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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A #2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
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 01-12846
PROLOGIS TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 74-2604728
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14100 EAST 35TH PLACE, AURORA, COLORADO 80011
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 375-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the Registrant's common stock as of
November 9, 2001 was 174,953,233.
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PROLOGIS TRUST
INDEX
PAGE
NUMBER(S)
---------
PART I. FINANCIAL INFORMATION
Consolidated Condensed Financial Statements:
Item 1.
Consolidated Condensed Balance Sheets -- September 30, 2001 2
and December 31, 2000.......................................
Consolidated Condensed Statements of Earnings and 3
Comprehensive Income -- Three and nine months ended
September 30, 2001 and 2000.................................
Consolidated Condensed Statements of Cash Flows 4
--Nine months ended September 30, 2001 and 2000.............
Notes to Consolidated Condensed Financial Statements........ 5-27
Report of Independent Public Accountants.................... 28
Management's Discussion and Analysis of Financial Condition 29-39
and Results of Operations...................................
Item 2.
Quantitative and Qualitative Disclosures About Market 39
Risk........................................................
Item 3.
PART II. OTHER INFORMATION
Submission of Matters to a Vote of Securities Holders....... 39
Item 4.
Other Information........................................... 39
Item 5.
Exhibits.................................................... 39
Item 6.
1
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CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2001 2000
--------------- --------------
(UNAUDITED) (AUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
Real estate................................................. $4,587,892 $4,689,492
Less accumulated depreciation............................. 555,264 476,982
---------- ----------
4,032,628 4,212,510
Investments in and advances to unconsolidated entities...... 1,318,616 1,453,148
Cash and cash equivalents................................... 41,119 57,870
Accounts and notes receivable............................... 27,772 34,989
Other assets................................................ 203,309 187,817
---------- ----------
Total assets...................................... $5,623,444 $5,946,334
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit........................................... $ 287,553 $ 439,822
Senior unsecured debt..................................... 1,670,271 1,699,989
Mortgage notes and other secured debt..................... 531,836 537,925
Accounts payable and accrued expenses..................... 140,527 106,097
Construction payable...................................... 18,835 40,925
Distributions and dividends payable....................... 729 57,739
Other liabilities......................................... 99,637 89,836
---------- ----------
Total liabilities................................. 2,749,388 2,972,333
---------- ----------
Minority interest........................................... 45,815 46,630
Shareholders' equity:
Series A Preferred Shares; $0.01 par value; 5,400,000
shares issued and outstanding at December 31, 2000;
stated liquidation preference of $25.00 per share...... -- 135,000
Series B Preferred Shares; $0.01 par value; 6,256,100
shares issued and outstanding at December 31, 2000;
stated liquidation preference of $25.00 per share...... -- 156,403
Series C Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at September 30, 2001 and
December 31, 2000; stated liquidation preference of
$50.00 per share....................................... 100,000 100,000
Series D Preferred Shares; $0.01 par value; 10,000,000
shares issued and outstanding at September 30, 2001 and
December 31, 2000; stated liquidation preference of
$25.00 per share....................................... 250,000 250,000
Series E Preferred Shares; $0.01 par value; 2,000,000
shares issued and outstanding at September 30, 2001 and
December 31, 2000; stated liquidation preference of
$25.00 per share....................................... 50,000 50,000
Common shares of beneficial interest; $0.01 par value;
174,645,388 shares issued and outstanding at September
30, 2001 and 165,287,358 shares issued and outstanding
at December 31, 2000................................... 1,746 1,653
Additional paid-in capital.................................. 2,933,202 2,740,136
Employee share purchase notes............................... (17,161) (18,556)
Accumulated other comprehensive income...................... (53,198) (33,768)
Distributions in excess of net earnings..................... (436,348) (453,497)
---------- ----------
Total shareholders' equity........................ 2,828,241 2,927,371
---------- ----------
Total liabilities and shareholders' equity........ $5,623,444 $5,946,334
========== ==========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
2
PROLOGIS TRUST
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Income:
Rental income............................................. $115,947 $121,519 $352,338 $362,024
Other real estate income.................................. 26,840 19,479 87,045 65,713
Income from unconsolidated entities....................... 14,621 21,336 27,556 46,725
Interest and other income................................. 837 1,334 3,444 5,554
-------- -------- -------- --------
Total income....................................... 158,245 163,668 470,383 480,016
-------- -------- -------- --------
Expenses:
Rental expenses, net of recoveries of $23,484 and $72,236
for the three and nine months in 2001, respectively, and
$22,426 and $68,163 for the three and nine months in
2000, respectively, and including amounts paid to
affiliate of $174 for the nine months in 2001 and $294
and $919 for the three and nine months in 2000,
respectively............................................ 7,973 6,486 21,655 20,617
General and administrative, including amounts paid to
affiliate of $170 for the nine months in 2001 and $252
and $719 for the three and nine months in 2000,
respectively............................................ 11,042 9,652 38,153 32,174
Depreciation and amortization............................. 36,040 35,448 106,403 112,513
Interest.................................................. 41,211 43,700 123,377 128,542
Other..................................................... 675 1,188 2,667 3,838
-------- -------- -------- --------
Total expenses..................................... 96,941 96,474 292,255 297,684
-------- -------- -------- --------
Earnings before minority interest........................... 61,304 67,194 178,128 182,332
Minority interest share in earnings......................... 1,470 1,228 4,304 4,317
-------- -------- -------- --------
Earnings before gain on disposition of real estate and
foreign currency exchange losses.......................... 59,834 65,966 173,824 178,015
Gain on disposition of real estate, net..................... 3,488 702 863 1,009
Foreign currency exchange losses, net....................... (6,545) (1,929) (2,236) (20,378)
-------- -------- -------- --------
Earnings before income taxes................................ 56,777 64,739 172,451 158,646
Income taxes:
Current income tax expense................................ 435 465 2,344 1,123
Deferred income tax expense (benefit)..................... (748) 1,535 3,507 1,702
-------- -------- -------- --------
Total income taxes................................. (313) 2,000 5,851 2,825
-------- -------- -------- --------
Net earnings................................................ 57,090 62,739 166,600 155,821
Less preferred share dividends.............................. 8,179 14,120 29,130 42,675
-------- -------- -------- --------
Net earnings attributable to Common Shares.................. 48,911 48,619 137,470 113,146
Other comprehensive income:
Foreign currency translation adjustments.................. 43,200 (38,263) (19,430) (49,613)
-------- -------- -------- --------
Comprehensive income........................................ $ 92,111 $ 10,356 $118,040 $ 63,533
======== ======== ======== ========
Weighted average Common Shares outstanding -- Basic......... 174,507 164,317 171,932 163,206
======== ======== ======== ========
Weighted average Common Shares outstanding -- Diluted....... 175,586 170,578 174,945 164,602
======== ======== ======== ========
Per Common Share:
Basic net earnings attributable to Common Shares.......... $ 0.28 $ 0.30 $ 0.80 $ 0.69
======== ======== ======== ========
Diluted net earnings attributable to Common Shares........ $ 0.28 $ 0.29 $ 0.79 $ 0.69
======== ======== ======== ========
Distributions............................................. $ 0.345 $ 0.335 $ 1.035 $ 1.005
======== ======== ======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
PROLOGIS TRUST
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2001 2000
----------- ---------
(UNAUDITED)
(IN THOUSANDS)
Operating activities:
Net earnings.............................................. $ 166,600 $ 155,821
Minority interest share in earnings....................... 4,304 4,317
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 106,403 112,513
Gain on disposition of real estate...................... (863) (1,009)
Straight-lined rents.................................... (5,392) (4,952)
Amortization of deferred loan costs..................... 3,689 3,028
Stock-based compensation................................ 5,150 2,330
Income from unconsolidated entities..................... (15,673) (36,321)
Deferred income tax expense............................... 3,507 1,702
Foreign currency exchange (gains) losses, net........... (251) 19,697
Increase in accounts receivable and other assets.......... (29,730) (33,429)
Increase in accounts payable, accrued expenses and other
liabilities............................................. 45,746 62,751
----------- ---------
Net cash provided by operating activities.......... 283,490 286,448
----------- ---------
Investing activities:
Real estate investments................................... (621,024) (470,711)
Tenant improvements and lease commissions on previously
leased space............................................ (16,379) (14,763)
Recurring capital expenditures............................ (23,401) (17,966)
Proceeds from dispositions of real estate................. 690,752 440,570
Net (advances to) amounts received from unconsolidated
entities................................................ 176,228 (72,568)
Proceeds from repayment of note receivable................ 10,424 --
Cash balances contributed as part of ProLogis European
Properties S.a.r.l. .................................... -- (17,968)
----------- ---------
Net cash provided by (used in) investing
activities....................................... 216,600 (153,406)
----------- ---------
Financing activities:
Net proceeds from exercised options and dividend
reinvestment and share purchase plans................... 48,575 17,560
Repurchase of Common Shares, net of costs................. (16,000) --
Redemption of Series A preferred shares................... (135,000) --
Redemption of Series B convertible preferred shares....... (4,583) --
Debt issuance and other transaction costs incurred........ (1,815) (4,546)
Distributions paid on Common Shares....................... (177,332) (163,465)
Distributions paid to minority interest holders........... (5,248) (5,422)
Distributions paid on preferred shares.................... (29,130) (42,675)
Principal payments on senior unsecured debt............... (30,000) (30,000)
Principal payments received on employee share purchase
notes................................................... 1,395 3,990
Payments on the purchase of derivative financial
instruments............................................. (2,232) --
Proceeds from settlement of derivative financial
instruments............................................. 106 2,172
Proceeds from lines of credit............................. 976,406 737,836
Payments on lines of credit............................... (1,128,675) (561,543)
Regularly scheduled principal payments on mortgage
notes................................................... (5,764) (5,229)
Principal prepayments on mortgage notes................... (7,544) (7,203)
----------- ---------
Net cash used in financing activities.............. (516,841) (58,525)
----------- ---------
Net increase (decrease) in cash and cash equivalents........ (16,751) 74,517
Cash and cash equivalents, beginning of period.............. 57,870 69,338
----------- ---------
Cash and cash equivalents, end of period.................... $ 41,119 $ 143,855
=========== =========
See Note 10 for information on non-cash investing and financing activities.
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(UNAUDITED)
1. GENERAL:
BUSINESS
ProLogis Trust (collectively with its consolidated subsidiaries and
partnerships "ProLogis") is a publicly held real estate investment trust
("REIT") that owns and operates a network of industrial distribution facilities
in North America, Europe and Asia (Japan). The ProLogis Operating System(R),
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 has organized its business into
three operating segments: property operations, corporate distribution facilities
services business ("CDFS business") and temperature-controlled distribution
operations. See Note 9.
PRINCIPLES OF FINANCIAL PRESENTATION
The consolidated condensed financial statements of ProLogis as of September
30, 2001 and for the three and nine months ended September 30, 2001 and 2000 are
unaudited and, pursuant to the rules of the Securities and Exchange Commission,
certain information and footnote disclosures normally included in financial
statements have been omitted. While management of ProLogis believes that the
disclosures presented are adequate, these interim consolidated condensed
financial statements should be read in conjunction with ProLogis' December 31,
2000 audited consolidated financial statements contained in ProLogis' 2000
Annual Report on Form 10-K, as amended.
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of ProLogis'
consolidated financial position and results of operations for the interim
periods. The consolidated results of operations for the three and nine months
ended September 30, 2001 and 2000 are not necessarily indicative of the results
to be expected for the entire year. Certain of the 2000 amounts have been
reclassified to conform to the 2001 financial statement presentation.
The preparation of consolidated condensed financial statements in
conformity with United States generally accepted accounting principles ("GAAP")
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated condensed financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Recently issued Statements of Financial Accounting Standards ("SFAS") that
are applicable to ProLogis' business are:
- SFAS No. 142, "Goodwill and Other Intangible Assets" provides that
goodwill is no longer subject to amortization over its estimated useful
life. Rather, goodwill will be subject to at least an annual assessment
for impairment by applying a fair-value-based-test (the impairment
guidance in existing rules for equity method goodwill will continue to
apply). SFAS No. 142 also changes the rules for recognition of acquired
intangible assets other than goodwill but continues to require that
intangible assets be amortized over their useful lives.
- SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" establishes a single accounting model for long-lived assets to be
disposed of by sale and provides implementation guidance with respect to
accounting for impairment of long-lived assets. SFAS No. 144 requires
that discontinued operations be measured on the same basis as other
long-lived assets (the lower of its carrying amount or fair value less
cost to sell) rather than at the net realizable value as previously
5
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
required. Additionally, future operating losses of discontinued
operations are no longer recognized before they occur.
- SFAS Nos. 142 and 144 are effective for ProLogis' fiscal year ending
December 31, 2002. Management is still evaluating the effects these
standards will have, if any, on ProLogis' consolidated financial
position, results of operations or financial statement disclosures. For
the nine months ended September 30, 2001 and 2000, ProLogis recognized
amortization expense related to recognized goodwill of $0.1 million and
$1.8 million, respectively, as a component of "Depreciation and
Amortization" in its Consolidated Condensed Statements of Earnings and
Comprehensive Income.
INTEREST EXPENSE
Interest expense was $123.4 million and $128.5 million for the nine months
in 2001 and 2000, respectively, which is net of capitalized interest of $18.4
million and $12.8 million, respectively. Amortization of deferred loan costs
included in interest expense was $3.7 million and $3.0 million for the nine
months in 2001 and 2000, respectively. Total interest paid in cash on all
outstanding debt was $133.2 million and $123.3 million for the nine months in
2001 and 2000, respectively.
FINANCIAL INSTRUMENTS
In the normal course of business, ProLogis uses certain derivative
financial instruments for the purpose of foreign currency exchange rate and
interest rate risk management. All derivative financial instruments are
accounted for at fair value with changes in fair value recognized immediately in
accumulated other comprehensive income or income.
ProLogis adopted SFAS No. 133, "Accounting for Derivative Instruments and
for Hedging Activities," as amended, on January 1, 2001. 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. ProLogis' only derivative
financial instruments in effect at September 30, 2001 were foreign currency put
option contracts. Similar foreign currency put option contracts were marked to
market through income in 2000 because they did not qualify for hedge accounting
treatment. Under SFAS No. 133, these contracts also do not qualify for hedge
accounting treatment. Consequently, ProLogis has continued to mark its foreign
currency put option contracts to market through income during the nine months
ended September 30, 2001. ProLogis' unconsolidated entities also adopted SFAS
No. 133 on January 1, 2001. The effect to ProLogis of their adoption of SFAS No.
133 was immaterial as these entities utilize derivative financial instruments on
a limited basis.
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, ProLogis uses quoted market prices or quotes from brokers or dealers
for the same or similar instruments. These values represent a general
approximation of possible value and may never actually be realized.
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. Income statement accounts that represent
significant, nonrecurring transactions are translated at the rate in effect as
of the date of the transaction. Gains and losses resulting from the translation
are included in accumulated other comprehensive income as a separate component
of shareholders' equity.
6
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
ProLogis and its foreign subsidiaries have certain transactions denominated
in currencies other than their functional currency. In these instances,
nonmonetary assets and liabilities are remeasured at the historical exchange
rate, monetary assets and liabilities are remeasured at the exchange rate in
effect at the end of the period, and income statement accounts are remeasured at
the average exchange rate for the period. Gains and losses from remeasurement
are included in ProLogis' results of operations.
Gains or losses are recorded in the income statement when a transaction
with a third party, denominated in a currency other than the functional
currency, is settled and the functional currency cash flows realized are more or
less than expected based upon the exchange rate in effect when the transaction
was initiated.
The net foreign currency exchange gains and losses recognized in ProLogis'
results of operations were as follows for the periods indicated (in thousands of
U.S. dollars):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
2001 2000 2001 2000
-------- -------- ------- --------
Losses from the remeasurement of third party
debt and remeasurement and settlement of
intercompany debt, net...................... $(5,445) $(2,661) $(1,461) $(21,669)
Mark to market gains (losses) on foreign
currency put option contracts(1)............ (817) (477) 245 --
Gains (losses) from the settlement of foreign
currency put option contracts, net(1)....... (417) 1,427 (998) 1,544
Other gains (losses), net..................... 134 (218) (22) (253)
------- ------- ------- --------
Total............................... $(6,545) $(1,929) $(2,236) $(20,378)
======= ======= ======= ========
---------------
(1) Upon settlement, the mark to market adjustments are reversed and the total
realized gain or loss is recognized.
2. AMENDED QUARTERLY REPORT ON FORM 10-Q/A#1
ProLogis' Quarterly Report on Form 10-Q for the period ended September 30,
2001 originally filed on November 13, 2001 included the financial position and
results of operations of ProLogis' subsidiary, Kingspark Holding S.A. and
subsidiaries ("Kingspark S.A."), in its unaudited consolidated condensed
financial statements on a consolidated basis. Until January 5, 2001, ProLogis
owned only the non-voting preferred stock of Kingspark S.A. and reported its
investment in Kingspark S.A. under the equity method. On that date, ProLogis
acquired 95% of the membership interest (all non-voting) in Kingspark LLC, which
acquired the voting common stock of Kingspark S.A. After the change in the
ownership structure, ProLogis believed it had control of Kingspark S.A. and
began consolidating it in its financial statements along with its other
majority-owned and controlled subsidiaries and partnerships. After
reconsideration of the facts underlying its ownership position, ProLogis
determined it did not have control of Kingspark S.A., as it held no voting
interest, and therefore, consolidation was deemed inappropriate. Therefore,
ProLogis has amended its unaudited consolidated condensed financial statements
as of and for the three and nine months ended September 30, 2001 included in
this Form 10-Q/A#1 to reflect its investment in Kingspark S.A. on the equity
method, consistent with its reporting of this investment prior to January 5,
2001. Further, ProLogis has amended its unaudited consolidated condensed
financial statements as of and for the three and nine months ended September 30,
2001 included in this Form 10-Q/A#1 to reflect its investments in two other
entities, whose sole purpose is to hold preferred stock in technology companies,
under the equity method. ProLogis began consolidating these entities in 2001,
but as with Kingspark S.A., subsequently determined that its ownership interest
did not give it control. These changes in reporting have no effect on ProLogis'
shareholders equity as of September 30, 2001
7
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
or its net earnings attributable to Common Shares, net earnings attributable to
Common Shares per share or comprehensive income for the three and nine months
ended September 30, 2001. These changes in reporting did result in changes in
certain financial statement amounts. The most significant of which are as
follows (in thousands):
SEPTEMBER 30, 2001
-----------------------
AS PREVIOUSLY
AMENDED REPORTED
---------- ----------
Real estate................................................. $4,587,892 $5,005,056
Investments in and advances to unconsolidated entities...... $1,318,616 $ 820,100
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
-------------------- --------------------
AS PREVIOUSLY AS PREVIOUSLY
AMENDED REPORTED AMENDED REPORTED
------- ---------- ------- ----------
Other real estate income..................... $26,840 $36,326 $87,045 $111,740
Income (loss) from unconsolidated entities... $14,621 $(3,101) $27,556 $ 6,204
Loss on investment........................... $ -- $ -- $ -- $ 7,456
3. REAL ESTATE:
REAL ESTATE INVESTMENTS
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):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Operating facilities:
Improved land........................................ $ 631,085(1) $ 648,950(1)
Buildings and improvements........................... 3,468,029(1) 3,619,543(1)
---------- ----------
4,099,114 4,268,493
---------- ----------
Facilities under development (including cost of
land)................................................ 186,775(2)(3) 186,020(2)
Land held for development.............................. 186,891(4) 187,405(4)
Capitalized preacquisition costs....................... 115,112(5) 47,574(5)
---------- ----------
Total real estate............................ 4,587,892 4,689,492
Less accumulated depreciation.......................... 555,264 476,982
---------- ----------
Net real estate.............................. $4,032,628 $4,212,510
========== ==========
---------------
(1) As of September 30, 2001 and December 31, 2000, ProLogis had 1,207 and 1,244
operating facilities, respectively, consisting of 121,716,000 and
126,275,000 square feet, respectively.
(2) Facilities under development consist of 36 facilities aggregating 8,736,000
square feet as of September 30, 2001 and 41 facilities aggregating 8,711,000
square feet as of December 31, 2000.
(3) In addition to the September 30, 2001 construction payable of $18.8 million,
ProLogis had unfunded commitments on its contracts for facilities under
construction totaling $221.2 million.
(4) Land held for future development consists of 1,964 acres as of September 30,
2001 and 2,047 acres as of December 31, 2000.
8
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(5) Capitalized preacquisition costs include $100.9 million and $32.5 million of
funds on deposit with title companies for future acquisition of operating
facilities as of September 30, 2001 and December 31, 2000, respectively.
ProLogis' operating facilities, facilities under development and land held
for future development are located in North America (the United States and
Mexico), in nine countries in Europe and in Japan. 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
September 30, 2001, minimum lease payments on leases with lease periods greater
than one year are as follows (in thousands):
Remainder of 2001........................................... $ 109,458
2002........................................................ 399,551
2003........................................................ 323,882
2004........................................................ 238,799
2005........................................................ 170,509
2006 and thereafter......................................... 330,449
----------
$1,572,648
==========
ProLogis' largest customer (based on rental income) accounted for 0.9% of
ProLogis' rental income (on an annualized basis) for the nine months ended
September 30, 2001. The annualized base rent for ProLogis' 25 largest customers
(based on rental income) accounted for 12.8% of ProLogis' rental income (on an
annualized basis) for the nine months ended September 30, 2001.
9
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
4. UNCONSOLIDATED ENTITIES:
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
Investments in and advances to unconsolidated entities are as follows (in
thousands):
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Temperature-controlled distribution companies:
CSI/Frigo LLC(1).......................................... $ 1,994 $ --
ProLogis Logistics(1)(2).................................. 132,257 231,053
Frigoscandia S.A.(1)(3)................................... 185,025 191,981
---------- ----------
319,276 423,034
---------- ----------
Distribution real estate entities:
ProLogis California(4).................................... 119,294 132,243
ProLogis North American Properties Fund I(5).............. 44,238 10,369
ProLogis North American Properties Fund II(6)............. 8,642 13,408
ProLogis North American Properties Fund III(7)............ 6,452 --
ProLogis North American Properties Fund IV(8)............. 4,315 --
ProLogis European Properties Fund(9)...................... 236,903 147,938
ProLogis European Properties S.a.r.l.(9).................. -- 84,767
---------- ----------
419,844 388,725
---------- ----------
CDFS business:
Kingspark LLC(10)......................................... 8,924 --
Kingspark S. A.(10)....................................... 510,025 570,582
---------- ----------
518,949 570,582
---------- ----------
Insight(11)................................................. 2,459 2,470
ProLogis Equipment Services(12)............................. 1,772 450
GoProLogis(13).............................................. 56,316 56,315
ProLogis PhatPipe(14)....................................... -- 11,572
---------- ----------
Total............................................. $1,318,616 $1,453,148
========== ==========
---------------
(1) CSI/Frigo LLC, a limited liability company, owns 100% of the voting common
stock of both ProLogis Logistics Services Incorporated ("ProLogis
Logistics") and Frigoscandia Holding S.A. ("Frigoscandia S.A.). ProLogis
directly owns all of the non-voting preferred stock of both ProLogis
Logistics and Frigoscandia S.A. representing a 95% interest in the earnings
of these entities.
ProLogis owns 89% of the membership interests (all non-voting) in CSI/Frigo
LLC and K. Dane Brooksher, ProLogis' chairman and chief executive officer,
owns the remaining 11% of the membership interests (all voting) and is the
managing member. ProLogis has a note agreement with CSI/Frigo LLC that
allows ProLogis to participate in its earnings such that ProLogis
recognizes 95% of the earnings of CSI/Frigo LLC. Mr. Brooksher may transfer
his membership interest, subject to certain conditions, including the
approval of ProLogis. There are no provisions that give ProLogis the right
to acquire Mr. Brooksher's membership interest. Mr. Brooksher does not
receive compensation in connection with being the managing member. Mr.
Brooksher invested $50,000 in CSI/Frigo LLC. Mr. Brooksher's membership
interests and the terms of the participating note entitle him to receive
dividends equal to 5% of the net cash flow of CSI/Frigo LLC, as defined, if
any. ProLogis' ownership interests in CSI/ Frigo LLC, ProLogis Logistics
and Frigoscandia S.A. do not result in ProLogis having ownership of or
10
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
control of the voting common stock or voting membership interests of these
entities; therefore, they are not consolidated in ProLogis' condensed
financial statements. See Note 11.
Prior to January 5, 2001, the common stock of ProLogis Logistics was owned
by unrelated third parties and the common stock of Frigoscandia S.A. was
owned by a limited liability company in which unrelated third parties owned
100% of the voting interests and Security Capital Group Incorporated
("Security Capital"), ProLogis' largest shareholder, owned 100% of the
non-voting interests. On January 5, 2001, the common stock of both ProLogis
Logistics and Frigoscandia S.A. was acquired by CSI/Frigo LLC for an
aggregate purchase price of $3.3 million.
(2) ProLogis Logistics owns 100% of CS Integrated LLC ("CSI"), a
temperature-controlled distribution company operating in the United States.
As of September 30, 2001, CSI owned or operated under lease agreements
facilities aggregating 178.4 million cubic feet (including 35.5 million
cubic feet of dry distribution space located in temperature-controlled
facilities).
(3) Frigoscandia S.A., through its wholly owned subsidiaries, owns 100% of
Frigoscandia AB, a temperature-controlled distribution company operating in
nine countries in Europe. As of September 30, 2001, Frigoscandia AB owned
or operated under lease agreements facilities aggregating 154.7 million
cubic feet.
(4) ProLogis California I LLC ("ProLogis California") owns 79 operating
facilities aggregating 13.1 million square feet, all located in the Los
Angeles/Orange County market. ProLogis has a 50% ownership interest in
ProLogis California.
(5) ProLogis North American Properties Fund I LLC owns 36 operating facilities
aggregating 9.0 million square feet in 16 markets (including three
operating facilities contributed to ProLogis North American Properties Fund
I for an additional equity interest of $34.1 million in January 2001). The
January contribution increased the combined ownership interests of ProLogis
and ProLogis Development Services Incorporated ("ProLogis Development
Services") in ProLogis North American Properties Fund I to 41.3% from 20%.
ProLogis Development Services is a consolidated taxable subsidiary of
ProLogis that engages in CDFS business activities in North America.
(6) ProLogis Iowa LLC ("ProLogis Principal") was formed on June 30, 2000 as a
limited liability company whose members were ProLogis with 20% of the
membership interests and Principal Financial Group with 80% of the
membership interests. ProLogis Principal owned three operating facilities,
all acquired from ProLogis, aggregating 440,000 square feet. On March 27,
2001, First Islamic Investment Bank E.C. acquired the membership interest
held by Principal Financial Group. Also on that date, this entity, under
the name ProLogis First US Properties LP ("ProLogis North American
Properties Fund II") acquired 24 additional operating facilities
aggregating 4.0 million square feet from ProLogis and ProLogis Development
Services, bringing its total portfolio to 27 operating facilities
aggregating 4.5 million square feet in 12 markets. ProLogis and ProLogis
Development Services continue to have a combined 20% ownership in ProLogis
North American Properties Fund II.
(7) ProLogis Second US Properties LP ("ProLogis North American Properties Fund
III") was formed on June 15, 2001 as a limited liability company whose
members are ProLogis and ProLogis Development Services with 20% of the
membership interests (on a combined basis) and First Islamic Investment
Bank E.C. with 80% of the membership interests. This entity acquired 34
operating facilities aggregating 4.4 million square feet in 16 markets from
ProLogis and ProLogis Development Services in June 2001.
(8) ProLogis Third US Properties LP ("ProLogis North American Properties Fund
IV") was formed on September 21, 2001 as a limited liability company whose
members are ProLogis and ProLogis Development Services with 20% of the
membership interests (on a combined basis) and First Islamic Investment
Bank E.C. with 80% of the membership interests. This entity acquired 17
operating facilities
11
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
aggregating 3.5 million square feet in ten markets from ProLogis and
ProLogis Development Services in September 2001.
(9) ProLogis European Properties Fund owns 123 operating facilities aggregating
19.2 million square feet in 23 markets, including facilities owned by
ProLogis European Properties S.a.r.l. On January 7, 2001, ProLogis
contributed the remaining 49.9% of the common stock of ProLogis European
Properties S.a.r.l. to ProLogis European Properties Fund for an additional
equity interest. ProLogis had contributed 50.1% of the common stock of this
entity to ProLogis European Properties Fund on January 7, 2000. As of
September 30, 2001, ProLogis European Properties Fund, in which ProLogis
had a 38.1% ownership at that date, owned 100% of ProLogis European
Properties S.a.r.l. ProLogis recognized a gain of $0.5 million related to
the January 2001 transaction (total gain of $9.8 million net of $9.3
million which does not qualify for current income recognition due to
ProLogis' continuing ownership in ProLogis European Properties Fund).
(10) ProLogis directly owns all of the non-voting preferred stock of Kingspark
S.A., representing a 95% interest in its earnings. Kingspark LLC, a limited
liability company owns 100% of the voting common stock of Kingspark S.A.
ProLogis owns 95% of the membership interests (all non-voting) in Kingspark
LLC and K. Dane Brooksher, ProLogis' chairman and chief executive officer,
owns the remaining 5% of the membership interests (all voting) and is the
managing member. Mr. Brooksher may transfer his membership interest,
subject to certain conditions, including the approval of ProLogis. There
are no provisions that give ProLogis the right to acquire Mr. Brooksher's
membership interest. Mr. Brooksher does not receive compensation in
connection with being the managing member. Mr. Brooksher invested $40,557
in Kingspark LLC which was loaned to him by ProLogis. The recourse loan is
payable on January 5, 2006 and bears interest at an annual rate of 8.0%.
Mr. Brooksher's membership interests entitle him to receive dividends equal
to 5% of the net cash flow of Kingspark LLC, as defined, if any. Neither
ProLogis' ownership interests in Kingspark LLC and Kingspark S.A., nor its
loan to Mr. Brooksher, result in ProLogis having ownership of or control of
the voting common stock or voting membership interests of these entities;
therefore, they are not consolidated in ProLogis' financial statements. See
Note 11.
Prior to January 5, 2001, the common stock of Kingspark S.A. was owned by a
limited liability company in which unrelated third parties owned 100% of
the voting interests and Security Capital, ProLogis' largest shareholder,
owned 100% of the non-voting interests. On January 5, 2001, the common
stock of Kingspark S.A. was acquired by Kingspark LLC for $8.1 million.
(11) Investment represents ProLogis Development Services' equity investment in
the common stock of Insight, Inc. ("Insight"), a privately owned logistics
optimization consulting company, as adjusted for ProLogis Development
Services' share of Insight's earnings or loss. ProLogis Development
Services has a 33.3% ownership interest in Insight.
(12) Investment represents ProLogis Development Services' (through a
wholly-owned subsidiary) equity investment in ProLogis Equipment Services
LLC, a limited liability company whose other member is a subsidiary of Dana
Commercial Credit Corporation, as adjusted for ProLogis Development
Services' share of ProLogis Equipment Services' earnings or loss. ProLogis
Equipment Services began operations on April 26, 2000 for the purpose of
acquiring, leasing and selling material handling equipment and providing
asset management services for such equipment. ProLogis Development Services
has a 50% ownership interest in ProLogis Equipment Services.
(13) ProLogis owns 100% of the non-voting preferred stock ($25.0 million of cash
invested and $30.4 million of preferred stock received under a license fee
agreement) of GoProLogis Incorporated ("GoProLogis") that has invested
$25.0 million in the non-cumulative preferred stock of Vizional
Technologies, Inc. (formerly GoWarehouse.com, Inc.) ("Vizional
Technologies"), a provider of integrated global logistics network
technology services. GoProLogis also received $30.4 million of
non-cumulative preferred stock of Vizional Technologies under a license
agreement for the non-exclusive use of the
12
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
ProLogis Operating System(TM) over a five-year period. Investment amount
also includes $0.9 million of other costs associated with this investment.
This investment was made on July 21, 2000. The income related to the
license agreement was deferred at the inception of the agreement in 2000
and was being recognized over the five-year term of the agreement. ProLogis
accounts for its investment in GoProLogis under the equity method.
GoProLogis has not received any dividends from its preferred stock
investment in Vizional Technologies since the investment was made in 2000.
As of September 30, 2001, ProLogis had deferred $24.7 million of income
related to the license fee agreement. ProLogis' net investment in
GoProLogis was $31.6 million as of September 30, 2001 ($55.4 million of
non-cumulative preferred stock and $0.9 million of additional costs offset
by $24.7 million of deferred income). ProLogis' investment in the
non-voting preferred stock of GoProLogis represents a 98% interest in its
earnings. The voting interest of GoProLogis represents a 2% interest in its
earnings. K. Dane Brooksher, ProLogis' chairman and chief executive
officer, holds the voting interest and is entitled to receive dividends
equal to 2% of the net cash flow of GoProLogis, as defined, if any. Mr.
Brooksher contributed a $1.1 million recourse promissory note to GoProLogis
in exchange for his interest in the entity, which note is payable on July
18, 2005 and bears interest at an annual rate of 8.0%. Mr. Brooksher is not
restricted from transferring his ownership interest in Go ProLogis but
ProLogis does have an option to acquire his interest beginning in 2001 at a
price equal to the principal amount plus accrued interest under the
promissory note. See Note 11.
(14) ProLogis owns 100% of the non-voting preferred stock ($6.0 million of cash
invested and $6.0 million of preferred stock received under a license fee
agreement) of ProLogis Broadband (1) Incorporated ("ProLogis PhatPipe")
that has invested $6.0 million in the non-cumulative preferred stock of
PhatPipe, Inc. ("PhatPipe"), a real estate technology company. ProLogis
PhatPipe also received $6.0 million of non-cumulative preferred stock of
PhatPipe and a receivable of $2.0 million, both under a license agreement
for the non-exclusive use of the ProLogis Operating System(TM) over a
three-year period. Investment amount also includes $50,000 of other costs
associated with this investment. The income related to the license fee
agreement was deferred at the inception of the agreement in 2000 and was
being recognized over the three-year term of the agreement. This investment
was made on September 20, 2000. ProLogis accounts for its investment in
ProLogis PhatPipe under the equity method and its carrying value of this
investment at September 30, 2001 was zero after Prologis recognized its
share of an impairment adjustment recorded by Prologis PhatPipe related to
its investment in PhatPipe. ProLogis PhatPipe has not received any
dividends from its preferred stock investment in PhatPipe since the
investment was made in 2000. ProLogis' investment in the non-voting
preferred stock of ProLogis PhatPipe represents a 98% interest in its
earnings. The voting interest of ProLogis PhatPipe represents a 2% interest
in its earnings. K. Dane Brooksher, ProLogis' chairman and chief executive
officer, holds the voting interest and is entitled to receive dividends
equal to 2% of the net cash flow of ProLogis PhatPipe, as defined, if any.
Mr. Brooksher contributed recourse promissory notes with an aggregate of
$122,449 principal amount to ProLogis PhatPipe in exchange for his interest
in the entity. A promissory note with the principal amount of $71,429 is
due September 20, 2005 and a promissory note with the principal amount of
$51,020 is due January 4, 2006. Both notes bear interest at an annual rate
of 8.0%. Mr. Brooksher is not restricted from transferring his ownership
interest in ProLogis PhatPipe but ProLogis does have an option to acquire
his interest beginning in 2001 at a price equal to the principal amount
plus accrued interest under the promissory notes. See Note 11.
ProLogis' net equity investment in ProLogis PhatPipe was $7.5 million in
the second quarter of 2001 (net of $6.6 million of income related to the
license fee agreement that had been deferred) when ProLogis, through its
investment in ProLogis PhatPipe, recognized its share of an impairment
adjustment of $7.5 million, representing the write-down of ProLogis
PhatPipe's entire net investment in PhatPipe.
13
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME (LOSS) FROM UNCONSOLIDATED ENTITIES
ProLogis recognized income (loss) from its investments in unconsolidated
entities as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Temperature-controlled distribution
companies:
CSI/Frigo LLC(1)........................... $ (550) $ -- $ (1,343) $ --
ProLogis Logistics(2)...................... (1,036) 2,196 (3,636) 8,067
Frigoscandia S.A.(2)....................... (8,066) (5,755) (18,061) (10,806)
------- ------- -------- --------
(9,652) (3,559) (23,040) (2,739)
------- ------- -------- --------
Distribution real estate entities:
ProLogis California(3)..................... 3,067 3,543 10,186 9,597
ProLogis North American Properties Fund
I(4).................................... 967 1,233 3,561 1,233
ProLogis North American Properties Fund
II(5)................................... 728 307 1,634 308
ProLogis North American Properties Fund
III(6).................................. 542 -- 582 --
ProLogis North American Properties Fund
IV(7)................................... (12) -- (12) --
ProLogis European Properties Fund(8)....... 965 4,637 7,816 8,949
ProLogis European Properties S.a.r.l.(9)... -- 2,811 36 7,686
------- ------- -------- --------
6,257 12,531 23,803 27,773
------- ------- -------- --------
Kingspark S.A.(10)........................... 18,016 11,083 30,704 20,412
Insight...................................... -- 36 (10) 34
ProLogis Equipment Services.................. -- -- (155) --
GoProLogis(11)............................... -- 1,171 3,043 1,171
ProLogis PhatPipe(12)........................ -- 74 (6,789) 74
------- ------- -------- --------
$14,621 $21,336 $ 27,556 $ 46,725
======= ======= ======== ========
---------------
(1) CSI/Frigo LLC recognizes its share of the losses of ProLogis Logistics and
Frigoscandia S. A. under the equity method. Amounts represent ProLogis'
share of the losses of CSI/Frigo LLC for the periods presented.
(2) Represents ProLogis' share of the income or losses of ProLogis Logistics
and Frigoscandia S. A. recognized under the equity method based on its
ownership of the preferred stock of each entity.
(3) Income includes management, leasing and development fees of $734,000 and
$657,000 for the three months ended September 30, 2001 and 2000,
respectively, and $2,308,000 and $1,940,000 for the nine months ended
September 30, 2001 and 2000, respectively. ProLogis has had a 50% ownership
interest in ProLogis California since its inception.
(4) ProLogis North American Properties Fund I was formed on June 30, 2000.
Income includes management fees of $464,000 and $1,592,000 for the three
and nine months ended September 30, 2001, respectively, and $216,000 for
both the three and nine months ended September 30, 2000. ProLogis and
ProLogis Development Services had a combined 20% ownership interest in
ProLogis North American
14
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
Properties Fund I from its inception on June 30, 2000 to January 14, 2001,
and a combined 41.3% ownership interest from January 15, 2001 to September
30, 2001.
(5) ProLogis North American Properties Fund II was originally formed as
ProLogis Principal on June 30, 2000. Income includes management fees of
$508,000 and $1,054,000 for the three and nine months ended September 30,
2001, respectively, and $24,000 for both the three and nine months ended
September 30, 2000. ProLogis (together with ProLogis Development Services
since March 27, 2001) has had a 20% ownership interest in ProLogis North
American Properties Fund II since its inception on June 30, 2000 to
September 30, 2001.
(6) ProLogis North American Properties Fund III was formed on June 15, 2001.
Income includes management fees of $501,000 for both the three and nine
months ended September 30, 2001. ProLogis and ProLogis Development Services
have had a combined 20% ownership interest in ProLogis North American
Properties Fund III since its inception.
(7) ProLogis North American Properties Fund IV was formed on September 21,
2001. ProLogis and ProLogis Development Services have had a combined 20%
ownership interest in ProLogis North American Properties Fund IV since its
inception.
(8) Income or loss includes management fees of $2,509,000 and $1,619,000 for
the three months ended September 30, 2001 and 2000, respectively, and
$6,013,000 and $3,923,000 for the nine months ended September 30, 2001 and
2000, respectively. ProLogis had a 38.1% ownership interest in ProLogis
European Properties Fund as of September 30, 2001.
(9) Represents income from ProLogis' investment in 49.9% of the common stock of
ProLogis European Properties S.a.r.l. in 2000 for the period from January
7, 2000 to June 30, 2000 and in 2001 for the period from January 1, 2001 to
January 6, 2001.
(10) Represents ProLogis' share of the earnings recognized of Kingspark LLC and
Kingspark S.A. under the equity method based on its ownership of each
entity.
(11) Represents ProLogis' share of the income of GoProLogis, primarily license
fees earned for the non-exclusive use of the ProLogis Operating System(R)
under a license agreement entered into in the third quarter of 2000.
ProLogis ceased recognizing income under the agreement in the third quarter
of 2001.
(12) Represents ProLogis' share of the losses of ProLogis PhatPipe, primarily
due to the write-down of ProLogis PhatPipe's investment in PhatPipe.
TEMPERATURE-CONTROLLED DISTRIBUTION COMPANIES
ProLogis' total investment in its temperature-controlled distribution
companies as of September 30, 2001 consisted of (in millions of U.S. dollars):
CSI/FRIGO PROLOGIS FRIGOSCANDIA
LLC LOGISTICS(1) S.A.(2)
--------- ------------ ------------
Equity interest.................................... $ 0.4 $138.4 $ 22.6
ProLogis' share of the earnings of the entity...... (1.5) (16.4) (95.9)
----- ------ ------
Subtotal................................. (1.1) 122.0 (73.3)
Other (including acquisition costs), net........... -- -- 1.7
----- ------ ------
Subtotal................................. (1.1) 122.0 (71.6)
Notes and other receivables........................ 3.1 10.2 256.6
----- ------ ------
Total.................................... $ 2.0 $132.2 $185.0
===== ====== ======
15
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
---------------
(1) ProLogis Logistics has borrowed $125.0 million under ProLogis' $500.0
million unsecured credit agreement as a designated subsidiary borrower. The
proceeds from this borrowing were used to repay $125.0 million of the
outstanding notes and accrued interest due to ProLogis in January 2001. The
remaining amounts due to ProLogis were converted to preferred stock on
January 2, 2001. Additionally, ProLogis Logistics had $90.0 million of
direct borrowings outstanding under a credit agreement as of September 30,
2001 that have been guaranteed by ProLogis.
(2) Frigoscandia AB has a credit agreement under which 171.0 million euros (the
currency equivalent of approximately $156.3 million as of September 30,
2001) is outstanding. All of the borrowings outstanding have been guaranteed
by ProLogis. The agreement expires on December 28, 2001.
DISTRIBUTION REAL ESTATE ENTITIES
ProLogis' total investment in its distribution real estate entities as of
September 30, 2001 consisted of (in millions of U.S. dollars):
PROLOGIS PROLOGIS PROLOGIS PROLOGIS
NORTH NORTH NORTH NORTH PROLOGIS
AMERICAN AMERICAN AMERICAN AMERICAN EUROPEAN
PROLOGIS PROPERTIES PROPERTIES PROPERTIES PROPERTIES PROPERTIES
CALIFORNIA FUND I FUND II FUND III FUND IV(1) FUND(2)
---------- ---------- ---------- ---------- ---------- ----------
Equity interest................. $161.1 $52.6 $14.3 $11.8 $ 8.2 $287.3
Distributions................... (35.5) (4.6) (1.2) (0.4) -- (17.2)
ProLogis' share of the earnings
of the entity, excluding fees
earned........................ 20.0 2.1 0.2 -- -- 12.1
------ ----- ----- ----- ----- ------
Subtotal.............. 145.6 50.1 13.3 11.4 8.2 282.2
Adjustments to carrying
value(3)...................... (28.0) (9.4) (6.4) (5.9) (4.5) (39.5)
Other (including acquisitions
costs), net................... 1.5 2.3 1.3 1.0 0.6 (11.3)
------ ----- ----- ----- ----- ------
Subtotal.............. 119.1 43.0 8.2 6.5 4.3 231.4
Other receivables............... 0.2 1.2 0.4 -- -- 5.5
------ ----- ----- ----- ----- ------
Total................. $119.3 $44.2 $ 8.6 $ 6.5 $ 4.3 $236.9
====== ===== ===== ===== ===== ======
---------------
(1) As of September 30, 2001, ProLogis North American Properties Fund IV had
$103.0 million of short-term borrowings outstanding under an agreement that
matures on December 21, 2001. The agreement provides for a 46-day extension
at ProLogis North American Properties Fund IV's option. ProLogis North
American Properties Fund IV intends to obtain permanent secured financing
which will be used to repay these short-term borrowings. ProLogis has
guaranteed the entire amount of short-term borrowings outstanding as of
September 30, 2001.
(2) Third parties (19 institutional investors) have invested 479.7 million euros
(the currency equivalent of approximately $438.6 million as of September 30,
2001) in ProLogis European Properties Fund and have committed to fund an
additional 580.6 million euros (the currency equivalent of approximately
$530.9 million as of September 30, 2001) through 2002. ProLogis has also
entered into a subscription agreement to make additional capital
contributions of 74.2 million euros (the currency equivalent of
approximately $67.9 million as of September 30, 2001) through 2002.
(3) Reflects the reduction in carrying value for amount of net gain on the
disposition of facilities to each entity that does not qualify for current
income recognition due to ProLogis' continuing ownership in each entity.
16
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
KINGSPARK S.A.
On August 14, 1998, Kingspark S.A., a Luxembourg company, acquired an
industrial distribution facility development company operating in the United
Kingdom, Kingspark Group Holdings Limited ("ProLogis Kingspark"). ProLogis had
the following investments in Kingspark S.A. and Kingspark LLC accounted for
under the equity method as of September 30, 2001:
- Investment in 100% of the non-voting preferred stock of Kingspark S.A.
and in 95% of the membership interests (all non- voting) of Kingspark
LLC, which owns the voting common stock of Kingspark S.A. These combined
investments entitle ProLogis to recognize 99.75% of the combined earnings
of these entities.
- 131.0 million pound sterling (the currency equivalent of approximately
$191.0 million as of September 30, 2001) outstanding on an unsecured
revolving loan facility from ProLogis to Kingspark S.A.; interest at 6.0%
per annum for borrowings outstanding at September 30, 2001; due on
demand;
- $130.9 million unsecured note from Kingspark S.A. ; interest at 5.0% per
annum; due on demand; and
- 85.6 million pound sterling (the currency equivalent of approximately
$125.3 million as of September 30, 2001) mortgage note from Kingspark
S.A.; secured by land parcels and facilities under development; interest
at 6.0% per annum for borrowings outstanding at September 30, 2001; due
on demand.
As of September 30, 2001, Kingspark S.A. had 1.0 million square feet of
operating facilities at an investment of $98.1 million and 3.6 million square
feet of facilities under development with a total budgeted cost of $378.7
million. Additionally, as of September 30, 2001, Kingspark S.A. owned 228 acres
of land and controlled 1,612 acres of land through purchase options, letters of
intent or contingent contracts. The land owned and controlled by Kingspark S.A.
has the capacity for the future development of approximately 26.2 million square
feet of facilities.
ProLogis Kingspark has a line of credit agreement with a bank in the United
Kingdom. The line of credit agreement provides for borrowings of up to 25.0
million pounds sterling (the currency equivalent of approximately $36.6 million
as of September 30, 2001) and has been guaranteed by ProLogis. As of September
30, 2001, no borrowings were outstanding on the line of credit. However, as of
September 30, 2001, ProLogis Kingspark had the currency equivalent of
approximately $6.2 million of letters of credit outstanding that reduce the
amount of available borrowings on the line of credit.
SUMMARIZED FINANCIAL INFORMATION
Summarized financial information for ProLogis' unconsolidated entities as
of and for the nine months ended September 30, 2001 is presented below (in
millions of U.S. dollars). The information presented is for the entire entity.
PROLOGIS PROLOGIS PROLOGIS
NORTH NORTH NORTH
AMERICAN AMERICAN AMERICAN
PROLOGIS FRIGOSCANDIA PROLOGIS PROPERTIES PROPERTIES PROPERTIES
LOGISTICS(1) S.A.(1) CALIFORNIA(2) FUND I(3) FUND II(4) FUND III(4)
------------ ------------ ------------- ---------- ---------- -----------
Total assets............. $379.9 $455.7 $592.0 $357.3 $236.2 $210.1
Total liabilities(7)..... $257.0 $535.0 $301.0 $238.5 $168.6 $152.9
Minority interest........ $ -- $ 0.2 $ -- $ -- $ -- $ --
Equity................... $122.9 $(79.5) $291.0 $118.8 $ 67.6 $ 57.2
Revenues................. $233.4 $274.5 $ 50.6 $ 31.9 $ 14.8 $ 6.5
Net earnings (loss)(8)... $ (3.7) $(27.9) $ 14.7 $ 4.3 $ 1.1 $ 0.2
17
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
PROLOGIS
NORTH PROLOGIS
AMERICAN EUROPEAN
PROPERTIES PROPERTIES KINGSPARK
FUND IV(5) FUND(6) S.A.(1)
---------- ---------- ---------
Total assets................................................ $145.6 $1,183.7 $586.0
Total liabilities(7)........................................ $104.7 $ 521.8 $524.7
Minority interest........................................... $ -- $ -- $ --
Equity...................................................... $ 40.9 $ 661.9 $ 61.3
Revenues.................................................... $ 0.2 $ 62.0 $ 38.4
Net earnings (loss)(8)...................................... $ --(9) $ 9.6 $ 18.9
---------------
(1) ProLogis had an ownership interest in excess of 99% in each entity as of
September 30, 2001.
(2) ProLogis had a 50% ownership interest in this entity as of September 30,
2001.
(3) ProLogis and ProLogis Development Services had a combined 41.3% ownership
interest in this entity as of September 30, 2001.
(4) ProLogis and ProLogis Development Services had a combined 20% ownership
interest in each entity as of September 30, 2001.
(5) ProLogis had a 20% ownership interest in this entity as of September 30,
2001.
(6) ProLogis had a 38.1% ownership interest in this entity as of September 30,
2001. Includes the ProLogis European Properties S.a.r.l. which is wholly
owned by ProLogis European Properties Fund as of September 30, 2001.
(7) Includes amounts due to ProLogis of $10.2 million from ProLogis Logistics,
$256.6 million from Frigoscandia S.A., $0.2 million from ProLogis
California, $1.2 million from ProLogis North American Properties Fund I,
$0.4 million for ProLogis North American Properties Fund II, $5.5 million
from ProLogis European Properties Fund and $470.4 million from Kingspark
S.A. Includes loans due to third parties (including accrued interest) of
$217.7 million for ProLogis Logistics, $156.6 million for Frigoscandia S.A.,
$294.9 million for ProLogis California, $233.6 million for ProLogis North
American Properties Fund I, $165.0 million for ProLogis North American
Properties Fund II, $150.3 million for ProLogis North American Properties
Fund III, $103.0 million for ProLogis North American Properties Fund IV,
$455.2 million for ProLogis European Properties Fund.
(8) ProLogis' share of the net earnings (loss) of the respective entities and
interest income on notes and mortgage notes due to ProLogis are recognized
in the Consolidated Condensed Statements of Earnings and Comprehensive
Income as "Income (loss) from unconsolidated entities." The net earnings
(loss) of each entity includes interest expense on amounts due to ProLogis,
as applicable. Includes net foreign currency exchange losses of $8.0 million
for Frigoscandia S.A., $3.2 million for ProLogis European Properties Fund
and foreign currency exchange losses of $2.4 million from Kingspark S.A.
(9) ProLogis North American Properties Fund IV had a net loss of $6,000 for the
period from inception (September 21, 2001) to September 30, 2001.
5. BORROWINGS:
In August 2001, the available commitment under ProLogis' unsecured credit
agreement with Bank of America, N.A., Commerzbank AG and Chase Bank of Texas,
National Association as Agents for a bank group that provides a revolving line
of credit to ProLogis, was increased by $25.0 million to a total of $500.0
million.
In September 2001, ProLogis entered into an unsecured credit agreement that
provides for a 24.5 billion yen revolving unsecured line of credit (the currency
equivalent of $205.6 million as of September 30, 2001)
18
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
through a group of 11 banks, on whose behalf Sumitomo Mitsui Banking Corporation
acts as agent. Borrowings under the line of credit bear interest at 1.00% over
the Tokyo Interbank Offering Rate (TIBOR). Borrowings outstanding as of
September 30, 2001 were at a weighted average interest rate of 1.06% per annum.
The credit agreement provides for an unused commitment fee of 0.25% per annum.
The credit agreement matures on September 13, 2004 and may be extended for an
additional year at ProLogis' option. As of September 30, 2001, the currency
equivalent of approximately $46.2 million of borrowings were outstanding on the
line of credit and ProLogis was in compliance with all covenants contained in
the agreement.
6. SHAREHOLDERS' EQUITY:
During the nine months ended September 30, 2001, ProLogis generated net
proceeds of $48.6 million from the issuance of 2,116,000 common shares of
beneficial interest, $0.01 par value ("Common Shares") under its 1999 Dividend
Reinvestment and Share Purchase Plan and issued 165,000 Common Shares upon the
exercise of stock options.
On January 11, 2001, ProLogis announced a Common Share repurchase program
under which it may repurchase up to $100.0 million of its Common Shares. The
Common Shares will be repurchased from time to time in the open market and in
privately negotiated transactions, depending on market prices and other
conditions. As of September 30, 2001, 778,400 Common Shares had been repurchased
at a total cost of $16.0 million.
ProLogis redeemed all of its outstanding Series B cumulative convertible
redeemable preferred shares ("Series B preferred shares") as of March 20, 2001.
Subsequent to the call for redemption, 5,908,971 Series B preferred shares were
converted into 7,575,301 Common Shares. The remaining 183,302 Series B preferred
shares outstanding on March 20, 2001 were redeemed at a price of $25.00 per
share, plus $0.442 in accrued and unpaid dividends, for an aggregate redemption
price of $25.442 per share.
ProLogis redeemed all of its outstanding Series A cumulative redeemable
preferred shares of beneficial interest as of May 8, 2001 at the price of $25.00
per share, plus $0.2481 in accrued and unpaid dividends, for an aggregate
redemption price of $25.2481 per share.
In May, 2001, ProLogis' shareholders approved the establishment of the
ProLogis Trust Employee Share Purchase Plan (the "Plan"). Under the terms of the
Plan, employees of ProLogis and its participating subsidiaries may purchase
Common Shares, through payroll deductions only, at a discounted price of 85% of
the fair market value of the Common Shares. Subject to certain provisions, the
aggregate number of Common Shares which may be issued under the Plan may not
exceed 5,000,000. ProLogis expects to begin issuing Common Shares under the Plan
in January, 2002.
7. DISTRIBUTIONS AND DIVIDENDS:
COMMON DISTRIBUTIONS
On February 23, 2001, May 25, 2001 and August 24, 2001, ProLogis paid a
quarterly distribution of $0.345 per Common Share to shareholders of record on
February 9, 2001, May 14, 2001 and August 10, 2001, respectively. The
distribution level for 2001 was set by ProLogis' Board of Trustees in December
2000 at $1.38 per Common Share.
PREFERRED DIVIDENDS
The annual dividend rates on ProLogis' preferred shares are $4.27 per
Series C cumulative redeemable preferred share, $1.98 per Series D cumulative
redeemable preferred share and $2.1875 per Series E cumulative redeemable
preferred share.
19
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
On January 31, 2001, April 30, 2001 and July 31, 2001 ProLogis paid
quarterly dividends of $0.5469 per Series E cumulative redeemable preferred
share. On March 30, 2001, ProLogis paid quarterly dividends of $0.5875 per
Series A cumulative redeemable preferred share. On March 30, 2001, June 29, 2001
and September 28, 2001, ProLogis paid quarterly dividends of $1.0675 per Series
C cumulative redeemable preferred share and $0.495 per Series D cumulative
redeemable preferred share.
Pursuant to the terms of its preferred shares, ProLogis is restricted from
declaring or paying any distribution with respect to the Common Shares unless
all cumulative dividends with respect to the preferred shares have been paid and
sufficient funds have been set aside for dividends that have been declared for
the then-current dividend period with respect to the preferred shares.
8. EARNINGS PER COMMON SHARE:
A reconciliation of the denominator used to calculate basic earnings per
Common Share to the denominator used to calculate diluted earnings per Common
Share for the periods indicated is as follows (in thousands, except per share
amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------
Net earnings attributable to Common
Shares................................... $ 48,911 $ 48,619 $137,470 $113,146
Add: Minority interest share in earnings... -- 1,228 -- --
Series B preferred share dividends... -- -- 81 --
-------- -------- -------- --------
Adjusted net earnings attributable to
Common Shares............................ $ 48,911 $ 49,847 $137,551 $113,146
======== ======== ======== ========
Weighted average Common Shares
outstanding -- Basic..................... 174,507 164,317 171,932 163,206
Incremental weighted average effect of
common share equivalents and contingently
issuable shares.......................... 1,079 1,097 948 1,396
Weighted average convertible limited
partnership units........................ -- 5,164 -- --
Weighted average Series B preferred
shares................................... -- -- 2,065 --
-------- -------- -------- --------
Adjusted weighted average Common Shares
outstanding -- Diluted................... 175,586 170,578 174,945 164,602
======== ======== ======== ========
Per share net earnings attributable to
Common Shares:
Basic.................................... $ 0.28 $ 0.30 $ 0.80 $ 0.69
======== ======== ======== ========
Diluted.................................. $ 0.28 $ 0.29 $ 0.79 $ 0.69
======== ======== ======== ========
20
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
For the periods indicated, the following weighted average convertible
securities were not included in the calculation of diluted per share net
earnings attributable to Common Shares as the effect, on an as-converted basis,
was antidilutive (in thousands):
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
----- ----- ----- -----
Series B preferred shares.............................. -- 8,133 -- 8,546
===== ===== ===== =====
Limited partnership units.............................. 5,088 -- 5,088 5,435
===== ===== ===== =====
9. BUSINESS SEGMENTS:
ProLogis has three reportable business segments:
- Property operations represents the long-term ownership and leasing of
industrial distribution facilities in the United States (portions of
which are owned through ProLogis California, ProLogis North American
Properties Fund I, ProLogis North American Properties Fund II, ProLogis
North American Properties Fund III and ProLogis North American Properties
Fund IV -- See Note 4), Mexico and Europe (portions of which are owned
through ProLogis European Properties Fund and ProLogis European
Properties S.a.r.l. -- See Note 4); 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;
- CDFS business represents the development of industrial distribution
facilities by ProLogis and Kingspark S.A. (which is not consolidated in
Prologis' financial statements) in the United States, Mexico, Europe (see
Note 4) and Japan that are often disposed of to third parties or entities
in which ProLogis has an ownership interest and the development of
industrial distribution facilities by ProLogis or Kingspark S.A. on a fee
basis for third parties in the United States, Mexico, Europe and Japan;
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 the United States (ProLogis
Logistics) and Europe (Frigoscandia S.A.). The operations of these
entities are considered to be one operating segments. See Note 4.
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 before minority interest (ProLogis' chief
operating decision makers rely primarily on net operating income and related
measures to
21
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
make decisions about allocating resources and assessing segment performance);
and (iii) assets to ProLogis' total assets are as follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
Income:
Property operations:
United States(1)....................................... $ 350,349 $ 359,133
Mexico................................................. 14,066 11,217
Europe(2).............................................. 11,726 19,447
--------- ---------
Total property operations segment................. 376,141 389,797
--------- ---------
CDFS business:
United States(3)....................................... 66,965 56,630
Mexico................................................. (10) 1,543
Europe(4)(5)........................................... 50,794 27,952
--------- ---------
Total CDFS business segment....................... 117,749 86,125
--------- ---------
Temperature-controlled distribution operations:
United States(6)....................................... (3,663) 8,067
Europe(7).............................................. (19,377) (10,806)
--------- ---------
Total temperature-controlled distribution
operations segment.............................. (23,040) (2,739)
--------- ---------
Reconciling items:
Income (loss) from unconsolidated entities............. (3,911) 1,279
Interest and other income.............................. 3,444 5,554
--------- ---------
Total reconciling items........................... (467) 6,833
--------- ---------
Total income...................................... $ 470,383 $ 480,016
========= =========
Net operating income:
Property operations:
United States(1)....................................... $ 326,290 $ 337,742
Mexico................................................. 17,272 10,922
Europe(2).............................................. 10,924 20,516
--------- ---------
Total property operations segment................. 354,486 369,180
--------- ---------
CDFS business:
United States(3)....................................... 64,498 53,826
Mexico................................................. (84) 1,514
Europe(4)(5)........................................... 50,671 27,901
--------- ---------
Total CDFS business segment....................... 115,085 83,241
--------- ---------
22
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
Temperature-controlled distribution operations:
United States(6)....................................... (3,663) 8,067
Europe(7).............................................. (19,377) (10,806)
--------- ---------
Total temperature-controlled distribution
operations segment.............................. (23,040) (2,739)
--------- ---------
Reconciling items:
Income (loss) from unconsolidated entities............. (3,911) 1,279
Interest and other income.............................. 3,444 5,554
General and administrative expense..................... (38,153) (32,174)
Depreciation and amortization.......................... (106,403) (112,513)
Interest expense....................................... (123,377) (128,542)
Other expense.......................................... (3) (954)
--------- ---------
Total reconciling items........................... (268,403) (267,350)
--------- ---------
Earnings from operations.......................... $ 178,128 $ 182,332
========= =========
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Assets:
Property operations:
United States(8)....................................... $3,737,656 $3,887,601
Mexico................................................. 130,903 113,538
Europe(8).............................................. 295,599 308,457
---------- ----------
Total property operations segment................. 4,164,158 4,309,596
---------- ----------
CDFS business:
United States.......................................... 222,412 304,697
Mexico................................................. 31,506 26,288
Europe(8).............................................. 676,881 637,207
Japan.................................................. 40,572 --
---------- ----------
Total CDFS business segment....................... 971,371 968,192
---------- ----------
Temperature controlled distribution operations:
United States(8)....................................... 133,539 231,053
Europe(8).............................................. 185,737 191,981
---------- ----------
Total temperature controlled distribution
operations segment.............................. 319,276 423,034
---------- ----------
23
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
Reconciling items:
Investment in and advances to unconsolidated
entities............................................. 60,548 70,807
Cash................................................... 41,119 57,870
Accounts and notes receivable.......................... 6,294 43,040
Other assets........................................... 60,678 73,795
---------- ----------
Total reconciling items........................... 168,639 245,512
---------- ----------
Total assets...................................... $5,623,444 $5,946,334
========== ==========
---------------
(1) In addition to the operations of ProLogis that are reported on a
consolidated basis, includes amounts recognized under the equity method
related to ProLogis' investment in ProLogis California, ProLogis North
American Properties Fund I, ProLogis North American Properties Fund II,
ProLogis North American Properties Fund III and ProLogis North American Fund
IV in 2001 and ProLogis California, ProLogis North American Properties Fund
I and ProLogis North American Properties Fund II in 2000. See Note 4 for
summarized financial information of ProLogis California, ProLogis North
American Properties Fund I, ProLogis North American Properties Fund II,
ProLogis North American Properties Fund III and ProLogis North American
Properties Fund IV.
(2) In addition to the operations of ProLogis that are reported on a
consolidated basis, includes amounts recognized under the equity method
related to ProLogis' investment in ProLogis European Properties Fund
(including net foreign currency exchange losses of $1.3 million and $1.9
million in 2001 and 2000, respectively) and ProLogis European Properties
S.a.r.l. (including net foreign currency exchange gains of $2.0 million in
2000). See Note 4 for summarized financial information of ProLogis European
Properties Fund.
(3) In 2001, includes $20.8 million, $21.6 million and $12.9 million of net
gains recognized by ProLogis related to the disposition of facilities to
ProLogis North American Properties Fund II, ProLogis North American
Properties Fund III and ProLogis North American Properties Fund IV,
respectively. In 2000, includes $2.9 million, $23.8 million and $1.5 million
of net gains recognized by ProLogis related to the disposition of facilities
to ProLogis California, ProLogis North American Properties Fund I and
ProLogis North American Properties Fund II.
(4) Includes amounts recognized under the equity method related to ProLogis'
investment in Kingspark S.A. in 2001 and 2000 (including $2.3 million of net
foreign currency exchange losses and $1.0 million of net foreign currency
exchange gains in 2001 and 2000, respectively).
(5) Includes $18.0 million and $5.9 million of net gains recognized by ProLogis
related to the disposition of facilities to ProLogis European Properties
Fund in 2001 and 2000, respectively. In addition, includes $15.3 million and
$1.0 million of net gains recognized under the equity method related to the
disposition of facilities to ProLogis European Properties Fund by Kingspark
S.A. in 2001 and 2000, respectively.
(6) Represents amounts recognized under the equity method related to ProLogis'
investments in ProLogis Logistics in 2001 and 2000 and in CSI/Frigo LLC in
2001. CSI/Frigo LLC recognizes income under the equity method based on its
common stock investment in ProLogis Logistics. See Note 4 for summarized
financial information of ProLogis Logistics.
(7) Represents amounts recognized under the equity method related to ProLogis'
investments in Frigoscandia S.A. in 2001 and 2000 (including $7.9 million of
net foreign currency exchange losses in 2001 and $1.1 million of net foreign
exchange gains in 2000) and CSI/Frigo LLC in 2001. CSI/Frigo LLC recognizes
income under the equity method based on its common stock investment in
Frigoscandia S.A. See Note 4 for summarized financial information of
Frigoscandia S.A.
24
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
(8) Amounts include investments in unconsolidated entities accounted for under
the equity method. See also Note 4 for summarized financial information of
these unconsolidated entities as of and for the nine months ended September
30, 2001.
10. SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities for the nine months ended
September 30, 2001, and 2000 are as follows:
- In 2001, ProLogis contributed its 49.9% of the common stock of ProLogis
European Properties S.a.r.l. to ProLogis European Properties Fund for an
additional equity interest in ProLogis European Properties Fund of $83.0
million. In 2000, in connection with ProLogis' initial contribution of
50.1% of the common stock of ProLogis European Properties S.a.r.l. to
ProLogis European Properties Fund, ProLogis received an equity interest
in ProLogis European Properties Fund of approximately $78.0 million.
ProLogis European Properties S.a.r.l. had total assets of $403.9 million
and total liabilities of $248.1 million. ProLogis recognized its
investment in the remaining 49.9% of the common stock under the equity
method from January 7, 2000 through January 6, 2001. See Note 4.
- ProLogis received $12.4 million, $34.1 million, $13.7 million, $11.7
million and $8.2 million of the proceeds from its disposition of
facilities to ProLogis European Properties Fund, ProLogis North American
Properties Fund I, ProLogis North American Properties Fund II, ProLogis
North American Properties Fund III and ProLogis North American Properties
Fund IV, respectively, in the form of an equity interest in these
entities during 2001. ProLogis received $5.2 million, $13.8 million,
$18.6 million and $0.6 million of the proceeds from its disposition of
facilities to ProLogis European Properties Fund, ProLogis California,
ProLogis North American Properties Fund I and ProLogis North American
Properties Fund II in the form of an equity interest during 2000.
- ProLogis received $13.2 million of the proceeds from its disposition of
facilities to North American Properties Fund II in the form of notes
receivable from this entity during 2000.
- ProLogis received $2.3 million and $7.4 million of the proceeds from its
disposition of facilities to third parties in the form of notes
receivable in 2001 and 2000, respectively.
- In connection with the acquisition of a facility, ProLogis assumed a $7.7
million mortgage note in 2001.
- In connection with the agreement for the acquisition of Kingspark S.A.,
ProLogis issued approximately 67,000 and 602,000 Common Shares valued at
$1.5 million and $11.9 million, respectively, in 2001 and 2000,
respectively.
- Series B preferred shares aggregating $151.8 million and $17.7 million
were converted into Common Shares in 2001 and 2000, respectively.
- Net foreign currency translation adjustments of $(19,430,000) and
$(49,613,000) were recognized in 2001 and 2000, respectively.
11. RELATED PARTY TRANSACTIONS:
TRANSACTIONS WITH CHIEF EXECUTIVE OFFICER AND CHAIRMAN
ProLogis has invested in the non-voting 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
Internal Revenue Code of 1986, as amended (the "Code"). Therefore, the voting
common stock of these companies was held by third parties including entities in
which Security Capital, ProLogis' largest shareholder, held non-voting
interests. The Code, as amended in 2001, allows for ProLogis to have a voting
ownership interest in these entities. ProLogis began negotiations to acquire the
voting ownership
25
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
interests in these entities during 2000. Before the acquisitions were completed
it was determined that the state income tax laws governing REITs were not all
going to be changed to coincide with the amendments to the Code. Therefore, K.
Dane Brooksher, ProLogis' chairman and chief executive officer, acquired the
voting ownership interests in Frigoscandia S.A., ProLogis Logistics and
Kingspark S.A. from the third parties and Security Capital. See Note 4.
Mr. Brooksher's voting ownership interests in the entities in which
ProLogis has only non-voting ownership interests are:
- Kingspark LLC, a limited liability company formed on January 5, 2001,
acquired the voting common stock of Kingspark S.A. (an entity in which
ProLogis owns all of the non-voting preferred stock) for $8.1 million.
ProLogis funded the entire purchase price either directly or through
loans to Kingspark LLC or Mr. Brooksher. The ProLogis loan to Kingspark
LLC is in the principal amount of $7.3 million, is due January 5, 2006
and bears interest at an annual rate of 8.0%. ProLogis made a direct
capital contribution to Kingspark LLC in the amount of $770,973. Mr.
Brooksher's $40,557 capital contribution to Kingspark LLC was loaned to
him by ProLogis, which recourse loan is payable on January 5, 2006 and
bears interest at an annual rate of 8.0%. Mr. Brooksher's membership
interest entitles him to receive dividends equal to 5% of the net cash
flow of Kingspark LLC, as defined, if any. Mr. Brooksher is the managing
member and he may transfer his membership interest, subject to certain
conditions, including the approval of ProLogis. There are no provisions
that give ProLogis the right to acquire Mr. Brooksher's membership
interests. Mr. Brooksher does not receive compensation in connection with
being the managing member. See Note 4.
- CSI/Frigo LLC, a limited liability company formed on January 5, 2001,
acquired the voting common stock of Frigoscandia S.A. and ProLogis
Logistics (both entities in which ProLogis owns all of the non-voting
preferred stock) for $3.3 million. ProLogis loaned $2.9 million to
CSI/Frigo LLC, which loan is due January 5, 2011 and bears interest at an
annual rate of 8.0%. ProLogis also made a capital contribution to
CSI/Frigo LLC in the amount of $404,545 and Mr. Brooksher made a $50,000
capital contribution to CSI/Frigo LLC. Mr. Brooksher's membership
interests (after considering the terms of the participating note from
CSI/Frigo LLC to ProLogis) entitles him to receive dividends equal to 5%
of the net cash flow of CSI/Frigo LLC, as defined, if any. Mr. Brooksher
is the managing member and he may transfer his membership interest,
subject to certain conditions, including the approval of ProLogis. There
are no provisions that give ProLogis the right to acquire Mr. Brooksher's
membership interest. Mr. Brooksher does not receive compensation in
connection with being the managing member.
As a result of the foregoing transactions, Mr. Brooksher has an effective
0.04% interest in the earnings of ProLogis Logistics, an effective 0.25%
interest in the earnings of Frigoscandia S.A. and an effective 0.25%
interest in the earnings of Kingspark S.A.
In 2000, ProLogis invested in GoProLogis and ProLogis PhatPipe, whose
income is not REIT qualifying income under the Code (amendments to the Code and
state income tax laws governing REITs were not in effect at this time). These
investments were structured whereby ProLogis would have only a non-voting
preferred stock ownership interest. To complete the transactions, Mr. Brooksher
acquired the voting ownership interest in each entity as noted below.
- GoProLogis owns preferred stock in Vizional Technologies. Mr. Brooksher
owns all of the voting common stock of GoProLogis, representing a 2%
interest in the earnings of GoProLogis and he is entitled to receive
dividends equal to 2% of the net cash flow of GoProLogis, as defined, if
any. ProLogis owns all of the non-voting preferred stock of GoProLogis,
representing a 98% interest in the earnings of GoProLogis and ProLogis is
entitled to receive dividends equal to the remaining 98% of net cash
flow, as defined, if any. Mr. Brooksher contributed a $1.1 million
recourse promissory note to
26
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
GoProLogis in exchange for his interest in the entity, which note is
payable on July 18, 2005 and bears interest at an annual rate of 8.0%.
Mr. Brooksher is not restricted from transferring his ownership interest
in GoProLogis and ProLogis has the right to acquire Mr. Brooksher's
ownership interest beginning in 2001 for a price equal to the outstanding
principal amount of the promissory note plus accrued and unpaid interest.
See Note 4.
- ProLogis PhatPipe owns preferred stock in PhatPipe. Mr. Brooksher owns
all of the voting common stock of ProLogis PhatPipe, representing a 2%
interest in the earnings of ProLogis PhatPipe and he is entitled to
receive dividends equal to 2% of the net cash flow of GoProLogis, as
defined, if any. ProLogis owns all of the non-voting preferred stock of
ProLogis PhatPipe, representing a 98% interest in the earnings of
ProLogis PhatPipe and ProLogis is entitled to receive dividends equal to
the remaining 98% of net cash flow, as defined, if any. Mr. Brooksher
contributed recourse promissory notes with the aggregate principal amount
of $122,449 to ProLogis PhatPipe in exchange for his interest in the
entity, which note is payable on September 20, 2005 ($71,429 principal
amount) and January 4, 2006 ($51,020 principal amount). Both notes bear
interest at an annual rate of 8.0%. Mr. Brooksher is not restricted from
transferring his ownership interest in ProLogis PhatPipe and ProLogis has
the right to acquire Mr. Brooksher's ownership interest beginning in 2001
for a price equal to the outstanding aggregate principal amount of the
promissory notes plus accrued and unpaid interest. See Note 4.
As of September 30, 2001, ProLogis had other loans outstanding from Mr.
Brooksher with an aggregate principal amount of $2,096,000. Of these, $1,858,000
was loaned to Mr. Brooksher under ProLogis' employee share purchase plan.
12. 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.
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees and Shareholders of ProLogis Trust:
We have reviewed the accompanying consolidated condensed balance sheets of
ProLogis Trust and subsidiaries as of September 30, 2001, and the related
consolidated condensed statements of earnings and comprehensive income for the
three and nine months ended September 30, 2001 and 2000 and the consolidated
condensed statements of cash flows for the nine months ended September 30, 2001
and 2000. These financial statements are the responsibility of the Trust's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of ProLogis Trust
and subsidiaries as of December 31, 2000, and in our report dated March 15,
2001, we expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 2000, is fairly stated in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Chicago, Illinois
November 9, 2001
(except with respect to
Note 2 as to which the
date is April 3, 2002)
28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with ProLogis'
Consolidated Condensed Financial Statements and the notes thereto included in
Item 1 of this report. See also ProLogis' 2000 Annual Report on Form 10-K, as
amended.
The statements contained in this discussion that are not historical facts
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements are based on current
expectations, estimates and projections about the industry and markets in which
ProLogis operates, management's beliefs, and assumptions made by management.
Words such as "expects", "anticipates", "intends", "plans", "believes", "seeks",
"estimates", variations of such words and similar expressions are intended to
identify such forward-looking statements. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. Factors which may affect outcomes and results include: (i) changes
in general economic conditions in ProLogis' markets that could adversely affect
demand for ProLogis' facilities and the creditworthiness of ProLogis' customers;
(ii) changes in financial markets, interest rates and foreign currency exchange
rates that could adversely affect ProLogis' cost of capital and its ability to
meet its financial needs and obligations; (iii) increased or unanticipated
competition for distribution facilities in ProLogis' target market cities; and
(iv) those factors discussed in ProLogis' 2000 Annual Report on Form 10-K, as
amended.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
ProLogis' net earnings attributable to Common Shares were $137.5 million
for the nine months ended September 30, 2001 as compared to $113.1 million for
the same period in 2000. For the nine months ended September 30, 2001, basic and
diluted per share net earnings attributable to Common Shares were $0.80 and
$0.79 per share, respectively. Basic and diluted per share net earnings
attributable to Common Shares were $0.69 per share for the same period in 2000.
The CDFS business segment provides capital for ProLogis to redeploy into
its development activities in addition to generating profits that contribute to
ProLogis' total income. ProLogis' net operating income from this segment
increased by $31.8 million in 2001 over 2000, primarily the result of the number
of dispositions of facilities developed by ProLogis to entities in which
ProLogis maintains an ownership interest, such as ProLogis North American
Properties Fund II, ProLogis North American Properties Fund III, ProLogis North
American Properties Fund IV and ProLogis European Properties Fund, as well as to
third parties. ProLogis' property operations segment net operating income was
$354.5 million for 2001 and $369.2 million for 2000, a decrease of $14.7
million. This operating segment's net income includes rental income and net
rental expenses from facilities directly owned by ProLogis and also its share of
the income of its unconsolidated entities that engage in property operations
segment activities. Losses from ProLogis' temperature-controlled distribution
operations in 2001 increased from 2000 by $20.3 million. See "--Property
Operations", "-- CDFS Business" and "-- Temperature-Controlled Distribution
Operations".
29
PROPERTY OPERATIONS
ProLogis owned or had ownership interests in the following operating
facilities as of the dates indicated (square footage in thousands):
SEPTEMBER 30,
-----------------------------------
2001 2000
---------------- ----------------
SQUARE SQUARE
NUMBER FOOTAGE NUMBER FOOTAGE
------ ------- ------ -------
Direct ownership(1).............................. 1,207 121,716 1,234 123,977
ProLogis California(2)........................... 79 13,052 77 12,395
ProLogis North American Properties Fund
I(1)(3)........................................ 36 8,963 33 8,024
ProLogis North American Properties Fund
II(1)(4)....................................... 27 4,477 3 440
ProLogis North American Properties Fund
III(1)(5)...................................... 34 4,380 -- --
ProLogis North American Properties Fund
IV(1)(6)....................................... 17 3,475 -- --
ProLogis European Properties Fund and ProLogis
European Properties S.a.r.l.(7)................ 123 19,236 94 12,494
----- ------- ----- -------
1,523 175,299 1,441 157,330
===== ======= ===== =======
---------------
(1) Includes operating facilities owned by ProLogis and its consolidated
entities. The decrease in 2001 from 2000 is primarily the result of the
formation of certain of ProLogis' distribution real estate entities
beginning in June 2000 whose entire portfolios consist of operating
facilities that were previously directly owned by or developed by ProLogis.
(2) ProLogis has had a 50% ownership interest in ProLogis California since its
inception. See Note 4 to ProLogis' Consolidated Condensed Financial
Statements in Item 1.
(3) ProLogis had a 41.3% ownership interest in ProLogis North American
Properties Fund I as of September 30, 2001. This entity was formed on June
30, 2000. The three operating facilities acquired by this entity in 2001
were previously directly owned by ProLogis. See Note 4 to ProLogis'
Consolidated Condensed Financial Statements in Item 1.
(4) ProLogis had a 20% ownership interest in ProLogis North American Properties
Fund II as of September 30, 2001. This entity was originally formed on June
30, 2000. The 24 operating facilities acquired by this entity in 2001 were
previously directly owned by ProLogis. See Note 4 to ProLogis' Consolidated
Condensed Financial Statements in Item 1.
(5) ProLogis had a 20% ownership interest in ProLogis North American Properties
Fund III as of September 30, 2001. This entity was formed in June 2001 with
the acquisition of 34 operating facilities from ProLogis. See Note 4 to
ProLogis' Consolidated Condensed Financial Statements in Item 1.
(6) ProLogis had a 20% ownership interest in ProLogis North American Properties
Fund IV as of September 30, 2001. This entity was formed in September 2001
with the acquisition of 17 operating facilities from ProLogis. See Note 4 to
ProLogis' consolidated condensed financial statements in Item 1.
(7) As of September 30, 2001, ProLogis' ownership interest in ProLogis European
Properties Fund was 38.1%. As of September 30, 2000, ProLogis had a 37.5%
ownership interest in the ProLogis European Properties Fund. Includes
facilities owned by ProLogis European Properties S.a.r.l. in which ProLogis
had a direct 49.9% ownership interest as of September 30, 2000, which is now
owned directly by ProLogis European Properties Fund. See Note 4 to ProLogis'
Consolidated Condensed Financial Statements in Item 1.
ProLogis' property operations segment income consists of the: (i) net
operating income from the operating facilities that are owned by ProLogis
directly or through its consolidated entities, and (ii) the income recognized by
ProLogis under the equity method from its investments in unconsolidated entities
engaged in property operations. See Note 9 to ProLogis' Consolidated Condensed
Financial Statements in Item 1. The amounts recognized under the equity method
are based on the net earnings of each
30
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 European Properties Fund and ProLogis European Properties S.a.r.l.).
ProLogis' net operating income from the property operations segment was as
follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
Facilities directly owned by ProLogis and its consolidated
entities:
Rental income(1).......................................... $352,338 $362,024
Property operating expenses(2)............................ 21,655 20,617
-------- --------
Net operating income.............................. 330,683 341,407
-------- --------
Income from ProLogis California............................. 10,186 9,597
Income from ProLogis North American Properties Fund I(3).... 3,561 1,233
Income from ProLogis North American Properties Fund II(3)... 1,634 308
Income from ProLogis North American Properties Fund
III(4).................................................... 582 --
Income from ProLogis North American Properties Fund IV(5)... (12) --
Income from ProLogis European Properties Fund(6)............ 7,816 8,949
Income from ProLogis European Properties S.a.r.l.(6)........ 36 7,686
-------- --------
Total property operations segment................. $354,486 $369,180
======== ========
---------------
(1) The decrease in rental income between the periods presented is due to the
changes in the number and composition of the directly owned facilities in
each year and to lower average occupancy levels of the directly owned
facilities in 2001 as compared to 2000.
(2) The increase in property operating expenses is a function of: (i) an
increase in bad debt expense (bad debt expense was $2.4 million for 2001 and
$1.1 million for 2000); (ii) an overall increase in operating costs (rental
expenses, excluding bad debt and before recoveries from tenants, were 26.0%
of rental income in 2001 as compared to 24.2% of rental income for 2000);
offset by (iii) changes in the number of directly owned facilities in 2001
as compared to 2000. The increase in bad debt expense and operating costs is
primarily due to general economic conditions in North America.
(3) ProLogis North American Properties Fund I and ProLogis North American
Properties Fund II began operations on June 30, 2000.
(4) ProLogis North American Properties Fund III began operations on June 15,
2001.
(5) ProLogis North American Properties Fund IV began operations on September 21,
2001.
(6) In 2001, ProLogis' share of the income of ProLogis European Properties Fund
includes net foreign currency losses of $1.3 million. In 2000, ProLogis'
share of the income of ProLogis European Properties Fund and ProLogis
European Properties S.a.r.l. includes net foreign currency gains of $1.9
million and $2.0 million, respectively. Excluding net foreign currency
exchange gains and losses, ProLogis' share of the income of ProLogis
European Properties Fund would have been $9.3 million and $7.0 million for
2001 and 2000, respectively. Excluding net foreign currency exchange gains
and losses, ProLogis' share of the income of ProLogis European Properties
S.a.r.l. would have been $5.7 million for 2000. The decrease in ProLogis'
combined share of the income of ProLogis European Properties Fund and
ProLogis European Properties S.a.r.l. in 2001 from 2000 is due to: (i)
higher effective interest costs in 2001; (ii) changes in ProLogis' ownership
interests between periods; and (iii) the effects of a decrease in the
foreign currency exchange rates at which the income of these entities is
translated to U.S. dollars. ProLogis recognized income under the equity
method related to ProLogis European Properties S.a.r.l. in 2001 for only six
days. See Note 4 to ProLogis' Consolidated Condensed Financial Statements in
Item 1.
Pre-stable facilities are generally newly developed or acquired facilities
that are usually underleased at the time they are completed or acquired.
ProLogis, utilizing its ProLogis Operating System(R), has been successful
31
in increasing occupancies on such facilities during their initial months of
operation. ProLogis' stabilized operating facilities (facilities owned by
ProLogis and its consolidated and unconsolidated entities) were 93.3% occupied
and 94.3% leased as of September 30, 2001. ProLogis' stabilized occupancy levels
have decreased during the first nine months of 2001 (95.4% occupied and 96.2%
leased as of December 31, 2000).
ProLogis believes that occupancies may continue to decline over the next
several quarters. However, ProLogis believes that the decrease in its stabilized
occupancy levels in 2001 is the result of the current economic conditions in
North America which have led to a slowing in customer leasing decisions and in
the absorption of new facilities in the market. However, ProLogis believes that
its global operating platform and the ProLogis Operating System(R) will
partially mitigate these occupancy decreases, as they have allowed ProLogis to
build strong local market presence and strong customer relationships across many
global markets. In Europe, leasing activity has remained constant throughout
2001, with 2.0 million and 6.0 million square feet of leases signed in the three
and nine month periods, respectively. ProLogis believes the leasing activity in
Europe is currently affected more by a shift in distribution patterns of its
customers and the need to reduce distribution costs, rather than by the effects
of general economic conditions.
The average increase in rental rates for both new and renewed leases on
previously leased space (28.7 million square feet) for all facilities including
those owned by ProLogis' consolidated and unconsolidated entities during 2001
was 17.9% (up from 15.5% for all of 2000). During the nine months ended
September 30, 2001, the net operating income (rental income less net rental
expenses) generated by ProLogis' "same store" portfolio of operating facilities
(facilities owned by ProLogis and its consolidated and unconsolidated entities
that were in operation throughout both nine month periods in 2001 and 2000)
increased by 2.0% over the same period in 2000 (as compared to an increase of
6.57% during the nine months ended September 30, 2000 as compared to the same
period in 1999). The decrease in the growth in same store net operating income
is due to increased bad debt expense in 2001 and to lower occupancy levels in
the same store portfolio in 2001 as compared to 2000. During the three months
ended September 30, 2001, the same store net operating income increased by 0.7%
over the same period in 2000 (as compared to an increase of 6.02% during the
three months ended September 30, 2000 as compared to the same period in 1999).
Although the average increase in rental rates for new and renewed leases was
18.1% for ProLogis' same store operating portfolio in 2001, only 18.2 million
square feet (of a total of 144.7 million square feet) were signed during the
nine months of 2001. Therefore, the rental rate growth did not have a
significant effect on same store net operating income.
CDFS BUSINESS
Net operating income from ProLogis' CDFS business segment consists
primarily of: (i) profits from the disposition of land parcels and facilities
that were developed by ProLogis and disposed of to customers or to entities in
which ProLogis has an ownership interest; (ii) development fees earned by
ProLogis; and (iii) income recognized under the equity method from ProLogis'
investment in Kingspark S.A. Kingspark S.A. engages in CDFS business activities
in the United Kingdom similar to those activities performed directly by ProLogis
in other locations. ProLogis recognizes 99.75% of the net earnings of Kingspark
S.A. under the equity method that includes: interest income and interest expense
(net of capitalized amounts), general and administrative expense (net of
capitalized amounts), income taxes and foreign currency exchange gains and
losses.
32
The CDFS business segment income increased for the nine months in 2001 over
the same period in 2000, due to an increase in sales volume. The CDFS business
segment's net operating income is comprised of the following (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
2001 2000
-------- -------
Net gains on disposition of land parcels and facilities
developed(1).............................................. $ 81,245 $60,615
Development fees and other, net............................. 2,499 2,842
Income from Kingspark S.A.(2)(3)............................ 30,704 20,411
Miscellaneous income........................................ 3,301 2,257
Other expenses(4)........................................... (2,664) (2,884)
-------- -------
$115,085 $83,241
======== =======
---------------
(1) Represents gains from the disposition of land parcels and facilities
developed as follows:
- 2001: 152 acres; 12.1 million square feet; $590.0 million of proceeds,
and
- 2000: 188 acres; 9.5 million square feet; $429.6 million of proceeds.
(2) Kingspark S.A.'s income in 2001 includes:
- Gains from the disposition of land parcels and facilities developed (2.4
acres; 2.1 million square feet; $203.3 million of proceeds; net gains of
$21.4 million);
- Development fees and other miscellaneous net income of $7.6 million;
- Deferred and current income tax expense of $50,000; and
- Foreign currency exchange losses of $2.3 million.
(3) Kingspark S.A.'s income in 2000 includes:
- Gains from the disposition of land parcels and facilities developed (11
acres; 0.7 million square feet; $91.8 million of proceeds; net gains of
$13.2 million);
- Development fees and other miscellaneous net income of $5.2 million;
- Deferred and current income tax expense of $2.6 million; and
- Foreign currency exchange gains of $1.0 million.
(4) Includes land holding costs of $1.7 million in 2001 and $1.5 million in 2000
and the write-off of previously capitalized pursuit costs related to
potential CDFS business segment projects of $1.0 million in 2001 and $1.4
million in 2000.
TEMPERATURE-CONTROLLED DISTRIBUTION OPERATIONS
ProLogis recognizes net operating income from the temperature-controlled
distribution operations segment of its business under the equity method.
ProLogis' share of the total income or loss of CSI/Frigo LLC, ProLogis Logistics
and Frigoscandia S.A. was as follows (in thousands) (see Notes 4 and 8 to
ProLogis' Consolidated Condensed Financial Statements in Item 1):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
Loss from CSI/Frigo LLC..................................... $ (1,343) $ --
Income (loss) from ProLogis Logistics....................... (3,636) 8,067
Loss from Frigoscandia S.A.................................. (18,061) (10,806)
-------- --------
Total temperature-controlled distribution operations
segment................................................... $(23,040) $ (2,739)
======== ========
Amounts recognized under the equity method from CSI/Frigo LLC include
ProLogis' share of this entity's share of the income or loss of ProLogis
Logistics and Frigoscandia S.A. Amounts recognized under the equity method for
ProLogis Logistics and Frigoscandia S.A. include interest income and interest
expense, depreciation and amortization expense, general and administrative
expense, income taxes and foreign currency
33
exchange gains and losses (with respect to Frigoscandia). ProLogis recognizes in
excess of 99% the net earnings of each entity in 2001 as compared to 95% in
2000.
CSI's operating capacity was comparable in both nine-month periods. The
decrease in ProLogis' share of ProLogis Logistics' net earnings from 2000 to
2001 of $11.7 million is attributable to: (i) higher interest expense as a
result of increasing external debt of this entity by $125.0 million and using
the proceeds to repay debt to ProLogis, and (ii) a decrease in operating income
as a result of lower occupancy levels in certain markets in 2001.
Frigoscandia's operating capacity was 171.5 million cubic feet as of
September 30, 2001 and 192.1 million cubic feet as of September 30, 2000. The
decrease reflects the disposition of the directly owned facilities in Germany
and the Czech Republic in May 2001 and September 2001, respectively. ProLogis'
share of Frigoscandia S.A.'s net losses includes net foreign currency exchange
losses of $7.9 million and net foreign currency exchange gains of $1.1 million
in 2001 and 2000, respectively. Excluding these foreign currency exchange gains
and losses, ProLogis recognized $1.7 million more income under the equity method
in 2001 than it recognized in 2000 from its investment in Frigoscandia S.A. The
increase in Frigoscandia S.A.'s net income in 2001 from the loss recognized in
2000 is primarily attributable to lower general and administrative expense in
2001 as compared to 2000, offset by a net loss recognized on the disposal of
Frigoscandia's directly owned facilities located in Germany and the Czech
Republic of approximately $3.9 million. The disposition of these facilities was
completed as the mix of facilities and customers no longer met ProLogis'
strategic objective in this business segment, which is to concentrate on the
distribution and logistics part of the supply chain rather than on storage.
ProLogis is continuing to evaluate its temperature-controlled distribution
operations in light of this strategic objective.
ProLogis believes that the factors that contributed to the decline in
operating performance of CSI and Frigoscandia are temporary and can be partially
mitigated in the short-term by reductions in general and administrative costs
and other operating costs. However, there is no assurance that these factors are
temporary or that some or all of these factors will not continue past 2001.
OTHER INCOME AND EXPENSE ITEMS
INCOME (LOSS) FROM UNCONSOLIDATED ENTITIES
Income (loss) from unconsolidated entities that is not directly
attributable to any of ProLogis' three business segments was a loss of $3.9
million for the nine months ended September 30, 2001. See Note 9 to ProLogis'
Consolidated Condensed Financial Statements in Item 1. This amount is made up of
the following:
- ProLogis PhatPipe: a loss of $6.8 million ($0.7 million of income
recognized in the first quarter and a loss of $7.5 million recognized in
the second quarter); the loss represents ProLogis' share of ProLogis
PhatPipe's impairment adjustment from the write-down of its preferred
stock investment in PhatPipe, offset by $0.7 million of license fee
income recognized under an agreement for the non-exclusive use of the
ProLogis Operating System(TM); no additional license fee income will be
recognized by ProLogis PhatPipe;
- GoProLogis: income of $3.0 million represents ProLogis' share of
GoProLogis' income, primarily license fee income recognized under an
agreement for the non-exclusive use of the ProLogis Operating System(TM)
($1.5 million of income recognized in each of the first and second
quarters); GoProLogis recognized license fee income from Vizional
Technologies only for the first six months of 2001, as GoProLogis is
monitoring this investment in light of the current economy's effects on
the technology industry and Vizional Technologies business plan;
- ProLogis Equipment Services: a loss of $155,000 (all recognized in the
second quarter); and
- Insight: a loss of $10,000 (all recognized in the first quarter).
34
INTEREST EXPENSE
Interest expense is a function of the level of borrowings outstanding and
interest rates charged on borrowings, offset by interest capitalization with
respect to development activities. Interest expense was $123.4 million in 2001
and $128.5 million in 2000. Capitalized interest was $18.4 million in 2001 and
$12.8 million in 2000. Capitalized interest levels are reflective of ProLogis'
cost of funds and the level of development activity in each year.
GAIN ON DISPOSITION OF REAL ESTATE
Gain on disposition of real estate represents the net gains or losses from
the disposition of operating facilities that were acquired or developed within
the property operations segment. Generally, ProLogis disposes of facilities in
the property operations segment because such facilities are considered to be
non-strategic facilities or to complement the portfolio of developed facilities
that are acquired by entities in which ProLogis maintains an ownership interest.
Non-strategic facilities are assets located in markets or submarkets that are no
longer considered target markets as well as assets that were acquired as part of
previous portfolio acquisitions that are not consistent with ProLogis' core
portfolio based on the asset's size or configuration.
Property operations segment dispositions were as follows:
- 2001: 4.7 million square feet; $180.9 million of proceeds; net gain of
$0.4 million (a net loss of $1.7 million was recognized in the first
quarter, a net loss of $1.4 million was recognized in the second quarter
and a net gain of $3.5 million was recognized in the third quarter); and
a net gain of $0.5 million recognized upon the contribution of ProLogis'
49.9% investment in the common stock of ProLogis European Properties
S.a.r.l. to ProLogis European Properties Fund in January 2001; and
- 2000: 3.5 million square feet; $133.7 million of proceeds; net gains of
$1.0 million (a net gain of $5.1 million was recognized in the first
quarter, a net loss of $4.8 million was recognized in the second quarter
and a net gain of $0.7 million was recognized in the third quarter).
FOREIGN CURRENCY EXCHANGE LOSSES
ProLogis recognized net foreign currency exchange losses of $2.2 million
and $20.4 million for 2001 and 2000, respectively. Foreign currency exchange
gains and losses are primarily the result of the remeasurement and settlement of
intercompany debt and the remeasurement of third party debt of ProLogis' foreign
subsidiaries. Fluctuations in the foreign currency exchange gains and losses
recognized in each period are a product of movements in certain foreign currency
exchange rates, primarily the euro and the pound sterling and the level of
intercompany and third party debt outstanding that is denominated in currencies
other than the U.S. dollar.
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 qualified
REIT subsidiary for tax purposes. 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.
Current income tax expense recognized in 2001 and 2000 was $2.3 million and
$1.1 million, respectively. Current income tax expense is higher in 2001
primarily due to the increased level of income recognized by ProLogis' taxable
subsidiaries in the CDFS business segment. Deferred income tax expense was $3.5
million and $1.7 million in 2001 and 2000, respectively. ProLogis' deferred tax
component of total income taxes is a function of each year's temporary
differences (items that are treated differently for tax purposes than for book
purposes) as well as the need for a deferred tax valuation allowance to adjust
certain deferred tax assets (primarily deferred tax assets created by tax net
operating losses) to their estimated realizable value.
35
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
The changes in net earnings attributable to Common Shares and its
components for the three months ended September 30, 2001 compared to the three
months ended September 30, 2000 are similar to the changes for the nine month
periods ended on the same dates and the three-month period changes are
attributable to the same reasons discussed under "-- Nine Months Ended September
20, 2001 and 2000" except as specifically discussed under "-- Property
Operations", "Income (Loss) from Unconsolidated Entities", "-- Gain on
Disposition of Real Estate".
ENVIRONMENTAL MATTERS
ProLogis has not experienced any environmental condition on its facilities,
which materially adversely affected its results of operations or financial
position nor is ProLogis aware of any environmental liability that ProLogis
believes would have a material adverse effect on its business, financial
condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW
ProLogis considers its liquidity and ability to generate cash from
operations as well as its financing capabilities (including proceeds from the
disposition of facilities) to be adequate and ProLogis expects to be able to
continue to meet its anticipated development, acquisition, operating and debt
service needs as well as its shareholder distribution requirements.
ProLogis' future investing activities are expected to consist of: (i)
acquisitions of existing facilities in key distribution markets in the property
operations segment and (ii) the acquisition of land for future development and
the development of distribution facilities in the CDFS business segment for
future disposition to entities in which ProLogis maintains an ownership interest
or to third parties. ProLogis' future investing activities are expected to be
primarily funded with:
- cash generated by operations;
- the proceeds from the disposition of facilities developed by ProLogis to
third parties;
- the proceeds from the disposition of facilities to entities in which
ProLogis maintains an ownership interest, such as ProLogis European
Properties Fund or other real estate distribution entities that may be
formed in the future; and
- utilization of ProLogis' U.S. dollar denominated and multi-currency
revolving credit facilities.
In the short-term, borrowings on and subsequent repayments of ProLogis'
unsecured revolving credit facilities will provide ProLogis with adequate
liquidity and financial flexibility to efficiently respond to market
opportunities. As of November 9, 2001, on a combined basis, ProLogis had
approximately $320.4 million of short-term borrowings outstanding resulting in
additional short-term borrowing capacity available of $609.0 million. ProLogis
will continue to evaluate the public debt markets with the objective of reducing
its short-term borrowings and extending debt maturities on favorable terms.
CASH OPERATING ACTIVITIES
Net cash provided by operating activities for the nine months ended
September 30, 2001 and 2000 was $283.5 million and $286.4 million, respectively.
See "-- Results of Operations -- Property Operations". Cash provided by
operating activities exceeded the cash distributions paid on Common Shares in
2001 and 2000. See ProLogis's Consolidated Condensed Statements of Cash Flows in
Item 1.
CASH INVESTING AND CASH FINANCING ACTIVITIES
In 2001, ProLogis' investing activities provided net cash of $216.6 million
and financing activities used net cash of $516.8 million. Proceeds received from
the dispositions of real estate and the repayments of loans
36
by and distributions received from ProLogis' unconsolidated entities were used
to fund real estate investments and repay borrowings on ProLogis' lines of
credit. In 2000, ProLogis used net cash of $153.4 million in its investing
activities and $58.5 million in its financing activities. Investing activities
in 2000 were primarily funded by lines of credit borrowings and proceeds from
dispositions of real estate. See ProLogis' Consolidated Condensed Statements of
Cash Flows in Item 1.
ProLogis Logistics and ProLogis Development Services may also borrow under
the $500.0 million credit agreement, with such borrowings guaranteed by
ProLogis. As of September 30, 2001, ProLogis Logistics, an unconsolidated
entity, had borrowed $125.0 million under the credit agreement and ProLogis
Development Services had no borrowings under the credit agreement.
COMMITMENTS
As of September 30, 2001, ProLogis had letters of intent or contingent
contracts, subject to ProLogis' final due diligence, for the acquisition of 3.1
million square feet of operating facilities at an estimated acquisition cost of
$109.0 million. The foregoing transactions are subject to a number of
conditions, and ProLogis cannot predict with certainty that they will be
consummated. ProLogis has sufficient funds escrowed as the result of
tax-deferred exchange transactions to acquire these assets. In addition, as of
September 30, 2001, ProLogis had $397.8 million of budgeted development costs
for developments in process, of which $221.2 million was unfunded.
On January 11, 2001, ProLogis announced a Common Share repurchase program
under which it may repurchase up to $100.0 million of its Common Shares. The
Common Shares will be repurchased from time to time in the open market and in
privately negotiated transactions, depending on market prices and other
conditions. As of September 30, 2001, 778,400 Common Shares had been repurchased
at a total cost of $16.0 million.
ProLogis has entered into a subscription agreement to make additional
capital contributions to ProLogis European Properties Fund of 74.2 million euros
(the currency equivalent of approximately $67.9 million as of September 30,
2001) through 2002.
As of September 30, 2001, ProLogis Logistics had $90.0 million of direct
borrowings outstanding under a credit agreement that has been guaranteed by
ProLogis.
Frigoscandia AB has a credit agreement under which 171.0 million euros (the
currency equivalent of approximately $156.3 million as of September 31, 2001) is
outstanding. All of the borrowings outstanding have been guaranteed by ProLogis.
The agreement has been extended until December 28, 2001.
ProLogis Kingspark has a line of credit agreement with a bank in the United
Kingdom that has been guaranteed by ProLogis and provides for borrowings of up
to 25.0 million pounds sterling (the currency equivalent of approximately $36.6
million as of September 30, 2001). As of September 30, 2001, no borrowings were
outstanding on the line of credit. However, ProLogis Kingspark had the currency
equivalent of approximately $6.2 million of letters of credit outstanding that
reduce the amount of available borrowings on the line of credit.
As of September 30, 2001, ProLogis North American Properties Fund IV had
$103.0 million of short-term borrowings outstanding under an agreement that
matures on December 21, 2001. The agreement provides for a 46-day extension at
ProLogis North American Properties Fund IV's option. ProLogis North American
Properties Fund IV intends to obtain permanent secured financing which will be
used to repay these short-term borrowings. ProLogis has guaranteed the entire
amount outstanding.
ProLogis has guaranteed a 30.0 million French franc (the currency
equivalent of approximately $4.2 million as of September 30, 2001) unsecured
loan outstanding of ProLogis European Properties Fund.
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
37
qualify as a REIT for tax purposes. Because depreciation is a non-cash expense,
cash flow typically will be greater than earnings from operations and net
earnings. Therefore, annual distributions are expected to be consistently higher
than annual earnings.
On February 23, 2001, May 25, 2001 and August 24, 2001, ProLogis paid a
quarterly distribution of $0.345 per Common Share to shareholders of record on
February 9, 2001, May 14, 2001 and August 10, 2001, respectively. The
distribution level for 2001 was set by ProLogis' Board of Trustees in December
2000 at $1.38 per Common Share.
The annual dividend rates on ProLogis' preferred shares are $4.27 per
Series C cumulative redeemable preferred share, $1.98 per Series D cumulative
redeemable preferred share and $2.1875 per Series E cumulative redeemable
preferred share.
On January 31, 2001, April 30, 2001 and July 31, 2001 ProLogis paid
quarterly dividends of $0.5469 per Series E cumulative redeemable preferred
share. On March 30, 2001, ProLogis paid quarterly dividends of $0.5875 per
Series A cumulative redeemable preferred share. On March 30, 2001, June 29, 2001
and September 28, 2001, ProLogis paid quarterly dividends of $1.0675 per Series
C cumulative redeemable preferred share and $0.495 per Series D cumulative
redeemable preferred share.
Pursuant to the terms of its preferred shares, ProLogis is restricted from
declaring or paying any distribution with respect to the Common Shares unless
and until all cumulative dividends with respect to the Preferred Shares have
been paid and sufficient funds have been set aside for dividends for the then
current dividend period with respect to the preferred shares.
FUNDS FROM OPERATIONS
Funds from operations attributable to Common Shares increased $23.3 million
to $302.6 million for 2001 from $279.3 million for 2000.
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 Condensed
Statements of Cash Flows in Item 1. Funds from operations should not be
considered as an alternative to net income as an indicator of ProLogis'
operating performance or as an alternative to cash flows from operating,
investing or financing activities as a measure of liquidity. Additionally, the
funds from operations measure presented by ProLogis will not necessarily be
comparable to similarly titled measures of other REITs. ProLogis considers funds
from operations to be a useful supplemental measure of comparative period
operating performance and as a supplemental measure to provide management,
financial analysts, potential investors and shareholders with an indication of
ProLogis' ability to fund its capital expenditures and investment activities and
to fund other cash needs.
Funds from operations is defined by the National Association of Real Estate
Investment Trusts ("NAREIT") generally as net income (computed in accordance
with GAAP), excluding real estate related depreciation and amortization, gains
and losses from sales of properties, except those gains and losses from sales of
properties upon completion or stabilization under pre-sale agreements and after
adjustments for unconsolidated entities to reflect their funds from operations
on the same basis. ProLogis includes gains and losses from the disposition of
its CDFS business segment assets in funds from operations.
Funds from operations, as used by ProLogis, is modified from the NAREIT
definition. ProLogis' funds from operations measure does not include: (i)
deferred income tax benefits and deferred income tax expenses of ProLogis'
taxable subsidiaries; (ii) foreign currency exchange gains and losses resulting
from debt transactions between ProLogis and its consolidated and unconsolidated
entities; (iii) foreign currency exchange gains and losses from the
remeasurement (based on current foreign currency exchange rates) of third party
debt of ProLogis' foreign consolidated and unconsolidated entities; and (iv)
mark to market adjustments related to derivative financial instruments utilized
to manage ProLogis' foreign currency risks. These adjustments to the NAREIT
definition are made to reflect ProLogis' funds from operations on a comparable
basis with the other REITs that do not engage in the types of transactions that
give rise to these items.
38
Funds from operations is as follows (in thousands):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
2001 2000
-------- --------
Net earnings attributable to Common Shares.................. $137,470 $113,146
Add (Deduct):
Real estate related depreciation and amortization...... 101,780 109,238
Gain (loss) on disposition of non-CDFS business segment
assets................................................ (863) (1,009)
Foreign currency exchange losses, net.................. 1,216 21,622
Deferred income tax expense............................ 3,507 1,702
ProLogis' share of reconciling items of
unconsolidated entities:
Real estate related depreciation and amortization.... 50,031 43,709
Loss on disposition of non-CDFS business segment
assets.............................................. 3,965 (357)
Foreign currency exchange gains, net................. 12,618 (4,589)
Deferred income tax expense benefit.................. (7,159) (4,204)
-------- --------
Funds from operations attributable to Common Shares......... $302,565 $279,258
======== ========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2001, no significant change had occurred in ProLogis'
interest rate risk or foreign currency risk as discussed in ProLogis' 2000
Annual Report on Form 10-K.
PART II
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITIES HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
4.1*.. Third Amendment to Rights Agreement, dated as of December
31, 1993, between ProLogis and Fleet National Bank, as
Rights Agent, to amend the agreement and appoint EquiServe
Trust Company, N.A.
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Share Dividends
15.1 Letter from Arthur Andersen LLP regarding unaudited
financial information dated April 2, 2002
99.1 Letter dated April 3, 2002 to United States Securities and
Exchange Commission related to the review performed by
Arthur Andersen
---------------
* Previously filed.
(b) Reports on Form 8-K:
DATE ITEMS REPORTED FINANCIAL STATEMENTS
---- -------------- --------------------
July 10, 2001......................................... 5 No
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROLOGIS TRUST
BY: /s/ WALTER C. RAKOWICH
--------------------------------------
Walter C. Rakowich
Managing Director and
Chief Financial Officer
(Principal Financial Officer)
BY: /s/ LUKE A. LANDS
--------------------------------------
Luke A. Lands
Senior Vice President and Controller
BY: /s/ SHARI J. JONES
--------------------------------------
Shari J. Jones
Vice President
(Principal Accounting Officer)
Date: April 15, 2002
40
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1* Third Amendment to Rights Agreement, dated as of December
31, 1993, between ProLogis and Fleet National Bank, as
Rights Agent, to amend the agreement and appoint EquiServe
Trust Company, N.A.
12.1 Computation of Ratio of Earnings to Fixed Charges
(incorporated by reference to the Quarterly Report on Form
10-Q/A #1 as filed April 5, 2002)
12.2 Computation of Ratio of Earnings to Combined Fixed Charges
and Preferred Share Dividends (incorporated by reference to
the Quarterly Report on Form 10-Q/A #1 as filed April 5,
2002)
15.1 Letter from Arthur Andersen LLP regarding unaudited
financial information dated April 2, 2002 (incorporated by
reference to the Quarterly Report on Form 10-Q/A #1 as filed
April 5, 2002)
99.1 Letter dated April 3, 2002 to United States Securities and
Exchange Commission related to the review performed by
Arthur Andersen (incorporated by reference to the Quarterly
Report on Form 10-Q/A #1 as filed April 5, 2002)
---------------
* Previously filed.