SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 14, 1996
EASTGROUP PROPERTIES
(Exact name of Registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation)
1-7094 13-2711135
(Commission File Number) (IRS Employer Identification No.)
300 One Jackson Place
188 East Capitol Street
P.O. Box 22728
Jackson, Mississippi 39225-2728
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (601) 354-3555
(Former name or former address, if changed since last report)
FORM 8-K
EASTGROUP PROPERTIES
Item 2. Acquisition or Disposition of Assets
On May 14, 1996, EastGroup-LNH Corporation, a wholly-owned
subsidiary of EastGroup Properties ("EastGroup" or the
"Trust"), merged with LNH REIT, Inc.("LNH"). Under the
terms of the merger, shareholders of LNH received .3671 of
one share of EastGroup for each share of LNH owned by them,
resulting in the issuance by EastGroup of an aggregate of
approximately 618,000 shares of beneficial interest.
Information regarding LNH assets, the principles followed in
determining the amount of shares of beneficial interest
issued by EastGroup in the merger, and the nature of certain
relationships between LNH and EastGroup is contained in
EastGroup's Prospectus dated April 15, 1996, which is a part
of EastGroup's Registration Statement on Form S-4 (No. 33-
65337), which is incorporated by reference.
The unaudited Pro Forma Consolidated Financial Statements
that are attached as an Exhibit hereto are based on
EastGroup's and LNH's historical financial data as adjusted
to give effect to the business combinations involving
Mergers between EastGroup's subsidiary and LNH on the basis
described in the notes thereto.
Item 7. Financial Statements and Exhibits
(a) Financial Statements of LNH
The following audited financial statements of LNH are filed
herewith:
LNH REIT, Inc. Page
Report of Independent Auditors 5
Consolidated Balance Sheets - as of
December 31, 1995 and 1994 6
Consolidated Statements of Operations - for
the years ended December 31, 1995 and 1994 7
Consolidated Statements of Cash Flows - for
the years ended December 31, 1995 and 1994 8
Consolidated Statements of Changes in
Stockholders' Equity - for the years ended
December 31, 1995 and 1994 9
Notes to Consolidated Financial Statements 10
The following unaudited financial statements of LNH are
filed herewith:
LNH REIT, INC. PAGE
Consolidated Balance Sheet (Unaudited)
as of March 31, 1996 23
Consolidated Statement of Operations (Unaudited)
for the three months ended March 31, 1996 and 1995 24
Consolidated Statement of Cash Flow (Unaudited)
for the three months ended March 31, 1996 and 1995 25
Notes to Consolidated Financial Statements 26
(b) Pro Forma Consolidated Financial Statements.
Then following unaudited Pro Forma Consolidated Financial
Statements are filed herewith:
EASTGROUP PROPERTIES PAGE
Pro Forma Consolidated Balance Sheet
(Unaudited) - as of December 31, 1995 27
Pro Forma Consolidated Statement of
Operations(Unaudited) - for the year
ended December 31, 1995 31
Pro Forma Consolidated Statement of
Operations (Unaudited) - for the three
months ended March 31, 1996 35
(c) Exhibits.
The following exhibit is incorporated herein by reference:
(1) Agreement and Plan of Merger among EastGroup,EastGroup-
LNH Corporation and LNH dated as of December 22,
1995(as amended by the First Amendment to Agreement and
Plan of Merger dated March 18, 1996) incorporated by
reference to Appendix A of EastGroup's Prospectus dated
April 15, 1996, which is a part of EastGroup's
Registration Statement on Form S-4 (No. 33-65337).
EastGroup agrees to furnish supplementally to the
Commission upon request a copy of any omitted schedule
or exhibit to the Agreement and Plan of Merger.
The following exhibit is included herein:
23(a) Consent of Independent Auditors
FORM 8-K
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned hereunto duly authorized.
EastGroup Properties
(Registrant)
Dated: May 24, 1996 By: \s\ Keith McKey
N. Keith McKey, CPA
Executive Vice-
President, Chief
Financial Officer,
and Secretary
\s\ Diane Hayman
Diane W. Hayman, CPA
Controller
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
LNH REIT, Inc.
We have audited the accompanying consolidated balance sheets
of LNH REIT, Inc. and subsidiaries as of December 31, 1995 and
1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of LNH REIT, Inc. and subsidiaries at December
31, 1995 and 1994, and the consolidated results of their
operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Jackson, Mississippi
March 15, 1996
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31
--------------------------
1995 1994
------------ ----------
Assets
Mortgage loans $ 7,135 $ 5,149
Mortgage loans subject to foreclosure
proceedings - 5,960
Real estate properties:
Earning
Warehouse 4,166 4,073
Shopping center 6,465 6,867
Accumulated depreciation (796) (427)
Joint venture in Cowesett 6,011 -
Non-earning land 776 3,067
----------- ----------
23,757 24,689
Less allowance for losses (275) (525)
----------- ----------
23,482 24,164
Marketable equity securities 675 525
Cash and cash equivalents 1,016 1,660
Accrued interest and other receivables 502 285
----------- ----------
$ 25,675 $ 26,634
=========== ==========
Liabilities
Minority interest $ 1,476 $ 1,510
Accrued expenses and other liabilities 750 493
----------- ----------
2,226 2,003
----------- ----------
Stockholders' Equity
Common stock, $.50 par value,
15,000,000 shares authorized,
2,200,000 shares issued and
outstanding in 1995 and 1994 1,100 1,100
Paid in capital 24,839 27,215
Deficit (2,996) (4,040)
Unrealized gain on marketable
equity securities 506 356
----------- ---------
23,449 24,631
----------- ----------
$ 25,675 $ 26,634
=========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended
December 31
-------------------
1995 1994
-------- -------
Revenues
Revenue from real estate properties $1,451 $1,249
Interest income:
Mortgage loans 889 574
Cash equivalents and other 52 101
Equity in operation of
Cowesett joint venture 40 -
Other income 47 226
-------- -------
2,479 2,150
-------- -------
Expenses
Management fees 294 338
Real estate expenses
Operating 521 605
Depreciation 369 277
Professional fees 283 49
General and administrative 216 178
Provision for losses 189 525
Minority interest expense 98 54
-------- -------
1,970 2,026
-------- -------
Income before gain on investments 509 124
-------- -------
Gain on investments
Real estate and mortgage loans 535 135
-------- -------
Net Income $ 1,044 $ 259
======== =======
Net Income per share $ .47 $ .12
======== =======
Average number of shares outstanding 2,200 2,200
======== =======
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
Year Ended
December 31
-------------------------
1995 1994
---------- ----------
Operating Activities
Net income $ 1,044 $ 259
Adjustments to reconcile
net income to net cash provided
by operating activities:
Amortization of deferred financing
fees and discount on mortgage loans (62) (60)
Depreciation 378 277
Joint Venture investment (50) -
Provision for losses 189 525
Gain on investments (535) (135)
Other (45) (35)
Net change in receivables, payables
and other assets 49 (14)
----------- ----------
Cash provided by operating activities 968 817
----------- ----------
Investing Activities
Collections on mortgage loans 269 3,999
Improvements to real estate (130) (228)
Proceeds from sale of real estate 625 44
----------- ----------
Cash provided by investing activities 764 3,815
----------- ----------
Financing Activities
Dividends paid (2,376) (4,312)
----------- ----------
Cash used in financing activities (2,376) (4,312)
----------- ----------
Net increase (decrease) in cash and
cash equivalents (644) 320
Cash and cash equivalents at
beginning of year 1,660 1,340
----------- ----------
Cash and cash equivalents at
end of year $ 1,016 $ 1,660
=========== ==========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Year Ended
December 31
--------------------------
1995 1994
----------- ----------
Common stock, $.50 par value
Balance at beginning and
end of period $ 1,100 $ 1,100
----------- ----------
Paid-in capital
Balance at beginning of period 27,215 31,527
Cash dividends declared and paid (2,376) (4,312)
----------- ----------
Balance at end of period 24,839 27,215
----------- ----------
Deficit
Balance at beginning of period (4,040) (4,299)
Net income 1,044 259
----------- ----------
Balance at end of period (2,996) (4,040)
----------- ----------
Unrealized gain on marketable
equity securities
Balance at beginning of period 356 -
Change in unrealized gain on
securities 150 356
----------- ----------
Balance at end of period 506 356
----------- ----------
Total stockholders' equity $ 23,449 $ 24,631
=========== ==========
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
The Company operates as a real estate investment trust
("REIT") under Sections 856-860 of the Internal Revenue Code.
The Company's revenues consist principally of rental income from
operating real estate properties and interest income from
mortgage loans. At December 31, 1995, the Company's investments
consisted, principally, of four mortgage loans collateralized by
real estate, three operating real estate properties (two shopping
centers and one industrial distribution center), and undeveloped
land.
Proposed Merger
On September 6, 1995 (amended on December 6, 1995), LNH
REIT, Inc. and EastGroup Properties announced that the Special
Committees of the Boards of each company had agreed in principle
to a merger between LNH and EastGroup. See Note L to the
Financial Statements for further details of this event.
Principles of Consolidation
The consolidated financial statements include the accounts of
LNH REIT, Inc., its wholly owned subsidiaries and a 77.78% owned
joint venture (referred to collectively as "LNH" or "the
Company"). The property included in the joint venture is the
Liberty Corners Shopping Center located in Kansas City, Missouri.
The Liberty Corners joint venture's assets, liabilities, revenues
and expenses are recorded by the Company with minority interest
provided for the 22.22% not owned. All significant intercompany
transactions and accounts have been eliminated in consolidation.
For years ending after December 31, 1992, the Company adopted
the financial statement reporting provisions of Regulation S-B of
the Securities and Exchange Commission.
Recognition of Interest Income
Interest is taken into income when earned. The Company
discontinues the accrual of income when circumstances exist which
cause the collection of such income to be doubtful. The
determination to discontinue accruing income is made after review
by management of all relevant facts including delinquency in
payment of principal, interest and the credit of the borrower.
NOTE A - ACCOUNTING POLICIES (continued)
Revenue from Real Estate Properties
Minimum rents are recognized ratably over the lease term.
Rents that represent tenant reimbursements of certain expenses
are recognized as the applicable services are provided or the
expenses incurred and totalled $320,000 in 1995 and $300,000 in
1994.
Earnings Per Share
Earnings per share is based on the average number of shares of
common stock outstanding during each year.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Real Estate Properties
Foreclosed properties are recorded at the lower of cost or fair
value at the date of foreclosure. A provision for losses, if
any, is determined at the time of foreclosure in an amount equal
to the excess of the recorded investment over estimated fair
value. The carrying value of real estate properties are
evaluated in relation to current estimates of net realizable
value. If necessary, a provision for losses is recorded to write-
down carrying value to the estimated net realizable value.
Depreciation
Depreciation for financial reporting purposes is provided by
the straight-line method over the estimated useful lives of the
property. Buildings are depreciated over a 30 year estimated
useful life and tenant improvements over a 5 year estimated
useful life. Depreciation for tax reporting purposes is provided
by the straight-line method over the applicable Modified
Accelerated Cost Recovery System (MACRS) life.
NOTE A - ACCOUNTING POLICIES (continued)
Allowance for Possible Losses
Prior to January 1, 1995, the Company followed the method of
determining the allowance for possible losses prescribed by the
AICPA Statement of Position on Accounting Practices for Real
Estate Investment Trusts. Under this method, the Company
established an allowance for possible losses on mortgage loans
based upon management's evaluation of the recoverability of each
loan in its portfolio through a comparison of the carrying value
of an investment with its estimated net realizable value. In
determining estimated net realizable value, consideration is
given to such factors as the financial condition of the borrower
and the determination of collectibility; the estimated selling
price a property will bring if exposed for sale in the open
market allowing a reasonable time to find a purchaser; prevailing
economic conditions; expectations of future development; the
estimated cost to complete and improve such property to the
condition used in determining the estimated selling price; the
cost to dispose of the property; and the cost to hold the
property (including an interest factor based on the Company's
cost of funds) to the estimated time of sale.
Beginning January 1, 1995, the Company adopted Financial
Accounting Standards Board No. 114, "Accounting by Creditors for
Impairment of a Loan." Under the new standard, the 1995
allowance for credit losses related to loans that are identified
for evaluation in accordance with Statement 114 is based on
discounted cash flows using the loan's initial effective interest
rate or the fair value of the collateral for certain collateral
dependent loans. The effect of adopting FASB 114 on results of
operations for 1995 and the allowance for possible losses was not
material.
This evaluation is inherently subjective as it requires
material estimates including the amounts and timing of future
cash flows expected to be received on impaired loans that may be
susceptible to significant change.
NOTE A - ACCOUNTING POLICIES (continued)
Income Taxes
The Company 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 has distributed all of
its taxable income to its shareholders, and, accordingly, no
provision for federal or state income taxes has been made and no
income taxes have been paid. Distributions paid per share in
1995 and 1994 for income tax purposes were as follows:
1995 1994
Ordinary Income $ .05 $ .63
Return of Capital 1.03 1.33
Total $ 1.08 $ 1.96
Taxable income differs from income reported for financial
reporting purposes primarily because of (1) the timing of the
deduction for the provision for possible losses, writedowns of
real estate investments and losses on securities, (2) different
depreciation methods and lives, and (3) different rates of
interest income accrual.
Marketable Equity Securities
On January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" and classified its investments as
securities available-for-sale. Accordingly, as of December 31,
1995 and 1994, investment securities are carried at fair value
with the unrealized gain of $506,000 and $356,000, respectively,
presented as a separate component of stockholders' equity.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly
liquid investments with original maturities of three months or
less.
Reclassifications
Certain amounts in the prior year financial statements have
been reclassified to conform to the current year's presentation.
NOTE B - MORTGAGE LOANS
The unpaid balances of mortgage loans, summarized by type of
loan, are as follows:
Type of Loan December 31
1995 1994
(In thousands)
Shopping Centers................. $ 1,868 $ 7,822
Land ............................ 5,267 3,287
$ 7,135 $11,109
The unpaid balances of mortgage loans, which bear interest at an
average rate of 8.91%, are scheduled to mature in succeeding
years as follows:
Year Amount
(In thousands)
1996 $ 144
1997 154
1998 2,034
1999 4,803
$ 7,135
Because of the circumstances discussed in Note C regarding the
Cowesett Corners Shopping Center, the interest income on this
loan was accounted for on the cash basis. The amount of interest
foregone on this loan due to this accounting method was $346,000
and $562,000 in the years ending December 31, 1995 and 1994,
respectively.
The amount of loan discounts and related accumulated
amortization reflected as a reduction to the carrying value of
mortgage loans were as follows:
December 31,
1995 1994
Loan discounts $ 292,000 $ 292,000
Accumulated amortization (108,000) ( 59,000)
$ 184,000 $ 233,000
The federal income tax basis of mortgage loans at December 31,
1995 is approximately $7,319,000. The federal income tax return
for the year ended December 31, 1995 has not been filed, and,
accordingly, the income tax basis of mortgage loans as of
December 31, 1995 is based on preliminary data.
NOTE C - REAL ESTATE INVESTMENTS
At December 31, 1995, the Company's investment in land
includes three parcels of undeveloped land, approximately 141
acres in total, located in Houston, Texas. The land has a
carrying value of $776,000 at December 31, 1995.
Also included in real estate investments at December
31,1995 are the Linpro Commerce Center in Fort Lauderdale,
Florida, the Liberty Corners shopping center in Kansas City,
Missouri, and the Cowesett Corners shopping center in Warwick,
Rhode Island. The Linpro Commerce Center is a 99,000 square foot
industrial building, and it is used by tenants as an office,
showroom and warehouse. Upon foreclosure in 1992, the property
was recorded at its estimated fair value of $3,800,000, resulting
in a loss of $1,350,000. At December 31, 1995, the property was
95% occupied.
The Liberty Corners Shopping Center is a 121,432 square
foot commercial facility that was 85% leased at December 31,1995.
The shopping center was collateral to a 77.78% mortgage loan
participation the Company owned with an outstanding principal
balance of $6,689,000 and a carrying value, net of allowance for
losses and deferred income, of $5,294,000. The Company received
a deed in lieu of foreclosure to Liberty Corners on February 25,
1994, and title to the property is held as tenants in common with
the 22.22% participant in the mortgage loan. The Company
recorded the total assets, liabilities, revenues and expenses of
the center with minority interest provided for the 22.22% not
owned. The Company recorded the original investment at
$6,806,000, which included the participant's 22.22% minority
interest of $1,512,000. In December 1995, the carrying value of
the Liberty Corners Shopping Center was adjusted to net
realizable value. The write-down of $439,000, net of minority
interest, is reflected in the Company's December 31, 1995
financial statements. The resulting carrying value of Liberty
Corners is management's best estimate of the property's net
realizable value.
The Cowesett Corners Shopping Center is a 135,713 square
foot shopping center in Warwick, Rhode Island. The Company
acquired title on December 1, 1995 through foreclosure and
recorded its net loan investment of $5,971,000 as an investment
in a joint venture. The company owns 50% of the investment and
accounts for this investment on the equity method of accounting.
The investment at December 31, 1995 amounted to $6,011,000. The
shopping center was 97% leased at December 31, 1995.
NOTE C - REAL ESTATE INVESTMENTS - (continued)
The following is a schedule by year of future approximate
minimum rental receipts under non-cancelable leases for the
Linpro Commerce Center, Liberty Corners Shopping Center and
Cowesett Corners Shopping Center as of December 31, 1995:
Year Amount
(In thousands)
1996 $ 2,555
1997 2,393
1998 2,165
1999 1,571
2000 1,391
Subsequently 6,998
$17,073
The federal income tax basis of real estate, net of
depreciation as of December 31, 1995, is approximately
$19,661,000. The federal income tax return for the year ended
December 31, 1995 has not been filed, and, accordingly, the
income tax basis of real estate as of December 31, 1995 is based
on preliminary data.
NOTE D - ALLOWANCE FOR LOSSES
Activity in the allowance account was as follows:
Year Ended December 31
1995 1994
(In thousands)
Beginning balance................. .... $ 525 $ 1,356
Provision for losses................... 525
Charge-offs on foreclosures and sales.. (1,356)
Recoveries of provisions for losses.... (250)
Ending balance......................... $ 275 $ 525
At December 31, 1995, the recorded investment in mortgage
loans that was considered to be impaired under FASB 114 was one
mortgage loan (Citrus Center) with a carrying value of
$1,868,000. This loan, for which the Company owns a 20.99%
participation, was modified in 1995. The interest rate was
reduced from 9% to 8%, with the 1% difference to be deferred
until the note matures on November 30, 1998. Certain payments
past due at June 1995 along with the unpaid principal balance is
due on November 30, 1998. At December 31, 1995, the balance of
the allowance for losses related to this mortgage loan. This
allowance ($275,000) had been recorded at December 31, 1994. For
the years ended December 31, 1995 and 1994, the Company
NOTE D - ALLOWANCE FOR LOSSES (continued)
recognized interest income on this impaired loan of $174,000 and
$85,000, respectively, compared to interest income according to
its original terms of $172,000 in each year.
During the year ended December 31, 1995 and 1994, the
Company's investment in a mortgage loan collateralized by
Cowesett Corners Shopping Center was impaired and nonperforming.
At December 31, 1994, the Company had recorded an allowance for
losses related to this mortgage loan of $250,000. Because of the
expected pay-off of this mortgage loan in 1995, the Company
reduced its allowance for losses by this amount. The mortgage
loan was foreclosed effective December 1, 1995. See Note C. For
the years ended December 31, 1995 and 1994, the Company
recognized interest income on this loan of $222,000 and $58,000,
respectively, compared to interest income according to its
original terms of $568,000 and $620,000, respectively.
NOTE E - RELATED PARTY TRANSACTIONS
Until April 1992, the Company was managed pursuant to a
Management Agreement with L & N Housing Managers, Inc. ("Prior
Manager"), a wholly-owned subsidiary of Lomas Financial
Corporation ("LFC"). The Prior Manager served as the Company's
investment advisor, administering the day-to-day affairs of the
Company and representing the Company in its dealing with third
parties, subject to the supervision of the Company's Board of
Directors. LFC also owned 352,000 shares of the Company's common
stock.
In 1992, EastGroup Properties, a Maryland real estate
investment trust ("EastGroup"), and Walker Investments L.P.
("Walker"), purchased 352,000 shares of the Company's Common
Stock from LFC. The agreement pursuant to which the shares were
purchased (the "Agreement") further provided that the Prior
Manager would assign its rights and duties as manager under the
Management Agreement to LNH REIT Managers, a Mississippi general
partnership (the "Manager") which is an affiliate of EastGroup
and Walker. The Management Agreement was amended to substitute
the Manager for the Prior Manager under the Management Agreement.
EastGroup and Walker agreed to pay an aggregate of $406,000 to
the Company, in consideration of the assignment of the Prior
Manager's duties and responsibilities as manager under the
Management Agreement to LNH REIT Managers. The $406,000 has been
paid in installments subject to the maximum amount that the
Company may receive in a year without violating the 95% gross
NOTE E - RELATED PARTY TRANSACTIONS (continued)
income test set forth in Section 856(c) of the Internal Revenue
Code. The unpaid balance of the $406,000 accrued simple interest
at the rate of 6.6% and the obligation of EastGroup and Walker to
pay any unpaid balance of the $406,000 terminated on January 1,
1996. During the year ended December 31, 1995 and 1994, the
Company accrued $41,000 and $125,000, respectively, as income
pursuant to the assignment of the Management Agreement and
recorded $2,000 and $10,000, respectively, in interest on the
unpaid balance. The final payment on this obligation was
received in September 1995.
On March 24, 1995, EastGroup and its wholly owned
subsidiary, EGP Managers, Inc. ("EGP Managers"), entered into an
agreement (the "March 24, 1995 Agreement") with Walker and
certain entities affiliated with Walker and its affiliates
pursuant to which EastGroup agreed to purchase 383,775 shares of
the Company's Common Stock from Walker and EGP Managers agreed to
purchase Walker's interest in the Manager. On that same date,
the Board of Directors of the Company approved an additional
amendment to the Management Agreement pursuant to which EGP
Managers would assume the obligations and duties of Managers
under the Management Agreement effective upon the Closing of the
transactions set forth in the March 24, 1995 Agreement, which
Closing took place on April 3, 1995. The Management Agreement, as
amended, was renewed at its original expiration on December 31,
1995 but it will terminate on the effective date of the Company's
merger with EastGroup Properties.
The Manager had entered into an Administration Agreement
with Congress Street Properties, Inc. (" Congress Street"), a
Delaware corporation and then an affiliate of EastGroup, pursuant
to which Congress Street provided day-to-day administrative
services to the Company, including office space, equipment and
personnel incident thereto. The Administration Agreement was
terminated by EGP Managers effective March 31, 1995.
Pursuant to the Management Agreement, the Company has no
employees. All personnel required for the administration of the
Company's operations, including LNH's officers, were compensated
by EastGroup. The Company bears the costs of independent agents,
such as attorneys, auditors and appraisers, retained on behalf of
the Company; of expenses connected with the acquisition,
operation and disposition of its real property interests; and of
shareholder communications, directors' fees and franchise taxes.
NOTE F - MARKETABLE EQUITY SECURITIES
The Company's investment in marketable equity securities
consists of the following:
December 31, 1995 December 31, 1994
------------------------- ------------------------
Quoted Quoted
Ownership Market Ownership Market
Interest Cost Value Interest Cost Value
--------- ------- ------ -------- --------- ------
Liberte' (In thousands) (In thousands)
Investors 2.41% $ 169 $ 675 2.41% $ 169 $ 525
("Liberte'") ======= ====== ======= =====
On January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" and classified its
investments as securities available-for-sale. Accordingly, as of
December 31, 1995 and 1994, investment securities are carried at
fair value with the unrealized gain of $506,000 and $356,000,
respectively, presented as a separate component of stockholders'
equity.
The income tax basis of the investment in marketable equity
securities at December 31, 1995 was $6,028,000.
NOTE G - SUPPLEMENTAL CASH FLOW INFORMATION
The following table provides information regarding
supplemental cash and noncash investing and financing activities:
Year Ended December 31
1995 1994
(In thousands)
Loan foreclosures, net of allowance for
losses, added to real
estate properties................... $ 5,971 $ 6,806 (1)
Loans made to facilitate sales of real
estate owned........................ 2,200 200
Unrealized gain on marketable equity
securities.......................... 150 356
(1) This includes the 22.22% minority participant's ownership of
$1,512,000.
NOTE H - REVERSE REPURCHASE AGREEMENT
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). The Company has controls which consist of the right to
demand additional collateral or return of these invested funds at
anytime the collateral value is less than the invested funds plus
any accrued earnings thereon. The Company conducts these
transactions on a short term basis with Deposit Guaranty National
Bank with which it has a normal business relationship. At
December 31, 1995, the Company had $645,000 invested in reverse
repurchase agreements which can be withdrawn at any time without
penalty.
NOTE I - INCENTIVE COMPENSATION PLAN
In December 1993, the Board of Directors approved the LNH
REIT, Inc. Incentive Compensation Plan, ("Incentive Plan") which
was effective as of October 1, 1993. Under the Incentive Plan,
80,000 incentive compensation units were granted to officers of
the Company. An incentive compensation unit is a right to
receive an amount equal to the dividend paid on a specified
number of shares and is payable to the grantee in cash as the
corresponding payments are made to shareholders. At December 31,
1994, 80,000 incentive compensation units were outstanding under
the incentive plan and there were no additional units available
for grant. Compensation expense related to the Incentive Plan
for the years ended December 31, 1995 and 1994 was $34,000 and
$37,000, respectively.
NOTE J - NEWLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of, which requires impairment losses
to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying value amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed
of. The Company will adopt Statement 121 in the first quarter of
1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table represents the carrying amounts and
estimated fair values of the Company's financial instruments at
December 31, 1995. FASB Statement 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.
1995
Carrying Fair
Amount Value
(In thousands)
Financial Assets
Cash and cash equivalents $1,016 1,016
Investment in marketable
securities 675 675
Mortgage loans 6,860 6,899
The carrying amounts shown in the table are included in the
balance sheet under the indicated captions, net of related
allowance for losses.
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
estimated using discounted cash flows at current interest rates
for loans with similar terms and maturities. The fair value for
nonperforming loans is based on the underlying estimated
collateral value.
Investment in marketable securities: The fair value of the
equity investment is based on quoted market prices at the
reporting date for the investment. Because this investment is
classified as a security available-for-sale, it is carried at
fair value with the unrealized gain of $506,000 presented as a
separate component of stockholders' equity.
NOTE L - PROPOSED MERGER
On September 6, 1995 (amended on December 6, 1995), LNH
REIT, Inc. and EastGroup Properties announced that the Special
Committees of the Boards of each company had agreed in principle
to a merger between LNH and EastGroup. The Company's
shareholders would receive shares of EastGroup with a value of
$8.10 for each LNH share. The number of EastGroup shares that
LNH shareholders receive would be determined by dividing the
value $8.10 by the average trading price of EastGroup shares
during the 10 trading days prior to the effective date of the
merger. EastGroup presently owns 23.4% of LNH. The merger is
subject to several conditions, including shareholder approval,
receipt of a satisfactory fairness opinion by LNH and
registration of the EastGroup shares to be issued in the merger
with the Securities and Exchange Commission. As a result of the
transaction, EastGroup will succeed to the operations and net
assets of the Company and the Company will cease to be a
reporting company under the Securities Exchange Act of 1934, as
amended.
CONSOLIDATED BALANCE SHEET (Unaudited)
(In thousands, except share data)
March 31
-------------
1996
------------
Assets
Mortgage loans $ 7,120
Real estate properties:
Earning
Warehouse 4,211
Shopping center 6,343
Accumulated depreciation (891)
Joint venture in Cowesett 6,179
Non-earning land 776
-----------
23,738
Less allowance for losses (275)
-----------
23,463
Marketable equity securities 1,088
Cash and cash equivalents 875
Accrued interest and
other receivables 423
-----------
$ 25,849
===========
Liabilities
Minority interest $ 1,346
Accrued expenses and
other liabilities 601
-----------
1,947
-----------
Stockholders' Equity
Common stock, $.50 par value,
15,000,000 shares authorized,
2,200,000 shares issued and
outstanding in 1995 and 1994 1,100
Paid in capital 24,509
Deficit (2,626)
Unrealized gain on marketable
equity securities 919
-----------
23,902
-----------
$ 25,849
===========
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended
March 31
-------------------
1996 1995
-------- -------
Revenues
Revenue from real estate properties $364 $379
Interest income:
Mortgage loans 170 134
Cash equivalents and other 11 19
Equity in operation of
Cowesett joint venture 131 -
Other income 2 27
-------- -------
678 559
-------- -------
Expenses
Management fees 71 76
Real estate expenses
Operating 136 130
Depreciation 95 90
Professional fees 31 41
General and administrative 31 41
Minority interest expense 22 26
-------- -------
386 404
-------- -------
Income before gain on investments 292 155
-------- -------
Gain on investments
Real estate and mortgage loans 78 -
-------- -------
Net Income $ 370 $ 155
======== =======
Net Income per share $ .17 $ .07
======== =======
Average number of shares outstanding 2,200 2,200
======== =======
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOW (Unaudited)
(In thousands)
Three Months Ended
March 31
-------------------------
1996 1995
---------- ----------
Operating Activities
Net income $ 370 $ 155
Adjustments to reconcile
net income to net cash provided
by operating activities:
Amortization of deferred financing
fees and discount on mortgage loans (13) (15)
Depreciation 123 90
Joint Venture investment (158) -
Gain on investments (78) -
Other (11) (16)
Net change in receivables, payables
and other assets - 43
----------- ----------
Cash provided by operating activities 233 257
----------- ----------
Investing Activities
Collections on mortgage loans 5 1
Improvements to real estate (49) (1)
Proceeds from sale of real estate - 265
----------- ----------
Cash provided by investing activities (44) 265
----------- ----------
Financing Activities
Dividends paid (330) (1,650)
----------- ----------
Cash used in financing activities (330) (1,650)
----------- ----------
Net increase (decrease) in cash and
cash equivalents (141) (1,128)
Cash and cash equivalents at
beginning of year 1,016 1,660
----------- ----------
Cash and cash equivalents at
end of year $ 875 $ 532
=========== ==========
See notes to consolidated financial statements
Notes to Consolidated Financial Statements (Unaudited)
(1) Basis of Presentation
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The financial statements should be read in conjunction with the
annual report and the notes thereto.
(2) Newly Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of, which requires impairment losses
to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the
assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed
of. There was no effect of adopting Statement 121 in the first
quarter of 1996.
(3) Supplemental Cash Flow Information
Three Months Ended
March 31
-----------------------
1996 1995
--------- ---------
Loan foreclosures added to
real estate owned $ - $ -
Loans made to facilitate sales
of real estate owned - -
Change in unrealized gain on
marketable equity securities 413 36
EASTGROUP PROPERTIES
PRO FORMA CONSOLIDATED BALANCE SHEET (Unaudited)
As of December 31, 1995
The following unaudited pro forma consolidated balance sheet
sets forth the effect of the EastGroup Properties proposed merger
with LNH REIT, Inc. as if the merger had been consummated on
December 31, 1995. The pro forma consolidated balance sheet has
been prepared by management of EastGroup based upon the
historical financial statements of EastGroup and LNH REIT. This
pro forma consolidated balance sheet may not be indicative of the
financial position had the merger been in effect on the dates
indicated or which may occur in the future. The pro forma
consolidated balance sheet should be read in conjunction with the
other financial statements and the notes to the financial
statements of EastGroup incorporated by reference and LNH REIT
enclosed herein.
EastGroup LNH
December 31, December 31, Merger
1995 1995 Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
(In thousands, except per share data)
ASSETS
Real estate properties (net of
accumulated depreciation) $136,398 $ 10,611 $ (3,728) (1) $143,281
Investment in joint venture - 6,011 (2,150) (1) 3,861
Mortgage loans (net of
allowance for losses) 6,008 6,860 - (1) 12,868
Land and land purchase-
lease backs 1,327 - - 1,327
Investment securities 6,811 675 - 7,486
Equity method investments 3,976 - (3,976) (1) -
Cash and cash equivalents 26 1,016 - 1,042
Other assets 3,409 502 (49) (2) 3,862
$157,955 $ 25,675 $ (9,903) $173,727
LIABILITIES
Mortgage notes payable $ 67,203 - - $ 67,203
Notes payable to banks 4,359 - - 4,359
Accounts payable, accrued
expenses and other liabilities 2,584 750 $(49) (2) 3,285
Minority interest 909 1,476 - 2,385
75,055 2,226 (49) 77,232
SHAREHOLDERS' EQUITY
Shares of beneficial interest 4,232 1,100 (1,100) (1) 4,850
618 (1)
Additional paid-in-capital 68,344 24,839 (24,839) (1) 81,371
13,027 (1)
Unrealized gain (loss) on 667 506 (506) (1) 617
securities (50) (1)
Undistributed earnings(deficit) 9,657 (2,996) 2,996 (1) 9,657
EastGroup LNH
December 31, December 31, Merger
1995 1995 Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
(In thousands, except per share data)
82,900 23,449 (9,854) 96,495
$157,955 $ 25,675 $(9,903) $173,727
Book value per share $19.59 $10.66 $19.90
Shares outstanding
(In thousands) 4,232 2,200 4,850
EASTGROUP PROPERTIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET (Unaudited)
As of December 31, 1995
1.EastGroup issues 618,490 shares to all LNH REIT shareholders
(except for EastGroup) in exchange for all LNH REIT shares
outstanding. The 515,200 LNH REIT shares owned by EastGroup
(representing 23.42% of the total shares outstanding) are
retired. The merger with LNH REIT is accounted for under the
purchase method of accounting.
LNH REIT shares outstanding 2,200,000
Less LNH REIT shares owned by EastGroup (515,200)
1,684,800
Exchange ratio (8.10/22.0625) .3671
New EastGroup shares issued 618,490
Market value per EastGroup share $22.0625
$ 13,645,000
EastGroup's investment in LNH at
December 31, 1995 3,976,000
Eliminate unrealized gain - investment in LNH (50,000)
EastGroup's cost of LNH REIT's net assets $ 17,571,000
The difference between LNH's book value and EastGroup's cost
is allocated to LNH's noncurrent assets (real estate and joint
venture) based upon relative fair values.
Cost $ 17,571,000
Book value 23,449,000
Difference $ (5,878,000)
Difference is allocated as
follows:
Real estate $ (3,728,000)
Joint venture (2,150,000)
$ (5,878,000)
2.Eliminate LNH's management fee payable to EastGroup against
EastGroup's management fee receivable.
EASTGROUP PROPERTIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For the year ended December 31, 1995 and the three months ended
March 31, 1996
The following unaudited pro forma consolidated statements of
operations for the year ended December 31, 1995 and the three
months ended March 31, 1996 set forth the effect of EastGroup's
proposed merger with LNH REIT as if these transactions had been
consummated on January 1, 1995. These pro forma consolidated
statements of operations have been prepared by management of
EastGroup based upon historical statements of operations of
EastGroup and LNH REIT. These pro forma statements of operations
may not be indicative of the results that actually would have
occurred if the transactions had been in effect on the dates
indicated or which may be obtained in the future. These pro
forma statements of operations should be read in conjunction with
their notes and the other financial statements and notes to the
financial statements of EastGroup incorporated by reference and
LNH REIT enclosed herein.
EASTGROUP PROPERTIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For the year ended December 31, 1995
EastGroup LNH
December 31, December 31, Merger
1995 1995 Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
(In thousands, except per share data)
REVENUES
Income from real estate
operations $ 28,386 $ 1,451 - $ 29,837
Land rents 217 - - 217
Equity in earnings of real
estate investment trust 203 - (203) (2) -
Interest:
Mortgage loans 1,036 889 - 1,925
Other - 52 - 52
Other 422 87 (146) (3) 363
30,264 2,479 (349) 32,394
EXPENSES
Management fees - 294 (294) (4) -
Operating expenses from real
estate operations 11,575 521 - 12,096
Interest expense 6,287 - 67 (5) 6,354
Depreciation and 5,613 369 - 5,982
amortization
Minority interest in joint
ventures 220 98 - 318
Provision for losses - 189 - 189
General and administrative
expenses 2,180 499 125 (6) 2,804
EastGroup LNH
December 31, December 31, Merger
1995 1995 Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
(In thousands, except per share data)
25,875 1,970 (102) 27,743
Income before gain
on investments 4,389 509 (247) 4,651
GAIN ON INVESTMENTS
Real estate and mortgage 3,322 535 (3,857) (1) -
loans
NET INCOME $ 7,711 $ 1,044 $(4,104) $ 4,651
Net income per share $1.82 $.47 $.96
WEIGHTED AVERAGE SHARES
OUTSTANDING (7) 4,226 2,200 4,844
EASTGROUP PROPERTIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 1995
(1) EastGroup and LNH dispositions:
The operating revenues and expenses associated with
EastGroup's acquisitions and dispositions in 1995 are
immaterial. Gain on dispositions of $3,322,000 in 1995 has
been removed in determining pro forma net income.
The operating revenues and expenses associated with the LNH
acquisitions and dispositions in 1994 and 1995 are immaterial.
Gain on dispositions of $535,000 in 1995 has been removed in
determining pro forma net income.
(2) Eliminate equity in earnings of LNH REIT, Inc.
(3) Eliminate equity in earnings of EastGroup Managers, Inc.
(4) Eliminate LNH management fee expense to LNH REIT
Managers.
(5) Increase interest expense for borrowings to purchase LNH
Shares from the Walker Interests. The borrowings to purchase
these shares was $3,070,000 at an average rate of 8.5% for one
quarter in 1995.
(6) Eliminate management fee income received from LNH REIT
Managers.
(7) Weighted average EastGroup Shares outstanding were
computed as follows:
Twelve Months
Ended
December 31, 1995
(In thousands)
Historical weighted average
EastGroup Shares outstanding 4,226
EastGroup Shares issued in merger
with LNH REIT 618
Pro forma weighted average
EastGroup Shares outstanding 4,844
EASTGROUP PROPERTIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (Unaudited)
For the three months ended March 31, 1996
EastGroup LNH
March 31, March 31, Merger
1996 1996 Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
(In thousands, except per share data)
REVENUES
Income from real estate
operations $ 6,853 $ 364 - $ 7,217
Land rents 52 - - 52
Equity in earnings of real
estate investment trust 40 - (40) (2) -
Interest:
Mortgage loans 246 170 - 416
Other - 11 - 11
Other 221 133 (36) (3) 318
7,412 678 (76) 8,014
EXPENSES
Management fees - 71 (71) (4) -
Operating expenses from real
estate operations 2,741 136 - 2,877
Interest expense 1,527 - - 1,527
Depreciation and 1,424 95 - 1,519
amortization
Minority interest in joint
ventures 32 22 - 54
EastGroup LNH
March 31, March 31, Merger
1996 1996 Pro Forma Pro Forma
(Historical) (Historical) Adjustments Consolidated
(In thousands, except per share data)
General and administrative
expenses 512 62 31 (5) 605
6,236 386 (40) 6,582
Income before gain
on investments 1,176 292 (36) 1,432
GAIN ON INVESTMENTS
Real estate and mortgage 1,353 78 (1,431) (1) -
loans
NET INCOME $ 2,529 $ 370 $(1,467) $ 1,432
Net income per share $.60 $.17 $.30
WEIGHTED AVERAGE SHARES
OUTSTANDING (6) 4,235 2,200 4,853
EASTGROUP PROPERTIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 1996
(1) EastGroup and LNH dispositions:
The operating revenues and expenses associated with
EastGroup's disposition in 1996 is immaterial. Gain on
disposition of $1,353,000 in 1996 has been removed in
determining pro forma net income.
The operating revenue and expenses associated with the LNH
disposition in 1996 are immaterial. Gain on disposition of
$78,000 in 1996 has been removed in determining pro forma net
income.
(2) Eliminate equity in earnings of LNH REIT, Inc.
(3) Eliminate equity in earnings of EastGroup Managers, Inc.
(4) Eliminate LNH management fee expense to LNH REIT
Managers.
(5) Eliminate management fee income received from LNH REIT
Managers.
(6) Weighted average EastGroup Shares outstanding were
computed as follows:
Three Months
Ended
March 31, 1996
(In thousands)
Historical weighted average
EastGroup Shares outstanding 4,235
EastGroup Shares issued in merger
with LNH REIT 618
Pro forma weighted average
EastGroup Shares outstanding 4,853