===============================================================================
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 September 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
November 8, 2000 was 164,849,586.
===============================================================================
<PAGE>
ProLogis Trust
Index
Page
Number(s)
--------
PART I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets--September 30, 2000
and December 31, 1999.............................. 3
Consolidated Statements of Earnings and Comprehensive
Income--Three and nine months ended September 30,
2000 and 1999...................................... 4
Consolidated Statements of Cash Flows--Nine months
ended September 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 - 32
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................ 32
PART II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders.. 33
Item 5. Other Information...................................... 33
Item 6. Exhibits............................................... 33
2
<PAGE>
PROLOGIS TRUST
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
(Unaudited) (Audited)
<S> <C> <C>
Real estate ................................................................. $ 4,567,691 $ 4,974,951
Less accumulated depreciation ............................................. 444,436 366,703
----------- -----------
4,123,255 4,608,248
Investments in and advances to unconsolidated entities ...................... 1,287,576 940,364
Cash and cash equivalents ................................................... 143,855 69,338
Accounts and notes receivable ............................................... 45,024 46,998
Other assets ................................................................ 182,990 183,092
----------- -----------
Total assets ....................................................... $ 5,782,700 $ 5,848,040
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit ........................................................... $ 274,993 $ 98,700
Senior unsecured debt ..................................................... 1,699,886 1,729,630
Other unsecured debt ...................................................... -- 30,892
Mortgage notes ............................................................ 505,585 657,913
Assessment bonds .......................................................... 10,349 10,721
Securitized debt .......................................................... 24,024 26,952
Accounts payable and accrued expenses ..................................... 130,992 117,651
Construction payable ...................................................... 44,768 23,064
Amount due to affiliate ................................................... -- 221
Distributions and dividends payable ....................................... 729 54,939
Other liabilities ......................................................... 99,524 81,549
----------- -----------
Total liabilities .................................................. 2,790,850 2,832,232
----------- -----------
Minority interest ........................................................... 47,080 62,072
Shareholders' equity:
Series A Preferred Shares; $0.01 par value; 5,400,000 shares issued
and outstanding at September 30, 2000 and December 31, 1999
stated liquidation preference of $25.00 per share....................... 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par value; 6,310,900
shares issued and outstanding at September 30, 2000 and
7,020,703 shares issued and outstanding at December 31,
1999; stated liquidation preference of $25.00 per share ................ 157,772 175,518
Series C Preferred Shares; $0.01 par value; 2,000,000 shares issued
and outstanding at September 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 September 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 September 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; 164,660,841
shares issued and outstanding at September 30, 2000 and 161,825,466
shares issued and outstanding at December 31, 1999 ..................... 1,643 1,618
Additional paid-in capital .................................................. 2,713,837 2,663,350
Employee share purchase notes ............................................... (18,916) (22,906)
Accumulated other comprehensive income ...................................... (59,378) (9,765)
Distributions in excess of net earnings ..................................... (385,188) (389,079)
----------- -----------
Total shareholders' equity ......................................... 2,944,770 2,953,736
----------- -----------
Total liabilities and shareholders' equity ......................... $ 5,782,700 $ 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 Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Income:
Rental income........................................................ $ 121,519 $ 135,503 $ 362,024 $ 363,915
Other real estate income............................................. 19,469 13,907 65,703 34,128
Income from unconsolidated entities.................................. 21,346 22,204 46,735 11,067
Interest............................................................. 1,334 2,235 5,554 4,006
--------- --------- --------- ---------
Total income........................................... 163,668 173,849 480,016 413,116
--------- --------- --------- ---------
Expenses:
Rental expenses, net of recoveries of $22,426 and $68,163 for
the three and nine months in 2000, respectively, and $20,944
and $58,820 for the three and nine months in 1999, respectively,
and including amounts paid to affiliate of $294 and $919 for
the three and nine months in 2000, respectively, and $387 and
$972 for the three and nine months in 1999, respectively.......... 6,486 9,891 20,617 26,056
General and administrative, including amounts paid to affiliate
of $252 and $719 for the three and nine months in 2000,
respectively, and $306 and $1,304 for the three and nine
months in 1999, respectively...................................... 9,652 9,708 32,174 27,519
Depreciation and amortization........................................ 35,448 43,903 112,513 110,895
Interest............................................................. 43,700 50,209 128,542 126,478
Interest rate hedge expense.......................................... -- -- -- 945
Other................................................................ 1,188 1,464 3,838 4,213
--------- --------- --------- ---------
Total expenses................................................ 96,474 115,175 297,684 296,106
--------- --------- --------- ---------
Earnings from operations............................................... 67,194 58,674 182,332 117,010
Minority interest share in earnings.................................... 1,228 1,139 4,317 3,742
--------- --------- --------- ---------
Earnings before gain on disposition of real estate and foreign
currency exchange gains (losses).................................. 65,966 57,535 178,015 113,268
Gain on disposition of real estate..................................... 702 25,643 1,009 26,358
Foreign currency exchange gains (losses), net.......................... (1,929) 5,830 (20,378) (6,465)
--------- --------- --------- ---------
Earnings before income taxes........................................... 64,739 89,008 158,646 133,161
Income taxes:
Current income tax expense........................................... 465 324 1,123 919
Deferred income tax expense.......................................... 1,535 210 1,702 574
--------- --------- --------- ---------
Total income taxes............................................ 2,000 534 2,825 1,493
--------- --------- --------- ---------
Earnings before cumulative effect of accounting change................. 62,739 88,474 155,821 131,668
Cumulative effect of accounting change................................. -- -- -- 1,440
--------- --------- --------- ---------
Net earnings........................................................... 62,739 88,474 155,821 130,228
Less preferred share dividends......................................... 14,120 14,453 42,675 42,391
--------- --------- --------- ---------
Net earnings attributable to Common Shares............................. 48,619 74,021 113,146 87,837
Other comprehensive income:
Foreign currency translation adjustments............................. (38,263) (208) (49,613) 1,326
--------- --------- --------- ---------
Comprehensive income................................................... $ 10,356 $ 73,813 $ 63,533 $ 89,163
========= ========= ========= =========
Weighted average Common Shares outstanding - Basic..................... 164,317 161,446 163,206 149,201
========= ========= ========= =========
Weighted average Common Shares outstanding - Diluted................... 170,578 176,329 164,602 149,363
========= ========= ========= =========
Basic per share net earnings attributable to Common Shares:
Earnings before cumulative effect of accounting change............... $ 0.30 $ 0.46 $ 0.69 $ 0.60
Cumulative effect of accounting change............................... -- -- -- (0.01)
--------- --------- --------- ---------
Net earnings attributable to Common Shares.................... $ 0.30 $ 0.46 $ 0.69 $ 0.59
========= ========= ========= =========
Diluted per share net earnings attributable to Common Shares:
Earnings before cumulative effect of accounting change............... $ 0.29 $ 0.44 $ 0.69 $ 0.60
Cumulative effect of accounting change............................... -- -- -- (0.01)
--------- --------- -------- ---------
Net earnings attributable to Common Shares.................... $ 0.29 $ 0.44 $ 0.69 $ 0.59
========= ========= ========= =========
Distributions per Common Share................................ $ 0.335 $ 0.3272 $ 1.005 $ 0.9727
========= ========= ========= =========
</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>
Nine Months Ended,
September 30,
--------------------------
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net earnings .................................................. $ 155,821 $ 130,228
Minority interest share in earnings ........................... 4,317 3,742
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ............................ 112,513 110,895
Gain on disposition of real estate ....................... (1,009) (26,358)
Straight-lined rents ..................................... (4,952) (7,434)
Amortization of deferred loan costs ...................... 3,028 2,997
Stock-based compensation ................................. 2,330 1,632
Income from unconsolidated entities ...................... (36,321) (11,067)
Foreign currency exchange losses, net .................... 19,697 6,589
Interest rate hedge expense .............................. -- 945
Cumulative effect of accounting change ................... -- 1,440
Increase in accounts receivable and other assets .............. (33,429) (20,676)
Increase in accounts payable, accrued expenses
and other liabilities ...................................... 64,674 39,364
Decrease in amount due to affiliate ........................... (221) (394)
----------- -----------
Net cash provided by operating activities ............... 286,448 231,903
----------- -----------
Investing activities:
Real estate investments ....................................... (470,711) (358,786)
Tenant improvements and lease commissions on
previously leased space .................................... (14,763) (16,196)
Recurring capital expenditures ................................ (17,966) (18,897)
Proceeds from dispositions of real estate ..................... 440,570 410,969
Investments in and advances to unconsolidated entities ........ (72,568) (167,984)
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 ................... (153,406) (101,932)
----------- -----------
Financing activities:
Proceeds from exercised warrants and options and dividend
reinvestment and share purchase plans....................... 17,560 2,142
Proceeds from secured financing transactions .................. -- 466,000
Proceeds from issuance of senior unsecured debt ............... -- 500,000
Debt issuance and other transaction costs incurred ............ (4,546) (58,169)
Distributions paid on Common Shares (including $11,132
paid to Meridian shareholders in 1999) ..................... (163,465) (156,040)
Distributions paid to minority interest holders ............... (5,422) (5,408)
Dividends paid on preferred shares (includes
$729 paid to Meridian shareholders in 1999)................. (42,675) (42,391)
Principal payments on senior unsecured debt ................... (30,000) (12,500)
Principal payments received on and retirements of
employee share purchase notes............................... 3,990 2,076
Proceeds from (payments on) derivative financial
instruments ................................................ 2,172 (26,995)
Payments to Meridian shareholders ............................. -- (67,581)
Proceeds from lines of credit and short-term borrowings ....... 737,836 1,436,645
Payments on lines of credit and short-term borrowings ......... (561,543) (1,803,045)
Payment on line of credit assumed in Meridian Merger .......... -- (328,400)
Regularly scheduled principal payments on mortgage notes ...... (5,229) (4,774)
Principal payments on mortgage notes at maturity and
prepayments ................................................ (7,203) (20,317)
----------- -----------
Net cash used in financing activities ................... (58,525) (118,757)
----------- -----------
Net increase in cash and cash equivalents ....................... 74,517 11,214
Cash and cash equivalents, beginning of period .................. 69,338 63,140
----------- -----------
Cash and cash equivalents, end of period ........................ $ 143,855 $ 74,354
=========== ===========
</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
September 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 customers' 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 ("CDFS business") and temperature-controlled distribution operations.
See Note 10.
Principles of Financial Presentation
The consolidated financial statements of ProLogis as of September 30,
2000 and for the three and nine months ended September 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 nine months ended September
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 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 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 reflected
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 or the periods indicated (in
thousands of U.S. dollars):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Gains (losses) from the remeasurement of
third party debt and remeasurement
and settlement of debt................... $ (2,661) $ 5,842 $ (21,669) $ (6,561)
Gains (losses) from the settlement of
foreign currency put option contracts.... 1,427 (13) 1,544 (13)
Mark to market losses on foreign currency
put option contracts (1)................. (477) (28) -- (28)
Other gains (losses), net.................... (218) 29 (253) 137
----------- ----------- ----------- ----------
$ (1,929) $ 5,830 $ (20,378) $ (6,465)
=========== =========== =========== ==========
<FN>
----------
(1) ProLogis entered into foreign currency put option contracts related to its
operations in Europe for 2000 and 1999. 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 period. Upon
settlement, the mark to market adjustments are reversed and the total
realized gain or loss is recognized.
</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, but does not
expect such effects to be significant.
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>
September 30, December 31,
2000 1999
------------ -----------
<S> <C> <C>
Operating facilities:
Improved land........................................ $ 635,519 (1) $ 736,605 (1)
Buildings and improvements........................... 3,527,116 (1) 3,871,396 (1)
----------- -----------
4,162,635 4,608,001
----------- -----------
Facilities under development (including cost of land).. 201,984 (2)(3) 186,169 (2)
Land held for development.............................. 152,876 (4) 163,696 (4)
Capitalized preacquisition costs....................... 50,196 (5) 17,085 (5)
----------- -----------
Total real estate............................ 4,567,691 4,974,951
Less accumulated depreciation.......................... 444,436 366,703
----------- -----------
$ 4,123,255 $ 4,608,248 (6)
=========== ===========
<FN>
----------
(1) As of September 30, 2000 and December 31, 1999, ProLogis had 1,234 and 1,328
operating facilities, respectively, consisting of 123,977,000 and
133,689,000 square feet, respectively.
(2) Facilities under development consisted of 49 buildings aggregating 9,842,000
square feet as of September 30, 2000 and 51 buildings aggregating 10,721,000
square feet as of December 31, 1999.
(3) In addition to the September 30, 2000 construction payable of $44.8 million,
ProLogis had unfunded commitments on its contracts for facilities under
construction totaling $216.8 million.
(4) Land held for future development consisted of 1,691 acres as of September
30, 2000 and 1,798 acres as of December 31, 1999.
(5) Capitalized preacquisition costs include $33.8 million and $6.3 million of
funds on deposit with title companies as of September 30, 2000 and December
31, 1999, respectively. Additionally, $82.8 million of ProLogis' cash and
cash equivalent balance as of September 30, 2000 was held in escrow. This
cash balance, representing the proceeds of certain dispositions, was
released from the escrow accounts by October 5, 2000.
(6) On January 7, 2000, ProLogis contributed 50.1% of the common stock of one
of its wholly owned European entities, 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 ProLogis European Properties Fund. ProLogis is
obligated to contribute the remaining 49.9% of the common stock to 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 seven 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
September 30, 2000, minimum lease payments on leases with lease periods greater
than one year are as follows (in thousands):
Remainder of 2000...................................... $ 113,377
2001................................................... 408,678
2002................................................... 335,576
2003................................................... 252,907
2004................................................... 181,935
2005 and thereafter.................................... 415,601
-----------
$ 1,708,074
===========
ProLogis' largest customer (based on rental income) accounted for 1.54%
of ProLogis' rental income (on an annualized basis) for the nine months ended
September 30, 2000. The annualized base rent for ProLogis' 20 largest customers
(based on rental income) accounted for11.5% of ProLogis' rental income (on an
annualized basis) for the nine months ended September 30, 2000.
8
<PAGE>
3. Unconsolidated Entities:
Investments in and advances to unconsolidated entities are as follows
(in thousands):
September 30, December 31,
2000 1999
------------ -----------
Insight (1)............................... $ 2,476 $ 2,442
ProLogis Logistics:
Investment (2).......................... 7,418 11,549
Notes receivable (3).................... 183,872 158,796
Accrued interest and other receivables.. 31,903 22,262
--------- ---------
223,193 192,607
Frigoscandia S.A.:
Investment (2).......................... (42,280) (17,396)
Notes receivable........................ 196,019 209,314
Accrued interest and other receivables.. 30,093 22,090
--------- ---------
183,832 214,008
Kingspark S.A.:
Investment (2).......................... 14,269 23,584
Notes receivable........................ 320,030 197,611
Mortgage notes receivable............... 101,338 140,668
Accrued interest and other receivables.. 22,228 19,908
--------- ---------
457,865 381,771
ProLogis California:
Investment (4).......................... 132,747 121,325
Other receivables....................... 2,855 3,235
--------- ---------
135,602 124,560
ProLogis European Properties Fund:
Investment (5).......................... 127,270 32,800
Other payables.......................... (11,816) (7,824)
---------- ---------
115,454 24,976
--------- ---------
ProLogis European Properties S.a.r.l (6).. 77,462 --
ProLogis North American Properties Fund I:
Investment (7).......................... 9,498 --
Other receivables....................... 116 --
--------- ---------
9,614 --
ProLogis Principal:
Investment (8).......................... 136 --
Note receivable......................... 13,250 --
Accrued interest and other receivables.. 187 --
--------- ---------
13,573 --
ProLogis Equipment Services (9)........... 508 --
GoProLogis (10)........................... 56,362 --
ProLogis PhatPipe(11)..................... 11,635 --
--------- ---------
Total........................... $1,287,576 $ 940,364
========== =========
----------
(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"), which 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 or loss of ProLogis California and for the
portion of the gain from the disposition of ProLogis' properties to ProLogis
California that does not qualify for income recognition due to ProLogis'
continuing ownership in ProLogis California.
(5) Investment represents ProLogis' equity investment in ProLogis European
Properties Fund, including acquisition costs, as adjusted for ProLogis'
share of the earnings or loss of ProLogis European Properties Fund, the
portion of the gain from the disposition of ProLogis' facilities to
ProLogis European Properties Fund that does not qualify for income
recognition due to ProLogis' continuing ownership in ProLogis European
Properties Fund and cumulative translation account adjustments, as
appropriate.
9
<PAGE>
(6) Investment represents ProLogis' investment in 49.9% of the common stock of
ProLogis European Properties S.a.r.l., a Luxembourg company, as adjusted
for ProLogis' share of the earnings or loss of ProLogis European Properties
S.a.r.l. Prior to January 7, 2000, ProLogis owned 100% of the common stock
of 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 ProLogis
European Properties Fund in exchange for an equity interest. ProLogis is
obligated to contribute the remaining 49.9% of the common stock of ProLogis
European Properties S.a.r.l. to 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 ProLogis' share of the earnings or loss of ProLogis North American
Properties Fund I and the portion of the gain from the disposition of
ProLogis' 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.
(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 ProLogis'
share of the earnings or loss of ProLogis Principal and the portion of the
gain from the disposition of ProLogis' facilities 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 ("ProLogis Development Services"), 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.
(10) Investment represents ProLogis' investment in GoProLogis Incorporated
("GoProLogis") which has invested $25.0 million in the non-cumulative
preferred stock of Vizional Technologies, Inc. (formerly GoWarehouse.com,
Inc.) ("Vizional Technologies"), a provider of integrated global logistics
network technology services. This investment was made on July 21, 2000. In
addition, investment includes $30.4 million of non-cumulative preferred
stock of Vizional Technologies received by ProLogis under a license
agreement for the non-exclusive use of the ProLogis Operating System(TM)
over a five-year period and $1.0 million of other costs associated with
this investment. ProLogis accounts for this investment on the cost method.
For both the three and nine months ended September 30, 2000, ProLogis
recognized fees under the license agreement of $1.2 million and ProLogis
has deferred $29.2 million of income related to this agreement as of
September 30, 2000.
(11) Investment represents ProLogis' investment in ProLogis Broadband (1)
Incorporated ("ProLogis PhatPipe") which has invested $3.5 million in the
non-cumulative preferred stock of PhatPipe, Inc. ("PhatPipe"), a real
estate technology company. This investment was made on September 20, 2000.
ProLogis has committed to fund a total of $8.0 million in ProLogis PhatPipe
over a three-year period pursuant to the terms of a stock purchase
agreement. In addition, investment includes $8.0 million of non-cumulative
preferred stock of PhatPipe received by ProLogis under a license agreement
for the non-exclusive use of the ProLogis Operating System(TM) over a
three-year period and $0.1 million of other costs associated with this
investment. ProLogis accounts for this investment on the cost method. For
both the three and nine months ended September 30, 2000, ProLogis
recognized fees under the license agreement of $74,000 and ProLogis has
deferred $7.9 million of income related to this agreement as of September
30, 2000.
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 September 30, 2000, ProLogis had
invested $19.9 million in the preferred stock of ProLogis Logistics. As of
September 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 as of September 30,
2000. 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 September 30, 2000, ProLogis had the following notes receivable
outstanding:
o $154.9 million unsecured note from ProLogis Logistics; interest at
8.0% per annum; due on April 2002;
o $24.0 million secured notes from CSI (originally MRI notes); interest
at 9.5% per annum; due March 2004; and
o $5.0 million unsecured notes from CSI (originally MRI notes);
interest at 10.4% per annum; due March 2004.
10
<PAGE>
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 $2.2 million and
$8.1 million for the three and nine months in 2000, respectively, and $3.1
million and $7.7 million for the three and nine 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, through its
acquisition of Frigoscandia Holding AB, which owns 100% of Frigoscandia AB. As
of September 30, 2000, Frigoscandia AB, which operates in ten European
countries, owned or operated 192.1 million cubic feet of temperature-controlled
distribution facilities. Of the total, 1.2 million cubic feet was under
development as of September 30, 2000. ProLogis had invested $22.6 million in the
preferred stock of Frigoscandia S.A. as of September 30, 2000. 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.
As of September 30, 2000, ProLogis had the following notes receivable
outstanding:
o 776.6 million Swedish krona (the currency equivalent of approximately
$79.8 million as of September 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 September 30, 2000) unsecured note from Frigoscandia Holding AB;
interest at 5.0% per annum; due on demand; and
o $115.5 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.
ProLogis accounts for its investment in Frigoscandia S.A. under the
equity method. ProLogis recognized losses (including interest income on the
notes receivable) from its investment in Frigoscandia S.A. of $5.7 million and
$10.8 million for the three and nine months in 2000, respectively, and income of
$5.6 million and a loss of $1.2 million for the three and nine months in 1999,
respectively.
Frigoscandia AB has a 360.0 million Deutsche mark, multi-currency
revolving credit agreement through a consortium of 11 European banks. As of
September 30, 2000, the currency equivalent of approximately $161.8 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 September 30, 2000, ProLogis Kingspark and
Kingspark S.A. had 639,000 square feet of operating facilities, 2.6 million
square feet of facilities under development with a total expected investment of
$266.5 million and 246,000 square feet of facilities that ProLogis Kingspark was
developing under development management agreements. Additionally, as of
September 30, 2000, ProLogis Kingspark and Kingspark S.A. owned 336 acres of
land and controlled 1,579 acres of land through purchase options, letters of
intent or contingent contracts. The land owned and controlled by ProLogis
Kingspark and Kingspark S.A. has the capacity for the future development of 96.4
million square feet of facilities. As of September 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.
As of September 30, 2000, ProLogis had the following amounts
outstanding:
o the currency equivalent of $193.5 million outstanding on a loan facility
that provides for unsecured borrowings of up to 200 million pounds
sterling (the currency equivalent of approximately $293.9 million as of
September 30, 2000); interest at 8.0% per annum; due on demand;
o $126.5 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
$61.8 million, as of September 30, 2000) mortgage note from ProLogis
Kingspark; secured by land parcels; interest at 8.0% per annum; due on
demand; and
11
<PAGE>
o 26.9 million pound sterling (the currency equivalent of approximately
$39.5 million as of September 30, 2000) of mortgage notes from
subsidiaries of Kingspark S.A.; secured by land parcels; interest at
7.0% per annum; due on demand.
ProLogis accounts for its investment in Kingspark S.A. under the equity
method. ProLogis recognized income (including interest income on the mortgages
and notes receivable and on the loan facility) from its investment in Kingspark
S.A. of $11.1 million and $20.4 million for the three and nine months in 2000,
respectively, and $12.9 million and $16.5 million for the three and nine months
in 1999, respectively. ProLogis' share of Kingspark S.A.'s income for the three
and nine months in 2000 includes a net gain from the disposition of facilities
developed by ProLogis Kingspark and Kingspark S.A. to ProLogis European
Properties Fund of $0.2 million and $1.0 million, respectively. The gain is net
of $0.1 million and $0.7 million for the three and nine months in 2000,
respectively, which did not qualify for income recognition by ProLogis due to
ProLogis' continuing ownership in ProLogis European Properties Fund.
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 $22.0
million as of September 30, 2000) and has been guaranteed by ProLogis. As of
September 30, 2000, no borrowings were outstanding on the line of credit.
However, as of September 30, 2000, ProLogis Kingspark had the currency
equivalent of approximately $14.7 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 September 30, 2000, ProLogis had an unfunded commitment on this guarantee
agreement in the currency equivalent of approximately $1.3 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"). As of September 30, 2000, ProLogis California owned
77 operating facilities aggregating 12.4 million square feet and had one 332,000
square foot facility under development. All of ProLogis California's facilities
are in the Los Angeles market. As of September 30, 2000, ProLogis and NYSCRF
each had an equity interest in ProLogis California of $167.6 million. ProLogis
received distributions aggregating $2.8 million and $8.2 million for the three
and nine months in 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 September 30,
2000 consisted of (in millions):
Equity interest........................................... $ 167.6
Distributions............................................. (18.0)
ProLogis' share of ProLogis California's earnings,
excluding fees earned................................... 9.9
--------
Subtotal............................................. 159.5
Adjustments to carrying value (1)......................... (28.3)
Other, including acquisition costs........................ 1.5
--------
132.7
Other receivables......................................... 2.9
--------
Total................................................ $ 135.6
========
----------
(1) Reflects the reduction in carrying value for the 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.
ProLogis accounts for its investment in ProLogis California under the
equity method. ProLogis recognized income (including management, leasing and
development fees) from its investment in ProLogis California of $3.5 million and
$9.6 million for the three and nine months in 2000, respectively, and $0.5
million for both the three and nine months in 1999. Fees earned by ProLogis were
$0.6 million and $1.9 million for the three and nine months in 2000,
respectively, and $0.1 million for both the three and nine months in 1999.
ProLogis European Properties Fund
ProLogis European Properties Fund was formed on September 16, 1999 and
began operations on September 23, 1999. As of September 30, 2000, ProLogis
European Properties Fund owned 94 facilities aggregating 12.5 million square
feet (including 60 facilities aggregating 6.6 million square feet owned by
ProLogis European Properties S.a.r.l.). Of these facilities, all but seven
facilities aggregating 0.8 million square feet were acquired from ProLogis,
ProLogis Kingspark or Kingspark S.A.
12
<PAGE>
On January 7, 2000, ProLogis contributed 50.1% of the common stock of
one of its wholly owned European entities, ProLogis European Properties
S.a.r.l., to ProLogis European Properties Fund in exchange for an equity
interest. 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 ProLogis European
Properties Fund in January 2001. As of September 30, 2000, ProLogis had a 37.5%
ownership interest in ProLogis European Properties Fund.
Third parties (19 institutional investors) have invested 262.6 million
euros (the currency equivalent of approximately $230.1 million as of September
30, 2000) in ProLogis European Properties Fund and have committed to fund an
additional 797.7 million euros (the currency equivalent of approximately $698.8
million as of September 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 ProLogis European Properties S.a.r.l.) of
182.9 million euros (the currency equivalent of approximately $160.3 million as
of September 30, 2000) to ProLogis European Properties Fund through 2002.
ProLogis European Properties Fund intends to acquire additional
stabilized operating facilities from ProLogis, ProLogis Kingspark, Kingspark
S.A. and unrelated parties, including facilities to be developed by ProLogis,
ProLogis Kingspark and Kingspark S.A. in the future. Stabilized facilities have
been defined for purposes of 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. ProLogis European
Properties Fund has the right to refuse to acquire facilities that ProLogis,
ProLogis Kingspark and Kingspark S.A. have developed if they do not meet the
established criteria. ProLogis has an agreement to manage ProLogis European
Properties Fund for a fee pursuant to a 20-year management agreement.
ProLogis' total investment in ProLogis European Properties Fund as of
September 30, 2000 consisted of (in millions of U.S. dollars):
Equity interest........................................ $ 141.1
Distributions.......................................... (4.0)
ProLogis' share of ProLogis European Properties
Fund's earnings, excluding fees earned.............. 5.5
-------
Subtotal.......................................... 142.6
Adjustments to carrying value (1)...................... (12.8)
Other, net............................................. (2.5)
-------
127.3
Other payables......................................... (11.8)
-------
Total............................................. $ 115.5
=======
---------
(1) Reflects the reduction in carrying value for the amount of net gain on the
disposition of facilities to ProLogis European Properties Fund that does
not qualify for income recognition due to ProLogis' continuing ownership in
ProLogis European Properties Fund.
ProLogis accounts for its investment in ProLogis European Properties
Fund under the equity method and recognizes its share of the earnings or loss of
ProLogis European Properties Fund based upon its average ownership interest
during the applicable period. ProLogis recognized income (including management
fees) from its investment in ProLogis European Properties Fund of $4.6 million
and $8.9 million for the three and nine months in 2000, respectively, and
$25,000 for both the three and nine months in 1999. Fees earned by ProLogis were
$1.6 million and $3.9 million for the three and nine months in 2000,
respectively.
ProLogis European Properties S.a.r.l.
ProLogis owns 49.9% of the common stock of ProLogis European Properties
S.a.r.l. and recognizes 49.9% of the income of this entity under the equity
method. ProLogis European Properties Fund owns the remaining 50.1% of the common
stock of ProLogis European Properties S.a.r.l. and recognizes 50.1% of the
income of this entity. ProLogis recognized income of $2.8 million and $7.7
million under the equity method for the three and nine months in 2000,
respectively, from its investment in the 49.9% of the common stock of ProLogis
European Properties S.a.r.l.
As of September 30, 2000, 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, ProLogis European Properties S.a.r.l. had the
currency equivalent of approximately $130.4 million of debt outstanding as of
September 30, 2000 (including $18.3 million of unsecured debt that is guaranteed
by ProLogis).
13
<PAGE>
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, ProLogis
Development Services and the State Teachers Retirement Board of Ohio. ProLogis
North American Properties Fund I owned 33 operating facilities aggregating 8.0
million square feet as of September 30, 2000. ProLogis has a 20% interest in
ProLogis North American Properties Fund I.
ProLogis North American Properties Fund I intends to acquire additional
stabilized operating facilities of 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 facilities of ProLogis 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 September 30, 2000 consisted of (in millions):
Equity interest............................. $ 18.6
Distributions............................... (0.4)
ProLogis' share of ProLogis North American
Properties Fund I's earnings, excluding
fees earned............................. 0.2
Adjustments to carrying value (1)........... (9.9)
Other, net.................................. 1.0
----------
9.5
Other receivables........................... 0.1
----------
Total.............................. $ 9.6
==========
----------
(1) Reflects the reduction in carrying value for the 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.
ProLogis accounts for its investment in ProLogis North American
Properties Fund I under the equity method. ProLogis recognized income (including
management fees) from its investment in ProLogis North American Properties Fund
I of $1.2 million for both the three and nine months in 2000. Fees earned by
ProLogis were $0.2 million for both periods.
ProLogis North American Properties Fund I has two short-term borrowing
arrangements totaling $232.6 million outstanding as of September 30, 2000. Of
the total, $102.0 million of borrowings are due November 15, 2000 with a
provision to extend the maturity to December 29, 2000. ProLogis has guaranteed
$92.0 million of these borrowings. ProLogis North American Properties Fund I has
a permanent loan commitment for secured financing which will be used to repay
these short-term borrowings. The remaining $132.6 million of short-term
borrowings have been guaranteed by ProLogis and are due on December 29, 2000.
The agreement provides for an extension of the maturity date until March 29,
2001. At such time, ProLogis North American Properties Fund I expects to repay
these borrowings with the proceeds from a secured financing transaction.
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 owned three operating facilities acquired from ProLogis
aggregating 440,000 square feet as of September 30, 2000. ProLogis has a 20%
interest in ProLogis Principal. As of September 30, 2000, ProLogis had a $13.3
million note receivable from ProLogis Principal that earns interest at 8.25% per
annum and is due December 2000. ProLogis had an agreement to manage ProLogis
Principal's facilities for a fee pursuant to a four-year agreement.
ProLogis' total investment in ProLogis Principal as of September 30,
2000 consisted of (in millions):
Equity interest............................. $ 0.6
Adjustments to carrying value (1)........... (0.5)
---------
0.1
Other receivables........................... 13.5
----------
Total.............................. $ 13.6
=========
----------
(1) Reflects the reduction in carrying value for 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.
14
<PAGE>
ProLogis accounts for its investment in ProLogis Principal under the
equity method. ProLogis recognized income (including interest income on the note
receivable and management fees) from its investment in ProLogis Principal of
$0.3 million for both the three and nine months in 2000. Fees earned by ProLogis
were $24,000 for both periods.
Summarized Financial Information
Summarized financial information for certain of ProLogis'
unconsolidated entities as of and for the nine months ended September 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.......... $ 372.1 $ 478.6 $ 551.7 $ 593.5 $ 757.8(5) $ 381.2 $ 16.5
Total liabilities (6). $ 364.1 $ 527.5 $ 534.7 $ 274.5 $ 359.4 $ 289.3 $ 13.6
Minority interest..... $ -- $ 0.7 $ -- $ -- $ 77.5 $ -- $ --
Equity................ $ 8.0 $ (49.6) $ 17.0 $ 319.0 $ 320.9 $ 91.9 $ 2.9
Revenues.............. $ 249.0 $ 284.3 $ 21.9 (7) $ 47.1 $ 47.9 $ 4.5 $ 0.5
Adjusted EBITDA (8)... $ 24.4 $ 23.1 $ 18.1 $ 38.5 $ 34.3 $ 3.7 $ 0.4
Net earnings (loss)
(9) (10)............ $ (3.4) $ (18.9)(11)$ 3.1(12) $ 14.4 $ 18.4(13) $ 0.9 $ -- (14)
<FN>
----------
(1) ProLogis had a 95% economic interest in each entity as of September 30,
2000.
(2) ProLogis had a 50% equity interest as of September 30, 2000.
(3) ProLogis had a 37.5% equity interest as of September 30, 2000. ProLogis
European Properties S.a.r.l. is consolidated with ProLogis European
Properties Fund. Minority interest represents ProLogis' 49.9% investment
in the common stock of ProLogis European Properties S.a.r.l.
(4) ProLogis had a 20% equity interest in each entity as of September 30,
2000. These entities were formed on June 30, 2000.
(5) Includes amounts due from ProLogis of $11.8 million.
(6) Includes amounts due to ProLogis of $215.8 million from ProLogis
Logistics, $226.1 million from Frigoscandia S.A., $443.6 million from
Kingspark S.A., $2.9 million from ProLogis California, $0.1 million from
ProLogis North American Properties Fund I and $13.4 million from
ProLogis Principal. Also includes loans from third parties (including
accrued interest) of $91.4 million for ProLogis Logistics, $183.0
million for Frigoscandia S.A., $262.9 million for ProLogis California,
$310.3 million for ProLogis European Properties Fund and $232.6 million
for ProLogis North American Properties Fund I.
(7) Includes $13.0 million of net gains related to the disposition of
facilities, including $1.0 million of net gains from the disposition of
facilities to ProLogis European Properties Fund.
(8) Adjusted EBITDA represents earnings from operations before interest
expense, interest income, current and deferred income taxes,
depreciation, amortization, gains and losses on disposition of non-CDFS
business segment assets (see Note 10); foreign currency exchange gains
and losses resulting from the remeasurement (at current foreign currency
exchange rates) of third party and intercompany debt and mark to market
adjustments related to derivative financial instruments utilized to
manage foreign currency risks.
(9) 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 from unconsolidated entities".
(10) The net earnings (loss) of each entity includes interest expense on
amounts due to ProLogis, as applicable. See footnote (6).
(11) Includes net foreign currency exchange gains of $1.2 million.
(12) Includes net foreign currency exchange gains of $1.0 million.
(13) Includes net foreign currency exchange gains of $6.2 million.
(14) Net earnings for the nine months ended September 30, 2000 was $18,000.
</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 $475.0 million
unsecured revolving line of credit. The credit agreement allows ProLogis to
increase the available commitment by $25.0 million to a total of $500.0 million.
ProLogis Logistics and ProLogis Development Services 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'
15
<PAGE>
current senior unsecured debt ratings. ProLogis' borrowings are primarily at the
30-day LIBOR rate plus 0.75% (7.3675% as of September 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 September 30, 2000, ProLogis had no 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 $55.0 million unsecured discretionary line
of credit with Bank of America that matures on June 6, 2001. Of the total,
ProLogis can borrow the currency equivalent of $30.0 million in certain foreign
currencies with U.S. dollar borrowings limited to $25.0 million. 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 discretionary line of credit as of September 30,
2000.
ProLogis has a 325.0 million euro, multi-currency, unsecured revolving
line of credit (the currency equivalent of approximately $284.7 million as of
September 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 September 30, 2000 were at a weighted average
interest rate of 6.49%). The credit agreement provides for an unused commitment
fee of 0.375% per annum. As of September 30, 2000, there were 321.6 million
euros (the currency equivalent of approximately $275.0 million) of borrowings
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 September 30, 2000 (in thousands):
<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:
Tampa West Distribution Center #20... 9.125% 11/30/00 (3) $ 7 $ --
Rio Grande Industrial Center #1...... 8.875 09/01/01 (2) 2,733 2,544
Titusville Industrial Center #1...... 10.000 09/01/01 (2) 4,361 4,181
Prudential Insurance (4)............. 8.590 04/01/03 (2) 25,546 23,505
Sullivan 75 Distribution Center #1... 9.960 04/01/04 (2) 1,774 1,663
Charter American Mortgage (4)........ 8.750 08/01/04 (2) 6,992 5,819
West One Business Center #3.......... 9.000 09/01/04 (2) 4,256 3,847
Raines Distribution Center........... 9.500 01/01/05 (2) 4,256 3,652
Prudential Insurance (4)(5).......... 6.850 03/01/05 (6) 52,677 48,850
Consulate Distribution Center #300
(5).............................. 6.970 02/01/06 (2) 3,681 3,167
Plano Distribution Center #7 (5)..... 7.020 04/15/06 (2) 3,727 3,200
Connecticut General Life Insurance
(4).............................. 7.080 03/01/07 (2) 147,574 134,431
Vista Del Sol Industrial Center #1
& 2.............................. 9.680 08/01/07 (3) 3,211 --
State Farm Insurance (4)(5).......... 7.100 11/01/08 (2) 15,356 13,698
Placid Street Distribution Center #1
(5).............................. 7.180 12/01/09 (2) 7,695 5,142
Earth City Industrial Center #4...... 8.500 07/01/10 (3) 1,841 --
GMAC Commercial Mortgage (4)......... 7.750 10/01/10 (3) 7615 --
Executive Park Distribution Center
#3............................... 8.190 03/01/11 (3) 1,009 --
Cameron Business Center #1 (5)....... 7.230 07/01/11 (2) 6,078 4,028
Platte Valley Industrial Center #9... 8.100 04/01/17 (3) 3,181 --
Platte Valley Industrial Center #4... 10.100 11/01/21 (3) 2,015 --
Morgan Guaranty Trust (4)............ 7.584 04/01/24 (7) 200,000 127,187
---------
$ 505,585
=========
Assessment bonds:
City of Fremont...................... 7.000% 03/01/11 (3) $ 9,068 --
Various (8).......................... (8) (8) (3) 1,281 --
---------
$ 10,349
=========
Securitized debt:
Tranche A............................ 7.740% 02/01/04 (2) $ 16,182 $ 13,021
Tranche B............................ 9.940 02/01/04 (2) 7,842 7,215
---------
$ 24,024
=========
<FN>
---------
(1) The weighted average interest rates for mortgage notes, assessment bonds
and securitized debt were 7.49%, 7.13% and 8.46%, respectively as of
September 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.
16
<PAGE>
(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 $930.4 million, $227.8
million and $61.1 million, respectively, as of September 30, 2000.
Interest Expense
For the nine months ended September 30, 2000 and 1999, interest expense
was $128.5 million and $126.5 million, respectively, which is net of capitalized
interest of $12.8 million and $11.0 million, respectively. Amortization of
deferred loan costs included in interest expense was $3.0 million and $3.0
million for the nine months ended September 30, 2000 and 1999, respectively. The
total interest paid in cash on all outstanding debt was $123.3 million and
$112.7 million during 2000 and 1999, respectively.
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 1.1 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 nine
months ended September 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 nine months ended September 30, 1999 (in
thousands, except per share amounts):
<TABLE>
<CAPTION>
Nine Months
Ended
September 30, 1999
------------------
<S> <C>
Rental income........................................... $ 397,429
Earnings from operations................................ $ 119,728
Earnings attributable to Common Shares before
cumulative effect of accounting change............. $ 100,299
Net earnings attributable to Common Shares.............. $ 98,859
Weighted average Common Shares outstanding:
Basic.............................................. 161,500
Diluted............................................ 166,645
Basic per share net earnings attributable to Common
Shares before cumulative effect of accounting
change............................................. $ 0.62
Cumulative effect of accounting change.................. (0.01)
-----------
Basic per share net earnings attributable to Common
Shares............................................. $ 0.61
===========
Diluted per share net earnings attributable to Common
Shares before cumulative effect of accounting
change............................................. $ 0.60
Cumulative effect of accounting change.................. (0.01)
-----------
Diluted per share net earnings attributable to Common
Shares............................................. $ 0.59
===========
</TABLE>
17
<PAGE>
6. Distributions and Dividends:
Common Distributions
On February 23, 2000, May 25, 2000 and August 24, 2000, ProLogis paid a
quarterly distribution of $0.335 per Common Share to shareholders of record on
February 9, 2000, May 11, 2000 and August 10, 2000, respectively. The
distribution level for 2000 was set by ProLogis' Board of Trustees in December
1999 at $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, April 28, 2000 and July 31, 2000, ProLogis paid
quarterly dividends of $0.5469 per cumulative redeemable Series E preferred
share. On March 31, 2000, June 30, 2000 and September 29, 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 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 nine months of 2000, ProLogis generated net proceeds
of $17.6 million from the issuance of 934,000 Common Shares under its 1999
Dividend Reinvestment and Share Purchase Plan and issued 151,000 Common Shares
upon the exercise of stock options. In addition, ProLogis issued: (i) 602,000
Common Shares in connection with the acquisition of ProLogis Kingspark and
Kingspark S.A. (see Note 3); (ii) 910,000 Common Shares upon conversion of
710,000 cumulative redeemable convertible Series B preferred shares; and (iii)
238,000 Common Shares to the holders of 216,000 convertible limited partnership
units in MDN/JSC II Limited Partnership.
In addition, ProLogis granted the following stock options during 2000:
(i) 35,000 stock options issued to its Outside Trustees under its Share Option
Plan for Outside Trustees, each with an exercise price of $20.75 and (ii)
1,209,000 stock options issued to employees under its Amended and Restated 1997
Long-Term Incentive Plan, each with an exercise price of $24.25. ProLogis also
sold 359,000 stock options to certain of its unconsolidated entities during
2000, each with an exercise price of $24.25.
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 periods indicated (in thousands, except per share amounts)
is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings attributable to Common Shares..... $ 48,619 $ 74,021 $ 113,146 $ 87,837
Add: Minority interest share in earnings...... 1,228 1,139 -- --
Series B preferred share dividends....... -- 3,102 -- --
--------- --------- --------- ---------
Adjusted net earnings attributable to Common
Shares....................................... $ 49,847 $ 78,262 $ 113,146 $ 87,837
========= ========= ========= =========
Weighted average Common Shares outstanding -
Basic........................................ 164,317 161,446 163,206 149,201
Incremental weighted average effect of common
stock equivalents and contingently issuable
shares....................................... 1,097 153 1,396 162
Weighted average convertible limited
partnership units............................ 5,164 5,587 -- --
Weighted average convertible Series B
preferred shares............................. -- 9,143 -- --
--------- --------- --------- ---------
Adjusted weighted average Common Shares
outstanding - Diluted........................ 170,578 176,329 164,602 149,363
========= ========= ========= =========
Per share net earnings attributable to Common
Shares:
Basic..................................... $ 0.30 $ 0.46 $ 0.69 $ 0.59
========= ========= ========= =========
Diluted................................... $ 0.29 $ 0.44 $ 0.69 $ 0.59
========= ========= ========= =========
</TABLE>
18
<PAGE>
For the nine months ended September 30, 1999, basic and diluted per
share net earnings attributable to Common Shares before the cumulative effect of
accounting change were $0.60. For the periods indicated, the following weighted
average convertible securities were not included in the calculation of diluted
per share net earnings attributable to Common Shares as the effect, on an
as-converted basis, was antidilutive (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -----------------
2000 1999 2000 1999
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Series B preferred shares................... 8,133 -- 8,546 9,271
===== ===== ===== =====
Limited partnership units................... -- -- 5,435 5,419
===== ===== ===== =====
</TABLE>
9. Supplemental Cash Flow Information:
Non-cash investing and financing activities for the nine months ended
September 30, 2000 and 1999 are as follows:
o In connection with ProLogis' contribution of 50.1% of the common stock of
ProLogis European Properties S.a.r.l. to ProLogis European Properties
Fund discussed in Note 3, ProLogis received an equity interest in
ProLogis European Properties Fund of approximately $78.0 million.
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.
o ProLogis received $5.2 million, $13.8 million, $18.6 million and $0.6
million of the proceeds from its disposition of facilities to 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 $13.2 million of the proceeds from its disposition of facilities
to ProLogis Principal in the form of a note receivable during 2000.
ProLogis received $148.2 million and $16.7 million of the proceeds from
its disposition of facilities to ProLogis California and ProLogis
European Properties Fund, respectively, in the form of an equity interest
in these entities during 1999.
o ProLogis received $2.1 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 602,000 Common Shares in 2000.
o Series B preferred shares aggregating $17.7 million and $11.3 million
were converted into Common Shares in 2000 and 1999, respectively.
o A net foreign currency translation loss of $49.6 million and a net
foreign currency translation gain of $1.3 million were recognized in
2000 and 1999, respectively.
o Limited partnership units aggregating $14.0 million and $0.2 million were
converted into Common Shares in 2000 and 1999, respectively.
o In connection with the Meridian Merger in 1999 (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, (portions of which are
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 portions of which are owned through ProLogis
European Properties Fund and 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;
19
<PAGE>
o Corporate distribution facilities services business represents the sale
of distribution facilities developed by ProLogis, ProLogis Kingspark or
Kingspark, S.A. (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, ProLogis Kingspark, 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):
Nine Months Ended
September 30,
-------------------------
2000 1999
---------- ----------
Income:
Property operations:
United States (1).................... $ 359,133 $ 339,285
Mexico............................... 11,217 6,398
Europe (2)........................... 19,447 6,305
---------- ----------
Total property operations
segment........................ 389,797 351,988
---------- ----------
Corporate distribution facilities
services business:
United States (3).................... $ 56,630 $ 23,579
Mexico............................... 1,543 --
Europe (4)(5)........................ 27,952 27,043
---------- ----------
Total corporate distribution
facilities services business
segment........................ 86,125 50,622
---------- ----------
Temperature-controlled distribution
operations:
North America (6).................... 8,067 7,685
Europe (7)........................... (10,806) (1,239)
---------- ----------
Total temperature-controlled
distribution operations
segment........................ (2,739) 6,446
---------- ----------
Reconciling items:
Interest income...................... 5,554 4,006
Income from unconsolidated entities.. 1,279 54
---------- ----------
Total reconciling items......... 6,833 4,060
---------- ----------
Total income.................... $ 480,016 $ 413,116
========== ==========
Net operating income:
Property operations:
United States (1).................... $ 337,742 $ 314,747
Mexico............................... 10,922 5,876
Europe (2)........................... 20,516 5,309
---------- ----------
Total property operations
segment........................ 369,180 325,932
---------- ----------
Corporate distribution facilities
services business:
United States (3).................... 56,630 23,579
Mexico............................... 1,543 --
Europe (4)(5)........................ 27,952 27,043
---------- ----------
Total corporate distribution
facilities services business
segment........................ 86,125 50,622
---------- ----------
Temperature-controlled distribution
operations:
North America (6).................... 8,067 7,685
Europe (7)........................... (10,806) (1,239)
---------- ----------
Total temperature-controlled
distribution operations
segment....................... (2,739) 6,446
---------- ----------
Reconciling items:
Interest income...................... 5,554 4,006
Income from unconsolidated entities.. 1,279 54
General and administrative expense... (32,174) (27,519)
Depreciation and amortization........ (112,513) (110,895)
Interest expense..................... (128,542) (126,478)
Interest rate hedge expense.......... -- (945)
Other expenses....................... (3,838) (4,213)
---------- ----------
Total reconciling items......... (270,234) (265,990)
---------- ----------
Earnings from operations........ $ 182,332 $ 117,010
========== ==========
20
<PAGE>
September 30, December 31,
2000 1999
------------ -----------
Assets:
Property operations:
United States (8).................... $3,837,277 $4,017,702
Mexico............................... 117,988 178,253
Europe (8)........................... 253,872 387,362
---------- ----------
Total property operations segment 4,209,137 4,583,317
---------- ----------
Corporate distribution facilities
services business:
United States........................ 275,580 210,088
Mexico............................... 16,069 13,249
Europe (8)........................... 534,357 432,455
---------- ----------
Total corporate distribution
facilities services business
segment........................ 826,006 655,792
---------- ----------
Temperature controlled distribution
operations:
North America (8).................... 223,193 192,607
Europe (8)........................... 183,832 214,008
---------- ----------
Total temperature controlled
distribution operations
segment........................ 407,025 406,615
---------- ----------
Reconciling items:
Investments in unconsolidated entities 70,981 2,442
Cash................................. 143,855 69,338
Accounts and notes receivable........ 36,716 31,084
Other assets......................... 88,980 99,452
---------- ----------
Total reconciling items........ 340,532 202,316
---------- ----------
Total assets................... $5,782,700 $5,848,040
========== ==========
----------
(1) In addition to the operations of ProLogis that are reported on a
consolidated basis, includes amounts recognized under the equity method
related to ProLogis' investment in ProLogis California, ProLogis North
American Properties Fund I and ProLogis Principal in 2000 and ProLogis
California in 1999. See Note 3 for summarized financial information of
ProLogis California, ProLogis North American Properties Fund I and ProLogis
Principal.
(2) In addition to the operations of ProLogis that are reported on a
consolidated basis, includes amounts recognized under the equity method
related to ProLogis' investment in ProLogis European Properties Fund
(including net foreign currency exchange gains of $1.9 million) and
ProLogis European Properties S.a.r.l. (including net foreign currency
exchange gains of $2.0 million) in 2000 and ProLogis European Properties
Fund in 1999. In 1999, also includes ProLogis' investment in Garonor
Holdings (including a $13.0 million net foreign currency exchange loss).
See Note 3 for summarized financial information of ProLogis European
Properties Fund and Note 1 for a discussion of Garonor Holdings.
(3) In 2000, includes $2.9 million, $23.8 million and $1.5 million of net gains
recognized by ProLogis related to the disposition of facilities to ProLogis
California, ProLogis North American Properties Fund I 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 $1.0 million and
$4.6 million of net foreign currency exchange gains in 2000 and in 1999,
respectively). See Note 3 for summarized financial information of Kingspark
S.A.
(5) Includes $5.9 million and $10.4 million of net gains recognized by ProLogis
related to the disposition of facilities to ProLogis European Properties
Fund in 2000 and 1999, respectively. In addition, includes $1.0 million and
$2.2 million of net gains recognized under the equity method related to
ProLogis Kingpark and Kingspark S.A.'s disposition of facilities to
ProLogis European Properties Fund in 2000 and 1999, respectively. 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 $1.1 million and $2.1 million of
net foreign currency exchange gains in 2000 and 1999, respectively). 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 Note 3 for summarized financial information of the
unconsolidated entities as of and for the nine months ended September 30,
2000.
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 September 30, 2000, and the related
consolidated statements of earnings and comprehensive income for the three and
nine months ended September 30, 2000 and 1999, and the consolidated statements
of cash flows for the nine months ended September 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
November 6, 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
Nine Months Ended September 30, 2000 and 1999
Net earnings attributable to Common Shares was $113.1 million for the
nine months ended September 30, 2000 as compared to $87.8 million for the same
period in 1999, an increase of $25.3 million. The increase in net earnings
attributable to Common Shares in 2000 over 1999 was primarily the result of:
o an increase of $32.8 million in other real estate income, primarily
profits earned in the CDFS business segment from dispositions of
facilities developed; and
o an increase of $34.4 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 ProLogis European Properties Fund, ProLogis European Properties
S.a.r.l., ProLogis California, ProLogis North American Properties Fund I
and ProLogis Principal, a portion of each of these entities' operations
was recognized on a consolidated basis in 1999 (see "--Property
Operations") and (iii) a net decrease in the earnings of ProLogis'
temperature-controlled distribution operations businesses (see
"--Temperature-Controlled Distribution Operations").
These 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 and
amortization) increased by $1.9 million in 2000 over 1999 (see "--Property
Operations"). Weighted average Common Shares outstanding increased in 2000 as
compared to 1999, primarily attributable to the issuance of Common 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 expense, general and administrative expense,
income taxes and foreign currency exchange gains and losses (with respect to
ProLogis Garonor, ProLogis European Properties Fund and ProLogis European
Properties S.a.r.l.). ProLogis' net operating income from the property
operations segment was as follows for the nine months ended September 30, 2000
and 1999 (in thousands):
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Nine Months Ended
September 30,
--------------------
2000 1999
-------- --------
Facilities directly owned by ProLogis and its
consolidated entities:
Rental income.......................................... $362,024 $363,915
Property operating expenses............................ 20,617 26,056
-------- --------
Net operating income........................... 341,407 337,859
-------- --------
Income from ProLogis California.......................... 9,597 469
Income from ProLogis European Properties Fund............ 8,949 26
Income from ProLogis European Properties S.a.r.l......... 7,686 --
Income from ProLogis North American Properties Fund I.... 1,233 --
Income from ProLogis Principal........................... 308 --
Loss from ProLogis Garonor............................... -- (12,422)
-------- --------
Total property operations segment.............. $369,180 $325,932
======== ========
Rental income decreased by $1.9 million in 2000 as compared to 1999.
This decrease is comprised of the following components:
o facilities acquired during 2000 contributed $0.3 million of additional
rental income in 2000; o facilities completed during 2000 contributed
$6.8 million of additional rental income in 2000;
o facilities acquired during 1999 that are still in operation as of
September 30, 2000 contributed $21.0 million of additional rental income
in 2000 (primarily the facilities acquired in the Meridian Merger; see
"--Meridian Merger");
o facilities completed during 1999 that are still in operation as of
September 30, 2000 contributed $6.5 million of additional rental income
2000;
o facilities owned and operated as of January 1, 1999 that are still in
operation as of September 30, 2000 contributed $11.0 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 $47.5 million (primarily
facilities contributed to ProLogis California, ProLogis European
Properties Fund, ProLogis North American Properties Fund I and ProLogis
Principal).
Rental expenses, net of recoveries from tenants, decreased by $5.4
million in 2000 from 1999 primarily due to increases in expense recoveries from
tenants. Rental expenses, before recoveries from tenants were 24.5% of rental
income for 2000 and 23.3% of rental income for 1999. Total rental expense
recoveries were 76.8% and 69.3% of total rental expenses in 2000 and 1999,
respectively.
Under the equity method, ProLogis 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; (iii) ProLogis European
Properties Fund beginning September 23, 1999 which includes ProLogis European
Properties S.a.r.l. since January 7, 2000; and (iv) ProLogis North American
Properties Fund I and ProLogis Principal since 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 ProLogis European Properties Fund and
ProLogis European Properties S.a.r.l. includes net foreign currency exchange
gains of $1.9 million and $2.0 million, respectively, in 2000. ProLogis' share
of ProLogis Garonor's loss in 1999 includes a net foreign currency exchange loss
of $13.0 million.
The facilities that ProLogis develops are not always pre-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 for ProLogis 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 95.3% and a leased rate of 96.2%
for stabilized facilities owned by ProLogis and its consolidated and
unconsolidated entities as of September 30, 2000. The average increase in rental
rates for new and renewed leases on previously leased space (26.7 million square
feet) for all facilities including those owned by ProLogis' consolidated and
unconsolidated entities during nine months in 2000 was 16.2%.
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Corporate Distribution Facilities Services Business
Income from ProLogis' CDFS business segment consists primarily of: (i)
the profits from the disposition of land parcels and facilities that were
developed by ProLogis or its consolidated subsidiaries and sold to customers or
to 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 and
Kingspark S.A. ProLogis Kingspark and Kingspark S.A. engage 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 and Kingspark S.A. which includes interest
income and interest expense (net of capitalized amounts), general and
administrative expense, 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):
Nine Months Ended
September 30,
------------------
2000 1999
-------- --------
Income from ProLogis Kingspark and Kingspark S.A........ $ 20,411 $ 16,494
Net gains on disposition of land parcels and
facilities developed for sale by ProLogis............. 60,615 33,058
Development fees earned by ProLogis..................... 2,842 919
Other, net.............................................. 2,257 151
-------- --------
$ 86,125 $ 50,622
======== ========
In the first nine months of 2000, ProLogis and its consolidated
entities disposed of land parcels and 9.5 million square feet of facilities in
the CDFS business segment with aggregate net sales proceeds of $429.6 million.
In the same period in 1999, ProLogis disposed of land parcels and 3.4 million
square feet of facilities with aggregate net sales proceeds of $199.2 million.
ProLogis Kingspark's and Kingspark S.A.'s dispositions in the first
nine months of 2000 generated net sales proceeds of $91.8 million on the
disposition of land parcels and 0.7 million square feet of facilities developed
for sale. ProLogis Kingspark and Kingspark S.A.'s dispositions in the first nine
months of 1999 generated net sales proceeds of $96.8 million on the disposition
of land parcels and 0.9 million square feet of facilities developed for sale.
ProLogis Kingspark also earned fees for developing facilities under development
management agreements ($5.2 million in 2000 and $4.0 million for 1999).
ProLogis' share of the net earnings of ProLogis Kingspark and Kingspark S.A. for
the nine months ended September 30, 2000 includes $2.6 million of current and
deferred income tax expense and $1.0 million of net foreign currency exchange
gains. ProLogis' share of ProLogis Kingspark's and Kingspark S.A.'s net earnings
for the nine months ended September 30, 1999 includes $7.1 million of current
and deferred income tax expense and $4.6 million of net foreign currency
exchange gains.
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 income (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):
Nine Months Ended
September 30,
-------------------
2000 1999
-------- --------
Income from ProLogis Logistics....................... $ 8,067 $ 7,685
Loss from Frigoscandia S. A. ........................ (10,806) (1,239)
-------- --------
Total temperature-controlled distribution
operations segment............................ $ (2,739) $ 6,446
======== ========
Net income (loss) of ProLogis Logistics and Frigoscandia S. A. includes
interest income and interest expense, depreciation and amortization expense,
general and administrative expense, income taxes and foreign currency exchange
gains and losses (with respect to Frigoscandia). ProLogis recognizes 95% of the
net earnings of each entity.
The increase in ProLogis' share of ProLogis Logistics' net earnings
from 1999 to 2000 of $0.4 million is attributable primarily to the increase in
cubic feet capacity in operation in 2000 over the same period in 1999 and to
income earned from retail dedicated services.
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<PAGE>
ProLogis' share of Frigoscandia S.A.'s net losses includes net foreign
currency exchange gains of $1.1 million and $2.1 million in 2000 and 1999,
respectively. Excluding foreign currency exchange gains, ProLogis recognized
$8.6 million less income under the equity method in 2000 than was recognized in
1999 from its investment in Frigoscandia S.A. The decrease in 2000 is due to:
(i) lower occupancy levels, principally the result of the reduction in
inventories of beef and pork products by the British, German and French
governments; (ii) a weak European vegetable harvest due to high rainfall levels
during the summer months resulting in reduced inventories of frozen vegetables;
and (iii) increases in fuel prices and expenses incurred related to trucker
strikes in August and September.
ProLogis believes that the factors that contributed to the decline in
operating performance of Frigoscandia S. A. are temporary and can be partially
mitigated in the short-term by reductions in general and administrative costs
and other operating costs. However, there is no assurance that these factors are
temporary or that some of all of these factors will not continue past 2001.
Income from Unconsolidated Entities
In addition to the amounts that were recognized under the equity method
that are discussed under "- Property Operations", "--Corporate Distribution
Facilities Services Business" and "--Temperature-Controlled Distribution
Operations", ProLogis recognized license fee income from it's non-exclusive
license agreements with Vizional Technologies and PhatPipe of $1.2 million and
$74,000, respectively, for the nine months ended September 30, 2000. See Note 3
to ProLogis' Consolidated Financial Statements in Item 1.
Under these license agreements, Vizional Technologies and PhatPipe have
the non-exclusive use of the ProLogis Operating System(TM) until July 2005 and
September 2003, respectively. As of September 30, 2000, ProLogis deferred $29.2
million under the Vizional Technologies agreement and $7.9 million under the
PhatPipe agreement. These amounts will be recognized in income over the
remaining terms of the respective agreements. ProLogis also recognized its share
of the income of Insight of $34,000 and $54,000 for the nine months ended
September 30, 2000 and 1999, respectively.
Other Income and Expense Items
Interest Income
Interest income was $5.6 million in 2000, an increase of $1.6 million
over the interest income recognized in 1999 of $4.0 million. The increase is
primarily the result of higher average cash balances.
General and Administrative Expense
General and administrative expense was $32.2 million in 2000 and $27.5
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 $1.6 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
and third quarters of 2000 decreased by a total $10.5 million from the same
period in 1999. The decrease during the second and third quarters of 2000 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 facilities to third parties and entities in which
ProLogis has an ownership interest. See "--Property Operations".
Interest Expense
Interest expense was $128.5 million and $126.5 million in 2000 and
1999, respectively. ProLogis' average debt balance outstanding was higher during
the nine months ended September 30, 2000 than for the same period in 1999
resulting in increased interest expense.
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<PAGE>
Other Expenses
Other expenses, which were $3.8 million in 2000 and $4.2 million in
1999, includes land holding costs and the write-off of previously capitalized
pursuit costs. Land holding costs were $1.4 million in 2000 and $2.2 million in
1999. Pursuit cost write-offs were $2.4 million in 2000 and $2.0 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 nine months ended September 30, 2000,
ProLogis disposed of 3.4 million square feet of such operating facilities
generating net sales proceeds of $133.7 million and a net gain of $1.0 million
(a net gain of $5.1 million was recognized in the first quarter of 2000, a net
loss of $4.8 million was recognized in the second quarter of 2000 and a net gain
of $0.7 million was recognized in the third quarter of 2000). During the nine
months ended September 30, 1999, ProLogis disposed of 81 operating facilities
aggregating 12.5 million square feet and generated a net gain of $26.4 million
(primarily the facilities acquired by ProLogis California in August 1999).
In 2000, ProLogis has disposed of certain 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 $20.4
million for the first nine months of 2000 as compared to a loss of $6.5 million
for the same period in 1999. In both periods, the losses are primarily the
result of the remeasurement and settlement of intercompany debt and the
remeasurement of third party debt of ProLogis' foreign subsidiaries.
Fluctuations in the foreign currency exchange gains and losses recognized in
each period are a product of movements in certain foreign currency 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 nine months of 2000, the euro and pound
sterling depreciated against the U.S. dollar which is the primary cause of the
remeasurement losses recognized in that period. During the first and second
quarters of 1999, the euro and pound sterling depreciated against the U.S.
dollar, which is the primary cause of the remeasurement losses recognized during
the first nine months of 1999. However, during the third quarter of 1999, the
euro and pound sterling appreciated against the U.S. dollar, resulting in a
remeasurement gain for that period.
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.
27
<PAGE>
Three Months Ended September 30, 2000 and 1999
The changes in net earnings attributable to Common Shares and its
components for the three months ended September 30, 2000 compared to the three
months ended September 30, 1999 are similar to the changes for the nine month
periods ended on the same dates. The three-month period changes are attributable
to the same reasons discussed under "--Nine Months Ended September 30, 2000 and
1999" except as specifically discussed under "--Other Income and Expense Items -
Depreciation Expense", "--Other Income and Expense Items - Gain on Disposition
of Real Estate" and "--Other Income and Expense Items - Foreign Currency
Exchange Losses, Net".
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 the development distribution
facilities. Within the temperature-controlled distribution operations segment,
ProLogis' future investing activities are expected to consist of facility
expansion and investment in additional facilities to achieve strategic
objectives with respect to targeted markets and to address specific customer
needs, in addition to capital expenditures for logistics information systems
improvements. 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 non-strategic temperature-controlled
facilities to third parties;
o the proceeds from the sale of facilities developed to third parties;
o the proceeds from the sale of facilities to ProLogis European Properties
Fund and ProLogis North American Properties Fund I or to other similar
entities; and
o utilization of ProLogis' unsecured lines of credit.
In the short-term, borrowings and subsequent repayments on ProLogis'
unsecured lines of credit will provide ProLogis with adequate liquidity and
financial flexibility to efficiently respond to market opportunities.
Within ProLogis European Properties Fund, ProLogis has access to 797.7
million euros (the currency equivalent of approximately $698.8 million as of
September 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. 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 September 30, 2000, 207.4 million euros (the currency
equivalent of approximately $177.4 million) was outstanding on the 500.0 million
euro credit facility. 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 ProLogis European
Properties Fund and ProLogis North American Fund I that will provide debt and
equity financing to ProLogis.
As of September 30, 2000, ProLogis had $530.0 million available for
borrowing under its U.S. dollar denominated unsecured lines of credit and the
currency equivalent of approximately $9.7 million available for borrowing under
its multi-currency unsecured line of credit. As of November 8, 2000, on a
combined basis ProLogis had approximately $537.7 million of borrowing capacity
28
<PAGE>
available (see "-- Credit Facilities"). ProLogis' U.S. dollar denominated line
of credit agreement allows ProLogis to increase the available commitment by
$25.0 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 $54.5 million in
2000 as compared to 1999 ($286.4 million in 2000 and $231.9 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
both the nine months in 2000 and 1999.
Cash Investing and Cash Financing Activities
For the nine months in 2000, ProLogis used net cash of $153.4 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 investments in unconsolidated
entities. In addition to cash generated by operations, these real estate
investments were funded by $440.6 million of proceeds generated from the
disposition of real estate assets from both the property operations segment and
the CDFS business segment as well as from borrowings on ProLogis' unsecured
lines of credit.
For the nine months in 1999, ProLogis used net cash of $101.9 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 investments in unconsolidated
entities. In addition to cash generated by operations, these real estate
investments were primarily funded by proceeds from secured and unsecured debt
transactions of approximately $966.0 million and $411.0 million of proceeds
generated from the disposition of real estate assets from both the property
operations segment and the CDFS business segment. Also in 1999, ProLogis made
net repayments on its unsecured lines of credit and short-term borrowings of
$366.4 million and 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".
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 $475.0 million unsecured revolving line of
credit. The credit agreement allows ProLogis to increase the available
commitment by $25.0 million to a total of $500.0 million. ProLogis Logistics and
ProLogis Development Services 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% (7.3675% as of September 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 September 30, 2000, ProLogis had no 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 $55.0 million unsecured discretionary line
of credit with Bank of America that matures on June 6, 2001. Of the total,
ProLogis can borrow the currency equivalent of $30.0 million in certain foreign
currencies with the U.S. dollar borrowings limited to $25.0 million. 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 discretionary line of credit as of
September 30, 2000.
ProLogis has a 325.0 million euro, multi-currency, unsecured revolving
line of credit (the currency equivalent of approximately $284.7 million as of
September 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 September 30, 2000 were
at a weighted average interest rate of 6.49%). The credit agreement provides for
an unused commitment fee of 0.375% per annum. As of September 30, 2000, there
were 321.6 million euros (the currency equivalent of approximately $275.0
million) of borrowings outstanding on the line of credit and ProLogis was in
compliance with all covenants contained in the credit agreement.
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<PAGE>
Commitments
As of September 30, 2000, ProLogis had $410.4 million of budgeted
development costs for developments under construction, of which $216.8 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
September 30, 2000, the currency equivalent of approximately $161.8 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.
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 $22.0
million as of September 30, 2000) has been guaranteed by ProLogis. As of
September 30, 2000 no borrowings were outstanding on the line of credit.
However, as of September 30, 2000, ProLogis Kingspark had the currency
equivalent of approximately $14.7 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 September 30, 2000, ProLogis had an unfunded commitment on this guarantee
agreement in the currency equivalent of approximately $1.3 million.
ProLogis European Properties S.a.r.l. has a 140.0 million French franc
unsecured loan outstanding (the currency equivalent of approximately $18.3
million as of September 30, 2000) that has been guaranteed by ProLogis.
ProLogis North American Properties Fund I has $232.6 million of
short-term borrowings outstanding as of September 30, 2000, of which ProLogis
has guaranteed $222.6 million.
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, May 25, 2000 and August 24, 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 and August 10, 2000, respectively. The
distribution level for 2000 was set by ProLogis' Board of Trustees in December
1999 at $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, April 28, 2000 and July 31, 2000, ProLogis paid
quarterly dividends of $0.5469 per cumulative redeemable Series E preferred
share. On March 31, 2000, June 30, 2000 and September 29, 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.
30
<PAGE>
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 evaluating
its options regarding 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 $50.4
million to $279.3 million for 2000 from $228.9 million for 1999.
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 that do not engage in the
types of transactions that give rise to these items.
31
<PAGE>
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 $1,724,000 to funds from operations
attributable to Common Shares for the nine months ended September 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>
Nine Months Ended
September 30,
----------------------
2000 1999
--------- ---------
<S> <C> <C>
Net earnings attributable to Common Shares....................... $ 113,146 $ 87,837
Add (Deduct):
Real estate related depreciation and amortization........... 109,238 109,398
Gain on disposition of non-CDFS business segment assets..... (1,009) (26,358)
Foreign currency exchange losses, net (1)................... 21,622 6,589
Cumulative effect of accounting change (2).................. -- 1,440
Deferred income tax expense................................. 1,702 574
ProLogis' share of reconciling items of unconsolidated
entities:
Real estate related depreciation and amortization......... 43,709 36,656
(Gain) loss on disposition of non-CDFS business segment
assets................................................. (357) 130
Foreign currency exchange (gains) losses, net............. (4,589) 5,737
Cumulative effect of accounting change (2)................ -- 1,480
Deferred income tax expense (benefit)..................... (4,204) 5,444
--------- ---------
Funds from operations attributable to Common Shares............ $ 279,258 $ 228,927
========= =========
<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 September 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.
32
<PAGE>
PART II
Item 4. Submission of Matters to Vote of Securities Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
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 November 6, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K:
Items Financial
Date Reported Statements
---- -------- ----------
None
33
<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/ LUKE A. LANDS
--------------------------------------------
Luke A. Lands
Senior Vice President and Controller
BY:/S/ SHARI J. JONES
--------------------------------------------
Shari J. Jones
Vice President
(Principal Accounting Officer)
Date: November 9, 2000
34
