,721, $1,019,610, $218,005, $214,210, $618,260,
$618,260, $326,814, $1,016,171 and $196,231, respectively, which totals in the
aggregate approximately $10.7 million (not taking into account obligations
related to certain of such individuals' personal taxes), a portion of which may
not be deductible to JCN or Highwoods. A full explanation of the triggering
events for such payments is set forth under "Description of JCN -- Change in
Control Agreements." As of the date of this Proxy Statement/Prospectus,
Highwoods has not entered into any agreement with such officers that would
avoid or reduce the amount of any consideration to which they might otherwise
be entitled.
Mr. Barrett Brady, Chief Executive Officer of JCN, is the only employee of
JCN who is a member of the JCN Board of Directors. Mr. Brady abstained from the
vote taken by the JCN Board of Directors to approve the Merger, and the JCN
Board of Directors was aware of the potential conflict of interest resulting
from Mr. Brady's status as an employee of JCN with an agreement providing
benefits upon the occurrence of a change of control.
Mr. C. Q. Chandler, III, a member of the JCN Board of Directors, is also
chairman of the board of directors and a significant shareholder of INTRUST
Bank, N.A. ("INTRUST"), the trustee of JCN's Employee Stock Ownership Trust
(the "ESOT"). INTRUST received payments of fees from the ESOT totaling $114,480
during 1997, and Highwoods has indicated its intention to terminate the ESOT
upon consummation of the Merger. As a result of the perception that the
interest
20
<PAGE>
of Mr. Chandler in INTRUST may result in a conflict of interest with his duties
as a member of the JCN Board of Directors, Mr. Chandler abstained from the vote
taken by the JCN Board of Directors to approve the Merger, and the JCN Board of
Directors was aware of the potential conflict of interest resulting from his
interests in INTRUST. Mr. Chandler and Mr. Brady expressed no objection to the
Merger Agreement.
Potential Decrease in Price of Highwoods Common Resulting from Future
Highwoods' Offerings
Highwoods from time to time sells additional shares of Highwoods Common in
public or private offerings to fund pending acquisition and development
activity, pay down indebtedness associated with its revolving loans and for
general working capital purposes. Such offerings may affect the market price of
Highwoods Common. Sales of substantial amounts of Highwoods Common or the
perception that such sales could occur could adversely affect the prevailing
market price for Highwoods Common. No assurances can be given that Highwoods
will not undertake any material public or private offering of Highwoods Common
in the near future.
Dilution of the Ownership Percentage of Holders of JCN Common
Because the aggregate value of the outstanding shares of Highwoods Common
is greater than that of the outstanding shares of JCN Common, the percentage of
Highwoods that a holder of JCN Common will own as a result of the Merger will
be smaller than such holder's ownership percentage in JCN prior to the Merger.
As a result, holders of JCN Common may have less influence over the affairs of
Highwoods than their current influence over the affairs of JCN.
Potential Adverse Effects of Combining the Companies
Highwoods and JCN are large enterprises with operations in a number of
different states. There can be no assurance that costs or other factors
associated with the integration of the two companies would not adversely affect
future combined results of operations. Highwoods may not be able to achieve
cost savings expected to result from the Merger or may not be able to realize
such savings as quickly as planned.
Dependence of Highwoods' Operating Performance on Southeastern Markets
Highwoods' revenues and the value of its properties may be affected by a
number of factors, including the local economic climate (which may be adversely
impacted by business layoffs or downsizing, industry slowdowns, changing
demographics and other factors) and local real estate conditions (such as
oversupply of or reduced demand for office, industrial and other competing
commercial properties). The Highwoods Properties are located in 19 markets in
North Carolina, Florida, Tennessee, Georgia, Virginia, South Carolina, Maryland
and Alabama. Based on March 1998 results, approximately 35% of the rental
revenue from the Highwoods Properties is derived from properties in Florida and
approximately 33% of such revenue is derived from properties in North Carolina.
Highwoods' performance and its ability to make distributions to shareholders is
particularly dependent on the economic and real estate conditions in the
Southeast and in its Florida and North Carolina markets in particular. There
can be no assurance as to the continued growth of the economy in Highwoods'
southeastern markets or the potential benefits to Highwoods of its investment
in the Midwest through its acquisition of JCN.
Potential Adverse Effects of Expanding into New Geographic Areas and Property
Types
Although Highwoods has limited its development, acquisition, management
and leasing business primarily to markets and property types with which
management is familiar, Highwoods may expand its business to new geographic
areas and property types. Management believes that much of its past success has
been a result of its local expertise in the Southeast and its experience in the
ownership, management and development of suburban office and industrial
properties. Highwoods may not initially possess the same level of familiarity
with new geographic areas and property types to develop, acquire, manage or
lease newly acquired properties as profitably as it does for its existing
properties.
As a result of the Merger, Highwoods will enter new markets in Missouri,
Kansas and Iowa. Highwoods' management is not as familiar with these geographic
markets as with its existing southeastern markets. Furthermore, Highwoods would
acquire different property types, such as retail properties, multifamily
communities and single-family subdivisions, with which its management is not as
familiar. Although Highwoods intends to retain the existing management of JCN
upon completion of the Merger, there can be no assurance as to the successful
integration of the properties acquired in the Merger into the existing
Highwoods' property portfolio. Failure to integrate such properties successfully
could adversely affect Highwoods' results of operations.
21
<PAGE>
Conflicts of Interest in the Business of Highwoods
Potential Adverse Tax Consequences upon Sale or Refinancing of Highwoods
Properties. Holders of Common Units in the Highwoods Operating Partnership may
suffer adverse tax consequences upon the sale or refinancing of any of
Highwoods' properties; therefore, such holders, including certain of Highwoods'
officers and directors, and Highwoods may have different objectives regarding
the appropriate pricing and timing of any sale or refinancing of such
properties. Although Highwoods, as the sole general partner of the Highwoods
Operating Partnership, has the exclusive authority to determine whether and on
what terms to sell or refinance an individual property, those members of
Highwoods' management and the Highwoods Board of Directors who hold Common
Units may influence Highwoods not to sell or refinance certain properties even
though such sale or refinancing might otherwise be financially advantageous to
Highwoods.
Potential Inability to Eliminate Conflicts of Interests. Highwoods has
adopted certain policies relating to conflicts of interest. These policies
include a bylaw provision requiring all transactions in which executive
officers or directors have a conflicting interest to be approved by a majority
of the independent directors of Highwoods or a majority of the shares of
capital stock held by disinterested shareholders. There can be no assurance
that Highwoods' policies will be successful in eliminating the influence of
such conflicts, and if they are not successful, decisions could be made that
might fail to reflect fully the interests of all shareholders.
Potential Anti-Takeover Effect of Certain Provisions of Maryland Law and
Highwoods' Governing Documents
Limitation on Ownership of Highwoods Common. The Amended and Restated
Articles of Incorporation of Highwoods (the "Highwoods Articles") prohibit
ownership of more than 9.8% of the outstanding capital stock of Highwoods by
any person or entity. Such restriction is likely to have the effect of
delaying, deferring or precluding an acquisition of control of Highwoods by a
third party without consent of the Highwoods Board of Directors even if a
change in control were in the best interest of shareholders.
Required Consent of the Highwoods Operating Partnership for Significant
Corporate Action. Highwoods may not engage in certain change of control
transactions without the approval of the holders of a majority of the
outstanding Common Units. Should Highwoods ever own less than a majority of the
outstanding Common Units, this voting requirement might delay, defer or
preclude an acquisition or change in the control of Highwoods. As of March 31,
1998, Highwoods owned approximately 83% of the Common Units.
Difficulty in Removing Current Directors. The Highwoods Board of Directors
has three classes of directors, the terms of which will expire in 1999, 2000
and 2001. Directors for each class are generally chosen for a three-year term.
The staggered terms for directors may affect the shareholders' ability to
change control of Highwoods even if a change in control were in the
shareholders' best interest. (JCN also has a staggered board of directors.)
Anti-Takeover Protections of Highwoods Operating Partnership Agreement.
The Highwoods Operating Partnership Agreement has been amended to clarify the
provisions relating to limited partners' redemption rights in the event of
certain changes of control of Highwoods. Because these provisions require an
acquiror to make provision under certain circumstances to maintain the
Highwoods Operating Partnership structure and maintain a limited partner's
right to continue to hold Common Units with future redemption rights, the
amendment could have the effect of discouraging a third party from making an
acquisition proposal for Highwoods.
Dilutive Effect of Shareholders' Rights Plan. On October 4, 1997, the
Highwoods Board of Directors adopted a Shareholders' Rights Plan and declared a
distribution of one preferred share purchase right (a "Right") for each
outstanding share of Highwoods Common. The Rights were issued on October 16,
1997 to each shareholder of record on such date. The Rights have certain
anti-takeover effects. The Rights will cause substantial dilution to a person
or group that attempts to acquire Highwoods on terms not approved by the
Highwoods Board of Directors. The Rights should not interfere with any merger
or other business combination approved by the Highwoods Board of Directors
since the Rights may be redeemed by Highwoods for $.01 per Right prior to the
time that a person or group has acquired beneficial ownership of 15% or more of
the Highwoods Common. (JCN has also adopted a shareholder rights plan. See
"Comparison of Rights of Shareholders -- Shareholders' Rights Plans.")
Adverse Consequences on Distributions of Highwoods' Failure to Qualify as a
REIT
Highwoods and the Highwoods Operating Partnership intend to operate in a
manner so as to permit Highwoods to remain qualified as a REIT under the Code.
Although Highwoods believes that it will operate in such a manner, no assurance
can be given that Highwoods will remain qualified as a REIT. If in any taxable
year Highwoods were to fail to qualify
22
<PAGE>
as a REIT, Highwoods would not be allowed a deduction for distributions to
shareholders in computing taxable income and would be subject to Federal income
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates.
Factors that Could Cause Poor Operating Performance of the Highwoods Properties
Reliance on Performance of Properties. Real property investments are
subject to varying degrees of risk. The yields available from equity
investments in real estate depend in large part on the amount of income
generated and expenses incurred. If Highwoods' properties do not generate
revenues sufficient to meet operating expenses, including debt service, tenant
improvements, leasing commissions and other capital expenditures, Highwoods'
ability to make distributions to its shareholders and the Highwoods Operating
Partnership's ability to make payments of interest and principal on any debt
securities may be adversely affected.
Highwoods' revenues and the value of its properties may be adversely
affected by a number of factors, including the national economic climate, the
local economic climate, local real estate conditions, the perceptions of
prospective tenants of the attractiveness of each property, the ability of
Highwoods to provide adequate management, maintenance and insurance, and
increased operating costs (including real estate taxes and utilities). In
addition, real estate values and income from properties are also affected by
such factors as applicable laws, including tax laws, interest rate levels and
the availability of financing.
Potential Adverse Effect of Competition on Operating Performance. Numerous
office and industrial properties compete with Highwoods' properties in
attracting tenants to lease space. Some of these competing properties are newer
or better located than some of Highwoods' properties. Significant development
of office or industrial properties in a particular area could have a material
adverse effect on Highwoods' ability to lease space in its properties and on
the rents charged.
Bankruptcy or Weak Financial Condition of Tenants. At any time, a tenant
of Highwoods' properties may seek the protection of the bankruptcy laws, which
could result in the rejection and termination of such tenant's lease and
thereby cause a reduction in the cash flow available for distribution by
Highwoods. Although Highwoods has not experienced material losses from tenant
bankruptcies, no assurance can be given that tenants will not file for
bankruptcy protection in the future or, if any tenants file, that they will
affirm their leases and continue to make rental payments in a timely manner. In
addition, a tenant from time to time may experience a downturn in its business,
which may weaken its financial condition and result in the failure to make
rental payments when due. If tenant leases are not affirmed following
bankruptcy or if a tenant's financial condition weakens, Highwoods' income and
its shareholder distributions may be adversely affected.
Uncertainty in Renewal of Leases and Reletting of Space. Highwoods will be
subject to the risks that upon expiration of leases for space located in its
properties, the leases may not be renewed, the space may not be relet or the
terms of renewal or reletting (including the cost of required renovations) may
be less favorable than current lease terms. If Highwoods were unable to relet
or renew promptly the leases for all or a substantial portion of this space or
if the rental rates upon such renewal or reletting were significantly lower
than expected rates, then Highwoods' cash flow and ability to make expected
distributions to shareholders may be adversely affected.
Illiquidity of Real Estate. Equity real estate investments are relatively
illiquid. Such illiquidity will tend to limit the ability of Highwoods to vary
its portfolio promptly in response to changes in economic or other conditions.
In addition, the Code limits Highwoods' ability to sell properties held for
fewer than four years, which may affect Highwoods' ability to sell properties
without adversely affecting its financial performance or at a time that would
otherwise be in the best interest of its shareholders.
Potential Adverse Effect on Results of Operations Due to Changes in Laws.
Because increases in income, service or transfer taxes are generally not passed
through to tenants under leases, such increases may adversely affect Highwoods'
cash flow and its ability to make distributions to shareholders. Highwoods'
properties are also subject to various Federal, state and local regulatory
requirements, such as requirements of the Americans with Disabilities Act and
state and local fire and life safety requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental
authorities or awards of damages to private litigants. Highwoods believes that
the Highwoods Properties comply in all material respects with such regulatory
requirements. However, there can be no assurance that these requirements will
not be changed or that new requirements will not be imposed which would require
significant unanticipated expenditures by Highwoods and could have an adverse
effect on Highwoods' cash flow and expected distributions.
23
<PAGE>
Potential Problems in Development, Construction and Acquisition Activities
Highwoods intends to continue development and construction of office and
industrial properties, including development on the Highwoods Development Land
and the completion of the Highwoods Development Projects. Risks associated with
Highwoods' development and construction activities, including activities
relating to the Highwoods Development Land and the Highwoods Development
Projects, may include: abandonment of development opportunities; construction
costs of a property exceeding original estimates, possibly making the property
uneconomical; occupancy rates and rents at a newly completed property may not
be sufficient to make the property profitable; financing may not be available
on favorable terms for development of a property; and construction and lease-up
may not be completed on schedule, resulting in increased debt service expense
and construction costs. In addition, new development activities, regardless of
whether or not they are ultimately successful, typically require a substantial
portion of management's time and attention. Development activities are also
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations. These risks may adversely affect
Highwoods' results of operations and ability to make distributions to its
shareholders.
Highwoods intends to continue to acquire office and industrial properties.
Acquisitions of office and industrial properties entail risks that investments
will fail to perform in accordance with expectations, adversely affecting
operations and shareholder distributions. Estimates of the costs of
improvements to bring an acquired property up to standards established for the
market position intended for that property may prove inaccurate.
Potential Adverse Effect of Incurrence of Debt
Potential Inflexibility of Debt Financing. Highwoods and the Highwoods
Operating Partnership are subject to the risks associated with debt financing,
including the risk that the cash provided by operating activities will be
insufficient to meet required payments of principal and interest, the risk of
rising interest rates on floating rate debt, the risk that Highwoods and the
Highwoods Operating Partnership will not be able to prepay or refinance
existing indebtedness (which generally will not have been fully amortized at
maturity) or that the terms of such refinancing will not be as favorable as the
terms of existing indebtedness. If refinancing of such indebtedness could not
be secured on acceptable terms, Highwoods might be forced to dispose of
properties upon disadvantageous terms, which might result in losses and might
adversely affect the cash flow available for distribution to equity holders or
debt service. An inability to secure refinancing could also cause Highwoods to
issue equity securities when its valuation is low, which could adversely affect
the market price of such securities. In addition, if a property or properties
are mortgaged to secure payment of indebtedness and Highwoods is unable to meet
mortgage payments, the mortgage securing the property could be foreclosed upon
by, or the property could be otherwise transferred to, the mortgagee with a
consequent loss of income and asset value to Highwoods and potential adverse
effect on shareholder distributions.
Adverse Effect of Potential Increases in Market Interest Rates. Highwoods
and the Highwoods Operating Partnership have incurred and expect in the future
to incur variable rate indebtedness in connection with the acquisition and
development of properties, as well as for other purposes. Also, additional
indebtedness that Highwoods and the Highwoods Operating Partnership may incur
under the existing revolving credit facilities will bear interest at variable
rates. Accordingly, increases in interest rates would increase interest costs
(to the extent that the related indebtedness was not protected by interest rate
protection arrangements), which could adversely affect Highwoods' results of
operations and its ability to pay expected distributions to shareholders.
Possible Environmental Liabilities
Under various Federal, state and local laws, ordinances and regulations,
such as the Comprehensive Environmental Response Compensation and Liability Act
or "CERCLA," and common laws, an owner or operator of real estate is liable for
the costs of removal or remediation of certain hazardous or toxic substances on
or in such property as well as certain other costs, including governmental
fines and injuries to persons and property. Such laws often impose such
liability without regard to whether the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. The
presence of such substances, or the failure to remediate such substances
properly, may adversely affect the owner's or operator's ability to sell or
rent such property or to borrow using such property as collateral. Persons who
arrange for the disposal or treatment of hazardous or toxic substances may also
be liable for the costs of removal or remediation of such substances at a
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials ("ACM"), and third parties may seek
recovery from owners or operators of real property for personal injuries
associated with ACM. A number of the Highwoods Properties contain ACM or
material that is presumed to be ACM. In connection with the ownership and
operation of its
24
<PAGE>
properties, Highwoods may be liable for such costs. In addition, it is not
unusual for property owners to encounter on-site contamination caused by
off-site sources, and the presence of hazardous or toxic substances at a site
in the vicinity of a property could require the property owner to participate
in remediation activities in certain cases or could have an adverse affect on
the value of such property. Contamination from adjacent properties has migrated
onto at least three properties owned by Highwoods; however, based on current
information, management of Highwoods does not believe that any significant
remedial action is necessary at these affected sites.
As of the date hereof, 99% of the Highwoods Properties have been subjected
to a Phase I environmental assessment. These assessments have not revealed, nor
is management of Highwoods aware of, any environmental liability that it
believes would have a material adverse effect on Highwoods' financial position,
operations or liquidity taken as a whole. This projection, however, could prove
to be incorrect depending on certain factors. For example, Highwoods'
assessments may not reveal all environmental liabilities or may underestimate
the scope and severity of environmental conditions observed, with the result
that there may be material environmental liabilities of which Highwoods is
unaware, or material environmental liabilities may have arisen after the
assessments were performed of which Highwoods is unaware. In addition,
assumptions regarding groundwater flow and the existence and source of
contamination are based on available sampling data, and there are no assurances
that the data is reliable in all cases. Moreover, there can be no assurance
that (i) future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Highwoods Properties will not be affected by tenants, by the condition of land
or operations in the vicinity of the Highwoods Properties, or by third parties
unrelated to Highwoods.
Some tenants use or generate hazardous substances in the ordinary course
of their respective businesses. These tenants are required under their leases
to comply with all applicable laws and are responsible to Highwoods for any
damages resulting from the tenants' use of the property. Highwoods is not aware
of any material environmental problems resulting from tenants' use or
generation of hazardous substances. There are no assurances, however, that all
tenants will comply with the terms of their leases or remain solvent and that
Highwoods may not at some point be responsible for contamination caused by such
tenants.
Rights of Holders of Highwoods Common may be Less Favorable than Rights of JCN
Shareholders
JCN is governed by the law of Missouri as well as by its charter (the "JCN
Articles") and bylaws (the "JCN Bylaws"); Highwoods is governed by the law of
Maryland, the rules of the NYSE, the Highwoods Articles and its bylaws (the
"Highwoods Bylaws"). The different laws governing the two corporations,
together with the different provisions in the respective corporate articles and
bylaws of JCN and Highwoods, create differences in the rights of the
shareholders of the two corporations. As a result of these differences, in some
cases, the rights of a holder of Highwoods Common may be considered less
favorable than those of a holder of JCN Common. This is especially true with
respect to differences in the provisions affecting change of control
transactions and those governing the Board of Directors, which differences are
summarized below. A detailed comparison of the rights of holders of JCN Common
versus those of holders of Highwoods Common is set forth at "Comparison of
Rights of Shareholders."
Difficulty in Changing Control of Highwoods. It may be more difficult for
a third party to acquire control of Highwoods than JCN. Frequently, a change of
control transaction involves a premium for the shares of the target over
then-current market prices, and the statutory, charter and bylaw provisions
governing Highwoods may reduce the likelihood that its shareholders would enjoy
the possible benefits of a change of control transaction.
JCN Shareholders may have Lesser Control over Affairs of Highwoods.
Minority shareholders are less likely to be able to secure representation on
the Highwoods Board of Directors than on the JCN Board of Directors because,
unlike JCN, Highwoods does not elect its directors by cumulative vote. With
respect to the removal of directors, it is more difficult to remove a Highwoods
director than a JCN director, even when the removal of a director would be in
the best interest of the shareholders.
In addition, the governing provisions regarding the liability and
indemnification of directors are more favorable for directors of Highwoods than
directors of JCN. As a result, directors of JCN may be more motivated than
directors of Highwoods to perform their duties at the highest standard of care.
25
<PAGE>
THE SPECIAL MEETING
Purpose
This Proxy Statement/Prospectus is furnished to JCN Shareholders in
connection with the solicitation of proxies by and on behalf of the JCN Board
of Directors for use at the Special Meeting. This Proxy Statement/Prospectus is
first being mailed to JCN Shareholders on or about June , 1998.
Record Date; Vote Required
The affirmative vote of the holders of at least two-thirds of the
outstanding shares of JCN Common is required to approve the Merger Agreement.
Only holders of JCN Common of record as of the close of business on April 27,
1998 (the "Record Date") are entitled to vote at the Special Meeting. At the
close of business on the Record Date, 4,619,039 shares of JCN Common were
outstanding. Holders of shares of JCN Common are entitled to one vote for each
share held on the Record Date.
THE JCN BOARD OF DIRECTORS HAS APPROVED THE TERMS OF THE MERGER AGREEMENT
AND THE CONSUMMATION OF THE MERGER CONTEMPLATED THEREBY, AND RECOMMENDS THAT
JCN SHAREHOLDERS VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
Solicitation and Revocation of Proxies
The Special Meeting will be held at The Ritz-Carlton Hotel, Kansas City,
Missouri on July 1, 1998, at 10:00 a.m. Central Time. At the Special Meeting,
JCN Shareholders will be asked to consider and vote upon the approval of the
Merger Agreement. Any proxy given may be revoked at any time before it is
exercised, by delivery of a later-dated proxy or by notifying the Secretary of
JCN, Mr. Price A. Sloan, in person or in writing of an intention to revoke a
proxy.
All shares represented by a proxy given pursuant to this solicitation will
be voted as specified thereon at the Special Meeting. If no specification is
given, such shares will be voted in favor of the proposal to approve the Merger
Agreement. The JCN Board of Directors will not use any proxies voted against
the Merger for adjournment or postponement of the Special Meeting intended to
permit further solicitation.
Proxies are being solicited by and on behalf of the JCN Board of
Directors. In addition to solicitation by mail, JCN may cause proxies to be
solicited in person or by telephone or telegram by JCN's officers, directors
and employees. These persons will receive no additional compensation for
solicitation of proxies, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitations. JCN has also arranged for
brokerage firms, banks, custodians, nominees and fiduciaries to forward proxy
solicitation materials to owners of the JCN Common held of record by such
persons. The cost of solicitation of proxies for the Special Meeting will be
borne by JCN.
JCN has retained Innisfree M & A Incorporated ("Innisfree") to assist in
the solicitation of proxies for the Special Meeting. For these services,
Innisfree will receive an initial fee of $10,000, plus reimbursement for its
out-of-pocket disbursements. If requested to contact individual registered
holders, nonobjecting beneficial holders and ESOT beneficiaries, Innisfree will
charge a modest per contact fee, which fee includes related telephone expenses.
JCN estimates the total cost of the services to JCN to be less than $40,000.
THE MERGER
The description of the Merger contained in this Proxy Statement/Prospectus
is qualified in its entirety by reference to the Agreement and Plan of Merger
among Highwoods, Jackson and JCN dated December 22, 1997 (the "Original Merger
Agreement") and Amendment No. 1 to the Agreement and Plan of Merger dated as of
April 29, 1998 (the "Amendment"), the full texts of which are attached as
Appendix A, and are incorporated herein by reference.
Terms of the Merger
The Merger Agreement provides that, upon satisfaction or waiver of certain
conditions, JCN will be merged into Jackson, a wholly owned subsidiary of
Highwoods formed for the sole purpose of effecting the Merger.
As a result of the Merger, each JCN Shareholder will receive, at his or
her election, shares of Highwoods Common or cash or a combination of the two,
subject to the limitation that Highwoods will not pay more than 40% of the
total Merger consideration in cash. A JCN Shareholder may elect to receive
shares of Highwoods Common for all or some of his or her shares of JCN Common.
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<PAGE>
With respect to each share of JCN Common for which its holder has elected
to receive shares of Highwoods Common, the number of shares of Highwoods Common
to be received in the Merger (the "Exchange Ratio") will vary depending on the
Value of a share of Highwoods Common as follows:
<TABLE>
<CAPTION>
Value of a share of Consideration to be received
Highwoods Common per share of JCN Common
- --------------------------------------- ------------------------------------------
<S> <C>
equal to or greater than $35.36 1.84 shares of Highwoods Common
between $35.36 and $32.00 that number of shares of Highwoods Common
determined by dividing $65 by the Value
of a share of Highwoods Common
equal to or under $32.00 2.03 shares of Highwoods Common
</TABLE>
No fractional shares of Highwoods Common will be issued in connection with
the Merger. In lieu thereof, holders of JCN Common will receive cash (without
interest) in an amount equal to such fractional part of a share of Highwoods
Common multiplied by the Exchange Ratio. No such holder will be entitled to
dividends, voting rights, or any other rights as a shareholder in respect of
any fractional shares.
With respect to the Cash Election Shares, the Merger consideration will be
$65 in cash. To the extent, however, that the number of Cash Election Shares
and Dissenting Shares exceeds 40% of the outstanding shares of JCN Common, then
a portion of the Cash Election Shares (spread proportionately among all of such
shares) will be converted into a right to receive Highwoods Common as specified
above. The number of Cash Election Shares to be so converted will be the
minimum number necessary to keep the cash component of the total Merger
consideration (including cash paid for Dissenting Shares) below 40%.
The following table illustrates the cash versus stock component of the
Merger consideration for each Cash Election Share under various JCN Shareholder
voting scenarios:
<TABLE>
<CAPTION>
Components of
Merger
Consideration
Percentage of Shares per Cash Election
of JCN Stock Share
------------------------------- -----------------
Perfecting Electing Highwoods
Dissenters' Rights Cash Cash Common
-------------------- ---------- ------ ----------
<S> <C> <C> <C> <C>
Scenario 1 25% 60% 25% 75%
Scenario 2 25% 30% 50% 50%
Scenario 3 25% 15% 100% 0%
Scenario 4 10% 75% 40% 60%
Scenario 5 10% 50% 60% 40%
Scenario 6 10% 30% 100% 0%
</TABLE>
Background of the Merger
In July 1997, the JCN Board of Directors requested that Morgan Stanley &
Co. Incorporated ("Morgan Stanley"), an internationally recognized investment
banking firm, review various capital planning and strategic alternatives
available to JCN. This analysis was requested because management of JCN had
identified significant development projects and outlined a strategy for growth
with which it was prepared to proceed. The JCN Board of Directors and Morgan
Stanley believed that certain capital raising alternatives were available,
pursuant to which JCN could finance its growth and provide liquidity to JCN
Shareholders, and management of JCN believed such alternatives could also cause
the value of the JCN Common to increase and better reflect the JCN Board of
Directors' assessment of JCN's value. (At that time, JCN Common was trading at
approximately $40 per share.) Morgan Stanley presented information to the JCN
Board of Directors at a meeting on August 27, 1997 that outlined the following
four options: (i) a private issuance of convertible preferred stock; (ii) a
private issuance of JCN Common; (iii) a public offering of JCN Common; or (iv)
a strategic combination with a public real estate company or a public real
estate investment trust.
The JCN Board of Directors identified the private issuance of convertible
preferred stock as the preferred method of satisfying the identified
objectives. However, the JCN Board of Directors solicited and was unable to
obtain the support of the trustee of the JCN Employee Stock Ownership Trust
(the "ESOT"), INTRUST Bank, N.A. ("INTRUST"), which support was viewed as
necessary to amend the JCN Articles in order to authorize the issuance of such
securities. The trustee's support was viewed as necessary because the ESOT
holds approximately 30.5% of the outstanding shares of JCN Common,
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<PAGE>
and the support of a majority of JCN Shareholders, as is required to amend the
JCN Articles, seemed uncertain without the support of INTRUST. Accordingly, the
JCN Board of Directors determined to pursue simultaneously what it perceived as
the two most viable remaining options, the private issuance of JCN Common or a
strategic merger with a public real estate company or a public real estate
investment trust. In September 1997, the JCN Board of Directors authorized
Morgan Stanley to canvass parties that it considered most likely to enter into
either of the foregoing transactions with JCN and to present any resulting
proposals to the JCN Board of Directors for consideration.
During the period beginning June 1997 and extending through October 1997,
management and representatives of JCN had numerous discussions with INTRUST to
address a number of concerns expressed by INTRUST, including the liquidity
needs of the ESOT. During the course of those discussions, JCN understands that
INTRUST was approached by Bosfield, L.L.C., an Indiana limited liability
corporation ("Bosfield"), with an offer to purchase at $59 per share all of the
shares of JCN Common held by the ESOT. INTRUST entered into an agreement with
Bosfield, dated as of September 24, 1997, pursuant to which INTRUST agreed to
sell to Bosfield all of the JCN Common then owned by the ESOT and "provide
reasonable assistance" to Bosfield in any effort by Bosfield to acquire an
additional 700,000 shares of JCN Common. The JCN Board of Directors met with
the principals of Bosfield and was told of Bosfield's desire to obtain control
of JCN. The JCN Board of Directors requested on more than one occasion, but was
never provided, specific steps to which Bosfield would commit that would
protect the interest of the minority shareholders of JCN subsequent to any
acquisition by Bosfield of control of JCN. The JCN Board of Directors concluded
that alternatives existed that would provide better value to all JCN
Shareholders, including the ESOT, and would meet the objectives previously
outlined by the JCN Board of Directors. Accordingly, the JCN Board of Directors
urged Morgan Stanley to continue its preliminary discussions with parties as
described above.
Morgan Stanley, together with JCN in certain instances, proceeded to
contact four investors to determine their interest in purchasing JCN Common in
amounts necessary to finance JCN's growth strategy. In addition, Morgan
Stanley, together with JCN in certain instances, contacted eight public real
estate companies and real estate investment trusts that it perceived as most
likely to be interested in a strategic merger with JCN. As a result of such
conversations, the JCN Board of Directors evaluated two specific proposals for
consideration. One such proposal contemplated an issuance by JCN, at a price
below $65 per share, of a significant (but not controlling) percentage of JCN
Common to a prospective investor. The other was a proposed strategic merger
with Highwoods. Highwoods expressed interest in a strategic merger with JCN, in
writing, indicating a range of perceived values it would expect to pay, subject
to due diligence, provided that JCN negotiated exclusively with Highwoods
during such period. At a November 19, 1997 meeting, the JCN Board of Directors
had an extensive discussion as to the advantages and disadvantages of each
option.
At a November 24, 1997 meeting, the JCN Board of Directors voted to pursue
a strategic merger with Highwoods and established a Negotiating Committee of
the JCN Board of Directors consisting of Messrs. Hoskins, Morgan and Brady to
work with JCN counsel to negotiate an acceptable letter of intent with
Highwoods and subsequently negotiate terms of a proposed definitive agreement
for consideration by the JCN Board of Directors. The JCN Board of Directors
determined that a strategic merger, such as the Merger, was at that time the
most viable option for JCN because, in the view of the JCN Board of Directors,
it would provide access to relatively low cost capital, permit pursuit of JCN's
existing business strategy, provide tax deferral for those JCN Shareholders
seeking that benefit, and provide greater liquidity to JCN Shareholders. The
JCN Board of Directors believed that alternatives then available to it could
not as effectively provide such benefits.
The letter of intent first offered by Highwoods indicated their interest
in pursuing a transaction at a price between $62 and $64 per share of JCN
Common. The draft letter of intent required a period of exclusivity extending
until December 20, 1997, during which time JCN could not solicit proposals or
discuss an acquisition with any party other than Highwoods. The draft letter of
intent also sought payment to Highwoods by JCN of a termination fee of 5% of
the aggregate transaction value in the event that Highwoods made an offer to
acquire all of the stock of JCN at a price at least equal to $64 per share. JCN
refused to agree to such terms. As a result of negotiations between the
Negotiating Committee and Mr. O. Temple Sloan, Jr., Chairman of the Board of
Highwoods, Mr. Mack D. Pridgen, III, Vice President and General Counsel of
Highwoods, and outside counsel to Highwoods, the letter of intent was revised
to delete the requested termination fee. Representatives of Highwoods, however,
insisted on retaining the period of exclusivity set forth in the letter of
intent and indicated they would be unwilling to go forward with discussions if
they were not granted the period of exclusivity. The letter of intent,
providing for a period of exclusivity, was then signed on November 24, 1997.
From December 2, 1997 through December 20, 1997, Highwoods, J.P. Morgan
Securities Inc. ("J.P. Morgan") (the investment banking firm serving as
financial advisor to Highwoods), and outside counsel to Highwoods conducted
extensive due diligence of the assets and properties of JCN. Highwoods first
provided to JCN a draft of the merger agreement (as executed on December 22,
1997, the "Original Merger Agreement") during the week of December 8, 1997.
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<PAGE>
On December 14, 1997, members of the Negotiating Committee, Mr. Price
Sloan, the General Counsel of JCN, individuals from Morgan Stanley, and outside
counsel to JCN held a telephone conference with officers of Highwoods and
outside counsel to Highwoods to discuss the proposed terms of the Original
Merger Agreement. During this conference, representatives of JCN made a number
of comments on the proposed Original Merger Agreement, noting in particular
their objection to: (i) the amount of a proposed termination fee and the
circumstances under which such fee would be payable to Highwoods; (ii) the
request by Highwoods that JCN enter into a stock option agreement granting
Highwoods an option to purchase from JCN shares of JCN Common representing up
to 10% of the issued and outstanding JCN Common (the "Ten Percent Option");
(iii) the provisions that set the stock portion of the consideration at a fixed
exchange rate rather than a fixed dollar amount; and (iv) the numerous
conditions to the obligation of Highwoods to close the transaction. At that
time, Highwoods had not completed sufficient due diligence to be in a position
to commit to a specific price.
While working with the Negotiating Committee, Highwoods sought to
negotiate with representatives of the extended Nichols family (who, through
individual share holdings and shares held in trust, own approximately 26% of
the JCN Common) and with INTRUST agreements that would commit the Nichols
family and INTRUST to support any agreement that might ultimately have been
entered into with JCN. Although both the Nichols family and INTRUST appeared
supportive of the proposed transaction, Highwoods was unable to obtain such
agreements on terms it deemed acceptable. Highwoods was also unable to obtain
from the Negotiating Committee a commitment to waive application of JCN's
Shareholder Rights Plan to a proposed purchase by Highwoods of all of the JCN
Common held by the Nichols family and the ESOT.
On December 16, 1997, Messrs. Temple Sloan, Pridgen, and Carman J. Liuzzo,
Vice President and Chief Financial Officer of Highwoods, J.P. Morgan, and
outside counsel to Highwoods met with the Negotiating Committee, Mr. Price
Sloan, Morgan Stanley, and outside counsel to JCN and indicated their
willingness to commit to a transaction at $64 per share of JCN Common.
Highwoods continued to insist on a termination fee totaling $19.2 million and
continued to seek the Ten Percent Option. After substantial negotiations and
discussion, it was agreed that the termination fee would be reduced to $16.5
million and Highwoods would forego the Ten Percent Option. The Negotiating
Committee agreed that the stock portion of the consideration could be set at a
fixed exchange ratio. At that time and in subsequent conversations, the
Negotiating Committee continued to refuse requests by Highwoods to waive
application of JCN's Shareholder Rights Plan to permit Highwoods to purchase
shares of JCN Common held by the Nichols family and the ESOT.
The JCN Board of Directors met on December 19, 1997 to obtain a full
report on the status of negotiations with Highwoods. At that time, outside
counsel to JCN described the status of negotiations and the issues remaining
open in the discussions with Highwoods. Counsel to JCN advised the JCN Board of
Directors of its fiduciary duties and provided advice on the reasonableness of
certain provisions, including the Ten Percent Option and the termination fee,
that had been requested by Highwoods. By the following morning, each member of
the JCN Board of Directors received for review a revised version of the
Original Merger Agreement, proposed resolutions for approval by the JCN Board
of Directors in the event the proposed terms of the Original Merger Agreement
were considered satisfactory, an executive summary of the Original Merger
Agreement, and a written report prepared by Morgan Stanley. By the end of the
day on December 20, 1997, all aspects of the Original Merger Agreement had been
negotiated to conclusion except for the termination fee and the conditions to
closing.
The JCN Board of Directors met again on December 21, 1997 to receive an
additional presentation from counsel to JCN, a review of the written material
from, and the oral opinion of, Morgan Stanley (which opinion was subsequently
updated and confirmed by delivery of a written opinion dated December 22, 1997)
to the effect that, as of December 21, 1997, and based upon and subject to
certain matters stated in such opinion, the proposed transaction was fair, from
a financial point of view, to the JCN Shareholders. The JCN Board of Directors
then provided guidance to the Negotiating Committee on the two open issues and
determined that, subject to agreement on the open issues in a manner consistent
with the guidance provided by the JCN Board of Directors, the terms of the
Original Merger Agreement and the transaction contemplated thereby were fair to
and in the best interests of JCN and the JCN Shareholders. Subject to the
foregoing, the JCN Board of Directors members present at the meeting (other
than Mr. Brady and Mr. Chandler, each of whom abstained as a result of the
perception of a potential conflict) approved the Original Merger Agreement and
resolved to recommend that the JCN Shareholders vote for the approval and
adoption of the Original Merger Agreement at a special meeting of the JCN
Shareholders to be held for that purpose.
The Negotiating Committee, Mr. Price Sloan, and outside counsel to JCN met
with Messrs. Ronald P. Gibson, President and Chief Executive Officer of
Highwoods, Liuzzo, and Pridgen of Highwoods and outside counsel to Highwoods
the evening of December 21, 1997 to negotiate the conditions to closing the
proposed transaction and the amount of the termination fee and the
circumstances under which such fee would be payable. At that time, Highwoods
offered to increase its offer to $65 per share of JCN Common in exchange for
concessions on the termination fee. The parties ended discussions
29
<PAGE>
on the evening of December 21 without reaching agreement. On the morning of
December 22, 1997, after each member of the JCN Board of Directors had been
contacted and told it did not appear as though the Original Merger Agreement
could be negotiated on terms outlined by the JCN Board of Directors the
previous day, the Negotiating Committee and representatives of Highwoods
resumed their discussions. As a result of those discussions, Highwoods agreed
to pay $65 per share of JCN Common, JCN agreed to a maximum payment on
termination of $17.2 million, and Highwoods agreed to a reduced termination fee
in the event the JCN Board of Directors continued to recommend to JCN
Shareholders the transaction with Highwoods. The parties further agreed to
limit the conditions to closing so that, most importantly, the transaction
would be contingent on Highwoods obtaining the consent of a limited number of
lenders to JCN.
Late in the afternoon of December 22, 1997, after the JCN Board of
Directors had been notified that an agreement had been reached on terms
consistent with the instructions of the JCN Board of Directors from the prior
day, the Original Merger Agreement was executed. The parties issued separate
press releases announcing the Original Merger Agreement before the markets
opened on December 23, 1997.
On January 6, 1998, JCN received an unsolicited expression of interest,
made jointly by Duke Realty Investments, Inc. and Simon DeBartolo Group, Inc.
("Duke/Simon"), indicating their preliminary belief that the value of JCN
Common was at least $75 per share. On January 9, 1998, JCN received a letter
from Intell in which it expressed the presumption that the value of JCN Common
was "in the range of $65-75 per share." At that time, neither Duke/Simon nor
Intell had undertaken a detailed review of the books and records of JCN. The
JCN Board of Directors agreed to permit both Duke/Simon and Intell to conduct a
thorough investigation of JCN to confirm their assessments of value and
determine their willingness to propose an alternative transaction to the
Merger. Both Duke/Simon and Intell then proceeded to conduct a due diligence
investigation of JCN. On January 28, 1998, JCN received a letter from
Duke/Simon indicating that they had elected not to propose a transaction with
JCN. Also on January 28, 1998, Intell expressed an interest in a merger with
JCN pursuant to which JCN Shareholders would receive $75 per share in cash. In
a February 11, 1998 letter to JCN, Intell indicated it did not feel it
appropriate to pursue a transaction with JCN until such time as JCN
Shareholders had an opportunity to vote on the Merger. Intell further indicated
its then-current intent, in the event the Merger was not approved by JCN
Shareholders and subject to a number of conditions, to pursue an acquisition of
JCN that would provide to JCN Shareholders $75 per share in cash, less an
adjustment that would include any amounts due to Highwoods pursuant to the
Original Merger Agreement.
In light of the February 11, 1998 letter from Intell and certain publicly
filed statements from certain significant shareholders of JCN expressing
dissatisfaction with the value of the consideration to be received by JCN
shareholders pursuant to the Merger, management of JCN requested that Highwoods
meet with the Company to discuss the status of the Merger. Accordingly, on
February 16, 1998, members of JCN's management, Morgan Stanley and outside
counsel to JCN met with members of Highwoods management, J.P. Morgan and
outside counsel to Highwoods to discuss whether Highwoods would consider
improving the consideration to be given to the shareholders of JCN in the
Merger. Highwoods indicated that it would entertain such discussions if it
could obtain certainty that the Merger would be consummated. The structure to
achieve the requisite degree of certainty contemplated by those present at the
meeting included a purchase by Highwoods of the ESOT shares, the waiver by
Highwoods of a number of conditions to the Merger, the granting to Highwoods of
a proxy to vote approximately 22% of the JCN Common shares in favor of the
Merger by certain members of the Nichols family and the approval of the JCN
Board of Directors so that the structure would not be prohibited by JCN's
Shareholders Rights Plan. Highwoods asked representatives of JCN to facilitate
such negotiations among Highwoods, JCN, INTRUST and the Nichols family and such
representatives agreed to do so.
On March 2 and March 3, 1998, at the request of JCN, members of management
of Highwoods and outside counsel to Highwoods met with members of management of
JCN, officers of INTRUST and representatives of the Nichols family and their
respective outside counsel to discuss draft agreements reflecting the
contemplated structure and the various open issues between the parties,
including consideration. At these meetings, the parties had various discussions
and engaged in negotiations concerning the terms of Highwoods' offer to the
shareholders of JCN, including the amount of increased consideration to be
paid, the relevant exchange ratio and the elimination of the limitation on the
amount of Highwoods stock available for exchange. Highwoods reaffirmed to JCN,
INTRUST and the Nichols family representatives that it had no interest in
increasing the terms of its offer in the Merger unless the other parties were
willing to adopt the structure to achieve certainty referred to above and
certain other outstanding issues were resolved to Highwoods' satisfaction,
including matters relating to certain existing lawsuits involving JCN and the
ESOT and any potential liabilities under such suits. The lawsuits that were of
primary concern to Highwoods were the Petula Litigation and the continuing
Medina Litigation. Those lawsuits, and the claims made therein, are described
in detail in "Description of JCN -- Litigation." While Highwoods expressed a
willingness to modify the terms of the Merger, including significantly
improving the level of consideration to
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be received by JCN Shareholders, and JCN, INTRUST and the representatives of
the Nichols family expressed their willingness to assure Highwoods that the
Merger would be consummated, Highwoods determined at the March 3, 1998 meeting
that it needed more information with respect to pending lawsuits and potential
liabilities before proceeding to attempt to come to terms as to the level of
consideration and on the various other open issues. The parties then ended the
meeting without reaching agreement on modifying the terms or structure of the
Merger. Subsequently, Highwoods advised JCN that it had determined not to
increase the Merger consideration and the parties ceased discussions related to
the contemplated structure.
In January 1998, the Internal Revenue Service adopted new regulations that
made it possible for the parties to simplify significantly the procedure
outlined in the Original Merger Agreement for allocating among shareholders the
cash and stock consideration to be received in the Merger. As a result,
beginning in late January and continuing through April 29, 1998, Highwoods and
JCN engaged with varying intensity in a series of discussions that resulted in
execution of an amendment to the Original Merger Agreement (the "Amendment").
In addition to addressing the simplification resulting from the new IRS
regulations, the parties also discussed: (i) the ability of JCN Shareholders to
obtain all of the consideration in the Merger in the form of Highwoods Common;
(ii) the willingness of Highwoods to fix at $65 per share the per share stock
consideration to be received by JCN Shareholders; and (iii) the desire of JCN
to obtain from Highwoods a waiver of the condition to closing that JCN obtain
the consent of a lender with which it is currently in litigation. At its March
25, 1998 meeting, the JCN Board of Directors authorized the Negotiating
Committee to negotiate and finalize the Amendment within guidelines and on
terms established by the JCN Board of Directors.
At various times from January through April the negotiations were
undertaken between Messrs. Brady and Gibson, between Messrs. Sloan and Pridgen,
between outside counsel to the two parties, and between the investment bankers
for the two parties. Those varying discussions were finalized on April 29, 1998
when the Amendment was executed. The Amendment revises the Original Merger
Agreement to provide, among other things: (i) that JCN Shareholders have the
right to receive the entire Merger consideration in the form of Highwoods
Common; (ii) simplification of the elections to be made by those JCN
Shareholders electing to receive shares of Highwoods Common; (iii) increases
the likelihood that JCN Shareholders electing to receive Highwoods Common in
the Merger will receive at least $65 in value; and (iv) waiver from Highwoods
of the requirement that JCN obtain the consent of its most significant lender
prior to the Effective Time. In considering the Amendment, the JCN Board of
Directors was aware that: (i) JCN Shareholders electing to receive shares of
Highwoods Common would not know, at the time of the Special Meeting, the value
of the consideration to be received for their shares of JCN Common, and (ii)
that JCN Shareholders electing to receive cash may instead receive shares of
Highwoods Common.
Reasons for the Merger; Recommendation of the JCN Board of Directors
The JCN Board of Directors believes that the terms of the Merger Agreement
are fair to, and in the best interest of, JCN and the JCN Shareholders. In
considering the terms and conditions of the Merger Agreement, the JCN Board of
Directors considered the material factors identified below:
Shareholder Benefits of the Merger
(1) Reports from members of the JCN Board of Directors, management and
legal advisors on the specific terms of the Merger Agreement and other
matters, including the fact that the Merger is structured to qualify as a
tax-free reorganization under the Code, which the JCN Board of Directors
viewed as beneficial to JCN Shareholders;
(2) The companies' respective financial condition, results of operations
and anticipated future results; current financial market conditions
(including that the investment community seemed more receptive to real
estate operations structured as real estate investment trusts) and
historical market prices; trading information for JCN Common and Highwoods
Common; and the consideration to be received by JCN Shareholders in the
Merger, all of which the JCN Board of Directors viewed as positive;
(3) The amount of consideration offered to JCN Shareholders, which
represents a premium of 12%, 30%, and 83% over the closing prices for the
30th day, the 90th day, and the 180th day, respectively, preceding December
21, 1997, which the JCN Board of Directors viewed as beneficial to JCN
Shareholders;
(4) The financial and other analyses presented by Morgan Stanley,
including the oral opinion of Morgan Stanley (subsequently confirmed in
writing) that the merger consideration was fair to JCN Shareholders from a
financial point of view as of the date of such opinion, which the JCN Board
of Directors viewed as positive;
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(5) The ability of JCN Shareholders to participate in the future growth
of Highwoods (including the growth resulting from acquisition of JCN)
through ownership of Highwoods Common, which the JCN Board of Directors
viewed as beneficial to JCN Shareholders;
(6) Limitations on JCN's access to low cost capital and the perception
that Highwoods' significant resources and lower cost of capital would
provide a competitive advantage and enable more rapid implementation of
JCN's long-term growth plans, which the JCN Board of Directors believed
would benefit JCN Shareholders;
(7) The geographic concentration of JCN's properties and the relatively
greater geographic diversity of the properties owned by Highwoods, which
diversity the JCN Board of Directors believed would benefit JCN
Shareholders;
(8) The fact that the Merger Agreement does not preclude JCN from (i)
participating in negotiations with, and furnishing information (pursuant to
a customary confidentiality agreement) to, persons or entities that seek to
engage in discussions or negotiations, or that request information, in
connection with a bona fide written or publicly announced takeover proposal
if the JCN Board of Directors determines, in good faith based on the advice
of outside counsel, that it is necessary to do so in order to comply with
its fiduciary duties, or (ii) terminating the Merger Agreement under
certain circumstances specified in the Merger Agreement (such termination
being subject to the payment of up to $2.5 million of Highwoods'
out-of-pocket expenses and a $14.7 million termination fee), all of which
the JCN Board of Directors viewed as positive;
(9) The financial condition and business reputation of Highwoods and the
ability of Highwoods to complete the Merger in a timely manner, which the
JCN Board of Directors viewed as positive;
(10) The absence of any term or condition in the Merger Agreement that in
the view of the JCN Board of Directors is unduly onerous or could
materially impede or impair the consummation of the Merger, the support for
the Merger from the Nichols family and the satisfaction expressed by
INTRUST at the time the general terms of the Merger were first presented on
November 25, 1997, all of which suggested that consummation of the Merger
was likely (although INTRUST has not expressed whether it currently
supports the Merger) and which the JCN Board of Directors viewed as
positive; and
(11) The fact that JCN Common is not actively traded and JCN is not in a
position to pay dividends, while Highwoods pays a regular quarterly
dividend, and the Merger would provide JCN Shareholders with highly liquid
Highwoods Common.
Additional Benefits of the Merger. The JCN Board of Directors considered
the social and economic effect of the Merger on the employees and tenants of
JCN and on the metropolitan Kansas City area. In particular, the JCN Board of
Directors considered that Highwoods has agreed to: (i) honor JCN's existing
obligations to its current and former employees, (ii) continue charitable
giving in the Kansas City metropolitan area at least at the level undertaken
historically by JCN, (iii) continue marketing support for tenants, (iv) pursue
the Plaza development plan, and (v) permit the JCN Board of Directors to
designate one member of the Highwoods Board of Directors. The expertise and
reputation of Highwoods' management in the real estate business further
supported the decision of the JCN Board of Directors to approve the Merger and
the Merger Agreement.
The Amendment. The JCN Board of Directors considered the following factors
in authorizing the Amendment:
(1) The opportunity for JCN Shareholders to elect to receive Highwoods
Common for all of their shares of JCN Common because of elimination of the
prior limitation on Per Share Stock Consideration, which the JCN Board of
Directors viewed as beneficial to JCN Shareholders;
(2) The fact that the financial interests of JCN Shareholders electing to
receive shares of Highwoods Common would receive some protection in the
event the Value of Highwoods Common was below $35.36, which the JCN Board
of Directors viewed as positive;
(3) The increased certainty of consummating the Merger that results from
Highwoods' waiver of the need for JCN to obtain the consent of Principal
Mutual Insurance Company, which consent was required under the Original
Merger Agreement, which the JCN Board of Directors viewed as beneficial to
JCN Shareholders;
(4) The benefit to Highwoods of the manner in which the Value was to be
calculated, which the JCN Board of Directors viewed as positive; and
(5) The correspondence from Intell, to which the JCN Board of Directors
did not attach great significance in light of the expressed conditions and
uncertainties.
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In addition, the JCN Board of Directors received confirmation from Morgan
Stanley that, from a financial point of view, the terms of the Merger Agreement
subsequent to the Amendment continued to be fair. Furthermore, the Amendment
did not diminish any of the benefits of the Original Merger Agreement. In
considering the Amendment, the JCN Board of Directors was aware that JCN
Shareholders would not know, at the time of the Special Meeting, the value of
the consideration to be received for their shares of JCN Common.
Risks of the Merger. The JCN Board of Directors also considered:
(1) The possible change in share prices of Highwoods Common and JCN
Common prior to the time the Merger becomes effective;
(2) The risk that some JCN Shareholders will not receive the form of
consideration that they elected for their shares of JCN Common;
(3) The potential adverse tax consequences of the Merger for those JCN
Shareholders receiving cash;
(4) The potential adverse impact on the share price of Highwoods Common
resulting from subsequent Highwoods offerings;
(5) Dilution of the ownership percentage of a JCN Shareholder who
receives Highwoods Common in the Merger;
(6) The possible failure of Highwoods to qualify as a REIT;
(7) That proposed Federal legislation affecting REITs could limit
Highwoods' ability to expand certain business activities;
(8) The possibility that Highwoods will not maintain the growth rate that
it has experienced since 1994;
(9) The possible difficulty of successfully integrating Highwoods and
JCN;
(10) The dependence of Highwoods after the Merger on southeastern
economic and real estate conditions; and
(11) Highwoods' unfamiliarity with JCN's markets and with retail and
multifamily properties and single-family subdivisions.
In view of the variety of factors considered in relation to its evaluation
of the Merger Agreement and the Merger, the JCN Board of Directors did not find
it practicable to, and did not, quantify or assign relative weights to the
specific factors considered in reaching its determination. In addition,
individual members of the JCN Board of Directors may have given different
weight to different factors.
Consequences of Failure to Approve Merger. In the event the JCN
Shareholders do not approve the Merger, the JCN Board of Directors may receive
one or more subsequent proposals to acquire JCN. Any such proposal may or may
not provide consideration to JCN Shareholders in an amount in excess of that
provided by the Merger. The JCN Board of Directors received a letter on
February 11, 1998 from Intell Management and Investment Company ("Intell")
indicating its then-current intention, if the Merger is not approved, to pursue
a transaction to acquire JCN for cash consideration of $75 per share of JCN
Common, less an adjustment that would include any amounts due to Highwoods
pursuant to the Merger Agreement. Even if such proposal is made, it may not be
endorsed by the JCN Board of Directors because the JCN Board of Directors has
indicated previously that JCN is not for sale. Further, the JCN Board of
Directors has received an indication from holders of approximately 32% of all
JCN Common (some of whom could be "affiliates" of JCN as such term is defined
in rules promulgated under the Securities Act and two of whom include members
of the JCN Board of Directors acting in their capacity as shareholders),
indicating they are currently unlikely to approve a cash transaction at $75 per
share of JCN Common because of the tax consequences of such a transaction. The
JCN Board of Directors has not received a specific proposal from any entity
expressing a current interest in a strategic transaction such as the Merger.
On May 13, 1998, JCN received from INTRUST a request for a special meeting
of JCN Shareholders to consider: (i) a proposal to amend the JCN Bylaws to
eliminate cumulative voting in the election of directors, and (ii) a proposal
to remove certain members of the JCN Board of Directors. No date has yet been
set for any such meeting.
JCN Common has historically been traded infrequently in the
over-the-counter market. If the Merger is not approved, it is difficult to
predict what impact that will have on the market price and liquidity of JCN
Common. If the market price were to drop and the JCN Common continued its
infrequent trading history, that could impact adversely the ability and terms
on which JCN may in the future be able to raise capital.
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THE JCN BOARD OF DIRECTORS RECOMMENDS THAT JCN SHAREHOLDERS VOTE "FOR"
APPROVAL OF THE MERGER AGREEMENT.
Opinion of Financial Advisor
JCN retained Morgan Stanley to act as financial advisor. Morgan Stanley
was selected by the JCN Board of Directors to act as JCN's financial advisor
based on Morgan Stanley's qualifications, expertise and reputation. No
limitations were imposed by the JCN Board of Directors upon Morgan Stanley with
respect to the investigations made or the procedures followed by it in
rendering its fairness opinion.
On December 22, 1997, Morgan Stanley rendered to the JCN Board of
Directors its written opinion that, as of such date and based upon and subject
to the various considerations set forth in the opinion, the consideration to be
received by the holders of shares of JCN Common pursuant to the Merger
Agreement was fair from a financial point of view to such holders (other than
Highwoods and its affiliates). Morgan Stanley subsequently delivered its
written opinion, dated May 15, 1998 that, as of such date and based upon and
subject to the various considerations set forth in the opinion, the
consideration to be received by the holders of shares of JCN Common pursuant to
the Merger Agreement was fair from a financial point of view to such holders
(other than Highwoods and its affiliates).
The full text of Morgan Stanley's opinion, dated as of May 15, 1998, which
sets forth, among other things, assumptions made, procedures followed, matters
considered and limitations on the review undertaken, is attached as Appendix B
to this Proxy Statement/Prospectus. JCN Shareholders are urged to, and should,
read the opinion carefully and in its entirety. Morgan Stanley's opinion is
directed to the JCN Board of Directors, addresses only the fairness of the
consideration to be received by holders of JCN Common from a financial point of
view, and does not address any other aspect of the Merger or constitute a
recommendation to any JCN Shareholder as to how such shareholder should vote at
the Special Meeting. The summary of Morgan Stanley's opinion, dated May 15,
1998, as set forth in this Proxy Statement/Prospectus is qualified in its
entirety by reference to the full text of such opinion.
In connection with rendering its opinion, Morgan Stanley, among other
things (i) reviewed certain publicly available financial statements and other
information of JCN and Highwoods, respectively; (ii) reviewed certain internal
financial statements and other financial and operating data concerning JCN and
Highwoods prepared by the managements of JCN and Highwoods, respectively; (iii)
analyzed certain financial projections for JCN and Highwoods prepared by the
managements of JCN and Highwoods, respectively; (iv) reviewed the reported
prices and trading activity for JCN Common and Highwoods Common; (v) compared
the financial performance of JCN and Highwoods and the prices and trading
activity of JCN Common and Highwoods Common with that of certain other
comparable publicly traded companies and their securities; (vi) discussed with
the senior management of JCN and Highwoods their estimates of the synergies and
cost savings expected to be derived from the Merger; (vii) reviewed the
financial terms, to the extent publicly available, of certain comparable
transactions; (viii) reviewed the pro forma impact of the Merger on Highwoods'
funds from operations per share, consolidated capitalization and financial
ratios; (ix) participated in discussions and negotiations among representatives
of JCN and Highwoods and their financial and legal advisors; (x) reviewed the
Merger Agreement and certain related documents; and (xi) performed such other
analyses as Morgan Stanley deemed appropriate.
Morgan Stanley assumed and relied upon without independent verification
the accuracy and completeness of the information supplied or otherwise made
available to it by JCN and Highwoods for purposes of rendering its opinion.
With respect to the financial projections, including the estimates of
synergies, cost savings and other benefits expected to result from the Merger,
Morgan Stanley assumed that they were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the future financial
performance of JCN and Highwoods, respectively. Morgan Stanley did not make any
independent valuation or appraisal of the assets or liabilities of JCN or
Highwoods, nor was it furnished with any such appraisals other than the common
stock valuation prepared by Houlihan Lokey Howard & Zukin as of December 31,
1996 and furnished to Morgan Stanley by JCN. In addition, Morgan Stanley
assumed that the Merger would be consummated in accordance with the terms set
forth in the Merger Agreement. Morgan Stanley's opinion was necessarily based
on economic, market and other conditions as in effect on, and the information
made available to Morgan Stanley as of, the respective dates thereof.
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The following is a brief summary of all of the analyses performed by
Morgan Stanley and initially reviewed with the JCN Board of Directors on
December 21, 1997, in connection with Morgan Stanley's presentation and opinion
to the JCN Board of Directors on such date. Subsequently, and in connection
with Morgan Stanley's May 15, 1998 opinion, these analyses were updated and are
described herein.
Comparable Company Analysis. As part of its analysis, Morgan Stanley
compared certain financial and operating information of JCN with that of a
group of publicly traded real estate companies, which included real estate
investment trusts ("REITs"), that Morgan Stanley deemed relevant, including:
Glenborough Realty Trust, MGI Properties, Pacific Gulf Properties, Pennsylvania
REIT and Washington REIT (collectively, the "Comparables"). The Comparables
were selected primarily on the basis of their possessing general business,
operating and financial characteristics, primarily market capitalization and
diversification of property portfolios, similar to that of JCN. The financial
information analyzed included a review of financial ratios (in each case based
upon the share price as of May 15, 1998) such as the ratio of total market
capitalization to earnings before interest, taxes, depreciation and
amortization ("EBITDA") and the ratio of equity market capitalization to funds
from operations ("FFO"). Morgan Stanley noted that based on a consensus of FFO
per share estimates dated May 15, 1998, obtained from First Call, the
Comparables traded at (i) multiples of total market capitalization to 1998
estimated EBITDA ("EBITDA Multiple") in the range of 11.2 times to 13.1 times,
with a mean of 12.0 times, and (ii) multiples of share price to 1998 estimated
FFO ("FFO Multiple") in the range of 9.8 times to 13.0 times, with a mean of
11.4 times. Based on the analysis of the financial ratios of the Comparables,
Morgan Stanley calculated theoretical per share trading values for JCN of
$59.02 to $75.72 based on EBITDA Multiples and $53.17 to $70.16 based on FFO
Multiples.
No company considered for purposes of comparison to JCN in the comparable
company analysis is identical to JCN. In evaluating the Comparables, Morgan
Stanley made judgements and assumptions with regard to industry performance,
general business, economic, market and financial conditions and other matters.
Analysis of Selected Precedent Transactions. Morgan Stanley reviewed
certain recent business combinations in the real estate sector. However, terms
were not publicly available for certain transactions, particularly involving
private companies, which would be relevant to the Merger. In addition, most
transactions in the real estate sector involving public companies have involved
REITs and not corporations like JCN. Morgan Stanley focused on transactions
involving mergers of REITs involving companies with total market
capitalizations reasonably comparable to the proposed Merger of JCN and
Highwoods. Using publicly available information, Morgan Stanley reviewed the
financial terms of the following nine publicly announced completed business
combinations in the real estate sector: Kimco Realty's merger with The Price
REIT; Camden Property Trust's merger with Oasis Residential; Equity Residential
Properties Trust's acquisition of Evans Withycombe Residential; Post
Properties' merger with Columbus Realty Trust; Equity Residential Properties
Trust's acquisition of Wellsford Residential Property Trust; Camden Property
Trust's acquisition of Paragon Group, Inc.; United Dominion Realty's
acquisition of South West Property Trust; Chateau Properties' acquisition of
ROC Communities; and Highwoods' acquisition of Crocker Realty Trust. For these
transactions, Morgan Stanley noted that the comparable transactions were
completed at premiums to the target's highest share price over the preceding 52
weeks in the range of -6.9% to 7.5% with a mean of -1.2% and a median of -2.8%.
Morgan Stanley also calculated the premium to "unaffected stock price" for
these transactions, which is the average stock price for the ten trading days
ending five days prior to announcement of the transaction. Morgan Stanley noted
that the selected precedent transactions were completed at premiums to
unaffected stock price of -2.1% to 20.7% with a mean of 11.2% and a median of
11.0%. Pursuant to this analysis, Morgan Stanley calculated per share values
for JCN of $58.10 to $63.24 based on premiums to unaffected share price and
$58.43 to $64.23 based on premium to the highest price reached in the preceding
52 weeks. JCN's unaffected stock price and 52 week stock price high are based
on the period prior to the announcement of the transaction.
No transaction considered for purposes of the precedent transaction
analysis is identical to the Merger. In evaluating the precedent transactions,
Morgan Stanley made judgements and assumptions with regard to industry
performance, general business, economic, market and financial conditions and
other factors.
Discounted Cash Flow Analysis. Morgan Stanley performed several discounted
cash flow analyses of JCN in order to estimate the present value of the
unleveraged free cash flow that may be generated by JCN. Such discounted cash
flow analyses were based on certain financial projections provided by the
management of JCN for the years 1998 to 2001 for JCN as a whole and from 1998
through 2004 for certain planned development projects of JCN. Unleveraged free
cash flow was calculated as cash flow from operations less scheduled capital
expenditures, taxes and certain non-recurring cash items identified by JCN
management. Additionally, Morgan Stanley performed certain sensitivity analyses
on management's projections to determine the effect on the present value of
unleveraged free cash flow if management's projections for JCN were not fully
realized. Morgan Stanley noted that the compounded annual growth from 1998 to
2001 of FFO per share and EBITDA implied by management's projections (the
"Management Case") were 20.3% and 10.7%, respectively, a high rate
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of growth as compared to real estate companies generally and JCN's recent
performance. To account for the implied risk in management's projections,
Morgan Stanley reduced the rate of EBITDA growth in the management case to
5.0%, resulting in implied compounded annual FFO per share growth of 11.7%
("Downside Case 1") and to 2.5%, resulting in implied FFO per share growth of
7.7% ("Downside Case 2)."
Morgan Stanley calculated a total discounted cash flow value for JCN by
adding the present values of discounted cash flows of JCN's existing business
and its planned development projects. For the existing business, Morgan Stanley
calculated terminal values by applying multiples to EBITDA in 2002 in the range
of 9.5x to 11.5x. For the development projects, Morgan Stanley calculated
terminal values by capitalizing projected net operating income in fiscal 2004
at rates ranging from 8.5% to 10.5%. For the existing business, EBITDA in 2002
was calculated by increasing fiscal 2001 EBITDA by 2.0%. The cash flow streams
and terminal values were discounted to the present using discount rates of
10.0% to 12.0% for the existing business and 12.0% to 14.0% for the development
projects. Based on this analysis of management's financial projections as well
as certain sensitivities thereto, Morgan Stanley calculated share prices for
JCN Common of $60.60 to $91.03 in the Management Case, $47.24 to $74.39 for
Downside Case 1 and $41.71 to $67.45 for Downside Case 2.
Contribution Analysis. Morgan Stanley analyzed the pro-forma contribution
of JCN to the 1998 FFO and EBITDA of Highwoods. Such analysis was based upon
(i) certain publicly filed documents of Highwoods, (ii) projections provided by
Highwoods and (iii) projections provided by the management of JCN. In addition,
Morgan Stanley made certain assumptions with respect to the transaction,
including that 60% of the total consideration paid would be in stock. The
analysis indicated that JCN would provide 11.7% and 13.7% of Highwoods 1998 FFO
and EBITDA, respectively, on a pro forma basis. In addition, the analysis
indicated that JCN would represent 8.3% and 13.0% of the equity market and
total market capitalization of Highwoods, respectively, pro forma for the
Merger.
Pro Forma Analysis of the Merger. Morgan Stanley analyzed the pro forma
impact of the Merger on Highwoods FFO per share for the fiscal years ended 1998
and 1999. The analysis was performed utilizing certain financial projections
based on the Management Case, Downside Case 1 and Downside Case 2,
incorporating Highwoods' First Call FFO per share estimates and Highwoods'
estimate of the potential cost savings expected to be realized in the Merger.
Based on these forecasts, assuming the achievement of the estimated cost
savings, and assuming that 60% of the total consideration paid would be in
stock, Morgan Stanley expects the Merger to be accretive to Highwoods' FFO per
share in the first full fiscal year after the consummation of the Merger under
both the Management Case and the Downside Case 1 and would be FFO per share
neutral to Highwoods based on Downside Case 2.
Highwoods Comparable Company Analysis. As part of its analysis, Morgan
Stanley compared certain financial and operating information of Highwoods with
that of a group of publicly traded REITs specializing in office and industrial
properties including: Arden Realty Group, Mack-Cali Realty, CarrAmerica Realty
Corporation, Duke Realty Investments, Kilroy Realty Corp, Prentiss Properties
Trust, Reckson Associates Realty and Spieker Properties (collectively, the
"Highwoods Comparables"). The Highwoods Comparables were chosen based on the
characteristics of their property portfolios such as property type and
geographic concentration, which are similar in nature to that of Highwoods.
Morgan Stanley analyzed the EBITDA Multiples, FFO Multiples and adjusted funds
from operations ("AFFO") multiples of the Highwoods Comparables. Morgan Stanley
noted that based on estimates of EBITDA, FFO and AFFO compiled from various
research reports including Realty Stock Review, Green Street Advisors, Inc. and
First Call, the Comparables traded at (i) EBITDA Multiples based on 1998
forecasted EBITDA in the range of 8.4x to 13.3x, with a mean of 10.4x, versus
11.6x for Highwoods, (ii) FFO multiples based on 1998 forecasted FFO in the
range of 10.1x to 13.4x, with a mean of 11.8x, versus 10.3x for Highwoods, and
(iii) AFFO multiples based on 1998 forecasted AFFO in the range of 12.5x and
15.7x, with a mean of 14.0x, versus 12.3x for Highwoods.
In connection with its written opinion dated May 15, 1998, Morgan Stanley
reviewed the analyses used to render its December 22, 1997 opinion by
performing procedures to update certain of the analyses and by reviewing both
the assumptions upon which such analyses were based and the factors considered
in connection therewith.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to a partial analysis or summary description. In
arriving at its opinion, Morgan Stanley considered the results of all its
analyses as a whole and did not attribute any particular weight to any
particular analysis or factor considered by it. Furthermore, selecting any
portion of Morgan Stanley's analyses or factors considered by it, without
considering all analyses and factors, would create an incomplete view of the
process underlying its opinion. The range of valuations resulting from any
particular analysis described above should therefore not be taken to be Morgan
Stanley's view of the actual value of JCN.
In performing its analyses, Morgan Stanley made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond the control of JCN or Highwoods. The
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<PAGE>
analyses performed by Morgan Stanley are not necessarily indicative of actual
values or actual future results, which may be significantly more or less
favorable than suggested by such analyses. Such analyses were prepared solely
as part of Morgan Stanley's analyses of the fairness from a financial point of
view of the consideration to be received by the holders of shares of JCN Common
pursuant to the Merger Agreement and were conducted in connection with the
delivery of Morgan Stanley's opinions dated December 22, 1997 and May 15, 1998.
The analyses do not purport to be appraisals or to reflect the prices at which
businesses actually may be valued in the marketplace.
In addition, as described above, Morgan Stanley's opinion and presentation
to JCN Board was one of many factors taken into consideration by the JCN Board
of Directors in making its determination to recommend approval of the Merger.
Consequently, the Morgan Stanley analyses described above should not be viewed
as determinative of the opinion of the JCN Board of Directors or the view of
the management of JCN with respect to the value of JCN or of whether the JCN
Board of Directors would have been willing to agree to a different merger
consideration. Such consideration was determined through negotiations between
JCN and Highwoods and were approved by the JCN Board of Directors. Morgan
Stanley provided advice to JCN during the course of such negotiations; however,
the decision to enter into the Merger Agreement and to accept the Merger
consideration was solely that of the JCN Board of Directors.
As part of its investment banking business, Morgan Stanley is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuation for estate, corporate or other purposes. In the course of its
market-making and other trading activities, Morgan Stanley may, from time to
time, have a long or short position in, and buy and sell, securities of JCN or
Highwoods.
Pursuant to a letter agreement dated October 24, 1997, between JCN and
Morgan Stanley, JCN has agreed to pay Morgan Stanley (1) an advisory fee of $1
million and (2) an additional fee of either (a) $2.7 million, which is payable
if the Merger is not consummated and another party does not acquire control of
JCN prior to April 24, 1999, or (b) approximately $3.8 million, which is
payable upon the consummation of the Merger. Any advisory fee paid may be
credited against the fee described in (2)(b), if any. JCN has also agreed to
reimburse Morgan Stanley for its out-of-pocket expenses and to indemnify Morgan
Stanley and its affiliates, their respective directors, officers, agents and
employees and each person, if any, controlling Morgan Stanley or any of its
affiliates against certain liabilities, including liabilities under federal
securities laws, and expenses, related to Morgan Stanley's engagement.
Effective Time of the Merger
If the Merger is approved by the requisite vote of the JCN Shareholders,
and the other conditions to the Merger are satisfied or waived, the Merger will
become effective when the Articles of Merger have been accepted for filing by
the appropriate authorities in Missouri and Maryland, or at such other time as
Highwoods and JCN agree should be specified in the Articles of Merger. It is
currently anticipated that the Merger will become effective upon filing of the
Articles of Merger, which Articles are expected to be filed promptly following
approval of the Merger by the JCN Shareholders.
Representations and Warranties; Conditions to the Merger
The Merger Agreement contains representations and warranties by Highwoods
and JCN regarding, among other things, their organization and good standing,
authority to enter into the Merger Agreement and related agreements,
capitalization, ownership and capitalization of their subsidiaries, filings
with the Commission, reliability of financial statements, absence of
undisclosed liabilities and certain changes or events, tax matters,
environmental matters, compliance with applicable laws and regulations, labor
relations, employee benefit plans, material contracts, legal proceedings, state
takeover laws, charter provisions, rights agreements, financial advisors, board
recommendations and other events, including material adverse changes in the
parties' businesses, financial condition or results of operations. These
representations and warranties will not survive the Effective Time.
The respective obligations of Highwoods and JCN to effect the Merger are
subject to the following conditions: (i) approval of the Merger Agreement, and
the transactions contemplated therein, by JCN Shareholders, (ii) approval by
the NYSE of the listing of the shares of Highwoods Common to be issued in
connection with the Merger, (iii) that the Registration Statement has not been
the subject of any stop order or proceeding by the Commission seeking a stop
order, (iv) the absence of any injunctions or restraints issued by any court of
competent jurisdiction preventing the consummation of the Merger in effect on
the Closing Date, (v) receipt of all necessary regulatory permits or
authorizations and (vi) receipt of all required third-party consents and
approvals.
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The obligations of Highwoods to effect the Merger are subject to the
following additional conditions: (i) the accuracy of all representations and
warranties made by JCN in all material respects as of the Closing Date; (ii)
JCN's performance in all material respects of its obligations under the Merger
Agreement; (iii) Highwoods' receipt of certificates from JCN with respect to
certain matters set forth in the Merger Agreement; (iv) Highwoods' receipt of
an opinion of Blackwell Sanders Matheny Weary & Lombardi LLP, counsel to JCN,
with respect to certain matters set forth in the Merger Agreement; (v)
Highwoods' receipt of letters from KPMG Peat Marwick LLP with respect to
certain matters set forth in the Merger Agreement; (vi) that the Merger
Agreement has not caused, and consummation of the Merger will not cause, any of
the rights under the JCN Shareholders' Rights Plan to become non-redeemable or
exercisable for capital stock of Highwoods or JCN; and (vii) that JCN's
shareholders' equity as of the Closing Date is not less than JCN's
shareholders' equity as of March 31, 1997, subject to certain exceptions set
forth in the Merger Agreement.
The obligations of JCN to effect the Merger are subject to the following
additional conditions: (i) the accuracy of all representations and warranties
made by Highwoods in all material respects as of the Closing Date; (ii)
Highwoods' performance in all material respects of its obligations under the
Merger Agreement; (iii) JCN's receipt of certificates from Highwoods with
respect to certain matters set forth in the Merger Agreement; (iv) JCN's
receipt of an opinion of Alston & Bird LLP, counsel to Highwoods, with respect
to certain matters set forth in the Merger Agreement; (v) that JCN has not
received notice from Morgan Stanley prior to the date hereof, indicating
withdrawal of its prior opinion that the consideration to be received by JCN
Shareholders in connection with the Merger is fair, from a financial point of
view, and that JCN has received an update to such opinion immediately prior to
the Special Meeting; and (vi) JCN's receipt of a certificate from the Exchange
Agent as required by the Merger Agreement.
Appraisal Rights
Under Section 351.455 of the General and Business Corporation Law of
Missouri (the "GBCL"), any JCN Shareholder who does not wish to accept the Per
Share Stock Consideration or the Per Share Cash Consideration for shares of JCN
Common as provided in the Merger Agreement has the right to dissent from the
Merger Agreement and to receive the value of his or her shares in cash,
provided that such holder complies with applicable statutory provisions.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO DISSENTERS' RIGHTS UNDER THE GBCL AND IS QUALIFIED IN ITS ENTIRETY BY THE
FULL TEXT OF SECTION 351.455 OF THE GBCL, WHICH IS REPRINTED IN ITS ENTIRETY AS
APPENDIX C TO THIS PROXY STATEMENT/PROSPECTUS. ALL REFERENCES IN SECTION
351.455 OF THE GBCL AND IN THIS SUMMARY TO A "JCN SHAREHOLDER" OR "HOLDER" ARE
TO THE RECORD HOLDERS OF DISSENTING SHARES.
Under Section 351.455 of the GBCL, if a JCN Shareholder files a written
objection to the Merger Agreement with JCN prior to or at the Special Meeting
and does not vote in favor of the Merger Agreement, and within 20 days such
holder demands in writing Highwoods' payment of the fair value of his or her
shares as of the day before the Special Meeting, that holder is entitled to the
fair value of his or her shares from Highwoods upon surrender of the
certificate or certificates representing the shares of JCN Common owned by such
holder. Any JCN Shareholder who fails to make such a demand within the 20-day
period will be presumed to have consented to the Merger Agreement and to the
Merger and will be bound by the terms thereof.
If within 30 days after the date on which the Merger was effected the
dissenting holder and Highwoods agree on the value of the dissenting holder's
shares of JCN Common, Highwoods must pay the dissenting holder such agreed upon
amount within 90 days of the effective date of the Merger, provided the holder
surrenders his or her certificate or certificates representing his shares. Upon
payment of the agreed value, the dissenting holder will have no further
interest in the shares or in JCN.
If within the 30-day period after the Merger was effected the dissenting
holder and Highwoods do not agree on the fair value of the dissenting holder's
shares of JCN Common, then the dissenting holder may, within 60 days after the
expiration of the 30-day period, file a petition with the court of Jackson
County, Missouri, asking for a finding and determination of the fair value of
his or her shares. The holder will be entitled to judgment against Highwoods
for the amount of the fair value as of the day prior to the Special Meeting,
together with interest thereon to the date of the judgment. The judgment will
be payable only upon and simultaneously with the surrender to Highwoods of the
certificate or certificates representing the holder's shares of JCN Common. If
the dissenting holder fails to file the petition within the time prescribed,
such holder will be conclusively presumed to have approved and ratified the
Merger and will be bound by the terms thereof.
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Regulatory Matters
Highwoods and JCN believe that the Merger may be consummated without
notification being given or certain information being furnished to the Federal
Trade Commission (the "FTC") or the Antitrust Division of the Department of
Justice (the "Antitrust Division") pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended ("HSR Act"), and that no waiting period
requirements under the HSR Act are applicable to the Merger. However, at any
time before or after the Effective Time, either the Antitrust Division or the
FTC could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, or certain other persons could take action
under the antitrust laws, including seeking to enjoin the Merger. Highwoods and
JCN believe that consummation of the Merger would not violate any antitrust
laws. However, there can be no assurance that a challenge to the Merger on
antitrust grounds will not be made or, if a challenge is made, as to the
result.
No Solicitation of Other Transactions
Neither JCN nor an entity affiliated with JCN (collectively, a "JCN
Entity") nor any officer or director thereof nor any representatives thereof
retained by any JCN Entity may directly or indirectly solicit any acquisition
proposal by any person other than Highwoods or a subsidiary. An acquisition
proposal includes any tender offer or exchange offer or any proposal for a
merger, acquisition of all of the stock or assets of, or other business
combination involving the acquisition of JCN or any of its subsidiaries or the
acquisition of a substantial equity interest in, or a substantial portion of
the assets of, JCN or any of its subsidiaries. Except to the extent the JCN
Board of Directors, after having consulted with and considered the advice of
outside counsel, reasonably determines in good faith that the failure to take
such actions would constitute a breach of fiduciary duties of the members of
the JCN Board of Directors to the JCN Shareholders under applicable law, no JCN
Entity or any officer or director or representative thereof may furnish any
non-public information that it is not legally obligated to furnish, negotiate
with respect to, or enter into any contract with respect to, any acquisition
proposal. JCN may communicate information about such an acquisition proposal to
the JCN Shareholders if and to the extent that it is required to do so in order
to comply with its legal obligations as advised by outside counsel. In
addition, JCN is obligated to advise Highwoods promptly following the receipt
of any acquisition proposal or any inquiry concerning a possible acquisition
proposal and the details thereof, and advise Highwoods of any developments with
respect to such acquisition proposal or inquiry promptly upon the occurrence
thereof.
Termination Provisions
The Merger Agreement provides that it may be terminated by either party if
any of the following events occur: (i) a material breach of a representation or
covenant that cannot be or is not cured within 30 days, (ii) Highwoods has not
filed an effective registration statement registering the shares of Highwoods
Common issuable pursuant to the Merger or is unable to obtain approval for
listing on the NYSE the Highwoods Common issuable pursuant to the Merger, (iii)
the failure of JCN Shareholders to approve the Merger, (iv) the failure to
effect the Merger by June 30, 1998 (although the parties have agreed to waive
this right to terminate until July 15, 1998), and (v) the withdrawal of the JCN
Board of Directors of its support of the Merger. The Merger Agreement becomes
void in the event of a termination except that the provisions described below
relating to termination fees will survive along with certain confidentiality
provisions.
Termination Fee and Expenses
With the exception of the termination fees described below, each of the
parties to the Merger Agreement has agreed to bear the costs incurred by it in
connection with the transactions contemplated by the Merger Agreement.
The Merger Agreement provides that JCN must pay $2.5 million to Highwoods
if (i) the Merger Agreement is terminated because JCN materially breaches a
representation or covenant set forth in the Merger Agreement which cannot be or
is not cured within 30 days, (ii) the Merger Agreement is terminated because
the JCN Board of Directors withdraws its support for the Merger or fails to
hold the Special Meeting or (iii) the Merger is not consummated because of the
failure of JCN to satisfy certain conditions to closing. Correspondingly,
Highwoods must pay JCN $2.5 million if (i) the Merger Agreement is terminated
because Highwoods materially breaches a representation or covenant set forth in
the Merger Agreement which cannot be or is not cured within 30 days, or (ii)
the Merger is not consummated because of the failure of Highwoods to satisfy
certain conditions to closing.
Highwoods may also be entitled to a termination fee if JCN enters into a
business combination with a third party. The termination fee is $14.7 million
if the business combination occurs within 12 months of any of the following:
(i) the termination of the Merger Agreement because (a) JCN materially breaches
a representation or covenant which cannot be or is not
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<PAGE>
cured within 30 days or (b) the JCN Board of Directors withdraws its support
for the Merger or fails to hold the Special Meeting or (ii) the failure to
consummate the Merger because JCN has not satisfied certain conditions to
closing.
The additional termination fee, however, is only $7.35 million if (i) the
letter of intent or definitive agreement relating to a business combination
with a third party has not been signed prior to the Special Meeting, (ii) the
JCN Board of Directors has withdrawn its support for the Merger prior to the
Special Meeting or fails to hold a Special Meeting and (iii) the business
combination with a third party occurs within 12 months of the Special Meeting
or, if no Special Meeting is held, the date that the Merger Agreement is
terminated as a result of the JCN Board of Directors' failure to hold the
Special Meeting.
In addition, Highwoods is entitled to a $2.5 million fee if: (i) the
Merger Agreement is terminated because the JCN Shareholders have rejected the
Merger, (ii) at the time of the Special Meeting, there is public knowledge of
an identifiable third party's financially superior proposal to purchase all of
the outstanding shares of JCN Common, (iii) the JCN Board of Directors has
continued to support the Merger through the date of the Special Meeting and
(iv) the other acquisition proposal is consummated by December 22, 1998.
JCN must pay the above termination fees if not first paid by any acquiror
of JCN upon demand.
Conversion of Shares
Subject to the cash election rights set forth in the succeeding paragraph,
each share of JCN Common (including any associated rights to purchase shares of
JCN Common, but excluding Dissenting Shares issued and outstanding immediately
prior to the Effective Time will cease to be outstanding and will be converted
into and exchanged for the right to receive shares of Highwoods Common. The
number of shares of Highwoods Common to be received in the Merger will vary
depending on the Value of a share of Highwoods Common as follows:
<TABLE>
<CAPTION>
Value of a share of Consideration to be received
Highwoods Common per share of JCN Common
- --------------------------------------- ------------------------------------------
<S> <C>
equal to or greater than $35.36 1.84 shares of Highwoods Common
between $35.36 and $32.00 that number of shares of Highwoods Common
determined by dividing $65 by the Value
of a share of Highwoods Common
equal to or under $32.00 2.03 shares of Highwoods Common
</TABLE>
Each share of Highwoods Common issued in connection with the Merger upon
conversion of JCN Common will be accompanied by a preferred stock purchase
right as set forth in the Shareholders Rights Agreement dated October 4, 1997
between Highwoods and First Union National Bank, as rights agent.
Cash Election
Holders of JCN Common will be provided with an opportunity to elect to
receive cash consideration in lieu of receiving Highwoods Common in the Merger.
Holders who are to receive cash in lieu of Highwoods Common will receive $65
per share of JCN Common in cash. The amount determined by multiplying $65 by
the number of Dissenting Shares is defined herein as the "Dissenting Share
Amount." The cash portion of the aggregate consideration as elected by JCN
Shareholders, plus the Dissenting Share Amount, will be limited to 40% of the
aggregate consideration paid in exchange for shares of JCN Common and is
defined herein as the "Cash Amount."
A form for use by JCN Shareholders to elect cash and other appropriate and
customary transmittal material in such form as Highwoods and JCN mutually agree
("Election Form") will be mailed concurrently with the mailing hereof, or on
such other date as Highwoods and JCN mutually agree, to each holder of record
of JCN Common on the Record Date for the JCN Shareholders entitled to vote at
the Special Meeting.
Each Election Form will permit a holder (or the beneficial owner through
appropriate and customary documentation and instructions) of JCN Common to
elect to receive cash with respect to all or a portion of such holder's JCN
Common. A JCN Shareholder who elects to receive stock pursuant to the Merger
will not know, at the time the shareholder votes on the Merger, the value of
the consideration he will receive for his shares of JCN Common. Although a JCN
Shareholder may
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elect to receive cash pursuant to the Merger with respect to some or all of his
or her shares of JCN Common, such shareholder may instead receive shares of
Highwoods Common with respect to some of such Cash Election Shares. Cash
consideration paid to JCN Shareholders pursuant to the Merger will be limited
to 40% of the aggregate consideration paid to all JCN Shareholders.
Any shares of JCN Common with respect to which the holder (or the
beneficial owner, as the case may be) has not submitted to the Exchange Agent
an effective, properly completed Election Form on or before 5:00 p.m. on the
fifth business day prior to the date of the Special Meeting or any adjournment
thereof (the "Election Deadline") are referred to herein as "No Election
Shares."
Any of the elections set forth in the foregoing paragraph will have been
properly made only if the Exchange Agent has actually received a properly
completed Election Form by the Election Deadline. Any Election Form may be
revoked or changed by the person submitting a subsequent Election Form at or
prior to the Election Deadline. In the event an Election Form is revoked prior
to the Election Deadline, the shares of JCN Common represented by such Election
Form will become No Election Shares. Subject to the terms of the Merger
Agreement and of the Election Form, the Exchange Agent (as defined herein) will
have reasonable discretion to determine whether any election, revocation or
change has been properly or timely made and to disregard immaterial defects in
the Election Forms. The Exchange Agent will promptly notify JCN of any defect
in an Election Form other than an immaterial defect disregarded in good faith
by the Exchange Agent; otherwise, neither Highwoods nor the Exchange Agent will
be under any obligation to notify any person of any defect in an Election Form.
Within three business days after the Election Deadline, Highwoods will
cause the Exchange Agent to effect the allocation of Highwoods Common and cash
among the holders of JCN Common in accordance with the Election Forms, subject
to the limitation that Highwoods will not pay more than 40% of the total Merger
consideration in cash.
The Merger consideration for Cash Election Shares will be $65 in cash. To
the extent, however, that the number of Cash Election Shares and Dissenting
Shares exceeds 40% of the outstanding shares of JCN Common, then a portion of
the Cash Election Shares (spread proportionately among all of such shares) will
be converted into a right to receive Highwoods Common as specified above. The
number of Cash Election Shares to be so converted will be the minimum necessary
to ensure that the cash component of the total Merger consideration does not
exceed 40%.
Highwoods will, at least two business days prior to the date of the
Special Meeting, communicate to JCN the approximate aggregate allocation of
stock and cash, the approximate amount of stock and cash going to each JCN
Shareholder, and the method in which such amounts were calculated.
Appointment of Exchange Agent
In order to facilitate the distribution of certificates representing
shares of Highwoods Common to JCN Shareholders, Highwoods will appoint First
Union National Bank to act as exchange agent in connection with the Merger. The
Exchange Agent will enter into an agreement with Highwoods and JCN pursuant to
which it will agree to act as agent for purposes of distributing the
certificates representing shares of Highwoods Common to JCN Shareholders.
Exchange of Certificates
At or prior to the Effective Time, Highwoods will deposit with the
Exchange Agent, for the benefit of the holders of certificates theretofore
representing JCN Common ("Old Certificates"), certificates representing the
shares of Highwoods Common ("New Certificates") and an estimated amount of cash
(such cash and New Certificates, together with any dividends or distributions
with respect thereto (without any interest thereon), being hereinafter referred
to as the "Exchange Fund") to be paid in exchange for outstanding shares of JCN
Common.
As promptly as practicable after the Effective Time, Highwoods will send
to each former holder of record of shares of JCN Common (other than holders of
Cash Election Shares entitled to receive cash, shares of JCN Common held in
treasury by JCN or Dissenting Shares) transmittal materials for use in
exchanging such shareholder's Old Certificates for the consideration set forth
in the Merger Agreement. Highwoods will cause the New Certificates into which
shares of a shareholder's JCN Common are converted at the Effective Time and/or
any check in respect of the Per Share Cash Consideration and any fractional
share interests or dividends or distributions which such person will be
entitled to receive to be delivered to such shareholder upon delivery to the
Exchange Agent of Old Certificates (or indemnity reasonably satisfactory to
Highwoods and the Exchange Agent, if any of such certificates are lost, stolen
or destroyed) owned by such shareholder. No interest will be paid on any such
cash to be paid pursuant to the Merger Agreement upon such delivery.
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No dividends or other distributions with respect to Highwoods Common with
a record date occurring after the Effective Time will be paid to the holder of
any unsurrendered Old Certificate representing shares of JCN Common converted
in the Merger into shares of such Highwoods Common until the holder thereof has
surrendered such Old Certificate. After the surrender of an Old Certificate,
the record holder thereof will be entitled to receive any such dividends or
other distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Highwoods Common represented by such Old
Certificates.
To the extent permitted by applicable law, any portion of the Exchange
Fund that remains unclaimed by the shareholders of JCN for 12 months after the
Effective Time will be paid to Highwoods. Any JCN Shareholder who has not
theretofore complied with the Merger Agreement may thereafter look only to
Highwoods for payment of the shares of Highwoods Common, cash in lieu of any
fractional shares and unpaid dividends and distributions on the Highwoods
Common deliverable in respect of each share of JCN Common such shareholder
holds as determined pursuant to the Merger Agreement, in each case, without any
interest thereon.
At the Effective Time, the stock transfer books of JCN will be closed as
to holders of JCN Common immediately prior to the Effective Time and no
transfer of JCN Common by any such holder may thereafter be made or recognized.
Until surrendered for exchange, each Old Certificate theretofore representing
shares of JCN Common (other than shares to be canceled) will from and after the
Effective Time represent for all purposes only the right to receive the
consideration provided in the Merger Agreement in exchange therefor, subject,
however, to Jackson's obligation (or Highwoods' obligation following any
liquidation of Jackson) to pay any dividends or make any other distributions
with a record date prior to the Effective Time which have been declared or made
by JCN in respect of such shares of JCN Common in accordance with the terms of
the Merger Agreement and which remain unpaid at the Effective Time. To the
extent permitted by applicable law, former shareholders of record of JCN will
be entitled to vote after the Effective Time at any meeting of Highwoods
shareholders the number of whole shares of Highwoods Common into which their
respective shares of JCN Common are converted, regardless of whether such
holders have exchanged their Old Certificates for New Certificates representing
Highwoods Common.
Conduct of Business Pending the Merger
Until either the Merger is completed or the Merger Agreement is
terminated, Highwoods and JCN have agreed to take no action that would
adversely affect their ability to obtain consents required for the Merger or to
perform their obligations under the Merger Agreement. Both have also agreed to
certain limitations on their ability to engage in material transactions. Among
those limitations, JCN has agreed, subject to certain exceptions, to refrain
from:
o amending its articles of incorporation, bylaws or other governing documents;
o borrowing more than $250,000 unless such borrowing is in the ordinary course
of its business and consistent with past practices;
o entering into, modifying, amending or terminating any material contract or
compromising any material rights or claims unless the action is in the
ordinary course of business and has received Highwoods' approval, which
Highwoods cannot unreasonably withhold;
o engaging in certain transactions relating to its capital structure and
shares; and
o declaring or paying any dividend or other distribution in respect of its
capital stock.
Highwoods generally must continue to conduct its business and the business
of its subsidiaries to maintain its REIT status. It must also take all action
necessary under the Maryland General Corporation Law ("MGCL") prior to the
Effective Time for Jackson to enter into and consummate the transactions
contemplated by the Merger Agreement. Further, Highwoods is restricted from
amending its Articles or bylaws in any manner adverse to the holders of JCN
Common as compared to rights of holders of Highwoods Common generally.
Highwoods is not, however, restricted from acquiring any assets or other
businesses or from discontinuing or disposing of any of its assets or
businesses if such action is, in the judgment of Highwoods, in Highwoods' best
interest.
Waiver and Amendment
The Merger Agreement provides that, at any time prior to the Effective
Time, either party may, to the extent legally allowed and set forth in a
written instrument signed on behalf of such party, (i) extend the time for the
performance of any of the obligations or other acts of the other party, (ii)
waive any inaccuracies in the representations and warranties contained in the
Merger Agreement or in any document delivered pursuant thereto or (iii) waive
compliance with any of the agreements or conditions for the benefit of such
party contained in the Merger Agreement.
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<PAGE>
The Merger Agreement provides that it may be amended by the parties in
writing by action taken by the Highwoods Board of Directors and the JCN Board
of Directors, at any time before or after approval of the Merger and Merger
Agreement by the JCN Shareholders and prior to the filing of the Articles of
Merger in the respective jurisdictions. After any such approval by the JCN
Shareholders, no amendment may be made which reduces or modifies in any
material respect the consideration to be received by JCN Shareholders.
Stock Exchange Listing
Highwoods will apply to list the Highwoods Common issuable in connection
with the Merger on the NYSE. Approval of the listing of such shares on the
NYSE, subject to official notice of issuance, is a condition to the obligation
of JCN to consummate the Merger.
Extraordinary Dividend
In the event that the consolidated earnings and profits of JCN (as defined
in Section 312 of the Code) would otherwise exceed $20,000,000 as of the
Effective Time, the JCN Board of Directors will take all necessary action to
cause the distribution of an extraordinary dividend to the JCN Shareholders
prior to the Effective Time in such amount that as of the Effective Time such
consolidated earnings and profits will be no more than $20,000,000. The amount
of earnings and profits will be determined by an earnings and profits study to
be performed by either KPMG Peat Marwick LLP or Ernst & Young, LLP, in
consultation with the other, including an estimate for the period beginning as
of the day following the date of the latest available financial statements of
JCN and ending on the probable Effective Time. The per share amount of the
extraordinary dividend so distributed, if any, will reduce the value of the JCN
Common in an equivalent amount, and the Per Share Stock Consideration, the Per
Share Cash Consideration and the Exchange Ratio shall be proportionately
adjusted, as appropriate. The JCN Board of Directors does not believe any such
dividend will be required.
Indemnification
For a period of six years after the Effective Time, Highwoods will
indemnify, defend and hold harmless the present and former directors, officers,
employees and agents of the JCN Entities (each, an "Indemnified Party") against
all liabilities arising out of actions or omissions arising out of the
Indemnified Party's service or services as directors, officers, employees or
agents of any JCN Entity or, at any JCN Entity's request, of another
corporation, partnership, joint venture, trust or other enterprise occurring at
or prior to the Effective Time (including the transactions contemplated by the
Merger Agreement) to the fullest extent permitted under the GBCL and by the JCN
Articles and the JCN Bylaws and any other organizational instruments of the
applicable JCN Entity as presently in effect, including provisions relating to
advances of expenses incurred in the defense of any litigation and whether or
not Highwoods or any of its affiliates is insured against any such matter.
Without limiting the foregoing, in any case in which approval by Jackson or
Highwoods is required to effectuate any indemnification, Highwoods will direct,
at the election of the Indemnified Party, that the determination of any such
approval be made by independent counsel mutually agreed upon between Highwoods
and the Indemnified Party.
Highwoods will use its reasonable efforts (and JCN shall cooperate prior
to the Effective Time in these efforts) to maintain in effect for a period of
three years after the Effective Time, JCN's existing directors' and officers'
liability insurance policy (provided that Highwoods may substitute therefor (i)
policies of at least the same coverage and amounts containing terms and
conditions that are substantially no less advantageous or (ii) with the consent
of JCN given prior to the Effective Time, any other policy) with respect to
claims arising from facts or events that occurred prior to the Effective Time
and covering persons who are currently covered by such insurance; provided,
that neither Highwoods nor Jackson shall be obligated to make aggregate premium
payments for such three-year period in respect of such policy (or coverage
replacing such policy) which exceed, for the portion related to JCN's directors
and officers, 200% of the annual premium payments on JCN's current policy in
effect as of the date of this Agreement (the "Maximum Amount"). If the amount
of the premiums necessary to maintain or procure such insurance coverage
exceeds the Maximum Amount, Highwoods will use its reasonable efforts to
maintain the most advantageous policies of directors' and officers' liability
insurance obtainable for a premium equal to the Maximum Amount.
The Highwoods Board of Directors has been advised that, in the opinion of
the Commission, indemnification for liabilities arising under the Securities
Act or the Exchange Act is contrary to public policy and is therefore
unenforceable, absent a decision to the contrary by a court of appropriate
jurisdiction.
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Continued Activities
Highwoods acknowledges the economic and social significance of the Country
Club Plaza district (the "Plaza") to Kansas City, Missouri and surrounding
communities, and further acknowledges the importance of the continued
development and redevelopment of the Plaza by the JCN Entities. From and after
the Effective Time, Highwoods intends to continue to pursue each portion of the
Plaza redevelopment plan unless the economics of any single portion of the
redevelopment plan, or changes in circumstances beyond the reasonable control
of Highwoods, cause the Highwoods Board of Directors to determine in good
faith, after consideration of available alternatives, that such redevelopment
plan or portion thereof is contrary to the best interests of the shareholders
of Highwoods.
From and after the Effective Time, Highwoods will make annual charitable
contributions and provide community support in the geographic areas in which
the business of JCN is currently operated, at levels substantially comparable
to or greater than the levels of charitable contributions and community support
provided by JCN Entities within such areas during calendar year 1996 and the
period from January 1, 1997 through the date of the Merger Agreement. From and
after the Effective Time, Highwoods also will provide annual financial
assistance and marketing support to merchants relating to properties currently
owned or operated by any JCN Entity, at levels substantially comparable to or
greater than the levels of such support provided by JCN Entities during
calendar year 1996 and the period from January 1, 1997 through the date of the
Merger Agreement.
Interests of Certain Persons
In considering the recommendation of the JCN Board of Directors with
respect to the Merger Agreement, JCN Shareholders should be aware that certain
officers and directors of JCN have interests in the Merger and related
transactions that conflict with the interests of JCN Shareholders generally.
From January 1996 through September 1997, JCN entered into employment
agreements with its executive officers to permit JCN to attract and retain
talented managers capable of providing continuity to, and enhancing the
operations of, JCN. One such agreement provides Mr. Brady with certain benefits
upon the occurrence of a change of control not supported by Mr. Brady and other
agreements would provide several other officers with certain benefits upon the
occurrence of a change of control and upon the occurrence of various triggering
events subsequent to a transaction such as the Merger. Accordingly, Messrs.
Brady, Cook, de Avila, Dixon, Fox, Peterson, Sloan, Stephenson, and Teaney and
Ms. Marietti may be entitled to the accelerated receipt of cash, stock, or
combined cash and stock consideration from Highwoods, in approximate amounts of
$6,215,783, $222,721, $1,019,610, $218,005, $214,210, $618,260, $618,260,
$326,814, $1,016,171 and $196,231, respectively, which totals in the aggregate
approximately $10.7 million (not taking into account obligations related to
certain of such individuals' personal taxes), a portion of which may or may not
be deductible to JCN or Highwoods. A full explanation of the triggering events
for such payments is set forth under "Description of JCN -- Officer
Compensation." As of the date of this Proxy Statement/Prospectus, Highwoods has
not entered into any agreement with such officers that would avoid or reduce
the amount of any consideration to which they might otherwise be entitled. In
addition, Highwoods has agreed, from and after the Effective Time and for a
period of six years thereafter, to assume the existing obligations to indemnify
and hold harmless present and former officers and directors of Highwoods in
respect of acts or omissions occurring at or prior to the Effective Time to the
extent provided under Missouri law, the JCN Articles and the JCN Bylaws, as in
effect on the date of the Merger Agreement, and also has agreed to maintain in
effect after the Effective Time JCN's current policies of directors' and
officers' liability insurance for a period of three years, but subject to
maximum aggregate premium cost equal to 200% of the annual premiums previously
paid by JCN.
Mr. Barrett Brady is the only officer of JCN who also serves on the JCN
Board of Directors, and Mr. Brady abstained from voting when the JCN Board of
Directors recommended that JCN Shareholders approve the Merger Agreement.
Mr. C. Q. Chandler, III is a member of the JCN Board of Directors and is
the chairman of the board of directors and a principal shareholder of INTRUST,
the trustee of JCN's Employee Stock Ownership Trust. INTRUST received $114,480
in fees from the ESOT in 1997 for serving in such capacity, and Highwoods has
indicated its intention to terminate the ESOT upon consummation of the Merger.
In the event the Merger Agreement is not approved and INTRUST continues to
serve in such capacity, INTRUST would continue to receive fees from the ESOT.
Because of the resulting appearance of a potential conflict, Mr. Chandler also
abstained from voting when the JCN Board of Directors recommended that JCN
Shareholders approve the Merger Agreement.
Neither Mr. Brady nor Mr. Chandler expressed any opposition to the Merger.
The JCN Board of Directors was aware of these interests and took these
interests into account in approving the Merger Agreement and the transactions
contemplated thereby.
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Anticipated Accounting Treatment
The Merger will be treated as a purchase in accordance with Accounting
Principles Board Opinion No. 16. Purchase accounting for a merger is the same
as the accounting treatment used for the acquisition of any group of assets.
The fair market value of the consideration given by Highwoods in the Merger
will be used as the valuation basis of the combination. The assets acquired and
liabilities assumed of JCN will be recorded at their relative fair market
values as of the Effective Time. The financial statements of Highwoods will
reflect the combined operations of Highwoods and JCN from the date of the
Merger.
Shares Available for Resale
The issuance of Highwoods Common upon consummation of the Merger will be
registered under the Securities Act. Such shares may be traded freely and
without restriction by those shareholders not deemed to be "affiliates" of JCN
or Highwoods as that term is defined in the rules and regulations promulgated
pursuant to the Securities Act. "Affiliates" are generally defined as persons
who control, are controlled by or are under common control with an issuer. This
Proxy Statement/Prospectus does not cover any resales of shares of Highwoods
Common received by affiliates of JCN.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material Federal income tax considerations is
based on current law, is for general purposes only, and is not tax advice. The
summary addresses the material Federal income tax consequences of the Merger to
Highwoods, JCN and the JCN Shareholders, and the material Federal income tax
considerations relating to Highwoods' REIT status, including the material
Federal income tax considerations relating to the Highwoods Operating
Partnership. The following summary does not address all the Federal income tax
consequences of the Merger that may be relevant to particular holders of JCN
Common and holders that are subject to special tax rules including dealers in
securities, mutual funds, insurance companies, tax-exempt entities, holders who
do not hold their JCN Common as capital assets, and holders that, for Federal
income tax purposes, are non-resident alien individuals, foreign corporations,
foreign partnerships or foreign estates or trusts, including any withholding
taxes that may apply to the consideration paid to the foreign holders.
EACH HOLDER OF JCN COMMON OR INVESTOR OF HIGHWOODS COMMON IS URGED TO
CONSULT HIS OR HER OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO
HIM OR HER OF THE MERGER IN LIGHT OF HIS OR HER PARTICULAR CIRCUMSTANCES,
INCLUDING THE EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS, AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
Federal Income Tax Consequences of Merger
It is intended that the Merger will qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Code, and as a condition to
consummation of the Merger, JCN will receive an opinion from Blackwell Sanders
Peper Martin LLP as to the qualification of the Merger as a tax-free
reorganization within the meaning of Section 368(a) of the Code and as to the
tax consequences of the Merger to the JCN Shareholders. Highwoods will receive
an opinion of Alston & Bird LLP as to the qualification of the Merger as a
tax-free reorganization within the meaning of Section 368(a) of the Code.
Copies of such opinions are included as Exhibits 8.1 and 8.2 to the
Registration Statement. In order to so qualify, various factual matters must be
true. In this regard, based upon certain factual representations of officers of
Highwoods and JCN (attached as exhibits to the opinions) and the terms of the
Merger, such counsel have advised Highwoods and JCN that the Merger qualifies
as a tax-free reorganization. It is important to note, however, that if such
representations are untrue or incorrect in any material respects, the
conclusions reached by Alston & Bird LLP and Blackwell Sanders Peper Martin LLP
in their respective opinions are jeopardized and may not be relied upon.
If, as is anticipated, the Merger is treated as a reorganization as
defined in Section 368(a) of the Code, the material Federal income tax
consequences would be as follows:
(i) Each of Highwoods and JCN will be a party to a reorganization within
the meaning of Section 368(b) of the Code.
(ii) No gain or loss will be recognized by Highwoods or JCN as a
consequence of the Merger.
(iii) No gain or loss will be recognized by any JCN Shareholder upon the
receipt of Highwoods Common solely in exchange for its shares of JCN
Common.
(iv) If a JCN Shareholder receives both cash and Highwoods Common in
exchange for his or her JCN Common because of an election to receive
cash with respect to only a portion of such a holder's JCN Common, then
gain
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(but not loss) will be recognized, but not in an amount in excess of the
amount of cash received. The general rule is that any such gain will be
treated as capital gain but if the exchange has the effect of a
distribution of a dividend, then the amount of gain recognized that is
not in excess of the JCN Shareholder's ratable share of the undistributed
earnings and profits of JCN will be treated as a dividend, rather than
capital gain. The determination of whether the exchange has the effect of
the distribution of a dividend will be made on a shareholder by
shareholder basis. The exchange will not have the effect of the
distribution of a dividend, provided that one of the safe-harbors of
Section 302(b) of the Code is met. Most JCN Shareholders electing to
receive cash will likely meet the "substantially disproportionate"
safe-harbor of Section 302(b)(2) of the Code, and thus have their gain
treated as capital gain rather than as a dividend. The substantially
disproportionate test will be met if after the transaction the
shareholder will own less than fifty percent (50%) of all Highwoods
Common and if his or her percentage ownership of Highwoods Common after
the transaction is less than eighty percent (80%) of what his or her
percentage ownership of Highwoods Common would have been if no cash
elections had been made by the JCN Shareholders in connection with the
Merger, in each case determined with application of Section 318 of the
Code attributing stock ownership among family members and related
entities. JCN Shareholders with attributed ownership or JCN Shareholders
making the cash election with respect to only a small percentage of their
stock may not fall within the substantially disproportionate safe-harbor.
Each JCN Shareholder is urged to consult his or her own tax advisor about
the applicable tax consequences in light of his or her particular
circumstances.
(v) If a JCN Shareholder receives solely cash in exchange for shares of JCN
Common either because of an election to receive cash with respect to all
of such holder's JCN Common, or because of the exercise of the right to
dissent to the transaction, such cash will be treated as having been
received as a distribution in redemption of the JCN Common subject to
the provisions of Section 302 of the Code. Where, as a result of such
distribution, the JCN Shareholder owns no Highwoods Common, either
directly or by reason of the application of Section 318 of the Code, the
"complete termination of interest" safe-harbor of Section 302(b)(3) of
the Code will be met, and such cash will be treated as a distribution in
full payment in exchange for his or her JCN Common. Such shareholders
will recognize gain or loss measured by the difference between the
amount of cash received and the adjusted basis of the JCN Common
surrendered.
(vi) The basis of the Highwoods Common received by a JCN Shareholder in the
Merger will be the same as the basis of the JCN Common surrendered in
exchange therefor (less the basis allocated to any fractional share of
Highwoods Common settled by cash payment), decreased by any cash
received and increased by the amount, if any, treated as a dividend and
the amount of the gain recognized by such JCN Shareholder with respect
to the Merger.
(vii) The holding period of the Highwoods Common received by a JCN
Shareholder (including the holding period of any fractional share
interest) will include the holding period of the JCN Common surrendered
in exchange therefor, provided the JCN Common was held as a capital
asset on the date of the exchange.
(viii) A JCN Shareholder who receives cash in the Merger in lieu of a
fractional share interest in Highwoods Common will be treated as having
received cash in redemption of such fractional share interest. The
receipt of such cash by the JCN Shareholder generally should result in
capital gain or loss equal to the difference between the amount of cash
received and the portion of such JCN Shareholder's adjusted basis in the
shares of JCN Common allocable to the fractional share interest.
If the Merger fails to qualify as a tax-free reorganization for any
reason, the material Federal income tax consequences would be as follows: (i)
no gain or loss would be recognized to Highwoods; (ii) gain would be recognized
to JCN (and the resulting tax borne by Highwoods) equal to the fair market
value of its assets at the Effective Time less its adjusted basis in the
assets; (iii) gain or loss would be recognized by the holders of JCN Common
upon the exchange of such shares in the Merger for shares of Highwoods Common;
(iv) the tax basis of the Highwoods Common to be received by the holders of the
JCN Common in the Merger would be the fair market value of such shares of
Highwoods Common at the Effective Time; and (v) the holding period of such
shares of Highwoods Common to be received by JCN Shareholders pursuant to the
Merger would begin the day after the Effective Time.
Taxation of Highwoods as a REIT
General. Commencing with its taxable year ended December 31, 1994,
Highwoods has elected to be taxed as a real estate investment trust under
Sections 856 through 860 of the Code. Highwoods believes that, commencing with
its taxable year ended December 31, 1994, it has been organized and has
operated in such a manner as to qualify for taxation as a REIT under the Code,
and Highwoods intends to continue to operate in such a manner, but no assurance
can be given that it has operated or will operate in a manner so as to qualify
or remain qualified.
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These sections of the Code are highly technical and complex. The following
sets forth the material aspects of the 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, rules and regulations promulgated
thereunder, and administrative and judicial interpretation thereof.
Alston & Bird LLP has acted as tax counsel to Highwoods in connection with
the Merger and Highwoods' election to be taxed as a REIT. Alston & Bird LLP is
of the opinion that Highwoods has been organized and has operated in conformity
with the requirements for qualification and taxation as a REIT under the Code
for its taxable years ended December 31, 1994 through 1997, and that Highwoods
is in a position to continue its 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, 1998. This opinion is based on factual representations of
Highwoods concerning its business operations and its properties and Alston &
Bird LLP has not independently verified these facts. In addition, Highwoods'
qualification and taxation as a REIT at any time during 1998 is dependent, among
other things, upon its meeting the requirements of Section 856(a) of the Code
throughout the year and for the year as a whole. Accordingly, because Highwoods'
satisfaction of the REIT requirements for such year will depend upon future
events, including precise terms and facts of proposed transactions, the
final determination of operational results and the effect of certain provisions
in the President's Budget Proposal for the Fiscal Year 1999 on Highwoods' REIT
status, no assurance can be given that the actual results of Highwoods'
operations for the taxable year that will end December 31, 1998, will satisfy
the REIT requirements.
Federal Income Taxation of Highwoods
If Highwoods qualifies for taxation as a REIT, it generally will not be
subject to Federal corporate income tax on that portion of its ordinary income
or capital gain that is currently distributed to 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, Highwoods will be subject to Federal income tax as
follows. First, Highwoods will be taxed at regular corporate rates on its
undistributed REIT taxable income, including undistributed net capital gains.
Second, under certain circumstances, Highwoods may be subject to the
"alternative minimum tax" as a consequence of its items of tax preference.
Third, if Highwoods has net income from the sale or other disposition of
"foreclosure property" that is held primarily for sale to customers in the
ordinary course of business or other non-qualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income. Fourth, if Highwoods has net income from prohibited transactions (which
are, in general, certain sales or other dispositions of property other than
foreclosure property held primarily for sale to customers in the ordinary
course of business), such income will be subject to a 100% tax. Fifth, if
Highwoods should fail to satisfy either of the 75% or 95% gross income tests
(discussed below) but has nonetheless maintained its qualification as a REIT
because certain other requirements have been met, it will be subject to a 100%
tax on the net income attributable to the greater of the amount by which
Highwoods fails either the 75% or 95% test, multiplied by a fraction intended
to reflect Highwoods' profitability. Sixth, if Highwoods fails to distribute
during each year at least the sum of (i) 85% of its ordinary income for such
year, (ii) 95% of its capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, Highwoods will be subject to a
4% excise tax on the excess of such required distribution over the amounts
actually distributed. Seventh, if Highwoods should acquire any asset from a C
corporation (i.e., a corporation generally subject to full corporate-level tax)
in a carryover-basis transaction and Highwoods subsequently recognizes gain on
the disposition of such asset during the 10-year period (the "Recognition
Period") beginning on the date on which the asset was acquired by Highwoods,
then, to the extent of the excess of (a) the fair market value of the asset as
of the beginning of the applicable Recognition Period over (b) Highwoods'
adjusted basis in such asset as of the beginning of such Recognition Period
(the "Built-In Gain"), such gain will be subject to tax at the highest regular
corporate rate, pursuant to guidelines issued by the Internal Revenue Service
("IRS") (the "Built-In Gain Rules").
Requirements for Qualification
To qualify as a REIT, Highwoods must elect to be so treated and must meet
the requirements, discussed below, relating to Highwoods' organization, sources
of income, and nature of assets.
Organizational Requirements. The Code defines a REIT as a corporation,
trust or association: (i) that is managed by one or more trustees or directors,
(ii) the beneficial ownership of which is evidenced by transferable shares or
by transferable certificates of beneficial interest, (iii) that would be
taxable as a domestic corporation but for the REIT requirements, (iv) that is
neither a financial institution nor an insurance company subject to certain
provisions of the Code, (v) the beneficial ownership of which is held by 100 or
more persons, (vi) during the last half of each taxable year, not more than 50%
in value of the outstanding stock of which is owned, directly or indirectly,
through the application of certain attribution rules,
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by five or fewer individuals (as defined in the Code to include certain
entities), (vii) files an election to be taxed as a REIT on its return for each
taxable year, and (viii) satisfies the 95% and 75% income tests and the 75%,
25%, 10% , and 5% asset tests, as described below. The Code provides that
conditions (i) through (iv), inclusive, 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), the
beneficiaries of a pension or profit-sharing trust under section 401(a) of the
Code are treated as REIT shareholders. In addition, the Highwoods Articles
currently include certain restrictions regarding transfer of its Highwoods
Common, which restrictions are intended (among other things) to assist
Highwoods in continuing to satisfy conditions (v) and (vi) 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 Section 856 of the Code,
including satisfying the gross income tests and asset tests. Thus, Highwoods'
proportionate share of the assets, liabilities, and items of income of the
Highwoods Operating Partnership (including the Highwoods Operating
Partnership's share of the assets, liabilities, and items of income with
respect to any partnership in which it holds an interest) will be treated as
assets, liabilities, and items of income of Highwoods for purposes of applying
the requirements described herein.
Income Tests. In order to maintain qualification as a REIT, Highwoods
annually must satisfy two gross income requirements. First, at least 75% of
Highwoods' gross income (excluding gross income from prohibited transactions)
for each taxable year must be derived directly or indirectly 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, at least 95% of Highwoods' gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property investments, dividends, interest, and
gain from the sale or disposition of stock or securities (or from any
combination of the foregoing). In addition, for taxable years ended on or
before December 31, 1997, short-term gain from the sale or other disposition of
stock or securities, gain from prohibited transactions and gain on the sale or
other disposition of real property held for less than four years (apart from
involuntary conversions and sales of foreclosure property) must represent less
than 30% of Highwoods' gross income (including gross income from prohibited
transactions). The Taxpayer Relief Act of 1997, enacted August 5, 1997
("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 Highwoods beginning with its taxable year that will end December 31,
1998.
Rents received by Highwoods will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above 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 but can be based on a
fixed percentage of gross receipts or gross sales. Second, "rents from real
property" excludes any amount received directly or indirectly from any tenant
if Highwoods, or an owner of 10% or more of Highwoods, directly or
constructively, owns 10% or more of such tenant taking into consideration the
applicable attribution rules (a "Related Party Tenant"). Third, rent
attributable to personal property is excluded from "rents from real property"
except where such personal property is leased in connection with a lease of
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 Highwoods. Where, on the
other hand, 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. In the event that an independent contractor provides
such services, Highwoods must adequately compensate the independent contractor,
Highwoods 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 Highwoods, taking into
consideration the applicable ownership rules. Pursuant to the Taxpayer Relief
Act and beginning with Highwoods' taxable year that will end December 31, 1998,
Highwoods' rental income will not cease to qualify as "rents from real
property" merely because Highwoods performs a de minimis amount of
impermissible services to the tenants. For purposes of the preceding sentence,
(i) the amount of income received from such impermissible services cannot
exceed one percent of all amounts received or accrued during such taxable year,
directly or indirectly, by Highwoods with respect to such property and (ii) the
amount treated as received by Highwoods for such impermissible services cannot
be less than 150 percent of the direct cost of Highwoods in furnishing or
rendering such services.
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Highwoods does not currently charge and does not anticipate charging rent
that is based in whole or in part on the income or profits of any person.
Highwoods also does not anticipate either deriving rent attributable to
personal property leased in connection with real property that exceeds 15% of
the total rents or receiving rent from Related Party Tenants.
The Highwoods Operating Partnership does provide certain services with
respect to the Highwoods Properties. The performance of services by Highwoods
or the Highwoods Operating Partnership with respect to the Highwoods
Properties, other than services that are and will be provided directly, that
are usually or customarily rendered in connection with the rental of space for
occupancy only, and that are not otherwise rendered to particular tenants
("customary services"), will cause rents received with respect to the Highwoods
Properties as to which the non-customary services are provided, to fail to
qualify as rents from real property. Although some of the services with respect
to the Highwoods Properties that Highwoods believes may not be provided by
Highwoods or the Highwoods Operating Partnership directly without jeopardizing
the qualification of rent as "rents from real property" are and will be
performed by independent contractors, some of the services are and will be
performed directly by Highwoods or the Highwoods Operating Partnership.
Highwoods believes, however, that the aggregate amount of the fees received for
the performance of non-customary services, the rents received with respect to
the Highwoods Properties as to which the non-customary services are provided,
and all other non-qualifying income in any taxable year will not cause
Highwoods to exceed the limits on non-qualifying income under the 75% or the
95% gross income tests.
The Highwoods Operating Partnership and Highwoods receive fees in
consideration of the performance of property management and brokerage and
leasing services with respect to certain Highwoods Properties not owned
entirely by the Highwoods Operating Partnership. Such fees will also not
qualify under the 75% or the 95% gross income test. In addition, Highwoods
Operating Partnership also may receive certain other types of income with
respect to the properties it owns that will not qualify for either of these
tests. Further, dividends on the Highwoods Operating Partnership's stock in
Highwoods Services will not qualify under the 75% gross income test. Highwoods
believes, however, that the aggregate amount of such fees and all other
non-qualifying income (including fees for the performance of non-customary
services and associated rents) in any taxable year will not cause Highwoods to
exceed the limits on non-qualifying income under either the 75% or the 95%
gross income test.
If Highwoods fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for that year
if it is eligible for relief under a certain provision of the Code. This relief
provision generally will be available if (i) Highwoods' failure to meet these
tests was due to reasonable cause and not due to willful neglect, (ii)
Highwoods attaches a schedule of the nature and amount of each item of income
to its Federal income tax return and (iii) the inclusion of any incorrect
information on such schedule is not due to fraud with intent to evade tax. It
is not possible, however, to state whether in all circumstances Highwoods would
be entitled to the benefit of this relief provision. For example, if Highwoods
fails to satisfy the gross income tests because non-qualifying income that
Highwoods intentionally incurs exceeds the limits on such income, the IRS could
conclude that Highwoods' failure to satisfy the tests was not due to reasonable
cause. As discussed above in " -- Federal Income Taxation of Highwoods," even
if this relief provision applies, a 100% tax would be imposed with respect to
the portion of Highwoods' taxable income that fails the 75% or 95% gross income
test.
Asset Tests. At the close of each quarter of its taxable year, Highwoods
also must satisfy four tests relating to the nature and diversification of its
assets. First, at least 75% of the value of Highwoods' total assets must be
represented by real estate assets, cash and cash items (including receivables),
and government securities. Second, no more than 25% of the value of Highwoods'
total assets may be represented by securities other than those in the 75% asset
class. Third, not more than 5% of the value of Highwoods' 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 Highwoods (other than those securities includible
in the 75% asset test).
The 5% test generally must be met for any quarter in which Highwoods
acquires securities of an issuer. Thus, this requirement must be satisfied not
only on the date on which Highwoods through the Highwoods Operating Partnership
acquired the securities of Highwoods Services, but also each time Highwoods
increases its ownership of its respective securities (including as a result of
increasing its interest in the Highwoods Operating Partnership as limited
partners exercise their redemption rights). Although Highwoods plans to take
steps to ensure that it satisfies the 5% value test for any quarter with
respect to which retesting is to occur, there can be no assurance that such
steps will always be successful or will not require a reduction in Highwoods'
overall interest in Highwoods Services.
The Highwoods Operating Partnership owns 100% of the nonvoting stock and
1% of the voting stock of Highwoods Services, and by virtue of its ownership of
Common Units, Highwoods will be considered to own its pro rata share of such
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stock. Neither Highwoods nor the Highwoods Operating Partnership, however, will
own more than 1% of the voting securities of Highwoods Services. In addition,
Highwoods and its senior management do not believe that Highwoods' pro rata
share of the value of the securities of Highwoods Services exceeds 5% of the
total value of Highwoods' assets. Highwoods' belief is based in part upon its
analysis of the estimated value of the securities of Highwoods Services owned
by the Highwoods Operating Partnership relative to the estimated value of the
other assets owned by the Highwoods Operating Partnership. No independent
appraisals will be obtained to support this conclusion, and Alston & Bird LLP,
in rendering its opinion as to the qualification and taxation of Highwoods as a
REIT, is relying on the conclusions of Highwoods and its senior management as
to the value of the securities of Highwoods Services. There can be no
assurance, however, that the IRS might not contend that the value of such
securities held by Highwoods (through the Highwoods Operating Partnership)
exceeds the 5% value limitation.
After initially meeting the asset tests at the close of any quarter,
Highwoods will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient non-qualifying assets within 30 days after the close
of that quarter. Highwoods intends to maintain adequate records of the value of
its assets to ensure compliance with the asset tests and to take such other
actions within 30 days after the close of any quarter as may be required to
cure any noncompliance.
Annual Distribution Requirements
In order to be taxed as a REIT, Highwoods is required to make
distributions (other than capital gain distributions) to its shareholders in an
amount at least equal to (a) the sum of (i) 95% of Highwoods' "REIT taxable
income" (computed without regard to the dividends-paid deduction and the
Highwoods' capital gain) and (ii) 95% of the net income, if any, from
foreclosure property in excess of the special tax on income from foreclosure
property, minus (b) the sum of certain items of non-cash income. Such
distributions must be paid 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 Highwoods timely files its 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 Highwoods elected on its Federal income 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 Highwoods satisfies the foregoing
distribution requirements, Highwoods will be subject to tax thereon at regular
capital gains or ordinary corporate tax rates to the extent that it does not
distribute all of its net capital gain or "REIT taxable income" as adjusted.
Furthermore, if Highwoods should fail to distribute during each calendar year
at least the sum of (a) 85% of its ordinary income for that year, (b) 95% of
its capital gain net income for that year, and (c) any undistributed taxable
income from prior periods, Highwoods would be subject to a 4% excise tax on the
excess of such required distribution over the amounts actually distributed. In
addition, during its Recognition Period, if Highwoods disposes of any asset
subject to the Built-In Gain Rules, Highwoods will be required, pursuant to
guidance issued by the IRS, to distribute at least 95% of the Built-In Gain
(after tax), if any, recognized on the disposition of the asset.
Highwoods intends to make timely distributions sufficient to satisfy the
annual distribution requirements. In this regard, the Highwoods Operating
Partnership Agreement authorizes Highwoods, as general partner, to take such
steps as may be necessary to cause the Highwoods Operating Partnership to
distribute to its partners an amount sufficient to permit Highwoods to meet
these distribution requirements.
It is expected that Highwoods' REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, Highwoods anticipates that it
generally will have sufficient cash or liquid assets to enable it to satisfy
the 95% distribution requirement. It is possible, however, that Highwoods, from
time to time, 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, Highwoods may
find it necessary to arrange for borrowings or, if possible, pay taxable stock
dividends in order to meet the distribution requirement.
In the event that Highwoods is subject to an adjustment to its REIT
taxable income (as defined in Section 860(d)(2) of the Code) resulting from an
adverse determination by either a final court decision, a closing agreement
between Highwoods and the IRS under Section 7121 of the Code, or an agreement
as to tax liability between Highwoods and an IRS district
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director, Highwoods may be able to rectify any resulting failure to meet the
95% annual distribution requirement by paying "deficiency dividends" to
shareholders that relate to the adjusted year but that are paid in a subsequent
year. To qualify as a deficiency dividend, the distribution must be made within
90 days of the adverse determination and Highwoods also must satisfy certain
other procedural requirements. If the statutory requirements of Section 860 of
the Code are satisfied, a deduction is allowed for any deficiency dividend
subsequently paid by Highwoods to offset an increase in Highwoods' REIT taxable
income resulting from the adverse determination. Highwoods, however, will be
required to pay statutory interest on the amount of any deduction taken for
deficiency dividends to compensate for the deferral of the tax liability.
Failure to Qualify
If Highwoods fails to qualify for taxation as a REIT in any taxable year
and the relief provisions do not apply, Highwoods will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to shareholders in any year in which
Highwoods fails to qualify will not be deductible by Highwoods nor will they be
required to be made. In such event, to the extent of positive current and
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 distributes may be eligible for the
dividends-received deduction. Unless Highwoods is entitled to relief under
specific statutory provisions, Highwoods 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 possible to state whether in all
circumstances Highwoods would be entitled to such statutory relief. For
example, if Highwoods fails to satisfy the gross income tests because
non-qualifying income that Highwoods intentionally incurs exceeds the limit on
such income, the IRS could conclude that Highwoods' failure to satisfy the
tests was not due to reasonable cause.
Taxation of U.S. Shareholders
As used herein, the term "U.S. Shareholder" means a holder of Highwoods
Common that (for Federal income tax purposes) (a) is a citizen or resident of
the United States, (b) is a corporation or partnership (including an entity
treated as a corporation or partnership for United States Federal income tax
purposes) created or organized in or under the laws of the United States or of
any political subdivision thereof, (c) is an estate, the income of which is
subject to Federal income taxation regardless of its source or (d) is any trust
if a court within the United States is able to exercise primary supervision
over the administration of the trust, and one or more United States persons
have the authority to control all substantial decisions of the trust. For any
taxable year for which Highwoods qualifies 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 Highwoods' positive current and accumulated earnings and profits and,
to that extent, will be taxable to the U.S. Shareholders as ordinary income.
These distributions are not eligible for the dividends-received deduction for
corporations. To the extent that Highwoods makes a distribution in excess of
its 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 Highwoods Common, and then the distribution in excess
of such basis will be taxable as gain realized from the sale of its Highwoods
Common. Dividends declared by Highwoods in October, November, or December of
any year payable to a U.S. Shareholder of record on a specified date in any
such month shall be treated as both paid by Highwoods and received by the
shareholders on December 31 of the year, provided that the dividends are
actually paid by Highwoods during January of the following calendar year. U.S.
Shareholders are not allowed to include on their own Federal income tax returns
any tax losses of Highwoods.
Highwoods will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by Highwoods up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed in "
- -- Federal Income Taxation of Highwoods" above.
Capital Gain Distributions. Distributions to U.S. Shareholders that are
properly designated by Highwoods as capital gain distributions will be treated
as long-term capital gains (to the extent they do not exceed Highwoods' actual
net capital gain) for the taxable year without regard to the period for which
the U.S. Shareholder has held his or her stock. However, corporate shareholders
may be required to treat up to 20% of certain capital gain dividends as
ordinary income. Capital gain dividends are not eligible for the
dividends-received deduction for corporations.
Pursuant to the Taxpayer Relief Act and beginning with Highwoods' taxable
year that will end December 31, 1998, Highwoods may elect to retain and pay
income tax on net long-term capital gain that it received during the tax year.
If such election is made, (i) the U.S. Shareholders will include in their
income their proportionate share of the undistributed long-term capital gains
as designated by Highwoods, (ii) the U.S. Shareholders will be deemed to have
paid their proportionate
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share of the tax, which would be credited or refunded to such shareholders, and
(iii) the basis of the U.S. Shareholders' shares will be increased by the
amount of the undistributed long-term capital gains (less the amount of capital
gains tax paid by Highwoods) included in such shareholders' long-term capital
gains.
As a result of the changes made to the capital gain rates by the Taxpayer
Relief Act (See " -- Certain Disposition of Shares"), 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 "Certain Disposition of Shares"), 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. When 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, as 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.
Passive Activity Loss and Investment Interest Limitations. Distributions
from Highwoods and gain from the disposition of Highwoods Common will not be
treated as passive activity income and, therefore, U.S. Shareholders will not
be able to apply any "passive losses" against such income. Dividends from
Highwoods (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 Highwoods Common or
capital gain dividends generally will be excluded from investment income unless
the U.S. Shareholder elects to have such gain taxed at ordinary income rates.
Certain Dispositions of Shares. In general, U.S. Shareholders will realize
capital gain or loss on the disposition of Highwoods Common equal to the
difference between (i) the amount of cash and the fair market value of any
property received on such disposition, and (ii) such shareholders' adjusted
basis in such Highwoods Common. Losses incurred on the sale or exchange of
Highwoods Common held for less than six months (after applying certain holding
period rules) will be deemed long-term capital loss to the extent of any
capital gain dividends received by the selling U.S. Shareholder from those
shares. As a result of the Taxpayer Relief Act, 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% percent bracket taxpayers, the maximum
rate on net capital gains is reduced to 10%, and such maximum rate is further
reduced to 8% for assets 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 U.S. Shareholders by Highwoods will be subject to the
25% rate to the extent that the gain does not exceed depreciation on real
property sold by Highwoods. 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.
Treatment of Tax-Exempt Shareholders. Distributions from Highwoods 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 its Highwoods Common.
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 a
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" exception to the five or fewer requirement
applicable to shares held by qualified trusts and (ii) the REIT is
"predominantly held" by qualified trusts. A REIT is predominantly held if
either (i) at least one qualified trust holds more than 25% by value of the
REIT interests or (ii) one or more qualified trusts, each owning more than 10%
by value of the REIT interests, hold in the aggregate more than 50% of the REIT
interests. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (a) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (b) the total gross
income (less certain associated expenses) of the REIT. In the event that this
ratio is less than 5% for any year, then the qualified trust will not be
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 restrictions on
ownership of Highwoods Common in the Articles of Incorporation generally will
prevent application of the provisions treating a portion of REIT distributions
as UBTI to tax-exempt entities purchasing Highwoods Common, absent a waiver of
the restrictions by the board of directors.
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Special Tax Considerations for Non-U.S. Shareholders
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships, and foreign trusts and
estates (collectively, "Non-U.S. Shareholders") are complex, and the following
discussion is intended only as a summary of these rules. This discussion is
based on current law, which is subject to change, and assumes that Highwoods
qualifies 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 Highwoods, including any
reporting requirements.
A distribution by Highwoods that is not attributable to gain from the sale
or exchange by Highwoods of a United States real property interest and that is
not designated by Highwoods as a capital gain distribution will be treated as
an ordinary income dividend to the extent that it is made out of current or
accumulated earnings and profits of Highwoods. 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 Highwoods' earnings and profits will be
treated first as a return of capital that will reduce a Non-U.S. Shareholder's
basis in its Highwoods Common (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 Highwoods Common.
Distributions by Highwoods 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 non-resident 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 rate under an income tax treaty.
Although tax treaties may reduce Highwoods' withholding obligations,
Highwoods 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 Highwoods designates 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 purposes of
withholding. A distribution in excess of Highwoods' 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 Highwoods 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
such excess from the IRS.
Unless the Highwoods Common constitutes a "United States real property
interest" within the meaning of FIRPTA, a sale of Highwoods Common by a
Non-U.S. Shareholder generally will not be subject to Federal income taxation.
The Highwoods Common will not constitute a United States real property interest
if Highwoods is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which at all times during a specified testing period less
than 50% in value of its shares is held directly or indirectly by Non-U.S.
Shareholders. It currently is anticipated that Highwoods will be a domestically
controlled REIT and, therefore, that the sale of Highwoods Common will not be
subject to taxation under FIRPTA. However, because the Highwoods Common will be
publicly traded, no assurance can be given that Highwoods will be a
domestically controlled REIT. If Highwoods were not a domestically controlled
REIT, a Non-U.S. Shareholder's sale of Highwoods Common would be subject to tax
under FIRPTA as a sale of a United States real property interest unless the
Highwoods Common were "regularly traded" on an established securities market
(such as the New York Stock Exchange) on which the Highwoods Common will be
listed and the selling shareholder owned no more than 5% of the Highwoods
Common throughout the testing period. If the gain on the sale of Highwoods
Common 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 and a special alternative
minimum tax in the case of non-resident alien individuals). Notwithstanding the
foregoing, capital gains not subject to FIRPTA will be taxable to a Non-U.S.
Shareholder if the Non-U.S. Shareholder is a non-resident alien individual who
is present in the United States for 183 days or more during the taxable year
and certain other conditions apply, in which case the non-resident alien
individual will be subject to a 30% tax on his or her U.S. source capital
gains.
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A purchaser of Highwoods Common from a Non-U.S. Shareholder will not be
required to withhold under FIRPTA on the purchase price if the purchased
Highwoods Common is "regularly traded" on an established securities market or
if Highwoods is a domestically controlled REIT. Otherwise, the purchaser of
Highwoods Common from a Non-U.S. Shareholder may be required to withhold 10% of
the purchase price and remit this amount to the IRS. Highwoods Common currently
is a regularly traded security on the New York Stock Exchange. Highwoods
believes that it qualifies under both the regularly 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, Highwoods Common. Backup withholding will apply only
if (i) the payee fails to furnish his or her taxpayer identification number
("TIN") (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
under reporting, 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.
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. 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
United States Federal income tax liability and may entitle the U.S. Shareholder
to a refund, provided that the required information is furnished to the IRS.
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.
Tax Aspects of the Highwoods Operating Partnership
General. Substantially all of Highwoods' investments are held through the
Highwoods Operating Partnership. In general, partnerships are "pass-through"
entities which are not subject to Federal income tax. Rather, partners are
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. Highwoods includes in its income its proportionate share of the
foregoing Highwoods Operating Partnership items for purposes of the various
REIT income tests and in the computation of its REIT taxable income. Moreover,
for purposes of the REIT asset tests, Highwoods includes its proportionate
share of assets held by the Highwoods Operating Partnership.
Tax Allocations with Respect to the Highwoods Properties. Pursuant to
Section 704(c) of the Code, income, gain, loss, and deduction attributable to
appreciated or depreciated property (such as the Highwoods Properties) that is
contributed to a partnership in exchange for an interest in the partnership,
must be allocated in a manner such that the contributing partner is charged
with, or benefits from the unrealized gain or unrealized loss, respectively,
associated with the property at the time of the contribution. The amount of
such unrealized gain or unrealized loss generally is equal to the difference
between the fair market value of 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. The Highwoods Operating
Partnership was formed by way of contributions of appreciated property
(including the Highwoods Properties). Consequently, the Highwoods Operating
Partnership Agreement requires such allocations to be made in a manner
consistent with Section 704(c) of the Code.
In general, the partners who have contributed partnership interests in the
Highwoods Properties to the Highwoods Operating Partnership (the "Contributing
Partners") will be allocated lower amounts of depreciation deductions for tax
purposes than such deductions would be if determined on a pro rata basis. In
addition, in the event of the disposition of any of the contributed assets
(including the Highwoods Properties) that have a Book-Tax Difference, all
taxable income attributable to such Book-Tax Difference generally will be
allocated to the Contributing Partners, and Highwoods generally will be
allocated only its share of capital gains attributable to appreciation, if any,
occurring after the closing of the acquisition of such
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properties. This will tend to eliminate the Book-Tax Difference over the life
of the Highwoods Operating Partnership. However, the special allocation rules
of Section 704(c) of the Code do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the
hands of the Highwoods Operating Partnership will cause Highwoods to be
allocated lower depreciation and other deductions and possibly amounts of
taxable income in the event of a sale of such contributed assets in excess of
the economic or book income allocated to it as a result of such sale. This may
cause Highwoods to recognize taxable income in excess of cash proceeds, which
might adversely affect Highwoods' ability to comply with the REIT distribution
requirements. See " -- Annual Distribution Requirements."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including the "traditional method" that may leave some of the Book-Tax
Differences unaccounted for, or the election of certain methods which would
permit any distortions caused by a Book-Tax Difference at this time to be
entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Highwoods Operating Partnership and Highwoods
have determined to use the "traditional method" for accounting for Book-Tax
Differences with respect to the Highwoods Properties contributed to the
Partnership. As a result of such determination, distributions to shareholders
will be comprised of a greater portion of taxable income rather than a return
of capital. The Highwoods Operating Partnership and Highwoods have not
determined which of the alternative methods of accounting for Book-Tax
Differences will be elected with respect to Highwoods Properties contributed to
the Partnership in the future.
With respect to any property purchased by the Highwoods Operating
Partnership, such property initially will have a tax basis equal to its fair
market value and Section 704(c) of the Code will not apply.
Basis in Highwoods Operating Partnership Interest. Highwoods' adjusted tax
basis in its interest in the Highwoods Operating Partnership generally (i) will
be equal to the amount of cash and the basis of any other property contributed
to the Highwoods Operating Partnership by Highwoods, (ii) will be increased by
(a) its allocable share of the Highwoods Operating Partnership's income and (b)
its allocable share of indebtedness of the Highwoods Operating Partnership and
(iii) will be reduced, but not below zero, by Highwoods' allocable share of (a)
losses suffered by the Highwoods Operating Partnership, (b) the amount of cash
distributed to Highwoods, and (c) constructive distributions resulting from a
reduction in Highwoods' share of indebtedness of the Highwoods Operating
Partnership.
If the allocation of Highwoods' distributive share of the Highwoods
Operating Partnership's loss exceeds the adjusted tax basis of Highwoods'
partnership interest in the Highwoods Operating Partnership, the recognition of
such excess loss will be deferred until such time and to the extent that
Highwoods has an adjusted tax basis in its partnership interest. To the extent
that the Highwoods Operating Partnership's distributions, or any decrease in
Highwoods' share of the indebtedness of the Highwoods Operating Partnership
(such decreases being considered a cash distribution to the partners) exceed
Highwoods' adjusted tax basis, such excess distributions (including such
constructive distributions) constitute taxable income to Highwoods. Such
taxable income normally will be characterized as a capital gain if Highwoods'
interest in the Highwoods Operating Partnership has been held for longer than
one year, subject to reduced tax rates described above (See " -- Taxation of
U.S. Shareholders -- Capital Gain Distributions"). Under current law, capital
gains and ordinary income of corporations generally are taxed at the same
marginal rates.
Sale of the Highwoods Properties. Highwoods' share of gain realized by the
Highwoods Operating Partnership on the sale of any property held by the
Highwoods Operating Partnership as inventory or other property held primarily
for sale to customers in the ordinary course of the Highwoods Operating
Partnership's trade or business will be treated as income from a prohibited
transaction that is subject to a 100% penalty tax. See " -- Requirements for
Qualification -- Income Tests." Such prohibited transaction income also may
have an adverse effect upon Highwoods' ability to satisfy the income tests for
qualification as a REIT. Under existing law, whether property is held as
inventory or primarily for sale to customers in the ordinary course of the
Highwoods Operating Partnership's trade or business is a question of fact that
depends on all the facts and circumstances with respect to the particular
transaction. The Highwoods Operating Partnership intends to hold the Highwoods
Properties for investment with a view to long-term appreciation, to engage in
the business of acquiring, developing, owning, and operating the Highwoods
Properties (and other properties) and to make such occasional sales of the
Highwoods Properties, including peripheral land, as are consistent with the
Highwoods Operating Partnership's investment objectives.
Other Tax Considerations
A portion of the amounts to be used to fund distributions to shareholders
is expected to come from the Highwoods Operating Partnership through
distributions on stock of Highwoods Services held by the Highwoods Operating
Partnership.
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Highwoods Services will not qualify as a REIT and will pay Federal, state, and
local income taxes on its taxable income at normal corporate rates. Any
Federal, state, or local income taxes that Highwoods Services is required to
pay will reduce the cash available for distribution by Highwoods to its
shareholders.
As described above, the value of the securities of Highwoods Services held
by Highwoods cannot exceed 5% of the value of Highwoods' assets at a time when
a Common Unit holder in the Highwoods Operating Partnership exercises his or
her redemption right (or Highwoods otherwise is considered to acquire
additional securities of Highwoods Services). See " -- Federal Income Taxation
of Highwoods." This limitation may restrict the ability of Highwoods Services
to increase the size of its business unless the value of the assets of
Highwoods is increasing at a commensurate rate.
State and Local Tax
Highwoods and its shareholders may be subject to state and local tax in
various states and localities, including those in which it or they transact
business, own property, or reside. The tax treatment of Highwoods and the
shareholders in such jurisdictions may differ from the Federal income tax
treatment described above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Highwoods Common.
Proposed Legislation
Under current law, Highwoods cannot own more than 10% of the outstanding
voting securities (other than those securities includible in the 75% asset
test) of any one issuer and qualify for taxation as a REIT. See " --
Requirements for Qualification -- Asset Tests." For example, the Highwoods
Operating Partnership owns 100% of the nonvoting stock and 1% of the voting
stock of Highwoods Services, and by virtue of its ownership of Common Units,
Highwoods is considered to own its pro rata share of such stock. Neither
Highwoods nor the Highwoods Operating Partnership, however, own more than 1% of
the voting securities of Highwoods Services and the 10% test is satisfied.
Highwoods conducts its third-party fee-based services (i.e., leasing,
property management, real estate development, construction and other
miscellaneous services) through Highwoods Services. The Budget Bill includes a
proposal to restrict these types of activities conducted by REITs under current
law by expanding the ownership limitation from 10% of the voting securities of
an issuer to 10% of the vote or value of all classes of the issuer's stock.
Highwoods, therefore, could not own stock (either directly or indirectly
through the Highwoods Operating Partnership) possessing more than 10% of the
vote or value of all classes of any issuer's stock.
The Budget Bill proposal would be effective only with respect to stock
directly or indirectly acquired by Highwoods on or after the date of first
committee action. In the event that the first committee action occurs on or
before the date of the Merger, Highwoods could not acquire 10% of the vote or
value of any corporation in connection with the Merger unless such issuer
became a wholly owned subsidiary of Highwoods or is qualified as a REIT. In
addition, to the extent that Highwoods' stock ownership is grandfathered by
virtue of this effective date (e.g., the stock ownership in Highwoods
Services), that grandfathered status will terminate if the subsidiary
corporation engages in a trade or business that it is not engaged in on the
date of first committee action or acquires substantial new assets on or after
that date. Such restriction would adversely affect the ability to expand the
business of Highwoods Services.
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DESCRIPTION OF HIGHWOODS
General
Highwoods is a self-administered and self-managed REIT that began
operations through a predecessor in 1978. At March 31, 1998, Highwoods owned a
portfolio of 382 office and 148 industrial (including 80 service center)
properties encompassing approximately 33.9 million rentable square feet and 895
acres (and had agreed to purchase an additional 395 acres) of undeveloped land
suitable for future development. In addition, as of March 31, 1998, an
additional 32 properties, which will encompass approximately 3.6 million
rentable square feet, were under development. The Highwoods Properties are
located in 19 markets in North Carolina, Florida, Tennessee, Georgia, Virginia,
South Carolina, Maryland and Alabama. As of March 31, 1998, the Highwoods
Properties were 93% leased to approximately 3,400 tenants.
Highwoods conducts substantially all of its activities through, and
substantially all of its interests in the Highwoods Properties are held
directly or indirectly by, the Highwoods Operating Partnership. Highwoods is
the sole general partner of the Highwoods Operating Partnership and as of March
31, 1998, owned approximately 83% of the Common Units in the Highwoods
Operating Partnership. The remaining Common Units are owned by limited partners
(including certain officers and directors of Highwoods). Each Common Unit may
be redeemed by the holder thereof for the cash value of one share of Highwoods
Common or, at Highwoods' option, one share (subject to certain adjustments) of
Highwoods Common. With each such exchange, the number of Common Units owned by
Highwoods and, therefore, Highwoods' percentage interest in the Highwoods
Operating Partnership, will increase.
In addition to owning the Highwoods Properties, the Highwoods Development
Projects and the Highwoods Development Land, Highwoods provides leasing,
property management, real estate development, construction and miscellaneous
tenant services for the Highwoods Properties as well as for third parties.
Highwoods conducts its third-party fee-based services through Highwoods
Services, Inc., a subsidiary of the Highwoods Operating Partnership ("Highwoods
Services"), and Highwoods/Tennessee Properties, Inc., a wholly owned subsidiary
of Highwoods.
Highwoods is a Maryland corporation that was incorporated in 1994. The
Highwoods Operating Partnership is a North Carolina limited partnership formed
in 1994. Highwoods' and the Highwoods Operating Partnership's executive offices
are located at 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604,
and their telephone number is (919) 872-4924. Highwoods maintains offices in
each of its primary markets.
Operating Strategy
Upon completion of the Merger, Highwoods believes that it will continue to
benefit from the following factors:
Diversification. Since its initial public offering (the "IPO") in 1994,
Highwoods has significantly reduced its dependence on any particular market,
property type or tenant. At the time of the IPO, Highwoods' portfolio consisted
almost exclusively of office properties in the Research Triangle. As of March
31, 1998, Highwoods' in-service portfolio had expanded from 41 North Carolina
properties (40 of which were in the Research Triangle) to 530 properties in 19
markets concentrated in the Southeast. Based on March 1998 results,
approximately 30.5% of the rental revenue from the Highwoods Properties is
derived from properties in North Carolina (16.8% in the Research Triangle).
In October 1997, Highwoods significantly expanded its Florida operations
through its business combination with Associated Capital Properties, Inc.
("ACP"). In February 1997, Highwoods made a significant investment in the
suburban Atlanta market with the acquisition of the Century Center Office Park
and a business combination with Anderson Properties, Inc. Highwoods first
entered the Atlanta market, as well as four markets in Florida and six other
markets, through its September 1996 merger with Crocker Realty Trust, Inc.
("Crocker"). Prior to its merger with Crocker, Highwoods expanded into
Winston-Salem/Greensboro, North Carolina (the "Piedmont Triad") and Charlotte,
North Carolina through a merger with Forsyth Properties, Inc. ("Forsyth") and
also completed significant business combinations in Richmond, Virginia and
Nashville, Tennessee. Highwoods has focused on markets that, like the Research
Triangle, have strong demographic and economic characteristics.
Highwoods' strategy has been to assemble a portfolio of properties that
enables Highwoods to offer buildings with a variety of cost, tenant finish and
amenity choices that satisfy the facility needs of a wide range of tenants
seeking commercial space. This strategy led, in part, to Highwoods' combination
with Forsyth in February 1995, which added industrial and service center
properties (as well as additional office properties) to its suburban office
portfolio. Based on March 1998 results, approximately 91% of Highwoods' rental
revenue is derived from office properties and 9% is derived from industrial
properties.
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Highwoods has also reduced its dependence on any particular tenant or
tenants in any particular industry. Its tenants represent a diverse
cross-section of the economy. As of March 31, 1998, the 20 largest tenants of
the Highwoods Properties represented approximately 20.7% of the combined rental
revenue from the Highwoods Properties, and the largest single tenant accounted
for approximately 3.5% of such revenue.
Acquisition and Development Opportunities. Highwoods seeks to acquire
suburban office and industrial properties at prices below replacement cost that
offer attractive returns, including acquisitions of under-performing, high
quality properties in situations offering opportunities for Highwoods to
improve such properties' operating performance. Highwoods will also continue to
engage in the selective development of office and industrial projects,
primarily in suburban business parks, and intends to focus on build-to-suit
projects and projects where Highwoods has identified sufficient demand. In
build-to-suit development, the building is significantly pre-leased to one or
more tenants prior to construction. Build-to-suit projects often foster strong
long-term relationships between Highwoods and the tenant, creating future
development opportunities as the facility needs of the tenant increase.
Highwoods believes that it has several advantages over many of its
competitors in pursuing development and acquisition opportunities. Highwoods
has the flexibility to fund acquisitions and development projects from numerous
sources, including the private and public debt markets, proceeds from its
private and public equity offerings, its $430 million aggregate amount of
revolving loans, other bank and institutional borrowings and the issuance of
Common Units. Frequently, Highwoods acquires properties through the exchange of
Common Units in the Highwoods Operating Partnership for the property owner's
equity in the acquired properties. As discussed above, each Common Unit
received by these property owners is redeemable for cash from Highwoods or, at
Highwoods' option, shares of Highwoods Common. In connection with these
transactions, Highwoods may also assume outstanding indebtedness associated
with the acquired properties. Highwoods believes that this acquisition method
may enable it to acquire properties at attractive prices from property owners
wishing to enter into tax-deferred transactions. As of March 31, 1998, Common
Units had constituted all or part of the consideration for 239 properties
comprising 16.9 million rentable square feet and only 1,200 of such Common
Units have been redeemed for cash, totaling $35,000.
Another advantage is Highwoods' commercially zoned and unencumbered
Highwoods Development Land in existing business parks. As of March 31, 1998,
Highwoods owned 895 acres (and had agreed to purchase an additional 395 acres)
of Highwoods Development Land, approximately 1,100 acres of which have utility
infrastructure already in place.
Highwoods' development and acquisition activities also benefit from its
local market presence and knowledge. Highwoods' property-level officers have on
average over 18 years of real estate experience in their respective markets.
Because of this experience, Highwoods is in a better position to evaluate
acquisition and development opportunities. In addition, Highwoods'
relationships with its tenants and those tenants at properties for which it
conducts third-party fee-based services may lead to development projects when
these tenants or their affiliates seek new space. Also, its relationships with
other property owners for whom it provides third-party management services
generate acquisition opportunities.
Managed Growth Strategy. Highwoods' strategy has been to focus its real
estate activities in markets where it believes its extensive local knowledge
gives it a competitive advantage over other real estate developers and
operators. As Highwoods has expanded into new markets, it has continued to
maintain this localized approach by combining with local real estate operators
with many years of development and management experience in their respective
markets. Also, in making its acquisitions, Highwoods has sought to employ those
property-level managers who are experienced with the real estate operations and
the local market relating to the acquired properties, so that approximately
three-quarters of the rentable square footage of the Highwoods Properties has
been developed by Highwoods or is managed on a day-to-day basis by personnel
that previously managed, leased and/or developed these Highwoods Properties
prior to their acquisition by Highwoods.
Efficient, Customer Service-Oriented Organization. Highwoods provides a
complete line of real estate services to its tenants and third parties.
Highwoods believes that its in-house development, acquisition, construction
management, leasing and management services allow it to respond to the many
demands of its existing and potential tenant base, and enable it to provide its
tenants cost-effective services such as build-to-suit construction and space
modification, including tenant improvements and expansions. In addition, the
breadth of Highwoods' capabilities and resources provides it with market
information not generally available. Highwoods believes that the operating
efficiencies achieved through its fully integrated organization also provide a
competitive advantage in setting its lease rates and pricing other services.
Flexible and Conservative Capital Structure. Highwoods is committed to
maintaining a flexible and conservative capital structure that: (i) allows
growth through development and acquisition opportunities; (ii) provides access
to the private and public equity and debt markets on favorable terms; and (iii)
promotes future earnings growth.
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Highwoods and the Highwoods Operating Partnership have demonstrated a
strong and consistent ability to access the private and public equity and debt
markets. Since the IPO, Highwoods has completed 11 public offerings and two
private placements of its Highwoods Common, one public offering of 8 5/8%
Series A Cumulative Redeemable Preferred Shares, one public offering of 8%
Series B Cumulative Redeemable Preferred Shares, and one public offering of
4,000,000 Depositary Shares (each representing 1/10 of an 8% Series D
Cumulative Redeemable Preferred Share), raising total net proceeds of
approximately $1.5 billion, which were contributed to the Highwoods Operating
Partnership in exchange for additional partnership interests as required under
the Highwoods Operating Partnership Agreement. On December 2, 1996, the
Highwoods Operating Partnership issued $100 million of 6 3/4% notes due
December 1, 2003 and $110 million of 7% notes due December 1, 2006. On February
2, 1998, the Highwoods Operating Partnership issued $125 million of 6.835%
MandatOry Par Put Remarketed SecuritiesSM ("MOPPRSSM") due February 1, 2013 and
$100 million of 7 1/8% notes due February 1, 2008. On April 20, 1998, the
Highwoods Operating Partnership issued $200 million of 7 1/2% Notes due April
15, 2018.
On June 24, 1997, a trust formed by the Highwoods Operating Partnership
sold $100 million of Exercisable Put Option Securities ("X-POSSM"), which
represent fractional undivided beneficial interests in the trust. The assets of
the trust consist of, among other things, $100 million of Exercisable Put
Option Notes due June 15, 2011, issued by the Highwoods Operating Partnership
(the "Put Option Notes"). The X-POSSM bear an interest rate of 7.19% and mature
on June 15, 2004, representing an effective borrowing cost of 7.09%, net of a
related put option and certain interest rate protection agreement costs. Under
certain circumstances, the Put Option Notes could also become subject to early
maturity on June 15, 2004.
In addition, Highwoods has two unsecured revolving lines of credit
aggregating $430 million with a syndicate of lenders (the "Revolving Loans").
Interest accrued on borrowings under a $280 million Revolving Loan at an
average rate of LIBOR plus 100 basis points and under a $150 million Revolving
Loan at an average rate of LIBOR plus 90 basis points. As of May 13, 1998,
interest on the outstanding balance on the Revolving Loans was payable monthly
at a weighted average interest rate of 6.65%.
DESCRIPTION OF JCN
General
JCN is a real estate operating company engaged in the acquisition,
development, ownership, and management of a diversified portfolio of real
estate properties, principally located in the Kansas City, Missouri
metropolitan area. JCN's real estate development activities were initiated in
1902. JCN was incorporated in Missouri in 1908 and its principal office has
been at 310 Ward Parkway, Kansas City, Missouri since July 1930.
JCN is best known for its development, ownership, and management of the
Plaza, a prestigious shopping, entertainment and office district in Kansas
City. The Plaza is surrounded principally by single family residences,
condominiums and upscale apartments, many of which are owned by JCN. The Plaza
is generally regarded as the oldest major suburban shopping center in the
United States.
At December 31, 1997, JCN and its consolidated subsidiaries owned 16
retail centers consisting of approximately 2,500,000 square feet of retail
space (including basement space) occupied by approximately 400 tenants, 14
apartment communities (including a majority interest in a partnership owning a
Des Moines, Iowa area apartment complex) representing approximately 2,300
units, 31 office properties (including majority interests in partnerships
owning seven Des Moines, Iowa area office buildings) consisting of
approximately 1,462,000 square feet of space occupied by over 500 tenants, two
industrial and warehouse properties consisting of approximately 337,000 square
feet of space occupied by 48 tenants, three residential developments containing
169 lots available for sale, and over 1,000 acres available for residential and
commercial development, as well as complete or partial ownership in several
other minor properties. JCN also owns six unsold units in its Alameda Towers
condominium project.
JCN also owns an equity interest in eleven active entities whose holdings
are not consolidated with the financial statements of JCN. The largest of these
holdings are JCN's approximately 50% interest in six partnerships which own
properties in the Des Moines, Iowa area. At December 31, 1997, these
partnerships owned fifteen buildings consisting of 936,000 square feet of
offices, 200,000 square feet of industrial space, 26 acres currently under
development or ground lease, and approximately 80 acres to be developed. The 80
acres are located in four separate developments in the Des Moines, Iowa area.
Of the 80 acres, 34 acres are planned for additional industrial buildings in
two industrial parks, 8 acres are planned for office development upon the
exercise of an option by the sole tenant of the adjacent office building, and
38 acres are planned for development as an office complex with related retail
development. Approximately 52,400 square feet of speculative office space in
the Des Moines, Iowa area was started and completed in 1997 and the entire
building was leased to a single tenant. In addition, in 1997, approximately
60,000 square feet of speculative office space in the Des Moines, Iowa area was
started and substantially completed and is expected to be fully leased up
during 1998. Also in process in the Des Moines,
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Iowa area is the construction of a 160,000 square foot industrial building and
a 35,000 square foot retail center. Additional speculative industrial space
will be constructed in 1998 when the 160,000 square foot building is
substantially leased. There are also plans to construct approximately 47,000
square feet of speculative office space during 1998 in the Des Moines, Iowa
area and when it is significantly leased, additional speculative office space
will be constructed. In addition to the Des Moines, Iowa area properties, one
of JCN's eleven unconsolidated affiliates is a 40% interest in J.C. Nichols
Real Estate, a residential sales and brokerage business in Kansas City. J.C.
Nichols Real Estate also has an interest in an entity which owns a mortgage
origination company.
Business Strategy
Management strives to increase the equity value of JCN's income producing
portfolio by increasing the net operating income from existing properties,
increasing the number of properties in its portfolio, and by reducing the
amount of debt associated with its existing properties. The number of
properties in JCN's portfolio is expected to increase by both the acquisition
and development of revenue-producing properties, as well as by the acquisition
of land for development and resale principally in the Midwest, and
predominately in the Kansas City metropolitan area.
Management believes JCN's strategy of enhancing its existing portfolio of
properties and focusing initially on acquisitions and developments in Kansas
City and surrounding markets allows JCN to best capitalize on its reputation
for quality and its employees' in-depth knowledge and experience in those
markets. Management also believes that by developing, owning, and managing a
diverse portfolio of properties in a relatively small geographic area, it can
better control the overall character of JCN's developments and thus create
greater value.
Recent Developments
In August of 1997, JCN announced the outsourcing of its Kansas City area
apartment management function. Previously, JCN's employees had provided leasing
and management services for all Kansas City area apartment properties owned by
JCN. These functions are now performed by RAM Partners, Inc., an affiliate of
Post Properties, Inc. JCN believes that this strategic decision will result in
improved operating efficiency and profitability.
In November of 1997, JCN announced an agreement with Kessinger/Hunter and
Company, Inc. ("Kessinger/Hunter"), a long-standing Kansas City real estate
brokerage, management and development firm, to form a limited liability company
("LLC") in which JCN would initially own a 30% interest. The LLC will provide
services to previous Kessinger/Hunter clients, as well as management and
leasing for JCN's Kansas City area portfolio of office, industrial, and retail
centers, exclusive of the Plaza. The acquisition provides JCN an immediate
platform from which to grow its management, leasing, and brokerage services to
third party property owners and investors.
JCN's comprehensive Plaza redevelopment plan continues to progress. The
projects covered by this plan will be supplemented by tax increment financing
("TIF"). JCN has begun construction on Valencia Place, a project containing
approximately 270,000 square feet of Class A office space and 80,000 square
feet of retail space. JCN has preleased approximately 100,000 square feet of
the office space. JCN has also begun construction to re-position the Seville
Square building on the Plaza. The new Seville Square will be anchored by a
70,000 square foot theater complex with 15 screens. Plans for JCN's upscale 350
unit Plaza area apartment community continue to progress and construction is
expected to begin in 1998.
Competition
Substantially all of JCN's properties are located in the Kansas City
metropolitan area, except those held in its Iowa investment partnerships. The
Kansas City market area is a highly competitive one for real estate and real
estate services. JCN's retail properties face increasing competition from newer
upscale shopping centers, discount shopping centers, outlet malls, catalogues,
discount shopping clubs, and telemarketing. All of JCN's retail properties
overlap to some degree with the trade area of other shopping centers.
Renovations and expansions at existing competing centers as well as the
development of new centers in JCN's market area could negatively affect
revenues of JCN.
JCN's office building properties compete for tenants principally with
office buildings in the same general geographic location. In many areas where
JCN's office buildings are located, there have been new office buildings built
and planned office building construction which have and will continue to
increase the supply of rentable office space, potentially placing downward
pressure on market rental rates.
JCN's apartment properties compete with numerous other apartment
properties within the same market area. Those other apartment properties could
have a material effect on the rental rates charged by JCN, as well as JCN's
ability to rent its apartment properties.
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JCN competes directly with developers and other buyers in the acquisition
of development sites for retail, office, and apartment development and for
financing sources.
With respect to all of its real estate operations, JCN competes for
tenants and property acquisitions with others who may have greater resources
than JCN and whose management may have more experience in operating and
acquiring properties than JCN's management.
Regulation and Legislation
Federal, state, and local statutes and regulations relating to
environmental protection have not had a material impact on the businesses of
JCN. However, existing properties and future development of other opportunities
by JCN may require additional capital and other expenditures in order to comply
with such statutes and regulations. It is impossible at this time to predict
with any certainty the magnitude of any such expenditures or the long range
effect, if any, on JCN's operations. JCN is currently not aware of any material
violation of any applicable environmental statute or regulation with respect to
any of its properties owned, managed, or held for development.
The federal government and the states in which JCN operates have adopted
handicapped facilities and energy laws and regulations impacting the use and
development of real estate. These laws and regulations may operate to reduce
the number, attractiveness, and investment potential of properties and
developments available to JCN. JCN has reviewed the properties it owns or in
which it has an interest to determine the extent and amount of capital
expenditures necessary to comply with the aforementioned laws and regulations.
These expenditures, which will be incurred by JCN over the course of the next
several years as modifications to such properties are undertaken, are not
expected to be material in any single year.
General Conditions
General economic conditions and trends, including interest rates,
inflation, availability of credit, real estate trends, construction costs,
income tax laws, governmental regulations and legislation, increases or
decreases in operating expenses, zoning laws, population trends, and the
ability of JCN to attract tenants and purchasers for its properties, among
other factors, will affect JCN's success.
Generally, JCN's business and that of the industry is not seasonal in
nature.
Reliance on Customers or Tenants
None of JCN's business segments depends upon a sole customer or tenant or
a few customers or tenants, the loss of which would materially adversely affect
the business or financial condition of JCN. No single customer or tenant
accounts for 5% or more of the consolidated revenues of JCN.
Employees
JCN and consolidated subsidiaries directly employed 159 full or part-time
employees as of December 31, 1997 as compared to 300 at December 31, 1996. The
decrease is primarily a result of outsourcing the management and leasing
functions for JCN's Kansas City area apartment properties and the agreement
with Kessinger/Hunter in which the newly created LLC will perform the
management and leasing functions for JCN's Kansas City area portfolio of
office, industrial, and retail centers, exclusive of the Plaza.
Properties
JCN's income producing properties include retail centers, apartments,
office buildings, industrial properties, and mixed-use projects. JCN is also
engaged in the development and sale of land for residential and commercial use.
The number of properties in JCN's portfolio is expected to increase by both the
acquisition and development of revenue-producing properties as well as by the
acquisition of land for development and resale principally in the Midwest, and
predominantly in the Kansas City Metropolitan Area. Management of JCN has
sought to reduce the amount of debt associated with existing properties;
however, no policy exists setting a limit on the number or amount of mortgages
that may be placed on any one property. JCN seeks to acquire assets primarily
for their revenue-producing capability and has no specific policy as to the
amount or percentage of assets invested in any specific property. The objective
of JCN management is to earn a normalized annual cash flow rate of return of at
least 8.5% on new acquisitions of income-producing properties and higher rates
of return on properties that JCN develops. JCN has in the past entered, and may
in the future enter, into partnerships or invest in other entities involved in
real estate activities. JCN has entered into partnerships related to its Des
Moines, Iowa investments, and has invested in Kessinger/Hunter and J.C. Nichols
Real Estate. Any such future investment will be based on its ability to provide
an appropriate rate of return to JCN. JCN does not seek to invest in securities
of other companies.
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<TABLE>
<CAPTION>
Percent
Ownership Company's Year Year Land area Rentable leased at
Name/location interest ownership developed acquired (acres) area (sq. ft) 12/31/97
- ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
RETAIL
Kansas City, Missouri
Country Club Plaza
(Retail only, includes
basement space)
Millcreek Block ...................... Fee 100% 1920 1906-1910 0.971 51,114 78%
Triangle Block ....................... Fee 100 1925 1906-1910 0.435 25,634 100
Balcony Block ........................ Fee 100 1925 1906-1910 1.068 38,571 100
Macy Building ........................ Fee 100 1926 1906-1910 0.555 71,365 100
Esplanade Block ...................... Fee 100 1928 1906-1910 1.838 145,694 100
Plaza Central ........................ Fee 100 1958 1906-1910 1.478 9,653 88
Theatre Block ........................ Fee 100 1928 1906-1910 1.223 99,699 87
Swanson Block ........................ Fee 100 1967 1906-1910 1.373 78,020 100
Halls Building ....................... Fee 100 1964 1906-1910 1.346 73,680 100
Nichols Block ........................ Fee 100 1930 1906-1910 1.161 59,085 100
Time Block ........................... Fee 100 1929 1906-1910 2.859 249,844 100
48th & Penn .......................... Fee 100 1948 1906-1910 0.560 37,654 76
Seville Shops West ................... Fee 100 1980 1906-1910 2.972 19,517 100
Plaza Savings South .................. Fee 100 1948 1906-1910 0.853 39,967 100
Court of the Penguins ................ Fee 100 1945 1975 0.678 28,707 92
Seville Square ....................... Fee 100 1945 1975 0.832 90,838 36
Colonial Shops ......................... Fee 100 1907 1907 0.517 14,160 100
Crestwood Shops ........................ Fee 100 1932 1923 1.079 20,261 100
Brookside Shops (Retail Only) .......... Fee 100 1919 1920 10.000 159,254 100
Romanelli Shops ........................ Fee 100 1925 1925 1.500 24,360 98
Red Bridge Shops (Retail Only) ......... Fee 100 1959 1959 21.592 153,015 97
Romanelli Annex (Retail Only) Fee 100 1963 1993 1.000 4,500 100
Shawnee Mission, Kansas
Westwood Shops ......................... Fee 100 1926 1926 0.626 5,773 100
Fairway Shops .......................... Fee 100 1940 1940 3.558 49,582 97
Prairie Village Shops (Retail Only) Fee 100 1948 1948 21.375 363,311 97
Corinth Square Shops ................... Fee 100 1962 1955 24.987 231,550 100
Kenilworth Shops ....................... Fee 100 1965 1972 1.788 13,136 100
Corinth Shops South .................... Fee 100 1953 1953 6.880 86,390 93
Trailwood Shops ........................ Fee 100 1968 1972 8.855 57,583 100
Trailwood III Shops .................... Fee 100 1986 1972 2.946 25,279 72
96th & Nall Shops ...................... Fee 100 1976 1981 1.027 7,202 100
Shannon Valley Shops ................... Fee 100 1988 1988 11.378 98,127 99
Oak Park Mall Land Lease ............... Fee 100 1959 1959 109.000 N/A 100
Georgetown Market Place ................ Fee 100 1974 1965 12.191 101,613 98
INDUSTRIAL
Kansas City, Missouri
Bannister Business Center .............. Fee 100 1985 1985 4.365 32,346 65
Shawnee Mission, Kansas
Quivira Business Park
Building A ........................... Fee 100% 1975 1973 1.695 20,848 100%
Building B ........................... Fee 100 1973 1973 2.064 12,960 75
Building C ........................... Fee 100 1973 1973 1.589 20,778 100
Building D ........................... Fee 100 1973 1973 1.597 20,798 97
Building E ........................... Fee 100 1973 1973 2.156 28,797 88
Building F ........................... Fee 100 1973 1973 2.346 29,876 100
Building G ........................... Fee 100 1973 1973 1.913 21,136 100
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Percent
Ownership Company's Year Year Land area Rentable leased at
Name/location interest ownership developed acquired (acres) area (sq. ft) 12/31/97
- ------------------------------------- ----------- ------------- ----------- ---------- ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Building H ....................... Fee 100 1973 1973 2.485 26,060 100
Southwestern Bell ................ Fee 100 1973 1973 3.127 58,644 0
Building J ....................... Fee 100 1973 1973 2.953 46,764 100
Building K ....................... Fee 100 1985 1965 1.179 9,017 100
Building L ....................... Fee 100 1985 1965 1.223 8,891 100
Urbandale, Iowa
Meredith Drive ..................... Fee 49.5(1) 1986 1985 13.910 200,000 100
OFFICE
Kansas City, Missouri
Country Club Plaza (Office only)
Millcreek Block .................. Fee 100 1925 1925 N/A 11,463(2) 74
Balcony Block .................... Fee 100 1928 1928 N/A 10,096(2) 97
Esplanade Block .................. Fee 100 1945 1945 N/A 37,133(2) 92
Theatre Block .................... Fee 100 1928 1928 N/A 29,740(2) 100
Nichols Block .................... Fee 100 1938 1938 N/A 13,310(2) 100
Time Block ....................... Fee 100 1945 1945 N/A 25,964(2) 95
Parkway Building ................... Fee 100 1906-1910 1955 0.588 26,365(2) 96
Brookside (Office Only) ............ Fee 100 1919 1919 N/A 6,796(2) 100
Romanelli Annex (Office Only) Fee 100 1963 1993 N/A 7,948 100
Two Brush Creek .................... Fee 100 1983 1983 1.500 63,325 84
One Ward Parkway ................... Fee 100 1980 1980 1.500 54,580(2) 97
Red Bridge Professional ............ Fee 100 1972 1976 1.428 40,693(2) 95
Park Plaza ......................... Fee 100 1983 1983 0.952 80,315 99
4900 Main (includes vacant
commercial ground) ............... Fee 100 1986 1985 5.000 182,153 100
Board of Trade ..................... Fee 49(1) 1966 1966 3.000 147,642(2) 99
Plaza West (includes vacant
commercial ground) ............... Fee 12.5(1) 1988 1989 4.140 257,932 94
Junior League Building ............. Fee 12.5(1) 1928 1989 0.368 5,400 100
Shawnee Mission, Kansas
Prairie Village (Office Only) ...... Fee 100 1956 1956 1.500 9,265(2) 51
Corinth Office Building ............ Fee 100 1960 1984 2.142 45,600(2) 100
Corinth Executive Building ......... Fee 100 1973 1986 3.638 44,441(2) 98
Nichols Building ................... Fee 100 1978 1979 3.941 37,964(2) 100
Prairie Village Office Center ...... Fee 100 1960 1981 4.443 69,002(2) 90
Brymar Building .................... Fee 100 1968 1984 1.500 55,890 100
7315 Building ...................... Fee 100 1978 1975 4.322 44,441(2) 100
Fairway West ....................... Fee 100(3) 1983 1948 5.483 67,519 84
Fairway North ...................... Fee 100(3) 1985 1948 4.141 61,225 93
Oak Park Bank Building ............. Fee 100 1976 1978 4.038 28,555(2) 97
Des Moines, Iowa
Terrace Place ...................... Fee 50%(1) 1987 1987 1.500 51,058 63
West Des Moines, Iowa
Crestwood Building ................. Fee 90(1) 1987 1987 3.208 30,128 89%
Highland Building .................. Fee 90(1) 1987 1987 6.120 72,637 86
Waterford Building ................. Fee 60(1) 1990 1988 4.414 53,459 92
Edgewater Building ................. Fee 60(1) 1989 1988 8.629 102,400 97
Veridian Building .................. Fee 60(1) 1989 1988 7.480 78,115 82
Sunset Building .................... Fee 60(1) 1989 1988 1.763 10,727 100
Norwest Day Care Center ............ Fee 50(1) 1994 1994 1.030 6,500 100
Wedgewood Building ................. Fee 50(1) 1994 1994 5.170 50,020 100
Coronado Building .................. Fee 50(1) 1994 1994 2.500 25,512 100
</TABLE>
63
<PAGE>
<TABLE>
<CAPTION>
Ownership Company's Year
Name/location interest ownership developed
- ------------------------------------- ----------- ----------- -----------
<S> <C> <C> <C>
Bristol Building ................... Fee 50(1) 1992
Ashford Building I ................. Fee 50(1) 1993
Ashford Building II ................ Fee 50(1) 1994
Augusta Building ................... Fee 50(1) 1994
Neptune Building ................... Fee 85(1) 1986
Norwest Card Services Building ..... Fee 50(1) 1993
Norwood Building I ................. Fee 50(1) 1996
Norwood Building II ................ Fee 50(1) 1996
Palisade Building .................. Fee 50(1) 1983
Cambridge Building ................. Fee 50(1) 1997
Brookview Building ................. Fee 50(1) 1997
APARTMENTS
Kansas City, Missouri
Coach House South .................. Fee 100(3) 1986-1987
Coach House ........................ Fee 100(3) 1984
Coach Lamp ......................... Fee 100 1961
Neptune ............................ Fee 100 1988
Regency ............................ Fee 100 1960
Sulgrave ........................... Fee 100 1967
Park Lane .......................... Fee 100 1924
Plaza North:
Penn Wick ........................ Fee 100 1960's
Cole Gardens ..................... Fee 100 1960
Tama ............................. Fee 100 1960's
Wornall Road ..................... Fee 100 1918
Saint Charles .................... Fee 100 1922
Shawnee Mission, Kansas
Corinth Gardens .................... Fee 100 1961
Kenilworth ......................... Fee 100 1965
Corinth Place ...................... Fee 100(3) 1987
Mission Valley ..................... Fee 100 1964
Corinth Paddock .................... Fee 100 1973
Johnston, Iowa
Winwood Apartments ................. Fee 65(1) 1986-1987
REAL ESTATE LOTS AND
MISCELLANEOUS
Shawnee Mission, Kansas
Whitehorse (Residential) ........... Fee 100% 1994
Whitehorse (Unplatted) ............. Fee 100 N/A
Whitehorse (Commercial &
Multifamily) ..................... Fee 100 N/A
Green Meadows ...................... Fee 100 1986-1996
Lionsgate (Residential-
under contract) .................. Fee 100 N/A
Lionsgate (Commercial) ............. Fee 100 N/A
Woodsonia (Residential) ............ Fee 100 1985-1996
Woodsonia (Unplatted) .............. Fee 100 N/A
Woodsonia (Commercial and
Residential) ..................... Fee 100 1985-1996
Clear Creek ........................ Fee 100 N/A
<CAPTION>
Percent
Year Land area Rentable leased at
Name/location acquired (acres) area (sq. ft) 12/31/97
- ------------------------------------- ------------ --------------------- --------------- ----------
<S> <C> <C> <C> <C>
Bristol Building ................... 1992 5.210 51,400 100
Ashford Building I ................. 1993 3.990 41,400 100
Ashford Building II ................ 1994 4.110 41,400 100
Augusta Building ................... 1994 4.930 50,800 70
Neptune Building ................... 1986 6.530 61,430 100
Norwest Card Services Building ..... 1993 35.250 272,490 100
Norwood Building I ................. 1996 4.420 42,400 90
Norwood Building II ................ 1996 4.420 42,400 80
Palisade Building .................. 1996 18.000 147,215 99
Cambridge Building ................. 1997 5.320 52,400 0
Brookview Building ................. 1997 6.460 60,640 0
APARTMENTS
Kansas City, Missouri
Coach House South .................. 1986-1987 35.276 489 Units 98
Coach House ........................ 1984 8.930 160 Units 96
Coach Lamp ......................... 1962 8.500 158 Units 96
Neptune ............................ 1988 N/A 96 Units 98
Regency ............................ 1976 1.150 131 Units 96
Sulgrave ........................... 1976 1.410 144 Units 95
Park Lane .......................... 1975 0.300 89 Units 100
Plaza North:
Penn Wick ........................ 1987 0.150 6 Units 100
Cole Gardens ..................... 1986 0.200 8 Units 88
Tama ............................. 1979 0.140 7 Units 86
Wornall Road ..................... 1968 0.220 17 Units 94
Saint Charles .................... 1971 0.150 12 Units 100
Shawnee Mission, Kansas
Corinth Gardens .................... 1995 3.722 52 Units 100
Kenilworth ......................... 1972 17.219 246 Units 97
Corinth Place ...................... 1987 7.888 76 Units 94
Mission Valley ..................... 1972 5.300 89 Units 95
Corinth Paddock .................... 1995 10.128 126 Units 95
Johnston, Iowa
Winwood Apartments ................. 1985 31.237 418 Units 90
REAL ESTATE LOTS AND
MISCELLANEOUS
Shawnee Mission, Kansas
Whitehorse (Residential) ........... 1983 33.000(lots) N/A N/A
Whitehorse (Unplatted) ............. 1984 76.600 N/A N/A
Whitehorse (Commercial &
Multifamily) ..................... 1983 26.600 N/A N/A
Green Meadows ...................... 1984 85.000(lots) N/A N/A
Lionsgate (Residential-
under contract) .................. 1989 64.000 N/A N/A
Lionsgate (Commercial) ............. 1989 109.200 N/A N/A
Woodsonia (Residential) ............ 1981 51.000(lots) N/A N/A
Woodsonia (Unplatted) .............. 1981 16.450 N/A N/A
Woodsonia (Commercial and
Residential) ..................... 1981 67.800 N/A N/A
Clear Creek ........................ 1981 371.000 N/A N/A
</TABLE>
64
<PAGE>
<TABLE>
<CAPTION>
Percent
Ownership Company's Year Year Land area Rentable leased at
Name/location interest ownership developed acquired (acres) area (sq. ft) 12/31/97
- ----------------------------------- ----------- --------------- ----------- ------------ ----------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Kansas City, Missouri
Alameda Towers (10
condominiums for sale) ......... Fee 100 1988-1996 1988 10 Units N/A N/A
54 Rental Houses ................. Fee 100 N/A 1928-1989 10.800 N/A 43%
Vacant Commercial Land and Land
Leases ......................... Fee 100 1974 1954-1972 49.400 N/A 100
Building Lease ................... Fee 100 N/A 1929 2.928 1,200 100
Lee's Summit, Missouri
Lakewood Sales Office (includes
vacant residential land) ....... Fee 100 1975 1993 8.738 1,363 100
Shawnee Mission, Kansas
Vacant Commercial Land and Land
Leases ......................... Fee 100 1956-1972 1956-1972 237.790 N/A 100
Corinth Place Villas (2 rental
condominiums) .................. Fee 100 1989 1957 0.267 N/A 100
Farm House and Buildings ......... Fee 100 1940 1981-1983 N/A N/A N/A
Olathe, Kansas
Land Leases ...................... Fee 100 1960 1995 1.070 N/A 100
Osage City, Kansas
Manufactured Homes Plant ......... Fee 100(4) 1985 1985 29.800 N/A N/A
Stone County, Missouri
Ozark Mountain Village Lots ...... Fee 100 1986-1995 1986 60.000 N/A N/A
Miami County, Kansas
810 Acre Farm (Someday, Inc.) .... Fee 100 N/A 1994 810.000 N/A 100
West Des Moines, Iowa
Vacant Commercial Land ........... Fee 50(1) N/A 1984-1985 44.370 N/A N/A
Land Lease ....................... Fee 50(1) N/A 1984 8.000 N/A N/A
Urbandale, Iowa
Vacant Commercial Land ........... Fee 49.5%(1) N/A 1985 12.000 N/A N/A
Land Lease ....................... Fee 50(1) N/A 1997 9.550 N/A 100
Vacant Commercial Land ........... Fee 50(1) N/A 1997 31.690 N/A N/A
St. Petersburg, Florida
Vacant Land ...................... Fee 100% N/A 1990 0.100 N/A N/A
Women's Tennis Association ....... Fee 50(1) 1990 1990 0.750 133,697 99
</TABLE>
- ---------
(1) The indicated percentage interest in the property reflects the interest of
JCN in the entity that owns the property.
(2) This square footage represents useable rather than rentable square
footage.
(3) JCN shares 50% of the cash flow from these properties with an outside
company providing credit enhancement support related to the financing of
these properties.
(4) JCN owns a 99% profit-sharing interest and a 100% loss-sharing interest in
the partnership owning this facility.
In the opinion of management, all properties of JCN listed above are
adequately insured.
JCN's only property that provided 10% or more of total 1997 rental income
or 10% or more of the total gross book value of land and building assets of JCN
at December 31, 1997 is the Plaza, when the multiple blocks of the Plaza are
considered to be a single property.
65
<PAGE>
The following table summarizes the principal types of business located on
the Plaza at December 31, 1997, and the percentage of total square footage
occupied by each principal type of business.
<TABLE>
<CAPTION>
Type of business % of total square footage
- ---------------------------------- --------------------------
<S> <C>
Anchor (Department Stores) ..... 23%
Miscellaneous Retail ........... 13
Office Space ................... 15
Restaurants and Food ........... 14
Apparel ........................ 11
Specialty Items ................ 10
Vacant Space ................... 6
Bookstores ..................... 3
Home Accessories ............... 3
Art Galleries .................. 2
--
Total .......................... 100%
===
</TABLE>
The following table summarizes the Plaza's occupancy rates and average
rental rates per square foot (showing only "minimum" rents or rents excluding
the percentage component and operating expense recoveries) for the last five
years. These figures include both the retail and office portions of the Plaza.
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Occupancy Percentage ............... 95% 96% 95% 93% 94%
Average Rental Rate Per Square Foot
(Exclusive of Basement Space) .... $ 12.02 $ 11.45 $ 11.29 $ 10.83 $ 10.20
</TABLE>
The following table sets forth for each of the next ten years and all
years thereafter (i) the number of leases on the Plaza that expire in each
period; (ii) the square feet covered by such expiring leases (excluding
basement space); (iii) the gross annual minimum rent revenue represented by
such leases; and (iv) the percentage of total gross annual minimum rent revenue
from such expiring leases based on December 31, 1997 rents. No single tenant
leases more than ten percent of the total rentable square footage at the Plaza.
<TABLE>
<CAPTION>
% of total
annualized
No. of Approximate Annualized minimum minimum rent
leases leased area rent under represented
Date expiring in square feet expiring leases by expiring leases
- ------------------ ---------- ---------------- -------------------- -------------------
<S> <C> <C> <C> <C>
1998 ........... 68 124,188 $ 1,173,739 10%
1999 ........... 27 130,791 983,971 8
2000 ........... 32 84,799 1,564,752 13
2001 ........... 22 68,752 1,214,220 10
2002 ........... 17 34,976 736,863 6
2003 ........... 10 54,793 1,043,162 9
2004 ........... 9 50,439 859,905 7
2005 ........... 10 42,920 691,964 6
2006 ........... 9 43,050 856,334 7
2007 ........... 10 38,877 512,811 5
Thereafter ..... 17 235,433 2,217,364 19
-- ------- ------------ --
Total .......... 231 909,018 $ 11,855,085 100%
=== ======= ============ ===
</TABLE>
The following table sets forth tax information for the Plaza.
<TABLE>
<CAPTION>
Federal Rate of 1997
tax basis depreciation Method Life (in years) property taxes
-------------- -------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Plaza ...... $56,208,876 2%-33% Straight Line 3-40 $ 1,756,154
</TABLE>
JCN is moving forward with three of the projects included in the
comprehensive Plaza redevelopment plan (which is supplemented by TIF).
66
<PAGE>
Valencia Place
Valencia Place, located on the Plaza, will include 270,000 square feet of
Class A office space, approximately 80,000 square feet of retail space, and
approximately 1,450 new parking spaces. JCN has preleased approximately 100,000
square feet of the office space. JCN anticipates that the cost to build the
project will be approximately $64 million, excluding any financing costs. The
parking related aspects of the project will be supplemented by a TIF bond
providing net proceeds of approximately $21 million. Due to the Merger
Agreement, JCN has not secured the additional financing necessary to fund
expenditures on this project beyond 1998.
Seville Square
The restoration of the 90,000 square foot Seville Square building and 735
space parking garage on the Plaza will produce approximately 29,000 additional
rentable square feet and an additional 500 parking spaces. The building will be
anchored by a 70,000 square foot, 15 screen multiplex theater, a lease for
which has been executed. JCN anticipates that the rehabilitation will cost
approximately $28 million and will be initially financed by JCN's current cash
reserves.
Luxury Apartments
JCN intends to break ground in 1998 on its 350 unit luxury apartment
community located south of the Plaza. JCN anticipates that the cost to build
the project will be approximately $48 million, excluding any financing costs.
Due to the Merger Agreement, JCN has not secured the financing necessary to
advance the project beyond the site preparation phase.
Legal Proceedings
On April 20, 1995, a shareholder derivative lawsuit was filed in which
JCN, each of the then existing members of the JCN Board of Directors, and the
Bowser Partnership, an entity controlled by and believed to be wholly owned by
the former chief executive officer of JCN, were named as defendants. Among
other things, the plaintiffs alleged a breach of fiduciary duties by the then
existing directors of JCN and alleged that certain then existing officers of
JCN had engaged in insider transactions from which they benefited personally at
the expense of JCN. Specifically, the plaintiffs alleged that the former chief
executive officer and former chief financial officer of JCN: (i) acquired in a
series of transactions certain real property and other assets from JCN without
paying fair value therefor; (ii) conveyed real property and other assets to JCN
in exchange for assets of far greater value; (iii) caused JCN to make loans and
investments unrelated to the business of JCN and intended for their personal
benefit; and (iv) failed to disclose to or attempted to conceal certain of the
foregoing matters from the other members of the JCN Board of Directors. The
other members of the JCN Board of Directors were named as defendants because of
their alleged failure to identify and prevent the foregoing actions.
This litigation was followed by a lawsuit entitled Medina, et al. v.
McCarthy, et al. (the "Medina Litigation") and initiated on behalf of the
beneficiaries of the ESOT against many of those defendants, including JCN,
named in the shareholder derivative lawsuit. The ESOT beneficiaries alleged
that the foregoing transactions resulted in damages to them because of the
significant interest in common stock of JCN held by the ESOT.
After completion of an internal investigation by a committee of outside
directors of JCN, JCN then filed a lawsuit against many of the defendants named
in the shareholder derivative lawsuit. All of such legal actions were
consolidated in the United States District Court for the Western District of
Missouri (the "Court"), where certain litigants, including JCN, requested,
among other things, that the Court rescind certain transactions to which
individuals who were then officers or directors of JCN were a party.
The consolidated litigation ended when JCN and the other parties thereto
entered into a Mutual Release and Settlement Agreement dated as of June 30,
1995 ("Settlement Agreement"). The parties to the Settlement Agreement included
the shareholders who had initiated the derivative litigation, JCN, the ESOT
beneficiaries that had initiated the litigation on behalf of all ESOT
participants, all of the individuals who were then directors of JCN, four
former directors of JCN who were on the JCN Board of Directors at the time of
certain transactions that were, in part, the subject of the litigation, the
individuals who were at various times prior to the Settlement Agreement the
trustees of the ESOT, certain individuals and entities related to or under the
control of the former chief executive officer and former chief financial
officer of JCN, and SunChase Capital, Inc. and Realty Capital Company, two
outside entities that had entered into a business arrangement with JCN prior to
the Settlement Agreement. The provisions of the Settlement Agreement that are
material to JCN, and in parenthesis, the impact of each such provision on JCN's
recognition of $19.6 million in net litigation settlement expense in 1995 are
as follows: (i) JCN received, in total, $6.6 million in cash from the insurance
companies providing director and officer liability insurance and a fiduciary
policy ($6.6 million income); (ii) JCN agreed to indemnify the then existing
directors and former
67
<PAGE>
directors for their litigation expenses and JCN agreed to pay all attorneys'
fees, costs and expenses incurred on behalf of the shareholders initiating the
shareholder derivative litigation and on behalf of the ESOT beneficiaries ($8.1
million expense); (iii) the Bowser Partnership conveyed to JCN 125,242 shares
(pre-split) of stock of JCN acquired by that partnership from the ESOT, and the
indebtedness owed by the Bowser Partnership to JCN was deemed satisfied (no
effect); (iv) all rights of the Bowser Partnership and other entities pursuant
to an option agreement entered into with the ESOT were forfeited (no effect);
(v) the former chief executive officer of JCN conveyed to JCN 5,719 shares
(pre-split) of stock of JCN ($4.3 million income); (vi) the former chief
executive officer of JCN conveyed to JCN 6,508 shares of stock of JCN that were
pledged as collateral for an obligation owed to another defendant in the
litigation ($4.9 million income), and JCN agreed to pay approximately $6.1
million to acquire such shares ($6.1 million expense); (vii) JCN agreed to pay
$3.6 million to the former chief executive officer of JCN ($3.6 million
expense), indebtedness owed by such individual or other individuals to JCN or
its subsidiaries, in the approximate amount of $8.1 million, was canceled ($5.6
million expense, net of reserves at December 31, 1994 of $2.5 million), and
$1.1 million of obligations of JCN to such individuals was cancelled ($1.1
million income); (viii) JCN received title to six properties from an entity
controlled by the former chief executive officer of JCN and indebtedness owed
to JCN relating to such properties was cancelled (no effect); (ix) JCN received
a new secured note in the approximate amount of $1.2 million from an entity
affiliated with the former chief financial officer of JCN in replacement of
accounts receivable of the same amount (no effect); (x) the former chief
financial officer of JCN agreed to provide to JCN the benefits of stock
ownership of certain stock of an entity affiliated with JCN (no effect); (xi)
JCN agreed to transfer 8,500 shares (pre-split) of stock received from the
Bowser Partnership and to pay $2 million to the ESOT or the beneficiaries of
the ESOT ($13.1 million expense); (xii) JCN agreed to appoint an independent
institutional trustee for the ESOT. The transfers made by the Bowser
Partnership pursuant to the Settlement Agreement were deemed appropriate by the
parties thereto because of the benefits derived through that entity by the
former chief executive officer of JCN.
A summary of the foregoing litigation settlement expenses is set forth in
note 11 to the consolidated financial statements of JCN.
Except for those involving the ESOT, nearly all transactions, conveyances,
payments, and debt extinguishment required by the Settlement Agreement were
completed by November 30, 1995. As part of the Settlement Agreement, JCN was
given the option to submit to the IRS a request for a private letter ruling on
matters related to the ESOT pursuant to the Settlement Agreement. On August 1,
1997 JCN entered into a closing agreement with the Internal Revenue Service. In
addition to the payment of 680,000 shares and $2.0 million plus interest, JCN
agreed to pay approximately $326,000 to the ESOT as an adjustment to a 1992
dividend allocation. All amounts will be allocated pursuant to the Settlement
Agreement and subject to the decision in the Interpleader action (discussed
below). JCN also agreed to make a nondeductible payment of $585,000 to the IRS.
The IRS agreed, among other things, not to assert that the events that were the
subject of the Settlement Agreement disqualified JCN's Employee Stock Ownership
Plan ("ESOP") or gave rise to liability for prohibited transaction excise
taxes. The IRS also agreed that JCN may deduct in full the value of the
settlement payment to the ESOT and that such payment and the method of
allocating it will not adversely affect the tax qualification of the ESOP.
Additionally, JCN agreed to deposit a portion of the settlement payment (59,413
shares and $58,064, plus accrued interest) with the Court and requested that
the Court determine the proper payee or payees. On August 15, 1997, JCN paid to
the ESOT and to the Court a total of 679,999 shares of JCN's Common and
$2,326,000, plus certain accrued interest (one share was converted to cash).
On August 29, 1997, JCN filed a Complaint for Interpleader and Declaratory
Relief with the Court. The interpleader portion of the complaint seeks the
adjudication of competing interests in the 59,413 shares of JCN's common stock
and $58,064, plus interest, discussed above. JCN asked the Court to resolve the
disagreement among various parties as to whether, pursuant to the Settlement
Agreement, the stock and cash should be paid directly to the ESOT or to nine
individual defendants named in the interpleader action.
In the same action, JCN also sought a ruling of the Court regarding
whether the Settlement Agreement requires the vesting provisions of the ESOP
plan documents to be amended to provide that the Medina Litigation plaintiff
class members be 100% vested in the stock and cash allocated in their ESOP
accounts pursuant to the Settlement Agreement. JCN named as defendants in this
proceeding certain ESOP participants who had raised an issue as to vesting of
the Settlement Agreement proceeds. JCN is seeking certification of a defendant
subclass consisting of those members of the Medina Litigation plaintiff class
who are not 100% vested in their participation accounts in the ESOP.
In response to such interpleader and declaratory relief action, various
defendants in the initial interpleader and declaratory relief action and the
original Medina Litigation filed motions to enforce the Settlement Agreement.
On October 3, 1997, a group of former JCN employees who were not 100% vested in
the ESOP at the time their employment with JCN was terminated filed a motion to
enforce the Settlement Agreement. In such motion, the employees requested that
the Court hold
68
<PAGE>
that all class members are fully vested in the settlement proceeds allocated to
their participation accounts in the ESOP. The Court sustained this motion on
March 24, 1998. JCN's former chief executive officer and his daughter also
filed a motion to enforce the Settlement Agreement and requested that a certain
portion of the shares and cash deposited by JCN with the Court be allocated to
them in the ESOT or alternatively, be paid to them directly. On April 1, 1998,
the Court ruled that the 59,413 shares and the $58,064, plus accrued interest,
deposited by JCN with the Court pursuant to the Settlement Agreement be paid
outside the ESOT directly to the nine individual defendants named in the
interpleader action.
Four other ESOP participants have filed a separate Motion to Interpret and
Enforce the Settlement Agreement and for Preliminary Injunction (the
"Participant Motion"). The relief sought by the Participant Motion included:
(i) a request that the Court order JCN to cause an interim appraisal in order
to allocate and to distribute stock to eligible ESOP participants in a manner
not provided by the ESOP's plan and trust documents at the time of such motion;
(ii) an order enjoining JCN from applying the provisions of its shareholders'
rights plan to a sale by the ESOT Trustee of its shares of JCN Common to one
party; (iii) an order requiring the 59,413 shares and the $58,064, plus accrued
interest, deposited by JCN with the Court to be paid into the ESOT and
allocated only to certain ESOP beneficiaries; (iv) an order enjoining the
operation of the terms of the ESOP plan documents which provide that upon
listing by JCN on an established securities exchange that JCN will no longer
have the obligation to pay cash to ESOP participants in exchange for JCN's
stock that they may receive from an ESOT distribution. A hearing date on the
Participant Motion has not been set.
JCN filed as a plaintiff on December 22, 1995, a petition against its
former attorney, Charles Schleicher, and the law firm of Schleicher Latz, P.C.
alleging certain breaches of fiduciary duties and obligations as an attorney
and the attorneys for JCN, and alleging certain failures in performance of
duties as attorney and attorneys for JCN. The suit against Mr. Schleicher and
his law firm was filed in the Circuit Court of Jackson County, Missouri. The
Settlement Agreement described above limits the potential recovery realizable
by JCN to $2.0 million. The actual amount recovered by JCN, by settlement or
otherwise, may be substantially less than such amount. This litigation has not
progressed, as the parties have been attempting to settle the matter.
JCN was named as a defendant in a complaint filed by Petula Associates
("Petula") in December 1996 in the United States District Court for the Western
District of Missouri (the "Petula Litigation"). The dispute involves an
agreement entered into in 1986 between Petula and JCN for the development of
Coach House South Apartments located in Kansas City, Missouri. Petula is
seeking reimbursement of approximately $3.9 million, plus interest, for its
share of the construction cost overruns which it paid in 1989. Petula has
alleged several alternative theories seeking to recover the payment including
theories based in fraud and contract. JCN believes it has strong statue of
limitations' defenses in addition to other meritorious defenses to the
allegations made by Petula. JCN has been granted summary judgment on the
contract and breach of fiduciary duty counts and currently has pending before
the court a motion for summary judgment on the remaining counts. Trial of the
matter is currently scheduled in November 1998.
A lawsuit was filed on January 8, 1998 by Dennis Wright against JCN, the
JCN Board of Directors, and Highwoods (the "Wright Litigation"). The lawsuit is
pending in the Circuit Court of Jackson County, Missouri. The plaintiff, a JCN
Shareholder, is bringing this lawsuit on behalf of other JCN Shareholders. The
relief sought by the plaintiff includes certification of a class, an injunction
preventing the Merger, and unspecified damages.
JCN has a $3.0 million proof of claim in the National Gypsum bankruptcy
proceeding pending in United States Bankruptcy Court, Northern District of
Texas. Pursuant to such claim, JCN has received payments of $389,000 and
$378,000 in 1997 and 1996, respectively. JCN's proof of claim in the National
Gypsum bankruptcy is based on tort liability arising from claims relating to
the quality of certain materials used in the construction of properties owned
by JCN. Total payments received by JCN under the National Gypsum plan of
reorganization will not equal the full amount of the proof of claim originally
filed by JCN. However, counsel for JCN has advised management that such plan
does provide for an additional payment of approximately $389,000 on JCN's claim
in 1998. Such payment, if any, will be recorded as income when it is received.
JCN and its subsidiaries are parties to certain other legal proceedings
incident to their business. In the opinion of management, none of these other
matters, either individually or in the aggregate, is material to JCN's
financial condition or results of operations.
Submission of Matters to a Vote of Security Holders
No matter was submitted to JCN shareholders in the fourth quarter of 1997.
69
<PAGE>
Market for JCN Common and Related Shareholder Matters
Although there is currently no established trading market for JCN Common,
such shares have for many years been traded over-the-counter very infrequently
through inter-broker bulletin board trading under the symbol "NCJC.BB." The
data prior to 1997 is high and low bid information reflecting inter-dealer
bulletin board prices without retail mark-up, mark-down or commission. These
quotations merely reflect the prices at which transactions were proposed, and
do not necessarily represent actual transactions. The data subsequent to 1996
is derived from actual closed transactions.
<TABLE>
<CAPTION>
1995 High Low
- -------------------- ------------- -------------
<S> <C> <C>
1st Quarter ...... $ 11.41 $ 9.38
2nd Quarter ...... 10.31 10.00
3rd Quarter ...... No Trades No Trades
4th Quarter ...... 21.88 14.38
1996 High Low
- ------ ------- --------
1st Quarter ...... $ 21.06 $ 20.00
2nd Quarter ...... 36.50 32.00
3rd Quarter ...... 34.00 28.13
4th Quarter ...... 31.06 27.00
1997 High Low
- ------ ------- --------
1st Quarter ...... $ 34.00 $ 29.00
2nd Quarter ...... 35.50 28.25
3rd Quarter ...... 56.00 37.25
4th Quarter ...... 70.00 51.00
</TABLE>
Issuances of JCN Common
In the first quarter of 1995, JCN contributed the post-split equivalent of
110,000 shares of JCN Common to the ESOT. Pursuant to the Settlement Agreement,
on August 15, 1997, JCN issued 59,413 shares of JCN Common to the United States
District Court for the Western District of Missouri and issued 620,586 shares
to the ESOT. On December 29, 1997, JCN issued 13,152 shares of JCN Common to
Mr. Brady upon the exercise by Mr. Brady of a portion of the options granted to
him at the time of his employment. Each of the foregoing issuances were made
pursuant to the exemption to registration set forth in Section 4(2) of the
Securities Act of 1933, as amended. Other than 1,001,696 shares of JCN Common
held by the ESOT, the Court and various other shareholders, the 4,619,039
currently outstanding shares of common stock of JCN may be sold pursuant to
Rule 144 under the Securities Act. JCN has entered into no agreements to
register any shares of JCN Common pursuant to the Securities Act and is not
publicly offering, and has not publicly proposed to offer, any shares of JCN
Common.
The Operating Agreement entered into between Kessinger/Hunter and JCN
required JCN to make an initial capital contribution of $4,285,714 in cash. The
Operating Agreement provides Kessinger/Hunter the right to use that cash to buy
a call right granting to the LLC the right to require JCN to issue to the LLC
76,530 shares of JCN Common (the "Call Right"). Kessinger/Hunter provided
notice to JCN of its intention to purchase the Call Right, and that purchase
occurred on February 27, 1998. The Operating Agreement grants to
Kessinger/Hunter authority to decide whether to exercise the Call Right and
such right was exercised by notice given to JCN on March 18, 1998. Accordingly,
JCN issued 76,530 shares of JCN Common to the LLC.
Dividend Policy
Prior to 1995, JCN typically declared and paid an annual cash dividend of
$10.00 on each share of JCN Common (or approximately $.125 per post-split
share). No dividend was declared on JCN Common in 1995, 1996 or 1997. The JCN
Board of Directors has not determined if, when or in what amount future
dividends will be declared or paid. JCN is not currently under any dividend
payment prohibition or restriction.
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Selected Financial Data
The following selected financial information has been derived from JCN's
audited consolidated financial statements for each of the five consecutive
years ended December 31, 1997. The information set forth below for 1993 is
based on JCN's audited financial statements for that year. Note, however, that
JCN's prior auditor qualified its report on the consolidated financial
statements for the year ended December 31, 1993 as a result of its inability to
obtain sufficient evidence to evaluate whether certain capitalized cost
balances for JCN's Bay Plaza assets as of December 31, 1993 were in excess of
recoverable amounts. "Bay Plaza" is a project for the redevelopment and
construction of parking, commercial and retail facilities in St. Petersburg,
Florida. JCN has since sold substantially all Bay Plaza assets. Per share
amounts for years prior to 1997 have been restated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share."
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- -------------- ----------- ----------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Operating Results
Sales and revenues ........................... $ 97,859 $ 132,628 $ 99,305 $ 94,213 $ 96,204
Selling, general and operating expenses ...... 44,654 45,394 45,952 43,203 44,615
Interest expense ............................. 22,333 23,466 27,862 27,049 26,693
Income (loss) before income taxes and
extraordinary gain .......................... 12,064 44,652 (16,498) (44,698) 26
Income (loss) before extraordinary gain ...... 19,386 27,902 (10,752) (43,670) 510
Net income (loss) ............................ 19,386 27,902 (10,752) (14,534) 510
Per Share Data (Basic):
Income (loss) before extraordinary gain ..... 4.63 5.75 (0.74) (2.89) 0.04
Net income (loss) ........................... 4.63 5.75 (0.74) (0.96) 0.04
Dividends ................................... -- -- -- 0.13 0.13
Per Share Data (Diluted):
Income (loss) before extraordinary gain 4.47 5.62 (0.74) (2.89) 0.04
Net income (loss) ........................... 4.47 5.62 (0.74) (0.96) 0.04
Dividends ................................... -- -- -- 0.13 0.13
</TABLE>
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Financial Position
Total properties ......................... $ 180,681 $ 220,133 $ 229,524 $ 244,105 $ 239,008
Total assets ............................. 297,774 320,327 328,695 350,302 362,112
Mortgage indebtedness .................... 288,553 309,188 326,349 339,881 327,354
Treasury stock ........................... 145,978 117,427 117,427 14,582 23,058
Total shareholders' equity (deficit) ..... (26,173) (28,606) (36,725) (25,821) (31,568)
</TABLE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Overview
JCN's operating results depend primarily upon income from the rental of
its retail, office, industrial, and residential properties. This income is
substantially influenced by the demand for JCN's rental space in the Kansas
City metropolitan area and, to a lesser degree, the Des Moines, Iowa
metropolitan area. The ability of JCN to increase its rental income is
dependent upon its ability to increase either or both of its occupancy rates
and rental rates, control expenses on its existing properties, and to acquire
or develop additional rental properties.
JCN's operating results are also dependent on the demand for lots in its
residential subdivisions. Demand for these lots is influenced by a number of
factors, including population growth in the Kansas City metropolitan area,
availability of existing housing stock, interest rates, tax rates, and the
number and financial health of home builders in the area.
JCN's primary markets in the midwest have continued to offer strong and
stable local economies. Management believes this will continue and the markets
will offer attractive acquisition and development opportunities because of
their central location, established business and industrial base, skilled work
force, and moderate labor cost.
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<PAGE>
At December 31, 1997, the occupancy rate for JCN's retail properties was
97%, 94% for its office properties, 77% for its industrial properties (which
includes one unoccupied building that represents approximately 17% of JCN's
total industrial space) and 97% for its multi-family residential properties.
Results of Operations
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Summary. Net income decreased by $8.5 million in 1997 to $19.4 million
primarily as a result of the absence of gains from disposition of JCN's
marketable equity securities portfolio, partially offset by lower income tax
expense in 1997. The change in several other income statement line items also
contributed to the $8.5 million decrease as detailed below.
Rents. Rental income decreased by $1.8 million (2.3%) to $78.1 million in
1997. This decrease was primarily due to the absence of $3.0 million in rental
income from JCN's leasehold interest in the Raphael Hotel of San Francisco (as
the underlying lease expired in the third quarter of 1996) and a $1.4 million
decrease in rental income related to four properties sold (three in the third
quarter of 1997 and one in the fourth quarter of 1996). These decreases were
offset by an increase in rental income of $1.2 million related to two of JCN's
office buildings that were substantially vacant during the first half of 1996
while JCN made significant tenant improvements for new tenants that are now
leasing all of the vacant space in those buildings. The remainder of the $1.4
million increase is due primarily to improved rents in JCN's office, retail,
and apartment properties.
Property Sales. Property sales primarily represent sales of residential
lots in subdivisions developed by JCN, sales of condominiums in the Alameda
Towers project, and sales of villas in the Corinth Place Villas project.
Property sales increased by $514,000 (7.8%) to $7.1 million in 1997 and
included lot sales of $4.3 million (including $1.2 million that was recognized
pursuant to JCN's change in accounting method from recording lot sales on an
"as closed" basis to recording lot sales on an "as sold" basis), condominium
sales of $2.6 million, and villa sales of $169,000. Property sales of $6.6
million in 1996 included $2.8 million of lot sales (also $2.8 million using an
"as sold" basis), condominium sales of $2.9 million and villa sales of
$945,000.
Dividends and Interest. Dividends were received on marketable equity
securities held for investment purposes prior to March 31, 1996. Interest
income is received on JCN's cash and cash equivalents, temporary investments
and notes receivable. Interest income fluctuates with interest rates, the level
of JCN's excess cash, and the level of notes receivable. Dividends and interest
income increased $1.1 million (23.9%) to $5.7 million in 1997. This increase is
primarily due to the higher average balances of cash and notes receivable
outstanding during 1997.
Gains on Sales of Investments and Other Assets. Gains on sales of
investments and other assets represent gains associated with the sales of
revenue-producing properties, property held for future development, marketable
equity securities, and other assets used in the business. These gains fluctuate
with the volume of asset dispositions and the magnitude of the difference
between sales proceeds and carrying value. In the first quarter of 1996, JCN
liquidated its entire investment in marketable equity securities for $38.6
million, recognizing a pre-tax gain of approximately $33.0 million. The
remainder of the gains in 1996 were primarily due to the sale of an industrial
park. The gains in 1997 were primarily due to the sale of two shopping centers,
one office property (two buildings), the majority of the Bay Plaza properties
and vacant ground.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates represents JCN's proportionate share of earnings of
affiliates in which JCN's ownership is 50% or less. This line item increased
$942,000 to $1.6 million in 1997. The increase is primarily due to increased
gains of $613,000 on pad sites sold by JCN's Iowa partnerships.
Other. Other represents miscellaneous revenues of JCN. Other revenue
decreased by $3.1 million in 1997 to $1.6 million. This decrease resulted
primarily from a $4.6 million payment recognized as income in 1996 pursuant to
a Resolution Agreement with JCN's prior auditor, reduced by certain expenses
totaling $1.4 million (See comments in "Comparison of Year Ended December 31,
1996 to Year Ended December 31, 1995" for additional details). In addition, JCN
received approximately $389,000 and $378,000 in 1997 and 1996, respectively, as
a result of a claim it filed in the National Gypsum bankruptcy proceeding now
pending in the United States Bankruptcy Court. JCN received notice that in 1998
it may receive an additional $389,000 in satisfaction of such claim. The actual
amount and date of any such payment is uncertain and therefore will not be
recorded until received.
Selling, General and Operating Expenses. Selling, general and operating
expenses represent the expenses directly associated with operating JCN's real
estate assets and expenses that are considered to be overhead. These expenses
decreased by $740,000 (1.6%) to $44.7 million in 1997, principally due to the
absence of $1.4 million of costs to secure a new management team and the
absence of $2.9 million in expenses related to the operation of the Raphael
Hotel of San Francisco due
72
<PAGE>
to the expiration of the underlying lease. In addition, selling, general and
operating expenses related to four sold properties decreased by $373,000. These
reductions were partially offset by unusual expenses in 1997 of $1.3 million
for severance costs relating to the outsourcing of certain functions and $1.9
million in costs related to the proposed merger with a wholly-owned subsidiary
of Highwoods. The remainder of the $733,000 increase over 1996 is due primarily
to increased operating costs of Des Moines, Iowa area properties.
Cost of Property Sales. Cost of property sales represents JCN's cost basis
in residential lots, condominium units, and villas sold during the year. The
cost of property sales is a function of the number of lots, condominium units,
and villas sold and their underlying cost basis. Cost of property sales
increased by $163,000 (3.2%) in 1997 to $5.3 million. Cost of property sales in
1997 included lot cost of sales of $2.6 million (including $696,000 that was
recognized pursuant to JCN's change in accounting method from recording sales
on an "as closed" basis to recording sales on an "as sold" basis), condominium
cost of sales of $2.6 million and villa cost of sales of $154,000. Cost of
property sales for 1996 included lot cost of sales of $1.7 million (also $1.7
million on an "as sold" basis of recording lot sales), condominium cost of
sales of $2.6 million and villa cost of sales of $923,000. The gross margin
percentage on lot sales was 40% for 1997 and 1996. The gross margin percentage
on condominium sales was 3% for 1997 and 11% for 1996. The decrease in gross
margin percentage on condominium sales in 1997 resulted from JCN incurring
greater finishing costs in 1997 than in 1996.
Interest Expense. Fluctuations in interest expense occur due to the level
of JCN's interest bearing indebtedness and the effect changes in interest rates
have on JCN's variable rate indebtedness. Interest expense declined by $1.1
million (4.8%) to $22.3 million in 1997 primarily due to the lower average
balance of outstanding indebtedness in 1997.
Depreciation and Amortization. Depreciation of JCN's revenue producing
properties is computed using the straight-line method over the estimated useful
lives of the assets, generally seven to thirty-one years. Depreciation expense
fluctuates to some degree as properties are bought and sold. In addition,
certain financing charges and certain lease related costs are amortized over
the term of the associated loan or lease as applicable. The decrease of
$471,000 (3.4%) to $13.5 million in 1997 is primarily due to property sales and
older fixed assets becoming fully depreciated.
Income Tax Expense (Benefit). The $24.1 million change in income tax
expense (benefit) from the $16.8 million expense in 1996 to the income tax
benefit of $7.3 million in 1997 is due primarily to the decrease in income tax
expense from operations of $12.3 million and the recognition of a net $11.8
million income tax benefit relating to the issuance of shares of common stock
to the ESOT and to a Court pursuant to the Settlement Agreement, as described
in "Legal Proceedings" above.
As discussed in Note 7 to JCN's consolidated financial statements, JCN
filed its 1996 income tax returns reflecting a net operating loss primarily
attributable to a $103 million deduction for losses of principal and accrued
interest arising from notes and accounts receivable to JCN from its ESOT and
from a limited partnership owned by JCN's former president. The IRS may reject
all or a portion of such claimed losses, and there is no assurance JCN will
ultimately prevail on all or any portion of such claimed losses. Accordingly,
JCN may not receive all or any portion of the benefits that result from such
claimed losses.
Management of JCN has been advised by counsel that such counsel believes
the claimed losses to be valid. Discussions with respect to JCN's position have
been held with representatives of the IRS, who are conducting an examination of
JCN's returns for the years 1989 through 1995.
To the extent allowed, the loss would be used first to file for a refund
of taxes paid previously after offsetting deficiencies that may be proposed by
the IRS in connection with its examination (JCN believes it has previously
provided sufficient tax reserves for financial reporting purposes to cover any
such deficiencies); second, the balance remaining, if any, could be used to
offset the recognition of gains in future years that had occurred but were
unrecognized prior to a "change in control," as defined in Section 382 of the
Internal Revenue Code; and finally, after such offset, any remaining amount may
be available annually to reduce other taxable income, subject to limitations
set forth in Section 382.
Consistent with the requirements of generally accepted accounting
principles, none of this potential impact is reflected in JCN's consolidated
financial statements due to its uncertainty.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Summary. Net income increased by $38.7 million in 1996 from a net loss of
$10.8 million in 1995 to net income of $27.9 million primarily as a result of
the gains from disposition of JCN's marketable equity securities portfolio, the
absence of litigation settlement expense in 1996, increased other income, and
lower interest expense.
73
<PAGE>
Rents. Rental income increased by $60,000 to $79.9 million in 1996. This
increase occurred even though one of JCN's larger office buildings was
substantially vacant during the first half of 1996 while JCN made significant
tenant improvements for a new tenant that is now leasing all of the vacant
space. This vacancy resulted in a $1.8 million reduction in rental income in
1996. Rental income from JCN's leasehold interest in the Raphael Hotel of San
Francisco decreased by $489,000 due to the expiration of the underlying lease.
As a result of apartment properties obtained pursuant to the Settlement
Agreement, rental income increased by approximately $700,000 in 1996. The
remainder of the $1.6 million increase is due primarily to $200,000 of certain
nonrecurring items and $1.4 million in improved rents on JCN's office, retail,
and apartment properties.
Property Sales. Property sales increased by $576,000 (9.5%) to $6.6
million in 1996 and included lot sales of $2.8 million, condominium sales of
$2.9 million, and villa sales of approximately $945,000. Property sales of $6.0
million in 1995 included $3.5 million of lot sales and condominium sales of
$2.5 million.
Gains on Sales of Investments and Other Assets. In early 1996, JCN
liquidated for $38.6 million its entire investment in marketable equity
securities held at December 31, 1995, recognizing a pre-tax gain of
approximately $33.0 million. The remainder of the gains in 1996 were primarily
due to the sale of an industrial park.
Equity in Earnings of Unconsolidated Affiliates. Equity in earnings of
unconsolidated affiliates increased $540,000 to $697,000 in 1996. The increase
is primarily due to $324,000 of gains on pad sites sold by JCN's Iowa
partnerships in 1996. Earnings from JCN's investment in J.C. Nichols Real
Estate increased by $255,000 in 1996 as a result of a record year in its sales
volume and net income.
Other. Other increased by $3.4 million in 1996 to $4.7 million. This
increase resulted primarily from a $4.6 million payment received by JCN from
its prior auditor, Deloitte & Touche LLP, pursuant to an agreement (the
"Resolution Agreement") in which the prior auditor denied any wrongdoing or
fault and agreed to resolve disagreements that arose out of circumstances that
were the subject of the Settlement Agreement. The $4.6 million payment was
reduced by certain expenses to reduce to $3.2 million the amount of income
recognized by JCN as a result of such payment. Furthermore, in the Resolution
Agreement JCN agreed to indemnify its prior auditor and various affiliates and
related persons thereof, in an amount up to $2.5 million, from a broad range of
losses and claims that may be incurred by such prior auditor as a result of its
relationship with JCN. However, management of JCN currently believes the
occurrence of a material reduction to the $3.2 million in recognized income is
remote. In addition, JCN received approximately $378,000 as a result of a claim
it filed in the National Gypsum bankruptcy proceeding now pending in the United
States Bankruptcy Court.
Selling, General and Operating Expenses. Selling, general and operating
expenses decreased by $558,000 (1.2%) to $45.4 million in 1996, principally due
to a decline of $2.3 million in operating expenses of the discontinued Bay
Plaza project, a decline of $827,000 in expenses related to the operation of
the Raphael Hotel of San Francisco due to the expiration of the underlying
lease, and $400,000 of nonrecurring items. These reductions were partially
offset by additional costs of $1.4 million incurred to secure a new management
team, and additional operating expenses of $255,000 related to apartment
properties obtained in the Settlement Agreement. The remainder of the $1.3
million increase over 1995 is due primarily to increased overhead (primarily
legal and professional fees) and property operating costs.
Cost of Property Sales. Cost of property sales increased by $1.2 million
(30.9%) in 1996 to $5.2 million. Cost of property sales in 1996 included lot
cost of sales of $1.7 million, condominium cost of sales of $2.6 million and
villa cost of sales of $923,000. Cost of property sales in 1995 included lot
cost of sales of $2.3 million and condominium cost of sales of $1.6 million.
The gross margin percentage on lot sales was 40% in 1996 as compared to 33% in
1995. The increase in gross margin percentage on lot sales in 1996 resulted
from a change in sales mix, as 1996 sales contained a larger percentage of
sales from higher margin subdivisions. The gross margin percentage on
condominium sales was 11% in 1996, as compared to 37% in 1995. The decrease in
gross margin percentage on condominium sales in 1996 resulted from JCN
incurring greater finishing costs on condominium sales in 1996 than in 1995.
The gross margin percentage on villa sales in 1996 was approximately 2%.
Interest Expense. Interest expense declined by $4.4 million (15.8%) to
$23.5 million in 1996. The primary reasons for this decline are the pay-down or
pay-off of certain notes and mortgages during 1996 of approximately $16 million
in addition to normal principal amortization, and the restructuring of a
mortgage note as discussed in Note 5 to JCN's consolidated financial
statements.
Employee Stock Ownership Trust Contribution. JCN maintains an ESOT to
which it has the right to make annual contributions in amounts determined by
the Board of Directors. JCN made no contributions during 1996.
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<PAGE>
Valuation Allowances. JCN's assets are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of an asset
is in excess of its net realizable value. If the carrying value of an asset is
determined, in the opinion of management, to be in excess of its net realizable
value, a charge to expense is recognized in the form of a valuation allowance.
No valuation allowances were recorded in 1996.
Litigation Settlement. In 1995, JCN recorded a one time charge of $19.6
million as "Litigation Settlement" in its consolidated statement of operations
as a result of the Settlement Agreement. The circumstances leading to and the
impact of the Settlement Agreement are described in "Legal Proceedings" above
and in Note 11 "Litigation and Settlements" of JCN's consolidated financial
statements.
Comparison of the Three Months Ended March 31, 1998 to the Three Months Ended
March 31, 1997
Summary. Net income increased by $516,000 (32.5%) from $1.6 million for
the three months ended March 31, 1997 to $2.1 million for the three months
ended March 31, 1998. This net increase is due to changes in several income
statement line items that are explained below.
Rents. Rental income decreased by $302,000 (1.5%) from $20.0 million for
the three months ended March 31, 1997 to $19.7 million for the three months
ended March 31, 1998 primarily due to a $1.1 million decrease in rental income
related to three properties that were sold during the third quarter of 1997.
This decrease is partially offset by a $771,000 increase due to improved rents
in JCN's office, retail, and apartment properties.
Property Sales. Property sales primarily represent sales of residential
lots in subdivisions developed by JCN, sales of condominiums in the Alameda
Towers project, and sales of villas in the Corinth Place Villas project.
Property sales decreased by $126,000 (9.4%) from $1.3 million for the three
months ended March 31, 1997 to $1.2 million for the three months ended March
31, 1998 and included lot sales of $820,000 and condominium sales of $401,000.
During the third quarter of 1997, JCN changed its accounting method from
recording lot sales on an "as closed" basis to recording lot sales on an "as
sold" basis. The lot sales recorded in the first quarter of 1997 are on an "as
closed" basis. Property sales of $1.3 million for the three months ended March
31, 1997 included lot sales of $518,000 ($666,000 on an "as sold" basis)
condominium sales of $660,000 and villa sales of $169,000.
Gains on Sales of Investments and Other Assets. Gains on sales of
investments and other assets represent gains associated with the sales of
revenue-producing properties, property held for future development and other
assets used in the business. These gains fluctuate with the volume of asset
dispositions and the magnitude of the difference between sales proceeds and
carrying value. The $586,000 gain for the three months ended March 31, 1998 is
primarily due to the disposition of certain construction and maintenance
equipment that was no longer necessary to service JCN's real estate portfolio.
Equity in Earnings (Losses) of Unconsolidated Affiliates. Equity in
earnings of unconsolidated affiliates represents JCN's proportionate share of
earnings of affiliates in which JCN's ownership is 50% or less. This line item
increased $131,000 from a $77,000 loss for the three months ended March 31,
1997 to $54,000 in income for the three months ended March 31, 1998. The
increase is primarily due to earnings generated by new office buildings that
were constructed and/or leased up during 1997 by the Iowa partnerships in which
JCN is a partner.
Other. Other represents leasing commissions and property management fees
generated from JCN's third party real estate brokerage and management services,
royalties, minority interest in losses and other miscellaneous revenues. Other
decreased by $130,000 from $378,000 for the three months ended March 31, 1997
to $248,000 for the three months ended March 31, 1998 primarily due to JCN
transferring its third party real estate brokerage and management services
business to Kessinger/ Hunter and Company, L.C., an unconsolidated affiliate.
Selling, General and Operating Expenses. Selling, general, and operating
expenses (S,G, & O) represent the expenses directly associated with operating
JCN's real estate assets and expenses that are considered to be overhead. These
expenses increased by $533,000 (5.4%) from $9.9 million for the three months
ended March 31, 1997 to $10.4 million for the three months ended March 31,
1998, principally due to the three months ended March 31, 1998 containing
approximately $1,100,000 of expenses related to JCN's proposed merger with a
wholly-owned subsidiary of Highwoods Properties, Inc. This increase was
partially offset by the absence of $307,000 of operating expenses related to
the three properties that were sold during the third quarter of 1997.
Cost of Property Sales. Cost of property sales represents JCN's cost basis
in residential lots, condominium units, and villas sold during the year. The
cost of property sales is a function of the number of lots, condominium units,
and villas sold and their underlying cost basis. Cost of property sales
decreased by $234,000 (21.1%) from $1.1 million for the three months ended
March 31, 1997 to $873,000 for the three months ended March 31, 1998 and
included lot cost of sales of $450,000
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<PAGE>
and condominium cost of sales of $423,000. Cost of property sales for the three
months ended March 31, 1997 included lot cost of sales of $342,000 ($448,000 on
an "as sold" basis), condominium cost of sales of $623,000 and villa cost of
sales of $142,000. The gross margin percentage on lot sales was 45.1% for the
three months ended March 31, 1998 as compared to 34.2% for the three months
ended March 31, 1997. The increase in gross margin percentage on lot sales for
the three months ended March 31, 1998 resulted from JCN achieving higher
average prices while keeping average lot costs at a level consistent with the
prior year. The gross margin percentage on condominium sales was (5.5%) for the
three months ended March 31, 1998, as compared to 5.6% for the three months
ended March 31, 1997. The decrease in gross margin percentage on condominium
sales for the three months ended March 31, 1998 resulted from JCN incurring
greater finishing costs on condominium sales for the three months ended March
31, 1998 than for the three months ended March 31, 1997.
Interest Expense. Fluctuations in interest expense occur due to the level
of JCN's interest bearing indebtedness and the effect changes in interest rates
have on JCN's variable rate indebtedness. Interest expense declined by $423,000
(7.2%) from $5.8 million for the three months ended March 31, 1997 to $5.4
million for the three months ended March 31, 1998 primarily due to the lower
average balance of outstanding indebtedness during the three months ended March
31, 1998.
Depreciation and Amortization. Depreciation of JCN's revenue-producing
properties is computed using the straight-line method over the estimated useful
lives of the assets, generally seven to thirty-one years. Depreciation expense
fluctuates to some degree as properties are bought and sold. In addition,
certain financing charges and certain lease related costs are amortized over
the term of the associated loan or lease as applicable. The decrease of
$479,000 (14.2%) from $3.4 million for the three months ended March 31, 1997 to
$2.9 million for the three months ended March 31, 1998 is primarily due to
property sales and older fixed assets becoming fully depreciated.
Liquidity and Capital Resources
Net cash provided by operating activities, permanent mortgage financing,
and short term notes payable to banks represent JCN's primary sources of
liquidity to fund recurring capital costs associated with renovating and
renewing leases of JCN's properties, payments on JCN's outstanding
indebtedness, and distributions to shareholders. In April 1997, JCN renewed its
$10 million unsecured line of credit with Commerce Bank, N.A. (Kansas City,
Missouri) bearing interest at the prime rate. At December 31, 1997, there were
no outstanding borrowings on this line of credit.
Management anticipates that cash generated before debt payments and
capital expenditures, together with the bank line of credit, will provide
adequate liquidity to conduct JCN's operations, fund its recurring capital
costs and interest expense, and permit normal amortization payments on
outstanding indebtedness.
JCN is in the process of developing two of the projects included in JCN's
comprehensive Plaza redevelopment plan. These projects are to be supplemented
by TIF. JCN will be able to fund the projects through 1998 with working capital
and the proceeds of a TIF bond. However, due to the proposed merger with a
wholly-owned subsidiary of Highwoods, JCN has not secured the additional
financing necessary to fund expenditures on these two projects or meet other
cash needs in 1999 and thereafter.
At December 31, 1997, the total of JCN's consolidated debt was $301.5
million. Such amount, with certain exceptions discussed below, bears interest
at rates ranging from 3.9% to 10.5%. Of JCN's consolidated debt at that date,
approximately $13.0 million was a note payable and $288.5 million was mortgage
indebtedness. Approximately $256.7 million of JCN's $288.5 million of mortgage
indebtedness at December 31, 1997, was nonrecourse to JCN. By including JCN's
percentage interest in the indebtedness of unconsolidated subsidiaries and
excluding the minority interest percentage in the indebtedness of consolidated
subsidiaries of JCN, the interest-bearing debt of JCN at December 31, 1997
would be $319.4 million.
Of JCN's $301.5 million in consolidated debt at December 31, 1997,
approximately $224.6 million accrued interest at fixed rates, $72.9 million was
floating rate debt of various types and $4.0 million was non-interest bearing
(see below). Interest expense of JCN in future periods may be expected to
fluctuate with short term interest rates.
As discussed in Note 5 to JCN's consolidated financial statements, JCN has
restructured two debt agreements. At December 31, 1997, JCN has classified as
mortgage indebtedness approximately $10.0 million in debt that will be forgiven
if JCN complies with certain conditions established by the lenders. The $10.0
million in forgiven debt is being amortized into income over the life of the
mortgages through monthly reductions to interest expense. This amortization
reduces the effective rate to JCN on restructured debt to approximately 3% for
financial reporting purposes. This treatment is in compliance with generally
accepted accounting principles as the sum of the future undiscounted debt
service payments exceeded the face value of the debt obligations at the time of
the restructurings.
76
<PAGE>
Also, as discussed in Note 5 to JCN's consolidated financial statements,
certain agreements to which JCN is a party provide for a 50% sharing of
positive and negative cash flows from operations and certain capital
expenditures. Interest expense recognized for such sharing arrangements was
$622,000, $929,000, $479,000 for the years ended December 31, 1997, 1996 and
1995, respectively. In addition, at December 31, 1997 and 1996, mortgage
indebtedness includes a non-interest bearing preference item of $4.0 million
related to these agreements. JCN's liability is contingent upon certain
conditions being met upon the sale or refinancing of the mortgaged properties.
The ESOT currently holds 1,390,003 shares of JCN's common stock. Until
such time as shares distributed by the ESOT to its beneficiaries can be readily
traded on an established securities market, JCN is obligated to repurchase such
shares for a specified period of time at a price determined by a qualified
appraiser (the "Put Option"). The most recent appraisal of the JCN Common held
by the ESOT was made as of October 31, 1997 and established a price of $61.00
per share.
If JCN remains obligated by the Put Option, JCN's liquidity could be
constrained. Given expected retirement trends, management expects it can meet
anticipated stock repurchase requirements with funds generated from operations,
selling its securities or additional borrowings.
On January 29, 1997, JCN purchased all outstanding shares of JCN Common
then owned beneficially and of record by AHI Metnall L.P. ("AHI").
Additionally, Mr. John Simon and Mr. James W. Quinn, who are affiliated with
AHI, resigned as directors of JCN.
JCN paid consideration of $27.25 per share, or a total of $25.9 million
for the 948,880 shares of JCN Common owned by AHI. The purchase price for the
stock held by AHI was based on a negotiated price within the range of trades in
the fourth quarter of 1996, which trades were between $27 and $31.06 per share.
At the closing, JCN delivered to AHI $12.8 million in cash (which included
approximately $39,000 of interest) and executed a promissory note in the amount
of $13.0 million (which reflected a $57,500 reduction for certain expenses),
bearing interest at a rate of eight percent (8%) per annum with interest only
payable quarterly. That promissory note is secured by the pledge of a mortgage
receivable and real property, and is due on January 29, 1999.
The Operating Agreement entered into between Kessinger/Hunter and JCN, and
by which the LLC was formed, required JCN to make an initial capital
contribution of $4,285,714 in cash. That capital contribution was made on
January 2, 1998. Kessinger/Hunter had the right to determine the use of such
cash, and it decided to pay such cash to JCN in exchange for the Call Right. As
a result, the $4,285,714 was paid back to JCN on February 27, 1998 in exchange
for the Call Right.
Comparison of Year Ended December 31, 1997 to Year Ended December 31, 1996
Net cash provided by operating activities decreased by $2.9 million to
$26.8 million in 1997. The primary reasons for such decrease are discussed
above under "Results of Operations."
Net cash flows used in investing activities increased by $3.6 million in
1997 to $8.2 million which amount was principally a result of issuing an
additional $19.5 million of notes receivable and investing $11.3 million for
additions to revenue-producing properties. These investments were substantially
offset by the decrease in temporary investments of $2.4 million, the receipt of
$9.1 million of payments on notes receivable, sales of capital assets of $9.6
million and proceeds from the return of capital from unconsolidated affiliates
of $1.4 million. In 1996, JCN's net cash used in investing activities of
approximately $4.6 million was principally a result of increasing temporary
investments a net $40.4 million, issuing an additional $6.6 million of notes
receivable and investing $8.3 million for additions to revenue-producing
properties. These investments were substantially offset by the receipt of $8.8
million of payments on notes receivable, sales of capital assets of $3.1
million and proceeds from the sale of marketable equity securities of $38.6
million.
Net cash used by financing activities decreased by $785,000 in 1997 to
$17.1 million. The principal uses of cash in financing activities in 1997 were
treasury stock purchases of $13.5 million and a net reduction of mortgage and
notes payable indebtedness of $3.6 million. In 1996 JCN's net cash used in
financing activities of $17.9 million resulted from a net reduction of mortgage
and notes payable indebtedness.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Net cash provided by operating activities increased by $7.7 million to
$29.7 million in 1996. The primary reasons for such increase are discussed
above under "Results of Operations."
77
<PAGE>
Net cash flows used in investing activities increased by $2.8 million in
1996 to $4.6 million which amount was principally a result of increasing
temporary investments a net $40.4 million, issuing an additional $6.6 million
of notes receivable and investing $8.3 million for additions to
revenue-producing properties. These investments were substantially offset by
the receipt of $8.8 million of payments on notes receivable, sales of capital
assets of $3.1 million and proceeds from the sale of marketable equity
securities of $38.6 million. In 1995, JCN's net cash used in investing
activities of approximately $1.7 million was principally a result of issuing an
additional $6.2 million of notes receivable, investing $7.9 million for
additions to revenue-producing properties and purchasing $3.0 million of
marketable equity securities. These investments were substantially offset by
the receipt of $6.9 million of payments on notes receivable, sales of capital
assets of $5.3 million, and the maturing of marketable securities of $2.4
million.
Net cash used by financing activities decreased by $9.4 million in 1996 to
$17.9 million. The principal use of cash in financing activities in 1996 and
1995 was a net reduction of mortgage and notes payable indebtedness of $17.9
million and $22.8 million, respectively.
Comparison of Three Months Ended March 31, 1998 to Three Months Ended March
31, 1997
Net cash provided by operating activities decreased by $6.8 million from
$8.4 million for the three months ended March 31, 1997 to $1.6 million for the
three months ended March 31, 1998. The primary reasons for such decrease
include higher net cash outflows from the payment of accounts payable and
accrued expenses, lower cash inflows from the collection of income taxes
receivable and accounts receivable, and other operating income factors
discussed above under "Results of Operations."
Net cash flows provided by investing activities decreased by $6.7 million
from $9.8 million for the three months ended March 31, 1997 to $3.1 million for
the three months ended March 31, 1998. The $3.1 million of net cash flow
provided by investing activities was principally a result of decreasing
temporary investments a net $9.1 million and receiving $2.3 million of payments
on notes receivable. These receipts were substantially offset by the investment
in unconsolidated affiliates of $4.3 million, the $2.0 million in additions to
revenue-producing properties, and the issuance of $1.9 million of notes
receivable. For the three months ended March 31, 1997, the Company's net cash
provided by investing activities of approximately $9.8 million was principally
a result of decreasing temporary investments $9.7 million and receiving $1.8
million in payments on notes receivable. These receipts were partially offset
by investments of $1.5 million for additions to revenue-producing properties.
Net cash provided by financing activities increased by $17.8 million from
($14.8) million for the three months ended March 31, 1997 to $3.0 million for
the three months ended March 31, 1998. The $3.0 million of net cash provided by
financing activities for the three months ended March 31, 1998 was principally
a result of issuing $4.3 million of common stock, partially offset by a $1.4
million reduction in mortgage indebtedness. For the three months ended March
31, 1997, the Company's net cash used in financing activities of $14.8 million
was principally a result of purchasing $12.8 million of treasury stock and
reducing mortgage indebtedness $2.0 million.
Earnings before Interest, Taxes Depreciation, and Amortization
It is management's intent to apply the majority of JCN's operating cash
flows to reduce indebtedness and to improve and increase JCN's portfolio of
revenue-producing properties. JCN is organized as a "Subchapter C" corporation
and as such pays income taxes on its taxable income and is generally not
subject to distribution requirements based on net income. Management believes
that JCN's core operations are best measured by its earnings before interest
and dividend income, interest expense, income taxes, depreciation and
amortization, gains or losses from debt restructuring and sales of assets,
valuation allowances, and after adjustments needed to similarly convert the
earnings of minority interests and unconsolidated partnerships. Earnings, as so
computed, are referred to herein as "EBITDA". This is a supplemental
performance measure used along with net income to report operating results.
EBITDA is not a measure of operating results or cash flows from operating
activities as defined by generally accepted accounting principles.
Additionally, EBITDA is not necessarily indicative of cash available to fund
operating needs and should not be considered as an alternative to cash flow as
a measure of liquidity. However, JCN believes that EBITDA provides relevant
information about its operations and, along with net income (loss), facilitates
understanding of its operating results. The EBITDA and EBITDA, as adjusted, set
forth below may not be comparable to other real estate companies, as each real
estate company may define differently such terms.
78
<PAGE>
<TABLE>
<CAPTION>
EBITDA
($000)
For the Years Ended For the Three Months Ended
December 31, March 31,
-------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1998 1997
-------- -------- --------- -------- --------
NET INCOME (LOSS) ...................................... $ 19,386 $ 27,902 $ (10,752) $ 2,103 $ 1,587
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS)
TO EBITDA:
Dividends and interest income ......................... (5,740) (4,634) (4,806) (1,147) (1,071)
Interest expense ...................................... 22,333 23,466 27,862 5,426 5,849
Income tax expense (benefit) .......................... (7,322) 16,750 (5,746) 1,262 955
Depreciation and amortization ......................... 13,483 13,954 14,355 2,894 3,373
Gains on sales of investments and other assets ........ (2,628) (34,867) (5,711) (586) (15)
Valuation allowances .................................. -- -- 2,350 -- --
Minority interest portion of add-backs ................ (2,420) (2,768) (3,136) (454) (699)
Unconsolidated subsidiaries' portion of add-backs ..... 3,642 3,684 3,997 1,189 1,071
--------- ---------- ------------ ---------- ----------
EBITDA ................................................. $ 40,734 $ 43,487 $ 18,413 $ 10,687 $ 11,050
========= ========== ============ ========== ==========
</TABLE>
Because of the number and size of non-recurring transactions included in
JCN's consolidated financial statements during the last three years, management
believes it is important to also present a reconciliation of the foregoing
EBITDA to "adjusted" EBITDA, as described below, which represents EBITDA
exclusive of certain non-recurring transactions. Management believes adjusted
EBITDA is more representative of JCN's underlying operations.
<TABLE>
<CAPTION>
Adjusted EBITDA
($000)
For the Three Months
For the Years Ended Ended
December 31, March 31,
----------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1998 1997
-------- -------- -------- -------- --------
EBITDA ................................................ $ 40,734 $ 43,487 $ 18,413 $ 10,687 $ 11,050
NON-RECURRING ITEMS:
Costs related to proposed merger .................... 1,910 -- -- 1,100 --
Severance costs ..................................... 1,320 -- -- -- --
Subdivision lots, change in accounting method ....... (504) -- -- --
Income from resolution of claims .................... (389) (3,578) -- -- --
Costs of securing new management (including stock
options) ........................................... -- 1,362 -- -- --
Litigation settlement expense ....................... -- -- 19,553 -- --
ESOT Contribution ................................... -- -- 1,787 -- --
Other, net .......................................... (143) (25) 400 -- --
--------- --------- --------- --------- ---------
ADJUSTED EBITDA ....................................... $ 42,928 $ 41,246 $ 40,153 $ 11,787 $ 11,050
========= ========= ========= ========= =========
</TABLE>
The above adjusted EBITDA amounts illustrate JCN's EBITDA if certain
non-recurring items had been eliminated from JCN's statements of operations.
These amounts are not necessarily indicative of future performance. However,
management does believe that, when read in conjunction with JCN's consolidated
financial statements, they assist the reader in better understanding JCN's
underlying business operations. The adjustments made to arrive at adjusted
EBITDA are explained as follows: "Costs related to proposed merger" represent
costs incurred by JCN in conjunction with the proposed merger with a
wholly-owned subsidiary of Highwoods. "Severance costs" reflects the expense to
JCN in 1997 of outsourcing certain functions. "Subdivision lots, change in
accounting method" in 1997 reflects the change in gross margin on residential
lot sales resulting from JCN's change in accounting method from recording sales
on an "as closed" basis to recording sales on a "as sold" basis. "Income from
resolution of claims" reflects the income to JCN from the resolution of certain
claims in 1997 and 1996. "Costs of securing new management (including stock
options)" reflects the expense to JCN in 1996 of obtaining the new members of
its senior management. "Litigation settlement expense" reflects the expenses
incurred by JCN in 1995 to implement substantially all of its obligations set
forth in the Settlement Agreement and the related legal and other professional
expense. "ESOT contribution" reflects the contribution by JCN to the ESOT of
1,375 shares (or 110,000 post-split) of common stock of JCN in 1995. "Other,
net" reflects the net of other less significant, non-recurring adjustments.
79
<PAGE>
Year 2000 Compliance
JCN has undertaken steps to address the issues and exposures related to
the Year 2000 which may affect key financial, operational, and information
systems. By the end of 1998, JCN intends to have all of its key systems
converted such that only year 2000 compliant, vendor developed software will be
utilized. As JCN is undertaking a complete information system conversion,
virtually all costs incurred in this process will be capitalized and such costs
are not expected to have a material effect on JCN's consolidated financial
statements.
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," requires the reporting of comprehensive income and its
components in the fiscal 1998 financial statements. Comprehensive income is
defined as the change in equity from transactions and other events and
circumstances from non-owner sources, and excludes investments by and
distributions to owners. Comprehensive income includes net income and other
items of comprehensive income meeting the above criteria. JCN currently has no
components other than net income which would constitute comprehensive income
and therefore no additional disclosures are anticipated.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" requires reporting about operating segments, products and
services, geographic areas, and major customers. The objective of the
pronouncement is to provide information about the different types of business
activities and economic activities in which businesses operate. The adoption of
SFAS No. 131 is not expected to require any additional disclosure during fiscal
1998.
80
<PAGE>
Directors and Executive Officers
The directors of JCN are set forth below.
<TABLE>
<S> <C>
a. Term Expiring 2000
BARRETT BRADY Age 51. Mr. Brady is the President and Chief Executive Officer of JCN and has been acting in
those capacities since September 1995. Mr. Brady has served as a director of JCN since
December 1995. For more than five years prior to becoming President and Chief Executive
Officer of JCN, Mr. Brady served as President of Dunn Industries, Inc., an investment holding
company in the primary business of regional commercial and industrial general contracting.
Mr. Brady is also a director of North American Savings Bank. Mr. Brady is the brother-in-law
of Mr. John Fox, Vice President of Special Projects for JCN.
KAY N. CALLISON Age 54. Ms. Callison has served as a director of JCN since 1982. For more than five years,
Ms. Callison has been active in charitable activities in the Kansas City metropolitan area.
WILLIAM V. MORGAN Age 55. Mr. Morgan has been a director of JCN since 1997. He has been the President of
Morgan Associates, Inc., an investment and pipeline management company, since February
1987, and Cortez Holdings Corporation, a related pipeline investment company, since October
1992. Mr. Morgan has served as a director of Midland Loan Services and Kinder Morgan, G.P.,
Inc. since 1994. In February 1997, Mr. Morgan was appointed Vice Chairman of Kinder
Morgan, G.P., Inc. Mr. Morgan has been Vice Chairman of Cortez Pipeline Company since
February 1987. He has held legal and management positions in the energy industry since 1975,
including the presidencies of three major interstate natural gas companies: Florida Gas
Transmission Company, Transwestern Pipeline Company and Northern Natural Gas Company.
b. Term Expiring 1999
WILLIAM K. HOSKINS Age 63. For more than five years Mr. Hoskins has served as Vice President, General Counsel,
and Secretary to Hoechst Marion Roussel, Inc., a major pharmaceutical company. In 1997,
Mr. Hoskins was appointed special counsel to Hoechst Marion Roussel, the parent company of
Hoechst Marion Roussel, Inc. Mr. Hoskins is currently Chairman of the JCN Board of
Directors and has served in that capacity since May 1996.
MARK C. DEMETREE Age 41. Since October 1997, Mr. Demetree has been the President, Chief Executive Officer
and Chairman of the Board of U.S. Salt Corporation. From February 1993 to July 1997,
Mr. Demetree was the President of North American Salt Company. From 1989 through January
1993, Mr. Demetree was a Senior Vice President of D.G. Harris & Associates, Inc. From 1991
through February 1993, Mr. Demetree was also President of the Trona Railway Company.
Mr. Demetree is also a member of the Board of Directors of Advanced Radio Telecom Corp.
c. Term Expiring 1998
CLARENCE L. ROEDER Age 64. Mr. Roeder has served as a director of JCN since 1974. For more than five years prior
to July 1995, Mr. Roeder was Secretary of JCN. For more than five years prior to January
1993, Mr. Roeder was Vice President and General Counsel of JCN. Mr. Roeder is also a
member of the Board of Directors of Mercantile Bank of Kansas and Mercantile Bank of
Kansas City.
THOMAS J. TURNER, III Age 53. Mr. Turner has served as a director of JCN since December 1995. For more than five
years, Mr. Turner has served as President of Charter American Mortgage Company, a business
that operates as a correspondent, and originates and services commercial loans, for institutional
mortgage lenders.
C. Q. CHANDLER, III Age 71. Mr. Chandler was appointed to the board of directors of JCN in May 1997 to fill the
vacancy created by the resignation of James W. Quinn. Mr. Chandler is the Chairman of the
Board of INTRUST; a director of Fidelity State Bank & Trust Co.; a director of First Newton
Bancshares; a director of Kansas Crippled Children's Society; the Vice President and Director,
First Bank of Newton; and a Trustee of Kansas State University.
</TABLE>
81
<PAGE>
The following are the executive officers of JCN, all of whom serve at the
will of the JCN Board of Directors.
<TABLE>
<S> <C>
BARRETT BRADY Information relating to Mr. Brady is set forth above.
G. REID TEANEY Age 51. Mr. Teaney is Senior Vice President of JCN and has served in that capacity since July
1996. For more than five years prior to becoming Senior Vice President of JCN, Mr. Teaney
served as Senior Vice President and Executive Managing Officer of the Kansas City office of
CB Commercial Group, a commercial real estate marketing, sales, leasing and brokerage
company. From January 1988 through March 1996, Mr. Teaney served as a director of
Columbia Trust Company.
EDWARD A. DE AVILA Age 43. Mr. de Avila is Senior Vice President of Development of JCN and has been acting in
that capacity since August 1996. From November 1993 to July 1996, Mr. de Avila was
Managing Director of Centertainment, Inc., an indirect wholly-owned subsidiary of AMC
Entertainment, Inc., one of the largest motion picture exhibitors in the United States.
Centertainment, Inc. pursued the development of entertainment based retail centers with AMC
Multiscreen Theaters as a major anchor. From March 1988 through May 1993, Mr. de Avila
was Vice President, Director of Retail for Reston Town Center Associates, a major developer
of retail space in Reston, Virginia.
MARK A. PETERSON Age 34. Mr. Peterson is a Vice President, Treasurer and Chief Financial Officer of JCN and has
been acting in that capacity since June 1995. For more than five years prior to that time,
Mr. Peterson acted in levels of increasing responsibility, concluding as senior audit manager
for Donnelly Meiners Jordan Kline, P.C., a certified public accounting firm that has provided
services to JCN.
PRICE A. SLOAN Age 35. Mr. Sloan is the Secretary and General Counsel of JCN and has been acting in that
capacity since March 1996. For more than five years prior to that time, Mr. Sloan was an
attorney with Blackwell Sanders Matheny Weary & Lombardi LLP, the law firm that has acted
and continues to act as legal counsel to JCN.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Under Section 16(a) of the Exchange Act, JCN's directors and executive
officers and shareholders holding more than ten percent of the outstanding
stock of JCN are required to report their initial ownership of stock and any
subsequent change in such ownership to the Securities and Exchange Commission
and JCN. Specific time deadlines for the Section 16(a) filing requirements have
been established by the Securities and Exchange Commission. To JCN's knowledge,
all Section 16(a) filing requirements applicable to its directors, executive
officers and ten percent holders were satisfied during the fiscal year ended
December 31, 1997.
82
<PAGE>
Officer Compensation
The following tables set forth the compensation of certain executive
officers of JCN for the last three fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------------------------------- ---------------------------------------
Other Annual Securities Underlying All Other
Name and Salary Bonus(a) Compensation Options/SARS Compensation
Principal Position Year ($) ($) ($) (#) ($)
- ------------------------ ------ --------------- ---------- -------------- ----------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barrett Brady, CEO 1997 232,701 150,000 15,861(b) N/A N/A
1996 225,000 144,000 9,857(c) 224,000 N/A
1995 110,000 N/A N/A N/A N/A
Jack Frost, CEO 1995 61,025 N/A N/A N/A 6,975(d)
Lynn L. McCarthy, 1995 87,667(f) 50,000 1,080(f) N/A 5,388(h)
CEO(e)
Edward A. de Avila, 1997 200,000 64,000 10,796(b) 7,500 N/A
Senior Vice President 1996 78,205 20,000 2,850(f) N/A N/A
G. Reid Teaney, Senior 1997 165,000 90,000 9,196(b) 10,000 N/A
Vice President 1996 74,666 40,000 3,300(g) N/A N/A
Mark A. Peterson, 1997 104,000 45,000 7,970(b) 5,000 N/A
CFO 1996 100,000 25,000 4,800(f) N/A N/A
Price A. Sloan, 1997 104,000 45,000 7,194(b) 5,000 N/A
General Counsel and
Secretary
</TABLE>
- ---------
(a) The amount reflects bonus in the year it was earned. All or a portion of
the bonus may have been paid in the subsequent year.
(b) Amounts reported as "Other Annual Compensation" in 1997 include (1) JCN's
matching contribution to its 401K savings plan as follows: Barrett Brady
$5,200, Edward de Avila $3,596, G. Reid Teaney $1,996, Mark Peterson
$3,170 and Price Sloan $2,394; (2) automobile allowances as follows:
Edward de Avila $7,200, G. Reid Teaney $7,200, Mark Peterson $4,800 and
Price Sloan $4,800; (3) the personal use of company automobile for Barrett
Brady $5,452; and (4) the cost of a country club membership for Barrett
Brady $5,209.
(c) The amount reported reflects the value of personal automobile use paid to
Mr. Brady by JCN and the cost of a country club membership provided to Mr.
Brady by JCN.
(d) The amount reported includes $6,975 paid to Mr. Frost as director fees.
(e) The amounts reflected for Mr. McCarthy in 1995 do not attempt to adjust for
the value of cash and property received by Mr. McCarthy pursuant to the
Settlement Agreement that resolved the significant shareholder litigation
that occurred in 1995.
(f) The amount reported includes $6,533 deferred by Mr. McCarthy and $4,333
contributed by JCN under JCN's 401(k) savings plan.
(g) The amount reported is an automobile allowance.
(h) The amount reported includes $1,050 paid to Mr. McCarthy as director fees
and $4,338 paid as premiums under supplemental split dollar life insurance
policies for Mr. McCarthy.
83
<PAGE>
Outside Director Compensation
Directors attending, whether by telephone or in person, any regular or
special meeting of the JCN Board of Directors are paid $1,000 per meeting.
Directors who are members of committees of the JCN Board of Directors
attending, whether by telephone or in person, any regular or special meeting of
a committee of the JCN Board of Directors are paid $500 per meeting. Directors
who are also employees of JCN are not paid directors' fees.
Options and Stock Appreciation Rights
Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------------------
Potential Realizable Value
Percent of at Assumed Annual Rates
Number of Total Market of Stock Price Appreciation
Securities Options Price on for Option Term
Underlying Granted to Exercise or Date of ----------------------------
Options Employees in Base Price Grant Expiration
Name Granted Fiscal Year ($/Shr) ($/Shr) Date 0% ($) 5% ($) 10%($)
- ----------------------- ------------ -------------- ------------- --------- ----------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
G. Reid Teaney,
Senior Vice President 10,000 36% 30 46 7/22/07 160,000 449,292 893,122
Edward de Avila,
Senior Vice President 7,500 28% 30 46 7/22/07 120,000 336,969 669,841
Mark A. Peterson, CFO 5,000 18% 30 46 7/22/07 80,000 224,646 446,561
Price Sloan,
General Counsel 5,000 18% 30 46 7/22/07 80,000 224,646 446,561
</TABLE>
Aggregated Option/SAR Exercises in Last
Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
Value of Unexercised
Number of Underlying In-the-Money
Unexercised Options at Options/SARS at
Fiscal Year-End (#) Fiscal Year-End ($)
------------------------ ---------------------
Shares Acquired
(#) Value Exercisable/ Exercisable/
Name on Exercise Received ($) Unexercisable Unexercisable
- ---------------------------------------- ---------------- -------------- ------------------------ ---------------------
<S> <C> <C> <C> <C>
Barrett Brady, CEO 25,000 1,500,156 79,000/120,000 4,754,512/6,075,000
G. Reid Teaney, Senior Vice President - 0 - - 0 - 0/10,000 0/400,000
Edward de Avila, Senior Vice President - 0 - - 0 - 0/7,500 0/300,000
Mark A. Peterson, CFO - 0 - - 0 - 0/5,000 0/200,000
Price Sloan, General Counsel -0- -0- 0/5,000 0/200,000
</TABLE>
Employment Agreements
JCN has an employment agreement with its President and Chief Executive
Officer, Mr. Barrett Brady. The principal terms of Mr. Brady's employment
agreement provide that for a period of five years ending on December 31, 2000,
Mr. Brady shall receive a base salary of $225,000 per year subject to annual
review and adjustment at the discretion of the JCN Board of Directors.
Additionally, Mr. Brady shall be entitled to an annual incentive discretionary
bonus based upon achieving goals to be set annually, with an opportunity to
earn up to 80% of his base salary as annual incentive discretionary bonus.
Moreover, Mr. Brady shall be entitled to fixed supplemental retirement benefits
of $78,000 per year payable for 15 years commencing upon the earlier of his
disability or reaching the age of 60. Such supplemental retirement benefits
vest at a rate of 40% on January 1, 1996, 20% on December 31, 1996, and 10%
annually on December 31st for the years 1997, 1998, 1999 and 2000. Mr. Brady
has been granted an option to purchase 64,000 shares of JCN Common Stock, or
their equivalent, at a price of $.0125 per share, which option vested 50% on
January 1, 1996 and the remaining 50% vested on January 1, 1997. Mr. Brady has
also been granted an option to purchase 160,000 shares of JCN Common Stock, or
their equivalent, at a price of $19.375 per share. Such options vest at a rate
of 10% on December 31, 1996, 15% on December 31, 1997, and 25% annually on
December 31st for the years 1998, 1999 and 2000. Mr. Brady shall be subject to
a confidentiality and non-competition agreement during the term of the
agreement and for a period of one year after termination.
Mr. Brady's employment agreement provides for termination by JCN for
cause, by voluntary resignation of Mr. Brady, or by JCN without cause. The
agreement also provides Mr. Brady the right to terminate the agreement upon a
change in
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<PAGE>
control of JCN, which is defined as the acquisition by any entity or affiliated
group of 35% or more of the combined voting power of the outstanding securities
of JCN. Upon termination of the agreement by either party as a result of a
change of control or by JCN without cause, Mr. Brady shall be entitled to
certain rights, including, but not limited to, immediate vesting of all stock
options and the right to receive his salary and normal employee benefits for
the longer of twenty-four months or the remainder of the agreement's term.
JCN has an employment agreement with its Senior Vice President of
Development, Mr. Edward A. de Avila. The principal terms of Mr. de Avila's
employment agreement provide that for a period of three years ending on August
12, 1999, Mr. de Avila shall receive a base salary of $200,000 per year subject
to annual review and increase at the discretion of JCN's Board of Directors.
Additionally, Mr. de Avila shall be entitled to an annual incentive
discretionary bonus, with an opportunity to receive up to 40% of his base
salary as annual incentive discretionary bonus. Mr. de Avila's employment
agreement provides for termination by JCN for cause, by voluntary resignation
of Mr. de Avila, or by JCN without cause. Upon termination of the Agreement by
JCN without cause, Mr. de Avila shall be entitled to certain rights, including,
but not limited to, the right to receive his annual salary and normal employee
benefits from the date of termination until August 12, 1999.
JCN has an employment agreement with its Senior Vice President, Mr. G.
Reid Teaney. The principal terms of Mr. Teaney's employment agreement provide
that for a period of three years ending on July 14, 1999, Mr. Teaney shall
receive a base salary of $160,000 per year subject to annual review and
increase at the discretion of JCN's Board of Directors. Additionally, Mr.
Teaney shall be entitled to an annual incentive discretionary bonus with an
opportunity to receive up to 60% of his base salary as annual incentive
discretionary bonus. Mr. Teaney's employment agreement provides for termination
by JCN for cause, by voluntary resignation of Mr. Teaney, or by JCN without
cause. Upon termination of the Agreement by JCN without cause, Mr. Teaney shall
be entitled to certain rights, including, but not limited to, the right to
receive his annual salary and normal employee benefits from the date of
termination until July 14, 1999.
JCN has an employment agreement with its Chief Financial Officer, Mr. Mark
A. Peterson. The principal terms of Mr. Peterson's employment agreement provide
that for a period of three years ending on December 31, 1998, Mr. Peterson
shall receive a base salary of $100,000 per year subject to annual review and
increase at the discretion of the JCN Board of Directors. Additionally, Mr.
Peterson shall be entitled to an annual incentive discretionary bonus set by
the JCN Board of Directors. Mr. Peterson's employment agreement provides for
termination by JCN for cause, by voluntary resignation of Mr. Peterson, or by
JCN without cause. Upon termination of the Agreement by JCN without cause, Mr.
Peterson shall be entitled to certain rights, including, but not limited to,
the right to receive his annual salary and normal employee benefits for a
period of not less than twelve months following the date of termination.
JCN has an employment agreement with its General Counsel and Secretary,
Mr. Price A. Sloan. The principal terms of Mr. Sloan's employment agreement
provide that for a period of three years ending on March 19, 1999, Mr. Sloan
shall receive a base salary of $100,000 per year subject to annual review and
increase at the discretion of the JCN Board of Directors. Additionally, Mr.
Sloan shall be entitled to an annual incentive discretionary bonus set by the
JCN Board of Directors. Mr. Sloan's employment agreement provides for
termination by JCN for cause, by voluntary resignation of Mr. Sloan, or by JCN
without cause. Upon termination of the Agreement by JCN without cause, Mr.
Sloan shall be entitled to certain rights, including, but not limited to, the
right to receive his annual salary and normal employee benefits for a period of
not less than twelve months following the date of termination.
Change in Control Agreements
JCN has entered into change in control agreements with several of its
employees to ensure their continued service and dedication to JCN and their
objectivity in considering on behalf of JCN any transaction which would result
in a change in control of JCN. Under an agreement with Mr. Brady, if Mr.
Brady's employment is terminated or not renewed following a change in control
(defined therein to exclude any transaction approved in advance by Mr. Brady in
his capacity as a member of the Board), JCN must pay to Mr. Brady (i) his base
salary and medical, dental, life, and long-term disability benefits through
December 31, 2000 or for twenty-four months, whichever period is longer, (ii)
cause all stock options to become immediately vested and (iii) cause certain
supplemental retirement benefits to become immediately vested. Mr. Brady also
has the right to voluntarily terminate employment during the period of six
months following a change in control and receive the same benefits. At his
current compensation level, the resulting benefit to Mr. Brady would be
approximately $6,215,783.
Under agreements with Messrs. Cook, de Avila, Dixon, Fox, Peterson, Sloan,
Stephenson and Teaney and Ms. Marietti, during the twenty-four month period
after a change in control, the employee would be entitled to receive a lump-sum
cash payment and certain insurance benefits if such employee's employment were
terminated by JCN other than for cause or by
85
<PAGE>
such employee for good reason (as defined therein). Upon such termination, JCN
must make a lump-sum cash payment to the employee, in addition to any other
compensation to which the employee is entitled, of (i) two (or three times in
the case of Messrs. de Avila, Peterson, Sloan, and Teaney) such employee's base
salary, (ii) an amount equal to the employee's base salary multiplied by such
employee's management incentive bonus target participation level percentage and
(iii) cause all stock options to become immediately vested. JCN must also
maintain medical and dental insurance coverage for the employee and his or her
dependents, on the same or substantially similar terms and conditions that
existed immediately prior to the termination, for eighteen months. At current
compensation levels, the following employees would receive the following
approximate amounts: de Avila, $1,019,610; Peterson, $618,260; Sloan, $618,260;
and Teaney, $1,016,171. JCN must also pay any excise tax payments required to
be withheld under the Internal Revenue Code from any payments made to the
employee.
Stock Option Plan
The Board of Directors of JCN on March 28, 1996 adopted the 1996 Stock
Option Plan (the "JCN Plan") that allowed the granting of stock options to
eligible plan participants. The JCN Shareholders approved the JCN Plan at their
1996 annual meeting on May 29, 1996. An amendment and restatement of the JCN
Plan was approved subsequently by the Board of Directors to reflect recent
changes in the federal securities regulations relevant to the JCN Plan. The JCN
Plan authorizes the Board to issue up to 480,000 shares of JCN Common Stock. If
an option granted under the JCN Plan expires or is canceled without having been
exercised or vested, the shares subject to the unvested and canceled options
will be available thereunder for subsequent grants of options. The type,
amount, and conditions of any options granted under the Plan are determined by
the compensation committee, or such other committee as the JCN Board of
Directors determines.
Compensation Committee Report on Executive Compensation
Compensation Philosophy. JCN's executive compensation program is designed
to provide fair compensation to executives based on their performance and
contribution to JCN and to provide incentives that attract and retain key
executives, instill a long-term commitment to JCN and develop pride and a sense
of Company ownership, all in a manner consistent with shareholder interests.
Given these objectives, the executive officers' compensation package includes
primarily two elements: (i) base salary, which is reviewed annually; and (ii)
incentive compensation consisting of stock options and bonuses.
Annual adjustments to the base salaries of JCN's executives are based on
JCN's performance during the preceding fiscal year and upon a subjective
evaluation of each executive's individual contribution to that performance. In
evaluating overall performance of JCN, the primary focus is on JCN's financial
performance for the year. Additionally, certain intangible criteria, including
whether JCN achieved strategic goals and conducted its operations in accordance
with the standards of business expected of JCN by its shareholders and the
community in which it operates, may also be considered.
Stock options are likely to be granted annually in the future as
additional compensation in an effort to link each executive's future
compensation to the long-term financial success of JCN, as measured by stock
performance. The total number of options awarded each executive will be based
on an evaluation of the performance of each executive under consideration
without regard to the number of options held by or previously granted to each
executive.
Compensation of the Chief Executive Officer. For the fiscal year ending
December 31, 1997, Barrett Brady, JCN's Chief Executive Officer, received a
bonus of $150,000. Mr. Brady's bonus was based on a subjective valuation that
considered, in part, JCN's financial performance for the fiscal year as well as
the implementation of business strategies established by the JCN Board of
Directors.
This report has been issued over the names of each member of the
compensation committee, Thomas J. Turner, III, Chairman, and Mark C. Demetree.
86
<PAGE>
Performance of JCN Common
Prior to 1997 JCN did not have a class of stock registered under the
Securities Exchange Act of 1934. Shares of JCN Common have been traded in the
over-the-counter market through inter-broker bulletin board trading under the
symbol "NCJC.BB." Trading prior to March 31, 1996 was very infrequent. The
graph set forth below compares the yearly percentage change in cumulative
stockholder return of JCN's shares of common stock since March 31, 1996 against
the cumulative return of the NASDAQ Stock (U.S.), and the group of publicly
held companies sharing JCN's Standard Industrial Code: 6552 -- Subdividers and
Developers (the "Peer Group Index") covering the same time period. The graph is
based on $100 invested on March 31, 1996, in JCN Common, the NASDAQ Stock
(U.S.), and the Peer Group Index, each assuming dividend reinvestment.
(Performance Graph appears here. See the table below for plot points.)
<TABLE>
<CAPTION>
3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
<S> <C> <C> <C> <C> <C> <C> <C> <C>
J.C. Nichols 100.00 160.00 143.28 143.28 160.00 152.84 243.58 334.33
NASDAQ - Total US 100.00 96.79 93.61 98.05 85.37 96.70 115.37 104.12
Peer Group Index 100.00 107.41 110.37 115.56 109.69 129.76 151.30 141.76
</TABLE>
87
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
Table A describes the security ownership of certain beneficial owners,
while Table B describes the security ownership by management as of April 27,
1998.
TABLE A -- Beneficial ownership of those owning more than five percent of the
outstanding shares of JCN Common
<TABLE>
<CAPTION>
Amount and
Nature of Percentage of
Name of Beneficial Outstanding
Beneficial Owner Address of Beneficial Owner Ownership Shares
- ------------------------------------------------ ----------------------------------- ------------------ --------------
<S> <C> <C> <C>
INTRUST Bank, N.A., trustee of the J.C. Nichols
Company Employee Stock Ownership Trust INTRUST Bank, N.A. 1,390,003(a) 30.1%
Attn: Scott Rankin
4000 Somerset Drive
Prairie Village, KS 66208
Stephen Feinberg 450 Park Avenue, 28th Floor 660,897(b) 14.3%
New York, NY 10022
The Miller Nichols Living Trust Miller Nichols, Jeannette Nichols 567,095(c) 12.3%
and Clarence Roeder, Trustees
400 West 49th Terrace
Alameda Towers
Kansas City, MO 64112
Kay N. Callison Kay N. Callison 277,440(d) 6.0%
55 Lemans Court
Shawnee Mission, KS 66208
</TABLE>
- ---------
(a) All 1,390,003 shares are owned by the ESOT and are held in the record name
of INTRUST's nominee, Transco & Company. INTRUST Bank, N.A. and Transco &
Company disclaim beneficial ownership of all such shares.
(b) 160,957 shares are owned by Cerberus Partners, L.P., a partnership
organized under the laws of Delaware ("Cerberus"). 173,220 shares are
owned by Cerberus International, Ltd., a corporation organized under the
laws of the Bahamas ("International"). 74,500 shares are owned by Ultra
Cerberus Fund, Ltd., a corporation organized under the laws of the Bahamas
("Ultra"). Mr. Feinberg possesses sole voting and investment control over
all securities owned by Cerberus, International and Ultra. In addition,
252,220 shares are owned by various other persons and entities for which
Stephen Feinberg possesses certain investment authority.
(c) Shares reflected include shares beneficially owned by the Miller Nichols
Living Trust. Miller Nichols and Clarence Roeder, Chairman Emeritus and
Director of JCN, respectively, and Ms. Jeanette Nichols are trustees of
the Miller Nichols Living Trust, none of whom have sole voting or
investment powers.
(d) Ms. Callison is a director of JCN. Of the shares reported by Ms. Callison,
114,040 are held individually by Ms. Callison and she has sole voting and
investment power over such shares. Additionally, 37,640 shares are held in
trusts for which Ms. Callison's spouse has sole voting and dispositive
power. Ms. Callison is the trustee and has sole investment and voting
power for a trust for the benefit of her daughter, Elizabeth Callison.
Such trust holds 40,800 shares. Ms. Callison is the co-trustee with her
son, Mark Callison, and shares investment and voting power for a trust for
the benefit of Mark Callison. Such trust holds 62,480 shares. Ms. Callison
is co-trustee with Ann Nichols and UMB Bank, N.A. of Kansas City of the
Nancy Nichols Lopez Trust, which owns 7,680 shares. Ms. Callison, Ms.
Nichols and UMB Bank share investment and voting power over such shares.
Ms. Callison is the co-trustee with Commerce Bank of the Miller Nichols
Trust, which owns 14, 800 shares for the benefit of Ms. Ann Nichols. Ms.
Callison and Commerce Bank share investment and voting power over such
shares.
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<PAGE>
TABLE B -- Management Ownership
<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Name, Title Beneficial Ownership Outstanding Shares
- ----------------------------------------------------------------------------- ---------------------- -------------------
<S> <C> <C>
Barrett Brady, Director, President and Chief Executive Officer .............. 122,672(a) 2.6%
Price A. Sloan, General Counsel and Secretary ............................... 2,550(b) *
G. Reid Teaney, Senior Vice President ....................................... 2,600(c) *
Mark A. Peterson, Vice President, Treasurer and Chief Financial Officer ..... 1,300(d) *
Edward A. de Avila, Senior Vice President ................................... 1,500(e) *
Clarence Roeder, Director ................................................... 567,095(f) 12.3%
Kay N. Callison, Director ................................................... 277,440(g) 6.0%
William K. Hoskins, Director ................................................ 2,240 *
Thomas J. Turner, III, Director ............................................. 1,500 *
Beneficial Ownership of Directors and Executive Officers as a Group ......... 978,897 21.2%
</TABLE>
- ---------
* Less than one percent.
(a) Of the 122,672 shares reported by Mr. Brady, 2,660 shares are held
individually by Mr. Brady's spouse. Mr. Brady disclaims beneficial
ownership of such shares. Additionally, shares reflected as beneficially
owned by Mr. Brady include 8,000 shares held by the Fred Brady Trust dated
December 5, 1985. Mr. Brady is a Trustee of such trust and has sole voting
and investment power over such shares. An additional 79,000 shares
reported by Mr. Brady are attributable to an unexercised but vested stock
option from JCN.
(b) Of the 2,550 shares reported by Mr. Sloan, 750 are held individually by Mr.
Sloan and 300 are held individually by Mr. Sloan's spouse. Additionally,
500 shares are held in a life insurance trust for the benefit of Mr.
Sloan's spouse. Mr. Sloan does not have voting or investment power over
the shares held by the trust and disclaims beneficial ownership of such
shares. An additional 1,000 shares reported by Mr. Sloan are attributable
to an unexercised but vested stock option from JCN.
(c) Of the 2,600 shares reported by Mr. Teaney, 300 are held individually by
Mr. Teaney's spouse. An additional 2,000 shares reported by Mr. Teaney are
attributable to an unexercised but vested stock option from JCN.
(d) Of the 1,300 shares reported by Mr. Peterson, 1,000 shares are attributable
to an unexercised but vested stock option from JCN.
(e) All of the shares reported by Mr. de Avila are attributable to an
unexercised but vested stock option from JCN.
(f) All 567,095 shares reported by Mr. Roeder are held by the Miller Nichols
Living Trust. Mr. Roeder, Ms. Jeannette Nichols and Mr. Miller Nichols,
Chairman Emeritus, are co-trustees of the Miller Nichols Living Trust. Mr.
Roeder does not have sole voting or investment powers for such shares. Mr.
Roeder disclaims all beneficial ownership of such shares.
(g) Ms. Callison is a director of JCN. Of the shares reported by Ms. Callison,
114,040 shares are held individually by Ms. Callison and she has sole
voting and investment power over such shares. Additionally, 37,640 shares
are held in trusts for which Ms. Callison's spouse has sole voting and
dispositive power. Ms. Callison is the trustee and has sole investment and
voting power for a trust for the benefit of her daughter, Elizabeth
Callison. Such trust holds 40,800 shares. Ms. Callison is co-trustee with
her son, Mark Callison, and shares investment and voting power for a trust
for the benefit of Mark Callison. Such trust holds 62,480 shares. Ms.
Callison is co-trustee with Ann Nichols and UMB Bank, N.A. of Kansas City
of the Nancy Nichols Lopez Trust, which owns 7,680 shares. Ms. Callison,
Ms. Nichols and UMB Bank share investment and voting power over such
shares. Ms. Callison is the co-trustee with Commerce Bank of the Miller
Nichols Trust, which owns 14,800 shares for the benefit of Ms. Ann
Nichols. Ms. Callison and Commerce Bank share investment and voting power
over such shares.
Certain Relationships and Related Transactions
Mr. Thomas J. Turner, III is a Director of JCN and is president and
principal shareholder of Charter American Mortgage Company, a business that
prepares and presents mortgage loan applications to institutional mortgage
lenders. Charter American Mortgage Company has from time to time been asked to
provide services to JCN, and JCN has obtained loans as a result of loan
applications taken by Charter American Mortgage Company. Such loans were
obtained by JCN at rates competitive with the rates charged by other mortgage
lenders. Charter American Mortgage Company has earned approximately $145,875 in
the last year in loan origination fees on mortgage financing obtained by JCN as
a result of services provided by Charter American Mortgage Company.
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<PAGE>
Mr. C. Q. Chandler, III is a director of JCN and is also chairman of the
board of directors and a significant shareholder of INTRUST. INTRUST received
payments of fees from the ESOT totaling $114,480 during 1997 for serving as
trustee of the ESOT. The fee was determined based on a percentage of assets in
the ESOT.
On January 29, 1997, JCN purchased all outstanding shares of JCN Common
owned beneficially and of record by AHI. Additionally, Mr. John Simon and Mr.
James W. Quinn, who are affiliated with AHI, resigned as directors of JCN. JCN
paid consideration of $27.25 per share, or a total of $25,856,980 for the
948,880 shares of JCN Common owned by AHI. At the closing, JCN delivered to AHI
$12,809,880 in cash (plus eight percent (8%) interest per annum from January
15, 1997 to January 29, 1997 in an amount totaling $39,307). JCN also executed
a promissory note in the amount of $12,989,600 (which reflects a $57,500
reduction for certain expenses), bearing interest at a rate of eight percent
(8%) per annum with interest accruing commencing on January 15, 1997. That
promissory note is secured by the pledge of a mortgage receivable and real
property. The purchase price for the stock held by AHI was based on a
negotiated price within the range of trades in the fourth quarter of 1996,
which trades were between $27.00 and $31.06 per share. The transaction was
negotiated on behalf of JCN over a number of months by management of JCN, with
input from the JCN Board of Directors. The transaction was unanimously approved
by the JCN Board of Directors without the participation of Mr. Simon or Mr.
Quinn.
MANAGEMENT AND OPERATION OF HIGHWOODS AFTER THE MERGER
Upon the consummation of the Merger, the executive officers and directors
of Highwoods shall continue to serve for the balance of their unexpired terms
or their earlier death, resignation or removal. In addition, it is expected
that Barrett Brady will become a senior vice president of Highwoods and the
Highwoods Board of Directors will be expanded to include one independent
director selected by the JCN Board of Directors.
Barrett Brady, age 51, has been serving as President and Chief Executive
Officer of JCN since September of 1995. Mr. Brady has served as a director of
JCN since December 1995. For more than five years prior to joining JCN, Mr.
Brady served as President of Dunn Industries, Inc., an investment holding
company in the primary business of regional commercial and industrial general
contracting. Mr. Brady is also a director of North American Savings Bank.
ANTICIPATED EFFECTS OF THE MERGER ON
RESULTS OF OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
As a result of the Merger, Highwoods expects to experience a significant
increase in net income available to Highwoods Common as well as an increase in
total revenues, property and maintenance expenses, real estate taxes and
insurance, property management expenses, depreciation expense, interest expense
and general and administrative expenses.
Also in connection with the Merger, Highwoods expects to assume
liabilities for financial statement purposes of approximately $250 million.
Because of the cash election option available to JCN Shareholders and the
varying exchange ratio in the Merger, Highwoods cannot estimate how many shares
of Highwoods Common will be issued or the amount of cash to be paid as
consideration in the Merger. No more than 40% of the total Merger
consideration, however, will be in cash. If the maximum amount of cash is paid,
the Merger consideration will consist of approximately $126 million in cash and
approximately 5.92 million shares of Highwoods Common. If the maximum number of
shares of Highwoods Common is issued, the Merger consideration will consist of
approximately 9.86 million shares of Highwoods Common and no cash. Highwoods
also expects to incur approximately $14.5 million in related Merger costs.
Highwoods expects to fund the cash portion of the purchase price and the Merger
expenses through borrowings under its Revolving Loans. After the closing of the
Merger, Highwoods will terminate JCN's line of credit facility but will
continue to maintain Highwoods' Revolving Loans. Highwoods and the Highwoods
Operating Partnership may also guarantee or assume debt obligations of JCN.
Highwoods expects to meet its short-term liquidity requirements including
capital expenditures relating to maintaining its existing properties and JCN's
properties generally through its working capital, net cash provided by
operating activities and borrowings under Highwoods' Revolving Loans. Highwoods
considers its cash provided by operating activities to be adequate to meet
operating requirements and payments of distributions. Highwoods also expects to
meet its long-term liquidity requirements, such as scheduled mortgage debt
maturities, reduction of outstanding amounts under its line of credit, property
acquisitions, financing of construction and development activities related to
JCN and capital improvements through the issuance of unsecured notes and equity
securities including additional Common Units as well as from undistributed FFO
and proceeds received from the disposition of certain properties.
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<PAGE>
COMPARISON OF RIGHTS OF SHAREHOLDERS
Highwoods is a Maryland corporation subject to the provisions of the MGCL.
JCN is a Missouri corporation subject to the provisions of the GBCL. The JCN
Shareholders, whose rights as shareholders currently are governed by Missouri
law, the JCN Articles and the JCN Bylaws, will become shareholders of Highwoods
to the extent they receive shares of Highwoods Common upon consummation of the
Merger; their rights as Highwoods shareholders will then be governed by
Maryland law, the rules of the NYSE, the Highwoods Articles and the Highwoods
Bylaws.
Discussed below are the differences between the rights of JCN Shareholders
and holders of Highwoods Common that are material to a JCN Shareholder's
investment decision with respect to the Merger.
Election of Directors
Highwoods: The Highwoods Board of Directors is divided into three classes,
and the directors are elected by classes to three-year terms, so that
approximately one-third of the directors of Highwoods will be elected at each
annual meeting of Highwoods shareholders. The election of a director requires
the vote of a plurality of all shares cast.
JCN: Like Highwoods, the JCN Board of Directors is divided equally into
three classes with one class of directors being elected at each annual meeting
of the JCN Shareholders. However, JCN Shareholders elect the JCN Directors
through cumulative voting, pursuant to which each share of stock eligible to be
cast entitles its holder to cast as many votes as there are directors to be
elected, and to cast all of such votes for the same candidate.
Removal of Directors
Highwoods: A director of Highwoods may only be removed from office for
cause and only by the affirmative vote of two-thirds of the shares of capital
stock of Highwoods entitled to vote in the election of directors, voting
together as a group. For the purposes of the removal of a director, "cause"
means the willful and continuous failure to substantially perform or willful
gross misconduct that demonstrably and materially harms Highwoods.
JCN: The JCN Bylaws permit a director to be removed by the affirmative
vote of (i) the holders of a majority of the shares of JCN Common at an annual
meeting or a special meeting called for that purpose or (ii) a majority of the
members of the JCN Board of Directors if the JCN Board of Directors is of the
opinion that such director has violated his fiduciary duties, engaged in an
interested director transaction without fully informing the JCN Board of
Directors or personally engaged in any transaction involving corporate property
that was not fully disclosed to the JCN Board of Directors and was not fair to
JCN. Additionally, since JCN elects directors through cumulative voting, if
less than the entire JCN Board of Directors is to be removed, no one of the
directors may be removed if the votes cast against his removal would be
sufficient to elect him if then cumulatively voted at an election of the entire
JCN Board of Directors or at an election of the class of directors of which he
is a part.
Indemnification and Liability of Directors and Officers
Highwoods: Under the MGCL, a corporation may indemnify its officers,
directors, employees or agents for expenses, judgments or settlements actually
and reasonably incurred by them in connection with suits and other legal
proceedings, unless (i) the act or omission 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 person actually received an
improper personal benefit in money, property or services; or (iii) in the case
of any criminal proceeding, the person had reasonable cause to believe that the
act or omission was unlawful. Regardless, indemnification may not be made to
such persons in connection with a proceeding by or in the right of the
corporation in which the person seeking indemnification is found liable to the
corporation or in any other proceeding in which the director is found liable
for receiving an improper personal benefit. The Highwoods Articles provide that
it shall indemnify its directors and officers to the full extent permitted by
the MGCL and its other employees and agents to the extent permitted by law if
so authorized by the Highwoods Board of Directors or the Highwoods Bylaws. The
Highwoods Articles provide that no subsequent amendment or repeal of the
Highwoods Articles shall limit or eliminate the benefits provided under its
indemnification provisions with respect to any act or omission that occurred
prior to such amendment or repeal.
The MGCL permits a corporation to include in its charter provisions
expanding or limiting the liability of directors and officers to Highwoods or
its shareholders for money damages, so long as such provisions do not limit the
liability of directors or officers (i) for the amount of any improper benefit
or profit in money, property or services actually received or (ii) to the
extent that a judgment or other final adjudication adverse to the director or
officer based on a finding in the proceeding that the person's action, or
failure to act, resulted from active and deliberate dishonesty and was material
to the
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causes of action adjudicated in the proceeding. The Highwoods Articles limit
the liability of directors and officers to the fullest extent allowed by the
MGCL and also state that no amendment or repeal of the Highwoods Articles shall
limit or eliminate this limitation on liability with respect to any act or
omission occurring before the amendment or repeal.
JCN: The GBCL authorizes a Missouri corporation to indemnify a director,
officer, employee or agent for actually and reasonably incurred expenses in
connection with suits and other legal proceedings, if (i) such person acted in
good faith, (ii) such person acted in a manner reasonably believed to be in or
not opposed to the best interests of the corporation, and (iii) with respect to
any criminal action or proceeding, such person had no reasonable cause to
believe his conduct was unlawful. No indemnification may be made, however, in
respect of any claim by or in the right of the corporation as to which such
person was adjudged to be liable for negligence or misconduct in the
performance of his duties to the corporation unless and to the extent that the
court in which the action or suit was brought determines upon application that,
despite the adjudication of liability and in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for the
expenses that the court deems proper. A corporation also may give any further
indemnity to any such person, if such further indemnity is either (i)
authorized, directed or provided for in the articles of incorporation of the
corporation or (ii) is authorized, directed or provided for in any bylaw or
agreement of the corporation that has been adopted by a vote of the
shareholders of the corporation; provided that no such indemnity shall
indemnify any person from or on account of such person's conduct that was
finally adjudged to have been knowingly fraudulent or deliberately dishonest or
to have engaged in willful misconduct. The JCN Bylaws provide that JCN will
indemnify its directors and officers who are or would be a party to any
proceeding, whether or not in right of the corporation, as a result of such
person's service to or at the request of JCN, against expenses (including
attorneys' fees), judgments, fines and settlement amounts paid or incurred by
him, except if such person is finally adjudged to have been knowingly
fraudulent or deliberately dishonest or to have engaged in willful misconduct.
Additionally, the JCN Bylaws permit the JCN Board of Directors to indemnify its
employees and agents to a similar extent.
The GBCL does not contain any provisions allowing the limitation of
liability of a director or officer. The JCN Bylaws do, however, limit the
liability of any director or officer of JCN on account of any action taken or
omitted as a director or officer of JCN or any other corporation at the request
of JCN, if such person (i) exercised prudent care and skill under the
circumstances or (ii) acted or did not act upon the advice of corporate counsel
which such person had no reasonable grounds to disbelieve.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling JCN or
Highwoods pursuant to the foregoing provisions, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
General Provisions Affecting Change of Control
Highwoods: The MGCL provides that, unless a corporation's articles of
incorporation or bylaws provide otherwise, certain business combinations,
including mergers, consolidations, share exchanges and transfers of assets,
require the approval of two-thirds of the shares entitled to vote thereon.
However, the Highwoods Articles provide that, notwithstanding the foregoing,
such business combinations may be taken by the affirmative vote of the holders
of a majority of the total number of shares of capital stock entitled to vote,
voting as a class. Additionally, under the MGCL, shareholder approval is not
required for business combinations in which Highwoods would be the surviving
corporation in the merger and (i) the merger does not reclassify or change the
surviving corporation's outstanding stock or otherwise amend its charter and
(ii) the number of shares of stock of the surviving corporation to be issued or
delivered in connection with the merger does not exceed 20% of the number of
shares of the same class or series outstanding immediately prior to the merger.
The NYSE also requires shareholder approval as a prerequisite to listing shares
to be issued in certain mergers or other acquisition transactions, including
any transaction that would result in the present or potential increase of 20%
or more in the outstanding shares of common stock of the acquiring corporation.
JCN: The GBCL provides that certain business combinations, including
mergers and consolidations, require the approval of the holders of two-thirds
of all outstanding shares entitled to vote thereon. The JCN Articles and JCN
Bylaws do not require otherwise.
Voting Rights of Control Shares
Highwoods: The MGCL provides that "control shares" acquired in a control
share acquisition have no voting rights except to the extent approved by a vote
of two-thirds of the shareholders, excluding shares owned by the acquiror, by
officers or by directors who are also employees of Highwoods. "Control shares"
are voting shares of stock that, if aggregated
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with all other such shares of stock previously acquired by the acquiror or for
which the acquiror is able to exercise or direct the exercise of voting power,
would entitle the acquiror to exercise voting power in electing directors in
excess of one-fifth, one-third or a majority of all voting power. The Highwoods
Bylaws exempt Highwoods from the control share acquisition provision of the
MGCL. Because the Highwoods Bylaws may be amended by the Highwoods Board of
Directors without shareholder approval, the Maryland control share statute may
still have the effect of increasing the difficulty of completing a change of
control transaction.
JCN: The GBCL contains "control share acquisition" provisions similar to
those of the MGCL. In Missouri, an acquiror of a corporation subject to the
GBCL's control share acquisition provisions would not be able to vote control
shares unless certain disclosure requirements are satisfied and the retention
of voting rights by such shareholder is approved by at least a majority of
shares entitled to vote and a majority of all non-interested shares entitled to
vote. The JCN Articles exempt JCN from the control share acquisition provisions
of the GBCL.
Business Combinations with Interested Shareholders
Highwoods: The MGCL establishes special requirements with respect to
business combinations between Maryland corporations and interested shareholders
unless exemptions are applicable. An "interested shareholder" is generally any
holder of 10% or more of the voting power of the outstanding voting stock of
the corporation. Among other things, the MGCL prohibits for a period of five
years a merger and other specified or similar transactions between a company
and an interested shareholder and requires a supermajority vote for such
transactions after the end of the five-year period. The Highwoods Articles
contain a provision exempting Highwoods from the requirements and provisions of
the Maryland business combination statute. There can be no assurance that such
provision will not be amended or repealed at any point in the future. If the
foregoing exemption in the Highwoods Articles is amended, the Maryland business
combination statute could have the effect of discouraging offers to acquire
Highwoods and of increasing the difficulty of consummating any such offer.
JCN: The GBCL contains provisions regulating a broad range of business
combinations, such as a merger or consolidation, between certain Missouri
corporations and an "interested shareholder" (which is generally defined as any
owner of 20% or more of the corporation's stock) for five years after the date
on which such shareholder became an interested shareholder, unless, among other
things, the stock acquisition that caused the person to become an interested
shareholder was approved in advance by the corporation's board of directors.
This so-called "five-year freeze" provision is effective even if all the
parties should subsequently decide that they wish to engage in a business
combination. Following the five-year period, a corporation cannot enter into a
business combination with an interested shareholder unless the holders of a
majority of the outstanding shares not beneficially owned by an interested
shareholder or an associate or affiliate of an interested shareholder approve
the business combination or the business combination satisfies certain price
and procedural requirements. JCN is governed by the Missouri interested
shareholder statute.
Ownership Limitations and Restrictions on Transfers
Highwoods: For Highwoods to remain qualified as a REIT under the Code, not
more than 50% in value of its outstanding shares of capital stock may be owned,
directly or indirectly, by five or fewer individuals during the last half of a
taxable year, and such shares must be beneficially owned by 100 or more
persons. To ensure that Highwoods remains a qualified REIT, the Highwoods
Articles provide that no holder (other than persons approved by the directors
at their option and in their discretion) may own, or be deemed to own by virtue
of the attribution provisions of the Code, more than 9.8% (the "Ownership
Limit") of the issued and outstanding capital stock of Highwoods. The Highwoods
Board may waive the Ownership Limit if evidence satisfactory to the Highwoods
Board of Directors and Highwoods' tax counsel is presented that the changes in
ownership will not jeopardize Highwoods' status as a REIT.
If any shareholder purports to transfer shares to a person and either the
transfer would result in Highwoods failing to qualify as a REIT, or the
shareholder knows that such transfer would cause the transferee to hold more
than the Ownership Limit, the purported transfer shall be null and void, and
the shareholder will be deemed not to have transferred the shares. In addition,
if any person holds shares of capital stock in excess of the Ownership Limit,
such person will be deemed to hold the excess shares in trust for Highwoods,
will not receive distributions with respect to such shares and will not be
entitled to vote such shares. The person will be required to sell such shares
to Highwoods or to sell such shares at the direction of Highwoods, in which
case Highwoods will be reimbursed for its expense in connection with the sale
and will receive any amount of such proceeds that exceeds the amount such
person paid for the shares. If Highwoods repurchases such shares, it may pay
for the shares with Common Units. The foregoing restrictions on transferability
and ownership will not apply if the Highwoods Board of Directors and the
shareholders (by the affirmative vote of the holders of two-thirds of the
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outstanding shares of capital stock entitled to vote on the matter) determine
that it is no longer in the best interest of Highwoods to continue to qualify
as a REIT.
All certificates representing shares of Highwoods Common bear a legend
referring to the restrictions described above.
Every beneficial owner of more than 5% (or such lower percentage as
required by the Code or regulations thereunder) of the issued and outstanding
shares of capital stock must file a written notice with Highwoods no later than
January 30th of each year, containing the name and address of such beneficial
owner, the number of shares of capital stock owned and a description of how the
shares are held. In addition, such shareholder shall be required upon demand to
disclose to Highwoods in writing such information as Highwoods may request in
order to determine the effect of such shareholder's direct, indirect and
constructive ownership of such shares on the Highwoods' status as a REIT.
These ownership limitations could have the effect of precluding
acquisition of control of Highwoods by a third party.
JCN: JCN has no similar ownership limitations or restrictions on transfer.
Operating Partnership Agreement
Highwoods: The Highwoods Operating Partnership Agreement provides that
Highwoods may not engage in certain change of control transactions without the
approval of the holders of a majority of the outstanding Common Units. Should
Highwoods ever own less than a majority of the outstanding Common Units, this
voting requirement might delay, defer or preclude an acquisition or change in
the control of Highwoods. As of March 31, 1998, Highwoods owned approximately
83% of the Common Units.
The Highwoods Operating Partnership Agreement also contains provisions
(the "Unit Protection Provisions") relating to a limited partner's redemption
right in the event of certain changes of control of Highwoods and under certain
circumstances allows for limited partners to continue to hold Common Units in
the Highwoods Operating Partnership following such a change of control, thereby
maintaining the tax basis in their Common Units. The covered changes of control
(each, a "Trigger Event") are: (i) a merger involving Highwoods in which
Highwoods is not the surviving entity; (ii) a merger involving Highwoods in
which Highwoods is the survivor but all or part of Highwoods' shares are
converted into securities of another entity or the right to receive cash; and
(iii) the transfer by Highwoods to another entity of substantially all of the
assets or earning power of Highwoods or the Highwoods Operating Partnership.
Upon occurrence of a Trigger Event, the rights of a limited partner to
receive a share of Highwoods Common (a "REIT Share") or cash equal to the fair
market value of a REIT Share upon redemption of a Common Unit is converted into
the right to receive a share (a "Replacement Share") or cash equal to the fair
market value thereof of the acquiror or a parent of the acquiror. If the
acquiror does not have publicly traded securities and a parent of the acquiror
does, the publicly traded equity securities of the parent entity with the
highest market capitalization will be the Replacement Shares. If neither the
acquiror nor any parent has publicly traded equity securities, the Replacement
Shares will be the equity securities of the entity with the highest market
capitalization. The number of Replacement Shares to be received by a limited
partner (or to be used to calculate the cash payment due) upon a redemption of
Common Units shall be equal to the number of REIT Shares issuable prior to the
Trigger Event multiplied by (i) the number of Replacement Shares the holder of
a single REIT Share would have received as a result of the Trigger Event or, if
the Replacement Shares have not been publicly traded for one year, (ii) a
fraction, the numerator of which is the Average Trading Price (as defined in
the Highwoods Operating Partnership Agreement) of a REIT Share as of the
Trigger Event and the denominator of which is the Average Trading Price of a
Replacement Share as of the Trigger Event.
If the acquiror in a Trigger Event is a REIT, it must make provision to
preserve an operating partnership structure with terms no less favorable to the
limited partners than currently in place. In addition, the Highwoods Operating
Partnership Agreement provides that, if a distribution of cash or property is
made in respect of a Replacement Share, the Highwoods Operating Partnership
will distribute the same amount in respect of a Common Unit as would have been
received by a limited partner had such partner's Common Units been redeemed for
Replacement Shares prior to such distribution.
Because the Highwoods Operating Partnership Agreement requires an acquiror
to make provision under certain circumstances to maintain the Highwoods
Operating Partnership structure and maintain a limited partner's right to
continue to hold Common Units with future redemption rights, the terms of the
Highwoods Operating Partnership Agreement could also have the effect of
discouraging a third party from making an acquisition proposal for Highwoods.
The Unit Protection Provisions may only be waived or amended upon the
consent of limited partners holding at least 75% of the Common Units (excluding
those held by Highwoods).
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JCN: Unlike Highwoods, JCN is not an umbrella partnership REIT and
therefore has no corresponding operating partnership agreement.
Shareholders' Rights Plan
Highwoods: On October 4, 1997, the Highwoods Board of Directors adopted a
Shareholders' Rights Plan and declared a distribution of one preferred share
purchase right (a "Highwoods Right") for each outstanding share of Highwoods
Common. The Highwoods Rights were issued on October 16, 1997 to each
shareholder of record on such date and are issued with each new issuance of
Highwoods Common after such date and before such time that a person or group
has acquired beneficial ownership of 15% or more of the outstanding Highwoods
Common. The Highwoods Rights have certain anti-takeover effects. The Highwoods
Rights will cause substantial dilution to a person or group that attempts to
acquire Highwoods on terms not approved by the Highwoods Board of Directors.
The Highwoods Rights should not interfere with any merger or other business
combination approved by the Highwoods Board of Directors since the Highwoods
Rights may be redeemed by Highwoods for $.01 per Highwoods Right prior to the
time that a person or group has acquired beneficial ownership of 15% or more of
the outstanding Highwoods Common.
JCN: On July 25, 1997, the JCN Board of Directors adopted a shareholders'
rights plan and declared a dividend of one common stock purchase right (a "JCN
Right") for each outstanding share of JCN Common. The JCN Rights were issued to
each JCN Shareholder of record on July 28, 1997. The JCN Rights provide an
incentive to any potential bidders to negotiate with the JCN Board of Directors
before attempting an acquisition of control of JCN and to discourage takeover
tactics. The JCN Rights should not interfere with any merger or other business
combination approved by the JCN Board of Directors since the JCN Rights may be
redeemed by JCN for $.01 per JCN Right prior to the time that a person or group
has acquired beneficial ownership of 15% or more of the outstanding JCN Common.
Dissenters' Rights of Appraisal
Highwoods: The MGCL eliminates dissenters' rights with respect to shares
of any class or series of stock listed on a national securities exchange.
Holders of Highwoods Common do not have dissenters' rights with respect to the
Highwoods Common because the Highwoods Common is listed on the NYSE.
JCN: The GBCL provides that a shareholder who complies with applicable
statutory procedures is entitled to receive fair value for his or her shares if
the shareholder dissents from certain transactions, including a merger or
consolidation, a disposition of all or substantially all of the assets of a
corporation, or a share exchange. Shareholders also have dissenters' rights
with respect to certain amendments that materially and adversely affect a
dissenter's shares as well as any corporate action taken pursuant to a
shareholder vote to the extent that the articles of incorporation or bylaws or
a resolution of the board of directors provides that voting or non-voting
shareholders are entitled to dissent and obtain payment for their shares. JCN
Shareholders who follow certain procedures are entitled to exercise their
dissenters' rights in the Merger. See "The Merger -- Appraisal Rights."
Dividends
Highwoods: Under the MGCL, Highwoods may pay dividends only to the extent
that, after giving effect to the dividend payment, Highwoods would be able to
pay its indebtedness as it becomes due in the usual course of business and
Highwoods' total assets would be at least equal to the sum of its total
liabilities plus the amount that would be needed to satisfy any liquidation
preferences.
JCN: The GBCL provides that a board of directors, unless its articles of
incorporation provide otherwise, may not declare or pay a dividend when the net
assets of the corporation are below its stated capital or such payment would
cause the net assets of the corporation to be below its stated capital.
Special Meetings
Highwoods: A special meeting of the shareholders of Highwoods may be
called by the Chairman of the Board, the Highwoods Board of Directors, the
President or at the request of shareholders entitled to cast at least 25% of
the votes at such meeting. A special meeting need not be called to consider any
matter that is substantially the same as a matter voted on at any special
meeting of shareholders held during the preceding 12 months unless the meeting
is requested by shareholders entitled to cast a majority of all the votes
entitled to be cast at the meeting.
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JCN: A special meeting of the JCN Shareholders may be convened by any of
the Chairman of the Board, the President, the Secretary, the JCN Board of
Directors or the JCN Shareholders upon the written request of the holders of
not less than 20% of all outstanding shares entitled to vote at any such
meeting.
Amendment of Articles of Incorporation
Highwoods: The Highwoods Articles require the affirmative vote of the
holders of at least a majority of the shares of capital stock outstanding and
entitled to vote thereon voting together as a single class to amend the
Highwoods Articles. Any amendment to provisions relating to the REIT status of
Highwoods, the removal of directors or to the ability to amend the Articles,
requires the affirmative vote of two-thirds of the shares of capital stock of
Highwoods outstanding and entitled to vote thereon, voting together as a single
class.
JCN: Amendments to the JCN Articles require an affirmative vote of a
majority of the outstanding shares entitled to vote thereon. Where shareholders
are entitled to cumulative voting rights in the election of directors, the GBCL
provides that the articles may not be amended to reduce the number of directors
to less than three if the number of shares voted against the proposal would be
sufficient to elect one member of a three-person board under cumulative voting.
Shareholder Proposal Procedures
Highwoods: Shareholder proposals must be received by Highwoods between 90
and 60 days before a shareholders' meeting.
JCN: Shareholder proposals must be received by JCN at least 150 days
before a shareholders' meeting.
LEGAL MATTERS
Certain legal matters in connection with the Merger will be passed upon
for Highwoods by Alston & Bird LLP, Raleigh, North Carolina. Certain legal
matters in connection with the Merger will be passed upon for JCN by Blackwell
Sanders Peper Martin LLP, Kansas City, Missouri.
EXPERTS
The consolidated financial statements and schedule of Highwoods
Properties, Inc., incorporated herein by reference from Highwoods' annual
report (Form 10-K) for the year ended December 31, 1997 (as amended on Form
10-K/A on April 29, 1998 and May 19, 1998), the statements of revenues and
certain expenses of Shelton Properties, Riparus Properties and Winners Circle
for the year ended December 31, 1996 incorporated herein by reference from
Highwoods' current report on Form 8-K dated November 17, 1997, and the
statements of revenue and certain expenses of Anderson Properties, Inc. and
Century Center Group for the year ended December 31, 1996 incorporated herein
by reference from Highwoods' current report on Form 8-K dated January 9, 1997
(as amended on Forms 8-K/A dated February 7, 1997, March 10, 1997 and April 28,
1998), have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon included therein and incorporated herein by
reference. Such financial statements are incorporated herein by reference in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The combined statement of revenue and certain operating expenses of the
Associated Capital Properties Portfolio for the year ended December 31, 1996,
and the combined statement of revenue and certain operating expenses of the
1997 Pending Acquisitions for the year ended December 31, 1996, incorporated by
reference herein from Highwoods' current report on Form 8-K dated August 27,
1997 (as amended on Form 8-K/A filed September 23, 1997) and dated October 1,
1997, have been so incorporated in reliance upon the reports of Coopers &
Lybrand L.L.P., independent accountants, given on the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements and schedules of J.C. Nichols
Company and subsidiaries as of December 31, 1997 and 1996, and for each of the
years in the three-year period ended December 31, 1997 have been included
herein and in the registration statement in reliance upon the reports of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
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AUDITORS
Representatives of KPMG Peat Marwick LLP shall be present at the Special
Meeting and shall have the opportunity to make a statement to the JCN
Shareholders should they so desire. In addition, the representatives of KPMG
Peat Marwick LLP shall be available to respond to appropriate questions of JCN
Shareholders.
SHAREHOLDER PROPOSALS
Any proposal which a JCN Shareholder intended to present at the 1998
Annual Meeting of Shareholders of JCN, if the Merger has not been consummated
prior to the date such meeting is held, must have been received by JCN at its
principal executive offices on or before December 29, 1997 to have been
eligible for inclusion in JCN's proxy statement and proxy form relating to such
meeting.
GLOSSARY
"ACM" means asbestos-containing materials.
"ACP" means Associated Capital Properties, Inc.
"AFFO" means adjusted funds from operations.
"AHI" means AHI Metnall, L.P.
"Amendment" means Amendment No. 1 to the Merger Agreement dated April 29,
1998.
"Antitrust Division" means the Antitrust Division of the Department of
Justice.
"Bay Plaza" means a project undertaken by JCN for the redevelopment and
construction of parking, commercial and retail facilities in St. Petersburg,
Florida.
"Book-Tax Difference" means the difference between the fair market value
of contributed property at the time of contribution and the adjusted tax basis
of such property at the time of contribution.
"Bosfield" means Bosfield, L.L.C., an Indiana limited liability company.
"Budget Bill" means the Budget Bill for Fiscal Year 1999.
"Call Right" means the call right issued to the LLC.
"Cash Amount" means the cash portion of the aggregate consideration as
elected by JCN Shareholders, plus the Dissenting Share Amount, which is limited
to 40% of the aggregate consideration paid in the Merger.
"Cash Election Shares" means those shares of JCN Common as to which the
holder elects to receive cash and does not dissent.
"Closing Date" means the date upon which the Closing will take place.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Units" means the common partnership interests in the Highwoods
Operating Partnership.
"Comparables" means a group of publicly traded real estate companies
comparable to JCN.
"Contributing Partners" means those partners who have contributed
partnership interests in the Highwoods Properties to the Highwoods Operating
Partnership.
"Court" means the United States District Court for the Western District of
Missouri.
"Dissenting Share Amount" means the amount equal to the number of
Dissenting Shares multiplied by $65 per share.
"Dissenting Shares" means those shares held by JCN Shareholders who
perfect their statutory dissenters' rights as set forth in Section 351.455 of
the GBCL.
"Downside Case 1" means the projection of Morgan Stanley after reducing
the projected EBITDA growth in the Management Case to 5.0%, resulting in
implied compounded annual FFO per share growth of 11.7%.
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"Downside Case 2" means the projection of Morgan Stanley after reducing
the projected EBITDA growth in the Management Case to 2.5%, resulting in
implied compounded annual FFO per share growth of 7.7%.
"Duke/Simon" means Duke Realty Investments, Inc. and Simon DeBartolo
Group, Inc., collectively.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"EBITDA Multiple" means the multiples of total market capitalization to
1998 estimated EBITDA.
"Effective Time" means the time at which the Merger is consummated.
"Election Deadline" means 5:00 p.m. on the fifth business day prior to the
date of the Special Meeting or any adjournment thereof.
"Election Form" means a form for use by JCN Shareholders to elect cash and
to state their intent to retain Highwoods Common to be received pursuant to the
Merger and other appropriate and customary transmittal material in such form as
Highwoods and JCN may mutually agree.
"ESOP" means JCN's Employee Stock Ownership Plan.
"ESOT" means JCN's Employee Stock Ownership Trust.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means First Union National Bank in its capacity as
exchange agent.
"Exchange Fund" means the New Certificates along with an estimated amount
of cash to be paid in exchange for outstanding shares of JCN Common.
"Exchange Ratio" means the ratio at which outstanding shares of JCN Common
will be converted into shares of Highwoods Common pursuant to the Merger.
"FFO" means funds from operations, which is defined as net income,
computed in accordance with GAAP, excluding gains (and losses) from debt
restructuring and sales of property, plus depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
"FFO Multiple" means the multiples of share price to 1998 estimated FFO.
"FIRPTA" means Foreign Investment in Real Property Tax Act of 1980.
"Forsyth" means Forsyth Properties, Inc.
"FTC" mens the Federal Trade Commission.
"GAAP "means generally accepted accounting principles.
"GBCL" means the General Business and Corporation Law of Missouri.
"Highwoods" means Highwoods Properties, Inc., a Maryland corporation.
"Highwoods Articles" means the Amended and Restated Articles of
Incorporation of Highwoods.
"Highwoods Bylaws" means the Amended and Restated Bylaws of Highwoods.
"Highwoods Common" means the common stock, par value $.01 per share, of
Highwoods.
"Highwoods Comparables" means a group of publicly traded REITs
specializing in office and industrial properties comparable to Highwoods.
"Highwoods Development Land" means the 1,285 acres of undeveloped land
suitable for future development controlled by Highwoods as of March 31, 1998.
"Highwoods Development Projects" means the 32 properties which will
encompass approximately 3.6 million rentable square feet under development by
Highwoods as of March 31, 1998.
"Highwoods Entity" means an entity affiliated with Highwoods.
"Highwoods Operating Partnership" means Highwoods/Forsyth Limited
Partnership, a North Carolina limited partnership.
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"Highwoods Operating Partnership Agreement" means the Amended and Restated
Agreement of Limited Partnership of the Highwoods Operating Partnership.
"Highwoods Properties" means the portfolio of 382 office and 148
industrial (including 80 service center) properties owned by Highwoods as of
March 31, 1998.
"Highwoods Right" means a preferred share purchase right declared by the
Highwoods Board of Directors for each outstanding share Highwoods Common.
"Highwoods Services" means Highwoods Services, Inc., a subsidiary of the
Highwoods Operating Partnership.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Indemnified Party" means the present and former directors, officers,
employees and agents of any JCN Entity whom, for a period of six years after
the Effective Time, Highwoods will indemnify, defend and hold harmless in
certain identified circumstances.
"Innisfree" means Innisfree M&A Incorporated.
"Intell" means Intell Management and Investment Company.
"INTRUST" means INTRUST Bank, N.A., the trustee of the ESOT.
"IPO" means the initial public offering of Highwoods in 1994.
"IRS" means Internal Revenue Service.
"J.P. Morgan" means J.P. Morgan Securities Inc.
"Jackson" means Jackson Acquisition Corp., a wholly owned subsidiary of
Highwoods Properties, Inc., formed for the sole purpose of effecting the
Merger.
"JCN" means J.C. Nichols Company, a Missouri real estate operating
company.
"JCN Articles" means the Amended and Restated Articles of Incorporation of
JCN.
"JCN Bylaws" means the Amended and Restated Bylaws of JCN.
"JCN Common" means the common stock, $.01 par value per share, of JCN.
"JCN Entity" means any entity affiliated with JCN.
"JCN Board of Directors" means the Board of Directors of JCN.
"JCN Plan" means JCN's 1996 Stock Option Plan.
"JCN Right" means a common stock purchase right declared by the JCN Board
of Directors for each outstanding share of JCN Common.
"JCN Shareholders" means the holders of JCN Common.
"Kessinger/Hunter" means Kessinger/Hunter and Company, Inc., a Kansas City
real estate brokerage, management and development firm.
"LLC" means the limited liability company formed by JCN and
Kessinger/Hunter.
"Management Case" means the compounded annual growth of FFO and EBITDA
implied by the projections of JCN's management.
"Maximum Amount" means 200% of the current annual premium for JCN's
existing directors' and officers' liability insurance.
"Medina Litigation" means the lawsuit entitled Medina, et al. v. McCarthy,
et al., initiated in 1995 on behalf of the beneficiaries of the ESOT.
"Merger" means the merger of JCN into Jackson Acquisition Corp.
"Merger Agreement" means the Agreement and Plan of Merger dated as of
December 22, 1997 by and among JCN, Jackson and Highwoods, as amended pursuant
to Amendment No. 1 dated April 29, 1998.
99
<PAGE>
"MGCL" means the Maryland General Corporation Law.
"MOPPRSSM" means 6.835% Mandatory Par Put Remarketed SecuritiesSM due
February 1, 2013 issued by the Highwoods Operating Partnership.
"Morgan Stanley" means Morgan Stanley & Co. Incorporated.
"New Certificates" means the certificates representing the shares of
Highwoods Common to be issued in the Merger.
"No Election Shares" means those shares of JCN Common whose holders have
not submitted an effective, properly completed Election Form on or before the
Election Deadline.
"Non-U.S. Shareholders" means non-resident alien individuals, foreign
corporations, foreign partnerships, and foreign trusts and estates.
"NYSE" means the New York Stock Exchange.
"Old Certificates" means the certificates representing the shares of JCN
Common.
"Original Merger Agreement" means the Agreement and Plan of Merger dated
December 22, 1998 among Highwoods, Jackson and JCN.
"Ownership Limit" means the limit set forth in the Highwoods Articles
providing that no holder may own, or be deemed to own by virtue of the
attribution provisions of the Code, more than 9.8% of the issued and
outstanding capital stock of Highwoods.
"Peer Group Index" means the group of publicly held companies sharing
JCN's standard industrial code.
"Per Share Cash Consideration" means the $65 per share of JCN Common Stock
to be received by JCN Shareholders who select to receive in cash in the Merger,
subject to the limitations described herein.
"Per Share Stock Consideration" means the 1.84 to 2.03 shares of Highwoods
Common issuable per share of JCN Common to JCN Shareholders who elect to
receive shares of Highwoods Common in the Merger.
"Petula" means Petula Associates.
"Petula Litigation" means the complaint filed by Petula Associates in
December 1996 in the United States District Court for the Western District of
Missouri, and related proceedings.
"Plaza" means the Country Club Plaza, JCN's most significant retail and
office development with approximately 1.1 million square feet of retail space.
"Put Option" means the obligation of JCN, under certain circumstances, to
repurchase shares from ESOT beneficiaries.
"Put Option Notes" means the $100 million of Exercisable Put Option Notes
due June 15, 2011 issued by the Highwoods Operating Partnership on June 24,
1997.
"Recognition Period" means the 10-year period beginning on the date on
which Highwoods acquires an asset from a C-corporation in a carryover-basis
transaction.
"Record Date" means the date upon which holders of JCN Common become
entitled to vote at the Special Meeting.
"Registration Statement" means the registration statement filed by
Highwoods on Form S-4 covering the shares of Highwoods Common to be issued in
connection with the Merger.
"REIT" means a real estate investment trust.
"REIT Share" means a share of Highwoods Common issued upon redemption of a
Common Unit.
"Related Party Tenant" means a tenant of Highwoods which is 10% or more
owned by either Highwoods or an owner of 10% or more (directly or
constructively) of Highwoods, taking into account the applicable attribution
rules.
"Replacement Share" is a share of the acquiror or the parent of an
acquiror which a limited partner may be entitled to upon occurrence of a
"Trigger Event."
"Research Triangle" means the Raleigh-Durham, North Carolina area.
"Revolving Loans" means Highwoods' two revolving loans aggregating $430
million.
100
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Settlement Agreement" means the Mutual Release and Settlement Agreement
dated as of June 30, 1995, between JCN and certain other parties.
"Special Meeting" means the Special Meeting of the shareholders of JCN to
be held on June , 1998 and any adjournments or postponements thereof.
"Taxpayer Relief Act" means the Taxpayer Relief Act of 1997.
"TIF" means tax increment financing.
"TIN" means taxpayer identification number.
"Trigger Event" means a change of control of Highwoods which under the
Highwoods Operating Partnership Agreement entitles a limited partner of the
Highwoods Operating Partnership to a Replacement Share or the cash value
thereof.
"U.S. Shareholder" means a holder of Highwoods Common that (for Federal
income tax purposes) (a) is a citizen or resident of the United States, (b) is
a corporation or partnership (including an entity treated as a corporation or
partnership for United States Federal income tax purposes) created or organized
in or under the laws of the United States or of any political subdivision
thereof, (c) is an estate, the income of which is subject to Federal income
taxation regardless of its source, or (d) is any trust if a court within the
United States is able to exercise primary supervision over the administration
of the trust and one or more United States persons have the authority to
control all substantial decisions of the trust.
"UBTI" means unrelated business taxable income.
"Wright Litigation" means a lawsuit filed on January 8, 1998 by Dennis
Wright against JCN, the JCN Board of Directors and Highwoods.
"X-POSSM" means Exercisable Put Option Securities issued by a trust formed
by the Highwoods Operating Partnership which represent factional undivided
beneficial interests in the trust.
101
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
PRO FORMA FINANCIAL STATEMENTS OF HIGHWOODS
Pro Forma Condensed Consolidated Balance Sheet (unaudited) as of March 31, 1998 ........ F-2
Notes to Pro Forma Condensed Consolidated Balance Sheet (unaudited) .................... F-3
Pro Forma Condensed Consolidated Statement of Operations (unaudited) For the Three
Months Ended March 31, 1998 ........................................................... F-4
Notes to Pro Forma Condensed Consolidated Statement of Operations (unaudited) .......... F-5
Pro Forma Condensed Consolidated Statement of Operations (unaudited) For the Year Ended
December 31, 1997 ..................................................................... F-7
Notes to Pro Forma Condensed Consolidated Statement of Operations (unaudited) .......... F-9
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES OF JCN
Years Ended December 31, 1997, 1996 and 1995 ............................................ F-12
FINANCIAL STATEMENTS:
Independent Auditors' Report ........................................................... F-13
Consolidated Balance Sheets at December 31, 1997 and 1996 .............................. F-14
Consolidated Statements of Operations For the Years Ended December 31, 1997, 1996 and
1995 ................................................................................... F-15
Consolidated Statements of Stockholders' Equity (Deficit) For the Years Ended December
31, 1997, 1996 and 1995 ............................................................... F-16
Consolidated Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and
1995 ................................................................................... F-17
Notes to Consolidated Financial Statements ............................................. F-18
FINANCIAL STATEMENT SCHEDULES:
Independent Auditors' Report ........................................................... F-29
Schedule of Real Estate and Accumulated Depreciation at December 31, 1997 .............. F-30
Schedule of Real Estate and Accumulated Depreciation Rollforwards For the Years ended
December 31, 1997, 1996 and 1995 ...................................................... F-36
Schedule of Mortgage Loans and Real Estate at December 31, 1997 ........................ F-37
Schedule of Rollforward of Mortgage Loans on Real Estate For the Years Ended December
31, 1997, 1996, and 1995 .............................................................. F-38
Schedule of Valuation and Qualifying Accounts For the Year Ended December 31, 1997 ..... F-39
Schedule of Valuation and Qualifying Accounts For the Year Ended December 31, 1996 ..... F-40
Schedule of Valuation and Qualifying Accounts For the Year Ended December 31, 1995 ..... F-41
Schedule of Mortgages Payable at December 31, 1997 ..................................... F-42
Three Months Ended March 31, 1998 and 1997
FINANCIAL STATEMENTS:
Consolidated Balance Sheets at March 31, 1998 (Unaudited) and December 31, 1997 ........ F-46
Consolidated Statements of Income for the Three Months Ended March 31, 1998 and
March 31, 1997 (Unaudited) ............................................................ F-47
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1998 and
March 31, 1997 (Unaudited) ............................................................ F-48
Notes to Unaudited Consolidated Financial Statements ................................... F-49
</TABLE>
F-1
<PAGE>
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, 1998
(in thousands)
<TABLE>
<CAPTION>
Series D
Preferred Share
Historical (a) Offering (b)
---------------- -----------------
<S> <C> <C>
ASSETS
Real estate assets, net .............................. $2,998,539 $ --
Cash and cash equivalents ............................ 42,436 --
Accounts and notes receivables ....................... 32,276 --
Accrued straight line rent receivable ................ 16,189 --
Investment in real estate partnerships ............... -- --
Other assets ......................................... 42,292 --
---------- ---------
$3,131,732 $ --
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable .......................... $1,231,099 $ (96,700)
Accounts payable, accrued expenses and other ......... 61,640 --
---------- ---------
Total liabilities .................................... 1,292,739 (96,700)
Minority interest .................................... 301,031 --
Preferred stock:
Series A ............................................ 125,000 --
Series B ............................................ 172,500 --
Series D ............................................ -- 100,000
Stockholders' equity:
Common stock ........................................ 510 --
Additional paid in capital .......................... 1,271,266 (3,300)
Distributions in excess of net earnings ............. (31,314) --
---------- ---------
Total stockholders' equity ........................... 1,537,962 96,700
---------- ---------
$3,131,732 $ --
========== =========
<CAPTION>
April 1998
Debt JCN
Offering (c) Transaction (d) Pro Forma
-------------- ----------------- -------------
<S> <C> <C> <C>
ASSETS
Real estate assets, net .............................. $ -- $509,806 $3,508,345
Cash and cash equivalents ............................ -- 42,767 85,203
Accounts and notes receivables ....................... -- 43,381 75,657
Accrued straight line rent receivable ................ -- -- 16,189
Investment in real estate partnerships ............... -- 29,888 29,888
Other assets ......................................... 8,988 8,069 59,349
------ -------- ----------
$8,988 $633,911 $3,774,631
====== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and notes payable .......................... $8,988 $300,116 $1,443,503
Accounts payable, accrued expenses and other ......... -- 16,218 77,858
------ -------- ----------
Total liabilities .................................... 8,988 316,334 1,521,361
Minority interest .................................... -- 1,846 302,877
Preferred stock:
Series A ............................................ -- -- 125,000
Series B ............................................ -- -- 172,500
Series D ............................................ -- -- 100,000
Stockholders' equity:
Common stock ........................................ -- 99 609
Additional paid in capital .......................... -- 315,632 1,583,598
Distributions in excess of net earnings ............. -- -- (31,314)
------ -------- ----------
Total stockholders' equity ........................... -- 315,731 1,950,393
------ -------- ----------
$8,988 $633,911 $3,774,631
====== ======== ==========
</TABLE>
F-2
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
March 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated balance sheet
of Highwoods Properties, Inc. (the "Company") is presented as if the following
transactions had been consummated on March 31, 1998: (a) the issuance of
4,000,000 Depositary Shares each representing 1/10 of an 8% Series D
Cumulative Redeemable Preferred Share (the "Series D Preferred Share
Offering"), (b) the issuance of $200 million 7.5% notes due 2018 (the "April
1998 Debt Offering"), and (c) the completion of the acquisition of J.C. Nichols
Company, a publicly traded Kansas City real estate operating company ("J.C.
Nichols") owning or having an ownership interest in 48 office properties, 14
industrial properties, 33 retail properties and 18 multi-family communities
(the "JCN Transaction").
The foregoing description of the properties to be acquired in the J.C.
Nichols Transaction may differ from J.C. Nichols' description of such
properties set forth elsewhere in the Proxy Statement/Prospectus. See
"Description of JCN." Such descriptions differ because, among other things, (i)
unlike J.C. Nichols, the Company discloses property information on a
consolidated, rather than unconsolidated, basis and (ii) the Company counts
each building as a separate property regardless of whether such building is
part of an office or industrial park.
The acquisitions have been accounted for using the purchase method of
accounting. Accordingly, assets acquired and liabilities assumed have been
recorded at their estimated fair values, which may be subject to further
refinement, including appraisals and other analyses.
This unaudited pro forma condensed consolidated balance sheet should be
read in conjunction with the pro forma condensed consolidated statement of
operations of the Company for the three months ended March 31, 1998 and for the
year ended December 31, 1997, the consolidated financial statements and related
notes of the Company included in its Annual Report on Form 10-K for the year
ended December 31, 1997, the unaudited financial statements and related notes
of the Company included in its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 and the consolidated financial statements and related
notes of J.C. Nichols Company and Subsidiaries as of and for the three months
ended March 31, 1998 set forth elsewhere in this Proxy Statement/Prospectus.
The pro forma condensed consolidated balance sheet is unaudited and not
necessarily indicative of what the actual financial position would have been
had the aforementioned transactions actually occurred on March 31, 1998, nor
does it purport to represent the future financial position of the Company.
F-3
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)-- Continued
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a.) Represents the Company's historical consolidated balance sheet
contained in the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
(b.) Reflects the issuance of 4,000,000 Depositary Shares, each
representing 1/10 of a share of the Company's 8% Series D Cumulative
Redeemable Preferred Shares in the 1998 Series D Preferred Share Offering,
at an offering price of $25 per Depositary Share, net of underwriting
discounts and other offering costs of approximately $3.3 million and the
use of net proceeds to pay off $96.7 million of debt drawn on the
Company's $430 aggregate amount of unsecured revolving loans (the "Lines
of Credit").
(c.) Reflects approximately $6.4 million paid to settle a treasury lock
agreement in connection with the April 1998 Debt Offering and the
underwriters discount and other offering costs of approximately $2.6
million. The $6.4 million paid to terminate the hedge instrument and the
underwriters discount and other offering costs are being amortized over
the life of the notes using the effective interest rate method for the
hedge instrument and the underwriters discount and the straight line basis
for the financing costs.
(d.) Reflects the allocation of the $589.3 million purchase price to the
fair value of the net assets acquired in the JCN Transaction. The purchase
price will consist of the issuance of approximately 9,860,496 shares of
the Company's Common Stock (valued at $32.0197 per share) and the
assumption of approximately $273.5 million of net liabilities ($316.3 of
liabilities assumed offset by the March 31, 1998 cash balance of J.C.
Nichols of $42.8 million, after paying approximately $14.5 million in
transaction costs). For purposes of calculating the pro forma condensed
consolidated balance sheet, the Company has assumed that the consideration
will consist entirely of the issuance of its Common Stock.
F-4
<PAGE>
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Three Months Ended March 31, 1998
(In thousands, except per share data)
<TABLE>
<CAPTION>
MOPPRS Series D
and Debt Preferred Share
Historical (a) Offering Offering
---------------- -------------- -----------------
<S> <C> <C> <C>
REVENUE:
Rental property ........................................................ $100,331 $ -- $ --
Residential sales ...................................................... -- -- --
Other Income ........................................................... 2,157 -- --
-------- --------- ----------
102,488 -- --
OPERATING EXPENSES:
Rental property ........................................................ 29,728 -- --
Residential cost of sales .............................................. -- -- --
Depreciation and amortization .......................................... 17,161 -- --
INTEREST EXPENSE:
Contractual ........................................................... 17,162 1,123(b) (1,612)(e)
Amortization of deferred financing costs .............................. 616 9(c) --
-------- --------- ----------
17,778 1,132 (1,612)
General and administrative ............................................. 3,784 -- --
-------- --------- ----------
Income before minority interest ........................................ 34,037 (1,132) 1,612
Minority interest ...................................................... (5,608) 170(d) (242)(d)
-------- --------- ----------
Income before extraordinary item and dividends on preferred shares ..... 28,429 (962) 1,370
Extraordinary item-loss on extinguishment of debt ...................... (46) -- --
-------- --------- ----------
28,383 (962) 1,370
Dividends on preferred shares .......................................... (6,145) -- (2,000)(f)
-------- --------- ----------
Net income available for common shareholders ........................... $ 22,238 $ (962) $ (630)
======== ========= ==========
Net income per common share-basic ...................................... $ 0.45
========
Net income per common share-diluted .................................... $ 0.45
========
Weighted average shares-basic .......................................... 49,051
========
Weighted average shares-diluted ........................................ 49,688
========
<CAPTION>
April 1998 JCN
Debt JCN Pro forma
Offering Historical (i) Adjustments
------------ ---------------- -----------------
<S> <C> <C> <C>
REVENUE:
Rental property ........................................................ $ -- $19,709 $ --
Residential sales ...................................................... -- 1,221 (1,221)(j)
Other Income ........................................................... -- 2,035 348 (j)
------ ------- ----------
-- 22,965 (873)
OPERATING EXPENSES:
Rental property ........................................................ -- 10,407 (1,845)(k)
Residential cost of sales .............................................. -- 873 (873)(j)
Depreciation and amortization .......................................... -- 2,894 (345)(l)
INTEREST EXPENSE:
Contractual ........................................................... 555(g) 5,426 --
Amortization of deferred financing costs .............................. 112(h) -- --
------ ------- ----------
667 5,426 --
General and administrative ............................................. -- -- 1,845 (k)
------ ------- ----------
Income before minority interest ........................................ (667) 3,365 345
Minority interest ...................................................... 100(d) -- (54)(d)
------ ------- ----------
Income before extraordinary item and dividends on preferred shares ..... (567) 3,365 291
Extraordinary item-loss on extinguishment of debt ...................... -- -- --
------ ------- ----------
(567) 3,365 291
Dividends on preferred shares .......................................... -- -- --
------ ------- ----------
Net income available for common shareholders ........................... $ (567) $ 3,365 $ 291
====== ======= ==========
Net income per common share-basic ......................................
Net income per common share-diluted ....................................
Weighted average shares-basic ..........................................
Weighted average shares-diluted ........................................
<CAPTION>
Pro Forma
------------
<S> <C>
REVENUE:
Rental property ........................................................ $120,040
Residential sales ...................................................... --
Other Income ........................................................... 4,540
--------
124,580
OPERATING EXPENSES:
Rental property ........................................................ 38,290
Residential cost of sales .............................................. --
Depreciation and amortization .......................................... 19,710
INTEREST EXPENSE:
Contractual ........................................................... 22,654
Amortization of deferred financing costs .............................. 737
--------
23,391
General and administrative ............................................. 5,629
--------
Income before minority interest ........................................ 37,560
Minority interest ...................................................... (5,634)
--------
Income before extraordinary item and dividends on preferred shares ..... 31,926
Extraordinary item-loss on extinguishment of debt ...................... (46)
--------
31,880
Dividends on preferred shares .......................................... (8,145)
--------
Net income available for common shareholders ........................... $ 23,735
========
Net income per common share-basic ...................................... $ 0.39
========
Net income per common share-diluted .................................... $ 0.39
========
Weighted average shares-basic .......................................... 60,897
========
Weighted average shares-diluted ........................................ 61,534
========
</TABLE>
F-5
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Three Months Ended March 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated statement of
operations is presented as if the following transactions had been consummated on
January 1, 1998: (a) the completion of offering of $125 million of 6.835%
MandatOry Par Put Remarketed SecuritiesSM ("MOPPRSSM") and $100 million of
unsecured notes due 2018 (collectively, the "MOPPRS and Debt Offering"), (b) the
completion of the Series D Preferred Share Offering, (c) the completion of the
April 1998 Debt Offering and (d) the completion of the JCN Transaction.
This unaudited pro forma condensed consolidated statement of operations
should be read in conjunction with the pro forma condensed consolidated balance
sheet of the Company as of March 31, 1998, the consolidated financial
statements and related notes of the Company included in its Annual Report on
Form 10-K for the year ended December 31, 1997, the unaudited financial
statements and related notes of the Company included in its Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, the financial statements and
related notes of Associated Capital Properties Portfolio and 1997 Pending
Acquisitions included in the Company's Current Report on Form 8-K dated October
1, 1997 (as filed with the Securities and Exchange Commission on October 16,
1997), the statements of revenues and certain expenses of Riparius Properties,
Shelton Properties and Winners Circle for the year ended December 31, 1996
included in the Company's Form 8-K dated November 17, 1997 (as filed with the
Securities and Exchange Commission on February 3, 1998), and the consolidated
financial statements and related notes of J.C. Nichols Company and Subsidiaries
for the year ended December 31, 1997 and for the three months ended March 31,
1998, both of which are set forth elsewhere in this Proxy Statement/
Prospectus.
The pro forma condensed consolidated statement of operations is unaudited
and is not necessarily indicative of what the Company's actual results would
have been had the aforementioned transactions actually occurred on January 1,
1998 nor does it purport to represent the future operating results of the
Company.
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
(a.) Represents the Company's historical consolidated statement of
operations contained in its Quarterly Report on Form 10-Q for the three
months ended March 31, 1998.
(b.) Represents the pro-rated estimated interest expense on $125 million of
MOPPRS due 2013 at an interest rate of 6.835% and $100 million in debt
securities due 2008 (at a rate of 7.125%) offset by the interest expense
savings of $33.3 million on the Lines of Credit at an average interest
rate of 6.59% repaid with the proceeds of the MOPPRS and Debt Offering.
(c.) Represents the amortization of the deferred financing costs associated
with the MOPPRS and Debt Offering, straight-line over the terms of the
securities offset by the amortization of the $3.5 million MOPPRS premium
paid by the remarketing dealer, using the effective interest method over
the term of the securities.
(d.) Represents the net adjustment to minority interest to reflect the pro
forma minority interest percentage of 15.0%.
(e.) Represents the interest expense savings on $96.7 million of the Lines
of Credit at an average interest rate of 6.67% repaid with the proceeds of
the Series D Preferred Share Offering.
(f.) Represents the pro-rated 8% dividend on the Series D Preferred Shares
issued in the Series D Preferred Share Offering.
(g.) Represents the estimated interest expense on $200 million of notes due
2018 at a discount of .361% with an interest rate of 7.5% offset by the
interest expense savings on $191.0 million of the Lines of Credit at an
average interest rate of 6.69% repaid with the proceeds of the notes.
(h.) Represents the amortization of the deferred financing costs (including
the $6.4 million paid to terminate the related treasury lock agreement)
associated with the $200 million notes using the effective interest rate
method for the hedge instrument and underwriters discount and the straight
line basis for the financing costs.
F-6
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)-- Continued
(i.) Represents the J.C. Nichols Company and Subsidiaries' historical
statement of operations (pre-tax) contained in its consolidated financial
statements and related notes for the three months ended March 31, 1998 set
forth elsewhere in this Proxy Statement/Prospectus.
(j.) Represents the reclass of the historical gross profit of the
residential business to other income as this will be accounted for in a
separate business entity under the equity method of accounting upon
acquisition. J.C. Nichols presently consolidates the residential business;
however, subsequent to the merger, Highwoods will not have majority
ownership or control of the entity which will conduct the residential
business and will accordingly use the equity method of accounting.
(k.) Represents a reclass of certain operating expenses to general and
administrative expense ($1,845) for comparative purposes.
(l.) Represents the reduction in historical depreciation expense on the
properties acquired in the JCN Transaction based on a 80% allocation to
buildings and a 20% allocation to land for net assets acquired. Amounts
recorded as tenant improvements on J.C. Nichols' general ledger
depreciated as buildings over 40 years after the combination which
accounts for the decrease.
F-7
<PAGE>
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Year Ended December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
Century Center 1997
and Anderson Other ACP Pending
Historical (a) Transactions (b) Offerings (c) Portfolio (d) Acquisitions (e)
---------------- ------------------ --------------- --------------- ------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental property ..................... $ 266,933 $ 1,047 $ -- $ 52,411 $10,560
Residential sales ................... -- -- -- -- --
Other Income ........................ 7,537 -- -- 1,880 123
--------- -------- --------- -------- -------
274,470 1,047 -- 54,291 10,683
OPERATING EXPENSES:
Rental property ..................... 76,743 317 -- 23,956 4,396
Residential cost of sales ........... -- -- -- -- --
Depreciation and amortization ....... 47,533 715 -- 9,019 --
INTEREST EXPENSE:
Contractual ........................ 45,138 1,358 (1,077) 25,215 --
Amortization of deferred
financing costs ................... 2,256 -- -- -- --
--------- -------- --------- -------- -------
47,394 1,358 (1,077) 25,215 --
General and administrative .......... 10,216 -- -- -- --
--------- -------- --------- -------- -------
Income before minority interest ..... 92,584 (1,343) 1,077 (3,899) 6,287
Minority interest ................... (15,106) -- -- -- --
--------- -------- --------- -------- -------
Income before extraordinary item
and dividends on preferred
shares ............................. 77,478 (1,343) 1,077 (3,899) 6,287
Extraordinary item-loss on
extinguishment of debt ............. (5,799)
---------
71,679 (1,343) 1,077 (3,899) 6,287
Dividends on preferred shares ....... (13,117) -- (1,289) -- --
--------- -------- --------- -------- -------
Net income available for common
shareholders ....................... $ 58,562 $ (1,343) $ (212) $ (3,899) $ 6,287
========= ======== ========= ======== =======
Net income per common
share-basic ........................ $ 1.51
=========
Net income per common-basic
share-diluted ...................... $ 1.50
=========
Weighted average shares-basic ....... 38,770
=========
Weighted average shares-diluted ..... 39,161
=========
<CAPTION>
Use of
Preferred
Stock Common Other Pro forma
Offering Stock Acquired Acquired Acquired Properties
Proceeds Offering Properties (j) Properties (k) Adjustments
----------------- ------------------ ---------------- ---------------- --------------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Rental property ..................... $ -- $ -- $9,332 $ 13,255 $ --
Residential sales ................... -- -- -- -- --
Other Income ........................ -- -- -- -- --
----------- ----------- ------ -------- ---------
-- -- 9,332 13,255 --
OPERATING EXPENSES:
Rental property ..................... -- -- 1,727 6,474 188(l)
Residential cost of sales ........... -- -- -- -- --
Depreciation and amortization ....... -- -- -- -- 3,369(m)
INTEREST EXPENSE:
Contractual ........................ (8,378)(f) (13,704)(i) -- -- 12,947(n)
Amortization of deferred
financing costs ................... -- -- -- -- --
----------- ----------- ------ -------- ---------
(8,378) (13,704) -- -- 12,947
General and administrative .......... -- -- -- -- --
----------- ----------- ------ -------- ---------
Income before minority interest ..... 8,378 13,704 7,605 6,781 (16,504)
Minority interest ................... (1,257)(g) (2,056)(g) -- -- --
----------- ----------- ------ -------- ---------
Income before extraordinary item
and dividends on preferred
shares ............................. 7,121 11,648 7,605 6,781 (16,504)
Extraordinary item-loss on
extinguishment of debt .............
7,121 11,648 7,605 6,781 (16,504)
Dividends on preferred shares ....... (10,175)(h) -- -- -- --
----------- ----------- ------ -------- ---------
Net income available for common
shareholders ....................... $ (3,054) $ 11,648 $7,605 $ 6,781 $ (16,504)
=========== =========== ====== ======== =========
Net income per common
share-basic ........................
Net income per common-basic
share-diluted ......................
Weighted average shares-basic .......
Weighted average shares-diluted .....
</TABLE>
F-8
<PAGE>
HIGHWOODS PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) --
(continued)
For the Year Ended December 31, 1997
(In thousands, except per share data)
<TABLE>
<CAPTION>
MOPPRS 1998 Series D
and Debt Common Stock Preferred Share
Offering Offering Offering
------------ -------------- -----------------
<S> <C> <C> <C>
REVENUE:
Rental property ........................................................ $ -- $ -- $ --
Residential sales ...................................................... -- -- --
Other Income ........................................................... -- -- --
------ -------- ----------
-- -- --
OPERATING EXPENSES:
Rental property ........................................................ -- -- --
Cost of residential sales .............................................. -- -- --
Depreciation and amortization .......................................... -- -- --
INTEREST EXPENSE:
Contractual ........................................................... 285(o) (415)(q) --
Amortization of deferred financing costs .............................. 108(p) -- --
------ -------- ----------
393 (415) --
General and administrative ............................................. -- -- --
------ -------- ----------
Income before minority interest ........................................ (393) 415 --
Minority interest ...................................................... 59(g) (62)(g) --
------ -------- ----------
Income before extraordinary item and dividends on preferred shares ..... (334) 353 --
Extraordinary item -- loss on extinguishment of debt ...................
(334) 353 --
Dividends on preferred shares .......................................... -- -- (8,000)(r)
------ -------- ----------
Net income available for common shareholders ........................... $ (334) $ 353 $ (8,000)
====== ======== ==========
Net income per common share -- basic ...................................
Net income per common share -- diluted .................................
Weighted average shares-basic ..........................................
Weighted average shares-diluted ........................................
<CAPTION>
$200 Million JCN
Debt JCN Pro Forma
Offering Historical (u) Adjustments
-------------- ---------------- -----------------
<S> <C> <C> <C>
REVENUE:
Rental property ........................................................ $ -- $78,076 $ --
Residential sales ...................................................... -- 7,137 (7,137)(v)
Other Income ........................................................... -- 12,646 1,812 (v)
-------- ------- ----------
-- 97,859 (5,325)
OPERATING EXPENSES:
Rental property ........................................................ -- 44,654 (7,476)(w)
Cost of residential sales .............................................. -- 5,325 (5,325)(v)
Depreciation and amortization .......................................... 13,483 (3,287)(x)
INTEREST EXPENSE:
Contractual ........................................................... 2,078(s) 22,333 --
Amortization of deferred financing costs .............................. 449(t) -- --
-------- ------- ----------
2,527 22,333 --
General and administrative ............................................. -- 7,476(w)
-------- ----------
Income before minority interest ........................................ (2,527) 12,064 3,287
Minority interest ...................................................... 379(g) -- (1,085)(g)
-------- ------- ----------
Income before extraordinary item and dividends on preferred shares ..... (2,148) 12,064 2,202
Extraordinary item -- loss on extinguishment of debt ...................
(2,148) 12,064 2,202
Dividends on preferred shares .......................................... -- -- --
-------- ------- ----------
Net income available for common shareholders ........................... $ (2,148) $12,064 $ 2,202
======== ======= ==========
Net income per common share -- basic ...................................
Net income per common share -- diluted .................................
Weighted average shares-basic ..........................................
Weighted average shares-diluted ........................................
<CAPTION>
Pro Forma
------------
<S> <C>
REVENUE:
Rental property ........................................................ $ 431,614
Residential sales ...................................................... --
Other Income ........................................................... 23,998
---------
455,612
OPERATING EXPENSES:
Rental property ........................................................ 150,979
Cost of residential sales .............................................. --
Depreciation and amortization .......................................... 70,832
INTEREST EXPENSE:
Contractual ........................................................... 85,780
Amortization of deferred financing costs .............................. 2,813
---------
88,593
General and administrative ............................................. 17,692
---------
Income before minority interest ........................................ 127,516
Minority interest ...................................................... (19,128)
---------
Income before extraordinary item and dividends on preferred shares ..... 108,388
Extraordinary item -- loss on extinguishment of debt ................... (5,799)
---------
102,589
Dividends on preferred shares .......................................... (32,581)
---------
Net income available for common shareholders ........................... $ 70,008
=========
Net income per common share -- basic ................................... $ 1.15
=========
Net income per common share -- diluted ................................. $ 1.14
=========
Weighted average shares-basic .......................................... 60,897
=========
Weighted average shares-diluted ........................................ 61,534
=========
</TABLE>
F-9
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
For the Year Ended December 31, 1997
1. BASIS OF PRESENTATION
The accompanying unaudited pro forma condensed consolidated statement of
operations is presented as if the following transactions had been consummated
on January 1, 1997: (a) the completion of the business combination with
Anderson Properties, Inc. ("Anderson Properties") and the purchase of a
portfolio of properties from affiliates of Anderson Properties (the "Anderson
Transaction") and the purchase of Century Center Office Park and an affiliated
property portfolio (the "Century Center Transaction"), (b) the issuance of
125,000 8 5/8% Series A Cumulative Redeemable Preferred Shares (the "Series A
Preferred Shares") and of $100,000,000 of Exercisable Put Option Notes
(collectively the "Other Offerings"), (c) the completion of a business
combination with Associated Capital Properties, Inc. ("ACP") (d) the completion
of the acquisition of the seven properties that ACP had under contract to
purchase (the "1997 Pending Acquisitions"), (e) the issuance of 6.9 million
Series B Preferred Shares at a price of $25 per share (the "Preferred Stock
Offering"), (f) the issuance of 8.5 million shares of Common Stock (the "Common
Stock Offering"), (g) the completion of the business combination with Riparius
Development Corporation and the acquisitions of seven properties in
Winston-Salem, NC and one property in Nashville, TN (collectively, the
"Acquired Properties"), (h) the completion of the Garcia acquisition consisting
of fourteen properties, six service center properties an 66 acres of
development land and the completion of four other acquisitions of seven
properties (collectively, the "Other Acquired Properties"), (i) the completion
of the MOPPRS and Debt Offering and (j) the completion of the issuance of 2
million shares of Common Stock at a price of $36 per share ("the 1998 Common
Stock Offering), (k) the completion of the Series D Preferred Share Offering,
(l) the completion of the April 1998 Debt Offering and (m) the completion of
the JCN Transaction.
This unaudited pro forma condensed consolidated statement of operations
should be read in conjunction with the pro forma condensed consolidated balance
sheet of the Company as of March 31, 1998, the consolidated financial
statements and related notes of the Company included in its Annual Report on
Form 10-K for the year ended December 31, 1997, the unaudited financial
statements and related notes of the Company included in its Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998, the financial statements and
related notes of Associated Capital Properties Portfolio and 1997 Pending
Acquisitions included in the Company's Current Report on Form 8-K dated October
1, 1997 (as filed with the Securities and Exchange Commission on October 16,
1997), the statements of revenues and certain expenses of Riparius Properties,
Shelton Properties and Winners Circle for the year ended December 31, 1996
included in the Company's Form 8-K dated November 17, 1997 (as filed with the
Securities and Exchange Commission on February 3, 1998), and the consolidated
financial statements and related notes of J.C. Nichols Company and Subsidiaries
for the year ended December 31, 1997 and for the three months ended March 31,
1998, both of which are set forth elsewhere in this Proxy Statement/
Prospectus.
The pro forma condensed consolidated statement of operations is unaudited
and is not necessarily indicative of what the Company's actual results would
have been had the aforementioned transactions actually occurred on January 1,
1997 nor does it purport to represent the future operating results of the
Company.
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
(a.) Represents the Company's historical consolidated statement of operations
contained in its Annual Report on Form 10-K for the year ended December
31, 1997.
(b.) Reflects the historical statement of operations of Century Center Office
Park and an affiliated portfolio ("Century Center") and the properties
acquired in the Anderson Transaction for the period from January 1, 1997
through the respective dates of their acquisition, adjusted on a pro
forma basis for interest expense and depreciation expense. Interest
expense reflects the reduction in mortgage interest rate costs based on
the average rate of assumed debt (7.15% and 8.78% for Century Center and
Anderson Properties, respectively) at the date of acquisition.
Depreciation expense has been adjusted to reflect a 40 year depreciable
life for buildings on a straight line basis at the date of acquisition.
(c.) Reflects the estimated interest expense savings on $127.5 million of the
Lines of Credit at an interest rate of 7.60% (6.25% interest rate cap
plus 135 basis points) and $63.1 million of other loans repaid with the
proceeds of the
F-10
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED) -- Continued
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS -- Continued
Other Offerings at an average interest rate of 8.50% and the dividends
incurred on the Company's Series A Cumulative Redeemable Preferred
Shares from January 1, 1997 through the date of the offering of the
Series A Cumulative Redeemable Preferred Shares.
(d.) Represents the historical revenues and operating expenses of the ACP
Portfolio through the date of acquisition and the historical operations
of properties acquired by ACP during 1997 from January 1, 1997 to the
respective dates of their acquisition adjusted on a pro forma basis for
incremental revenue related to owner-occupied buildings, interest
expense and depreciation expense related to the ACP Portfolio and the
1997 Pending Acquisitions. Interest expense reflects the reduction in
mortgage interest costs based on the average interest rate of assumed
debt (8.27%) and the interest rate on debt drawn on the line of credit
(6.69%) at the date of acquisition. Depreciation expense had been
adjusted to reflect a 40 year depreciable life for buildings on a
straight line basis at the date of acquisition.
(e.) Reflects the historical revenues and operating expenses of the 1997
Pending Acquisitions through the date of acquisition.
(f.) Reflects the estimated interest expense savings on $166.9 million of the
Lines of Credit at an average interest rate of 6.69% repaid with the
proceeds of the Preferred Stock Offering.
(g.) Represents the net adjustment to minority interest to reflect the pro
forma minority interest percentage of 15.0%.
(h.) Represents the 8% dividend on the Series B Preferred Shares issued in
the Preferred Stock Offering.
(i.) Represents the estimated interest expense savings on $273.1 million of
the Lines of Credit at an average interest rate of 6.69% repaid with the
proceeds of the Common Stock Offering.
(j.) Reflects the historical revenues and operating expenses of Acquired
Properties through the date of acquisition.
(k.) Reflects the historical revenues and operating expenses of Other
Acquired Properties through the date of acquisition.
(l.) Represents the incremental operating expenses related to salary expense
of property management expected to be incurred by the Company upon
completion of the Acquired Properties and the Other Acquired Properties.
(m.) Represents the net adjustment of depreciation expense for Acquired
Properties and the Other Acquired Properties based upon an assumed
allocation of the purchase price to land, buildings and development in
process. Building depreciation is computed on a straight-line basis
using an estimated life of 40 years.
(n.) Represents the net adjustment to interest expense to reflect interest
costs on $219.4 million in borrowings under the Lines of Credit at an
assumed rate of 6.87% (the capped interest rate based on a 30-day LIBOR
rate of 5.87% plus 100 basis points) and $31.0 million in assumed debt
at a weighted average interest rate of 8.33%.
(o.) Represents the estimated interest expense on $125 million of MOPPRS due
2013 at an interest rate of 6.835% and $100 million in debt securities
due 2008 (at a rate of 7.125%) offset by the interest expense savings on
the $226.3 million of the Lines of Credit at an average interest rate of
6.69% repaid with the proceeds of the MOPPRS and Debt Offering.
(p.) Represents the amortization of the deferred financing costs associated
with the MOPPRS and Debt Offering, straight-line over the terms of the
securities offset by the amortization of the $3.5 million MOPPRS premium
paid by the remarketing dealer, using the effective interest method over
the term of the securities.
(q.) Represents the estimated interest expense savings on $30.8 million of
the Lines of Credit at an average interest rate of 6.69% repaid with a
portion of the net proceeds of the 1998 Common Stock Offering.
(r.) Represents the 8% dividend on the Series D Preferred Shares issued in
the Series D Preferred Share Offering.
F-11
<PAGE>
HIGHWOODS PROPERTIES, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)-- Continued
(s.) Represents the estimated interest expense on $200 million of notes due
2018 at a discount of .361% with an interest rate of 7.5% offset by the
interest expense savings on $170.9 million of the Lines of Credit at an
average interest rate of 6.95% repaid with the proceeds of the notes.
(t.) Represents the amortization of the deferred financing costs (including
the $6.4 million paid to terminate the related treasury lock agreement)
associated with the $200 million notes using the effective interest rate
method for the hedge instrument and underwriters discount and the
straight line basis for the financing costs.
(u.) Represents the J.C. Nichols Company and Subsidiaries' historical
statement of operations (pre-tax) contained in the consolidated
financial statements and related notes of J.C. Nichols Company and
Subsidiaries as of and for the year ended December 31, 1997 set forth
elsewhere in this Proxy Statement/Prospectus.
(v.) Represents the reclass of the historical gross profit of the residential
business to other income as this will be accounted for in a separate
business entity under the equity method of accounting upon acquisition.
J.C. Nichols Company presently consolidates the residential business;
however, subsequent to the merger, Highwoods will not have majority
ownership or control of the entity which will conduct the residential
business and will accordingly use the equity method of accounting.
(w.) Represents a reclass of certain operating expenses to general and
administrative expense ($7,476) for comparative purposes.
(x.) Represents the reduction in historical depreciation expense on the
properties acquired in the JCN Transaction based on a 80% allocation to
buildings and a 20% allocation to land for net assets acquired. Amounts
recorded as tenant improvements on J.C. Nichols' general ledger and
depreciated as buildings over 40 years after the combination which
accounts for the decrease.
F-12
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
J.C. Nichols Company
Kansas City, Missouri:
We have audited the accompanying consolidated balance sheets of J.C.
Nichols Company and subsidiaries (the Company) as of December 31, 1997 and 1996
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the years in the three year period ended
December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1997 and 1996 and the results of their
operations and their cash flows for each of the years in the three year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Kansas City, Missouri
March 6, 1998
F-13
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
Revenue-producing properties (note 2) .................................................... $ 163,097,000 $ 189,011,000
Land and improvement inventories ......................................................... 9,791,000 24,204,000
Property held for future development ..................................................... 7,793,000 6,918,000
------------- -------------
Total properties ........................................................................ 180,681,000 220,133,000
Cash and cash equivalents ................................................................ 15,968,000 14,454,000
Temporary investments .................................................................... 42,633,000 45,053,000
Accounts receivable (note 9) ............................................................. 3,061,000 2,000,000
Prepaid expenses ......................................................................... 6,378,000 6,355,000
Notes receivable (notes 3, 9 and 10) ..................................................... 40,757,000 21,514,000
Investments in real estate partnerships (note 4) ......................................... 2,457,000 2,163,000
Minority interest in consolidated partnerships ........................................... 4,717,000 4,431,000
Income taxes receivable .................................................................. 383,000 --
Deferred income taxes (note 7) ........................................................... -- 3,456,000
Other assets, net ........................................................................ 739,000 768,000
------------- -------------
$ 297,774,000 $ 320,327,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Mortgage indebtedness (note 5) ........................................................... $ 288,553,000 $ 309,188,000
Notes payable to banks and others (notes 9 and 14) ....................................... 12,990,000 2,000,000
Accounts payable and tenants' deposits ................................................... 9,059,000 6,633,000
Accrued expenses and other liabilities ................................................... 8,613,000 8,020,000
Income taxes payable ..................................................................... -- 11,525,000
Accrued contribution to Employee Stock Ownership Trust (note 10) ......................... -- 11,050,000
Deferred gains on the sale of property ................................................... 2,024,000 517,000
Deferred income taxes (note 7) ........................................................... 2,708,000 --
------------- -------------
323,947,000 348,933,000
------------- -------------
Stockholders' equity (deficit):
Common stock, par value $.01 per share; 10,000,000 shares authorized and 5,721,744
and 5,016,745 shares issued (note 13) ................................................. 100,000 100,000
Additional paid-in capital .............................................................. 19,917,000 8,319,000
Retained earnings ....................................................................... 99,788,000 80,402,000
------------- -------------
119,805,000 88,821,000
Less treasury stock, at cost (1,179,235 and 164,345 shares of common stock) (note 14) 145,978,000 117,427,000
------------- -------------
Total stockholders' equity (deficit) ..................................................... (26,173,000) (28,606,000)
Commitments and contingencies (notes 2, 8 and 10) ........................................
------------- -------------
$ 297,774,000 $ 320,327,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1997 1996 1995
--------------- ----------------- ------------------
<S> <C> <C> <C>
Sales and revenues:
Rents ..................................................... $ 78,076,000 $ 79,878,000 $ 79,818,000
Property sales ............................................ 7,137,000 6,623,000 6,047,000
Commissions and fees ...................................... 1,057,000 1,232,000 1,459,000
Dividends and interest .................................... 5,740,000 4,634,000 4,806,000
Gains on sales of investments and other assets ............ 2,628,000 34,867,000 5,711,000
Equity in earnings of unconsolidated affiliates ........... 1,639,000 697,000 157,000
Other ..................................................... 1,582,000 4,697,000 1,307,000
------------ ------------- --------------
97,859,000 132,628,000 99,305,000
------------ ------------- --------------
Costs and expenses:
Selling, general and operating expenses ................... 44,654,000 45,394,000 45,952,000
Cost of property sales .................................... 5,325,000 5,162,000 3,944,000
Interest .................................................. 22,333,000 23,466,000 27,862,000
Depreciation and amortization ............................. 13,483,000 13,954,000 14,355,000
Employee Stock Ownership Trust contribution (note 10) ..... -- -- 1,787,000
Valuation allowances ...................................... -- -- 2,350,000
Litigation settlement (note 11) ........................... -- -- 19,553,000
------------ ------------- --------------
85,795,000 87,976,000 115,803,000
------------ ------------- --------------
Income (loss) before income taxes .......................... 12,064,000 44,652,000 (16,498,000)
Income tax expense (benefit) (note 7) ...................... (7,322,000) 16,750,000 (5,746,000)
------------ ------------- --------------
Net income (loss) .......................................... $ 19,386,000 $ 27,902,000 $ (10,752,000)
============ ============= ==============
Basic income (loss) per share .............................. $ 4.63 $ 5.75 $ (0.74)
============ ============= ==============
Diluted income (loss) per share ............................ $ 4.47 $ 5.62 $ (0.74)
============ ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Years ended
December 31,
-----------------
1997
-----------------
<S> <C>
Common stock:
Balance at beginning and end of year (note 13) ........................... $ 100,000
--------------
Additional paid-in capital (note 13):
Balance at beginning of year ............................................. 8,319,000
Contribution of 110,000 shares to Employee Stock Ownership Trust
(note 10) .............................................................. --
Conveyance of 679,999 shares to Employee Stock Ownership Trust
and to a Court (note 10) ............................................... 11,050,000
Income tax benefit of options exercised on 25,000 shares ................. 381,000
Earned stock compensation (note 12) ...................................... 167,000
--------------
Balance at end of year ................................................... 19,917,000
--------------
Unrealized gain on marketable equity securities available-for-sale, net
of income taxes:
Balance at beginning of year ............................................. --
Unrealized gain, net of income taxes of $184,000 and $4,165,000 .......... --
Realized loss from sale of securities, net of income taxes of
$23,000 ................................................................ --
Realized gain from sale of securities, net of income taxes of
$11,636,000 and $208,000 ............................................... --
--------------
Balance at end of year ................................................... --
--------------
Retained earnings:
Balance at beginning of year ............................................. 80,402,000
Net income (loss) ........................................................ 19,386,000
--------------
Balance at end of year ................................................... 99,788,000
--------------
Treasury stock:
Balance at beginning of year ............................................. (117,427,000)
Contribution of 110,000 shares to Employee Stock Ownership Trust
(notes 10 and 13) ...................................................... --
Receipt of 12,227 shares in litigation settlement (note 11) .............. --
Receipt of 125,242 shares previously securing note receivable
(note 11) .............................................................. --
Purchase of 948,880 shares (note 14) ..................................... (25,857,000)
Receipt of 54,162 shares from Employee Stock Ownership Trust in
payment of note receivable (note 10) ................................... (1,983,000)
Purchase of 11,848 shares ................................................ (711,000)
--------------
Balance at end of year ................................................... (145,978,000)
--------------
Note receivable secured by the Company's common stock:
Balance at beginning of year ............................................. --
Transfer of 125,242 shares to treasury stock in settlement of note
receivable (note 11) ................................................... --
Balance at end of year ................................................... --
--------------
Total stockholders' equity (deficit) ...................................... $ (26,173,000)
==============
<CAPTION>
Years ended December 31,
-------------------------------------
1996 1995
------------------ ------------------
<S> <C> <C>
Common stock:
Balance at beginning and end of year (note 13) ........................... $ 100,000 $ 100,000
-------------- --------------
Additional paid-in capital (note 13):
Balance at beginning of year ............................................. 7,079,000 6,002,000
Contribution of 110,000 shares to Employee Stock Ownership Trust
(note 10) .............................................................. -- 1,077,000
Conveyance of 679,999 shares to Employee Stock Ownership Trust
and to a Court (note 10) ............................................... -- --
Income tax benefit of options exercised on 25,000 shares ................. -- --
Earned stock compensation (note 12) ...................................... 1,240,000 --
-------------- --------------
Balance at end of year ................................................... 8,319,000 7,079,000
-------------- --------------
Unrealized gain on marketable equity securities available-for-sale, net
of income taxes:
Balance at beginning of year ............................................. 21,023,000 13,755,000
Unrealized gain, net of income taxes of $184,000 and $4,165,000 .......... 320,000 7,612,000
Realized loss from sale of securities, net of income taxes of
$23,000 ................................................................ -- 42,000
Realized gain from sale of securities, net of income taxes of
$11,636,000 and $208,000 ............................................... (21,343,000) (386,000)
-------------- --------------
Balance at end of year ................................................... -- 21,023,000
-------------- --------------
Retained earnings:
Balance at beginning of year ............................................. 52,500,000 63,252,000
Net income (loss) ........................................................ 27,902,000 (10,752,000)
-------------- --------------
Balance at end of year ................................................... 80,402,000 52,500,000
-------------- --------------
Treasury stock:
Balance at beginning of year ............................................. (117,427,000) (14,582,000)
Contribution of 110,000 shares to Employee Stock Ownership Trust
(notes 10 and 13) ...................................................... -- 710,000
Receipt of 12,227 shares in litigation settlement (note 11) .............. -- (9,207,000)
Receipt of 125,242 shares previously securing note receivable
(note 11) .............................................................. -- (94,348,000)
Purchase of 948,880 shares (note 14) ..................................... -- --
Receipt of 54,162 shares from Employee Stock Ownership Trust in
payment of note receivable (note 10) ................................... -- --
Purchase of 11,848 shares ................................................ -- --
-------------- --------------
Balance at end of year ................................................... (117,427,000) (117,427,000)
-------------- --------------
Note receivable secured by the Company's common stock:
Balance at beginning of year ............................................. -- (94,348,000)
Transfer of 125,242 shares to treasury stock in settlement of note
receivable (note 11) ................................................... -- 94,348,000
Balance at end of year ................................................... -- --
-------------- --------------
Total stockholders' equity (deficit) ...................................... $ (28,606,000) $ (36,725,000)
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------
1997 1996 1995
--------------- --------------- ------------------
<S> <C> <C> <C>
Operating activities:
Net income (loss) .................................................... $ 19,386,000 $ 27,902,000 $ (10,752,000)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ....................................... 13,483,000 13,954,000 14,355,000
Valuation allowances ................................................ -- -- 2,350,000
Earned stock compensation ........................................... 167,000 1,240,000 --
Noncash portion of litigation settlement ............................ -- -- 13,588,000
Deferred income taxes ............................................... 6,164,000 2,062,000 (2,597,000)
Equity in earnings of unconsolidated affiliates ..................... (1,639,000) (697,000) (157,000)
Employee Stock Ownership Trust contribution ......................... -- -- 1,787,000
Gains on sales of investments and other assets ...................... (2,628,000) (34,867,000) (5,711,000)
Changes in:
Land and improvement inventories ................................... 3,604,000 2,714,000 7,280,000
Accounts receivable ................................................ (1,114,000) 2,165,000 577,000
Minority interest in consolidated partnerships ..................... (424,000) (147,000) (430,000)
Accounts payable and tenants' deposits ............................. 2,577,000 (153,000) (539,000)
Accrued expenses and other liabilities ............................. 707,000 (577,000) (640,000)
Current income taxes ............................................... (11,528,000) 15,717,000 1,437,000
Other, net ......................................................... (1,954,000) 400,000 1,469,000
------------- ------------- --------------
Net cash provided by operating activities .............................. 26,801,000 29,713,000 22,017,000
------------- ------------- --------------
Investing activities:
Net (increase) decrease in temporary investments ..................... 2,420,000 (40,447,000) (202,000)
Payments on notes receivable ......................................... 9,086,000 8,773,000 6,927,000
Issuance of notes receivable ......................................... (19,466,000) (6,632,000) (6,174,000)
Additions to revenue-producing properties ............................ (11,327,000) (8,317,000) (7,862,000)
Purchase of marketable equity securities ............................. -- -- (3,021,000)
Proceeds from sales of capital assets ................................ 9,577,000 3,056,000 5,269,000
Return of capital from unconsolidated affiliates ..................... 1,360,000 400,000 420,000
Proceeds from sales of marketable equity securities .................. -- 38,617,000 925,000
Maturities of marketable securities .................................. -- -- 2,359,000
Investments in and advances to unconsolidated affiliates ............. (15,000) (14,000) (394,000)
Other, net ........................................................... 191,000 (6,000) 30,000
------------- ------------- --------------
Net cash used in investing activities .................................. (8,174,000) (4,570,000) (1,723,000)
------------- ------------- --------------
Financing activities:
Payments on mortgage indebtedness .................................... (22,978,000) (20,593,000) (11,825,000)
Issuance of mortgage indebtedness .................................... 21,366,000 6,353,000 --
Purchases of treasury stock .......................................... (13,521,000) -- (4,901,000)
Issuance of notes to banks and others ................................ -- -- 11,356,000
Payments on notes to banks and others ................................ (2,000,000) (3,658,000) (22,362,000)
Dividends paid ....................................................... -- -- (1,180,000)
Capital contributions from minority partners ......................... 20,000 -- 1,641,000
------------- ------------- --------------
Net cash used in financing activities .................................. (17,113,000) (17,898,000) (27,271,000)
------------- ------------- --------------
Net increase (decrease) in cash and cash equivalents ................... 1,514,000 7,245,000 (6,977,000)
Cash and cash equivalents, beginning of year ........................... 14,454,000 7,209,000 14,186,000
------------- ------------- --------------
Cash and cash equivalents, end of year ................................. $ 15,968,000 $ 14,454,000 $ 7,209,000
============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include the accounts of J.C. Nichols
Company and its majority controlled affiliates (the Company). Significant
intercompany profits, transactions and balances have been eliminated.
Minority interest in consolidated partnerships represents the cumulative
losses, after capital contributions, attributable to minority interests in
consolidated general partnership investments of the Company.
Revenue-producing Properties
Revenue-producing properties are carried at cost less accumulated
depreciation. All direct and indirect costs clearly associated with the
acquisition and development of real estate projects are capitalized. Interest
and certain indirect costs are capitalized during periods in which activities
necessary to ready the property for its intended use are in progress.
Depreciation is generally computed using the straight-line method over the
estimated useful lives of the assets, generally seven to thirty-one years.
Real estate projects are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recoverable. If the sum of the expected future cash flows (undiscounted and
without interest changes) of the asset is less than the carrying amount of the
asset, an impairment loss is recognized. The amount of the impairment loss is
calculated based on an evaluation of discounted cash flows.
Leases for office and warehouse space provide for fixed monthly rents and
may contain provisions for rent escalations, utility charges and other
adjustments. Retail leases generally provide for minimum annual rents,
contingent rentals based on a percentage of the lessee's sales and, in many
instances, the tenant's proportionate share of real estate taxes, insurance and
maintenance. These leases generally have a term of three to five years or
longer in the case of most major tenants. Apartment leases provide for a fixed
monthly rental primarily for a term of one year. All leases are accounted for
as operating leases.
Land and Improvement Inventories
Land and improvement inventories includes residentially zoned land, land
improvements and building improvements, and are carried at the lower of average
cost or market. Revenues from property sales are recorded when sufficient funds
are received from the buyer and all conditions precedent to the sale are
completed, generally when the property is deeded to the buyer. Improvement
costs are allocated to the parcels benefited on the basis of estimated relative
sales value.
Deferred Gains on the Sale of Property
Gains on the sale of property are deferred until such time as the Company
is no longer required to perform significant activities related to the property
sold, has no continuing involvement and has transferred the risks and rewards
of ownership. Additionally, the buyer must have evidenced a substantial initial
and continuing investment in the property.
Gains on the sale of property to unconsolidated affiliates are deferred to
the extent of the Company's ownership interest in such affiliates.
Investments in Real Estate Partnerships
Investments in real estate partnerships primarily consist of investments
in and advances to unconsolidated affiliates. Investments in real estate
partnerships are accounted for on the equity method and reflect the Company's
share of income or loss of the partnerships, reduced by distributions received
and increased by contributions made.
Temporary Investments and Cash Equivalents
Temporary investments are marketable securities which are callable within
30 to 180 days of purchase and are carried at the lower of amortized cost or
market value. Cash equivalents include money market funds, certificates of
deposit and debt securities acquired with an original maturity of three months
or less.
F-18
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Income Taxes
Deferred tax assets and liabilities are recognized for temporary
differences between the financial reporting basis and the income tax basis of
the Company's assets and liabilities. The impact on deferred taxes of changes
in tax rates and laws is reflected in the financial statements in the period of
change.
Treasury Stock
Treasury stock purchases have been recorded at cost. Other receipts of
treasury stock have been recorded at estimated fair value.
Income (Loss) Per Share
In 1997, the Company adopted Statement of Financial Accounting Standard
(SFAS) No. 128 Earnings Per Share, which established new standards for
computing and presenting income per share. Basic income per share is computed
using the weighted average number of common shares outstanding during each
year. Diluted income per share includes the effect of all dilutive potential
common shares (primarily stock options) outstanding during each year. All
income per share data has been restated to reflect the adoption of SFAS No. 128
and retroactive adjustment of the 1996 stock split (see note 13).
The shares used in the calculation of basic and diluted income per share
are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -------------
<S> <C> <C> <C>
Weighted average common shares outstanding for
computation of basic income per share ................ 4,186,219 4,852,400 14,469,360
Stock options .......................................... 153,807 116,029 --
--------- --------- ----------
Shares outstanding for computation of diluted income per
share ................................................ 4,340,026 4,968,429 14,469,360
========= ========= ==========
</TABLE>
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported balances of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Reclassifications
Certain amounts in the consolidated financial statements have been
reclassified to conform with the 1997 presentation.
(2) REVENUE-PRODUCING PROPERTIES
Revenue-producing properties at December 31, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Land and improvements .................. $ 25,567,000 $ 29,355,000
Buildings and improvements ............. 284,423,000 308,667,000
Furnishings and equipment .............. 5,450,000 4,163,000
Construction in progress ............... 5,925,000 625,000
------------- -------------
321,365,000 342,810,000
Less accumulated depreciation .......... 158,268,000 153,799,000
------------- -------------
$ 163,097,000 $ 189,011,000
============= =============
</TABLE>
F-19
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(2) REVENUE-PRODUCING PROPERTIES -- Continued
As of December 31, 1997, future minimum lease payments receivable under
noncancelable operating leases, excluding apartments, are as follows:
<TABLE>
<CAPTION>
Year Amount
- --------------------------------------------- ---------------
<S> <C>
1998 .................................... $ 37,333,000
1999 .................................... 32,294,000
2000 .................................... 25,810,000
2001 .................................... 21,574,000
2002 .................................... 18,194,000
Thereafter .............................. 136,483,000
-------------
Total future minimum lease payments ..... $ 271,688,000
=============
</TABLE>
Contingent rents amounted to $3,395,000, $3,713,000 and $4,162,000 for
1997, 1996 and 1995, respectively. Apartment rentals under leases of one year
or less aggregated $19,793,000, $19,735,000 and $18,681,000 for 1997, 1996 and
1995, respectively.
In 1987, a subsidiary of the Company entered into various contracts with
the City of St. Petersburg, Florida (the City) for the redevelopment and
construction of certain parking, commercial and retail facilities known as Bay
Plaza. Due to a delay in significant development activities, the Company ceased
capitalization of interest, property taxes, insurance and other development
costs on December 31, 1990.
Based on its assessment of the feasibility of developing Bay Plaza under
the existing cost structure, management determined in 1994 that the value of
Bay Plaza had declined and reduced its carrying value to $3,000,000 at December
31, 1994. During 1996, the Company disposed of certain Bay Plaza assets with a
book value of $7,300,000 and was released from related mortgages payable in the
amount of $2,200,000. In December 1997, the Company sold substantially all of
its remaining Bay Plaza assets for $4,000,000, realizing a gain of $2,500,000.
In December 1996, the Company announced a $240,000,000 plan to redevelop
areas on and around the Country Club Plaza in Kansas City, Missouri. The
Company filed an application with the Tax Increment Financing Commission of
Kansas City seeking to use funds generated from tax increment financing to fund
approximately 25% of the proposed redevelopment. The application was approved
by the Tax Increment Financing Commission, and the City Council of Kansas City,
Missouri gave final approval in April 1997. The Plan is to be executed over the
next ten years and is contingent on market demand. The Company is currently
exploring various options for funding development cost in excess of the
approved tax increment financing. At December 31, 1997, the Company had
capitalized approximately $5,100,000 in costs relating to the redevelopment.
(3) NOTES RECEIVABLE
Notes receivable at December 31, 1997 and 1996 consisted of:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
<S> <C> <C>
Promissory notes, collateralized by real estate, due
1998 to 2013, 7% to 11% ........................... $ 24,682,000 $ 14,116,000
Notes receivable -- ESOT (note 10) ................. 12,000,000 1,926,000
Notes receivable -- miscellaneous, 8% to 10% ....... 657,000 2,577,000
First mortgage and construction loans on residential
property, 10% to 10.5% ............................ 3,418,000 2,895,000
------------ ------------
$ 40,757,000 $ 21,514,000
============ ============
</TABLE>
In 1997, the Company sold a parcel of real estate in exchange for a
$10,845,000 promissory note receivable bearing interest at 7% and maturing on
May 10, 2000. The resulting gain of $1,523,000 was deferred at December 31,
1997 and will be recognized upon collection of the note.
F-20
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(3) NOTES RECEIVABLE -- Continued
The Company has valuation reserves of $1,954,000 and $3,799,000 related to
notes receivable at December 31, 1997 and 1996, respectively.
(4) INVESTMENTS IN REAL ESTATE PARTNERSHIPS
In November, 1997, the Company entered into an agreement with
Kessinger/Hunter & Company, Inc. (Kessinger/
Hunter) to form a limited liability company (LLC) to provide services to
previous Kessinger/Hunter clients as well as management and leasing for the
Company's portfolio of office, industrial and retail properties, excluding the
Country Club Plaza in Kansas City, Missouri. On January 2, 1998, the Company
made an initial investment in the LLC of $4,286,000, which represents a 30%
equity interest. The Company has the option of increasing its equity interest
to 65% by 2001. In addition, the agreement provides to the LLC a call right
which enables it to purchase up to 76,530 shares of common stock of the Company
at a price of $56 per share. In February 1998, the LLC returned to the Company
the $4,286,000 to permit it to exercise this call right. Accordingly, the
Company will issue 76,530 shares of its common stock to the LLC.
At December 31, 1997, the Company had an equity interest in the following
unconsolidated entities:
<TABLE>
<CAPTION>
Percent owned
--------------
<S> <C>
Center Court Partners ...................... 50.0%
Dallas County Partners ..................... 50.0
Dallas County Partners II .................. 50.0
Dallas County Partners III L.C ............. 50.0
Fountain Three ............................. 50.0
Terrace Place Partners ..................... 50.0
Meredith Drive Associates L.P .............. 49.5
Board of Trade Investment Company .......... 49.0
J.C. Nichols Real Estate ................... 40.0
4600 Madison Associates L.P ................ 12.5
Raphael Hotel Group L.P .................... 5.0
</TABLE>
Selected aggregate financial data for unconsolidated affiliates for 1997
and 1996 is presented below:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Total assets ...................... $ 131,341,000 $ 125,076,000
Total liabilities (note 8) ........ $ 141,526,000 $ 137,870,000
Net income ........................ $ 3,714,000 $ 2,189,000
</TABLE>
(5) MORTGAGE INDEBTEDNESS
Mortgage indebtedness consists principally of first mortgage notes on
revenue-producing properties. These obligations bear annual interest at rates
ranging from 3.9% to 10.5% and mature from 1998 to 2021. Substantially all of
the Company's revenue-producing properties are pledged to secure this debt.
Aggregate annual principal payments applicable to mortgage indebtedness
subsequent to December 31, 1997 are:
<TABLE>
<S> <C>
1998 ............... $ 8,723,000
1999 ............... 13,968,000
2000 ............... 6,982,000
2001 ............... 7,419,000
2002 ............... 15,540,000
Thereafter ......... 235,921,000
-------------
$ 288,553,000
=============
</TABLE>
F-21
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(5) MORTGAGE INDEBTEDNESS -- Continued
As a result of the bankruptcy of a primary tenant, the Company ceased
making debt service payments on the underlying loan in 1991 and began
negotiations with the lender to restructure the debt agreement. As of December
31, 1993, this nonrecourse debt had a principal balance of $7,149,000 and
accrued interest of $1,818,000. In March 1994, the Company and the lender
agreed to restructure the loan which required a cash payment of $1,649,000 to
reduce the loan balance to $5,500,000. Accrued interest through February 1994
was waived under the agreement. The restructuring reduced the effective
interest rate for financial statement purposes from 12% to approximately 3%.
Due to the loss of a primary tenant in an office building that had an
underlying mortgage, the Company began negotiations in 1995 with the lender to
restructure the debt agreement. As of December 31, 1995, this nonrecourse debt
had a principal balance of $22,500,000 and accrued interest of $3,720,000. In
January 1996, the Company and the lender agreed to restructure the loan, which
required a cash payment by the Company of $2,500,000. In addition, the Company
has the option to retire the outstanding indebtedness prior to maturity for
$14,000,000 less future principal payments thereon. The restructuring reduced
the effective interest rate beginning in 1996, for financial statement
purposes, from 10.5% to approximately 3%.
In 1997, the Company relinquished certain partnership interests, the
primary assets of which were revenue-producing properties, in exchange for the
acquiror assuming $18,223,000 of related mortgage indebtedness. As a result of
this transaction, the Company recognized a gain of $128,000.
Certain debt agreements provide for a 50% sharing of positive and negative
cash flows from operations and capital expenditures as defined between the
parties. Interest expense recognized for such sharing was $622,000, $929,000
and $479,000 for 1997, 1996 and 1995, respectively. Additionally, as of
December 31, 1997 and 1996, mortgage indebtedness includes a $4,026,000
preference item related to these agreements. The Company's liability is
contingent upon certain conditions being met upon the sale or refinancing of
the mortgaged properties.
Interest payments (net of capitalized interest of $31,000, $14,000 and
$121,000, respectively) aggregated $22,533,000, $22,898,000 and $28,417,000 for
1997, 1996 and 1995, respectively.
The Company has a $10,000,000 unsecured line of credit with a bank.
Interest on outstanding borrowings are at the prime rate and are due on demand.
There were no borrowings on this line of credit at December 31, 1997 or 1996.
(6) DEFERRED COMPENSATION
Prior to 1995, the Company accrued deferred compensation for certain key
personnel to be paid over a five or ten-year period following retirement or
death, including interest. Interest expense related to these agreements
amounted to $126,000, $229,000 and $275,000 for 1997, 1996 and 1995,
respectively, with the accrued liability as of December 31, 1997 and 1996
aggregating $2,113,000 and $2,910,000, respectively.
(7) INCOME TAXES
Income tax expense (benefit) is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ --------------- -----------------
<S> <C> <C> <C>
Current ........................... $ (13,486,000) $ 14,688,000 $ (3,149,000)
Deferred .......................... 6,164,000 2,062,000 (2,597,000)
-------------- ------------ -------------
Total income tax expense (benefit) $ (7,322,000) $ 16,750,000 $ (5,746,000)
============== ============ =============
</TABLE>
In 1997, the Company recognized $11,846,000 in additional income tax
benefit after the conveyance of 679,999 common shares to the Employee Stock
Option Trust (ESOT) and to a Court was determined to be fully deductible by the
Internal Revenue Service (IRS), as described in note 10. The deduction for the
contribution of those shares is based on the market value at the date of the
conveyance, with no limitations.
F-22
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(7) INCOME TAXES -- Continued
Total income tax expense (benefit) differs from expected income tax
expense (benefit) as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------------- --------------- -----------------
<S> <C> <C> <C>
Expected income tax expense (benefit) at 34% ..... $ 4,102,000 $ 15,182,000 $ (5,609,000)
ESOT contribution ................................ (11,846,000) -- --
Tax-exempt income ................................ -- -- (26,000)
State income taxes, exclusive of ESOT contribution 422,000 1,455,000 --
Dividend exclusion ............................... -- (7,000) (170,000)
Other, net ....................................... -- 120,000 59,000
------------- ------------ -------------
Total income tax expense (benefit) ............... $ (7,322,000) $ 16,750,000 $ (5,746,000)
============= ============ =============
</TABLE>
Deferred income taxes reflect the tax impact of temporary differences
between the amount of assets and liabilities for financial reporting and such
amounts measured by tax laws and regulations. Deferred income taxes are
comprised of the following:
<TABLE>
<CAPTION>
1997 1996
---------------- ---------------
<S> <C> <C>
Deferred tax assets:
Property and receivable allowances ........................... $ 3,430,000 $ 10,590,000
Note receivable extinguished in settlement (note 11) ......... 15,715,000 15,715,000
Alternative minimum tax credits .............................. 6,162,000 --
Gains recognized for tax reporting, deferred for financial
reporting .................................................. 4,024,000 3,654,000
Net operating loss carryforward .............................. 2,066,000 --
Deferred compensation ........................................ 718,000 990,000
ESOT contributions ........................................... -- 4,437,000
Other ........................................................ -- 106,000
------------- -------------
Total gross deferred tax assets ............................... 32,115,000 35,492,000
Less valuation allowance ...................................... (15,715,000) (15,715,000)
------------- -------------
Total deferred tax assets ..................................... 16,400,000 19,777,000
------------- -------------
Deferred tax liabilities:
Accelerated depreciation ..................................... (12,601,000) (11,845,000)
Gains recognized for financial reporting, deferred for tax
reporting .................................................. (5,696,000) (4,476,000)
State taxes .................................................. (804,000) --
Other ........................................................ (7,000) --
------------- -------------
Total deferred tax liabilities ................................ (19,108,000) (16,321,000)
------------- -------------
Net deferred tax assets (liabilities) ......................... $ (2,708,000) $ 3,456,000
============= =============
</TABLE>
The Company filed its 1996 income tax returns reflecting a net operating
loss primarily attributable to a $103 million deduction for losses of principal
and accrued interest arising from notes and accounts receivable to the Company
from its ESOT and from a limited partnership, owned by the Company's former
president, which could result in immediate tax benefits of up to $7,400,000 and
additional deferred tax benefits of up to $39 million. Due to the uncertainty
surrounding these issues, the Company has not recognized these tax benefits in
the accompanying consolidated financial statements.
Net cash refunds for income taxes during 1997, 1996 and 1995 were
$2,543,000, $955,000 and $4,588,000, respectively.
(8) CONCENTRATION OF CREDIT RISK
Several of the Company's consolidated general partnerships and
subsidiaries have revenue-producing real estate. During the initial lease-up
phase, this real estate generated net operating losses, which upon
consolidation resulted in minority
F-23
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(8) CONCENTRATION OF CREDIT RISK -- Continued
obligations to the Company of $4,717,000 and $4,431,000 at December 31, 1997
and 1996, respectively. If the outside partners fail to perform their
obligations, such amounts may not be realized by the Company. Based on its
evaluation of the outside partners, the Company has determined that the outside
partners have the financial ability to perform their obligations.
As of December 31, 1997 and 1996, the aggregate of the liabilities of
unconsolidated partnerships in which the Company is a general partner,
excluding nonrecourse debt, is approximately $10,477,000 and $12,534,000,
respectively. The Company could become liable for such amounts in the event of
default by the various partnerships and nonperformance by the outside partners.
The collection of principal and interest balances secured by
revenue-producing properties and real estate under development is dependent
upon sufficient cash flows from operations of the properties, refinancing,
capital infusions from outside parties or the sale of the related property. All
such property is principally located in the metropolitan Kansas City, Missouri
area.
(9) AFFILIATED PARTY BALANCES AND TRANSACTIONS
Included in the consolidated financial statements are the following
affiliated party balances:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Notes receivable (note 10) .......... $ 12,497,000 $ 4,084,000
Accounts receivable ................. 400,000 737,000
Notes payable ....................... -- 2,000,000
</TABLE>
The Company established a valuation allowance of $2,467,000 at December
31, 1994 related to notes and accounts receivable from former executive
officers and directors of the Company who were removed from their positions on
May 26, 1995 by action of the Board of Directors. The Company entered
settlement agreements in August 1995 with certain former executive officers and
directors (see note 11).
(10) EMPLOYEE STOCK OWNERSHIP TRUST (ESOT)
The Company has an Employee Stock Ownership Plan (ESOP) related to the
ESOT. All nonunion employees of the Company qualify for participation in the
ESOP after one year of continuous service (1,000 hours) and upon reaching age
twenty-one. Under the terms of the ESOP, the Company makes voluntary
contributions, as determined by the Board of Directors and not to exceed IRS
limitations, that are allocated to participants using a formula based on
compensation. Compensation is defined as total salary and wages paid by the
Company subject to certain limitations. Noncash contributions to the ESOT are
recorded at fair market value.
As of December 31, 1997 and 1996, the ESOT held 1,390,233 shares and
825,280 shares, respectively, of common stock of the Company.
In 1995, the Company contributed 110,000 shares of the Company's common
stock to the ESOT which were valued at $1,787,500.
On August 15, 1997, as part of the 1995 settlement described in note 11,
the Company conveyed to the Company's ESOT 620,586 shares of common stock and
$2,326,000 plus accrued interest of $226,000. Additionally, the Company agreed
to resolve related claims with certain ESOP participants by reducing the
settlement payment otherwise due to the ESOT by approximately $67,000 and
59,413 shares of the Company's common stock, which were delivered to a Court to
determine the proper payee or payees. The Company also agreed to make a
nondeductible payment of approximately $585,000 to the IRS. The IRS agreed,
among other things, that the Company may deduct in full the value of the
settlement payments to the ESOT and a Court and that such payments and methods
of allocating the payments will not adversely affect the tax qualification of
the ESOP.
The conveyance of cash and stock resulted in a decrease in liabilities of
$13,602,000, an increase in additional paid-in capital of $11,050,000 and a
decrease in income tax expense of $11,846,000.
F-24
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(10) EMPLOYEE STOCK OWNERSHIP TRUST (ESOT) -- Continued
ESOP participants may request their distributions from the ESOT in cash or
Company common stock that is held by the ESOT. Future distributions to ESOP
participants for the next five years based on December 31, 1997 market values
of Company common stock could be as much as:
<TABLE>
<S> <C>
1998 ............... $ 11,500,000
1999 ............... 1,900,000
2000 ............... 2,900,000
2001 ............... 4,900,000
2002 ............... 11,400,000
Thereafter ......... 45,800,000
</TABLE>
In the absence of a liquid trading market for the Company's common stock,
the Company may be obligated to repurchase shares of the Company's common stock
from ESOP participants in future years in the amounts detailed above. The ESOT
has sufficient assets to meet its obligations, and the Company has recorded no
additional liability beyond its contributions to the ESOT.
In 1997 and 1996, the Company provided short-term advances to the ESOT to
assist in funding distributions and expenses. All advances to the ESOT are
unsecured and noninterest bearing. At December 31, 1997 and 1996, the Company
had advanced $12,000,000 and $1,926,000, respectively. The amount due at
December 31, 1996, from the ESOT, along with an additional advance of $56,000,
was repaid by the ESOT during January 1997 by transferring 54,162 shares of the
Company's common stock to the Company.
(11) LITIGATION AND SETTLEMENTS
In 1995, the Company was involved in various legal actions as plaintiff
and defendant against former officers and directors, representatives of the
ESOT, minority shareholders and others. The Company had requested, among other
things, that the District Court rescind certain transactions (including the
1992 transactions described below) between the Company and former executive
officers, the ESOP and others.
The Company and various other parties entered settlement agreements in
August 1995 which required conveyance of Company common stock, payment of cash
and extinguishment of amounts due to and from the Company in consideration of
releases from all present and future claims by, among and between the parties
to the settlements.
During 1992, the Company entered into a transaction with the Company's
former president, whereby properties with aggregate carrying values of
$2,592,000 and marketable equity securities with aggregate carrying values of
$1,103,000 were exchanged for 517,920 shares of common stock of the Company and
a note receivable for $2,700,000. The fair values of the properties received,
based on current appraisals, aggregated $5,907,000. The quoted market values of
the marketable equity securities aggregated $2,781,000. The purchase price of
the common stock was equivalent to the former president's basis in such shares.
The Company recognized a gain on the transaction of $4,993,000 in 1992. As part
of the 1995 settlement, the common stock was retained by the Company, the
properties were returned to the Company and the note receivable was canceled.
Management of the Company determined the canceled note receivable did not
exceed the fair value of the properties received. This portion of the
settlement had no net impact on the 1995 consolidated statement of operations.
In May 1992, a limited partnership owned in part by the Company's former
president, acquired 125,242 unallocated shares of common stock of the Company
from the ESOT. These shares were acquired for $124,529,000 through the
assumption of existing principal indebtedness from the ESOT of $94,348,000 and
accrued interest and other advances of $30,181,000. The Company had previously
recorded, as contribution expense, the accrued interest and other advances to
the ESOT. At the time the shares were sold, the $30,181,000 was deferred and
recorded as a reduction of the contractual note receivable from the limited
partnership. The $94,348,000 note receivable, secured by Company stock as of
December 31, 1994, was comprised of the contractual note receivable from the
limited partnership of $124,529,000 net of the $30,181,000 deferrals.
Contractual interest of $12,291,000 on the note receivable from the limited
partnership was deferred as of December 31, 1993. Pursuant to a Pledge
Agreement, the shares of common stock were pledged as collateral to secure the
note receivable from the limited partnership. The related note receivable was
due in ten annual equal installments beginning December 31,
F-25
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(11) LITIGATION AND SETTLEMENTS -- Continued
1994 and had a stated interest rate of prime (6.0% as of December 31, 1993)
payable annually beginning December 31, 1994. As part of the 1995 settlement,
the unallocated 125,242 shares were conveyed to the Company as treasury stock
in exchange for extinguishment of the $94,348,000 note receivable and all
related deferred amounts. This portion of the settlement had no impact on the
1995 consolidated statement of operations.
In 1994, the Company provided valuation allowances of $2,502,000 on notes
and accounts receivable that were part of the 1995 litigation settlement. The
impact of the litigation settlement included in the 1995 statement of
operations was as follows:
<TABLE>
<S> <C>
ESOT contribution (8,500 shares and $2,000,000)................................. $ 13,050,000
Settlement of notes and accounts receivable ($5,619,000) and cash paid
($9,665,000), net of related obligations ($1,064,000) and receipt of 12,227
shares of Company common stock ($9,207,000) ................................... 5,013,000
Legal expenses ($8,117,000), net of insurance reimbursement ($6,627,000) ....... 1,490,000
------------
$ 19,553,000
============
</TABLE>
(12) EARNED STOCK COMPENSATION
In March 1996, the Company approved the 1996 Stock Option Plan (the Plan)
enabling the Company to grant stock options to eligible plan participants. The
options vest immediately upon a change in control, as defined, of the Company.
Pursuant to this Plan, the Company in 1996 granted to an executive officer a
nonstatutory stock option to purchase 64,000 shares at a price of $.0125 per
share, which option vested 50% on January 1, 1996 and the remaining 50% vested
on January 1, 1997. The Company recorded compensation expense and additional
paid-in capital relating to this stock option during the year ended December
31, 1996 of $1,240,000. An incentive stock option was also granted to this
executive officer to purchase 160,000 shares of common stock of the Company at
a price of $19.375 per share, which option vests at a rate of 10% on December
31, 1996, 15% on December 31, 1997 and 25% annually on December 31 for the
years ended 1998, 1999 and 2000. The fair market value of the Company's common
stock was $19.375 per share at the date this incentive stock option was
granted.
In July 1997, the Company granted to key executives nonstatutory stock
options to purchase 27,500 shares of the Company's common stock at a price of
$30 per share. The options vest 20% on January 1, 1998, 35% on January 1, 1999,
and 45% on January 1, 2000. At the date of grant, the estimated fair market
value of the stock was approximately $46 per share. In 1997, the Company
recorded compensation expense and additional paid-in capital relating to these
options of $167,000.
Transactions involving the 1996 Stock Option Plan are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ----------------------
Number of Average Number of Average
shares price shares price
----------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
Stock options:
Outstanding, beginning of year ..... 224,000 $ 13.84 -- $ --
Granted during the year ............ 27,500 30.00 224,000 13.84
Exercised during the year .......... (25,000) 0.01 -- --
------- --------- ------- -------
Outstanding, end of year ........... 226,500 $ 17.33 224,000 $ 13.84
======= ========= ======= ========
</TABLE>
F-26
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(12) EARNED STOCK COMPENSATION -- Continued
Options outstanding and exercisable are as follows:
<TABLE>
<CAPTION>
Outstanding at Exercise Exercisable at Average
December 31, 1997 price December 31, 1997 price
- ------------------- ---------- ------------------- -----------
<S> <C> <C> <C>
39,000 $ 0.01 39,000 $ 0.01
160,000 19.38 40,000 19.38
27,500 30.00 5,500 30.00
------- -------- ------ --------
226,500 $ 17.33 84,500 $ 11.13
======= ======== ====== ========
</TABLE>
On January 1, 1996, the Company adopted SFAS 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 allows entities to disclose pro forma net income
and income per share as if the fair value-based method defined in SFAS 123 had
been applied, while continuing to apply the provisions of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, under
which compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price.
The Company has elected to apply the recognition provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS 123. Had
compensation expense for the Company's incentive and nonstatutory stock options
been determined based upon the fair value at the grant date consistent with the
methodology prescribed under SFAS 123, the Company's net income and diluted
earnings per share would have been reduced by approximately $501,000, or $.12
per share in 1997 and $367,000, or $.07 per share in 1996. The weighted average
fair value of all options granted during 1997 and 1996 is estimated as $36.38
and $12.34 per share, respectively, on the date of grant using an
option-pricing model with the following assumptions: expected dividend yield of
0.0%, risk-free interest rate of 7.0%, and an average expected life of ten
years in 1997 and 11.4 years in 1996. The stock price volatility was 52.7% in
1997.
Pro forma net income reflects only options granted and vested by the end
of the respective year. Therefore, the full impact of calculating compensation
expense for stock options under SFAS 123 is not reflected in the pro forma net
income amounts presented above because compensation expense is reflected over
the options' vesting period.
(13) STOCK SPLIT
On May 29, 1996, the Company approved an increase from 225,000 to
10,000,000 in the number of shares of common stock authorized for issuance by
the Company and a decrease in the par value per share of common stock from
$20.00 to $.01. Additionally, the Company approved an 80-for-1 stock split of
the Company's common stock for all issued and outstanding shares not then held
in the Company's treasury. Accordingly, the common stock par value decreased
from $4,500,000 to $100,000 with an off-setting increase in additional paid-in
capital from $2,679,000 to $7,079,000. All periods presented have been restated
to reflect the effect of the Company's stock split.
(14) TREASURY STOCK
Included in treasury stock transactions during 1997 is the purchase by the
Company of 948,880 shares of its common stock from a shareholder in January
1997 for $25,857,000, payable in cash of $12,849,000 (which included
approximately $39,000 of interest) and a note payable of $12,990,000 (net of
expenses totaling approximately $57,000), bearing interest at 8% and due
January 29, 1999.
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
Disclosures About Fair Value of Financial Instruments. The estimated fair value
amounts have been determined by the Company, using available market information
and appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates
F-27
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
(15) FAIR VALUES OF FINANCIAL INSTRUMENTS -- Continued
presented herein are not necessarily indicative of the amounts that the Company
might realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
o Notes receivable -- Fair value for notes receivable was estimated
utilizing discounted cash flow calculations based on interest rates
currently offered for notes with similar terms and credit risk.
o Temporary investments -- Fair values for temporary investments were
based upon quoted market prices.
o Notes payable to banks and others -- The carrying value of these
financial instruments approximates fair value.
o Mortgage indebtedness -- The carrying value of variable rate mortgages
approximates fair value. Fair value for fixed rate mortgage indebtedness
was estimated utilizing discounted cash flow calculations based on the
Company's incremental borrowing rates for similar types of borrowing
arrangements.
o Off-balance sheet instruments -- Fair value of commitments to extend
credit, guarantees of debt and letters of credit is based on the estimated
fees which would be charged for similar arrangements or the estimated cost
to terminate or otherwise settle the obligations with the counterparties at
the reporting date. The aggregate amount of these fees is not material to
the consolidated financial statements.
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------- -------------------------------
Carrying Fair Carrying Fair
value value value value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Financial assets:
Temporary investments ............ $ 42,633,000 $ 42,633,000 $ 45,053,000 $ 45,053,000
Notes receivable ................. 40,757,000 39,861,000 21,514,000 20,900,000
Financial liabilities:
Notes payable to banks and others 12,990,000 12,990,000 2,000,000 2,000,000
Mortgage indebtedness ............ 288,553,000 279,341,000 309,188,000 300,234,000
</TABLE>
The fair value estimates presented are based on information available to
management as of December 31, 1997 and 1996. Although management is not aware
of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been revalued for purposes of these consolidated
financial statements since the balance sheet date, and current estimates may
differ significantly from the amounts presented above.
(16) POTENTIAL SALE OF COMPANY
In December 1997, with the approval of the Board of Directors, the Company
entered into a definitive agreement to merge with a wholly-owned subsidiary of
Highwoods Properties, Inc. (Highwoods), a real estate investment trust based in
North Carolina for consideration of $65 per common share of the Company to be
received as a combination of cash and Highwood's common stock, subject to
certain limitations. The potential merger is conditional upon the approval of
two-thirds of the Company's shareholders. Under certain conditions, if the
Highwoods transaction is not consummated because the Board of Directors
withdraws its support for the transaction, the Company may be required to pay a
breakup fee ranging from $2,500,000 to $17,200,000 to Highwoods.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
J.C. Nichols Company
Kansas City, Missouri:
Under date of March 6, 1998, we reported on the consolidated balance
sheets of J.C. Nichols Company and subsidiaries (the Company) as of December
31, 1997 and 1996 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for each of the years in the
three year period ended December 31, 1997, which are included in the
prospectus. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related consolidated financial
statement schedules in the registration statement. These consolidated financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statement schedules based on our audits.
In our opinion, these consolidated financial statement schedules, when
considered in relation to the basic consolidated financial statements taken as
a whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Kansas City, Missouri
March 6, 1998
F-29
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
SCHEDULE OF REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Total
Initial
Building Bldg.
Location/Development Building Type Encumbrances Land Costs
- ----------------------------- ---------------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Kansas City, Missouri
Country Club Plaza .......... Millcreek Office & $ 2,595,435 $ 73,343 $ 82,820
Block Retail
Country Club Plaza .......... Triangle Block Retail 1,709,189 32,857 284,951
Country Club Plaza .......... Balcony Block Office & 3,734,895 80,670 4,755,506
Retail
Country Club Plaza ......... Macy Building Retail -- 41,921 140,668
Country Club Plaza .......... Esplanade Office & 7,659,699 138,830 883,230
Block Retail
Country Club Plaza .......... Plaza Central Retail 1,519,279 111,638 818,484
Country Club Plaza .......... Theatre Block Office & 5,507,387 92,377 796,865
Retail
Country Club Plaza .......... Swanson Block Retail 3,608,288 103,707 83,720
Country Club Plaza .......... Halls Building Retail 1,645,886 101,668 3,209,723
Country Club Plaza .......... Nichols Block Office & 3,165,165 87,694 349,267
Retail
Country Club Plaza .......... Time Block Office & 11,774,413 215,950 1,907,746
Retail
Country Club Plaza .......... 48th & Penn Retail 1,772,492 42,299 177,782
Country Club Plaza .......... Seville Shops Retail 2,278,919 224,485 572,084
West
Country Club Plaza .......... Plaza Savings Retail 1,962,402 64,430 1,949,328
South
Country Club Plaza .......... Court of the Retail 2,658,739 51,212 2,744,639
Penguins
Country Club Plaza .......... Seville Square Office & 6,013,813 62,844 1,969,500
Retail
Country Club Plaza .......... Plaza Parking Parking -- 689,286 204,291
Country Club Plaza .......... Common Areas Sidewalks, -- -- 336,922
Fountains,
Statues
4620 Nichols Parkway ........ Parkway Office -- 44,414 858,939
Building
300-320 East 51st St. ....... Colonial Shops Retail -- 6,805 139,680
301-337 East 55th St. ....... Crestwood Retail -- 18,205 114,196
Shops
63rd & Brookside ............ Brookside Office & 4,251,989 128,392 521,792
Shops Retail
7100-7126 Wornall Rd. ....... Romanelli Retail -- 4,656 87,629
Shops
Red Bridge & Holmes ......... Red Bridge Retail -- 8,860 1,717,885
Shops
7140 Wornall Road ........... Romanelli Office & -- 1,404 8,351
Annex Retail
Two Brush Creek Blvd. ....... Two Brush Office 6,533,612 6,539 7,327,125
Creek Plaza
One Ward Parkway ............ One Ward Office -- 10,755 5,946,413
Parkway
400 East Red Bridge Rd. ..... Red Bridge Office 617,578 4,290 1,382,758
Prof. Bldg.
801 West 47th St. ........... Park Plaza Office 5,697,297 132,572 6,769,352
<CAPTION>
Total
Costs Cost
Capitalized -------------------------------------
Subseq. to Land & Buildings/ Accum. Date of Date
Location/Development Acquisition Impts. Impts. Total Depr. Const. Acquired
- ----------------------------- ------------ ----------- ------------ ------------ ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Kansas City, Missouri
Country Club Plaza .......... $ 4,731,005 $ 73,343 $ 4,813,825 $ 4,887,168 $ 2,012,051 1920 1906-1910
Country Club Plaza .......... 651,188 32,857 936,139 968,996 397,887 1925 1906-1910
Country Club Plaza .......... 1,568,643 80,670 6,324,149 6,404,819 2,969,614 1925 1906-1910
Country Club Plaza ......... 2,442,558 41,921 2,583,226 2,625,147 749,151 1926 1906-1910
Country Club Plaza .......... 2,469,596 138,830 3,352,826 3,491,656 2,033,551 1928 1906-1910
Country Club Plaza .......... 2,615,338 111,638 3,433,822 3,545,460 1,959,734 1958 1906-1910
Country Club Plaza .......... 1,701,276 92,377 2,498,141 2,590,518 1,312,854 1928 1906-1910
Country Club Plaza .......... 5,509,830 103,707 5,593,550 5,697,257 2,412,931 1967 1906-1910
Country Club Plaza .......... 411,563 101,668 3,621,286 3,722,954 2,605,389 1964 1906-1910
Country Club Plaza .......... 2,150,060 87,694 2,499,327 2,587,021 2,005,691 1930 1906-1910
Country Club Plaza .......... 2,749,542 215,950 4,657,288 4,873,238 3,159,581 1929 1906-1910
Country Club Plaza .......... 298,215 42,299 475,997 518,296 316,379 1948 1906-1910
Country Club Plaza .......... 132,756 224,485 704,840 929,325 271,323 1980 1906-1910
Country Club Plaza .......... 182,654 64,430 2,131,982 2,196,412 669,833 1948 1906-1910
Country Club Plaza .......... 198,019 51,212 2,942,658 2,993,870 2,825,831 1945 1975
Country Club Plaza .......... 7,042,257 62,844 9,011,757 9,074,601 7,098,693 1945 1975
Country Club Plaza .......... -- 689,286 204,291 893,577 147,941 1920-1964 1906-1910
Country Club Plaza .......... 869,687 744,254 462,355 1,206,609 822,251 1920-1964 1906-1910
4620 Nichols Parkway ........ 524,327 44,414 1,383,266 1,427,680 870,970 1955 1906-1910
300-320 East 51st St. ....... 90,809 6,805 230,489 237,294 140,873 1907 1907
301-337 East 55th St. ....... 85,819 36,357 181,863 218,220 145,015 1932 1923
63rd & Brookside ............ 922,710 142,844 1,430,050 1,572,894 937,925 1919 1920
7100-7126 Wornall Rd. ....... 54,694 4,656 142,323 146,979 99,965 1925 1925
Red Bridge & Holmes ......... 1,863,187 532,623 3,057,309 3,589,932 2,878,549 1959 1959
7140 Wornall Road ........... 34,369 1,404 42,720 44,124 2,770 1963 1993
Two Brush Creek Blvd. ....... 431,593 6,539 7,758,718 7,765,257 4,625,583 1983 1983
One Ward Parkway ............ 228,161 10,755 6,174,574 6,185,329 3,833,959 1980 1980
400 East Red Bridge Rd. ..... 342,585 4,290 1,725,343 1,729,633 1,178,019 1972 1976
801 West 47th St. ........... 797,119 132,572 7,566,471 7,699,043 3,735,136 1983 1983
<CAPTION>
Depr.
Location/Development Life
- ----------------------------- ------------
<S> <C>
Kansas City, Missouri
Country Club Plaza .......... 20-40
Country Club Plaza .......... 20-50
Country Club Plaza .......... 20-50
Country Club Plaza ......... 20-50
Country Club Plaza .......... 20-50
Country Club Plaza .......... 20-40
Country Club Plaza .......... 20-45
Country Club Plaza .......... 20-55
Country Club Plaza .......... 20-60
Country Club Plaza .......... 20-45
Country Club Plaza .......... 20-45
Country Club Plaza .......... 20-40
Country Club Plaza .......... 20-45
Country Club Plaza .......... 20-40
Country Club Plaza .......... 10-20
Country Club Plaza .......... 10-39
Country Club Plaza .......... 15
Country Club Plaza .......... 10-20
4620 Nichols Parkway ........ 20-45
300-320 East 51st St. ....... 20-25
301-337 East 55th St. ....... 15-50
63rd & Brookside ............ 10-50
7100-7126 Wornall Rd. ....... 10-49
Red Bridge & Holmes ......... 10-50
7140 Wornall Road ........... 20
Two Brush Creek Blvd. ....... 10-45
One Ward Parkway ............ 10-45
400 East Red Bridge Rd. ..... 10-31.5
801 West 47th St. ........... 10-45
</TABLE>
F-30
<PAGE>
<TABLE>
<CAPTION>
Total
Initial
Building Bldg.
Location/Development Building Type Encumbrances Land Costs
- ----------------------------- ---------------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
4900 Main ................... 4900 Main Office & 22,460,327 2,138,451 18,977,120
Bldg. Vacant
1.926
Acres
400 East Bannister Rd. ...... Bannister Industrial 1,208,571 5,839 1,553,689
Business
Center
6310 Troost ................. Retail Shops Land Lease -- 13,764 --
664 E. Red Bridge Road ...... KFC Land Lease -- 604 --
11049 Holmes ................ Burger King Land Lease -- 100,465 --
135th & Holmes
(18.6 Acres) ............... Golf Driving Land Lease -- 5,074 1
Range
Bannister & Raytown
Rd. ........................ 2.928 Acres Bldg. Lease -- 1,589 1
(6)655 East Minor Drive ..... Coach House Apartments 20,000,000 54,754 23,400,787
South
(6)11230 Oak ................ Coach House Apartments 8,000,000 16,285 6,474,535
11209 McGee Drive ........... Coach Lamp Apartments -- 16,374 1,989,363
4509 Wornall Rd. ............ Wornall Road Apartments -- 5,188 93,720
4517 Wornall Rd. ............ St. Charles Apartments -- 4,200 57,600
221 West 48th St. ........... Regency Apartments 4,396,430 35,263 3,085,365
House
121 West 48th St. ........... Sulgrave Apartments 8,164,799 240,000 5,145,373
4600 Nichols Parkway ........ Park Lane Apartments -- 55,960 554,840
4417 Pennsylvania ........... Penn Wick Apartments -- 4,108 208,509
4424-4426 Pennsylvania ...... Cole Gardens Apartments -- 4,521 287,844
4419 Pennsylvania ........... Tama Apartments -- 15,952 1
333 West 46th Terr. ......... Neptune Apartments 3,538,739 -- 5,987,040
4921 Wornall Rd. ............ Wornall Point Apartments -- 18,750 656,250
Plaza Area .................. 54 Rental Single 23,470 177,324 3,339,091
Houses Family
95th & Noland Road .......... Vacant Lot -- 6,000 --
2.72 Acres
72nd & Wyandotte ............ Maintenance -- 1,243 684,964
Shop
26 Miscellaneous Vacant -- 1,087,843 --
Lots, Less Than 1 Acre
Each
46th Terr. &
Pennsylvania ............... Surface Parking -- -- 254,075
Parking
Various Locations ........... Const. In Development -- 303,966 --
Progress Costs
and Tenant
Improvements
Lee's Summit, Missouri
211 N. E. Lakewood
Blvd. ...................... Sales Office Retail -- 267,122 133,333
Shawnee Mission, Kansas
5000-5012 State Line ........ Westwood Retail -- 2,470 21,236
Shops
2700-2812 W. 53 Street ...... Fairway Shops Retail 2,874,813 1,099 243,393
Mission Road &
Tomahawk ................... Prairie Village Retail & 11,384,100 30,889 2,150,389
Shops Office
<CAPTION>
Total
Costs Cost
Capitalized -------------------------------------
Subseq. to Land & Buildings/ Accum. Date of Date
Location/Development Acquisition Impts. Impts. Total Depr. Const. Acquired
- ----------------------------- ------------ ----------- -------------- ----------- ------------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
4900 Main ................... 1,452,477 2,138,451 20,429,597 22,568,048 8,429,077 1986 1985
400 East Bannister Rd. ...... 181,583 177,540 1,563,571 1,741,111 1,093,407 1985 1985
6310 Troost ................. 44,034 57,798 -- 57,798 44,034 1974 1971
664 E. Red Bridge Road ...... -- 604 -- 604 -- -- 1954
11049 Holmes ................ -- 100,465 -- 100,465 -- -- 1954
135th & Holmes
(18.6 Acres) ............... -- 5,074 1 5,075 -- -- 1972
Bannister & Raytown
Rd. ........................ -- 1,589 1 1,590 -- -- 1929
(6)655 East Minor Drive ..... 2,988,581 2,980,304 23,463,818 26,444,122 11,421,626 1986 1986
(6)11230 Oak ................ 1,205,966 854,240 6,842,546 7,696,786 3,995,979 1984 1984
11209 McGee Drive ........... 630,102 189,645 2,446,194 2,635,839 2,082,989 1961 1963
4509 Wornall Rd. ............ 14,384 5,188 108,104 113,292 107,477 1918 1968
4517 Wornall Rd. ............ 16,137 4,200 73,737 77,937 59,217 1922 1972
221 West 48th St. ........... 3,414,509 35,263 6,499,874 6,535,137 4,933,662 1960 1961
121 West 48th St. ........... 2,585,132 240,000 7,730,505 7,970,505 4,513,357 1967 1976
4600 Nichols Parkway ........ 319,593 55,960 874,433 930,393 837,511 1924 1971
4417 Pennsylvania ........... 5,227 4,108 213,736 217,844 209,190 1960 1987
4424-4426 Pennsylvania ...... -- 4,521 287,844 292,365 287,844 1960 1987
4419 Pennsylvania ........... 9,166 15,952 9,167 25,119 389 1960 1979
333 West 46th Terr. ......... 114,661 94,557 6,007,144 6,101,701 2,409,329 1988 1910
4921 Wornall Rd. ............ 1,931 20,681 656,250 676,931 253,211 1950 1987
Plaza Area .................. 15,032 177,324 3,354,123 3,531,447 1,882,222 1920's & 1971-1989
1930's
95th & Noland Road .......... -- 6,000 -- 6,000 -- -- 1956
72nd & Wyandotte ............ -- 1,243 684,964 686,207 275,421 1986 1983
26 Miscellaneous Vacant 76,468 1,164,311 -- 1,164,311 20,456 -- 1930-1985
Lots, Less Than 1 Acre
Each
46th Terr. &
Pennsylvania ............... -- -- 254,075 254,075 26,819 -- --
Various Locations ........... 5,664,412 303,966 5,664,412 5,968,378 -- -- --
Lee's Summit, Missouri
211 N. E. Lakewood
Blvd. ...................... 8,249 275,371 133,333 408,704 23,100 1975 1993
Shawnee Mission, Kansas
5000-5012 State Line ........ 116,460 2,470 137,696 140,166 22,805 1926 1949
2700-2812 W. 53 Street ...... 1,487,462 27,330 1,704,624 1,731,954 391,238 1940 1962
Mission Road &
Tomahawk ................... 3,690,459 121,092 5,750,645 5,871,737 3,508,640 1948 1962
<CAPTION>
Depr.
Location/Development Life
- ----------------------------- ------------
<S> <C>
4900 Main ................... 10-50
400 East Bannister Rd. ...... 10-40
6310 Troost ................. 20
664 E. Red Bridge Road ...... --
11049 Holmes ................ --
135th & Holmes
(18.6 Acres) ............... --
Bannister & Raytown
Rd. ........................ --
(6)655 East Minor Drive ..... 10-35
(6)11230 Oak ................ 10-45
11209 McGee Drive ........... 10-50
4509 Wornall Rd. ............ 15
4517 Wornall Rd. ............ 15-27.5
221 West 48th St. ........... 10-40
121 West 48th St. ........... 10-31
4600 Nichols Parkway ........ 8-21
4417 Pennsylvania ........... 7-31.5
4424-4426 Pennsylvania ...... 7
4419 Pennsylvania ........... 15
333 West 46th Terr. ......... 10-40
4921 Wornall Rd. ............ 31.5
Plaza Area .................. 10-31.5
95th & Noland Road .......... --
72nd & Wyandotte ............ 10-40
26 Miscellaneous Vacant --
Lots, Less Than 1 Acre
Each
46th Terr. &
Pennsylvania ............... 10-40
Various Locations ........... --
Lee's Summit, Missouri
211 N. E. Lakewood
Blvd. ...................... 15-31.5
Shawnee Mission, Kansas
5000-5012 State Line ........ 48
2700-2812 W. 53 Street ...... 10-39
Mission Road &
Tomahawk ................... 10-50
</TABLE>
F-31
<PAGE>
<TABLE>
<CAPTION>
Total
Initial
Building Bldg.
Location/Development Building Type Encumbrances Land Costs
- ----------------------------- ---------------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
83 & Mission Road .......... Corinth Square Retail 6,976,058 43,330 2,033,398
Shops
3910-4024 W. 95 Street ..... 95 & Mission Retail -- 3,041 110,785
Road
Shops
9507-9541 Nall ............. Trailwood Retail -- 4,232 567,658
Shops
9555-9563 Nall ............. 96 & Nall Retail -- 509 151,583
Shops
5205-5287 W. 95 Street ..... Trailwood III Retail 856,071 1,459 1,473,877
Shops
4101-4117 W. 83 Street ..... Corinth Shops Retail 1,967,606 11,931 191,765
South
75 & I-35 .................. Georgetown Retail -- 11,335 1,548,724
Shops
8340 Mission Road .......... Corinth Office Office 954,382 3,715 1,121,970
Building
4121 W. 83 Street .......... Corinth Office 381,708 6,309 1,117,443
Executive
Building
7315 Frontage Road ......... Hartford Office Office -- 5,004 1,344,996
Building
4200 Somerset .............. Nichols Office 1,011,644 6,834 1,849,885
Building
11111 W. 95 Street ......... Oak Park Bank Office 430,663 4,912 1,025,676
Building
7301 Mission Road .......... Prairie Village Office -- 44,254 443,776
Office Ctr
(6)4350 Shawnee Msn
Pkway ..................... Fairway West Office 4,775,000 68,829 3,771,257
Office Ctr.
2400 W. 75 Street .......... Brymar Office -- -- 1,634,058
Building
(6)4330 Shawnee Msn
Pkway ..................... Fairway North Office 4,500,000 109,739 3,809,023
11836-50 W. 85 Street ...... Quivira Bus Industrial 18,918 24,605 246,154
Park --
Bldg A
8441-8457 Quivira .......... Quivira Bus Industrial -- 29,968 284,611
Park --
Bldg B
8419-8433 Quivira .......... Quivira Bus Industrial 18,918 23,079 235,351
Park --
Bldg C
8403-8417 Quivira .......... Quivira Bus Industrial 18,918 23,189 256,012
Park --
Bldg D
8347-8363 Quvira ........... Quivira Bus Industrial 145,159 31,309 304,368
Park --
Bldg E
11835-55 W. 83 Street ...... Quivira Bus Industrial 150,496 34,061 463,200
Park --
Bldg F
8605-8619 Quivira .......... Quivira Bus Industrial 106,734 27,279 244,256
Park --
Bldg G
<CAPTION>
Total
Costs Cost
Capitalized ----------------------------------
Subseq. to Land & Buildings/ Accum. Date of Date Depr.
Location/Development Acquisition Impts. Impts. Total Depr. Const. Acquired Life
- ----------------------------- ------------- ---------- ---------- ---------- ---------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
83 & Mission Road .......... 3,832,759 519,635 5,389,852 5,909,487 3,830,299 1962 1955 10-50
3910-4024 W. 95 Street ..... 72,142 63,254 122,714 185,968 146,476 1965 1972 15-50
9507-9541 Nall ............. 26,924 4,232 594,582 598,814 468,212 1968 1972 10-50
9555-9563 Nall ............. 22,347 2,358 172,081 174,439 133,632 1976 1981 15-35
5205-5287 W. 95 Street ..... 4,820 1,459 1,478,697 1,480,156 781,504 1986 1972 10-40
4101-4117 W. 83 Street ..... 2,455,002 116,999 2,541,699 2,658,698 1,362,619 1953 1953 10-55
75 & I-35 .................. 1,173,856 69,784 2,664,131 2,733,915 1,478,208 1974 1965 10-40
8340 Mission Road .......... 266,179 3,715 1,388,149 1,391,864 1,101,136 1960 1984 15-20
4121 W. 83 Street .......... 395,038 6,309 1,512,481 1,518,790 888,205 1973 1986 10-55
7315 Frontage Road ......... 454,367 64,377 1,739,990 1,804,367 1,181,303 1978 1975 10-45
4200 Somerset .............. 254,865 25,135 2,086,449 2,111,584 1,327,703 1978 1979 10-45
11111 W. 95 Street ......... 105,877 13,202 1,123,263 1,136,465 773,331 1976 1978 15-40
7301 Mission Road .......... 440,346 53,430 874,946 928,376 512,727 1960 1981 15-20
(6)4350 Shawnee Msn
Pkway ..................... 572,600 147,319 4,265,367 4,412,686 2,231,978 1983 1981 15-32
2400 W. 75 Street .......... 204,850 5,808 1,833,100 1,838,908 1,600,801 1968 1984 15-20
(6)4330 Shawnee Msn
Pkway ..................... 224,819 209,651 3,933,930 4,143,581 2,202,673 1985 1985 10-45
11836-50 W. 85 Street ...... 156,518 105,801 321,476 427,277 264,513 1973 1973 15-45
8441-8457 Quivira .......... 36,816 29,968 321,427 351,395 230,765 1975 1973 15-35
8419-8433 Quivira .......... 109,159 23,079 344,510 367,589 187,717 1973 1973 15-45
8403-8417 Quivira .......... 49,929 23,189 305,941 329,130 191,804 1973 1973 15-45
8347-8363 Quvira ........... 105,019 31,309 409,387 440,696 258,042 1973 1973 10-45
11835-55 W. 83 Street ...... 130,045 34,061 593,245 627,306 330,901 1973 1973 15-45
8605-8619 Quivira .......... 4,428 27,279 248,684 275,963 153,103 1973 1973 15-45
</TABLE>
F-32
<PAGE>
<TABLE>
<CAPTION>
Total
Initial
Building Bldg.
Location/Development Building Type Encumbrances Land Costs
- ----------------------------- ---------------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
11730-11748 W. 86
Terrace ................... Quivira Bus Industrial 131,283 36,082 324,805
Park --
Bldg H
11705 W. 83 Terrace ........ Quivira Bus Industrial 53,237 45,412 516,014
Park --
Bldg WE
11531-11621 W. 83
Terrace ................... Quivira Bus Industrial 1,396,000 4,962 1,064,467
Park --
Bldg J
11633-11647 W. 83
Terrace ................... Quivira Bus Industrial 304,000 1,982 364,696
Park --
Bldg K
11505-11517 W. 83
Terrace ................... Quivira Bus Industrial 300,000 2,056 400,517
Park --
Bldg L
11100-11200 Antioch ........ Shannon Valley Retail 6,738,583 1,800,000 6,307,009
8201 Mission Road .......... Land Lease -- 276,648 --
4010 Somerset .............. 1.25 Acres Land Lease -- 2,166 --
I-35 & 75th St.
(1.1 Acres) ............... Perkins Land Lease -- 1,303 --
Restaurant
I-35 & 75th St.
(.45 Acres) ............... Bank Drive-In Land Lease -- 537 --
I-35 & 75th St.
(.86 Acres) ............... Convenience Land Lease -- 1,020 --
Store
I-35 & 75th St.
(.64 Acres) ............... Vacant Land -- 390 --
5301 West 95th St.
(.31 Acres) ............... Savings & Land Lease -- 155 --
Loan
75th & Reinhardt ........... Service Station Vacant -- 12,825 --
Building
and Land
8100-8300 Quivira .......... Vacant Land -- 81,308 --
45 Acres
99th & Nieman Road ......... Vacant Land -- 26,830 --
22 Acres
3541 Somerset Drive ........ Maintenance -- 850 266,120
Shop
151st & Nall ............... 11.214 Acres -- 32,079 159,770
Land
Johnson Drive & Hwy. 7 ..... Farm House & -- -- 53,106
Bldgs.
135th-143rd, Metcalf to
Nall ...................... Farm Houses -- -- 467,987
& Bldgs.
Various Locations .......... Tenant Const. In -- -- --
Improvements, Progress
Etc.
3617 & 3733 Somerset
Drive ..................... Corinth Place 2 Condos -- 541 313,608
Villas
<CAPTION>
Total
Costs Cost
Capitalized -----------------------------------
Subseq. to Land & Buildings/ Accum. Date of Date
Location/Development Acquisition Impts. Impts. Total Depr. Const. Acquired
- ----------------------------- ------------- --------- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
11730-11748 W. 86
Terrace ................... 54,288 36,082 379,093 415,175 209,590 1973 1973
11705 W. 83 Terrace ........ 169,830 45,412 685,844 731,256 381,393 1973 1973
11531-11621 W. 83
Terrace ................... 372,485 355,896 1,086,018 1,441,914 899,994 1983 1965
11633-11647 W. 83
Terrace ................... 88,880 82,510 373,048 455,558 303,951 1985 1965
11505-11517 W. 83
Terrace ................... 88,940 82,559 408,954 491,513 331,005 1985 1965
11100-11200 Antioch ........ 1,830,227 1,800,000 8,137,236 9,937,236 4,145,178 1988 1988
8201 Mission Road .......... -- 276,648 -- 276,648 -- -- 1957
4010 Somerset .............. -- 2,166 -- 2,166 -- -- 1955
I-35 & 75th St.
(1.1 Acres) ............... -- 1,303 -- 1,303 -- -- 1953
I-35 & 75th St.
(.45 Acres) ............... -- 537 -- 537 -- -- 1953
I-35 & 75th St.
(.86 Acres) ............... -- 1,020 -- 1,020 -- -- 1953
I-35 & 75th St.
(.64 Acres) ............... -- 390 -- 390 -- -- 1953
5301 West 95th St.
(.31 Acres) ............... -- 155 -- 155 -- -- 1972
75th & Reinhardt ........... -- 12,825 -- 12,825 -- -- 1950
8100-8300 Quivira .......... -- 81,308 -- 81,308 -- -- 1955
99th & Nieman Road ......... 210,628 237,458 -- 237,458 177,275 1966-1995 1959
3541 Somerset Drive ........ -- 850 266,120 266,970 132,914 1987 1957
151st & Nall ............... 11,945 44,024 159,770 203,794 157,673 1940's 1983
Johnson Drive & Hwy. 7 ..... -- -- 53,106 53,106 53,105 1940's 1981
135th-143rd, Metcalf to
Nall ...................... -- -- 467,987 467,987 158,362 1950's 1989
Various Locations .......... 260,499 -- 260,499 260,499 -- -- 1995
3617 & 3733 Somerset
Drive ..................... -- 541 313,608 314,149 37,701 1989 1957
<CAPTION>
Depr.
Location/Development Life
- ---------------------------- ------------
<S> <C>
11730-11748 W. 86
Terrace ................... 15-45
11705 W. 83 Terrace ........ 15-45
11531-11621 W. 83
Terrace ................... 10-35
11633-11647 W. 83
Terrace ................... 15-35
11505-11517 W. 83
Terrace ................... 15-35
11100-11200 Antioch ........ 10-48
8201 Mission Road .......... --
4010 Somerset .............. --
I-35 & 75th St.
(1.1 Acres) ............... --
I-35 & 75th St.
(.45 Acres) ............... --
I-35 & 75th St.
(.86 Acres) ............... --
I-35 & 75th St.
(.64 Acres) ............... --
5301 West 95th St.
(.31 Acres) ............... --
75th & Reinhardt ........... --
8100-8300 Quivira .......... --
99th & Nieman Road ......... 15-20
3541 Somerset Drive ........ 10-40
151st & Nall ............... 15
Johnson Drive & Hwy. 7 ..... 15
135th-143rd, Metcalf to
Nall ...................... 20-27.5
Various Locations .......... --
3617 & 3733 Somerset
Drive ..................... 15-27.5
</TABLE>
F-33
<PAGE>
<TABLE>
<CAPTION>
Total
Initial
Building Bldg.
Location/Development Building Type Encumbrances Land Costs
- ----------------------------- ---------------- ------------ -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
84th & Mission Road ......... Corinth Apartments -- 43,000 228,396
Gardens
4120 West 94th Terr. ........ Kenilworth Apartments 7,569,683 63,527 4,085,515
(6)3815 Somerset Drive ...... Corinth Place Apartments 4,500,000 27,101 3,868,982
3518 West 83rd St. .......... Mission Valley Apartments 1,160,839 38,192 930,039
8037 Mohawk ................. Corinth Apartments 307,515 205,500 986,170
Paddock
Olathe, Kansas
1515 E. Santa Fe ............ Land Lease -- 44,441 --
Miami County, Kansas
250th & Farley .............. 810 Acre Land Lease -- 1,173,083 357,950
Farmland
Osage City, Kansas
(1)East HiWay 31 ............ Manufactured Building 4,800,000 47,840 3,866,625
Homes Lease
Plant
Valuations -- -- (1,194,800)
Reserve
Des Moines, Iowa
(2)4201 Westown
Parkway .................... Highland Office 6,261,065 1,066,243 5,056,684
Building
(2)4200 Corporate Drive ..... Crestwood Office 2,315,737 171,121 2,068,285
Building
(3)4344 Corporate Drive ..... Sunset Office 907,993 93,759 834,073
Building
(3)4601 Westown
Parkway .................... Veridian Office 7,220,709 396,387 5,530,003
Building
(3)4200 University Ave. ..... Edgewater Office 8,928,602 458,901 6,699,069
Building
(3)4445 Corporate Drive ..... Waterford Office 4,561,586 234,529 3,977,761
Building
(4)4401 Westown
Parkway .................... Neptune Office 6,000,000 624,327 4,363,862
Building
(5)6031 Meadow Crest
Drive ...................... Winwood Apartments 23,000,000 1,299,865 19,103,697
Apartments
St. Petersburg, Florida
135 1st Ave NE .............. Vacant Land -- 156,563 --
---------- --------- ----------
Total Revenue -- Producing Properties .................. 265,526,833 16,187,648 216,670,401
(7)Preference Item ...................................... 4,026,458
-----------
Total Encumbrances -- Revenue-Producing Property ....... 269,553,291
<CAPTION>
Total
Costs Cost
Capitalized ------------------------------------------
Subseq. to Land & Buildings/ Accum. Date of Date
Location/Development Acquisition Impts. Impts. Total Depr. Const. Acquired
- ----------------------------- ------------- ------------ -------------- ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
84th & Mission Road ......... 31,098 47,979 254,515 302,494 28,365 1961 1995
4120 West 94th Terr. ........ 2,640,303 347,301 6,442,044 6,789,345 4,691,151 1965 1972
(6)3815 Somerset Drive ...... 665,189 650,565 3,910,707 4,561,272 1,909,772 1987 1987
3518 West 83rd St. .......... 889,006 93,438 1,763,799 1,857,237 1,004,546 1964 1972
8037 Mohawk ................. 308,626 307,897 1,192,399 1,500,296 148,444 1973 1995
Olathe, Kansas
1515 E. Santa Fe ............ -- 44,441 -- 44,441 -- -- 1995
Miami County, Kansas
250th & Farley .............. -- 1,173,083 357,950 1,531,033 66,407 1940's-50's 1994
Osage City, Kansas
(1)East HiWay 31 ............ 682,582 47,840 4,549,207 4,597,047 2,523,665 1985 1985
-- -- (1,194,800) (1,194,800) -- -- --
Des Moines, Iowa
(2)4201 Westown
Parkway .................... (213,725) 1,066,243 4,842,959 5,909,202 2,398,758 1987 1987
(2)4200 Corporate Drive ..... -- 171,121 2,068,285 2,239,406 1,024,439 1987 1987
(3)4344 Corporate Drive ..... 463,315 93,759 1,297,388 1,391,147 339,493 1989 1988
(3)4601 Westown
Parkway .................... 584,787 396,387 6,114,790 6,511,177 1,600,079 1989 1988
(3)4200 University Ave. ..... 1,192,112 683,229 7,666,853 8,350,082 2,006,213 1989 1988
(3)4445 Corporate Drive ..... -- 234,529 3,977,761 4,212,290 1,040,875 1990 1988
(4)4401 Westown
Parkway .................... 1,812,768 1,161,419 5,639,538 6,800,957 2,874,517 1986 1986
(5)6031 Meadow Crest
Drive ...................... 123,227 1,299,865 19,226,924 20,526,789 8,937,493 1986-87 1985
St. Petersburg, Florida
135 1st Ave NE .............. -- 156,563 -- 156,563 -- 1992 1990
--------- --------- ---------- ---------- ---------
Total Revenue -- Producing 88,507,300 25,566,667 295,798,682 321,365,349 158,268,459
Properties
(7)Preference Item ........
Total Encumbrances --
Revenue-Producing Property
<CAPTION>
Depr.
Location/Development Life
- ----------------------------- ------------
<S> <C>
84th & Mission Road ......... 15-27.5
4120 West 94th Terr. ........ 10-40
(6)3815 Somerset Drive ...... 10-40
3518 West 83rd St. .......... 10-40
8037 Mohawk ................. 15-27.5
Olathe, Kansas
1515 E. Santa Fe ............ --
Miami County, Kansas
250th & Farley .............. 5-30
Osage City, Kansas
(1)East HiWay 31 ............ 5-35
--
Des Moines, Iowa
(2)4201 Westown
Parkway .................... 10-40
(2)4200 Corporate Drive ..... 10-40
(3)4344 Corporate Drive ..... 5-39
(3)4601 Westown
Parkway .................... 7-39
(3)4200 University Ave. ..... 7-39
(3)4445 Corporate Drive ..... 7-39
(4)4401 Westown
Parkway .................... 10-50
(5)6031 Meadow Crest
Drive ...................... 5-28
St. Petersburg, Florida
135 1st Ave NE ..............
Total Revenue -- Producing
Properties
(7)Preference Item ........
Total Encumbrances --
Revenue-Producing Property
</TABLE>
- -------
(1) The Company owns a 99% profit-sharing interest and a 100% loss-sharing
interest in the partnership owning this facility.
(2) The Company owns a 90% interest in the partnership owning these two office
buildings.
(3) The Company owns a 60% interest in the partnership owning these four
office buildings.
(4) The Company owns an 85% interest in the partnership owning this office
building.
(5) The Company owns a 65% interest in the partnership owning this apartment
building.
(6) The Company shares 50% of the cash flow from these properties with an
outside company providing credit enhancement support related to the
financing of these properties.
(7) See discussion in Note 5 to the 1997 Consolidated Financial Statements and
Management's Discussion and Analysis.
F-34
<PAGE>
<TABLE>
<CAPTION>
Location/ Building
Development Building Type Encumberances Land
- ------------------------------------------- ------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C>
Kansas City,
Missouri
400 West 49th Terr. Alameda 49 Units
Towers Sold -- --
Condominium 10 Units
(19-Story Remaining
Building) for Sale
Valuation
Reserve -- --
Stone County,
Missouri
Table Rock Lake
(20 Miles West
of Branson, MO) 257-Lot 148 Lots
Subdivision Available -- 1,226,379
(104 Acres) for Sale
Valuation
Reserve (425,000)
Shawnee Mission,
Kansas
(1)135th-151st,
Metcalf to Nall .......................... 64 Acres
Vacant Land -- 1,334,040
Residential
Subdivisions:
151st & Nall (SW
Corner) .................................. Green 85 Lots
Meadows Available
for Sale -- 162,411
148th & Nall .............................. Whitehorse 33 Lots -- 3,970
Available
for Sale
Johnson Dr. & Hwy 51 Lots -- 107,970
Woodsonia
K-7 ...................................... Available
for Sale
TOTAL LAND & IMPROVEMENT
INVENTORIES ...................................................... -- 2,409,770
PROPERTY HELD FOR FUTURE
DEVELOPMENT
Various Land Parcels Kansas City, Missouri;
Johnson County, Kansas and Miami County,
Kansas Held for Future Development ............................... 19,000,000 6,433,337
---------- ---------
TOTAL PROPERTIES & MORTGAGE
INDEBTEDNESS PER CONSOLIDATED
BALANCE SHEET .................................................... $ 288,553,291 $ 25,030,755
============= ============
LESS ACCUMULATED DEPRECIATION .....................................
TOTAL PROPERTIES, NET OF
ACCUMULATED DEPRECIATION .........................................
<CAPTION>
Total Costs Total
Cost
Initial Capitalized ----------------------------------------------------
Location/ Bldg. Subseq. to Land & Buildings/
Development Costs Acquisition Impts. Impts. Total
- ------------------------------------------- ---------------- --------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Kansas City,
Missouri
400 West 49th Terr.
9,066,409 -- -- 9,066,409 9,066,409
-- (5,023,443) -- (5,023,443) (5,023,443)
Stone County,
Missouri
Table Rock Lake
(20 Miles West
of Branson, MO)
-- -- 1,226,379 -- 1,226,379
-- -- (425,000) -- (425,000)
Shawnee Mission,
Kansas
(1)135th-151st,
Metcalf to Nall ..........................
-- -- 1,334,040 -- 1,334,040
Residential
Subdivisions:
151st & Nall (SW
Corner) ..................................
-- 1,310,113 1,472,524 -- --
148th & Nall .............................. -- 1,222,181 1,226,151 -- 1,226,151
Johnson Dr. & Hwy -- 805,542 913,512 -- 913,512
K-7 ......................................
TOTAL LAND & IMPROVEMENT
INVENTORIES ............................ 9,066,409 (1,685,607) 5,747,606 4,042,966 9,790,572
PROPERTY HELD FOR FUTURE
DEVELOPMENT
Various Land Parcels Kansas City, Missouri;
Johnson County, Kansas and Miami County,
Kansas Held for Future Development ..... -- 1,359,245 7,792,582 -- 7,792,582
--------- ---------- --------- ---------- ----------
TOTAL PROPERTIES & MORTGAGE
INDEBTEDNESS PER CONSOLIDATED
BALANCE SHEET .......................... $ 225,736,810 $ 88,180,938 $ 39,106,855 $ 299,841,648 $ 338,948,503
============= ============ ============ =============
LESS ACCUMULATED DEPRECIATION ........... 158,268,459
TOTAL PROPERTIES, NET OF
ACCUMULATED DEPRECIATION ............... $ 180,680,044
=============
<CAPTION>
Location/ Accum. Date of Date Depr.
Development Depr. Const. Acquired Life
- ------------------------------------------- ---------------- ----------- ---------- ------
<S> <C> <C> <C> <C>
Kansas City,
Missouri
400 West 49th Terr.
-- 1988-1996 1962 --
-- -- -- --
Stone County,
Missouri
Table Rock Lake
(20 Miles West
of Branson, MO)
-- -- 1986 --
-- -- -- --
Shawnee Mission,
Kansas
(1)135th-151st,
Metcalf to Nall ..........................
-- -- 1989 --
Residential
Subdivisions:
151st & Nall (SW
Corner) ..................................
-- -- 1984 --
148th & Nall .............................. -- -- 1983 --
Johnson Dr. & Hwy -- -- 1981 --
K-7 ......................................
TOTAL LAND & IMPROVEMENT
INVENTORIES ............................ --
PROPERTY HELD FOR FUTURE
DEVELOPMENT
Various Land Parcels Kansas City, Missouri;
Johnson County, Kansas and Miami County,
Kansas Held for Future Development ..... -- -- 1981 --
-- --------- ---- --
TOTAL PROPERTIES & MORTGAGE
INDEBTEDNESS PER CONSOLIDATED
BALANCE SHEET .......................... $ 158,268,459
=============
LESS ACCUMULATED DEPRECIATION ...........
TOTAL PROPERTIES, NET OF
ACCUMULATED DEPRECIATION ...............
</TABLE>
- -------
(1) All of this property is under contract for sale.
F-35
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
REAL ESTATE AND ACCUMULATED DEPRECIATION ROLLFORWARDS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------- -------------------------------- -------------------------------
Real Estate Accumulated Real Estate Accumulated Real Estate Accumulated
Assets Depreciation Assets Depreciation Assets Depreciation
--------------- ---------------- --------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning
of year ................... $ 373,932,917 $153,799,478 $375,972,490 $146,449,317 $ 381,320,313 $137,215,827
Additions during year:
Acquisitions .............. -- -- -- -- 3,700,609 --
Construction and
tenant
improvements ............ 13,846,635 -- 10,717,282 -- 7,449,127 --
Depreciation and
amortization
expense ................. (2,509,222) 9,741,447 (2,390,406) 10,391,018 (3,324,818) 9,991,182
Deductions during year:
Cost of real estate
sold .................... (46,100,123) (5,272,466) (9,405,299) (3,040,857) (11,055,540) (757,692)
Valuation allowances
and write-offs .......... (221,704) -- (961,150) -- (2,117,201) --
------------- ------------ ------------ ------------ ------------- ------------
Balance at end of year ..... $ 338,948,503 $158,268,459 $373,932,917 $153,799,478 $ 375,972,490 $146,449,317
============= ============ ============ ============ ============= ============
</TABLE>
F-36
<PAGE>
J.C. NICHOLS COMPANY
MORTGAGE LOANS ON REAL ESTATE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Interest Maturity
Description Rate Date
- --------------------------- ------------------ --------------
<S> <C> <C>
Landing Ventures
Shopping Center
Kansas City, MO ........... Prime adj. qtrly 8/15/98
Lemons Descendents
Shopping Center
Kansas City, MO ........... 11% 11/30/01
Rayman, Steven M.
Apartments
Merriam, KS ............... 7% 12/1/02
Synergy Dev. Alliance
Land
Overland Park, KS ......... 7% 5/10/00
Construction loans
on single family
residences ................ 10% to 10.50% On Demand
Other misc. mortgages ..... 0% to 9.5% 1/98 to 9/99
Totals ...................
<CAPTION>
Principal
amount of
loans subject
Periodic Face Carrying to delinquent
Payment Prior Amount of Amount of principal or
Description Term Liens Mortgage Mortgage interest
- --------------------------- ----------------------- ------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Varying amounts
Landing Ventures over life to maturity
Shopping Center Balloon at maturity
Kansas City, MO ........... of $2,861,723 $ -- $ 3,255,000 $ 2,907,939 $ --
Level monthly
Lemons Descendents at $7,741
Shopping Center Balloon at maturity
Kansas City, MO ........... of $564,556 -- 750,000 660,523 --
Level monthly
Rayman, Steven M. at $87,000
Apartments Balloon at maturity
Merriam, KS ............... of $8,736,325 -- 11,750,000 10,530,900 --
Interest only,
Synergy Dev. Alliance payable every 6 months
Land Balloon at maturity
Overland Park, KS ......... of $10,845,302 -- 10,845,302 10,845,302 --
Construction loans
on single family
residences ................ N/A N/A N/A 3,429,828 --
Other misc. mortgages ..... N/A N/A N/A 474,073 26,007
----------- ----------- -------
Totals ................... $26,600,302 $28,848,565 $26,007
=========== =======
Reserve for uncollectable accounts (749,055)
-----------
$28,099,510
===========
</TABLE>
F-37
<PAGE>
J.C. NICHOLS COMPANY
ROLLFORWARD OF MORTGAGE LOANS ON REAL ESTATE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ---------------- ----------------
<S> <C> <C> <C>
Balance at beginning of period ................ $ 17,916,799 $ 21,337,384 $ 24,332,412
Additions during period:
New mortgage loans ......................... 16,660,302 4,649,693 4,591,994
Deductions during period:
Collections of principal ................... (5,728,536) (7,918,608) (5,065,068)
Write-offs ................................. -- (151,670) (250,000)
Settlement expense items (see Note 11 to
consolidated financial statements) ........ -- -- (2,271,954)
------------ ------------ ------------
Balance at close of period .................... $ 28,848,565 $ 17,916,799 $ 21,337,384
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------------------------
1997 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Gross balance ..................... $28,848,565 $ 17,916,799 $ 21,337,384
Reserve for uncollectible accounts (749,055) (905,397) (1,468,218)
----------- ------------ ------------
$28,099,510 $ 17,011,402 $ 19,869,166
=========== ============ ============
</TABLE>
F-38
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at End
Description Year Expenses Write-Offs of Year
- ------------------------------------------------ -------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Valuation Reserve:
Revenue-producing property .................. $10,402,332 $ (465,818) $ (8,954,932) $ 981,582
Valuation Reserve:
Land and improvements inventory ............. 4,983,443 465,000 -- 5,448,443
Valuation Reserve:
Marketable equity securities ................ 85,000 -- (85,000) --
Valuation Reserve:
Notes and accounts receivable ............... 3,496,337 639,853 (1,046,740) 3,089,450
Valuation Reserve:
Investments in real estate partnerships ..... 1,216,839 -- (647,624) 569,215
----------- ---------- -------------- ------------
Totals ..................................... $20,183,951 $ 639,035 $ (10,734,296) $ 10,088,690
=========== ========== ============== ============
</TABLE>
F-39
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Costs and Balance at End
Description Year Expenses Write-Offs of Year
- ----------------------------------------------- -------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Valuation Reserve:
Revenue-producing property .................. $16,715,475 $ (961,489) $ (5,351,654) $10,402,332
Valuation Reserve:
Land and improvements inventory ............. 4,983,443 -- -- 4,983,443
Valuation Reserve:
Marketable equity securities ................ 85,000 -- -- 85,000
Valuation Reserve:
Notes and accounts receivable ............... 5,143,001 (102,833) (1,543,831) 3,496,337
Valuation Reserve:
Investments in real estate partnerships ..... 1,216,839 -- -- 1,216,839
----------- ------------ ------------ -----------
Totals .................................... $28,143,758 $ (1,064,322) $ (6,895,485) $20,183,951
=========== ============ ============ ===========
</TABLE>
F-40
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Balance at Charged to Charged to
Beginning of Costs and Other Balance at End
Description Year Expenses Accounts* Write-Offs of Year
- ------------------------------------------ -------------- -------------- ----------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Valuation Reserve:
Revenue-producing property .............. $ 15,025,400 $ 1,830,000 $ -- $ (139,925) $ 16,715,475
Valuation Reserve:
Land and improvements inventory ......... 4,696,242 287,201 -- -- 4,983,443
Valuation Reserve:
Property held for future development .... 1,327,450 -- (1,327,450) -- --
Valuation Reserve:
Marketable equity securities ............ -- 85,000 -- -- 85,000
Valuation Reserve:
Notes and accounts receivable ........... 4,259,930 2,380,750 -- (1,497,679) 5,143,001
Valuation Reserve:
Prepaid expenses ........................ 1,208,631 -- (1,208,631) -- --
Valuation Reserve:
Investments in real estate partnerships . 1,360,239 -- (68,400) (75,000) 1,216,839
Valuation Reserve:
Minority interest ....................... 952,474 -- (952,474) -- --
------------ ----------- ------------- ------------- ------------
Totals ................................ $ 28,830,366 $ 4,582,951 $ (3,556,955) $ (1,712,604) $ 28,143,758
============ =========== ============= ============= ============
</TABLE>
* These amounts were taken as credits to valuation allowance expense as
the Company was released from the assets and liabilities (net liability
position) of a consolidated affiliate during 1995.
F-41
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
MORTGAGES PAYABLE
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Balance
Lender Origination Maturity Outstanding as
Property or Trustee Date Date of 12/31/97
- ------------------------ ------------------ ------------- ---------- ----------------
<S> <C> <C> <C> <C>
Millcreek Block ........ Principal Mutual 12/15/93 12/13/13 $ 2,595,435
Swanson Block .......... Principal Mutual 12/15/93 12/13/13 $ 3,608,288
Hall's Building ........ Principal Mutual 12/15/93 12/13/13 $ 1,645,886
Theatre Block .......... Principal Mutual 12/15/93 12/13/13 $ 5,507,387
Triangle Block ......... Principal Mutual 12/15/93 12/13/13 $ 1,709,189
Balcony Block .......... Principal Mutual 12/15/93 12/13/13 $ 3,734,895
Plaza Central .......... Principal Mutual 12/15/93 12/13/13 $ 1,519,279
Nichols Block .......... Principal Mutual 12/15/93 12/13/13 $ 3,165,165
Time Block ............. Principal Mutual 12/15/93 12/13/13 $ 11,774,413
Esplanade Block ........ Principal Mutual 12/15/93 12/13/13 $ 7,659,699
Plaza Savings South .... Principal Mutual 12/15/93 12/13/13 $ 1,962,402
48th & Penn ............ Principal Mutual 12/15/93 12/13/13 $ 1,772,492
Court of the Penguins .. Principal Mutual 12/15/93 12/13/13 $ 2,658,739
Seville Shops West ..... Principal Mutual 12/15/93 12/13/13 $ 2,278,919
Seville Square ......... Principal Mutual 12/15/93 12/13/13 $ 6,013,813
Park Plaza ............. Principal Mutual 12/15/93 12/13/13 $ 5,697,297
Mission Valley
Apartments ............ Royal 06/26/96 07/01/11 $ 1,160,839
Neighbors
<CAPTION>
Prepayment Amortization Balance Due
Property Interest Rate Provisions Period at Maturity
- ------------------------ -------------------------------- --------------------------------- -------------- ----------------
<S> <C> <C> <C> <C>
Millcreek Block ........ Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Swanson Block .......... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Hall's Building ........ Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Theatre Block .......... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Triangle Block ......... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Balcony Block .......... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Plaza Central .......... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Nichols Block .......... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Time Block ............. Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Esplanade Block ........ Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Plaza Savings South .... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
48th & Penn ............ Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Court of the Penguins .. Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Seville Shops West ..... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Seville Square ......... Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Park Plaza ............. Fixed at 8% until 2004; rate Greater of 1% of principal or a 20 years Fully Amortized
adjusted by holder, as calculated re-investment yield
defined at 2004 and 2009
Mission Valley
Apartments ............ 7.875% Greater of 1% of principal or 15 years Fully Amortized
a calculated re-investment
yield
</TABLE>
F-42
<PAGE>
<TABLE>
<CAPTION>
Balance
Lender Origination Maturity Outstanding as
Property or Trustee Date Date of 12/31/97
- --------------------------- --------------- ------------- ---------- ----------------
<S> <C> <C> <C> <C>
Corinth Office
Building ................. Members Life 08/29/96 09/01/06 $ 954,382
Ins
Nichols Building .......... CUNA Mutual 08/29/96 09/01/06 $ 1,011,644
Trailwood III Shops ....... Bank Midwest 05/22/86 05/01/21 $ 856,071
Bannister Business
Center ................... Bank Midwest 05/22/86 05/01/21 $ 1,208,571
Regency House ............. Lincoln 05/23/97 06/10/17 $ 4,396,430
National
Sulgrave .................. Lincoln 05/23/97 06/10/17 $ 8,164,799
National
Corinth Place ............. Bank of NY 12/31/85 12/01/15 $ 4,500,000
Coach House South ......... Bank of NY 12/31/85 12/01/15 $ 20,000,00
Coach House ............... U. S. Trust 05/01/85 05/01/15 $ 8,000,000
Fairway North ............. U. S. Trust 11/28/84 11/01/14 $ 4,500,000
(1)Two Brush Creek
Plaza .................... Archon Group 05/12/83 01/01/02 $ 6,533,612
Brookside Shops ........... Lutheran 12/21/90 01/01/11 $ 4,251,989
Prairie Village Shops ..... Lutheran 12/21/90 01/01/11 $ 11,384,100
Rental Houses ............. Mages 05/01/89 05/01/04 $ 23,470
Neptune Apartments ........ Lutheran 12/09/91 01/01/99 $ 3,538,739
Quivira Business Park
Buildings J, K
and L .................... Commerce Bank 08/01/83 08/01/98 $ 2,000,000
Corinth Square Shops ...... Farm Bureau 03/12/92 04/01/02 $ 6,976,058
Corinth Shops South ....... Farm Bureau 03/12/92 04/01/02 $ 1,967,606
<CAPTION>
Prepayment Amortization Balance Due
Property Interest Rate Provisions Period at Maturity
- --------------------------- -------------------------- ----------------------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Corinth Office
Building ................. 7.950% Greater of 1% of principal or 15 years $ 476,814
a calculated re-investment
yield
Nichols Building .......... 7.950% Greater of 1% of principal or 15 years $ 505,423
a calculated re-investment
yield
Trailwood III Shops ....... Monthly weighted average None 35 years Fully Amortized
plus 2%
Bannister Business
Center ................... Monthly weighted average None 35 years Fully Amortized
plus 2%
Regency House ............. 7.560% Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Sulgrave .................. 7.560% Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Corinth Place ............. Lower floater, adjusted Administrative costs for early Interest Only $ 4,500,000
monthly call
Coach House South ......... Lower floater, adjusted Administrative costs for early Interest Only $20,000,000
monthly call
Coach House ............... Lower floater, adjusted Administrative costs for early Interest Only $ 8,000,000
monthly call
Fairway North ............. Lower floater, adjusted Administrative costs for early Interest Only $ 4,500,000
monthly call
(1)Two Brush Creek
Plaza .................... 8.000% Requires lender's approval and 25 years $ 4,977,066
payment of all contingent
interest
Brookside Shops ........... 10.500% In the first ten years additional 20 years Fully Amortized
charge at reinvestment rate.
Beginning in 11th year 5% of
principal, declining by 1/2%
each year thereafter
Prairie Village Shops ..... 10.500% In the first ten years additional 30 years $ 9,537,790
charge at reinvestment rate.
Beginning in 11th year 5% of
principal, declining by 1/2%
each year thereafter
Rental Houses ............. 8.000% None 15 years Fully Amortized
Neptune Apartments ........ 9.875% Beginning in 4th year, 5% of 30 years $ 3,500,962
principal and declining 1%
each year to a minimum of
2%
Quivira Business Park
Buildings J, K
and L .................... 9.800% Administrative costs for early Interest Only $ 2,000,000
call
Corinth Square Shops ...... 9.375% Beginning in 8th year, greater of 30 years $ 5,767,975
1% of principal or a
calculated reinvestment yield
Corinth Shops South ....... 9.375% Beginning in 8th year, greater of 30 years $ 1,626,865
1% of principal or a
calculated reinvestment yield
</TABLE>
F-43
<PAGE>
<TABLE>
<CAPTION>
Balance
Lender Origination Maturity Outstanding as
Property or Trustee Date Date of 12/31/97
- -------------------------- ---------------- ----------------- ---------- ----------------
<S> <C> <C> <C> <C>
Kenilworth
Apartments .............. Aegon 05/07/97 06/01/07 $ 7,569,683
Red Bridge
Professional
Building ................ NYLIC 04/04/72 07/10/98 $ 617,578
Fairway West Office
Center .................. Commerce Bank 03/01/83 03/01/03 $ 4,775,000
Oak Park Bank
Building ................ NYLIC 02/10/78 01/10/03 $ 430,663
Quivira Business Park
Buildings A, C, D,
and SWB ................. Northland 12/14/71 01/01/99 $ 109,991
Financial
Quivira Business Park
Buildings E, F,
G and H ................. Northland 09/12/73 11/01/98 $ 533,672
Financial
Corinth Paddock
Apartments .............. NYLIC 05/23/74 04/10/99 $ 307,515
(1) 4900 Main
Building ................ KPERS 06/09/86(2) 02/01/21 $ 22,460,327
Corinth Executive
Building ................ NYLIC 09/18/72 10/01/02 $ 381,708
Fairway Shops ............ USG Annuity 01/16/96 02/01/06 $ 2,874,813
Shannon Valley Shops ..... Ohio National 12/01/97 11/01/17 $ 6,738,583
Winwood Apartments ....... Iowa Finance 12/31/83 11/01/15 $ 23,000,000
Authority
Neptune Building ......... Iowa Finance 09/01/85 09/01/15 $ 6,000,000
Authority
Manufactured Homes
Plant ................... Osage City -- 12/01/84 12/01/99 $ 4,800,000
IRB
<CAPTION>
Prepayment Amortization Balance Due
Property Interest Rate Provisions Period at Maturity
- -------------------------- -------------------------------- --------------------------------- --------------- -------------------
<S> <C> <C> <C> <C>
Kenilworth
Apartments .............. 8.070% Beginning in 37th month, 20 years $ 4,776,930
greater of 1% of principal or
a calculated re-investment
yield
Red Bridge
Professional
Building ................ 9.125% Beginning in 14th year, 5% of 25 years $ 617,578
principal declining 1/4% per
year
Fairway West Office
Center .................. 9.000% Redeemable on 3/1/98 and 2000-2003 $ 1,775,000
thereafter on interest payment Sinking
Fund
dates declining from 102% to
100% of principal
Oak Park Bank
Building ................ 8.875% Beginning in 11th year, 5% of 25 years Fully Amortized
principal declining 1/4% per
year
Quivira Business Park
Buildings A, C, D,
and SWB ................. 8.875% Beginning in 11th year, 5% of 27 years Fully Amortized
principal
declining
1/2 of 1%
per year to
not less
than 1%
Quivira Business Park
Buildings E, F,
G and H ................. 8.750% Beginning in 11th year, 5% of 25 years $ 527,720
principal declining 1/2 of 1%
per year to not less than 1%
Corinth Paddock
Apartments .............. 8.500% Beginning in 11th year, 5% of 25 years Fully Amortized
principal declining 1/2% per
year to a minimum of 1%
thereafter
(1) 4900 Main
Building ................ 8.000% None 35 years Fully Amortized
Corinth Executive
Building ................ 8.000% Beginning in 11th year 3% of 30 years Fully Amortized
principal declining 1/2% per to 1%
year
Fairway Shops ............ 7.650% Greater of 1% of principal or a 20 years $ 2,057,065
calculated re-investment yield
Shannon Valley Shops ..... 8.030% Greater of 1% of principal or a 20 years Fully Amortized
calculated re-investment yield
Winwood Apartments ....... Lower floater, adjusted weekly Redeemable at rates declining Interest Only $23,000,000
from 102% to 100% of
principal
Neptune Building ......... Lower floater, adjusted weekly Redeemable at rates declining Interest Only $ 6,000,000
from 102% to 100% of
principal
Manufactured Homes
Plant ................... Lower floater, adjusted weekly Redeemable at rates declining Interest Only $ 4,800,000
from 103% to 100% of
principal
</TABLE>
F-44
<PAGE>
<TABLE>
<CAPTION>
Balance
Lender Origination Maturity Outstanding as
Property or Trustee Date Date of 12/31/97
- -------------------------- ------------ ------------- ---------- ----------------
<S> <C> <C> <C> <C>
Highland and
Crestwood Buildings Cigna 10/27/89 12/01/02 $ 8,576,802
Sunset, Veridian,
Edgewater and
Waterford Buildings ..... Cigna 10/27/89 12/01/02 $ 21,618,890
Land under ground
lease ................... Cigna 12/13/92 03/01/09 $ 19,000,000
(1) Preference Items ..... $ 4,026,458
-------------
Total mortgages
payable ................. $ 288,553,291
=============
<CAPTION>
Prepayment Amortization Balance Due
Property Interest Rate Provisions Period at Maturity
- -------------------------- --------------- --------------------------------- -------------- --------------
<S> <C> <C> <C> <C>
Highland and
Crestwood Buildings 8.290% Greater of 1% of principal or a 25 years $ 7,918,383
calculated re-investment yield
Sunset, Veridian,
Edgewater and
Waterford Buildings ..... 8.290% Greater of 1% of principal or a 25 years $19,737,955
calculated re-investment yield
Land under ground
lease ................... 9.050% Beginning in 9th year, 1% plus 25 years $17,429,339
yield maintenance
(1) Preference Items .....
Total mortgages
payable .................
</TABLE>
- -------
(1) See discussion in Note 5 to the Consolidated Financial Statements and
Management's Discussion and Analysis -- Liquidity and Capital Resources.
(2) This note is callable by the lender on 2/1/06.
F-45
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------- ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Revenue-producing properties ............................................................ $ 162,705,000 $ 163,320,000
Land and improvement inventories ........................................................ 9,424,000 9,791,000
Property held for future development .................................................... 8,597,000 7,660,000
------------- -------------
Total properties ...................................................................... 180,726,000 180,681,000
Cash and cash equivalents ............................................................... 23,713,000 15,968,000
Temporary investments ................................................................... 33,554,000 42,633,000
Accounts receivable ..................................................................... 2,974,000 2,454,000
Prepaid expenses ........................................................................ 7,005,000 6,378,000
Notes receivable ........................................................................ 40,407,000 40,757,000
Investments in real estate partnerships ................................................. 6,445,000 2,457,000
Minority interest in consolidated partnerships .......................................... 4,680,000 4,717,000
Income taxes receivable ................................................................. 365,000 383,000
Other assets, net ....................................................................... 699,000 739,000
------------- -------------
$ 300,568,000 $ 297,167,000
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Mortgage indebtedness ................................................................... $ 287,126,000 $ 288,553,000
Notes payable to banks and others ....................................................... 12,990,000 12,990,000
Accounts payable and tenants' deposits .................................................. 6,551,000 9,059,000
Accrued expenses and other liabilities .................................................. 7,645,000 8,006,000
Deferred income taxes ................................................................... 3,970,000 2,708,000
Deferred gains on the sale of property .................................................. 2,022,000 2,024,000
------------- -------------
320,304,000 323,340,000
Shareholders' equity (deficit):
Common stock, par value $.01 per share; 10,000,000 shares authorized (5,798,274 and
5,721,744 shares issued) ............................................................. 100,000 100,000
Additional paid-in capital ............................................................ 24,251,000 19,917,000
Retained earnings ..................................................................... 101,891,000 99,788,000
------------- -------------
126,242,000 119,805,000
Less:
Treasury stock, at cost (1,179,235 shares of common stock) ............................ 145,978,000 145,978,000
------------- -------------
Total shareholders' equity (deficit) .................................................... (19,736,000) (26,173,000)
Commitments and contingencies ...........................................................
$ 300,568,000 $ 297,167,000
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-46
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
1998 1997
---------------- --------------
<S> <C> <C>
Sales and revenues:
Rents ........................................................ $ 19,709,000 $20,011,000
Property sales ............................................... 1,221,000 1,347,000
Dividends and interest ....................................... 1,147,000 1,071,000
Gains on sales of investments and other assets ............... 586,000 15,000
Equity in earnings (losses) of unconsolidated affiliates ..... 54,000 (77,000)
Other ........................................................ 248,000 378,000
------------ -----------
22,965,000 22,745,000
------------ -----------
Costs and expenses:
Selling, general and operating expenses ...................... 10,407,000 9,874,000
Cost of property sales ....................................... 873,000 1,107,000
Interest ..................................................... 5,426,000 5,849,000
Depreciation and amortization ................................ 2,894,000 3,373,000
------------ -----------
19,600,000 20,203,000
------------ -----------
Income before income taxes .................................... 3,365,000 2,542,000
Income tax expense ............................................ 1,262,000 955,000
------------ -----------
Net income ................................................... $ 2,103,000 $ 1,587,000
============ ===========
Basic income per share (note 2) ............................... $ 0.46 $ 0.38
============ ===========
Diluted income per share (note 2) ............................. $ 0.44 $ 0.37
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-47
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
-------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Operating activities:
Net income .......................................................................... $ 2,103,000 $ 1,587,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ..................................................... 2,894,000 3,373,000
Deferred income taxes ............................................................. 1,262,000 955,000
Equity in (earnings) losses of unconsolidated affiliates .......................... (54,000) 77,000
Earned stock compensation ......................................................... 48,000 --
Gains on sales of investments and other assets .................................... (586,000) (15,000)
Changes in:
Land and improvement inventories .................................................. 356,000 726,000
Accounts receivable ............................................................... (520,000) 90,000
Prepaid expenses .................................................................. (982,000) (1,169,000)
Income taxes receivable ........................................................... 17,000 2,071,000
Minority interest in consolidated partnerships .................................... (110,000) (15,000)
Accounts payable and tenants' deposits ............................................ (2,507,000) (174,000)
Accrued expenses and other liabilities ............................................ (269,000) 951,000
Other, net ........................................................................ (60,000) (69,000)
------------ -------------
Net cash provided by operating activities ........................................ 1,592,000 8,388,000
------------ -------------
Investing activities:
Net decrease in temporary investments ............................................... 9,079,000 9,677,000
Payments on notes receivable ........................................................ 2,272,000 1,805,000
Issuance of notes receivable ........................................................ (1,922,000) (931,000)
Additions to revenue-producing properties ........................................... (1,963,000) (1,531,000)
Additions to property held for future development ................................... (937,000) --
Proceeds from sales of capital assets ............................................... 537,000 --
Investments in unconsolidated affiliates ............................................ (4,289,000) --
Return of capital from real estate partnerships ..................................... 370,000 548,000
Other, net .......................................................................... -- 188,000
------------ -------------
Net cash provided by investing activities ........................................ 3,147,000 9,756,000
------------ -------------
Financing activities:
Payments on mortgage indebtedness ................................................... (1,427,000) (2,010,000)
Issuance of common stock ............................................................ 4,286,000 --
Purchase of treasury stock .......................................................... -- (12,810,000)
Capital contributions from minority partners ........................................ 147,000 --
------------ -------------
Net cash provided by (used in) financing activities .............................. 3,006,000 (14,820,000)
------------ -------------
Net increase in cash and cash equivalents ........................................ 7,745,000 3,324,000
Cash and cash equivalents, beginning of period ....................................... 15,968,000 14,454,000
------------ -------------
Cash and cash equivalents, end of period ............................................. $ 23,713,000 $ 17,778,000
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-48
<PAGE>
J.C. NICHOLS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(1) INTERIM FINANCIAL STATEMENTS
The consolidated financial statements of J.C. Nichols Company and
subsidiaries (the Company) have been prepared in accordance with the
instructions to interim financial statements. To the extent that information
and footnotes required by generally accepted accounting principles for complete
financial statements are contained in or consistent with the audited
consolidated financial statements, such information and footnotes have not been
duplicated herein. The December 31, 1997 consolidated balance sheet has been
derived from the audited consolidated financial statements as of that date. In
the opinion of management, all adjustments, including normal recurring
accruals, considered necessary for a fair presentation of financial statements
have been reflected herein. The results of the interim period ended March 31,
1998 are not necessarily indicative of the results expected for the year ended
December 31, 1998. Certain amounts in the consolidated financial statements
have been reclassified to conform with the 1998 presentation.
(2) INCOME PER SHARE
Basic income per share is computed using the weighted average number of
common shares outstanding during each period. Diluted income per share includes
the effect of all dilutive potential common shares (primarily stock options)
outstanding during each period.
The shares used in the calculation of basic and diluted income per share
are shown below:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
------------------------
1998 1997
----------- ------------
<S> <C> <C>
Weighted average common shares outstanding for computation of
basic income per share ...................................... 4,571,420 4,172,560
Stock options ................................................. 167,946 125,562
--------- ---------
Shares outstanding for computation of diluted income per share 4,739,366 4,298,122
========= =========
</TABLE>
(3) INVESTMENT IN LIMITED LIABILITY COMPANY
In November, 1997, the Company entered into an agreement with
Kessinger/Hunter & Company, Inc. (Kessinger/
Hunter) to form a limited liability company (LLC) to provide services to
previous Kessinger/Hunter clients as well as management and leasing for the
Company's Kansas City area portfolio of office, industrial and retail
properties, excluding the Country Club Plaza. On January 2, 1998, the Company
made an initial investment in the LLC of $4,286,000, which represents a 30%
equity interest. The Company has the option of increasing its equity interest
to 65% by 2001. In addition, the agreement provides to the LLC a call right
which enables it to purchase up to 76,530 shares of common stock of the Company
at a price of $56 per share. In February, 1998, the LLC returned to the Company
the $4,286,000 to permit it to exercise this call right. Accordingly, the
Company issued 76,530 shares of its common stock to the LLC.
F-49
<PAGE>
Appendix A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made and entered
into as of December 22, 1997, by and among HIGHWOODS PROPERTIES, INC.
("Highwoods"), a Maryland corporation; JACKSON ACQUISITION CORP. ("Sub"), a
Maryland corporation; and J.C. Nichols Company ("JCN"), a Missouri corporation.
PREAMBLE
The respective Boards of Directors of JCN, Sub and Highwoods are of the
opinion that the transactions described herein are in the best interests of the
parties to this Agreement and their respective shareholders. This Agreement
provides for the acquisition of JCN by Highwoods pursuant to the merger of JCN
with and into Sub. At the effective time of such merger, the outstanding shares
of the capital stock of JCN shall be converted into the right to receive shares
of the common stock of Highwoods (except as provided herein). The transactions
described in this Agreement are subject to the approvals of the shareholders of
JCN and the satisfaction of certain other conditions described in this
Agreement. It is the intention of the parties to this Agreement that the Merger
for federal income tax purposes shall qualify as a "reorganization" within the
meaning of Section 368(a)(1)(A) of the Internal Revenue Code.
Certain terms used in this Agreement are defined in Section 11.1 of this
Agreement.
NOW, THEREFORE, in consideration of the above and the mutual warranties,
representations, covenants, and agreements set forth herein, the parties agree
as follows:
ARTICLE 1
TRANSACTIONS AND TERMS OF MERGER
1.1 Merger. Subject to the terms and conditions of this Agreement, at the
Effective Time, JCN shall be merged with and into Sub in accordance with the
provisions of Section 351.440 of the GBCL and with the effect provided in
Section 351.450 of the GBCL and in accordance with Section 3-105 of the MGCL
and with the effect provided in Section 3-114 of the MGCL (the "Merger"). Sub
shall be the Surviving Corporation resulting from the Merger and shall remain a
wholly owned Subsidiary of Highwoods and shall continue to be governed by the
Laws of the State of Maryland. The Merger shall be consummated pursuant to the
terms of this Agreement, which has been approved and adopted by the respective
Boards of Directors of JCN, Sub and Highwoods and by Highwoods, as the sole
shareholder of Sub.
1.2 Time and Place of Closing. The closing of the transactions
contemplated hereby (the "Closing") will take place at 9:00 A.M. on the date
that the Effective Time occurs (or the immediately preceding day if the
Effective Time is earlier than 9:00 A.M.), or at such other time as the
Parties, acting through their authorized officers, may mutually agree. The
Closing shall be held at such location as may be mutually agreed upon by the
Parties.
1.3 Effective Time. The Merger and other transactions contemplated by this
Agreement shall become effective on the later of the date and at the time the
Articles of Merger reflecting the Merger shall become effective with the
Secretary of State of the State of Missouri and the Articles of Merger
reflecting the Merger become effective with the Department of Assessments and
Taxation of the State of Maryland (the "Effective Time"). Subject to the terms
and conditions hereof, unless otherwise mutually agreed upon in writing by the
authorized officers of each Party, the Parties shall use their reasonable
efforts to cause the Effective Time to occur on the second business day
following the last to occur of (i) the effective date (including expiration of
any applicable waiting period) of the last required Consent referred to in
Section 9.1(b) hereof, and (ii) the date on which the shareholders of JCN
approve this Agreement to the extent such approval is required by applicable
Law; provided, however, in the event the Effective Time, as otherwise
determined hereunder, would be any date within 15 business days prior to the
last day of a calendar quarter, the Effective Time shall be the first business
day of the next calendar quarter.
A-1
<PAGE>
ARTICLE 2
TERMS OF MERGER
2.1 Charter. The Articles of Incorporation of Sub in effect immediately
prior to the Effective Time shall be the Articles of Incorporation of the
Surviving Corporation until duly amended or repealed.
2.2 Bylaws. The Bylaws of Sub in effect immediately prior to the Effective
Time shall be the Bylaws of the Surviving Corporation until duly amended or
repealed.
2.3 Directors and Officers. The directors of Sub in office immediately
prior to the Effective Time, together with such additional persons as may
thereafter be elected, shall serve as the directors of the Surviving
Corporation from and after the Effective Time in accordance with the Bylaws of
the Surviving Corporation. The officers of Sub in office immediately prior to
the Effective Time, together with such additional persons as may thereafter be
elected, shall serve as the officers of the Surviving Corporation from and
after the Effective Time in accordance with the Bylaws of the Surviving
Corporation.
ARTICLE 3
MANNER OF CONVERTING SHARES
3.1 Conversion of Shares. Subject to the provisions of this Article 3, at
the Effective Time, by virtue of the Merger and without any action on the part
of Highwoods, JCN, Sub or the shareholders of any of the foregoing, the shares
of the constituent corporations shall be converted as follows:
(a) Each share of capital stock of Highwoods issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding
from and after the Effective Time.
(b) Each share of Sub Common Stock issued and outstanding immediately
prior to the Effective Time shall remain issued and outstanding from and
after the Effective Time.
(c) Subject to the rights granted in Section 3.2, each share of JCN
Common Stock (including any associated JCN Rights, but excluding shares
held by any JCN Entity or any Highwoods Entity, and excluding shares held
by shareholders who perfect their statutory dissenters' rights as provided
in Section 3.5) issued and outstanding immediately prior to the Effective
Time shall cease to be outstanding and shall be converted into and
exchanged for the right to receive 1.84 shares (the "Exchange Ratio") of
Highwoods Common Stock (the "Per Share Stock Consideration"). Pursuant to
the Highwoods Rights Agreement, each share of Highwoods Common Stock issued
in connection with the Merger upon conversion of JCN Common Stock shall be
accompanied by a Highwoods Right.
3.2 Cash Election. Holders of JCN Common Stock shall be provided with an
opportunity to elect to receive cash consideration in lieu of receiving
Highwoods Common Stock in the Merger, in accordance with the election
procedures set forth below in this Section 3.2. Holders who are to receive cash
in lieu of exchanging their shares of JCN Common Stock for Highwoods Common
Stock as specified below shall receive $65 per share of JCN Common Stock in
cash (the "Per Share Cash Consideration"). The amount determined by multiplying
$65 by the number of Dissenting Shares shall be defined herein as the
"Dissenting Share Amount." The aggregate Per Share Cash Consideration to be
paid in the Merger, plus the Dissenting Share Amount, shall be limited to 40%
of the aggregate consideration paid in exchange for shares of JCN Common Stock
and shall be defined herein as the "Cash Amount." Furthermore, in the event the
aggregate Per Share Stock Consideration to be paid for the JCN Common Stock is
in excess of 75% of the aggregate consideration to be paid in exchange for
shares of JCN Common Stock, Highwoods shall have the option to limit the
aggregate Per Share Stock Consideration to as low as 75% of such consideration
(such limiting amount as may be elected by Highwoods shall be referred to as
the "Maximum Share Amount") and to make a corresponding increase in the
aggregate Per Share Cash Consideration. For purposes of calculating the
aggregate consideration to be paid in exchange for shares of JCN Common Stock
for purposes of this Section 3.2, the aggregate Per Share Stock Consideration
shall be determined by using the price of Highwoods Common Stock used to
calculate the Exchange Ratio in Section 3.1 hereof.
A form for use by JCN shareholders to elect cash and to state their intent
to retain Highwoods Common Stock to be received pursuant to the Merger and
other appropriate and customary transmittal material (which shall specify that
delivery shall be effected only upon proper delivery of the certificates
theretofore representing JCN Common Stock ("Old Certificates") to an exchange
agent designated by Highwoods (the "Exchange Agent")) in such form as Highwoods
and JCN shall mutually agree ("Election Form") shall be mailed concurrently
with the mailing of the Proxy Statement required by Section 8.1 hereof, or on
such other date as Highwoods and JCN shall mutually agree ("Mailing Date") to
each holder of record of
A-2
<PAGE>
JCN Common Stock on the record date ("Record Date") for the JCN shareholders
entitled to vote at the shareholders' meeting to approve the Merger as required
by Section 8.1 (the "JCN Shareholders Meeting").
Each Election Form shall permit a holder (or the beneficial owner through
appropriate and customary documentation and instructions) of JCN Common Stock
to elect to receive cash with respect to all or a portion of such holder's JCN
Common Stock and to state an intent to retain Highwoods Common Stock to be
received pursuant to the Merger.
Any shares of JCN Common Stock with respect to which the holder (or the
beneficial owner, as the case may be) elects to receive cash and does not
dissent shall be referred to herein as the "Cash Election Shares." Any shares
of JCN Common Stock with respect to which the holder (or the beneficial owner,
as the case may be) does not elect to receive cash, states an intention to
retain Highwoods Common Stock to be received pursuant to the Merger and does
not dissent shall be referred to herein as "Stock Retained Shares." Any shares
of JCN Common Stock with respect to which the holder (or the beneficial owner,
as the case may be) does not elect to receive cash, does not state an intention
to retain Highwoods Common Stock to be received pursuant to the Merger and does
not dissent shall be referred to herein as "Stock Non-Retained Shares." Any
shares of JCN Common Stock with respect to which the holder (or the beneficial
owner, as the case may be) shall not have submitted to the Exchange Agent an
effective, properly completed Election Form on or before 5:00 p.m. on the fifth
business day prior to the date of the JCN Shareholders Meeting (or such other
time and date as Highwoods and JCN may mutually agree) (the "Election
Deadline") shall be referred to herein as "No Election Shares."
Any of the elections set forth in the foregoing paragraph shall have been
properly made only if the Exchange Agent shall have actually received a
properly completed Election Form by the Election Deadline. Any Election Form
may be revoked or changed by the person submitting a subsequent Election Form
at or prior to the Election Deadline. In the event an Election Form is revoked
prior to the Election Deadline, the shares of JCN Common Stock represented by
such Election Form shall become No Election Shares. Subject to the terms of
this Agreement and of the Election Form, the Exchange Agent shall have
reasonable discretion to determine whether any election, revocation or change
has been properly or timely made and to disregard immaterial defects in the
Election Forms, and any good faith decisions of the Exchange Agent regarding
such matters shall be binding and conclusive. The Exchange Agent shall promptly
notify JCN of any defect in an Election Form other than an immaterial defect
disregarded in good faith by the Exchange Agent. Subject to the foregoing
sentence, neither Highwoods nor the Exchange Agent shall be under any
obligation to notify any person of any defect in an Election Form.
Within three business days after the Election Deadline, Highwoods shall
cause the Exchange Agent to effect the allocation among the holders of JCN
Common Stock in accordance with the Election Forms, subject to the following:
(i) Cash Elections More Than the Cash Amount. If the amount of cash that
would be issued upon the conversion of the Cash Election Shares is greater
than the amount by which the Cash Amount exceeds the Dissenting Share
Amount (the "Maximum Cash Election Amount"), then the Exchange Agent shall
convert a sufficient number of Cash Election Shares (other than Dissenting
Shares) into the right to receive the Per Share Stock Consideration, which
Cash Election Shares shall be selected pro rata from among all of the
holders thereof, based upon the aggregate number of Cash Election Shares
held by each of such holders, such that the amount of cash that will be
issued in the Merger to satisfy the non-converted Cash Election Shares
equals as closely as practicable the Maximum Cash Election Amount.
(ii) Stock Elections More than Maximum Share Amount. If the value of
Highwoods Common Stock that would be issued in the Merger upon conversion
of all shares of JCN Common Stock other than Cash Election Shares and
Dissenting Shares (whose value for purposes of this determination is
presumed to be $65 per share) is greater than the Maximum Share Amount and
Highwoods has elected to exercise its option to limit the aggregate Per
Share Stock Consideration to an amount equal to the Maximum Share Amount,
then the Exchange Agent shall:
(1) convert a sufficient number of No Election Shares (other than
Dissenting Shares) into the right to receive the Per Share Cash
Consideration, which No Election Shares shall be selected pro rata from
among all of the holders thereof, based upon the aggregate number of No
Election Shares held by each such holder, such that the amount of
Highwoods Common Stock to be issued in the Merger equals as close as
practicable the Maximum Share Amount; and
(2) to the extent that such conversion of No Election Shares does not
reduce the value of Highwoods Common Stock that would be issued in the
Merger to the Maximum Share Amount, convert a sufficient number of Stock
Non-Retained Shares into the right to receive the Per Share Cash
Consideration, which Stock Non-Retained Shares shall be selected pro rata
from among all of the holders thereof, based upon the aggregate number of
Stock
A-3
<PAGE>
Non-Retained Shares held by each such holder, such that the amount of
Highwoods Common Stock to be issued in the Merger equals as close as
practicable the Maximum Share Amount; and
(3) to the extent that such conversions of the No Election Shares and
Stock Non-Retained Shares does not reduce the value of Highwoods Common
Stock that would be issued in the Merger to the Maximum Share Amount,
convert a sufficient number of Stock Retained Shares into the right to
receive the Per Share Cash Consideration, which Stock Retained Shares
shall be selected pro rata from among all of the holders thereof, based
upon the aggregate number of Stock Retained Shares held by each such
holder, such that the amount of Highwoods Common Stock to be issued in
the Merger equals as close as practicable the Maximum Share Amount.
Highwoods shall, at least two business days prior to the date of the JCN
Shareholders Meeting, communicate to JCN the aggregate allocation of stock and
cash, the amount of stock and cash going to each of JCN's shareholders, and the
method in which such amounts were calculated.
3.3 Anti-Dilution Provisions. In the event Highwoods (i) changes the
number of shares of Highwoods Common Stock issued and outstanding prior to the
Effective Time as a result of a stock split, stock dividend, or similar
recapitalization with respect to such stock; (ii) makes any distribution to its
shareholders other than in the ordinary course (such as Highwoods regular
quarterly dividend in an amount generally consistent with past practices,
including typical annual increases); (iii) issues any Highwoods security or
other right to receive any Highwoods security except upon receipt of reasonably
equivalent value or pursuant to any Highwoods (or its Affiliates) stock option
or other benefit plans, and the record date therefor (in the case of a stock
dividend) or the effective date thereof (in the case of a stock split or
similar recapitalization for which a record date is not established) shall be
prior to the Effective Time, the Exchange Ratio shall be proportionately
adjusted.
3.4 Shares Held by JCN or Highwoods. Each of the shares of JCN Common
Stock held by any JCN Entity or by any Highwoods Entity shall be canceled and
retired at the Effective Time and no consideration shall be issued in exchange
therefor.
3.5 Dissenting Shareholders. Any holder of shares of JCN Common Stock who
perfects his dissenters' rights in accordance with and as contemplated by
Section 351.455 of the GBCL shall be entitled to receive the value of such
shares in cash as determined pursuant to such provision of Law; provided, that
no such payment shall be made to any dissenting shareholder unless and until
such dissenting shareholder has complied with the applicable provisions of the
GBCL and surrendered to the Surviving Corporation the certificate or
certificates representing the shares for which payment is being made. In the
event that after the Effective Time a dissenting shareholder of JCN fails to
perfect, or effectively withdraws or loses, his right to appraisal and of
payment for his shares, Highwoods shall issue and deliver the consideration to
which such holder of shares of JCN Common Stock would have been entitled under
this Article 3 (without interest) had such shares been No Election Shares upon
surrender by such holder of the certificate or certificates representing shares
of JCN Common Stock held by him. If and to the extent required by applicable
Law, the Surviving Corporation will establish (or cause to be established) an
escrow account with an amount sufficient to satisfy the maximum aggregate
payment that may be required to be paid to dissenting shareholders. Upon
satisfaction of all claims of dissenting shareholders, the remaining escrowed
amount, reduced by payment of the fees and expenses of the escrow agent, will
be returned to the Surviving Corporation. In the event that the Surviving
Corporation is liquidated prior to the fulfillment of all obligations of the
Surviving Corporation under this Section 3.5, such obligations shall be assumed
by Highwoods.
3.6 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of JCN Common Stock exchanged pursuant to the
Merger who would otherwise have been entitled to receive a fraction of a share
of Highwoods Common Stock (after taking into account all certificates delivered
by such holder) shall receive, in lieu thereof, cash (without interest) in an
amount equal to such fractional part of a share of Highwoods Common Stock
multiplied by the market value of one share of Highwoods Common Stock at the
Effective Time. For purposes of this Section 3.6, the market value of one share
of Highwoods Common Stock at the Effective Time shall be equal to the price of
Highwoods Common Stock used to calculate the Exchange Ratio in Section 3.1
hereof. No such holder will be entitled to dividends, voting rights, or any
other rights as a shareholder in respect of any fractional shares.
3.7 Conversion of Stock Options.
(a) At the Effective Time, each option or other Equity Right to purchase
shares of JCN Common Stock pursuant to stock options or stock appreciation
rights ("JCN Options") granted by JCN under the JCN Stock Plans, which are
outstanding at the Effective Time, whether or not exercisable, shall be
converted into and become rights with respect to Highwoods Common Stock,
and Highwoods shall assume each JCN Option, in accordance with the terms of
the JCN
A-4
<PAGE>
Stock Plan and stock option agreement by which it is evidenced, except that
from and after the Effective Time, (i) Highwoods and its Compensation
Committee shall be substituted for JCN and the committee of JCN's Board of
Directors (including, if applicable, the entire Board of Directors of JCN)
administering such JCN Stock Plan, (ii) each JCN Option assumed by
Highwoods may be exercised solely for shares of Highwoods Common Stock (or
cash, if so provided under the terms of such JCN Option), (iii) the number
of shares of Highwoods Common Stock subject to such JCN Option shall be
equal to the number of shares of JCN Common Stock subject to such JCN
Option immediately prior to the Effective Time multiplied by the Exchange
Ratio, (iv) the per share exercise price under each such JCN Option shall
be adjusted by dividing the per share exercise price under each such JCN
Option by the Exchange Ratio and rounding up to the nearest cent, (v) each
JCN Option that would have become fully exercisable under a JCN Stock Plan
as a result of a "change in control" will continue to be fully exercisable
into shares of Highwoods Common Stock upon consummation of the Merger, and
(vi) employment by Highwoods of a JCN employee upon consummation of the
Merger will not be deemed a termination of employment by JCN that would
limit such employee's rights to exercise any JCN Option under the
provisions hereof. Notwithstanding the provisions of clause (iii) of the
preceding sentence, Highwoods shall not be obligated to issue any fraction
of a share of Highwoods Common Stock upon exercise of JCN Options and any
fraction of a share of Highwoods Common Stock that otherwise would be
subject to a converted JCN Option shall represent the right to receive a
cash payment upon exercise of such converted JCN Option equal to the
product of such fraction and the difference between the market value of one
share of Highwoods Common Stock at the time of exercise of such Option and
the per share exercise price of such Option. For purposes of this Section
3.7, the market value of one share of Highwoods Common Stock at the time of
exercise of a JCN Option shall be the closing price of such common stock on
the NYSE-Composite Transactions List (as reported by The Wall Street
Journal or, if not reported thereby, any other authoritative source
selected by Highwoods) on the last trading day preceding the date of
exercise. In addition, notwithstanding the provisions of clauses (iii) and
(iv) of the first sentence of this Section 3.7, each JCN Option which is an
"incentive stock option" shall be adjusted as required by Section 424 of
the Internal Revenue Code, and the regulations promulgated thereunder, so
as not to constitute a modification, extension or renewal of the option,
within the meaning of Section 424(h) of the Internal Revenue Code. Each of
JCN and Highwoods agrees to take all necessary steps to effectuate the
foregoing provisions of this Section 3.7, including using its reasonable
efforts to obtain from each holder of a JCN Option any reasonable Consent
or Contract that may be deemed reasonably necessary or advisable in order
to effect the transactions contemplated by this Section 3.7. Anything in
this Agreement to the contrary notwithstanding, Highwoods shall have the
right, in its sole discretion, not to deliver the consideration provided in
this Section 3.7 to a former holder of a JCN Option who has not delivered
such Consent or Contract.
(b) As soon as practicable after the Effective Time, Highwoods shall
deliver to the participants in each JCN Stock Plan an appropriate notice
setting forth such participant's rights pursuant thereto and the grants
subject to such JCN Stock Plan shall continue in effect on the same terms
and conditions (subject to the adjustments required by Section 3.7(a) after
giving effect to the Merger), and Highwoods shall comply with the terms of
each JCN Stock Plan to ensure, to the extent required by, and subject to
the provisions of, such JCN Stock Plan, that JCN Options which qualified as
incentive stock options prior to the Effective Time continue to qualify as
incentive stock options after the Effective Time. At or prior to the
Effective Time, Highwoods shall take all corporate action necessary to
reserve for issuance sufficient shares of Highwoods Common Stock for
delivery upon exercise of JCN Options assumed by it in accordance with this
Section 3.7. As soon as practicable after the Effective Time, Highwoods
shall file a registration statement on Form S3 or Form S8, as the case may
be (or any successor or other appropriate forms), with respect to the
shares of Highwoods Common Stock subject to such options and shall use its
reasonable efforts to maintain the effectiveness of such registration
statements (and maintain the current status of the prospectus or
prospectuses contained therein) for so long as such options remain
outstanding. With respect to those individuals who subsequent to the Merger
will be subject to the reporting requirements under Section 16(a) of the
1934 Act, where applicable, Highwoods shall administer the JCN Stock Plan
assumed pursuant to this Section 3.7 in a manner that complies with Rule
16b3 promulgated under the 1934 Act.
(c) All contractual restrictions or limitations on transfer with respect
to JCN Common Stock awarded under the JCN Stock Plan or any other plan,
program, Contract or arrangement of any JCN Entity, to the extent that such
restrictions or limitations shall not have already lapsed (whether as a
result of the Merger or otherwise), and except as otherwise expressly
provided in such plan, program, Contract or arrangement, shall remain in
full force and effect with respect to shares of Highwoods Common Stock into
which such restricted stock is converted pursuant to Section 3.1.
3.8 Extraordinary Dividend. In the event that the consolidated earnings
and profits of JCN (as defined in Section 312 of the Internal Revenue Code)
would otherwise exceed $20,000,000 as of the Effective Time, the directors of
JCN shall take all necessary action to cause the distribution of an
extraordinary dividend to the shareholders of JCN prior to the Effective
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Date in such amount that as of the Effective Date such consolidated earnings
and profits will be no more than $20,000,000. The amount of earnings and
profits shall be determined by an earnings and profits study to be performed by
either KPMG Peat Marwick or Ernst & Young, L.L.P. in consultation with the
other, including an estimate for the period beginning as of the day following
the date of the latest available JCN Financial Statements and ending on the
probable Effective Time. In making the earnings and profits study, the interest
accrued by the Company on the ESOT (as defined below) debt and the Bowser
limited partnership debt shall be excluded from taxable income. The per share
amount of the extraordinary dividend so distributed, if any, shall reduce the
value of the JCN Common Stock in an equivalent amount, and the Per Share Stock
Consideration, the Per Share Cash Consideration and the Exchange Ratio shall be
proportionately adjusted, as appropriate.
ARTICLE 4
EXCHANGE OF SHARES
4.1 Exchange Procedures.
(a) At or prior to the Effective Time, Highwoods shall deposit, or shall
cause to be deposited, with the Exchange Agent, for the benefit of the
holders of Old Certificates for exchange in accordance with this Article IV
certificates representing the shares of Highwoods Common Stock ("New
Certificates") and an estimated amount of cash (such cash and New
Certificates, together with any dividends or distributions with respect
thereto (without any interest thereon), being hereinafter referred to as
the "Exchange Fund") to be paid pursuant to this Article IV in exchange for
outstanding shares of JCN Common Stock.
(b) As promptly as practicable after the Effective Date, Highwoods shall
send or cause to be sent to each former holder of record of shares of JCN
Common Stock (other than Cash Election Shares, shares of JCN Common Stock
held in treasury by JCN or Dissenting Shares) of JCN Common Stock
immediately prior to the Effective Time transmittal materials for use in
exchanging such stockholder's Old Certificates for the consideration set
forth in this Article IV. Highwoods shall cause the New Certificates into
which shares of a stockholder's JCN Common Stock are converted on the
Effective Date and/or any check in respect of the Per Share Cash
Consideration and any fractional share interests or dividends or
distributions which such person shall be entitled to receive to be
delivered to such stockholder upon delivery to the Exchange Agent of Old
Certificates representing such shares of JCN Common Stock (or indemnity
reasonably satisfactory to Highwoods and the Exchange Agent, if any of such
certificates are lost, stolen or destroyed) owned by such stockholder. No
interest will be paid on any such cash to be paid pursuant to this Article
IV upon such delivery.
(c) Notwithstanding the foregoing, neither the Exchange Agent nor any
party hereto shall be liable to any former holder of JCN Common Stock for
any amount properly delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(d) No dividends or other distributions with respect to Highwoods Common
Stock with a record date occurring after the Effective Time shall be paid
to the holder of any unsurrendered Old Certificate representing shares of
JCN Common Stock converted in the Merger into shares of such Highwoods
Common Stock until the holder thereof shall surrender such Old Certificate
in accordance with this Article IV. After the surrender of an Old
Certificate in accordance with this Article IV, the record holder thereof
shall be entitled to receive any such dividends or other distributions,
without any interest thereon, which theretofore had become payable with
respect to shares of Highwoods Common Stock represented by such Old
Certificates.
(e) To the extent permitted by Law, any portion of the Exchange Fund that
remains unclaimed by the stockholders of JCN for twelve months after the
Effective Time shall be paid to Highwoods. Any stockholders of JCN who have
not theretofore complied with this Article IV shall thereafter look only to
Highwoods for payment of the shares of Highwoods Common Stock, cash in lieu
of any fractional shares and unpaid dividends and distributions on the
Highwoods Common Stock deliverable in respect of each share of JCN Common
Stock such stockholder holds as determined pursuant to this Agreement, in
each case, without any interest thereon.
4.2 Rights of Former JCN Shareholders. At the Effective Time, the stock
transfer books of JCN shall be closed as to holders of JCN Common Stock
immediately prior to the Effective Time and no transfer of JCN Common Stock by
any such holder shall thereafter be made or recognized. Until surrendered for
exchange in accordance with the provisions of Section 4.1, each Certificate
theretofore representing shares of JCN Common Stock (other than shares to be
canceled pursuant to
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Sections 3.4 and 3.5) shall from and after the Effective Time represent for all
purposes only the right to receive the consideration provided in Sections 3.1
through 3.6 in exchange therefor, subject, however, to the Surviving
Corporation's obligation (or Highwoods' obligation following any liquidation of
the Surviving Corporation) to pay any dividends or make any other distributions
with a record date prior to the Effective Time which have been declared or made
by JCN in respect of such shares of JCN Common Stock in accordance with the
terms of this Agreement and which remain unpaid at the Effective Time. To the
extent permitted by Law, former shareholders of record of JCN shall be entitled
to vote after the Effective Time at any meeting of Highwoods shareholders the
number of whole shares of Highwoods Common Stock into which their respective
shares of JCN Common Stock are converted, regardless of whether such holders
have exchanged their Old Certificates for New Certificates representing
Highwoods Common Stock in accordance with the provisions of this Agreement.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF JCN
JCN hereby represents and warrants to Highwoods as follows:
5.1 Organization, Standing, and Power. JCN is a corporation duly
organized, validly existing, and in good standing under the Laws of the State
of Missouri, and has the corporate power and authority to carry on its business
as now conducted and to own, lease and operate its Assets. JCN is duly
qualified or licensed to transact business as a foreign corporation in good
standing in the States of the United States and foreign jurisdictions where the
character of its Assets or the nature or conduct of its business requires it to
be so qualified or licensed, except for such jurisdictions in which the failure
to be so qualified or licensed is not reasonably likely to have a JCN Material
Adverse Effect. The minute book and other organizational documents for JCN have
been made available to Highwoods for its review and, except as disclosed in
Section 5.1 of the JCN Disclosure Memorandum, are complete in all material
respects as in effect as of the date of this Agreement and accurately reflect
in all material respects all amendments thereto and all proceedings of the
Board of Directors and shareholders thereof.
5.2 Authority of JCN; No Breach By Agreement.
(a) JCN has the corporate power and authority necessary to execute,
deliver, and perform its obligations under this Agreement and to consummate
the transactions contemplated hereby. The execution, delivery, and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly
authorized by all necessary corporate action in respect thereof on the part
of JCN, subject to the approval of this Agreement by the holders of
two-thirds of the outstanding shares of JCN Common Stock, which is the only
vote of JCN shareholders required for approval of this Agreement and
consummation of the Merger by JCN. Subject to such requisite shareholder
approval, this Agreement represents a legal, valid, and binding obligation
of JCN, enforceable against JCN in accordance with its terms (except in all
cases as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, conservatorship, moratorium, or
similar Laws affecting the enforcement of creditors' rights generally and
except that the availability of the equitable remedy of specific
performance or injunctive relief is subject to the discretion of the court
before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by JCN, nor the
consummation by JCN of the transactions contemplated hereby, nor compliance
by JCN with any of the provisions hereof, will (i) conflict with or result
in a breach of any provision of JCN's Articles of Incorporation or Bylaws
or the certificate or articles of incorporation or bylaws of any JCN
Subsidiary or any resolution adopted by the board of directors or the
shareholders of any JCN Entity, or (ii) except as disclosed in Section 5.2
of the JCN Disclosure Memorandum, constitute or result in a Default under,
or require any Consent pursuant to, or result in the creation of any Lien
on any Asset of any JCN Entity under, any Contract or Permit of any JCN
Entity, where such Default or Lien, or any failure to obtain such Consent,
is reasonably likely to have, individually or in the aggregate, a JCN
Material Adverse Effect, or, (iii) subject to receipt of the requisite
Consents referred to in Section 9.1(b) and 9.1(c), constitute or result in
a Default under, or require any Consent pursuant to, any Law or Order
applicable to any JCN Entity or any of their respective material Assets.
(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules
of the NASD, and other than Consents required from Regulatory Authorities,
and other than notices to or filings with the Internal Revenue Service or
the Pension Benefit Guaranty Corporation with respect to any employee
benefit plans, or under the HSR Act, and other than Consents, filings, or
notifications which, if not obtained or made, are not reasonably likely to
have, individually or in the aggregate, a JCN Material Adverse Effect, no
notice to, filing with, or Consent of, any public body or authority is
necessary for the consummation by JCN of the Merger and the other
transactions contemplated in this Agreement.
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5.3 Capital Stock.
(a) The authorized capital stock of JCN consists of (i) 10,000,000 shares
of JCN Common Stock, of which 4,529,357 shares are issued and outstanding
as of the date of this Agreement and not more than 4,857,387 shares will be
issued and outstanding at the Effective Time. All of the issued and
outstanding shares of capital stock of JCN are duly and validly issued and
outstanding and are fully paid and nonassessable under the GBCL. None of
the outstanding shares of capital stock of JCN has been issued in violation
of any preemptive rights of the current or past shareholders of JCN.
(b) Except as set forth in Section 5.3(a), or as set forth in the Call
Right granted to KH/JCN LLC, or as disclosed in Section 5.3(b) of the JCN
Disclosure Memorandum, there are no shares of capital stock or other equity
securities of JCN outstanding and no outstanding Equity Rights relating to
the capital stock of JCN.
5.4 JCN Subsidiaries. JCN has disclosed in Section 5.4 of the JCN
Disclosure Memorandum all of the JCN Subsidiaries that are corporations
(identifying its jurisdiction of incorporation, each jurisdiction in which it
is qualified and/or licensed to transact business, and the number of shares
owned and percentage ownership interest represented by such share ownership)
and all of the JCN Subsidiaries that are general or limited partnerships,
limited liability companies, or other non-corporate entities (identifying the
Law under which such entity is organized, each jurisdiction in which it is
qualified and/or licensed to transact business, and the amount and nature of
the ownership interest therein). Except as disclosed in Section 5.4 of the JCN
Disclosure Memorandum, JCN or one of its Subsidiaries owns all of the issued
and outstanding shares of capital stock (or other equity interests) of each JCN
Subsidiary. No capital stock (or other equity interest) of any JCN Subsidiary
is or may become required to be issued (other than to another JCN Entity) by
reason of any Equity Rights, and there are no Contracts by which any JCN
Subsidiary is bound to issue (other than to another JCN Entity) additional
shares of its capital stock (or other equity interests) or Equity Rights or by
which any JCN Entity is or may be bound to transfer any shares of the capital
stock (or other equity interests) of any JCN Subsidiary (other than to another
JCN Entity). There are no Contracts relating to the rights of any JCN Entity to
vote or to dispose of any shares of the capital stock (or other equity
interests) of any JCN Subsidiary. All of the shares of capital stock (or other
equity interests) of each JCN Subsidiary held by a JCN Entity are fully paid
and nonassessable under the applicable corporation Law of the jurisdiction in
which such Subsidiary is incorporated or organized and are owned by the JCN
Entity free and clear of any Lien. Except as disclosed in Section 5.4 of the
JCN Disclosure Memorandum, each JCN Subsidiary is a corporation, and each JCN
Subsidiary is duly organized, validly existing, and (as to corporations) in
good standing under the Laws of the jurisdiction in which it is incorporated or
organized, and has the corporate power and authority necessary for it to own,
lease, and operate its Assets and to carry on its business as now conducted.
Each JCN Subsidiary is duly qualified or licensed to transact business as a
foreign corporation or organization, as the case may be, in good standing in
the States of the United States where the character of its Assets or the nature
or conduct of its business requires it to be so qualified or licensed, except
for such jurisdictions in which the failure to be so qualified or licensed is
not reasonably likely to have, individually or in the aggregate, a JCN Material
Adverse Effect. The minute book and other organizational documents for each JCN
Subsidiary have been made available to Highwoods for its review, and, except as
disclosed in Section 5.4 of the JCN Disclosure Memorandum, are complete in all
material respects as in effect as of the date of this Agreement and accurately
reflect in all material respects all amendments thereto and all proceedings of
the Board of Directors and shareholders thereof; provided, however, that for
purposes of this sentence all representations relating to the period prior to
January 1, 1996, are based solely on the Knowledge of JCN.
5.5 SEC Filings; Financial Statements.
(a) JCN has timely filed and made available to Highwoods all SEC
Documents required to be filed by JCN since November 30, 1996 (the "JCN SEC
Reports"). The JCN SEC Reports (i) at the time filed, complied in all
material respects with the applicable requirements of the Securities Laws
and other applicable Laws and (ii) did not, at the time they were filed
(or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of
a material fact or omit to state a material fact required to be stated in
such JCN SEC Reports or necessary in order to make the statements in such
JCN SEC Reports, in light of the circumstances under which they were made,
not misleading. No JCN Subsidiary is required to file any SEC Documents.
(b) Each of the JCN Financial Statements (including, in each case, any
related notes) contained in the JCN SEC Reports, including any JCN SEC
Reports filed after the date of this Agreement until the Effective Time,
complied as to form in all material respects with the applicable published
rules and regulations of the SEC with respect thereto, was prepared in
accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes to such financial
statements or, in the case of unaudited interim statements, as permitted by
Form
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10-Q of the SEC), and fairly presented in all material respects the
consolidated financial position of JCN and its Subsidiaries as at the
respective dates and the consolidated results of operations and cash flows
for the periods indicated, except that the unaudited interim financial
statements were or are subject to normal and recurring year-end adjustments
which were not or are not expected to be material in amount or effect.
5.6 Absence of Undisclosed Liabilities. Except as set forth in Section 5.6
of the JCN Disclosure Memorandum, no JCN Entity has any Liabilities that are
reasonably likely to have a JCN Material Adverse Effect, except Liabilities
which are accrued or reserved against in the consolidated balance sheets of JCN
as of September 30, 1997 or December 31, 1996, included in the JCN Financial
Statements delivered prior to the date of this Agreement or reflected in the
notes thereto.
5.7 Absence of Certain Changes or Events. Since December 31, 1996, except
as disclosed in the JCN Financial Statements delivered prior to the date of
this Agreement or as disclosed in Section 5.7 of the JCN Disclosure Memorandum,
there have been no events, changes, or occurrences which have had, or are
reasonably likely to have a JCN Material Adverse Effect.
5.8 Tax Matters.
(a) To the Knowledge of JCN, no Tax Return is or has been delinquent and,
except as set forth in Section 5.8 of the JCN Disclosure Memorandum, all
Tax Returns filed are complete and accurate in all material respects. All
Taxes shown on filed Tax Returns have been paid. There is no audit
examination, deficiency, or refund Litigation with respect to any Taxes,
except as reserved against in the JCN Financial Statements delivered prior
to the date of this Agreement or as disclosed in Section 5.8 of the JCN
Disclosure Memorandum. The statute of limitations on JCN's federal income
Tax Returns have run for all periods prior to December 31, 1987. All Taxes
and other Liabilities due with respect to completed and settled
examinations or concluded Litigation have been paid. There are no Liens
with respect to Taxes upon any of the Assets of the JCN Entities, except
for any such Liens which are not reasonably likely to have a JCN Material
Adverse Effect.
(b) Except as may result from the extension of JCN's federal income Tax
Returns described in Section 5.8 of the JCN Disclosure Memorandum or from
of an adjustment by the Internal Revenue Service of JCN's income, none of
the JCN Entities has executed an extension or waiver of any statute of
limitations on the assessment or collection of any Tax due to any State
taxing authority that is currently in effect.
(c) Except as set forth in Section 5.8 of the JCN Disclosure Memorandum,
the provision for any Taxes due or to become due for any of the JCN
Entities for the period or periods through and including the date of the
respective JCN Financial Statements that has been made and is reflected on
such JCN Financial Statements is sufficient to cover all such Taxes.
(d) Except as set forth in Section 5.8 of the JCN Disclosure Memorandum,
deferred taxes of the JCN Entities have been provided for in accordance
with GAAP.
(e) None of the JCN Entities is a party to any Tax allocation or sharing
agreement, none of the JCN Entities has been a member of an affiliated
group filing a consolidated federal income Tax Return (other than a group
the common parent of which was JCN), and none of the JCN Entities has any
Liability for Taxes of any Person (other than JCN and its Subsidiaries)
under Treasury Regulation Section 1.15026 (or any similar provision of
state, local or foreign Law) as a transferee or successor or by Contract or
otherwise.
(f) Each of the JCN Entities is in compliance with, and its records
contain all information and documents (including properly completed IRS
Forms W9) necessary to comply with, all applicable information reporting
and Tax withholding requirements under federal, state, and local Tax Laws,
and such records identify with specificity all accounts subject to backup
withholding under Section 3406 of the Internal Revenue Code, except for
such instances of noncompliance and such omissions as are not reasonably
likely to have, individually or in the aggregate, a JCN Material Adverse
Effect.
(g) Except as disclosed in Section 5.8 of the JCN Disclosure Memorandum,
none of the JCN Entities has made any payments, is obligated to make any
payments, or is a party to any Contract that could obligate it to make any
payments that would be disallowed as a deduction under Section 280G or
162(m) of the Internal Revenue Code.
(h) Except as disclosed in Section 5.8 of the JCN Disclosure Memorandum,
there has not been an ownership change, as defined in Internal Revenue Code
Section 382(g), of the JCN Entities that occurred during or after any
taxable period in which the JCN Entities incurred a net operating loss that
carries over to any taxable period ending after December 31, 1996.
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(i) No JCN Entity has or has had in any foreign country a permanent
establishment, as defined in any applicable tax treaty or convention
between the United States and such foreign country.
5.9 Assets.
(a) Except as disclosed in Section 5.9 or 5.14 of the JCN Disclosure
Memorandum, or as disclosed or reserved against in the JCN Financial
Statement, the JCN Entities have good and marketable title, free and clear
of all Liens to all of their respective Assets, except for any such Liens
or other defects of title which are not reasonably likely to have a JCN
Material Adverse Effect. All material personal property used in the
business of the JCN Entities are in good condition, reasonable wear and
tear excepted, and are usable in the ordinary course of business consistent
with such entities past practices.
(b) None of the JCN Entities has received notice from any insurance
carrier that (i) any policy of insurance will be canceled or that coverage
thereunder will be reduced or eliminated, or (ii) premium costs with
respect to such policy of insurance will be substantially increased. Except
as set forth in Section 5.9 of the JCN Disclosure Memorandum, there are
presently no claims for amounts exceeding in any individual case $50,000
pending under such policies of insurance and no notices of claims in excess
of such amounts have been given by any JCN Entity under such policies.
(c) JCN will make available to Highwoods a true and correct copy of all
Leases.
(d) Except as set forth in Section 5.9 of the JCN Disclosure Memorandum
and except for such matters which would not reasonably be expected to have
a JCN Material Adverse Effect, as of the last day of the calendar month
immediately preceding the date hereof, no tenant under any of the Leases
has asserted any claim of which JCN or any Subsidiary has received written
notice which would materially affect the collection of rent from such
tenant and neither JCN nor any JCN Subsidiary has received written notice
of any material default or breach on the part of JCN or any Subsidiary
under any of the Leases which has not been cured.
(e) Section 5.9 of the JCN Disclosure Memorandum sets forth all space
leases under which JCN or any JCN Subsidiary is a lessee (except where the
underlying real property is owned by JCN). True and correct copies of such
leases have been delivered or made available to Highwoods.
5.10 Environmental Matters.
(a) Each JCN Entity, its Operating Properties and, to the Knowledge of
JCN, its Participation Facilities are, and have been, in compliance with
all Environmental Laws, except for violations which are not reasonably
likely to have, individually or in the aggregate, a JCN Material Adverse
Effect.
(b) There is no Litigation pending or, to the Knowledge of JCN,
threatened before any court, governmental agency, or authority or other
forum in which any JCN Entity or any of its Operating Properties or
Participation Facilities (or JCN in respect of such Operating Property or
Participation Facility) has been or, with respect to threatened Litigation,
may be named as a defendant (i) for alleged noncompliance (including by any
predecessor) with any Environmental Law or (ii) relating to the release,
discharge, spillage, or disposal into the environment of any Hazardous
Material, whether or not occurring at, on, under, adjacent to, or affecting
(or potentially affecting) a site owned, leased, or operated by any JCN
Entity or any of its Operating Properties or Participation Facilities,
except such as is not reasonably likely to have, individually or in the
aggregate, a JCN Material Adverse Effect.
(c) During the period of (i) any JCN Entity's ownership or operation of
any of their respective current properties, (ii)any JCN Entity's
participation in the management of any Participation Facility, or (iii) any
JCN Entity's holding of a security interest in an Operating Property, there
have been no releases, discharges, spillages, or disposals of Hazardous
Material in, on, under, adjacent to, or affecting (or potentially
affecting) such properties, except such as are not reasonably likely to
have, individually or in the aggregate, a JCN Material Adverse Effect. To
the Knowledge of JCN, prior to the period of (i) any JCN Entity's ownership
or operation of any of their respective current properties, (ii) any JCN
Entity's participation in the management of any Participation Facility, or
(iii) any JCN Entity's holding of a security interest in an Operating
Property, there were no releases, discharges, spillages, or disposals of
Hazardous Material in, on, under, or affecting any such property,
Participation Facility or Operating Property, except such as are not
reasonably likely to have, individually or in the aggregate, a JCN Material
Adverse Effect.
5.11 Compliance with Laws. Each JCN Entity has in effect all Permits
necessary for it to own, lease, or operate its material Assets and to carry on
its business as now conducted, except for those Permits the absence of which
are not reasonably likely to have, individually or in the aggregate, a JCN
Material Adverse Effect, and there has occurred no Default
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under any such Permit, other than Defaults which are not reasonably likely to
have a JCN Material Adverse Effect. Except as disclosed in Section 5.11 of the
JCN Disclosure Memorandum, none of the JCN Entities:
(a) is in Default under any of the provisions of its Certificate of
Incorporation or Bylaws (or other governing instruments);
(b) is in Default under any Laws, Orders, or Permits applicable to its
business, except for Defaults which are not reasonably likely to have,
individually or in the aggregate, a JCN Material Adverse Effect; or
(c) since January 1, 1993, has received any notification or communication
from any agency or department of federal, state, or local government or any
Regulatory Authority or the staff thereof (i) asserting that any JCN Entity
is not in compliance with any of the Laws or Orders which such governmental
authority or Regulatory Authority enforces, where such noncompliance is
reasonably likely to have a JCN Material Adverse Effect, (ii) threatening
to revoke any Permits, the revocation of which is reasonably likely to have
a JCN Material Adverse Effect, or (iii) requiring any JCN Entity to enter
into or consent to the issuance of a cease and desist order, formal
agreement, directive, commitment or memorandum of understanding, or to
adopt any Board resolution or similar undertaking, which restricts
materially the conduct of its business.
Copies of all material reports, correspondence, notices and other
documents relating to any inspection, audit, monitoring or other form of review
or enforcement action by a Regulatory Authority have been made available to
Highwoods.
5.12 Labor Relations. No JCN Entity is the subject of any Litigation
asserting that it or any other JCN Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other JCN Entity to bargain with any
labor organization as to wages or conditions of employment, nor, except as
disclosed in Section 5.12 of the JCN Disclosure Memorandum, is any JCN Entity
party to any collective bargaining agreement, nor is there any strike or other
labor dispute involving any JCN Entity, pending or, to the Knowledge of JCN,
threatened, or to the Knowledge of JCN, is there any activity involving any JCN
Entity's employees seeking to certify a collective bargaining unit or engaging
in any other organization activity.
5.13 Employee Benefit Plans.
(a) JCN has disclosed in Section 5.13 of the JCN Disclosure Memorandum,
and has delivered or made available to Highwoods prior to the execution of
this Agreement copies in each case of, all pension, retirement,
profit-sharing, deferred compensation, stock option, employee stock
ownership, severance pay, vacation, bonus, or other incentive plan, all
other written employee programs, arrangements, or agreements, all medical,
vision, dental, or other health plans, all life insurance plans, and all
other employee benefit plans or fringe benefit plans, including "employee
benefit plans" as that term is defined in Section 3(3) of ERISA, currently
adopted, maintained by, sponsored in whole or in part by, or contributed to
by any JCN Entity or ERISA Affiliate thereof for the benefit of employees,
retirees, dependents, spouses, directors, independent contractors, or other
beneficiaries and under which employees, retirees, dependents, spouses,
directors, independent contractors, or other beneficiaries are eligible to
participate (collectively, the "JCN Benefit Plans"). Any of the JCN Benefit
Plans which is an "employee pension benefit plan," as that term is defined
in Section 3(2) of ERISA, is referred to herein as a "JCN ERISA Plan." Each
JCN ERISA Plan which is also a "defined benefit plan" (as defined in
Section 414(j) of the Internal Revenue Code) is referred to herein as a
"JCN Pension Plan." Except as disclosed in Section 5.13 of the JCN
Disclosure Memorandum, no JCN Pension Plan is or has been a multiemployer
plan within the meaning of Section 3(37) of ERISA.
(b) Except as disclosed in Section 5.13 of the JCN Disclosure Memorandum,
all JCN Benefit Plans are in compliance with the applicable terms of ERISA,
the Internal Revenue Code, and any other applicable Laws the breach or
violation of which are reasonably likely to have a JCN Material Adverse
Effect. Each JCN ERISA Plan which is intended to be qualified under Section
401(a) of the Internal Revenue Code has received a favorable determination
letter from the Internal Revenue Service, and JCN is not aware of any
circumstances likely to result in revocation of any such favorable
determination letter. To the Knowledge of JCN, no JCN Entity has engaged in
a transaction with respect to any JCN Benefit Plan that, assuming the
taxable period of such transaction expired as of the date hereof, would
subject any JCN Entity to a Tax imposed by either Section 4975 of the
Internal Revenue Code or Section 502(i) of ERISA.
(c) Except as disclosed in Section 5.13 of the JCN Disclosure Memorandum,
no JCN Pension Plan has any "unfunded current liability," as that term is
defined in Section 302(d)(8)(A) of ERISA, and the fair market value of the
assets of any such plan exceeds the plan's "benefit liabilities," as that
term is defined in Section 4001(a)(16) of ERISA, when determined under
actuarial factors that would apply if the plan terminated in accordance
with all applicable legal
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requirements. Since the date of the most recent actuarial valuation, there
has been (i) no material change in the financial position of any JCN
Pension Plan, (ii) no change in the actuarial assumptions with respect to
any JCN Pension Plan, and (iii) no increase in benefits under any JCN
Pension Plan as a result of plan amendments or changes in applicable Law
which is reasonably likely to have a JCN Material Adverse Effect or
materially adversely affect the funding status of any such plan. Neither
any JCN Pension Plan nor any "single-employer plan," within the meaning of
Section 4001(a)(15) of ERISA, currently or formerly maintained by any JCN
Entity, or the single-employer plan of any entity which is considered one
employer with JCN under Section 4001 of ERISA or Section 414 of the
Internal Revenue Code or Section 302 of ERISA (whether or not waived) (an
"ERISA Affiliate") has an "accumulated funding deficiency" within the
meaning of Section 412 of the Internal Revenue Code or Section 302 of
ERISA, which is reasonably likely to have a JCN Material Adverse Effect. No
JCN Entity has provided, or is required to provide, security to a JCN
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant
to Section 401(a)(29) of the Internal Revenue Code.
(d) No Liability under Subtitle C or D of Title IV of ERISA has been or
is expected to be incurred by any JCN Entity with respect to any ongoing,
frozen, or terminated single-employer plan or the single-employer plan of
any ERISA Affiliate, which Liability is reasonably likely to have a JCN
Material Adverse Effect. No JCN Entity has incurred any withdrawal
Liability with respect to a multiemployer plan under Subtitle B of Title IV
of ERISA (regardless of whether based on contributions of an ERISA
Affiliate), which Liability is reasonably likely to have a JCN Material
Adverse Effect. No notice of a "reportable event," within the meaning of
Section 4043 of ERISA for which the 30-day reporting requirement has not
been waived, has been required to be filed for any JCN Pension Plan or by
any ERISA Affiliate within the 12-month period ending on the date hereof.
(e) Except as disclosed in Section 5.13 of the JCN Disclosure Memorandum,
no JCN Entity has any Liability for retiree health and life benefits under
any of the JCN Benefit Plans and there are no restrictions on the rights of
such JCN Entity to amend or terminate any such retiree health or benefit
Plan without incurring any Liability.
(f) Except as disclosed in Section 5.13 of the JCN Disclosure Memorandum,
neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will (i) result in any payment
(including severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any director or any employee of any JCN Entity
from any JCN Entity under any JCN Benefit Plan or otherwise, (ii) increase
any benefits otherwise payable under any JCN Benefit Plan, or (iii) result
in any acceleration of the time of payment or vesting of any such benefit.
(g) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any JCN Entity and their respective beneficiaries, other than
entitlements accrued pursuant to funded retirement plans subject to the
provisions of Section 412 of the Internal Revenue Code or Section 302 of
ERISA, have been fully reflected on the JCN Financial Statements to the
extent required by and in accordance with GAAP.
5.14 Material Contracts. Except as disclosed in Section 5.14 of the JCN
Disclosure Memorandum or otherwise reflected in the JCN Financial Statements,
none of the JCN Entities, nor any of their respective Assets, businesses, or
operations, is a party to, or is bound or affected by, or receives benefits
under, (i) any employment, severance, termination, consulting, or retirement
Contract providing for aggregate payments to any Person in any calendar year in
excess of $50,000, (ii) any Contract relating to the borrowing of money by any
JCN Entity or the guarantee by any JCN Entity of any such obligation (other
than Contracts evidencing trade payables and Contracts relating to borrowings
or guarantees made in the ordinary course of business), (iii) any Contract
which materially prohibits or restricts any JCN Entity from engaging in any
business activities in any geographic area, line of business or otherwise in
competition with any other Person, other than restrictions in Leases intended
to protect certain tenant interests, all of which restrictions are normal and
customary in the business of JCN, (iv) any Material Contract between or among
JCN Entities, (v) any Material Contract involving Intellectual Property (other
than Contracts entered into in the ordinary course with customers and
"shrink-wrap" software licenses), (vi) any Contract relating to the provision
of data processing, network communication, or other technical services to or by
any JCN Entity, (vii) any Contract relating to the purchase or sale of any
goods or services (other than Contracts entered into in the ordinary course of
business and involving payments under any individual Contract not in excess of
$50,000), (viii) any Material Contract for property management or property
operations, and (ix) any other Contract or amendment thereto that would be
required to be filed as an exhibit to a Form 10-K filed by JCN with the SEC as
of the date of this Agreement (together with all Contracts referred to in
Sections 5.9 and 5.13(a), the "JCN Contracts"). With respect to each JCN
Contract and except as disclosed in Section 5.14 of the JCN Disclosure
Memorandum: (i) the Contract is in full force and effect; (ii) no JCN Entity is
in Default thereunder, other than Defaults which are not reasonably likely to
have a JCN Material Adverse Effect;
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(iii) no JCN Entity has repudiated or waived any material provision of any such
Contract; and (iv) no other party to any such Contract, to the Knowledge of
JCN, is, in Default in any respect, other than Defaults which are not
reasonably likely to have a JCN Material Adverse Effect, or has repudiated or
waived any material provision thereunder.
5.15 Legal Proceedings. Except as disclosed in Section 5.15 of the JCN
Disclosure Memorandum, there is no Litigation instituted or pending, or, to the
Knowledge of JCN, threatened (or unasserted but considered probable of
assertion and which if asserted would have at least a reasonable probability of
an unfavorable outcome) against any JCN Entity, or against any director,
employee or employee benefit plan of any JCN Entity, or against any Asset,
interest, or right of any of them, that is reasonably likely to have a JCN
Material Adverse Effect, nor are there any Orders of any Regulatory
Authorities, other governmental authorities, or arbitrators outstanding against
any JCN Entity, that are reasonably likely to have a JCN Material Adverse
Effect. Section 5.15 of the JCN Disclosure Memorandum contains a summary of all
Litigation as of the date of this Agreement to which any JCN Entity is a party
and which names a JCN Entity as a defendant or cross-defendant or for which any
JCN Entity has any potential uninsured Liability in excess of $50,000.
5.16 Reports. Since January 1, 1993, or the date of organization if later,
each JCN Entity has timely filed all reports and statements, together with any
amendments required to be made with respect thereto, that it was required to
file with Regulatory Authorities, except for those which the failure to file
are not reasonably likely to have a JCN Material Adverse Effect). To the
Knowledge of JCN, as of their respective dates, each of such reports and
documents, including the financial statements, exhibits, and schedules thereto,
complied in all material respects with all applicable Laws. As of its
respective date, each such report and document did not, in all material
respects, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
made therein, in light of the circumstances under which they were made, not
misleading, except for those untrue statements or omissions not reasonably
expected to have a JCN Material Adverse Effect.
5.17 Statements True and Correct. No certificate or instrument furnished
by any JCN Entity or any officer, director or employee thereof to Highwoods
pursuant to this Agreement or pursuant to any other document, agreement, or
instrument referred to herein contains or will contain any untrue statement of
material fact or will omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. None of the information supplied or to be supplied by any JCN
Entity or any officer, director or employee thereof for inclusion in the
Registration Statement to be filed by Highwoods with the SEC will, when the
Registration Statement becomes effective, be false or misleading with respect
to any material fact, or omit to state any material fact necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by any JCN Entity or any officer, director or employee thereof for
inclusion in the Proxy Statement to be mailed to JCN's shareholders in
connection with the JCN Shareholders Meeting, and any other documents to be
filed by a JCN Entity or any officer, director or employee thereof with the SEC
or any other Regulatory Authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed, and
with respect to the Proxy Statement, when first mailed to the shareholders of
JCN, be false or misleading with respect to any material fact, or omit to state
any material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or, in the case of
the Proxy Statement or any amendment thereof or supplement thereto, at the time
of the JCN Shareholders Meeting, be false or misleading with respect to any
material fact, or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the JCN Shareholders Meeting. All documents that any JCN Entity is
responsible for filing with any Regulatory Authority in connection with the
transactions contemplated hereby will comply as to form in all material
respects with the provisions of applicable Law.
5.18 Tax and Regulatory Matters. No JCN Entity or any officer or director
thereof has taken or agreed to take any action or has any Knowledge of any fact
or circumstance that is reasonably likely to (i) prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) materially impede or delay receipt of any
Consents of Regulatory Authorities referred to in Section 9.1(b).
5.19 State Takeover Laws. Each JCN Entity has taken all necessary action
to exempt the transactions contemplated by this Agreement from, or, if
necessary, to challenge the validity or applicability of, any applicable
"moratorium," "fair price," "business combination," "control share," or other
anti-takeover Laws (collectively, "Takeover Laws"), including Section 351.459
of the GBCL.
5.20 Charter Provisions. Each JCN Entity has taken all action so that the
entering into of this Agreement and the consummation of the Merger and the
other transactions contemplated by this Agreement do not and will not result in
the grant of any rights to any Person under the Certificate of Incorporation,
Bylaws or other governing instruments of any JCN Entity
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or restrict or impair the ability of Highwoods or any of its Subsidiaries to
vote, or otherwise to exercise the rights of a shareholder with respect to,
shares of any JCN Entity that may be directly or indirectly acquired or
controlled by them.
5.21 Rights Agreement. JCN has taken all necessary action (including, if
required, redeeming all of the outstanding JCN Rights or amending or
terminating the JCN Rights Agreement) so that the entering into of this
Agreement, the acquisition of shares pursuant to the consummation of the Merger
and the other transactions contemplated hereby do not and will not result in
any Person becoming able to exercise any JCN Rights under the JCN Rights
Agreement or enabling or requiring the JCN Rights to be separated from the
shares of JCN Common Stock to which they are attached or to be triggered or to
become exercisable.
5.22 Opinion of Financial Advisor. JCN has received the opinion of Morgan
Stanley, Dean Witter, Discover & Co., dated the date of this Agreement, to the
effect that the consideration to be received in the Merger by the holders of
JCN Common Stock is fair, from a financial point of view, to such holders, a
signed copy of which has been delivered to Highwoods.
5.23 Board Recommendation. The Board of Directors of JCN, at a meeting
duly called and held, has validly adopted resolutions (which resolutions have
not been withdrawn or revoked) stating that the Board of Directors of JCN has
(i) determined that this Agreement and the transactions contemplated hereby,
including the Merger and the transactions contemplated thereby, taken together,
are fair to and in the best interests of the shareholders and (ii) resolved to
recommend that the holders of the shares of JCN Common Stock approve this
Agreement.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF HIGHWOODS
Highwoods hereby represents and warrants to JCN as follows:
6.1 Organization, Standing, and Power. Highwoods is a corporation duly
organized, validly existing, and in good standing under the Laws of the State
of Maryland, and has the corporate power and authority to carry on its business
as now conducted and to own, lease and operate its material Assets. Highwoods
is duly qualified or licensed to transact business as a foreign corporation in
good standing in the States of the United States and foreign jurisdictions
where the character of its Assets or the nature or conduct of its business
requires it to be so qualified or licensed, except for such jurisdictions in
which the failure to be so qualified or licensed is not reasonably likely to
have, individually or in the aggregate, a Highwoods Material Adverse Effect.
6.2 Authority; No Breach By Agreement.
(a) Highwoods has the corporate power and authority necessary to execute,
deliver and perform its obligations under this Agreement and to consummate
the transactions contemplated hereby. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly
authorized by all necessary corporate action in respect thereof on the part
of Highwoods. This Agreement represents a legal, valid, and binding
obligation of Highwoods, enforceable against Highwoods in accordance with
its terms (except in all cases as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, receivership,
conservatorship, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the
equitable remedy of specific performance or injunctive relief is subject to
the discretion of the court before which any proceeding may be brought).
(b) Neither the execution and delivery of this Agreement by Highwoods,
nor the consummation by Highwoods of the transactions contemplated hereby,
nor compliance by Highwoods with any of the provisions hereof, will (i)
conflict with or result in a breach of any provision of Highwoods' Amended
and Restated Articles of Incorporation or Bylaws, or (ii) constitute or
result in a Default under, or require any Consent pursuant to, or result in
the creation of any Lien on any Asset of any Highwoods Entity under, any
Contract or Permit of any Highwoods Entity, where such Default or Lien, or
any failure to obtain such Consent, is reasonably likely to have a
Highwoods Material Adverse Effect, or, (iii) subject to receipt of the
requisite Consents referred to in Section 9.1(b), constitute or result in a
Default under, or require any Consent pursuant to, any Law or Order
applicable to any Highwoods Entity or any of their respective material
Assets (including any Highwoods Entity or any JCN Entity becoming subject
to or liable for the payment of any Tax or any of the Assets owned by any
Highwoods Entity or any JCN Entity being reassessed or revalued by any
taxing authority).
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(c) Other than in connection or compliance with the provisions of the
Securities Laws, applicable state corporate and securities Laws, and rules
of the NYSE, and other than Consents required from Regulatory Authorities,
and other than notices to or filings with the Internal Revenue Service or
the Pension Benefit Guaranty Corporation with respect to any employee
benefit plans, or under the HSR Act, and other than Consents, filings, or
notifications which, if not obtained or made, are not reasonably likely to
have a Highwoods Material Adverse Effect, no notice to, filing with, or
Consent of, any public body or authority is necessary for the consummation
by Highwoods of the Merger and the other transactions contemplated in this
Agreement.
6.3 Capital Stock.
(a) The authorized capital stock of Highwoods consists of (i) 100,000,000
shares of Highwoods Common Stock, of which 37,948,435 shares are issued and
outstanding as of the date of this Agreement, and (ii) 10,000,000 shares of
Highwoods Preferred Stock, of which 7,025,000 shares are issued and
outstanding. All of the issued and outstanding shares of Highwoods Capital
Stock are, and all of the shares of Highwoods Common Stock to be issued in
exchange for shares of JCN Common Stock upon consummation of the Merger,
when issued in accordance with the terms of this Agreement, will be, duly
and validly issued and outstanding and fully paid and nonassessable under
the MGCL. None of the outstanding shares of Highwoods Capital Stock has
been, and none of the shares of Highwoods Common Stock to be issued in
exchange for shares of JCN Common Stock upon consummation of the Merger
will be, issued in violation of any preemptive rights of the current or
past shareholders of Highwoods.
(b) Except as set forth in Section 6.3(a), or as provided pursuant to the
Highwoods Stock Plans or the Highwoods Rights Agreement, or as disclosed in
Section 6.3 of the Highwoods Disclosure Memorandum, there are no shares of
capital stock or other equity securities of Highwoods outstanding and no
outstanding Equity Rights relating to the capital stock of Highwoods.
6.4 Highwoods Subsidiaries. Highwoods has disclosed in Section 6.4 of the
Highwoods Disclosure Memorandum all of the Highwoods Subsidiaries as of the
date of this Agreement that are corporations (identifying its jurisdiction of
incorporation and percentage ownership interest represented by such share
ownership) and all of the Highwoods Subsidiaries that are general or limited
partnerships or other non-corporate entities (identifying the Law under which
such entity is organized and the amount and nature of the ownership interest
therein). Except as disclosed in Section 6.4 of the Highwoods Disclosure
Memorandum, Highwoods and/or one of its Subsidiaries owns all of the issued and
outstanding shares of capital stock (or other equity interests) of each
Highwoods Subsidiary. No capital stock (or other equity interest) of any
Highwoods Subsidiary are or may become required to be issued (other than to
another Highwoods Entity) by reason of any Equity Rights, and there are no
Contracts (except for property acquisition contracts utilizing the issuance of
partnership interests in Highwoods/ Forsyth Limited Partnership and for which
the partnership is receiving reasonable equivalent value or as otherwise
disclosed in Section 6.13 of the Highwoods Disclosure Memorandum) by which any
Highwoods Subsidiary is bound to issue (other than to another Highwoods Entity)
additional shares of its capital stock (or other equity interests) or Equity
Rights or by which any Highwoods Entity is or may be bound to transfer any
shares of the capital stock (or other equity interests) of any Highwoods
Subsidiary (other than to another Highwoods Entity). There are no Contracts
relating to the rights of any Highwoods Entity to vote or to dispose of any
shares of the capital stock (or other equity interests) of any Highwoods
Subsidiary. All of the shares of capital stock (or other equity interests) of
each Highwoods Subsidiary held by a Highwoods Entity are fully paid and
nonassessable under the applicable corporation Law of the jurisdiction in which
such Subsidiary is incorporated or organized and are owned by the Highwoods
Entity free and clear of any Lien. Except as disclosed in Section 6.4 of the
Highwoods Disclosure Memorandum), each Highwoods Subsidiary is a corporation,
and each Highwoods Subsidiary is duly organized, validly existing, and (as to
corporations) in good standing under the Laws of the jurisdiction in which it
is incorporated or organized, and has the corporate power and authority
necessary for it to own, lease and operate its Assets and to carry on its
business as now conducted. Each Highwoods Subsidiary is duly qualified or
licensed to transact business as a foreign corporation or organization, as the
case may be, is in good standing in the States of the United States and foreign
jurisdictions where the character of its Assets or the nature or conduct of its
business requires it to be so qualified or licensed, except for such
jurisdictions in which the failure to be so qualified or licensed is not
reasonably likely to have a Highwoods Material Adverse Effect.
6.5 SEC Filings; Financial Statements.
(a) Highwoods and Highwoods/Forsyth Limited Partnership has timely filed
and made available to JCN all SEC Documents required to be filed by
Highwoods or Highwoods/Forsyth Limited Partnership since June 14, 1994 (the
"Highwoods SEC Reports"). The Highwoods SEC Reports (i) at the time filed,
complied in all material respects with the applicable requirements of the
Securities Laws and other applicable Laws and (ii) did not, at the time
they were
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filed (or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of
a material fact or omit to state a material fact required to be stated in
such Highwoods SEC Reports or necessary in order to make the statements in
such Highwoods SEC Reports, in light of the circumstances under which they
were made, not misleading. Except for Highwoods/Forsyth Limited
Partnership, no Highwoods Subsidiary is required to file any SEC Documents.
(b) Each of the Highwoods Financial Statements (including, in each case,
any related notes) contained in the Highwoods SEC Reports, including any
Highwoods SEC Reports filed after the date of this Agreement until the
Effective Time, complied as to form in all material respects with the
applicable published rules and regulations of the SEC with respect thereto,
was prepared in accordance with GAAP applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to
such financial statements or, in the case of unaudited interim statements,
as permitted by Form 10-Q of the SEC), and fairly presented in all material
respects the consolidated financial position of Highwoods and its
Subsidiaries as at the respective dates and the consolidated results of
operations and cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be
material in amount or effect.
6.6 Absence of Undisclosed Liabilities. No Highwoods Entity has any
Liabilities that are reasonably likely to have a Highwoods Material Adverse
Effect, except Liabilities which are accrued or reserved against in the
consolidated balance sheets of Highwoods as of September 30, 1997 or December
31, 1996, included in the Highwoods Financial Statements delivered prior to the
date of this Agreement or reflected in the notes thereto.
6.7 Absence of Certain Changes or Events. Since December 31, 1996, except
as disclosed in the Highwoods Financial Statements delivered prior to the date
of this Agreement or as disclosed in Section 6.7 of the Highwoods Disclosure
Memorandum, there have been no events, changes or occurrences which have had,
or are reasonably likely to have a Highwoods Material Adverse Effect.
6.8 Tax Matters.
(a) All Tax Returns required to be filed by or on behalf of any of the
Highwoods Entities have been timely filed or requests for extensions have
been timely filed, granted, and have not expired for periods ended on or
before September 30, 1997, and on or before the date of the most recent
fiscal year end immediately preceding the Effective Time, and all Tax
Returns filed are complete and accurate in all material. All Taxes shown on
filed Tax Returns have been paid. As of the date of this Agreement, there
is no audit examination, deficiency, or refund Litigation with respect to
any Taxes that is reasonably likely to result in a determination that would
have a Highwoods Material Adverse Effect, except as reserved against in the
Highwoods Financial Statements or as disclosed in Section 6.8 of the
Highwoods Disclosure Memorandum.
(b) Highwoods, based on its current and intended method of operation,
meets the requirements for qualification as a REIT under Sections 856-860
of the Internal Revenue Code.
6.9 Assets. Except as disclosed in Section 6.9 of the Highwoods Disclosure
Memorandum or as disclosed or reserved against in the Highwoods Financial
Statements, the Highwoods Entities have good and marketable title, free and
clear of all Liens, to all of their respective Assets, except for any such
Liens or other defects of title which are not reasonably likely to have a
Highwoods Material Adverse Effect. All Material personal properties used in the
businesses of the Highwoods Entities are in good condition, reasonable wear and
tear excepted, and are usable in the ordinary course of business consistent
with Highwoods' past practices.
6.10 Environmental Matters.
(a) Each Highwoods Entity, its Operating Properties, and, to the
Knowledge of Highwoods, its Participating Facilities are, and have been, in
compliance with all Environmental Laws, except for violations which are not
reasonably likely to have a Highwoods Material Adverse Effect.
(b) There is no Litigation pending or, to the Knowledge of Highwoods,
threatened before any court, governmental agency, or authority or other
forum in which any Highwoods Entity or any of its Operating Properties or
Participation Facilities (or Highwoods in respect of such Operating
Property or Participation Facility) has been or, with respect to threatened
Litigation, may be named as a defendant (i) for alleged noncompliance
(including by any predecessor) with any Environmental Law or (ii) relating
to the release, discharge, spillage, or disposal into the environment of
any Hazardous Material, whether or not occurring at, on, under, adjacent
to, or affecting (or potentially affecting) a site
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owned, leased, or operated by any Highwoods Entity or any of its Operating
Properties or Participation Facilities, except such as is not reasonably
likely to have a Highwoods Material Adverse Effect.
(c) During the period of (i) any Highwoods Entity's ownership or
operation of any of their respective current properties, (ii) any Highwoods
Entity's participation in the management of any Participation Facility, or
(iii) any Highwoods Entity's holding of a security interest in an Operating
Property, there have been no releases, discharges, spillages, or disposals
of Hazardous Material in, on, under, adjacent to, or affecting (or
potentially affecting) such properties, except such as are not reasonably
likely to have a Highwoods Material Adverse Effect. To the Knowledge of
Highwoods, prior to the period of (i) any Highwoods Entity's ownership or
operation of any of their respective current properties, (ii) any Highwoods
Entity's participation in the management of any Participation Facility, or
(iii) any Highwoods Entity's holding of a security interest in an Operating
Property, there were no releases, discharges, spillages, or disposals of
Hazardous Material in, on, under, or affecting any such property,
Participation Facility or Operating Property, except such as are not
reasonably likely to have a Highwoods Material Adverse Effect.
6.11 Compliance with Laws. Each Highwoods Entity has in effect all Permits
necessary for it to own, lease or operate its material Assets and to carry on
its business as now conducted, except for those Permits the absence of which
are not reasonably likely to have a Highwoods Material Adverse Effect, and
there has occurred no Default under any such Permit, other than Defaults which
are not reasonably likely to have a Highwoods Material Adverse Effect. Except
as disclosed in Section 6.11 of the Highwoods Disclosure Memorandum, none of
the Highwoods Entities:
(a) is in Default under its Amended and Restated Articles of
Incorporation or Bylaws (or other governing instruments); or
(b) is in Default under any Laws, Orders or Permits applicable to its
business or employees conducting its business, except for Defaults which
are not reasonably likely to have, individually or in the aggregate, a
Highwoods Material Adverse Effect; or
(c) since January 1, 1993, has received any notification or communication
from any agency or department of federal, state, or local government or any
Regulatory Authority or the staff thereof (i) asserting that any Highwoods
Entity is not in compliance with any of the Laws or Orders which such
governmental authority or Regulatory Authority enforces, where such
noncompliance is reasonably likely to have a Highwoods Material Adverse
Effect, (ii) threatening to revoke any Permits, the revocation of which is
reasonably likely to have a Highwoods Material Adverse Effect, or (iii)
requiring any Highwoods Entity to enter into or consent to the issuance of
a cease and desist order, formal agreement, directive, commitment or
memorandum of understanding, or to adopt any board resolution or similar
undertaking, which restricts materially the conduct of its business.
6.12 Labor Relations. No Highwoods Entity is the subject of any Litigation
asserting that it or any other Highwoods Entity has committed an unfair labor
practice (within the meaning of the National Labor Relations Act or comparable
state law) or seeking to compel it or any other Highwoods Entity to bargain
with any labor organization as to wages or conditions of employment, nor is any
Highwoods Entity party to any collective bargaining agreement, nor is there any
strike or other labor dispute involving any Highwoods Entity, pending or
threatened, or to the Knowledge of Highwoods, is there any activity involving
any Highwoods Entity's employees seeking to certify a collective bargaining
unit or engaging in any other organization activity.
6.13 Employee Benefit Plans.
(a) Highwoods has disclosed in Section 6.13 of the Highwoods Disclosure
Memorandum, and has delivered or made available to JCN prior to the
execution of this Agreement copies in each case of, all pension,
retirement, profit-sharing, deferred compensation, stock option, employee
stock ownership, severance pay, vacation, bonus, or other incentive plan,
all other written employee programs, arrangements, or agreements, all
medical, vision, dental, or other health plans, all life insurance plans,
and all other employee benefit plans or fringe benefit plans, including
"employee benefit plans" as that term is defined in Section 3(3) of ERISA,
currently adopted, maintained by, sponsored in whole or in part by, or
contributed to by any Highwoods Entity or ERISA Affiliate thereof for the
benefit of employees, retirees, dependents, spouses, directors, independent
contractors, or other beneficiaries and under which employees, retirees,
dependents, spouses, directors, independent contractors, or other
beneficiaries are eligible to participate (collectively, the "Highwoods
Benefit Plans"). Any of the Highwoods Benefit Plans which is an "employee
pension benefit plan," as that term is defined in Section 3(2) of ERISA, is
referred to herein as a "Highwoods ERISA Plan." Each Highwoods ERISA Plan
which is also a "defined benefit plan" (as defined in Section 414(j) of the
Internal Revenue
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Code) is referred to herein as a "Highwoods Pension Plan." No Highwoods
Pension Plan is or has been a multiemployer plan within the meaning of
Section 3(37) of ERISA.
(b) All Highwoods Benefit Plans are in compliance with the applicable
terms of ERISA, the Internal Revenue Code, and any other applicable Laws
the breach or violation of which are reasonably likely to have a Highwoods
Material Adverse Effect. Each Highwoods ERISA Plan which is intended to be
qualified under Section 401(a) of the Internal Revenue Code has received a
favorable determination letter from the Internal Revenue Service, and
Highwoods is not aware of any circumstances likely to result in revocation
of any such favorable determination letter. To the Knowledge of Highwoods,
no Highwoods Entity has engaged in a transaction with respect to any
Highwoods Benefit Plan that, assuming the taxable period of such
transaction expired as of the date hereof, would subject any Highwoods
Entity to a Tax imposed by either Section 4975 of the Internal Revenue Code
or Section 502(i) of ERISA.
(c) No Highwoods Pension Plan has any "unfunded current liability," as
that term is defined in Section 302(d)(8)(A) of ERISA, and the fair market
value of the assets of any such plan exceeds the plan's "benefit
liabilities," as that term is defined in Section 4001(a)(16) of ERISA, when
determined under actuarial factors that would apply if the plan terminated
in accordance with all applicable legal requirements. Since the date of the
most recent actuarial valuation, there has been (i) no material change in
the financial position of any Highwoods Pension Plan, (ii) no change in the
actuarial assumptions with respect to any Highwoods Pension Plan, and (iii)
no increase in benefits under any Highwoods Pension Plan as a result of
plan amendments or changes in applicable Law which is reasonably likely to
have a Highwoods Material Adverse Effect or materially adversely affect the
funding status of any such plan. Neither any Highwoods Pension Plan nor any
"single-employer plan," within the meaning of Section 4001(a)(15) of ERISA,
currently or formerly maintained by any Highwoods Entity, or the
single-employer plan of any entity which is considered an ERISA Affiliate
of Highwoods has an "accumulated funding deficiency" within the meaning of
Section 412 of the Internal Revenue Code or Section 302 of ERISA, which is
reasonably likely to have a Highwoods Material Adverse Effect. No Highwoods
Entity has provided, or is required to provide, security to a Highwoods
Pension Plan or to any single-employer plan of an ERISA Affiliate pursuant
to Section 401(a)(29) of the Internal Revenue Code.
(d) No Liability under Subtitle C or D of Title IV of ERISA has been or
is expected to be incurred by any Highwoods Entity with respect to any
ongoing, frozen, or terminated single-employer plan or the single-employer
plan of any ERISA Affiliate, which Liability is reasonably likely to have a
Highwoods Material Adverse Effect. No Highwoods Entity has incurred any
withdrawal Liability with respect to a multiemployer plan under Subtitle B
of Title IV of ERISA (regardless of whether based on contributions of an
ERISA Affiliate), which Liability is reasonably likely to have a Highwoods
Material Adverse Effect. No notice of a "reportable event," within the
meaning of Section 4043 of ERISA for which the 30-day reporting requirement
has not been waived, has been required to be filed for any Highwoods
Pension Plan or by any ERISA Affiliate within the 12-month period ending on
the date hereof.
(e) Except as disclosed in Section 6.13 of the Highwoods Disclosure
Memorandum, no Highwoods Entity has any Liability for retiree health and
life benefits under any of the Highwoods Benefit Plans and there are no
restrictions on the rights of such Highwoods Entity to amend or terminate
any such retiree health or benefit Plan without incurring any Liability.
(f) The actuarial present values of all accrued deferred compensation
entitlements (including entitlements under any executive compensation,
supplemental retirement, or employment agreement) of employees and former
employees of any Highwoods Entity and their respective beneficiaries, other
than entitlements accrued pursuant to funded retirement plans subject to
the provisions of Section 412 of the Internal Revenue Code or Section 302
of ERISA, have been fully reflected on the Highwoods Financial Statements
to the extent required by and in accordance with GAAP.
6.14 Legal Proceedings. There is no Litigation instituted or pending, or,
to the Knowledge of Highwoods, threatened (or unasserted but considered
probable of assertion and which if asserted would have at least a reasonable
probability of an unfavorable outcome) against any Highwoods Entity, or against
any director, employee or employee benefit plan of any Highwoods Entity, or
against any Asset, interest, or right of any of them, that is reasonably likely
to have a Highwoods Material Adverse Effect, nor are there any Orders of any
Regulatory Authorities, other governmental authorities, or arbitrators
outstanding against any Highwoods Entity, that are reasonably likely to have a
Highwoods Material Adverse Effect.
6.15 Reports. Since January 1, 1993, or the date of organization if later,
each Highwoods Entity has timely filed all reports and statements, together
with any amendments required to be made with respect thereto, that it was
required to file with Regulatory Authorities except for those which the failure
to file are not reasonably likely to have a Highwoods Material Adverse Effect).
To the Knowledge of Highwoods, as of their respective dates, each of such
reports and documents, including the financial statements, exhibits, and
schedules thereto, complied in all material respects with all applicable Laws.
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As of its respective date, each such report and document did not, in all
material respects, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances under which they were
made, not misleading, except for those untrue statements or omissions not
reasonably expected to have a Highwoods Material Adverse Effect.
6.16 Statements True and Correct. No statement, certificate, instrument or
other writing furnished or to be furnished by any Highwoods Entity or any
Affiliate thereof to JCN pursuant to this Agreement or any other document,
agreement or instrument referred to herein contains or will contain any untrue
statement of material fact or will omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. None of the information supplied or to be supplied
by any Highwoods Entity or any Affiliate thereof for inclusion in the
Registration Statement to be filed by Highwoods with the SEC, will, when the
Registration Statement becomes effective, be false or misleading with respect
to any material fact, or omit to state any material fact necessary to make the
statements therein not misleading. None of the information supplied or to be
supplied by any Highwoods Entity or any Affiliate thereof for inclusion in the
Proxy Statement to be mailed to JCN's shareholders in connection with the JCN
Shareholders Meeting, and any other documents to be filed by any Highwoods
Entity or any Affiliate thereof with the SEC or any other Regulatory Authority
in connection with the transactions contemplated hereby, will, at the
respective time such documents are filed, and with respect to the Proxy
Statement, when first mailed to the shareholders of JCN, be false or misleading
with respect to any material fact, or omit to state any material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading, or, in the case of the Proxy Statement or any
amendment thereof or supplement thereto, at the time of the JCN Shareholders
Meeting, be false or misleading with respect to any material fact, or omit to
state any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the JCN
Shareholders Meeting. All documents that any Highwoods Entity or any Affiliate
thereof is responsible for filing with any Regulatory Authority in connection
with the transactions contemplated hereby will comply as to form in all
material respects with the provisions of applicable Law.
6.17 Authority of Sub. Sub is a corporation duly organized, validly
existing and in good standing under the Laws of the State of Maryland as a
wholly owned Subsidiary of Highwoods. The authorized capital stock of Sub
consists of 1,000 shares of Sub Common Stock, all of which is validly issued
and outstanding, fully paid and nonassessable and is owned by Highwoods free
and clear of any Lien. Sub has the corporate power and authority necessary to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein, including the Merger, have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
Sub. This Agreement represents a legal, valid, and binding obligation of Sub,
enforceable against Sub in accordance with its terms (except in all cases as
such enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar Laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the
discretion of the court before which any proceeding may be brought).
6.18 Tax and Regulatory Matters. No Highwoods Entity or any Affiliate
thereof has taken or agreed to take any action or has any Knowledge of any fact
or circumstance that is reasonably likely to (i) prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, or (ii) materially impede or delay receipt of any
Consents of Regulatory Authorities referred to in Section 9.1(b) or result in
the imposition of a condition or restriction of the type referred to in the
last sentence of Section 9.1(b).
6.19 Rights Agreement. Execution of this Agreement and consummation of the
Merger and the other transactions contemplated by this Agreement will not
result in the grant of any rights to any Person under the Highwoods Rights
Agreement (other than as contemplated by Section 3.1) or enable or require the
Highwoods Rights to be exercised, distributed or triggered.
ARTICLE 7
CONDUCT OF BUSINESS PENDING CONSUMMATION
7.1 Affirmative Covenants of JCN. From the date of this Agreement until
the earlier of the Effective Time or the termination of this Agreement, unless
the prior written consent of Highwoods shall have been obtained, and except as
otherwise expressly contemplated herein or as set forth in the capital budget
for JCN as detailed in Section 7.1 of the JCN Disclosure Memorandum, JCN shall
and shall cause each of its Subsidiaries to (a) operate its business only in
the usual, regular, and ordinary course, (b) preserve intact its business
organization and Assets and maintain its rights and franchises, (c) take
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no action which would (i) adversely affect the ability of any Party to obtain
any Consents required for the transactions contemplated hereby without
imposition of a condition or restriction of the type referred to in the last
sentences of Section 9.1(b) or 9.1(c), or (ii) adversely affect the ability of
any Party to perform its covenants and agreements under this Agreement, and (d)
aggressively take such actions as may reasonably be necessary to prevent any
violation of Law by any Person suggesting a competing Acquisition Proposal
without first obtaining the endorsement of the JCN Board of Directors for such
Acquisition Proposal.
7.2 Negative Covenants of JCN. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of Highwoods shall have been obtained, and except as
otherwise expressly contemplated herein, JCN covenants and agrees that it will
not do or agree or commit to do, or permit any of its Subsidiaries to do or
agree or commit to do, any of the following:
(a) amend the Certificate of Incorporation, Bylaws or other governing
instruments of any JCN Entity; or
(b) other than as provided in Section 7.2(b) of the JCN Disclosure
Memorandum, incur any additional debt obligation or other obligation for
borrowed money (other than indebtedness of a JCN Entity to another JCN
Entity) in excess of an aggregate of $250,000 (for the JCN Entities on a
consolidated basis) except in the ordinary course of the business of JCN
Subsidiaries consistent with past practices, or impose, or suffer the
imposition, on any Asset of any JCN Entity of any Lien or permit any such
Lien to exist (other than in connection with Liens in effect as of the date
hereof that are disclosed in the JCN Disclosure Memorandum); or
(c) repurchase, redeem, or otherwise acquire or exchange (other than in
settlement of obligations then owed by the ESOT (as defined below) to JCN
as reasonably approved by Highwoods and other than exchanges in the
ordinary course under employee benefit plans), directly or indirectly, any
shares, or any securities convertible into any shares, of the capital stock
of any JCN Entity, or declare or pay any dividend or make any other
distribution in respect of JCN's capital stock; or
(d) except for this Agreement, or pursuant to the exercise of stock
options outstanding as of the date hereof and pursuant to the terms thereof
in existence on the date hereof or as disclosed in Section 7.2(d) of the
JCN Disclosure Memorandum, issue, sell, pledge, encumber, authorize the
issuance of, enter into any Contract to issue, sell, pledge, encumber, or
authorize the issuance of, or otherwise permit to become outstanding, any
additional shares of JCN Common Stock or any other capital stock of any JCN
Entity, or any stock appreciation rights, or any option, warrant, or other
Equity Right; or
(e) except as provided in Section 7.2(e) of the JCN Disclosure
Memorandum, adjust, split, combine or reclassify any capital stock of any
JCN Entity or issue or authorize the issuance of any other securities in
respect of or in substitution for shares of JCN Common Stock, or sell,
lease, mortgage or otherwise dispose of or otherwise encumber (x) any
shares of capital stock of any JCN Subsidiary (unless any such shares of
stock are sold or otherwise transferred to another JCN Entity) or (y) any
Asset having a book value or gross lease value (with respect to any new
Lease of a JCN Property) in excess of $50,000 other than in the ordinary
course of business for reasonable and adequate consideration; or
(f) except for purchases of U.S. Treasury securities or U.S. Government
agency securities, which in either case have maturities of three years or
less, purchase any securities or make any material investment, either by
purchase of stock of securities, contributions to capital, Asset transfers,
or purchase of any Assets, in any Person other than a wholly owned JCN
Subsidiary, or otherwise acquire direct or indirect control over any
Person, other than in connection with (i) foreclosures in the ordinary
course of business, or (ii) the creation of new wholly owned Subsidiaries
organized to conduct or continue activities otherwise permitted by this
Agreement; or
(g) grant any increase in compensation or benefits to the employees or
officers of any JCN Entity, except in accordance with past practice
disclosed in Section 7.2(g) of the JCN Disclosure Memorandum and as
reasonably approved by Highwoods or as required by Law; pay any severance
or termination pay or any bonus other than pursuant to written policies or
written Contracts in effect on the date of this Agreement and disclosed in
Section 7.2(g) of the JCN Disclosure Memorandum; enter into or amend any
severance agreements with officers of any JCN Entity; grant any material
increase in fees or other increases in compensation or other benefits to
directors of any JCN Entity except in accordance with past practice
disclosed in Section 7.2(g) of the JCN Disclosure Memorandum; or
(h) enter into or amend any employment Contract between any JCN Entity
and any Person (unless such amendment is required by Law) that the JCN
Entity does not have the unconditional right to terminate without Liability
(other than Liability for services already rendered), at any time on or
after the Effective Time; or
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(i) except as provided in Section 7.2(i) of the JCN Disclosure
Memorandum, adopt any new employee benefit plan of any JCN Entity or
terminate or withdraw from, or make any material change in or to, any
existing employee benefit plans of any JCN Entity other than any such
change that is required by Law or that, in the opinion of counsel, is
necessary or advisable to maintain the tax qualified status of any such
plan, or make any distributions from such employee benefit plans, except as
required by Law, the terms of such plans or consistent with past practice;
or
(j) make any significant change in any Tax or accounting methods or
systems of internal accounting controls, except as may be appropriate to
conform to changes in Tax Laws or regulatory accounting requirements or
GAAP; or
(k) commence any Litigation other than in accordance with past practice,
settle any Litigation involving any Liability of any JCN Entity for
material money damages or restrictions upon the operations of any JCN
Entity without first providing notice thereof to Highwoods and obtaining
Highwoods consent, which consent shall not be unreasonably withheld; or
(l) make any payments or accommodations to the Employee Stock Ownership
Trust of the J.C. Nichols Company ("ESOT") or any other shareholder
relating directly or indirectly to any of the costs, expenses or other
charges (including break-up fees owed to any third-party) of the ESOT or
any other shareholder related to or arising out of directly or indirectly
any of the transactions contemplated by this Agreement without first
obtaining Highwoods consent; or
(m) without first providing notice thereof to Highwoods and obtaining
Highwoods consent, which consent shall not be unreasonably withheld and,
except in the ordinary course of business, enter into, modify, amend or
terminate any material Contract (including any loan Contract with an unpaid
balance exceeding $50,000) or waive, release, compromise or assign any
material rights or claims.
7.3 Covenants of Highwoods. From the date of this Agreement until the
earlier of the Effective Time or the termination of this Agreement, unless the
prior written consent of JCN shall have been obtained, and except as otherwise
expressly contemplated herein, Highwoods covenants and agrees that it shall (a)
continue to conduct its business and the business of its Subsidiaries in a
manner designed in its reasonable judgment, to continue it to meet the
requirements for qualification as a real estate investment trust under Sections
856-860 of the Internal Revenue Code and to enhance the long-term value of the
Highwoods Common Stock and the business prospects of the Highwoods Entities and
to the extent consistent therewith use all reasonable efforts to preserve
intact the Highwoods Entities' core businesses and goodwill with their
respective employees and the communities they serve, (b) take no action which
would (i) materially adversely affect the ability of any Party to obtain any
Consents required for the transactions contemplated hereby without imposition
of a condition or restriction of the type referred to in the last sentences of
Section 9.1(b) or 9.1(c), or (ii) materially adversely affect the ability of
any Party to perform its covenants and agreements under this Agreement;
provided, that the foregoing shall not prevent any Highwoods Entity from
acquiring any Assets or other businesses or from discontinuing or disposing of
any of its Assets or business if such action is, in the judgment of Highwoods,
desirable in the conduct of the business of Highwoods and its Subsidiaries.
Highwoods further covenants and agrees that it will not, without the prior
written consent of JCN, which consent shall not be unreasonably withheld, amend
the Amended and Restated Articles of Incorporation or Bylaws of Highwoods, in
each case, in any manner adverse to the holders of JCN Common Stock as compared
to rights of holders of Highwoods Common Stock generally as of the date of this
Agreement. Highwoods shall take all action necessary under the MGCL prior to
the Effective Time for Sub to enter into and consummate the transactions
contemplated hereunder, including the Merger.
7.4 Adverse Changes in Condition.
(a) Each Party agrees to give written notice promptly to the other Party
upon becoming aware of the occurrence or impending occurrence of any event
or circumstance relating to it or any of its Subsidiaries which (i) is
reasonably likely to have, individually or in the aggregate, a JCN Material
Adverse Effect or a Highwoods Material Adverse Effect, as applicable, or
(ii) would cause or constitute a material breach of any of its
representations, warranties, or covenants contained herein, and to use its
reasonable efforts to prevent or promptly to remedy the same.
(b) Unless JCN, based upon the advice of tax counsel, is reasonably
satisfied that JCN shareholders receiving only Highwoods Common Stock in
the Merger will incur no income tax liability as a result of the Merger,
the parties shall develop a mutually acceptable plan that carries out as
nearly as possible the economic results provided herein without resulting
in income tax liability for JCN shareholders receiving only Highwoods
Common Stock.
7.5 Reports. Each Party and its Subsidiaries shall file all reports
required to be filed by it with Regulatory Authorities between the date of this
Agreement and the Effective Time and shall deliver to the other Party copies of
all such reports
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promptly after the same are filed. If financial statements are contained in any
such reports filed with the SEC, such financial statements will fairly present
the consolidated financial position of the entity filing such statements as of
the dates indicated and the consolidated results of operations, changes in
shareholders' equity, and cash flows for the periods then ended in accordance
with GAAP (subject in the case of interim financial statements to normal
recurring year-end adjustments that are not material). As of their respective
dates, such reports filed with the SEC will comply in all material respects
with the Securities Laws and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. Any financial
statements contained in any other reports to another Regulatory Authority shall
be prepared in accordance with Laws applicable to such reports.
ARTICLE 8
ADDITIONAL AGREEMENTS
8.1 Registration Statement; Proxy Statement; Shareholder Approval. As soon
as reasonably practicable after execution of this Agreement, Highwoods shall
prepare and file the Registration Statement with the SEC, and shall use its
reasonable efforts to cause the Registration Statement to become effective
under the 1933 Act and take any action required to be taken under the
applicable state Blue Sky or securities Laws in connection with the issuance of
the shares of Highwoods Common Stock upon consummation of the Merger. JCN shall
cooperate in the preparation and filing of the Registration Statement and shall
furnish all information concerning it and the holders of its capital stock as
Highwoods may reasonably request in connection with such action. JCN shall call
the JCN Shareholders Meeting, to be held as soon as reasonably practicable
after the Registration Statement is declared effective by the SEC, for the
purpose of voting upon approval of this Agreement and such other related
matters as it deems appropriate. In connection with the JCN Shareholders
Meeting, (i) JCN shall prepare and file with the SEC a Proxy Statement and mail
such Proxy Statement to its shareholders, (ii) the Parties shall furnish to
each other all information concerning them that they may reasonably request in
connection with such Proxy Statement, (iii) the Board of Directors of JCN shall
recommend to its shareholders the approval of the matters submitted for
approval (subject to the Board of Directors of JCN, after having consulted with
outside counsel, reasonably determining in good faith that the making of such
recommendation, or the failure to withdraw or modify its recommendation, would
be inconsistent with the fiduciary duties of the members of such Board of
Directors to JCN's shareholders under applicable law), and (iv) the Board of
Directors and officers of JCN shall use their reasonable efforts to obtain such
shareholders' approval (subject to the Board of Directors of JCN, after having
consulted with outside counsel, reasonably determining in good faith the taking
of such actions would be inconsistent with the fiduciary duties of the members
of such Board of Directors to JCN's shareholders under applicable law).
Highwoods and JCN shall make all necessary filings with respect to the Merger
under the Securities Laws.
8.2 Exchange Listing. Highwoods shall cause to be listed, prior to the
Effective Time, on the NYSE, subject to official notice of issuance, the shares
of Highwoods Common Stock to be issued to the holders of JCN Common Stock
pursuant to the Merger, and Highwoods shall give all notices and make all
filings with the NYSE required in connection with the transactions contemplated
herein.
8.3 Applications; Antitrust Notification. Highwoods shall promptly prepare
and file, and JCN shall cooperate in the preparation and, where appropriate,
filing of, applications with all Regulatory Authorities having jurisdiction
over the transactions contemplated by this Agreement seeking the requisite
Consents necessary to consummate the transactions contemplated by this
Agreement. To the extent required by the HSR Act, each of the Parties will
promptly file with the United States Federal Trade Commission and the United
States Department of Justice the notification and report form required for the
transactions contemplated hereby and any supplemental or additional information
which may reasonably be requested in connection therewith pursuant to the HSR
Act and will comply in all material respects with the requirements of the HSR
Act. The Parties shall deliver to each other copies of all filings,
correspondence and orders to and from all Regulatory Authorities in connection
with the transactions contemplated hereby. The Parties agree that the
consummation of the Merger does not require any filings or approvals under the
HSR Act.
8.4 Filings with State Offices. Upon the terms and subject to the
conditions of this Agreement, Sub shall execute and file the Articles of Merger
with the Secretary of State of the State of Missouri and the Articles of Merger
with the Department of Assessment and Taxation of the State of Maryland in
connection with the Closing.
8.5 Agreement as to Efforts to Consummate. Subject to the terms and
conditions of this Agreement, each Party agrees to use, and to cause its
Subsidiaries to use, its reasonable efforts to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary, proper, or
advisable under applicable Laws to consummate and make effective, as soon as
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reasonably practicable after the date of this Agreement, the transactions
contemplated by this Agreement, including using its reasonable efforts to lift
or rescind any Order adversely affecting its ability to consummate the
transactions contemplated herein and to cause to be satisfied the conditions
referred to in Article 9; provided, that nothing herein shall preclude either
Party from exercising its rights under this Agreement. Each Party shall use,
and shall cause each of its Subsidiaries to use, its reasonable efforts to
obtain all Consents necessary or desirable for the consummation of the
transactions contemplated by this Agreement.
8.6 Investigation and Confidentiality.
(a) Prior to the Effective Time, each Party shall keep the other Party
advised of all material developments relevant to its business and to
consummation of the Merger and shall permit the other Party to make or
cause to be made such investigation of the business and properties of it
and its Subsidiaries and of their respective financial and legal conditions
as the other Party reasonably requests, provided that such investigation
shall be reasonably related to the transactions contemplated hereby and
shall not interfere unnecessarily with normal operations. No investigation
by a Party shall affect the representations and warranties of the other
Party.
(b) In addition to the Parties' respective obligations under the
Confidentiality Agreement, which is hereby reaffirmed and adopted, and
incorporated by reference herein, each Party shall, and shall cause its
advisers and agents to, maintain the confidentiality of all confidential
information furnished to it by the other Party concerning its and its
Subsidiaries' businesses, operations, and financial positions and shall not
use such information for any purpose except in furtherance of the
transactions contemplated by this Agreement. If this Agreement is
terminated prior to the Effective Time, each Party shall promptly return or
certify the destruction of all documents and copies thereof, and all work
papers containing confidential information received from the other Party.
(c) Each Party agrees to give the other Party notice as soon as
practicable after any determination by it of any fact or occurrence
relating to the other Party which it has discovered through the course of
its investigation and which represents, or is reasonably likely to
represent, either a material breach of any representation, warranty,
covenant or agreement of the other Party or which has had or is reasonably
likely to have a JCN Material Adverse Effect or a Highwoods Material
Adverse Effect, as applicable. Each party hereby represents and warrants
that it knows of no such fact or occurrence as of the date of this
Agreement.
8.7 Press Releases. Prior to the Effective Time, JCN and Highwoods shall
consult with each other as to the form and substance of any press release or
other public disclosure materially related to this Agreement or any other
transaction contemplated hereby; provided, that nothing in this Section 8.7
shall be deemed to prohibit any Party from making any disclosure which its
counsel deems necessary or advisable in order to satisfy such Party's
disclosure obligations imposed by Law.
8.8 Certain Actions.
(a) Except with respect to this Agreement and the transactions
contemplated hereby, no JCN Entity nor any officer or director thereof nor
any Representatives thereof retained by any JCN Entity shall directly or
indirectly solicit any Acquisition Proposal by any Person. Except to the
extent the Board of Directors of JCN, after having consulted with and
considered the advice of outside counsel, reasonably determines in good
faith that the failure to take such actions would constitute a breach of
fiduciary duties of the members of such Board of Directors to JCN's
shareholders under applicable law, no JCN Entity or any officer or director
or Representative thereof shall furnish any non-public information that it
is not legally obligated to furnish, negotiate with respect to, or enter
into any Contract with respect to, any Acquisition Proposal. JCN may
communicate information about such an Acquisition Proposal to its
shareholders if and to the extent that it is required to do so in order to
comply with its legal obligations as advised by outside counsel. JCN shall
promptly advise Highwoods following the receipt of any Acquisition Proposal
or any inquiry concerning a possible Acquisition Proposal and the details
thereof, and advise Highwoods of any developments with respect to such
Acquisition Proposal or inquiry promptly upon the occurrence thereof. JCN
shall (i) immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any Persons conducted
heretofore with respect to any of the foregoing, and (ii) use its
reasonable efforts to cause all of its Affiliates and Representatives not
to engage in any of the foregoing. JCN also agrees to take reasonable
efforts to prevent any employee of any JCN Entity from committing any of
the foregoing acts.
(b) During the period from the date of this Agreement through the
Effective Time (or earlier termination hereof), none of the JCN Entities
shall terminate, amend, modify or waive any provision of any
confidentiality or standstill agreement to which it is a party. During such
period, the JCN Entities shall enforce, to the fullest extent permitted
under
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applicable law, the provisions of any such agreement, including, but not
limited to, by obtaining injunctions to prevent any breaches of any such
agreements and to enforce specifically the terms and provisions thereof in
any court having jurisdiction.
8.9 Tax Treatment. Each of the Parties undertakes and agrees to use its
reasonable efforts to cause the Merger, and to take no action which would cause
the Merger not, to qualify for or as a "reorganization" within the meaning of
Section 368(a) of the Internal Revenue Code for federal income tax purposes,
including obtaining letters or other written instruments evidencing investment
intent from the requisite number of JCN Shareholders.
8.10 State Takeover Laws. Each JCN Entity shall take all necessary steps
to exempt the transactions contemplated by this Agreement from, or if necessary
to challenge the validity or applicability of, any applicable Takeover Law,
including Section 351.459 of the GBCL.
8.11 Charter Provisions. Each JCN Entity shall take all necessary action
to ensure that the entering into of this Agreement and the consummation of the
Merger and the other transactions contemplated hereby do not and will not
result in the grant of any rights to any Person under the Certificate of
Incorporation, Bylaws or other governing instruments of any JCN Entity or
restrict or impair the ability of Highwoods or any of its Subsidiaries to vote,
or otherwise to exercise the rights of a shareholder with respect to, shares of
any JCN Entity that may be directly or indirectly acquired or controlled by
them.
8.12 Agreement of Affiliates. JCN has disclosed in Section 8.12 of the JCN
Disclosure Memorandum all Persons it reasonably believes are an "affiliate" of
JCN for purposes of Rule 145 under the 1933 Act. JCN shall use its reasonable
efforts to cause each such Person to deliver to Highwoods not later than 30
days prior to the Effective Time, a written agreement providing that such
Person will not sell, pledge, transfer, or otherwise dispose of the shares of
Highwoods Common Stock to be received by such Person upon consummation of the
Merger except in compliance with applicable provisions of the 1933 Act and the
rules and regulations thereunder. Highwoods shall not be required to maintain
the effectiveness of the Registration Statement under the 1933 Act for the
purposes of resale of Highwoods Common Stock by such affiliates who do not
enter into such written agreements.
8.13 Employee Benefits and Contracts. Following the Effective Time,
Highwoods shall provide generally to officers and employees of the JCN Entities
employee benefits under employee benefit and welfare plans (other than stock
option or other plans involving the potential issuance of Highwoods Common
Stock), on terms and conditions which when taken as a whole are substantially
similar to those currently provided by the Highwoods Entities to their
similarly situated officers and employees. For purposes of participation,
vesting and (except in the case of Highwoods retirement plans) benefit accrual
under Highwoods' employee benefit plans, the service of the employees of the
JCN Entities prior to the Effective Time shall be treated as service with a
Highwoods Entity participating in such employee benefit plans. Highwoods also
shall cause the Surviving Corporation and its Subsidiaries to honor in
accordance with their terms all employment, severance, consulting and other
compensation Contracts disclosed in Section 8.13 of the JCN Disclosure
Memorandum to Highwoods between any JCN Entity and any current or former
director, officer, or employee thereof, and all provisions for vested benefits
or other vested amounts earned or accrued through the Effective Time under the
JCN Benefit Plans.
8.14 Indemnification.
(a) For a period of six years after the Effective Time, Highwoods shall,
and shall cause the Surviving Corporation to, indemnify, defend and hold
harmless the present and former directors, officers, employees and agents
of the JCN Entities (each, an "Indemnified Party") against all Liabilities
arising out of actions or omissions arising out of the Indemnified Party's
service or services as directors, officers, employees or agents of any JCN
Entity or, at any JCN Entity's request, of another corporation,
partnership, joint venture, trust or other enterprise occurring at or prior
to the Effective Time (including the transactions contemplated by this
Agreement) to the fullest extent permitted under Missouri Law and by the
Certificate of Incorporation and Bylaws and any other organizational
instruments of the applicable JCN Entity as in effect on the date hereof,
including provisions relating to advances of expenses incurred in the
defense of any Litigation and whether or not any Highwoods Entity is
insured against any such matter. Without limiting the foregoing, in any
case in which approval by the Surviving Corporation is required to
effectuate any indemnification, the Surviving Corporation shall direct, at
the election of the Indemnified Party, that the determination of any such
approval shall be made by independent counsel mutually agreed upon between
Highwoods and the Indemnified Party.
(b) Highwoods shall, or shall cause the Surviving Corporation to, use its
reasonable efforts (and JCN shall cooperate prior to the Effective Time in
these efforts) to maintain in effect for a period of three years after the
Effective
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Time JCN's existing directors' and officers' liability insurance policy
(provided that Highwoods may substitute therefor (i) policies of at least
the same coverage and amounts containing terms and conditions which are
substantially no less advantageous or (ii) with the consent of JCN given
prior to the Effective Time, any other policy) with respect to claims
arising from facts or events which occurred prior to the Effective Time and
covering persons who are currently covered by such insurance; provided,
that neither Highwoods nor the Surviving Corporation shall be obligated to
make aggregate premium payments for such three-year period in respect of
such policy (or coverage replacing such policy) which exceed, for the
portion related to JCN's directors and officers, 200% of the annual premium
payments on JCN's current policy in effect as of the date of this Agreement
(the "Maximum Amount"). If the amount of the premiums necessary to maintain
or procure such insurance coverage exceeds the Maximum Amount, Highwoods
shall use its reasonable efforts to maintain the most advantageous policies
of directors' and officers' liability insurance obtainable for a premium
equal to the Maximum Amount.
(c) Any Indemnified Party wishing to claim indemnification under
paragraph (a) of this Section 8.14, upon learning of any such Liability or
Litigation, shall promptly notify Highwoods thereof. In the event of any
such Litigation (whether arising before or after the Effective Time), (i)
Highwoods or the Surviving Corporation shall have the right (but only
subsequent to the Effective Time) to assume the defense thereof and neither
Highwoods nor the Surviving Corporation shall be liable to such Indemnified
Parties for any legal expenses of other counsel or any other expenses
subsequently incurred by such Indemnified Parties in connection with the
defense thereof, except that if Highwoods or the Surviving Corporation
elects not to assume such defense or counsel for the Indemnified Parties
advises that there are substantive issues which raise conflicts of interest
between Highwoods or the Surviving Corporation and the Indemnified Parties,
the Indemnified Parties may retain counsel satisfactory to them, and
Highwoods or the Surviving Corporation shall pay all reasonable fees and
expenses of such counsel for the Indemnified Parties promptly as statements
therefor are received; provided, that Highwoods and the Surviving
Corporation shall be obligated pursuant to this paragraph (c) to pay for
only one firm of counsel for all Indemnified Parties in any jurisdiction,
(ii) the Indemnified Parties will cooperate in the defense of any such
Litigation, and (iii) neither Highwoods nor the Surviving Corporation shall
be liable for any settlement effected without its prior written consent,
which consent shall not be unreasonably withheld; and provided further that
neither Highwoods nor the Surviving Corporation shall have any obligation
hereunder to any Indemnified Party when and if a court of competent
jurisdiction shall determine, and such determination shall have become
final, that the indemnification of such Indemnified Party in the manner
contemplated hereby is prohibited by applicable Law.
(d) If Highwoods or the Surviving Corporation or any successors or
assigns shall consolidate with or merge into any other Person and shall not
be the continuing or surviving Person of such consolidation or merger or
shall transfer all or substantially all of its assets to any Person, then
and in each case, proper provision shall be made so that the successors and
assigns of Highwoods or the Surviving Corporation shall assume the
obligations set forth in this Section 8.14.
(e) The provisions of this Section 8.14 are intended to be for the
benefit of and shall be enforceable by, each Indemnified Party and their
respective heirs and representatives.
8.15 Tenant Estoppels. JCN shall endeavor to use reasonable commercial
efforts to obtain prior to the Effective Date, tenant estoppel certificates for
the 100 largest Leases (based on gross rental payments) with respect to the JCN
Properties in form reasonably acceptable to Highwoods.
8.16 Maintenance of Organizational Structure. Highwoods acknowledges that
its present operating structure enables a level of operational flexibility that
facilitates the growth of Highwoods and its business. Highwoods shall not alter
its current operating structure in any material respect, except to the extent
the Board of Directors of Highwoods determines in good faith that such
alteration is in the best interests of the shareholders of Highwoods.
8.17 Maintenance of Plaza Redevelopment Plan. Highwoods acknowledges the
economic and social significance of the Country Club Plaza district (the
"Plaza") to Kansas City, Missouri and surrounding communities, and further
acknowledges the importance of the development and redevelopment of the Plaza
by the JCN Entities. From and after the Effective Time, Highwoods shall
continue to pursue each portion of the Plaza redevelopment plan unless the
economics of any single portion of the redevelopment plan, or changes in
circumstances beyond the reasonable control of Highwoods, causes the Board of
Directors of Highwoods to determine in good faith, after consideration of
available alternatives, that such redevelopment plan or portion thereof is
contrary to the best interests of the shareholders of Highwoods.
8.18 Maintenance of Charitable Contributions. From and after the Effective
Time, Highwoods shall make annual charitable contributions and provide
community support in the geographic areas in which the business of JCN is
currently
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operated, at levels substantially comparable to or greater than the levels of
charitable contributions and community support provided by JCN Entities within
such areas during calendar year 1996 and the period from January 1, 1997
through the date of this Agreement.
8.19 Maintenance of Merchant Support. From and after the Effective Time,
Highwoods shall provide annual financial assistance and marketing support to
merchants' associations relating to properties currently owned or operated by
any JCN Entity, at levels substantially comparable to or greater than the
levels of such support provided by JCN Entities during calendar year 1996 and
the period from January 1, 1997 through the date of this Agreement.
8.20 Member of Board of Directors. Highwoods shall appoint to its Board of
Directors an individual (who would qualify as an independent director under
Highwoods' Articles of Incorporation and bylaws) designated by JCN's Board of
Directors, which designee shall be reasonably acceptable to the Highwoods Board
of Directors to serve until the next annual shareholders meeting, at which time
the Highwoods Board of Directors will nominate and recommend such designee for
a three-year term on Highwoods Board of Directors.
ARTICLE 9
CONDITIONS PRECEDENT TO OBLIGATIONS TO CONSUMMATE
9.1 Conditions to Obligations of Each Party. The respective obligations of
each Party to perform this Agreement and consummate the Merger and the other
transactions contemplated hereby are subject to the satisfaction of the
following conditions, unless waived by both Parties pursuant to Section 11.6:
(a) Shareholder Approval. The shareholders of JCN shall have approved
this Agreement, and the consummation of the transactions contemplated
hereby, including the Merger, as and to the extent required by Law, by the
provisions of any governing instruments, or by the rules of the NASD, if
applicable.
(b) Regulatory Approvals. All Consents of, filings and registrations
with, and notifications to, all Regulatory Authorities required for
consummation of the Merger shall have been obtained or made and shall be in
full force and effect and all waiting periods required by Law shall have
expired.
(c) Third Party Consents and Approvals. Each Party shall have obtained
any and all Consents required for consummation of the Merger (other than
those referred to in Section 9.1(b)), which as to JCN, the parties agree
shall include only those Consents set forth in Section 9.1 of the JCN
Disclosure Memorandum. In the event such third party does not make such
payment within ten days of demand therefor by Highwoods, the payment shall
be an obligation of JCN and shall be paid by JCN within two business days
of notice to JCN by Highwoods. In addition to the Consents set forth in
Section 9.1 to the JCN Disclosure Memorandum, to the extent required by the
applicable contract, mortgage, document or other instrument, JCN shall use
commercially reasonable efforts to obtain the consent of (i) any lender to
JCN and (ii) any other party reasonably identified by Highwoods. No Consent
so obtained which is necessary to consummate the transactions contemplated
hereby shall be conditioned or restricted in a manner which in the
reasonable judgment of the Board of Directors of Highwoods would so
materially adversely impact the economic or business benefits of the
transactions contemplated by this Agreement that, had such condition or
requirement been known, such Party would not, in its reasonable judgment,
have entered into this Agreement.
(d) Legal Proceedings. No court or governmental or regulatory authority
of competent jurisdiction shall have enacted, issued, promulgated, enforced
or entered any Law or Order (whether temporary, preliminary or permanent)
or taken any other action which prohibits, restricts or makes illegal
consummation of the transactions contemplated by this Agreement.
(e) Registration Statement. The Registration Statement shall be effective
under the 1933 Act, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued, no action, suit, proceeding
or investigation by the SEC to suspend the effectiveness thereof shall have
been initiated and be continuing, and all necessary approvals under state
securities Laws or the 1933 Act or the 1934 Act relating to the issuance or
trading of the shares of Highwoods Common Stock issuable pursuant to the
Merger shall have been received.
(f) Exchange Listing. The shares of Highwoods Common Stock issuable
pursuant to the Merger shall have been approved for listing on the NYSE,
subject to official notice of issuance.
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9.2 Conditions to Obligations of Highwoods. The obligations of Highwoods
to perform this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following
conditions, unless waived by Highwoods pursuant to Section 11.6(a):
(a) Representations and Warranties. For purposes of this Section 9.2(a),
the accuracy of the representations and warranties of JCN set forth in this
Agreement shall be assessed as of the date of this Agreement and as of the
Effective Time with the same effect as though all such representations and
warranties had been made on and as of the Effective Time (provided that
representations and warranties which are confined to a specified date shall
speak only as of such date). The representations and warranties set forth
in Section 5.3 shall be true and correct (except for inaccuracies which are
de minimus in amount). The representations and warranties set forth in
Sections 5.18, 5.19, and 5.20 shall be true and correct in all material
respects. No representation or warranty of JCN set forth in this Agreement
shall be deemed untrue or incorrect, and no JCN Entity shall be deemed to
have breached a representation or warranty, as a consequence of the
existence of any fact, circumstance or event unless such fact, circumstance
or event, individually or taken together with other facts, circumstances or
events inconsistent with any other representation or warranty has had, or
is expected to have, a JCN Material Adverse Effect; provided that, for
purposes of this sentence only, those representations and warranties which
are qualified by references to "material" or "Material Adverse Effect" or
to the "Knowledge" of any Person shall be deemed not to include such
qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of JCN to be performed and complied with pursuant
to this Agreement and the other agreements contemplated hereby prior to the
Effective Time shall have been duly performed and complied with in all
material respects, as of the Effective Time.
(c) Certificates. JCN shall have delivered to Highwoods (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its chief financial officer, to the effect that
the conditions set forth in Section 9.1 as relates to JCN and in Section
9.2(a) and 9.2(b) have been satisfied, and (ii) certified copies of
resolutions duly adopted by JCN's Board of Directors and shareholders
evidencing the taking of all corporate action necessary to authorize the
execution, delivery and performance of this Agreement, and the consummation
of the transactions contemplated hereby, all in such reasonable detail as
Highwoods and its counsel shall request.
(d) Opinion of Counsel. Highwoods shall have received an opinion of
Blackwell Sanders Matheny Weary & Lombardi L.L.P., counsel to JCN, dated as
of the Closing, in form reasonably satisfactory to Highwoods, as to the
matters set forth in Exhibit 1.
(e) Accountant's Letters. Highwoods shall have received from KPMG Peat
Marwick LLP letters dated not more than five days prior to (i) the date of
the Proxy Statement and (ii) the Effective Time, with respect to certain
financial information regarding JCN, in form and substance reasonably
satisfactory to Highwoods, which letters shall be based upon customary
specified procedures undertaken by such firm in accordance with Statement
of Auditing Standard Nos. 72 and 75.
(f) Rights Agreement. Neither this Agreement and any agreements related
hereto nor consummation of the Merger shall have caused or shall cause any
of the JCN Rights to become non-redeemable or exercisable for capital stock
of Highwoods or JCN.
(g) Shareholders' Equity. JCN's shareholders' equity as of the Closing
shall not be less than JCN's shareholders' equity as of March 31, 1997,
excluding for purposes of the calculation of such shareholders' equity the
effects of (i) all costs, fees and charges, including fees and charges of
JCN's accountants, counsel and financial advisors, whether or not accrued
or paid, that are related to the transactions contemplated by this
Agreement and (ii) any reductions in JCN's shareholders' equity resulting
from any actions or changes in policies of JCN taken at the request of
Highwoods.
9.3 Conditions to Obligations of JCN. The obligations of JCN to perform
this Agreement and consummate the Merger and the other transactions
contemplated hereby are subject to the satisfaction of the following
conditions, unless waived by JCN pursuant to Section 11.6(b):
(a) Representations and Warranties. For purposes of this Section 9.3(a),
the accuracy of the representations and warranties of Highwoods set forth
in this Agreement shall be assessed as of the date of this Agreement and as
of the Effective Time with the same effect as though all such
representations and warranties had been made on and as of the Effective
Time (provided that representations and warranties which are confined to a
specified date shall speak only as of such date). The representations and
warranties of Highwoods set forth in Section 6.15 shall be true and correct
in all material respects. No representation or warranty of Highwoods set
forth in this Agreement shall be deemed untrue or incorrect, and no
Highwoods Entity shall be deemed to have breached a representation or
warranty, as a consequence
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of the existence of any fact, circumstance or event unless such fact,
circumstance or event, individually or taken together with all other facts,
circumstances or events inconsistent with any other representation or
warranty has had, or is expected to have, a Highwoods Material Adverse
Effect; provided that, for purposes of this sentence only, those
representations and warranties which are qualified by references to
"material" or "Material Adverse Effect" or to the "Knowledge" of any Person
shall be deemed not to include such qualifications.
(b) Performance of Agreements and Covenants. Each and all of the
agreements and covenants of Highwoods to be performed and complied with
pursuant to this Agreement and the other agreements contemplated hereby
prior to the Effective Time shall have been duly performed and complied
with in all material respects.
(c) Certificates. Highwoods shall have delivered to JCN (i) a
certificate, dated as of the Effective Time and signed on its behalf by its
chief executive officer and its chief financial officer, to the effect that
the conditions set forth in Section 9.1 as relates to Highwoods and in
Section 9.3(a) and 9.3(b) have been satisfied, and (ii) certified copies of
resolutions duly adopted by Highwoods' Board of Directors and Sub's Board
of Directors and sole shareholder evidencing the taking of all corporate
action necessary to authorize the execution, delivery and performance of
this Agreement, and the consummation of the transactions contemplated
hereby, all in such reasonable detail as JCN and its counsel shall request.
(d) Opinion of Counsel. JCN shall have received an opinion of (i) Alston
& Bird LLP, counsel to Highwoods, dated as of the Effective Time, in form
reasonably acceptable to JCN, as to the matters set forth in Exhibit 2 and
(ii) a tax opinion of Blackwell Sanders Matheny Weary & Lombardi, L.L.P.,
to the effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code and that JCN
shareholders receiving only Highwoods Common Stock will incur no income tax
liability.
(e) Fairness Opinion. JCN shall not have received notice from Morgan
Stanley, Dean Witter, Discover & Co. prior to the date of the Proxy
Statement, indicating withdrawal of its prior opinion that the
consideration to be received by JCN shareholders in connection with the
Merger is fair, from a financial point of view, to such shareholders and
shall have received an update to such opinion immediately prior to the
shareholder meeting at which approval of this Agreement will be considered.
(f) Exchange Agent Certification. The Exchange Agent shall have delivered
to JCN a certificate, dated as of the Effective Time, to the effect that
the Exchange Agent has received from Highwoods appropriate instructions and
authorization for the Exchange Agent to issue a sufficient number of shares
of Highwoods Common Stock in exchange for outstanding shares of JCN Common
Stock and that Highwoods has deposited with the Exchange Agent sufficient
funds to pay a reasonable estimate of the cash payments necessary to make
all fractional share payments as required by Section 3.6.
ARTICLE 10
TERMINATION
10.1 Termination. Notwithstanding any other provision of this Agreement,
and notwithstanding the approval of this Agreement by the shareholders of JCN,
this Agreement may be terminated and the Merger abandoned at any time prior to
the Effective Time:
(a) By mutual consent of Highwoods and JCN; or
(b) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material breach by
the other Party of any representation or warranty contained in this
Agreement which cannot be or has not been cured within 30 days after the
giving of written notice to the breaching Party of such breach and which
breach is reasonably likely, in the opinion of the non-breaching Party, to
have, individually or in the aggregate, a JCN Material Adverse Effect or a
Highwoods Material Adverse Effect, as applicable, on the breaching Party;
or
(c) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event of a material breach by
the other Party of any covenant or agreement contained in this Agreement
which cannot be or has not been cured within 30 days after the giving of
written notice to the breaching Party of such breach; or
(d) By either Party (provided that the terminating Party is not then in
material breach of any representation, warranty, covenant, or other
agreement contained in this Agreement) in the event (i) any Consent of any
Regulatory
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Authority required for consummation of the Merger and the other
transactions contemplated hereby shall have been denied by final
nonappealable action of such authority or if any action taken by such
authority is not appealed within the time limit for appeal, or (ii) the
shareholders of JCN fail to vote their approval of the matters relating to
this Agreement and the transactions contemplated hereby at the JCN
Shareholders Meeting where such matters were presented to such shareholders
for approval and voted upon; or
(e) By either Party in the event that the Merger shall not have been
consummated by June 30, 1998, if the failure to consummate the transactions
contemplated hereby on or before such date is not caused by any breach of
this Agreement by the Party electing to terminate pursuant to this Section
10.1(e); or
(f) By Highwoods or JCN, in the event that the Board of Directors of JCN
shall have failed to recommend to its shareholders the approval of the
Merger and the transactions contemplated by this Agreement (to the
exclusion of any other Acquisition Proposal), or shall have resolved not to
recommend to its shareholders the approval of the Merger, or shall have
affirmed, recommended or authorized entering into any other Acquisition
Proposal or other transaction involving a merger, share exchange,
consolidation or transfer of substantially all of the Assets of JCN, or
shall fail to call and hold a JCN Shareholders Meeting for purposes of
voting on the approval of the Merger and the transaction contemplated
hereby.
10.2 Effect of Termination. In the event of the termination and
abandonment of this Agreement pursuant to Section 10.1, this Agreement shall
become void and have no effect, except that (i) the provisions of this Section
10.2 and Article 11 and Section 8.6(b) shall survive any such termination and
abandonment, and (ii) a termination pursuant to Sections 10.1(b) or 10.1(c)
shall not relieve the breaching Party from Liability for an uncured willful
breach of a representation, warranty, covenant, or agreement giving rise to
such termination.
10.3 Non-Survival of Representations and Covenants. The respective
representations, warranties, obligations, covenants, and agreements of the
Parties shall not survive the Effective Time except this Section 10.3 and
Articles 1, 2, 3, 4 and 11 and Sections 8.13 and 8.14.
ARTICLE 11
MISCELLANEOUS
11.1 Definitions.
(a) Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
"1933 Act" shall mean the Securities Act of 1933, as amended.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended.
"Acquisition Proposal" with respect to a Party shall mean any tender
offer or exchange offer or any proposal for a merger, acquisition of all of the
stock or assets of, or other business combination involving the acquisition of
such Party or any of its Subsidiaries or the acquisition of a substantial
equity interest in, or a substantial portion of the assets of, such Party or
any of its Subsidiaries.
"Affiliate" of a Person shall mean: (i) any other Person directly, or
indirectly through one or more intermediaries, controlling, controlled by or
under common control with such Person; (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity
or voting interest of such Person.
"Agreement" shall mean this Agreement and Plan of Merger, including the
Exhibits delivered pursuant hereto and incorporated herein by reference.
"Articles of Merger" shall mean, collectively, the Articles of Merger to
be executed by JCN and Sub and filed with the Secretary of State of the State
of Missouri relating to the Merger as contemplated by Section 1.1, and the
Articles of Merger to be executed by JCN and Sub and filed with the Department
of Assessments and Taxation of the State of Maryland relating to the Merger as
contemplated by Section 1.1.
"Assets" of a Person shall mean all of the assets, properties, businesses
and rights of such Person of every kind, nature, character and description,
whether real, personal or mixed, tangible or intangible, accrued or contingent,
or otherwise relating to or utilized in such Person's business, directly or
indirectly, in whole or in part, whether or not carried on the books and
records of such Person, and whether or not owned in the name of such Person or
any Affiliate of such Person and wherever located.
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"Cash Amount" shall have the meaning set forth in Section 3.2.
"Closing Date" shall mean the date on which the Closing occurs.
"Confidentiality Agreement" shall mean that certain Confidentiality
Agreement, dated November 24, 1997, between JCN and Highwoods.
"Consent" shall mean any consent, approval, authorization, clearance,
exemption, waiver, or similar affirmation required from any Person pursuant to
any Contract, Law, Order, or Permit.
"Contract" shall mean any written or oral agreement, arrangement,
authorization, commitment, contract, indenture, instrument, lease, obligation,
plan, practice, restriction, understanding, or undertaking of any kind or
character, or other document to which any Person is a party or that is binding
on any Person or its capital stock, Assets or business.
"Default" shall mean (i) any breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit, (ii)
any occurrence of any event that with the passage of time or the giving of
notice or both would constitute a breach or violation of, default under,
contravention of, or conflict with, any Contract, Law, Order, or Permit, or
(iii) any occurrence of any event that with or without the passage of time or
the giving of notice would give rise to a right of any Person to exercise any
remedy or obtain any relief under, terminate or revoke, suspend, cancel, or
modify or change the current terms of, or renegotiate, or to accelerate the
maturity or performance of, or to increase or impose any Liability under, any
Contract, Law, Order, or Permit.
"Dissenting Shares" shall mean those shares of JCN Common Stock as to
which the holders thereof elect to exercise their dissenter's rights in
accordance with and as contemplated by Section 351.455 of the GBCL and as
provided for in Section 3.5 hereof.
"Environmental Laws" shall mean all Laws relating to pollution or
protection of human health and the environment (including ambient air, surface
water, ground water, land surface, or subsurface strata) and which are
administered, interpreted, or enforced by the United States Environmental
Protection Agency or state and local agencies with jurisdiction over, and
including published court decisions interpreting the foregoing pollution or
protection of the environment, including the Comprehensive Environmental
Response Compensation and Liability Act, as amended, 42 U.S.C. 9601 et seq.
("CERCLA"), the Resource Conservation and Recovery Act, as amended, 42 U.S.C.
6901 et seq. ("RCRA"), and other Laws relating to emissions, discharges,
releases, or threatened releases of any Hazardous Material, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of any Hazardous Material.
"Equity Rights" shall mean all arrangements, calls, commitments,
Contracts, options, rights to subscribe to, scrip, understandings, warrants, or
other binding obligations of any character whatsoever relating to, or
securities or rights convertible into or exchangeable for, shares of the
capital stock of a Person or by which a Person is or may be bound to issue
additional shares of its capital stock or other Equity Rights.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
"Exhibits" 1 through 2, inclusive, shall mean the Exhibits so marked,
copies of which are attached to this Agreement. Such Exhibits are hereby
incorporated by reference herein and made a part hereof, and may be referred to
in this Agreement and any other related instrument or document without being
attached hereto.
"GAAP" shall mean generally accepted accounting principles, consistently
applied during the periods involved.
"GBCL" shall mean the General and Business Corporation Law of Missouri.
"Hazardous Material" shall mean (i) any hazardous substance, hazardous
material, hazardous waste, regulated substance, or toxic substance (as those
terms are defined by any applicable Environmental Laws) and (ii) any chemicals,
pollutants, contaminants, petroleum, petroleum products, or oil (and
specifically shall include asbestos requiring abatement, removal, or
encapsulation pursuant to any Environmental Law and any polychlorinated
biphenyls).
"Highwoods Capital Stock" shall mean, collectively, the Highwoods Common
Stock, the Highwoods Preferred Stock and any other class or series of capital
stock of Highwoods.
"Highwoods Common Stock" shall mean the $.01 par value common stock of
Highwoods.
"Highwoods Disclosure Memorandum" shall mean the written information
entitled "Highwoods Properties, Inc. Disclosure Memorandum" delivered prior to
the date of this Agreement to JCN describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement
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under which such disclosure is being made. Information disclosed with respect
to one Section shall not be deemed to be disclosed for purposes of any other
Section not specifically referenced with respect thereto.
"Highwoods Entities" shall mean, collectively, Highwoods and all
Highwoods Subsidiaries.
"Highwoods Financial Statements" shall mean (i) the consolidated balance
sheets (including related notes and schedules, if any) of Highwoods as of
September 30, 1997, and as of December 31, 1996 and 1995, and the related
statements of operations, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) for the nine months ended
September 30, 1997, and for each of the three fiscal years ended December 31,
1996, 1995 and 1994, as filed by Highwoods in SEC Documents, and (ii) the
consolidated balance sheets of Highwoods (including related notes and
schedules, if any) and related statements of operations, changes in
shareholders' equity, and cash flows (including related notes and schedules, if
any) included in SEC Documents filed with respect to periods ended subsequent
to September 30, 1997.
"Highwoods Material Adverse Effect" shall mean an event, change or
occurrence which, individually or together with any other event, change or
occurrence, has a material adverse impact on (i) the financial position,
business, or results of operations of Highwoods and its Subsidiaries, taken as
a whole, or (ii) the ability of Highwoods to perform its obligations under this
Agreement or to consummate the Merger or the other transactions contemplated by
this Agreement.
"Highwoods Preferred Stock" shall mean, collectively, the 8 5/8% Series A
Cumulative Redeemable Preferred Shares of which 125,000 shares are outstanding
and the 8% Series B Cumulative Redeemable Preferred Shares of which 6,900,000
shares are outstanding, of Highwoods.
"Highwoods Rights Agreement" shall mean that certain Shareholders Rights
Agreement, dated October 4, 1997, between Highwoods and First Union National
Bank, as Rights Agent.
"Highwoods Rights" shall mean the preferred stock purchase rights issued
pursuant to the Highwoods Rights Agreement.
"Highwoods Stock Plans" shall mean the existing stock option and other
stock-based compensation plans of Highwoods designated as follows: the Amended
and Restated 1994 Stock Option Plan; the Dividend Reinvestment Plan and the
1997 Employee Stock Purchase Plan.
"Highwoods Subsidiaries" shall mean the Subsidiaries of Highwoods, which
shall include Highwoods/Forsyth Limited Partnership and the other Highwoods
Subsidiaries described in Section 6.4 and any corporation or other organization
acquired as a Subsidiary of Highwoods in the future and held as a Subsidiary by
Highwoods at the Effective Time.
"HSR Act" shall mean Section 7A of the Clayton Act, as added by Title II
of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and
the rules and regulations promulgated thereunder.
"Intellectual Property" shall mean copyrights, patents, trademarks,
service marks, service names, trade names, applications therefor, technology
rights and licenses, computer software (including any source or object codes
therefor or documentation relating thereto), trade secrets, franchises,
know-how, inventions, and other intellectual property rights.
"Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as
amended, and the rules and regulations promulgated thereunder.
"JCN Common Stock" shall mean the $.01 par value common stock of JCN.
"JCN Disclosure Memorandum" shall mean the written information
entitled"J.C. Nichols Company Disclosure Memorandum" delivered prior to the
date of this Agreement to Highwoods describing in reasonable detail the matters
contained therein and, with respect to each disclosure made therein,
specifically referencing each Section of this Agreement under which such
disclosure is being made. Information disclosed with respect to one Section
shall not be deemed to be disclosed for purposes of any other Section not
specifically referenced with respect thereto.
"JCN Entities" shall mean, collectively, JCN and all JCN Subsidiaries.
"JCN Financial Statements" shall mean (i) the consolidated balance sheets
(including related notes and schedules, if any) of JCN as of September 30,
1997, and as of December 31, 1996 and 1995, and the related statements of
income, changes in shareholders' equity, and cash flows (including related
notes and schedules, if any) for the nine months ended September 30, 1997, and
for each of the three fiscal years ended December 31, 1996, 1995, and 1994, as
filed by JCN in SEC Documents, and (ii) the consolidated balance sheets of JCN
(including related notes and schedules, if any) and related
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statements of operations, changes in shareholders' equity, and cash flows
(including related notes and schedules, if any) included in SEC Documents filed
with respect to periods ended subsequent to September 30, 1997.
"JCN Material Adverse Effect" shall mean an event, change or occurrence
which, individually or together with any other event, change or occurrence, has
a material adverse impact on (i) the financial position, business, or results
of operations of JCN and its Subsidiaries, taken as a whole, or (ii) the
ability of JCN to perform its obligations under this Agreement or to consummate
the Merger or the other transactions contemplated by this Agreement.
"JCN Rights" shall mean the common stock purchase rights issued pursuant
to the JCN Rights Agreement.
"JCN Rights Agreement" shall mean that certain Shareholders Rights
Agreement, dated July 28, 1997, between JCN and American Stock Transfer & Trust
Company, as Rights Agent.
"JCN Stock Plans" shall mean the existing stock option and other
stock-based compensation plans of JCN designated as follows: the Amended and
Restated 1996 Stock Option Plans.
"JCN Subsidiaries" shall mean the Subsidiaries of JCN, which shall
include the JCN Subsidiaries described in Section 5.4 and any corporation or
other organization acquired as a Subsidiary of JCN in the future and held as a
Subsidiary by JCN at the Effective Time; provided, however, that neither KH/JCN
L.L.C., a Missouri limited liability company, nor the ESOT shall be deemed a
JCN Subsidiary.
"Knowledge" as used with respect to a Person (including references to
such Person being aware of a particular matter) shall mean those facts that are
known or should reasonably have been known after due inquiry by the chairman,
president, chief financial officer, chief accounting officer, chief operating
officer, general counsel, any assistant or deputy general counsel, or any
senior, executive or other vice president of such Person and the Knowledge of
any such persons obtained or which would have been obtained from a reasonable
investigation.
"Law" shall mean any code, law, ordinance, regulation, reporting or
licensing requirement, rule, or statute applicable to a Person or its Assets,
Liabilities, or business, including those promulgated, interpreted or enforced
by any Regulatory Authority.
"Lease" shall mean any lease of more than 10,000 rentable square feet in
effect as of the date hereof and as to which JCN is the lessor.
"Liability" shall mean any direct or indirect, primary or secondary,
liability, indebtedness, obligation, penalty, cost or expense (including costs
of investigation, collection and defense), claim, deficiency, guaranty or
endorsement of or by any Person (other than endorsements of notes, bills,
checks, and drafts presented for collection or deposit in the ordinary course
of business) of any type, whether accrued, absolute or contingent, liquidated
or unliquidated, matured or unmatured, or otherwise.
"Lien" shall mean any conditional sale agreement, default of title,
easement, encroachment, encumbrance, hypothecation, infringement, lien,
mortgage, pledge, reservation, restriction, security interest, title retention
or other security arrangement, or any adverse right or interest, charge, or
claim of any nature whatsoever of, on, or with respect to any property or
property interest, other than (i) liens for current property Taxes not yet due
and payable, and (iii) liens which do not materially impair the use of or title
to the Assets subject to such lien.
"Litigation" shall mean any action, arbitration, cause of action, claim,
complaint, criminal prosecution, governmental or other examination or
investigation, hearing, administrative or other proceeding to which a Party is
a party or of which a Party's, business or Assets (including Contracts related
to it) are the subject, or relating in any way to the transactions contemplated
by this Agreement.
"Material" for purposes of this Agreement shall be determined in light of
the facts and circumstances of the matter in question; provided that any
specific monetary amount stated in this Agreement shall determine materiality
in that instance.
"MGCL" shall mean the Maryland General Corporation Law.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NYSE" shall mean the New York Stock Exchange, Inc.
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"Operating Property" shall mean any property owned, leased, or operated
by the Party in question or by any of its Subsidiaries and, where required by
the context, includes the owner or operator of such property, but only with
respect to such property.
"Order" shall mean any administrative decision or award, decree,
injunction, judgment, order, quasi-judicial decision or award, ruling, or writ
of any federal, state, local or foreign or other court, arbitrator, mediator,
tribunal, administrative agency, or Regulatory Authority.
"Participation Facility" shall mean any facility or property in which the
Party in question or any of its Subsidiaries participates in the management
and, where required by the context, said term means the owner or operator of
such facility or property, but only with respect to such facility or property.
"Party" shall mean either JCN or Highwoods, and "Parties" shall mean both
JCN and Highwoods.
"Permit" shall mean any federal, state, local, and foreign governmental
approval, authorization, certificate, easement, filing, franchise, license,
notice, permit, or right to which any Person is a party or that is or may be
binding upon or inure to the benefit of any Person or its securities, Assets,
or business.
"Per Share Cash Consideration" shall have the meaning set forth in
Section 3.2.
"Per Share Stock Consideration" shall have the meaning set forth in
Section 3.1.
"Person" shall mean a natural person or any legal, commercial or
governmental entity, such as, but not limited to, a corporation, general
partnership, joint venture, limited partnership, limited liability company,
trust, business association, group acting in concert, or any person acting in a
representative capacity.
"Proxy Statement" shall mean the proxy statement used by JCN to solicit
the approval of its shareholders of the transactions contemplated by this
Agreement, which shall include the prospectus of Highwoods relating to the
issuance of the Highwoods Common Stock to holders of JCN Common Stock.
"Registration Statement" shall mean the Registration Statement on Form
S4, or other appropriate form, including any pre-effective or post-effective
amendments or supplements thereto, filed with the SEC by Highwoods under the
1933 Act with respect to the shares of Highwoods Common Stock to be issued to
the shareholders of JCN in connection with the transactions contemplated by
this Agreement.
"Regulatory Authorities" shall mean, collectively, the SEC, the NYSE, the
NASD, the Federal Trade Commission, the United States Department of Justice,
and all other federal, state, county, local or other governmental or regulatory
agencies, authorities (including self-regulatory authorities),
instrumentalities, commissions, boards or bodies having jurisdiction over the
Parties and their respective Subsidiaries.
"Representative" shall mean any investment banker, financial advisor,
attorney, accountant, consultant, or other representative engaged by a Person.
"SEC Documents" shall mean all forms, proxy statements, registration
statements, reports, schedules, and other documents filed, or required to be
filed, by a Party or any of its Subsidiaries with any Regulatory Authority
pursuant to the Securities Laws.
"Securities Laws" shall mean the 1933 Act, the 1934 Act, the Investment
Company Act of 1940, as amended, the Investment Advisors Act of 1940, as
amended, the Trust Indenture Act of 1939, as amended, and the rules and
regulations of any Regulatory Authority promulgated thereunder.
"Sub Common Stock" shall mean the $.01 par value common stock of Sub.
"Subsidiaries" shall mean all those corporations, associations, or other
business entities of which the entity in question either (i) owns or controls
50% or more of the outstanding equity securities either directly or through an
unbroken chain of entities as to each of which 50% or more of the outstanding
equity securities is owned directly or indirectly by its parent (provided,
there shall not be included any such entity the equity securities of which are
owned or controlled in a fiduciary capacity), (ii) in the case of partnerships,
serves as a general partner, (iii) in the case of a limited liability company,
serves as a managing member, or (iv) otherwise has the ability to elect a
majority of the directors, trustees or managing members thereof.
"Surviving Corporation" shall mean Sub as the surviving corporation
resulting from the Merger.
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<PAGE>
"Tax Return" shall mean any report, return, information return, or other
information required to be supplied to a taxing authority in connection with
Taxes, including any return of an affiliated or combined or unitary group that
includes a Party or its Subsidiaries.
"Tax" or "Taxes" shall mean any federal, state, county, local, or foreign
taxes, charges, fees, levies, imposts, duties, or other assessments, including
income, gross receipts, excise, employment, sales, use, transfer, license,
payroll, franchise, severance, stamp, occupation, windfall profits,
environmental, federal highway use, commercial rent, customs duties, capital
stock, paid-up capital, profits, withholding, Social Security, single business
and unemployment, disability, real property, personal property, registration,
ad valorem, value added, alternative or add-on minimum, estimated, or other tax
or governmental fee of any kind whatsoever, imposed or required to be withheld
by the United States or any state, county, local or foreign government or
subdivision or agency thereof, including any interest, penalties, and additions
imposed thereon or with respect thereto.
(b) The terms set forth below shall have the meanings ascribed thereto in
the referenced sections:
<TABLE>
<S> <C>
Business Combination Section 11.2
Cash Election Shares Section 3.2
Closing Section 1.2
Dissenting Share Amount Section 4.2
Effective Time Section 1.3
Election Deadline Section 3.2
Election Form Section 3.2
ERISA Affiliate Section 5.13(c)
ESOT Section 7.2(l)
Exchange Agent Section 3.2
Exchange Fund Section 4.1(a)
Exchange Ratio Section 3.1(c)
Highwoods Benefit Plans Section 6.13(a)
Highwoods ERISA Plan Section 6.13(a)
Highwoods Option Amount Section 3.2(ii)
Highwoods Pension Plan Section 6.13(a)
Highwoods SEC Reports Section 6.5(a)
JCN Benefit Plans Section 5.13(a)
JCN Contracts Section 5.14
JCN ERISA Plan Section 5.13(a)
JCN Options Section 3.7(a)
JCN Pension Plan Section 5.13(a)
JCN Retained Shares Section 3.2
JCN Non-Retained Shares Section 3.2
JCN Properties Section 5.9(a)
JCN Permitted Encumbrances Section 5.9(a)
JCN SEC Reports Section 5.5(a)
JCN Shareholders Meeting Section 3.2
Leases Section 5.9(b)
Mailing Date Section 3.2
Maximum Amount Section 8.14
Maximum Cash Election Amount Section 3.2(i)
Maximum Share Amount Section 3.2
Merger Section 1.1
New Certificates Section 4.1(a)
No Election Shares Section 3.2
Old Certificates Section 3.2
Record Date Section 3.2
Takeover Laws Section 5.19
</TABLE>
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<PAGE>
(c) Any singular term in this Agreement shall be deemed to include the
plural, and any plural term the singular. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed
followed by the words "without limitation."
11.2 Expenses.
(a) Except as otherwise provided in this Section 11.2, each of the
Parties shall bear and pay all direct costs and expenses incurred by it or
on its behalf in connection with the transactions contemplated hereunder,
including filing, registration and application fees, printing fees, and
fees and expenses of its own financial or other consultants, investment
bankers, accountants, and counsel.
(b) Notwithstanding the foregoing,
(i) if this Agreement is terminated by Highwoods pursuant to any of
Sections 10.1(b), 10.1(c) or 10.1(f); or
(ii) if the Merger is not consummated as a result of the failure of
JCN to satisfy any of the conditions set forth in Section 9.2,
then JCN shall promptly pay Highwoods the sum of $2,500,000, which amount
represents the costs and expenses of Highwoods (including reasonable costs of
counsel, investment bankers, actuaries and accountants).
(c) Notwithstanding the foregoing,
(i) if this Agreement is terminated by JCN pursuant to either of
Sections 10.1(b) or 10.1(c); or
(ii) if the Merger is not consummated as a result of the failure of
Highwoods to satisfy any of the conditions set forth in Section 9.3,
then Highwoods shall promptly pay JCN $2,500,000, which amount represents the
costs and expenses of JCN (including reasonable costs of counsel, investment
bankers, actuaries and accountants).
(d) In addition to the foregoing, if within twelve (12) months following:
(i) any termination of this Agreement by Highwoods pursuant to
Sections 10.1(b), 10.1(c), or 10.1(f); or
(ii) failure to consummate the Merger by reason of any failure of JCN
to satisfy the conditions enumerated in Section 9.2; or
any third-party shall acquire, merge with, combine with, purchase more than 40%
of the Assets of, or engage in any other business combination with, or purchase
any equity securities involving the acquisition of 50% or more of the voting
stock of JCN or a transaction which results in a Person owning 50% or more of
the voting stock of JCN, or enter into any binding agreement to do any of the
foregoing (collectively, a "Business Combination"), such third-party that is a
party to the Business Combination shall pay to Highwoods, prior to the earlier
of consummation of the Business Combination or execution of any letter of
intent or definitive agreement with JCN or any JCN Entity relating to such
Business Combination, an amount in cash equal to the sum of
(x) $14,700,000, plus
(y) the amount described in subsection (b) of this Section 11.2 (if not
previously paid to Highwoods);
provided, however, that in the event: (i) there has been no Business
Combination consummated or a letter of intent or definitive agreement relating
to a Business Combination entered into at or prior to the time of the JCN
Shareholders Meeting, (ii) this Agreement is terminated or terminable by
Highwoods under Section 10.1(f), and (iii) within 12 months of such meeting or
such termination, a Business Combination is consummated, then such third party
shall pay to Highwoods, at the time of consummation of the Business
Combination, an amount in cash equal to the sum of
(xx) $7,350,000; plus
(yy) the amount described in subsection (b) of this Section 11.2 (if not
previously paid to Highwoods);
which payments represent additional compensation for Highwoods' loss as the
result of the transactions contemplated by this Agreement not being
consummated. In the event such third-party shall refuse to pay such amounts
within ten days of demand therefor by Highwoods, the amounts shall be an
obligation of JCN and shall be paid by JCN within two business days of notice
to JCN by Highwoods. Notwithstanding anything herein to the contrary, if: (i)
Highwoods would not have had the right to terminate this Agreement under
Section 10.1(f) above, and (ii) JCN has not intentionally taken any action
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<PAGE>
reasonably likely to afford Highwoods the right to terminate this Agreement
pursuant to 10.1(b) or 10.1(c) or JCN has not intentionally failed to satisfy
any of the conditions set forth in Section 9.2, then no payments shall be due
to Highwoods pursuant to this Section 11.2(d).
(e) Notwithstanding the foregoing, if
(i) this Agreement is not terminable by Highwoods pursuant to Section
10.1(f); and
(ii) this Agreement is terminated by either Party pursuant to Section
10.1(d)(ii);and
(iii) at the time of the JCN Shareholders Meeting there is public
knowledge of an identifiable third party's financially superior proposal
to purchase all of the then outstanding JCN Common Stock; and
(iv) the proposal by such third party referred to in clause (iii)
above is accepted and closes within 12 months of the date of this
Agreement,
then the third party making such proposal shall pay to Highwoods, upon
consummation of the transaction, the sum of $2,500,000, which amount represents
the costs and expenses of Highwoods (including reasonable costs of counsel,
investment bankers, actuaries and accountants). In the event such third party
does not make such payment within ten days of demand therefor by Highwoods, the
payment shall be an obligation of JCN and shall be paid by JCN within two
business days of notice to JCN by Highwoods.
11.3 Brokers and Finders. Except for Morgan Stanley, Dean Witter, Discover
& Co. as to JCN and except for J.P. Morgan Securities Inc. as to Highwoods,
each of the Parties represents and warrants that neither it nor any of its
officers, directors or employees has employed any broker or finder or incurred
any Liability for any financial advisory fees, investment bankers' fees,
brokerage fees, commissions, or finders' fees in connection with this Agreement
or the transactions contemplated hereby. In the event of a claim by any broker
or finder based upon his or its representing or being retained by or allegedly
representing or being retained by JCN or by Highwoods, each of JCN and
Highwoods, as the case may be, agrees to indemnify and hold the other Party
harmless of and from any Liability in respect of any such claim.
11.4 Entire Agreement. Except as otherwise expressly provided herein, this
Agreement (including the documents and instruments referred to herein)
constitutes the entire agreement between the Parties with respect to the
transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereto, written or oral (except, as to Section
8.6(b), for the Confidentiality Agreement). Nothing in this Agreement expressed
or implied, is intended to confer upon any Person, other than the Parties or
their respective successors, any rights, remedies, obligations, or liabilities
under or by reason of this Agreement, other than as provided in Sections 8.13
and 8.14.
11.5 Amendments. To the extent permitted by Law, this Agreement may be
amended by a subsequent writing signed by each of the Parties upon the approval
of each of the Parties, whether before or after shareholder approval of this
Agreement has been obtained; provided, that after any such approval by the
holders of JCN Common Stock, there shall be made no amendment that reduces or
modifies in any material respect the consideration to be received by holders of
JCN Common Stock.
11.6 Waivers.
(a) Prior to or at the Effective Time, Highwoods, acting through its Board
of Directors, chief executive officer or other authorized officer, shall have
the right to waive any Default in the performance of any term of this Agreement
by JCN, to waive or extend the time for the compliance or fulfillment by JCN of
any and all of its obligations under this Agreement, and to waive any or all of
the conditions precedent to the obligations of Highwoods under this Agreement,
except any condition which, if not satisfied, would result in the violation of
any Law. No such waiver shall be effective unless in writing signed by a duly
authorized officer of Highwoods.
(b) Prior to or at the Effective Time, JCN, acting through its Board of
Directors, chief executive officer or other authorized officer, shall have the
right to waive any Default in the performance of any term of this Agreement by
Highwoods, to waive or extend the time for the compliance or fulfillment by
Highwoods of any and all of its obligations under this Agreement, and to waive
any or all of the conditions precedent to the obligations of JCN under this
Agreement, except any condition which, if not satisfied, would result in the
violation of any Law. No such waiver shall be effective unless in writing
signed by a duly authorized officer of JCN.
(c) The failure of any Party at any time or times to require performance
of any provision hereof shall in no manner affect the right of such Party at a
later time to enforce the same or any other provision of this Agreement. No
waiver of any
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<PAGE>
condition or of the breach of any term contained in this Agreement in one or
more instances shall be deemed to be or construed as a further or continuing
waiver of such condition or breach or a waiver of any other condition or of the
breach of any other term of this Agreement.
11.7 Assignment. Except as expressly contemplated hereby, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by any Party hereto (whether by operation of Law or otherwise) without
the prior written consent of the other Party. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the Parties and their respective successors and assigns.
11.8 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered by hand, by
facsimile transmission, by registered or certified mail, postage pre-paid, or
by courier or overnight carrier, to the persons at the addresses set forth
below (or at such other address as may be provided hereunder), and shall be
deemed to have been delivered as of the date so delivered:
JCN:
J.C. Nichols Company
310 Ward Parkway
Kansas City, Missouri 64112
Telecopy Number: (816) 561-3456
Attention: Barrett Brady
Copy to Counsel:
Blackwell Sanders Matheny Weary & Lombardi L.L.P.
Two Pershing Square, Suite 1100
Kansas City, Missouri 64108
Telecopy Number: (816) 983-8080
Attention: Steve Carman
and to:
Weil, Gotshal & Manges L.L.P.
767 Fifth Avenue
New York, New York 10153
Telecopy Number: (212) 310-8007
Attention: Steve Jacobs
Highwoods:
Highwoods Properties, Inc.
3100 Smoketree Court, Suite 600
Raleigh, North Carolina 27604
Telecopy Number: (919) 876-6929
Attention: Mack D. Pridgen, III,
Vice President and General Counsel
Copy to Counsel:
Alston & Bird LLP
3605 Glenwood Avenue, Suite 310
Raleigh, North Carolina 27612
Telecopy Number: (919) 881-3175
Attention: Brad S. Markoff
11.9 Governing Law. This Agreement shall be governed by and construed in
accordance with the Laws of the State of Missouri, without regard to any
applicable conflicts of Laws.
11.10 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
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<PAGE>
11.11 Captions; Articles and Sections. The captions contained in this
Agreement are for reference purposes only and are not part of this Agreement.
Unless otherwise indicated, all references to particular Articles or Sections
shall mean and refer to the referenced Articles and Sections of this Agreement.
11.12 Interpretations. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against any party, whether
under any rule of construction or otherwise. No party to this Agreement shall
be considered the draftsman. The parties acknowledge and agree that this
Agreement has been reviewed, negotiated, and accepted by all parties and their
attorneys and shall be construed and interpreted according to the ordinary
meaning of the words used so as fairly to accomplish the purposes and
intentions of all parties hereto.
11.13 Enforcement of Agreement. The Parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the Parties shall be entitled to an
injunction or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy to
which they are entitled at law or in equity.
11.14 Severability. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
executed on its behalf by its duly authorized officers as of the day and year
first above written.
HIGHWOODS PROPERTIES, INC.
By:-------------------------------------
President
JACKSON ACQUISITION CORP.
By:-------------------------------------
President
J.C. NICHOLS COMPANY
By:-------------------------------------
President
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<PAGE>
Exhibit 1
MATTERS AS TO WHICH BLACKWELL SANDERS MATHENY WEARY &
LOMBARDI LLP WILL OPINE
1. JCN is a corporation duly organized, validly existing and in good
standing under the laws of the State of Missouri, with full corporate power and
authority to carry on the business in which it is engaged and to own and use
its Assets.
2. The authorized capital stock of JCN consists of shares of JCN
Common Stock, of which shares were issued and outstanding as of , 19 .
Subsequent to September 1995, no shares of JCN Common Stock have been issued in
violation of any statutory preemptive rights of shareholders, and all shares
issued since such date were duly issued and are fully paid and nonassessable
under the Missouri Business Corporation Act. To our knowledge, except as set
forth above or as disclosed in Section 5.3 of the JCN Disclosure Memorandum, as
of , 19 there were no shares of capital stock or other equity
securities of JCN outstanding and no outstanding Equity Rights relating to the
capital stock of JCN.
3. The execution and delivery of the Agreement and compliance with its
terms do not and will not violate or contravene any provision of the Articles
of Incorporation or Bylaws of JCN or, to our knowledge but without any
independent investigation, result in any conflict with, breach of, or default
or acceleration under any Law or Order to which JCN is a party or by which JCN
is bound, except as may be disclosed in the JCN Disclosure Memorandum.
4. The Agreement has been duly and validly executed and delivered by JCN
and, assuming valid authorization, execution and delivery by Highwoods and Sub,
constitutes a valid and binding agreement of JCN enforceable in accordance with
its terms, except as enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, provided,
however, that we express no opinion as to the availability of the equitable
remedy of specific performance.
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<PAGE>
Exhibit 2
MATTERS AS TO WHICH ALSTON & BIRD LLP WILL OPINE
1. Highwoods is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland with full corporate power and
authority to carry on the business in which it is engaged, and to own and use
its Assets.
2. Sub is a corporation duly organized and validly existing and in good
standing under the laws of the State of Maryland with full corporate power and
authority to carry on the business in which it is engaged, and to own and use
its Assets.
3. The execution and delivery of the Agreement and compliance with its
terms do not and will not violate or contravene any provision of the Amended
and Restated Articles of Incorporation or Bylaws of Highwoods or, to our
knowledge but without any independent investigation, any Law or Order to which
Highwoods is a party or by which Highwoods is bound. The adoption of the
Agreement and compliance with its terms do not and will not violate or
contravene any provision of the Articles of Incorporation or Bylaws of Sub or,
to our knowledge but without any independent investigation, any Law or Order to
which Sub is a party or by which Sub is bound.
4. The Agreement has been duly and validly executed and delivered by
Highwoods and Sub, and assuming valid authorization, execution and delivery by
JCN, constitutes a valid and binding agreement of Highwoods and Sub enforceable
in accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, or similar laws affecting creditors'
rights generally, provided, however, that we express no opinion as to the
availability of the equitable remedy of specific performance.
5. The shares of Highwoods Common Stock to be issued to the shareholders
of JCN as contemplated by the Agreement have been registered under the
Securities Act of 1933, as amended, and when properly issued and delivered
following consummation of the Merger will be fully paid and non-assessable
under the General Corporation Law of Maryland.
A-40
<PAGE>
Appendix A-1
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 1 TO AGREEMENT AND PLAN OF MERGER (this "Amendment") is
dated as of April 23, 1998, by and among HIGHWOODS PROPERTIES, INC., a Maryland
corporation ("Highwoods"), JACKSON ACQUISITION CORP., a Maryland corporation
("Sub"), and J.C. NICHOLS COMPANY, a Missouri corporation ("JCN"). Capitalized
terms used but not defined herein shall have the meanings set forth in the
Agreement and Plan of Merger dated as of December 22, 1997 and entered into
among Highwoods, Sub, and JCN (the "Agreement").
WHEREAS, the Parties wish to amend the Agreement, which contemplates the
merger of JCN with and into Sub (the "Merger"), in order to provide to JCN
shareholders greater certainty in determining the amount and form of
consideration to be received in the Merger; and
WHEREAS, Highwoods wishes to waive a condition to its obligation to
consummate the Merger.
NOW, THEREFORE, in consideration of the foregoing premises, covenants, and
agreements contained herein, and other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties to this Amendment,
intending to be legally bound, hereby agree as follows:
SECTION I
AMENDMENT TO ARTICLE 3
Section 1.1 Conversion of Shares. Section 3.1 (c) is hereby amended in its
entirety to read as follows:
(c) Subject to the right granted in Section 3.2, each share of JCN Common
Stock (including any associated JCN Rights, but excluding shares held by
any JCN Entity or any Highwoods Entity and excluding shares held by
shareholders who perfect their statutory dissenters' rights as provided in
Section 3.5) issued and outstanding immediately prior to the Effective
Time shall cease to be outstanding and shall be converted into a fixed
number of shares of Highwoods Common Stock. The number of shares of
Highwoods Common Stock to be issued for each share of JCN Common Stock
(the "Per Share Stock Consideration") shall be determined by reference to
a ratio (the "Exchange Ratio") that shall be equal to the greater of: (i)
1.84, or (ii) the quotient of $65 divided by the average of the daily
average high and low sale price for shares of Highwoods Common Stock on
the NYSE for each of the twenty (20) days immediately preceding the
Effective Time; provided, however, that at no time shall the Exchange
Ratio exceed 2.03. Pursuant to the Highwoods Rights Agreement, each share
of Highwoods Common Stock issued in connection with the Merger upon
conversion of JCN Common Stock shall be accompanied by a Highwoods Right.
Section 1.2 Cash Election. Section 3.2 is hereby amended in its entirety to
read as follows:
3.2 Cash Election. Holders of JCN Common Stock shall be provided with
an opportunity to elect to receive cash consideration in lieu of receiving
Highwoods Common Stock in the Merger, in accordance with the election
procedures set forth below in this Section 3.2. Holders who are to receive
cash in lieu of exchanging their shares of JCN Common Stock for Highwoods
Common Stock as specified below shall receive $65 per share of JCN Common
Stock in cash (the "Per Share Cash Consideration"). The amount determined
by multiplying $65 by the number of Dissenting Shares shall be defined
herein as the "Dissenting Share Amount." The aggregate Per Share Cash
Consideration to be paid in the Merger, plus the Dissenting Share Amount,
shall be limited to 40% of the aggregate consideration paid in exchange
for shares of JCN Common Stock and shall be defined herein as the "Cash
Amount."
A form for use by JCN shareholders to elect to receive cash and other
appropriate and customary transmittal material (which shall specify that
delivery shall be effected only upon proper delivery of the certificates
theretofore representing JCN Common Stock ("Old Certificates") to an
exchange agent designated by Highwoods (the "Exchange Agent")) in such
form as Highwoods and JCN shall mutually agree ("Election Form") shall be
mailed concurrently with the mailing of the Proxy Statement required by
Section 8.1 hereof, or on such other date as Highwoods and JCN shall
mutually agree ("Mailing Date") to each holder of record of JCN Common
Stock on the record date ("Record Date") for the JCN shareholders
A-41
<PAGE>
entitled to vote at the shareholders meeting to approve the Merger as
required by Section 8.1 (the "JCN Shareholders Meeting").
Each Election Form shall permit a holder (or the beneficial owner
through appropriate and customary documentation and instructions) of JCN
Common Stock to elect to receive cash with respect to all or a portion of
such holder's JCN Common Stock.
Any shares of JCN Common Stock with respect to which the holder (or the
beneficial owner, as the case may be) elects to receive cash and does not
dissent shall be referred to herein as the "Cash Election Shares." Any
shares of JCN Common Stock with respect to which the holder (or the
beneficial owner, as the case may be) either does not submit an Election
Form or does not elect to receive cash and does not dissent, shall be
collectively referred to herein as "Stock Election Shares."
Any of the elections set forth in the foregoing paragraph shall have
been properly made only if the Exchange Agent shall have actually received
an effective, properly completed Election Form on or before 5:00 p.m. on
the fifth business day prior to the date of the JCN Shareholders Meeting
(or such other time and date as Highwoods and JCN may mutually agree,
including as a result of any adjournment or postponement of the JCN
Shareholders Meeting) (the "Election Deadline") which is not revoked or
changed prior to the Election Deadline. Any Election Form may be revoked
or changed by the person submitting a subsequent Election Form at or prior
to the Election Deadline. In the event an Election Form is revoked prior
to the Election Deadline, the shares of JCN Common Stock represented by
such Election Form shall become Stock Election Shares unless the Exchange
Agent shall have actually received an effective, properly completed
Election Form prior to the Election Deadline and such Election Form is not
revoked or changed prior to the Election Deadline. Subject to the terms of
this Agreement and of the Election Form, the Exchange Agent shall have
reasonable discretion to determine whether any election, revocation or
change has been properly or timely made and to disregard immaterial
defects in the Election Forms, and any good faith decisions of the
Exchange Agent regarding such matters shall be binding and conclusive. The
Exchange Agent shall promptly notify JCN of any defect in an Election Form
other than an immaterial defect disregarded in good faith by the Exchange
Agent. Subject to the foregoing sentence, neither Highwoods nor the
Exchange Agent shall be under any obligation to notify any person of any
defect in an Election Form.
Within three business days after the Election Deadline, Highwoods shall
cause the Exchange Agent to effect the allocation among the holders of JCN
Common Stock in accordance with the Election Forms; provided, however, if
the amount of cash that would be issued upon the conversion of the Cash
Election Shares is greater than the amount by which the Cash Amount
exceeds the Dissenting Share Amount (the "Maximum Cash Election Amount"),
then the Exchange Agent shall convert a sufficient number of Cash Election
Shares (other than Dissenting Shares) into the right to receive the Per
Share Stock Consideration, which Cash Election Shares shall be selected
pro rata from among all of the holders thereof, based upon the aggregate
number of Cash Election Shares held by each of such holders, such that the
amount of cash that will be issued in the Merger to satisfy the
non-converted Cash Election Shares equals as closely as practicable the
Maximum Cash Election Amount.
Highwoods shall, at least two business days prior to the date of the
JCN Shareholders Meeting, communicate to JCN the aggregate allocation of
stock and cash, the amount of stock and cash going to each of JCN's
shareholders, and the method in which such amounts were calculated.
SECTION II
AMENDMENT TO ARTICLE 9
Section 2.1 Waiver by Highwoods of Certain Obligations. The introductory
paragraph to Section 9.1 of the Agreement is hereby amended in its entirety to
read as follows:
9.1 Conditions to Obligations of Each Party. The respective obligations
of each Party to perform this Agreement and consummate the Merger and the
other transactions contemplated hereby are subject to the satisfaction of
the conditions set forth below in this Section 9.1. JCN may waive,
pursuant to Section 11.6, one or more of the following conditions.
Highwoods hereby irrevocably waives and agrees to waive immediately prior
to Closing, pursuant to Section 11.6, all of the conditions set forth in
Section 9.1(b) (except
A-42
<PAGE>
for the filing of the Articles of Merger as contemplated by Section
1.1) and the condition set forth in Section 9.1(c) that JCN obtain
from Principal Mutual Insurance Company the Consent to the Merger
referred to in Section 9.1 of the JCN Disclosure Memorandum.
SECTION III
AMENDMENT TO ARTICLE 10
Section 3.1 Waiver by Highwoods of Certain Termination Rights. Section
10.1(d)(i) is hereby amended in its entirety to read as follows:
(i) Highwoods shall, after using its best efforts, have been unable
to satisfy the condition to closing set forth in either Section 9.1(e)
or (f), to the extent required for consummation of the Merger and the
other transactions contemplated hereby, or
SECTION IV
AMENDMENT TO ARTICLE 11.1
Section 4.1 Definitions.
(a) Section 11.1(a) is hereby amended by adding the phrase, "as
such Section has been amended by Amendment No. 1 to this Agreement" to
the end of the definition of "Per Share Stock Consideration".
(b) Section 11.1(b) is hereby amended by adding the phrase "as
amended by Amendment No. 1 to this Agreement" after the end of each of
the definitions of "Cash Election Shares" and "Maximum Cash Election
Amount".
SECTION V
GENERAL PROVISIONS
Section 5.1 Entire Agreement. Except as otherwise expressly provided
herein, this Amendment (including the Agreement and the documents and
instruments referred to therein) constitutes the entire agreement between the
Parties with respect to the transactions contemplated hereunder and in the
Agreement and supersedes all other arrangements or understandings with respect
thereto, written or oral (except for the Confidentiality Agreement referred to
in Section 8.6(b) of the Agreement and any correspondence from any Party
waiving any rights or obligations or consenting to any actions taken by or on
behalf of another party).
Section 5.2 Counterparts. This Amendment may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
Section 5.3 Captions, Articles and Sections. The captions contained in
this Amendment are for reference purposes only and are not part of this
Amendment. Unless otherwise indicated, all references to particular Articles or
Sections shall mean and refer to the referenced Articles and Sections of this
Amendment.
Section 5.4 References to the Agreement. From and after the execution of
this Amendment, all references in the Agreement to "this Agreement," "hereof,"
"herein" and similar terms shall mean and refer to the Agreement as amended by
this Amendment, and all references in other documents to the Agreement shall
mean the Agreement as amended by this Amendment. This Amendment shall not be
modified, supplemented or terminated in any manner whatsoever except by written
instrument signed by the party against which such modification, supplement or
termination is sought to be enforced.
Section 5.5 Ratification and Confirmation. The Agreement is hereby
ratified and confirmed and, except as herein amended, remains in full force and
effect.
Section 5.6 Governing Law. This Amendment shall be governed by and
construed in accordance with the Laws of the State of Missouri, without regard
to any applicable conflicts of Laws.
A-43
<PAGE>
IN WITNESS WHEREOF, Highwoods, Sub, and JCN have caused this Amendment to
be signed by their respective duly authorized officers as of the date first
written above.
HIGHWOODS PROPERTIES, INC.
By: ------------------------------------
Name: ----------------------------------
Title: -----------------------------------
JACKSON ACQUISITION CORP.
By: ------------------------------------
Name: ----------------------------------
Title: -----------------------------------
J.C. NICHOLS COMPANY
By: ------------------------------------
Name: ----------------------------------
Title: -----------------------------------
A-44
<PAGE>
Appendix B
MORGAN STANLEY
MORGAN STANLEY & CO.
INCORPORATED
1585 BROADWAY
NEW YORK, NEW YORK 10036
(212) 761-4000
May 15, 1998
Board of Directors
J.C. Nichols Company
310 Ward Parkway
Kansas City, MO 64112
Members of the Board:
We understand that J.C. Nichols Company ("JCN" or the "Company"),
Highwoods Properties, Inc. ("Highwoods" or "Buyer") and Jackson Acquisition
Corp. ("Acquisition Sub") have entered into an Agreement and Plan of Merger,
dated December 22, 1997 (the "Original Merger Agreement"), and Amendment No. 1
to the Original Merger Agreement, dated April 29, 1998 (together with the
Original Merger Agreement, the "Merger Agreement"), which provides, among other
things, for the merger (the "Merger") of JCN with and into Acquisition Sub.
Pursuant to the Merger, each outstanding share of common stock, par value $0.01
per share (the "JCN Common Stock") of JCN, other than shares held in treasury
or held by Buyer or any affiliate of Buyer or as to which dissenters' rights
have been perfected, will cease to be outstanding and be converted into a fixed
number of shares of common stock of Buyer, par value $0.01 per share (the
"Buyer Common Stock"). The number of shares of Buyer Common Stock to be issued
for each share of JCN Common Stock will be determined by reference to a ratio
(the "Exchange Ratio") that shall be equal to the greater of: (i) 1.84, or (ii)
the quotient of $65 divided by the average of the daily average high and low
sale price for shares of Buyer Common Stock on the New York Stock Exchange for
each of the twenty (20) days immediately preceding the Effective Time, as
defined in the Merger Agreement; provided, however, that at no time shall the
Exchange Ratio exceed 2.03. Holders of JCN Common Stock will also be provided
with an opportunity to elect to receive cash consideration in lieu of receiving
Buyer Common Stock in an amount equal to $65 per share of JCN Common Stock in
cash (the "Per Share Cash Consideration"); provided that the aggregate Per
Share Cash Consideration to be paid in the Merger, plus the Dissenting Share
Amount (as defined in the Merger Agreement), shall be limited to 40% of the
aggregate consideration paid in exchange for shares of JCN Common Stock. The
terms and conditions of the Merger are more fully set forth in the Merger
Agreement.
You have asked for our opinion as to whether the consideration to be
received by the holders of shares of JCN Common Stock pursuant to the Merger
Agreement is fair from a financial point of view to such holders (other than
Buyer and its affiliates).
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company and Buyer, respectively;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning the Company and Buyer and prepared by the
managements of the Company and Buyer, respectively;
(iii) analyzed certain financial projections for the Company and Buyer
prepared by the managements of the Company and Buyer, respectively;
(iv) reviewed the reported prices and trading activity for the JCN Common
Stock and the Buyer Common Stock;
(v) compared the financial performance of the Company and the Buyer and the
prices and trading activity of the JCN Common Stock and Buyer Common
Stock with that of certain other comparable publicly-traded companies
and their securities;
(vi) discussed with the senior management of the Company and Buyer their
estimates of the synergies and cost savings expected to be derived from
the Merger;
(vii) reviewed the financial terms, to the extent publicly available, of
certain comparable transactions;
(viii) reviewed the pro forma impact of the Merger on the Buyer's funds from
operations per share, consolidated capitalization and financial ratios;
B-1
<PAGE>
Board of Directors
JCN Properties Corporation MORGAN STANLEY
May 15, 1998
Page 2
(ix) participated in discussions and negotiations among representatives of
the Company and Buyer and their financial and legal advisors;
(x) reviewed the Merger Agreement, the Registration Statement on Form
S-4, including the Proxy Statement/
Prospectus relating to the Special Meeting of the Holders of JCN Common
Stock to be held pursuant to the Merger Agreement, and certain related
documents; and
(xi) performed such other analyses as we have deemed appropriate.
We have assumed and relied upon without independent verification the
accuracy and completeness of the information reviewed by us for the purposes of
this opinion. With respect to the financial projections, including the
estimates of synergies and cost savings expected to be derived from the Merger,
we have assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the future financial
performance of the Company and Buyer. We have not made any independent
valuation or appraisal of the assets or liabilities of the Company or Buyer,
nor have we been furnished with any such appraisals other than the common stock
valuation prepared by Houlihan Lokey Howard & Zukin as of December 31, 1996 and
furnished to us by the Company. Our opinion is necessarily based on economic,
market and other conditions as in effect on, and the information made available
to us as of, the date hereof.
We have acted as financial advisor to the Board of Directors of the
Company in connection with this transaction and will receive a fee for our
services. In the past, Morgan Stanley & Co. Incorporated and its affiliates
have provided financial advisory and financing services for the Company and
Buyer and have received fees for the rendering of these services.
It is understood that this letter is for the information of the Board of
Directors of JCN only and may not be used for any other purpose without our
prior written consent, except that this opinion may be included in its entirety
in any filing made by JCN or Highwoods with the Securities and Exchange
Commission with respect to the Merger. We express no opinion and make no
recommendation as to how shareholders of JCN should vote at any shareholders'
meeting to be held in connection with the Merger.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the consideration to be received by the holders of shares of JCN
Common Stock pursuant to the Merger Agreement is fair from a financial point of
view to such holders (other than Buyer and its affiliates).
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ YIE-HSIN HUNG
----------------------------------
Yie-Hsin Hung
Principal
B-2
<PAGE>
Appendix C
Missouri Revised Statutes, Section 351.455:
Shareholder Who Objects to Merger May Demand Value of Shares, When.
1. If a shareholder of a corporation which is a party to a merger or
consolidation shall file with such corporation, prior to or at the meeting of
shareholders at which the plan of merger or consolidation is submitted to a
vote, a written objection to such plan of merger or consolidation, and shall
not vote in favor thereof, and such shareholder, within twenty days after the
merger or consolidation is effected, shall make written demand on the surviving
or new corporation for payment of the fair value of his shares as of the day
prior to the date on which the vote was taken approving the merger or
consolidation, the surviving or new corporation shall pay to such shareholder,
upon surrender of his certificate or certificates representing said shares, the
fair value thereof. Such demand shall state the number and class of the shares
owned by such dissenting shareholder. Any shareholder failing to make demand
within the twenty day period shall be conclusively presumed to have consented
to the merger or consolidation and shall be bound by the terms thereof.
2. If within thirty days after the date on which such merger or
consolidation was effected the value of such shares is agreed upon between the
dissenting shareholder and the surviving or new corporation, payment therefor
shall be made within ninety days after the date on which such merger or
consolidation was effected, upon the surrender of his certificate or
certificates representing said shares. Upon payment of the agreed value the
dissenting shareholder shall cease to have any interest in such shares or in
the corporation.
3. If within such period of thirty days the shareholder and the surviving
or new corporation do not so agree, then the dissenting shareholder may, within
sixty days after the expiration of the thirty day period, file a petition in
any court of competent jurisdiction within the county in which the registered
office of the surviving or new corporation is situated, asking for a finding
and determination of the fair value of such shares, and shall be entitled to
judgment against the surviving or new corporation for the amount of such fair
value as of the day prior to the date on which such vote was taken approving
such merger or consolidation, together with interest thereon to the date of
such judgment. The judgment shall be payable only upon and simultaneously with
the surrender to the surviving or new corporations of the certificate or
certificates representing said shares. Upon the payment of the judgment, the
dissenting shareholder shall cease to have any interest in such shares, or in
the surviving or new corporation. Such shares may be held and disposed of by
the surviving or new corporation as it may see fit. Unless the dissenting
shareholder shall file such petition within the time herein limited, such
shareholder and all persons claiming under him shall be conclusively presumed
to have approved and ratified the merger or consolidation, and shall be bound
by the terms thereof.
4. The right of a dissenting shareholder to be paid the fair value of his
shares as herein provided shall cease if and when the corporation shall abandon
the merger or consolidation.
C-1
<PAGE>
PROXY PROXY
J.C. NICHOLS COMPANY
This Proxy is Solicited on Behalf of the Board of Directors.
The undersigned hereby appoints William K. Hoskins and Barrett Brady and
anyone or more of them, with full power of substitution, as a proxy or proxies
to represent and to vote, as designated below, all the shares of Common Stock
of J.C. Nichols Company the undersigned is entitled to vote at the Special
Meeting of Shareholders to be held on July 1, 1998, or any adjournment or
postponement thereof. This proxy revokes all prior proxies given by the
undersigned. Please mark vote in box in the following manner using dark ink
only. -The Board of Directors recommends a vote FOR the following proposal:
1. Approval of the Agreement and Plan of Merger among Highwoods Properties,
Inc., Jackson Acquisition Corp. and J.C. Nichols Company, pursuant to
which the Company's shareholders may elect to receive either shares of
Highwoods common stock or cash in exchange for shares of Company common
stock.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY
USING THE ENCLOSED PREPAID ENVELOPE.
(Continued and to be signed on the reverse side)
<PAGE>
J.C. NICHOLS COMPANY
This proxy, when properly executed, will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy
will be voted FOR the Merger Agreement.
2. The named proxies may vote in their discretion upon such other business
as may properly come before the Special Meeting, and all matters incident
to the conduct of the Special Meeting. If you have voted against the first
proposal, the named proxies may not vote the shares represented by this
proxy in favor of any adjournment or postponement intended to permit
further solicitation.
-----------------------------------------------------------------------------
Printed Name of Certificate Holder
------------------------------ , 1998
Signature Date
------------------------------ , 1998
Signature(s) (if Jointly Held) Date
------------------------------ , 1998
Title (If Applicable) Date
---------------------------------
Please sign exactly as name appears on
your stock certificate. When shares are
held by joint tenants, both should sign.
When signing as attorney, executor,
administrator, trustee or guardian,
please give full title as such. If a
corporation, please sign in full
corporate name by President or other
authorized officer. If a partnership,
please sign in partnership name by an
authorized person.
<PAGE>
ELECTION FORM
THIS ELECTION FORM MUST BE COMPLETED AND DELIVERED BY TO:
First Union National Bank
-------------------
-------------------
Attention:
Telephone No.:---------
Facsimile No.:---------
An envelope addressed to First Union National Bank (the "Exchange Agent")
is enclosed for your convenience. Delivery of this instrument to an address
other than as set forth above will not constitute valid delivery.
On December 22, 1997, Highwoods Properties, Inc. ("Highwoods"), Jackson
Acquisition Corp. and J.C. Nichols Company (the "Company") entered into an
Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the Merger
Agreement, as amended, all of the issued and outstanding shares of common stock
of the Company are to be converted into either the right to receive between
1.84 and 2.03 shares of Highwoods common stock, or $65 in cash or a combination
of the two, as elected by the holder thereof (subject to the limitations set
forth in the Merger Agreement). The right to receive Highwoods common stock or
cash, as the case may be, is subject to the completion of this Election Form.
TO FIRST UNION NATIONAL BANK:
By executing this Election Form, the undersigned hereby elects to receive
cash for the number of his or her shares of Company common stock set forth
below. The undersigned understands that the Exchange Agent will pay cash in
lieu of any fractional shares of Highwoods common stock otherwise issuable in
connection with the transaction contemplated by the Merger Agreement.
The undersigned hereby represents and warrants that the undersigned is, as
of the date hereof, the registered holder or assignee of the registered holder
of the Company common stock for which the election below is. The undersigned
will, upon request, execute any additional documents necessary or desirable to
complete the surrender and exchange of such Company common stock. All authority
conferred or agreed to be conferred in this Election Form shall be binding upon
the successors, assigns, heirs, executors, administrators and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. The Exchange Agent
reserves the right to waive any defect in this Election Form.
If you wish to receive Highwoods common stock for all of your shares of
Company common stock, you should either enter a "0" in the appropriate blank
below or not submit this Election Form at all. If you wish to receive a
combination of cash and Highwoods common stock for your shares of Company
common stock, you should state, in the appropriate blank below, the number of
shares of Company common stock for which you wish to receive cash. If you wish
to receive cash for all of your shares of Company common stock, you should, in
the appropriate blank below, either enter the total number of shares of Company
common stock you own or write the word "all."
IMPORTANT: COMPLETE THIS SECTION
[ ] I hereby elect to receive cash for of my shares of Company common
stock.
X-------------------------------------------------------------------------
(Signature(s) of Holder(s))
Dated:-------------------------------------------------------------- , 1998
Name:----------------------------------------------------------------------
Authorized Signature:-----------------------------------------------------
Print Name of Authorized Signor:-------------------------------------------
Title of Authorized Signor (if applicable):--------------------------------
<PAGE>
INSTRUCTIONS TO ELECTION FORM
This Election Form must be properly filled in, dated and signed and must
be either sent to the Exchange Agent or delivered by hand to the Exchange Agent
at the address listed above. Delivery of your Election Form will not be
complete until actually received by the Exchange Agent. The signature on this
Election Form must correspond exactly with the name appearing on the holder's
stock certificate(s). Joint owners should each sign personally. The person
signing on behalf of an entity must give such person's full title in such
capacity, if applicable. The Exchange Agent will give notification to the
Company of defects in this Election Form or in any other required documents.
The terms and conditions of the Merger Agreement are incorporated herein by
reference and are deemed to form a part of the terms and conditions of this
Election Form for all purposes.
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. Indemnification of Directors and Officers
Highwoods' officers and directors are and will be indemnified against
certain liabilities in accordance with the MGCL, the Articles of Incorporation
and bylaws of Highwoods and the Highwoods Operating Partnership Agreement. The
Articles of Incorporation require Highwoods 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 Highwoods Operating Partnership Agreement also provides for
indemnification of Highwoods and its officers and directors to the same extent
indemnification is provided to officers and directors of Highwoods in its
Articles of Incorporation and limits the liability of Highwoods and its
officers and directors to the Highwoods Operating Partnership and its partners
to the same extent liability of officers and directors of Highwoods to
Highwoods and its stockholders is limited under Highwoods' Articles of
Incorporation.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Highwoods
pursuant to the foregoing provisions, Highwoods 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.
ITEM 21. Exhibits
<TABLE>
<CAPTION>
Ex. FN Description
- -------- --------- ----------------------------------------------------------------------------------------------
<S> <C> <C>
2 (1) Master Agreement and Plan of Merger by and among the Registrant, Jackson Acquisition
Corp. and J.C. Nichols Company dated December 22, 1997, as amended on April 29, 1998
3.1 (2) Amended and Restated Articles of Incorporation of the Registrant
3.2 (3) Amended and Restated Bylaws of the Registrant
4.1 (3) Specimen of certificate representing shares of Highwoods Common
4.2 (4) Rights Agreement, dated as of October 6, 1997, between the Registrant and First Union
National Bank
4.3 (5) Purchase Agreement between the Registrant, UBS Limited and Union Bank of Switzerland,
London Branch, dated as of August 28, 1997
4.4 (5) Forward Stock Purchase Agreement between the Registrant and Union Bank of Switzerland,
London Branch, dated as of August 28, 1997
4.5 (5) Agreement to furnish certain instruments defining the rights of long-term debt holders of the
Registrant
5 Opinion of Alston & Bird LLP re legality
8.1 Opinion of Blackwell Sanders Peper Martin LLP re tax matters
8.2 Opinion of Alston & Bird LLP re certain tax matters
8.3 Opinion of Alston & Bird LLP re certain tax matters
10.1 (3) Amended and Restated Agreement of Limited Partnership of the Highwoods Operating
Partnership
10.2 (6) Amendment to Amended and Restated Agreement of Limited Partnership of the Highwoods
Operating Partnership with respect to Series A Preferred Units
10.3 (7) Amendment to Amended and Restated Agreement of Limited Partnership of the Highwoods
Operating Partnership with respect to certain rights of limited partners upon a change in
control
10.4 (8) Amendment to Amended and Restated Agreement of Limited Partnership of the Highwoods
Operating Partnership with respect to Series B Preferred Units
10.5 (9) Amendment to Amended and Restated Agreement of Limited Partnership of the Highwoods
Operating Partnership with respect to Series D Preferred Units
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Ex. FN Description
- ---------------- ---------------- --------------------------------------------------------------------------------------
<S> <C> <C>
10.6 (10) Form of Registration Rights and Lockup Agreement among the Registrant and the Holders
named therein, which agreement is signed by all Common Unit holders
10.7 (10) Articles of Incorporation of Highwoods Services, Inc.
10.8 (10) Bylaws of Highwoods Services, Inc.
10.9 (11)(12) Amended and Restated 1994 Stock Option Plan of the Registrant
10.10 (5)(12) 1997 Performance Award Plan of the Registrant
10.11 (5)(12) 1997 Unit Option Plan of the Highwoods Operating Partnership
10.12(a) (10)(12) Employment Agreement between the Registrant and the Highwoods Operating Partnership
and John L. Turner
10.12(b) (13)(12) Employment Agreement between the Registrant and the Highwoods Operating Partnership
and John W. Eakin
10.12(c) (14)(12) Employment Agreement between the Registrant and the Highwoods Operating Partnership
and Gene H. Anderson
10.12(d) (5)(12) Employment Agreement between the Registrant and the Highwoods Operating Partnership
and James R. Heistand
10.13(a) (5)(12) Executive Supplemental Employment Agreement between the Registrant and
Ronald P. Gibson
10.13(b) (5)(12) Executive Supplemental Employment Agreement between the Registrant and John L. Turner
10.13(c) (5)(12) Executive Supplemental Employment Agreement between the Registrant and Edward
J. Fritsch
10.13(d) (5)(12) Executive Supplemental Employment Agreement between the Registrant and Carman
J. Liuzzo
10.13(e) (5)(12) Executive Supplemental Employment Agreement between the Registrant and Mack
D. Pridgen, III
10.14 (15) Form of warrants to purchase Highwoods Common issued to John L. Turner, William
T. Wilson III and John E. Reece II
10.15 (13) Form of warrants to purchase Highwoods Common issued to W. Brian Reames, John
W. Eakin and Thomas S. Smith
10.16 (5) Form of warrants to purchase Highwoods Common issued to James R. Heistand and certain
other shareholders of Associated Capital Properties, Inc.
21 (5) Schedule of subsidiaries of the Registrant
23.1 Consent of Alston & Bird LLP (included in Exhibits 5 and 8.3)
23.2 Consent of Blackwell Sanders Peper Martin LLP (included in Exhibit 8.1)
23.3 Consent of Ernst & Young LLP
23.4 Consent of Coopers & Lybrand LLP
23.5 Consent of Morgan Stanley & Co. Incorporated
23.6 Consent of KPMG Peat Marwick LLP
24 Power of attorney (included on signature page)
</TABLE>
- ---------
(1) Included as Appendix A to the Proxy Statement/Prospectus contained herein.
(2) Filed as part of the Registrant's Current Report on Form 8-K dated
September 25, 1997 and amended by articles supplementary filed as part of
the Registrant's Current Report on Form 8-K dated October 4, 1997 and
articles supplementary filed as part of the Registrant's Current Report on
Form 8-K dated April 20, 1998, each of which is incorporated herein by
reference.
(3) Filed as part of Registration Statement No. 33-76952 with the Securities
and Exchange Commission and incorporated herein by reference.
(4) Filed as part of the Registrant's Current Report on Form 8-K dated October
4, 1997 and incorporated herein by reference.
(5) Filed as part of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 and incorporated herein by reference.
II-2
<PAGE>
(6) Filed as a part of the Registrant's Current Report on Form 8-K dated
February 12, 1997 and incorporated herein by reference.
(7) Filed as a part of the Highwoods Operating Partnership's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997 and incorporated herein
by reference.
(8) Filed as a part of the Registrant's Current Report on Form 8-K dated
September 25, 1997 and incorporated herein by reference.
(9) Filed as a part of the Registrant's Current Report on Form 8-K dated April
20, 1998 and incorporated herein by reference.
(10) Filed as a part of the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated herein by reference.
(11) Filed as a part of the Registrant's proxy statement on Schedule 14A
relating to the 1997 Annual Meeting of Stockholders.
(12) Management contract or compensatory plan.
(13) Filed as a part of the Registrant's Current Report on Form 8-K dated April
1, 1996 and incorporated herein by reference.
(14) Filed as a part of the Registrant's Current Report on Form 8-K dated
January 9, 1997 and incorporated herein by reference.
(15) Filed as part of Registration Statement No. 33-88364 with the Securities
and Exchange Commission and incorporated herein by reference.
The Registrant will provide copies of any exhibit, upon written request,
at a cost of $.05 per page.
ITEM 22. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement; provided, however, that any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that the undertakings set forth in paragraphs (i) and
(ii) also shall not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 that are incorporated by reference
in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new
II-3
<PAGE>
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.
(c) Insofar as indemnification for liability arising under the Securities Act
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 Commission such indemnification is
against public policy as expressed in the Securities 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 Securities Act and will be governed
by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of Form S-4, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(e) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(f) The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to the reofferings
by persons who may be deemed underwriters, in addition to the information
called for by the other Items of the applicable form.
(g) The registrant undertakes that every prospectus (i) that is filed pursuant
to paragraph (f) immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment 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.
II-4
<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-4 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Raleigh, State of North Carolina, on June 1, 1998.
HIGHWOODS PROPERTIES, INC.
By: /s/ RONALD P. GIBSON
------------------------------------
Ronald P. Gibson
President
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Highwoods Properties, Inc. hereby severally constitute Ronald P.
Gibson, Carman J. Liuzzo and Edward J. Fritsch and each of them singly, our
true and lawful attorneys with full power to them, and each of them singly, to
sign for us and in our names in the capacities indicated below, the
Registration Statement filed herewith and any and all amendments to said
Registration Statement, and generally to do all such things in our names and in
our capacities as officers and directors to enable Highwoods Properties, Inc.
to comply with the provisions of the Securities Act of 1933, and all
requirements of the Securities and Exchange Commission, hereby ratifying and
confirming our signature as they may be signed by our said attorneys, or any of
them, to said Registration Statement and any and all amendments thereto.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Name Title Date
- -------------------------------------- ---------------------------------------- -------------
<S> <C> <C>
/s/ O. TEMPLE SLOAN, JR. Chairman of the Board of Directors June 1, 1998
- ----------------------------------
O. Temple Sloan, Jr.
/s/ RONALD P. GIBSON President, Chief Executive Officer June 1, 1998
- ---------------------------------- and Director
Ronald P. Gibson
/s/ JOHN L. TURNER Chief Investment Officer and June 1, 1998
- ---------------------------------- Vice Chairman of the Board of Directors
John L. Turner
Senior Vice President and Director
- ----------------------------------
James R. Heistand
/s/ GENE H. ANDERSON Senior Vice President and Director June 1, 1998
- ----------------------------------
Gene H. Anderson
/s/ JOHN W. EAKIN Senior Vice President and Director June 1, 1998
- ----------------------------------
John W. Eakin
/s/ THOMAS W. ADLER Director June 1, 1998
- ----------------------------------
Thomas W. Adler
/s/ WILLIAM E. GRAHAM, JR. Director June 1, 1998
- ----------------------------------
William E. Graham, Jr.
/s/ L. GLENN ORR, JR. Director June 1, 1998
- ----------------------------------
L. Glenn Orr, Jr.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
- -------------------------------------- -------------------------------- -------------
<S> <C> <C>
/s/ WILLIAM H. SMITH, JR. Director June 1, 1998
- ----------------------------------
Willard H. Smith, Jr.
/s/ STEPHEN TIMKO Director June 1, 1998
- ----------------------------------
Stephen Timko
/s/ WILLIAM T. WILSON, III Director June 1, 1998
- ----------------------------------
William T. Wilson, III
/s/ CARMAN J. LIUZZO Vice President and June 1, 1998
- ----------------------------------
Carman J. Liuzzo Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
II-6
<PAGE>
Exhibit 5.1
ALSTON & BIRD LLP
3605 Glenwood Ave., Suite 310
Raleigh, North Carolina 27612
June 1, 1998
Highwoods Properties, Inc.
3100 Smoketree Court
Suite 600
Raleigh, North Carolina 27604
Ladies and Gentlemen:
This opinion is furnished in connection with the registration pursuant to the
Securities Act of 1933, as amended (the "Securities Act"), of 9,860,496 shares
(the "Shares") of common stock, par value $.01 per share, of Highwoods
Properties, Inc., a Maryland corporation (the "Company").
We have reviewed such documents and considered such matters of law and fact as
we, in our professional judgment, have deemed appropriate to render the
opinions contained herein. Where we have considered it appropriate, as to
certain facts we have relied, without investigation or analysis of any
underlying data contained therein, upon certificates of officers or other
appropriate representatives of the Company.
Based upon and subject to the foregoing and the further limitations and
qualifications hereinafter expressed, we are of the opinion that when the
Shares have been issued in accordance with the terms of the Prospectus, the
Shares will be legally issued, fully paid and non-assessable shares.
The foregoing assumes that all requisite steps will be taken to comply with the
requirements of the Securities Act and applicable requirements of state laws
regulating the offer and sale of securities.
Our opinions expressed herein are as of the date hereof, and we undertake no
obligation to advise you of any changes in applicable law or any other matters
that may come to our attention after the date hereof that may affect our
opinions expressed herein.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus.
Very truly yours,
ALSTON & BIRD LLP
/s/ BRAD S. MARKOFF
-----------------------------------------
Brad S. Markoff, Partner
<PAGE>
Exhibit 8.1
June 1, 1998
J. C. Nichols Company
310 Ward Parkway
Kansas City, Missouri 64112
Ladies & Gentlemen:
We have acted as counsel to J. C. Nichols Company, a corporation organized
under the laws of Missouri ("JCN"), in connection with its planned merger
("Merger") with and into Jackson Acquisition Corp. ("Jackson"), a corporation
organized under the laws of Maryland and a wholly-owned subsidiary of Highwoods
Properties, Inc., a real estate investment trust organized under the laws of
Maryland ("Highwoods"), pursuant to the Agreement and Plan of Merger
("Agreement"), dated as of December 22, 1997, and as amended as of April 29,
1998, by and among Highwoods, Jackson and JCN. In our capacity as counsel to
JCN, our opinion has been requested with respect to certain of the federal
income tax consequences of the Merger and the federal income tax consequences
to holders of JCN Common who exercise dissenters' rights.
For purposes of the opinion set forth below, we have relied, with the
consent of JCN and Highwoods, upon the accuracy and completeness of the factual
statements and factual representations (which factual statements and factual
representations we have neither investigated nor verified) contained in the
certificates of the officers of JCN and Highwoods to us dated May 21, 1998, and
May 28, 1998, respectively, attached hereto, and have assumed that such
certificates will be complete and accurate as of the effective date of the
Merger. Our opinion cannot be relied upon if any of the factual statements and
factual representations contained in the certificates of JCN and Highwoods is,
or later becomes, inaccurate.
In rendering this opinion, we have relied upon the accuracy of the
Registration Statement on form S-4 filed by Highwoods and the Proxy
Statement/Prospectus included therein (together, "Proxy Statement"). We have
also assumed that the transactions contemplated by the Agreement will be
consummated in accordance therewith and as described in the Proxy Statement and
that the Merger will qualify as a statutory merger under the applicable laws of
Maryland and Missouri. All capitalized terms used herein without definition
shall have the respective meanings specified in the Agreement, and unless
otherwise specified, all section references herein are to the Internal Revenue
Code of 1986 ("Code").
On the basis of the foregoing and our consideration of such other matters
of fact and law as we have deemed necessary or appropriate, it is our opinion,
under presently applicable federal income tax law, that, with respect to
Highwoods, JCN and Jackson:
(i) Each of Highwoods and JCN will be a party to a reorganization within
the meaning of Section 368(b) of the Code.
(ii) No gain or loss will be recognized by Highwoods or JCN as a
consequence of the Merger.
With respect to holders of JCN Common, their potential differing
individual situations make it impractical to address all of the possible
federal income tax consequences of the Merger. Thus, we have made no attempt to
comment on the federal income tax consequences to holders of JCN Common who:
(i) Are subject to special tax rules, such as dealers in securities,
mutual funds, insurance companies, financial institutions or
tax-exempt entities;
(ii) Do not hold their JCN Common as capital assets;
(iii) Immediately prior to the Merger own shares of Highwoods Common;
(iv) Received their JCN Common upon the exercise of employee stock options
or otherwise as compensation;
(v) For federal income tax purposes:
(a) Have attributed to them JCN Common or Highwoods Common owned by
family members or related entities;
(b) Are non-resident alien individuals, foreign corporations, foreign
partnerships or foreign estates or trusts;
<PAGE>
(c) Are required to recognize unrealized gains and losses at the end
of each taxable year under a mark-to-market system.
(d) Hold their JCN Common as part of a "straddle" or "conversion
transaction".
Except with respect to the foregoing special situations, it is our
opinion, under presently applicable federal income tax law, that the material
federal income tax consequences with respect to consideration to be received in
the Merger by JCN Shareholders and by JCN Shareholders exercising dissenters'
rights are set forth below:
(i) The JCN Shareholders will recognize no gain or loss upon their
exchange of JCN Common solely for shares of Highwoods Common.
(ii) If a JCN Shareholder receives both cash and Highwoods Common as a
result of the Merger, then gain (but not loss) will be recognized,
but not in an amount in excess of the amount of cash received. The
general rule is that any such gain will be treated as capital gain,
but if the exchange has the effect of the distribution of a dividend,
then the amount of gain recognized that is not in excess of the JCN
Shareholder's ratable share of the undistributed earnings and profits
of JCN will be treated as a dividend, rather than capital gain. The
determination of whether the exchange has the effect of the
distribution of a dividend will be made on a shareholder by
shareholder basis. Any such gain will generally be treated as capital
gain if, viewed as a redemption of Highwoods Common, such redemption
would have qualified as being "substantially disproportionate" under
Section 302(b)(2) of the Code. The substantially disproportionate
test is applied by assuming that the JCN Shareholder had received
Highwoods Common instead of cash and such Highwoods Common was
redeemed immediately after the Merger. The substantially
disproportionate test will be met if after the transaction the JCN
Shareholder will own less than fifty percent (50%) of all Highwoods
Common and if his or her percentage ownership of Highwoods Common
after the transaction is less than eighty percent (80%) of what his
or her percentage ownership of Highwoods Common would have been if no
Cash Elections had been made by JCN Shareholders in connection with
the Merger.
(iii) The basis of the Highwoods Common received by each JCN Shareholder
(including fractional shares) will be the same as the basis of all of
the shares of JCN Common Stock owned by such shareholder, decreased
by the amount of cash received by such shareholder, increased by any
amount that is treated as a dividend and further increased by any
amount of capital gain which is recognized by such shareholder
because of the Merger.
(iv) The holding period of the Highwoods Common received by a JCN
Shareholder will include the period during which the JCN Common
surrendered in exchange therefor was held.
(v) If a JCN Shareholder receives solely cash in exchange for shares of
JCN Common either because of an election to receive cash in the
Merger or because of the exercise of any right to dissent to the
Merger, such Shareholder will recognize gain or loss measured by the
difference between the amount of cash received and the adjusted basis
of the JCN Common surrendered.
(vi) A JCN Shareholder who receives cash in the Merger in lieu of a
fractional share interest in Highwoods Common will be treated as
having received cash in redemption of such fractional share interest
which should generally result in capital gain or loss equal to the
difference between the amount of cash received and the portion of
such JCN Shareholder's adjusted basis in the shares of JCN Common
allocable to the fractional share interest.
The opinions expressed herein are based upon existing statutory,
regulatory and judicial authority, any of which may be changed at any time with
retroactive effect.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement filed by Highwoods and to the reference to our firm
under the caption "Legal Matters" in the Proxy Statement/Prospectus included
therein.
Very truly yours,
/s/ BLACKWELL SANDERS PEPER MARTIN LLP
----------------------------------------
Blackwell Sanders Peper Martin LLP
<PAGE>
HIGHWOODS PROPERTIES, INC.
OFFICER'S CERTIFICATE
Reference is hereby made to that certain Agreement and Plan of Merger (the
"Agreement") made and entered into as of December 22, 1997, which sets forth
the terms and conditions of the merger (the "Merger") of J.C. Nichols Company
("JCN"), a corporation organized under the laws of Missouri, with and into
Jackson Acquisition Corp. ("Merger Sub"), a corporation organized under the
laws of Maryland and a wholly-owned subsidiary of Highwoods Properties, Inc.
("Highwoods"), a corporation organized under the laws of Maryland. Capitalized
terms used herein without definition shall have the respective meanings
specified in the Agreement, and unless otherwise specified, all section
references herein are to the Internal Revenue Code of 1986, as amended (the
"Code").
The undersigned hereby certifies that he is a duly elected officer of
Highwoods and in such capacity has access to and knowledge of the information
contained herein, and that each of the following facts and representations are
true, correct, and complete, in all material respects, on the date hereof, and
such facts and representations will be true, correct, and complete, in all
material respects, on the effective date of the Merger (the "Effective Time").
The undersigned further certifies that he has reviewed the Registration
Statement on Form S-4 filed by Highwoods and the Proxy Statement/Prospectus
included therein (together, the "Proxy Statement"), is fully informed with
respect to the Merger, that all facts set forth in the Proxy Statement are true
and accurate, and that the proposed actions described in the Proxy Statement
will be consummated as described therein. The undersigned, on behalf of
Highwoods, submits this certificate to be relied upon by Alston & Bird LLP and
Blackwell Sanders Matheny Weary & Lombardi LLP in delivering their respective
tax opinions with respect to the tax consequences of the Merger.
1. The fair market value of the Highwoods Common Stock and other
consideration received by each shareholder of JCN will be approximately equal
to the fair market value of the JCN Common Stock surrendered in exchange
therefor.
2. Taking into account shares of JCN Common Stock exchanged for cash or
other property in the Merger and cash received in lieu of fractional shares of
Highwoods Common Stock, holders of the outstanding shares of JCN Common Stock
immediately prior to the Effective Time will receive in the Merger an amount of
Highwoods Common Stock with a value as of the Effective Time equal to at least
fifty percent (50%) of the total value of all shares of JCN Common Stock
outstanding immediately prior to the Effective Time. For purposes of this
representation, shares of JCN Common Stock held by former holders who receive
cash pursuant to the exercise of their rights of appraisal shall be treated as
outstanding immediately prior to the Effective Time.
3. Neither Highwoods nor Merger Sub has any plan or intention to sell,
transfer or otherwise dispose of any of the assets of JCN acquired in the
Merger, except for (i) dispositions made in the ordinary course of business,
and (ii) a transfer immediately after the Merger by Merger Sub of all of the
assets of JCN acquired in the Merger (the "JCN assets") to Highwoods pursuant
to the merger of Merger Sub with and into Highwoods, which merger qualifies as
a statutory merger under Maryland law, followed immediately by a contribution
by Highwoods of the JCN assets to Highwoods/Forsyth Limited Partnership, a
North Carolina limited partnership (the "Highwoods Operating Partnership") in
exchange for the number of the common partnership interests in the Highwoods
Operating Partnership (the "Common Units") equal to (a) the number of shares of
Highwoods Common Stock issued in the Merger and (b) the number of Common Units
obtained by dividing the cash component of the Merger consideration by the
value of a share of Highwoods Common Stock as of the Effective Time.
4. Following the Merger, either Highwoods, Merger Sub, or the Highwoods
Operating Partnership will use at least forty percent (40%) of JCN's historic
assets in a business.
5. Highwoods owns a 33.33% or greater interest in the Highwoods Operating
Partnership.
6. Highwoods and Merger Sub have paid and will pay their respective
expenses, if any, incurred in connection with the merger.
7. There is no intercorporate indebtedness existing between JCN and
Highwoods or between JCN and Merger Sub that was issued, acquired, or will be
settled at a discount.
8. None of the compensation received by any shareholder-employees of JCN
will be separate consideration for, or allocable to, any of their shares of JCN
Common Stock; none of the shares of Highwoods Common Stock received by any
shareholder-employees will be separate consideration for, or allocable to, any
employment agreement; and the compensation paid to any shareholder-employees of
JCN will be for services actually rendered, or to be rendered, or will arise
under certain change in control agreements that arise out of an employment
relationship between JCN and the shareholder-employees, which change in control
agreements are more fully described in the Proxy Statement/Prospectus filed by
JCN in connection with the Merger.
<PAGE>
9. Merger Sub is not an investment company. For purposes hereof, an
"investment company" is a corporation that is a regulated investment company, a
real estate investment trust, or a corporation fifty percent (50%) or more of
the value of whose total assets are stock and securities and eighty percent
(80%) or more of the value of whose total assets are assets held for
investment. In making the fifty percent (50%) and eighty percent (80%)
determinations under the preceding sentence, stock and securities in any
subsidiary corporation shall be disregarded and the parent corporation shall be
deemed to own its ratable share of the subsidiary's assets, and a corporation
shall be considered a subsidiary if parent owns fifty percent (50%) or more of
the combined voting power of all classes of stock entitled to vote or fifty
percent (50%) or more of the total value of shares of all classes of stock
outstanding.
10. Although Highwoods is an investment company, Highwoods meets the
requirements of Section 368(A)(2)(F)(i) of the Code in that it is an real
estate investment trust.
11. None of (i) Highwoods, (ii) any member of Highwoods' affiliated group
as defined in Section 1504 of the Code without regard to Section 1504(b) of the
Code (including but not limited to Merger Sub) (iii) any corporation in which
at least fifty percent (50%) of the total combined voting power of all classes
of stock entitled to vote or at least fifty percent (50%) of the value of all
classes of stock is owned directly or indirectly by Highwoods, or (iv) any
entity that is treated as a partnership for federal income tax purposes and has
as an owner a corporation described in (i), (ii) or (iii) of this paragraph has
the intent to, at the time of the Merger, or shall, in a transaction that may
be considered in connection with the Merger, acquire or redeem (directly or
indirectly) any shares of Highwoods Common Stock issued in connection with the
Merger, except for repurchases by Highwoods of a small percentage of its stock
in the open market as part of an ongoing stock repurchase program not created
or modified in any way in connection with the Merger. For purposes hereof, an
entity described in (ii), (iii), or (iv) shall be referred to as a Highwoods
Related Party. An entity will be treated as a Highwoods Related Party if the
requisite relationship exists immediately before or immediately after the
acquisition or redemption. In addition, an entity (other than JCN or any JCN
Related Party) will be treated as a Highwoods Related Party if the requisite
relationship is created in connection with the Merger. A JCN Related Party
means any corporation in which at least fifty percent (50%) of the total
combined voting power of all classes of stock entitled to vote or at least
fifty percent (50%) of the value all classes of stock is owned directly or
indirectly by JCN.
12. None of Highwoods, Merger Sub or any other Highwoods Related Party has
at any time owned (directly or indirectly) any JCN stock during the three (3)
year period ending at the Effective Time.
13. Merger Sub has been newly formed as a Maryland corporation solely for
the purpose of the Merger and all of its stock has been since inception wholly
owned by Highwoods. Following the Merger, Merger Sub will not issue any
additional shares of its stock to any person other than Highwoods.
14. Following the Merger, at all times during the existence of Merger Sub,
Highwoods will not sell or otherwise transfer any of the shares of Merger Sub
that it owns, other than a transfer pursuant to the merger of Merger Sub with
and into Highwoods which occurs immediately after the Merger.
15. The payment of cash to shareholders of JCN in lieu of fractional
shares of Highwoods Common Stock will not be a separately bargained for
consideration, but will be undertaken solely for the purpose of avoiding the
expense and inconvenience of issuing and transferring fractional shares, and
the total cash consideration that will be paid to the JCN's shareholders in
lieu of fractional shares of Highwoods Common Stock will represent less than
one percent (1%) of the total consideration issued in the Merger.
16. The Agreement represents the entire understanding of JCN, Merger Sub
and Highwoods with respect to the Merger.
IN WITNESS WHEREOF, the undersigned has duly executed this certificate
this 28th day of May, 1998.
HIGHWOODS PROPERTIES, INC.
CORPORATE SEAL By: /s/ MACK D. PRIDGEN, III
------------------------------------------------
Name: Mack D. Pridgen, III
-----------------------------------------------
Title: Vice President and General Counsel
----------------------------------------------
2
<PAGE>
J.C. NICHOLS COMPANY
OFFICER'S CERTIFICATE
Reference is hereby made to that certain Agreement and Plan of Merger (the
"Agreement") made and entered into as of December 22, 1997, which sets forth
the terms and conditions of the merger (the "Merger") of J.C. Nichols ("JCN"),
a corporation organized under the laws of Missouri, with and into Jackson
Acquisition Corp. ("Merger Sub"), a corporation organized under the laws of
Maryland and a wholly-owned subsidiary of Highwoods Properties, Inc.
("Highwoods"), a corporation organized under the laws of Maryland. Capitalized
terms used herein without definition shall have the respective meanings
specified in the Agreement, and unless otherwise specified, all section
references herein are to the Internal Revenue Code of 1986, as amended (the
"Code").
The undersigned hereby certifies that he is a duly elected officer of JCN
and in such capacity has access to and knowledge of the information contained
herein, and that each of the following facts and representations are true,
correct, and complete, in all material respects, on the date hereof, and such
facts and representations will be true, correct, and complete, in all material
respects, on the effective date of the Merger (the "Effective Time"). The
undersigned further certifies that he has reviewed the Registration Statement
on Form S-4 filed by Highwoods and the Proxy Statement/Prospectus included
therein (together, the "Proxy Statement"), is fully informed with respect to
the Merger, that all facts set forth in the Proxy Statement are true and
accurate, and that the proposed actions described in the Proxy Statement will
be consummated as described therein.The undersigned, on behalf of JCN, submits
this certificate to be relied upon by Alston & Bird LLP and Blackwell Sanders
Matheny Weary & Lombardi LLP in delivering their respective tax opinions with
respect to the tax consequences of the Merger.
1. The fair market value of the Highwoods Common Stock and cash received
by each shareholder of JCN will be approximately equal to the fair market value
of the JCN Common Stock surrendered in exchange therefor.
2. Other than cash paid to former shareholders of the JCN who dissent from
the Merger and perfect their rights of appraisal, neither JCN nor any
corporation in which at least fifty percent (50%) of the total combined voting
power of all classes of stock entitled to vote or at least fifty percent (50%)
of the value of all classes of stock is or was owned directly or indirectly by
JCN ("JCN Related Party") has redeemed or acquired any JCN stock prior to the
Merger in a transaction that may be considered in connection with the Merger,
except as set forth on the schedule attached hereto.
3. During the three (3) year period prior to the Merger, neither JCN nor
any JCN Related Party declared or paid any dividends with respect to the
outstanding JCN Common Stock.
4. The liabilities of JCN assumed in the Merger and the liabilities to
which the transferred assets of JCN are subject were incurred by JCN in the
ordinary course of its business.
5. JCN and the shareholders of JCN will pay their respective expenses, if
any, incurred in connection with the transaction.
6. There is no intercorporate indebtedness existing between JCN and
Highwoods or between JCN and Merger Sub that was issued, acquired, or will be
settled at a discount.
7. JCN is not under the jurisdiction of a court in a case under Title 11
of the United States Code or a receivership, foreclosure, or similar proceeding
in a federal or state court.
8. The fair market value of the assets of JCN to be transferred in the
Merger will equal or exceed the sum of the liabilities assumed in the Merger
plus the amount of the liabilities, if any, to which the transferred assets are
subject.
9. None of the compensation received, or to be received, by any
shareholder-employees of JCN will be separate consideration for, or allocable
to, any of their shares of JCN Common Stock; none of the shares of Highwoods
Common Stock received by any shareholder-employees will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees of JCN will be for services
actually rendered, or to be rendered, and will be commensurate with amounts
paid to third parties bargaining at arm's length for similar services.
10. JCN is not an investment company. For purposes of the foregoing, an
"investment company" is a corporation that is a regulated investment company, a
real estate investment trust, or a corporation fifty percent (50%) or more of
the value of whose total assets are stock and securities and eighty percent
(80%) or more of the value of whose total assets are assets held for
investment. In making the fifty percent (50%) and eighty percent (80%)
determinations under the preceding sentence, stock and securities in any
subsidiary corporation shall be disregarded and the parent corporation shall be
deemed to
<PAGE>
own its ratable share of the subsidiary's assets, and a corporation shall be
considered a subsidiary if the parent owns fifty percent (50%) or more of the
combined voting power of all classes of stock entitled to vote or fifty percent
(50%) or more of the total value of shares of all classes of stock outstanding.
11. The Agreement represents the entire understanding of JCN, Merger Sub
and Highwoods with respect to the Merger.
IN WITNESS WHEREOF, the undersigned has duly executed this certificate
this 21st day of May, 1998.
J.C. NICHOLS COMPANY
CORPORATE SEAL By: /s/ MARK A. PETERSON
------------------------------------------------
Name: Mark A. Peterson
----------------------------------------------
Title: Chief Financial Officer
---------------------------------------------
2
<PAGE>
SCHEDULE
In December, 1997, J. C. Nichols redeemed 11,848 shares of common stock in
connection with the exercise of a stock option for 25,000 shares by an officer
of the Company. The shares redeemed were used to pay income taxes on behalf of
the officer.
3
<PAGE>
EXHIBIT 8.2
ALSTON&BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
404-881-7000
Fax: 404-881-4777
Pinney L.
AllenDirect Dial: 404-881-7000 www.alston.com
June 1, 1998
Highwoods Properties, Inc.
3100 Smoketree Court
Suite 600
Raleigh, North Carolina 27604
Ladies & Gentlemen:
We have acted as counsel to Highwoods Properties, Inc. ("Highwoods"), a
real estate investment trust ("REIT") organized under the laws of Maryland in
connection with the planned merger (the "Merger") of J.C. Nichols Company
("JCN"), a corporation organized under the laws of Missouri, with and into
Jackson Acquisition Corp. ("Merger Sub"), a corporation organized under the
laws of Maryland and a wholly-owned subsidiary of Highwoods, pursuant to the
Agreement and Plan of Merger (the "Agreement"), dated as of December 22, 1997,
by and among Highwoods, Merger Sub and JCN. In our capacity as counsel to
Highwoods, our opinion has been requested with respect to certain of the
federal income tax consequences of the Merger.
For purposes of the opinion set forth below, we have relied, with the
consent of Highwoods and JCN, upon the accuracy and completeness of the factual
statements and factual representations (which factual statements and factual
representations we have neither investigated nor verified) contained in the
certificates of the officers of Highwoods and JCN to us dated May 28, 1998, and
May 21, 1998, respectively, attached hereto, and have assumed that such
certificates will be complete and accurate as of the effective date of the
Merger (the "Effective Time"). Our opinion cannot be relied upon if any of the
facts contained in the certificates of the officers of Highwoods or JCN is, or
later becomes, inaccurate.
In rendering this opinion, we have relied upon the accuracy of the
Registration Statement on Form S-4 filed by Highwoods (the "Registration
Statement") and the Proxy Statement/Prospectus included therein (together, the
"Proxy Statement"). We have also assumed that the transactions contemplated by
the Agreement will be consummated in accordance therewith and as described in
the Proxy Statement and that the Merger will qualify as a statutory merger
under the applicable laws of Maryland and Missouri.
All capitalized terms used herein without definition shall have the
respective meanings specified in the Agreement, and unless otherwise specified,
all section references herein are to the Code.
On the basis of the foregoing, and our consideration of such other matters
of fact and law as we have deemed necessary or appropriate, it is our opinion,
under presently applicable federal income tax law, that:
(i) The Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code.
(ii) No gain or loss will be recognized by Highwoods or JCN as a
consequence of the Merger.
The opinions expressed herein are based upon existing statutory,
regulatory, and judicial authority, any of which may be changed at any time
with retroactive effect. Our opinion is limited to the tax matters specifically
covered herein, and we have not been asked to address, nor have we addressed,
any other tax consequences of the Merger.
Very truly yours,
ALSTON & BIRD LLP
By: /s/ PINNEY L. ALLEN
- --------------------------------------------------------------------------------
Pinney L. Allen, Partner
SA:sa
1211 East Morehead Street
P. O. Drawer 34009
Charlotte, NC 28234-4009
704-331-6000
Fax: 704-334-2014
3605 Glenwood Avenue, Suite 310
P. O. Drawer 31107
Raleigh, NC 27622-1107
919-420-2200
Fax: 919-881-3175
601 Pennsylvania Avenue, N.W.
North Building, 11th Floor
Washington, DC 20004-2601
202-756-3300
Fax: 202-756-3333
<PAGE>
HIGHWOODS PROPERTIES, INC.
OFFICER'S CERTIFICATE
Reference is hereby made to that certain Agreement and Plan of Merger (the
"Agreement") made and entered into as of December 22, 1997, which sets forth
the terms and conditions of the merger (the "Merger") of J.C. Nichols Company
("JCN"), a corporation organized under the laws of Missouri, with and into
Jackson Acquisition Corp. ("Merger Sub"), a corporation organized under the
laws of Maryland and a wholly-owned subsidiary of Highwoods Properties, Inc.
("Highwoods"), a corporation organized under the laws of Maryland. Capitalized
terms used herein without definition shall have the respective meanings
specified in the Agreement, and unless otherwise specified, all section
references herein are to the Internal Revenue Code of 1986, as amended (the
"Code").
The undersigned hereby certifies that he is a duly elected officer of
Highwoods and in such capacity has access to and knowledge of the information
contained herein, and that each of the following facts and representations are
true, correct, and complete, in all material respects, on the date hereof, and
such facts and representations will be true, correct, and complete, in all
material respects, on the effective date of the Merger (the "Effective Time").
The undersigned further certifies that he has reviewed the Registration
Statement on Form S-4 filed by Highwoods and the Proxy Statement/Prospectus
included therein (together, the "Proxy Statement"), is fully informed with
respect to the Merger, that all facts set forth in the Proxy Statement are true
and accurate, and that the proposed actions described in the Proxy Statement
will be consummated as described therein. The undersigned, on behalf of
Highwoods, submits this certificate to be relied upon by Alston & Bird LLP and
Blackwell Sanders Matheny Weary & Lombardi LLP in delivering their respective
tax opinions with respect to the tax consequences of the Merger.
1. The fair market value of the Highwoods Common Stock and other
consideration received by each shareholder of JCN will be approximately equal
to the fair market value of the JCN Common Stock surrendered in exchange
therefor.
2. Taking into account shares of JCN Common Stock exchanged for cash or
other property in the Merger and cash received in lieu of fractional shares of
Highwoods Common Stock, holders of the outstanding shares of JCN Common Stock
immediately prior to the Effective Time will receive in the Merger an amount of
Highwoods Common Stock with a value as of the Effective Time equal to at least
fifty percent (50%) of the total value of all shares of JCN Common Stock
outstanding immediately prior to the Effective Time. For purposes of this
representation, shares of JCN Common Stock held by former holders who receive
cash pursuant to the exercise of their rights of appraisal shall be treated as
outstanding immediately prior to the Effective Time.
3. Neither Highwoods nor Merger Sub has any plan or intention to sell,
transfer or otherwise dispose of any of the assets of JCN acquired in the
Merger, except for (i) dispositions made in the ordinary course of business,
and (ii) a transfer immediately after the Merger by Merger Sub of all of the
assets of JCN acquired in the Merger (the "JCN assets") to Highwoods pursuant
to the merger of Merger Sub with and into Highwoods, which merger qualifies as
a statutory merger under Maryland law, followed immediately by a contribution
by Highwoods of the JCN assets to Highwoods/Forsyth Limited Partnership, a
North Carolina limited partnership (the "Highwoods Operating Partnership") in
exchange for the number of the common partnership interests in the Highwoods
Operating Partnership (the "Common Units") equal to (a) the number of shares of
Highwoods Common Stock issued in the Merger and (b) the number of Common Units
obtained by dividing the cash component of the Merger consideration by the
value of a share of Highwoods Common Stock as of the Effective Time.
4. Following the Merger, either Highwoods, Merger Sub, or the Highwoods
Operating Partnership will use at least forty percent (40%) of JCN's historic
assets in a business.
5. Highwoods owns a 33.33% or greater interest in the Highwoods Operating
Partnership.
6. Highwoods and Merger Sub have paid and will pay their respective
expenses, if any, incurred in connection with the merger.
7. There is no intercorporate indebtedness existing between JCN and
Highwoods or between JCN and Merger Sub that was issued, acquired, or will be
settled at a discount.
8. None of the compensation received by any shareholder-employees of JCN
will be separate consideration for, or allocable to, any of their shares of JCN
Common Stock; none of the shares of Highwoods Common Stock received by any
shareholder-employees will be separate consideration for, or allocable to, any
employment agreement; and the compensation paid to any shareholder-employees of
JCN will be for services actually rendered, or to be rendered, or will arise
under certain change in control agreements that arise out of an employment
relationship between JCN and the shareholder-employees, which change in control
agreements are more fully described in the Proxy Statement/Prospectus filed by
JCN in connection with the Merger.
<PAGE>
9. Merger Sub is not an investment company. For purposes hereof, an
"investment company" is a corporation that is a regulated investment company, a
real estate investment trust, or a corporation fifty percent (50%) or more of
the value of whose total assets are stock and securities and eighty percent
(80%) or more of the value of whose total assets are assets held for
investment. In making the fifty percent (50%) and eighty percent (80%)
determinations under the preceding sentence, stock and securities in any
subsidiary corporation shall be disregarded and the parent corporation shall be
deemed to own its ratable share of the subsidiary's assets, and a corporation
shall be considered a subsidiary if parent owns fifty percent (50%) or more of
the combined voting power of all classes of stock entitled to vote or fifty
percent (50%) or more of the total value of shares of all classes of stock
outstanding.
10. Although Highwoods is an investment company, Highwoods meets the
requirements of Section 368(A)(2)(F)(i) of the Code in that it is an real
estate investment trust.
11. None of (i) Highwoods, (ii) any member of Highwoods' affiliated group
as defined in Section 1504 of the Code without regard to Section 1504(b) of the
Code (including but not limited to Merger Sub) (iii) any corporation in which
at least fifty percent (50%) of the total combined voting power of all classes
of stock entitled to vote or at least fifty percent (50%) of the value of all
classes of stock is owned directly or indirectly by Highwoods, or (iv) any
entity that is treated as a partnership for federal income tax purposes and has
as an owner a corporation described in (i), (ii) or (iii) of this paragraph has
the intent to, at the time of the Merger, or shall, in a transaction that may
be considered in connection with the Merger, acquire or redeem (directly or
indirectly) any shares of Highwoods Common Stock issued in connection with the
Merger, except for repurchases by Highwoods of a small percentage of its stock
in the open market as part of an ongoing stock repurchase program not created
or modified in any way in connection with the Merger. For purposes hereof, an
entity described in (ii), (iii), or (iv) shall be referred to as a Highwoods
Related Party. An entity will be treated as a Highwoods Related Party if the
requisite relationship exists immediately before or immediately after the
acquisition or redemption. In addition, an entity (other than JCN or any JCN
Related Party) will be treated as a Highwoods Related Party if the requisite
relationship is created in connection with the Merger. A JCN Related Party
means any corporation in which at least fifty percent (50%) of the total
combined voting power of all classes of stock entitled to vote or at least
fifty percent (50%) of the value all classes of stock is owned directly or
indirectly by JCN.
12. None of Highwoods, Merger Sub or any other Highwoods Related Party has
at any time owned (directly or indirectly) any JCN stock during the three (3)
year period ending at the Effective Time.
13. Merger Sub has been newly formed as a Maryland corporation solely for
the purpose of the Merger and all of its stock has been since inception wholly
owned by Highwoods. Following the Merger, Merger Sub will not issue any
additional shares of its stock to any person other than Highwoods.
14. Following the Merger, at all times during the existence of Merger Sub,
Highwoods will not sell or otherwise transfer any of the shares of Merger Sub
that it owns, other than a transfer pursuant to the merger of Merger Sub with
and into Highwoods which occurs immediately after the Merger.
15. The payment of cash to shareholders of JCN in lieu of fractional
shares of Highwoods Common Stock will not be a separately bargained for
consideration, but will be undertaken solely for the purpose of avoiding the
expense and inconvenience of issuing and transferring fractional shares, and
the total cash consideration that will be paid to the JCN's shareholders in
lieu of fractional shares of Highwoods Common Stock will represent less than
one percent (1%) of the total consideration issued in the Merger.
16. The Agreement represents the entire understanding of JCN, Merger Sub
and Highwoods with respect to the Merger.
IN WITNESS WHEREOF, the undersigned has duly executed this certificate
this 28th day of May, 1998.
HIGHWOODS PROPERTIES, INC.
CORPORATE SEAL By: /s/ MACK D. PRIDGEN, III
------------------------------------------------
Name: Mack D. Pridgen, III
----------------------------------------------
Title: Vice President and General Counsel
---------------------------------------------
2
<PAGE>
J.C. NICHOLS COMPANY
OFFICER'S CERTIFICATE
Reference is hereby made to that certain Agreement and Plan of Merger (the
"Agreement") made and entered into as of December 22, 1997, which sets forth
the terms and conditions of the merger (the "Merger") of J.C. Nichols ("JCN"),
a corporation organized under the laws of Missouri, with and into Jackson
Acquisition Corp. ("Merger Sub"), a corporation organized under the laws of
Maryland and a wholly-owned subsidiary of Highwoods Properties, Inc.
("Highwoods"), a corporation organized under the laws of Maryland. Capitalized
terms used herein without definition shall have the respective meanings
specified in the Agreement, and unless otherwise specified, all section
references herein are to the Internal Revenue Code of 1986, as amended (the
"Code").
The undersigned hereby certifies that he is a duly elected officer of JCN
and in such capacity has access to and knowledge of the information contained
herein, and that each of the following facts and representations are true,
correct, and complete, in all material respects, on the date hereof, and such
facts and representations will be true, correct, and complete, in all material
respects, on the effective date of the Merger (the "Effective Time"). The
undersigned further certifies that he has reviewed the Registration Statement
on Form S-4 filed by Highwoods and the Proxy Statement/Prospectus included
therein (together, the "Proxy Statement"), is fully informed with respect to
the Merger, that all facts set forth in the Proxy Statement are true and
accurate, and that the proposed actions described in the Proxy Statement will
be consummated as described therein. The undersigned, on behalf of JCN, submits
this certificate to be relied upon by Alston & Bird LLP and Blackwell Sanders
Matheny Weary & Lombardi LLP in delivering their respective tax opinions with
respect to the tax consequences of the Merger.
1. The fair market value of the Highwoods Common Stock and cash received by
each shareholder of JCN will be approximately equal to the fair market value of
the JCN Common Stock surrendered in exchange therefor.
2. Other than cash paid to former shareholders of the JCN who dissent from
the Merger and perfect their rights of appraisal, neither JCN nor any
corporation in which at least fifty percent (50%) of the total combined voting
power of all classes of stock entitled to vote or at least fifty percent (50%)
of the value of all classes of stock is or was owned directly or indirectly by
JCN ("JCN Related Party") has redeemed or acquired any JCN stock prior to the
Merger in a transaction that may be considered in connection with the Merger,
except as set forth on the schedule attached hereto.
3. During the three (3) year period prior to the Merger, neither JCN nor any
JCN Related Party declared or paid any dividends with respect to the outstanding
JCN Common Stock.
4. The liabilities of JCN assumed in the Merger and the liabilities to which
the transferred assets of JCN are subject were incurred by JCN in the ordinary
course of its business.
5. JCN and the shareholders of JCN will pay their respective expenses, if
any, incurred in connection with the transaction.
6. There is no intercorporate indebtedness existing between JCN and Highwoods
or between JCN and Merger Sub that was issued, acquired, or will be settled at a
discount.
7. JCN is not under the jurisdiction of a court in a case under Title 11 of
the United States Code or a receivership, foreclosure, or similar proceeding in
a federal or state court.
8. The fair market value of the assets of JCN to be transferred in the Merger
will equal or exceed the sum of the liabilities assumed in the Merger plus the
amount of the liabilities, if any, to which the transferred assets are subject.
9. None of the compensation received, or to be received, by any
shareholder-employees of JCN will be separate consideration for, or allocable
to, any of their shares of JCN Common Stock; none of the shares of Highwoods
Common Stock received by any shareholder-employees will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any shareholder-employees of JCN will be for services
actually rendered, or to be rendered, and will be commensurate with amounts paid
to third parties bargaining at arm's length for similar services.
10. JCN is not an investment company. For purposes of the foregoing, an
"investment company" is a corporation that is a regulated investment company, a
real estate investment trust, or a corporation fifty percent (50%) or more of
the value of whose total assets are stock and securities and eighty percent
(80%) or more of the value of whose total assets are assets held for investment.
In making the fifty percent (50%) and eighty percent (80%) determinations under
the preceding sentence, stock and securities in any subsidiary corporation shall
be disregarded and the parent corporation shall be deemed to
<PAGE>
own its ratable share of the subsidiary's assets, and a corporation shall be
considered a subsidiary if the parent owns fifty percent (50%) or more of the
combined voting power of all classes of stock entitled to vote or fifty percent
(50%) or more of the total value of shares of all classes of stock outstanding.
11. The Agreement represents the entire understanding of JCN, Merger Sub and
Highwoods with respect to the Merger.
IN WITNESS WHEREOF, the undersigned has duly executed this certificate
this 21st day of May, 1998.
J.C. NICHOLS COMPANY
CORPORATE SEAL /s/ Mark A. Peterson
By: -------------------------------------
Mark A. Peterson
Name: -------------------------------------
Chief Financial Officer
Title: ------------------------------------
2
<PAGE>
SCHEDULE
In December 1997, J. C. Nichols redeemed 11,848 shares of common stock in
connection with the exercise of a stock option for 25,000 shares by an officer
of the Company. The shares redeemed were used to pay income taxes on behalf of
the officer.
3
<PAGE>
Exhibit 8.3
ALSTON & BIRD LLP
One Atlantic Center
1201 West Peachtree Street
Atlanta, Georgia 30309-3424
404-881-7000
Fax: 404-881-4777
www.alston.com
Pinney L. Allen Direct Dial: 404-881-7485
June 1, 1998
Highwoods Properties, Inc.
3100 Smoketree Court, Suite 600
Raleigh, North Carolina 27604
Ladies and Gentlemen:
In connection with the Form S-4, File No. 333- , as in the form filed on
June 1, 1998, relating to the planned merger of J.C. Nichols Company, a
corporation organized under the laws of Missouri, with and into Jackson
Acquisition Corp., a corporation organized under the laws of Maryland and a
wholly-owned subsidiary of Highwoods Properties, Inc. (the "Company"), (the
"Registration Statement"), you have requested our opinion concerning certain of
the federal income tax consequences to the Company of its election to be taxed
as a real estate investment trust ("REIT") under Sections 856 through 860 of
the Internal Revenue Code of 1986, as amended (the "Code").
This opinion is based solely on various facts and factual assumptions as
set forth in the Registration Statement and is conditioned upon certain
representations made by the Company as to factual matters through certificates
of officers of the Company (the "Officers' Certificates") attached hereto and
made a part hereof. We have made no independent inquiry as to the factual
matters set forth herein. In addition, we have examined no documents other than
the Registration Statement for purposes of this opinion and, therefore, our
opinion is limited to matters determined through an examination of such document
and the factual matters set forth in the Officers' Certificates.
In rendering the opinions set forth herein, we have assumed the
authenticity of all documents submitted to us as originals, the genuineness of
all signatures thereon, the legal capacity of natural persons executing such
documents and the conformity to authentic original documents of all documents
submitted to us as copies.
We are opining herein as to the effect on the subject transaction only of
the federal income tax laws of the United States and we express no opinion with
respect to the applicability thereto, or the effect thereon, of other federal
laws, the laws of any other jurisdiction, the laws of any state or as to any
matters of municipal law or the laws of any other local agencies within any
state.
<TABLE>
<S> <C> <C>
1211 East Morehead Street 3605 Glenwood Avenue 601 Pennsylvania Avenue, N.W.
P.O. Drawer 34009 P.O. Drawer 31107 North Building, Suite 250
Charlotte, NC 28234-4009 Raleigh, NC 27622-1107 Washington, DC 20004-2601
704-334-2014 9190420-2200 202-508-3300
Fax: 704-334-2014 Fax: 919-881-3175 Fax: 202-508-3333
</TABLE>
<PAGE>
Based solely on the facts in the Registration Statement and the facts set
forth in the Officers' Certificates, we are of the opinion that the Company has
been organized and has operated in conformity with the requirements for
qualification and taxation as a REIT under the Code for its taxable years ended
December 31, 1994 through 1997, and that the Company is in a position to
continue its 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, 1998.
With respect to 1998, we note that the Company's status as a REIT at any time
during such year is dependent, among other things, upon the Company meeting the
requirements of Sections 856 through 860 of the Code throughout the year and for
the year as a whole. Accordingly, because the Company's satisfaction of such
requirements will depend upon future events, including the precise terms and
conditions of proposed transactions, the final determination of operational
results, and the effect of certain provisions contained in the President's
Budget Proposal for the Fiscal Year 1999 on the Company's REIT status, it is not
possible to assure that the Company will satisfy the requirements to be a REIT
during the taxable year that will end December 31, 1998.
In addition, we have participated in the preparation of the material under
the heading "Federal Income Tax Considerations" of the Registration Statement
and we are of the opinion that the federal income tax treatment described
therein is accurate in all material respects.
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Also, any variation or
difference in the facts from those set forth in the Registration Statement or
in the Officers' Certificates may affect the opinions stated herein.
This opinion is limited to the specific matters covered hereby and should
not be interpreted to imply that the undersigned has offered its opinion on any
other matter. We hereby consent to the filing of this opinion as an exhibit to
the Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement.
Very truly yours,
By: /s/ PINNEY L. ALLEN
---------------------------------------------
Pinney L. Allen
PLA:MMH
<PAGE>
CERTIFICATE
I, CARMAN J. LIUZZO, in my capacity as Vice-President, Chief Financial
Officer, and Treasurer of Highwoods Properties, Inc. (the "Company"), do hereby
certify, to the best of my knowledge and belief after making appropriate
inquiries with respect to all matters set forth below, as follows:
1. That I am a Vice-President, Chief Financial Officer, and Treasurer of the
Company;
2. That in such capacity, I have access to relevant information regarding
each of the factual matters set forth below;
3. That for purposes of this Certificate, "Registration Statement" means the
Form S-4, File No. 333- , as in the form filed on June 1, 1998, relating to the
planned merger of J.C. Nichols Company, a corporation organized under the laws
of Missouri, with and into Jackson Acquisition Corp., a corporation organized
under the laws of Maryland and a wholly-owned subsidiary of the Company;
4. That the description of the Company, its properties, and its method of
operation contained in the Registration Statement is accurate and complete in
all material aspects with respect to this opinion; and
5. That the Company will undertake to advise you of any change in the
representations made herein for so long as the Registration Statement referred
to above remains in effect.
The foregoing Certification is provided to Alston & Bird LLP in connection
with rendering an opinion regarding the qualification of the Company as a real
estate investment trust and may not be relied upon for any other purpose or by
any other party. It is understood that such opinion is limited to the factual
matters revealed pursuant hereto and other materials provided to them and that
to the extent required, I have asked questions of the appropriate individuals
to confirm the foregoing answers, and to the best of my knowledge and belief
such answers are true, correct, and complete and in no way are misleading.
June 1, 1998
/s/ CARMAN J. LIUZZO
--------------------------------------------------
CARMAN J. LIUZZO
Vice-President, Chief Financial
Officer, and Treasurer
Highwoods Properties, Inc.
<PAGE>
CERTIFICATE
I, MACK D. PRIDGEN, III, in my capacity as Vice-President and General
Counsel of Highwoods Properties, Inc. (the "Company"), do hereby certify, to
the best of my knowledge and belief after making appropriate inquiries with
respect to all matters set forth below, as follows:
1. That I am a Vice-President and the General Counsel of the Company and I
am licensed to practice law in the state of North Carolina;
2. That in such capacity, I have access to relevant information regarding
each of the factual matters set forth below;
3. That for purposes of this Certificate,
(a) "Affiliated Partnerships" means AP-GP Southeast Portfolio Partners,
L.P., Highwoods/Tennessee Holdings, L.P., AP Southeast Portfolio Partners,
L.P., Highwoods/Florida Holdings, L.P., Pinellas Northside Partners, Ltd.,
Interstate Business Park, Ltd., Pinellas Bay Vista Partners, Ltd., Pinellas
Pinebrook Partners, Ltd., Downtown Clearwater Tower, Ltd., BDBP, Ltd., Cross
Bayou, Ltd., and SISBROS, Ltd., collectively;
(b) "Code" means the Internal Revenue Code of 1986, as amended;
(c) "Easton-Babcock Transaction" means the proposed transaction that
will occur pursuant to (1) the Master Acquisition Agreement, dated February 9,
1998, by and among Highwoods Properties, Inc., Highwoods/Forysth Limited
Partnership, the Easton-Babcock Partnerships (as defined in the Agreement), the
Easton-Babcock Corporations (as defined in the Agreement), Calvin H. Babcock,
and Edward W. Easton, and (2) the Contribution and Exchange Agreement, dated
February 9, 1998, by and between Highwoods/Forysth Limited Partnership and
International Place Associates IV, Ltd.;
(d) "Foreclosure Property" means real property (including interests in
real property), and any personal property incident to such real property,
acquired by the real estate investment trust as a result of such trust having
bid in such property at foreclosure, or having otherwise reduced such property
to ownership or possession by agreement or process of law, after there was
default (or default was imminent) on a lease of such property or on an
indebtedness that such property secured;
(e) "Highwoods Services" means Highwoods Services, Inc., a North
Carolina corporation, the equity ownership of which is owned 99% by
Highwoods/Forsyth Limited Partnership and .5% each by Ronald P. Gibson and
Edward J. Fritsch;
(f) "Independent Contractor" means any person who does not own,
directly or indirectly, more than 35% of the shares in the REIT, and, if such
person is a corporation, not more than 35% of the total combined voting power
of whose stock (or 35% of the total shares of all classes of whose stock), or,
if such person is not a corporation, not more than 35% of the interest in whose
assets or net profits is owned, directly or indirectly, by one or more persons
owning 35% or more of the shares in the REIT;
(g) "J.C. Nichols Transaction" means the proposed merger of J.C.
Nichols Company with and into Jackson Acquisition Corp., a wholly-owned
subsidiary of the Company, that will be consummated pursuant to the terms and
conditions set forth in the Agreement and Plan of Merger, dated December 22,
1997, by and among Highwoods Properties, Inc., Jackson Acquisition Corp., and
J.C. Nichols Company;
(h) "Operating Partnership" means Highwoods/Forsyth Limited
Partnership, a North Carolina partnership of which the Company is the sole
general partner with an approximate 83% ownership interest, including a 1%
general partnership interest and an 82% limited partnership interest, and
various others (including officers and directors of the Company) are the
remaining limited partners with an approximate 17% aggregate interest;
(i) "Operating Partnership Agreement" means the First Amended and
Restated Agreement of Limited Partnership of Highwoods/Forsyth Limited
Partnership, dated June 14, 1994, as amended;
(j) "Prohibited Transaction" means a sale or other disposition of
property, other than foreclosure property, that is stock in trade of the
taxpayer or other property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
(k) "Qualified REIT Subsidiary" means (1) any corporation in which a
real estate investment trust owned stock during any taxable year ended on or
before December 31, 1997, if 100% of the stock of such corporation was held by
the real estate investment trust at all times during the period such
corporation was in existence and (2) any corporation in which a real estate
investment trust may own stock after the taxable year ended December 31, 1997,
if 100% of the stock of such corporation is held by the real estate investment
trust;
<PAGE>
(l) "Real Estate Assets" means real property (including interests in
real property and interests in mortgages on real property) and shares (or
transferable certificates of beneficial interest) in other entities qualifying
to be taxed as real estate investment trusts;
(m) "Registration Statement" means the Form S-4, File No. 333- , as
in the form filed on June 1, 1998, relating to the planned merger of J.C.
Nichols Company, a corporation organized under the laws of Missouri, with and
into Jackson Acquisition Corp., a corporation organized under the laws of
Maryland and a wholly-owned subsidiary of the Company;
(n) "REIT" means a real estate investment trust;
(o) "REIT Election" means an election to be taxed as a REIT under Code
Section 856(c)(1); and
(p) "Service" means the Internal Revenue Service;
4. That I have consulted with other employees and officers of the Company
regarding the matters set forth below and such persons have agreed in all
respects with the representations made below;
5. That, except as otherwise noted, all representations made below are
true and complete for each of the taxable years ended December 31, 1994,
through December 31, 1997, and through the date hereof; and that I have no
reason to believe that such representations will not continue to be true for
the taxable year that will end December 31, 1998;
6. That the Company has operated and will continue to operate in
accordance with Maryland law, its articles of incorporation, and its bylaws and
in accordance with the statements and representations made in the Registration
Statement;
7. That the Operating Partnership has operated and will continue to
operate in accordance with North Carolina law, the Operating Partnership
Agreement, and the statements and representations made in the Registration
Statement;
8. That I am a licensed attorney familiar with the requirements for
qualification as a REIT under applicable provisions of the Code, that all such
requirements have been satisfied for the Company's taxable years ended December
31, 1994, through December 31, 1997 (except for the election to be taxed as a
REIT for the taxable year ended December 31, 1997, which will be made on the
federal income tax return for such taxable year as noted in Item 9 below); that
I have no reason to believe that such requirements will not continue to be
satisfied in the taxable year that will end December 31, 1998; and that I have
exercised ordinary business care and prudence to attempt to satisfy such
requirements and I have advised Alston & Bird LLP of any matter of which I am
aware that could cause reason for concern as to whether those requirements have
been or will be satisfied;
9. That the Company filed an election to be taxed as a REIT with its tax
return for the period ended December 31, 1994, and has not taken any action to
terminate such election; that the Company will continue such election for the
period ended December 31, 1997, and has not taken any action to prevent such
election; that I have no reason to believe that the Company will not continue
such election or that it will take any action to terminate such election for the
period that will end December 31, 1998; and that the Company has received no
notification formally or informally from the Service or any other person that
such election may not be valid or has been revoked or withdrawn in any respect;
10. That the Company is and will continue to be managed by one or more of
its directors who have exclusive authority over the management of the Company,
the management of its officers, and the management and disposition of the
Company's property;
11. That the beneficial ownership of the Company is and will continue to
be evidenced by transferable shares; and that there are no restrictions on the
transferability of such shares either in the Articles of Incorporation or in
any agreement to which the Company is a party, other than the restrictions set
forth in the Articles of Incorporation that permit the directors to redeem
shares or refuse to transfer shares in any case where such directors, in good
faith, believe that a failure to redeem or that a transfer of shares would
result in the loss of the Company's REIT status;
12. That the Company has been a domestic corporation during its entire
existence;
13. That the Company has not been, is not, and will not be (i) a bank, a
mutual savings bank, a cooperative bank, a domestic building and loan
association or other savings institution, a small business investment company
operating under the Small Business Investment Act of 1958, or a corporation
created under state law for the purpose of promoting, maintaining, and
assisting the economy within a state by making loans, or (ii) an insurance
company;
14. That at no time during the last half of any taxable year for which a
REIT election has been made or during the taxable year ended December 31, 1997,
for which a REIT election will be made has more than 50% of the value of the
<PAGE>
Company's outstanding stock been beneficially owned by five or fewer
individuals, taking into consideration the applicable attribution rules, which
generally apply a look-through provision to determine constructive stock
ownership; and that the Company will take all measures within its control to
ensure that, at no time during the last half of any taxable year for which a
REIT election will be made will more than 50% of the value of the Company's
outstanding stock be beneficially owned by or for five or fewer individuals;
15. That the record and beneficial ownership of the Company has been and
will be held by 100 or more persons;
16. That at least 95% of the gross income derived by the Company
(including the income derived through its ownership of the Operating
Partnership and the Affiliated Partnerships) in all taxable years consisted of:
(i) amounts derived from rental of real property, including rents attributable
to personal property as described in representation (20) below and including
charges for services customarily furnished or rendered in connection with the
rental of such real property, whether or not such charges are separately
stated, but excluding rents received from parties in which the Company owns 10%
or more of the vote or value of equity ownership of such party and excluding
amounts received or accrued with respect to any real or personal property if
the Company furnishes noncustomary services to the tenants or manages or
operates such property other than through an independent contractor from which
neither the Company nor the Partnership derives any form of income; (ii)
interest; (iii) gain realized upon the sale of all or a portion of a Real
Estate Asset that is not a Prohibited Transaction; (iv) dividends; (v)
abatements and refunds of tax; (vi) income and gain from Foreclosure Property;
and (vii) amounts for making loans by secured properties or to purchase or
lease real property; and that I have no reason to believe that such 95% gross
income test will not continue to be met for the taxable year that will end
December 31, 1998;
17. That at least 75% of the gross income derived by the Company
(including the income derived through its ownership of the Operating
Partnership and the Affiliated Partnerships) in all taxable years consisted of:
(i) amounts derived from rental of real property, including rents attributable
to personal property as described in representation (20) below and including
charges for services customarily furnished or rendered in connection with the
rental of such real property, whether or not such charges are separately
stated, but excluding rents received from parties in which the Company owns 10%
or more of the vote or value of equity ownership of such party and excluding
amounts received or accrued with respect to any real or personal property if
the Company furnishes noncustomary services to the tenants or manages or
operates such property other than through an independent contractor from which
neither the Company nor the Partnership derives any form of income; (ii)
interest on obligations secured by mortgages on real property or on interests
in real property; (iii) gain realized upon the sale of all or a portion of the
real property; (iv) abatements and refunds of property tax; (v) income and gain
derived from Foreclosure Property; (vi) amounts for agreeing to make loans
secured by real property or to purchase or lease real property; and (vii) gain
from the sale or disposition of a Real Estate Asset that is not a Prohibited
Transaction; and that I have no reason to believe that such 75% gross income
test will not continue to be met for the taxable year that will end December
31, 1998;
18. That less than 30% of the gross income of the Company (including the
income derived through its ownership of the Operating Partnership and the
Affiliated Partnerships) in all taxable years was derived from (i) the sale or
other disposition of stock or securities held for less than one year; (ii)
property in a transaction that is a Prohibited Transaction; and (iii) real
property (including interests in real property and interests in mortgages on
real property) held for less than four years other than property compulsorily
or involuntarily converted and property that is Foreclosure Property;
19. That the Company, the Operating Partnership and the Affiliated
Partnerships, have not entered into and will not enter into any lease,
agreement, or other arrangement in connection with the rental of real property
under which any amount payable to the Company, the Operating Partnership, or
the Affiliated Partnerships depends or will depend in whole or in part on the
income or profits derived from any tenant (or sub-tenant) of such real property
(except that such an amount may be based on a fixed percentage or percentages
of gross receipts or sales);
20. That (i) less than 15% of the rent received or accrued from any lease
of real property has been and will be attributable to personal property; (ii)
any such personal property has been and will be leased under or in connection
with a lease of the real property; and (iii) no personal property owned by the
Company or the Operating Partnership at any time has had or will have
significant value in excess of its adjusted basis for federal income tax
purposes;
21. That for purposes of Items 16 and 17 above, "rent" does not include
rent received for any real property directly or indirectly from any person in
which the Company owns (i) in the case of a corporation, 10% or more of the
total combined voting power of all classes of stock entitled to vote, or 10% or
more of the total number of shares of all classes of stock; or (ii) in the case
of an entity other than a corporation, an interest of 10% or more in the assets
or net profits of such entity; (for purposes of this representation, ownership
is determined by taking into account the attribution rules, which generally
apply a look-through provision to determine constructive stock ownership);
<PAGE>
22. That the fair market value of any real property (or, with respect to
any construction loan, the fair market value of the land plus the reasonably
estimated cost of the improvements other than personal property) securing a
note, determined at the time the Company became bound to make the loan, is
equal to or exceeds the amount of the loan;
23. That no interest (including interest on obligations secured by
mortgages on real property or interests in real property) received or accrued,
directly or indirectly, by the Company, its Qualified REIT Subsidiaries, the
Operating Partnership, or the Affiliated Partnerships has been or will be
determined in whole or in part by reference to the income or profits derived by
any person;
24. That neither the Company, its Qualified REIT Subsidiaries, the
Operating Partnership, nor the Affiliated Partnerships have owned any
Foreclosure Property (other than property the income from which would not cause
the statements contained in Items 16 and 17 above to no longer be true).
25. That the Company has reviewed and will continue to review all leases
for each property to ensure that such leases conform with all REIT
requirements;
26. For taxable years prior to 1998, that neither the Company, the
Operating Partnership, nor the Affiliated Partnerships, have provided or will
provide any services to any tenant other than services that would be considered
customarily furnished or rendered in connection with the rental of real
property, such as the furnishing of water, heat, lights, trash collection, and
maintenance of common areas; for taxable years beginning after December 31,
1997, that neither the Company, the Operating Partnership, nor the Affiliated
Partnerships have provided or will provide services that would generate
impermissible service income in an amount that exceeds 1% of all amounts
received or accrued during the taxable year, directly or indirectly, by the
Company with respect to such property, with the amount treated as received or
accrued by the Company for such impermissible services not being less than 150%
of the direct cost of the Company in furnishing or rending such services (for
purposes of this representation, impermissible service income means any amount
received or accrued directly or indirectly by the Company for services furnished
or rendered by the Company to the tenants or its property or for managing or
operating such property, unless (i) such services, management, or operations are
provided through an independent contractor or (ii) such services are customarily
furnished or rendered in connection with the rental of real property, such as
the furnishing of water, heat, lights, trash collection and maintenance of
common areas);
27. That no Independent Contractor providing management and operating
functions for either the Company, the Operating Partnership, or the Affiliated
Partnerships, or any of their properties has any ownership interest in the
Company in excess of 35%;
28. That at the close of each quarter of any taxable year that the Company
has made or will make a REIT election, at least 75% of the total combined value
of its assets, including its proportionate share of the assets of the Operating
Partnership and the Affiliated Partnerships, has or will consist of Real Estate
Assets, cash and cash items (including receivables), and government securities;
29. That at the close of each quarter of any taxable year that the Company
has made or will make a REIT election not more than 25% of the value of the
Company's total assets (including those assets owned indirectly through the
Operating Partnership or the Affiliated Partnerships) has been or will be
represented by securities (other than government securities) for purposes of
this calculation limited in respect of any one issuer to an amount not greater
in value than 5% of the value of the total assets of the Company and to not
more than 10% of the outstanding voting securities of such issuer;
30. That the Company's pro rata share of the value of the securities of
Highwoods Services has not exceeded 5% of the total value of the Company's
assets at the end of any calendar quarter; that 99% of the voting stock of
Highwoods Services is owned by Ronald P. Gibson and Edward J. Fritsch; that the
Company has no informal or formal agreement with Highwoods Services or the
other shareholders of Highwoods Services regarding the voting of the Highwoods
Services stock; and that the stock owned by Ronald P. Gibson and Edward J.
Fritsch is not subject to any voting or purchase agreement that effectively
would deny such individuals of the economic rights of such stock;
31. That the Company, the Operating Partnership, and the Affiliated
Partnerships have held and hold all real property and all other assets for
investment purposes and not as (i) stock in trade or other property of a kind
which would properly be includible in inventory if on hand at the close of the
taxable year, or (ii) property held primarily for sale to customers in the
ordinary course of the trade or business of the Operating Partnership or the
Company;
32. That for each taxable year for which a REIT election has been or will
be made the Company has distributed or will distribute an amount equal to or
exceeding the sum of 95% of the Company's real estate investment trust taxable
income for such taxable year, determined without regard for the deduction for
dividends paid and by excluding any net capital gain, and 95% of the excess of
the net income from Foreclosure Property over the tax imposed on such income,
reduced by, any excess noncash income;
33. That, in each taxable year for which a REIT election has been or will
be made, the dividends paid by the Company on the Company's common stock were
made pro rata, with no preference to any share of the common stock as compared
with other such shares;
34. That for each taxable year for which a REIT election has been or will
be made the Company has and will (i) maintain stock records that disclose
actual ownership of the Company's outstanding stock, and (ii) within 30 days of
each
<PAGE>
taxable year end, demand a written statement from shareholders of record of five
percent or more of the Company for the purpose of disclosing actual ownership;
35. That the Company has at all times adopted and will continue to use a
calendar year accounting period;
36. That other than the direct ownership of the stock in Highwoods/Florida
GP Corp., Highwoods Realty GP Corp., Highwoods/Tennessee Properties, Inc.,
Jackson Acquisition Corporation, Florida Transition Co. II, Garcia Property
Management, Inc., Westshore Square, Inc., and Garcia, Meyers Co., and the
indirect ownership of stock in Highwoods Services and its subsidiaries,
Southeast Realty Options Corp. and PSC Acquisition Corporation (which is owned
through RC One LLC), the Company has owned no stock or other voting securities
in any corporation (including mutual funds) at the close of any quarter of any
taxable year ended on or before December 31, 1997, or as of the date hereof;
37. That each of Highwoods/Florida GP Corp., Highwoods Realty GP Corp.,
Highwoods/Tennessee Properties, Inc., Jackson Acquisition Corporation, Florida
Transition Co. II, Garcia Property Management, Inc., Westshore Square, Inc.,
and Garcia, Meyers Co. is a Qualified REIT Subsidiary;
38. That the stock of Garcia Property Management, Inc. was acquired for
cash by Company; and that, at the time of such transaction, Garcia Property
Management, Inc. was a Subchapter S corporation and had no accumulated
Subchapter C earnings and profits;
39. That the stock of Garcia, Meyers Co. was acquired for cash by the
Company; and that, at the time of such transaction, Garcia, Meyers Co. was a
Subchapter S corporation and had no accumulated Subchapter C earnings and
profits;
40. That the stock of Westshore Square, Inc. was acquired for cash by the
Company; and that, at the time of such transaction, Westshore Square, Inc. was
a Subchapter S corporation and had no accumulated Subchapter C earnings and
profits;
41. That the Operating Partnership and the Affiliated Partnerships are the
only partnerships in which the Company has held a direct or indirect interest
at the close of any quarter of any taxable year ended on or before December 31,
1997, or as of the date hereof; that each of these partnerships were formed as
partnerships under the laws of the applicable states; that Shockoe Plaza LLC,
which is owned 99% by the Operating Partnership and 1% by Highwoods Services,
and RC One LLC, which is owned 100% by Highwoods Services, were formed as
limited liability companies under the laws of the applicable states and elected
to be treated as partnerships for federal income tax purposes; that all such
partnerships (including Shockoe Plaza LLC and RC One LLC) have made no election
to be treated as a corporation or any other type of entity for federal income
tax purposes; and that the Company has received no notification formally or
informally from the Service or any other person challenging the status of any
of these entities as a partnership for federal income tax purposes;
42. That the Company is conducting due diligence and I have no reason to
believe that the Easton-Babcock Transaction or the ownership of any of the
properties acquired directly or indirectly thereby will cause the Company to
fail to satisfy any of the matters set forth in this Certificate or to fail to
qualify as a REIT in the taxable year that will end December 31, 1998;
43. That the Company is conducting due diligence and I have no reason to
believe that the J.C. Nichols Transaction or the ownership of any of the
properties acquired directly or indirectly thereby will cause the Company to
fail to satisfy any of the matters set forth in this Certificate or to fail to
qualify as a REIT in the taxable year that will end December 31, 1998;
44. That the Company is not a party to any stock or asset purchase
agreement, including any plan of merger or reorganization, that will cause the
Company to fail to satisfy any of the matters set forth in this Certificate or
to fail to qualify as a REIT in the taxable year that will end December 31,
1998;
45. That the Company has filed timely income tax returns in each year of
its existence and has not included any information in such returns due to fraud
with an intent to evade taxes;
46. That the Company's ownership interests in the Operating Partnership
and its other directly or indirectly held subsidiaries (the "Subsidiaries") are
held free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity;
47. That the Company will undertake to advise you of any change in the
representations made herein for so long as the Registration Statement referred
to above remains in effect; and
48. That, in rendering an opinion in connection with the Registration
Statement, Alston & Bird is entitled to rely on the factual representations set
forth in previous Officer's Certificates to the extent that such
representations are not otherwise reflected herein.
<PAGE>
The foregoing Certification is provided to Alston & Bird LLP in connection
with rendering an opinion regarding the qualification of the Company as a REIT
and may not be relied upon for any other purpose or by any other party. It is
understood that such opinion is limited to the factual matters revealed
pursuant hereto and other materials provided to them and that to the extent
required, I have asked questions of the appropriate individuals to confirm the
foregoing answers, and to the best of my knowledge and belief such answers are
true, correct, and complete and in no way are misleading.
June 1, 1998 /s/ MACK D. PRIDGEN, III
--------------------------------------
MACK D. PRIDGEN, III
Vice-President and General Counsel
Highwoods Properties, Inc.
<PAGE>
Exhibit 23.3
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4 No. 33- ) and related prospectus of
Highwoods Properties, Inc. for the registration of up to a maximum of 9,860,496
shares of its common stock and to the incorporation by reference therein of our
reports (a) dated February 20, 1998, with respect to the consolidated financial
statements and schedule of Highwoods Properties, Inc. included in its Annual
Report (Form 10-K) for the year ended December 31, 1997 (as amended on Form
10-K/A on April 29, 1998 and May 19, 1998); (b) dated January 24, 1997 and
January 25, 1997 with respect to the Combined Statements of Revenues and
Certain Expenses of Century Center and Anderson Properties, respectively,
included in Highwoods Properties, Inc.'s Current Report of Forms 8-K dated
January 9, 1997 (as amended on Form 8-K/A on February 7, 1997, March 10, 1997
and April 28, 1998), and (c) dated January 16, 1998 with respect to the
Combined Statements of Revenues and Certain Expenses of Riparius Properties and
Shelton Properties and the Statement of Revenues and Certain Expenses of
Winners Circle for the year ended December 31, 1996 included in the Current
Report on Form 8-K of Highwoods Properties, Inc. dated November 17, 1997, all
filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
/s/ Ernst & Young LLP
Raleigh, North Carolina
May 29, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement on
Form S-4 (File No. 333- ) of our reports dated September 12, 1997, on our
audits of the combined statement of revenues and certain operating expenses of
the Associated Capital Properties Portfolio for the year ended December 31,
1996, and the combined statement of revenues and certain operating expenses of
the 1997 Pending Acquisitions for the year ended December 31, 1996, which
reports are included in the Forms 8-K of Highwoods Properties, Inc. dated
August 27, 1997 (as amended on September 23, 1997) and October 1, 1997. We also
consent to the reference to our firm under the caption "Experts".
COOPERS & LYBRAND L.L.P
/s/ Coopers & Lybrand L.L.P.
Memphis, Tennessee
May 27, 1998
<PAGE>
Exhibit 23.5
CONSENT OF MORGAN STANLEY & CO. INCORPORATED
May 29, 1998
J.C. Nichols Company
310 Ward Parkway
Kansas City, Missouri 64112
Dear Sirs:
We hereby consent to the inclusion in the Registration Statement of
Highwoods Properties, Inc. (the "Company") on Form S-4, relating to the
proposed merger of J.C. Nichols Company ("J.C. Nichols") with the Company, of
our opinion letter appearing as Appendix B to the Proxy Statement/Prospectus
which is a part of the Registration Statement, and to the references of our
firm name therein. In giving such consent, we do not thereby admit that we come
within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations adopted by the
Securities and Exchange Commission thereunder nor do we admit that we are
experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ YIE-HSIN HUNG
----------------------------------
Yie-Hsin Hung
Principal
<PAGE>
Exhibit 23.6
Independent Accountants' Consent
The Board of Directors
J.C. Nichols Company:
We consent to the use of our reports included herein and to the reference to
our firm under the heading of "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
/s/ KPMG Peat Marwick LLP
Kansas City, Missouri
May 29, 1998
