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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2003 COMMISSION FILE NUMBER 1-7094
EASTGROUP PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 13-2711135
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 ONE JACKSON PLACE
188 EAST CAPITOL STREET
JACKSON, MISSISSIPPI 39201-2195
(Address of principal executive offices) (Zip code)
Registrant's telephone number: (601) 354-3555
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES (x) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). YES (x) NO ( )
The number of shares of common stock, $.0001 par value, outstanding as of May 9,
2003 was 16,412,589.
EASTGROUP PROPERTIES, INC.
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 31, 2003
PART I. FINANCIAL INFORMATION Pages
Item 1. Consolidated Financial Statements
Consolidated balance sheets, March 31, 2003 (unaudited)
and December 31, 2002 3
Consolidated statements of income for the three months
ended March 31, 2003 and 2002 (unaudited) 4
Consolidated statements of changes in stockholders' equity
for the three months ended March 31, 2003 (unaudited) 5
Consolidated statements of cash flows for the three months
ended March 31, 2003 and 2002 (unaudited) 6
Notes to consolidated financial statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 Certification of David H. Hoster II, Chief Executive
Officer, pursuant to 18 U.S.C. Section 1350.
Exhibit 99.2 Certification of N. Keith McKey, Chief Financial Officer,
pursuant to 18 U.S.C. Section 1350.
(b) Form 8-K filed March 20, 2003 - Reg FD disclosure - Certifications
under Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Authorized signatures 19
CERTIFICATIONS 20
EASTGROUP PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
March 31, 2003 December 31, 2002
-----------------------------------------------
(Unaudited)
ASSETS
Real estate properties $ 761,406 750,578
Development 36,142 39,718
-----------------------------------------------
797,548 790,296
Less accumulated depreciation (125,771) (118,977)
-----------------------------------------------
671,777 671,319
-----------------------------------------------
Real estate held for sale 1,375 1,375
Investment in real estate investment trusts 122 1,663
Cash 1,870 1,383
Other assets 26,371 26,601
-----------------------------------------------
TOTAL ASSETS $ 701,515 702,341
===============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Mortgage notes payable $ 246,770 248,343
Notes payable to banks 81,214 73,957
Accounts payable & accrued expenses 12,883 15,571
Other liabilities 5,995 6,226
-----------------------------------------------
346,862 344,097
-----------------------------------------------
-----------------------------------------------
Minority interest in joint ventures 1,765 1,759
-----------------------------------------------
STOCKHOLDERS' EQUITY
Series A 9.00% Cumulative Redeemable Preferred Shares and additional paid-in
capital; $.0001 par value; 1,725,000 shares authorized and issued; stated
liquidation preference of $43,125 41,357 41,357
Series B 8.75% Cumulative Convertible Preferred Shares and additional paid-in
capital; $.0001 par value; 2,800,000 shares authorized and issued; stated
liquidation preference of $70,000 67,178 67,178
Series C Preferred Shares; $.0001 par value; 600,000
shares authorized; no shares issued - -
Common shares; $.0001 par value; 64,875,000 shares authorized; 16,184,809
shares issued and outstanding at March 31, 2003 and 16,104,356 at
December 31, 2002 2 2
Excess shares; $.0001 par value; 30,000,000 shares
authorized; no shares issued - -
Additional paid-in capital on common shares 244,900 243,562
Undistributed earnings 2,203 7,109
Accumulated other comprehensive income (loss) (75) 58
Unearned compensation (2,677) (2,781)
-----------------------------------------------
352,888 356,485
-----------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 701,515 702,341
===============================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
March 31,
----------------------------------------
2003 2002
----------------------------------------
REVENUES
Income from real estate operations $ 26,487 24,872
Interest 5 136
Gain on securities 282 421
Other 69 144
------------------------------------------
26,843 25,573
------------------------------------------
EXPENSES
Operating expenses from real estate operations 7,960 7,108
Interest 4,698 4,175
Depreciation and amortization 7,687 7,105
General and administrative 1,239 1,087
Minority interest in joint ventures 99 93
-------------------------------------------
21,683 19,568
-------------------------------------------
INCOME BEFORE GAIN ON SALE OF REAL ESTATE INVESTMENTS 5,160 6,005
Gain on sale of real estate investments - 93
-------------------------------------------
INCOME FROM CONTINUING OPERATIONS 5,160 6,098
-------------------------------------------
DISCONTINUED OPERATIONS
Income (loss) from real estate operations (2) 12
Gain on sale of real estate investments 106 -
-------------------------------------------
INCOME FROM DISCONTINUED OPERATIONS 104 12
-------------------------------------------
NET INCOME 5,264 6,110
Preferred dividends-Series A 970 970
Preferred dividends-Series B 1,532 1,532
-------------------------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 2,762 3,608
===========================================
BASIC PER COMMON SHARE DATA
Income from continuing operations $ 0.16 0.23
Income from discontinued operations 0.01 0.00
--------------------------------------------
Net income available to common stockholders $ 0.17 0.23
============================================
Weighted average shares outstanding 15,924 15,772
============================================
DILUTED PER COMMON SHARE DATA
Income from continuing operations $ 0.16 0.22
Income from discontinued operations 0.01 0.00
--------------------------------------------
Net income available to common stockholders $ 0.17 0.22
============================================
Weighted average shares outstanding 16,282 16,166
============================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
Accumulated
Additional Other
Preferred Common Paid-In Unearned Undistributed Comprehensive
Stock Stock Capital Compensation Earnings Income (Loss) Total
-------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 $ 108,535 2 243,562 (2,781) 7,109 58 356,485
Comprehensive income
Net income - - - - 5,264 - 5,264
Net unrealized change in
investment securities - - - - - (233) (233)
Net unrealized change in cash flow hedge - - - - - 100 100
--------
Total comprehensive income 5,131
--------
Cash dividends declared-common, $.475 per share - - - - (7,668) - (7,668)
Preferred stock dividends declared - - - - (2,502) - (2,502)
Issuance of 2,108 shares of common stock,
incentive compensation - - 53 - - - 53
Issuance of 3,468 shares of common stock,
dividend reinvestment plan - - 89 - - - 89
Issuance of 75,127 shares of common stock,
exercise options - - 1,202 - - - 1,202
Forfeiture of 250 shares of common stock,
incentive restricted stock - - (7) 7 - - -
Amortization of unearned compensation,
incentive restricted stock - - - 97 - - 97
Issuance of common stock options - - 1 - - - 1
-------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2003 $ 108,535 2 244,900 (2,677) 2,203 (75) 352,888
=====================================================================================
See accompanying notes to consolidated financial statements.
EASTGROUP PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
March 31,
--------------------------------------------
2003 2002
--------------------------------------------
OPERATING ACTIVITIES:
Net income $ 5,264 6,110
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization from continuing operations 7,687 7,105
Depreciation and amortization from discontinued operations - 20
Gain on sale of real estate investments - (93)
Gain on sale of real estate investments from discontinued operations (106) -
Gain on real estate investment trust (REIT) shares (282) (421)
Amortization of unearned compensation 97 109
Minority interest depreciation and amortization (40) (43)
Changes in operating assets and liabilities:
Accrued income and other assets 1,643 1,326
Accounts payable, accrued expenses and prepaid rent (1,371) (1,041)
--------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,892 13,072
--------------------------------------------
INVESTING ACTIVITIES:
Proceeds from sale of real estate investments 445 1,111
Real estate improvements (2,594) (1,789)
Real estate development (5,052) (10,925)
Proceeds from sale of REIT shares 1,590 2,405
Changes in other assets and other liabilities (3,207) (13)
--------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (8,818) (9,211)
--------------------------------------------
FINANCING ACTIVITIES:
Proceeds from bank borrowings 30,045 106,705
Principal payments on bank borrowings (22,788) (100,645)
Principal payments on mortgage notes payable (1,573) (1,292)
Debt issuance costs (52) (1,007)
Distributions paid to stockholders (10,082) (9,955)
Proceeds from exercise of stock options 1,203 2,301
Proceeds from dividend reinvestment plan 89 92
Other (429) (460)
--------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (3,587) (4,261)
--------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 487 (400)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,383 1,767
--------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,870 1,367
============================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amount capitalized $ 4,505 4,214
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements of EastGroup Properties, Inc.
("EastGroup" or "the Company") have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In management's opinion, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. The financial statements should be read in conjunction with the
2002 annual report and the notes thereto.
(2) RECLASSIFICATIONS
Certain reclassifications have been made in the 2002 financial statements to
conform to the 2003 presentation.
(3) REAL ESTATE HELD FOR SALE
Real estate properties that are currently offered for sale or are under contract
to sell have been shown separately on the consolidated balance sheets as "real
estate held for sale." The Company applies Statement of Financial Accounting
Standards (SFAS) No. 144, which requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less estimated costs
to sell and are not depreciated while they are held for sale.
At March 31, 2003 and December 31, 2002, the Company had three parcels of
land held for sale. There can be no assurances that such properties will be
sold.
In accordance with the guidelines established under SFAS No. 144,
operations and gains and losses on sale from the properties placed in the
category "held for sale" subsequent to December 31, 2001 have been classified as
income (loss) from discontinued operations for the three months ended March 31,
2003 and 2002. No interest expense was allocated to the properties that are held
for sale.
(4) BUSINESS COMBINATIONS AND GOODWILL
The Company applies SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for by using the
purchase method of accounting and addresses accounting for purchased goodwill
and other intangibles. SFAS No. 142 addresses financial accounting and reporting
for the impairment of goodwill and other intangibles and is effective for fiscal
years beginning after December 15, 2001. The Company had no business
combinations after June 30, 2001. At March 31, 2003 and December 31, 2002, the
Company had unamortized goodwill of $990,000 resulting from the acquisition of
Ensign Properties in 1998. Upon adoption of SFAS No. 142 on January 1, 2002,
amortization of goodwill ceased. The Company periodically reviews, at least
annually, the recoverability of goodwill for possible impairment and will
continue to do so under the new statement. In management's opinion, no material
impairment of goodwill existed at March 31, 2003 and December 31, 2002.
(5) OTHER ASSETS
A summary of the Company's other assets follows:
March 31, 2003 December 31, 2002
---------------------------------------------
(In thousands)
Leasing costs, net of accumulated amortization $ 10,805 10,841
Receivables, net of allowance for doubtful accounts 7,025 7,967
Prepaid expenses and other assets 8,541 7,793
---------------------------------------------
$ 26,371 26,601
=============================================
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
A summary of the Company's accounts payable and accrued expenses follows:
March 31, 2003 December 31, 2002
---------------------------------------------
(In thousands)
Property taxes payable $ 5,060 5,814
Dividends payable 3,434 3,346
Other payables and accrued expenses 4,389 6,411
---------------------------------------------
$ 12,883 15,571
=============================================
(7) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income plus all other changes in equity
from nonowner sources. The components of accumulated other comprehensive income
(loss) for the three months ended March 31, 2003 and 2002 are summarized below:
Accumulated Other Comprehensive Income (Loss)
Three Months Ended
March 31,
---------------------------------
2003 2002
---------------------------------
(In thousands)
Balance at beginning of period $ 58 1,193
Unrealized holding gains on REIT securities during
the period 49 693
Less reclassification adjustment for realized gains on
REIT securities included in net income (282) (421)
Change in fair value of interest rate swap 100 -
----------------------------------
Balance at end of period $ (75) 1,465
==================================
(8) EARNINGS PER SHARE
The Company applies SFAS No. 128, "Earnings Per Share," which requires companies
to present basic earnings per share (EPS) and diluted EPS.
Basic EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period. The
Company's basic EPS is calculated by dividing net income available to common
stockholders by the weighted average number of common shares outstanding.
Diluted EPS represents the amount of earnings for the period available to
each share of common stock outstanding during the reporting period and to each
share that would have been outstanding assuming the issuance of common shares
for all dilutive potential common shares outstanding during the reporting
period. The Company calculates diluted EPS by totaling net income available to
common stockholders plus dividends on dilutive convertible preferred shares and
dividing this numerator by the weighted average number of common shares
outstanding plus the dilutive effect of stock options related to outstanding
employee stock options, nonvested restricted stock and convertible preferred
stock, had the options or conversions been exercised. The dilutive effect of
stock options and nonvested restricted stock was determined using the treasury
stock method which assumes exercise of the options as of the beginning of the
period or when issued, if later, and assumes proceeds from the exercise of
options are used to purchase common stock at the average market price during the
period. The dilutive effect of convertible securities was determined using the
if-converted method. Reconciliation of the numerators and denominators in the
basic and diluted EPS computations is as follows:
Reconciliation of Numerators and Denominators
Three Months Ended
March 31,
-----------------------------
2003 2002
-----------------------------
(In thousands)
Basic EPS Computation
Numerator-net income available to common stockholders $ 2,762 3,608
Denominator-weighted average shares outstanding 15,924 15,772
Diluted EPS Computation
Numerator-net income available to common stockholders $ 2,762 3,608
Denominator:
Weighted average shares outstanding 15,924 15,772
Common stock options 171 210
Nonvested restricted stock 187 184
-----------------------------
Total Shares 16,282 16,166
=============================
The Company's Series B Preferred Stock, which is convertible into common
stock at a conversion price of $22.00 per share, was not included in the
computation of diluted earnings per share for the periods presented due to its
antidilutive effect.
(9) SEGMENT REPORTING
The Company applies SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information." This Statement establishes standards for the reporting
of information about operating segments in annual and interim financial
statements. Operating segments are defined as components of an enterprise for
which separate financial information is available that is evaluated regularly by
the chief operating decision makers in deciding how to allocate resources and in
assessing performance.
EastGroup has one reportable segment--industrial properties. These
properties are concentrated in major Sunbelt regions of the United States, have
similar economic characteristics and also meet the other criteria that permit
the properties to be aggregated into one reportable segment. The Company's chief
decision makers use two primary measures of operating results in making
decisions, such as allocating resources: property net operating income (PNOI),
defined as income from real estate operations (REO) less property operating
expenses (before interest expense and depreciation and amortization), and funds
from operations (FFO), defined as net income (loss) (computed in accordance with
accounting principles generally accepted in the United States of America
(GAAP)), excluding gains or losses from sales of depreciable real estate
property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures.
PNOI is a supplemental industry reporting measurement used to evaluate the
performance of the Company's investments in real estate assets. The Company
believes that the exclusion of depreciation and amortization in the industry's
calculation of PNOI provides a supplemental indicator of the property's
performance since real estate values have historically risen or fallen with
market conditions. PNOI as calculated by the Company may not be comparable to
similarly titled but differently calculated measures for other REITs.
The major factors that influence PNOI are occupancy levels, acquisitions
and sales, development properties that achieve stabilized operations, rental
rate increases or decreases, and the recoverability of operating expenses. The
Company's success depends largely upon its ability to lease warehouse space and
to recover from tenants the operating costs associated with those leases. REO
income is comprised of rental income including straight-line rent adjustments,
pass-through income and other REO income, which includes termination fees.
Property operating expenses are comprised of insurance, property taxes, repair
and maintenance expenses, management fees and other operating costs. Generally,
the Company's most significant operating expenses are insurance and property
taxes. Tenant leases may be net leases in which the total operating expenses are
recoverable, modified gross leases in which some of the operating expenses are
recoverable, or gross leases in which no expenses are recoverable (gross leases
represent a small portion of the Company's total leases). Increases in property
operating expenses are fully recoverable under net leases and recoverable to a
high degree under modified gross leases. Modified gross leases often include
base year amounts and expense increases over these amounts are recoverable. The
Company's exposure to property operating expenses is primarily due to vacancies
and leases for occupied space that limit the amount of expenses that can be
recoverable.
The Company believes FFO is an appropriate measure of performance for
equity real estate investment trusts. FFO is not considered as an alternative to
net income (determined in accordance with GAAP) as an indication of the
Company's financial performance, or to cash flows from operating activities
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to provide for the Company's cash needs,
including its ability to make distributions. The following table presents on a
comparative basis for the three months ended March 31, 2003 and 2002 reported
PNOI by operating segment, followed by reconciliations of PNOI to FFO and FFO to
Net Income.
Three Months Ended
March 31,
-----------------------------
2003 2002
-----------------------------
(In thousands)
PROPERTY REVENUES
Industrial $ 26,068 24,454
Other 419 418
----------------------------
26,487 24,872
----------------------------
PROPERTY EXPENSES
Industrial (7,835) (6,971)
Other (125) (137)
----------------------------
(7,960) (7,108)
----------------------------
PROPERTY NET OPERATING INCOME
Industrial 18,233 17,483
Other 294 281
----------------------------
TOTAL PROPERTY NET OPERATING INCOME 18,527 17,764
----------------------------
Income (loss) from discontinued operations
(before depreciation and amortization) (2) 32
Gain on securities 282 421
Other income 74 280
Interest expense (4,698) (4,175)
General and administrative expense (1,239) (1,087)
Minority interest in earnings (139) (136)
Dividends on Series A preferred shares (970) (970)
-----------------------------
FUNDS FROM OPERATIONS 11,835 12,129
Depreciation and amortization from continuing operations (7,687) (7,105)
Depreciation and amortization from discontinued operations - (20)
Share of joint venture depreciation and amortization 40 43
Gain on sale of depreciable real estate investments 106 93
Dividends on Series B convertible preferred shares (1,532) (1,532)
-----------------------------
NET INCOME AVAILABLE TO COMMON STOCKHOLDERS 2,762 3,608
Dividends on preferred shares 2,502 2,502
-----------------------------
NET INCOME $ 5,264 6,110
=============================
(10) STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure, an
amendment of SFAS No. 123, 'Accounting for Stock-Based Compensation' " to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In addition,
this Statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements. Certain
of the disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.
Effective January 1, 2002, the Company adopted the fair value recognition
provisions of SFAS No. 148, prospectively to all employee awards granted,
modified, or settled after January 1, 2002. Stock-based compensation expense was
immaterial for both the three months ended March 31, 2003 and 2002. There was an
immaterial effect to pro forma net income available to common stockholders for
both periods and no effect to basic or diluted earnings per share for either
period.
The Company accounts for restricted stock in accordance with Accounting
Principles Board No. 25, and accordingly, compensation expense is recognized
over the expected vesting period using the straight-line method.
(11) SUBSEQUENT EVENTS
EastGroup is currently under contract to purchase a 62,000 square foot property
in Altamonte Springs, Florida for approximately $3,850,000 and a 63,000 square
foot property in Phoenix, Arizona for approximately $2,550,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
(Comments are for the balance sheet dated March 31, 2003 compared to December
31, 2002.)
Assets of EastGroup were $701,515,000 at March 31, 2003, a decrease of $826,000
from December 31, 2002. Liabilities (excluding minority interests) increased
$2,765,000 to $346,862,000 and stockholders' equity decreased $3,597,000 to
$352,888,000 during the same period. Book value per common share decreased from
$15.11 at December 31, 2002 to $14.81 at March 31, 2003. The paragraphs that
follow explain these changes in detail.
Real estate properties increased $10,828,000 during the three months ended
March 31, 2003. This increase was due to the transfer of three properties and
one parcel of land from development with total costs of $8,144,000, capital
improvements of $2,594,000, and improvements on development properties
transferred to real estate properties in the 12-month period following transfer
of $484,000. These increases were offset by the transfer of one property to real
estate held for sale with costs of $394,000.
Development decreased $3,576,000 during the three months ended March 31,
2003. This decrease was due to the transfer of three development properties with
total costs of $7,755,000 and the transfer of land with costs of $389,000 to
real estate properties. These decreases were offset by development costs of
$4,568,000 on existing and completed development, as detailed in the table
below.
Total cash outflows for development for the three months ended March 31,
2003 were $5,052,000. In addition to the costs incurred for the three months
ended March 31, 2003 as detailed in the table below, development costs included
$484,000 for improvements on properties transferred to real estate properties
during the 12-month period following transfer. These costs are included in Real
Estate Properties on the balance sheet.
Development
Costs Incurred
-----------------------------------
For the 3 Months Cumulative as Estimated
Size Ended 3/31/03 of 3/31/03 Total Costs (1)
-----------------------------------------------------------------------
(Square feet) (In thousands)
Lease-Up:
Metro Airport Commerce Center I, Jackson, MS 32,000 $ 27 1,754 1,900
World Houston 19, Houston, TX 66,000 125 2,106 3,100
World Houston 20, Houston, TX 62,000 92 2,050 2,800
Executive Airport CC I & III, Fort Lauderdale, FL 85,000 322 5,073 5,900
-----------------------------------------------------------------------
Total Lease-up 245,000 566 10,983 13,700
-----------------------------------------------------------------------
Under Construction:
Expressway Commerce Center, Tampa, FL 108,000 1,226 4,847 5,800
Sunport Center IV, Orlando, FL 63,000 1,200 2,226 3,500
Techway Southwest II, Houston, TX 94,000 220 1,189 4,800
-----------------------------------------------------------------------
Total Under Construction 265,000 2,646 8,262 14,100
-----------------------------------------------------------------------
Prospective Development (Principally Land):
Phoenix, Arizona 103,000 18 1,394 6,000
Tucson, Arizona 70,000 - 326 3,500
Tampa, Florida 140,000 25 1,853 7,700
Orlando, Florida 142,000 29 1,914 8,600
Fort Lauderdale, Florida 55,000 108 1,711 3,800
El Paso, Texas 251,000 56 2,280 7,600
Houston, Texas 906,000 1,063 6,880 43,700
Jackson, Mississippi 32,000 8 539 1,700
-----------------------------------------------------------------------
Total Prospective Development 1,699,000 1,307 16,897 82,600
-----------------------------------------------------------------------
2,209,000 $ 4,519 36,142 110,400
=======================================================================
Completed Development and Transferred
To Real Estate Properties During the
Three Months Ended March 31, 2003:
World Houston 14, Houston, TX 77,000 $ 32 3,106
Americas 10 Business Center I, El Paso, TX 98,000 17 3,304
Chamberlain Expansion, Tucson, AZ 34,000 - 1,345
--------------------------------------------------
Total Transferred to Real Estate Properties 209,000 $ 49 7,755
==================================================
(1) The information provided above includes forward-looking data based on
current construction schedules, the status of lease negotiations with
potential tenants and other relevant factors currently available to the
Company. There can be no assurance that any of these factors will not
change or that any change will not affect the accuracy of such
forward-looking data. Among the factors that could affect the accuracy of
the forward-looking statements are weather or other natural occurrence,
default or other failure of performance by contractors, increases in the
price of construction materials or the unavailability of such materials,
failure to obtain necessary permits or approvals from government entities,
changes in local and/or national economic conditions, increased competition
for tenants or other occurrences that could depress rental rates, and other
factors not within the control of the Company.
Real estate held for sale did not change during the quarter; however, one
property with costs of $394,000 was transferred from real estate properties and
was subsequently sold.
Accumulated depreciation on real estate properties and real estate held for
sale increased $6,794,000 due to depreciation expense of $6,849,000 on real
estate properties, offset by the sale of one property with accumulated
depreciation of $55,000.
Investment in REITs decreased from $1,663,000 at December 31, 2002 to
$122,000 at March 31, 2003 primarily as a result of the sale of REIT shares with
a cost of $1,308,000. Unrealized gains decreased $233,000 as a result of
realized gains of $282,000 on REIT shares, offset by unrealized gains of
$49,000.
Notes payable to banks increased $7,257,000 as a result of advances of
$30,045,000 exceeding payments of $22,788,000. The Company's credit facilities
are described in greater detail under Liquidity and Capital Resources.
Accumulated other comprehensive income (loss) decreased $133,000 as a
result of realized gains of $282,000 on the sale of REIT shares offset by
unrealized gains of $49,000 on REIT shares and an unrealized gain of $100,000
due to the fair value adjustment of the Company's interest rate swap.
Undistributed earnings decreased from $7,109,000 at December 31, 2002 to
$2,203,000 at March 31, 2003, as a result of dividends on common and preferred
stock of $10,170,000 exceeding net income for financial reporting purposes of
$5,264,000.
RESULTS OF OPERATIONS
(Comments are for the three months ended March 31, 2003, compared to the three
months ended March 31, 2002).
Net income available to common stockholders for the three months ended March 31,
2003 was $2,762,000 ($.17 per basic and diluted share) compared to net income
available to common stockholders for the three months ended March 31, 2002 of
$3,608,000 ($.23 per basic share and $.22 per diluted share). Income before gain
on sale of real estate investments was $5,160,000 for the three months ended
March 31, 2003 compared to $6,005,000 for the three months ended March 31, 2002.
There was no gain on sale of real estate investments from continuing operations
for the three months ended March 31, 2003 compared to $93,000 for the same
period in 2002. In accordance with the guidelines under SFAS No. 144, gains and
losses on the sale of properties placed in the category "held for sale"
subsequent to December 31, 2001 are included in Discontinued Operations. There
was a gain of $106,000 from discontinued operations for the three months ended
March 31, 2003 compared to no gain for the same period in 2002. The paragraphs
that follow describe the results of operations in detail.
PNOI from continuing operations, as defined and discussed in Note 9 in the
Notes to the Consolidated Financial Statements, increased by $763,000 or 4.3%
for the three months ended March 31, 2003 compared to the three months ended
March 31, 2002. PNOI by property type and percentage leased for industrial were
as follows:
Property Net Operating Income
Three Months Ended Percent
March 31, Leased
--------------------------------------------------------
2003 2002 3-31-03 3-31-02
--------------------------------------------------------
(In thousands)
Industrial $ 18,233 17,483 90.5% 90.1%
Other 294 281
---------------------------
Total PNOI $ 18,527 17,764
===========================
PNOI from industrial properties increased $750,000 (4.3%) for the three
months ended March 31, 2003, compared to March 31, 2002. Industrial properties
held throughout the three months ended March 31, 2003 compared to the same
period in 2002 showed a decrease in PNOI of .6%.
The Company has a carrying amount of $122,000 in its ownership of Pacific
Gulf Properties, which is in the final stage of liquidating its assets. During
the first quarter, EastGroup sold all of its remaining investments in other
REITs and realized gains of $282,000 compared to $421,000 in the same period of
2002.
Bank interest expense before amortization of loan costs and capitalized
interest was $491,000 for the three months ended March 31, 2003, a decrease of
$175,000 from the three months ended March 31, 2002. Average bank borrowings
were $75,274,000 for the three months ended March 31, 2003 compared to
$86,767,000 for the same period in 2002 with average bank interest rates of
2.62% for the three months ended March 31, 2003 compared to 3.07% for the same
period in 2002. Interest costs incurred during the period of construction of
real estate properties are capitalized and offset against the bank interest
expense. The interest costs capitalized on real estate properties for the three
months ended March 31, 2003 were $486,000 compared to $532,000 for the same
period in 2002. Amortization of bank loan costs was $103,000 for the three
months ended March 31, 2003 compared to $106,000 for the same period in 2002.
Mortgage interest expense on real estate properties was $4,496,000 for the
three months ended March 31, 2003, an increase of $614,000 from the three months
ended March 31, 2002. The increase in interest for the three months was
primarily due to three new mortgage loans totaling $59,200,000 obtained in 2002,
offset by the payoff of two loans totaling $10,350,000. Amortization of mortgage
loan costs was $94,000 for the three months ended March 31, 2003 compared to
$53,000 for the same period in 2002.
During the three months ended March 31, 2003, the Company sold Air Park
Distribution Center II and recognized a gain of $106,000, which is recorded
under Discontinued Operations in accordance with SFAS No. 144 (see Note 3 in the
Notes to Consolidated Financial Statements). In the same period of 2002, the
Company recognized a gain of $93,000 from the sale of Carpenter Duplex, which is
reported in Income From Continuing Operations on the income statement. A summary
of gains on real estate investments for the comparative periods follows.
Gains on Real Estate Investments
Net Recognized
Sales Price Basis Gain
-----------------------------------------------
(In thousands)
2003
Real estate properties:
Air Park Distribution Center II, Memphis, TN $ 445 339 106
===============================================
2002
Real estate properties:
Carpenter Duplex, Dallas, TX $ 1,111 1,018 93
===============================================
The increase in general and administrative expenses of $152,000 for the
three months ended March 31, 2003 compared to the same period in 2002 is
primarily due to increased employee costs.
NAREIT has recommended supplemental disclosures concerning straight-line
rent, capital expenditures and leasing costs. Straight-lining of rent increased
income by $439,000 for the three months ended March 31, 2003 compared to
$225,000 for the same period in 2002. Capital expenditures for the three months
ended March 31, 2003 and 2002 were as follows:
Capital Expenditures
Three Months Ended
March 31,
Estimated ----------------------
Useful Life 2003 2002
----------------------------------------
(In thousands)
Upgrade on Acquisitions 40 yrs $ 20 -
Major Renovation/Redevelopment 40 yrs - 50
Tenant Improvements:
New Tenants Lease Life 1,054 788
New Tenants (first generation)(1) Lease Life 442 63
Renewal Tenants Lease Life 810 358
Other:
Building Improvements 5-40 yrs 157 321
Roofs 5-15 yrs 47 194
Parking Lots 5 yrs 39 5
Other 5 yrs 25 10
----------------------
Total capital expenditures $ 2,594 1,789
======================
The Company's leasing costs are capitalized and included in other assets.
The costs are amortized over the terms of the leases and are included in
depreciation and amortization expense. Capitalized leasing costs for the three
months ended March 31, 2003 and 2002 were as follows:
Capitalized Leasing Costs
Three Months Ended
March 31,
Estimated ----------------------
Useful Life 2003 2002
----------------------------------------
(In thousands)
Development Lease Life $ 234 640
New Tenants Lease Life 211 156
New Tenants (first generation)(1) Lease Life 82 68
Renewal Tenants Lease Life 275 96
----------------------
Total capitalized leasing costs $ 802 960
======================
Amortization of leasing costs $ 838 617
======================
(1) First generation refers to space that has never been occupied.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $12,892,000 for the three months
ended March 31, 2003. Other sources of cash were primarily from bank borrowings,
sales of REIT shares and proceeds from exercise of stock options. The Company
distributed $7,580,000 in common and $2,502,000 in preferred stock dividends.
Other primary uses of cash were for bank debt payments, construction and
development of properties, capital improvements at the various properties and
mortgage note payments.
Total debt at March 31, 2003 and December 31, 2002 is detailed below. The
Company's bank credit facilities have certain restrictive covenants, and the
Company was in compliance with all of its debt covenants at March 31, 2003 and
December 31, 2002.
March 31, 2003 December 31, 2002
--------------------------------------
(In thousands)
Mortgage notes payable - fixed rate $ 246,770 248,343
Bank notes payable - floating rate 81,214 73,957
--------------------------------------
Total debt $ 327,984 322,300
======================================
The Company has a three-year $175,000,000 unsecured revolving credit
facility with a group of ten banks that matures in January 2005. The interest
rate on the facility is based on the Eurodollar rate and varies according to
debt-to-total asset value ratios. EastGroup's current interest rate for this
facility is the Eurodollar rate plus 1.25%. At March 31, 2003, the interest rate
was 2.56% on $79,000,000. The interest rate on each tranche is currently reset
on a monthly basis and was last reset on April 28, 2003 at 2.57% on $79,000,000.
An unused facility fee is also assessed on this loan. This fee varies according
to debt-to-total asset value ratios and is currently .20%.
The Company has a one-year $12,500,000 unsecured revolving credit facility
with PNC Bank, N.A. that matured in January 2003 and was amended to reflect a
new maturity date of January 2004. The interest rate on this facility is based
on the LIBOR rate and varies according to debt-to-total asset value ratios. At
March 31, 2003, the interest rate was 2.475% on $2,214,000. EastGroup's current
interest rate for this facility is the LIBOR rate plus 1.175%.
The Company anticipates that its current cash balance, operating cash
flows, and borrowings under its lines of credit will be adequate for (i)
operating and administrative expenses, (ii) normal repair and maintenance
expenses at its properties, (iii) debt service obligations, (iv) distributions
to stockholders, (v) capital improvements, (vi) purchases of properties, (vii)
development, (viii) common stock repurchases, and (ix) any other normal business
activities of the Company.
INFLATION
In the last five years, inflation has not had a significant impact on the
Company because of the relatively low inflation rate in the Company's geographic
areas of operation. Most of the leases require the tenants to pay their pro rata
share of operating expenses, including common area maintenance, real estate
taxes and insurance, thereby reducing the Company's exposure to increases in
operating expenses resulting from inflation. In addition, the Company's leases
typically have three to five year terms, which may enable the Company to replace
existing leases with new leases at a higher base if rents on the existing leases
are below the then-existing market rate.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to interest rate changes primarily as a result of its
lines of credit and long-term debt maturities. This debt is used to maintain
liquidity and fund capital expenditures and expansion of the Company's real
estate investment portfolio and operations. The Company's interest rate risk
management objective is to limit the impact of interest rate changes on earnings
and cash flows and to lower its overall borrowing costs. To achieve its
objectives, the Company borrows at fixed rates but also has several variable
rate bank lines as discussed under Liquidity and Capital Resources. The table
below presents the principal payments due and weighted average interest rates
for both the fixed rate and variable rate debt.
Apr-Dec Fair
2003 2004 2005 2006 2007 Thereafter Total Value
--------------------------------------------------------------------------------------
Fixed rate debt (in thousands) $ 6,303 11,234 25,153 21,715 20,390 161,975 246,770 270,865(1)
Weighted average interest rate 7.68% 7.90% 7.96% 7.76% 7.71% 7.08% 7.34%
Variable rate debt (in thousands) - 2,214 79,000 - - - 81,214 81,214
Weighted average interest rate - 2.48% 2.56% - - - 2.56%
(1) The fair value of the Company's fixed rate debt is estimated based on the
quoted market prices for similar issues or by discounting expected cash flows at
the rates currently offered to the Company for debt of the same remaining
maturities, as advised by the Company's bankers.
As the table above incorporates only those exposures that exist as of March
31, 2003, it does not consider those exposures or positions that could arise
after that date. The Company's ultimate economic impact with respect to interest
rate fluctuations will depend on the exposures that arise during the period and
interest rates. If the weighted average interest rate on the variable rate bank
debt as shown above changes by 10% or approximately 26 basis points, interest
expense and cash flows would increase or decrease by approximately $208,000
annually.
The Company has an interest rate swap agreement to hedge its exposure to
the variable interest rate on the Company's $11,000,000 Tower Automotive Center
recourse mortgage. Under the swap agreement, the Company effectively pays a
fixed rate of interest over the term of the agreement without the exchange of
the underlying notional amount. This swap is designated as a cash flow hedge and
is considered to be fully effective in hedging the variable rate risk associated
with the Tower mortgage loan. Changes in the fair value of the swap are
recognized in accumulated other comprehensive income. The Company does not hold
or issue this type of derivative contract for trading or speculative purposes.
FORWARD-LOOKING STATEMENTS
In addition to historical information, certain sections of this Form 10-Q
contain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
such as those pertaining to the Company's hopes, expectations, intentions,
beliefs, strategies regarding the future, the anticipated performance of
development and acquisition properties, capital resources, profitability and
portfolio performance. Forward-looking statements involve numerous risks and
uncertainties. The following factors, among others discussed herein, could cause
actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements: defaults or nonrenewal of
leases, increased interest rates and operating costs, failure to obtain
necessary outside financing, difficulties in identifying properties to acquire
and in effecting acquisitions, failure to qualify as a real estate investment
trust under the Internal Revenue Code of 1986, as amended, environmental
uncertainties, risks related to disasters and the costs of insurance to protect
from such disasters, financial market fluctuations, changes in real estate and
zoning laws and increases in real property tax rates. The success of the Company
also depends upon the trends of the economy, including interest rates and the
effects to the economy from possible terrorism and related world events, income
tax laws, governmental regulation, legislation, population changes and those
risk factors discussed elsewhere in this Form. Readers are cautioned not to
place undue reliance on forward-looking statements, which reflect management's
analysis only as the date hereof. The Company assumes no obligation to update
forward-looking statements. See also the Company's reports to be filed from time
to time with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934.
ITEM 4. CONTROLS AND PROCEDURES.
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
In addition, the Company reviewed its internal controls, and there have
been no significant changes in the Company's internal controls or in other
factors that could significantly affect those controls subsequent to the date of
their last evaluation.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DATE: May 13, 2003
EASTGROUP PROPERTIES, INC.
/s/ BRUCE CORKERN
Bruce Corkern, CPA
Senior Vice President and Controller
/s/ N. KEITH MCKEY
N. Keith McKey, CPA
Executive Vice President, Chief
Financial Officer and Secretary
CERTIFICATIONS
I, David H. Hoster II, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EastGroup Properties,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: May 13, 2003 /s/ DAVID H. HOSTER II
David H. Hoster II
Chief Executive Officer
I, N. Keith McKey, certify that:
1. I have reviewed this quarterly report on Form 10-Q of EastGroup Properties,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
DATE: May 13, 2003 /s/ N. KEITH MCKEY
N. Keith McKey
Chief Financial Officer
EXHIBIT 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EastGroup Properties, Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, David
H. Hoster II, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ DAVID H. HOSTER II
David H. Hoster II
Chief Executive Officer
May 13, 2003
A signed original of this written statement required by Section 906 has been
provided to EastGroup Properties, Inc. and will be retained by EastGroup
Properties, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
EXHIBIT 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of EastGroup Properties, Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, N.
Keith McKey, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that,
to my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ N. KEITH MCKEY
N. Keith McKey
Chief Financial Officer
May 13, 2003
A signed original of this written statement required by Section 906 has been
provided to EastGroup Properties, Inc. and will be retained by EastGroup
Properties, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.