1 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 1-7094 EASTGROUP PROPERTIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 13-2711135 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION IDENTIFICATION NO.) 300 ONE JACKSON PLACE 188 EAST CAPITOL STREET JACKSON, MISSISSIPPI 39201 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER: (601) 354-3555 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: SHARES OF COMMON STOCK, $.0001 PAR VALUE, SHARES OF SERIES A 9.00% CUMULATIVE REDEEMABLE PREFERRED, $.0001 PAR VALUE NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES (x) NO ( ) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (x) The aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 10, 1999 was $275,867,516. The number of shares of common stock, $.0001 par value, outstanding as of March 10, 1999 was 16,287,381. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS ARE INCORPORATED BY REFERENCE INTO PART III.
2 PART I ITEM 1. BUSINESS. ORGANIZATION EastGroup Properties, Inc. (the "Company" or "EastGroup") is an equity real estate investment trust ("REIT") organized in 1969. The Company has elected to be taxed as a real estate investment trust under Sections 856-860 of the Internal Revenue Code, as amended, and intends to continue to qualify to be so taxed. On March 20, 1997, the Company announced that its Board of Directors approved a three-for-two share split in the form of a share dividend of one share for every two shares outstanding. The share dividend was distributed on April 7, 1997 to shareholders of record as of March 31, 1997. All share and per share amounts in the Company's financial statements have been retroactively restated for the share split. ADMINISTRATION The Company is self-administered and maintains its principal executive offices in Jackson, Mississippi. As of March 10, 1999, EastGroup had 45 full-time and three part-time employees. CURRENT OPERATIONS EastGroup is a self-administered REIT focused on the ownership, acquisition and selective development of industrial properties in major Sunbelt markets throughout the United States. As of December 31, 1998, EastGroup's portfolio included industrial properties comprising over 14 million square feet of leasable space. As of December 31, 1998, the industrial portfolio was 98% leased. During 1998, EastGroup significantly expanded its industrial properties portfolio through 30 acquisitions in seven states, aggregating 4,954,000 square feet of leasable space for a total cost of approximately $178,163,000. Additionally, capital improvements amounting to $7,543,000 were made on existing properties, and $25,511,000 was invested in industrial development projects. In addition to direct property acquisitions, EastGroup also seeks to grow its portfolio through the acquisition of other public and private real estate companies and REITs. EastGroup invested $1,832,000 in stock of other REITs during the year. The Company sold three industrial properties, four apartment complexes, one office building and one small parcel of land for net proceeds of $50,620,000 and gains of approximately $9,257,000. Deferred gains of $456,000 were also recognized on two other properties for total gains of $9,713,000. The Company intends to continue to qualify as a REIT under the Code. Ordinary taxable income will continue to be paid to the stockholders. The Company has the option of (i) paying out capital gains to the stockholders with no tax to the Company, (ii) paying a capital gains tax and retaining the gains on sales, or (iii) treating the capital gains as having been distributed to the stockholders, paying the tax on the gain deemed distributed and allocating the tax paid as a credit to the stockholders. The book value of the property sold and the retained portion of capital gains, if any, are generally reinvested by the Company, which considers many factors in making these investments, such as type of property, location, current yield, potential for appreciation and others. EastGroup incurs short-term floating rate debt in connection with the acquisition of real estate and payment of costs of development projects, and attempts to replace floating rate debt with fixed-rate term loans secured by real property or to repay the debt with the proceeds of sales of equity securities as market conditions permit. EastGroup also may, in appropriate circumstances, acquire one or more properties in exchange for EastGroup's equity securities. 2
3 EastGroup holds its properties as long-term investments, but may determine to sell certain properties that no longer meet its investment criteria. The Company may provide financing in connection with such sales of property if market conditions so require, but it does not presently intend to make loans other than in connection with such transactions. EastGroup has no present intentions of underwriting securities of other issuers. The strategies and policies set forth above were determined, and are subject to review by, EastGroup's Board of Directors which may change such strategies or policies based upon its evaluation of the state of the real estate market, the performance of EastGroup's assets, capital and credit market conditions, and other relevant factors. EastGroup provides annual reports to its stockholders, which contain financial statements audited by the Company's independent public accountants. ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances and regulations, an owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in such property. Such laws often impose such liability without regard to whether the owner knows of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate such substances, may adversely affect the owner's ability to sell or rent such property or to use such property as collateral in its borrowings. All of EastGroup's properties have been subjected to environmental audits by independent environmental consultants, which reports have not revealed any potential significant environmental liability. Management of EastGroup is not aware of any environmental liability that would have a material adverse effect on EastGroup's business, assets, financial position or results of operations. ITEM 2. PROPERTIES. The Company conducts its primary operations from approximately 11,000 square feet of rented office space located at 300 One Jackson Place, 188 East Capitol Street, Jackson, Mississippi. In March 1998, EastGroup acquired Ensign Properties, Inc., an independent industrial developer in Orlando. This acquisition allowed EastGroup to become self-managed in Orlando and Tampa with plans to expand self-management to its other Florida markets. It also significantly increases the Company's development capability in Florida. In September 1998, EastGroup opened a western regional office based in Phoenix, Arizona. This office manages the Company's operations in Arizona and California that total over 4.6 million square feet of industrial space. At December 31, 1998, the Company did not own any single property that is 10% or more of total book value or 10% or more of total gross revenues and thus is not subject to the requirements of Items 14 and 15 of Form S-11. ITEM 3. LEGAL PROCEEDINGS. The Company is not presently involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company or its properties, other than routine litigation arising in the ordinary course of business or which is expected to be covered by the Company's liability insurance. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. SHARES OF COMMON STOCK MARKET PRICES AND DIVIDENDS The Company's shares of Common Stock are presently listed for trading on the New York Stock Exchange under the symbol "EGP." The following table shows the high and low share prices for each quarter (first quarter of 1997 restated to give effect to the 3 for 2 share split in April 1997) reported by the 3
4 New York Stock Exchange during the past two years and per share distributions paid (restated to give effect to the share split) for each quarter. <TABLE> <CAPTION> CALENDAR 1998 CALENDAR 1997 ------------- ------------- QUARTER HIGH LOW DISTRIBUTIONS HIGH LOW DISTRIBUTIONS - ------- ---- --- ------------- ---- --- ------------- <S> <C> <C> <C> <C> <C> <C> First $22.13 19.44 $ .34 $19.92 17.75 $ .33 Second 20.88 18.88 .34 20.25 17.38 .33 Third 21.88 16.31 .36 22.94 19.25 .34 Fourth 19.75 16.75 .36 22.88 18.75 .34 ------ ------ $ 1.40 $ 1.34 ====== ====== </TABLE> SHARES OF SERIES A PREFERRED STOCK MARKET PRICES AND DIVIDENDS The Company's shares of Series A 9.00% Cumulative Redeemable Preferred Stock are also listed for trading on the New York Stock Exchange and trade under the symbol "EGP PrA." The following table shows the high and low preferred share prices and per share distributions paid for each quarter of 1998 (no Preferred Shares were issued in 1997 or in the first quarter 1998) reported by the New York Stock Exchange. <TABLE> <CAPTION> CALENDAR 1998 CALENDAR 1997 ------------- ------------- QUARTER HIGH LOW DISTRIBUTIONS HIGH LOW DISTRIBUTIONS - ------- ---- --- ------------- ---- --- ------------- <S> <C> <C> <C> <C> <C> <C> First N/A N/A N/A N/A N/A N/A Second 25.50 25.38 N/A N/A N/A N/A Third 25.50 23.50 $.1625 N/A N/A N/A Fourth 25.25 23.50 .5625 N/A N/A N/A ------ $.7250 ====== </TABLE> As of March 10, 1999, there were 1,291 holders of record of the Company's 16,287,381 outstanding shares of common stock. Approximately 91% of the Company's outstanding common shares are held by CEDE & Co., which is accounted for as a single shareholder of record for multiple common stock owners. In 1998, of the $1.40 per common share total distributions paid, $1.36 per share was taxable as ordinary income for federal income tax purposes and $.04 per share represented a 20% long-term capital gain. In 1997, of the $1.34 per common share total distributions paid, $1.14 per share was taxable as ordinary income for federal income tax purposes and $.20 per share represented a return of capital. As of March 10, 1999, there were 47 holders of record of the Company's 1,725,000 outstanding shares of Series A preferred stock. Approximately 98% of the Company's outstanding Series A preferred shares are held by CEDE & Co., which is accounted for as a single shareholder of record for multiple preferred stock owners. All of the $.725 per share Series A preferred stock distributions paid in 1998 was taxable as ordinary income for federal income tax purposes. In September 1998, EastGroup entered into an agreement with Five Arrows Realty Securities II, L.L.C., an investment fund managed by Rothschild Realty, Inc., a member of the Rothschild Group, providing for the sale of up to 2,800,000 shares of Series B 8.75% Cumulative Convertible Preferred Stock at a net price of $24.50 per share. The Series B Preferred Stock, which is convertible into common stock at a conversion price of $22.00 per share, is entitled to quarterly dividends in arrears equal to the greater of $0.547 per share or the dividend on the number of shares of common stock into which a share of Series B Preferred Stock is convertible. In December 1998, the Company sold $10 million of the Series B Preferred Stock to Five Arrows and plans to sell the remaining $60 million by September 25, 1999. No dividends were paid on the Series B preferred stock during 1998. 4
5 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA. The following table sets forth selected consolidated financial data for the Company and should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report. <TABLE> <CAPTION> Years Ended December 31, -------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> OPERATING DATA: Revenues Income from real estate operations $74,312 49,791 37,143 28,386 23,194 Interest 1,868 2,571 1,718 1,036 1,054 Other 548 1,260 904 842 647 ------- ------- ------- ------- ------- 76,728 53,622 39,765 30,264 24,895 ------- ------- ------- ------- ------- Expenses Operating expenses of real estate operations 19,328 14,825 13,262 11,575 9,741 Interest expense 16,948 10,551 8,930 6,287 3,905 Depreciation and amortization 16,574 10,409 7,759 5,613 4,323 General and administrative expenses 3,822 2,923 2,356 2,180 2,046 Stock appreciation rights and incentive compensation recovery - - - - (129) ------- ------- ------- ------- ------- 56,672 38,708 32,307 25,655 19,886 ------- ------- ------- ------- ------- Income before minority interest and gain on investments 20,056 14,914 7,458 4,609 5,009 Minority interests in joint ventures 433 512 289 220 163 ------- ------- ------- ------- ------- Income before gains on investments 19,623 14,402 7,169 4,389 4,846 Gains on investments Real estate 9,713 6,377 5,334 3,322 2,322 Real estate investment trust securities - - 6 - - ------- ------- ------- ------- ------- Net income 29,336 20,779 12,509 7,711 7,168 Preferred dividends 2,070 - - - - ------- ------- ------- ------- ------- Net income available to common shareholders $27,266 20,779 12,509 7,711 7,168 ======= ======= ======= ======= ======= BASIC PER SHARE DATA: Net income available to common shareholders $ 1.67 1.58 1.44 1.22 1.16 Weighted average number of shares outstanding 16,283 13,176 8,677 6,338 6,170 DILUTED PER SHARE DATA: Net income available to common shareholders $ 1.66 1.56 1.43 1.21 1.15 Weighted average number of shares outstanding 16,432 13,338 8,749 6,362 6,220 OTHER PER SHARE DATA: Book value (at end of year) $ 16.12 15.88 13.78 13.06 12.98 Common distributions declared 1.40 1.34 1.28 1.23 0.87 Common distributions paid 1.40 1.34 1.28 1.23 1.16 </TABLE> 5
6 <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (In thousands, except per share data) <S> <C> <C> <C> <C> <C> OTHER DATA: Funds from operations: Net income $ 29,336 20,779 12,509 7,711 7,168 Preferred dividends (2,070) - - - - --------- --------- --------- --------- --------- Net income available to common shareholders 27,266 20,779 12,509 7,711 7,168 Add: Depreciation and amortization 16,574 10,409 7,759 5,613 4,323 Real estate investment trust dividends received - - 77 182 60 Deduct: Gains on investments, net (9,713) (6,377) (5,340) (3,322) (2,322) Equity in earnings of real estate investment trust - - (43) (203) (123) Stock appreciation rights and incentive compensation recovery - - - - (129) Other (324) (284) (142) (134) (64) --------- --------- --------- --------- --------- Funds from operations (1) $ 33,803 24,527 14,820 9,847 8,913 ========= ========= ========= ========= ========= Cash flows provided by (used in): Operating activities $ 29,393 23,685 13,996 9,746 8,448 Investing activities (123,592) (79,959) (577) (5,721) (46,831) Financing activities 95,685 57,134 (13,007) (4,300) 35,994 BALANCE SHEET DATA (AT END OF YEAR): Real estate investments, at cost (2) $ 582,565 419,857 292,620 162,400 165,395 Real estate investments, net of accumulated depreciation and allowance for losses (2) 539,729 387,545 269,058 143,194 149,507 Total assets 567,548 413,127 281,455 157,955 154,860 Mortgage, bond and bank loans payable 236,816 147,150 129,078 71,562 68,229 Total liabilities 251,524 155,812 136,129 75,055 72,684 Total shareholders' equity 316,024 257,315 145,326 82,900 82,176 </TABLE> 6
7 (1) EastGroup defines funds from operations ("FFO"), consistent with the National Association of Real Estate Investment Trusts ("NAREIT") definition, as net income (loss)(computed in accordance with generally accepted accounting principles ("GAAP")), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The Company believes FFO is helpful to investors as a measure of the performance of an equity REIT because, along with cash flows from operating activities, financing activities and investing activities, it provides investors with an understanding of the ability of the Company to incur and service debt and to make capital expenditures. The Company computes FFO in accordance with standards established by EastGroup, which may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions. (2) Does not include a 50% controlled joint venture investment of $4,367,000 at December 31, 1996 that was sold in 1997, or the $500,000 land purchase-leaseback held for sale at December 31, 1998. 7
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION: Assets of EastGroup were $567,548,000 at December 31, 1998, an increase of $154,421,000 from December 31, 1997. Liabilities (excluding minority interests) increased $95,445,000 to $248,821,000; minority interests increased $267,000 to $2,703,000; and stockholders' equity increased $58,709,000 to $316,024,000 during the same period. Book value per common share increased from $15.88 at December 31, 1997 to $16.12 at December 31, 1998. Industrial properties increased $190,379,000 during the year ended December 31, 1998 as compared to 1997. This increase was primarily due to the acquisition of 12 industrial properties for $81,004,000 and the purchase of the remaining 25% interest in WestPort Commerce for $793,000 for a total of $81,797,000 (as detailed below) and the acquisition of 18 properties in the Meridian merger with an allocated purchase price of $96,366,000 (as detailed below). Capital improvements of $6,777,000 were made on existing and acquired properties. Adding to these increases were the reclassifications of five industrial properties from industrial development with total costs of $13,618,000. Offsetting these increases were the sales of three industrial properties with total costs of $4,547,000 and the reclassification of one industrial property with total costs of $3,179,000 to real estate held for sale. <TABLE> <CAPTION> INDUSTRIAL PROPERTIES SIZE DATE COST ACQUIRED IN 1998 LOCATION (SQUARE FEET) ACQUIRED (IN THOUSANDS) - ---------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Estrella East Phoenix, Arizona 174,000 02-18-98 $5,322 Stemmons Circle Dallas, Texas 99,000 03-06-98 2,377 51st Avenue Phoenix, Arizona 79,000 03-09-98 2,329 Airpark Distribution Memphis, Tennessee 92,000 04-01-98 2,166 WestPort Commerce (25% interest) Tampa, Florida 140,000 06-05-98 793 Industry Distribution Los Angeles, California 572,000 06-11-98 22,603 World Houston 1 & 2 Houston, Texas 158,000 06-18-98 6,553 Airport Distribution Tucson, Arizona 162,000 06-23-98 5,775 Interstate Commerce Fort Lauderdale, Florida 85,000 06-24-98 3,137 American Plaza Houston, Texas 121,000 06-25-98 5,322 Shaw Commerce Fresno, California 398,000 06-25-98 14,092 Northpointe Commerce Oklahoma City, Oklahoma 58,000 09-01-98 3,890 World Houston 3, 4 & 5 Houston, Texas 166,000 09-25-98 7,438 ------- TOTAL INDUSTRIAL ACQUISITIONS $81,797 ======= </TABLE> 8
9 <TABLE> <CAPTION> INDUSTRIAL PROPERTIES ACQUIRED IN SIZE MERGER COST MERIDIAN MERGER LOCATION (SQUARE FEET) DATE (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> East Maricopa Distribution Phoenix, Arizona 14,000 06-01-98 $435 East University I & II Phoenix, Arizona 145,000 06-01-98 5,602 7th Street Distribution Phoenix, Arizona 39,000 06-01-98 1,863 55th Street Distribution Phoenix, Arizona 131,000 06-01-98 4,629 Ethan Allen Distribution Los Angeles, California 300,000 06-01-98 12,719 Park Ridge Distribution Boynton Beach, Florida 45,000 06-01-98 3,181 West Palm I & II West Palm Beach, Florida 26,000 06-01-98 3,177 Auburn Facility Auburn Hills, Michigan 114,000 06-01-98 16,152 Air Park Distribution II Memphis, Tennessee 17,000 06-01-98 329 Delp Distribution I, II and III Memphis, Tennessee 274,000 06-01-98 5,246 Getwell Distribution Memphis, Tennessee 26,000 06-01-98 754 Lamar Distribution Memphis, Tennessee 276,000 06-01-98 6,730 Penney Distribution Memphis, Tennessee 106,000 06-01-98 2,432 Senator Street Distribution II Memphis, Tennessee 105,000 06-01-98 2,177 Waldenbooks Distribution Nashville, Tennessee 564,000 06-01-98 22,145 Ambassador Row Dallas, Texas 317,000 06-01-98 5,781 Carpenter Duplex Dallas, Texas 47,000 06-01-98 1,041 Viscount Row Dallas, Texas 104,000 06-01-98 1,973 ------- TOTAL MERIDIAN INDUSTRIAL $96,366 ======= </TABLE> Industrial development increased $11,851,000 during the year ended December 31, 1998. This increase resulted primarily from development costs of $25,511,000 on existing and completed development properties, offset by costs of $13,618,000 on completed development properties reclassified to industrial properties, as detailed below (approximately $251,000 of costs were incurred on such properties subsequent to reclassification to industrial properties). 9
10 <TABLE> <CAPTION> COSTS INCURRED SIZE AT ----------------------------------- COMPLETION FOR THE 12 MONTHS CUMULATIVE AS ESTIMATED (SQUARE FEET) ENDED 12-31-98 OF 12-31-98 TOTAL COSTS (1) ------------------------------------------------------------------- (IN THOUSANDS) <S> <C> <C> <C> <C> LEASE-UP: - --------- Walden Distribution Center II Tampa, Florida 122,000 $ 1,774 4,191 4,300 Sunbelt Distribution Center II Orlando, Florida 61,000 1,030 2,212 2,300 John Young Orlando, Florida 51,000 2,357 2,915 2,915 World Houston 7 & 8 Houston, Texas 166,000 4,687 4,687 7,600 ------------------------------------------------------------------ TOTAL LEASE-UP 400,000 9,848 14,005 17,115 ------------------------------------------------------------------ UNDER CONSTRUCTION: - ------------------- Rampart Distribution Center III Denver, Colorado 92,000 1,134 2,172 5,553 Sample 95 II Pompano, Florida 70,000 1,012 1,012 3,587 World Houston 9 Houston, Texas 160,000 1,016 1,016 7,289 Airport Commerce Center Tampa, Florida 108,000 1,385 1,385 5,962 John Young II Orlando, Florida 46,000 665 665 3,164 Premier Beverage Tampa, Florida 222,000 408 408 7,775 Chestnut City of Industry, California 75,000 1,674 1,674 5,207 ------------------------------------------------------------------ TOTAL UNDER CONSTRUCTION 773,000 7,294 8,332 38,537 ------------------------------------------------------------------ APPROVED BY BOARD: - ------------------ Westlake I Tampa, Florida 70,000 1,611 1,611 3,922 Glenmont I Houston, Texas 110,000 937 937 3,551 Main Street Carson , California 106,000 -- -- 5,548 ------------------------------------------------------------------ TOTAL APPROVED BY BOARD 286,000 2,548 2,548 13,021 ------------------------------------------------------------------ PROSPECTIVE DEVELOPMENT: - ------------------------ Houston, Texas 110,000 -- -- 3,900 Tampa, Florida 459,000 460 797 21,600 ------------------------------------------------------------------ TOTAL PROSPECTIVE DEVELOPMENT 569,000 460 797 25,500 ------------------------------------------------------------------ 2,028,000 $ 20,150 25,682 94,173 ================================================================== COMPLETED DEVELOPMENT AND TRANSFERRED TO INDUSTRIAL PROPERTIES DURING 1998: - ----------------------- Benjamin Distribution Center II Tampa, Florida 47,000 $ 815 2,437 2,437 Palm River II Tampa, Florida 72,000 1,236 3,307 3,307 Rampart Distribution Center II Denver, Colorado 66,000 294 3,266 3,266 Chancellor Center Orlando, Florida 51,000 168 2,011 2,011 World Houston 6 Houston, Texas 68,000 2,848 2,848 2,848 ------------------------------------------------------------------ TOTAL TRANSFERRED TO INDUSTRIAL 304,000 $ 5,361 13,869 13,869 ================================================================== </TABLE> (1) The information provided above includes forward-looking data based on current construction schedules, the status of lease negotiations with potential tenants and other relevant factors currently available to the Company. There can be no assurance that any of these factors will not change or that any change will not affect the accuracy of such forward-looking data. Among the factors that could affect the accuracy of the forward-looking statements are weather, default or other failure of performance by contractors, increases in the price of construction materials or the unavailability of such materials, failure to obtain necessary permits or approvals from governmental entities, changes in local and/or national economic conditions, increased competition for tenants or other occurrences that could depress rental rates, and other factors not within the control of the Company. Office buildings decreased $32,857,000 during the year ended December 31, 1998, as a result of capital improvements of $500,000, the sale of the Columbia Place Office Building with a cost of $12,012,000, and the reclassification of the 8150 Leesburg Pike Office Building with a cost of $21,345,000 to real estate held for sale. Apartments decreased $6,514,000 as a result of capital improvements of $206,000 and the sale of Grande Pointe Apartments with a cost of $6,720,000. Real estate held for sale increased $2,387,000 primarily as a result of capital improvements of $60,000 and the reclassifications of three properties to real estate held for sale with a total cost of $25,023,000. These increases were primarily offset by the sales of three apartment complexes with total costs of $22,687,000 and one small parcel of land with a cost of $9,000. 10
11 Accumulated depreciation on real estate properties and real estate held for sale increased $10,524,000 due to depreciation expense of $15,239,000, offset by the sale of eight properties with total accumulated depreciation of $4,715,000. Mortgage loans receivable decreased $2,038,000 during 1998. Decreases resulted from regularly scheduled principal payments of $1,467,000 and the payoff of the Palm River Center mortgage of $1,575,000. Increases resulted from the amortization of loan discounts of $621,000 and deferred gains (recognized on the installment method) of $383,000. Investments in real estate investment trusts decreased from $16,518,000 at December 31, 1997 to $5,737,000 at December 31, 1998. The following table provides an analysis of the changes that occurred in these investments and accounts for the decrease. <TABLE> <CAPTION> (In thousands) ----------------- <S> <C> Balance at December 31, 1997 $16,518 Purchase of additional Meridian shares 52,760 Recognized unrealized gains prior to Meridian merger 2,100 Investment of Meridian allocated to purchase price at merger date (66,515) Balance of Meridian unrealized gains written off at merger date (850) Investment in other real estate investment trusts 1,832 Recognized unrealized loss on other real estate investment trusts (108) ----------------- Balance at December 31, 1998, consisting of Franklin Select Realty Trust shares $5,737 ================= </TABLE> Other assets increased $11,032,00 during 1998 primarily as a result of $4,324,000 received from the sale of Columbia Place Office Building and placed in escrow to be used in facilitating tax deferred exchanges, unamortized goodwill of $1,174,000 relating to the Ensign acquisition, prepaid costs of $947,000 relating to the Series B Preferred Stock offering which will be netted against future funding proceeds, good faith deposit of $940,000 relating to the $47,000,000 Metropolitan Life mortgage loan and other costs such as leasing commissions and unamortized organization costs. Mortgage notes payable increased $17,114,000 during 1998, as a result of regularly scheduled principal payments of $2,978,000, the repayments of $1,668,000 on the Metro mortgage and $1,620,000 on the Lamar mortgage, and the assumptions by the buyer of the following mortgages: $4,173,000 on the Doral Club Apartments mortgage, $5,682,000 on the Sutton House Apartments mortgage and $9,550,000 on the Columbia Place mortgage. These decreases were offset by the placement of a $2,200,000 mortgage on the Lamar Distribution Center with monthly principal and interest of $16,925, rate of 6.9% and maturity date of December 1, 2008. In addition, the Company assumed debt on the following properties: $2,610,000 on the acquisition of Estrella, $4,553,000 on the acquisition of World Houston 1 & 2, and $33,422,000 on the Meridian VIII acquisition. Terms of these mortgage notes payable are detailed in the following tables. MORTGAGES ASSUMED IN PROPERTY ACQUISITIONS ------------------------------------------ <TABLE> <CAPTION> DATE OF AMOUNT OF ASSUMPTION INTEREST MATURITY MORTGAGE OF LOAN PROPERTY RATE DATE (IN THOUSANDS) ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 02-18-98 Estrella 9.250% 01-02-03 $2,610 06-18-98 World Houston 1 & 2 7.770% 04-15-07 4,553 ------ $7,163 ====== </TABLE> MORTGAGES ASSUMED IN MERIDIAN MERGER ------------------------------------ <TABLE> <CAPTION> DATE OF AMOUNT OF ASSUMPTION INTEREST MATURITY MORTGAGE OF LOAN PROPERTY RATE DATE (IN THOUSANDS) ------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> 06-01-98 Auburn 8.875% 09-01-09 $ 5,529 06-01-98 West Palm 8.250% 09-01-00 986 06-01-98 Ethan Allen 8.060% 06-26-07 6,438 06-01-98 55th St., 7th St. & E. Univ. 8.060% 06-26-07 5,942 06-01-98 Lamar 8.000% 11-01-98 1,642 06-01-98 Waldenbooks 7.830% 09-15-07 12,885 ------- $33,422 ======= </TABLE> 11
12 Notes payable to banks increased from $41,770,000 at December 31, 1997 to $114,322,000 at December 31, 1998. As of December 31, 1998, the acquisition line had a balance of $96,930,000 and the working capital line had a balance of $17,392,000. These lines of credit are described in detail under Liquidity and Capital Resources. Unrealized gain on securities increased $1,142,000 as a result of an increase in the market value of the Company's investments recorded in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Undistributed earnings increased from $13,633,000 at December 31, 1997 to $18,076,000 at December 31, 1998, as a result of net income available to common shareholders for financial reporting purposes of $27,266,000 exceeding dividends on common stock of $22,823,000. In June 1998, the Company sold 1,725,000 shares of Series A 9.00% Cumulative Redeemable Preferred Stock at $25 per share in a public offering. In December 1998, the Company sold $10,000,000 of Series B 8.75% Cumulative Convertible Preferred Stock to Five Arrows Realty Securities II, L.L.C. for $24.50 per share, net of a 2% discount per share. For a more detailed discussion of these issues, see Note 8 in the Notes to the Consolidated Financial Statements. 12
13 RESULTS OF OPERATIONS 1998 COMPARED TO 1997 Net income available to common shareholders for 1998 was $27,266,000 ($1.67 per basic share and $1.66 per diluted share) compared to net income in 1997 of $20,779,000 ($1.58 per basic share and $1.56 per diluted share). Income before gains on investments was $19,623,000 in 1998 compared to $14,402,000 in 1997. Gains on investments were $9,713,000 in 1998 compared to $6,377,000 in 1997. The paragraphs that follow describe the results of operations in greater detail. Property net operating income (PNOI) from real estate properties, defined as income from real estate operations less property operating expenses (before interest expense and depreciation), increased by $20,018,000 or 57.25% for 1998, compared to 1997. PNOI and percentage leased by property type were as follows: <TABLE> <CAPTION> PNOI YEARS ENDED PERCENT DECEMBER 31, LEASED ------------ ------- 1998 1997 12-31-98 12-31-97 ---- ---- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Industrial $47,003 25,080 98% 97% Office Buildings 4,856 5,735 100% 100% Other 3,125 4,151 99% 94% ------- ------ Total PNOI $54,984 34,966 ======= ====== </TABLE> PNOI from industrial properties increased $21,923,000 for 1998 compared to 1997. Industrial properties held throughout the year showed an increase in PNOI of 4.8% for 1998. The increase in PNOI from industrial properties resulted primarily from the 1997 and 1998 acquisitions and from an increase in same store property operations. Of the increase in PNOI relating to acquisitions, $6,121,00 was attributable to the Meridian acquisitions in 1998, $4,081,000 was attributable to other acquisitions in 1998, and $9,416,000 was attributable to 1997 acquisitions. PNOI from the Company's office buildings decreased $879,000 for 1998 compared to 1997. This decrease was primarily the result of the sale of the Santa Fe Office Building in July 1997 and the Columbia Place Office Building in December 1998. Office properties held throughout the year showed an increase in PNOI of 9.6% compared to 1997. PNOI from the Company's other properties decreased $1,026,000 for 1998 compared to 1997. This decrease is primarily attributable to the sale of the Sutton House and Doral Club Apartments in September 1998, the Hampton House Apartments in June 1998 and the Grande Pointe Apartments in December 1998. Other properties held throughout the year showed an increase in PNOI of 19.6%. Interest income on mortgage loans decreased $309,000 for 1998 compared to 1997. The following is a breakdown of interest income for the year ended December 31, 1998 compared to 1997: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, 1998 1997 Interest income from: (In thousands) ----------------------- <S> <C> <C> Land mortgage loans $886 915 Apartment mortgage loans 556 533 Motel mortgage loans 174 364 Other mortgage loans 88 201 ---------------------- $1,704 2,013 ====================== </TABLE> 13
14 Interest income from motel mortgage loans decreased as a result of the repayment of the Jacksonville mortgage loan. Due to uncertainty of collection, interest income from the motel mortgage loans is recorded as received, and the notes have been written down to their estimated net realizable value. Interest income on other mortgage loans decreased primarily as a result of the repayment of three mortgage loans. Interest expense increased $6,397,000 from 1997 to 1998. Average bank borrowings were $94,488,000 in 1998 compared to $11,155,000 in 1997 with average interest rates of 7.06% in 1998 compared to 7.55% in 1997. Average bank borrowings increased primarily as a result of the Meridian acquisition and the acquisition of other industrial properties. Bank interest rates at December 31, 1998 and 1997 were 6.96% (LIBOR plus 1.40%) and 7.49% (LIBOR plus 1.50%), respectively. Interest cost incurred during the period of construction of real estate properties is capitalized. The interest cost capitalized on real estate properties for 1998 was $822,000 compared to $401,000 for 1997. Interest expense on real estate properties increased primarily as a result of mortgages assumed in 1997 on Southbay and on mortgages assumed in 1998 on Estrella, World Houston 1 & 2 and Meridian VIII merger discussed previously. Depreciation and amortization increased $6,165,000 in 1998 compared to 1997. This increase was primarily due to the industrial properties acquired in both 1997 and 1998, partially offset by sale of the real estate properties discussed below. The increase in general and administrative expenses of $899,000 for the year ended December 31, 1998 is primarily due to an increase in general and administrative costs due to growth of the Company. In 1998, the Company recognized gains of $9,713,000 consisting primarily of the sale of eight properties and the recognition of other deferred gains. In 1997, the Company recognized gains of $6,377,000 consisting of the sale of three properties, a write-down on a mortgage note receivable and the recognition of other deferred gains. See Note 2 of the Consolidated Financial Statements for details of these sales. NAREIT has recommended supplemental disclosures concerning capital expenditures and leasing costs. The Company expenses apartment unit turnover costs such as carpet, painting and small appliances. Capital expenditures for the years ended December 31, 1998 and 1997 by category are as follows: <TABLE> <CAPTION> 1998 CAPITAL IMPROVEMENTS 1998 ------------------------- Industrial 1997 Industrial Other Total Development Total ------------- ------------- -------------- ----------------- --------- (In thousands) <S> <C> <C> <C> <C> <C> Upgrade on Acquisitions $ 2,555 - 2,555 - 742 Major Renovation 793 - 793 - 105 New Development 165 - 165 23,907 14,053 Tenant improvements: New Tenants 1,701 399 2,100 - 2,187 New Tenants (first generation) 53 - 53 1,604 883 Renewal Tenants 1,200 107 1,307 - 383 Other 315 255 570 - 988 -------------------------------------------------------- ------- $ 6,782 761 7,543 25,511 19,341 ======================================================== ======= </TABLE> 14
15 The Company's leasing costs are capitalized and included in other assets. The costs are amortized over the lives of the leases and are included in depreciation and amortization expense. A summary of these costs for the years ended December 31, 1998 and 1997 is as follows: <TABLE> <CAPTION> 1998 CAPITALIZED LEASING COSTS ------------------------------ Industrial 1997 Industrial Other Total Development Total ------------------------------------------------------------ ---------- (In thousands) <S> <C> <C> <C> <C> <C> Capitalized leasing costs: New Tenants $ 1,348 117 1,465 - 1,247 New Tenants (first generation) 53 - 53 193 324 Renewal Tenants 1,130 - 1,130 - 514 ------------------------------------------------------ --------- $ 2,531 117 2,648 193 2,085 ====================================================== ========= Amortization of leasing costs 1,072 718 ===== === </TABLE> Rental income from real estate operations is principally recognized based on the terms of the operating leases, which does not differ materially from recognizing rental income on a straight-line basis. 15
16 1997 COMPARED TO 1996 Net income for 1997 was $20,779,000 ($1.58 per basic share and $1.56 per diluted share) compared to net income in 1996 of $12,509,000 ($1.44 per basic share and $1.43 per diluted share). Income before gains on investments was $14,402,000 in 1997 compared to $7,169,000 in 1996. Gains on investments were $6,377,000 in 1997 compared to $5,340,000 in 1996. For 1996, the results of operations include the results of operations for LNH from May 14, 1996 through December 31, 1996 and the results of operations for Copley from June 19, 1996 through December 31, 1996 (dates of acquisition through year-end). PNOI from real estate properties, defined as income from real estate operations less property operating expenses (before interest expense and depreciation), increased by $11,085,000 or 46.4% for 1997, compared to 1996. PNOI and percentage leased by property type were as follows: <TABLE> <CAPTION> PNOI YEARS ENDED PERCENT DECEMBER 31, LEASED ------------ ------ 1997 1996 12-31-97 12-31-96 ---- ---- -------- -------- (IN THOUSANDS) <S> <C> <C> <C> <C> Industrial $25,080 14,327 97% 97% Office Buildings 5,735 4,454 100% 97% Apartments 3,694 4,824 94% 97% Other 457 276 - - ------- ------ Total PNOI $34,966 23,881 ======= ====== </TABLE> PNOI from industrial properties increased $10,753,000 for 1997 compared to 1996. Industrial properties held throughout the year showed an increase in PNOI of 4.9% for 1997. Of the increase in PNOI from industrial properties, $5,501,000 resulted from the industrial properties acquired in the mergers with LNH and Copley. Also contributing to this increase in PNOI from industrial properties were the 1997 acquisitions discussed previously and the acquisitions of Walnut Business Center, a 234,070 square foot industrial complex in Fullerton, California in August 1996 and Braniff Park West, a 259,352 square foot industrial complex in Tulsa, Oklahoma in September 1996. These acquisitions contributed $4,696,000 to the increase in PNOI from industrial properties for 1997 compared to 1996. PNOI from the Company's office buildings increased $1,281,000 for 1997 compared to 1996. Office properties held throughout the year showed an increase in PNOI of 21.8% compared to 1996. Of the increase in PNOI from office buildings, $1,384,000 resulted from the office buildings acquired in the mergers with LNH and Copley. Other increases were attributable to improvement in operations from office properties held throughout 1997 compared to 1996. These increases were partially offset by the sale of the Santa Fe Office Building in July 1997. PNOI from the Company's apartment properties decreased $1,130,000 for 1997 compared to 1996. This decrease is primarily attributable to the sale of the Garden Villa Apartments in January 1996, the Pin Oaks and EastGate Apartments in November 1996 and the Plantations Apartments in December 1996. Apartment properties held throughout the year showed a decrease in PNOI of 2.0% compared to 1996. Interest income on mortgage loans increased $369,000 for 1997 compared to 1996. The following is a breakdown of interest income for the year ended December 31, 1997 compared to 1996: 16
17 <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, 1997 1996 Interest income from: (In thousands) -------------------------- <S> <C> <C> Land mortgage loans $915 566 Apartment mortgage loans 533 514 Motel mortgage loans 364 403 Other mortgage loans 201 161 ----------------------- $2,013 1,644 ======================= </TABLE> Interest income from land mortgage loans increased as a result of interest income on loans received in the merger with LNH. The LNH loans were discounted to estimated fair value at the merger date. This discount is being amortized over the life of the loans and is included in interest income. The amounts amortized for 1997 and 1996 were $465,000 and $287,000, respectively. Due to uncertainty of collection, interest income from the motel mortgage loans is recorded as received, and the notes have been written down to their estimated net realizable value. Interest income on other mortgage loans increased primarily as a result of interest income on loans received in the mergers with LNH and Copley. Interest expense increased $1,621,000 from 1996 to 1997. Average bank borrowings were $11,155,000 in 1997 compared to $11,572,000 in 1996 with average interest rates of 7.55% in 1997 compared to 7.3% in 1996. Bank interest rates at December 31, 1997 and 1996 were 7.49% (LIBOR plus 1.50%) and 7.48% (LIBOR plus 1.85%), respectively. Interest cost incurred during the period of construction of real estate properties is capitalized. The interest cost capitalized on real estate properties for 1997 was $401,000, compared to $19,000 for 1996. Interest expense on real estate properties increased primarily as a result of the University Business Center mortgage, the mortgages assumed in the Copley merger, the mortgage assumed on the acquisition of Chamberlain and the mortgage on the purchase of the four industrial properties in Jacksonville and New Orleans. This increase in interest expense was offset by the payoff of the Nobel Center mortgage and the sale of the Garden Villa Apartments and the Plantations Apartments in 1996. Depreciation and amortization increased $2,650,000 in 1997 compared to 1996. This increase was primarily due to the properties acquired in the Copley and LNH mergers and the industrial properties acquired in 1997, partially offset by sale of the real estate properties presented below. The increase in general and administrative expenses of $567,000 for the year ended December 31, 1997 is primarily due to an increase in costs as a result of the Copley and LNH mergers and the 1997 property acquisitions. In 1997, the Company recognized gains of $6,377,000 consisting of the sale of three properties, a write-down on a mortgage note receivable and the recognition of other deferred gains. In 1996, the Company recognized gains of $5,340,000 consisting of the sale of five properties, two land purchase-leasebacks, three parcels of land, a write-down on a mortgage note receivable and the sale of REIT securities. See Note 2 of the Consolidated Financial Statements for details of these sales. NAREIT has recommended supplemental disclosures concerning capital expenditures and leasing costs. The Company expenses apartment unit turnover costs such as carpet, painting and small 17
18 appliances. Capital expenditures for the years ended December 31, 1997 and 1996 by category are as follows: <TABLE> <CAPTION> 1997 CAPITAL IMPROVEMENTS ------------------------- 1997 1996 Industrial Industrial Other Total Development Total ------------------------------------------ ------------- ---------- (In thousands) <S> <C> <C> <C> <C> <C> Upgrade on Acquisitions $ 742 - 742 - 90 Major Renovation - 105 105 - 2,867 New Development - - - 14,053 1,695 Tenant improvements: New Tenants 1,282 905 2,187 - 959 New Tenants (first generation) - - - 883 - Renewal Tenants 214 169 383 - 852 Other 483 505 988 - 1,006 ------------------------------------- ------------- --------- $ 2,721 1,684 4,405 14,936 7,469 ===================================== ============= ========= </TABLE> The Company's leasing costs are capitalized and included in other assets. The costs are amortized over the lives of the leases and are included in depreciation and amortization expense. A summary of these costs for the years ended December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 CAPITALIZED LEASING COSTS ------------------------------ Industrial 1996 Industrial Other Total Development Total ---------------------------------------------------------- ----------- (In thousands) <S> <C> <C> <C> <C> <C> Capitalized leasing costs: New Tenants $ 786 399 1,185 62 528 New Tenants (first generation) - - - 324 - Renewal Tenants 441 15 456 58 290 ---------------------------------------------------- ------ $ 1,227 414 1,641 444 818 ==================================================== ====== Amortization of leasing costs $718 493 ==== === </TABLE> Rental income from real estate operations is principally recognized based on the terms of the operating leases, which does not differ materially from recognizing rental income on a straight-line basis. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This statement established standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) and is effective for fiscal years beginning after December 15, 1997. The adoption of this statement in 1998 did not have a material impact on the Company's consolidated financial statements. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way that public business enterprises report information about operating standards for annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement is effective for fiscal years beginning after December 15, 1997. The adoption of this statement in 1998 had an immaterial impact on the Company's consolidated financial 18
19 statements and required expanded disclosures as discussed in Note 12 of the Notes to the Consolidated Financial Statements. In April 1998, Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities," was issued. This SOP provides guidance on the financial reporting of start-up costs and organization costs, and requires that these costs be expensed as incurred effective for fiscal years beginning after December 15, 1998. Unamortized organization costs will be written off in first quarter 1999 and accounted for as a cumulative effect of a change in accounting principle. 19
20 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $29,393,000 for the year ended December 31, 1998. Other sources of cash were collections on mortgage loan receivables, sales of real estate investments, mortgage borrowings, bank borrowings and proceeds from the stock offerings. The Company distributed $24,073,000 in common and preferred share dividends. Other uses of cash were for capital improvements at the various properties, construction and development of properties, purchases of real estate investments, bank debt payments, mortgage note payments and purchases of real estate investment trust shares. Total debt at December 31, 1998 and 1997 was as follows: <TABLE> <CAPTION> DECEMBER 31, 1998 1997 ---- ---- (IN THOUSANDS) <S> <C> <C> Mortgage notes payable - fixed rate $122,494 105,380 Bank notes payable - floating rate 114,322 41,770 -------- ------- Total debt $236,816 147,150 ======== ======= </TABLE> At December 31, 1998, the Company had a line of credit from a commercial bank in the amount of $50,000,000 that was secured by the outstanding stock of two of the Company's wholly-owned subsidiaries and by the Company's ownership interests in two partnerships. Borrowings under the credit line at December 31, 1998 were $17,392,000 and the interest rate was LIBOR plus 1.40% (6.96% at December 31, 1998). Total loan commitment fees of $74,000, $75,000 and $50,000 were paid in 1998, 1997 and 1996 for this line of credit. This line of credit expired January 31, 1999. At December 31, 1998, the Company had $96,930,000 outstanding under a $100,000,000 acquisition line of credit from a commercial bank. The acquisition line had an interest rate of LIBOR plus 1.40% at December 31, 1998. The line was secured by 11 properties of the Company with an aggregate carrying amount of $129,754,000 at December 31, 1998 and was due to expire September 30, 2000. Total loan commitment fees of $62,500, $143,750 and $37,500 were paid in 1998, 1997 and 1996 for this line of credit. On January 13, 1999, the Company replaced the $50,000,000 and $100,000,000 bank lines with a new three-year $150 million unsecured revolving credit facility with a group of ten banks which was arranged by Chase Securities, Inc. The interest rate is based on the Eurodollar rate plus 1.25% and was 6.19% at March 10, 1999. The book manager and administrative agent for the credit facility is Chase Bank of Texas, which led a syndicate of banks including First Union National Bank, syndication agent; PNC Bank, documentation agent; First American National Bank operating as Deposit Guaranty National Bank, co-agent; SouthTrust Bank; AmSouth Bank; Bank One Louisiana; Hibernia National Bank; First Tennessee Bank and Trustmark National Bank. On March 1, 1999, the Company closed a $47 million, nonrecourse first mortgage loan with Metropolitan Life. The note has an interest rate of 6.8%, 20-year amortization and a 10-year maturity. It is secured by six industrial properties in California: Industry Distribution Center, Shaw Commerce Center, Kingsview Industrial Center, Dominguez Distribution Center, Walnut Business Center and Washington Distribution Center. The proceeds were used to reduce bank borrowings. This new loan reduced the Company's weighted average interest rate on mortgage debt from 8.2% to 7.8%. During the third quarter 1998, EastGroup's Board of Directors authorized the repurchase of up to 500,000 shares of its outstanding common stock. The shares may be purchased from time to time in the open market or in privately negotiated transactions. As of December 31, 1998, the Company had repurchased 21,100 shares for $359,000. 20
21 In September 1998, EastGroup entered into an agreement with Five Arrows Realty Securities II, L.L.C., an investment fund managed by Rothschild Realty, Inc., a member of the Rothschild Group, providing for the sale of up to 2,800,000 shares of Series B 8.75% Cumulative Convertible Preferred Stock at a net price of $24.50 per share. In December 1998, the Company sold $10 million of the Series B Preferred Stock to Five Arrows and plans to sell the remaining $60 million by September 25, 1999. Budgeted capital expenditures and development for the year ending December 31, 1999 follow: <TABLE> <CAPTION> INDUSTRIAL CAPITAL IMPROVEMENTS DEVELOPMENT -------------------- ----------- Industrial Office Total Total ------------------------------------------- ------------------- <S> <C> <C> <C> <C> Upgrades on Acquisitions $ 651 - 651 - Major Renovation 776 29 805 - New Development 1,200 - 1,200 40,739 Tenant Improvements: New Tenants 2,242 216 2,458 - New Tenants-First Generation 278 - 278 4,759 Renewal Tenants 1,526 27 1,553 - Other 1,238 39 1,277 - ------------------------------------------- ------------------- $7,911 311 8,222 45,498 ------------------------------------------- ------------------- </TABLE> The Company anticipates that its current cash balance, operating cash flows borrowings under the working capital line of credit and the Series B preferred stock offering will be adequate for the Company's (i) operating and administrative expenses, (ii) normal repair and maintenance expenses at its properties, (iii) debt service obligations, (iv) distributions to stockholders, (v) capital improvements, (vi) purchases of properties, (vii) development, and (viii) common share repurchases. Purchases of industrial properties subsequent to December 31, 1998 include the following: <TABLE> <CAPTION> CLOSING PROPERTY LOCATION DATE SIZE PURCHASE PRICE - ----------------------------------------------------------------------------------------------------------------- (Square feet) (In thousands) <S> <C> <C> <C> <C> Central Green Houston, Texas 01-07-99 83,575 $ 4,570 Blue Heron Distribution Center West Palm Beach, Florida 01-15-99 110,000 4,535 ------- $ 9,105 ======= </TABLE> In addition, subsequent to December 31, 1998, the Company purchased a 4.73 acre parcel of land for development in Carson, California for $1,600,000. In the last five years, inflation has not had a significant impact on the Company because of the relatively low inflation rate in the Company's geographic areas of operation. Most of the leases require the tenants to pay their pro rata share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing the Company's exposure to increases in operating expenses resulting from inflation. In addition, the Company's leases typically have three to five year terms, which may 21
22 enable the Company to replace existing leases with new leases at a higher base if rents on the existing leases are below the then-existing market rate. YEAR 2000 ISSUE The Company has been addressing the potential computer program and other related problems resulting from the arrival of Year 2000 (Y2K). The Company has established a Y2K compliance review process to assess the impact on its internal financial and management information systems and property mechanical operations systems, as well as the potential impact on the Company from Y2K problems of significant tenants, vendors and suppliers of financial and other services (collectively "independent third parties"). Regarding the Company's internal financial and management information systems, as part of the Company's ongoing capital improvements process, plans are to replace during the first quarter of 1999 the financial information and reporting system (which the vendor has represented to the Company is Y2K compliant) with a new, more efficient, information and reporting system designed to be Y2K compliant and which will also be used by our major external property managers. The Company is assessing Y2K compliance of its individual property engineering and mechanical systems through inquiry via questionnaire of its respective property managers. This is designed to identify any systems that may not be compliant early on to avert any major interruption in the provision of services to our tenants. In addition, during fourth quarter 1998, the Company sent correspondence to all tenants to determine how the Y2K issue is being addressed at the tenant level in an attempt to determine the impact on revenue, if any. Additionally, the Company's compliance plan is to continue the process of conducting inquiries of independent third party vendors and suppliers in order to determine if these third parties have Y2K problems and what contingency plans they have developed to deal with identified exposure. Based on the results of these inquiries and those of our property managers and tenants, we will formulate appropriate contingency plans to take necessary and feasible precautions against problems not within our control. The Company is also continuing the process of reviewing its own internal systems to ensure that they are Y2K compliant and to make necessary and timely corrections of identified Y2K problems under its direct control. This overall process will extend into 1999 depending upon the timeliness of activities of independent third parties. The Company anticipates that total costs relating to Y2K compliance will have an immaterial impact on the Company's overall financial statements. 22
23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to interest rate changes primarily as a result of its line of credit and long-term debt used to maintain liquidity and fund capital expenditures and expansion of the Company's real estate investment portfolio and operations. The Company's interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower its overall borrowing costs. To achieve its objectives, the Company borrows at fixed rates but also has a three-year $150 million unsecured revolving credit facility with a group of ten banks which was arranged by Chase Securities, Inc. The interest rate is based on the Eurodollar rate plus 1.25%. The table below presents the principal payments due and weighted average interest rates for both the fixed rate and variable rate debt. <TABLE> <CAPTION> 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Fixed rate debt (in thousands) 3,131 12,621 7,228 11,636 7,387 80,491 122,494 130,066 Average interest rate 8.34% 8.80% 8.01% 7.74% 8.66% 8.19% 8.29% Variable rate LIBOR debt (in thousands) 17,392 96,930 - - - - 114,322 114,322 Average interest rate 6.96% 7.66% - - - - 7.55% </TABLE> On January 13, 1999, the Company replaced the $50,000,000 and $100,000,000 bank lines with a new three-year $150 million unsecured revolving credit facility with a group of ten banks which was arranged by Chase Securities, Inc. The interest rate is based on the Eurodollar rate plus 1.25% and was 6.19% at March 10, 1999. The book manager and administrative agent for the credit facility is Chase Bank of Texas, which led a syndicate of banks including First Union National Bank, syndication agent; PNC Bank, documentation agent; First American National Bank operating as Deposit Guaranty National Bank, co-agent; SouthTrust Bank; AmSouth Bank; Bank One Louisiana; Hibernia National Bank; First Tennessee Bank and Trustmark National Bank. On March 1, 1999, the Company closed a $47 million, nonrecourse first mortgage loan with Metropolitan Life. The note has an interest rate of 6.8%, 20-year amortization and a 10-year maturity. It is secured by six industrial properties in California: Industry Distribution Center, Shaw Commerce Center, Kingsview Industrial Center, Dominguez Distribution Center, Walnut Business Center and Washington Distribution Center. The proceeds were used to reduce bank borrowings. This new loan reduced the Company's weighted average interest rate on mortgage debt from 8.2% to 7.8%. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Registrant's Consolidated Balance Sheets as of December 31, 1998 and 1997, and its Consolidated Statements of Income, Changes in Stockholders' Equity and Cash Flows and Notes to Consolidated Financial Statements for the years ended December 31, 1998, 1997 and 1996 and the independent auditors' report thereon are included under Item 14 of this report and are incorporated herein by reference. Unaudited quarterly results of operations included in the notes to the consolidated financial statements are also incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 23
24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Registrant's definitive proxy statement which will be filed with the Securities and Exchange Commission (the "Commission") pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN COMMON STOCK OWNERS AND MANAGEMENT. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Registrant's definitive proxy statement which will be filed with the Commission pursuant to Regulation 14A within 120 days of the end of Registrant's calendar year is incorporated herein by reference. FORWARD-LOOKING STATEMENTS In addition to historical information, certain sections of this Annual Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, such as those pertaining to the Company's capital resources, profitability and portfolio performance. Forward-looking statements involve numerous risks and uncertainties. The following factors, among others discussed herein, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: defaults or non-renewal of leases, increased interest rates and operating costs, failure to obtain necessary outside financing, difficulties in identifying properties to acquire and in effecting acquisitions, failure to qualify as a real estate investment trust under the Internal Revenue Code of 1986, as amended, environmental uncertainties, risks related to natural disasters, financial market fluctuations, changes in real estate and zoning laws and increases in real property tax rates. The success of the Company also depends upon the trends of the economy, including interest rates, income tax laws, governmental regulation, legislation, population changes and those risk factors discussed elsewhere in this Annual Report. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as the date hereof. The Company assumes no obligation to update forward-looking statements. See also the Company's reports to be filed from time to time with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. 24
25 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. <TABLE> <CAPTION> PAGE ---- Index to Financial Statements: <S> <C> (a) (1) Consolidated Financial Statements: Independent Auditors' Report 27 Consolidated Balance Sheets - December 31, 1998 and 1997 28 Consolidated Statements of Income - Years ended December 31, 1998, 1997 and 1996 29 Consolidated Statements of Changes in Stockholders' Equity- Years ended December 31, 1998, 1997 and 1996 30 Consolidated Statements of Cash Flows - Years ended December 31, 1998, 1997 and 1996 31 Notes to Consolidated Financial Statements 32 (2) Consolidated Financial Statement Schedules: Schedule III - Real Estate Properties and Accumulated Depreciation 52 Schedule IV - Mortgage Loans on Real Estate 57 </TABLE> All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted, or the required information is included in the notes to the consolidated financial statements. (3) Form 10-K Exhibits: (a) Articles of Incorporation (incorporated by reference to Appendix B to the Registrant's Proxy Statement dated April 24, 1997). (b) Bylaws of the Registrant (incorporated by reference to Appendix C to the Registrant's Proxy Statement dated April 24, 1997). (c) Articles Supplementary of the Company relating to the 9.00% Series A Cumulative Redeemable Preferred Stock of the Company (incorporated by reference to the Company's Form 8-A filed June 15, 1998). (d) Articles Supplementary of the Company relating to the Series B Cumulative Convertible Preferred Stock (incorporated by reference to the Company's Form 8-K filed on October 1, 1998). (e) Articles Supplementary of the Company relating to the Series C Preferred Stock (incorporated by reference to the Company's Form 8-A filed December 9, 1998). (f) Certificate of Correction to Articles Supplementary with respect to Series B Cumulative Convertible Preferred Stock (filed herewith). (10) Material Contracts: (a) EastGroup Properties 1994 Management Incentive Plan, As Amended (incorporated by reference to Appendix D of the Registrant's Registration Statement on Form S-4 (No. 333-01815).* (b) EastGroup Properties 1991 Directors Stock Option Plan, As Amended (incorporated by reference to Exhibit B of the Registrant's proxy statement dated April 26, 1994).* (c) Form of Change in Control Agreement that Registrant has entered into with certain executive officers (Leland R. Speed, David H. Hoster II and N. Keith McKey)(incorporated by reference to Exhibit 10(e) to the Registrant's 1996 Annual Report on Form 10-K). (d) Form of Change in Control Agreement that Registrant has entered into with certain executive officers (Diane W. Hayman, Marshall A. Loeb, Jann W. Puckett and Stewart R. Speed) (incorporated by reference to Exhibit 10(e) to the Registrant's 1996 Annual Report on Form 10-K). 25
26 (e) Agreement and Plan of Merger dated February 18, 1998 among the Registrant, EastGroup-Meridian, Inc. and Meridian Point Realty Trust VIII Co.(incorporated by reference to Exhibit 10 (a) to the Registrant's Current Report on Form 8-K dated March 13, 1998). (f) Purchase Agreement for Jacksonville and New Orleans Properties (incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated September 24, 1997). (g) Investment Agreement dated as of September 25, 1998 between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (h) Operating Agreement dated September 25, 1998 between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (i) Agreement and Waiver between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (j) Credit Agreement dated January 13, 1999 among EastGroup Properties, L.P.; EastGroup Properties, Inc.; Chase Bank of Texas, National Association, as Arranger, Book Manager and Administrative Agent; First Union National Bank, as Syndication Agent; PNC Bank, National Association, as Documentation Agent; First American National Bank, operating as Deposit Guaranty National Bank, as Co-Agent; and the Lenders (filed herewith). (21) Subsidiaries of Registrant (filed herewith). (23) Consent of KPMG Peat Marwick LLP (filed herewith). (24) Powers of attorney (filed herewith). (27) Financial Data Schedule (filed herewith). (28) Agreement of Registrant to furnish the Commission with copies of instruments defining the rights of holders of long-term debt (incorporated by reference to Exhibit 28(e) of the Registrant's 1986 Annual Report on Form 10-K). (99) Rights Agreement dated as of December 3, 1998 between the Company and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to the Company's Form 8-A filed December 9, 1998). (b) (1) 8K - Filed October 16, 1997 - Reporting the completion of an offering of 3,500,000 shares of common stock for net proceeds of $72,555,000. (2) 8K - Filed December 4, 1998 - Reporting Adoption of Rights Agreement. *Indicates management or compensatory agreement. 26
27 INDEPENDENT AUDITORS' REPORT THE DIRECTORS AND STOCKHOLDERS EASTGROUP PROPERTIES, INC.: We have audited the consolidated financial statements of EastGroup Properties, Inc. and subsidiaries, as listed in the accompanying index. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EastGroup Properties, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. Jackson, Mississippi KPMG Peat Marwick LLP March 5, 1999 27
28 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) <TABLE> <CAPTION> DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- <S> <C> <C> ASSETS Real estate properties: Industrial $ 507,187 316,808 Industrial development 25,682 13,831 Other 15,762 55,133 --------- ------- 548,631 385,772 Less accumulated depreciation (34,042) (29,095) --------- ------- 514,589 356,677 --------- ------- Real estate held for sale 25,620 23,233 Less accumulated depreciation (8,794) (3,217) --------- ------- 16,826 20,016 --------- ------- Mortgage loans 8,814 10,852 Investment in real estate investment trusts 5,737 16,518 Cash 2,784 1,298 Other assets 18,798 7,766 --------- ------- TOTAL ASSETS $ 567,548 413,127 ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Mortgage notes payable $ 122,494 105,380 Notes payable to banks 114,322 41,770 Accounts payable & accrued expenses 9,138 3,979 Other liabilities 2,867 2,247 --------- ------- 248,821 153,376 --------- ------- Minority interest in joint ventures 2,053 2,436 Minority interest in operating partnership 650 - --------- ------- 2,703 2,436 --------- ------- STOCKHOLDERS' EQUITY Series A 9.00% Cumulative Redeemable Preferred Shares and additional paid-in capital; $.0001 par value; 1,725,000 shares authorized and issued at December 31, 1998 and none at December 31, 1997; stated liquidation preference of $43,125 at December 31, 1998 41,357 - Series B 8.75% Cumulative Convertible Preferred Shares and additional paid-in capital; $.0001 par value; 2,800,000 shares authorized; 400,000 shares issued at December 31, 1998; stated liquidation preference of $10,000 at December 31, 1998 9,642 - Series C Preferred Shares; $.0001 par value - - Common shares; $.0001 par value; 65,475,000 shares authorized; 16,307,681 shares issued at December 31, 1998 and 16,204,523 at December 31, 1997 2 2 Excess shares; $.0001 par value; 30,000,000 shares authorized; no shares issued - - Additional paid-in capital on common shares 246,340 244,215 Undistributed earnings 18,076 13,633 Accumulated other comprehensive income 607 (535) --------- ------- 316,024 257,315 --------- ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 567,548 413,127 ========= ======= </TABLE> See accompanying notes to consolidated financial statements. 28
29 CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) <TABLE> <CAPTION> Years Ended December 31, ----------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> REVENUES Income from real estate operations $74,312 49,791 37,143 Interest: Mortgage loans 1,704 2,013 1,644 Other interest 164 558 74 Other 548 1,260 904 ------- ------- ------- 76,728 53,622 39,765 ------- ------- ------- EXPENSES Operating expenses of real estate operations 19,328 14,825 13,262 Interest 16,948 10,551 8,930 Depreciation and amortization 16,574 10,409 7,759 General and administrative 3,822 2,923 2,356 ------- ------- ------- 56,672 38,708 32,307 ------- ------- ------- INCOME BEFORE MINORITY INTEREST AND GAIN ON INVESTMENTS 20,056 14,914 7,458 Minority interest in joint ventures and operating partnership 433 512 289 ------- ------- ------- INCOME BEFORE GAINS ON INVESTMENTS 19,623 14,402 7,169 Gains on real estate investments 9,713 6,377 5,340 ------- ------- ------- NET INCOME 29,336 20,779 12,509 Preferred dividends 2,070 - - ------- ------- ------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $27,266 20,779 12,509 ======= ======= ======= BASIC PER SHARE DATA: Net income available to common shareholders $ 1.67 1.58 1.44 ======= ======= ======= Weighted average number of shares outstanding 16,283 13,176 8,677 ======= ======= ======= DILUTED PER SHARE DATA Net income available to common shareholders $ 1.66 1.56 1.43 ======= ======= ======= Weighted average shares outstanding 16,432 13,338 8,749 ======= ======= ======= </TABLE> See accompanying notes to consolidated financial statements. 29
30 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA) <TABLE> <CAPTION> Shares Shares Shares of of of Additional Preferred Common Beneficial Paid-In Stock Stock Interest Capital ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> BALANCE, DECEMBER 31, 1995 $ - - 6,348 66,228 Comprehensive income Net income - - - - Net unrealized change in investment securities - - - - Total comprehensive income Cash dividends declared, $1.28 per share - - - - Repurchase of 12,750 shares, options exercised - - (13) (137) Issuance of 9,640 shares, incentive compensation - - 10 118 Issuance of 31,500 shares, exercise options - - 32 321 Issuance of 927,366 shares in LNH merger - - 927 12,713 Issuance of 3,238,343 shares in Copley merger - - 3,238 44,420 Issuance of 7,382 shares in dividend reinvestment plan - - 7 117 ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1996 - - 10,549 123,780 Comprehensive income Net income - - - - Net unrealized change in investment securities - - - - Total comprehensive income Cash dividends declared, $1.34 per share - - - - Issuance of 2,100,000 shares of beneficial interest - - 2,100 34,554 Issuance of 23,800 shares of beneficial interest and 31,142 shares of common stock, options exercised - - 23 654 Repurchase of 8,268 shares of beneficial interest and 11,725 shares of common stock, options exercised - - (8) (380) Issuance of 6,490 shares of beneficial interest, incentive compensation - - 7 97 Issuance of 3,441 shares of beneficial interest, and 10,872 shares of common stock, dividend reinvestment plan - - 3 288 Purchase of 194 fractional shares of beneficial interest - - - (5) Reduction of par value associated with reorganization - 1 (12,674) 12,673 Issuance of 3,500,000 shares of common stock - 1 - 72,554 ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1997 - 2 - 244,215 Comprehensive income Net income - - - - Net unrealized change in investment securities - - - - Total comprehensive income Cash dividends declared-common, $1.40 per share - - - - Preferred stock dividends declared - - - - Repurchase of 5,025 common shares, options exercised - - - (75) Repurchase of 21,100 common shares, stock repurchase plan - - - (359) Issuance of 5,007 shares of common stock, incentive compensation - - - 102 Issuance of 29,685 shares of common stock, exercise options - - - 415 Issuance of 79,353 shares of common stock, Ensign merger - - - 1,746 Issuance of 1,725,000 shares of Series A preferred 41,357 - - - Issuance of 400,000 shares of Series B preferred 9,642 - - - Issuance of 15,238 shares of common stock, dividend reinvestment plan - - - 296 ------------ ------------ ------------ ------------ BALANCE, DECEMBER 31, 1998 $ 50,999 2 - 246,340 ============ ============ ============ ============ </TABLE> <TABLE> <CAPTION> Accumulated Other Undistributed Comprehensive Earnings Income Total ------------ ------------ ------------ <S> <C> <C> <C> BALANCE, DECEMBER 31, 1995 9,657 667 82,900 Comprehensive income Net income 12,509 - 12,509 Net unrealized change in investment securities - (667) (667) ------------ Total comprehensive income 11,842 ------------ Cash dividends declared, $1.28 per share (11,169) - (11,169) Repurchase of 12,750 shares, options exercised - - (150) Issuance of 9,640 shares, incentive compensation - - 128 Issuance of 31,500 shares, exercise options - - 353 Issuance of 927,366 shares in LNH merger - - 13,640 Issuance of 3,238,343 shares in Copley merger - - 47,658 Issuance of 7,382 shares in dividend reinvestment plan - - 124 ------------ ------------ ------------ BALANCE, DECEMBER 31, 1996 10,997 - 145,326 Comprehensive income Net income 20,779 - 20,779 Net unrealized change in investment securities - (535) (535) ------------ Total comprehensive income 20,244 ------------ Cash dividends declared, $1.34 per share (18,143) - (18,143) Issuance of 2,100,000 shares of beneficial interest - - 36,654 Issuance of 23,800 shares of beneficial interest and 31,142 shares of common stock, options exercised - - 677 Repurchase of 8,268 shares of beneficial interest and 11,725 shares of common stock, options exercised - - (388) Issuance of 6,490 shares of beneficial interest, incentive compensation - - 104 Issuance of 3,441 shares of beneficial interest, and 10,872 shares of common stock, dividend reinvestment plan - - 291 Purchase of 194 fractional shares of beneficial interest - - (5) Reduction of par value associated with reorganization - - - Issuance of 3,500,000 shares of common stock - - 72,555 ------------ ------------ ------------ BALANCE, DECEMBER 31, 1997 13,633 (535) 257,315 Comprehensive income Net income 29,336 - 29,336 Net unrealized change in investment securities - 1,142 1,142 ------------ Total comprehensive income 30,478 ------------ Cash dividends declared-common, $1.40 per share (22,823) - (22,823) Preferred stock dividends declared (2,070) - (2,070) Repurchase of 5,025 common shares, options exercised - - (75) Repurchase of 21,100 common shares, stock repurchase plan - - (359) Issuance of 5,007 shares of common stock, incentive compensation - - 102 Issuance of 29,685 shares of common stock, exercise options - - 415 Issuance of 79,353 shares of common stock, Ensign merger - - 1,746 Issuance of 1,725,000 shares of Series A preferred - - 41,357 Issuance of 400,000 shares of Series B preferred - - 9,642 Issuance of 15,238 shares of common stock, dividend reinvestment plan - - 296 ------------ ------------ ------------ BALANCE, DECEMBER 31, 1998 18,076 607 316,024 ============ ============ ============ </TABLE> See accompanying notes to consolidated financial statements 30
31 CONSOLIDATED STATEMENTS OF CASH FLOW <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, -------------------------------------- 1998 1997 1996 ---------- ---------- ---------- (In thousands) <S> <C> <C> <C> OPERATING ACTIVITIES: Net income $ 29,336 20,779 12,509 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of deferred leasing costs 16,574 10,409 7,759 Gains on investments, net (9,713) (6,377) (5,340) Real estate investment trust: Equity in earnings - - (43) Dividends received - - 77 Other (324) (284) (142) Changes in operating assets and liabilities: Accrued income and other assets (13,403) (3,709) (122) Accounts payable, accrued expenses and prepaid rent 6,923 2,867 (702) ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 29,393 23,685 13,996 ---------- ---------- ---------- INVESTING ACTIVITIES: Collections of mortgage loans receivable, net of amortization of loan discounts 2,421 2,910 (80) Advances on mortgage loans receivable - (1,575) (121) Sales of real estate investments 31,215 23,838 23,480 Sales of real estate investment trust securities - - 1,056 Real estate improvements (7,543) (4,405) (5,774) Real estate development (25,511) (14,936) (1,695) Purchases of real estate (73,980) (71,569) (13,865) Acquisition of Meridian (52,760) - - Purchases of real estate investment trusts shares (1,832) (16,119) (934) Merger costs (1,614) - (3,169) Changes in other assets and other liabilities (106) 1,897 (2,225) Cash balances of acquired companies 6,118 - 2,750 ---------- ---------- ---------- NET CASH USED IN INVESTING ACTIVITIES (123,592) (79,959) (577) ---------- ---------- ---------- FINANCING ACTIVITIES: Proceeds from bank borrowings 202,560 122,962 60,374 Proceeds from mortgage notes payable 2,200 9,250 19,000 Principal payments on bank borrowings (130,008) (95,154) (50,771) Principal payments on mortgage notes payable (6,270) (71,565) (30,768) Distributions paid to shareholders (24,073) (18,143) (11,169) Purchases of shares of beneficial interest and common stock (434) (393) (150) Proceeds from exercise of stock options 415 677 353 Net proceeds from issuance of shares of beneficial interest and common stock - 109,209 - Net proceeds from issuance of shares of preferred stock 50,999 - - Proceeds from dividend reinvestment plan 296 291 124 ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 95,685 57,134 (13,007) ---------- ---------- ---------- INCREASE IN CASH AND CASH EQUIVALENTS 1,486 860 412 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 1,298 438 26 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,784 1,298 438 ========== ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest, net of amount capitalized $ 15,505 10,474 8,444 Debt assumed by the Company in purchase of real estate 7,167 52,579 - Operating partnership units issued in purchase of real estate 650 - - Debt assumed by the Company in the Meridian acquisition 33,422 - - Debt assumed by buyer of real estate 19,405 - 8,359 Fair value of shares issued in Copley merger - - 47,658 Fair value of shares issued in LNH merger - - 13,640 Issuance of common stock to acquire Ensign 1,746 - - </TABLE> See accompanying notes to consolidated financial statements 31
32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998, 1997 AND 1996 (1) SIGNIFICANT ACCOUNTING POLICIES (a) Principles of Consolidation The consolidated financial statements include the accounts of EastGroup Properties, Inc. (the Company), its wholly-owned subsidiaries and its investment in three joint ventures. At December 31, 1998, the three properties in the joint ventures included the 75% owned 56th Street Commerce Park and JetPort Commerce Park, and the 80% owned University Business Center. At December 31, 1997, the four properties in the joint ventures included the 75% owned 56th Street Commerce Park, JetPort Commerce Park, and WestPort Commerce Center, and the 80% owned University Business Center. Also included in 1996 was a joint venture in which the Company owned 77.78% of Liberty Corners Shopping Center that was sold in 1997. The Company records 100% of the joint ventures' assets, liabilities, revenues and expenses with minority interests provided for the percentage not owned. All significant intercompany transactions and accounts have been eliminated in consolidation. Prior to its sale in 1997, the Company's investment in Cowesett Corners Shopping Center (a 50% owned joint venture) was not consolidated but accounted for using the equity method of accounting. (b) Federal Income Taxes EastGroup Properties, a Maryland corporation, has qualified as a real estate investment trust under Sections 856-860 of the Internal Revenue Code and intends to continue to qualify as such. The Company distributed all of its 1998, 1997 and 1996 taxable income to its stockholders. Accordingly, no provision for federal income taxes was necessary. Distributions paid per common share for federal income tax purposes were: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 -------- -------- -------- <S> <C> <C> <C> Ordinary Income $ 1.36 1.14 1.28 Long-Term 20% Capital Gain .04 - - Return of Capital - .20 - -------- -------- -------- $ 1.40 1.34 1.28 ======== ======== ======== </TABLE> Distributions paid per share of Series A Convertible Preferred for federal income tax purposes for the year ended December 31, 1998 were $.725, paid as ordinary income with no return of capital. The Company's income differs for tax and financial reporting purposes principally because of (1) the timing of the deduction for the provision for possible losses and losses on investments, (2) the timing of the recognition of gains or losses from the sale of investments, (3) different depreciation methods and lives, and (4) mortgage loans having a different basis for tax and financial reporting purposes, thereby producing different gains upon collection of these loans. (c) Income Recognition Rental income from real estate operations is principally recognized based on the terms of the operating leases, which does not differ materially from recognizing rental income on a straight-line basis. Interest income on mortgage loans is recognized based on the accrual method unless a significant uncertainty of collection exists. If a significant uncertainty exists, interest income is recognized as collected. Certain mortgage loan discounts are amortized over the lives of the loans using a method that does not differ materially from the interest method. 32
33 The Company recognizes gains on sales of real estate in accordance with the principles set forth in Statement of Financial Accounting Standards No. 66 (SFAS 66), "Accounting for Sales of Real Estate." Upon closing of real estate transactions, the provisions of SFAS 66 require consideration for the transfer of rights of ownership to the purchaser, receipt of an adequate cash down payment from the purchaser and adequate continuing investment by the purchaser. If the requirements for recognizing gains have not been met, the sale and related costs are recorded, but the gain is deferred and recognized by the installment method as collections are received. (d) Real Estate Properties Real estate properties are carried at cost less accumulated depreciation. Cost includes the carrying amount of the Company's investment plus any additional consideration paid, liabilities assumed, costs of securing title (not to exceed fair market value in the aggregate) and improvements made subsequent to acquisition. Depreciation of buildings and other improvements, including personal property, is computed using the straight-line method over estimated useful lives of 25 to 40 years for buildings and 3 to 10 years for other improvements and personal property. Building improvements are capitalized, while maintenance and repair expenses are charged to expense as incurred. Apartment turnover costs such as carpet, painting and small appliances are also expensed as incurred. Geographically, the Company's investments are concentrated in the major sunbelt market areas of the southeastern and southwestern United States, primarily in the states of California, Florida, Texas and Arizona. (e) Real Estate Held for Sale Real estate properties that are currently offered for sale or are under contract to sell have been shown separately on the consolidated balance sheets as "real estate held for sale." Such assets are carried at the lower of current carrying amount or fair market value less estimated selling costs and are not depreciated while they are held for sale. (f) Marketable Equity Securities The Company's marketable equity securities owned by the Company are categorized as available-for-sale securities, as defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are reflected as a net amount in a separate component of stockholders' equity until realized. (g) Investments in Real Estate Investment Trusts At December 31, 1998, EastGroup's only investment in real estate investment trusts was in Franklin Select Realty Trust (Franklin). Since the Company did not exercise significant influence over Franklin, this investment was accounted for under the cost method. The cost of this investment is adjusted to fair market value with an equity adjustment to account for unrealized gains/losses as indicated in Note 1 (f) above. Although the Company owned 21% of Meridian VIII at December 31, 1997, it did not exercise significant influence over the investee and the investment was accounted for under the cost method (the difference between applying the cost and equity method would not be material to the 1997 consolidated financial statements). Meridian VIII was acquired during 1998. 33
34 (h) Allowance for Possible Losses and Impairment Losses The Company measures impaired and restructured loans at the present value of expected future cash flows, discounted at the loan's effective interest rate or, as a practical expedient, at the loan's market price or the fair value of collateral if the loan is collateral dependent. The Company applies SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by the Company be reviewed for impairment of value whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This statement requires that the majority of long-lived assets and certain identifiable intangibles to be disposed of be reported at the lower of carrying amount or fair value less selling costs. (i) Amortization Debt origination costs are deferred and amortized using the straight-line method over the term of the loan. Leasing commissions are deferred and amortized using the straight-line method over the term of the lease. (j) Goodwill In March 1998, EastGroup acquired Ensign Properties, Inc., the largest independent industrial developer in Orlando. A portion of the total acquisition price for Ensign included goodwill, which represents the excess of the purchase price and related costs over the fair value assigned to the net tangible assets. The Company amortizes goodwill on a straight-line basis over 20 years. The Company will periodically review the recoverability of goodwill. The measurement of possible impairment is based primarily on the ability to recover the balance of the unamortized basis. In management's opinion, no material impairment exists at December 31, 1998. Amortization expense for goodwill was $51,000 in 1998. (k) Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. (l) Reclassifications Certain reclassifications have been made in the 1997 and 1996 financial statements to conform to the 1998 presentation. (m) Share Split On March 20, 1997, the Company announced that its Board of Directors approved a three-for-two share split in the form of a share dividend of one share for every two shares outstanding. The share dividend was distributed on April 7, 1997, to shareholders of record as of March 31, 1997. All share and per share amounts in these financial statements have been retroactively restated to account for the share split. (n) Earnings Per Share In December 1997, the Company adopted SFAS No. 128 "Earnings Per Share," which requires companies to present basic earnings per share (EPS) and diluted EPS. Prior to the effective date of SFAS No. 128, EPS was reported under Accounting Principles Board Opinion No. 15, which required presentation of primary and fully diluted EPS. The new standard, which went into effect December 15, 1997, requires 34
35 additional informational disclosures contained herein and on the face of the statement of income, makes certain modifications to APB Opinion No. 15, and requires restatement of EPS for all prior periods reported. Accordingly, EPS figures for 1996 have been restated. Basic EPS represents the amount of earnings for the year available to each share of common stock outstanding during the reporting period. The Company's basic EPS is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS represents the amount of earnings for the year available to each share of common stock outstanding during the period and to each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The Company's diluted EPS is calculated by totaling net income available to common shareholders plus preferred dividends and limited partnership (LP) dividends and dividing it by the weighted average number of common shares outstanding plus the dilutive effect of stock options related to outstanding employee stock options, LP units and convertible preferred stock, had the options or conversions been exercised. The dilutive effect of stock options was determined using the treasury stock method which assumes exercise of the options as of the beginning of the period or when issued, if later, and assuming proceeds from the exercise of options are used to purchase common stock at the average market price during the period. The treasury stock method was also used assuming conversion of the convertible preferred stock. (o) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and revenues and expenses during the reporting period, and to disclose material contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. (p) Stock Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted by the Company effective January 1, 1996. This standard defines a fair value based method of accounting for an employee stock option or similar equity instrument. Companies are given the choice of either recognizing related compensation cost by adopting the new fair value method, or to continue to use the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees," while supplementally disclosing the proforma effect on net income and net income per share using the new measurement criteria. The Company elected to continue to follow the requirements of APB No. 25, and accordingly, there was no effect on the results of operations. (q) Capitalized Development Costs During the industrial development stage, costs associated with development (i.e., land, buildings scheduled for renovation, construction costs, interest expense during construction, property taxes, etc.) are aggregated into the total capitalization of the property. As the properties become occupied, interest, depreciation and property taxes for the percentage occupied only is expensed as incurred. When the property becomes 80% occupied or one year after completion of the construction, whichever comes first, the property is no longer considered a development property and becomes an industrial property. When the property becomes classified as an industrial property, the entire property is depreciated accordingly, and interest and property taxes are expensed. (2) REAL ESTATE OWNED At December 31, 1998, the Company, as part of its focus on industrial properties, is offering for sale the 8150 Leesburg Pike Office Building in Tyson's Corner, Virginia with a carrying amount of $12,616,000 and West Palm I and II in West Palm Beach, Florida with a carrying amount of $3,133,000. No loss is anticipated on the sale of these properties. The results of operations for real estate held for sale at December 31, 1998, amounted to $1,338,000, $687,000 and $375,000, respectively, for the years ended December 31, 1998, 1997 and 1996. The results of operations for real estate held for sale at December 31, 1997 amounted to $658,000 and $684,000 for the years ended December 31, 1997 and 1996, respectively. 35
36 Costs incurred include capitalization of interest costs during the period of construction. The interest costs capitalized on real estate properties for 1998 was $822,000, compared to $401,000 for 1997, and $19,000 for 1996. 36
37 The Company is currently developing the following properties as detailed below: <TABLE> <CAPTION> COSTS INCURRED SIZE AT --------------------------------------- COMPLETION FOR THE 12 MONTHS CUMULATIVE AS ESTIMATED (SQUARE FEET) ENDED 12-31-98 OF 12-31-98 TOTAL COSTS (1) --------------------------------------------------------------------------- (Unaudited) (IN THOUSANDS) (Unaudited) <S> <C> <C> <C> <C> LEASE-UP: - --------- Walden Distribution Center II Tampa, Florida 122,000 $ 1,774 4,191 4,300 Sunbelt Distribution Center II Orlando, Florida 61,000 1,030 2,212 2,300 John Young Orlando, Florida 51,000 2,357 2,915 2,915 World Houston 7 & 8 Houston, Texas 166,000 4,687 4,687 7,600 --------------------------------------------------------------------------- TOTAL LEASE-UP 400,000 9,848 14,005 17,115 --------------------------------------------------------------------------- UNDER CONSTRUCTION: - ------------------- Rampart Distribution Center III Denver, Colorado 92,000 1,134 2,172 5,553 Sample 95 II Pompano, Florida 70,000 1,012 1,012 3,587 World Houston 9 Houston, Texas 160,000 1,016 1,016 7,289 Airport Commerce Center Tampa, Florida 108,000 1,385 1,385 5,962 John Young II Orlando, Florida 46,000 665 665 3,164 Premier Beverage Tampa, Florida 222,000 408 408 7,775 Chestnut City of Industry, California 75,000 1,674 1,674 5,207 --------------------------------------------------------------------------- TOTAL UNDER CONSTRUCTION 773,000 7,294 8,332 38,537 --------------------------------------------------------------------------- APPROVED BY BOARD: - ------------------ Westlake I Tampa, Florida 70,000 1,611 1,611 3,922 Glenmont I Houston, Texas 110,000 937 937 3,551 Main Street Carson , California 106,000 - - 5,548 --------------------------------------------------------------------------- TOTAL APPROVED BY BOARD 286,000 2,548 2,548 13,021 --------------------------------------------------------------------------- PROSPECTIVE DEVELOPMENT: - ------------------------ Houston, Texas 110,000 - - 3,900 Tampa, Florida 459,000 460 797 21,600 --------------------------------------------------------------------------- TOTAL PROSPECTIVE DEVELOPMENT 569,000 460 797 25,500 --------------------------------------------------------------------------- 2,028,000 $ 20,150 25,682 94,173 =========================================================================== COMPLETED DEVELOPMENT AND TRANSFERRED TO INDUSTRIAL PROPERTIES DURING 1998: - ----------------------- Benjamin Distribution Center II Tampa, Florida 47,000 $ 815 2,437 2,437 Palm River II Tampa, Florida 72,000 1,236 3,307 3,307 Rampart Distribution Center II Denver, Colorado 66,000 294 3,266 3,266 Chancellor Center Orlando, Florida 51,000 168 2,011 2,011 World Houston 6 Houston, Texas 68,000 2,848 2,848 2,848 --------------------------------------------------------------------------- TOTAL TRANSFERRED TO INDUSTRIAL 304,000 $ 5,361 13,869 13,869 =========================================================================== </TABLE> (1) The information provided above includes forward-looking data based on current construction schedules, the status of lease negotiations with potential tenants and other relevant factors currently available to the Company. There can be no assurance that any of these factors will not change or that any change will not affect the accuracy of such forward-looking data. Among the factors that could affect the accuracy of the forward-looking statements are weather, default or other failure of performance by contractors, increases in the price of construction materials or the unavailability of such materials, failure to obtain necessary permits or approval from governmental entities, changes in local and/or national economic conditions, increased competition for tenants or other occurrences that could depress rental rates, and other factors not within the control of the Company. 37
38 A summary of gains (losses) on real estate investments for the years ended December 31, 1998, 1997 and 1996 follows: <TABLE> <CAPTION> NET RECOGNIZED BASIS SALES PRICE GAIN/(LOSS) ---------------- ---------------- ---------------- (IN THOUSANDS) <S> <C> <C> <C> 1998 Real estate properties: Hampton House Apartments $ 5,977 6,611 634 Sutton House Apartments 7,696 9,448 1,752 Doral Club Apartments 5,900 9,046 3,146 Grande Pointe Apartments 5,857 7,104 1,247 401 Exchange Distribution Center 621 666 45 East Maricopa Distribution Center 625 625 - Columbia Place Office Building 11,524 13,913 2,389 Park Ridge Distribution Center 3,154 3,154 - LNH Land 9 53 44 Jacksonville - deferred gain (383) - 383 Other (73) - 73 ---------------- ---------------- ---------------- $ 40,907 50,620 9,713 ================ ================ ================ 1997 Real estate properties: Santa Fe Energy Building $ 10,354 12,660 2,306 Liberty Corners Shopping Center 2,649 5,263 2,614 Cowesett Corners Shopping Center 4,253 5,929 1,676 Houston Land (98) - 98 Wellington Land (14) (14) - Plus Park - deferred gain (62) - 62 Bell Road - deferred gain (96) - 96 Mortgage loan writedown 475 - (475) ---------------- ---------------- ---------------- $ 17,461 23,838 6,377 ================ ================ ================ 1996 Real estate properties: Garden Villa Apartments $ 2,715 4,068 1,353 Southwyck Land 97 149 52 Pompano Beach Land 3,280 3,267 (13) Baygreen Industrial Center 1,679 1,677 (2) Wellington Land 397 601 204 Pin Oaks Apartments 1,675 4,235 2,560 Eastgate Apartments 1,326 1,753 427 Plantations Apartments 6,765 7,116 351 Land purchase leasebacks: Bellevue - 472 472 Taco Bell 12 142 130 Mortgage loan writedown 200 - (200) ---------------- ---------------- ---------------- $ 18,146 23,480 5,334 ================ ================ ================ </TABLE> The following schedule indicates approximate future minimum rental receipts under noncancelable leases for the real estate properties by year as of December 31, 1998 (in thousands): <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 1998 - ----------------- <S> <C> 1999 $ 61,030 2000 52,272 2001 44,574 2002 34,818 2003 24,073 Later Years 49,988 ---------------- Total Minimum Receipts $266,755 ---------------- </TABLE> 38
39 (3) MORTGAGE LOANS RECEIVABLE A summary of mortgage loans follows: <TABLE> <CAPTION> DECEMBER 31, ------------ 1998 1997 ---- ---- (IN THOUSANDS) <S> <C> <C> First mortgage loans: Industrial (2 loans in 1997) $ - 1,686 Apartment (1 loan) 3,010 2,836 Motels (2 loans in 1998; 3 loans in 1997) 1,250 1,714 Undeveloped Land (2 loans) 4,405 4,382 Other (3 loans in 1998; 4 loans in 1997) 149 234 -------- -------- $ 8,814 10,852 ======== ======== </TABLE> At December 31, 1997, the carrying value of two impaired motel mortgage loans was $1,318,000. At December 31, 1998, the carrying value of these two motel mortgage loans was reduced to $1,250,000. Interest income recorded on the motel mortgages was $174,000 for 1998, $364,000 for 1997, and $403,000 for 1996. These loans were paid off in February 1999. (4) INVESTMENT IN REAL ESTATE INVESTMENT TRUSTS The investment in real estate investment trusts ("REIT") consists of the following: <TABLE> <CAPTION> DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- ESTIMATED ESTIMATED COST FAIR VALUE COST FAIR VALUE --------- ----------- -------- ----------- (In thousands) <S> <C> <C> <C> <C> Meridian Point Realty Trust VIII * $ - - 13,756 12,506 Franklin Select Realty Trust 5,130 5,737 3,297 4,012 ------------------------------------------------- $ 5,130 5,737 17,053 16,518 ================================================= </TABLE> * See Note 9 for a full discussion on the Meridian VIII acquisition. (5) NOTES PAYABLE TO BANKS At December 31, 1998, the Company had a line of credit from a commercial bank in the amount of $50,000,000 that was secured by the outstanding stock of two of the Company's wholly-owned subsidiaries and by the Company's ownership interests in two partnerships. Borrowings under the credit line at December 31, 1998 were $17,392,000 and the interest rate was LIBOR plus 1.40% (6.96% at December 31, 1998). Total loan commitment fees of $74,000, $75,000 and $50,000 were paid in 1998, 1997 and 1996 for this line of credit. This line of credit expired January 31, 1999. At December 31, 1998, the Company had $96,930,000 outstanding under a $100,000,000 acquisition line of credit from a commercial bank. The acquisition line had an interest rate of LIBOR plus 1.40% at December 31, 1998. The line was secured by 11 properties of the Company with an aggregate carrying amount of $129,754,000 at December 31, 1998 and was due to expire September 30, 2000. Total loan commitment fees of $62,500, $143,750 and $37,500 were paid in 1998, 1997 and 1996 for this line of credit. On January 13, 1999, the Company replaced the $50,000,000 and $100,000,000 bank lines with a new three-year $150 million unsecured revolving credit facility with a group of ten banks which was arranged by Chase Securities, Inc. The interest rate is based on the Eurodollar rate plus 1.25% and was 6.19% at March 10, 1999. The book manager and administrative agent for the credit facility is Chase Bank of Texas, which led a syndicate of banks including First Union National Bank, syndication agent; PNC Bank, documentation agent; First American National Bank operating as Deposit Guaranty National 39
40 Bank, co-agent; SouthTrust Bank; AmSouth Bank; Bank One Louisiana; Hibernia National Bank; First Tennessee Bank and Trustmark National Bank. On March 1, 1999, the Company closed a $47 million, nonrecourse first mortgage loan with Metropolitan Life. The note has an interest rate of 6.8%, 20-year amortization and a 10-year maturity. It is secured by six industrial properties in California: Industry Distribution Center, Shaw Commerce Center, Kingsview Industrial Center, Dominguez Distribution Center, Walnut Business Center and Washington Distribution Center. The proceeds were used to reduce bank borrowings. This new loan reduced the Company's weighted average interest rate on mortgage debt from 8.2% to 7.8%. Average bank borrowings were $94,488,000 in 1998 compared to $11,155,000 in 1997, with average interest rates of 7.06% in 1998 compared to 7.55% in 1997. (6) MORTGAGE NOTES PAYABLE A summary of mortgage notes payable follows: <TABLE> <CAPTION> - ---------------------------------- ----------- ------------- ----------- ------------- ----------------------------- CARRYING AMOUNT BALANCE AT DECEMBER 31, P&I MATURITY OF SECURING ----------------------- PROPERTY RATE PAYMENT DATE REAL ESTATE 1998 1997 (IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Interstate Distribution Center #1 9.25% $10,827 06/01/09 2,672 758 814 Interstate Distribution Center #2 9.25% 12,844 06/01/09 2,971 971 1,032 8150 Leesburg Pike Office Building 8.50% 52,304 06/15/05 12,617 3,109 3,456 Deerwood Distribution Center 8.375% 16,339 07/01/03 2,639 1,648 1,699 North Shore Improvement Bonds 6.3-7.5% Semiannual 09/02/16 2,539 410 421 Northwest Point Business Park 7.75% 32,857 03/01/01 6,428 4,016 4,096 56th Street Commerce Park 8.875% 21,816 08/01/04 2,885 2,143 2,212 Exchange Distribution Center 8.375% 21,498 08/01/05 3,239 2,314 2,375 LaVista Apartments 8.688% 48,667 09/01/05 6,614 5,699 5,784 Westport Commerce Center 8.00% 28,021 08/01/05 5,119 3,090 3,176 LakePointe Business Park 8.125% 81,675 10/01/05 9,418 10,680 10,788 JetPort, Jetport 515, Jetport 516 8.125% 33,769 10/01/05 4,588 3,711 3,811 University Business Center 9.06% 85,841 04/01/00 15,258 8,727 9,095 University Business Center 7.45% 74,235 02/28/02 11,117 8,874 8,955 Huntwood Associates 7.99% 100,250 08/22/06 17,680 12,597 12,785 Wiegman Associates 7.99% 46,269 08/22/06 8,768 5,814 5,900 Chamberlain Distribution Center 8.75% 21,376 01/01/05 3,926 2,462 2,501 Eastlake Distribution Center 8.50% 57,115 07/05/04 9,698 4,771 5,039 Estrella Distribution Center 9.25% 23,979 01/02/03 5,213 2,571 - E.Univ, 7th St, 55th St, Ethan Allen 8.06% 96,974 06/26/07 24,541 12,281 - Waldenbooks Distribution Center 7.83% 98,877 09/15/07 21,801 12,779 - West Palm Distribution Center 8.25% 7,700 09/01/00 3,133 981 - Lamar II Distribution Center 6.90% 16,925 12/01/08 6,645 2,200 - Auburn I Distribution Center 8.875% 64,885 09/01/09 15,905 5,357 - World Houston 1 and 2 7.77% 33,019 04/15/07 6,386 4,531 - Doral Club Apartments 8.625% 36,494 10/31/03 - Repaid 09/98 4,230 Sutton House Apartments 8.00% 45,257 10/31/03 - Repaid 09/98 5,746 Columbia Place Office Building 8.875% 93,292 12/31/09 - Repaid 12/98 9,788 Metro Business Park 8.00% 15,892 04/01/98 - Repaid 04/98 1,677 ------------------------------------------- $211,800 $122,494 105,380 ------------------------------------------- </TABLE> 40
41 Approximate principal payments due during the next five years as of December 31, 1998 are as follows: <TABLE> <S> <C> 1999 $3,131,000 2000 12,621,000 2001 7,228,000 2002 11,636,000 2003 7,387,000 </TABLE> As discussed in Note 5 above, the Company closed a $47 million, nonrecourse first mortgage loan with Metropolitan Life on March 1, 1999. Considering the effect of this new loan, approximate principal payments due during the next five years are as follows: <TABLE> <S> <C> 1999 $ 3,982,000 2000 13,825,000 2001 8,516,000 2002 13,015,000 2003 8,863,000 </TABLE> (7) REVERSE REPURCHASE AGREEMENTS The Company does not in the ordinary course of business take possession of the securities, which collateralize its reverse repurchase agreements (assets purchased under agreements to resell). However, the Company has the right to demand additional collateral or to request return of the invested funds at any time the collateral value is less than the invested funds plus any accrued earnings thereon. These transactions are conducted on a short-term basis with financial institutions with which the Company has normal business relationships. At December 31, 1998 and 1997, the Company did not hold reverse repurchase agreements with any individual counterparty or group of counterparties in excess of 10% of stockholders' equity. (8) STOCKHOLDERS' EQUITY MANAGEMENT INCENTIVE PLAN-STOCK OPTIONS/INCENTIVE AWARD In 1994, the Company adopted the 1994 Management Incentive Plan. The Plan includes stock options (50% vested after one year and the other 50% after two years) and an annual incentive award. Stock option activity for the 1994 plan is as follows: <TABLE> <CAPTION> Years ended December 31, -------------------------------------- 1998 1997 1996 ----------------------------- -------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Price Price Price ------------- ----------- ------------- --------- ------------ --------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 668,758 $16.49 422,250 $13.42 261,375 $12.12 Granted 7,000 $20.67 287,425 $20.39 202,125 $14.61 Exercised (22,935) $14.17 (37,692) $13.05 (31,500) $12.29 Expired (7,190) $18.01 (3,225) $14.97 (9,750) $13.09 ------------- ------------ ---------- Outstanding at end of year 645,633 $16.60 668,758 $16.49 422,250 $13.42 ============= ============ ========== Exercisable at end of year 497,391 $15.45 282,633 $13.18 220,125 $12.51 Available for grant at end of year 29,388 - 34,205 - 44,896 - Price range of options: Outstanding $12.00-$22.375 $12.00-$22.375 $12.00-$17.92 Exercised $12.67-$17.92 $12.00-$14.92 $12.00-$12.67 Exercisable $12.00-$22.375 $12.00-$14.83 $12.00-$12.67 </TABLE> The weighted average contractual life of the options outstanding as of December 31, 1998 was 7.44 years. The annual incentive award program began in 1995 and the Compensation Committee determines awards based on actual funds from operations per share ("FFO") compared to goals set for the year. The 1998, 1997 and 1996 awards approximated $469,000, $307,000 and $311,000, respectively, and were payable two-thirds in cash and one-third in stock of the Company. DIRECTORS STOCK OPTION PLAN The Company has a Directors Stock Option Plan, as amended in 1994, under which an aggregate of 150,000 shares of common stock were reserved for issuance upon exercise of any options granted. Under 41
42 the Directors plan, each Non-Employee Director is granted an initial 7,500 options and 2,250 additional options on the date of any Annual Meeting at which the Director is reelected to the Board. Stock option activity for the Director plan is as follows: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 ------------------------- ------------------------- ----------------------- Weighted Weighted Weighted Average Average Average Shares Exercise Shares Exercise Shares Exercise Price Price Price ------- -------- ------- --------- ------ -------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 70,500 $13.300 76,500 $11.830 65,250 $11.350 Granted 16,500 $20.625 11,250 $19.375 11,250 $14.580 Exercised (6,750) $12.830 (17,250) $10.750 - - Expired (2,250) $19.375 - - - - ------- ------- ------ Outstanding at end of year 78,000 $14.710 70,500 $13.300 76,500 $11.830 ======= ======= ====== Exercisable at end of year 78,000 $14.710 70,500 $13.300 76,500 $11.830 Available for grant at end of year 25,500 - 39,750 - 51,000 - Price range of options: Outstanding $10.67-$20.625 $10.67-$19.375 $10.67-$14.58 Exercised $11.25-$14.58 $10.67-11.25 - Exercisable $10.67-$20.625 $10.67-$19.375 $10.67-$14.58 </TABLE> The weighted average contractual life of the options outstanding as of December 31, 1998 was 6.67 years. SERIES A 9.00% CUMULATIVE REDEEMABLE PREFERRED STOCK In June 1998, EastGroup sold 1,725,000 shares of Series A 9.00% Cumulative Redeemable Preferred Stock at $25.00 per share in a public offering. Net proceeds of approximately $41,357,000 were used to repay advances outstanding on the Company's line of credit. The preferred stock, which may be redeemed by the Company at $25.00 per share, plus accrued and unpaid dividends, on or after June 19, 2003, has no stated maturity, sinking fund or mandatory redemption and is not convertible into any other securities of the Company. SERIES B 8.75% CUMULATIVE CONVERTIBLE PREFERRED STOCK In September 1998, EastGroup entered into an agreement with Five Arrows Realty Securities II, L.L.C. (Five Arrows), an investment fund managed by Rothschild Realty, Inc., a member of the Rothschild Group, providing for the sale of 2,800,000 shares of Series B 8.75% Cumulative Convertible Preferred Stock at a net price of $24.50 per share. Under the terms of this agreement, EastGroup Properties could sell 2,800,000 shares of Series B Preferred Stock to Five Arrows at up to five closings, at EastGroup's option, through September 25, 1999. In connection with this offering, EastGroup has entered into certain related agreements with Five Arrows, providing, among other things, for certain registration rights with respect to the Series B Preferred Stock and the right to designate a member of the Board of Directors under certain circumstances. The Series B Preferred Stock, which is convertible into common stock at a conversion price of $22.00 per share, is entitled to quarterly dividends in arrears equal to the greater of $0.547 per share or the dividend on the number of shares of common stock into which a share of Series B Preferred Stock is convertible. In December 1998, the Company sold $10,000,000 of the Series B Preferred Stock to Five Arrows and plans to sell the remaining $60,000,000 by September 25, 1999. COMMON STOCK ISSUANCES In February 1997, the Company issued a total of 2,100,000 shares under an existing shelf registration statement for net proceeds of $36,654,000. On June 5, 1997, the Company's stockholders approved and the Company subsequently completed the reorganization of the Trust into a Maryland corporation. The purpose of the reorganization was to modernize EastGroup's governance procedures and to provide EastGroup with a greater degree of 42
43 certainty and flexibility in planning and implementing corporate action by adopting a form of organization used by many real estate investment trusts. EastGroup will continue to qualify as a real estate investment trust for tax purposes. Effective with the reorganization, the Company has the authority to issue 100,000,000 shares consisting of 70,000,000 shares of common stock, $.0001 par value per share, and 30,000,000 shares of excess stock, $.0001 par value per share. Effective June 5, 1997, all stock transactions reflect the new par value. Stock transactions prior to the reorganization have not been restated to reflect the new par value. In October 1997, the Company completed an offering of 3,500,000 shares of its common stock for net proceeds of approximately $72,555,000. COMMON STOCK REPURCHASE PLAN During third quarter 1998, EastGroup's Board of Directors authorized the repurchase of up to 500,000 shares of its outstanding common stock. The shares may be purchased from time to time in the open market or in privately negotiated transactions. As of December 31, 1998, the Company had repurchased 21,100 shares for $359,000. Under Maryland law, these shares became authorized but unissued shares of common stock when repurchased. SHAREHOLDER RIGHTS PLAN In December 1998, EastGroup adopted a Shareholder Rights Plan designed to enhance the ability of all of the Company's stockholders to realize the long-term value of their investment. Under the Plan, Rights were distributed as a dividend on each share of Common Stock (one Right for each share of Common Stock) held as of the close of business on December 28, 1998. A Right will also be delivered with all shares of Common Stock issued after December 28, 1998 and 1.1364 Rights will be delivered with all shares of EastGroup's Series B Cumulative Convertible Preferred Stock issued after December 28, 1998. The Rights will expire at the close of business on December 3, 2008. Each whole Right will entitle the holder to buy one one-thousandth (1/1000) of a newly issued share of EastGroup's Series C Preferred Stock at an exercise price of $70.00. The Rights attach to and trade with the shares of the Company's Common Stock and Series B Preferred Stock. No separate Rights Certificates will be issued unless an event triggering the Rights occurs. The Rights will detach from the Common Stock and Series B Preferred Stock and will initially become exercisable for shares of Series C Preferred Stock if a person or group acquires beneficial ownership of, or commences a tender or exchange offer which would result in such person or group beneficially owning 15% or more of EastGroup's Common Stock, except through a tender or exchange offer for all shares which the Board determines to be fair and otherwise in the best interest of EastGroup and its shareholders. The Rights will also detach from the Common Stock and Series B Preferred Stock if the Board determines that a person holding at least 9.8% of EastGroup's Common Stock intends to cause EastGroup to take certain actions adverse to it and its shareholders or that such holder's ownership would have a material adverse effect on EastGroup. If any person becomes the beneficial owner of 15% or more of EastGroup's Common Stock and the Board of Directors does not within 10 days thereafter redeem the Rights, or a 9.8% holder is determined by the Board to be an adverse person, each Right not owned by such person or related parties will then enable its holder to purchase, at the Right's then-current exercise price, EastGroup Common Stock (or, in certain circumstances as determined by the Board, a combination of cash, property, common stock or other securities) having a value of twice the Right's exercise price. Under certain circumstances, if EastGroup is acquired in a merger or similar transaction with another person, or sells more than 50 percent of its assets, earning power or cash flow to another entity, each Right that has not previously been exercised will entitle its holder to purchase, at the Right's then-current exercise price, common stock of such other entity having a value of twice the Right's exercise price. 43
44 EastGroup will generally be entitled to redeem the Rights at $0.0001 per Right at any time until the 10th day following public announcement that a 15% position has been acquired, or until the Board has determined a 9.8% holder to be an adverse person. Prior to such time, the Board of Directors may extend the redemption period. DIVIDEND REINVESTMENT PLAN During 1995, the Company adopted a dividend reinvestment plan, which allows stockholders to reinvest cash distributions in new shares of the Company. FAIR VALUE OF STOCK OPTIONS In accordance with SFAS No. 123, the following additional disclosures are required related to options granted after January 1, 1995. The fair value of each option grant is estimated on the grant date using the Black-Scholes option pricing model with the following weighted-average assumptions used for 1998, 1997 and 1996, respectively: risk-free interest rates of 5.54%, 6.09%, and 6.66%; dividend yields of 7.64%, 7.49%, and 8.60%; volatility factors of 15.5%, 13%, and 12.4%, and expected option lives of 5 years for all years presented. The Company applies APB No. 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost been determined based on fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, the Company's net income and net income per basic share would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> 1998 1997 1996 ----------- ----------- -------------- (In thousands, except per share data) <S> <C> <C> <C> Net income available to common shareholders - as reported $27,266 20,779 12,509 Net income available to common shareholders - pro forma 27,033 20,642 12,472 Net income per basic share - as reported 1.67 1.58 1.44 Net income per basic share - pro forma 1.66 1.57 1.44 Weighted average fair value of options 3.48 1.10 .86 granted during year </TABLE> EARNINGS PER SHARE In December 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which requires companies to present basic EPS and diluted EPS, instead of the formerly required primary and fully diluted EPS. Reconciliation of the numerators and denominators in the basic and diluted EPS computations are as follows: <TABLE> <CAPTION> 1998 1997 1996 -------------- --------------- -------------- BASIC EPS COMPUTATION (In thousands) <S> <C> <C> <C> Numerator-net income available to common shareholders $27,266 20,779 12,509 Denominator-weighted average shares outstanding 16,283 13,176 8,677 DILUTED EPS COMPUTATION Numerator-net income available to common shareholders $27,266 20,779 12,509 Denominator-weighted average shares outstanding 16,283 13,176 8,677 </TABLE> 44
45 <TABLE> <S> <C> <C> <C> Common stock options 140 162 72 Limited partnership units 9 - - -------------- --------------- -------------- Total Shares 16,432 13,338 8,749 ============== =============== ============== </TABLE> (9) ACQUISITIONS ENSIGN PROPERTIES, INC. ACQUISITION In March 1998, EastGroup acquired Ensign Properties, Inc., an independent industrial developer in Orlando. This acquisition, which was accounted for under the purchase method of accounting, allowed EastGroup to become self-managed in Orlando and Tampa with plans to expand self-management to its other Florida markets. The purchase price of the acquisition amounting to approximately $1,800,000 was allocated primarily to goodwill, development costs, leasing commissions and other prepaid costs. The operating results of Ensign Properties, Inc. have been included in the consolidated statement of income subsequent to the date of acquisition. The pro forma impact related to the acquisition would be immaterial to the consolidated financial statements. MERIDIAN VIII ACQUISITION On June 1, 1998, the merger of Meridian VIII into a wholly-owned subsidiary of EastGroup was completed, accounting for the acquisition by using the purchase method of accounting. For financial reporting purposes, the acquired assets of Meridian VIII were assigned new cost basis amounts based on the allocation of the purchase price of the assets. In general, the purchase price to the Company consisted of the cash paid for the Meridian VIII and the Company's previous investment in Meridian VIII. The shares of Meridian VIII owned by the Company were retired at the merger date. The operating results of Meridian VIII have been included in the consolidated statement of income subsequent to the date of acquisition. Pursuant to the terms of its merger agreement with Meridian VIII, EastGroup's wholly-owned subsidiary exercised options to acquire a sufficient number of common and preferred shares of Meridian VIII such that it owned 90% of all outstanding common and preferred shares. Prior to the exercise of the options, EastGroup's subsidiary beneficially owned approximately 83.2% of the outstanding voting securities of Meridian VIII. Following the exercise of the options, Meridian VIII was merged into EastGroup's wholly-owned subsidiary, with all outstanding common shares of Meridian VIII not held by EastGroup receiving, as a result of the merger, $8.50 per share in cash and all preferred shares of Meridian VIII not held by EastGroup receiving $10.00 per share in cash. The consideration paid to the remaining common and preferred shareholders of Meridian VIII was equivalent to that paid by EastGroup in its tender offer for Meridian VIII's common and preferred shares which was completed in April 1998. The total purchase price to EastGroup was approximately $102,000,000 which included the assumption of Meridian VIII's outstanding indebtedness. As a result of the merger, Meridian VIII's common and preferred shares have been removed from registration under the Securities Exchange Act of 1934 and ceased to be listed on the American Stock Exchange effective as of June 1, 1998. 45
46 The increase in net assets at the acquisition date, based on estimated relative fair values, resulting from the acquisition was as follows (in thousands): <TABLE> <S> <C> Real estate properties $96,366 Cash 6,118 Accrued interest and other receivables 119 Other assets 124 Mortgage notes and interest payable (33,422) Accounts payable and other liabilities (871) ----------- TOTAL $68,434 =========== </TABLE> The purchase price of the net assets acquired consisted of the following (in thousands): <TABLE> <S> <C> Acquisition of Meridian Shares $52,760 Merger costs 1,569 Prior investment in Meridian 14,105 ----------- TOTAL $68,434 =========== </TABLE> The following unaudited pro forma combined results of operations give effect to the Meridian VIII merger as if it had occurred at the beginning of the fiscal year for each of the years presented: <TABLE> <CAPTION> (In thousands, except per share amounts) 1998 1997 ----------------------------------------------------------------------------- <S> <C> <C> Revenues $80,022 63,978 --------------------------- Net income available to common shareholders $25,566 19,316 --------------------------- Net income per basic share $ 1.57 1.47 --------------------------- Shares used in computation 16,283 13,176 --------------------------- Net income per basic share $ 1.56 1.45 --------------------------- Shares used in computation 16,432 13,338 --------------------------- </TABLE> In management's opinion, the unaudited pro forma combined results of operations are not necessarily indicative of the actual results that would have occurred had the transaction been consummated at the beginning of 1998 and the beginning of 1997 or of future operations of the combined companies under the ownership and management of the Company. COPLEY AND LNH ACQUISITIONS During 1996, the Company acquired the entities described below accounting for the acquisitions by using the purchase method of accounting. For financial reporting purposes, the assets of the company acquired were assigned new cost basis amounts based on the allocation of the purchase price of the assets to the Company. In general, the purchase price to the Company consisted of the new shares issued at the market price of the Company's shares and the previous investment the Company had in LNH and Copley. The shares of LNH and Copley owned by the Company were retired at the merger date. The operating results of LNH and Copley have been included in the consolidated statements of income subsequent to the dates of acquisition. On May 14, 1996, the merger of LNH with EGP-LNH Corporation, a wholly-owned subsidiary of the Company, was completed. Under the terms of the merger, each LNH share was converted into the right to receive .55065 EastGroup shares (.3671 pre-split). The Company issued 927,366 shares as a result of this merger. On June 19, 1996, Copley was merged into the Company. Under the terms of the merger, each Copley share was converted into the right to receive 1.06002 EastGroup shares (.70668 pre-split). EastGroup issued 3,238,343 of its shares as a result of this merger. The following unaudited pro forma combined results of operations give effect to the LNH and Copley mergers as if they had occurred at the beginning of the fiscal year for the year presented: (In thousands, except per share amounts) 1996 ---- Revenues $47,191 ======= Net income 12,796 ======= Net income per basic share 1.21 ======= Shares used in computation 10,532 ======= In management's opinion, the unaudited pro forma combined results of operations are not necessarily indicative of the actual results that would have occurred had the transaction been consummated at the beginning of 1996 or of future operations of the combined companies under the ownership and management of the Company. 46
47 (10) QUARTERLY RESULTS OF OPERATIONS - UNAUDITED <TABLE> <CAPTION> 1998 1997 Quarter Ended Quarter Ended --------------------------------------------------- ------------------------------------------------ Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31 (In thousands, except per share data) <S> <C> <C> <C> <C> <C> <C> <C> <C> Revenues $ 16,041 18,681 20,753 21,253 11,989 12,665 13,546 15,422 Expenses (11,116) (14,150) (15,595) (16,244) (9,014) (9,112) (9,941) (11,153) ------------ ------------ ------------ ------------ ------------ ---------- ------------ ----------- Income before gain (loss) on investments 4,925 4,531 5,158 5,009 2,975 3,553 3,605 4,269 Gain (loss) on investments 73 1,017 4,996 3,627 112 (5) 6,300 (30) ------------ ------------ ------------ ------------ ------------ ---------- ------------ ----------- Net income $ 4,998 5,548 10,154 8,636 3,087 3,548 9,905 4,239 Preferred dividends - (129) (970) (971) - - - - ------------ ------------ ------------ ------------ ------------ ---------- ------------ ----------- Net income available to common shareholders $ 4,998 5,419 9,184 7,665 3,087 3,548 9,905 4,239 ============ ============ ============ ============ ============ ========== ============ =========== BASIC PER SHARE DATA Net income 0.31 0.33 0.56 0.47 0.26 0.28 0.78 0.27 ============ ============ ============ ============ ============ ========== ============ =========== Weighted average shares oustanding 16,223 16,299 16,308 16,300 11,722 12,675 12,685 15,583 ============ ============ ============ ============ ============ ========== ============ =========== DILUTED PER SHARE DATA Net income 0.30 0.33 0.56 0.47 0.26 0.28 0.77 0.27 ============ ============ ============ ============ ============ ========== ============ =========== Weighted average shares outstanding 16,391 16,452 16,423 16,456 11,861 12,822 12,865 15,765 ============ ============ ============ ============ ============ ========== ============ =========== </TABLE> The above quarterly earnings per share calculations are based on the weighted average number of common shares outstanding during each quarter for earnings per common share and the weighted average number of outstanding common shares and common share equivalents during each quarter for the earnings per common share, assuming dilution. The annual earnings per share calculations are based on the weighted average number of common shares outstanding during each year for earnings per common share and the weighted average number of outstanding common shares and common share equivalents during each year for earnings per common share, assuming dilution. (11) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1998 and 1997. SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. <TABLE> <CAPTION> 1998 1997 ---- ---- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (IN THOUSANDS) <S> <C> <C> <C> <C> Financial Assets Cash and cash equivalents $ 2,784 2,784 1,298 1,298 Investments in real estate Investment trusts 5,737 5,737 16,518 16,518 Mortgage loans receivable 8,814 8,946 10,852 11,937 Financial Liabilities Mortgage notes payable 122,494 130,066 105,380 110,181 Notes payable to banks 114,322 114,322 41,770 41,770 </TABLE> Carrying amounts shown in the table are included in the balance sheet under the indicated captions. The following methods and assumptions were used to estimate fair value of each class of financial instruments: Cash and Cash Equivalents: The carrying amounts approximate fair value because of the short maturity of those instruments. Mortgage Loans: The fair value of performing mortgage loans is either estimated using discounted cash flows at current interest rates for loans with similar terms and maturities or based on the estimated value of the underlying collateral adjusted for the borrower's payment history and financial strength. The fair value for nonperforming loans is based on underlying collateral value. Investment in Real Estate Investment Trusts: The fair value of this equity investment is based on quoted market prices. 47
48 Mortgage Notes Payable: The fair value of the Company's mortgage notes payable is estimated based on the quoted market prices for similar issues or by discounting expected cash flows at the rates currently offered to the Company for debt of the same remaining maturities, as advised by the Company's bankers. Notes Payable to Banks: The carrying amounts approximate fair value because of the variable rates of interest on the debt. (12) NEW ACCOUNTING PRONOUNCEMENTS COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for reporting comprehensive income. SFAS No. 130 defines comprehensive income as the changes in equity of an enterprise except those resulting from stockholder transactions. All components of comprehensive income are required to be reported in a financial statement. The Company adopted this standard as of January 1, 1998. BUSINESS SEGMENTS Also in June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was issued effective for fiscal years ending after December 15, 1998. The Company's reportable segments consist of industrial properties, office buildings, and an other category that includes apartments and other real estate. The Company's chief decision makers use two primary measures of operating results in making decisions, such as allocating resources: property net operating income (PNOI), defined as real estate operating revenues less real estate operating expenses (before interest expense and depreciation), and funds from operations (FFO), defined as net income (loss) (computed in accordance with generally accepted accounting principles GAAP)), excluding gains or losses from debt restructuring and sales of property, plus real estate related depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The Company uses FFO as a measure of the performance of our industry as an equity real estate investment trust because, along with cash flows from operating activities, financing and investing activities, it provides a measure of our ability to incur and service debt and to make capital expenditures. FFO is not considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including our ability to make distributions. The table below presents on a comparative basis for the three fiscal years reported PNOI by operating segment, followed by reconciliations of PNOI to FFO and FFO to net income available for common shareholders: <TABLE> <CAPTION> 1998 1997 1996 (In thousands) ----------------------------------------------- <S> <C> <C> <C> PROPERTY REVENUES: Industrial $61,417 33,338 19,314 Office 6,783 8,353 7,383 Other 6,112 8,100 10,446 ------------- ----------- -------------- 74,312 49,791 37,143 ------------- ----------- -------------- PROPERTY EXPENSES: Industrial (14,414) (8,258) (4,987) Office (1,927) (2,618) (2,929) Other (2,987) (3,949) (5,346) ------------- ----------- ------------- (19,328) (14,825) (13,262) ------------- ----------- ------------- PROPERTY NET OPERATING INCOME: Industrial 47,003 25,080 14,327 </TABLE> 48
49 <TABLE> <S> <C> <C> <C> Office 4,856 5,735 4,454 Other 3,125 4,151 5,100 -------------- ----------- -------------- TOTAL PROPERTY NET OPERATING INCOME 54,984 34,966 23,881 -------------- ----------- -------------- Other income 2,442 3,831 2,656 Interest expense (16,948) (10,551) (8,930) General and administrative (3,822) (2,923) (2,356) Minority interest in earnings (783) (796) (431) Dividends on preferred shares (2,070) - - -------------- ----------- -------------- FUNDS FROM OPERATIONS 33,803 24,527 14,820 Depreciation and amortization (16,574) (10,409) (7,759) Share of joint venture depreciation and amortization 324 284 142 Gains from property sales/investment in REITs 9,713 6,377 5,340 Other - - (34) -------------- ----------- -------------- NET INCOME AVAILABLE TO COMMON SHAREHOLDERS 27,266 20,779 12,509 Dividends on preferred shares 2,070 - - -------------- ----------- -------------- NET INCOME $29,336 20,779 12,509 ============== =========== ============== ASSETS: Industrial $532,869 330,639 188,833 Office 6,896 39,753 38,912 Other 8,866 15,380 37,494 -------------- ----------- -------------- 548,631 385,772 265,239 Less accumulated depreciation (34,042) (29,095) (22,703) -------------- ----------- -------------- 514,589 356,677 242,536 -------------- ----------- -------------- Real estate held for sale 25,620 23,233 14,878 Less accumulated depreciation (8,794) (3,217) (859) -------------- ----------- -------------- 16,826 20,016 14,019 Investment in joint venture - - 4,367 Mortgage loans 8,814 10,852 12,503 Investment in real estate investment trusts 5,737 16,518 934 Cash 2,784 1,298 438 Other assets 18,798 7,766 6,658 -------------- ----------- -------------- TOTAL ASSETS $567,548 413,127 281,455 ============== =========== ============== REAL ESTATE INVESTMENT CAPITAL EXPENDITURES ACQUISITIONS Industrial $178,163 124,149 111,085 Office -- -- 18,829 Other -- -- 7,336 DEVELOPMENTS Industrial 25,511 14,936 1,695 Office -- -- -- Other -- -- -- </TABLE> ORGANIZATION COSTS In April 1998, Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities," was issued. This SOP provides guidance on the financial reporting of start-up costs and organization costs, and requires that these costs be expensed as incurred effective for fiscal years beginning after December 15, 1998. Unamortized organization costs will be written off in first quarter 1999 and accounted for as a cumulative effect of a change in accounting principle. (13) SUBSEQUENT EVENTS Purchases of industrial properties subsequent to December 31, 1998 include the following: 49
50 <TABLE> <CAPTION> CLOSING PROPERTY LOCATION DATE SIZE PURCHASE PRICE - -------- -------- ---- ---- -------------- (Square feet) (In thousands) <S> <C> <C> <C> <C> Central Green Houston, Texas 01-07-99 83,575 $ 4,570 Blue Heron Distribution Center West Palm Beach, Florida 01-15-99 110,000 4,535 -------- $ 9,105 ======= </TABLE> In addition, subsequent to December 31, 1998, the Company purchased a 4.73 acre parcel of land for development in Carson, California for $1,600,000. On January 13, 1999, the Company replaced the $50,000,000 and $100,000,000 bank lines held with Deposit Guaranty National Bank with a new three-year $150 million unsecured revolving credit facility with a group of ten banks which was arranged by Chase Securities, Inc. The interest rate is based on the Eurodollar rate plus 1.25% and was 6.19% at March 10, 1999. The book manager and administrative agent for the credit facility is Chase Bank of Texas, which led a syndicate of banks including First Union National Bank, syndication agent; PNC Bank, documentation agent; First American National Bank operating as Deposit Guaranty National Bank, co-agent; SouthTrust Bank; AmSouth Bank; Bank One Louisiana; Hibernia National Bank; First Tennessee Bank and Trustmark National Bank. The amounts outstanding under the bank lines with Deposit Guaranty were repaid in January 1999. On March 1, 1999, the Company closed a $47 million, nonrecourse first mortgage loan with Metropolitan Life. The note has an interest rate of 6.8%, 20-year amortization and a 10-year maturity. It is secured by six industrial properties in California: Industry Distribution Center, Shaw Commerce Center, Kingsview Industrial Center, Dominguez Distribution Center, Walnut Business Center and Washington Distribution Center. The proceeds were used to reduce bank borrowings. This new loan reduced the Company's weighted average interest rate on mortgage debt from 8.2% to 7.8%. (14) RELATED PARTY TRANSACTIONS EastGroup and Parkway Properties, Inc. ("Parkway") shared the same office space at One Jackson Place in Jackson, Mississippi, until April 1997 when Parkway moved to its own space. EastGroup and Parkway shared the rent with respect to such space based upon the relative number of employees of each using the space. EastGroup and Parkway currently share the services and expenses of the Company's Chairman of the Board and his administrative assistant. 50
51 INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES THE DIRECTORS AND STOCKHOLDERS EASTGROUP PROPERTIES, INC.: Under date of March 5, 1999, we reported on the consolidated balance sheets of EastGroup Properties, Inc., and subsidiaries, as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, which are included in the 1998 Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related consolidated financial statement schedules as listed in Item 14 (a)(2) of Form 10-K. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such 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. Jackson, Mississippi KPMG Peat Marwick LLP March 5, 1999 51
52 <TABLE> <CAPTION> REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION DECEMBER 31, 1998 (IN THOUSANDS) INITIAL COST TO THE COMPANY ------------------------------------ BUILDINGS DESCRIPTION ENCUMBRANCES LAND AND IMPROVEMENTS - ----------- ------------ ---- ---------------- Real estate properties (c) and (d): Industrial: <S> <C> <C> Nobel Center - California 410 542 - Exchange Warehouses -Texas - 250 750 Interstate Warehouses -Texas 1,729 1,757 4,941 Venture Warehouses -Texas - 1,452 3,762 Rampart-Colorado - 1,023 3,861 Sunbelt-Florida - 1,034 5,056 La Quinta-Florida - 191 575 Deerwood-Florida 1,648 1,147 1,799 56th Street - Florida 2,143 683 2,880 JetPort Commerce Park - Florida 3,711 857 3,635 Lake Pointe - Florida 10,680 3,442 6,450 Exchange Distribution - Florida 2,314 603 2,414 Phillips - Florida - 1,375 2,961 Northwest Point - Texas (h) 5,415 1,243 5,640 Westport - Florida 3,090 980 3,800 Lakeside Distribution - Oklahoma - 120 1,154 Linpro Distribution - Florida - 613 2,243 Broadway Industrial Center - Arizona - 837 3,349 Dominguez Distribution - California - 2,006 8,025 Huntwood Associates - California 12,597 3,842 15,368 Kingsview Industrial - California - 643 2,573 Metro Business Park - Arizona - 1,927 7,708 Sample I-95 - Florida - 1,565 6,262 University Business Center - California 17,601 5,517 22,067 Wiegman Associates - California 5,814 2,197 8,788 Braniff Park West - Oklahoma (g) 4,203 1,066 4,641 Walnut Business Park - California (g) 5,791 2,885 5,274 Interchange Business Park - Mississippi (h) 891 343 5,007 Palm River I - Florida - 540 2,131 West Loop II - Texas (h) 636 440 2,511 Lockwood Distribution Center - Texas (h) 1,316 749 5,444 Lockhart Distribution Center - Texas (h) 840 - 3,489 Cypress Creek - Florida (h) 584 - 2,465 Senator Street - Tennessee (h) 585 540 2,187 Chamberlain - Arizona (h) 3,316 506 3,564 35th Avenue - Arizona (h) 594 418 2,381 Washington - California (h) 1,409 1,636 4,900 San Clemente - California (h) 616 893 2,004 Ellis Dist. Center - Florida (g) 5,979 540 7,513 Westside Dist. Center - Florida (g) 9,926 1,170 11,726 Elmwood Business Park - Louisiana (g) 6,733 2,861 6,337 Riverbend Business Park - Louisiana (g) 14,511 2,592 17,623 Butterfield Trail Industrial - Texas (g) 14,321 - 19,842 Eastlake Distribution Center - California (h) 6,882 3,046 6,888 109th Street - Texas (h) 218 110 867 Benjamin I - Florida - 424 1,966 Chancellor Distribution - Florida - 291 1,711 Rampart II - Colorado - 230 2,977 Benjamin II - Florida - 419 1,997 Palm River II - Florida - 650 2,494 Estrella East - Arizona (h) 3,705 628 4,694 51st Avenue - Arizona (h) 493 300 2,029 Stemmons Circle - Texas (h) 504 363 2,014 East University I and II - Arizona 2,772 1,120 4,482 7th Street Dist. Center - Arizona 925 373 1,490 55th Street Dist. Center - Arizona 2,318 912 3,717 </TABLE> 52
53 <TABLE> <CAPTION> SCHEDULE III (CONTINUED) COSTS CAPITALIZED GROSS AMOUNT AT WHICH SUBSEQUENT TO ACQUISITION CARRIED AT CLOSE OF PERIOD - -------------------------- ------------------------------ BUILDINGS ACCUMULATED CAPITALIZED AND DEPRECIATION YEAR YEAR COSTS OTHER LAND IMPROVEMENTS TOTAL DEC. 31, 1998 ACQUIRED CONSTRUCTED ----- ----- ---- ------------ ----- ------------- -------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> 3,710 -- 542 3,710 4,252 1,713 1988 1979 218 -- 250 968 1,218 336 1988 1978 786 -- 1,757 5,727 7,484 1,841 1988 1979 718 -- 1,452 4,480 5,932 1,423 1988 1987 295 -- 1,023 4,156 5,179 1,189 1989 1987 661 -- 1,034 5,717 6,751 1,493 1989 1974 67 -- 191 642 833 206 1989 1978 1,154 -- 1,147 2,953 4,100 569 1993 1981/86/97 827 -- 683 3,707 4,390 656 1993/94/95 1974/79/85 1,114 -- 857 4,749 5,606 1,017 1993 1986/87 1,375 -- 3,442 7,825 11,267 1,849 1994 1975 740 -- 603 3,154 3,757 518 1994 1984/95 1,863 -- 1,375 4,824 6,199 738 1994 1984/85 292 -- 1,243 5,932 7,175 747 1994 1983/87 880 -- 980 4,680 5,660 541 1994 1986 109 -- 120 1,263 1,383 144 1996 1986 96 2 615 2,339 2,954 214 1996 1971 18 -- 837 3,367 4,204 392 1996 1977 478 -- 2,006 8,503 10,509 579 1996 1988 126 -- 3,842 15,494 19,336 1,656 1996 1980 1 -- 643 2,574 3,217 219 1996 1977/79 455 -- 1,927 8,163 10,090 718 1996 1990 152 -- 1,565 6,414 7,979 820 1996 1987/88 472 3 5,520 22,539 28,059 1,684 1996 1986/87 21 -- 2,197 8,809 11,006 657 1996 1974 382 -- 1,066 5,023 6,089 463 1996 1966/90 42 -- 2,885 5,316 8,201 448 1997 1981 104 -- 343 5,111 5,454 280 1997 1990 107 -- 540 2,238 2,778 106 1997 1980 94 -- 440 2,605 3,045 123 1997 1968/69= 88 -- 749 5,532 6,281 233 1997 1986 539 -- -- 4,028 4,028 166 1997 1986 359 -- -- 2,824 2,824 139 1997 1982 42 -- 540 2,229 2,769 82 1997 1994 8 -- 506 3,572 4,078 152 1997 1967 14 -- 418 2,395 2,813 86 1997 1996/97 164 -- 1,636 5,064 6,700 224 1997 1978 -- -- 893 2,004 2,897 68 1997 1977 228 -- 540 7,741 8,281 277 1997 1984 871 -- 1,170 12,597 13,767 481 1997 1979 287 -- 2,861 6,624 9,485 472 1997 1984 244 -- 2,592 17,867 20,459 1,033 1997 1995 145 -- -- 19,987 19,987 816 1997 1989 24 -- 3,046 6,912 9,958 260 1997 1970 55 -- 110 922 1,032 30 1997 1996 (18) -- 424 1,948 2,372 99 1996/97 1996/97 9 -- 291 1,720 2,011 108 1996/97 1996/97 59 -- 230 3,036 3,266 205 1997/98 1997/98 22 -- 419 2,019 2,438 66 1997/98 1997/98 164 -- 650 2,658 3,308 119 1998 1988 20 -- 628 4,714 5,342 129 1998 1987 5 -- 300 2,034 2,334 70 1998 1977 40 363 2,054 2,417 104 1998 1989/87 36 -- 1,120 4,518 5,638 100 1998 1987 15 -- 373 1,505 1,878 30 1998 1987 77 -- 912 3,794 4,706 73 1998 1987 </TABLE> 53
54 SCHEDULE III (CONTINUED) <TABLE> <CAPTION> INITIAL COST TO THE COMPANY ------------------------------------ BUILDINGS DESCRIPTION ENCUMBRANCES LAND AND IMPROVEMENTS - ----------- ------------ ---- ---------------- <S> <C> <C> <C> Ethan Allen - California 6,266 2,544 10,175 Waldenbooks Dist. Center - Tennessee 12,779 4,429 17,716 Lamar - Tennessee 2,200 1,332 5,398 Auburn Facility - Michigan 5,357 3,230 12,922 World Houston 1 and 2 - Houston 4,531 660 5,893 Senator Street II - Tennessee - 435 1,742 Airpark Distribution - Tennessee (h) 462 250 1,916 Airport Distribution - Arizona (g) 4,251 1,103 4,672 World Houston 3,4,5 - Texas - 1,025 6,413 World Houston 6 - Texas - 425 2,423 America Plaza - Texas (g) 3,895 662 4,660 Shaw Commerce - California (g) 10,524 2,465 11,627 Industry Distribution - California (g) 16,796 10,230 12,373 Interstate Commerce - Florida - 485 2,652 Northpointe Commerce - Oklahoma - 777 3,113 Delp - Tennessee - 1,049 4,197 Airpark - Tennessee - 66 262 Getwell - Tennessee - 151 603 JC Penney - Tennessee - 486 1,946 Ambassador Row - Texas - 1,156 4,625 Carpenter - Texas - 208 833 Viscount - Texas - 395 1,578 -------------- --------------- ----------------- 224,281 95,454 390,165 -------------- --------------- ----------------- Industrial Development: Rampart III - Colorado - 1,038 - John Young Parkway - Florida - 470 - Walden - Florida - 337 - Walden II - Florida - 465 - Sunbelt II - Florida - 249 - World Houston 7 & 8 - Texas - 680 - Sample I-95 II - Florida - 785 - Westlake - Florida - 700 - Airport Commerce - Florida - 1,108 - World Houston 9 - Texas - 889 - Sabal Sites - Florida - 351 - Stone - Florida - - - Chestnut St. - California - 1,570 - John Young Parkway II - Florida - 527 - Glenmont - Texas - 937 - Premier Beverage - Florida - - - ------------------------------------------------------------------------- - 10,106 - ------------------------------------------------------------------------- Office Buildings: Los Angeles Corporate Center - California - 1,363 5,453 ------------------------------------------------------------------------- - 1,363 5,453 ------------------------------------------------------------------------- Apartments: LaVista-Georgia 5,699 1,526 2,886 ------------------------------------------------------------------------- 5,699 1,526 2,886 ------------------------------------------------------------------------- Operating Properties Held For Sale: 8150 Leesburg Pike - Virginia (h) 5,855 2,208 14,068 West Palm I and II - Florida 981 635 2,542 ------------------------------------------------------------------------ 6,836 2,843 16,610 ------------------------------------------------------------------------ Land Held for Sale (e): Jefferson Parish-Louisiana - 3,050 - Silvermill - Texas - 27 - ------------------------------------------------------------------------ - 3,077 0 ------------------------------------------------------------------------ Total real estate owned 236,816 114,369 415,114 ======================================================================== </TABLE> 54
55 SCHEDULE III (CONTINUED) <TABLE> <CAPTION> COSTS CAPITALIZED GROSS AMOUNT AT WHICH SUBSEQUENT TO ACQUISITION CARRIED AT CLOSE OF PERIOD - -------------------------- ------------------------------ BUILDINGS ACCUMULATED CAPITALIZED AND DEPRECIATION YEAR YEAR COSTS OTHER LAND IMPROVEMENTS TOTAL DEC. 31, 1998 ACQUIRED CONSTRUCTED ----- ----- ---- ------------ ----- ------------- -------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> - - 2,544 10,175 12,719 198 1998 1989 1 - 4,429 17,717 22,146 345 1998 1978/80 25 - 1,332 5,423 6,755 104 1998 1986 4 - 3,230 12,926 16,156 251 1998 1996 - - 660 5,893 6,553 167 1998 1968 17 - 435 1,759 2,194 39 1998 1975 2 - 250 1,918 2,168 46 1998 1995 - - 1,103 4,672 5,775 85 1998 1998 - - 1,025 6,413 7,438 96 1998 1998 - - 425 2,423 2,848 - 1998 1996 - - 662 4,660 5,322 109 1998 1978/81/87 215 - 2,465 11,842 14,307 219 1998 1959 127 - 10,230 12,500 22,730 246 1998 1988 246 - 485 2,898 3,383 83 1998 1996/1997 - - 777 3,113 3,890 28 1998 1977 45 - 1,049 4,242 5,291 94 1998 1975 10 - 66 272 338 5 1998 1972 6 - 151 609 760 11 1998 1972 1 - 486 1,947 2,433 38 1998 1958/1965 10 - 1,156 4,635 5,791 90 1998 1958 - - 208 833 1,041 16 1998 1965 - - 395 1,578 1,973 31 1998 1965 - ----------------------------------------------------------------------- 21,563 5 95,459 411,728 507,187 31,262 - ----------------------------------------------------------------------- 1,131 3 1,038 1,134 2,172 - 1997/98 1997/98 2,445 - 470 2,445 2,915 3 1997/98 1997/98 - - 337 - 337 6 1998 1998 3,726 - 465 3,726 4,191 - 1997/98 1997/98 1,963 - 249 1,963 2,212 - 1998 1998 4,008 - 680 4,008 4,688 115 1998 1998 226 - 785 226 1,011 - 1998 1998 911 - 700 911 1,611 - 1998 1998 277 - 1,108 277 1,385 - 1998 1998 127 - 889 127 1,016 - 1998 1998 - - 351 - 351 - 1998 1998 109 - - 109 109 - 1998 1998 104 - 1,570 104 1,674 - 1998 1998 138 - 527 138 665 - 1998 1998 - - 937 - 937 - 1998 1998 408 - - 408 408 - 1998 1998 - ----------------------------------------------------------------------- 15,573 3 - 10,106 15,576 25,682 124 - ----------------------------------------------------------------------- - 80 - 1,363 5,533 6,896 404 1996 1986 - ----------------------------------------------------------------------- 80 - 1,363 5,533 6,896 404 - ----------------------------------------------------------------------- - 4,454 - 1,526 7,340 8,866 2,252 1991 1968/96 - ----------------------------------------------------------------------- 4,454 - 1,526 7,340 8,866 2,252 - ----------------------------------------------------------------------- 5,086 - 2,208 19,154 21,362 8,745 1975/89 1974/94 5 - 635 2,547 3,182 49 1998 1993 - ----------------------------------------------------------------------- 5,091 - 2,843 21,701 24,544 8,794 - ----------------------------------------------------------------------- - 49 (2,541)(f) 558 - 558 - 1976 n/a - (9) 18 - 18 - 1996 n/a - ----------------------------------------------------------------------- 49 (2,550) 576 - 576 - - ----------------------------------------------------------------------- - 46,810 (2,542) 111,873 461,878 573,751 42,836 ======================================================================= </TABLE> 55
56 REAL ESTATE PROPERTIES AND ACCUMULATED DEPRECIATION (CONTINUED) Notes: (a) Changes in Real Estate Properties follow: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) <S> <C> <C> <C> Balance at beginning of year $ 409,005 280,117 156,392 Real estate properties acquired - LNH merger -- -- 6,243 Land acquired in LNH merger -- -- 521 Real estate properties acquired - Copley merger -- -- 113,192 Land acquired in Copley merger -- -- 3,280 Real estate properties acquired - Meridian merger 96,366 -- -- Improvements 32,559 19,341 7,469 Purchase of real estate properties 81,797 124,149 13,865 Carrying amount of investments sold (45,976) (14,351) (20,845) Write-off of depreciated assets -- (251) -- --------- --------- --------- Balance at end of year (1)(2) $ 573,751 409,005 280,117 ========= ========= ========= </TABLE> (1) Includes 25% minority interest in JetPort Commerce Park and 56th Street Commerce Park and 20% minority interest in University Business Center totaling $7,888,000 at December 31, 1998. Includes 25% minority interest in JetPort Commerce Park, 56th Street Commerce Park, and Westport Commerce Center and 20% minority interest in University Business Center totaling $8,947,000 at December 31, 1997. Includes 25% minority interest in JetPort Commerce Park, 56th Street Commerce Park and Westport Commerce Center, 20% minority interest in University Business Center and 22.22% minority interest in Liberty Corner shopping Center, totaling $9,576,000 at December 31, 1996. (2) Does not include the $500,000 land purchase-leaseback held for sale at December 31, 1998. Changes in the accumulated depreciation on real estate properties follow: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) <S> <C> <C> <C> Balance at beginning of year $ 32,312 23,562 19,206 Depreciation expense 15,239 9,691 7,266 Accumulated depreciation on assets sold (4,715) (859) (2,910) Write-off of fully depreciated assets - (82) - -------- ------ ------ Balance at end of year $ 42,836 32,312 23,562 ======== ====== ====== </TABLE> (b) The aggregate cost for federal income tax purposes is approximately $394,827,000. The federal income tax return for the year ended December 31, 1998 has not been filed and, accordingly, the income tax basis of real estate properties as of December 31, 1998 is based on preliminary data. (c) Reference is made to impairment losses on real estate investments in the notes to consolidated financial statements. (d) The Company computes depreciation using the straight-line method over the estimated useful lives of the buildings (25 to 40 years) and other improvements (3 to 10 years). (e) The investment is not producing income to the Company as of December 31, 1998. (f) Represents a write-down of $2,496,000 and income received but deferred of $45,000. (g) The acquisition line of credit is secured by Walnut Business Park, Braniff Park West, Butterfield Trail Industrial, Elmwood and Riverbend Business Parks, Ellis Distribution Center, Westside Distribution Center, Airport Distribution Center, Industry Distribution Center, America Plaza and Shaw Commerce Center. The outstanding acquisition line of $96,930,000 at December 31, 1998 was allocated to encumbrances for these respective properties based on carrying value at December 31, 1998. (h) The line of credit is secured by the outstanding stock of the Company's wholly-owned subsidiary, EastGroup Virginia, Inc., which owns 8150 Leesburg Pike Office Building; partnership interests in EastGroup Houston Partners, Ltd. which owns the Lockwood Distribution Center and Northwest Point Distribution Center; EastGroup Properties, LP which owns West Loop II Distribution, Interchange D, Lockhart Distribution Center, Cypress Creek Business Park, Senator Street Distribution Center, Chamberlain Distribution Center, 35th Avenue, Washington Distribution Center, San Clemente Distribution Center, Interchange B, Eastlake Distribution Industrial Center, 109th Street, Estrella Distribution Center, Stemmons Distribution Center, 51st Avenue Distribution Center and Airpark Distribution Center I. The outstanding line of credit of $17,392,000 at December 31, 1998 was allocated to encumbrances for these respective properties based on carrying value at December 31, 1998. 56
57 SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1998 (IN THOUSANDS) <TABLE> <CAPTION> NUMBER INTEREST FINAL PERIODIC OF LOANS RATE MATURITY DATE PAYMENT TERMS -------- ---- ------------- ------------- <S> <C> <C> <C> <C> First mortgage loans (c): MOTELS: Nashville, Tennessee 1 10% 7/98 Interest monthly Gainesville, Florida 1 10% 1/02 P&I monthly APARTMENTS: Country Club - Alabama 1 8.5%-9%(d) 12/99 (d) OFFICE BUILDINGS: Columbia, Maryland 1 9.56% 2/00 P&I annually UNDEVELOPED LAND: Hickory Creek, Houston, Texas 1 Prime 9/99 (f) Baypointe, Houston, Texas 1 9.5% 4/99 P&I semi-annually OTHER LOANS 2 8.5% 3/07-1/08 P&I monthly ----- Total first mortgage loans 8 ===== </TABLE> <TABLE> <CAPTION> PRINCIPAL AMOUNT OF LOANS SUBJECT TO FACE AMOUNT CARRYING TO DELINQUENT OF MORTGAGES AMOUNT OF PRINCIPAL DEC. 31, 1998 MORTGAGES OR INTEREST(E) ------------- --------- -------------- <S> <C> <C> <C> First mortgage loans (c): MOTELS: Nashville, Tennessee 67 67 67 Gainesville, Florida 1,571 1,183 - APARTMENTS: Country Club - Alabama 4,245 3,010(d) - OFFICE BUILDINGS: Columbia, Maryland 98 98 - UNDEVELOPED LAND: Hickory Creek, Houston, Texas 2,711 2,550 - Baypointe, Houston, Texas 1,916 1,855 - OTHER LOANS 51 51 - ------- ------ ----- Total first mortgage loans $10,659 8,814(a)(b) 67 ======= ====== ===== </TABLE> 57
58 MORTGAGE LOANS ON REAL ESTATE (CONTINUED) Notes: (a) Changes in mortgage loans follow: <TABLE> <CAPTION> YEARS ENDED DECEMBER 31, 1998 1997 1996 ---- ---- ---- (IN THOUSANDS) -------------------------------------------------------- <S> <C> <C> <C> Balance at beginning of year $10,852 12,503 6,008 Advances on mortgage notes receivable - 1,575 121 Payments on mortgage notes receivable (3,042) (3,528) (338) Amortization of discount on loans, net 621 618 418 Deferred gains 383 159 - Write-down of mortgage notes receivable - (475) (200) Mortgage notes receivable from LNH merger - - 5,614 Mortgage notes receivable from Copley merger - - 880 -------------------------------------------------------- Balance at end of year $8,814 10,852 12,503 ======================================================== </TABLE> (b) The aggregate cost for federal income tax purposes is approximately $9,233,000. The federal income tax return for the year ended December 31, 1998 has not been filed and, accordingly, the income tax basis of mortgage loans as of December 31, 1998 is based on preliminary data. (c) Reference is made to allowance for possible losses on real estate investments in the notes to consolidated financial statements. (d) (Effective January 1, 1994, this note was modified. The interest rate decreased from 9% to 8.50% beginning January 1, 1994, increased to 8.75% as of January 1, 1995 and increased to 9% as of January 1, 1996. The past due interest and land rent of $70,000 was added to the outstanding face value of the mortgage balance, increasing it to $4,245,000. The maturity of the loan was extended from August 28, 1996 to December 31, 1999. Prior to this modification, the stated rate on the note was 9%. The carrying amount of this note is net of the deferred gain of $1,127,000 and interest valuation of $108,000. The deferred gain is recognized by the installment method. This note was repaid in February 1999. (e) Interest or principal in arrears for three months or less is disregarded in computing principal amount of loans subject to delinquent principal or interest. (f) Payments on this note are received quarterly. They include a fixed principal amount as scheduled in the note document and interest that has accrued since the last payment. 58
59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EASTGROUP PROPERTIES, INC. By: /s/ David H. Hoster II -------------------------------- David H. Hoster II, Chief Executive Officer, President & Director March 19, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. <TABLE> <S> <C> * * - --------------------------------------- -------------------------------------------- H. C. Bailey, Jr., Director Leland R. Speed, Chairman of the Board March 11, 1999 (Principal Executive Officer) March 11, 1999 * * - --------------------------------------- -------------------------------------------- David M. Osnos, Director Alexander G. Anagnos, Director March 11, 1999 March 11, 1999 * /s/ Diane W. Hayman - --------------------------------------- -------------------------------------------- John N. Palmer, Director Diane W. Hayman, Vice President & March 11, 1999 Controller (Principal Accounting Officer) March 19, 1999 * /s/ N. Keith McKey - --------------------------------------- -------------------------------------------- Fredric H. Gould, Director N. Keith McKey, Executive Vice-President, March 11, 1999 Chief Financial Officer and Secretary (Principal Financial Officer) March 19, 1999 /s/ N. Keith McKey - --------------------------------------------------- * By N. Keith McKey, Attorney in fact </TABLE> 59
60 EXHIBIT INDEX ------------- The following exhibits are included in this Form 10-K or are incorporated by reference as noted in the following table: (3) Form 10-K Exhibits: (a) Articles of Incorporation (incorporated by reference to Appendix B to the Registrant's Proxy Statement dated April 24, 1997). (b) Bylaws of the Registrant (incorporated by reference to Appendix C to the Registrant's Proxy Statement dated April 24, 1997). (c) Articles Supplementary of the Company relating to the 9.00% Series A Cumulative Redeemable Preferred Stock of the Company (incorporated by reference to the Company's Form 8-A filed June 15, 1998). (d) Articles Supplementary of the Company relating to the Series B Cumulative Convertible Preferred Stock (incorporated by reference to the Company's Form 8-K filed on October 1, 1998). (e) Articles Supplementary of the Company relating to the Series C Preferred Stock (incorporated by reference to the Company's Form 8-A filed December 9, 1998). (f) Certificate of Correction to Articles Supplementary with respect to Series B Cumulative Convertible Preferred Stock (filed herewith). (10) Material Contracts: (a) EastGroup Properties 1994 Management Incentive Plan, As Amended (incorporated by reference to Appendix D of the Registrant's Registration Statement on Form S-4 (No. 333-01815).* (b) EastGroup Properties 1991 Directors Stock Option Plan, As Amended (incorporated by reference to Exhibit B of the Registrant's proxy statement dated April 26, 1994).* (c) Form of Change in Control Agreement that Registrant has entered into with certain executive officers (Leland R. Speed, David H. Hoster II and N. Keith McKey)(incorporated by reference to Exhibit 10(e) to the Registrant's 1996 Annual Report on Form 10-K). (d) Form of Change in Control Agreement that Registrant has entered into with certain executive officers (Diane W. Hayman, Marshall A. Loeb, Jann W. Puckett and Stewart R. Speed) (incorporated by reference to Exhibit 10(e) to the Registrant's 1996 Annual Report on Form 10-K). (e) Agreement and Plan of Merger dated February 18, 1998 among the Registrant, EastGroup-Meridian, Inc. and Meridian Point Realty Trust VIII Co.(incorporated by reference to Exhibit 10 (a) to the Registrant's Current Report on Form 8-K dated March 13, 1998). (f) Purchase Agreement for Jacksonville and New Orleans Properties (incorporated by reference to Exhibit 10(a) to the Registrant's Current Report on Form 8-K dated September 24, 1997). (g) Investment Agreement dated as of September 25, 1998 between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (h) Operating Agreement dated September 25, 1998 between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (i) Agreement and Waiver between the Company and Five Arrows Realty Securities II, L.L.C. (incorporated by reference to the Company's Form 8-K filed October 1, 1998). (j) Credit Agreement dated January 13, 1999 among EastGroup Properties, L.P.; EastGroup Properties, Inc.; Chase Bank of Texas, National Association, as Arranger, Book Manager and Administrative Agent; First Union National Bank, as Syndication Agent; PNC Bank, National Association, as Documentation Agent; First American National Bank, operating as Deposit Guaranty National Bank, as Co-Agent; and the Lenders (filed herewith). (21) Subsidiaries of Registrant (filed herewith). (23) Consent of KPMG Peat Marwick LLP (filed herewith). 60
61 (24) Powers of attorney (filed herewith). (27) Financial Data Schedule (filed herewith). (28) Agreement of Registrant to furnish the Commission with copies of instruments defining the rights of holders of long-term debt (incorporated by reference to Exhibit 28(e) of the Registrant's 1986 Annual Report on Form 10-K). (99) Rights Agreement dated as of December 3, 1998 between the Company and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to the Company's Form 8-A filed December 9, 1998). (b) (1) 8K - Filed October 1, 1998 - Reporting Agreements with Five Arrows Realty Securities II, L.L.C. (2) 8K - Filed December 4, 1998 - Reporting Adoption of Rights Agreement. *Indicates management or compensatory agreement. 61