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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-K

(Mark One)

x   

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002.

OR

o   

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                     .

Commission File Number 1-12846


PROLOGIS

(Exact name of registrant as specified in its charter)
     
Maryland
  74-2604728
(State or other jurisdiction
of incorporation or organization)
  (I.R.S. employer
identification no.)

14100 East 35th Place

Aurora, Colorado 80011
(Address of principal executive offices and zip code)

(303) 375-9292

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

         
Name of each exchange
Title of Each Class on which registered


Common Shares of Beneficial Interest, par value $0.01 per share
    New York Stock Exchange  
Series D Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share
    New York Stock Exchange  
Series E Cumulative Redeemable Preferred Shares of Beneficial Interest, par value $0.01 per share
    New York Stock Exchange  
Preferred Share Purchase Rights
    New York Stock Exchange  

Securities registered pursuant to Section 12(g) of the Act:     NONE

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ  No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     Yes þ  No o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).     Yes þ  No o

     Based on the closing price of the registrant’s shares on June 28, 2002, the aggregate market value of the voting common equity held by non-affiliates of the registrant was $4,154,572,578.

     At March 24, 2003, there were outstanding approximately 178,630,570 common shares of beneficial interest of the registrant.

DOCUMENTS INCORPORATED BY REFERENCE

None




TABLE OF CONTENTS

TABLE OF CONTENTS
PART I
PART II
PART III
PART IV
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE III
INDEPENDENT AUDITORS’ REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
PROLOGIS CONSOLIDATED STATEMENTS OF EARNINGS Years Ended December 31, 2002, 2001 and 2000 (In thousands, except per share data)
PROLOGIS CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME Years Ended December 31, 2002, 2001 and 2000 (In thousands)
PROLOGIS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001 and 2000
INDEPENDENT AUDITORS’ REPORT
SCHEDULE III -- REAL ESTATE AND ACCUMULATED DEPRECIATION
SIGNATURES
INDEX TO EXHIBITS
EX-4.5 Fourth Amendment to Rights Agreement
EX-4.26 Form of 5.50% Promissory Note
EX-10.27 Code of Ethics and Business Conduct
EX-10.28 Amended/Restated Special Equity Agreement
EX-10.29 Special Equity Agreement
EX-12.1 Statement re: Computation of Ratio
EX-12.2 Statement re: Computation of Ratio
EX-21.1 Subsidiaries of ProLogis
EX-23.1 Consent of KPMG LLP - Stockholm, Sweden
EX-23.2 Report of KPMG - Stockholm, Sweden
EX-23.3 Consent of KPMG - New York, New York
EX-23.4 Report of KPMG - New York, New York
EX-23.5 Consent of KPMG - San Diego, California
EX-99.13 Purchase and Sale Agreement dated 7/1/02
Ex-99.14 Purchase and Sale Agrmt. dated 10/23/02
EX-99.15 Promissory Note


Table of Contents

TABLE OF CONTENTS

                   
Item Description Page



PART I
  1.    
Business
    1  
         
ProLogis
    1  
         
2002 Financial Results
    3  
         
ProLogis’ Operating Segments
    4  
         
ProLogis Operating System®
    14  
         
ProLogis Management
    16  
         
Environmental Matters
    21  
         
Insurance Coverage
    22  
  2.    
Properties
    22  
         
Industrial Distribution Properties
    22  
         
Geographic Distribution
    22  
         
Properties
    26  
         
Real Estate Partnerships
    31  
         
Unconsolidated Investees
    32  
  3.    
Legal Proceedings
    38  
  4.    
Submission of Matters to a Vote of Security Holders
    38  
PART II
  5.    
Market for the Registrant’s Common Equity and Related Stockholder Matters
    38  
  6.    
Selected Financial Data
    40  
  7.    
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    44  
         
Critical Accounting Policies
    44  
         
Results of Operations
    46  
         
Environmental Matters
    59  
         
Liquidity and Capital Resources
    59  
         
Funds from Operations
    66  
         
Risk Factors
    68  
  7A.    
Quantitative and Qualitative Disclosure About Market Risk
    73  
  8.    
Financial Statements and Supplementary Data
    75  
  9.    
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Matters
    75  
PART III
  10.    
Directors and Executive Officers of the Registrant
    76  
  11.    
Executive Compensation
    76  
  12.    
Security Ownership of Certain Beneficial Owners and Management
    76  
  13.    
Certain Relationships and Related Transactions
    76  
  14.    
Controls and Procedures
    76  
PART IV
  15.    
Exhibits, Financial Statement Schedules and Reports on Form 8-K
    77  


Table of Contents

PART I

ITEM 1. Business

ProLogis

      ProLogis, formerly ProLogis Trust, (collectively with its consolidated subsidiaries and partnerships, “ProLogis”) is a real estate investment trust (“REIT”) that operates a global network of industrial distribution properties. ProLogis’ business strategy is designed to achieve long-term sustainable growth in cash flow and increase the overall return on equity for its shareholders. ProLogis manages its business by utilizing the ProLogis Operating System®, an organizational structure and service delivery system that ProLogis built around its customers. The ProLogis Operating System® is made up of the Market Services Group, the Global Services Group, the Global Development Group and the ProLogis Solutions Group. When combined with ProLogis’ international network of distribution properties, the ProLogis Operating System® enables ProLogis to meet its customers’ distribution space needs on a global basis. ProLogis believes that by integrating international scope and expertise with a strong local presence in its markets, it has become an attractive choice for the largest global users of distribution properties, its targeted customer base.

      ProLogis is organized under Maryland law and has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). ProLogis’ world headquarters are located in Aurora, Colorado, its European headquarters are located in Luxembourg, its European customer service headquarters are located in Amsterdam, Netherlands and its Asian headquarters are located in Tokyo, Japan.

      This report on Form 10-K includes certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations due to changes in global economic, business, competitive, market and regulatory factors. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”

      A copy of this Annual Report on Form 10-K, as well as ProLogis’ Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to such reports are available, free of charge, on the Internet in the Investor Relations section of ProLogis’ website. All required reports are made available on the website as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. ProLogis’ website address is www.prologis.com. The reference to ProLogis’ website address does not constitute incorporation by reference of the information contained in the website and such information should not be considered to be part of this document.

     Business Strategy

      In response to what was perceived to be a highly fragmented industrial distribution real estate industry, ProLogis was formed in 1991 with the primary objective of creating an operating company in the United States that would differentiate itself from its competition through its ability to meet a corporate customer’s distribution property requirements on a national, regional and local basis with the added benefit of providing consistent levels of service throughout the country. ProLogis was able to take advantage of unique market conditions in its early years that allowed it to build an asset base of industrial distribution properties in the United States, in many cases at prices below replacement cost. ProLogis also began acquiring a land inventory in key distribution markets that could be developed into industrial distribution properties. ProLogis funded its initial portfolio and the formation of its national operating system primarily with direct public debt and public equity capital. ProLogis’ common shares of beneficial interest, par value $0.01 per share (“Common Shares”) were listed on the New York Stock Exchange (“NYSE”) in March 1994. All of ProLogis’ acquired and developed distribution properties were integrated into one operating segment — the property operations segment — as ProLogis’ intent was to hold these investments on a long-term basis while generating rental income.

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      An integral part of ProLogis’ customer service focus is having a portfolio that meets the distribution space needs of its existing customers and also the needs of targeted national and international companies. As these companies expanded and managed their businesses for greater profitability, they also expanded and reconfigured their distribution networks, including expansion of their networks outside of the United States. In order to meet the growing distribution space needs of these companies, ProLogis expanded its operations to Mexico and Europe in 1997 and to Japan in 2001.

      In 1995, ProLogis’ business expanded to include the corporate distribution facilities services operating segment (“CDFS business”) to utilize ProLogis’ existing development capabilities to develop properties for sale to third parties, in addition to ProLogis’ existing development activities that focused only on the development of properties for long-term investment. The CDFS business was concentrated in North America until 1998 when these activities were added as a complement to ProLogis’ property operations segment activities in Europe. With the acquisition of an established development business in the United Kingdom in August 1998, ProLogis had access to strategic land positions in a country in which ProLogis previously had limited investments and where significant barriers for initial start-up activities existed. With holdings in both the United Kingdom and Continental Europe, ProLogis was positioned to be a single-source pan-European provider of distribution space to global users.

      After 1995, ProLogis focused on creating a critical mass of operating properties in key distribution markets in the United States, in addition to growing its CDFS business activities. To this end, ProLogis merged with a publicly traded REIT in March 1999, adding 32.2 million square feet of distribution properties in the United States to ProLogis’ property operations segment. And, to enhance its presence in Europe, ProLogis acquired 5.2 million square feet of distribution properties, primarily in Paris, through its acquisition of a real estate operating company in December 1998.

      ProLogis, as a REIT, must distribute rather than reinvest substantial amounts of its internally generated capital. Consequently, ProLogis utilized the public debt and equity capital markets to build its portfolio and operating system. By early 1999, the public equity capital markets were an increasingly costly method of raising capital. To secure private equity capital, ProLogis changed the primary focus of its overall development activities — from the development of distribution properties to hold in the property operations segment on a long-term basis — to the development of distribution properties in the CDFS business segment that, upon completion, are generally contributed to property funds formed by ProLogis. Accordingly, the primary focus of the CDFS business segment became that of developing properties to be contributed to property funds rather than properties that are sold to third parties. As a REIT, ProLogis can dispose of its properties under certain circumstances, therefore, ProLogis’ taxable REIT subsidiaries develop properties that ProLogis intends to sell to third parties. Properties that ProLogis intends to contribute to the property funds are developed directly by the REIT or one of its qualified REIT subsidiaries. Property funds are business partnerships between ProLogis and private investors, primarily institutional capital sources, with the private investors having equal or majority ownership interests in each property fund. The property funds acquire distribution properties, primarily from ProLogis with the intent to hold these properties as long-term investments. ProLogis acts as manager of the property fund and the individual properties that each fund owns. ProLogis intends to hold each of its ownership interests in the property funds as long-term investments.

      The property fund strategy: (i) allows ProLogis to realize, for financial reporting purposes, a portion of the development profits attendant to its CDFS business activities by contributing its developed properties to a property fund; (ii) provides a source of private capital to ProLogis; and (iii) allows ProLogis, as the manager of the property fund, to maintain its market presence and customer relationships that are the key drivers of its operating system. ProLogis realizes a portion of the development profits from the properties contributed to property funds to the extent of the third party investment in the property fund acquiring the property. The proceeds received by ProLogis from the contribution of properties to the property funds are recycled into ProLogis’ CDFS business segment thus, providing a private funding source for its future development activities and continued growth. To supplement the private equity investments in each property fund, the property funds obtain secured debt financing using their properties as security such that the leverage ratios in the property funds range from 30 to 75%. Approximately $3.4 billion of debt and private equity capital has been raised since the formation of ProLogis’ first property fund in August 1999. ProLogis has since created

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seven additional property funds that primarily acquire properties that have been developed by ProLogis. Of the eight property funds, six own properties in North America, including one property fund that owns properties in both the United States and Mexico, one property fund owns properties in Europe and one property fund owns a property in Japan. As a result of this shift in its business strategy, ProLogis’ total income in the CDFS business segment has grown from $20.5 million in 1998 to $156.9 million in 2002. Fees generated from property management and other services provided to the property funds by ProLogis in its role as manager of each of the funds were $34.5 million in 2002. These fees are included as part of the total income of the property operations segment, not the CDFS business segment.

      In 1997 and 1998, ProLogis acquired an international temperature-controlled distribution and logistics network. After four years of investing in this operating segment, ProLogis decided to reduce the level of its investment in favor of maintaining its focus on its core operating segments — property operations and the CDFS business. Since June 2001, ProLogis’ investees in this operating segment have disposed of over 250 million cubic feet of operating facilities in the United States and Europe. ProLogis has investments in only one temperature-controlled distribution company as of December 31, 2002. Substantially all of this investee’s operations are in France and the United Kingdom. The operating assets in the United Kingdom were classified as held for sale by ProLogis’ investee in December 2002.

2002 Financial Results

      ProLogis’ net earnings attributable to Common Shares were $216.2 million in 2002 and $90.8 million in 2001. ProLogis’ temperature-controlled distribution operations segment was the primary source of the increase in net earnings in 2002 over 2001. This operating segment’s share of ProLogis’ earnings from operations was income of $7.1 million in 2002 as compared to a loss of $111.5 million in 2001. The 2001 loss was primarily attributable to the recognition of impairment charges and net losses related to the disposition of certain operating assets, of which ProLogis’ proportionate share, recognized under the equity method, was $97.9 million ($88.4 million and $5.8 million of impairment charges related to operating assets and technology investments, respectively, and net losses of $3.7 million). This operating segment recognized additional impairment charges and net gains related to the disposition of certain of its operating assets in 2002 ($42.9 million of impairment charges and net gains of $1.5 million) and also experienced improved operating performance in 2002. The earnings from operations of ProLogis’ two primary operating segments were relatively unchanged from 2001 to 2002. See further discussion of ProLogis’ operating segments in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” and Note 10 to ProLogis’ Consolidated Financial Statements in Item 8.

      ProLogis believes that the weaknesses in the United States economy in 2002 negatively impacted its property operations segment’s results, primarily impacting ProLogis’ occupancy levels (overall occupancy declined from 2001 by 185 basis points) and its rental rate growth on new and renewed leases of previously leased space, which was 2.0% in 2002 as compared to 14.6% in 2001. See “— Property Operating Segments — Property Operations Segment — Operations.” In late 2002, ProLogis observed a slowing in its European customers’ decision-making processes with respect to changes in or reconfigurations of their distribution networks. ProLogis believes this trend was primarily the result of geopolitical concerns and the uncertainties surrounding the threat of war that existed throughout the fourth quarter of 2002 and into 2003. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Property Operations Segment” and “— CDFS Business Segment.”

      ProLogis considers funds from operations to be a useful supplemental measure of comparative period operating performance. Funds from operations attributable to Common Shares were $436.0 million in 2002 and $374.4 million in 2001. See the definition and calculation of funds from operations at “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds from Operations.” ProLogis’ cash flow from operating activities for 2002 was $377.2 million as compared to $343.3 million for 2001. ProLogis distributed $1.42 per Common Share in 2002, as compared to the 2001 distribution level of $1.38 per Common Share. ProLogis’ Board of Trustees (the “Board”) set the distribution level for 2003 at $1.44 per Common Share, a 1.4% increase over 2002. See further information on ProLogis’ Common Share distributions in “Item 5. Market for the Registrant’s Common Equity and Related

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Stockholder Matters — Dividends and Distributions” and Note 8 to ProLogis’ Consolidated Financial Statements in Item 8.

ProLogis’ Operating Segments

      ProLogis’ business is organized into two primary operating segments: property operations and the CDFS business. During 2001 and 2002, the temperature-controlled distribution companies, in which ProLogis had invested, disposed of significant portions of their operating assets.

     Property Operations Segment

          Investments

      The property operations segment represents the long-term ownership, management and leasing of distribution properties. ProLogis’ property operations segment at December 31, 2002 consisted of 1,674 operating properties aggregating 210.6 million square feet in North America (the United States and Mexico), 11 countries in Europe and in Japan (including assets owned by the property funds that are presented under the equity method in ProLogis’ Consolidated Financial Statements). Of the total operating properties, ProLogis directly owned 1,230 operating properties aggregating 128.0 million square feet. ProLogis’ ownership interest in the eight property funds ranges from 16.1% to 50%. ProLogis’ investment strategy in the property operations segment has focused primarily on generic industrial distribution properties in key distribution markets. ProLogis’ properties generally have a low percentage of office finish (generally less than 10%) such that they are easily adaptable for both distribution and light manufacturing or assembly uses.

      Certain operating properties developed by ProLogis in the CDFS business segment with the intent to contribute the property to a property fund or sell the property to a third party and properties that have been acquired by ProLogis with the intent to contribute the property to a property fund are included in the property operations segment for periods of time prior to their contribution or sale. The profits from the disposition of these properties will be included in the CDFS business segment income as they have been developed or acquired in that segment. These properties are reported as part of the property operations segment for the period from completion of development or from the acquisition date through the date of disposition (through either a property fund contribution or a third party sale). At December 31, 2002, there were 88 properties totaling 15.3 million square feet at an aggregate investment of $663.0 million that are reflected in the property operations segment due to the following circumstances:

  •  When properties are not immediately contributed or sold after the completion of development, they are included in the property operations segment until the date of contribution to a property fund, along with any earnings or losses generated during that period. However, upon contribution, the resulting gain or loss is included in the income of the CDFS business segment.
 
  •  When properties are acquired by ProLogis with plans for their rehabilitation and/or repositioning prior to their contribution to a property fund, they are included in the property operations segment while the rehabilitation and/or repositioning activities are performed, along with any earnings or losses generated during that period. However, upon contribution, the resulting gain or loss is included in the income of the CDFS business segment.
 
  •  ProLogis may acquire a property to complement the portfolio of properties that are intended for contribution to a property fund to allow the overall contribution portfolio to meet the geographic, size, and customer base requirements of the private investor. Additionally, ProLogis may acquire properties as an interim step prior to the ultimate acquisition of that property by a property fund if ProLogis’ direct acquisition of the property from the third party facilitates the transfer or is more efficient. These properties will be included in the property operations segment until the date of contribution along with any earnings or losses generated during that period. However, upon contribution, the resulting gain or loss is included in the income of the CDFS business segment.

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      Property operations segment investment activities in 2002 included the following:

  •  In 2002, ProLogis acquired 19 properties aggregating 3.9 million square feet at a total acquisition cost of $137.4 million with the intent to include these properties in the property operations segment for long-term investment rather than to contribute the properties to property funds.
 
  •  In 2002, ProLogis generated total proceeds of $63.6 million from the disposition of 23 properties aggregating 2.0 million square feet that were long-term investments in the property operations segment.
 
  •  ProLogis North American Properties Fund V, formed in 2002, acquired 57 properties aggregating 12.0 million square feet from ProLogis. ProLogis’ other property funds in the United States maintained their existing portfolio sizes in 2002 except that ProLogis California acquired two properties from ProLogis and disposed of two properties and a land parcel and ProLogis earned a fee for expanding one of the properties in ProLogis North American Properties Fund I.
 
  •  ProLogis European Properties Fund acquired 53 properties aggregating 12.6 million square feet and disposed of an 18,000 square foot property. Of the properties acquired in 2002, 30 properties aggregating 7.0 million square feet were acquired from ProLogis (including five properties aggregating 1.2 million square feet that were acquired from Kingspark S.A. during the first six months of 2002 when this investment was presented under the equity method by ProLogis; see “— CDFS Business Segment — Investments”).
 
  •  In Japan, ProLogis’ first completed development project was acquired by a property fund that was formed in 2002.

      See “Item 2. Properties — Properties”, “Item 2. Properties — Unconsolidated Investees — Property Operations” and Notes 4 and 10 to ProLogis’ Consolidated Financial Statements in Item 8.

          Operations

      The property operations segment generates income from rents and reimbursements of property operating expenses from unaffiliated customers. Also, ProLogis’ proportionate share of the earnings of the property funds and the fee income that ProLogis receives for managing the properties owned by the property funds are included in the earnings from operations of the property operations segment. In addition to property and asset management fees, ProLogis also earns fees for performing other services on behalf of the property funds, including, but not limited to, development, leasing and acquisition activities. The earnings or losses generated by properties that are included in the property operations segment prior to their contribution or, with respect to developed properties, prior to their sale, are also included in the total income of the property operations segment’s income during the period prior to contribution or sale. The resulting gain or loss from the contribution or sale of the property is included in the total income of the CDFS business segment. Once the property is acquired by a property fund, the earnings or losses of the property are included in the net earnings of the property fund. ProLogis recognizes its proportionate share of the net earnings of the property fund under the equity method. These amounts and the fees that ProLogis earns from the property funds are included in the total income of the property operations segment.

      In 2002, 2001 and 2000, the property operations segment’s share of ProLogis’ earnings from operations were $477.6 million, $477.5 million and $493.9 million, respectively. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Property Operations” and Note 10 to ProLogis’ Consolidated Financial Statements in Item 8.

      Operational information about this operating segment for 2002 includes the following:

  •  ProLogis’ stabilized operating portfolio of 205.8 million square feet (including properties owned by the property funds) was 91.2% leased and 89.5% occupied at December 31, 2002. ProLogis’ total operating portfolio of 210.6 million square feet (including properties owned by the property funds) was 89.6% leased and 87.9% occupied at December 31, 2002. ProLogis defines its stabilized properties as those properties where the capital improvements, repositioning efforts, new management and new marketing programs for acquisitions, or development and marketing programs in the case of newly developed

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  properties, have been in effect for a sufficient period of time, generally 12 months, to achieve stabilized occupancy, typically 93%. Overall occupancy levels decreased in 2002 from prior periods. ProLogis’ leased occupancy for the stabilized portfolio at December 31, 2002 was approximately 185 basis points lower than the 2001 level.
 
  •  ProLogis leased 55.1 million square feet of distribution space in 1,324 leasing transactions for its properties and the properties owned by the property funds. Rental rates increased by 2.0% for 2002 transactions involving previously leased space. ProLogis’ weighted average customer retention rate was 64.7% for all properties in 2002. In 2001 for leasing transactions in all properties, ProLogis’ rental rate growth on leases of previously leased space was 14.6% and its weighted average retention rate was 63.4%.
 
  •  ProLogis’ “same store” portfolio of operating properties (properties owned by ProLogis and the property funds that were operating throughout both 2002 and 2001) aggregated 159.0 million square feet. Rental revenues, excluding termination and renegotiation fees, less net rental expenses of the same store portfolio decreased by 0.9% in 2002 from 2001. For the “same store” portfolio applicable to 2001, rental revenues less net rental expenses grew by 1.4% in 2001 over 2000.
 
  •  ProLogis earned termination and renegotiation fees of $14.6 million related to leases in its directly owned properties in 2002. Such fees in 2001 aggregated $3.1 million. In certain leasing situations, ProLogis finds it advantageous to have its customers exercise termination clauses in their leases, particularly if the customer is experiencing financial difficulties, but also when ProLogis believes that it can re-lease the space on more advantageous terms.
 
  •  ProLogis earned $34.5 million in various fees from the property funds, primarily from property management and asset management services provided to the property funds.

          Market Presence

      ProLogis has generally invested in distribution markets in North America, Europe and Japan in which ProLogis has identified strong distribution dynamics and supply and demand factors that have previously allowed for higher occupancy levels and increasing rental rates. In making its investment decisions, ProLogis evaluates market conditions that indicate favorable distribution growth prospects including, but not limited to: (i) growth in imports and exports; (ii) long-term cost and quality of labor advantages for domestic and international manufacturers; (iii) proximity to large regional and local population centers with good access to transportation networks; (iv) expansion and contraction needs of distribution space users located in the market; and (v) an historically high ratio of distribution space per capita.

      ProLogis assesses its market presence not only in terms of its investments in the market, but also by the extent it has developed relationships with customers in such markets. ProLogis believes it can maintain these relationships by offering operating properties that are functional and cost-effective, complemented by a comprehensive level of customer service. ProLogis believes that by being a significant local owner and developer in a given market it has the ability to increase customer retention because it can meet its customers’ needs to either expand or contract through its network of distribution properties and land positions that allow ProLogis to relocate a customer within its existing inventory of distribution space or to readily develop a new property for the customer.

      At December 31, 2002, the 1,230 properties in the property operations segment that are owned directly by ProLogis are located in 37 markets in the United States, four markets in Mexico and 10 markets in six countries in Europe. ProLogis’ largest markets (based on investment in directly owned properties) are Atlanta, Chicago, Dallas/ Fort Worth, Houston, Memphis and San Francisco (both South Bay and East Bay markets). See “Item 2. Properties — Geographic Distribution” and “Item 2. Properties — Properties.”

      The operating properties owned by the property funds at December 31, 2002 are as follows:

  •  ProLogis California:  79 properties, 13.0 million square feet, all located in the Los Angeles/ Orange County market;

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  •  ProLogis North American Properties Fund I:  36 properties, 9.4 million square feet, located in 16 markets in the United States;
 
  •  ProLogis North American Properties Fund II:  27 properties, 4.5 million square feet, located in 13 markets in the United States;
 
  •  ProLogis North American Properties Fund III:  34 properties, 4.4 million square feet, located in 15 markets in the United States;
 
  •  ProLogis North American Properties Fund IV:  17 properties, 3.5 million square feet, located in 10 markets in the United States;
 
  •  ProLogis North American Properties Fund V:  57 properties, 12.0 million square feet, located in 20 markets in the United States and in three markets in Mexico;
 
  •  ProLogis European Properties Fund: 193 properties, 35.7 million square feet, located in 25 markets in 11 countries in Europe (including 68 properties, 10.3 million square feet located in Central France, primarily in Paris, France); and
 
  •  ProLogis Japan Properties Fund:  one property, 0.2 million square feet, located in Tokyo, Japan.

      See “Item 2. Properties — Unconsolidated Investees — Property Operations.”

 
           Competition

      In general, numerous other industrial distribution properties are located in close proximity to ProLogis’ properties. The amount of rentable distribution space available in any market could have a material effect on ProLogis’ ability to rent space and on the rents that ProLogis can charge. In addition, in many of ProLogis’ submarkets, institutional investors and owners and developers of industrial distribution properties (including other REITs) compete for the acquisition, development and leasing of the same distribution space. Many of these entities have substantial resources and experience. Competition for acquisition of existing distribution properties and land, both from institutional capital sources and from other REITs, has been strong over the past several years.

 
           Property Management

      ProLogis’ business strategy includes a focus on customer service that requires ProLogis to provide responsive, professional and effective property management services at the local level. To enhance its management services, ProLogis’ property management group has developed and implemented proprietary operating, recruiting and training systems to achieve consistent levels of performance and professionalism in all markets and to give the proper level of attention to its customers’ needs throughout the ProLogis network. ProLogis manages substantially all of its directly owned operating properties and all of the operating properties owned by the property funds.

 
           Customers

      ProLogis has sought to develop a customer base in each market that is diverse in terms of industry concentration and that represents a broad spectrum of international, national, regional and local distribution space users. At December 31, 2002, ProLogis and the property funds had over 3,600 customers occupying 185.1 million square feet of distribution space. Including the customers in properties owned by the property funds, ProLogis’ largest customer and its 25 largest customers accounted for 2.2% and 17.5%, respectively, of ProLogis’ annualized base rental income as of December 31, 2002. When the customers in the properties owned by the property funds are excluded, ProLogis’ largest customer and its 25 largest customers accounted for 1.4% and 14.7%, respectively, of ProLogis’ annualized base rental income as of December 31, 2002.

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           Employees

      ProLogis directly employs approximately 700 persons in North America, in eight countries in Europe and in Japan. Of the total, approximately 320 employees are assigned to the property operations segment and ProLogis’ other employees may provide assistance in this operating segment. ProLogis believes that its relationship with its employees is good. ProLogis’ employees are not represented by a collective bargaining agreement.

 
           Seasonal Nature of the Business

      The demand for industrial distribution space is not seasonal.

 
           Future Plans

      ProLogis believes that its current level of direct investment in the property operations segment in North America enables it to serve its customers at a high level and increase returns to its shareholders. ProLogis’ business plan with respect to direct investments in the property operations segment in North America calls for the expansion of its network of operating properties on a limited basis and only as necessary to: (i) address the specific expansion needs of a customer; (ii) enhance its market presence in specific submarkets or (iii) take advantage of opportunities where ProLogis believes it has the ability to achieve favorable returns. ProLogis has no plans to increase its property operations segments in Europe or Japan, except through growth of its property funds.

      ProLogis plans to continue with its current business strategy with respect to the growth in assets held by property funds. ProLogis expects to achieve this growth primarily through the property funds’ acquisition of properties developed or acquired by ProLogis, in addition to the acquisition of properties from third parties. ProLogis expects that the fee income earned from property funds will increase in 2003 over the 2002 levels as the portfolios of operating properties in the property funds increase. Also, depending on capital availability, the number of property funds could increase in 2003.

      ProLogis’ business plans with respect to property fund investments in North America have been made in anticipation of continued poor economic conditions through the end of 2003. In both Europe and Japan, the consolidation and reconfiguration of distribution networks by users of distribution space has been the primary driver in leasing decisions based on market research available to ProLogis and customer feedback to ProLogis. The consolidation trend and the emergence of regional distribution centers have provided, and ProLogis believes could continue to provide, growth opportunities for ProLogis as a single-source provider of state-of-the-art distribution properties. However, ProLogis has observed a slowing in its customers’ decision making processes that it believes is the result of geopolitical concerns and the uncertainties surrounding the threat of war that was present in the fourth quarter of 2002 and into 2003. ProLogis’ business plans with respect to investments in property funds in Europe and Japan emphasize growth in key distribution markets, from the development of properties within ProLogis’ CDFS business segment that will be contributed to property funds and from third party acquisitions directly by the property funds.

      ProLogis intends to fund its investment activities in the property operations segment in 2003 with operating cash flow from this operating segment and the proceeds from contributions and sales of properties from this segment (including long-term investment properties and CDFS business segment properties that are included in this segment prior to their contribution or sale).

      See the discussion of factors that could affect the future plans of ProLogis and the property funds in the property operations segment at “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”

 
CDFS Business Segment

      The CDFS business segment encompasses those activities that ProLogis engages in that are not primarily associated with the long-term ownership, management and leasing of industrial distribution properties. Within this operating segment, ProLogis’ primary activity is the development of distribution properties that are either

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contributed to property funds in which ProLogis maintains an ownership interest and acts as manager or sold to unaffiliated customers.
 
           Investments

      At December 31, 2002, ProLogis had 37 distribution properties aggregating 9.6 million square feet under development at a total expected cost at completion of $683.0 million. These properties are all being developed with the objective that they will be contributed to a property fund or sold to a third party and are located in the United States ($109.7 million total expected cost or 16% of the total), Mexico ($9.7 million total expected cost or 2% of the total), six countries in Europe ($336.1 million total expected cost or 49% of the total) and Japan ($227.5 million total expected cost or 33% of the total). ProLogis had land positions, including land controlled through contracts, options or letters of intent aggregating 4,637 acres with the capacity for developing approximately 80.0 million square feet of distribution properties at December 31, 2002, of which 2,466 acres with the capacity for developing approximately 44.2 million square feet of distribution properties are owned. Land positions in North America total 2,534 acres with the capacity for developing approximately 43.2 million square feet of distribution properties and land positions in ten countries in Europe total 2,103 acres with the capacity for developing approximately 36.8 million square feet of distribution properties. At December 31, 2002, ProLogis had begun development on all of its land holdings in Japan.

      ProLogis U.K. Holdings S.A., formerly Kingspark Holding S.A., (collectively with its subsidiaries “Kingspark S.A.”) performs ProLogis’ CDFS business activities in the United Kingdom. ProLogis’ investment in Kingspark S.A. was presented under the equity method through June 30, 2002 but has been consolidated in ProLogis’ financial statements since July 1, 2002. This change in reporting method coincides with ProLogis acquisition of the voting ownership interests of Kingspark S.A., as previously ProLogis’ ownership interests were all non-voting. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.

      CDFS business segment investment activities in 2002 included the following:

  •  Development starts aggregated 14.7 million square feet at a total expected cost at completion of $936.4 million (including 0.9 million square feet at a total expected cost at completion of $104.6 million on which development was begun during the first six months of 2002 by Kingspark S.A.). Development starts in North America aggregated 5.1 million square feet at a total expected cost at completion of $185.2 million, development starts in Europe aggregated 8.1 million square feet at a total expected cost at completion of $523.7 million and development starts in Japan aggregated 1.5 million square feet and a total expected cost at completion of $227.5 million. The economic weaknesses in the United States, consistent demand in Europe and anticipated demand in Japan, ProLogis has been shifting its development activities from the United States in favor of Europe and Japan. Consequently, less than 20% of the development starts (based on total expected cost at completion) in 2002 were in North America.
 
  •  Development completions aggregated 11.6 million square feet at a total cost of $716.4 million (including 2.1 million square feet at a total cost of $232.3 million that were completed during the first six months of 2002 by Kingspark S.A.). Development completions in North America aggregated 2.8 million square feet at a total cost of $120.5 million, development completions in Europe aggregated 8.6 million square feet at a total cost of $540.9 million and ProLogis’ one development completion in Japan was of a 0.2 million square foot property at a total cost of $55.0 million.
 
  •  In 2002, ProLogis acquired 36 operating properties aggregating 6.9 million square feet at a total acquisition cost of $214.0 million with the intent to contribute the property to a property fund (including properties where rehabilitation and/or repositioning efforts are needed prior to contribution or sale). Even though these properties are reported in the property operations segment prior to their contribution, any gain or loss realized when ProLogis contributes these properties will be included in the CDFS business segment’s total income. See “— Operations.”

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  •  ProLogis contributed to property funds or sold to third parties 80 properties aggregating 18.1 million square feet that were developed by ProLogis with the intent to contribute or sell the property or acquired by ProLogis with the intent to contribute the property to a property fund, including properties that have been or are going to be rehabilitated and/or repositioned. These transactions and the dispositions of land parcels that no longer fit in ProLogis’ development plans generated net proceeds to ProLogis of $1.12 billion (including transactions involving five properties aggregating 1.2 million square feet and land parcels that generated aggregate net proceeds of $146.4 million during the first six months of 2002 of Kingspark S.A.).
 
  •  Land acquisitions aggregated 892 acres: 295 acres in the United States, 64 acres in Mexico, 517 acres in Europe (including 79 acres acquired during the first six months of 2002 by Kingspark S.A.) and 16 acres in Japan. This land can be used for the development of approximately 14.8 million square feet of distribution properties.
 
           Operations

      The total income of the CDFS business segment consists primarily of the gains recognized from the contributions and sales of developed properties and from the contributions of operating properties that were acquired with the intent to contribute the property to a property fund. ProLogis utilizes its development and leasing expertise to rehabilitate and/or reposition certain of the properties that it acquires such that the subsequent contribution or sale of the property will generate a profit to ProLogis. ProLogis also earns fees from customers for development activities performed on their behalf and realizes profits from sales of land parcels when ProLogis’ development plans no longer include these parcels.

      At December 31, 2002, ProLogis’ property operations segment included 88 properties that were not developed or acquired as long-term investments. These properties aggregated 15.3 million square feet of distribution space at a total investment of $663.0 million. See (“— Property Operations — Investments”). Earnings or losses of these properties generated prior to their contribution or sale are included in the earnings from operations of the property operations segment. Once the properties are contributed to property funds, ProLogis recognizes its proportionate share of the earnings of the property funds under the equity method, which, along with the fees earned from the property funds, is included in the earnings from operations of the property operations segment. See “— Property Operations Segment — Operations.”

      In 2002, 2001 and 2000, the CDFS business segment’s earnings from operations were $152.3 million, $151.7 million and $114.5 million, respectively. In 2002, 36% of the earnings from operations of this operating segment were generated in North America, 59% were generated in Europe and 5% were generated in Japan. In 2001 and 2000, 43% and 48%, respectively, of the earnings from operations of this operating segment were generated in North America. For these years, Europe generated the remaining portions of the CDFS business segment’s earnings from operations. See Note 10 to ProLogis’ Consolidated Financial Statements in Item 8.

      The results of operations of Kingspark S.A., which performs ProLogis’ CDFS business activities in the United Kingdom, were recognized by ProLogis under the equity method and included in the CDFS business segment through June 30, 2002. The results of operations of Kingspark S.A. have been consolidated in ProLogis’ financial statements since July 1, 2002 and, as applicable, are included in the earnings from operations of the CDFS business segment. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.

      Operational information about this operating segment for 2002 includes the following:

  •  Contributions and sales of properties generated net gains of $137.1 million (including $14.8 million of net gains that were recognized during the first six months of 2002 by Kingspark S.A.). Of the property contributions and sales, $132.1 million of net gains were generated by developed properties and $5.0 million of net gains were generated by acquired properties.
 
  •  ProLogis developed 2.4 million square feet of distribution properties on behalf of customers under development management agreements generating $9.6 million of fees, including 1.4 million square feet and fees of $5.5 million recognized during the first six months of 2002 by Kingspark S.A. Other fees

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  and miscellaneous income from the CDFS business segment was $0.5 million, including $16,000 recognized during the first six months of 2002 by Kingspark S.A.

      See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — CDFS Business.”

 
           Market Presence

      ProLogis’ CDFS business has had development activities in substantially all of ProLogis’ property operations markets. At December 31, 2002, ProLogis had properties under development in eight markets in the United States, one market in Mexico, 12 markets in six countries in Europe and in Tokyo, Japan. At December 31, 2002, the land positions owned by ProLogis were located in 26 markets in the United States, four markets in Mexico and 17 markets in nine countries in Europe. At December 31, 2002, ProLogis had begun development on all of its land holdings in Japan.

 
           Competition

      There are a number of other national, regional and local developers engaged in industrial distribution property development in the North American markets where ProLogis conducts business and ProLogis competes with these developers for land acquisitions and development opportunities. The disposition market in North America is competitive and is driven by the supply of new developments, access to capital and interest rate levels. The key component of ProLogis’ success in North America will be its ability to develop and lease properties that will generate profits upon contribution or sale and its ability to continue to access private capital that will allow for the acquisition of these developed properties by property funds, such as the six existing property funds in North America.

      ProLogis believes that there are no other pan-European real estate operating companies in direct competition with its CDFS business in Europe. However, there are a number of local and regional developers in ProLogis’ target markets. As in North America, the disposition market in Europe is competitive and driven by the supply of new developments, access to capital and interest rate levels and ProLogis’ ability to develop and lease properties in Europe that will generate profits upon contribution or sale and its ability to continue to access private capital such that its European property fund can acquire ProLogis’ developed properties is critical to its success. With respect to its development activities in Europe, ProLogis believes that it has a competitive advantage based upon the strategic locations of its land positions owned or under control in Europe. As the only owner of distribution properties and services provider operating on a global basis, ProLogis believes it has differentiated itself from many of its competitors in Europe.

      Market research available to ProLogis has identified a trend in Japan toward larger, more efficient distribution centers due to vertical integration, continued merger activity and the need to reduce costs in the supply chain. ProLogis currently serves customers in other global markets who also have operations in Japan. ProLogis believes that its past experience in serving these international customers, as with its entry into Europe, will provide opportunities for ProLogis to meet these customers’ distribution space needs in Japan. ProLogis has not currently identified any North American industrial development companies who are in direct competition with its CDFS business in Japan. Further, ProLogis believes that it has an advantage over local industrial development companies in Japan as the result of its experience in the development of industrial properties, its focus on customer relationships and the high quality service that it can provide through the ProLogis Operating System® (see “— ProLogis Operating System®”). ProLogis has properties under development with a total expected cost at completion of $227.5 million, which based on information available to ProLogis, makes ProLogis one of the leading industrial distribution developers in Japan based on portfolio size at December 31, 2002.

 
           Customers

      ProLogis utilizes the customer relationships that it has developed through its property operations segment activities and the ProLogis Operating System® in marketing its CDFS business. See “— Property Operations — Customers” and “— ProLogis Operating System®.” In 2002, approximately 62% of the customers

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that leased distribution space in properties developed or rehabilitated and/or repositioned in the CDFS business segment were repeat customers of ProLogis.
 
           Employees

      ProLogis directly employs approximately 700 persons in North America, eight countries in Europe and in Japan. Of the total, approximately 110 employees are assigned directly to the CDFS business segment and ProLogis’ other employees may also provide assistance in this operating segment. ProLogis believes that its relationship with its employees is good. ProLogis’ employees are not represented by a collective bargaining agreement.

 
           Seasonal Nature of the Business

      The demand for the industrial distribution properties that are developed in the CDFS business segment is not seasonal in nature. However, the development process can be impeded by weather in certain markets, particularly during the winter months, affecting the scheduling of development activities and potentially delaying construction completions.

 
           Future Plans

      ProLogis intends to utilize the capital generated through the contributions or sales of properties, the proceeds from public debt offerings that take advantage of favorable market conditions and, to a lesser extent, the proceeds from sales of its Common Shares under various plans to finance its future CDFS business activities in North America, Europe and Japan. To this end, ProLogis issued $300.0 million of senior unsecured notes in February 2003, representing its first public debt offering since April 1999. The proceeds from this offering were used to repay borrowings on ProLogis’ revolving lines of credit that had been incurred to fund ProLogis’ development and acquisition activities.

      ProLogis’ success in this operating segment depends on its ability to develop and lease properties and the availability of private capital that can be used by a property fund to acquire properties that have been developed or acquired in the CDFS business segment. See “— Competition.” ProLogis believes that the reconfiguration of supply chains driven by the need for distribution space users to add efficiencies within their distribution networks will continue to favorably impact the demand for distribution properties and the distribution-related services that ProLogis provides in the CDFS business segment. Also, a limited supply of state-of-the-art distribution space in Europe and Japan could also provide opportunities within this operating segment. However, for ProLogis to take advantage of these opportunities under its current business strategy, the availability of private capital is critical. ProLogis is committed to offer to contribute to existing property funds substantially all of its stabilized developed properties in North America through December 2003, in Europe through September 2019 and in Japan through June 2006. ProLogis believes that these property funds have available capital, including borrowing capacity, to acquire the properties that ProLogis expects it will be available for contribution in North America and Europe through June 2003 and in Japan through June 2006. ProLogis North American Properties Fund V and ProLogis European Properties Fund do not have capital commitments from third parties at this time such that they can acquire properties from ProLogis after June 2003. However, ProLogis expects that both of these property funds will secure additional capital commitments such they will be able to acquire ProLogis’ available properties after June 2003. ProLogis Japan Properties Fund has a capital commitment from an institutional investor that is expected to be sufficient to acquire all of the properties that ProLogis expects to be available for contribution through June 2006.

      ProLogis North American Properties Fund V’s majority owner is a listed property trust in Australia that raises capital in the public market. ProLogis European Properties Fund is seeking additional equity commitments and has had discussions with certain institutional investors, including some investors that are currently owners of the property fund. There can be no assurance that these property funds will obtain a sufficient amount of capital (either debt or equity capital) such that they will be able to acquire the properties that ProLogis expects to have available for contribution after June 2003. And, there can be no assurance that if additional commitments are not received by the property funds, ProLogis will be able to secure other sources

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of private equity capital such that it can contribute or sale its stabilized development properties in a timely manner to allow ProLogis to continue to generate development profits through the end of the current commitment periods.

      See the discussion of factors that could affect the future plans of ProLogis, in the CDFS business segment at “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”

 
Temperature-Controlled Distribution Operations

      ProLogis first invested in this operating segment through a temperature-controlled distribution company that operated in the United States. This investment, along with ProLogis’ investment in a similar company operating in Europe that was made in 1998, were presented under the equity method. In 2001 and 2002, significant portions of these investees’ operating assets were sold and ProLogis no longer considers the temperature-controlled distribution operations segment to be one of its primary operating segments or a primary line of business. At December 31, 2002, the remaining operating assets in this operating segment were only in Europe, primarily in France and the United Kingdom.

 
           Investments

      At December 31, 2002, ProLogis’ investee in this operating segment, Frigoscandia Holdings S.A., (collectively with its subsidiaries “Frigoscandia S.A.”) owned or operated 103.6 million cubic feet (62.4 million cubic feet in France and 41.2 million cubic feet in the United Kingdom) of temperature-controlled operating assets, had an investment in a temperature-controlled operating company in Austria and operated a temperature-controlled transportation network in the Netherlands. The operating assets in the United Kingdom were classified as held for sale by Frigoscandia S.A. in December 2002. ProLogis has non-voting ownership interests in Frigoscandia S.A. and a related company, CSI/ Frigo LLC, such that it recognizes in excess of 99% of the earnings or losses of Frigoscandia S.A. under the equity method.

      The sale of a significant portion of the United States temperature-controlled distribution operating assets occurred in October 2002. After the sale, $54.4 million of assets that were not sold (four leased facilities and four land parcels) were integrated into ProLogis’ two primary operating segments and are now presented on a consolidated basis as, concurrent with the sale, ProLogis acquired all voting ownership interests of its United States investee. Previously, ProLogis’ ownership interests were all non-voting. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8.

 
           Operations

      Frigoscandia S.A. earns revenues from unaffiliated customers for various services associated with temperature-controlled distribution operations. ProLogis recognizes its proportionate share of the net earnings or losses of Frigoscandia S.A. under the equity method as a component of its total income. Prior to the disposition of all of the United States operations by ProLogis’ investee in this operating segment, ProLogis also recognized its proportionate share of this investee’s net earnings or losses under the equity method.

      ProLogis’ total income from this operating segment, all recognized under the equity method, was income of $7.1 million in 2002, including a net loss of $41.4 million representing ProLogis’ proportionate share of the net gains recognized upon the sale of significant portions of these entities’ operating assets and related impairment charges ($42.9 million of impairment charges offset by net gains of $1.5 million). Included in ProLogis’ total income in 2001, was a net loss from this operating segment of $111.5 million, including a net loss of $97.9 million representing ProLogis’ proportionate share of the net losses recognized upon the sale of significant portions of these entities’ operating assets and related impairment charges ($88.4 million and $5.8 million of impairment charges related to operating assets and technology investments, respectively, and net losses of $3.7 million). ProLogis’ total income in 2000 includes a net loss of $8.3 million from this operating segment. See “Item 7. Management’s Discussion and Analysis of Results of Operations and Financial Condition — Results of Operations — Temperature-Controlled Distribution Operations” and Notes 4 and 10 to ProLogis’ Consolidated Financial Statements in Item 8.

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           Market Presence

      Market presence in the temperature-controlled distribution industry is generally defined by the volume available for storage of frozen and chilled foods in addition to the transportation network in place to serve customers. Frigoscandia S.A. operates a storage network in France and the United Kingdom, has an investment in a temperature-controlled operating company in Austria and has transportation operations in the Netherlands.

 
           Competition

      ProLogis believes that the temperature-controlled distribution industry has significant barriers to entry due to its capital-intensive nature, which limits competition. Frigoscandia is one of a few European temperature-controlled distribution companies that have operations in more than one country. Frigoscandia’s primary competition in each country is from local smaller warehouse operators.

 
           Customers

      In the United Kingdom, Frigoscandia S.A. has approximately 315 customers. Of Frigoscandia S.A.’s total revenues in the United Kingdom, approximately 83% were derived from its 15 largest customers and Frigoscandia S.A.’s largest customer in the United Kingdom accounted for approximately 23% of its total revenues. In France, Frigoscandia S.A. has approximately 1,600 customers. Of Frigoscandia S.A.’s total revenues in France, approximately 71% were derived from its 25 largest customers and Frigoscandia S.A.’s largest customer in France accounted for approximately 15% of its total revenues.

 
           Employees

      Frigoscandia S.A. employs approximately 1,240 persons in three European countries. Of these employees, approximately 77% participate in collective bargaining agreements. Frigoscandia S.A. believes that its relationship with its employees is good.

 
           Seasonal Nature of the Business

      Temperature-controlled distribution operations are seasonal, in that demand for temperature-controlled storage capacity is stronger during the third quarter of the calendar year and is at its lowest level in the first quarter of the calendar year. The seasonal nature of temperature-controlled distribution operations coincides with the lower demand for frozen foods, such as ice cream, during the winter months and the timing of the harvests of various food crops in the third quarter of the year.

 
           Future Plans

      The focus in both France and the United Kingdom in 2003 will be on increasing the operating efficiencies and profitability. The operating assets located in the United Kingdom were classified as held for sale in December 2002 indicating that Frigoscandia S.A. intends to dispose of these assets and that it believes that such disposition will occur before the end of 2003.

      See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Temperature-Controlled Distribution Operations” for a discussion of operating performance of this operating segment and the discussion of factors that could affect the future plans of ProLogis and Frigoscandia S.A. at “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”

ProLogis Operating System®

      ProLogis’ management team is headed by its Chairman and Chief Executive Officer, K. Dane Brooksher and its Vice Chairman and Chief Investment Officer, Irving F. Lyons III. Mr. Brooksher and Mr. Lyons are members of the Board. On March 25, 2003, ProLogis announced that Mr. Brooksher would relinquish his role as Chief Executive Officer of ProLogis on December 31, 2004 and that Mr. Lyons would relinquish his role as

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Vice Chairman and Chief Investment Officer of ProLogis on December 31, 2004. Mr. Brooksher will remain as Chairman of the Board and Mr. Lyons will retain his membership on the Board and will serve as Chairman of the Board’s investment committee. The Board has formed a succession committee that has been working with the full Board and ProLogis’ management group on succession planning and transition issues.

      ProLogis’ investments and operations in each geographical area of the world are overseen by Jeffrey H. Schwartz, President of International Operations and President and Chief Operating Officer — Asia, John W. Seiple, Jr., President and Chief Operating Officer — North America and Robert J. Watson, President and Chief Operating Officer — Europe. Further, in North America, each of ProLogis’ four regions (Mid-Atlantic, Southeast, Central/ Mexico and Pacific) is led by a senior member of the Market Services Group, who is responsible for capital management in that region and a senior member of the Global Development Group, who is responsible for capital deployment for that region. The three regions in Europe (Northern and Central Europe, Southern Europe and the United Kingdom) are each led by a senior officer who has both capital management and capital deployment responsibilities. In Japan, the capital management and capital deployment responsibilities are primarily those of the Chief Operating Officer. This structure will continue in Japan until such time as the volume of investments and operations demonstrates the need for additional managers. ProLogis’ management team is responsible for overseeing the utilization of the ProLogis Operating System®, the cornerstone of ProLogis’ business strategy, to allow ProLogis to achieve long-term sustainable growth in cash flow and increase the overall return on equity for its shareholders.

      The ProLogis Operating System® is a proprietary property management and customer service delivery system that has been designed to integrate four groups of professionals such that ProLogis provides a unique and disciplined approach to serving existing and prospective customers. The ProLogis Operating System® is comprised of the Market Services Group, the Global Services Group, the Global Development Group and the ProLogis Solutions Group. ProLogis believes that it is, and will continue to be, well positioned to leverage its customer relationships to generate additional business opportunities.

 
Market Services Group

      The Market Services Group is responsible for managing and leasing the properties owned by ProLogis and the property funds. The members of the Market Services Group include professionals who are responsible for capital management in the various regions and 41 Market Officers who are primarily responsible for understanding and meeting the needs of existing and prospective customers in their respective markets. The Market Officers, along with their team of property management and leasing professionals, use their knowledge of local market conditions to assist the Global Services Group in identifying and accommodating those customers with multiple market requirements and assist in the marketing efforts directed at these customers. The Market Officers’ ability to serve customers in the local market is enhanced by their access to both national and international ProLogis resources. The Market Officers do not develop projects or borrow or commit capital. Their focus is strictly on managing the capital invested in their markets, creating and maintaining relationships with customers, potential customers and industrial brokers, leasing ProLogis’ properties and identifying potential acquisition and development opportunities in their markets.

 
Global Services Group

      The Global Services Group is dedicated to providing service to the largest users of distribution space, a group of companies that ProLogis has identified as its targeted customers. The Global Services Group’s primary focus is to position ProLogis as the preferred provider of distribution space to these companies. The professionals in the Global Services Group seek to build long-term relationships with ProLogis’ customers and provide a single point of contact for multi-location global users of distribution space to simplify and streamline the execution of such customers’ distribution space plans. An ancillary benefit of ProLogis’ on-going contact with its customers is the ability to be on the forefront of international and national distribution and logistics trends. The Global Services Group is headquartered in Aurora and Amsterdam and has regional offices in Atlanta, Chicago and New Jersey.

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Global Development Group

      The Global Development Group focuses substantial research and development efforts on creating industry-leading distribution properties and master-planned distribution parks. Members of the Global Development Group have extensive experience in the development and construction of generic industrial development properties that appeal to a wide variety of customers as well as the development of industrial development properties that meet a particular customer’s needs. ProLogis incorporates the latest technology with respect to building design and systems and has developed standards and procedures that it strictly adheres to in the development of all properties to ensure that properties developed by ProLogis are of a consistent quality.

      The Global Development Group includes architects, engineers and construction professionals who oversee the land planning and building design processes, monitor the construction process and monitor the performance of third-party general contractors. This Group’s project managers, who operate regionally, supervise each project with further oversight from ProLogis’ development management team. ProLogis’ development projects are completed pursuant to uniform standards, procedures and specifications that have been designed to achieve consistent quality in ProLogis developed properties.

      ProLogis believes the depth and breadth of experience within the Global Development Group enhances the effectiveness of the Global Services Group and provides the Market Services Group with a distinct competitive advantage in securing development opportunities in their respective markets.

 
ProLogis Solutions Group

      The ProLogis Solutions Group was formed to allow ProLogis to address its customers’ distribution needs by providing analysis, consulting and material handling equipment. The distribution-related consulting services available to customers by the ProLogis Solutions Group, includes network optimization tools, strategic site selection, business location services (including tax incentive analysis and tax negotiation consulting) and design consulting services. ProLogis believes that the services provided by the ProLogis Solutions Group can strengthen its customer relationships with the added benefit of increasing its cash flows with modest additional capital requirements.

ProLogis Management

      ProLogis’ future success depends upon management’s ability to continue to provide strategic and day-to-day management functions of research, investment analysis, acquisition and due diligence, development, marketing, asset management, capital markets, asset disposition, management information systems support, accounting services and legal services. Since its inception in 1991, ProLogis’ management has demonstrated a strategic vision in determining an operating and investment focus that has provided favorable returns to its shareholders and has positioned ProLogis for long-term growth. Through the ProLogis Operating System®, ProLogis believes it is the first international operating company that has been able to address and service a corporate customer’s distribution space requirements on an international, national, regional and local basis.

      ProLogis maintains a Code of Ethics and Business Conduct applicable to its Board and all of its officers and employees, including the principal executive officer, the principal financial officer, the principal accounting officer, the controller or persons performing similar functions. A copy of ProLogis’ Code of Ethics and Business Conduct is included as an exhibit to this Annual Report on Form 10-K and is available on ProLogis’ website, www.prologis.com. In addition to being accessible through ProLogis’ website, copies of ProLogis’ Code of Ethics and Business Conduct can be obtained, free of charge, upon written request to Investor Relations, 14100 East 35th Place, Aurora, Colorado 80011. Any amendments to or waivers of ProLogis’ Code of Ethics and Business Conduct that apply to the principal executive officer, the principal financial officer, the principal accounting officer, the controller or the persons performing similar functions and that relate to any matter enumerated in Item 406(b) of Regulation S-K, will be disclosed on ProLogis’ website.

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      The reference to ProLogis’ website address does not constitute incorporation by reference of the information contained in the website and such information should not be considered to be part of this document.

 
Trustees

      K. Dane Brooksher — 64 — Mr. Brooksher has served as a Trustee since October 1993. Mr. Brooksher has been Chairman and Chief Executive Officer of ProLogis since March 1999 and he was Co-Chairman and Chief Operating Officer of ProLogis from November 1993 to March 1999 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Brooksher was Area Managing Partner and Chicago Office Managing Partner of KPMG Peat Marwick (now KPMG LLP), independent public accountants, where he served on the Board of Directors and Management Committee and as International Development Partner for Belgium and the Netherlands. Mr. Brooksher is a Director of Butler Manufacturing Company, the National Association of Manufacturers, Pactiv Corporation, Insight Inc. (an unconsolidated investee of ProLogis — see Note 4 to ProLogis’ Consolidated Financial Statements in Item 8) and Colorado Forum, a not-for-profit organization and he serves as an Advisory Board Member of the J.L. Kellogg Graduate School of Management of Northwestern University. Mr. Brooksher’s term as Trustee expires in 2005.

      Irving F. Lyons, III — 53 — Mr. Lyons has served as a Trustee since March 1996. Mr. Lyons has been Vice Chairman of ProLogis since December 2001 and Chief Investment Officer of ProLogis since March 1997. Mr. Lyons was President of ProLogis from March 1999 to December 2001, Co-Chairman of ProLogis from March 1997 to March 1999 and Managing Director of ProLogis from December 1993 to March 1997 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Lyons was the Managing Partner of King & Lyons, a San Francisco Bay Area industrial real estate development and management company, since its inception in 1979. Mr. Lyons’ term as Trustee expires in 2003.

      Stephen L. Feinberg — 58 — Mr. Feinberg has served as a Trustee since January 1993. Mr. Feinberg has been Chairman of the Board and Chief Executive Officer of Dorsar Investment Co., Inc., a diversified holding company with interests in real estate and venture capital since 1970. Mr. Feinberg is also a Director of Security Capital Preferred Growth, an affiliate of Security Capital Group Incorporated (“Security Capital”), previously ProLogis’ largest shareholder (see Note 7 to ProLogis’ Consolidated Financial Statements in Item 8), Continental Transmission Corporation, MetaMetrics, Inc., St. John’s College, The Santa Fe Institute and The Feinberg Foundation, Inc. He was formerly Chairman of the Board of St. John’s College and a former Director of Farrar, Strauss and Giroux, Inc. (a private publishing company), Molecular Informatics, Inc., Border Steel Mills, Inc., Springer Building Materials Corporation, Circle K Corporation, EnerServ Products, Inc. and Texas Commerce Bank-First State. Mr. Feinberg’s term as Trustee expires in 2004.

      George L. Fotiades — 49 — Mr. Fotiades has served as a Trustee since December 2001 when he was appointed as Trustee prior to his election in May 2002. Mr. Fotiades is President and Chief Executive Officer of Life Sciences Products & Services, a unit of Cardinal Health, Inc., a provider of services supporting the health-care industry. Prior thereto, Mr. Fotiades was President and Chief Operating Officer of R. P. Scherer Corporation (which was merged into Cardinal Health, Inc. in August 1998), Executive Vice President and Group President from 1996 to 1998 and Group President of the Americas and Asia Pacific from 1996 to 1998. Mr. Fotiades’ term as Trustee expires in 2003.

      Donald P. Jacobs — 75 — Mr. Jacobs has served as a Trustee since February 1996. Mr. Jacobs has been a faculty member of the J.L. Kellogg Graduate School of Management of Northwestern University since 1957 and he was Dean from 1975 until he retired as Dean in 2001. Mr. Jacobs is currently Dean Emeritus. Mr. Jacobs is a Director of Hartmarx Corporation, Terex Corporation and CDW Computer Centers. Mr. Jacobs was formerly a Director of Commonwealth Edison and its parent company, Unicom and he was formerly Chairman of the Public Review Board of Andersen Worldwide. Mr. Jacobs was Chairman of the Advisory Committee of the Oversight Board of the Resolution Trust Corporation for the third region from

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1990 to 1992, Chairman of the Board of AMTRAK from 1975 to 1979, Co-Staff Director of the Presidential Commission on Financial Structure and Regulation from 1970 to 1971 and Senior Economist for the Banking and Currency Committee of the U.S. House of Representatives from 1963 to 1964. Mr. Jacobs’ term as Trustee expires in 2004.

      Neelie Kroes — 61 — Ms. Kroes was appointed as a Trustee in May 2002. Ms. Kroes served as President of Nyenrode University, a private university in the Netherlands, from May 1991 to April 2000. Prior thereto, Ms. Kroes held various logistics-related positions in the Dutch government, including Cabinet Minister of Transportation, Public Works and Telecommunication. Ms. Kroes was an assistant professor for transport areas at Erasmus University in Rotterdam, the Netherlands from May 1965 to August 1971. Ms. Kroes serves on various advisory boards including P&O Nedlloyd, Lucent Technologies B.V. and Nederlands Spoorwegen NV (Dutch Railways). Ms. Kroes’ term as trustee expires in 2005.

      Kenneth N. Stensby — 63 — Mr. Stensby has served as a Trustee since March 1999. Mr. Stensby was a Director of Meridian Industrial Trust Inc. from 1996 to March 1999, when it was merged with and into ProLogis. Mr. Stensby was President and Chief Executive Officer of United Properties, a Minneapolis-based diversified real estate company, from 1974 until his retirement in January 1995. Mr. Stensby is past President of the National Association of Industrial and Office Parks and was a Director of First Asset Realty Advisors, a pension advisory subsidiary of First Bank of Minneapolis and Corner House. Mr. Stensby’s term as Trustee expires in 2005.

      J. André Teixeira — 50 — Mr. Teixeira has served as a Trustee since February 1999. Mr. Teixeira is Vice President, Global Technology Development of Interbrew, a publicly traded brewer headquartered in Belgium. He was Chairman and Senior Partner with BBL Partners LLC, Moscow, Russia, a consulting and trading company specializing in the food and food ingredient industry from 2001 to 2002 and he was the President of Coca-Cola for the Russia and Ukraine region, General Manager of Coca-Cola Russia, Ukraine and Belarus and Head of Representation for the Coca-Cola Export Corporation, Moscow from 2000 to 2001. Mr. Teixeira was General Manager/ President of the Coca-Cola Ukraine and Belarus region, Kiev from 1998 to 2000 and was with Coca-Cola in various capacities since 1978. Mr. Teixeira’s term as Trustee expires in 2004.

      William D. Zollars — 55 — Mr. Zollars has served as a Trustee since June 2001 when he was appointed as Trustee prior to his election in May 2002. Mr. Zollars has been Chairman, President and Chief Executive Officer of Yellow Corporation, a holding company specializing in transportation of industrial, commercial and retail goods, since 1999. From 1996 to 1999, Mr. Zollars was President of Yellow Freight System Inc., Yellow Corporation’s principal operating subsidiary and he was a Senior Vice President of Ryder Integrated Logistics, Inc. from 1994 to 1996. Mr. Zollars is a Director of Butler Manufacturing Co. and Rogers Group, Inc. Mr. Zollars’ term as Trustee expires in 2003.

 
Senior Officers

      Jeffrey H. Schwartz — 43 — President of International Operations since March 2003 and President and Chief Operating Officer — Asia since March 2002. Mr. Schwartz was President and Chief Executive Officer of Vizional Technologies, Inc. (“Vizional Technologies”), an unconsolidated investee of ProLogis (see Note 4 to ProLogis’ Consolidated Financial Statements in Item 8) from September 2000 to February 2002. From October 1994 to August 2000, Mr. Schwartz was with ProLogis, most recently as Vice Chairman for International Operations (through September 1997 he was employed by ProLogis’ former management company). Prior to originally joining ProLogis in October 1994, Mr. Schwartz was a founder and managing partner of The Krauss/ Schwartz Company, an industrial real estate developer in Florida.

      John W. Seiple, Jr. — 44 — President of North America since December 2001 and Chief Operating Officer — North America since December 1998. Mr. Seiple has been with ProLogis in varying capacities since October 1993 (through September 1997 he was employed by ProLogis’ former management company). Mr. Seiple is a Director of Insight Inc. (an unconsolidated investee of ProLogis — see Note 4 to ProLogis’ Consolidated Financial Statements in Item 8). Prior to joining ProLogis, Mr. Seiple was a Senior Vice President with Trammell Crow Company, a diversified commercial real estate company in North America.

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      Robert J. Watson — 53 — President of Europe since December 2001 and Chief Operating Officer — Europe since December 1998. Mr. Watson has been with ProLogis in varying capacities since November 1992 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Watson was with the Regional Partner for Southwest United States Real Estate with Trammell Crow Company, a diversified commercial real estate company in North America. Prior to the end of 2003, Mr. Watson will relinquish his role as President and Chief Operating Officer — Europe and will return to ProLogis’ world headquarters in Aurora, Colorado.

      Walter C. Rakowich — 45 — Managing Director and Chief Financial Officer of ProLogis since December 1998, where he is responsible for worldwide corporate finance. Mr. Rakowich has been with ProLogis in varying capacities since July 1994 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Rakowich was a consultant to ProLogis in the area of due diligence and acquisitions and he was a Principal with Trammell Crow Company, a diversified commercial real estate company in North America.

      Edward S. Nekritz — 37 — Managing Director of ProLogis since December 2002, General Counsel of ProLogis since December 1998 and Secretary of ProLogis since March 1999, where he oversees the provision of all legal services for ProLogis and is responsible for ProLogis’ Risk Management and Asset Services departments. Mr. Nekritz has been with ProLogis in varying capacities since September 1995 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Nekritz was an attorney with Mayer, Brown & Platt (now Mayer, Brown, Rowe & Maw).

      Paul C. Congleton — 48 — Managing Director of ProLogis since September 1999, where he oversees the Global Capital Group, which is responsible for securing sources of private capital. Mr. Congleton has been with ProLogis in varying capacities since January 1995 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Congleton was Managing Principal with Overland Company, a property management, leasing and consulting company based in Arizona.

      Alan J. Curtis — 55 — Managing Director of ProLogis since December 2002, where he has capital management and capital deployment responsibilities for the United Kingdom. Mr. Curtis has been with ProLogis or Kingspark S.A., since June 1997 (ProLogis acquired Kingspark S.A. in August 1998) in varying capacities. Prior to joining Kingspark S.A., Mr. Curtis was with Gazely Properties as a Senior Development Surveyor with responsibilities for the Midlands market of the United Kingdom.

      Ranald A. Hahn — 47 — Managing Director of ProLogis since December 2002, where he has capital management and capital deployment responsibilities for Southern Europe. Mr. Hahn has been with ProLogis in varying capacities since March 1999. Prior to joining ProLogis, Mr. Hahn was the International Business Development Director of GSE, a French logistics construction company.

      Steven K. Meyer — 55 — Managing Director of ProLogis since December 1998, where he has capital deployment responsibilities for the Central/ Mexico region. Mr. Meyer has been with ProLogis in varying capacities since September 1994 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Meyer was an Executive Vice President with Trammell Crow Company, a diversified commercial real estate company in North America. Mr. Meyer will assume the role of President and Chief Operating Officer — Europe, completing the transition with Mr. Watson before the end of 2003.

      John R. Rizzo — 53 — Managing Director of ProLogis since December 2000, where he is responsible for the Global Development Group in North America. Mr. Rizzo has been with ProLogis in varying capacities since January 1999. Prior to joining ProLogis, Mr. Rizzo was Senior Vice President and Chief Operating Officer of Perini Management Services Incorporated, an affiliate of Perini Corporation, a construction management and general contracting firm.

      Robin P. R. von Weiler — 46 — Managing Director of ProLogis since December 1999, where he has capital management and capital deployment responsibilities for Northern and Central Europe. Mr. von Weiler has been with ProLogis in varying capacities since October 1997. Prior to joining ProLogis, Mr. von Weiler

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was with DTZ Zadelhoff V.O.F., part of DTZ Debenham Tie Lung, in Rotterdam, the Netherlands, most recently as Vice Managing Director, Real Estate Agent and Corporate Advisor.

      Gregory J. Arnold — 48 — Senior Vice President of ProLogis since December 2001, where he oversees the Global Services Group. Mr. Arnold has been with ProLogis in varying capacities since May 1994 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Arnold was an Equity Vice President with LaSalle Partners (now Jones Lang LaSalle), a corporate real estate advisory firm.

      Patrick J. Boot — 38 — Senior Vice President of ProLogis since January 2003, where he is a member of the Asian operations group. Prior to joining ProLogis, Mr. Boot was Executive Vice President and Executive Director of Property Investment Advisors Indonesia/ P.T. Sanggraha Daksamitra, a real estate development and leasing company in Indonesia.

      Mark R. Cashman — 42 — Senior Vice President of ProLogis since March 2003, where he has capital management responsibilities for the Central/ Mexico region. Mr. Cashman has been with ProLogis in varying capacities since January 1995 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Cashman was with First Nationwide Financial Corporation, a bank holding company in Los Angeles, California, most recently as First Vice President and Portfolio Manager.

      James D. Cochran — 42 — Senior Vice President of ProLogis since December 2001, where he is a member of the Global Capital Group, which is responsible for securing sources of private capital. Mr. Cochran has been with ProLogis in varying capacities since March 1994 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Cochran was a Vice President with TCW Realty Advisors, a real estate pension advisory firm.

      Frank H. Fallon — 41 — Senior Vice President of ProLogis since September 1999, where he has capital deployment responsibilities for the Southeast region. Mr. Fallon has been with ProLogis in varying capacities since January 1995 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Fallon was a Marketing Principal with Trammell Crow Company, a diversified commercial real estate company in North America.

      Ken R. Hall — 52 — Senior Vice President of ProLogis since December 2002, where he oversees the Global Development Group in Europe. Mr. Hall has been with ProLogis or Kingspark S.A. since July 1998 (ProLogis acquired Kingspark S.A. in August 1998) in varying capacities. Prior to joining Kingspark S.A., Mr. Hall was with Birse Construction, a development company in the United Kingdom, most recently as Managing Director.

      Larry H. Harmsen — 42 — Senior Vice President of ProLogis since December 2001, where he has capital deployment responsibilities for the Pacific region. Mr. Harmsen has been with ProLogis in varying capacities since February 1995 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Harmsen was a Vice President and General Partner with Lincoln Property Company, a diversified national real estate operating company.

      M. Gordon Keiser, Jr. — 58 — Senior Vice President of ProLogis since October 1995 and Treasurer of ProLogis since December 1998, where he is responsible for relationships with ProLogis’ lenders. Mr. Keiser has been with ProLogis in varying capacities since October 1995 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Keiser was Senior Vice President of JMB Realty Corporation with responsibilities for corporate finance and capital markets financing.

      Douglas A. Kiersey, Jr. — 42 — Senior Vice President of ProLogis since December 2001, where he has capital deployment responsibilities for the Mid-Atlantic region. Mr. Kiersey has been with ProLogis in varying capacities since May 1994 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Kiersey was a member of the Industrial/ Technology Group at Cushman & Wakefield of Oregon, Inc., a real estate brokerage and services company.

      W. Scott Lamson — 40 — Senior Vice President of ProLogis since March 2003, where he has capital management responsibilities for the Pacific region. Mr. Lamson has been with ProLogis in varying capacities

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since June 1995 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Lamson was a Vice President with Commercial Property Services, a commercial real estate company with responsibilities in the San Francisco market.

      Luke A. Lands — 46 — Senior Vice President and Controller of ProLogis since August 2000, where he supervises ProLogis’ accounting, financial reporting and financial forecasting functions. Mr. Lands has been with ProLogis in varying capacities since January 1996 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Lands was Vice President of SCG Realty Services, an affiliate of Security Capital, from February 1995 to January 1996. Prior thereto, Mr. Lands was Vice President and Controller for Lincoln Property Company, a diversified national real estate operating company. Mr. Lands is a Certified Public Accountant.

      Debra A. McRight — 43 — Senior Vice President of ProLogis since December 1999, where she is responsible for property management operations in ProLogis’ four North American regions. Ms. McRight has been with ProLogis in varying capacities since September 1995 (through September 1997 she was employed by ProLogis’ former management company). Prior to joining ProLogis, Ms. McRight was with Paragon Group, Inc., a full service real estate company, where she was responsible for property management operations in St. Louis, Missouri.

      Daryl H. Mechem — 42 — Senior Vice President of ProLogis since March 2003, where he has capital management responsibilities for the Mid-Atlantic region. Mr. Mechem has been with ProLogis in varying capacities since May 1995 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Mechem was the Director of Tennis at Club El Gancho in Santa Fe, New Mexico.

      Charles E. Sullivan — 45 — Senior Vice President of ProLogis since December 2001, where he has capital management responsibilities for the Southeast region. Mr. Sullivan has been with ProLogis in varying capacities since October 1994 (through September 1997 he was employed by ProLogis’ former management company). Prior to joining ProLogis, Mr. Sullivan was an Industrial Broker with Cushman & Wakefield of Florida, a real estate brokerage and services company.

Environmental Matters

      Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, under or in its property. The costs of removal or remediation of such substances could be substantial. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release or presence of such hazardous substances. The presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow funds by using such real estate as collateral. ProLogis has not been notified by any governmental authority of any non-compliance, liability or other claim in connection with any of the properties owned, or being acquired, as of December 31, 2002, and ProLogis is not aware of any environmental condition with respect to any of its properties that is likely to have a material adverse effect on ProLogis’ business, financial condition or results of operations. ProLogis or the predecessor owners have subjected each of its properties to an environmental assessment (which may not involve invasive procedures such as soil sampling or ground water analysis) by independent consultants. While some of these assessments have led to further investigation and sampling, none of these environmental assessments have revealed, nor is ProLogis aware of, any environmental liability (including asbestos-related liability) that ProLogis believes would have a material adverse effect on its business, financial condition or results of operations. No assurance can be given, however, that these assessments and investigations have revealed or will reveal all potential environmental liabilities, that no prior owner or operator created any material environmental condition not known to ProLogis or the independent consultants or that future uses or conditions (including, without limitation, customer actions or changes in applicable environmental laws and regulations) will not result in unreimbursed costs relating to environmental liabilities. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”

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Insurance Coverage

      ProLogis and its unconsolidated investees currently carry comprehensive insurance coverage including property, liability, fire, flood, earthquake, environmental, terrorism, extended coverage and rental loss, as appropriate for the markets where each of their properties and their business operations are located. The insurance coverage contains policy specifications and insured limits customarily carried for similar properties and business activities. ProLogis believes its properties and the properties of its unconsolidated investees are adequately insured. However, an uninsured loss could result in loss of capital investment and anticipated profits. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors.”

 
ITEM 2.  Properties

Industrial Distribution Properties

      ProLogis has directly invested in real estate assets that are primarily generic bulk industrial distribution properties. These properties generally have an average office finish level of less than 10%. Due to the costs associated with retrofitting space for new customers that has previously been used for service center operations, ProLogis has acquired properties containing service center space on a very limited basis, generally as part of portfolio acquisitions in which the majority of the properties being acquired were generic distribution properties. In Japan, ProLogis’ distribution properties will generally be multi-level centers, which is common in Japan due to the cost and limited availability of land. ProLogis’ properties are typically used for storage, packaging, assembly, distribution and light manufacturing of consumer and industrial products. Based on square footage, ProLogis’ properties at December 31, 2002 that are used for bulk distribution comprised 87.5% of its total operating portfolio, properties used for light manufacturing and assembly comprised 10.9% of its total operating portfolio and properties used for other purposes, primarily service centers, was 1.6% of its total operating portfolio.

      ProLogis has commitments with certain property funds that require ProLogis to offer to contribute its stabilized developed properties to the property fund, subject to certain conditions, to the property fund upon completion. During the period that properties are under development, they are included in the CDFS business segment. Regardless of ProLogis’ intent with respect to a property (i.e., long-term investment or expectation of future contribution or sale), all properties that are classified as operating properties are included in the property operations segment while they are directly owned by ProLogis.

Geographic Distribution

      ProLogis has direct ownership of 1,267 distribution properties (operating and under development) in North America, Europe and Japan at December 31, 2002. In North America, properties that are owned directly by ProLogis are located in 37 markets (including two cities that are not target markets) in 22 states and the District of Columbia in the United States and in four markets in Mexico. In Europe, the properties that are owned directly by ProLogis are located in 16 markets in eight countries. In Japan, the properties that are owned directly by ProLogis are located in Tokyo. ProLogis defines its markets based on the concentration of properties in a specific area. A market, as defined by ProLogis, can be a metropolitan area, a city, a subsection of a metropolitan area, a subsection of a city or a region of a state or country. Accordingly, the actual location of each market may not be easily identifiable by the names given by ProLogis. Such markets

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are identified below along with the major metropolitan areas or cities located in that market to assist in understanding of the information presented in the tables that follow in Item 2.
         
United States:
   
 
I-81 Corridor, Pennsylvania
  Allentown, Bethlehem, Harrisburg
 
I-95 Corridor, New Jersey
  Cranbury, Newark, Secaucus, Trenton
Europe:
   
 
France:
   
   
Central
  Orleans, Paris, Vatry
   
East
  Metz
   
North
  Lille, Le Havre
   
South
  Lyon, Marseille
 
Germany:
   
   
Rhine/Mein
  Frankfurt
   
Rhine/Ruhr
  Cologne, Dortmund, Dusseldorf
   
South
  Munich
 
Netherlands:
   
   
South
  Haaften, Tilburg, Veghel, Venlo
 
Poland:
   
   
Central
  Piotrkow
   
South
  Bedzin
   
West
  Poznan
 
United Kingdom:
   
   
East Midlands
  Bedfordshire, Coalville, Corby, Daventry, Leicester, Northhampton
   
London and Southeast
  London, Hemel Hempstead, Thurrock
   
North
  Leeds, Wakefield, Crewe
   
West Midlands
  Banbury, Birmingham, Coventry, Rugby

      The table below illustrates the geographic distribution of ProLogis’ portfolio of directly owned operating properties and properties under development. The table excludes land held for future development. The table includes properties owned by ProLogis and its consolidated subsidiaries and partnerships, which may not be 100% owned by ProLogis (see “— Real Estate Partnerships”). The table does not include properties that are owned by the property funds or ProLogis’ other unconsolidated investees which are discussed under “— Unconsolidated Investees.”

                                   
December 31,

2002 2001


Percentage of Percentage of
Number of Assets Based Number of Assets Based
Properties on Cost(1) Properties on Cost(1)




North American Markets(2):
                               
United States:
                               
 
Atlanta, Georgia
    84       5.22 %     89       6.08 %
 
Austin, Texas
    27       1.31       27       1.52  
 
Charlotte, North Carolina
    30       2.20       31       2.78  
 
Chattanooga, Tennessee
    5       0.30       5       0.35  
 
Chicago, Illinois
    59       6.07       62       7.99  
 
Cincinnati, Ohio
    39       1.95       40       2.52  
 
Columbus, Ohio
    29       2.93       31       3.70  
 
Dallas/Ft. Worth, Texas
    127       8.52       126       9.83  
 
Denver, Colorado
    25       1.52       23       1.60  
 
El Paso, Texas
    19       1.24       18       1.45  
 
Ft. Lauderdale/Miami, Florida
    11       0.92       12       1.14  
 
Houston, Texas
    92       4.86       85       5.07  
 
I-81 Corridor, Pennsylvania
    3       0.92       2       1.26  

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December 31,

2002 2001


Percentage of Percentage of
Number of Assets Based Number of Assets Based
Properties on Cost(1) Properties on Cost(1)




 
I-95 Corridor, New Jersey
    28       2.98       26       2.70  
 
Indianapolis, Indiana
    43       2.53       43       2.96  
 
Kansas City, Kansas/Missouri
    29       1.19       29       1.36  
 
Las Vegas, Nevada
    17       1.80       18       2.25  
 
Los Angeles/Orange County, California
    2       0.94       4       1.40  
 
Louisville, Kentucky
    7       0.64       8       1.01  
 
Memphis, Tennessee
    48       4.07       43       3.69  
 
Nashville, Tennessee
    31       1.72       31       1.96  
 
Oklahoma City, Oklahoma
    6       0.22       6       0.25  
 
Orlando, Florida
    19       1.31       19       1.54  
 
Phoenix, Arizona
    30       1.30       30       1.52  
 
Portland, Oregon
    20       0.92       20       1.09  
 
Reno, Nevada
    23       1.85       25       2.85  
 
Salt Lake City, Utah
    7       0.88       7       1.01  
 
San Antonio, Texas
    51       2.36       43       2.06  
 
San Francisco (East Bay), California
    53       4.34       52       4.89  
 
San Francisco (South Bay), California
    71       4.43       71       5.21  
 
Seattle, Washington
    14       1.10       14       1.30  
 
St. Louis, Missouri
    14       1.44       13       0.83  
 
Tampa, Florida
    64       2.88       62       3.04  
 
Tulsa, Oklahoma
    9       0.24       9       0.28  
 
Washington D.C./Baltimore, Maryland
    42       3.35       39       3.17  
 
Other(3)
    2       0.10       3       0.11  
Mexico:
                               
 
Juarez
    12       0.70       10       0.54  
 
Monterrey
    8       0.64       11       1.16  
 
Reynosa
    11       0.66       15       1.21  
 
Tijuana
    2       0.18       5       0.59  
     
     
     
     
 
   
Subtotal North America(2)
    1,213       82.73       1,207       95.27  
     
     
     
     
 
European Markets(4)(5):
                               
Belgium
                1       0.15  
Czech Republic:
                               
 
Prague
    1       0.24              
France:
                               
 
Central
    1       0.18              
 
North
    2       0.36       2       0.40  
 
South
    3       0.54       2       0.40  
Germany:
                               
 
Rhine/Mein
    1       0.32              
 
Rhine/Ruhr
    2       0.32       1       0.21  
Hungary:
                               
 
Budapest
                1       0.23  
Italy:
                               
 
Milan
    3       0.69       1       0.29  
Netherlands:
                               
 
South
    1       0.37       2       0.66  

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December 31,

2002 2001


Percentage of Percentage of
Number of Assets Based Number of Assets Based
Properties on Cost(1) Properties on Cost(1)




Poland:
                               
 
South
    1       0.07              
 
Warsaw
    1       0.18       1       0.19  
 
West
    1       0.04       2       0.17  
Spain:
                               
 
Barcelona
                1       0.26  
 
Madrid
    2       0.52       2       0.59  
United Kingdom:
                               
 
East Midlands
    12       2.61              
 
London and Southeast
    14       5.08              
 
North
    1       0.27              
 
West Midlands
    4       1.14              
   
Subtotal Europe(4)(5)
    50       12.93       16       3.55  
     
     
     
     
 
Asia(6):
                               
 
Tokyo, Japan
    4       4.34       1       1.18  
     
     
     
     
 
     
Total
    1,267 (7)     100.00 %     1,224 (7)     100.00 %
     
     
     
     
 


(1)  Properties under development are reflected at the total expected cost at completion, rather than at the cost incurred as of the dates presented.
 
(2)  ProLogis is committed to offer to contribute its stabilized properties developed in North America (excluding properties developed in the Los Angeles/ Orange County market) through December 2003 to ProLogis North American Properties Fund V, subject to the property meeting certain specified criteria, including leasing criteria, and the property fund having the capital to acquire the property. ProLogis California has the right of first offer with respect to ProLogis’ stabilized developed properties, excluding properties developed under build to suit lease agreements, in the Los Angeles/ Orange County market, subject to the property meeting certain specified criteria, including leasing criteria, and the property fund having the capital to acquire the property. Stabilized development properties offered to ProLogis California that are not accepted must then be offered to ProLogis North America Properties Fund V.
 
(3)  In 2002, includes one property in each of Akron, Ohio and Brownsville, Texas. In 2001, includes one property in each of Akron, Ohio, Brownsville, Texas and Norfolk, Virginia.
 
(4)  ProLogis is committed to offer to contribute its stabilized properties developed in specific markets in Europe through September 2019 to ProLogis European Properties Fund, subject to the property meeting certain specified criteria, including leasing criteria, and the property fund having the capital to acquire the property.
 
(5)  Kingspark S.A., a wholly owned subsidiary at December 31, 2002, performs CDFS business activities in the United Kingdom only. Prior to July 1, 2002, ProLogis investment in Kingspark S.A. was presented under the equity method. On July 1, 2002, ProLogis began consolidating its investment in Kingspark S.A. in its financial statements coincident with ProLogis’ acquisition of all of the voting ownership interests in Kingspark S.A. Previously ProLogis’ ownership interests were all non-voting.

  At December 31, 2001, Kingspark S.A. had 16 operating properties aggregating 1.6 million square feet at an investment of $140.5 million and 13 properties under development aggregating 2.4 million square feet with an expected cost at completion of $262.2 million. See “Item 1. — Business — ProLogis’ Operating Segments — CDFS Business Segment” and Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.

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(6)  ProLogis is committed to offer to contribute its stabilized properties developed in Japan to ProLogis Japan Properties Fund through June 2006, subject to the property meeting certain specified criteria, including leasing criteria, and the property fund having the capital to acquire the properties.
 
(7)  Includes 37 properties under development at December 31, 2002 and 16 properties under development at December 31, 2001.

Properties

      The information in the following table is as of December 31, 2002 for the properties directly owned by ProLogis and its consolidated subsidiaries and partnerships, which may not be 100% owned by ProLogis (see “— Real Estate Partnerships”). No individual property or group of properties operated as a single business unit amounted to 10% or more of ProLogis’ consolidated total assets at December 31, 2002 or generated income equal to 10% or more of ProLogis’ consolidated gross revenues or total income for the year ended December 31, 2002. The table does not include properties that are owned by property funds or ProLogis’ other unconsolidated investees which are discussed under “— Unconsolidated Investees.”

                                             
Percentage Rentable
No. of Occupancy Square Investment Encumbrances
Bldgs. (1) Footage (2) (3)





Operating Properties Directly Owned at December 31, 2002(4):
                                       
 
North American Markets(5):
                                       
 
United States:
                                       
   
Atlanta, Georgia(6)
    84       80.18 %     8,838,837     $ 274,116,732     $ 35,814,394  
   
Austin, Texas
    27       90.00       1,759,309       68,533,410        
   
Charlotte, North Carolina
    30       89.48       3,801,070       115,703,160       41,515,093  
   
Chattanooga, Tennessee
    5       100.00       1,147,872       15,598,174        
   
Chicago, Illinois
    59       91.34       7,678,325       318,521,990       44,975,541  
   
Cincinnati, Ohio
    39       85.20       3,880,392       102,222,659       40,575,593  
   
Columbus, Ohio
    29       93.24       4,636,360       154,002,823       30,864,422  
   
Dallas/ Ft. Worth, Texas
    127       75.77       13,638,967       447,212,535       64,957,334  
   
Denver, Colorado
    24       87.66       2,753,996       75,453,033        
   
El Paso, Texas
    18       90.77       2,181,522       63,390,093       2,390,232  
   
Ft. Lauderdale/ Miami, Florida
    10       96.16       795,237       39,783,464       1,782,491  
   
Houston, Texas
    90       91.89       8,387,225       249,436,056       46,374,600  
   
I-81 Corridor, Pennsylvania
    3       100.00       1,068,420       48,304,131       16,837,001  
   
I-95 Corridor, New Jersey(7)
    28       86.71       3,939,353       156,568,514       28,334,653  
   
Indianapolis, Indiana
    43       76.36       4,184,599       132,800,481        
   
Kansas City, Kansas/ Missouri
    29       87.80       1,578,487       62,265,395       12,111,655  
   
Las Vegas, Nevada
    17       96.67       2,061,291       94,666,595       17,285,448  
   
Los Angeles/ Orange County, California
    1       100.00       249,283       11,407,072        
   
Louisville, Kentucky
    7       77.39       1,469,988       33,810,237       6,207,602  
   
Memphis, Tennessee
    48       86.01       8,139,029       213,663,802       11,485,712  
   
Nashville, Tennessee
    30       78.45       3,235,280       82,114,061       7,031,091  
   
Oklahoma City, Oklahoma
    6       82.39       639,942       11,504,076        
   
Orlando, Florida
    19       93.36       1,750,236       68,861,393       7,815,917  
   
Phoenix, Arizona
    30       89.79       2,016,336       68,444,781        
   
Portland, Oregon
    20       94.64       1,330,129       48,400,079       374,805  
   
Reno, Nevada
    23       92.12       2,702,923       97,273,089       10,771,658  
   
Salt Lake City, Utah
    7       88.47       1,643,468       46,243,660        
   
San Antonio, Texas
    50       91.49       4,327,143       118,600,252        
   
San Francisco (East Bay), California
    53       88.78       5,655,697       227,700,329       20,643,800  

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Percentage Rentable
No. of Occupancy Square Investment Encumbrances
Bldgs. (1) Footage (2) (3)





 
San Francisco (South Bay), California
    71       84.14       3,694,781       232,763,811       17,131,901  
 
Seattle, Washington
    14       87.32       1,272,827       57,640,735       4,652,083  
 
St. Louis, Missouri
    13       85.05       1,251,825       38,309,893       7,932,787  
 
Tampa, Florida
    64       90.97       3,906,175       151,484,260       26,990,563  
 
Tulsa, Oklahoma
    9       96.42       523,623       12,533,713        
 
Washington D.C./ Baltimore, Maryland
    42       93.01       4,221,518       175,979,160       50,442,077  
 
Other(8)
    2       100.00       215,723       4,995,993       390,730  
Mexico:
                                       
 
Juarez
    12       92.13       966,918       36,511,743        
 
Monterrey
    6       100.00       582,663       23,913,216        
 
Reynosa
    11       74.43       967,041       34,749,507        
 
Tijuana
    2       100.00       262,220       9,476,027        
     
     
     
     
     
 
   
Subtotal North America(5)
    1,202       86.86       123,356,030       4,224,960,134       555,689,183  
     
     
     
     
     
 
European Markets(9):
                                       
France:
                                       
 
North
    1       0.00       192,977       7,780,588        
 
South
    2       34.44       560,718       18,403,705        
Germany:
                                       
 
Rhine/ Ruhr
    1       0.00       176,121       9,885,191        
Netherlands:
                                       
 
South
    1       0.00       456,760       19,669,313        
Poland:
                                       
 
South
    1       100.00       123,000       3,288,943        
Spain:
                                       
 
Madrid
    2       0.00       608,467       27,541,457        
United Kingdom:
                                       
 
East Midlands
    11       18.49       1,137,453       127,165,729        
 
London and Southeast
    5       0.00       509,423       68,832,669        
 
North
    1       0.00       185,123       14,103,901        
 
West Midlands
    3       27.69       649,996       46,242,057        
     
     
     
     
     
 
   
Subtotal Europe(9)
    28       15.36       4,600,038       342,913,553        
     
     
     
     
     
 
   
Total Operating Properties Directly Owned at December 31, 2002(4)
    1,230       84.29 %     127,956,068     $ 4,567,873,687     $ 555,689,183  
     
     
     
     
     
 
                                     
Rentable
No. of Square Investment Total Expected
Bldgs. Footage (2) Cost (10)




Properties Under Development at December 31, 2002(11)(12):
                               
 
North American Markets:
                               
 
United States:
                               
   
Denver, Colorado
    1       95,700     $ 2,218,101     $ 4,532,693  
   
El Paso, Texas
    1       53,240       1,065,827       1,959,452  
   
Ft. Lauderdale/ Miami, Florida
    1       164,511       6,952,728       8,427,327  
   
Houston, Texas
    2       153,600       4,364,068       5,897,186  
   
Los Angeles/ Orange County, California
    1       1,056,484       25,867,107       38,060,512  

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Rentable
No. of Square Investment Total Expected
Bldgs. Footage (2) Cost (10)




 
Nashville, Tennessee
    1       301,440       3,469,975       8,275,945  
 
San Antonio, Texas
    1       136,987       1,249,760       5,397,995  
 
St. Louis, Missouri
    1       1,262,648       26,202,112       37,159,396  
Mexico:
                               
 
Monterrey
    2       242,338       3,965,282       9,655,297  
     
     
     
     
 
   
Subtotal North America
    11       3,466,948       75,354,960       119,365,803  
     
     
     
     
 
European Markets:
                               
Czech Republic:
                               
 
Prague
    1       284,719       7,735,938       12,435,047  
France:
                               
 
Central
    1       213,988       5,235,629       9,479,206  
 
North
    1       344,760       6,750,645       10,867,276  
 
South
    1       282,275       5,687,003       10,353,036  
Germany:
                               
 
Rhine/ Mein
    1       227,938       15,084,972       16,636,824  
 
Rhine/ Ruhr
    1       122,473       1,571,259       6,852,715  
Italy:
                               
 
Milan
    3       783,867       14,608,928       36,088,956  
Poland:
                               
 
Warsaw
    1       283,911       6,984,853       9,565,097  
 
West
    1       63,938       1,370,087       2,355,642  
United Kingdom:
                               
 
East Midlands
    1       150,000       4,671,367       9,773,943  
 
London and Southeast
    9       1,779,034       99,401,394       197,831,680  
 
West Midlands
    1       113,000       12,450,845       13,870,097  
     
     
     
     
 
   
Subtotal Europe
    22       4,649,903       181,552,920       336,109,519  
     
     
     
     
 
Asian Market:
                               
Tokyo, Japan
    4       1,531,492       120,475,886       227,520,218  
     
     
     
     
 
   
Total Properties Under Development at December 31, 2002(11)(12)
    37       9,648,343     $ 377,383,766     $ 682,995,540  
     
     
     
     
 
                             
Investment Encumbrances
Acreage (2) (3)



Land Held for Development at December 31, 2002(13):
                       
 
North American Markets:
                       
 
United States:
                       
   
Atlanta, Georgia(14)
    234.2     $ 19,266,615     $  
   
Austin, Texas
    7.2       764,367        
   
Charlotte, North Carolina
    17.4       1,516,968        
   
Chicago, Illinois(15)
    151.5       25,535,192        
   
Cincinnati, Ohio
    100.1       8,816,354        
   
Columbus, Ohio
    56.5       2,377,315        
   
Dallas/ Ft. Worth, Texas(16)
    156.7       17,633,703        
   
El Paso, Texas
    95.9       5,955,618        
   
Houston, Texas
    56.4       5,231,419        
   
I-81 Corridor, Pennsylvania
    42.8       2,500,000        
   
I-95 Corridor, New Jersey
    10.1       817,943        
   
Indianapolis, Indiana
    123.4       8,616,824        
   
Kansas City, Kansas/ Missouri
    16.6       1,526,602        

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Investment Encumbrances
Acreage (2) (3)



 
Las Vegas, Nevada
    61.8       7,541,633       289,045  
 
Los Angeles/ Orange County, California(17)
    5.2       2,682,011        
 
Louisville, Kentucky
    66.5       5,659,060        
 
Memphis, Tennessee
    120.6       6,982,762        
 
Orlando, Florida
    28.1       2,841,892        
 
Portland, Oregon
    10.3       1,692,235        
 
Reno, Nevada
    30.1       4,267,753        
 
Salt Lake City, Utah
    30.4       2,027,560        
 
San Antonio, Texas
    64.7       4,914,282        
 
San Francisco (East Bay) California
    77.6       6,512,725        
 
Seattle, Washington
    10.6       1,991,730        
 
Tampa, Florida
    49.9       3,489,015        
 
Washington D.C./ Baltimore, Maryland
    31.1       5,298,574        
Mexico:
                       
 
Juarez
    47.2       7,755,978        
 
Monterrey
    12.7       1,759,700        
 
Reynosa
    80.8       10,081,468        
 
Tijuana
    25.8       5,071,531        
     
     
     
 
   
Subtotal North America
    1,822.2       181,128,829       289,045  
     
     
     
 
European Markets:
                       
 
Belgium
    9.2       760,671        
 
Czech Republic:
                       
   
Prague
    37.0       9,778,312        
 
France:
                       
   
Central
    24.0       3,977,254        
   
North
    23.1       1,311,335        
   
South
    24.7       5,804,341        
 
Germany:
                       
   
Rhine/ Mein
    4.4       4,598,735        
   
Rhine/ Ruhr
    19.7       4,917,537        
 
Hungary:
                       
   
Budapest
    55.7       6,735,102        
 
Netherlands:
                       
   
Rotterdam
    5.0       1,608,279        
 
Poland:
                       
   
Central
    5.7       1,395,575        
   
South
    19.1       2,548,699        
   
Warsaw
    131.4       9,861,374        
   
West
    5.8       1,024,147        
 
Spain:
                       
   
Madrid
    33.3       9,374,530        
 
United Kingdom:
                       
   
East Midlands
    44.4       14,200,486        
   
London and Southeast
    50.4       56,474,671        
   
West Midlands
    151.3       71,320,059        
     
     
     
 
     
Subtotal Europe
    644.2       205,691,107        
     
     
     
 
     
Total Land Held for Development at December 31, 2002(13)
    2,466.4     $ 386,819,936     $ 289,045  
     
     
     
 

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Rentable
No. of Square Investment Total Expected Encumbrances
Bldgs. Acreage Footage (2) Cost(10) (3)






Grand Totals at December 31, 2002:
                                               
 
Operating properties(4)(5)(7)
    1,230       n/a       127,956,068     $ 4,567,873,687       n/a     $ 555,689,183  
 
Properties under development
    37       n/a       9,648,343       377,383,766     $ 682,995,540        
 
Land held for development
    n/a       2,466.4       n/a       386,819,936       n/a       289,045  
 
Other investments(18)
    n/a       n/a       n/a       63,449,553       n/a        
     
     
     
     
     
     
 
   
Totals
    1,267       2,466.4       137,604,411     $ 5,395,526,942     $ 682,995,540     $ 555,978,228  
     
     
     
     
     
     
 


n/a  Not Applicable
 
(1)  The percentage occupancy presented is the physical occupancy at December 31, 2002. Operating properties at December 31, 2002 include recently completed development properties that may be in the initial lease-up phase, including properties aggregating 1.3 million square feet that were completed in the fourth quarter of 2002. The inclusion of properties in the initial lease-up phase can reduce the overall occupancy percentage.
 
(2)  Represents the investment balance at December 31, 2002 and is ProLogis’ carrying value of the properties.
 
(3)  Certain properties are pledged as security under ProLogis’ mortgage notes, securitized debt and assessment bonds at December 31, 2002. For purposes of this table, the total principal balance of a debt issuance that is secured by a pool of properties is allocated among the properties in the pool based on each property’s investment balance. See Schedule III — Real Estate and Accumulated Depreciation to ProLogis’ Consolidated Financial Statements in Item 8 for additional identification of the properties pledged.
 
(4)  All operating properties are included in the property operations segment. See “Item 1. Business — ProLogis’ Operating Segments — Property Operations Segment.”
 
(5)  Includes 67 properties aggregating 11.2 million square feet at an aggregate investment of $372.0 million that were developed in the CDFS business segment with the intent to contribute or sale the property or acquired with the intent to contribute the property to a property fund, including properties that have been or are being rehabilitated and/or repositioned utilizing CDFS business personnel that are pending contribution or a property fund or sale to a third party. See “Item 1 — Business — ProLogis’ Operating Segments — CDFS Business Segment.”
 
(6)  Includes one 0.2 million square foot property that was previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
 
(7)  Includes three properties aggregating 0.5 million square feet that were previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
 
(8)  Includes one property in each of Akron, Ohio and Brownsville, Texas.
 
(9)  Includes 21 properties aggregating 4.1 million square feet at an aggregate investment of $291.0 million that were developed in the CDFS business segment that are pending contribution to a property fund or sale to a third party. See “Item 1. — Business — ProLogis’ Operating Segments — CDFS Business Segment.”

(10)  Represents the total expected cost at completion for properties under development, including the cost of land, fees, permits, payments to contractors, architectural and engineering fees and interest and property taxes to be capitalized during construction, rather than actual costs incurred to date, as applicable.

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(11)  All of the properties under development are included in the CDFS business segment. See “Item 1 — Business — ProLogis’ Operating Segments — CDFS Business Segment.”
 
(12)  Includes properties aggregating 1.3 million square feet that are in the design and permitting stage.
 
(13)  All of the land held for future development is included in the CDFS business segment. The land owned can be used for the development of approximately 44.2 million square feet of distribution properties. See “Item 1 — Business — ProLogis’ Operating Segments — CDFS Business Segment.” Does not include 1,510 acres of land controlled directly by ProLogis under option, letter of intent or contingent contract with the capacity for developing approximately 24.8 million square feet of distribution properties.
 
(14)  Includes approximately 33 acres of land that were previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
 
(15)  Includes approximately six acres of land that were previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
 
(16)  Includes approximately four acres of land that were previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
 
(17)  Includes approximately five acres of land that were previously presented under the equity method in the temperature-controlled distribution segment. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.
 
(18)  Other investments include: (i) restricted funds that are held in escrow pending the completion of tax-deferred exchange transactions involving operating properties ($6.9 million on deposit with third parties at December 31, 2002); (ii) earnest money deposits associated with potential acquisitions; (iii) costs incurred during the pre-acquisition due diligence process; and (iv) costs incurred during the pre-construction phase related to future development projects.

Real Estate Partnerships

      At December 31, 2002, ProLogis held a majority interest in and controlled five real estate partnerships (collectively, the “Partnerships”). For financial reporting purposes, the assets, liabilities, results of operations and cash flows of each of the Partnerships are included in ProLogis’ Consolidated Financial Statements and in the preceding real estate tables. The interests of the limited partners are reflected as minority interest in ProLogis’ Consolidated Balance Sheet. See Note 6 to ProLogis’ Consolidated Financial Statements in Item 8.

      Generally, pursuant to partnership agreements, ProLogis or a wholly owned subsidiary of ProLogis is the sole controlling general partner of each of the Partnerships with all management powers over the business and affairs of the Partnership. The limited partners of each Partnership generally do not have the authority to transact business for, or participate in the management decisions of, the Partnerships. The general partner in each of the Partnerships may not, without the written consent of all of the limited partners: (i) take any action that would prevent the Partnership from conducting its business; (ii) possess the property of the partnership; (iii) admit an additional partner; or (iv) subject a limited partner to the liability of a general partner. In each Partnership, ProLogis or its wholly owned subsidiary may not voluntarily withdraw from the Partnership or transfer or assign its interests in the Partnership without the consent of all of the limited partners. The limited partners may freely transfer their partnership units to their affiliates, provided that the transfer does not cause a termination of the Partnership under the Code and does not cause ProLogis to cease to comply with the REIT requirements under the Code. The limited partners in each of the Partnerships are entitled to redeem their partnership units for Common Shares. Additionally, the limited partners are entitled to receive preferential cumulative quarterly distributions per unit equal to the quarterly distributions paid on Common Shares.

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      The Partnerships are as follows at December 31, 2002:

                                 
Investment In Limited
Formation Real Estate ProLogis’ Partnership Units
Date (in millions) Ownership Outstanding




ProLogis Limited Partnership-I
    1993     $ 215.1 (1)(2)     68.65 %     4,520,532 (3)(4)
ProLogis Limited Partnership-II
    1994       60.8 (5)     97.82 %     90,213 (3)
ProLogis Limited Partnership-III
    1994       35.8 (6)     95.25 %     78,678 (3)(7)
ProLogis Limited Partnership-IV(8)
    1994       97.0 (9)     98.52 %     68,612 (3)(7)
Meridian Realty Partners Limited Partnership
    (10 )     11.1 (11)     87.00 %     29,712 (12)
             
             
 
            $ 419.8               4,787,747  
             
             
 


  (1)  These properties cannot be sold, prior to the occurrence of certain events, without the consent of the limited partners, other than in tax-deferred exchanges.
 
  (2)  One property is located in the Tampa market; all other properties are located in the San Francisco (South Bay and East Bay) markets.
 
  (3)  Each unit is convertible into one Common Share.
 
  (4)  Entities in which Irving F. Lyons, III, ProLogis’ Vice Chairman and Chief Investment Officer has ownership interests owned 2,459,183 of the outstanding limited partnership units in ProLogis Limited Partnership-I at December 31, 2002 or 17.1% of ProLogis Limited Partnership-I’s total units outstanding at December 31, 2002. Mr. Lyons’ effective ownership in ProLogis Partnership-I was 1.8% at December 31, 2002.
 
  (5)  These properties are located in the Charlotte, Dallas/ Ft. Worth, Denver, El Paso, San Francisco (East Bay), St. Louis and Washington, D.C./ Baltimore markets.
 
  (6)  These properties are located in the Chicago, Orlando, San Antonio and Tampa markets.
 
  (7)  Jeffrey H. Schwartz, ProLogis’ President of International Operations and President and Chief Operating Officer — Asia, owned all of the outstanding limited partnership units in ProLogis Limited Partnership-III at December 31, 2002 or 4.75% of ProLogis Limited Partnership-III’s total units outstanding at December 31, 2002 and 49,587 of the outstanding limited partnership units in ProLogis Limited Partnership-IV at December 31, 2002 or 1.07% of ProLogis Limited Partnership-IV’s total units outstanding at December 31, 2002.
 
  (8)  ProLogis Limited Partnership-IV was formed through a cash contribution from a wholly owned subsidiary of ProLogis, ProLogis IV, Inc., and the contribution of properties from the limited partner. ProLogis Limited Partnership-IV and ProLogis IV, Inc. are legal entities that are separate and distinct from ProLogis, its affiliates and each other, and each has separate assets, liabilities, business functions and operations. At December 31, 2002, the sole asset of ProLogis IV, Inc. was its interest in ProLogis Limited Partnership-IV. At December 31, 2002, ProLogis IV, Inc. had outstanding borrowings from ProLogis of $0.6 million.
 
  (9)  These properties are located in the Cincinnati, Dallas/ Ft. Worth, Ft. Lauderdale/ Miami, Houston, I-95 Corridor (New Jersey), Orlando and Tampa markets and one property is located in Akron, Ohio.

(10)  This general partnership was formed by another REIT that was merged with and into ProLogis in 1999.
 
(11)  This property is located in the Los Angeles/ Orange County market.
 
(12)  Each unit is convertible into 1.1 Common Shares, plus $2.00.

Unconsolidated Investees

      At December 31, 2002, ProLogis’ investments in and advances to unconsolidated investees (entities that are presented on the equity method rather than consolidated in ProLogis’ financial statements) totaled $821.4 million. ProLogis’ investments in and advances to property funds discussed below under “— Property

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Operations” totaled $593.5 million at December 31, 2002. ProLogis’ investments in and advances to the temperature-controlled distribution operating companies totaled $178.4 million at December 31, 2002. ProLogis’ investment in and advances to the Kingspark Joint Ventures was $45.2 million at December 31, 2002. ProLogis’ investments in and advances to other companies that do not own real estate totaled $4.3 million at December 31, 2002. ProLogis’ unconsolidated investees are discussed in Note 4 to ProLogis’ Consolidated Financial Statements in Item 8. See also “Item 1 — Business — ProLogis’ Operating Segments.”

      ProLogis’ investments in unconsolidated investees, other than the property funds, were structured to allow ProLogis to comply with the REIT requirements under the Code. Certain of these investees produce income that is not REIT qualifying income (i.e., not rental income or mortgage interest income). To maintain its qualification as a REIT, ProLogis can collectively invest in these companies in amounts up to 20% of the fair market value of ProLogis’ total assets.

      With respect to the property funds, an ownership interest of 50% or less is integral to ProLogis’ business strategy. This business strategy allows ProLogis to realize a portion of the profits from its development activities, earn fees from the property funds, raise private debt and equity capital to fund its future development activities, maintain an ownership interest in its developed properties and maintain relationships with its customers. See “Item 1. Business — ProLogis — Business Strategy.”

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Property Operations

      At December 31, 2002, ProLogis had ownership interests ranging from 16.1% to 50% in eight property funds that are presented under the equity method. The property funds primarily own operating properties and ProLogis’ investments in the property funds are included in the property operations segment. The information provided in the table below is for the total entity in which ProLogis has an ownership interest, not ProLogis’ proportionate share of the entity. ProLogis is the manager of each property fund. See “Item 1. Business — ProLogis’ Operating Segments — Property Operations Segment” and Note 4 to ProLogis’ Consolidated Financial Statements in Item 8.

                                       
Rentable
No. of Square Percentage Entity’s
Bldgs. Footage Occupancy(1) Investment(2)




North America:
                               
 
ProLogis California(3):
                               
   
Los Angeles/ Orange County, California
    79       13,017,390       92.86 %   $ 620,621,905  
     
     
     
     
 
 
ProLogis North American Properties Fund I(4):
                               
   
Atlanta, Georgia
    5       1,615,688       100.00       53,475,336  
   
Chicago, Illinois
    1       249,576       100.00       14,791,711  
   
Cincinnati, Ohio
    2       297,720       100.00       15,056,021  
   
Columbus, Ohio
    2       888,691       100.00       30,227,733  
   
Dallas/ Ft. Worth, Texas
    3       1,221,934       100.00       49,637,817  
   
Denver, Colorado
    2       198,892       100.00       9,174,982  
   
El Paso, Texas
    1       354,159       100.00       13,613,996  
   
Houston, Texas
    2       238,450       100.00       10,854,356  
   
I-95 Corridor, New Jersey
    5       1,100,320       79.13       58,983,435  
   
Indianapolis, Indiana
    2       719,829       100.00       21,439,503  
   
Louisville, Kentucky
    3       905,800       93.38       33,472,045  
   
Nashville, Tennessee
    1       412,800       100.00       14,619,970  
   
Phoenix, Arizona
    1       156,410       100.00       6,762,008  
   
Salt Lake City, Utah
    3       396,600       100.00       17,026,296  
   
San Antonio, Texas
    1       244,800       100.00       9,033,242  
   
San Francisco (East Bay), California
    2       404,400       91.69       16,956,782  
     
     
     
     
 
     
Total ProLogis North American Properties Fund I
    36       9,406,069       96.56       375,125,233  
     
     
     
     
 
 
ProLogis North American Properties Fund II(5):
                               
   
Austin, Texas
    4       324,800       100.00       17,823,370  
   
Charlotte, North Carolina
    2       178,000       100.00       7,807,320  
   
Chicago, Illinois
    4       510,725       72.20       37,848,443  
   
Dallas/ Ft. Worth, Texas
    4       669,416       100.00       25,591,595  
   
Denver, Colorado
    1       104,400       100.00       5,404,190  
   
El Paso, Texas
    1       239,133       100.00       10,315,354  
   
Ft. Lauderdale/ Miami, Florida
    3       383,650       100.00       23,611,839  
   
I-81 Corridor, Pennsylvania
    1       528,670       100.00       25,418,967  
   
I-95 Corridor, New Jersey
    1       501,400       100.00       26,280,972  
   
Reno, Nevada
    1       169,625       100.00       7,172,847  
   
San Antonio, Texas
    1       160,000       100.00       6,739,827  
   
San Francisco (East Bay), California
    1       89,626       100.00       4,345,906  
   
Washington D.C./ Baltimore, Maryland
    3       617,225       100.00       35,492,888  
     
     
     
     
 
     
Total ProLogis North American Properties Fund II
    27       4,476,670       96.83       233,853,518  
     
     
     
     
 

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Rentable
No. of Square Percentage Entity’s
Bldgs. Footage Occupancy(1) Investment(2)




ProLogis North American Properties Fund III(5):
                               
 
Atlanta, Georgia
    2       151,600       78.89       6,825,130  
 
Austin, Texas
    6       282,100       86.18       15,486,076  
 
Charlotte, North Carolina
    1       136,000       100.00       5,390,350  
 
Cincinnati, Ohio
    5       1,044,390       99.97       45,147,881  
 
Columbus, Ohio
    1       289,280       100.00       8,561,643  
 
Denver, Colorado
    1       104,400       100.00       5,324,759  
 
Houston, Texas
    1       140,000       82.86       5,483,341  
 
1-95 Corridor, New Jersey
    1       204,000       100.00       10,558,827  
 
Las Vegas, Nevada
    1       235,520       100.00       9,872,212  
 
Orlando, Florida
    4       361,866       97.22       18,112,612  
 
Portland, Oregon
    2       200,600       100.00       10,697,311  
 
San Francisco (East Bay), California
    1       351,788       100.00       15,391,381  
 
Seattle, Washington
    1       117,620       100.00       5,836,000  
 
St. Louis, Missouri
    2       370,000       100.00       14,962,004  
 
Washington D.C./ Baltimore, Maryland
    5       391,325       97.35       29,667,790  
     
     
     
     
 
   
Total ProLogis North American Properties Fund III
    34       4,380,489       97.36       207,317,317  
     
     
     
     
 
ProLogis North American Properties Fund IV(5):
                               
 
Atlanta, Georgia
    3       252,800       100.00       13,397,043  
 
Columbus, Ohio
    1       1,014,592       100.00       28,001,909  
 
Dallas/ Ft. Worth, Texas
    1       180,440       100.00       10,975,768  
 
Denver, Colorado
    2       357,400       100.00       15,069,608  
 
El Paso, Texas
    1       153,034       100.00       5,716,451  
 
Ft. Lauderdale/ Miami, Florida
    1       421,101       100.00       17,206,879  
 
I-95 Corridor, New Jersey
    1       181,370       100.00       9,152,342  
 
Phoenix, Arizona
    1       273,586       100.00       9,885,012  
 
Portland, Oregon
    4       426,780       73.52       24,210,195  
 
San Antonio, Texas
    2       213,800       96.26       10,047,100  
     
     
     
     
 
   
Total ProLogis North American Properties Fund IV
    17       3,474,903       96.52       143,662,307  
     
     
     
     
 
ProLogis North American Properties Fund V(6):
                               
United States:
                               
 
Atlanta, Georgia
    11       1,561,261       100.00       45,467,387  
 
Charlotte, North Carolina
    1       246,400       100.00       9,143,973  
 
Chicago, Illinois
    1       124,519       100.00       12,015,958  
 
Cincinnati Ohio
    2       544,800       81.78       19,289,605  
 
Columbus, Ohio
    2       402,439       93.81       13,602,411  
 
Dallas/ Fort Worth, Texas
    7       1,597,600       72.33       56,959,465  
 
Denver, Colorado
    1       52,915       100.00       1,612,302  
 
El Paso, Texas
    2       231,721       100.00       8,388,783  
 
Ft. Lauderdale/ Miami, Florida
    2       189,640       79.96       11,091,422  
 
Houston, Texas
    1       403,200       100.00       13,368,334  
 
I-81 Corridor, Pennsylvania
    1       1,059,645       100.00       49,155,851  
 
I-95 Corridor, New Jersey
    1       302,372       100.00       16,001,504  

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Rentable
No. of Square Percentage Entity’s
Bldgs. Footage Occupancy(1) Investment(2)




   
Los Angeles/ Orange County, California
    1       670,292       100.00       46,912,645  
   
Louisville, Kentucky
    1       350,000       85.71       14,572,946  
   
Nashville, Tennessee
    1       214,800       100.00       7,448,839  
   
Portland, Oregon
    1       127,420       0.00       6,758,722  
   
Reno, Nevada
    2       820,006       100.00       35,053,221  
   
San Antonio, Texas
    4       706,308       94.27       26,256,859  
   
San Francisco (East Bay), California
    1       401,536       35.02       16,140,419  
   
Washington D.C./ Baltimore, Maryland
    1       99,904       100.00       6,354,738  
 
Mexico:
                               
   
Monterrey
    5       684,940       95.28       36,650,042  
   
Reynosa
    4       534,106       100.00       28,503,124  
   
Tijuana
    4       653,090       100.00       30,344,101  
     
     
     
     
 
     
Total ProLogis North American Properties Fund V
    57       11,978,914       90.69       511,092,651  
     
     
     
     
 
       
Subtotal North America
    250       46,734,435       95.34       2,091,672,931  
     
     
     
     
 
Europe:
                               
 
ProLogis European Properties Fund(7):
                               
   
Belgium
    2       468,535       100.00       19,928,720  
   
Czech Republic:
                               
     
Prague
    5       872,239       99.89       56,100,777  
   
France:
                               
     
Central
    68       10,274,256       88.93       592,701,279  
     
East
    2       614,323       100.00       24,884,381  
     
North
    7       1,407,317       100.00       58,821,991  
     
South
    15       3,675,681       99.99       154,755,919  
   
Germany:
                               
     
Rhine/ Mein
    1       69,030       100.00       5,076,812  
     
Rhine/ Ruhr
    3       623,483       49.65       46,118,346  
     
South
    1       210,146       100.00       17,136,844  
   
Hungary:
                               
     
Budapest
    1       215,280       44.60       11,463,455  
   
Italy:
                               
     
Milan
    5       1,444,389       47.20       81,934,323  
   
Netherlands:
                               
     
Amsterdam
    5       804,565       100.00       60,281,485  
     
Rotterdam
    9       1,763,121       99.27       94,514,157  
     
South
    5       1,553,697       100.00       82,080,059  
   
Poland:
                               
     
Central
    1       230,629       100.00       14,238,034  
     
South
    1       366,877       100.00       23,845,575  
     
Warsaw
    9       1,555,246       97.87       116,135,383  
     
West
    2       277,701       97.74       15,750,441  
   
Spain:
                               
     
Barcelona
    7       1,808,771       99.52       119,838,034  
     
Madrid
    1       124,755       100.00       8,148,529  
   
Sweden:
                               
     
Stockholm
    1       216,345       100.00       11,948,416  

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Rentable
No. of Square Percentage Entity’s
Bldgs. Footage Occupancy(1) Investment(2)




   
United Kingdom:
                               
     
East Midlands
    14       2,917,827       97.26       280,077,381  
     
London and Southeast
    12       1,499,207       87.48       238,713,716  
     
North
    2       249,047       100.00       22,934,522  
     
West Midlands
    14       2,457,932       100.00       281,299,456  
     
     
     
     
 
     
Total ProLogis European Properties Fund
    193       35,700,399       92.54       2,438,728,035  
     
     
     
     
 
Asia:
                               
 
ProLogis Japan Properties Fund(5):
                               
   
Tokyo, Japan
    1       198,725       100.00       65,101,127  
     
     
     
     
 
     
Total Unconsolidated Investees
    444       82,633,559       93.45 %   $ 4,595,502,093  
     
     
     
     
 


(1)  The percentage occupancy presented is the physical occupancy at December 31, 2002.
 
(2)  The investment represents 100% of the carrying value of the operating properties of each entity at December 31, 2002.
 
(3)  ProLogis had a 50% ownership interest in ProLogis California at December 31, 2002.
 
(4)  ProLogis had a 41.3% ownership interest in ProLogis North American Properties Fund I at December 31, 2002.
 
(5)  At December 31, 2002, ProLogis had a 20% ownership interest in each of ProLogis North American Properties Fund II, ProLogis North American Properties Fund III, ProLogis North American Properties Fund IV and ProLogis Japan Properties Fund.
 
(6)  ProLogis had a 16.1% ownership interest in ProLogis North American Properties Fund V at December 31, 2002.
 
(7)  ProLogis had a 29.6% ownership interest in ProLogis European Properties Fund at December 31, 2002.
 
CDFS Business

      In the United Kingdom, ProLogis’ wholly owned subsidiary, Kingspark S.A., has investments in four joint ventures (the “Kingspark Joint Ventures”) that primarily own and develop distribution properties and own land for the future development of distribution properties. ProLogis’ ownership in each of the Kingspark Joint Ventures is 50%. One of the Kingspark Joint Ventures owned 11 operating properties that it had previously developed at a total investment of $81.8 million at December 31, 2002. Collectively, the Kingspark Joint Ventures owned 150 acres of land with the capacity for developing approximately 1.5 million square feet of distribution properties at December 31, 2002. Additionally, at December 31, 2002, the Kingspark Joint Ventures collectively controlled 511 acres of land (through contracts, options or letters of intent) with the capacity for developing approximately 9.5 million square feet of distribution properties. See “Item 1. Business — ProLogis’ Operating Segments — CDFS Business Segment.”

 
Temperature-Controlled Distribution Operations

      See “Item 1. Business — ProLogis’ Operating Segments — Temperature-Controlled Distribution Operations Segment” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Temperature-Controlled Distribution Operations” for a discussion of the operating assets of the temperature-controlled distribution company in which ProLogis has invested as of December 31, 2002.

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ITEM 3.  Legal Proceedings

      From time to time, ProLogis and its unconsolidated investees are parties to a variety of legal proceedings arising in the ordinary course of their businesses. Generally, such matters are not expected to have a material adverse effect on ProLogis’ business, financial position or results of operations.

 
ITEM 4.  Submission of Matters to a Vote of Security Holders

      Not applicable.

PART II

 
ITEM 5.  Market for the Registrant’s Common Equity and Related Stockholder Matters

      ProLogis’ Common Shares are listed on the NYSE under the symbol “PLD”. The following table sets forth the high and low sale prices of the Common Shares, as reported in the NYSE Composite Tape, and distributions per Common Share, for the periods indicated.

                           
Per
Common Share
High Low Distribution



2001:
                       
 
First Quarter
  $ 22.937     $ 19.730     $ 0.345 (1)
 
Second Quarter
    22.950       19.650       0.345  
 
Third Quarter
    23.300       19.350       0.345  
 
Fourth Quarter
    22.800       19.600       0.345  
2002:
                       
 
First Quarter
  $ 24.150     $ 20.960     $ 0.355 (2)
 
Second Quarter
    26.000       21.900       0.355  
 
Third Quarter
    25.950       21.700       0.355  
 
Fourth Quarter
    25.270       22.850       0.355  
2003:
                       
 
First Quarter (through March 24)
  $ 26.60     $ 23.63     $ 0.36 (3)


(1)  Declared in the fourth quarter of 2000 and paid in the first quarter of 2001.
 
(2)  Declared in the fourth quarter of 2001 and paid in the first quarter of 2002.
 
(3)  Declared and paid in the first quarter of 2003.

      On March 24, 2003, ProLogis had approximately 178,630,570 Common Shares outstanding, which were held of record by approximately 10,500 shareholders.

      In 2002, ProLogis’ Board approved an increase to the maximum amount of Common Shares that ProLogis can repurchase under a Common Share repurchase program from the original maximum of $100.0 million to $215.0 million. Under this program, the Common Shares have been and, to the extent these repurchases continue, they will be repurchased in the open market and in privately negotiated transactions, depending on market prices and other conditions. Common Share repurchases through December 31, 2002 aggregated 5,183,200 Common Shares at a total cost of $121.2 million. As of March 24, 2003, 5,530,800 Common Shares at a total cost of $129.9 million had been repurchased.

      In 2002, ProLogis issued 272,000 Common Shares, upon redemption of limited partnership units in one or more of the Partnerships. See “Item 2. Properties — Properties — Real Estate Partnerships.” These Common Shares were issued in transactions exempt from registration under Section 4(2) of the Securities Act.

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Distributions and Dividends

      In order to comply with the REIT requirements under the Code, ProLogis is required to make distributions (other than capital gain distributions) to its shareholders in amounts at least equal to (i) the sum of (a) 90% of its “REIT taxable income” computed without regard to the dividends paid deduction and its net capital gains and (b) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. ProLogis’ distribution policy is to distribute a percentage of its cash flow that ensures that ProLogis will meet the distribution requirements of the Code and allows ProLogis to maximize the cash retained to meet other cash needs such as capital improvements and investment activities.

      ProLogis announces the following year’s projected annual Common Share distribution level after the annual budget review and approval by the Board in December of each year. In December 2002, the Board announced a projected increase in the annual distribution level for 2003 from $1.42 to $1.44 per Common Share. The payment of distributions is subject to the discretion of the Board and is dependent on the financial condition and operating results of ProLogis. The amount of the distribution may be adjusted at the discretion of the Board during the year. On February 3, 2003, the Board declared a distribution of $0.36 per Common Share for the first quarter of 2003. This distribution was paid on February 28, 2003 to holders of Common Shares on February 14, 2003.

      Distributions to shareholders are characterized for federal income tax purposes, as ordinary income, capital gains, non-taxable return of capital or a combination of the three. Distributions that exceed ProLogis’ current and accumulated earnings and profits (calculated for tax purposes) constitute a return of capital rather than a dividend and reduce the shareholders’ basis in the Common Shares. To the extent that a distribution exceeds both current and accumulated earnings and profits and the shareholders’ basis in the Common Shares, it will generally be treated as a gain from the sale or exchange of that shareholder’s Common Shares. ProLogis annually notifies shareholders of the taxability of distributions paid during the preceding year. The following summarizes the taxability of distributions on Common Shares for the periods indicated (amounts in U.S. dollars; taxability for 2002 is estimated):

                             
Years Ended December 31,

2002 2001 2000



Per Common Share:
                       
 
Ordinary income
  $ 0.95     $ 1.09     $ 1.19  
 
Capital gains
    0.06       0.19       0.15  
 
Return of capital
    0.41       0.10        
     
     
     
 
   
Total
  $ 1.42     $ 1.38     $ 1.34  
     
     
     
 

      Annual dividends paid on each series of preferred shares were as follows for the periods indicated (in U.S. dollars):

                         
Years Ended December 31,

2002(1) 2001(2) 2000(3)



Series A Preferred Shares(4)
  $     $ 0.84     $ 2.35  
Series B Convertible Preferred Shares(5)
          0.44       1.75  
Series C Preferred Shares
    4.27       4.27       4.27  
Series D Preferred Shares
    1.98       1.98       1.98  
Series E Preferred Shares
    2.19       2.19       2.19  


(1)  For federal income tax purposes, $4.04 of the Series C dividend, $1.87 of the Series D dividend and $2.07 of the Series E dividend is estimated to represent ordinary income to the holders. The remaining portion of each dividend is estimated to represent capital gains.
 
(2)  For federal income tax purposes $0.71 of the Series A dividend, $0.38 of the Series B dividend, $3.63 of the Series C dividend, $1.68 of the Series D dividend and $1.86 of the Series E dividend represent ordinary income to the holders. The remaining portion of each dividend represents capital gains.

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(3)  For federal income tax purposes $2.08 of the Series A dividend, $1.55 of the Series B dividend, $3.78 of the Series C dividend, $1.75 of the Series D dividend and $1.94 of the Series E dividend represent ordinary income to the holders. The remaining portion of each dividend represents capital gains.
 
(4)  The Series A Preferred Shares were redeemed as of May 8, 2001.
 
(5)  The Series B Convertible Preferred Shares were redeemed as of March 20, 2001.

      Pursuant to the terms of its preferred shares, ProLogis is restricted from declaring or paying any distribution with respect to its Common Shares unless and until all cumulative dividends with respect to the preferred shares have been paid and sufficient funds have been set aside for dividends that have been declared for the then-current dividend period with respect to the preferred shares.

      ProLogis’ tax return for the year ended December 31, 2002 has not been filed. The taxability information for 2002 is based upon the best available data. ProLogis’ tax returns for previous tax years have not been examined by the Internal Revenue Service. Consequently, the taxability of distributions is subject to change.

      Under the Code, ProLogis’ earnings and profits are first allocated to the preferred shares, which increases the portion of the Common Share distribution that is characterized as return of capital. The portion of distribution that is characterized as return of capital represents the excess of distributions over the earnings and profits, and results because non-cash charges such as depreciation are not considered in determining distribution levels. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations.”

 
Common Share Plans

      ProLogis’ holders of Common Shares may acquire additional Common Shares by automatically reinvesting distributions under the 1999 Dividend Reinvestment and Share Purchase Plan (the “1999 Common Share Plan”). Holders of Common Shares who do not participate in the 1999 Common Share Plan continue to receive distributions as declared. The 1999 Common Share Plan also allows both holders of Common Shares and persons who are not holders of Common Shares to purchase a limited number of additional Common Shares by making optional cash payments, without payment of any brokerage commission or service charge. Common Shares are acquired pursuant to the 1999 Common Share Plan at a price ranging from 98% to 100% of the market price of such Common Shares. Under the 1999 Common Share Plan, ProLogis generated net proceeds of $125.7 million from the issuance of 5,295,000 Common Shares in 2002. On November 13, 2002, ProLogis amended the 1999 Common Share Plan to: (i) limit participants to only those holders of Common Shares registered on the share transfer books of ProLogis in the shareholders’ name; (ii) limit the distributions that can be reinvested to those distributions earned on no more than 300,000 Common Shares per quarter; and (iii) allow for the discount from market price at which distributions can be reinvested and optional share purchases can be made to be within a range of 0% to 2% as determined by ProLogis. Previously the discount was fixed at 2%.

      Under the terms of the ProLogis Trust Employee Share Purchase Plan (the “Employee Share Plan”), employees of ProLogis and its participating entities may purchase Common Shares, through payroll deductions only, at a discounted price of 85% of the market price of the Common Shares. Subject to certain provisions, the aggregate number of Common Shares that may be issued under the Employee Share Plan may not exceed 5,000,000. ProLogis began issuing Common Shares under the Employee Share Plan in January 2002. As of December 31, 2002, 22,000 Common Shares have been purchased under the Employee Share Plan generating net proceeds to ProLogis of $0.4 million.

 
ITEM 6.  Selected Financial Data

      The following tables set forth selected financial data relating to the historical financial condition and results of operations of ProLogis for 2002 and the four preceding years. Certain amounts for the years prior to 2002 presented in the tables below have been reclassified to conform to the 2002 financial statement presentation. The financial data in the tables is qualified in its entirety by, and should be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and

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ProLogis’ Consolidated Financial Statements and related notes in Item 8. The amounts in the table below are in thousands of U.S. dollars, except for per share amounts.
                                               
Years Ended December 31,

2002 2001 2000 1999 1998





Operating Data:
                                       
 
Rental income
  $ 449,479     $ 466,714     $ 481,000     $ 491,826     $ 345,046  
 
Other real estate income
    126,773       99,890       75,573       46,678       17,554  
 
Income (loss) from unconsolidated investees(1)(2)
    96,381       (49,644 )     78,858       22,519       2,755  
 
Total income(1)(2)
    675,001       523,125       643,521       567,392       368,107  
 
Rental expenses, net of recoveries
    32,593       28,700       27,177       33,501       27,120  
 
General and administrative expenses
    53,893       50,274       44,954       38,284       22,893  
 
Interest expense
    152,958       163,629       172,191       170,746       77,650  
 
Earnings from operations(1)(2)
    277,941       133,043       241,807       166,549       107,617  
 
Gains on disposition of real estate, net
    6,648       10,008       1,314       38,994       5,565  
 
Foreign currency exchange gains (losses), net
    (2,031 )     (3,721 )     (17,927 )     (16,818 )     2,938  
 
Income tax expense
    28,169       4,725       5,130       1,472       2,164  
 
Preferred share dividends
    32,715       37,309       56,763       56,835       49,098  
 
Net earnings attributable to Common Shares(1)(2)
    216,166       90,835       157,715       123,999       62,231  
 
Common Share cash distributions paid(3)
  $ 252,270     $ 237,691     $ 219,333     $ 208,969     $ 151,050  
 
Per Share Data:
                                       
 
Basic net earnings attributable to Common Shares(1)(2)
  $ 1.22     $ 0.53     $ 0.96     $ 0.81     $ 0.51  
 
Diluted net earnings attributable to Common Shares
    1.20       0.52       0.96       0.81       0.51  
 
Series A Preferred Share dividends paid(4)
          0.84       2.35       2.35       2.35  
 
Series B Convertible Preferred Share dividends paid(5)
          0.44       1.75       1.75       1.75  
 
Series C Preferred Share dividends paid
    4.27       4.27       4.27       4.27       4.27  
 
Series D Preferred Share dividends paid
    1.98       1.98       1.98       1.98       1.42  
 
Series E Preferred Share dividends paid(6)
    2.19       2.19       2.19       1.64        
 
Common Share distributions paid(6)
  $ 1.42     $ 1.38     $ 1.34     $ 1.30     $ 1.24  
 
Weighted average Common Shares outstanding:
                                       
     
Basic
    177,813       172,755       163,651       152,412       121,721  
     
Diluted
    184,869       175,197       164,401       152,739       122,028  
Other Data:
                                       
 
Reconciliation of net earnings to funds from operations(1)(2):
                                       
 
Net earnings attributable to Common Shares(1)(2)
  $ 216,166     $ 90,835     $ 157,715     $ 123,999     $ 62,231  
 
Add (Deduct):
                                       
   
Real estate related depreciation and amortization
    145,233       137,033       146,859       150,050       99,514  
   
Gains on contribution or sale of non-CDFS business segment assets, net
    (6,648 )     (10,008 )     (1,314 )     (38,994 )     (5,565 )
   
Foreign currency exchange (gains) losses, net
    (743 )     1,484       19,569       16,596       (3,227 )
   
Deferred income tax expense
    17,660       2,258       4,230             1,796  
   
Cumulative effect of accounting change
                      1,440        
   
ProLogis’ share of reconciling items of unconsolidated investees:
                                       
     
Real estate related depreciation and amortization
    41,779       63,948       57,366       49,644       36,489  
     
Write-down of operating assets and other impairment charges(1)
    42,917       88,413                    

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Years Ended December 31,

2002 2001 2000 1999 1998





   
(Gains) losses on contribution or sale of non-CDFS business segment assets, net
    (2,248 )     4,417       (744 )     826       179  
   
Foreign currency exchange (gains) losses, net
    (4,268 )     8,204       (2,773 )     14,650       14,208  
   
Deferred income tax expense (benefit)
    (13,881 )     (12,171 )     (4,190 )     510       (2,929 )
   
Cumulative effect of accounting change
                      1,480        
     
     
     
     
     
 
Funds from operations attributable to Common Shares(2)(7)
  $ 435,967     $ 374,413     $ 376,718     $ 320,201     $ 202,696  
     
     
     
     
     
 
Weighted average Common Shares outstanding:
                                       
 
Basic
    177,813       172,755       163,651       152,412       121,721  
 
Diluted(8)
    184,869       180,284       178,166       167,421       137,153  
Net cash provided by operating activities
  $ 377,235     $ 343,272     $ 321,091     $ 271,376     $ 238,253  
Net cash provided by (used in) investing activities
    (136,145 )     103,952       (376,945 )     (34,350 )     (1,264,722 )
Net cash provided by (used in) financing activities
  $ (158,270 )   $ (477,105 )   $ 44,386     $ (230,828 )   $ 1,064,600  
                                           
December 31,

2002 2001 2000 1999 1998





Financial Position:
                                       
 
Real estate owned, excluding land held for development, at cost
  $ 5,008,707     $ 4,387,456     $ 4,502,087     $ 4,811,255     $ 3,476,704  
 
Land held for development
    386,820       200,737       187,405       163,696       180,796  
 
Investments in and advances to unconsolidated investees
    821,431       1,310,735       1,453,148       940,364       733,863  
 
Total assets
    5,923,525       5,559,863       5,946,334       5,848,040       4,330,729  
 
Lines of credit and short-term borrowings(9)
    545,906       375,875       439,822       98,700       494,300  
 
Senior unsecured debt
    1,630,094       1,670,359       1,699,989       1,729,630       1,083,641  
 
Mortgage notes and other secured debt
    555,978       532,106       537,925       695,586       227,804  
 
Total liabilities
    2,994,571       2,838,225       2,972,333       2,832,232       2,023,066  
 
Minority interest
    42,467       45,639       46,630       62,072       51,295  
 
Total shareholders’ equity
  $ 2,886,487     $ 2,675,999     $ 2,927,371     $ 2,953,736     $ 2,256,368  
 
Number of Common Shares outstanding
    178,146       175,888       165,287       161,825       123,416  


(1)  Income (loss) from unconsolidated investees, total income, earnings from operations and net earnings attributable to Common Shares include:

  •  2002: A loss of $42.9 million representing ProLogis’ proportionate share of the write-downs of operating assets of its unconsolidated investees operating in the temperature-controlled distribution operations segment and net gains of $2.2 million representing ProLogis’ proportionate share of the net gains of its unconsolidated investees resulting from the sales of certain of their operating assets ($1.5 million of net gains were in the temperature-controlled distribution operations segment).
 
  •  2001: A loss of $88.4 million representing ProLogis’ proportionate share of the write-downs of operating assets and other impairment charges of its unconsolidated investees operating in the temperature-controlled distribution operations segment, a loss of $5.8 million representing ProLogis’ proportionate share of the write-downs of technology related investments of its unconsolidated investees operating in the temperature-controlled distribution operations segment and a net loss of $3.7 million representing ProLogis’ proportionate share of the net losses of its unconsolidated investees operating in the temperature-controlled distribution operations segment resulting from the sales of

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  significant portions of their operating assets. The technology related charges are included in funds from operations attributable to Common Shares.
 
  •  1999: A one-time expense of $1.4 million related to the write-off of unamortized organization and start-up costs due to an accounting change adopted by ProLogis.

  See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations — Temperature-Controlled Distribution Operations.”

(2)  Income (loss) from unconsolidated investees, total income, earnings from operations, net earnings attributable to Common Shares and funds from operations include:

  •  2001: Losses of $37.0 million representing ProLogis’ proportionate share of the write-downs of technology related investments of two of ProLogis’ unconsolidated investees.
 
  •  1999 and 1998: Losses of $0.9 million and $26.1 million, respectively, of mark to market expense associated with two interest rate hedge agreements that, due to changing market conditions, no longer qualified for hedge accounting treatment under generally accepted accounting principles (“GAAP”).

  See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Other Income and Expense Items — Income (Loss) from Unconsolidated Investees.”

(3)  For 1999, includes dividends of $11.1 million that were paid to shareholders of another REIT that was merged with and into ProLogis in March 1999.
 
(4)  The Series A Preferred Shares were redeemed as of May 8, 2001.
 
(5)  The Series B Preferred Shares were redeemed as of March 20, 2001.
 
(6)  For 1999, does not include dividends paid to shareholders of another REIT that was merged with and into ProLogis in March 1999.
 
(7)  ProLogis considers funds from operations to be a useful supplemental measure of comparative period operating performance and as a supplemental measure to provide management, financial analysts, potential investors and shareholders with an indication of ProLogis’ ability to fund its capital improvements, investment activities and other cash needs. Funds from operations is discussed and defined in “Item 7 — Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Funds from Operations.” Funds from operations does not represent net earnings or cash from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs, which is presented in the Consolidated Statement of Cash Flows in ProLogis’ Consolidated Financial Statements in Item 8. Cash distributions paid to shareholders are presented above in the “Operating Data” section of this table. Funds from operations should not be considered as an alternative to net earnings as an indicator of ProLogis’ operating performance or as an alternative to cash flows from operating, investing or financing activities as a measure of liquidity. Additionally, the funds from operations measure presented by ProLogis will not necessarily be comparable to similarly titled measures of other REITs.
 
(8)  In calculating the weighted average Common Shares for funds from operations purposes, weighted average Series B Convertible Preferred Shares and weighted average limited partnership units are considered potentially dilutive instruments. The weighted average Series B Convertible Preferred Shares included are 1,544,000, 8,417,000, 9,221,000 and 10,055,000 for 2001, 2000, 1999 and 1998, respectively (the Series B Preferred Shares were redeemed in 2001). The amount of dividends associated with the Series B Convertible Preferred Shares are $81,000, $11,358,000, $12,523,000 and $13,668,000 and for 2001, 2000, 1999 and 1998, respectively (the Series B Preferred Shares were redeemed in 2001). The weighted average limited partnership units included are 4,938,000, 5,087,000, 5,348,000, 5,461,000 and 5,070,000 for 2002, 2001, 2000, 1999 and 1998, respectively. The minority interest share in earnings associated with these limited partnership units are $5,508,000, $5,968,000, $5,586,000, $4,979,000 and $4,681,000 for 2002, 2001, 2000, 1999 and 1998, respectively.

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(9)  At March 24, 2003, ProLogis had $520.1 million of total borrowings outstanding under its revolving credit agreements resulting in $606.9 million of borrowing capacity available (total commitment of $1.15 billion reduced by $21.2 million of letters of credit outstanding with lending banks at March 24, 2003).

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The following discussion should be read in conjunction with ProLogis’ Consolidated Financial Statements and the related notes included in Item 8 of this report.

      Some statements contained in this discussion are not historical facts but are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Because these forward-looking statements are based on current expectations, estimates and projections about the industry and markets in which ProLogis operates, management’s beliefs and assumptions made by management, they involve uncertainties that could significantly impact ProLogis’ financial results. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, variations of such words and similar expressions are intended to identify such forward-looking statements. Forward-looking statements include discussions of strategy, plans or intentions of management. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. The discussions concerning ProLogis’ expectations with respect to economic conditions in the United States, its ability to raise private capital and generate income in the CDFS business segment (including the discussions with respect to ProLogis’ expectations as to the availability of capital in ProLogis European Properties Fund and ProLogis North American Properties Fund V such that these property funds will be able to acquire ProLogis’ stabilized developed properties that are expected to be available for contribution during 2003) and its plans for its investments in the temperature-controlled distribution operations segment contain forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. Factors that may affect outcomes and results include: (i) changes in general economic conditions in ProLogis’ markets that could adversely affect demand for ProLogis’ properties and the creditworthiness of ProLogis’ customers; (ii) changes in financial markets, interest rates and foreign currency exchange rates that could adversely affect ProLogis’ cost of capital, its ability to meet its financial needs and obligations and its results of operations; (iii) increased or unanticipated competition for distribution properties in ProLogis’ markets; (iv) the availability of private capital to ProLogis; (v) geopolitical concerns and uncertainties resulting because the United States is at war with Iraq; and (vi) those additional factors discussed under “— Risk Factors.”

Critical Accounting Policies

      A critical accounting policy is one that is both important to the portrayal of an entity’s financial condition and results of operations and requires judgment on the part of management. Generally, the judgment requires management to make estimates about the effect of matters that are inherently uncertain. Of the accounting policies discussed in Note 2 to ProLogis’ Consolidated Financial Statements in Item 8, those presented below have been identified by ProLogis as critical accounting policies.

 
Consolidation

      ProLogis’ consolidated financial statements include the accounts of ProLogis, its wholly owned subsidiaries and its majority-owned and controlled subsidiaries and partnerships. All subsidiaries in which ProLogis owns a majority voting interest are consolidated. Investments in entities in which ProLogis does not own a majority voting interest but does have the ability to exercise significant influence over operating and financial policies are presented under the equity method. Investments in entities in which ProLogis does not own a majority voting interest and over which ProLogis does not have the ability to exercise significant influence are carried at the lower of cost or fair value, as appropriate. Management’s judgments with respect to its level of influence or control of each entity involves consideration of various factors including the form of ProLogis’ ownership interest, its representation on the board of directors, the size of its investment (including loans) and ProLogis’ ability to participate in policy making decisions. Management’s ability to correctly assess its influence or control over an entity affects the presentation of these investments in ProLogis’ financial

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statements and, consequently, its financial position and specific items in its results of operations which are used by its shareholders, potential investors, industry analysts and lenders to evaluate ProLogis.
 
Impairment of Long-Lived Assets

      ProLogis and its unconsolidated investees assess the carrying value of their respective long-lived assets whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable and, with respect to goodwill, at least annually using a fair-value-based test. The determination of the fair value of long-lived assets, including goodwill, involves significant judgment. This judgment is based on management’s analysis and estimates of the future operating results and resulting cash flows of each long-lived asset. Management’s ability to accurately predict future operating results and cash flows impacts the determination of fair value.

      If there is a decline in fair value of a long-lived asset combined with a history of operating losses for the asset, ProLogis or its unconsolidated investees will be required to determine whether the losses associated with the asset will continue. Management’s assessment as to the nature of a decline in fair value is primarily based on estimates of future operating results, the resulting cash flows and ProLogis’ intent to either hold or dispose of the long-lived asset. If an investment is considered impaired, a write-down is recognized.

 
Revenue Recognition

      ProLogis recognizes gains from the contributions and sales of real estate assets generally at the time the title to the asset is transferred and ProLogis has no future involvement with the asset sold. In certain transactions, an entity in which ProLogis has an ownership interest will acquire the real estate assets from ProLogis. Management makes judgments based on the specific terms of each transaction as to the amount of the total profit from the transaction that ProLogis can recognize given its ownership interests and its level of future involvement in these investees that are acquiring the assets. Management’s ability to accurately assess the provisions of each disposition transaction under the accounting guidelines for profit recognition could impact ProLogis’ financial position and results of operations which are used by shareholders, potential investors, industry analysts and lenders to evaluate ProLogis.

 
Depreciation and Useful Lives of Real Estate Assets

      ProLogis estimates the depreciable portion of its real estate assets and the related useful lives in order to record depreciation expense related to these assets. Management’s ability to accurately estimate the depreciable portion of its real estate assets and their useful lives is critical to the determination of the appropriate amount of depreciation expense recorded and the carrying value of the underlying assets. Any change to the estimated depreciable lives of these assets used by ProLogis would have an impact on the depreciation expense recognized by ProLogis.

 
Recently Issued Accounting Standards

      ProLogis adopted the following recently issued 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:

  •  Statement of Financial Accounting Standards (“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.

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  •  SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123.” ProLogis does not account for share-based compensation under the fair value method provided in SFAS No. 123.

      In January 2003, Interpretation No. 46, “Consolidation of Variable Interest Entities”, was issued. ProLogis is required to adopt the requirements of this interpretation for its consolidated financial statements for the fiscal year or interim period beginning 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. Based on its initial assessment, ProLogis believes that it will begin to consolidate Frigoscandia S.A. and CSI/ Frigo LLC 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, which operate in the temperature-controlled distributions segment, on the equity method. ProLogis’ combined effective ownership in these entities was 99.75% at December 31, 2002. See “— Temperature Controlled Distribution Operations.”

      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 obligations it assumes under that guarantee. Further, this interpretation requires that this information be disclosed in the interim and annual financial statements. The initial recognition and measurement provisions of this interpretation are applicable to guarantees issued or modified after December 31, 2002. ProLogis does not believe that the application of this interpretation will have a material effect on its financial position, results of operations or cash flows. The disclosure requirements in the interpretation were effective immediately and ProLogis has made all applicable disclosures in the notes to its Consolidated Financial Statements for 2002.

Results of Operations

      ProLogis’ net earnings attributable to Common Shares were $216.2 million in 2002, $90.8 million in 2001 and $157.7 million in 2000. Basic and diluted per share net earnings attributable to Common Shares were $1.22 and $1.20 per share, respectively, in 2002 and $0.53 and $0.52 per share, respectively, in 2001. Basic and diluted net earnings attributable to Common Shares were $0.96 per share in 2000.

      The temperature-controlled distribution operating segment was the primary source of ProLogis’ increase in net earnings in 2002 from 2001. Under the equity method, ProLogis’ proportionate share of the earnings or losses of its two unconsolidated investees operating in this segment was income of $7.1 million in 2002, a loss of $111.5 million in 2001 and a loss of $8.3 million in 2000. The loss in 2000 is primarily attributable to poor operating performance. In 2001, the operating performance of these companies did not improve and ProLogis’ proportionate share of these companies’ combined net losses from the sales of significant portions of their operating assets and related impairment charges was $97.9 million. In 2002, the operating performance of these companies improved over 2001 levels, in part due to depreciation not being recognized on assets held for sale. Also in 2002, ProLogis’ proportionate share of these companies’ combined net gains from the dispositions of significant portions of their assets and related impairment charges was $41.4 million.

      In 1999, ProLogis shifted the primary focus of its development activities to the development of properties that ProLogis intends to contribute to property funds or sell to third parties. Consequently, the CDFS business segment’s role in ProLogis’ business strategy increased. The CDFS business segment provides capital to fund ProLogis’ development activities and generates profits that have contributed to ProLogis’ net earnings. ProLogis’ earnings from operations from this segment were constant in 2002 ($152.3 million as compared to $151.7 million in 2001) after increasing by $37.2 million in 2001 over 2000 and increasing by $48.9 million in 2000 over 1999. The increases in 2000 and 2001 were primarily the result of the volume of properties contributed to property funds by ProLogis. ProLogis’ property operations segment’s earnings from operations

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was also constant in 2002 ($477.6 million in 2002 as compared to $477.5 million in 2001) after decreasing by $16.4 million in 2001 from 2000. This operating segment’s earnings from operations includes rental income and net rental expenses from properties directly owned by ProLogis and also ProLogis’ proportionate share of the earnings or losses of the property funds and fees earned for services provided to the property funds. See “— Property Operations”, “— CDFS Business” and “— Temperature-Controlled Distribution Operations.”

      ProLogis adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” on January 1, 2002. Accordingly, ProLogis and its unconsolidated investees did not recognize amortization expense related to goodwill during 2002. See Note 2 to ProLogis’ Consolidated Financial Statements in Item 8. Had the accounting provisions for goodwill not changed in 2002, ProLogis estimates that it would have recognized amortization expense of $6.8 million directly and has also estimated that its aggregate proportionate share of the amortization expense that would have been recognized by its unconsolidated investees in 2002 to be $4.8 million.

 
Property Operations

      In addition to its directly owned operating properties, ProLogis includes its investments in property funds that are presented under the equity method in its property operations segment. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8. ProLogis owned or had ownership interests through the property funds in the following operating properties as of the dates indicated (square feet in thousands):

                                                       
December 31,

2002 2001 2000



Square Square Square
Number Footage Number Footage Number Footage






Direct ownership(1)
    1,230       127,956       1,208       123,356       1,244       126,275  
Property Funds:
                                               
 
ProLogis California(2)
    79       13,017       79       13,052       77       12,395  
 
ProLogis North American Properties Fund I(1)(3)
    36       9,406       36       8,963       33       8,031  
 
ProLogis North American Properties Fund II(1)(4)
    27       4,477       27       4,477       3       440  
 
ProLogis North American Properties Fund III(1)(5)
    34       4,380       34       4,380              
 
ProLogis North American Properties Fund IV(1)(6)
    17       3,475       17       3,475              
 
ProLogis North American Properties Fund V(1)(7)
    57       11,979                          
 
ProLogis European Properties Fund and ProLogis European Properties S.a.r.l.(8)
    193       35,700       141       23,130       104       14,385  
 
ProLogis Japan Properties Fund(9)
    1       199                          
     
     
     
     
     
     
 
   
Subtotal property funds
    444       82,633       334       57,477       217       35,251  
     
     
     
     
     
     
 
     
Totals
    1,674       210,589       1,542       180,833       1,461       161,526  
     
     
     
     
     
     
 


(1)  Includes operating properties directly owned by ProLogis. See “Item 2. Properties — Properties” and “Item 2. Properties — Real Estate Partnerships.”

  ProLogis contributes properties to property funds and sells properties to third parties as part of its business strategy. ProLogis reflects the properties that it intends to hold for long-term investment, as well as properties that were developed with the intent to contribute the property to a property fund or sell the property to a third party or properties that were acquired with the intent to contribute the property to a property fund, including properties that are being or have been rehabilitated and/or repositioned in the

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  CDFS business segment but that have not yet been contributed or sold in the property operations segment. Consequently, the size of this portfolio will fluctuate from period to period. Also, ProLogis will, as necessary, contribute operating properties originally intended for long-term investment to a property fund in order to meet the leasing, geographic and size requirements of a property fund’s third party investors. The increase in properties directly owned in 2002 from 2001 is partially due to the poor economic conditions in the United States during 2002. Leasing activity slowed in 2002, delaying contributions to property funds since the properties that are contributed to property funds generally must meet certain leasing criteria. Also, ProLogis has used the proceeds received from the dispositions of operating assets from the temperature-controlled distribution operations segment to acquire properties that it intends to rehabilitate and/or reposition prior to contributing or selling the properties, thus increasing the size of this portfolio at December 31, 2002.

(2)  ProLogis has had a 50% ownership interest in ProLogis California since it began operations on August 26, 1999.
 
(3)  ProLogis had a 41.3% ownership interest at both December 31, 2002 and 2001 and had an ownership interest of 20% at December 31, 2000. This property fund began operations on June 30, 2000 with the acquisition of 33 operating properties from ProLogis. In January 2001, ProLogis contributed three additional operating properties to this property fund and received all of the $34.1 million of proceeds in an additional equity interest in the property fund. This transaction increased ProLogis’ ownership interest to 41.3% as of January 15, 2001.
 
(4)  ProLogis has had a 20% ownership interest in ProLogis North American Properties Fund II since it began operations on June 30, 2000. This property fund originally acquired three operating properties from ProLogis in 2000 and acquired 24 additional operating properties from ProLogis in 2001.
 
(5)  ProLogis has had a 20% ownership interest in ProLogis North American Properties Fund III since it began operations on June 15, 2001. This property fund’s 34 operating properties were all acquired from ProLogis in 2001.
 
(6)  ProLogis has had a 20% ownership interest in ProLogis North American Properties Fund IV since it began operations on September 21, 2001. This property fund’s 17 operating properties were all acquired from ProLogis in 2001.
 
(7)  ProLogis had a 16.1% ownership interest in ProLogis North American Properties Fund V at December 31, 2002. ProLogis’ ownership interest in this property fund has been between 15.0% and 16.7% since it began operations on March 28, 2002. This property fund’s 57 operating properties were all acquired from ProLogis in 2002.
 
(8)  ProLogis’ ownership interest in ProLogis European Properties Fund was 29.6%, 35.4% and 34.4% at December 31, 2002, 2001 and 2000, respectively. This property fund began operations on September 23, 1999. The operating properties at December 31, 2000, include 44 operating properties aggregating 7,751,000 square feet that were owned directly by the property fund and 60 operating properties aggregating 6,634,000 square feet that were owned by ProLogis European Properties S.a.r.l. ProLogis European Properties S.a.r.l was 100% owned by ProLogis until January 7, 2000 when ProLogis contributed 50.1% of this entity to the property fund in exchange for an additional equity interest in the property fund. ProLogis contributed the remaining 49.9% of ProLogis European Properties S.a.r.l. to the property fund on January 7, 2001.
 
(9)  ProLogis has had a 20% ownership interest in ProLogis Japan Properties Fund since it began operations on September 24, 2002. ProLogis developed the property owned by this property fund.

      The earnings from operations of ProLogis’ property operations segment consists of: (i) net operating income (rental income less net rental expenses) from the operating properties that are directly owned by ProLogis; (ii) income recognized by ProLogis under the equity method from its investments in the property funds; and (iii) fees earned by ProLogis for services performed on behalf of the property funds, primarily property management and asset management services. The net operating income generated by operating properties that were developed by ProLogis with the intent to contribute the property to a property fund or sell the property to a third party or properties that were acquired by ProLogis with the intent to contribute the

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property to a property fund, including those properties that are being or have been rehabilitated and/or repositioned in the CDFS business segment, is included in the property operations segment during the period that these properties are included in the property operations segment (generally from the date of acquisition or date of completion of development, rehabilitation or repositioning activities through the date the properties are contributed to a property fund or sold to a third party). See “Item 1. “Business — Business Strategy and Operating Segments — Property Operations Segment”, “Item 1. “Business — Business Strategy and Operating Segments — CDFS Business Segments” and Note 10 to ProLogis’ Consolidated Financial Statements in Item 8.

      The amounts recognized under the equity method represent ProLogis’ share of the earnings or losses of each property fund based on its ownership interest and include the following income and expense items, in addition to net operating income: (i) interest income and interest expense; (ii) depreciation and amortization expenses; (iii) general and administrative expenses; (iv) income taxes; and (v) foreign currency exchange gains and losses, with respect to ProLogis European Properties Fund. See Note 10 to ProLogis’ Consolidated Financial Statements in Item 8. The number of properties in each property fund and ProLogis’ ownership percentage as of December 31, 2002, 2001 and 2000 are presented above. ProLogis’ earnings from operations from the property operations segment were follows for the periods indicated (in thousands of U.S. dollars).

                               
Years Ended December 31,

2002 2001 2000



Properties directly owned by ProLogis:
                       
 
Rental income(1)(2)
  $ 449,479     $ 466,714     $ 481,000  
 
Rental expenses, net of recoveries from customers(2)(3)
    32,593       28,700       27,177  
     
     
     
 
     
Net operating income
    416,886       438,014       453,823  
     
     
     
 
Property funds:
                       
 
Income from ProLogis California
    14,379       13,147       13,178  
 
Income from ProLogis North American Properties Fund I(4)
    5,997       4,648       1,806  
 
Income from ProLogis North American Properties Fund II(4)
    3,645       2,328       612  
 
Income from ProLogis North American Properties Fund III(5)
    2,779       1,178        
 
Income from ProLogis North American Properties Fund IV(6)
    1,977       598        
 
Income from ProLogis North American Properties Fund V(7)
    7,544              
 
Income from ProLogis European Properties Fund(8)
    24,162       17,581       24,484  
 
Income from ProLogis Japan Properties Fund(9)
    239              
     
     
     
 
     
Subtotal property funds
    60,722       39,480       40,080  
     
     
     
 
   
Total property operations segment
  $ 477,608     $ 477,494     $ 493,903  
     
     
     
 


(1)  The number and composition of operating properties in the directly owned portfolio throughout the periods presented impact rental income for each period. Rental income in 2002 includes $14.6 million of termination and renegotiation fees as compared to comparable fees recognized in 2001 of $3.1 million and in 2000 of $3.2 million. In certain leasing situations, ProLogis finds it advantageous to have its customers exercise termination clauses in their leases; however, ProLogis cannot predict the levels of such fees that will be earned in the future or whether ProLogis will be successful in re-leasing the vacant space associated with the lease terminations in a timely manner. Rental income, excluding termination and renegotiation fees, decreased by $28.7 million in 2002 from 2001, primarily due to lower average occupancy levels in 2002 as compared to 2001. Overall occupancy declines were experienced in all regions of the United States and in Europe. Rental income, excluding termination and renegotiation fees decreased by $14.2 million in 2001 from 2000, primarily due to the decrease in the number of operating properties directly owned during the period and, to a lesser extent, deceases in average occupancy levels.
 
(2)  Rental expenses, before recoveries, were 28.0% of rental income in 2002 as compared to 26.7% of rental income in 2001 and 24.7% of rental income in 2000. Total rental expense recoveries were 74.0%, 76.9% and 77.1% of total rental expenses in 2002, 2001 and 2000, respectively.

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(3)  The number and composition of operating properties in the directly owned portfolio throughout the periods presented impacts rental expenses for each period. The increase in net rental expenses in 2002 is primarily due to the lower occupancy levels experienced in 2002. Lower occupancy levels result in certain fixed costs being incurred directly by ProLogis, as there are fewer customers to pay them. Additionally, a higher percentage of common area costs were absorbed by ProLogis in 2002, as there are fewer customers available from whom these costs can be recovered. The economic weaknesses that began in the United States in late 2001 contributed to the increase in operating costs in 2001 over 2000, as did the nature and composition of operating properties in the directly owned portfolio in each period.
 
(4)  ProLogis North American Properties Fund I and ProLogis North American Properties Fund II began operations on June 30, 2000.
 
(5)  ProLogis North American Properties Fund III began operations on June 15, 2001.
 
(6)  ProLogis North American Properties Fund IV began operations on September 21, 2001.
 
(7)  ProLogis North American Properties Fund V began operations on March 28, 2002.
 
(8)  Includes net foreign currency exchange losses of $4.5 million in 2002, net foreign currency exchange gains of $0.8 million in 2001 and net foreign currency exchange gains of $4.7 million in 2000. Excluding these net foreign currency exchange gains and losses, ProLogis’ proportionate share of the earnings of ProLogis European Properties Fund is $28.7 million, $16.8 million and $19.8 million for 2002, 2001 and 2000, respectively. The increase in the income recognized by ProLogis from its ownership in this property fund, excluding foreign currency losses in 2002, is primarily the result of: (i) the additional properties owned in 2002 as compared to 2001; (ii) increases in the fees earned by ProLogis for services provided to the property fund due to the increase in properties owned; offset by (iii) higher interest costs in 2002 related to debt incurred to acquire the additional properties. Additionally, the foreign currency exchange rate at which the earnings of the property fund is translated to U.S. dollars increased in 2002, resulting in higher earnings that can be recognized by ProLogis under the equity method.

  The decrease in the income recognized by ProLogis from its ownership in this property fund, excluding foreign currency gains in 2001 is primarily the result of: (i) the additional properties owned offset by (ii) higher interest costs in 2001 associated with higher debt levels and changes in the composition of debt within the property fund. Also, changes in ProLogis’ ownership interests between periods and a decrease in the foreign currency exchange rate at which the earnings of the property fund is translated to U.S. dollars decreased in 2001, resulting in lower earnings that can be recognized by ProLogis under the equity method. Amounts in the table include ProLogis’ proportionate share of the earnings of ProLogis European Properties S.a.r.l. in 2001 and 2000, as applicable, and as discussed in Note 4 to ProLogis’ Consolidated Financial Statements in Item 8.

(9)  ProLogis Japan Properties Fund began operations on September 24, 2002.

      The stabilized operating properties owned by ProLogis and the property funds were 91.2% leased and 89.5% occupied at December 31, 2002. ProLogis’ stabilized occupancy levels decreased in 2002 from 2001 (93.1% leased and 92.4% occupied) and 2000 (96.2% leased and 95.4% occupied). ProLogis defines its stabilized properties as those properties where the capital improvements, repositioning efforts, new management and new marketing programs for acquisitions and development and marketing programs in the case of newly developed properties have been completed and in effect for a sufficient period of time, generally 12 months, to achieve stabilized occupancy, typically 93%.

      ProLogis believes that the decrease in its stabilized occupancy levels in the United States in 2002 is primarily the result of the current economic conditions that have led to a slowing in customer leasing decisions and in a slowing in the absorption of new distribution properties in many of ProLogis’ United States markets. ProLogis does not expect market conditions affected by the United States economy to change significantly in 2003. While there have been some positive trends in occupancy levels in certain markets in late 2002, ProLogis believes that occupancies will remain unstable and that further declines in occupancies in the United States, if any, would not be significant. ProLogis believes that the effects of these United States market occupancy decreases have been mitigated through the diversification benefits of its global operating platform and the ProLogis Operating System®.

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      Based on its recent leasing experience, ProLogis believes that shifts in distribution patterns of its customers in Europe and their needs to reduce their distribution costs are key drivers of leasing decisions in its European markets. ProLogis believes that current geopolitical concerns and the uncertainties that result because the United States is at war with Iraq have led to a slowing of customers’ decision-making processes in Europe with respect to changes in their distribution networks. ProLogis cannot predict the effect that these uncertainties will have on its ability to re-let distribution space that is subject to expiring leases in 2003. Should ProLogis European Properties Fund experience significant occupancy declines, ProLogis would recognize less earnings from its investment in ProLogis European Properties Fund.

      In Japan, ProLogis has fully leased two of its four development projects, aggregating 380,000 square feet. ProLogis is currently in negotiation for all of the space in the three remaining projects aggregating 1.1 million square feet.

      The average increase in rental rates for both new and renewed leases on previously leased space (37.7 million square feet) for all properties including those owned by the property funds during 2002 was 2.0% as compared to 14.6% in 2001 and 15.5% in 2000. ProLogis believes that the weaker rental rate growth experienced in 2002 is attributable to the downturn in the United States economy that began in late 2001.

      ProLogis’ “same store” portfolio of operating properties, properties owned by ProLogis and the property funds that were in operation throughout both 2002 and 2001, aggregated 159.0 million square feet. The net operating income (rental income, excluding termination and renegotiation fees, less net rental expenses) generated by the same store portfolio decreased by 0.9% in 2002 from 2001. In 2001, the same store portfolio’s net operating income increased by 1.4% over 2000.

 
CDFS Business

      Earnings from operations from ProLogis’ CDFS business segment consists primarily of: (i) the gains and losses from the contribution and sale of developed properties and from the contribution of properties that were acquired with the intent to contribute the properties to a property fund, including properties that have been rehabilitated and/or repositioned; (ii) gains and losses from the disposition of land parcels; (iii) development management fees earned by ProLogis for services provided to third parties; and (iii) income recognized under the equity method from ProLogis’ investment in Kingspark S.A. through June 30, 2002. Under the equity method, ProLogis recognized over 99% of the earnings of Kingspark S.A. since January 5, 2001 and 95% of the earnings of Kingspark S.A. prior to that date which includes (in addition to net operating income): (i) interest income and interest expense (net of capitalized amounts); (ii) general and administrative expenses (net of capitalized amounts); (iii) income taxes; and (iv) foreign currency exchange gains and losses. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.

      Income from the CDFS business segment is dependent on ProLogis’ ability to develop and lease distribution properties that can be contributed to property funds or sold to third parties generating profits to ProLogis and ProLogis’ success in raising private capital through the formation of property funds or other sources. There can be no assurance that ProLogis will be able to maintain the current level of profits in this operating segment. ProLogis does believe that current geopolitical concerns and the uncertainties that result because the United States is at war with Iraq have led to a slowing of customers’ decision-making processes with respect to changes in their distribution networks. ProLogis cannot predict the effect that these uncertainties will have on its ability to lease its completed development properties, the length of time that such uncertainties will continue or the effect, if any, that an end to the war would have on these decision-making processes. If ProLogis is unable to timely lease its completed developments, it will be unable to contribute these properties to the European Properties Fund or otherwise dispose of the properties and would be unable to recognize development profits in the anticipated accounting period. See “Item 1. ProLogis — ProLogis’ Operating Segments — CDFS Business Segment — Future Plans,” “— Risk Factors — General Real Estate Risks — Risks Associated with the Contribution or Sale of Properties” and “— Risk Factors — Financing and Capital Risks — Access to Capital.”

      The CDFS business segment operations and ProLogis’ earnings from operations from this segment were relatively unchanged in 2002 from 2001 and increased by $37.2 million in 2001 over 2000. The CDFS business

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segment’s earnings from operations includes the following components for the periods indicated (in thousands of U.S. dollars):
                           
Years Ended December 31,

2002 2001 2000



Net gains from dispositions of land parcels and contributions and sales of properties developed and acquired(1)
  $ 122,264     $ 96,847     $ 71,284  
Development management fees
    4,038       2,723       3,954  
Income from Kingspark S.A. and Kingspark LLC(2)
    29,531       55,839       43,795  
Income from Kingspark Joint Ventures(3)
    551              
Miscellaneous fees and other income
    470       321       334  
Other expenses(4)
    (4,540 )     (3,983 )     (4,863 )
     
     
     
 
 
Total CDFS business segment
  $ 152,314     $ 151,747     $ 114,504  
     
     
     
 


(1)  Represents the gains from the disposition of land parcels and contributions and sales of properties as follows:

  •  2002: 45 acres; 16.9 million square feet; $972.6 million of proceeds;
 
  •  2001: 229 acres; 14.5 million square feet; $714.0 million of proceeds; and
 
  •  2000: 193 acres; 10.6 million square feet; $491.9 million of proceeds.

(2)  ProLogis recognized its proportionate share of the earnings of Kingspark S.A. and Kingspark LLC under the equity method through June 30, 2002. ProLogis acquired the voting ownership interests in these companies on July 1, 2002 and began presenting its investments in these entities on a consolidated basis as of that date. Prior to July 1, 2002, ProLogis’ ownership interests in these entities were all non-voting. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8. The income recognized by ProLogis under the equity method from its ownership interests in Kingspark S.A. and Kingspark LLC includes, among other items:

  •  Gains from the disposition of land parcels and contributions and sales of properties developed as follows:

  •  2002: 23 acres; 1.2 million square feet; $146.4 million of proceeds; net gains of $14.8 million;
 
  •  2001: 63 acres; 2.7 million square feet; $300.0 million of proceeds; net gains of $38.5 million; and
 
  •  2000: 11 acres; 1.2 million square feet; $180.5 million of proceeds; net gains of $30.5 million.

  •  Development fees and other miscellaneous income of $5.5 million in 2002, $11.4 million in 2001 and $11.9 million in 2000.
 
  •  Deferred and current income tax expense of $2.6 million in 2002; deferred and current income tax benefits of $3.7 million in 2001 and deferred and current income tax expense of $2.6 million in 2000; and
 
  •  Foreign currency exchange gains of $4.5 million in 2002; foreign currency exchange losses of $4.6 million in 2001 and foreign currency exchange gains of $0.3 million in 2000.

(3)  ProLogis, through Kingspark S.A., has investments in the Kingspark Joint Ventures, that develop properties in the United Kingdom. ProLogis’ ownership in each of the four Kingspark Joint Ventures was 50% at December 31, 2002. One of the Kingspark Joint Ventures owns 11 operating properties that it had previously developed at a total investment of $81.8 million at December 31, 2002. Collectively, the Kingspark Joint Ventures also owned 150 acres of land with the capacity for developing approximately 1.5 million square feet of distribution properties at December 31, 2002. At December 31, 2002, the Kingspark Joint Ventures collectively controlled 511 acres of land, through contracts, options or letters of intent, with the capacity for developing approximately 9.5 million square feet of distribution properties.

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While ProLogis’ investment in Kingspark S.A. was presented under the equity method, the Kingspark Joint Ventures, that were accounted for under the equity method by Kingspark S.A., were not separately presented in ProLogis’ Consolidated Balance Sheet. See Note 4 to ProLogis’ Consolidated Financial Statements in Item 8.
 
(4)  Includes land holding costs of $2.8 million, $2.7 million and $2.1 million, in 2002, 2001 and 2000, respectively, and the write-off of previously capitalized pursuit costs related to potential CDFS business segment projects of $1.8 million, $1.3 million and $2.8 million in 2002, 2001 and 2000, respectively.

      Since 1999, ProLogis’ focus in the CDFS business reflects the economic conditions in the areas in which it owns properties. Accordingly, an increasing percentage of ProLogis’ CDFS business activity has been occurring outside of North America. At December 31, 2000, 65% of ProLogis’ CDFS business segment assets were located outside of North America as compared to 70% at December 31, 2002. In 2002, 38% of the total income in the CDFS business segment was generated in North America, 58% was generated in Europe and 4% was generated in Japan. In 2001 and 2000, 45% and 50%, respectively, of the total income of this operating segment was generated in North America, with Europe generating the remaining portion of total income. See Note 10 to ProLogis’ Consolidated Financial Statements in Item 8.

      ProLogis will continue to monitor leasing activity and general economic conditions in North America as it pertains to its CDFS business segment operations with the expectation that an economic recovery in North America could provide increased CDFS opportunities to ProLogis as companies continue optimizing their supply chains. ProLogis believes that the demand for state-of-the-art distribution properties in Europe could continue to provide opportunities for ProLogis in the CDFS business segment; however, ProLogis will continue to monitor the impact of geopolitical concerns that it has recently observed and that it believes could negatively impact its ability to complete leases in Europe in a timely manner during 2003. ProLogis believes its development activities will not be significantly affected by European land entitlement constraints that currently exist in Europe because it has over 2,100 acres of land owned or controlled in Europe at December 31, 2002. In 2001, ProLogis began its first development project in Japan, which was acquired by ProLogis Japan Properties Fund in September 2002. ProLogis began development of four additional properties in Japan during the third and fourth quarters of 2002. As in Europe, ProLogis believes that demand for state-of-the-art distribution properties in Japan will provide opportunities for ProLogis in the CDFS business segment and ProLogis has not observed similar trends in Japan with respect to geopolitical concerns and uncertainties. In Japan, the CDFS business opportunities available to ProLogis could be limited if ProLogis is unable to acquire adequate land parcels for development. See “— Liquidity and Capital Resources — Overview.”

 
Temperature-Controlled Distribution Operations

      The income in the temperature-controlled distribution operations segment consists entirely of ProLogis’ proportionate share of the earnings or losses recognized under the equity method from its investees in this segment, ProLogis Logistics Services Incorporated (“ProLogis Logistics”) in the United States and Frigoscandia S.A. in Europe. Since June 2001, these companies have sold significant portions of their operating assets. From June 2001 through October 2002, the operations in Germany, the Czech Republic, Sweden, Denmark, Finland, Norway, the Netherlands, Spain, Italy and the United States were sold. At December 31, 2002, this segment included 103.6 million cubic feet of operating facilities (62.4 million in France and 41.2 million in the United Kingdom). The assets in the United Kingdom were classified as held for sale by Frigoscandia S.a. at December 31, 2002.

      ProLogis has also invested in CSI/ Frigo LLC and recognizes 95% of the earnings or losses of CSI/ Frigo LLC under the equity method based on its ownership interest in this entity. The amounts recognized by ProLogis from CSI/ Frigo LLC include ProLogis’ proportionate share of this entity’s proportionate share of the earnings or losses from ProLogis Logistics and Frigoscandia S.A., as this entity has ownership interests in both ProLogis Logistics and Frigoscandia S.A. Amounts recognized by ProLogis under the equity method from ProLogis Logistics and Frigoscandia S.A. include (in addition to net operating income): (i) interest income and interest expense; (ii) depreciation and amortization expense; (iii) general and administrative

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expenses; (iv) income taxes; (v) foreign currency exchange gains and losses (with respect to Frigoscandia); and (vi) impairment charges.

      ProLogis’ proportionate share of the earnings or losses from this operating segment are set forth below for the periods indicated (in thousands of U.S. dollars) (See “Item 1. Business — Business Strategy and Operating Segments — Temperature-Controlled Distribution Operations — Operations” and Notes 4 and 10 to ProLogis’ Consolidated Financial Statements in Item 8).

                                                   
ProLogis Logistics(1) Frigoscandia S.A.(2)
Years Ended December 31, Years Ended December 31,


2002 2001 2000 2002 2001 2000






Income from operations after general and administrative expenses(3)
  $ 26,537     $ 22,548     $ 33,288     $ 28,030     $ 39,309     $ 28,766  
Interest expense(4)
    (2,095 )     (10,730 )     (6,210 )     (1,448 )     (10,610 )     (10,158 )
Depreciation and amortization expense(5)
    (2,357 )     (19,846 )     (18,012 )     (18,779 )     (34,084 )     (39,903 )
Current and deferred income tax benefit(6)
    13,005       2,872       2,884       1,341       539       1,099  
Foreign currency exchange gains (losses), net
                      4,236       (3,539 )     (866 )
Adjustment to carrying value(7)
    (37,240 )     (53,324 )           (5,706 )     (35,089 )      
Technology asset write-off(8)
          (662 )                 (5,105 )      
Gains (losses) on disposition of assets(9)
    6,305       646             (4,757 )     (4,393 )     764  
     
     
     
     
     
     
 
 
Total temperature-controlled segment
  $ 4,155     $ (58,496 )   $ 11,950     $ 2,917     $ (52,972 )   $ (20,298 )
     
     
     
     
     
     
 


(1)  Represents ProLogis’ proportionate share of the earnings or losses of ProLogis Logistics from its ownership of 100% of the non-voting preferred stock of ProLogis Logistics plus ProLogis’ proportionate share of the earnings or losses of CSI/ Frigo LLC, a limited liability company, that owned 100% of the voting common stock of ProLogis Logistics from January 5, 2001 to October 23, 2002. ProLogis owns 89% of the membership interests (all non-voting) in CSI/ Frigo LLC and K. Dane Brooksher, ProLogis’ chairman and chief executive officer, owns the remaining 11% of the membership interests (all voting). Mr. Brooksher is the managing member of CSI/ Frigo LLC. ProLogis has a $0.3 million note agreement with CSI/ Frigo LLC that allows ProLogis to participate in its earnings such that ProLogis recognizes 95% of the earnings of CSI/ Frigo LLC. The loan accrues interest at 8% per annum and is due in 2012. ProLogis’ ownership in CSI/ Frigo LLC does not result in ProLogis having control of this entity, as ProLogis’ membership interests are all non-voting. Therefore, CSI/ Frigo LLC is not consolidated in ProLogis’ financial statements. ProLogis did not have either a direct or indirect ownership interest (voting or non-voting) in the common stock of ProLogis Logistics prior to January 5, 2001. ProLogis’ proportionate share of the earnings or losses of ProLogis Logistics was 95% through January 5, 2001 and 99.96% from that date through October 23, 2002 when ProLogis acquired the voting common stock of ProLogis Logistics from CSI/ Frigo LLC and began consolidating this investment in its financial statements. CS Integrated LLC (“CSI”), the wholly owned operating company of ProLogis Logistics, sold a significant portion of its operating assets and all of its operations on October 23, 2002. Therefore, the amounts above include only those operations for 2002 prior to this sale. The remaining operating assets of CSI have been presented on a consolidated basis since ProLogis acquired the voting ownership interests in ProLogis Logistics on October 23, 2002.
 
(2)  Represents ProLogis’ proportionate share of the earnings or losses of Frigoscandia S.A. from its ownership of 100% of the non-voting preferred stock of Frigoscandia S.A. and ProLogis’ proportionate share of the earnings or losses of CSI/ Frigo LLC, a limited liability company that has owned 100% of the

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voting common stock of Frigoscandia S.A. since January 5, 2001. ProLogis owns 89% of the membership interests (all non-voting) in CSI/ Frigo LLC and K. Dane Brooksher, ProLogis’ chairman and chief executive officer, owns the remaining 11% of the membership interests (all voting). ProLogis has a note agreement with CSI/ Frigo LLC that allows ProLogis to participate in its earnings such that ProLogis will recognize 95% of the earnings of CSI/ Frigo LLC. Mr. Brooksher is the managing member of CSI/ Frigo LLC. ProLogis’ ownership in CSI/ Frigo LLC does not result in ProLogis having control if this entity, as all of its membership interests are non-voting. Therefore, CSI/ Frigo LLC is not consolidated in ProLogis’ financial statements. ProLogis did not have either a direct or indirect ownership interest (voting or non-voting) in the common stock of Frigoscandia S.A. prior to January 5, 2001. ProLogis’ proportionate share of the earnings or losses of Frigoscandia S.A. was 95% through January 5, 2001 and 99.75% since that date. Frigoscandia S.A.’s wholly owned operating companies began selling significant portions of their operating assets in June 2001.

  The CSI/ Frigo LLC loan was originally issued in January 2001 for $2.9 million when CSI/ Frigo LLC purchased the voting common stock of ProLogis Logistics and Frigoscandia S.A. In October 2002, CSI/ Frigo LLC used the $2.6 million of proceeds from the sale of the voting common stock of ProLogis Logistics to ProLogis to reduce the amount outstanding under the loan agreement.

(3)  Amounts for 2002 for CSI reflect only operations through October 23, 2002. The decrease in 2001 from 2000 is also due to lower occupancy levels in certain markets in 2002 as compared to 2001.
 
     For Frigoscandia S.A., the decrease in 2002 from 2001 is the result of the sales of 73.5 million cubic feet of operating facilities over the period from June 2001 to July 2002. The increase in 2001 from 2000 is the result of improved operating performance in 2001 over the poor operating results in 2000, primarily the result of improved occupancy levels in 2000.
 
(4)  For ProLogis Logistics, the decrease in interest expense results from the repayment of third party debt in December 2001 with funds provided by ProLogis through a capital contribution. In 2001, interest expense increased as ProLogis Logistics increased its third party debt from 2000 levels, using the funds provided to repay amounts due to ProLogis.
 
     For Frigoscandia S.A., substantially all of its third party debt was repaid in 2002 with the proceeds from the sales of ceratin of its operating assets.
 
(5)  For ProLogis Logistics, the decrease in depreciation and amortization expense in 2002 is primarily the result of CSI ceasing to the recognition of depreciation expense on substantially all of its assets in January 2002 when they were classified as held for sale.
 
     For Frigoscandia, S.A. the decrease in depreciation and amortization expense in 2002 and 2001 results from the sales of operating assets that began in June 2001.
 
(6)  For ProLogis Logistics the 2002 amount is primarily the result of the recognition of future tax benefits from the losses recognized upon the sale of a significant portion of CSI’s operating assets and all of CSI’s operations in October 2002.
 
(7)  Both ProLogis Logistics and Frigoscandia S.A. recognized impairment charges in 2001 related to the write-downs of certain of their assets to their estimated fair value. In 2002, ProLogis Logistics and CSI recognized additional impairment charges prior to the completion of the sale of a significant portion of CSI’s operating assets in October.
 
     In 2002, Frigoscandia S.A. recognized additional impairment charges based on a review of the carrying value of its assets in France.
 
(8)  Both entities wrote off various investments in technology related assets in 2001 based on their estimates of the fair values of these items.
 
(9)  These amounts represent the final gains or losses at the time the sale is consummated. A gain or loss will result upon sale even though there have been previous write-downs to estimated fair value because the write-downs are based on management’s estimate of the amount that will be realized upon sale. Final negotiations of the sales transactions will differ from management’s earlier estimates. In 2002, the net gain for ProLogis Logistics results primarily from the recognition of a gain of approximately $10.0 million

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from the sale of certain management contracts to the buyers of the operating assets. This gain could not be included in the previous fair value estimates for computing impairment adjustments under GAAP but could be recognized after the transaction was closed.
 
Other Income and Expense Items
 
           General and Administrative Expense

      General and administrative expense was $53.9 million in 2002, $50.3 million in 2001 and $45.0 million in 2000. Had ProLogis presented its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all three years, ProLogis would have recognized general and administrative expense of $55.5 million, $52.0 million and $50.0 million for 2002, 2001 and 2000, respectively. General and administrative expense is primarily a function of the various business initiatives being undertaken in a given period and can vary from year to year based on ProLogis’ business activities. See Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.

 
           Depreciation and Amortization

      Depreciation and amortization expense was $153.1 million in 2002, $143.5 million in 2001 and $151.5 million in 2000. The fluctuations in this expense between years is primarily attributable to the number of distribution properties directly owned by ProLogis in each year. See “— Property Operations”. In 2002, ProLogis adopted SFAS No. 142 “Goodwill and Intangible Assets” and ceased recognizing amortization related to goodwill. See further discussion of the effect of this change in accounting principle at “— Results of Operations”.

 
           Interest Expense

      Interest expense is a function of the level of borrowings outstanding, interest rates charged on borrowings and the amount of interest capitalization that is allowed based on the volume of ProLogis’ development activities. Interest expense was $153.0 million in 2002, $163.6 million in 2001 and $172.2 million in 2000. Had ProLogis presented its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all three years, ProLogis would have recognized interest expense of $146.0 million, $151.5 million and $161.3 million for 2002, 2001 and 2000, respectively. The decrease in interest expense in each year is due to lower average interest rates, lower average borrowings outstanding and higher levels of capitalized interest levels. For a discussion of the presentation of ProLogis’ investment in Kingspark S.A. and Kingspark LLC, see Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.

      Gross interest expense incurred on borrowings outstanding during the period is offset by the amount of interest that is capitalized based on ProLogis’ qualifying development expenditures. Capitalized interest was $30.5 million in 2002, $24.3 million in 2001 and $18.5 million in 2000. Had ProLogis presented its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all three years, ProLogis’ capitalized interest would have been $38.5 million, $36.4 million and $29.4 million for 2002, 2001 and 2000, respectively. Capitalized interest levels are reflective of ProLogis’ cost of funds and the volume of development activities in each year.

 
           Other Expenses

      Other expenses consist of land holding costs and the write-off of previously capitalized pursuit costs. These amounts will vary based on the balances of land held for future development in a given period and the timing of when a pursuit is abandoned.

 
           Gains on Disposition of Real Estate, Net

      The net gains recognized from the contributions and sales of operating properties that were acquired or developed for long-term investment in the property operations segment are presented after “Earnings from operations” in ProLogis’ Consolidated Statement of Earnings. From time to time, ProLogis will contribute or

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sell properties that have been held for long-term investment in the property operations segment because such properties are determined to have become non-strategic properties. Non-strategic properties are assets located in markets or submarkets that are no longer considered target markets as well as assets that were acquired as part of previous portfolio acquisitions that are not consistent with ProLogis’ core portfolio based on the asset’s size or configuration. Also, ProLogis may contribute long-term investment properties from its property operations segment to complement the portfolio of developed distribution properties that are contributed to the property funds.

      Contributions and sales of long-term investment properties from the property operations segment were as follows:

  •  2002: 2.0 million square feet; $63.6 million of proceeds; net gains of $6.6 million;
 
  •  2001: 6.7 million square feet; $236.1 million of proceeds; net gain of $9.5 million; and a net gain of $0.5 million recognized upon the contribution of ProLogis’ 49.9% ownership interest in ProLogis European Properties S.a.r.l. to ProLogis European Properties Fund in January 2001; and
 
  •  2000: 3.5 million square feet; $133.7 million of proceeds; net gains of $1.3 million.
 
           Income (Loss) from Unconsolidated Investees

      ProLogis recognized a net loss of $1.5 million in 2002, a net loss of $33.5 million in 2001 and net income of $3.3 million in 2000 under the equity method from its investments in unconsolidated investees that are not directly associated with one of its three operating segments. For a discussion of these four unconsolidated investees, see Note 4 to ProLogis’ Consolidated Financial Statements in Item 8.

      For 2002, the net loss recognized consisted of: (i) income of $4,000 from ProLogis’ investment in Insight, Inc.; (ii) income of $0.6 million from ProLogis’ investment in ProLogis Equipment Services LLC; and (iii) a loss of $2.1 million from ProLogis’ investment in Go ProLogis Incorporated (“GoProLogis”). During the third quarter of 2002, ProLogis Equipment Services sold a significant portion of its assets. ProLogis expects that this entity will be fully liquidated during 2003. The loss recognized from GoProLogis represents ProLogis’ proportionate share of GoProLogis’ impairment adjustment that reduced GoProLogis’ remaining investment in Vizional Technologies to zero.

      In 2001, the net loss recognized consisted of: (i) income of $9,000 from ProLogis’ investment in Insight, Inc.; (ii) a loss of $0.2 million from ProLogis’ investment in ProLogis Equipment Services; (iii) a loss of $26.5 million from ProLogis’ investment in GoProLogis; and (iv) a loss of $6.8 million from ProLogis’ investment in ProLogis PhatPipe. The loss recognized by GoProLogis represents ProLogis’ proportionate share of GoProLogis’ impairment adjustments that reduced its investment in Vizional Technologies to its estimated fair value at the time offset by license fee income for the non-exclusive use of the ProLogis Operating System® earned from Vizional Technologies. The loss recognized by ProLogis Broadband (1) Incorporated (“ProLogis PhatPipe”) consisted of a $7.5 million loss in the second quarter, representing ProLogis’ proportionate share of ProLogis PhatPipe’s impairment charge resulting from the write-down to zero of its preferred stock investment in PhatPipe, Inc. (“PhatPipe”) offset by $0.7 million of license fee income for the non-exclusive use of the ProLogis Operating System® earned from PhatPipe (all in the first quarter). ProLogis PhatPipe and GoProLogis ceased recognizing income under their license fee agreements in the first and second quarters of 2001, respectively.

      In 2000, the net income consisted of: (i) income of $27,000 from ProLogis’ investment in Insight, Inc.; (ii) a loss of $0.1 million from ProLogis’ investment in ProLogis Equipment Services; (iii) income of $2.7 million from ProLogis’ investment in GoProLogis and (iv) income of $0.7 million from ProLogis’ investment in ProLogis PhatPipe. The income recognized from GoProLogis and ProLogis PhatPipe consists entirely of license fee income for the non-exclusive use of the ProLogis Operating System® earned from Vizional Technologies and PhatPipe.

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           Foreign Currency Exchange Losses, Net

      ProLogis recognized net foreign currency exchange losses of $2.0 million, $3.7 million and $17.9 million for 2002, 2001 and 2000, respectively. Had ProLogis reported its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all three years, ProLogis would have recognized a net foreign currency exchange gain of $2.4 million for 2002, a net foreign currency exchange loss of $8.3 million for 2001 and a net currency exchange loss of $17.5 million for 2000. For a discussion of the presentation of ProLogis’ investment in Kingspark S.A. and Kingspark LLC, see Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.

      ProLogis and certain of its foreign consolidated subsidiaries have intercompany or third party debt that is not denominated in that entity’s functional currency. When the debt is remeasured against the functional currency of the entity, a gain or loss can result. ProLogis attempts to mitigate its foreign currency exchange exposure by borrowing in the functional currency of the borrowing entity. Additionally, ProLogis utilizes derivative financial instruments to manage certain of its foreign currency exchange risks, primarily put option contracts with notional amounts corresponding to ProLogis’ projected net income from its European operations, and recognizes the expense associated with these contracts in results of operations, primarily the premium price associated with the contract upon settlement and interim period mark-to-market adjustments. See “— Liquidity and Capital Resources — Derivative Financial Instruments” and Note 15 to ProLogis’ Consolidated Financial Statements in Item 8.

      Generally, the amount of foreign currency gains and losses that are recognized in results from operations are a function of movements in exchange rates, the levels of intercompany and third party debt outstanding and the currency in which such debt is denominated as compared to the functional currency of the entities that are party to the debt agreements. The net foreign currency exchange gains and losses recognized in ProLogis’ results of operations are presented in the following table for the periods indicated with explanations of items that are not the result of the factors noted above (in thousands of U.S. dollars):

                           
Years Ended December 31,

2002 2001 2000



Remeasurement of third party and certain intercompany debt, net(1)(2)
  $ (10,267 )   $ 3,657     $ (20,104 )
Settlement of third party and certain intercompany debt, net(1)(3)
    12,421       (6,166 )     1,342  
Costs of put option contracts expiring in each year
    (3,171 )     (2,255 )     (698 )
Mark-to-market gains (losses) on put option contracts outstanding at the end of each year
    (1,411 )     1,122       (854 )
Gains realized at the expiration of put option contracts, net
    159       106       2,179  
Transaction gains (losses), net
    238       (185 )     208  
     
     
     
 
 
Total
  $ (2,031 )   $ (3,721 )   $ (17,927 )
     
     
     
 


(1)  When debt is settled, previously recognized remeasurement gains or losses that were recognized as unrealized are reversed and the cumulative foreign currency exchange gain or loss realized with respect to the debt is reflected as a realized gain or loss.
 
(2)  In the third quarter of 2002, Kingspark S.A., a pound sterling functional entity, converted $117.3 million of intercompany debt into 75.3 million pound sterling of intercompany debt. At the time the debt was converted, this entity had recognized a cumulative remeasurement gain of $9.0 million. However, this remeasurement gain is not entirely reflected in the consolidated totals for 2002 in the table above because Kingspark S.A. was accounted for under the equity method through June 30, 2002. Consequently, the reversal of the previously recognized remeasurement gain that ProLogis recorded in the third quarter is included in the net loss for this category of foreign currency exchange gains and losses. Had ProLogis reported its investment in Kingspark S.A. on a consolidated basis for all of 2002, this line item would have been a loss of $5.9 million.

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(3)  The subsequent recognition of the total gain resulting from the conversion of U.S. dollar denominated debt to pound sterling denominated debt by the subsidiary of Kingspark S.A. is the primary item included in this category in 2002.
 
           Income Taxes

      ProLogis is a REIT for federal income tax purposes and is not generally required to pay federal income taxes if minimum distribution and income, asset and shareholder tests are met. Not all of ProLogis’ consolidated subsidiaries in the United States are qualified REIT subsidiaries for tax purposes. Also, the foreign countries in which ProLogis operates do not recognize REITs under their respective tax laws and ProLogis is taxed in certain states in which it operates. Accordingly, ProLogis has recognized foreign country income taxes and state income taxes in accordance with GAAP, as applicable.

      Current income tax expense recognized was $10.5 million, $2.5 million and $0.9 million for 2002, 2001 and 2000, respectively. Had ProLogis reported its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all three years, current income tax expense for 2002, 2001 and 2000 would have been $13.1 million, $6.6 million and $1.8 million, respectively. ProLogis recognized deferred income tax expense of $17.7 million, $2.3 million and $4.2 million for 2002, 2001 and 2000, respectively. Had ProLogis reported its investments in Kingspark S.A. and Kingspark LLC on a consolidated basis for all three years, deferred income tax expense for 2002 would not have changed and ProLogis would have recognized a deferred income benefit of $5.6 million in 2001 and deferred income tax expense of $6.0 million in 2000. For a discussion of the presentation of ProLogis’ investment in Kingspark S.A. and Kingspark LLC, see Notes 2 and 4 to ProLogis’ Consolidated Financial Statements in Item 8.

      Current income tax expense is generally a function of the level of income recognized by ProLogis’ taxable subsidiaries operating in the CDFS business segment and taxes incurred in foreign jurisdictions. The deferred income tax component of total income taxes is a function of the period’s temporary differences (items that are treated differently for tax purposes than for book purposes) and the utilization of tax net operating losses generated in prior years that had been recognized as deferred tax assets. The deferred tax expense in 2002 is primarily the result of the reversal of previously recognized deferred tax benefits due to the utilization of net operating losses from previous years.

Environmental Matters

      ProLogis has not experienced any environmental condition associated with its properties which materially adversely affected its results of operations or financial position, nor is ProLogis aware of any environmental liability that it believes would have a material adverse effect on its business, financial condition or results of operations. See “— Risk Factors”.

Liquidity and Capital Resources

 
Overview

      ProLogis considers its liquidity and ability to generate cash from its operating activities, the contribution or sale of properties and other financing sources to be adequate and expects it to continue to be adequate to meet its anticipated future development, acquisition, operating and debt service needs, as well as its shareholder distribution requirements.

      ProLogis’ future investing activities are expected to consist primarily of: (i) the acquisition of land for future development; (ii) the development and acquisition of properties, and in certain situations, the rehabilitation and/or repositioning of properties acquired for future contribution to property funds; and (iii) the acquisition of operating properties in key distribution markets for long-term investment in the property operations segment. Additionally, ProLogis has a Common Share repurchase program under which it

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may repurchase additional Common Shares. At December 31, 2002, ProLogis may repurchase an additional $93.8 million of Common Shares under this program. ProLogis expects to fund its future cash needs with:

  •  cash generated by property operations;
 
  •  the proceeds from the disposition of the temperature-controlled distribution operating assets located in the United Kingdom that were classified as held for sale by Frigoscandia S.A. in December 2002;
 
  •  the proceeds from the contribution of properties to property funds;
 
  •  the proceeds from the sales of properties to third parties;
 
  •  the issuance of senior unsecured notes, including the senior unsecured notes issued in February 2003 that generated net proceeds to ProLogis of $297.5 million;
 
  •  utilization of ProLogis’ revolving lines of credit; and
 
  •  the proceeds from the sale of Common Shares, including sales of Common Shares under ProLogis’ various Common Share plans.

      For its short-term borrowing needs, ProLogis’ lines of credit are expected to provide adequate liquidity and financial flexibility to allow ProLogis to efficiently respond to market opportunities. Regular repayments of lines of credit borrowings, primarily with the proceeds from property contributions and sales and the proceeds from public debt offerings that are expected to occur periodically during periods of favorable market conditions, allow ProLogis to maintain adequate liquidity. At March 24, 2003, ProLogis had $1.15 billion of total commitments under its revolving lines of credit. ProLogis’ total outstanding borrowings were $520.1 million at March 24, 2003 resulting in additional short-term borrowing capacity available to ProLogis of approximately $606.9 million (after reducing the total commitments available by $21.2 million of letters of credit outstanding with the lending banks). See “— Borrowing Capacity and Debt Maturities.”

      As of March 24, 2003, ProLogis had $308.0 million of shelf-registered securities that 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 affect an offering on satisfactory terms. ProLogis continues to evaluate the public debt markets with the objective of reducing its short-term borrowings in favor of longer-term fixed-rate debt, when it is deemed appropriate. ProLogis has the ability to increase the amount of shelf-registered securities and expects that it will do so in 2003.

      ProLogis is committed to offer to contribute all of its stabilized developed properties in certain European markets to ProLogis European Properties Fund through September 2019, subject to the property meeting certain criteria, including leasing criteria. In September 2002, ProLogis European Properties Fund drew down the remaining third party equity capital commitments on the subscription agreements that expired on September 15, 2002. ProLogis European Properties Fund is seeking additional equity commitments from potential investors, including certain of the existing investors in the property fund and new investors. ProLogis European Properties Fund entered into a 250.0 million euro revolving, multi-currency credit agreement with a lender in December 2002 and has executed a non-binding mandate letter with another lender for an additional 250.0 million euro borrowing arrangement that is expected to be completed in April 2003. With its current borrowing capacity, ProLogis European Properties Fund expects to be able to acquire the properties that ProLogis expects to have available for contribution in March 2003. If the second agreement is completed, ProLogis European Properties Fund will have a committed borrowing capacity of 500.0 million euro for a two-year period. While there can be no assurance that the new borrowing arrangement will be completed, ProLogis European Properties Fund expects that it will have this new borrowing facility or alternative borrowing arrangements in place prior to June 2003 such that it can acquire ProLogis’ stabilized European development properties that are expected to be available for contribution by ProLogis in the second quarter of 2003 should additional equity commitments not be obtained. ProLogis European Properties Fund also believes that its efforts to obtain additional equity commitments will be successful and that such commitments would be available in the second quarter of 2003. However, there can be no assurance that ProLogis European Properties Fund will be able to obtain additional equity commitments such that it will be able to acquire the completed development properties that ProLogis expects to be available for contribution after March 2003.

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      ProLogis is committed to offer to contribute all of its stabilized developed properties in North America (excluding properties in the Los Angeles/ Orange County market) to ProLogis North American Properties Fund V through December 2003. The acquisition of these properties by ProLogis North American Properties Fund V is subject to the property meeting certain criteria, including leasing criteria, and the ability of ProLogis North American Properties Fund V to raise equity capital and to obtain debt financing. Under certain circumstances this right of first offer can be extended through December 2004. The majority owner in ProLogis North American Properties Fund V is a listed property trust in Australia. Currently, ProLogis North American Properties Fund V has sufficient capital available to acquire all of the stabilized properties that ProLogis expects to have available for contribution to ProLogis North American Properties Fund V through June 2003 and expects that it will have sufficient capital available such that it can acquire all of the properties that ProLogis expects to have available for contribution through December 2003. However, there can be no assurance that this property fund will be successful in its capital raising efforts.

      ProLogis is committed to offer to contribute all of its stabilized developed properties to ProLogis Japan Properties Fund through June 2006. The acquisition of these properties by ProLogis Japan Properties Fund is subject to the property meeting certain criteria, including leasing criteria, and the ability of ProLogis Japan Properties Fund to access the $286.8 million of additional third party equity capital that has been committed by a real estate investment subsidiary of the Government of Singapore Investment Corporation (“GIC”) through June 2006. The capital can be used for the acquisition of properties from third parties in Japan. The development of properties in Japan by ProLogis is subject to ProLogis’ ability to acquire adequate land parcels for development and obtain leasing commitments. ProLogis had four projects under development at a total expected cost at completion of $227.5 million in the Tokyo market at December 31, 2002.

      There can be no assurance that the property funds will have sufficient capital available (either debt or equity capital) such that they will be able to acquire the properties that ProLogis expects to have available for contribution in the future. Should the property funds not have sufficient capital to acquire these properties, ProLogis is allowed to pursue other third party disposition opportunities. However, there can be no assurance that ProLogis can readily dispose of its development pipeline to third parties and ProLogis could experience delays in making sales to third parties. Such delays could result in the recognition of the expected development profits in an accounting period that is later than expected. See the discussion of risks factors involved with disposition of properties and the raising of capital at “— Risk Factors.”

          Cash Generated by Operating Activities

      Net cash provided by operating activities was $377.2 million in 2002, $343.3 million in 2001 and $321.1 million in 2000. These increases are primarily the result of lower interest expense in 2001 as well as other operational items discussed in “— Results of Operations.” Cash provided by operating activities exceeded the cash distributions paid on Common Shares in each year, 2000 to 2002.

          Cash Investing and Cash Financing Activities

      In 2002, ProLogis’ investing activities used net cash of $136.1 million. In 2001, ProLogis’ investing activities provided net cash of $104.0 million. In 2000, ProLogis’ investing activities used net cash of $376.9 million. ProLogis’ investing activities consisted primarily of investments in real estate (both acquisition and development expenditures) as well as recurring capital expenditures, tenant improvements and lease commissions on previously leased space that aggregated $1.21 billion in 2002, $836.3 million in 2001 and $670.9 million in 2000. ProLogis’ unconsolidated investees generated net cash to ProLogis of $79.8 million in 2002 and $72.7 million in 2001. However, ProLogis’ unconsolidated investees required a net cash investment of $188.8 million in 2000. Sales of operating assets in the temperature-controlled distributions operating segment was the primary source of the net cash provided by the unconsolidated investees. Also, the property funds make distributions to ProLogis. In 2000, ProLogis made additional investments in Kingspark S.A., ProLogis Logistics, GoProLogis and ProLogis Phatpipe that offset cash provided from its unconsolidated investees. Net cash generated from contributions and sales of properties and land parcels were $968.9 million, $856.0 million and $489.0 million in 2002, 2001 and 2000, respectively.

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      In 2002 and 2001, ProLogis’ financing activities utilized net cash of $158.3 million and $477.1 million, respectively. Financing activities provided net cash of $44.4 million in 2000. Excluding cash distributions on Common Shares and to minority interest holders and preferred share dividends, ProLogis’ financing activities provided net cash of $134.0 million in 2002 and $327.6 million in 2000 with net borrowings on the lines of credit and proceeds from the sales of Common Shares as the primary sources of cash in these years. Excluding cash distributions on Common Shares and to minority interest holders and preferred share dividends, ProLogis’ financing activities used net cash of $195.0 million in 2001 with net repayments on ProLogis’ lines of credit and the redemption of $139.6 million of preferred equity being the primary uses of cash.

      Aggregate distributions paid to holders of Common Shares were $252.3 million, $237.7 million and $219.3 million for 2002, 2001 and 2000, respectively. Dividends paid on preferred shares were $32.7 million in 2002, $37.3 million in 2001 and $56.8 million in 2000. Distributions to minority interest holders were $7.2 million in 2002 and $7.1 million in both 2001 and 2000.

 
Borrowing Capacity and Debt Maturities

      ProLogis has $1.15 billion of short-term borrowing commitments through six revolving lines of credit. These borrowings are available in four currencies and are summarized below for the periods indicated (dollar amounts in millions of U.S. dollars, as applicable):

                                                 
Commitments at Outstanding Balances at Weighted


Average Interest
Facility 12/31/02 03/24/03 12/31/02 03/24/03 Rate(1) Expiration







North America
  $ 400.0     $ 400.0     $ 110.0     $ 50.0       2.08 %     11/08/05 (2)
North America(3)
    100.0       100.0       3.4       3.7       3.68 %     11/07/03 (2)
North America(3)(4)
    60.0       60.0       3.8       8.7       1.90 %     06/06/03  
Europe(5)
    340.8       345.9       320.8       331.4       3.88 %     12/17/03  
United Kingdom(6)(7)
    40.3       39.4             17.8             07/31/03  
Japan(8)
    206.6       202.9       107.9       108.5       1.07 %     09/13/04 (2)
     
     
     
     
     
         
    $ 1,147.7     $ 1,148.2     $ 545.9     $ 520.1       2.95 %        
     
     
     
     
     
         


(1)  Represents the weighted average interest rate on borrowings outstanding at December 31, 2002.
 
(2)  The credit agreement may be extended for one year from this date at ProLogis’ option.
 
(3)  Borrowings can be denominated in U.S. dollar, euro, pound sterling or yen.
 
(4)  Total commitments available to ProLogis at December 31, 2002 and March 24, 2003, have been reduced by letters of credit outstanding of $9.2 million and $11.2 million, respectively.
 
(5)  Borrowings can be denominated in euro or pound sterling with a total commitment of 325.0 million euro. At December 31, 2002 and March 24, 2003, amounts outstanding represent the U.S. dollar equivalent of borrowings of 311.2 million euro and 311.4 million euro, respectively.
 
(6)  Borrowings are denominated in pound sterling with a total commitment is 25.0 million pound sterling. At March 24, 2003, the amount outstanding represents the U.S. dollar equivalent of borrowings of 11.3 million pound sterling.
 
(7)  Total commitments available to ProLogis at December 31, 2002 and March 24, 2003, have been reduced by letters of credit outstanding of $9.9 million (the currency equivalent of 6.1 million pound sterling) and $10.0 million (the currency equivalent of 6.4 million pound sterling) of letters of credit outstanding, respectively.
 
(8)  Borrowings are denominated in yen with a total commitment is 24.5 billion yen. At December 31, 2002 and March 24, 2003, amounts outstanding represent the U.S. dollar equivalent of borrowings of 12.8 billion yen and 13.1 billion yen, respectively.

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      ProLogis had senior unsecured notes and secured debt (mortgage notes, assessment bonds and securitized debt) outstanding at December 31, 2002 with annual principal payments during each of the years in the five-year period ending December 31, 2007 and thereafter as follows (in thousands of U.S. dollars):