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<SEC-DOCUMENT>0001035704-00-000194.txt : 20000323
<SEC-HEADER>0001035704-00-000194.hdr.sgml : 20000323
ACCESSION NUMBER: 0001035704-00-000194
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 17
CONFORMED PERIOD OF REPORT: 19991231
FILED AS OF DATE: 20000322
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: PROLOGIS TRUST
CENTRAL INDEX KEY: 0000899881
STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500]
IRS NUMBER: 742604728
STATE OF INCORPORATION: MD
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT:
SEC FILE NUMBER: 001-12846
FILM NUMBER: 575109
BUSINESS ADDRESS:
STREET 1: 14100 EAST 35TH PLACE
CITY: AURORA
STATE: CO
ZIP: 80011
BUSINESS PHONE: 3033759292
MAIL ADDRESS:
STREET 1: 14100 EAST 35TH PLACE
CITY: AURORA
STATE: CO
ZIP: 80011
FORMER COMPANY:
FORMER CONFORMED NAME: SECURITY CAPITAL INDUSTRIAL TRUST
DATE OF NAME CHANGE: 19931228
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 1999
<TEXT>
<PAGE> 1
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
OR
[ ] 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 1-12846
---------------------
PROLOGIS TRUST
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
MARYLAND 74-2604728
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
14100 EAST 35TH PLACE
AURORA, COLORADO 80011
(Address of principal executive offices and zip code)
(303) 375-9292
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
<S> <C>
Common Shares of Beneficial Interest, par value $0.01 per
share New York Stock Exchange
Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest, par value $0.01 per share New York Stock Exchange
Series B Cumulative Convertible Redeemable Preferred Shares
of Beneficial Interest, par value $0.01 per share New York Stock Exchange
Series D Cumulative Redeemable Preferred Shares of
Beneficial Interest, par value $0.01 per share New York Stock Exchange
Series E Cumulative Redeemable Preferred Shares of
Beneficial Interest, par value $0.01 per share New York Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Based on the closing price of the registrant's shares on March 14, 2000,
the aggregate market value of the voting shares held by non-affiliates of the
registrant was $2,030,987,388.
At March 14, 2000, there were outstanding approximately 162,252,057 common
shares of beneficial interest of the registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for the 2000 annual
meeting of its shareholders are incorporated by reference in Part III of this
report.
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- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM DESCRIPTION PAGE
- ---- ----------- ----
<S> <C> <C>
PART I
1. Business.................................................... 1
ProLogis Trust............................................ 1
Business Strategy and Operating Segments.................. 3
ProLogis Operating System(TM)............................. 12
Financing Strategy........................................ 13
ProLogis Management....................................... 14
Environmental Matters..................................... 19
Insurance Coverage........................................ 19
2. Properties.................................................. 20
Industrial Distribution Facilities........................ 20
Geographic Distribution................................... 20
Facilities................................................ 22
Consolidated Entities..................................... 26
Unconsolidated Entities................................... 28
3. Legal Proceedings......................................... 29
4. Submission of Matters to a Vote of Security Holders....... 29
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters....................................... 30
Dividend Reinvestment and Share Purchase Plan............. 32
6. Selected Financial Data..................................... 33
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 35
Results of Operations..................................... 36
Environmental Matters..................................... 43
Liquidity and Capital Resources........................... 43
New Tax Legislation....................................... 48
Funds from Operations..................................... 48
Year 2000................................................. 50
Risk Factors.............................................. 51
7A. Quantitative and Qualitative Disclosure About Market Risk... 54
8. Financial Statements and Supplementary Data................. 55
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure Matters.......................... 55
PART III
10. Directors and Executive Officers of the Registrant.......... 56
11. Executive Compensation...................................... 56
12. Security Ownership of Certain Beneficial Owners and
Management................................................ 56
13. Certain Relationships and Related Transactions.............. 56
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 57
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
PROLOGIS TRUST
ProLogis Trust ("ProLogis") is a real estate investment trust ("REIT") that
operates a global network of industrial distribution facilities. ProLogis owns
(directly, through consolidated entities or through investments in other real
estate entities accounted for under the equity method) 162.3 million square feet
of industrial distribution facilities operating or under development and 365.9
million cubic feet of temperature-controlled distribution facilities operating
or under development (including 35.5 million cubic feet of dry distribution
space located in temperature-controlled facilities) located throughout North
America and Europe. This network of distribution facilities makes ProLogis the
largest publicly held U.S.-based, global owner and lessor of industrial
distribution and temperature-controlled 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
believes that its service approach, which combines international scope and
expertise and a strong local presence in each of its target markets, makes it
attractive to its targeted customer base that includes the largest global users
of distribution facilities. ProLogis is organized under Maryland law and has
elected to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended (the "Code").
ProLogis' business strategy is designed to: 1) achieve long-term
sustainable growth in cash flow; 2) reduce the need for ProLogis to issue
additional public debt or public equity capital; and 3) increase the overall
return on equity for shareholders. ProLogis has organized its business into
three operating segments in order to achieve its objectives. For a discussion of
certain financial information regarding each segment see Note 18 and for a
discussion of ProLogis' investments in unconsolidated entities see Note 5 to
ProLogis' Consolidated Financial Statements in Item 8. These three segments are:
- Property Operations -- The long-term ownership, management and leasing of
industrial distribution facilities in North America and Europe, primarily
distribution space that is adaptable for both distribution and light
manufacturing or assembly uses. This segment generates income from rents
and reimbursement of property operating expenses from unaffiliated
customers and earns management fees from entities in which it has an
ownership interest. As of December 31, 1999, in this operating segment
ProLogis owned and operated (directly, through consolidated entities or
through investments in other real estate entities that are accounted for
under the equity method) 148.5 million square feet of industrial
distribution facilities at an investment of $5.4 billion (133.7 million
square feet at an investment of $4.6 billion for properties that are
owned directly by ProLogis and its consolidated entities). Of the total,
137.9 million square feet are located in North America and the remaining
10.6 million square feet are located in Europe. Also, as of December 31,
1999, ProLogis and its consolidated entities owned 2.7 million square
feet of facilities under development with a total budgeted cost of $98.7
million, all located in North America. Upon completion, these facilities
are expected to become a part of ProLogis' operating portfolio.
- Corporate Distribution Facilities Services Business -- Development of
industrial distribution facilities for future sale to unaffiliated
customers or entities in which ProLogis has an ownership interest or for
a development fee for unaffiliated customers in North America and Europe.
In addition, entities in which ProLogis has an ownership interest that
own and operate industrial distribution facilities acquire facilities
from ProLogis or its affiliates that were developed within this operating
segment. ProLogis' investments in these other entities, and fees earned
from these entities, are reflected in ProLogis' property operations
segment. The development activities in this operating segment are
performed directly by ProLogis, by a consolidated entity in which
ProLogis recognizes substantially all of the economic benefits or through
an unconsolidated entity that is accounted for under the equity method in
which ProLogis recognizes substantially all of the economic benefits.
Income from this segment is derived from the profit resulting from the
sale of the facilities developed and from fees paid by customers for the
development of a facility
1
<PAGE> 4
on their behalf. As of December 31, 1999, ProLogis had, either directly,
through its consolidated entity or through an unconsolidated entity, 10.2
million square feet of facilities under development with a total budgeted
cost of $543.0 million (8.0 million square feet at a total budgeted
development cost of $325.5 million for properties owned directly by
ProLogis and its consolidated entity). Also as of December 31, 1999,
ProLogis owned or controlled, either directly, through its consolidated
entity or through an unconsolidated entity, 4,832 acres of land for the
future development of approximately 80.1 million square feet of
industrial distribution facilities (3,020 acres of land for the future
development of approximately 51.6 million square feet on properties owned
directly by ProLogis and its consolidated entity). Upon completion, these
facilities are expected to be sold to customers or to entities in which
ProLogis has an ownership interest.
- Temperature-Controlled Distribution Operations -- Operation of
temperature-controlled distribution facilities where fees are earned from
unaffiliated customers for various services associated with a
temperature-controlled distribution environment. Such services include:
1) total supply chain management; 2) management of customer inventory and
related services, (i.e. case picking, sorting, labeling, stenciling,
shrink wrapping and blast freezing); 3) temperature-controlled product
consolidation and transportation services; and 4) third-party logistics
services and facility management for leading grocery retailers. In this
segment, ProLogis recognizes substantially all of the economic benefits
of two companies that are accounted for under the equity method. As of
December 31, 1999, these unconsolidated entities owned or operated 359.9
million cubic feet of temperature-controlled distribution space
(including 35.5 million cubic feet of dry distribution space located in
temperature-controlled facilities) and had 6.1 million cubic feet of
temperature-controlled distribution space under development. Of the total
cubic feet in operation, 167.6 million cubic feet are located in North
America and 192.3 million cubic feet are located in nine European
countries. Of the facilities under development, 4.8 million cubic feet
are located in North America (Atlanta) and 1.3 million cubic feet are
located in Europe (Denmark).
1999 Operating Performance
ProLogis' 12.2% growth in funds from operations (on a per share basis) in
1999 over 1998 was driven by its successful operating and investment strategies.
Total funds from operations increased by $91.8 million from $228.4 million in
1998 to $320.2 million in 1999. The contribution to total funds from operations
by ProLogis' operating segments for 1999 and 1998 is as follows (see also Note
18 to ProLogis' Consolidated Financial Statements in Item 8):
- 70.6% and 78.2% of total funds from operations is attributable to the
property operations segment in 1999 and 1998, respectively;
- 20.3% and 8.1% of total funds from operations is attributable to the
corporate distribution facilities services business segment in 1999 and
1998, respectively; and
- 9.2% and 13.6% of total funds from operations is attributable to the
temperature-controlled distribution operations segment in 1999 and 1998,
respectively.
Funds from operations is a performance measure used by REITs and is defined
and discussed in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources -- Funds
from Operations".
ProLogis' net operating income (rental revenues less rental expenses)
increased from $317.9 million in 1998 to $458.3 million in 1999. ProLogis
generated earnings from operations of $166.5 million in 1999, an increase of
$58.9 million over 1998. ProLogis' cash flow provided by operating activities
for 1999 was $271.4 million, an increase of $33.1 million over 1998. Net
earnings attributable to Common Shares of $124.0 million in 1999 was nearly two
times greater than the 1998 amount of $62.2 million. See ProLogis' Consolidated
Financial Statements in Item 8.
2
<PAGE> 5
BUSINESS STRATEGY AND OPERATING SEGMENTS
Business Strategy
ProLogis was originally formed in 1991 with the objective of building a
distribution and light manufacturing asset base at costs significantly below
replacement cost and a land inventory for the future development of distribution
facilities. Additionally, ProLogis intended to create a national operating
company that would differentiate itself from its competition through its ability
to meet a corporate customer's distribution facility requirements on a national,
regional and local basis. In 1997, ProLogis expanded its property operations
into Mexico and Europe to meet the needs of its targeted national and
international customers as they expanded and reconfigured their distribution
facility requirements globally. To enhance its North American property
operations and service platform, ProLogis completed a merger with Meridian
Industrial Trust Inc. ("Meridian"), a publicly held REIT, in March 1999 (the
"Meridian Merger"). The Meridian Merger added 32.2 million square feet of
operating facilities, 228 acres of land for future development and 15.2 million
cubic feet of temperature-controlled distribution facilities to ProLogis'
holdings. The Meridian Merger is discussed in Note 3 to ProLogis' Consolidated
Financial Statements in Item 8 and in "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- Meridian Merger".
Having established its core property operations business, in 1997 and 1998
ProLogis expanded its service platform by acquiring an international
temperature-controlled distribution network. Also, to enhance its corporate
distribution facilities services business, ProLogis acquired an industrial
distribution development company with extensive holdings in the United Kingdom
in August 1998.
To further its objective of increasing cash flows without the need to raise
additional capital through direct public debt and public equity offerings,
ProLogis expanded its operations in Europe through the formation of the ProLogis
European Properties Fund in September 1999 (see Note 5 to ProLogis' Consolidated
Financial Statements in Item 8). The ProLogis European Properties Fund, in which
ProLogis maintains an ownership interest, enables ProLogis to take advantage of
the growth opportunities in the European industrial distribution industry by
accessing over 1.06 billion euros (the currency equivalent of $1.07 billion as
of December 31, 1999 based on currency exchange rates quoted by Reuters) of
third party equity capital that has been committed to the ProLogis European
Properties Fund by a group of institutional investors. Formation of the ProLogis
European Properties Fund enhances the ProLogis Operating System(TM) because the
capital commitments secured through this entity will allow ProLogis to expand
its operating platform in Europe.
Additionally, in the third quarter of 1999, ProLogis sold over $550 million
of real estate assets to a limited liability company in which ProLogis has a 50%
equity interest. The formation of this company and subsequent sale of assets
allowed ProLogis to privately raise additional capital to be used for its
investment activities. See Note 5 to ProLogis' Consolidated Financial Statements
in Item 8.
Also in 1999, ProLogis formed its Integrated Solutions Group (see "--
ProLogis Operating System(TM) -- Integrated Solutions Group") with the objective
of increasing ProLogis' service income thereby growing cash flows in a less
capital intensive manner.
ProLogis' network of distribution facilities has positioned it to become
the global leader in this rapidly consolidating industry. ProLogis' three
operating segments, property operations, corporate distribution facilities
services business and temperature-controlled distribution operations, are
discussed below.
Property Operations Segment
Investments
In the property operations segment, ProLogis owned and operated (directly,
through its consolidated entities or through investments in other real estate
entities accounted for under the equity method) 1,424 industrial distribution
facilities aggregating 148.5 million square feet as of December 31, 1999.
ProLogis' investment strategy with respect to the property operations segment is
to focus its development and acquisition activities primarily on generic
distribution facilities with an average office finish level of less than 10%.
ProLogis' distribution space is adaptable for both distribution and light
manufacturing or assembly uses. ProLogis has invested in selected distribution
markets in North America and Europe where ProLogis believes the distribution
3
<PAGE> 6
dynamics are strong and supply and demand factors allow for high occupancy
levels and increasing rental rates. The market characteristics ProLogis
evaluates include: 1) growth in imports and exports that represent favorable
distribution growth prospects for distribution space; 2) markets possessing
long-term cost and quality of labor advantages for domestic and international
manufacturers (such as markets benefitting from the U.S./Mexico twin plant
program); and 3) markets with strong potential for distribution growth,
generally indicated by their proximity to large regional and local population
centers with good access to transportation networks, by cost advantages in terms
of transportation rates and state income and inventory taxes or by a high ratio
of distribution space per capita.
Property operations segment investment activities in 1999 included the
following:
- In March 1999, the Meridian Merger was completed which added 32.2 million
square feet of operating facilities in 25 markets in the United States.
- In August 1999, ProLogis sold 78 operating facilities aggregating 11.5
million square feet, two properties under development and two land
parcels to a limited liability company, ProLogis California I LLC
("ProLogis California"), in which ProLogis has a 50% equity interest.
ProLogis continues to manage the facilities in addition to providing
leasing and development management services to ProLogis California. See
"Item 2. Properties -- Unconsolidated Entities" and Note 5 to ProLogis'
Consolidated Financial Statements in Item 8.
- In September 1999, the ProLogis European Properties Fund began operations
with the acquisition of 12 operating facilities aggregating 2.2 million
square feet. The facilities were acquired from ProLogis and from
Kingspark Group Holdings Limited ("ProLogis Kingspark"), an entity in
which ProLogis owns 100% of the preferred stock (representing
substantially all of the economic benefits). ProLogis Kingspark develops
industrial distribution facilities in the United Kingdom. In December
1999, the ProLogis European Properties Fund acquired six additional
operating facilities aggregating 1.1 million square feet from ProLogis
and ProLogis Kingspark. ProLogis manages the assets of the ProLogis
European Properties Fund and earns fees for these services. ProLogis had
a 19.68% ownership interest in the ProLogis European Properties Fund as
of December 31, 1999. On January 7, 2000, ProLogis contributed 50.1% of
the common stock of one of its wholly owned European entities to the
ProLogis European Properties Fund. As of December 31, 1999, this entity
owned real estate with a net book value of $334.9 million (61 buildings
aggregating 6.8 million square feet) and held secured debt of $142.7
million and unsecured debt of $30.9 million. After this contribution,
ProLogis' ownership in the ProLogis European Properties Fund was
increased to 44.29%. ProLogis is committed to contributing the remaining
49.9% of the common stock of this entity to the ProLogis European
Properties Fund in January 2001. See "Item 2. Properties -- Facilities",
"Item 2. Properties--Unconsolidated Entities" and Note 5 to ProLogis'
Consolidated Financial Statements in Item 8.
- During 1999, ProLogis completed the development of 4.5 million square
feet of facilities at a total budgeted development cost of $179.8 for use
in the property operations segment. As of December 31, 1999, ProLogis had
2.7 million square feet of facilities under development with a total
budgeted development cost of $98.7 million that, upon completion, are
expected to be included in ProLogis' operating portfolio.
- Acquisitions of existing distribution facilities were limited to two
buildings in Mexico aggregating 98,000 square feet.
Operations
The property operations segment generated 85% of ProLogis' total revenues
in 1999 (including amounts recognized under the equity method with respect to
ProLogis' unconsolidated entities). This segment generated 94% of revenues in
both 1998 and 1997 (including amounts recognized under the equity method with
respect to ProLogis' unconsolidated entities). See Note 18 to ProLogis'
Consolidated Financial Statements in Item 8.
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Operational achievements in this operating segment in 1999 included the
following:
- ProLogis' stabilized industrial distribution facilities portfolio of
141.6 million square feet (including facilities directly owned, owned by
consolidated entities or owned by unconsolidated entities) was 96.52%
leased (96.02% occupied) as of December 31, 1999. Also, as of December
31, 1999, ProLogis' total operating portfolio of 148.5 million square
feet (including facilities owned by ProLogis' consolidated and
unconsolidated entities) was 94.95% leased (94.45% occupied). Stabilized
facilities are those in which 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) to
achieve stabilized occupancy (typically 93%, but ranging from 90% to 95%,
depending on the submarket and product type).
- During 1999, ProLogis, its consolidated and unconsolidated entities
leased 33.2 million square feet of distribution space in 1,122
transactions. Rental rates on both new leases and renewals of leases on
previously leased space increased 15.5% in 1999 and the weighted average
customer retention rate was 68.1% in 1999.
Market Presence
The facilities in the property operations segment that are owned directly
by ProLogis or through its consolidated entities are located in 46 cities in
North America and seven cities in Europe. As of December 31, 1999, no individual
market represents more than 10% of ProLogis' total real estate assets. ProLogis'
largest markets (based on cost) are Dallas/Fort Worth (8.5%), Chicago (6.8%),
Atlanta (6.7%), Paris, France (6.3%), San Francisco (South Bay) (5.11%) and San
Francisco (East Bay) (4.9%). All of the facilities owned by ProLogis California
are located in the Los Angeles market. The 18 facilities owned by the ProLogis
European Properties Fund are located in 13 markets in Europe.
ProLogis has sought to achieve significant market presence through the
development and acquisition of master-planned distribution parks in its target
market cities and selected submarkets of those cities. The target market cities
and submarkets are selected when ProLogis' market research indicates that the
long-term demand for distribution and light manufacturing space is stable to
strong. The primary factors influencing future supply and demand for
distribution facilities in ProLogis' target market cities will be continued job
and population growth, import/export growth, related regional and local company
growth, potential for reconfiguration of existing distribution networks and
quality and cost of labor.
ProLogis defines market presence not only in terms of square feet of
facilities and acres of development land owned, but also by the extent ProLogis
has developed relationships with customers in such markets. ProLogis' operating
strategy is designed to meet the needs of today's distribution space users,
which means providing functional, cost-effective facilities with a comprehensive
level of service. ProLogis aims to shape the future trends of the industry
through innovation, service and product leadership. ProLogis believes that by
being a significant local owner and developer in a given market, it can generate
high relative rental rates and occupancy levels, primarily because it has the
ability to reduce turnover by meeting its customers' needs to either expand or
contract. With its network of industrial distribution facilities and land
positions, ProLogis is able to either relocate customers within its existing
inventory of distribution space or develop new facilities to meet the customer's
needs.
In addition, a strong market presence provides ProLogis with increased
access to potential leasing and corporate distribution facilities services
transactions. ProLogis' experience has been that many members of the industrial
brokerage community and many corporate users are motivated to develop
relationships with the significant owners and developers in a particular market
to facilitate their respective distribution needs. Having the opportunity to
compete for a large percentage of the space requirements in each market is a
crucial factor in achieving ProLogis' operating objectives.
5
<PAGE> 8
Competition
In general, there are numerous other industrial facilities located in close
proximity to ProLogis' facilities. The amount of rentable space available in any
market could have a material effect on ProLogis' ability to rent space and on
the rents charged. In addition, in many of ProLogis' submarkets, institutional
investors and owners and developers of industrial facilities (including other
REITs) compete for the acquisition, development and leasing of industrial space.
Many of these entities have substantial resources and experience. Competition
for acquisition of existing distribution facilities and land, both from
institutional capital sources and from other REITs, has increased over the past
several years.
Property Management
ProLogis provides active and effective management to directly serve its
customers at the local level -- a strategy that ProLogis believes will enhance
the long-term economic performance of its facilities and increase cash flow.
ProLogis' property management group seeks to provide exceptional customer
service and attention to customer needs. The group develops and implements
proprietary operating, recruiting and training systems to achieve consistent
levels of performance and professionalism throughout the ProLogis network. Of
facilities directly owned and owned by ProLogis' consolidated and unconsolidated
entities, ProLogis' property management group was managing 96.7% of ProLogis'
North American operating facilities and all of ProLogis' European facilities.
Customers
One of ProLogis' objectives is to develop a customer base in each market
that is diverse in terms of industry concentration and represents a broad
spectrum of international, national, regional and local distribution space users
who have potential for growth in demand for distribution space owned by
ProLogis. As of December 31, 1999, ProLogis (including its consolidated and
unconsolidated entities) had over 3,600 customers in 140.3 million square feet
of occupied industrial distribution space. ProLogis believes that having a large
number of customers with generic space requirements in each submarket reduces
ProLogis' exposure to overall occupancy declines. ProLogis' largest customer
accounted for less than 2% of ProLogis' 1999 rental income (on an annualized
basis) and the annualized base rent for ProLogis' 20 largest customers accounted
for approximately 14% of ProLogis' 1999 rental income (on an annualized basis).
Employees
ProLogis and its consolidated entities directly employ approximately 600
persons in North America and Europe. Of the total, approximately 350 employees
are assigned directly to the property operations segment. ProLogis' other
employees may provide assistance in this segment but are not directly assigned
to property operations. ProLogis believes its relationship with its employees to
be good. ProLogis' employees are not represented by a collective bargaining
agreement.
Seasonal Nature of the Business
The demand for industrial distribution space is not seasonal.
Future Plans
ProLogis' business plan for the property operations segment in North
America calls for development and acquisition of existing distribution
facilities to serve its customers, to enhance ProLogis' market presence in
specific submarkets and to take advantage of opportunities where ProLogis
believes it has the ability to achieve very favorable returns. ProLogis believes
that its current level of investment in this operating segment in North America,
including the facilities currently under development that will be part of the
operating portfolio upon completion, enables it to service its customers at a
high level and increase returns to shareholders.
ProLogis' market research and customer feedback identified strong demand
for distribution space in Europe as cross-border trade increases and many
companies move to consolidate and reconfigure their distribution
6
<PAGE> 9
networks. Consolidation and the emergence of dominant regional distribution
centers provide opportunities for ProLogis as a single-source pan-European
provider of distribution facilities. Consequently, ProLogis' business plan for
the property operations segment in Europe emphasizes growth in key distribution
markets through the ProLogis European Properties Fund, primarily from the
development of facilities within ProLogis' corporate distribution facilities
services business segment that will be sold to the ProLogis European Properties
Fund and then managed by ProLogis.
ProLogis intends to self-fund its future investment activities in the
property operations segment through operating cash flow, the disposition of
non-strategic facilities and sales to the ProLogis European Properties Fund. The
non-strategic assets are identified as those facilities that provide ProLogis
with limited opportunities to increase cash flow and returns through increases
in occupancy levels and rental rates. See the discussion of factors that could
effect the future plans of ProLogis and its consolidated and unconsolidated
entities at "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition -- Risk Factors".
Corporate Distribution Facilities Services Business Segment
Investment
ProLogis operates its corporate distribution facilities services business
segment ("CDFS business") in North America directly or through a consolidated
entity in which ProLogis realizes substantially all of the economic benefits,
ProLogis Development Services Incorporated ("ProLogis Development Services")
(see "Item 2. Properties -- ProLogis Development Services"). In Europe
(excluding the United Kingdom), ProLogis directly operates its CDFS business
segment. In the United Kingdom, the CDFS business is operated by ProLogis
Kingspark, an unconsolidated entity in which ProLogis recognizes substantially
all of the economic benefits (see "Item 2. Properties -- Unconsolidated
Entities"). ProLogis' CDFS business is customer-driven in that ProLogis will
develop facilities for customers in locations desired by the customer. ProLogis
will then sell the facility and redeploy the capital into land acquisitions and
development opportunities. ProLogis does not intend to incur capital risk in
this operating segment. In situations where ProLogis' customers need a
specialized facility or need a facility in a market that ProLogis does not
consider to have favorable dynamics, ProLogis will meet the customer's needs on
a fee development basis only.
As of December 31, 1999, the CDFS business segment had 10.2 million square
feet of facilities under development with a total budgeted development cost of
$543.0 million (including 8.0 million square feet with a total budgeted
development cost of $325.5 million owned directly by ProLogis and ProLogis
Development Services). These facilities are being developed with the objective
of selling the facility to a third party or to an entity in which ProLogis has
an ownership interest. To the extent the facilities are sold to entities in
which ProLogis has an ownership interest, ProLogis' interest in the operations
of these facilities will be included in its property operations segment.
ProLogis, ProLogis Development Services and ProLogis Kingspark also earn fees
under development management agreements. During 1999, 2.1 million square feet
were developed under such agreements.
ProLogis, ProLogis Development Services and ProLogis Kingspark have land
positions (land owned or controlled through option, letter of intent,
development rights agreement or contingent contract) aggregating 4,832 acres
with the capacity for developing approximately 80.1 million square feet of
distribution facilities. Of the total land positions, 3,020 acres, with the
capacity for developing approximately 51.6 million square feet of distribution
facilities, are owned or controlled by ProLogis and ProLogis Development
Services. A significant portion of this land will be used within the CDFS
business to develop facilities that will either be sold to third parties or to
entities in which ProLogis has an ownership interest. However, some of the
acreage could be used for future developments of facilities that, when
completed, could be included in ProLogis' operating portfolio.
Investment activities in the CDFS business in 1999 included the following:
- Development starts aggregated 8.0 million square feet at a total budgeted
development cost of $498.6 million. Of these starts, 4.0 million square
feet at a total budgeted development cost of $355.8 million were in
Europe.
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- Development completions aggregated 7.6 million square feet at a total
budgeted development cost of $403.5 million (3.1 million square feet at a
total budgeted development cost of $221.4 million located in Europe).
- Land acquisitions aggregating 938.1 acres in 1999, 724.7 acres in North
America and 213.4 acres in Europe. This land can be used for the
development of approximately 16.4 million square feet of distribution
facilities.
Operations
In 1999, the CDFS business generated $70.5 million of ProLogis' total
revenues as compared to 1998 and 1997 when the CDFS business generated $20.5
million and $12.3 million of total revenues, respectively. As a percentage of
total revenues, this operating segment has grown from 4% in 1997 to over 12% in
1999. In this operating segment, ProLogis recognizes its share of the net
earnings of ProLogis Kingspark under the equity method as a component of its
total revenues ($23.9 million in 1999 and $2.9 million for the period from
acquisition on August 14, 1998 to December 31, 1998). See Note 18 to ProLogis'
Consolidated Financial Statements in Item 8.
The primary source of income in the CDFS business segment is the aggregate
profits from dispositions of facilities. In addition, income in the CDFS
business segment includes development management fees, earned primarily by
ProLogis Kingspark. The CDFS business generated funds from operations of $76.5
million in 1999 ($28.9 million in North America and $47.6 million in Europe). Of
the total European contribution to funds from operations in the CDFS business
segment, ProLogis' share of ProLogis Kingspark's funds from operations was $29.8
million in 1999. In 1998 and 1997, the CDFS business generated funds from
operations of $22.2 million and $12.3 million, respectively. All of the funds
from operations generated by the CDFS business segment were from North America
in 1998 (except for ProLogis' share of ProLogis Kingspark's funds from
operations of $4.9 million) and 1997. Funds from operations is discussed and
defined at "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Funds from Operations".
Operational achievements in the CDFS business in 1999 included the
following:
- ProLogis, ProLogis Development Services and ProLogis Kingspark sold 6.5
million square feet of facilities with net sales proceeds of $512.9
million.
- ProLogis Kingspark had 1.2 million square feet of facilities being
developed on behalf of customers under development management agreements.
Fees earned by ProLogis Kingspark under such agreements were $5.4 million
in 1999.
Market Presence
ProLogis' CDFS business spans substantially all of the property operations
markets. Currently, ProLogis has facilities under development in this operating
segment in 24 markets (including six markets in Europe) and has land positions
in 39 markets (including six markets in Europe).
Competition
There are a number of other local, regional and national developers engaged
in industrial distribution facility development in the same North American
markets that ProLogis conducts business. Competition for land acquisitions, from
both institutional capital sources and other REITs, has increased over the past
several years. The disposition market in North America is competitive and is
driven by the supply of new developments and interest rate levels.
ProLogis believes that there are no other REITs or pan-European real estate
operating companies in direct competition with their operations in Europe.
However, there are a number of local and regional developers in ProLogis' target
markets. The formation of the ProLogis European Properties Fund allows ProLogis
and ProLogis Kingspark to sell the facilities it develops in the CDFS business
to the ProLogis European Properties Fund at independently appraised values (i.e.
95% of appraised value) which minimizes the effects of competition.
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In addition, ProLogis, ProLogis Development Services and ProLogis Kingspark
believe that they have a significant competitive advantage based upon the
strategic locations of their extensive land positions owned or under control.
Also, as the only industrial distribution facilities and services provider
operating on a national, pan-European and global basis, ProLogis believes it has
differentiated itself from many of its competitors.
Customers
ProLogis leverages off its existing customer relationships, primarily
within the property operations segment and utilizes the ProLogis Operating
System(TM) in identifying and marketing its CDFS business. See "-- ProLogis
Operating System(TM)".
Employees
ProLogis and its consolidated entities directly employ approximately 600
persons in North America and Europe. Of the total, approximately 75 employees
perform development activities including activities related to the CDFS business
segment. ProLogis' other employees may provide assistance in this segment but
are not directly assigned to the CDFS business segment. ProLogis believes its
relationship with its employees to be good. ProLogis' employees are not
represented by a collective bargaining agreement.
ProLogis Kingspark employs 55 persons. ProLogis Kingspark's employees do
not participate in a collective bargaining agreement and ProLogis Kingspark
believes its relationship with its employees to be good.
Seasonal Nature of the Business
The demand for the industrial distribution facilities that are developed by
ProLogis' CDFS business is not impacted on a seasonal basis. However, the
development process can be impeded by weather, potentially delaying construction
completions, particularly during the winter months in certain markets.
Future Plans
ProLogis' objective is to utilize the capital generated in the CDFS
business to self-fund future CDFS business activities in North America and
Europe, thereby minimizing the need for ProLogis to raise additional direct
public debt and public equity capital. In addition, proceeds from the
disposition of non-strategic assets in the property operations segment can be
re-invested in higher yielding new development facilities within the CDFS
business segment. ProLogis' research indicates that favorable market conditions
are likely to continue in 2000 directly impacting this operating segment.
Specifically, a limited supply of new state-of-the-art distribution space in
Europe and the reconfiguration of supply chains necessitated by the increase in
e-commerce businesses globally should favorably impact demand for the facilities
and services provided by ProLogis within its CDFS operating segment.
ProLogis believes that significant shareholder value can be achieved by
expanding its service offerings to customers with limited need for ProLogis to
raise additional public debt and public equity capital. ProLogis will continue
to develop facilities for third parties and earn fees for these services in
2000. In addition, ProLogis has expanded the scope of the ProLogis Operating
System(TM) through the formation of the Integrated Solutions Group (see
"-- ProLogis Operating System(TM) -- Integrated Solutions Group"). The
Integrated Solutions Group will provide distribution-related services for
customers including network optimization tools, tax incentive analysis and tax
negotiation consulting, site selection and design consulting services. See the
discussion of factors that could effect the future plans of ProLogis, ProLogis
Development Services and ProLogis Kingspark at "Item 7. Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Risk Factors".
Temperature-Controlled Distribution Operations
Investments
In April 1997, ProLogis expanded its services platform by acquiring CS
Integrated LLC a temperature-controlled-distribution company operating in the
United States. ProLogis recognizes substantially all of the economic benefits of
the entity that owns 100% of CS Integrated LLC (collectively, "CSI"). As of
December 31,
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1999 CSI owned or operated 54 temperature-controlled distribution facilities
aggregating 167.6 million cubic feet (including 35.5 million cubic feet of dry
distribution space located in temperature-controlled facilities) and had 4.8
million cubic feet under development in Atlanta. In January 1998, ProLogis
acquired 100% of the preferred stock of a company in which it recognizes
substantially all of the economic benefits. This company owns, through its
wholly owned subsidiaries, 100% of a temperature-controlled distribution company
headquartered in Sweden, Frigoscandia AB (collectively, "Frigoscandia"). As of
December 31, 1999, Frigoscandia, which operates in nine European countries,
owned or operated 88 temperature-controlled distribution facilities aggregating
192.3 million cubic feet and had 1.3 million cubic feet under development in
Denmark. ProLogis accounts for its investments in CSI and Frigoscandia under the
equity method. See "Item 2. Properties -- Unconsolidated Entities" and Note 5 to
ProLogis' Consolidated Financial Statements in Item 8.
In order to provide value-added supply chain management services to its
customers, CSI and Frigoscandia leverage their existing temperature-controlled
facilities network with information technology investments that increase the
velocity and visibility of inventory and information throughout the entire
supply chain. Additionally, CSI and Frigoscandia have and will continue to
expand their respective temperature-controlled capacity through expansion and
acquisition in selected markets that they believe will enhance their existing
network and provide opportunities for growth in operating profits and cash
flows. Accordingly, CSI added 53.5 million cubic feet of operating capacity in
1999, including 15.2 million cubic feet that was acquired in connection with the
Meridian Merger. The remaining increase resulted from additional capacity in the
retail dedicated segment (see "-- Operations"). Frigoscandia's cubic feet
capacity was constant throughout 1999. However, to better serve its key
customers, improvements and upgrades were made to its primary distribution
service centers in the United Kingdom, Denmark, Sweden and Germany.
During 1999, both CSI and Frigoscandia enhanced and improved their
logistics information technology systems. These systems are being coordinated on
a global basis which, when completed, will enable CSI and Frigoscandia to
maximize synergies within and between the North American operations and the
European operations.
Operations
ProLogis recognizes its share of the net earnings of CSI and Frigoscandia
under the equity method as a component of its total revenues. For 1999,
ProLogis' share of the net earnings of CSI and Frigoscandia was $6.4 million. In
1998 and 1997, ProLogis' share of the net earnings of CSI and Frigoscandia was a
loss of $186,000 and income of $3.3 million, respectively. The income in 1997
consisted entirely of income from CSI. See Note 18 to ProLogis' Consolidated
Financial Statements in Item 8. ProLogis' share of the funds from operations of
CSI and Frigoscandia was $46.1 million in 1999 as compared to $45.7 million in
1998 and $3.3 million in 1997 (CSI only). Funds from operations is discussed and
defined at "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Funds from Operations".
In 1999, CSI increased its non-asset based retail dedicated business
segment, where CSI provides all logistics services (i.e. labor and
transportation) to supermarket retailers in distribution facilities not owned by
CSI. This business segment enables CSI to increase its revenues without
significantly increasing its invested capital.
Market Presence
Market presence in the temperature-controlled distribution industry is
generally defined by the volume available for storage of frozen and chilled
foods in addition to the transportation network in place to serve its customers.
With 54 facilities and 167.6 million cubic feet in operation (including 35.5
million cubic feet of dry distribution space operated in temperature-controlled
facilities), CSI has the third largest temperature-controlled distribution
network in the United States (based on cubic feet in operation). CSI's largest
markets (based on cubic feet in operation) are Phoenix (17.8%), Southeastern
Pennsylvania (15.2%), Atlanta (9.9%), Southern California (7.0%) and Chicago
(6.6%).
Frigoscandia is the largest temperature-controlled distribution company in
Europe with 88 facilities in 12 markets and nine countries, consisting of 192.3
million cubic square feet in operation and 1.3 million cubic
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feet under development. Based on cubic feet in operation, France (36.9%), the
United Kingdom (24.0%) and Germany (14.4%) represent the largest concentrations
within Frigoscandia's service territory.
This strong market presence in both North America and Europe benefits CSI
and Frigoscandia in light of the trend toward industry consolidation. ProLogis
believes that CSI and Frigoscandia are well positioned to provide supply-chain
management services to major food manufacturers and retailers across multiple
markets.
Competition
In North America, CSI competes directly with several national
temperature-controlled distribution companies. However, the primary competition
in many markets is from local and considerably smaller warehouse operators. In
Europe, Frigoscandia has a distinct advantage over its competitors as few other
European temperature-controlled distribution companies have operations in more
than one market (as compared to the 12 markets in which Frigoscandia operates).
Additionally, Frigoscandia is the largest operator of temperature-controlled
distribution facilities in Europe, with a temperature-controlled storage volume
of approximately three times that of its closest competitor. The
temperature-controlled logistics industry has significant barriers to entry due
to its capital-intensive nature.
Customers
CSI has approximately 3,275 customers including some of the nation's
leading supermarket retailers in the United States. Of CSI's total revenues,
approximately 59% were derived from its 20 largest customers. CSI's largest
customer accounted for approximately 33% of total revenues. Frigoscandia has
approximately 6,000 customers and its largest customer accounted for
approximately 9% of total revenues. Frigoscandia's 20 largest customers
accounted for approximately 45% of total revenues.
The objective of the temperature-controlled distribution operations segment
is to develop a customer base with complementary needs to build a highly
effective consolidated supply chain for temperature-controlled foods. In
addition to the marketing efforts designed to meet this objective, CSI and
Frigoscandia have begun coordinated global marketing efforts aimed at leveraging
off their existing customer relationships with multinational companies.
Employees
CSI and Frigoscandia directly employ all employees in the
temperature-controlled distribution operations segment. CSI employs
approximately 3,700 persons in the United States, of whom approximately 41%
participate in collective bargaining agreements. Frigoscandia employs
approximately 2,800 persons in 12 European countries (including three countries
where Frigoscandia provides transportation services but has no temperature-
controlled distribution facilities), of whom approximately 80% participate in
collective bargaining agreements. Both CSI and Frigoscandia believe their
relationships with their employees to be good.
Seasonal Nature of the Business
The temperature-controlled distribution operations segment is seasonal, in
that demand for temperature-controlled distribution facilities is stronger
during the third quarter of the calendar year and is at its lowest level in the
first quarter of the calendar year. The seasonal nature of
temperature-controlled distribution operations coincides with the lower demand
for frozen foods, such as ice cream, during the winter months and the timing of
the harvests of various food crops in the third quarter of the year, which
increases the demand for temperature-controlled storage capacity during that
time.
Future Plans
ProLogis believes that the overall temperature-controlled logistics
industry supply and demand trends are positive and signal continued
consolidation, optimization and globalization. ProLogis views its investments in
CSI and Frigoscandia as one temperature-controlled distribution network
delivering worldwide temperature-controlled logistics solutions to national,
pan-European and global customers. Expansion into new markets in
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North America and Europe will be considered to the extent that such expansion is
necessary to enable CSI and Frigoscandia to expand its services to the major
food manufacturers and retailers that operate across multiple markets and
internationally. These expansions are expected to be principally funded with
internal capital generated from the operations of each company. Strong emphasis
in the year 2000 will be placed on the global marketing of the varied service
offerings that CSI and Frigoscandia can provide to customers who can benefit
from a single-source global temperature-controlled logistics provider.
Additionally, investments in information technology in 2000 will enhance the
operation of both CSI and Frigoscandia by upgrading their warehouse management
systems and labor management systems thereby improving productivity and service
quality. These efforts will provide CSI and Frigoscandia with opportunities to
increase their service offerings, including integrated supply chain management,
transportation services and retail dedicated services without the need for
significant additional capital investments from ProLogis. See the discussion of
factors that could effect the future plans of ProLogis, CSI and Frigoscandia at
"Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Risk Factors".
PROLOGIS OPERATING SYSTEM(TM)
The cornerstone of ProLogis' business strategy is the ProLogis Operating
System(TM). The ProLogis Operating System(TM) is comprised of the Market
Services Group, the Global Services Group, the Global Development Group and the
newly formed Integrated Solutions Group. The ProLogis Operating System(TM) is a
customer service delivery system that has been designed to provide substantial
benefits to existing and prospective ProLogis customers, including:
- Relocation Capability. Because user requirements can change frequently,
ProLogis' presence in over 50 North American and European markets permits
ProLogis to accommodate the reconfiguration needs of its customers by
relocating an existing customer within a market or between markets both
nationally and globally.
- Expansion Capability. ProLogis, through its development program, land
inventory and existing facilities, can work effectively with existing and
prospective customers whose growing business needs require them to expand
their distribution facilities. This expansion may result in relocating
the customer to larger ProLogis spaces within a market or in developing a
facility specifically for the customer.
- Development Capability. ProLogis' team of development professionals
builds generic facilities that will appeal to a wide variety of customers
or to specifically meet ProLogis' customers' needs. ProLogis incorporates
the latest technology with respect to building design and building
systems and has developed consistent standards and procedures that it
strictly adheres to in the development of all of its facilities.
- Centrally Coordinated Program. ProLogis provides a single point of
contact for multi-location global users of distribution facilities
through the Global Services Group, whose members are responsible for
building long-term customer relationships and ensuring that all of
ProLogis' services and products are consistent in quality. ProLogis'
experience to date suggests that many major corporate customers are
limiting the number of services providers that they work with to meet
their distribution facility requirements.
The customer focus of the ProLogis Operating System(TM) provides for a
high-quality service level and a single point of contact for distribution
solutions on a global basis and positions ProLogis to build customer
relationships that will generate additional business opportunities.
Market Services Group
The Market Services Group is comprised of five senior officers, 23 market
officers, three country officers in Europe and approximately 315 property
management and leasing employees. ProLogis' market officers have extensive
experience in marketing distribution space and are responsible for understanding
the needs of existing and prospective customers in their respective markets. To
meet such needs, market officers utilize their extensive knowledge of local
market conditions, including the cost and availability of alternative space, and
are supported by their team of property management and leasing professionals. A
key role of the market officers is assisting the
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Global Services Group in identifying ProLogis' customers with multiple market
requirements. ProLogis believes that the market officers' access to national and
international ProLogis resources improves their ability to serve customers in
the local market.
Market officers do not develop projects or borrow or commit capital. Their
focus is strictly on managing the facilities in their markets, creating and
maintaining relationships with distribution space users and industrial brokers,
marketing ProLogis' products and identifying potential acquisition, development
and leasing opportunities in their target market cities.
Global Services Group
The Global Services Group, comprised of 16 employees, is dedicated to
providing service to the largest users of distribution space that ProLogis has
identified as targeted customers, with the primary focus on making ProLogis the
preferred provider of distribution space to these companies. The Global Services
Group is headquartered in Denver and Amsterdam and has regional offices in
Atlanta, Chicago, the Los Angeles metropolitan area and the New York City
metropolitan area. A key function of this group is identifying companies whose
reconfiguration and expansion plans will create future development or multiple
market opportunities to meet these customers' needs. Global Services Group
professionals build long-term relationships with ProLogis' customers and provide
a single point of contact to simplify and streamline the execution of such
customers' distribution space plans. An ancillary benefit of this extensive
contact with customers is the ability to be on the forefront of international
and national distribution and logistics trends.
Global Development Group
The Global Development Group, comprised of 72 employees, focuses
substantial research and development efforts on creating industry-leading
master-planned distribution parks and facilities. Members of the Global
Development Group have extensive experience in the development and construction
of these facilities.
The Global Development Group is comprised principally of architects,
engineers and construction professionals who oversee every aspect of the land
planning and building design processes. These professionals also monitor the
construction process and oversee the performance of third-party general
contractors. The Group's development specialists and project managers operate
regionally to better serve their markets. The project managers supervise each
project with oversight from ProLogis' management, pursuant to uniform standards,
procedures and specifications that have been carefully designed to achieve
consistent quality.
ProLogis believes the depth and breadth of experience within the Global
Development Group enhances the effectiveness of the Global Services Group and
provides the market officers with a distinct competitive advantage for
development opportunities in their respective markets.
Integrated Solutions Group
The Integrated Solutions Group, currently comprised of four employees,
coordinates a menu of value-added customer services including supply chain
optimization, strategic site selection, business location services and design
build/fee development. The Integrated Solutions Group was formed in August 1999
to further develop ProLogis' ability to service all areas of its customer's
distribution needs. ProLogis believes that the offering of these additional
services will allow ProLogis to deepen its customer relationships with
relatively small additional capital requirements.
FINANCING STRATEGY
ProLogis believes that a successful real estate operating company should
have the ability to access the equity and debt markets efficiently and
expeditiously to permit it to capitalize on business opportunities within each
of its operating segments. ProLogis funded its capital requirements in 1999 with
internally generated capital, asset sales, private equity, public debt and other
debt financing transactions. Historically, ProLogis has utilized and will
continue to utilize the borrowing capacity available through its unsecured lines
of credit to finance investment opportunities as they arise pending completion
of asset sales and longer-term debt or equity financing
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arrangements. ProLogis' total debt as a percentage of total undepreciated book
capitalization was 43.0% as of December 31, 1999.
During 1999, the following financing activities were completed:
- ProLogis completed a series of secured debt financing transactions with
aggregate principal of $466.0 million at an average interest rate of
7.34% ($182.0 million of this debt was assumed by ProLogis California
when the company was formed -- see Note 5 to ProLogis' Consolidated
Financial Statements in Item 8).
- ProLogis completed a $500.0 million unsecured public debt offering in
April 1999, at an average interest rate of 6.90%.
- ProLogis' U.S. dollar denominated, short-term borrowing capacity was
increased from $375.0 million to $575.0 million. ProLogis' average
interest rate on the $45.0 million of outstanding borrowings on the U.S.
dollar denominated unsecured lines of credit as of December 31, 1999 was
7.46%.
- A multi-currency line of credit in the currency equivalent of 325.0
million euros (the currency equivalent of $327.3 million as of December
31, 1999 based on currency exchange rates quoted by Reuters) was put in
place. The outstanding borrowings as of December 31, 1999 of 53.3 million
euros (the currency equivalent of $53.7 million as of December 31, 1999
based on currency exchange rates quoted by Reuters) were at a weighted
average interest rate of 4.25%.
- Formation of the ProLogis European Properties Fund which will allow
ProLogis to access over 1.06 billion euros (the currency equivalent of
$1.07 billion as of December 31, 1999 based on currency exchange rates
quoted by Reuters) of third party equity capital committed by a group of
institutional investors. This capital is to be used to fund acquisitions
of industrial distribution facilities in Europe from ProLogis, ProLogis
Kingspark or third parties. Of the total commitment, 182.6 million euros
(the currency equivalent of $184.0 million as of December 31, 1999 based
on currency exchange rates quoted by Reuters) was funded through December
31, 1999.
- In 1999, ProLogis disposed of 20.6 million square feet of facilities: (i)
sales of non-strategic facilities aggregated 2.6 million square feet with
net proceeds of $99.5 million; (ii) facilities sold to ProLogis
California aggregated 11.5 million square feet with total proceeds of
$538.3 million (of which 50% represented third party investment and
portions of the proceeds were received in the form of an equity interest
in ProLogis California, the assumption of $199.3 million of ProLogis debt
by ProLogis California and the issuance of $62.0 million of debt by
ProLogis California); (iii) dispositions of facilities in the CDFS
business segment to third parties aggregated 3.2 million square feet and
net proceeds of $256.4 million; and (iv) sales of facilities from
ProLogis and ProLogis Kingspark to the ProLogis European Properties Fund
aggregated 3.3 million square feet with total proceeds of $256.5 million
(of which $38.4 million was received in the form of an equity interest in
the ProLogis European Properties Fund).
PROLOGIS MANAGEMENT
ProLogis' success depends upon management's ability to provide strategic
and day-to-day management, research, investment analysis, acquisition and due
diligence, development, marketing, asset management, capital markets, asset
disposition, management information systems support and legal and accounting
services. A significant portion of these services are provided internally by
ProLogis' management, while certain other administrative services are
supplemented by or provided by Security Capital Group Incorporated ("Security
Capital"), ProLogis' largest shareholder, pursuant to an administrative services
agreement ("ASA"). The ASA supplements services performed by ProLogis personnel
including, but not limited to, payroll and human resources, cash management,
accounts payable, specified information systems support, research and insurance
services. These services are provided in exchange for a fee based on negotiated
rates for each service provided. Total fees incurred under the ASA were $3.4
million in 1999. The ASA expires on December 31, 2000.
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ProLogis believes that the quality of its management should be assessed in
light of the following factors:
- Management Depth. ProLogis has several senior executives with the
leadership, operational, investment and financial skills and experience
to oversee the entire operation of the company.
- Strategic Vision. ProLogis' management has demonstrated a strategic
vision in determining an operating and investment focus that has provided
favorable initial yields and long-term growth prospects. ProLogis'
business strategy has focused on acquiring (at prices below replacement
cost) and developing an international distribution network and a land
inventory in selected distribution markets where demographic and supply
factors have permitted high relative occupancies at increasing rents.
Through the ProLogis Operating System(TM), ProLogis believes it is the
first international operating company that has been able to address and
service a corporate customer's distribution space requirements on an
international, national, regional and local basis.
- Research Capability. ProLogis divides its target market cities into
numerous submarkets for analysis purposes. ProLogis' management has
emphasized a submarket by submarket research-based approach in
determining appropriate investment opportunities.
- Investment Committee Process. An internal investment committee provides
ProLogis with discipline and guidance to allow ProLogis to achieve its
investment goals. The 12 members of ProLogis' investment committee have
extensive years of experience in the real estate industry. The internal
investment committee evaluates all prospective investments pursuant to
uniform underwriting criteria prior to submission of investment
recommendations to the investment committee of the Board of Trustees (the
"Board").
- Acquisitions Capability/Due Diligence Process/Asset
Optimization. ProLogis has experienced senior personnel who perform
disciplined and thorough due diligence in determining whether potential
investments and divestitures meet ProLogis' long-term objectives.
ProLogis employs 24 professionals performing these functions and has
developed extensive uniform systems and procedures for analysis and due
diligence to ensure that ProLogis maximizes its investment and
divestiture opportunities.
- Development Capability. By internally developing projects, ProLogis has
captured additional value that normally escapes through sales premiums
paid to third party developers. ProLogis has approximately 115 employees
performing development activities (including 43 of ProLogis Kingspark's
employees) with significant development experience. ProLogis has engaged
in substantial development of distribution facilities (50.8 million
square feet at a total investment of $1.9 billion developed since 1991).
- Operating Capability. ProLogis believes that management can substantially
improve operating performance and achieve long-term sustainable growth in
cash flow by actively and effectively managing assets. ProLogis conceived
of and developed the ProLogis Operating System(TM) to effectively operate
ProLogis' business and provide customers with an exceptional level of
coordinated, comprehensive services, including property management,
leasing and development management services. ProLogis also provides
comprehensive asset management services provided to entities in which
ProLogis has an ownership interest.
- Capital Markets Capability. ProLogis has been able to effectively raise
equity and debt capital that has allowed it to achieve strong growth in
cash flows through investment. ProLogis enhances its ability to raise
capital and acquire assets by its ability to effectively communicate
ProLogis' strategy and performance to investors, sellers of property and
the financial media. ProLogis' personnel prepare informational materials
for and conduct periodic meetings with the investment community and
analysts.
Executive Officers and Trustees of ProLogis
Officers and Trustees of ProLogis
*K. Dane Brooksher -- 61 -- Mr. Brooksher was elected as a Trustee in
October 1993. He has been Chairman and Chief Executive Officer of ProLogis since
March 1999 and Co-Chairman and Chief Operating Officer of ProLogis from November
1993 to March 1999. Mr. Brooksher had comparable responsibilities with
15
<PAGE> 18
ProLogis' former management company from November 1993 to September 1997. Prior
thereto, Mr. Brooksher was Area Managing Partner and Chicago Office Managing
Partner of KPMG Peat Marwick, independent public accountants, where he served on
the Board of Directors and Management Committee and as International Development
Partner for Belgium and the Netherlands. Mr. Brooksher is also a Director of
Butler Manufacturing Company. Mr. Brooksher's term as Trustee expires in 2002.
*Stephen L. Feinberg -- 55 -- Mr. Feinberg was elected as a Trustee in
January 1993. Since 1970, he has been Chairman of the Board and Chief Executive
Officer of Dorsar Investment Co., Inc., a diversified holding company with
interests in real estate and venture capital. Mr. Feinberg is also a Director of
Security Capital Preferred Growth Incorporated, Continental Transmission
Corporation, Harvill Press Limited, St. John's College, The Santa Fe Institute,
and The Feinberg Foundation, Inc. He was formerly Chairman of the Board of St.
John's College, and a former director of Farrar, Strauss and Gioroux, Inc. (a
private publishing company), Molecular Informatics, Inc., Border Steel Mills,
Inc., Springer Building Materials Corporation, Circle K Corporation, EnerServe
Products, Inc., and Texas Commerce Bank-First State. Mr. Feinberg's term as
Trustee expires in 2001.
Donald P. Jacobs -- 72 --Mr. Jacobs was elected as a Trustee in February
1996. Mr. Jacobs has been a member of the J.L. Kellogg Graduate School of
Management of Northwestern University since 1957, and Dean since 1975. Mr.
Jacobs is a member of the Board of Directors of Commonwealth Edison and its
parent company, Unicom, Hartmarx Corporation, Terex Corporation, and CDW. He was
formerly Chairman of the Public Review Board of Andersen Worldwide. From 1990 to
1992, Mr. Jacobs was Chairman of the Advisory Committee of the Oversight Board
of the Resolution Trust Corporation for the third region; from 1975 to 1979,
Chairman of the Board of AMTRAK; from 1970 to 1971, Co-Staff Director of the
Presidential Commission on Financial Structure and Regulation; from 1963 to
1964, Senior Economist for the Banking and Currency Committee of the U.S. House
of Representatives. Mr. Jacobs' term as Trustee expires in 2001.
*Irving F. Lyons, III -- 50 -- Mr. Lyons was elected as a Trustee in March
1996. He has been President of ProLogis since March 1999 and Chief Investment
Officer from March 1997. Mr. Lyons was Co-Chairman of ProLogis from March 1997
to March 1999 and from December 1993 to March 1997, he was Managing Director.
Mr. Lyons had comparable responsibilities with ProLogis' former management
company from January 1994 to September 1997. Prior thereto, Mr. Lyons was the
Managing Partner of King & Lyons, a San Francisco Bay Area industrial real
estate development and management company, since its inception in 1979. Mr.
Lyons' term as Trustee expires in 2000.
John S. Moody -- 51 -- Mr. Moody was elected a Trustee in March 1999. He
was a director of Meridian Industrial Trust from 1996 to March 1999. Mr. Moody
is a Director and President and Chief Executive Officer of Cornerstone
Properties, Inc., a publicly held REIT that became self-advised in June 1995.
From April 1991 to June 1995, Mr. Moody was President and Chief Executive
Officer of Deutsche Bank Realty Advisors, where he was responsible for a $2
billion real estate portfolio. Deutsche Bank Realty Advisors was a wholly owned
subsidiary of Deutsche Bank AG and acted as the real estate advisor to all
Deutsche Bank-sponsored real estate in North America. Mr. Moody's professional
affiliations include the Association of Foreign Investors in U.S. Real Estate
and the Urban Land Institute. Mr. Moody's term as Trustee expires in 2001.
*William G. Myers -- 72 -- Mr. Myers was elected as a Trustee in January
1995. Mr. Myers is Chief Executive Officer of Ojai Ranch and Investment Company,
Inc., Santa Barbara, California, which he founded in 1963 (agri-business and
other investments). He was formerly a Trustee of Archstone Communities Trust, a
REIT affiliated with Security Capital and a former Director of S.E.E.
International, Itedek, Inc. and Bank of A. Levy. Mr. Myers serves as a Director
of the Library of Congress, James Madison Council; California Historical Society
Foundation; and St. Joseph's Health & Retirement Foundation. He is also a
Director of the Santa Barbara Botanic Gardens, Chalone Wine Group and The Nature
Conservancy and a Trustee of H.C.R.C. Merritt Trusts. Mr. Myers' term as Trustee
expires in 2000.
John E. Robson -- 69 -- Mr. Robson was elected as a Trustee in April 1994.
Since October 1993, Mr. Robson has served as Senior Advisor of Robertson
Stephens, a San Francisco based investment banking firm. From 1989 to 1992, Mr.
Robson served as Deputy Secretary of the United States Treasury. From 1986 to
1989, Mr. Robson was Dean and Professor of Management, Emory University School
of Business Administration. From 1977 to 1985, he served as President and Chief
Executive Officer and as Executive Vice President of
16
<PAGE> 19
G.D. Searle & Co. (pharmaceutical and consumer products). Mr. Robson is
currently a director of Exide Corporation, Monsanto Company and Northrop Grumman
Corporation. Mr. Robson's term as Trustee expires in 2000.
*Kenneth N. Stensby -- 60 -- Mr. Stensby was elected as a Trustee in March
1999. He was a director of Meridian Industrial Trust from 1996 to March 1999.
Mr. Stensby was President and Chief Executive Officer of United Properties, a
large Minneapolis-based diversified real estate company, from 1974 until his
retirement in January 1995. Mr. Stensby is past President of the National
Association of Industrial and Office Parks and was a director of First Asset
Realty Advisors, a pension advisory subsidiary of First Bank of Minneapolis. Mr.
Stensby is currently a director of Corner House. Mr. Stensby's term as Trustee
expires in 2002.
J. Andre Teixeira -- 47 -- Mr. Teixeira was appointed as a Trustee in
February 1999. He is President of Coca-Cola for the Russia/Ukraine Region. He is
also General Manager for Coca-Cola Russia, Ukraine and Belarus. Mr. Teixeira
also serves as Head of Representation for the Coca-Cola Export Corporation,
Moscow. From 1995 to 1998, Mr. Teixeira was Director of the Development Center,
Europe, for Coca-Cola Greater Europe, Director, Brussels Operations, Coca-Cola
Greater Europe, and Managing Director, Coca-Cola Services S.A. Mr. Teixeira was
the Africa Group Account Executive, Development, for Coca-Cola from 1994 to
1995, and Director, Research & Development, Coca-Cola Greater Europe from 1990
to 1995. Mr. Teixeira's term as Trustee expires in 2001.
*Thomas G. Wattles -- 48 -- Mr. Wattles was elected as a Trustee in January
1993. He was a Director of ProLogis' predecessor since its formation in June
1991. Mr. Wattles was Non-Executive Chairman of ProLogis from March 1997 to May
1998. Mr. Wattles was Co-Chairman and Chief Investment Officer of ProLogis from
November 1993 to March 1997, and had comparable responsibilities with ProLogis'
former management company from June 1991 to September 1997. Mr. Wattles is
currently a director of Security Capital, Urban Growth Properties Trust, CWS
Communities Trust and Security Capital-European Realty (all affiliates of
Security Capital). Mr. Wattles' term as Trustee expires in 2002.
Members of ProLogis' investment committee are designated by an asterisk
(*).
Senior Officers
*Jeffrey H. Schwartz -- 40 -- Vice Chairman for International Operations
since June 1999, where he has overall responsibility for all international
investment activities and operations. Mr. Schwartz was Senior Managing Director
and Chief Investment Officer for International Operations of ProLogis from
December 1998 to June 1999. Mr. Schwartz was Managing Director of ProLogis from
December 1994 to December 1998; he had comparable responsibilities with
ProLogis' former management company from October 1994 to September 1997. Prior
thereto, Mr. Schwartz was a founder and managing partner of The Krauss/Schwartz
Company, one of the largest industrial real estate developers in Florida. Mr.
Schwartz has been a Director of Security Capital European Realty since November
1997.
*Walter C. Rakowich -- 42 -- Managing Director and Chief Financial Officer
of ProLogis since December 1998, where he is responsible for worldwide corporate
finance. From December 1997 to December 1998, Mr. Rakowich was Managing Director
of ProLogis. Mr. Rakowich had comparable responsibilities with ProLogis' former
management company from July 1994 to September 1997. Prior thereto, Mr. Rakowich
was a consultant to ProLogis in the area of due diligence and acquisitions from
October 1993 to June 1994.
*John W. Seiple -- 41 -- Managing Director of ProLogis since December 1997,
where he has been Chief Operating Officer for North American operations since
December 1998. From November 1994 to December 1997, Mr. Seiple was Senior Vice
President of ProLogis and from October 1993 to September 1997, he had comparable
responsibilities with ProLogis' former management company.
*Robert J. Watson -- 50 -- Managing Director of ProLogis since January
1993, where he has been the Chief Operating Officer for European operations
since December 1998; he was formerly the Chief Operating Officer for North
American operations. From January 1993 to September 1997, he had comparable
responsibilities with ProLogis' former management company.
17
<PAGE> 20
*Ned K. Anderson -- 53 -- Managing Director of ProLogis since December
1998, where he has responsibility for the Pacific Region of the United States;
from December 1993 to December 1998, Mr. Anderson was Senior Vice President of
ProLogis. Mr. Anderson had comparable responsibilities with ProLogis' former
management company from September 1994 to September 1997. Prior thereto, Mr.
Anderson was a partner at King & Lyons, a San Francisco Bay Area industrial real
estate development and management company.
Paul C. Congleton -- 45 -- Managing Director of ProLogis since September
1999, where he heads the Global Services Group. Mr. Congleton was a Senior Vice
President of ProLogis from December 1998 to September 1999, where he has
responsibility for the Southeast Region. Mr. Congleton was Vice President of
ProLogis from January 1995 to December 1998; from January 1995 to September
1997, he had comparable responsibilities with ProLogis' former management
company. Prior thereto, from October 1990 to December 1994, he was Principal
with Overland Company.
*Steven K. Meyer -- 51 -- Managing Director of ProLogis since December
1998, where he has responsibility for the Central Region of the United States.
Mr. Meyer was Senior Vice President of ProLogis from December 1995 to December
1998. Mr. Meyer had comparable responsibilities with ProLogis' former management
company from September 1994 to September 1997. Prior thereto, from 1990 to July
1994, Mr. Meyer was Executive Vice President with Trammell Crow Company.
Robin P. R. von Weiler -- 43 -- Managing Director and Regional Head of
ProLogis since December 1999, where he is responsible for Northern and Central
Europe. Mr. von Weiler was a Senior Vice President of ProLogis from October 1997
to December 1999, where he was responsible for global services and marketing in
Northern Europe. Prior thereto, from April 1972 to September 1997, he was with
DTZ Zadelhoff V.O.F., where his most recent position was Vice Managing Director,
Real Estate Agent and Corporate Advisor. Mr. von Weiler is a registered Real
Estate Agent and a Member of the Dutch Real Estate Agents Association.
Frank H. Fallon -- 38 -- Senior Vice President of ProLogis since September
1999, where he has responsibility for the Southeast Region of the United States.
From January 1995 to September 1999, Mr. Fallon was Vice President of ProLogis;
from September 1995 to September 1997, he had comparable responsibilities with
ProLogis' former management company. Prior thereto, from March 1987 to December
1994, Mr. Fallon was with Trammell Crow Company
Kent W. Johnson -- 46 -- Senior Vice President of ProLogis since July 1995,
where he heads the Integrated Solutions Group; from July 1995 to September 1997,
he headed the Global Services Group for ProLogis' former management company.
Prior thereto, from March 1994 to June 1995, Mr. Johnson was National Director
for Sequent Computer Systems; from January 1977 to March 1994, he held various
positions with IBM, including National Account Director and Branch Manager.
M. Gordon Keiser, Jr. -- 55 -- Senior Vice President of ProLogis since
October 1995 and Treasurer since December 1998, where he is responsible for
relationships with ProLogis lenders; from October 1995 to September 1997, he had
comparable responsibilities with ProLogis' former management company. Prior
thereto, from August 1988 to October 1995, Mr. Keiser was Senior Vice President
of JMB Realty Corporation, where he was responsible for corporate finance and
capital markets financing. Previously, he was with KPMG Peat Marwick.
Edward F. Long -- 43 -- Senior Vice President and Controller of ProLogis
since December 1998, where he is responsible for worldwide accounting, financial
reporting and financial forecasting. From January 1996 to December 1998, Mr.
Long was Vice President and Controller of ProLogis; from June 1995 to September
1997, he had comparable responsibilities with ProLogis' former management
company. Prior thereto, from December 1990 to June 1995, he was Director of
Financial Services for Coopers & Lybrand in Central Florida and the Carolinas.
Mr. Long is a Certified Public Accountant.
Debra A. McRight -- 40 -- Senior Vice President of ProLogis since December
1999, where she is responsible for national property management operations. From
September 1995 to December 1999, Ms. McRight was Vice President of ProLogis;
from September 1995 to September 1997, she had comparable responsibilities with
ProLogis' former management company. Prior thereto, from June 1989 to February
1995, she was with Paragon Group, Inc.
18
<PAGE> 21
David S. Morze -- 39 -- Senior Vice President of ProLogis since March 1999,
where he has responsibility for the Mid-Atlantic Region of the United States.
Mr. Morze was Vice President of ProLogis from March 1995 to December 1998; from
March 1995 to September 1997, he had comparable responsibilities with ProLogis'
former management company. Prior thereto, from May 1993 to March 1995, Mr. Morze
was employed by the SARES*REGIS GROUP of Northern California, where he was
responsible for marketing and leasing activities in the San Francisco Eastbay
Industrial Market.
Edward S. Nekritz -- 34 -- Senior Vice President of ProLogis since December
1998 and Secretary since March 1999, where he serves as General Counsel and
oversees the provision of all legal services for ProLogis. Mr. Nekritz also
focuses on strategic initiatives and is responsible for the coordination of
ProLogis' international leasing and environmental compliance programs. From
September 1995 to December 1998, Mr. Nekritz was Vice President of ProLogis;
from September 1995 to September 1997, he had comparable responsibilities with
ProLogis' former management company. Prior thereto, from October 1990 to
September 1995, Mr. Nekritz was an attorney with Mayer, Brown & Platt.
John R. Rizzo -- 50 -- Senior Vice President of ProLogis since January
1999, where he supervises development services related to construction
management and corporate distribution facilities. Prior thereto, from 1983 to
January 1999, Mr. Rizzo was with the Perini Corporation, where his most recent
position was Senior Vice President and Chief Operating Officer of Perini
Management Services Incorporated.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of certain hazardous or toxic substances
at, on, under or in its property. The costs of removal or remediation of such
substances could be substantial. Such laws often impose liability without regard
to whether the owner or operator knew of, or was responsible for, the release or
presence of such hazardous substances. The presence of such substances may
adversely affect the owner's ability to sell such real estate or to borrow using
such real estate as collateral. ProLogis has not been notified by any
governmental authority of any non-compliance, liability or other claim in
connection with any of the properties owned or being acquired as of December 31,
1999, and ProLogis is not aware of any environmental condition with respect to
any of its properties that is likely to be material. ProLogis or the predecessor
owners have subjected each of its properties to an environmental assessment
(which does not involve invasive procedures such as soil sampling or ground
water analysis) by independent consultants. While some of these assessments have
led to further investigation and sampling, none of the environmental assessments
has revealed, nor is ProLogis aware of, any environmental liability (including
asbestos-related liability) that ProLogis believes would have a material adverse
effect on its business, financial condition or results of operations. No
assurance can be given, however, that these assessments and investigations
reveal all potential environmental liabilities, that no prior owner or operator
created any material environmental condition not known to ProLogis or the
independent consultants or that future uses or conditions (including, without
limitation, customer actions or changes in applicable environmental laws and
regulations) will not result in unreimbursed costs relating to environmental
liabilities.
INSURANCE COVERAGE
ProLogis and its consolidated and unconsolidated entities currently carry
comprehensive insurance coverage including, liability, fire, flood, earthquake,
environmental, extended coverage and rental loss as appropriate for the markets
where each entities' facilities and business operations are located. The
insurance coverage contains policy specifications and insured limits customarily
carried for similar facilities. ProLogis believes its facilities and the
facilities of its consolidated and unconsolidated entities are adequately
insured; however, an uninsured loss could result in loss of capital investment
and anticipated profits.
19
<PAGE> 22
ITEM 2. PROPERTIES
INDUSTRIAL DISTRIBUTION FACILITIES
ProLogis and its consolidated entities (see -- "Consolidated
Entities -- Partnerships") have invested primarily in generic industrial
distribution facilities with an average office finish level of less than 10%.
Due to the costs associated with retrofitting customer spaces, service center
product has been acquired only on a very limited basis, generally as part of
portfolio acquisitions in which the majority of product being acquired was bulk
distribution. ProLogis' industrial real estate is typically used for storage,
packaging, assembly, distribution and light manufacturing of consumer and
industrial products.
- Distribution. ProLogis' distribution space is adaptable for both bulk
distribution and light manufacturing or assembly uses. Based upon square
footage, ProLogis' operating portfolio was comprised of 88.1% bulk
distribution and 10.5% light manufacturing facilities as of December 31,
1999.
- Service Center and Other. Under ProLogis' definition, service centers are
multi-customer buildings that have a higher percentage of office space
than distribution facilities and only have grade-level loading as opposed
to truck dock loading. As of December 31, 1999, service center product
constituted approximately 1.1% of the square feet in ProLogis' operating
portfolio and other miscellaneous facilities (primarily office
facilities), acquired as part of portfolio acquisitions, constitute 0.3%
of the square feet in ProLogis' operating portfolio.
GEOGRAPHIC DISTRIBUTION
ProLogis and its consolidated entities (see -- "Consolidated
Entities -- Partnerships") have direct ownership of industrial distribution
facilities in North America and Europe. In North America (United States and
Mexico), ProLogis' facilities are located in 25 states and the District of
Columbia and 46 cities (including four cities in Mexico). In Europe, ProLogis'
facilities are located in four countries and seven cities. The table below
demonstrates the geographic distribution of ProLogis' portfolio (operating
facilities and facilities under development). The table excludes land held for
future development which represents less than 5% of ProLogis' total investment,
based on cost as of December 31, 1999 and 1998. The table does not include
facilities that are owned by ProLogis' unconsolidated entities which are
discussed under " -- Unconsolidated Entities".
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
PERCENTAGE PERCENTAGE
NUMBER OF ASSETS BASED NUMBER OF ASSETS BASED
FACILITIES ON COST(1) FACILITIES ON COST(1)
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
NORTH AMERICAN MARKETS:
Atlanta, Georgia........................ 103 6.20% 104 7.15%
Austin, Texas........................... 33 1.53 37 2.22
Birmingham, Alabama..................... 6 0.69 6 0.96
Charlotte, North Carolina............... 32 2.28 29 2.41
Chattanooga, Tennessee.................. 5 0.30 5 0.43
Chicago, Illinois....................... 64 6.25 40 4.89
Cincinnati, Ohio........................ 46 3.04 43 3.15
Columbus, Ohio.......................... 32 4.43 21 2.10
Dallas/Fort Worth, Texas................ 120 8.31 71 5.07
Denver, Colorado........................ 28 1.82 26 2.46
Detroit, Michigan....................... 21 0.78 4 0.14
East Bay (San Francisco), California.... 54 4.59 44 3.55
El Paso, Texas.......................... 22 1.56 27 2.33
Fort Lauderdale/Miami, Florida.......... 16 1.58 11 1.49
Houston, Texas.......................... 84 4.29 74 4.73
I-95 Corridor, New Jersey............... 35 4.27 21 3.89
Indianapolis, Indiana................... 45 2.85 41 3.15
Juarez, Mexico.......................... 6 0.27 4 0.26
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
PERCENTAGE PERCENTAGE
NUMBER OF ASSETS BASED NUMBER OF ASSETS BASED
FACILITIES ON COST(1) FACILITIES ON COST(1)
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Kansas City, Kansas/Missouri............ 29 1.14 29 1.57
Las Vegas, Nevada....................... 18 2.18 14 1.50
Los Angeles/Orange County,
California(2)........................ 4 0.95 29 6.38
Louisville, Kentucky.................... 10 1.19 8 0.97
Memphis, Tennessee...................... 40 2.80 25 2.13
Monterrey, Mexico....................... 10 0.90 8 1.04
Nashville, Tennessee.................... 31 1.72 27 1.66
Oklahoma City, Oklahoma................. 6 0.21 6 0.29
Orlando, Florida........................ 23 1.73 17 1.16
Phoenix, Arizona........................ 32 1.63 25 1.32
Portland, Oregon........................ 26 1.42 29 2.11
Reno, Nevada............................ 19 1.50 17 1.29
Reynosa, Mexico......................... 12 0.77 8 0.67
Rio Grande Valley, Texas................ 14 0.49 15 0.85
Salt Lake City, Utah.................... 10 1.16 9 1.46
San Antonio, Texas...................... 47 2.08 46 2.70
San Diego, California................... -- -- 3 0.38
Seattle, Washington..................... 15 1.21 10 1.34
South Bay (San Francisco), California... 72 4.68 70 6.06
St. Louis, Missouri..................... 15 0.95 15 1.13
Tampa, Florida.......................... 62 2.52 62 3.41
Tijuana, Mexico......................... 4 0.42 2 0.26
Tulsa, Oklahoma......................... 9 0.23 10 0.37
Washington D.C./Baltimore, Maryland..... 40 3.05 39 3.98
Other................................... 3 0.13 4 0.32
----- ------ ----- ------
1,303 90.10 1,135 94.73
----- ------ ----- ------
EUROPEAN MARKETS(3)(4)(5):
Amsterdam, Netherlands.................. 1 0.20 4 1.18
Cologne, Germany........................ 1 0.33 -- --
Lille, France........................... 2 0.15 -- --
London, England......................... -- -- 1 0.97
Lyon, France............................ 3 0.50 3 0.62
Paris, France........................... 57 6.36 4 0.82
Rotterdam, Netherlands.................. 3 0.52 2 0.45
Warsaw, Poland.......................... 9 1.84 5 1.23
----- ------ ----- ------
76 9.90 19 5.27
----- ------ ----- ------
Total........................... 1,379(6) 100.00% 1,154(7) 100.00%
===== ====== ===== ======
</TABLE>
- ---------------
(1) Facilities under development are reflected at their total budgeted
development cost, rather than cost incurred to date.
(2) In 1999, does not include 78 buildings owned by ProLogis California, an
unconsolidated entity in which ProLogis has a 50% ownership interest as of
December 31, 1999. See "-- Unconsolidated Entities" for additional
information on these facilities.
(3) In 1999, does not include 18 buildings owned by the ProLogis European
Properties Fund, an unconsolidated entity in which ProLogis has a 19.68%
ownership interest as of December 31, 1999. See "-- Unconsolidated Entities"
for additional information on these facilities.
21
<PAGE> 24
(4) Does not include facilities owned by ProLogis Kingspark (15 operating
facilities and 14 facilities under development as of December 31, 1999 and
15 operating facilities and five facilities under development as of December
31, 1998), an unconsolidated entity in which ProLogis recognizes
substantially all of the economic benefits. See "-- Unconsolidated
Entities".
(5) On January 7, 2000, ProLogis contributed 50.1% of the common stock of one of
its wholly owned European entities to the ProLogis European Properties Fund
and is committed to contributing the remaining 49.9% of the common stock to
the ProLogis European Properties Fund in January 2001. This entity owned 61
facilities (54 facilities in Paris, five facilities in Warsaw, one facility
in Lyon and one facility in Rotterdam) representing approximately 6.9% of
ProLogis' assets (operating facilities and facilities under development).
(6) Includes 51 buildings under development.
(7) Includes 55 buildings under development.
FACILITIES
The information in the following table is as of December 31, 1999 for the
facilities owned by ProLogis and its consolidated entities in North America and
Europe. No individual facility or group of facilities operated as a single
business unit amounted to 10% or more of ProLogis' consolidated total assets as
of December 31, 1999 or generated gross revenue equal to 10% or more of
ProLogis' consolidated gross revenues for the year ended December 31, 1999. The
table does not include facilities that are owned by ProLogis' unconsolidated
entities which are discussed under "-- Unconsolidated Entities".
<TABLE>
<CAPTION>
PERCENTAGE RENTABLE
NO. OF OCCUPANCY SQUARE FOOTAGE INVESTMENT ENCUMBRANCES
BLDGS. (1) (2) (3) (4)
------ ---------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
OPERATING FACILITIES OWNED AS OF
DECEMBER 31, 1999(5):
NORTH AMERICAN MARKETS:
Atlanta, Georgia........... 102 90.63% 10,387,479 $ 309,214,441 $ 39,067,157
Austin, Texas.............. 33 95.09 2,041,409 77,048,515 --
Birmingham, Alabama........ 6 97.87 1,135,278 34,390,764 --
Charlotte, North
Carolina(6).............. 30 95.56 3,802,670 108,347,568 40,805,692
Chattanooga, Tennessee..... 5 100.00 1,147,872 15,154,843 --
Chicago, Illinois(7)....... 64 92.54 8,035,702 313,788,625 46,374,007
Cincinnati, Ohio(8)........ 45 94.05 4,726,802 146,293,557 40,497,330
Columbus, Ohio............. 31 100.00 6,160,622 212,409,143 40,735,793
Dallas/Fort Worth,
Texas(6)(8)(9)........... 118 92.93 12,024,827 389,544,811 68,624,175
Denver, Colorado(6)........ 26 96.99 3,084,301 82,583,116 --
Detroit, Michigan.......... 21 85.76 820,932 39,376,762 --
East Bay (San Francisco),
California(6)(10)........ 53 99.47 5,368,799 223,354,014 15,309,989
El Paso, Texas(6).......... 20 90.41 2,423,983 64,899,270 3,446,843
Fort Lauderdale/Miami,
Florida(7)(8)............ 14 90.03 1,437,058 67,318,075 2,137,690
Houston, Texas............. 84 93.98 7,448,797 215,263,465 47,848,401
I-95 Corridor, New
Jersey(8)................ 32 99.75 4,991,937 190,394,174 28,374,495
Indianapolis, Indiana...... 45 83.29 4,908,137 143,008,379 --
Juarez, Mexico............. 5 100.00 288,786 10,911,576 --
Kansas City,
Kansas/Missouri.......... 29 90.83 1,578,487 57,319,731 13,778,445
Las Vegas, Nevada(9)....... 17 96.76 2,061,291 100,429,463 22,941,817
Los Angeles/Orange County,
California(11)........... 3 100.00 605,548 23,775,360 --
Louisville, Kentucky....... 8 99.95 1,682,788 40,030,408 6,114,170
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
PERCENTAGE RENTABLE
NO. OF OCCUPANCY SQUARE FOOTAGE INVESTMENT ENCUMBRANCES
BLDGS. (1) (2) (3) (4)
------ ---------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Memphis, Tennessee......... 39 95.45 5,415,819 130,757,790 15,485,333
Monterrey, Mexico.......... 8 100.00 973,303 38,063,833 --
Nashville, Tennessee....... 29 94.52 3,177,349 75,764,488 --
Oklahoma City, Oklahoma.... 6 96.06 639,942 10,674,408 --
Orlando, Florida(7)(8)..... 23 81.49 2,112,100 86,696,058 12,979,216
Phoenix, Arizona........... 32 99.12 2,446,332 81,821,252 --
Portland, Oregon........... 26 85.07 1,957,295 71,336,274 414,479
Reno, Nevada............... 17 91.85 1,556,786 47,198,323 --
Reynosa, Mexico............ 9 90.03 765,674 25,378,728 --
Rio Grande Valley
(Brownsville), Texas..... 14 94.72 916,746 24,714,456 2,877,600
Salt Lake City, Utah....... 9 100.00 1,890,268 53,008,891 --
San Antonio, Texas(7)...... 46 95.42 3,991,403 98,538,471 --
Seattle, Washington........ 15 98.59 1,390,447 60,910,418 4,985,349
South Bay (San Francisco),
California(10)........... 72 97.21 3,768,371 235,215,326 20,116,111
St. Louis, Missouri(6)..... 15 86.84 1,621,825 47,631,368 9,906,808
Tampa, Florida(7)(8)(10)... 61 91.67 3,358,403 121,270,212 31,932,890
Tijuana, Mexico............ 2 100.00 262,220 9,173,870 --
Tulsa, Oklahoma............ 9 100.00 523,463 11,754,885 --
Washington, D.C./Baltimore,
Maryland(6).............. 38 96.23 3,315,902 138,096,133 37,220,360
Other(7)(8)................ 3 100.00 193,562 6,565,883 468,592
----- ------ ----------- -------------- ------------
Subtotal North America... 1,264 94.12 126,440,715 4,239,427,127 552,442,742
----- ------ ----------- -------------- ------------
EUROPEAN MARKETS(12):
Lille, France.............. 2 52.95 219,112 7,458,220 --
Lyon, France............... 1 100.00 296,720 7,856,904 4,797,421
Paris, France.............. 54 93.46 5,802,889 290,740,988 137,932,339
Rotterdam, Netherlands..... 2 38.84 355,998 15,426,721 --
Warsaw, Poland............. 5 67.03 573,129 39,426,346 --
----- ------ ----------- -------------- ------------
Subtotal Europe(12)...... 64 87.73 7,247,848 360,909,179 142,729,760
----- ------ ----------- -------------- ------------
TOTAL OPERATING
FACILITIES OWNED AS
OF DECEMBER 31,
1999(5)............. 1,328 93.78% 133,688,563 $4,600,336,306 $695,172,502
===== ====== =========== ============== ============
</TABLE>
<TABLE>
<CAPTION>
RENTABLE BUDGETED
SQUARE DEVELOPMENT
NO. OF FOOTAGE INVESTMENT COSTS
BLDGS. (2) (3) (13)
------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
FACILITIES UNDER DEVELOPMENT AS OF
DECEMBER 31, 1999(14)(15):
NORTH AMERICAN MARKETS:
Atlanta, Georgia..................... 1 51,600 1,627,001 $ 2,410,800
Charlotte, North Carolina............ 2 178,000 4,439,919 6,284,890
Cincinnati, Ohio..................... 1 205,920 4,358,008 6,420,453
Columbus, Ohio....................... 1 378,283 5,453,824 10,004,947
Dallas/Fort Worth, Texas............. 2 868,425 6,287,474 28,213,658
Denver, Colorado..................... 2 208,800 4,309,707 9,093,060
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
RENTABLE BUDGETED
SQUARE DEVELOPMENT
NO. OF FOOTAGE INVESTMENT COSTS
BLDGS. (2) (3) (13)
------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
East Bay (San Francisco),
California......................... 1 200,000 4,922,217 7,141,304
El Paso, Texas....................... 2 426,580 4,064,227 13,650,269
Fort Lauderdale/Miami, Florida....... 2 257,750 7,512,819 11,988,350
I-95 Corridor, New Jersey............ 3 482,720 20,332,955 24,226,111
Juarez, Mexico....................... 1 73,150 2,078,356 2,677,877
Las Vegas, Nevada.................... 1 235,520 1,960,950 8,874,076
Los Angeles/Orange County,
California......................... 1 763,228 7,733,649 24,131,163
Louisville, Kentucky................. 2 693,000 14,601,206 19,844,317
Memphis, Tennessee................... 1 360,000 1,795,590 9,790,347
Monterrey, Mexico.................... 2 194,100 3,555,654 7,164,487
Nashville, Tennessee................. 2 320,400 6,038,536 10,712,190
Reno, Nevada......................... 2 771,131 21,615,462 27,809,659
Reynosa, Mexico...................... 3 375,179 4,938,757 13,152,320
Salt Lake City, Utah................. 1 149,800 3,188,221 5,296,079
San Antonio, Texas................... 1 160,000 4,157,754 5,910,823
Tampa, Florida....................... 1 115,200 1,511,421 5,538,684
Tijuana, Mexico...................... 2 352,900 5,274,105 12,078,985
Washington, D.C./Baltimore,
Maryland........................... 2 303,200 9,057,588 15,188,967
-- ---------- ------------ ------------
Subtotal North America............. 39 8,124,886 150,815,400 287,603,816
-- ---------- ------------ ------------
EUROPEAN MARKETS:
Amsterdam, Netherlands............... 1 160,491 5,033,872 10,250,060
Cologne, Germany..................... 1 222,459 3,090,942 16,747,841
Lyon, France......................... 2 484,110 8,172,399 17,413,191
Paris, France........................ 3 415,360 12,826,942 28,795,925
Rotterdam, Netherlands............... 1 238,406 2,143,225 10,453,111
Warsaw, Poland....................... 4 1,075,321 4,086,456 52,964,592
-- ---------- ------------ ------------
Subtotal Europe.................... 12 2,596,147 35,353,836 136,624,720
-- ---------- ------------ ------------
TOTAL FACILITIES UNDER
DEVELOPMENT AS OF DECEMBER 31,
1999(14)(15).................. 51 10,721,033 $186,169,236 $424,228,536
== ========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
ACREAGE INVESTMENT ENCUMBRANCES
(2) (3) (4)
------- ------------ ------------
<S> <C> <C> <C>
LAND HELD FOR DEVELOPMENT AS OF DECEMBER 31,
1999(16)(17):
NORTH AMERICAN MARKETS:
Atlanta, Georgia................................... 98.8 $ 7,469,303 $ --
Austin, Texas...................................... 27.7 2,141,471 --
Charlotte, North Carolina.......................... 25.3 2,446,431 --
Chicago, Illinois.................................. 172.1 29,555,762 --
Cincinnati, Ohio................................... 53.9 4,174,844 --
Columbus, Ohio..................................... 77.3 2,871,689 --
Dallas/Fort Worth, Texas........................... 77.3 4,433,969 --
Denver, Colorado................................... 15.6 1,405,890 --
Detroit, Michigan.................................. 70.0 2,817,513 --
East Bay (San Francisco), California............... 38.7 5,079,463 --
El Paso, Texas..................................... 122.4 6,494,513 --
Fort Lauderdale/Miami, Florida..................... 5.5 1,219,839 --
Houston, Texas..................................... 64.9 5,289,948 --
I-95 Corridor, New Jersey.......................... 67.9 5,088,853 --
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
ACREAGE INVESTMENT ENCUMBRANCES
(2) (3) (4)
------- ------------ ------------
<S> <C> <C> <C>
Indianapolis, Indiana.............................. 102.8 7,790,021 --
Juarez, Mexico..................................... 17.7 2,909,424 --
Kansas City, Kansas/Missouri....................... 16.6 1,511,000 --
Las Vegas, Nevada.................................. 76.1 7,341,610 413,038
Los Angeles/Orange County, California.............. 34.7 9,106,360 --
Louisville, Kentucky............................... 18.3 807,775 --
Memphis, Tennessee................................. 26.6 1,975,109 --
Monterrey, Mexico.................................. 3.8 125,607 --
Orlando, Florida................................... 28.1 2,788,623 --
Portland, Oregon................................... 18.0 2,857,201 --
Reno, Nevada....................................... 58.6 8,725,359 --
Reynosa, Mexico.................................... 40.2 2,485,485 --
Rio Grande Valley (Brownsville), Texas............. 14.8 439,288 --
Salt Lake City, Utah............................... 42.5 2,909,424 --
San Antonio, Texas................................. 47.5 4,472,060 --
Seattle, Washington................................ 10.6 1,916,510 --
Tampa, Florida..................................... 56.2 4,030,697 --
Tijuana, Mexico.................................... 14.1 2,869,952 --
Washington, D.C./Baltimore, Maryland............... 39.4 5,673,678 --
------- ------------ --------
Subtotal North America........................... 1,584.0 151,224,671 413,038
------- ------------ --------
EUROPEAN MARKETS:
Amsterdam, Netherlands............................. 17.9 3,517,450 --
Le Havre, France................................... 123.6 1,135,321 --
Milan, Italy....................................... 32.4 1,628,283 --
Paris, France...................................... 5.5 1,626,318 --
Rotterdam, Netherlands............................. 15.1 1,523,571 --
Warsaw, Poland..................................... 19.1 3,040,083 --
------- ------------ --------
Subtotal Europe.................................. 213.6 12,471,026 --
------- ------------ --------
TOTAL LAND HELD FOR DEVELOPMENT AS OF DECEMBER
31, 1999(16)(17)............................ 1,797.6 $163,695,697 $413,038
======= ============ ========
</TABLE>
<TABLE>
<CAPTION>
RENTABLE BUDGETED
SQUARE DEVELOPMENT
NO. OF ACREAGE FOOTAGE INVESTMENT COST ENCUMBRANCES
BLDGS. (2) (2) (3) (13) (4)
------ ------- ----------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
GRAND TOTALS AS OF DECEMBER 31,
1999:
Operating Facilities............ 1,328 n/a 133,688,563 $4,600,336,306 n/a $695,172,502
Facilities Under Development.... 51 n/a 10,721,033 186,169,236 $424,228,536 n/a
Land Held for Development....... n/a 1,797.6 n/a 163,695,697 n/a 413,038
----- ------- ----------- -------------- ------------ ------------
Totals................... 1,379 1,797.6 144,409,596 $4,950,201,239(18) $424,228,536 $695,585,540
===== ======= =========== ============== ============ ============
</TABLE>
- ---------------
(1) Percentage Occupancy is physical occupancy for the facility as of December
31, 1999. Operating facilities as of December 31, 1999 include recently
completed development facilities in initial lease-up (1.3 million square
feet completed in the fourth quarter of 1999) which impacts the overall
occupancy percentage as of December 31, 1999.
(2) Square footage is shown for operating facilities and facilities under
development; acreage is shown for land held for future development and land
subject to fixed price options and rights of first refusal.
(3) ProLogis investment is as of December 31, 1999 and represents ProLogis'
historical cost.
25
<PAGE> 28
(4) Certain facilities are pledged as collateral under ProLogis' mortgage
notes, assessment bonds and securitized debt as of December 31, 1999. See
Schedule III-Real Estate and Accumulated Depreciation to ProLogis'
Consolidated Financial Statements in Item 8 for specific facilities
pledged.
(5) All assets are utilized in the property operations segment. See "Item
1 -- Business -- ProLogis Trust".
(6) Includes facilities owned by ProLogis Limited Partnership-II at 100%. See
-- "Partnerships".
(7) Includes facilities owned by ProLogis Limited Partnership-III at 100%. See
-- "Partnerships".
(8) Includes facilities owned by ProLogis Limited Partnership-IV at 100%. See
-- "Partnerships".
(9) Includes facilities owned by MDN/JSC II Limited Partnership at 100%. See
-- "Partnerships".
(10) Includes facilities owned by ProLogis Limited Partnership-I at 100%. See
-- "Partnerships".
(11) Includes a facility owned by Meridian Realty Partners Limited Partnership
at 100%. See -- "Partnerships".
(12) On January 7, 2000, ProLogis contributed 50.1% of the common stock of one
of its wholly owned European entities to the ProLogis European Properties
Fund and is committed to contributing the remaining 49.9% of the common
stock to the ProLogis European Properties Fund in January 2001. This
European entity owned the following facilities as of December 31, 1999:
<TABLE>
<CAPTION>
RENTABLE
NO. OF SQUARE
LOCATION BLDGS. FOOTAGE INVESTMENT ENCUMBRANCES
- -------- ------ --------- ------------ ------------
<S> <C> <C> <C> <C>
Lyon, France.................. 1 296,720 $ 7,856,904 $ 4,797,421
Paris, France................. 54 5,802,889 290,740,988 137,932,339
Rotterdam, Netherlands........ 1 135,961 6,743,028 --
Warsaw, Poland................ 5 573,129 39,426,346 --
-- --------- ------------ ------------
Total............... 61 6,808,699 $344,767,266 $142,729,760
== ========= ============ ============
</TABLE>
(13) Represents the total budgeted development cost for facilities under
development, which includes the cost of land, fees, permits, payments to
contractors, architectural and engineering fees and interest and property
taxes to be capitalized during construction, rather than costs incurred to
date.
(14) Of the total facilities under development, 2.7 million square feet with a
total budgeted development cost of $98.7 million are expected to be
utilized in the property operations segment. The remaining 8.0 million
square feet with a total budgeted development cost of $325.5 million are
expected to be utilized in the CDFS business segment. See "Item
1 -- Business -- ProLogis Trust".
(15) Includes 1.8 million square feet in the design and permitting stage.
(16) All of the land held for future development is expected to be utilized in
the CDFS business segment. See "Item 1 -- Business -- ProLogis Trust".
(17) Does not include 1,222.1 acres of land controlled under option, letter of
intent or contingent contract.
(18) See Schedule III -- Real Estate and Accumulated Depreciation to ProLogis'
Consolidated Financial Statements in Item 8 for a reconciliation of this
amount to ProLogis' total investment in real estate.
CONSOLIDATED ENTITIES
Partnership
To facilitate certain strategic acquisitions ProLogis formed four
partnerships and, in conjunction with the Meridian Merger, ProLogis acquired
interests in two partnerships (see Notes 3 and 7 to ProLogis' Consolidated
Financial Statements in Item 8). ProLogis holds a majority interest in and
controls all six of these partnerships (collectively, the "Partnerships").
Consequently, the Partnerships are consolidated with the accounts of ProLogis.
Generally, pursuant to the Partnership agreements, ProLogis or one of its wholly
owned entities, is the sole controlling general partner and has full
responsibility for the management and control of the Partnerships. The limited
partners have no authority to transact business for, or, except as described
below, participate in the management decisions of, the Partnerships. However,
any decision to amend certain provisions of the applicable partnership
agreement, to dissolve a Partnership prior to the term set forth in the
applicable partnership agreement
26
<PAGE> 29
or to enter into certain extraordinary transactions would require the consent of
all limited partners. Pursuant to the partnership agreements, ProLogis, or its
wholly owned entity, as the case may be, may not voluntarily withdraw from the
applicable Partnership or transfer or assign its interests in the Partnership
without the consent of all of the limited partners thereto. The limited partners
may freely transfer their Partnership units to affiliates, provided that such
transfer does not cause a termination of the Partnership for federal income tax
purposes and does not cause ProLogis to cease to comply with requirements under
the Code for qualification as a REIT. Each of the Partnership agreements grants
to the limited partners the right to exchange their Partnership units for
ProLogis common shares of beneficial interest, par value $0.01 per share,
("Common Shares"), subject to certain conditions. The six partnerships, which
are part of the property operations segment are as follows:
- ProLogis Limited Partnership-I, which owned approximately $209.6 million
of industrial distribution facilities totaling 3.9 million square feet
located primarily in the San Francisco Bay market as of December 31,
1999, was formed in December 1993. ProLogis had a 68.7% controlling
general partnership interest and there were 4,520,532 limited partnership
units outstanding as of December 31, 1999. These facilities cannot be
sold, prior to the occurrence of certain events, without the consent of
the limited partners thereto, other than in tax deferred exchanges.
- ProLogis Limited Partnership-II, which owned approximately $56.8 million
of industrial distribution facilities totaling 1.9 million square feet
located primarily in the Charlotte, Dallas/Ft. Worth, Denver, El Paso,
St. Louis, Washington D.C./Baltimore and the San Francisco Bay markets as
of December 31, 1999, was formed in May 1994. ProLogis' initial 81.2%
controlling general partnership interest has subsequently been increased
to 97.8% (the ownership interest as of December 31, 1999) due to the
conversion of limited partnership units into Common Shares. There were
90,213 limited partnership units outstanding as of December 31, 1999.
- ProLogis Limited Partnership-III, which owned approximately $51.7 million
of industrial distribution facilities totaling 1.4 million square feet
located primarily in the San Antonio, Orlando, Ft. Lauderdale/ Miami and
Tampa markets as of December 31, 1999, was formed in October 1994.
ProLogis had a 50.4% controlling general partnership interest at
formation, which has subsequently been increased to 88.2% (the ownership
interest as of December 31, 1999) as the result of additional
contributions by ProLogis and the conversion of limited partnership units
into Common Shares. There were 376,347 limited partnership units
outstanding as of December 31, 1999.
- ProLogis Limited Partnership-IV, which owned approximately $94.8 million
of industrial distribution facilities totaling 2.6 million square feet
located primarily in the Cincinnati, Dallas/Ft. Worth, Ft.
Lauderdale/Miami, Orlando and Tampa markets as of December 31, 1999, was
formed in October 1994 through a cash contribution from a wholly owned
subsidiary of ProLogis, ProLogis IV, Inc., and the contribution of
industrial distribution facilities from the limited partner. ProLogis'
initial 96.4% controlling general partnership interest has been increased
to 98.2% (the ownership interest as of December 31, 1999) as the result
of additional contributions by ProLogis. There were 68,612 limited
partnership units outstanding as of December 31, 1999.
- ProLogis Limited Partnership-IV and ProLogis IV, Inc. are legal entities
separate and distinct from ProLogis, its affiliates and each other, and
each has separate assets, liabilities, business functions and operations.
The sole assets of ProLogis IV, Inc. are its general partner advances to
and its interest in ProLogis Limited Partnership-IV. As of December 31,
1999, ProLogis Limited Partnership-IV had outstanding borrowings from
ProLogis IV, Inc. of $0.7 million and ProLogis IV, Inc. had outstanding
borrowings from ProLogis and its affiliates of $0.7 million.
- Meridian Realty Partners, L.P. owned a $10.3 million industrial
distribution facility totaling 255,000 square feet in the Los Angeles
market as of December 31, 1999. ProLogis had an 88.0% controlling general
partnership interest and there were 29,712 limited partnership units
outstanding as of December 31, 1999.
- MDN/JSC II Limited Partnership owned approximately $62.1 million of
industrial distribution facilities totaling 986,000 square feet located
in the Dallas and Las Vegas markets as of December 31, 1999.
27
<PAGE> 30
ProLogis had a 67.4% controlling general partnership interest and there were
453,375 limited partnership units outstanding as of December 31, 1999.
For financial reporting purposes, the assets, liabilities, results of
operations and cash flows of each of the Partnerships are included in ProLogis'
consolidated financial statements, and the interests of the limited partners are
reflected as minority interest.
ProLogis Development Services
ProLogis Development Services, which is part of the CDFS business segment,
develops corporate distribution facilities to meet customer requirements, which
are often sold to customers or third parties. ProLogis Development Services also
contracts on a fee basis to develop distribution facilities for customers or
third parties. ProLogis owns 100% of the preferred stock of ProLogis Development
Services and realizes substantially all economic benefits of its activities.
Because ProLogis advances mortgage loans to ProLogis Development Services to
fund its acquisition, development and construction activities, ProLogis
Development Services is consolidated with ProLogis. ProLogis Development
Services' real estate assets represented 7.5% of ProLogis' total assets (at
cost) as of December 31, 1999. ProLogis Development Services is not a qualified
REIT subsidiary of ProLogis under the Code. Accordingly, ProLogis Development
Services pays federal and state income taxes, as appropriate.
UNCONSOLIDATED ENTITIES
In order to comply with the requirements of the Code to qualify as a REIT,
ProLogis has invested in the nonvoting preferred stock of certain entities that
have ownership interests in companies that produce income that is not REIT
"qualifying" income (i.e., rental income and mortgage interest income) under the
Code. To maintain its qualification as a REIT, ProLogis can collectively invest
in these entities in amounts up to 25% of the fair market value of ProLogis'
total assets, with a maximum per company investment of 5% of the fair market
value of ProLogis' total assets. These investments are accounted for under the
equity method and are discussed in Note 5 to ProLogis' Consolidated Financial
Statements in Item 8. See also "Item 7 -- Management's Discussion and Analysis
of Financial Condition and Results of Operations -- New Tax Legislation".
Summarized information with respect to the real estate assets owned by such
entities and ProLogis' ownership in such entities follows:
Property Operations Segment:
- As of December 31, 1999, ProLogis had a 50% ownership interest in
ProLogis California and a 19.68% ownership interest in the ProLogis
European Properties Fund. These entities owned the following operating
facilities as of December 31, 1999:
<TABLE>
<CAPTION>
RENTABLE
NO. OF SQUARE PERCENTAGE
BLDGS. FOOTAGE OCCUPANCY
------ ---------- ----------
<S> <C> <C> <C>
ProLogis California:
Los Angeles, California.............................. 78 11,500,014 97.92%
== ========== =======
Prologis European Properties Fund:
Amsterdam, Netherlands............................... 4 644,741 99.22%
Gelderland, Netherlands.............................. 1 499,880 100.00%
Lille, France........................................ 1 172,224 100.00%
London/Midands, United Kingdom....................... 8 1,269,348 100.00%
Lyon, France......................................... 2 361,402 100.00%
Rotterdam, Netherlands............................... 1 178,704 100.00%
Yeneo, Netherlands................................... 1 232,384 100.00%
-- ---------- -------
18 3,358,683 99.85%
== ========== =======
</TABLE>
In addition, as of December 31, 1999, ProLogis California had a 272,000
square foot facility under development and 27.2 acres of land for future
development in Los Angeles.
28
<PAGE> 31
On January 7, 2000, ProLogis contributed 50.1% of the common stock of one
of its wholly owned European entities to the ProLogis European Properties
Fund in exchange for an additional equity interest. This entity owns 61
operating facilities aggregating 6.8 million square feet in three
countries (55 of the facilities are located in France). After this
contribution, ProLogis' equity interest in the ProLogis European
Properties Fund increased to 44.29%. ProLogis will account for its
investment in the remaining 49.9% of the common stock in this entity
under the equity method and is committed to contributing this interest to
the ProLogis European Properties Fund in January 2001.
CDFS Business:
- ProLogis recognizes substantially all of the economic benefits of
Kingspark S.A, which owns 100% of ProLogis Kingspark. As of December 31,
1999, ProLogis Kingspark had 15 operating facilities aggregating 550,000
square feet, 14 facilities under development aggregating 2,202,000 square
feet and 844,000 square feet of facilities that it was developing under
development management agreements. In addition, ProLogis Kingspark owned
397 acres and controlled 1,415 acres of land through purchase option,
letter of intent, development rights agreement or contingent contract as
of December 31, 1999. The land owned and controlled by ProLogis Kingspark
has the capacity for the future development of 21.4 million square feet
of facilities. ProLogis Kingspark's facilities and land acreage are
located in 15 cities or counties in the United Kingdom.
Temperature-Controlled Distribution Operations:
- ProLogis recognizes substantially all of the economic benefits of
ProLogis Logistics Incorporated, which owns 100% of CSI Integrated LLC.
As of December 31, 1999, CSI owned or operated 54 facilities totaling
167.6 million cubic feet of temperature controlled distribution
facilities (including 35.5 million cubic feet of dry distribution space
located in temperature-controlled facilities in 28 cities in North
America and had 4.8 million cubic feet under development in Atlanta.
Included in these amounts are operating facilities of Meridian
Refrigerated Inc. ("MRI") which was acquired by ProLogis in conjunction
with the Meridian Merger (see Note 3 to ProLogis' Consolidated Financial
Statements in Item 8). Subsequent to December 31, 1999, ProLogis'
contributed its investment in MRI to CSI.
- ProLogis recognizes substantially all of the economic interest in
Frigoscandia S.A. which owns, through its subsidiaries, 100% of
Frigoscandia AB. Frigoscandia owned or operated 88 facilities totaling
192.3 million of cubic feet of temperature-controlled distribution
facilities in nine countries in Europe as of December 31, 1999. Also as
of December 31, 1999, Frigoscandia had a facility under development in
Denmark, aggregating 1.3 million cubic feet.
ITEM 3. LEGAL PROCEEDINGS
ProLogis from time to time may be a party to a variety of legal proceedings
arising in the ordinary course of its business. Such matters generally are not
expected to have a material adverse effect on ProLogis' business, financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
29
<PAGE> 32
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
ProLogis' Common Shares are listed on the NYSE under the symbol "PLD." The
following table sets forth the high and low sale prices of the Common Shares as
reported in the NYSE Composite Tape, and distributions per Common Share, for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTION
---- --- ------------
<S> <C> <C> <C>
1998:
First Quarter............................................ $26 3/8 $24 1/4 $0.2850(1)
Second Quarter........................................... 25 15/16 23 0.3183
Third Quarter............................................ 26 20 0.3183
Fourth Quarter........................................... 22 3/4 20 1/16 0.3183
1999:
First Quarter............................................ $22 3/16 $18 5/8 $0.3183(2)
Second Quarter........................................... 22 18 3/4 0.3272
Third Quarter............................................ 20 1/2 17 7/8 0.3272
Fourth Quarter........................................... 20 1/16 16 13/16 0.3272
2000:
First Quarter (through March 14)......................... $18 3/8 $18 1/8 $0.3350(3)
</TABLE>
- ---------------
(1) Declared in the fourth quarter of 1997 and paid in the first quarter of
1998.
(2) Declared in the fourth quarter of 1998 and paid in the first quarter of
1999.
(3) Declared in the fourth quarter of 1999 and paid in the first quarter of
2000.
On March 14, 2000, ProLogis had approximately 162,252,057 Common Shares
outstanding, which were held of record by approximately 11,205 shareholders.
In order to qualify as a REIT under the Code, ProLogis is required to make
distributions (other than capital gain distributions) to its shareholders in
amounts at least equal to (i) the sum of (a) 95% of its "REIT taxable income"
computed without regard to the dividends paid deduction and its net capital
gain) (changed to 90% as a result of the RMA -- see "Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations -- New
Tax Legislation") and (b) 95% of the net income (after tax), if any, from
foreclosure property, minus (ii) the sum of certain items of noncash income.
ProLogis' distribution strategy is to distribute what it believes is a
conservative percentage of its cash flow, permitting ProLogis to retain funds
for capital improvements and other investments.
ProLogis announces the following year's projected annual distribution level
after the annual budget review and approval by the Board in December of each
year. At its December 1999 meeting, the Board announced a projected increase in
the annual distribution level for 2000 from $1.30 to $1.34 per Common Share. The
payment of distributions is subject to the discretion of the Board and is
dependent upon the financial condition and operating results of ProLogis and may
be adjusted at the discretion of the Board during the year.
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, non-taxable return of capital or a combination thereof.
Distributions that exceed ProLogis' current and accumulated earnings and profits
(calculated for tax purposes) constitute a return of capital rather than a
distribution and reduce the shareholder's basis in the Common Shares. To the
extent that a distribution exceeds both current and accumulated earnings and
profits and the shareholders basis in the Common Shares, it will generally be
treated as gain from the sale or exchange of that shareholder's Common Shares.
ProLogis annually notifies shareholders of the
30
<PAGE> 33
taxability of distributions paid during the preceding year. The following
summarizes the taxability of distributions paid in 1998 and 1997 on Common
Shares and the estimated taxability for 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Per Common Share:
Ordinary income........................................... $0.84 $1.12 $1.07
Capital gains............................................. 0.35 -- --
Return of capital......................................... 0.11 0.12 --
----- ----- -----
Total............................................. $1.30 $1.24 $1.07
===== ===== =====
</TABLE>
On May 3, 1999, ProLogis paid a common distribution to holders of Meridian
common stock as of March 19, 1999. This distribution, which was declared by the
Meridian Board of Directors prior to the closing of the Meridian Merger, related
to the first quarter of 1999 and aggregated $11.1 million. This liability was
assumed by ProLogis in connection with the Meridian Merger. See Note 3 to
ProLogis' Consolidated Financial Statements in Item 8.
In connection with the 1997 Merger discussed in Note 10 to ProLogis'
Consolidated Financial Statements in Item 8, Security Capital issued warrants to
acquire 3,608,202 shares of Class B common stock of Security Capital pro rata to
holders of Common Shares (other than Security Capital), Series B preferred
shares and limited partnership units. Holders of Common Shares and holders of
limited partnership units received 0.046549 warrants for each Common Share or
unit held and holders of Series B preferred shares received 0.059676 warrants
for each preferred share held. Each warrant was exercisable for one share of
Security Capital Class B common stock at an exercise price of $28.00 per share.
The warrants expired in September 1998. Security Capital issued the warrants as
an incentive to ProLogis' shareholders to vote in favor of the 1997 Merger and
to raise additional equity capital at a relatively low cost, in addition to
other benefits.
In 1999, 1998 and 1997, ProLogis issued an aggregate of 14,000, 20,000 and
105,000 Common Shares, respectively, upon exchange of limited partnership units
in one or more of the Partnerships. The Common Shares were issued in
transactions exempt from registration under Section 4(2) of the Securities Act.
The annual dividends per preferred share are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999(1) 1998(2) 1997(2)
------- ------- -------
<S> <C> <C> <C>
Series A................................................... $2.35 $2.35 $2.35
Series B................................................... 1.75 1.75 1.75
Series C................................................... 4.27 4.27 4.27
Series D................................................... 1.98 1.42(3) --
Series E................................................... 1.64(4) -- --
</TABLE>
- ---------------
(1) For federal income tax purposes $1.65 of the Series A dividend, $1.23 of the
Series B dividend, $3.00 of the Series C dividend, $1.39 of the Series D
dividend and $1.15 of the Series E dividend are treated as ordinary income.
The remaining portion of each dividend represents capital gains.
(2) For federal income tax purposes these dividends are treated as ordinary
income to the holders.
(3) For the period from date of issuance to December 31, 1998.
(4) For the period from date of issuance to December 31, 1999.
On April 30, 1999, ProLogis paid an aggregate dividend of $1.1 million on
the Series E preferred shares ($0.5469 per share), of which $729,200 related to
Meridian's series D preferred stock that was accrued by Meridian prior to the
closing of the Meridian Merger. See Note 3 to ProLogis' Consolidated Financial
Statements in Item 8.
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
31
<PAGE> 34
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.
Under federal income tax rules, ProLogis' earnings and profits are first
allocated to its preferred shares, which increases the portion of the Common
Shares distribution classified as return of capital. The portion of
distributions characterized as return of capital results primarily from the
excess of distributions over earnings and profits primarily because non-cash
charges such as depreciation are not considered in determining distribution
levels. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Results of Operations."
ProLogis' tax return for the year ended December 31, 1999 has not been
filed. The taxability information for 1999 is based upon the best available
data. ProLogis' tax returns for prior years have not been examined by the
Internal Revenue Service. Consequently, the taxability of distributions and
dividends is subject to change.
DIVIDEND REINVESTMENT AND SHARE PURCHASE PLAN
In March 1995, ProLogis adopted a Dividend Reinvestment and Share Purchase
Plan (the "1995 Plan"), which commenced in April 1995. The 1995 Plan allowed
holders of Common Shares the opportunity to acquire additional Common Shares by
automatically reinvesting distributions. Holders of Common Shares who do not
participate in the 1995 Plan continue to receive distributions as declared. The
1995 Plan also allowed participating holders of Common Shares to purchase a
limited number of additional Common Shares by making optional cash payments,
without payment of any brokerage commission or service charge. Common Shares are
acquired pursuant to the 1995 Plan at a price equal to 98% of the market price
of such Common Shares, without payment of any brokerage commission or service
charge.
The 1995 Plan was amended in June 1999 by the 1999 Dividend Reinvestment
and Share Purchase plan (the "1999 Plan"). The primary change effective with the
1999 Plan allows persons who are not holders of Common Shares to participate in
the share purchase plan.
32
<PAGE> 35
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected financial data relating to the
historical financial condition and results of operations of ProLogis for the
years indicated (amounts in thousands, except per share data). Such selected
financial data is qualified in its entirety by, and should be read in
conjunction with, "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation" and ProLogis' Consolidated Financial
Statements and notes thereto in Item 8.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Rental income....................... $ 491,826 $ 345,046 $ 284,533 $ 227,000 $ 153,879
Other real estate income............ 46,678 17,554 12,291 5,342 2,899
Income from unconsolidated
entities......................... 22,519 2,755 3,278 -- --
Total revenues...................... 567,392 368,107 302,494 233,463 158,503
Rental expenses, including property
management fees paid to affiliate
in 1997, 1996 and 1995........... 33,501 27,120 27,008 26,674 18,460
REIT management fees paid to
affiliate........................ -- -- 17,791 21,472 14,207
General and administrative.......... 38,284 22,893 6,770 1,025 839
Interest rate hedge expense(1)...... 945 26,050 -- -- --
Costs incurred in acquiring
management companies from
affiliate(2)..................... -- -- 75,376 -- --
Earnings from operations (1)(2)..... 166,549 107,617 42,392 82,710 50,991
Gain (loss) on disposition of real
estate........................... 38,994 5,565 7,378 (29) 1,053
Foreign currency hedge income
(expense)........................ -- 2,054 (6,028) -- --
Foreign currency exchange gains
(losses), net.................... (16,818) 2,938 (348) -- --
Income tax expense.................. 1,472 2,164 85 -- --
Cumulative effect of accounting
change........................... 1,440 -- -- -- --
Preferred share dividends........... 56,835 49,098 35,318 25,895 6,698
Net earnings attributable to Common
Shares(1)(2)..................... 123,999 62,231 4,431 53,460 42,015
Common Share cash distributions
paid(3).......................... $ 208,969 $ 151,050 $ 106,556 $ 85,340 $ 64,445
PER SHARE DATA:
Basic and diluted net earnings
attributable to Common
Shares(1)(2)..................... $ 0.81 $ 0.51 $ 0.04 $ 0.63 $ 0.61
Series A preferred share dividends
paid............................. 2.35 2.35 2.35 2.35 1.24
Series B preferred share dividends
paid............................. 1.75 1.75 1.75 1.50 --
Series C preferred share dividends
paid............................. 4.27 4.27 4.27 0.57 --
Series D preferred share dividends
paid............................. 1.98 1.42 -- -- --
Series E preferred share dividends
paid(5).......................... 1.64 -- -- -- --
Common Share distributions declared
and
paid............................. $ 1.30 $ 1.24 $ 1.07 $ 1.01 $ 0.935
Weighted average Common Shares
outstanding:
Basic............................ 152,412 121,721 100,729 84,504 68,924
Diluted.......................... 152,739 122,028 100,869 84,511 74,422
OTHER DATA:
Reconciliation of net earnings to
funds from operations (4):
Net earnings attributable to Common
Shares........................... $ 123,999 $ 62,231 $ 4,431 $ 53,460 $ 42,015
Add (Deduct):
Real estate related depreciation
and amortization............... 150,050 99,514 76,275 59,850 39,767
(Gain) loss on disposition of
non-CDFS business real estate
assets......................... (38,994) (5,565) (7,378) 29 (1,053)
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Foreign currency exchange (gains)
losses, net.................... 16,596 (3,227) 348 -- --
Non-recurring foreign currency
hedge (income) expense......... -- (2,054) 6,028 -- --
Interest rate hedge expense(1)... 945 26,050 -- -- --
Costs incurred in acquiring
management companies from
affiliate(2)................... -- -- 75,376 -- --
Non-recurring items.............. (247) 1,686 -- 225 --
Deferred income tax expense...... -- 1,797 -- -- --
Cumulative effect of accounting
change......................... 1,440 -- -- -- --
ProLogis' share of reconciling
items of unconsolidated
entities:
Real estate related
depreciation and
amortization................ 49,644 36,489 2,419 -- --
Loss on disposal of assets..... 826 179 -- -- --
Foreign currency exchange
losses, net................. 14,650 14,207 -- -- --
Non-recurring items............ (700) -- -- -- --
Deferred income tax expense
(benefit)................... 510 (2,929) -- -- --
Cumulative effect of accounting
change...................... 1,480 -- -- -- --
---------- ----------- ---------- ---------- ----------
Funds from operations attributable
to Common Shares (1)(2)(4)....... $ 320,199 $ 228,378 $ 157,499 $ 113,564 $ 80,729
========== =========== ========== ========== ==========
Weighted average Common Shares
outstanding:
Basic............................ 152,412 121,721 100,729 84,504 68,924
Diluted(6)....................... 167,421 137,153 116,371 89,700 74,422
Net cash provided by operating
activities.......................... $ 271,391 $ 238,253 $ 192,473 $ 136,201 $ 100,154
Net cash used in investing
activities.......................... (34,365) (1,264,722) (571,061) (665,878) (628,795)
Net cash (used in) provided by
financing activities................ $ (230,828) $ 1,064,600 $ 398,827 $ 512,212 $ 529,606
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL POSITION:
Real estate owned, at cost.......... $4,811,255 $ 3,476,704 $2,846,591 $2,399,431 $1,767,307
Land held for development........... 163,696 180,796 159,645 109,316 60,363
Investments in and advances to
unconsolidated entities.......... 940,364 733,863 86,139 -- --
Total assets........................ 5,848,040 4,330,729 3,033,953 2,462,306 1,833,972
Lines of credit and short-term
borrowings(7).................... 98,700 494,300 -- 38,600 81,000
Other unsecured debt................ 30,892 -- -- -- --
Senior unsecured debt............... 1,729,630 1,083,641 724,052 524,191 324,527
Mortgage notes, assessment bonds and
securitized debt................. 695,586 227,804 133,028 139,952 145,276
Total liabilities................... 2,832,232 2,023,066 1,003,912 805,933 639,040
Minority interest................... 62,072 51,295 53,304 56,984 58,741
Total shareholders' equity.......... $2,953,736 $ 2,256,368 $1,976,737 $1,599,389 $1,136,191
Number of Common Shares
outstanding...................... 161,825 123,416 117,364 93,677 81,416
</TABLE>
- ---------------
(1) Earnings from operations for 1999 and 1998 reflect $0.9 million and $26.1
million of mark to market adjustments, respectively, associated with two
interest rate hedges that, due to changing market conditions, no longer
qualified for hedge accounting treatment under generally accepted accounting
principles
34
<PAGE> 37
("GAAP"). See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Derivative Financial Instruments".
(2) Earnings from operations for 1997 reflect the one-time, non-cash charge of
$75.4 million associated with the costs incurred in acquiring ProLogis'
management companies from Security Capital in September 1997. This one-time
charge was not deducted for purposes of calculating funds from operations
due to its non-recurring and non-cash nature. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Other Income and Expense
Items -- Costs Incurred in Acquiring Management Companies From Affiliate".
(3) For 1999, includes $11.1 million paid to Meridian Shareholders. See "Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters".
(4) Funds from operations attributable to Common Shares is discussed and defined
in "Item 7 -- Management's Discussion and Analysis of Financial Conditions
and Results of Operations -- Funds from Operations". 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 8. Cash
distributions paid to shareholders are presented above in the "Operating
Data" section. 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. ProLogis considers funds from
operations to be a useful supplemental measure of comparative period
operating performance and as a supplemental measure to assist 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.
(5) Does not include dividends paid to Meridian shareholders. See "Item 5.
Market for the Registrant's Common Equity and Related Stockholder Matters".
(6) In calculating the weighted average Common Shares for funds from operations
purposes, the weighted average Series B convertible preferred shares and
limited partnership units are considered common stock equivalents. The
weighted average Series B convertible preferred shares included are
9,221,000, 10,055,000 and 10,319,000 for 1999, 1998 and 1997, respectively.
The amount of dividends associated with these preferred shares are
$12,523,000, $13,668,000 and $14,088,000 for 1999, 1998 and 1997,
respectively. There were no outstanding Series B convertible preferred
shares prior to 1996 and the effect of these preferred shares in 1996 was
anti-dilutive. The weighted average limited partnership units included are
5,461,000, 5,070,000, 5,190,000, 5,194,000 and 5,485,000 for 1999, 1998,
1997, 1996 and 1995, respectively. The minority interest share of earnings
associated with these units are $4,979,000, $4,681,000, $3,560,000,
$3,326,000 and $3,331,000 for 1999, 1998, 1997, 1996 and 1995, respectively.
(7) As of March 14, 2000, ProLogis had $38.0 million of borrowings outstanding
under its unsecured U.S. dollar denominated lines of credit resulting in
$537.0 million of borrowing capacity available. As of March 14, 2000,
ProLogis had the currency equivalent of $130.3 million (based on currency
exchange rates quoted by Reuters) on its multi-currency unsecured line of
credit outstanding resulting in the currency equivalent of $184.5 million
(based on currency exchange rates quoted by Reuters) of borrowing capacity
available.
ITEM 7. 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 8 of
this report.
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,
35
<PAGE> 38
uncertainties and assumptions which 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 under
"-- Risk Factors".
RESULTS OF OPERATIONS
Net earnings attributable to Common Shares increased by $61.8 million to
$124.0 million for 1999 from $62.2 million for 1998. Net earnings attributable
to Common Shares in 1998 was $57.8 million above the 1997 amount of $4.4
million.
The increase in net earnings attributable to Common Shares in 1999 over
1998 was primarily the result of:
- an increase of $88.5 million in net operating income from property
operations (after deductions for depreciation), primarily the result of
the increased number of distribution facilities in operation in 1999 as
compared to 1998 (the Meridian Merger in March 1999 added 32.2 million
square feet of facilities to ProLogis' operating portfolio. See
"-- Meridian Merger");
- an increase of $29.1 million in other real estate income, primarily
profits earned in the CDFS business from dispositions of facilities
developed;
- an increase of $19.8 million in income from ProLogis' investments in
unconsolidated entities due to: i) recognition of a full year of income
from ProLogis' August 1998 acquisition of ProLogis Kingspark; ii) the
recognition of income from the operations of Garonor S. A. ("ProLogis
Garonor"), a real estate operating company in France that was acquired in
December 1998 and accounted for under the equity method from that date
until June 29, 1999 when ProLogis began consolidating its results in its
consolidated financial statements (see Note 2 to ProLogis' Consolidated
Financial Statements in Item 8); and iii) increased earnings from
ProLogis' temperature-controlled distribution operations which are
recognized under the equity method, primarily due to increases in the
cubic feet in operation in 1999 as compared to 1998;
- a $33.4 million increase in gains recognized on the disposition of
facilities from ProLogis' property operations segment; and
- the recognition of a $26.1 million expense in 1998 as compared to $0.9
million recognized in 1999 from mark to market adjustments related to two
interest rate protection agreements (see "Liquidity and Capital
Resources -- Derivative Financial Instruments").
These increases in net earnings in 1999 were partially offset by:
- an increase of $93.1 million in interest expense due to higher average
debt balances in 1999;
- net foreign currency exchange losses in 1999 of $16.8 million ($11.4
million resulting from remeasurement of intercompany and other debt) as
compared to net foreign currency exchange gains of $2.9 million in 1998;
and
- an increase of $15.4 million in general and administrative expenses, due
to the continued expansion of the organizational infrastructure in Europe
and due to a change in accounting rules which no longer allows costs
associated with start-up activities and organization costs to be
capitalized (see "-- Other Income and Expense Items -- General and
Administrative" and "-- Other Income and Expense Items -- Cumulative
Effect of Accounting Change").
Net earnings attributable to Common Shares in 1998 and 1997 were impacted
by one time charges: a $26.1 million charge in 1998 from mark to market
adjustments related to two interest rate protection agreements (see
"-- Liquidity and Capital Resources -- Derivative Financial Instruments") and a
$75.4 million charge in
36
<PAGE> 39
1997 related to the acquisition of the management companies from Security
Capital (see "-- Other Income and Expense Items -- Costs Incurred in Acquiring
Management Companies From Affiliate"). Without the effects of these one-time
charges, net earnings attributable to Common Shares in each year would have been
$88.3 million in 1998 and $79.8 million in 1997. The resulting increase of $8.5
million in 1998 over 1997 is primarily due to the higher number of distribution
facilities in operation in 1998 as compared to 1997. ProLogis' rental revenues,
rental expenses (including property management fees paid to affiliate in 1997)
and depreciation expense all increased in 1998. This increase was partially
offset by an increase in interest expense associated with the financing of
ProLogis' investment activities in 1998.
Preferred share dividends and weighted average Common Shares outstanding
both increased in 1999 as compared to 1998 and in 1998 as compared to 1997. For
1999, these increases were primarily attributable to the issuance of Common
Shares and Series E preferred shares related to the Meridian Merger (see
"-- Meridian Merger"). For 1998, these increases were the result of additional
equity issued by ProLogis to finance its acquisition and development activities
in that year.
Property Operations
ProLogis owned (directly or through consolidated subsidiaries) 1,328
operating facilities totaling 133.7 million square feet as of December 31, 1999,
1,099 operating facilities totaling 104.5 million square feet as of December 31,
1998 and 1,005 operating facilities totaling 90.8 million square feet as of
December 31, 1997. In addition, as of December 31, 1999 ProLogis California (in
which ProLogis has a 50% ownership interest) owned 78 operating facilities
totaling 11.5 million square feet and the ProLogis European Properties Fund (in
which ProLogis' ownership interest was approximately 19.68% as of December 31,
1999) owned 18 operating facilities totaling 3.3 million square feet.
As of December 31, 1998 ProLogis owned 100% of the preferred stock
(representing substantially all of the economic benefits) of ProLogis Garonor
(which owned 54 operating facilities totaling 5.2 million square feet as of
December 31, 1998). This investment was accounted for under the equity method
from December 29, 1998 (the date of acquisition) until June 29, 1999. On June
29, 1999, ProLogis Garonor became a wholly owned subsidiary of ProLogis and its
results of operations after that date have been consolidated along with
ProLogis' other wholly owned subsidiaries.
37
<PAGE> 40
Under the equity method, ProLogis recognized its share of the net earnings
of the following entities that are part of ProLogis' property operations
segment: (i) ProLogis Garonor from December 29, 1998 to June 29, 1999; (ii)
ProLogis California beginning August 26, 1999; and (iii) the ProLogis European
Properties Fund beginning September 23, 1999. The amounts recognized under the
equity method are based on the net earnings of the unconsolidated entity and
include interest income and interest expense, depreciation and amortization
expenses, general and administrative expenses, income taxes and foreign currency
exchange gains and losses (with respect to ProLogis Garonor and the ProLogis
European Properties Fund). ProLogis' net operating income from the property
operations segment was as follows for 1999, 1998 and 1997 (in thousands) (see
Note 18 to ProLogis' Consolidated Financial Statements in Item 8):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Properties directly owned by ProLogis and its
consolidated entities:
Rental income...................................... $491,826 $345,046 $284,533
Property operating expenses:
Rental expenses, net of recoveries.............. 33,501 27,120 23,187
Property management fees paid to affiliate...... -- -- 3,821
-------- -------- --------
33,501 27,120 27,008
-------- -------- --------
Net operating income....................... 458,325 317,926 257,525
Income from the ProLogis California.................. 3,917 -- --
Income from the ProLogis European Properties Fund.... 820 -- --
Income (loss) from ProLogis Garonor.................. (12,423) 6 --
-------- -------- --------
Total property operations segment.......... $450,639 $317,932 $257,525
======== ======== ========
</TABLE>
Rental income increased by $146.8 million in 1999 as compared to 1998. This
increase is comprised of the following components:
- facilities acquired during 1999 contributed $80.7 million of additional
rental income (primarily due to the Meridian Merger; see "-- Meridian
Merger") in 1999;
- facilities developed during 1999 contributed $17.7 million of additional
rental income in 1999;
- facilities acquired during 1998 contributed $25.0 million of additional
rental income in 1999;
- facilities developed during 1998 contributed $20.1 million of additional
rental income 1999;
- facilities owned and operated as of January 1, 1998 contributed $12.4
million of additional rental income in 1999; and
- facilities that were in operation during 1998 but have subsequently been
disposed of reduced rental income in 1999 by $9.1 million.
Rental income increased by $60.5 million in 1998 as compared to 1997. This
increase is comprised of the following components:
- facilities acquired during 1998 contributed $8.2 million of additional
rental income in 1998;
- facilities developed during 1998 contributed $13.9 million of additional
rental income in 1998;
- facilities acquired during 1997 contributed $17.4 million of additional
rental income in 1998;
- facilities developed during 1997 contributed $18.8 million of additional
rental income in 1998;
- facilities owned and operated as of January 1, 1997 contributed $11.2
million of additional rental income in 1998; and
- facilities that were in operation during 1997 but have subsequently been
disposed of reduced rental income in 1998 by $9.0 million.
38
<PAGE> 41
Rental expenses, including property management fees paid to an affiliate in
1997 and net of recoveries from tenants, increased by $6.4 million in 1999 over
1998 and by $112,000 in 1998 over 1997. The increase in 1999 over 1998 is
primarily attributable to the additional facilities acquired in the Meridian
Merger (see "-- Meridian Merger"). Rental expenses, before recoveries from
tenants and including property management fees paid to an affiliate in 1997,
were 24.7% of rental income for 1999, 24.5% of rental income for 1998 and 25.7%
of rental income for 1997. Total rental expense recoveries were 72.4%, 67.9% and
63.1% of total rental expenses (including property management fee paid to
affiliate in 1997) in 1999, 1998, and 1997, respectively.
ProLogis' share of ProLogis Garonor's loss in 1999 includes the recognition
of a net foreign currency exchange loss of $13.0 million resulting from the
remeasurement of intercompany and other debt.
As a result of the 1997 Merger discussed below under "-- Other Income and
Expense Items -- Costs Incurred in Acquiring Management Companies From
Affiliate" and in Note 10 to ProLogis' Consolidated Financial Statements in Item
8, ProLogis no longer pays a property management fee to its affiliate, Security
Capital. However, ProLogis has recognized the actual personnel and other
operating costs associated with the property management function in rental
expenses since September 9, 1997.
The facilities that ProLogis develops are not always fully leased at the
start of construction. In addition, ProLogis may acquire facilities that are
underleased at the time of acquisition. While these situations will reduce
ProLogis' overall occupancy rate below its stabilized level in the short-term,
they do provide opportunities to increase revenues. The term "stabilized" means
that capital improvements, repositioning, new management and new marketing
programs (or development and marketing, in the case of newly developed
facilities) have been in effect for a sufficient period of time (but in no case
longer than 12 months for facilities acquired by ProLogis and 12 months after
shell completion for facilities developed by ProLogis) to achieve stabilized
occupancy (typically 93%, but ranging from 90% to 95%, depending on the
submarket and product type). ProLogis has been successful in increasing
occupancies on acquired and developed facilities during their initial months of
operation, resulting in an occupancy rate of 96.0% and a leased rate of 96.5%
for stabilized facilities owned by ProLogis and its consolidated and
unconsolidated entities as of December 31, 1999. The average increase in rental
rates for new and renewed leases on previously leased space (21.1 million square
feet) for all facilities including those owned by consolidated and
unconsolidated entities during 1999 was 15.5%.
Corporate Distribution Facilities Services Business
ProLogis recognized income from its CDFS business segment of $70.5 million
in 1999, $20.5 million in 1998 and $12.3 million in 1997 (see Note 18 to
ProLogis' Consolidated Financial Statements in Item 8). Of the total CDFS
business segment income recognized, $23.9 million and $2.9 million represents
ProLogis' 95% share of the net earnings of ProLogis Kingspark for 1999 and 1998,
respectively, recognized under the equity method. ProLogis Kingspark was
acquired on August 14, 1998. The remaining income of $46.6 million in 1999 and
$17.6 million in 1998 and the entire amount of $12.3 million in 1997 was earned
directly by ProLogis and ProLogis Development Services. This income consists
primarily of the profits from the disposition of properties that were developed
in the CDFS business segment and sold to customers or entities in which ProLogis
has an ownership interest.
In 1999, ProLogis and ProLogis Development Services disposed of an
aggregate of 5.4 million square feet of properties in the CDFS business segment
with aggregate net sales proceeds of $357.5 million. In 1998 and 1997, ProLogis
disposed of 2.0 million and 1.9 million square feet of properties, respectively,
with aggregate net sales proceeds of $82.6 million and $82.4 million,
respectively. The CDFS business segment operations have increased in volume in
each year, consequently, ProLogis' income from this segment has increased in
each year.
ProLogis recognizes 95% of the net earnings of ProLogis Kingspark in its
results of operations. The net earnings of the ProLogis Kingspark include
interest income and interest expense (net of capitalized amounts), general and
administrative expenses, income taxes and foreign currency exchange gains and
losses. ProLogis Kingspark's dispositions generated aggregate net sales proceeds
of $155.4 million on the disposition of 1.1 million square feet in 1999 and
$13.8 million on the disposition of land parcels for the period from August 14,
1998 to December 31, 1998. ProLogis Kingspark also earned fees for developing
properties under development management agreements ($5.4 million in 1999 and
$2.6 million for the period from August 14,
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<PAGE> 42
1998 to December 31, 1998). With the capital invested by ProLogis, ProLogis
Kingspark has been able to increase its level of operations subsequent to August
14, 1998. ProLogis' share of the net earnings of ProLogis Kingspark includes
$7.7 million of current and deferred income tax expense and $1.5 million of net
foreign currency exchange losses for 1999. ProLogis' share of ProLogis
Kingspark's net earnings for the period August 14, 1998 to December 31, 1998
includes $0.2 million of current and deferred income tax expense and $1.0
million of net foreign currency exchange losses.
Temperature-Controlled Distribution Operations
ProLogis recognizes income from the temperature-controlled distribution
operations segment of its business under the equity method. ProLogis' share of
the net earnings of CSI and Frigoscandia was as follows (in thousands) (see Note
18 to ProLogis' Consolidated Financial Statements in Item 8):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
CSI..................................................... $10,791 $ 7,349 $3,278
Frigoscandia............................................ (4,364) (7,535) --
------- ------- ------
Total temperature-controlled distribution
operations segment.......................... $ 6,427 $ (186) $3,278
======= ======= ======
</TABLE>
The net earnings of the unconsolidated entities includes interest income
and interest expense, depreciation and amortization expenses, general and
administrative expenses, income taxes and foreign currency exchange gains or
losses (with respect to Frigoscandia). ProLogis recognizes 95% of the net
earnings of each entity in its results of operations.
The increase in ProLogis' share of CSI's net earnings from 1998 to 1999 of
$3.4 million is attributable primarily to the increase in cubic feet capacity in
operation in 1999 over 1998 and to income from retail dedicated services (see
"Item 1. Business -- Business Strategy and Operating
Segments -- Temperature-Controlled Distribution Operations -- Operations"). The
increase in ProLogis' share of CSI's net earnings from 1997 to 1998 of $4.0
million is attributable primarily to the increase in cubic feet capacity in
operation in 1998 over 1997. ProLogis acquired CSI on April 24, 1997 and owned
between 60% and 77.1% until June 12, 1998, at which time ProLogis became CSI's
sole owner.
ProLogis' share of Frigoscandia's net earnings in 1999 and 1998 includes
net foreign currency exchange losses of $1.3 million and $11.4 million,
respectively. In 1999, Frigoscandia's cubic feet capacity remained constant. The
decrease in Frigoscandia's net earnings is attributable primarily to decreased
occupancy levels and lower operating margins in the transportation services
segment.
Other Income and Expense Items
Interest Income
Interest income was $6.4 million in 1999, an increase of $3.6 million over
the interest income recognized in 1998 of $2.8 million. Interest income
increased by $0.4 million in 1998 over 1997. The increases in interest income
are primarily the result of higher average cash balances.
General and Administrative Expense
General and administrative expense, including REIT management fee paid to
affiliate in 1997, was $38.3 million in 1999, $22.9 million in 1998 and $24.6
million in 1997. The increase in general and administrative expense in 1999 over
1998 is primarily related to ProLogis' expanded operational infrastructure in
Europe and also because ProLogis expensed costs related to start-up activities
and organization costs under a new accounting pronouncement in 1999 (see
"-- Cumulative Effect of Accounting Change"). The decrease in general and
administrative expense in 1998 from 1997 is primarily attributable to the cost
savings realized after ProLogis acquired the management companies from Security
Capital in September 1997 (see "-- Costs Incurred in Acquiring Management
Companies from Affiliate").
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Depreciation and Amortization
The increases in depreciation and amortization expense of $51.9 million in
1999 as compared to 1998 and $24.0 million in 1998 as compared to 1997 result
primarily from the increases in operating facilities each year. See "-- Property
Operations".
Interest Expense
Interest expense was $170.7 million in 1999, $77.7 million in 1998 and
$52.7 million in 1997. The increases in each year are primarily the result of
the increase use of debt to finance investment activities in each year,
particularly in 1999 when ProLogis increased its secured debt balances to $695.6
million as of December 31, 1999 (of which $90.1 million was assumed in the
Meridian Merger; see "-- Meridian Merger") from $227.8 million as of December
31, 1998. In addition, ProLogis issued senior unsecured notes in the amounts of
$500.0 million in April 1999, $125.0 million in October 1998, $250.0 million in
July 1998, $100.0 million in February 1997 and $100.0 million in July 1997. In
conjunction with the Meridian Merger, ProLogis assumed $160.0 million of senior
unsecured notes.
Interest expense on lines of credit borrowings increased by $1.4 million in
1999 over 1998 and by $11.3 million in 1998 over 1997 due primarily to a higher
average outstanding balance in each year ($232.8 million in 1999, $174.9 million
in 1998 and $56.9 million in 1997) partially offset by a lower weighted average
daily interest rate (6.13% in 1999, 6.46% in 1998 and 6.75% in 1997). ProLogis
also had $150.0 million of short-term borrowings from September 11, 1998 to
April 26, 1999. See "-- Liquidity and Capital Resources -- Investing and
Financing Activities".
Interest expense recognized on borrowings is offset by interest capitalized
with respect to ProLogis' development activities. Capitalized interest decreased
by $3.2 million to $16.0 million in 1999 from $19.2 million in 1998 and
increased by $0.8 million to $19.2 million in 1998 from $18.4 million in 1997.
Capitalized interest levels are reflective of ProLogis' cost of funds and the
level of development activity in each year.
Interest Rate Hedge Expense
See "-- Liquidity and Capital Resources -- Derivative Financial
Instruments" for a discussion of this expense.
Costs Incurred in Acquiring Management Companies From Affiliate
As a result of the 1997 Merger discussed in Note 10 to ProLogis'
Consolidated Financial Statements in Item 8, ProLogis terminated the REIT
management and property management agreements that were in place while Security
Capital owned the management companies. The employees of the REIT management and
property management companies became employees of ProLogis and ProLogis directly
incurs the personnel and other costs related to these functions. The costs
relating to property management are recorded as rental expenses whereas the
costs associated with managing the corporate entity are recorded as general and
administrative expenses. In connection with this transaction, ProLogis
recognized a one-time expense of $75.4 million, representing the excess of the
purchase price over the net tangible assets acquired.
Upon consummation of the 1997 Merger, ProLogis and Security Capital entered
into the ASA, pursuant to which Security Capital provides ProLogis with certain
administrative and other services as determined by ProLogis (certain services
originally provided under the ASA are now being performed by ProLogis
employees). ProLogis; fees under the ASA were $3.4 million, $3.7 million and
$1.1 million for 1999, 1998 and the period from September 9, 1997 to December
31, 1997, respectively. Of these fees, $0.6 million, $0.7 million and $0.2
million were capitalized for 1999, 1998 and for the period from September 9,
1997 to December 31, 1997, respectively. The ASA expires on December 31, 2000.
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Other Expenses
Other expenses were $4.9 million in 1999, $6.2 million in 1998 and $3.9
million in 1997. Included as "Other Expenses" are land holding costs, the
write-off of previously capitalized pursuit costs and costs associated with the
name change to ProLogis in 1998.
Land holding costs were $2.0 million in 1999, $2.2 million in 1998 and $2.3
million in 1997. Pursuit cost write-offs were $2.9 million in 1999 $2.3 million
in 1998 and $1.6 million in 1997. Non-recurring costs associated with the name
change were $1.7 million in 1998.
Gain on Disposition of Real Estate
In 1999, ProLogis disposed of 2.6 million square feet of operating
facilities to third parties from its property operations segment generating net
sales proceeds of $99.5 million and aggregate gains of $13.4 million. In August
1999, in connection with the formation of ProLogis California, ProLogis disposed
of 78 operating facilities and two facilities under development to ProLogis
California. The net sales proceeds from this disposition were $538.3 million and
ProLogis recognized a gain of $25.6 million on the transaction, which is net of
$25.6 million that did not qualify for income recognition due to ProLogis'
continuing ownership in ProLogis California. ProLogis received an equity
interest in ProLogis California of $148.2 million and ProLogis California
assumed ProLogis' debt of $199.3 million. The remaining proceeds were received
in cash.
ProLogis recognized gains of $5.6 million and $7.4 million from the
dispositions of operating facilities from the property operations segment in
1998 and 1997, respectively. These dispositions aggregated 1.1 million square
feet and net sales proceeds of $26.7 million in 1998 and 1.3 million square feet
and net sales proceeds of $53.0 million in 1997.
Foreign Currency Hedge Income (Expense)
On December 22, 1997, ProLogis entered into two separate contracts to (i)
exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange 310.0
million German marks for $175.0 million in anticipation of the January 1998
acquisition and planned European currency denominated financing of Frigoscandia
AB by ProLogis through its unconsolidated entity. The contracts were marked to
market as of December 31, 1997 and ProLogis recognized a net loss of $6.0
million in 1997. Both contracts were settled during the first quarter of 1998 at
a net loss of $4.0 million. Accordingly, ProLogis recognized a net gain of $2.0
million in 1998. These foreign currency exchange hedges were one-time,
non-recurring contracts that fixed the exchange rate between the U.S. dollar and
the Swedish krona and German mark. ProLogis executed these hedges after the
execution of the purchase agreement to acquire Frigoscandia AB, which required
payment in Swedish krona. The contracts were executed exclusively for the
acquisition and financing of Frigoscandia AB and were not entered into to hedge
on-going income in foreign currencies.
Foreign Currency Exchange Gains (Losses)
The foreign currency exchange loss in 1999 consists of a net loss from
remeasurement of intercompany and other debt of $11.4 million, net transaction
losses of $5.3 million (including $45,000 of costs related to foreign currency
put options contracts) and mark to market adjustments on the foreign currency
put option contracts of $47,000. ProLogis recognized a net gain from
remeasurement of intercompany and other debt of $3.2 million and net transaction
losses of $0.3 million in 1998. In 1997, ProLogis recognized a net remeasurement
loss of $0.3 million. No foreign currency exchange transaction gain or loss was
recognized in 1997 due to ProLogis' limited foreign operations in that year.
ProLogis began utilizing foreign currency put options to hedge its foreign
currency exchange risk only in September 1999. See "-- Liquidity and Capital
Resources -- Derivative Financial Instruments".
Income Taxes
ProLogis is taxed as a REIT for federal income tax purposes and is not
required to pay federal income taxes if minimum distribution and income, asset
and shareholder tests are met. ProLogis Development Services is not a
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<PAGE> 45
qualified REIT subsidiary for tax purposes. Accordingly, ProLogis incurs and
pays current federal and state income taxes with respect to the taxable earnings
of ProLogis Development Services. Also, the foreign countries in which ProLogis
operates do not recognize REITs under their respective tax laws. Accordingly,
ProLogis recognizes income taxes as appropriate and in accordance with GAAP with
respect to the taxable earnings of ProLogis Development Services and its foreign
subsidiaries.
In 1998, ProLogis recognized deferred income tax expense of $1.8 million.
In 1999 and 1997, the deferred income tax expense based on each year's temporary
differences has been reduced to zero due to changes in the deferred tax
valuation allowance. The valuation allowance was recognized in previous years to
reflect the estimated realizability of deferred tax assets created by ProLogis'
tax net operating loss carryforwards.
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
organizational, 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. All such costs incurred in 1999
have been expensed (see "-- General and Administrative").
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 a 8.75% annual dividend rate
($2.1875 per share) and an aggregate liquidation value of $50.0 million. The
total purchase price of Meridian was approximately $1.54 billion, which included
the assumption of the outstanding debt and liabilities of Meridian as of March
30, 1999 and the issuance of approximately 1.1 million stock options each to
acquire 1.10 ProLogis Common Shares and $2.00 in cash. The assets acquired from
Meridian included approximately $1.44 billion of real estate assets, an interest
in a refrigerated distribution business of $28.7 million and cash and other
assets aggregating $72.3 million. The transaction was structured as a tax-free
merger and was accounted for under the purchase method.
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. See "-- Risk Factors -- Potential
Environmental Liability".
LIQUIDITY AND CAPITAL RESOURCES
Overview
ProLogis considers its liquidity and ability to generate cash from
operations and financing activities to be adequate and expects it to continue to
be adequate to meet its anticipated development, acquisition, operating and debt
service needs as well as its shareholder distribution requirements.
ProLogis' future investing activities within the property operations
segment and the CDFS business segment are expected to consist primarily of
acquiring land for future development and developing distribution facilities.
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Within the temperature-controlled distribution operations segment, ProLogis'
future investing activities are expected to include the expansion of its current
capacity through the acquisition of existing businesses operating in this
industry. ProLogis' future investing activities are expected to be funded with:
- cash generated by operations;
- the proceeds from the sale of non-strategic facilities to third parties;
- the proceeds from the sale of facilities developed to third parties or to
entities in which ProLogis has an ownership interest;
- the proceeds from the sale of facilities to the ProLogis European
Properties Fund;
- other capital generated from the CDFS business segment; and
- utilization of ProLogis' unsecured lines of credit.
In the short-term, borrowings and subsequent repayments on the unsecured
lines of credit will provide ProLogis with adequate liquidity and financial
flexibility to efficiently respond to market opportunities. Within the ProLogis
European Properties Fund, ProLogis has access to 877.7 million euros (the
currency equivalent of $884.0 million as of December 31, 1999 based on currency
exchange rates quoted by Reuters) of third party equity capital in Europe that
has been committed primarily by institutional investors for the period 2000 to
2002. This capital is available to fund acquisitions of ProLogis' completed
stabilized European developments by the ProLogis European Properties Fund, as
well as acquisitions of other facilities from third parties. ProLogis will
continue to evaluate other financing arrangements similar to the ProLogis
European Properties Fund that will provide debt and equity financing to
ProLogis.
As of December 31, 1999, ProLogis had $530.0 million available for
borrowing under its U.S. dollar denominated unsecured lines of credit and the
currency equivalent of $273.6 million (based on currency exchange rates quoted
by Reuters) available for borrowing under its multi-currency unsecured line of
credit. As of March 14, 2000, on a combined basis ProLogis had approximately
$721.5 million of borrowing capacity available (see "-- Credit Facilities").
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 $33.1 million in 1999 as
compared to 1998 ($271.4 million in 1999 and $238.3 million in 1998). Cash
provided by operating activities increased by $45.8 million in 1998 as compared
to 1997 ($238.3 million in 1998 as compared to $192.5 million in 1997). These
increases are primarily the result of the increased number of operating
facilities in each year. See "-- Results of Operations -- Property Operations".
Cash provided by operating activities exceeded the cash distributions paid on
Common Shares in 1999, 1998 and 1997.
Cash Investing and Cash Financing Activities
For the years 1999, 1998 and 1997, ProLogis funded its investment needs
primarily with lines of credit borrowings and short-term borrowings, which were
subsequently repaid with cash flow from operations, proceeds from sales of debt
and equity securities, and proceeds from the dispositions of real estate assets
(from both the property operations segment and the CDFS business segment).
ProLogis' investment activities used approximately $34.4 million, $1.26 billion
and $571.1 million of cash in 1999, 1998 and 1997, respectively. ProLogis'
primary investing activity in 1999 was the Meridian Merger which was financed
primarily with the issuance of equity securities and the assumption of
Meridian's liabilities. ProLogis' financing activities resulted in a decrease in
cash of $230.8 million in 1999 (primarily due to net repayments on ProLogis'
lines of credit) and increases in cash of $1.06 billion and $398.8 million in
1998 and 1997, respectively.
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Investments in real estate (including recurring capital expenditures and
tenant improvements and lease commissions on previously leased space), net of
proceeds from dispositions, provided net cash of $57.7 million in 1999 and used
cash of $607.2 million in 1998 and $485.5 million in 1997. ProLogis' cash
investments in its unconsolidated entities aggregated $141.0 million in 1999,
$657.5 million in 1998 (includes the initial cash outlays for the acquisitions
of Frigoscandia, ProLogis Kingspark and ProLogis Garonor) and $85.6 million in
1997. ProLogis' investment activities in 1999 were substantially self-funding,
primarily due to the significant amount of cash generated from the disposition
of facilities.
ProLogis' primary cash financing activities in 1999 were: (i) the issuance
of $500.0 million of senior unsecured notes; (ii) arranging longer-term secured
debt agreements that generated $462.1 million of funds; (iii) repayments of
borrowings on ProLogis' unsecured lines of credit (net reduction in outstanding
borrowings of $395.6 million in 1999); and (iv) cash payments associated with
the Meridian Merger (paydown of Meridian's outstanding line of credit of $328.4
million and $67.6 million of payments to Meridian shareholders). See "-- Results
of Operations -- Meridian Merger".
ProLogis' primary cash financing activities in 1998 were: (i) the sale of
Series D preferred shares generating net proceeds of $241.5 million; (ii) sales
of Common Shares (net of repurchases of Common Shares under the employee share
purchase plan) generating net proceeds of $130.6 million; (iii) net borrowings
on ProLogis' credit facilities of $494.3 million; (iv) proceeds from short-term
borrowings of $350.0 million ($200 million of which was used primarily to
finance the acquisition of Frigoscandia AB and was repaid on March 31, 1998
after third-party financing was obtained); (v) the issuance of senior unsecured
notes generating net proceeds of $371.5 million; and (vi) net proceeds from a
secured financing of $65.5 million.
ProLogis' primary cash financing activities in 1997 were: (i) sales of
Common Shares (net of repurchases of Common Shares under the employee share
purchase plan) generating net proceeds of $406.1 million; (ii) the issuance of
senior unsecured notes generating net proceeds of $197.8 million; and (iii) net
repayments on ProLogis' lines of credit of $38.6 million.
Common Share cash distributions were $209.0 million (including $11.1
million paid to Meridian shareholders), $151.1 million and $106.6 million in
1999, 1998 and 1997, respectively. Dividends paid on preferred shares were $56.8
million in 1999 (including $0.7 million paid to Meridian shareholder), $49.1
million in 1998 and $35.3 million in 1997. See "-- Distribution and Dividend
Requirements".
Credit Facilities
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 (the "Lenders") that provides for a
$550.0 million unsecured revolving line of credit. Borrowings bear interest, at
ProLogis' option, at either (a) the greater of the federal funds rate plus 0.5%
and the prime rate, or (b) LIBOR plus 1.00% based upon ProLogis' current senior
debt ratings. ProLogis' borrowings are primarily at the 30-day LIBOR rate plus
1.00% (6.8225% as of December 31, 1999). Additionally, the credit agreement
provides for a facility fee of 0.20% per annum. The line of credit matures on
March 29, 2001 and may be extended for an additional year at ProLogis' option.
As of December 31, 1999, $45.0 million of borrowings were outstanding on the
line of credit and ProLogis was in compliance with all covenants contained in
the credit agreement.
The $550.0 million unsecured line of credit replaced ProLogis' previous
$350.0 million unsecured line of credit that was put into place in August 1998.
ProLogis' entered into the new credit agreement to allow for increased borrowing
capacity following the Meridian Merger.
As of December 31, 1998, ProLogis had an agreement with the Lenders that
provided for a term loan of $150.0 million. The term loan was repaid on April
26, 1999 and the agreement was terminated. ProLogis paid interest at LIBOR plus
1.00% on the term loan borrowings.
In addition, ProLogis has a $25.0 million short-term unsecured
discretionary line of credit with Bank of America that matures on October 1,
2000. By agreement between ProLogis and Bank of America, the rate of interest on
and the maturity date of each advance are determined at the time of each
advance. There were no borrowings outstanding on the line of credit as of
December 31, 1999.
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On December 17, 1999, ProLogis obtained a multi-currency, unsecured
revolving line of credit in the currency equivalent of 325.0 million euros (the
currency equivalent of approximately $327.3 million as of December 31, 1999
based on currency exchange rates quoted by Reuters) through a group of 17 banks,
on whose behalf ABN AMRO Bank, N.V. acted as agent. The line of credit was
obtained for the purpose of funding ProLogis' European development activities.
The interest rate on this four-year revolving line of credit is Euribor plus
0.75% or Sterling LIBOR plus 0.75%, (borrowings outstanding as of December 31,
1999 were at a weighted average interest rate of 4.25%). As of December 31,
1999, there were 53.3 million euros of borrowings (the currency equivalent of
approximately $53.7 million as of December 31, 1999 based on currency exchange
rates quoted by Reuters) were outstanding on the line of credit and ProLogis was
in compliance with all covenants contained in the credit agreement.
Derivative Financial Instruments
ProLogis uses derivative financial instruments as hedges to manage
well-defined risk associated with interest and foreign currency rate
fluctuations on existing or anticipated obligations and transactions. ProLogis
does not use derivative financial instruments for trading purposes.
The primary risks associated with derivative instruments are market risk
and credit risk. Market risk is defined as the potential for loss in the value
of the derivative due to adverse changes in market prices (interest rates or
foreign currency rates). The use of derivative financial instruments allows
ProLogis to manage the risks of increases in interest rates and fluctuations in
foreign currency exchange rates with respect to the effects these fluctuations
would have on ProLogis' income and cash flows.
Credit risk is the risk that one of the parties to a derivative contract
fails to perform or meet their financial obligation under the contract. ProLogis
does not obtain collateral to support financial instruments subject to credit
risk but monitors the credit standing of counterparties. ProLogis does not
anticipate non-performance by any of the counterparties to its derivative
contracts. Should a counterparty fail to perform, however, ProLogis would incur
a financial loss to the extent of the positive fair market value of the
derivative instruments, if any.
As of December 31, 1999, ProLogis had foreign currency put option contracts
outstanding in the notional amount of 23.0 million euros (the currency
equivalent of approximately $23.2 million based on currency exchange rates
quoted by the Reuters) related to its operations in Europe. The outstanding
contracts do not qualify for hedge accounting and were marked to market as of
December 31, 1999. ProLogis recognized an aggregate expense of $92,000 on the
put option contracts including the mark to market adjustment of $47,000. The put
option contracts provide ProLogis with the option to exchange euros for U.S.
dollars at a fixed exchange rate such that if the euro were to depreciate
against the U.S. dollar to predetermined levels (as set by the contract),
ProLogis could exercise its options and mitigate its foreign currency exchange
losses.
ProLogis has interest rate swap agreements related to variable rate
mortgage notes and other unsecured debt in the currency equivalent of
approximately $169.9 million as of December 31, 1999 (based on currency exchange
rates quoted by Reuters). The swap agreements have a combined notional amount of
1.1 billion French francs and fix the Euribor rate at 3.62% through December
2003 on a notional amount in the currency equivalent of approximately $30.9
million as of December 31, 1999, at 3.60% through January 2004 on a notional
amount in the currency equivalent of approximately $118.9 million as of December
31, 1999 and at 3.59% through January 2004 on a notional amount in the currency
equivalent of approximately $20.1 million. In December 1999, a principal paydown
was made on the underlying debt resulting in a notional amount of the swap
agreements in excess of the principal balances. Consequently, swap agreements
with a notional amount of $26.2 million were cancelled in January 2000 at a gain
to ProLogis of $1.4 million. ProLogis contributed 50.1% of the common stock of
the wholly owned entity that holds the debt related to the swap agreements to
the ProLogis European Properties Fund in January 2000. ProLogis is committed to
contributing the remaining 49.9% of the common stock to the ProLogis European
Properties Fund in January 2001.
ProLogis entered into two interest rate protection agreements with a
combined notional amount of $150.0 million in October 1997 in anticipation of
debt offerings to be completed in 1998. During 1998, the interest rate
protection agreements no longer qualified for hedge accounting treatment under
GAAP. Accordingly, ProLogis began marking these agreements to market and for the
year ended December 31, 1998 ProLogis
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recognized a non-cash expense of $26.1 million. These agreements were terminated
in February 1999 at a total cost of $27.0 million (an additional $0.9 million
expense was recognized in 1999). ProLogis used these agreements to set the
interest rate on $200.0 million of secured debt that was obtained in March 1999.
See "-- Results of Operations -- Other Income and Expense Items -- Foreign
Currency Hedge Income (Expense)" for a discussion of foreign currency hedge
contracts entered into in 1997 and terminated in 1998 related to the acquisition
of Frigoscandia.
Commitments
As of December 31, 1999, ProLogis had letters of intent or contingent
contracts, subject to ProLogis' final due diligence, for the acquisition of
140,000 square feet of distribution facilities at an estimated acquisition cost
of $4.0 million. The foregoing transactions are subject to a number of
conditions, and ProLogis cannot predict with certainty that they will be
consummated. In addition, as of December 31, 1999, ProLogis had $424.2 million
of budgeted development costs for developments in process, of which $247.6
million was unfunded.
Frigoscandia AB has a multi-currency, three-year revolving credit agreement
through a consortium of 11 European banks in the currency equivalent of
approximately $186.0 million as of December 31, 1999 based on currency exchange
rates quoted by the Svenska Handelsbanken. The loan bears interest at the
relevant index (LIBOR or Euribor based on the currency borrowed) plus 0.65%.
ProLogis has entered into a guaranty agreement for 25% of the loan balance.
ProLogis Kingspark has a line of credit agreement with a bank in the United
Kingdom. The credit agreement, which provides for borrowings of up to 10.0
million pounds sterling (the currency equivalent of approximately $16.1 million
as of December 31, 1999 based on currency exchange rates quoted by Reuters). The
line of credit, which was increased to 15.0 million pounds sterling in February
2000, has been guaranteed by ProLogis. As of December 31, 1999, no borrowings
were outstanding on the line of credit. However, as of December 31, 1999,
ProLogis Kingspark had the currency equivalent of approximately $7.9 million of
letters of credit outstanding (based on currency exchange rates quoted by
Reuters) 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 December 31, 1999, ProLogis had an unfunded
commitment on this guarantee agreement in the currency equivalent of
approximately $9.0 million based on currency exchange rates quoted by Reuters.
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.
Cash distributions paid in 1999, 1998 and 1997 were $1.30 per Common Share,
$1.24 per Common Share and $1.07 per Common Share, respectively. On December 16,
1999, ProLogis declared a distribution of $0.335 per Common Share which was paid
on February 23, 1999. The Board has set a projected annual distribution rate for
2000 of $1.34 per Common Share. The payment of distributions is subject to the
discretion of the Board and is dependent upon the financial condition and
operating results of ProLogis and may be adjusted at the discretion of the Board
during the year.
On May 3, 1999, ProLogis paid a common distribution to holders of Meridian
common stock as of March 19, 1999. This distribution, which was declared by the
Meridian Board of Directors prior to the closing of the Meridian Merger, related
to the first quarter of 1999 and aggregated $11.1 million. This liability was
assumed by ProLogis in connection with the Meridian Merger. ). See " -- Results
of Operations -- Meridian Merger".
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The annual dividend rates on ProLogis' preferred shares are $2.35 per
Series A preferred share, $1.75 per Series B preferred share, $4.27 per Series C
preferred share, $1.98 per Series D preferred share and $2.19 per series E
preferred share.
On April 30, 1999, ProLogis paid an aggregate dividend of $1.1 million on
the Series E preferred shares ($0.5469 per share) of which $729,200 related to
Meridian's Series D preferred stock and was accrued by Meridian prior to the
closing of the Meridian Merger. See "-- Results of Operations -- Meridian
Merger".
Pursuant to the terms of its preferred shares, ProLogis is restricted from
declaring or paying any distribution with respect to the Common Shares unless
and until all cumulative dividends with respect to the Preferred Shares have
been paid and sufficient funds have been set aside for dividends that have been
declared for the then current dividend period with respect to the Preferred
Shares.
Conversion to the Euro
Effective January 1, 1999, eleven of the fifteen member countries of the
European Monetary Union launched the new monetary unit, the euro, as the single
currency for the member countries of the European Monetary Union. During the
period from January 1, 1999 to January 1, 2002, a transition period will be in
effect during which time the euro will be available for non-cash transactions.
However, transactions can continue to be denominated in the old national
currencies. After January 1, 2002, all transactions must be denominated in the
euro. The targeted exchange rates of the old national currencies to the euro
were determined in May 1998. Conversion to the euro has not had, nor is
management aware of any future effects of the conversion to the euro that will
have, a material impact on its business operations or results of operations.
NEW TAX LEGISLATION
The REIT Modernization Act ("RMA"), which was passed in 1999 and will take
effect on January 1, 2001, modifies certain provisions of the 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 these investments (excluding ProLogis Development
Services which is consolidated) under the equity method rather than
consolidating the investments in its balance sheet and results of operations.
Because ProLogis will be able to own 100% of these entities beginning on January
1, 2001, ProLogis is pursuing the purchase of the common stock of these entities
from the third parties currently owning the stock. See Note 5 to ProLogis'
Consolidated Financial Statements in Item 8.
FUNDS FROM OPERATIONS
Funds from operations attributable to Common Shares increased $91.8 million
to $320.2 million for 1999 from $228.4 million for 1998. Funds from operation
attributable to Common Shares increased $70.9 million from 1997 to 1998.
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 8. 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.
ProLogis considers funds from operations to be a useful supplemental measure of
comparative period operating performance and as a supplemental measure to assist
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.
The funds from operations measure presented by ProLogis will not
necessarily be comparable to similarly titled measures of other REITs because
many REITs, including ProLogis, compute funds from operations in a
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manner different from the definition used by the National Association of Real
Estate Investment Trusts ("NAREIT"). For the three year period ended December
31, 1999 presented below, funds from operations, as published by NAREIT is
defined as net income (computed in accordance with GAAP), excluding gains or
(losses) from debt restructuring and sales of previously depreciated property,
extraordinary or unusual items as defined by GAAP and significant non-recurring
items that materially distort the comparative measurement of company performance
over time, plus depreciation and amortization unique to the real estate
industry, and after adjustments for unconsolidated entities. The adjustments for
unconsolidated entities are computed to reflect their funds from operations on
the same basis.
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. Additionally,
ProLogis includes gains or losses on the disposition of real estate utilized in
ProLogis' non-CDFS business in funds from operations. These adjustments to the
NAREIT definition are made to reflect ProLogis' funds from operations on a
comparable basis with the other REITs who to not engage in the types of
transactions that give rise to these items.
Funds from operations is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net earnings attributable to Common Shares.............. $123,999 $ 62,231 $ 4,431
Add (Deduct):
Real estate related depreciation and
amortization..................................... 150,050 99,514 76,275
(Gain) loss on disposition of non-CDFS business
real estate assets............................... (38,994) (5,565) (7,378)
Foreign currency exchange (gains) losses, net(1)... 16,596 (3,227) 348
Non-recurring foreign currency hedge (income)
expense(2)....................................... -- (2,054) 6,028
Interest rate hedge expense(3)..................... 945 26,050 --
Costs incurred in acquiring management companies
from affiliate(4)................................ -- -- 75,376
Non-recurring items(5)............................. (247) 1,686 --
Deferred income tax expense........................ -- 1,797 --
Cumulative effect of accounting change(6).......... 1,440 -- --
ProLogis' share of reconciling items of
unconsolidated entities:
Real estate related depreciation and
amortization.................................. 49,644 36,489 2,419
Loss on disposal of assets....................... 826 179 --
Foreign currency exchange losses, net............ 14,650 14,207 --
Non-recurring items.............................. (700) -- --
Deferred income tax expense (benefit)............ 510 (2,929)
Cumulative effect of accounting change(6)........ 1,480 -- --
-------- -------- --------
Funds from operations attributable to Common Shares... $320,199 $228,378 $157,499
======== ======== ========
</TABLE>
- ---------------
(1) See "-- Results of Operations -- Other Income and Expense Items -- Foreign
Currency Exchange Gain (Losses), Net".
(2) See "-- Results of Operations -- Other Income and Expense Items -- Foreign
Currency Hedge Income (Expense)".
(3) See "-- Liquidity and Capital Resources -- Derivative Financial
Instruments".
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(4) See "-- Results of Operations -- Other Income and Expense Items -- Costs
Incurred in Acquiring Management Companies From Affiliate".
(5) In 1998 represents the costs associated with ProLogis' name change. See
"-- Results of Operations -- Other Income and Expense Items -- Other
Expense".
(6) See "-- Results of Operations -- Other Income and Expense
Items -- Cumulative Effect of Accounting Change".
YEAR 2000
Overview
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Certain computer
programs that have time-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar business activities.
Prior to December 31, 1999, ProLogis completed a review of all of its
computer systems and applications to determine if these programs were Year 2000
compliant. ProLogis did not identify any computer system or applications that,
upon failure to be Year 2000 compliant, would have had a material adverse impact
on its business or results of operations.
Prior to and after January 1, 2000 ProLogis and its unconsolidated entities
(CSI, Frigoscandia and ProLogis Kingspark) have not experienced any disruptions
in their business operations related to the Year 2000 issue. Accordingly, Year
2000 problems have not materially impacted the financial condition, liquidity or
results of operations of ProLogis and its unconsolidated entities as reported
through December 31, 1999. Further, Year 2000 issues are not expected to
materially impact the financial condition, liquidity or results of operations of
ProLogis and its unconsolidated entities after December 31, 1999. Therefore,
ProLogis and its unconsolidated entities have not recorded any accruals for
contingent losses related to Year 2000 issues.
There can be no assurances that Year 2000 related issues will not still
have a material adverse effect on ProLogis, its business and its financial
condition or on the business and financial condition of ProLogis' unconsolidated
entities. However, ProLogis believes its Year 2000 compliance program has
reduced the level of uncertainty about the Year 2000 impact in areas that are
within its direct control and management of ProLogis believes that the
possibility of any future interruptions of normal operations is remote.
ProLogis' activities with respect to its assessment of Year 2000 compliance
and its remediation efforts have been performed primarily by existing personnel.
ProLogis' historical costs for addressing the Year 2000 issue are not material
and management does not anticipate any future costs associated with the Year
2000 issue. Third-party costs and interim software solutions for Year 2000
issues have not exceeded $250,000. ProLogis does not separately track the
internal costs incurred for Year 2000 compliance issues. Such costs are
principally the related payroll costs of its IT group. Although the cost
associated with the replacement of ProLogis' key property management and core
accounting systems that was completed in 1999 was substantial, the replacements
were made to improve operational efficiency and were not accelerated due to the
Year 2000 issue. ProLogis did not delay any material projects as a result of the
Year 2000 issue. Funds expended to address Year 2000 issues were made from
operating cash flow.
The total costs incurred for Year 2000 remediation was less than $250,000
for CSI, approximately $3.0 million for Frigoscandia and less than $100,000 for
ProLogis Kingspark. No future costs are expected to be incurred.
ProLogis and its unconsolidated entities believe that Year 2000 issues have
not and will not materially effect the their historic spending patterns or cost
relationships. Additionally, ProLogis believes that the revenue patterns of it
and its unconsolidated entities have not and will not be effected by Year 2000
related problems.
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RISK FACTORS
Risks factors include the occurrence of any of the events described below
that could adversely affect ProLogis' ability to achieve its projected returns
on acquisitions and projects under development and could hinder ProLogis'
ability to make expected distributions to equity holders.
ProLogis is Exposed to the General Economic Conditions of the Markets in which
it Owns Property
ProLogis' operating performance depends on the economic conditions of
markets in which its facilities are concentrated. ProLogis' operating
performance could be adversely affected if conditions, such as an oversupply of
space or a reduction in demand for industrial distribution facilities, in
ProLogis' larger markets become less favorable relative to other geographic
areas. Any material oversupply of space or material reduction of demand for
space could adversely effect ProLogis' operating income and the value of the
Common Shares.
ProLogis' Investments Are Subject To Risks Particular To Real Estate
Value of Real Estate Dependent on Numerous Factors
Real property investments are subject to varying degrees of risk. Real
estate values are affected by a number of factors, including:
- changes in the general economic climate;
- local conditions, such as an oversupply of space or a reduction in demand
for real estate in an area;
- the quality and philosophy of management;
- competition from other available space;
- the ability of the owner to provide adequate maintenance and insurance;
- the ability of the owner to control variable operating costs;
- governmental regulations;
- interest rate levels;
- the availability of financing; and
- potential liability under, and changes in, environmental, zoning, and
other laws.
Restrictions on, and Risks of, Unsuccessful Development Activities
ProLogis intends to continue to pursue development activities as
opportunities arise. Such development activities generally require various
government and other approvals. ProLogis may not receive such approvals.
ProLogis will be subject to risks associated with any such development
activities. These risks include:
- the risk that development opportunities explored by ProLogis may be
abandoned;
- the risk that construction costs of a project may exceed original
estimates, possibly making the project less profitable than originally
estimated;
- limited cash flow during the construction period; and
- the risk that occupancy rates and rents of a completed project will not
be sufficient to make the project profitable.
In case of an unsuccessful development project, ProLogis' loss could exceed
its investment in the project.
Tenant Default
ProLogis' income and distributable cash flow would be adversely affected if
a significant number of ProLogis' tenants are unable to meet their obligations
to ProLogis, or if ProLogis is unable to lease, on
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economically favorable terms, a significant amount of space in its industrial
distribution facilities. In the event of default by a significant number of
tenants, ProLogis may experience delays and incur substantial costs in enforcing
its rights as landlords.
Real Estate Investments Are Not As Liquid As Other Types Of Assets
Real estate investments are not as liquid as other types of assets and
therefore may tend to limit the ability of ProLogis to react promptly to changes
in economic or other conditions. In addition, significant expenditures
associated with real estate investments, such as mortgage payments, real estate
taxes and maintenance costs, are generally not reduced when circumstances cause
a reduction in income from the investments. Like other companies qualifying as
REITs under the Code, ProLogis must comply with the safe harbor rules, relating
to the number of properties sold in a year, their tax bases and the cost of
improvements made to the properties, or meet other tests which enable a REIT to
avoid punitive taxation on the sale of assets. Thus, ProLogis' ability to sell
assets at any time to change its asset base may be restricted.
Share Prices May Be Affected By Market Interest Rates
The annual distribution rate on Common Shares as a percentage of its market
price may influence the trading price of such Common Shares. An increase in
market interest rates may lead investors to demand a higher annual distribution
rate, which could adversely affect the market price of such Common Shares. A
decrease in the market price of the Common Shares could reduce ProLogis' ability
to raise additional equity capital in the public markets.
Uninsured Losses May Adversely Affect ProLogis
Some types of losses, such as from acts of war, may be uninsurable, or the
cost of insuring against such losses may not be economically justifiable. If an
uninsured loss occurs, ProLogis could lose both the invested capital in and
anticipated revenues from the affected facility, but would still be obligated to
repay any recourse mortgage indebtedness on the facility.
Potential Environmental Liability
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner, developer or operator of real estate may be liable
for the costs of removal or remediation of hazardous or toxic substances at, on,
under or in its property. The costs of removal or remediation of such substances
could be substantial. Such laws often impose liability without regard to whether
the owner or operator knew of, or was responsible for, the release or presence
of such hazardous substances. The presence of such substances on ProLogis'
properties may adversely affect its ability to sell such properties or to borrow
using such properties as collateral and may also have an adverse affect on
ProLogis' ability to pay distributions to its shareholders.
Debt Financing, Increases in Interest Rates, Financial Covenants and Absence
of Limitations on Debt May Result in Decreased Distribution to Shareholders
Debt Financing
ProLogis is subject to risks normally associated with debt financing,
including the risk that ProLogis' cash flow will be insufficient to meet
required payments or principal and interest and the risk that ProLogis will not
be able to refinance existing indebtedness or that the terms of such
refinancings will not be as favorable as terms of the existing indebtedness.
There can be no assurance that ProLogis will be able to refinance any
indebtedness or otherwise obtain funds by selling assets or raising equity to
make required payments on maturing indebtedness.
Requirements of Credit Facilities; Foreclosures
The terms of ProLogis' indebtedness require ProLogis to comply with a
number of customary financial and other covenants, such as maintaining debt
service coverage and leverage ratios, maintaining insurance coverage, etc. These
covenants may limit ProLogis' flexibility in its operations, and breaches of
these covenants could
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result in defaults under the instruments governing the applicable indebtedness
even if ProLogis has satisfied its payment obligations. If ProLogis is unable to
refinance its indebtedness at maturity or meet its payment obligations, the
amount of cash available for distribution may be adversely affected.
No Limitations on Debt
ProLogis currently has a policy of incurring debt only, if upon such
incurrence, ProLogis' debt-to-book capitalization ratio, as adjusted, would
equal 50% or less. The Board could alter or eliminate this policy without
shareholder approval and would do so if, for example, it were necessary in order
for ProLogis to continue to qualify as a REIT under the Code. If this policy
were changed, ProLogis could become more highly leveraged, resulting in an
increase in debt service that could adversely affect the cash available for
distribution to shareholders.
Failure to Qualify as a REIT Could Adversely Affect Shareholders
ProLogis has elected to be taxed as a REIT under the Code commencing with
its taxable year ended December 31, 1993. To maintain REIT status, ProLogis must
meet a number of highly technical requirements on a continuing basis. Those
requirements seek to ensure, among other things, that the gross income and
investments of a REIT are largely real estate related, that a REIT distributes
substantially all its ordinary taxable income to shareholders on a current basis
and that the REIT's ownership is not overly concentrated. Due to the complex
nature of these rules, the limited available guidance concerning interpretation
of the rules, the importance of ongoing factual determinations and the
possibility of adverse changes in the law, administrative interpretations of the
law and developments at ProLogis, no assurance can be given that ProLogis will
qualify as a REIT for any particular year.
If ProLogis fails to qualify as a REIT, it will be taxed as a regular
corporation, and distributions to shareholders will not be deductible in
computing ProLogis' taxable income. The resulting corporate tax liabilities
could materially reduce the funds available for distribution to ProLogis'
shareholders or for reinvestment. In the absence of REIT status, distributions
to shareholders would no longer be required. Moreover, ProLogis might not be
able to elect to be treated as a REIT for the four taxable years after the year
during which ProLogis ceased to qualify as a REIT. In addition, if ProLogis
later requalified as a REIT, it might be required to pay a full corporate-level
tax on any unrealized gain in its assets as of the date of requalification and
to make distributions to shareholders equal to any earnings accumulated during
the period of non-REIT status.
Potential Adverse Effect of REIT Distribution Requirements
To maintain its qualification as a REIT under the Code, ProLogis must
annually distribute to ProLogis' shareholders at least 95% of its ordinary
taxable income, excluding net capital gains (changed to 90% as a result of the
RMA -- see "-- New Tax Legislation"). This requirement limits ProLogis' ability
to accumulate capital. ProLogis may not have sufficient cash or other liquid
assets to meet the distribution requirements. Difficulties in meeting the
distribution requirements might arise due to competing demands for ProLogis'
funds or to timing differences between tax reporting and cash receipts and
disbursements, because income may have to be reported before cash is received,
because expenses may have to be paid before a deduction is allowed or because
deductions may be disallowed or limited. In those situations, ProLogis might be
required to borrow funds or sell facilities on adverse terms in order to meet
the distribution requirements. If ProLogis fails to make a required
distribution, it would cease to be a REIT.
Currency Risk
ProLogis has pursued and intends to continue to pursue growth opportunities
in international markets and often invests in countries where the U.S. dollar is
not the national currency. As a result, ProLogis is subject to foreign currency
risk due to potential fluctuations in exchange rates between foreign currencies
and the U. S. dollar. For example, a significant depreciation in the value of
the foreign currencies of one or more countries where ProLogis has a significant
investment may materially adversely affect ProLogis' performance. ProLogis
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attempts to mitigate any such effects through the use of foreign currency hedge
contracts, although there can be no assurance that such attempts will be
successful.
Influence of ProLogis' Principal Shareholder May Impact ProLogis' Management
and Operations
ProLogis and Security Capital are parties to a Third Amended and Restated
Investor Agreement, dated as of September 9, 1997. Pursuant to the investor
agreement, Security Capital has the right, so long as it owns between 10% and
25% of the Common Shares, to nominate one person to the Board. So long as
Security Capital owns 25% or more of the Common Shares, Security Capital will be
entitled to nominate a proportionate number of persons to the Board subject to a
maximum of three nominees if the size of the Board does not increase above the
current size of ten trustees. Under the investor agreement, so long as it owns
at least 25% of the Common Shares, Security Capital also has the right of prior
approval with respect to the following matters:
- the issuance of equity securities or securities convertible into equity
securities, other than issuances in connection with option, dividend
reinvestment and similar plans, for less than the fair market value of
such securities;
- the issuance of any preferred shares which would result in the fixed
charge coverage ratio being less than 1.4 to 1.0;
- adopting any employee benefit plans under which Common Shares may be
issued;
- the compensation of senior officers of ProLogis; and
- the incurrence of additional indebtedness which would result in the
interest expense coverage ratio being less than 2.0 to 1.0.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
ProLogis is exposed to market risk from changes in interest rates and
foreign currency exchange rates. On a limited basis, ProLogis uses certain
derivative financial instruments, including interest rate swap agreements and
foreign currency option and forward contracts to reduce its market risk.
ProLogis does not use financial instruments for trading or speculative purposes
and all financial instruments are entered into in accordance with Board approved
policies.
ProLogis has estimated its market risk exposures using sensitivity
analysis. ProLogis has defined its market risk exposure as the potential loss in
future earnings and cash flow with respect to interest rate exposure and future
earnings with respect to foreign currency exchange exposure of its market risk
sensitive instruments assuming a hypothetical 10% adverse change in year end
interest rates and foreign currency exchange rates. The results of the
sensitivity analysis are summarized below. The sensitivity analysis is of
limited predictive value. As a result, ProLogis' ultimate realized gains or
losses with respect to interest and foreign currency exchange rate fluctuations
will depend on the exposures that arise during a future period, hedging
strategies at the time, and the prevailing interest and foreign currency
exchange rates.
Interest Rate Risk
ProLogis' interest rate risk is related primarily to its variable rate
credit facilities. ProLogis' interest rate risk management objective is to limit
the impact of interest rate changes on earnings and cash flows. To achieve its
objective, ProLogis primarily borrows on a fixed rate basis. Therefore,
ProLogis' primary interest rate risk is created by its variable rate unsecured
lines of credit and its variable rate short-term borrowing arrangements.
ProLogis substantially eliminates the interest rate risk generated by longer
term variable rate debt by fixing the interest payments with interest rate swap
agreements. ProLogis had $160.7 million longer-term variable rate debt
outstanding as of December 31, 1999. ProLogis has substantially fixed the
interest payments on this debt with interest rate swap agreements. In addition,
ProLogis has in the past and may in the future, utilize derivative instruments
as hedges in anticipation of future fixed rate debt transactions to manage
interest rate exposure.
During the year ended December 31, 1999, ProLogis had weighted average
outstanding borrowings of $232.8 million on its variable rate unsecured lines of
credit and $47.9 million on its variable rate short-term
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borrowing arrangement. Based on the results of the sensitivity analysis, which
assumed a 10% adverse change in interest rates, the estimated market risk
exposure for interest rate-related financial instruments was approximately $1.7
million on both future earnings and cash flow as of December 31, 1999. The
sensitivity analysis was based on the weighted average outstanding variable rate
borrowings for 1999 and assumed a flat yield curve.
Foreign Currency Risk
ProLogis uses foreign currency forward and option contracts to manage
foreign currency exchange rate risk related to projected net operating income
(operating income net of foreign denominated interest expense) from foreign
entities. Prior to September 1999, ProLogis did not hedge projected net
operating income from foreign entities with derivative contracts because it was
not material relative to ProLogis' total net operating income.
In addition, ProLogis incurs foreign currency risk related to its U.S.
dollar denominated loans to its foreign consolidated subsidiaries. The
remeasurement of intercompany loans results in foreign currency exchange gains
or losses which are recognized by ProLogis. However, ProLogis does not incur an
actual cash gain or loss until the loans are repaid. ProLogis' exposure to
foreign currency exchange rates exists with the following currencies versus the
U.S. dollar: euro, British pound sterling and Swedish krona.
ProLogis' foreign currency exchange sensitivity analysis included foreign
currency forward and options contracts and other financial instruments affected
by foreign currency exchange risk, as well as U.S. dollar denominated loans to
foreign consolidated entities. Based on the results of the sensitivity analysis,
which assumed a 10% adverse change in foreign currency exchange rates, the
estimated 1999 year-end market risk exposure to future earnings was $16.8
million. The sensitivity analysis excluded the impact of the change in foreign
currency exchange rates on the underlying projected net operating income, which
has a high degree of inverse correlation with the derivative instruments used to
hedge it. However, since ProLogis hedges approximately 75% of its projected net
operating income from foreign entities, approximately 25% of the impact to total
net operating income of an adverse movement in foreign exchange rates would not
be offset by derivative instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ProLogis Consolidated Balance Sheets as of December 31, 1999 and 1998, its
Consolidated Statements of Earnings, Shareholders' Equity and Cash Flows for
each of the three years in the period ended December 31, 1999, Notes to
Consolidated Financial Statements and Schedule III -- Real Estate and
Accumulated Depreciation, together with the report of Arthur Andersen LLP,
independent public accountants, are included under Item 14 of this report and
are incorporated herein by reference. Selected quarterly financial data is
presented in Note 14 of Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE MATTERS
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information regarding ProLogis' executive officers, see "Item 1.
Business -- Executive Officers and Trustees" and "-- Senior Officers." The other
information required by this Item 10 is incorporated herein by reference to the
description under the captions "Election of Trustees" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in ProLogis' definitive proxy
statement for its 2000 annual meeting of shareholders ("2000 Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the description under the captions
"Executive Compensation," "Compensation Committee Report on Executive
Compensation," "Trustee Compensation" and "Outside Trustee Plan" in the 2000
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the description under the caption
"Principal Shareholders" in the 2000 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the description under the caption
"Certain Relationships and Transactions" in the 2000 Proxy Statement.
56
<PAGE> 59
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) Financial Statements and Schedules:
1. Financial Statements:
See Index to Consolidated Financial Statements and Schedule III on
page 58 of this report, which is incorporated herein by reference.
2. Financial Statement Schedules:
Schedule III -- Real Estate and Accumulated Depreciation
All other schedules have been omitted since the required information
is presented in the financial statements and the related notes or is
not applicable.
3. Exhibits:
See Index to Exhibits on pages 118 to 122 of this report, which is
incorporated herein by reference.
(b) Reports on Form 8-K: The following reports on Form 8-K were filed
during the last quarter of the period covered by this report:
<TABLE>
<CAPTION>
ITEM FINANCIAL
DATE REPORTED STATEMENTS
- ---- -------- ----------
<S> <C> <C>
None
</TABLE>
(c) Exhibits: The Exhibits required by Item 601 of Regulation S-K are
listed in the Index to Exhibits on pages 118 to 122 of this report, which
is incorporated herein by reference.
57
<PAGE> 60
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE III
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ProLogis Trust:
Report of Independent Public Accountants.................. 59
Consolidated Balance Sheets............................... 60
Consolidated Statements of Earnings....................... 61
Consolidated Statements of Shareholders' Equity........... 62
Consolidated Statements of Cash Flows..................... 63
Notes to Consolidated Financial Statements................ 64
Report of Independent Public Accountants.................. 100
Schedule III -- Real Estate and Accumulated
Depreciation........................................... 101
</TABLE>
58
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
ProLogis Trust
We have audited the accompanying consolidated balance sheets of ProLogis
Trust and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits. We
did not audit the financial statements of Frigoscandia Holding AB accounted for
under the equity method of accounting, in which the Trust has investments in and
advances to amounting to $196.9 million and $229.9 million as of December 31,
1999 and 1998, respectively, and losses from unconsolidated entity of $2.9
million and $7.6 million in 1999, and 1998, respectively. We did not audit the
financial statements of CS Integrated LLC accounted for under the equity method
of accounting, in which the Trust has an investment in and advances to amounting
to $186.9 million as of December 31, 1999 and earnings from unconsolidated
entity of $9.2 million in 1999. These statements were audited by other auditors
whose reports were furnished to us, and our opinion, insofar as it relates to
the amounts included for these entities is based solely on the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors,
the financial statements referred to above present fairly, in all material
respects, the financial position of ProLogis Trust and subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Chicago, Illinois
March 21, 2000
59
<PAGE> 62
PROLOGIS TRUST
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Real estate................................................. $4,974,951 $3,657,500
Less accumulated depreciation............................. 366,703 254,288
---------- ----------
4,608,248 3,403,212
Investments in and advances to unconsolidated entities...... 940,364 733,863
Cash and cash equivalents................................... 69,338 63,140
Accounts and notes receivable............................... 46,998 11,648
Other assets................................................ 183,092 118,866
---------- ----------
Total assets....................................... $5,848,040 $4,330,729
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit........................................... $ 98,700 $ 344,300
Short-term borrowings..................................... -- 150,000
Senior unsecured debt..................................... 1,729,630 1,083,641
Other unsecured debt...................................... 30,892 --
Mortgage notes............................................ 657,913 184,964
Assessment bonds.......................................... 10,721 11,281
Securitized debt.......................................... 26,952 31,559
Accounts payable and accrued expenses..................... 117,651 116,378
Construction payable...................................... 23,064 34,025
Amount due to affiliate................................... 221 395
Distributions and dividends payable....................... 54,939 39,283
Other liabilities......................................... 81,549 27,240
---------- ----------
Total liabilities.................................. 2,832,232 2,023,066
---------- ----------
Minority interest........................................... 62,072 51,295
Shareholders' equity:
Series A Preferred Shares; $0.01 par value; 5,400,000
shares issued and outstanding at December 31, 1999 and
1998; stated liquidation preference of $25.00 per
share................................................... 135,000 135,000
Series B Convertible Preferred Shares; $0.01 par value;
7,020,703 shares issued and outstanding at December 31,
1999 and 7,537,600 shares issued and outstanding at
December 31, 1998; stated liquidation preference of
$25.00 per share........................................ 175,518 188,440
Series C Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at December 31, 1999 and
1998; stated liquidation preference of $50.00 per
share................................................... 100,000 100,000
Series D Preferred Shares; $0.01 par value; 10,000,000
shares issued and outstanding at December 31, 1999 and
1998; stated liquidation preference of $25.00 per
share................................................... 250,000 250,000
Series E Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at December 31, 1999;
stated liquidation preference of $25.00 per share....... 50,000 --
Common shares of beneficial interest; $0.01 par value;
161,825,466 shares issued and outstanding at December
31, 1999 and 123,415,711 shares issued and outstanding
at December 31, 1998.................................... 1,618 1,234
Additional paid-in capital.................................. 2,663,350 1,907,232
Employee share purchase notes............................... (22,906) (25,247)
Accumulated other comprehensive income...................... (9,765) 23
Distributions in excess of net earnings..................... (389,079) (300,314)
---------- ----------
Total shareholders' equity......................... 2,953,736 2,256,368
---------- ----------
Total liabilities and shareholders' equity......... $5,848,040 $4,330,729
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
60
<PAGE> 63
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income:
Rental income............................................. $491,826 $345,046 $284,533
Other real estate income.................................. 46,678 17,554 12,291
Income from unconsolidated entities....................... 22,519 2,755 3,278
Interest.................................................. 6,369 2,752 2,392
-------- -------- --------
Total income....................................... 567,392 368,107 302,494
-------- -------- --------
Expenses:
Rental expenses, net of recoveries $87,907 in 1999,
$57,415 in 1998 and $42,288 in 1997 and including
amounts paid to affiliate of $1,314 in 1999, $984 in
1998 and $280 in 1997................................... 33,501 27,120 23,187
Property management fees paid to affiliate, net of
recoveries of $3,870 in 1997............................ -- -- 3,821
General and administrative, including amounts paid to
affiliate of $1,582 in 1999, $1,992 in 1998 and $657 in
1997.................................................... 38,284 22,893 6,770
REIT management fee paid to affiliate..................... -- -- 17,791
Depreciation and amortization............................. 152,447 100,590 76,562
Interest.................................................. 170,746 77,650 52,704
Interest rate hedge expense............................... 945 26,050 --
Costs incurred in acquiring management companies from
affiliate............................................... -- -- 75,376
Other..................................................... 4,920 6,187 3,891
-------- -------- --------
Total expenses..................................... 400,843 260,490 260,102
-------- -------- --------
Earnings from operations.................................... 166,549 107,617 42,392
Minority interest share in earnings......................... 4,979 4,681 3,560
-------- -------- --------
Earnings before gain on disposition of real estate and
foreign currency exchange gains (losses).................. 161,570 102,936 38,832
Gain on disposition of real estate.......................... 38,994 5,565 7,378
Foreign currency hedge income (expense)..................... -- 2,054 (6,028)
Foreign currency exchange gains (losses), net............... (16,818) 2,938 (348)
-------- -------- --------
Earnings before income taxes................................ 183,746 113,493 39,834
Income tax expense:
Current................................................... 1,472 368 85
Deferred.................................................. -- 1,796 --
-------- -------- --------
Total income taxes................................. 1,472 2,164 85
-------- -------- --------
Earnings before cumulative effect of accounting change...... 182,274 111,329 39,749
Cumulative effect of accounting change...................... 1,440 -- --
-------- -------- --------
Net earnings................................................ 180,834 111,329 39,749
Less preferred share dividends.............................. 56,835 49,098 35,318
-------- -------- --------
Net earnings attributable to Common Shares.................. $123,999 $ 62,231 $ 4,431
======== ======== ========
Weighted average Common Shares outstanding -- Basic......... 152,412 121,721 100,729
======== ======== ========
Weighted average Common Shares outstanding -- Diluted....... 152,739 122,028 100,869
======== ======== ========
Basic per share net earnings attributable to Common Shares:
Earnings before cumulative effect of accounting change.... $ 0.82 $ 0.51 $ 0.04
Cumulative effect of accounting change.................... (0.01) -- --
-------- -------- --------
Net earnings attributable to Common Shares......... $ 0.81 $ 0.51 $ 0.04
======== ======== ========
Diluted per share net earnings attributable to Common
Shares:
Earnings before cumulative effect of accounting change.... $ 0.82 $ 0.51 $ 0.04
Cumulative effect of accounting change.................... (0.01) -- --
-------- -------- --------
Net earnings attributable to Common Shares......... $ 0.81 $ 0.51 $ 0.04
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
61
<PAGE> 64
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
PREFERRED PREFERRED PREFERRED
COMMON SHARES SHARES AT SHARES AT SHARES AT
-------------------- AGGREGATE AGGREGATE AGGREGATE
NUMBER PAR LIQUIDATION LIQUIDATION LIQUIDATION
OF SHARES VALUE PREFERENCE PREFERENCE PREFERENCE
--------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996............................... 93,677 $ 937.0 $135,000 $201,250 $100,000
Net earnings............................................... -- -- -- -- --
Preferred share dividends.................................. -- -- -- -- --
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- -- -- -- --
Comprehensive income attributable to Common Shares......... -- -- -- -- --
Sale of Common Shares...................................... 18,455 184.6 -- -- --
Common Shares issued under employee share purchase plan.... 1,357 13.6 -- -- --
Common Shares issued in 1997 Merger, net of costs.......... 3,692 36.9 -- -- --
Common Shares issued under dividend reinvestment and share
purchase plans........................................... 20 0.2 -- -- --
Limited partnership units converted to Common Shares....... 105 1.0 -- -- --
Series B preferred shares converted to Common Shares....... 63 0.6 -- (1,242) --
Principal payments on employee share purchase notes........ -- -- -- -- --
Retirements of employee share purchase notes............... (5) (0.1) -- -- --
Common Share distributions paid............................ -- -- -- -- --
Common Share distributions accrued......................... -- -- -- -- --
------- -------- -------- -------- --------
Balances at December 31, 1997............................... 117,364 1,173.8 135,000 200,008 100,000
Net earnings............................................... -- -- -- -- --
Preferred share dividends.................................. -- -- -- -- --
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- -- -- -- --
Comprehensive income attributable to Common Shares......... -- -- -- -- --
Sale of Common Shares...................................... 5,494 54.9 -- -- --
Sale of preferred shares................................... -- -- -- -- --
Common Shares issued under dividend reinvestment and share
purchase plans........................................... 18 0.1 -- -- --
Common Shares issued upon exercise of warrants............. 12 0.1 -- -- --
Limited partnership units converted to Common Shares....... 20 0.2 -- -- --
Series B preferred shares converted to Common Shares....... 593 5.9 -- (11,568) --
Principal payments on employee share purchase notes........ -- -- -- -- --
Retirements of employee share purchase notes............... (85) (0.8) -- -- --
Sale of options to unconsolidated entities................. -- -- -- -- --
Stock-based compensation................................... -- -- -- -- --
Common Share distributions paid............................ -- -- -- -- --
Common Share distributions accrued......................... -- -- -- -- --
------- -------- -------- -------- --------
Balances at December 31, 1998............................... 123,416 1,234.2 135,000 188,440 100,000
Net earnings............................................... -- -- -- -- --
Preferred share dividends.................................. -- -- -- -- --
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- -- -- -- --
Comprehensive income attributable to Common Shares......... -- -- -- -- --
Preferred and Common Shares issued in Meridian Merger...... 37,388 373.9 -- -- --
Common Shares issued under dividend reinvestment and share
purchase plans........................................... 344 3.4 -- --
Limited partnership units converted to Common Shares....... 14 0.1 -- -- --
Series B preferred shares converted to Common Shares....... 663 6.6 -- (12,922) --
Principal payments on employee share purchase notes........ -- -- -- -- --
Sale of options to unconsolidated entities................. -- -- -- -- --
Stock-based compensation................................... -- -- -- -- --
Common Share distributions paid............................ -- -- -- -- --
Common Share distributions accrued......................... -- -- -- -- --
------- -------- -------- -------- --------
Balances at December 31, 1999............................... 161,825 $1,618.2 $135,000 $175,518 $100,000
======= ======== ======== ======== ========
<CAPTION>
SERIES D SERIES E
PREFERRED PREFERRED
SHARES AT SHARES AT EMPLOYEE ACCUMULATED
AGGREGATE AGGREGATE ADDITIONAL SHARE OTHER
LIQUIDATION LIQUIDATION PAID-IN PURCHASE COMPREHENSIVE
PREFERENCE PREFERENCE CAPITAL NOTES INCOME
----------- ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1996............................... $ -- $ -- $1,257,347 $ -- $ --
Net earnings............................................... -- -- -- -- --
Preferred share dividends.................................. -- -- -- -- --
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- -- -- -- (63)
Comprehensive income attributable to Common Shares......... -- -- -- -- --
Sale of Common Shares...................................... -- -- 405,082 -- --
Common Shares issued under employee share purchase plan.... -- -- 28,777 (27,345) --
Common Shares issued in 1997 Merger, net of costs.......... -- -- 79,102 -- --
Common Shares issued under dividend reinvestment and share
purchase plans........................................... -- -- 429 -- --
Limited partnership units converted to Common Shares....... -- -- 1,587 -- --
Series B preferred shares converted to Common Shares....... -- -- 1,241 -- --
Principal payments on employee share purchase notes........ -- -- -- 64 --
Retirements of employee share purchase notes............... -- -- (100) 95 --
Common Share distributions paid............................ -- -- -- -- --
Common Share distributions accrued......................... -- -- -- -- --
-------- -------- ---------- -------- -------
Balances at December 31, 1997............................... -- -- 1,773,465 (27,186) (63)
Net earnings............................................... -- -- -- -- --
Preferred share dividends.................................. -- -- -- -- --
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- -- -- -- 86
Comprehensive income attributable to Common Shares......... -- -- -- -- --
Sale of Common Shares...................................... -- -- 130,279 -- --
Sale of preferred shares................................... 250,000 -- (8,469) -- --
Common Shares issued under dividend reinvestment and share
purchase plans........................................... -- -- 403 -- --
Common Shares issued upon exercise of warrants............. -- -- 118 -- --
Limited partnership units converted to Common Shares....... -- -- 302 -- --
Series B preferred shares converted to Common Shares....... -- -- 11,562 -- --
Principal payments on employee share purchase notes........ -- -- -- 143 --
Retirements of employee share purchase notes............... -- -- (2,039) 1,796 --
Sale of options to unconsolidated entities................. -- -- 1,333 -- --
Stock-based compensation................................... -- -- 278 -- --
Common Share distributions paid............................ -- -- -- -- --
Common Share distributions accrued......................... -- -- -- -- --
-------- -------- ---------- -------- -------
Balances at December 31, 1998............................... 250,000 -- 1,907,232 (25,247) 23
Net earnings............................................... -- -- -- -- --
Preferred share dividends.................................. -- -- -- -- --
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- -- -- -- (9,788)
Comprehensive income attributable to Common Shares......... -- -- -- -- --
Preferred and Common Shares issued in Meridian Merger...... -- 50,000 733,307 -- --
Common Shares issued under dividend reinvestment and share
purchase plans........................................... -- -- 6,327 -- --
Limited partnership units converted to Common Shares....... -- -- 205 -- --
Series B preferred shares converted to Common Shares....... -- -- 12,916 -- --
Principal payments on employee share purchase notes........ -- -- -- 2,341 --
Sale of options to unconsolidated entities................. -- -- 1,226 -- --
Stock-based compensation................................... -- -- 2,137 -- --
Common Share distributions paid............................ -- -- -- -- --
Common Share distributions accrued......................... -- -- -- -- --
-------- -------- ---------- -------- -------
Balances at December 31, 1999............................... $250,000 $ 50,000 $2,663,350 $(22,906) $(9,765)
======== ======== ========== ======== =======
<CAPTION>
DISTRIBUTIONS TOTAL
IN EXCESS OF SHAREHOLDERS'
NET EARNINGS EQUITY
------------- -------------
<S> <C> <C>
Balances at December 31, 1996............................... $ (95,145) $1,599,389
Net earnings............................................... 39,749 39,749
Preferred share dividends.................................. (35,318) (35,318)
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- (63)
----------
Comprehensive income attributable to Common Shares......... -- 4,368
Sale of Common Shares...................................... -- 405,267
Common Shares issued under employee share purchase plan.... -- 1,445
Common Shares issued in 1997 Merger, net of costs.......... -- 79,139
Common Shares issued under dividend reinvestment and share
purchase plans........................................... -- 429
Limited partnership units converted to Common Shares....... -- 1,588
Series B preferred shares converted to Common Shares....... -- --
Principal payments on employee share purchase notes........ -- 64
Retirements of employee share purchase notes............... -- (5)
Common Share distributions paid............................ (81,498) (81,498)
Common Share distributions accrued......................... (33,449) (33,449)
--------- ----------
Balances at December 31, 1997............................... (205,661) 1,976,737
Net earnings............................................... 111,329 111,329
Preferred share dividends.................................. (49,098) (49,098)
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- 86
----------
Comprehensive income attributable to Common Shares......... -- 62,317
Sale of Common Shares...................................... -- 130,334
Sale of preferred shares................................... -- 241,531
Common Shares issued under dividend reinvestment and share
purchase plans........................................... -- 403
Common Shares issued upon exercise of warrants............. -- 118
Limited partnership units converted to Common Shares....... -- 302
Series B preferred shares converted to Common Shares....... -- --
Principal payments on employee share purchase notes........ -- 143
Retirements of employee share purchase notes............... -- (244)
Sale of options to unconsolidated entities................. -- 1,333
Stock-based compensation................................... -- 278
Common Share distributions paid............................ (117,601) (117,601)
Common Share distributions accrued......................... (39,283) (39,283)
--------- ----------
Balances at December 31, 1998............................... (300,314) 2,256,368
Net earnings............................................... 180,834 180,834
Preferred share dividends.................................. (56,835) (56,835)
Accumulated other comprehensive income -- foreign currency
translation adjustments.................................. -- (9,788)
----------
Comprehensive income attributable to Common Shares......... -- 114,211
Preferred and Common Shares issued in Meridian Merger...... -- 783,681
Common Shares issued under dividend reinvestment and share
purchase plans........................................... -- 6,331
Limited partnership units converted to Common Shares....... -- 205
Series B preferred shares converted to Common Shares....... -- --
Principal payments on employee share purchase notes........ -- 2,341
Sale of options to unconsolidated entities................. -- 1,226
Stock-based compensation................................... -- 2,137
Common Share distributions paid............................ (158,554) (158,554)
Common Share distributions accrued......................... (54,210) (54,210)
--------- ----------
Balances at December 31, 1999............................... $(389,079) $2,953,736
========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
62
<PAGE> 65
PROLOGIS TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Operating activities:
Net earnings.............................................. $ 180,834 $ 111,329 $ 39,749
Minority interest share in earnings....................... 4,979 4,681 3,560
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 152,447 100,590 76,562
Gain on disposition of real estate...................... (38,994) (5,565) (7,378)
Straight-lined rents.................................... (9,889) (6,756) (5,435)
Amortization of deferred loan costs..................... 4,440 2,200 1,977
Stock-based compensation................................ 1,657 278 --
(Income) loss from unconsolidated entities.............. (20,948) 11,108 (570)
Deferred income taxes................................... -- 1,796 --
Foreign currency exchange (gains) losses, net............. 11,344 (3,227) 348
Foreign currency hedge (income) expense................... -- (2,054) 6,028
Interest rate hedge expense............................... 945 26,050 --
Costs incurred in acquiring management companies from
affiliate............................................... -- -- 75,376
Increase in accounts receivable and other assets.......... (35,904) (36,824) (24,390)
Increase in accounts payable, accrued expenses and other
liabilities............................................. 20,654 35,390 25,508
Increase (decrease) in amount due to affiliate............ (174) (743) 1,138
----------- ----------- ---------
Net cash provided by operating activities........... 271,391 238,253 192,473
----------- ----------- ---------
Investing activities:
Real estate investments................................... (452,161) (695,764) (601,577)
Tenant improvements and lease commissions on previously
leased space............................................ (19,751) (12,757) (15,539)
Recurring capital expenditures............................ (28,114) (8,038) (5,523)
Proceeds from dispositions of real estate................. 557,736 109,336 137,147
Investments in and advances to unconsolidated entities.... (141,037) (657,499) (85,569)
Cash acquired in Meridian Merger.......................... 48,962 -- --
----------- ----------- ---------
Net cash used in investing activities............... (34,365) (1,264,722) (571,061)
----------- ----------- ---------
Financing activities:
Proceeds from sale of shares, net of expenses............. -- 371,865 405,712
Proceeds from exercised warrants, dividend reinvestment
plan and share purchase plan............................ 6,331 521 429
Repurchase of Common Shares............................... -- (244) (5)
Proceeds from secured financing transactions.............. 466,075 66,000 --
Proceeds from issuance of senior unsecured debt........... 500,000 374,463 199,772
Debt issuance and other transaction costs incurred........ (58,248) (5,848) (3,171)
Distributions paid on Common Shares (includes $11,132 paid
to Meridian shareholders)............................... (208,969) (151,050) (106,556)
Distributions paid to minority interest holders........... (7,251) (6,409) (5,665)
Preferred shares dividends paid (includes $729 paid to
Meridian shareholders).................................. (56,835) (49,098) (35,318)
Principal payments on senior unsecured notes.............. (12,500) (15,000) --
Principal payments received on and retirements of employee
share purchase notes.................................... 2,341 143 64
Payments on derivative financial instruments.............. (27,715) (3,974) 1,894
Payments to Meridian shareholders......................... (67,581) -- --
Proceeds from lines of credit and short-term borrowings... 1,939,845 1,569,225 530,991
Payments on lines of credit and short-term borrowings..... (2,335,445) (1,074,925) (569,591)
Payment on line of credit assumed in Meridian Merger...... (328,400) -- --
Regularly scheduled principal payments on mortgage
notes................................................... (6,560) (5,658) (4,925)
Principal payments on mortgage notes at maturity and
prepayments............................................. (35,916) (5,411) (14,804)
----------- ----------- ---------
Net cash (used in) provided by financing
activities........................................ (230,828) 1,064,600 398,827
----------- ----------- ---------
Net increase in cash and cash equivalents................... 6,198 38,131 20,239
Cash and cash equivalents, beginning of year................ 63,140 25,009 4,770
----------- ----------- ---------
Cash and cash equivalents, end of year...................... $ 69,338 $ 63,140 $ 25,009
=========== =========== =========
</TABLE>
See Note 12 for information on non-cash investing and financing activities.
The accompanying notes are an integral part of these consolidated financial
statements.
63
<PAGE> 66
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. DESCRIPTION OF BUSINESS:
ProLogis Trust ("ProLogis") is a publicly held real estate investment trust
("REIT") that owns and operates a global network of industrial distribution
facilities. The ProLogis Operating System(TM), comprised of the Market Services
Group, the Global Services Group, the Global Development Group and the Customer
Services Group, utilizes ProLogis' international network of distribution
facilities to meet customer expansion and reconfiguration needs globally.
ProLogis believes it has distinguished itself from its competition by developing
an organizational structure and service delivery system built around its
customers. ProLogis has organized its business into three operating segments:
property operations, corporate distribution facilities services business and
temperature-controlled distribution operations. See Note 18.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Financial Presentation
The accounts of ProLogis, its wholly owned subsidiaries and its majority
owned and controlled partnerships are consolidated in the accompanying financial
statements. All material intercompany transactions have been eliminated. Certain
amounts included in the consolidated financial statements for prior years have
been reclassified to conform to the 1999 financial statement presentation.
The preparation of 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 as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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, owns Garonor S.A. ("ProLogis Garonor"), an industrial
distribution real estate operating company in France. Security Capital Group
Incorporated ("Security Capital"), ProLogis' largest shareholder, acquired 100%
of the common stock of Garonor Holdings. ProLogis accounted for its investment
in Garonor Holdings under the equity method. On June 29, 1999, ProLogis acquired
the common stock of Garonor Holdings from Security Capital, resulting in
ProLogis owning all of the outstanding common and preferred stock of Garonor
Holdings. Accordingly, since June 29, 1999 the accounts of Garonor Holdings have
been consolidated in ProLogis' financial statements along with ProLogis' other
wholly owned subsidiaries and majority owned and controlled partnerships. The
results of operations of Garonor Holdings for the period from December 29, 1998
through June 29, 1999 are reflected by ProLogis under the equity method. See
Note 5.
REIT Organization Status
In January 1993, ProLogis was formed as a Maryland REIT and has elected to
be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code").
REITs are not generally required to pay federal income taxes if minimum
distribution and income, asset and shareholder tests are met. During 1999, 1998
and 1997, ProLogis was in compliance with the REIT requirements. Thus, no
federal income tax provision has been reflected in the accompanying consolidated
financial statements for ProLogis and its wholly owned subsidiaries which are
qualified REIT subsidiaries. The foreign countries that ProLogis operates in do
not recognize REITs under their respective tax laws. Accordingly, ProLogis has
recognized foreign country income taxes in its results of operations, as
applicable.
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Real Estate and Depreciation
Real estate is carried at cost, which is not in excess of estimated fair
market value. Costs directly associated with the successful acquisition,
renovation or development of real estate are capitalized. Direct costs
associated with unsuccessful acquisitions are expensed at the time the pursuit
is abandoned.
Depreciation is computed over the estimated useful lives of depreciable
property on a straight-line basis: 10 years for tenant improvements, 30 years
for acquired buildings and 40 years for buildings developed by ProLogis.
ProLogis' management periodically reviews long-lived assets (primarily real
estate) that it owns and operates for impairment whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be
recoverable. In accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of", management's
review involves comparing current and future operating performance of the
assets, the most significant of which is undiscounted operating cash flows, to
the carrying value of the assets. Based on this analysis, a provision for
possible loss is recognized if necessary. In management's opinion, long-lived
assets, primarily real estate assets, are not carried at amounts in excess of
their estimated realizable values. Long-lived assets (primarily real estate) to
be disposed of, if any, are reported at the lower of their carrying amount or
fair value less cost to sell.
ProLogis acquired certain real estate through the formation of partnerships
(as discussed in Note 7) wherein ProLogis contributed cash and the limited
partners contributed real estate in exchange for partnership units which are
ultimately exchangeable for ProLogis common shares of beneficial interest, $0.01
par value ("Common Shares"). In consolidating the partnerships' assets, real
estate cost includes the estimated fair value attributable to the limited
partners' interests as of the acquisition dates.
ProLogis Development Services Incorporated ("ProLogis Development
Services") develops industrial distribution facilities to meet customer
requirements, which are often subsequently sold to customers or third parties.
ProLogis Development Services also contracts on a fee basis to develop
distribution facilities for customers or third parties. ProLogis owns 100% of
the preferred stock of ProLogis Development Services and realizes substantially
all economic benefits of its activities. Because ProLogis advances mortgage
loans to ProLogis Development Services to fund its acquisition, development and
construction activities, ProLogis Development Services is consolidated with
ProLogis. ProLogis Development Services is not a qualified REIT subsidiary of
ProLogis under the Code. Accordingly, provisions for federal income taxes are
recognized, as appropriate.
Capitalization Policy
Renovations and improvements to real estate assets are capitalized and
depreciated over their estimated useful lives. Repairs and maintenance costs are
expensed as incurred to the extent they are not acquisition-related renovation
costs identified during ProLogis' pre-acquisition due diligence.
General and administrative costs incurred for development (including land
acquisitions), renovation and leasing activities that are incremental and
identifiable to a specific activity are capitalized. Prior to April 1, 1998,
ProLogis also capitalized direct and incremental management costs incurred in
connection with the acquisition of existing operating facilities. In accordance
with Emerging Issues Task Force Issue 97-11, "Accounting for Internal Costs
Relating to Real Estate Property Acquisitions", which was effective on April 1,
1998, such costs are no longer capitalized.
Costs capitalized to real estate are depreciated over the estimated useful
lives of the real estate. Costs capitalized related to leasing activities are
included with other assets and are amortized over the lease term. ProLogis'
average lease term is between four and five years.
65
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ProLogis capitalizes interest costs incurred during the land development or
construction period of qualifying projects.
Unconsolidated Entities
ProLogis' investments in certain entities are accounted for under the
equity method. Accordingly, these investments are recognized at ProLogis' cost
as adjusted for ProLogis' proportionate share of the earnings or losses of the
companies, distributions received and other basis adjustments, as appropriate.
ProLogis' proportionate share of the earnings or losses of these companies is
recognized in income. See Note 5.
Cash and Cash Equivalents
ProLogis considers all cash on hand, demand deposits with financial
institutions and short-term, highly liquid investments with original maturities
of three months or less to be cash equivalents.
Costs of Raising Capital
Costs incurred in connection with the issuance of shares are deducted from
shareholders' equity. Costs incurred in connection with the incurrence or
renewal of debt are capitalized, included with other assets, and amortized over
the term of the related loan or the renewal term.
Minority Interest
Minority interest is carried at cost and represents limited partners'
interests in various real estate partnerships controlled by ProLogis. Certain
minority interests are carried at the pro rata share of the estimated fair value
of the real estate contributed as of the acquisition dates, as adjusted for
subsequent earnings, contributions and distributions. Common Shares issued upon
exchange of limited partnership units are accounted for at the cost of the
minority interest surrendered.
Financial Instruments
In the normal course of business, ProLogis uses certain derivative
financial instruments for the purpose of currency exchange rate and interest
rate risk management. To qualify for hedge accounting, the derivative
instruments used for risk management purposes must effectively reduce the risk
exposure that they are designed to hedge. For instruments associated with the
hedge of anticipated transactions, hedge effectiveness criteria also require
that the occurrence of the underlying transactions be probable. Instruments
meeting these hedging criteria are formally designated as hedges at the
inception of the contract. Those risk management instruments not meeting these
criteria are accounted for at fair value with changes in fair value recognized
immediately in net income. See Note 16.
In assessing the fair value of its financial instruments, both derivative
and non-derivative, ProLogis uses a variety of methods and assumptions that are
based on market conditions and risks existing at each balance sheet date.
Primarily, quoted market prices or quotes from brokers or dealers for the same
or similar instruments are used to value marketable securities, long-term
investments and long-term debt. These values represent a general approximation
of possible value and may never actually be realized.
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
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
66
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statement disclosures based on the derivative financial instruments
currently employed by ProLogis. See Note 16.
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.
Foreign subsidiaries of ProLogis have certain transactions denominated in
currencies other than their functional currency. In these instances, nonmonetary
assets and liabilities are remeasured at the historical exchange rate, monetary
assets and liabilities are remeasured at the exchange rate in effect at the end
of the period, and income statement accounts are remeasured at the average
exchange rate for the period. Remeasurement gains and losses of such foreign
subsidiaries, resulting primarily from the remeasurement of intercompany loans,
are included in ProLogis' results of operations. ProLogis recognized losses from
remeasurement of $11,436,000 and $348,000 for the years ended December 31, 1999
and 1997, respectively, and a gain from remeasurement of $3,227,000 for the year
ended December 31, 1998.
Transaction gains or losses occur when a transaction, 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. Transaction gains
and losses are included in ProLogis' results of operations. ProLogis recognized
net foreign currency exchange transaction losses of $5,335,000 (including
$45,000 related to foreign currency put option contracts-see Note 16) and
$289,000 for the years ended December 31, 1999 and 1998, respectively. ProLogis
did not incur transaction gains or losses in 1997 due to its limited foreign
operations in that year.
During 1999, ProLogis entered into foreign currency put option contracts
related to its operations in Europe. These put option contracts do not qualify
for hedge accounting treatment, therefore, ProLogis recognized net mark to
market losses related to the contracts of $47,000 for 1999. See Note 16.
Revenue Recognition
ProLogis leases its operating facilities under operating leases and
recognizes the total lease payments provided for under the leases on a
straight-line basis over the lease term. A provision for possible loss is made
when collection of receivables is considered doubtful.
Gains or losses on the disposition of real estate are recorded when the
recognition criteria set forth under GAAP have been met, generally at the time
title is transferred and ProLogis has no future obligations under the contract.
Rental Expenses
Rental expenses include costs of on-site and property management personnel,
utilities, repairs and maintenance, property insurance and real estate taxes,
net of amounts recovered from tenants under the terms of the respective leases.
Stock-Based Compensation
ProLogis adopted SFAS No. 123, "Accounting for Stock-Based Compensation",
which allows ProLogis to continue to account for its various stock-based
compensation plans using Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations. Under
APB No. 25, if
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the exercise price of the stock options issued equals or exceeds the market
price of the underlying stock on the date of grant, no compensation expense is
recognized. However, certain pro forma earnings per share disclosures are
required and are presented in Note 13.
Comprehensive Income
ProLogis adopted SFAS No. 130, "Reporting Comprehensive Income", on January
1, 1998. SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components. Comprehensive income is the total of
net earnings attributable to Common Shares and other comprehensive income.
The adoption of this standard did not have a significant effect on the
consolidated financial position, results of operations or financial statement
disclosures of ProLogis. For the years ended December 31, 1999, 1998 and 1997,
ProLogis had one item of other comprehensive income, the cumulative translation
adjustments account. This account has been recognized as a component of
shareholders' equity. ProLogis displays comprehensive income and its components
in its consolidated statements of shareholders' equity.
Earnings Per Share
SFAS No. 128, "Earnings Per Share" was adopted in 1997. SFAS No. 128
replaced the presentation of primary and fully diluted earnings per share with a
presentation of basic and diluted earnings per share. Diluted earnings per share
reflects the potential dilution that would result if securities or other
contracts to issue Common Shares were exercised or converted to Common Shares or
resulted in the issuance of Common Shares that then shared in earnings. See Note
11.
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. In 1999, ProLogis expensed all
unamortized organization and start-up costs, approximating $1.4 million, as a
cumulative effect of a change in accounting principle. In 1999, such costs
incurred have been expensed.
3. MERIDIAN MERGER
On March 30, 1999, Meridian Industrial Trust, Inc. ("Meridian"), a publicly
traded REIT that owned industrial distribution facilities in the United States,
was merged with and into ProLogis (the "Meridian Merger"). In accordance with
the terms of the Agreement and Plan of Merger dated as of November 16, 1998, as
amended (the "Merger Agreement"), the approximately 33.8 million outstanding
shares of Meridian common stock were exchanged (on a 1.10 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 a 8.75% annual dividend rate
($2.1875 per share) and an aggregate liquidation value of $50.0 million. The
total purchase price of Meridian was approximately $1.54 billion, which included
the assumption of the outstanding debt and liabilities of Meridian as of March
30, 1999 and the issuance of approximately 1.1 million stock options each to
acquire 1.1 ProLogis Common Shares and $2.00 in cash. The assets acquired from
Meridian included approximately $1.44 billion of real estate assets, an interest
in a temperature-controlled distribution business of $28.7 million and cash and
other assets aggregating $72.3 million. The transaction was structured as a
tax-free merger and was accounted for under the purchase method.
68
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarized pro forma unaudited information represents the
combined historical operating results of ProLogis and Meridian with the
appropriate purchase accounting adjustments, assuming the Meridian Merger had
occurred on January 1, 1998. The pro forma financial information presented is
not necessarily indicative of what ProLogis' actual operating results would have
been had ProLogis and Meridian constituted a single entity during such periods
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Rental income............................................... $525,340 $464,034
Earnings from operations.................................... $170,681 $124,928
Earnings attributable to Common Shares before cumulative
effect of accounting change............................... $136,461 $ 78,847
Net earnings attributable to Common Shares.................. $135,021 $ 78,847
Weighted average Common Shares outstanding:
Basic..................................................... 160,705 155,923
Diluted................................................... 161,044 156,680
Basic per share net earnings attributable to Common Shares
before cumulative effect of accounting change............. $ 0.85 $ 0.51
Cumulative effect of accounting change...................... (0.01) --
-------- --------
Basic per share net earnings attributable to Common
Shares.................................................... $ 0.84 $ 0.51
======== ========
Diluted per share net earnings attributable to Common Shares
before cumulative effect of accounting change............. $ 0.85 $ 0.50
Cumulative effect of accounting change...................... (0.01) --
-------- --------
Diluted per share net earnings attributable to Common
Shares.................................................... $ 0.84 $ 0.50
======== ========
</TABLE>
4. REAL ESTATE
Investments in Real Estate
Real estate investments consisting of income producing industrial
distribution facilities, facilities under development and land held for future
development, at cost, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Operating facilities:
Improved land.......................................... $ 736,605(1) $ 517,803(1)
Buildings and improvements............................. 3,871,396(1) 2,731,203(1)
---------- ----------
4,608,001 3,249,006
---------- ----------
Facilities under development (including cost of land).... 186,169(2)(3) 209,670(2)
Land held for development................................ 163,696(4) 180,796(4)
Capitalized preacquisition costs......................... 17,085(5) 18,028(5)
---------- ----------
Total real estate.............................. 4,974,951 3,657,500
Less accumulated depreciation............................ 366,703 254,288
---------- ----------
Net real estate................................ $4,608,248(6) $3,403,212
========== ==========
</TABLE>
- ---------------
(1) As of December 31, 1999 and December 31, 1998, ProLogis had 1,328 and 1,099
operating buildings, respectively, consisting of 133,689,000 and 104,540,000
square feet, respectively.
69
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(2) Facilities under development consist of 51 buildings aggregating 10,721,000
square feet as of December 31, 1999 and 55 buildings aggregating 8,022,000
square feet as of December 31, 1998.
(3) In addition to the December 31, 1999 construction payable of $23.1 million,
ProLogis had unfunded commitments on its contracts for facilities under
construction totaling $247.6 million.
(4) Land held for future development consisted of 1,798 acres as of December 31,
1999 and 1,673 acres as of December 31, 1998.
(5) Capitalized preacquisition costs include $6,253,000 and $2,199,000 of funds
on deposit with title companies as of December 31, 1999 and December 31,
1998, respectively.
(6) On January 7, 2000, ProLogis contributed 50.1% of the common stock of one of
its wholly owned European entities that owned real estate with a net book
value of $334.9 million as of December 31, 1999 to the ProLogis European
Properties Fund. ProLogis is committed to contributing the remaining 49.9%
of the common stock to the ProLogis European Properties Fund in January
2001. See Note 5.
ProLogis' operating facilities, facilities under development and land held
for future development are located in North America and Europe. No individual
market represents more than 10% of ProLogis' real estate assets.
Operating Lease Agreements
ProLogis leases its facilities to customers under agreements which 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
December 31, 1999, minimum lease payments on leases with lease periods greater
than one year are as follows (in thousands):
<TABLE>
<S> <C>
2000..................................................... $ 484,346
2001..................................................... 406,946
2002..................................................... 325,825
2003..................................................... 244,484
2004..................................................... 174,656
2005 and thereafter...................................... 544,468
----------
$2,180,725
==========
</TABLE>
ProLogis' largest customer (based on rental income) accounted for 1.81% of
ProLogis' rental income (on a annualized basis) for the year ended December 31,
1999. The annualized base rent for ProLogis' 20 largest customers (based on
rental income) accounted for 13.95% of ProLogis' rental income (on an annualized
basis) for the year ended December 31, 1999.
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. UNCONSOLIDATED ENTITIES:
Investments in and advances to unconsolidated entities are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Insight(1).................................................. $ 2,442 $ 1,520
-------- --------
ProLogis Logistics:
Investment(2)(3).......................................... 40,210 13,241
Note receivable........................................... 130,135 128,634
Accrued interest and other receivables.................... 22,262 9,146
-------- --------
192,607 151,021
-------- --------
Frigoscandia S.A.:
Investment(2)............................................. (17,396) 2,900
Notes receivable.......................................... 209,314 206,667
Accrued interest and other receivables.................... 22,090 11,998
-------- --------
214,008 221,565
-------- --------
Kingspark S.A.:
Investment(2)............................................. 23,584 22,413
Notes receivable.......................................... 197,611 146,135
Mortgage notes receivable................................. 140,668 52,371
Accrued interest and other receivables.................... 19,908 3,850
-------- --------
381,771 224,769
-------- --------
ProLogis California:
Investment(4)............................................. 121,325 --
Other receivable.......................................... 3,235 --
-------- --------
124,560 --
-------- --------
ProLogis European Properties Fund:
Investment(5)............................................. 32,800 --
Other payables............................................ (7,824) --
-------- --------
24,976 --
-------- --------
Garonor Holdings (6):
Investment(2)............................................. -- 5,508
Note receivable........................................... -- 129,395
Accrued interest receivable............................... -- 85
-------- --------
-- 134,988
-------- --------
Total............................................. $940,364 $733,863
======== ========
</TABLE>
- ---------------
(1) Investment represents ProLogis' investment in the common stock of Insight,
Inc. ("Insight") 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
adjustments, as appropriate.
(3) Includes $28.7 million representing an equity interest in and notes from
Meridian Refrigerated Incorporated ("MRI") that were acquired as part of the
Meridian Merger (see Note 3). CS Integrated LLC ("CSI"), which is owned by
ProLogis Logistics Services Incorporated ("ProLogis Logistics") also
acquired an equity
71
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest in MRI on March 30, 1999. Subsequent to December 31, 1999, ProLogis
contributed its interest in MRI to CSI.
(4) Investment represents ProLogis' equity investment in ProLogis California I
LLC ("ProLogis California"), a limited liability company that began
operations on August 26, 1999, including acquisition costs, as adjusted for
ProLogis' share of the earnings of ProLogis California and for the portion
of the gain from the disposition of properties from ProLogis to ProLogis
California that does not qualify for income recognition due to ProLogis'
continuing ownership in ProLogis California.
(5) The ProLogis European Properties Fund was formed on September 16, 1999 and
began operations on September 23, 1999 with the purchase of facilities from
ProLogis and Kingspark Group Holdings Limited ("ProLogis Kingspark").
Additional facilities were acquired from ProLogis and ProLogis Kingspark in
December 1999. Investment represents ProLogis' equity investment in the
ProLogis European Properties Fund including acquisition costs, as adjusted
for ProLogis' share of the earnings of the ProLogis European Properties Fund
and for the portion of the gain from the disposition of facilities to the
ProLogis European Properties Fund that does not qualify for income
recognition due to ProLogis' continuing ownership in the ProLogis European
Properties Fund.
(6) Garonor Holdings was acquired on December 29, 1998 and was accounted for
under the equity method from that date to June 29, 1999. After June 29,
1999, Garonor Holdings is consolidated with the accounts of ProLogis. See
Note 2.
Insight
As of December 31, 1999, ProLogis Development Services had a 33.3%
ownership interest in Insight, a privately owned logistics optimization
consulting company. ProLogis is not required to make additional investments in
Insight. This investment is accounted for under the equity method. ProLogis
recognized a loss of $78,000 and income of $20,000 from its investment in
Insight for the years ended December 31, 1999 and 1998, respectively. Prior to
July 1, 1998, this investment was accounted for under the cost method.
ProLogis Logistics
ProLogis owns 100% of the preferred stock of ProLogis Logistics. On April
24, 1997, ProLogis Logistics acquired a 60% interest in CSI, a
temperature-controlled distribution company operating in the United States and
Canada. 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 December 31,
1999, ProLogis had invested $19.9 million in the preferred stock of ProLogis
Logistics and ProLogis' investment in MRI aggregated $28.7 million. As of
December 31, 1999, CSI owned or operated temperature-controlled distribution
facilities aggregating 172.4 million cubic feet (including 35.5 million cubic
feet of dry distribution space located in temperature-controlled facilities) of
the total, 4.8 million cubic feet was under development. The common stock of
ProLogis Logistics is owned by an unrelated party. ProLogis recognizes 95% of
the economic benefits of the activities of ProLogis Logistics and its
subsidiaries.
As of December 31, 1999, ProLogis had a $130.1 million note receivable from
ProLogis Logistics. The note is unsecured, bears interest at 8.0% per annum and
matures on April 24, 2002.
ProLogis accounts for its investment in ProLogis Logistics under the equity
method. ProLogis recognized income (including interest income on the note
receivable and a management fee payable from CSI through June 1998) from its
investment in ProLogis Logistics of $10.8 million, $7.3 million and $3.3 million
for the years ended December 31, 1999, 1998 and 1997, respectively.
72
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Frigoscandia S.A.
On January 16, 1998, ProLogis invested in 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 refrigerated distribution
company headquartered in Sweden. Frigoscandia AB is 100% owned by Frigoscandia
Holding AB, which is 100% owned by a wholly owned subsidiary of Frigoscandia
S.A. As of December 31, 1999, Frigoscandia AB, which operates in nine European
countries, owned or operated 193.6 million cubic feet of refrigerated
distribution facilities (including 1.3 million cubic feet under development). As
of December 31, 1999, ProLogis had invested $28.5 million in the preferred stock
of Frigoscandia S.A. The common stock of Frigoscandia S.A. is owned by a limited
liability company, in which unrelated parties own 100% of the voting interests
and Security Capital 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 December 31, 1999, ProLogis had the following notes receivable
outstanding:
- $91.5 million unsecured note from Frigoscandia Holding AB; interest at
5.0% per annum; due on demand;
- $87.8 million unsecured note from Frigoscandia S.A.; interest at 5.0% per
annum; $80.0 million due July 15, 2008 with the remainder due on demand;
and
- $30.0 million unsecured, non-interest bearing note from a subsidiary of
Frigoscandia Holding AB; due on demand.
ProLogis accounts for its investment in Frigoscandia S.A. under the equity
method. ProLogis recognized losses of $4.4 million and of $7.5 million for the
years ended December 31, 1999 and 1998, respectively, (including interest income
on the mortgage notes and notes receivable).
Frigoscandia AB has a multi-currency, three-year revolving credit agreement
through a consortium of 11 European banks in the currency equivalent of
approximately $186.0 million as of December 31, 1999. The loan bears interest at
the relevant index (LIBOR or Euribor based on the currency borrowed) rate plus
0.65%. ProLogis has entered into a guaranty agreement for 25% of the loan
balance.
Kingspark S.A.
On August 14, 1998, ProLogis invested in Kingspark Holding S.A. ("Kingspark
S.A.") by acquiring 100% of its preferred stock. Also on August 14, 1998,
Kingspark S.A., a Luxembourg company, acquired an industrial distribution real
estate development company operating in the United Kingdom, ProLogis Kingspark.
As of December 31, 1999, ProLogis Kingspark had 550,000 square feet of operating
facilities, 2,202,000 square feet of facilities under development and 844,000
square feet of facilities that it was developing under development management
agreements. Additionally, as of December 31, 1999, ProLogis Kingspark owned 397
acres and controlled 1,415 acres of land through purchase options, letters of
intent or contingent contracts. The land owned and controlled by ProLogis
Kingspark has the capacity for the future development of 21.4 million square
feet of facilities. As of December 31, 1999, ProLogis had invested $24.0 million
in the preferred stock of Kingspark S.A. The common stock of Kingspark S.A. is
owned by a limited liability company, in which unrelated third parties own 100%
of the voting interests and Security Capital owns 100% of the non-voting
interests. ProLogis recognizes 95% of the economic benefits of the activities of
Kingspark S.A. and its subsidiaries.
ProLogis Kingspark has a loan facility with ProLogis which provides for
borrowings of up to 200 million pounds sterling. This facility is available as a
line of credit, has an interest rate of 8.0% per annum and is due on demand. As
of December 31, 1999, the currency equivalent of $81.2 million of borrowings
were outstanding on
73
<PAGE> 76
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the loan facility. ProLogis also had the following notes and mortgage notes
receivable outstanding as of December 31, 1999:
- $116.4 million unsecured note receivable from Kingspark S.A.; interest at
5.0% per annum; due on demand;
- $75.9 million mortgage note receivable from ProLogis Kingspark; interest
at 8.0% per annum; secured by land parcels; due on demand; and
- $64.8 million of mortgage notes receivable from subsidiaries of Kingspark
S.A.; interest at 7.0% per annum; secured by land parcels; due on demand.
ProLogis accounts for its investment in Kingspark S.A. under the equity
method. ProLogis recognized income of $23.9 million and $2.9 million for the
years ended December 31, 1999 and 1998, respectively, (including interest income
on the mortgage notes and notes receivable and the line of credit) from its
investment in Kingspark S.A. ProLogis' share of Kingspark S.A.'s income for the
year ended December 31, 1999 includes a net gain of $4.5 million from the
disposition of facilities developed by ProLogis Kingspark to the ProLogis
European Properties Fund. The gain recognized is net of $1.1 million which did
not qualify for income recognition by ProLogis due to ProLogis' continuing
ownership in the ProLogis European Properties Fund. The ProLogis European
Properties Fund is discussed below.
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 10.0
million pounds sterling (the currency equivalent of approximately $16.1 million
as of December 31, 1999). The line of credit, which was increased to 15.0
million pounds sterling in February 2000, has been guaranteed by ProLogis. As of
December 31, 1999, no borrowings were outstanding on the line of credit.
However, as of December 31, 1999, ProLogis Kingspark had the currency equivalent
of approximately $7.9 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 December
31, 1999, ProLogis had an unfunded commitment on this guarantee agreement in the
currency equivalent of approximately $9.0 million.
ProLogis California I LLC
ProLogis California began operations on August 26, 1999 as a limited
liability company whose members are ProLogis and New York State Common
Retirement Fund ("NYSCRF"). ProLogis California acquired 78 operating facilities
aggregating 11.5 million square feet, two facilities under development and two
land parcels from ProLogis, all in the Los Angeles market for $558.2 million and
ProLogis received net cash of $210.0 million. In addition, ProLogis California
assumed $199.25 million of ProLogis' mortgage debt secured by the facilities
acquired. As of December 31, 1999, ProLogis and NYSCRF each had an equity
interest in ProLogis California of $143.1 million. ProLogis received
distributions aggregating $9.7 million in 1999. ProLogis provides property
management, leasing and development management services to ProLogis California
and earns fees for these services.
ProLogis' investment in ProLogis California as of December 31, 1999
consisted of (in millions):
<TABLE>
<S> <C>
Equity interest, net of distributions....................... $143.1
Adjustment to carrying value(1)............................. (26.0)
ProLogis' share of ProLogis California's earnings, excluding
fees earned............................................... 2.9
Other, including acquisition costs.......................... 1.3
------
$121.3
======
</TABLE>
74
<PAGE> 77
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) Reflects the reduction in carrying value for amount of net gain on the
disposition of properties to ProLogis California that does not qualify for
income recognition due to ProLogis' continuing ownership in ProLogis
California.
ProLogis accounts for its investment in ProLogis California under the
equity method and recognized $3.9 million of income for 1999 from its investment
in ProLogis California, including management, leasing and development fees of
$930,000.
ProLogis European Properties Fund
The ProLogis European Properties Fund was formed on September 16, 1999 and
began operations on September 23, 1999 when the ProLogis European Properties
Fund acquired 12 operating facilities aggregating 2.2 million square feet from
ProLogis and ProLogis Kingspark. In December 1999, the ProLogis European
Properties Fund acquired an additional six facilities from ProLogis and ProLogis
Kingspark aggregating 1.1 million square feet. Third parties (19 institutional
investors) have invested 182.6 million euros (the currency equivalent of
approximately $184.0 million as of December 31, 1999) in the ProLogis European
Properties Fund and have committed to fund an additional 877.7 million euros
(the currency equivalent of approximately $884.0 million as of December 31,
1999) through 2002.
The ProLogis European Properties Fund intends to acquire additional
stabilized operating facilities from ProLogis, ProLogis Kingspark and unrelated
parties, including facilities to be developed by ProLogis and ProLogis Kingspark
in the future. Stabilized facilities have been defined for purposes of the
ProLogis European Properties Fund as facilities that meet minimum leasing
criteria and minimum net operating income yields, as defined and established by
agreement for each country. The ProLogis European Properties Fund has the right
to refuse to acquire facilities that ProLogis and ProLogis Kingspark have
developed if they do not meet the established criteria. ProLogis has an
agreement to manage the ProLogis European Properties Fund for a fee pursuant to
a 20-year management agreement.
In October 1999, the ProLogis European Properties Fund entered into an
agreement with two international banks for a three-year 500.0 million euro
revolving credit facility. The facility is secured by certain assets of the
ProLogis European Properties Fund. Borrowings can be denominated in sterling
currencies or the euro, and will bear interest at rates above the relevant index
(LIBOR or Euribor).
ProLogis' investment in the ProLogis European Properties Fund as of
December 31, 1999 consisted of (in millions of U.S. dollars):
<TABLE>
<S> <C>
Equity interest............................................. $38.4
Adjustment to carrying value(1)............................. (6.7)
ProLogis' share of the ProLogis European Properties Fund's
earnings, excluding fees earned........................... 0.5
Other acquisition costs..................................... 0.6
-----
$32.8
=====
</TABLE>
- ---------------
(1) Reflects the reduction in carrying value for amount of net gain on the
disposition of facilities to the ProLogis European Properties Fund that does
not qualify for income recognition due to ProLogis' continuing ownership in
the ProLogis European Properties Fund.
On January 7, 2000, ProLogis increased its equity investment in the
ProLogis European Properties Fund through the contribution of 50.1% of the
common stock of one of its wholly owned European entities, which included
ProLogis Garonor. This entity owned 6.8 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 committed to
75
<PAGE> 78
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contributing the remaining 49.9% of the common stock to the ProLogis European
Properties Fund in January 2001. ProLogis has also entered into a subscription
agreement to make capital contributions of 109.2 million euros (the currency
equivalent of approximately $110.0 million as of December 31, 1999) to the
ProLogis European Properties Fund through 2002.
ProLogis accounts for its investment in the ProLogis European Properties
Fund under the equity method and recognized $820,000 of income, including
management fees of $269,000 and interest income of $86,000 on a note receivable,
for the year ended December 31, 1999 from its investment in the ProLogis
European Properties Fund.
Summarized Financial Information
Summarized financial information for ProLogis' unconsolidated entities as
of and for the year ended December 31, 1999 is presented below (in millions of
U.S. dollars). The information presented is for the entire entity.
<TABLE>
<CAPTION>
PROLOGIS
PROLOGIS EUROPEAN
LOGISTICS FRIGOSCANDIA KINGSPARK PROLOGIS PROPERTIES
(1)(2) S.A.(1) S.A.(1) CALIFORNIA(3) FUND(4)
--------- ------------ --------- ------------- ----------
<S> <C> <C> <C> <C> <C>
Total assets............................ $351.8 $558.0 $443.7 $563.5 $333.9(5)
Total liabilities(6).................... $340.4 $580.6 $417.6 $271.9 $110.1
Minority interest....................... $ -- $ 1.3 $ -- $ -- $ --
Equity.................................. $ 11.4 $(23.9) $ 26.1 $291.6 $223.8
Revenues................................ $276.0 $426.0 $ 37.4(7) $ 20.2 $ 6.2
Adjusted EBITDA(8)...................... $ 34.9 $ 49.8 $ 30.5 $ 16.8 $ 3.0
Net earnings (loss)(9)(10).............. $ (2.7) $(14.7)(11) $ 4.6(12) $ 5.4 $ 2.5(13)
</TABLE>
- ---------------
(1) ProLogis has a 95% economic interest in each entity as of December 31,
1999.
(2) ProLogis Logistics' balances include MRI, which was acquired on March 30,
1999. See Note 3.
(3) ProLogis has a 50% equity interest as of December 31, 1999. ProLogis
California began operations on August 26, 1999.
(4) ProLogis has a 19.68% equity interest as of December 31, 1999. The ProLogis
European Properties Fund began operations on September 23, 1999.
(5) Includes $7.8 million due from ProLogis.
(6) Includes amounts due to ProLogis of $192.2 million from ProLogis Logistics,
$231.4 million from Frigoscandia S.A., and $358.2 million from Kingspark
S.A. and loans from third parties (including accrued interest) of $102.0
million for ProLogis Logistics, $210.9 million for Frigoscandia S.A.,
$262.9 million for ProLogis California and $88.2 million for the ProLogis
European Properties Fund.
(7) Includes $25.8 million of gains related to the disposition of facilities,
including $5.5 million from the disposition of facilities to the ProLogis
European Properties Fund.
(8) Adjusted EBITDA represents earnings from operations before interest
expense, interest income, current and deferred income taxes, depreciation,
amortization, cumulative effect of accounting changes, non-recurring items
and foreign currency exchange gains and losses.
(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 as "Income from
unconsolidated entities".
(10) The net earnings (loss) of each company includes interest expense on
intercompany notes and mortgage notes due to ProLogis, as applicable.
76
<PAGE> 79
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) Includes a net foreign currency exchange loss of $1.4 million.
(12) Includes a net foreign currency exchange loss of $1.6 million.
(13) Includes a net foreign currency exchange gain of $1.8 million.
6. 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 $550.0 million
unsecured revolving line of credit. Borrowings bear interest, at ProLogis'
option, at either (a) the greater of the federal funds rate plus 0.5% and the
prime rate, or (b) LIBOR plus 1.00% based upon ProLogis' current senior debt
ratings. ProLogis' borrowings are primarily at the 30-day LIBOR rate plus 1.00%
(6.8225% as of December 31, 1999). Additionally, the credit agreement provides
for a facility fee of 0.20% per annum. The line of credit matures on March 29,
2001 and may be extended for an additional year at ProLogis' option. As of
December 31, 1999, $45.0 million of borrowings were outstanding on the line of
credit and ProLogis was in compliance with all covenants contained in the credit
agreement.
The $550.0 million unsecured line of credit replaced ProLogis' previous
$350.0 million unsecured line of credit that was put into place in August 1998.
ProLogis' entered into the new credit agreement in March 1999 to provide for
increased borrowing capacity following the Meridian Merger. See Note 3.
As of December 31, 1998, ProLogis had an agreement that provided for a term
loan of $150.0 million. The term loan was repaid on April 26, 1999 and the
agreement was terminated. ProLogis paid interest at LIBOR plus 1.00% on the term
loan borrowings.
In addition, ProLogis has a $25.0 million unsecured discretionary line of
credit with Bank of America that matures on October 1, 2000. By agreement
between ProLogis and Bank of America, the rate of interest on and the maturity
date of each advance are determined at the time of each advance. There were no
borrowings outstanding on the line of credit as of December 31, 1999.
On December 17, 1999, ProLogis obtained a multi-currency, unsecured
revolving line of credit in the currency equivalent of 325.0 million euros (the
currency equivalent of approximately $327.3 million as of December 31, 1999)
through a group of 17 banks, on whose behalf ABN AMRO Bank, N.V. acted 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 December 31, 1999 were at a weighted average
interest rate of 4.25%). As of December 31, 1999, the currency equivalent of
approximately $53.7 million of borrowings were outstanding on the line of credit
and ProLogis was in compliance with all covenants contained in the credit
agreement.
A summary of ProLogis' unsecured lines of credit borrowings is as follows
(dollar amounts in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Weighted average daily interest rate................. 6.13% 6.46% 6.75%
Borrowings outstanding as of December 31............. $ 98,700 $344,300 $ --
Weighted average daily borrowings.................... $232,821 $174,901 $ 56,938
Maximum borrowings outstanding at any month end...... $440,100 $344,300 $143,800
Total borrowing capacity on all lines of credit as of
December 31........................................ $902,340 $375,000 $375,000
</TABLE>
77
<PAGE> 80
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Senior Unsecured Notes
ProLogis has issued senior unsecured notes and medium-term unsecured notes
that bear interest at fixed rates, payable semi-annually (the "Notes"). The
Notes are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
PRINCIPAL
OUTSTANDING AT PRINCIPAL
ORIGINAL COUPON MATURITY DECEMBER 31, PAYMENT
DATE OF ISSUANCE PRINCIPAL RATE DATE 1999(1) REQUIREMENT
- ---------------- ---------- ------ -------- -------------- -----------
<S> <C> <C> <C> <C> <C>
May 16, 1995........... $ 17,500 7.250% 05/15/00 $ 17,494 (2)
May 16, 1995........... 17,500 7.300% 05/15/01 17,477 (2)
May 17, 1996........... 50,000 7.250% 05/15/02 37,486 (3)
October 9, 1998........ 125,000 7.000% 10/01/03 125,000 (2)
April 26, 1999......... 250,000 6.700% 04/15/04 249,604 (2)
July 20, 1998.......... 250,000 7.050% 07/15/06 249,555 (2)
November 20, 1997(4)... 135,000 7.250% 11/20/07 134,023 (2)
April 26, 1999......... 250,000 7.100% 04/15/08 249,932 (2)
May 17, 1996........... 100,000 7.950% 05/15/08 99,876 (5)
March 2, 1995.......... 150,000 8.720% 03/01/09 150,000 (6)
May 16, 1995........... 75,000 7.875% 05/15/09 74,757 (7)
November 20, 1997(4)... 25,000 7.300% 11/20/09 24,771 (2)
February 4, 1997....... 100,000 7.810% 02/01/15 100,000 (8)
March 2, 1995.......... 50,000 9.340% 03/01/15 50,000 (9)
May 17, 1996........... 50,000 8.650% 05/15/16 49,870 (10)
July 11, 1997.......... 100,000 7.625% 07/01/17 99,785 (2)
---------- ----------
$1,745,000 $1,729,630
========== ==========
</TABLE>
- ---------------
(1) Amounts are net of applicable unamortized original issue discount.
(2) Principal due at maturity.
(3) Annual principal payments of $12.5 million from 5/15/00 to 5/15/02.
(4) Senior unsecured notes assumed by ProLogis in March 1999 in connection with
the Meridian Merger. See Note 3.
(5) Annual principal payments of $25.0 million from 5/15/05 to 5/15/08.
(6) Annual principal payments of $18.75 million from 3/1/02 to 3/1/09.
(7) Annual principal payments of $9.375 million from 5/15/02 to 5/15/09.
(8) Annual principal payments ranging from $10.0 million to $20.0 million from
2/1/10 to 2/1/15.
(9) Annual principal payments ranging from $5.0 million to $12.5 million from
3/1/10 to 3/1/15.
(10) Annual principal payments ranging from $5.0 million to $12.5 million from
5/15/10 to 5/15/16.
The Notes rank equally with all other unsecured and unsubordinated
indebtedness of ProLogis from time to time outstanding. The Notes are redeemable
at any time at the option of ProLogis. Such redemption and other terms are
governed by the provisions of an indenture agreement or, with respect to the
notes assumed in connection with the Meridian Merger, note purchase agreements.
Under the terms of the indenture agreement and note purchase agreements,
ProLogis must meet certain financial covenants and ProLogis was in compliance
with all such covenants as of December 31, 1999.
78
<PAGE> 81
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other Unsecured Debt
ProLogis has an unsecured term loan in the amount of 200.0 million French
francs (the currency equivalent of approximately $30.9 million as of December
31, 1999). The loan bears interest at a variable rate (Euribor plus 1.20%) that
has been fixed through maturity at 3.62% through an interest rate swap
agreement. See Note 16. Annual payments are due on the loan commencing in the
year 2001, with the final payment due in 2006. The term loan prohibits
distributions from the entity that holds the debt unless certain principal
reductions are made. ProLogis contributed 50.1% of the common stock of the
wholly owned entity holding this debt to the ProLogis European Properties Fund
on January 7, 2000. ProLogis is committed to contributing the remaining 49.9% of
the common stock to the ProLogis European Properties Fund in January 2001. See
Note 5.
Mortgage Notes, Assessment Bonds and Securitized Debt
Mortgage notes, assessment bonds and securitized debt consisted of the
following as of December 31, 1999 (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:
Platte Valley Industrial Center #1... 9.750% 03/01/00 (2) $ 264 $ 256
West One Business Center #1.......... 8.250 09/01/00 (2) 4,327 4,252
Tampa West Distribution Center #20... 9.125 11/30/00 (3) 52 --
Rio Grande Industrial Center #1...... 8.875 09/01/01 (2) 2,878 2,544
Titusville Industrial Center #1...... 10.000 09/01/01 (2) 4,494 4,181
Prudential Insurance(4).............. 8.590 04/01/03 (2) 26,078 23,505
Sullivan 75 Distribution Center #1... 9.960 04/01/04 (2) 1,793 1,663
Charter American Mortgage(4)......... 8.750 08/01/04 (2) 7,180 5,819
West One Business Center #3.......... 9.000 09/01/04 (2) 4,318 3,847
Raines Distribution Center........... 9.500 01/01/05 (2) 5,259 4,402
Prudential Insurance(4)(5)........... 6.850 03/01/05 (6) 53,111 48,850
Consulate Distribution Center
#300(5)........................... 6.970 02/01/06 (2) 3,740 367
Plano Distribution Center #7(5)...... 7.020 04/15/06 (2) 3,785 3,200
Societe Generale(4)(7)............... 4.790(8) 12/29/06 (2) 14,041 5,307
Societe Generale(4)(7)............... 4.800(9) 12/29/06 (2) 115,769 78,235
Connecticut General Life
Insurance(4)...................... 7.080 03/01/07 (2) 148,757 134,431
Vista Del Sol Industrial Center #1 &
2................................. 9.680 08/01/07 (3) 3,446 --
Credit Lyonnais(4)(7)................ 8.600 07/21/08 (3) 12,921 --
State Farm Insurance(4)(5)........... 7.100 11/01/08 (2) 15,467 13,698
Placid Street Distribution Center
#1(5)............................. 7.180 12/01/09 (2) 7,829 5,142
Earth City Industrial Center #4...... 8.500 07/01/10 (3) 1,933 --
GMAC Commercial Mortgage(4).......... 7.750 10/01/10 (3) 7,974 --
Executive Park Distribution Center
#3................................ 8.190 03/01/11 (3) 1,053 --
Cameron Business Center #1(5)........ 7.230 07/01/11 (2) 6,162 4,028
Platte Valley Industrial Center #9... 8.100 04/01/17 (3) 3,248 --
Platte Valley Industrial Center #4... 10.100 11/01/21 (3) 2,034 --
Morgan Guaranty Trust(4)............. 7.584 04/01/24 (10) 200,000 127,187
--------
$657,913
========
Assessment bonds:
City of Wilsonville.................. 6.820% 08/19/04 (3) $ 111 --
</TABLE>
79
<PAGE> 82
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
BALLOON
PERIODIC PAYMENT
INTEREST MATURITY PAYMENT PRINCIPAL DUE AT
DESCRIPTION RATE(1) DATE DATE BALANCE MATURITY
- ----------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
City of Kent......................... 5.500 05/01/05 (3) 16 --
City of Kent......................... 7.850 06/20/05 (3) 84 --
City of Portland..................... 8.330 11/17/07 (3) 6 --
City of Kent......................... 7.980 05/20/09 (3) 64 --
City of Fremont...................... 7.000 03/01/11 (3) 9,348 --
City of Las Vegas.................... 8.750 10/01/13 (3) 720 --
City of Kent......................... 6.210 01/15/15 (3) 75 --
City of Portland..................... 7.250 11/07/15 (3) 86 --
City of Portland..................... 7.250 09/15/16 (3) 211 --
--------
$ 10,721
========
Securitized debt:
Tranche A............................ 7.740% 02/01/04 (2) $ 18,995 $ 15,214
Tranche B............................ 9.940 02/01/04 (2) 7,957 7,215
--------
$ 26,952
========
</TABLE>
- ---------------
(1) The weighted average interest rates for mortgage notes, assessment bonds
and securitized debt were 6.99%, 7.13% and 8.39%, respectively as of
December 31, 1999.
(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 3. Under purchase accounting, the mortgage note was
recorded at its fair value. Accordingly, a premium or discount was
recognized, where applicable.
(6) Carrying value includes premium, interest only with stated principal amount
due at maturity.
(7) On January 7, 2000, ProLogis contributed 50.1% of the common stock of the
wholly owned entity holding this debt to the ProLogis European Properties
Fund. ProLogis is committed to contributing the remaining 49.9% in January
2001. See Note 5.
(8) Variable rate provided by loan agreement is Euribor plus 1.20%. The Euribor
rate has been fixed through January 2004 at 3.59% through interest rate
swap agreement. See Note 16.
(9) Variable rate provided by loan agreement is Euribor plus 1.20%. The Euribor
rate has been fixed through January 2004 at 3.60% through interest rate
swap agreement. See Note 16.
(10) 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.
Mortgage notes are secured by real estate with an aggregate undepreciated
cost of $1.21 billion as of December 31, 1999. Assessment bonds are secured by
real estate with an aggregate undepreciated cost of $226.9 million as of
December 31, 1999. Securitized debt is collateralized by real estate with an
aggregate undepreciated cost of $63.4 million as of December 31, 1999.
80
<PAGE> 83
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Debt Maturities
Approximate principal payments due on senior unsecured notes, other
unsecured debt, mortgage notes, assessment bonds and securitized debt during
each of the years in the five-year period ending December 31, 2004 and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
2000.................................................... $ 43,455
2001.................................................... 53,027
2002.................................................... 64,767
2003.................................................... 202,429
2004.................................................... 336,520
2005 and thereafter..................................... 1,758,780
----------
Total principal due........................... 2,458,978
Less: Original issue discount........................... (2,870)
----------
Total carrying value.......................... $2,456,108
==========
</TABLE>
Interest Expense
For 1999, 1998 and 1997, interest expense was $170.7 million, $77.7 million
and $52.7 million, respectively, which is net of capitalized interest of $16.0
million, $19.2 million and $18.4 million, respectively. Amortization of deferred
loan costs included in interest expense was $4.4 million, $2.2 million and $2.0
million for 1999, 1998 and 1997, respectively. The total interest paid in cash
on all outstanding debt was $169.8 million, $83.2 million and $61.3 million
during 1999, 1998 and 1997, respectively.
7. MINORITY INTEREST:
Minority interest represents the limited partners' interests in real estate
partnerships controlled by ProLogis. With respect to each of the partnerships
either ProLogis or a subsidiary of ProLogis is the sole general partner with all
management powers over the business and affairs of the partnership. The limited
partners of each partnership generally do not have the right to participate in
or exercise management control over the business and affairs of the partnership.
With respect to each partnership the general partner may not, without the
written consent of all of the limited partners, take any action that would
prevent such partnership from conducting its business, possess the property of
the partnership, admit an additional partner or subject a limited partner to the
liability of a general partner.
ProLogis sold its 70.0% general partnership interest in Red Mountain Joint
Venture in March 1999 and recognized a gain of $715,000. As of December 31,
1999, ProLogis is the controlling general partner in six partnerships, including
two partnerships (MDN/JSC II Limited Partnership and Meridian Realty Partners,
L.P.) acquired in the Meridian Merger (see Note 3). In each of these
partnerships, the limited partners are entitled to exchange partnership units
for Common Shares (5,055,704 on a one for one basis and 483,087 at a rate of
1.10 Common Share per partnership unit, plus $2.00). Additionally, the limited
partners are entitled to receive preferential cumulative quarterly distributions
per unit equal to the quarterly distributions in respect of Common Shares.
The six partnerships are as follows:
- ProLogis Limited Partnership-I, which owned approximately $209.6 million
of industrial distribution facilities located primarily in the San
Francisco Bay market as of December 31, 1999, was formed in December
1993. ProLogis had a 68.7% controlling general partnership interest and
there were 4,520,532 limited partnership units outstanding as of December
31, 1999. These facilities cannot be sold, prior to the occurrence of
certain events, without the consent of the limited partners thereto,
other than in tax-deferred exchanges.
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ProLogis Limited Partnership-II, which owned approximately $56.8 million
of industrial distribution facilities located primarily in the Charlotte,
Dallas/Fort Worth, Denver, El Paso, St. Louis, Washington D.C./Baltimore
and the San Francisco Bay markets as of December 31, 1999, was formed in
May 1994. ProLogis' initial 81.2% controlling general partnership
interest has subsequently been increased to 97.8% (the ownership interest
as of December 31, 1999) due to the conversion of limited partnership
units into Common Shares. There were 90,213 limited partnership units
outstanding as of December 31, 1999.
- ProLogis Limited Partnership-III, which owned approximately $51.7 million
of industrial distribution facilities located primarily in the San
Antonio, Orlando, Miami/Ft. Lauderdale and Tampa markets as of December
31, 1999, was formed in October 1994. ProLogis had a 50.4% controlling
general partnership interest at formation, which has subsequently been
increased to 88.2% (the ownership interest as of December 31, 1999) as
the result of additional contributions by ProLogis and the conversion of
limited partnership units into Common Shares. There were 376,347 limited
partnership units outstanding as of December 31, 1999.
- ProLogis Limited Partnership-IV, which owned approximately $94.8 million
of industrial distribution facilities located primarily in the
Cincinnati, Dallas/Fort Worth, Miami/Ft. Lauderdale, Orlando and Tampa
markets as of December 31, 1999, was formed in October 1994 through a
cash contribution from a wholly owned subsidiary of ProLogis, ProLogis
IV, Inc., and the contribution of industrial distribution facilities from
the limited partner. ProLogis' initial 96.4% controlling general
partnership interest has been increased to 98.2% (the ownership interest
as of December 31, 1999) as the result of additional contributions by
ProLogis. There were 68,612 limited partnership units outstanding as of
December 31, 1999.
ProLogis Limited Partnership-IV and ProLogis IV, Inc. are legal entities
separate and distinct from ProLogis, its affiliates and each other, and
each has separate assets, liabilities, business functions and operations.
The sole assets of ProLogis IV, Inc. are its general partner advances to
and its interest in ProLogis Limited Partnership-IV. As of December 31,
1999, ProLogis Limited Partnership-IV had outstanding borrowings from
ProLogis IV, Inc. of $0.7 million and ProLogis IV, Inc. had outstanding
borrowings from ProLogis and its affiliates of $0.7 million.
- Meridian Realty Partners, L.P. owned a $10.3 million industrial
distribution facility located in the Los Angeles market as of December
31, 1999. ProLogis had an 88.0% controlling general partnership interest
and there were 29,712 limited partnership units outstanding as of
December 31, 1999.
- MDN/JSC II Limited Partnership owned approximately $62.1 million of
industrial distribution facilities located in the Dallas and Las Vegas
markets as of December 31, 1999. ProLogis had a 67.4% controlling general
partnership interest and there were 453,375 limited partnership units
outstanding as of December 31, 1999.
For financial reporting purposes, the assets, liabilities, results of
operations and cash flows of each of the six partnerships are included in
ProLogis' consolidated financial statements, and the interests of the limited
partners are reflected as minority interest.
8. SHAREHOLDERS' EQUITY:
Shares Authorized
As of December 31, 1999, 275,000,000 shares were authorized (increased from
230,000,000 shares on June 24, 1999 through a shareholder-approved amendment to
ProLogis' Declaration of Trust). ProLogis' Board of Trustees (the "Board") may
increase the number of authorized shares and may classify or reclassify any
unissued shares of ProLogis stock from time to time by setting or changing the
preferences, conversion or other
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
rights, voting powers, restrictions, limitations as of distributions,
qualifications and terms or conditions of redemption of such shares.
Preferred Shares
As of December 31, 1999, ProLogis had four series of cumulative redeemable
preferred shares of beneficial interest outstanding (Series A, C, D and E) and
one series of cumulative convertible redeemable preferred shares of beneficial
interest outstanding (Series B). Holders of each series of preferred shares
have, subject to certain conditions, limited voting rights. The holders of the
preferred shares are entitled to receive cumulative preferential dividends based
upon each series' respective liquidation preference. Such dividends are payable
quarterly in arrears on the last day of March, June, September and December for
all series of preferred shares, with the exception of Series E, which are
payable quarterly on the last day of January, April, July and October, when, and
if, declared by the Board, out of funds legally available for payment of
dividends. After the respective redemption dates, each series can be redeemed
for a cash redemption price which (other than the portion consisting of accrued
and unpaid dividends) is payable solely out of the sales proceeds of other
capital shares of ProLogis, which may include shares of other series of
preferred shares. With respect to payment of dividends, each series of preferred
shares ranks on parity with ProLogis' other series of preferred shares.
The Series B preferred shares are convertible at any time, unless
previously redeemed, at the option of the holders thereof into Common Shares at
a conversion price of $19.50 per share (equivalent to a conversion rate of 1.282
Common Shares for each Series B preferred share).
ProLogis' preferred shares are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES STATED EQUIVALENT BASED OPTIONAL
OUTSTANDING AS OF LIQUIDATION DIVIDEND ON LIQUIDATION REDEMPTION
DECEMBER 31, 1999 PREFERENCE RATE PREFERENCE DATE(1)
----------------- ----------- -------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Series A............. 5,400,000 $25.00 9.40% $2.35 per share 06/21/00
Series B(2).......... 7,020,703 $25.00 7.00% $1.75 per share 02/21/01
Series C............. 2,000,000 $50.00 8.54% $4.27 per share 11/13/26
Series D............. 10,000,000 $25.00 7.92% $1.98 per share 04/13/03
Series E............. 2,000,000 $25.00 8.75% $2.19 per share 06/30/03
</TABLE>
- ---------------
(1) After this date, the preferred shares can be redeemed at ProLogis' option.
(2) During 1999 and 1998, Series B preferred shares of 516,897 and 462,700,
respectively, were converted into 662,661 and 593,181 Common Shares,
respectively.
Issuance of Common Shares
The purchase agreement of ProLogis Kingspark contained a provision that
allowed for additional contingent consideration, to be settled by the issuance
of Common Shares, upon the achievement of a specified level of earnings by
ProLogis Kingspark. The conditions precedent to the issuance of the Common
Shares were met in 1999. ProLogis recognized a liability of $3.9 million related
to the additional purchase price as of December 31, 1999. In settlement of this
liability, 200,535 Common Shares were issued in February 2000.
Shelf Registration
In June 1999, ProLogis filed a $500.0 million shelf registration statement
with the Securities and Exchange Commission supplementing its existing shelf
registration. The shelf registration allows ProLogis to issue securities 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. As of
December 31, 1999, ProLogis had
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$608.0 million of shelf-registered securities available for issuance, subject to
ProLogis' ability to effect an offering on satisfactory terms.
Ownership Restrictions and Significant Shareholder
For ProLogis to qualify as a REIT under the Code, not more than 50% in
value of its outstanding shares of stock may be owned by five or fewer
individuals at any time during the last half of ProLogis' taxable year.
Therefore, ProLogis' Declaration of Trust restricts beneficial ownership (or
ownership generally attributed to a person under the REIT tax rules) of
ProLogis' outstanding shares by a single person, or persons acting as a group,
to 9.8% of ProLogis' outstanding shares. This provision assists ProLogis in
protecting and preserving its REIT status and protects the interest of
shareholders in takeover transactions by preventing the acquisition of a
substantial block of shares.
Shares owned by a person or group of persons in excess of these limits are
subject to redemption by ProLogis. The provision does not apply where a majority
of the Board, in its sole and absolute discretion, waives such limit after
determining that the status of ProLogis as a REIT for federal income tax
purposes will not be jeopardized or the disqualification of ProLogis as a REIT
is advantageous to the shareholders.
Security Capital is exempt from the ownership restrictions described above.
Security Capital owned 30.8% of the outstanding Common Shares as of December 31,
1999. For tax purposes, Security Capital's ownership is attributed to its
shareholders.
Dividend Reinvestment and Share Purchase Plan
In March 1995, ProLogis adopted a Dividend Reinvestment and Share Purchase
Plan (the "1995 Plan"), which commenced in April 1995. The 1995 Plan allowed
holders of Common Shares the opportunity to acquire additional Common Shares by
automatically reinvesting distributions. Holders of Common Shares who do not
participate in the 1995 Plan continue to receive distributions as declared. The
1995 Plan also allowed participating holders of Common Shares to purchase a
limited number of additional Common Shares by making optional cash payments,
without payment of any brokerage commission or service charge. Common Shares are
acquired pursuant to the 1995 Plan at a price equal to 98% of the market price
of such Common Shares, without payment of any brokerage commission or service
charge.
The 1995 Plan was amended in June 1999 by the 1999 Dividend Reinvestment
and Share Purchase Plan (the "1999 Plan"). The primary change effective with the
1999 Plan allows persons who are not holders of Common Shares to participate in
the share purchase plan.
Shareholder Purchase Rights
On December 7, 1993, the Board declared a dividend of one preferred share
purchase right ("Right") for each outstanding Common Share to be distributed to
all holders of record of the Common Shares on December 31, 1993. Each Right
entitles the registered holder to purchase one-hundredth of a Participating
Preferred Share for an exercise price of $40.00 per one-hundredth of a
Participating Preferred Share, subject to adjustment as provided in the Rights
Agreement. The Rights will generally be exercisable only if a person or group
(other than certain affiliates of ProLogis) acquires 20% or more of the Common
Shares or announces a tender offer for 25% or more of the Common Shares. Under
certain circumstances, upon a shareholder acquisition of 20% or more of the
Common Shares (other than certain affiliates of ProLogis), each Right will
entitle the holder to purchase, at the Right's then-current exercise price, a
number of Common Shares having a market value of twice the Right's exercise
price. The acquisition of ProLogis pursuant to certain mergers or other business
transactions will entitle each holder of a Right to purchase, at the Right's
then-current exercise price, a number of the acquiring company's common shares
having a market value at that time equal to twice the Right's exercise price.
The Rights held by certain 20% shareholders will not be exercisable. The Rights
will expire on
84
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 7, 2003, unless the expiration date of the Rights is extended, and the
Rights are subject to redemption at a price of $0.01 per Right under certain
circumstances.
9. DISTRIBUTIONS AND DIVIDENDS:
Common Distributions
ProLogis' annual distribution per Common Share was $1.30 in 1999, $1.24 in
1998 and $1.07 in 1997. For Federal income tax purposes, the following
summarizes the taxability of cash distributions paid on Common Shares in 1998
and 1997 and the estimated taxability for 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Per Common Share:
Ordinary income........................................... $0.84 $1.12 $1.07
Capital gains............................................. 0.35 -- --
Return of capital......................................... 0.11 0.12 --
----- ----- -----
Total............................................. $1.30 $1.24 $1.07
===== ===== =====
</TABLE>
The distribution level for 2000 was set at $1.34 per Common Share by the
Board in December 1999. Additionally, on December 16, 1999, ProLogis declared a
distribution of $0.335 per Common Share payable on February 23, 2000 to
shareholders of record as of February 9, 2000.
On May 3, 1999, ProLogis paid a common distribution to holders of Meridian
common stock as of March 19, 1999. This distribution, which was declared by the
Meridian Board of Directors prior to the closing of the Meridian Merger, related
to the first quarter of 1999 and aggregated $11.1 million. This liability was
assumed by ProLogis in connection with the Meridian Merger. See Note 3.
In connection with the 1997 Merger discussed in Note 10, Security Capital
issued warrants to acquire 3,608,202 shares of Class B common stock of Security
Capital pro rata to holders of Common Shares (other than Security Capital),
Series B preferred shares and limited partnership units. Holders of Common
Shares and holders of limited partnership units received 0.046549 warrants for
each Common Share or unit held and holders of Series B preferred shares received
0.059676 warrants for each preferred share held. Each warrant was exercisable
into one share of Security Capital Class B common stock at an exercise price of
$28.00 per share. The warrants expired in September 1998. Security Capital
issued the warrants as an incentive to ProLogis' shareholders to vote in favor
of the 1997 Merger and to raise additional equity capital at a relatively low
cost, in addition to other benefits.
Preferred Dividends
The annual dividends per preferred share are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999(1) 1998(2) 1997(2)
------- ------- -------
<S> <C> <C> <C>
Series A.............................................. $2.35 $2.35 $2.35
Series B.............................................. 1.75 1.75 1.75
Series C.............................................. 4.27 4.27 4.27
Series D.............................................. 1.98 1.42(3) --
Series E.............................................. 1.64(4) -- --
</TABLE>
85
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- ---------------
(1) For federal income tax purposes $1.65 of the Series A dividend, $1.23 of the
Series B dividend, $3.00 of the Series C dividend, $1.39 of the Series D
dividend and $1.15 of the Series E dividend are treated as ordinary income
to the holders. The remaining portion of each dividend represents capital
gains.
(2) For federal income tax purposes these dividends are treated as ordinary
income to the holders.
(3) For the period from date of issuance to December 31, 1998.
(4) For the period from date of issuance to December 31, 1999.
On April 30, 1999, ProLogis paid an aggregate dividend of $1.1 million on
the Series E preferred shares ($0.5469 per share), of which $729,200 related to
Meridian's series D preferred stock that was accrued by Meridian prior to the
closing of the Meridian Merger. See Note 3.
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.
ProLogis' tax return for the year ended December 31, 1999 has not been
filed. The taxability information for 1999 is based upon the best available
data. ProLogis' tax returns have not been examined by the Internal Revenue
Service. Consequently, the taxability of distributions and dividends is subject
to change.
10. 1997 MERGER TRANSACTION:
On September 8, 1997, ProLogis' shareholders approved an agreement with
Security Capital to exchange Security Capital's REIT management and property
management companies for 3,692,023 Common Shares (the "1997 Merger"). As a
result, ProLogis became an internally managed REIT on September 9, 1997 with
Security Capital remaining as ProLogis' largest shareholder. The $81.9 million
value of the management companies was approved by the independent members of the
Board and a fairness opinion was obtained from a third party financial advisor.
The number of Common Shares issued to Security Capital was based on the average
market price of the Common Shares ($22.175) over the five-day period prior to
the August 6, 1997 record date for determining the ProLogis shareholders
entitled to vote on the 1997 Merger. The market value of the Common Shares
issued to Security Capital on September 9, 1997 was $79.8 million, of which $4.4
million was allocated to the net tangible assets acquired and the $75.4 million
difference was accounted for as the cost incurred in acquiring the management
companies. Because the management companies did not have significant operations
other than the management of ProLogis and ProLogis' assets, the transaction did
not qualify as the acquisition of a business for purposes of applying APB
Opinion No. 16, "Business Combinations". Consequently, the market value of the
Common Shares issued in excess of the fair value of the net tangible assets
acquired was charged to operating income rather than capitalized as goodwill.
As a result of the 1997 Merger, ProLogis terminated the REIT management and
property management agreements that were in place while Security Capital owned
the management companies. All employees of the management companies became
employees of ProLogis and ProLogis directly incurs the personnel and other costs
related to these functions. The costs relating to property management are
recorded as rental expenses whereas the costs associated with managing the
corporate entity are recorded as general and administrative expenses.
86
<PAGE> 89
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. EARNINGS PER COMMON SHARE:
A reconciliation of the denominator used to calculate basic earnings per
Common Share to the denominator used to calculate diluted earnings per Common
Share for the years indicated (in thousands, except per share amounts) is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net earnings attributable to Common Shares........... $123,999 $ 62,231 $ 4,431
======== ======== ========
Weighted average Common Shares outstanding --
Basic.............................................. 152,412 121,721 100,729
Incremental effect of common stock equivalents and
contingently issuable shares (see Note 8).......... 327 307 140
-------- -------- --------
Adjusted weighted average Common Shares outstanding--
Diluted............................................ 152,739 122,028 100,869
======== ======== ========
Per share net earnings attributable to Common Shares:
Basic.............................................. $ 0.81 $ 0.51 $ 0.04
======== ======== ========
Diluted............................................ $ 0.81 $ 0.51 $ 0.04
======== ======== ========
</TABLE>
For the year ended December 31, 1999, basic and diluted per share net
earnings attributable to Common Shares before the cumulative effect of
accounting change were $0.82. The following convertible securities were not
included in the calculation of diluted net earnings per Common Share as the
effect, on an as-converted basis, was antidilutive (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ------ ------
<S> <C> <C> <C>
Series B preferred shares................................... 9,221 10,055 10,319
===== ====== ======
Limited partnership units................................... 5,461 5,070 5,190
===== ====== ======
</TABLE>
12. SUPPLEMENTAL CASH FLOW INFORMATION
Non-cash investing and financing activities for the years ended December
31, 1999, 1998 and 1997 are as follows:
- In connection with the Meridian Merger discussed in Note 3, 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).
- ProLogis disposed of properties to ProLogis California as discussed in
Note 5 and received $148.2 million of the proceeds in the form of an
equity interest.
- In connection with the formation of the ProLogis European Properties Fund
as discussed in Note 5, ProLogis received $23.4 million of the proceeds
from its disposition of facilities to the ProLogis European Properties
Fund in the form of an equity interest.
- Series B preferred shares aggregating $12.9 million, $11.6 million and
$1.2 million were converted into Common Shares in 1999, 1998 and 1997,
respectively.
87
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Limited partnership units aggregating $205,000, $302,000 and $1,588,000
were converted into Common Shares in 1999, 1998 and 1997, respectively.
- Net foreign currency translation adjustments of $9,788,000, $(86,000) and
$63,000 were recognized in 1999, 1998 and 1997, respectively.
- Mortgage notes in the amount of $39.8 million and $12.8 million were
assumed in connection with the acquisition of real estate in 1998 and
1997, respectively.
- Common Shares in the amount of $1.0 million were issued in connection of
the acquisition of real estate in 1997.
- In connection with the 1997 Merger discussed in Note 10, $79.8 million of
Common Shares were issued in exchange for $4.4 million of net tangible
assets in 1997.
- Employee share purchase notes in the amount of $27.3 million were
received for Common Shares issued under the employee share purchase plan
in 1997. See Note 13.
- Employee share purchase notes in the amount of $1.8 million and $0.1
million were retired in 1998 and 1997, respectively. See Note 13.
13. LONG-TERM COMPENSATION
Long-Term Incentive Plan and Share Option Plan for Outside Trustees
ProLogis has a long-term incentive plan (the "Incentive Plan"), which
includes an employee share purchase plan, a stock option plan, a restricted
share unit plan and a performance share plan. No more than 9,410,000 Common
Shares in the aggregate may be awarded under the Incentive Plan and no
individual may be granted awards with respect to more than 500,000 Common Shares
in any one-year period. The Incentive Plan has a ten-year term. Additionally,
ProLogis has 100,000 Common Shares authorized for issuance under its Share
Option Plan for Outside Trustees (the "Outside Trustees Plan").
Employee Share Purchase Plan
Under the employee share purchase plan certain employees of ProLogis
purchased 1,356,834 Common Shares on September 8, 1997 at a price of $21.21875
per share. ProLogis financed 95% of the total purchase price through ten-year,
recourse notes to the participants aggregating $27.3 million. The loans, which
have been recognized as a deduction from shareholders' equity, bear interest at
the lower of ProLogis' annual dividend yield on Common Shares or 6% per annum.
The loans are secured by the Common Shares purchased. For each Common Share
purchased, participants were granted two options to purchase Common Shares at a
price of $21.21875. As of December 31, 1999, there were 1,154,349 Common Shares
securing the employee share purchase notes.
The outstanding notes receivable at December 31, 1999 of $22,906,000
include $20,277,000 due from officers of ProLogis.
88
<PAGE> 91
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options
ProLogis has granted stock options under the Incentive Plan and the Outside
Trustees Plan. Stock options outstanding as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXPIRATION REMAINING
OPTIONS EXERCISE PRICE(1) DATE LIFE
--------- ------------------- ---------- ---------
<S> <C> <C> <C> <C>
Outside Trustees Plan(2)....... 65,000 $16.00-$25.00 2000-2009 6.1 years
Employee stock purchase
plan(3)...................... 2,244,586 $21.21875 2007 7.5 years
Stock option plan(2)(3):
1997 awards.................. 285,321 $21.21875-$23.96875 2007 7.7 years
1998 awards.................. 1,397,879 $20.9375-$24.625 2008 8.7 years
1999 awards.................. 1,459,753 $17.1875-$19.71875 2009 9.7 years
Meridian options(4)............ 1,025,850 $15.125-$23.9375 2004 4.2 years
Options sold to unconsolidated
entities(2).................. 984,819 $18.625-$24.5625 2008-2009 9.2 years
---------
Total................ 7,463,208
=========
</TABLE>
- ---------------
(1) Exercise price was equal to the average of the high and low market price on
the date of grant.
(2) The holders are awarded dividend equivalent units each year of the plan,
except for holders of 30,000 options issued under the Outside Trustees Plan
prior to 1999.
(3) Graded vesting at various rates over periods from one to ten years, subject
to certain conditions.
(4) Options are fully exercisable. Options issued to holders of Meridian options
are exercisable into 1.10 Common Shares plus $2.00. See Note 3.
The weighted average fair value of the stock options issued under the
Incentive Plan to ProLogis' employees, issued under the Outside Trustees Plan
and sold to unconsolidated entities during 1999 was $2.99 per option (excluding
the value of the DEUs to be earned). The activity with respect to ProLogis'
stock option plans for the years ended December 31, 1999, 1998 and 1997 is
presented below.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE NUMBER OF
NUMBER OF EXERCISE OPTIONS
OPTIONS PRICE EXERCISABLE
--------- -------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996......................... 18,000 $16.56 18,000
Granted............................................ 3,097,012 21.24 710,473
Exercised.......................................... -- -- --
Forfeited.......................................... (11,721) 21.22 --
--------- ------ ---------
Balance at December 31, 1997......................... 3,103,291 21.21 728,473
Granted/Sold....................................... 2,011,392 21.17 504,513
Exercised.......................................... -- -- --
Forfeited.......................................... (251,473) 21.22 --
--------- ------ ---------
Balance at December 31, 1998......................... 4,863,210 21.19 1,232,986
Granted/Sold....................................... 2,066,133 20.41 --
Issued in Meridian Merger (see Note 3)............. 1,025,850 20.13 1,025,850
Exercised.......................................... (4,000) 15.50 (4,000)
Forfeited.......................................... (487,985) 21.02 --
--------- ------ ---------
Balance at December 31, 1999......................... 7,463,208 $20.37 2,254,836
========= ====== =========
</TABLE>
89
<PAGE> 92
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ProLogis did not recognize compensation expense in 1999, 1998 or 1997
related to stock options granted as the exercise price of all options granted
was equal to the average of the high and low market price on the date of grant.
Had compensation expense for these plans been determined using an option
valuation model as provided in SFAS No. 123, ProLogis net earnings attributable
to Common Shares and net earnings per Common Share would change as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
-------- ------- ------
<S> <C> <C> <C>
Net earnings attributable to Common Shares:
As reported........................................... $123,999 $62,231 $4,431
Pro forma............................................. 121,767 60,805 4,016
Basic and diluted net earnings per Common Share:
As reported........................................... $ 0.81 $ 0.51 $ 0.04
Pro forma............................................. 0.80 0.50 0.04
</TABLE>
Since stock options vest over several years and additional grants are
likely to be made in future years, the pro forma compensation cost may not be
representative of that to be expected in future years.
The pro forma amounts above were calculated using the Black-Scholes model
and the following assumptions:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Risk-free interest rate........................... 6.58% 4.74% 6.35%
Forecasted dividend yield......................... 6.10% 7.36% 7.36%
Volatility........................................ 23.01% 27.37% 19.20%
Weighted average option life...................... 6.25 years 6.75 years 6.75 years
</TABLE>
Dividend Equivalent Units ("DEUs")
DEUs in the form of Common Shares are awarded at a rate of one Common Share
per DEU on December 31st of each year the stock options are outstanding and are
vested to the same extent the underlying stock options are vested. The DEUs are
valued on the award date based upon the market price of the Common Shares on
that date and ProLogis recognizes that value as compensation expense over the
underlying vesting period of the related stock options. As of December 31, 1999,
there were 171,677 DEUs outstanding. ProLogis recognized compensation expense
related to the DEUs of $103,000 and $5,000 in 1999 and 1998, respectively, net
of amounts capitalized. ProLogis did not incur compensation expense related to
the DEUs in 1997 as the DEUs were awarded on December 31, 1997.
Restricted Share Units
On October 15, 1998, the Board granted 377,500 restricted share units
("RSU") to twelve officers of ProLogis. The RSUs vest 25% per year beginning
December 31, 1999 through December 31, 2002 and earn DEUs in accordance with the
DEU awards under the Incentive Plan. The RSUs are valued on the award date based
upon the market price of Common Shares on that date and ProLogis recognizes that
value as compensation expense over the underlying vesting period. The RSUs
granted in 1998 were valued at $8.0 million, of which ProLogis recognized $1.6
million and $0.3 million of compensation expense in 1999 and 1998, respectively,
net of amounts capitalized.
90
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Performance Share Plan
In September 1999, the Board approved a performance share plan whereby
certain employees can be awarded Common Shares if performance criteria is met.
Common Shares will be awarded on December 31, 2000 based upon the criteria set
for 2000, but will not vest to the employee until December 31, 2002.
401(k) Savings Plan and Trust
ProLogis has a 401(k) Savings Plan and Trust ("401(k) Plan"), that provides
for matching employer contributions in Common Shares of 50 cents for every
dollar contributed by an employee, up to 6% of the employees' annual
compensation (within the statutory compensation limit). The vesting of
contributed Common Shares is based on the employees' years of service, with 20%
vesting each year of service, over a five-year period. Through December 31,
1999, no Common Shares have been issued under the 401(k) Plan as all matching
contributions have been made with Common Shares purchased in the public market.
A total of 190,000 Common Shares have been authorized for issuance under the
401(k) Plan.
Nonqualified Savings Plan
Effective January 1, 1998, ProLogis established the Nonqualified Savings
Plan to provide benefits for a select group of management. The purpose of this
plan is to allow highly compensated employees the opportunity to defer the
receipt and income taxation of a certain portion of their compensation in excess
of the amount permitted under the 401(k) Plan. ProLogis will match the lesser of
(a) 50% of the sum of deferrals under both the 401(k) Plan and this plan, and
(b) 3% of total compensation up to certain levels. The matching account will
vest in the same manner as the 401(k) Plan.
Warrants
During 1998, warrants were exercised into 11,764 Common Shares at an
exercise price of $10.00. There were no outstanding warrants as of December 31,
1999.
91
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data (in thousands, except for per share
amounts) for 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED,
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL
--------- -------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C>
1999:
Rental income.......................................... $97,161 $131,251 $135,503 $127,911 $491,826
======= ======== ======== ======== ========
Earnings from operations............................... $25,046 $ 33,290 $ 58,674 $ 49,539 $166,549
Minority interest share in earnings.................... 1,169 1,434 1,139 1,237 4,979
Gain on disposition of real estate..................... 715 -- 25,643 12,636 38,994
Foreign currency exchange gains (losses), net.......... (8,283) (4,012) 5,830 (10,353) (16,818)
Income tax expense (benefit)........................... 374 585 534 (21) 1,472
------- -------- -------- -------- --------
Earnings before cumulative effect in accounting
change............................................... 15,935 27,259 88,474 50,606 182,274
Cumulative effect of accounting change................. 1,440 -- -- -- 1,440
------- -------- -------- -------- --------
Net earnings........................................... 14,495 27,259 88,474 50,606 180,834
Less preferred share dividends......................... 13,445 14,493 14,453 14,444 56,835
------- -------- -------- -------- --------
Net earnings attributable to Common Shares............. $ 1,050 $ 12,766 $ 74,021 $ 36,162 $123,999
======= ======== ======== ======== ========
Per Common Share:
Basic earnings attributable to Common Shares before
cumulative effect of accounting change............. $ 0.02 $ 0.08 $ 0.46 $ 0.22 $ 0.82
Cumulative effect of accounting change............... (0.01) -- -- -- (0.01)
------- -------- -------- -------- --------
Basic net earnings attributable to Common Shares..... $ 0.01 $ 0.08 $ 0.46 $ 0.22 0.81
======= ======== ======== ======== ========
Diluted earnings attributable to Common Shares before
cumulative effect of accounting change............. $ 0.02 $ 0.08 $ 0.44 $ 0.22 $ 0.82
Cumulative effect of accounting change............... (0.01) -- -- -- (0.01)
------- -------- -------- -------- --------
Diluted net earnings attributable to Common Shares... $ 0.01 $ 0.08 $ 0.44 $ 0.22 $ 0.81
======= ======== ======== ======== ========
1998:
Rental income.......................................... $78,565 $ 84,353 $ 88,687 93,441 $345,046
======= ======== ======== ======== ========
Earnings from operations............................... $34,041 $ 35,143 $ 3,132 $ 35,301 $107,617
Minority interest share in earnings.................... 979 1,075 1,047 1,580 4,681
Gain on disposition of real estate..................... 2,066 2,212 -- 1,287 5,565
Foreign currency exchange gains (losses), net.......... 1,607 453 3,277 (345) 4,992
Income tax expense..................................... 190 7 2 1,965 2,164
------- -------- -------- -------- --------
Net earnings........................................... 36,545 36,726 5,360 32,698 111,329
Less preferred share dividends......................... 8,799 13,075 13,669 13,555 49,098
------- -------- -------- -------- --------
Net earnings (loss) attributable to Common Shares...... $27,746 $ 23,651 $ (8,309) $ 19,143 $ 62,231
======= ======== ======== ======== ========
Per Common Share:
Basic net earnings (loss) attributable to Common
Shares............................................. $ 0.24 0.19 $ (0.07) $ 0.16 $ 0.51
======= ======== ======== ======== ========
Diluted net earnings (loss) attributable to Common
Shares............................................. $ 0.23 $ 0.19 $ (0.07) $ 0.16 $ 0.51
======= ======== ======== ======== ========
</TABLE>
15. RELATED PARTY TRANSACTIONS:
ProLogis leases space to Security Capital and certain of its affiliates on
market terms that management believes are no less favorable to ProLogis than
those that could be obtained with unaffiliated third parties.
ProLogis' rental income related to these leases were $756,000, $717,000 and
$1,528,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
As of December 31, 1999, 109,804 square feet were leased to related parties. The
annualized rental revenues for these leases are $746,000.
On September 8, 1997, ProLogis and Security Capital entered into an
administrative services agreement (the "ASA"). Under the ASA, Security Capital
provides ProLogis with certain administrative and other services as
92
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined by ProLogis (certain services originally provided under the ASA are
now being performed by ProLogis employees). ProLogis' fees under the ASA were
$3.4 million, $3.7 million and $1.1 million for 1999, 1998 and for the period
from September 9, 1997 to December 31, 1997, respectively. Of these fees, $0.6
million, $0.7 million and $0.2 million were capitalized in 1999, 1998 and for
the period from September 9, 1997 to December 31, 1997, respectively. ProLogis
recognizes the ASA fees related to property management activities as a component
of rental expenses. The ASA expires on December 31, 2000.
During 1999, ProLogis paid investment advisory fees to Security Capital
Markets Group Incorporated, a registered broker-dealer subsidiary of Security
Capital, aggregating $15.6 million. The fees were incurred in connection with
the Meridian Merger ($1.54 billion purchase price -- see Note 3), the formation
of ProLogis California which generated $148.2 million of outside equity capital
to ProLogis (see Note 5) and the formation of the ProLogis European Properties
Fund (the currency equivalent as of December 31, 1999 of over $1 billion of
third party capital invested or committed -- see Note 5).
16. FINANCIAL INSTRUMENTS:
Fair Value of Financial Instruments
The following estimates of the fair value of financial instruments have
been determined by ProLogis using available market information and valuation
methodologies believed to be appropriate for these purposes. Considerable
judgement and a high degree of subjectivity are involved in developing these
estimates and, accordingly, they are not necessarily indicative of amounts
ProLogis would realize upon disposition.
As of December 31, 1999 and 1998, the carrying amounts of certain financial
instruments employed by ProLogis, including cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses were representative of their
fair values because of the short-term maturity of these instruments. Similarly,
the carrying values of the lines of credit and short-term borrowings balances
approximate fair value as of those dates since the interest rate fluctuates
based on published market rates. As of December 31, 1999 and 1998, the fair
values of the senior unsecured debt and the secured debt (including mortgage
notes, assessment bonds and securitized debt) have been estimated based upon
quoted market prices for the same or similar issues or by discounting the future
cash flows using rates currently available for debt with similar terms and
maturities. The differences in the fair value of ProLogis' senior unsecured debt
and secured debt from the carrying value in the table below are the result of
variances in the interest rates available to ProLogis as of December 31, 1999
and 1998, from the interest rates in effect at the dates of issuance. The senior
unsecured debt and many of the secured debt issues contain pre-payment penalties
or yield maintenance provisions which would make the cost of refinancing exceed
the benefit of refinancing at the lower rates.
As of December 31, 1999 and 1998, the fair value of ProLogis' derivative
financial instruments are the amounts at which they could be settled, based on
quoted market prices or estimates obtained from brokers or dealers.
93
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table reflects the carrying amount and estimated fair value
of ProLogis' financial instruments (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance sheet financial instruments:
Senior unsecured debt.............. $1,729,630 $1,656,445 $1,083,641 $1,108,692
Secured debt (fixed rate debt)..... $ 565,776 $ 547,428 $ 227,804 $ 232,809
Derivative financial instruments:
Interest rate contracts............ $ -- $ -- $ (26,050) $ (26,050)
Foreign currency put option
contracts....................... $ 628 $ 628 $ -- $ --
Interest rate swap agreements...... $ -- $ 7,998 $ -- $ --
</TABLE>
Derivative Financial Instruments
ProLogis uses derivative financial instruments as hedges to manage
well-defined risk associated with interest and foreign currency rate
fluctuations on existing or anticipated obligations and transactions. ProLogis
does not use derivative financial instruments for trading purposes.
The primary risks associated with derivative instruments are market risk
and credit risk. Market risk is defined as the potential for loss in the value
of the derivative due to adverse changes in market prices (interest rates or
foreign currency rates). The use of derivative financial instruments allows
ProLogis to manage the risks of increases in interest rates and fluctuations in
foreign currency exchange rates with respect to the effects these fluctuations
would have on ProLogis' income and cash flows.
Credit risk is the risk that one of the parties to a derivative contract
fails to perform or meet their financial obligation under the contract. ProLogis
does not obtain collateral to support financial instruments subject to credit
risk but monitors the credit standing of counterparties. ProLogis does not
anticipate non-performance by any of the counterparties to its derivative
contracts. Should a counterparty fail to perform, however, ProLogis would incur
a financial loss to the extent of the positive fair market value of the
derivative instruments, if any.
The following table summarizes the activity in derivative financial
instruments for the years ended December 31, 1999 and 1998 (in millions):
<TABLE>
<CAPTION>
INTEREST FOREIGN
INTEREST RATE RATE SWAP CURRENCY PUT
CONTRACTS AGREEMENTS OPTIONS (1)
------------- ---------- ------------
<S> <C> <C> <C>
Notional amounts as of December 31, 1997....... $ 75.0(2) $ 75.0(2) $ --
New contracts.................................. -- -- --
Matured or expired contracts................... -- -- --
Terminated contracts........................... -- -- --
------ ------ -----
Notional amounts as of December 31, 1998....... 75.0 $ 75.0 --
------ ------ -----
New contracts.................................. -- 169.9(3) 27.1
Matured or expired contracts................... -- -- (3.9)
Terminated contracts........................... (75.0) (75.0) --
------ ------ -----
Notional amounts as of December 31, 1999....... $ -- $169.9 $23.2
====== ====== =====
</TABLE>
- ---------------
(1) ProLogis entered into foreign currency put option contracts during 1999
related to its operations in Europe. The notional amount as of December 31,
1999 represents the U.S. dollar equivalent related to the put option
contracts with notional amounts of 23.0 million euros. The outstanding
contracts do not qualify for hedge
94
<PAGE> 97
PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accounting treatment and were marked to market as of December 31, 1999.
ProLogis recognized an aggregate expense of $92,000 on the put option
contracts including the mark to market adjustment of $47,000. The put option
contracts provide ProLogis with the option to exchange euros for U.S.
dollars at a fixed exchange rate such that if the euro were to depreciate
against the U.S. dollar to predetermined levels as set by the contracts,
ProLogis could exercise its options and mitigate its foreign currency
exchange losses.
(2) In October 1997, in anticipation of debt offerings in 1998, ProLogis entered
into two interest rate protection agreements which were renewed past the
original termination dates. These agreements were entered into by ProLogis
to fix the interest rate on anticipated financings.
During the third quarter of 1998, ProLogis determined that the interest rate
protection agreements would no longer qualify for hedge accounting treatment
under GAAP based upon the following:
- Due to changing conditions in the public debt markets, it was no
longer considered probable that ProLogis would complete the
anticipated 1998 longer term debt offerings that prompted ProLogis to
enter into these interest rate protection agreements in 1997 (i.e.,
ProLogis would not be exposed to the interest rate risk that these
instruments were intended to hedge); and
- ProLogis determined, through internal analysis and through
communications with independent third parties, that a high degree of
correlation no longer existed between changes in the market values of
these interest rate protection agreements and the "market values" of
the anticipated debt offerings (i.e., the interest rate at which the
debt could be issued by ProLogis under existing market conditions).
Accordingly, ProLogis began marking these agreements to market as of
September 30, 1998. For 1998, ProLogis recognized a non-cash expense
of $26.1 million. These agreements were terminated in February 1999 at
a cost of $27.0 million and were used to set the interest rate
associated with the $200.0 million secured financing transaction with
MGT that was completed in March 1999.
(3) ProLogis has interest rate swap agreements related to variable rate mortgage
notes and other unsecured debt in the currency equivalent of approximately
$169.9 million as of December 31, 1999. The swap agreements have a combined
notional amount of 1.1 billion French francs and fix the Euribor rate at
3.62% through December 2003 on a notional amount in the currency equivalent
of approximately $30.9 million, at 3.60% through January 2004 on a notional
amount in the currency equivalent of approximately $118.9 million and at
3.59% through January 2004 on a notional amount in the currency equivalent
of approximately $20.1 million. In December 1999, a principal paydown was
made on the underlying debt resulting in a notional amount of the swap
agreements in excess of the principal balances. Consequently, swap
agreements with a notional amount in the currency equivalent of
approximately $26.2 million were cancelled in January 2000 at a gain to
ProLogis in the currency equivalent of approximately $1.4 million. ProLogis
contributed 50.1% of the common stock of the wholly owned entity that holds
the debt related to the swap agreements to the ProLogis European Properties
Fund on January 7, 2000. ProLogis is committed to contributing the remaining
49.9% of the common stock to the ProLogis European Properties Fund in
January 2001. See Note 5.
On December 22, 1997, ProLogis entered into two separate contracts to (i)
exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange 310.0
million German marks for $175.0 million in anticipation of the January 1998
acquisition and planned European currency denominated financing of Frigoscandia
AB by Frigoscandia S.A., ProLogis' unconsolidated entity. The contracts were
marked to market as of December 31, 1997 and ProLogis recognized a net loss of
$6.0 million in 1997. Both contracts were settled during the first quarter of
1998 at a net loss of $4.0 million. Accordingly, ProLogis recognized a net gain
of $2.0 million in 1998. These foreign currency exchange hedges were one-time,
non-recurring contracts that fixed the exchange rate between the U.S. dollar and
the Swedish krona and German mark. ProLogis executed these hedges after the
95
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
execution of the purchase agreement to acquire Frigoscandia AB, which required
payment in Swedish krona. The contracts were executed exclusively for the
acquisition and financing of Frigoscandia AB and were not entered into to hedge
on-going income in foreign currencies.
17. COMMITMENTS AND CONTINGENCIES:
Environmental Matters
All of the facilities acquired by ProLogis have been subjected to
environmental reviews by ProLogis or predecessor owners. While some of these
assessments have led to further investigation and sampling, none of the
environmental assessments has revealed, nor is ProLogis aware of any
environmental liability (including asbestos related liability) that ProLogis
believes would have a material adverse effect on ProLogis' business, financial
condition or results of operations.
18. BUSINESS SEGMENTS:
ProLogis has three reportable business segments:
- Property operations represents the long-term ownership and leasing of
industrial distribution facilities in North America (a portion of which
is owned through ProLogis California -- See Note 5) and Europe (a portion
of which is owned through Garonor Holdings, a subsidiary that was
recognized under the equity method of accounting until June 29, 1999 and
a portion of which is owned through the ProLogis European Properties
Fund -- See Note 5); 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;
- Corporate distribution facilities services business represents the
development of distribution facilities for future sale to third parties
or entities in which ProLogis has an ownership interest or on a fee basis
for third parties in North America and in Europe (a portion of which is
owned through Kingspark S.A.); the development activities of ProLogis and
Kingspark S.A. are considered to be individual operating segments having
similar economic characteristics which are combined within the reportable
segment based upon geographic location; and
- Temperature-controlled distribution operations represents the operation
of a temperature-controlled distribution and logistics network through
investments in unconsolidated entities in North America (ProLogis
Logistics and MRI) 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.
Reconciliations of the three reportable segments': (i) income from external
customers to ProLogis' total income; (ii) net operating income from external
customers to ProLogis' earnings from operations (ProLogis' chief operating
decision makers rely primarily on net operating income to make decisions about
allocating resources and assessing segment performance); and (iii) assets to
ProLogis' total assets are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Property operations:
United States(1)............................ $ 457,592 $ 333,494 $ 283,909
Mexico...................................... 10,503 3,499 624
Europe(2)................................... 16,045 8,059 --
---------- ---------- ----------
Total property operations segment...... 484,140 345,052 284,533
---------- ---------- ----------
</TABLE>
96
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Corporate distribution facilities services
business:
United States............................... 28,783 17,441 12,374
Mexico...................................... -- 133 (83)
Europe(3)(4)................................ 41,673 2,915 --
---------- ---------- ----------
Total corporate distribution facilities
services business segment............ 70,456 20,489 12,291
---------- ---------- ----------
Temperature-controlled distribution operations:
North America(5)............................ 10,791 7,349 3,278
Europe(6)................................... (4,364) (7,535) --
---------- ---------- ----------
Total temperature-controlled
distribution operations segment...... 6,427 (186) 3,278
---------- ---------- ----------
Reconciling items:
Interest income............................. 6,369 2,752 2,392
---------- ---------- ----------
Total income........................... $ 567,392 $ 368,107 $ 302,494
========== ========== ==========
Net operating income:
Property operations:
United States(1)............................ $ 424,633 $ 306,920 $ 256,953
Mexico...................................... 10,569 3,302 572
Europe(2)................................... 15,437 7,710 --
---------- ---------- ----------
Total property operations segment...... 450,639 317,932 257,525
---------- ---------- ----------
Corporate distribution facilities services
business:
United States............................... 28,783 17,441 12,374
Mexico...................................... -- 133 (83)
Europe (3)(4)............................... 41,673 2,915 --
---------- ---------- ----------
Total corporate distribution facilities
services business segment............ 70,456 20,489 12,291
---------- ---------- ----------
Temperature-controlled distribution operations:
North America(5)............................ 10,791 7,349 3,278
Europe(6)................................... (4,364) (7,535) --
---------- ---------- ----------
Total temperature-controlled
distribution operations segment...... 6,427 (186) 3,278
---------- ---------- ----------
Reconciling items:
Interest income............................. 6,369 2,752 2,392
General and administrative expense.......... (38,284) (22,893) (6,770)
REIT management fee paid to affiliate....... -- -- (17,791)
Depreciation and amortization............... (152,447) (100,590) (76,562)
Interest expense............................ (170,746) (77,650) (52,704)
Interest rate hedge expense................. (945) (26,050) --
Costs incurred in acquiring management
companies................................. -- -- (75,376)
Other expenses.............................. (4,920) (6,187) (3,891)
---------- ---------- ----------
Total reconciling items................ (360,973) (230,618) (230,702)
---------- ---------- ----------
Earnings from operations............... $ 166,549 $ 107,617 $ 42,392
========== ========== ==========
</TABLE>
97
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Assets:
Property operations:
United States(7)............................ $4,017,702 $3,073,248 $2,787,118
Mexico...................................... 154,701 74,494 27,828
Europe(7)................................... 387,362 309,639 --
---------- ---------- ----------
Total property operations segment...... 4,559,765 3,457,381 2,814,946
---------- ---------- ----------
Corporate distribution facilities services
business:
United States............................... 212,530 149,521 86,415
Mexico...................................... 36,801 16,465 3,522
Europe(7)................................... 432,455 224,769 --
---------- ---------- ----------
Total corporate distribution facilities
services business segment............ 681,786 390,755 89,937
---------- ---------- ----------
Temperature controlled distribution operations:
North America(7)............................ 192,607 151,021 85,639
Europe(7)................................... 214,008 221,566 --
---------- ---------- ----------
Total temperature controlled
distribution operations segment...... 406,615 372,587 85,639
---------- ---------- ----------
Reconciling items:
Cash........................................ 69,338 63,140 25,009
Accounts and notes receivable............... 31,084 1,313 167
Other assets................................ 99,452 45,553 18,255
---------- ---------- ----------
Total reconciling items................ 199,874 110,006 43,431
---------- ---------- ----------
Total assets........................... $5,848,040 $4,330,729 $3,033,953
========== ========== ==========
</TABLE>
- ---------------
(1) Includes an amount recognized under the equity method related to ProLogis'
investment in ProLogis California in 1999 in addition to the operations of
ProLogis that are reported on a consolidated basis. See Note 5 for
summarized financial information of ProLogis California.
(2) Includes amounts recognized under the equity method related to ProLogis'
investments in Garonor Holdings in 1999 and 1998 (including a $13.0 million
net foreign currency exchange loss in 1999) and in the ProLogis European
Properties Fund in 1999 (including a net foreign currency exchange gain of
$0.3 million), in addition to the operations of ProLogis that are reported
on a consolidated basis. See Note 5 for summarized financial information of
the ProLogis European Properties Fund and Note 2 for a discussion of Garonor
Holdings.
(3) Includes amounts recognized under the equity method related to ProLogis'
investment in Kingspark S.A. in 1999 and 1998 (including $1.5 million and
$0.9 million of net foreign currency exchange losses in 1999 and 1998,
respectively. See Note 5 for summarized financial information of Kingspark
S.A.
(4) In 1999, includes $17.3 million of net gain recognized by ProLogis related
to the disposition of facilities to the ProLogis European Properties Fund.
Also, in 1999, includes $4.5 million of net gain recognized under the equity
method related to ProLogis Kingspark's disposition of facilities to the
ProLogis European Properties Fund.
(5) Represents amounts recognized under the equity method related to ProLogis'
investment in ProLogis Logistics in each year. See Note 5 for summarized
financial information of ProLogis Logistics.
98
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PROLOGIS TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) Represents amounts recognized under the equity method related to ProLogis'
investment in Frigoscandia S.A. in 1999 and 1998 (including $1.3 million and
$11.4 million of net foreign currency exchange losses in 1999 and 1998,
respectively). See Note 5 for summarized financial information of
Frigoscandia S.A.
(7) Amounts include investments in unconsolidated entities accounted for under
the equity method. See footnotes (2), (3), (4) and (5) above. See also Note
5 for summarized financial information of the unconsolidated entities as of
and for the year ended December 31, 1999.
99
<PAGE> 102
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of
ProLogis Trust:
We have audited, in accordance with generally accepted auditing standards,
the financial statements of ProLogis Trust included in this Form 10-K, and have
issued our report thereon dated March 21, 2000. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
supplemental Schedule III -- Real Estate and Accumulated Depreciation ("Schedule
III") is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. The
Schedule III has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen, LLP
Chicago, Illinois
March 21, 2000
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SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST TO
PROLOGIS
----------------------- COSTS CAPITALIZED
NO. OF ENCUM- BUILDING & SUBSEQUENT
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION
----------- ------ ------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
OPERATING PROPERTIES
Atlanta, Georgia
Atlanta Airport Distribution
Center........................... 6 $ 3,437 $ -- $ 14,658
Atlanta NE at Sugarloaf............ 4 2,453 -- 16,227
Atlanta NE Distribution Center..... 8 (d) 5,582 3,047 24,237
Atlanta West Distribution Center... 20 6,771 34,785 11,852
Carter-Pacific Business Center..... 3 556 3,151 744
Cedars Distribution Center......... 2 2,915 16,516 157
Cobb Place Distribution Center..... 2 1,579 -- 7,862
International Airport Industrial
Center........................... 9 (e) 2,939 14,146 5,056
LaGrange Distribution Center....... 1 174 986 128
McLarinn Distribution Center....... 1 3,038 17,217 26
Northeast Industrial Center........ 4 1,109 6,283 191
Northmont Industrial Center........ 1 566 3,209 219
Oakcliff Industrial Center......... 3 608 3,446 429
Olympic Industrial Center.......... 2 698 3,956 1,632
Peachtree Commerce Business
Center........................... 4 (e) 707 4,004 756
Peachtree Distribution Center...... 1 302 1,709 48
Piedmont Court Distribution
Center........................... 2 885 5,013 1,064
Plaza Industrial Center............ 1 66 372 86
Pleasantdale Industrial Center..... 2 541 3,184 438
Riverside Distribution Center...... 4 3,063 15,821 2,979
Sullivan 75 Distribution Center.... 3 (f) 728 4,123 1,389
Tradeport Distribution Center...... 3 1,464 4,563 5,509
Weaver Distribution Center......... 2 935 5,182 618
Westfork Industrial Center......... 10 2,483 14,115 918
Zip Industrial Center.............. 4 533 3,023 9
Austin, Texas
Corridor Park Corporate Center..... 6 2,109 1,681 12,883
Montopolis Distribution Center..... 1 580 3,384 669
Rutland Distribution Center........ 2 460 2,617 248
Southpark Corporate Center......... 7 1,946 -- 15,051
Walnut Creek Corporate Center...... 17 3,626 5,649 26,145
Birmingham, Alabama
Oxmoor Distribution Center......... 4 2,398 13,591 902
Perimeter Distribution Center...... 2 2,489 14,109 902
Charlotte, North Carolina
Barringer Industrial Center........ 3 308 1,746 516
Bond Distribution Center........... 2 905 5,126 905
Carowinds Distribution Center...... 1 3,239 18,353 --
Charlotte Commerce Center.......... 10 (d) 4,341 24,954 2,565
Charlotte Distribution Center...... 9 (d) 4,579 -- 24,218
Charlotte Distribution Center
South............................ 1 309 -- 4,094
Interstate North Business Park..... 2 535 3,030 269
Northpark Distribution Center...... 2 (d) 1,183 6,707 468
Chattanooga, Tennessee
Stone Fort Distribution Center..... 4 2,063 11,688 245
Tiftonia Distribution Center....... 1 146 829 184
<CAPTION>
GROSS AMOUNTS AT WHICH CARRIED
AS OF DECEMBER 31, 1999
-------------------------------------- ACCUMULATED DATE OF
BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ---------- ------------ ---------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
OPERATING PROPERTIES
Atlanta, Georgia
Atlanta Airport Distribution
Center........................... $ 5,188 $ 12,907 $ 18,095 $ (1,005) 1996,1997,1998
Atlanta NE at Sugarloaf............ 3,613 15,067 18,680 (249) 1999
Atlanta NE Distribution Center..... 6,276 26,590 32,866 (2,761) 1996,1997
Atlanta West Distribution Center... 6,776 46,632 53,408 (7,194) 1994,1996
Carter-Pacific Business Center..... 556 3,895 4,451 (553) 1995
Cedars Distribution Center......... 2,915 16,673 19,588 (396) 1999
Cobb Place Distribution Center..... 2,096 7,345 9,441 (128) 1999
International Airport Industrial
Center........................... 2,972 19,169 22,141 (3,198) 1994,1995
LaGrange Distribution Center....... 174 1,114 1,288 (207) 1994
McLarinn Distribution Center....... 3,038 17,243 20,281 (408) 1999
Northeast Industrial Center........ 1,050 6,533 7,583 (862) 1996
Northmont Industrial Center........ 566 3,428 3,994 (608) 1994
Oakcliff Industrial Center......... 608 3,875 4,483 (614) 1995
Olympic Industrial Center.......... 757 5,529 6,286 (746) 1996
Peachtree Commerce Business
Center........................... 707 4,760 5,467 (889) 1994
Peachtree Distribution Center...... 302 1,757 2,059 (292) 1994
Piedmont Court Distribution
Center........................... 885 6,077 6,962 (526) 1997
Plaza Industrial Center............ 66 458 524 (74) 1995
Pleasantdale Industrial Center..... 541 3,622 4,163 (611) 1995
Riverside Distribution Center...... 3,086 18,777 21,863 (378) 1997,1999
Sullivan 75 Distribution Center.... 728 5,512 6,240 (902) 1994,1995
Tradeport Distribution Center...... 1,479 10,057 11,536 (1,398) 1994,1996
Weaver Distribution Center......... 935 5,800 6,735 (965) 1995
Westfork Industrial Center......... 2,483 15,033 17,516 (2,275) 1995
Zip Industrial Center.............. 485 3,080 3,565 -- 1996
Austin, Texas
Corridor Park Corporate Center..... 2,113 14,560 16,673 (1,877) 1995,1996
Montopolis Distribution Center..... 580 4,053 4,633 (853) 1994
Rutland Distribution Center........ 462 2,863 3,325 (577) 1993
Southpark Corporate Center......... 1,946 15,051 16,997 (2,160) 1994,1995,1996
Walnut Creek Corporate Center...... 3,685 31,735 35,420 (3,182) 1994,1995,1996,1999
Birmingham, Alabama
Oxmoor Distribution Center......... 2,398 14,493 16,891 (2,757) 1994
Perimeter Distribution Center...... 2,490 15,010 17,500 (2,823) 1994
Charlotte, North Carolina
Barringer Industrial Center........ 308 2,262 2,570 (431) 1994
Bond Distribution Center........... 905 6,031 6,936 (1,149) 1994
Carowinds Distribution Center...... 3,239 18,353 21,592 (434) 1999
Charlotte Commerce Center.......... 4,342 27,518 31,860 (5,182) 1994
Charlotte Distribution Center...... 6,096 22,701 28,797 (2,483) 1995,1996,1997,1998
Charlotte Distribution Center
South............................ 1,072 3,331 4,403 (80) 1999
Interstate North Business Park..... 535 3,299 3,834 (315) 1997
Northpark Distribution Center...... 1,184 7,174 8,358 (673) 1994,1998
Chattanooga, Tennessee
Stone Fort Distribution Center..... 2,063 11,933 13,996 (2,096) 1994
Tiftonia Distribution Center....... 146 1,013 1,159 (158) 1995
</TABLE>
101
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SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<TABLE>
<CAPTION>
INITIAL COST TO
PROLOGIS
----------------------- COSTS CAPITALIZED
NO. OF ENCUM- BUILDING & SUBSEQUENT
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION
----------- ------ ------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Chicago, Illinois
Addison Distribution Center........ 1 646 3,662 393
Alsip Distribution Center.......... 2 (f) 2,076 11,766 6,709
Bedford Park Distribution Center... 2 1,115 6,318 11
Bensenville Distribution Center.... 2 1,668 9,448 2,846
Bloomingdale 100 Business Center... 1 940 -- 4,917
Bolingbrook Distribution Center.... 2 4,488 25,435 326
Bridgeview Distribution Center..... 4 1,302 7,378 785
Des Plaines Distribution Center.... 3 2,158 12,232 752
Elk Grove Distribution Center...... 20 (e)(f) 7,755 43,940 4,256
Elmhurst Distribution Center....... 1 713 4,043 94
Glendale Heights Distribution
Center........................... 3 3,844 21,782 177
Glenview Distribution Center....... 2 (e)(f) 1,140 6,459 611
Itasca Distribution Center......... 3 1,613 9,143 279
Lombard Distribution Center........ 1 (f) 1,144 6,485 2
Mitchell Distribution Center....... 1 (e) 1,236 7,004 1,045
North Avenue Distribution Center... 3 3,201 -- 19,994
Northlake Distribution Center...... 1 372 2,106 63
O'Hare Cargo Distribution Center... 2 3,566 -- 14,885
Pleasant Prairie Distribution
Center........................... 1 1,274 7,222 --
Remington Lakes Business Park...... 1 1,023 -- 6,914
Romeoville Distribution Center..... 2 1,080 6,120 --
South Holland Distribution
Center........................... 2 (f) 1,132 6,415 103
Tri-Center Distribution Center..... 3 889 5,038 421
Woodale Distribution Center........ 1 263 1,490 81
Cincinnati, Ohio
Airpark Distribution Center........ 5 (d) 2,986 -- 20,298
Blue Ash/Interstate Distribution
Center........................... 1 144 817 520
Capital Distribution Center I...... 4 (d) 1,750 9,922 1,205
Capital Distribution Center II..... 5 (d) 1,953 11,067 1,789
Capital Industrial Center I........ 10 (d) 1,039 5,885 1,720
Constitution Distribution Center... 1 1,434 8,124 1
Empire Distribution Center......... 3 (d) 529 2,995 495
Kentucky Drive Business Center..... 4 553 3,134 823
Princeton Distribution Center...... 1 816 -- 4,031
Production Distribution Center..... 2 (g) 717 2,717 2,406
Sharonville Distribution Center.... 3 (d) 1,761 -- 11,295
Springdale Commerce Center......... 3 421 2,384 1,025
Union Center Business Park......... 3 2,852 -- 36,686
Columbus, Ohio
Canal Pointe Distribution Center... 1 1,619 9,174 --
Capital Park South Distribution
Center........................... 5 (d) 2,551 -- 29,504
Charter Street Distribution
Center........................... 1 (f) 1,770 10,027 --
Columbus West Industrial Center.... 3 (d) 645 3,655 881
Corporate Park West................ 2 (d) 679 3,849 271
Crosswinds Distribution Center..... 1 (f) 4,046 22,929 --
Fisher Distribution Center......... 1 1,197 6,785 1,550
Foreign Trade Center I............. 6 11,820 66,979 275
International Street Commerce...... 2 455 -- 6,828
McCormick Distribution Center...... 5 1,664 9,429 1,329
<CAPTION>
GROSS AMOUNTS AT WHICH CARRIED
AS OF DECEMBER 31, 1999
-------------------------------------- ACCUMULATED DATE OF
BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ---------- ------------ ---------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Chicago, Illinois
Addison Distribution Center........ 640 4,061 4,701 (457) 1997
Alsip Distribution Center.......... 2,533 18,018 20,551 (1,079) 1998,1999
Bedford Park Distribution Center... 1,115 6,329 7,444 (375) 1996,1999
Bensenville Distribution Center.... 1,667 12,295 13,962 (1,064) 1997,1998
Bloomingdale 100 Business Center... 1,531 4,326 5,857 -- 1999
Bolingbrook Distribution Center.... 4,489 25,760 30,249 (642) 1999
Bridgeview Distribution Center..... 1,303 8,162 9,465 (976) 1996
Des Plaines Distribution Center.... 2,159 12,983 15,142 (1,657) 1995,1996
Elk Grove Distribution Center...... 7,754 48,197 55,951 (3,708) 1995,1996,1997,
1998,1999
Elmhurst Distribution Center....... 713 4,137 4,850 (357) 1997
Glendale Heights Distribution
Center........................... 3,844 21,959 25,803 (556) 1999
Glenview Distribution Center....... 1,138 7,072 8,210 (281) 1996,1999
Itasca Distribution Center......... 1,613 9,422 11,035 (637) 1996,1997,1998
Lombard Distribution Center........ 1,144 6,487 7,631 (154) 1999
Mitchell Distribution Center....... 1,236 8,049 9,285 (967) 1996
North Avenue Distribution Center... 3,948 19,247 23,195 (883) 1997,1998
Northlake Distribution Center...... 372 2,169 2,541 (267) 1996
O'Hare Cargo Distribution Center... 5,924 12,527 18,451 (416) 1997
Pleasant Prairie Distribution
Center........................... 1,274 7,222 8,496 (171) 1999
Remington Lakes Business Park...... 1,193 6,744 7,937 -- 1998
Romeoville Distribution Center..... 1,080 6,120 7,200 (153) 1999
South Holland Distribution
Center........................... 1,132 6,518 7,650 (154) 1999
Tri-Center Distribution Center..... 890 5,458 6,348 (603) 1996
Woodale Distribution Center........ 263 1,571 1,834 (140) 1997
Cincinnati, Ohio
Airpark Distribution Center........ 3,719 19,565 23,284 (1,665) 1996,1998,1999
Blue Ash/Interstate Distribution
Center........................... 144 1,337 1,481 (184) 1995
Capital Distribution Center I...... 1,751 11,126 12,877 (1,853) 1994
Capital Distribution Center II..... 1,953 12,856 14,809 (2,223) 1994
Capital Industrial Center I........ 1,039 7,605 8,644 (1,276) 1994,1995
Constitution Distribution Center... 1,434 8,125 9,559 (192) 1999
Empire Distribution Center......... 529 3,490 4,019 (527) 1995
Kentucky Drive Business Center..... 553 3,957 4,510 (432) 1997
Princeton Distribution Center...... 1,075 3,772 4,847 -- 1997
Production Distribution Center..... 785 5,055 5,840 (548) 1994,1998
Sharonville Distribution Center.... 2,424 10,632 13,056 (524) 1997,1998
Springdale Commerce Center......... 421 3,409 3,830 (487) 1996
Union Center Business Park......... 3,438 36,100 39,538 (121) 1998,1999
Columbus, Ohio
Canal Pointe Distribution Center... 1,619 9,174 10,793 (217) 1999
Capital Park South Distribution
Center........................... 2,615 29,440 32,055 (2,796) 1996,1998,1999
Charter Street Distribution
Center........................... 1,770 10,027 11,797 (237) 1999
Columbus West Industrial Center.... 645 4,536 5,181 (684) 1995
Corporate Park West................ 679 4,120 4,799 (500) 1996
Crosswinds Distribution Center..... 4,046 22,929 26,975 (543) 1999
Fisher Distribution Center......... 1,197 8,335 9,532 (1,308) 1995
Foreign Trade Center I............. 11,853 67,221 79,074 (1,592) 1999
International Street Commerce...... 483 6,800 7,283 (117) 1997,1999
McCormick Distribution Center...... 1,664 10,758 12,422 (1,826) 1994
</TABLE>
102
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SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<TABLE>
<CAPTION>
INITIAL COST TO
PROLOGIS
----------------------- COSTS CAPITALIZED
NO. OF ENCUM- BUILDING & SUBSEQUENT
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION
----------- ------ ------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
New World Distribution Center...... 1 207 1,173 681
South Park Distribution Center..... 1 1,069 6,056 --
Westbelt Business Center........... 2 (d) 466 2,635 213
Dallas/Fort Worth, Texas
Carter Industrial Center........... 1 334 -- 2,497
Centerport Distribution Center..... 2 (f) 1,901 10,775 6
Dallas Corporate Center............ 11 (e) 5,714 -- 33,568
Enterprise Distribution Center..... 3 2,719 15,410 --
Franklin Distribution Center....... 2 528 2,991 803
Freeport Distribution Center....... 4 1,393 5,549 4,078
Great Southwest Corporate Center... 3 2,330 -- 11,001
Great Southwest Distribution
Center........................... 32 (e)(f) 16,266 79,396 16,867
Great Southwest Industrial Center
I................................ 2 (e) 308 1,744 267
Lone Star Distribution Center...... 2 967 5,477 243
Metropolitan Distribution Center... 1 201 1,097 723
Northgate Distribution Center...... 10 (f) 4,398 24,924 1,376
Northpark Business Center.......... 2 467 2,648 282
Plano Distribution Center.......... 7 (f) 3,787 21,462 1
Redbird Distribution Center........ 2 1,022 5,796 96
Royal Commerce Center.............. 4 (e) 1,975 11,190 534
Stemmons Distribution Center....... 1 272 1,544 467
Stemmons Industrial Center......... 15 2,244 12,715 2,008
Trinity Mills Distribution
Center........................... 7 (e) 5,322 30,157 1,358
Valwood Distribution Center........ 7 (f) 4,248 24,071 26
Denver, Colorado
Denver Business Center............. 7 2,144 7,486 13,798
Downing Distribution Center........ 1 -- 3,877 48
Havana Distribution Center......... 1 401 2,281 302
Moline Distribution Center......... 1 327 1,850 165
Moncrieff Distribution Center...... 1 314 2,493 428
Pagosa Distribution Center......... 1 406 2,322 412
Peoria Distribution Center......... 2 1,363 -- 9,642
Upland Distribution Center I....... 6 820 5,710 7,977
Upland Distribution Center II...... 6 2,456 13,946 1,355
Detroit, Michigan
H & J Industrial Center............ 4 510 2,890 6
Huron Commerce Center I............ 3 2,014 11,413 160
Metro Distribution Center.......... 4 671 3,801 573
Pontiac Distribution Center........ 1 441 2,497 --
Southfield Commerce Center......... 2 575 3,261 18
Troy Tech II Service Center........ 5 1,142 6,474 9
Westhills Commerce Center I........ 2 454 2,575 54
East Bay (San Francisco), California
Barrington Business Center......... 3 1,714 9,710 125
Central Valley Distribution
Center........................... 3 5,082 28,801 2
Central Valley Industrial Center... 3 7,621 43,184 --
East Bay Industrial Center......... 1 531 3,009 359
Eigenbrodt Way Distribution
Center........................... 1 (f) 393 2,228 114
Hayward Commerce Center............ 4 1,933 10,955 637
Hayward Commerce Park.............. 9 2,764 15,661 1,990
Hayward Distribution Center........ 6 2,906 19,165 1,435
Hayward Industrial Center.......... 13 (f) 4,481 25,393 1,896
<CAPTION>
GROSS AMOUNTS AT WHICH CARRIED
AS OF DECEMBER 31, 1999
-------------------------------------- ACCUMULATED DATE OF
BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ---------- ------------ ---------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
New World Distribution Center...... 207 1,854 2,061 (324) 1994
South Park Distribution Center..... 1,069 6,056 7,125 (143) 1999
Westbelt Business Center........... 465 2,849 3,314 (160) 1998
Dallas/Fort Worth, Texas
Carter Industrial Center........... 334 2,497 2,831 (283) 1996
Centerport Distribution Center..... 1,901 10,781 12,682 (255) 1999
Dallas Corporate Center............ 6,012 33,270 39,282 (2,498) 1996,1997,1998,1999
Enterprise Distribution Center..... 2,719 15,410 18,129 (365) 1999
Franklin Distribution Center....... 528 3,794 4,322 (743) 1994
Freeport Distribution Center....... 1,440 9,580 11,020 (708) 1996,1997,1998
Great Southwest Corporate Center... 2,401 10,930 13,331 (235) 1999
Great Southwest Distribution
Center........................... 16,558 95,971 112,529 (4,821) 1994,1995,1996,
1997,1998,1999
Great Southwest Industrial Center
I................................ 308 2,011 2,319 (279) 1995
Lone Star Distribution Center...... 967 5,720 6,687 (706) 1996
Metropolitan Distribution Center... 297 1,724 2,021 (251) 1995
Northgate Distribution Center...... 4,398 26,300 30,698 (2,191) 1994,1996,1999
Northpark Business Center.......... 467 2,930 3,397 (377) 1995,1996
Plano Distribution Center.......... 3,787 21,463 25,250 (508) 1999
Redbird Distribution Center........ 1,023 5,891 6,914 (350) 1994,1999
Royal Commerce Center.............. 1,975 11,724 13,699 (950) 1997
Stemmons Distribution Center....... 272 2,011 2,283 (309) 1995
Stemmons Industrial Center......... 2,244 14,723 16,967 (1,745) 1994,1995,1996,1999
Trinity Mills Distribution
Center........................... 5,322 31,515 36,837 (1,894) 1996,1999
Valwood Distribution Center........ 4,248 24,097 28,345 (571) 1999
Denver, Colorado
Denver Business Center............. 2,243 21,185 23,428 (2,466) 1992,1994,1996,
1998,1999
Downing Distribution Center........ -- 3,925 3,925 (50) 1999
Havana Distribution Center......... 401 2,583 2,984 (557) 1993
Moline Distribution Center......... 327 2,015 2,342 (397) 1994
Moncrieff Distribution Center...... 314 2,921 3,235 (678) 1992
Pagosa Distribution Center......... 406 2,734 3,140 (644) 1993
Peoria Distribution Center......... 1,635 9,370 11,005 (234) 1999
Upland Distribution Center I....... 821 13,686 14,507 (2,749) 1992,1994,1995
Upland Distribution Center II...... 2,489 15,268 17,757 (3,174) 1993,1994
Detroit, Michigan
H & J Industrial Center............ 510 2,896 3,406 (69) 1999
Huron Commerce Center I............ 2,014 11,573 13,587 (270) 1999
Metro Distribution Center.......... 671 4,374 5,045 -- 1996
Pontiac Distribution Center........ 441 2,497 2,938 (59) 1999
Southfield Commerce Center......... 575 3,279 3,854 (78) 1999
Troy Tech II Service Center........ 1,142 6,483 7,625 (154) 1999
Westhills Commerce Center I........ 454 2,629 3,083 (62) 1999
East Bay (San Francisco), California
Barrington Business Center......... 1,714 9,835 11,549 (233) 1999
Central Valley Distribution
Center........................... 5,082 28,803 33,885 (682) 1999
Central Valley Industrial Center... 7,621 43,184 50,805 (1,022) 1999
East Bay Industrial Center......... 531 3,368 3,899 (604) 1994
Eigenbrodt Way Distribution
Center........................... 393 2,342 2,735 (475) 1993
Hayward Commerce Center............ 1,933 11,592 13,525 (2,314) 1993
Hayward Commerce Park.............. 2,764 17,651 20,415 (3,521) 1994
Hayward Distribution Center........ 3,327 20,179 23,506 (3,981) 1993
Hayward Industrial Center.......... 4,481 27,289 31,770 (5,495) 1993
</TABLE>
103
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SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<TABLE>
<CAPTION>
INITIAL COST TO
PROLOGIS
----------------------- COSTS CAPITALIZED
NO. OF ENCUM- BUILDING & SUBSEQUENT
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION
----------- ------ ------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Patterson Pass Business Center..... 7 3,340 4,885 13,322
San Leandro Distribution Center.... 3 1,387 7,862 468
El Paso, Texas
Billy the Kid Distribution
Center........................... 1 273 1,547 533
Broadbent Industrial Center........ 3 676 5,183 996
Goodyear Distribution Center....... 1 511 2,899 66
Northwestern Corporate Center...... 6 1,552 -- 16,467
Vista Corporate Center............. 4 1,945 -- 10,890
Vista Del Sol Industrial Center.... 5 (f) 1,245 -- 20,117
Fort Lauderdale/Miami, Florida
Airport West Distribution Center... 2 1,253 3,825 3,244
CenterPort Distribution Center..... 4 3,300 12,989 3,564
Copans Distribution Center......... 2 504 2,857 296
North Andrews Distribution
Center........................... 1 (g) 698 3,956 97
Port Lauderdale Distribution
Center........................... 5 4,874 6,654 19,208
Houston, Texas
Brittmore Distribution Center...... 2 1,713 9,708 633
Crosstimbers Distribution Center... 1 359 2,035 442
Hempstead Distribution Center...... 3 1,013 5,740 744
I-10 Central Distribution Center... 2 181 1,023 239
I-10 Central Service Center........ 1 58 330 111
Jersey Village Corporate Center.... 1 1,536 -- 12,505
Perimeter Distribution Center...... 2 744 4,216 10
Pine Forest Business Center........ 18 (e) 4,859 27,557 2,852
Pine North Distribution Center..... 2 789 4,469 230
Pine Timbers Distribution Center... 2 2,570 14,566 915
Pinemont Distribution Center....... 2 590 3,342 216
Post Oak Business Center........... 15 (e) 3,005 15,378 3,430
Post Oak Distribution Center....... 7 (e) 2,115 12,017 3,068
South Loop Distribution Center..... 5 1,051 5,964 1,724
Southwest Freeway Industrial
Center........................... 1 84 476 166
West by Northwest Industrial
Center........................... 18 4,749 8,382 40,308
White Street Distribution Center... 1 469 2,656 288
World Houston...................... 1 425 -- 3,210
I-95 Corridor, New Jersey
Amerisource Distribution Center.... 1 1,406 7,969 1
Bellmawr Distribution Center....... 1 226 1,278 54
Brunswick Distribution Center...... 2 870 4,928 1,515
Clearview Distribution Center...... 1 2,232 12,648 375
Cranbury Business Park............. 3 4,015 -- 29,513
Kilmer Distribution Center......... 4 (d) 2,526 14,313 683
Kraft Distribution Center.......... 2 6,092 34,519 --
Meadowland Industrial Center....... 8 (d) 5,676 32,167 11,851
Mt. Laurel Distribution Center..... 3 877 4,968 18
National Distribution Center....... 2 513 2,908 1,040
Newark Distribution Center......... 1 260 1,472 2
Pennsauken Distribution Center..... 4 522 2,957 4
Indianapolis, Indiana
Airport Business Center............ 2 847 4,801 1,427
Eastside Distribution Center....... 3 1,418 8,032 345
<CAPTION>
GROSS AMOUNTS AT WHICH CARRIED
AS OF DECEMBER 31, 1999
-------------------------------------- ACCUMULATED DATE OF
BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ---------- ------------ ---------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
Patterson Pass Business Center..... 3,698 17,849 21,547 (1,794) 1993,1997,1998
San Leandro Distribution Center.... 1,387 8,330 9,717 (1,682) 1993
El Paso, Texas
Billy the Kid Distribution
Center........................... 273 2,080 2,353 (379) 1994
Broadbent Industrial Center........ 676 6,179 6,855 (1,319) 1993
Goodyear Distribution Center....... 511 2,965 3,476 (613) 1994
Northwestern Corporate Center...... 2,205 15,814 18,019 (2,048) 1992,1993,1994,
1997,1998
Vista Corporate Center............. 1,946 10,889 12,835 (1,563) 1994,1995,1996
Vista Del Sol Industrial Center.... 2,637 18,725 21,362 (1,822) 1995,1997,1998
Fort Lauderdale/Miami, Florida
Airport West Distribution Center... 1,974 6,348 8,322 (608) 1995,1998
CenterPort Distribution Center..... 3,515 16,338 19,853 (378) 1999
Copans Distribution Center......... 504 3,153 3,657 (305) 1997,1998
North Andrews Distribution
Center........................... 698 4,053 4,751 (699) 1994
Port Lauderdale Distribution
Center........................... 6,531 24,205 30,736 (1,881) 1995,1997,1998
Houston, Texas
Brittmore Distribution Center...... 1,713 10,341 12,054 (253) 1999
Crosstimbers Distribution Center... 359 2,477 2,836 (471) 1994
Hempstead Distribution Center...... 1,013 6,484 7,497 (1,250) 1994
I-10 Central Distribution Center... 181 1,262 1,443 (245) 1994
I-10 Central Service Center........ 58 441 499 (90) 1994
Jersey Village Corporate Center.... 2,063 11,978 14,041 -- 1999
Perimeter Distribution Center...... 744 4,226 4,970 (100) 1999
Pine Forest Business Center........ 4,859 30,409 35,268 (4,936) 1993,1994,1995
Pine North Distribution Center..... 789 4,699 5,488 (111) 1999
Pine Timbers Distribution Center... 2,570 15,481 18,051 (372) 1999
Pinemont Distribution Center....... 590 3,558 4,148 (83) 1999
Post Oak Business Center........... 3,005 18,808 21,813 (3,779) 1993,1994,1996
Post Oak Distribution Center....... 2,115 15,085 17,200 (3,092) 1993,1994
South Loop Distribution Center..... 1,052 7,687 8,739 (1,402) 1994
Southwest Freeway Industrial
Center........................... 84 642 726 (114) 1994
West by Northwest Industrial
Center........................... 5,135 48,304 53,439 (4,895) 1993,1994,1995,1996,
1997,1998,1999
White Street Distribution Center... 469 2,944 3,413 (476) 1995
World Houston...................... 508 3,127 3,635 -- 1999
I-95 Corridor, New Jersey
Amerisource Distribution Center.... 1,406 7,970 9,376 (189) 1999
Bellmawr Distribution Center....... 226 1,332 1,558 (32) 1999
Brunswick Distribution Center...... 870 6,443 7,313 (805) 1997
Clearview Distribution Center...... 2,232 13,023 15,255 (1,379) 1996
Cranbury Business Park............. 7,376 26,152 33,528 (947) 1998,1999
Kilmer Distribution Center......... 2,526 14,996 17,522 (1,675) 1996
Kraft Distribution Center.......... 6,092 34,519 40,611 (817) 1999
Meadowland Industrial Center....... 5,677 44,017 49,694 (4,641) 1996,1998
Mt. Laurel Distribution Center..... 877 4,986 5,863 (118) 1999
National Distribution Center....... 513 3,948 4,461 (278) 1998
Newark Distribution Center......... 260 1,474 1,734 (35) 1999
Pennsauken Distribution Center..... 522 2,961 3,483 (70) 1999
Indianapolis, Indiana
Airport Business Center............ 904 6,171 7,075 (140) 1999
Eastside Distribution Center....... 1,418 8,377 9,795 (542) 1995,1999
</TABLE>
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SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<TABLE>
<CAPTION>
INITIAL COST TO
PROLOGIS
----------------------- COSTS CAPITALIZED
NO. OF ENCUM- BUILDING & SUBSEQUENT
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION
----------- ------ ------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
North by Northeast Distribution
Center........................... 1 1,058 -- 6,135
North Plainfield Park Distribution
Center........................... 1 849 -- 7,370
Park 100 Industrial Center......... 25 10,733 60,828 5,438
Park Fletcher Distribution
Center........................... 9 2,687 15,224 2,924
Plainfield Park Distribution
Center........................... 1 885 -- 8,512
Shadeland Industrial Center........ 3 428 2,431 635
Juarez, Mexico
Salvacar Industrial Center......... 4 1,685 -- 8,236
Los Aztecas Industrial Center...... 1 148 837 5
Kansas City, Kansas/Missouri
44th Street Business Center........ 1 143 813 383
Congleton Distribution Center...... 3 518 2,937 419
Executive Park Distribution
Center........................... 1 (f) 258 1,463 51
Lamar Distribution Center.......... 1 323 1,829 638
Macon Bedford Distribution
Center........................... 1 304 1,725 473
Platte Valley Industrial Center.... 11 (f) 3,867 20,017 6,886
Riverside Distribution Center...... 5 (f) 533 3,024 835
Riverside Industrial Center........ 5 (f) 1,012 5,736 789
Terrace & Lackman Distribution
Center........................... 1 285 1,615 444
Las Vegas, Nevada
Black Mountain Distribution
Center........................... 2 1,108 -- 6,892
Cameron Business Center............ 1 (f) 2,228 12,625 --
Hughes Airport Center.............. 1 876 -- 3,274
Las Vegas Corporate Center......... 7 (h) 4,157 -- 21,729
Placid Street Distribution
Center........................... 1 (f) 2,579 14,615 --
South Arville Center............... 1 1,966 11,140 --
West One Business Center........... 4 (f) 2,468 13,985 787
Lille, France
Lille Business Park................ 1 90 510 123
Lille Distribution Center.......... 1 1,143 5,592 --
Los Angeles/Orange County,
California
Camarillo Distribution Center...... 1 926 5,246 4,371
Chatsworth Distribution Center..... 1 241 1,364 1,312
Inland Empire Distribution
Center........................... 1 889 5,037 4,390
Louisville, Kentucky
Airpark Commerce Center............ 4 1,583 8,971 2,851
Louisville Distribution Center..... 2 680 3,402 4,525
Riverport Distribution Center...... 2 (f) 2,262 10,682 5,073
Lyon, France
L'Isle d'Abeau Distribution
Center........................... 1 (f) 1,240 6,617 --
Memphis, Tennessee
Airport Distribution Center........ 20 7,066 40,041 6,211
Delp Distribution Center........... 10 (f) 4,827 27,354 3,174
Fred Jones Distribution Center..... 1 125 707 111
Olive Branch Distribution Center... 2 (f) 2,786 15,787 58
Raines Distribution Center......... 1 (f) 1,635 9,264 2,868
Southwide Industrial Center........ 4 696 3,943 75
Willow Lake Distribution Center.... 1 (f) 604 3,425 --
<CAPTION>
GROSS AMOUNTS AT WHICH CARRIED
AS OF DECEMBER 31, 1999
-------------------------------------- ACCUMULATED DATE OF
BUILDING & TOTAL DEPRECIATION CONSTRUCTION/
DESCRIPTION LAND IMPROVEMENTS (A,B) (C) ACQUISITION
----------- ---------- ------------ ---------- ------------ --------------------
<S> <C> <C> <C> <C> <C>
North by Northeast Distribution
Center........................... 1,059 6,134 7,193 (1,063) 1995
North Plainfield Park Distribution
Center........................... 1,330 6,889 8,219 (1) 1999
Park 100 Industrial Center......... 10,628 66,371 76,999 (9,203) 1994,1995,1999
Park Fletcher Distribution
Center........................... 2,776 18,059 20,835 (2,425) 1994,1995,1996
Plainfield Park Distribution
Center........................... 1,389 8,008 9,397 -- 1997
Shadeland Industrial Center........ 429 3,065 3,494 (478) 1995
Juarez, Mexico
Salvacar Industrial Center......... 2,811 7,110 9,921 (358) 1998,1999
Los Aztecas Industrial Center...... 148 842 990 (3) 1999
Kansas City, Kansas/Missouri
44th Street Business Center........ 143 1,196 1,339 (150) 1996
Congleton Distribution Center...... 518 3,356 3,874 (607) 1994
Executive Park Distribution
Center........................... 258 1,514 1,772 (72) 1998
Lamar Distribution Center.......... 323 2,467 2,790 (483) 1994
Macon Bedford Distribution
Center........................... 304 2,198 2,502 (299) 1996
Platte Valley Industrial Center.... 4,002 26,768 30,770 (4,024) 1994,1997
Riverside Distribution Center...... 534 3,858 4,392 (715) 1994
Riverside Industrial Center........ 1,012 6,525 7,537 (1,099) 1994
Terrace & Lackman Distribution
Center........................... 285 2,059 2,344 (392) 1994
Las Vegas, Nevada
Black Mountain Distribution
Center........................... 1,206 6,794 8,000 (578) 1997
Cameron Business Center............ 2,228 12,625 14,853 (299) 1999
Hughes Airport Center.............. 910 3,240 4,150 (614) 1994
Las Vegas Corporate Center......... 4,763 21,123 25,886 (2,753) 1994,1995,1996,1997
Placid Street Distribution
Center........................... 2,579 14,615 17,194 (346) 1999
South Arville Center............... 1,966 11,140 13,106 (264) 1999
West One Business Center........... 2,468 14,772 17,240 (1,667) 1996
Lille, France
Lille Business Park................ 108 615 723 (22) 1999
Lille Distribution Center.......... 1,143 5,592 6,735 (12) 1999
Los Angeles/Orange County,
California
Camarillo Distribution Center...... 1,491 9,052 10,543 (223) 1999
Chatsworth Distribution Center..... 438 2,479 2,917 (62) 1999
Inland Empire Distribution
Center........................... 1,546 8,770 10,316 (220) 1999
Louisville, Kentucky
Airpark Commerce Center............ 1,583 11,822 13,405 (721) 1998,1999
Louisville Distribution Center..... 689 7,918 8,607 (703) 1995,1998
Riverport Distribution Center...... 2,378 15,639 18,017 (255) 1999
Lyon, France
L'Isle d'Abeau Distribution
Center........................... 1,240 6,617 7,857 (462) 1997
Memphis, Tennessee
Airport Distribution Center........ 7,066 46,252 53,318 (4,547) 1995,1996,1999
Delp Distribution Center........... 4,827 30,528 35,355 (2,811) 1995,1997,1999
Fred Jones Distribution Center..... 125 818 943 (144) 1994
Olive Branch Distribution Center... 2,786 15,845 18,631 (377) 1999
Raines Distribution Center......... 1,635 12,132 13,767 (990) 1998
Southwide Industrial Center........ 696 4,018 4,714 (95) 1999
Willow Lake Distribution Center.... 604 3,425 4,029 (81) 1999
</TABLE>
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SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION -- (CONTINUED)
<TABLE>
<CAPTION>
INITIAL COST TO
PROLOGIS
----------------------- COSTS CAPITALIZED
NO. OF ENCUM- BUILDING & SUBSEQUENT
DESCRIPTION BLDGS. BRANCES LAND IMPROVEMENTS TO ACQUISITION
----------- ------ ------- -------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Monterrey, Mexico
Monterrey Industrial Park.......... 7 4,353 3,785 22,213
Ojo de Agua Industrial Center...... 1 983 -- 6,731
Nashville, Tennessee
Bakertown Distribution Center...... 2 463 2,626 226
I-40 Industrial Center............. 4 1,687 9,564 371
Interchange City Distribution
Center........................... 7 3,524 12,585 10,236
Nashville/I-24 Distribution
Center........................... 1 380 -- 7,809
Space Park South Distribution
Center........................... 15 3,499 19,830 2,963
Oklahoma City, Oklahoma
Melcat Distribution Center......... 1 240 1,363 465
Meridian Business Center........... 2 195 1,109 655
Oklahoma Distribution Center....... 3 893 5,082 673
Orlando, Florida
33rd Street Industrial Center...... 9 (f)(g) 1,980 11,237 1,128
Chancellor Distribution Center..... 1 380 2,156 1,105
Consulate Distribution Center...... 5 (f) 5,482 31,062 948
La Quinta Distribution Center...... 1 354 2,006 661
Orlando Central Park............... 3 1,378 -- 9,084
Orlando Corporate Center........... 2 1,081 -- 6,525
Princeton Oaks Distribution
Center........................... 1 (f) 1,223 6,930 --
Titusville Industrial Center....... 1 (f) 283 1,603 91
Paris, France
Annecy Distribution Center......... 1 (f) 313 1,052 280
Aulnay Distribution Center......... 28 (f) 55,417 117,082 35,331
Aulnay Office Complex.............. 9 (f) 2,174 4,485 1,364
Aulnay-Balladines.................. 1 (f) 275 568 172
Cergy-Pontoise..................... 5 (f) 6,257 13,325 4,050
Epone Distribution Center.......... 1 457 1,586 1,397
Longjumeau Distribution Center..... 1 (f) 1,160 6,592 --
Mitry Mory Distribution Center..... 1 (f) 1,083 6,137 379
Oceanie Distribution Center........ 1 323 5,866 404
Senart Distribution Center......... 3 (f) 4,233 8,885 2,687
Vitrolles Distribution Center...... 3 (f) 1,949 4,197 1,259
Phoenix, Arizona
24th Street Industrial Center...... 2 503 2,852 396
Alameda Distribution Center........ 2 820 4,977 795
Black Canyon Business Center....... 3 704 3,990 11
Brookridge Distribution Center..... 1 1,592 9,022 --
Hohokam 10 Industrial Center....... 6 4,237 7,348 11,371
I-10 West Business Center.......... 3 263 1,525 262
Kyrene Commons Distribution
Center........................... 4 2,361 8,294 2,697
Kyrene Commons South Distribution
Center........................... 2 1,096 -- 5,035
Martin Van Buren Distribution
Center........................... 6 572 3,285 728
Papago Distribution Center......... 1 420 2,383 165
Pima Distribution Center........... 1