<PAGE>
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 SEPTEMBER 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.
- --------------------------------------------------------------------------------
(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 NOVEMBER 2, 1998: 1,623,376
SHARES OF SERIES D CUMULATIVE REDEEMABLE
PREFERRED STOCK AS OF NOVEMBER 2, 1998: 2,000,000
SHARES OF COMMON STOCK AS OF NOVEMBER 2, 1998: 31,689,273
<PAGE>
- --------------------------------------------------------------------------------
PART I: FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, the
Registrant hereby amends and restates its Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1998 in its entirety as follows.
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 Reports on Form 10-Q for the
three months ended March 31, 1998 and June 30, 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 nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998.
1
<PAGE>
MERIDIAN INDUSTRIAL TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1998 1997
(UNAUDITED) (AUDITED)
------------- -------------
<S> <C> <C>
INVESTMENT IN REAL ESTATE ASSETS:
Rental Properties Held for Investment $ 1,085,299 $ 813,389
Less: Accumulated Depreciation (29,005) (14,374)
------------- -------------
1,056,294 799,015
Rental Properties Held for Divestiture -- 9,492
------------- -------------
1,056,294 808,507
Investment in Unconsolidated Joint Venture 21,500 21,500
------------- -------------
TOTAL INVESTMENT IN REAL ESTATE ASSETS 1,077,794 830,007
OTHER ASSETS:
Investment in and Advances to Unconsolidated Subsidiaries 45,907 --
Cash and Cash Equivalents 3,535 7,855
Cash Held in Consolidated Limited Partnerships 2,556 992
Restricted Cash and Cash Held in Escrow 8,356 11,267
Note Receivable 8,000 --
Accounts Receivable, Net of Reserves of $273 and $228 at
September 30, 1998 and December 31, 1997, respectively 6,989 3,460
Capitalized Loan Fees, Lease Commissions and Other Assets, Net 24,490 9,931
------------- -------------
TOTAL ASSETS $ 1,177,627 $ 863,512
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Unsecured Notes, Including Unamortized Debt Premium of $102
and $109 at September 30, 1998 and December 31, 1997, respectively $ 160,102 $ 160,109
Mortgage Loan 66,094 66,094
Unsecured Credit Facility 235,300 20,500
Mortgage Notes Payable, Including Unamortized Debt Premium of
$153 at December 31, 1997 21,218 10,503
Accrued Dividends Payable 11,714 9,473
Accounts Payable, Prepaid Rent, Tenant Deposits and Other Liabilities 38,157 21,562
------------- -------------
TOTAL LIABILITIES 532,585 288,241
------------- -------------
MINORITY INTEREST IN CONSOLIDATED LIMITED PARTNERSHIPS 17,605 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; 31,674,027 and 30,165,662 shares of Common Stock issued and
outstanding at September 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 September 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 September 30, 1998 35 32
Additional Paid-in Capital 642,041 574,848
Distributions in Excess of Income (14,639) (4,741)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 627,437 570,139
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,177,627 $863,512
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
2
<PAGE>
MERIDIAN INDUSTRIAL TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
---------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
REVENUES:
Rentals from Real Estate Investments $ 31,073 $ 14,707 $ 85,726 $ 39,271
Income from Unconsolidated Joint Venture 495 -- 1,485 --
Income from Unconsolidated Subsidiaries 785 -- 1,534 --
Interest and Other Income 465 326 994 630
---------- ----------- ------------ -----------
TOTAL REVENUES 32,818 15,033 89,739 39,901
---------- ----------- ------------ -----------
EXPENSES:
Interest Expense 6,863 3,084 17,344 6,868
Loss on Interest Rate Protection Agreement 12,633 -- 12,633 --
Property Taxes 4,076 1,905 10,900 5,298
Property Operating 2,316 1,246 6,579 3,288
General and Administrative 2,040 1,413 6,015 3,914
Depreciation and Amortization 6,259 2,485 16,729 6,701
---------- ----------- ------------ -----------
TOTAL EXPENSES 34,187 10,133 70,200 26,069
---------- ----------- ------------ -----------
Income (Loss) Before Minority Interest (1,369) 4,900 19,539 13,832
Minority Interest in Net (Income) (176) -- (423) --
---------- ----------- ------------ -----------
Income (Loss) Before Gain (Loss) on Divestiture
of Properties and Extraordinary Item (1,545) 4,900 19,116 13,832
Gain (Loss) on Divestiture of Properties, Net 2,442 (17) 4,497 (465)
---------- ----------- ------------ -----------
Income Before Extraordinary Item 897 4,883 23,613 13,367
Extraordinary Item - Expenses Incurred in
Connection with Debt Restructuring
and Retirements -- -- -- (808)
---------- ----------- ------------ -----------
NET INCOME $ 897 $ 4,883 $ 23,613 $ 12,559
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
Net Income $ 897 $ 4,883 $ 23,613 $ 12,559
Less Preferred Dividends Declared:
Series B Preferred Stock (535) (705) (1,821) (2,114)
Series D Preferred Stock (1,094) -- (1,106) --
---------- ----------- ------------ -----------
NET INCOME (LOSS) ALLOCABLE TO COMMON $ (732) $ 4,178 $ 20,686 $ 10,445
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
BASIC PER SHARE DATA:
Income (Loss) Before Extraordinary Item $ (0.02) $ 0.29 $ 0.68 $ 0.81
Extraordinary Item -- -- -- (0.06)
---------- ----------- ------------ -----------
NET INCOME (LOSS) ALLOCABLE TO COMMON $ (0.02) $ 0.29 $ 0.68 $ 0.75
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
DILUTED PER SHARE DATA:
Income (Loss) Before Extraordinary Item $ (0.02) $ 0.28 $ 0.67 $ 0.79
Extraordinary Item -- -- -- (0.06)
---------- ----------- ------------ -----------
NET INCOME (LOSS) ALLOCABLE TO COMMON $ (0.02) $ 0.28 $ 0.67 $ 0.73
---------- ----------- ------------ -----------
---------- ----------- ------------ -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 31,492,559 14,569,981 30,622,741 13,925,269
Diluted 31,492,559 15,066,705 31,079,886 14,379,496
</TABLE>
The accompanying notes are an integral part of these statements.
3
<PAGE>
MERIDIAN INDUSTRIAL TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 23,613 $ 12,559
Adjustments to Reconcile Net Income to Cash Provided by
Operating Activities:
Depreciation and Amortization 16,729 6,701
Amortization of Debt Premium (160) (102)
Amortization of Financing Costs 304 220
Straight Line Rent (3,279) (1,501)
Income Allocated to Minority Partner Interest 423 --
(Gain) Loss on Divestiture of Properties (4,497) 465
Extraordinary Item - Expenses Incurred in Connection with
Debt Restructuring and Retirements -- 808
Increase in Accounts Receivable and Other Assets (6,339) (1,269)
Increase in Accounts Payable, Prepaid Rent,
Tenant Deposits and Other Liabilities 14,127 667
------------- ------------
Net Cash Provided by Operating Activities 40,921 18,548
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net Proceeds from Property Sales 23,297 16,112
(Increase) Decrease in Restricted Cash and Cash Held In Escrow (11) 3,353
Increase in Cash Held In Consolidated Limited Partnerships (1,362) (3,582)
Investments in and Advances to Unconsolidated Subsidiaries (45,895) --
Investments in Real Estate (245,958) (169,171)
Recurring Building Improvements (2,313) (994)
Recurring Tenant Improvements (682) (328)
Recurring Leasing Commissions (2,118) (841)
Receipt of Note Receivable -- 503
Purchase of Minority Partner Interest (1,089) --
Distributions Paid to Minority Partners (327) --
Purchase of Other Assets (7,302) (187)
------------- ------------
Net Cash Used in Investing Activities (283,760) (155,135)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments for Capitalized Loan Fees (105) (627)
Principal Payments on Mortgage Notes Payable (10,520) (5,756)
Borrowings on Unsecured Credit Facility 305,300 171,000
Repayment of Borrowings on Unsecured Credit Facility (90,500) (4,500)
Distributions Paid to Stockholders (31,270) (13,945)
Net Proceeds from issuance of Common and Preferred Stock, Exercise
of Warrants and Stock Options 71,789 195
Repurchase and Cancellation of Shares and Offering Costs (6,175) --
------------- ------------
Net Cash Provided by Financing Activities 238,519 146,367
------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,320) 9,780
Cash and Cash Equivalents at Beginning of Period 7,855 2,942
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,535 $ 12,722
------------- ------------
------------- ------------
CASH PAID FOR INTEREST $ 17,405 $ 7,191
------------- ------------
------------- ------------
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE>
MERIDIAN INDUSTRIAL TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 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 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 September 30, 1998, the Company's principal
asset was its portfolio of 223 warehouse/distribution and light industrial
properties, one retail property and eight properties under development. As
of September 30, 1998 and 1997, the Company's properties were 94% and 96%
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.
The accompanying consolidated financial statements should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
(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 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
<PAGE>
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 September 30, 1998 and 1997, Expense Recaptures
of $4,754 and $1,948, respectively, have been included in Rentals from Real
Estate Investments. For the nine months ended September 30, 1998 and 1997,
Expense Recaptures of $12,261 and $5,059, 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 nine
months ended September 30, 1998.
6
<PAGE>
(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 nine months ended September 30, 1997 have been restated to conform to the
new standards as follows:
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------------- --------------------------------
1998 1997 1998 1997
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Net Income (Loss) Allocable to
Common - Basic $ (732) $ 4,178 $ 20,686 $ 10,445
Net Income (Loss) Allocable to
Common- Diluted (732) 4,178 20,686 10,445
Weighted Average Shares
Outstanding:
Basic 31,492,559 14,569,981 30,622,741 13,925,269
Stock Options -- 330,715 317,547 300,304
Warrants -- 166,009 139,598 153,923
-------------- -------------- -------------- -----------
Diluted 31,492,559 15,066,705 31,079,886 14,379,496
-------------- -------------- -------------- -----------
-------------- -------------- -------------- -----------
Net Income (Loss) Allocable to
Common Per Share:
Basic $ (0.02) $ 0.29 $ 0.68 $ 0.75
Diluted (0.02) 0.28 0.67 0.73
</TABLE>
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 (subject to
extension in certain circumstances). As of September 30, 1998, the Company
had issued 121,905 shares of Common Stock 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% ($2.1875 per share) of the liquidation
preference per annum.
On July 20, 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 its unsecured
credit facility.
7
<PAGE>
(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.
3. INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
The Company has an investment in an unconsolidated subsidiary, Meridian
Refrigerated, Inc. ("MRI"), a Delaware corporation engaged in acquiring and
operating refrigerated distribution services. In the nine months ended
September 30, 1998, MRI completed two strategic acquisitions. 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 Cold Storage, Inc. ("Arctic"), a refrigerated
distribution and freight consolidation company with facilities located in the
Los Angeles Basin aggregating 7.2 million cubic feet and 299,000 square feet.
In its second acquisition on June 11, 1998, MRI acquired for $29,741 all
of the common stock of C.E.G.F. (USA), Inc., a refrigerated distribution
services company located in Tampa, Florida. Concurrent with the acquisition,
C.E.G.F. (USA), Inc. changed its name to Meridian Refrigerated East, Inc.
("MRE"). MRE, a wholly owned subsidiary of MRI, 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 September 30, 1998, the
outstanding balances on the secured and unsecured notes totaled $30,650 and
$6,053, 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% and requires interest only
payments until its maturity in 2005. In addition, the Mortgage Loan is
secured by a pool of the Company's properties with a net book value of
$118,661, and a letter of credit issued by the Company in favor of the lender
in the amount of $13,520 as of September 30, 1998. The letter of credit
reduces the Company's ability to borrow under its unsecured credit facility.
Concurrent with the Merger, the Company entered into an unsecured credit
facility (the "Unsecured Credit Facility"). Prior to amendments and
restatements made on the Unsecured Credit Facility, it 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.
As of September 30, 1998, the amended and restated Unsecured Credit
Facility provided for (i) a borrowing limit of $250,000, (ii) an interest
rate spread over LIBOR of 1.2%, and (iii) an extension of the maturity date
to April 3, 2000. At September 30, 1998, the weighted average interest rate
on the Unsecured Credit Facility was 6.88%. During the nine months ended
September 30, 1998, the Company paid a fee totaling $250 in connection with
an amendment. The Company also recorded an extraordinary expense of $808 in
loan costs in the second quarter of 1997 in connection with a restructuring
of the Unsecured Credit Facility.
8
<PAGE>
Subsequent to September 30, 1998, the Company entered into a fourth
amendment and restatement of the Unsecured Credit Facility. The fourth
amendment and restatement provides for (i) an increase of the Company's
borrowing limit from $250,000 to $350,000 and (ii) an extension of the
maturity date to October 8, 2001. In connection therewith, the Company paid
fees to the lender of $2,625, which will be amortized over the new term of
the Unsecured Credit Facility. In addition, certain other costs incurred in
connection with this amendment and restatement will be expensed.
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,
(i) $135,000 maturing on November 20, 2007 and bearing an interest rate of
7.25% per annum and (ii) $25,000 maturing on November 20, 2009 and 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.
In May 1998, in anticipation of a near-term debt offering, the Company
entered into an interest rate protection agreement. Unanticipated and rapid
deterioration in the United States credit markets prevented the Company from
executing that planned offering. Due to the volatile nature of the capital
markets and the rapid decline in interest rates during the third quarter, the
Company terminated the agreement on October 2, 1998. This action resulted in
a one time non-recurring expense of $12,633 for the nine months ended
September 30, 1998.
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 September 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. On July 15, 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 September 30,
1998, this mortgage note payable had an outstanding balance of $3,648.
During the nine months ended September 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 $6,195 as of September 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 $7,484 as of September 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 $3,891 as of September 30, 1998, matures on April 15,
9
<PAGE>
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 nine months ended September 30, 1998, the Company, either
directly or through one of its consolidated partnerships, purchased 24
properties located in California, Illinois, Indiana, Massachusetts, Nevada,
Ohio and Texas, with an aggregate square footage of approximately 3,092,000.
The aggregate purchase price for these properties totaled $132,922. 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 acquisitions by the
Company's consolidated partnerships, the Company's minority partners'
contribution was valued at $11,600.
During the nine months ended September 30, 1998, the Company, either
directly or through one of its consolidated partnerships, acquired
approximately 245 acres of land scheduled for future development for an
aggregate purchase price of $26,853. The aggregate cost to develop these
parcels is expected to be approximately $146,487. These properties, when
complete, will total approximately 3,597,000 square feet.
During the nine months ended September 30, 1998, the Company, either
directly or through consolidated partnerships, completed development of and
placed in service six warehouse/distribution properties comprising
approximately 2,137,000 square feet with an aggregate cost of $90,631.
At September 30, 1998, the Company had, directly or through consolidated
partnerships, eight warehouse/distribution properties either under
development or scheduled for development which will total approximately
3,113,000 square feet upon completion. The aggregate cost for the design and
construction of these development projects is estimated to be approximately
$116,860. As of September 30, 1998, the Company had incurred total project
costs of approximately $58,627 on these development projects.
The Company expects to finance its future development costs from each of
the following sources: (i) borrowings under the Unsecured Credit Facility,
(ii) cash reserves, and (iii) proceeds to be derived from future property
divestitures, future bank and institutional financings (including
co-investment transactions), and/or future private and public debt and equity
financings.
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 $4,975.
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 value of 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 another 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.
10
<PAGE>
7. PROPERTY DIVESTITURES
During the nine months ended September 30, 1998, the Company divested
itself of four properties located in California, Georgia and Tennessee for
an aggregate sales price of $33,865. After closing costs and pro-rated items
which totaled $1,288, an escrow holdback of $1,280 and acceptance of a note
receivable of $8,000, the Company received net cash proceeds of $23,297.
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 nine months ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Property Acquisitions:
Acquisition Price $253,052 $ 82,483
Restricted Cash (4,228) --
Minority Limited Partners' Capital Contributions (12,592) (3,863)
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 (2,356) (951)
Portfolio Acquisitions:
Acquisition Price -- 304,664
Common Stock Issued -- (259,817)
Accrued Closing Costs and Pro-rated Items -- 31,185
Property Divestitures:
Net Basis (34,157) (61,745)
Note Receivable 8,000 --
Cash Held In Escrow 1,280 --
Other Assets Net of Other Liabilities (11) 45,329
</TABLE>
During the nine months ended September 30, 1998 and 1997, interest
expense totaling $3,160 and $1,143, respectively, was capitalized for
properties under development. For the three months ended September 30, 1998
and 1997, interest expense totaling $1,303 and $459, respectively, was
capitalized for properties under development.
9. SUBSEQUENT EVENTS
ACQUISITIONS
Subsequent to September 30, 1998, the Company purchased four properties
located in Florida, Kentucky and Ohio, comprising approximately 965,000
square feet for a purchase price of $32,042. These acquisitions were funded
through borrowings under the Unsecured Credit Facility and a mortgage note
payable totaling $16,000 which is secured by three of the properties
acquired. The mortgage note payable bears an interest rate of 6.74% per
annum, provides for monthly and interest payments of $104 and matures on
November 1, 2008.
Subsequent to September 30, 1998, the Company acquired approximately 97
acres of land scheduled for future development for an aggregate purchase
price of $2,745. The costs to develop these parcels are expected to
aggregate to approximately $25,177. These properties, when complete, will
total approximately 878,000 square feet.
11
<PAGE>
Subsequent to September 30, 1998, the Company completed development of
and placed in service a warehouse/distribution property comprising
approximately 529,000 square feet for an aggregate development cost of
approximately $25,169.
OTHER
Subsequent to September 30, 1998, the Company and the minority partners in
two of its consolidated partnerships, executed Assignments of Partnership
Interests, whereby the Company, as the managing general partner, exercised its
right to purchase the partnership interests of the minority partners. The
Company purchased the partnership interests for a total purchase price of
$2,673.
12
<PAGE>
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 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
September 30, 1998, the Company's principal asset was its portfolio of 223
warehouse/distribution and light industrial properties, one retail property
and eight properties under development. As of September 30, 1998 and 1997,
the Company's properties were 94% and 96% 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 Reports on Form 10-Q for the three months ended March
31, 1998 and June 30, 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 expects to finance its operating cash needs, its
distributions to common and preferred stockholders, and its cash requirements
for existing, committed property acquisition, development, expansion and
renovation activity from each of the following sources: (i) borrowings under
the Unsecured Credit Facility, (ii) cash reserves, and (iii) proceeds to be
derived from future property divestitures, future bank and institutional
financings (including co-investment transactions), and/or future private and
public debt and equity financings. 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 (i) total indebtedness, (ii) Series
D Preferred Stock with a liquidation preference of $50,000, and (iii) 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 certain limited partnership units. At September 30,
1998, the Company's debt-to-total market capitalization rate was 37.7%.
13
<PAGE>
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 and
co-investment transactions with institutional investors. A summary of the
Company's historical cash flows for the nine months ended September 30, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows provided by (used in):
Operating activities $ 40,921 $ 18,548
Investing activities (283,760) (155,135)
Financing activities 238,519 146,367
</TABLE>
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, divestiture of properties
and significant non-recurring items that materially distort the comparative
measurement of the Company over time, 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). 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 nine months ended September 30, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
---------- ---------
<S> <C> <C>
Income Before Minority Interest, Gain
(Loss) on Divestiture of Properties
and Extraordinary Item $19,539 $13,832
Reconciling Items:
Depreciation and Amortization
Relating to Real Estate Operations 17,240 6,644
Loss on Interest Rate Protection
Agreement 12,633 --
Series D Preferred Stock Dividends
and Other (1,150) --
---------- ---------
Funds From Operations $48,262 $20,476
---------- ---------
---------- ---------
</TABLE>
14
<PAGE>
As of September 30, 1998, the Company had approximately $3,535 in
unrestricted cash and cash equivalents.
At September 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.
During the nine months ended September 30, 1998, the Company borrowed
$305,300 under its Unsecured Credit Facility to fund property acquisitions
and developments.
Subsequent to September 30, 1998, the Company entered into a fourth
amendment and restatement of the Unsecured Credit Facility. The fourth
amendment and restatement provides for (i) an increase of the Company's
borrowing limit from $250,000 to $350,000 and (ii) an extension of the
maturity date to October 8, 2001. In connection therewith, the Company paid
fees to the lender of $2,625, which will be amortized over the new term of
the Unsecured Credit Facility. In addition, certain other costs incurred in
connection with this amendment and restatement will be expensed.
At September 30, 1998, the outstanding balances on the Company's
Unsecured Notes and corresponding premium were $160,000 and $102,
respectively. The Unsecured Notes were issued in two tranches, (i) $135,000
maturing on November 20, 2007 and bearing an interest rate of 7.25% per
annum, and (ii) $25,000 maturing on November 20, 2009 and 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. On July 15, 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 September 30, 1998, this
mortgage note payable had an outstanding balance of $3,648.
During the nine months ended September 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 $6,195 as of September 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 $7,484 as of September 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 $3,891 as of September 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.
Subsequent to September 30, 1998, the Company financed in part the
acquisition of four properties located in Florida, Kentucky and Ohio with a
mortgage note payable in the principal amount of $16,000. The mortgage note
payable bears an interest rate of 6.74% per annum, provides for monthly and
interest payments of $104 and matures on November 1, 2008.
15
<PAGE>
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 (subject to extension
in certain circumstances). The exercise period began May 23, 1997 and ends
February 23, 1999. As of September 30, 1998, the Company had issued 121,905
shares of Common Stock pursuant to exercise of the Merger Warrants.
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% ($2.1875 per share) of the liquidation
preference per annum.
On July 20, 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 nine months ended September 30, 1998, the Company divested
itself of four properties located in California, Georgia and Tennessee for an
aggregate sales price of $33,865. After closing costs and pro-rated items
which totaled $1,288, an escrow holdback of $1,280 and acceptance of a note
receivable of $8,000, the Company received net cash proceeds of $23,297.
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 nine months ended September 30, 1998, the Company declared
dividends to holders of its Common Stock and Series B Preferred Stock in the
aggregate amounts of $30,584 and $1,821 respectively, or $0.33 and $0.33 per
share per quarter, respectively.
During the nine months ended September 30, 1998, the Company declared
partial quarterly dividends totaling $380 ($0.19 per share) to holders of its
Series D Preferred Stock. Subsequent to September 30, 1998, the Company
declared full quarterly dividends of $1,094 ($0.5469 per share), to holders
of its Series D Preferred Stock as of the record date October 22, 1998 and
payable on November 2, 1998.
16
<PAGE>
During the nine months ended September 30, 1998, the Company repaid
borrowings on its Unsecured Credit Facility totaling $90,500 using the net
proceeds from (i) the issuance of 2,000,000 shares of the Series D Preferred
Stock (ii) the direct placement of 850,000 shares of Common Stock and (iii)
property divestitures.
In May 1998, in anticipation of a near-term debt offering, the Company
entered into an interest rate protection agreement. Unanticipated and rapid
deterioration in the United States credit markets prevented the Company from
executing that planned offering. Due to the volatile nature of the capital
markets and the rapid decline in interest rates during the third quarter, the
Company terminated the agreement on October 2, 1998. This action resulted in
a one time non-recurring expense of $12,633 for the nine months ended
September 30, 1998.
DEVELOPMENT PROJECTS
During the nine months ended September 30, 1998, the Company, either
directly or through one of its consolidated partnerships, acquired
approximately 245 acres of land scheduled for future development for an
aggregate purchase price of $26,853. The aggregate cost to develop these
parcels is expected to be approximately $146,487. These properties, when
complete, will total approximately 3,597,000 square feet.
During the nine months ended September 30, 1998, the Company, either
directly or through consolidated partnerships, completed development of and
placed in service six warehouse/distribution properties comprising
approximately 2,137,000 square feet with an aggregate cost of $90,631.
At September 30, 1998, the Company had, directly or through consolidated
partnerships, eight warehouse/distribution properties either under
development or scheduled for development which will total approximately
3,113,000 square feet upon completion. The aggregate cost for the design and
construction of these development projects is estimated to be approximately
$116,860. As of September 30, 1998, the Company had incurred total project
costs of approximately $58,627 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 $4,975.
Subsequent to September 30, 1998, the Company acquired approximately 97
acres of land scheduled for future development for an aggregate purchase
price of $2,745. The costs to develop these parcels are expected to
aggregate to approximately $25,177. These properties, when complete, will
total approximately 878,000 square feet.
Subsequent to September 30, 1998, the Company completed development of
and placed in service a warehouse/distribution property comprising
approximately 529,000 square feet for an aggregate development cost of
approximately $25,169.
The Company expects to finance its future development costs from each of
the following sources: (i) borrowings under the Unsecured Credit Facility,
(ii) cash reserves, and (iii) proceeds to be derived from future property
divestitures, future bank and institutional financings (including
co-investment transactions), and/or future private and public debt and equity
financings.
ACQUISITIONS
During the nine months ended September 30, 1998, the Company, either
directly or through one of its consolidated partnerships, purchased 24
properties located in California, Illinois, Indiana, Massachusetts, Nevada,
Ohio and Texas, with an aggregate square footage of approximately 3,092,000.
The aggregate purchase price for these properties totaled $132,922. 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
17
<PAGE>
connection with the acquisitions by the Company's consolidated partnerships,
the Company's minority partners' contribution was valued at $11,600.
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 value of 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.
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 another 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.
The Company has an investment in an unconsolidated subsidiary, MRI, a
Delaware corporation engaged in acquiring and operating refrigerated
distribution services. In the nine months ended September 30, 1998, MRI
completed two strategic acquisitions. 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 with facilities
located in the Los Angeles Basin aggregating 7.2 million cubic feet and
299,000 square feet.
In its second acquisition on June 11, 1998, MRI acquired for $29,741 all
of the common stock of C.E.G.F. (USA), Inc., a refrigerated distribution
services company located in Tampa, Florida. Concurrent with the acquisition,
C.E.G.F. (USA), Inc. changed its name to Meridian Refrigerated East, Inc.
("MRE"). MRE, a wholly owned subsidiary of MRI, 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 September 30, 1998, the
outstanding balances on the secured and unsecured notes totaled $30,650 and
$6,053, respectively.
Subsequent to September 30, 1998, the Company purchased four properties
located in Florida, Kentucky and Ohio, comprising approximately 965,000
square feet for a purchase price of $32,042. These acquisitions were funded
through borrowings under the Unsecured Credit Facility and a mortgage note
payable totaling $16,000 which is secured by three of the properties acquired.
Subsequent to September 30, 1998, the Company and the minority partners
in two of its consolidated partnerships, executed Assignments of Partnership
Interests, whereby the Company, as the managing general partner, exercised
its right to purchase the partnership interests of the minority partners.
The Company purchased the partnership interests for a total purchase price of
$2,673.
YEAR 2000
The Year 2000 problem is the inability of a meaningful proportion of
the world's computers, software applications and embedded semiconductor chips
to cope with the change of the year from 1999 to 2000. This issue can be
traced to the infancy of computing, when computer data and programs were
designed to save memory space by truncating the date field to just six digits
(two for the day, two for the month and two for the year). Such information
applications automatically assume that the two-digit year field represents a
year within the 20th century. As a result of this, systems could fail to
operate or fail to produce correct results.
The Year 2000 problem affects computers, software applications, and
related equipment used, operated or maintained by the Company. Accordingly,
the Company is currently assessing the potential impact of, and the costs of
remediating the Year 2000 problem for its internal systems and on facilities
and equipment. The operations of computer systems have a significant role in
the Company's business and in recognition of that fact, the Company's Board
of Directors has directed the Company's senior management to assess the
impact of the Year 2000 problem. The Company is in negotiations to engage a
consultant to provide the Company with certain support and assistance in
developing the Company's Year 2000 compliance program (the "Year 2000
Program"). The Company initially expects the consultant's fee for such
consulting services will be $45 plus reimbursement of its out of pocket
expenses.
The Company believes that it has substantially completed the process
of identifying computers, software applications, and related equipment used
in its operations that must be modified, upgraded or replaced to minimize the
possibility of a material disruption of its business. The Company's current
information systems environment is based on a WINTEL platform
(Intel/PC/LAN/WAN) configuration and does not contain mainframe computers.
The Company has commenced the process of modifying, upgrading and replacing
systems which have already been assessed as adversely affected by the Year
2000 problem and expects to complete this process by the third quarter of
1999.
In addition to computers and related systems, the operation of
office equipment, such as fax machines, copiers, telephone switches, security
systems and other common devices may be affected by the Year 2000 problem.
The Company is currently assessing the potential effect of, and costs of
remediating the Year 2000 problem on its office systems and equipment. The
Company has initiated communications with third party suppliers of computers,
software, and other equipment used, operated or maintained by the Company to
identify and, to the extent possible, to resolve any significant Year 2000
problem. However, the Company has limited or no control over the actions of
these third party suppliers. Thus, while the Company expects that it will be
able to resolve any significant Year 2000 problems with these systems, there
can be no assurance that these suppliers will resolve any or all Year 2000
problems with these systems before the occurrence of a material disruption to
the business of the Company. Any failure of these third parties to timely
resolve Year 2000 problems with their systems could have a material adverse
effect on the Company's business, financial condition, and results of
operations.
Because the Company's assessment is not complete, it is unable to
accurately predict the total cost to the Company of completing any required
modifications, upgrades, or replacements of its systems or equipment. The
Company does not, however, believe that such total cost will exceed $500. As
of September 30, 1998, the Company had spent $5 in connection with its Year
2000 Program. The Company expects to identify and resolve all Year 2000
problems that could materially adversely affect its business operations.
However, management believes that it is not possible to determine with
complete certainty that all Year 2000 problems affecting the Company, its
tenants or its suppliers have been identified or corrected. The number of
devices that could be affected and the interactions among these devices are
simply too numerous. In addition, no one can accurately predict how many Year
2000 problem-related failures will occur or the severity, duration, or
financial consequences of these perhaps inevitable failures. As a result,
management expects that a reasonable worst case scenario for the Company
would result in the following consequences: (i) a significant number of
operational inconveniences and inefficiencies of the Company, including
failure of office equipment, computers and telephone switches, and similar
disruptions at its tenants and its suppliers will divert management's time
and attention and financial and human resources from its ordinary business
activities; (ii) a few serious system failures that will require significant
effort by the Company, its tenants or its suppliers to prevent or alleviate
material business disruption, such system failures include but are not
limited to, failure of cold storage capabilities, failure of fire suppression
devices, failure of security systems and inability to access storage
facilities in facilities in which access is limited to computerized
electrical door systems; (iii) several routine business disputes and claims
due to Year 2000 problems that will be resolved in the ordinary course of
business; and (iv) possible business disputes alleging the Company failed to
comply with the terms of its contracts or industry standards of performance,
some of which could result in litigation.
The Company will develop contingency plans to be implemented if its
efforts to identify and correct Year 2000 problems affecting its operational
systems and equipment are not effective. The Company plans to complete its
contingency plans by the end of the first quarter of 1999. Depending on the
systems affected, any contingency plans developed by the Company, if
implemented, could have a material adverse effect on the Company's financial
condition and results of operations.
The discussion of the Company's efforts, and management's
expectations, relating to Year 2000 compliance are forward-looking
statements. The Company's ability to achieve Year 2000 compliance and the
level of incremental costs associated therewith, could be adversely impacted
by, among other things, the availability and cost of programming and testing
resources, vendors' ability to modify proprietary software, and unanticipated
problems identified in the ongoing compliance review.
18
<PAGE>
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Rentals from Real Estate Investments for the nine months ended September
30, 1998 and 1997 totaled $85,726 and $39,271, respectively. The increase of
$46,455 was due to primarily to (i) Properties acquired during 1997 and 1998
("Property Acquisitions") which increased rental revenues by $41,777 and (ii)
the rental revenues generated by the build-to-suit properties placed in
service during 1997 and 1998 ("Completed Build-to-Suits") totaling $5,817.
These increases were partially offset by Properties divested during 1997 and
1998 ("Property Divestitures") which reduced rental revenues by $1,935.
Income from Unconsolidated Joint Venture totaled $1,485 for the nine
months ended September 30, 1998 comprised of interest income on the $21,500
participating mortgage loan purchased by the Company in 1997 in connection
with the property-for-stock acquisition with Ameritech Pension Trust.
Income from Unconsolidated Subsidiaries totaled $1,534 for the nine
months ended September 30, 1998 resulting from MRI's secured and unsecured
notes payable to the Company and equity earnings of MRI.
Interest and Other Income totaled $994 and $630 for the nine months
ended September 30, 1998 and 1997, respectively. The increase of $364 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 $10,476 to $17,344 during the nine months
ended September 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 $8,709 and (ii) the assumption of
mortgage notes payable relating to the acquisitions in Florida, Nevada and
Texas resulting in an increase of $827.
Loss on Interest Rate Protection Agreement totaled $12,633 for the nine
months ended September 30, 1998. This one-time non-recurring expense resulted
from the Company's termination of an interest rate protection agreement it
entered into May 1998 in anticipation of a near-term debt offering which did
not occur.
Compared to the same period in 1997, Property Taxes increased by $5,602
to $10,900 during the nine months ended September 30, 1998. The increase was
primarily due to (i) the Property Taxes attributable to the Property
Acquisitions totaling $5,069 and (ii) the Property Taxes for the Completed
Build-to-Suits amounting to $493. These increases were partially offset by
Property Divestitures, which reduced Property Taxes by $170.
Compared to the same period in 1997, Property Operating Expenses
increased by $3,291 to $6,579 during the nine months ended September 30,
1998. The increase was primarily due to (i) the Property Operating Expenses
attributable to the Property Acquisitions totaling $3,414 and (ii) the
Property Operating
19
<PAGE>
Expenses for the Completed Build-to-Suits amounting to $470. These increases
were offset in part by Property Divestitures, which reduced Property
Operating Expenses by $275.
General and Administrative Expenses totaled $6,015 and $3,914 for the
nine months ended September 30, 1998 and 1997, respectively. The increase of
$2,101 was primarily due to (i) an increase in personnel and administrative
costs of $968 arising from the growth of the Company, (ii) an increase of
$457 in fees relating to terminated property deals and (iii) an increase of
$564 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 $10,028 to $16,729 during the nine months ended
September 30, 1998. The increase was primarily due to (i) Depreciation
Expense attributable to the Property Acquisitions totaling $8,701 and (ii)
Depreciation Expense for the Completed Build-to-Suits amounting to $1,175.
These increases were offset by Property Divestitures, which reduced
Depreciation and Amortization Expenses by $292.
The Gain on Divestiture of Properties totaling $4,497 for the nine
months ended September 30, 1998 was attributable to the divestiture of the
San Carlos, 4013 Preimer, Nancy Ridge and Marietta properties.
The Net Loss on Divestiture of Properties totaling $465 for the nine
months ended September 30, 1997 was attributable to the divestiture of the
Wildwood and Golden Cove properties which resulted in a total loss of $1,172.
The losses were partially offset by gains on the divestiture of the
Birmingham I, Birmingham II properties and Phoenix North 23rd properties
totaling $707.
The Extraordinary Item totaling $808 for the nine months ended
September 30, 1997 was attributable to the restructuring of the Company's
Unsecured Credit Facility.
20
<PAGE>
- --------------------------------------------------------------------------------
PART II: OTHER INFORMATION
- --------------------------------------------------------------------------------
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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1(1) The Company's Third Amended and Restated Articles of
Incorporation.
3.2(2) 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.
4.1(4) Rights Agreement, dated as of March 12, 1998, between the
Company and First Chicago Trust Company of New York, which
includes the form of Certificate of Designation of Series C
Junior Participating Stock as Exhibit A, the form of Rights
Certificate as Exhibit B and the form of the Summary of
Rights as Exhibit C.
27.1(5) Financial Data Schedule.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the quarter ended September 30, 1998:
Current Report on Form 8-K dated and filed July 2, 1998,
filing financial statements related to the Company's
acquisition of property located in Ontario, California.
Current Report on Form 8-K dated and filed August 25, 1998,
filing material related to the announcement of the Company's
results for the quarter ended March 31, 1998.
- ---------------
(1) Filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement No. 333-02322 on March 25, 1996, and incorporated herein by
reference.
(2) Filed on June 26, 1998 as an exhibit to the Company's Current Report on
Form 8-K dated June 25, 1998, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998, as amended.
(4) Filed on March 16, 1998 with the Company's Registration Statement on
Form 8A dated March 16, 1998 and incorporated herein by reference.
(5) Previously filed.
21
<PAGE>
Current Report on Form 8-K dated September 10, 1998, filing
material related to the announcement of the Company's results
for the quarter ended June 30, 1998.
22
<PAGE>
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.
MERIDIAN INDUSTRIAL TRUST, INC.
Dated: February 24, 1999 By: /s/ Robert A. Dobbin
--------------------------------------
Robert A. Dobbin
Secretary
23
<PAGE>
MERIDIAN INDUSTRIAL TRUST, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number
(corresponding to the Sequentially
Exhibit Table of Item Numbered
601 of Regulation S-K) Description Page
- ---------------------- ----------- ------------
<S> <C> <C>
3.1(1) The Company's Third Amended and Restated Articles
of Incorporation.
3.2(2) 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.
4.1(4) Rights Agreement, dated as of March 12, 1998, between
the Company and First Chicago Trust Company of New York,
which includes the form of Certificate of Designation of
Series C Junior Participating Stock as Exhibit A, the
form of Rights Certificate as Exhibit B and the form of
the Summary of Rights as Exhibit C.
27.1(5) Financial Data Schedule.
</TABLE>
- ---------------
(1) Filed as an exhibit to the Company's Amendment No. 1 to Registration
Statement No. 333-02322 on March 25, 1996, and incorporated herein by
reference.
(2) Filed on June 26, 1998 as an exhibit to the Company's Current Report on
Form 8-K dated June 25, 1998, and incorporated herein by reference.
(3) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1998, as amended.
(4) Filed on March 16, 1998 with the Company's Registration Statement on
Form 8A dated March 16, 1998 and incorporated herein by reference.
(5) Previously filed.
24