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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 01-12846

PROLOGIS

(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 [  ]

     Indicate by check mark whether the registrant is accelerated file (as defined in Rule 12b-2 of the Securities Act of 1934).

Yes [X] No [  ]

     The number of shares outstanding of the Registrant’s common shares as of May 12, 2003 was 178,996,921.

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PROLOGIS

INDEX

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PROLOGIS

CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
(Unaudited)
(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated condensed financial statements.

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PROLOGIS

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

See Note 9 for information on non-cash investing and financing activities.

The accompanying notes are an integral part of these consolidated condensed financial statements.

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PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
March 31, 2003 and 2002
(Unaudited)

1. General

  Business

     ProLogis, collectively with its consolidated subsidiaries and partnerships, is a publicly held real estate investment trust (“REIT”) that owns, operates and develops industrial distribution properties in North America (the United States and Mexico), Europe (11 countries) and Asia (Japan). ProLogis established a representative office in China in April 2003, but owns no real estate assets in China as of March 31, 2003. The ProLogis Operating System®, comprised of the Market Services Group, the Global Services Group, the Global Development Group and the ProLogis Solutions Group, utilizes ProLogis’ international network of properties to meet its customers’ distribution space needs globally. ProLogis’ business consists of two reportable business segments: property operations and corporate distribution facilities services business (“CDFS business”). See Note 8.

  Principles of Financial Presentation

     The consolidated condensed financial statements of ProLogis as of March 31, 2003 and for the three months ended March 31, 2003 and 2002 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. Management of ProLogis believes that the disclosures presented are adequate; however, these interim consolidated condensed financial statements should be read in conjunction with ProLogis’ December 31, 2002 audited consolidated financial statements contained in ProLogis’ 2002 Annual Report on Form 10-K.

     In the opinion of management, the accompanying unaudited consolidated condensed financial statements contain all adjustments, consisting of normal recurring adjustments; necessary for a fair presentation of ProLogis’ consolidated financial position and results of operations for the interim periods. The consolidated results of operations for the three months ended March 31, 2003 and 2002 are not necessarily indicative of the results to be expected for the entire year. Certain of the 2002 amounts have been reclassified to conform to the 2003 financial statement presentation.

     ProLogis began presenting its investment in ProLogis UK Holdings S.A., formerly Kingspark Holding S.A., (collectively with its subsidiaries “Kingspark S.A.”), a Luxembourg company that engages in CDFS business activities in the United Kingdom, and its investment in Kingspark LLC, a holding company that holds the voting ownership interests of Kingspark S.A., on a consolidated basis on July 1, 2002. ProLogis began presenting its investment in ProLogis Logistics Services Incorporated (“ProLogis Logistics”), which owns CS Integrated LLC (“CSI”), previously a temperature-controlled distribution company operating in the United States, on a consolidated basis on October 24, 2002. Previously, all of these investments were presented under the equity method. ProLogis’ changes in reporting method with respect to these entities occurred at the time ProLogis acquired (directly or indirectly) 100% of the ownership interests (both voting and non-voting) of Kingspark S.A. and ProLogis Logistics. Generally accepted accounting principles in the United States (“GAAP”) do not require that previously reported financial information be restated when the reporting method is changed to consolidation from the equity method under these circumstances. ProLogis’ consolidated shareholders’ equity and its consolidated net earnings are the same under the two reporting methods. The accompanying consolidated condensed financial statements present ProLogis’ investments in Kingspark S.A. and Kingspark LLC under the equity method through June 30, 2002 and ProLogis’ investment in ProLogis Logistics under the equity method through October 23, 2002. From these dates forward, these investments are presented on a consolidated basis. See Note 3.

     In January 2003, Interpretation No. 46, “Consolidation of Variable Interest Entities”, was issued. ProLogis is required to adopt the requirements of this Interpretation for the interim period that begins after June 15, 2003. This Interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, and requires that ProLogis present any variable interest entities in which it has a majority variable interest on a consolidated basis in its financial statements. ProLogis is continuing to assess the provisions of this Interpretation and the impact to ProLogis of adopting this Interpretation. Based on its initial assessment, ProLogis believes that, due to the adoption of this Interpretation, it will begin to present its investments in Frigoscandia Holding S.A. (“Frigoscandia S.A.”) and CSI/Frigo LLC, a holding company that has an ownership interest in Frigoscandia S.A., on a consolidated basis in its financial statements beginning with the consolidated condensed financial statements issued for the quarterly period ended September 30, 2003. Currently, ProLogis presents its investments in Frigoscandia S.A. and CSI/Frigo LLC under the equity method.

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ProLogis’ combined effective ownership in these entities is 99.75% at March 31, 2003. ProLogis expects that it will continue to present all of its other investments under the equity method. See Note 3 for information on ProLogis’ investments in these entities and for summarized financial information of Frigoscandia S.A. as of and for the three months ended March 31, 2003.

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

  Foreign Operations

     The U.S. dollar is the functional currency for ProLogis’ consolidated subsidiaries and unconsolidated investees operating in the United States and Mexico. The functional currency for ProLogis’ consolidated subsidiaries and unconsolidated investees operating outside North America is the local currency of the country in which the entity is located (euro for members of the European Union that have adopted the euro, krona for Sweden, pound sterling for the United Kingdom, forint for Hungary, koruna for the Czech Republic, zloty for Poland and yen for Japan).

     ProLogis’ consolidated subsidiaries whose functional currency is not the U.S. dollar translate their financial statements into U.S. dollars prior to consolidating their financial statements with those of ProLogis. Assets and liabilities are translated at the exchange rate in effect as of the financial statement date. Income statement accounts are translated using the average exchange rate for the period. Income statement accounts that represent significant nonrecurring transactions are translated at the rate in effect as of the date of the transaction. Gains and losses resulting from the translation are included in accumulated other comprehensive income as a separate component of shareholders’ equity. ProLogis translates its share of the earnings or losses of its unconsolidated investees whose functional currency is not the U.S. dollar at the average exchange rate for the period.

     ProLogis and its consolidated subsidiaries and unconsolidated investees may have transactions denominated in currencies other than their functional currency. In these instances, nonmonetary assets and liabilities are reflected at the historical exchange rate, monetary assets and liabilities are remeasured at the exchange rate in effect at the end of the period and income statement accounts are remeasured at the average exchange rate for the period. Gains and losses from remeasurement are generally included in results of operations. Certain intercompany debt balances are remeasured with the resulting adjustment recognized as a cumulative translation adjustment in accumulated other comprehensive income in shareholders’ equity. This treatment is given to intercompany debt that is deemed to be a permanent source of capital to the subsidiary or investee.

     Gains or losses are also recorded in the income statement when a transaction with a third party, denominated in a currency other than the entity’s functional currency, is settled and the functional currency cash flows realized are more or less than expected based upon the exchange rate in effect when the transaction was initiated.

     The components of the net foreign currency exchange gains and losses recognized in ProLogis’ results of operations were as follows for the periods indicated (in thousands of U.S. dollars):

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(2)

ProLogis enters into foreign currency put option contracts related to its operations in Europe and Japan. These put option contracts do not qualify for hedge accounting treatment. Accordingly, the cost of the contract is capitalized at the contract’s inception and then marked-to-market by ProLogis as of the end of each accounting period until the contract’s expiration. Upon expiration, the mark-to-market adjustments are reversed, the total cost of the contract is expensed and any amounts received at expiration are recognized as gains.

Other Recently Issued Accounting Standards

     In November 2002, Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others as an interpretation of SFAS Nos. 5, 57 and 107 and a rescission of Interpretation No. 34” was issued. This Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit and provides that an entity that issues a guarantee must recognize an initial liability for the fair value, or market value, of the obligation it assumes under that guarantee. Further, this Interpretation requires that this information be disclosed in the interim and annual financial statements.

     This Interpretation’s disclosure requirements were effective for ProLogis’ December 31, 2002 consolidated financial statements and the initial recognition and measurement provisions of this Interpretation are applicable to guarantees issued or modified after December 31, 2002. ProLogis made all applicable disclosures in its consolidated financial statements included in its 2002 Annual Report on Form 10-K. The application of the recognition and measurement provisions of this Interpretation did not have a material effect on ProLogis’ financial position, results of operations or cash flows. See Note 3.

     In December 2002, SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123” was issued. This standard is effective for financial statements for fiscal years ending after December 15, 2002. ProLogis does not account for share-based compensation under the fair value method provided in SFAS No. 123. Rather, ProLogis continues to account for its various share-based compensation plans using Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations, as also allowed under SFAS No. 123. Under APB No. 25, if the exercise price of the share options issued equals or exceeds the market price of the underlying share on the date of grant, no compensation expense is recognized. Under SFAS No. 123, the fair value of the share options issued would be recognized as compensation expense. ProLogis issues share options to employees and members of its Board of Trustees (the “Board”) that have an exercise price that is equal to the average of the high and low market prices on the day the options are issued. Therefore, no compensation expense is recognized. ProLogis does recognize compensation expense when changes to the terms of the share options or other instruments awarded require the use of variable accounting as provided under SFAS No. 123.

     Had compensation expense been recognized by ProLogis for the three months ended March 31, 2003 and 2002 using an option valuation model as provided in SFAS No. 123, ProLogis’ net earnings attributable to Common Shares and net earnings per Common Share for these periods would change as follows (in thousands of U.S. dollars, except per share amounts):

     Since share options vest over several years and additional grants are likely to be made in future years, the pro forma compensation expense may not be representative of compensation cost to be expected in future years.

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     The pro forma amounts above were calculated using the Black-Scholes model and the following assumptions:

     ProLogis adopted the following accounting standards as of January 1, 2003. Adoption of these standards has not had a material impact on ProLogis’ financial position, results of operations or cash flows:

	•		SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB statement No. 13, and Technical Corrections”. SFAS No. 145 significantly limits the treatment of losses associated with early extinguishment of debt as an extraordinary item and impacts certain sale-leaseback transactions.
	•		SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 requires that certain expenses associated with restructuring charges be accrued as liabilities in the period in which the liability is incurred.

2. Real Estate

Investments in Real Estate

     Real estate assets directly owned by ProLogis consist of income producing industrial distribution properties, properties under development and land held for future development, at cost. ProLogis’ real estate investments include the following as of the dates indicated (in thousands of U.S. dollars):

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     ProLogis’ directly owned real estate assets are located in North America (the United States and Mexico), ten countries in Europe and in Japan. No individual market in any country, as defined by ProLogis and presented in Item 2 of its 2002 Annual Report on Form 10-K, represents more than 10% of ProLogis’ total real estate assets, before depreciation.

Operating Lease Agreements

     ProLogis leases its operating properties to customers under agreements that are generally classified as operating leases. At March 31, 2003, minimum lease payments on leases with lease periods greater than one year for space in ProLogis’ directly owned properties during the remainder of 2003 and the other years in the five-year period ending December 31, 2007 and thereafter are as follows (in thousands of U.S. dollars):

     In ProLogis’ directly owned properties, the largest customer and the 25 largest customers accounted for 1.44% and 14.75%, respectively, of ProLogis’ annualized base rental income at March 31, 2003.

3. Unconsolidated Investees:

Summary of Investments and Income

     Since 1997, ProLogis has invested in various entities that are presented under the equity method in ProLogis’ consolidated condensed financial statements. Certain of these investments have been structured such that ProLogis’ ownership interest will allow ProLogis to continue to comply with the requirements of the Internal Revenue Code of 1986, as amended (“the Code”), to qualify as a REIT. However, with respect to ProLogis’ investments in property funds, having an ownership interest of less than 50% is part of ProLogis’ business strategy. This business strategy allows ProLogis to realize a portion of the profits from its development activities and raise private debt and equity capital to fund its future development activities — while also allowing ProLogis to maintain an ownership interest in its developed properties.

     ProLogis’ investments in entities that were presented under the equity method are summarized as follows as of the dates indicated (in thousands of U.S. dollars):

     ProLogis recognizes income or losses from its unconsolidated investees consisting of its proportionate share of the earnings or losses of these entities recognized under the equity method, interest income on advances to these entities, if any, and fees earned from these entities, if any. Amounts recognized by ProLogis from unconsolidated investees are summarized as follows for the periods indicated (in thousands of U.S. dollars):

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Property Funds

     Since 1999, ProLogis has formed eight property funds. ProLogis’ ownership interests in these property funds range from 14.5% to 50%. The property funds own distribution properties, generally properties that have been contributed to the property funds by ProLogis. ProLogis receives ownership interests in the property funds as part of the proceeds received from these contributions. ProLogis recognizes its proportionate share of the earnings or losses of each property fund under the equity method. ProLogis earns fees for acting as the manager of the property funds and may earn additional fees by providing other services to certain of the property funds including, but not limited to, development and leasing activities performed on their behalf.

     ProLogis’ investments in the eight property funds, presented under the equity method, were as follows as of the dates indicated (in thousands of U.S. dollars):

     ProLogis’ total investment in the eight property funds as of March 31, 2003 consisted of the following components (in millions of U.S. dollars):

     ProLogis’ proportionate share of the earnings of each of the property funds recognized under the equity method, interest income on advances to the property funds, if any, and fees earned from the property funds were as follows for the periods indicated (in thousands of U.S. dollars):

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	•		Began operations on August 26, 1999;
	•		Members are ProLogis and New York State Common Retirement Fund;
	•		Owned 79 properties aggregating 13.0 million square feet at March 31, 2003;
	•		All but one of the properties owned were acquired from ProLogis or were developed by ProLogis on behalf of the property fund;
	•		Properties are located in the Los Angeles/Orange County market;
	•		ProLogis California has the right of first offer with respect to properties that ProLogis develops, excluding properties developed under build to suit lease agreements, in the Los Angeles/Orange County market;
	•		ProLogis’ ownership interest has been 50% since the property fund’s inception; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.8 million for both the three months ended March 31, 2003 and 2002.

(2)

ProLogis North American Properties Fund I LLC (“ProLogis North American Properties Fund I”):

	•		Began operations on June 29, 2000;
	•		Members are ProLogis and an affiliate of the State Teachers’ Retirement Board of Ohio;
	•		Owned 36 properties aggregating 9.4 million square feet at March 31, 2003;
	•		All properties were acquired from ProLogis;
	•		Properties are located in 16 markets in the United States;
	•		ProLogis’ ownership interest has been 41.3% since January 15, 2001 and was 20% from inception of the property fund to that date; and
	•		Property management, asset management and other fees recognized by ProLogis were $0.5 million and $0.9 million for the three months ended March 31, 2003 and 2002, respectively.

(3)

ProLogis First U.S. Properties LP (“ProLogis North American Properties Fund II”):

	•		Began operations on June 30, 2000;
	•		Members are ProLogis and an affiliate of First Islamic Investment Bank E.C. (“First Islamic Bank”). First Islamic Bank obtained its initial ownership interest on March 27, 2001 from Principal Financial Group, the original member;
	•		Owned 27 properties aggregating 4.5 million square feet at March 31, 2003;
	•		All properties were acquired from ProLogis;
	•		Properties are located in 13 markets in the United States;
	•		ProLogis’ ownership interest has been 20% since the property fund’s inception; and

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•

Property management, asset management, leasing and other fees recognized by ProLogis were $0.5 million for both the three months ended March 31, 2003 and 2002.

(4)

ProLogis Second U.S. Properties LP (“ProLogis North American Properties Fund III”):

	•		Began operations on June 15, 2001;
	•		Members are ProLogis and an affiliate of First Islamic Bank;
	•		Owned 34 properties aggregating 4.4 million square feet at March 31, 2003;
	•		All properties were acquired from ProLogis;
	•		Properties are located in 15 markets in the United States;
	•		ProLogis’ ownership interest has been 20% since the property fund’s inception; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.6 million and $0.5 million for the three months ended March 31, 2003 and 2002, respectively.

(5)

ProLogis Third U.S. Properties LP (“ProLogis North American Properties Fund IV”):

	•		Began operations on September 21, 2001;
	•		Members are ProLogis and an affiliate of First Islamic Bank;
	•		Owned 17 properties aggregating 3.5 million square feet at March 31, 2003;
	•		All properties were acquired from ProLogis;
	•		Properties are located in ten markets in the United States;
	•		ProLogis’ ownership interest has been 20% since the property fund’s inception; and
	•		Property management, asset management, leasing and other fees recognized by ProLogis were $0.3 million for both the three months ended March 31, 2003 and 2002.