<PAGE> 1
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): June 19, 1996
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EASGTROUP 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)
<PAGE> 2
FORM 8-K
EASTGROUP PROPERTIES
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
------------------------------------
On June 19, 1996, Copley Properties, Inc. ("Copley") merged into EastGroup
Properties ("EastGroup or the "Trust"). Under the terms of the merger,
shareholders of Copley received .70668 of one share of EastGroup for each
share of Copley owned by them, resulting in the issuance by EastGroup of an
aggregate of approximately 2,159,000 shares of beneficial interest.
Information regarding Copley 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 Copley and
EastGroup is contained under the heading "Proposal - The Merger Agreement",
which is incorporated herein by reference as contained in EastGroup's
Prospectus dated May 14, 1996, which is a part of EastGroup's Registration
Statement on Form S-4 (No. 333-01815).
The unaudited Pro Forma Consolidated Financial Statements that are attached
as an Exhibit hereto are based on EastGroup's and Copley's historical
financial data as adjusted to give effect to the business combinations
involving Mergers between EastGroup and Copley on the basis described
in the notes thereto.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
---------------------------------
(a) Financial Statements of Copley
The following audited financial statements of Copley are filed herewith:
COPLEY PROPERTIES, INC. PAGE
Report of Independent Accountants 5
Consolidated Balance Sheets - as of
December 31, 1995 and 1994 6
Consolidated Statements of Operations and Cumulative
Deficit - for the years ended December 31, 1995,
1994 and 1993 7
Consolidated Statements of Cash Flows - for the years
ended December 31, 1995, 1994 and 1993 8
Notes to Consolidated Financial Statements 9
<PAGE> 3
The following unaudited financial statements of Copley are filed herewith:
COPLEY PROPERTIES, INC. PAGE
Consolidated Balance Sheet (Unaudited)
as of March 31, 1996 21
Consolidated Statements of Operations and Cumulative
Deficit (Unaudited) for the three months ended
March 31, 1996 and 1995 22
Consolidated Statements of Cash Flows (Unaudited)
for the three months ended March 31, 1996 and 1995 23
Notes to Consolidated Financial Statements 24
(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 30
Pro Forma Consolidated Statement of
Operations (Unaudited) - for the year
ended December 31, 1995 33
Pro Forma Consolidated Statement of
Operations (Unaudited) - for the three
months ended March 31, 1996 36
(c) Exhibits.
---------
The following exhibit is incorporated herein by reference:
(1) Agreement and Plan of Merger among EastGroup and Copley dated as of
February 12, 1996 incorporated by reference to Appendix A of
EastGroup's Prospectus dated May 14, 1996, which is a part of
EastGroup's Registration Statement on Form S-4 (No. 333-01815).
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
<PAGE> 4
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: July 2, 1996 By: /s/ Keith McKey
---------------------------------
N. Keith McKey, CPA
Executive Vice-
President, Chief
Financial Officer,
and Secretary
/s/ Diane W. Hayman
---------------------------------
Diane W. Hayman, CPA
Controller
<PAGE> 5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Copley Properties, Inc.:
We have audited the accompanying consolidated balance sheets of Copley
Properties, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1995 and 1994, and the related statements of operations and cumulative deficit
and cash flows for each of the three years in the period ended December 31,
1995. 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 Copley Properties,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
March 15, 1996
<PAGE> 6
COPLEY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Real estate investments (Notes 3 and 4):
Property, net................................................. $ 72,396,765 $ 88,640,489
Joint ventures................................................ -- 1,037,178
Investment in tenancies-in-common............................. 2,310,781 --
Loans to joint ventures....................................... -- 4,859,903
Ground lease.................................................. -- 1,187,000
Notes receivable.............................................. 895,963 1,000,966
Other......................................................... -- 681,356
------------ ------------
Total real estate investments......................... 75,603,509 97,406,892
Cash and cash equivalents....................................... 5,716,300 1,491,554
Deferred financing costs (Note 10).............................. -- 486,366
Other assets.................................................... 197,448 --
------------ ------------
Total assets.......................................... $ 81,517,257 $ 99,384,812
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Losses of joint ventures in excess of investment.............. $ -- $ 3,261,463
Accounts payable and other liabilities........................ 544,045 436,478
Accrued management advisory fees (Notes 9 and 14)............. 2,573,917 2,491,445
Line of credit borrowings..................................... -- 3,500,000
Mortgage notes payable (Notes 2 and 5)........................ 39,333,349 49,219,448
------------ ------------
Total liabilities..................................... 42,451,311 58,908,834
------------ ------------
Commitments (Note 3)
SHAREHOLDERS' EQUITY (Note 8):
Common stock, $1.00 par value; authorized 20,000,000 shares;
issued 4,007,500 shares.................................... 4,007,500 4,007,500
Additional paid-in capital.................................... 69,625,444 69,625,444
Treasury stock; 423,150 shares of common stock, at cost....... (4,895,726) (4,895,726)
Cumulative deficit............................................ (29,671,273) (28,261,241)
Class A common stock.......................................... 1 1
------------ ------------
Total shareholders' equity............................ 39,065,946 40,475,978
------------ ------------
Total liabilities and shareholders' equity............ $ 81,517,257 $ 99,384,812
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 7
COPLEY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND CUMULATIVE DEFICIT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
INVESTMENT ACTIVITY (Notes 2, 3 and 6):
Property operations, net....................... $ 1,445,701 $ 1,452,003 $ 1,128,334
Share of real estate investment earnings
Operations.................................. 748,067 415,742 191,333
Lease termination charges (Note 6).......... -- (1,770,471) --
Investment valuation allowance.............. -- -- (900,000)
------------ ------------ ------------
Total real estate operations........... 2,193,768 97,274 419,667
Gain on sales of Properties.................... 2,564,478 626,931 --
------------ ------------ ------------
Total real estate activity............. 4,758,246 724,205 419,667
Interest on short-term investments and cash
equivalents................................. 39,255 79,975 195,885
------------ ------------ ------------
Total investment activity.............. 4,797,501 804,180 615,552
------------ ------------ ------------
PORTFOLIO EXPENSES:
Management advisory fee........................ 451,863 714,761 601,535
General and administrative..................... 371,941 273,974 227,758
Professional fees (Note 13).................... 898,608 142,149 97,241
Interest expense............................... 184,562 210,241 --
Write-off of deferred financing costs (Note
10)......................................... 501,227 -- --
------------ ------------ ------------
2,408,201 1,341,125 926,534
------------ ------------ ------------
NET INCOME (LOSS)................................ 2,389,300 (536,945) (310,982)
Common stock dividends........................... (3,799,332) (3,369,229) (2,867,442)
CUMULATIVE DEFICIT:
Beginning of year.............................. (28,261,241) (24,355,067) (21,176,643)
------------ ------------ ------------
End of year.................................... $(29,671,273) $(28,261,241) $(24,355,067)
============ ============ ============
PER SHARE DATA:
Net Income (Loss).............................. $ .67 $ (.15) $ (.09)
============ ============ ============
Dividends...................................... $ 1.06 $ .94 $ .80
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 8
COPLEY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 2,389,300 $ (536,945) $ (310,982)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Joint venture and tenancy-in-common
operations.................................. (673,799) (352,606) 16,832
Lease termination charges..................... -- 1,770,471 --
Cash distributions from joint ventures and
tenancies-in-common......................... 807,255 1,632,460 3,136,357
Property depreciation and amortization........ 3,735,914 3,999,341 810,305
Write-off of deferred financing costs......... 501,227 -- --
Gain on sales of Property..................... (2,564,478) (626,931) --
Investment valuation allowance................ -- -- 900,000
Increase in investment income receivable...... -- (30,365) (211,559)
Increase in deferred leasing commissions...... (404,330) (519,173) (33,153)
(Increase) decrease in property working
capital..................................... (374,311) (358,974) 133,263
Increase in accounts payable and accrued
management advisory fees.................... 109,795 318,478 228,202
Other, net.................................... (76,137) (72,683) --
----------- ---------- ----------
Net cash provided by operating
activities............................. 3,450,436 5,295,756 4,596,582
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in loans to joint ventures.............. (6,436) (191,037) (42,290)
Reduction of loans to joint ventures............. -- -- 551,895
Investment in joint ventures..................... (31,346) (143,494) (3,336,120)
Return of capital from joint ventures............ -- -- 25,119
Investment in Property........................... (4,553,172) (3,928,552) (2,291,721)
Proceeds from sale of Property................... 22,864,250 1,082,925 --
Decrease (increase) in short-term investments,
net........................................... -- 1,967,451 (979,408)
Increase in other assets......................... (280,570) -- --
Decrease in notes receivable..................... 109,426 2,444,619 --
----------- ---------- ----------
Net cash provided by (used in) investing
activities............................. 18,102,152 1,231,912 (6,072,525)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in line of credit borrowings,
net........................................... (3,500,000) 3,500,000 --
Proceeds from third-party mortgage note.......... 3,250,000 -- --
Principal payments on mortgage notes............. (13,136,099) (6,801,089) --
Dividends paid................................... (3,799,332) (3,369,229) (2,867,442)
Financing costs.................................. (142,411) (267,586) --
----------- ---------- ----------
Net cash used in financing activities.... (17,327,842) (6,937,904) (2,867,442)
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents................................... 4,224,746 (410,236) (4,343,385)
CASH AND CASH EQUIVALENTS:
Beginning of year............................. 1,491,554 1,901,790 6,245,175
----------- ---------- ----------
End of year................................... $ 5,716,300 $ 1,491,554 $ 1,901,790
----------- ---------- ----------
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........ $ 4,827,630 $ 4,784,473 $ 358,177
=========== ========== ==========
NONCASH INVESTING AND FINANCING ACTIVITIES (NOTES 3 AND 12)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 9
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 ORGANIZATION AND BUSINESS
Copley Properties, Inc. (the Company), a Delaware corporation, was
incorporated in May 1985 and operates as a qualified real estate investment
trust under applicable provisions of the Internal Revenue Code of 1986, as
amended. The Company acquires, develops, operates and owns industrial real
estate. The Company currently owns and operates, either directly or through
tenancy-in-common arrangements, 15 properties totaling over 2.5 million square
feet of net rentable area. Copley Real Estate Advisors, Inc. (the Advisor)
provides investment management and administrative services to the Company. The
Advisor is an indirect wholly owned subsidiary of New England Investment
Companies, L.P. (NEIC), a publicly traded limited partnership. New England
Mutual Life Insurance Company is the principal unitholder of NEIC.
As described in Note 14, in February 1996, the Company entered into an
Agreement and Plan of Merger, under which the Company will be merged into
EastGroup Properties.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and its consolidated joint ventures as of and subsequent to the date
on which the Company acquired a controlling ownership interest therein. The
Company has several tenancies-in-common, and previously had several other joint
ventures, which are presented in these financial statements using the equity
method, since control of the business is shared with the respective co-tenant.
All interentity balances and transactions have been eliminated.
Under circumstances arising from the inability of certain of its venture
partners to perform under joint venture agreements, the Company assumed control
over the respective businesses. Upon restructuring, these investments have been
classified as Properties in the consolidated balance sheets and any third-party
mortgage financing is separately presented, and operating revenues and expenses
are separately classified in property operations. Prior to restructuring, the
real estate assets and third-party mortgage loans of joint ventures are
considered in the investment balances and operating results are reported as
share of investment earnings. The restructuring transactions do not affect the
Company's net income (loss) or shareholders' equity.
Property
Property includes land and buildings wholly owned by the Company or owned
by consolidated joint ventures. These investments are referred to herein as
"Properties" and are stated at cost less accumulated depreciation. The Company's
cost of a Property previously owned by a joint venture equals the Company's
carrying value of the prior investment on the conversion date. It is the
Company's policy to estimate the remaining useful life of real estate assets at
the conversion date. This balance sheet caption also includes deferred leasing
costs, incidental working capital items related to Properties, and the minority
interest related to a consolidated joint venture.
Tenancies-in-Common, Joint Ventures and Secured Loans
The Company accounts for its investments in unconsolidated
tenancies-in-common using the equity method, under which the cost of the
investment is adjusted by the Company's share of the respective tenancy-
in-common's results of operations and reduced by certain cash distributions
received.
The Company has had investments in unconsolidated joint ventures which were
also accounted for using the equity method as described above. In addition, the
Company made loans to joint ventures in which the Company had an ownership
interest.
<PAGE> 10
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Share of real estate investment earnings (losses) in the accompanying
consolidated statements of operations includes tenancy-in-common and joint
venture earnings (losses) allocated to the Company. Allocations of
tenancy-in-common earnings (losses) are made in accordance with the ownership
interests of the respective co-tenants. Allocations of joint venture earnings
(losses) were made to the Company's joint venture partners in accordance with
the terms of the respective joint venture agreements as long as they had
economic equity in the project. A joint venture partner is determined to have
economic equity if the appraised value of the property exceeds the Company's
total cash investment plus accrued preferential returns and interest thereon, or
if the venture partner is entitled to current operating cash distributions.
Depreciation and Capitalization
Maintenance and repair costs are charged to operations as incurred.
Significant improvements and renewals are capitalized. Depreciation is computed
using the straight-line method based on the estimated useful lives of the
buildings and improvements. Leasing and financing costs are also capitalized and
amortized over the related agreement terms.
Rental Revenues
Rental revenues from certain operating leases with fixed rent increases or
rent credits are recognized on a straight-line basis over the terms of the
leases. The difference between straight-line rental revenues and cash rents
received in accordance with the terms of the leases is recorded as accounts
receivable.
Realizability of Real Estate Investments
The carrying value of the Company's real estate investments is reduced to
net realizable value, if lower. Since the Company's intention is to hold
properties for long-term investment, net realizable value is measured by the
recoverability of the investment carrying value through expected undiscounted
future cash flows, net of the cost of third-party financing associated with the
investment. As of December 31, 1995 and 1994, the estimated net realizable value
of each real estate investment either exceeded or approximated its carrying
value.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of Long
Lived Assets and for Long Lived Assets to Be Disposed Of" (SFAS 121), 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. SFAS 121 also addresses the accounting for long-lived assets
that are expected to be disposed of. As required, the Company will adopt SFAS
121 in the first quarter of 1996. Based upon current circumstances, management
believes adoption will not have any effect on the financial position of the
Company.
Cash Equivalents and Short-term Investments
Cash equivalents and short-term investments are stated at cost, plus
accrued interest, which approximates market. Such investments consist primarily
of certificates of deposit and commercial paper. The Company considers all
highly liquid debt instruments purchased with a maturity of 90 days or less to
be cash equivalents; otherwise, they are classified as short-term investments.
Financial Instruments
Mortgage notes payable and notes receivable are considered the Company's
most significant financial instruments at December 31, 1995. Based on the
interest rates on these notes, some of which are variable and
7
<PAGE> 11
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
several of which have recently been negotiated, the fair value of these
instruments approximates their carrying values.
Per Share Computations
Net income (loss) per share is computed by dividing net income (loss),
after deducting any Class A dividends, by the weighted average number of shares
outstanding during each year (3,584,350 in 1995, 1994 and 1993).
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
with the 1995 presentation. There is no effect on net income (loss) or cash flow
from operations.
3 REAL ESTATE INVESTMENTS
The Company's real estate investments are either owned in their entirety or
jointly through tenancies-in-common or joint ventures. Wholly owned property
operations are under the oversight of local management companies. For jointly
owned property, the Company's co-tenants or venture partners are responsible for
day-to-day operating activities under separate property management agreements,
and they are entitled to fees for such services. The joint venture agreements
provide for the funding of cash flow deficits by the venture partners in
proportion to ownership interests, and for the dilution of ownership interest in
cases where a partner does not so contribute. Under the tenancy-in-common
agreements, each co-tenant is responsible for funding its proportionate share of
cash flow deficits.
The Company's cash investments in joint ventures are in two forms: a
capital contribution generally subject to preferential cash distributions at a
specified rate and to priority distributions with respect to sale or refinancing
proceeds; and secured, interest-bearing loans to certain ventures. When
converted to tenancy-in-common ownership, these loans and the corresponding
accrued interest were classified as part of the Company's contribution to the
capital of the new entity.
Acquisitions
In July 1995, the Company purchased the Kingsview Industrial Center, an
83,000 square foot industrial building located in Carson, California. The total
purchase price was approximately $3,000,000.
The Company purchased an industrial building located in Tempe, Arizona, on
March 31, 1994, which is referred to as Broadway Industrial Center. The total
purchase price was approximately $2,350,000.
Sales
In November 1995, the Company sold its interest in the Peachtree Corners
Distribution Center investment for a purchase price of approximately
$10,000,000. After payment of selling expenses and the outstanding mortgage
loan, the Company received net cash proceeds of approximately $7,626,000,
including deposits of $125,000 and $1,165,000 received in March 1995 and June
1995. The outstanding principal
<PAGE> 12
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
balance of $2,250,000 on a $3,250,000 mortgage note payable which the buyer
issued to the Company in February 1995 was retired as part of the closing. The
loan had been secured by a first mortgage on the Peachtree Corners Distribution
Center and bore interest at the rate of 10% per annum. In July 1995, the Company
made a payment to reduce the outstanding principal by $1,000,000. The Company
recognized a gain on the sale of approximately $1,806,000.
In June 1995, the Company sold all of its interests and rights, including
its ground lease position, related to the Park North Business Center investment
for approximately $18,500,000. Proceeds from the sale of approximately
$12,900,000, net of the assumption of debt associated with the ground lease
property, were used to pay off the mortgage notes payable to Wells Fargo Realty
Advisors and the revenue bonds, which were owed by the ground lessee and
guaranteed by the Company (Note 5). After settlement of the debt and payment of
selling expenses, the Company received net cash proceeds of approximately
$6,825,000, including a deposit of $125,000 received in March 1995. The Company
recognized a gain of approximately $758,000.
During 1994, the Company sold two buildings at the Baygreen Industrial
Park. Proceeds from the sales totaled $1,782,925, including a $700,000 purchase
money mortgage note. Under the terms of this note, interest only is due monthly
at the rate of 9% per annum, and the note matures January 1, 1997. The note is
included in Notes Receivable in the accompanying consolidated balance sheet at
December 31, 1995 and 1994. The Company recognized a gain on these sales of
approximately $627,000 in 1994.
Restructurings
In September 1995, the Company paid approximately $100,000 to terminate an
incentive property management agreement related to Broadway Industrial Center
and paid approximately $200,000 in October 1995 to terminate an incentive
property management agreement related to Baygreen Industrial Park. The incentive
property management agreements represented a contingent equity interest in the
properties granted at the date of acquisition, payable upon sale, refinancing,
or termination. Therefore, the termination fees paid have been recorded as
acquisition costs and added to the Company's carrying value of the investments.
In August 1995, the Company entered into agreements with certain of its
co-venture partners to restructure the ownership of their joint venture
investments as tenancies-in-common between the Company and the respective
co-venturers. Certain amounts previously recorded by the Company as loans to the
joint ventures and corresponding accrued interest have been reclassified at book
value, as part of the Company's capital contribution to its ownership interest
in the tenancies-in-common. These transactions did not generate a gain or loss
or have an impact on shareholders' equity. Subsequent to the establishment of
the tenancies-in-common, the respective ownership interests of the Company and
its co-tenants-in-common are substantially as follows:
<TABLE>
<CAPTION>
COMPANY CO-TENANT
------- ---------
<S> <C> <C>
Central Distribution Center............................. 57.38% 42.62%
West Side Business Park................................. 75.49% 24.51%
Metro Business Park..................................... 69.03% 30.97%
Dominguez Properties.................................... 55.00% 45.00%
Columbia Place.......................................... 78.00% 22.00%
270 Technology Park..................................... 61.00% 39.00%
</TABLE>
As discussed further in Note 14, subsequent to December 31, 1995, the
Company entered into agreements with its various co-tenants to exchange
ownership interests such that the Company would have a 100% ownership interest
in certain of the properties owned by the tenancies-in-common and no ownership
interest in the others.
<PAGE> 13
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of January 1, 1994, the ownership of three partnerships that were formed
to own a portion of the Park North Business Center investment (the "Parknorth
Partnerships") was restructured whereby the Company became the controlling
venturer and increased its legal ownership percentage. On March 30, 1995, 100%
ownership of the property owned by the Parknorth Partnerships was transferred to
the Company. In addition, on March 30, 1995, the Company restructured its
long-term ground lease arrangement within the Park North Business Center. As
discussed under "Sales," the entire Park North Business Center investment was
sold on June 30, 1995.
The following is a summary of the real estate investment structures at
December 31, 1995:
<TABLE>
<CAPTION>
DATE
CONSOLIDATED DATE
LEGAL OR CONVERTED CONVERTED
OWNERSHIP FROM JOINT TO TENANCY-
INVESTMENT SHARE VENTURE IN-COMMON
------------------------------------------------- --------- ------------ -----------
<S> <C> <C> <C>
Broadway Industrial Center....................... 100.00% 03/31/94 --
Central Distribution Center...................... 57.38% -- 8/16/95
West Side Business Park.......................... 75.49% -- 8/16/95
Metro Business Park.............................. 69.03% -- 8/16/95
Carson Industrial Center(1)...................... 50.00% -- 3/29/90
Dominguez Properties............................. 55.00% -- 8/16/95
Los Angeles Corporate Center..................... 100.00% 12/18/90 --
University Business Center....................... 80.00% 11/01/93 --
Huntwood Associates.............................. 100.00% 12/31/93 --
Wiegman Associates(2)............................ 80.00% 12/31/93 --
Baygreen Industrial Park......................... 100.00% 10/26/93 --
Columbia Place................................... 78.00% -- 8/16/95
270 Technology Park.............................. 61.00% -- 8/16/95
Sample/I-95 Business Park........................ 100.00% 12/31/93 --
Kingsview Industrial Center...................... 100.00% 07/14/95 --
</TABLE>
- ---------------
(1) The Company has a note receivable of approximately $177,000 from its
co-tenant which bears interest at 10% and is secured by the co-tenant's
interest in the property.
(2) The Company has a preferred capital investment which bears interest at 12%.
<PAGE> 14
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4 REAL ESTATE ASSETS AND LIABILITIES
The following is a summary of the assets and liabilities underlying the
Company's real estate investments:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1995 1994
------------ ------------
<S> <C> <C>
PROPERTY
Land.................................................... $ 21,655,181 $ 24,018,575
Buildings and improvements.............................. 52,400,189 66,402,879
Accumulated depreciation................................ (5,752,574) (5,079,353)
Deferred leasing costs and other assets, net............ 1,162,722 1,332,458
Minority interest....................................... 1,509,970 1,471,483
---------- ----------
Total real estate assets........................... 70,975,488 88,146,042
Accounts receivable..................................... 2,048,357 2,254,603
Accounts payable and other liabilities.................. (627,080) (1,760,156)
---------- ----------
$ 72,396,765 $ 88,640,489
========== ==========
Mortgage notes payable to third-parties (Note 5)........ $ 39,333,349 $ 49,219,448
========== ==========
INVESTMENTS IN TENANCIES-IN-COMMON AND JOINT VENTURES
Land.................................................... $ 8,246,048 $ 8,246,048
Buildings and improvements.............................. 33,965,653 35,542,264
Accumulated depreciation................................ (11,791,003) (12,370,021)
Cash.................................................... 511,717 346,176
Other, net.............................................. 2,921,034 3,521,924
---------- ----------
Total assets....................................... 33,853,449 35,286,391
---------- ----------
Mortgage notes payable to third-parties (Note 5)........ 31,601,919 32,127,307
Other................................................... 632,950 1,913,431
---------- ----------
Total liabilities.................................. 32,234,869 34,040,738
---------- ----------
Net assets.............................................. $ 1,618,580 $ 1,245,653
========== ==========
Company's share:
Loans to joint ventures............................... $ -- $ 4,859,903
Capital............................................... 2,310,781 (2,224,285)
---------- ----------
$ 2,310,781 $ 2,635,618
========== ==========
</TABLE>
As of December 31, 1994 assets of joint ventures exclude capitalized
interest or preferred returns to the Company and liabilities of joint ventures
exclude amounts owed to the Company in connection with secured loans, accrued
interest thereon, or accrued preferred returns. As part of the conversion to
tenancies-in-common as discussed in Note 3, these items were converted at book
value to the Company's ownership interest.
<PAGE> 15
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5 MORTGAGE NOTES PAYABLE
Mortgage notes payable on Properties are summarized below. They are
collateralized by real estate and, in certain cases, the assignment of rents.
The mortgage notes are generally non-recourse to the other assets of the
Company.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
----------- -----------
<S> <C> <C>
UNIVERSITY BUSINESS CENTER
CIGNA; interest at 9.06%, payable monthly; principal payments
based on a 20-year amortization schedule; remainder due April 1,
2000............................................................ $ 9,353,947 $13,000,000
CIGNA; interest at 9.37%, payable monthly; principal due January
1, 1997......................................................... 10,000,000 10,000,000
HUNTWOOD ASSOCIATES
Wells Fargo Bank; interest is a fixed rate option with interest
based on LIBOR plus 3.25% and a variable rate option with
interest based on the prime rate plus 1% (the effective interest
rate was 9.5% at December 31, 1995); principal due January 15,
1997............................................................ 2,292,993 2,350,292
Massachusetts Mutual Life Insurance Company; interest at 9.875%,
payable monthly; principal due June 1, 1996..................... 10,000,000 10,000,000
WIEGMAN ASSOCIATES
Massachusetts Mutual Life Insurance Company; interest at 9.875%,
payable monthly; principal due June 1, 1996..................... 6,700,000 6,700,000
Allstate Insurance Company; interest at 8.75%, payable monthly;
principal due October 1, 1997................................... 986,409 1,011,311
PARK NORTH BUSINESS CENTER
Wells Fargo Realty Advisors; interest at .65% over the prime rate
or 1.75% over LIBOR, payable monthly. Principal balance was paid
at maturity on June 30, 1995.................................... -- 3,362,692
Wells Fargo Realty Advisors; interest at .65% over the prime rate
or 1.75% over LIBOR, payable monthly. Principal balance was paid
at maturity on June 30, 1995.................................... -- 2,795,153
----------- -----------
$39,333,349 $49,219,448
=========== ===========
</TABLE>
Mortgage notes payable to third-parties, based on contractual terms in
existence as of December 31, 1995, mature as follows:
<TABLE>
<CAPTION>
TENANCIES-IN-
YEAR ENDED DECEMBER 31, PROPERTIES(1) COMMON(2)
------------------------------------------------------ ------------- -------------
<S> <C> <C>
1996.................................................. $ 16,974,870 $ 4,280,310
1997.................................................. 13,403,318 10,997,500
1998.................................................. 228,070 5,203,115
1999.................................................. 249,613 1,854,579
2000.................................................. 8,477,478 309,903
Thereafter............................................ -- 8,956,512
------------- -------------
$ 39,333,349 $ 31,601,919
============= =============
</TABLE>
- ---------------
(1) Includes 100% of the joint venture debt.
(2) Amounts represent 100% of the tenancies-in-common debt. The Company's share
of notes payable is consistent with its respective ownership interest (Note
3) except at West Side Business Park where the Company's share of the
obligation under the notes payable is 57.38%.
<PAGE> 16
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mortgage notes payable at December 31, 1994 do not include revenue bonds at
Park North Business Center owed by the ground lessee, repayment of which was
guaranteed by the Company. The ground lease arrangement resulted from a
transaction in which the Company purchased land in a portion of Park North
Business Center for lease back to the seller for a term of 60 years. Contractual
rent was $142,440 per annum. The Company's guarantee of the revenue bonds was
extinguished in connection with the sale of the property in June 1995.
The Company guaranteed 50% of the outstanding obligation of the revenue
bonds at 270 Technology Park up to a maximum of $2,000,000. The outstanding
principal balance of the bonds at December 31, 1995 and 1994 was $3,713,011. As
discussed in Note 14, subsequent to December 31, 1995, the Company exchanged its
ownership interest in the 270 Technology Park property, and its guarantee of the
revenue bonds was extinguished.
6 RESULTS OF REAL ESTATE INVESTMENTS
Operations
The following is a summary of the operating results of the properties
underlying the Company's real estate investments:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
PROPERTY
Rentals..................................... $12,679,060 $13,338,097 $ 3,128,332
Operating expenses.......................... (3,030,306) (3,072,560) (821,215)
Interest expense............................ (4,348,126) (4,696,303) (358,177)
Depreciation and amortization............... (3,735,914) (3,999,341) (810,305)
Minority interest........................... (119,013) (117,890) $ (10,301)
----------- ----------- -----------
$ 1,445,701 $ 1,452,003 $ 1,128,334
=========== =========== ===========
INVESTMENTS IN TENANCIES-IN-COMMON AND
JOINT VENTURES
Rentals..................................... $ 6,856,262 $ 7,442,165 $14,850,192
Operating expenses.......................... (1,223,767) (1,136,267) (2,749,486)
Interest expense............................ (2,857,655) (2,931,718) (7,615,524)
Depreciation and amortization............... (1,921,274) (4,551,781) (4,551,489)
----------- ----------- -----------
$ 853,566 $(1,177,601) $ (66,307)
=========== =========== ===========
Company share:
Interest on loans to joint ventures....... $ 74,268 $ 63,136 $ 208,165
Equity in net income (losses)............. 673,799 (1,417,865) (16,832)
----------- ----------- -----------
$ 748,067 $(1,354,729) $ 191,333
=========== =========== ===========
</TABLE>
<PAGE> 17
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum rentals under non-cancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED TENANCIES-IN-
DECEMBER 31, PROPERTIES COMMON
---------------------------------------------------- ----------- -------------------
<S> <C> <C>
1996........................................... $ 9,051,444 $ 4,551,838
1997........................................... 8,702,558 2,833,264
1998........................................... 7,728,819 2,526,885
1999........................................... 6,890,149 2,389,048
2000........................................... 6,022,828 2,265,552
Thereafter.......................................... 16,546,140 9,180,224
----------- -----------
$54,941,938 $23,746,811
=========== ===========
</TABLE>
Investment Valuation Allowance
The estimated net realizable value of the undeveloped land at Sample/I-95
Business Park declined significantly in 1993. In accordance with the Company's
policy, the carrying value was reduced to approximate estimated net realizable
value, resulting in an investment valuation allowance of $900,000 in 1993.
Significant Lease Transactions
In September 1994, M.O.R. XXXVI Associates Limited Partnership, a
partnership in which the Company is a general partner (the "Partnership") and
the owner of Columbia Place, modified the existing terms of its sole lease and
mortgage loan agreements. BDM Federal, Inc. ("BDM"), the original tenant with a
lease expiring in March 1998, desired to vacate the building and Ceridian
Corporation ("Ceridian"), a new tenant, desired to occupy the building. BDM,
Ceridian, and the Partnership entered into a series of agreements (the
"Agreements") under which BDM is obligated for certain payments to the
Partnership through March 1998. The payments are contingent on future events and
are being recognized as income when the contingencies expire. In 1994,
approximately $864,000 was recognized as additional income from BDM as a result
of the transaction.
Ceridian entered into a lease with the Partnership which commenced
September 1994 and expires December 2009, subject to earlier termination options
in December 2004 and December 2006.
Ceridian was responsible for the cost of all of its tenant improvements and
chose to substantially re-fit this space. This resulted in the write-off by the
Partnership of approximately $2,635,000 of tenant improvements and other capital
costs in 1994.
In conjunction with the leasing transaction, the mortgage note payable to a
third-party lender of approximately $10,490,000 was restructured. The interest
rate was reduced from 10.125% to 8.875% per annum, effective December 1, 1994,
and the maturity date was extended from May 1998 to December 2009. The maturity
date may be accelerated if Ceridian exercises its termination options. The
revised mortgage note requires monthly payments of principal and interest based
on a 20-year amortization schedule.
The Partnership's costs of these transactions have been capitalized and are
being amortized over the life of the lease or loan as applicable.
In January 1996, the Company executed a lease agreement which increased the
occupancy of the Los Angeles Corporate Center property from 50% to 100%.
<PAGE> 18
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7 LINE-OF-CREDIT
At December 31, 1995, the Company had an unsecured line-of-credit agreement
with a bank which was due to expire on January 31, 1996. Under its terms, the
Company could borrow up to $5,000,000 at the prime rate of interest or LIBOR
plus 1.5%. The average outstanding balance on the line-of-credit during 1995 and
1994 was $2,091,644 and $3,402,000, respectively, and the weighted average
interest rate was 7.85% and 6.18%, respectively. There were no borrowings in
1993.
Subsequent to December 31, 1995, the bank agreed to extend the
line-of-credit agreement to July 31, 1996. All other terms and conditions are
unchanged.
8 SHAREHOLDERS' EQUITY
Increase in Authorized Shares
The total number of authorized shares of the Company was increased from
8,000,000 to 20,000,000 effective June 14, 1994.
Class A Common Stock
On June 3, 1985, the Company sold one share of Class A Common Stock (par
value of one dollar) to the Advisor for $50,000. As the holder of such share,
the Advisor is entitled to receive 10% of the Company's net gain (as defined)
from the disposition of properties, reduced by any accumulated net losses. Upon
termination of the Advisory Agreement, the Company will have an option to
purchase the share of Class A Common Stock for an amount equal to 10% of the net
gain which would be realized by the Company had all of the real estate owned by
the Company as of the date of termination been sold at its fair market value. If
the Company does not elect to purchase the Class A Common Stock, such share will
automatically convert to shares of common stock of the Company. See Note 14 for
further discussion of the Class A Common Stock.
Shareholders' Rights Plan
The Company's Board of Directors unanimously adopted a shareholders' rights
plan on June 28, 1990 applicable to shareholders of record on July 19, 1990. The
plan, as amended on September 20, 1995, provides for the dividend of a right to
buy one share of common stock for a stated amount determined in accordance with
the provisions of the plan for each share of common stock outstanding. Rights
would initially become exercisable on the earlier of (1) the tenth day after the
date on which a person has acquired beneficial ownership of 15% or more of the
Company's common stock or (2) the tenth business day after a person commences a
tender or exchange offer, the consummation of which would result in such person
owning 30% or more of the Company's common stock.
9 MANAGEMENT ADVISORY FEES
The Company has an agreement with the Advisor, pursuant to which the
Advisor provides investment management and administrative services to the
Company. Fees for these services totaled $451,863, $714,761 and $601,535 for
1995, 1994 and 1993, respectively, and are determined as:
a. A base fee of 7.5% of net cash flow (as defined in the Advisory
Agreement) from sources other than short-term assets, as defined.
b. An incentive fee of 5% of net cash flow (as defined in the Advisory
Agreement) from sources other than short-term assets, as defined.
c. A short-term investment fee of 0.25% of average annual short-term
assets, as defined.
<PAGE> 19
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995 and 1994, payments of the incentive fees totaling
$2,573,917 and $2,473,054, respectively, have been deferred and become payable
only after the Company has achieved a specified return to shareholders, or
refinancing or sale proceeds are distributed to shareholders. Payment of the
deferred fee would also become payable upon termination or resignation of the
Advisor. See Note 14 for further discussion of the management advisory fee.
10 DEFERRED FINANCING COSTS
In 1994, the Company commenced the marketing of additional equity on a
private placement basis and incurred $501,227 in Deferred Financing Costs in
connection with pursuing the private placement and arranging for an increased
line of credit, which was contingent on additional equity. Discussions with
potential investors did not produce an agreement on the terms of an equity
investment and the Company wrote off the Deferred Financing Costs in 1995.
11 INCOME TAXES
The Company believes that it continues to qualify as a real estate
investment trust under the Internal Revenue Code of 1986, as amended. The
Company has distributed all of its taxable income for 1995, 1994 and 1993.
Accordingly, no provision for income taxes has been made in the accompanying
consolidated financial statements. For federal income tax purposes, the amounts
distributed as dividends were ordinary income, except for $1.06 per share, $.17
per share and $.06 per share in 1995, 1994 and 1993, respectively, which relate
to capital gains. No portion of the dividend in any of the years presented
relates to a return of capital.
12 NONCASH INVESTING AND FINANCING ACTIVITIES
The restructuring of certain joint ventures, as more fully described in
Note 3, resulted in the following noncash investing and financing activities:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- -----------
<S> <C> <C> <C>
Conversion of loans to joint ventures and
accrued interest to Property and
tenancies-in-common........................ $4,999,071 $ 4,109,037 $ 265,694
Conversion of investments in joint ventures
to Property................................ -- -- 14,424,483
Conversion of losses of joint ventures in
excess of investment to Property........... -- (2,095,608) --
Recording of third party mortgage notes...... -- 9,310,914 46,864,843
---------- ----------- -----------
Total converted assets............. $4,999,071 $11,324,343 $61,555,020
========== =========== ===========
</TABLE>
13 PROFESSIONAL FEES
Certain professional fees are costs incurred by the Company related to its
consideration of various strategic alternatives aimed at maximizing shareholder
value and subsequent solicitation of proposals to acquire the Company. Included
in professional fees for the year ended December 31, 1995 is approximately
$352,000 of investment advisory fees earned by Morgan Stanley and Co.
Incorporated (Morgan Stanley) and legal fees of $324,000 associated with this
process.
14 SUBSEQUENT EVENTS
Merger Agreement
In February 1996, the Company entered into an Agreement and Plan of Merger
under which the Company will be merged into EastGroup Properties (EastGroup). In
the merger, each share of the
<PAGE> 20
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's common stock will be converted into EastGroup shares of beneficial
interest with a value of $15.60, subject to the limitations described below.
The value of EastGroup shares for purposes of calculating the ratio at
which the Company's shares will be converted into EastGroup shares in the merger
will be the average of the closing price of EastGroup shares on the New York
Stock Exchange on the 20 trading days immediately preceding the fifth trading
day prior to the effective date of the merger (the "EastGroup Stock Price");
however, the EastGroup Stock Price will be deemed to equal $20.25 if the average
price of EastGroup shares calculated above is less than or equal to $20.25, and
$23.00 if the average price of EastGroup shares is greater than or equal to
$23.00. The Company has the right, waivable by it, to terminate the merger
agreement without liability if the average closing price of EastGroup shares on
the New York Stock Exchange on the 20 trading days immediately preceding the
fifth trading day prior to (i) the date on which the Securities and Exchange
Commission declares EastGroup's Registration Statement with respect to the
merger effective or (ii) the date on which the Company's stockholders' meeting
with respect to the merger is held, is equal to or less than $18.25.
The merger is subject to several conditions including approval by the
shareholders of both the Company and EastGroup and registration of the shares to
be issued in the merger with the Securities and Exchange Commission. Upon the
consummation of the merger, the Company has committed to pay Morgan Stanley a
transaction fee equal to $1.5 million, against which approximately $350,000 of
other fees and expenses previously paid to Morgan Stanley will be credited.
Upon the event of merger, the Advisor agrees to the termination of the
Advisory Agreement and relinquishment of its right to, and interest in, the
Class A share in consideration of payment by the Company of 95% of the amount of
the unpaid incentive advisory fees.
February Exchange of Interests
Effective February 1, 1996, the Company exchanged its co-tenant interest in
the 270 Technology Park property to obtain 100% ownership of the Columbia Place
property. In addition, the Company received $50,000 in cash and a secured
promissory note of $180,000 bearing interest at 9.56% and maturing on February
1, 2000, with annual interest and principal payments of $56,250. The note is
secured by a second deed of trust on the 270 Technology Park property.
Effective February 2, 1996, the Company exchanged its co-tenant interests
in the Carson Industrial Center, Central Distribution Center, West Side Business
Park and the three El Presidio buildings (comprising a portion of the Dominguez
Properties) to obtain 100% ownership of the Metro Business Park tenancy-in-
common and the remaining building in the Dominguez Properties tenancy-in-common.
As part of the exchange, the Company paid $138,000 in cash and forgave its note
receivable from its co-tenant in the Carson Industrial Center property of
approximately $177,000.
<PAGE> 21
COPLEY PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
(UNAUDITED)
<S> <C>
ASSETS
Real estate investments (Notes 3 and 4):
Property, net................................................. $ 95,020,392
Investment in tenancies-in-common............................. --
Notes receivable.............................................. 880,000
------------
Total real estate investments............................ 95,900,392
Cash and cash equivalents....................................... 5,236,859
Other assets.................................................... 157,333
------------
Total assets............................................. $ 101,294,584
------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable and other liabilities........................ $ 341,750
Accrued management advisory fees (Note 8)..................... 2,684,241
Mortgage notes payable (Note 6)............................... 59,868,190
------------
Total liabilities........................................ 62,894,181
------------
SHAREHOLDERS' EQUITY
Common stock, $1.00 par value; authorized 20,000,000 shares;
issued 4,007,500 shares.................................... 4,007,500
Additional paid-in capital.................................... 69,625,444
Treasury stock; 423,150 shares of common stock, at cost....... (4,895,726)
Cumulative deficit............................................ (30,336,816)
Class A common stock (Note 8)................................. 1
------------
Total shareholders' equity............................... 38,400,403
------------
Total liabilities and shareholders' equity............... $ 101,294,584
------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 22
COPLEY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND CUMULATIVE DEFICIT (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
1996 1995
------------ ------------
<S> <C> <C>
INVESTMENT ACTIVITY (Notes 3 and 5):
Property operations, net..................... $ 644,717 $ 393,782
Share of real estate investment earnings..... 39,215 136,650
------------ ------------
Total real estate operations............ 683,932 530,432
Gain on exchange of ownership interests...... 30,397
------------ ------------
Total real estate activity.............. 714,329 530,432
Interest on short-term investments and cash
equivalents............................... 50,079 1,992
------------ ------------
Total investment activity............... 764,408 532,424
------------ ------------
PORTFOLIO EXPENSES:
Management advisory fee...................... (115,253) (149,237)
General and administrative................... (66,866) (65,112)
Professional fees (Note 10).................. (280,079) (33,671)
Interest expense............................. -- (94,778)
Write-off of deferred financing costs (Note
9)........................................ -- (501,227)
------------ ------------
(462,198) (844,025)
------------ ------------
NET INCOME (LOSS).............................. 302,210 (311,601)
Common stock dividends......................... (967,753) (896,070)
CUMULATIVE DEFICIT:
Beginning of period.......................... (29,671,273) (28,261,241)
------------ ------------
End of year.................................. $(30,336,816) $(29,468,912)
------------ ------------
PER SHARE DATA:
Net Income (Loss)............................ $ .08 $ (.09)
------------ ------------
Dividends.................................... $ .27 $ .25
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 23
COPLEY PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 302,210 $ (311,601)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Joint venture and tenancy-in-common operations........... (37,741) (132,228)
Cash distributions from joint ventures and
tenancies-in-common.................................... 301,628 96,812
Property depreciation and amortization................... 879,614 1,008,170
Gain on exchange of ownership interests.................. (30,397) --
Write-off of deferred financing costs.................... -- 501,227
Increase in investment income receivable................. -- (12,924)
Increase in deferred leasing commissions................. (284,656) (275,195)
(Increase) decrease in property working capital.......... (82,402) 209,538
(Decrease) increase in accounts payable and accrued
management advisory fees............................... (91,971) 42,196
Other, net............................................... 4,422 (10,125)
----------- -----------
Net cash provided by operating activities.............. 960,707 1,115,870
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITES:
Net cash payments in connection with the exchange of
ownership interests...................................... (87,878) --
Investment in Property...................................... (265,668) (830,829)
Deposit received on sale of property........................ -- 250,000
Decrease in notes receivable, net........................... 14,652 28,003
----------- -----------
Net cash used in investing activities.................. (338,894) (552,826)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in line of credit borrowings, net.................. -- 250,000
Proceeds from third-party mortgage note..................... -- 3,250,000
Principal payments on mortgage notes........................ (133,501) (3,534,464)
Dividends paid.............................................. (967,753) --
Financing costs............................................. -- (130,184)
----------- -----------
Net cash used in financing activities.................. (1,101,254) (164,648)
----------- -----------
Net increase (decrease) in cash and cash equivalents........ (479,441) 398,396
CASH AND CASH EQUIVALENTS:
Beginning of period......................................... 5,716,300 1,491,554
----------- -----------
End of period............................................... $ 5,236,859 $ 1,889,950
----------- -----------
SUPPLEMENTARY DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 1,335,484 $ 1,042,954
----------- -----------
</TABLE>
As more fully described in Note 3, the Company consummated two exchange
transactions in February 1996, resulting in the conversion of the
tenancies-in-common balance of $2,040,359 and related notes receivable balance
of $176,890 to property of $22,705,585 and mortgage notes payable of $20,668,341
and notes receivable of $180,000.
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE> 24
COPLEY PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 GENERAL
These financial statements have been prepared by Copley Properties, Inc.
(the "Company") without audit and reflect all normal and required adjustments
which are, in the opinion of management, necessary to fairly present the interim
results. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's audited financial statements for the year ended December 31, 1995.
2 ORGANIZATION AND BUSINESS
Copley Properties, Inc., a Delaware corporation, was incorporated in May
1985 and operates as a qualified real estate investment trust under applicable
provisions of the Internal Revenue Code of 1986, as amended. The Company
acquires, develops, operates and owns industrial real estate. The Company
currently owns and operates, either directly or through joint ventures, 11
properties totaling over 2.0 million square feet of net rentable area. Copley
Real Estate Advisors, Inc. (the Advisor) provides investment management and
administrative services to the Company. The Advisor is an indirect wholly owned
subsidiary of New England Investment Companies, L.P. (NEIC), a publicly traded
limited partnership. New England Mutual Life Insurance Company is the principal
unitholder of NEIC.
As described in Note 8, in February 1996, the Company entered into an
Agreement and Plan of Merger, under which the Company will be merged into
EastGroup Properties.
3 REAL ESTATE INVESTMENTS
The Company's real estate investments are either owned in their entirety or
through joint ventures in which the Company has a controlling interest. Several
properties were previously owned as tenancies-in-common. Wholly owned property
operations are under the oversight of local management companies. For jointly
owned property, the Company's venture partners are responsible for day-to-day
operating activities under separate property management agreements, and they are
entitled to fees for such services.
Effective February 1, 1996, the Company exchange its co-tenant interest in
the 270 Technology Park property to obtain 100% ownership of the Columbia Place
property. In addition, the Company received $50,000 in cash and a secured
promissory note of $180,000 bearing interest at 9.56% per annum and maturing on
February 1, 2000, with annual interest and principal payments of $56,250. The
note is secured by a second deed of trust on the 270 Technology Park property.
The Company recognized a gain of $30,397 as a result of this transaction.
<PAGE> 25
Effective February 2, 1996, the Company exchanged its co-tenant
interests in Carson Industrial Center, Central Distribution Center, West Side
Business Park and the three El Presidio buildings (comprising a portion of the
Dominguez Properties) to obtain 100% ownership of the Metro Business Park
property and the remaining building in Dominguez Properties. As part of the
exchange, the Company paid $138,000 in cash and forgave its note receivable of
approximately $177,000 from its co-tenant in Carson Industrial Center. No gain
or loss was recognized as a result of this transaction.
4 REAL ESTATE ASSETS AND LIABILITIES
The following is a summary of the assets and liabilities underlying the
Company's real estate investments. As of February 1996, the Company
relinquished its rights in some of the tenancies-in-common and obtained 100%
ownership of the others (See Note 3).
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
PROPERTY
Land $ 27,293,776 $ 21,655,181
Buildings and improvements 68,144,398 52,400,189
Accumulated depreciation (6,515,817) (5,752,574)
Deferred leasing costs and other assets, net 2,117,864 1,162,722
Minority interest 1,516,589 1,509,970
------------- -------------
Total real estate assets 92,556,810 70,975,488
Accounts receivable 3,387,262 2,048,357
Accounts payable and other liabilities (923,680) (627,080)
------------- -------------
$ 95,020,392 $ 72,396,765
------------- -------------
Mortgage notes payable to third-parties $ 59,868,190 $ 39,333,349
------------- -------------
INVESTMENTS IN TENANCIES-IN-COMMON
Land $ - $ 8,246,048
Buildings and improvements - 33,965,653
Accumulated depreciation - (11,791,003)
Cash - 511,717
Other, net - 2,921,034
------------- -------------
Total assets - 33,853,449
------------- -------------
Mortgage notes payable to third-parties - 31,601,919
Other - 632,950
------------- -------------
Total liabilities - 32,234,869
------------- -------------
Net assets $ - $ 1,618,580
------------- -------------
Company's share:
Loans to joint ventures $ - $ -
Capital - 2,310,781
------------- -------------
$ - $ 2,310,781
------------- -------------
</TABLE>
- 7 -
<PAGE> 26
5 RESULTS OF REAL ESTATE INVESTMENTS
OPERATIONS
The following is a summary of the operating results of the properties
underlying the Company's real estate investments:
<TABLE>
<CAPTION>
Quarter ended March 31,
-----------------------
1996 1995
------------ ------------
<S> <C> <C>
PROPERTY
Rentals $ 3,485,171 $ 3,375,393
Operating expenses (668,218) (805,007)
Interest expense (1,259,241) (1,142,838)
Depreciation and amortization (879,614) (1,008,170)
Minority interest (33,381) (25,596)
------------ ------------
$ 644,717 $ 393,782
------------ ------------
INVESTMENTS IN TENANCIES-IN-COMMON (a)
Rentals $ 513,721 $ 1,572,188
Operating expenses (86,318) (257,485)
Interest expense (230,522) (703,674)
Depreciation and amortization (143,744) (458,187)
------------ ------------
$ 53,137 $ 152,842
------------ ------------
Company's share:
Interest on loans to joint ventures $ 1,474 $ 4,422
Equity in net income 37,741 132,228
------------ ------------
$ 39,215 $ 136,650
------------ ------------
<FN>
(a) The 1996 results for properties owned as Tenancies-in-Common include only
the month of January (See Note 3), after which all of the Company's
remaining properties are owned in their entirety or through joint ventures
in which the Company has a controlling interest.
</TABLE>
- 8 -
<PAGE> 27
6 MORTGAGE NOTES PAYABLE
Mortgage notes payable on Properties are summarized below. They are
collateralized by real estate and, in certain cases, the assignment of rents.
The mortgage notes are generally non-recourse to the other assets of the
Company.
<TABLE>
<CAPTION>
March 31,
1996
---------
<S> <C>
UNIVERSITY BUSINESS CENTER
CIGNA; interest at 9.06%, payable monthly; principal
payments based on a 20-year amortization schedule;
remainder due April 1, 2000 $ 9,307,945
CIGNA; interest at 9.37%, payable monthly; principal due
January 1, 1997 10,000,000
HUNTWOOD ASSOCIATES
Wells Fargo Bank; interest is a fixed rate option with
interest based on LIBOR plus 3.25% and a variable rate
option with interest based on the prime rate plus 1% (the
effective interest rate was 9.5% at December 31, 1995);
principal due January 15, 1997 2,278,668
Massachusetts Mutual Life Insurance Company; interest at
9.875%, payable monthly; principal due June 1, 1996 10,000,000
WIEGMAN ASSOCIATES
Massachusetts Mutual Life Insurance Company; interest at
9.875%, payable monthly; principal due June 1, 1996 6,700,000
Allstate Insurance Company; interest at 8.75% payable
monthly; principal due October 1, 1997 979,837
COLUMBIA PLACE
American General Investment Corp.; interest at 8.875%
payable monthly; principal due December 31, 2009 (a) 10,211,212
DOMINGUEZ PROPERTIES
Allstate Life Insurance Co.; interest at 9.00%, payable
monthly; principal due January 1, 1997 (a) 5,197,107
</TABLE>
- 9 -
<PAGE> 28
<TABLE>
<CAPTION>
METRO BUSINESS PARK
<S> <C>
State Farm Life Insurance Co.; interest at 9.25%, payable
monthly; principal due March 1, 1997 (a) 3,424,173
Allstate Life Insurance Co.; interest at 8.00%, payable
monthly; principal due April 1, 1998 (a) 1,769,248
-----------
$59,868,190
-----------
<FN>
(a) Balances for these mortgage notes payable were not separately
presented as of December 31, 1995 as these real estate
investments were owned as tenancies-in-common (See Note 3).
</TABLE>
7 LINE-OF-CREDIT
The Company has an unsecured line-of-credit agreement with a bank which
expires on July 31, 1996. Under its terms, the Company could borrow up to
$5,000,000 at the prime rate of interest or LIBOR plus 1.5%. There was no
outstanding balance on the line-of-credit as of December 31, 1995 or March 31,
1996.
8 MERGER AGREEMENT
In February 1996, the Company entered into an Agreement and Plan of
Merger under which the Company will be merged into EastGroup Properties
(EastGroup). In the merger, each share of the Company's common stock will be
converted into EastGroup shares of beneficial interest with a value of $15.60,
subject to the limitations described below.
The value of EastGroup shares for purposes of calculating the ratio at
which the Company's shares will be converted into EastGroup shares in the
merger will be the average of the closing price of EastGroup shares on the New
York Stock Exchange on the 20 trading days immediately preceding the fifth
trading day prior to the effective date of the merger (the "EastGroup Stock
Price"); however, the EastGroup Stock Price will be deemed to equal $20.25 if
the average price of EastGroup shares calculated above is less than or equal to
$20.25, and $23.00 if the average price of EastGroup shares is greater than or
equal to $23.00. The Company has the right, waivable by it, to terminate the
merger agreement without liability if the average closing price of EastGroup
shares on the New York Stock Exchange on the 20 trading days immediately
preceding the fifth trading day prior to (i) the date on which the Securities
and Exchange Commission declares EastGroup's Registration Statement with
respect to the merger effective or (ii) the date on which the Company's
stockholders' meeting with respect to the merger is held, is equal to or less
than $18.25.
The merger is subject to several conditions including approval by the
shareholders of both the Company and EastGroup and registration of the shares
to be issued in the merger with the Securities and Exchange Commission. Upon
the consummation of the merger, the Company has committed to pay Morgan Stanley
a transaction fee equal to $1.5 million, against which approximately $350,000
of others fees and expenses previously paid to Morgan Stanley will be credited.
The Advisor has agreed, upon the effectiveness of the merger, to the
termination of the Advisory Agreement and relinquishment of its right to, and
interest in, the Class A common share in consideration of payment by the
Company of 95% of the unpaid incentive advisory fees.
- 10 -
<PAGE> 29
9 DEFERRED FINANCING COSTS
In 1994, the Company commenced the marketing of additional equity on a
private placement basis and incurred $501,227 in Deferred Financing Costs in
connection with pursuing the private placement and arranging for an increased
line of credit, which was contingent on additional equity. Discussions with
potential investors did not produce an agreement on the terms of an equity
investment and the Company wrote off the Deferred Financing Costs in the first
quarter of 1995.
10 PROFESSIONAL FEES
Certain professional fees are costs incurred by the Company related to
its consideration of various strategic alternatives aimed at maximizing
shareholder value and subsequent solicitation of proposals to acquire the
Company. Professional fees primarily consist of legal fees of approximately
$227,500 related to this process and accounting fees of $52,500.
- 11 -
<PAGE> 30
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 merger with LNH REIT, Inc. and with Copley
Properties, Inc. as if the mergers 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, LNH REIT
and Copley. 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 and LNH REIT incorporated by reference herein
and Copley enclosed herein.
<TABLE>
<CAPTION>
EASTGROUP LNH
DECEMBER 31, DECEMBER 31, MERGER PRO FORMA
1995 1995 PRO FORMA CONSOLIDATED
(HISTORICAL) (HISTORICAL) ADJUSTMENTS BEFORE COPLEY
------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Real estate properties (net
of accumulated
depreciation)..................... $136,398 $ 10,611 $ (3,728)(1) $ 143,281
Investments in tenancies-
in-common......................... -- -- -- --
Investment in joint venture......... -- 6,011 (2,150)(1) 3,861
Mortgage loans (net of
allowance for losses)............. 6,008 6,860 -- 12,868
Land and land purchase-
leasebacks........................ 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
Short term investments.............. -- -- -- --
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)
Undistributed earnings
(deficit)......................... 9,657 (2,996) 2,996(1) 9,657
Unrealized gain (loss) on
securities........................ 667 506 (506)(1) 617
(50)(1)
Treasury stock...................... -- -- -- --
------------ ------------ ----------- -----------
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
======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
COPLEY
DECEMBER 31, MERGER
1995 COPLEY PRO FORMA PRO FORMA
(HISTORICAL) EXCHANGES ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
ASSETS
Real estate properties (net
of accumulated
depreciation)..................... $ 72,397 $ 22,918 (4) $ 14,791(3) $253,387
Investments in tenancies-
in-common......................... 2,311 (2,311)(4) -- --
Investment in joint venture......... -- -- -- 3,861
Mortgage loans (net of
allowance for losses)............. 896 -- -- 13,764
Land and land purchase-
leasebacks........................ -- -- -- 1,327
Investment securities............... -- -- (6,811)(3) 675
Equity method investments........... -- -- -- --
Cash and cash equivalents........... 1,116 (88)(4) -- 2,070
Short term investments.............. 4,600 -- (2,445)(5) 2,155
Other assets........................ 197 180 (4) -- 4,239
-------- ------- -------- --------
$ 81,517 $ 20,699 $ 5,535 $281,478
======== ======= ======== ========
LIABILITIES
Mortgage notes payable.............. $ 39,333 $ 20,699 (4) $ -- $127,235
Notes payable to banks.............. -- -- -- 4,359
Accounts payable, accrued
expenses and other
liabilities....................... 3,118 -- (2,574)(5) 3,829
Minority interest................... -- -- -- 2,385
-------- ------- -------- --------
42,451 20,699 (2,574) 137,808
-------- ------- -------- --------
SHAREHOLDERS' EQUITY
Shares of beneficial
interest.......................... 4,008 -- (4,008)(3) 7,009
2,159 (3)
Additional paid-in-capital.......... 69,625 -- (69,625)(3) 126,875
45,504 (3)
Undistributed earnings
(deficit)......................... (29,671) -- 29,671 (3) 9,786
Unrealized gain (loss) on 129 (5)
securities........................ -- -- (617)(3) --
Treasury stock...................... (4,896) -- 4,896 (3) --
-------- ------- -------- --------
39,066 -- 8,109 143,670
-------- ------- -------- --------
$ 81,517 $ 20,699 $ 5,535 $281,478
======== ======= ======== ========
Book value per share................ $ 10.90 $ 20.50
======== ========
Shares outstanding
(In thousands)..................... 3,584 7,009
======== ========
</TABLE>
<PAGE> 31
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.
<TABLE>
<S> <C>
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
===========
</TABLE>
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.
<TABLE>
<S> <C>
Cost.......................................................... $17,571,000
Book value.................................................... 23,449,000
------------
Difference.................................................... $(5,878,000)
============
</TABLE>
Difference is allocated as follows:
<TABLE>
<S> <C>
Real estate................................................... $(3,728,000)
Joint venture................................................. (2,150,000)
-----------
$(5,878,000)
==========
</TABLE>
Fair values used in the allocation are as follows:
<TABLE>
<S> <C>
Real estate, including minority interest...................... $11,096,000
Joint venture................................................. 6,400,000
-----------
$17,496,000
==========
</TABLE>
2. Eliminate LNH's management fee payable to EastGroup against EastGroup's
management fee receivable.
3. EastGroup issues 2,159,154 shares to all Copley stockholders (except for
EastGroup) in exchange for all Copley shares outstanding. The 529,000 Copley
shares owned by EastGroup (representing 14.76% of the total shares outstanding)
are retired. The merger with Copley is accounted for under the purchase method
of accounting.
<PAGE> 32
EASTGROUP PROPERTIES
NOTES TO PRO FORMA CONSOLIDATED BALANCE SHEET -- (CONTINUED)
<TABLE>
<S> <C>
Copley shares outstanding, net of treasury stock................ 3,584,350
Less Copley shares owned by EastGroup........................... (529,000)
-----------
3,055,350
Exchange ratio ($15.60/$22.075)................................. .70668
-----------
New EastGroup shares issued..................................... 2,159,154
Market value per EastGroup share................................ $ 22.075
-----------
$47,663,000
EastGroup's investment in Copley at December 31, 1995........... 6,811,000
Eliminate unrealized gain -- investment in Copley............... (617,000)
-----------
EastGroup's cost of Copley's net assets......................... $53,857,000
===========
</TABLE>
The difference between Copley's book value and EastGroup's cost is
allocated to Copley's noncurrent assets (real estate) based upon relative fair
values.
<TABLE>
<S> <C>
Cost............................................................ $53,857,000
Book value...................................................... 39,066,000
-----------
Difference...................................................... $14,791,000
===========
</TABLE>
4. Copley's exchanges:
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------------------------------------
INVESTMENTS IN
REAL ESTATE TENANCIES-IN- CASH AND CASH OTHER MORTGAGE
PROPERTIES, NET COMMON EQUIVALENTS ASSETS NOTES PAYABLE
--------------- -------------- ------------- ------ -------------
<S> <C> <C> <C> <C> <C>
Columbia Place(A).................... $11,684 (1,650) 50 180 10,264
Metro Business Park & East
Dominguez(A)....................... 11,234 (661) (138) -- 10,435
------- ------- ----- --- ------
Total...................... $22,918 (2,311) (88) 180 20,699
======= ======= ===== === ======
</TABLE>
- ---------------
(A) In February 1996, Copley effected two exchange transactions. In the first
exchange transaction, Copley exchanged its tenancy-in-common interest in 270
Technology Park to obtain 100% ownership of Columbia Place, subject to a
mortgage note payable of $10,264,000. In addition, Copley received $230,000
of monetary consideration. In the second exchange transaction, Copley
exchanged its tenancy-in-common interest in West Side Business Park, Central
Distribution Center, Carson Industrial Center and the three El Presidio
buildings (comprising a portion of the Dominguez Properties) to obtain 100%
ownership of Metro Business Park and the remaining building in the Dominguez
Properties tenancy-in-common, subject to mortgage notes payable of
$10,435,000. In addition, Copley was required to make a $138,000 cash
payment. These transactions were accounted for at the book value of the
assets exchanged.
For purposes of determining pro forma adjustments, it was assumed that the
exchange transaction occurred at December 31, 1995. As a result, all investments
in tenancies-in-common have been eliminated from the pro forma balance sheet and
the real estate properties which are eventually 100% owned by Copley have been
reflected as such, with associated debt separately stated.
5. Upon the Merger, Copley Advisors has agreed (i) to the termination of
the Advisory Agreement in consideration of the payment of 95% of the amount of
the unpaid incentive advisory fees and (ii) to relinquish its rights to and
interest in the Class A Share for one dollar ($1.00). These transactions have
been reflected on the pro forma balance sheet. The impact of the forgiveness of
the five percent of the unpaid incentive management fees is also reflected
therein. Funds for the payment of the accrued advisory fees is assumed to be
provided by the liquidation of short-term investments.
<PAGE> 33
EASTGROUP PROPERTIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
The following unaudited pro forma consolidated statement of operations for
the year ended December 31, 1995 sets forth the effect of EastGroup's merger
with LNH REIT and Copley as if these transactions had been consummated on
January 1, 1995. The pro forma consolidated statement of operations has been
prepared by management of EastGroup based upon historical statements of
operations of EastGroup, LNH REIT and Copley. The pro forma statement 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. The pro forma statement of operations should be
read in conjunction with their notes and the other financial statements and
notes to the financial statements of EastGroup and LNH REIT incorporated by
reference herein and Copley enclosed herein.
<TABLE>
<CAPTION>
EASTGROUP LNH
DECEMBER 31, DECEMBER 31, MERGER PRO FORMA
1995 1995 PRO FORMA CONSOLIDATED
(HISTORICAL) (HISTORICAL) ADJUSTMENTS BEFORE COPLEY
------------ ------------ ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Income from real estate
operations..................... $ 28,386 $1,451 $ -- $29,837
Share of real estate
investment operations.......... -- -- -- --
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
amortization................... 5,613 369 -- 5,982
Minority interest in joint
ventures....................... 220 98 -- 318
Provision for losses............. -- 189 -- 189
General and administrative
expenses....................... 2,180 499 125(6) 2,804
Write-off of deferred
financing costs................ -- -- -- --
-------- ------- -------- --------
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
loans.......................... 3,322 535 (3,857)(1) --
-------- ------- -------- --------
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
======== ======= ========
</TABLE>
<TABLE>
Caption>
COPLEY COPLEY'S
DECEMBER 31, ACQUISITIONS/ MERGER
1995 DISPOSITIONS/ PRO FORMA PRO FORMA
(HISTORICAL) EXCHANGES ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Income from real estate
operations..................... $ 12,679 $ 2,566 (8) $ -- $ 45,082
Share of real estate
investment operations.......... 748 (748)(8) -- --
Land rents....................... -- -- -- 217
Equity in earnings
of real estate
investment trust............... -- -- -- --
Interest:
Mortgage loans................. 39 -- -- 1,964
Other.......................... -- -- -- 52
Other............................ -- -- (254)(9) 109
-------- ------- -------- --------
13,466 1,818 (254) 47,424
-------- ------- -------- --------
EXPENSES
Management fees.................. 452 -- -- 452
Operating expenses from
real estate operations......... 3,030 51 (8) 15,177
Interest expense................. 4,533 1,204 (8) 40(10) 12,131
Depreciation and
amortization................... 3,736 488 (8) 240(11) 10,446
Minority interest in joint
ventures....................... 119 -- -- 437
Provision for losses............. -- -- -- 189
General and administrative
expenses....................... 1,270 -- -- 4,074
Write-off of deferred
financing costs................ 501 -- -- 501
-------- ------- -------- --------
13,641 1,743 280 43,407
-------- ------- -------- --------
Income before gain on
investments.................. (175) 75 (534) 4,017
-------- ------- -------- --------
GAIN ON
INVESTMENTS
Real estate and mortgage
loans.......................... 2,564 (2,564)(8) -- --
-------- ------- -------- --------
NET INCOME......................... $ 2,389 $ (2,489) $ (534) $ 4,017
======== ======= ======== ========
Net income per share............... $ 0.67 $ .57
======== ========
WEIGHTED AVERAGE
SHARES
OUTSTANDING(7)................... 3,584 7,003
======== ========
</TABLE>
2
<PAGE> 34
EASTGROUP PROPERTIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) EastGroup and LNH dispositions have been accounted for as follows:
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 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:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
-----------------
(IN THOUSANDS)
<S> <C>
Historical weighted average EastGroup Shares
outstanding........................................... 4,226
EastGroup Shares issued in merger with LNH REIT......... 618
-----
Pro forma weighted average EastGroup Shares outstanding
before Copley......................................... 4,844
EastGroup Shares issued in merger with Copley........... 2,159
-----
Pro Forma weighted average EastGroup Shares
outstanding........................................... 7,003
=====
</TABLE>
3
<PAGE> 35
EASTGROUP PROPERTIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(8) Copley's acquisitions/dispositions/exchanges:
<TABLE>
<CAPTION>
SALE, PURCHASE INCOME SHARE OF
OR EXCHANGE FROM REAL R.E. R.E.
--------------------------- ESTATE OPERATING DEPRECIATION INTEREST INVESTMENT GAIN (LOSS) ON
PROPERTY DESCRIPTION DATE OPERATIONS EXPENSE EXPENSE EXPENSE OPERATIONS INVESTMENTS TOTAL
- ----------- ----------- --------- --------- --------- ------------ ------- ---------- -------------- -------
AMOUNTS (000'S)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Peachtree
Corners
Dist
Center.... Sale Nov. 1995 $(1,134) $ 312 $ 396 $ 198 $ -- $ (1,806) $(2,034)
University
Business
Center.... (A) (64) -- -- 57 -- -- (7)
Park North
Business
Center.... Sale June 1995 (806) 229 411 251 -- (758) (673)
Kingsview
Industrial
Center.... Purchase July 1995 231 -- (45) -- -- -- 186
Columbia
Place..... Exchange(B) Feb. 1996 1,838 (32) (237) (921 ) (599) -- 49
Metro
Business
Park...... Exchange(B) Feb. 1996 1,391 (366) (658) (500 ) 47 -- (86)
Dominiguez
Properties... Exchange(B) Feb. 1996 1,110 (194) (355) (474 ) (155) -- (68)
270
Technology
Park...... Exchange(B) Feb. 1996 -- -- -- -- (111) -- (111)
West Side
Business
Park...... Exchange(B) Feb. 1996 -- -- -- -- 106 -- 106
Central
Distribution
Center.... Exchange(B) Feb. 1996 -- -- -- -- (3) -- (3)
Carson
Industrial
Center.... Exchange(B) Feb. 1996 -- -- -- -- (33) -- (33)
Line of
Credit.... (A) -- -- -- -- 185 -- -- 185
------- ----- ----- ----- ----- ------- -------
Total... $ 2,566 $ (51) $ (488) $(1,204) $ (748) $ (2,564) $(2,489)
======= ===== ===== ===== ===== ======= =======
</TABLE>
- ---------------
(A) For purposes of determining pro forma adjustments, it was assumed that the
principal due under certain debt agreements was repaid with available cash
and net proceeds available from dispositions which were assumed to occur on
January 1, 1995. Principal on notes payable at University Business Center
was assumed to be repaid on January 1, 1995. As the $3.5 million pay down on
the University Business Center note actually occurred in February 1995, the
pro forma adjustment reduces the interest expense by the interest accrued
for that portion of the note ($57,000 in 1995). As discussed above, on a pro
forma basis, Copley had sufficient cash available throughout the pro forma
period to mitigate any need to draw on the line of credit. In addition, the
line of credit balance was substantially repaid from the proceeds received
as a result of the sale of the Park North Business Center. Therefore, the
pro forma adjustments eliminate the effect of interest charges incurred
related to amounts drawn under the line of credit during the pro forma
period.
(B) As discussed in footnote 4(A) to the pro forma balance sheet, in February
1996 Copley effected two exchange transactions swapping tenancy-in-common
interests to gain 100% ownership of certain wholly owned properties. For
purposes of the pro forma statement of operations, share of real estate
investment operations for all investments involved in the exchange has been
eliminated and the separate components of income from operations for the
100% owned real estate properties have been reflected for the pro forma
periods.
(9) Eliminate dividend income from Copley's shares.
(10) Increase interest expense for borrowings to purchase Copley shares.
The borrowings to purchase these shares were $1,992,000 for six months and
$4,201,000 for three months of 1995 at an average rate 8.42%.
(11) Depreciation on step up in basis from allocation of the purchase price
over an estimated life of forty years.
4
<PAGE> 36
EASTGROUP PROPERTIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
The following unaudited pro forma consolidated statement of operations for
the three months ended March 31, 1996 sets forth the effect of EastGroup's
merger with LNH REIT and Copley as if these transactions had been consummated
on January 1, 1995. The pro forma consolidated statement of operations has been
prepared by management of EastGroup based upon historical statements of
operations of EastGroup, LNH REIT and Copley. The pro forma statement 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. The pro forma statement of operations should be
read in conjunction with their notes and the other financial statements and
notes to the financial statements of EastGroup and LNH REIT incorporated by
reference herein and Copley enclosed herein.
<TABLE>
<CAPTION>
EASTGROUP LNH
MARCH 31, MARCH 31, MERGER PRO FORMA
1996 1996 PRO FORMA CONSOLIDATED
(HISTORICAL) (HISTORICAL) ADJUSTMENTS BEFORE COPLEY
------------ ------------ ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Income from real estate
operations............... $ 6,853 $ 364 $ -- $ 7,217
Share of real estate
investment operations.... -- -- -- --
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
amortization............. 1,424 95 -- 1,519
Minority interest in joint
ventures................. 32 22 -- 54
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
loans.................... 1,353 78 (1,431)(1) --
-------- ------- -------- --------
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
======== ======= ========
<CAPTION>
COPLEY COPLEY'S
MARCH 31, ACQUISITIONS/ MERGER
1996 DISPOSITIONS/ PRO FORMA PRO FORMA
(HISTORICAL) EXCHANGES ADJUSTMENTS CONSOLIDATED
------------ ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES
Income from real Estate
operations............... $ 3,485 $ 514 (7) $ -- $ 11,216
Share of real estate
investment operations.... 39 (39)(7) -- --
Land rents................. -- -- -- 52
Equity in earnings
of real estate
investment trust......... -- -- -- --
Interest:
Mortgage loans........... 50 -- -- 466
Other.................... -- -- -- 11
Other...................... -- -- (143)(8) 175
-------- ------- -------- --------
3,574 475 (143) 11,920
-------- ------- -------- --------
EXPENSES
Management fees............ 115 -- -- 115
Operating expenses from
real estate operations... 668 86 (7) 3,631
Interest expense........... 1,259 231 (7) -- 3,017
Depreciation and
amortization............. 880 144 (7) 60 (9) 2,603
Minority interest in joint
ventures................. 33 -- -- 87
General and administrative
expenses................. 347 -- -- 952
-------- ------- -------- --------
3,302 461 60 10,405
-------- ------- -------- --------
Income before gain on
investments............ 272 14 (203) 1,515
-------- ------- -------- --------
GAIN ON
INVESTMENTS
Real estate and mortgage
loans.................... 30 (30)(7) -- --
-------- ------- -------- --------
NET INCOME.................. $ 302 $ (16) $ (203) $ 1,515
======== ======= ======== ========
Net income per share........ $ .08 $ .22
======== ========
WEIGHTED AVERAGE
SHARES
OUTSTANDING(6)............. 3,584 7,012
======== ========
</TABLE>
<PAGE> 37
EASTGROUP PROPERTIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(1) EastGroup and LNH dispositions have been accounted for as follows:
The operating revenues and expenses associated with EastGroup's
acquisitions and dispositions in 1996 are immaterial. Gain on dispositions
of $1,353,000 in 1996 has been removed in determining pro forma net income.
The operating revenues and expenses associated with the LNH
acquisitions and dispositions in 1995 are immaterial. Gain on dispositions
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1996
------------------
(IN THOUSANDS)
<S> <C>
Historical weighted average EastGroup Shares
outstanding........................................... 4,235
EastGroup Shares issued in merger with LNH REIT......... 618
-----
Pro forma weighted average EastGroup Shares outstanding
before Copley......................................... 4,853
EastGroup Shares issued in merger with Copley........... 2,159
-----
Pro Forma weighted average EastGroup Shares
outstanding........................................... 7,012
=====
</TABLE>
<PAGE> 38
EASTGROUP PROPERTIES
NOTES TO PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(7) Copley's acquisitions/dispositions/exchanges:
<TABLE>
<CAPTION>
SALE, PURCHASE INCOME
OR EXCHANGE FROM REAL R.E.
--------------------------- ESTATE OPERATING DEPRECIATION INTEREST
PROPERTY DESCRIPTION DATE OPERATIONS EXPENSE EXPENSE EXPENSE
- ----------- ----------- --------- --------- --------- ------------ --------
AMOUNTS (000'S)
<S> <C> <C> <C> <C> <C> <C>
Columbia Place................. Exchange(A) Feb. 1996 153 (9) (23) (76)
Metro Business Park............ Exchange(A) Feb. 1996 98 (21) (40) (40)
Dominiguez Properties.......... Exchange(A) Feb. 1996 168 (23) (56) (75)
270 Technology Park............ Exchange(A) Feb. 1996 -- -- -- --
West Side Business Park........ Exchange(A) Feb. 1996 7 (6) (7) (7)
Central Distribution Center.... Exchange(A) Feb. 1996 44 (13) (9) (17)
Carson Industrial Center....... Exchange(A) Feb. 1996 44 (14) (9) (16)
------- ----- ------ ------
Total....................... $ 514 $ (86) $ (144) $ (231)
======= ===== ====== ======
<CAPTION>
SHARE OF
R.E.
INVESTMENT GAIN (LOSS) ON
PROPERTY OPERATIONS INVESTMENTS TOTAL
- ----------- ---------- -------------- -------
AMOUNTS (000'S)
<S> <C> <C> <C>
Columbia Place................. (35) (30) (20)
Metro Business Park............ 2 -- (1)
Dominiguez Properties.......... (9) -- 5
270 Technology Park............ 1 -- 1
West Side Business Park........ 8 -- (5)
Central Distribution Center.... (3) -- 2
Carson Industrial Center....... (3) -- 2
------ ------- -------
Total....................... $ (39) $ (30) $ (16)
====== ======= =======
</TABLE>
- ---------------
(A) In February 1996 Copley effected two exchange transactions swapping
tenancy-in-common interests to gain 100% ownership of certain wholly owned
properties. For purposes of the pro forma statement of operations, share of
real estate investment operations for all investments involved in the
exchange has been eliminated and the separate components of income from
operations for the 100% owned real estate properties have been reflected for
the pro forma periods.
(8) Eliminate dividend income from Copley's shares.
(9) Depreciation on step up in basis from allocation of the purchase price
over an estimated life of forty years.
<PAGE> 1
ARTHUR ANDERSEN LLP
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
to the Board of Directors of Copley Properties, Inc. dated March 15, 1996,
included in or made a part of the Form 8-K filed in conjunction with the
EastGroup Properties and Copley Properties, Inc. merger effected on June 19,
1996.
Arthur Andersen LLP
Boston, Massachusetts
July 2, 1996
