-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Srn+Xlq5SumiR/XP63Qu86f+mtBW3p7eLkyHN5YKF0QolKZdqyjhgdtx2XO3Zn+W MiOVcDMoJroviT9v9Hcg9w== 0000899881-99-000027.txt : 19991117 0000899881-99-000027.hdr.sgml : 19991117 ACCESSION NUMBER: 0000899881-99-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROLOGIS TRUST CENTRAL INDEX KEY: 0000899881 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 742604728 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12846 FILM NUMBER: 99751439 BUSINESS ADDRESS: STREET 1: 14100 EAST 35TH PLACE CITY: AURORA STATE: CO ZIP: 80011 BUSINESS PHONE: 3033759292 MAIL ADDRESS: STREET 1: 14100 EAST 35TH PLACE CITY: AURORA STATE: CO ZIP: 80011 FORMER COMPANY: FORMER CONFORMED NAME: SECURITY CAPITAL INDUSTRIAL TRUST DATE OF NAME CHANGE: 19931228 10-Q 1 FORM 10-Q =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q --------------- QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number 01-12846 PROLOGIS TRUST (Exact name of registrant as specified in its charter) Maryland 74-2604728 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 14100 East 35th Place, Aurora, Colorado 80011 (Address or principal executive offices) (Zip Code) (303) 375-9292 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days. Yes X No ---- ---- The number of shares outstanding of the Registrant's common stock as of November 10, 1999 was 161,628,339. =============================================================================== PROLOGIS TRUST INDEX Page Number(s) -------- PART I. Financial Information Item 1. Consolidated Financial Statements: Consolidated Balance Sheets--September 30, 1999 and December 31, 1998................................. 3 Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss)--Three and nine months ended September 30, 1999 and 1998.............. 4 Consolidated Statements of Cash Flows--Nine months ended September 30, 1999 and 1998..................... 5 Notes to Financial Statements............................. 6 - 24 Report of Independent Public Accountants.................. 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 26 - 38 Item 3. Quantitative and Qualitative Disclosure About Market Risk.................................................. 39 Part II. Other Information Item 4. Submission of Matters to a Vote of Securities Holders..... 40 Item 5. Other Information......................................... 40 Item 6. Exhibits.................................................. 40 PROLOGIS TRUST CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
September 30, December 31, 1999 1998 ----------- ----------- ASSETS (Unaudited) (Audited) Real estate............................................................................... $ 5,012,666 $ 3,657,500 Less accumulated depreciation.......................................................... 337,934 254,288 ----------- ----------- 4,674,732 3,403,212 Investments in and advances to unconsolidated entities.................................... 982,390 733,863 Cash and cash equivalents................................................................. 74,354 63,140 Accounts and notes receivable............................................................. 47,841 11,648 Other assets.............................................................................. 169,749 118,866 ----------- ----------- Total assets................................................................ $ 5,949,066 $ 4,330,729 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Lines of credit........................................................................ $ 127,900 $ 344,300 Short-term borrowings.................................................................. -- 150,000 Senior unsecured notes................................................................. 1,729,552 1,083,641 Other unsecured debt................................................................... 32,600 -- Mortgage notes......................................................................... 678,566 184,964 Assessment bonds....................................................................... 10,929 11,281 Securitized debt....................................................................... 30,788 31,559 Accounts payable and accrued expenses.................................................. 184,843 117,506 Construction payable................................................................... 26,785 34,025 Amount due to affiliate................................................................ -- 395 Distributions and dividends payable.................................................... 729 39,283 Other liabilities...................................................................... 33,068 26,112 ----------- ----------- Total liabilities........................................................... 2,855,760 2,023,066 ----------- ----------- Minority interest......................................................................... 63,667 51,295 Commitments and contingencies Shareholders' equity: Series A Preferred Shares; $0.01 par value; 5,400,000 shares issued and outstanding at September 30, 1999 and December 31, 1998; stated liquidation preference of $25.00 per share....................................................... 135,000 135,000 Series B Convertible Preferred Shares; $0.01 par value; 7,086,902 shares issued and outstanding at September 30, 1999 and 7,537,300 shares issued and outstanding at December 31, 1998; stated liquidation preference of $25.00 per share 177,173 188,440 Series C Preferred Shares; $0.01 par value; 2,000,000 shares issued and outstanding at September 30, 1999 and December 31, 1998; stated liquidation preference of $50.00 per share....................................................... 100,000 100,000 Series D Preferred Shares; $0.01 par value; 10,000,000 shares issued and outstanding at September 30, 1999 and December 31, 1998; stated liquidation preference of $25.00 per share........................................................ 250,000 250,000 Series E Preferred Shares; $0.01 par value; 2,000,000 shares issued and outstanding at September 30, 1999; stated liquidation preference of $25.00 per share............. 50,000 -- Common shares of beneficial interest; $0.01 par value; 161,580,959 shares issued and outstanding at September 30, 1999 and 123,415,711 shares issued and outstanding at December 31, 1998................................................. 1,615 1,234 Additional paid-in capital................................................................ 2,655,775 1,907,232 Employee share purchase notes............................................................. (23,171) (25,247) Accumulated other comprehensive income.................................................... 1,349 23 Distributions in excess of net earnings................................................... (318,102) (300,314) ----------- ----------- Total shareholders' equity.................................................. 3,029,639 2,256,368 ----------- ----------- Total liabilities and shareholders' equity.................................. $ 5,949,066 $ 4,330,729 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 3 PROLOGIS TRUST CONSOLIDATED STATEMENTS OF EARNINGS (LOSS) AND COMPREHENSIVE INCOME (LOSS) (Unaudited) (In thousands, except per share data)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Income: Rental income.................................................. $ 135,503 $ 88,687 $ 363,915 $ 251,605 Other real estate income....................................... 13,907 3,538 34,128 10,542 Income (loss) from unconsolidated entities..................... 22,204 (1,278) 11,067 1,930 Interest....................................................... 2,234 687 4,006 2,012 ----------- ----------- ----------- ----------- Total income.......................................... 173,848 91,634 413,116 266,089 ----------- ----------- ----------- ----------- Expenses: Rental expenses, net of recoveries of $20,944 and $58,820 for the three and nine months in 1999, respectively and $14,459 and $42,686 for the three and nine months in 1998, respectively and including amounts paid to affiliate of $387 and $972 for the three and nine months in 1999, respectively and $237 and $682 for the three and nine months in 1998, respectively.......................... 9,891 7,158 26,056 20,458 General and administrative, including amounts paid to affiliate of $306 and $1,304 for the three and nine months in 1999, respectively, and $545 and $1,566 for the three and nine months in 1998, respectively............ 9,715 5,713 27,526 15,626 Depreciation and amortization.................................. 43,903 26,950 110,895 73,684 Interest....................................................... 50,209 18,448 126,478 52,455 Interest rate hedge expense.................................... -- 27,652 945 27,652 Other.......................................................... 2,018 2,579 5,727 4,096 ----------- ----------- ----------- ----------- Total expenses........................................ 115,736 88,500 297,627 193,971 ----------- ----------- ----------- ----------- Earnings from operations............................................ 58,112 3,134 115,489 72,118 Minority interest share in earnings................................. 1,139 1,047 3,742 3,101 ----------- ----------- ----------- ----------- Earnings before gain on disposition of real estate and foreign currency exchange gains (losses)............................... 56,973 2,087 111,747 69,017 Gain on disposition of real estate.................................. 25,643 -- 26,358 4,278 Foreign currency exchange gains (losses)............................ 5,858 3,273 (6,437) 5,336 ----------- ----------- ----------- ----------- Earnings before cumulative effect of accounting change.............. 88,474 5,360 131,668 78,631 Cumulative effect of accounting change.............................. -- -- 1,440 -- ----------- ----------- ----------- ----------- Net earnings........................................................ 88,474 5,360 130,228 78,631 Less preferred share dividends...................................... 14,453 13,669 42,391 35,543 ----------- ----------- ----------- ----------- Net earnings (loss) attributable to Common Shares................... 74,021 (8,309) 87,837 43,088 Other comprehensive income (loss): Foreign currency translation adjustments....................... (207) 308 1,326 370 ----------- ----------- ----------- ----------- Comprehensive income (loss)......................................... $ 73,814 $ (8,001) $ 89,163 $ 43,458 =========== =========== =========== =========== Weighted average Common Shares outstanding - Basic.................. 161,446 123,045 149,201 121,183 =========== =========== =========== =========== Weighted average Common Shares outstanding - Diluted................ 176,329 123,045 149,363 121,421 =========== =========== =========== =========== Basic per share net earnings (loss) attributable to Common Shares: Earnings (loss) before cumulative effect of accounting change.. $ 0.46 $ (0.07) $ 0.60 $ 0.36 Cumulative effect of accounting change......................... -- -- (0.01) -- ----------- ----------- ----------- ----------- Net earnings (loss) attributable to Common Shares..... $ 0.46 $ (0.07) $ 0.59 $ 0.36 =========== =========== =========== =========== Diluted per share net earnings (loss) attributable to Common Shares: Earnings (loss) before cumulative effect of accounting change.. $ 0.44 $ (0.07) $ 0.60 $ 0.35 Cumulative effect of accounting change......................... -- -- (0.01) -- ----------- ----------- ----------- ----------- Net earnings (loss) attributable to Common Shares..... $ 0.44 $ (0.07) $ 0.59 $ 0.35 =========== =========== =========== =========== Distributions per Common Shares..................................... $ 0.3272 $ 0.3183 $ 0.9727 $ 0.9216 =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 4 PROLOGIS TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
Nine Months Ended September 30, -------------------------- 1999 1998 ----------- ----------- Operating activities: Net earnings..................................................................... $ 130,228 $ 78,631 Minority interest share in earnings.............................................. 3,742 3,101 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................................................ 110,895 73,684 Gain on disposition of real estate........................................... (26,358) (4,278) Straight-lined rents......................................................... (7,434) (4,170) Amortization of deferred loan costs.......................................... 3,799 1,303 Stock-based compensation..................................................... 1,632 -- (Income) loss from unconsolidated subsidiaries............................... (11,067) 14,446 Foreign currency exchange (gains) losses, net.................................... 6,561 (5,471) Interest rate hedge expense.................................................. 945 27,652 Increase in accounts receivable and other assets................................. (20,010) (25,016) Increase (decrease) in accounts payable, accrued expenses and other liabilities.. 39,364 20,728 Decrease in amount due to affiliate.............................................. (394) 408 ----------- ----------- Net cash provided by operating activities........................................ 231,903 181,018 ----------- ----------- Investing activities: Real estate investments.......................................................... (345,147) (520,611) Tenant improvements and lease commissions on previously leased space............. (16,196) (8,905) Recurring capital expenditures................................................... (18,897) (4,226) Proceeds from dispositions of real estate........................................ 397,330 64,222 Investments in and advances to unconsolidated subsidiaries....................... (167,984) (453,445) Cash acquired in Meridian Merger................................................. 48,962 -- ----------- ----------- Net cash used in investing activities................................... (101,932) (922,965) ----------- ----------- Financing activities: Proceeds from sale of shares, net of expenses.................................... -- 372,165 Proceeds from exercised options, dividend reinvestment, optional share purchase and employee share purchase plans............................. 2,142 399 Repurchase of Common Shares...................................................... -- (181) Proceeds from secured financing transactions..................................... 466,000 -- Proceeds from issuance of senior unsecured notes................................. 500,000 250,000 Debt issuance and other transaction costs incurred............................... (58,169) (3,227) Distributions paid on Common Shares.............................................. (156,040) (111,769) Distributions paid to minority interest holders.................................. (5,408) (4,764) Dividends paid on preferred shares............................................... (42,391) (35,543) Principal payments on senior unsecured notes..................................... (12,500) (15,000) Principal payments received on and retirements of employee share purchase notes.. 2,076 107 Payments on derivative financial instruments..................................... (26,995) (3,974) Payments to Meridian shareholders................................................ (67,581) -- Proceeds from lines of credit and short-term borrowings.......................... 1,436,645 1,237,325 Payments on lines of credit and short-term borrowings............................ (1,803,045) (927,825) Payment on line of credit assumed in Meridian Merger............................. (328,400) -- Regularly scheduled principal payments on mortgage notes......................... (4,774) (3,714) Principal payments on mortgage notes at maturity and prepayments................. (20,317) (5,411) ----------- ----------- Net cash provided by (used in) financing activities..................... (118,757) 748,588 ----------- ----------- Net increase in cash and cash equivalents............................................. 11,214 6,641 Cash and cash equivalents, beginning of period........................................ 63,140 25,009 ----------- ----------- Cash and cash equivalents, end of period.............................................. $ 74,354 $ 31,650 =========== ===========
See Note 10 for information on non-cash investing and financing activities. The accompanying notes are an integral part of these consolidated financial statements. 5 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS September 30, 1999 (Unaudited) 1. General: Business ProLogis Trust ("ProLogis"), a Maryland real estate investment trust ("REIT"), is a publicly held global owner and lessor of distribution facilities focused exclusively on meeting the distribution space needs of international, national, regional and local industrial real estate users through the ProLogis Operating System(TM). ProLogis engages in the acquisition, development, marketing, leasing and long-term ownership of industrial distribution facilities, and the development of master-planned distribution parks and corporate distribution facilities for its customers. ProLogis deploys capital in markets that ProLogis believes have excellent long-term growth prospects and where ProLogis believes it can achieve a strong market position through the acquisition and development of generic, flexible facilities designed for both warehousing and light manufacturing uses. In addition, ProLogis has invested in refrigerated distribution companies in North America and Europe. Principles of Financial Presentation The consolidated financial statements of ProLogis as of September 30, 1999 and for the three and nine months ended September 30, 1999 and 1998 are unaudited, and pursuant to the rules of the Securities and Exchange Commission, certain information and footnote disclosures normally included in financial statements have been omitted. While management of ProLogis believes that the disclosures presented are adequate, these interim consolidated financial statements should be read in conjunction with ProLogis' December 31, 1998 audited consolidated financial statements contained in ProLogis' 1998 Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of ProLogis' consolidated financial position and results of operations for the interim periods. The consolidated results of operations for the three and nine months ended September 30, 1999 and 1998 are not necessarily indicative of the results to be expected for the entire year. The preparation of consolidated financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On December 29, 1998, ProLogis invested in Garonor Holdings S.A. ("Garonor Holdings") by acquiring 100% of its preferred stock. Garonor Holdings, a Luxembourg company, owns Garonor S.A. ("ProLogis Garonor"), a real estate operating company in France. Security Capital Group Incorporated ("Security Capital"), ProLogis' largest shareholder, owned 100% of the common stock of Garonor Holdings. ProLogis accounted for this investment in Garonor Holdings under the equity method. On June 29, 1999, ProLogis acquired the common stock of Garonor Holdings from Security Capital, resulting in ProLogis owning all of the outstanding common and preferred stock of Garonor Holdings. Accordingly, as of that date the accounts of Garonor Holdings are consolidated in ProLogis' financial statements along with ProLogis' other majority owned and controlled subsidiaries and partnerships. The results of operations of Garonor Holdings for the period from January 1, 1999 through June 29, 1999 are reflected by ProLogis under the equity method of accounting. As of September 30, 1999, Garonor Holdings' real estate assets, at cost, were $284.3 million and Garonor Holdings had third party debt of $171.6 million ($32.6 million of unsecured debt and $139.0 million of mortgage notes). 6 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) Start-up and Organization Costs Through 1998, ProLogis capitalized costs associated with start-up activities and organization costs and amortized such costs over an appropriate period, generally five years. Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities", which requires that costs associated with organization, pre-opening, and start-up activities be expensed as incurred, was adopted by ProLogis on January 1, 1999. Accordingly, ProLogis expensed $1.4 million of unamortized organization and start-up costs as a cumulative effect of accounting change in the first quarter of 1999. Accounting for Derivatives SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998 and amended in June 1999. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000 and early adoption is allowed. SFAS No. 133 provides comprehensive guidelines for the recognition and measurement of derivatives and hedging activities and, specifically, requires all derivatives to be recorded on the balance sheet at fair value as an asset or liability. Management does not believe this standard will have a significant effect on ProLogis' consolidated financial position, results of operations or financial statement disclosures. Reclassifications Certain 1998 amounts have been reclassified within the financial statements and the notes to conform to the 1999 presentation. 2. Meridian Merger On March 30, 1999, Meridian Industrial Trust, Inc. ("Meridian"), a publicly traded REIT that owned industrial distribution facilities in the United States, was merged with and into ProLogis (the "Meridian Merger"). In accordance with the terms of the Agreement and Plan of Merger dated as of November 16, 1998, as amended (the "Merger Agreement"), the approximately 33.8 million outstanding shares of Meridian common stock were exchanged (on a 1.10 for one basis) into approximately 37.2 million ProLogis common shares of beneficial interest, $0.01 par value ("Common Shares"). In addition, the holders of Meridian common stock received $2.00 in cash per outstanding share, approximately $67.6 million in total. The holders of Meridian's Series D cumulative redeemable preferred stock received a new series of ProLogis cumulative redeemable preferred shares, Series E preferred shares, on a one for one basis. The Series E preferred shares have a 8.75% annual dividend rate ($2.1875 per share) and an aggregate liquidation value of $50.0 million. The total purchase price of Meridian was approximately $1.54 billion, which included the assumption of the outstanding debt and liabilities of Meridian as of March 30, 1999 and the issuance of approximately 1.10 million options each to acquire 1.10 ProLogis Common Shares and $2.00 in cash. The assets acquired from Meridian included approximately $1.44 billion of real estate assets, an interest in a refrigerated distribution business of $28.8 million and cash and other assets aggregating $72.3 million. The transaction was structured as a tax-free merger and was accounted for under the purchase method. The following summarized pro forma unaudited information represents the combined historical operating results of ProLogis and Meridian with the appropriate purchase accounting adjustments, assuming the Meridian Merger had occurred on January 1, 1998. The pro forma financial information presented is not necessarily indicative of what ProLogis' actual operating results would have been had ProLogis and Meridian constituted a single entity during such periods (in thousands, except per share amounts): 7 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued)
Nine Months Ended September 30, ------------------------------ 1999 1998 ------------- ------------ Rental income................................................................. $ 397,429 $ 337,331 Earnings from operations...................................................... $ 119,728 $ 82,062 Earnings attributable to Common Shares before cumulative effect of accounting change................................... $ 100,299 $ 54,179 Net earnings attributable to Common Shares.................................... $ 98,859 $ 54,179 Weighted average Common Shares outstanding: Basic.................................................................... 161,500 155,088 Diluted.................................................................. 166,645 155,829 Basic per share net earnings attributable to Common Shares before cumulative effect of accounting change............................ $ 0.62 $ 0.35 Cumulative effect of accounting change........................................ (0.01) -- ------------ ------------ Basic per share net earnings attributable to Common Shares.................... $ 0.61 $ 0.35 ============ ============ Diluted per share net earnings attributable to Common Shares before cumulative effect of accounting change............................ $ 0.60 $ 0.35 Cumulative effect of accounting change........................................ (0.01) -- ------------ ------------ Diluted per share net earnings attributable to Common Shares.................. $ 0.59 $ 0.35 ============ ============
3. Real Estate Investments in Real Estate Real estate investments consisting of income producing industrial distribution facilities, facilities under development and land held for future development, at cost, are summarized as follows (in thousands):
September 30, December 31, 1999 1998 ------------ ------------ Operating facilities: Improved land........................................................... $ 775,486 (1) $ 517,803 (1) Buildings and improvements.............................................. 3,939,983 (1) 2,731,203 (1) ------------ ------------ 4,715,469 3,249,006 ------------ ------------ Facilities under development (including cost of land)........................ 97,553 (2)(3) 209,670 (2) Land held for development.................................................... 172,280 (4) 180,796 (4) Capitalized preacquisition costs............................................. 27,364 (5) 18,028 (5) ------------ ------------ Total real estate................................................... 5,012,666 3,657,500 Less accumulated depreciation................................................ 337,934 254,288 ------------ ------------ Net real estate..................................................... $ 4,674,732 $ 3,403,212 ============ ============ - ------------ (1) As of September 30, 1999 and December 31, 1998, ProLogis had 1,350 and 1,099 operating buildings, respectively, consisting of 135,102,000 and 104,540,000 square feet, respectively. (2) Facilities under development consist of 47 buildings aggregating 8,663,000 square feet as of September 30, 1999 and 55 buildings aggregating 8,022,000 square feet as of December 31, 1998. (3) In addition to the September 30, 1999 construction payable of $26.8 million, ProLogis had unfunded commitments on its contracts for facilities under construction totaling $245.2 million. (4) Land held for future development consisted of 1,841 acres as of September 30, 1999 and 1,673 acres as of December 31, 1998. (5) Capitalized preacquisition costs include $4,126,000 and $2,199,000 of funds on deposit with title companies for future acquisitions as of September 30, 1999 and December 31, 1998, respectively.
8 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) ProLogis Development Services ProLogis Development Services Incorporated ("ProLogis Development Services") develops corporate distribution facilities for future sale or on a fee basis for customers or third parties. ProLogis owns 100% of the preferred stock of ProLogis Development Services and realizes substantially all economic benefits of its activities. Because ProLogis advances mortgage loans to ProLogis Development Services to fund its acquisition, development and construction activities, ProLogis Development Services is consolidated with the accounts of ProLogis. Accordingly, these loans ($283.1 million as of September 30, 1999) are reflected as real estate investments in ProLogis' consolidated balance sheet. ProLogis Development Services is not a qualified REIT subsidiary of ProLogis. Accordingly, provisions for federal income taxes are recognized, as appropriate. The gains recognized on disposition of properties held by ProLogis Development Services and the fees generated by ProLogis Development Services are reflected as other real estate income by ProLogis. Operating Lease Agreements ProLogis leases its facilities to customers under agreements which are classified as operating leases. The leases generally provide for payment of all or a portion of utilities, property taxes and insurance by the tenant. As of September 30, 1999, minimum lease payments receivable on leases with lease periods greater than one year are as follows (in thousands):
Remainder of 1999................................. $ 125,818 2000.............................................. 457,489 2001.............................................. 381,233 2002.............................................. 305,975 2003.............................................. 236,120 Thereafter........................................ 727,151 ------------- $ 2,233,786 =============
ProLogis' largest customer (based on rental income) accounted for 1.81% of ProLogis' rental income (on an annualized basis) for the nine months ended September 30, 1999, and the annualized base rent for ProLogis' 20 largest customers (based on rental income) accounted for approximately 13.46% of ProLogis' rental income (on an annualized basis) for the nine months ended September 30, 1999. 4. Unconsolidated Entities: Investments in and advances to unconsolidated entities are as follows (in thousands):
September 30, December 31, 1999 1998 ------------- ------------ Insight (1)..................................................................... $ 2,573 $ 1,520 ------------- ------------ ProLogis Logistics: Investment (2)(3)........................................................... 41,982 13,241 Note receivable............................................................. 130,134 128,634 Accrued interest and other receivables...................................... 17,002 9,146 ------------- ------------ 189,118 151,021 ------------- ------------ Frigoscandia S.A.: Investment (2).............................................................. (5,737) 2,900 Notes receivable............................................................ 209,314 206,667 Accrued interest and other receivables...................................... 19,911 11,998 ------------- ------------ 223,488 221,565 ------------- ------------
9 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued)
September 30, December 31, 1999 1998 ------------- ------------ Kingspark S.A.: Investment (2).............................................................. 25,576 22,413 Notes receivable............................................................ 268,474 146,135 Mortgage notes receivable................................................... 102,155 52,371 Accrued interest and other receivables...................................... 17,500 3,850 ------------- ------------ 413,705 224,769 ------------- ------------ ProLogis California: Investment (4).............................................................. 123,593 -- Other receivable............................................................ 148 -- ------------- ------------ 123,741 -- ProLogis European Properties Fund: Investment (5).............................................................. 15,677 -- Other receivables........................................................... 14,088 -- ------------- ------------ 29,765 -- Garonor Holdings (6): Investment (2).............................................................. -- 5,508 Note receivable............................................................. -- 129,395 Accrued interest receivable................................................. -- 85 ------------- ------------ -- 134,988 ------------- ------------ Total $ 982,390 $ 733,863 ============= ============ - --------------- (1) Investment represents ProLogis' investment in the common stock of Insight, Inc. ("Insight") as adjusted for ProLogis' share of Insight's earnings or loss. (2) Investment represents ProLogis' investment in the preferred stock of the respective companies including acquisition costs, as adjusted for ProLogis' share of each company's earnings or loss. (3) Includes $28.8 million representing ProLogis' interest in Meridian Refrigerated Incorporated ("MRI") which was acquired as part of the Meridian Merger. CS Integrated LLC ("CSI"), which is owned by ProLogis Logistics, also acquired an interest in MRI on March 30, 1999. ProLogis intends to sell its interest in MRI to CSI. (4) Investment represents ProLogis' equity investment in ProLogis California I LLC (`ProLogis California"), a joint venture that began operations on August 26, 1999, including acquisition costs, as adjusted for ProLogis' share of the earnings of ProLogis California and for the portion of the gain from the disposition of properties from ProLogis to ProLogis California that does not qualify for income recognition due to ProLogis' continuing ownership in ProLogis California. (5) The ProLogis European Properties Fund (the "Fund") was formed on September 16, 1999 and began operations on September 23, 1999 with the purchase of properties from ProLogis and ProLogis Kingspark. Investment represents ProLogis' equity investment in the Fund including acquisition costs, as adjusted for ProLogis' share of the earnings of the Fund and for the portion of the gain from the disposition of properties to the Fund that does not qualify for income recognition due to ProLogis' continuing ownership in the Fund. (6) Garonor Holdings was acquired on December 29, 1998 and was accounted for under the equity method from that date to June 29, 1999. After June 29, 1999, Garonor Holdings is consolidated with the accounts of ProLogis. See Note 1.
Insight As of September 30, 1999, ProLogis Development Services had a 33.3% ownership interest in Insight, a privately owned logistics optimization consulting company. This investment is accounted for under the equity method. ProLogis recognized income of $53,000 from its investment in Insight for the nine months ended September 30, 1999. Prior to July 1, 1998, this investment was accounted for under the cost method. 10 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) ProLogis Logistics ProLogis owns 100% of the preferred stock of ProLogis Logistics Services Incorporated ("ProLogis Logistics"). ProLogis Logistics owns CSI, a refrigerated distribution company operating in the United States and Canada. Prior to June 12, 1998, ProLogis Logistics owned, at various points in time, between 60.0% and 77.1% of CSI. As of September 30, 1999, ProLogis had invested $19.9 million in the preferred stock of ProLogis Logistics. As of September 30, 1999, CSI owned or operated refrigerated distribution facilities aggregating 139.4 million cubic feet. The common stock of ProLogis Logistics is owned by an unrelated party. ProLogis recognizes 95% of the economic benefits of the activities of ProLogis Logistics and its subsidiaries. As of September 30, 1999, ProLogis had a $130.1 million note receivable from ProLogis Logistics. The note is unsecured, bears interest at 8.0% per annum and matures on April 24, 2002. Interest payments on the note are due annually. ProLogis accounts for its investment in ProLogis Logistics under the equity method. ProLogis recognized income (including interest income on the note receivable and a management fee payable from CSI through June 1998) from its investment in ProLogis Logistics of $3.1 million and $7.7 million for the three and nine months in 1999 and $2.2 million and $4.7 million for the three and nine months in 1998, respectively. Frigoscandia S.A. On January 16, 1998, ProLogis invested in Frigoscandia S.A. by acquiring 100% of its preferred stock. Also on January 16, 1998, Frigoscandia S.A., a Luxembourg company, acquired Frigoscandia AB, a refrigerated distribution company headquartered in Sweden. Frigoscandia AB is 100% owned by Frigoscandia Holding AB, which is 100% owned by a wholly owned subsidiary of Frigoscandia S.A. As of September 30, 1999, Frigoscandia AB, which operates in nine European countries, owned or operated 190.2 million cubic feet of refrigerated distribution facilities. As of September 30, 1999, ProLogis had invested $28.5 million in the preferred stock of Frigoscandia S.A. The common stock of Frigoscandia S.A. is owned by a limited liability company, in which unrelated parties own 100% of the voting interests and Security Capital owns 100% of the non-voting interests. ProLogis recognizes 95% of the economic benefits of the activities of Frigoscandia S.A. and its subsidiaries. As of September 30, 1999, ProLogis had the following notes receivable outstanding: o $91.5 million unsecured note from Frigoscandia Holding AB; interest at 5.0% per annum; due on demand; o $87.8 million unsecured note from Frigoscandia S.A.; interest at 5.0% per annum; o $80.0 million due July 15, 2008 with the remainder due on demand; and o $30.0 million unsecured, non-interest bearing note from a subsidiary of Frigoscandia Holding AB; due March 20, 2018. ProLogis accounts for its investment in Frigoscandia S.A. under the equity method. ProLogis recognized income of $5.6 million and a loss of $1.2 million for the three and nine months in 1999, respectively, and losses of $4.7 million and $4.0 million for the three and nine months in 1998, respectively, (including interest income on the mortgage notes and notes receivable). Frigoscandia AB has a multi-currency, three-year revolving credit agreement through a consortium of 11 European banks in the currency equivalent of approximately $194.4 million as of September 30, 1999. The loan bears interest at each currency's respective LIBOR or Euribor rate plus 0.65%. ProLogis has entered into a guaranty agreement for 25% of the loan balance. 11 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) Kingspark S.A. On August 14, 1998, ProLogis invested in Kingspark Holding S.A. ("Kingspark S.A.") by acquiring 100% of its preferred stock. Also on August 14, 1998, Kingspark S.A., a Luxembourg company, acquired an industrial real estate development company operating in the United Kingdom, Kingspark Group Holdings Limited ("ProLogis Kingspark"). As of September 30, 1999, ProLogis Kingspark had 321,000 square feet of operating facilities, 2,830,000 square feet of facilities under development and 947,000 square feet of facilities being developed under construction management agreements. Additionally, as of September 30, 1999, ProLogis Kingspark owned 393 acres and controlled 1,412 acres of land through purchase options, letters of intent or contingent contracts. The land owned and controlled by ProLogis Kingspark has the capacity for the future development of 28.1 million square feet of facilities. As of September 30, 1999, ProLogis had invested $24.0 million in the preferred stock of Kingspark S.A. The common stock of Kingspark S.A. is owned by a limited liability company, in which unrelated third parties own 100% of the voting interests and Security Capital owns 100% of the non-voting interests. ProLogis recognizes 95% of the economic benefits of the activities of Kingspark S.A. and its subsidiaries. As of September 30, 1999, ProLogis had the following notes and mortgage notes receivable outstanding: o $112.4 million unsecured note receivable from Kingspark S.A.; interest at 5.0% per annum; due January 2000; o $156.1 million unsecured note receivable from ProLogis Kingspark; interest at 8.0% per annum; due January 2000; o $52.4 million mortgage note receivable from ProLogis Kingspark; interest at 8.0% per annum; secured by land parcels; due January 2002; and o $49.8 million of mortgage notes receivable from subsidiaries of Kingspark S.A.; interest at 7.0% per annum; secured by land parcels; due on demand. ProLogis accounts for its investment in Kingspark S.A. under the equity method. ProLogis recognized income of $12.9 million and $16.5 million for the three and nine months in 1999, respectively, and income of $1.2 million for each of the three and nine months in 1998 (including interest income on the mortgage notes and notes receivable) from its investment in Kingspark S.A. ProLogis' share of Kingspark S.A.'s income for the three and nine months ended September 30, 1999 includes a gain of $2.1 million from the disposition of properties ProLogis Kingspark had developed to the Fund. The gain recognized is net of $0.5 million which did not qualify for income recognition due to ProLogis' continuing ownership in the Fund. See the discussion below regarding the Fund. ProLogis Kingspark has a line of credit agreement with a bank in the United Kingdom. The credit agreement, which provides for borrowings of up to approximately $16.0 million, has been guaranteed by ProLogis. As of September 30, 1999, no borrowings were outstanding on the line of credit. Additionally, ProLogis has an agreement whereby it has guaranteed the performance and obligations of ProLogis Kingspark with respect to an infrastructure agreement entered into by ProLogis Kingspark related to the development of a land parcel. As of September 30, 1999, ProLogis had an unfunded commitment on this guarantee agreement of $10.0 million. ProLogis California I LLC ProLogis California began operations on August 26, 1999 as a joint venture between ProLogis and New York State Common Retirement Fund ("NYSCRF"). ProLogis California acquired 78 operating properties aggregating 11.5 million square feet, two properties under development and two land parcels from ProLogis, all in the Los Angeles market for $558.2 million. In addition, ProLogis California assumed $199.25 million of ProLogis' mortgage debt secured by the properties acquired. As of September 30, 1999, ProLogis and NYSCRF each had an equity interest in ProLogis California of $148.2 million. ProLogis provides property management, leasing and development management services to ProLogis California and earns fees for these services. 12 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) ProLogis' investment in ProLogis California as of September 30, 1999 consists of (in millions):
Equity interest............................................ $ 148.2 Reduction in ProLogis' carrying value for amount of net gain on the disposition of properties to ProLogis California that does not qualify for income recognition....................................... (25.9) ProLogis' share of ProLogis California's earnings.......... 0.3 Other, including costs..................................... 1.0 ---------- $ 123.6 ==========
ProLogis accounts for its investment in ProLogis California under the equity method and recognized $469,000 of income in the third quarter of 1999, including management fees, from its investment in ProLogis California. ProLogis European Properties Fund The ProLogis European Properties Fund was formed on September 16, 1999 and began operations on September 23, 1999 when the Fund acquired 12 operating properties aggregating 2.2 million square feet from ProLogis and ProLogis Kingspark. As of September 30, 1999, third party investors have invested $108.6 million in the Fund and a total of $1.07 billion has been committed by a group of 16 institutional investors through a private placement, which will be funded through 2002. The Fund intends to acquire additional stabilized operating properties from ProLogis, ProLogis Kingspark and unrelated parties, including properties to be developed by ProLogis and ProLogis Kingspark in the future. Stabilized properties have been defined for purposes of the Fund as properties that are greater than 90% leased with minimum lease terms of three years and that meet minimum net operating income yields, as defined and established by agreement for each country. The Fund has the right to refuse to acquire properties that ProLogis and ProLogis Kingspark have developed if they do not meet the established criteria. ProLogis has an agreement to manage the Fund for a fee pursuant to a 20-year management agreement. ProLogis has committed an additional equity investment to the Fund through the contribution of the common stock of one of ProLogis' wholly-owed European entities that owns and leases 6.6 million square feet of distribution properties in Europe with an agreed upon value of $355.2 million. This entity has total property level debt of $182.7 million, which will be assumed by the Fund. ProLogis will contribute 50.1% of common stock in January 2000 and the remaining common stock in January 2001. ProLogis has also entered into a subscription agreement with the Fund in the amount of $122.7 million. In October 1999, the Fund entered into an agreement with two international banks for a three-year 500.0 million euro revolving credit facility. The facility is secured by assets of the Fund. Borrowings can be denominated in either the euro or Sterling currencies, and will bear interest at rates above the relevant index (LIBOR or Euribor). ProLogis' investment in the Fund as of September 30, 1999 consists of (in millions of U.S. dollars):
Equity interest............................................ $ 16.7 Reduction in ProLogis' carrying value for amount of net gain on the disposition of properties to the Fund that does not qualify for income recognition............................................. (4.1) Other, including costs and ProLogis' share of the Fund's earnings.......................................... 3.1 ---------- $ 15.7 ==========
ProLogis accounts for its investment in the Fund under the equity method and recognized $25,000 of income in the third quarter of 1999 from its investment in the Fund. 13 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) Summarized Financial Information Summarized financial information for ProLogis' unconsolidated entities as of and for the nine months ended September 30, 1999 is presented below (in millions of U.S. dollars). The information presented is for the entire entity.
ProLogis European ProLogis Frigoscandia Kingspark ProLogis Properties Logistics (1)(2) S.A.(1) S.A.(1) California I(3) Fund (4) ---------------- ------------ --------- --------------- ---------- Total assets................. $ 322.4 $ 577.0 $ 503.3 $ 565.9 $ 213.3 Total liabilities (5)........ $ 280.0 $ 590.3 $ 475.3 $ 268.9 $ 87.7 Minority interest............ $ -- $ 1.6 $ -- $ -- $ -- Equity....................... $ 42.4 $ (14.9) $ 28.0 $ 297.0 $ 125.6 Revenues..................... $ 190.8 $ 314.5 $ 22.2 (6) $ 5.6 $ 0.2 Adjusted EBITDA (7).......... $ 25.2 $ 38.1 $ 17.9 $ 4.5 $ 0.2 Net earnings (loss)(8)(9).... $ (0.1) $ 9.1 (10) $ 3.8 (11) $ 0.6 $ 0.1 - --------------- (1) ProLogis has a 95% economic interest in each entity as of September 30, 1999. (2) ProLogis Logistics' balances include MRI, which was acquired on March 30, 1999. See Note 2. (3) ProLogis has a 50% equity interest as of September 30, 1999. (4) ProLogis has a 18.2% equity interest as of September 30, 1999. (5) Includes amounts due to ProLogis of $147.1 million from ProLogis Logistics, $229.2 million from Frigoscandia S.A., $388.1 million from Kingspark S.A. and $14.1 million from the Fund and loans from third parties (including accrued interest) of $88.2 million for ProLogis Logistics, $220.2 million for Frigoscandia S.A. and $262.9 million for ProLogis California. (6) Includes $14.8 million of gains related to the disposition of properties, including $2.8 million from the disposition of properties to the Fund. (7) Adjusted EBITDA represents earnings from operations before interest expense, interest income, current and deferred income taxes, depreciation, amortization, cumulative effect of accounting changes, non-recurring items and foreign currency exchange gains and losses. (8) ProLogis' share of the net earnings (loss) and interest income on intercompany notes and mortgage notes receivable are recognized in the Consolidated Statements of Earnings (Loss) and Comprehensive Income (Loss) as "Income (loss) from unconsolidated entities". (9) The net earnings (loss) of each company includes interest expense on intercompany notes and mortgage notes due to ProLogis, as applicable. (10) Includes a net foreign currency exchange gain of $2.2 million. (11) Includes a net foreign currency exchange loss of $4.8 million.
5. Borrowings: Lines of Credit ProLogis has an unsecured credit agreement with Bank of America, N.A. ("Bank of America"), Commerzbank AG and Chase Bank of Texas, National Association, as agents for a bank group that provides for a $550.0 million unsecured revolving line of credit (increased from $540.0 million on May 28, 1999). Borrowings bear interest at ProLogis' option, at either (a) the greater of the federal funds rate plus 0.5% and the prime rate, or (b) LIBOR plus 1.00% based upon ProLogis' current senior debt ratings. ProLogis' borrowings are primarily at the 30-day LIBOR rate plus 1.00% (5.40% as of September 30, 1999). Additionally, the credit agreement provides for a facility fee of 0.20% per annum. The line of credit matures on March 29, 2001 and may be extended for an additional year at ProLogis' option. ProLogis was in compliance with all covenants contained in the credit agreement as of September 30, 1999. As of September 30, 1999, $121.0 million of borrowings were outstanding on the line of credit. 14 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) The $550.0 million unsecured line of credit replaced ProLogis' previous $350.0 million unsecured line of credit that was put into place in August 1998. ProLogis' entered into the new credit agreement to allow for increased borrowing capacity after the Meridian Merger. In addition, ProLogis has a $25.0 million short-term unsecured discretionary line of credit with Bank of America that matures on October 1, 2000. By agreement between ProLogis and Bank of America, the rate of interest on and the maturity date of each advance are determined at the time of each advance. There were $6.9 million of borrowings outstanding on the line of credit as of September 30, 1999. As of September 30, 1999, ProLogis had outstanding letters of credit with Bank of America of $12.5 million which reduce the amount of available borrowings on the discretionary line of credit. Senior Unsecured Notes ProLogis has issued senior unsecured notes and medium-term unsecured notes that bear interest at fixed rates, payable semi-annually (the "Notes"). The Notes are summarized as follows (in thousands of dollars):
Carrying Principal Original Coupon Maturity Amount at Payment Date of Issuance Principal Rate Date September 30, 1999(1) Requirement ---------------- ----------- ------ -------- -------------------- ----------- May 16, 1995 $ 17,500 7.250% 05/15/00 $ 17,489 (2) May 16, 1995 17,500 7.300% 05/15/01 17,474 (2) May 17, 1996 50,000 7.250% 05/15/02 37,483 (3) October 9, 1998 125,000 7.000% 10/01/03 125,000 (2) April 26, 1999 250,000 6.700% 04/15/04 249,589 (2) July 20, 1998 250,000 7.050% 07/15/06 249,544 (2) November 20, 1997 (4) 135,000 7.250% 11/20/07 134,001 (2) April 26, 1999 250,000 7.100% 04/15/08 249,931 (2) May 17, 1996 100,000 7.950% 05/15/08 99,873 (5) March 2, 1995 150,000 8.720% 03/01/09 150,000 (6) May 16, 1995 75,000 7.875% 05/15/09 74,748 (7) November 20, 1997 (4) 25,000 7.300% 11/20/09 24,767 (2) February 4, 1997 100,000 7.810% 02/01/15 100,000 (8) March 2, 1995 50,000 9.340% 03/01/15 50,000 (9) May 17, 1996 50,000 8.650% 05/15/16 49,869 (10) July 11, 1997 100,000 7.625% 07/01/17 99,784 (2) ----------- ----------- $ 1,745,000 $ 1,729,552 =========== =========== - --------------- (1) Amounts are net of unamortized original issue discount. (2) Principal due at maturity. (3) Annual principal payments of $12.5 million from 5/15/00 to 5/15/02. (4) Senior unsecured notes assumed by ProLogis in connection with the Meridian Merger. See Note 2. (5) Annual principal payments of $25.0 million from 5/15/05 to 5/15/08. (6) Annual principal payments of $18.75 million from 3/1/02 to 3/1/09. (7) Annual principal payments of $9.375 million from 5/15/02 to 5/15/09. (8) Annual principal payments ranging from $10.0 million to $20.0 million from 2/1/10 to 2/1/15. (9) Annual principal payments ranging from $5.0 million to $12.5 million from 3/1/10 to 3/1/15. (10)Annual principal payments ranging from $5.0 million to $12.5 million from 5/15/10 to 5/15/16.
The Notes rank equally with all other unsecured and unsubordinated indebtedness of ProLogis from time to time outstanding. The Notes are redeemable at any time at the option of ProLogis. Such redemption and other terms are governed by the provisions of an indenture agreement or, with respect to the notes assumed in connection with the Meridian Merger, note purchase agreements. Under the terms of the indenture agreement and note purchase agreements, ProLogis must meet certain financial covenants and ProLogis was in compliance with all such covenants as of September 30, 1999. Other Unsecured Debt ProLogis has an unsecured term loan in the amount of 200.0 million French francs ($32.6 million as of September 30, 1999). The loan bears interest at a variable rate of Euribor plus 1.20%. The Euribor rate has been fixed through maturity at 3.62% through an interest rate swap agreement. See Note 11. The loan is due in December 2003. 15 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) Mortgage Notes, Assessment Bonds and Securitized Debt Mortgage notes, assessment bonds and securitized debt consisted of the following as of September 30, 1999 (in thousands):
Balloon Periodic Payment Interest Maturity Payment Carrying Due at Description Rate (1) Date Date Value Maturity ----------- -------- -------- -------- -------- -------- Mortgage notes: Platte Valley Industrial Center #1...... 9.750% 03/01/00 (2) $ 288 $ 256 West One Business Center #1............. 8.250 09/01/00 (2) 4,351 4,252 Tampa West Distribution Center #20...... 9.125 11/30/00 (3) 60 -- Rio Grande Industrial Center #1......... 8.875 09/01/01 (2) 2,924 2,544 Titusville Industrial Center #1......... 10.000 09/01/01 (2) 4,546 4,181 Eigenbrodt Way Distribution Center #1... 8.590 04/01/03 (2) 1,632 1,479 Gateway Corporate Center #10............ 8.590 04/01/03 (2) 1,819 1,361 Hayward Industrial Center I & II........ 8.590 04/01/03 (2) 13,768 12,480 Thornton Business Center #1--#4......... 8.590 04/01/03 (2) 9,029 8,185 Sullivan 75 Distribution Center #1...... 9.960 04/01/04 (2) 1,799 1,663 Oceanie Distribution Center #1 and Epone Distribution Center #1......... 5.000 07/26/04 (3) 1,809 -- Platte Valley Industrial Center #8...... 8.750 08/01/04 (2) 1,852 1,488 Riverside Distribution Center #3........ 8.750 08/01/04 (2) 1,455 1,170 Riverside Distribution Center #4........ 8.750 08/01/04 (2) 3,932 3,161 West One Business Center #3............. 9.000 09/01/04 (2) 4,337 3,847 Raines Distribution Center.............. 9.500 01/01/05 (2) 5,334 4,402 Prudential Insurance (4) (5)............ 6.850 03/01/05 (6) 53,260 48,850 Consulate Distribution Center #300 (4).. 6.970 02/01/06 (2) 3,759 3,167 Plano Distribution Center #7 (4)........ 7.020 04/15/06 (2) 3,804 3,200 Mitry-Mory Distribution Center #1, Isle d'Abeau Distribution Center #1 and 2 and Longjumeau Distribution Center.... (7) 12/29/06 (2) 21,190 8,150 Societe Generale (5).................... (8) 12/29/06 (2) 127,107 83,284 CIGNA (5)............................... 7.080 03/01/07 (2) 149,138 134,431 Vista Del Sol Industrial Center #1...... 9.680 08/01/07 (3) 2,474 -- Vista Del Sol Industrial Center #3...... 9.680 08/01/07 (3) 1,047 -- Senart Distribution Center #5 and Aulany Distribution Center #24....... 8.600 07/21/08 (3) 11,881 -- State Farm Insurance (4) (5)............ 7.100 11/01/08 (2) 15,497 13,698 Placid Street Distribution Center #1(4). 7.180 12/01/09 (2) 7,876 5,142 Earth City Industrial Center #4......... 8.500 07/01/10 (3) 1,952 -- GMAC Commercial Mortgage (5)............ 7.750 10/01/10 (3) 8,076 -- Executive Park Distribution Center #3... 8.190 03/01/11 (3) 1,067 -- Cameron Business Center #1 (4).......... 7.230 07/01/11 (2) 6,193 4,028 Platte Valley Industrial Center #9...... 8.100 04/01/17 (3) 3,269 -- Platte Valley Industrial Center #4...... 10.100 11/01/21 (3) 2,041 -- MGT (5)................................. 7.584 04/01/24 (9) 200,000 127,187 ---------- $ 678,566 ========== Assessment bonds: City of Wilsonville..................... 6.82% 08/19/04 (3) $ 111 City of Kent............................ 5.50 05/01/05 (3) 16 City of Kent............................ 7.85 06/20/05 (3) 84 City of Portland........................ 8.33 11/17/07 (3) 6 City of Kent............................ 7.98 05/20/09 (3) 64 City of Fremont......................... 7.00 03/01/11 (3) 9,628 City of Las Vegas....................... 8.75 10/01/13 (3) 284 City of Las Vegas....................... 8.75 10/01/13 (3) 279 City of Las Vegas....................... 8.75 10/01/13 (3) 157 City of Portland........................ 7.25 11/07/15 (3) 89 City of Portland........................ 7.25 09/15/16 (3) 211 ---------- $ 10,929 ========== Securitized debt: Tranche A............................... 7.74% 02/01/04 (2) $ 22,795 $ 20,821 Tranche B............................... 9.94 02/01/04 (2) 7,993 7,215 ----------- $ 30,788 ========== 16 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) - --------------- (1) The weighted average interest rates for mortgage notes, assessment bonds and securitized debt were 6.92%, 7.13% and 8.31%, respectively as of September 30, 1999. (2) Monthly amortization with a balloon payment due at maturity. (3) Fully amortizing. (4) Mortgage note was assumed by ProLogis in connection with the Meridian Merger. See Note 2. Under purchase accounting, the mortgage note was recorded at its fair value. Accordingly, a premium or discount was recognized, where applicable. (5) Secured by a pool of distribution facilities. (6) Carrying value includes premium, interest only with full principal amount due at maturity. (7) Variable rate provided by loan agreement is Euribor plus 1.20%. The Euribor rate has been fixed through January 2004 at 3.59% through interest rate swap agreement. See Note 11. (8) Variable rate provided by loan agreement is Euribor plus 1.20%. The Euribor rate has been fixed through January 2004 at 3.60% through interest rate swap agreement related to $125,510,000 of principal. Remaining principal bears interest at variable the rate, 3.89% as of September 30, 1999. See Note 11. (9) Monthly interest only payments through May 2005, monthly principal and interest payments from June 2005 to April 2024 with a balloon payment due at maturity.
Mortgage notes are secured by real estate with an aggregate undepreciated cost of $1.24 billion as of September 30, 1999. Assessment bonds are secured by real estate with an aggregate undepreciated cost of $226.5 million as of September 30, 1999. Securitized debt is collateralized by real estate with an aggregate undepreciated cost of $67.1 million as of September 30, 1999. Long-term Debt Maturities Approximate principal payments due on senior unsecured notes, other unsecured debt, mortgage notes, assessment bonds and securitized debt during each of the years in the five-year period ending December 31, 2003 and thereafter are as follows (in thousands):
Remainder of 1999......................................... $ 12,821 2000...................................................... 44,159 2001...................................................... 47,911 2002...................................................... 60,482 2003...................................................... 229,728 2004 and thereafter....................................... 2,090,282 ----------- Total principal due.............................. 2,485,383 Less: Original issue discount on senior unsecured notes.. (2,948) ----------- Total carrying value............................. $ 2,482,435 ===========
Interest Expense For the nine months ended September 30, 1999 and 1998, interest expense was $126.5 million and $52.5 million, respectively, which excludes capitalized interest of $11.0 million and $14.8 million, respectively. Amortization of deferred loan costs included in interest expense was $3.0 and $1.3 million for the nine months ended September 30, 1999 and 1998, respectively. The total interest paid in cash on all outstanding debt was $112.7 million and $67.6 million for the nine months ended September 30, 1999 and 1998, respectively. 6. Minority Interest: Minority interest represents the limited partners' interests in real estate partnerships controlled by ProLogis. With respect to each of the partnerships either ProLogis or a subsidiary of ProLogis is the sole general partner with all management powers over the business and affairs of the partnership. The limited partners of each partnership generally do not have the right to participate in or exercise management control over the business and affairs of the partnership. With respect to each partnership the general partner may not, without the written consent of all of the limited partners, take any action that would prevent such partnership from conducting its business, possess the property of the partnership, admit an additional partner or subject a limited partner to the liability of a general partner. 17 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) ProLogis sold its 70.0% general partnership interest in Red Mountain Joint Venture in March 1999 and recognized a gain of $715,000. As of September 30, 1999, ProLogis is the controlling general partner in six partnerships: ProLogis Limited Partnership-I, ProLogis Limited Partnership-II, ProLogis Limited Partnership-III, ProLogis Limited Partnership-IV and two partnerships (MDN/JSC II and Meridian Realty Partners, L.P.) acquired in the Meridian Merger. A total of 5,538,791 limited partnership units were held by minority interest limited partners in these partnerships as of September 30, 1999. In each of these partnerships, the limited partners are entitled to exchange partnership units for Common Shares (5,055,704 on a one for one basis and 483,087 at a rate of 1.1 Common Share per partnership unit, plus $2.00). Additionally, the limited partners are entitled to receive preferential cumulative quarterly distributions per unit equal to the quarterly distributions in respect of Common Shares. ProLogis acquired two other partnership interests in the Meridian Merger. During the second quarter of 1999, ProLogis purchased the minority partners' interest in one of these partnerships and disposed of its interest in the other of these partnerships. For the nine months ended September 30, 1999, distributions of $5.4 million were made to the minority interest limited partners. For financial reporting purposes, the assets, liabilities, results of operations and cash flows of each of the six partnerships are included in ProLogis' consolidated financial statements, and the interests of the limited partners are reflected as minority interest. 7. Distributions and Dividends: Common Share Distributions On February 24, 1999, ProLogis paid a quarterly distribution of $0.3183 per Common Share to shareholders of record on February 10, 1999. On March 18, 1999, ProLogis' Board of Trustees (the "Board") set a proposed annual distribution level of $1.30 per Common Share. Quarterly distributions of $0.3272 per Common Share were paid on May 27, 1999 to shareholders of record on May 13, 1999 and on August 26, 1999 to shareholders of record as of August 12, 1999. On October 20, 1999, the Board declared a distribution of $0.3272 per Common Share for the fourth quarter of 1999 payable on November 24, 1999 to shareholders of record on November 9, 1999. On May 3, 1999, ProLogis paid a common distribution to holders of Meridian common stock as of March 19, 1999. This distribution, which was declared by the Meridian Board of Directors prior to the closing of the Meridian Merger, related to the first quarter of 1999 and aggregated $11.1 million. This liability was assumed by ProLogis in connection with the Meridian Merger. Preferred Share Dividends On March 31, June 30, and September 30, 1999, ProLogis paid quarterly dividends of $0.5875 per cumulative redeemable Series A preferred share, $0.4375 per cumulative redeemable convertible Series B preferred share, $1.0675 per cumulative redeemable preferred Series C share and $0.495 per cumulative redeemable Series D preferred share. On April 30, 1999, ProLogis paid an aggregate dividend of $1.1 million on the Series E preferred shares ($0.5469 per share), of which $729,200 related to Meridian's Series D preferred stock and was accrued by Meridian prior to the closing of the Meridian Merger. Quarterly distributions of $0.5469 per share were paid on July 30, 1999 to shareholders of record on July 15, 1999 and on October 29, 1999 to shareholders of record on October 15, 1999. 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 distributions with respect to the Preferred Shares have been paid and sufficient funds have been set aside for distributions that have been declared for the then current distribution period with respect to the Preferred Shares. 18 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) 8. Shareholders' Equity: Authorized Shares At the annual meeting on June 24, 1999, the shareholders of ProLogis approved an Amended and Restated Declaration of Trust, which, among other provisions, increased the number of authorized shares of beneficial interest from 230,000,000 shares to 275,000,000 shares. Shelf Registration In June 1999, ProLogis' $500.0 million shelf registration statement was declared effective by the Securities and Exchange Commission. This shelf registration supplemented an existing shelf registration with a balance of $108.0 million. As a result of this filing, ProLogis can issue $608.0 million of securities in the form of debt securities, preferred shares, Common Shares, rights to purchase Common Shares and preferred share purchase rights on an as-needed basis, subject to ProLogis' ability to effect offerings on satisfactory terms. 9. Earnings Per Common Share: A reconciliation of the numerator and denominator used to calculate basic earnings per share to the numerator and denominator used to calculate diluted earnings per share for the periods indicated (in thousands, except per share amounts) is as follows:
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net earnings (loss) attributable to Common Shares....................................... $ 74,021 $ (8,309) $ 87,837 $ 43,088 Add: Minority interest share in earnings......... 1,139 -- -- -- Preferred share dividends................... 3,102 -- -- -- ----------- ----------- ----------- ----------- Adjusted net earnings (loss) attributable to Common Shares................................ $ 78,262 $ (8,309) $ 87,837 $ 43,088 =========== =========== =========== =========== Weighted average Common Shares outstanding - basic........................................ 161,446 123,045 149,201 121,183 Weighted average effect of convertible limited partnership units.................... 5,587 -- -- -- Weighted average effect of convertible preferred shares............................. 9,143 -- -- -- Incremental effect of common stock equivalents.... 153 -- 162 238 ----------- ----------- ----------- ----------- Adjusted weighted average Common Shares outstanding - diluted........................ 176,329 123,045 149,363 121,421 =========== =========== =========== =========== Per share net earnings (loss) attributable to Common Shares: Basic........................................ $ 0.46 $ (0.07) $ 0.59 $ 0.36 =========== =========== =========== =========== Diluted...................................... $ 0.44 $ (0.07) $ 0.59 $ 0.35 =========== =========== =========== ===========
19 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) For the nine months ended September 30, 1999, basic and diluted per share net earnings (loss) attributable to Common Shares before cumulative effect of accounting change was $0.60. The following convertible securities were not included in the calculation of diluted net earnings (loss) per Common Share as the effect, on an as-converted basis, was antidilutive (in thousands):
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Series B preferred shares........ -- 10,052 9,271 10,156 =========== =========== =========== =========== Limited partnership units........ -- 5,069 5,419 5,070 =========== =========== =========== =========== Options and warrants............. -- 231 -- -- =========== =========== =========== ===========
10. Supplemental Cash Flow Information Non-cash investing and financing activities for the nine months ended September 30, 1999 and 1998 are as follows: o In connection with the Meridian Merger discussed in Note 2, ProLogis issued approximately 37.2 million Common Shares and 2.0 million Series E preferred shares, assumed approximately 1.1 million options and assumed outstanding debt and liabilities of Meridian for an aggregate purchase price of approximately $1.54 billion in exchange for the assets of Meridian (including cash balances acquired of $49.0 million). o ProLogis disposed of properties to ProLogis California as discussed in Note 4 and received $148.2 million of the proceeds in the form of an equity interest in ProLogis California. o In connection with the formation of the Fund as discussed in Note 4, ProLogis received $16.7 million of the proceeds from its disposition of properties to the Fund in the form of an equity interest in the Fund. o Series B convertible redeemable preferred shares aggregating $11.3 million and $5.1 million were converted into Common Shares in 1999 and 1998, respectively. o Limited partnership units aggregating $205,000 and $302,000 were converted into Common Shares in 1999 and 1998, respectively. o Net foreign currency translation adjustments of $1,326,000 and $370,000 were recognized in 1999 and 1998, respectively. o Mortgage notes in the amount of $10.6 million were assumed in connection with the acquisition of real estate in 1998. 11. Financial Instruments: Derivative Financial Instruments ProLogis uses derivative financial instruments as hedges to manage well-defined risks associated with interest and foreign currency rate fluctuations on existing obligations and transactions or on anticipated transactions. ProLogis does not use derivative financial instruments for trading purposes. The primary risks associated with derivative instruments are market risk and credit risk. Market risk is defined as the potential for loss in the value of the derivative due to adverse changes in market prices (interest rates or foreign currency rates). Through hedging, ProLogis can effectively manage the risk of increases in interest rates and fluctuations in foreign currency exchange rates. Credit risk is the risk that one of the parties to a derivative contract fails to perform or meet their financial obligation under the contract. ProLogis does not obtain collateral to support financial instruments subject to credit risk but monitors the credit standing of counterparties. ProLogis does not anticipate non-performance by any of the counterparties to its derivative contracts. Should a counterparty fail to perform, however, ProLogis would incur a financial loss to the extent of the positive fair market value of the derivative instruments, if any. 20 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) The following table summarizes the activity in derivative instruments for the nine months ended September 30, 1999 (in millions):
Interest Rate Foreign Futures Interest Rate Currency Put Contracts Swaps Options (1) ------------- ------------- ------------ Notional amount as of December 31, 1998......... $ 75.0 $ 75.0 $ -- New contracts................................... -- 179.3 (2) 30.0 Terminated contracts............................ (75.0) (75.0)(3) (11.4) --------- --------- --------- Notional amount as of September 30, 1999........ $ -- $ 179.3 $ 18.6 ========= ========= ========= - -------------- (1) ProLogis entered into foreign currency put options during the third quarter of 1999 related to its operations in Europe. The notional amount as of September 30, 1999 represents the U.S. dollar equivalent related to put options with notional amounts of 9.7 million Swedish krona, 6.4 million British pounds and 6.4 million euros. The outstanding contracts were marked to market as of September 30, 1999. ProLogis recognized an aggregate loss of $381,000 on the put options including the mark to market adjustment. The put options provide ProLogis with the option to exchange the applicable foreign currencies for U. S. dollars at a fixed exchange rate such that if the foreign currencies were to depreciate against the U. S. dollar to predetermined levels, ProLogis could exercise its options and mitigate its foreign currency exchange losses. (2) ProLogis has interest rate swap agreements related to variable rate mortgage notes and other unsecured debt in the currency equivalent of $179.3 million as of September 30, 1999. The swap agreements have a combined notional amount of 1.1 billion French francs and fix the Euribor rate at 3.62% through December 2003 on $32.6 million of other unsecured debt, at 3.60% through January 2004 on $125.5 million of mortgage notes and at 3.59% through 2004 on $21.2 million of mortgage notes. (3) In October 1997, in anticipation of debt offerings in 1998, ProLogis entered into two interest rate protection agreements which were renewed past the original termination dates. These agreements were entered into by ProLogis to fix the interest rate on anticipated financings.
During the third quarter of 1998, ProLogis determined that the interest rate protection agreements no longer qualified for hedge accounting treatment under GAAP based upon the following: o Due to changing conditions in the public debt markets, it was no longer considered probable that ProLogis would complete the anticipated 1998 longer term debt offerings that prompted ProLogis to enter into these interest rate protection agreements in 1997 (i.e., ProLogis would not be exposed to the interest rate risk that these instruments were intended to hedge); and o ProLogis determined, through internal analysis and through communications with independent third parties, that a high degree of correlation no longer existed between changes in the market values of these interest rate protection agreements and the "market values" of the anticipated debt offerings (i.e., the interest rate at which the debt could be issued by ProLogis under existing market conditions). Accordingly, ProLogis began marking these agreements to market as of September 30, 1998. For 1998, ProLogis recognized a non-cash expense of $26.1 million. These agreements were terminated in February 1999 at a total cost of $27.0 million. On December 22, 1997, ProLogis entered into two separate contracts to (i) exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange 310.0 million German marks for $175.0 million in anticipation of the January 1998 acquisition and planned European currency denominated financing of Frigoscandia AB by Frigoscandia S.A., ProLogis' unconsolidated subsidiary. The contracts were marked to market as of December 31, 1997 and ProLogis recognized a net loss of $6.0 million in 1997. Both contracts were settled during the first quarter of 1998 at a net loss of $4.0 million. Accordingly, ProLogis recognized a net gain of $2.0 million in the first quarter of 1998. These foreign currency exchange hedges were one-time, non-recurring contracts that fixed the exchange rate between the U.S. dollar and the Swedish krona and German mark. ProLogis executed these hedges after the execution of the purchase agreement to acquire Frigoscandia AB, which required payment in Swedish krona. The contracts were executed exclusively for the acquisition and financing of Frigoscandia AB and were not entered into to hedge on-going income in foreign currencies. 21 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) 12. Business Segments: ProLogis has three reportable business segments: o long-term ownership and leasing of industrial distribution facilities in North America (a portion of which is owned through ProLogis California--See Note 4) and Europe (a portion of which is owned through Garonor Holdings, a subsidiary that was recognized under the equity method of accounting until June 29, 1999 and a portion of which is owned through the Fund - See Notes 1 and 4); each operating property is considered to be an individual operating segment having similar economic characteristics which are combined within the reportable segment based upon geographic location; o operation of refrigerated distribution facilities through unconsolidated entities in North America (ProLogis Logistics and MRI) and Europe (Frigoscandia S.A.); each company's operating properties are considered to be individual operating segments having similar economic characteristics which are combined within the reportable segment based upon geographic location; and o corporate distribution facilities services business which is the development of distribution facilities for future sale or on a fee basis for customers in North America and in Europe (a portion of which is owned through Kingspark S.A.); the development activities of ProLogis and Kingspark S.A. are considered to be individual operating segments having similar economic characteristics which are combined within the reportable segment based upon geographic location. Reconciliations of the three reportable segments': (i) income from external customers to ProLogis' total income; (ii) net operating income from external customers to ProLogis' earnings from operations (ProLogis' chief operating decision makers rely primarily on net operating income to make decisions about allocating resources and assessing segment performance); and (iii) assets to ProLogis' total assets are as follows (in thousands):
Nine Months Ended September 30, ------------------------------ 1999 1998 ------------- ------------- Income: Property operations: North America (1)................................................... $ 345,683 $ 246,783 Europe (2).......................................................... 6,305 4,824 ------------- ------------- Total property operations segment.......................... 351,988 251,607 ------------- ------------- Refrigerated distribution operations: North America (3)................................................... 7,685 4,734 Europe (4) (5)...................................................... (1,239) (3,982) ------------- ------------- Total refrigerated distribution operations segment......... 6,446 752 ------------- ------------- Corporate distribution facilities services business: North America....................................................... 23,633 10,540 Europe (6) (7)...................................................... 27,043 1,178 ------------- ------------- Total corporate distribution facilities services business segment...................................... 50,676 11,718 ------------- ------------- Reconciling items: Interest income..................................................... 4,006 2,012 ------------- ------------- Total income............................................... $ 413,116 $ 266,089 ============= =============
22 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued)
Nine Months Ended September 30, ------------------------------ 1999 1998 ------------- ------------- Net operating income: Property operations: North America (1)................................................... $ 320,623 $ 226,791 Europe (2).......................................................... 5,309 4,358 ------------- ------------- Total property operations segment.......................... 325,932 231,149 ------------- ------------- Refrigerated distribution operations: North America (3)................................................... 7,685 4,734 Europe (4) (5)...................................................... (1,239) (3,982) ------------- ------------- Total refrigerated distribution operations segment......... 6,446 752 ------------- ------------- Corporate distribution facilities services business: North America....................................................... 23,633 10,540 Europe (6) (7)...................................................... 27,043 1,178 ------------- ------------- Total corporate distribution facilities services business segment...................................... 50,676 11,718 ------------- ------------- Reconciling items: Interest income..................................................... 4,006 2,012 General and administrative expense.................................. (27,526) (15,626) Depreciation and amortization....................................... (110,895) (73,684) Interest expense.................................................... (126,478) (52,455) Interest rate hedge expense......................................... (945) (27,652) Other expenses...................................................... (5,727) (4,096) ------------- ------------- Total reconciling items.................................... (267,565) (171,501) ------------- ------------- Earnings from operations............................................ $ 115,489 $ 72,118 ============= ============= September 30, December 31, 1999 1998 ------------- ------------- Assets: Property operations: North America (8)................................................... $ 4,277,876 $ 3,147,742 Europe (8).......................................................... 491,358 309,639 ------------- ------------- Total property operations segment.......................... 4,769,234 3,457,381 ------------- ------------- Refrigerated distribution operations: North America (8)................................................... 189,118 151,021 Europe (8).......................................................... 223,488 221,566 ------------- ------------- Total refrigerated distribution operations segment......... 412,606 372,587 ------------- ------------- Corporate distribution facilities services business: North America....................................................... 166,188 165,986 Europe (8).......................................................... 413,705 224,769 ------------- ------------- Total corporate distribution facilities services business segment...................................... 579,893 390,755 Reconciling items: Cash ............................................................... 74,354 63,140 Accounts and notes receivable....................................... 15,281 1,313 Other assets........................................................ 97,698 45,553 ------------- ------------- Total reconciling items.................................... 187,333 110,006 ------------- ------------- Total assets........................................................ $ 5,949,066 $ 4,330,729 ============= ============= 23 PROLOGIS TRUST NOTES TO FINANCIAL STATEMENTS--(Continued) - --------------- (1) Includes an amount recognized under the equity method related to ProLogis' investment in ProLogis California in addition to the operations of ProLogis that are reported on a consolidated basis. See Note 4 for summarized financial information of ProLogis California. (2) Includes amounts recognized under the equity method related to ProLogis' investments in Garonor Holdings (including a $13.0 million net foreign currency exchange loss) and the Fund, in addition to the operations of ProLogis that are reported on a consolidated basis. See Note 4 for summarized financial information of the Fund and Note 1 for a discussion of Garonor Holdings. (3) Represents amount recognized under the equity method related to ProLogis' investment in ProLogis Logistics. See Note 4 for summarized financial information of ProLogis Logistics. (4) Represents amount recognized under the equity method related to ProLogis' investment in Frigoscandia S.A. See Note 4 for summarized financial information of Frigoscandia S.A. (5) Amount for the nine months ended September 30, 1999 includes a $2.1 million net foreign currency exchange gains. (6) Amount for the nine months ended September 30, 1999 includes $16.5 million recognized under the equity method related to ProLogis' investment in Kingspark S.A. Also includes $10.4 million of gains recognized by ProLogis related to the sale of properties by ProLogis to the Fund. See Note 4 for summarized financial information of Kingspark S.A. (7) Amount for the nine months ended September 30, 1999 includes a $4.6 million net foreign currency exchange gains. (8) Amounts include investments in unconsolidated entities accounted for under the equity method. See Note 4 for summarized financial information as of September 30, 1999.
24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Trustees and Shareholders of ProLogis Trust: We have reviewed the accompanying consolidated balance sheet of ProLogis Trust and subsidiaries as of September 30, 1999, and the related consolidated statements of earnings and comprehensive income for the three and nine months ended September 30, 1999 and 1998, and the consolidated statements of cash flows for the nine months ended September 30, 1999 and 1998. These financial statements are the responsibility of the Trust's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of ProLogis Trust and subsidiaries as of December 31, 1998, and in our report dated March 5, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Chicago, Illinois November 10, 1999 25 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with ProLogis' consolidated financial statements and the notes thereto included in Item 1 of this report. See ProLogis' 1998 Annual Report on Form 10-K for a discussion of various risk factors associated with forward-looking statements made in this document. Overview General ProLogis' operating results depend primarily on (i) the operating results of its industrial distribution facilities, which are substantially influenced by the demand for and supply of industrial distribution facilities in ProLogis' North American and European target market cities, the pace and economic returns at which ProLogis can acquire and develop additional industrial distribution facilities and the extent to which ProLogis can sustain improved market performance as measured by lease rates and occupancy levels; (ii) the demand for the corporate distribution facilities services that are provided by ProLogis, ProLogis Development Services and ProLogis Kingspark; and (iii) the operating performance of ProLogis' unconsolidated subsidiaries that are engaged in the refrigerated distribution business. ProLogis' target markets and submarkets have benefited substantially in recent periods from demographic trends (including population and job growth) which influence the demand for distribution facilities. ProLogis believes its ability to compete is significantly enhanced relative to other companies due to its depth of management and ability to serve customers through the ProLogis Operating System(TM). As of September 30, 1999, ProLogis' real estate investments included 135.1 million square feet of operating facilities with a total expected investment of $4.84 billion. ProLogis had 8.7 million square feet of facilities under development as of September 30, 1999 with a total expected investment at completion of $352.5 million. Development starts during the nine months ended September 30, 1999 aggregated 9.2 million square feet at a total expected investment of $362.7 million. Development completions during the nine months ended September 30, 1999 aggregated 8.9 million square feet at a total expected investment of $371.4 million. As of September 30, 1999, ProLogis had 1,841 acres of land in inventory with the capacity for the future development of approximately 30.6 million square feet of distribution facilities. Additionally, ProLogis had 1,242 acres of land under control for the future development of 22.1 million square feet of distribution facilities. Through ProLogis' investment in ProLogis Kingspark, ProLogis had an additional 321,000 square feet of operating facilities, 2,830,000 square feet of facilities under development and 947,000 square feet of facilities being developed under construction management agreements in the United Kingdom as of September 30, 1999. Additionally, as of September 30, 1999, ProLogis Kingspark owned 393 acres and controlled 1,412 acres of land with the capacity for the future development of 28.1 million square feet of distribution facilities. ProLogis has also invested in refrigerated distribution businesses through investments in the preferred stock of two companies. As of September 30, 1999, ProLogis' had approximately 329.6 million cubic feet of refrigerated distribution facilities in operation. Of the total, 190.2 million cubic feet are located in Europe. On December 29, 1998, ProLogis invested in Garonor Holdings by acquiring 100% of its preferred stock. Garonor Holdings, a Luxembourg company, owns ProLogis Garonor, a real estate operating company in France. Security Capital, ProLogis' largest shareholder, owned 100% of the common stock of Garonor Holdings. ProLogis accounted for its investment in Garonor Holdings and ProLogis Garonor under the equity method. On June 29, 1999, ProLogis acquired the voting stock of Garonor Holdings from Security Capital resulting in ProLogis owning all of the outstanding common and preferred stock of Garonor Holdings. Accordingly, as of that date the accounts of Garonor Holdings and ProLogis Garonor are consolidated in ProLogis' financial statements along with ProLogis' other majority owned and controlled subsidiaries and partnerships. The results of operations of Garonor Holdings for the period from January 1, 1999 through June 29, 1999 are reflected by ProLogis under the equity method. As of September 30, 1999, Garonor Holdings' real estate assets, at cost, were $284.3 million and Garonor Holdings had third party debt of $171.6 million ($32.6 million of unsecured debt and $139.0 million of mortgage notes). 26 On March 30, 1999, Meridian Industrial Trust, Inc., a publicly traded REIT that owned approximately 32.2 million square feet of industrial distribution facilities in the United States, was merged with and into ProLogis. In accordance with the terms of the Merger Agreement, the approximately 33.8 million outstanding shares of Meridian common stock were exchanged (on a 1.10 for one basis) into approximately 37.2 million ProLogis Common Shares. In addition, the holders of Meridian common stock received $2.00 in cash per outstanding share, approximately $67.6 million in total. The holders of Meridian's Series D cumulative redeemable preferred stock received cumulative redeemable ProLogis Series E preferred shares on a one for one basis. The Series E preferred shares have a 8.75% annual dividend rate ($2.1875 per share) and an aggregate liquidation value of $50.0 million. The total purchase price of Meridian was approximately $1.54 billion, which included the assumption of the outstanding debt and liabilities of Meridian as of March 30, 1999 and the issuance of approximately 1.10 million options each to acquire 1.10 ProLogis Common Shares and $2.00 in cash. The assets acquired from Meridian included approximately $1.44 billion of real estate assets, an interest in a refrigerated distribution business of $28.8 million and cash and other assets aggregating $72.3 million. The transaction was structured as a tax-free merger and was accounted for under the purchase method. In the third quarter of 1999, ProLogis disposed of properties to two entities in exchange for cash and an ownership interest in the entities that acquired the properties. In one transaction, ProLogis disposed of 11.5 million square feet of properties, two properties under development and two land parcels to ProLogis California. ProLogis has an equity interest in ProLogis California of $148.2 million as of September 30, 1999. ProLogis recognized $26.0 million of the total gain of $52.0 million related to the disposition of properties to ProLogis California. The remaining gain did not qualify for income recognition due to ProLogis' continuing ownership in ProLogis California. In the second transaction, the Fund acquired 2.2 million square feet of distribution properties from ProLogis and ProLogis Kingspark. ProLogis has a $16.7 million equity interest in the Fund as of September 30, 1999. ProLogis recognized a gain of $10.4 million as other real estate income on the disposition of the properties it owned to the Fund, net of $4.1 million that did not qualify for income recognition. ProLogis Kingspark recognized a gain of $2.8 million on the disposition of properties it developed to the Fund. Under the equity method, ProLogis recognized $2.6 million of this gain (95%), net of $0.5 million which did not qualify for income recognition. No assurance can be given that the current cost of funds available to ProLogis will be available in the future or that ProLogis will continue to be able to obtain unsecured debt or equity financing in the public markets on favorable terms or to continue to generate capital for redeployment through sales of existing assets. During 1998 and the first nine months of 1999, the real estate industry experienced a general tightening of the equity and credit markets. Additionally, no assurance can be given that the expected trends in leasing rates and economic returns on acquired and developed facilities will be realized. There are risks associated with ProLogis' development and acquisition activities which include factors such as development and acquisition opportunities explored by ProLogis may be abandoned; construction costs of a project may exceed original estimates due to increased materials, labor or other expenses; and construction and lease-up may not be completed on schedule, resulting in increased debt service expense and construction costs. Acquisition activities entail risks that investments will fail to perform in accordance with expectations and that analysis with respect to the cost of improvements to bring an acquired project up to standards will prove inaccurate, as well as general investment risks associated with any new real estate investment. Although ProLogis undertakes a thorough evaluation of the physical condition of each proposed investment before it is acquired, certain defects or necessary repairs may not be detected until after it is acquired, which could increase ProLogis' total acquisition cost. There are also risks associated with the hedging strategies used to manage interest rate and foreign currency exchange rate fluctuations on transactions. If these transactions do not occur as planned, ProLogis could incur costs. To the extent ProLogis' business activities outside the United States are conducted in a currency other than the U.S. dollar, ProLogis is exposed to foreign currency exchange rate fluctuations. However, all of ProLogis' business activities in Mexico and Poland are U.S. dollar denominated. The occurrence of any of the events described above could adversely affect ProLogis' ability to achieve its projected returns on acquisitions and projects under development and could hinder ProLogis' ability to make expected distributions to equity holders. Results of Operations Nine Months Ended September 30, 1999 and 1998 Net earnings attributable to Common Shares increased by $44.7 million to $87.8 million for the nine months ended September 30, 1999 from $43.1 million for the same period in 1998. The increase in net earnings attributable to Common Shares in 1999 from 1998 was primarily the result of: o a net increase in income generated by ProLogis' unconsolidated subsidiaries in 1999 from 1998, primarily due to the recognition of a full nine months of income from ProLogis Kingspark in 1999 as compared to 1998 (ProLogis Kingspark was acquired on August 14, 1998), partially offset by the Garonor Holding loss in 1999; 27 o An increase in the gains from disposition of real estate in 1999 over 1998; o the recognition of an interest rate hedge expense of $27.7 million in 1998 as compared to $1.0 million in 1999. o an increase in net operating income from property operations (after deductions for depreciation), primarily the result of the increased number of distribution facilities in operation in 1999 as compared to 1998; and o an increase in other real estate income, primarily gains on disposition of facilities and fees generated by ProLogis' corporate distribution facilities services business. See "--Other Real Estate Income". These increases in net earnings attributable to Common Shares were partially offset by: o net foreign currency exchange losses recognized by ProLogis in 1999; o the write-off of previously capitalized start-up and organization costs due to the adoption of a new accounting principle in 1999; and o increases in 1999 in general and administrative expenses and other expenses, primarily pursuit costs written-off and franchise and income taxes. Interest expense, preferred share dividends and weighted average Common Shares outstanding all increased in 1999 as compared to 1998. These increases are the result of additional debt and equity used by ProLogis to finance its acquisition and development activities in each period. Property Operations As of September 30, 1999 ProLogis had 1,350 operating facilities totaling 135.1 million square feet. ProLogis had 1,074 operating facilities totaling 100.0 million square feet as of September 30, 1998. This increase in operating facilities (primarily due to the Meridian Merger partially offset by the disposition of facilities to ProLogis California and the ProLogis European Properties Fund) resulted in an increase in property-level net operating income of $106.7 million from 1998 to 1999 as follows (in thousands):
1999 1998 ---------- ---------- Rental income................................ $ 363,915 $ 251,605 Rental expenses, net of recoveries........... 26,056 20,458 ---------- ---------- Net operating income.................... $ 337,859 $ 231,147 ========== ==========
Rental income increased by $112.3 million in 1999 as compared to 1998. This increase is comprised from the following components: o facilities acquired or developed during 1999 contributed $59.1 million (primarily due to the Meridian Merger) and $10.3 million of additional rental income, respectively; o facilities acquired or developed during 1998 contributed $19.0 million and $21.4 million of additional rental income, respectively; o facilities owned and operated as of January 1, 1998 contributed $8.6 million of additional rental income; and o facilities that were in operation during 1998 but have subsequently been disposed of reduced rental income in 1999 by $6.1 million. Rental expenses, net of recoveries from tenants, increased by $5.6 million in 1999 over 1998. Rental expenses, before the deduction of amounts recovered from tenants, were 23.3% of rental income for 1999 and 25.1% of rental income for 1998. ProLogis frequently acquires facilities that are underleased and develops facilities that are not fully leased at the start of construction, which reduces ProLogis' overall occupancy rate below its stabilized level but provides opportunities to increase revenues. The term "stabilized" means that capital improvements, repositioning, new management and new marketing programs (or development and marketing, in the case of newly developed facilities) have been completed and in effect for a sufficient period of time (but in no case longer than 12 months for facilities acquired by ProLogis and 12 months after shell completion for facilities developed by ProLogis) to achieve stabilized occupancy (typically 93%). ProLogis has been successful in increasing occupancies on acquired and developed facilities during their initial months of operation resulting in an occupancy rate of 94.8% and a leased rate of 95.9% for stabilized facilities owned as of September 30, 1999. ProLogis' marketing and leasing efforts have resulted in an average increase in rental rates of 15.1% in 1999. The increase is based on 16.7 million square feet of new leases and lease renewals on previously leased space (including leased space in properties owned or managed by ProLogis). As leases are renewed or new leases are acquired, ProLogis expects most rental rates on renewals or new leases to increase during 1999. 28 Other Real Estate Income Other real estate income consists primarily of gains on the disposition of land and operating properties that have been acquired or developed with the intent to hold the properties only in the short-term with future disposition to another party as the primary objective. In addition, the fees and other income received from customers for whom ProLogis develops corporate distribution facilities are recognized as other real estate income. Of the total other real estate income of $34.1 million recognized by ProLogis in 1999, $22.6 million was generated by such dispositions, $1.1 million represents fees and other income and $10.4 million represents the gain recognized on the disposition of developed properties to the Fund. Due to the timing of the dispositions and the completion of the development projects, other real estate income recognized by ProLogis will vary on a quarterly and annual basis. Income (Loss) from Unconsolidated Entities Income (loss) from unconsolidated entities relates to ProLogis' investments in: o 100% of the preferred stock of two companies, whose primary source of income is their respective investments in refrigerated distribution businesses; o Kingspark S.A., which owns an industrial real estate development company; o Garonor Holdings, which owns an industrial distribution facilities company and has been consolidated with the accounts of ProLogis subsequent to June 29, 1999; o ProLogis California which owns distribution facilities in the Los Angeles market; and o the Fund which owns distribution facilities in Europe. These investments, discussed in Notes 1 and 4 to the consolidated financial statements in Item 1, generated income (losses) as follows (in thousands):
Nine Months Ended September 30, ----------------------- 1999 1998 ---------- ---------- Insight (1)................................. $ 53 $ 13 ---------- ---------- ProLogis Logistics: Equity in loss......................... (100) (4,223) Management fee from CSI (2)............ -- 1,011 Interest income on note receivable..... 7,785 7,933 ---------- ---------- 7,685 4,721 ---------- ---------- Frigoscandia S.A. (3): Equity in loss (4)..................... (8,793) (18,735) Interest income on mortgage notes and notes receivable................... 7,555 14,753 ---------- ---------- (1,238) (3,982) ---------- ---------- Kingspark S.A. (5): Equity in earnings (loss) (6).......... 2,984 (76) Interest income on mortgage notes and notes receivable................... 13,510 1,254 ---------- ---------- 16,494 1,178 ---------- ---------- ProLogis California (7): Equity in earnings..................... 321 -- Fees earned............................ 148 -- ---------- ---------- 469 -- Fund (8): Equity in earnings..................... 25 -- Garonor Holdings (9): Equity in loss (10).................... (15,409) -- Interest income on note receivable..... 2,988 -- ---------- ---------- (12,421) -- ---------- ---------- Total........................... $ 11,067 $ 1,930 ========== ========== 29 - ----------------- (1) Represents ProLogis' investment in a privately owned logistics optimization consulting company that, prior to July 1, 1998, was accounted for under the cost method. (2) ProLogis received a management fee from CSI during the first six months of 1998. (3) Frigoscandia S.A. was acquired on January 16, 1998. (4) Includes a net foreign currency exchange loss of $2.1 million. (5) Kingspark S.A. was acquired on August 14, 1998. (6) Includes a net foreign currency exchange loss of $4.6 million. (7) ProLogis California began operations on August 26, 1999. (8) The Fund began operations on September 23, 1999. (9) Garonor Holdings was acquired on December 29, 1998 and was accounted for under the equity method of accounting from that date to June 29, 1999. After June 29, 1999, Garonor Holdings is consolidated with the accounts of ProLogis. See Note 1 to the consolidated financial statements in Item 1. (10) Includes a net foreign currency exchange loss of $13.0 million.
Depreciation and Amortization The increase in depreciation and amortization expense of $37.2 million for the nine months ended September 30, 1999 as compared to the same period in 1998 results primarily from the increase in operating facilities in 1999 over 1998. See "--Property Operations". Interest Rate Hedge Expense See "--Liquidity and Capital Resources--Derivative Financial Instruments" for a discussion of this expense. Interest Expense Interest expense is summarized as follows (in thousands):
Nine Months Ended September 30, ------------------------ 1999 1998 ----------- ---------- Lines of credit and short-term borrowings................................ $ 15,954 $ 11,111 Senior unsecured notes....................... 81,567 48,110 Mortgage notes and other debt................ 39,986 8,048 Capitalized interest......................... (11,029) (14,814) ----------- ---------- $ 126,478 $ 52,455 =========== ==========
Interest expense on lines of credit and short-term borrowings increased $4.8 million in 1999 over 1998 due primarily to a higher average outstanding balance ($303.4 million in 1999 and $208.6 million in 1998) partially offset by a lower weighted average daily interest rate (5.99% in 1999 and 6.56% in 1998). See " -- Liquidity and Capital Resources -- Investing and Financing Activities". In addition, loan cost amortization related to the lines of credit and short-term borrowings increased in 1999 over 1998. Senior unsecured notes interest expense increased by $33.5 million in 1999 as compared to 1998 due to interest on new senior unsecured debt issuances: $250.0 million issued in July 1998, $125.0 million issued in October 1998 and $500.0 million issued in April 1999 and the assumption of $160.0 million of Notes in the Meridian Merger. Interest expense on mortgage notes and other debt increased by $31.9 million in 1999 over 1998 due to the higher weighted average balance of mortgage notes and other debt outstanding in 1999 over 1998, primarily three secured financing transactions aggregating $532.0 million that were completed between December 1998 and April 1999. See "Liquidity and Capital Resources--Other Financing Sources." Interest expense recognized on borrowings is offset by interest capitalized with respect to ProLogis' development activities. Capitalized interest decreased by $3.8 million in 1999 over 1998. Capitalized interest levels are reflective of ProLogis' cost of funds and the level of development activity. The decrease in capitalized interest is due to decreased development activity in 1999 and to ProLogis' lower weighted average cost of funds in 1999. 30 Other Expenses Other expenses, which increased by $1.6 million for the nine months ended September 30, 1999 over the same period in 1998, consist of land holding costs, the write-off of previously capitalized pursuit costs, franchise and income tax expenses related to ProLogis' taxable subsidiaries in 1999 and non-recurring costs associated with ProLogis' name change in 1998. Land holding costs were $2.2 million in 1999 and $1.7 million in 1998. Pursuit cost write-offs were $2.0 million in 1999 and $0.9 million in 1998. Tax expense was $1.5 million in 1999 and the name change costs were $1.5 million in 1998. Foreign Currency Exchange Gains (Losses) ProLogis makes intercompany loans to its consolidated foreign subsidiaries primarily in U.S. dollars. Because the consolidated foreign subsidiaries' functional currencies are not the U.S. dollar, these intercompany loans have been marked to market by the foreign subsidiaries based upon the applicable exchange rate in effect at the end of the period. ProLogis incurred a remeasurment loss of $6.6 million and a remeasurement gain of $5.5 million for the nine months in 1999 and 1998, respectively. These gains or losses resulted primarily from fluctuations of the U.S. dollar against the euro, French franc, Dutch guilder and British pound, the primary currencies of the foreign subsidiaries to which ProLogis makes intercompany loans. Also, ProLogis recognized a foreign currency transaction gain of $125,000 for the nine months ended September 30, 1999 and a foreign currency transaction loss of $135,000 for the nine months ended September 30, 1998. For the nine months ended September 30, 1998, ProLogis recognized foreign currency hedge income of $2,054,000 related to two separate contracts entered into on December 22, 1997 to (i) exchange $373.8 million for 2.9 billion Swedish krona, and (ii) exchange 310.0 million German marks for $175.0 million in anticipation of the January 1998 acquisition and planned European currency denominated financing of Frigoscandia AB by Frigoscandia S.A., ProLogis' unconsolidated subsidiary. The contracts were marked to market as of December 31, 1997. ProLogis recognized a net loss of $6.0 million in 1997. Both contracts were settled during the first quarter of 1998 and ProLogis recognized a net gain of $2,054,000 upon settlement. These foreign currency exchange hedges were one-time, non-recurring contracts that fixed the exchange rate between the U.S. dollar and the Swedish krona and German mark. ProLogis executed these hedges after the execution of the purchase agreement to acquire Frigoscandia AB, which required payment in Swedish krona. The contracts were executed exclusively for the acquisition and financing of Frigoscandia AB and were not entered into to hedge on-going income in foreign currencies. Cumulative Effect of Accounting Change Through 1998, ProLogis capitalized costs associated with start-up activities and organization costs and amortized such costs over an appropriate period, generally five years. SOP 98-5, "Reporting on the Costs of Start-Up Activities", which requires that costs associated with organization, pre-opening, and start-up activities be expensed as incurred, was adopted by ProLogis on January 1, 1999. Accordingly, ProLogis expensed $1.4 million of unamortized organization and start-up costs as a cumulative effect of accounting change in the first quarter of 1999. Preferred Share Dividends The increase in preferred share dividends of $6.8 million for the nine months ended September 30, 1999 over the same period in 1998 is primarily attributable to the issuance of Series D preferred shares in April 1998 and the issuance of Series E preferred shares in March 1999. See "--Liquidity and Capital Resources--Investing and Financing Activities". Three Months Ended September 30, 1999 and 1998 ProLogis had net earnings attributable to Common Shares for the three months ended September 30, 1999 of $74.0 million as compared to a net loss of $8.3 million for the same period in 1998. During the three months ended September 30, 1999, ProLogis recognized gains on disposition of real estate of $25.6 million and no such gains were recognized in the comparable period in 1998. Also, in the three months ended September 30, 1998, ProLogis recognized an interest rate hedge expense of $27.7 million while no such expense was incurred in 1999. All other components of the net earnings (loss) attributable to Common Shares for the three months ended September 30, 1999 compared to three months ended September 30, 1998 reflect changes similar to those discussed in the preceding paragraphs for comparison of the nine months ended on the same dates. 31 Environmental Matters ProLogis did not experience any environmental condition on its facilities which materially adversely affected its results of operations or financial position. Liquidity and Capital Resources Overview ProLogis considers its liquidity and ability to generate cash from operations and financing alternatives to be adequate and expects it to continue to be adequate to meet its anticipated development, acquisition, operating and debt service needs as well as its shareholder distribution requirements. ProLogis future investing activities are expected to consist primarily of acquiring and developing distribution facilities. These activities are expected to be funded with the proceeds from the disposition of selected facilities currently in ProLogis' portfolio and the proceeds from the disposition of facilities developed specifically for sale through ProLogis' corporate distribution facilities services business. In the short-term, borrowings and subsequent repayments on its unsecured lines of credit will provide ProLogis with adequate liquidity and financial flexibility. As of September 30, 1999, ProLogis had $434.6 million available for borrowing under its unsecured lines of credit ($420.8 million available as of November, 10, 1999). See "--Credit Facilities". Another source of future liquidity and financial flexibility is ProLogis' shelf-registered securities which can be issued in the form of debt securities, preferred shares, Common Shares, rights to purchase Common Shares and preferred share purchase rights on an as-needed basis, subject to ProLogis' ability to effect an offering on satisfactory terms. ProLogis currently has $608.0 million of shelf-registered securities available for issuance. Operating Activities Cash provided by operating activities increased by $50.9 million for the nine months ended September 30, 1999 as compared to the same period in 1998 ($231.9 million in 1999 and $181.0 million in 1998). See "--Results of Operations". Investing and Financing Activities ProLogis funds its current investment needs primarily with lines of credit and short-term borrowings, which are subsequently repaid with proceeds from the disposition of certain properties or other financing sources, as necessary. ProLogis' investment activities used approximately $101.9 million and $923.0 million of cash in the nine months ended September 30, 1999 and 1998, respectively. ProLogis' financing activities resulted in a net decrease in cash of $118.8 million and provided net cash flow of $748.6 million in 1999 and 1998, respectively. Cash distributions paid on Common Shares were $156.0 (including $11.1 million paid to Meridian's shareholders which was assumed by ProLogis as part of the Meridian Merger) million and $111.8 million for 1999 and 1998, respectively, which have been substantially funded by cash generated from operating activities. Investments in real estate, used cash of $345.1 million during the nine months ended September 30, 1999 and $520.6 million during the same period in 1998. ProLogis' cash investment in its unconsolidated entities was $168.0 million and $453.4 million during the nine months ended September 30, 1999 and 1998, respectively. ProLogis generated cash proceeds from dispositions of $397.3 million in 1999 as compared to $64.2 million in 1998. During the nine months ended September 30, 1999, ProLogis' primary financing activities were entering into secured financing agreements which generated $466.0 million of proceeds and the issuance of $500.0 million of senior unsecured notes. The proceeds from these transactions were primarily used to repay borrowings on the unsecured lines of credit. In connection with the Meridian Merger, ProLogis assumed Meridian's $328.4 million line of credit which was repaid on March 30, 1999 with proceeds from borrowings on ProLogis' unsecured lines of credit. During the nine months ended September 30, 1999, ProLogis had net repayments on its unsecured lines of credit of $366.4 million. The Meridian Merger, which was completed in March 1999 was principally a non-cash transaction. However, the Meridian Merger did result in an increase in cash of $49.0 million, representing Meridian's cash balance on March 30, 1999. A $67.6 million cash payment to Meridian's stockholders was made in April 1999. 32 ProLogis' primary financing activities in the first nine months of 1998 were the sale of Series D preferred shares generating net proceeds of $241.5 million and the sale of Common Shares (including sales under the employee share purchase and dividend reinvestment plans) generating net proceeds of $131.1 million. ProLogis also had net borrowings on its unsecured lines of credit of $309.5 million and generated proceeds from a short-term bridge loan from Bank of America of $200.0 million (used primarily to finance the acquisition of Frigoscandia AB), which was repaid on March 31, 1998 after Frigoscandia Holding AB obtained third-party financing. Credit Facilities ProLogis has an unsecured credit agreement with Bank of America, Commerzbank AG and Chase Bank of Texas, National Association, as agents for a bank group that provides for a $500.0 million unsecured revolving line of credit (increased from $540.0 million on May 28, 1999). Borrowings bear interest at ProLogis' option, at either (a) the greater of the federal funds rate plus 0.5% and the prime rate, or (b) LIBOR plus 1.00% based upon ProLogis' current senior debt ratings. ProLogis' borrowings are primarily at the 30-day LIBOR rate plus 1.00% (5.40% as of September 30, 1999). Additionally, the credit agreement provides for a facility fee of 0.20% per annum. The line of credit matures on March 29, 2001 and may be extended for an additional year at ProLogis' option. ProLogis was in compliance with all covenants contained in the credit agreement as of September 30, 1999. As of September 30, 1999, $121.0 million of borrowings were outstanding on the line of credit. In addition, ProLogis has a $25.0 million short-term unsecured discretionary line of credit with Bank of America that matures on October 1, 2000. By agreement between ProLogis and Bank of America, the rate of interest on and the maturity date of each advance are determined at the time of each advance. There were $6.9 million of borrowings outstanding on the line of credit as of September 30, 1999. As of September 30, 1999, ProLogis had outstanding letters of credit with Bank of America of $12.5 million which reduce the amount of available borrowings on the discretionary line of credit. Other Financing Sources On December 23, 1998, ProLogis entered into a $150.0 million secured financing agreement with Connecticut General Life Insurance Company. On that date, $66.0 million was funded under the agreement and the remaining $84.0 million was funded on January 22, 1999. Under the terms of the agreement, ProLogis pledged distribution facilities ($209.6 million undepreciated cost as of September 30, 1999) as collateral for the term loan. The loan bears interest at 7.08% per annum and provides for monthly principal and interest payments through March 2007, at which time the remaining principal outstanding of $134.4 million will be due. On February 22, 1999, ProLogis entered into a $182.0 million secured financing agreement with Teachers Insurance and Annuity Association of America. Of the total borrowings, $119.3 million was funded on February 22, 1999, $35.7 million was funded on March 5, 1999 and the remaining $27.0 million was funded on April 30, 1999. This loan was assumed by ProLogis California in connection with the acquisition of properties from ProLogis in August 1999. On March 29, 1999, ProLogis entered into a $200.0 million secured financing agreement with Morgan Guaranty Trust Company of New York. The loan is secured by distribution facilities with an undepreciated cost of $335.6 million as of September 30, 1999. The loan provides for interest only payments through May 2005 and principal and interest payments thereafter with the remaining balance of $127.2 million due on March 2024. The loan bears interest at 7.584% per annum. On April 26, 1999, ProLogis completed a $500.0 million offering of senior unsecured notes. The notes were issued in two tranches of $250.0 million due April 15, 2004 and April 15, 2008. The Notes have a coupon rate of 6.70% and 7.10%, respectively. Both the Notes were issued at a discount and are governed by the terms and provisions of the same indenture agreement applicable to ProLogis' other senior unsecured notes. Net proceeds from the offering were approximately $495.9 million, net of underwriters' commissions and other costs. The proceeds were used to repay borrowings on ProLogis' unsecured lines of credit and unsecured term loan. Derivative Financial Instruments ProLogis uses derivative financial instruments as hedges to manage well-defined risks associated with interest and foreign currency rate fluctuations on existing obligations and transactions or on anticipated transactions. ProLogis does not use derivative financial instruments for trading purposes. 33 The primary risks associated with derivative instruments are market risk and credit risk. Market risk is defined as the potential for loss in the value of the derivative due to adverse changes in market prices (interest rates or foreign currency rates). Through hedging, ProLogis can effectively manage the risk of increases in interest rates and fluctuations in foreign currency exchange rates. Credit risk is the risk that one of the parties to a derivative contract fails to perform or meet their financial obligation under the contract. ProLogis does not obtain collateral to support financial instruments subject to credit risk but monitors the credit standing of counterparties. ProLogis does not anticipate non-performance by any of the counterparties to its derivative contracts. Should a counterparty fail to perform, however, ProLogis would incur a financial loss to the extent of the positive fair market value of the derivative instruments, if any. The following table summarizes the activity in derivitive instruments interest rate contracts for the nine months ended September 30, 1999 (in millions):
Interest Rate Foreign Futures Interest Rate Currency Put Contracts Swaps Options (1) ------------ ------------- ------------ Notional amount as of December 31, 1998......... $ 75.0 $ 75.0 $ -- New contracts................................... -- 179.3 (2) 30.0 Terminated contracts............................ (75.0) (75.0)(3) (11.4) ---------- ---------- --------- Notional amount as of September 30, 1999........ $ -- $ 179.3 $ 18.6 ========== ========== ========= - -------------- (1) ProLogis entered into foreign currency put options during the third quarter of 1999 related to its operations in Europe. The notional amount as of September 30, 1999 represents the U.S. dollar equivalent related to put options with notional amounts of 9.7 million Swedish krona, 6.4 million British pounds and 6.4 million euros. The outstanding contracts were marked to market as of September 30, 1999. ProLogis recognized an aggregate loss of $381,000 on the put options including the mark to market adjustment. The put options provide ProLogis with the option to exchange the applicable foreign currencies for U. S. dollars at a fixed exchange rate such that if the foreign currencies were to depreciate against the U. S. dollar to predetermined levels, ProLogis could exercise its options and mitigate its foreign currency exchange losses. (2) ProLogis has interest rate swap agreements related to variable rate mortgage notes and other unsecured debt in the currency equivalent of $179.3 million as of September 30, 1999. The swap agreements have a combined notional amount of 1.1 billion French francs and fix the Euribor rate at 3.62% through December 2003 on $32.6 million of other unsecured debt, at 3.60% through January 2004 on $125.5 million of mortgage notes and at 3.59% through 2004 on $21.2 million of mortgage notes. (3) In October 1997, in anticipation of debt offerings in 1998, ProLogis entered into two interest rate protection agreements which were renewed past the original termination dates. These agreements were entered into by ProLogis to fix the interest rate on anticipated financings. During the third quarter of 1998, ProLogis determined that the interest rate protection agreements no longer qualified for hedge accounting treatment under GAAP based upon the following:
o Due to changing conditions in the public debt markets, it was no longer considered probable that ProLogis would complete the anticipated 1998 longer term debt offerings that prompted ProLogis to enter into these interest rate protection agreements in 1997 (i.e., ProLogis would not be exposed to the interest rate risk that these instruments were intended to hedge); and o ProLogis determined, through internal analysis and through communications with independent third parties, that a high degree of correlation no longer existed between changes in the market values of these interest rate protection agreements and the "market values" of the anticipated debt offerings (i.e., the interest rate at which the debt could be issued by ProLogis under existing market conditions). Accordingly, ProLogis began marking these agreements to market as of September 30, 1998. For 1998, ProLogis recognized a non-cash expense of $26.1 million. These agreements, which were terminated in February 1999 at a total cost of $27.0 million, were used to set the interest rate associated with a secured financing transaction that was completed in March 1999. ProLogis intends to amortize this expense as a component of interest expense over the 25-year term of debt issued in the first quarter of 1999 for purposes of calculating funds from operations. See "--Funds From Operations". 34 Commitments ProLogis has letters of intent or contingent contracts, subject to ProLogis' final due diligence, for the acquisition of 332,000 square feet of operating distribution facilities with an aggregate acquisition cost of $8.4 million. The facilities are located in Europe and Mexico. The foregoing transactions are subject to a number of conditions, and ProLogis cannot predict with certainty that any of them will be consummated. In addition, as of September 30, 1999, ProLogis had $342.8 million of budgeted development cost for developments in process, of which $245.2 million was unfunded. Frigoscandia AB has a multi-currency, three-year revolving credit agreement through a consortium of 11 European banks in the currency equivalent of approximately $194.4 million as of September 30, 1999. The loan bears interest at each currency's respective LIBOR or Euribor rate plus 0.65%. ProLogis has entered into a guaranty agreement for 25% of the loan balance. ProLogis Kingspark has a line of credit agreement with a bank in the United Kingdom. The credit agreement, which provides for borrowings of up to approximately $16.0 million, has been guaranteed by ProLogis. As of September 30, 1999, there were no borrowings outstanding on the line of credit. Additionally, ProLogis has an agreement whereby it has guaranteed the performance and obligations of ProLogis Kingspark with respect to an infrastructure agreement entered into by ProLogis Kingspark related to the development of a land parcel. As of September 30, 1999, ProLogis had an unfunded commitment on this guarantee agreement of $10.0 million. Distribution and Dividend Requirements ProLogis' current distribution policy is to pay quarterly distributions to shareholders based upon what it considers to be a reasonable percentage of cash flow and at the level that will allow ProLogis to continue to qualify as a REIT for tax purposes. Because depreciation is a non-cash expense, cash flow typically will be greater than earnings from operations and net earnings. Therefore, annual distributions are expected to be consistently higher than annual earnings. On February 24, 1999, ProLogis paid a quarterly distribution of $0.3183 per Common Share to shareholders of record on February 10, 1999. On March 18, 1999, the Board set a proposed annual distribution level of $1.30 per Common Share. Quarterly distributions of $0.3272 per Common Share were paid on May 27, 1999 to shareholders of record on May 13, 1999 and on August 26, 1999 to shareholders of record as of August 12, 1999. On October 20, 1999, the Board declared a distribution of $0.3272 per Common Share for the fourth quarter of 1999 payable on November 24, 1999 to shareholders of record on November 9, 1999. On May 3, 1999, ProLogis paid a common distribution to holders of Meridian common stock as of March 19, 1999. This distribution, which was declared by the Meridian Board of Directors prior to the closing of the Meridian Merger, related to the first quarter of 1999 and aggregated $11.1 million. This liability was assumed by ProLogis in connection with the Meridian Merger. On March 31, June 30, and September 30, 1999, ProLogis paid quarterly dividends of $0.5875 per cumulative redeemable Series A preferred share, $0.4375 per cumulative redeemable convertible Series B preferred share, $1.0675 per cumulative redeemable preferred Series C share and $0.495 per cumulative redeemable Series D preferred share. On April 30, 1999, ProLogis paid an aggregate dividend of $1.1 million on the Series E preferred shares ($0.5469 per share) of which $729,200 related to Meridian's Series D preferred stock and was accrued by Meridian prior to the closing of the Meridian Merger. Quarterly distributions of $0.5469 per share were paid on July 30, 1999 to shareholders of record on July 15, 1999 and on October 29, 1999 to shareholders of record on October 15, 1999. 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 distributions with respect to the Preferred Shares have been paid and sufficient funds have been set aside for distributions that have been declared for the then current distribution period with respect to the Preferred Shares. 35 Conversion to the Euro Effective January 1, 1999, eleven of the fifteen member countries of the European Monetary Union launched the new monetary unit, the euro, as the single currency for the member countries of the European Monetary Union. During the period from January 1, 1999 to January 1, 2002, a transition period will be in effect during which time the euro will be available for non-cash transactions. However, transactions can continue to be denominated in the old national currencies. After January 1, 2002, all transactions must be denominated in the euro. The targeted exchange rates of the old national currencies to the euro were determined in May 1998. Conversion to the euro has not had, nor is management aware of any future effects of the conversion to the euro that will have, a material impact on its business operations or results of operations. Funds from Operations Funds from operations attributable to Common Shares increased $62.6 million to $230.6 million for the nine months ended September 30, 1999 from $168.0 million for the same period in 1998. Funds from operations represent ProLogis' net earnings (computed in accordance with GAAP) before gains or losses from debt restructuring, before gains or losses on disposition of depreciated real estate, before foreign currency exchange gains or losses resulting from intercompany debt transactions and from the remeasurement (based on current foreign currency exchange rates) of intercompany and other debt of ProLogis' foreign subsidiaries, before deferred tax benefits and deferred tax expenses of ProLogis' taxable subsidiaries, before significant non-recurring items that materially distort the comparative measurement of company performance over time, plus real estate related depreciation and amortization (exclusive of amortization of loan costs), and after adjustments for unconsolidated entities calculated to compute their funds from operations on the same basis as ProLogis. ProLogis believes that funds from operations is helpful to a reader as a measure of the performance of an equity REIT because, along with cash flow from operating activities, investing activities and financing activities, it provides a reader with an indication of the ability of ProLogis to incur and service debt, to make capital expenditures and to fund other cash needs. The funds from operations measure presented by ProLogis will not be comparable to similarly titled measures of other REITs that do not compute funds from operations in a manner consistent with ProLogis. Funds from operations is not intended to represent cash made available to shareholders. Funds from operations should not be considered as an alternative to net earnings or any other GAAP measurement of performance 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. Funds from operations is as follows (in thousands):
Nine Months Ended September 30, -------------------------- 1999 1998 ----------- ----------- Net earnings attributable to Common Shares................................................ $ 87,837 $ 43,088 Add (Deduct): Real estate related depreciation and amortization................................ 109,398 72,902 Gain on disposition of depreciated real estate................................... (26,358) (4,278) Foreign currency exchange (gains) losses (1)..................................... 6,561 (5,471) Interest rate hedge expense, net (2)............................................. 396 27,652 Cumulative effect of accounting change (3)....................................... 1,440 -- Other............................................................................ 605 1,452 ProLogis' share of reconciling items of unconsolidated entities: Real estate related depreciation and amortization........................... 36,656 26,668 Net foreign currency exchange losses on intercompany debt transactions and the remeasurement of intercompany and other debt............................................. 5,737 8,046 Deferred tax expense (benefit).............................................. 5,444 (2,759) Other, net.................................................................. 2,935 747 ----------- ----------- Funds from operations attributable to Common Shares....................................... $ 230,651 $ 168,047 =========== =========== 36 - --------------- (1) See "--Results of Operations - Foreign Currency Exchange Gains (Losses)". (2) Net of $549,000 of additional interest expense in 1999 resulting from the amortization of the interest rate hedge expense incurred in 1998. See "--Liquidity and Capital Resources - Derivative Financial Instruments". (3) See "--Results of Operations - Cumulative Effect of Accounting Change".
Year 2000 Overview The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Certain computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar business activities. ProLogis has undertaken a review of all of its computer systems and applications to determine if these programs are Year 2000 compliant and if not, the efforts that will be necessary to bring the programs into compliance. ProLogis has not identified any computer system or applications that, upon failure to be Year 2000 compliant, would have a material adverse impact on its business or results of operations. Information Technology Systems ProLogis' information technology ("IT") environment is primarily a Microsoft Windows-based personal computer network (NT or Novell) utilizing desktop applications, primarily data base and spreadsheet applications. ProLogis recently installed a new, third-party developed property management and core accounting system. Also, ProLogis Garonor a wholly-owned subsidiary of ProLogis that operates in France, installed a new Year 2000 compliant version of its financial accounting software in 1999. The critical computer hardware, operating systems and key general accounting, property management and financial reporting applications of ProLogis and its subsidiaries are Year 2000 compliant, as verified by the appropriate vendors. Non-IT Systems Many of ProLogis' operating facilities have microchips embedded in the building operating systems. ProLogis, as owner and lessor of these buildings, has assessed its exposure with respect to Year 2000 related failures in these operating systems. These building operating systems include programmable thermostats, security systems, communications systems, utility monitoring systems and timed locks. Under the terms of substantially all of ProLogis' building leases, the tenant has responsibility for the operating systems within their leased space, including the responsibility for addressing the Year 2000 compliance of those systems. However, ProLogis is responsible for the operating systems that control the common exterior areas of the buildings, including parking lot lighting and sprinkler systems. Generally, these systems are programmed on daily or weekly cycles (as opposed to calendar-based programming). Consequently, the risk of a Year 2000 related malfunction is extremely low and any such malfunction would not have a material impact on ProLogis' operations. ProLogis is also responsible for the fire and life safety monitoring systems in its buildings. ProLogis contracts with a third party to monitor these systems. These systems are not calendar-based, because reportable events are identified as they occur. Consequently, the risk of a Year 2000 related failure is low. ProLogis has conducted a review of all operating systems that fall within its responsibility. Results have indicated that ProLogis' primary vendor for monitoring of fire and life safety systems has verified that their system is Year 2000 compliant. ProLogis has reviewed and performed testing and verification as deemed appropriate. ProLogis has not identified any major operating systems within its responsibility that are not Year 2000 compliant or that would create a significant adverse effect on its customers or business undertakings. Should the systems that ProLogis is responsible for fail, ProLogis' tenants may experience inconveniences with respect to the maintenance and operations of the facilities (i.e., parking lot lighting and sprinkler systems). Should the fire and life safety systems fail, there could be a delay in identifying a reportable event or a reportable event could occur without being identified. In such a situation, ProLogis could be exposed to the extent the failure resulted in a loss not covered by existing insurance policies. 37 Third Parties Management believes that its planning efforts are adequate to address the Year 2000 issue and that its risk factors are primarily those that it cannot directly control, including the readiness of financial institutions and utility providers. Failure on the part of these entities to become Year 2000 compliant could result in disruptions in the business operations of ProLogis. Costs ProLogis' activities with respect to its assessment of Year 2000 compliance and its remediation efforts are being performed primarily by existing personnel. ProLogis' historical costs for addressing the Year 2000 issue are not material and management does not anticipate that its future costs associated with the Year 2000 issue will be material. Third-party costs and interim software solutions for Year 2000 issues are not expected to exceed $250,000. ProLogis does not separately track the internal costs incurred for Year 2000 compliance issues. Such costs are principally the related payroll costs of its IT group. Although the cost of replacing ProLogis' key property management and core accounting systems is substantial, the replacements were made to improve operational efficiency and were not accelerated due to the Year 2000 issue. ProLogis has not delayed any material projects as a result of the Year 2000 issue. Funds expended to address Year 2000 issues have been made from operating cash flow. Unconsolidated Subsidiaries As part of its compliance program, management of ProLogis has received ongoing reports from CSI, Frigoscandia AB and ProLogis Kingspark on the impact of the Year 2000 problems on their operations and financial results. CSI has completed testing on all IT and embedded operating systems. No critical IT or embedded operating systems have been identified that have not already been remediated or are not Year 2000 compliant. CSI is currently verifying and testing customer and supplier electronic data interface programming standards. CSI retained an outside consulting firm to review their Year 2000 testing methodologies and no significant issues were found. CSI estimates that the total cost incurred to date and estimated total cost to be incurred for Year 2000 remediation is less than $250,000. CSI is currently finalizing detailed contingency plans in the event of unexpected Year 2000 disruptions. Frigoscandia AB has substantially completed testing of its IT and embedded operating systems. No critical IT or embedded operating systems have been identified that have not been remediated, with the exception of minor components of its inventory management systems in a few remaining facilities. Modifications to the components of its inventory management systems are currently being finalized and all modifications are expected to be completed prior to year-end. Frigoscandia AB is currently conducting a coordinated program whereby testing with key customers and critical suppliers is performed. Additionally, Frigoscandia AB is finalizing detailed contingency plans in the event of unexpected Year 2000 disruptions. Frigoscandia AB estimates that the total cost incurred to date and the estimated total costs to be incurred for Year 2000 remediation is between $2 million and $4 million. ProLogis Kingspark has recently installed a Year 2000 compliant version of non-customized financial forecasting and accounting software. ProLogis Kingspark has virtually no risk associated with embedded operating systems because substantially all of ProLogis Kingspark activities are related to development of facilities for third parties and not for its own long-term ownership. ProLogis Kingspark estimates that the total cost incurred to date and the estimated total cost to be incurred for the Year 2000 remediation is less than $100,000. There can be no assurances that Year 2000 remediation efforts by ProLogis, its unconsolidated entities or third parties will be properly and timely completed, and failure to do so could have a material adverse effect on ProLogis, its business and its financial condition. ProLogis cannot predict the actual effects to it of the Year 2000 problem, which depends on numerous uncertainties such as: (i) whether significant third parties properly and timely address the Year 2000 issue and (ii) whether broad-based or systemic economic failures may occur. Due to the general uncertainty inherent in the Year 2000, ProLogis is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on its operations. ProLogis' Year 2000 compliance program is expected to significantly reduce the level of uncertainty about the Year 2000 impact in areas that are within its direct control and management of ProLogis believes that the possibility of significant interruptions of normal operations will be reduced. 38 Item 3. Quantitative and Qualitative Disclosure About Market Risk As of September 30, 1999, no significant change had occurred in ProLogis' interest rate risk or foreign currency risk as discussed in ProLogis' 1998 Annual Report on Form 10-K. 39 PART II Item 4. Submission of Matters to Vote of Securities Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 10.1 ProLogis Trust 1997 Long-Term Incentive Plan (as Amended and Restated Effective as of October 20, 1999) 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Share Dividends 15.1 Letter from Arthur Andersen LLP regarding unaudited financial information dated November 10, 1999 27 Financial Data Schedule (b) Reports on Form 8-K: Items Financial Date Reported Statements ---- -------- ---------- September 9, 1999 7 Yes 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROLOGIS TRUST BY:/S/ WALTER C. RAKOWICH --------------------------------- Walter C. Rakowich Managing Director and Chief Financial Officer (Principal Financial Officer) BY:/S/ EDWARD F. LONG --------------------------------- Edward F. Long Senior Vice President and Controller BY:/S/ SHARI J. JONES --------------------------------- Shari J. Jones Vice President (Principal Accounting Officer) Date: November 12, 1999 41 EX-10 2 MATERIAL CONTRACTS EXHIBIT 10.1 PROLOGIS TRUST 1997 LONG-TERM INCENTIVE PLAN (As Amended and Restated Effective as of October 20, 1999) TABLE OF CONTENTS SECTION 1....................................................................1 GENERAL.............................................................1 1.1. Purpose..................................................1 1.2. Participation............................................1 SECTION 2....................................................................1 OPTIONS.............................................................1 2.1. Definitions..............................................1 2.2. Eligibility..............................................1 2.3. Price....................................................2 2.4. Exercise.................................................2 2.5. Post-Exercise Limitations................................3 2.6. Expiration Date..........................................3 SECTION 3....................................................................3 DIVIDEND EQUIVALENT UNITS...........................................3 3.1. Award of Dividend Equivalent Units.......................3 3.2. Terms and Conditions of Dividend Equivalent Units........4 SECTION 4....................................................................4 SHARE PURCHASE PROGRAM..............................................4 4.1. Purchase of Shares.......................................4 4.2. Matching Shares and Options..............................4 4.3. Restrictions on Shares...................................4 4.4. Purchase Loans...........................................4 SECTION 5....................................................................5 SHARE AWARDS........................................................5 5.1. Definition...............................................5 5.2. Eligibility..............................................5 5.3. Terms and Conditions of Awards...........................5 SECTION 6....................................................................6 OPERATION AND ADMINISTRATION........................................6 6.1. Effective Date...........................................6 6.2. Shares Subject to Plan...................................6 6.3. Individual Limits on Awards..............................6 6.4. Adjustments to Shares....................................6 6.5. Change in Control........................................8 6.6. Limit on Distribution....................................9 6.7. Liability for Cash Payments..............................9 6.8. Performance-Based Compensation...........................9 6.9. Withholding..............................................10 6.10. Transferability..........................................10 6.11. Notices..................................................10 6.12. Form and Time of Elections...............................10 6.13. Agreement With Trust or Related Company..................10 6.14. Limitation of Implied Rights.............................10 6.15. Evidence.................................................10 6.16. Action by Trust or Related Company.......................10 6.17. Gender and Number........................................11 6.18. Applicable Law...........................................11 6.19. Foreign Employees........................................11 SECTION 7....................................................................11 COMMITTEES..........................................................11 7.1. Administration...........................................11 7.2. Selection of Trust Committee.............................11 7.3. Powers of Committees.....................................11 7.4. Delegation by Committee..................................12 7.5. Information to be Furnished to Committees................12 7.6. Liability and Indemnification of Committees..............12 SECTION 8....................................................................12 AMENDMENT AND TERMINATION...........................................12 PROLOGIS TRUST 1997 LONG-TERM INCENTIVE PLAN (As Amended and Restated Effective as of October 20, 1999) SECTION 1 GENERAL 1.1. Purpose. ProLogis Trust (formerly known as Security Capital Industrial Trust), a Maryland real estate investment trust (the "Trust"), established the Security Capital Industrial Trust 1997 Long-Term Incentive Plan effective September 8, 1997 and renamed it the ProLogis Trust 1997 Long-Term Incentive Plan effective July 1, 1998 (the "Plan"). The provisions that follow constitute an amendment and restatement of the Plan as in effect immediately prior to October 20, 1999, the "Effective Date" of the Plan as set forth herein. The Plan was established by the Trust to: (a) attract and retain employees and other persons providing services to the Trust and the Related Companies (as defined below); (b) motivate Participants (as defined in subsection 1.2), by means of appropriate incentives, to achieve long-range goals; (c) provide incentive compensation opportunities that are competitive with those of other corporations and real estate investment trusts; and (d) further identify Participants' interests with those of the Trust's other shareholders through compensation that is based on the value of the Trust's common shares; and thereby promote the long-term financial interest of the Trust and the Related Companies, including the growth in value of the Trust's equity and enhancement of long-term shareholder return. The term "Related Company" means any company during any period in which it is a "subsidiary corporation" (as that term is defined in section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code")), with respect to the Trust or any affiliate of the Trust which is designated as a Related Company by the Committee, including, without limitation, any subsidiary of the Trust. 1.2. Participation. Subject to the terms and conditions of the Plan, the Committees (as described in Section 7) shall determine and designate, from time to time, from among the Eligible Individuals (as defined below), those persons who will be granted one or more awards under Sections 2, 3, 4 or 5 of the Plan (an "Award"), and thereby become "Participants" in the Plan. In the discretion of the granting Committee, and subject to the terms of the Plan, a Participant may be granted any Award permitted under the provisions of the Plan, and more than one Award may be granted to a Participant. Except as otherwise agreed by the Trust and the Participant, or except as otherwise provided in the Plan, an Award under the Plan shall not affect any previous Award under the Plan or an award under any other plan maintained by the Trust or the Related Companies. For purposes of the Plan, the term "Eligible Individual" shall mean any employee of the Trust or a Related Company; provided, however, that a member of the Board of Trustees of the Trust (the "Board") who is not an employee of the Trust or a Related Company shall not be an "Eligible Individual". SECTION 2 OPTIONS 2.1. Definition The grant of an "Option" under this Section 2 entitles the Participant to purchase common shares of beneficial interest of the Trust ("Shares") at a price fixed at the time the Option is granted, subject to the terms of this Section. Options granted under this Section may be either Incentive Share Options or Non-Qualified Share Options, as determined in the discretion of the Trust Committee. An "Incentive Share Option" is an Option that is intended to satisfy the requirements applicable to an "incentive stock option" described in section 422 of the Code. A "Non-Qualified Share Option" is an Option that is not intended to be an Incentive Share Option. 2.2. Eligibility. Each Committee shall designate the Participants to whom Options are to be granted under this Section and shall determine the number of Shares subject to each such Option. If the Trust Committee grants Incentive Share Options, to the extent that the aggregate fair market value of Shares with respect to which Incentive Share Options are exercisable for the first time by any individual during any calendar year (under all plans of the Trust and all related companies within the meaning of section 424(f) of the Code) exceeds $100,000, such options shall be treated as Non-Qualified Share Options, to the extent required by section 422 of the Code. 1 2.3. Price. The determination and payment of the purchase price of a Share under each Option granted under this Section shall be subject to the following: (a) The purchase price shall be established by the granting Committee at the time the Option is granted; provided, however, that in no event shall such price be less than the par value of a Share on such date; further, provided, in no event shall the purchase price of a Share under an Incentive Share Option be less than the Fair Market Value (defined below) of a Share at the time the Option is granted. (b) Subject to the following provisions of this subsection, the full purchase price of each Share purchased upon the exercise of any Option shall be paid at the time of such exercise (or such later date as may be permitted by the granting Committee in the case of a cashless exercise) and, as soon as practicable thereafter (subject to an election under subsection 2.4), a certificate representing the Shares so purchased shall be delivered to the person entitled thereto. (c) The purchase price shall be payable in cash or by tendering Shares by actual delivery or attestation (valued at Fair Market Value as of the day of exercise) that have been held by the Participant at least six months, or in any combination thereof, as determined by the granting Committee. (d) The "Fair Market Value" of a Share as of any date shall be determined in accordance with the following rules: (i) If the Shares are at the time listed or admitted to trading on any stock exchange, then the Fair Market Value shall be the average of the highest and lowest sales price per Share on such date on the principal exchange on which the Shares are then listed or admitted to trading or, if no such sale is reported on that date, on the last preceding date on which a sale was so reported. (ii) If the Shares are not at the time listed or admitted to trading on a stock exchange, the Fair Market Value shall be the average of the lowest reported bid price and highest reported asked price of the Shares on the date in question in the over-the-counter market, as such prices are reported in a publication of general circulation selected by the granting Committee and regularly reporting the market price of Shares in such market. (iii) If the Shares are not listed or admitted to trading on any stock exchange or traded in the over-the-counter market, the Fair Market Value shall be as determined by the granting Committee in good faith. (iv) For purposes of determining the Fair Market Value of Shares that are sold pursuant to a cashless exercise program, Fair Market Value shall be the price at which such Shares are sold. 2.4. Exercise. Except as otherwise expressly provided in the Plan, an Option granted under this Section shall be exercisable in accordance with the following terms of this subsection: (a) The terms and conditions relating to exercise of an Option shall be established by the granting Committee, and may include, without limitation, conditions relating to completion of a specified period of service (subject to paragraph (b) below), achievement of performance standards prior to exercise of the Option or the achievement of Share ownership objectives by the Participant. The granting Committee, in its sole discretion, may accelerate the vesting of any Option under circumstances designated by it at the time the Option is granted or thereafter. (b) No Option may be exercised by a Participant after the Expiration Date (as defined in subsection 2.6) applicable to that Option. (c) Prior to the date the Shares would otherwise be transferred pursuant to the exercise of an Option, to the extent permitted by the granting Committee, a Participant may irrevocably elect to defer receipt of such Shares until the last date of a later calendar year, but in no event later than the Participant's Date of Termination (as defined in 2 subsection 2.6), provided, that if the Date of Termination of a Participant who is a member of a select group of management or a highly compensated employee within the meaning of section 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended, occurs by reason of Retirement (as defined in subsection 2.6), the Participant may elect to defer receipt for a period up to the last day of the calendar year in which occurs the fifteenth anniversary of the Participant's Retirement. Any such deferral election shall be made in such form and at such times as the Committee may determine and shall be subject to such other terms, conditions and limitations as the Committee may establish, provided, however, any election to defer payment beyond a Participant's Retirement which has not been on file at least 12 months prior to the Participant's Retirement shall be disregarded. 2.5. Post-Exercise Limitations. The granting Committee, in its discretion, may impose such restrictions on Shares acquired pursuant to the exercise of an Option as it determines to be desirable, including, without limitation, restrictions relating to disposition of the shares and forfeiture restrictions based on service, performance, Share ownership by the Participant and such other factors as the granting Committee determines to be appropriate. 2.6. Expiration Date. The "Expiration Date" with respect to an Option means the date established as the Expiration Date by the granting Committee at the time of the grant; provided, however, that unless determined otherwise by the Committee, the Expiration Date with respect to any Option shall not be later than the earliest to occur of: (a) the ten-year anniversary of the date on which the Option is granted; (b) if the Participant's Date of Termination occurs by reason of death, Disability or Retirement, the one-year anniversary of such Date of Termination; (c) if the Participant's Date of Termination occurs for reasons other than Retirement, death, Disability or Cause, the three-month anniversary of such Date of Termination; or (d) if the Participant's Date of Termination occurs for reasons of Cause, such Date of Termination. For purposes of the Plan, a Participant's "Date of Termination" shall be the date on which he both ceases to be an employee of the Trust and the Related Companies and ceases to perform material services for the Trust and the Related Companies, regardless of the reason for the cessation; provided that a "Date of Termination" shall not be considered to have occurred during the period in which the reason for the cessation of services is a leave of absence approved by the Trust or the Related Company which was the recipient of the Participant's services. Except as otherwise provided by the granting Committee, a Participant shall be considered to have a "Disability" during the period in which he is unable, by reason of a medically determinable physical or mental impairment, to engage in the material and substantial duties of his regular occupation, which condition is expected to be permanent. "Retirement" of a Participant shall mean the occurrence of a Participant's Date of Termination after providing at least five years of service to the Trust or the Related Companies and attaining age 60. For purposes of the Plan, "Cause" shall mean, in the reasonable judgment of the granting Committee (i) the willful and continued failure by the Participant to substantially perform his duties with the Company or any Related Company after written notification by the Company or Related Company, (ii) the willful engaging by the Participant in conduct which is demonstrably injurious to the Company or any Related Company, monetarily or otherwise, or (iii) the engaging by the Participant in egregious misconduct involving serious moral turpitude. For purposes hereof, no act, or failure to act, on the Participant's part shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that such action was in the best interest of the Company or Related Company. SECTION 3 DIVIDEND EQUIVALENT UNITS 3.1. Award of Dividend Equivalent Units. Unless determined otherwise by the granting Committee, a Participant who is awarded an Option under the Plan (other than a matching Option awarded under subsection 4.2) shall also be entitled to receive "Dividend Equivalent Units" with respect to such Option, as follows: (a) Annual crediting of Dividend Equivalent Units. As of the last day of each calendar year, each Participant shall be credited with a number of Dividend Equivalent Units equal to (i) the amount the Trust Committee determines to be the average dividend yield per Share for such calendar year, 3 reduced by the amount that the Committee determines to be the S&P 500 average dividend yield for such year, multiplied by (ii) the number of Shares underlying the Participant's outstanding Options that are entitled to Awards under this Section 3 during such calendar year (reduced pro rata to reflect Shares underlying such Options that were not outstanding on the record date with respect to each dividend payment date during such year). (b) Additional credits to reflect dividend payments on Dividend Equivalent Units. As of the last day of each calendar year, each Participant shall be credited with additional Dividend Equivalent Units equal to (i) the amount the Trust Committee determines to be the average dividend yield per Share for such calendar year, multiplied by (ii) the number of Dividend Equivalent Units outstanding during such calendar year (reduced pro rata to reflect Dividend Equivalent Units that were not outstanding on each dividend payment date during such year). 3.2. Terms and Conditions of Dividend Equivalent Units. Unless determined otherwise by the granting Committee, Dividend Equivalent Units shall be subject to the following terms and conditions: (a) Dividend Equivalent Units shall vest in accordance with the vesting schedule applicable to the Option with respect to which the Dividend Equivalent Unit was awarded. (b) Each vested Dividend Equivalent Unit shall entitle the holder thereof to a Share on the last day of the calendar year in which occurs the first of (i) the date the Participant exercises the Option with respect to which the Dividend Equivalent Unit was awarded, or (ii) the date such Option expires by its terms (whether by reason of termination of employment or otherwise); provided, however, prior to the date the Shares would otherwise be payable, to the extent permitted by the granting Committee, a Participant may irrevocably elect to defer receipt of such Shares until the last date of a later calendar year, but in no event later than the last day of the calendar year in which occurs the tenth anniversary of the grant of the underlying Option. Any such deferral election shall be made in such form and at such times as the Committee may determine and shall be subject to such other terms, conditions and limitations as the Committee may establish. (c) All Dividend Equivalent Units which are not vested upon the Participant's Date of Termination shall be forfeited. (d) Settlement of all Dividend Equivalent Units shall be made in the form of whole Shares. Any fractional Shares shall be settled in cash. SECTION 4 SHARE PURCHASE PROGRAM 4.1. Purchase of Shares. Each Committee may, from time to time, establish one or more programs under which Participants will be permitted to purchase Shares under the Plan and shall designate the Participants eligible to participate under such Share purchase programs. The purchase price for Shares available under such programs, and other terms and conditions of such programs, shall be established by the Committee, provided that the purchase price may not be less than par value. 4.2. Matching Shares and Options. Except as otherwise provided in subsection 4.1, any Share purchase program established by a Committee under this Section may provide for the award of matching Shares or Options in the amount, if any, determined by the Committee. 4.3. Restrictions on Shares. The granting Committee may impose such restrictions with respect to Shares purchased under subsection 4.1, or matching Shares or Options awarded pursuant to subsection 4.2, as the Committee determines to be appropriate. Such restrictions may include, without limitation, restrictions of the type that may be imposed with respect to Share Awards under Section 5. 4.4. Purchase Loans. In connection with the purchase of Shares under this Section 4, the granting Committee, in its sole discretion, may determine that the Trust or the Related Company, as applicable, shall, at the Participant's election, make a loan (a "Loan") to the Participant for all or a portion of the purchase price of the Shares purchased. The Loan may be used only for the purpose of financing the purchase, subject to the following: 4 (a) Each Loan shall be evidenced by a promissory note and pledge agreement in such form as the granting Committee shall approve; provided, that the note shall (i) provide full recourse to the Participant, (ii) provide for interest at a rate to be determined by the granting Committee, (iii) be secured, pursuant to a pledge agreement, by the purchased Shares, and (iv) comply with all applicable laws, regulations and rules of the Board of Governors of the Federal Reserve System and any other governmental agency having jurisdiction. (b) Each Loan shall provide for a term of no more than 10 years. (c) All principal and interest outstanding under a Loan with respect to any Participant will automatically become due and payable (i) 90 days after the date the Participant terminates employment with the Trust and Related Companies for any reason other than death, Disability, Retirement or Cause, provided that such termination is not following a Change in Control, (ii) 365 days after the date on which the Participant's employment with the Trust and Related Companies terminates by reason of death, Disability or Retirement, (iii) 180 days after the Participant's employment with the Trust and Related Companies terminates following a Change in Control of the Trust for reasons other than Cause, or (iv) immediately upon a sale of the Shares which are pledged as collateral for the loan or if the Participant's employment with the Trust and Related Companies is terminated for Cause. (d) Each Loan shall contain such other terms, conditions and limitations as may be determined by the granting Committee in its sole discretion. SECTION 5 SHARE AWARDS 5.1. Definition. Subject to the terms of this Section, a Share Award under the Plan is a grant of Shares to a Participant, the earning, vesting or distribution of which is subject to one or more conditions established by the Trust Committee. Such conditions may relate to events (such as performance or continued employment) occurring before or after the date the Share Award is granted, or the date the Shares are earned by, vested in or delivered to the Participant. If the vesting of Share Awards is subject to conditions occurring after the date of grant, the period beginning on the date of grant of a Share Award and ending on the vesting or forfeiture of such Shares (as applicable) is referred to as the "Restricted Period". To the extent that the vesting of a Share Award is contingent on performance, the performance shall be measured over a period of not less than one year. Share Awards may provide for delivery of the shares of Shares at the time of grant or may provide for a deferred delivery date. A Share Award may, but need not, be made in conjunction with a cash-based incentive compensation program maintained by the Trust and may, but need not, be in lieu of cash otherwise awardable under such program. 5.2. Eligibility. The Trust Committee shall designate the Participants to whom Share Awards are to be granted and the number of Shares that are subject to each such Award. 5.3. Terms and Conditions of Awards. Share Awards granted to Participants under the Plan shall be subject to the following terms and conditions: (a) Beginning on the date of grant (or, if later, the date of distribution) of Shares comprising a Share Award, and including any applicable Restricted Period, the Participant as owner of such Shares shall have the right to vote such Shares. (b) Payment of dividends with respect to Share Awards shall be subject to the following: (i) On and after the date that a Participant has a fully earned and vested right to the Shares comprising a Share Award and the Shares have been distributed to the Participant, the Participant shall have all dividend rights (and other rights) of a shareholder with respect to such Shares. (ii) Prior to the date that a Participant has a fully earned and vested right to the shares comprising a Share Award, the Trust Committee, in its sole discretion, may award Dividend Rights with respect to such shares. 5 (iii) On and after the date that a Participant has a fully earned and vested right to the Shares comprising a Share Award, but before the Shares have been distributed to the Participant, the Participant shall be entitled to Dividend Rights with respect to such Shares, at the time and in the form determined by the Trust Committee. (iv) A "Dividend Right" with respect to shares comprising a Share Award shall entitle the Participant, as of each dividend payment date, to an amount equal to the dividends payable with respect to a Share multiplied by the number of such Shares. Dividend Rights shall be settled in cash or in Shares valued at Fair Market Value as of the date of settlement, as determined by the Trust Committee, shall be payable at the time determined by the Committee and shall be subject to such other terms and conditions as the Committee may determine. SECTION 6 OPERATION AND ADMINISTRATION 6.1. Effective Date. The Plan was originally effective as of the date it was adopted by the Board; provided, however, that Awards granted under the Plan prior to its approval by shareholders were contingent on approval of the Plan by the Trust's shareholders. The Plan shall be unlimited in duration and, in the event of Plan termination, shall remain in effect as long as any Shares awarded under it are outstanding and not fully vested; provided, however, that no new Awards shall be made under the Plan on or after the tenth anniversary of the date on which the Plan is adopted by the Board. 6.2. Shares Subject to Plan. The Shares with respect to which Awards may be made under the Plan shall be shares currently authorized but unissued or currently held or subsequently acquired by the Trust as treasury shares, including shares purchased in the open market or in private transactions. Subject to the provisions of subsection 6.4, the number of Shares which may be issued with respect to Awards under the Plan shall not exceed 9,600,000 Shares in the aggregate. Except as otherwise provided herein, any Shares subject to an Award which for any reason expires or is terminated without issuance of Shares (including Shares that are not issued because Shares are tendered pursuant to subsection 2.3(c) or 6.9) shall again be available under the Plan. 6.3. Individual Limits on Awards. Notwithstanding any other provision of the Plan to the contrary, no Participant shall receive any Award of an Option under the Plan to the extent that the sum of: (a) the number of Shares subject to such Award; (b) the number of Shares subject to all other prior Awards of Options under the Plan during the one-year period ending on the date of the Award; and (c) the number of Shares subject to all other prior share options granted to the Participant under other plans or arrangements of the Trust during the one-year period ending on the date of the Award; would exceed the Participant's Individual Limit under the Plan. The determination made under the foregoing provisions of this subsection shall be based on the Shares subject to the Awards at the time of grant, regardless of when the Awards become exercisable. Subject to the provisions of subsection 6.4, a Participant's "Individual Limit" shall be 500,000 Shares. 6.4. Adjustments to Shares. (a) If the Trust shall effect any subdivision or consolidation of Shares or other capital readjustment, payment of stock dividend, stock split, combination of shares or recapitalization or other increase or reduction of the number of Shares outstanding without receiving compensation therefor in money, services or property, then the Trust Committee shall equitably adjust (i) the number of Shares available under the Plan; (ii) the number of shares available under any individual or other limits; (iii) the number of Shares subject to outstanding Awards; and (iv) the per-share price under any outstanding Award to the extent that the Participant is required to pay a purchase price per share with respect to the Award. (b) If the Trust is reorganized, merged or consolidated or is party to a plan of exchange with another corporation, pursuant to which reorganization, merger, consolidation or plan of exchange, the shareholders of the Trust receive any shares of stock or other securities or property, or the 6 Trust shall distribute securities of another corporation to its shareholders, there shall be substituted for the shares subject to outstanding Awards an appropriate number of shares of each class of stock or amount of other securities or property which were distributed to the shareholders of the Trust in respect of such shares, subject to the following: (i) If the Trust Committee determines that the substitution described in accordance with the foregoing provisions of this paragraph would not be fully consistent with the purposes of the Plan or the purposes of the outstanding Awards under the Plan, the Committee may make such other adjustments to the Awards to the extent that the Committee determines such adjustments are consistent with the purposes of the Plan and of the affected Awards. (ii) All or any of the Awards may be cancelled by the Trust Committee on or immediately prior to the effective date of the applicable transaction, but only if the Committee gives reasonable advance notice of the cancellation to each affected Participant, and only if either: (A) the Participant is permitted to exercise all Awards that will be cancelled (without regard to whether such Awards would otherwise be exercisable) for a reasonable period prior to the effective date of the cancellation; or (B) the Participant receives payment or other benefits that the Committee determines to be reasonable compensation for the value of all cancelled Awards (without regard to whether such Awards would otherwise be vested). (iii) Upon the occurrence of a reorganization of the Trust or any other event described in this paragraph (b), any successor to the Trust shall be substituted for the Trust to the extent that the Trust and the successor agree to such substitution. (c) Upon (or, in the discretion of the Trust Committee, immediately prior to) the sale to (or exchange with) a third party unrelated to the Trust of all or substantially all of the assets of the Trust, all Awards shall be cancelled. If Awards are cancelled under this paragraph, then, with respect to any affected Participant, either: (i) the Participant shall be provided with reasonable advance notice of the cancellation, and the Participant shall be permitted to exercise all Awards that will be cancelled (without regard to whether such awards would otherwise be exercisable) for a reasonable period prior to the effective date of the cancellation; or (ii) the Participant shall receive payment or other benefits that the Committee determines to be reasonable compensation for the value of all cancelled Awards (without regard to whether such cancelled Awards would otherwise be vested). The foregoing provisions of this paragraph shall also apply to the sale of all or substantially all of the assets of the Trust to a related party, if the Committee determines such application is appropriate. Notwithstanding the foregoing provisions of this paragraph (c), in lieu of cancellation of outstanding Awards, the Committee and the purchaser of all or substantially all of the Trust's assets may provide that an appropriate number of shares or securities of the purchaser or its affiliates shall be substituted for Shares with respect to outstanding Awards under the Plan, provided that such substituted awards shall be comparable in value and contain terms and conditions similar to the Awards. (d) In determining what action, if any, is necessary or appropriate under the foregoing provisions of this subsection, the Trust Committee shall act in a manner that it determines to be consistent with the purposes of the Plan and of the affected Awards and, where applicable or otherwise appropriate, in a manner that it determines to be necessary to preserve the benefits and potential benefits of the affected Awards for the Participants and the Trust. (e) The existence of this Plan and the Awards granted hereunder shall not affect in any way the right or power of the Trust or its shareholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other 7 changes in the Trust's capital structure or its business, any merger or consolidation of the Trust, any issue of bonds, debentures, preferred or prior preference stocks ahead of or affecting the Trust's Shares or the rights thereof, the dissolution or liquidation of the Trust, any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. (f) Except as expressly provided by the terms of this Plan, the issue by the Trust of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property or for labor or services, either upon direct sale, upon the exercise of rights or warrants to subscribe therefor or upon conversion of shares or obligations of the Trust convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof, shall be made with respect to Awards then outstanding hereunder. (g) Awards under the Plan are subject to adjustment under this subsection only during the period in which they are considered to be outstanding under the Plan. For purposes of this subsection, an Award is considered "outstanding" on any date if the Participant's ability to obtain all benefits with respect to the Award is subject to limits imposed by the Plan (including any limits imposed by the Agreement reflecting the Award). The determination of whether an Award is outstanding shall be made by the Trust Committee. 6.5. Change in Control. In the event that (i) a Participant's employment is terminated by the Trust or the successor to the Trust or an affiliated entity which is his or her employer for reasons other than Cause following a Change in Control of the Trust (as defined below) or (ii) the Plan is terminated by the Trust or its successor following a Change in Control without provision for the continuation of outstanding Awards hereunder, all Options and related Awards which have not otherwise expired shall become immediately exercisable and all other Awards shall become fully vested. For purposes of the Plan, a "Change in Control" means the happening of any of the following: (a) the shareholders of the Trust approve a definitive agreement to merge the Trust into or consolidate the Trust with another entity, sell or otherwise dispose of all or substantially all of its assets or adopt a plan of liquidation, provided, however, that a Change in Control shall not be deemed to have occurred by reason of a transaction, or a substantially concurrent or otherwise related series of transactions, upon the completion of which 50% or more of the beneficial ownership of the voting power of the Trust, the surviving corporation or corporation directly or indirectly controlling the Trust or the surviving corporation, as the case may be, is held by the same persons (as defined below) (although not necessarily in the same proportion) as held the beneficial ownership of the voting power of the Trust immediately prior to the transaction or the substantially concurrent or otherwise related series of transactions, except that upon the completion thereof, employees or employee benefit plans of the Trust may be a new holder of such beneficial ownership; provided, further, that any transaction described in this paragraph (a) with an "Affiliate" of the Trust (as defined in the Securities Exchange Act of 1934, as amended (the "Exchange Act")) shall not be treated as a Change in Control; or (b) the "beneficial ownership" (as defined in Rule 13d-3 under the Exchange Act) of securities representing 50% or more of the combined voting power of the Trust is acquired, other than from the Trust, by any "person" as defined in Sections 13(d) and 14(d) of the Exchange Act (other than any trustee or other fiduciary holding securities under an employee benefit or other similar stock plan of the Trust) provided, that any purchase by Security Capital Group Incorporated or any of its affiliates of securities representing 50% or more of the combined voting power of the Trust shall not be treated as a Change in Control; or (c) at any time during any period of two consecutive years, individuals who at the beginning of such period were members of the Board of Trustees of the Trust cease for any reason to constitute at least a majority thereof (unless the election, or the nomination for election by the Trust's shareholders, of 8 each new trustee was approved by a vote of at least two-thirds of the trustees still in office at the time of such election or nomination who were trustees at the beginning of such period). For purposes of this subsection, a Participant's employment shall be deemed to be terminated by the Trust or the successor to the Trust or an affiliated entity if the Participant terminates employment after (i) a substantial adverse alteration in the nature of the Participant's status or responsibilities from those in effect immediately prior to the Change in Control, or (ii) a material reduction in the Participant's annual base salary and target bonus, if any, as in effect immediately prior to the Change in Control. If, upon a Change in Control, awards in other shares or securities are substituted for outstanding Awards pursuant to Section 6.4, and immediately following the Change in Control the Participant becomes employed by the entity into which the Trust merged, or the purchaser of substantially all of the assets of the Trust, or a successor to such entity or purchaser, the Participant shall not be treated as having terminated employment for purposes of this Section 6.5 until such time as the Participant terminates employment with the merged entity or purchaser (or successor), as applicable. 6.6. Limit on Distribution. Distribution of Shares or other amounts under the Plan shall be subject to the following: (a) Notwithstanding any other provision of the Plan, the Trust shall have no liability to deliver any Shares under the Plan or make any other distribution of benefits under the Plan unless such delivery or distribution would comply with all applicable laws and the applicable requirements of any securities exchange or similar entity. (b) In the case of a Participant who is subject to Section 16(a) and 16(b) of the Exchange Act, the Trust Committee may, at any time, add such conditions and limitations to any Award to such Participant, or any feature of any such Award, as the Committee, in its sole discretion, deems necessary or desirable to comply with Section 16(a) or 16(b) and the rules and regulations thereunder or to obtain any exemption therefrom. (c) To the extent that the Plan provides for issuance of certificates to reflect the transfer of Shares, the transfer of such Shares may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the rules of any stock exchange. 6.7. Liability for Cash Payments. Subject to the provisions of this Section, each Related Company shall be liable for payment of cash due under the Plan with respect to any Participant to the extent that such benefits are attributable to the service rendered for that Related Company by the Participant. Any disputes relating to liability of a Related Company for cash payments shall be resolved by the Trust Committee. 6.8. Performance-Based Compensation. To the extent that the Trust Committee determines that it is necessary or desirable to conform any Awards under the Plan with the requirements applicable to "Performance-Based Compensation", as that term is used in Code section 162(m)(4)(C), it may, at or prior to the time an Award is granted, take such steps and impose such restrictions with respect to such Award as it determines to be necessary to satisfy such requirements including, without limitation: (a) The establishment of performance goals that must be satisfied prior to the payment or distribution of benefits under such Awards. (b) The submission of such Awards and performance goals to the Trust's shareholders for approval and making the receipt of benefits under such Awards contingent on receipt of such approval. (c) Providing that no payment or distribution be made under such Awards unless the Committee certifies that the goals and the applicable terms of the Plan and Agreement reflecting the Awards have been satisfied. To the extent that the Committee determines that the foregoing requirements relating to Performance-Based Compensation do not apply to Awards under the Plan because the Awards constitute Options, the Committee may, at the time the Award is granted, conform the Awards to alternative methods of satisfying the requirements applicable to Performance-Based Compensation. 9 6.9. Withholding. All Awards and other payments under the Plan are subject to withholding of all applicable taxes, which withholding obligations may be satisfied, with the consent of the granting Committee, through the surrender of Shares which the Participant already owns or to which a Participant is otherwise entitled under the Plan; provided, however, previously-owned Shares that have been held by the Participant less than six months or Shares to which the Participant is entitled under the Plan may only be used to satisfy the minimum tax withholding required by applicable law. 6.10. Transferability. Awards under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution or, to the extent provided by the granting Committee, pursuant to a qualified domestic relations order (within the meaning of the Code and applicable rules thereunder). To the extent that the Participant who receives an Award under the Plan has the right to exercise such Award, the Award may be exercised during the lifetime of the Participant only by the Participant. Notwithstanding the foregoing provisions of this subsection, the Committee may permit Awards under the Plan to be transferred to or for the benefit of the Participant's family (including, without limitation, to a trust or partnership for the benefit of a Participant's family), subject to such procedures as the Committee may establish. In no event shall an Incentive Share Option be transferable to the extent that such transferability would violate the requirements applicable to such option under Code section 422. 6.11. Notices. Any notice or document required to be filed with a Committee under the Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to the Committee, in care of the Trust or the Related Company, as applicable, at its principal executive offices. The Committee may, by advance written notice to affected persons, revise such notice procedure from time to time. Any notice required under the Plan (other than a notice of election) may be waived by the person entitled to notice. 6.12. Form and Time of Elections. Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification or revocation thereof, shall be in writing filed with the applicable Committee at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Committee shall require. 6.13. Agreement With Trust or Related Company. At the time of an Award to a Participant under the Plan, the granting Committee may require a Participant to enter into an agreement with the Trust or the Related Company, as applicable (the "Agreement"), in a form specified by the granting Committee, agreeing to the terms and conditions of the Plan and to such additional terms and conditions, not inconsistent with the Plan, as the granting Committee may, in its sole discretion, prescribe. 6.14. Limitation of Implied Rights. (a) Neither a Participant nor any other person shall, by reason of the Plan, acquire any right in or title to any assets, funds or property of the Trust or any Related Company whatsoever, including, without limitation, any specific funds, assets, or other property which the Trust or any Related Company, in its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the amounts, if any, payable under the Plan, unsecured by any assets of the Trust and any Related Company. Nothing contained in the Plan shall constitute a guarantee by the Trust or any Related Company that the assets of such companies shall be sufficient to pay any benefits to any person. (b) The Plan does not constitute a contract of employment, and selection as a Participant will not give any employee the right to be retained in the employ of the Trust or any Related Company, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. Except as otherwise provided in the Plan, no Award under the Plan shall confer upon the holder thereof any right as a shareholder of the Trust prior to the date on which he fulfills all service requirements and other conditions for receipt of such rights and Shares are registered in his name. 6.15. Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 6.16. Action by Trust or Related Company. Any action required or permitted to be taken by the Trust or any Related Company shall be by resolution of its board of trustees or directors, as applicable, or by action of one or more members of the board (including a committee of the board) who are duly authorized to act for the board or (except to the extent prohibited by applicable law or the rules of any stock exchange) by a duly authorized officer of the Trust. 10 6.17. Gender and Number. Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular. 6.18. Applicable Law. The provisions of the Plan shall be construed in accordance with the laws of the State of Maryland, without giving effect to choice of law principles. 6.19. Foreign Employees. Notwithstanding any other provision of the Plan to the contrary, a Committee may grant Awards to eligible persons who are foreign nationals on such terms and conditions different from those specified in the Plan as may, in the judgment of the Committee, be necessary or desirable to foster and promote achievement of the purposes of the Plan. In furtherance of such purposes, the Committee may make such modifications, amendments, procedures and subplans as may be necessary or advisable to comply with provisions of laws in other countries or jurisdictions in which the Trust or a Related Company operates or has employees. SECTION 7 COMMITTEES 7.1. Administration. The authority to control and manage the operation and administration of the Plan shall be vested in the Trust Committee and the Related Companies' Committees (the "Committees") in accordance with this Section 7. 7.2. Selection of Trust Committee. So long as the Trust is subject to Section 16 of the Exchange Act, the Trust Committee shall be selected by the Board and shall consist of not fewer than two members of the Board or such greater number as may be required for compliance with Rule 16b-3 issued under the Exchange Act, none of whom shall be eligible to receive Awards under the Plan. 7.3. Powers of Committees. The authority to manage and control the operation and administration of the Plan shall be vested in the Committees, subject to the following: (a) Subject to the provisions of the Plan, the Trust Committee will have the authority and discretion to select which employees of the Trust are eligible to receive Awards and each Related Company Committee will have the authority and discretion to select which employees of the Related Company are eligible to receive Awards. Each Committee shall have the authority to determine the time or times of receipt, to determine the types of Awards and the number of Shares covered by the Awards, to establish the terms, conditions, performance criteria, restrictions, and other provisions of such Awards, and to cancel or suspend Awards. In making such Award determinations, the Committee may take into account the nature of services rendered by the respective employee, the individual's present and potential contribution to the Trust's or the Related Company's success and such other factors as the Committee deems relevant. (b) Subject to the provisions of the Plan, the Trust Committee will have the authority and discretion to determine the extent to which Awards under the Plan will be structured to conform to the requirements applicable to Performance-Based Compensation, and to take such action, establish such procedures, and impose such restrictions at the time such Awards are granted as the Committee determines to be necessary or appropriate to conform to such requirements. (c) Subject to the provisions of the Plan, the Trust Committee will have the authority and discretion to interpret the Plan, to establish, amend and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any agreements made pursuant to the Plan and to make all other determinations that may be necessary or advisable for the administration of the Plan. (d) Any interpretation of the Plan by a Committee and any decision made by it under the Plan is final and binding on all persons. (e) Except as otherwise expressly provided in the Plan, where a Committee is authorized to make a determination with respect to any Award, such determination shall be made at the time the Award is made, except that the Committee may reserve the authority to have such determination made by the Committee in the future (but only if such reservation is made at the time the Award is granted and is expressly stated in the Agreement reflecting the Award). 11 7.4. Delegation by Committee. Except to the extent prohibited by applicable law or the rules of any stock exchange or NASDAQ (if appropriate), a Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time. 7.5. Information to be Furnished to Committees. The Trust and Related Companies shall furnish each Committee such data and information as may be required for it to discharge its duties. The records of the Trust and Related Companies as to an employee's or Participant's employment (or other provision of services), termination of employment (or cessation of the provision of services), leave of absence, reemployment and compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits under the Plan must furnish the Committees such evidence, data or information as the Committees consider desirable to carry out the terms of the Plan. 7.6. Liability and Indemnification of Committees. No member or authorized delegate of any Committee shall be liable to any person for any action taken or omitted in connection with the administration of the Plan unless attributable to his own fraud or willful misconduct; nor shall the Trust or any Related Company be liable to any person for any such action unless attributable to fraud or willful misconduct on the part of a trustee or employee of the Trust or Related Company. Each Committee, the individual members thereof, and persons acting as the authorized delegates of the Committee under the Plan, shall be indemnified by the Trust against any and all liabilities, losses, costs and expenses (including legal fees and expenses) of whatsoever kind and nature which may be imposed on, incurred by or asserted against the Committee or its members or authorized delegates by reason of the performance of a Committee function if the Committee or its members or authorized delegates did not act dishonestly or in willful violation of the law or regulation under which such liability, loss, cost or expense arises. This indemnification shall not duplicate but may supplement any coverage available under any applicable insurance. SECTION 8 AMENDMENT AND TERMINATION Subject to obtaining such approvals as may be required under the Code, Federal securities law, Maryland corporate law or stock exchange requirements, the Board may, at any time, amend or terminate the Plan, provided that, subject to subsection 6.4 (relating to certain adjustments to shares), no amendment or termination may materially adversely affect the rights of any Participant or beneficiary under any Award made under the Plan prior to the date such amendment is adopted by the Board. 12 EX-12 3 COMPUTATION OF RATIOS EXHIBIT 12.1 PROLOGIS COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollar amounts in thousands)
Nine Months Ended September 30, Year Ended December 31, ---------------------- ------------------------------------------------------------ 1999 1998 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- --------- ---------- ---------- Net Earnings from Operations $ 111,747 $ 69,017 $ 100,772 $ 38,747 $ 79,384 $ 47,660 $ 25,066 Add: Interest Expense 126,478 52,455 77,650 52,704 38,819 32,005 7,568 ---------- ---------- ---------- ---------- --------- ---------- ---------- Earnings as Adjusted $ 238,225 $ 121,472 $ 178,422 $ 91,451 $ 118,203 $ 79,665 $ 32,634 ========== ========== ========== ========== ========= ========== ========== Fixed Charges: Interest Expense $ 126,478 $ 52,455 $ 77,650 $ 52,704 $ 38,819 $ 32,005 $ 7,568 Capitalized Interest 11,029 14,814 19,173 18,365 16,138 8,599 2,208 ---------- ---------- ---------- ---------- --------- ---------- ---------- Total Fixed Charges $ 137,507 $ 67,269 $ 96,823 $ 71,069 $ 54,957 $ 40,604 $ 9,776 ========== ========== ========== ========== ========= ========== ========== Ratio of Earnings, as Adjusted to Fixed Charges 1.7 1.8 1.8 1.3 2.2 2.0 3.3 ========== ========== ========== ========== ========= ========== ==========
EX-12 4 COMPUTATION OF RATIOS EXHIBIT 12.2 PROLOGIS COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE DIVIDENDS (Dollar amounts in thousands)
Nine Months Ended September 30, Year Ended December 31, ---------------------- ------------------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Earnings from Operations $ 111,747 $ 69,017 $ 100,772 $ 38,747 $ 79,384 $ 47,660 $ 25,066 Add: Interest Expense 126,478 52,455 77,650 52,704 38,819 32,005 7,568 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Earnings, as Adjusted $ 238,225 $ 121,472 $ 178,422 $ 91,451 $ 118,203 $ 79,665 $ 32,634 ========== ========== ========== ========== ========== ========== ========== Combined Fixed Charges and Preferred Share Dividends: Interest Expense $ 126,478 $ 52,455 $ 77,650 $ 52,704 $ 38,819 $ 32,005 $ 7,568 Capitalized Interest 11,029 14,814 19,173 18,365 16,138 8,599 2,208 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total Fixed Charges 137,507 67,269 96,823 71,069 54,957 40,604 9,776 Preferred Share Dividends(a) 42,391 35,543 49,098 35,318 25,895 6,698 -- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Combined Fixed Charges and Preferred Share Dividends $ 179,898 $ 102,812 $ 145,921 $ 106,387 $ 80,852 $ 47,302 $ 9,776 ========== ========== ========== ========== ========== ========== ========== Ratio of Earnings, as Adjusted to Combined Fixed Charges and Preferred Share Dividends 1.3 1.2 1.2 (b) 1.5 1.7 3.3 ========== ========== ========== ========== ========== ========== ==========
(a) ProLogis had no preferred shares prior to 1995. (b) Due to a one-time, non-recurring, non-cash charge of $75.4 million relating to the costs incurred in acquiring the management companies from a related party earnings were insufficient to cover combined fixed charges and preferred share dividends for the year ended December 31, 1997 by $21.3 million. EX-15 5 UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15.1 November 10, 1999 Board of Trustees and Shareholders of ProLogis Trust: We are aware that ProLogis Trust has incorporated by reference in its Registration Statement Nos. 33-91366, 33-92490, 333-4961, 333-31421, 333-39797, 333-38515, 333-52867, 333-26597, 333-74917, 333-75893, 333-79813 and 333-86081 its Form 10-Q for the quarter ended September 30, 1999, which includes our report dated November 10, 1999 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933 (the "Act"), that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP EX-27 6 EXHIBIT 27 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. EXHIBIT 27
5 This schedule contains summary financial information extracted from the Form 10-Q for the nine months ended September 30, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 74,354 0 1,030,231 0 0 0 5,012,666 337,934 5,949,066 0 2,482,435 0 712,173 1,615 2,315,851 5,949,066 363,915 413,116 0 26,056 0 0 126,478 89,277 0 89,277 0 0 1,440 87,837 0.59 0.59
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