FORM 10-Q

Commission File Number 01-12846

PROLOGIS

(303) 375-9292
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year,
if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing for the past 90 days.

Yes [X] No [  ]

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

Yes [X] No [  ]

     The number of shares outstanding of the Registrant’s common shares as of August 5, 2004 was 181,810,517.

PROLOGIS

INDEX

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PROLOGIS

CONSOLIDATED CONDENSED BALANCE SHEETS

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

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PROLOGIS

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

(Continued)

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

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PROLOGIS

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

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

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PROLOGIS

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

     See Note 12 for information on non-cash investing and financing activities and other information.

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

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PROLOGIS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 2004 and 2003
(Unaudited)

1. General:

     Business

     ProLogis (collectively with its consolidated subsidiaries and partnerships “ProLogis”) is a publicly held real estate investment trust (“REIT”) that owns (directly or through unconsolidated investees), operates and develops industrial distribution properties in North America (the United States and Mexico), Europe (11 countries) and Asia (Japan). While ProLogis owned no real estate assets in China at June 30, 2004, it has initiated operations in China and, in April 2004 and July 2004, ProLogis formed two joint ventures to acquire and develop distribution properties in the Shanghai market. ProLogis has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”).

     ProLogis’ business consists of two reportable business segments: property operations and the corporate distribution facilities services business (“CDFS business”). The property operations segment represents the long-term ownership, management and leasing of distribution properties. The CDFS business segment primarily encompasses the development of distribution properties that are either contributed to an unconsolidated property fund in which ProLogis has an ownership interest and acts as manager, or sold to third parties. Additionally, ProLogis will acquire distribution properties in the CDFS business segment that are generally rehabilitated and/or repositioned prior to being contributed to a property fund. See Note 11.

     Principles of Financial Presentation

     ProLogis’ Consolidated Condensed Financial Statements are prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The accounts of ProLogis, its wholly owned subsidiaries and its majority owned and controlled subsidiaries and partnerships are consolidated in the accompanying financial statements and are presented in ProLogis’ functional currency, the U.S. dollar. ProLogis consolidates all entities in which it owns a majority voting interest and those variable interest entities, as defined, in which it is the primary beneficiary. All material intercompany transactions, including transactions with unconsolidated investees, have been eliminated.

     The Consolidated Condensed Financial Statements of ProLogis as of June 30, 2004 and for the three and six months ended June 30, 2004 and 2003 are unaudited and, pursuant to the rules of the United States Securities and Exchange Commission (the “SEC”), certain information and footnote disclosures normally included in financial statements have been omitted. Management of ProLogis believes that the disclosures presented are adequate. However, these interim Consolidated Condensed Financial Statements should be read in conjunction with ProLogis’ December 31, 2003 audited Consolidated Financial Statements contained in ProLogis’ 2003 Annual Report on Form 10-K.

     Interpretation No. 46, “Consolidation of Variable Interest Entities”, was issued in January 2003 and revised in December 2003. ProLogis adopted the revised Interpretation No. 46 (“FIN 46R”) as of January 1, 2004. FIN 46R clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, and requires that variable interest entities in which ProLogis is the primary beneficiary be presented on a consolidated basis in its financial statements. As a result of adopting FIN 46R on January 1, 2004, ProLogis began consolidating its investments in TCL Holding S.A. (“TCL Holding”), formerly Frigoscandia Holding S.A., and CSI/Frigo LLC, a company that holds the voting ownership interest in TCL Holding. Through December 31, 2003, ProLogis presented its investments in TCL Holding and CSI/Frigo LLC under the equity method. ProLogis’ combined effective ownership in these entities was 99.75% at both June 30, 2004 and December 31, 2003. ProLogis’ other unconsolidated investees are not variable interest entities as defined in FIN 46R. Therefore, ProLogis will continue to present its investments in these entities under the equity method. See Note 4.

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

     Certain amounts included in ProLogis’ Consolidated Condensed Financial Statements for the prior period have been reclassified to conform to the 2004 financial statement presentation.

2. Keystone Transaction:

     On May 3, 2004, ProLogis and affiliates of four investment funds managed by Eaton Vance Management (the “Fund Partners”) established five property funds (the “Acquiring Property Funds” and also referred to by ProLogis as ProLogis North American Properties Funds VI, VII, VIII, IX and X—see Note 4). Also on that date, ProLogis and the Acquiring Property Funds entered into an agreement to acquire the outstanding equity and operating units of Keystone Property Trust (“Keystone”), a publicly traded REIT (the “Keystone Transaction”). Keystone owned and leased industrial distribution properties located in New Jersey, Pennsylvania, Indiana, Florida, South Carolina and Ohio. The Keystone Acquisition was approved by Keystone’s shareholders on July 30, 2004 and was closed on August 4, 2004.

     ProLogis has a 20% ownership interest in the Acquiring Property Funds with the remainder owned by the Fund Partners. Consideration for the common shares of Keystone was paid in cash at $23.80 per share. The Acquiring Property Funds retired approximately $567 million of Keystone’s outstanding debt at closing. On September 3, 2004, Keystone will be liquidated and, in conjunction with such liquidation, all then outstanding preferred shares of Keystone will be cancelled and holders will receive a cash liquidation distribution in the aggregate amount of approximately $125 million, including accrued dividends.

     The total consideration for the Keystone Acquisition was approximately $1.70 billion, including cash, assumed liabilities, preferred share liquidation payments and estimated transaction costs. ProLogis’ share of the total consideration was approximately $580 million, including approximately $300 million for the direct acquisition of certain Keystone assets. ProLogis issued approximately $30 million of limited partnership units that are redeemable for cash or, at ProLogis’ election, ProLogis’ common shares of beneficial interest, par value $0.01 per share (“Common Shares”), as part of its share of the total consideration. ProLogis and the Fund Partners funded approximately $915 million at closing (ProLogis’ share was approximately $183 million) on a short-term basis that ProLogis and the Fund Partners expect will be returned to them after long-term financing arrangements are completed by the Acquiring Property Funds. The Acquiring Property Funds expect to complete these financing arrangements in the third and fourth quarters of 2004.

     Collectively, the Acquiring Property Funds acquired approximately $1.40 billion of assets from Keystone, including 22.5 million square feet of operating properties. ProLogis’ direct acquisition included operating properties aggregating 2.3 million square feet, Keystone’s 20% ownership interests in two unconsolidated entities that on a combined basis own 7.7 million square feet of operating properties, Keystone’s 50% ownership interest in an unconsolidated entity that is developing a 0.8 million square foot property and land positions aggregating 156 acres.

     In anticipation of the closing of the Keystone Transaction, the Acquiring Property Funds entered into five rate-lock agreements with five U.S. life insurance companies to fix the interest rate for eight years on a total of $915 million of secured debt that may be issued by these companies (“Anticipated Secured Debt”). The rate-lock agreements are subject to the companies issuing firm commitments, reaching an agreement on the loan documents and the completion of customary lender due diligence by the companies. The average interest rate for the Anticipated Secured Debt is 5.48% per annum.

     In May 2004, the Acquiring Property Funds entered into interest rate swap agreements to hedge a portion of the future interest payments associated with the Anticipated Secured Debt. These interest rate swap agreements qualified for hedge accounting treatment. Certain of the interest rate swap agreements were subject to an indemnification agreement between the Acquiring Property Funds and ProLogis. The indemnification agreements obligate ProLogis to make any settlement payments that may become due and, alternatively, entitle ProLogis to receive any settlement proceeds that may be paid. The indemnification agreement relates to interest swap agreements with an aggregate

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notional amount of $185.2 million, originally estimated to be the amount of the Anticipated Secured Debt attributable to ProLogis’ 20% ownership interest. Upon settlement of the swap agreements in June 2004 and July 2004, ProLogis’ net exposure under the indemnification agreements was $1.2 million.

     On June 30, 2004, ProLogis contributed 21 operating properties aggregating 3.0 million square feet to the Acquiring Property Funds. Total proceeds from these contributions were $127.4 million. These properties will also secure a portion of the Anticipated Secured Debt. See Note 4.

3. Real Estate:

   Real Estate Assets

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

     ProLogis’ directly owned real estate assets are located in North America (the United States and Mexico), 11 countries in Europe and in Japan. No individual market in any country, as defined by ProLogis and presented in Item 2 of its 2003 Annual Report on Form 10-K, represents more than 10% of ProLogis’ total real estate assets, before depreciation.

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   Operating Lease Agreements

     ProLogis leases its operating properties to customers under agreements that are generally classified as operating leases. At June 30, 2004, minimum lease payments on leases with lease periods greater than one year for space in ProLogis’ directly owned properties for the remainder of 2004 and the other years in the five-year period ending December 31, 2008 and thereafter are as follows (in thousands of U.S. dollars):

     For ProLogis’ directly owned properties, the largest customer and the 25 largest customers accounted for 1.35% and 15.84%, respectively, of ProLogis’ annualized collected base rents at June 30, 2004.

4. Unconsolidated Investees:

   Summary of Investments and Income

     Since 1997, ProLogis has invested in various entities in which its ownership interest is less than 100% and in which it does not have control as defined under GAAP. Accordingly, these investments are presented under the equity method in ProLogis’ Consolidated Condensed Financial Statements. Generally, these entities are not variable interest entities as defined in FIN 46R (see Note 1). Certain of these investments were originally structured such that ProLogis’ ownership interest would allow ProLogis to continue to comply with the requirements of the Code to qualify as a REIT. However, with respect to ProLogis’ investments in property funds, having an ownership interest of 50% or less is part of ProLogis’ business strategy. This business strategy allows ProLogis to realize, for financial reporting purposes, a portion of the profits from its development activities, raise private equity capital or issue private debt instruments, generate fee income, provide liquidity to fund its future development activities, while still allowing ProLogis to maintain a long-term ownership interest in its developed properties.

     ProLogis’ investments in entities that are accounted for under the equity method, summarized by type of investee, are as follows as of the dates indicated (in thousands of U.S. dollars):

     ProLogis recognizes income or losses from its investments in unconsolidated investees consisting of its proportionate shares of the net earnings or losses of these investees recognized under the equity method and interest income on advances made to these investees, if any. Further, ProLogis earns fees for providing services to the property funds. The amounts recognized by ProLogis from its investments in unconsolidated investees are summarized as follows for the periods indicated (in thousands of U.S. dollars):

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   Property Funds

     Since 1999, ProLogis has formed 13 property funds. ProLogis’ ownership interests in these property funds ranged from 11.4% to 50% as of June 30, 2004. The property funds own operating properties that have generally been contributed to them by ProLogis. Certain of the property funds have also acquired properties from third parties. In most cases, ProLogis receives ownership interests in the property funds as part of the proceeds received from its contributions of properties. ProLogis recognizes its proportionate share of the net earnings or losses of each property fund under the equity method. ProLogis earns fees for acting as the manager of each of the property funds and may earn additional fees by providing other services to certain of the property funds including, but not limited to, acquisition, development and leasing activities performed on their behalf.

     ProLogis’ investments in the 13 property funds, presented under the equity method, were as follows as of the dates indicated (in thousands of U.S. dollars):

     ProLogis’ investments in the property funds at June 30, 2004 consisted of the following components (in millions of U.S. dollars):

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

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15

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     ProLogis, from time to time, enters into Special Limited Contribution Agreements (“SLCA”) in connection with certain of its contributions of properties to certain of its property funds. Under the SLCAs, ProLogis is obligated to make an additional capital contribution to the respective property fund under certain circumstances, the occurrence of which ProLogis believes to be remote. Specifically, ProLogis would be required to make an additional capital contribution to the property fund if the property fund’s third-party lender, whose loans to the property fund are generally secured by the property fund’s assets and are non-recourse, does not receive a specified minimum level of debt repayment. However, the proceeds received by the third-party lender from the exhaustion of all of the assets of the property fund combined with the debt repayments received directly from the property fund will reduce ProLogis’ obligations under the SLCA on a dollar-for-dollar basis. ProLogis’ potential obligations under the respective SLCAs, as a percentage of the assets in the property funds, range from 2% to 28%. Accordingly, the value of the assets of the respective property funds would have to decline by between 98% and 72% before ProLogis would be required to make an additional capital contribution. ProLogis believes that the likelihood of declines in the values of the assets that support the third-party loans of the magnitude necessary to require an additional capital contribution is remote, especially in light of the geographically diversified portfolios of properties owned by the property funds. Accordingly, these potential obligations have not been recognized as a liability by ProLogis at June 30, 2004 and ProLogis has assessed a nominal value to the guarantee undertaken through the SLCAs. The potential obligations under the SLCAs aggregate $402.4 million at June 30, 2004 and the combined book value of the assets in the property funds, before depreciation, that are subject to the provisions of the SLCAs was approximately $5.6 billion at June 30, 2004.

     In August 2003, ProLogis entered into an indemnification agreement with ProLogis European Properties Fund whereby ProLogis would indemnify ProLogis European Properties Fund for certain future capital gains tax liabilities that could be incurred by ProLogis European Properties Fund. The indemnification agreement applies to properties that ProLogis contributes to ProLogis European Properties Fund after March 31, 2003. ProLogis’ contributions to ProLogis European Properties Fund are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the capital gains tax liability associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to ProLogis European Properties Fund at contribution. ProLogis has indemnified ProLogis European Properties Fund to the extent that ProLogis European Properties Fund: (i) incurs capital gains tax as a result of a direct sale of the real estate asset, as opposed to a transaction in which the shares of the company owning the real estate asset are transferred or sold or (ii) is required to grant a discount to the buyer of shares under a share transfer transaction as a result of ProLogis European Properties Fund transferring the embedded capital gain tax liability to the buyer of the shares in the transaction. Further, if an initial public offering of units in ProLogis European Properties Fund is undertaken, ProLogis has indemnified the unit holders of ProLogis European Properties Fund in the event the unit holders are required to accept a discount to the value of their units because the capital gain tax liability is being transferred to the holders of units in the new public entity. The agreement limits the amount that is subject to ProLogis’ indemnification with respect to each property to 100% of the actual capital gains tax liability that is deferred and transferred by ProLogis to ProLogis European Properties Fund at the time of the initial contribution. Pursuant to the indemnification agreement, ProLogis has recognized a

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deferred income tax liability of $6.7 million associated with the contributions of 31 properties to ProLogis European Properties Fund during the period from April 1, 2003 to June 30, 2004.

     In June 2004, ProLogis entered into an indemnification agreement with ProLogis North American Properties Fund V whereby ProLogis would indemnify ProLogis North American Properties Fund V for certain capital gains tax liabilities that could be incurred by ProLogis North American Properties Fund V in the future associated with the contribution of assets located in Mexico. ProLogis’ contributions of properties located in Mexico to ProLogis North American Properties Fund V are structured as contributions of the shares of companies that own the real estate assets. Accordingly, the Mexico capital gains tax liability associated with the step up in the value, if any, of the underlying real estate assets is deferred and transferred to ProLogis North American Properties Fund V at contribution. ProLogis has indemnified ProLogis North American Properties Fund V to the extent that ProLogis North American Properties Fund V incurs Mexico capital gains tax as a result of a sale of the real estate asset or an interest in the real estate asset. The agreement limits the amount that is subject to ProLogis’ indemnification with respect to each Mexico property to the lesser of (1) the actual Mexico capital gains tax paid upon the sale of the real estate assets or (2) 100% of the Mexico capital gains tax liability that is deferred and transferred by ProLogis to ProLogis North American Properties Fund V at the time of the initial contribution. Pursuant to the indemnification agreement, ProLogis has recognized a deferred income tax liability of $3.9 million associated with the contributions of 20 properties to ProLogis North American Properties Fund V during the period from March 28, 2002 to June 30, 2004.

     Summarized financial information of the property funds as of and for the three months ended June 30, 2004 is presented below (in millions of U.S. dollars). The information presented is for the entire entity, not ProLogis’ proportionate share of the entity.

   CDFS Business Investees

     ProLogis has active investments in three joint ventures that perform some of ProLogis’ CDFS business activities in the United Kingdom (the “CDFS Joint Ventures”). ProLogis discontinued its participation and significantly reduced its investment in a fourth CDFS Joint Venture in November 2003. ProLogis’ ownership interest in each of the CDFS Joint Ventures is 50%. ProLogis’ combined investment in the CDFS Joint Ventures was $12.1 million

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and $12.7 million at June 30, 2004 and December 31, 2003, respectively. The CDFS Joint Ventures are presented under the equity method.

     The CDFS Joint Ventures in which ProLogis currently actively participates engage primarily in development activities (currently the holding of land positions aggregating 27 acres and land options for future development aggregating 365 acres). The CDFS Joint Venture in which ProLogis ceased its participation and significantly reduced its investment in November 2003 owned 11 operating properties at June 30, 2003. Based on its investment in this entity, ProLogis recognized $0.3 million and $0.6 million of income under the equity method during the three and six months ended June 30, 2003, respectively.

   Other Investees

     ProLogis has also invested in temperature-controlled distribution companies and in other companies that do not own or operate real estate but that provide ProLogis’ customers with access to logistics expertise and technology. Generally these investments were structured to allow ProLogis to continue to meet the REIT requirements of the Code. ProLogis’ investment in these companies were as follows as of the dates indicated (in thousands of U.S. dollars):

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     ProLogis recognized its proportionate shares of the net earnings or losses of its other unconsolidated investees including interest income, if any, as follows for the periods indicated (in thousands of U.S. dollars):

5. Discontinued Operations:

     Discontinued operations are defined in Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, as a component of an entity that has either been disposed of or is classified as held for sale if both the operations and cash flows of the component have been or will be eliminated from ongoing operations of the entity as a result of the disposal transaction and the entity will not have any significant continuing involvement in the operations of the component after the disposal transaction. SFAS No. 144 further provides that the assets and liabilities of the component of the entity that has been classified as discontinued operations be presented separately in the entity’s balance sheet. The results of operations of the component of the entity that has been classified as discontinued operations are also reported as discontinued operations for all periods presented.

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     Properties that ProLogis disposed of to third parties are considered to be discontinued operations unless ProLogis developed such properties under a pre-sale agreement. However, properties that ProLogis contributes to property funds in which ProLogis maintains an ownership interest and acts as manager are not considered to be discontinued operations due to ProLogis’ continuing involvement with the properties. Discontinued operations recognized directly by ProLogis’ unconsolidated investees, if any, are not required to be reflected separately from ProLogis’ investment balance or separately from the net earnings or losses of those entities of which ProLogis recognizes its proportionate share under the equity method.

     During the period prior to the contribution or sale but after the completion of CDFS business activities (development, rehabilitation or repositioning), ProLogis includes CDFS business assets in its operating portfolio and as a part of the property operations segment. See Note 11. These assets do not generally meet the criteria to be classified as held for sale or as discontinued operations.

     As of and for the three and six months ended June 30, 2004, ProLogis reported discontinued operations as follows:

   Assets Held For Sale

     The net assets of TCL Holding’s operations in France that are classified as held for sale consisted of the following at June 30, 2004 (in thousands of U.S. dollars):

     TCL Holding’s operations in France that are classified as held for sale generated net income of $3.5 million and $6.9 million for the three and six months ended June 30, 2004, respectively. ProLogis began consolidating its investments in TCL Holding as of January 1, 2004 (see Notes 1 and 4). Certain of these operations were classified as held for sale during portions of 2003. However, because ProLogis’ investments in TCL Holding were presented under the equity method during 2003, it was not required to reflect the portion of its investments in TCL Holding related to the French operations that were held for sale or the portion of its earnings recognized under the equity method from TCL Holding attributable to the French operations that were held for sale separately as discontinued operations in 2003.

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   Assets Disposed of in 2004

     ProLogis recognized net gains of $1.7 million and $6.6 million, primarily from the disposition of the 5 and 12 properties that meet the criteria to be presented as discontinued operations, during the three and six months ended June 30, 2004, respectively. Of the 12 properties disposed of during 2004, six properties were CDFS business assets. These properties generated an aggregate net gain of $9.5 million from aggregate net disposition proceeds of $113.6 million. The remaining six properties disposed of in 2004 were held in ProLogis’ property operations segment. The dispositions of these properties generated an aggregate net loss of $1.1 million. Also included in the net loss recognized for the three and six months ended June 30, 2004 was a loss of $1.7 million representing an adjustment to the net gain recognized upon the sale of TCL Holding’s operating assets in the United Kingdom in December 2003.

     The operating amounts attributable to the 12 properties that are presented as discontinued operations (other than the net gain or loss recognized upon disposition) are as follows for the periods indicated (in thousands of U.S. dollars):

6. Borrowings:

   Senior Notes

     On April 13, 2004, ProLogis issued 350.0 million euro of senior notes (the currency equivalent of approximately $421.6 million as of June 30, 2004) that are registered on the Luxembourg Stock Exchange (the “Euro Notes”). The Euro Notes will mature in April 2011 and bear interest at a fixed coupon rate of 4.375% per annum (an effective interest rate of 4.414% per annum) to be paid on an annual basis beginning in April 2005. The net proceeds from the issuance of the Euro Notes were 347.8 million euro. A portion of the proceeds were used to repay 76.8 million euro of borrowings under one of ProLogis’ revolving lines of credit. The remaining cash (approximately $329.8 million) was repatriated to the United States. As of June 30, 2004, the carrying balance of the Euro Notes, net of applicable original issue discount, was $420.6 million.

     ProLogis has issued senior notes that bear interest at fixed rates to be paid on a semi-annual basis. At June 30, 2004, ProLogis had $1.34 billion of publicly issued senior notes (the “Public Notes”) and $160.0 million of senior notes issued pursuant to a private placement (the “Private Placement Notes”) (collectively the “Notes”) outstanding. The holders of the Euro Notes and the Notes together with various other creditors of ProLogis, share in the benefits of the pledge of intercompany debt obligations by certain subsidiaries of ProLogis. However, the Euro Notes and the Notes are effectively subordinated in certain respects to: (i) any debt of ProLogis secured by a lien on its real property, to the extent of the value of such real property; (ii) debt of certain subsidiaries of ProLogis that can borrow under ProLogis’ 45.0 billion yen revolving line of credit agented by Sumitomo Mitsui Banking Corporation; (iii) borrowings under ProLogis’ 25.0 million pound sterling revolving line of credit provided by the Royal Bank of Scotland plc; and (iv) debt of certain other subsidiaries of ProLogis that due to restrictions under applicable law or tax considerations, or by agreement, are not required to pledge assets to secure debt of ProLogis. In addition, as a result of the termination of a guaranty by certain subsidiaries that was temporarily in place with respect to the Public Notes, the Public Notes are effectively subordinated in certain respects to any debt of ProLogis that has the benefit of a guaranty by one or more subsidiaries of ProLogis.

   Long-Term Debt Maturities

     The approximate principal payments on ProLogis’ senior notes, secured debt and assessment bonds outstanding at June 30, 2004 that are due during the remainder of 2004, during the other years in the five-year period ending December 31, 2008 and thereafter are as follows (in thousands of U.S. dollars):

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7. Shareholders’ Equity:

   Common Shares

     ProLogis had 181,695,627 and 180,182,615 Common Shares outstanding at June 30, 2004 and December 31, 2003, respectively.

     ProLogis issues Common Shares under various Common Share Plans:

     In February 2004, ProLogis issued 5,000 Common Shares upon exchange of limited partnership units in one of ProLogis’ majority-owned and controlled real estate partnerships.

   Preferred Shares

     At June 30, 2004, ProLogis had three series of preferred shares of beneficial interest (“Preferred Shares”) outstanding (“Series C Preferred Shares”, “Series F Preferred Shares” and “Series G Preferred Shares”). Holders of each series of Preferred Shares outstanding have, subject to certain conditions, limited voting rights and all holders are entitled to receive cumulative preferential dividends based upon each series’ respective liquidation preference. Such dividends are payable quarterly in arrears on the last day of March, June, September and December. Dividends

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on Preferred Shares are payable when, and if, they have been declared by the Board, out of funds legally available for the payment of dividends. After the respective redemption dates, each series of Preferred Shares can be redeemed at ProLogis’ option. The cash redemption price (other than the portion consisting of accrued and unpaid dividends) with respect to Series C Preferred Shares is payable solely out of the cumulative sales proceeds of other capital shares of ProLogis, which may include shares of other series of Preferred Shares. With respect to the payment of dividends, each series of Preferred Shares ranks on parity with ProLogis’ other series of Preferred Shares.

     ProLogis’ Preferred Shares outstanding at June 30, 2004 are summarized as follows (amounts in U.S. dollars as applicable):

     ProLogis’ remaining outstanding Series D Preferred Shares (5,000,000 shares) were redeemed on January 12, 2004 at the price of $25.00 per share, plus $0.066 in accrued and unpaid dividends. The total redemption value (including accrued dividends) was $125.3 million. ProLogis recognized a charge of $4.2 million representing the excess of the redemption value over the carrying value of the Series D Preferred Shares redeemed.

8. Distributions and Dividends:

   Common Share Distributions

     In December 2003, the Board announced a projected increase in the annual distribution level for 2004 ($1.46 per Common Share in 2004 as compared to $1.44 per Common Share in 2003). The payment of Common Share distributions is subject to the discretion of the Board and is dependent upon ProLogis’ financial condition and operating results, and may be adjusted at the discretion of the Board during the year. Distributions of $0.365 per Common Share for both the first and second quarters of 2004 were paid on February 27, 2004 and May 28, 2004, respectively, to holders of Common Shares on February 13, 2004 and May 14, 2004, respectively.

   Preferred Share Dividends

     The annual dividends on ProLogis’ Preferred Shares are $4.27 per share (Series C) and $1.6875 per share (Series F and Series G). On March 31, 2004 and June 30, 2004, ProLogis paid quarterly dividends of $1.0675 per share (Series C) and $0.421875 per share (Series F and Series G).

     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.

9. Earnings Per Common Share:

     Reconciliations of the numerator and denominator used to calculate basic net earnings attributable to Common Shares per share to the numerator and denominator used to calculate diluted net earnings attributable to Common Shares per share for the periods indicated are as follows (in thousands of U.S. dollars, except per share amounts):

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