<PAGE>
===============================================================================
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 June 30, 2000
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
August 8, 2000 was 164,310,125.
===============================================================================
<PAGE>
ProLogis Trust
Index
<TABLE>
<CAPTION>
Page
Number(s)
--------
<S> <C> <C>
PART I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets--June 30, 2000 and December 31, 1999................................. 3
Consolidated Statements of Earnings and Comprehensive Income
--Three and six months ended June 30, 2000 and 1999.......................................... 4
Consolidated Statements of Cash Flows--Six months ended June 30, 2000
and 1999.................................................................................... 5
Notes to Consolidated Financial Statements...................................................... 6 - 21
Report of Independent Public Accountants........................................................ 22
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 23 - 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................... 31
PART II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders........................................... 32
Item 5. Other Information............................................................................... 32
Item 6. Exhibits........................................................................................ 32
</TABLE>
2
<PAGE>
PROLOGIS TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
(Unaudited) (Audited)
<S> <C> <C>
Real estate.............................................................. $ 4,576,944 $ 4,974,951
Less accumulated depreciation.......................................... 416,458 366,703
------------- -------------
4,160,486 4,608,248
Investments in and advances to unconsolidated entities................... 1,253,595 940,364
Cash and cash equivalents................................................ 103,346 69,338
Accounts and notes receivable............................................ 54,257 46,998
Other assets............................................................. 179,906 183,092
------------- -------------
Total assets.................................................... $ 5,751,590 $ 5,848,040
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit........................................................ $ 262,279 $ 98,700
Senior unsecured debt.................................................. 1,699,815 1,729,630
Other unsecured debt................................................... -- 30,892
Mortgage notes......................................................... 511,347 657,913
Assessment bonds....................................................... 10,399 10,721
Securitized debt....................................................... 26,452 26,952
Accounts payable and accrued expenses.................................. 114,545 117,651
Construction payable................................................... 34,997 23,064
Amount due to affiliate................................................ 348 221
Distributions and dividends payable.................................... 729 54,939
Other liabilities...................................................... 56,942 81,549
------------- -------------
Total liabilities............................................... 2,717,853 2,832,232
------------- -------------
Minority interest........................................................ 58,896 62,072
Shareholders' equity:
Series A Preferred Shares; $0.01 par value; 5,400,000
shares issued and outstanding at June 30, 2000 and
December 31, 1999; stated iquidation preference of
$25.00 per share..................................................... 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par value;
6,397,402 shares issued and outstanding at June 30, 2000
and 7,020,703 shares issued and outstanding at December
31, 1999; stated liquidation preference of $25.00 per share.......... 159,935 175,518
Series C Preferred Shares; $0.01 par value; 2,000,000 shares issued
and outstanding at June 30, 2000 and December 1999; 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 June 30, 2000 and December 31, 1999; 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 June 30, 2000 and December 31, 1999; stated
liquidation preference of $25.00 per share........................... 50,000 50,000
Common shares of beneficial interest; $0.01 par value; 163,413,794
shares issued and outstanding at June 30, 2000 and 161,825,466
shares issued and outstanding at December 31, 1999................... 1,634 1,618
Additional paid-in capital............................................. 2,699,596 2,663,350
Employee share purchase notes.......................................... (20,830) (22,906)
Accumulated other comprehensive income................................. (21,115) (9,765)
Distributions in excess of net earnings................................ (379,379) (389,079)
------------- -------------
Total shareholders' equity.................................... 2,974,841 2,953,736
------------- -------------
Total liabilities and shareholders' equity.................... $ 5,751,590 $ 5,848,040
============= =============
</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 Six Months Ended
June 30, June 30,
----------------------- ------------------------
2000 1999 2000 1999
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Income:
Rental income................................................................ $ 119,696 $ 131,251 $ 240,505 $ 228,412
Other real estate income..................................................... 27,289 6,833 46,234 20,221
Income (loss) from unconsolidated entities................................... 4,022 (1,928) 25,389 (11,137)
Interest..................................................................... 2,349 1,062 4,220 1,771
--------- --------- --------- ---------
Total income......................................................... 153,356 137,218 316,348 239,267
--------- --------- --------- ---------
Expenses:
Rental expenses, net of recoveries of $22,575 and $45,737 for
the three and six months in 2000, respectively and $20,993
and $37,876 for the three and six months in 1999, respectively
and including amounts paid to affiliate of $319 and $625 for
the three and six months in 2000, respectively and $242 and
$492 for the three and six months in 1999, respectively..................... 7,584 8,976 14,131 16,165
General and administrative, including amounts paid to affiliate
of $243 and $467 for the three and six months in 2000, respectively
and $466 and $998 for the three and six months in 1999, respectively......... 11,281 9,390 22,522 17,811
Depreciation and amortization.................................................. 37,591 39,628 77,065 66,992
Interest....................................................................... 42,856 45,351 84,842 76,269
Interest rate hedge expense.................................................... -- -- -- 945
Other.......................................................................... 1,432 583 2,650 2,749
--------- --------- --------- ---------
Total expenses................................................ 100,744 103,928 201,210 180,931
--------- --------- --------- ---------
Earnings from operations........................................................ 52,612 33,290 115,138 58,336
Minority interest share in earnings............................................. 1,435 1,434 3,089 2,603
--------- --------- --------- ---------
Earnings before gain on disposition of real estate and foreign
currency exchange losses...................................................... 51,177 31,856 112,049 55,733
Gain (loss) on disposition of real estate....................................... (4,801) -- 307 715
Foreign currency exchange losses, net........................................... (11,929) (4,012) (18,449) (12,295)
--------- --------- --------- ---------
Earnings before income taxes.................................................... 34,447 27,844 93,907 44,153
Income taxes:
Current income tax expense.................................................... 541 221 658 595
Deferred income tax expense................................................... 167 364 167 364
--------- --------- --------- ---------
Total income taxes..................................................... 708 585 825 959
--------- --------- --------- ---------
Earnings before cumulative effect of accounting change.......................... 33,739 27,259 93,082 43,194
Cumulative effect of accounting change.......................................... -- -- -- 1,440
--------- --------- --------- ---------
Net earnings.................................................................... 33,739 27,259 93,082 41,754
Less preferred share dividends.................................................. 14,150 14,493 28,555 27,938
--------- --------- --------- ---------
Net earnings attributable to Common Shares...................................... 19,589 12,766 64,527 13,816
Other comprehensive income:
Foreign currency translation adjustments...................................... 11,224 1,975 (11,350) 1,534
--------- --------- --------- ---------
Comprehensive income............................................................$ 30,813 $ 14,741 $ 53,177 $ 15,350
========= ========= ========= =========
Weighted average Common Shares outstanding - Basic.............................. 163,148 162,004 162,644 142,974
========= ========= ========= =========
Weighted average Common Shares outstanding - Diluted............................ 163,730 162,209 163,370 143,110
========= ========= ========= =========
Basic per share net earnings attributable to Common Shares:
Earnings before cumulative effect of accounting change........................$ 0.12 $ 0.08 $ 0.40 $ 0.11
Cumulative effect of accounting change........................................ -- -- -- (0.01)
--------- --------- --------- ---------
Net earnings attributable to Common Shares.............................$ 0.12 $ 0.08 $ 0.40 $ 0.10
========= ========= ========= =========
Diluted per share net earnings attributable to Common Shares:
Earnings before cumulative effect of accounting change..........................$ 0.12 $ 0.08 $ 0.39 $ 0.11
Cumulative effect of accounting change.......................................... -- -- -- (0.01)
--------- --------- --------- ---------
Net earnings attributable to Common Shares.............................$ 0.12 $ 0.08 $ 0.39 $ 0.10
========= ========= ========= =========
Distributions per Common Shares........................................$ 0.335 $ 0.3272 $ 0.6700 $ 0.6455
========= ========= ========= =========
</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>
Six Months Ended,
June 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net earnings............................................................. $ 93,082 $ 41,754
Minority interest share in earnings...................................... 3,089 2,603
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization....................................... 77,065 66,992
Gain on disposition of real estate.................................. (307) (715)
Straight-lined rents................................................ (3,690) (4,632)
Amortization of deferred loan costs................................. 2,020 2,046
Stock-based compensation............................................ 1,325 1,125
(Income) loss from unconsolidated entities.......................... (19,940) 11,137
Foreign currency exchange losses, net............................... 13,687 12,402
Interest rate hedge expense......................................... -- 945
Cumulative effect of accounting change ............................. -- 1,440
Increase in accounts receivable and other assets......................... (22,530) (27,354)
Increase (decrease) in accounts payable, accrued expenses and other
liabilities........................................................... 45,435 (3,571)
Increase in amount due to affiliate...................................... 127 240
----------- -----------
Net cash provided by operating activities.......................... 189,363 104,412
----------- -----------
Investing activities:
Real estate investments.................................................. (304,848) (197,842)
Tenant improvements and lease commissions on previously leased space..... (10,821) (8,079)
Recurring capital expenditures........................................... (12,762) (10,659)
Proceeds from dispositions of real estate................................ 242,798 102,392
Investments in and advances to unconsolidated entities................... (48,524) (139,841)
Cash balances contributed with ProLogis European Properties S.a.r.l...... (17,968) --
Cash acquired in Meridian Merger......................................... -- 48,962
----------- -----------
Net cash used in investing activities.............................. (152,125) (205,067)
----------- -----------
Financing activities:
Proceeds from exercised warrants and options and dividend reinvestment
and share purchase plan............................................... 10,628 946
Proceeds from secured financing transactions............................. -- 466,000
Proceeds from issuance of senior unsecured debt.......................... -- 500,000
Debt issuance and other transaction costs incurred....................... (4,212) (56,258)
Distributions paid on Common Shares (including $11,132 paid to Meridian
shareholders in 1999)................................................. (109,037) (103,276)
Distributions paid to minority interest holders.......................... (3,728) (3,393)
Dividends paid on preferred shares (includes $729 paid to Meridian
shareholders in 1999)................................................. (28,555) (27,938)
Principal payments on senior unsecured debt.............................. (30,000) (12,500)
Principal payments received on and retirements of employee share
purchase notes........................................................ 2,076 1,968
Proceeds from (payments on) derivative financial instruments............. 366 (26,996)
Payments to Meridian shareholders........................................ -- (67,581)
Proceeds from lines of credit and short-term borrowings.................. 465,829 1,202,645
Payments on lines of credit and short-term borrowings.................... (302,250) (1,430,345)
Payment on line of credit assumed in Meridian Merger..................... -- (328,400)
Regularly scheduled principal payments on mortgage notes................. (3,597) (6,795)
Principal payments on mortgage notes at maturity and prepayments......... (750) (10,130)
----------- -----------
Net cash provided by (used in) financing activities................ (3,230) 97,947
----------- -----------
Net increase (decrease) in cash and cash equivalents....................... 34,008 (2,708)
Cash and cash equivalents, beginning of period............................. 69,338 63,140
----------- -----------
Cash and cash equivalents, end of period................................... $ 103,346 $ 60,432
=========== ===========
</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 CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
1. General:
Business
ProLogis Trust ("ProLogis") is a publicly held real estate investment
trust ("REIT") that owns and operates a global network of distribution
facilities. The ProLogis Operating System(TM), comprised of the Market Services
Group, the Global Services Group, the Global Development Group and the
Integrated Solutions Group, utilizes ProLogis' international network of
distribution facilities to meet its customer's distribution space needs
globally. ProLogis believes it has distinguished itself from its competition by
developing an organizational structure and service delivery system built around
its customers. ProLogis has organized its business into three operating
segments: property operations, corporate distribution facilities services
business and temperature-controlled distribution operations. See Note 10.
Principles of Financial Presentation
The consolidated financial statements of ProLogis as of June 30, 2000
and for the three and six months ended June 30, 2000 and 1999 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, 1999 audited consolidated
financial statements contained in ProLogis' 1999 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 and six months ended June 30,
2000 and 1999 are not necessarily indicative of the results to be expected for
the entire year. Certain of the 1999 amounts have been reclassified to conform
to the 2000 financial statement presentation.
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.
On December 29, 1998, ProLogis invested in Garonor Holdings S.A.
("Garonor Holdings") by acquiring 100% of its preferred stock. Garonor Holdings,
a Luxembourg company, owned Garonor S.A. ("ProLogis Garonor"), a real estate
operating company in France. Security Capital Group Incorporated ("Security
Capital"), ProLogis' largest shareholder, owned 100% of the common stock of
Garonor Holdings. ProLogis accounted for this investment in Garonor Holdings
under the equity method of accounting. On June 29, 1999, ProLogis acquired the
common stock of Garonor Holdings from Security Capital, resulting in ProLogis
owning all of the outstanding common stock and preferred stock of Garonor
Holdings. Accordingly, as of that date the accounts of Garonor Holdings were
consolidated in ProLogis' financial statements along with ProLogis' other
majority-owned and controlled subsidiaries and partnerships. The results of
operations of Garonor Holdings for the period from January 1, 1999 through June
29, 1999 are reflected by ProLogis under the equity method of accounting.
ProLogis Garonor was transferred to the ProLogis European Properties S.a.r.l.
prior to ProLogis contributing 50.1% of the common stock of ProLogis European
Properties S.a.r.l. to the ProLogis European Properties Fund on January 7, 2000.
See Note 3.
6
<PAGE>
Foreign Currency Exchange Gains or Losses
ProLogis' consolidated subsidiaries whose functional currency is not
the U.S. dollar translate their financial statements into U.S. dollars. Assets
and liabilities are translated at the exchange rate in effect as of the
financial statement date. Income statement accounts are translated using the
average exchange rate for the period. Gains and losses resulting from the
translation are included in accumulated other comprehensive income as a separate
component of shareholders' equity. ProLogis and its foreign subsidiaries have
certain transactions denominated in currencies other than their functional
currency. In these instances, nonmonetary assets and liabilities are remeasured
at the historical exchange rate, monetary assets and liabilities are remeasured
at the exchange rate in effect at the end of the period, and income statement
accounts are remeasured at the average exchange rate for the period. Gains and
losses from remeasurement are included in ProLogis' results of operations. In
addition, gains or losses occur when a transaction with a third party,
denominated in a currency other than the functional currency, is settled and the
functional currency cash flows realized are more or less than expected based
upon the exchange rate in effect when the transaction was initiated.
The net foreign currency exchange gains and losses recognized in
ProLogis' results of operations were as follows for the periods indicated (in
thousands of U.S. dollars):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Losses from the remeasurement of third
party debt and remeasurement and
settlement of intercompany debt............. $ (11,984) $ (4,029) $ (19,008) $ (12,403)
Gains from the settlement of foreign
currency put option contracts............... 60 -- 117 --
Mark to market gains (losses) on foreign
currency put option contracts (1)........... (3) -- 477 --
Other gains (losses), net................. (2) 17 (35) 108
---------- ---------- ---------- ----------
$ (11,929) $ (4,012) $ (18,449) $ (12,295)
========== ========== ========== ==========
<FN>
----------
(1) ProLogis entered into foreign currency put option contracts related to its
operations in Europe for 2000. These put option contracts do not qualify
for hedge accounting treatment, therefore, ProLogis marks these contracts
to market as of the end of the applicable accounting periods.
</FN>
</TABLE>
Accounting for Derivatives
SFAS No. 133, "Accounting for Derivative Instruments and for Hedging
Activities" was issued in June 1998. SFAS No. 133 is effective for fiscal years
beginning after June 15, 2000 and early adoption is allowed. SFAS No. 133, as
amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", issued in June 2000, 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, with an offset to
accumulated other comprehensive income or income. Management is still evaluating
the effects this standard will have on ProLogis' consolidated financial
position, results of operations or financial statement disclosures based on the
derivative financial instruments currently employed by ProLogis.
Cost of Start-Up Activities
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. Through December 31, 1998, ProLogis capitalized
costs associated with start-up activities and amortized such costs over an
appropriate period, generally five years. ProLogis expensed all unamortized
organization and start-up costs, approximating $1.4 million, as a cumulative
effect of a change in accounting principle as of January 1, 1999. Subsequent to
that date, such costs incurred have been expensed.
7
<PAGE>
2. Real Estate
Investments in Real Estate
Real estate investments consisting of income producing distribution
facilities, facilities under development and land held for future development,
at cost, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Operating facilities:
Improved land........................................ $ 649,104 (1) $ 736,605 (1)
Buildings and improvements........................... 3,596,317 (1) 3,871,396 (1)
----------- -----------
4,245,421 4,608,001
----------- -----------
Facilities under development (including cost of land).. 140,765 (2)(3) 186,169 (2)
Land held for development.............................. 178,223 (4) 163,696 (4)
Capitalized preacquisition costs....................... 12,535 (5) 17,085 (5)
----------- -----------
Total real estate............................ 4,576,944 4,974,951
Less accumulated depreciation.......................... 416,458 366,703
----------- -----------
$ 4,160,486 $ 4,608,248 (6)
=========== ===========
<FN>
----------
(1) As of June 30, 2000 and December 31, 1999, ProLogis had 1,249 and 1,328
operating facilities, respectively, consisting of 126,723,000 and
133,689,000 square feet, respectively.
(2) Facilities under development consist of 47 buildings aggregating 8,920,000
square feet as of June 30, 2000 and 51 buildings aggregating 10,721,000
square feet as of December 31, 1999.
(3) In addition to the June 30, 2000 construction payable of $35.0 million,
ProLogis had unfunded commitments on its contracts for facilities under
construction totaling $220.0 million.
(4) Land held for future development consisted of 1,730 acres as of June 30,
2000 and 1,798 acres as of December 31, 1999.
(5) Capitalized preacquisition costs include $916,000 and $6,253,000 of funds
on deposit with title companies as of June 30, 2000 and December 31, 1999,
respectively.
(6) On January 7, 2000, ProLogis contributed 50.1% of the common stock of one of
its wholly owned European entities, the ProLogis European Properties
S.a.r.l. that owned real estate with a net book value of $334.9 million as
of December 31, 1999 to the ProLogis European Properties Fund. ProLogis is
obligated to contribute the remaining 49.9% of the common stock to the
ProLogis European Properties Fund in January 2001. See Note 3.
</FN>
</TABLE>
ProLogis' operating facilities, facilities under development and land
held for future development are located in North America (the United States and
Mexico) and eight countries in Europe. No individual market represents more than
10% of ProLogis' real estate assets.
Operating Lease Agreements
ProLogis leases its facilities to customers under agreements that are
classified as operating leases. The leases generally provide for payment of all
or a portion of utilities, property taxes and insurance by the tenant. As of
June 30, 2000, minimum lease payments on leases with lease periods greater than
one year are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Remainder of 2000...................................... $ 254,602
2001................................................... 450,889
2002................................................... 369,457
2003................................................... 280,257
2004................................................... 206,470
2005 and thereafter.................................... 615,740
-----------
$ 2,177,415
===========
</TABLE>
ProLogis' largest customer (based on rental income) accounted for 1.54%
of ProLogis' rental income (on an annualized basis) for the six months ended
June 30, 2000. The annualized base rent for ProLogis' 20 largest customers
(based on rental income) accounted for 11.31% of ProLogis' rental income (on an
annualized basis) for the six months ended June 30, 2000.
8
<PAGE>
3. Unconsolidated Entities:
Investments in and advances to unconsolidated entities are as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ----------
<S> <C> <C>
Insight (1)............................... $ 2,440 $ 2,442
---------- ----------
ProLogis Logistics:
Investment (2).......................... 9,144 11,549
Notes receivable (3).................... 170,783 158,796
Accrued interest and other receivables.. 28,032 22,262
---------- ----------
207,959 192,607
---------- ----------
Frigoscandia S.A.:
Investment (2).......................... (31,276) (17,396)
Notes receivable........................ 205,192 209,314
Accrued interest and other receivables.. 29,652 22,090
---------- ----------
203,568 214,008
---------- ----------
Kingspark S.A.:
Investment (2).......................... 13,067 23,584
Notes receivable........................ 252,440 197,611
Mortgage notes receivable............... 111,735 140,668
Accrued interest and other receivables.. 21,711 19,908
---------- ----------
398,953 381,771
---------- ----------
ProLogis California:
Investment (4).......................... 132,464 121,325
Other receivables....................... 2,327 3,235
---------- ----------
134,791 124,560
---------- ----------
ProLogis European Properties Fund:
Investment (5).......................... 125,234 32,800
Other receivables (payables)............ 2,489 (7,824)
---------- ----------
127,723 24,976
---------- ----------
ProLogis European Properties S.a.r.l.:
Investment (6).......................... 89,956 --
Note receivable......................... 18,973 --
---------- ----------
108,929 --
---------- ----------
ProLogis North American Properties Fund I:
Investment (7).......................... 10,838 --
Note receivable......................... 44,600 --
---------- ----------
55,438 --
---------- ----------
ProLogis Principal:
Investment (8).......................... 126 --
Note receivable......................... 13,250 --
---------- ----------
13,376 --
---------- ----------
ProLogis Equipment Services (9)........... 418 --
---------- ----------
Total........................... $1,253,595 $ 940,364
========== ==========
<FN>
----------
(1) Investment represents ProLogis' investment in the common stock of Insight,
Inc. ("Insight"), a privately owned logistics optimization consulting
company, as adjusted for ProLogis' share of Insight's earnings or loss.
(2) Investment represents ProLogis' investment in the preferred stock of the
respective companies including acquisition costs, as adjusted for ProLogis'
share of each company's earnings or loss and cumulative translation account
adjustments, as appropriate.
(3) As of December 31, 1999, notes receivable includes $28.7 million
representing notes from Meridian Refrigerated Incorporated ("MRI") that were
acquired by ProLogis as part of the Meridian Merger (see Note 5). In 2000,
ProLogis contributed its equity interest in MRI to CS Integrated LLC
("CSI"), who had also acquired an equity interest in MRI as part of the
Meridian Merger. CSI is owned by ProLogis Logistics Services Incorporated
("ProLogis Logistics"). The MRI notes were assumed by CSI in this
transaction.
(4) Investment represents ProLogis' equity investment in ProLogis California I
LLC ("ProLogis California"), a limited liability company that began
operations on August 26, 1999, including acquisition costs, as adjusted for
ProLogis' share of the earnings of ProLogis California and for the portion
of the gain from the disposition of properties from ProLogis to ProLogis
California that does not qualify for income recognition due to ProLogis'
continuing ownership in ProLogis California.
</FN>
9
<PAGE>
<FN>
(5) Investment represents ProLogis' equity investment in the ProLogis European
Properties Fund, including acquisition costs, as adjusted for ProLogis'
share of the earnings of the ProLogis European Properties Fund, the portion
of the gain from the disposition of facilities to the ProLogis European
Properties Fund that does not qualify for income recognition due to
ProLogis' continuing ownership in the ProLogis European Properties Fund and
cumulative translation account adjustments, as appropriate.
(6) Investment represents ProLogis' investment in 49.9% of the common stock of
the ProLogis European Properties S.a.r.l., a Luxembourg company, as
adjusted for ProLogis' share of the earnings of the ProLogis European
Properties S.a.r.l. Prior to January 7, 2000, ProLogis owned 100% of the
common stock of the ProLogis European Properties S.a.r.l. and the accounts
of this entity were consolidated in ProLogis' financial statements along
with ProLogis' other majority owned and controlled subsidiaries and
partnerships. On January 7, 2000, ProLogis contributed 50.1% of the common
stock to the ProLogis European Properties Fund in exchange for an equity
interest. ProLogis is obligated to contribute the remaining 49.9% of the
common stock of the ProLogis European Properties S.a.r.l. to the ProLogis
European Properties Fund in January 2001.
(7) Investment represents ProLogis' equity investment in ProLogis North
American Properties Fund I LLC, a limited liability company that began
operations on June 30, 2000, including acquisition costs, as adjusted for
the portion of the gain from the disposition of facilities from ProLogis to
ProLogis North American Properties Fund I that does not qualify for income
recognition due to ProLogis' continuing ownership in ProLogis North
American Properties Fund I.
(8) Investment represents ProLogis' equity investment in ProLogis Iowa I LLC
("ProLogis Principal"), a limited liability company that began operations
on June 30, 2000, including acquisition costs, as adjusted for the portion
of the gain from the disposition of facilities from ProLogis to ProLogis
Principal that does not quality for income recognition due to ProLogis'
continuing ownership in ProLogis Principal.
(9) Investment represents ProLogis' equity investment in ProLogis Equipment
Services LLC, a limited liability company whose members are ProLogis
Development Services Incorporated (a consolidated subsidiary of ProLogis)
and a subsidiary of Dana Commercial Credit Corporation. ProLogis Equipment
Services began operations on April 26, 2000 for the purpose of acquiring,
leasing and selling material handling equipment and providing asset
management services for such equipment.
</FN>
</TABLE>
ProLogis Logistics
ProLogis owns 100% of the preferred stock of ProLogis Logistics. On
April 24, 1997, ProLogis Logistics acquired a 60% interest in CSI, a
temperature-controlled distribution company operating in the United States. From
that date to June 12, 1998, ProLogis Logistics owned, at various points in time,
between 60.0% and 77.1% of CSI. On June 12, 1998, ProLogis Logistics increased
its ownership interest in CSI to 100%. As of June 30, 2000, ProLogis had
invested $19.9 million in the preferred stock of ProLogis Logistics. As of June
30, 2000, CSI owned or operated temperature-controlled distribution facilities
aggregating 182.2 million cubic feet (including 35.5 million cubic feet of dry
distribution space located in temperature-controlled facilities). Of the total,
6.3 million cubic feet was under development. The common stock of ProLogis
Logistics is owned by an unrelated party. ProLogis recognizes 95% of the
economic benefits of the activities of ProLogis Logistics and its subsidiaries.
As of June 30, 2000, ProLogis had the following notes receivable
outstanding:
o $141.8 million unsecured note from ProLogis Logistics; interest
at 8.0% per annum; due on April 24, 2002;
o $24.0 million of secured notes from CSI (originally MRI notes);
interest at 9.5% per annum; due March 2004; and
o $5.0 million of unsecured notes from CSI (originally MRI notes);
interest at 10.4% per annum; due March 2004.
ProLogis accounts for its investment in ProLogis Logistics under the
equity method. ProLogis recognized income (including interest income on the
notes receivable) from its investment in ProLogis Logistics of $3.0 million, and
$5.9 million for the three and six months in 2000 and $3.1 million and $4.6
million for the three and six months in 1999, respectively.
Frigoscandia S.A.
On January 16, 1998, ProLogis invested in Frigoscandia Holding S.A.
("Frigoscandia S. A.") by acquiring 100% of its preferred stock. Also on January
16, 1998, Frigoscandia S.A., a Luxembourg company, acquired Frigoscandia AB, a
temperature-controlled distribution company headquartered in Sweden.
Frigoscandia AB is 100% owned by Frigoscandia Holding AB, which is 100% owned by
a wholly owned subsidiary of Frigoscandia S.A. As of June 30, 2000, Frigoscandia
AB, which operates in ten European countries, owned or operated 192.1 million
cubic feet of temperature-controlled distribution facilities. As of June 30,
2000, 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 owns 100% of the non-voting interests. ProLogis recognizes 95%
of the economic benefits of the activities of Frigoscandia S.A. and its
subsidiaries.
10
<PAGE>
As of June 30, 2000, ProLogis had the following notes receivable
outstanding:
o 776.6 million Swedish krona (the currency equivalent of approximately
$88.5 million as of June 30, 2000) unsecured note from Frigoscandia
Holding AB; interest at 5.0% per annum; due on demand;
o 0.8 million euro (the currency equivalent of approximately $0.7 million
as of June 30, 2000) unsecured note from Frigoscandia Holding AB;
interest at 5.0% per annum; due on demand;
o $87.8 million unsecured note from Frigoscandia S.A.; interest at 5.0%
per annum; $80.0 million due July 15, 2008 with the remainder due on
demand; and
o 18.6 million pound sterling (the currency equivalent of approximately
$28.2 million as of June 30, 2000) unsecured, non-interest bearing note
from a subsidiary of Frigoscandia Holding AB; due on demand.
ProLogis accounts for its investment in Frigoscandia S.A. under the
equity method. ProLogis recognized losses of $3.4 million and of $5.1 million
for the three and six months in 2000 and $3.4 million and $6.9 million for the
three and six months in 1999, respectively, (including interest income on the
notes receivable).
Frigoscandia AB has a 360.0 million Deutsche Mark, multi-currency
revolving credit agreement through a consortium of 11 European banks. As of June
30, 2000, the currency equivalent of approximately $175.4 million was
outstanding. The loan matures in September 2001 and bears interest at the
relevant index (LIBOR or Euribor based on the currency borrowed) plus 1.15%.
ProLogis has entered into a guarantee 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. Also on August 14,
1998, Kingspark S.A., a Luxembourg company, acquired a real estate development
company operating in the United Kingdom, Kingspark Group Holdings Limited
("ProLogis Kingspark"). As of June 30, 2000, ProLogis Kingspark had 649,000
square feet of operating facilities, 2.5 million square feet of facilities under
development and 612,000 square feet of facilities that it was developing under
development management agreements. Additionally, as of June 30, 2000, ProLogis
Kingspark owned 360 acres and controlled 1,427 acres of land through purchase
options, letters of intent or contingent contracts. The land owned and
controlled by ProLogis Kingspark has the capacity for the future development of
28.0 million square feet of facilities. As of June 30, 2000, 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 95% of the economic benefits of
the activities of Kingspark S.A. and its subsidiaries.
ProLogis had the following amounts outstanding as of June 30, 2000:
o the currency equivalent of $127.5 million outstanding on a loan facility
that provides for unsecured borrowings of up to 200 million pounds
sterling (the currency equivalent of approximately $303.7 million);
interest at 8.0% per annum; outstanding borrowings due on demand; the
facility terminates on September 1, 2000;
o $124.9 million unsecured note from Kingspark S.A.; interest at 5.0% per
annum; due on demand;
o 42.0 million pound sterling (the currency equivalent of approximately
$63.8 million, as of June 30, 2000) mortgage note from ProLogis
Kingspark; interest at 8.0% per annum; secured by land parcels; due on
demand; and
o 31.5 million pound sterling (the currency equivalent of approximately
$47.9 million as of June 30, 2000) of mortgage notes from subsidiaries
of Kingspark S.A.; interest at 7.0% per annum; secured by land parcels;
due on demand.
ProLogis accounts for its investment in Kingspark S.A. under the equity
method. ProLogis recognized income of $4.5 million and $9.3 million for the
three and six months in 2000 and $5.0 million and $3.6 million for the three and
six months in 1999, respectively, (including interest income on the mortgage
notes and notes receivable and the loan facility) from its investment in
Kingspark S.A. ProLogis' share of Kingspark S.A.'s income for the three and six
months ended June 30, 2000 includes a net gain of $0.3 million and $0.8 million,
respectively, from the disposition of facilities developed by ProLogis Kingspark
to the ProLogis European Properties Fund. The gain recognized is net of $0.2
million and $0.6 million for the three and six months in 2000, respectively,
which did not qualify for income recognition by ProLogis due to ProLogis'
continuing ownership in the ProLogis European Properties Fund.
11
<PAGE>
ProLogis Kingspark has a line of credit agreement with a bank in the
United Kingdom. The line of credit agreement provides for borrowings of up to
15.0 million pounds sterling (the currency equivalent of approximately $22.8
million as of June 30, 2000) and has been guaranteed by ProLogis. As of June 30,
2000, no borrowings were outstanding on the line of credit. However, as of June
30, 2000, ProLogis Kingspark had the currency equivalent of approximately $15.2
million of letters of credit outstanding that reduce the amount of available
borrowings on the line of credit. Additionally, ProLogis has an agreement
whereby it has guaranteed the performance and obligations of ProLogis Kingspark
with respect to an infrastructure agreement entered into by ProLogis Kingspark
related to the development of a land parcel. As of June 30, 2000, ProLogis had
an unfunded commitment on this guarantee agreement in the currency equivalent of
approximately $1.7 million.
ProLogis California I LLC
ProLogis California began operations on August 26, 1999 as a limited
liability company whose members are ProLogis and New York State Common
Retirement Fund ("NYSCRF"). ProLogis California operates 79 operating facilities
aggregating 12.5 million square feet, all in the Los Angeles market. All of the
facilities were acquired from ProLogis. As of June 30, 2000, ProLogis and NYSCRF
each had an equity interest in ProLogis California of $167.3 million. ProLogis
received distributions aggregating $3.0 million and $5.4 million for the three
and six months ended June 30, 2000. ProLogis provides property management,
leasing and development management services to ProLogis California and earns
fees for these services.
ProLogis' total investment in ProLogis California as of June 30, 2000
consisted of (in millions):
<TABLE>
<CAPTION>
<S> <C>
Equity interest........................................... $ 167.3
Distributions............................................. (15.2)
ProLogis' share of ProLogis California's earnings,
excluding fees earned................................... 7.2
--------
Subtotal............................................. 159.3
Adjustments to carrying value (1)......................... (28.3)
Other, including acquisition costs........................ 1.5
--------
132.5
Other receivables......................................... 2.3
--------
Total................................................ $ 134.8
========
<FN>
----------
(1) Reflects the reduction in carrying value for amount of net gain on the
disposition of properties to ProLogis California that does not qualify for
income recognition due to ProLogis' continuing ownership in ProLogis
California.
</FN>
</TABLE>
ProLogis accounts for its investment in ProLogis California under the
equity method. ProLogis recognized $3.0 million and $6.1 million of income,
including management, leasing and development fees of $0.6 million and $1.3
million for the three and six months ended June 30, 2000 from its investment in
ProLogis California, respectively.
ProLogis European Properties Fund
The ProLogis European Properties Fund was formed on September 16, 1999
and began operations on September 23, 1999. As of June 30, 2000, the ProLogis
European Properties Fund owned 90 buildings aggregating 11.7 million square feet
(including 60 facilities aggregating 6.6 million square feet owned by the
ProLogis European Properties S.a.r.l.). Of these facilities, all but six
facilities aggregating 0.7 million square feet were acquired from ProLogis or
ProLogis Kingspark.
On January 7, 2000, ProLogis contributed 50.1% of the common stock of
one of its wholly owned European entities, the ProLogis European Properties
S.a.r.l., to the ProLogis European Properties Fund in exchange for an equity
interest. The ProLogis European Properties S.a.r.l. owned 6.6 million square
feet of operating facilities with a net book value of $334.9 million and held
third party debt of $173.6 million as of December 31, 1999. ProLogis is
obligated to contribute the remaining 49.9% of the common stock to the ProLogis
European Properties Fund in January 2001. As of June 30, 2000, ProLogis has a
42.1% ownership interest in the ProLogis European Properties Fund.
Third parties (19 institutional investors) have invested 209.6 million
euros (the currency equivalent of approximately $200.9 million as of June 30,
2000) in the ProLogis European Properties Fund and have committed to fund an
additional 850.7 million euros (the currency equivalent of approximately $815.3
million as of June 30, 2000) through 2002. ProLogis has also entered into a
subscription agreement to make additional capital contributions (including the
remaining 49.9% of the common stock of the ProLogis European Properties
S.a.r.l.) of 188.9 million euros (the currency equivalent of approximately
$181.1 million as of June 30, 2000) to the ProLogis European Properties Fund
through 2002.
12
<PAGE>
The ProLogis European Properties Fund intends to acquire additional
stabilized operating facilities from ProLogis, ProLogis Kingspark and unrelated
parties, including facilities to be developed by ProLogis and ProLogis Kingspark
in the future. Stabilized facilities have been defined for purposes of the
ProLogis European Properties Fund as facilities that meet minimum leasing
criteria and minimum net operating income yields, as defined and established by
agreement for each country. The ProLogis European Properties Fund has the right
to refuse to acquire facilities that ProLogis and ProLogis Kingspark have
developed if they do not meet the established criteria. ProLogis has an
agreement to manage the ProLogis European Properties Fund for a fee pursuant to
a 20-year management agreement.
ProLogis' total investment in the ProLogis European Properties Fund as
of June 30, 2000 consisted of (in millions of U.S. dollars):
<TABLE>
<CAPTION>
<S> <C>
Equity interest........................................ $ 133.2
ProLogis' share of the ProLogis European Properties
Fund's Earnings, excluding fees earned.............. 2.5
-------
Subtotal.......................................... 135.7
Adjustments to carrying value (1)...................... (12.3)
Other, net............................................. 1.8
-------
125.2
Other receivables 2.5
-------
Total............................................. $ 127.7
=======
<FN>
---------
(1) Reflects the reduction in carrying value for amount of net gain on the
disposition of facilities to the ProLogis European Properties Fund that
does not qualify for income recognition due to ProLogis' continuing
ownership in the ProLogis European Properties Fund.
</FN>
</TABLE>
ProLogis accounts for its investment in the ProLogis European
Properties Fund under the equity method, based upon its average ownership
interest during the applicable period. ProLogis recognized a loss of $3.0
million and income of $4.3 million, including management fees of $1.2 million
and $2.3 million for the three and six months ended June 30, 2000, respectively,
from its investment in the ProLogis European Properties Fund.
ProLogis European Properties S.a.r.l.
ProLogis owns 49.9% of the common stock of the ProLogis European
Properties S.a.r.l. and recognizes 49.9% of the income of this entity under the
equity method. The ProLogis European Properties Fund owns the remaining 50.1% of
the common stock of the ProLogis European Properties S.a.r.l. and recognizes
50.1% of the income of this entity in its income. ProLogis recognized a loss of
$53,000 and income of $4.9 million under the equity method for the three and six
months ended June 30, 2000 from its investment in the 49.9% of the common stock
of the ProLogis European Properties S.a.r.l.
As of June 30, 2000, the ProLogis European Properties S.a.r.l. owned
6.1 million square feet of distribution facilities in France (including ProLogis
Garonor's 5.0 million square feet), 0.4 million square feet of distribution
facilities in Poland and 0.1 million square feet of distribution facilities in
the Netherlands. Additionally, the ProLogis European Properties S.a.r.l. had the
currency equivalent of $156.4 million of debt (including $29.5 million of
unsecured debt that is guaranteed by ProLogis) outstanding as of June 30, 2000.
ProLogis North American Properties Fund I
ProLogis North American Properties Fund I LLC began operations on June
30, 2000, as a limited liability company whose members are ProLogis and the
State Teachers Retirement Board of Ohio. ProLogis North American Properties Fund
I operates seventeen operating facilities aggregating 3.8 million square feet.
As of June 30, 2000, ProLogis had a 20% interest in ProLogis North American
Properties Fund I. ProLogis accounts for its investment in ProLogis North
American Properties Fund I under the equity method. No income was reported for
the six months ended June 30, 2000 as the company was formed on June 30, 2000.
As of June 30, 2000, ProLogis has a $44.6 million note receivable from ProLogis
North American Properties Fund I which earns interest at a rate of LIBOR plus
1.5% per annum, and due November 2000.
13
<PAGE>
ProLogis North American Properties Fund I intends to acquire additional
stabilized operating facilities developed by ProLogis. Stabilized facilities
have been defined for purposes of ProLogis North American Properties Fund I as
facilities that meet certain construction parameters, minimum leasing criteria
and minimum net operating yields. ProLogis North American Properties Fund I is
under no obligation to acquire the facilities that ProLogis develops if they do
not meet the established criteria. ProLogis has an agreement to manage ProLogis
North American Properties Fund I for a fee for a ten-year period, unless
terminated at an earlier date as provided under the terms of the agreement.
ProLogis total investment in ProLogis North American Properties Fund I
as of June 30, 2000 consisted of (in millions):
<TABLE>
<CAPTION>
<S> <C>
Equity interest............................. $ 14.8
Adjustments to carrying value (1)........... (4.8)
Other, net.................................. 0.8
----------
10.8
Note receivable............................. 44.6
---------
Total.............................. $ 55.4
=========
<FN>
----------
(1) Reflects the reduction in carrying value for amount of net gain on the
disposition of facilities to ProLogis North American Properties Fund I that
does not qualify for income recognition due to ProLogis' continuing
ownership in ProLogis North American Properties Fund I.
</FN>
</TABLE>
ProLogis Principal
ProLogis Principal began operations on June 30, 2000, as a limited
liability company whose members are ProLogis and Principal Financial Group.
ProLogis Principal owns three operating facilities acquired from ProLogis
aggregating 440,000 square feet. As of June 30, 2000, ProLogis had a 20%
interest in ProLogis Principal. ProLogis' $0.6 million equity investment in
ProLogis Principal has been reduced by $0.5 million which represents the amount
of net gain on the disposition of facilities to ProLogis Principal that does not
qualify for income recognition due to ProLogis' continuing ownership in ProLogis
Principal. ProLogis accounts for its investment in ProLogis Principal under the
equity method. No income has been reported for the six months ended June 30,
2000 as the company was formed on June 30, 2000. As of June 30, 2000, ProLogis
has a $13.2 million note receivable from ProLogis Principal that earns interest
at 8.25% per annum and is due December 2000. ProLogis has an agreement to manage
ProLogis Principal's properties for a fee pursuant to a four-year agreement.
Summarized Financial Information
Summarized financial information for ProLogis' unconsolidated entities
as of and for the six months ended June 30, 2000 is presented below (in millions
of U.S. dollars). The information presented is for the entire entity.
<TABLE>
<CAPTION>
ProLogis
ProLogis North
ProLogis European American
Logistics Frigoscandia Kingspark ProLogis Properties Properties ProLogis
(1) S.A. (1) S.A. (1) California (2) Fund (3) Fund I (4) Principal (4)
-------- ------------ --------- -------------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets.......... $ 358.2 $ 514.8 $ 489.4 $ 591.4 $ 757.1 $ 180.0 $ 16.1
Total liabilities (5). $ 348.4 $ 552.0 $ 473.7 $ 272.1 $ 383.0 $ 105.9 $ 13.2
Minority interest..... $ -- $ 0.9 $ -- $ -- $ 90.0 $ -- $ --
Equity................ $ 9.8 $ (38.1) $ 15.7 $ 319.3 $ 284.1 $ 74.1 $ 2.9
Revenues.............. $ 166.3 $ 191.5 $ 10.8 (6) $ 30.6 $ 25.7 $ -- $ --
Adjusted EBITDA (7)... $ 16.4 $ 17.6 $ 7.3 $ 25.0 $ 21.8 $ -- $ --
Net earnings (loss)
(8) (9)............... $ (2.5) $ (10.2)(10)$ (1.9)(11) $ 8.9 $ 8.7(12) $ -- $ --
<FN>
----------
(1) ProLogis had a 95% economic interest in each entity as of June 30, 2000.
(2) ProLogis had a 50% equity interest as of June 30, 2000.
(3) ProLogis had a 42.1% equity interest as of June 30, 2000. The ProLogis
European Properties S.a.r.l. is consolidated with the ProLogis European
Properties Fund. Minority interest represents ProLogis' 49.9% investment
in the common stock of the ProLogis European Properties S.a.r.l.
(4) ProLogis had a 20% equity interest in each entity as of June 30, 2000.
These entities were formed on June 30, 2000. Accordingly, no income
under the equity method is reported for the six months ended June 30,
2000.
</FN>
14
<PAGE>
<FN>
(5) Includes amounts due to ProLogis of $198.8 million from ProLogis
Logistics, $234.8 million from Frigoscandia S.A., $385.9 million from
Kingspark S.A., $2.3 million from ProLogis California, $21.5 million
from the ProLogis European Properties Fund and the ProLogis European
Properties S.a.r.l., $44.6 million from ProLogis North American
Properties Fund I and $13.3 million from ProLogis Principal and loans
from third parties (including accrued interest) of $96.5 million
for ProLogis Logistics, $198.5 million for Frigoscandia S.A., $262.9
million for ProLogis California, $311.8 million for the ProLogis
European Properties Fund and $37.7 million for ProLogis North American
Properties Fund I.
(6) Includes $6.1 million of gains related to the disposition of facilities,
including $1.5 million from the disposition of facilities to the
ProLogis European Properties Fund.
(7) Adjusted EBITDA represents earnings from operations before interest
expense, interest income, current and deferred income taxes,
depreciation, amortization, gains and losses on real estate dispositions
and foreign currency exchange gains and losses.
(8) ProLogis' share of the net earnings (loss) of the respective entities
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 entities".
(9) The net earnings (loss) of each entity includes interest expense on
amounts due to ProLogis, as applicable.
(10) Includes a net foreign currency exchange gain of $1.8 million.
(11) Includes a net foreign currency exchange gain of $0.5 million.
(12) Includes a net foreign currency exchange loss of $1.1 million.
</FN>
</TABLE>
4. Borrowings:
Unsecured Lines of Credit
ProLogis has an unsecured credit agreement with Bank of America, N.A.
("Bank of America"), Commerzbank AG and Chase Bank of Texas, National
Association, as agents for a bank group that provides for a $450.0 million
unsecured revolving line of credit. The credit agreement allows ProLogis to
increase the available commitment by $50.0 million to a total of $500.0 million.
ProLogis Logistics and ProLogis Development Services Incorporated, a
consolidated subsidiary of ProLogis, may also borrow under the credit agreement
with such borrowings guaranteed by ProLogis. 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 0.75% based upon ProLogis' current senior
unsecured debt ratings. ProLogis' borrowings are primarily at the 30-day LIBOR
rate plus 0.75% (7.3919% as of June 30, 2000). Additionally, the credit
agreement provides for a facility fee of 0.15% per annum. The line of credit
matures on June 6, 2003 and may be extended for an additional year at ProLogis'
option. As of June 30, 2000, ProLogis had $45.0 million of borrowings
outstanding on the line of credit and ProLogis was in compliance with all
covenants contained in the credit agreement.
In addition, ProLogis has a $25.0 million unsecured discretionary line
of credit with Bank of America that matures on October 1, 2000. By agreement
between ProLogis and Bank of America, 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 June 30, 2000.
ProLogis has a 325.0 million euro, multi-currency, unsecured revolving
line of credit (the currency equivalent of approximately $311.5 million as of
June 30, 2000) through a group of 17 banks, on whose behalf ABN AMRO Bank, N.V.
acts as agent. The interest rate on this multi-currency, four-year revolving
line of credit is Euribor plus 0.75% or Sterling LIBOR plus 0.75% (borrowings
outstanding as of June 30, 2000 were at a weighted average interest rate of
5.04%). As of June 30, 2000, the currency equivalent of approximately $217.3
million of borrowings were outstanding on the line of credit and ProLogis was in
compliance with all covenants contained in the credit agreement.
Mortgage Notes, Assessment Bonds and Securitized Debt
Mortgage notes, assessment bonds and securitized debt consisted of the
following as of June 30, 2000 (in thousands):
15
<PAGE>
<TABLE>
<CAPTION>
Balloon
Periodic Payment
Interest Maturity Payment Principal Due at
Description Rate(1) Date Date Balance Maturity
----------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Mortgage notes:
West One Business Center #1......... 8.250% 09/01/00 (2) $ 4,277 $ 4,252
Tampa West Distribution Center #20.. 9.125 11/30/00 (3) 22 --
Rio Grande Industrial Center #1..... 8.875 09/01/01 (2) 2,783 2,544
Titusville Industrial Center #1..... 10.000 09/01/01 (2) 4,406 4,181
Prudential Insurance (4)............ 8.590 04/01/03 (2) 25,727 23,505
Sullivan 75 Distribution Center #1.. 9.960 04/01/04 (2) 1,781 1,663
Charter American Mortgage (4)....... 8.750 08/01/04 (2) 7,056 5,819
West One Business Center #3......... 9.000 09/01/04 (2) 4,277 3,847
Raines Distribution Center.......... 9.500 01/01/05 (2) 4,354 3,652
Prudential Insurance (4)(5)......... 6.850 03/01/05 (6) 52,821 48,850
Consulate Distribution Center
#300 (5).......................... 6.970 02/01/06 (2) 3,701 3,167
Plano Distribution Center #7 (5).... 7.020 04/15/06 (2) 3,747 3,200
Connecticut General Life Insurance
(4)............................... 7.080 03/01/07 (2) 147,975 134,431
Vista Del Sol Industrial Center
#1 & 2............................ 9.680 08/01/07 (3) 3,291 --
State Farm Insurance (4)(5)......... 7.100 11/01/08 (2) 15,394 13,698
Placid Street Distribution Center
#1 (5)............................ 7.180 12/01/09 (2) 7,757 5,142
Earth City Industrial Center #4..... 8.500 07/01/10 (3) 1,873 --
GMAC Commercial Mortgage (4)........ 7.750 10/01/10 (3) 7,737 --
Executive Park Distribution
Center #3......................... 8.190 03/01/11 (3) 1,024 --
Cameron Business Center #1 (5)...... 7.230 07/01/11 (2) 6,119 4,028
Platte Valley Industrial Center #9.. 8.100 04/01/17 (3) 3,204 --
Platte Valley Industrial Center #4.. 10.100 11/01/21 (3) 2,021 --
Morgan Guaranty Trust (4)........... 7.584 04/01/24 (7) 200,000 127,187
---------
$ 511,347
=========
Assessment bonds:
City of Fremont................. 7.000% 03/01/11 (3) $ 9,073 --
Various (8)..................... (8) (8) (3) 1,326 --
---------
$ 10,399
=========
Securitized debt:
Tranche A....................... 7.740% 02/01/04 (2) $ 18,571 $ 15,214
Tranche B....................... 9.940 02/01/04 (2) 7,881 7,215
---------
$ 26,452
=========
<FN>
----------
(1) The weighted average interest rates for mortgage notes, assessment bonds
and securitized debt were 7.50%, 7.12% and 8.40%, respectively as of June
30, 2000. The total weighted average interest rate for ProLogis' secured
borrowings is 7.53%.
(2) Monthly amortization with a balloon payment due at maturity.
(3) Fully amortizing.
(4) Secured by various distribution facilities.
(5) Mortgage note was assumed by ProLogis in connection with the Meridian
Merger. See Note 5. Under purchase accounting, the mortgage note was
recorded at its fair value. Accordingly, a premium or discount was
recognized, as applicable.
(6) Carrying value includes premium. Terms are interest only with stated
principal amount of $48.9 million due at maturity.
(7) 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.
(8) Includes nine issues of assessment bonds with four municipalities.
Interest rates range from 5.5% to 8.75%. Maturity dates range from August
2004 to September 2016.
</FN>
</TABLE>
Mortgage notes, assessment bonds and securitized debt are secured by
real estate with an aggregate undepreciated cost of $928.6 million, $227.5
million and $63.5 million, respectively, as of June 30, 2000.
Interest Expense
For the six months ended June 30, 2000 and 1999, interest expense was
$84.8 million and $76.3 million, respectively, which is net of capitalized
interest of $8.4 million and $7.7 million, respectively. Amortization of
deferred loan costs included in interest expense was $2.0 million and $2.0
million for the six months ended June 30, 2000 and 1999, respectively. The total
interest paid in cash on all outstanding debt was $83.8 million and $69.9
million during 2000 and 1999, respectively.
16
<PAGE>
5. Meridian Merger
On March 30, 1999, Meridian Industrial Trust, Inc. ("Meridian"), a
publicly traded REIT that owned 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 million 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, par
value $0.01 per share ("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 an 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 stock options each to acquire 1.1 ProLogis
Common Shares and $2.00 in cash. The total assets acquired from Meridian
aggregated approximately $1.54 billion, including $1.42 billion of real estate
assets and an interest in a temperature-controlled distribution business of
$28.7 million. The transaction was structured as a tax-free merger and was
accounted for under the purchase method.
The following summarized pro forma unaudited information for the six
months ended June 30, 1999 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, 1999. 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 the six months ended June 30, 1999 (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Six Months
Ended
June 30, 1999
--------------
<S> <C>
Rental income........................................ $ 261,926
Earnings from operations............................. $ 61,616
Earnings attributable to Common Shares before
cumulative effect of accounting change............. $ 26,278
Net earnings attributable to Common Shares........... $ 24,838
Weighted average Common Shares outstanding:
Basic.............................................. 161,528
Diluted............................................ 161,723
Basic and diluted per share net earnings
attributable to Common Shares before
cumulative effect of accounting change............. $ 0.16
Cumulative effect of accounting change............... (0.01)
-----------
Basic and diluted per share net earnings
attributable to Common Shares...................... $ 0.15
===========
</TABLE>
6. Distributions and Dividends:
Common Distributions
On February 23, 2000 and May 25, 2000, ProLogis paid a quarterly
distribution of $0.335 per Common Share to shareholders of record on February 9,
2000 and May 11, 2000, respectively. The distribution level for 2000 as set by
the Board of Trustees in December 1999 is $1.34 per Common Share.
Preferred Dividends
The annual dividend rates on ProLogis' preferred shares are $2.35 per
cumulative redeemable Series A preferred share, $1.75 per cumulative redeemable
convertible Series B preferred share, $4.27 per cumulative redeemable Series C
preferred share, $1.98 per cumulative redeemable Series D preferred share and
$2.1875 per cumulative redeemable Series E preferred share.
On January 31, 2000 and April 28, 2000, ProLogis paid quarterly
dividends of $0.5469 per cumulative redeemable Series E preferred share. On
March 31, 2000 and June 30, 2000, 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 Series C preferred share and $0.495 per cumulative redeemable Series
D preferred share.
17
<PAGE>
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 dividends with respect to the preferred shares have been
paid and sufficient funds have been set aside for dividends that have been
declared for the then-current dividend period with respect to the preferred
shares.
7. Shareholders' Equity:
During the first six months of 2000, ProLogis generated net proceeds of
$10.6 million from the issuance of 491,000 Common Shares under its 1999 Dividend
Reinvestment and Share Purchase Plan and the issuance of 61,000 Common Shares
upon the exercise of stock options. In addition, ProLogis issued: (i) 201,000
Common Shares in connection with the acquisition of ProLogis Kingspark and
Kingspark S.A. (see Note 3); (ii) 799,000 Common Shares upon conversion of
623,000 Series B cumulative redeemable convertible preferred shares; and (iii)
36,000 Common Shares to the holders of 33,000 convertible limited partnership
units in MDN/JSC II.
Subsequent to June 30, 2000, ProLogis issued an additional 401,000
Common Shares in connection with the acquisition of ProLogis Kingspark and
Kingspark S.A. and an additional 202,000 Common Shares to the remaining holders
of the convertible limited partnership units in MDN/JSC II.
8. Earnings Per Common Share:
A reconciliation of the denominator used to calculate basic earnings
per Common Share to the denominator used to calculate diluted earnings per
Common Share for the years indicated (in thousands, except per share amounts) is
as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net earnings attributable to Common Shares..... $ 19,589 $ 12,766 $ 64,527 $ 13,816
========= ========= ========= =========
Weighted average Common Shares outstanding -
Basic..................................... 163,148 162,004 162,644 142,974
Incremental effect of common stock equivalents
and contingently issuable shares............. 582 205 726 136
--------- --------- --------- ---------
contingently issuable shares..............
Adjusted weighted average Common Shares
outstanding - Diluted..................... 163,730 162,209 163,370 143,110
========= ========= ========= =========
Per share net earnings attributable to Common
Shares
Basic..................................... $ 0.12 $ 0.08 $ 0.40 $ 0.10
========== ========== ========== ==========
Diluted................................... $ 0.12 $ 0.08 $ 0.39 $ 0.10
========== ========== ========== ==========
</TABLE>
For the six months ended June 30, 1999, basic and diluted per share net
earnings attributable to Common Shares before the cumulative effect of
accounting change were $0.11. The following weighted average convertible
securities were not included in the calculation of diluted net earnings per
Common Share as the effect, on an as-converted basis, was antidilutive (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Series B preferred shares................... 8,543 9,248 8,755 9,336
===== ===== ===== =====
Limited partnership units................... 5,558 5,599 5,573 5,245
===== ===== ===== =====
</TABLE>
9. Supplemental Cash Flow Information:
Non-cash investing and financing activities for the six months ended
June 30, 2000 and 1999 are as follows:
o In connection with ProLogis' contribution of 50.1% of the common stock of
the ProLogis European Properties S.a.r.l. to the ProLogis European
Properties Fund discussed in Note 3, ProLogis received an equity interest
in the ProLogis European Properties Fund of approximately $78.0 million.
The ProLogis European Properties S.a.r.l. had total assets of $403.9
million and total liabilities of $248.1 million. ProLogis has recognized
its investment in the remaining 49.9% of the common stock under the
equity method since January 7, 2000.
18
<PAGE>
o ProLogis received $4.4 million, $13.8 million, $14.8 million and $0.6
million of the proceeds from its disposition of facilities to the
ProLogis European Properties Fund, ProLogis California, ProLogis North
American Properties Fund I and ProLogis Principal, respectively, in the
form of an equity interest in these entities during 2000. Additionally,
ProLogis received $15.6 million, $44.6 million and $13.2 million of the
proceeds from its disposition of facilities to the ProLogis European
Properties Fund, ProLogis North American Properties Fund I and ProLogis
Principal, respectively in the form of notes receivable from these
entities during 2000.
o ProLogis received $7.7 million of the proceeds from its disposition of
facilities to third parties in the form of notes receivable during 2000.
o In connection with the acquisition of ProLogis Kingspark and Kingspark
S.A. discussed in Note 3, ProLogis issued 201,000 Common Shares in 2000.
o Series B preferred shares aggregating $15.6 million and $9.6 million
were converted into Common Shares during the six months ended June 30,
2000 and 1999, respectively.
o Net foreign currency translation losses of $11.4 million and gains of
$1.5 million were recognized in the six months ended June 30, 2000 and
1999, respectively.
o Limited partnership units aggregating $2.6 million and $0.2 million
were converted into Common Shares in 2000 and 1999, respectively.
o In connection with the Meridian Merger discussed in Note 5, ProLogis
issued approximately 37.2 million Common Shares and 2.0 million Series E
preferred shares, assumed approximately 1.1 million stock 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).
10. Business Segments:
ProLogis has three reportable business segments:
o Property operations represents the long-term ownership and leasing of
distribution facilities in the United States, (a portion of which is
owned through ProLogis California, ProLogis North American Properties
Fund I and ProLogis Principal --See Note 3), Mexico and Europe (a
portion of which is owned through Garonor Holdings (see Note 1), a
subsidiary that was recognized under the equity method of accounting
until June 29, 1999 and a portion of which is owned through the ProLogis
European Properties Fund and the ProLogis European Properties S.a.r.l.
in 2000-- See Note 3); 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 Corporate distribution facilities services business ("CDFS business")
represents the sale of distribution facilities developed by ProLogis or
ProLogis Kingspark (see Note 3) to third parties or entities in which
ProLogis has an ownership interest or the development of distribution
facilities by ProLogis or ProLogis Kingspark on a fee basis for third
parties in the United States, Mexico and Europe; the development
activities of ProLogis and Kingspark S.A. are considered to be
individual operating segments having similar economic characteristics
which are combined within the reportable segment based upon geographic
location; and
o Temperature-controlled distribution operations represents the operation
of a temperature-controlled distribution and logistics network through
investments in unconsolidated entities in the United States (ProLogis
Logistics) and Europe (Frigoscandia S.A.); each company'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. See Note 3.
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):
19
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Income:
Property operations:
United States (1).................... $ 238,173 $ 215,838
Mexico............................... 6,933 4,220
Europe (2)........................... 10,641 (4,068)
---------- -----------
Total property operations segment. 255,747 215,990
---------- ----------
Corporate distribution facilities
services business:
United States (3).................... 38,239 20,161
Mexico............................... 1,284 --
Europe (4)(5)........................ 16,038 3,583
---------- ----------
Total corporate distribution
facilities services business
segment......................... 55,561 23,744
---------- ----------
Temperature-controlled distribution
operations:
North America (6).................... 5,871 4,621
Europe (7)........................... (5,051) (6,859)
---------- ----------
Total temperature-controlled
distribution operations
segment......................... 820 (2,238)
---------- ----------
Reconciling items:
Interest income...................... 4,220 1,771
---------- ----------
Total income...................... $ 316,348 $ 239,267
========== ==========
Six Months Ended
June 30,
-----------------------
2000 1999
---------- ----------
Net operating income:
Property operations:
United States (1).................... $ 223,464 $ 200,059
Mexico............................... 6,763 3,983
Europe (2)........................... 11,389 (4,217)
---------- ----------
Total property operations segment. 241,616 199,825
---------- ----------
Corporate distribution facilities
services business:
United States (3).................... 38,239 20,161
Mexico............................... 1,284 --
Europe (4)(5)........................ 16,038 3,583
---------- ----------
Total corporate distribution
facilities services business
segment......................... 55,561 23,744
---------- ----------
Temperature-controlled distribution
operations:
North America (6).................... 5,871 4,621
Europe (7)........................... (5,051) (6,859)
---------- ----------
Total temperature-controlled
distribution operations
segment......................... 820 (2,238)
---------- ----------
Reconciling items:
Interest income...................... 4,220 1,771
General and administrative expense... (22,522) (17,811)
Depreciation and amortization........ (77,065) (66,992)
Interest expense..................... (84,842) (76,269)
Interest rate hedge expense.......... -- (945)
Other expenses....................... (2,650) (2,749)
---------- ----------
Total reconciling items......... (182,859) (162,995)
---------- ----------
Earnings from operations........ $ 115,138 $ 58,336
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- ----------
<S> <C> <C>
Assets:
Property operations:
United States (8).................... $3,932,269 $4,017,702
Mexico............................... 149,883 178,253
Europe (8)........................... 302,047 387,362
---------- ----------
Total property operations
segment......................... 4,384,199 4,583,317
---------- ----------
Corporate distribution facilities
services business:
United States........................ 252,885 210,088
Mexico............................... 9,361 13,249
Europe (8)........................... 453,181 432,455
---------- ----------
Total corporate distribution
facilities services business
segment......................... 715,427 655,792
---------- ----------
Temperature controlled distribution
operations:
North America (8).................... 207,959 192,607
Europe (8)........................... 203,569 214,008
---------- ----------
Total temperature controlled
distribution operations
segment....................... 411,528 406,615
---------- ----------
Reconciling items:
Investments in unconsolidated
entities........................... 2,858 2,442
Cash................................. 103,346 69,338
Accounts and notes receivable........ 45,238 31,084
Other assets......................... 88,994 99,452
---------- ----------
Total reconciling items......... 240,436 202,316
---------- ----------
Total assets.................... $5,751,590 $5,848,040
========== ==========
20
<PAGE>
<FN>
----------
(1) Includes an amount recognized under the equity method related to ProLogis'
investment in ProLogis California in 2000 in addition to the operations of
ProLogis that are reported on a consolidated basis. See Note 3 for
summarized financial information of ProLogis California.
(2) Includes amounts recognized under the equity method related to ProLogis'
investment in the ProLogis European Properties Fund (including the
operations of the ProLogis European Properties S.a.r.l.) in 2000 (including
net foreign currency exchange losses of $1.1 million) and ProLogis'
investment in Garonor Holdings in 1999 (including a $13.0 million net
foreign currency exchange loss), in addition to the operations of ProLogis
that are reported on a consolidated basis. See Note 3 for summarized
financial information of the ProLogis European Properties Fund and Note 1
for a discussion of Garonor Holdings.
(3) In 2000, includes $9.9 million, $3.0 million and $1.5 million of net gain
recognized by ProLogis related to the disposition of facilities to ProLogis
North American Properties Fund I, ProLogis California, and ProLogis
Principal. respectively. See Note 3.
(4) Includes amounts recognized under the equity method related to ProLogis'
investment in Kingspark S.A. in 2000 and 1999 (including $0.5 million of
net foreign currency exchange gains in 2000 and $5.5 million of net foreign
currency exchange losses in 1999). See Note 3 for summarized financial
information of Kingspark S.A.
(5) In 2000, includes $5.3 million of net gain recognized by ProLogis related
to the disposition of facilities to the ProLogis European Properties Fund.
Also, in 2000, includes $0.8 million of net gain recognized under the
equity method related to ProLogis Kingspark's disposition of facilities to
the ProLogis European Properties Fund. See Note 3.
(6) Represents amounts recognized under the equity method related to ProLogis'
investment in ProLogis Logistics. See Note 3 for summarized financial
information of ProLogis Logistics.
(7) Represents amounts recognized under the equity method related to ProLogis'
investment in Frigoscandia S.A. (including $1.7 million of net foreign
currency exchange gains in 2000 and $2.1 million of net foreign currency
exchange losses in 1999). See Note 3 for summarized financial information
of Frigoscandia S.A.
(8) Amounts include investments in unconsolidated entities accounted for under
the equity method. See footnotes (1), (2), (3), (4), (5) and (6) above. See
also Note 3 for summarized financial information of the unconsolidated
entities as of and for the six months ended June 30, 2000.
</FN>
</TABLE>
21
<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 June 30, 2000, and the related
consolidated statements of earnings and comprehensive income for the three and
six months ended June 30, 2000 and 1999, and the consolidated statements of cash
flows for the six months ended June 30, 2000 and 1999. 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 accounting principles generally accepted in the United
States.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of ProLogis Trust and
subsidiaries as of December 31, 1999, and in our report dated March 21, 2000, 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, 1999, 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
August 9, 2000
22
<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'
Consolidated Financial Statements and the notes thereto included in Item 1 of
this report. See also ProLogis' 1999 Annual Report on Form 10-K.
The statements contained in this discussion that are not historical
facts are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in which
ProLogis operates, management's beliefs, and assumptions made by management.
Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks,"
"estimates," variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Factors which may affect outcomes and results include: (i) changes
in general economic conditions in ProLogis' markets that could adversely affect
demand for ProLogis' facilities and the creditworthiness of ProLogis' customers,
(ii) changes in financial markets, interest rates and foreign currency exchange
rates that could adversely affect ProLogis' cost of capital and its ability to
meet its financial needs and obligations, (iii) increased or unanticipated
competition for distribution facilities in ProLogis' target markets and (iv)
those factors discussed in ProLogis' 1999 Annual Report on Form 10-K.
Results of Operations
Six Months Ended June 30, 2000 and 1999
Net earnings attributable to Common Shares was $64.5 million for the six
months ended June 30, 2000 as compared to $13.8 million for the same period in
1999, an increase of $50.7 million. The increase in net earnings attributable to
Common Shares in 2000 over 1999 was primarily the result of:
o an increase of $26.0 million in other real estate income, primarily
profits earned in the CDFS business segment from dispositions of
facilities developed; and
o an increase of $36.5 million in income recognized under the equity
method from ProLogis' investments in unconsolidated entities due to: (i)
an increase in the earnings from ProLogis Kingspark in 2000 (see
"--Corporate Distribution Facilities Services Business"); (ii) earnings
from the ProLogis European Properties Fund, ProLogis European Properties
S.a.r.l. and ProLogis California, a portion of whose operations was
recognized on a consolidated basis in 1999 (see "--Property Operations")
and (iii) a net increase in the earnings of ProLogis'
temperature-controlled distribution operations (see
"--Temperature-Controlled Distribution Operations).
The increases in net earnings were partially offset by increases in the
following expenses in 2000 over 1999: (i) net foreign currency exchange losses
(see "--Other Income and Expense Items - Foreign Currency Exchange Losses,
Net"); (ii) general and administrative expense (see "--Other Income and Expense
Items - General and Administrative Expense") and (iii) interest expense (see
"--Other Income and Expense Items - Interest Expense"). Net operating income
from property operations (after deductions for depreciation) increased by $4.1
million in 2000 over 1999 (see "--Property Operations"). Preferred share
dividends and weighted average Common Shares outstanding both increased in 2000
as compared to 1999 primarily attributable to the issuance of Common Shares and
Series E preferred shares related to the Meridian Merger on March 30, 1999 (see
"-- Meridian Merger").
Property Operations
ProLogis' property operations segment income consists of: (i) the net
operating income from the operating facilities that are owned directly by
ProLogis or its consolidated majority-owned and controlled subsidiaries and
partnerships and (ii) the income recognized by ProLogis under the equity method
from its investments in unconsolidated entities engaged in property operations
(see Note 10 to ProLogis' Consolidated Financial Statements in Item 1). The
amounts recognized under the equity method are based on the net earnings of the
unconsolidated entity and include interest income and interest expense,
depreciation and amortization expenses, general and administrative expenses,
income taxes and foreign currency exchange gains and losses (with respect to
ProLogis Garonor, the ProLogis European Properties Fund and the ProLogis
European Properties S.a.r.l.). ProLogis' net operating income from the property
operations segment was as follows for the six months ended June 30, 2000 and
1999 (in thousands):
23
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Facilities directly owned by ProLogis and its
consolidated entities:
Rental income......................................... $ 240,505 $ 228,412
Property operating expenses........................... 14,131 16,165
--------- ---------
Net operating income.......................... 226,374 212,247
--------- ---------
Income from ProLogis California......................... 6,055 --
Income from the ProLogis European Properties fund....... 4,312 --
Income from the ProLogis European Properties S.a.r.l.... 4,875 --
Loss from ProLogis Garonor.............................. -- (12,422)
--------- ---------
Total property operations segment............. $ 241,616 $ 199,825
========= =========
</TABLE>
Rental income increased by $12.1 million in 2000 as compared to
1999. This increase is comprised of the following components:
o facilities completed during 2000 contributed $3.6 million of additional
rental income in 2000;
o facilities acquired during 1999 contributed $23.7 million of additional
rental income in 2000 (primarily the facilities acquired in the Meridian
Merger; see "--Meridian Merger");
o facilities completed during 1999 contributed $8.1 million of additional
rental income 2000;
o facilities owned and operated as of January 1, 1999 contributed $8.2
million of additional rental income in 2000; and
o facilities that were in operation during 1999 but have subsequently been
disposed of reduced rental income in 2000 by $31.5 million (primarily
facilities contributed to the ProLogis European Properties Fund,
ProLogis North American Properties Fund I and ProLogis Principal).
Rental expenses, net of recoveries from tenants, decreased by $2.0
million in 2000 over 1999 primarily due to increases in expense recoveries.
Rental expenses, before recoveries from tenants were 24.9% of rental income for
2000 and 23.7% of rental income for 1999. Total rental expense recoveries were
76.4% and 70.1% of total rental expenses in 2000 and 1999, respectively.
Under the equity method, ProLogis has recognized its share of the net
earnings of the entities that are part of ProLogis' property operations segment
as follows: (i) ProLogis Garonor from December 29, 1998 to June 29, 1999; (ii)
ProLogis California beginning August 26, 1999; and (iii) the ProLogis European
Properties Fund beginning September 23, 1999 which includes the ProLogis
European Properties S.a.r.l. since January 7, 2000. ProLogis North American
Properties Fund I and ProLogis Principal were formed on June 30, 2000. No income
was recognized from these two entities for the six months ended June 30, 2000.
The operations of ProLogis Garonor are included in the ProLogis European
Properties S.a.r.l. in 2000. See Notes 1 and 3 to ProLogis' Consolidated
Financial Statements in Item 1.
ProLogis' share of the income of the ProLogis European Properties Fund
and the ProLogis European Properties S.a.r.l. includes a $0.7 million net
foreign currency loss and a $0.8 million net foreign currency gain, respectively
in 2000. ProLogis' share of ProLogis Garonor's loss in 1999 includes the
recognition of a net foreign currency exchange loss of $13.0 million resulting
from the remeasurement of intercompany and other debt.
The facilities that ProLogis develops are not always fully leased at the
start of construction. In addition, ProLogis may acquire facilities that are
underleased at the time of acquisition. While these situations will reduce
ProLogis' overall occupancy rate below its stabilized level in the short-term,
they do provide 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 in effect for a sufficient period of time (but in no case
longer than 12 months for facilities acquired by ProLogis and 12 months after
shell completion for facilities developed by ProLogis) to achieve stabilized
occupancy (typically 93%, but ranging from 90% to 95%, depending on the
submarket and product type). ProLogis has been successful in increasing
occupancies on acquired and developed facilities during their initial months of
operation, resulting in an occupancy rate of 94.8% and a leased rate of 95.8%
for stabilized facilities owned by ProLogis and its consolidated and
unconsolidated entities as of June 30, 2000. The average increase in rental
rates for new and renewed leases on previously leased space (13.0 million square
feet) for all facilities including those owned by ProLogis' consolidated and
unconsolidated entities during six months in 2000 was 16.7%.
24
<PAGE>
Corporate Distribution Facilities Services Business
Income from ProLogis' CDFS business segment consists primarily of: (i)
the profits from the disposition of facilities that were developed by ProLogis
or its consolidated subsidiaries and sold to customers or entities in which
ProLogis has an ownership interest; (ii) development fees earned by ProLogis or
its consolidated subsidiaries and (iii) income recognized under the equity
method from ProLogis' investment in ProLogis Kingspark. ProLogis Kingspark
engages in CDFS business activities in the United Kingdom similar to those
activities performed directly by ProLogis and its consolidated subsidiaries.
ProLogis recognizes 95% of the net earnings of ProLogis Kingspark which include
interest income and interest expense (net of capitalized amounts), general and
administrative expenses, income taxes and foreign currency exchange gains and
losses. See Note 3 to ProLogis' Consolidated Financial Statements in Item 1.
The CDFS business segment income is comprised of the following (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------
2000 1999
--------- --------
<S> <C> <C>
Income from ProLogis Kingspark......................... $ 9,329 $ 3,583
Gains on disposition of facilities developed for
sale by ProLogis..................................... 43,187 19,302
Development fees earned by ProLogis.................... 2,042 709
Other, net............................................. 1,003 150
--------- --------
$ 55,561 $ 23,744
========= ========
</TABLE>
In the first six months of 2000, ProLogis and its consolidated entities
disposed of land parcels and an aggregate of 5.9 million square feet of
facilities in the CDFS business segment with aggregate net sales proceeds of
$268.2 million. In the same period in 1999, ProLogis disposed of land parcels
and 1.2 million square feet of facilities with aggregate net sales proceeds of
$71.4 million.
ProLogis Kingspark's dispositions in the first six months of 2000
generated net sales proceeds of $38.8 million on the disposition of land parcels
and 0.4 million square feet of facilities developed for sale and net sales
proceeds of $32.4 million in the first six months of 1999 on the disposition of
land parcels and 41,000 square feet of facilities developed for sale. ProLogis
Kingspark also earned fees for developing facilities under development
management agreements ($2.5 million in 2000 and $1.8 million for 1999).
ProLogis' share of the net earnings of ProLogis Kingspark includes $1.9 million
of current and deferred income tax expense and $0.5 million of net foreign
currency exchange gains for the six months ended June 30, 2000. ProLogis' share
of ProLogis Kingspark's net earnings for the six months ended June 30, 1999
includes $0.9 million of current and deferred income tax expense and $5.5
million of net foreign currency exchange losses.
Temperature-Controlled Distribution Operations
ProLogis recognizes income from the temperature-controlled distribution
operations segment of its business under the equity method. ProLogis' share of
the net earnings (loss) of ProLogis Logistics and Frigoscandia S. A. was as
follows (in thousands) (see Notes 3 and 10 to ProLogis' Consolidated Financial
Statements in Item 1):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Income from ProLogis Logistics........................ $ 5,871 $ 4,621
Losses from Frigoscandia S. A. ....................... (5,051) (6,859)
-------- --------
Total temperature-controlled distribution
operations segment..................... $ 820 $ (2,238)
======== ========
</TABLE>
Net earnings of ProLogis Logistics and Frigoscandia S. A. include
interest income and interest expense, depreciation and amortization expenses,
general and administrative expenses, income taxes and foreign currency exchange
gains and losses (with respect to Frigoscandia). ProLogis recognizes 95% of the
net earnings of each entity in its results of operations.
25
<PAGE>
The increase in ProLogis' share of ProLogis Logistics' net earnings
from 1999 to 2000 of $1.3 million is attributable primarily to the increase in
cubic feet capacity in operation in 2000 over the same period in 1999 and to
income from retail dedicated services.
ProLogis' share of Frigoscandia S.A.'s net earnings includes a net
foreign currency exchange gain of $1.7 million and a net foreign currency
exchange loss of $2.4 million in 2000 and 1999, respectively. Excluding foreign
currency exchange losses, ProLogis' share of Frigoscandia S.A.'s net earnings
for the six months in 2000 was approximately $2.3 million lower than for the
same period in 1999. The decrease in 2000 is due to lower occupancy levels in
the United Kingdom and additional general and administrative and information
technology costs associated with integrating the European and North American
temperature-controlled distribution operations.
Other Income and Expense Items
Interest Income
Interest income was $4.2 million in 2000, an increase of $2.4 million
over the interest income recognized in 1999 of $1.8 million, primarily the
result of higher average cash balances.
General and Administrative Expense
General and administrative expense was $22.5 million in 2000 and $17.8
million in 1999. The $4.7 million increase in general and administrative expense
is attributable to new business initiatives in both North America and Europe.
Depreciation and Amortization
Depreciation and amortization expense increased by $10.1 million in
2000 as compared to 1999. Depreciation and amortization expense in the first
quarter of 2000 increased by $12.1 million over the first quarter of 1999. This
increase is primarily attributable to a full quarter of depreciation expense in
2000 related to the 246 facilities acquired in the Meridian Merger on March 30,
1999 (see "--Meridian Merger"). Depreciation and amortization expense for the
second quarter of 2000 decreased by $2.0 million from the second quarter of
1999. This decrease is primarily attributable to the decrease in the number of
operating facilities directly owned by ProLogis and its consolidated
subsidiaries in 2000 from the same period in 1999. This decrease in operating
facilities is the result of dispositions of operating properties to third
parties and entities in which ProLogis has an ownership interest. See
"--Property Operations".
Interest Expense
Interest expense was $84.8 million and $76.3 million in 2000 and 1999,
respectively. The increase is primarily the result of the increase in the use of
debt to finance investment activities beginning in 1999 ($500.0 million of
senior unsecured notes issued in April 1999 and $466.0 million of secured
financing transactions completed during the first six months of 1999) and the
approximately $250.0 million of additional debt that was assumed in the Meridian
Merger on March 30, 1999 (see "--Meridian Merger"). Consequently, ProLogis'
average debt balance outstanding was higher during the six months ended June 30,
2000 than for the same period in 1999 resulting in increased interest expense.
Other Expenses
Other expenses, which were $2.7 million in 2000 and in 1999, includes
land holding costs and the write-off of previously capitalized pursuit costs.
Land holding costs were $0.7 million in 2000 and $1.3 million in 1999. Pursuit
cost write-offs were $2.0 million in 2000 and $1.4 million in 1999.
Gain on Disposition of Real Estate
Gain on disposition of real estate represents the net gains from the
disposition of operating facilities that were acquired or developed within the
property operations segment. During the six months ended June 30, 2000, ProLogis
disposed of 2.5 million square feet of such operating facilities generating net
sales proceeds of $98.5 million and net gains of $0.3 million (a gain of $5.1
million was recognized in the first quarter of 2000 and a loss of $4.8 million
was recognized in the second quarter of 2000). During the six months ended June
30, 1999, ProLogis disposed of one operating facility of 0.1 million square feet
generating a gain of $0.7 million.
The loss recognized in the second quarter of 2000 was generated by the
disposition of non-strategic facilities. Non-strategic facilities are assets
located in markets or sub markets that are no longer considered target markets
and assets that were acquired as part of portfolio acquisitions that are not
consistent with ProLogis' core portfolio based on the asset's size or
configuration.
Foreign Currency Exchange Losses, Net
ProLogis recognized a net foreign currency exchange loss of $18.4
million for the first six months of 2000 as compared to a loss of $12.3 million
for the same period in 1999. In both periods, the loss consists primarily from
the remeasurement and settlement of intercompany debt and the remeasurement of
third party debt of ProLogis' foreign subsidiaries. Fluctuations in the foreign
currency gains and losses recognized in each period are a product of movements
in the exchange rates, primarily the euro and the pound sterling and the level
of intercompany and third party debt outstanding that is denominated in
currencies other than the U.S. dollar. During the first six months of 2000, the
euro and pound sterling depreciated against the U.S. dollar which is the primary
source of the remeasurement losses recognized.
26
<PAGE>
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. 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. Subsequent to that date, all
such costs incurred have been expensed.
Meridian Merger
On March 30, 1999, Meridian, a publicly traded REIT that owned
industrial distribution facilities in the United States, was merged with and
into ProLogis. In accordance with the terms of the Agreement and Plan of Merger
dated as of November 16, 1998, as amended, the approximately 33.8 million
outstanding shares of Meridian common stock were exchanged (on a 1.1 for one
basis) into approximately 37.2 million ProLogis 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 an 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 stock options each to
acquire 1.1 ProLogis Common Shares and $2.00 in cash. The total assets acquired
from Meridian aggregated approximately $1.54 billion including $1.42 billion of
real estate assets and an interest in a temperature-controlled distribution
business of $28.7 million. The transaction was structured as a tax-free merger
and was accounted for under the purchase method.
Three Months Ended June 30, 2000 and 1999
The changes in net earnings attributable to Common Shares and its
components for the three months ended June 30, 2000 compared to the three months
ended June 30, 1999 are similar to the changes for the six month periods ended
on the same date and the three-month period changes are attributable to same
reasons discussed under "--Six Months Ended June 30, 2000 and 1999" except as
specifically discussed under "--Other Income and Expense Items - Depreciation
Expense" and "--Other Income and Expense Items Gain on Disposition of Real
Estate".
Environmental Matters
ProLogis did not experience any environmental condition on its
facilities which materially adversely affected its results of operations or
financial position nor is ProLogis aware of any environmental liability that
ProLogis believes would have a material adverse effect on its business,
financial condition or results of operations.
Liquidity and Capital Resources
Overview
ProLogis considers its liquidity and ability to generate cash from
operations and financing activities 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' future investing activities within the property operations
segment and the CDFS business segment are expected to consist primarily of
acquiring land for future development and developing distribution facilities.
Within the temperature-controlled distribution operations segment, ProLogis'
future investing activities are expected to include the expansion of its current
capacity through internal development. In addition, the acquisition of existing
businesses operating in the temperature-controlled distribution industry will be
considered. ProLogis' future investing activities are expected to be primarily
funded with:
o cash generated by operations;
o the proceeds from the sale of non-strategic facilities to third parties;
o the proceeds from the sale of facilities developed to third parties;
27
<PAGE>
o the proceeds from the sale of facilities to the ProLogis European
Properties Fund and ProLogis North American Properties Fund I or other
similar entities; and
o utilization of ProLogis' unsecured lines of credit.
In the short-term, borrowings and subsequent repayments on the unsecured
lines of credit will provide ProLogis with adequate liquidity and financial
flexibility to efficiently respond to market opportunities.
Within the ProLogis European Properties Fund, ProLogis has access to 850.7
million euros (the currency equivalent of approximately $815.3 million as of
June 30, 2000) of third party equity capital in Europe that has been committed
primarily by institutional investors through 2002 to fund acquisitions of
ProLogis' completed stabilized European developments and acquisitions of other
facilities from third parties. The ProLogis European Properties Fund has a 500.0
million euro secured, revolving credit facility which is utilized in conjunction
with the committed equity to provide additional capital for its acquisitions. As
of June 30, 2000, 157.9 million euros (the currency equivalent of approximately
$153.0 million) was outstanding on the 500.0 million euro credit facility. The
ProLogis European Properties Fund expects to obtain secured, term financing to
refinance the 500.0 million euro credit facility with the intent that the total
loan to value ratio not exceed 50% on an on-going basis.
Through ProLogis North American Properties Fund I, ProLogis has access to
additional third party equity capital in North America which can be used to
acquire ProLogis' completed, stabilized North American developments.
Additionally, ProLogis North American Properties Fund I intends to seek
additional equity capital and to arrange secured, term financing (such that the
entity's loan to value ratio is not intended to exceed 65%). ProLogis will
continue to evaluate other financing arrangements similar to the ProLogis
European Properties Fund and ProLogis North American Fund I that will provide
debt and equity financing to ProLogis.
As of June 30, 2000, ProLogis had $430.0 million available for borrowing
under its U.S. dollar denominated unsecured lines of credit and the currency
equivalent of approximately $94.2 million available for borrowing under its
multi-currency unsecured line of credit. As of August 8, 2000, on a combined
basis ProLogis had approximately $496.2 million of borrowing capacity available
(see "-- Credit Facilities"). ProLogis' U.S. dollar denominated line of credit
agreement allows ProLogis to increase the available commitment by $50.0 million
to a total of $500.0 million. 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.
ProLogis currently has $608.0 million of shelf-registered securities available
for issuance, subject to ProLogis' ability to effect an offering on satisfactory
terms.
Cash Operating Activities
Cash provided by operating activities increased by $85.0 million in
2000 as compared to 1999 ($189.4 million in 2000 and $104.4 million in 1999).
See "--Results of Operations--Property Operations". Cash provided by operating
activities exceeded the cash distributions paid to holders of Common Shares for
the six months in 2000 and 1999.
Cash Investing and Cash Financing Activities
For the six months in 2000, ProLogis used net cash of $152.1 million in
investing activities consisting primarily of investments in real estate
(including recurring capital expenditures and tenant improvements and lease
commissions on previously leased space) and unconsolidated entities. In addition
to cash generated by operations, these real estate investments were financed by
proceeds from the disposition of real estate assets from both the property
operations segment and the CDFS business segment and borrowings on ProLogis'
unsecured lines of credit.
For the six months in 1999, ProLogis used net cash of $205.1 million in
investing activities consisting primarily of investments in real estate
(including recurring capital expenditures and tenant improvements and lease
commissions on previously leased space) and unconsolidated entities. In addition
to cash generated by operations, these real estate investments were primarily
financed by proceeds from secured and unsecured debt transactions of
approximately $966.0 million, borrowings on ProLogis' unsecured lines of credit
and proceeds from the disposition of real estate assets from both the property
operations segment and the CDFS business segment. Also in 1999, ProLogis made
cash payments associated with the Meridian Merger (a payment of $328.4 million
on Meridian's outstanding line of credit, $11.9 million of accrued distributions
to Meridian shareholders and $67.6 million of payments to Meridian
shareholders). See "-- Results of Operations - Meridian Merger".
28
<PAGE>
Credit Facilities
ProLogis has an unsecured credit agreement with Bank of America, N.A.,
Commerzbank AG and Chase Bank of Texas, National Association, as agents for a
bank group that provides for a $450.0 million unsecured revolving line of
credit. The credit agreement allows ProLogis to increase the available
commitment by $50.0 million to a total of $500.0 million. ProLogis Logistics and
ProLogis Development Services Incorporated may also borrow under the credit
agreement, with such borrowings guaranteed by ProLogis.
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 0.75% based upon ProLogis' current senior unsecured debt ratings. ProLogis'
borrowings are primarily at the 30-day LIBOR rate plus 0.75% (7.3919% as of June
30, 2000). Additionally, the credit agreement provides for a facility fee of
0.15% per annum. The line of credit matures on June 6, 2003 and may be extended
for an additional year at ProLogis' option. As of June 30, 2000, ProLogis had
$45.0 million of borrowings outstanding on the line of credit and ProLogis was
in compliance with all covenants contained in the credit agreement.
In addition, ProLogis has a $25.0 million unsecured discretionary line
of credit with Bank of America that matures on October 1, 2000. By agreement
between ProLogis and Bank of America, 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 June 30, 2000.
ProLogis has a 325.0 million euro, multi-currency, unsecured revolving
line of credit (the currency equivalent of approximately $311.5 million as of
June 30, 2000) through a group of 17 banks, on whose behalf ABN AMRO Bank, N.V.
acts as agent. The line of credit was obtained for the purpose of funding
ProLogis' European development activities. The interest rate on this
multi-currency, four-year revolving line of credit is Euribor plus 0.75% or
Sterling LIBOR plus 0.75%, (borrowings outstanding as of June 30, 2000 were at a
weighted average interest rate of 5.04%). As of June 30, 2000, there were 226.7
million euros of borrowings (the currency equivalent of approximately $217.3
million as of June 30, 2000) outstanding on the line of credit and ProLogis was
in compliance with all covenants contained in the credit agreement.
Commitments
As of June 30, 2000, ProLogis had $352.8 million of budgeted development
costs for developments in process, of which $220.0 million was unfunded.
Frigoscandia AB has a 360.0 million Deutsche Mark, multi-currency
revolving credit agreement through a consortium of 11 European banks. As of June
30, 2000, the currency equivalent of approximately $175.4 million was
outstanding. The loan matures in September 2001 and bears interest at the
relevant index (LIBOR or Euribor based on the currency borrowed) plus 1.15%.
ProLogis has entered into a guarantee agreement for 25% of the loan balance. In
addition, ProLogis has committed to convert its $28.2 million non-interest
bearing note from a subsidiary of Frigoscandia Holding AB to equity either
directly or by making an equity contribution to the subsidiary such that the
subsidiary can repay the note in its entirety before the end of 2000.
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
15.0 million pounds sterling (the currency equivalent of approximately $22.8
million as of June 30, 2000). As of June 30, 2000 no borrowings were outstanding
on the line of credit. However, as of June 30, 2000, ProLogis Kingspark had the
currency equivalent of approximately $15.2 million of letters of credit
outstanding that reduce the amount of available borrowings on the line of
credit. Additionally, ProLogis has an agreement whereby it has guaranteed the
performance and obligations of ProLogis Kingspark with respect to an
infrastructure agreement entered into by ProLogis Kingspark related to the
development of a land parcel. As of June 30, 2000, ProLogis had an unfunded
commitment on this guarantee agreement in the currency equivalent of
approximately $1.7 million.
The ProLogis European Properties S.a.r.l. has a 200.0 million French
franc unsecured loan outstanding (the currency equivalent of $29.5 million as of
June 30, 2000) that has been guaranteed by ProLogis.
On July 25, 2000, ProLogis invested $25.0 million in the convertible
preferred stock of GOwarehouse.com, Inc. ("GOwarehouse"). This investment
represents an ownership interest of approximately 15.6%, upon conversion.
GOwarehouse provides integrated global logistics network technology services to
distribution space users. In addition to its investment in the preferred stock
of GOwarehouse, ProLogis will receive $30.0 million in GOwarehouse stock,
representing an additional 18.9% ownership interest, for a five-year
non-exclusive license of the ProLogis Operating System(TM). See Note 1 to
ProLogis' Consolidated Financial Statements in Item 1.
29
<PAGE>
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.
On February 23, 2000 and May 25, 2000, ProLogis paid a quarterly
distribution of $0.335 per Common Share to shareholders of record as of February
9, 2000 and May 11, 2000, respectively. The distribution level for 2000 as set
by the Board of Trustees in December 1999 is $1.34 per Common Share.
The annual dividend rates on ProLogis' preferred shares are $2.35 per
cumulative redeemable Series A preferred share, $1.75 per convertible cumulative
redeemable Series B preferred share, $4.27 per cumulative redeemable Series C
preferred share, $1.98 per cumulative redeemable Series D preferred share and
$2.1875 per cumulative redeemable Series E preferred share.
On January 31, 2000 and April 28, 2000, ProLogis paid quarterly
dividends of $0.5469 per cumulative redeemable Series E preferred share. On
March 31, 2000 and June 30, 2000, 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 Series C preferred share and $0.495 per cumulative redeemable Series
D preferred share.
Pursuant to the terms of its preferred shares, ProLogis is restricted
from declaring or paying any distribution with respect to the Common Shares
unless and until all cumulative dividends with respect to the preferred shares
have been paid and sufficient funds have been set aside for dividends that have
been declared for the then-current dividend period with respect to the preferred
shares.
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.
New Tax Legislation
The REIT Modernization Act ("RMA"), which was passed in 1999 and will
take effect on January 1, 2001, modifies certain provisions of the Internal
Revenue Code of 1986, as amended (the "Code") with respect to the taxation of
REITs. Primarily, the RMA allows for the creation of Taxable REIT Subsidiaries
("TRS") which will allow ProLogis and other REITs to own up to 100% of a TRS
(previously limited to 10% of the voting stock). Due to the previous
limitations, certain of ProLogis' current taxable subsidiaries (those entities
whose operations generated income that was restricted under the REIT rules) were
formed as entities in which ProLogis owned 100% of the preferred stock and a
third party owned 100% of the voting common stock. Accordingly, ProLogis
accounted for its investments in ProLogis Logistics, Frigoscandia S.A. and
Kingspark S.A. under the equity method rather than consolidating the investments
in its balance sheet and results of operations (ProLogis Development Services
Incorporated is consolidated with ProLogis). Because ProLogis will be able to
own 100% of these entities beginning on January 1, 2001, ProLogis is pursuing
the purchase of the common stock of these entities from the third parties
currently owning the stock. See Note 3 to ProLogis' Consolidated Financial
Statements in Item 1.
Funds from Operations
Funds from operations attributable to Common Shares increased
$40.1 million to $181.6 million for 2000 from $141.5 million for 1999.
30
<PAGE>
Funds from operations does not represent net income or cash from
operating activities in accordance with GAAP and is not necessarily indicative
of cash available to fund cash needs, which is presented in the Consolidated
Statement of Cash Flows in ProLogis' Consolidated Financial Statements in Item
1. Funds from operations should not be considered as an alternative to net
income 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. Additionally, the funds from operations measure presented by ProLogis
will not necessarily be comparable to similarly titled measures of other REITs.
ProLogis considers funds from operations to be a useful supplemental measure of
comparative period operating performance and as a supplemental measure to
provide management, financial analysts, potential investors and shareholders
with an indication of the ability of ProLogis to fund its capital expenditures
and investment activities and to fund other cash needs.
Funds from operations, as published by National Association of Real
Estate Investment Trusts ("NAREIT") is defined as net income (computed in
accordance with GAAP), excluding real estate related depreciation and
amortization, gains and losses from sales of properties, except those gains and
losses from sales of properties upon completion or stabilization under pre-sale
agreements and after adjustments for unconsolidated entities to reflect their
funds from operations on the same basis. ProLogis includes gains and losses from
the disposition of its CDFS business segment assets in funds from operations.
Funds from operations as used by ProLogis is modified from the NAREIT
definition to exclude: (i) deferred income tax benefits and deferred income tax
expenses of ProLogis' taxable subsidiaries; (ii) foreign currency exchange gains
and losses resulting from debt transactions between ProLogis and its
consolidated and unconsolidated entities; (iii) foreign currency exchange gains
and losses from the remeasurement (based on current foreign currency exchange
rates) of third party debt of ProLogis' foreign consolidated and unconsolidated
entities; and (iv) mark to market adjustments related to derivative financial
instruments utilized to manage ProLogis' foreign currency risks. These
adjustments to the NAREIT definition are made to reflect ProLogis' funds from
operations on a comparable basis with other REITs who do not engage in the types
of transactions that give rise to these items.
In October 1999, NAREIT's definition of funds from operations was
changed to include non-recurring items as a component of funds from operations.
The 1999 amount presented below has been restated to reflect this change. The
effect of this restatement is a reduction of $1,976,000 to funds from operations
attributable to Common Shares for the six months ended June 30, 1999. For the
entire year ended December 31, 1999, the effect of the restatement is an
increase of $2,000 to funds from operations attributable to Common Shares.
Funds from operations is as follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
2000 1999
--------- ---------
<S> <C> <C>
Net earnings attributable to Common Shares............... $ 64,527 $ 13,816
Add (Deduct):
Real estate related depreciation and amortization... 75,057 66,241
Gain on disposition of non-CDFS business
segment assets.................................... (307) (715)
Foreign currency exchange losses, net (1)........... 18,592 12,402
Cumulative effect of accounting change (2).......... -- 1,440
Deferred income tax expense......................... 167 364
ProLogis' share of reconciling items of
unconsolidated entities:
Real estate related depreciation and
amortization.................................... 28,535 24,869
Gain on disposition of non-CDFS business
segment assets.................................. 26 132
Foreign currency exchange (gains) losses, net..... (1,971) 20,543
Deferred income tax expense (benefit)............. (3,064) 884
Cumulative effect of accounting change (2)........ -- 1,480
--------- ---------
Funds from operations attributable to Common Shares.... $ 181,562 $ 141,456
========= =========
<FN>
----------
(1) See "-- Results of Operations -- Other Income and Expense Items -- Foreign
Currency Exchange Losses, Net".
(2) See "-- Results of Operations -- Other Income and Expense Items --
Cumulative Effect of Accounting Change".
</FN>
</TABLE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2000, no significant change had occurred in ProLogis'
interest rate risk or foreign currency risk as discussed in ProLogis' 1999
Annual Report on Form 10-K.
31
<PAGE>
PART II
Item 4. Submission of Matters to Vote of Securities Holders
At a meeting on May 18, 2000, the shareholders of ProLogis elected the
following Trustees to office (of the total 162,252,451 shares outstanding on the
record date of April 4, 2000, 132,616,373 shares were voted at the meeting):
o 132,106,434 shares were voted for the election of Mr. Irving F.
Lyons, III as a Class I Trustee to serve until the annual meeting of
shareholders in the year 2003, 509,939 shares were withheld;
o 132,119,934 shares were voted for the election of Mr. William G.
Myers as a Class I Trustee to serve until the annual meeting of
shareholders in the year 2003, 496,439 shares were withheld; and
o 132,123,395 shares were voted for the election of Mr. John E. Robson
as a Class I Trustee to serve until the annual meeting of
shareholders in the year 2003, 492,978 shares were withheld.
In addition, at the May 18, 2000 meeting, ProLogis' shareholders
approved and adopted an Amendment to the ProLogis 1997 Long-Term Incentive Plan
("1997 LTIP") which increased by 5,000,000 the number of Common Shares reserved
for issuance under the 1997 LTIP. There were 122,419,246 shares in favor,
10,070,045 shares against and 127,082 shares abstaining on this proposal.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 ProLogis Trust 1997 Long-Term Incentive Plan (as Amended and Restated
effective as of May 18, 2000)
10.2 Credit Agreement among ProLogis Trust, as Borrower and Guarantor,
ProLogis Logistics Services Incorporated, as Borrower, ProLogis
Development Services Incorporated as Borrower, Bank of America, N.A.,
as Administrative Agent, Commerzbank Aktiengesellschaft, New York
Branch, as Syndication Agent, Chase Bank of Texas, National
Association, as Documentation Agent, First Union National Bank and
Societe Generale, Southwest Agency, as Managing Agents and the Lenders
Named Herein, as Lenders, dated as of June 6, 2000.
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
15.1 Letter from Arthur Andersen LLP regarding unaudited financial
information dated August 9, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K:
Items Financial
Date Reported Statements
---- -------- ----------
None
32
<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: August 9, 2000
33
