==============================================================================
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
---------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 01-12846
PROLOGIS TRUST
(Exact name of registrant as specified in its charter)
Maryland 74-2604728
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14100 East 35th Place,
Aurora, Colorado 80011
(Address or principal executive offices) (Zip Code)
(303) 375-9292
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report) 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 for the past 90 days. Yes X No _____
The number of shares outstanding of the Registrant's common stock as of May
12, 1999 was 161,232,707.
<PAGE>
PROLOGIS TRUST
INDEX
Page
Number(s)
---------
PART I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets--March 31, 1999 and
December 31, 1998........................................... 3
Consolidated Statements of Earnings and Comprehensive
Income--Three months ended March 31, 1999 and 1998.......... 4
Consolidated Statements of Cash Flows--Three months
ended March 31, 1999 and 1998............................... 5
Notes to Consolidated Financial Statements.................... 6 - 22
Report of Independent Public Accountants...................... 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 24 - 38
Item 3. Quantitative and Qualitative Disclosure About Market Risk..... 38
Part II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders...... 39
Item 5. Other Information.......................................... 39
Item 6. Exhibits................................................... 39
<PAGE>
PROLOGIS TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ----------
ASSETS (Unaudited) (Audited)
<S> <C> <C>
Real estate............................................................................... $ 5,143,836 $ 3,657,500
Less accumulated depreciation.......................................................... 276,922 254,288
----------- -----------
4,866,914 3,403,212
Investments in and advances to unconsolidated subsidiaries................................ 761,776 733,863
Cash and cash equivalents................................................................. 187,732 63,140
Accounts and notes receivable............................................................. 29,623 11,648
Other assets.............................................................................. 128,046 118,866
----------- -----------
Total assets................................................................ $ 5,974,091 $ 4,330,729
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit........................................................................ $ 440,100 $ 344,300
Short-term borrowings.................................................................. 150,000 150,000
Senior unsecured debt.................................................................. 1,242,403 1,083,641
Mortgage notes......................................................................... 731,734 184,964
Assessment bonds....................................................................... 11,259 11,281
Securitized debt....................................................................... 31,306 31,559
Accounts payable and accrued expenses.................................................. 80,520 117,506
Construction payable................................................................... 14,258 34,025
Amount due to affiliate................................................................ 805 395
Distributions payable.................................................................. 64,601 39,283
Other liabilities...................................................................... 147,059 26,112
----------- -----------
Total liabilities........................................................... 2,914,045 2,023,066
----------- -----------
Commitments and contingencies
Minority interest......................................................................... 70,451 51,295
Shareholders' equity:
Series A Preferred Shares; $0.01 par value; 5,400,000 shares issued and
outstanding at March 31, 1999 and December 31, 1998; stated liquidation
preference of $25.00 per share....................................................... 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par value; 7,255,350 shares
issued and outstanding at March 31, 1999 and 7,537,300 shares issued and
outstanding at December 31, 1998; stated liquidation preference of
$25.00 per share..................................................................... 181,384 188,440
Series C Preferred Shares; $0.01 par value; 2,000,000 shares issued and
outstanding at March 31, 1999 and December 31, 1998; stated liquidation
preference of $50.00 per share....................................................... 100,000 100,000
Series D Preferred Shares; $0.01 par value; 10,000,000 shares issued and
outstanding at March 31, 1999 and December 31, 1998; stated liquidation
preference of $25.00 per share........................................................ 250,000 250,000
Series E Preferred Shares; $0.01 par value; 2,000,000 shares issued and
outstanding at March 31, 1999; stated liquidation preference of $25.00
per share............................................................................ 50,000 --
Common shares of beneficial interest; $0.01 par value; 161,186,798 shares
issued and outstanding at March 31, 1999 and 123,415,711 shares issued
and outstanding at December 31, 1998................................................. 1,612 1,234
Additional paid-in capital................................................................ 2,648,599 1,907,232
Employee share purchase notes............................................................. (24,474) (25,247)
Accumulated other comprehensive income.................................................... (418) 23
Distributions in excess of net earnings................................................... (352,108) (300,314)
----------- -----------
Total shareholders' equity.................................................. 2,989,595 2,256,368
----------- -----------
Total liabilities and shareholders' equity.................................. $ 5,974,091 $ 4,330,729
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Income:
Rental income........................................................................ $ 97,161 $ 78,565
Other real estate income............................................................. 13,388 5,257
Income (loss) from unconsolidated subsidiaries....................................... (9,209) 4,238
Foreign currency exchange losses, net................................................ (8,283) (447)
Foreign currency hedge income........................................................ -- 2,054
Interest............................................................................. 709 625
----------- -----------
Total income................................................................ 93,766 90,292
----------- -----------
Expenses:
Rental expenses, net of recoveries of $16,883 in 1999 and $14,384 in 1998
and including amounts paid to affiliate of $250 in 1999 and
$253 in 1998..................................................................... 7,189 5,938
General and administrative, including amounts paid to affiliate of
$532 in 1999 and $572 in 1998.................................................... 8,421 5,171
Depreciation and amortization........................................................ 27,364 23,180
Interest............................................................................. 30,918 19,642
Interest rate hedge expense.......................................................... 945 --
Other................................................................................ 2,540 903
----------- -----------
Total expenses.............................................................. 77,377 54,834
----------- -----------
Earnings from operations.................................................................. 16,389 35,458
Minority interest share in earnings....................................................... 1,169 979
----------- -----------
Earnings before gain on disposition of real estate........................................ 15,220 34,479
Gain on disposition of real estate........................................................ 715 2,066
----------- -----------
Earnings before cumulative effect of accounting change.................................... 15,935 36,545
Cumulative effect of accounting change.................................................... 1,440 --
----------- -----------
Net earnings.............................................................................. 14,495 36,545
Less preferred share dividends............................................................ 13,445 8,799
----------- -----------
Net earnings attributable to Common Shares................................................ 1,050 27,746
Other comprehensive income:
Foreign currency translation adjustments............................................. (441) 56
----------- -----------
Comprehensive income...................................................................... $ 609 $ 27,802
=========== ===========
Weighted average Common Shares outstanding - Basic........................................ 123,660 118,003
=========== ===========
Weighted average Common Shares outstanding - Diluted...................................... 123,681 123,564
=========== ===========
Basic per share net earnings attributable to Common Shares:
Earnings before cumulative effect of accounting change............................... $ 0.02 $ 0.24
Cumulative effect of accounting change............................................... (0.01) --
----------- -----------
Net earnings attributable to Common Shares....................................... $ 0.01 $ 0.24
=========== ===========
Diluted per share net earnings attributable to Common Shares:
Earnings before cumulative effect of accounting change............................... $ 0.02 $ 0.23
Cumulative effect of accounting change............................................... (0.01) --
----------- -----------
Net earnings attributable to Common Shares....................................... $ 0.01 $ 0.23
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating activities:
Net earnings..................................................................... $ 14,495 $ 36,545
Minority interest................................................................ 1,169 979
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization................................................ 27,364 23,180
Gain on disposition of real estate........................................... (715) (2,066)
Straight-lined rents......................................................... (1,449) (680)
Amortization of deferred loan costs.......................................... 802 441
Stock-based compensation..................................................... 618 --
Income from unconsolidated subsidiaries...................................... 9,209 2,323
Foreign exchange (gains) losses, net......................................... 8,283 444
Foreign currency hedge income................................................ -- (2,054)
Interest rate hedge expense.................................................. 945 --
(Increase) decrease in accounts receivable and other assets...................... (7,956) 842
Decrease in accounts payable and accrued expenses................................ (6,485) (12,907)
Increase (decrease) in other liabilities......................................... (5,292) 302
Increase in amount due to affiliate.............................................. 410 (165)
----------- -----------
Net cash provided by operating activities........................... 41,398 47,184
----------- -----------
Investing activities:
Real estate investments.......................................................... (102,229) (140,339)
Tenant improvements and lease commissions........................................ (4,243) (3,205)
Recurring capital expenditures................................................... (5,123) (892)
Proceeds from dispositions of real estate........................................ 46,338 35,010
Investments in and advances to unconsolidated subsidiaries....................... (9,447) (211,051)
Cash acquired in Meridian Merger................................................. 48,962 --
----------- -----------
Net cash used in investing activities............................... (25,742) (320,477)
----------- -----------
Financing activities:
Proceeds from sale of Common Shares, net of expenses............................. -- 95,733
Proceeds from exercised options, dividend reinvestment
and employee share purchase plan............................................ 113 99
Repurchase of Common Shares...................................................... -- (170)
Proceeds from secured financings................................................. 439,000 --
Debt issuance and other transaction costs incurred............................... (13,578) (13)
Distributions paid on Common Shares.............................................. (39,386) (33,455)
Distributions paid to minority interest holders.................................. (1,679) (1,496)
Dividends paid on preferred shares............................................... (13,446) (8,799)
Principal payments on employee share purchase notes.............................. 773 28
Payments on derivative financial instruments..................................... (26,996) (3,974)
Proceeds from lines of credit and short-term borrowings.......................... 544,500 599,000
Payments on lines of credit and short-term borrowings............................ (777,100) (345,800)
Regularly scheduled principal payments on mortgage notes......................... (3,265) (852)
Mortgage notes principal payments at maturity.................................... -- (3,900)
----------- -----------
Net cash provided by financing activities........................... 108,936 296,401
----------- -----------
Net increase in cash and cash equivalents............................................. 124,592 23,108
Cash and cash equivalents, beginning of period........................................ 63,140 25,009
----------- -----------
Cash and cash equivalents, end of period.............................................. $ 187,732 $ 48,117
=========== ===========
</TABLE>
See Note 9 for information on non-cash investing and financing activities.
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. General:
ProLogis Trust ("ProLogis"), a Maryland real estate investment trust
("REIT"), is a publicly held global owner and lessor of distribution facilities
focused exclusively on meeting the distribution space needs of international,
national, regional and local industrial real estate users through the ProLogis
Operating System(TM). ProLogis engages in the acquisition, development,
marketing, leasing and long-term ownership of industrial distribution
facilities, and the development of master-planned distribution parks and
corporate distribution facilities for its customers. ProLogis deploys capital in
markets that ProLogis believes have excellent long-term growth prospects and
where ProLogis believes it can achieve a strong market position through the
acquisition and development of generic, flexible facilities designed for both
warehousing and light manufacturing uses. In addition, ProLogis has invested in
refrigerated distribution companies in North America and Europe.
The consolidated financial statements of ProLogis as of March 31, 1999
and for the three months ended March 31, 1999 and 1998 are unaudited, and
pursuant to the rules of the Securities and Exchange Commission, certain
information and footnote disclosures normally included in financial statements
have been omitted. While management of ProLogis believes that the disclosures
presented are adequate, these interim consolidated financial statements should
be read in conjunction with ProLogis' December 31, 1998 audited consolidated
financial statements contained in ProLogis' 1998 Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of ProLogis' consolidated
financial position and results of operations for the interim periods. The
consolidated results of operations for the three months ended March 31, 1999 and
1998 are not necessarily indicative of the results to be expected for the entire
year.
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles ("GAAP") requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Segment Reporting
ProLogis adopted SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information" in 1998. SFAS No. 131 provides standards for the
reporting of financial information about a public enterprise's operating
segments, as well as related disclosures about products and services, geographic
locations and major customers. See Note 11.
Start-up and Organization Costs
Through 1998, ProLogis capitalized costs associated with start-up
activities and organization costs and amortized such costs over an appropriate
period, generally five years. Statement of Position ("SOP") 98-5, "Reporting on
the Costs of Start-Up Activities", which requires that costs associated with
organization, pre-opening, and start-up activities be expensed as incurred, was
adopted by ProLogis on January 1, 1999. Accordingly, ProLogis expensed $1.4
million of unamortized organization and start-up costs as a cumulative effect of
accounting change in the first quarter of 1999.
6
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Accounting for Derivatives
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued in June 1998. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999 and early adoption is allowed. SFAS No. 133
provides comprehensive guidelines for the recognition and measurement of
derivatives and hedging activities and, specifically, requires all derivatives
to be recorded on the balance sheet at fair value as an asset or liability.
Management does not believe this standard will have a significant effect on
ProLogis' consolidated financial position, results of operations or financial
statement disclosures.
Reclassifications
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
2. Meridian Merger
On March 30, 1999, Meridian Industrial Trust Inc. ("Meridian"), a
publicly traded REIT that owned industrial distribution facilities in the United
States, was merged with and into ProLogis (the "Meridian Merger"). In accordance
with the terms of the Agreement and Plan of Merger dated as of November 16,
1998, as amended (the "Merger Agreement"), the approximately 33.8 outstanding
shares of Meridian common stock were exchanged (on a 1.10 for one basis) into
approximately 37.2 million ProLogis common shares of beneficial interest, $0.01
par value ("Common Shares"). In addition, the holders of Meridian common stock
received $2.00 in cash per outstanding share, approximately $67.6 million in
total. The holders of Meridian's Series D cumulative redeemable preferred stock
received a new series of ProLogis cumulative redeemable preferred shares
("Series E Preferred Shares") on a one for one basis. The Series E Preferred
Shares have a 8.75% annual dividend rate ($2.1875 per share) and an aggregate
liquidation value of $50.0 million. The total purchase price of Meridian was
approximately $1.54 billion, which included the assumption of the outstanding
debt and liabilities of Meridian as of March 30, 1999 and the issuance of
approximately 1.1 million options each to acquire 1.10 ProLogis Common Shares
and $2.00 in cash. The assets acquired from Meridian include approximately $1.44
billion of real estate assets, an investment in a refrigerated distribution
business of $27.7 million and cash and other assets aggregating $72.3 million.
The transaction was structured as a tax-free merger and was accounted for under
the purchase method.
After the Meridian Merger, Security Capital Group Incorporated
("Security Capital"), which voted its shares in favor of the Meridian Merger,
owned approximately 31.0% of the outstanding Common Shares and remains ProLogis'
largest shareholder.
The following summarized pro forma unaudited information represents the
combined historical operating results of ProLogis and Meridian with the
appropriate purchase accounting adjustments, assuming the Meridian Merger had
occurred on January 1, 1998. The pro forma financial information presented is
not necessarily indicative of what ProLogis' actual operating results would have
been had ProLogis and Meridian constituted a single entity during such periods
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Rental income................................................................. $ 130,675 $ 104,825
Earnings from operations...................................................... $ 20,521 $ 42,534
Earnings attributable to Common Shares before
cumulative effect of accounting change................................... $ 13,512 $ 34,044
Net earnings attributable to Common Shares.................................... $ 12,072 $ 34,044
Weighted average per Common Shares outstanding:
Basic.................................................................... $ 161,050 $ 151,419
Diluted.................................................................. $ 161,236 $ 157,685
</TABLE>
7
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Basic per share net earnings attributable to Common Shares
before cumulative effect of accounting change.............................. $ 0.08 $ 0.22
Cumulative effect of accounting change........................................ (0.01) --
------------- -------------
Basic per share earnings attributable to Common Shares........................ $ 0.07 $ 0.22
============= =============
Diluted per share net earnings attributable to Common Shares
before cumulative effect of accounting change.............................. $ 0.08 $ 0.22
Cumulative effect of accounting change........................................ (0.01) --
------------- -------------
Diluted per share earnings attributable to Common Shares...................... $ 0.07 $ 0.22
============= =============
</TABLE>
3. Real Estate
Investments in Real Estate
Real estate investments consisting of income producing industrial
distribution facilities, facilities under development and land held for future
development, at cost, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
Operating facilities:
Improved land..................................... $ 753,485 (1) $ 517,803 (1)
Buildings and improvements........................ 4,037,615 (1) 2,731,203 (1)
-------------- --------------
4,791,100 3,249,006
-------------- --------------
Facilities under development (including
cost of land)..................................... 116,325 (2)(3) 209,670 (2)
Land held for development.............................. 214,289 (4) 180,796 (4)
Capitalized preacquisition costs....................... 22,122 (5) 18,028 (5)
-------------- --------------
Total real estate............................. 5,143,836 3,657,500
Less accumulated depreciation.......................... 276,922 254,288
-------------- --------------
Net real estate............................... $ 4,866,914 $ 3,403,212
============== ==============
<FN>
- ------------
(1) As of March 31, 1999 and December 31, 1998, ProLogis had 1,369 and 1,099
operating buildings, respectively, consisting of 140,871,000 and
104,540,000 square feet, respectively.
(2) Facilities under development consist of 31 buildings aggregating 4,698,000
square feet as of March 31, 1999 and 55 buildings aggregating 8,022,000
square feet as of December 31, 1998.
(3) In addition to the March 31, 1999 construction payable of $14.3 million,
ProLogis had unfunded commitments on its contracts for facilities under
construction totaling $106.6 million.
(4) Land held for future development consisted of 1,899 acres as of March 31,
1999 and 1,673 acres as of December 31, 1998.
(5) Capitalized preacquisition costs include $1,452,000 and $2,199,000 of funds
on deposit with title companies as of March 31, 1999 and December 31, 1998,
respectively, for future acquisitions.
</FN>
</TABLE>
ProLogis Development Services
ProLogis Development Services Incorporated ("ProLogis Development
Services") develops corporate distribution facilities to meet customer
requirements, which are often sold to the customer or third parties. ProLogis
Development Services also contracts on a fee basis to develop distribution
facilities for customers. ProLogis owns 100% of the preferred stock of ProLogis
Development Services and realizes substantially all economic benefits of its
activities. Because ProLogis advances mortgage loans to ProLogis Development
Services to fund its acquisition, development and construction activities,
ProLogis Development Services is consolidated with ProLogis. Accordingly, these
loans are reflected as real estate investments in ProLogis' consolidated
financial statements. ProLogis Development Services is not a qualified REIT
subsidiary of ProLogis. Accordingly, provisions for federal income taxes are
recognized, as appropriate.
8
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
The outstanding balances of development and mortgage loans made by
ProLogis to ProLogis Development Services for the purchase of distribution
facilities and land for distribution facility development and for development
costs aggregated $242.3 million as of March 31, 1999. The gains recognized on
disposition of undepreciated property by ProLogis Development Services and the
fees generated by ProLogis Development Services are reflected as other real
estate income by ProLogis.
4. Unconsolidated Subsidiaries:
Investments in and advances to unconsolidated subsidiaries are as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Insight......................................................................... $ 1,959 $ 1,520
------------- -------------
ProLogis Logistics:
Investment (1)(2)........................................................... 39,873 13,241
Note receivable............................................................. 128,634 128,634
Accrued interest and other receivables...................................... 13,185 9,146
------------- -------------
181,692 151,021
------------- -------------
Frigoscandia S.A.:
Investment (1).............................................................. (3,442) 2,900
Note receivable from Frigoscandia S.A....................................... 87,795 85,148
Note receivable from Frigoscandia Holding AB................................ 91,519 91,519
Mortgage note receivable from Frigoscandia Limited UK....................... 30,000 30,000
Accrued interest and other receivables...................................... 15,056 11,998
------------- -------------
220,928 221,565
------------- -------------
Kingspark S.A.:
Investment (1).............................................................. 17,728 22,413
Note receivable from Kingspark S.A.......................................... 111,856 111,744
Note receivable from ProLogis Kingspark..................................... 47,614 34,391
Mortgage note receivable from ProLogis Kingspark............................ 52,371 52,371
Accrued interest and other receivables...................................... 7,113 3,850
------------- -------------
236,682 224,769
------------- -------------
Garonor Holdings:
Investment (1).............................................................. 1,574 5,508
Note receivable............................................................. 116,620 129,395
Accrued interest receivable................................................. 2,321 85
------------- -------------
120,515 134,988
------------- -------------
Total.............................................................. $ 761,776 $ 733,863
============= =============
<FN>
- ---------------
(1) Investment represents ProLogis' investment in Insight and in the preferred
stock of the respective companies as adjusted for ProLogis' share of each
company's net earnings or loss.
(2) Includes $27.7 million representing ProLogis' investment in the preferred
stock of Meridian Refrigeration Incorporated ("MRI") which was acquired as
part of the Meridian Merger. CSI acquired 100% of the common stock of MRI
on March 30, 1999. ProLogis intends to sell its interest in MRI to CSI.
</FN>
</TABLE>
9
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Insight
ProLogis Development Services has a 28.6% ownership interest in
Insight, Inc. ("Insight"), a privately owned logistics optimization consulting
company. On January 2, 1999, ProLogis Development Services invested an
additional $500,000 in Insight and is committed to investing an additional
$500,000 on July 1, 1999, which will bring its ownership interest to 33.3%. This
investment is accounted for under the equity method. ProLogis recognized a loss
of $60,000 from its investment in Insight for the three months ended March 31,
1999. Prior to July 1, 1998, this investment was accounted for under the cost
method.
ProLogis Logistics
ProLogis owns 100% of the preferred stock of ProLogis Logistics
Services Incorporated ("ProLogis Logistics"). ProLogis Logistics owns 100% of
the common stock of a refrigerated distribution company operating in the United
States and Canada, CS Integrated LLC ("CSI"). Prior to June 12, 1998, ProLogis
Logistics owned, at various points in time, between 60.0% and 77.1% of CSI. As
of March 31, 1999, ProLogis had invested $19.9 million in the preferred stock of
ProLogis Logistics. As of March 31, 1999, CSI owned or operated refrigerated
distribution facilities aggregating 140.6 million cubic feet (including MRI's
16.4 million cubic feet).
The common stock of ProLogis Logistics is owned by an unrelated party.
ProLogis recognizes substantially all economic benefits of ProLogis Logistics
and its subsidiaries.
As of March 31, 1999, ProLogis had a $128.6 million note receivable
from ProLogis Logistics. The note is unsecured, bears interest at 8.0% per annum
and matures on April 24, 2002. Interest payments on the note are due annually.
ProLogis accounts for its investment in ProLogis Logistics under the
equity method. ProLogis recognized income (including interest income on the note
receivable and a management fee payable from CSI) from its investment in
ProLogis Logistics of $1.5 million and $1.0 million for the three months ended
March 31, 1999 and 1998, respectively.
Frigoscandia S.A.
On January 16, 1998, ProLogis invested in Frigoscandia S.A. by
acquiring 100% of its preferred stock. Frigoscandia S.A. is a Luxembourg company
that acquired a refrigerated distribution company headquartered in Sweden,
Frigoscandia AB on that date. Frigoscandia AB is 100% owned by Frigoscandia
Holding AB, which is 100% owned by a wholly owned subsidiary of Frigoscandia
S.A. As of March 31, 1999, Frigoscandia AB, which operates in nine European
countries, owned 189.6 million cubic feet of refrigerated distribution
facilities. As of March 31, 1999, ProLogis had invested $28.5 million in the
preferred stock of Frigoscandia S.A. The common stock of Frigoscandia S.A. is
owned by a limited liability company, in which unrelated parties own 100% of the
voting interests and Security Capital, ProLogis' largest shareholder, owns 100%
of the non-voting interests. ProLogis recognizes substantially all economic
benefits of the activities of Frigoscandia S.A. and its subsidiaries.
As of March 31, 1999, ProLogis had a $91.5 million note receivable from
Frigoscandia Holding AB and a $87.8 million note receivable from Frigoscandia
S.A. These unsecured notes bear interest at 5.0% per annum and are due on demand
($80.0 million of the note receivable from Frigoscandia S.A. is due on July 15,
2008). Additionally, as of March 31, 1999, ProLogis had a $30.0 million mortgage
note receivable from Frigoscandia Limited UK, a subsidiary of Frigoscandia AB.
The mortgage note receivable, which provides for interest at 7.0% per annum and
matures on March 20, 2018, is secured by refrigerated distribution facilities.
Subsequent to March 31, 1999, the mortgage note receivable was converted to a
non-interest bearing note.
ProLogis accounts for its investment in Frigoscandia S.A. under the
equity method. ProLogis recognized a loss of $3.5 million and income of $3.2
million (including interest income on the mortgage note and notes receivable)
from its investment in Frigoscandia S.A. for the three months ended March 31,
1999 and 1998, respectively.
10
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Frigoscandia AB has a multi-currency, three-year revolving credit
agreement through a consortium of 11 European banks in the currency equivalent
of approximately $197.6 million as of March 31, 1999. The loan bears interest at
each currency's LIBOR rate plus 0.65%. ProLogis has entered into a guaranty
agreement for 25% of the loan balance.
Kingspark S.A.
On August 14, 1998, ProLogis invested in Kingspark Holding S.A.
("Kingspark S.A.") by acquiring 100% of its preferred stock. Kingspark S.A. is a
Luxembourg company that acquired an industrial real estate development company
operating in the United Kingdom, Kingspark Group Holdings Limited ("ProLogis
Kingspark"), on that date. As of March 31, 1999, ProLogis Kingspark had 329,600
square feet of operating facilities, 515,500 square feet of facilities under
development and 140,900 square feet of facilities being developed under
construction management agreements. Additionally, as of March 31, 1999, ProLogis
Kingspark owned 569 acres and controlled 1,615 acres of land through letters of
intent or contingent contracts for future development of 38.2 million square
feet of distribution facilities. As of March 31, 1999, ProLogis had invested
$24.0 million in the preferred stock of Kingspark S.A. The common stock of
Kingspark S.A. is owned by a limited liability company, in which unrelated third
parties own 100% of the voting interests and Security Capital owns 100% of the
non-voting interests. ProLogis recognizes substantially all economic benefits of
the activities of Kingspark S.A. and ProLogis Kingspark.
As of March 31, 1999, ProLogis had a $111.9 million note receivable
from Kingspark S.A. and a $47.6 million note receivable from ProLogis Kingspark.
These unsecured notes bear interest at 5.0% (Kingspark S.A.) and 8.0% (ProLogis
Kingspark) per annum and are due on demand. Also, as of March 31, 1998, ProLogis
had a $52.4 million mortgage note receivable from ProLogis Kingspark which bears
interest at 8.0% per annum and is secured by certain land parcels.
ProLogis accounts for its investment in Kingspark S.A. under the equity
method. ProLogis recognized a loss of $1.4 million in 1999 (including interest
income on the mortgage note and notes receivable) from its investment in
Kingspark S.A.
ProLogis Kingspark has a line of credit agreement with a bank in the
United Kingdom. The credit agreement, which provides for borrowings of up to
approximately $16 million, has been guaranteed by ProLogis. As of March 31,
1999, approximately $14.7 million was outstanding on the line of credit.
Garonor Holdings
On December 29, 1998, ProLogis invested in Garonor Holdings S.A.
("Garonor Holdings") by acquiring 100% of its preferred stock. Garonor Holdings
is a Luxembourg company that acquired in excess of 99% of the voting stock of
Garonor S.A. ("ProLogis Garonor") on that date. As of March 31, 1999, ProLogis
had invested $9.6 million in the preferred stock of Garonor Holdings. ProLogis
Garonor owns and leases approximately 5.2 million square feet of industrial
distribution facilities located in France. Garonor Holdings is in the process of
acquiring the remaining voting stock of ProLogis Garonor.
The common stock of Garonor Holdings is owned by Security Capital.
Security Capital can require ProLogis to purchase the Garonor Holdings common
stock held by Security Capital beginning January 1, 2000. ProLogis recognizes
substantially all of the economic benefits of Garonor Holdings and its
subsidiaries.
As of March 31, 1999, ProLogis had a $116.6 million note receivable
from Garonor Holdings. The note is unsecured, bears interest at 6.5% per annum
and is due on demand. Interest payments on the note are due annually.
11
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
ProLogis accounts for this investment under the equity method. Should
Garonor Holdings acquire 100% of the voting stock of ProLogis Garonor, it is
anticipated that the ownership of Garonor Holdings will be restructured such
that ProLogis would become the sole owner of Garonor Holdings and, as a
wholly-owned subsidiary of ProLogis, Garonor Holdings would be consolidated with
the accounts of ProLogis. ProLogis recognized a loss of $5.7 million (including
interest income on the note receivable) from its investment in Garonor Holdings
in 1999.
In connection with the acquisition of ProLogis Garonor, Garonor
Holdings obtained two credit facilities from a French bank. One facility is in
the amount of 200.0 million French francs ($136.5 million as of March 31,
1999) and is guaranteed by ProLogis. ProLogis has guaranteed an additional 10.0
million French francs ($1.7 million as of March 31, 1999), which approximates
the annual interest to be charged on the facility. The second facility, in the
amount of 870.0 million French francs (of which 814.4 million French francs were
outstanding as of March 31, 1999) is secured by the real estate owned by
ProLogis Garonor. ProLogis has guaranteed 100.0 million French francs of the
amount outstanding as of March 31, 1999 ($16.8 million as of March 31, 1999).
Garonor Holdings has the ability to borrow an additional 50.0 million French
francs under this facility. The total guaranty of 100.0 million French francs
can be reduced as ProLogis Garonor meets certain operating covenants.
Summarized Financial Information
Summarized financial information for ProLogis' unconsolidated
subsidiaries as of and for the three months ended March 31, 1999 is presented
below (in millions of U.S. dollars).
<TABLE>
<CAPTION>
ProLogis Frigoscandia Kingspark Garonor
Logistics (1) S.A. S.A. Holdings
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Total assets................ $ 311.9 $ 565.5 $ 324.0 $ 339.9
Total liabilities (2)....... $ 270.0 $ 574.3 $ 307.1 $ 344.3
Minority interest........... $ -- $ 1.7 $ -- $ 0.2
Shareholders' equity........ $ 41.9 $ (10.5) $ 16.9 $ (4.6)
Revenues.................... $ 47.4 $ 100.8 $ 2.1 $ 6.8
Adjusted EBITDA (3)......... $ 6.7 $ 11.4 $ 0.7 $ 5.7
Net loss (4) (5)............ $ (1.1) $ (6.7) (6) $ (4.9) (7) $ (8.4) (8)
<FN>
- ---------------
(1) ProLogis Logistics' balances include MRI, which was acquired on March 30,
1999. See Note 2.
(2) Includes amounts due to ProLogis of $141.8 million from ProLogis Logistics,
$224.4 million from Frigoscandia S.A., $219.0 million from Kingspark S.A.
and $118.9 million from Garonor Holdings.
(3) Adjusted EBITDA represents earnings from operations before interest
expense, interest income, current and deferred income taxes, depreciation,
amortization, cumulative effect of accounting changes and adjustments from
the remeasurement of intercompany and other debt based on current foreign
currency exchange rates.
(4) ProLogis' share of the net loss and interest income on intercompany notes
and mortgage notes receivable are recognized in the Consolidated Statements
of Earnings and Comprehensive Income as "Income (loss) from Unconsolidated
Subsidiaries".
(5) Net loss of each company includes interest expense on intercompany notes
and mortgage notes.
(6) Includes a net loss of $0.8 million from the remeasurement of intercompany
and other debt based on the foreign currency exchange rates in effect as of
March 31, 1999.
(7) Includes a net loss of $2.4 million from the remeasurement of intercompany
debt based on foreign currency exchange rates in effect as of March 31,
1999.
(8) Includes a net loss of $7.5 million from the remeasurement of intercompany
and other debt based on the foreign currency exchange rates in effect as of
March 31, 1999.
</FN>
</TABLE>
12
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Borrowings:
Lines of Credit
ProLogis has an unsecured credit agreement with NationsBank, N.A.
("NationsBank"), Commerzbank AG and Chase Bank of Texas, National Association,
as agents for a bank group (the "Lenders") that provides for a $540.0 million
unsecured revolving line of credit. Borrowings bear interest at ProLogis'
option, at either (a) the greater of the federal funds rate plus 0.5% and the
prime rate, or (b) LIBOR plus 1.00% based upon ProLogis' current senior debt
ratings. The prime rate was 7.75% and the 30-day LIBOR rate was 4.9372% as of
March 31, 1999. Additionally, the credit agreement provides for a facility fee
of 0.20% per annum. The line of credit matures on March 29, 2001 and may be
extended annually for an additional year at ProLogis' option. ProLogis was in
compliance with all covenants contained in the credit agreement as of March 31,
1999. As of March 31, 1999, $440.1 million of borrowings were outstanding on the
line of credit.
The $540.0 million unsecured revolving line of credit replaced
ProLogis' previous $350.0 million unsecured revolving line of credit that was
put into place in August 1998. ProLogis' entered into the new credit agreement
to allow for increased borrowing capacity after the Meridian Merger, which added
approximately 32.2 million square feet of operating facilities to ProLogis'
existing portfolio.
In addition, ProLogis has a $25.0 million short-term unsecured
discretionary line of credit with NationsBank that matures on October 1, 1999.
By agreement between ProLogis and NationsBank, the rate of interest on and the
maturity date of each advance are determined at the time of each advance. There
were no borrowings outstanding on the line of credit as of March 31, 1999.
As of March 31, 1999, ProLogis had an agreement with the Lenders that
provided for a term loan of $150.0 million. The term loan was repaid on April
26, 1999 and the agreement was terminated. ProLogis paid interest at LIBOR plus
1.00% on the term loan borrowings.
Senior Unsecured Debt
ProLogis has issued senior unsecured notes and medium-term unsecured
notes that bear interest at fixed rates, payable semi-annually (the "Notes").
The Notes are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
Principal Principal
Original Coupon Maturity Outstanding at Payment
Date of Issuance Principal Rate Date March 31, 1999 (1) Requirement
---------------- ----------- --------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
May 16, 1995 $ 17,500 7.250% 05/15/00 $ 17,481 (2)
May 16, 1995 17,500 7.300% 05/15/01 17,466 (2)
May 17, 1996 50,000 7.250% 05/15/02 49,978 (3)
October 9, 1998 125,000 7.000% 10/01/03 125,000 (2)
July 20, 1998 250,000 7.050% 07/15/06 249,510 (2)
November 20, 1997 (4) 135,000 7.250% 11/20/07 133,961 (2)
May 17, 1996 100,000 7.950% 05/15/08 99,866 (5)
March 2, 1995 150,000 8.720% 03/01/09 150,000 (6)
May 16, 1995 75,000 7.875% 05/15/09 74,732 (7)
November 20, 1997 (4) 25,000 7.300% 11/20/09 24,761 (2)
February 4, 1997 100,000 7.810% 02/01/15 100,000 (8)
March 2, 1995 50,000 9.340% 03/01/15 50,000 (9)
May 17, 1996 50,000 8.650% 05/15/16 49,867 (10)
July 11, 1997 100,000 7.625% 07/01/17 99,781 (2)
----------- -----------
$ 1,245,000 $ 1,242,403
=========== ===========
<FN>
- ---------------
(1) Amounts are net of unamortized original issue discount.
(2) Principal due at maturity.
(3) Annual principal payments of $12.5 million from 5/15/99 to 5/15/02.
13
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
(4) Senior unsecured debt assumed by ProLogis in connection with the Meridian
Merger. See Note 2.
(5) Annual principal payments of $25.0 million from 5/15/05 to 5/15/08.
(6) Annual principal payments of $18.75 million from 3/1/02 to 3/1/09.
(7) Annual principal payments of $9.375 million from 5/15/02 to 5/15/09.
(8) Annual principal payments ranging from $10.0 million to $20.0 million from
2/1/10 to 2/1/15.
(9) Annual principal payments ranging from $5.0 million to $12.5 million from
3/1/10 to 3/1/15.
(10)Annual principal payments ranging from $5.0 million to $12.5 million from
5/15/10 to 5/15/16.
</FN>
</TABLE>
The Notes rank equally with all other unsecured and unsubordinated
indebtedness of ProLogis from time to time outstanding. The Notes are redeemable
at any time at the option of ProLogis. Such redemption and other terms are
governed by the provisions of an indenture agreement between ProLogis and State
Street Bank and Trust Company, as trustee.
Under the terms of the indenture agreement, ProLogis must meet certain
financial covenants and ProLogis was in compliance with all such covenants as of
March 31, 1999.
On April 26, 1999, ProLogis completed a $500.0 million offering of
senior unsecured notes. The notes were issued in two tranches of $250.0 million
due April 15, 2004 (the "2004 Notes") and April 15, 2008 (the "2008 Notes").
The 2004 Notes have a coupon rate of 6.70% and the 2008 Notes have a coupon rate
of 7.10%. Both the 2004 Notes and the 2008 Notes were issued at a discount and
are governed by the terms and provisions of the same indenture agreement
applicable to ProLogis' other senior unsecured notes. Net proceeds from the
offering were approximately $495.9 million, net of underwriters' commissions and
other costs, which were used to repay borrowings on ProLogis' unsecured lines of
credit and unsecured term loan. After the issuance of the 2004 Notes and the
2008 Notes, ProLogis has $108.0 million of shelf registered securities available
for issuance in the form of debt securities, preferred shares, Common Shares,
rights to purchase Common Shares and preferred share purchase rights.
Mortgage Notes, Assessment Bonds and Securitized Debt
Mortgage notes, assessment bonds and securitized debt consisted of the
following as of March 31, 1999 (in thousands):
<TABLE>
<CAPTION>
Balloon
Periodic Payment
Interest Maturity Payment Principal Due at
Description (1) Rate Date Date Balance Maturity
----------- -------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Mortgage notes:
Princeton Distribution Center.......... 9.250% 05/19/99 (2) $ 378 $ 378
Oxmoor Distribution Center #1.......... 8.390 04/01/99 (2) 3,895 3,895
Oxmoor Distribution Center #2.......... 8.100 05/01/99 (2) 1,439 1,439
Oxmoor Distribution Center #3.......... 8.100 05/01/99 (2) 1,429 1,426
Peter Cooper Distribution Center #1.... 10.625 06/01/99 (2) 2,624 2,619
Platte Valley Industrial Center #1..... 9.750 03/01/00 (2) 342 256
West One Business Center #1............ 8.250 09/01/00 (2) 4,397 4,252
Tampa West Distribution Center #20..... 9.125 11/30/00 (3) 93 --
Rio Grande Industrial Center #1........ 8.875 09/01/01 (2) 3,013 2,544
Titusville Industrial Center #1........ 10.000 09/01/01 (2) 4,618 4,181
Eigenbrodt Way Distribution Center #1.. 8.590 04/01/03 (2) 1,650 1,479
Gateway Corporate Center #10........... 8.590 04/01/03 (2) 1,874 1,361
Hayward Industrial Center I & II....... 8.590 04/01/03 (2) 13,922 12,480
Thornton Business Center #1--#4........ 8.590 04/01/03 (2) 9,131 8,185
Sullivan 75 Distribution Center #1..... 9.960 04/01/04 (2) 1,811 1,663
Oceanie Distribution Center #1 and
Epone Distribution Center #1........ 8.000 07/01/04 (3) 5,293 --
Platte Valley Industrial Center #8..... 8.750 08/01/04 (2) 1,881 1,488
Riverside Industrial Center #3......... 8.750 08/01/04 (2) 1,478 1,170
Riverside Industrial Center #4......... 8.750 08/01/04 (2) 3,995 3,161
West One Business Center #3............ 9.000 09/01/04 (2) 4,381 3,847
Raines Distribution Center............. 9.500 01/01/05 (2) 6,209 5,902
Prudential Insurance (4) (5)........... 6.850 03/01/05 (6) 73,160 73,160
Societe Generale (5)................... 5.700 12/01/06 (2) 21,788 8,940
14
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Consulate Distribution Center #200 (4). 6.970% 02/01/06 (2) 3,871 3,585
Plano Distribution Center #7 (4)....... 7.020 04/15/06 (2) 3,748 3,015
CIGNA (5).............................. 7.080 03/01/07 (2) 149,879 134,431
Vista Del Sol Industrial Center #1..... 9.680 08/01/07 (3) 2,576 --
Vista Del Sol Industrial Center #3..... 9.680 08/01/07 (3) 1,090 --
State Farm Insurance (4) (5)........... 7.100 11/01/08 (6) 15,626 13,065
TIAA (5) (7)........................... 7.200 03/01/09 (8) 155,000 135,136
Placid Street Distribution
Center #1 (4) (5)................... 7.180 12/01/09 (2) 8,003 6,529
Earth City Industrial Center #3........ 8.500 07/01/10 (3) 2,252 --
GMAC Commercial Mortgage (5)........... 7.750 10/01/10 (3) 8,080 --
Executive Park Distribution Center #3.. 8.190 03/01/11 (3) 1,095 --
Cameron Business Center #1 (4) (5)..... 7.230 07/01/11 (2) 6,350 4,526
Platte Valley Industrial Center #9..... 8.100 04/01/17 (3) 3,310 --
Platte Valley Industrial Center #4..... 10.100 11/01/21 (3) 2,053 --
MGT (5)................................ 7.584 03/01/24 (9) 200,000 127,187
----------
$ 731,734
==========
Assessment bonds:
City of Wilsonville.................... 6.82% 08/19/04 (3) $ 120 $ --
City of Kent........................... 5.50 05/01/05 (3) 18 --
City of Kent........................... 7.85 06/20/05 (3) 104 --
City of Portland....................... 8.33 11/17/07 (3) 7 --
City of Kent........................... 7.98 05/20/09 (3) 64 --
City of Fremont........................ 7.00 03/01/11 (3) 9,890 --
City of Las Vegas...................... 8.75 10/01/13 (3) 294 --
City of Las Vegas...................... 8.75 10/01/13 (3) 289 --
City of Las Vegas...................... 8.75 10/01/13 (3) 163 --
City of Portland....................... 7.25 11/07/15 (3) 99 --
City of Portland....................... 7.25 09/15/16 (3) 211 --
----------
$ 11,259
==========
Securitized debt:
Tranche A.............................. 7.74% 02/01/04 (2) $ 23,243 $20,821
Tranche B.............................. 9.94 02/01/04 (2) 8,063 7,215
----------
$ 31,306
==========
<FN>
- ---------------
(1) The weighted average interest rates for mortgage notes, assessment bonds
and securitized debt for the three months ended March 31, 1999 were 7.57%,
7.12% and 8.31%, respectively.
(2) Monthly amortization with a balloon payment due at maturity.
(3) Fully amortizing.
(4) Mortgage note was assumed by ProLogis in connection with the Meridian
Merger. See Note 2. Under purchase accounting, the mortgage note was
recorded at its fair value. Accordingly, a premium or discount was
recognized, where applicable.
(5) Secured by a pool of distribution facilities.
(6) Interest only with balloon payment due at maturity.
(7) Final funding of $27.0 million under this term loan was received by
ProLogis on April 30, 1999.
(8) Monthly interest only payments through March 2002 and monthly principal and
interest payments from April 2002 to March 2009. (9) Monthly interest only
payments through May 2005, monthly principal and interest payments from
June 2005 to April 2024 with a balloon payment due at maturity.
</FN>
</TABLE>
Mortgage notes are secured by real estate with an aggregate
undepreciated cost of $1.28 billion as of March 31, 1999. Assessment bonds are
secured by real estate with an aggregate undepreciated cost of $236.8 million as
of March 31, 1999. Securitized debt is collateralized by real estate with an
aggregate undepreciated cost of $66.4 million as of March 31, 1999.
15
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Long-term Debt Maturities
Approximate principal payments due on senior unsecured debt, mortgage
notes, assessment bonds and securitized debt during each of the years in the
five-year period ending December 31, 2003 and thereafter are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Remainder of 1999............................................. $ 27,835
2000.......................................................... 42,086
2001.......................................................... 45,906
2002.......................................................... 53,134
2003.......................................................... 189,750
2004 and thereafter........................................... 1,660,588
-----------
Total principal due.................................. 2,019,299
Less: Original issue discount................................ (2,597)
-----------
Total carrying value................................. $ 2,016,702
===========
</TABLE>
Interest Expense
For the three months ended March 31, 1999 and 1998, interest expense
was $30.9 million and $19.6 million, respectively, which was net of capitalized
interest of $3.9 million and $4.3 million, respectively. Amortization of
deferred loan costs included in interest expense was $802,000 and $441,000
million for the three months ended March 31, 1999 and 1998, respectively. The
total interest paid in cash on all outstanding debt was $36.0 million and $21.2
million for the three months ended March 31, 1999 and 1998, respectively.
6. Minority Interest:
Minority interest represents the limited partners' interests in real
estate partnerships controlled by ProLogis. With respect to each of the
partnerships either ProLogis or a subsidiary of ProLogis is the sole general
partner with all management powers over the business and affairs of the
partnership. The limited partners of each partnership generally do not have the
right to participate in or exercise management control over the business and
affairs of the partnership. With respect to each partnership the general partner
may not, without the written consent of all of the limited partners, take any
action that would prevent such partnership from conducting its business, possess
the property of the partnership, admit an additional partner or subject a
limited partner to the liability of a general partner.
ProLogis sold its 70.0% general partnership interest in Red Mountain
Joint Venture in March 1999 and recognized a gain of $715,000. ProLogis is the
controlling general partner in four partnerships: ProLogis Limited
Partnership-I, ProLogis Limited Partnership-II, ProLogis Limited Partnership-III
and ProLogis Limited Partnership-IV. As of March 31, 1999, a total of 5,055,704
limited partnership units were held by minority interest limited partners in the
various real estate partnerships. In each of these partnerships, the limited
partners are entitled to exchange partnership units for Common Shares on a one
for one basis. Additionally, the limited partners are entitled to receive
preferential cumulative quarterly distributions per unit equal to the quarterly
distributions in respect of Common Shares.
For the three months ended March 31, 1999, distributions of $1.7
million were made to the minority interest limited partners. For financial
reporting purposes, the assets, liabilities, results of operations and cash
flows of each of the four partnerships are included in ProLogis' consolidated
financial statements, and the interests of the limited partners are reflected as
minority interest.
16
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the Meridian Merger, ProLogis acquired partnership
interests in four real estate partnerships. These partnerships, which were
controlled by Meridian and are now controlled by ProLogis, own and/or develop
industrial facilities with an undepreciated cost of $139.8 million as of March
31, 1999. ProLogis has recognized the aggregate minority interests in these four
partnerships of $20.8 million as of March 31, 1999. There are a total of 483,087
limited partnership units held by the limited partners in two of the
partnerships, which are convertible into Common Shares at a rate of 1.1 Common
Share per partnership unit plus $2.00.
7. Distributions and Dividends:
Common Share Distributions
On February 24, 1999, ProLogis paid a quarterly distribution of $0.3183
per Common Share. On March 17, 1999, the Board set a proposed annual
distribution level of $1.30 per Common Share. Accordingly, on that date the
Board declared a quarterly distribution of $0.3272 per Common Share payable on
May 27, 1999 to shareholders of record on May 13, 1999.
On May 3, 1999, ProLogis paid a common distribution to holders of
Meridian common stock as of March 19, 1999. This distribution, which was
declared by the Meridian Board of Directors prior to the closing of the Merger,
related to the first quarter of 1999 and aggregated $11.1 million. This
liability was assumed by ProLogis in connection with the Meridian Merger.
Preferred Share Dividends
On March 31, 1999, ProLogis paid quarterly dividends of $0.5875 per
cumulative redeemable Series A preferred share, $0.4375 per cumulative
redeemable convertible Series B preferred share, $1.0675 per cumulative
redeemable preferred Series C share and $0.495 per cumulative redeemable Series
D preferred share.
On April 30, 1999, ProLogis paid an aggregate dividend of $1.1 million
on the Series E Preferred Shares ($0.5469 per share), of which $729,200 related
to Meridian's Series D preferred stock and was accrued by Meridian prior to the
closing of the Merger.
8. Earnings Per Common Share:
A reconciliation of the denominator used to calculate basic earnings
per share to the denominator used to calculate diluted earnings per share for
the periods indicated (in thousands, except per share amounts) is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net earnings attributable to Common Shares............... $ 1,050 $ 27,746
Add: Minority interest.................................. -- 979
----------- -----------
Adjusted net earnings attributable to Common Shares...... $ 1,050 $ 28,725
=========== ===========
Weighted average Common Shares outstanding - basic....... 123,660 118,003
Weighted average effect of convertible limited
partnership units.................................... -- 5,071
Incremental effect of common stock equivalents........... 21 490
----------- -----------
Adjusted weighted average Common Shares
outstanding - diluted................................ 123,681 123,564
=========== ===========
Per share net earnings attributable to Common Shares:
Basic................................................ $ 0.01 $ 0.24
=========== ===========
Diluted.............................................. $ 0.01 $ 0.23
=========== ===========
</TABLE>
17
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
For the three months ended March 31, 1999, there were 5,065,000
weighted average limited partnership units outstanding and for the three months
ended March 31, 1999 and 1998, there were 9,425,000 and 10,243,000 weighted
average Series B preferred shares outstanding on an as-converted basis,
respectively, that were not assumed converted into Common Shares because they
were antidilutive to earnings per share. These securities may become dilutive to
earnings per share in subsequent years.
9. Supplemental Cash Flow Information
Non-cash investing and financing activities for the three months ended
March 31, 1999 and 1998 are as follows:
(a) In connection with the Meridian Merger discussed in Note 2,
ProLogis issued approximately 37.2 million Common Shares and 2.0
million Series E Preferred Shares, assumed approximately 1.1
million options and assumed outstanding debt and liabilities of
Meridian for an aggregate purchase price of approximately $1.54
billion in exchange for the assets of Meridian (including cash
balances acquired of $49.0 million).
(b) Series B convertible redeemable preferred shares aggregating $7.1
million were converted into Common Shares in 1999.
(c) Limited partnership units aggregating $205,000 and $302,000 were
converted into Common Shares in 1999 and 1998, respectively.
(d) Foreign currency translation adjustments of $441,000 and $(56,000)
were recognized in 1999 and 1998, respectively.
(e) ProLogis accrued the Common Share distribution for the second
quarter of 1999 aggregating $52.7 million that was declared on
March 17, 1999.
10. Financial Instruments:
Derivative Financial Instruments
ProLogis occasionally uses derivative financial instruments as hedges
to manage well-defined risk associated with interest and foreign currency rate
fluctuations on existing obligations or anticipated transactions. ProLogis does
not use derivative financial instruments for trading purposes.
The primary risks associated with derivative instruments are market
risk and credit risk. Market risk is defined as the potential for loss in the
value of the derivative due to adverse changes in market prices (interest rates
or foreign currency rates). Through hedging, ProLogis can effectively manage the
risk of increases in interest rates and fluctuations in foreign currency
exchange rates.
Credit risk is the risk that one of the parties to a derivative
contract fails to perform or meet their financial obligation under the contract.
ProLogis does not obtain collateral to support financial instruments subject to
credit risk but monitors the credit standing of counterparties. ProLogis does
not anticipate non-performance by any of the counterparties to its derivative
contracts. Should a counterparty fail to perform, however, ProLogis would incur
a financial loss to the extent of the positive fair market value of the
derivative instruments, if any.
The following table summarizes the activity in interest rate contracts
for the three months ended March 31, 1999 (in millions):
18
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Interest Rate Interest Rate
Futures Contracts Swaps
----------------- -------------
<S> <C> <C>
Notional amount as of December 31, 1998............ $ 75.0 $ 75.0
New contracts...................................... -- --
Matured or expired contracts (1)................... (75.0) (75.0)
Terminated contracts............................... -- --
------------ ------------
Notional amount as of March 31, 1999............... $ -- $ --
============ ============
<FN>
- ---------------
(1) In October 1997, in anticipation of debt offerings in 1998, ProLogis
entered into two interest rate protection agreements which were renewed
past the original termination dates. These agreements were entered into
by ProLogis to fix the interest rate on anticipated financings.
During the third quarter of 1998, ProLogis determined that the interest
rate protection agreements no longer qualified for hedge accounting
treatment under GAAP based upon the following:
o Due to changing conditions in the public debt markets, it was no
longer considered probable that ProLogis would complete the
anticipated 1998 longer term debt offerings that prompted ProLogis
to enter into these interest rate protection agreements in 1997
(i.e., ProLogis would not be exposed to the interest rate risk
that these instruments were intended to hedge); and
o ProLogis determined, through internal analysis and through
communications with independent third parties, that a high degree
of correlation no longer existed between changes in the market
values of these interest rate protection agreements and the
"market values" of the anticipated debt offerings (i.e., the
interest rate at which the debt could be issued by ProLogis under
existing market conditions).
Accordingly, ProLogis began marking these agreements to market as of
September 30, 1998. For 1998, ProLogis recognized a non-cash expense of
$26.1 million. These agreements which were terminated in February 1999
at a total cost of $27.0 million were used to set the interest rate
associated with a secured financing transaction that was completed in
March 1999.
</FN>
</TABLE>
On December 22, 1997, ProLogis entered into two separate contracts to
(i) exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange
310.0 million German marks for $175.0 million in anticipation of the January
1998 acquisition and planned European currency denominated financing of
Frigoscandia AB by Frigoscandia S.A., ProLogis' unconsolidated subsidiary. The
contracts were marked to market as of December 31, 1997 and ProLogis recognized
a net loss of $6.0 million in 1997. Both contracts were settled during the first
quarter of 1998 at a net loss of $4.0 million. Accordingly, ProLogis recognized
a net gain of $2.0 million. These foreign exchange hedges were one-time,
non-recurring contracts that fixed the exchange rate between the U.S. dollar and
the Swedish krona and German mark. ProLogis executed these hedges after the
execution of the purchase agreement to acquire Frigoscandia AB, which required
payment in Swedish krona. The contracts were executed exclusively for the
acquisition and financing of Frigoscandia AB and were not entered into to hedge
on-going income in foreign currencies.
11. Business Segments:
ProLogis has three reportable business segments:
o acquisition and development of industrial distribution facilities for
long-term ownership and leasing in the United States, Europe (a portion
of which is owned through Garonor Holdings, an unconsolidated
subsidiary) and Mexico--each operating facility is considered to be an
individual operating segment having similar economic characteristics
which are combined within the reportable segment based upon geographic
location;
o operation of refrigerated distribution facilities through
unconsolidated subsidiaries in the United States (ProLogis Logistics
and MRI) and Europe (Frigoscandia S.A.)--each subsidiary's operating
facilities are considered to be individual operating segments having
similar economic characteristics which are combined within the
reportable segment based upon geographic location; and
19
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
o development of distribution facilities for future sale or on a fee
basis in the United States and Mexico and in the United Kingdom through
an unconsolidated subsidiary (Kingspark S.A.)--the development
activities of ProLogis and its unconsolidated subsidiary are considered
to be individual operating segments having similar economic
characteristics which are combined within the reportable segment based
upon geographic location.
Reconciliations of the three reportable segments: (i) income from external
customers to ProLogis' total income; (ii) net operating income from external
customers to ProLogis' earnings from operations (ProLogis' chief operating
decision makers rely primarily on net operating income to make decisions about
allocating resources and assessing segment performance); and (iii) assets to
ProLogis' total assets are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Income:
Leasing activities:
United States.................................................. $ 91,237 $ 78,023
Europe (1)..................................................... (1,796) --
Mexico......................................................... 2,101 542
------------- -------------
Total leasing activities segment........................... 91,452 78,565
------------- -------------
Refrigerated operations:
United States (2) (3).......................................... 1,494 1,036
Europe (4) (5)................................................. (3,511) 3,202
------------- -------------
Total refrigerated operations segment...................... (2,017) 4,238
------------- -------------
Development activities:
United States.................................................. 13,327 5,090
Europe (United Kingdom) (6) (7)................................ (1,422) --
Mexico......................................................... -- 167
------------- -------------
Total development activities segment....................... 11,905 5,257
------------- -------------
Reconciling items:
Foreign currency exchange losses, net.......................... (8,283) (447)
Foreign currency hedge income.................................. -- 2,054
Interest income................................................ 709 625
------------- -------------
Total reconciling items.................................... (7,574) 2,232
------------- -------------
Total income........................................................ $ 93,766 $ 90,292
============= =============
Three Months Ended
March 31,
------------------------------
1999 1998
------------- -------------
Net operating income:
Leasing activities:
United States....................................................... $ 84,176 $ 72,102
Europe (1).......................................................... (1,826) --
Mexico.............................................................. 1,913 525
------------- -------------
Total leasing activities segment............................... 84,263 72,627
------------- -------------
Refrigerated operations:
United States (2) (3)............................................... 1,494 1,036
Europe (4) (5)...................................................... (3,511) 3,202
------------- -------------
Total refrigerated operations segment.......................... (2,017) 4,238
------------- -------------
Development activities:
United States....................................................... 13,327 5,090
Europe (United Kingdom) (6) (7)..................................... (1,422) --
Mexico.............................................................. -- 167
------------- -------------
Total development activities segment........................... 11,905 5,257
------------- -------------
20
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
Three Months Ended
March 31,
------------------------------
1999 1998
------------- -------------
Reconciling items:
Foreign currency exchange losses, net............................... (8,283) (447)
Foreign currency hedge income....................................... -- 2,054
Interest income..................................................... 709 625
General and administrative expense.................................. (8,421) (5,171)
Depreciation and amortization....................................... (27,364) (23,180)
Interest expense.................................................... (30,918) (19,642)
Interest rate hedge expense......................................... (945) --
Other expense....................................................... (2,540) (903)
------------- -------------
Total reconciling items........................................ (77,762) (46,664)
------------- -------------
Earnings from operations................................................ $ 16,389 $ 35,458
============= =============
March 31, December 31,
1999 1998
------------- -------------
Assets:
Leasing activities:
United States..................................................... $ 4,533,465 $ 3,073,248
Europe (8)........................................................ 298,664 309,639
Mexico............................................................ 77,149 74,494
------------- -------------
Total leasing activities segment............................. 4,909,278 3,457,381
------------- -------------
Refrigerated operations:
United States (3) (8)............................................. 181,692 151,021
Europe (8)........................................................ 220,928 221,566
------------- -------------
Total refrigerated operations segment........................ 402,620 372,587
------------- -------------
Development activities:
United States..................................................... 157,691 149,521
Europe (United Kingdom) (8)....................................... 236,682 224,769
Mexico............................................................ 17,488 16,465
------------- -------------
Total development activities segment......................... 411,861 390,755
------------- -------------
Reconciling items:
Cash ............................................................. 187,732 63,140
Accounts and notes receivable..................................... 15,776 1,313
Other assets...................................................... 46,824 45,553
------------- -------------
Total reconciling items...................................... 250,332 110,006
------------- -------------
Total assets...................................................... $ 5,974,091 $ 4,330,729
============= =============
<FN>
- ---------------
(1) Includes a $5.7 million loss recognized under the equity method of
accounting related to ProLogis' investment in Garonor Holdings, including a
$7.2 million foreign currency exchange loss from the remeasurement of
intercompany debt based on the foreign currency exchange rates in effect as
of March 31, 1999. See Note 4 for summarized financial information of
Garonor Holdings.
(2) Represents amount recognized under the equity method of accounting related
to ProLogis' investment in ProLogis Logistics. See Note 4 for summarized
financial information of ProLogis Logistics.
(3) Includes one facility in Canada.
(4) Represents amount recognized under the equity method of accounting related
to ProLogis' investment in Frigoscandia S.A. See Note 4 for summarized
financial information of Frigoscandia S.A.
(5) Includes a net loss of $0.8 million from the remeasurement of intercompany
and other debt based on the foreign currency exchange rates in effect as of
March 31, 1999.
(6) Represents amount recognized under the equity method of accounting related
to ProLogis' investment in Kingspark S.A. See Note 4 for summarized
financial information of Kingspark S.A.
(7) Includes a net loss of $2.3 million from the remeasurement of intercompany
debt based on the foreign currency exchange rates in effect as of March 31,
1999.
(8) Includes equity investments. See Note 4 for summarized financial informa-
tion.
</FN>
</TABLE>
21
<PAGE>
PROLOGIS TRUST
NOTES TO FINANCIAL STATEMENTS--(Continued)
ProLogis' largest customer accounted for 0.95% of ProLogis' rental
income (on an annualized basis) for the three months ended March 31, 1999, and
the annualized base rent for ProLogis' 20 largest customers accounted for
approximately 9.50% of ProLogis' rental income (on an annualized basis) for the
three months ended March 31, 1999.
22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders
of ProLogis Trust:
We have reviewed the accompanying consolidated balance sheet of
ProLogis Trust and subsidiaries as of March 31, 1999, and the related
consolidated statements of earnings and comprehensive income for the three
months ended March 31, 1999 and 1998, and the consolidated statements of cash
flows for the three months ended March 31, 1999 and 1998. These financial
statements are the responsibility of the Trust's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of ProLogis Trust and
subsidiaries as of December 31, 1998, and in our report dated March 5, 1999, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1998, is fairly stated in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Chicago, Illinois
May 13, 1999
23
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with ProLogis'
financial statements and the notes thereto included in Item 1 of this report.
See ProLogis' 1998 Annual Report on Form 10-K for a discussion of various risk
factors associated with forward-looking statements modern this document.
Overview
General
ProLogis' operating results depend primarily on the operating results
of its industrial distribution facilities, which are substantially influenced by
(i) the demand for and supply of industrial distribution facilities in ProLogis'
North American and European target market cities; (ii) the pace and economic
returns at which ProLogis can acquire and develop additional industrial
distribution facilities; (iii) the extent to which ProLogis can sustain improved
market performance as measured by lease rates and occupancy levels; and, (iv)
the demand for the corporate distribution facilities services that are provided
by ProLogis Development Services and ProLogis Kingspark. In addition, the
operating performance of ProLogis' unconsolidated subsidiaries that are engaged
in the refrigerated distribution business affect ProLogis' operating results.
ProLogis' target market cities and submarkets have benefited
substantially in recent periods from demographic trends (including population
and job growth) which influence the demand for distribution facilities. ProLogis
believes its ability to compete is significantly enhanced relative to other
companies due to its depth of management and ability to serve customers through
the ProLogis Operating System(TM), which includes acquisition, development,
property management personnel and presence in local markets.
As of March 31, 1999, ProLogis' real estate investments included 140.9
million square feet of operating facilities with a total expected investment of
$4.9 billion. During the three months ended March 31, 1999, ProLogis disposed of
facilities from its operating portfolio aggregating 0.9 million square feet. For
the three months ended March 31, 1999, ProLogis recognized $13.4 million of
other real estate income related to the activities of ProLogis Development
Services, primarily from the disposition of undepreciated facilities.
ProLogis had 4.7 million square feet of facilities under development as
of March 31, 1999 with a total expected investment at completion of $209.7
million. Development starts during the three months ended March 31, 1999
aggregated 1.7 million square feet at a total expected investment of $58.0
million. Development completions during the three months ended March 31, 1999
aggregated 4.8 million square feet at a total expected investment of $173.6
million. As of March 31, 1999, ProLogis had 1,899 acres of land in inventory for
the future development of approximately 33.4 million square feet of distribution
facilities. Additionally, ProLogis had 1,125 acres of land under control through
option for the future development of 19.3 million square feet of distribution
facilities.
Through ProLogis' investment in ProLogis Kingspark, ProLogis had an
additional 329,600 square feet of operating facilities, 515,500 square feet of
facilities under development and 140,900 square feet of facilities being
developed under construction management agreements in the United Kingdom as of
March 31, 1999. Additionally, as of March 31, 1999, ProLogis Kingspark owned 569
acres of land and controlled 1,615 acres of land through letter of intent or
contingent contract for future development of 38.2 million square feet of
distribution facilities.
In 1997, ProLogis began expanding its distribution facilities
operations into Europe and Mexico. This expansion was necessary to meet the
needs of its targeted national and international customers as they expand and
reconfigure their distribution facility requirements globally. With over 18
target market cities identified in Europe and four target market cities
identified in Mexico, ProLogis believes significant growth opportunities exist
internationally to enable ProLogis to meet its objective of achieving long-term
sustainable growth in cash flow. As of March 31, 1999 (excluding its investment
in Kingspark S.A. and Garonor Holdings), ProLogis owned 2.7 million square feet
of operating facilities with a total expected investment of $159.9 million in
Europe and 1.9 million square feet of operating facilities with a total expected
investment of $73.0 million in Mexico. Additionally, as of March 31, 1999,
ProLogis had 725,800 square feet of facilities under development in Europe with
a total expected investment of approximately $59.6 million and 385,500 square
feet of facilities under development in Mexico with a total expected investment
of $13.7 million.
24
<PAGE>
ProLogis has invested in refrigerated distribution businesses through
investments in the preferred stock of two companies. As of March 31, 1999,
ProLogis' had approximately 330.2 million cubic feet of refrigerated
distribution facilities in operation, which includes approximately 16.4 million
cubic feet acquired in the Meridian Merger. Of the total, 189.6 million cubic
feet are located in Europe.
Through its investment in ProLogis Garonor, which was acquired by
ProLogis on December 29, 1998, ProLogis had 5.2 million square feet of operating
facilities at a total expected investment of $297.4 million as of March 31,
1999. All of these operating facilities are located in France, principally near
the Charles de Gaulle Airport outside Paris.
On March 30, 1999, Meridian Industrial Trust Inc., a publicly traded REIT
that owned approximately 32.2 million square feet of industrial operating
facilities in the United States, was merged with and into ProLogis. In
accordance with the terms of the Merger Agreement, the approximately 33.8
outstanding shares of Meridian common stock were exchanged (on a 1.10 for one
basis) into approximately 37.2 million Common Shares. In addition, the holders
of Meridian common stock received $2.00 in cash per outstanding share,
approximately $67.6 million in total. The holders of Meridian's Series D
cumulative redeemable preferred stock received Series E Preferred Shares on a
one for one basis. The Series E Preferred Shares have a 8.75% annual dividend
rate ($2.1875 per share) and an aggregate liquidation value of $50.0 million.
The total purchase price of Meridian was approximately $1.54 billion, which
included the assumption of the outstanding debt and liabilities of Meridian as
of March 30, 1999 and the issuance of approximately 1.1 million options each to
acquire 1.10 ProLogis Common Shares and $2.00 in cash. The assets acquired from
Meridian include approximately $1.44 billion of real estate assets, an
investment in a refrigerated distribution business of $27.7 million and cash and
other assets aggregating $72.3 million. The transaction was structured as a
tax-free merger and was accounted for under the purchase method.
No assurance can be given that the current cost of funds available to
ProLogis will be available in the future or that ProLogis will continue to be
able to obtain unsecured debt or equity financing in the public markets on
favorable terms. During 1998 and the first quarter of 1999, the real estate
industry experienced a general tightening of the equity and credit markets.
Additionally, no assurance can be given that the expected trends in leasing
rates and economic returns on acquired and developed facilities will be
realized. There are risks associated with ProLogis' development and acquisition
activities which include factors such as development and acquisition
opportunities explored by ProLogis may be abandoned; construction costs of a
project may exceed original estimates due to increased materials, labor or other
expenses; and construction and lease-up may not be completed on schedule,
resulting in increased debt service expense and construction costs. Acquisition
activities entail risks that investments will fail to perform in accordance with
expectations and that analysis with respect to the cost of improvement to bring
an acquired project up to standards will prove inaccurate, as well as general
investment risks associated with any new real estate investment. Although
ProLogis undertakes a thorough evaluation of the physical condition of each
proposed investment before it is acquired, certain defects or necessary repairs
may not be detected until after it is acquired, which could increase ProLogis'
total acquisition cost. There are also risks associated with the hedging
strategies used to manage interest rate fluctuations on anticipated
transactions. If these anticipated transactions do not occur as planned,
ProLogis could incur costs. To the extent ProLogis' business activities outside
the United States conducted are in a currency other than the U.S. dollar,
ProLogis is exposed to foreign currency exchange rate fluctuations. However, all
of ProLogis' business activities in Mexico and Poland are U.S. dollar
denominated. The occurrence of any of the events described above could adversely
affect ProLogis' ability to achieve its projected returns on acquisitions and
projects under development and could hinder ProLogis' ability to make expected
distributions to equity holders.
Results of Operations
General
Net earnings attributable to Common Shares decreased by $26.7 million
to $1.0 million for the three months ended March 31, 1999 from $27.7 million for
the same period in 1998. The decrease in net earnings attributable to Common
Shares in 1999 from 1998 was primarily the result of:
o a net decrease in income generated by ProLogis' unconsolidated
subsidiaries in 1999 from 1998, primarily due to the recognition
of net foreign currency exchange losses in 1999;
25
<PAGE>
o net foreign currency exchange losses recognized by ProLogis in
1999;
o the write-off of previously capitalized start-up and organization
costs due to the adoption of a new accounting principle in 1999;
and
o increases in general and administrative expenses and other
expenses, primarily pursuit costs written-off, in 1999.
These decreases in net earnings attributable to Common Shares were
partially offset by:
o an increase in net operating income from property operations
(after deductions for depreciation), primarily the result of the
increased number of distribution facilities in operation in 1999
as compared to 1998; and
o an increase in other real estate income, primarily gains on
disposition of undepreciated facilities and fees generated by
ProLogis Development Services.
Interest expense, preferred share dividends and weighted average Common
Shares outstanding all increased in 1999 as compared to 1998. These increases
are the result of additional debt and equity used by ProLogis to finance the
increases in its acquisition and development activities in each period.
Property Operations
As of March 31, 1999 ProLogis had 1,369 operating facilities totaling
140.9 million square feet (1,122 operating facilities and 108.7 million square
feet excluding the assets acquired in the Meridian Merger on March 30, 1999).
ProLogis had 1,024 operating facilities totaling 93.1 million square feet and as
of March 31, 1998. This increase in operating facilities resulted in an increase
in property-level net operating income of $17.3 million from 1998 to 1999 as
follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Rental income.......................................................... $ 97,161 $ 78,565
Property operating expenses:
Rental expenses, net of recoveries................................ 7,189 5,938
----------- -----------
Net operating income.............................................. $ 89,972 $ 72,627
=========== ===========
</TABLE>
Rental income increased by $18.6 million in 1999 as compared to 1998.
This increase is comprised from the following components:
o facilities developed during 1999 contributed $1.2 million of
additional rental revenues;
o facilities acquired or developed during 1998 contributed $5.5
million and $8.2 million of additional rental revenues,
respectively;
o facilities owned and operated at January 1, 1998 contributed
$5.6 million of additional rental revenues; and
o facilities that were in operation during 1998 but have
subsequently been disposed of reduced rental revenues 1999 by
$1.9 million.
Rental expenses, net of recoveries from tenants, increased by $1.3
million in 1999 over 1998. Rental expenses, before the deduction of amounts
recovered from tenants, were 24.8% of rental income for 1999 and 25.9% of rental
income for 1998.
ProLogis frequently acquires facilities that are underleased and
develops facilities that are not fully leased at the start of construction,
which reduces ProLogis' overall occupancy rate below its stabilized level but
provides opportunities to increase revenues. The term "stabilized" means that
capital improvements, repositioning, new management and new marketing programs
(or development and marketing, in the case of newly developed facilities) have
been completed and in effect for a sufficient period of time (but in no case
longer than 12 months for facilities
26
<PAGE>
acquired by ProLogis and 12 months after shell completion for facilities
developed by ProLogis) to achieve stabilized occupancy (typically 93%). ProLogis
has been successful in increasing occupancies on acquired and developed
facilities during their initial months of operation resulting in an occupancy
rate of 95.4% and a leased rate of 96.7% for stabilized facilities owned as of
March 31, 1999. The average increase in rental rates for new and renewed leases
on previously leased space (4.9 million square feet) during 1999 was 16.3%. As
leases are renewed or new leases are acquired, ProLogis expects most rental
rates on renewals or new leases to increase during 1999.
Other Real Estate Income
Other real estate income consists primarily of gains on the disposition
of undepreciated facilities and fees and other income received from customers
for whom ProLogis develops corporate distribution facilities. Other real estate
income is generated primarily by ProLogis Development Services. ProLogis
Development Services develops corporate distribution facilities to meet specific
customer requirements or contracts on a fee basis to develop distribution
facilities for customers. Through its preferred stock ownership of ProLogis
Development Services, ProLogis realizes substantially all economic benefits of
these activities. ProLogis advances mortgage loans to ProLogis Development
Services to fund its acquisition, development and construction activities. The
activities of ProLogis Development Services are consolidated with ProLogis'
activities and all intercompany balances are eliminated. Due to the timing of
the completion of these development projects and the related dispositions, other
real estate income recognized by ProLogis will vary on a annual basis.
Income (Loss) from Unconsolidated Subsidiaries
Income (loss) from unconsolidated subsidiaries relates primarily to
ProLogis' investments in 100% of the preferred stock of two companies, whose
primary source of income is their respective investments in refrigerated
distribution businesses, in Kingspark S.A., which owns an industrial real estate
development company and in Garonor Holdings S.A. which owns an industrial
distribution facilities company. These investments, discussed in Note 4 to the
Consolidated Financial Statements in Item 1, generated income as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Insight (a)...................................... $ (60) $ --
----------- -----------
ProLogis Logistics:
Equity in loss.............................. (1,043) (1,502)
Management fee from CSI (b)................. -- 342
Interest income on note receivable.......... 2,537 2,196
----------- -----------
1,494 1,036
----------- -----------
Frigoscandia S.A. (c):
Equity in loss (d).......................... (6,336) (3,345)
Interest income on mortgage notes and
notes receivable........................ 2,825 6,547
----------- -----------
(3,511) 3,202
------------ -----------
Kingspark S.A. (e):
Equity in loss (f).......................... (4,685) --
Interest income on mortgage note and
note receivable......................... 3,263 --
----------- -----------
(1,422) --
----------- -----------
Garonor Holdings (g):
Equity in loss (h).......................... (7,946) --
Interest income on notes receivable......... 2,236 --
----------- -----------
(5,710) --
----------- -----------
Total................................... $ (9,209) $ 4,238
=========== ===========
27
<PAGE>
<FN>
- ----------------
(a) Represents ProLogis' investment in a privately owned logistics optimization
consulting company that, prior to July 1, 1998, was accounted for under the
cost method.
(b) ProLogis no longer receives the management fee from CSI.
(c) Frigoscandia S.A. was acquired on January 16, 1998.
(d) Includes a net loss of $0.8 million on the remeasurement from intercompany
and other debt based on the foreign currency exchange rates in effect as of
March 31, 1999.
(e) Kingspark S.A. was acquired on August 14, 1998.
(f) Includes a net loss of $2.3 million from the remeasurement of intercompany
debt based on the foreign currency exchange rates in effect as of March 31,
1999.
(g) Garonor Holdings was acquired on December 29, 1998.
(h) Includes a net loss of $7.2 million from the remeasurement of intercompany
debt based on the foreign currency exchange rates in effect as of March 31,
1999.
</FN>
</TABLE>
Foreign Currency Exchange Losses, Net
ProLogis makes intercompany loans to its foreign subsidiaries in U.S.
dollars. Because the foreign subsidiaries' functional currencies are not the
U.S. dollar, these intercompany loans have been marked to market by the foreign
subsidiaries based upon the applicable exchange rate in effect at the end of the
period For the three months ended March 31, 1999 and 1998, ProLogis incurred
such remeasurmeent losses of $8.4 million and $0.4 million, respectively. These
losses resulted primarily from the appreciation of the U.S. dollar against the
French franc, Dutch guilder and British pound, the primary currencies of the
subsidiaries to which ProLogis makes intercompany loans. Also, ProLogis
recognized a foreign currency transaction gain of $90,000 for the three months
ended March 31, 1999 and a foreign currency transaction loss of $3,000 for the
three months ended March 31, 1998.
Foreign Currency Hedge Income
On December 22, 1997, ProLogis entered into two separate contracts to
(i) exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange
310.0 million German marks for $175.0 million in anticipation of the January
1998 acquisition and planned European currency denominated financing of
Frigoscandia AB by Frigoscandia S.A., ProLogis' unconsolidated subsidiary. The
contracts were marked to market as of December 31, 1997 and ProLogis recognized
a net loss of $6.0 million in 1997. Both contracts were settled during the first
quarter of 1998 and ProLogis recognized a net gain of $2.0 million. These
foreign exchange hedges were one-time, non-recurring contracts that fixed the
exchange rate between the U.S. dollar and the Swedish krona and German mark.
ProLogis executed these hedges after the execution of the purchase agreement to
acquire Frigoscandia AB, which required payment in Swedish krona. The contracts
were executed exclusively for the acquisition and financing of Frigoscandia AB
and were not entered into to hedge on-going income in foreign currencies.
Depreciation and Amortization
The increase in depreciation and amortization expense of $4.2 million
for the three months ended March 31, 1999 as compared to the same period in 1998
results primarily from the increase in operating facilities in 1999 over 1998.
See "--Property Operations".
Interest Rate Hedge Expense
See "--Liquidity and Capital Resources--Derivative Financial Instruments"
for a discussion of this expense.
28
<PAGE>
Interest Expense
Interest expense is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Lines of credit and short-term borrowings.................... $ 6,169 $ 6,245
Senior unsecured debt........................................ 21,808 15,103
Mortgage notes............................................... 5,595 1,278
Assessment bonds............................................. 572 572
Securitized debt............................................. 701 728
Capitalized interest......................................... (3,927) (4,284)
------------- -------------
$ 30,918 $ 19,642
============= =============
</TABLE>
Interest expense on lines of credit and short-term borrowings decreased
$0.8 million in 1999 over 1998 due primarily to a lower weighted average daily
interest rate (5.91% in 1999 and 6.58% in 1998) partially offset by a higher
average outstanding balance ($415.6 million in 1999 and $364.1 million in 1998).
See " -- Liquidity and Capital Resources -- Investing and Financing Activities".
Senior unsecured debt interest expense increased by $6.7 million in
1999 as compared to 1998 due primarily to interest on new senior unsecured debt
issuances in each year ($250.0 million issued in July 1998 and $125.0 million
issued in October 1998).
Interest expense on mortgage notes increased by $4.3 million in 1999
over 1998 due to the higher weighted average balance of mortgage notes
outstanding in 1999 over 1998 ($314.1 million in 1999 and $83.6 million in
1998).
Interest expense recognized on borrowings is offset by interest
capitalized with respect to ProLogis' development activities. Capitalized
interest decreased by $0.4 million in 1999 over 1998. Capitalized interest
levels are reflective of ProLogis' cost of funds and the level of development
activity. The increase in capitalized interest is due to increased development
activity during each year.
Other Expenses
Other expenses, which increased by $1.6 million for the three months
ended March 31, 1999 over the same period in 1998, consist of land holding
costs, the write-off of previously capitalized pursuit costs and franchise and
income tax expense related to ProLogis' taxable subsidiaries. Land holding costs
were $640,000 in 1999 and $712,000 in 1998. Pursuit cost write-offs were $1.5
million in 1999 and $191,000 in 1998. Tax expense was $374,000 in 1999.
Cumulative Effect of Accounting Change
Through 1998, ProLogis capitalized costs associated with start-up
activities and organization costs and amortized such costs over an appropriate
period, generally five years. SOP 98-5, "Reporting on the Costs of Start-Up
Activities", which requires that costs associated with organization,
pre-opening, and start-up activities be expensed as incurred, was adopted by
ProLogis on January 1, 1999. Accordingly, ProLogis expensed $1.4 million of
unamortized organization and start-up costs as a cumulative effect of accounting
change in the first quarter of 1999.
29
<PAGE>
Preferred Share Dividends
The increase in preferred share dividends of $4.6 million for the three
months ended March 31, 1999 over the same period in 1998 is primarily
attributable to the issuance of Series D Preferred Shares in April 1998. See
"--Liquidity and Capital Resources--Investing and Financing Activities".
Environmental Matters
ProLogis did not experience any environmental condition on its
facilities which materially adversely affected its results of operations or
financial position.
Liquidity and Capital Resources
Overview
ProLogis considers its liquidity and ability to generate cash from
operations and financing to be adequate and expects it to continue to be
adequate to meet its anticipated development, acquisition, operating and debt
service needs as well as its shareholder distribution requirements.
ProLogis expects to finance future activities with proceeds from the
disposition of selected facilities in addition to borrowings on its credit
facilities, issuance of limited partnership units, the assumption of existing
mortgage debt, when applicable, secured and unsecured debt issuances and sales
of Common Shares and preferred shares. The credit facilities provide ProLogis
with the ability to efficiently respond to market opportunities while minimizing
the amount of cash invested in short-term investments at lower yields. As of
March 31, 1999 ProLogis had $99.9 million available for borrowing under its
credit facilities ($508.0 million available as of May 12, 1999). Another source
of future liquidity and financial flexibility is ProLogis' shelf-registered
securities which can be issued in the form of debt securities, preferred shares,
Common Shares, rights to purchase Common Shares and preferred share purchase
rights on an as-needed basis, subject to ProLogis' ability to effect an offering
on satisfactory terms. ProLogis currently has $108.0 million of shelf-registered
securities available for issuance and intends to register additional securities
in the second quarter of 1999. See " - Credit Facilities".
Operating Activities
Cash provided by operating activities decreased by $5.8 million for the
three months ended March 31, 1999 as compared to the same period in 1998 ($41.4
million in 1999 and $47.2 million in 1998). See "-- Results of Operations".
Investing and Financing Activities
ProLogis funds its current investment needs primarily with lines of
credit and short-term borrowings, which are subsequently repaid with proceeds
from sales of debt and equity securities. ProLogis' investment activities used
approximately $25.7 million and $320.5 million of cash in the three months ended
March 31, 1999 and 1998, respectively. ProLogis' financing activities provided
net cash flow of $108.9 million and $296.4 million in 1999 and 1998,
respectively. Cash distributions paid on Common Shares were $39.4 million and
$33.5 million for 1998 and 1998, respectively, which have been substantially
funded by cash generated from operating activities.
Investments in real estate, net of proceeds from dispositions, used
cash of $55.9 million during the three months ended March 31, 1999 and $105.3
million during the same period in 1998. ProLogis' cash investment in its
unconsolidated subsidiaries was $9.4 million and $211.1 million during the three
months ended March 31, 1999 and 1998, respectively.
30
<PAGE>
During the three months ended March 31, 1999, ProLogis' primary
financing activity was entering into secured financing agreements which
generated $439.0 million of proceeds that were primarily used to repay
borrowings on the unsecured lines of credit. In connection with the Meridian
Merger, ProLogis assumed Meridian's $328.4 million line of credit which was
repaid on March 30, 1999 with proceeds from borrowings on ProLogis' unsecured
lines of credit. During the three months ended March 31, 1998, ProLogis
generated cash proceeds of $95.7 million from the sale of Common Shares and had
net borrowings on its unsecured lines of credit of $253.2 million.
During 1999 ProLogis primary investing and financing activities
involved the Meridian Merger, which was principally a non-cash transaction.
However, the Meridian Merger did result in an increase in cash of $49.0 million,
representing Meridian's cash balance on March 30, 1999. The $67.6 million cash
payment to Meridian's stockholders was funded by ProLogis as of March 31, 1999,
however, the actual payments to the stockholders were made in April 1999 at the
time the stock certificates were actually exchanged.
Credit Facilities
ProLogis has an unsecured credit agreement with NationsBank, N.A.
("NationsBank"), Commerzbank AG and Chase Bank of Texas, National Association,
as agents for a bank group (the "Lenders") that provides for a $540.0 million
unsecured revolving line of credit. ProLogis has a commitment to increase the
borrowing capacity to $550.0 million which should be completed in the second
quarter of 1999. Borrowings bear interest at ProLogis' option, at either (a) the
greater of the federal funds rate plus 0.5% and the prime rate, or (b) LIBOR
plus 1.00% based upon ProLogis' current senior debt ratings. The prime rate was
7.75% and the 30-day LIBOR rate was 4,9375% as of March 31, 1999. Additionally,
the credit agreement provides for a facility fee of 0.20% per annum. The line of
credit matures on March 29, 2001 and may be extended annually for an additional
year at ProLogis' option. ProLogis was in compliance with all covenants
contained in the credit agreement as of March 31, 1999. As of March 31, 1999,
$440.1 million of borrowings were outstanding on the line of credit.
In addition, ProLogis has a $25.0 million short-term unsecured
discretionary line of credit with NationsBank that matures on October 1, 1999.
By agreement between ProLogis and NationsBank, the rate of interest on and the
maturity date of each advance are determined at the time of each advance. There
were no borrowings outstanding on the line of credit as of March 31, 1999.
As of March 31, 1999, ProLogis had an agreement with the Lenders that
provides for a term loan of $150.0 million. The term loan was repaid on April
26, 1999 and the agreement was terminated. ProLogis paid interest at LIBOR plus
1.00% on the term loan borrowings.
On April 26, 1999, ProLogis completed a $500.0 million offering of
senior unsecured notes. The notes were issued in two tranches of $250.0 million
due April 15, 2004 (the "2004 Notes") and April 15, 2008 (the "2008 Notes").
The 2004 Notes have a coupon rate of 6.70% and the 2008 Notes have a coupon rate
of 7.10%. Both the 2004 Notes and the 2008 Notes were issued at a discount and
are governed by the terms and provisions of the same indenture agreement
applicable to ProLogis' other senior unsecured notes. Net proceeds from the
offering were approximately $495.9 million, net of underwriters' commissions and
other costs, which were used to repay borrowings on ProLogis' unsecured lines of
credit and unsecured term loan.
Other Financing Sources
On December 23, 1998, ProLogis entered into a $150.0 million secured
financing agreement with Connecticut General Life Insurance Company. On that
date, $66.0 million was funded under the agreement and the remaining $84.0
million was funded on January 22, 1999. Under the terms of the agreement,
ProLogis pledged distribution facilities ($207.6 million undepreciated cost as
of March 31, 1999) as collateral for the term loan. The loan bears interest at
7.08% per annum and provides for monthly principal and interest payments through
March 2007, at which time the remaining principal outstanding of $134.4 million
will be due.
31
<PAGE>
On February 22, 1999, ProLogis entered into a $182.0 million secured
financing agreement with Teachers Insurance and Annuity Association. Of the
total borrowings, $119.3 million was funded on February 22, 1999, $35.7 million
was funded on March 5, 1999 and the remaining $27.0 million was funded on April
30, 1999. The loan bears interest at 7.20% and provides for monthly interest
payments through March 2002 and monthly principal and interest payments from
April 2002 to March 2009, at which time the remaining principal outstanding of
$135.1 million will be due. ProLogis pledged distribution facilities with an
undepreciated cost of $257.7 million at March 31, 1999 as collateral under the
agreement.
On March 29, 1999, ProLogis entered into a $200.0 million secured financing
agreement with Morgan Guaranty Trust Company of New York. The loan is secured by
distribution facilities with an undepreciated cost of $332.2 million as of March
31, 1999. The loan provides for interest only payments through May 2005 and
principal and interest payments thereafter, with the remaining balance of $127.2
million due on March 2024. The loan bears interest at 7.584% per annum.
Derivative Financial Instruments
ProLogis occasionally uses derivative financial instruments as hedges
to manage well-defined risk associated with interest and foreign currency rate
fluctuations on existing obligations or anticipated transactions. ProLogis does
not use derivative financial instruments for trading purposes.
The primary risks associated with derivative instruments are market
risk and credit risk. Market risk is defined as the potential for loss in the
value of the derivative due to adverse changes in market prices (interest rates
or foreign currency rates). Through hedging, ProLogis can effectively manage the
risk of increases in interest rates and fluctuations in foreign currency
exchange rates.
Credit risk is the risk that one of the parties to a derivative
contract fails to perform or meet their financial obligation under the contract.
ProLogis does not obtain collateral to support financial instruments subject to
credit risk but monitors the credit standing of counterparties. ProLogis does
not anticipate non-performance by any of the counterparties to its derivative
contracts. Should a counterparty fail to perform, however, ProLogis would incur
a financial loss to the extent of the positive fair market value of the
derivative instruments, if any.
The following table summarizes the activity in interest rate contracts
for the three months ended March 31, 1999 (in millions):
<TABLE>
<CAPTION>
Interest Rate Interest Rate
Futures Contracts Swaps
----------------- ------------
<S> <C> <C>
Notional amount as of December 31, 1998............ $ 75.0 $ 75.0
New contracts...................................... -- --
Matured or expired contracts (1)................... (75.0) (75.0)
Terminated contracts............................... -- --
------------- ------------
Notional amount as of March 31, 1999............... $ -- $ --
============= ============
</TABLE>
(1) In October 1997, in anticipation of debt offerings in 1998, ProLogis
entered into two interest rate protection agreements which were renewed
past the original termination dates. These agreements were entered into
by ProLogis to fix the interest rate on anticipated financings.
During the third quarter of 1998, ProLogis determined that the interest
rate protection agreements no longer qualified for hedge
accounting treatment under GAAP based upon the following:
o Due to changing conditions in the public debt markets, it was no
longer considered probable that ProLogis would complete the
anticipated 1998 longer term debt offerings that prompted ProLogis
to enter into these interest rate protection agreements in 1997
(i.e., ProLogis would not be exposed to the interest rate risk
that these instruments were intended to hedge); and
o ProLogis determined, through internal analysis and through
communications with independent third parties, that a high degree
of correlation no longer existed between changes in the market
values of these interest rate protection agreements and the
"market values" of the anticipated debt offerings (i.e., the
interest rate at which the debt could be issued by ProLogis under
existing market conditions).
32
<PAGE>
Accordingly, ProLogis began marking these agreements to market as
of September 30, 1998. For 1998, ProLogis recognized a non-cash
expense of $26.1 million. These agreements, which were terminated
in February 1999 at a total cost of $27.0 million, were used to
set the interest rate associated with a secured financing
transaction that was completed in March 1999. ProLogis intends to
amortize this expense as a component of interest expense over the
25-year term of the MGT debt for purposes of calculating funds
from operations. See "Funds From Operations".
On December 22, 1997, ProLogis entered into two separate contracts to
(i) exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange
310.0 million German marks for $175.0 million in anticipation of the January
1998 acquisition and planned European currency denominated financing of
Frigoscandia AB by Frigoscandia S.A., ProLogis' unconsolidated subsidiary. The
contracts were marked to market as of December 31, 1997 and ProLogis recognized
a net loss of $6.0 million in 1997. Both contracts were settled during the first
quarter of 1998 and ProLogis recognized a net gain of $2.0 million. This gain is
recognized in the caption "Foreign exchange gains, net" in the Consolidated
Statements of Earnings and Comprehensive Income. These foreign exchange hedges
were one-time, non-recurring contracts that fixed the exchange rate between the
U.S. dollar and the Swedish krona and German mark. ProLogis executed these
hedges after the execution of the purchase agreement to acquire Frigoscandia AB,
which required payment in Swedish krona. The contracts were executed exclusively
for the acquisition and financing of Frigoscandia AB and were not entered into
to hedge on-going income in foreign currencies.
Commitments
As of March 31, 1999, ProLogis had letters of intent or contingent
contracts, subject to ProLogis' final due diligence, for the acquisition of
59,300 square feet in Europe with an acquisition cost of $2.0 million. The
foregoing transaction is subject to a number of conditions, and ProLogis cannot
predict with certainty that any of them will be consummated. In addition, as of
March 31, 1999, ProLogis had $209.7 million of budgeted development cost for
developments in process, of which $106.6 million was unfunded.
Frigoscandia AB has a multi-currency, three-year revolving credit agreement
through a consortium of 11 European banks in the currency equivalent of
approximately $197.6 million as of March 31, 1999. The loan bears interest at
each currency's LIBOR rate plus 0.65%. ProLogis has entered into a guaranty
agreement for 25% of the loan balance.
ProLogis Kingspark has a line of credit agreement with a bank in the
United Kingdom. The credit agreement, which provides for borrowings of up to
approximately $16.0 million, has been guaranteed by ProLogis. As of March 31,
1999, approximately $14.7 million was outstanding on the line of credit.
In connection with the acquisition of ProLogis Garonor, Garonor
Holdings obtained two credit facilities from a French bank. One facility is in
the amount of 200.0 million French francs ($136.5 million as of March 31,
1999) and is guaranteed by ProLogis. ProLogis has guaranteed an additional 10.0
million French francs ($1.7 million as of March 31, 1999), which approximates
the annual interest to be charged on the facility. The second facility, in the
amount of 870.0 million French francs (of which 814.4 million French francs was
outstanding as of March 31, 1999), is secured by the real estate owned by
ProLogis Garonor. ProLogis has guaranteed 100.0 million French francs of the
amount outstanding as of March 31, 1999 ($16.8 million as of March 31, 1999).
Garonor Holdings has the ability to borrow an additional 50.0 million French
francs under this facility. The total guaranty of 100.0 million French francs
can be reduced as ProLogis Garonor meets certain operating covenants.
Distribution and Dividend Requirements
ProLogis' current distribution policy is to pay quarterly distributions
to shareholders based upon what it considers to be a reasonable percentage of
cash flow and at the level that will allow ProLogis to continue to qualify as a
REIT for tax purposes. Because depreciation is a non-cash expense, cash flow
typically will be greater than earnings from operations and net earnings.
Therefore, annual distributions are expected to be consistently higher than
annual earnings.
33
<PAGE>
On February 24, 1999, ProLogis paid a quarterly distribution of $0.3183
per Common Share. On March 17, 1999, the Board set a proposed annual
distribution level of $1.30 per Common Share. Accordingly, on that date the
Board declared a quarterly distribution of $0.3272 per Common Share payable on
May 27, 1999 to shareholders of record on May 13, 1999.
On May 3, 1999, ProLogis paid a common distribution to holders of Meridian
common stock as of March 19, 1999. This distribution was declared by the
Meridian Board of Directors prior to the closing of the Merger. This
distribution related to the first quarter of 1999 and aggregated $11.1 million.
This liability was assumed by ProLogis in connection with the Meridian Merger.
Pursuant to the terms of its preferred shares, ProLogis is restricted
from declaring or paying any distribution with respect to the Common Shares
unless all cumulative distributions with respect to the Preferred Shares have
been paid and sufficient funds have been set aside for distributions that have
been declared for the then current distribution period with respect to the
Preferred Shares.
On March 31, 1999, ProLogis paid quarterly dividends of $0.5875 per
cumulative redeemable Series A preferred share, $0.4375 per cumulative
redeemable convertible Series B preferred share, $1.0675 per cumulative
redeemable preferred Series C share and $0.495 per cumulative redeemable Series
D preferred share.
On April 30, 1999, ProLogis paid an aggregate dividend of $1.1 million
on the Series E Preferred Shares ($0.5469 per share) of which $729,200 related
to Meridian's Series D preferred stock and was accrued by Meridian prior to the
closing of the Merger.
Conversion to the Euro
Effective January 1, 1999, eleven of the fifteen member countries of
the European Monetary Union launched the new monetary unit, the euro, as the
single currency for the member countries of the European Monetary Union. During
the period from January 1, 1999 to January 1, 2002 a transition period will be
in effect during which time the euro will be available for non-cash
transactions. However, transactions can continue to be denominated in the old
national currencies. After January 1, 2002, all transactions must be denominated
in the euro. The targeted exchange rates of the old national currencies to the
euro were determined in May 1998. Conversion to the euro has not had, nor is
management aware of any future effects of the conversion to the euro, that will
have a material impact on its business operations or results of operations.
Funds from Operations
Funds from operations attributable to Common Shares increased $8.6
million to $62.9 million for the three months ended March 31, 1999 from $54.3
million for the same period in 1998.
Funds from operations represent ProLogis' net earnings (computed in
accordance with GAAP) before minority interest, before gains or losses from debt
restructuring, before gains or losses on disposition of depreciated real estate,
before gains or losses from mark to market adjustments resulting from the
remeasurement (based on current foreign currency exchange rates) of intercompany
and other debt of ProLogis' foreign subsidiaries, before deferred tax benefits
and deferred tax expenses of ProLogis' taxable subsidiaries, before significant
non-recurring items that materially distort the comparative measurement of
company performance over time, plus real estate depreciation and amortization
(exclusive of amortization of loan costs), and after adjustments for
unconsolidated subsidiaries calculated to compute their funds from operations on
the same basis as ProLogis. ProLogis believes that funds from operations is
helpful to a reader as a measure of the performance of an equity REIT because,
along with cash flow from operating activities, investing activities and
financing activities, it provides a reader with an indication of the ability of
ProLogis to incur and service debt, to make capital expenditures and to fund
other cash needs. The funds from operations measure presented by ProLogis, while
comparable to the National Association of Real Estate Investment Trusts'
definition, will not be comparable to similarly titled measures of other REITs
that do not compute funds from operations in a manner consistent with ProLogis.
Funds from operations is not intended to represent cash made available to
shareholders. Funds from operations should not be considered as an alternative
to net earnings or any other GAAP measurement of performance as an indicator of
ProLogis' operating performance, or as an alternative to cash flows from
operating, investing or financing activities as a measure of liquidity. Funds
from operations is as follows (in thousands):
34
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------
1999 1998
---------- -----------
<S> <C> <C>
Net earnings attributable to Common Shares................................... $ 1,050 $ 27,746
Add (Deduct):
Real estate depreciation and amortization........................... 27,052 22,934
Minority interest................................................... 1,169 979
Gain on disposition of depreciated real estate...................... (715) (2,066)
Non-recurring foreign currency exchange gain (1).................... -- (2,054)
Foreign currency exchange losses, net (2)........................... 8,373 444
Interest rate hedge expense, net (3)................................ 937 --
Cumulative effect of accounting change (4).......................... 1,440 --
ProLogis' share of reconciling items of unconsolidated subsidiaries:
Real estate depreciation and amortization...................... 12,585 8,086
Net foreign currency exchange loss on remeasurement
of intercompany and other debt............................. 10,245 --
Deferred tax benefit........................................... (837) (893)
Other, net..................................................... 1,580 (866)
---------- -----------
Funds from operations attributable to Common Shares.......................... $ 62,879 $ 54,310
========== ===========
<FN>
- ---------------
(1) See "--Results of Operations - Foreign Currency Hedge Income".
(2) See "--Results of Operations - Foreign Currency Exchange Losses, Net".
(3) Includes $8,000 of additional interest expense resulting from the
amortization of the interest rate hedge expense. See "--Liquidity and
Capital Resources - Derivative Financial Instruments".
(4) See "--Results of Operations - Cumulative Effect of Accounting Change".
</FN>
</TABLE>
Year 2000
Overview
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Certain
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar business activities.
ProLogis has undertaken a review of all of its computer systems and
applications to determine if these programs are Year 2000 compliant and if not,
the efforts that will be necessary to bring the programs into compliance.
ProLogis has not identified any computer system or applications that, upon
failure to be Year 2000 compliant, would have a material adverse impact on its
business or results of operations.
Information Technology Systems
ProLogis' information technology ("IT") environment is primarily a
Microsoft Windows-based personal computer network (NT or Novell) utilizing
desktop applications, primarily data base and spreadsheet applications.
Additionally, ProLogis utilizes third-party developed software, including
accounting and property management systems. ProLogis' critical computer
hardware, operating systems and key general accounting, property management and
financial reporting applications are Year 2000 compliant, as verified by the
various vendors. ProLogis has identified one accounting application that is not
Year 2000 compliant.
35
<PAGE>
Because ProLogis has undertaken to replace its core financial systems
with computer software that will better serve its future needs (such software is
Year 2000 compliant), it is not expected that the non-compliant accounting
application will continue to be used by ProLogis after mid-1999. Should the
enterprise-wide implementation of the new computer software not be accomplished
in a timely manner and the non-compliant accounting application is still in use
at the end of 1999, ProLogis has two contingency plans. The first option is to
install a Year 2000 compliant version of the current software that the vendor
has indicated will be available in 1999. Secondly, ProLogis can, with minimal
efforts, convert this application to the Year 2000 compliant software currently
in use for all other accounting applications. Should neither contingency plan be
successfully implemented, ProLogis could experience a delay in reporting its
financial results and also delays in processing payments to vendors beginning
with the first quarter of 2000. Also, additional costs would be incurred to
perform this function manually until such time as the computer application is
made Year 2000 complaint.
Non-IT Systems
Many of ProLogis' operating facilities have microchips embedded in the
building operating systems. ProLogis, as owner and lessor of these buildings,
has assessed its exposure with respect to Year 2000 related failures in these
operating systems. These building operating systems include programmable
thermostats, security systems, communications systems, utility monitoring
systems and timed locks.
Under the terms of substantially all of ProLogis' building leases, the
tenant has responsibility for the operating systems within their leased space,
including the responsibility for addressing the Year 2000 compliance of those
systems. However, ProLogis is responsible for the operating systems that control
the common exterior areas of the buildings, including parking lot lighting and
sprinkler systems. Generally, these systems are programmed on daily or weekly
cycles (as opposed to calendar-based programming). Consequently, the risk of a
Year 2000 related malfunction is extremely low and any such malfunction would
not have a material impact on ProLogis' operations. ProLogis is also responsible
for the fire and life safety monitoring systems in its buildings. ProLogis
contracts with a third party to monitor these systems. These systems are not
calendar-based, because reportable events are identified as they occur.
Consequently, the risk of a Year 2000 related failure is low.
ProLogis is currently conducting a review of all operating systems that
fall within its responsibility. Preliminary results have indicated that
ProLogis' primary vendor for monitoring of fire and life safety systems has
verified that their system is Year 2000 compliant. ProLogis is continuing its
review of other systems and is performing testing and verification as deemed
appropriate. This process is expected to be completed during the second quarter
of 1999. Based upon the results of this review, ProLogis will formulate a
contingency plan to address risk areas identified, if any. Should the systems
that ProLogis is responsible for fail, ProLogis' tenants may experience
inconveniences with respect to the maintenance and operations of the facilities
(i.e., parking lot lighting and sprinkler systems). Should the fire and life
safety systems fail, there could be a delay in identifying a reportable event or
a reportable event could occur without being identified. In such situation,
ProLogis could be exposed to the extent the failure resulted in a loss not
covered by existing insurance policies.
Third Parties
Management believes that its planning efforts are adequate to address
the Year 2000 issue and that its risk factors are primarily those that it cannot
directly control, including the readiness of financial institutions and utility
providers. Failure on the part of these entities to become Year 2000 compliant
could result in disruptions in the business operations of ProLogis.
Costs
ProLogis' activities with respect to its assessment of Year 2000
compliance and its remediation efforts are being performed by existing
personnel. ProLogis has not obtained a cost estimate for upgrading the
accounting application referred to above, as the need for this contingency plan
is not considered probable at this time. ProLogis' historical costs for
addressing the Year 2000 issue are not material and management does not
anticipate
36
<PAGE>
that its future costs associated with the Year 2000 issue will be material.
Third-party costs and interim software solutions for Year 2000 issues have been
less than $100,000 and are not expected to exceed $250,000. ProLogis does not
separately track the internal costs incurred for Year 2000 compliance issues.
Such costs are principally the related payroll costs of its IT group. Although
the cost of replacing ProLogis' key IT systems is substantial, the replacements
have been and are being made to improve operational efficiency and were not
accelerated due to the Year 2000 issue. ProLogis has not delayed any material
projects as a result of the Year 2000 issue. Funds expended to address Year 2000
issues have been made from operating cash flow.
Unconsolidated Subsidiaries
As part of its compliance program, management of ProLogis has received
ongoing reports from CSI, Frigoscandia AB, ProLogis Kingspark and ProLogis
Garonor on the impact of the Year 2000 problems on their operations and
financial results.
CSI has completed testing on all IT and embedded operating systems. No
critical IT or embedded operating systems have been identified that have not
already been remediated or are not Year 2000 compliant. CSI is currently
verifying and testing customer and supplier electronic data interface
programming standards. CSI has retained an outside consulting firm to review
their internal testing results. The consultants review is expected to be
completed during the third quarter of 1999. CSI estimates that the total cost
incurred to date and estimated total cost to be incurred for Year 2000
remediation is less than $250,000. Also, additional costs would be incurred
to perform this function manually.
Frigoscandia AB has substantially completed all testing of its IT and
embedded operating systems. No critical IT or embedded operating systems have
been identified that have not already been remediated, with the exception of the
financial reporting application for its Spanish and French operations and
certain components of an inventory management system. A new financial reporting
system for the Spanish and French operations is being implemented and is
expected to be fully operational by the third quarter of 1999. Modifications to
the components of the inventory management system will be completed by the third
quarter of 1999.
Frigoscandia AB is currently planning a coordinated program whereby
testing with key customers and critical suppliers is performed. Additionally,
Frigoscandia AB is preparing detailed contingency plans in the event of
unexpected Year 2000 disruptions. Frigoscandia AB estimates that the total cost
incurred to date and the estimated total costs to be incurred for Year 2000
remediation is between $2 million and $4 million. Failure of Frigoscandia AB to
convert the financial reporting application for its French operations to a Year
2000 compliant system could result in delays in reporting financial results
beginning with the first quarter of 2000 and also delays in billings to
customers and in payments to vendors. These delays could result in additional
costs to Frigoscandia AB. Also, additional costs would be incurred by
Frigoscandia AB to perform these functions manually.
The primary accounting applications of ProLogis Kingspark are not Year
2000 compliant. To remediate this problem, ProLogis Kingspark is currently
installing a Year 2000 compliant version of non-customized accounting software.
Installation and testing is expected to be completed by the end of the second
quarter of 1999.
ProLogis Kingspark has virtually no risk associated with embedded
operating systems because substantially all of ProLogis Kingspark activities are
related to development of facilities for third parties and not for its own
long-term ownership. ProLogis Kingspark estimates that the total cost incurred
to date and the estimated total cost to be incurred for the Year 2000
remediation is less than $100,000. Failure of ProLogis Kingspark to convert its
primary accounting applications to a Year 2000 compliant system could result in
delays in reporting financial results beginning with the first quarter of 2000
and also delays in billings to customers and in payments to vendors. These
delays could result in additional costs to ProLogis Kingspark. Also, additional
costs would be incurred by ProLogis Kingspark to perform these functions
manually.
37
<PAGE>
ProLogis Garonor has completed testing on all IT and embedded operating
systems. Garonor plans to install a Year 2000 compliant version of its current
financial accounting software by the end of the third quarter of 1999. ProLogis
Garonor's customer billing and cash management software are also not Year 2000
compliant. ProLogis Garonor is in the process of replacing these software
applications and expects the new software will be in place prior to the end of
1999. Costs to bring these applications into compliance are expected to be less
than $100,000. Should the new software applications not be successfully
implemented, ProLogis Garonor could experience a delay in reporting its
financial results beginning with the first quarter of 2000 and also delays in
processing billings to customers and in payments to vendors. These delays could
result in additional costs to ProLogis Garonor. Also, additional costs could be
incurred to perform these functions manually.
ProLogis Garonor's responsibility for the operating systems that
control the interior equipment, common exterior areas and the fire and life
safety systems of its buildings is similar to that of ProLogis, as discussed
under "--Non - IT Systems". ProLogis Garonor has tested these systems and
determined that they are Year 2000 compliant. In addition, ProLogis Garonor has
received an indemnification from the vendors who supplied these systems' with
respect to any Year 2000 failures.
There can be no assurances that Year 2000 remediation efforts by
ProLogis, its unconsolidated subsidiaries or third parties will be properly and
timely completed, and failure to do so could have a material adverse effect on
ProLogis, its business and its financial condition. ProLogis cannot predict the
actual effects to it of the Year 2000 problem, which depends on numerous
uncertainties such as: (i) whether significant third parties properly and timely
address the Year 2000 issue; and, (ii) whether broad-based or systemic economic
failures may occur. Due to the general uncertainty inherent in the Year 2000,
ProLogis is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on its operations. ProLogis' Year 2000
compliance program is expected to significantly reduce the level of uncertainty
about the Year 2000 impact in areas that are within its direct control and
management of ProLogis believes that the possibility of significant
interruptions of normal operations will be reduced.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
No change has occurred in ProLogis' interest rate risk or foreign
currency risk as discussed in ProLogis' 1998 Annual Report on Form 10-K.
38
<PAGE>
PART II
Item 4. Submission of Matters to Vote of Securities Holders
On March 30, 1999, at a special meeting, the shareholders approved the
merger of Meridian Industrial Trust, Inc. with and into ProLogis in accordance
with the terms of the Agreement and Plan of Merger dated as of November 16,
1998, as amended. Of the total 123,741,580 shares outstanding on the record date
of February 24, 1999, 109,481,280 shares were voted at the meeting. Of the total
shares voted at the meeting, 106,449,387 shares were voted in favor, 2,933,133
shares withheld and 98,760 shares abstaining.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 Mortgage Note dated as of March 29, 1999 between ProLogis Trust and
Pro-Industrial Funding Company, Inc.
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred
Share Dividends
15.2 Letter from Arthur Andersen LLP regarding unaudited financial information
dated May 13, 1999
27 Financial Data Schedule
Date Financial
Reported Item Statements
-------- ---- ----------
February 24, 1999 5, 7 Yes
February 24, 1999 5, 7 Yes
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PROLOGIS TRUST
BY:/S/ WALTER C. RAKOWICH
------------------------------------
Walter C. Rakowich
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
BY:/S EDWARD F. LONG
-----------------------------------
Edward F. Long
Senior Vice President and Controller
BY:/S/ SHARI J. JONES
-----------------------------------
Shari J. Jones
Vice President
(Principal Accounting Officer)
Date: May 14, 1999
40
EXHIBIT 10.1
MORTGAGE NOTE
$200,000,000.00 New York, New York
Dated as of March 29, 1999
FOR VALUE RECEIVED, PROLOGIS TRUST, a Maryland real estate investment
trust, having an office at 14100 East 35th Place, Aurora, Colorado 80011 (the
"Maker"), promises to pay to the order of PRO-INDUSTRIAL FUNDING COMPANY, INC.,
a Delaware corporation (the "Payee"), at its office c/o Morgan Guaranty Trust
Company of New York, 522 Fifth Avenue, New York, New York 10036, or at such
other place as may be designated in writing by the holder of this Note, in legal
tender of the United States of America in immediately available funds, the
principal sum of TWO HUNDRED MILLION AND NO/100 DOLLARS ($200,000,000) or so
much thereof as shall at any time be outstanding (the "Principal Amount"),
together with interest on the Principal Amount to be computed from the date
hereof on the basis of a 360-day year (consisting of twelve thirty day months,
except that for periods of less than 30 days, interest shall be computed on the
basis of the actual number of days in such period divided by the actual number
of days in such calendar year), at the rate of 7.584% per annum (the "Interest
Rate").
All capitalized terms used herein and not defined herein shall have the
respective meanings assigned to them in those certain Mortgages and Security
Agreements and Assignments of Leases and Rents, Deeds of Trust and Security
Agreements and Assignments of Leases and Rents and Deeds to Secure Debt and
Assignments of Leases and Rents of even date herewith (collectively, the
Mortgages") given by Maker, ProLogis Limited Partnership II, a Delaware limited
partnership and ProLogis - North Carolina Limited Partnership, a Delaware
limited partnership (collectively, the "Mortgagors"), to, or for the benefit of,
Payee, as mortgagee or beneficiary, as security for the indebtedness evidenced
hereby and covering the interests of the Mortgagors in the real and personal
property more particularly described in said Mortgages (collectively, the
"Mortgaged Property").
Maturity Date. As used herein, the term "Maturity Date" shall mean
April 1, 2024 or any earlier date to which such Maturity Date shall be
accelerated pursuant to any right or option (including the right to prepay, if
any, contained herein) under this Note or the other Loan Documents by which the
Payee may accelerate the Maturity Date.
Defaults. This Note is secured by the Mortgages, as the same may be
amended, modified, supplemented, restated, consolidated, spread, split,
extended, replaced or renewed, from time to time, and all of the other Loan
Documents. The Obligations shall become immediately due and payable, at the
option of the Payee, upon the occurrence of any default in payment under this
Note, or any other event which would constitute an Event of Default under the
Mortgages or any of the other Loan Documents. All of the terms, provisions,
covenants, agreements and conditions contained in the Mortgages and all of the
other Loan Documents are hereby made a part of this Note to the same extent and
effect as if fully set forth herein.
Payments. The Principal Amount shall be paid by Maker to Payee
together with interest at the Interest Rate as follows:
On the date hereof, the Maker shall pay to the Payee an installment of
interest only computed on the Principal Amount at the Interest Rate for the
actual number of days to elapse from and including the date hereof through and
including March 31, 1999.
<PAGE>
On the first day of May, 1999 and on the first day of each month
thereafter through and including May 1, 2005, Maker shall make Interest Only
Payments (as hereinafter defined) to Payee.
The term "Interest Only Payments" shall mean payments of interest
accruing on the Principal Amount hereunder at the Interest Rate, payable monthly
in arrears.
On the first day of June, 2005 and the first day of each month
thereafter through and including (i) May 1, 2018 (the "Conversion Date") if the
Conversion (as hereinafter defined) occurs and (ii) the Maturity Date (if the
Conversion does not occur), Maker shall make Constant Monthly Payments (as
hereinafter defined) to Payee.
The term "Constant Monthly Payments" shall mean monthly payments of
principal and interest in the amount of (i) One Million Four Hundred Nine
Thousand Nine Hundred Fifty and 80/100 Dollars ($1,409,950.80) prior to the
exercise of the Amortization Acceleration Option (hereinafter defined) and (ii)
the Accelerated Constant Monthly Payment Amount (hereinafter defined) from and
after the exercise of the Amortization Acceleration Option. Each Constant
Monthly Payment shall be applied first to interest and then to the reduction of
the Principal Amount.
Provided that (i) no Event of Default shall exist under this Note, the
Mortgages or the other Loan Documents as of the Conversion Date and (ii) the
outstanding Principal Amount shall not exceed forty percent (40%) of the value
of the Mortgaged Property as of the Conversion Date, and (iii) Payee shall not
have exercised the Amortization Acceleration Option (as hereinafter defined),
Maker shall have the option (the "Conversion Option"), exercisable by written
notice delivered by Maker to Payee on or before April 30, 2018, to cease making
Constant Monthly Payments and convert the schedule for repayment of the
indebtedness evidenced hereby to an interest only schedule (the "Conversion").
In such event, Maker shall make Interest Only Payments to Payee, on the first
day of June, 2018 and the first day of each month thereafter through and
including the Maturity Date. The value of the Mortgaged Property as of the
Conversion Date shall be determined pursuant to an appraisal acceptable to Payee
to be obtained by Payee at Maker's sole cost and expense.
Notwithstanding anything to the contrary contained in this Note (and
irrespective of whether Maker shall have previously exercised the Conversion
Option), in the event that the Maker shall exercise the DE-REIT Option (defined
in Section 2.14 of the Mortgage), Payee shall have the option (the "Amortization
Acceleration Option"), exercisable, in Payee's sole discretion, by written
notice to Maker given any time within five (5) years after the Maker's exercise
of the DE-REIT Option, to require that the amount of each Periodic Installment
(as hereinafter defined) thereafter be an amount sufficient to fully repay the
entire remaining Principal Amount, less the Balloon Payment (as hereinafter
defined), together with interest accruing on the Principal Amount at the
Interest Rate in equal monthly installments over the remainder of the term of
this Note (based on a conventional 30-day month amortization schedule) (the
"Accelerated Constant Monthly Payment Amount").
The term Balloon Amount shall mean SEVENTY-FIVE MILLION AND NO/100
DOLLARS ($75,000,000) of the Principal Amount.
The remaining balance of the Principal Amount, all accrued interest,
and all other portions of the Obligations remaining unpaid on the Maturity Date
shall be due and payable on the Maturity Date.
All payments, whether of principal, interest or otherwise, due
hereunder and under any of the Loan Documents shall be paid by wire transfer of
immediately available federal funds to the following account of the Payee,
unless otherwise directed by the Payee in writing:
<PAGE>
Morgan Guaranty Trust Company of New York
Bank of New York
ABA #021-000-018 BNF: IOC566
Attn: P&I Dept/for further credit to
A/C: 188967 - Re: ProLogis Portfolio
Any wire transfer received by the Payee after 1:00 p.m. New York City time shall
be deemed received on the next succeeding business day.
For purposes hereof, the following terms shall have the following meanings:
The term "Periodic Installments" shall mean collectively the Constant Monthly
Payments and the Interest Only Payments.
Prepayment Rights and Charges.
A. The Principal Amount shall not be prepayable, in whole or in part.
Notwithstanding the foregoing, at any time following the first (1st) anniversary
of the date hereof, the Maker shall have the right to prepay the entire unpaid
Principal Amount evidenced by this Note, in full, but not in part upon not less
than sixty (60) days prior written notice to Payee, with accrued and unpaid
interest thereon and all other sums due under the Mortgages and the other Loan
Documents by paying to Payee (x) the then remaining unpaid Principal Amount and
all accrued and unpaid interest thereon and all other sums then due and owing
under the Mortgages and the other Loan Documents plus (y) if such prepayment is
made prior to the date which is six (6) months prior to the scheduled Maturity
Date, an amount (the "Make Whole Amount") not less than zero, equal to the
amount by which:
(1) the sum of the Present Value (as hereinafter defined) of
(i) all Periodic Installments which would have been payable under this
Note had this Note not been prepaid, and (ii) the portion of the
Principal Amount which would have been due and payable on the scheduled
Maturity Date had this Note not been prepaid; exceeds
(2) the then outstanding Principal Amount of this Note.
For purposes of the definition of Make-Whole Amount, "Present Value" shall be
computed in accordance with generally accepted accounting principles at a
discount rate equal to the Treasury Yield (as hereinafter defined), plus
twenty-five hundredths of one percent (0.25%); and the "Treasury Yield" shall be
determined by reference to the most recent Federal Reserve Statistical Release
H.15 (519) (or any successor or substitute publication of the Federal Reserve
Board) (the "Statistical Release") that has become publicly available at least
two business days prior to the date fixed for prepayment, and shall be the most
recent weekly average yield to maturity (expressed as a rate per annum) opposite
the caption "Treasury Constant Maturities" for the year corresponding to the
then Remaining Life (as hereinafter defined) of this Note, converted to a
mortgage equivalent yield; provided that if the Remaining Life of this Note does
not correspond directly to any of the "Treasury Constant Maturities" shown on
the Statistical Release, the Treasury Yield shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the most
recent weekly average yield of the two "Treasury Constant Maturities" shown on
the Statistical Release and which are for maturities as close as possible to the
Remaining Life. The "Remaining Life" of this Note shall equal, at the date of
prepayment or acceleration, the number of years obtained by dividing (x) the
Principal Amount of this Note as of the date of prepayment into (y) the sum of
the products obtained by multiplying (A) the amount of each then remaining
principal payment, including the payment on the scheduled Maturity Date, under
this Note by (B) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date of prepayment or acceleration and the date on
which such payment is to be made (assuming for purposes of clauses (A) and (B)
above that (i) the optional prepayment of this Note pursuant hereto or any
acceleration of maturity of this Note, as applicable, in respect of which the
Make-Whole Amount is then being determined, had not occurred, (ii) the
Conversion, if not previously exercised and still exercisable, shall have
<PAGE>
occurred, and (iii) the Amortization Acceleration Option, unless previously
exercised, shall not have been exercised). The Treasury Yield shall be computed
to the fifth decimal place (one thousandth of a percentage point) and then
rounded to the fourth decimal point (one hundredth of a percentage point).
B. The Maker hereby acknowledges that the Payee would not make the loan
evidenced by this Note without full and complete assurance by the Maker of its
agreement to pay the Periodic Installments as hereinabove provided, and its
further agreement not to prepay all or any part of the Principal Amount prior to
the Maturity Date, except on the terms expressly set forth herein. In
consideration of the foregoing, if, as a result of an Event of Default, the
Payee shall declare the Obligations due and payable, in whole or in part, prior
to the scheduled Maturity Date in accordance with its rights under this Note,
the Mortgages or any Loan Documents, then, the Maker shall pay to the Payee on
the date of such acceleration, in addition to all other amounts due the Payee,
an amount equal to the Make-Whole Amount which would have been due and payable
in accordance with the foregoing provisions of this Note had a prepayment
occurred on the date of such acceleration. The Maker hereby waives any rights
the Maker may have to prepay the loan evidenced by this Note without charge and
agrees to pay the Make-Whole Amount, if applicable, upon any prepayment, whether
voluntary, pursuant to any such acceleration or otherwise. The Maker hereby
acknowledges that if such acceleration shall result from an Event of Default, it
shall be presumed, for purposes of imposing the Make-Whole Amount only, and
conclusively deemed to be a willful and deliberate attempt by the Maker to avoid
the payment of the Make-Whole Amount or the limitations on prepayment herein
contained and the Make-Whole Amount shall constitute liquidated damages, and not
a penalty, as a reasonable estimate of the Payee's loss as a consequence of the
breach of the Maker's covenant not to prepay the Obligations other than as
specifically permitted herein, the exact amount of which damages would be
impossible to ascertain.
C. Any such Make-Whole Amount (whether voluntary, pursuant to any
acceleration or otherwise) shall constitute a portion of the Obligations
evidenced hereby and secured by the Mortgages and the other Loan Documents.
Nothing herein shall constitute a waiver by the Payee of any right it may have
to specifically enforce the terms of repayment of the Obligations set forth
herein, in the Mortgages and in the other Loan Documents. The foregoing
provisions shall be deemed to apply, without limitation, to any prepayment of
the Obligations in connection with (i) any reinstatement of any or all of the
Loan Documents under any foreclosure proceedings, (ii) any right of redemption
or (iii) the consummation of any foreclosure sale, whether or not such
prepayment is made by or on behalf of the Maker or otherwise and whether or not
any such prepayment is made pursuant to rights granted at law or in equity.
Late Charge. In the event that any payment provided for herein shall
become overdue for a period of ten (10) days or more, in addition to any other
amounts due the Payee hereunder, a late charge of four cents ($.04) for each
dollar of the amount so overdue shall become immediately due to the Payee as
liquidated damages, and not as a penalty, as a reasonable estimate of the
Payee's additional administrative expenses, the exact amount of which would be
impossible to ascertain, and such sum shall be part of the Obligations evidenced
hereby and secured by the Mortgages and the other Loan Documents. Such late
charges shall be due and payable with the immediately succeeding monthly payment
due hereunder whether or not the Payee shall have billed the Maker for such
charges or upon demand if there shall be no succeeding monthly payment due
thereafter. Application of a late charge shall not be construed as a consent by
the Payee to an extension of time for any payment, as a waiver of any default
that may be related to such or any other overdue payment or of any other default
or as a waiver of any other right or remedy of the Payee hereunder, at law or in
equity.
<PAGE>
Default Rate Applied Upon Non-Payment. In the event that any payment
due hereunder is not paid in full when due or the Obligations are not paid in
full on the Maturity Date, or such earlier date as the Obligations may become
due hereunder, the entire amount of the Obligations (including, to the extent
permitted by applicable law, any portion thereof which constitutes accrued and
unpaid interest) shall accrue interest until all payments past due hereunder are
fully paid at a rate of interest equal to the lesser of (i) three percent (3%)
per annum above the Interest Rate and (ii) the highest lawful rate of interest
per annum allowable under applicable law (the "Default Rate"), whether or not an
action against the Maker shall have been commenced, and if commenced, whether or
not a judgment against the Maker shall have been obtained.
Set off. Upon the occurrence of an Event of Default under the terms of
this Note or the Mortgages or any of the Loan Documents, the Payee is hereby
authorized at any time or from time to time without notice to the Maker or to
any other person, any such notice being hereby expressly waived, to immediately
set off and appropriate and apply any and all deposits (general or special) and
any other indebtedness at any time held or owing by the Payee to or for the
credit or the account of the Maker against and on account of the Obligations and
liabilities of the Maker hereunder.
Nonrecourse Obligation. Subject to the limitations and conditions of
clauses (A) and (B) of this paragraph, the Payee agrees that it will look solely
to the Mortgaged Property and Additional Property and such other collateral, if
any, as may now or hereafter be given to secure the repayment of the Obligations
and no other property or assets of the Maker, or any partner, trustee,
shareholder or principal of the Maker, shall be subject to levy, execution or
other enforcement procedure for the satisfaction of the remedies of the Payee,
or for any payment required to be made under this Note or any of the other Loan
Documents or for the performance of any of the covenants or warranties contained
in the Loan Documents; provided that (A) the foregoing provisions of this
paragraph shall not (i) constitute a waiver of the Obligations secured by the
Mortgages or the other Loan Documents, (ii) impair the right of Payee to obtain
a deficiency judgment in any action or proceeding in order to preserve its
rights and remedies, including, without limitation, foreclosure, non-judicial
foreclosure, or the exercise of a power of sale, under the Mortgages; however,
Payee agrees that it shall not enforce such deficiency judgment against the
assets of the Maker or any other Mortgagor other than the Additional Properties
or in the exercise of its rights and remedies under the Mortgages, (iii) limit
the right of the Payee to name the Maker and/or the partners, trustees,
shareholders or principals of the Maker as parties defendant in any action or
suit for judicial foreclosure and sale under the Mortgages or the other Loan
Documents so long as no monetary judgment shall be enforced against the Maker,
or any partner, trustee, shareholder or principal of the Maker except to the
extent of the Mortgaged Property or such other collateral, it being agreed by
Payee that in no event shall Payee have recourse to the assets of Maker's
trustees, directors, shareholders, officers or employees and Payee shall have
recourse to the assets of Maker other than the Mortgaged Property only to the
extent of the Recourse Obligations of Maker (as hereinafter defined), (iv)
release or impair this Note, the Indemnity Agreement, or the liens of the
Mortgages, (v) prevent or in any way hinder the Payee from exercising any remedy
available to the Payee under this Note or any of the other Loan Documents or to
name the Maker or any person owning an interest in the Maker in any action, suit
or proceeding in connection with the exercise of any such remedy, provided that,
except to the extent of the Recourse Obligations of Maker, no judgment in the
nature of a deficiency shall be enforced against any assets of the Maker or any
person owning an interest in the Maker, other than the Mortgaged Property or
such other collateral securing the Obligations, (vi) release or limit the
liability of the Maker or any Indemnitors under the Indemnity Agreement or
affect in any way the validity, enforceability or recourse of any indemnity,
including, but not limited to, the Indemnity Agreement, the Lease Indemnity
Agreement executed by the Maker in favor of the Payee of even date herewith and
the Legal Compliance Indemnity Agreement executed by the Maker in favor of the
<PAGE>
Payee of even date herewith, or any guaranty given in connection with this Note
or any of the other Loan Documents, and further provided that (B) Maker (but not
its trustees, officers, directors or shareholders) shall be personally liable to
Payee for the Recourse Obligations of Maker. For purposes hereof, the term
"Recourse Obligations of Maker" shall mean any and all Losses (as hereinafter
defined) Payee incurs due to (a) fraud or intentional misrepresentation by
Maker, its agents or principals in connection with the execution and the
delivery of this Note, the Mortgages or the other Loan Documents, (b) any
inaccuracy contained in that certain Compliance and Survey Certificate delivered
by the Maker to the Payee of even date herewith, (c) Maker's misapplication or
misappropriation of any of the following with respect to the Mortgaged Property
(1) rents received by Maker, (2) tenant security deposits or rents collected in
advance, or (3) insurance proceeds or condemnation awards, (d) waste, (e)
Maker's failure to pay taxes, maintenance charges, ground rents, charges for
utility services, charges for labor or materials or other charges that can
create liens on the Mortgaged Property, (f) Maker's willful failure to deliver
the financial information described in Section 2.10 of the Mortgages, (g) any
Transfer or encumbrance made by Maker contrary to the provisions of the Loan
Documents, (h) any failure of Maker to comply with handicapped accessibility
laws (including, without limitation, the Americans with Disabilities Act, as
amended (the "ADA")) affecting the Mortgaged Property, and (i) the voidability,
in whole or in part, of the Obligations incurred by PROLOGIS LIMITED
PARTNERSHIP-II and PROLOGIS-NORTH CAROLINA LIMITED PARTNERSHIP or any lien or
security interest granted by PROLOGIS LIMITED PARTNERSHIP-II and/or
PROLOGIS-NORTH CAROLINA LIMITED PARTNERSHIP because of the occurrence of a
fraudulent transfer or a preference, in either case under federal bankruptcy,
state insolvency, or similar creditors rights laws. For purposes hereof, the
term "Losses" shall mean any and all claims, suits, liabilities (including,
without limitation, strict liabilities), actions, proceedings, obligations,
debts, damages, losses, costs, expenses, diminutions in value, fines, penalties,
charges, fees, expenses, judgments, awards, amounts paid in settlement, punitive
damages, foreseeable and unforseeable consequential damages, of whatever kind or
nature (including but not limited to reasonable attorneys' fees and other costs
of defense).
Miscellaneous.
A. All parties now and hereafter liable with respect to this Note,
whether as Maker, principal, surety, guarantor, endorsee or otherwise, hereby
waive presentation for payment, demand, notice of nonpayment or dishonor,
protest and notice of protest. No delay or omission on the part of the Payee in
exercising any right under this Note, the Mortgages or any other Loan Documents
shall operate as a waiver of such right or of any other right of the Payee, nor
shall any waiver by the Payee of any such right or rights on any one occasion be
deemed a bar to exercise or waiver of the same right or rights on any future
occasion.
B. All agreements in this Note and in the other Loan Documents are
expressly limited so that in no contingency or event whatsoever, whether by
reason of advancement or acceleration of maturity of the Obligations, or
otherwise, shall the amount paid or agreed to be paid hereunder or thereunder
for the use, forbearance or detention of money exceed the highest lawful rate
permitted under applicable usury laws. If, from any circumstance whatsoever,
fulfillment of any provision of this Note or any of the Loan Documents, at the
time performance of such provision shall be due, shall involve transcending the
limit of validity prescribed by law which a court of competent jurisdiction may
deem applicable hereto, then, ipso facto, the obligation to be fulfilled shall
be reduced to the limit of such validity and if, from any circumstance
whatsoever, the Payee shall ever receive as interest an amount which would
exceed the highest lawful rate, the receipt of such excess shall be deemed a
mistake and shall be canceled automatically and such excess shall be held in
trust by the Payee for the benefit of the Maker and shall be credited against
the Principal Amount of the Obligations to which the same may lawfully be
credited, and any portion of such excess not capable of being so credited shall
be rebated to the Maker.
<PAGE>
C. Each and every right, remedy and power hereby granted to the Payee
or allowed it by law or other agreement shall be cumulative and not exclusive
and may be exercised by the Payee from time to time.
D. If any payment on this Note becomes due and payable on a Saturday,
Sunday or public holiday under the laws of the State of New York, the maturity
thereof shall, unless otherwise provided herein, be extended to the next
business day.
E. The Maker agrees to promptly pay all taxes which may be imposed,
either directly or indirectly, on this Note (other than income taxes imposed on
Payee). Any such sums shall be added to the amount due under this Note and be
paid herewith.
F. The Maker hereby agrees to pay all costs of collection when
incurred, including reasonable attorneys' fees and expenses (which costs may be
added to the amount due under this Note and shall be paid promptly upon demand
with interest thereon at the Default Rate) and to perform and comply with each
of the terms, covenants and provisions contained in this Note, the Mortgages or
any of the other Loan Documents on the part of the Maker to be observed or
performed. No release of any security for the Principal Amount due under this
Note, or extension of time for the payment of this Note, or any installment
hereof, and no alteration, amendment or waiver of any provision of this Note,
the Mortgages or any of the other Loan Documents, shall release, discharge,
modify, change or affect the liability of the Maker or any guarantor under this
Note, the Mortgages or any of the other Loan Documents.
G. In the event that any provision of this Note or the application
thereof to the Maker shall, to any extent, be invalid or unenforceable under any
applicable statute, regulation, or rule of law, then such provision shall be
deemed inoperative to the extent that it may conflict therewith and shall be
deemed modified to conform to such statute, regulation or rule of law, and the
remainder of this Note and the application of any such invalid or unenforceable
provision to parties, jurisdictions, or circumstances other than to whom or to
which it shall be held invalid or unenforceable, shall not be affected thereby
nor shall same affect the validity or enforceability of any other provision of
this Note.
H. The headings in this Note are for the convenience of reference only,
are not to be considered a part hereof and shall not limit or otherwise affect
any of the terms hereof.
I. This Note is made and delivered in New York, New York and shall be
governed by, and construed according to, the laws of the State of New York. The
Maker hereby irrevocably: (a) submits in any legal proceeding relating to this
Note to the non-exclusive in personam jurisdiction of any state or United States
court of competent jurisdiction sitting in the City and State of New York and
agrees to suit being brought in such courts, as the Payee may elect; (b) waives
any objection it may now or hereafter have to the venue of such proceeding in
any such court or that such proceeding was brought in an inconvenient court; (c)
agrees to service of process in any legal proceeding by mailing of copies
thereof (by registered or certified mail, if practicable) postage prepaid, or by
telecopy, to its address set forth above or such other address of which the
Payee shall have been notified in writing; and (d) agrees that nothing herein
shall affect the Payee's right to effect service of process in any other manner
permitted by law, and that the Payee shall have the right to bring any legal
proceedings (including a proceeding for enforcement of a judgment entered by any
of the aforementioned courts) against the Maker in any other court or
jurisdiction in accordance with applicable law. The Maker, after consulting or
having had the opportunity to consult with counsel, knowingly, voluntarily and
<PAGE>
intentionally waives any right it may have to a trial by jury in any action
brought with respect to any of the Loan Documents or related instrument or
agreement or any of the transactions contemplated by this Note or any course of
conduct, dealing, statements (whether oral or written) or actions of any party
to this Note, the Mortgages or any of the other Loan Documents. The Maker shall
not seek to consolidate, by counterclaim or otherwise, any such action in which
a jury trial has been waived with any other action in which a jury trial cannot
be or has not been waived. These provisions shall not be deemed to have been
modified in any respect or relinquished by the Payee except by a written
instrument executed by the Payee.
J. This Note may not be changed, modified, waived or discharged orally,
but only by an agreement in writing executed by the party against whom
enforcement of such change, modification, waiver or discharge is sought.
K. Whenever used in this Note, the singular number shall include the
plural, the plural the singular, and the terms the "Maker" and the "Payee" shall
include their respective successors and assigns; provided, however, that the
Maker shall in no event or under any circumstances have the right, without
obtaining the prior written consent of the Payee (which may be granted or
withheld in the sole and absolute discretion of the Payee), to assign or
transfer its obligations under this Note, the Mortgages or the other Loan
Documents, in whole or in part, to any other person, party or entity.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, Maker has executed this Note as of the date first
set forth above.
PROLOGIS TRUST, a Maryland real estate investment trust
By:
Name: Michael Nachamkin
Title: Vice President
EXHIBIT 12.1
PROLOGIS
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (Loss) from Operations $ 15,220 $ 34,479 $ 105,764 $ 32,371 $ 79,384 $ 47,660 $ 25,066
Add:
Interest Expense 30,918 19,642 77,650 52,704 38,819 32,005 7,568
--------- --------- --------- --------- --------- --------- ---------
Earnings as Adjusted $ 46,138 $ 54,121 $ 183,414 $ 85,075 $ 118,203 $ 79,665 $ 32,634
========= ========= ========= ========= ========= ========= =========
Fixed Charges:
Interest Expense $ 30,918 $ 19,642 $ 77,650 $ 52,704 $ 38,819 $ 32,005 $ 7,568
Capitalized Interest 3,927 4,284 19,173 18,365 16,138 8,599 2,208
--------- --------- --------- --------- --------- --------- ---------
Total Fixed Charges $ 34,845 $ 23,926 $ 96,823 $ 71,069 $ 54,957 $ 40,604 $ 9,776
========= ========= ========= ========= ========= ========= =========
Ratio of Earnings (Loss) to
Fixed Charges 1.3 2.3 1.9 1.2 2.2 2.0 3.3
========= ========= ========= ========= ======== ========= =========
</TABLE>
EXHIBIT 12.2
PROLOGIS
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------- -----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Earnings (Loss) from Operations $ 15,220 $ 34,479 $ 105,764 $ 32,371 $ 79,384 $ 47,660 $ 25,066
Add:
Interest Expense 30,918 19,642 77,650 52,704 38,819 32,005 7,568
--------- --------- --------- --------- --------- --------- ---------
Earnings as Adjusted $ 46,138 $ 54,121 $ 183,414 $ 85,075 $ 118,203 $ 79,665 $ 32,634
========= ========= ========= ========= ========= ========= =========
Combined Fixed Charges and Preferred
Share Dividends:
Interest Expense $ 30,918 $ 19,642 $ 77,650 $ 52,704 $ 38,819 $ 32,005 $ 7,568
Capitalized Interest 3,927 4,284 19,173 18,365 16,138 8,599 2,208
--------- --------- --------- --------- --------- --------- ---------
Total Fixed Charges 34,845 23,926 96,823 71,069 54,957 40,604 9,776
Preferred Share Dividends (a) 13,445 8,799 49,098 35,318 25,895 6,698 --
--------- --------- --------- --------- --------- --------- ---------
Combined Fixed Charges and Preferred
Share Dividends $ 48,290 $ 32,725 $ 145,921 $ 106,387 $ 80,852 $ 47,302 $ 9,776
========= ========= ========= ========= ========= ========= =========
Ratio of Earnings (Loss) to Combined
Fixed Charges and Preferred Share
Dividends 1.0 1.7 1.3 (b) 1.5 1.7 3.3
========= ========= ========= ========= ========= ========= =========
<FN>
(a) ProLogis had no preferred shares prior to 1995.
(b) Due to a one-time, non-recurring charge of $75.4 million relating to the
costs incurred in acquiring the management companies from a related party
earnings were insufficient to cover combined fixed charges and preferred
share dividends for the year ended December 31, 1997 by $21.3 million.
</FN>
</TABLE>
EXHIBIT 15.2
May 13, 1999
Board of Trustees and Shareholders of ProLogis Trust:
We are aware that ProLogis Trust has incorporated by reference in its
Registration Statement Nos. 33-91366, 33-92490, 333-4961, 333-31421, 333-39797,
333-38515, 333-52867 and 333-26597 its Form 10-Q for the quarter ended March 31,
1999, which includes our report dated May 12, 1999 covering the unaudited
interim financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933 (the "Act"), that report is not considered a part of the
registration statements prepared or certified by our firm or a report prepared
or certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Form 10-Q for the three months ended March 31, 1999, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 187,732
<SECURITIES> 0
<RECEIVABLES> 791,399
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,143,836
<DEPRECIATION> 276,922
<TOTAL-ASSETS> 5,974,091
<CURRENT-LIABILITIES> 0
<BONDS> 2,016,702
0
716,384
<COMMON> 1,612
<OTHER-SE> 2,271,599
<TOTAL-LIABILITY-AND-EQUITY> 5,974,091
<SALES> 97,161
<TOTAL-REVENUES> 93,766
<CGS> 0
<TOTAL-COSTS> 7,189
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,918
<INCOME-PRETAX> 2,490
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 1,440
<NET-INCOME> 1,050
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
