UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-14166
MERIDIAN INDUSTRIAL TRUST, INC.
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(Exact name of registrant as specified in its charter)
MARYLAND 94-3224765
- ----------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
455 MARKET STREET
17TH FLOOR
SAN FRANCISCO, CALIFORNIA 94105
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 281-3900
------------------------
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 the number of shares outstanding of the common and
preferred stock, as of the latest practicable date:
SHARES OF SERIES B CONVERTIBLE PREFERRED STOCK AS OF AUGUST 1, 1998: 1,623,376
SHARES OF SERIES D CUMULATIVE REDEEMABLE PREFERRED STOCK AS OF AUGUST 1, 1998: 2,000,000
SHARES OF COMMON STOCK AS OF AUGUST 1, 1998: 31,672,388
This Form 10-Q/A amends Item 1 of Part I of the registrant's Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998 to read in its
entirety as follows and amends Item 5 and Item 6 of Part II:
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PART I: FINANCIAL INFORMATION
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the Annual Report on Form 10-K
for the year ended December 31, 1997 and the Quarterly Report on Form 10-Q
for the three months ended March 31, 1998 of Meridian Industrial Trust, Inc.
(the "Company"). These condensed consolidated statements have been prepared
in accordance with the instructions of the Securities and Exchange Commission
Form 10-Q and do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, all material
adjustments of a normal, recurring nature considered necessary for a fair
presentation of the results of operations for the interim periods have been
included. The results of consolidated operations for the six months ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998.
1
MERIDIAN INDUSTRIAL TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
1998 1997
(unaudited) (audited)
----------- ----------
Investment in Real Estate Assets:
Rental Properties Held for Investment $ 974,076 $813,389
Less: Accumulated Depreciation (23,912) (14,374)
---------- --------
950,164 799,015
Rental Properties Held for Divestiture 267 9,492
---------- --------
950,431 808,507
Investment in Unconsolidated Joint Venture 21,500 21,500
---------- --------
Total Investment in Real Estate Assets 971,931 830,007
Other Assets:
Investment in and Advances to Unconsolidated Subsidiaries 46,019 --
Cash and Cash Equivalents 8,195 7,855
Cash Held in Consolidated Limited Partnerships 2,506 992
Restricted Cash and Cash Held in Escrow 7,031 11,267
Note Receivable 8,000 --
Accounts Receivable, Net of Reserves of $468 and $228 at
June 30, 1998 and December 31, 1997, respectively 4,837 3,460
Capitalized Loan Fees, Lease Commissions and Other Assets, Net 23,739 9,931
---------- --------
Total Assets $1,072,258 $863,512
---------- --------
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unsecured Notes, Including Unamortized Debt Premium of $105
and $109 at June 30, 1998 and December 31, 1997, respectively $ 160,105 $160,109
Mortgage Loan 66,094 66,094
Unsecured Credit Facility 145,800 20,500
Mortgage Notes Payable, Including Unamortized Debt Premium of $12
and $153 at June 30, 1998 and December 31, 1997, respectively 31,580 10,503
Accrued Dividends Payable 10,723 9,473
Accounts Payable, Prepaid Rent, Tenant Deposits and Other Liabilities 22,439 21,562
---------- --------
Total Liabilities 436,741 288,241
---------- --------
Minority Interest in Consolidated Limited Partnerships 17,024 5,132
---------- --------
Commitments and Contingencies -- --
Stockholders' Equity:
Authorized Shares - 175,000,000 shares of Common Stock and
25,000,000 shares of Preferred Stock authorized, each with par
value of $0.001; 30,799,933 and 30,165,662 shares of Common Stock
issued and outstanding at June 30, 1998 and December 31, 1997,
respectively; 1,623,376 and 2,272,727 shares of Series B
Convertible Preferred Stock issued and outstanding with a
liquidation preference of $25,000 and $35,000 at June 30, 1998 and
December 31, 1997, respectively; and 2,000,000 shares of Series D
Preferred Stock issued and outstanding with a liquidation preference
of $50,000 at June 30, 1998 35 32
Additional Paid-in Capital 621,912 574,848
Distributions in Excess of Income (3,454) (4,741)
---------- --------
Total Stockholders' Equity 618,493 570,139
---------- --------
Total Liabilities and Stockholders' Equity $1,072,258 $863,512
---------- --------
---------- --------
The accompanying notes are an integral part of these statements.
2
MERIDIAN INDUSTRIAL TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
----------- ----------- ----------- -----------
REVENUES:
Rentals from Real Estate Investments $ 28,393 $ 12,870 $ 54,653 $ 24,564
Income from Unconsolidated Joint Venture 495 -- 990 --
Income from Unconsolidated Subsidiaries 563 -- 750 --
Interest and Other Income 427 147 528 304
----------- ----------- ----------- -----------
TOTAL REVENUES 29,878 13,017 56,921 24,868
----------- ----------- ----------- -----------
EXPENSES:
Interest Expense 5,888 2,160 10,480 3,784
Property Taxes 3,515 1,764 6,824 3,393
Property Operating 2,263 956 4,262 2,042
General and Administrative 2,087 1,350 3,976 2,501
Depreciation and Amortization 5,467 2,211 10,470 4,216
----------- ----------- ----------- -----------
TOTAL EXPENSES 19,220 8,441 36,012 15,936
----------- ----------- ----------- -----------
Income Before Minority Interest 10,658 4,576 20,909 8,932
Minority Interest in Net (Income) (158) -- (247) --
----------- ----------- ----------- -----------
Income Before Gain (Loss) on Divestiture of
Properties and Extraordinary Item 10,500 4,576 20,662 8,932
Gain (Loss) on Divestiture of Properties, Net 1,993 (877) 2,054 (448)
----------- ----------- ----------- -----------
Income Before Extraordinary Item 12,493 3,699 22,716 8,484
Extraordinary Item - Expenses Incurred in
Connection with Debt Restructuring
and Retirements -- (808) -- (808)
----------- ----------- ----------- -----------
NET INCOME $ 12,493 $ 2,891 $ 22,716 $ 7,676
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net Income $ 12,493 $ 2,891 $ 22,716 $ 7,676
Less Preferred Dividends Declared:
Series B Preferred Stock (536) (705) (1,286) (1,409)
Series D Preferred Stock (12) -- (12) --
----------- ----------- ----------- -----------
NET INCOME ALLOCABLE TO COMMON $ 11,945 $ 2,186 $ 21,418 $ 6,267
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
BASIC PER SHARE DATA:
Income Before Extraordinary Item $ 0.40 $ 0.22 $ 0.71 $ 0.52
Extraordinary Item -- (0.06) -- (0.06)
----------- ----------- ----------- -----------
NET INCOME ALLOCABLE TO COMMON PER BASIC
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING
$ 0.40 $ 0.16 $ 0.71 $ 0.46
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
DILUTED PER SHARE DATA:
Income Before Extraordinary Item $ 0.37 $ 0.22 $ 0.68 $ 0.51
Extraordinary Item -- (0.06) -- (0.06)
----------- ----------- ----------- -----------
NET INCOME ALLOCABLE TO COMMON PER DILUTED
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING
$ 0.37 $ 0.16 $ 0.68 $ 0.45
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 30,182,754 13,598,756 30,180,624 13,597,570
Diluted 33,331,951 14,015,823 33,212,739 14,030,853
The accompanying notes are an integral part of these statements.
3
MERIDIAN INDUSTRIAL TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS)
1998 1997
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 22,716 $ 7,676
Adjustments to Reconcile Net Income to Cash Provided by
Operating Activities:
Depreciation and Amortization 10,470 4,216
Amortization of Debt Premium (146) (22)
Amortization of Financing Costs 202 176
Straight Line Rent (1,893) (851)
Income Allocated to Minority Partner Interest 247 --
(Gain) Loss on Divestiture of Properties (2,054) 448
Extraordinary Item - Expenses Incurred in Connection with
Debt Restructuring and Retirements -- 808
Increase in Accounts Receivable and Other Assets (5,105) (6,004)
Decrease in Accounts Payable, Prepaid Rent,
Tenant Deposits and Other Liabilities (1,199) (75)
----------- ---------
Net Cash Provided by Operating Activities 23,238 6,372
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Proceeds from Property Sales 3,693 11,195
Decrease in Restricted Cash and Cash Held In Escrow 34 317
Increase in Cash Held In Consolidated Limited Partnerships (1,311) --
Investment in and Advances to Unconsolidated Subsidiaries (46,007) --
Investments in Real Estate (117,897) (57,148)
Recurring Building Improvements (1,465) (228)
Recurring Tenant Improvements (480) (637)
Recurring Leasing Commissions (1,892) (735)
Receipt of Note Receivable -- 503
Purchase of Minority Partner Interest (1,089) --
Distributions Paid to Minority Partners (105) --
Purchase of Other Assets (6,753) (94)
----------- ---------
Net Cash Used in Investing Activities (173,272) (46,827)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Capitalized Loan Fees (82) (121)
Principal Payments on Mortgage Notes Payable (170) (24)
Borrowings on Unsecured Credit Facility 183,800 53,500
Repayment of Borrowings on Unsecured Credit Facility (58,500) (4,500)
Distributions Paid to Stockholders (20,178) (9,295)
Net Proceeds from issuance of Common and Preferred Stock, Exercise
of Warrants and Stock Options 51,362 48
Repurchase and Cancellation of Shares and Offering Costs (5,858) --
----------- ---------
Net Cash Provided by Financing Activities 150,374 39,608
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 340 (847)
Cash and Cash Equivalents at Beginning of Period 7,855 2,942
----------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,195 $ 2,095
----------- ---------
----------- ---------
CASH PAID FOR INTEREST $ 12,365 $ 4,023
----------- ---------
----------- ---------
The accompanying notes are an integral part of these statements.
4
MERIDIAN INDUSTRIAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE DATA AND PROPERTY DATA)
1. ORGANIZATION
Meridian Industrial Trust, Inc. (the "Company") was incorporated
in the state of Maryland on May 18, 1995. The Company is a self-administered
and self-managed real estate investment trust ("REIT") engaged primarily in
the business of owning, acquiring, developing, managing and leasing
income-producing warehouse/distribution and light industrial properties. At
June 30, 1998, the Company's principal asset was its portfolio of 213
warehouse/distribution and light industrial properties, two retail properties
and eleven properties under development. As of June 30, 1998 and 1997, the
Company's properties were 96% and 97% occupied, respectively.
On February 23, 1996, the Company merged with Meridian Point
Realty Trust IV Co., Meridian Point Realty Trust VI Co. and Meridian Point
Realty Trust VII Co. ("Trust IV," "Trust VI" and "Trust VII," respectively;
collectively referred to as the "Merged Trusts"), with the Company as the
surviving entity (that transaction is referred to below as the "Merger").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION The accompanying consolidated financial
statements include the results of the Company, its wholly-owned subsidiaries
and its majority-owned and controlled partnerships. All intercompany
transactions have been eliminated.
(B) 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 the 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.
(C) RENTAL PROPERTIES HELD FOR INVESTMENT Investments in rental
properties are stated at cost unless circumstances indicate that cost cannot
be recovered, in which case, the carrying value of the property is reduced to
estimated fair value. Estimated fair value: (i) is based upon the Company's
plans for the continued operation of each property and (ii) is computed using
estimated sales price, as determined by prevailing market values for
comparable properties and/or the the application of capitalization rates to
annualized rental income. The capitalization rate is based upon the age,
construction and use of the building. The fulfillment of the Company's plans
related to each of its properties is dependent upon, among other things, the
presence of economic conditions which will enable the Company to continue to
hold and operate the properties to yield an acceptable return on the
Company's investment. Due to uncertainties inherent in the valuation process
and in the economy, management can provide no assurances that the actual
results of operating and disposing of the Company's properties will not be
materially different than current expectations.
Rental Properties Held for Investment are depreciated over 35
years using the straight-line method. Expenditures for maintenance, repairs,
and improvements which do not materially prolong the normal useful life of an
asset are charged to operations as incurred. Tenant improvements are
capitalized and amortized under the straight-line method over the term of the
related lease.
5
Rental Properties Held for Divestiture are stated at the lower of
cost or estimated fair value. Estimated fair value is based upon prevailing
market values for comparable properties or the application of capitalization
rates to annualized rental income. The capitalization rate is based upon the
age, construction and use of building. No depreciation is recorded on Rental
Properties Held for Divestiture.
(D) CONSTRUCTION IN PROGRESS Costs clearly associated with the
development and construction of a real estate project are capitalized as
construction in progress. In addition, interest, real estate taxes, insurance
and other holding costs are capitalized until the property is placed in
service.
(E) CASH AND CASH EQUIVALENTS For the purposes of reporting cash
flows, Cash and Cash Equivalents include cash on hand and short-term
investments with an original maturity of three months or less when purchased.
(F) CAPITALIZED LOAN FEES, LEASE COMMISSIONS AND OTHER ASSETS
Capitalized Loan Fees are amortized as interest expense over the term of the
related debt. Lease Commissions are amortized into depreciation and
amortization expense on a straight-line basis over the term of the related
lease. Other Assets are comprised of a loan extended to a minority limited
partner, security deposits for future acquisitions and deferred rent
receivable.
(G) FAIR VALUE OF FINANCIAL INVESTMENTS Statement of Financial
Accounting Standards No. 107, "Accounting for Fair Value of Financial
Instruments," requires disclosure of fair value for all financial
instruments. Based on the borrowing rates currently available to the Company,
the carrying amount of its debt approximates fair value. The carrying amount
of Cash and Cash Equivalents also approximates fair value.
(H) OFFERING COSTS Underwriting commissions, offering costs and
other expenses incurred in connection with stock offerings of the Company's
Common and Preferred Stock have been reflected as a reduction of
Stockholders' Equity.
(I) RENTALS FROM REAL ESTATE INVESTMENTS All leases are classified
as operating leases. The Company recognizes rental income on a straight-line
basis over the term of the lease. Deferred rent receivable, included in Other
Assets, represents the excess of rental revenue on a straight-line basis over
the cash received under the applicable lease provision.
Certain of the Company's leases relating to its properties require
tenants to pay all or a portion of real estate taxes, insurance and operating
expenses ("Expense Recaptures"). Expense Recaptures are recognized as
revenues in the same period the related expenses are incurred by the Company.
For the three months ended June 30, 1998 and 1997, Expense Recaptures of
$3,741 and $1,731, respectively, have been included in Rentals from Real
Estate Investments. For the six months ended June 30, 1998 and 1997, Expense
Recaptures of $7,507 and $3,111, respectively, have been included in Rentals
from Real Estate Investments.
(J) INCOME TAXES The Company has previously elected to be taxed as
a REIT for federal and, where the federal rules are allowed, state income tax
purposes. To continue to qualify for REIT status, the Company must meet a
number of ongoing organizational and operational requirements. If the Company
satisfies those REIT requirements and the Company currently distributes all
of its net taxable income (including net capital gains) to its stockholders,
the Company should generally owe no federal or state income tax. The REIT
provisions of the Internal Revenue Service Code of 1986, as amended,
generally allow a REIT to deduct dividends paid to stockholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
certain state and federal taxes imposed on its income and properties.
As a result of deductions allowed for the dividends paid to
stockholders and the utilization of net operating loss carryovers of the
Merged Trusts, the Company has no federal or state taxable income.
Accordingly, no provisions for federal or state income taxes have been made
in the accompanying consolidated statements of operations for the three and
six months ended June 30, 1998.
6
(K) EARNINGS PER SHARE During the first quarter of 1997, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." SFAS 128 requires the
disclosure of basic earnings per share and modifies existing guidance for
computing diluted earnings per share. Under the new standard, basic earnings
per share is computed as net income or loss divided by the weighted average
number of shares of Common Stock outstanding, excluding the dilutive effects
of stock options and other potentially dilutive securities. SFAS No. 128 is
effective for periods ending after December 15, 1997. Earnings per share for
the three and six months ended June 30, 1997 have been restated to conform to
the new standards as follows:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net Income - Basic $ 11,945 $ 2,186 $ 21,418 $ 6,267
Net Income - Diluted 12,481 2,186 22,704 6,267
Weighted Average Shares Outstanding:
Basic 30,182,754 13,598,756 30,180,624 13,597,570
Stock options 315,459 275,550 358,539 285,861
Warrants 137,400 141,517 160,931 147,422
Series B Preferred Stock 2,258,456 -- 2,265,552 --
Operating Limited Partnership Units 437,882 -- 247,093 --
----------- ----------- ----------- -----------
Diluted 33,331,951 14,015,823 33,212,739 14,030,853
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net Income (Loss) Per Share:
Basic $ 0.40 $ 0.16 $ 0.71 $ 0.46
Diluted 0.37 0.16 0.68 0.45
In connection with the Merger, the Company issued approximately
553,000 warrants to purchase an equal number of shares of the Company's
Common Stock (the "Merger Warrants"). Each Merger Warrant entitles the holder
to purchase one share of the Company's Common Stock at the exercise price of
$16.23. The exercise period began May 23, 1997 and ends February 23, 1999. As
of June 30, 1998, the Company had issued 94,034 shares pursuant to exercise
of the Merger Warrants.
On June 29, 1998, 649,351 shares of the Company's Series B
Preferred Stock were converted into shares of Common Stock on a one-for-one
basis.
On June 30, 1998, the Company completed a public offering of
2,000,000 shares of Series D Cumulative Redeemable Preferred Stock for an
aggregate offering price of $50,000 or $25.00 per share. The net proceeds of
$48,425 were used to reduce borrowings under the Company's unsecured credit
facility. Shares of the Series D Preferred Stock are redeemable by the
Company on or after June 30, 2003 and have a liquidation preference of
$50,000. Shares of the Series D Preferred Stock are not convertible into any
other securities of the Company. Dividends on the Series D Preferred Shares
are cumulative and payable quarterly at the rate of 8.75% of the liquidation
preference per annum.
(L) NEW ACCOUNTING PRONOUNCEMENT In June, 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
(SFAS) No. 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 is effective for fiscal years beginning after December
15, 1997. Management has not yet determined the level of additional
disclosure, if any, that may be required by SFAS No. 131. Additional
disclosure that may be required will be provided beginning with the financial
statements of the Company for the year ending December 31, 1998.
(M) RECLASSIFICATIONS Certain 1997 items have been reclassified
to conform to the 1998 presentation.
7
3. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company has an investment in an unconsolidated subsidiary,
Meridian Refrigerated, Inc. ("MRI"), formed for the purpose of acquiring and
operating companies providing refrigerated distribution services. In the six
months ended June 30, 1998, MRI completed two strategic operating company
acquisitions: Arctic Cold Storage, Inc. ("Arctic") and C.E.G.F. (USA), Inc.
("CEGF"). In its first acquisition on February 19, 1998, MRI acquired for an
aggregate purchase price of $36,000, the real estate, business, and operating
assets including $15,263 in cash of Arctic, a refrigerated distribution and
freight consolidation company operating three refrigerated warehouses. The
facilities are located in the Los Angeles Basin and aggregate 7.2 million
cubic feet and 299,000 square feet.
In its second acquisition on June 11, 1998, MRI acquired for
$29,741 the common stock of CEGF, a refrigerated distribution services
company located in Tampa, Florida. CEGF operates two facilities in Tampa,
Florida and one facility in Houston, Texas aggregating 9.2 million cubic feet
and 332,924 square feet.
The Company's investment in MRI is comprised of secured and
unsecured notes and non-voting participating preferred stock. The voting
common stock of MRI is owned by certain officers of the Company. The Company
accounts for its investment in MRI using the equity method. At June 30, 1998,
the outstanding balances on the secured and unsecured notes totaled $30,650
and $5,879, respectively.
4. LONG-TERM DEBT
The Company assumed a fixed rate facility (the "Mortgage Loan") in
connection with the Merger. The Mortgage Loan has a principal balance of
$66,094, bears interest at an annual rate of 8.63%, requires interest only
payments until its maturity in 2005 and is secured by a pool of the Company's
properties with a net book value of $137,311 as of June 30, 1998.
Concurrent with the Merger, the Company entered into an unsecured
credit facility (the "Unsecured Credit Facility"). The Unsecured Credit
Facility originally bore interest at LIBOR plus 1.7%, was scheduled to mature
in February 1998, and provided for a maximum borrowing amount of $75,000. On
April 21, 1997, the Unsecured Credit Facility was amended and restated. This
amendment and restatement of the Unsecured Credit Facility provided for (i)
an increase in the borrowing limit from $75,000 to $150,000, (ii) a decrease
in the interest rate spread over LIBOR from 1.7% to 1.4%, and (iii) an
extension of the maturity date to April 3, 2000, from February 26, 1998. The
Company recorded an extraordinary expense of $808 in loan costs in the second
quarter of 1997 in connection with this restructuring.
On September 23, 1997, the Unsecured Credit Facility was further
amended and restated to provide for (i) an increase of the borrowing limit
from $150,000 to $250,000 and (ii) a decrease in the interest rate spread
over LIBOR from 1.4% to 1.3%. Effective, May 26, 1998, the interest rate
spread over LIBOR for the Unsecured Credit Facility was further decreased
from 1.3% to 1.2%. At June 30, 1998, the weighted average interest rate on
the Unsecured Credit Facility was 6.9%. The Company paid a fee totaling $250
in connection with this amendment.
On November 20, 1997, the Company completed a private offering to
institutional investors of $160,000 in principal of unsecured senior notes
(the "Unsecured Notes"). The Unsecured Notes were issued in two tranches,
$135,000 maturing on November 20, 2007, bearing an interest rate of 7.25% per
annum, and $25,000 maturing on November 20, 2009, bearing an interest rate of
7.30% per annum. Interest on these notes is payable semiannually. The
proceeds were used to repay borrowings on the Unsecured Credit Facility. In
connection with this transaction, the Company entered into two forward
exchange rate contracts which resulted in a payment to the Company totaling
$109, which was accounted for as a premium.
8
In the opinion of the Company's management, the Company was in
compliance with all loan covenants related to the debt instruments discussed
above at June 30, 1998.
5. MORTGAGE NOTES PAYABLE
On May 13, 1997, the Company purchased a property located in
Montebello, California, subject to a mortgage note payable bearing an
interest rate different from the prevailing market rate at the date of
acquisition. This interest rate differential was recorded as a premium. This
mortgage note payable had a maturity date of July 15, 1998, an outstanding
balance of $10,429 and provided for monthly principal and interest payments
of $96 based on an interest rate of 9.89% per annum and a 30-year
amortization schedule. The premium totaling $324 was amortized over the term
of the mortgage note payable using the effective interest method. As of June
30,1998, this mortgage note payable and debt premium had outstanding balances
of $10,286 and $12, respectively. Subsequent to June 30, 1998, the mortgage
note payable was repaid from borrowings made under the Company's Unsecured
Credit Facility.
The Company, through one of its consolidated partnerships, assumed
a mortgage note payable in the principal amount of $3,676 in connection with
a contribution of a property located in Orlando, Florida (see Note 6). The
mortgage note payable has a maturity date of February 1, 2006, and provides
for monthly principal and interest payments of $28 based on an interest rate
of 7.90% per annum and a 25-year amortization schedule. As of June 30, 1998,
this mortgage note payable had an outstanding balance of $3,656.
During the six months ended June 30, 1998, the Company, through
one of its consolidated partnerships, assumed three mortgage notes payable in
connection with the acquisition of three properties located in Las Vegas,
Nevada and four properties located in Plano, Texas. Two of the mortgage notes
payable are secured by properties located in Las Vegas, Nevada. One mortgage
note payable had a principal balance of $6,212 as of June 30, 1998, matures
on July 1, 2011 and provides for monthly principal and interest payments of
$47 based on an interest rate of 7.50% per annum and a 23-year amortization
schedule. The second mortgage note payable had a principal balance of $7,505
as of June 30, 1998, matures on December 1, 2009 and provides for monthly
principal and interest payments of $63 based on an interest rate of 8.30% per
annum and a 22-year amortization schedule. The third mortgage note payable,
which is secured by a property in Texas, had a principal balance of $3,909 as
of June 30, 1998, matures on April 15, 2006 and provides for monthly
principal and interest payments of $28 based on an interest rate of 6.95% per
annum.
6. PROPERTY ACQUISITIONS AND DEVELOPMENTS
During the six months ended June 30, 1998, the Company, either
directly or through one of its consolidated partnerships, purchased 16
properties located in California, Massachusetts, Nevada, Ohio and Texas, with
an aggregate square footage of approximately 1,771,000. The aggregate
purchase price for these properties totaled $88,121. The Company funded a
portion of these acquisitions from cash reserves and funded the majority of
the remaining costs with borrowings under the Unsecured Credit Facility. In
addition, the Company assumed three mortgage notes payable totaling $17,713.
In connection with the acquisition relating to the consolidated partnership,
the Company's minority partners' contribution is valued at $11,000.
During the six months ended June 30, 1998, the Company, either
directly or through one of its consolidated partnerships, acquired
approximately 172 acres of land scheduled for future development for an
aggregate purchase price of $21,262. The aggregate cost to develop these
parcels is expected to be approximately $108,774, to be funded from
borrowings under the Unsecured Credit Facility and from cash reserves. These
properties, when complete, will total approximately 2,576,000 square feet.
During the six months ended June 30, 1998, the Company, either
directly or through consolidated partnerships, completed development of and
placed in service three warehouse/distribution properties comprising
approximately 803,000 square feet with an aggregate cost of $29,228.
9
At June 30, 1998, the Company had, directly or through
consolidated partnerships, eleven warehouse/distribution properties either
under development or scheduled for development which will total approximately
4,447,000 square feet upon completion. The aggregate cost for the design and
construction of these development projects is estimated to be approximately
$171,409. As of June 30, 1998, the Company had incurred total project costs
of approximately $45,512 on these development projects. The Company
anticipates funding the balance of such development costs from cash reserves
and borrowings under the Unsecured Credit Facility.
In connection with land acquisitions and development activities
relating to the consolidated partnerships, the Company's minority partners
contributed land and other consideration valued at $4,948.
On April 2, 1998, the minority partners of one of the Company's
consolidated partnerships contributed a property located in Orlando, Florida
with a square footage of approximately 120,000. The minority partners'
contribution totaled $950. With regard to this transaction, the partnership
assumed a mortgage note payable in the principal amount of $3,676 (see Note
5).
On April 22, 1998, the Company and a minority partner of one of
its consolidated partnerships, executed an Assignment of Partnership
Interests, whereby the Company, as the managing general partner, exercised
its right to purchase the partnership interest of the minority partner. The
Company purchased the partnership interest for a total purchase price of
$1,089.
On May 7, 1998, the Company entered into a property exchange
transaction. This transaction involved the Company's transfer of its interest
in three properties located in Nashville, Tennessee with a net book value of
$6,174 to the other property owner in exchange for five properties owned by
the other property owner located in Memphis, Tennessee. The Company paid $350
to the other property owner representing the difference in the exchange
values of the properties. In addition, the Company paid closing costs and
prorated items totaling $317.
7. PROPERTY DIVESTITURES
During the six months ended June 30, 1998, the Company divested
two properties located in California and Tennessee for an aggregate sales
price of $12,080. After closing costs and pro-rated items which totaled $387
and acceptance of a note receivable of $8,000, the Company received net cash
proceeds of $3,693.
10
8. SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING TRANSACTIONS
The following table summarizes the Company's non-cash investing
and financing transactions for the six months ended June 30, 1998 and 1997.
1998 1997
------------ ------------
Property Acquisitions:
Acquisition Price $ 141,122 $ 49,557
Land for Built-to-Suit Facilities 1,196 9,410
Restricted Cash (4,228) --
Minority Limited Partners' Capital Contributions (11,992) 1,130
Purchase of Minority Partner Interest 637 --
Mortgage Notes Payable Assumed (21,389) (16,136)
Shares of Common Stock Issued (1,525) --
Accrued Closing Costs and Pro-rated Items (1,864) (386)
Property Divestitures:
Net Basis (15,835) (11,543)
Note Receivable 8,000 --
Other Assets Net of Other Liabilities 105 44
During the six months ended June 30, 1998 and 1997, interest
expense totaling $1,857 and $684, respectively, was capitalized for
properties under development. For the three months ended June 30, 1998 and
1997, interest expense totaling $1,061 and $473, respectively, was
capitalized for properties under development.
9. SUBSEQUENT EVENTS
ACQUISITIONS
Subsequent to June 30, 1998, the Company purchased a property
located in Indiana comprising approximately 133,000 square feet for a
purchase price of $4,400. This acquisition was funded through borrowings
under the Unsecured Credit Facility.
Subsequent to June 30, 1998, the Company acquired approximately 61
acres of land scheduled for future development for an aggregate purchase
price of $4,416. The costs to develop these parcels are expected to aggregate
to approximately $29,600, to be funded from borrowings under the Unsecured
Credit Facility and from cash reserves. These properties, when complete, will
total approximately 909,000 square feet.
Subsequent to June 30, 1998, the Company completed development of
and placed in service two warehouse/distribution properties comprising
approximately 1,069,000 square feet. The aggregate development cost for
these properties was approximately $40,655.
DIVESTITURE
Subsequent to June 30, 1998, the Company divested a property
located in California for a sales price of $335. After closing costs and
pro-rated items which totaled $18, the Company received net proceeds of $317.
11
OTHER
Subsequent to June 30, 1998, the Company completed a direct
placement of 850,000 shares of the Company's Common Stock at an offering
price of $23.50 per share, resulting in gross proceeds of $19,975. The
Company used the net proceeds of the direct placement to reduce borrowings
under the Unsecured Credit Facility.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
(DOLLARS IN THOUSANDS, UNLESS INDICATED OTHERWISE)
INTRODUCTION
The Company is a self-administered and self-managed real estate
investment trust engaged primarily in the business of owning, acquiring,
managing, leasing and developing income-producing warehouse/distribution and
light industrial properties. At June 30, 1998, the Company's principal asset
was its portfolio of 213 warehouse/distribution and light industrial
properties, two retail properties and eleven properties under development. As
of June 30, 1998 and 1997, the Company's properties were 96% and 97%
occupied, respectively.
The following discussion should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 1997,
the Company's Quarterly Report on Form 10-Q for the three months ended March
31, 1998 and the Condensed Consolidated Balance Sheets, Condensed
Consolidated Statements of Operations and Condensed Consolidated Statements
of Cash Flows and the notes thereto included in pages 2 through 12 of this
report. Unless otherwise defined in this report, or unless the context
otherwise requires, the capitalized words or phrases used in this section
either (i) describe accounting terms that are used as line items in such
financial statements, or (ii) have the meanings ascribed to them in such
financial statements and the notes thereto.
This report, including the financial information and statements,
and the notes thereto appearing elsewhere in this report, contains
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted with accuracy and some of which might not even be
anticipated. Future events and actual results, financial and otherwise, may
differ materially from the events and results discussed in the
forward-looking statements. Factors that might cause such a difference
include, but are not limited to, the general economic climate, competition
and the supply of and demand for industrial properties in the Company's
markets, interest rate levels, the availability of financing, potential
environmental liability and other risks associated with the ownership,
development and acquisition of properties, including risks that tenants will
not take or remain in occupancy or pay rent, or that construction or
operating costs may be greater than anticipated, and additional factors
discussed in detail in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, as amended.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company intends to finance its operating cash needs,
distributions to common and preferred stockholders, property acquisitions,
development, expansions and renovations using a combination of cash flow from
operations and bank and institutional debt financing, supplemented with
private or public debt or equity placements. Where intermediate or long-term
debt financing is employed, the Company generally seeks to obtain fixed
interest rates or enter into agreements intended to cap the effective
interest rate on floating rate debt. The Company intends to operate with a
ratio of debt-to-total market capitalization that generally will not exceed
50%. Total market capitalization is the sum of total indebtedness, Series D
Preferred Stock with a liquidation preference of $50,000, and the market
value of the Company's Common Stock, after giving effect to the conversion of
the Company's 1,623,376 outstanding shares of Series B Preferred Stock and
limited partnership units. At June 30, 1998, the Company's debt-to-total
market capitalization rate was 33.4%.
SOURCES OF LIQUIDITY
The Company's main sources of liquidity are: (i) cash flows from
operating activities, (ii) cash reserves, (iii) borrowings under the
Unsecured Credit Facility, (iv) proceeds from private or public equity or
debt placements, and (iv) proceeds from the divestiture of properties. A
summary of the Company's historical cash flows for the six months ended June
30, 1998 and 1997 is as follows:
13
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
Cash flows provided by (used in):
Operating activities $ 23,238 $ 6,372
Investing activities (173,272) (46,827)
Financing activities 150,374 39,608
In addition to cash flows and net income, management considers
Funds From Operations to be one additional measure of the performance of an
equity REIT because, together with net income and cash flows, Funds From
Operations provides investors with an additional basis to evaluate the
ability of the Company to incur and service debt and to fund acquisitions and
other capital expenditures. However, Funds From Operations does not measure
whether cash flow is sufficient to fund all of the Company's cash needs
including principal amortization, capital improvements and distributions to
stockholders. Funds From Operations also does not represent cash generated
from operating, investing or financing activities as determined in accordance
with generally accepted accounting principles. Funds From Operations should
not be considered as an alternative to net income as an indicator of the
Company's operating performance or as an alternative to cash flow as a
measure of liquidity. Funds From Operations is defined by the National
Association of Real Estate Investment Trusts ("NAREIT") as net income or loss
(computed in accordance with generally accepted accounting principles),
excluding gains or losses from debt restructurings and divestitures of
properties, plus depreciation and amortization of real estate assets, and
after adjustment for unconsolidated partnerships and joint ventures. The
Company calculates Funds From Operations as defined by NAREIT and as
interpreted in NAREIT's White Paper (i.e. the Company does not add back
amortization of deferred financing costs and depreciation of non-rental real
estate assets to net income). In addition, other real estate companies may
calculate Funds From Operations differently than the Company. A
reconciliation of the Company's income before gains or losses on divestiture
of properties, minority interest in net income and extraordinary item to
Funds From Operations for the six months ended June 30, 1998 and 1997 is as
follows:
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1998 1997
------------- --------------
Income Before Minority Interest, Gain (Loss) on
Divestiture of Properties and Extraordinary Item $20,909 $ 8,932
Reconciling Items:
Depreciation and Amortization
Relating to Real Estate Operations 10,562 4,179
Series D Preferred Stock Dividends
and Other (57) --
------- -------
Funds From Operations $31,414 $13,111
------- -------
------- -------
As of June 30, 1998, the Company had approximately $8,195 in
unrestricted cash and cash equivalents.
At June 30, 1998, the outstanding balance on the Mortgage Loan was
$66,094. The Mortgage Loan bears interest at the annual rate of 8.63% and
requires interest only payments until its maturity in 2005.
14
During the six months ended June 30, 1998, the Company borrowed
$183,800 under its Unsecured Credit Facility to fund property acquisitions
and developments.
At June 30, 1998, the outstanding balances on the Company's
Unsecured Notes and corresponding premium were $160,000 and $105,
respectively. The Unsecured Notes were issued in two tranches, $135,000
maturing on November 20, 2007, bearing an interest rate of 7.25% per annum,
and $25,000 maturing on November 20, 2009, bearing an interest rate of 7.30%
per annum. Interest on these notes is payable semiannually.
On May 13, 1997, the Company purchased a property located in
Montebello, California, subject to a mortgage note payable bearing an
interest rate different from the prevailing market rate at the date of
acquisition. This interest rate differential was recorded as a premium. This
mortgage note payable had a maturity date of July 15, 1998, an outstanding
balance of $10,429 and provided for monthly principal and interest payments
of $96 based on an interest rate of 9.89% per annum and a 30-year
amortization schedule. The premium totaling $324 was amortized over the term
of the mortgage note payable using the effective interest method. As of June
30,1998, this mortgage note payable and debt premium had outstanding balances
of $10,286 and $12, respectively. Subsequent to June 30, 1998, the mortgage
note payable was repaid from borrowings made under the Company's Unsecured
Credit Facility.
The Company, through one of its consolidated partnerships, assumed
a mortgage note payable in the principal amount of $3,676 in connection with
a contribution of a property located in Orlando, Florida. The mortgage note
payable has a maturity date of February 1, 2006, and provides for monthly
principal and interest payments of $28 based on an interest rate of 7.90% per
annum and a 25-year amortization schedule. As of June 30, 1998, this mortgage
note payable had an outstanding balance of $3,656.
During the six months ended June 30, 1998, the Company, through
one of its consolidated partnerships, assumed three mortgage notes payable in
connection with the acquisition of three properties located in Las Vegas,
Nevada and four properties located in Plano, Texas. Two of the mortgage notes
payable are secured by properties located in Las Vegas, Nevada. One mortgage
note payable had a principal balance of $6,212 as of June 30, 1998, matures
on July 1, 2011 and provides for monthly principal and interest payments of
$47 based on an interest rate of 7.50% per annum and a 23-year amortization
schedule. The second mortgage note payable had a principal balance of $7,505
as of June 30, 1998, matures on December 1, 2009 and provides for monthly
principal and interest payments of $63 based on an interest rate of 8.30% per
annum and a 22-year amortization schedule. The third mortgage note payable,
which is secured by a property in Texas, had a principal balance of $3,909 as
of June 30, 1998, matures on April 15, 2006 and provides for monthly
principal and interest payments of $28 based on an interest rate of $6.95%
per annum.
The Company currently has a policy of incurring debt only if, upon
such incurrence, the Company's debt-to-total market capitalization would be
50% or less. However, the Company's organizational documents do not contain
any limitation on the amount of indebtedness the Company may incur.
Accordingly, the Board could alter or eliminate this policy and would do so
if, for example, it were necessary in order for the Company to continue to
qualify as an REIT. If this policy were changed, the Company could become
more highly leveraged, resulting in an increase in debt service that could
adversely affect the cash available for distribution to stockholders and
could increase the risk of default on the Company's indebtedness.
In addition to the variable interest rate contracts on the
Unsecured Credit Facility, the Company may incur indebtedness in the future
that bears interest at a variable rate or may be required to refinance its
debt at higher rates. As a result, increases in interest rates could increase
the Company's interest expense, which could adversely affect the Company's
ability to pay distributions to stockholders.
In connection with the Merger, the Company issued approximately
553,000 warrants to purchase an equal number of shares of the Company's
Common Stock. Each Merger Warrant entitles the holder to purchase one share
of the Company's Common Stock at the exercise price of $16.23. The exercise
period began May 23, 1997 and ends February 23, 1999. As of June 30, 1998,
the Company had issued 94,034 shares pursuant to exercise of the Merger
Warrants.
15
On June 30, 1998, the Company completed a public offering of
2,000,000 shares of Series D Cumulative Redeemable Preferred Stock for an
aggregate offering price of $50,000 or $25.00 per share. The net proceeds of
$48,425 were used to reduce borrowings under the Company's Unsecured Credit
Facility. Shares of the Series D Preferred Stock are redeemable by the
Company on or after June 30, 2003 and have a liquidation preference of
$50,000. Shares of the Series D Preferred Stock are not convertible into any
other securities of the Company. Dividends on the Series D Preferred Shares
are cumulative and payable quarterly at the rate of 8.75% of the liquidation
preference per annum.
Subsequent to June 30, 1998, the Company completed a direct
placement of 850,000 shares of the Company's Common Stock at an offering
price of $23.50 per share, resulting in gross proceeds of $19,975. The
Company used the net proceeds of the direct placement to reduce borrowings
under the Unsecured Credit Facility.
During the six months ended June 30, 1998, the Company divested
two properties located in California and Tennessee for an aggregate sales
price of $12,080. After closing costs and pro-rated items which totaled $387
and acceptance of a note receivable of $8,000, the Company received net cash
proceeds of $3,693.
Subsequent to June 30, 1998, the Company divested a property
located in California for a sales price of $335. After closing costs and
pro-rated items which totaled $18, the Company received net proceeds of $317.
USES OF LIQUIDITY
The Company's principal applications of its cash resources are:
(i) funding of property acquisitions and developments; (ii) payments of
capital improvements and leasing costs; (iii) payment of distributions; (iv)
payment of property operating costs including property expenses, property
taxes, general and administrative expenses, and interest expense; and (v)
principal payments on debt. Planned capital improvements on the Company's
properties consist of tenant improvements and other expenditures necessary to
lease and maintain the properties.
During the six months ended June 30, 1998, the Company declared
dividends to holders of its Common Stock, Series B Preferred Stock in the
aggregate amounts of $20,131 and $1,286 respectively, or $0.33 and $0.33 per
share, respectively. In addition, during the six months ended June 30, 1998,
the Company accrued $12 in dividends to holders of its Series D Preferred
Stock.
During the six months ended June 30, 1998, the Company repaid
borrowings on its Unsecured Credit Facility totaling $58,500 using the net
proceeds from the issuance of 2,000,000 shares of the Series D Preferred
Stock and the direct placement of 850,000 shares of Common Stock.
DEVELOPMENT PROJECTS
During the six months ended June 30, 1998, the Company, either
directly or through one of its consolidated partnerships, acquired
approximately 172 acres of land scheduled for future development for an
aggregate purchase price of $21,262. The aggregate cost to develop these
parcels is expected to be approximately $108,774. These properties, when
complete, will total approximately 2,576,000 square feet.
16
During the six months ended June 30, 1998, the Company, either
directly or through consolidated partnerships, completed development of and
placed in service three warehouse/distribution properties comprising
approximately 803,000 square feet with an aggregate cost of $29,228.
At June 30, 1998, the Company had, directly or through
consolidated partnerships, eleven warehouse/distribution properties either
under development or scheduled for development which will total approximately
4,447,000 square feet upon completion. The aggregate cost for the design and
construction of these development projects is estimated to be approximately
$171,409. As of June 30, 1998, the Company had incurred total project costs
of approximately $45,512 on these development projects.
In connection with land acquisitions and development activities
relating to the consolidated partnerships, the Company's minority partners
contributed land and other consideration valued at $4,948.
Subsequent to June 30, 1998, the Company acquired approximately 61
acres of land scheduled for future development for an aggregate purchase
price of $4,416. The costs to develop these parcels are expected to aggregate
to approximately $29,600. These properties, when complete, will total
approximately 909,000 square feet.
Subsequent to June 30, 1998, the Company completed development of
and placed in service two warehouse/distribution properties comprising
approximately 1,069,000 square feet. The aggregate development cost for these
properties was approximately $40,655.
The Company expects to fund its future development costs with
Borrowings under the Unsecured Credit Facility, cash reserves, bank and
institutional debt financing, and private or public debt and equity placements.
PROPERTY ACQUISITIONS
During the six months ended June 30, 1998, the Company, either
directly or through one of its consolidated partnerships, purchased 16
properties located in California, Massachusetts, Nevada, Ohio and Texas, with
an aggregate square footage of approximately 1,771,000. The aggregate
purchase price for these properties totaled $88,121. The Company funded a
portion of these acquisitions from cash reserves and funded the majority of
the remaining costs with borrowings under the Unsecured Credit Facility. In
addition, the Company assumed three mortgage notes payable totaling $17,713.
In connection with the acquisition relating to the consolidated partnership,
the Company's minority partners' contribution is valued at $11,000.
On April 2, 1998, the minority partners of one of the Company's
consolidated partnerships contributed a property located in Orlando, Florida
with a square footage of approximately 120,000. The minority partners'
contribution totaled $950. With regard to this transaction, the partnership
assumed a mortgage note payable in the principal amount of $3,676 (see Note
5).
On April 22, 1998, the Company and a minority partner of one of
its consolidated partnerships, executed an Assignment of Partnership
Interests, whereby the Company, as the managing general partner, exercised
its right to purchase the partnership interest of the minority partner. The
Company purchased the partnership interest for a total purchase price of
$1,089.
On May 7, 1998, the Company entered into a property exchange
transaction. This transaction involved the Company's transfer of its interest
in three properties located in Nashville, Tennessee with a net book value of
$6,174 to the other property owner in exchange for five properties owned by
the other property owner located in Memphis, Tennessee. The Company paid $350
to the other property owner representing the difference in the exchange
values of the properties. In addition, the Company paid closing costs and
prorated items totaling $317.
17
The Company has an investment in an unconsolidated subsidiary,
MRI, formed for the purpose of acquiring and operating companies providing
refrigerated distribution services. In the six months ended June 30, 1998,
MRI completed two strategic operating company acquisitions: Arctic and CEGF.
In its first acquisition on February 19, 1998, MRI acquired for an aggregate
purchase price of $36,000, the real estate, business, and operating assets
including $15,263 in cash of Arctic, a refrigerated distribution and freight
consolidation company operating three refrigerated warehouses. The facilities
are located in the Los Angeles Basin and aggregate 7.2 million cubic feet and
299,000 square feet.
In its second acquisition on June 11, 1998, MRI acquired for
$29,741 the common stock of CEGF, a refrigerated distribution services
company located in Tampa, Florida. CEGF operates two facilities in Tampa,
Florida and one facility in Houston, Texas aggregating 9.2 million cubic feet
and 332,924 square feet.
The investment in MRI is comprised of secured and unsecured notes
and non-voting participating preferred stock. The Company accounts for its
investment in MRI using the equity method. At June 30, 1998, the outstanding
balances on the secured and unsecured notes totaled $30,650 and $5,879
respectively.
Subsequent to June 30, 1998, the Company purchased a property
located in Indiana comprising approximately 133,000 square feet for a
purchase price of $4,400. This acquisition was funded through borrowings
under the Unsecured Credit Facility.
YEAR 2000 COMPLIANCE
The Company utilizes a number of computer software programs and
operating systems, including applications used in financial business systems
and various administrative functions. To the extent that the Company's
software applications contain source code that is unable to appropriately
interpret the upcoming calendar year "2000" and beyond, replacement or some
level of modification of such application will be necessary. The Company's
current information systems environment is based on a WINTEL platform (Intel
PC/LAN/WAN) configuration. The environment does not contain mainframe
computers.
The Company has substantially completed its assessment of the
effect of Year 2000 compliance on its information systems. Based on its
assessment, the Company believes that substantially all of its systems are
currently Year 2000 compliant. The Company also believes that its
non-information-technology systems are Year 2000 compliant.
If material suppliers of products or services purchased by the
Company and others with whom the Company does business are not Year 2000
compliant, the Company's results of operations could be negatively impacted.
Although the Company has no reason to believe that its material vendors and
other material third parties with whom it does business are not Year 2000
compliant (or will not be compliant on a timely basis), the Company is unable
to determine at this time the effect that any such non-compliance would have
on the Company's operations. The Board of Directors of the Company has
directed the Company's management team to assess the potential impact on the
Company of the Year 2000 compliance status of material third parties with
whom the Company does business. This assessment is currently in its
preliminary stage.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Rentals from Real Estate Investments for the six months ended June
30, 1998 and 1997 totaled $54,653 and $24,564, respectively. The increase of
$30,089 was due to primarily to (i) Properties acquired during 1997 and 1998
("Property Acquisitions") which increased rental revenues by $28,067 and (ii)
the rental revenues generated by the build-to-suit properties placed in
service during 1997 and 1998 ("Completed Build-to-Suits") totaling $3,066.
These increases were offset by Properties divested during 1997 and 1998
("Property Divestitures") which reduced rental revenues by $988.
Income from Unconsolidated Joint Venture totaled $990 for the six
months ended June 30, 1998 resulting from interest income on the $21,500
participating mortgage loan purchased by the Company in 1997 in connection
with the property-for-stock transaction with Ameritech Pension Trust.
Income from Unconsolidated Subsidiaries totaled $750 for the six
months ended June 30, 1998 resulting from MRI's secured and unsecured notes
payable to the Company and equity earnings of MRI.
Interest and Other Income totaled $528 and $304 for the six months
ended June 30, 1998 and 1997, respectively. The increase of $224 was
primarily due to interest income from the note receivable from the
divestiture of a property located in California and a loan extended to a
minority limited partner.
Interest Expense increased by $6,696 to $10,480 during the six
months ended June 30, 1998 from the same period in 1997. The increase was
primarily due to (i) the Company's completion of a private offering of
$160,000 in principal of unsecured senior notes to institutional investors in
November 1997 resulting in an increase of $5,806 and (ii) the assumption of
mortgage notes payable relating to the acquisitions in Florida, Nevada and
Texas resulting in an increase of $790.
Compared to the same period in 1997, Property Taxes increased by
$3,431 to $6,824 during the six months ended June 30, 1998. The increase was
primarily due to (i) the Property Taxes attributable to the Property
Acquisitions totaling $3,355 and (ii) the Property Taxes for the Completed
Build-to-Suits amounting to $209. These increases were partially offset by
Property Divestitures, which reduced Property Taxes by $112.
Compared to the same period in 1997, Property Operating Expenses
increased by $2,220 to $4,262 during the six months ended June 30, 1998. The
increase was primarily due to (i) the Property Operating Expenses
attributable to the Property Acquisitions totaling $2,192 and (iii) the
Property Operating Expenses for the Completed Build-to-Suits amounting to
$422. These increases were offset in part by Property Divestitures, which
reduced Property Operating Expenses by $213.
18
General and Administrative Expenses totaled $3,976 and $2,501 for
the six months ended June 30, 1998 and 1997, respectively. The increase of
$1,475 was primarily due to (i) an increase in personnel and administrative
costs of $708 arising from the growth of the Company, (ii) an increase of
$332 in fees relating to terminated property deals and (iii) an increase of
$367 in accounting, legal, marketing and system conversion costs resulting
from the increased size of the Company's property portfolio.
Compared to the same period in 1997, Depreciation and Amortization
Expense increased by $6,254 to $10,470 during the six months ended June 30,
1998. The increase was primarily due to (i) Depreciation Expense attributable
to the Property Acquisitions totaling $5,639 and (ii) Depreciation Expense
for the Completed Build-to-Suits amounting to $538. These increases were
offset by Property Divestitures, which reduced Depreciation and Amortization
Expenses by $185.
The Gain on Divestiture of Properties totaling $2,054 for the six
months ended June 30, 1998 was attributable to the divestiture of the San
Carlos property located in California and the 4013 Premier property located
in Tennessee.
The Net Loss on Divestiture of Properties totaling $448 for the six
months ended June 30, 1997 was attributable to the divestiture of the
Wildwood and Golden Cove properties which resulted in a total loss of $1,158.
The losses were partially offset by gains on the divestiture of the
Birmingham I, Birmingham II and Phoenix North 23rd properties totaling $710.
The Extraordinary Item totaling $808 for the six months ended June
30, 1997 was attributable to the restructuring of the Company's Unsecured
Credit Facility.
19
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PART II: OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or
any of its subsidiaries is a party or to which any of the assets of the
Company or any of its subsidiaries is subject.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 15, 1998. At
that meeting, the stockholders voted on and approved the following
proposals:
1. The election of seven directors for terms expiring in 1999.
2. A proposal to ratify the selection of Arthur Andersen LLP as
the Company's independent auditors for the fiscal year ending
December 31, 1998.
The proposals were approved by the following votes:
1. Election of Directors
---------------------
Name For Withheld
---- --- --------
Allen J. Anderson 28,316,538 77,557
C. E. Cornutt 28,316,312 77,783
T. Patrick Duncan 28,118,582 275,513
Peter O. Hanson 28,312,396 81,699
John S. Moody 28,139,406 254,689
Kenneth N. Stensby 28,118,351 275,744
Lee W. Wilson 28,312,730 81,365
2. Ratification of Independent Auditors
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
28,332,476 19,655 41,964 N/A
ITEM 5. OTHER INFORMATION
On May 15th, 1998, the Board of Directors amended the Second Amended
and Restated Bylaws as follows:
1. The Board amended Section 2.3 SPECIAL MEETINGS to require that a
special meeting of stockholders shall be called by the secretary of
the Corporation upon the written request of the holders of shares
entitled to cast not less than a majority of all the votes entitled
to be cast at that meeting. The Second Amended Bylaws previously
required 10% of the votes entitled to be cast before a special
meeting would be called.
2. The Board amended Section 2.12.3(c) GENERAL to state that nothing
in Section 2.12 would be deemed to affect the rights of the
Corporation to omit proposals from the Corporation's proxy statement
pursuant to Rule 14a-18 under the Exchange Act.
3. The board amended Section 2.9 PROXIES by changing the phrase
"attorney in fact" to "agent".
The Third Amended and Restated Bylaws appear as Exhibit 3.3.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
1.1(1) Underwriting Agreement dated June 24, 1998, among Meridian
Industrial Trust, Inc., Goldman Sachs & Co., Prudential
Securities Incorporated, ABN AMRO Incorporated, A.G.
Edwards & Sons, Inc., Legg Mason Wood Walker, Incorporated,
and PaineWebber, Incorporated, as representatives of the
several underwriters.
1.2(1) Pricing Agreement dated June 24, 1998, among Meridian
Industrial Trust, Inc., Goldman Sachs & Co., Prudential
Securities Incorporated, ABN AMRO Incorporated, A.G.
Edwards & Sons, Inc., Legg Mason Wood Walker, Incorporated,
and PaineWebber, Incorporated, as representatives of the
several underwriters.
3.1(2) The Company's Third Amended and Restated Articles of Incorporation.
3.2(1) Articles Supplementary dated June 25, 1998, classifying 2,300,000
shares of 8.75% Series D Cumulative Redeemable Preferred Stock.
3.3(3) The Company's Third Amended and Restated Bylaws.
10.1(4) Second Amendment dated June 23, 1998 to Third Amended and
Restated Revolving Credit Agreement dated February 19, 1998
among (i) the Company, (ii) MIT Unsecured L.P. and Meridian
Refrigerated, Inc. (iv) BankBoston, N.A., Chase Bank of
Texas, National Association, NationsBank of Texas, N.A.,
Wells Fargo Bank, N.A., Dresdner Bank AG, New York Branch
and Grand Cayman Branch, and First American Bank Texas,
S.S.B., (collectively, the "Banks"), (iii) BankBoston, N.A.
as Agent for the Banks, (iv) Chase Bank of Texas, National
Association as Documentation Agent for the Banks, and (v)
NationsBank of Texas, N.A. as Syndication Agent for the
Banks.
10.2(4) Registration Rights Agreement dated June 30, 1998 among
Meridian Industrial Trust, Inc., R. William Gardner,
Douglas C. Gardner, Steven D. Gardner, and Todd L. Platt.
10.3(3) Second Amended and Restated Employee and Director
Incentive Stock Plan of Meridian Industrial Trust, Inc.
27.1(4) Financial Data Schedule.
- --------
(1) Filed on June 26, 1998, as part of the Company's Current Report on Form
8-K dated June 25, 1998, and incorporated herein by reference.
(2) Filed with the Company's Amendment No. 1 to Registration Statement No.
333-02322 on March 25, 1996, and incorporated herein by reference.
(3) Filed with this report.
(4) Previously filed.
21
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the quarter ended June 30, 1998:
Current Report on Form 8-K dated and filed May 29, 1998,
filing financial statements related to the Company's
acquisition of properties located in Arlington, Carrollton,
and Grand Prairie, Texas.
Current Report on Form 8-K dated and filed June 23, 1998,
filing financial statements related to the Company's
acquisition of properties located in Las Vegas, Nevada, and
Dallas, Texas.
Current Report on Form 8-K dated June 25, 1998, (filed June
26, 1998) filing exhibits related to the Company's sale of
Series D preferred stock.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to its quarterly report
on Form 10-Q to be signed on its behalf by the undersigned thereunto duly
authorized.
MERIDIAN INDUSTRIAL TRUST, INC.
Dated: September 10, 1998 By: /s/ Robert A. Dobbin
---------------------------
Robert A. Dobbin
Secretary and General Counsel
23
MERIDIAN INDUSTRIAL TRUST, INC.
INDEX TO EXHIBITS
Exhibit Number
(corresponding to the Sequentially
Exhibit Table of Item Numbered
601 of Regulation S-K) Description Page
---------------------- ----------- ------------
1.1(1) Underwriting Agreement dated June 24, 1998,
among Meridian Industrial Trust, Inc., Goldman
Sachs & Co., Prudential Securities Incorporated,
ABN AMRO Incorporated, A.G. Edwards & Sons,
Inc., Legg Mason Wood Walker, Incorporated, and
PaineWebber, Incorporated, as representatives of
the several underwriters.
1.2(1) Pricing Agreement dated June 24, 1998, among
Meridian Industrial Trust, Inc., Goldman Sachs &
Co., Prudential Securities Incorporated, ABN
AMRO Incorporated, A.G. Edwards & Sons, Inc.,
Legg Mason Wood Walker, Incorporated, and
PaineWebber, Incorporated, as representatives of
the several underwriters.
3.1(2) The Company's Third Amended and Restated Articles of
Incorporation.
3.2(1) Articles Supplementary dated June 25, 1998, classifying
2,300,000 shares of 8.75% Series D Cumulative Redeemable
Preferred Stock.
3.3(3) The Company's Third Amended and Restated Bylaws.
24
MERIDIAN INDUSTRIAL TRUST, INC.
INDEX TO EXHIBITS
Exhibit Number
(corresponding to the Sequentially
Exhibit Table of Item Numbered
601 of Regulation S-K) Description Page
---------------------- ----------- ------------
10.1(4) Second Amendment dated June 23, 1998 to Third
Amended and Restated Revolving Credit Agreement
dated February 19, 1998 among (i) the Company,
(ii) MIT Unsecured L.P. and Meridian
Refrigerated, Inc. (iv) BankBoston, N.A., Chase
Bank of Texas, National Association, NationsBank
of Texas, N.A., Wells Fargo Bank, N.A., Dresdner
Bank AG, New York Branch and Grand Cayman
Branch, and First American Bank Texas, S.S.B.,
(collectively, the "Banks"), (iii) BankBoston,
N.A. as Agent for the Banks, (iv) Chase Bank of
Texas, National Association as Documentation
Agent for the Banks, and (v) NationsBank of
Texas, N.A. as Syndication Agent for the Banks.
10.2(4) Registration Rights Agreement dated June 30, 1998
among Meridian Industrial Trust, Inc., R. William
Gardner, Douglas C. Gardner, Steven D. Gardner, and
Todd L. Platt
10.3(3) Second Amended and Restated Employee and
Director Incentive Stock Plan of Meridian
Industrial Trust, Inc.
27.1(4) Financial Data Schedule.
- --------
(1) Filed on June 26, 1998, as part of the Company's Current Report on Form
8-K dated June 25, 1998, and incorporated herein by reference.
(2) Filed with the Company's Amendment No. 1 to Registration Statement No.
333-02322 on March 25, 1996, and incorporated herein by reference.
(3) Filed with this report.
(4) Previously filed.
25