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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A#1
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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 OR PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(303) 375-9292
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's common stock as of
August 9, 2001 was 174,251,253.
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PROLOGIS TRUST
INDEX
PAGE
NUMBER(S)
---------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Condensed Financial Statements:
Consolidated Condensed Balance Sheets--June 30, 2001 and December 31, 2000......................... 3
Consolidated Condensed Statements of Earnings and Comprehensive Income
--Three and six months ended June 30, 2001 and 2000............................................ 4
Consolidated Condensed Statements of Cash Flows--Six months ended
June 30, 2001 and 2000......................................................................... 5
Notes to Consolidated Condensed Financial Statements............................................... 6 - 21
Report of Independent Public Accountants........................................................... 22
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................................... 23 - 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk......................................... 32
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders.............................................. 32
Item 5. Other Information.................................................................................. 32
Item 6. Exhibits........................................................................................... 32
2
PROLOGIS TRUST
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
(UNAUDITED) (AUDITED)
Real estate ................................................................. $ 4,552,088 $ 4,689,492
Less accumulated depreciation ............................................. 532,036 476,982
------------ ------------
4,020,052 4,212,510
Investments in and advances to unconsolidated entities ...................... 1,283,822 1,453,148
Cash and cash equivalents ................................................... 53,239 57,870
Accounts and notes receivable ............................................... 37,729 50,856
Other assets ................................................................ 192,596 171,950
------------ ------------
Total assets ....................................................... $ 5,587,438 $ 5,946,334
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit ........................................................... $ 306,086 $ 439,822
Senior unsecured debt ..................................................... 1,670,184 1,699,989
Mortgage notes and other secured debt ..................................... 540,722 537,925
Accounts payable and accrued expenses ..................................... 117,512 107,494
Construction payable ...................................................... 20,312 40,925
Distributions and dividends payable ....................................... 729 57,739
Other liabilities ......................................................... 105,257 88,439
------------ ------------
Total liabilities .................................................. 2,760,802 2,972,333
------------ ------------
Minority interest ........................................................... 46,106 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 June 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 June 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 June 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; 174,085,313
shares issued and outstanding at June 30, 2001 and 165,287,358
shares issued and outstanding at December 31, 2000 ...................... 1,741 1,653
Additional paid-in capital .................................................. 2,918,031 2,740,136
Employee share purchase notes ............................................... (17,703) (18,556)
Accumulated other comprehensive income ...................................... (96,398) (33,768)
Distributions in excess of net earnings ..................................... (425,141) (453,497)
------------ ------------
Total shareholders' equity ......................................... 2,780,530 2,927,371
------------ ------------
Total liabilities and shareholders' equity ......................... $ 5,587,438 $ 5,946,334
============ ============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
3
PROLOGIS TRUST
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
Income:
Rental income ............................................ $ 117,147 $ 119,696 $ 236,391 $ 240,505
Other real estate income ................................. 29,081 27,289 60,205 46,234
Income from unconsolidated entities ...................... 4,778 4,022 12,935 25,389
Interest ................................................. 1,483 2,349 2,607 4,220
------------ ------------ ------------ ------------
Total income ...................................... 152,489 153,356 312,138 316,348
------------ ------------ ------------ ------------
Expenses:
Rental expenses, net of recoveries of $23,888 and
$48,752 for the three and six months in 2001,
respectively, and $22,575 and $45,737 for the
three and six months in 2000, respectively, and
including amounts paid to affiliate of $174 for
the six months in 2001 and $319 and $625 for the
three and six months in 2000, respectively ............. 6,920 7,584 13,682 14,131
General and administrative, including amounts paid
to affiliate of $170 for the six months in 2001
and $243 and $467 for the three and six months
in 2000, respectively months in 1999, respectively .... 12,694 11,281 27,111 22,522
Depreciation and amortization ............................ 32,503 37,591 70,363 77,065
Interest ................................................. 40,644 42,856 82,166 84,842
Other .................................................... 749 1,432 1,992 2,650
------------ ------------ ------------ ------------
Total expenses .................................... 93,510 100,744 195,314 201,210
------------ ------------ ------------ ------------
Earnings before minority interest .......................... 58,979 52,612 116,824 115,138
Minority interest share in earnings ........................ 1,458 1,435 2,834 3,089
------------ ------------ ------------ ------------
Earnings before gain (loss) on disposition of real
estate and foreign currency exchange losses ............. 57,521 51,177 113,990 112,049
Gain (loss) on disposition of real estate .................. (1,427) (4,801) (2,625) 307
Foreign currency exchange gains (losses), net .............. 1,652 (11,929) 4,309 (18,449)
------------ ------------ ------------ ------------
Earnings before income taxes ............................... 57,746 34,447 115,674 93,907
Income taxes:
Current income tax expense ............................... 329 541 1,909 658
Deferred income tax expense .............................. 3,346 167 4,255 167
------------ ------------ ------------ ------------
Total income taxes ................................ 3,675 708 6,164 825
------------ ------------ ------------ ------------
Net earnings ............................................... 54,071 33,739 109,510 93,082
Less preferred share dividends ............................. 9,519 14,150 20,951 28,555
------------ ------------ ------------ ------------
Net earnings attributable to Common Shares ................. 44,552 19,589 88,559 64,527
Other comprehensive income:
Foreign currency translation adjustments ................. (19,946) 11,224 (62,630) (11,350)
------------ ------------ ------------ ------------
Comprehensive income ....................................... $ 24,606 $ 30,813 $ 25,929 $ 53,177
============ ============ ============ ============
Weighted average Common Shares outstanding - Basic ......... 173,913 163,148 170,624 162,644
============ ============ ============ ============
Weighted average Common Shares outstanding - Diluted ....... 174,696 163,730 174,563 163,370
============ ============ ============ ============
Per Common Share:
Basic net earnings attributable to Common Shares ......... $ 0.26 $ 0.12 $ 0.52 $ 0.40
============ ============ ============ ============
Diluted net earnings attributable to Common Shares ....... $ 0.26 $ 0.12 $ 0.51 $ 0.39
============ ============ ============ ============
Distributions ............................................ $ 0.345 $ 0.335 $ 0.690 $ 0.670
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated
condensed financial statements.
4
PROLOGIS TRUST
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
SIX MONTHS ENDED,
JUNE 30,
------------------------------
2001 2000
------------ ------------
Operating activities:
Net earnings ........................................................................... $ 109,510 $ 93,082
Minority interest share in earnings .................................................... 2,834 3,089
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization ..................................................... 70,363 77,065
(Gain) loss on disposition of real estate ......................................... 2,625 (307)
Straight-lined rents .............................................................. (3,385) (3,690)
Amortization of deferred loan costs ............................................... 2,357 2,020
Stock-based compensation .......................................................... 3,385 1,325
Income from unconsolidated entities ............................................... (5,781) (19,940)
Foreign currency exchange (gains) losses, net ..................................... (5,642) 13,687
Deferred income tax expense ....................................................... 4,255 167
Increase in accounts receivable and other assets ....................................... (19,561) (22,530)
Increase in accounts payable, accrued expenses and other liabilities ................... 28,286 45,395
------------ ------------
Net cash provided by operating activities ........................................ 189,246 189,363
------------ ------------
Investing activities:
Real estate investments ................................................................ (395,954) (304,848)
Tenant improvements and lease commissions on previously leased space ................... (9,702) (10,821)
Recurring capital expenditures ......................................................... (12,979) (12,762)
Proceeds from dispositions of real estate .............................................. 475,812 242,798
Net (advances to) amounts received from unconsolidated entities ........................ 170,167 (48,524)
Proceeds from repayment of note receivable ............................................. 7,500 --
Cash balances contributed as part of ProLogis European Properties S.a.r.l .............. -- (17,968)
------------ ------------
Net cash provided by (used in) investing activities .............................. 234,844 (152,125)
------------ ------------
Financing activities:
Proceeds from exercised options and dividend reinvestment and share
purchase plans ...................................................................... 27,034 10,628
Repurchase of Common Shares ............................................................ (7,146) --
Redemption of Series A preferred shares ................................................ (135,000) --
Redemption of Series B convertible preferred shares .................................... (4,583) --
Debt issuance and other transaction costs incurred ..................................... -- (4,212)
Distributions paid on Common Shares .................................................... (117,213) (109,037)
Distributions paid to minority interest holders ........................................ (3,496) (3,728)
Distributions paid on preferred shares ................................................. (20,951) (28,555)
Principal payments on senior unsecured debt ............................................ (30,000) (30,000)
Principal payments received on employee share purchase notes ........................... 853 2,076
Proceeds from settlement of derivative financial instruments ........................... 106 366
Proceeds from lines of credit .......................................................... 579,509 465,829
Payments on lines of credit ............................................................ (713,245) (302,250)
Regularly scheduled principal payments on mortgage notes ............................... (3,839) (3,597)
Principal prepayments on mortgage notes ................................................ (750) (750)
------------ ------------
Net cash used in financing activities ............................................ (428,721) (3,230)
------------ ------------
Net increase (decrease) in cash and cash equivalents ..................................... (4,631) 34,008
Cash and cash equivalents, beginning of period ........................................... 57,870 69,338
------------ ------------
Cash and cash equivalents, end of period ................................................. $ 53,239 $ 103,346
============ ============
See Note 9 for information on non-cash investing and financing activities.
The accompanying notes are an integral part of these consolidated
condensed financial statements.
5
PROLOGIS TRUST
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 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 and Europe. The ProLogis Operating System(TM), comprised of the
Market Services Group, the Global Services Group, the Global Development Group
and the Integrated Solutions Group, utilizes ProLogis' international network of
distribution facilities to meet its customers' distribution space needs
globally. ProLogis has organized its business into three operating segments:
property operations, corporate distribution facilities services business ("CDFS
business") and temperature-controlled distribution operations. See Note 8.
Principles of Financial Presentation
The consolidated condensed financial statements of ProLogis as of June 30,
2001 and for the three and six months ended June 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 six months
ended June 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.
Statements of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations" and No. 142, "Goodwill and Other Intangible Assets" were
issued on June 30, 2001. Both standards are effective for fiscal years beginning
after December 15, 2001. SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase method. SFAS
No. 142 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).
Also, under SFAS No. 142, the rules concerning the recognition of acquired
intangible assets other than goodwill have changed. However, intangible assets
will continue to be amortized over their useful lives. 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 six months ended June 30, 2001 and 2000, ProLogis
recognized amortization expense related to recognized goodwill of $0.3 million
and $1.6 million, respectively, as a component of "Depreciation and
Amortization" in its Consolidated Condensed Statements of Earnings and
Comprehensive Income".
Interest Expense
Interest expense was $82.2 million and $84.8 million for the six months in
2001 and 2000, respectively, which is net of capitalized interest of $12.4
million and $8.4 million, respectively. Amortization of deferred loan costs
included in interest expense was $2.4 million and $2.0 million for the six
months in 2001 and 2000, respectively. Total interest paid in cash on all
outstanding debt was $92.7 million and $83.8 million during 2001 and 2000,
respectively.
6
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 June 30, 2001 were foreign currency put
option contracts that were marked to market through income in 2000 because they
did not qualify for hedge accounting treatment at that time. Under SFAS No. 133,
these contracts also do not qualify for hedge accounting treatment.
Consequently, ProLogis has continued to mark these contracts to market through
income during the six months ended June 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. ProLogis and its foreign subsidiaries have certain
transactions denominated in currencies other than their functional currency. In
these instances, nonmonetary assets and liabilities are remeasured at the
historical exchange rate, monetary assets and liabilities are remeasured at the
exchange rate in effect at the end of the period, and income statement accounts
are remeasured at the average exchange rate for the period. Gains and losses
from remeasurement are included in ProLogis' results of operations. In addition,
gains or losses 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Gains (losses) from the remeasurement of third party debt
and remeasurement and settlement of intercompany
debt, net ...................................................... $ 2,112 $ (11,984) $ 3,984 $ (19,008)
Mark to market gains on foreign currency put option
contracts (1) .................................................. 50 (86) 1,062 416
Gains (losses) from the settlement of foreign currency
put option contracts, net (1) .................................. (326) 143 (581) 178
Other losses, net ................................................ (184) (2) (156) (35)
---------- ---------- ---------- ----------
$ 1,652 $ (11,929) $ 4,309 $ (18,449)
========== ========== ========== ==========
----------
(1) Upon settlement, the mark to market adjustments are reversed and the total
realized gain or loss is recognized.
7
2. AMENDED QUARTERLY REPORT ON FORM 10-Q/A#1
ProLogis' Quarterly Report on Form 10-Q for the period ended June 30, 2001
originally filed on August 10, 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 an
indirect interest in the voting common stock 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 that its indirect
ownership interest in the voting common stock of Kingspark S.A. does not give it
control such that consolidation is the appropriate method of reporting.
Therefore, ProLogis has amended its unaudited consolidated condensed financial
statements as of and for the six months ended June 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 six months ended June 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 June 30, 2001 or its net earnings attributable to Common Shares,
net earnings attributable to Common Shares per share or comprehensive income for
the three and six months ended June 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):
JUNE 30, 2001
-----------------------------
AS PREVIOUSLY
AMENDED REPORTED
------------ ------------
Real estate ...................................................... $ 4,552,008 $ 4,905,991
Investments in and advances to unconsolidated entities ........... $ 1,283,822 $ 812,451
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
----------------------------- -----------------------------
AS PREVIOUSLY AS PREVIOUSLY
AMENDED REPORTED AMENDED REPORTED
------------ ------------ ------------ ------------
Other real estate income ................... $ 29,081 $ 32,560 $ 60,205 $ 75,414
Income from unconsolidated entities ........ $ 4,778 $ 11,349 $ 12,935 $ 9,305
Loss on investment ......................... $ -- $ 7,456 $ -- $ 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):
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
Operating facilities:
Improved land ............................................ $ 631,226(1) $ 648,950(1)
Buildings and improvements ............................... 3,510,229(1) 3,619,543(1)
------------ ------------
4,141,455 4,268,493
------------ ------------
Facilities under development (including cost of land) ...... 125,824(2)(3) 186,020(2)
Land held for development .................................. 174,325(4) 187,405(4)
Capitalized preacquisition costs ........................... 110,484(5) 47,574(5)
------------ ------------
Total real estate ................................ 4,552,088 4,689,492
Less accumulated depreciation .............................. 532,036 476,982
------------ ------------
Net real estate .................................. $ 4,020,052 $ 4,212,510
============ ============
----------
(1) As of June 30, 2001 and December 31, 2000, ProLogis had 1,214 and 1,244
operating facilities, respectively, consisting of 123,719,000 and
126,275,000 square feet, respectively.
(2) Facilities under development consist of 50 facilities aggregating
10,706,000 square feet as of June 30, 2001 and 41 facilities aggregating
8,711,000 square feet as of December 31, 2000.
(3) In addition to the June 30, 2001 construction payable of $20.3 million,
ProLogis had unfunded commitments on its contracts for facilities under
construction totaling $197.6 million.
8
(4) Land held for future development consists of 1,968 acres as of June 30,
2001 and 2,047 acres as of December 31, 2000.
(5) Capitalized preacquisition costs include $97.7 million and $32.5 million of
funds on deposit with title companies as of June 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) and eight countries in Europe. No individual market represents more than
10% of ProLogis' real estate assets. In July 2001, ProLogis acquired land for
future development in Japan.
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
June 30, 2001, minimum lease payments on leases with lease periods greater than
one year are as follows (in thousands):
Remainder of 2001 .............. $ 217,795
2002 ........................... 373,573
2003 ........................... 291,310
2004 ........................... 207,957
2005 ........................... 144,262
2006 and thereafter ............ 276,157
----------
$1,511,054
==========
ProLogis' largest customer (based on rental income) accounted for 1.6% of
ProLogis' rental income (on an annualized basis) for the six months ended June
30, 2001. The annualized base rent for ProLogis' 25 largest customers (based on
rental income) accounted for 13.3% of ProLogis' rental income (on an annualized
basis) for the six months ended June 30, 2001.
4. UNCONSOLIDATED ENTITIES:
Investments In and Advances To Unconsolidated Entities
Investments in and advances to unconsolidated entities are as follows (in
thousands):
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
Temperature-controlled distribution
companies:
CSI/Frigo LLC (1) ................................... $ 2,544 $ --
ProLogis Logistics (1) (2) .......................... 125,705 231,053
Frigoscandia S.A. (1) (3) ........................... 180,906 191,981
------------ ------------
309,155 423,034
------------ ------------
Distribution real estate entities:
ProLogis California (4) ............................. 119,752 132,243
ProLogis North American Properties Fund I (5) ....... 44,723 10,369
ProLogis North American Properties Fund II (6) ...... 9,051 13,408
ProLogis North American Properties Fund III (7) ..... 6,837 --
ProLogis European Properties Fund (8) ............... 216,643 147,938
ProLogis European Properties S.a.r.l. (8) ........... -- 84,767
------------ ------------
397,006 388,725
------------ ------------
CDFS business:
Kingspark LLC (9) .................................. 8,202 --
Kingspark S. A. (9) ................................ 509,200 570,582
------------ ------------
517,402 570,582
------------ ------------
Insight (10) .......................................... 2,459 2,470
ProLogis Equipment Services (11) ...................... 1,616 450
GoProLogis (12) ....................................... 56,184 56,315
ProLogis Phatpipe (13) ................................ -- 11,572
------------ ------------
Total ........................................ $ 1,283,822 $ 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.
9
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 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 10.
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 June 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
ten countries in Europe. As of June 30, 2001, Frigoscandia AB owned or
operated under lease agreements facilities aggregating 155.9 million cubic
feet.
(4) ProLogis California I LLC ("ProLogis California") owned 79 operating
facilities aggregating 13.1 million square feet as of June 30, 2001, all
located in the Los Angeles/Orange County market. ProLogis had a 50%
ownership interest in ProLogis California as of June 30, 2001.
(5) ProLogis North American Properties Fund I LLC owned 36 operating facilities
aggregating 9.0 million square feet as of June 30, 2001 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 in
ProLogis North American Properties Fund I to 41.3% from 20%.
(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 as of June 30, 2001.
(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 Incorporated
("ProLogis Development Services") with a combined 20% membership interest
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. ProLogis Development Services is a consolidated
taxable subsidiary of ProLogis that engages in CDFS business activities in
North America.
10
(8) ProLogis European Properties Fund owned 114 operating facilities
aggregating 17.0 million square feet in 17 markets as of June 30, 2001,
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 June 30, 2001, ProLogis European Properties
Fund, in which ProLogis had a 39.7% ownership, 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).
(9) 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 interests. 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 10.
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.
(10) 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 had a 33.3% ownership interest in Insight as of June 30, 2001.
(11) Investment represents ProLogis Development Services' 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 the earnings or loss of
ProLogis Equipment Services. 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 had a 50% ownership interest
in ProLogis Equipment Services as of June 30, 2001.
(12) 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 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 June 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 June 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
11
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 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 10.
(13) 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 for $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
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 at June
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 10.
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.
Income (Loss) from Unconsolidated Entities
ProLogis recognized income (loss) from its investments in unconsolidated
entities as follows (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Temperature-controlled distribution
companies:
CSI/Frigo LLC (1) ................................... $ (283) $ -- $ (793) $ --
ProLogis Logistics (2) .............................. (870) 3,000 (2,600) 5,871
Frigoscandia S.A (2) ................................ (2,763) (3,377) (9,995) (5,051)
---------- ---------- ---------- ----------
(3,916) (377) (13,388) 820
---------- ---------- ---------- ----------
Distribution real estate entities:
ProLogis California (3) ............................. 4,052 2,955 7,119 6,054
ProLogis North American Properties Fund I (4) ....... 1,242 -- 2,594 --
ProLogis North American Properties Fund II (5) ...... 565 -- 906 --
ProLogis North American Properties Fund III (6) ..... 40 -- 40 --
ProLogis European Properties Fund (7) ............... 6,449 (3,012) 6,851 4,312
ProLogis European Properties S.a.r.l. (8) ........... -- (52) 36 4,875
---------- ---------- ---------- ----------
12,348 (109) 17,546 15,241
---------- ---------- ---------- ----------
Kingspark S.A. (9) .................................... 2,436 4,510 12,689 9,330
Insight ............................................... -- (2) (10) (2)
ProLogis Equipment Services ........................... (155) -- (155) --
GoProLogis (10) ....................................... 1,521 -- 3,042 --
ProLogis PhatPipe (11) ................................ (7,456) -- (6,789) --
---------- ---------- ---------- ----------
$ 4,778 $ 4,022 $ 12,935 $ 25,389
========== ========== ========== ==========
----------
(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 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 $908,000 and
$1,574,000 for the three and six months ended June 30, 2001, respectively,
and $617,000 and $1,282,000 for the three and six months ended June 30,
2000, respectively. ProLogis has had a 50% ownership interest in ProLogis
California since its inception.
12
(4) ProLogis North American Properties Fund I was formed on June 30, 2000.
Income includes management fees of $616,000 and $1,128,000 for the three
and six months ended June 30, 2001, respectively. ProLogis and ProLogis
Development Services had a combined 41.3% ownership interest in ProLogis
North American Properties Fund I as of June 30, 2001.
(5) ProLogis North American Properties Fund II was originally formed as
ProLogis Principal on June 30, 2000. Income includes management fees of
$501,000 and $546,000 for the three and six months ended June 30, 2001,
respectively. ProLogis and ProLogis Development Services have had a
combined 20% ownership interest in ProLogis North American Properties Fund
II since its inception.
(6) ProLogis North American Properties Fund III was formed on June 15, 2001.
ProLogis and ProLogis Development Services had a combined 20% ownership
interest in ProLogis North American Properties Fund III as of June 30,
2001.
(7) Income or loss includes management fees of $1,782,000 and $3,504,000 for
the three and six months ended June 30, 2001, respectively, and $1,162,000
and $2,304,000 for the three and six months ended June 30, 2000,
respectively. ProLogis had a 39.7% ownership interest in ProLogis European
Properties Fund as of June 30, 2001.
(8) 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.
(9) Represents ProLogis' share of the earnings of Kingspark LLC and Kingspark
S.A. recognized under the equity method based on its ownership of each
entity.
(10) Represents ProLogis' share of the income of GoProLogis, primarily license
fees earned for the non-exclusive use of the ProLogis Operating System(TM)
under license agreements entered into in the third quarter of 2000.
(11) 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 June 30, 2001 consisted of (in millions of U.S. dollars):
CSI/FRIGO PROLOGIS FRIGOSCANDIA
LLC LOGISTICS(1) S.A.(2)
---------- ------------ ------------
Equity interest .................................. $ 0.4 $ 135.8 $ 17.7
Notes receivable ................................. 3.1 -- 210.4
Other receivables ................................ (0.1) 5.2 37.8
ProLogis' share of the earnings of the entity .... (0.9) (15.3) (85.0)
---------- ---------- ----------
Total ..................................... $ 2.5 $ 125.7 $ 180.9
========== ========== ==========
----------
(1) On January 2, 2001, ProLogis Logistics borrowed $125.0 million under
ProLogis' $475.0 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. 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
June 30, 2001 that have been guaranteed by ProLogis.
(2) As of June 30, 2001, Frigoscandia AB had a 185.0 million euro credit
agreement under which the currency equivalent of approximately $157.9
million was outstanding. All of the borrowings outstanding have been
guaranteed by ProLogis. The agreement expires on September 28, 2001 and
contains a provision to extend the due date until December 28, 2001, at
ProLogis' option.
Distribution Real Estate Entities
ProLogis' total investment in its distribution real estate entities as of
June 30, 2001 consisted of (in millions of U. S. dollars):
13
PROLOGIS PROLOGIS PROLOGIS PROLOGIS
NORTH NORTH NORTH EUROPEAN
AMERICAN AMERICAN AMERICAN PROPERTIES
PROLOGIS PROPERTIES PROPERTIES PROPERTIES PROPERTIES
CALIFORNIA FUND I FUND II FUND III(1) FUND(2)
----------- ----------- ----------- ----------- -----------
Equity interest ............................ $ 160.6 $ 52.6 $ 14.3 $ 11.7 $ 266.4
Distributions .............................. (32.2) (3.5) (0.7) -- (9.3)
ProLogis' share of the earnings of the
entity, excluding fees earned ............ 17.8 1.6 0.1 0.1 13.8
----------- ----------- ----------- ----------- -----------
Subtotal ............................ 146.2 50.7 13.7 11.8 270.9
Adjustments to carrying value (3) .......... (28.1) (9.5) (6.6) (5.8) (32.4)
Other (including acquisitions costs), net .. 1.5 2.4 1.3 0.8 (25.9)
----------- ----------- ----------- ----------- -----------
Subtotal ............................ 119.6 43.6 8.4 6.8 212.6
Other receivables .......................... 0.2 1.1 0.7 -- 4.0
----------- ----------- ----------- ----------- -----------
Total ............................... $ 119.8 $ 44.7 $ 9.1 $ 6.8 $ 216.6
=========== =========== =========== =========== ===========
----------
(1) As of June 30, 2001, ProLogis North American Properties Fund III had $150.0
million of short-term borrowings outstanding under an agreement that
matures on September 13, 2001. The agreement provides for a 45-day
extension at ProLogis North American Properties Fund III's option. ProLogis
North American Properties Fund III intends to obtain permanent secured
financing which will be used to repay these short-term borrowings. ProLogis
has guaranteed the entire amount outstanding.
(2) Third parties (19 institutional investors) have invested 414.7 million
euros (the currency equivalent of approximately $355.7 million as of June
30, 2001) in ProLogis European Properties Fund and have committed to fund
an additional 645.6 million euros (the currency equivalent of approximately
$553.9 million as of June 30, 2001) through 2002. ProLogis has also entered
into a subscription agreement to make additional capital contributions of
82.2 million euros (the currency equivalent of approximately $72.4 million
as of June 30, 2001) through 2002.
As of June 30, 2001, 39.0 million euros and 17.0 million pound sterling
were outstanding on ProLogis European Properties Fund's 400.0 million euro
multi-currency, secured, revolving credit facility (the currency equivalent
of approximately $57.2 million as of June 30, 2001), all of which has been
guaranteed by ProLogis.
(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.
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 under
the equity method as of June 30, 2001:
o 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.
o 153.5 million pound sterling (the currency equivalent of approximately
$215.2 million as of June 30, 2001) outstanding on an unsecured
revolving loan facility from ProLogis to Kingspark S.A.; interest at
6.3% per annum for borrowings outstanding at June 30, 2001; due on
demand;
o $130.9 million unsecured note from Kingspark S.A.; interest at 5.0%
per annum; due on demand; and
o 85.6 million pound sterling (the currency equivalent of approximately
$120.0 million as of June 30, 2001) mortgage note from Kingspark S.A.;
secured by land parcels and facilities under development; interest at
7.5% per annum; due on demand.
As of June 30, 2001, Kingspark S.A. had 1.2 million square feet of
operating facilities at an investment of $105.6 million and 0.7 million square
feet of facilities under development with a total budgeted cost of $72.1
million. Additionally, as of June 30, 2001, Kingspark S.A. owned 236 acres of
land and controlled 2,025 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 32.7 million square
feet of facilities.
14
ProLogis Kingspark has a line of credit agreement with a bank in the United
Kingdom. The line of credit agreement provides for borrowings of up to 15.0
million pounds sterling (the currency equivalent of approximately $21.0 million
as of June 30, 2001) and has been guaranteed by ProLogis. As of June 30, 2001,
no borrowings were outstanding on the line of credit. However, as of June 30,
2001, ProLogis Kingspark had the currency equivalent of approximately $7.1
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 six months ended June 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 ............... $ 376.9 $ 449.1 $ 592.5 $ 440.3 $ 237.8 $ 211.4
Total liabilities (6) ...... $ 255.3 $ 523.3 $ 300.0 $ 319.0 $ 169.0 $ 152.5
Minority interest .......... $ -- $ 0.3 $ -- $ -- $ -- $ --
Equity ..................... $ 121.6 $ (74.5) $ 292.5 $ 121.3 $ 68.8 $ 58.9
Revenues ................... $ 155.5 $ 184.0 $ 33.9 $ 22.0 $ 7.8 $ 0.5
Net earnings (loss) (7) .... $ (2.7) $ (16.4) $ 10.4 $ 3.2 $ 0.2 $ 0.1
PROLOGIS
EUROPEAN
PROPERTIES KINGSPARK
FUND(5) S.A.(1)
----------- -----------
Total assets ............... $ 1,001.1 $ 566.9
Total liabilities (6) ...... $ 434.6 $ 520.8
Minority interest .......... $ -- --
Equity ..................... $ 566.5 $ 46.1
Revenues ................... $ 39.4 $ 25.5
Net earnings (loss) (7) .... $ 13.1 $ 5.6
----------
(1) ProLogis had an ownership interest in excess of 99% in each entity as of
June 30, 2001.
(2) ProLogis had a 50% ownership interest in this entity as of June 30, 2001.
(3) ProLogis and ProLogis Development Services had a combined 41.3% ownership
interest in this entity as of June 30, 2001.
(4) ProLogis and ProLogis Development Services had a combined 20.0% ownership
interest in each entity as of June 30, 2001.
(5) ProLogis had a 39.7% ownership interest in this entity as of June 30, 2001.
Includes the ProLogis European Properties S.a.r.l. which is wholly owned by
ProLogis European Properties Fund as of June 30, 2001.
(6) Includes amounts due to ProLogis of $5.2 million from ProLogis Logistics,
$248.3 million from Frigoscandia S.A., $0.2 million from ProLogis
California, $1.1 million from ProLogis North American Properties Fund I,
$0.7 million for ProLogis North American Properties Fund II, $4.0 million
from ProLogis European Properties Fund and $481.7 million from Kingspark
S.A. Includes loans due to third parties (including accrued interest) of
$217.7 million for ProLogis Logistics, $160.8 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, $150.0 million for ProLogis North American
Properties Fund III and $383.7 million for ProLogis European Properties
Fund.
(7) 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 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 $0.6 million
for Frigoscandia S.A., $5.5 million for ProLogis European Properties Fund
and $8.9 million for Kingspark S.A.
5. SHAREHOLDERS' EQUITY:
During the six months ended June 30, 2001, ProLogis generated net proceeds
of $27.0 million from the issuance of 1,220,000 common shares of beneficial
interest, $0.01 par value ("Common Shares") under its 1999 Dividend Reinvestment
and Share Purchase Plan and issued 68,000 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 June 30, 2001, 345,100 Common Shares had been repurchased at a
total cost of $7.1 million.
15
ProLogis called for the redemption of 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 on February 12,
2001, 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.
On March 30, 2001, ProLogis called for the redemption of its outstanding
Series A cumulative redeemable preferred shares of beneficial interest 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 (the "Redemption Price"). The
shares were redeemed on May 8, 2001 at a total cost of $136.3 million.
6. DISTRIBUTIONS AND DIVIDENDS:
Common Distributions
On February 23, 2001 and May 25, 2001, ProLogis paid a quarterly
distribution of $0.345 per Common Share to shareholders of record on February 9,
2001 and May 14, 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.
On January 31, 2001 and April 30, 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 and June 29, 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.
7. EARNINGS PER COMMON SHARE:
A reconciliation of the denominator used to calculate basic earnings per
Common Share to the denominator used to calculate diluted earnings per Common
Share for the periods indicated (in thousands, except per share amounts) is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Net earnings attributable to Common Shares ................. $ 44,552 $ 19,589 $ 88,559 $ 64,527
Add: Series B preferred share dividends ................... -- -- 81 --
---------- ---------- ---------- ----------
Adjusted net earnings attributable to Common Shares ........ $ 44,552 $ 19,589 $ 88,640 $ 64,527
========== ========== ========== ==========
Weighted average Common Shares outstanding - Basic ......... 173,913 163,148 170,624 162,644
Incremental weighted average effect of common share
equivalents and contingently issuable shares .......... 783 582 825 726
Weighted average Series B preferred shares ................. -- -- 3,114 --
---------- ---------- ---------- ----------
Adjusted weighted average Common Shares outstanding -
Diluted ............................................... 174,696 163,730 174,563 163,370
========== ========== ========== ==========
Per share net earnings attributable to Common Shares:
Basic ................................................. $ 0.26 $ 0.12 $ 0.52 $ 0.40
========== ========== ========== ==========
Diluted ............................................... $ 0.26 $ 0.12 $ 0.51 $ 0.39
========== ========== ========== ==========
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 ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Series B preferred shares ....... -- 8,543 -- 8,755
========== ========== ========== ==========
Limited partnership units ....... 5,088 5,558 5,088 5,573
========== ========== ========== ==========
16
8. BUSINESS SEGMENTS:
ProLogis has three reportable business segments:
o 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 and
ProLogis North American Properties Fund III -- See Note 3), 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;
o 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
and Europe (see Note 4) 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 and
Kingspark S.A. on a fee basis for third parties in the United States,
Mexico and Europe; the development activities of ProLogis and
Kingspark S.A. are considered to be individual operating segments
having similar economic characteristics which are combined within the
reportable segment based upon geographic location; and
o Temperature-controlled distribution operations represents the
operation of a temperature-controlled distribution and logistics
network through investments in unconsolidated entities in the United
States (ProLogis Logistics) and Europe (Frigoscandia S.A.). The
operations of these entities are considered to be one operating
segment. 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 make decisions about allocating resources and assessing segment
performance); and (iii) assets to ProLogis' total assets are as follows (in
thousands):
SIX MONTHS ENDED
JUNE 30,
------------------------------
2001 2000
------------ ------------
Income:
Property operations:
United States (1) ................................ $ 236,087 $ 238,173
Mexico ........................................... 8,912 6,933
Europe (2) ....................................... 8,938 10,641
------------ ------------
Total property operations segment .............. 253,937 255,747
------------ ------------
CDFS business:
United States (3) ................................ 52,062 38,239
Mexico ........................................... (10) 1,284
Europe (4) (5) ................................... 20,841 16,038
------------ ------------
Total CDFS business segment .................... 72,893 55,561
------------ ------------
Temperature-controlled distribution operations:
United States (6) ................................ (2,620) 5,871
Europe (7) ....................................... (10,768) (5,051)
------------ ------------
Total temperature-controlled distribution
operations segment ........................... (13,388) 820
------------ ------------
Reconciling items:
Interest income .................................. 2,607 4,220
Income (loss) from unconsolidated entities ....... (3,911) --
------------ ------------
Total reconciling items ........................ (1,304) 4,220
------------ ------------
Total income ................................... $ 312,138 $ 316,348
============ ============
Net operating income:
Property operations:
United States (1) ................................ $ 222,799 $ 223,464
Mexico ........................................... 9,067 6,763
Europe (2) ....................................... 8,389 11,388
------------ ------------
Total property operations segment .............. 240,255 241,615
------------ ------------
CDFS business:
United States (3) ................................ 50,247 36,659
Mexico ........................................... (84) 1,268
Europe (4) (5) ................................... 20,742 15,907
------------ ------------
Total CDFS business segment .................... 70,905 53,834
------------ ------------
Temperature-controlled distribution operations:
United States (6) ................................ (2,620) 5,871
Europe (7) ....................................... (10,768) (5,051)
------------ ------------
Total temperature-controlled distribution
operations segment ........................... (13,388) 820
------------ ------------
Reconciling items:
Interest income .................................. 2,607 4,220
Income (loss) from unconsolidated entities ....... (3,911) (2)
General and administrative expense ............... (27,111) (22,522)
Depreciation and amortization .................... (70,363) (77,065)
Interest expense ................................. (82,166) (84,842)
Other ............................................ (4) (920)
------------ ------------
Total reconciling items ........................ (180,948) (181,131)
------------ ------------
Earnings before minority interest .............. $ 116,824 $ 115,138
============ ============
17
JUNE 30, DECEMBER 31,
2001 2000
------------ ------------
Assets:
Property operations:
United States (8) ................................. $ 3,781,849 $ 3,887,601
Mexico ............................................ 121,790 113,538
Europe ............................................ 293,512 308,457
------------ ------------
Total property operations segment ............ 4,197,151 4,309,596
------------ ------------
CDFS business:
United States ..................................... 201,272 304,697
Mexico ............................................ 33,995 26,288
Europe(8) ......................................... 658,348 637,207
------------ ------------
Total CDFS business segment .................. 893,615 968,192
------------ ------------
Temperature controlled distribution operations:
United States (8) ................................. 127,341 231,053
Europe (8) ........................................ 181,814 191,981
------------ ------------
Total temperature controlled distribution
operations segment ......................... 309,155 423,034
------------ ------------
Reconciling items:
Investment in and advances to unconsolidated
entities ........................................ 60,260 70,807
Cash .............................................. 53,239 57,870
Accounts and notes receivable ..................... 27,505 43,040
Other assets ...................................... 46,513 73,795
------------ ------------
Total reconciling items ...................... 187,517 245,512
------------ ------------
Total assets ................................. $ 5,587,438 $ 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 and
ProLogis North American Properties Fund III in 2001 and ProLogis California
in 2000. See Note 3 for summarized financial information of ProLogis
California, ProLogis North American Properties Fund I, ProLogis North
American Properties Fund II and ProLogis North American Properties Fund
III.
(2) In addition to the operations of ProLogis that are reported on a
consolidated basis, includes amounts recognized under the equity method
related to ProLogis' investment in ProLogis European Properties Fund
(including net foreign currency exchange gains of $2.3 million in 2001 and
net foreign currency losses of $2.6 million in 2000) and ProLogis European
Properties S.a.r.l. (including net foreign currency exchange gains of $1.5
million in 2000). See Note 4 for summarized financial information of
ProLogis European Properties Fund.
(3) In 2001, includes $20.8 million and $67.4 million of net gains recognized
by ProLogis related to the disposition of facilities to ProLogis North
American Properties Fund II and ProLogis North American Properties Fund
III, respectively.
(4) Includes amounts recognized under the equity method related to ProLogis'
investment in Kingspark S.A. (including $8.9 million of foreign currency
exchange losses and $0.5 million of net foreign currency exchange gains in
2001 and 2000, respectively). See Note 4.
(5) Includes $6.4 million and $5.3 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 $10.7 million
and $0.8 million of net gains recognized under the equity method related to
the disposition of facilities to ProLogis European Properties Fund by the
Kingspark entities in 2001 and 2000, respectively.
18
(6) Represents amounts recognized under the equity method related to ProLogis'
investments in ProLogis Logistics in 2001 and 2000 and 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 3 for summarized
financial information of ProLogis Logistics.
(7) Represents amounts recognized under the equity method related to ProLogis'
investments in Frigoscandia S.A. (including $0.6 million of net foreign
currency exchange losses in 2001 and $1.7 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 3 for summarized financial information of
Frigoscandia S.A.
(8) Amounts include investments in unconsolidated entities accounted for under
the equity method. See Note 4 for summarized financial information of these
unconsolidated entities as of and for the six months ended June 30, 2001.
9. SUPPLEMENTAL CASH FLOW INFORMATION:
Non-cash investing and financing activities for the six months ended June
30, 2001, and 2000 are as follows:
o 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 3.
o ProLogis received $4.2 million, $34.1 million, $13.7 million and $11.7
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 and ProLogis North American
Properties Fund III, respectively, in the form of an equity interest
in these entities during 2001. ProLogis received $4.4 million, $13.8
million, $14.8 million and $0.6 million of the proceeds from its
disposition of facilities to ProLogis European Properties Fund,
ProLogis California, ProLogis North American Properties Fund I and
ProLogis Principal in the form of an equity interest during 2000.
o ProLogis received $4.2 million of the proceeds from its disposition of
facilities to ProLogis European Properties Fund in the form of a note
receivable during 2001. ProLogis received $15.6 million, $44.6 million
and $13.2 million of the proceeds from its disposition of facilities
to ProLogis European Properties Fund, ProLogis North American
Properties Fund I and ProLogis Principal, respectively, in the form of
notes receivable from these entities during 2000.
o ProLogis received $10.8 million and $7.7 million of the proceeds from
its disposition of facilities to a third parties in the form of notes
receivable in 2001 and 2000, respectively.
o In connection with the acquisition of a facility, ProLogis assumed a
$7.7 million mortgage note in 2001.
o In connection with the agreement for the acquisition of Kingspark
S.A., ProLogis issued approximately 67,000 and 201,000 Common Shares
valued at $1.5 million and $3.9 million, respectively, in 2001 and
2000, respectively.
o Series B preferred shares aggregating $151.8 million and $1.0 million
were converted into Common Shares in 2001 and 2000, respectively.
o Net foreign currency translation adjustments of $(62,630,000) and
$(11,350,000) were recognized in 2001 and 2000, respectively.
19
10. 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 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:
o 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%. 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 interest. Mr. Brooksher
does not receive compensation in connection with being the managing
member. See Note 4.
o 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.
o 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
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.
20
o 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 June 30, 2001, ProLogis had other loans outstanding from
Mr. Brooksher with an aggregate principal amount of $2,100,000. Of these,
$1,863,000 was loaned to Mr. Brooksher under ProLogis' employee share purchase
plan.
11. 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.
21
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 June 30, 2001, and the related
consolidated condensed statements of earnings and comprehensive income for the
three and six months ended June 30, 2001 and 2000 and the consolidated condensed
statements of cash flows for the six months ended June 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
August 10, 2001
(except with respect to
Note 2 as to which the
date is April 3, 2002)
22
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
Six Months Ended June 30, 2001 and 2000
ProLogis' net earnings attributable to Common Shares were $88.6 million for
the six months ended June 30, 2001 as compared to $64.5 million for the same
period in 2000. For the six months ended June 30, 2001, basic and diluted per
share net earnings attributable to Common Shares were $0.52 and $0.51 per share,
respectively. Basic and diluted per share net earnings attributable to Common
Shares were $0.40 and $0.39 per share, respectively, 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 $17.1 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 and ProLogis
European Properties Fund, as well as to third parties. ProLogis' property
operations segment net operating income was $240.2 million for 2001 and $241.6
million for 2000. 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. Income from ProLogis' temperature-controlled
distribution operations decreased in 2001 from 2000 by $14.2 million. See
"--Property Operations", "-- CDFS Business" and "-- Temperature-Controlled
Distribution Operations".
Property Operations
ProLogis owned or had ownership interests in the following operating
facilities as of the dates indicated (square footage in thousands):
JUNE 30,
-------------------------------------------------------
2001 2000
------------------------- -------------------------
SQUARE SQUARE
NUMBER FOOTAGE NUMBER FOOTAGE
---------- ---------- ---------- ----------
Direct ownership (1) ............................. 1,214 123,719 1,249 126,723
ProLogis California (2) .......................... 79 13,052 79 12,494
ProLogis North American Properties Fund I
(1)(3) ........................................ 36 8,963 17 3,836
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 European Properties Fund and
ProLogis
European Properties S.a.r.l. (6) .............. 114 17,028 90 11,707
---------- ---------- ---------- ----------
1,504 171,619 1,438 155,200
========== ========== ========== ==========
23
----------
(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 ProLogis.
(2) ProLogis has had a 50% ownership interest in ProLogis California since its
inception. See Note 3 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 June 30, 2001. This entity was formed on June 30,
2000. All operating facilities owned by this entity were previously
directly owned by ProLogis. See Note 3 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 June 30, 2001. This entity was originally formed on June 30,
2000. All operating facilities owned by this entity were previously
directly owned by ProLogis. See Note 3 to ProLogis' Consolidated Condensed
Financial Statements in Item 1.
(5) ProLogis had a 20.0% ownership interest in ProLogis North American
Properties Fund III as of June 30, 2001. This entity was formed in June
2001 with the acquisition of 34 operating facilities from ProLogis. See
Note 3 to ProLogis' Consolidated Condensed Financial Statements in Item 1.
(6) As of June 30, 2001, ProLogis' ownership interest in ProLogis European
Properties Fund is 39.7%. As of June 30, 2000, ProLogis had a 42.1%
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 June 30, 2000. 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 8 to ProLogis' Consolidated Condensed
Financial Statements in Item 1. The amounts recognized under the equity method
are based on the net earnings of each 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):
SIX MONTHS ENDED
JUNE 30,
-------------------------
2001 2000
---------- ----------
Facilities directly owned by ProLogis and its consolidated entities
Rental income .................................................. $ 236,391 $ 240,505
Property operating expenses .................................... 13,682 14,131
---------- ----------
Net operating income (1) .................................... 222,709 226,374
---------- ----------
Income from the ProLogis California .............................. 7,119 6,054
Income from ProLogis North American Properties Fund I (2) ........ 2,594 --
Income from ProLogis North American Properties Fund II (2) ....... 906 --
Income from ProLogis North American Properties Fund III (3) ...... 40 --
Income from ProLogis European Properties Fund (4) ................ 6,851 4,312
Income from ProLogis European Properties S.a.r.l. (4) ............ 36 4,875
---------- ----------
Total property operations segment ........................... $ 240,255 $ 241,615
========== ==========
----------
(1) The fluctuations in rental expenses between years is primarily the result
of the changes in the composition of the directly owned facilities in each
year in addition to increased rental expense recoveries (as a percentage of
total rental expenses) in each year. Rental expenses, before recoveries
from tenants, were 26.4% of rental income in 2001 and 24.9% rental income
for 2000. Rental expenses, after recoveries from tenants, were 5.8% of
rental income in 2001 and 5.9% of rental income in 2000. Total rental
expense recoveries were 78.1% and 76.4% of total rental expenses in 2001
and 2000, respectively. The increase in rental expense recoveries as a
percentage of total rental expenses reflects ProLogis' emphasis on on-site
property management teams and the effectiveness of the ProLogis Operating
System(TM).
(2) ProLogis North American Properties Fund I and ProLogis North American
Properties Fund II began operations on June 30, 2000.
(3) ProLogis North American Properties Fund III began operations on June 15,
2001.
24
(4) In 2001, ProLogis' share of the income of ProLogis European Properties Fund
includes net foreign currency gains of $2.3 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 losses of $0.7
million and net foreign currency gains of $0.8 million, respectively.
Excluding net foreign currency exchange gains and losses, ProLogis' share
of the income of ProLogis European Properties Fund would have been $4.6
million and $5.0 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 $4.1 million for
2000. ProLogis' combined share of the income of ProLogis European
Properties Fund and ProLogis European Properties S.a.r.l. decreased in 2001
from 2000 primarily due to higher interest expense in 2001 as the use of
debt proceeds to fund acquisitions increased in the second half of 2000 and
in 2001. ProLogis recognized income under the equity method related to
ProLogis European Properties S.a.r.l. in 2001 for only six days.
The operating facilities in ProLogis' portfolio are classified as either
stable or pre-stable facilities. Stabilized operating facilities are those
facilities where the capital improvements, repositioning and management and
marketing programs have been in effect for a sufficient period of time
(generally 12 months) to achieve a stabilized occupancy (typically 93%, but
ranging from 90% to 95%, depending on the submarket and product type).
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(TM), has been successful 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 94.0% occupied and 95.0% leased
as of June 30, 2001. ProLogis' stabilized occupancy levels have decreased
slightly during the first six months of 2001 (95.4% occupied and 96.2% leased as
of December 31, 2000). ProLogis believes that economic conditions in North
America have led to a slowing in customer leasing decisions and in the
absorption of new facilities in the market. However, ProLogis believes that it
will benefit from the ProLogis Operating System(TM) during this period, as it
has allowed ProLogis to build a strong local market presence and develop strong
customer relationships.
The average increase in rental rates for both new and renewed leases on
previously leased space (20.3 million square feet) for all facilities including
those owned by ProLogis' consolidated and unconsolidated entities during 2001
was 18.3% (up from 15.5% for all of 2000). During the six months ended June 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 six month periods in 2001 and 2000)
increased by 2.81% over the same period in 2000 (as compared to an increase of
6.89% during the six months ended June 30, 2000 as compared to the same period,
in 1999). The population of same-store facilities has a greater percentage of
stabilized facilities in 2001 than in 2000. Stabilized facilities have generally
already reached an occupancy level of 93%, resulting in fewer opportunities for
these facilities to generate net operating income growth from occupancy
increases.
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.
The CDFS business segment operations increased in volume for the six months
in 2001 over the same period in 2000; consequently, ProLogis' income from this
segment has increased in 2001 over 2000. The CDFS business segment's net
operating income is comprised of the following (in thousands):
25
SIX MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
---------- ----------
Net gains on disposition of land parcels and facilities
developed (1) ................................................. $ 56,081 $ 43,187
Development fees and other, net .................................. 1,830 2,042
Income from Kingspark S.A.(2)(3) ................................. 12,689 9,330
Miscellaneous income ............................................. 2,294 1,005
Other expenses (4) ............................................... (1,989) (1,730)
---------- ----------
$ 70,905 $ 53,834
========== ==========
----------
(1) Represents gains from the disposition of land parcels and facilities
developed as follows:
o 2001: 138 acres; 8.9 million square feet; $452.9 million of proceeds,
and
o 2000: 158 acres; 5.9 million square feet; $268.2 million of proceeds.
(2) The Kingspark entities' income in 2001 includes:
o Gains from the disposition of facilities developed (1.4 million square
feet; $141.4 million of proceeds; net gains of $12.1 million);
o Development fees and other miscellaneous net income of $6.4 million;
o Deferred and current income tax benefit of $1.0 million; and
o Foreign currency exchange losses of $8.9 million.
(3) Kingspark S. A. and its subsidiaries' income in 2000 includes:
o Gains from the disposition of land parcels and facilities developed
(11 acres; 0.4 million square feet; $38.8 million of proceeds; net
gains of $5.9 million);
o Development fees and other miscellaneous net income of $2.5 million;
o Deferred and current income tax expense of $1.9 million; and
o Foreign currency exchange gains of $0.5 million.
(4) Includes land holding costs of $1.1 million in 2001 and $0.7 million in
2000 and the write-off of previously capitalized pursuit costs related to
potential CDFS business segment projects of $0.9 million in 2001 and $1.0
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):
SIX MONTHS ENDED
JUNE 30,
--------------------------
2001 2000
---------- ----------
Loss from CSI/Frigo LLC .................................... $ (793) $ --
Income (loss) from ProLogis Logistics ...................... $ (2,600) $ 5,871
Loss from Frigoscandia S.A ................................. (9,995) (5,051)
---------- ----------
Total temperature-controlled distribution operations
segment ............................................... $ (13,388) $ 820
========== ==========
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 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.
26
CSI's operating capacity was comparable in both six-month periods. The
decrease in ProLogis' share of ProLogis Logistics' net earnings from 2000 to
2001 of $8.5 million is attributable to: (i) higher interest expense as a result
of increasing external debt by $125.0 million, and (ii) a decrease in operating
income as a result of lower occupancy levels in certain markets in 2001. The
proceeds from the borrowings of ProLogis Logistics were used to repay $125.0
million of outstanding notes and accrued interest due to ProLogis. See "--
Liquidity and Capital Resources -- Credit Facilities".
Frigoscandia's operating capacity was comparable in both six-month periods
with the exception of the disposition in May 2001 of the directly owned German
facilities. ProLogis' share of Frigoscandia S.A.'s net losses includes net
foreign currency exchange losses of $0.6 million and $1.7 million in 2001 and
2000, respectively. Excluding these foreign currency exchange losses, ProLogis
recognized $6.0 million less 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 loss in 2001 from the loss recognized in 2000 is
attributable to: (i) lower occupancy levels, principally the result of the
reduction in inventories of beef and pork products by the German and French
governments, and (ii) a loss recognized on the disposal of Frigoscandia's
directly-owned facilities located in Germany of approximately $2.4 million. The
disposition of the directly owned German 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 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.
ProLogis and Frigoscandia are currently monitoring the recent outbreak of foot
and mouth disease in Europe. At this time, the effect (positive or negative), if
any, on the demand for temperature-controlled distribution services and the
related transportation services offered by Frigoscandia cannot be determined.
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 six months ended June 30, 2001. See Note 8 to ProLogis'
Consolidated Condensed Financial Statements in Item 1. This amount is made up of
the following:
o 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 charge resulting 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;
o 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 does not expect that it will continue to
recognize license fee income from Vizional Technologies after the
second quarter of 2001;
o ProLogis Equipment Services: a loss of $155,000 (all recognized in the
second quarter); and
o Insight: a loss of $10,000 (all recognized in the first quarter).
Interest Expense
Interest expense is a function of the level of borrowings outstanding
offset by interest capitalization with respect to development activities.
Interest expense was $82.2 million in 2001 and $84.8 million in 2000.
Capitalized interest was $12.4 million in 2001 and $8.4 million in 2000.
Capitalized interest levels are reflective of ProLogis' cost of funds and the
level of development activity in each year.
Gain (Loss) on Disposition of Real Estate
Gain (loss) 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.
27
Property operations segment dispositions were as follows:
o 2001: 2.3 million square feet; $95.2 million of proceeds; net loss of
$3.2 million (offset by a 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), and
o 2000: 2.5 million square feet; $98.5 million of proceeds; net gains of
$0.3 million.
Foreign Currency Exchange Losses
ProLogis recognized net foreign currency exchange gains of $4.3 million and
foreign currency exchange losses of $18.4 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. In 2000, the euro and pound sterling currencies both devalued
against the U.S. dollar which resulted in losses to ProLogis to the extent that
it had made loans denominated in those currencies.
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 $1.9 million and
$0.7 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 $4.2
million and $0.2 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.
Three Months Ended June 30, 2001 and 2000
The changes in net earnings attributable to Common Shares and its
components for the three months ended June 30, 2001 compared to the three months
ended June 30, 2000 are similar to the changes for the six month periods ended
on the same dates and the three-month period changes are attributable to the
same reasons discussed under "--Six Months Ended June 20, 2001 and 2000" except
as specifically discussed under "--Income (Loss) from Unconsolidated Entities".
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.
28
ProLogis' future investing activities are expected to consist of: (i)
acquisitions of existing facilities in key distribution markets in the property
operations segment; (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; and (iii) to a limited extent, certain temperature-controlled
distribution facility expansions and investments in additional
temperature-controlled distribution facilities. Temperature-controlled
investments will be made as deemed necessary to achieve strategic objectives
with respect to targeted markets in the United States or to address specific
customer needs in the United States and Europe. ProLogis' future investing
activities are expected to be primarily funded with:
o cash generated by operations;
o the proceeds from the disposition of facilities developed by ProLogis
to third parties;
o 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
o utilization of ProLogis' revolving credit facilities.
In July 2001, ProLogis acquired a land parcel for the development of a
196,000 square feet facility in Tokyo, Japan. This facility, which has been
leased under a 20-year agreement and is expected to be completed in 2002,
represents ProLogis' first investment in Japan. ProLogis' investment strategy in
Japan is to only develop facilities under pre-lease arrangements.
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 August 9, 2001, on a combined basis, ProLogis had
approximately $369.6 million of short-term borrowing capacity available under
its U.S. dollar denominated and multi-currency unsecured revolving credit
facilities (see "--Credit Facilities"). 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 six months ended June 30,
2001 was $189.2 million and $189.4 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 $234.8 million
and financing activities used net cash of $428.7 million. Proceeds received from
the dispositions of real estate and the repayments of loans 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 $152.1 million in its investing activities and $3.2 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.
Credit Facilities
As of June 30, 2001, ProLogis' combined direct borrowings on its lines of
credit were $306.1 million (a combined $100.0 million borrowed under its $475.0
million revolving line of credit and $60.0 million discretionary line of credit)
and $206.1 million under its 325.0 million euro revolving line of credit.
ProLogis was in compliance with all covenants contained in its credit agreements
as of June 30, 2001.
ProLogis Logistics and ProLogis Development Services may also borrow under
the $475.0 million credit agreement, with such borrowings guaranteed by
ProLogis. As of June 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.
29
Commitments
As of June 30, 2001, ProLogis had letters of intent or contingent
contracts, subject to ProLogis' final due diligence, for the acquisition of 2.0
million square feet of operating facilities at an estimated acquisition cost of
$80.2 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 June 30, 2001, ProLogis
had $315.5 million of budgeted development costs for developments in process, of
which $197.6 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 June 30, 2001, 345,100 Common Shares had been repurchased at a
total cost of $7.1 million.
ProLogis has entered into a subscription agreement to make additional
capital contributions to ProLogis European Properties Fund of 82.2 million euros
(the currency equivalent of approximately $72.4 million as of June 30, 2001)
through 2002.
As of June 30, 2001, ProLogis Logistics had $90.0 million of direct
borrowings outstanding under a credit agreement that has been guaranteed by
ProLogis.
As of June 30, 2001, Frigoscandia AB had a 185.0 million euro credit
agreement under which the currency equivalent of approximately $157.9 million
was outstanding. All of the borrowings outstanding have been guaranteed by
ProLogis. The agreement expires on September 28, 2001 and contains a provision
to extend the due date until December 28, 2001, at ProLogis' option.
As of June 30, 2001, ProLogis North American Properties Fund III had $150.0
million of short-term borrowings outstanding under an agreement that matures on
September 13, 2001. The agreement provides for a 45-day extension at ProLogis
North American Properties Fund III's option. ProLogis North American Properties
Fund III intends to obtain permanent secured financing which will be used to
repay these short-term borrowings. ProLogis has guaranteed the entire amount
outstanding.
As of June 30, 2001, 39.0 million euros and 17.0 million pound sterling
were outstanding on ProLogis European Properties Fund's 400.0 million euro
multi-currency, secured, revolving credit facility (the currency equivalent of
approximately $57.2 million as of June 30, 2001), all of which has guaranteed by
ProLogis.
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 15.0 million pounds sterling (the currency equivalent of approximately $21.0
million as of June 30, 2001). As of June 30, 2001, no borrowings were
outstanding on the line of credit. However, ProLogis Kingspark had the currency
equivalent of approximately $7.1 million of letters of credit outstanding that
reduce the amount of available borrowings on the line of credit.
ProLogis has guaranteed a 110.0 million French franc (the currency
equivalent of approximately $14.4 million as of June 30, 2001) unsecured loan
outstanding of ProLogis European Properties S.a.r.l. ProLogis European
Properties S.a.r.l. made a principal payment of 80.0 million French francs in
July 2001.
Distribution and Dividend Requirements
ProLogis' current distribution policy is to pay quarterly distributions to
shareholders based upon what it considers to be a reasonable percentage of cash
flow and at the level that will allow ProLogis to continue to qualify as a REIT
for tax purposes. Because depreciation is a non-cash expense, cash flow
typically will be greater than earnings from operations and net earnings.
Therefore, annual distributions are expected to be consistently higher than
annual earnings.
On February 23, 2001 and May 25, 2001, ProLogis paid a quarterly
distribution of $0.345 per Common Share to shareholders of record on February 9,
2001 and May 14, 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.
30
On January 31, 2001 and April 30, 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 and June 29, 3001, 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 $14.5 million
to $196.1 million for 2001 from $181.6 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.
Funds from operations is as follows (in thousands):
SIX MONTHS ENDED
JUNE 30,
------------------------
2001 2000
--------- ---------
Net earnings attributable to Common Shares ....................... $ 88,559 $ 64,527
Add (Deduct):
Real estate related depreciation and amortization ........... 67,299 75,057
Gain (loss) on disposition of non-CDFS business
segment assets ........................................... 2,625 (307)
Foreign currency exchange (gains) losses, net ............... (5,044) 18,592
Deferred income tax expense ................................. 4,254 167
ProLogis' share of reconciling items of unconsolidated
entities
Real estate related depreciation and amortization ........ 34,049 28,535
Loss on disposition of non-CDFS business segment
assets ................................................. 2,426 26
Foreign currency exchange (gains) losses, net ............ 8,294 (1,971)
Deferred income tax expense benefit ...................... (6,343) (3,064)
--------- ---------
Funds from operations attributable to Common Shares ............ $ 196,119 $ 181,562
========= =========
31
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of June 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
At a meeting on May 17, 2001, the shareholders of ProLogis elected the
following Trustees to office (of the total 173,736,419 Common Shares outstanding
on the record date of April 3, 2001, 152,000,189 Common Shares were voted at the
meeting):
o 151,628,484 Common Shares were voted for the election of Mr. C.
Ronald Blankenship as a Class II Trustee to serve until the
annual meeting of shareholders in the year 2004, 371,705 Common
Shares voted against;
o 151,649,679 Common Shares were voted for the election of Mr.
Stephen L. Feinberg as a Class II Trustee to serve until the
annual meeting of shareholders in the year 2004, 350,510 Common
Shares voted against;
o 151,648,334 Common Shares were voted for the election of Mr.
Donald P. Jacobs as a Class II Trustee to serve until the annual
meeting of shareholders in the year 2004, 351,855 Common Shares
voted against; and
o 151,652,546 Common Shares were voted for the election of Mr. J.
Andre Teixeira as a Class II Trustee to serve until the annual
meeting of shareholders in the year 2004, 347,643 Common Shares
voted against.
In addition, at the May 17, 2001 meeting, ProLogis' shareholders approved
and adopted the ProLogis Trust Employee Share Purchase Plan. There were
147,323,467 Common Shares in favor, 4,548,877 Common Shares against, 126,561
Common Shares abstaining from the proposal and Broker non-votes aggregated 1,284
Common Shares.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Share Dividends
15.1 Letter from Arthur Andersen LLP regarding unaudited financial
information dated April 3, 2002
99.1 Letter dated April 3, 2002 to the United States Securities and Exchange
Commission related to the review performed by Arthur Andersen LLP
(b) Reports on Form 8-K:
ITEMS FINANCIAL
DATE REPORTED STATEMENTS
---- -------- ----------
None
32
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 5, 2002
33
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
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 3, 2002
99.1 Letter dated April 3, 2002 to the United States
Securities and Exchange Commission related to the
review performed by Arthur Andersen LLP