<PAGE>
As filed with the Securities and Exchange Commission on October 21, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CABOT INDUSTRIAL TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN GOVERNING INSTRUMENTS)
TWO CENTER PLAZA, SUITE 200
BOSTON, MASSACHUSETTS 02108
(617) 723-0900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT E. PATTERSON
PRESIDENT
CABOT INDUSTRIAL TRUST
TWO CENTER PLAZA, SUITE 200
BOSTON, MASSACHUSETTS 02108
(617) 723-0900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
JAMES R. WALTHER, ESQ. GERALD S. TANENBAUM, ESQ.
MAYER, BROWN & PLATT CAHILL GORDON & REINDEL
350 SOUTH GRAND AVENUE 80 PINE STREET
LOS ANGELES, CALIFORNIA 90071-1503 NEW YORK, NEW YORK 10005
(213) 229-9597 (212) 701-3000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
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If this Form is filed to register additional securities for an offering pur-
suant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF SECURITIES AGGREGATE OFFERING AMOUNT OF
BEING REGISTERED PRICE (1) REGISTRATION FEE
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<S> <C> <C>
Common Shares of Beneficial Interest, $0.01
par value per share...................... $115,000,000 $34,849
</TABLE>
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(1) Estimated solely for the purpose of determining the registration fee pur-
suant to Rule 457(o) of the Securities Act of 1933.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRA-
TION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION
8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SEC-
TION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGIS- +
+TRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECU- +
+RITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
October 21, 1997
PROSPECTUS
Shares
[COMPANY LOGO]
CABOT INDUSTRIAL TRUST
Common Shares of Beneficial Interest
(par value $.01 per share)
Cabot Industrial Trust (the "Company") is an internally managed, fully inte-
grated real estate company formed to continue and expand the national indus-
trial real estate business of Cabot Partners Limited Partnership ("Cabot Part-
ners") and its affiliates (collectively, the "Cabot Group"). Concurrently with
the closing of this offering (the "Offering"), the Company will acquire indus-
trial properties owned by certain of Cabot Partners' advisory clients and
affiliates, and certain other investors (collectively, the "Contributing
Investors"). The Company will be one of the largest industrial real estate com-
panies, with a portfolio of 123 industrial buildings (the "Properties") located
in 21 states throughout the United States and containing approximately 19 mil-
lion rentable square feet. At June 30, 1997, the Properties were approximately
94% leased to 202 tenants. The Company expects to qualify for taxation as a
real estate investment trust ("REIT") for federal income tax purposes.
The common shares of beneficial interest, par value $.01 per share (the "Common
Shares"), offered hereby are being sold by the Company and will represent
approximately % of the common equity of the Company on a fully diluted basis.
The remaining % of the Company's fully diluted common equity will be benefi-
cially owned by officers and trustees of the Company (the "Trustees") and by
the Contributing Investors in the form of Common Shares or limited partnership
interests (the "Units") in Cabot Industrial Properties, L.P. (the "Operating
Partnership") that, subject to certain limitations, will be exchangeable on a
one-for-one basis for Common Shares.
The Company expects to make regular quarterly cash distributions to its share-
holders, with the initial distribution expected to be at the quarterly rate of
$ per Common Share. See "Distribution Policy."
Prior to the Offering, there has been no public market for the Common Shares.
It is anticipated that the initial public offering price will be between $
and $ per Common Share. See "Underwriting" for a summary of factors that
will be considered in determining the initial public offering price. The Com-
pany intends to list the Common Shares on the New York Stock Exchange (the
"NYSE").
SEE "RISK FACTORS AND INVESTMENT CONSIDERATIONS" BEGINNING ON PAGE 14 FOR
DESCRIPTIONS OF CERTAIN FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON SHARES,
INCLUDING:
. The market value of the Common Shares may exceed the aggregate fair market
value of the proportionate interest in the Company's portfolio of properties
and other net assets they represent;
. The Company's expected level of distributions is based on assumptions which
could prove incorrect or change over time;
. Limitation on ownership of Common Shares initially to 9.8% of the outstanding
Common Shares (with certain exceptions), staggered elections of the Trustees
and other provisions which may deter third parties from seeking to acquire
the Company;
. Taxation of the Company as a corporation if it fails to qualify as a REIT and
the Company's lack of experience in operating as a REIT; and
. Risks associated with industrial real estate investment, such as failure of
tenants to make lease payments, the effect of national and local economic and
other considerations on real estate values and environmental issues.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE
TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share $ $ $
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Total(3) $ $ $
</TABLE>
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(1)The Company has agreed to indemnify the Underwriters against certain liabil-
ities, including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2)Before deducting expenses payable by the Company estimated at $ .
(3)The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase up to an additional
Common Shares on the same terms as set forth above, solely to cover over-allot-
ments, if any. If such over-allotment option is exercised in full, the total
Price to Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
The Common Shares offered by this Prospectus are being offered by the Under-
writers, subject to prior sale, when as and if delivered to and accepted by the
Underwriters, and subject to approval of certain legal matters by Cahill Gordon
& Reindel, counsel for the Underwriters. It is expected that delivery of cer-
tificates representing the Common Shares will be made against payment therefor
on or about , 1997 at the offices of J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York.
J.P. MORGAN & CO.
, 1997
<PAGE>
[MAP SHOWING THE FIVE U.S. REGIONS
AND LOCATIONS OF PROPERTIES AND
PHOTOGRAPHS OF CERTAIN PROPERTIES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES. SPECIF-
ICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND MAY
BID FOR, AND PURCHASE, COMMON SHARES IN THE OPEN MARKET. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
CAUTIONARY STATEMENT
INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS
RELATING TO, WITHOUT LIMITATION, FUTURE ECONOMIC PERFORMANCE, PLANS AND OBJEC-
TIVES OF MANAGEMENT FOR FUTURE OPERATIONS AND PROJECTIONS OF REVENUE AND OTHER
FINANCIAL ITEMS, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMI-
NOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE,"
"BELIEVE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE CAUTIONARY STATEMENTS SET FORTH UNDER THE CAPTION
"RISK FACTORS AND INVESTMENT CONSIDERATIONS" AND ELSEWHERE IN THIS PROSPECTUS
IDENTIFY IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS,
INCLUDING CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE SET FORTH IN SUCH FORWARD-LOOKING STATEMENTS.
No person has been authorized to give any information or to make any represen-
tations not contained in this Prospectus and, if given or made, such informa-
tion or representations must not be relied upon as having been authorized by
the Company or any Underwriter. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, the Common Shares in any jurisdic-
tion to any person to whom it is unlawful to make such offer or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall under
any circumstances create any implication that there has been no change in the
affairs of the Company subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 1
The Company......................... 1
Risk Factors and Investment
Considerations..................... 2
Industrial Real Estate Business..... 3
Business and Growth Strategies...... 4
Properties.......................... 6
The Formation Transactions and the
Offering........................... 7
Structure of the Company............ 8
Benefits to Related Parties......... 9
The Offering........................ 10
Distributions....................... 10
Tax Status of the Company........... 11
Summary Financial and Other Data.... 11
Risk Factors and Investment
Considerations....................... 14
The Company........................... 23
Use of Proceeds....................... 30
Distribution Policy................... 31
Capitalization........................ 35
Dilution.............................. 36
Pro Forma Condensed Consolidated
Financial Statements................. 37
</TABLE>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Selected Financial and Other Data .... 46
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................... 49
Properties............................ 54
Policies with Respect to Certain
Activities........................... 66
Management............................ 69
Formation Transactions................ 74
Certain Relationships and
Transactions......................... 77
Principal and Management
Shareholders......................... 78
Description of Shares of Beneficial
Interest............................. 79
Certain Provisions of Maryland Law and
of the Company's Declaration of Trust
and Bylaws........................... 82
Shares Available for Future Sale...... 85
Partnership Agreement of Operating
Partnership.......................... 86
Federal Income Tax Considerations..... 88
ERISA Considerations.................. 96
Underwriting.......................... 98
Legal Matters......................... 99
Experts............................... 99
Additional Information................ 100
Glossary.............................. 101
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON SHARES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PRO-
SPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
The Company intends to furnish its shareholders with annual reports containing
audited consolidated financial statements and a report thereon by its indepen-
dent certified public accountants.
i
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed infor-
mation and financial statements, including the notes thereto, appearing else-
where in this Prospectus. Unless otherwise indicated, the information contained
in this Prospectus assumes (i) the consummation of the transactions relating to
the formation of the Company and the acquisition of the Properties and certain
other assets described under the heading "The Formation Transactions" (the
"Formation Transactions"), (ii) the Underwriters' over-allotment option is not
exercised, and (iii) the actual initial public offering price (the "Offering
Price") is $ per Common Share (the midpoint of the range set forth on the
cover page of this Prospectus). Unless the context otherwise requires, all ref-
erences in this Prospectus to (i) the "Company" means Cabot Industrial Trust
and its operating subsidiaries, including the Operating Partnership, of which
the Company is the sole general partner, and Cabot Services, Inc., a corpora-
tion to be formed under Delaware law (the "Management Company"), (ii) the
"Cabot Group" means Cabot Partners Limited Partnership ("Cabot Partners") and
certain affiliated partnerships, including C-M Holdings L.P. ("C-M Holdings")
and certain affiliated partnerships (the "C-M Property Partnerships"), and
(iii) the "Contributing Investors" means those Cabot Partners advisory clients
who are contributing Properties (or where such clients hold title through
another entity, such entity), the C-M Property Partnerships and other investors
who are contributing Properties, in the Formation Transactions. All other capi-
talized terms used in this Prospectus have the meanings set forth in the Glos-
sary hereto.
THE COMPANY
The Company is an internally managed, fully integrated real estate company
formed to continue and expand the national industrial real estate business of
Cabot Partners. Upon the consummation of the Formation Transactions and the
closing of the Offering, the Company will be one of the largest industrial real
estate companies, with a portfolio of 123 Properties located in 21 states
throughout the United States and containing approximately 19 million rentable
square feet. At June 30, 1997, the Properties were approximately 94% leased to
202 tenants, with no single tenant accounting for more than 4.0% of the
Company's total Annualized Base Rent. Approximately 96% of the Company's Prop-
erties are located in the top 15% of the nation's 273 industrial markets as
rated by Cognetics Real Estate, Inc., a nationally recognized real estate
research firm ("Cognetics"), on the basis of projected demand for industrial
property space.
The Company's strategy is to be the preeminent national real estate company
focused on serving a broad spectrum of industrial space users in the country's
principal commercial markets. The Company owns and operates a diversified port-
folio of bulk distribution, multitenant distribution and "workspace" (light
assembly and flex/R&D) properties and has a significant market presence across
the United States, owning Properties in a total of 20 markets and owning Prop-
erties with approximately one million or more rentable square feet in seven of
such markets. The Properties are within overnight trucking access (a 500-mile
radius) to 90% of the country's population. The Company believes that its geo-
graphic diversification and substantial presence in multiple markets is a stra-
tegic advantage that allows it to (i) serve industrial space users with mul-
tiple site and property type requirements, (ii) compete more effectively in its
chosen markets, and (iii) respond quickly to acquisition opportunities across
the country. The Company, through its investment in the Management Company,
will also continue Cabot Partners' industrial real estate investment management
business.
The Company's principal growth strategy is to acquire modern, high-quality
industrial properties in attractive submarkets within the markets it currently
serves. Cabot Partners completed the acquisition of approximately $251 million
and $191 million of industrial properties on behalf of its clients in 1995 and
1996, respectively. In 1997 (through October 10), Cabot Partners has completed
the acquisition of approximately $197 million of industrial properties on
behalf of its clients and has under contract or letter of intent approximately
$128 million of industrial properties which it expects to acquire on behalf of
its clients by the end of 1997. Additionally, in 1997 (through October 10),
Cabot Partners has negotiated the contribution to the Company in the Formation
Transactions of approximately $270 million of industrial properties not previ-
ously owned by its advisory clients.
The senior management of the Company has an average of over 20 years experience
in the real estate industry and will beneficially own % of the Company's fully
diluted common equity interests upon the closing of the Offering. Members of
the Company's senior management have worked together since 1987 as the execu-
tive officers of Cabot Partners and Cabot, Cabot & Forbes Realty Advisors, Inc.
("Cabot Advisors"). Cabot Advisors was founded in 1986 as an affiliate of
Cabot, Cabot & Forbes Company ("CC&F"), a nationwide real estate development,
investment, construction and management firm that pioneered the development of
large-scale planned industrial parks. Cabot Partners, a registered investment
advisor providing industrial real estate investment and management services to
public and private pension funds and others, was formed as a separate entity in
1990 to purchase the real estate advisory management business of Cabot Advi-
sors.
The Company is organized as a real estate investment trust under Maryland laws
and expects to qualify as a REIT for federal income tax purposes.
1
<PAGE>
RISK FACTORS AND INVESTMENT CONSIDERATIONS
An investment in the Common Shares involves various risks and investment con-
siderations. Prospective investors should carefully consider the matters dis-
cussed under "Risk Factors and Investment Considerations" prior to making an
investment in the Company. Such risks and investment considerations include,
among others:
. The market value of the Common Shares may exceed the aggregate fair
market value of the proportionate interest in the Company's portfolio of
Properties and other assets they represent.
. The Company's expected initial level of distributions was determined on
the basis of a number of assumptions, any of which could prove incorrect
or become incorrect over time. No assurance can be given that the Company
will be able to sustain its expected initial level of distributions.
. The antitakeover effects of limiting actual or constructive ownership of
capital shares of the Company by a single person to 9.8% of the number of
issued and outstanding capital shares of the Company or the total equity
value of such capital shares, subject to certain exceptions, the stag-
gered elections of Trustees, and certain other provisions contained in
the organizational documents of the Company and the Operating Partner-
ship, each of which may have the effect of delaying, deferring or pre-
venting a change in control of the Company, or other transaction that
might involve a price for the Common Shares that exceeds their then cur-
rent market price or that may otherwise be considered by the Company's
shareholders to be desirable.
. Tax risks, including taxation of the Company as a corporation if it fails
to qualify as a REIT for federal income tax purposes and the resulting
decrease in cash that would be available for distribution, and the fact
that the Company's management lacks experience in operating in accordance
with the requirements for maintaining qualification as a REIT.
. Risks incident to investment in and operation of commercial real estate
generally, including the failure of tenants to make lease payments, the
inability to renew or release space upon the expiration of leases (leases
with respect to 3.3% and 16.1% of the Company's total leased space are
scheduled to expire in the last three months of 1997 and in all of 1998,
respectively), the effect of economic and other conditions on real estate
values, including those associated with cyclical weaknesses or demo-
graphic changes in real estate markets, competition from other REITs and
real estate investors seeking properties of the types which the Company
intends to acquire, costs relating to renovation and re-leasing costs,
the impact on the Properties of competition from other existing proper-
ties and from newly constructed properties in future periods, environ-
mental issues and the ability of the Properties to generate sufficient
cash flow to meet operating expenses (including possible future debt
service requirements).
. Conflicts of interest between the Company, the Cabot Group Participants
(most of whom will serve as executive officers and Trustees of the Com-
pany) and the other Contributing Investors with respect to the Formation
Transactions and the ongoing business decisions regarding the Company,
which could result in decisions that do not fully reflect the interests
of all of the Company's shareholders.
. The absence of a prior market for the Common Shares, the lack of assur-
ance that an active trading market will develop or that Common Shares
will trade at or above the Offering Price, the potential negative effects
of rising interest rates on the market price of the Common Shares, and
the effect of the availability of shares for future sale on the price of
the Common Shares.
. A certain Contributing Investor has relied upon an exemption from the
prohibited transaction rules of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and section 4975 of the Internal Rev-
enue Code of 1986, as amended (the "Code"), in contributing Properties to
the Company; the use of such exemption in certain circumstances recently
has been questioned by the Department of Labor; the Company has received
an opinion of counsel that such exemption applies to the Formation Trans-
actions, however, such opinion is not binding on the Department of Labor,
the Internal Revenue Service (the "Service") or any court.
. The possibility that certain of the newly acquired Properties and proper-
ties acquired in the future, may fail to perform as expected or may have
characteristics or defects unknown to the Company.
. As a result, among other things, of the annual income distribution
requirements applicable to REITs under the Code, the Company expects to
rely on borrowings and other external sources of financing to fund the
costs of new property acquisitions, capital expenditures and other items.
Accordingly, the Company will be subject to real estate financing risks,
including changes from period to period in the availability of such
financing, increased interest expense that may be incurred on variable
rate debt in rising interest rate markets and the risk that the Company's
cash flow may not be sufficient to cover both required debt service pay-
ments and distributions to shareholders at desired levels.
2
<PAGE>
. The Company's Board of Trustees may change the Company's investment,
financing, distribution and other policies at any time without share-
holder approval.
. The Company is dependent on the efforts of its executive officers and the
loss of their services could have an adverse effect on the operations of
the Company.
. This Prospectus contains certain forward-looking statements which involve
risks and uncertainties. The Company's actual results may differ signifi-
cantly from the results discussed in such forward-looking statements.
Factors that cause such differences include, but are not limited to, the
risks described under the "Risk Factors and Investment Considerations"
section of this Prospectus.
. The purchasers of Common Shares in the Offering will experience immediate
and substantial dilution of $ per Common Share in the net tangible book
value of the Common Shares offered hereby based on the Offering Price.
INDUSTRIAL REAL ESTATE BUSINESS
Attractive Real Estate Sector
Industrial real estate has historically generated a high level of cash income
and attractive rates of return as compared with other types of real estate
investments. The Company believes that industrial properties tend to be less
costly to manage and require lower amounts of capital expenditures and tenant-
specific improvement costs. Such properties provide generic storage and work
space suitable for and adaptable to a broad range of tenants and uses. Indus-
trial properties also generally require relatively short development periods,
which enables better balancing of supply and demand for such properties and
reduces overbuilding risks.
Strong Demand
The Company believes that, at least for the near term, the demand for desir-
able, well-located industrial property will continue and will support
increasing rents. Nationwide, the demand for industrial property space during
the period from 1997 to 2002 is projected by Cognetics to increase over
existing levels by approximately 800 million square feet, consisting of approx-
imately 600 million square feet for distribution properties and approximately
200 million square feet for other industrial property types. Continuing demand
for well-located, modern industrial properties is expected to increase due to
(i) increasing consumption on a per capita basis, coupled with population
growth, (ii) business' increasing need for efficient inventory management,
(iii) growing international trade, and (iv) the growing significance of smaller
companies (according to Cognetics, companies with fewer than 100 employees now
account for 47% of all jobs and are projected to account for 67% of all new
jobs projected to be created during the period from 1997 to 2002), which are
increasingly looking for efficient and flexible work space in well-located,
suburban industrial parks.
Industry Consolidation
The historically fragmented industrial real estate business is being reshaped
by strong pressures toward consolidation resulting from the substantial advan-
tages enjoyed by large, integrated and well-capitalized firms over local owners
and developers. These advantages include professional management, greater
access to public and private capital, economies of scale, and greater opportu-
nities to increase revenue by serving the changing needs of industrial tenants.
In addition, there is an increasing trend toward securitization of real estate
holdings as institutional real estate investors shift from direct private own-
ership to indirect public ownership of real estate. The Company believes that
both of these trends provide substantial opportunities for publicly held real
estate companies that have the managerial and financial resources to maintain
an active acquisition and development program.
Diverse Tenant Needs
Different types of industrial space users have significantly different property
and space requirements. Large national and major regional distributors gener-
ally require efficient, well-located bulk distribution properties. Smaller com-
panies generally demand more flexible work space, including light assembly
facilities and flex/R&D space. While these properties are generally more costly
to manage, the Company believes that such properties offer the prospect of
higher current returns because the users of such space are location sensitive
and less inclined to move if the properties they occupy are well located and
managed. Moreover, the Company believes that the continued employment growth
resulting from smaller companies will result in strong demand for these
workspace properties.
3
<PAGE>
BUSINESS AND GROWTH STRATEGIES
The Company's fundamental business objective is to maximize the total return to
its shareholders through growth in its cash available for distribution per
Common Share and in the value of its portfolio of industrial properties and
operations.
BUSINESS STRATEGIES
Leveraging Substantial National Market Presence
The Company's substantial presence in markets throughout the country positions
it well to market its industrial space to national companies with space
requirements in multiple locations. The Company will pursue a national tenant
marketing program emphasizing the advantages of dealing with a single source
for industrial space needs, as well as the quality and central locations of the
Company's properties. These advantages include greater efficiency of lease
negotiations and day-to-day property management matters, as well as better
understanding of the tenant's current needs and prospective space requirements.
Within each local market, having a substantial inventory of properties and sig-
nificant leasing activities increase the Company's visibility to prospective
tenants and enable the Company to establish strong relationships with leasing
brokers and other local market participants who serve as sources of information
and referrals of potential tenants. In addition, the Company has increased
opportunities to relocate tenants to one or more of its other properties as
their needs change.
Serving a Broad Spectrum of Tenants by Offering a Variety of Industrial
Property Types
Offering a variety of industrial property types and the Company's size enable
it to provide better service, on a more cost-efficient basis, to national cus-
tomers who often need various types of workspace properties, in addition to
distribution properties, for their local operations. At the same time, offering
an array of property types suitable for smaller companies enables the Company
to capture a larger share of the growth in its chosen industrial property mar-
kets by serving a broader spectrum of companies in those markets. The Company
believes that smaller business establishments will form an important segment of
its tenant base. Business establishments with fewer that 100 employees are pro-
jected by Cognetics to generate approximately 67% of the projected increased
demand for industrial property space during the period from 1997 to 2002.
GROWTH STRATEGIES
The Company intends to achieve its growth objectives through a combination of
property acquisitions and internal growth.
Acquisitions
The Company will seek to capitalize on its competitive advantages primarily by
acquiring additional modern, high-quality properties in attractive submarkets
within the major industrial markets that it currently serves.
The Company's property acquisitions are based on extensive research in each
targeted market regarding (i) economic and demographic trends, (ii) supply of
and demand for industrial space in targeted sub-markets, (iii) existing and
potential tenant space requirements, (iv) rent levels and trends, and (v) the
physical characteristics of buildings within the market. The Company's research
also involves physical site inspections and continuing contacts with leasing
brokers and other market participants. The results of the Company's research
are compiled into a proprietary database covering each market and submarket in
which it has invested or that it has targeted. This database is updated period-
ically, and contains computerized profiles, keyed to Company prepared aerial
maps, of the Properties and each of the buildings deemed most competitive to
the Company's properties or attractive for acquisition. Each profile includes
information regarding the building's age, physical characteristics and current
tenant and lease information.
Upon the closing of the Offering, the Company expects to have approximately
$5.2 million of outstanding long-term debt, approximately $ million of avail-
able cash and a Debt-to-Total Market Capitalization Ratio of less than %. The
Company expects to be able to obtain borrowings on a timely basis that will
enable it to move quickly in completing proposed property acquisitions and
believes that its ability to do so will enhance its credibility with potential
property sellers. In addition, the Company's UPREIT structure, which will
enable it to acquire industrial properties on a non-cash basis by exchanging
Units in the Operating Partnership for such properties in a tax-deferred man-
ner, provides an attractive alternative to taxable cash sales for tax-paying
property owners.
4
<PAGE>
The Company's management has extensive knowledge of and, the Company believes,
a favorable reputation with public and private pension funds and other institu-
tional real estate investors as a result of Cabot Partners' focus on serving
such investors. The Company believes that it will benefit from its relation-
ships with these investors through further acquisitions as they increasingly
seek to securitize their direct real estate investments.
Internal Growth
The Company's primary internal growth strategy is to increase the cash flow
generated by the Properties, and from properties that it acquires in the
future, by renewing or replacing expiring leases with new leases at higher
rents and through rent increase provisions in its leases. In addition, the Com-
pany intends to work actively to (i) maintain its historically high occupancy
levels by retaining existing tenants (84% of the leases for the Properties and
89% of the leases for the Existing Investors Property Group, by square footage,
have been renewed over the past two years), thereby minimizing "down time" and
releasing costs, (ii) improve the occupancy levels of any newly acquired prop-
erties that have low occupancy levels, (iii) realize economies of scale from
the size of its portfolio of properties, and (iv) control costs.
Development
The Company's senior management has extensive real estate development experi-
ence, including experience derived from the industrial park development activi-
ties of CC&F. The Company is engaging its existing tenants in discussions about
future space needs, and believes that financially attractive build-to-suit
opportunities from its tenant base may be available over time. The Company also
believes that in select target markets there are attractive opportunities for
new development with potentially greater returns than those available from the
purchase of existing stabilized properties and it intends to pursue a develop-
ment program where such opportunities exist. In order to limit initial overhead
expenses, the Company intends to begin its development activities by engaging
local or regional builders with whom it has established strong relationships.
Thereafter, the Company intends to expand its in-house development staff as the
Company's development activities increase.
FINANCIAL STRATEGIES
The Company's financial strategy is to minimize its cost of capital by main-
taining adequate working capital and conservative debt levels. The Company
estimates that approximately $ million of the proceeds from the Offering will
be available for general corporate purposes, including acquisitions and working
capital, after payment of offering and formation expenses and the use of
approximately $13.3 million of net proceeds to repay certain outstanding
indebtedness. The Company is currently negotiating with several financial
institutions the establishment of a $ million revolving credit facility (the
"Acquisition Facility") to be used primarily for property acquisitions and
expects the facility to be in place upon the closing of the Offering. The Com-
pany intends to operate with a Debt-to-Total Market Capitalization Ratio that
generally will not exceed 40%, although the Company's Declaration of Trust and
By-laws do not impose any limit on the incurrence of debt.
The Company believes that the size and diversity of its portfolio of Properties
will provide it access to the public debt and equity markets which are not gen-
erally available to smaller, less diversified property owners. The Company also
believes that its "UPREIT" structure (i.e., ownership of properties through the
Operating Partnership) will enable it to acquire industrial properties in
exchange for Units in the Operating Partnership, thereby reducing its need to
incur indebtedness to support future acquisitions.
5
<PAGE>
PROPERTIES
Upon the closing of the Offering, the Company will own a portfolio of 123 Prop-
erties having an aggregate of approximately 19 million rentable square feet,
approximately 94% of which space was leased to 202 tenants at June 30, 1997.
The Company categorizes its properties into three types: bulk distribution
properties, multitenant distribution properties and workspace properties. See
"Properties--General."
The following tables provide information regarding the Properties as of June
30, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------ ----------------------------------
PER LEASED
NUMBER OF SQUARE PERCENT
PROPERTY TYPE BY REGION PROPERTIES NUMBER % OF TOTAL AMOUNT % OF TOTAL FOOT LEASED
- ----------------------- ---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BULK DISTRIBUTION
PROPERTIES:
West................... 11 2,269,146 12.2% $ 5,952,064 9.3% $3.05 86.0%
Southwest.............. 2 346,200 1.9 1,172,796 1.8 3.39 100.0
Midwest................ 16 3,872,086 20.9 11,207,288 17.4 2.98 97.0
Southeast.............. 4 1,029,247 5.5 3,358,660 5.2 3.26 100.0
Northeast.............. 7 1,661,862 8.9 6,644,553 10.3 4.00 100.0
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Subtotal/weighted aver-
age................... 40 9,178,541 49.4% $28,335,361 44.0% $3.24 95.3%
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
MULTITENANT DISTRIBUTION
PROPERTIES:
West................... 4 831,626 4.5% $ 3,029,131 4.7% $3.64 100.0%
Southwest.............. 3 385,135 2.1 1,140,062 1.8 2.96 100.0
Midwest................ 13 2,159,560 11.6 7,415,362 11.6 4.02 85.5
Southeast.............. 7 1,274,745 6.9 3,907,932 6.1 3.36 91.3
Northeast.............. 11 2,065,503 11.1 7,877,136 12.2 3.81 100.0
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Subtotal/weighted aver-
age................... 38 6,716,569 36.2% $23,369,623 36.4% $3.71 93.7%
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
WORKSPACE PROPERTIES:
West................... 27 1,254,386 6.8% $ 6,066,675 9.4% $5.04 96.0%
Southwest.............. 1 56,535 0.3 325,044 0.5 5.75 100.0
Midwest................ 3 283,505 1.5 832,334 1.3 4.65 63.2
Southeast.............. 3 413,930 2.2 1,657,386 2.6 4.00 100.0
Northeast.............. 11 665,892 3.6 3,730,726 5.8 5.88 95.3
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Subtotal/weighted aver-
age................... 45 2,674,248 14.4% $12,612,165 19.6% $5.07 93.1%
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE.. 123 18,569,358 100.0% $64,317,149 100.0% $3.67 94.4%
<CAPTION>
========== ========== ========== =========== ========== ========== =======
-------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------ ----------------------------------
PER LEASED
NUMBER OF SQUARE PERCENT
PROPERTIES BY REGION PROPERTIES NUMBER % OF TOTAL AMOUNT % OF TOTAL FOOT LEASED
- -------------------- ---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
West................... 42 4,355,158 23.5% $15,047,870 23.4% $3.77 91.6%
Southwest.............. 6 787,870 4.2 2,637,902 4.1 3.35 100.0
Midwest................ 32 6,315,151 34.0 19,454,984 30.3 3.36 91.6
Southeast.............. 14 2,717,922 14.6 8,923,978 13.9 3.42 95.9
Northeast.............. 29 4,393,257 23.7 18,252,415 28.3 4.18 99.3
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE.. 123 18,569,358 100.0% $64,317,149 100.0% $3.67 94.4%
<CAPTION>
========== ========== ========== =========== ========== ========== =======
</TABLE>
- -------
(1) "Annualized Net Rent" means annualized monthly Net Rent from leases in
effect as of June 30, 1997. "Net Rent" means contractual rent, excluding any
reimbursements for real estate tax or operating expenses.
6
<PAGE>
THE FORMATION TRANSACTIONS AND THE OFFERING
Cabot Partners and the Contributing Investors are undertaking the Formation
Transactions for the purpose of organizing the Company and the Operating Part-
nership in preparation for the Offering and to transfer the Properties and
Cabot Partners' real estate advisory and management business to the Operating
Partnership in a tax efficient manner. Upon completion of the Formation Trans-
actions, (i) the Properties and the Company's other operating assets, other
than those relating to Cabot Partners' advisory and management business, will
be held by the Operating Partnership, of which the Company will be the sole
general partner, and (ii) the assets of Cabot Partners advisory and management
business will be held, and such business will be conducted, through the Manage-
ment Company.
The Formation Transactions have been and will be effected as follows:
.The Company has been organized by Cabot Partners as a real estate investment
trust under Maryland law.
. The Operating Partnership has been formed as a limited partnership under
Delaware law, with the Company as its sole and managing general partner.
. The Properties described in this Prospectus will be contributed by the Con-
tributing Investors to the Operating Partnership (or, in certain cases, to
the Company for transfer to the Operating Partnership) concurrently with
the closing of the Offering. The Contributing Investors include certain of
the existing advisory clients of Cabot Partners (referred to hereinafter as
the "Existing Investors") and certain other industrial real estate invest-
ors.
. The Properties that are to be contributed to the Company in the Formation
Transactions include both previously owned Properties of the Existing
Investors that have been managed by Cabot Partners and are referred to in
the historical and pro forma financial statements included in this Pro-
spectus as the "Existing Investors Property Group," additional Properties
recently acquired or being acquired by Cabot Partners on behalf of the
Existing Investors, and Properties owned by the other Contributing Invest-
ors.
. Cabot Partners will contribute its real estate advisory and management
business and related assets, including its investment advisory and manage-
ment contracts with certain of its advisory clients (the "Advisory Con-
tracts") relating to industrial properties that are not being contributed
in the Formation Transactions, to the Operating Partnership concurrently
with the closing of the Offering. Cabot Partners' Advisory Contracts and
assets relating to industrial properties that are not being contributed
pursuant to the Formation Transactions will be held by the Management Com-
pany. The Operating Partnership will own 100% of the non-voting preferred
stock of the Management Company, representing 95% of the economic interest
of the Management Company. Ferdinand Colloredo-Mansfeld, the Company's
Chief Executive Officer, will own 100% of the voting common stock of the
Management Company, representing 5% of the economic interest of the Manage-
ment Company.
. The Contributions of Properties and other assets by the Contributing
Investors and Cabot Partners will be made in exchange for Units in the
Operating Partnership that may, subject to certain limitations and excep-
tions, be exchanged for Common Shares or, in certain cases, will be made in
exchange for Common Shares.
. As a result of the Formation Transactions, and giving effect to the pro-
posed issuance and sale of Common Shares in the Offering, the Contributing
Investors and Cabot Partners will become equity investors in the Company
and the Operating Partnership. The Contributing Investors will hold an
aggregate of Units and Common Shares and Cabot Partners will hold an
aggregate of Units, representing approximately % and %, respec-
tively, of the fully diluted common equity interests in the Company. Pur-
chasers of Common Shares in the Offering will own the remaining % of the
fully diluted common equity of the Company.
. The Company will contribute the net proceeds of the Offering received by it
to the Operating Partnership in exchange for the number of general partner-
ship interests ("GP Units") in the Operating Partnership that equals the
number of Common Shares sold in the Offering. As a result of such contribu-
tion and its receipt of Units in connection with the Formation Transac-
tions, the Company will hold a % general partnership interest in the Oper-
ating Partnership and will be an indirect owner of the contributed Proper-
ties and other assets through and to the extent of such general partnership
interest.
7
<PAGE>
STRUCTURE OF THE COMPANY
The following chart illustrates the structure of the Company and the beneficial
ownership of the Company, the Operating Partnership and the Management Company
after the consummation of the Formation Transactions and the closing of the
Offering. See "Formation Transactions."
THE COMPANY
<TABLE>
<CAPTION>
---------------------
PERCENTAGE PERCENTAGE
OF COMMON OF COMMON
SHARES SHARES
BEFORE AFTER
EXCHANGE EXCHANGE
OWNER OF UNITS OF UNITS
----- ---------- ----------
<S> <C> <C>
Public Investors.................................. % %
Contributing Investors(1)......................... % %
Management(2)..................................... -- %
</TABLE>
THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
---------------------
OWNERSHIP OWNERSHIP
INTEREST INTEREST
BEFORE AFTER
EXCHANGE EXCHANGE
OWNER OF UNITS OF UNITS
----- --------- ---------
<S> <C> <C>
Company........................................... % 100%
Contributing Investors(1)......................... % --
Management(2)..................................... % --
</TABLE>
THE MANAGEMENT COMPANY
<TABLE>
<CAPTION>
--------------------------------
VOTING NON-VOTING TOTAL
COMMON PREFERRED ECONOMIC
OWNER STOCK STOCK INTEREST
----- --------- --------- ---------
<S> <C> <C> <C>
Operating Partnership(3)............... -- 100% 95%
Ferdinand Colloredo-Mansfeld........... 100% -- 5%
</TABLE>
(1) Includes each of the Contributing Investors other than the C-M Property
Partnerships. The C-M Property Partnerships are owned by Ferdinand Colloredo-
Mansfeld, who is the Company's chief executive officer, and members of his
immediate family. Such ownership interests are included under "Management." See
note (2) below. Each of the Contributing Investors will receive Units or Common
Shares in the Formation Transactions in exchange for their interests in the
Properties. See "Formation Transactions."
(2) Includes certain officers and Trustees and members of their immediate
family who will receive or beneficially own Units in exchange for their inter-
ests in Cabot Partners and/or interests of the C-M Property Partnerships which
are being contributed in the Formation Transactions. See "Formation Transac-
tions."
(3) As a result of the Operating Partnership's ownership of non-voting pre-
ferred stock of the Management Company, the Company, through the Operating
Partnership, expects to receive most of the after-tax economic benefits of the
Management Company. See "The Company--Third-Party Investment Management."
8
<PAGE>
BENEFITS TO RELATED PARTIES
Certain of the officers and Trustees of the Company and members of their imme-
diate family who are contributing their interests in Cabot Partners and/or the
C-M Property Partnerships (the partnership interests of the C-M Property Part-
nerships are beneficially owned by Ferdinand Colloredo-Mansfeld, the Company's
Chief Executive Officer and members of his immediate family) (collectively, the
"Cabot Group Participants") and the Contributing Investors who are contributing
their interests in the Properties will realize certain benefits as a result of
the Offering and the Formation Transactions, including the following:
RECEIPT OF UNITS BY THE CABOT GROUP PARTICIPANTS AND THE CONTRIBUTING INVESTORS
The Cabot Group Participants will receive a total of Units and Units in
consideration for their interests in the C-M Property Partnerships and Cabot
Partners, respectively, in connection with the Formation Transactions. These
Units (representing approximately % of the equity interests in the Company on
a fully diluted basis) will have a total value of approximately $ million
based on the Offering Price, compared to the aggregate pro forma net tangible
book value of the assets contributed to the Operating Partnership by the Cabot
Group Participants of approximately $ million as of June 30, 1997. The Com-
pany believes that the net tangible book value of the individual assets con-
tributed to the Operating Partnership by the Cabot Group Participants (which
reflects the historical cost of such assets less accumulated depreciation and
amortization) is less than the aggregate current market value of such assets.
At any time after two years following the Closing Date, any of the Cabot Group
Participants holding Units may, in accordance with the Operating Partnership
Agreement, exchange all or a portion of such Units for Common Shares on a one-
for-one basis or, at the election of the Company, the cash equivalent thereof.
The Contributing Investors (not including the C-M Property Partnerships) will
receive a total of Units and Common Shares in consideration for their
interests in the Properties in connection with the Formation Transactions.
These Units and Common Shares (representing approximately % of the equity
interests in the Company on a fully diluted basis) will have a total value of
approximately $ million based on the Offering Price, compared to the aggre-
gate net tangible book value of the assets contributed to the Company by such
Contributing Investors of approximately $ million. The Company believes that
the net tangible book value of the individual assets contributed to the Company
by such Contributing Investors (which reflects the historical cost of such
assets less accumulated depreciation) is less than the aggregate current market
value of such assets. At any time after one year following the Closing Date,
any of such Contributing Investors holding Units may, in accordance with the
Operating Partnership Agreement, exchange all or a portion of such Units for
Common Shares on a one-for-one basis or, at the election of the Company, the
cash equivalent thereof.
The Company currently expects that it will not elect to pay cash for Units in
connection with any such exchange request, but instead will issue Common Shares
in exchange for such Units. The receipt and retention of the Units in exchange
for contributed assets may provide the Cabot Group Participants and certain of
the Contributing Investors with continued deferral of the taxable gain associ-
ated with dispositions of those assets.
INCREASE IN NET TANGIBLE INVESTMENT
The Cabot Group Participants and the Contributing Investors (not including the
C-M Property Partnerships) on a pro forma basis, as of June 30, 1997 will
realize an immediate increase of $ million and $ million, respectively, in
the net tangible book value of their respective original investments in the
Company. This increase is derived from the difference between the net tangible
assets per Common Share before and after giving effect to the Formation Trans-
actions multiplied by the Units to be received as consideration by the Cabot
Group Participants and by the Units and Common Shares to be received as
consideration by such Contributing Investors, respectively. See "Dilution."
REPAYMENT OF DEBT
Approximately $18.5 million of indebtedness (based on amounts outstanding as of
June 30, 1997) secured by the Properties to be contributed by the C-M Property
Partnerships (which are owned by certain of the Cabot Group Participants) will
be assumed by the Operating Partnership and approximately $13.3 million of such
indebtedness (based on amounts outstanding as of the anticipated date of repay-
ment) will be repaid from the proceeds of the Offering.
OPTIONS GRANTED
The Company will grant options to purchase an aggregate of Common Shares
under the Company's Long Term Incentive Plan at the Offering Price to officers
and Trustees of the Company, subject to certain vesting requirements. See "Man-
agement--Long Term Incentive Plan."
9
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
COMMON SHARES OFFERED........................ (1)
COMMON SHARES TO BE OUTSTANDING AFTER THE
OFFERING.................................... (1)(2)
USE OF PROCEEDS.............................. The proceeds to the Company from the Offering,
after deducting the underwriting discount and
estimated expenses of the Offering and of the
Formation Transactions, are estimated to be
approximately $ million (approximately $
million if the Underwriters' over-allotment
option is exercised in full). Approximately
$13.3 million of such net proceeds will be used
to repay indebtedness secured by certain of the
Properties, with the balance to be used for
general purposes including acquisition of
additional properties.
NYSE SYMBOL..................................
</TABLE>
- -------
(1) Excludes Common Shares issuable upon exercise of the Underwriters'
over-allotment option.
(2) Includes Common Shares that may be issued upon exchange of Units. See
"Formation Transactions." Excludes Common Shares reserved for issuance upon
exercise of options to be granted pursuant to the Company's Long Term Incentive
Plan effective upon the closing of the Offering.
DISTRIBUTIONS
The Company intends to make regular quarterly cash distributions to its share-
holders, commencing with a pro rata distribution for the period from completion
of the Offering through March 31, 1998, based upon a quarterly distribution of
$ per Common Share. On an annualized basis, this would be $ per Common
Share (or an annual distribution rate of approximately % based on the
Offering Price). The Company does not expect to change its estimated initial
distribution per Common Share if the Underwriters' over-allotment option is
exercised.
The Company intends to maintain its initial distribution rate for at least
twelve months following the closing of the Offering unless actual results of
operations, economic conditions or other factors differ from the assumptions
used in calculating the estimate. Based on the Company's estimated results of
operations for the twelve months ending December 31, 1998, the Company esti-
mates that approximately % of the anticipated initial annual distribution to
shareholders will represent a return of capital for federal income tax purposes
and that the Company would have been required to distribute $ million or $
per Common Share during such twelve-month period in order to maintain its
status as a REIT. If future taxable income increases above or decreases below
the estimated taxable income for the twelve months following the closing of the
Offering, the percentage of the anticipated initial annual distribution repre-
senting a return of capital will decrease or increase, respectively. See "Dis-
tribution Policy" for the calculation of estimated pro forma cash available for
distributions and related assumptions. Future distributions by the Company will
be at the discretion of the Board of Trustees and will depend on the actual
cash available for distribution, the Company's financial condition and capital
requirements, the annual distribution requirements under the REIT provisions of
the Code (see "Federal Income Tax Considerations--Taxation of the Company--
Annual Distribution Requirements") and such other factors as the Board of
Trustees deems relevant. See "Risk Factors and Investment Considerations--Pos-
sible Changes in Policies Without Shareholder Approval; No Limitation on Debt."
10
<PAGE>
TAX STATUS OF THE COMPANY
The Company intends to qualify and will elect to be taxed as a REIT under Sec-
tions 856 through 860 of the Code, commencing with its short taxable year
ending December 31, 1997. If the Company qualifies for taxation as a REIT, the
Company generally will not be subject to federal income tax on its taxable
income that is distributed to its shareholders. A REIT is subject to a number
of organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income (excluding net
capital gains). The Company does not intend to request a ruling from the
Service as to its REIT status. The Company has received an opinion of its legal
counsel that the Company will qualify to be taxed as a REIT under the Code,
which opinion is based on certain assumptions and representations and will not
be binding on the Service or any court. Even if the Company qualifies for taxa-
tion as a REIT, the Company may be subject to certain federal, state and local
taxes on its income and property. Failure to qualify as a REIT would subject
the Company to tax (including any applicable minimum tax) on its taxable income
at regular corporate rates, and distributions to the Company's shareholders in
any such year would not be deductible by the Company. See "Risk Factors and
Investment Considerations--Tax Risks" and "--Antitakeover Effect of Ownership
Limit, Staggered Board and Power to Issue Additional Shares" and "Federal
Income Tax Considerations--Taxation of the Company."
SUMMARY FINANCIAL AND OTHER DATA
Set forth below are (i) summary historical financial and other data for (A) the
Properties that were managed by Cabot Partners as of June 30, 1997 for the Con-
tributing Investors (such Contributing Investors hereinafter referred to as the
"Existing Investors" and such Properties (including the related assets and lia-
bilities) hereinafter referred to as the "Existing Investors Property Group"),
and (B) the real estate advisory business of Cabot Partners, and (ii) summary
financial and other data for the Company on a pro forma basis.
The summary financial data presented below as of and for the years ended
December 31, 1996, 1995 and 1994 have been derived from the Existing Investors
Property Group Combined Financial Statements and the Cabot Partners Financial
Statements, each of which has been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports included elsewhere in this
Prospectus. This information should be read in conjunction with such financial
statements and the notes thereto included elsewhere in this Prospectus. The
summary financial data presented below as of and for the years ended December
31, 1993 and 1992 for Cabot Partners are derived from the Cabot Partners Finan-
cial Statements and the notes thereto not included in this Prospectus which
have been audited by Arthur Andersen LLP. The summary financial data presented
below as of and for the years ended December 31, 1993 and 1992 for the Existing
Investors Property Group and as of June 30, 1997 and 1996 and for each of the
six-month periods then ended for both Cabot Partners and the Existing Investors
Property Group has not been audited but, in the opinion of management, includes
all adjustments (consisting only of normal recurring accruals) necessary to
present fairly such information in accordance with generally accepted
accounting principles ("GAAP") applied on a consistent basis. The results of
operations for the six months ended June 30, 1997 are not necessarily indica-
tive of results for the entire year. Other Data and Property Data for all
periods and dates presented are unaudited and are derived from the financial
and other records of Cabot Partners.
The pro forma condensed consolidated balance sheet data as of June 30, 1997 has
been prepared to reflect (i) the contribution to the Company of (A) the
Existing Investors Property Group, (B) Properties acquired or to be acquired
after June 30, 1997 by Cabot Partners on behalf of the Existing Investors (the
"Additional Acquisitions"), and (C) the Properties owned by the Contributing
Investors which were not advisory clients of Cabot Partners at or prior to June
30, 1997 (the "New Investors Property Group"), (ii) the other Formation Trans-
actions, (iii) the Offering and the use of a portion of the net proceeds there-
from to repay indebtedness, and (iv) certain other adjustments, as if each of
such contributions, transactions and adjustments had occurred on June 30, 1997.
The pro forma condensed combined operating and other data for the six months
ended June 30, 1997 and the year ended December 31, 1996 have been prepared to
reflect (i) the contribution to the Company of (A) the Existing Investors Prop-
erty Group, (B) the Additional Acquisitions, (C) the New Investors Property
Group, and (D) the Properties acquired during the year ended December 31, 1996
and during the six months ended June 30, 1997, (ii) each of the other Formation
Transactions, (iii) the repayment of indebtedness with a portion of the net
proceeds of the Offering, and (iv) certain other adjustments, as if each of
such contributions, transactions and adjustments had occurred on January 1,
1996.
11
<PAGE>
In the opinion of management, the pro forma condensed consolidated financial
information provides for all adjustments necessary to reflect the effects of
the foregoing transactions and adjustments. The pro forma information is unau-
dited and is not necessarily indicative of the consolidated results that would
have occurred if the transactions and adjustments reflected therein had been
consummated on the dates indicated, or on any particular date in the future,
nor does it purport to represent the financial position, results of operations
or changes in cash flows for future periods.
CABOT INDUSTRIAL TRUST
SUMMARY FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------- -------------------------------
COMPANY EXISTING INVESTORS COMPANY
EXISTING INVESTORS PROPERTY GROUP (1) PRO FORMA PROPERTY GROUP (1) PRO FORMA
------------------------------------------------ --------- -------------------- ---------
Dollars in thousands, 1992 1993 1994 1995 1996 1996 1996 1997 1997
except per share data -------- -------- -------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 21,904 $ 25,252 $ 28,209 $ 28,794 $ 35,180 $ 80,491 $ 17,194 $ 18,922 $ 39,736
Real estate tax expense 2,772 5,144 3,769 3,979 5,037 9,478 2,301 2,735 4,607
Property operating
expenses 2,940 3,227 3,063 3,357 4,323 9,360 2,040 2,115 4,643
General and administra-
tive expenses -- -- -- -- -- -- -- -- --
Interest expense 2,292 2,013 2,082 2,097 1,931 449 973 936 218
Depreciation and amorti-
zation expense 5,441 6,111 6,606 7,118 7,966 18,895 3,919 4,323 8,928
<CAPTION>
-------- -------- -------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating income 8,459 8,757 12,689 12,243 15,923 42,309 7,961 8,813 21,340
Gain on sale of proper-
ties -- -- 186 -- -- -- -- -- --
<CAPTION>
-------- -------- -------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $ 8,459 $ 8,757 $ 12,875 $ 12,243 $ 15,923 $ 42,309 $ 7,961 $ 8,813 $ 21,340
<CAPTION>
======== ======== ======== ======== ======== ========= ========= ========= =========
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pro forma net income per
Common Share (2) $ $
<CAPTION>
========= =========
-------------------------------------------------------------------------------------------
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------ -------------------------------
EXISTING INVESTORS COMPANY
EXISTING INVESTORS PROPERTY GROUP (1) PROPERTY GROUP (1) PRO FORMA
------------------------------------------------ -------------------- ---------
1992 1993 1994 1995 1996 1996 1997 1997
Dollars in thousands -------- -------- -------- -------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Properties (before
accumulated
depreciation) $240,358 $255,050 $250,387 $301,059 $336,836 $ 312,924 $ 345,537 $641,131
Properties, net 227,149 237,101 229,451 274,629 304,308 283,473 309,712 641,131
Total assets 236,457 247,615 241,026 289,337 318,732 297,198 324,136 651,323
Mortgage debt 20,550 20,550 20,608 20,083 19,292 19,696 18,872 5,363
Owners' equity 211,897 220,621 213,203 261,629 291,286 269,709 296,459 645,957
<CAPTION>
-------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------------- -------------------------------
COMPANY EXISTING INVESTORS COMPANY
EXISTING INVESTORS PROPERTY GROUP (1) PRO FORMA PROPERTY GROUP (1) PRO FORMA
------------------------------------------------ --------- -------------------- ---------
In thousands,
except number of 1992 1993 1994 1995 1996 1996 1996 1997 1997
properties -------- -------- -------- -------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (3) $ 16,892 $ 16,881 $ 21,377 $ 21,458 $ 25,820 $ 61,653 $ 12,853 $ 14,072 $ 30,486
Funds From Operations
(4) 13,900 14,764 19,193 19,298 23,809 61,204 11,851 13,085 30,268
Cash flows provided by
(used in):
Operating activities 14,123 17,471 17,552 19,401 25,695 12,559 13,061
Investing activities (9,980) (17,393) 2,037 (53,868) (39,074) (12,660) (9,507)
Financing activities (6,216) (278) (19,596) 35,680 13,204 (91) (4,081)
Total rentable square
footage of properties
at end of period 6,100 6,644 6,253 7,879 9,069 8,199 9,414 18,569
Number of properties at
end of period 53 57 53 61 66 63 68 123
Occupancy rate at end of
the period 86% 90% 90% 99% 92% 96% 92% 94%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CABOT PARTNERS (5)
- ------------------
----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------ -------------------------
1992 1993 1994 1995 1996 1996 1997
Dollars in thousands -------- -------- -------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 3,618 $ 4,088 $ 4,159 $ 6,516 $ 7,908 $ 3,324 $ 4,413
General and administra-
tive expenses 3,992 4,074 4,267 5,069 5,888 2,874 3,323
Depreciation and amorti-
zation expense 480 480 474 453 419 210 255
Equity in income (loss)
from unconsolidated
subsidiary 48 38 46 63 (7) (44) 22
<CAPTION>
-------- -------- -------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (806) $ (428) $ (536) $ 1,057 $ 1,594 $ 196 $ 857
<CAPTION>
======== ======== ======== ======== ======== ============ =============
----------------------------------------------------------------------------
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------ --------------------------
1992 1993 1994 1995 1996 1996 1997
Dollars in thousands -------- -------- -------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 5,412 $ 4,923 $ 4,300 $ 5,628 $ 6,075 $ 4,873 $ 5,081
Total liabilities 440 379 292 563 485 682 703
Total partners' capital 4,972 4,544 4,008 5,065 5,590 4,191 4,378
<CAPTION>
----------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------ -------------------------
1992 1993 1994 1995 1996 1996 1997
Dollars in thousands -------- -------- -------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flows provided by
(used in):
Operating activities $ (269) $ (173) $ (12) $ 1,351 $ 1,283 $ 238 $ 1,048
Investing activities 5 25 40 (6) 113 (13) 28
Financing activities 0 0 0 0 (1,069) (1,069) (2,069)
Assets under manage-
ment (6) $442,000 $472,000 $515,000 $778,000 $979,000 $ 863,000 $ 1,120,000
</TABLE>
- -------
(1) Represents historical combined financial and other data for the Existing
Investors Property Group for the periods indicated. See Note (1) to Combined
Financial Statements of the Existing Investors Property Group.
(2) Pro forma net income per Common Share equals the pro forma net income
divided by issued and outstanding Common Shares (assuming the exchange of
the issued and outstanding Units into Common Shares).
(3) EBITDA is computed as operating income before gain on sale of properties
plus interest expense, income taxes, depreciation and amortization. Management
believes that in addition to cash flows and net income, EBITDA is a useful
financial performance measure of assessing the operating performance of an
equity REIT because, together with net income and cash flows, EBITDA provides
investors with an additional basis to evaluate the ability of a REIT to incur
and service debt and to fund acquisitions and other capital expenditures. To
evaluate EBITDA and the trends it depicts, the components of EBITDA, such as
revenues, property operating expenses, real estate tax and general and adminis-
trative expenses should be considered. See "Management's Discussion and Anal-
ysis of Financial Condition and Results of Operations." Excluded from EBITDA
are financing costs such as interest, as well as depreciation and amortization,
each of which can significantly affect a REIT's results of operations and
liquidity and should be considered in evaluating a REIT's operating perfor-
mance. Further, EBITDA does not represent net income or cash flows from operat-
ing, financing and investing activities as defined by GAAP and does not neces-
sarily indicate that cash flows will be sufficient to fund cash needs. It
should not be considered as an alternative to net income as an indicator of the
Company's operating performance or to cash flows as a measure of liquidity.
(4) Funds from Operations ("FFO") represents net income before minority inter-
ests and extraordinary items, adjusted for depreciation on real property and
amortization of tenant improvements costs and lease commissions, gains from the
sale of properties and FFO attributable to minority interests in consolidated
joint ventures whose interests are not convertible into shares of Common Stock.
In addition to cash flow and net income, management and industry analysts gen-
erally consider FFO to be one additional measure of the performance of an
equity REIT because together with net income and cash flows, FFO provides
investors with an additional basis to evaluate the ability of an entity to
incur and service debt and to fund acquisitions and other capital expenditures.
However, FFO does not measure whether cash flow is sufficient to fund all of an
entity's cash needs including principal amortization, capital improvements and
distributions to stockholders. FFO also does not represent cash generated from
operating, investing or financing activities as determined in accordance with
GAAP. FFO should not be considered as an alternative to net income as an indi-
cator of an entity's operating performance or as an alternative to cash flow as
a measure of liquidity. Further, FFO as disclosed by other REITs may not be
comparable to the Company's calculation of FFO. The Company calculates FFO in
accordance with the White Paper on Funds from Operations approved by the Board
of Governors of NAREIT in March 1995.
(5) Represents the historical financial and other data of Cabot Partners for
periods prior to the Formation Transactions.
(6) Based on the fair market value of such assets as of the dates indicated.
13
<PAGE>
RISK FACTORS AND INVESTMENT CONSIDERATIONS
An investment in the Common Shares involves various risks and considerations.
Prospective investors should carefully consider the following information in
conjunction with the other information contained in this Prospectus before
making a decision to purchase Common Shares in the Offering.
OFFERING PRICE MAY NOT REFLECT VALUES OF THE PROPERTIES
The value of the Company and the Offering Price have not been determined on
the basis of valuations of the fair market value of the Properties or other
assets, although third-party estimates of derived contribution values were
obtained in August and September 1997 solely to assist the Cabot Group and the
Contributing Investors in determining the relative ownership interests in the
Company to be received by such parties in the Formation Transactions. Rather,
the focus of the valuation of the Company in connection with the negotiation
of the Offering Price between the Company and the Representatives of the
Underwriters has been based on pro forma adjusted Funds from Operations, esti-
mated cash available for distribution, the Company's potential for growth,
multiples of publicly traded REITs, and the other factors set forth under "Un-
derwriting." Management believes it is appropriate to value the Company as an
ongoing business, rather than with a view to values that could be obtained
from a liquidation of the Company or of individual assets owned by the Com-
pany. Accordingly, the aggregate market value of the Common Shares offered
hereby does not exceed the aggregate fair market value of the proportionate
interest in the Properties and other assets they represent.
RISK OF INABILITY TO SUSTAIN DISTRIBUTION LEVEL
The Company's initial intended distribution level for the twelve months fol-
lowing the Offering is based on a number of assumptions, including assumptions
relating to future operations of the Company. These assumptions concern, among
other matters, continued property occupancy and profitability of tenants, the
amount of future capital expenditures and expenses relating to the Company's
properties, the level of leasing activity and future rental rates, the
strength of the industrial real estate market, competition, the costs of com-
pliance with environmental and other laws, the amount of uninsured losses and
decisions by the Company to reinvest rather than distribute cash available for
distribution. The Company currently expects to maintain its initial distribu-
tion level throughout 1998. A number of the assumptions described above, how-
ever, are beyond the control of the Company. Accordingly, no assurance can be
given that the Company will be able to maintain its initial distribution level
beyond such date.
ANTITAKEOVER EFFECTS OF OWNERSHIP LIMIT, STAGGERED BOARD AND POWER TO ISSUE
ADDITIONAL SHARES
Potential Effects of Ownership Limitation. For the Company to maintain its
qualification as a REIT under the Code, not more than 50% in value of the cap-
ital shares of the Company may be owned, directly or indirectly, by five or
fewer persons (defined in the Code to include certain entities) at any time
during the last half of any taxable year other than the first taxable year for
which the election to be treated as a REIT has been made. See "Federal Income
Tax considerations--Taxation of the Company." To ensure that the Company will
not fail to qualify as a REIT under this and other tests under the Code, the
Company's Declaration of Trust authorizes the Trustees, subject to certain
exceptions, to take such actions as may be necessary or desirable to preserve
its qualification as a REIT and to limit any person to direct or indirect own-
ership of no more than (i) 9.8% of the Company's number of issued and out-
standing capital shares, or (ii) 9.8% of the total equity value of such cap-
ital shares (the "Ownership Limit"). The Company's Board of Trustees, upon
receipt of a ruling from the Service, an opinion of counsel or other evidence
satisfactory to the Board, and upon such other conditions as the Board may
establish, may exempt a proposed transferee from the Ownership Limit. However,
the Board may not grant an exemption from the Ownership Limit to any proposed
transferee whose ownership, direct or indirect, of shares of beneficial
interest of the Company in excess of the Ownership Limit would result in the
termination of the Company's status as a REIT. A transfer of shares in viola-
tion of the above limits may be void under certain circumstances. See "De-
scription of Shares of Beneficial Interest--Restrictions on Transfer." The
foregoing restrictions on transferability and ownership will continue to apply
until the Board of Trustees determines that it is no longer in the best inter-
ests of the Company to attempt to qualify, or to continue to qualify, as a
REIT. The Ownership Limit may have the effect of delaying, deferring or pre-
venting a transaction or a change in control of the Company that might involve
a premium over the then prevailing market price for the Common Shares or oth-
erwise be in the best interest of the shareholders. See "Description of Shares
of Beneficial Interest--Restrictions on Transfer."
14
<PAGE>
Potential Effects of Staggered Elections of Trustees. The Company's Board of
Trustees is divided into three classes. The initial terms of the first, second
and third classes will expire in 1998, 1999 and 2000, respectively. Beginning
in 1998, Trustees of each class will be chosen for three-year terms upon the
expiration of their current terms and one class of Trustees will be elected by
the shareholders each year. The staggered terms of the Trustees may reduce the
possibility of a tender offer or an attempt to change control of the Company,
even though a tender offer or change in control might be considered by the
shareholders to be desirable. See "Certain Provisions of Maryland Law and of
the Company's Declaration of Trust and Bylaws--Classification of the Board of
Trustees."
Potential Effects of Issuance of Additional Shares, Other Matters. The
Company's Declaration of Trust authorizes the Board of Trustees to (i) amend
the Declaration of Trust, without shareholder approval, to increase or decrease
the aggregate number of shares of beneficial interest of any class, including
Common Shares, that the Company has the authority to issue, (ii) cause the Com-
pany to issue additional authorized but unissued Common or Preferred Shares,
and (iii) classify or reclassify any unissued Common Shares and Preferred
Shares and to set the preferences, rights and other terms of such classified or
unclassified shares. See "Description of Shares of Beneficial Interest."
Although the Board of Trustees has no intention to do so at the present time,
it will be authorized pursuant to these provisions to establish a class or
series of shares of beneficial interest that could, depending on the terms of
such series, delay, defer or prevent a transaction or a change in control of
the Company that might involve a price for the Common Shares or other attri-
butes that the shareholders may consider to be desirable. The Declaration of
Trust and Bylaws of the Company also contain other provisions that may have the
effect of delaying, deferring or preventing a transaction or a change in con-
trol of the Company that might involve a price for the Common Shares or other
attributes that the shareholders may consider to be desirable. See "Certain
Provisions of Maryland Law and of the Company's Declaration of Trust and
Bylaws--Removal of Trustees," "--Control Share Acquisitions" and "--Advance
Notice of Trustee Nominations and New Business." The Company also may cause the
Operating Partnership to offer additional Units in exchange for property or
otherwise. Existing shareholders will have no preemptive right to acquire any
such equity securities, and any such issuance of equity securities could result
in dilution of an existing shareholder's investment in the Company.
TAX RISKS
Failure to Qualify as a REIT; Lack of Management Experience in Maintaining
Qualification as a REIT. The Company intends to operate so as to qualify as a
REIT for federal income tax purposes. The Company has not requested, and does
not expect to request, a ruling from the Service that it qualifies as a REIT.
The Company has received an opinion of its counsel that, based on certain
assumptions and representations, it so qualifies. Investors should be aware,
however, that opinions of counsel are not binding on the Service or any court.
The REIT qualification opinion only represents the view of counsel to the Com-
pany based on such counsel's review and analysis of existing law, which
includes no controlling precedent. Furthermore, both the validity of the
opinion and the qualification of the Company as a REIT will depend on the
Company's continuing ability to meet various requirements concerning, among
other things, the ownership of its outstanding stock, the nature of its assets,
the sources of its income and the amount of its distributions to its sharehold-
ers. Because management of the Company has no history of operating so as to
qualify as a REIT, there can be no assurance that the Company will do so suc-
cessfully. See "Federal Income Tax Considerations--Taxation of the Company."
If the Company were to fail to qualify as a REIT for any taxable year, the Com-
pany would not be allowed a deduction for distributions to its shareholders in
computing its taxable income and would be subject to federal income tax (in-
cluding any applicable minimum tax) on its taxable income at regular corporate
rates. Unless entitled to relief under certain Code provisions, the Company
also would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. As a result, cash
available for distribution would be reduced for each of the years involved.
Although management intends to operate the Company in a manner designed to meet
the REIT qualification requirements, it is possible that future economic, mar-
ket, legal, tax or other considerations may cause the Board of Trustees to
revoke the REIT election. See "Federal Income Tax Considerations."
Other Tax Liabilities. Even if the Company qualifies as a REIT, it will be sub-
ject to certain state and local taxes on its income and property, and may be
subject to certain federal taxes. See "Federal Income Tax Considerations--Taxa-
tion of the Company." In addition, the net taxable income, if any, from activi-
ties conducted through the Management Company will be subject to federal and
state income tax.
REIT Minimum Distribution Requirements; Possible Incurrence of Additional
Debt. In order to qualify as a REIT, the Company generally will be required
each year to distribute to its shareholders at least 95% of its net taxable
income (excluding any net capital gain). In addition, the Company will be sub-
ject to a 4% nondeductible excise tax on the amount,
15
<PAGE>
if any, by which certain distributions paid by it with respect to any calendar
year are less than the sum of (i) 85% of its ordinary income for that year,
(ii) 95% of its capital gain net income for that year, and (iii) 100% of its
undistributed taxable income from prior years. The Company intends to make dis-
tributions to its shareholders to comply with the 95% distribution requirement
and to avoid the nondeductible excise tax. The Company's income will consist
primarily of its share of the income of the Operating Partnership, and the cash
available for distribution by the Company to its shareholders will consist of
its share of cash distributions from the Operating Partnership. Differences in
timing between (i) the actual receipt of income and actual payment of deduct-
ible expenses, and (ii) the inclusion of such income and deduction of such
expenses in arriving at taxable income of the Company could require the Com-
pany, through the Operating Partnership, to borrow funds on a short-term basis
to meet the 95% distribution requirement and to avoid the nondeductible excise
tax.
REAL ESTATE INVESTMENT RISKS
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend in
large part on the amount of rental income earned and capital appreciation gen-
erated, as well as property operating and other expenses incurred. If the
Company's properties do not generate revenues sufficient to meet operating
expenses, including debt service, tenant improvements, leasing commissions and
other capital expenditures, the Company may have to borrow additional amounts
to cover fixed costs, and the Company's cash flow and ability to make distribu-
tions to its shareholders may be adversely affected.
The Company's revenues and the value of its properties may be adversely
affected by a number of factors, including (i) the national, state and local
economic climate and real estate conditions (such as oversupply of or reduced
demand for space and changes in market rental rates), (ii) the perceptions of
prospective tenants of the attractiveness, convenience and safety of the
Company's properties, (iii) the ability of the Company to provide adequate man-
agement, maintenance and insurance, (iv) the ability to collect all rent from
tenants on a timely basis, (v) the expense of periodically renovating,
repairing and reletting spaces, and (vi) increasing operating costs (including
real estate taxes and utilities) to the extent that such increased costs cannot
be passed through to tenants. Certain significant costs associated with invest-
ments in real estate (such as mortgage payments, real estate taxes, insurance
and maintenance costs) generally are not reduced when circumstances cause a
reduction in rental revenues from the property and vacancies result in loss of
the ability to receive tenant reimbursements of operating costs customarily
borne by industrial real estate tenants. In addition, real estate values and
income from properties are also affected by such factors as compliance with
laws applicable to real property, including environmental and tax laws,
interest rate levels and the availability of financing. Furthermore, the amount
of available rentable square feet of commercial property is often affected by
market conditions and may therefore fluctuate over time.
Tenant Defaults and Bankruptcy. A significant portion of the Company's income
will be derived from rental income from its properties. The Company's distrib-
utable cash flow and ability to make expected distributions to shareholders
would be adversely affected if a significant number of its tenants failed to
meet their lease obligations. Tenants may seek the protection of the bankruptcy
laws, which could result in delays in rental payments or in the rejection and
termination of such tenant's lease and thereby cause a reduction in the
Company's cash flow and the amounts available for distributions to its share-
holders. No assurance can be given that tenants will not file for bankruptcy
protection in the future or, if any tenants file, that they will affirm their
leases and continue to make rental payments in a timely manner. In addition, a
tenant from time to time may experience a downturn in its business which may
weaken its financial condition and result in the failure to make rental pay-
ments when due. If tenant leases are not affirmed following bankruptcy or if a
tenant's financial condition weakens, the Company's cash flow and the amounts
available for distribution to its shareholders may be adversely affected.
Operating Risks. The Company's properties will be subject to operating risks
common to commercial real estate in general, any and all of which may adversely
affect occupancy and rental rates. Such properties will be subject to increases
in operating expenses such as cleaning, electricity, heating, ventilation and
air conditioning and maintenance, insurance and administrative costs, and other
general costs associated with security, landscaping, repairs and maintenance.
While the Company's current tenants generally are obligated to pay a portion of
these escalating costs, there can be no assurance that tenants will agree to
pay all or a portion of such costs upon renewal or that new tenants will agree
to pay such costs. If operating expenses increase, the local rental market may
limit the extent to which rents may be increased to meet increased expenses
without decreasing occupancy rates. While the Company implements cost-saving
incentive measures at each of its properties, the Company's ability to make
distributions to shareholders could be adversely affected if operating expenses
increase without a corresponding increase in revenues, including tenant reim-
bursements of operating costs.
16
<PAGE>
Risks of Non-renewal of Leases and Vacancies. The Company will be subject to
the risk that upon expiration of leases for space located in its properties,
the leases may not be renewed, the space may not be relet or the terms of
renewal or reletting (including the cost of required renovations) may be less
favorable than expiring lease terms. Leases on a total of approximately 3.3%
and 16.1% of the total leased area of the Properties will expire in the last
four months of 1997 and in all of 1998, respectively. The Company has estab-
lished annual reserves for renovation and reletting expenses, which take into
consideration its views of both the current and expected business conditions in
the appropriate markets, but no assurance can be given that these reserves will
be sufficient to cover such expenses. If the Company were unable to promptly
relet or renew the leases for all or a substantial portion of the Company's
space, if the rental rates upon such renewal or reletting were significantly
lower than expected rates or if its reserves for these purposes proved inade-
quate, then the Company's cash flow and ability to make expected distributions
to shareholders may be adversely affected.
Competition; Risk of Not Meeting Targeted Level of Leasing Activity, Acquisi-
tions and Development. Numerous industrial properties compete with the Proper-
ties in attracting tenants to lease space and additional properties can be
expected to be built in the markets in which the Company's properties are
located. The number and quality of competitive industrial properties in a par-
ticular area will have a material effect on the Company's ability to lease
space at the Properties or at newly acquired properties and on the rents
charged. Some of these competing properties may be newer or better located than
the Company's properties. In addition, the industrial real estate market has
become highly competitive. There are a significant number of buyers of indus-
trial property, including other publicly traded industrial REITs, many of which
have significant financial resources. This has resulted in increased competi-
tion in acquiring attractive industrial properties. See "--Risks Associated
with Acquisition, Development and Construction Activities." Accordingly, it is
possible that the Company may not be able to meet its targeted level of prop-
erty acquisitions and developments due to such competition or other factors
which may have an adverse effect on the Company's expected growth in Funds from
Operations.
Possible Environmental Liabilities. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under or in such property. Such laws often
impose liability whether or not the owner or operator knew of, or was respon-
sible for, the presence of such hazardous or toxic substances. In addition, the
presence of hazardous or toxic substances, or the failure to remediate such
property properly, may adversely affect the owner's ability to borrow using
such real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or remediation of hazardous substances at the disposal or treatment
facility, whether or not such facility is or ever was owned or operated by such
person. Certain environmental laws and common law principles could be used to
impose liability for release of and exposure to hazardous substances, including
asbestos-containing materials ("ACMs"), into the air, and third parties may
seek recovery from owners or operators of real properties for
personal injury or property damage associated with exposure to released haz-
ardous substances, including ACMs. As the owner of real properties, the Company
may be potentially liable for any such costs. Phase I environmental site
assessments ("ESAs") were obtained in connection with the initial acquisition
of the Properties by the Contributing Investors, for those Properties managed
by Cabot Partners as of June 30, 1997, and, for all other Properties, in con-
nection with their contribution to the Company in the Formation Transactions.
The purpose of Phase I ESAs is to identify potential sources of contamination
for which the Company may be responsible and to assess the status of environ-
mental regulatory compliance. Where recommended in the Phase I ESA, invasive
procedures, such as soil sampling and testing or the installation and moni-
toring of groundwater wells, were subsequently performed.
The Phase I ESAs, including subsequent procedures where applicable, have not
revealed any environmental liability that the Company believes would have a
material adverse affect on the Company's business, assets or results of opera-
tions, nor is the Company aware of any such material environmental liability.
Nevertheless, it is possible that the Phase I ESAs relating to any one of the
Properties do not reveal all environmental liabilities or that there are mate-
rial environmental liabilities of which the Company is unaware. Moreover, there
can be no assurance that (i) future laws, ordinances or regulations will not
impose any material environmental liability or (ii) the current environmental
condition of the Properties will not be affected by tenants, by the condition
of land or operations in the vicinity of the Properties (such as the presence
of underground storage tanks) or by third parties unrelated to the Company.
Effect of Americans with Disabilities Act Compliance on Cash Flow and
Distributions. Under the Americans with Disabilities Act of 1990 (the "ADA"),
all public accommodations and commercial facilities are required to meet cer-
tain federal requirements related to access and use by disabled persons.
Existing industrial properties generally are exempt from the
17
<PAGE>
provisions of the ADA but may be subject to provisions requiring that build-
ings be made accessible to people with disabilities. Compliance with the ADA
requirements could require removal of access barriers, and non-compliance
could result in imposition of fines by the U.S. government or an award of dam-
ages to private litigants. While the amounts of such compliance costs, if any,
are not currently ascertainable, they are not expected to have a material
effect on the Company.
Changes in Laws. Because increases in income or service taxes generally are
not passed through to tenants under leases, such increases may adversely
affect the Company's cash flow and its ability to make distributions to share-
holders. The Properties also are subject to various federal, state and local
regulatory requirements and to state and local fire and life-safety require-
ments. Failure to comply with these requirements could result in the imposi-
tion of fines by governmental authorities or awards of damages to private lit-
igants. The Company believes that the Properties currently are in material
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company's cash flow and
ability to make expected distributions to shareholders.
Uninsured Losses. The Company will generally carry commercial general lia-
bility insurance, standard "all-risk" property insurance, and flood and earth-
quake (where appropriate) and rental loss insurance with respect to the Prop-
erties with policy terms and conditions customarily carried for similar prop-
erties. No assurance can be given, however, that material losses in excess of
insurance proceeds will not occur in the future which would adversely affect
the business of the Company and its financial condition and results of opera-
tions. In addition, certain types of losses (such as from wars or from earth-
quakes for Properties located in California), however, may be either uninsur-
able or not economically insurable. Should an uninsured loss or a loss in
excess of insured limits occur, the Company could lose its capital invested in
a property, as well as the anticipated future revenue from such property, and
would continue to be obligated on any mortgagee indebtedness or other obliga-
tions related to the property. With certain exceptions, the Company does not
carry earthquake insurance on the Properties located in California. In light
of the California earthquake risk, California building codes have since the
early 1970's established construction standards for all new buildings and also
contain guidelines for seismic upgrading of buildings intended to reduce the
possibility and severity of loss from earthquakes. It is the Company's policy
to obtain assessments from qualified third-party professionals of the seismic
standards of its Properties located in California and to conduct such seismic
upgrading thereof as it determines, on the basis of such third-party assess-
ments, to be appropriate. Such upgrading, however, does not eliminate the pos-
sibility of earthquake loss. In addition, such upgrading with respect to a
number of such Properties is at various stages of completion as of the date
hereof, ranging from initial plan review to partial completion of construc-
tion. Of the Company's 32 Properties located in California, 13 were covered by
earthquake insurance. Seismic upgrading has been completed on four of the
Properties located in California and is expected to be completed with respect
to its remaining California Properties within 12 months from date hereof. The
Company currently maintains blanket earthquake insurance coverage for all
Properties located outside California in amounts it deems reasonable.
Risks Associated with Illiquidity of Real Estate. Equity real estate invest-
ments are relatively illiquid. Such illiquidity will tend to limit the ability
of the Company to vary its portfolio promptly in response to changes in eco-
nomic or other conditions. In addition, the Code limits the ability of a REIT
to sell properties held for fewer than four years, which may affect the
Company's ability to sell properties without adversely affecting returns to
holders of Common Shares.
Risks Associated with Acquisition, Development and Construction
Activities. The Company intends to acquire existing industrial properties to
the extent that they can be acquired on advantageous terms and meet the
Company's investment criteria. See "Business and Growth Strategies--Growth
Strategies--Acquisitions." Acquisitions of such properties entail general
investment risks associated with any real estate investment, including the
risk that investments will fail to perform in accordance with expectations or
that estimates of the costs of improvements to bring an acquired property up
to the Company's standards may prove inaccurate.
The Company also intends to grow through the selective development and con-
struction of industrial properties, including build-to-suit properties and
speculative development, as suitable opportunities arise. See "The Company--
Business Strategies and Operations." Additional risks associated with such
real estate development and construction activities include the risk that the
Company may abandon development activities after expending significant
resources to determine their feasibility; the construction cost of a project
may exceed original estimates; occupancy rates and rents at a newly completed
property may not be sufficient to make the property profitable; financing may
not be available on favorable terms for development of a property; and the
construction and lease up of a property may not be completed on schedule (re-
sulting in increased debt service and construction costs). Development activi-
ties are also subject to risks relating to inability to obtain, or delays in
obtaining, necessary zoning, land-use, building occupancy and other required
governmental permits
18
<PAGE>
and authorizations. If any of the above occur, the Company's cash flow and
ability to make expected distributions to shareholders could be adversely
affected. In addition, new development activities, regardless of whether they
are ultimately successful, may require a substantial portion of management's
time and attention.
Risk of Reassessment. Certain local real property tax assessors may seek to
reassess certain of the Properties as a result of the Formation Transactions
and the transfer of interests to occur in connection therewith. In jurisdic-
tions such as California, where Proposition 13 limits the assessor's ability to
reassess real property so long as there is no change in ownership, the assessed
value could increase by as much as the full value of any appreciation that has
occurred during the Contributing Investors' period of ownership. Where appro-
priate, the Company would contest vigorously any such reassessment. Certain of
the current leases may permit the Company to pass through to tenants a portion
of the effect of any increases in real estate resulting from any such reassess-
ment.
CONFLICTS OF INTEREST IN THE FORMATION TRANSACTIONS AND THE BUSINESS OF THE
COMPANY
Benefits to the Cabot Group Participants and the Contributing Investors. The
Cabot Group Participants and the other Contributing Investors will receive cer-
tain benefits from the Formation Transactions. As such, these persons may have
interests that differ from, and may in certain cases conflict with, the inter-
ests of persons acquiring Common Shares in the Offering. The benefits the Cabot
Group Participants and the other Contributing Investors will receive might have
been different if they had not participated in structuring the Formation Trans-
actions. These benefits include the following: (i) receipt by certain of the
Cabot Group Participants, as officers and Trustees of the Company, of options
to purchase an aggregate of Common Shares under the Company's Long Term
Incentive Plan at the Offering Price, subject to certain vesting requirements,
which will have an aggregate purchase price of approximately $ million based
on the Offering Price, (ii) deferral of certain tax consequences to the Cabot
Group Participants from the contribution of their interests in Cabot Partners
and the interests of the C-M Property Partnerships in certain Properties to the
Operating Partnership, and (iii) the Operating Partnership's assumption and
repayment from the proceeds of the Offering of approximately $18.5 million and
$13.3 million, respectively, in debt relating to the Properties beneficially
owned by the Cabot Group Participants. See "Certain Relationships and Transac-
tions--Benefits to Related Parties," "Use of Proceeds" and "Management--Long
Term Incentive Plan."
Immediate and Substantial Dilution. The Properties and other assets to be con-
tributed by the Cabot Group Participants and the Contributing Investors in
exchange for Units and Common Shares have a pro forma net tangible book value
of $ per Common Share as of June 30, 1997. The pro forma net tangible book
value per share of the assets of the Company after the Offering will be sub-
stantially less than the Offering Price per share. Accordingly, purchasers of
the Common Shares offered hereby will experience an immediate dilution of $
per Common Share in the net tangible book value of the Common Shares based on
the Offering Price. See "Dilution."
Limitations on Representations and Warranties. The Contributing Investors and
Cabot Partners have each made certain representations and warranties to the
Company in the Contribution Agreement entered into among the parties in connec-
tion with the Formation Transactions. Such representations and warranties,
which in the case of environmental matters and certain other matters are lim-
ited to the knowledge of specified entities and persons, relate to, among other
things, their authority to enter into the Formation Transactions, their owner-
ship of the Properties or other assets to be contributed by them, and the
absence of certain liabilities and other matters relating to the Properties and
such assets. The respective obligations of each Contributing Investor and of
Cabot Partners to indemnify the Company in the event of breach of any of such
representations and warranties, or breach of certain other provisions of the
Contribution Agreement or under certain other circumstances is subject to an
overall limitation under the Contribution Agreement equal to the value (based
on the Offering Price) of the Units or Common Shares received by the Contrib-
uting Investor in the Formation Transactions (or in lieu thereof, the return to
the Company of all such Units or Common Shares received), and is subject to the
further limitation that any such indemnification obligation relating to a spe-
cific Property is limited to the contribution amount assigned to such Property
by the parties in connection with the Formation Transactions. The obligation to
make any such indemnification payments may be satisfied by making cash payments
or by delivering Common Shares or Units, valued at the then market price for
Common Shares, to the Company. In addition, such indemnification obligations
are, with certain limited exceptions, limited to claims for indemnification
made within one year after the completion of the Formation Transactions. Any
losses to the Company resulting from breaches of such representations and war-
ranties or other provisions of the Contribution Agreement in excess of the
foregoing indemnification limitations would have to be satisfied out of the
Company's assets, with the potential consequences of adversely affecting the
Company's financial condition and of decreasing cash available for distribution
to the shareholders.
19
<PAGE>
Enforcement of Terms of Contribution and Other Agreements. The Cabot Group Par-
ticipants, some of whom are Trustees and executive officers of the Company, and
the other Contributing Investors each, directly or indirectly, have ownership
interests in certain of the Properties and in the other assets to be acquired
by the Company. Following the closing of the Offering and consummation of the
Formation Transactions, the Company, under the agreements relating to the con-
tribution of the Properties and such other assets, will be entitled to indemni-
fication and damages in the event of breaches of certain of the terms thereof.
Due to conflicts of interest or in order to maintain an ongoing business rela-
tionship with the entity or individual involved, such officers and Trustees may
cause the Company to choose to enforce its rights under any of these contribu-
tion agreements and to pursue available remedies, such as actions for damages
or injunctive relief, less vigorously than it otherwise might.
Differing Objectives Between the Cabot Group Participants and the Company
Relating to the Sale of the Properties. As holders of Units, the Cabot Group
Participants will have unrealized taxable gain associated with their interests
in certain Properties contributed to the Operating Partnership. Because the
Cabot Group Participants may incur different and more adverse tax consequences
than the Company upon the sale of those Properties, the Cabot Group Partici-
pants and the Company may have different views regarding the appropriate
pricing and timing of any sale of such Properties. While the Company has the
exclusive authority as to whether and on what terms to sell an individual Prop-
erty, the Cabot Group Participants through their status as holders of Units and
senior executives and Trustees of the Company may influence the Company not to
sell the Properties even though such event might otherwise be financially
advantageous to the Company. See "Policies With Respect to Certain Activities--
Conflict of Interest Policies."
Influence of Significant Shareholders. Upon the closing of the Offering,
and will be deemed beneficially to own approximately % and % of the
outstanding Common Shares (assuming, with respect to each such person, only the
exchange of the Units owned by such person into Common Shares), respectively.
and , at such time as each may become a shareholder, will have influ-
ence on the management and operations of the Company and the outcome of matters
submitted to a vote of the Company's shareholders. Such influence might be
exercised in a manner that is inconsistent with the interests of other share-
holders.
Risks Relating to the Operating Partnership. Persons holding Units in the Oper-
ating Partnership (including the Cabot Group Participants) will have the right
to vote, as limited partners of the Operating Partnership ("Limited Partners"),
on certain amendments to the Operating Partnership Agreement (most of which
require approval by a majority in interest of the Limited Partners), on certain
matters involving the Company (such as a merger of the Company or an amendment
to the Declaration of Trust that requires the approval of the Company's share-
holders), see "Partnership Agreement of Operating Partnership--Management," and
individually to approve certain amendments that would adversely affect their
rights, which may be exercised in a manner that conflicts with the interests of
the Company's shareholders. After the Offering, the Company, as the general
partner of the Operating Partnership, may have fiduciary duties to the Limited
Partners, the discharge of which may conflict with interests of the Company's
shareholders. Pursuant to the Operating Partnership Agreement, however, the
Limited Partners have acknowledged that the Company is acting both on behalf of
the Company's shareholders and, in its capacity as general partner of the Oper-
ating Partnership, on behalf of the Limited Partners. The Limited Partners have
agreed that the Company is under no obligation to consider the separate inter-
ests of the Limited Partners in deciding whether to cause the Operating Part-
nership to take (or decline to take) any actions which the General Partner has
taken in good faith on behalf of the Operating Partnership.
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON SHARES
Prior to the Offering, there has been no public market for the Common Shares
and there can be no assurance that an active trading market will develop or be
sustained or that Common Shares will be resold at or above the Offering Price.
The Company has applied for listing of the Common Shares on the NYSE. The
Offering Price has been determined by agreement between the Company and the
Representatives of the Underwriters and may not be indicative of the market
price for the Common Shares after the Offering. See "Formation Transactions--
Contribution Amounts of Properties and Cabot Partners" and "Underwriting." The
market value of the Common Shares could be substantially affected by general
market conditions, including changes in interest rates. Moreover, numerous
other factors, such as regulatory action and changes in tax laws, could have a
significant impact on the future market price of the Common Shares. There also
can be no assurances that, following listing, the Company will continue to meet
the criteria for continued listing of the Common Shares on the NYSE.
20
<PAGE>
POSSIBLE ADVERSE EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON SHARES
One of the factors that is expected to influence the market price of the
Common Shares is the annual distribution rate on the Common Shares. An
increase in market interest rates may lead prospective purchasers of the
Common Shares to demand a higher annual distribution rate from future distri-
butions. Such an increase in the required distribution rate may adversely
affect the market price of the Common Shares.
POSSIBLE ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE SALE ON PRICE OF COMMON
SHARES
Sales of a substantial number of Common Shares, or the perception that such
sales could occur, could adversely affect prevailing market prices of the
Common Shares. In addition to the Common Shares offered by the Company in the
Offering, the Company will issue Units and Common Shares to the Con-
tributing Investors (not including the C-M Property Partnerships ) and
Units to the Cabot Group Participants and the C-M Property Partnerships in the
Formation Transactions. See "Formation Transactions." The Contributing
Investors and the Cabot Group Participants will not be permitted to offer,
sell, contract to sell or otherwise dispose of the Units or Common Shares,
except in certain limited circumstances, for one year after the closing of the
Offering, or two years thereafter in the case of the partners of Cabot Part-
ners and of C-M Holdings. See "Shares Available for Future Sale." At the con-
clusion of such period, and, in the case of Units, upon the subsequent
exchange of Units for Common Shares, the Common Shares received therefor may
be sold in the public market pursuant to shelf registration statements which
the Company is obligated to file on behalf of the Contributing Investors and
the Cabot Group Participants or pursuant to any available exemptions from reg-
istration.
In addition, options to purchase a total of Common Shares will be granted
to certain executive officers, employees and Trustees upon the closing of the
Offering. See "Management--Compensation of Trustees" and "--Long Term Incen-
tive Plan." No prediction can be made concerning the effect that future sales
of any of such Common Shares will have on the market prices of shares.
ERISA RISKS
ERISA and section 4975 of the Code prohibit certain transactions that involve
an ERISA plan and a "party in interest" or "disqualified person" (collectively
referred to herein as a "party in interest") with respect to the plan. Cabot
Partners is a party in interest with respect to one ERISA plan that is a Con-
tributing Investor. It is not clear that the Formation Transactions would con-
stitute a prohibited transaction with respect to such plan. Nevertheless, such
plan has informed the Company that it is relying on Prohibited Transaction
Exemption 84-14 ("PTE 84-14") and has retained a Qualified Professional Asset
Manager ("QPAM") to decide whether or not to enter into the Formation Transac-
tions. If it were ultimately determined that the Formation Transactions con-
stitute a prohibited transaction, and also that PTE 84-14 does not apply to
such plan's participation in the Formation Transactions, then sanctions could
be imposed on Cabot Partners and the fiduciaries of such plan that could
include reallocation of Units between Cabot Partners and such plan or other
remedies, possibly including rescission of the Property transfers from such
plan, intended to put such plan in a financial position not worse than that in
which it would have been if the parties had acted in accordance with the
requirements of ERISA. Cabot Partners and the Company have received an opinion
from Mayer, Brown & Platt that PTE 84-14 applies to the Formation Transactions
with respect to such plan; however, such opinion is not binding on the Depart-
ment of Labor, the Service or any court. See "ERISA Considerations."
RISKS ASSOCIATED WITH THE RECENT ACQUISITION OF NEW PROPERTIES; LACK OF
OPERATING HISTORY
Certain of the Properties acquired by the Company in the Formation Transac-
tions have not previously been, or only recently have been, under the manage-
ment of the Company or its predecessors. Such Properties, in addition to prop-
erties acquired in the future, may have characteristics or deficiencies
unknown to the Company affecting their valuation or revenue potential, and the
operating performance of the newly acquired properties may therefore decline.
As the Company acquires additional properties, the Company will be subject to
risks associated with managing new properties, including lease-up and tenant
retention. In addition, the Company's ability to manage its growth effectively
will require it to successfully integrate its new acquisitions into its
existing management structure.
21
<PAGE>
REAL ESTATE FINANCING RISKS
Debt Financing and Potential Adverse Effects on Cash Flows and
Distributions. Upon the consummation of the Formation Transactions and the
closing of the Offering, the Company expects to have no material outstanding
debt.As a result, among other things, of the annual income distribution
requirements applicable to REITs under the Code, however, the Company will be
required to rely on borrowings and other external sources of financing to fund
the costs of new property acquisitions, capital expenditures and other items.
Accordingly, the Company will be subject to real estate financing risks,
including changes from period to period in the availability of such financing,
the risk that the Company's cash flow may not be sufficient to cover both
required debt service payments and distributions to shareholders, and the risk
that indebtedness secured by properties will not be able to be refinanced or
that the terms of such refinancing will not be as favorable as the terms of
existing indebtedness. If the Company becomes unable to meet its required mort-
gage payment obligations, the property or properties subject to such mortgage
indebtedness could be foreclosed upon by or otherwise transferred to the mort-
gagee, with a consequent loss of income and asset value to the Company.
Rising Interest Rates. The Company, at present, generally desires to incur
indebtedness on a fixed rate basis, however, it is currently negotiating the
Acquisition Facility which would bear interest at variable rates, and it may
incur additional variable rate indebtedness in the future. Variable rate debt
creates higher debt service requirements if market interest rates increase,
which would adversely affect the Company's cash flow and the amounts available
for distribution to its shareholders. In such event, the Company may in the
future engage in transactions to limit its exposure to rising interest rates as
appropriate and cost effective.
POSSIBLE CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL; NO LIMITATION ON
DEBT
The Company's investment, financing and distribution policies, and its policies
with respect to all other activities, including growth, capitalization and
operations, will be determined by the Board of Trustees. The Company's "Debt
Limitation" described elsewhere in this Prospectus is a policy limiting the
Company's Debt-to-Total Market Capitalization Ratio to 40%, but the organiza-
tional documents of the Company do not contain any limitation on the amount of
indebtedness the Company may incur. Although the Company's Board of Trustees
has no present intention to do so, these policies may be amended or revised at
any time and from time to time at the discretion of the Board of Trustees
without a vote of the shareholders of the Company. A change in these policies
could adversely affect the Company's financial condition, results of operations
or the market price of the Common Shares. See "Policies with Respect to Certain
Activities."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers, including,
Ferdinand Colloredo-Mansfeld and Robert E. Patterson, the Company's Chief Exec-
utive Officer and President, respectively. The loss of either of their services
could have an adverse effect on the operations of the Company.
CONTROL OF MANAGEMENT
None of the Trustees or officers of the Company is selling any Common Shares in
the Offering. Upon the closing of the Offering, all Trustees and executive
officers of the Company as a group will beneficially own approximately % of
the total issued and outstanding Common Shares (assuming issuance of Common
Shares upon exchange of all of the Units owned by such group, which Units will
be exchangeable by the holders for Common Shares on a one-for-one basis or, at
the election of the Company, for cash, beginning one year after the closing of
the Offering). See "Principal and Management Shareholders." The Company cur-
rently expects it will elect to exchange such Units for Common Shares. Accord-
ingly, such Trustees and executive officers will have substantial influence on
the Company, which influence might not be consistent with the interests of all
other shareholders, and may in the future have a substantial influence on the
outcome of any matters submitted to the Company's shareholders for approval if
all of their Units are exchanged for Common Shares. See "--Conflicts of Inter-
ests in the Formation Transactions and the Business of the Company."
RISKS ASSOCIATED WITH RELIANCE ON FORWARD-LOOKING STATEMENTS.
This Prospectus contains "forward-looking statements" relating to, without lim-
itation, future economic performance, plans and objectives of management for
future operations and projections of revenue and other financial items, which
can be identified by the use of forward-looking terminology such as "may,"
"will," "should," "expect," "anticipate," "estimate," "believe" or "continue"
or the negative thereof or other variations thereon or comparable terminology.
The Company's actual results may differ significantly from the results dis-
cussed in such "forward-looking statements." Factors that could cause such dif-
ferences include, but are not limited to, the risks described in this Risk Fac-
tors and Investment Considerations section of the Prospectus.
22
<PAGE>
THE COMPANY
GENERAL
The Company is an internally managed, fully integrated real estate company that
was formed to continue and expand the national industrial real estate business
of Cabot Partners. Upon the closing of the Offering, the Company will be one of
the largest industrial property REITs, with a portfolio of 123 Properties con-
taining approximately 19 million rentable square feet located in 21 states
throughout the country. At June 30, 1997, the Properties were approximately 94%
leased to 202 tenants and no single tenant accounted for more than 4.0% of the
Company's total Annualized Base Rent. Approximately 96% of the Company's prop-
erties are located in the top 15% of the nation's 273 industrial markets, as
ranked by Cognetics on the basis of projected demand for industrial property
space.
The Company's strategy is to be the preeminent national real estate company
focused on serving a broad spectrum of industrial space users. The Company cur-
rently owns and operates a diversified portfolio of properties and has a sig-
nificant market presence across the United States, owning properties in a total
of 20 markets and owning Properties with approximately 1 million or more rent-
able square feet in seven of such markets. Its tenant base ranges from large
national distributors using bulk warehouse and other types of industrial space
in multiple locations to small companies located in single flexible workspace
properties. The Properties are within overnight trucking access (a 500-mile
radius) to 90% of the country's population. The Company believes that its geo-
graphic diversification and substantial presence in multiple markets is a stra-
tegic advantage that allows it (i) to serve industrial space users with mul-
tiple site and industrial property type requirements, (ii) compete more effec-
tively in its individual markets, and (iii) respond quickly to acquisition
opportunities in markets across the country.
The Company's markets, together with information summarizing its property hold-
ings in each market, are presented in the following table as of June 30, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------------
NUMBER RENTABLE SQUARE FEET ANNUALIZED NET RENT
OF --------------------- -----------------------
BY REGION(1) PROPERTIES NUMBER % OF TOTAL AMOUNT % OF TOTAL
- ------------ ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
WESTERN REGION
San Francisco 18 819,869 4.4% $ 3,580,469 5.6%
Los Angeles 14 2,186,026 11.8 7,391,804 11.5
Phoenix 5 946,503 5.1 2,210,041 3.4
Seattle 5 402,760 2.2 1,865,556 2.9
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Subtotal Western Region 42 4,355,158 23.5% $15,047,870 23.4%
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
SOUTHWEST REGION
Dallas 6 787,870 4.2% $ 2,637,902 4.1%
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
MIDWEST REGION
Chicago 12 2,582,328 13.9% $ 9,133,944 14.1%
Cincinnati/Northern
Kentucky 8 1,524,992 8.2 4,573,123 7.1
Columbus 9 1,609,599 8.7 3,968,763 6.3
Other 3 598,232 3.2 1,779,154 2.8
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Subtotal Midwest Region 32 6,315,151 34.0% $19,454,984 30.3%
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
SOUTHEAST REGION
Orlando 8 1,630,477 8.7% $ 5,613,919 8.7%
Memphis 1 336,080 1.8 778,522 1.2
Atlanta 3 359,530 1.9 1,304,227 2.0
Charlotte 1 231,835 1.3 555,924 0.9
Other 1 160,000 0.9 671,386 1.0
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Subtotal Southeast
Region 14 2,717,922 14.6% $ 8,923,978 13.8%
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
NORTHEAST REGION
Boston 3 208,197 1.1% $ 1,059,407 1.7%
New York/New Jersey 15 3,265,090 17.6 12,775,861 19.8
Baltimore/Washington,
D.C. 10 882,170 4.8 4,168,177 6.5
Other 1 37,800 0.2 248,970 0.4
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Subtotal Northeast
Region 29 4,393,257 23.7% $18,252,415 28.4%
<CAPTION>
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
TOTAL 123 18,569,358 100.0% $64,317,149 100.0%
<CAPTION>
========== ========== ========== =========== ==========
</TABLE>
- -------
(1) References to specific cities include suburban portions of the relevant
metropolitan areas.
23
<PAGE>
The Company offers a variety of industrial property types to meet the diverse
needs of its tenants. The Company classifies its properties into three general
categories: bulk distribution properties, multitenant distribution properties,
and workspace properties (light assembly and flex/R&D). The following table
provides information concerning the general characteristics, and the Company's
holdings, of each of these property types as of June 30, 1997.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT
--------------------- -----------------------------------
PER LEASED
PROPERTY TYPE PROPERTY CHARACTERISTICS NUMBER % OF TOTAL AMOUNT % OF TOTAL SQUARE FOOT
- ------------- ------------------------ ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bulk Distribution Buildings
configured for
large tenants
(generally at least
100,000 square
feet; building
depths of 240 feet
or more) 9,178,541 50% $28,335,361 44% $3.24
Multitenant Distribution Buildings
configured for
multitenant use
(generally tenant
sizes of 10,000-
100,000 square
feet; building
depths of less than
240 feet) 6,716,569 36% $23,369,623 36% $3.71
Workspace Light assembly and
flex/R&D (generally
tenant sizes of
3,000-70,000 square
feet) 2,674,248 14% $12,612,165 20% $5.07
---------- ========= ----------- --------- ---------
Total/weighted average 18,569,358 100% $64,317,149 100% $3.67
========== ========= =========== ========= =========
</TABLE>
The Company's principal growth strategy is to acquire modern, high-quality
industrial properties in attractive submarkets within the markets it currently
serves. Cabot Partners completed the acquisition of approximately $251 million
and $191 million of industrial properties on behalf of its clients in 1995 and
1996, respectively. In 1997, (through October 10), Cabot Partners has completed
the acquisition of approximately $197 million of industrial properties on
behalf of its clients and has under contract or letter of intent approximately
$128 million of industrial properties which it expects to acquire on behalf of
its clients by the end of 1997. Additionally, in 1997 (through October 10)
Cabot Partners has negotiated the contribution to the Company in the Formation
Transactions of approximately $270 million of industrial properties not previ-
ously owned by its advisory clients.
The senior management of the Company has an average of over 20 years experience
in the real estate industry and will beneficially own % of the Company's out-
standing equity interests upon the closing of the Offering (on a diluted basis
assuming only the exchange of Units owned by management into Common Shares).
Members of the Company's senior management have worked together since 1987 as
the executive officers of Cabot Partners and Cabot Advisors. Cabot Advisors was
founded as an affiliate of CC&F, a nationwide real estate development, invest-
ment, construction and management firm established in 1904. CC&F pioneered the
development of large-scale planned industrial parks in suburban areas along
major highways and built, leased and managed over 100 million square feet of
office and industrial space in 80 industrial business parks throughout the
United States. In 1990, Ferdinand Colloredo-Mansfeld, the Chief Executive
Officer of Cabot Partners, who was also the Chief Executive Officer of CC&F
from 1976 to 1989, and other senior managers of CC&F formed Cabot Partners as a
separate entity to purchase the real estate advisory management business of
Cabot Advisors. Cabot Partners was established as a registered investment
advisor to provide real estate investment services primarily to public and pri-
vate pension funds and others.
The Company is organized as a REIT under the laws of Maryland and expects to
qualify as a REIT for federal income tax purposes. See "Federal Income Tax Con-
siderations." The Company's principal executive offices are located at Two
Center Plaza, Suite 200, Boston, Massachusetts 02108, and its telephone number
is (617) 723-0900.
24
<PAGE>
INDUSTRIAL REAL ESTATE BUSINESS
Attractive Real Estate Sector.
The industrial sector of the real estate market has historically generated a
high level of cash income and attractive annual rates of return as compared
with other types of real estate investments. Industrial properties tend to be
less costly to manage and require lower amounts of capital expenditures and
tenant-specific improvement costs. Such properties provide generic storage and
work space suitable for and adaptable to a broad range of tenants and uses.
Industrial properties also generally require shorter development periods as
compared with other commercial property types, such as office buildings, which
enables better balancing of supply and demand for such properties and reduces
risk of overbuilding.
[GRAPH APPEARS HERE]
Label A B C D E F
Label Industrial R&D Retail All Apartment Office
1 9.6 9.3 8.6 8.3 7.5 6.9
* Annual Returns are for first quarter 1978 (except apartment since 1984)
through second quarter 1997.
Source: NCREIF.
Strong Demand
The Company believes that the demand for desirable, well-located industrial
properties will continue to be strong and support increasing rents due to the
following factors: (i) increasing consumption on a per capita basis, coupled
with population growth, (ii) business' increasing need for efficient inventory
management, (iii) growing international trade, and (iv) the growing signifi-
cance of smaller business establishments (according to Cognetics, smaller busi-
ness establishments with fewer than 100 employees now account for 47% of all
jobs and are projected to account for 67% of all new jobs projected to be cre-
ated during the period from 1997 to 2002), which are increasingly looking for
efficient and flexible work space in well located suburban industrial parks.
Nationwide, the demand for industrial property space during the period from
1997 to 2002 is projected by Cognetics to increase over existing levels by
approximately 800 million square feet, consisting of approximately 600 million
square feet for distribution properties and approximately 200 million square
feet for other industrial property types. The Company believes that much of the
available supply of industrial property is functionally obsolete and is at a
significant competitive disadvantage to modern, well-designed types of facili-
ties. Older facilities often do not have the modern design configurations
required to satisfy current truck handling and efficiency standards of major
distributors and third-party logistics companies. Approximately 42% of existing
warehouse facilities in the top 50 United States industrial markets were built
prior to 1970 and two-thirds were built before 1980 according to CB
Commercial/Torto Wheaton Research.
Industry Consolidation
The historically fragmented industrial real estate business is being reshaped
by strong pressures toward consolidation resulting from the substantial advan-
tages enjoyed by large, integrated and well capitalized firms over local owners
and developers. These advantages include professional management, greater
access to public and private capital, economies of scale and greater opportuni-
ties to increase revenue by serving the changing needs of industrial space
users. In addition, there is an increasing trend toward securitization of real
estate holdings as institutional real estate investors shift from direct pri-
vate ownership to indirect public ownership of real estate. The Company
believes that both of these trends provide substantial opportunities for pub-
licly held real estate companies that have the managerial and financial
resources to maintain an active acquisition and development program.
25
<PAGE>
Diverse Tenant Needs
Different types of industrial space users have significantly different property
and space requirements. Large national and major regional distributors gener-
ally require efficient, well-located bulk distribution properties. These prop-
erties offer the advantages of predictable incomes, less costly management
operations and additional growth opportunities through targeted marketing of
additional sites and property types to large national companies having space
requirements in multiple locations, as well as rental growth resulting from
favorable supply and demand factors. Smaller companies generally demand more
flexible work space, including light assembly facilities and flex/R&D space.
While the operation of these properties is generally more costly to manage, the
Company believes that such properties offer the prospect of higher current
returns because the users of such space are location sensitive and less
inclined to move if the properties they occupy are well located and managed.
Moreover, the Company believes that the continued employment growth resulting
from smaller companies will result in strong demand in the near future for
these workspace properties.
BUSINESS STRATEGIES
The Company's fundamental business objective is to maximize the total return to
its shareholders through growth in its cash available for distribution per
Common Share and in the value of its portfolio of industrial properties and
operations. The Company believes that it is well positioned to take advantage
of the opportunities presented by today's changing industrial real estate mar-
kets through the business strategies and operations described below.
Leveraging Substantial National Market Presence
The Company believes that maintaining and expanding its market presence in its
15 principal targeted markets across the country will be an important factor in
achieving future growth and its targeted returns on investment. These 15 mar-
kets are projected by Cognetics to capture 40% of the growth in the nation's
industrial space demand projected to occur over the period from 1997 to 2002.
See "Properties--Industrial Property Market Information."
The Company's substantial market presence in its principal markets provides
significant strategic advantages. Foremost among these advantages is that the
Company is well positioned to market its industrial space to national companies
and third party logistics companies who have space requirements in multiple
markets. Approximately 36% of the Company's rentable space is leased by Fortune
1,000 companies and major third party logistics companies serving such compa-
nies. The Company has a national tenant marketing program that, in addition to
the quality and attractive locations of the Properties, emphasizes the advan-
tages of dealing with a single source for their industrial space needs. These
advantages include greater efficiency of lease negotiations and day-to-day
property management, as well as better understanding of the tenants' current
needs and prospective space requirements. The Company currently serves 12 ten-
ants, occupying approximately 14% of the Company's rentable space, in multiple
Properties.
Within each local market, having a substantial inventory of properties and sig-
nificant leasing activities increases the Company's visibility to prospective
tenants and enables the Company to establish strong relationships with leasing
brokers and other local market participants. Such persons serve as sources of
information and potential tenant referrals. In addition, larger inventories
increase the Company's opportunities to relocate tenants to one or more of its
other properties as their needs change. Critical mass also permits the Company
to achieve the economies of scale necessary to support the management personnel
and infrastructure needed to build long-term tenant relationships.
Serving a Broad Spectrum of Tenants Through a Variety of Industrial Property
Types
The Company believes that its broad service strategy provides complementary
benefits in meeting the Company's growth objectives. Offering a variety of
industrial property types and the Company's size enable it to provide better
service, on a more cost efficient basis, to national customers who often need
various types of workspace properties, in addition to distribution space, for
their local operations. At the same time, offering a variety of property types
to smaller companies enables the Company to capture a larger share of the
growth in its chosen industrial property markets. Smaller business establish-
ments are projected by Cognetics to generate approximately 67% of the projected
increased demand for industrial properties during the period from 1997 to 2002.
The Company's strategy of offering diverse property types also enables the Com-
pany to pursue opportunities as they arise across industry segments by
responding to shifts in demand at different stages of the economic cycle.
GROWTH STRATEGIES
The Company intends to achieve its growth objectives through a combination of
property acquisitions and internal growth.
26
<PAGE>
Acquisitions
The Company will seek to capitalize on its competitive advantages primarily by
acquiring additional modern, high-quality properties in attractive submarkets
within the industrial markets that it currently serves.
Investment Criteria. The Company follows a disciplined, value-oriented strategy
in its property acquisitions. The Company seeks to acquire modern, cost-effi-
cient buildings located in key national and regional distribution centers. The
Company's investment considerations include (i) capitalization rates; (ii) eco-
nomic fundamentals in the market; (iii) replacement costs; (iv) rent levels and
trends; (v) construction quality and property condition; (vi) historical occu-
pancy rates; (vii) access to transportation; (viii) proximity to housing; (ix)
operating costs; (x) location in modern industrial parks; and (xi) local crime
rates.
Emphasis on Market Research. The Company's property acquisitions are based on
extensive research in each targeted market regarding (i) economic and demo-
graphic trends; (ii) supply of and demand for industrial space in targeted sub-
markets; (iii) existing and potential tenant space requirements; (iv) rent
levels and trends; and (v) the physical characteristics of buildings within the
market. The Company's research includes extensive in-market activity by Company
employees, including physical site inspections and continuing contacts with
leasing brokers and other active participants in the local markets. The Company
has compiled the results of its extensive research over the years into a pro-
prietary database, which is updated periodically, covering each market and
submarket in which it has invested or that it has targeted. The database con-
tains computerized profiles, keyed to Company-prepared aerial maps, of the
properties and each of the buildings deemed most competitive to the Company's
properties or attractive for acquisition. Such profiles include information
regarding the building's age, physical characteristics (including overall
dimensions, clear heights and truck court dimensions) and current tenant and
lease information.
Diversification of Industrial Property Types. To date, the majority of the
Company's properties (86% of the Properties based on rentable square feet at
June 30, 1997) have been bulk distribution and multitenant distribution facili-
ties because of the opportunities for superior returns such properties have
provided. While the Company expects that both types of properties will continue
to be an important focus of its future acquisition program, the Company
believes that workspace properties (light assembly and flex/R&D facilities) are
also attractive in selected markets where they are in limited supply and strong
demand exists. The Company has begun to increase its acquisitions of workspace
properties, which represented approximately 14% of its property portfolio based
on Rentable Square Feet at June 30, 1997.
Relationships with Institutional Real Estate Investors. Over the past ten
years, Cabot Partners' operations have been focused on serving public and pri-
vate pension funds and other institutional real estate investors in connection
with investments in and management of industrial real estate. This has provided
the Company's management with an extensive knowledge of and, the Company
believes, a favorable reputation with such investors. The Company believes that
it will benefit from its relationships with these investors through further
acquisitions as they increasingly seek to securitize their direct real estate
investments.
Capital and UPREIT Structure. The Company intends to exploit its relatively
unleveraged capital structure and substantial equity base in its acquisition
and future development activities. Upon the closing of the Offering, the Com-
pany expects to have approximately $5.2 million of outstanding long term debt,
approximately $ million of available cash and a Debt-to-Total Market Capital-
ization Ratio of less than %. The Company expects to be able to obtain
borrowings on a timely basis that will enable it to move quickly in completing
proposed property acquisitions. The Company believes that its ability to do so
will enhance its credibility with potential property sellers. The Company is
currently in discussions regarding the establishment of an Acquisition Facility
to be used for the purpose of property acquisitions and expects that this
facility will be available to it upon the closing of the Offering. The
Company's UPREIT structure, which will enable it to acquire industrial proper-
ties on a non-cash basis by exchanging Units in the Operating Partnership for
properties in a tax-deferred manner, provides an attractive alternative to a
taxable cash sale for tax paying property owners. See""--Financial Strategies"
below.
Internal Growth
The Company's primary internal growth strategy is to increase the cash flow
generated by the Properties, and from properties that it acquires in the
future, by renewing or replacing expiring leases with new leases at higher
rental rates and through rent increase provisions in its leases. Based on
available industry research and its own market knowledge, the Company believes
that market rents exceed the Company's current rental rates in a number of
instances. The Company expects to increase its rental income with respect to
such properties over time if market rental rates remain stable or increase. The
Company believes that it will have an opportunity to increase the average
rental rate on leases expiring
27
<PAGE>
during 1998 covering an aggregate of approximately 1.5 million rentable square
feet. In addition, the Company intends to work actively to (i) maintain its
historically high occupancy levels by retaining existing tenants (Cabot Part-
ners has renewed 84% of its leases, by square footage, over the past two
years), thereby minimizing "down time" and re-leasing costs, (ii) improve the
occupancy levels of any newly acquired properties that have lower occupancy
levels than the Company typically expects from its existing properties, (iii)
capitalize on economies of scale arising from the size of its portfolio of
properties, and (iv) control costs. The Company also will seek internal growth
through converting its properties to more intensive, higher margin uses if and
to the extent that suitable opportunities to do so arise.
Development
The Company's senior management has extensive real estate development experi-
ence, including experience derived from the industrial park development activi-
ties of CC&F. The Company is engaging its existing tenants in discussions about
future space needs, and believes that financially attractive build-to-suit
opportunities from its tenant base may be available over time. The Company also
believes that in select target markets there are attractive opportunities for
new development with potentially greater returns than those available from the
purchase of existing stabilized properties and it intends to pursue a develop-
ment program where such opportunities exist. In order to limit initial overhead
expenses, the Company intends to begin its development activities by engaging
local or regional builders with whom it has established strong relationships.
Thereafter, the Company intends to expand its in-house development staff as the
Company's development activities increase.
OPERATIONS
Real Estate Operations. The Company's property management functions with
respect to its own properties include strategic planning and decision making,
centralized leasing activities and other property management activities. The
Director of Real Estate Operations and the Company's four regional managers,
all of whom are located in the Company's Boston headquarters, oversee the prop-
erty management activities relating to the Company's properties, which include
controlling capital expenditures and expenses that are not reimbursable by ten-
ants, making regular property inspections, overseeing rent collections and cost
control and planning and budgeting activities. Tenant relations functions,
including monitoring of tenant compliance with their property maintenance obli-
gations and other lease provisions, have been handled by in-house personnel for
most of the properties under Cabot Partners' management located in its North-
east Region and by third-party building managers for most other properties
under its management. Shortly after the closing of the Offering, the Company
expects to further internalize such tenant relations functions by opening local
offices in Chicago, Columbus, Dallas, Los Angeles and Orlando.
Leasing. The Company's leasing activities are the primary responsibility of the
Company's Director of Leasing, who reports to the Director of Real Estate Oper-
ations. The Director of Leasing leads the negotiation of most leases with major
tenants and oversees all other leasing negotiations. Smaller tenant leasing and
marketing efforts are typically handled by the Company's regional managers,
working with local leasing brokers and under the overall direction of the
Director of Leasing. The Company believes that centralizing of its leasing
activities provides greater coordination and control of its leasing strategy.
The Company seeks to maximize rental income by working actively to retain
existing tenants and by aggressively marketing space for which tenant renewals
are not obtained. The Company takes an active approach to managing its lease
portfolio, typically preparing its renewal or releasing strategy 24 months
prior to scheduled lease expiration dates and entering into discussions with
tenants well in advance of such termination date. The Company also seeks to
stagger lease termination dates so as to minimize the possibility of large
blocks of space becoming vacant at the same time.
National Marketing. The Company will pursue a national tenant marketing program
emphasizing the advantages of dealing with a single source supplier of indus-
trial space for industrial space needs across the country and the flexibility
in structuring lease maturities and other terms that the Company is able to
offer.
Service Orientation. The Company intends to continue Cabot Partners' emphasis
on providing high-quality service to its tenants. Examples of such service
include promptly addressing tenant concerns, determining and regularly reas-
sessing tenant space requirements and engaging in cooperative cost reduction
efforts with or for the benefit of tenants. As part of its ongoing program of
building mutually beneficial long term tenant relationships, the Company's
regional managers meet with tenants frequently to supplement the day-to-day
activities of the Company's internal and third-party building managers. The
Company believes that the quality of its tenant services is evidenced by its
high tenant retention rates.
Financial and Cost Controls. The Company maintains strict financial and cost
controls in administering its asset/property management operations. These
include (i) close monitoring and active collection of rents and tenant expense
reimbursements, (ii) use of competitive bidding procedures for all maintenance
and other material expenses and for capital expenditures, (iii) regular real
estate tax assessment appeals where warranted, (iv) approval of all
nonreimbursable expenses and capital expenditures by the Company's regional
managers, and (v) active lease administration, including close monitoring of
28
<PAGE>
tenants' compliance with their lease responsibilities. The Company also
requires extensive planning and budgeting activities for each of its properties
using a standardized, zero-basis budgeting format in an annual process that is
updated quarterly and is coordinated by the Director of Real Estate Operations.
The results of this budgeting process are then incorporated into the Company's
overall budgeting and planning process.
THIRD-PARTY INVESTMENT MANAGEMENT
The Management Company will continue to provide investment management services
to the clients of Cabot Partners that elected not to contribute some or all of
their industrial properties to the Company. On a pro forma basis as of June 30,
1997, the Management Company would have generated less than 3% of the Company's
revenues. The Management Company will not provide services relating to any
industrial real estate acquisition or development activities that would con-
flict with the Company's own acquisition and development activities. The Com-
pany believes that its investment in the Management Company will help it
achieve economies of scale with its property management systems, increase
market penetration and provide access to further acquisition opportunities.
FINANCIAL STRATEGIES
The Company's financial strategy is to minimize its cost of capital by main-
taining adequate working capital and conservative debt levels. The Company
estimates that approximately $ million of net proceeds from the Offering will
be available to allocate to operating capital after payment of offering
expenses and the use of approximately $13.3 million of such proceeds to repay
certain outstanding indebtedness secured by the Properties. See "Use of Pro-
ceeds." The Company intends to operate with a Debt-to-Total Market Capitaliza-
tion Ratio that generally will not exceed 40%, although the Company's Declara-
tion of Trust and By-laws do not impose any limit on the incurrence of debt.
The Company is currently negotiating with several financial institutions the
establishment of the Acquisition Facility under which the Company would be per-
mitted to borrow up to $ million. The Acquisition Facility is expected to be
used primarily in connection with the acquisition of additional properties and
is anticipated to be available for such use upon the closing of the Offering.
The Company believes that the size and diversity of its portfolio of Properties
will provide it with access to the public debt and equity markets which are not
generally available to smaller, less diversified property owners. The Company
also believes that its UPREIT structure will enable it to acquire industrial
properties in exchange for Units in the Operating Partnership, thereby reducing
its need to incur indebtedness to support future acquisitions. Contributions of
properties to the Operating Partnership by the owners thereof in exchange for
such Units, if properly structured, permit the transferring property owner to
defer recognition, for federal income tax purposes, of gains realized on such
transactions and thereby provide attractive alternatives to a cash sale for
property owners.
29
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the Offering, after deducting the underwriting
discount and estimated expenses of the Offering and of the Formation Transac-
tions, are estimated to be approximately $ million (approximately $ million
if the Underwriters' over-allotment option is exercised in full). The Company
will contribute such net proceeds to the Operating Partnership in exchange for
the Company's general partner interest therein. The Operating Partnership will
use approximately $13.3 million of such net proceeds to repay mortgage indebt-
edness secured by certain of the Properties, not including accrued interest and
certain other expenses in connection therewith. The Operating Partnership will
use the remainder of the funds contributed to it by the Company for general
purposes, including acquisitions of additional properties. None of the net cash
proceeds from the Offering is being paid to any member of the Cabot Group or
any officer, Trustee or affiliate of the Company. The net proceeds not immedi-
ately used for the foregoing purposes will be invested in short-term, income
producing investments such as depository accounts, investment grade commercial
paper, government securities or money market funds that invest in government
securities.
The following table presents information, as of the anticipated date of repay-
ment, regarding the indebtedness intended to be repaid as described above.
<TABLE>
<CAPTION>
------------------------------------------------
AMOUNT
PROPERTY MATURITY DATE INTEREST RATE TO BE REPAID
- -------- --------------------- ------------- ------------
<S> <C> <C> <C>
Mortgage Debt relating to
Properties to be contributed
by the C-M Property
Partnerships December 1, 1997(/1/) 8.375% $13,300,000
</TABLE>
- -------
(1) The loan due date is expected to be extended from December 1, 1997 to a
date on or after the closing of the Offering.
30
<PAGE>
DISTRIBUTION POLICY
The Company intends to make regular quarterly cash distributions to its share-
holders, commencing with a pro rata distribution for the period from comple-
tion of the Offering through March 31, 1998, based upon a quarterly distribu-
tion of $ per Common Share. On an annualized basis, this would be $ per
Common Share (or an annual distribution rate of approximately % based on the
Offering Price). The Company does not expect to change its estimated initial
distribution per Common Share if the Underwriters' over-allotment option is
exercised.
The following discussion and the information set forth in the tables and
related notes below should be read in conjunction with the historical and pro
forma financial statements and respective notes thereto and "Management's Dis-
cussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
The Company's intended initial annual distribution rate is based on an esti-
mate of the cash that will be available for distribution for the twelve months
ending December 31, 1998. This estimate is based on pro forma combined histor-
ical cash flows provided by operations of the Company for the twelve months
ended June 30, 1997, as adjusted for the impact of the Offering, the Formation
Transactions and other known events. Except as reflected in the table below
and the notes thereto, investing and financing activities are not expected to
have a material adverse effect on the estimated cash that will be available
for distribution. The estimate of Funds from Operations is being made solely
for the purpose of setting the initial distribution rate and is not intended
to be a prediction or forecast of the Company's results of operations or of
its liquidity.
The Company believes that its estimated cash available for distribution con-
stitutes a reasonable basis for setting the initial distribution rate on the
Common Shares and intends to maintain its initial distribution rate for the
twelve months following the Offering unless actual results of operations, eco-
nomic conditions or other factors differ from the assumptions used in its
estimate. The actual return that the Company will realize and the amount
available for distributions to shareholders will be affected by a number of
factors, including the revenues received from the Properties, the distribu-
tions received from the Operating Partnership, the operating expenses of the
Company, the interest expense incurred on its borrowings and unanticipated
capital expenditures. No assurance can be given that the Company's estimate
will prove accurate. In addition, pro forma results of operations do not pur-
port to present the actual results that can be expected for future periods.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Funds from Operations."
The Company anticipates that Funds from Operations will exceed earnings and
profits due to non-cash expenses, primarily depreciation and amortization,
expected to be incurred by the Company. Distributions by the Company to the
extent of its current or accumulated earnings and profits for federal income
tax purposes, other than capital gain dividends, will be taxable to share-
holders as ordinary dividend income. Capital gain dividends generally will be
treated as long-term capital gain. Distributions in excess of earnings and
profits generally will be treated as a non-taxable reduction of the sharehold-
er's basis in the Common Shares to the extent thereof, and thereafter as cap-
ital gain. Distributions treated as a non-taxable reduction in basis will have
the effect of deferring taxation until the sale of a shareholder's Common
Shares. Based on the Company's estimated results of operations for the twelve
months ending December 31, 1998, the Company estimates that approximately %
of the anticipated initial annual distribution to shareholders will represent
a return of capital for federal income tax purposes and that the Company would
have been required to distribute $ million, or $ per Common Share, during
such twelve-month period in order to maintain its status as a REIT. If actual
Funds from Operations or taxable income vary from these amounts, the per-
centage of distributions which represents a return of capital may be materi-
ally different. In addition, such capital gain percentage of distributions may
vary substantially in future years, particularly since REITs are no longer
required to distribute net capital gains to shareholders. For a further dis-
cussion of the tax treatment of distributions to holders of Common Shares, see
"Federal Income Tax Considerations--Taxation of Taxable U.S. Shareholders" and
"--Taxation of Non-U.S. Shareholders." In order to qualify to be taxed as a
REIT, the Company must make annual distributions to shareholders of at least
95% of its REIT taxable income (determined by excluding any net capital gain),
which the Company anticipates will be less than its share of adjusted Funds
from Operations. Under certain circumstances, the Company may be required to
make distributions in excess of its cash available for distribution in order
to meet such distribution requirements. In such a case, the Company may find
it necessary to arrange for short-term (or possibly long-term) borrowings or
to raise funds through the issuance of preferred shares or additional Common
Shares.
Future distributions by the Company will be at the discretion of the Board of
Trustees and will depend on the actual Funds from Operations of the Company,
its financial condition, capital requirements, the annual distribution
requirements under the REIT provisions of the Code (see "Federal Income Tax
Considerations--Taxation of the Company--Annual
31
<PAGE>
Distribution Requirements") and such other factors as the Board of Trustees
deems relevant. See "Risk Factors and Investment Considerations--Changes in
Policies Without Shareholder Approval."
The following table illustrates the adjustments made by the Company to its pro
forma Funds from Operations for the twelve months ended June 30, 1997 in order
to determine its initial estimated distributions.
<TABLE>
<CAPTION>
---------------
(Dollars in Thousands except Per Share Data)
<S> <C> <C>
Pro forma net income for 12 months ended December 31, 1996
ADJUSTMENTS:
Depreciation and amortization
<CAPTION>
---------
<S> <C> <C>
Pro forma funds from operations for the 12 months ended
December 31, 1996(1)
ADJUSTMENTS:
Less: pro forma funds from operations for the six months ended
June 30, 1996
Add: pro forma funds from operations for the six months ended
June 30, 1997
<CAPTION>
---------
<S> <C> <C>
Pro forma funds from operations for the 12 months ended June
30, 1997
ADJUSTMENTS:
Contractual increases in rental revenues(2)(3)
Contractual increases in rental revenues from recently signed
leases(4) --
<CAPTION>
---------
<S> <C> <C>
Pro forma adjusted funds from operations for the months
ending June 30, 1998(5)
ADJUSTMENTS:
Straight line rent accrual adjustment(6)
<CAPTION>
---------
<S> <C> <C>
Pro forma cash flow from operations for the 12 months ending
June 30, 1998
ADJUSTMENTS:
Estimated annual non-revenue enhancing tenant improvements and
leasing commissions attributable to existing leased space(7)
Estimated recurring non-incremental revenue-generating capital
expenditures(8)
<CAPTION>
---------
<S> <C> <C>
Estimated cash available for distribution $
<CAPTION>
=========
<S> <C> <C>
Expected initial annual distributions $
<CAPTION>
=========
<S> <C> <C>
Expected initial annual distributions per share $
<CAPTION>
=========
<S> <C> <C>
Expected cash available for distribution payout ratio(9) %
<CAPTION>
=========
</TABLE>
- -------
(1) The Company generally considers Funds From Operations to be an appropriate
measure of the liquidity of an equity REIT because industry analysts have
accepted it as a performance measure of such REITs. The White Paper on Funds
From Operations approved by the Board of Governors of NAREIT in March 1995
defines Funds From Operations as net income (loss) computed in accordance with
GAAP, excluding gains (or losses) from debt restructuring and sales of prop-
erty, plus depreciation and amortization on real estate assets and after
adjustments for unconsolidated partnerships and joint ventures. The Company
computes Funds From Operations in accordance with standards established by
NAREIT which may not be comparable to Funds From Operations reported by other
REITs that do not define the term in accordance with the current NAREIT defini-
tion or that interpret the current NAREIT definition differently than the Com-
pany. Funds From Operations does not represent cash generated from operating
activities in accordance with GAAP and should not be considered an alternative
to net income determined in accordance with GAAP as an indication of the
Company's financial performance or to cash flow from operating activities
determined in accordance with GAAP as a measure of the Company's liquidity, nor
is it indicative of funds available to fund the Company's cash needs, including
the ability to pay distributions. Pro forma Funds From Operations for the six
months ended June 30, 1997 and 1998 were calculated as follows:
<TABLE>
<CAPTION>
---------------------
SIX MONTHS ENDED
JUNE 30,
1997 1996
--------- ---------
<S> <C> <C>
Pro Forma Net Income $ $
ADJUSTMENTS:
Depreciation and amortization
<CAPTION>
--------- ---------
<S> <C> <C>
Pro Forma Funds From Operations $ $
<CAPTION>
========= =========
</TABLE>
32
<PAGE>
(2) Contractual increases in rental revenues from leases executed prior to June
30, 1997, including (i) contractual increases in base rents for existing
leases, (ii) contractual base rents from leases which commenced paying from
July 1, 1996 to June 30, 1997, and (iii) net contractual expense reimbursements
provided for under such lease.
(3) Increases are for the 12 months ending June 30, 1998 compared to the 12
months ended June 30, 1997. All such increases are included only for the period
that the leases are in effect and the tenants will be making payments and are
not annualized for the 12 months ending June 30, 1998.
(4) Contractual increases in rental revenues from executed leases that com-
menced paying between July 1, 1997 and October 13, 1997, including (i) contrac-
tual base rents, (ii) contractual increases in base rents and (iii) net con-
tractual expense reimbursements.
(5) Management has assumed for purposes of determining the net increase in base
rents that the existing leases which expire during the 12 months ending June
30, 1998 will be renewed at existing rental rates. Given the Company's histor-
ical rate of renewals and increasing average rental income, management believes
that its assumption regarding the rents at which leases renew (i.e., the cur-
rent base rent) is reasonable and that no adjustment needs to be made for
potential shortfalls from leases which may not be renewed or for which there
may be a timing delay in generating rental income in the case of tenant turn-
over. These adjustments do not represent forecasts or projections of expected
future rental revenue from space not currently under lease.
(6) Represents the effect of adjusting straight-line rental income included in
estimated pro forma adjusted Funds From Operations for the 12 months ended June
30, 1997 to a cash basis.
(7) Represents recurring non-revenue enhancing tenant improvements ("TI") and
leasing commissions ("LC") anticipated for the 12 months ending June 30, 1998
based on the weighted average tenant improvements and leasing commissions for
renewed and re-tenanted space at the Properties for the years ended December
31, 1994, 1995, 1996 multiplied by the average annual square feet of space for
which leases expire during the period from July 1, 1997 to December 31, 2000.
The weighted average annual per square foot costs of tenant improvements and
leasing commissions and the calculation of the estimated provision for non-rev-
enue enhancing tenant improvements and leasing commissions on an annual basis
based on lease expirations (rollover) for the period July 1, 1997 to December
31, 2000 are presented below:
<TABLE>
<CAPTION>
-------------------------------------------
TOTAL/
WEIGHTED
1994 1995 1996 AVERAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total expenditures $2,416,987 $2,490,707 $3,875,246 $8,782,940
Renewed or released space in
square feet 2,347,899 2,578,374 4,880,988 9,807,261
Cost per square foot $ 1.03 $ 0.97 $ 0.79 $ 0.90
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
AVERAGE
JULY 1-- ANNUAL
DECEMBER 31, FOOTAGE
1997 1998 1999 2000 EXPIRING
------------ --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Annual Square Footage
Expiring 574,554 2,829,902 3,374,733 2,001,126 2,508,661
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL SQUARE
TI & LC PER SQUARE FOOT FOOTAGE EXPIRING IN THE TOTAL
RENEWED OR RELEASED NEXT 3 YEARS (INCLUDING 1997) COSTS
----------------------- ----------------------------- ----------
<S> <C> <C> <C> <C>
$0.90 X 2,508,661 = $2,257,795
</TABLE>
(8) Represents estimated annual provision for recurring capital expenditures
for the 12 months ending June 30, 1998 based upon an annual cost of $0.20 per
square foot. The Company has calculated this reserve based on the weighted
average historical recurring capital expenditures for the years ended December
31, 1994, 1995 and 1996. The following table summarizes the capital expendi-
tures for the properties for the last three years.
<TABLE>
<CAPTION>
-----------------------------------------------
TOTAL
WEIGHTED
1994 1995 1996 AVERAGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total Capital Expenditures $ 2,076,193 $ 2,133,118 $ 2,830,780 $ 7,040,091
Weighted average square feet 8,959,973 11,588,260 14,449,744 34,997,977
Cost per square foot $0.23 $0.18 $0.20 $0.20
Pro forma total square feet 18,569,358
Cost per square foot $0.20
<CAPTION>
-----------
<S> <C> <C> <C> <C>
Estimated recurring capital expenditures $ 3,713,872
<CAPTION>
===========
</TABLE>
33
<PAGE>
(9) Calculated by dividing the estimated initial annual distributions by the
estimated adjusted cash available for distribution. The Company's estimated pro
forma adjusted Funds from Operations payout ratio, which is calculated by
dividing the estimated initial annual dividends by the estimated pro forma
adjusted funds from operations, is .
The Company believes that the amount not distributed will be sufficient to
cover (i) tenant allowances and other costs associated with renewal or replace-
ment of current tenants as their leases expire, (ii) recurring capital expendi-
tures that will not be reimbursed by tenants and (iii) other unforeseen cash
needs. The Company also will have available to it for such purposes a portion
of the net proceeds from the Offering and available borrowing capacity under
the Acquisition Facility. See "Use of Proceeds" and "The Company--Financial
Strategies." The expected amount of distributions will not allow the Company,
using only cash from operations, to retire all of its anticipated debt when
due, and therefore the Company expects that it will be required to seek addi-
tional debt or equity financings, and/or sell properties, in order to repay
such debt. See "Policies with Respect to Certain Activities--Financing Poli-
cies."
34
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company on a pro forma
basis as of June 30, 1997 to reflect the consummation of the Formation Transac-
tions and on a pro forma basis, as adjusted to reflect the closing of the
Offering and the application of the assumed net proceeds therefrom to repay
certain indebtedness, as if each of such transactions had occurred on June 30,
1997. See "Use of Proceeds." The information set forth in the table should be
read in conjunction with the combined historical financial statements of the
Company, pro forma financial information and respective notes thereto included
elsewhere in this Prospectus and the discussion under "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
----------------------
AS OF JUNE 30, 1997
PRO FORMA,
PRO FORMA AS ADJUSTED
Dollars in thousands --------- -----------
<S> <C> <C>
Long-term debt $ 18,872 $ 5,363
Limited Partners interests in Operating Partnership 632,236 632,236
Shareholders' equity:
Common shares, $.01 par value; authorized; issued
and outstanding on a pro forma basis(1) and issued
and outstanding on a pro forma, as adjusted basis --
Additional paid-in Capital --
<CAPTION>
--------- -----------
<S> <C> <C>
Total shareholders' equity 632,236
<CAPTION>
--------- -----------
<S> <C> <C>
Total capitalization $ 651,108 $
<CAPTION>
========= ===========
</TABLE>
- -------
(1) Does not include Common Shares reserved for issuance upon (i) possible
exchange of Units issued and outstanding after the Offering, (ii)
Common Shares subject to options to be granted pursuant to the Company's Long
Term Incentive Plan effective upon the closing of the Offering (see "Manage-
ment--Long Term Incentive Plan"), or (iii) the Common Shares subject to the
Underwriters over-allotment option.
35
<PAGE>
DILUTION
The expected initial price per share to the public of the Common Shares offered
hereby exceeds the Company's expected net tangible book value per Common Share
immediately following the closing of the Offering and consummation of the For-
mation Transactions. Therefore, holders of Units and Common Shares issued in
connection with the Formation Transactions will realize an immediate increase
in the net tangible book value of their Units and Common Shares, while pur-
chasers of the Common Shares in the Offering will realize an immediate and sub-
stantial dilution in the net tangible book value of their shares. Pro forma net
tangible book value per share has been determined as of June 30, 1997 by sub-
tracting the Company's total liabilities from its total tangible assets and
dividing the remainder by the number of Units and Common Shares that will be
outstanding after the Offering. The following table illustrates the dilution to
purchasers of Common Shares sold in the Offering.
<TABLE>
<CAPTION>
--------------------
<S> <C> <C>
Initial public offering price per share (1) $
Pro forma net tangible book value per share as of June
30, 1997 prior to the Offering, attributable to Units
issued to Cabot Group Participants $
Pro forma net tangible book value per share as of June
30, 1997 prior to the Offering, attributable to Units
and Common Shares issued to Contributing Investors
(2) $
Increase in net tangible book value per share
attributable to purchasers of Common Shares in the
Offering(3) $
<CAPTION>
---------
<S> <C> <C>
Pro forma net tangible book value per share after the Offering (4) $
<CAPTION>
---------
<S> <C> <C>
Dilution per share sold in the Offering $
<CAPTION>
=========
</TABLE>
- -------
(1) Before deducting the Underwriters' discount and estimated expenses of the
Offering and the Formation Transactions.
(2) Excludes Units issued to the C-M Property Partnerships, which are included
in the Units issued to the Cabot Group Participants.
(3) Based on the Offering Price and after deducting Underwriters' discounts and
estimated expenses of the Offering and the Formation Transactions.
(4) Based on pro forma shareholders' equity of $ and minority interests in
the Operating Partnership of $ , net of intangible assets of $ , divided by
, the total number of Common Shares outstanding after the Offering (including
Common Shares issuable upon exchange of Units issued to the Contributing
Investors and Cabot Partners).
The following table summarizes, on a pro forma basis giving effect to the
Offering and the number of Common Shares and Units to be issued to each of the
Contributing Investors (other than the C-M Property Partnerships) and the Cabot
Group Participants in connection with the Formation Transactions, the net tan-
gible book value as of June 30, 1997 of the net assets contributed by the Con-
tributing Investors (other than the C-M Property Partnerships) and the Cabot
Group Participants in the Formation Transactions and the net tangible book
value of the average contribution per share based on total contributions:
<TABLE>
<CAPTION>
------------------------------------------------------------------
PURCHASE
PRICE/BOOK
CASH/BOOK VALUE OF
COMMON VALUE OF AVERAGE
SHARES/UNITS ISSUED TOTAL CONTRIBUTIONS CONTRIBUTIONS
Dollars in thousands, -------------------- -------------------------- PER
except per share/unit SHARES/UNITS PERCENT AMOUNT (1) PERCENT SHARE/UNIT (2)
amounts ------------ ------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Common Shares sold in
the Offering % $ % $
Units issued to Cabot
Group Participants
Common Shares/Units
issued to Contributing
Investors (3)
<CAPTION>
------------ ------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Total 100.0% $ 100.0% $
<CAPTION>
============ ======= =========== ========== ==============
</TABLE>
- -------
(1) Based on the June 30, 1997 net book value of the assets to be contributed
in connection with the Formation Transactions, net of liabilities to be
assumed.
(2) Before deducting Underwriters' discounts and estimated expenses of the
Offering and the Formation Transactions.
(3) Excludes Units issued to the C-M Property Partnerships, which are included
in the Units issued to the Cabot Group Participants.
36
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma condensed consolidated balance sheet data as of June 30, 1997 has
been prepared to reflect (i) the contribution to the Company of (A) the
Existing Investors Property Group, (B) the New Investors Property Group, and
(C) the Additional Acquisitions, (ii) each of the other Formation Transactions,
(iii) the Offering and the use of a portion of the net proceeds therefrom to
repay indebtedness, and (iv) certain other adjustments, as if each of such con-
tributions, transactions and adjustments had occurred on June 30, 1997. The pro
forma condensed consolidated operating and other data for the six months ended
June 30, 1997 and the year ended December 31, 1996 have been prepared to
reflect (i) the contribution to the Company of (A) the Existing Investors Prop-
erty Group, (B) the New Investors Property Group, (C) the Additional Acquisi-
tions, and (D) the Properties acquired during the year ended December 31, 1996
and during the six months ended June 30, 1997, (ii) the other Formation Trans-
actions, (iii) the repayment of indebtedness with a portion of the net proceeds
of the Offering, and (iv) certain other adjustments, as if each of such contri-
butions, transactions and adjustments had occurred on January 1, 1996.
In the opinion of management, the pro forma condensed consolidated financial
information provides for all adjustments necessary to reflect the effects of
the foregoing transactions and adjustments. The pro forma information is unau-
dited and is not necessarily indicative of the consolidated results that would
have occurred if the transactions and adjustments reflected therein had been
consummated on the dates indicated, or on any particular date in the future,
nor does it purport to represent the financial position, results of operations
or changes in cash flows for future periods.
37
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
EXISTING NEW PRE-OFFERING THE CABOT
INVESTORS INVESTORS OTHER CABOT INDUSTRIAL OFFERING INDUSTRIAL
CABOT PROPERTY PROPERTY ADDITIONAL FORMATION TRUST PRO FORMA TRUST
PARTNERS GROUP GROUP(A) ACQUISITIONS TRANSACTIONS PRO-FORMA ADJUSTMENTS(I)(J) PRO FORMA
-------- --------- --------- ------------ ------------ ---------------- ---------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Properties, net $ -- $309,712 $244,131 $69,769(B) $ 17,519 (C) $641,131 $ -- $641,131
Cash and cash
equivalents 716 1,896 1,410 -- (4,022)(F) -- -- --
Rents and other
receivables 1,563 1,205 652 -- (3,420)(F) -- -- --
Advisory fees
receivables 383 -- -- -- (383)(G) -- --
Restricted cash -- 3 -- -- -- 3 -- 3
Deferred rent
receivable -- 4,252 3,874 -- (8,126)(D) -- -- --
Lease acquisition
costs, net -- 6,639 3,469 -- -- 10,108 -- 10,108
Other assets 2,419 429 601 -- (3,368)(E),(F) 81 -- 81
------ -------- -------- ------- --------- -------- -------- --------
Total Assets $5,081 $324,136 $254,137 $69,769 $ (1,800) $651,323 $ -- $651,323
====== ======== ======== ======= ========= ======== ======== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Mortgage debt $ -- $ 18,872 $ -- $ -- $ -- $ 18,872 $(13,509) $ 5,363
Due to related
parties -- 3,647 -- -- (3,647)(H) -- -- --
Accounts payable
and accrued
liabilities 703 3,845 1,403 -- (5,739)(F) 212 (212) --
Advisory fees
payable -- 383 1,624 -- (2,007)(F),(G) -- -- --
Other liabilities -- 930 1,209 -- (2,136)(F) 3 -- 3
------ -------- -------- ------- --------- -------- -------- --------
Total
Liabilities 703 27,677 4,236 -- (13,529) 19,087 (13,721) 5,366
------ -------- -------- ------- --------- -------- -------- --------
Limited Partners
Interest in
Operating
Partnership -- -- -- -- 632,236 (C) 632,236 -- 632,236
Owners' equity 4,378 296,459 249,901 69,769(B) (620,507) -- -- --
Common stock -- -- -- -- -- -- 50 50
Paid in capital -- -- -- -- -- -- 13,671 13,671
------ -------- -------- ------- --------- -------- -------- --------
Total
Shareholders'
Equity 4,378 296,459 249,901 69,769 11,729 632,236 13,721 645,957
------ -------- -------- ------- --------- -------- -------- --------
Total
Liabilities and
Shareholders'
Equity $5,081 $324,136 $254,137 $69,769 $ (1,800) $651,323 $ -- $651,323
====== ======== ======== ======= ========= ======== ======== ========
</TABLE>
38
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PRE-
OFFERING
EXISTING NEW CABOT THE CABOT
INVESTORS INVESTORS OTHER INDUSTRIAL OFFERING INDUSTRIAL
CABOT PROPERTY PROPERTY 1997 FORMATION TRUST PRO FORMA TRUST
PARTNERS GROUP GROUP(A) ACQUISITIONS(K) TRANSACTIONS PRO FORMA ADJUSTMENTS PRO FORMA
-------- --------- --------- --------------- ------------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental $ -- $15,571 $15,150 $3,583 $ 53 (T) $34,357 $ -- $34,357
Tenant reimbursements -- 2,933 709 616 -- 4,258 -- 4,258
Other -- 372 19 4 -- 395 -- 395
Advisory fee income 3,359 -- -- -- (2,725)(M) 634 -- 634
Advisory fee income
associated with
the Existing
Investors Property
Group 1,076 -- -- -- (1,076)(L) -- -- --
Interest -- 46 46 -- -- 92 -- 92
------ ------- ------- ------ ------- ------- ---- -------
Total Revenues 4,435 18,922 15,924 4,203 (3,748) 39,736 -- 39,736
------ ------- ------- ------ ------- ------- ---- -------
EXPENSES
Real estate tax -- 2,735 1,354 518 -- 4,607 -- 4,607
Management fees -- 90 87 72 -- 249 -- 249
Advisory fees -- 1,014 2,016 -- (3,030)(L) -- -- --
Property operating -- 268 1,254 277 221 (N) 2,020 -- 2,020
Maintenance and
repairs -- 231 -- 79 -- 310 -- 310
Grounds care -- 142 -- 19 -- 161 -- 161
Professional services -- 157 -- 13 -- 170 -- 170
Insurance -- 153 131 28 -- 312 -- 312
Compensation 2,133 -- -- -- (1,441)(M),(N) 692 -- 692
Other 1,190 60 -- 4 (1,025)(M) 229 500 (O) 729
Interest -- 936 -- -- (145)(P) 791 (573)(P) 218
Depreciation and
amortization 255 4,323 3,637 822 (109)(Q),(R),(S) 8,928 -- 8,928
------ ------- ------- ------ ------- ------- ---- -------
Total Expenses 3,578 10,109 8,479 1,832 (5,529) 18,469 (73) 18,396
------ ------- ------- ------ ------- ------- ---- -------
Net income $ 857 $ 8,813 $ 7,445 $2,371 $ 1,781 $21,267 $ 73 $21,340
====== ======= ======= ====== ======= ======= ==== =======
</TABLE>
39
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
PRE-
OFFERING
EXISTING NEW CABOT
INVESTORS INVESTORS INDUSTRIAL
CABOT PROPERTY PROPERTY 1996 1997 FORMATION TRUST
PARTNERS GROUP GROUP(A) ACQUISITIONS(K) ACQUISITIONS(K) TRANSACTIONS PRO-FORMA
-------- --------- --------- --------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental $ -- $29,736 $29,335 $1,995 $7,777 $ 787 (T) $69,630
Tenant
reimbursements -- 4,917 2,068 154 1,195 -- 8,334
Other -- 334 735 -- 33 -- 1,102
Advisory fee
income 5,822 -- -- -- -- (4,729)(M) 1,093
Advisory fee
income
associated with
the Existing
Investors
Property Group 2,086 -- -- -- -- (2,086)(L) --
Interest -- 193 139 -- -- -- 332
------ ------- ------- ------ ------ ------- -------
Total Revenues 7,908 35,180 32,277 2,149 9,005 (6,028) 80,491
------ ------- ------- ------ ------ ------- -------
EXPENSES
Real estate tax -- 5,037 3,030 169 1,242 -- 9,478
Management fees -- 163 175 135 161 -- 634
Advisory fees -- 1,726 1,451 116 -- (3,293)(L) --
Property
operating -- 755 2,410 39 369 389 (N) 3,962
Maintenance and
repairs -- 504 -- 8 153 -- 665
Grounds care -- 298 -- 10 38 -- 346
Professional
services -- 214 -- 6 43 -- 263
Insurance -- 210 136 25 53 -- 424
Compensation 3,887 -- -- -- -- (2,962)(M),(N) 925
Other 2,008 453 -- 5 4 (1,329)(M) 1,141
Interest -- 1,931 -- -- -- (299)(P) 1,632
Depreciation and
amortization 419 7,966 7,020 399 1,709 1,382 (Q),(R),(S) 18,895
------ ------- ------- ------ ------ ------- -------
Total Expenses 6,314 19,257 14,222 912 3,772 (6,112) 38,365
------ ------- ------- ------ ------ ------- -------
Net income $1,594 $15,923 $18,055 $1,237 $5,233 $ 84 $42,126
====== ======= ======= ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
-------------------------
CABOT
OFFERING INDUSTRIAL
PRO FORMA TRUST
DJUSTMENTS PRO FORMA
---------- ----------
<S> <C> <C>
REVENUES
Rental $ -- $69,630
Tenant
reimbursements -- 8,334
Other -- 1,102
Advisory fee
income -- 1,093
Advisory fee
income
associated with
the Existing
Investors
Property Group -- --
Interest -- 332
------- -------
Total Revenues -- 80,491
------- -------
EXPENSES
Real estate tax -- 9,478
Management fees -- 634
Advisory fees -- --
Property
operating -- 3,962
Maintenance and
repairs -- 665
Grounds care -- 346
Professional
services -- 263
Insurance -- 424
Compensation -- 925
Other 1,000 (O) 2,141
Interest (1,183)(P) 449
Depreciation and
amortization -- 18,895
------- -------
Total Expenses (183) 38,182
------- -------
Net income $ 183 $42,309
======= =======
</TABLE>
40
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
New Investors Property Group
(A) The New Investors Property Group is the combination of the financial infor-
mation for the following Contributing Investors whose financial statements
are included elsewhere in this prospectus:
Orlando Central Park and 500 Memorial Drive
Knickerbocker Properties, Inc. II
Pennsylvania Public School Employes' Retirement System Industrial Prop-
erties Portfolio
Prudential Properties Group
West Coast Industrial, LLC
In addition, the New Investors Property Group includes a Contributing Investor
with a single property which commenced operations on September 1, 1997. Accord-
ingly, no financial statements for the property are included in this Prospec-
tus.
Additional Acquisitions
(B) To reflect the acquisition, or probable acquisition, of the following prop-
erties after June 30, 1997 and their contribution to the Company in accordance
with the Formation Transactions:
<TABLE>
<CAPTION>
-----------------------------------------------
SQUARE ACQUISITION
BUILDING TYPE FEET PRICE
------------------------ --------- -----------
<S> <C> <C> <C>
PROPERTY LOCATION
Herrod Boulevard, So.
Brunswick, NJ Bulk Distribution 418,000 $18,100
Blue Ash, OH Multitenant Distribution
and Workspace 482,942 15,371
Remington Street,
Bolingbrook, IL Bulk Distribution 212,333 8,500
Ambassador Road,
Naperville, IL Bulk Distribution 203,500 7,986
Luna Road, Carrollton,
TX Bulk Distribution 205,400 7,400
South Rockefeller
Avenue, Ontario, CA Bulk Distribution 164,140 5,680
Huntwood Avenue,
Hayward, CA Workspace 62,031 4,232
Diplomat Drive,
Carrollton, TX Workspace 56,535 2,500
<CAPTION>
--------- -----------
<S> <C> <C> <C>
1,804,881 $69,769
<CAPTION>
========= ===========
</TABLE>
Other Formation Transactions
(C) To record the allocation of cost of assets acquired in excess of the Prop-
erties' historical net book value based on the Common Shares and Units issued
in connection with the Formation Transactions (includes Units issued to the
accounting acquiror, Cabot Partners, which are recorded at Cabot Partners' car-
ryover basis), as follows:
<TABLE>
<CAPTION>
---------
<S> <C>
Issuance of million Common Shares and Units at $ per Common
Share/Unit $ 632,236
Plus: Liabilities assumed 19,087
Less: Historical net book value of Properties and other acquired
assets (633,804)
<CAPTION>
---------
<S> <C>
Cost of assets acquired in excess of historical book value $ 17,519
<CAPTION>
=========
</TABLE>
41
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEETS--(CONTINUED)
AS OF JUNE 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(D) To eliminate $8,126 deferred rent receivable which arose from the histor-
ical straight-lining of rents.
(E) To write off $1,487 of intangible assets of Cabot Partners related to Advi-
sory Contracts terminated at the time of the Formation Transactions and to
eliminate $143 of unamortized deferred loan costs related to mortgage debt to
be repaid with net proceeds of the Offering.
(F) To reflect the distribution of substantially all of the net non-real estate
assets distributed to the Contributing Investors as a result of the Formation
Transactions.
(G) To eliminate fees receivable (payable) between Cabot Partners and the
Existing Investors Property Group arising from Advisory Contracts which will be
terminated as a part of the Formation Transactions.
(H) To reflect the conversion to equity of $3,647 due by certain of the C-M
Property Partnerships to certain affiliated entities.
The Offering
(I) To reflect the net proceeds of the Offering of $ received in exchange
for the issuance of million Common Shares at a price of $ per share, net
of $ million of fees and expenses associated with the Formation Transactions
and Offering.
(J) To reflect the repayment of three mortgage loans totalling $13,509, each
with a fixed interest rate of 8.375%, due December 1, 1997 plus accrued
interest of $212 with a portion of the net proceeds of the Offering. The total
debt to be repaid with the proceeds of the Offering is based on the principal
outstanding at June 30, 1997. The actual amounts repaid will differ to the
extent of any amortization of the principal occurring prior to the actual date
of repayment. An extension of such due date to a date on or after the closing
of the Offering is being negotiated.
42
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Acquisitions
(K) To reflect the operations and the depreciation expense for the pro forma
condensed combined statement of operations for (a) the six months ended June
30, 1997: for the period from January 1, 1997 through the earlier of the date
of acquisition or June 30, 1997, as applicable, for properties acquired or
anticipated to be acquired in 1997 and (b) the year ended December 31, 1996:
for the period from January 1, 1996 through the date of acquisition for proper-
ties acquired in 1996 or December 31, 1996 for the properties acquired or
anticipated to be acquired in 1997, for the following properties:
<TABLE>
<CAPTION>
-----------------------------
PERIOD
DATE ACQUIRED REFERENCE
------------------ ---------
<S> <C> <C>
ACQUIRED PROPERTY
- -----------------
Reames Road, Charlotte, NC February 22, 1996 *
Santa Anita Avenue, Rancho Cucamonga, CA June 27, 1996 *
Holton Drive, Independence, KY July 6, 1996 *
East Jurupa Street, Ontario, CA November 11, 1996 *
North 104th Avenue, Tolleson, AZ November 26, 1996 *
Kingspointe Parkway, Orlando, FL December 30, 1996 *
South 55th Avenue, Phoenix, AZ March 27, 1997 **
North 47th Avenue, Phoenix, AZ March 27, 1997 **
South Rockefeller Avenue, Ontario, CA July 17, 1997 **
Huntwood Avenue, Hayward, CA September 12, 1997 **
Diplomat Drive, Carrollton, TX September 19, 1997 **
Remington Street, Bolingbrook, IL October 7, 1997 **
Ambassador Road, Naperville, IL October 9, 1997 **
Blue Ash, OH Under Contract **
Herrod Boulevard, South Brunswick, NJ Under Contract **
Luna Road, Carrollton, TX Under Contract **
</TABLE>
* Included in the pro forma condensed combined statement of operations for
the year ended December 31, 1996 (through the date of acquisition) in the
column entitled "1996 Acquisitions".
** Included in the pro forma condensed combined statement of operations for
the year ended December 31, 1996 and for the six months ended June 30, 1997
through the date of acquisition or June 30, 1997, whichever is earlier in
the column entitled "1997 Acquisitions".
Other Formation Transactions
(L) To eliminate advisory fee revenues and expenses between Cabot Partners and
the Existing Investors Property Group arising from Advisory Contracts which
will be terminated as a part of the Formation Transactions and to eliminate
advisory fees paid by the New Investors Property Group to third parties under
Advisory Contracts which will be terminated as part of the Formation Transac-
tions (see Note E).
43
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS- (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(M) To reflect the effects of establishing the Company's investment in the Man-
agement Company by reclassifying the associated revenues and operating expenses
to an unconsolidated subsidiary for the six months ended June 30, 1997 and the
year ended December 31, 1996. The pro forma operations of the Management Com-
pany and the Company's share of the Management Company's net income, based upon
its 95% economic interest, are as follows:
<TABLE>
<CAPTION>
------------------------
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
---------- ------------
<S> <C> <C>
Advisory fee revenues $ 3,359 $ 5,822
General and administra-
tive expenses (2,245) (3,902)
<CAPTION>
---------- ------------
<S> <C> <C>
Income before income
taxes 1,114 1,920
Income tax (assumed
effective tax rate of
40%) (446) (768)
<CAPTION>
---------- ------------
<S> <C> <C>
Net income 668 1,152
<CAPTION>
---------- ------------
<S> <C> <C>
Company's share of net
income $ 634 $ 1,093
<CAPTION>
========== ============
</TABLE>
Advisory fee revenues consist of actual fees earned by Cabot Partners during
the six months ended June 30, 1997 and the year ended December 31, 1996 from
the assets that are expected to be managed by the Management Company after the
Offering.
General and administrative expenses consist of direct and indirect costs allo-
cated by the Company to the Management Company. Such indirect costs have been
allocated based upon the percentage of total assets expected to be managed by
the Management Company after the Offering.
(N) To reflect the effects of the internalization of property management by the
reclassification of certain property related expenses totalling $221 and $389,
for the periods ended June 30, 1997 and December 31, 1996, respectively, from
general and administrative expenses to property operating expenses.
The Offering
(O) To reflect additional general and administrative expenses expected to be
incurred on an annual basis, as a result of reporting as a public company, as
follows:
<TABLE>
<CAPTION>
---------
<S> <C>
Legal, audit and tax services $ 350
Printing and mailing 350
Directors and officers insurance 100
Investor relations 50
Other 150
<CAPTION>
---------
<S> <C>
Totals $ 1,000
<CAPTION>
=========
</TABLE>
(P) To reflect the reduction of interest expense associated with the repayment
of mortgage debt with a portion of the net proceeds of the Offering and the
conversion to equity of related party indebtedness (see Note H).
(Q) To eliminate deferred loan cost amortization of $51 for the six months
ended June 30, 1997 and $80 for the year ended December 31, 1996 historically
recognized by Existing Investors Property Group (see Note E)
(R) To fully amortize the unamortized intangible assets of Cabot Partners
($1,487 in the period ended December 31, 1996) and to eliminate the related
historical amortization for the Advisory Contracts which will be terminated as
part of the Formation Transactions, $255 and $419, for the periods ended June
30, 1997 and December 31, 1996, respectively.
44
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS--(CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(S) The depreciation adjustment for the six months ended June 30, 1997 and the
year ended December 31, 1996, respectively, includes the following:
<TABLE>
<CAPTION>
---------
<S> <C>
Adjustment to the basis of the Properties (see Note C) $ 17,519
Less: Portion allocated to land estimated at 10% 1,752
<CAPTION>
---------
<S> <C>
$ 15,767
<CAPTION>
=========
<S> <C>
Depreciation expense based on a weighted average estimated useful
life of 40 years--
For the Six Months ended June 30, 1997 $ 197
<CAPTION>
=========
<S> <C>
For the Year ended December 31, 1996 $ 394
<CAPTION>
=========
</TABLE>
(T) To reflect the adjustment for the straight-line effect of scheduled rent
increases, assuming the transaction closed on January 1, 1996.
45
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
Set forth below are (i) selected historical financial and other data for (A)
the Existing Investors Property Group, and (B) the real estate advisory busi-
ness of Cabot Partners, and (ii) selected financial and other data for the Com-
pany on a pro forma basis.
The selected financial data presented below as of and for the years ended
December 31, 1996, 1995 and 1994 have been derived from the Existing Investors
Property Group Combined Financial Statements and the Cabot Partners Financial
Statements, each of which have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports included elsewhere in this
Prospectus. This information should be read in conjunction with such financial
statements and the notes thereto included elsewhere in this Prospectus. The
selected financial data presented below as of and for the years ended December
31, 1993 and 1992 for Cabot Partners are derived from the Cabot Partners Finan-
cial Statements and the notes thereto not included in this Prospectus which
have been audited by Arthur Andersen LLP. The selected financial data presented
below as of and for the years ended December 31, 1993 and 1992 for the Existing
Investors Property Group and as of June 30, 1997 and 1996 and for each of the
six-month periods then ended for both Cabot Partners and the Existing Investors
Property Group has not been audited but, in the opinion of management, includes
all adjustments (consisting only of normal recurring accruals) necessary to
present fairly such information in accordance with GAAP applied on a consistent
basis. The results of operations for the six months ended June 30, 1997 are not
necessarily indicative of results for the entire year. Other Data and Property
Data for all periods and dates presented are unaudited and are derived from the
unaudited financial and other records of Cabot Partners.
The pro forma condensed consolidated balance sheet data as of June 30, 1997 has
been prepared to reflect (i) the contribution to the Company of (A) the
Existing Investors Property Group, (B) the Additional Acquisitions, and (C) the
New Investors Property Group, (ii) each of the other Formation Transactions,
(iii) the Offering and the use of a portion of the net proceeds therefrom to
repay indebtedness, and (iv) certain other adjustments, as if each of such con-
tributions, transactions and adjustments had occurred on June 30, 1997. The pro
forma condensed consolidated operating and other data for the six months ended
June 30, 1997 and the twelve months ended December 31, 1996 have been prepared
to reflect (i) the contribution to the Company of (A) the Existing Investors
Property Group, (B) the Additional Acquisitions, (C) the New Investors Property
Group, and (D) the Properties acquired during the year ended December 31, 1996
and during the six months ended June 30, 1997, (ii) the other Formation Trans-
actions, (iii) the repayment of indebtedness with a portion of the net proceeds
of the Offering, and (iv) certain other adjustments, as if each of such contri-
butions, transactions and adjustments had occurred on January 1, 1996.
In the opinion of management, the pro forma condensed consolidated financial
information provides for all adjustments necessary to reflect the effects of
the foregoing transactions and adjustments. The pro forma information is unau-
dited and is not necessarily indicative of the consolidated results that would
have occurred if the transactions and adjustments reflected therein had been
consummated on the dates indicated, or on any particular date in the future,
nor does it purport to represent the financial position, results of operations
or changes in cash flows for future periods.
46
<PAGE>
CABOT INDUSTRIAL TRUST
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------ --------------------------------
COMPANY EXISTING INVESTORS COMPANY
EXISTING INVESTORS PROPERTY GROUP (1) PRO FORMA PROPERTY GROUP (1) PRO FORMA
------------------------------------------------ ---------- -------------------- ----------
Dollars in thousands, 1992 1993 1994 1995 1996 1996 1996 1997 1997
except per share data -------- -------- -------- -------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 21,904 $ 25,252 $ 28,209 $ 28,794 $ 35,180 $ 80,491 $ 17,194 $ 18,922 $ 39,736
Real estate tax expense 2,772 5,144 3,769 3,979 5,037 9,478 2,301 2,735 4,607
Property operating
expenses 2,940 3,227 3,063 3,357 4,323 9,360 2,040 2,115 4,643
General and administra-
tive expenses -- -- -- -- -- -- -- -- --
Interest expense 2,292 2,013 2,082 2,097 1,931 449 973 936 218
Depreciation and amorti-
zation expense 5,441 6,111 6,606 7,118 7,966 18,895 3,919 4,323 8,928
<CAPTION>
-------- -------- -------- -------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating income 8,459 8,757 12,689 12,243 15,923 42,309 7,961 8,813 21,340
Gain on sale of proper-
ties -- -- 186 -- -- -- -- -- --
<CAPTION>
-------- -------- -------- -------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $ 8,459 $ 8,757 $ 12,875 $ 12,243 $ 15,923 $ 42,309 $ 7,961 $ 8,813 $ 21,340
<CAPTION>
======== ======== ======== ======== ======== ========== ========= ========= ==========
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pro forma net income per
Common Share (2) $ $
<CAPTION>
========== ==========
---------------------------------------------------------------------------------------------
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------ --------------------------------
EXISTING INVESTORS COMPANY
EXISTING INVESTORS PROPERTY GROUP (1) PROPERTY GROUP (1) PRO FORMA
------------------------------------------------ -------------------- ----------
1992 1993 1994 1995 1996 1996 1997 1997
Dollars in thousands -------- -------- -------- -------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Properties (before
accumulated
depreciation) $240,358 $255,050 $250,387 $301,059 $336,836 $ 312,924 $ 345,537 $ 641,131
Properties, net 227,149 237,101 229,451 274,629 304,308 283,473 309,712 641,131
Total assets 236,457 247,615 241,026 289,337 318,732 297,198 324,136 651,323
Mortgage debt 20,550 20,550 20,608 20,083 19,292 19,696 18,872 5,363
Owners' equity 211,897 220,621 213,203 261,629 291,286 269,709 296,459 645,957
<CAPTION>
---------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------ --------------------------------
COMPANY EXISTING INVESTORS COMPANY
EXISTING INVESTORS PROPERTY GROUP (1) PRO FORMA PROPERTY GROUP (1) PRO FORMA
------------------------------------------------ ---------- -------------------- ----------
In thousands,
except number of 1992 1993 1994 1995 1996 1996 1996 1997 1997
properties -------- -------- -------- -------- -------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA (3) $ 16,892 $ 16,881 $ 21,377 $ 21,458 $ 25,820 $ 61,653 $ 12,853 $ 14,072 $ 30,486
Funds From Operations
(4) 13,900 14,764 19,193 19,298 23,809 61,204 11,851 13,085 30,268
Cash flows provided by
(used in):
Operating activities 14,123 17,471 17,552 19,401 25,695 12,559 13,061
Investing activities (9,980) (17,393) 2,037 (53,868) (39,074) (12,660) (9,507)
Financing activities (6,216) (278) (19,596) 35,680 13,204 (91) (4,081)
Total rentable square
footage of properties
at end of period 6,100 6,644 6,253 7,879 9,069 8,199 9,414 18,569
Number of properties at
end of period 53 57 53 61 66 63 68 123
Occupancy rate at end of
the period 86% 90% 90% 99% 92% 96% 92% 94%
</TABLE>
- -------
(1) Represents historical combined financial and other data for the Existing
Investors Property Group for the periods indicated. See Note (1) to Combined
Financial Statements of the Existing Investors Property Group.
(2) Pro forma net income per Common Share equals the pro forma net income
divided by issued and outstanding Common Shares (assuming the exchange of
the issued and outstanding Units into Common Shares).
(3) EBITDA is computed as operating income before gain on sale of properties
plus interest expense, income taxes, depreciation and amortization. Management
believes that in addition to cash flows and net income, EBITDA is a useful
financial performance measure of assessing the operating performance of an
equity REIT because, together with net income and cash flows, EBITDA provides
investors with an additional basis to evaluate the ability of a REIT to incur
and service debt and to fund acquisitions and other capital expenditures. To
evaluate EBITDA and the trends it depicts, the components of EBITDA, such as
revenues, property operating expenses, real estate tax and general and adminis-
trative expenses should be considered. See "Management's Discussion and Anal-
ysis of Financial Condition and Results of Operations." Excluded from EBITDA
are financing costs such as interest, as well as depreciation and amortization,
each of which can
(notes continued on next page)
47
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
SIX MONTHS
CABOT PARTNERS (5) YEARS ENDED DECEMBER 31, ENDED JUNE 30,
- ------------------ ------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
Dollars in thousands -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 3,618 $ 4,088 $ 4,159 $ 6,516 $ 7,908 $ 3,324 $ 4,413
General and
administrative expenses 3,992 4,074 4,267 5,069 5,888 2,874 3,323
Depreciation and
amortization expense 480 480 474 453 419 210 255
Equity in income (loss)
from unconsolidated
subsidiary 48 38 46 63 (7) (44) 22
<CAPTION>
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net income (loss) $ (806) $ (428) $ (536) $ 1,057 $ 1,594 $ 196 $ 857
<CAPTION>
======== ======== ======== ======== ======== ======== ==========
----------------------------------------------------------------
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
Dollars in thousands -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets $ 5,412 $ 4,923 $ 4,300 $ 5,628 $ 6,075 $ 4,873 $ 5,081
Total liabilities 440 379 292 563 485 682 703
Total partners' capital 4,972 4,544 4,008 5,065 5,590 4,191 4,378
----------------------------------------------------------------
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1996 1997
Dollars in thousands -------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Cash flows provided by
(used in):
Operating activities $ (269) $ (173) $ (12) $ 1,351 $ 1,283 $ 238 $ 1,048
Investing activities 5 25 40 (6) 113 (13) 28
Financing activities 0 0 0 0 (1,069) (1,069) (2,069)
Assets under
management (6) $442,000 $472,000 $515,000 $778,000 $979,000 $863,000 $1,120,000
</TABLE>
- -------
(notes continued from preceding page)
significantly affect a REIT's results of operations and liquidity and should be
considered in evaluating a REIT's operating performance. Further, EBITDA does
not represent net income or cash flows from operating, financing and investing
activities as defined by GAAP and does not necessarily indicate that cash flows
will be sufficient to fund cash needs. It should not be considered as an alter-
native to net income as an indicator of the Company's operating performance or
to cash flows as a measure of liquidity.
(4) FFO represents net income before minority interests and extraordinary
items, adjusted for depreciation on real property and amortization of tenant
improvements costs and lease commissions, gains from the sale of properties and
FFO attributable to minority interests in consolidated joint ventures whose
interests are not convertible into shares of Common Stock. In addition to cash
flow and net income, management and industry analysts generally consider FFO to
be one additional measure of the performance of an equity REIT because together
with net income and cash flows, FFO provides investors with an additional basis
to evaluate the ability of an entity to incur and service debt and to fund
acquisitions and other capital expenditures. However, FFO does not measure
whether cash flow is sufficient to fund all of an entity's cash needs including
principal amortization, capital improvements and distributions to stockholders.
FFO also does not represent cash generated from operating, investing or
financing activities as determined in accordance with GAAP. FFO should not be
considered as an alternative to net income as an indicator of an entity's oper-
ating performance or as an alternative to cash flow as a measure of liquidity.
Further, FFO as disclosed by other REITs may not be comparable to the Company's
calculation of FFO. The Company calculates FFO in accordance with the White
Paper on Funds from Operations approved by the Board of Governors of NAREIT in
March 1995.
(5) Represents the historical financial and other data of Cabot Partners for
periods prior to the Formation Transactions.
(6) Based on the fair market value of such assets as of the dates indicated.
48
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements contained in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" which are not historical facts may be for-
ward-looking statements. Such statements are subject to certain risks and
uncertainties which could cause actual results to differ materially from those
projected. Readers are cautioned not to place undue reliance on these forward-
looking statements which speak only as of the date hereof. See "Risk Factors
and Investment Considerations--Risks Associated with Reliance on Forward-
Looking Statements."
GENERAL
EXISTING INVESTORS PROPERTY GROUP
The Existing Investors Property Group referred to herein is not a separate
legal entity and has not conducted operations as such for any period. Refer-
ences to the Existing Investors Property Group, and the combined financial
statements and related notes thereto contained in this Prospectus, are intended
to reflect, in accordance with the accounting requirements of the Commission
and GAAP, the Properties contributed by the Contributing Investors that were
actually managed by Cabot Partners as of the dates indicated on a combined his-
torical basis. The New Investors Property Group operations are presented sepa-
rately in the other financial statements included in this Prospectus.
The timing and amount of funds used for property acquisitions by the Existing
Investors was primarily the result of individual decisions of the Existing
Investors to commit additional capital to industrial real estate investments.
The Existing Investors Property Group financial statements and related notes
contained elsewhere in this Prospectus should be read in conjunction with the
other historical financial statements relating to Cabot Partners and the other
Properties that are to be contributed to the Company in the Formation Transac-
tions, as well as the pro forma financial statements and related notes, for
more complete information concerning the intended combined operations, assets
and liabilities of the Company.
CABOT PARTNERS
Cabot Partners is the real estate advisory and management entity that is the
accounting acquiror and the predecessor to the Company as described in this
Prospectus. Its revenues have primarily consisted of asset management and
acquisition fees earned under Advisory Contracts with large institutional
investors. Cabot Partners' property acquisitions on the behalf of its clients
for 1995, 1996 and the first six months of 1997 were approximately $251 mil-
lion, $191 million and $126 million, respectively.
THE COMPANY
The Company will be the result of combining the properties of the Contributing
Investors and the advisory business of Cabot Partners contributed in the Forma-
tion Transactions described in this Prospectus, the Offering and the use of a
portion of the net proceeds therefrom to repay indebtedness as described herein
under "Use of Proceeds." The Company's growth will be dependent upon its
ability to acquire and develop additional properties, attract low cost debt and
equity capital and to increase occupancy rates and increase rental rates of its
properties.
RESULTS OF OPERATIONS
EXISTING INVESTORS PROPERTY GROUP
The historical financial data presented herein show increases in revenues and
expenses attributable to property acquisitions and increases in occupancy and
rental rates. Therefore, the analysis below describes (i) changes resulting
from properties that were held during the entire period for both periods being
compared (the "Base Line Properties") and (ii) changes attributable to acquisi-
tion activity. Base Line Properties consisted of 61 properties for the compar-
ison between the six months ended June 30, 1997 and 1996, 53 properties for the
comparison between the years ended December 31, 1996 and 1995 and 51 properties
for the comparison between the years ended December 31, 1995 and 1994.
Six Months Ended June 30, 1997 and 1996
Revenues. Revenues include rental revenues, tenant reimbursements, interest and
other rental revenues. Revenues increased by $1.7 million for the six months
ended June 30, 1997, or 10.1%, to $18.9 million as compared to $17.2 million
for the six months ended June 30, 1996. Substantially all of this increase was
attributable to properties acquired in 1997 and 1996.
49
<PAGE>
Real estate tax expense. Real estate tax expense increased by $434,000 for the
six months ended June 30, 1997, or 18.9%, to $2.7 million as compared to $2.3
million for the six months ended June 30, 1996. Approximately $248,000, or
57.1%, of this increase was attributable to properties acquired in 1997 and
1996. The remainder of the increase was attributable to Base Line Properties.
Property operating expenses. Property operating expenses (excluding real estate
tax expense) increased by $75,000 for the six months ended June 30, 1997, or
3.7%, to $2.1 million as compared to $2.0 million for the six months ended June
30, 1996. Properties acquired in 1996 and 1997 resulted in an increase to prop-
erty operating expenses of $189,000, partially offset by property operating
expenses for Base Line Properties which decreased by $114,000 due primarily to
lower snow removal expenses and provisions for doubtful tenant accounts receiv-
able.
Depreciation and amortization expense. Depreciation and amortization expense
increased by $404,000 for the six months ended June 30, 1997, or 10.3%, to $4.3
million as compared to $3.9 million for the six months ended June 30, 1996.
Approximately $290,000, or 71.8%, of this increase was attributable to proper-
ties acquired in 1997 and 1996 and $114,000 of this increase was attributable
to the Base Line Properties. The increase in the Base Line Properties was
related to depreciation and amortization of capital and tenant improvements and
leasing commissions made at the Base Line Properties in 1997 and 1996.
Years Ended December 31, 1996 and 1995
Revenues. Revenues increased by $6.4 million for the year ended December 31,
1996, or 22.2%, to $35.2 million as compared to $28.8 million for the year
ended 1995. Approximately $4.1 million, or 63.9%, of this increase was attrib-
utable to properties acquired in 1996 and 1995. The remaining $2.3 million was
attributable to growth in rental revenue in the Base Line Properties primarily
from leasing vacant space.
Real estate tax expense. Real estate tax expense increased by $1.1 million for
the year ended December 31, 1996, or 26.6%, to $5.0 million as compared to $4.0
million for the year ended December 31, 1995. Approximately $615,000, or 58.1%,
of this increase was attributable to properties acquired in 1996 and 1995. The
Base Line Properties increase of approximately $443,000 was primarily attribut-
able to lower real estate tax expense due to tax abatements received in 1995
that related to 1995 and prior years.
Property operating expenses. Property operating expenses (excluding real estate
tax expense) increased by $966,000 for the year ended December 31, 1996, or
28.8%, to $4.3 million as compared to $3.4 million for the year ended December
31, 1995. Approximately $590,000, or 61.1%, of this increase was attributable
to Base Line Properties. The increase in property operating expenses for Base
Line Properties was due primarily to additional provisions for doubtful tenant
accounts receivable and unusually high snow removal costs. The remainder of the
increase was attributable to properties acquired in 1996 and 1995.
Depreciation and amortization expense. Depreciation and amortization expense
increased by $848,000 for the year ended December 31, 1996, or 11.9%, to $8.0
million as compared to $7.1 million for the year ended December 31, 1995.
Approximately $681,000, or 80.3%, of the increase was related to properties
acquired in 1996 and 1995 and the remainder of this increase was related to
Base Line Properties. The increase in the Base Line Properties was related to
depreciation and amortization of capital and tenant improvements and leasing
commissions incurred at the Base Line Properties in 1996 and 1995.
Years Ended December 31, 1995 and 1994
Revenues. Revenues increased by $585,000 for the year ended December 31, 1995,
or 2.1%, to $28.8 million as compared to $28.2 million for the year ended 1994.
Approximately $4.4 million of additional rental revenue was earned in 1995 as
compared to 1994 from properties acquired during 1994 and 1995, offset by lower
revenue from Base Line Properties of approximately $2.2 million, due primarily
to $1.6 million of termination payments received in 1994 and the resulting
vacancy in 1995 of the properties previously leased to the terminating tenants.
Rental revenue also decreased by $1.7 million in 1995 as compared to 1994 due
to properties sold during 1994.
50
<PAGE>
Real estate tax expense. Real estate tax expense increased by $210,000 for the
year ended December 31, 1995, or 5.6%, to $4.0 million as compared to $3.8 mil-
lion for the year ended December 31, 1994. Properties acquired in 1995 and 1994
resulted in an increase of $675,000, offset by a decrease in Base Line Proper-
ties of approximately $148,000 due to real estate tax abatements. Properties
sold in 1994 resulted in a $317,000 decrease in real estate tax expense for
1995 as compared to 1994.
Property operating expenses. Property operating expenses (excluding real estate
tax expense) increased by $294,000 for the year ended December 31, 1995, or
9.6%, to $3.4 million as compared to $3.1 million for the year ended December
31, 1994. Properties acquired in 1994 and 1995 resulted in an increase of
$446,000, partially offset by properties sold in 1994 which resulted in a
$233,000 decrease in property operating expenses.
Depreciation and amortization expense. Depreciation and amortization expense
increased by $512,000 for the year ended December 31, 1995, or 7.8%, to $7.1
million as compared to $6.6 million for the year ended December 31, 1994. Prop-
erties acquired after January 1, 1994 resulted in a $857,000 increase, while
properties sold in 1994 resulted in a $419,000 decrease in depreciation and
amortization expense for 1995 as compared to 1994.
CABOT PARTNERS
Six Months Ended June 30, 1997 and 1996
Revenues. Revenues, primarily consisting of asset management fees and acquisi-
tion fees, increased by $1.1 million for the six months ended June 30, 1997, or
32.8%, to $4.4 million as compared to $3.3 million for the six months ended
June 30, 1996. The increase was due to a $257 million increase in assets under
management which resulted in a $554,000 increase in asset management fees and a
$465,000 increase in acquisition fees.
General and administrative expense. General and administrative expenses
increased $449,000 for the six months ended June 30, 1997, or 15.6%, to $3.3
million as compared to $2.9 million for the six months ended June 30, 1996,
primarily due to compensation expense increases. General and administrative
expenses as a percent of revenues declined from 86.5% to 75.3% for the compara-
tive periods.
Years Ended December 31, 1996, 1995 and 1994
Revenues. Revenues, primarily consisting of asset management fees and acquisi-
tion fees, increased by $1.4 million for the year ended December 31, 1996, or
21.4%, to $7.9 million as compared to $6.5 million for the year ended December
31, 1995 due to a $201 million, or 25.8%, increase in assets under management.
Advisory fee revenues increased $2.4 million for the year ended December 31,
1995, or 56.7%, to $6.5 million as compared to $4.1 million for the year ended
December 31, 1994 because of a $188 million, or 355%, increase in acquisitions
in 1995 as compared to 1994.
General and administrative expense. General and administrative expenses for the
years ended December 31, 1996 and 1995 increased by approximately 16.2% and
18.8% over the prior year due primarily to compensation expense increases. Gen-
eral and administrative expense as a percent of revenues for 1996, 1995 and
1994 was 74.5%, 77.8% and 102.6%, respectively.
CAPITAL RESOURCES AND LIQUIDITY
The principal sources of funding for acquisitions, expansions and renovation of
the Existing Investors Property Group historically have been capital contribu-
tions from its investors and cash flow provided by operations. In the future,
the Company intends to rely on cash provided by operations, bank borrowings,
and public debt and equity financings as its primary sources of funding for
acquisition, development, expansion and renovation of properties. The Company
is currently negotiating with several financial institutions concerning the
establishment of a $ million Acquisition Facility. It is anticipated the
Acquisition Facility will be available at the closing of the Offering and it
will be used to fund property acquisitions, development activities, building
expansions, tenant leasing costs and other general corporate purposes. The
Acquisition Facility is expected to contain certain customary restrictions and
requirements such as total debt-to-assets, debt service coverage, minimum unen-
cumbered assets to unsecured debt ratios, and other limitations. Although the
Company is currently negotiating the terms of the Acquisition Facility and
believes commercially acceptable terms will be realized, a currently binding
commitment does not exist. The Company believes cash flow from operations not
distributed will be sufficient to cover tenant allowances and costs associated
with renewal or replacement of current tenants as their leases expire and
recurring non-incremental revenue generating capital expenditures. See "Proper-
ties--Tenant Improvements and Leasing Commissions and Capital Expenditures" for
a discussion of historical leasing costs and capital expenditures.
51
<PAGE>
CAPITAL RESOURCES
The Company's low Debt-to-Total Market Capitalization Ratio reduces exposure to
fixed charges and increases its ability to access large amounts of debt capi-
tal. On a pro forma basis at June 30, 1997, after giving effect to the Forma-
tion Transactions and the Offering, the Operating Partnership expects to have
fixed rate debt secured by only three properties with an outstanding principal
amount of approximately $5.4 million and a Debt-to-Total Market Capitalization
Ratio of %. See "Financial Information Pro Forma Condensed Financial State-
ments."
LIQUIDITY
EXISTING INVESTORS PROPERTY GROUP
Six Months Ended June 30, 1997 and 1996
Cash and cash equivalents decreased by approximately $527,000 to approximately
$1.9 million at June 30, 1997, compared to $2.4 million at December 31, 1996.
This was the result of $13.1 million of cash generated from operations, reduced
by $9.5 million of net cash used for investing and $4.1 million used for
financing, including $3.6 million of distributions to investors, net of capital
contributions. Cash flow generated by operations increased by $502,000, from
$12.6 million to $13.1 million, primarily due to additional cash flow generated
by an increase in the number of properties owned. Net cash used for investing
activities decreased by $3.2 million, from $12.7 million to $9.5 million, due
to a $4.6 million decrease in property acquisitions partially offset by
increased capital expenditures and lease acquisition costs. Net cash used for
financing activities increased $4.0 million from $91,000 to $4.1 million pri-
marily due to a $3.8 million decrease in capital contributions, net of distri-
butions, and a $198,000 reduction in net advances from related parties.
Years ended December 31, 1996 and 1995
Cash and cash equivalents decreased by $175,000, to $2.4 million at December
31, 1996 compared to $2.6 million at December 31, 1995. This was the result of
$25.7 million generated from operations and $13.2 million provided by financing
activities, reduced by $39.1 million of net cash used for investing activities.
Cash generated by operations increased by $6.3 million, from $19.4 million to
$25.7 million, primarily due to additional cash flow generated by an increase
in the number of properties owned. Net cash used for investing activities
decreased by $14.8 million, from $53.9 million to $39.1 million, primarily due
to a decrease in the number of properties purchased during 1996 as compared to
1995. Net cash provided by financing activities decreased by $22.5 million,
from $35.7 million to $13.2 million due to a $15.1 million decrease in capital
contributions and a $7.4 million increase in distributions.
CABOT PARTNERS
Cabot Partners relies primarily on cash payments of asset management fees and
acquisition fees from its advisory clients to fund its operating expenses and
distributions to its partners.
INFLATION
Substantially all of the leases of the Properties require the tenant to pay, as
additional rent, either all real estate taxes and operating expenses or all
increases in real estate taxes and operating expenses over a base amount. In
addition, many of such leases provide for fixed increases in base rent or
indexed escalations (based on the Consumer Price Index or other measures). Man-
agement believes that inflationary increases in operating expenses will be off-
set, in part, by the expense reimbursements and contractual rent increases
described above.
52
<PAGE>
FUNDS FROM OPERATIONS
Management believes that Funds from Operations ("FFO"), as defined by the
National Association of Real Estate Investment Trusts ("NAREIT") is an appro-
priate measure of performance for an equity REIT. While FFO is a relevant and
widely used measure of operating performance of REITs, it does not represent
cash flow from operations or net income as defined by GAAP, and it should not
be considered as an alternative to those indicators in evaluating liquidity or
operating performance.
The following table reflects the calculation of the Existing Investors Property
Group's FFO on a historical combined basis for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997, and on a
pro forma basis for the Company for the year ended December 31, 1996 and the
six months ended June 30, 1997:
<TABLE>
<CAPTION>
-----------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------- -------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996(2) 1996 1997 1997(2)
------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income before gain on
sale of properties..... $12,689 $12,243 $15,923 $42,309 $ 7,961 $ 8,813 $21,340
Real estate depreciation
and amortization....... 6,504 7,055 7,886 18,895 3,890 4,272 8,928
<CAPTION>
------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
FFO(1).................. $19,193 $19,298 $23,809 $61,204 $11,851 $13,085 $30,268
<CAPTION>
======= ======= ======= ========= ======= ======= =========
</TABLE>
- -------
(1) The White Paper on Funds from Operations approved by the Board of Governors
of NAREIT in March 1995 (the "White Paper") defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization. Management considers FFO to be an appropriate measure of per-
formance of an equity REIT because it is predicated on cash flow analyses. The
Company computes FFO in accordance with standards established by the White
Paper which may differ from the methodology for calculating FFO utilized by
other REITs and, accordingly, may not be comparable to such other REITs. FFO
should not be considered as an alternative to net income (determined in accor-
dance with GAAP) as an indicator of the Company's financial performance or to
cash flow from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds available to
fund the Company's cash needs, including its ability to make distributions.
(2) See the Pro Forma Financial Statements of Cabot Industrial Trust and the
notes thereto included elsewhere in this Prospectus.
53
<PAGE>
PROPERTIES
GENERAL
Upon the closing of the Offering, the Company will own a geographically diver-
sified portfolio of 123 Properties having an aggregate of approximately 19 mil-
lion rentable square feet, approximately 94% of which space was leased to 202
tenants at June 30, 1997. The Properties are located in 21 states and in each
of the five principal regions of the United States and are within overnight
trucking access (a 500-mile radius) to 90% of the population of the United
States.
The Company categorizes its properties into three types: bulk distribution
properties, multitenant distribution properties, and workspace properties. Bulk
distribution properties are oriented primarily to large national and regional
distribution tenants. These properties generally have at least 100,000 square
feet of rentable space, building depths of at least 240 feet, clear heights of
24 feet or more, truck courts in excess of 100 feet in depth to accommodate
larger modern trucks, a ratio of loading docks to rentable space of one or more
per 10,000 square feet, and a location with good access to interstate highways.
Multitenant distribution properties are oriented primarily to smaller regional
and local distribution tenants, and are generally designed to be subdivided to
suit tenants whose space requirements generally range from 10,000 square feet
to 100,000 square feet. These properties generally have clear heights of 20
feet or more, building depths of less than 240 feet (unless configured with
loading on two sides), and a location with good access to regional and inter-
state highways. Both types of distribution property are used predominately for
the storage and distribution of goods. Workspace properties are designed to
serve a broad range of industrial tenants with workspace related requirements,
including light manufacturing and assembly, research, testing, re-packaging and
sorting, back office, and sales office functions. Workspace tenants include
smaller companies whose space requirements generally range from 3,000 square
feet to 70,000 square feet. Workspace properties generally have clear heights
of 14 to 24 feet, attractive building exteriors, office finish of up to 30%,
parking ratios of one to four spaces per 1,000 rentable square feet, and loca-
tions with good access to executive residential areas and local highways, labor
supply, and dining and shopping amenities.
The Properties typically are leased on a triple net basis, with tenants paying
their proportionate share of real estate taxes, operating costs and utilities
costs. However, some of the Properties are leased at higher gross rents with
the Company responsible for paying a stated amount of real estate taxes, oper-
ating costs and utilities costs with tenants being responsible for any and all
increases in such taxes and costs above that stated amount. Excluding lease
renewal options, lease terms typically range from three to five years or, for
leases that are renewed, a shorter period of generally two to three years.
Approximately 52% (based on leased square footage) of the leases contain a pro-
vision providing for an automatic "stepped rent" increase of a specified amount
or percentage at a certain point or points during the term of the lease.
54
<PAGE>
PROPERTY OVERVIEW
The Properties are located in 20 major industrial real estate markets and in
each of the five principal regions of the United States. Information regarding
the Properties by region as of June 30, 1997 is set forth below.
PROPERTIES BY REGION
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------ ----------------------------------
PER LEASED
NUMBER OF SQUARE PERCENT
PROPERTY TYPE BY REGION PROPERTIES NUMBER % OF TOTAL AMOUNT % OF TOTAL FOOT LEASED
- ----------------------- ---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
BULK DISTRIBUTION
PROPERTIES:
West 11 2,269,146 12.2% $ 5,952,064 9.3% $3.05 86.0%
Southwest 2 346,200 1.9 1,172,796 1.8 3.39 100.0
Midwest 16 3,872,086 20.9 11,207,288 17.4 2.98 97.0
Southeast 4 1,029,247 5.5 3,358,660 5.2 3.26 100.0
Northeast 7 1,661,862 8.9 6,644,553 10.3 4.00 100.0
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Subtotal/weighted
average 40 9,178,541 49.4% $28,335,361 44.0% $3.24 95.3%
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
MULTITENANT DISTRIBUTION
PROPERTIES:
West 4 831,626 4.5% $ 3,029,131 4.7% $3.64 100.0%
Southwest 3 385,135 2.1 1,140,062 1.8 2.96 100.0
Midwest 13 2,159,560 11.6 7,415,362 11.6 4.02 85.5
Southeast 7 1,274,745 6.9 3,907,932 6.1 3.36 91.3
Northeast 11 2,065,503 11.1 7,877,136 12.2 3.81 100.0
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Subtotal/weighted
average 38 6,716,569 36.2% $23,369,623 36.4% $3.71 93.7%
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
WORKSPACE PROPERTIES:
West 27 1,254,386 6.8% $ 6,066,675 9.4% $5.04 96.0%
Southwest 1 56,535 0.3 325,044 0.5 5.75 100.0
Midwest 3 283,505 1.5 832,334 1.3 4.65 63.2
Southeast 3 413,930 2.2 1,657,386 2.6 4.00 100.0
Northeast 11 665,892 3.6 3,730,726 5.8 5.88 95.3
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Subtotal/weighted
average 45 2,674,248 14.4% $12,612,165 19.6% $5.07 93.1%
<CAPTION>
---------- ---------- ---------- ----------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
TOTAL/WEIGHTED AVERAGE 123 18,569,358 100.0% $64,317,149 100.0% $3.67 94.4%
<CAPTION>
========== ========== ========== =========== ========== ========== =======
</TABLE>
- -------
(1) "Annualized Net Rent" means annualized monthly Net Rent from leases in
effect as of June 30, 1997. "Net Rent" means contractual rent, excluding any
reimbursements for real estate taxes or operating expenses.
55
<PAGE>
PROPERTIES BY REGION AND MARKET
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------- ----------------------------------
ANNUALIZED
EFFECTIVE RENT
YEAR BUILT/ NUMBER OF PER LEASED PER LEASED
PROPERTY TYPE AND LOCATION RENOVATED PROPERTIES NUMBER % LEASED AMOUNT % OF TOTAL SQUARE FOOT SQUARE FOOT(2)
- -------------------------- ----------- ---------- ------------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BULK DISTRIBUTION
PROPERTIES:
West Region
Los Angeles Market
South Vintage Avenue,
Ontario, CA............ 1986 2 520,512 100% $1,512,233 2.4% $2.91 $2.83
South Rockefeller
Avenue, Ontario, CA.... 1986 1 164,140 100 551,510 0.9 3.36 3.36
East Jurupa Street,
Ontario, CA............ 1986 1 141,132 0 0 0.0 0.00 0.00
Vintage Avenue, Ontario,
CA..................... 1988 1 284,559 100 914,000 1.4 3.21 3.11
Santa Anita Avenue,
Rancho Cucamonga, CA... 1988 1 212,300 100 764,280 1.2 3.60 3.73
<CAPTION>
---------- ------------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 6 1,322,643 89% $3,742,023 5.9% $3.17 $3.14
Phoenix Market
North 47th Avenue,
Phoenix, AZ............ 1986 1 163,200 100% $ 411,264 0.6% $2.52 $2.55
South 63rd Avenue,
Phoenix, AZ............ 1990 1 168,165 100 450,494 0.7 2.68 2.73
South 55th Avenue,
Phoenix, AZ............ 1986 1 100,000 100 288,000 0.4 2.88 2.88
North 104th Avenue,
Tolleson, AZ........... 1995 1 279,131 37 297,815 0.5 2.88 2.64
South 84th Avenue,
Tolleson, AZ........... 1989 1 236,007 100 762,468 1.2 3.23 3.16
<CAPTION>
---------- ------------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 5 946,503 81% $2,210,041 3.4% $2.87 $2.83
<CAPTION>
---------- ------------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEST REGION SUBTOTAL... 11 2,269,146 86% $5,952,064 9.3% $3.05 $3.01
Southwest Region
Dallas Market
Luna Road, Carrollton,
TX..................... 1997 1 205,400 100% $ 679,992 1.0% $3.31 $3.40
Airline Drive, Building
2, Coppell, TX......... 1990 1 140,800 100 492,804 0.8 3.50 3.34
<CAPTION>
---------- ------------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHWEST REGION/MARKET
SUBTOTAL.............. 2 346,200 100% $1,172,796 1.8% $3.39 $3.38
Midwest Region
Chicago Market
West 73rd Street,
Building 1, Bedford
Park, IL............... 1982 1 233,282 100% $ 671,482 1.0% $2.88 $2.67
West 73rd Street,
Building 2, Bedford
Park, IL............... 1986 1 380,269 100 1,034,331 1.7 2.72 2.52
West 73rd Street,
Building 3, Bedford
Park, IL............... 1979 1 232,000 100 720,953 1.1 3.11 2.80
Remington Street,
Bolingbrook, IL........ 1996 1 212,333 100 796,925 1.2 3.75 3.75
Harvester Drive,
Chicago, IL............ 1974 1 212,922 100 723,935 1.1 3.40 3.27
Arthur Avenue, Elk
Grove, IL.............. 1978 1 230,768 100 653,076 1.0 2.83 3.07
Ambassador Road,
Naperville, IL......... 1997 1 203,500 44 328,967 0.5 3.70 3.96
Mark Street, Wood Dale,
IL..................... 1985 1 234,000 100 809,992 1.3 3.46 2.91
<CAPTION>
---------- ------------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 8 1,939,074 94% $5,739,661 8.9% $3.15 $3.00
Cincinnati/Northern Ken-
tucky Market
Holton Drive,
Independence, KY....... 1996 1 352,000 100% $ 991,952 1.5% $2.82 $3.04
International Way,
Hebron, KY............. 1990 1 192,000 100 556,800 0.9 2.90 2.81
International Road,
Building 1,
Cincinnatti, OH........ 1990 1 192,000 100 528,000 0.8 2.75 2.41
International Road,
Building 2,
Cincinnatti, OH........ 1990 1 204,800 100 721,520 1.1 3.52 3.54
<CAPTION>
---------- ------------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 4 940,800 100% $2,798,272 4.3% $2.97 $2.97
Columbus Market
Westbelt Drive, Building
2, Columbus, OH........ 1980 1 229,200 100% $ 602,304 1.0% $2.63 $2.41
Equity Drive, Building
1, Columbus, OH........ 1980 1 227,480 100 648,318 1.0 2.85 2.90
<CAPTION>
---------- ------------- ----------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 2 456,680 100% $1,250,622 2.0% $2.74 $2.65
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------- -----------------------------------
ANNUALIZED
EFFECTIVE
RENT
PER LEASED
YEAR BUILT/ NUMBER OF PER LEASED SQUARE
PROPERTY TYPE AND LOCATION RENOVATED PROPERTIES NUMBER % LEASED AMOUNT % OF TOTAL SQUARE FOOT FOOT(2)
- -------------------------- ----------- ---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Market
North State Rd. #9,
Howe, IN................ 1988 1 346,515 100% $ 762,333 1.2% $2.20 $1.84
Lakefront Drive, Earth
City, MO................ 1995 1 189,017 100 656,400 1.0 3.47 3.78
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal......... 2 535,532 100% $1,418,733 2.2% $2.65 $2.53
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MIDWEST REGION
SUBTOTAL............... 16 3,872,086 97% $11,207,288 17.4% $2.98 $2.88
Southeast Region
Memphis Market
Pilot Drive, Memphis,
TN...................... 1987 1 336,080 100% $ 778,522 1.2% $2.32 $2.21
Orlando Market
Land Street, Orlando,
FL...................... 1997 1 355,732 100% $1,705,987 2.6% $4.80 $4.80
Charlotte Market
Reames Road, Charlotte,
NC...................... 1994 1 105,600 100% $ 318,227 0.5% $3.01 $3.01
Atlanta Market
Westgate Parkway,
Atlanta, GA............. 1988 1 231,835 100% $ 555,924 0.9% $2.40 $2.45
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHEAST REGION
SUBTOTAL............... 4 1,029,247 100% $ 3,358,660 5.2% $3.26 $3.24
Northeast Region
Baltimore/Washington
Market
Tar Bay Drive, Jessup,
MD...................... 1990 1 210,000 100% $ 800,527 1.2% $3.81 $3.81
Oceano Avenue, Jessup,
MD...................... 1987 1 243,500 100 1,069,559 1.7 4.39 4.39
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal......... 2 453,500 100% $1,870,086 2.9% $4.12 $4.12
New York/New Jersey
Market
Pepes Farm Road,
Milford, CT............. 1980 1 200,000 100% $ 829,998 1.3% $4.15 $4.07
South Middlesex Avenue,
Building 1,
Cranbury, NJ............ 1989 1 204,369 100 735,728 1.1 3.60 3.60
Birch Creek Road,
Bridgeport, NJ.......... 1991/1997 1 203,229 100 713,204 1.1 3.51 3.76
Pierce Street, Franklin
Township, NJ............ 1984 1 182,764 100 776,748 1.2 4.25 4.25
Herrod Boulevard, South
Brunswick, NJ........... 1989 1 418,000 100 1,718,789 2.7 4.11 4.11
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal......... 5 1,208,362 100% $4,774,467 7.4% $3.95 $3.98
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION
SUBTOTAL............... 7 1,661,862 100% $ 6,644,553 10.3% $4.00 $4.02
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BULK DISTRIBUTION PROP-
ERTIES TOTAL.......... 40 9,178,541 95% $28,335,361 44.0% $3.24 $3.19
MULTITENANT DISTRIBUTION
PROPERTIES:
West Region
Los Angeles Market
East Dyer Road, Santa
Ana, CA................. 1954/1965 1 372,096 100% $1,301,983 2.0% $3.50 $3.29
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
San Francisco Market
Reed Avenue, Building 1,
West
Sacramento, CA.......... 1988 1 103,110 100% $ 404,712 0.6% $3.93 $4.28
Reed Avenue, Building 2,
West
Sacramento, CA.......... 1988 1 105,600 100 423,336 0.7 4.01 4.24
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal......... 2 208,710 100% $ 828,048 1.3% $3.97 $4.26
Seattle Market
Kent West Corporate
Park, II, Kent, WA...... 1989 1 250,820 100% $ 899,100 1.4% $3.58 $3.24
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEST REGION SUBTOTAL.... 4 831,626 100% $ 3,029,131 4.7% $3.64 $3.52
Southwest Region
Dallas Market
113th Street, Arlington,
TX...................... 1979 1 79,735 100% $ 267,112 0.4% $3.35 $3.49
Airline Drive, Building
1, Coppell, TX.......... 1991 1 75,000 100 262,500 0.4 3.50 3.38
North Lake Drive,
Coppell, TX............. 1982 1 230,400 100 610,450 1.0 2.65 2.38
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHWEST REGION/MARKET
SUBTOTAL............... 3 385,135 100% $ 1,140,062 1.8% $2.96 $2.81
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------- -----------------------------------
ANNUALIZED
EFFECTIVE
RENT
PER LEASED
YEAR BUILT/ NUMBER OF PER LEASED SQUARE
PROPERTY TYPE AND LOCATION RENOVATED PROPERTIES NUMBER % LEASED AMOUNT % OF TOTAL SQUARE FOOT FOOT(2)
- -------------------------- ----------- ---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Midwest Region
Chicago Market
Medinah Road, Roselle,
IL.................... 1986 2 480,258 100% $2,618,591 4.0% $5.45 $5.45
High Grove Lane, Naper-
ville, IL............. 1994 1 95,000 100 392,549 0.6 4.13 4.13
Western Avenue, Lisle,
IL.................... 1970/1985 1 67,996 100 383,143 0.6 5.63 4.50
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal....... 4 643,254 100% $3,394,283 5.2% $5.28 $5.16
Cincinnati/Northern
Kentucky Market
Lake Forest Drive,
Building 1, Blue Ash,
OH.................... 1978 1 239,891 98% $ 628,303 1.0% $2.67 $2.70
Lake Forest Drive,
Building 2, Blue Ash,
OH.................... 1979 1 176,956 100 428,691 0.7 2.42 2.47
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal....... 2 416,847 99% $1,056,994 1.7% $2.56 $2.60
Columbus Market
International Street,
Columbus, OH.......... 1988 1 152,800 0% $ 0 0.0% $0.00 $0.00
Port Road, Building 1,
Columbus, OH.......... 1995 1 205,109 100 672,903 1.0 3.28 3.27
Port Road, Building 2,
Columbus, OH.......... 1995 1 156,000 100 425,880 0.7 2.73 2.82
Westbelt Drive,
Building 1,
Columbus, OH.......... 1979 1 202,000 100 1,010,000 1.6 5.00 5.36
Dividend Drive, Colum-
bus, OH............... 1980 1 144,850 100 429,881 0.7 2.97 3.11
Twin Creek Drive,
Columbus, OH.......... 1989 1 176,000 11 65,000 0.1 3.25 3.25
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal....... 6 1,036,759 70% $2,603,664 4.1% $3.58 $3.72
Other Market
Sysco Court, Grand Rap-
ids, MI............... 1985 1 62,700 100% $ 360,421 0.6% $5.75 $5.17
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MIDWEST REGION
SUBTOTAL............. 13 2,159,560 86% $ 7,415,362 11.6% $4.02 $4.02
SOUTHEAST REGION
Orlando Market
Orlando Central Park,
Orlando, FL........... 1983 6 1,172,875 91% $3,567,791 5.6% $3.36 $2.78
Kingspointe Parkway,
Orlando, FL........... 1991 1 101,870 100 340,141 0.5 3.34 3.34
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHEAST
REGION/MARKET
SUBTOTAL............. 7 1,274,745 91% $ 3,907,932 6.1% $3.36 $2.83
Northeast Region
Boston Market
First Avenue, Needham,
MA.................... 1961/1992 1 119,573 100% $ 662,892 1.0% $5.54 $4.19
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New York/ New Jersey
Market
South Middlesex Avenue,
Building 2, Cranbury,
NJ.................... 1982 1 203,404 100% $ 661,062 1.0% $3.25 $3.25
Colony Road, Building
1, Jersey City, NJ.... 1976 1 262,453 100 918,586 1.4 3.50 3.41
Colony Road, Building
2, Jersey City, NJ.... 1974 1 124,933 100 456,005 0.7 3.65 3.95
Pulaski Boulevard,
Bayonne, NJ........... 1974/1982 1 224,664 100 703,439 1.1 3.13 3.13
Port Jersey Boulevard,
Building 1,
Jersey City, NJ....... 1974 1 425,121 100 1,746,443 2.7 4.11 4.22
Port Jersey Boulevard,
Building 2,
Jersey City, NJ....... 1974 1 204,564 100 754,841 1.2 3.69 3.60
Industrial Drive,
Building 1,
Jersey City, NJ....... 1976 1 263,717 100 988,939 1.5 3.75 3.80
Industrial Drive,
Building 2,
Jersey City, NJ....... 1976 1 154,000 100 577,500 0.9 3.75 3.75
Industrial Drive,
Building 3,
Jersey City, NJ....... 1972 1 45,274 100 158,459 0.3 3.50 4.00
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal....... 9 1,908,130 100% $6,965,274 10.8% $3.65 $3.69
Other Market
Ritter Road, Mechanics-
burg, PA.............. 1986 1 37,800 100% $ 248,970 0.4% $6.59 $5.44
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION
SUBTOTAL............. 11 2,065,503 100% $ 7,877,136 12.2% $3.81 $3.75
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MULTITENANT
DISTRIBUTION
PROPERTIES TOTAL... 38 6,716,569 94% $23,369,623 36.4% $3.71 $3.57
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------- -----------------------------------
ANNUALIZED
EFFECTIVE
RENT
PER LEASED
YEAR BUILT/ NUMBER OF PER LEASED SQUARE
PROPERTY TYPE AND LOCATION RENOVATED PROPERTIES NUMBER % LEASED AMOUNT % OF TOTAL SQUARE FOOT FOOT(2)
- -------------------------- ----------- ---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WORKSPACE PROPERTIES:
West Region
Los Angeles Market
East Howell Avenue,
Building 1, Anaheim,
CA..................... 1968 1 81,475 100% $ 322,653 0.5% $3.96 $4.08
East Howell Avenue,
Building 2, Anaheim,
CA..................... 1991 1 25,962 100 109,040 0.2 4.20 4.20
Avenida Encinas, Carls-
bad, CA................ 1972 1 80,000 100 613,193 0.9 7.66 9.30
Avenida Encinas, Carls-
bad, CA................ 1993 1 126,008 100 682,711 1.0 5.42 6.44
Artesia Avenue, Building
1, Fullerton, CA....... 1991 1 55,498 100 232,629 0.4 4.19 4.19
Artesia Avenue, Building
2, Fullerton, CA....... 1991 1 60,502 100 224,944 0.3 3.72 3.81
Commonwealth Avenue,
Fullerton, CA.......... 1965 1 61,842 100 162,628 0.3 2.63 2.63
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 7 491,287 100% $2,347,798 3.6% $4.78 $5.34
San Francisco Market
Brisbane Industrial
Park, Brisbane, CA..... 1965 15 549,128 91% $2,305,793 3.6% $4.62 $4.31
Huntwood Avenue, Hay-
ward, CA............... 1982 1 62,031 100 446,628 0.7 7.20 7.20
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 16 611,159 92% $2,752,421 4.3% $4.90 $4.63
Seattle Market
Kent West Corporate Park
I, Kent, WA............ 1989 4 151,940 100% $ 966,456 1.5% $6.36 $6.08
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WEST REGION SUBTOTAL... 27 1,254,386 96% $ 6,066,675 9.4% $5.04 $5.10
Southwest Region
Dallas Market
Diplomat Drive, Carroll-
ton, TX................ 1997 1 56,535 100% $ 325,044 0.5% $5.75 $5.75
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHWEST REGION/MARKET
SUBTOTAL.............. 1 56,535 100% $ 325,044 0.5% $5.75 $5.75
Midwest Region
Cincinnati/Northern Ken-
tucky Market
Empire Drive, Florence,
KY..................... 1991 1 101,250 100% $ 318,999 0.5% $3.15 $3.15
Creek Road, Blue Ash,
OH..................... 1983 1 66,095 88 398,858 0.6 6.84 7.13
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 2 167,345 95% $ 717,857 1.1% $4.50 $4.61
Columbus Market
Equity Drive, Building
2, Columbus, OH........ 1980 1 116,160 17% $ 114,477 0.2% $5.86 $4.03
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MIDWEST REGION
SUBTOTAL.............. 3 283,505 63% $ 832,334 1.3% $4.65 $4.54
Southeast Region
Charlotte Market
Old Charlotte Highway,
Monroe, NC............. 1957/1972 2 253,930 100% $ 986,000 1.6% $3.88 $3.55
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Other Market
Industrial Drive South,
Gluckstadt, MS......... 1988 1 160,000 100% $ 671,386 1.0% $4.20 $4.20
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SOUTHEAST REGION
SUBTOTAL.............. 3 413,930 100% $ 1,657,386 2.6% $4.00 $3.80
Northeast Region
Baltimore/Washington
Market
The Crysen Center,
Jessup, MD............. 1985 2 151,863 97% $ 683,387 1.1% $4.66 $4.04
Oakville Industrial
Park, Alexandria, VA... 1948 6 276,807 90 1,614,704 2.5 6.45 5.46
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 8 428,670 93% $2,298,091 3.6% $5.79 $4.93
Boston Market
Technology Drive,
Auburn, MA............. 1973 1 54,400 100% $ 190,368 0.3% $3.50 $2.75
John Hancock Road,
Taunton, MA............ 1986 1 34,224 100 206,147 0.3 6.02 5.24
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Market Subtotal........ 2 88,624 100% $ 396,515 0.6% $4.47 $3.71
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------- -----------------------------------
ANNUALIZED
EFFECTIVE
RENT
PER LEASED
YEAR BUILT/ NUMBER OF PER LEASED SQUARE
PROPERTY TYPE AND LOCATION RENOVATED PROPERTIES NUMBER % LEASED AMOUNT % OF TOTAL SQUARE FOOT FOOT(2)
- -------------------------- ----------- ---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New York/ New Jersey
Market
Memorial Drive,
Franklin Township, NJ... 1988 1 148,598 100% $1,036,120 1.6% $6.97 $6.43
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NORTHEAST REGION
SUBTOTAL............... 11 665,892 95% $ 3,730,726 5.8% $5.88 $5.11
<CAPTION>
---------- ------------- ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
WORKSPACE PROPERTIES
TOTAL................. 45 2,674,248 93% $12,612,165 19.6% $5.07 $4.86
GRAND TOTALS.............. 123 18,569,358 94% $64,317,149 100.0% $3.67 $3.56
<CAPTION>
========== ============= =========== =========== ========== =========== ==========
</TABLE>
- -------
(1) "Annualized Net Rent" means annualized monthly Net Rent from leases in
effect as of June 30, 1997. "Net Rent" means contractual rent, excluding any
reimbursements for real estate taxes or operating expenses.
(2) "Annualized Effective Rent" means Annualized Net Rent, less amortization of
the related leasing costs, plus the effect of straight-lining rent steps.
60
<PAGE>
INDUSTRIAL PROPERTY MARKET INFORMATION
Cognetics and CB Commercial/Torto Wheaton Research have each ranked the fastest
growing industrial property markets in the United States. Of the top 10 markets
ranked by each as listed below, the Company owns properties in those markets
highlighted in bold face text.
LEADING MARKETS FOR
FORECASTED NET ABSORPTION OF
INDUSTRIAL SPACE 1997-2002
----------------------------
1. ATLANTA
2. CHICAGO
3. RIVERSIDE
4. Houston
5. PHOENIX
6. WASHINGTON, D.C.
7. Oakland
8. Portland
9. SEATTLE
10. DALLAS
TOP 10
DISTRIBUTION SPACE MARKETS
FORECASTED SPACE
DEMAND 1997-2002
--------------------------
1. NEW YORK/NEW JERSEY
2. LOS ANGELES
3. CHICAGO
4. SAN FRANCISCO BAY AREA
5. ATLANTA
6. DALLAS/FORT WORTH
7. Miami/Ft. Lauderdale
8. Houston/Galveston
9. PHOENIX
10. Detroit
TOP 10
FLEX/R&D MARKETS
FORECASTED SPACE
DEMAND 1997-2002
----------------
1. SAN FRANCISCO BAY AREA
2. LOS ANGELES
3. NEW YORK/NEW JERSEY
4. DALLAS/FORTH WORTH
5. CHICAGO
6. BOSTON
7. ATLANTA
8. SEATTLE
9. Minneapolis/St. Paul
10. PHOENIX
Source: CB Source: Cognetics Source: Cognetics
Commercial/Torto
Wheaton
Research
The Company's 15 principal targeted markets, based on percentage of annualized
net rent and percentage of rentable area, as of June 30, 1997, are set forth
below:
<TABLE>
<CAPTION>
-----------------------------
PERCENT OF PERCENT OF
MARKET ANNUALIZED RENT RENTABLE AREA
------ --------------- -------------
<S> <C> <C>
New York/New
Jersey 19.9% 17.6%
Chicago 14.2 13.9
Los Angeles, including Riverside 11.5 11.8
Orlando 8.7 8.8
Cincinnati/Northern
Kentucky 7.1 8.2
Baltimore/Washington,
D.C. 6.5 4.8
Columbus 6.2 8.7
San Francisco, including San Jose 5.6 4.4
Dallas 4.1 4.2
Phoenix 3.4 5.1
Seattle 2.9 2.2
Charlotte 2.0 1.9
Boston 1.6 1.1
Memphis 1.2 1.8
Atlanta 0.9 1.2
Other Markets 4.2 4.3
------ ------
Total 100.0% 100.0%
====== ======
</TABLE>
61
<PAGE>
VACANCY RATE AND TW RENT INDEX FOR THE COMPANY'S 14 LARGEST MARKETS(1)
[GRAPH APPEARS HERE]
Label A
Label Vacancy
1 1992 10.4
2 1993 9.8
3 1994 8.6
4 1995 7.9
5 1996 7.8
6 1997 7.1
Source: CB Commercial/Torto Wheaton Research
- -------
(1) CB Commercial/Torto Wheaton Research defines the "TW Rent Index" as a "sta-
tistically computed dollar value for a three-year, 15,000 square foot lease for
an existing warehouse space in the statistical average of the metro or
submarket area." The TW Rent Index and vacancy rate in the chart above repre-
sent the weighted average of the TW Rent Index and vacancy rate for 14 of the
Company's 15 largest markets, as identified in the Company's principal targeted
markets table on the preceding page. The Memphis market is not covered by CB
Commercial/Torto Wheaton Research. The 1997 figures are forecasts.
NET ABSORPTION, COMPLETIONS AND VACANCY RATES FOR THE COMPANY'S 14 LARGEST
MARKETS (1)
[GRAPH APPEARS HERE]
Label A B
Label NetAbsorption Completions
1 1992 41792 22153
2 1993 46299 19248
3 1994 79764 24254
4 1995 78271 48837
5 1996 54562 53787
6 1997 90804 62529
Source: CB Commercial/Torto Wheaton Research
- -------
(1) CB Commercial/Torto Wheaton Research defines "net absorption" as the change
in occupied stock (completions less change in availability) of industrial
space, in square feet, during that period. The net absorption and completions
in the chart above represent the aggregate of such parameters, and the vacancy
rate in the chart above represents the weighted average vacancy rate, for 14 of
the Company's 15 largest markets, as identified in the Company's principal
targeted markets table on the preceding page. The Memphis market is not covered
by CB Commercial/Torto Wheaton Research. The 1997 figures are forecasts.
62
<PAGE>
TENANT INFORMATION
The following table sets forth the Company's 20 largest tenants based on
Annualized Base Rent as of August 31, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------
MONTHS
TOTAL PERCENT REMAINING
LEASED ANNUALIZED OF ANNUALIZED AFTER
SQUARE BASE BASE AUGUST 31,
TENANTS(1) FEET(1) RENT(1)(2) RENT(1) 1997
- ---------- --------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Forrestville Industries,
Inc. (guaranteed by North
American Philips
Corporation) 480,258 $ 2,618,591 3.93% 47
GTK Duplicating Corp. of NJ 358,564 1,332,341 2.00 30
National Distribution
Centers 301,468 1,188,458 1.78 82
B. Dalton Bookseller
(guaranteed by Barnes &
Noble, Inc.) 305,000 1,161,699 1.74 36
Menlo Logistics, Inc.
(guaranteed by Emery Air
Freight Corporation) 167,264 1,074,619 1.61 54
Enesco Corporation 234,000 1,064,700 1.60 21
GATX Logistics, Inc. 380,269 1,034,331 1.55 26
CGM, Inc. (Tri-State Gift) 202,000 1,010,000 1.52 141
Giant of Maryland, Inc. 243,500 998,349 1.50 22
Appleton Papers Inc. 352,000 991,952 1.49 106
CPC International Inc. 263,717 988,939 1.48 56
Yale Security, Inc. 253,930 986,000 1.48 49
Food Warehousing Corp 223,412 949,501 1.43 11
Port Jersey Distribution
Services, Inc. 262,453 918,586 1.38 8
LA Gear Inc. 284,559 914,000 1.37 22
Reebok International Ltd. 336,080 907,416 1.36 7
Locust Industries Ltd.
Partnership 210,000 871,500 1.31 2
Waldes Truarc Inc. 107,209 855,234 1.28 23
Excel Logistics, Inc. (CA) 272,448 850,037 1.28 24
Totes, Inc. 204,800 813,680 1.22 82
<CAPTION>
--------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Total 5,442,931 $21,529,933 32.31% 43
<CAPTION>
========= =========== ============= ==========
</TABLE>
- -------
(1) Aggregate of all affiliated entities based on information known.
(2) Annualized Base Rent means annual contractual rent.
The following table sets forth information relating to the distribution of the
Company's leases at the Properties based upon rentable square feet under lease
as of August 31, 1997.
<TABLE>
<CAPTION>
--------------------------------------------------------------------
PERCENT OF ANNUALIZED PERCENT
PERCENT AGGREGATE BASE OF PORTFOLIO
SQUARE FOOTAGE NUMBER OF OF ALL TOTAL SQUARE LEASED RENT (IN ANNUALIZED
UNDER LEASE LEASES LEASES FEET SQUARE FEET THOUSANDS) BASE RENT
- -------------- --------- ------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Less than 10,000 39 17.4% 210,085 1.2% $ 1,350 2.0%
10,001-20,000 27 12.1 384,693 2.2 2,048 3.1
20,001-50,000 50 22.3 1,614,512 9.2 7,107 10.7
50,001-100,000 41 18.3 3,002,021 17.0 12,203 18.3
100,001 and over 67 29.9 12,418,515 70.4 43,909 65.9
<CAPTION>
--------- ------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Total 224 100.0% 17,629,826 100.0% $66,617 100.0%
<CAPTION>
========= ======= ============ =========== ========== ============
</TABLE>
63
<PAGE>
LEASE EXPIRATIONS--PORTFOLIO TOTAL
The following table sets forth a summary schedule of lease expirations for the
Properties for leases in place as of August 31, 1997, assuming that none of the
tenants exercise renewal options or termination rights, if any, at or prior to
the scheduled expirations.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
ANNUALIZED PERCENT
ANNUALIZED BASE RENT OF ANNUALIZED
NUMBER OF EXPIRING LEASES BASE RENT OF OF EXPIRING BASE RENT OF
LEASES ---------------------- EXPIRING LEASES PER EXPIRING
YEAR OF LEASE EXPIRATION EXPIRING SQUARE FEET % OF TOTAL LEASES(1) SQUARE FOOT(1) LEASES(1)
- ------------------------ --------- ----------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1997(2) 14 574,554 3.3% $ 2,293,148 $3.99 3.5%
1998 37 2,829,902 16.1 9,529,554 3.37 14.3
1999 43 3,374,733 19.1 12,818,087 3.80 19.2
2000 40 2,001,126 11.4 8,311,481 4.15 12.5
2001 37 2,809,344 15.9 11,075,042 3.94 16.6
2002 18 1,775,462 10.1 6,422,753 3.62 9.6
2003 8 841,219 4.8 3,339,797 3.97 5.0
2004 5 411,265 2.3 1,473,519 3.58 2.2
2005 6 749,765 4.3 3,043,670 4.06 4.6
2006 5 764,416 4.3 2,862,928 3.75 4.3
2007 6 701,857 4.0 2,579,808 3.68 3.9
2008 and beyond 5 796,183 4.4 2,866,828 3.60 4.3
<CAPTION>
--------- ----------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
224 17,629,826 100.00% $66,616,615 $3.78 100.00%
<CAPTION>
========= =========== ========== ============ ============== =============
</TABLE>
- -------
(1) Based on currently payable rent.
(2) Represents lease expirations from September 1 to December 31, 1997 and
month-to-month leases.
The following reconciles the square footage of expiring leases set forth above
to the Company's total rentable square footage as of August 31, 1997.
<TABLE>
<CAPTION>
---------------------
SQUARE PERCENTAGE
FOOTAGE TOTAL
---------- ----------
<S> <C> <C>
Square footage occupied by tenants 17,629,826 94.9%
Square footage vacant 939,532 5.1
<CAPTION>
---------- ----------
<S> <C> <C>
Total net rentable square footage 18,569,358 100.0%
<CAPTION>
========== ==========
</TABLE>
TENANT IMPROVEMENTS AND LEASING COMMISSIONS
The following table summarizes by year the Company's capitalized tenant
improvement and leasing commission expenditures incurred in the renewal or
releasing of previously occupied space for the past three years.
<TABLE>
<CAPTION>
--------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Cost per square foot $ 0.79 $ 0.97 $ 1.03
Renewed or released space in square feet 4,880,988 2,578,374 2,347,899
Total expenditures $3,875,246 $2,490,707 $2,416,987
</TABLE>
CAPITAL EXPENDITURES
The following table summarizes the capital expenditures for the Properties for
the last three years.
<TABLE>
<CAPTION>
----------------------------------
1996 1995 1994
----------- ----------- ----------
<S> <C> <C> <C>
Cost per square foot $ 0.20 $ 0.18 $ 0.23
Total portfolio square feet at year end 14,449,744 11,588,260 8,959,973
Total capital expenditures $ 2,830,780 $ 2,133,118 $2,076,193
</TABLE>
64
<PAGE>
INSURANCE
The Company maintains comprehensive insurance, including liability, fire, work-
ers' compensation, extended coverage, rental loss and, when available on rea-
sonable commercial terms, flood and earthquake insurance, with policy specifi-
cations, limits and deductibles customarily carried for other properties sim-
ilar to the Properties. The Company currently maintains blanket earthquake
insurance on all Properties located outside of California in amounts it deems
reasonable. With certain exceptions, the Company does not carry earthquake
insurance on its Properties located in California. In light of the California
earthquake risk, California building codes have since the early 1970's estab-
lished construction standards for all new buildings and also contain standards
for seismic upgrading of buildings intended to reduce the possibility and
severity of loss from earthquakes. It is the Company's policy to obtain assess-
ments from qualified third-party professionals of the seismic guidelines of its
Properties located in California and to conduct such seismic upgrading thereof
as it determines, on the basis of such third-party assessments, to be appropri-
ate. Such upgrading, however, does not eliminate the possibility of earthquake
loss. In addition, such upgrading with respect to a number of such Properties
is at various stages of completion as of the date hereof, ranging from initial
plan review to partial completion of construction. Of the Company's 32 Proper-
ties located in California, 13 were covered by earthquake insurance. Seismic
upgrading has been completed on four of the Properties located in California
and is expected to be completed with respect to all remaining California Prop-
erties within 12 months from the date hereof. Certain types of losses, such as
those arising from subsidence activity, are insurable only to the extent that
certain standard policy exceptions to insurability are waived by agreement with
the insurer. The Company believes, however, that the Properties are insured in
accordance with industry standards.
ENVIRONMENTAL MATTERS
In connection with the ownership and operation of the Properties, the Company
may be potentially liable for costs associated with the removal or remediation
of certain hazardous or toxic substances or the release of or exposure to haz-
ardous substances, including ACMs, into the air. See "Risk Factors and Invest-
ment Considerations--Real Estate Investment Risks--Possible Environmental Lia-
bilities."
Phase I ESAs were obtained in connection with initial acquisition of the Prop-
erties by the Contributing Investors, for those Properties managed by Cabot
Partners as of June 30, 1997, and for all other Properties in connection with
their contribution to the Company in the Formation Transactions. The purpose of
Phase I ESAs is to identify potential sources of contamination for which the
Company may be responsible and to assess the status of environmental regulatory
compliance. Where recommended in the Phase I ESA, invasive procedures, such as
soil sampling and testing or the installation and monitoring of groundwater
wells, were subsequently performed.
The Phase I ESAs, including subsequent procedures where applicable, have not
revealed any environmental liability that the Company believes would have a
material adverse affect on the Company's business, assets or results of opera-
tions, nor is the Company aware of any such material environmental liability.
Nevertheless, it is possible that the Phase I ESAs relating to any one of the
Properties do not reveal all environmental liabilities or that there are mate-
rial environmental liabilities of which the Company is unaware. Neither the
Company nor, to the knowledge of the Company, any of the current owners of the
Properties has been notified by any governmental authority of any material non-
compliance, liability or claim relating to hazardous or toxic substances or
other environmental substances in connection with any of its present or former
properties.
LEGAL PROCEEDINGS
Neither the Company nor any of the Properties is presently subject to any mate-
rial litigation nor, to the Company's knowledge, is any litigation threatened
against the Company or any of the Properties, other than routine actions
arising in the ordinary course of business, substantially all of which are
expected to be covered by liability insurance and which in the aggregate are
not expected to have a material adverse effect on the business, results of
operations or financial condition of the Company.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a description of certain investment, financing and other poli-
cies of the Company. These policies have been adopted by the Company's Board of
Trustees and may be amended or revised from time to time without the approval
of the Company's shareholders, except that (i) the Company may not change its
policy of holding its assets and conducting its businesses only through the
Operating Partnership and its subsidiaries and other affiliates, including the
Management Company and joint ventures in which the Operating Partnership or a
subsidiary may be a partner, without the consent of the Limited Partners as
provided in the Operating Partnership Agreement, and (ii) changes in certain
policies with respect to conflicts of interest must be consistent with legal
requirements.
INVESTMENT POLICIES
The Company will conduct all of its investment activities through the Operating
Partnership and its subsidiaries and other affiliates, including the Management
Company and joint ventures in which the Operating Partnership or a subsidiary
may be a partner. The Company's investment objectives are to provide quarterly
cash distributions and achieve long-term capital appreciation through increases
in the value of the Company's portfolio of properties and its operations. For a
discussion of the Company's Properties and its property acquisition and other
strategic objectives, see "Properties" and "Business Strategies and Opera-
tions." The Company's policies are to (i) purchase income-producing industrial
properties primarily for long-term capital appreciation and rental growth, and
(ii) expand and improve the Properties or other properties purchased or sell
such properties, in whole or in part, when circumstances warrant.
Equity investments may be subject to existing mortgage financing and other
indebtedness or to such financing or indebtedness as may be incurred in connec-
tion with acquiring or refinancing such equity investments. Debt service with
respect to such financing or indebtedness will have a priority over any distri-
butions with respect to the Common Shares. Investments are also subject to the
Company's policy not to be treated as an investment company under the Invest-
ment Company Act of 1940.
The Company expects to pursue its investment objectives primarily through the
direct ownership by the Operating Partnership of the Properties and other
acquired properties. The Company currently intends to invest primarily in
existing improved properties but may, if market conditions warrant, invest in
development projects as well. Future investment or development activities will
not be limited to any geographic area or product type or to a specified per-
centage of the Company's assets. While the Company intends to maintain diver-
sity in its investments in terms of property locations, size and market, the
Company does not have any limit on the amount or percentage of its assets that
may be invested in any one property or any one geographic area. The Company
intends to engage in such future investment and development activities in a
manner which is consistent with the maintenance of its status as a REIT for
federal income tax purposes.
While the Company's current portfolio consists of, and the Company's business
objectives emphasize, equity investments in commercial real estate, the Company
may, in the discretion of the Board of Directors, invest in mortgages and deeds
of trust, consistent with the Company's continued qualification as a REIT for
federal income tax purposes, including participating or convertible mortgages
if the Company concludes that it may benefit from the cash flow or any appreci-
ation in value of the property secured by such mortgages. Investments in real
estate mortgages run the risk that one or more borrowers may default under such
mortgages and that the collateral securing such mortgages may not be sufficient
to enable the Company to recoup its full investment.
Subject to the limitations on ownership of certain types of assets and the
gross income tests imposed by the Code, the Company also may invest in the
securities of other REITs, other entities engaged in real estate activities or
other issuers, including for the purpose of exercising control over such enti-
ties. See "Federal Income Tax Considerations--Requirements for Qualification--
Income Tests" and "--Requirements for Qualification--Asset Tests." The Company
may enter into joint ventures or partnerships for the purpose of obtaining an
equity interest in a particular property in accordance with the Company's
investment policies. Such investments may permit the Company to own interests
in larger assets without unduly restricting diversification and, therefore, add
flexibility in structuring its portfolio. The Company will not enter into a
joint venture or partnership to make an investment that would not otherwise
meet its investment policies.
FINANCING POLICIES
As a general policy, the Company intends to limit its total consolidated
indebtedness incurred so that at the time any debt is incurred, the Company's
Debt-to-Total Market Capitalization Ratio does not exceed 40%. The Company's
Declaration of
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Trust and Bylaws do not, however, limit the amount or percentage of indebted-
ness that the Company may incur. In addition, the Company may from time to time
modify its debt policy in light of current economic conditions, relative costs
of debt and equity capital, the market values of its properties, general condi-
tions in the market for debt and equity securities, fluctuations in the market
price of its Common Shares, growth and acquisition opportunities and other fac-
tors. Accordingly, the Company may increase its Debt-to-Total Market Capital-
ization Ratio beyond the limit described above. If its debt policy were
changed, the Company could become more highly leveraged, resulting in an
increased risk of default on its obligations and a related increase in debt
service requirements that could adversely affect the financial condition and
results of operations of the Company and the Company's ability to make distri-
butions to shareholders.
The Company has established its debt policy on the basis of its Debt-to-Total
Market Capitalization Ratio, rather than on the basis of a ratio of debt to the
book value of its assets, a ratio that is frequently employed, because it
believes that the book value of its assets (which to a large extent is the
depreciated value of real property, the Company's primary tangible asset) does
not accurately reflect its ability to borrow and to meet debt service require-
ments. The Debt-to-Total Market Capitalization, however, is subject to greater
fluctuation than book value ratios, and does not necessarily reflect the fair
market value of the underlying assets of the Company. Moreover, due to fluctua-
tions in the value of the Company's portfolio of properties over time, and
since any determination of the Company's Debt-to-Total Market Capitalization
Ratio is made only at the time debt is incurred, the Debt-to-Total Market Capi-
talization Ratio could exceed the 40% level.
The Company has not established any limit on the number or amount of mortgages
that may be placed on any single property or on its portfolio as a whole.
Although the Company will consider factors other than its Debt-to-Total Market
Capitalization Ratio in making decisions regarding the incurrence of debt (such
as the purchase price of properties to be acquired with debt financing, the
estimated market value of properties upon refinancing and the ability of par-
ticular properties and the Company as a whole to generate sufficient cash flow
to cover expected debt service), there can be no assurance that the Debt-to-
Total Market Capitalization Ratio, or any other financial measure, at the time
the debt is incurred or at any other time will be consistent with any partic-
ular level of distributions to shareholders. See "Risk Factors and Investment
Considerations--Possible Changes in Policies Without Shareholder Approval; No
Limitation on Debt."
To the extent that the Board of Trustees decides to obtain additional capital,
the Company may raise such capital through additional equity offerings (in-
cluding offerings of senior securities), debt financings or retention of cash
available for distribution (subject to provisions in the Code concerning tax-
ability of undistributed REIT income), or a combination of these methods. As
long as the Operating Partnership is in existence, the net proceeds of the sale
of Common Shares by the Company will be transferred to the Operating Partner-
ship in exchange for that number of Units in the Operating Partnership equal to
the number of Common Shares sold by the Company. The Company presently antici-
pates that any additional borrowings would be made through the Operating Part-
nership, although the Company may incur indebtedness directly and loan the pro-
ceeds to the Operating Partnership. Borrowings may be unsecured or may be
secured by any or all of the assets of the Company, the Operating Partnership
or any existing or new property owning partnership and may have full or limited
recourse to all or any portion of the assets of the Company, the Operating
Partnership or any existing or new property owning partnership. Indebtedness
incurred by the Company may be in the form of bank borrowings, purchase money
obligations to sellers of properties, publicly or privately placed debt instru-
ments or financing from institutional investors or other lenders. The proceeds
from any borrowings by the Company may be used for working capital, to refi-
nance existing indebtedness or to finance acquisitions, expansions or the
development of new properties, and for the payment of distributions. See "Fed-
eral Income Tax Considerations."
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies that are intended to minimize poten-
tial conflicts of interest. The Company's Board of Trustees also is subject to
certain provisions of Maryland law that are designed to eliminate or minimize
certain potential conflicts of interest. However, there can be no assurance
that these policies will be successful in eliminating the influence of such
conflicts, and if they are not successful, decisions could be made that might
fail to reflect fully the interests of all shareholders.
Declaration of Trust and Bylaw Provisions
The Company's Declaration of Trust, with limited exceptions, requires that a
majority of the Company's Board of Trustees be comprised of Independent Trust-
ees. Such Independent Trustee requirement may not be amended, altered, changed
or repealed without the affirmative vote of majority of all of the outstanding
shares of the Company entitled to vote on the
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<PAGE>
matter. The Declaration of Trust also includes a provision generally permitting
the Company to enter into an agreement or transaction with any person,
including any Trustee, employee or agent of the Company. The Operating Partner-
ship Agreement provides that neither the Company nor any of its affiliates (in-
cluding its officers and Trustees) may sell, transfer or convey any property
to, or purchase any property from, the Operating Partnership except on terms
that are fair and reasonable and no less favorable than would be obtained from
an unaffiliated party.
The Operating Partnership
The Operating Partnership Agreement gives the Company, in its capacity as gen-
eral partner, full, complete and exclusive discretion in managing and control-
ling the business of the Operating Partnership and in making all decisions
affecting the business and assets of the Operating Partnership. Pursuant to the
Operating Partnership Agreement, the Limited Partners have agreed that the Com-
pany is acting on behalf of the Operating Partnership and the Company's share-
holders generally and, in its capacity as general partner of the Operating
Partnership, the Company is under no obligation to consider the separate inter-
ests of the Limited Partners in deciding whether to cause the Operating Part-
nership to take (or decline to take) any actions which the Company, in its
capacity as general partner, has undertaken in good faith on behalf of the
Operating Partnership. In addition, the Company in its capacity as general
partner is not responsible for any misconduct or negligence on the part of its
agents, provided that such agents were appointed in good faith.
Provisions of Maryland Law
Pursuant to Maryland law (the jurisdiction under which the Company is orga-
nized), each Trustee is required to discharge his or her duties in good faith,
with the care an ordinary prudent person in a like position would exercise
under similar circumstances and in a manner he reasonably believes to be in the
best interest of the Company. In addition, under Maryland law, a contract or
transaction between the Company and any of its Trustees or between the Company
and a corporation, firm or other entity in which a Trustee is a director or has
a material financial interest is not void or voidable solely because of (a) the
common directorship or interest, (b) the presence of the Trustee at the meeting
of the Board or a committee of the Board that authorizes or approves or rati-
fies the contract or transaction or (c) the counting of the vote of the Trustee
for the authorization, approval or ratification of the contract or transaction
if (i) after disclosure of the interest, the transaction is authorized,
approved or ratified by the affirmative vote of a majority of the disinterested
Trustees, or by the affirmative vote of a majority of the votes cast by share-
holders entitled to vote other than the votes of shares owned of record or ben-
eficially by the interested Trustee or such corporation, firm or other entity,
or (ii) the transaction is fair and reasonable to the Company.
Policies with Respect to Other Activities
The Company may, but does not presently intend, to make investments other than
as previously described. The Company has authority to offer its Common Shares,
other shares of beneficial interest or other securities for cash or in exchange
for property and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. As described under
"Shares Available for Future Sale," the Company expects to issue Common Shares
to holders of Units upon exercise of their Exchange Rights. The Company has not
issued Common Shares, interests or any other securities to date, except in con-
nection with the formation of the Company. The Company has no outstanding loans
to other entities or persons, including its officers and Trustees. The Company
has not engaged in trading, underwriting or agency distribution or sale of
securities of other issuers, nor has the Company invested in the securities of
other issuers other than the Operating Partnership for the purpose of exer-
cising control and currently does not intend to do so. The Company makes and
intends to continue to make investments in such a way that it will not be
treated as an investment company under the Investment Company Act of 1940. The
Company's policies with respect to such activities may be reviewed and modified
or amended from time to time by the Company's Board of Trustees without
approval of the Company's shareholders.
At all times, the Company intends to make investments in such a manner consis-
tent with the requirements of the Code for the Company to qualify as a REIT
unless, because of changing circumstances or changes in the Code (or in Trea-
sury Regulations), the Company's Board of Trustees determines that it is no
longer in the best interests of the Company to qualify as a REIT.
WORKING CAPITAL RESERVES
The Company intends to maintain working capital reserves in amounts that the
Board of Trustees determines to be adequate to meet normal contingencies in
connection with the operation of the Company's business and investments.
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MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the Company's execu-
tive officers and Trustees (including those persons who have agreed to become
Trustees upon the closing of the Offering).
<TABLE>
<CAPTION>
-------------------------------------------------
TERM
NAME AGE POSITION EXPIRING
- ---- --- -------- --------
<S> <C> <C> <C>
Ferdinand Colloredo- 58 Chairman of the Board and Chief 2000
Mansfeld(1) Executive Officer, Trustee
Robert E. Patterson 52 President, Trustee 2000
Franz Colloredo-Mansfeld(1) 34 Chief Financial Officer
Andrew D. Ebbott 41 Senior Vice President--Director of
Acquisitions
Howard B. Hodgson, Jr. 41 Senior Vice President--Director of
Real Estate Operations
Neil E. Waisnor 42 Senior Vice President--Finance,
Treasurer and Secretary
Eugene F. Reilly 36 Senior Vice President--Director of
Leasing, Marketing and Development
Robert M. Angland 53 President, Management Company
Noah T. Herndon (2) 64 Trustee
Christopher C. Milliken (2) 52 Trustee
Maurice Segall (2) 67 Trustee
W. Nicholas Thorndike (2) 63 Trustee
Ronald L. Skates (2) 56 Trustee
</TABLE>
- -------
(1) Mssrs. Ferdinand and Franz Colloredo-Mansfeld are father and son.
(2) Has agreed to become a Trustee upon the closing of the Offering.
The following paragraphs summarize the business experience of the Trustees and
executive officers of the Company:
Ferdinand Colloredo-Mansfeld has been Chairman, Chief Executive Officer and
Chief Investment Officer of Cabot Partners since he founded it in 1990, having
previously served in the same positions with Cabot Advisors since its formation
in 1986. Mr. Colloredo-Mansfeld began his real estate career in 1970 when he
joined the Cabot, Cabot & Forbes, a national real estate development, manage-
ment and construction firm, becoming its Chief Financial Officer in 1973, Chief
Operating Officer in 1974 and Chief Executive Officer in 1976, a position he
held until his retirement from Cabot, Cabot & Forbes in 1989. As Chief Execu-
tive Officer, Mr. Colloredo-Mansfeld oversaw the development and management of
approximately $4 billion of commercial properties in twenty states including 35
master planned suburban business and industrial parks. Mr. Colloredo-Mansfield
is a graduate of Harvard College and Harvard Business School. He is a limited
partner in Brown Brothers, Harriman and Company and is a Director of Data Gen-
eral Corporation and Raytheon Company. He is Chairman of the Board of Trustees
of Massachusetts General Hospital and a Trustee of Partners HealthCare System,
Inc.
Robert E. Patterson has been Executive Vice President, Director of Acquisitions
and a member of the Investment Committee of Cabot Advisors and Cabot Partners
since 1987. He was also a founding partner of Cabot Partners upon its formation
in 1990. Mr. Patterson began his real estate career in 1972 as a lawyer with
the firm of Gaston Snow & Ely Bartlet. In 1978, he became the first Executive
Director of the Massachusetts Industrial Finance Agency and remained in that
position until 1983 when he joined the Beal Companies, a Boston-based real
estate development, management and investment firm as Senior Vice President. He
joined Cabot, Cabot & Forbes Realty Advisors, Inc. in 1987 to head its acquisi-
tions group and was a founding partner of Cabot Partners upon its formation as
an independent entity in 1990. Mr. Patterson is a graduate of Harvard College
and Harvard Law School. He is a Trustee of the Putnam Group of Mutual Funds and
is Chairman of the Board of Trustees of the Joslin Diabetes Center. He is a
member of numerous industry associations including the Society of Industrial
and Urban Realtors, the Urban Land Institute and the National Association of
Real Estate Investment Managers.
Franz Colloredo-Mansfeld has been a Senior Vice President of Cabot Partners
since 1996. He was a Senior Engagement Manager of McKinsey & Company, Inc. from
1992 through 1996. He previously worked for the Deutsche Bank real estate
investment group in 1992 and was a Robert Bosch Fellow at the German Central
Bank (Bundesbank) in 1991 (Frankfurt, Germany). He was also an investment
banker with Merrill Lynch & Co. from 1986 through 1989 where he worked in
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Mergers and Acquisitions. Mr. Colloredo-Mansfeld is a graduate of Harvard Col-
lege and Harvard Business School. He is a director or trustee of numerous char-
itable organizations.
Andrew D. Ebbott joined Cabot Advisors in 1988 as its Director of Research,
becoming a Vice President in 1991 and a Senior Vice President in 1995 of Cabot
Partners. He has been involved in real estate acquisitions since 1991. Mr.
Ebbott is a graduate of Dartmouth College and the University of Chicago. He has
over 11 years experience in real estate finance, investments and research and
is a member of the American Institute of Certified Public Accountants, the
National Association of Real Estate Investment Managers and the National
Council of Real Estate Investment Fiduciaries.
Howard B. Hodgson, Jr. has been a Senior Vice President--Director of Asset Man-
agement and Member of the Investment Committee of Cabot Partners since 1992.
Mr. Hodgson began his real estate career in 1979 with the Boston-based real
estate firm R.M. Bradley & Co., Inc., becoming the head of its institutional
property management group prior to joining CC&F Asset Management Company, a
subsidiary of Cabot, Cabot & Forbes, in 1991 as a Senior Vice President and
head of its property management group. Mr. Hodgson is a graduate of North-
eastern University. He is a Trustee and a member of the Board of Investment of
the Cambridge Savings Bank. He is a member of the Building Owners and Managers
Association, the National Association of Industrial and Office Parks and the
National Council of Real Estate Investment Fiduciaries.
Neil E. Waisnor was a founding partner of Cabot Partners, joining as a Vice
President and Treasurer in 1990 and becoming a Senior Vice President and Chief
Financial Officer in 1994. Prior to joining Cabot Partners, he was Vice Presi-
dent and Controller of Cabot, Cabot & Forbes, where he served in a variety of
financial capacities since 1985. He worked for Arthur Andersen & Co. from 1977
until 1985 where he was a senior audit manager serving real estate and high
technology companies. Mr. Waisnor is a graduate of the University of Massachu-
setts at Amherst and is a member of the American Institute of Certified Public
Accountants, the Massachusetts Society of Certified Public Accountants, the
National Association of Real Estate Investment Managers and has served on the
Accounting Committee of the National Council of Real Estate Investment
Fiduciaries.
Eugene F. Reilly has been Senior Vice President--Director of Leasing, Marketing
& Development of Cabot Partners since 1995. Mr. Reilly began his real estate
career with the Boston commercial real estate brokerage firm of Leggat McCall
and Werner in 1983 and subsequently became a leasing broker with Julien J.
Studley, Inc. In 1985, he joined National Development Corporation where he
became a Senior Vice President prior to joining Cabot Partners as a Vice Presi-
dent in 1992. Mr. Reilly is a graduate of Harvard College. He is a member of
the National Association of Industrial and Office Parks, the Industrial Devel-
opment Research Council and The Council of Logistics Managers.
Robert M. Angland served as President, Chief Operating Officer and a member of
the Investment Committee of Cabot Advisors and Cabot Partners from 1986 to
1997. He was a founding partner of Cabot Partners upon its formation as an
independent entity in 1990. Mr. Angland's real estate experience began in 1974
when he joined Equitable Life Assurance Society where he rose to head its Group
Pension Department and its Real Estate Capital Acquisition Department. He also
served as a member of its Pension Investment Committee. In 1983 he was instru-
mental in founding Lehndorff & Babson Real Estate Counsel, an institutional
real estate advisor. Mr. Angland is a graduate of Lesley College. He is a
member of numerous industry associations, including the National Association of
Real Estate Investment Trusts.
Noah T. Herndon is a Partner of Brown Brothers Harriman & Co., where he has
worked since 1958. Mr. Herndon is a Director of Fieldcrest Cannon, Inc.,
National Auto Credit, Inc., Scully Signal Company, Standard Mutual Insurance
Company, Watts Industries, Inc., Wonalancet Company and Zoll Medical Company.
He is an Overseer of the Museum of Science, Boston, and the Tufts University
School of Veterinary Medicine. He is Trustee and Treasurer of Dumaines Trust,
and Trustee of the Museum of the American Textile History, The Carroll School
and Thompson Island Outward Bound Education Center. Mr. Herndon is a graduate
of Princeton University and Harvard Business School.
Christopher C. Milliken has been the Senior Vice President, Operations of the
Boise Cascade Office Products Corporation since 1995, previously having served
as the Eastern Region Manager from 1990. Prior to beginning his career at Boise
Cascade Office Products Corporation in 1977, Mr. Milliken served in various
merchandise management positions at Marshall Fields & Company from 1970 to
1977. Mr. Milliken is a graduate of Clemson University.
Maurice Segall has been a senior lecturer at the MIT-Sloan School of Management
and a senior advisor to the Boston Consulting Group since 1989. Until 1989, he
was Chairman, President and Chief Executive Corporate Officer of Zayre Corpora-
tion which he joined as President and Chief Executive Officer in 1978. Mr.
Segall is a Director of AMR Corporation and Harcourt General, Inc. He is
Trustee of Massachusetts General Hospital, Beth Israel Hospital, and the Museum
of Fine Arts, Boston. Mr. Segall is a graduate of McGill University, Columbia
University and the London School of Economics.
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<PAGE>
Ronald L. Skates has been President, Chief Executive Officer and a Director of
Data General Corporation since 1989. Prior to joining Data General Corporation
in 1986, Mr. Skates was a Partner of Price Waterhouse LLP, certified public
accountants. He is a member of the American Institute of Certified Public
Accountants and the Massachusetts Society of Certified Public Accountants. He
is also a Trustee of Massachusetts General Hospital, an Overseer of the Boston
Museum of Fine Arts, and Vice Chairman and a Director of the Massachusetts High
Technology Council. Mr. Skates is a graduate of Harvard College and Harvard
Business School.
W. Nicholas Thorndike retired in 1988 from Wellington Management
Company/Thorndike, Doran, Paine and Lewis where he was Chairman of the Board
and Managing Partner. Mr. Thorndike is a Director of Courier Corporation, Data
General Corporation, The Providence Journal (where he is Chairman of the Execu-
tive Committee), and Bradley Real Estate Inc. He is a Trustee and a former
Chairman of the Board and President of Massachusetts General Hospital, and a
Trustee of Eastern Utilities Associates, Northeastern University and The Putnam
Funds. Mr. Thorndike is a graduate of Harvard University.
BOARD OF TRUSTEES
The business and affairs of the Company will be managed under the direction of
the Board of Trustees. Pursuant to the terms of the Company's Declaration of
Trust, the Trustees are divided into three classes. One class will hold office
initially for a term expiring at the annual meeting of shareholders to be held
in 1998, a second class will hold office initially for a term expiring at the
annual meeting of shareholders to be held in 1999, and a third class will hold
office initially for a term expiring at the annual meeting of shareholders to
be held in 2000. At each annual meeting of the shareholders of the Company, the
successors to the class of Trustees whose terms expire at that meeting will be
elected to hold office for a term continuing until the annual meeting of share-
holders held in the third year following the year of their election and the
election and qualification of their successors. See "Certain Provisions of
Maryland Law and of the Company's Declaration of Trust and Bylaws."
COMMITTEES OF THE BOARD OF TRUSTEES
Audit Committee. Within 30 days following the closing of the Offering, the
Board of Trustees of the Company will establish an Audit Committee that will
consist of not less than three Independent Trustees. The Audit Committee will
make recommendations concerning the engagement of independent public accoun-
tants, review with the independent public accountants the plans and results of
the audit engagement, approve professional services provided by the independent
public accountants, review the independence of the independent public accoun-
tants, consider the range of audit and non-audit fees and review the adequacy
of the Company's internal accounting controls.
Executive Compensation Committee. The Board of Trustees will also establish an
Executive Compensation Committee (the "Compensation Committee") comprised of
two or more Independent Trustees to determine the compensation levels and poli-
cies for the Company's executive officers and to implement the Company's Long
Term Incentive Plan.
The Board of Trustees will not have a standing nominating committee.
COMPENSATION OF TRUSTEES
The Independent Trustees will receive annual retainer fees of $18,000 and per
meeting compensation of $1,000. The chairmen of the Audit Committee and the
Compensation Committee will each receive an additional $1,000 annually for
their services in such capacities. Officers of the Company who are Trustees
will not receive any separate compensation for their service as Trustees.
71
<PAGE>
EXECUTIVE COMPENSATION
The Company was organized as a Maryland real estate investment trust on October
10, 1997, and has not to date paid any cash compensation to its executive offi-
cers. The following table sets forth the base compensation proposed to be paid
and the initial amounts of stock options proposed to be granted to each of the
seven most highly compensated executive officers of the Company during the
fiscal year ending December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
----------------------
BASE STOCK
NAME AND PRINCIPAL POSITION SALARY RATE OPTIONS(1)
--------------------------- ----------- ----------
<S> <C> <C>
Ferdinand Colloredo-Mansfeld $265,000
Chairman of the Board
Robert E. Patterson 245,000
President
Franz Colloredo-Mansfeld 175,000
Chief Financial Officer
Andrew D. Ebbott 175,000
Senior Vice President
Howard B. Hodgson, Jr. 175,000
Senior Vice President
Eugene F. Reilly 175,000
Senior Vice President
Neil E. Waisnor 175,000
Senior Vice President, Treasurer and Secretary
</TABLE>
- -----------
(1) All options will vest in three equal annual installments commencing on the
first anniversary of the date of grant and will have per share exercise prices
equal to the Offering Price.
In addition to cash compensation in the form of annual base salary, the Company
will have a cash bonus incentive plan pursuant to which cash bonuses may be
awarded to executive officers and other key employees based on attainment of
specified personal and corporate objectives. The amounts of such bonus awarded
may, depending on the level of an individual's corporate responsibility and
attainment of specified objectives, range up to 100% of the individual's annual
base salary.
EMPLOYMENT AGREEMENTS
Messrs. Ferdinand Colloredo-Mansfeld, Robert E. Patterson and Franz Colloredo-
Mansfeld will enter into employment agreements with the Company. Each agreement
will be for an initial term of three years, which will be automatically renewed
for successive one-year periods unless otherwise terminated. The agreements
will provide for base annual compensation in the amounts set forth in "--Execu-
tive Compensation" above and incentive compensation to be determined by the
Board of Trustees or the Compensation Committee thereof. The base annual com-
pensation may be increased in subsequent years by action of the Board of
Trustees or the Compensation Committee. Each of the employment agreements pro-
vides for certain severance payments in the event of disability or termination
by the Company without cause or by the employee with cause. Each executive will
be required under the terms of his employment agreement to devote substantially
all of his business time to the affairs of the Company. The agreements also
prohibit each executive from engaging, directly or indirectly, during the term
of their employment in activities that compete with those of the Company.
LONG TERM INCENTIVE PLAN
Prior to the Offering, the Board of Trustees will adopt, and the sole share-
holder of the Company will approve, the Cabot Industrial Trust Long Term Incen-
tive Plan (the "Long Term Incentive Plan" or the "Plan") for the purpose of
attracting and retaining highly qualified executive officers, directors and
employees. The Long Term Incentive Plan authorizes the issuance of up to
Common Shares. The Long Term Incentive Plan will be administered by the Compen-
sation Committee of the Board of Trustees or, with respect to certain matters,
its delegate. As used in this summary, the term
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<PAGE>
"Administrator" means the Compensation Committee or its delegate, as appropri-
ate. Officers and other employees of the Company, the Operating Partnership and
designated subsidiaries, including the Management Company, will be eligible for
selection by the Administrator to participate in the Long Term Incentive Plan.
The Administrator selects the individuals who will participate in the Plan
("Participants"). No awards may be granted under the Plan after December ,
2007.
The Plan provides for the grant of (i) share options intended to qualify as
incentive options under Section 422 of the Code, (ii) share options not
intended to qualify as incentive stock options under Section 422 of the Code,
(iii) stock appreciation rights, issued alone or in tandem with options, (iv)
restricted shares, which are contingent upon the attainment of performance
goals or subject to vesting requirements or other restrictions and (v) other
incentive awards. The Administrator will prescribe the conditions which must
occur for any Restricted Shares to vest and for any incentive awards to be
earned.
In connection with the grant of options under the Long Term Incentive Plan, the
Administrator will determine the option exercise period and any vesting
requirements. Effective as of the closing of the Offering, options for
Common Shares will be granted to employees and officers, including the officers
named in "--Executive Compensation" above, with an exercise price equal to the
Offering Price. The initial options granted under the Plan will have ten-year
terms and will become exercisable in three equal annual installments commencing
on the first anniversary of the date of grant, subject to acceleration of
vesting upon a change in control of the Company (as defined in the Plan).
An option granted under the Plan may be exercised for any number of whole
Common Shares less than the full number of Common Shares for which the option
could be exercised. A holder of an option will have no rights as a shareholder
with respect to Common Shares subject to his or her option until the option is
exercised. To the extent an option has not become exercisable at the time of
the holder's termination of employment, it will be forfeited unless exercised
within a specified period after such termination. Any Common Shares subject to
options which are forfeited (or expire without exercise) pursuant to the
vesting requirement or other terms established at the time of grant will again
be available for grant under the Long Term Incentive Plan. Payment of the exer-
cise price of an option granted under the Long Term Incentive Plan may be made
in cash, cash equivalents acceptable to the Compensation Committee or, if per-
mitted by the option agreement, by exchanging Common Shares having a fair
market value equal to the option exercise price.
SAVINGS PLAN
The Company intends to assume and continue, and the Operating Partnership and
designated subsidiaries, including the Management Company (each, a "Partici-
pating Employer"), intend to adopt, the Cabot Partners Employee Savings Plan
(the "401(k) Plan"). Prior service with Cabot Partners will be credited in full
as service with the Company or a Participating Employer for all purposes under
the 401(k) Plan, including eligibility and vesting.
The 401(k) Plan permits each participating employee to elect to defer up to 15%
of base compensation, subject to the annual statutory limitation prescribed by
Section 402(g) of the Code, on a pre-tax basis. Plan participants may also
elect to make an after-tax contribution of up to % of their base compensation.
The Company and the Participating Employers will make matching contributions
equal to % of amounts deferred up to $ in deferrals. The Company and the
Participating Employers may also make annual contributions if the Company
achieves certain performance objectives to be determined on an annual basis by
the Compensation Committee. Matching and discretionary contributions will be
made in cash or Common Shares.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights of
the Company's officers and Trustees, see "Certain Provisions of Maryland Law
and of the Company's Declaration of Trust and Bylaws--Limitation of Liability
and Indemnification."
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FORMATION TRANSACTIONS
The Company was formed to continue and to expand Cabot Partners' national
industrial real estate business and to acquire the Properties. Prior to or
simultaneously with the closing of the Offering, the Company will complete the
Formation Transactions described below, which are designed to consolidate the
ownership of the Properties and Cabot Partners' industrial real estate busi-
ness (and certain of its related assets) in the Company, to facilitate the
Offering and to enable the Company to qualify as a REIT commencing with its
short taxable year ending December 31, 1997.
FORMATION TRANSACTIONS
The principal focus of Cabot Partners' real estate advisory services for third
parties has been on assisting pension funds and other institutional investors
in developing industrial real estate investment strategies that are appro-
priate to their needs, implementing such strategies through identifying suit-
able properties for acquisition, acquiring and managing such properties for
the advisory clients and, ultimately, deciding when to sell such investments
and conducting the sale process. Such services are provided pursuant to
written contracts (the "Advisory Contracts") entered into between Cabot Part-
ners and the advisory client. The advisory clients hold such real estate
investments in a variety of forms, predominantly including single asset corpo-
rations of which a single pension fund or other advisory client is the sole
direct or indirect stockholder, but also including direct ownership of the
properties in certain cases and ownership through a corporation established
and managed by Cabot Partners for the purpose of providing a vehicle for
pooled investment by institutional clients.
In preparation for the Offering and in connection with the closing thereof,
Cabot Partners and the Contributing Investors are undertaking the transactions
summarized below (the "Formation Transactions") for the purpose of organizing
the Company and the Operating Partnership, and transferring the Properties and
Cabot Partners' real estate advisory and management business and certain
related assets to the Company and the Operating Partnership in a tax efficient
manner. As a result of the Formation Transactions, the Contributing Investors,
including the C-M Property Partnerships (all of the partnership interests in
which are owned by Ferdinand Colloredo-Mansfeld and Franz Colloredo-Mansfeld,
respectively, and members of their immediate families), will become equity
investors in the Company through, in certain cases, direct ownership of Common
Shares or, in most cases, ownership of Units in the Operating Partnership that
may, subject to the limitations described below, be exchanged for Common
Shares, to be received by them in exchange for their contributions of Proper-
ties to the Company or the Operating Partnership. Cabot Partners will con-
tribute to the Operating Partnership its real estate advisory and management
business and other assets that relate to the Properties contributed to the
Operating Partnership pursuant to the Formation Transactions. Cabot Partners'
Advisory Contracts and assets relating to industrial properties that are not
being contributed pursuant to the Formation Transactions will be held by the
Management Company. As a result of such contributions, the Company will become
the indirect owner of the contributed Properties, through and to the extent of
its interest in the Operating Partnership, and will no longer receive advisory
or management fees with respect to such Properties. The Properties to be con-
tributed by the Contributing Investors, including those of the C-M Property
Partnerships, do not, however, comprise all of the industrial properties for
which Cabot Partners is currently providing advisory or management services,
nor do the Contributing Investors comprise all of the advisory clients of
Cabot Partners.
The Formation Transactions include the following:
(i) The Company was formed as a real estate investment trust under Maryland
law through the filing of the Company's Declaration of Trust with the Mary-
land Secretary of State on October 10, 1997.
(ii) The Operating Partnership was formed as a limited partnership under
Delaware law on October 10, 1997.
(iii) The Operating Partnership incorporated the Management Company as its
wholly-owned subsidiary through the filing of a certificate of incorpora-
tion for the Management Company with the Delaware Secretary of State on
, 1997 and the contemporaneous initial purchase by the Operating Part-
nership of 100 shares of the common stock of the Management Company.
(iv) Prior to or simultaneously with the closing of the Offering, the Con-
tributing Investors, including the C-M Property Partnerships, will con-
tribute certain of their industrial real estate investment properties (com-
prising the Properties described herein), directly or indirectly, to the
Operating Partnership. Such contributions will be effected pursuant to the
Contribution Agreement, dated as of October 10, 1997, entered into among
the Company, the Operating Partnership, Cabot Partners and each of the Con-
tributing Investors. The Contribution Agreement provides, among other
things, that the Contributing Investors will convey to the Operating Part-
nership, or in certain cases directly to the Company, all of their inter-
ests in the Properties, in exchange for a number of Units, or Common
Shares, determined on the basis of the relative derived contribution
amounts of the Properties contributed as compared to the aggregate
74
<PAGE>
derived contribution amounts of all of the Properties and assets to be con-
tributed by the Contributing Investors and Cabot Partners in the Formation
Transactions. See "--Contribution Amounts of Properties and Cabot Part-
ners." In the case of contributions of Properties that the Contribution
Agreement provides are to be made directly to the Company in exchange for
Common Shares, the Company will direct that such Properties be conveyed by
the Contributing Investor to the Operating Partnership, in exchange for
which the Operating Partnership will issue to the Company a number of GP
Units in the Operating Partnership equal to the number of Common Shares
issued by the Company to the Contributing Investor. The determination of
the specific forms of such contribution transactions and whether Units or
Common Stock are to be issued in connection therewith was made in order to
maximize the tax efficiency of such contributions taking into account the
specific facts relating to and the organizational structure of the respec-
tive contributing entities. As a result of such contributions, the Contrib-
uting Investors (not including the C-M Property Partnerships) will receive
a total of Units and Common Shares, which will in the aggregate
represent approximately % of the common equity of the Company on a fully
diluted basis.
(v) The Contribution Agreement also provides, among other things, that
prior to or simultaneously with the closing of the Offering, Cabot Part-
ners, most of whose partners are Cabot Group Participants, will contribute
to the Operating Partnership (or to a subsidiary thereof) the Advisory Con-
tracts and other assets relating to Cabot Partner's advisory and management
business, including furniture, fixtures and equipment, general intangibles,
intellectual property, books and records. As a result of such contribution
and the contribution of the C-M Partnerships, Cabot Partners and Messrs.
Colloredo-Mansfeld (including members of their immediate families) will
receive a total of Units and Units, respectively, which will repre-
sent approximately % and % of the common equity of the Company on a
fully diluted basis. Cabot Partners' Advisory Contracts and assets relating
to industrial properties that are not being contributed pursuant to the
Formation Transactions will be held by the Management Company. The Oper-
ating Partnership will own 100% of the non-voting preferred stock of the
Management Company, representing 95% of the economic interest of the Man-
agement Company. Ferdinand Colloredo-Mansfield will own 100% of the voting
common stock of the Management Company, representing 5% of the economic
interest of the Management Company.
(vi) The Units and Common Shares received by the Contributing Investors
(excluding the C-M Property Partnerships) in connection with the Formation
Transactions will have a total value of approximately $ million and $
million, respectively, based on the Offering Price. The Units will be
exchangeable for Common Shares on a one-for-one basis or the cash equiva-
lent thereof (as determined by the Company) beginning one year after the
Closing Date, or such earlier date as the Company may authorize.
(vii) The Units received by the Cabot Group Participants (including the C-M
Property Partnerships) in connection with the Formation Transactions will
have a total value of approximately $ million based on the Offering Price
and will be exchangeable into Common Shares on a one-for-one basis or the
cash equivalent thereof (as determined by the Company), beginning one year
after the Closing Date (or such earlier date as the Company may authorize);
however, such Units or Common Shares may not, subject to certain excep-
tions, be disposed of until two years after the Closing Date (or such ear-
lier date as the Company and J.P. Morgan Securities Inc. may authorize).
(viii) The Operating Partnership will use approximately $13.3 million of
the net proceeds of the Offering to repay mortgage indebtedness secured by
certain of the Properties. See "Use of Proceeds" and "Certain Relationships
and Transactions."
LIMITATIONS ON REPRESENTATIONS AND WARRANTIES
The Contributing Investors and Cabot Partners have each made certain represen-
tations and warranties to the Company in the Contribution Agreement entered
into among the parties in connection with the Formation Transactions. Such
representations and warranties, which in the case of environmental matters and
certain other matters are limited to the knowledge of specified entities and
persons, relate to, among other things, their authority to enter into the For-
mation Transactions, their ownership of the Properties or other assets to be
contributed by them, and the absence of certain liabilities and other matters
relating to the Properties and such assets. The respective obligations of each
Contributing Investor and of Cabot Partners to indemnify the Company in the
event of breach of any of such representations and warranties, or breach of
certain other provisions of the Contribution Agreement or under certain other
circumstances is subject to an overall limitation under the Contribution
Agreement equal to the value (based on the Offering Price) of the Units or
Common Shares received by the Contributing Investor in the Formation Transac-
tions (or in lieu thereof, the return to the Company of all such Units or
Common Shares received), and is subject to the further limitation that any
such indemnification obligation relating to a specific Property is limited to
the contribution amount assigned to such Property by the parties in connection
with the Formation Transactions. In addition, such indemnification obligations
are, with certain exceptions, limited to claims for indemnification made
within one year after the completion of the Formation Transactions.
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<PAGE>
EFFECTS OF THE FORMATION TRANSACTIONS AND THE OFFERING
As a result of the transactions involved in the formation of the Company (in-
cluding the Offering), the Company initially will hold an approximate %
interest in the Operating Partnership, the remaining % interest in the Oper-
ating Partnership will be held by certain Contributing Investors and the Cabot
Group Participants, and certain Contributing Investors will own Common Shares
representing, on a fully diluted basis approximately % of the common equity
of the Company. Immediately following the closing of the Offering, on a fully
diluted basis, purchasers of Common Shares in the Offering will hold approxi-
mately % of the common equity of the Company, the Cabot Group Participants
(including the C-M Property Partnerships) will directly or indirectly hold
approximately % of the common equity of the Company and the Contributing
Investors (not including the C-M Property Partnerships) will hold approximately
% of the common equity of the Company.
The Operating Partnership will own 100% of the fee interest in the Properties
and 100% of the non-voting preferred stock of the Management Company, repre-
senting 95% of the economic interests therein, with Ferdinand Colloredo-
Mansfeld, the Company's chief executive officer, owning 100% of the voting
stock, representing 5% of the economic interests therein.
CONTRIBUTION AMOUNTS OF THE PROPERTIES AND CABOT PARTNERS
Neither Cabot Partners, the Contributing Investors nor the Company obtained any
third-party determination of the fair market value of the Properties or other
assets contributed to the Company or the Operating Partnership in connection
with the Formation Transactions. Third-party estimates of the derived contribu-
tion amounts of such assets, however, were obtained in August and September
1997 in accordance with procedures agreed upon by the Contributing Investors
and Cabot Partners solely to assist Cabot Partners and the Contributing
Investors in determining the allocation of the equity interests in the Company
and the Operating Partnership among Cabot Partners and the Contributing
Investors (including the C-M Property Partnerships) prior to the Offering.
The Total Market Capitalization of the Company at the Offering Price may not be
indicative of, and may exceed: (i) the aggregate derived contribution values of
the Properties and other assets to be acquired by the Company in the Formation
Transactions and (ii) the fair market value of the Properties and such other
assets. The Offering Price has been negotiated between the Company and the Rep-
resentatives of the Underwriters named herein based on their consideration of
the factors referred to in "Underwriting." This methodology has been used
because the Company believes it is appropriate to value the Company as an
ongoing business, rather than on the basis of values that might be obtained
from a liquidation of the Company or of its individual assets. No assurance can
be given that the Offering Price will be an indication of the actual value of
the Common Shares, which will be determined by market conditions and other fac-
tors over time. The Company's percentage interest in the Operating Partnership
was determined based upon the percentage of estimated cash available for dis-
tribution required to pay estimated distributions at an annual rate equal to
% of the Offering Price on the Common Shares to be outstanding upon the
closing of the Offering. The distribution rate was derived by comparison to
distribution rates of other REITs that the Company believes may be comparable
and in light of current market conditions. The percentage of Common Shares
allocated to the purchasers of Common Shares sold by the Company in the
Offering ( % on a fully diluted basis) is equal to the percentage of estimated
pro forma cash flow available for distribution necessary to pay the targeted
distribution rate. The remaining equity of the Company was allocated to Cabot
Partners and the Contributing Investors.
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<PAGE>
CERTAIN RELATIONSHIPS AND TRANSACTIONS
See "Formation Transactions" for a summary of certain related party transac-
tions that will be consummated prior to or simultaneously with the closing of
the Offering.
BENEFITS TO RELATED PARTIES
The Cabot Group Participants and the Contributing Investors will realize cer-
tain benefits as a result of the Offering and the Formation Transactions,
including the following:
Receipt of Units by the Cabot Group Participants and the Contributing Investors
The Cabot Group Participants will receive a total of Units and Units in
consideration for their interests in Cabot Partners and the C-M Property Part-
nerships, respectively, in connection with the Formation Transactions. These
Units (representing approximately % of the common equity interests in the
Company on a fully diluted basis) will have a total value of approximately $
million based on the Offering Price, compared to the aggregate net tangible
book value of the assets contributed to the Operating Partnership by the Cabot
Group Participants of approximately $ million as of June 30, 1977. The Com-
pany believes that the net tangible book value of the individual assets con-
tributed to the Operating Partnership by the Cabot Group Participants (which
reflects the historical cost of such assets less accumulated depreciation and
amortization) is less than the aggregate current market value of such assets.
Beginning one year following the Closing Date, any of the Cabot Group Partici-
pants holding Units may, in accordance with the Operating Partnership Agree-
ment, exchange all or a portion of such Units for Common Shares on a one-for-
one basis or, at the election of the Company, the cash equivalent thereof, but
may not, with certain exceptions, transfer any of such Units or Common Shares
prior to two years after the Closing Date.
The Contributing Investors (not including the C-M Property Partnerships) will
receive a total of Units and Common Shares in consideration for their
interests in the Properties in connection with the Formation Transactions.
These Units and Common Shares (representing in the aggregate approximately %
of the equity interests in the Company on a fully diluted basis) will have a
total value of approximately $ million based on the Offering Price, compared
to the aggregate net tangible book value of the Properties contributed to the
Company by such Contributing Investors of approximately $ million. The Com-
pany believes that the net tangible book value of the individual assets con-
tributed to the Company by such Contributing Investors (which reflects the his-
torical cost of such assets less accumulated depreciation) is less than the
aggregate current market value of such assets. At any time after one year fol-
lowing the Closing Date, any of such Contributing Investors holding Units may,
in accordance with the Operating Partnership Agreement, exchange all or a por-
tion of such Units for Common Shares on a one-for-one basis or, at the election
of the Company, the cash equivalent thereof.
The Company currently expects that it will not elect to pay cash for Units in
connection with any such exchange request, but instead will issue Common Shares
in exchange for such Units. The receipt and retention of Units in exchange for
contributed assets may provide the Cabot Group Participants and certain of the
Contributing Investors with continued deferral of the taxable gain that would
otherwise be associated with dispositions of those assets.
Increase in Net Tangible Investment
The Cabot Group Participants, together with the C-M Property Partnerships, and
the Contributing Investors (not including the C-M Property Partnerships), each
on a pro forma basis as of June 30, 1997, will realize an immediate increase of
$ million and $ million, respectively, in the net tangible book value of
their respective original investments in the Company. This increase is derived
from the difference between the net tangible assets per Common Share before and
after giving effect to the Formation Transactions multiplied by the Units to
be received as consideration by the Cabot Group Participants and by the
Units and Common Shares to be received as consideration by such Contributing
Investors, respectively. See "Dilution."
Repayment of Debt
Approximately $18.5 million of indebtedness secured by the Properties to be
contributed by the C-M Property Partnerships (which are owned by certain of the
Cabot Group Participants) will be assumed by the Operating Partnership and
approximately $13.3 million (based on amounts outstanding as of the anticipated
date of repayment) will be repaid from the proceeds of the Offering.
Options Granted
The Company will grant options to purchase an aggregate of Common Shares
under the Company's Long Term
Incentive Plan at the Offering Price to officers and Trustees of the Company,
subject to certain vesting requirements. See "Management--Long Term Incentive
Plan."
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PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Shares and
Units of (i) each person who is a shareholder of the Company owning more than
5% of the beneficial interest in the Company, (ii) each person who is a Trustee
or executive officer of the Company, and (iii) the Trustees and executive offi-
cers of the Company as a group, in each case after the closing of the Offering
and the Formation Transactions. Unless otherwise indicated in the footnotes,
all of such interests are to be owned directly, and the indicated person or
entity will have sole voting and investment power. The number of shares repre-
sents the number of Common Shares the person is expected to hold plus the
number of shares for which Units expected to be held by the person are redeem-
able (if the Company elects to issue Common Shares rather than pay cash upon
such redemption). The extent to which the persons will hold Common Shares as
opposed to Units is set forth in the notes to the table.
<TABLE>
<CAPTION>
------------------------------------
NUMBER OF
SHARES AND
UNITS
BENEFICIALLY PERCENT OF
NAMES OF BENEFICIAL OWNERS OWNED ALL COMMON PERCENT OF
AND ADDRESS OF 5% AFTER THE SHARES ALL COMMON
BENEFICIAL OWNERS OFFERING AND UNITS(1) SHARES(1)
- -------------------------- ------------ ------------ ----------
<S> <C> <C> <C>
</TABLE>
- -----------
* Less than 1%.
(1) Assumes that all Units held by the person are redeemed for Common Shares.
The total number of Common Shares outstanding used in calculating the per-
centage of all Common Shares and Units assumes that all of the Units held are
redeemed for Common Shares. The total number of Common Shares outstanding used
in calculating the percentage of all Common Shares assumes that none of the
Units held by other persons are redeemed for Common Shares.
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<PAGE>
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
The following summary of the terms of the shares of beneficial interest of the
Company does not purport to be complete and is subject to and qualified in its
entirety by reference to the Declaration of Trust and Bylaws of the Company,
copies of which are exhibits to the Registration Statement of which this Pro-
spectus is a part. See "Additional Information."
GENERAL
The Declaration of Trust of the Company provides that the Company may issue up
to 150,000,000 shares of beneficial interest, which may consist of Common
Shares and preferred shares of beneficial interest, $0.01 par value per share
("Preferred Shares"), in such combination as the Trustees shall determine. Upon
the closing of the Offering and the consummation of the Formation Transactions,
Common Shares will be issued and outstanding ( shares if the Underwrit-
ers' overallotment option is exercised in full) and no Preferred Shares will be
issued and outstanding. As permitted by the Maryland statute governing REITs
formed as trusts (the "Maryland REIT Law"), the Declaration of Trust contains a
provision permitting the Board of Trustees, without any action by the share-
holders of the Trust, to amend the Declaration of Trust to increase or decrease
the aggregate number of shares of beneficial interest or the number of shares
of any class of shares of beneficial interest that the Trust has authority to
issue. The Company believes that the power of the Board of Trustees to issue
additional shares of beneficial interest will provide the Company with
increased flexibility in structuring possible future financings and acquisi-
tions and in meeting other needs that might arise. The additional shares of
beneficial interest, including possibly Common Shares, will be available for
issuance without further action by the Company's shareholders, unless action by
the shareholders is required by applicable law or the rules of any stock
exchange or automated quotation system on which the Company's securities may be
listed or traded. Although the Board of Trustees currently has no intention of
doing so, it could authorize the Company to issue a class or series that could,
depending on the terms of such class or series, delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for the Common Shares and might otherwise be in the best interests of the
shareholders.
Both the Maryland REIT Law and the Company's Declaration of Trust provide that
no shareholder of the Company will be personally liable for any obligation of
the Company solely as a result of such shareholder's status as a shareholder of
the Company. The Company's Declaration of Trust further provides that the Com-
pany shall indemnify each shareholder against any claim or liability to which
the shareholder may become subject by reason of such shareholder's being or
having been a shareholder or former shareholder, subject to such shareholder
providing notice to the Company, and that the Company shall pay or reimburse
each shareholder or former shareholder for all legal and other expenses reason-
ably incurred by such shareholder in connection with any claim or liability
unless it is established by a court that such claim or liability arose out of
such shareholder's bad faith, willful misconduct or gross negligence. Inasmuch
as the Company carries public liability insurance which it considers adequate,
any risk of personal liability to shareholders is limited to situations in
which the Company's assets plus its insurance coverage would be insufficient to
satisfy the claims against the Company and its shareholders.
COMMON SHARES
All Common Shares offered hereby will be duly authorized, fully paid and nonas-
sessable. Subject to the preferential rights of any other shares or series of
beneficial interest and to the provisions of the Company's Declaration of Trust
regarding the restriction on transfer of Common Shares, holders of Common
Shares are entitled to receive dividends on such shares if, as and when autho-
rized and declared by the Board of Trustees of the Company out of assets
legally available therefor and to share ratably in the assets of the Company
legally available for distribution to its shareholders in the event of its liq-
uidation, dissolution or winding-up after payment of, or adequate provision
for, all known debts and liabilities of the Company.
Each outstanding Common Share entitles the holder thereof to one vote on all
matters submitted to a vote of shareholders, including the election of Trust-
ees, and, except as provided with respect to any other class or series of
shares of beneficial interest, the holders of such Common Shares possess the
exclusive voting power. There is no cumulative voting in the election of Trust-
ees, which means that the holders of a majority of the outstanding Common
Shares can elect all of the Trustees then standing for election and the holders
of the remaining shares will not be able to elect any Trustees.
Holders of Common Shares have no preference, conversion, sinking fund, redemp-
tion or appraisal rights and have no preemptive rights to subscribe for any
securities of the Company. Subject to the provisions of the Declaration of
Trust regarding the restriction on transfer of Common Shares, Common Shares
have equal dividend, distribution, liquidation and other rights.
Under the Maryland REIT Law, a Maryland real estate investment trust generally
cannot dissolve, amend its declaration of trust or merge unless approved by the
affirmative vote of shareholders holding at least two-thirds of the shares
entitled to
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<PAGE>
vote on the matter unless a lesser percentage (but not less than a majority of
all the votes entitled to be cast on the matter) is set forth in the real
estate investment trust's declaration of trust. The Company's Declaration of
Trust provides for approval by a majority of the votes cast at a shareholder
meeting by holders of Common Shares entitled to vote on the matter in all sit-
uations permitting or requiring action by the shareholders, except with
respect to: (i) the election of Trustees (which requires a plurality of all
the votes cast at a meeting of shareholders of the Company at which a quorum
is present), (ii) the removal of Trustees (which requires the affirmative vote
of the holders of two-thirds of the outstanding shares of beneficial interest
of the Company entitled to vote generally in the election of Trustees, which
action can only be taken by vote at a shareholder meeting), (iii) the merger
or sale (or other disposition) of all or substantially all of the assets of
the Company (which requires the affirmative vote of the holders of two-thirds
of the outstanding shares entitled to vote on the matter, which action can
only be taken by vote at a shareholder meeting), (iv) the amendment of the
Declaration of Trust by shareholders, including the amendment or repeal of the
Independent Trustee provision (which requires the affirmative vote of a
majority of votes entitled to be cast on the matter, except under certain cir-
cumstances specified in the Declaration of Trust which require the affirmative
vote of two-thirds of all the votes entitled to be cast on the matter), and
(v) the dissolution of the Company (which requires the affirmative vote of
two-thirds of the outstanding shares entitled to vote on the matter). The Com-
pany has agreed pursuant to the Operating Partnership Agreement that Limited
Partners also have voting rights with respect to certain of the foregoing
actions for a limited period. See "Partnership Agreement of Operating Partner-
ship--Management." As allowed under the Maryland REIT Law, the Company's Dec-
laration of Trust permits the Trustees by a two-thirds vote to amend the dec-
laration of trust from time to time to qualify as a real estate investment
trust under the Code or the Maryland REIT Law without the approval of the
shareholders. As permitted by the Maryland REIT Law, the Declaration of Trust
contains a provision permitting the Board of Trustees, without any action by
the shareholders of the Company, to amend the Declaration of Trust to increase
or decrease the aggregate number of shares of beneficial interest or the
number of shares of any class of shares of beneficial interest that the Com-
pany has authority to issue.
CLASSIFICATION OR RECLASSIFICATION OF COMMON SHARES OR PREFERRED SHARES
The Declaration of Trust authorizes the Board of Trustees to classify any
unissued Preferred Shares and to reclassify any previously classified but
unissued Preferred Shares of any series from time to time in one or more
series, as authorized by the Board of Trustees. Prior to issuance of shares of
each series, the Board of Trustees is required by the Maryland REIT Law and
the Company's Declaration of Trust to set for each such series, subject to the
provisions of the Company's Declaration of Trust regarding the restriction on
transfer of shares of beneficial interest, the terms, the preferences, conver-
sion or other rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms or conditions of redemption
for each such series. Thus, the Board of Trustees could authorize the issuance
of Preferred Shares with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of the
Company that might involve a premium price for holders of Common Shares or
otherwise might be in their best interest. As of the date hereof, no Preferred
Shares are outstanding and the Company has no present plans to issue any Pre-
ferred Shares.
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, it must meet certain
requirements concerning the ownership of its outstanding shares of beneficial
interest. Specifically, not more than 50% in value of the Company's out-
standing shares of beneficial interest may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Code to include certain enti-
ties) during the last half of a taxable year, and the Company must be benefi-
cially owned by 100 or more persons during at least 335 days of a taxable year
of twelve months or during a proportionate part of a shorter taxable year. See
"Federal Income Tax Considerations--Taxation of the Company."
Because the Board of Trustees believes it is essential for the Company to con-
tinue to qualify as a REIT, the Declaration of Trust, subject to certain
exceptions described below and to possible limited exceptions regarding cer-
tain Contributing Investors, provides that no person may own, or be deemed to
own by virtue of the attribution provisions of the Code, more than (i) 9.8% of
the Company's issued and outstanding capital shares, or (ii) 9.8% of the total
value of such capital shares (the "Ownership Limit"). Any transfer of Common
or Preferred Shares that would (i) result in any person owning, directly or
indirectly, Common or Preferred Shares in excess of the Ownership Limit, (ii)
result in the Common and Preferred Shares being owned by fewer than 100 per-
sons (determined without reference to any rules of attribution), or (iii)
result in the Company being "closely held" within the meaning of Section
856(h) of the Code, shall be null and void, and the intended transferee will
acquire no rights in such Common or Preferred Shares.
Subject to certain exceptions described below, if any purported transfer of
Common or Preferred Shares would (i) result in any person owning, directly or
indirectly, Common or Preferred Shares in excess of the Ownership Limit, or
(ii) result in the Company being "closely held" within the meaning of Section
856(h) of the Code, the Common or Preferred Shares will be designated as "Ex-
cess Shares" and transferred automatically to a trust (the "Share Trust")
effective on the day before
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the purported transfer of such Common or Preferred Shares. The record holder of
the Common or Preferred Shares that are designated as Excess Shares (the "Pur-
ported Transferee") will have no rights in such shares except as described
below. The Share Trustee will be designated by the Company, but will not be
affiliated with the Company. The beneficiary of the Share Trust (the "Benefi-
ciary") will be one or more charitable organizations that are named by the Com-
pany.
Excess Shares will remain issued and outstanding Common or Preferred Shares and
will be entitled to the same rights and privileges as all other shares of the
same class or series. The Share Trust will receive all dividends and distribu-
tions on the Excess Shares and will hold such dividends and distributions in
trust for the benefit of the Beneficiary. The Share Trustee will vote all
Excess Shares. The Company shall designate to the Share Trustee within a speci-
fied period a permitted transferee of the Excess Shares, provided that the per-
mitted transferee may acquire such Excess Shares without such acquisition
resulting in a transfer to another Share Trust and resulting in the redesigna-
tion of such Common or Preferred Shares as Excess Shares. Upon such a transfer,
which is subject to the Company waiving its purchase right described below, the
Purported Transferee generally will receive from the Share Trustee the lesser
of (i) the price per share such Purported Transferee paid for the Common or
Preferred Shares that were designated as Excess Shares (or, in the case of a
gift or devise, the Market Price (as defined below) per share on the date of
such transfer) and (ii) the price per share received by the Share Trustee from
the sale of such Excess Shares. Any amounts received by the Share Trustee in
excess of the amounts to be paid to the Purported Transferee will be distrib-
uted to the Beneficiary.
The Excess Shares will be deemed to have been offered for sale to the Company,
or its designee, at a price per share equal to the lesser of (i) the price per
share in the transaction that created such Excess Shares (or, in the case of a
gift or devise, the Market Price per share on the date of such transfer) or
(ii) the Market Price per share on the date that the Company, or its designee,
accepts such offer. The Company will have the right to accept such offer for a
period of ninety days after the later of (i) the date of the purported transfer
which resulted in such Excess Shares and (ii) the date the Company determines
in good faith that a transfer resulting in such Excess Shares occurred.
"Market Price" on any date shall mean the last reported sales price reported on
the NYSE for a particular class of equity shares on the trading day immediately
preceding the relevant date, or if not then traded on the NYSE, the last
reported sales price for such class of equity shares on the trading day immedi-
ately preceding the relevant date as reported on any exchange or quotation
system over or through which such class of equity shares may be traded, or if
not then traded over or through any exchange or quotation system, then the
market price of such class of equity shares on the relevant date as determined
in good faith by the Board of Trustees.
Any person who acquires or attempts to acquire Common or Preferred Shares in
violation of the foregoing restrictions, or any person who owned Common or Pre-
ferred Shares that were transferred to a Share Trust, will be required (i) to
give immediately written notice to the Company of such event and (ii) to pro-
vide to the Company such other information as the Company may request in order
to determine the effect, if any, of such transfer on the Company's status as a
REIT.
The Declaration of Trust requires all persons who own, directly or indirectly,
more than 5% (or such lower percentages as required pursuant to regulations
under the Code) of the outstanding Common and Preferred Shares, within 30 days
after January 1 of each year, to provide to the Company a written statement or
affidavit stating the name and address of such direct or indirect owner, the
number of Common and Preferred Shares owned directly or indirectly, and a
description of how such shares are held. In addition, each direct or indirect
shareholder shall provide to the Company such additional information as the
Company may request in order to determine the effect, if any, of such ownership
on the Company's status as a REIT and to ensure compliance with the Ownership
Limit.
The Ownership Limit generally will not apply to the acquisition of Common or
Preferred Shares by an underwriter that participates in a public offering of
such shares. In addition, the Board of Trustees, upon receipt of a ruling from
the Service or an opinion of counsel and upon such other conditions as the
Board of Trustees may direct, may exempt a person from the Ownership Limit
under certain circumstances. However, the Board may not grant an exemption from
the Ownership Limit to any proposed transferee whose ownership, direct or indi-
rect, of shares of beneficial interest of the Company in excess of the Owner-
ship Limit would result in the termination of the Company's status as a REIT.
The foregoing restrictions will continue to apply until the Board of Trustees
determines that it is no longer in the best interests of the Company to attempt
to qualify, or to continue to qualify, as a REIT.
The Ownership Limit could have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company that might involve a pre-
mium price for the Common Shares or otherwise be in the best interest of the
shareholders of the Company.
All certificates representing Common or Preferred Shares will bear a legend
referring to the restrictions described above.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S DECLARATION OF TRUST
AND BYLAWS
The following summary of certain provisions of Maryland law and of the Declara-
tion of Trust and Bylaws of the Company is subject, and is qualified in its
entirety by reference, to the applicable Maryland statutes and to the Declara-
tion of Trust and Bylaws of the Company.
CLASSIFICATION OF THE BOARD OF TRUSTEES
The Company's Declaration of Trust provides that the number of Trustees of the
Company cannot be less than three nor more than 15. At the closing of the
Offering, there will be seven Trustees. The Trustees are divided into three
classes, with terms of three years each and with one class to be elected at
each annual meeting of shareholders. The incumbent Board of Trustees is autho-
rized to fill vacancies on the Board, including vacancies resulting from any
increase in the number of members constituting the Board of Trustees by up to
two in any calendar year. Any members so appointed by the incumbent Trustees
(whether to fill a vacancy or a newly created trusteeship) will serve until the
next annual meeting of Shareholders.
The classified Board of Trustees could have the effect of making the removal of
incumbent Trustees time-consuming and difficult, which could discourage a third
party from making a tender offer or otherwise attempting to effect a change in
control of the Company that a majority of shareholders may believe to be bene-
ficial to the Company and its shareholders.
REMOVAL OF TRUSTEES
The Declaration of Trust provides that a Trustee may be removed with or without
cause upon the affirmative vote of at least two-thirds, rather than a simple
majority, of the votes entitled to be cast in the election of Trustees, but
only by a vote taken at a shareholder meeting. This provision has the effect of
limiting shareholders action to remove incumbent Trustees to cases in which a
substantial majority of shareholders approve such removal.
BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland real estate investment trusts, cer-
tain "business combinations" (including a merger, consolidation, share exchange
or, in certain circumstances, an asset transfer or issuance or reclassification
of equity securities) between a Maryland real estate investment trust and any
person who beneficially owns ten percent or more of the voting power of the
trust's shares or an affiliate of the trust who, at any time within the two-
year period prior to the date in question, was the beneficial owner of ten per-
cent or more of the voting power of the then outstanding voting stock of the
Trust (an "Interested Shareholder"), or an affiliate of such an Interested
Shareholder, are prohibited for five years after the most recent date on which
the Interested Shareholder becomes an Interested Shareholder. Thereafter, any
such business combination must be recommended by the board of trustees of such
trust and approved by the affirmative vote of at least (i) 80% of the votes
entitled to be cast by holders of outstanding voting shares of beneficial
interest of the trust and (ii) two-thirds of the votes entitled to be cast by
holders of voting shares of the trust other than shares held by the Interested
Shareholder with whom (or with whose affiliate) the business combination is to
be effected, unless, among other conditions, the trust's common shareholders
receive a minimum price (as defined in the MGCL) for their shares and the con-
sideration is received in cash or in the same form as previously paid by the
Interested Shareholder for its shares. These provisions of Maryland law do not
apply, however, to business combinations that are approved or exempted by the
board of trustees of the trust prior to the time that the Interested Share-
holder becomes an Interested Shareholder.
CONTROL SHARE ACQUISITIONS
The MGCL, as applicable to Maryland real estate investment trusts, provides
that "control shares" (as defined below) of a Maryland real estate investment
trust acquired in a "control share acquisition" (as defined below) have no
voting rights except to the extent approved by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares of beneficial
interest owned by the acquiror, by officers or by trustees who are employees of
the trust. "Control Shares" are voting shares of beneficial interest which, if
aggregated with all other such shares of beneficial interest previously
acquired by the acquiror or in respect of which the acquiror is able to exer-
cise or direct the exercise of voting power (except solely by virtue of a revo-
cable proxy), would entitle the acquiror to exercise voting power in electing
trustees within one of the following ranges of voting power: (i) one-fifth or
more but less than one-third, (ii) one-third or more but less than a majority,
or (iii) a majority or more of all voting power. Control Shares do not include
shares the acquiring person is then entitled to
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vote as a result of having previously obtained shareholder approval. A "control
share acquisition" means the acquisition of Control Shares, subject to certain
exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the board of trustees of the trust to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. If no request for a meeting is made, the trust may itself
present the question at any shareholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the trust may redeem any
or all of the Control Shares (except those for which voting rights have previ-
ously been approved) at their fair value, determined without regard to the
absence of voting rights for the Control Shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of such shares are considered and not approved. If
voting rights for Control Shares are approved at a shareholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote,
all other shareholders may exercise appraisal rights. The fair value of the
shares as determined for purposes of such appraisal rights may not be less than
the highest price per share paid by the acquiror in the control share acquisi-
tion.
The control share acquisition statute does not apply (a) to shares acquired in
a merger, consolidation or share exchange if the trust is a party to the trans-
action or (b) to acquisitions approved or exempted by the declaration of trust
or bylaws of the trust.
SHAREHOLDERS' MEETINGS
The Declaration of Trust and By-laws provide for an annual meeting of Share-
holders to be held upon reasonable notice and within a reasonable period, but
not less than 30 days, following delivery of the Company's annual report, but
in any event within six months after the end of each full fiscal year. Special
meetings of Shareholders may be called by a majority of the Trustees, a
majority of the Independent Trustees or by an executive officer of the Company
and shall be called upon the written request of Shareholders holding in the
aggregate not less than 25% of the outstanding shares of the Company entitled
to vote. Written notice stating the place, date and hour of the Shareholders'
meeting and, in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than 10 nor more than
60 days before the day of the meeting to each holder of record.
ANNUAL REPORT
The Declaration of Trust requires the Company to deliver to Shareholders an
annual report concerning its operations for the preceding fiscal year con-
taining financial statements prepared in accordance with GAAP which are audited
and reported on by independent certified public accountants. The report must
include a balance sheet, an income statement and a surplus statement. Annual
reports must be mailed or delivered to each Shareholder and must be placed on
file at the principal office of the Company within the time prescribed by the
Maryland REIT Law.
AMENDMENT
The Trustees, by a two-thirds vote, may amend the provisions of the Company's
Declaration of Trust from time to time to qualify the Company as a REIT. The
Company's Declaration of Trust may be amended only by the affirmative vote or
written consent of the holders of not less than a majority of the Common Shares
then outstanding and entitled to vote thereon, except as provided in the pre-
ceding sentence and except with respect to provisions therein relating to (i)
removal of Trustees and (ii) certain reorganization transactions of the Com-
pany. The provisions described in clauses (i)-(ii) in the preceding sentence
may be amended only by the affirmative vote or, in certain instances, written
consent of the holders of not less than two-thirds of the Common Shares then
outstanding. The Company's Bylaws may only be amended by the Board of Trustees.
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LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland real estate investment trust to in its
declaration of trust a provision limiting the liability of its trustees and
officers to the trust and its shareholders for money damages except for lia-
bility resulting from (i) actual receipt of an improper benefit or profit in
money, property or services or (ii) active and deliberate dishonesty estab-
lished by a final judgment as being material to the cause of action. The
Company's Declaration of Trust contains such a provision limiting such lia-
bility to the maximum extent permitted by Maryland law.
The Declaration of Trust provides that the Company, to the maximum extent per-
mitted by Maryland law, shall obligate itself to indemnify and to pay or reim-
burse reasonable expenses in advance of final disposition of a proceeding to
(a) any present or former Trustee, officer, employee or agent or (b) any such
individual who at the request of the Company serves or has served another for-
eign or domestic corporation, partnership, joint venture, trust, employee ben-
efit plan or any other enterprise as a director, trustee, officer, partner,
employee or agent of such foreign or domestic entity from and against any claim
or liability to which such person may become subject or which such person may
incur by reason of service in such capacity. The Bylaws of the Company obligate
it, to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding
to (i) any present or former Trustee or officer who is made a party to the pro-
ceeding by reason of his service in that capacity, or (ii) any such Trustee or
officer who at the request of the Company serves or has served another foreign
or domestic corporation, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a director, trustee, officer or partner,
employee or agent of such foreign or domestic entity and who is made a party to
the proceeding by reason of his service in that capacity against any claim or
liability to which he may become subject by reason of such status.
The Maryland REIT Law permits a Maryland real estate investment trust to indem-
nify, and to advance expenses to, its trustees, officers, employees and agents
to the same extent as permitted by the MGCL for directors and officers of Mary-
land corporations. The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in connec-
tion with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (i) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty, (ii) the director or officer actually
received an improper personal benefit in money, property or services or (iii)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. However, a Maryland
corporation may not indemnify for an adverse judgment in a suit by or in the
right of the corporation. In accordance with the MGCL, the Bylaws of the Com-
pany require it, as a condition to advancing expenses, to obtain (a) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by the Company as autho-
rized by the Bylaws and (b) a written statement by or on his behalf to repay
the amount paid or reimbursed by the Company if it shall ultimately be deter-
mined that the standard of conduct was not met.
OPERATIONS
The Company is generally prohibited from acquiring or holding property or
engaging in any activity that would cause the Company to fail to qualify as a
real estate investment trust.
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TERMINATION OF THE TRUST AND REIT STATUS
The Company's Declaration of Trust permits (i) the termination of the Company
and the discontinuation of the operations of the Company by the affirmative
vote or written consent of the holders of not less than two-thirds of the
Company's outstanding equity shares of all classes and (ii) the termination of
the Company's qualification as a REIT if such qualification, in the opinion of
the Board of Trustees, is no longer advantageous to the shareholders.
ADVANCE NOTICE OF TRUSTEE NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (i) with respect to an annual meeting of
shareholders, nominations of persons for election to the Board of Trustees and
the proposal of business to be considered by shareholders may be made only (a)
pursuant to the Company's notice of the meeting, (b) by the Board of Trustees
or (c) by a shareholder who is entitled to vote at the meeting and has complied
with the advance notice procedures set forth in the Bylaws and (ii) with
respect to special meetings of Shareholders, only the business specified in the
Company's notice of meeting may be brought before the meeting of shareholders
and nominations of persons for election to the Board of Trustees may be made
only (a) pursuant to the Company's notice of the meeting, (b) by the Board of
Trustees, or (c) provided that the Board of Trustees has determined that
Trustees shall be elected at such meeting, by a shareholder who is entitled to
vote at the meeting and has complied with the advance notice provisions set
forth in the Bylaws.
POSSIBLE ANTITAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
DECLARATION OF TRUST AND BYLAWS
The provisions of the Declaration of Trust on classification of the Board of
Trustees, the removal of Trustees and the restrictions on the transfer of
shares of beneficial interest and the advance notice provisions of the Bylaws
could have the affect of delaying, deferring or preventing a transaction or a
change in control of the Company that might involve a premium price for holders
of Common Shares or otherwise be considered by shareholders to be in their best
interest.
MARYLAND ASSET REQUIREMENTS
To maintain its qualification as a Maryland real estate investment trust, the
Maryland REIT Law requires at least 75% of the value of the Company's assets to
be held, directly or indirectly, in real estate assets, mortgages or mortgage
related securities, government securities, cash and cash equivalent items,
including high-grade short term securities and receivables. The Maryland REIT
Law also prohibits the Company from using or applying land for farming, agri-
cultural, horticultural or similar purposes.
SHARES AVAILABLE FOR FUTURE SALE
Upon the closing of the Offering and consummation of the Formation Transac-
tions, the Company will have Common Shares issued and outstanding (
Common Shares if the Underwriter's overallotment option is exercised in full).
In addition, Common Shares will be reserved for issuance upon redemption of
Units and Common Shares will be reserved for issuance under the Company's
Long Term Incentive Plan. The Common Shares issued in the Offering will be
freely tradeable by persons other than "Affiliates" (as that term is defined
for purposes of compliance with the Securities Act of 1933, as amended (the
"Securities Act")) of the Company without restriction under the Securities Act,
subject to certain limitations on ownership set forth in the Declaration of
Trust. See "Description of Shares of Beneficial Interest--Restrictions on
Transfer."
Pursuant to the Operating Partnership Agreement, the Limited Partners have
Exchange Rights which, beginning one year (or earlier upon the consent of the
Company) from the Closing Date, enable them to cause the Operating Partnership
to exchange their Units for Common Shares on a one-for-one basis. Also, each of
the Limited Partners has agreed under the Operating Partnership Agreement that
until one year (or two years in the case of any Limited Partner that is a
partner of Cabot Partners or C-M Holdings), it will not dispose of any Common
Shares or Units without the prior consent of the Company.
The Common Shares issued to the Contributing Investors and the Common Shares
that will be issuable to holders of Units upon exercise of the Exchange Rights
will be "restricted" securities under the meaning of Rule 144 promulgated under
the Securities Act ("Rule 144") and may not be sold in the absence of registra-
tion under the Securities Act unless an exemption from the registration
requirements of the Securities Act is available, including exemptions pursuant
to Rule 144. As described below, the Company has granted registration rights
with respect to such Common Shares to the holders thereof.
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In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the Com-
pany or any Affiliate of the Company, the acquiror or subsequent holder thereof
will be entitled to sell within any three-month period a number of shares that
does not exceed the greater of 1% of the then outstanding Common Shares or the
average weekly trading volume of the Common Shares during the four calendar
weeks preceding the date on which an appropriate notice of the sale is filed
with the Securities and Exchange Commission (the "Commission"). Sales under
Rule 144 also are subject to certain manner of sale provisions, notice require-
ments and the availability of current public information about the Company. If
two years have elapsed since the date of acquisition of restricted shares from
the Company or from any Affiliate, and the acquiror or subsequent holder
thereof is deemed not to have been an Affiliate at any time during the three
months preceding a sale, such person would be entitled to sell such shares in
the public market under Rule 144(k) without regard to the volume limitations,
manner of sale provisions, public information requirements or notice require-
ments.
On the first business day after the first anniversary of the Closing Date, the
Company has agreed to file a registration statement with the Commission for the
purpose of registering the sale, subject to certain exceptions, of all, but not
less than all, of the Common Shares issued to the Contributing Investors or
Cabot Partners (or issued upon conversion of Units issued to such persons). The
Company will use its best efforts to have such registration statement declared
effective as soon as practical thereafter and to keep it effective for a period
expiring on the earlier of (i) the date on which all such securities have been
sold and (ii) the date on which all such securities are in the opinion of legal
counsel for the Company eligible for sale (A) under Rule 144(k) or, (B) in the
case of any Affiliate of the Company, under Rule 144 and could be sold in one
transaction in accordance with the volume limitations contained therein. Upon
effectiveness of such registration statement, those persons holding Common
Shares upon redemption of the applicable Units who are not Affiliates of the
Company may sell such shares in the secondary market without being subject to
the volume limitations or other requirements of Rule 144. The Operating Part-
nership will bear expenses incident to the registration requirements, except
that such expenses shall not include any underwriting discounts or commissions,
Commission or state securities registration fees, transfer taxes or certain
other fees or taxes relating to such shares. Registration rights may be granted
to future sellers of properties to the Operating Partnership who agree to
receive Common Shares, Units, or other securities convertible into Common
Shares, in lieu of cash.
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Shares prevailing from time to time. Sales of substantial
amounts of Common Shares, or the perception that such sales could occur, may
affect adversely prevailing market prices of the Common Shares. See "Risk Fac-
tors and Investment Considerations--Effect of Shares Available for Future Sale
on Price of Common Shares."
PARTNERSHIP AGREEMENT OF OPERATING PARTNERSHIP
GENERAL
The Properties will be owned by the Operating Partnership. By contributing
their interests in the CM Property Partnerships and Cabot Partners to the Oper-
ating Partnership, the Cabot Group Participants will, among other things, be
permitted to defer until a later date a portion of the tax liabilities that
they otherwise would incur if they received Common Shares. In addition, through
the Operating Partnership the Company may acquire interests in additional
industrial properties in transactions that may defer such tax consequences for
the contributors.
Following the closing of the Offering, substantially all of the Company's
assets (including the Company's interest in the Properties) will be held by,
and its operations will be conducted through, the Operating Partnership. The
Company will initially hold Units equal to . % of the economic interest in the
Operating Partnership and will control the Operating Partnership in its
capacity as the sole general partner. The Company's interest in the Operating
Partnership will entitle it to share in cash distributions from, and in the
profits and losses of, the Operating Partnership in proportion to the Company's
percentage ownership of the Operating Partnership (apart from tax allocations
of profits and losses to take into account pre-contribution property apprecia-
tion). The Limited Partners will own the remaining % economic interest in
the Operating Partnership. For a period of one year (or two years for any
partner of Cabot Partners or C-M Holdings) following the Closing Date, the
holders of Units or Common Shares will not be permitted to offer, pledge, sell,
contract to sell, grant any options for the sale of or otherwise dispose of any
such Units or Common Shares without the permission of the Company (except (i)
in the case of a holder that is a natural person, to certain family members of
such holder or upon death of such holder, to such holder's estate, personal
representative or beneficiaries, (ii) in the case of a business entity, to
another entity wholly owned thereby or as a distribution to the equity owners
thereof, (iii) in the case of a master pension or profit sharing trust or group
trust, to one or more of its participating trusts or to a
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successor trust, (iv) as a bona fide gift, or (v) pursuant to a pledge, grant
of a security interest or other encumbrance effected in a bona fide transaction
with an unrelated and unaffiliated pledgee). After the first anniversary after
the closing of the Offering (or second anniversary for any partner of Cabot
Partners or C-M Holdings) Units or Common Shares may be transferred by a Lim-
ited Partner without restriction (except if such transfer would (i) violate any
securities laws, (ii) result in the Operating Partnership being treated as an
association taxable as a corporation, (iii) be effectuated through an "estab-
lished securities market" or a "secondary market (or the substantial equivalent
thereof)" within the meaning of Section 7709 of the Code, or (iv) be to a
lender to the Operating Partnership or related person holding nonrecourse lia-
bility), although the transferee will only be admitted as a Limited Partner
subject to furnishing certain specified or requested instruments or documents
to the Company in its capacity as general partner. Also, after the first anni-
versary after the closing of the Offering (or earlier with the consent of the
Company in its capacity as general partner), any holder of Units may exchange
one Unit for one Common Share subject to the Company's right to pay cash in
lieu of issuing Common Shares. With each exchange of Units, the Company's
interest in the Operating Partnership will increase.
The Company will hold one Unit in the Operating Partnership for each Common
Share that it has issued. The net proceeds of any issuance of Common Shares of
the Company will be contributed to the Operating Partnership in exchange for an
equivalent number of Units.
As the general partner of the Operating Partnership, the Company will have the
exclusive power under the Operating Partnership Agreement to manage and conduct
the business of the Operating Partnership. The Board of Trustees of the Company
will manage the affairs of the Company by directing the affairs of the Oper-
ating Partnership. The Operating Partnership will be responsible for, and pay
when due, its share of all administrative and operating expenses of the Proper-
ties.
The following summary of the Operating Partnership Agreement, including the
descriptions of certain provisions set forth elsewhere in this Prospectus, is
qualified in its entirety by reference to the Operating Partnership Agreement,
which is filed as an exhibit to the Registration Statement of which the Pro-
spectus is a part.
MANAGEMENT
The Operating Partnership has been organized as a Delaware limited partnership
pursuant to the terms of the Operating Partnership Agreement. The Company, as
the sole general partner of the Operating Partnership and the holder of the
majority of the Units, will generally have full, exclusive and complete discre-
tion in managing and controlling the Operating Partnership. The Contributing
Investors receiving Units, as the Limited Partners of the Operating Partner-
ship, will have no authority to transact business for, or to participate in the
management activities or decisions of, the Operating Partnership, except as
provided in the Operating Partnership Agreement and as provided by applicable
law. However, the consent of all the Limited Partners will be required to (i)
take any action that would make it impossible to carry on the ordinary business
of the Operating Partnership, except as otherwise provided in the Operating
Partnership Agreement; (ii) possess Operating Partnership property, or assign
any rights to specific Operating Partnership property for other than an Oper-
ating Partnership purpose, except as otherwise provided in the Operating Part-
nership Agreement; (iii) admit a person as a partner, except as otherwise pro-
vided in the Operating Partnership Agreement; or (iv) perform any act that
would subject a Limited Partner to liability as a general partner in any juris-
diction or any other liability except as provided in the Operating Partnership
Agreement or under the laws of the State of Delaware. In addition, the Company
has agreed pursuant to the Operating Partnership Agreement that it will not
take any of the following actions prior to the first anniversary of the Closing
Date without the consent of Limited Partners holding a majority of the out-
standing Units: (i) a merger, consolidation or share exchange of the Company
requiring the approval of the Company's shareholders or any merger, consolida-
tion or partnership interest exchange of the Operating Partnership, (ii) a
sale, lease, transfer or other disposition of all or substantially all of the
Company's assets requiring the approval of the Company's shareholders, a sale,
lease, transfer or other disposition of all or substantially all of the Oper-
ating assets, or any election to dissolve the Company requiring the approval of
the Company's shareholders, or (iii) an amendment to the Declaration of Trust
requiring the approval of the Company's shareholders.
INDEMNIFICATION
The Operating Partnership Agreement provides that each individual made a party
to a proceeding by reason of his status as a general partner or an officer of
the Operating Partnership or a trustee or officer of the Company or any other
person as the Company may designate from time to time in its sole and absolute
discretion (each, an "Indemnitee") will be indemnified and held harmless by the
Operating Partnership for any act relating to the operation of Operating Part-
nership unless it is established that (i) the act or omission of the Indemnitee
was material to the matter giving rise to the proceeding and either was com-
mitted in bad faith or was the result of active and deliberate dishonesty; (ii)
the Indemnitee actually received an improper personal benefit of money, prop-
erty or services; or (iii) in the case of any criminal proceeding, the Indem-
nitee
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had reasonable cause to believe that the act or omission was unlawful. The
Operating Partnership Agreement further provides that the termination of any
proceeding by judgment, order or settlement does not create a presumption that
the Indemnitee did not meet the requisite standard of conduct set forth above.
The termination of any proceeding by conviction or upon a plea of nolo conten-
dere or its equivalent, or an entry of an order of probation prior to judg-
ment, would, under the Operating Partnership Agreement, create a rebuttable
presumption that the individual acted in a manner contrary to that specified
above. Any indemnification so made shall be made only out of the assets of the
Operating Partnership.
CAPITAL CONTRIBUTIONS
When the Company contributes additional capital to the Operating Partnership
from the proceeds of Common Shares (or preferred shares of beneficial inter-
est) issued by the Company, the Company's interest in the Operating Partner-
ship will be increased on a proportionate basis based upon the number of
Common Shares (or preferred shares of beneficial interest) issued to the
extent the net proceeds from, or the property received in consideration for,
the issuance thereof are used to fund the contribution.
TAX MATTERS
Pursuant to the Operating Partnership Agreement, the Company will be the tax
matters partner of the Operating Partnership and, as such, will have authority
to make certain tax related decisions and tax elections under the Code on
behalf of the Operating Partnership.
OPERATIONS
The Operating Partnership Agreement allows the Company to operate the Oper-
ating Partnership in a manner that will enable the Company to satisfy the
requirements for being classified as a REIT. The Operating Partnership Agree-
ment also requires the distribution of the cash available for distribution of
the Operating Partnership quarterly on a basis in accordance with the Oper-
ating Partnership Agreement.
DUTIES AND CONFLICTS
The Operating Partnership Agreement provides that the Company shall not enter
into or conduct any business other than in connection with its ownership,
acquisition and disposition of partnership interests in the Operating Partner-
ship and the management of the business and incidental activities of the Oper-
ating Partnership. Thereof, all activities pertaining to the acquisition,
development, management and operation of any properties, must be conducted
through the Operating Partnership.
TERM
The Operating Partnership will continue in full force and effect until
December 31, 2097 or until sooner dissolved upon (i) the withdrawal of the
Company as a general partner (unless all of the Limited Partners elect to con-
tinue the Operating Partnership), or (ii) by the election of the Company, with
the consent of a majority in interest of Limited Partners, or (iii) in connec-
tion with a merger or other combination of the Operating Partnership, or (iv)
by the sale or other disposition of all or substantially all of the assets of
the Operating Partnership, or (v) entry of a decree of judicial dissolution of
the Operating Partnership, or (vi) bankruptcy or insolvency of the Company.
FEDERAL INCOME TAX CONSIDERATIONS
The Company intends to operate in a manner that permits it to satisfy the
requirements for taxation as a REIT under the applicable provisions of the
Code. No assurance can be given, however, that such requirements will be met.
The following is a summary of the federal income tax considerations for the
Company and its shareholders with respect to the treatment of the Company as a
REIT.
Based upon certain assumptions and representations described below, in the
opinion of Mayer, Brown & Platt, counsel to the Company, the Company has been
organized in conformity with the requirements for qualification as a REIT
beginning with its taxable year ending December 31, 1997, and its proposed
method of operation as described in this Prospectus and as represented by the
Company will enable it to satisfy the requirements for such qualification.
This opinion is based on certain assumptions relating to the organization and
operation of the Company, the Operating Partnership and Management Company,
and is conditioned upon certain representations made by the Company as to cer-
tain factual matters relating to the Company's organization and intended or
expected manner of operation. In addition, this opinion is based on the law
existing and in effect on the date hereof and the Company's qualification and
taxation as a REIT will depend on compli
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ance with such law existing and in effect on the date hereof and as the same
may hereafter be amended. The Company's qualification and taxation as a REIT
will further depend upon the Company's ability to meet, on a continuing basis
through actual operating results, asset composition, distribution levels and
diversity of share ownership, the various qualification tests imposed under the
Code discussed below. Counsel will not review compliance with these tests on a
continuing basis. No assurance can be given that the Company will satisfy such
tests on a continuing basis.
In brief, a corporation that invests primarily in real estate can, if it meets
the REIT provisions of the Code described below, claim a tax deduction for the
dividends it pays to its shareholders. Such a corporation generally is not
taxed on its "REIT taxable income" to the extent such income is currently dis-
tributed to shareholders, thereby substantially eliminating the "double taxa-
tion" (i.e., at both the corporate and shareholder levels) that generally
results from an investment in a corporation. However, as discussed in greater
detail below, such an entity remains subject to tax in certain circumstances
even if it qualifies as a REIT. Further, if the entity were to fail to qualify
as a REIT in any year, it would not be able to deduct any portion of the divi-
dends it paid to its shareholders and would be subject to full federal income
taxation on its earnings, thereby significantly reducing or eliminating the
cash available for distribution to its shareholders. See "--Taxation of the
Company--General" and "--Taxation of the Company--Failure to Qualify."
The Board of Trustees of the Company currently expects that the Company will
operate in a manner that permits it to elect, and that it will timely and
effectively elect, REIT status for its taxable year ending December 31, 1997,
and in each taxable year thereafter. There can be no assurance, however, that
this expectation will be fulfilled since qualification as a REIT depends on the
Company continuing to satisfy numerous asset, income and distribution tests
described below, which in turn will be dependent in part on the Company's oper-
ating results.
The following summary is based on existing law, is not exhaustive of all pos-
sible tax considerations and does not give a detailed discussion of any state,
local or foreign tax considerations, nor does it discuss all of the aspects of
federal income taxation that may be relevant to a prospective shareholder in
light of his or her particular circumstances or to certain types of share-
holders (including insurance companies, tax-exempt entities, financial institu-
tions, broker-dealers, foreign corporations and persons who are not the citi-
zens or residents of the United States) subject to special treatment under the
federal income taxation laws.
TAXATION OF THE COMPANY
General. In any year in which the Company qualifies as a REIT, in general it
will not be subject to federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. The Company may,
however, be subject to tax at normal corporate rates upon any taxable income or
capital gain not distributed. Under recently enacted legislation, shareholders
are required to include their proportionate share of the REIT's undistributed
long-term capital gain in income but receive a credit for their share of any
taxes paid on such gain by the REIT.
Notwithstanding its qualification as a REIT, the Company also may be subject to
taxation in certain other circumstances. If the Company should fail to satisfy
either the 75% or the 95% gross income test (each as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which the Company fails either the 75% or the 95% test, multiplied by
a fraction intended to reflect the Company's profitability. The Company will
also be subject to a tax of 100% on net income from any "prohibited transac-
tion" (as described below), and if the Company has (i) net income from the sale
or other disposition of "foreclosure property" which is held primarily for sale
to customers in the ordinary course of business or (ii) other non-qualifying
income from foreclosure property, it will be subject to tax on such income from
foreclosure property at the highest corporate rate. In addition, if the Company
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain
net income for such year, and (iii) any undistributed taxable income from prior
years, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company also
may be subject to the corporate alternative minimum tax, as well as to tax in
certain situations not presently contemplated. The Management Company will be
taxed on its income at regular corporate rates. The Company will use the cal-
endar year both for federal income tax purposes, as is required of a newly
organized REIT, and for financial reporting purposes.
In order to qualify as a REIT, the Company must meet, among others, the fol-
lowing requirements:
Share Ownership Tests. The Company's shares of beneficial interest (which term,
in the case of the Company, currently means the Common Shares) must be held by
a minimum of 100 persons for at least 335 days in each taxable year (or a pro-
portional number of days in any short taxable year). In addition, at all times
during the second half of each taxable year, no more than 50% in value of the
outstanding shares of beneficial interest of the Company may be owned, directly
or indirectly and including the effects of certain constructive ownership
rules, by five or fewer individuals, which for this purpose includes certain
tax-exempt entities. However, for purposes of this test, any shares of benefi-
cial interest held by a
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qualified domestic pension or other retirement trust will be treated as held
directly by its beneficiaries in proportion to their actuarial interest in such
trust rather than by such trust. These share ownership requirements need not be
met until the second taxable year of the Company for which a REIT election is
made.
In order to attempt to ensure compliance with the foregoing share ownership
tests, the Company has placed certain restrictions on the transfer of its
shares of beneficial interest to prevent additional concentration of stock own-
ership. Moreover, to evidence compliance with these requirements, Treasury reg-
ulations require the Company to maintain records which disclose the actual own-
ership of its outstanding shares of beneficial interest. In fulfilling its
obligations to maintain records, the Company must and will demand written
statements each year from the record holders of designated percentages of its
shares of beneficial interest disclosing the actual owners of such shares of
beneficial interest (as prescribed by Treasury regulations). A list of those
persons failing or refusing to comply with such demand must be maintained as
part of the Company's records. A shareholder failing or refusing to comply with
the Company's written demand must submit with his tax return a similar state-
ment disclosing the actual ownership of Company shares of beneficial interest
and certain other information. In addition, the Company's Declaration of Trust
provides restrictions regarding the transfer of its shares of beneficial
interest that are intended to assist the Company in continuing to satisfy the
share ownership requirements. See "Description of Shares of Beneficial Inter-
est--Restrictions on Transfer."
Asset Tests. At the close of each quarter of the Company's taxable year, the
Company must satisfy two tests relating to the nature of its assets (determined
in accordance with generally accepted accounting principles). First, at least
75% of the value of the Company's total assets must be represented by interests
in real property, interests in mortgages on real property, shares in other
REITs, cash, cash items, government securities and qualified temporary invest-
ments. Second, although the remaining 25% of the Company's assets generally may
be invested without restriction, securities in this class may not exceed (i) in
the case of securities of any one non-government issuer, 5% of the value of the
Company's total assets (the "Value Test") or (ii) 10% of the outstanding voting
securities of any one such issuer (the "Voting Stock Test"). Where the Company
invests in a partnership (such as the Operating Partnership), it will be deemed
to own a proportionate share of the partnership's assets and the partnership
interest does not constitute a security for purposes of these tests. See "--Tax
Aspects of the Company's Investments in Partnerships--General." Accordingly,
the Company's investment in the Properties through its interest in the Oper-
ating Partnership is intended to constitute an investment in qualified assets
for purposes of the 75% asset test.
The Operating Partnership will own 100% of the non-voting preferred stock of
the Management Company, and by virtue of its partnership interest in the Oper-
ating Partnership, the Company will be deemed to own initially a pro rata share
of such non-voting preferred stock. Because the Operating Partnership will own
none of the voting common stock of the Management Company and the non-voting
preferred stock's approval right is limited to certain fundamental corporate
actions that could adversely affect the preferred stock as a class, the Voting
Stock Test should be satisfied.
Based upon its analysis of the estimated value of the stock of the Management
Company to be owned by the Operating Partnership relative to the estimated
value of the total assets to be owned by the Operating Partnership, the Company
believes that its pro rata share of the stock of the Management Company to be
held by the Operating Partnership will not exceed on the date of this Pro-
spectus 5% of the value of the Company's total assets. Mayer, Brown & Platt, in
rendering its opinion as to the qualification of the Company as a REIT, is
relying on representations of the Company to such effect with respect to the
value of such stock and assets. The Value Test must be satisfied at the end of
any quarter in which the Company so increases its interest in the Management
Company or so acquires other property. In this respect, if any Continuing
Investor exercises its conversion option to exchange Units for Common Shares,
the Company will thereby increase its proportionate (indirect) ownership
interest in the Management Company, thus requiring the Company to meet the
Value Test in any quarter in which such conversion option is exercised. A sim-
ilar result will follow in the case of any exchange of Units by the Operating
Partnership or the Management Company employees that they received pursuant to
the Company's Long Term Incentive Plan. See "Management--Long Term Incentive
Plan." Although the Company plans to take steps to ensure that it satisfies the
Value Test for any quarter with respect to which retesting is to occur, there
can be no assurance that such steps will always be successful and will not
require a reduction in the Operating Partnership's overall interest in the Man-
agement Company.
Gross Income Tests. There are two separate percentage tests relating to the
sources of the Company's gross income which must be satisfied for each taxable
year. For purposes of these tests, where the Company invests in a partnership,
the Company will be treated as receiving its share of the income and loss of
the partnership, and the gross income of the partnership will retain the same
character in the hands of the Company as it has in the hands of the partner-
ship. See "--Tax Aspects of the Company's Investments in Partnerships--General"
below. The two tests are as follows:
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The 75% Test. At least 75% of the Company's gross income for the taxable year
must be "qualifying income." Qualifying income generally includes: (i) rents
from real property (except as modified below); (ii) interest on obligations
secured by mortgages on, or interests in, real property; (iii) gains from the
sales or other disposition of interests in real property and real estate mort-
gages, other than gain from property bought primarily for sale to customers in
the ordinary course of the Company's trade or business ("dealer property");
(iv) dividends or other distributions on shares in other REITs, as well as gain
from the sale of such shares; (v) abatements and refunds of real property
taxes; (vi) income from the operation, and gain from the sale, of property
acquired at or in lieu of a foreclosure of the mortgage secured by such prop-
erty ("foreclosure property"); and (vii) commitment fees received for agreeing
to make loans secured by mortgages on real property or to purchase or lease
real property.
Rents received from a customer will not, however, qualify as rents from real
property in satisfying the 75% gross income test (or the 95% gross income test
described below) if the Company, or an owner of 10% or more of the Company,
directly or constructively owns 10% or more of such customer. In addition, if
rent attributable to personal property leased in connection with a lease of
real property is greater that 15% of the total rent received under the lease,
then the portion of rent attributable to such personal property will not
qualify as rents from real property. Moreover, an amount received or accrued
will not qualify as rents from real property (or as interest income) for pur-
poses of the 75% and 95% gross income tests if it is based in whole or in part
on the income or profits of any person, although an amount received or accrued
generally will not be excluded from "rents from real property" solely by reason
of being based on a fixed percentage or percentages of receipts or sales.
Finally, for rents received to qualify as rents from real property for purposes
of the 75% and 95% gross income tests, the Company generally must not operate
or manage the property or furnish or render services to customers, other than
through an "independent contractor" from whom the Company derives no income,
except that the "independent contractor" requirement does not apply to the
extent that the services provided by the Company are "usually or customarily
rendered" in connection with the rental of space for occupancy only, or are not
otherwise considered "rendered to the occupant for his convenience."
The Company intends to monitor its operations in the context of these standards
so as to satisfy the 75% and 95% gross income tests. The Operating Partnership
will provide certain services at the Properties that it owns and possibly at
any newly acquired Properties of the Operating Partnership. The Company
believes that for purposes of the 75% and 95% gross income tests the services
provided at such Properties and any other services and amenities provided by
the Operating Partnership or its agents with respect to such Properties will be
of the type usually or customarily rendered in connection with the rental of
space for occupancy only. Mayer, Brown & Platt, in rendering its opinion as to
the qualification of the Company as a REIT, is relying on representations of
the Company to such effect. The Company intends that services that cannot be
provided directly by the Operating Partnership, the Management Company or other
agents will be performed by independent contractors. The Company anticipates
that the dividend income on its indirect investment in the Management Company
will not cause it to fail to satisfy the 75% gross income test.
The 95% Test. In addition to deriving 75% of its gross income from the sources
listed above, at least 95% of the Company's gross income for the taxable year
must be derived from the above-described qualifying income or from dividends,
interest, or gains from the sale or other disposition of stock or other securi-
ties that are not dealer property. Dividends and interest on any obligations
not collateralized by an interest in real property are included for purposes of
the 95% test, but not for purposes of the 75% test. The Company intends to
closely monitor its non-qualifying income and anticipates that non-qualifying
income from its other activities will not result in the Company failing to sat-
isfy either the 75% or 95% gross income test.
For purposes of determining whether the Company complies with the 75% and the
95% gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property (ex-
cluding foreclosure property); however, a sale of property will not be a pro-
hibited transaction if such property is held by the Company for at least four
years and certain other requirements (relating to the number of properties sold
in a year, their tax bases, and the cost of improvements made thereto) are sat-
isfied. See "--Taxation of the Company--General" and "--Tax Aspects of the
Company's Investments in Partnerships--Sale of the Properties."
The Company believes that, for purposes of both the 75% and the 95% gross
income test, its investment in the Properties through the Operating Partnership
will in major part give rise to qualifying income in the form of rents, and
that gains on sales of the Properties, or of the Company's interest in the
Operating Partnership, generally will also constitute qualifying income.
Even if the Company fails to satisfy one or both of the 75% and 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) the Company's failure to comply
is due to reasonable cause and not to willful neglect; (ii) the
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Company reports the nature and amount of each item of its income included in
the tests on a schedule attached to its tax return; and (iii) any incorrect
information on this schedule is not due to fraud with intent to evade tax. If
these relief provisions apply, however, the Company will nonetheless be subject
to a 100% tax on the greater of the amount by which it fails either the 75% or
95% gross income test, multiplied by a fraction intended to reflect the
Company's profitability.
Annual Distribution Requirements. In order to qualify as a REIT, the Company is
required to distribute dividends to its shareholders each year in an amount at
least equal to (A) the sum of (i) 95% of the Company's REIT taxable income
(computed without regard to the dividends received deduction and the Company's
net capital gain) and (ii) 95% of the net income (after tax), if any, for fore-
closure property, minus (B) the sum of certain items of non-cash income. Such
distributions must be paid in the taxable year to which they relate, or in the
following taxable year if declared before the Company timely files its tax
return for such year and if paid on or before the first regular dividend pay-
ment after the declaration. To the extent that the Company does not distribute
all of its net capital gain or distributes at least 95%, but less than 100%, of
its REIT taxable income, as adjusted, it will be subject to tax on the undis-
tributed amount at regular capital gain or ordinary corporate tax rates, as the
case may be.
The Company intends to make timely distributions sufficient to satisfy the
annual distribution requirements described in the first sentence of the pre-
ceding paragraph. In this regard, the Partnership Agreement authorizes the Com-
pany in its capacity as general partner to take such steps as may be necessary
to cause the Operating Partnership to distribute to its partners an amount suf-
ficient to permit the Company to meet the distribution requirements. It is pos-
sible that the Company may not have sufficient cash or other liquid assets to
meet the 95% distribution requirement, due to timing differences between the
actual receipt of income and actual payment of expenses on the one hand, and
the inclusion of such income and deduction of such expense in computing the
Company's REIT taxable income on the other hand; due to the Operating Partner-
ship's inability to control cash distributions with respect to any properties
as to which its does not have decision making control; or for other reasons.
The Company will closely monitor the relationship between its REIT taxable
income and cash flow and, if necessary, intends to borrow funds (or cause the
Operating Partnership or other affiliates to borrow funds) in order to satisfy
the distribution requirement. However, there can be no assurance that such bor-
rowing would be available at such time.
If the Company fails to meet the 95% distribution requirement as a result of an
adjustment to the Company's tax return by the Service, the Company may retroac-
tively cure the failure by paying a "deficiency dividend" (plus applicable pen-
alties and interest) within a specified period.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT in
any taxable year and the relief provisions do not apply, the Company will be
subject to tax (including any applicable alternative minimum tax) on its tax-
able income at regular corporate rates. Distributions to shareholders in any
year which the Company fails to qualify as a REIT will not be deductible by the
Company, nor generally will they be required to be made under the Code. In such
event, to the extent of current and accumulated earnings and profits, all dis-
tributions to shareholders will be taxable as ordinary income, and subject to
certain limitations in the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statu-
tory provisions, the Company also will be disqualified from the re-electing
taxation as a REIT for the four taxable years following the year during which
qualification was lost.
TAX ASPECTS OF THE COMPANY'S INVESTMENTS IN PARTNERSHIPS
General. The Company will hold a partnership interest in the Operating Partner-
ship. In general, a partnership is a "pass-through" entity which is not subject
to federal income tax. Rather, partners are allocated their proportionate
shares of the items of income, gain, loss, deduction and credit of a partner-
ship, and are potentially subject to tax thereon, without regard to whether the
partnership received a distribution from the partnership. The Company will
include its proportionate share of the foregoing partnership items for purposes
of the various REIT gross income tests and in the computation of its REIT tax-
able income. See "--Taxation of the Company--General" and "--Gross Income
Tests."
Each partner's share of a partnership's tax attributes is determined in accor-
dance with the partnership agreement, although the allocations will be adjusted
for tax purposes if they do not comply with the technical provisions of Code
Section 704(b) and the regulations thereunder. The Operating Partnership's
allocations of tax attributes are intended to comply with these provisions.
Notwithstanding these allocation provisions, for purposes of complying with the
gross income and asset tests discussed above, the Company will be deemed to own
its proportionate share of each of the assets of the partnership and will be
deemed to have received a share of the income of the Partnership based on its
capital interest in the Operating Partnership.
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Accordingly, any resultant increase in the Company's REIT taxable income from
its interest in the Operating Partnership (whether or not a corresponding cash
distribution is also received from the Operating Partnership) will increase its
distribution requirements (see "--Taxation of the Company--Annual Distribution
Requirements"), but will not be subject to federal income tax in the hands of
the Company provided that an amount equal to such income is distributed by the
Company to its shareholders. Moreover, for purposes of the REIT asset tests
(see "Federal Income Tax Considerations--Taxation of the Company--Asset
Tests"), the Company will include its proportionate share of assets held by the
Operating Partnership.
Entity Classification. Based on certain representations of the Company and the
condition that the Operating Partnership does not become a "publicly traded
partnership" under the Code, in the opinion of Mayer, Brown & Platt, under
existing federal income tax law and regulations, the Operating Partnership will
be treated for federal income tax purposes as a partnership, and not as an
association taxable as a corporation. Such opinion, however, is not binding on
the Service.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c) of
the Code, income, gain, loss and deductions attributable to appreciated or
depreciated property that is contributed to a partnership in exchange for an
interest in the partnership (such as certain of the Properties or interests
therein) must be allocated in a manner such that the contributing partner is
charged with, or benefits from, respectively, the unrealized gain or unrealized
loss associated with the property at the time of the contribution. The amount
of such unrealized gain or unrealized loss is generally equal to the difference
between the fair market value of the contributed property at the time of con-
tribution, and the adjusted tax basis of such property at the time of contribu-
tion (a "Book-Tax Difference"). Such allocations are solely for federal income
tax purposes and do not affect the book capital amounts or other economic
arrangements among the partners. The formation of the Operating Partnership
included contributions of appreciated property (including certain of the Prop-
erties or interests therein). Consequently, the Partnership Agreement requires
certain allocations to be made in a manner consistent with Section 704(c) of
the Code.
In general, certain of the Continuing Investors and the Cabot Group Partici-
pants as contributors of certain of the Properties or interests therein will be
allocated lower amounts of depreciation deductions for tax purposes and
increased taxable income and gain on sale by the Operating Partnership on the
contributed assets (including certain of such Properties). This will tend to
eliminate the Book-Tax Difference over the life of the Operating Partnership.
However, the special allocation rules of Section 704(c) do not always entirely
rectify the Book-Tax Difference on an annual basis or with respect to a spe-
cific taxable transaction such as a sale, and accordingly variations from
normal Section 704(c) principles may arise, which could result in the alloca-
tion of additional taxable income to the Company in excess of corresponding
cash proceeds in certain circumstances.
Treasury regulations under Section 704(c) provide partnerships with a choice of
several methods of accounting for Book-Tax Differences, including retention of
the method under current law. The Operating Partnership and the Company have
not yet determined which of the alternative methods of accounting for Book-Tax
Differences will be elected, and accordingly, such determination could have
differing timing and other effects on the Company.
Certain of the Properties acquired in taxable transactions will in general have
a tax basis equal to their fair market value. Section 704(c) of the Code will
not apply in such cases.
Sale of the Properties. The Company's share of any gain realized by the Oper-
ating Partnership on the sale of any "dealer property" generally will be
treated as income from a prohibited transaction that is subject 100% penalty
tax. See "Federal Income Tax Considerations--Taxation of the Company--General"
and "--Gross Income Tests--The 95% Test." Under existing law, whether property
is dealer property is a question of fact that depends on all the facts and cir-
cumstances with respect to the particular transaction. The Operating Partner-
ship intends to hold (and, to the extent within its control, to have any joint
venture to which the Operating Partnership is a partner so hold) the Properties
for investment with a view to long-term appreciation, to engage in the business
of acquiring, owning, operating and developing the Properties and other indus-
trial properties, and to make such occasional sales of the Properties and other
properties acquired subsequent to the date hereof as are consistent with the
Company's investment objectives. Based upon the Company's investment objec-
tives, the Company believes that overall, the Properties should not be consid-
ered dealer property and that the amount of income from prohibited transac-
tions, if any, will not be material.
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TAXATION OF SHAREHOLDERS
Taxation of Taxable Domestic Shareholders. As long as the Company qualifies as
a REIT, distributions made to the Company's taxable domestic shareholders out
of current or accumulated earnings and profits generally will be taxed to such
shareholders as ordinary dividend income, except that, subject to the discus-
sion below regarding the new tax rates contained in the Taxpayer Relief Act of
1997 (the "1997 Act"), distributions of net capital gain designated by the
Company as capital gain dividends will be taxed to such shareholders as long-
term capital gain. To the extent that the Company makes distributions in
excess of current and accumulated earnings and profits, such distributions
will be treated first as a tax-free return of capital to the shareholder,
reducing the tax basis of a shareholder's Common Shares by the amount of such
excess distribution (but not below zero), with distributions in excess of the
shareholder's tax basis being taxed as capital gains (if the Common Shares are
held by the shareholder as a capital asset). See "Distributions." In addition,
any dividend declared by the Company in October, November or December of any
year that is payable to a shareholder of record on a specific date in any such
month shall be treated as both paid by the Company and received by the share-
holder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. Share-
holders may not include in their individual income tax returns any net oper-
ating losses of the Company. Federal income tax rules may also require that
certain minimum tax adjustments and preferences be apportioned to Company
shareholders.
The Company is permitted under the Code to elect to retain and pay income tax
on its net long-term capital gain for any taxable year. Under the 1997 Act,
however, if the Company so elects, a shareholder must include in income such
shareholder's proportionate share of the Company's undistributed long-term
capital gain for the taxable year, and will be deemed to have paid such share-
holder's proportionate share of the income tax paid by the Company with
respect to such undistributed capital gain. Such tax would be credited against
the shareholder's tax liability and subject to normal refund procedures. In
addition, each shareholder's basis in such shareholder's shares of Common
Shares would be increased by the amount of undistributed long-term capital
gain (less the tax paid by the Company) included in the shareholder's income.
The 1997 Act also alters the taxation of capital gain income for individuals
(and for certain trusts and estates). Gain from the sale or exchange of cer-
tain investments held for more than 18 months will be taxed at a maximum long-
term capital gain rate of 20%. Gain from the sale or exchange of such invest-
ments held for 18 months or less, but for more than one-year, will be taxed at
a maximum mid-term capital gain rate of 28%. The 1997 Act also provides a max-
imum rate of 25% for "unrecaptured section 1250 gain" recognized on the sale
or exchange of certain real estate assets, introduces special rules for "qual-
ified 5-year gain," and makes certain other changes to prior law. The Service
may prescribe regulations on how the 1997 Act's new capital gain rates will
apply to sales of capital assets by REITs and other pass-through entities, but
it has not yet done so, and it remains unclear how the 1997 Act's new rates
will apply to capital gain dividends and undistributed capital gain. For exam-
ple, the extent, if any, to which capital gain dividends and undistributed
capital gain from the Company will be taxed to individuals at the new rates
for mid-term capital gain and unrecaptured section 1250 gain, rather than the
long-term capital gain rates, is unclear.
In general, any loss upon a sale or exchange of Common Shares by a shareholder
who has held such Common Shares for six months or less (after applying certain
holding period rules) will be treated as a long-term capital loss, to the
extent of distributions from the Company required to be treated by such share-
holders as long-term capital gains.
Backup Withholding. The Company will report to its domestic shareholders and
to the Service the amount of dividends paid for each calendar year, and the
amount of tax withheld, if any, with respect thereto. Under the backup with-
holding rules, a shareholder may be subject to backup withholding at a rate of
31% with respect to dividends paid unless such shareholder (i) is a corpora-
tion or comes with certain other exempt categories and, when required, demon-
strates this fact or (ii) provides a taxpayer identification number, certifies
as to no loss of exemption from backup withholding, and otherwise complies
with applicable requirements of the backup withholding rules. A shareholder
that does not provide the Company with its correct taxpayer identification
number may also be subject to penalties imposed by the Service. Any amount
paid as backup withholding is available as a credit against the shareholder's
income tax liability. In addition, the Company may be required to withhold a
portion of capital gain distributions made to any shareholders who fail to
certify their non-foreign status to the Company. See "Federal Income Tax Con-
siderations--Taxation of the Shareholders--Taxation of Foreign Shareholders"
below.
Taxation of Tax-Exempt Shareholders. The Service has issued a revenue ruling
in which it held that amounts distributed by a REIT to a tax-exempt employees'
pension trust do not constitute unrelated business taxable income ("UBTI").
Subject to the discussion below regarding a "pension-held REIT," based upon
such ruling and the statutory framework of the Code, distributions by the Com-
pany to a shareholder that is a tax-exempt entity should not constitute UBTI,
provided that the tax-
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exempt entity has not financed the acquisition of its shares with "acquisition
indebtedness" within the meaning of the Code, that the shares are not otherwise
used in an unrelated trade or business of the tax-exempt entity, and that the
Company, consistent with its present intent, does not hold a residual interest
in a real estate mortgage investment conduit ("REMIC") that is an entity or
arrangement that satisfies the standards set forth in Section 860D of the Code.
If any pension or other retirement trust that qualifies under Section 401(a) of
the Code (a "qualified pension trust") holds more than 10% by value of the
interests in a "pension-held REIT" at any time during a taxable year, a portion
of the dividends paid to the qualified pension trust by such REIT may consti-
tute UBTI. For these purposes, a "pension-held REIT" is defined as a REIT (i)
which would not have qualified as a REIT but for the provisions of the Code
which look through such a qualified pension trust in determining ownership of
shares of the REIT and (ii) as to which at least one qualified pension trust
holds more than 25% by value of the interests of such REIT or one or more qual-
ified pension trusts (each owning more than a 10% interest by value in the
REIT) hold in the aggregate more than 50% by value of the interests in such
REIT.
Taxation of Foreign Shareholders. The rules governing United States federal
income taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign shareholders (collectively, "Non-U.S. Sharehold-
ers") are highly complex and the following is only a summary of such rules.
Prospective Non-U.S. Shareholders should consult with their own tax advisors to
determine the impact of federal, state and local income tax laws with regard to
an investment in Common Shares, including any reporting requirements. The Com-
pany will qualify as a "domestically-controlled REIT" so long as less than 50%
in value of its shares of beneficial interest are held by foreign persons
(i.e., non-resident aliens, and foreign corporations, partnerships, trusts and
estates). The Company currently anticipates that it will qualify as a domesti-
cally-controlled REIT. Under these circumstances, gain from the sale of Common
Shares by a foreign person should not be subject to United States taxation,
unless such gain is effectively connected with such person's United States
trade or business or, in the case of an individual foreign person, such person
is present within the United States for more than 182 days during the taxable
year. However, notwithstanding the Company's current anticipation that the Com-
pany will qualify as a domestically-controlled REIT, because the Common Shares
will be publicly traded no assurance can be given that the Company will con-
tinue to so qualify.
Distributions of cash generated by the Company's real estate operations (but
not by the sale or exchange of properties) that are paid to foreign persons
generally will be subject to United States withholding tax at a rate of 30%,
unless (i) an applicable tax treaty reduces that tax and the foreign share-
holder files with the Company the required form evidencing such lower rate, or
(ii) the foreign shareholder files and IRS Form 4224 with the Company claiming
that the distribution is "effectively connected" income.
Distributions of proceeds attributable to the sale or exchange of United States
real property interests by the Company are subject to income and withholding
taxes pursuant to the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"), and may also be subject to branch profits tax in the hands of a
shareholder which is a foreign corporation if it is not entitled to treaty
relief or exemption. The Company is required by applicable Treasury regulations
to withhold 35% of any distribution to a foreign person that could be desig-
nated by the Company as a capital gain dividend. This amount is creditable
against the foreign shareholder's FIRPTA tax liability.
The federal income taxation of foreign persons is a highly complex matter that
may be affected by other considerations. Accordingly, foreign investors in the
Company should consult their own tax advisor regarding the income and with-
holding tax considerations with respect to their investments in the Company.
OTHER TAX CONSIDERATIONS
Management Company. The income of the Management Company will be subject to
federal and state income tax at full corporate rates, and the Management Com-
pany cannot claim a deduction for the dividends it pays to its shareholders,
including the Operating Partnership. To the extent that the Management Company
pays federal, state or local taxes, it will have less cash available to dis-
tribute to its shareholders, thereby reducing cash available for distribution
by the Company to its shareholders. The Management Company will attempt to min-
imize the amount of such taxes, but there can be no assurance whether or the
extent to which the measures it takes to minimize taxes will be successful.
The 1997 Act. The 1997 Act which was recently signed into law by President
Clinton on August 5, 1997, modified many of the provisions relating to the
requirements for qualification as, and the taxation of, a REIT. Among other
things, the 1997 Act (1) replaced the rule that disqualifies a REIT for any
year in which the REIT fails to comply with Treasury regulations to ascertain
its ownership with an intermediate penalty for failing to do so; (ii) permits a
REIT to render a de
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minimis amount of impermissible services to tenants, or in connection with the
management of property, and still treat amounts received with respect to that
property as rents from real property; (iii) permits a REIT to elect to retain
and pay income tax on net long-term capital gains; (iv) repealed a rule that
required that less than 30% of a REIT's gross income be derived from gain from
the sale or other disposition of stock or securities held for less than one
year, certain real property held for less than four years, and property that
is sold or disposed of in a prohibited transaction; (v) lengthened the orig-
inal grace period for foreclosure property from two years after the REIT
acquired the property to a period ending on the last day of the third full
taxable year following the election; (vi) treat income from all hedges that
reduce the interest rate risk of REIT liabilities, not just interest rate
swaps and caps, as qualifying income under the 95% gross income test; and
(vii) permits any corporation wholly-owned by a REIT to be treated as a quali-
fied subsidiary, regardless of whether the corporation has always been owned
by a REIT. The changes are effective for taxable years beginning after the
date of enactment. Thus, these changes will apply to the formation and opera-
tion of the Company.
Possible Legislative or Other Actions Affecting Tax Consequences. Prospective
shareholders should recognize that the present federal income tax treatment of
an investment in the Company may be modified by legislative, judicial or
administrative action at any time and that any such action may affect invest-
ments and commitments previously made. The rules dealing with federal income
taxation are constantly in review by persons involved in the legislative
process and by the Service and the Treasury Department resulting in revisions
of regulations and revised interpretations of established concepts as well as
statutory changes. No assurance can be given as to the form or content (in-
cluding with respect to effective dates) of any tax legislation which may be
enacted. Revisions in federal tax laws and interpretations thereof can
adversely affect the tax consequences of an investment in the Company.
State and Local Taxes. The Company and its shareholders may be subject to
state or local taxation, the Company and the Operating Partnership may be sub-
ject to state or local tax withholding requirements in various jurisdictions,
including those in which it or they transact business or reside. The state and
the tax treatment of the Company and its shareholders may not conform to the
federal income tax consequences discussed above. Consequently, prospective
shareholders should consult their own tax advisors regarding the effect of
state and local tax laws on an investment in Common Shares.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT WITH SUCH PURCHASER'S TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE PUR-
CHASE, OWNERSHIP AND SALE OF COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED
AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOR-
EIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION
AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
ERISA CONSIDERATIONS
THE FOLLOWING IS INTENDED TO BE A SUMMARY ONLY AND IS NOT A SUBSTITUTE FOR
CAREFUL PLANNING WITH A PROFESSIONAL. Employee benefit plans subject to ERISA
("ERISA Plans"), governmental plans, Individual Retirement Accounts and Indi-
vidual Retirement Annuities ("IRAs") and certain other non-ERISA plans (col-
lectively, "Plans") considering purchasing the Common Shares should consult
with their own legal counsel regarding specific considerations arising under
ERISA, the Code or state law with respect to their purchase of the Common
Shares.
GENERAL FIDUCIARY CONSIDERATIONS
The fiduciary requirements of Title I of ERISA require the investments of an
ERISA Plan to be (i) prudent and in the best interest of the ERISA Plan, its
participants and beneficiaries; (ii) diversified in order to avoid the risk of
large losses, unless it is clearly prudent not to do so; and (iii) authorized
under the terms of the governing documents of the ERISA Plan. Each fiduciary
of an ERISA Plan should carefully consider whether an investment in the Common
Shares is consistent with his or her fiduciary duties.
PROHIBITED TRANSACTIONS
ERISA and the Code prohibit certain transactions that involve an ERISA Plan
and a "party in interest" or "disqualified person" (collectively referred to
herein as a "party in interest") with respect to the plan. A party in interest
who engages in a prohibited transaction with a plan is subject to an excise
tax of 15% of the amount involved in the prohibited transaction. If the pro-
hibited transaction is not corrected by undoing the transaction to the extent
possible and, in any case, putting the plan in a financial position not worse
than that in which it would have been had the party in interest acted in
accordance with the requirements of ERISA, the party in interest is subject to
a further excise tax of 100%. Cabot Partners is a party in interest with
respect to one ERISA plan that is a Contributing Investor. It is not clear
that the Formation Transactions
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would constitute a prohibited transaction with respect to such plan. Neverthe-
less, such plan has informed the Company that it is relying on Prohibited
Transaction Exemption 84-14 ("PTE 84-14") and has retained a Qualified Profes-
sional Asset Manager ("QPAM") to decide whether or not to enter into the Forma-
tion Transactions. If it were ultimately determined that the Formation Transac-
tions constitute a prohibited transaction, and also that PTE 84-14 does not
apply to such plan's participation in the Formation Transactions, then sanc-
tions could be imposed on Cabot Partners and the fiduciaries of such plan that
could include reallocation of Units between Cabot Partners and such plan or
other remedies, possibly including rescission of the Property transfers from
such plan, intended to put such plan in a financial position not worse than
that in which it would have been if the parties had acted in accordance with
the requirements of ERISA. Cabot Partners and the Company have received an
opinion from Mayer, Brown & Platt that PTE 84-14 applies to the Formation
Transactions with respect to such plan; however, such opinion is not binding on
the Department of Labor, the Service or any court. See "ERISA Considerations."
PLAN ASSETS ISSUES
A regulation promulgated by the Department of Labor (the "Regulation") provides
that, except under certain circumstances set forth therein, investment by an
ERISA Plan in a corporation, partnership or other entity may result in the
assets of that entity being treated as the assets of the investing ERISA Plan.
The Regulation provides that an entity's assets will not be treated as "plan
assets" because of an ERISA Plan's investment if the ERISA Plan acquires an
equity interest in the entity which is a "publicly offered security." Under the
Regulation, a "publicly-offered security" is a security that is freely trans-
ferable, part of a class of securities that is widely held and either (i) part
of a class of securities that is registered under section 12(b) or 12(g) of the
Exchange Act, or (ii) sold pursuant to an effective registration statement
under the Securities Act (provided that the securities are registered under the
Exchange Act within 120 days after the end of the fiscal year of the issuer
during which the offering occurred). The Common Shares are expected to be reg-
istered under section 12(b) of the Exchange Act.
A security is "widely held" if it is part of a class of securities owned by 100
or more investors independent of the issuer and of each other. The Company
believes that the Common Shares will be widely held upon the closing of the
Offering.
Whether a security is considered "freely transferable" is a factual question
determined upon the relevant facts and circumstances. The Regulation provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the Offering, certain restrictions ordi-
narily will not affect, alone or in combination, the finding that the securi-
ties are freely transferable. The Company believes that the restrictions
imposed under the Company's Declaration of Trust on the transfer of the Common
Shares are limited to restrictions on transfer generally permitted under the
Regulation and will not result in the failure of the Common Shares to be
"freely transferable." The Company also believes that the restrictions that
apply to the Common Shares that derive from contractual arrangements requested
by the Underwriters in connection with the Offering will not result in the
failure of the Common Shares to be "freely transferable." The Regulation only
establishes a presumption in favor or free transferability, and no assurance
can be given that the Department of Labor or the U.S. Treasury Department will
not reach a contrary conclusion.
Assuming that the Common Shares will be "widely held" and that no facts and
circumstances other than those referred to in the preceding paragraph exist
that restrict transferability, the Company believes that, while the issue is
not entirely free of doubt because of its factual nature, the Common Shares
will be publicly offered securities and the assets of the Company will not be
deemed to be "plan assets" of any Plan which invests in the Common Shares.
The Regulation also provides exceptions to the rule that an entity will hold
plan assets if the entity qualifies as an operating company or a real estate
operating company ("REOC"). A REOC is an entity which, on certain specified
valuation dates, has at least 50 percent of it assets, valued at cost (other
than short term investments pending long term commitment or distribution)
invested in real estate which is managed or developed and with respect to which
the REOC has the right to substantially participate in the management or devel-
opment activities; and which throughout the year(s) is engaged directly in real
estate management or development. As the Company will be self-managed, it may
qualify under the Regulation as a REOC. The Company may also constitute an "op-
erating company" within the meaning of the Regulation.
Notwithstanding the foregoing, if the assets of the Company were deemed to be
"plan assets" under ERISA, the Company's ability to engage in business transac-
tions could be hampered because (i) certain persons exercising discretion as to
the Company's assets might be considered fiduciaries of the ERISA Plans; and
(ii) transactions involving the Company undertaken at their discretion or
transactions that the Company might enter into in the ordinary course of its
business might constitute prohibited transactions under ERISA and the Code.
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UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), the Under-
writers named below, for whom J.P. Morgan Securities Inc. and are acting
as representatives (the "Representatives"), have severally agreed to purchase,
and the Company has agreed to sell to them, the respective number of Common
Shares set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
J.P. Morgan Securities Inc.........................................
<CAPTION>
---------
<S> <C>
Total.............................................................
<CAPTION>
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several Under-
writers to purchase Common Shares are subject to approval of certain legal mat-
ters by counsel and certain other conditions. The Underwriters are obligated to
take and pay for all of the Common Shares, if any are taken.
The Underwriters propose initially to offer the Common Shares directly to the
public at the public offering price set forth on the cover page of this Pro-
spectus and to certain dealers at such price less a concession not in excess of
$ per Share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per Share to certain other dealers. After the
Common Shares are released for sale to the public, the offering price and such
concessions may be changed.
The Company has granted to the Underwriters an option, expiring at the close of
business on the 30th day after the date of this Prospectus, to purchase up to
an additional Common Shares at the initial public offering price, less the
underwriting discount. The Underwriters may exercise such option solely to
cover over-allotments, if any. To the extent that the Underwriters exercise
such option, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage of such additional
Common Shares as the number set forth next to such Underwriters name in the
preceding table bears to the total number of Common Shares offered hereby.
The Company has agreed not to offer for sale, contract to sell, sell or other-
wise dispose of, directly or indirectly, any Common Shares (other than the
Common Shares offered hereby, shares issued pursuant to the Company's Long Term
Incentive Plan and any Units or Common Shares that may be issued in connection
with any acquisition of a property), or sell or grant options, rights or war-
rants with respect to any Common Shares (other than pursuant to the Company's
Long Term Incentive Plan), for a period of months after the closing of the
Offering, without the prior written consent of J.P. Morgan Securities Inc. Each
of the Contributing Investors and the Company's officers, Trustees and affili-
ates, including the Cabot Group Participants, who have acquired Units in con-
nection with the organization of the Company and the Formation Transactions has
entered into agreements with the Underwriters providing that, subject to cer-
tain exceptions, such holders of Units may not sell any Units prior to one year
and two years, respectively, after Closing Date, without the consent of the
Company and J.P. Morgan Securities Inc.
The Company and the Operating Partnership have agreed to indemnify the Under-
writers against certain liabilities, including liabilities under the Securities
Act of 1933.
The Underwriters have informed the Company that they do not expect sales to
accounts over which they exercise discretionary authority to exceed five per-
cent of the total number of shares offered by them.
In connection with the Offering, the Underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Shares.
Specifically, the Underwriters may overallot the offering, creating a syndicate
short position. In addition, the Underwriters may bid for, and purchase, Shares
in the open market to cover syndicate shorts or to stabilize the price of the
Common Shares. Finally, the underwriting syndicate may reclaim selling conces-
sions allowed for distributing the Shares in the Offering, if the syndicate
repurchases previously distributed Common Shares in syndicate covering transac-
tions, in stabilization transactions or otherwise. Any of these activities may
stabilize or maintain the market price of the Shares above independent market
levels. The Underwriters are not required to engage in these activities, and
may end any of these activities at any time.
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Prior to the Offering, there has been no public market for the Common Shares.
Consequently, the Offering Price was determined by negotiations among the Com-
pany and the Representatives. Among the factors considered in such negotiations
in addition to prevailing market conditions, were estimated cash available for
distribution and Funds from Operations, multiples of comparable publicly traded
REITs, the revenues and earnings of the Company, including the historical reve-
nues and earnings of the Properties contributed by the Contributing Investors
in recent periods, the current financial position of the Company and estimates
of the business potential and earnings prospects of the Company. Additionally,
consideration was given to the general status of the securities market, the
market conditions for new issues of securities and the demand for securities of
comparable companies at the times the offerings for such companies were made.
There can be no assurance that an active trading market will develop for the
Common Shares or that the Common Shares will trade in the public market subse-
quent to the Offering at or above the initial public offering price.
Certain of the Underwriters and their affiliates have from time to time per-
formed, and may continue to perform in the future, various investment banking
services for Cabot Partners, for which customary compensation has been
received. The Company will pay an advisory fee equal to 0.5% of the gross pro-
ceeds of the Offering (including any exercise of the Underwriters'
overallotment option) to J.P. Morgan Securities Inc. for advisory services in
connection with the evaluation, analysis and structuring of the Company's for-
mation as a REIT in connection with the Offering. J.P. Morgan Capital Corpora-
tion, Inc. ("J.P. Morgan Capital"), an affiliate of J.P. Morgan Securities
Inc., has an ownership interest in the Argo Fund, which is one of the Contrib-
uting Investors. Upon consummation of the Formation Transactions, J.P. Morgan
Capital will receive less than % of the ownership interest of the Company on a
fully diluted basis as a result of its interest in the Argo Fund. J.P. Morgan
Securities Inc. as lead managing underwriter of the Offering will receive stan-
dard underwriter's compensation in connection therewith.
LEGAL MATTERS
Certain legal matters, including the validity of the Common Shares offered
hereby, will be passed upon for the Company by Mayer, Brown & Platt, Chicago,
Illinois and for the Underwriters by Cahill Gordon & Reindel (a partnership
including a professional corporation), New York, New York. Mayer, Brown & Platt
and Cahill Gordon & Reindel will rely on , as to certain matters of Maryland
law.
EXPERTS
The audited financial statements and schedules (if applicable) of Cabot Part-
ners Limited Partnership, Existing Investors Property Group, Prudential Proper-
ties Group, West Coast Industrial, LLC, included in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
The financial statements and related schedule of Pennsylvania Public School
Employes' Retirement System Industrial Properties Portfolio included in this
Prospectus and elsewhere in the Registration Statement, have been audited by
KPMG Peat Marwick LLP, independent certified public accountants, to the extent
and for the periods indicated in their report thereon also appearing elsewhere
herein and in the Registration Statement. Such financial statements and related
schedule have been included herein in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The historical cost basis combined statements of assets and liabilities of
Orlando Central Park and 500 Memorial Drive as of December 31, 1996 and 1995
and the related historical cost basis combined statements of income, changes in
net assets, and cash flows for the years then ended, included in this Prospec-
tus, have been included herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
The historical cost basis balance sheets of Knickerbocker Properties, Inc. II
as of December 31, 1996 and 1995 and the related historical cost basis state-
ments of operations, stockholder's equity and cash flows for the years then
ended, included in this Prospectus, have been included herein in reliance on
the report of Coopers & Lybrand L.L.P., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
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The statement of revenue and certain expenses of Herrod Associates for the year
ended December 31, 1996 has been audited by Grant Thornton LLP, independent
certified public accountants, whose report thereon is included herein in reli-
ance upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement with the Commission on Form S-11
under the Securities Act with respect to the Common Shares offered hereby. In
accordance with the rules and regulations of the Commission, this Prospectus
does not contain all of the information set forth in the Registration Statement
and the exhibits and financial statement schedules thereto. For further infor-
mation with respect to the Company and the Common Shares, reference is made to
the Registration Statement and such exhibits and financial statement schedules,
copies of which may be examined without charge at or obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at Judi-
ciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also be
available for inspection and copying at the regional offices of the Commission
located at 13th Floor, 7 World Trade Center, New York, New York 10048 and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. The Commis-
sion maintains a Website at http:/www.sec.gov, and reports, proxy and informa-
tion statements and other information regarding registrants that file electron-
ically with the Commission (including the Company) can be obtained from that
site.
Statements contained in this Prospectus as to the contents of any contract or
other document that is filed as an exhibit to the Registration Statement are
not necessarily complete, and each such statement is qualified in its entirety
by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934. Reports, proxy
statements and other information concerning the Company filed with the Commis-
sion pursuant to the Exchange Act may be inspected and copied, or obtained
from, the above described officer of the Commission. Such materials may also be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
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GLOSSARY
Unless the context otherwise requires, the following capitalized terms shall
have the meanings set forth below for the purposes of this Prospectus.
"401(k) Plan" means the Cabot Partners Employee Savings Plan that will be
assumed and continued by the Company.
"ACMs" means asbestos-containing materials.
"Acquisition Facility" means a revolving credit facility, which the Company is
negotiating with several financial institutions, under which the Company would
be permitted to borrow up to $ million.
"ADA" means the Americans with Disabilities Act of 1990.
"Additional Acquisitions" means the Properties acquired or to be acquired after
June 30, 1997 by Cabot Partners on behalf of the Existing Investors.
"Administrator" means the Compensation Committee or its delegate, as appropri-
ate.
"Advisory Contracts" means the investment advisory and property management con-
tracts entered into between Cabot Partners and certain advisory clients.
"Affiliate" means (i) any person that, directly or indirectly, controls or is
controlled by or is under common control with such person, (ii) any other
person that owns, beneficially, directly or indirectly, five percent or more of
the outstanding capital stock, shares or equity interests of such person, or
(iii) any officer, director, employee, partner or trustee of such person or any
person controlling, controlled by or under common control with such person (ex-
cluding trustees and persons serving in similar capacities who are not other-
wise an Affiliate of such person). The term "person" means and includes indi-
viduals, corporations, general and limited partnerships, stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other entities and governments and
agencies and political subdivisions thereof. For the purposes of this defini-
tion, "control" (including the correlative meanings of the terms "controlled
by" and "under common control with"), as used with respect to any person, shall
mean the possession, directly or indirectly, of the power to direct or cause
the direction of the management and policies of such person, through the owner-
ship of voting securities, partnership interests or other equity interests.
"Annualized Base Rent" means annual contractual rent.
"Annualized Net Rent" means annualized monthly Net Rent from leases in effect
as of June 30, 1997.
"Annualized Effective Rent" means Annualized Net Rent, less amortization of the
related leasing costs, plus the effect of straight-lining rent steps.
"Base Line Properties" means properties that were held during the entire period
for both periods being compared in "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
"Beneficiary" means the beneficiary of the Share Trust.
"Book-Tax Difference" means the difference between the fair market value of the
contributed property at the time of contribution, and the adjusted tax basis of
such property at the time of contribution.
"Bylaws" means the Company's Bylaws.
"CC&F" means Cabot, Cabot & Forbes Company.
"Cabot Advisors" means Cabot, Cabot & Forbes Realty Advisors, Inc.
"Cabot Group" means Cabot Partners and certain affiliated partnerships.
"Cabot Group Participants" means certain of the officers and Trustees of the
Company and members of their immediate family members who are contributing
their interests in Cabot Partners and/or the C-M Property Partnerships (the
partnership interests of which are entirely owned by Ferdinand Colloredo-
Mansfeld, the Company's chief executive officer, his son Franz Colloredo-
Mansfeld, the Company's chief financial officer, and members of their immediate
family).
"Cabot Partners" means Cabot Partners Limited Partnership, a Massachusetts lim-
ited partnership.
"Closing Date" means the date of the closing of the Offering.
101
<PAGE>
"C-M" Limited" means C-M Holdings L.P.
"C-M Property Partnerships" means C-M Holdings L.P. and its affiliated partner-
ships.
"Cognetics" means Cognetics Real Estate, Inc.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Shares" means common shares of beneficial interest, $.01 par value per
share, of the Company.
"Company" means Cabot Industrial Trust and its operating subsidiaries,
including the Operating Partnership, of which the Company is the sole general
partner, and the Management Company.
"Compensation Committee" means the committee comprised of two or more of the
Independent Trustees established by the Board of Trustees to determine compen-
sation for the Company's executive officers and to implement the Company's Long
Term Incentive Plan.
"Contributing Investors" means the C-M Property Partnerships, those Cabot Part-
ners advisory clients who are contributing Properties (or where such clients
hold title through another entity, such title holding entity), and other
investors who are contributing Properties, in the Formation Transactions.
"Control Share Acquisition" means the acquisition of Control Shares, subject to
certain exceptions.
"Control Shares" means shares of beneficial interest that, if aggregated with
all other such shares of beneficial interest of the Company previously acquired
by the acquiror, would entitle the acquiror to exercise voting power in
electing trustees within one of the following ranges of voting power: (i) one-
fifth or more but less than one-third, (ii) one-third or more but less than a
majority, or (iii) a majority of all voting power, but does not include shares
which the acquiring person is then entitled to vote as a result of having pre-
viously obtained shareholder approval.
"Debt Limitation" means the Company's policy limiting its Debt-to-Total Market
Capitalization Ratio to 40%.
"Debt-to-Total Market Capitalization Ratio" means a ratio calculated based on
the Company's total consolidated and unconsolidated debt as a percentage of the
market value of outstanding Common Shares and Units (not owned by the Company)
plus total consolidated and unconsolidated debt, but excluding (i) all nonre-
course consolidated debt in excess of the Company's proportionate shares of
such debt and (ii) all nonrecourse unconsolidated debt of partnerships in which
the Company is a limited partner.
"Declaration of Trust" means the Declaration of Trust of the Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA Plans" means employee benefit plans subject to ERISA.
"ESAs" means Phase I environmental site assessments.
"Excess Shares" means Common or Preferred Shares which are transferred automat-
ically to the Share Trust.
"Exchange Rights" means the right of Limited Partners to exchange all or a por-
tion of their Units for Common Shares on a one-for-one basis pursuant to the
terms of the Operating Partnership Agreement.
"Existing Investors" means those Contributing Investors that are to contribute
Properties which were managed by Cabot Partners as of June 30, 1997.
"Existing Investors Property Group" means the Properties of Contributing
Investors that were managed by Cabot Partners as of June 30, 1997.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Formation Transactions" means the transactions relating to the formation of
the Company and the acquisition of the Properties and certain other assets.
"FFO" means Funds from Operations.
102
<PAGE>
"GAAP" means generally accepted accounting principles.
"GP Units" means general partnership interests in the Operating Partnership.
"Indemnitee" means each individual made a party to a proceeding by reason of
his status as a general partner or an officer of the Operating Partnership or a
trustee or officer of the Company or any other Person as the Company may desig-
nate from time to time in its sole and absolute discretion.
"Independent Trustee" means a Trustee of the Company who is not an officer or
employee of the Company.
"Interested Shareholder" means a beneficial owner of ten percent or more of the
voting power of the then outstanding voting shares of beneficial interest of a
trust or an Affiliate thereof.
"IRAs" means government plans, Individual Retirement Accounts and Individual
Retirement Annuities.
"Limited Partners" means the limited partners of the Operating Partnership.
"LC" means leasing commissions.
"Management Company" means Cabot Services, Inc., a Delaware corporation.
"Market Price" means the last reported sales price reported on the NYSE for a
particular class of equity shares on the trading day immediately preceding the
relevant date, or if not then traded on the NYSE, the last reported sales price
for such class of equity shares on the trading day immediately preceding the
relevant date as reported on any exchange or quotation system over or through
which such class of equity shares may be traded, or if not then traded over or
through any exchange or quotation system, then the market price of such class
of equity shares on the relevant date as determined in good faith by the Board
of Trustees.
"Maryland REIT Law" means Title 8 of the Corporations and Associations Article
of the Annotated Code of Maryland, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"NAREIT" means National Association of Real Estate Investment Trusts, Inc.
"New Investors Property Group" means the Properties of Contributing Investors
who were not property management clients of Cabot Partners at or prior to June
30, 1997.
"Net Rent" means contractual rent, excluding any reimbursements for real estate
taxes or operating expenses.
"Non-U.S. Shareholders" means nonresident alien individuals, foreign corpora-
tions, foreign partnerships and other foreign shareholders.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Common Shares hereby.
"Offering Price" means $ per Common Share (the midpoint of the range set
forth in the cover page of this Prospectus).
"Operating Partnership" means Cabot Industrial Properties, L.P., a Massachu-
setts limited partnership.
"Operating Partnership Agreement" means the Amended and Restated Agreement of
Limited Partnership of the Operating Partnership.
"Ownership Limit" means the direct or indirect ownership of no more than 9.8%
of the Company's number of issued and outstanding capital shares or 9.8% of the
total equity value of such capital shares.
"Participating Employer" means the Company and the Operating Partnership and
designated subsidiaries, including the Management Company.
"Participants" means the individuals who will participate in the Plan.
103
<PAGE>
"Party in Interest" means persons who have specified relationships with a Plan,
"Parties in Interest" under ERISA and "Disqualified Persons" under the Code.
"Plans" means certain employee benefit plans and individual retirement accounts
and individual retirement arrangements.
"Preferred Shares" means the preferred shares of beneficial interest, $.01 par
value per share, of the Company.
"Properties" means, collectively, the industrial buildings contributed to the
Company or the Operating Partnership.
"PTE 84-14" means Prohibited Transaction Exemption.
"Purported Transferee" means the record holder of the Common or Preferred
Shares that are designated as Excess Shares.
"QPAM" means Qualified Professional Asset Manager.
"qualified pension trust" means a pension or other retirement trust that quali-
fies under Section 401(a) of the Code.
"R&D" means research and development.
"REIT" means a real estate investment trust.
"REOC" means a real estate operating company.
"Regulation" means the United States Department of Labor regulation which pro-
vides that, except under certain circumstances set forth therein, investment by
an ERISA Plan in a corporation, partnership or other entity may result in the
assets of that entity being treated as the assets of the investing ERISA Plan.
"REMIC" means a Real Estate Mortgage Investment Conduit that is an entity or
arrangement that satisfies the standards set forth in Section 860D of the Code.
"Representatives" means J.P. Morgan Securities Inc. and , in their capac-
ities as representatives for the Underwriters.
"Restricted Shares" means restricted Common Shares of the Company.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Service" means the U.S. Internal Revenue Service.
"Share Trust" means a trust which holds Common or Preferred Shares of the Com-
pany which have been designated as Excess Shares.
"The 1997 Act" means the Taxpayer Relief Act of 1997.
"Trustees" means trustees of the Company.
"TI" means tenant improvements.
"UBTI" means unrelated business taxable income.
"Underwriters" means the underwriters named in this Prospectus.
"Underwriting Agreement" means the underwriting agreement whereby the Company
has agreed to sell to the Underwriters, and each of the Underwriters has sever-
ally agreed to purchase, a certain number of Common Shares as set forth
therein.
"Units" means limited partnership interests in the Operating Partnership.
"UPREIT" means the structure of the Company as a REIT that owns all of its
properties through the Operating Partnership.
"Value Test" means 5% of the value of the Company's total assets in the case of
securities of any one non-government issuer.
"Voting Stock Test" means 10% of the outstanding voting securities of any one
such issuer.
"White Paper" means the White Paper on Funds from Operations approved by the
Board of Governors of NAREIT in March 1995.
"Workspace" means light assembly and Flex/R&D.
104
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CABOT INDUSTRIAL TRUST
Pro Forma Condensed Combined Financial Statements (unaudited):
Pro Forma Condensed Combined Financial Statements...................... 37
Pro Forma Condensed Combined Balance Sheet as of June 30, 1997......... 38
Pro Forma Condensed Combined Statement of Operations for the six months
ended June 30, 1997................................................... 39
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1996..................................................... 40
Notes to Pro Forma Condensed Combined Financial Statements............. 41
CABOT PARTNERS LIMITED PARTNERSHIP
Report of Independent Public Accountants................................. F-3
Balance Sheets as of June 30, 1997 (unaudited), December 31, 1996 and
1995.................................................................... F-4
Statements of Operations for the six months ended June 30, 1997 and 1996
(unaudited), and the years ended December 31, 1996, 1995 and 1994....... F-5
Statements of Partners' Capital for the six months ended June 30, 1997
(unaudited) and the years ended December 31, 1996, 1995 and 1994........ F-6
Statements of Cash Flows for the six months ended June 30, 1997 and 1996
(unaudited), and the years ended December 31, 1996, 1995 and 1994....... F-7
Notes to Financial Statements............................................ F-8
EXISTING INVESTORS PROPERTY GROUP
Report of Independent Public Accountants................................. F-11
Combined Balance Sheets as of June 30, 1997 (unaudited), December 31,
1996 and 1995........................................................... F-12
Combined Statements of Income for the six months ended June 30, 1997 and
1996 (unaudited), and the years ended December 31, 1996, 1995 and 1994.. F-13
Combined Statements of Owners' Equity for the six months ended June 30,
1997 (unaudited) and the years ended December 31, 1996, 1995 and 1994... F-14
Combined Statements of Cash Flows for the six months ended June 30, 1997
and 1996 (unaudited), and the years ended December 31, 1996, 1995 and
1994.................................................................... F-15
Notes to Combined Financial Statements................................... F-16
Schedule III -- Real Estate and Accumulated Depreciation as of December
31, 1996................................................................ F-21
NEW INVESTORS PROPERTY GROUP
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
Report of Independent Accountants........................................ F-25
Combined Statement of Assets and Liabilities as of June 30, 1997
(unaudited), December 31, 1996 and 1995................................. F-26
Combined Statements of Income for the six months ended June 30, 1997 and
1996 (unaudited), and the years ended December 31, 1996, and 1995....... F-27
Combined Statement of Changes in Net Assets for the six months ended June
30, 1997 (unaudited), and the years ended December 31, 1996, and 1995... F-28
Combined Statement of Cash Flows for the six months ended June 30, 1997
and 1996 (unaudited), and the years ended December 31, 1996, and 1995... F-29
Notes to Combined Financial Statements................................... F-30
KNICKERBOCKER PROPERTIES, INC. II
Report of Independent Accountants........................................ F-33
Combined Balance Sheets as of June 30, 1997 (unaudited), December 31,
1996 and 1995........................................................... F-34
Combined Statements of Operations for the six months ended June 30, 1997
and 1996 (unaudited), and the years ended December 31, 1996, and 1995... F-35
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Combined Statements of Stockholders' Equity for the six months ended
June 30, 1997 (unaudited), and the years ended December 31, 1996, and
1995................................................................... F-36
Combined Statements of Cash Flows for the six months ended June 30, 1997
and 1996 (unaudited), and the years ended December 31, 1996, and 1995.. F-37
Notes to Combined Financial Statements.................................. F-38
PENNSYLVANIA PUBLIC SCHOOL EMPLOYES' RETIREMENT SYSTEM INDUSTRIAL
PROPERTIES PORTFOLIO
Report of Independent Auditors'......................................... F-40
Combined Balance Sheets as of June 30, 1997 (unaudited), December 31,
1996 and 1995.......................................................... F-41
Combined Statements of Operations for the six months ended June 30, 1997
and 1996 (unaudited), and the years ended December 31, 1996, and 1995.. F-42
Combined Statements of Owner's Equity for the six months ended June 30,
1997 (unaudited), and the years ended December 31, 1996, and 1995...... F-43
Combined Statements of Cash Flows for the six months ended June 30, 1997
and 1996 (unaudited), and the years ended December 31, 1996, and 1995.. F-44
Notes to Combined Financial Statements.................................. F-45
Schedule III -- Combined Real Estate and Accumulated Depreciation as of
December 31, 1996...................................................... F-48
PRUDENTIAL PROPERTIES GROUP
Report of Independent Public Accountants................................ F-49
Combined Balance Sheets as of June 30, 1997 (unaudited), December 31,
1996 and 1995.......................................................... F-50
Combined Statements of Operations for the six months ended June 30, 1997
and 1996 (unaudited), and the years ended December 31, 1996, and 1995.. F-51
Combined Statements of Owners' Equity for the six months ended June 30,
1997 (unaudited), and the years ended December 31, 1996, and 1995...... F-52
Combined Statements of Cash Flows for the six months ended June 30, 1997
and 1996 (unaudited), and the years ended December 31, 1996, and 1995.. F-53
Notes to Combined Financial Statements.................................. F-54
Schedule III -- Real Estate and Accumulated Depreciation as of December
31, 1996............................................................... F-57
WEST COAST INDUSTRIAL, LLC
Report of Independent Public Accountants ............................... F-58
Statements of Revenue and Certain Expenses for the six months ended June
30, 1997 (unaudited), and the year ended December 31, 1996............. F-59
Notes to Statements of Revenue and Certain Expenses..................... F-60
ACQUISITIONS SUBSEQUENT TO JUNE 30, 1997
HERROD ASSOCIATES
Report of Independent Certified Public Accountants...................... F-61
Statement of Revenue and Certain Expenses for the six months ended June
30, 1997 and 1996 (unaudited), and the year ended December 31, 1996.... F-62
Notes to Statement of Revenue and Certain Expenses...................... F-63
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Cabot Partners Limited Partnership:
We have audited the accompanying balance sheets of Cabot Partners Limited Part-
nership as of December 31, 1996 and 1995, and the related statements of opera-
tions, partners' capital, and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the responsi-
bility of the management of the Partnership. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cabot Partners Limited Part-
nership as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts March 20, 1997 (except with respect to certain matters
discussed in Note 6, as to which the date is October 13, 1997)
F-3
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------
DECEMBER 31,
JUNE 30, ---------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ 716 $ 1,709 $ 1,382
Accounts receivable 1,946 1,637 942
Investments 830 836 1,026
Cost of Investment Advisory Contracts
acquired, net of accumulated amortization
of $ 2,667, $2,425 and $2,034,
respectively 1,487 1,729 2,121
Other assets 102 164 157
--------- --------- ---------
Total Assets $ 5,081 $ 6,075 $ 5,628
========= ========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accrued compensation $ 560 $ 385 $ 457
Accrued liabilities 143 100 106
--------- --------- ---------
Total Liabilities 703 485 563
--------- --------- ---------
Commitments and Contingencies
Partners' Capital 4,378 5,590 5,065
--------- --------- ---------
Total Liabilities and Partners' Capital $ 5,081 $ 6,075 $ 5,628
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- --------------------------------
1997 1996 1996 1995 1994
------------ ------------ --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Advisory fees $ 4,381 $ 3,317 $ 7,871 $ 6,482 $ 4,149
Other income 32 7 37 34 10
------------ ------------ --------- --------- ---------
Total Revenues 4,413 3,324 7,908 6,516 4,159
------------ ------------ --------- --------- ---------
EXPENSES
Compensation 2,133 1,826 3,887 3,416 2,553
Other general and
administrative 1,190 1,048 2,001 1,653 1,714
Depreciation and amor-
tization 255 210 419 453 474
------------ ------------ --------- --------- ---------
Total Expenses 3,578 3,084 6,307 5,522 4,741
------------ ------------ --------- --------- ---------
Income (loss) before
income (loss) from
unconsolidated
subsidiary 835 240 1,601 994 (582)
Equity in income (loss)
from unconsolidated
subsidiary 22 (44) (7) 63 46
------------ ------------ --------- --------- ---------
Net income (loss) $ 857 $ 196 $ 1,594 $ 1,057 $ (536)
============ ============ ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) ANDTHE YEARS ENDED DECEMBER
31, 1996, 1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------
GENERAL LIMITED PARTNERS PARTNERS'
PARTNER CLASS A CLASS B CAPITAL
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Partners' Capital, January 1,
1994 $ -- $ 4,544 $ -- $ 4,544
Net loss for the year ended
December 31, 1994 -- (536) -- (536)
--------- --------- --------- ---------
Partners' Capital, December 31,
1994 -- 4,008 -- 4,008
Net income for the year ended
December 31, 1995 -- 1,057 -- 1,057
--------- --------- --------- ---------
Partners' Capital, December 31,
1995 -- 5,065 -- 5,065
Net income for the year ended
December 31, 1996 10 1,194 390 1,594
Distributions -- (1,069) -- (1,069)
--------- --------- --------- ---------
Partners' Capital, December 31,
1996 10 5,190 390 5,590
Net income for the six months
ended June 30, 1997
(unaudited) -- 857 -- 857
Distributions (unaudited) (10) (1,669) (390) (2,069)
--------- --------- --------- ---------
Partners' Capital, June 30,
1997 (unaudited) $ -- $ 4,378 $ -- $ 4,378
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 857 $ 196 $ 1,594 $ 1,057 $ (536)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization 255 210 419 453 474
Unrealized equity in
loss (income) of
investment (22) 44 7 (63) (46)
(Increase) Decrease in
accounts receivable (309) (387) (695) (315) 183
Increase (Decrease) in
accrued liabilities 221 135 (70) 265 (59)
(Decrease) Increase in
accounts payable (3) (16) (9) 6 (28)
Decrease (Increase) in
other assets 49 56 37 (52) 0
<CAPTION>
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) operating
activities 1,048 238 1,283 1,351 (12)
<CAPTION>
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INVESTING ACTIVITIES
Dividends received 28 33 183 77 50
Purchase of furniture,
fixtures and equipment 0 (36) (50) (63) 0
Additional cost-basis
investments 0 (10) (20) (20) (10)
<CAPTION>
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by
(used in) investing
activities 28 (13) 113 (6) 40
<CAPTION>
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Distribution to
partners (2,069) (1,069) (1,069) -- --
<CAPTION>
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net increase (decrease)
in cash and cash
equivalents (993) (844) 327 1,345 28
Cash and cash equiva-
lents, beginning of
period 1,709 1,382 1,382 37 9
<CAPTION>
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equiva-
lents, end of period $ 716 $ 538 $ 1,709 $ 1,382 $ 37
<CAPTION>
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. ORGANIZATION
Cabot Partners Limited Partnership (the Partnership), a Massachusetts limited
partnership, was formed as of July 11, 1990 to provide a variety of real estate
investment advisory and management services, primarily to a small number of
pension and profit-sharing plans and other institutional investors. Nine
investors represented 77% of fee revenues for 1996, eleven investors repre-
sented 81% of fee revenues for 1995 and nine investors represented 56% of fee
revenues for 1994.
The Partnership has two classes of limited partners. The Class A limited part-
ners contributed cash on a disproportionate basis to their ownership interest
and are entitled to a cumulative guaranteed return on their Adjusted Capital
Contributions, as defined, of 10% through December 31, 1995 and 5% thereafter,
payable only out of available cash. In addition, the Class A limited partners
are entitled to a 5% return of their Adjusted Capital Contributions prior to
distributions of available cash to all the partners in accordance with their
ownership interest. As of December 31, 1996, the cumulative unpaid and unrecog-
nized return was $3,978.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
No provision for federal and state income taxes has been recorded relating to
the Partnership, as the partners report their respective shares of the net tax-
able income on their individual tax returns. The tax basis of assets and lia-
bilities does not significantly differ from their historical cost basis.
Furniture, Fixtures and Equipment
Furniture and equipment additions are recorded at cost and are depreciated over
an estimated useful life of five years. Fixtures include leasehold improvements
that are recorded at cost and amortized over the shorter of their useful life
or the remaining lease term.
Cost of Investment Advisory Contracts Acquired
The investment advisory contracts acquired are recorded at their fair market
value at the date of acquisition, based on independent appraisals, and are
being amortized over their estimated lives, which range from eight to sixteen
years.
Allocation of Profits and Losses
Income and losses have been allocated to the partners in accordance with the
provisions of the partnership agreement.
Cash Equivalents
At December 31, 1996, the Partnership had invested excess funds in money market
mutual funds, which have an original maturity of less than three months. For
purposes of the statement of cash flows, this investment has been considered a
cash equivalent.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amounts reported on the accompanying balance sheets for cash and
cash equivalents, receivables, accounts payable and accrued expenses approxi-
mate fair value, due to the short-term nature of these investments.
3. INVESTMENTS
The Partnership owns a 1% managing general partnership interest in a real
estate operating company, CP Private Partners, L.P.-I (Private Partners), and
accounts for this investment under the equity method. Under this method of
accounting, the Partnership's pro rata share of Private Partners' income (loss)
is recorded each year as an increase (decrease) in the carrying value of its
investment, and any distributions received are recorded as decreases in the
carrying value.
F-8
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
The condensed unaudited historical cost balance sheet of Private Partners at
December 31, 1996 and December 31, 1995 is as follows:
<TABLE>
<CAPTION>
---------------------
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 186 $ 51
Real estate assets, net 58,776 80,537
Other assets 18,203 25,402
<CAPTION>
--------- ---------
<S> <C> <C>
Total Assets $ 77,165 $ 105,990
<CAPTION>
========= =========
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities $ 453 $ 605
Note payable -- 9,665
<CAPTION>
--------- ---------
<S> <C> <C>
Total Liabilities 453 10,270
<CAPTION>
--------- ---------
<S> <C> <C>
PARTNERS' CAPITAL
The Partnership 767 957
Other Partners 75,945 94,763
<CAPTION>
--------- ---------
<S> <C> <C>
Total Partners' Capital 76,712 95,720
<CAPTION>
--------- ---------
<S> <C> <C>
Total Liabilities and Partners' Capital $ 77,165 $ 105,990
<CAPTION>
========= =========
</TABLE>
The difference between the Partnership's share of the historical partners' cap-
ital and the investment on the balance sheet is due to stating the investment
at fair market value at the time of purchase.
The condensed unaudited historical cost income statement of Private Partners
for the years ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
---------------------------------
YEARS ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Sale of real estate assets $ 20,817 $ -- $ --
Rental revenues 11,726 12,778 11,344
Cost of real estate sold (20,411) -- --
Note receivable reduction (7,688) -- --
Operating expenses (5,163) (6,483) (6,761)
<CAPTION>
--------- --------- ---------
<S> <C> <C> <C>
Net (loss) income $ (719) $ 6,295 $ 4,583
<CAPTION>
========= ========= =========
<S> <C> <C> <C>
Dividends paid $ 18,292 $ 7,700 $ 5,000
<CAPTION>
========= ========= =========
<S> <C> <C> <C>
The Partnership's share of:
Net (loss) income $ (7) $ 63 $ 46
<CAPTION>
========= ========= =========
<S> <C> <C> <C>
Dividends paid $ 183 $ 77 $ 50
<CAPTION>
========= ========= =========
</TABLE>
F-9
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
4. MINIMUM FUTURE LEASE OBLIGATIONS
Minimum future lease obligations under noncancelable operating leases for each
of the next five years ending December 31 and thereafter are as follows:
<TABLE>
<CAPTION>
---------
<S> <C>
1997 $ 261,625
1998 294,907
1999 310,833
2000 323,336
2001 309,864
Thereafter 0
</TABLE>
5. RELATED PARTY TRANSACTIONS
Under two separate agreements, the Partnership provides acquisition, asset man-
agement and property management services to a partnership and a company sepa-
rately controlled by two Class A limited partners. The agreements are cancel-
able by either party with 30 days notice. After a recent amendment, one agree-
ment provides for annual fixed fees of $158,172. The other agreement provides
for an acquisition fee of .25% of acquisition cost and an asset management fee
of 5% of net operating income. The Partnership received acquisition fees of
$345,000 for the six months ended June 30, 1997, and asset management fees of
$143,426, $153,172 and $70,200 for the six months ended June 30, 1997 and the
years ended December 31, 1996 and 1995, respectively.
6. SUBSEQUENT EVENT
Under the terms of the investment advisory agreements, investors have the right
to terminate the Partnership as advisor with 30 days notice. In addition, a
significant portion of the Partnership's assets under management may be trans-
ferred to other advisors or sold as a part of the portfolio's investment strat-
egy.
Subsequent to June 30, 1997, but prior to the end of 1997, all the properties
of two portfolios are expected to be sold. These portfolios accounted for asset
management fees of $599 and $760 for the six months ended June 30, 1997 and
1996, respectively, and $1,506, $1,075 and $703 for the years ended December
31, 1996, 1995 and 1994, respectively. Management believes the loss of these
revenues will not have a material adverse effect on the Partnership's financial
position.
Under the provisions of the Contribution Agreement executed by each Contrib-
uting Investor, Cabot Partners will contribute its Advisory Contracts and cer-
tain of its other net assets to Cabot Industrial Trust (the Company) or a sub-
sidiary partnership, Cabot Industrial Properties, L.P. (the Operating Partner-
ship) and will receive Common Shares from the Company or Units from the Oper-
ating Partnership. The remainder of the net assets will be distributed to its
partners. The consummation of these proposed transactions is subject to the
completion of an offering of Common Shares of the Company to the public and
various other conditions of the Contribution Agreement. It is anticipated that
the Company will seek to qualify as a real estate investment trust under the
Internal Revenue Code of 1986, as amended. The impact of these proposed trans-
actions is not reflected in the accompanying financial statements.
It is anticipated that the cumulative unpaid and unrecognized return discussed
in Note 1 will be settled through the distribution of Common Shares or Units to
be received in conjunction with the transactions.
F-10
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the Existing Investors Property Group:
We have audited the accompanying combined balance sheets of the Existing
Investors Property Group, as defined in Note 1, as of December 31, 1996 and
1995, and the related combined statements of income, owners' equity and cash
flows for each of the three years in the period ended December 31, 1996. These
combined financial statements are the responsibility of the management of the
Existing Property Investors. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Existing
Investors Property Group at December 31, 1996 and 1995, and the combined
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic com-
bined financial statements taken as a whole. The schedule listed in the index
of financial statements is presented for the purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic finan-
cial statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts September 2, 1997
F-11
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------
DECEMBER 31,
JUNE 30, ------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Rental properties $345,537 $336,836 $301,059
Accumulated depreciation (35,825) (32,528) (26,430)
<CAPTION>
----------- -------- --------
<S> <C> <C> <C>
309,712 304,308 274,629
Cash and Cash Equivalents 1,896 2,423 2,598
Rents and other receivables, net of allowance
for doubtful accounts of $258, $339 and
$294, respectively 5,457 4,810 6,041
Restricted cash 3 71 353
Lease acquisition costs, net of accumulated
amortization of $6,691, $5,721 and $4,505,
respectively 6,639 6,808 5,307
Other assets 429 312 409
<CAPTION>
----------- -------- --------
<S> <C> <C> <C>
Total Assets $324,136 $318,732 $289,337
<CAPTION>
=========== ======== ========
<S> <C> <C> <C>
LIABILITIES AND OWNERS' EQUITY
Mortgage debt $ 18,872 $ 19,292 $ 20,083
Due to Related Parties 3,647 3,668 3,407
Accounts payable and accrued expenses 4,228 3,608 3,606
Other liabilities 930 878 612
<CAPTION>
----------- -------- --------
<S> <C> <C> <C>
Total Liabilities 27,677 27,446 27,708
<CAPTION>
----------- -------- --------
<S> <C> <C> <C>
Contingencies
Owners' Equity 296,459 291,286 261,629
<CAPTION>
----------- -------- --------
<S> <C> <C> <C>
Total Liabilities and Owners' Equity $324,136 $318,732 $289,337
<CAPTION>
=========== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-12
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
----------------------------------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- --------------------------
1997 1996 1996 1995 1994
------------ ------------ -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Rental $ 15,571 $ 14,594 $ 29,736 $ 24,691 $ 22,552
Tenant reimbursements 2,933 2,310 4,917 3,759 3,473
Other rental 372 222 334 199 2,035
Interest 46 68 193 145 149
<CAPTION>
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Revenues 18,922 17,194 35,180 28,794 28,209
<CAPTION>
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
EXPENSES
Real estate taxes 2,735 2,301 5,037 3,979 3,769
Management fees 1,104 884 1,889 1,522 1,306
Property operating costs 268 388 755 648 563
Maintenance and repairs 231 201 504 393 502
Grounds care 142 188 298 218 189
Professional services 157 113 214 194 158
Insurance 153 96 210 151 78
Other 60 170 453 231 267
Interest 936 973 1,931 2,097 2,082
Depreciation and amortiza-
tion 4,323 3,919 7,966 7,118 6,606
<CAPTION>
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Total Expenses 10,109 9,233 19,257 16,551 15,520
<CAPTION>
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income before gain on sale
of properties 8,813 7,961 15,923 12,243 12,689
Gain on sale of properties -- -- -- -- 186
<CAPTION>
------------ ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income $ 8,813 $ 7,961 $ 15,923 $ 12,243 $ 12,875
<CAPTION>
============ ============ ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-13
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND THE YEARS ENDED DECEMBER 31, 1996,
1995 AND 1994
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------
<S> <C>
Owners' Equity, January 1, 1994 $ 220,621
Contributions 10,005
Distributions (30,298)
Net income for the year ended December 31, 1994 12,875
<CAPTION>
---------
<S> <C>
Owners' Equity, December 31, 1994 213,203
Contributions 50,326
Distributions (14,143)
Net income for the year ended December 31, 1995 12,243
<CAPTION>
---------
<S> <C>
Owners' Equity, December 31, 1995 261,629
Contributions 35,228
Distributions (21,494)
Net income for the year ended December 31, 1996 15,923
<CAPTION>
---------
<S> <C>
Owners' Equity, December 31, 1996 291,286
Contributions (unaudited) 7,203
Distributions (unaudited) (10,843)
Net income for the six months ended June 30, 1997 (unau-
dited) 8,813
<CAPTION>
---------
<S> <C>
Owners' Equity, June 30, 1997 (unaudited) $ 296,459
<CAPTION>
=========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-14
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- ---------------------------------
1997 1996 1996 1995 1994
------------ ------------ --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,813 $ 7,961 $ 15,923 $ 12,243 $ 12,875
Adjustments to reconcile
net income to net cash
provided by operating
activities--
Depreciation and amorti-
zation adjustments 4,323 3,919 7,966 7,118 6,606
Rent normalization
adjustments (154) (400) (519) (993) (452)
Gain on sale of real
estate -- -- -- -- (186)
Changes in assets--(in-
crease) decrease--
Rents and other receiv-
ables (493) 1,183 1,750 196 (1,071)
Restricted cash 68 (22) 282 265 (268)
Other assets (168) (73) 25 184 (83)
Changes in liabilities--
increase (decrease)--
Accounts payable and
accrued liabilities 620 (92) 2 705 260
Other liabilities 52 83 266 (317) (129)
<CAPTION>
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net cash provided by
operations 13,061 12,559 25,695 19,401 17,552
<CAPTION>
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INVESTING ACTIVITIES
Property acquisitions (6,207) (10,841) (33,485) (49,677) (9,240)
Payments for capital
expenditures and
lease acquisition costs (3,300) (1,811) (5,581) (4,038) (3,545)
Proceeds on the sale of
real estate -- -- -- -- 14,841
Deferred financing costs -- (8) (8) (153) (19)
<CAPTION>
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net cash (used in)
provided by investing
activities (9,507) (12,660) (39,074) (53,868) 2,037
<CAPTION>
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
FINANCING ACTIVITIES
Capital contributions 7,203 11,546 35,228 50,326 10,005
Distributions (10,843) (11,427) (21,494) (14,143) (30,298)
Mortgage loan proceeds -- -- -- 10,865 14,950
Repayments of mortgage
loans (420) (387) (791) (11,390) (14,892)
Advances from (repayments
to) related
parties, net (21) 177 261 22 639
<CAPTION>
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net cash (used in) pro-
vided by
financing activities (4,081) (91) 13,204 35,680 (19,596)
<CAPTION>
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net (decrease) increase
in Cash and Cash
Equivalents (527) (192) (175) 1,213 (7)
Cash and Cash
Equivalents, Beginning
of Period 2,423 2,598 2,598 1,385 1,392
<CAPTION>
------------ ------------ --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash and Cash Equiva-
lents, End of Period $ 1,896 $ 2,406 $ 2,423 $ 2,598 $ 1,385
<CAPTION>
============ ============ ========= ========= =========
<S> <C> <C> <C> <C> <C>
Supplemental Information
Interest paid during the
period $ 809 $ 868 $ 1,730 $ 1,909 $ 1,927
<CAPTION>
============ ============ ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-15
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. BUSINESS AND ORGANIZATION
Existing Investors Property Group (EIP Group) is not a legal entity but rather
a combination of all the assets, liabilities and operations for 67 industrial
buildings that are owned by certain real estate title holding corporations,
general partnerships and a retirement plan. EIP Group properties are located in
selected markets in the United States and are managed, leased and renovated by
Cabot Partners Limited Partnership (Cabot Partners), the investment manager,
under separate investment management agreements with each owner. The accompa-
nying financial statements include all of the direct and indirect costs of the
business of EIP Group. Refer to Schedule III for a detailed listing of the
industrial properties included in the financial statements. A summary of EIP
Group is as follows:
<TABLE>
<CAPTION>
----------------------
NUMBER OF
BUILDINGS SQUARE FEET
--------- -----------
<S> <C> <C>
PROPERTY OWNER
CP Investment Properties, Inc. 45 5,179,162
CP REPROP, Corp. 7 1,537,200
Properties owned by two real estate title holding
companies and a limited partnership owned by the New
York State Teachers' Retirement System 7 1,245,007
Six general partnerships owned by C-M Holdings Limited
Partnership 7 895,169
State of Wisconsin Investment Board 1 212,300
<CAPTION>
--------- -----------
<S> <C> <C>
Total 67 9,068,838
<CAPTION>
========= ===========
</TABLE>
2. FORMATION TRANSACTION
Under the provisions of the Contribution Agreement executed by each property
owner, EIP Group will contribute all of its properties to Cabot Industrial
Trust (the Company) or a subsidiary partnership, Cabot Industrial Properties,
L.P. (the Operating Partnership) and will receive common shares from the Com-
pany or units from the Operating Partnership. The consummation of these pro-
posed transactions is subject to the completion of an offering of common shares
of the Company to the public and various other conditions of the Contribution
Agreement. It is anticipated that the Company will seek to qualify as a real
estate investment trust under the Internal Revenue Code of 1986, as amended.
The impact of these proposed transactions is not reflected in the accompanying
combined financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination
The accompanying financial statements have been presented on a combined basis,
at historical cost, because EIP Group is under the common management of Cabot
Partners through investment advisory agreements. All significant intercompany
transactions and balances have been eliminated in combination.
The combined financial statements and information included in these notes to
the combined financial statements as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 are unaudited. In the opinion of management, such
combined financial statements and information reflect all adjustments necessary
for a fair presentation of the results of the respective interim periods. All
such adjustments are of a normal, recurring nature.
F-16
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Rental Properties
Rental properties, which consist of industrial warehouses, are stated at cost.
Expenditures for ordinary maintenance and repairs are expensed to operations as
incurred. Significant renovations and improvements that improve or extend the
useful life of the assets are capitalized. Except for amounts attributed to
land, rental property and improvements are depreciated over their estimated
useful lives using the straight-line method. The estimated useful lives by
asset category are as follows:
--------
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE
--
<S> <C>
ASSET CATEGORY
Buildings and improvements 10 - 40
years
Tenant improvements Life of
lease
</TABLE>
Properties consisted of the following at June 30, 1997, December 31, 1996 and
December 31, 1995:
<TABLE>
<CAPTION>
-------------------------------
JUNE 30, DECEMBER 31,
----------- -------------------
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Land $ 75,625 $ 74,939 $ 69,602
Buildings and improvements 269,912 261,897 231,457
<CAPTION>
----------- --------- ---------
<S> <C> <C> <C>
Total $ 345,537 $ 336,836 $ 301,059
<CAPTION>
=========== ========= =========
</TABLE>
EIP Group adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of, on January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Adoption of this
statement did not have an impact on EIP Group's financial position, results of
operations or liquidity.
Lease Acquisition Costs
Capitalized lease acquisition costs are recorded at cost. These costs are amor-
tized over the respective lives of the leases. Unamortized costs are charged to
expense in the event of any early termination of the lease.
Loan Costs
Capitalized loan costs are recorded at cost and are included in other assets.
These costs are amortized over the term of the respective financings on a
straight-line basis. Loan costs, net of accumulated amortization of $304,000,
$253,000 and $173,000 as of June 30, 1997, December 31, 1996 and 1995, respec-
tively, were approximately $143,000, $194,000 and $266,000, respectively.
Rental Income
All leases are classified as operating leases. Certain leases provide for min-
imum rent payments that increase during the term of the lease and tenant occu-
pancy during periods for which no rent is due. EIP Group records rental income
for the full term of each lease on a straight-line basis. As of June 30, 1997,
December 31, 1996 and 1995, the receivables from tenants, net of reserves,
which EIP Group expects to collect over the remaining life of these leases
rather than currently, were approximately $4,252,000, $4,098,000 and
$3,579,000, respectively (Deferred Rent). The amounts included in rental income
for the six months ended June 30, 1997 and 1996, and for the years ended
December 31, 1996, 1995 and 1994, which are not currently due, were approxi-
mately $154,000, $400,000, $519,000, $993,000 and $452,000, respectively.
Deferred Rent is not recognized for income tax purposes until received.
Cash Equivalents
EIP Group invests excess funds in short-term investments with original maturi-
ties of less than three months. For the purpose of the statements of cash
flows, all such investments are considered cash equivalents.
F-17
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
Restricted Cash
Restricted cash represents amounts committed for security deposits and utility
deposits. Certain of these amounts may be reduced upon the fulfillment of cer-
tain obligations.
Fair Value of Financial Instruments
Management believes that the carrying basis of EIP Group mortgage loans approx-
imated their respective fair market values as of June 30, 1997 and December 31,
1996 and 1995. The current value of debt was computed by discounting the pro-
jected debt service payments for each loan based on the spread between the
market rate and the effective rate, including the amortization of loan origina-
tion costs, for each year. In addition, the carrying values of cash and cash
equivalents, restricted cash, escrow deposits, rents receivable (excluding
Deferred Rent), accounts payable and accrued expenses are reasonable estimates
of their fair value.
Income Taxes
The properties are owned in tax-exempt real estate title holding companies,
general partnerships or directly by qualified pension plans. Since the taxable
operating results of EIP Group are either included in the income tax returns of
tax-exempt entities or the owners, no provision for state and federal income
taxes has been reflected in these combined financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
4. MORTGAGE DEBT
As of June 30, 1997, December 31, 1996 and 1995, EIP Group had outstanding
fixed and variable rate mortgage indebtedness as follows:
<TABLE>
<CAPTION>
---------------------------------
JUNE 30, DECEMBER 31,
1997 1996 1995
----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Three mortgage loans at fixed interest rate
of 8.375% due December 1, 1997 $13,509 $13,813 $14,383
Three mortgage loans at fixed interest rates
ranging from 7.95% to 8.05% due
January 1, 2003 5,363 5,479 5,700
<CAPTION>
----------- --------- ---------
<S> <C> <C> <C>
Total mortgage loans payable $18,872 $19,292 $20,083
<CAPTION>
=========== ========= =========
</TABLE>
Payments on mortgage debt are due in monthly installments of principal and
interest. The weighted average interest rate was approximately 8.3% as of June
30, 1997, December 31, 1996 and 1995. The mortgage loans are secured by deeds
of trust on six properties and all of the fixed interest rate loans are subject
to prepayment penalties based on a yield maintenance formula in the event of
early repayment.
Scheduled payments of principal on mortgage debt for each of the next five
years and thereafter as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
-------
<S> <C>
1997 $14,052
1998 259
1999 280
2000 304
2001 329
Thereafter 4,068
</TABLE>
F-18
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
5. FUTURE MINIMUM RENTS
Future minimum rental receipts due on noncancellable operating leases for the
industrial properties as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
-------
<S> <C>
1997 $28,269
1998 25,202
1999 21,454
2000 16,644
2001 13,051
Thereafter 35,423
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through and escalation provisions in the
leases. EIP Group is subject to the usual business risks associated with the
collection of the above scheduled rents.
6. TRANSACTIONS WITH THE INVESTMENT MANAGER
Under the provisions of the separate investment management agreements, EIP
Group is obligated to pay Cabot Partners acquisition, asset management and
property management fees. Acquisition fees are payable based on a percentage of
acquisition cost (ranging from .75 to 1.50%), asset management fees are payable
based on a percentage (ranging from .4 to .6%) of the properties' fair market
value or a percentage (ranging from 6 to 8.75%) of the properties' net oper-
ating income and property management fees are payable on certain properties
based on a percentage (ranging from 2.25 to 2.5%) of gross receipts. Fees
incurred under the agreements were as follows:
<TABLE>
--------------------------------------------------------------
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------------------- -----------------------------------
1997 1996 1996 1995 1994
---------------- ---------------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FEE INCURRED
Asset management $ 709 $ 595 $ 1,244 $ 981 $ 769
Acquisition 62 50 222 504 100
Property management 305 283 482 437 503
</TABLE>
At June 30, 1997, December 31, 1996 and December 31, 1995, total fees payable
to Cabot Partners were $383, $343 and $311, respectively.
Acquisition fees are capitalized to Rental Properties in the accompanying
combined balance sheets and property and asset management fees are expensed as
incurred and included in management fees in the accompanying combined
statements of operations.
7. DUE TO RELATED PARTIES
Four properties held in general partnerships incurred capital expenditures,
leasing costs and operating deficits that were funded through cash advances
from the general partners. The advances accrue interest at prime plus 1.5% (10%
as of June 30, 1997) and are payable out of cash flows after third-party debt
service of the property. Interest expense related to the advances was $299,
$314 and $265 for the years ended December 31, 1996, 1995 and 1994, respec-
tively, and $145 and $149 for the six months ended June 30, 1997 and 1996,
respectively.
F-19
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
8. COMMITMENTS AND CONTINGENCIES
Concentration of Credit Risk
EIP Group maintains its cash and cash equivalents at financial institutions.
The combined account balances at each institution periodically exceed FDIC
insurance coverage, and, as a result, there is a concentration of credit risk
related to amounts on deposit in excess of FDIC insurance coverage. Management
of EIP Group believes the risk is not significant.
Environmental
EIP Group, as an owner of real estate, is subject to various environmental
laws of federal and local governments. Compliance by EIP Group with existing
laws has not had a material adverse effect on EIP Group's financial condition
and results of operations, and management does not believe it will have such
an impact in the future. However, EIP Group cannot predict the impact of new
or changed laws or regulations on its current properties or on properties that
it may acquire in the future.
Litigation
Management of EIP Group does not believe there is any litigation threatened
against it other than routine litigation arising out of the ordinary course of
business, some of which is expected to be covered by liability insurance, none
of which is expected to have a material adverse effect on the operating
results or financial position of EIP Group.
Commitments
Subsequent to June 30, 1997, EIP Group has acquired, or has executed commit-
ments to acquire, the following industrial properties:
<TABLE>
<CAPTION>
-----------------------------------------------------
ACQUISITION
BUILDING TYPE SQUARE FEET PRICE
------------------- ----------- -----------
<S> <C> <C> <C>
PROPERTY LOCATION
Herrod Boulevard, So.
Brunswick, NJ Bulk Distribution 418,000 $18,100
Blue Ash, OH Bulk Distribution
and Workspace 482,942 15,371
Remington Street,
Bolingbrook, IL Bulk Distribution 212,333 8,500
Ambassador Road,
Naperville, IL Bulk Distribution 203,500 7,986
Luna Road, Carrollton,
TX Bulk Distribution 205,400 7,400
South Rockefeller
Avenue, Ontario, CA Bulk Distribution 164,140 5,680
Huntwood Avenue,
Hayward, CA Workspace 62,031 4,232
Diplomat Drive,
Carrollton, TX Workspace 56,535 2,500
<CAPTION>
----------- -----------
<S> <C> <C> <C>
1,804,881 $69,769
<CAPTION>
=========== ===========
</TABLE>
Pursuant to the Contribution Agreement, EIP Group will contribute the proper-
ties to the Company or the Operating Partnership and will receive common
shares from the Company or units from the Operating Partnership.
F-20
<PAGE>
SCHEDULE III
EXISTING INVESTORS PROPERTY GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
COSTS
CAPITALIZED GROSS AMOUNT
SUBSEQUENT CARRIED AS OF
INITIAL COST TO ACQUISITION DECEMBER 31, 1996
--------------------- ------------------ ------------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND
PROPERTY NAME(8) LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL(7)
- ---------------- -------- ------------ ------- ------------- ---- ------------- ------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
South 63rd
Avenue Phoenix, AZ -- $ 528 $ 3,953 -- -- $ 528 $ 3,953 $ 4,481
North 104th
Avenue Tolleson, AZ -- 651 5,948 -- -- 651 5,948 6,599
South 84th
Avenue Tolleson, AZ -- 553 5,116 -- $ 187 553 5,303 5,856
Brisbane
Industrial
Park(1) Brisbane, CA -- 10,519 17,011 -- 409 10,519 17,420 27,939
South Vintage
Avenue(2) Ontario, CA -- 2,896 15,836 -- 92 2,896 15,928 18,824
East Jurupa
Street Ontario, CA -- 409 2,217 -- -- 409 2,217 2,626
Santa Anita
Avenue Rancho Cucamonga, CA -- 1,200 6,491 -- -- 1,200 6,491 7,691
East Dyer Road Santa Ana, CA -- 8,160 10,432 -- 2,162 8,160 12,594 20,754
Pepes Farm Road Milford, CT -- 1,637 8,787 -- 558 1,637 9,345 10,982
Kingspointe
Parkway Orlando, FL -- 600 2,581 -- 6 600 2,587 3,187
West 73rd
Street, Building
1 Bedford Park, IL -- 1,333 4,819 -- 35 1,333 4,854 6,187
West 73rd
Street, Building
2 Bedford Park, IL -- 2,148 8,258 -- 45 2,148 8,303 10,451
West 73rd
Street, Building
3 Bedford Park, IL -- 986 5,395 -- 77 986 5,472 6,458
Harvester Drive Chicago, IL -- 763 5,604 -- 156 763 5,760 6,523
Arthur Avenue Elk Grove, IL -- 2,160 4,777 -- 825 2,160 5,602 7,762
Western Avenue Lisle, IL -- 700 1,922 -- 131 700 2,053 2,753
Mark Street Wood Dale, IL -- 2,844 9,668 -- -- 2,844 9,668 12,512
High Grove Lane Naperville, IL -- 800 3,334 -- 5 800 3,339 4,139
North State Road
#9(9) Howe, IN 4,620 239 6,112 -- 28 239 6,140 6,379
Holton Drive Independence, KY -- 2,100 8,294 -- -- 2,100 8,294 10,394
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------
DEPRECI-
DATE ABLE
ACCUMULATED CONSTRUCTED/ DATE LIVES
PROPERTY NAME(8) DEPRECIATION RENOVATED ACQUIRED IN YEARS(9)
- ---------------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C>
South 63rd
Avenue $ 262 1990 05/27/94 10-40
North 104th
Avenue 15 1995 11/26/96 10-40
South 84th
Avenue 227 1989 04/03/95 10-40
Brisbane
Industrial
Park(1) 2,781 1965 08/10/90 10-40
South Vintage
Avenue(2) 3,127 1986 11/20/89 10-40
East Jurupa
Street 10 1986 11/19/96 10-40
Santa Anita
Avenue 95 1988 06/27/96 10-40
East Dyer Road 2,173 1954/1965 04/24/89 10-40
Pepes Farm Road 1,795 1980 11/07/88 10-40
Kingspointe
Parkway -- 1991 12/30/96 10-40
West 73rd
Street, Building
1 757 1982 09/13/90 10-40
West 73rd
Street, Building
2 1,296 1986 09/13/90 10-40
West 73rd
Street, Building
3 850 1979 09/13/90 10-40
Harvester Drive 1,276 1974 07/05/88 10-40
Arthur Avenue 1,166 1978 06/27/88 10-40
Western Avenue 419 1970/1985 06/27/88 10-40
Mark Street 1,468 1985 12/14/90 10-40
High Grove Lane 166 1994 01/11/95 10-40
North State Road
#9(9) 1,084 1988 12/01/89 10-40
Holton Drive 52 1996 07/6/96 10-40
</TABLE>
F-21
<PAGE>
SCHEDULE III--(CONTINUED)
EXISTING INVESTORS PROPERTY GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
COSTS
CAPITALIZED GROSS AMOUNT
SUBSEQUENT CARRIED AS OF
INITIAL COST TO ACQUISITION DECEMBER 31, 1996
------------------- ------------------ ----------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND
PROPERTY NAME(8) LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL(7)
- ---------------- -------- ------------ ----- ------------- ---- ------------- ----- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Empire Drive Florence, KY -- 212 2,456 -- 57 212 2,513 2,725
Technology Drive Auburn, MA -- 663 2,050 -- 344 663 2,394 3,057
First Avenue Needham, MA -- 2,530 3,120 -- 873 2,530 3,993 6,523
John Hancock
Road(6) Taunton, MA $1,607 257 1,753 -- 133 257 1,886 2,143
Tar Bay Drive Jessup, MD -- 1,415 5,111 -- 13 1,415 5,124 6,539
The Crysen
Center(3) Jessup, MD -- 1,662 4,470 -- 201 1,662 4,671 6,333
Oceano Avenue Jessup, MD -- 1,629 7,940 -- 49 1,629 7,989 9,618
Sysco Court(6) Grand Rapids, MI 2,324 354 2,452 -- -- 354 2,452 2,806
Lakefront Drive Earth City, MO -- 1,320 4,799 -- -- 1,320 4,799 6,119
Industrial Drive
South(6) Gluckstadt, MS 3,742 320 4,325 -- -- 320 4,325 4,645
Old Charlotte
Highway(4)(6) Monroe, NC 5,451 2,311 6,137 -- -- 2,311 6,137 8,448
Reames Road Charlotte, NC -- 365 2,939 -- -- 365 2,939 3,304
Birch Creek Road Bridgeport, NJ -- 24 4,858 $330 -- 354 4,858 5,212
South Middlesex
Avenue, Building
1 Cranbury, NJ -- 1,300 6,817 -- 19 1,300 6,836 8,136
South Middlesex
Avenue, Building
2 Cranbury, NJ -- 1,400 5,470 -- 31 1,400 5,501 6,901
Pierce Street Franklin Township, NJ -- 1,400 5,635 -- 6 1,400 5,641 7,041
International
Street Columbus, OH -- 517 3,537 -- -- 517 3,537 4,054
Twin Creek Drive Columbus, OH -- 705 4,071 -- 8 705 4,079 4,784
Ritter Road(6) Mechanicsburg, PA 1,549 332 1,460 -- -- 332 1,460 1,792
Pilot Drive Memphis, TN -- 1,364 6,334 -- -- 1,364 6,334 7,698
113th Street Arlington, TX -- 506 1,855 -- 18 506 1,873 2,379
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------
DEPRECI-
DATE ABLE
ACCUMULATED CONSTRUCTED/ DATE LIVES IN
PROPERTY NAME(8) DEPRECIATION RENOVATED ACQUIRED YEARS(9)
- ---------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Empire Drive 236 1991 04/06/93 10-40
Technology Drive 436 1973 01/30/89 10-40
First Avenue 636 1961/1992 01/16/90 10-40
John Hancock
Road(6) 316 1986 12/01/89 10-40
Tar Bay Drive 768 1990 12/20/90 10-40
The Crysen
Center(3) 728 1985 08/09/90 10-40
Oceano Avenue 1,290 1987 06/28/90 10-40
Sysco Court(6) 431 1985 12/01/89 10-40
Lakefront Drive 190 1995 06/15/95 10-40
Industrial Drive
South(6) 760 1988 12/01/89 10-40
Old Charlotte
Highway(4)(6) 1,078 1957/1972 12/01/89 10-40
Reames Road 73 1994 02/22/96 10-40
Birch Creek Road 509 1991/1997 10/22/92 10-40
South Middlesex
Avenue, Building
1 341 1989 01/17/95 10-40
South Middlesex
Avenue, Building
2 274 1982 06/02/95 10-40
Pierce Street 141 1984 08/18/95 10-40
International
Street 96 1988 11/21/95 10-40
Twin Creek Drive 212 1989 12/01/94 10-40
Ritter Road(6) 257 1986 12/01/89 10-40
Pilot Drive 212 1987 09/05/95 10-40
113th Street 213 1979 07/20/92 10-40
</TABLE>
F-22
<PAGE>
SCHEDULE III--(CONTINUED)
EXISTING INVESTORS PROPERTY GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
COSTS
CAPITALIZED GROSS AMOUNT
SUBSEQUENT CARRIED AS OF
INITIAL COST TO ACQUISITION DECEMBER 31, 1996
---------------------- ------------------ -------------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND
PROPERTY NAME(8) LOCATION ENCUMBRANCES LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL(7)
- ---------------- -------- ------------ -------- ------------- ---- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Airline Drive,
Building 1 Coppell, TX -- $ 316 $ 1,850 -- -- $ 316 $ 1,850 $ 2,166
Airline Drive,
Building 2 Coppell, TX -- 696 3,491 -- -- 696 3,491 4,187
North Lake Drive Coppell, TX -- 1,165 3,636 $ 68 -- 1,233 3,636 4,869
Oakville
Industrial
Park(5) Alexandria, VA -- 10,552 19,806 -- 2,502 10,552 22,308 32,860
------------ -------- ------------- ---- ------------- -------- ------------- --------
Totals $19,293 $ 74,541 $252,927 $398 $8,970 $ 74,939 $261,897 $336,836
============ ======== ============= ==== ============= ======== ============= ========
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------
DEPRECI-
ABLE
DATE LIVES
ACCUMULATED CONSTRUCTED/ DATE IN
PROPERTY NAME(8) DEPRECIATION RENOVATED ACQUIRED YEARS(9)
- ---------------- ------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Airline Drive,
Building 1 $ 171 1991 04/23/93 10-40
Airline Drive,
Building 2 323 1990 04/23/93 10-40
North Lake Drive 337 1982 05/12/93 10-40
Oakville
Industrial
Park(5) 3,481 1948 02/28/90 10-40
-------
Totals $32,528
========
</TABLE>
- ----
(1) Brisbane Industrial Park consists of fifteen buildings.
(2) South Vintage Avenue consists of two buildings.
(3) The Crysen Center consists of two buildings.
(4) Old Charlotte Highway consists of two buildings.
(5) Oakville Industrial Park consists of six buildings.
(6) The loans encumbering these properties are subject to cross default provi-
sions.
(7) The aggregate cost for federal income tax purposes as of December 31, 1996
was approximately $337 million
(8) All buildings within schedule are industrial properties.
(9) Buildings are depreciated over 40 years and certain improvements are depre-
ciated over their expected life.
F-23
<PAGE>
SCHEDULE III--(CONTINUED)
EXISTING INVESTORS PROPERTY GROUP
REAL ESTATE AND ACCUMULATED DEPRECIATION
(DOLLARS IN THOUSANDS)
The changes in the total investment in real estate for the years ended December
31, 1996, 1995, 1994 are as follows:
<TABLE>
<CAPTION>
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of the year $301,059 $250,387 $255,050
Acquisitions 33,485 49,677 9,240
Improvements 2,292 995 2,290
Properties disposed of 0 0 (16,193)
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Balance, end of year $336,836 $301,059 $250,387
<CAPTION>
============ ============ ============
</TABLE>
The changes in accumulated depreciation for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
--------------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Balance, beginning of the year $26,430 $20,936 $17,949
Depreciation 6,098 5,494 4,821
Properties disposed of 0 0 (1,834)
<CAPTION>
------------ ------------ ------------
<S> <C> <C> <C>
Balance, end of year $32,528 $26,430 $20,936
<CAPTION>
============ ============ ============
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of the State of Wisconsin
Investment Board:
We have audited the accompanying historical cost basis combined statements of
assets and liabilities of ORLANDO CENTRAL PARK and 500 MEMORIAL DRIVE (the
"Properties") as of December 31, 1996 and 1995, and the related historical cost
basis combined statements of income, changes in net assets and cash flows for
the years then ended. These financial statements are the responsibility of the
Properties' investment advisor. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the historical cost basis combined financial
position of Orlando Central Park and 500 Memorial Drive as of December 31, 1996
and 1995, and the historical cost basis combined results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
As indicated in Note 2, these financial statements have been prepared on the
historical cost basis to comply with Regulation S-X of the Securities and
Exchange Commission.
Coopers & Lybrand L.L.P.
New York, New York
October 6, 1997.
F-25
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
-------------------------------------
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate investments
Land $ 8,847,965 $ 8,847,965 $ 8,847,965
Building and improvements 40,727,325 40,720,252 40,650,198
Accumulated depreciation (6,831,910) (6,316,118) (5,285,497)
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
42,743,380 43,252,099 44,212,666
Cash and Cash Equivalents 225,902 591,653 229,262
Accounts receivable and accrued
investment income 180,511 109,938 92,105
Deferred leasing costs, net of
accumulated amortization of
$2,523,596, $2,135,209 and
$1,420,455 at June 30, 1997,
December 31, 1996 and December 31,
1995, respectively 3,038,633 3,392,025 3,331,155
Deferred rent concessions 1,078,233 838,408 985,175
Other assets 71,049 62,815 21,929
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total Assets $47,337,708 $48,246,938 $48,872,292
<CAPTION>
=========== =========== ===========
<S> <C> <C> <C>
LIABILITIES AND NET ASSETS
Accounts payable and accrued expenses $ 459,221 597,561 176,895
Security deposits 216,875 211,363 273,105
Unearned rental income 211,898 247,756 120,156
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total Liabilities 887,994 1,056,680 570,156
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Net Assets 46,449,714 47,190,258 48,302,136
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total Liabilities and Net Assets $47,337,708 $48,246,938 $48,872,292
<CAPTION>
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
---------------------------------------------------------
SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- -------------------------------
1997 1996 1996 1995
------------ ------------ --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Rental income $ 3,076,092 $ 2,909,371 $ 5,521,188 $ 5,757,490
Other income 10,109 85,393 99,749 233,998
<CAPTION>
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Total Revenue 3,086,201 2,994,764 5,620,937 5,991,488
OPERATING EXPENSES
Property taxes 345,635 333,631 653,797 640,810
Operating expenses 520,712 512,173 1,045,704 928,209
Depreciation and
amortization 904,180 856,656 1,745,376 1,693,022
<CAPTION>
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Total Operating
Expenses 1,770,527 1,702,460 3,444,877 3,262,041
<CAPTION>
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 1,315,674 $ 1,292,304 $ 2,176,060 $ 2,729,447
<CAPTION>
============ ============ =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENT OF CHANGES IN NET ASSETS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 ANDTHE YEARS ENDED DECEMBER 31, 1996 AND
1995
<TABLE>
<CAPTION>
-----------
<S> <C>
Net assets, January 1, 1995 $49,237,627
Asset advisory fees paid by owner 281,062
Distributions (3,946,000)
Net income for the year ended December 31, 1995 2,729,447
<CAPTION>
-----------
<S> <C>
Net assets, January 1, 1996 48,302,136
Asset advisory fees paid by owner 275,062
Distributions (3,563,000)
Net income for the year ended December 31, 1996 2,176,060
<CAPTION>
-----------
<S> <C>
Net assets, January 1, 1997 47,190,258
Asset advisory fees paid by owner (unaudited) 160,782
Distributions (unaudited) (2,217,000)
Net income for the six months ended June 30, 1997
(unaudited) 1,315,674
<CAPTION>
-----------
<S> <C>
Net assets, June 30, 1997 (unaudited) $46,449,714
<CAPTION>
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------------------- --------------------------
1997 1996 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 1,315,674 $ 1,292,304 $ 2,176,060 $ 2,729,447
Adjustments to reconcile
net income to net cash
provided by operating
activities-
Depreciation and
amortization 904,180 856,656 1,745,376 1,693,022
Asset advisory fee paid
by owner 160,782 137,531 275,062 281,062
Changes in operating
assets and liabilities
Accounts receivable (70,573) 26,293 (17,833) 85,920
Other assets (8,234) (42,092) (40,886) 344
Deferred rent
concessions (239,825) (31,731) 146,767 (197,855)
Accounts payable and
accrued expenses (138,340) 224,953 420,666 (73,095)
Security deposits 5,512 (42,368) (61,742) 5,919
Unearned rental income (35,858) (21,907) 127,600 (3,394)
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash provided by
operations 1,893,318 2,399,639 4,771,070 4,521,370
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
INVESTING ACTIVITIES
Payments for capital
expenditures and
leasing commissions (42,069) (83,333) (845,679) (908,717)
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash used in
investing activities (42,069) (83,333) (845,679) (908,717)
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES
Distributions (2,217,000) (2,360,000) (3,563,000) (3,946,000)
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net cash used in
financing activities (2,217,000) (2,360,000) (3,563,000) (3,946,000)
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net (decrease)
increase in cash (365,751) (43,694) 362,391 (333,347)
Cash and cash
equivalents, beginning
of period 591,653 229,262 229,262 562,609
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash and cash
equivalents, end of
period $ 225,902 $ 185,568 $ 591,653 $ 229,262
<CAPTION>
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
The properties known as Orlando Central Park and 500 Memorial Drive (the "Prop-
erties") are owned by the State of Wisconsin Investment Fixed Retirement Trust
Fund ("SWIB") which was established for the benefit of the participants in the
Wisconsin Retirement System. The State of Wisconsin Investment Board has exclu-
sive control over all monies in the Fixed Retirement Trust Fund. Jones Lang
Wootton Realty Advisors ("Realty Advisors") manages the Properties under an
investment advisory agreement. These financial statements include the combined
assets, liabilities and operations of the Properties which comprise Orlando
Central Park (six industrial bulk warehouse buildings and associated land
located in an industrial park in Orlando, Florida) and 500 Memorial Drive (an
industrial building and associated land located in an industrial park in
Franklin Township, New Jersey).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation:
These financial statements of the Properties have been combined since they are
under common ownership and management and they are expected to be acquired in a
business combination by a newly formed real estate investment trust in connec-
tion with a public offering of securities.
SWIB is a pension fund and prepares the financial statements, including those
of the Properties, on the fair value basis pursuant to Statement of Financial
Accounting Standards No. 35 and Statement of Government Accounting Standards
No. 25. However, these financial statements have been restated utilizing the
historical cost basis in accordance with the requirement of Regulation S-X of
the Securities and Exchange Commission.
Real Estate
Rental property is presented in the balance sheet at cost, which includes fees
for services related to the acquisition of the rental property. Depreciation of
the buildings is computed using the straight-line method over the estimated
useful lives of the property, generally 40 years. Depreciation of improvements
to the rental property is computed using the straight-line method over the
remaining useful lives of the buildings, or the useful life of the improvement,
if shorter. Tenant improvements, including commissions paid for services
related to the signing of new leases, are amortized using the straight-line
method over the lesser of their useful lives or the remaining term of the lease
to which they relate.
Expenditures for major renewals and betterments are capitalized and expendi-
tures for repairs and maintenance are expensed when incurred. Sales and dispo-
sitions of assets are recorded by removing the related costs and accumulated
depreciation amounts with any resulting gain or loss reflected in income.
Revenue Recognition
The Properties earn rental income from tenants under leasing arrangements which
generally provide for minimum rents, escalations and charges to tenants for
their pro-rata share of real estate taxes and operating expenses. All leases
have been accounted for as operating leases.
The Properties recognize rental income from leases with scheduled rent
increases on a straight-line basis over the lease term. Deferred rent conces-
sions represent the difference between the straight-line rent and amounts cur-
rently due.
Investment Advisory Fees:
Fees earned by Jones Lang Wootton Realty Advisors in its role as investment
advisor are paid directly by SWIB. These financial statements reflect those
fees as expenses with a corresponding capital contribution. The asset manage-
ment fees for the years ended December 31, 1996 and 1995 were $275,062 and
$281,062, respectively.
Income Taxes
SWIB and the entities through which the Properties are owned are not subject to
income taxes, therefore no income taxes have been provided in the accompanying
financial statements.
F-30
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Cash and Cash Equivalents
The Properties consider all highly liquid investments purchased with original
maturities of three months or less, at the date of purchase, to be cash equiva-
lents. At times, cash and cash equivalent balances at a limited number of banks
and financial institutions may exceed insurable amounts. The Properties' Man-
agement believes it mitigates its risks by depositing cash or investing cash
equivalents through major financial institutions.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of con-
tingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. The most
significant estimates relate to the recoverability of the real estate invest-
ments. Actual results could differ from those estimates.
3. LEASES
Minimum future rental receipts under noncancelable operating leases which
extend for more than one year at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1997 $ 4,381,000
1998 4,350,000
1999 3,665,000
2000 2,065,000
2001 1,634,000
Thereafter 3,797,000
<CAPTION>
-----------
<S> <C>
$19,892,000
<CAPTION>
===========
</TABLE>
Minimum rentals above do not include recoveries of operating expenses and real
estate taxes. Recoveries of operating expenses and real estate taxes, included
in base rental income, amounted to approximately $1,068,000 and $1,015,000 for
the years ended December 31, 1996 and 1995, respectively.
4. PROPERTY MANAGEMENT FEES
Orlando Central Park
SWIB has retained Trammell Crow Realty Associates, Inc. ("Trammell Crow") to
provide management services to Orlando Central Park on a year-to-year basis.
For its services, Trammell Crow receives a base management fee equal to 3% of
base rents collected, as defined. SWIB has the right to terminate the agree-
ment, with written notice, under certain conditions, as defined in the manage-
ment agreement. In 1996 and 1995, fees incurred under this agreement were
$104,590 and $112,083, respectively.
Trammell Crow earns leasing commissions when it provides services in negoti-
ating and obtaining, on behalf of SWIB, leases with tenants for Orlando Central
Park in accordance with provisions of the management agreement.
Trammell Crow also earns fees for providing construction management services at
the request of SWIB. The Construction Management fee is equal to (i) 8% of the
construction costs of each Capital Repair in excess of $10,000, as defined in
the agreement, and (ii) 8% of the construction costs of alterations, additions
and improvement work made by SWIB on behalf of tenants, as defined in the
agreement.
500 Memorial Drive
SWIB retained Jones Lang Wootton USA ("JLW USA") to provide management services
to 500 Memorial Drive on a year-to-year basis. For its services, JLW USA
received a management fee equal to 3% of gross income collected, as defined in
the management agreement. In 1996 and 1995, fees incurred under these agree-
ments were $38,595 and $37,259, respectively, of which $3,194 is included in
accrued expenses at December 31, 1995.
F-31
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
JLW USA earned fees from leasing commissions when it provides services in nego-
tiating and obtaining, on behalf of SWIB, leases with tenants for 500 Memorial
Drive in accordance with provisions of the management agreement, as defined. No
such fees for leasing commissions were incurred in 1996 and 1995.
Effective January 1, 1997, SWIB entered into an agreement with Institutional
Realty Management, L.L.C., an affiliate of Realty Advisors, to provide manage-
ment services to 500 Memorial Drive on a month-to-month basis which is cancel-
able by either party with 30 days written notice.
F-32
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholder
Knickerbocker Properties, Inc. II
We have audited the accompanying historical cost basis balance sheets of Knick-
erbocker Properties, Inc. II as of December 31, 1996 and 1995, and the related
historical cost basis statements of income, stockholder's equity, and cash
flows for the years then ended. These financial statements are the responsi-
bility of the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the historical cost basis financial position of Knicker-
bocker Properties, Inc. II at December 31, 1996 and 1995, and the historical
cost basis results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
As indicated in Note 1, these financial statements have been prepared on the
historical cost basis to comply with Regulation S-X of the Securities and
Exchange Commission.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
April 25, 1997
F-33
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------------
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate investments
Land $ 3,691,118 $ 3,691,118 $ 3,691,118
Building and improvements 17,021,347 16,865,157 16,855,791
Accumulated depreciation (3,124,832) (2,888,428) (2,392,331)
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
17,587,633 17,667,847 18,154,578
Cash and Cash Equivalents 48,068 80,186 66,853
Deferred rent concessions 174,195 148,959 163,944
Other assets 8,845 13,414 --
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total Assets $17,818,741 $17,910,406 $18,385,375
<CAPTION>
=========== =========== ===========
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 96,077 33,125 47,759
Security deposits 148,812 146,996 146,527
Dividend payable -- -- 25,090
Unearned rental income 74,970 58,930 17,463
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total Liabilities 319,859 239,051 236,839
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Stockholder's Equity
Common Stock $1 par value; 500 shares
authorized, issued and outstanding 500 500 500
Additional Paid in Capital 17,498,382 17,670,855 18,148,036
Retained Earnings -- -- --
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
17,498,882 17,671,355 18,148,536
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total Liabilities and Stockholder's
Equity $17,818,741 $17,910,406 $18,385,375
<CAPTION>
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------------
SIX MONTHS ENDED JUNE 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------- -------------------------------
1997 1996 1996 1995
------------ ------------ --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Rental income $1,152,797 $ 1,095,661 $ 2,171,445 $ 2,250,490
Other income 395 587 1,372 1,371
<CAPTION>
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Total Revenue 1,153,192 1,096,248 2,172,817 2,251,861
OPERATING EXPENSES
Property taxes 149,374 148,004 296,291 291,804
Operating Expenses 98,068 93,373 178,487 195,505
Depreciation and
amortization 236,404 235,667 496,096 460,397
<CAPTION>
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Total Operating
Expenses 483,846 477,044 970,874 947,706
<CAPTION>
------------ ------------ --------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 669,346 $ 619,204 $ 1,201,943 $ 1,304,155
<CAPTION>
============ ============ =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND THE YEARS ENDED DECEMBER 31,
1996 AND 1995
<TABLE>
<CAPTION>
--------------------------------------------
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $500 $18,619,408 $ -- $18,619,908
Net Income 1,304,155 1,304,155
Dividends (471,372) (1,304,155) (1,775,527)
<CAPTION>
------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 500 18,148,036 -- 18,148,536
Net income 1,201,943 1,201,943
Additional Paid in Capital 139,904 139,904
Dividends (617,085) (1,201,943) (1,819,028)
<CAPTION>
------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 500 17,670,855 -- 17,671,355
Net income 669,346 669,346
Additional Paid in Capital 141,718 141,718
Dividends (314,191) (669,346) (983,537)
<CAPTION>
------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at June 30, 1997 $500 $17,498,382 $ -- $17,498,882
<CAPTION>
====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
-------------------- ------------------------
1997 1996 1996 1995
--------- --------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 669,346 $ 619,204 $ 1,201,943 $ 1,304,155
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 236,404 235,667 496,096 460,397
Changes in assets--(Increase)
Decrease:
Other assets 4,569 (2,947) (13,414) 8,029
Deferred rent concessions (25,236) (73,153) 14,985 71,580
Changes in liabilities--
Increase (Decrease):
Accounts payable and accrued
expenses 62,952 (30,865) (14,634) 12,835
Unearned rental income 16,040 (460) 41,467 (42,622)
Tenant security deposits 1,816 469 469 (1,596)
<CAPTION>
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net cash provided by operating
activities 965,891 747,915 1,726,912 1,812,778
<CAPTION>
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES
Capital and tenant improve-
ments (156,190) (9,365) (9,365) (83,030)
<CAPTION>
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net cash used for investing
activities (156,190) (9,365) (9,366) (83,030)
<CAPTION>
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Contributions 141,718 -- 139,904 --
Distributions (983,537) (736,082) (1,844,118) (1,750,437)
<CAPTION>
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net cash used in financing
activities (841,819) (736,082) (1,704,214) (1,750,437)
<CAPTION>
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Net increase (decrease) in
cash (32,118) 2,468 13,333 (20,689)
Cash at beginning of period 80,186 66,853 66,853 87,542
<CAPTION>
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Cash at end of period $ 48,068 $ 69,321 $ 80,186 $ 66,853
<CAPTION>
========= ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-37
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
NOTES TO FINANCIAL STATEMENTS
1. GENERAL
The Company
Knickerbocker Properties, Inc. II (the Company) was incorporated under the
laws of the State of Delaware in June 1990. The Company, which was formed to
acquire real estate, is wholly owned by New York State Teachers' Retirement
System (the Parent), a pension benefit organization for New York State teach-
ers. Capital contributions were made by the Parent to fund real estate pur-
chases.
On June 28, 1990, the Company purchased the property and improvements known as
Kent West Corporate Park, a multi-tenant industrial park located in Kent,
Washington containing five buildings with approximately 400,000 total square
feet. As of December 31, 1996, the Property was fully leased. Cash flow in
excess of operating requirements is distributed to the Parent.
Basis of Presentation
The Company is expected to be acquired in a business combination by a newly
formed real estate investment trust in connection with a public offering of
securities. As such, these financial statements have been prepared utilizing
the historical cost basis in accordance with the requirement of Regulation S-X
of the Securities and Exchange Commission.
2. SIGNIFICANT ACCOUNTING POLICIES
Rental Property
Rental property is presented in the balance sheets at cost, which includes
fees for services related to the acquisition of the rental property. Deprecia-
tion of the buildings is computed using the straight-line method over the
estimated useful lives of the property, generally 40 years. Depreciation of
improvements to the rental property is computed using the straight-line method
over the remaining useful lives of the buildings, or the useful life of the
improvement, if shorter. Tenant improvements, including commissions paid for
services related to the signing of new leases, are amortized using the
straight-line method over the remaining term of the lease to which they
relate.
Expenditures for major renewals and betterments are capitalized and expendi-
tures for repairs and maintenance are expensed when incurred. Sales and dis-
posals of assets are recorded by removing the related cost and accumulated
depreciation amounts with any resulting gain or loss reflected in income.
Revenue Recognition
Rental revenue is recognized by amortizing future minimum lease payments over
the lease term using the straight-line method. Amounts recorded as straight-
line rent in excess of amounts currently due are included in deferred lease
concessions. Tenants are required to reimburse their pro rata share of the
majority of operating expenses of the industrial park. The Company recognizes
such reimbursement of expenses by tenants as revenue when earned.
Investment Advisors Fees
Fees earned by Equitable Real Estate Management, Inc. ("Equitable"), in its
role as investment advisor, are paid directly by the Parent and, therefore,
are not included in the statements of Operations. Certain other expenses are
paid by Equitable and reimbursed by the Company. Certain officers of Equitable
are also officers of the Company.
Cash and Cash Equivalents
The Company classifies as cash equivalents any investments which can be
readily converted to cash and have an original maturity of less than three
months. At times, cash and cash equivalent balances at a limited number of
banks and financial institutions may exceed insurable amounts. The Company
believes it mitigates its risks by depositing cash or investing cash equiva-
lents through major financial institutions.
Income Taxes
The Company is exempt from income taxation pursuant to Section 501(c)(25) of
the Internal Revenue Code. Accordingly, no income taxes have been provided in
the accompanying financial statements.
F-38
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of con-
tingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported period. The most
significant estimates relate to the recoverablility of the operating property
and the unbilled rent receivable. Actual results could differ from these esti-
mates.
Financial Instruments
The fair value of the Company's financial instruments, including cash and cash
equivalents, approximates carrying value. Fair values were estimated based on
quoted market prices, where available.
Reclassification
Certain reclassifications have been made to the 1995 financial statements to
conform to the 1996 presentation.
3. LEASES
The Company's property is being leased to ten tenants under operating leases
that expire at various dates through 2001. The Company expects that the leases
will be renewed or replaced by other leases in the normal course of business.
Three tenants currently lease 48%, 23% and 10% of the total leaseable space.
Expected future minimum rental on noncancelable long-term leases in effect at
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1997 $1,678,049
1998 1,380,941
1999 758,718
2000 74,421
2001 7,174
</TABLE>
4. COMMITMENTS
The property has been assessed local improvement district costs by the local
county authorities totaling $194,758, of which $103,585 is outstanding at
December 31, 1996. The Company's policy is to bill tenants for their pro rata
share of these assessments. To the extent the property is not fully leased, the
Company would have to incur a pro rata portion of these costs. Since the Com-
pany anticipates having the ability to bill all costs, these amounts are not
included as liabilities on the balance sheet. The payments, including interest
ranging from 7.85% to 7.98%, for each of the next five years and thereafter are
as follows:
<TABLE>
<CAPTION>
---------
<S> <C>
1997 $ 16,418
1998 15,768
1999 15,118
2000 14,468
2001 13,817
Thereafter 84,931
<CAPTION>
---------
<S> <C>
$ 160,520
<CAPTION>
=========
</TABLE>
The total amount of interest included in the above minimum payments is 56,935
to be paid through May 2009.
5. MANAGEMENT AGREEMENT
The Company entered into a Real Estate Management Agreement with Crow-Wash-
ington Management Limited Partnership ("Crow") to manage the operations of the
property. In accordance with this agreement, Crow is paid a management fee
based on the rental income collected, as defined. The December 1996 management
fee amounted to $6,687.
F-39
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Retirement Board Pennsylvania Public School Employes' Retirement System:
We have audited the accompanying combined balance sheets of Pennsylvania Public
School Employes' Retirement System Industrial Properties Portfolio Managed by
RREEF America L.L.C. (the Portfolio, as defined in Note 1) as of December 31,
1996 and 1995, and the related combined statements of operations, combined own-
er's equity, and combined cash flows for the year ended December 31, 1996 and
the period from July 6, 1995 (date of acquisition) to December 31, 1995. In
connection with our audits of the aforementioned combined financial statements,
we have also audited the accompanying Schedule III, Combined Real Estate and
Accumulated Depreciation as of December 31, 1996. These combined financial
statements and combined financial statement schedule are the responsibility of
the Portfolio's management. Our responsibility is to express an opinion on
these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Port-
folio as of December 31, 1996 and 1995, and the combined results of its opera-
tions and its combined cash flows for the year ended December 31, 1996 and the
period from July 6, 1995 (date of acquisition) to December 31, 1995 in confor-
mity with generally accepted accounting principles. Also in our opinion, the
related combined financial statement schedule, when considered in relation to
the basic combined financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG Peat Marwick LLP
September 29, 1997
F-40
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------
DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate:
Land $ 21,148,662 $ 21,148,662 $19,116,603
Building and improvements 84,603,735 83,748,432 77,994,039
Accumulated depreciation (5,616,010) (4,142,761) (1,304,717)
<CAPTION>
------------ ------------ -----------
<S> <C> <C> <C>
100,136,387 100,754,333 95,805,925
Cash and cash equivalents 682,667 1,431,677 2,688,020
Rents and other tenant receivables,
net 451,758 462,457 299,613
Accrued rents receivable (note 3) 2,204,916 1,901,037 699,246
Deferred expenses (note 2) 408,319 331,426 1,360
Other assets 107,080 184,028 93,152
<CAPTION>
------------ ------------ -----------
<S> <C> <C> <C>
Total Assets $103,991,127 $105,064,958 $99,587,316
<CAPTION>
============ ============ ===========
<S> <C> <C> <C>
LIABILITIES AND OWNER'S EQUITY
Accounts payable and accrued expenses $ 1,981,283 $ 1,255,294 $ 500,296
Tenant security deposits 364,047 327,400 303,604
Other 69,692 42,344 167,679
<CAPTION>
------------ ------------ -----------
<S> <C> <C> <C>
Total Liabilities 2,415,022 1,625,038 971,579
<CAPTION>
------------ ------------ -----------
<S> <C> <C> <C>
Owner's Equity 101,576,105 103,439,920 98,615,737
<CAPTION>
------------ ------------ -----------
<S> <C> <C> <C>
Total Liabilities and Owner's Equity $103,991,127 $105,064,958 $99,587,316
<CAPTION>
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-41
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA, L.L.C.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------
FOR THE
FOR THE YEAR PERIOD FROM
SIX MONTHS ENDED JUNE 30, ENDED JULY 6, TO
------------------------- DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995
------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
INCOME
Rental income (note 3) $ 6,146,414 $ 6,164,116 $12,348,207 $5,859,691
Tenant reimbursements 483,672 624,233 1,389,320 333,724
Interest 46,360 83,723 139,190 95,901
Other 6,876 14,545 633,066 2,667
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Income 6,683,322 6,886,617 14,509,783 6,291,983
EXPENSES
Property taxes 443,295 521,257 1,234,230 271,316
Operating expenses 467,983 503,966 853,074 271,920
Advisor fees (note 4) 1,717,843 360,513 731,836 339,440
Depreciation and amortiza-
tion 1,510,676 1,420,048 2,858,118 1,304,717
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Expenses 4,139,797 2,805,784 5,677,258 2,187,393
<CAPTION>
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 2,543,525 $ 4,080,833 $ 8,832,525 $4,104,590
<CAPTION>
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-42
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
COMBINED STATEMENT OF OWNER'S EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED), THE YEAR ENDED DECEMBER 31,
1996, AND THE PERIOD FROM JULY 6, TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
------------
<S> <C>
Beginning balance $ --
Contributions 98,561,147
Distributions (4,050,000)
Net income 4,104,590
<CAPTION>
------------
<S> <C>
Balance at December 31, 1995 98,615,737
Contributions 7,147,878
Distributions (11,156,219)
Net income 8,832,525
<CAPTION>
------------
<S> <C>
Balance at December 31, 1996 $103,439,920
Contributions (unaudited) 372,660
Distributions (unaudited) (4,780,000)
Net income for the six months ended June 30, 1997
(unaudited) 2,543,525
<CAPTION>
------------
<S> <C>
Balance at June 30, 1997 (unaudited) $101,576,105
<CAPTION>
============
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-43
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA, L.L.C.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------
FOR THE YEAR FOR THE PERIOD
SIX MONTHS ENDED ENDED FROM JULY 6, TO
JUNE 30, DECEMBER 31, DECEMBER 31,
------------------------ ------------ ---------------
1997 1996 1996 1995
----------- ----------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPER-
ATING ACTIVITIES
Net income $ 2,543,525 $ 4,080,833 $ 8,832,525 $ 4,104,590
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amor-
tization 1,510,676 1,420,048 2,858,118 1,304,717
Accrued rents receiv-
able (303,879) (642,128) (1,201,791) (699,246)
Changes in:
Rents and other tenant
receivables, net 10,699 253,794 (162,845) (299,613)
Other assets 76,948 (31,026) (90,876) (93,152)
Accounts payable and
accrued expenses 725,989 156,094 754,998 500,296
Tenant security
deposits 36,647 28,125 23,796 303,604
Other liabilities 27,348 (124,146) (125,335) 167,679
<CAPTION>
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Net cash provided by
operating activities 4,627,953 5,141,594 10,888,590 5,288,875
<CAPTION>
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of real estate
investment property
(note 1) -- (6,268,069) (6,268,069) (96,049,051)
Additions and improve-
ments to real estate (855,303) (1,012,748) (1,518,383) (1,061,591)
Payment of deferred
expenses (114,320) (74,972) (350,140) (1,360)
<CAPTION>
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Net cash used in
investing activities (969,623) (7,355,789) (8,136,592) (97,112,002)
<CAPTION>
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES
Contributions 372,660 6,776,904 7,147,878 98,561,147
Distributions (4,780,000) (5,456,219) (11,156,219) (4,050,000)
<CAPTION>
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Net cash (used in) pro-
vided by financing
activities (4,407,340) 1,320,685 (4,008,341) 94,511,147
<CAPTION>
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Net increase (decrease)
in cash and cash equiv-
alents (749,010) (893,510) (1,256,343) 2,688,020
Cash and cash equiva-
lents, at beginning of
period 1,431,677 2,688,020 2,688,020 --
<CAPTION>
----------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Cash and cash equiva-
lents, at end of period $ 682,667 $ 1,794,510 $ 1,431,677 $ 2,688,020
<CAPTION>
=========== =========== ============ ===============
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-44
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. ORGANIZATION
The accompanying combined financial statements include the accounts of the
industrial real estate investment properties and related title holding compa-
nies, collectively referred to as the Portfolio, which are managed by RREEF
America L.L.C. (Advisor) for Pennsylvania Public School Employes' Retirement
System (PSERS). At December 31, 1996, the Portfolio includes the following
wholly owned real estate investment properties:
<TABLE>
<CAPTION>
-----------------------
LOCATION
-----------------------
NAME OF PROPERTIES IN PORTFOLIO
<S> <C>
Medinah Roselle, Illinois
Port Jersey Jersey City, New Jersey
Westbelt Columbus, Ohio
</TABLE>
On July 6, 1995, PSERS acquired industrial properties aggregating to approxi-
mately 2,881,000 square feet located in Roselle, Illinois, Jersey City, New
Jersey and Columbus, Ohio for a cash purchase price including closing costs of
approximately $96,049,000.
On January 30, 1996, the Portfolio acquired a 225,000 square foot industrial
property located in Bayonne, New Jersey for a cash purchase price including
closing costs of approximately $6,268,000. The property is included in the Port
Jersey Industrial Properties.
2. SIGNIFICANT ACCOUNTING POLICIES
Depreciation of buildings and improvements is provided using a 30-year life on
a straight-line basis for financial reporting purposes.
Tenant improvement costs, included in buildings and improvements in the accom-
panying balance sheets, are amortized using the straight-line method over the
term of the lease to which they relate.
Maintenance and repair expenses are charged to operations as incurred. Expendi-
tures which extend the economic life or represent additional capital invest-
ments benefiting future periods, including tenant improvements and leasing com-
missions, are capitalized.
Deferred expenses are comprised of leasing commissions and other costs directly
attributable to obtaining tenants are amortized over the terms of the leases to
which they relate.
For purposes of the combined statements of cash flows, the Portfolio considers
all highly liquid marketable securities purchased with a maturity of three
months or less to be cash equivalents.
The preparation of combined financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and dis-
closure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires all entities to disclose the SFAS 107
value of all financial assets and liabilities for which it is practicable to
estimate. Value is defined in the Statement as the amount at which the instru-
ment could be exchanged in a current transaction between willing parties, other
than in a forced or liquidation sale. The Portfolio believes the carrying
amount of its financial instruments approximates SFAS 107 value due to the rel-
atively short maturity of these instruments.
The Portfolio adopted the provisions of Statement of Financial Accounting Stan-
dards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of (SFAS 121), on January 1, 1996. This Statement
requires
F-45
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or change in circumstances indicate that the car-
rying amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement did not
have an impact on the Portfolio's combined financial position, combined results
of operations, or liquidity.
The combined financial statements as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 are unaudited. In the opinion of management all
adjustments (consisting solely of normal recurring adjustments) necessary for a
fair presentation of such combined financial statements have been included. The
results of combined operations for the six months ended June 30, 1997 are not
necessarily indicative of the Portfolio future results of combined operations
for the full year ending December 31, 1997.
Pennsylvania Public School Employes' Retirement System and the Portfolio's
title holding companies are exempt from taxes, and accordingly, no income tax
provision is required.
3. LEASES
The Portfolio has determined that all leases relating to the Portfolio's
investment properties are to be classified as operating leases; therefore,
rental income is reported when earned. Leases range from two to thirteen years
and provide, with the exception of one tenant, for fixed base rent, partial
reimbursement of operating costs, including real estate taxes. The lease of one
tenant provides for the payment of base rent, additional rents related to
increases in the Consumer Price Index and the direct payment of all operating
costs, real estate taxes and insurance related to the property.
The approximate future minimum rentals on noncancelable long-term operating
leases in effect at December 31, 1996 (exclusive of expense reimbursements) are
as follows:
<TABLE>
<CAPTION>
-----------
AMOUNT
-----------
YEAR
<S> <C>
1997 $11,883,886
1998 10,192,438
1999 8,622,861
2000 7,172,169
2001 3,829,988
Thereafter 18,328,642
<CAPTION>
-----------
<S> <C>
Total $60,029,984
<CAPTION>
===========
</TABLE>
A number of tenant leases contain provisions for scheduled rent increases
during the term of the lease. Generally accepted accounting principles require
that rental income be recorded for the period of occupancy using the effective
monthly rent, which is the average monthly rent for the entire period of occu-
pancy during the term of the lease. Accrued rents receivable represents future
amounts receivable related to scheduled future rent increases. The net
increases in accrued rents receivable during the year ended December 31, 1996
and the period from July 6, 1995 to December 31, 1995, of $1,201,791 and
$699,246, respectively, and for the six months ended June 30, 1997 and 1996 of
$303,879 and $642,128, respectively, represent increases to base rent revenue.
F-46
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995--(CONTINUED)
4. ADVISOR'S AND AFFILIATES FEES
The annual advisor's fee for the Portfolio is calculated in accordance with the
agreement as a percentage of PSERS' original cash investment for those proper-
ties. All fees are paid quarterly in arrears.
The Advisor may also be entitled in future years to receive an incentive fee
based primarily on cumulative unrealized appreciation related to the Portfolio.
An affiliate of the Advisor acts as the property manager, as well as performs
leasing and construction supervisory services. A property management fee is
paid based upon methods and rates that the Advisor believes is consistent with
industry practice. Management fees for the year ended December 31, 1996 and the
period from July 6, 1995 to December 31, 1995 amounted to $287,879 and
$119,055, respectively, and $140,206 and $133,818 for the six months ended June
30, 1997 and 1996, respectively. Leasing commissions for the year ended
December 31, 1996 and the period from July 6, 1995 to December 31, 1995
amounted to $216,380 and $1,360, respectively, and $105,408 and $63,457 for the
six months ended June 30, 1997 and 1996, respectively. Construction supervisory
services for the year ended December 31, 1996 and the period from July 6, 1995
to December 31, 1995, amounted to $53,981 and $0, respectively, and $27,253 and
$43,987 for the six months ended June 30, 1997 and 1996, respectively.
5. SUBSEQUENT EVENT
In June 1997, an estimate of the incentive fee referred to in Note 4 above
became determinable and approximately $1,345,000 was accrued at June 30, 1997.
F-47
<PAGE>
SCHEDULE III
PENNSYLVANIA PUBLIC SCHOOL EMPLOYES' RETIREMENT
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
COMBINED REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
COSTS CAPITALIZED
SUBSEQUENT TO GROSS AMOUNT AT WHICH CARRIED
INITIAL COST(A) ACQUISITION AT CLOSE OF PERIOD
------------------------- ----------------- -------------------------------------
LAND
BUILDINGS AND BUILDING AND BUILDING AND ACCUMULATED
DESCRIPTION LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(B) DEPRECIATION(C)
- ----------- ----------- ------------- ----------------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Industrial Prop-
erty:
Medinah Indus- $ 3,120,000 $17,668,584 $ 195,457 $ 3,120,000 $17,864,041 $ 20,984,041 $ 892,619
trial Park
(Roselle, Illi-
nois)
Port Jersey 15,230,059 37,593,965 1,545,787 15,230,059 39,139,752 54,369,711 1,911,464
Industrial Park
(Jersey City,
New Jersey)
Westbelt Busi- 2,798,603 25,905,909 838,730 2,798,603 26,744,639 29,543,242 1,338,678
ness Park
(Columbus, Ohio)
----------- ------------- ----------------- ----------- ------------ ------------ ---------------
$21,148,662 $81,168,458 $2,579,974 $21,148,662 $83,748,432 $104,897,094 $4,142,761
=========== ============= ================= =========== ============ ============ ===============
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
LIFE ON WHICH
DEPRECIATION IN
STATEMENT
DATE OF OPERATIONS IS
DESCRIPTION ACQUIRED COMPUTED
- ----------- -------- ----------------
<S> <C> <C>
Industrial Prop-
erty:
Medinah Indus- 7/6/95 30 years
trial Park
(Roselle, Illi-
nois)
Port Jersey 7/6/95 2-30 years
Industrial Park
(Jersey City,
New Jersey)
Westbelt Busi- 7/6/95 2-30 years
ness Park
(Columbus, Ohio)
</TABLE>
Notes
(A) The initial cost to the Portfolio represents the original purchase price of
the properties
(B) Reconciliation of real estate owned:
<TABLE>
<CAPTION>
--------------------------------
1996 1995
------------ -----------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 97,110,642 --
Additions during period 7,786,452 $97,110,642
<CAPTION>
------------ -----------
<S> <C> <C> <C> <C>
Balance at end of period $104,897,094 $97,110,642
<CAPTION>
============ ===========
(C) Reconciliation of accumulated depreciation:
--------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $1,304,717 --
Depreciation expense 2,838,044 $1,304,717
<CAPTION>
------------ -----------
<S> <C> <C> <C> <C>
Balance at end of period $4,142,761 $1,304,717
<CAPTION>
============ ===========
</TABLE>
F-48
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the Prudential Properties Group:
We have audited the accompanying combined balance sheets of the Prudential
Properties Group, as defined in Note 1, as of December 31, 1996 and 1995, and
the related combined statements of operations, owners' equity and cash flows
for each of the two years in the period ended December 31, 1996. These combined
financial statements are the responsibility of the management of the Prudential
Properties Investors. Our responsibility is to express an opinion on these com-
bined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of the Prudential Prop-
erties Group at December 31, 1996 and 1995, and the combined results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic com-
bined financial statements taken as a whole. The schedule listed in the index
of financial statements is presented for the purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic finan-
cial statements. This schedule has been subjected to the auditing procedures
applied in the audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Boston, Massachusetts
October 13, 1997
F-49
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------------
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real Estate Investments:
Land $ 8,302,419 $ 8,302,419 $ 7,071,873
Buildings and improvements 35,656,389 35,656,389 25,312,335
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
43,958,808 43,958,808 32,384,208
Accumulated depreciation (4,443,636) (3,997,931) (3,128,071)
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
39,515,172 39,960,877 29,256,137
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Cash and Cash Equivalents 452,805 61,377 95,161
Accounts Receivable and Accrued
Investment Income 18,696 53,272 89,083
Deferred Leasing Costs 429,992 181,461 72,198
Deferred Rent Concessions 417,265 345,406 190,308
Other Assets 6,280 6,284 6,306
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total assets $40,840,210 $40,608,677 $29,709,193
<CAPTION>
=========== =========== ===========
<S> <C> <C> <C>
LIABILITIES
Accounts Payable and Accrued Expenses $ 491,180 $ 557,563 $ 381,874
Other Liabilities 121,782 75,000 75,000
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total liabilities 612,962 632,563 456,874
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Owners' Equity 40,227,248 39,976,114 29,252,319
<CAPTION>
----------- ----------- -----------
<S> <C> <C> <C>
Total Liabilities and Owners' Equity $40,840,210 $40,608,677 $29,709,193
<CAPTION>
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-50
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
--------------------- ---------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Rental income $2,353,145 $2,336,188 $4,433,557 $3,776,468
Other income 596 -- 1,975 --
<CAPTION>
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total revenue 2,353,741 2,336,188 4,435,532 3,776,468
OPERATING EXPENSES
Property taxes 164,850 198,300 371,771 290,962
Operating expenses 346,282 410,377 823,830 482,778
Depreciation and amortization 487,834 459,327 928,406 686,548
<CAPTION>
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total operating expenses 998,966 1,068,004 2,124,007 1,460,288
<CAPTION>
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $1,354,775 $1,268,184 $2,311,525 $2,316,180
<CAPTION>
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-51
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND THE YEARS ENDED DECEMBER 31, 1996
AND 1995
<TABLE>
<CAPTION>
-----------
<S> <C>
Owners' Equity, December 31, 1994 $29,998,086
Net transfers to owners (3,061,947)
Net income for the year ended December 31, 1995 2,316,180
<CAPTION>
-----------
<S> <C>
Owners' Equity, December 31, 1995 29,252,319
Net transfers from owners 8,412,270
Net income for the year ended December 31, 1996 2,311,525
<CAPTION>
-----------
<S> <C>
Owners' Equity, December 31, 1996 39,976,114
Net transfers to owners (unaudited) (1,103,641)
Net income for the six months ended June 30, 1997 (unau-
dited) 1,354,775
<CAPTION>
-----------
<S> <C>
Owners' Equity, June 30, 1997 (unaudited) $40,227,248
<CAPTION>
===========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-52
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
------------------------------------------------------
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------- -------------------------
1997 1996 1996 1995
------------ ------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,354,775 $ 1,268,184 $ 2,311,525 $ 2,316,180
Adjustments to reconcile
net income to net cash
provided by operating
activities-
Depreciation and amorti-
zation 487,834 459,327 928,406 686,548
Changes in assets--(in-
crease) decrease
Accounts receivable 34,576 (5,697) 35,811 (122,243)
Other assets 4 12 22 (1,621)
Deferred rent conces-
sions (71,859) (125,347) (155,098) (83,760)
Changes in liabilities--
increase (decrease)-
Accounts payable and
accrued expenses (66,383) 147,189 175,689 193,561
Other liabilities 46,782 -- -- --
<CAPTION>
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net cash provided by
operations 1,785,729 1,743,668 3,296,355 2,988,665
<CAPTION>
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
INVESTING ACTIVITIES
Property acquisitions -- (11,574,600) (11,574,600) --
Payments for capital and
tenant improvements (290,660) (167,809) (167,809) --
<CAPTION>
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net cash used in
investing activities (290,660) (11,742,409) (11,742,409) --
<CAPTION>
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES
Net transfers (to) from
owners (1,103,641) 10,001,850 8,412,270 (3,061,947)
<CAPTION>
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Net increase (decrease)
in cash 391,428 3,109 (33,784) (73,282)
Cash, beginning of period 61,377 95,161 95,161 168,443
<CAPTION>
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Cash, end of period $ 452,805 $ 98,270 $ 61,377 $ 95,161
<CAPTION>
============ ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-53
<PAGE>
PRUDENTIAL PROPERTIES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
Prudential Properties Group (Prudential Group) is not a legal entity but rather
a combination of all the assets, liabilities and operations for seven warehouse
buildings that are owned by a real estate title holding corporation and in a
separate account of The Prudential Insurance Company of America, Inc. Pruden-
tial Group properties are managed, leased and renovated by The Prudential's
Private Asset Management Group--Real Estate Division (PAMG), the investment
manager, under separate investment management agreements with each owner. The
accompanying financial statements include all of the direct and indirect costs
of the business of Prudential Group. A summary of the holdings of Prudential
Group is as follows (each location has one building):
<TABLE>
<CAPTION>
---------------------
NUMBER OF
TENANTS SQUARE FEET
--------- -----------
<S> <C> <C>
BULK DISTRIBUTION PROPERTIES:
Ontario, CA 1 284,599
Hebron, KY 1 192,000
Cincinnati, OH 1 192,000
Cincinnati, OH 1 204,800
Columbus, OH 3 205,109
Columbus, OH 1 156,000
Fulton County, GA 1 231,835
<CAPTION>
--------- -----------
<S> <C> <C>
Total 9 1,466,343
<CAPTION>
--------- -----------
</TABLE>
2. FORMATION TRANSACTION
Under the provisions of the Contribution Agreement executed by each property
owner, Prudential Group will contribute all of its properties to Cabot Indus-
trial Trust (the Company) or a subsidiary partnership, Cabot Industrial Proper-
ties, L.P. (the Operating Partnership) and will receive common shares from the
Company or units from the Operating Partnership. The consummation of these pro-
posed transactions is subject to the completion of an offering of common shares
of the Company to the public and various other conditions of the Contribution
Agreement. It is anticipated that the Company will seek to qualify as a real
estate investment trust under the Internal Revenue Code of 1986, as amended.
The impact of these proposed transactions is not reflected in the accompanying
financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination
The accompanying financial statements have been presented on a combined basis,
at historical cost, because Prudential Group is under the common management of
PAMG through investment advisory agreements. All significant intercompany
transactions and balances have been eliminated in combination.
The combined financial statements and information included in these notes to
the combined financial statements as of June 30, 1997 and for the six months
ended June 30, 1997 and 1996 are unaudited. In the opinion of management, such
financial statements and information reflect all adjustments necessary for a
fair presentation of the results of the respective interim periods. All such
adjustments are of a normal, recurring nature.
Real Estate Investments
Real estate investments, which consist of industrial warehouses, are stated at
cost. Expenditures for ordinary maintenance and repairs are expensed to opera-
tions as incurred. Significant renovations and improvements that improve or
extend the useful life of the assets are capitalized. Except for amounts
attributed to land, rental property and improvements are depreciated over their
estimated useful lives using the straight-line method. The estimated useful
lives by asset category are as follows:
<TABLE>
<CAPTION>
-------------
ESTIMATED
USEFUL LIFE
ASSET CATEGORY -------------
<S> <C>
Buildings and improvements 40 years
Tenant improvements Life of lease
</TABLE>
F-54
<PAGE>
PRUDENTIAL PROPERTIES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Prudential Group adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets To Be Disposed Of, on January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Adoption of this
statement did not have an impact on Prudential Group's financial position,
results of operations or liquidity.
Lease Acquisition Costs
Capitalized lease acquisition costs are recorded at cost. These costs are amor-
tized over the respective lives of the leases. Unamortized costs are charged to
expense in the event of any early termination of the lease.
Rental Income
All leases are classified as operating leases. Certain leases provide for min-
imum rent payments that increase during the term of the lease and tenant occu-
pancy during periods for which no rent is due. Prudential Group records rental
income for the full term of each lease on a straight-line basis. As of June 30,
1997 and December 31, 1996 and 1995, the receivables from tenants, net of
reserves, which Prudential Group expects to collect over the remaining life of
these leases rather than currently, were approximately $417,000, $345,000 and
$190,000, respectively (Deferred Rent). The amounts included in rental income
for the six months ended June 30, 1997 and 1996, and for the years ended
December 31, 1996 and 1995, which are not currently due, were approximately
$72,000, $125,000, $155,000 and $84,000, respectively. Deferred Rent is not
recognized for income tax purposes until received.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, rents receivable (excluding
Deferred Rent), accounts payable and accrued expenses are reasonable estimates
of their fair value.
Income Taxes
The properties are owned in tax-exempt real estate title holding companies or
directly by other legal entities not subject to tax. Since the taxable oper-
ating results of Prudential Group are either included in the income tax returns
of tax-exempt entities or the owners, no provision for state and federal income
taxes has been reflected in these financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
4. FUTURE MINIMUM RENTS
Future minimum rental receipts due on noncancellable operating leases for the
industrial properties as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1997 $4,291,865
1998 4,329,812
1999 3,472,172
2000 2,942,526
2001 2,003,584
Thereafter 4,026,498
<CAPTION>
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through and escalation provisions in the
leases. Prudential Group is subject to the usual business risks associated with
the collection of the above scheduled rents.
F-55
<PAGE>
PRUDENTIAL PROPERTIES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. TRANSACTIONS WITH THE INVESTMENT MANAGER
Under the provisions of the separate investment management agreements, Pruden-
tial Group is obligated to pay PAMG acquisition and asset management fees.
Acquisition fees are payable based on a percentage of acquisition cost (ranging
from .75% to .80%), and asset management fees are payable based on a percentage
(ranging from .20% to .40%) of the properties' net cost and/or a percentage
(ranging from 0% to 7.5%) of the properties' net operating income. Incentive
fees are based on performance in excess of various levels of internal rates of
return. Fees incurred under the agreements were as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 3FOR THE YEARS ENDED DECEMBER 31,0,
---------------------------------- --------------------------------
1997 1996 1996 1995 1994
----------------- ---------------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FEE INCURRED:
Asset management $ 123,521 138,853 274,410 168,796 205,836
Acquisition -- 93,000 93,000 -- --
Property management 33,765 32,796 62,835 60,302 59,969
Incentive 14,121 -- 76,514 3,400 --
</TABLE>
At June 30, 1997, December 31, 1996 and December 31, 1995, total fees payable
to PAMG were $198,747, $308,103 and $124,505, respectively.
All property and asset management fees are expensed as incurred and included in
management fees in the accompanying statements of operations.
6. COMMITMENTS AND CONTINGENCIES
Environmental
Prudential Group, as an owner of real estate, is subject to various environ-
mental laws of federal and local governments. Compliance by the Prudential
Group with existing laws has not had a material adverse effect on either finan-
cial condition or results of operations, and management does not believe it
will have such an impact in the future. However, Prudential Group cannot pre-
dict the impact of new or changed laws or regulations on its current properties
or on properties that it may acquire in the future.
Litigation
Management of Prudential Group does not believe there is any litigation threat-
ened against it other than routine litigation arising out of the ordinary
course of business, some of which is expected to be covered by liability insur-
ance, none of which is expected to have a material adverse effect on the oper-
ating results or financial position of Prudential Group.
F-56
<PAGE>
PRUDENTIAL PROPERTIES GROUP
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
COSTS CAPITALIZED
SUBSEQUENT TO
INITIAL COST TO GROUP ACQUISITION GROSS AMOUNT CARRIED AT DECEMBER 31,1996
-------------------------- ------------------ ------------------------------------------
BUILDINGS AND BUILDINGS AND BUILDINGS AND ACCUMULATED
DESCRIPTION(1) LOCATION LAND IMPROVEMENTS LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL(2) DEPRECIATION
- -------------- ------------- ---------- --------------- ---- ------------- ------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Vintage Avenue Ontario CA $ 3,761 $ 6,918 -- -- $3,761 $ 6,918 $10,679 $1,384
Westgate Parkway Fulton Co. GA 1,619 4,196 -- -- 1,619 4,196 5,815 839
International
Way Hebron KY 663 4,483 -- -- 663 4,483 5,146 486
International
Blvd., Building
1 Cincinnati OH 564 4,858 -- -- 564 4,858 5,422 526
International
Blvd., Building
2 Cincinatti OH 464 4,858 -- -- 464 4,858 5,322 526
Port Road,
Building 1 Columbus OH 651 5,974 -- -- 651 5,974 6,625 137
Port Road,
Building 2 Columbus OH 580 4,370 -- -- 580 4,370 4,950 100
---------- --------------- ---- ------------- ------ ------------- -------- ------------
$ 8,302 $ 35,657 -- -- $8,302 $35,657 $43,959 $3,998
========== =============== ==== ============= ====== ============= ======== ============
</TABLE>
<TABLE>
<CAPTION>
--------------------------------
DATE DATE DEPRECIABLE
DESCRIPTION(1) CONSTRUCTED ACQUIRED LIVES
- -------------- ----------- -------- -----------
<S> <C> <C> <C>
Vintage Avenue 1988 1998 40
Westgate Parkway 1988 1998 40
International
Way 1990 1992 40
International
Blvd., Building
1 1990 1992 40
International
Blvd., Building
2 1990 1992 40
Port Road,
Building 1 1995 1996 40
Port Road,
Building 2 1995 1996 40
</TABLE>
- -----
(1)All properties consist of single buildings which are considered to be Indus-
trial
(2)The aggregate cost for Federal Income Tax purposes as of December 31, 1996
was approximately $44 million
<TABLE>
<S> <C> <C>
The changes
in the
total
Investment
in real
estate for
the years
ended
December
31, 1996
and 1995
are as fol-
lows:
</TABLE>
<TABLE>
<CAPTION>
-------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Balance, beginning of the year $32,384 $32,384
Acquisitions 11,575 --
<CAPTION>
------------ ------------
<S> <C> <C>
Balance, end of year $43,959 $32,384
<CAPTION>
============ ============
<S> <C> <C>
The changes in accumulated depreciation for
the years ended December 31, 1996 and 1995
are as follows:
</TABLE>
<TABLE>
<CAPTION>
-------------------------
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Balance, beginning of the year $3,128 $2,495
Depreciation 870 633
<CAPTION>
------------ ------------
<S> <C> <C>
Balance, end of year $3,998 $3,128
<CAPTION>
============ ============
</TABLE>
F-57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of West Coast Industrial, LLC:
We have audited the accompanying Statement of Revenue and Certain Expenses of
West Coast Industrial, LLC (the Portfolio) for the year ended December 31,
1996. The Statement of Revenue and Certain Expenses is the responsibility of
the Portfolio's management. Our responsibility is to express an opinion on the
Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the Statement of Revenue and Certain
Expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures made in the
Statement of Revenue and Certain Expenses. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the Statement of Revenue and
Certain Expenses. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11 of
Cabot Industrial Trust as described in Note 2 and is not intended to be a
complete presentation of the Portfolio's revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to above
presents fairly, in all material respects, the revenue and certain expenses of
the Portfolio described in Note 2 for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
September 10, 1997
F-58
<PAGE>
WEST COAST INDUSTRIAL, LLC
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
------------------------
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $1,568,688 $3,154,050
Tenant Reimbursements 129,585 488,767
Other Income 1,554 (1,133)
<CAPTION>
----------- ------------
<S> <C> <C>
Total Revenues 1,699,827 3,641,684
<CAPTION>
----------- ------------
<S> <C> <C>
EXPENSES
Property, Operating and Maintenance 85,784 241,665
Real Estate Taxes 180,737 332,503
Management Fees 33,962 74,323
Insurance 130,568 135,953
<CAPTION>
----------- ------------
<S> <C> <C>
Total Expenses 431,051 784,444
<CAPTION>
----------- ------------
<S> <C> <C>
Revenue in Excess of Certain Expenses $1,268,776 $2,857,240
<CAPTION>
=========== ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-59
<PAGE>
WEST COAST INDUSTRIAL, LLC
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Statement of Revenue and Certain Expenses relates to the oper-
ations of West Coast Industrial, LLC (the Portfolio). The Portfolio consists of
nine buildings totaling approximately 700,000 rentable square feet, which are
located at the following addresses:
<TABLE>
<CAPTION>
--------------
<S> <C> <C>
East Howell Avenue, Building 1 Anaheim CA
East Howell Avenue, Building 2 Anaheim CA
Commonwealth Avenue Fullerton CA
Artesia Avenue, Building 1 Fullerton CA
Artesia Avenue, Building 2 Fullerton CA
Avenida Encinas, Building 1 Carlsbad CA
Avenida Encinas, Building 2 Carlsbad CA
Reed Avenue, Building 1 Sacramento CA
Reed Avenue, Building 2 Sacramento CA
</TABLE>
These properties were acquired by the Portfolio on August 12, 1997, from an
unrelated party.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Statement of Revenue and Certain Expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11 of
Cabot Industrial Trust. The statement is not representative of the actual oper-
ations of the Portfolio for the period presented nor indicative of future oper-
ations as certain expenses, primarily depreciation, amortization and interest
expenses, which may not be comparable to the expenses expected to be incurred
by Cabot Industrial Trust in future operations of the Portfolio, have been
excluded.
The combined financial statements and information included in these notes to
the combined financial statements as of June 30, 1997 and for the six months
ended June 30, 1997 are unaudited. In the opinion of management, such financial
statements and information reflect all adjustments necessary for a fair presen-
tation of the results of the interim periods. All such adjustments are of a
normal, recurring nature.
Revenue and Expense Recognition
Revenue is recognized on a straight-line basis over the terms of the related
leases. Expenses are recognized in the period in which they are incurred.
Use of Estimates
The preparation of the Statement of Revenue and Certain Expenses in conformity
with generally accepted accounting principles requires management to make esti-
mates and assumptions that affect the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
3. RENTALS
The property has entered into tenant leases that provide for tenants to share
in the operating expenses and real estate taxes on a pro rata basis, as
defined.
4. FUTURE MINIMUM RENTS
Future minimum rental receipts due on noncancellable operating leases for the
Portfolio as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1997 $3,180,528
1998 3,007,911
1999 2,659,887
2000 2,512,865
2001 2,475,949
Thereafter 9,189,156
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through and escalation provisions in the
leases. The Portfolio is subject to the usual business risks associated with
the collection of the above scheduled rents.
F-60
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners of Herrod Associates:
We have audited the accompanying statement of revenues and certain expenses of
Herrod Associates (a general partnership) for the year ended December 31, 1996.
The financial statement is the responsibility of the Partnership's management.
Our responsibility is to express an opinion on this financial statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenues and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement of
revenues and certain expenses. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evalu-
ating the overall presentation of the statement of revenues and certain
expenses. We believe that our audit provides a reasonable basis for our opin-
ion.
The accompanying statement of revenues and certain expenses was prepared for
the purposes of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the Form S-11 of Cabot Industrial Trust
and excludes material amounts, described in note B to the statement of revenues
and certain expenses, that would not be comparable to those resulting from the
proposed future operations of the property.
In our opinion, the statement of revenues and certain expenses referred to
above presents fairly, in all material respects, the revenues and certain
expenses of Herrod Associates for the year ended December 31, 1996 in confor-
mity with generally accepted accounting principles.
Grant Thornton LLP
Philadelphia, Pennsylvania
March 5, 1997
F-61
<PAGE>
HERROD ASSOCIATES
(A GENERAL PARTNERSHIP)
STATEMENT OF REVENUES AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------------
SIX MONTHS ENDED
JUNE 30, YEAR ENDED
------------------- DECEMBER 31,
1997 1996 1996
-------- ---------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
REVENUES
Rental income
Affiliate $457,976 $ 515,340 $ 968,530
Other 432,032 397,124 845,222
Tenant-reimbursed expenses
Affiliate 1,130 19,371 19,371
Other 106,465 103,592 191,631
<CAPTION>
-------- ---------- ------------
<S> <C> <C> <C>
997,603 1,035,427 2,024,754
<CAPTION>
-------- ---------- ------------
<S> <C> <C> <C>
CERTAIN EXPENSES
General operating 61,410 68,828 92,483
Real estate taxes and licenses 146,900 138,450 293,800
<CAPTION>
-------- ---------- ------------
<S> <C> <C> <C>
208,310 207,278 386,283
<CAPTION>
-------- ---------- ------------
<S> <C> <C> <C>
REVENUES IN EXCESS OF CERTAIN EXPENSES $789,293 $ 828,149 $1,638,471
<CAPTION>
======== ========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-62
<PAGE>
HERROD ASSOCIATES
(A GENERAL PARTNERSHIP)
NOTES TO STATEMENT OF REVENUES AND CERTAIN EXPENSES
NOTE A--ORGANIZATION
Herrod Associates (the Partnership), a New Jersey general partnership, owns and
operates a building in New Jersey which is leased to two tenants, one of whom
is a related party. The related party accounts for approximately 49% of 1996
revenues. The building has an aggregate net leasable area of approximately
418,000 square feet.
NOTE B--BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statement is not representative of the actual opera-
tions of the Partnership for the period presented as certain expenses, which
may not be comparable to the expenses to be incurred by the Cabot Industrial
Trust in the proposed future operation of the property, have been excluded.
Expenses excluded consist of interest, depreciation and amortization. After
reasonable inquiry, the Partnership is not aware of any material factors that
would cause reported financial information not to be necessarily indicative of
future operating results.
The statement of revenues and certain expenses for the six months ended June
30, 1997 and 1996 is unaudited. In the opinion of management, all adjustments
consisting solely of normal recurring adjustments necessary for a fair presen-
tation of the financial statements for the interim periods have been included.
The results for the interim periods are not necessarily indicative of the
results for the full years.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE C--LEASING ACTIVITIES
The Partnership leases warehouse space to tenants under operating leases.
Leases generally provide for minimum rents, as well as reimbursement of the
lessor for certain operating expenses and real estate taxes. The minimum future
rentals on the existing long-term noncancellable operating leases as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1997 $ 869,700
1998 869,700
1999 869,700
2000 579,800
<CAPTION>
----------
<S> <C>
$3,188,900
<CAPTION>
==========
</TABLE>
Minimum future rentals above exclude amounts related to a lease with an affili-
ated company which is on a month-to-month basis.
F-63
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ADD ITEM 30. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth estimates of the expenses that will be incurred
by the Registrant in connection with the issuance and distribution of the
Shares being registered.
<TABLE>
-----
<CAPTION>
AMOUNT
-------
<S> <C>
SEC Registration Fee................................................... $34,849
NASD Filing Fee........................................................ *
NYSE Fee............................................................... *
Legal Fees and Expenses................................................ *
Accounting Fees and Expenses........................................... *
Printing and Engraving Expense......................................... *
Transfer Agent and Registrar Fees...................................... *
Blue Sky Fees and Expenses............................................. *
Other Miscellaneous.................................................... *
Property Transfer Fees................................................. *
<CAPTION>
-------
<S> <C>
Total................................................................ $ *
<CAPTION>
=======
</TABLE>
- -------
* To be supplied by amendment.
ITEM 32. SALES TO SPECIAL PARTIES.
See Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article 5, Section 11, of the Registrant's Declaration of Trust provides as
follows with respect to indemnification of Trustees:
"The Company shall indemnify each Trustee, to the maximum extent permitted by
Maryland law, as amended from time to time, in connection with any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of his or her being or having been a
Trustee of the Company or serving or having served at the request of the Com-
pany as a director, trustee, officer, parnter, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise from all claims and liabilities to which such
Trustee may become subject by reason of service in that capacity and to pay or
reimburse reasonable expenses, as such expenses are incurred, by such Trustee
in connection with any such claim or liability."
II-1
<PAGE>
Article 9, Section 1 of the Registrant's Declaration of Trust provides as fol-
lows with respect to the limitation of liability for Trustees and officers and
indemnification:
"To the maximum extent that Maryland law in effect from time to time per-
mits limitation of the liability of trustees, officers, employees or agents
of a REIT, no trustee, officer, employee or agent of the Company shall be
liable to the Company or to any shareholder for money damages. Neither the
amendment nor the repeal of this Section 1, nor the adoption or amendment
of any other provision of this Declaration of Trust inconsistent with this
Section 1, shall apply to or affect in any respect the applicability of the
preceding sentence with respect to any act or failure to act which occurred
prior to such amendment, repeal or adoption. In the absence of any Maryland
statute limiting the liability of trustees, officers, employees or agents
of a Maryland REIT for money damages in a suit by or on behalf of the Com-
pany or by any shareholder, trustee, officer, employee or agent of the Com-
pany shall be liable to the Company or to any shareholder for money damages
except to the extent that (a) the trustee, officer, employee or agent actu-
ally received an improper benefit or profit in money, property or services,
for the amount of the benefit or profit in money, property or services
actually received; or (b) a judgment or other final adjudication adverse to
the trustee, officer, employee or agent is entered in a proceeding based on
a finding in the proceeding that the trustee's, officer's, employee's or
agent's action or failure to act was the result of active and deliberate
dishonesty and was material to the cause of the action adjudicated in the
proceeding."
Article 9, Section 3 of the Registrant's Declaration of Trust provides as fol-
lows with respect to the indemnification of Trustees and officers:
"Notwithstanding any other provisions of this Declaration of Trust, the
Trust, for the purpose of providing indemnification for its Trustees and
officers, shall have the authority, without specific shareholder approval,
to enter into insurance or other arrangements to indemnify all Trustees and
officers of the Trust against any and all liabilities and expenses incurred
by them by reason of their being Trustees or officers of the Trust, whether
or not the Trust would otherwise have the power under this Declaration of
Trust or under Maryland law to indemnify such persons against such liabil-
ity. Without limiting the power of the Trust to procure or maintain any
kind of insurance or other arrangement, the Trust may, for the benefit of
persons indemnified by it, (a) create a trust fund, (b) establish any form
of self-insurance, (c) secure its indemnity obligation by grant of any
security interest or other lien on the assets of the Trust, or (d) estab-
lish a letter of credit, guaranty or surety arrangement. Any such insurance
or other arrangement may be procured, maintained or established within the
Trust or with any insurer or other person deemed appropriate by the Board
regardless of whether all or part of the stock or other securities thereof
are owned in whole or in part by the Trust. In the absence of fraud, the
judgment of the Board as to the terms and conditions of insurance or other
arrangement and the identity of the insurer or other person participating
in any arrangement shall be conclusive, and such insurance or other
arrangement shall not be subject to voidability, nor subject the Trustees
approving such insurance or other arrangement to liability on any ground,
regardless of whether Trustees participating and approving such insurance
or other arrangement shall be beneficiaries thereof."
The Registrant will enter into indemnity agreements with each of its officers
and Trustees which provide for reimbursement of all expenses and liabilities of
such officer or Trustee, arising out of any lawsuit or claim against such
officer or Trustee due to the fact that he was or is serving as an officer or
Trustee, except for such liabilities and expenses (a) the payment of which is
judicially determined to be unlawful, (b) relating to claims under Section
16(b) of the Securities Exchange Act of 1934, or (c) relating to judicially
determined criminal violations.
The form of Underwriting Agreement to be filed as an exhibit to this Registra-
tion Statement will provide for the reciprocal indemnifications by the Under-
writers of the Registrant, and its Trustees, officers and controlling persons,
and by the Registrant of the Underwriters, and their respective directors,
officers and controlling persons, against certain liabilities under the Securi-
ties Act.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
The consideration to be received by the Registrant from sales of the Shares
hereby registered will be credited to the appropriate capital accounts of the
Registrant.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
See Index to Financial Statements and Index to Exhibits.
II-2
<PAGE>
ITEM 37. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide the underwriters at the
closing specified in the underwriting agreements certificates in such denomina-
tion and registered in such names as required by the underwriters to permit
prompt deliver to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the Reg-
istrant pursuant to the foregoing provisions, or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is, there-
fore, unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a trustee, officer or controlling person of the Registrant in the suc-
cessful defense of any action, suit or proceeding) is asserted by such trustee,
officer or controlling person in connection with the securities being regis-
tered, the Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate juris-
diction the question of whether such indemnification is against public policy
as expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4), or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securi-
ties offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant cer-
tifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly autho-
rized, in the City of Boston, State of Massachusetts, on October 21, 1997.
CABOT INDUSTRIAL TRUST
/s/ Robert E. Patterson
By: _____________________________________
ROBERT E. PATTERSON, PRESIDENT
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of Cabot Industrial Trust, a Maryland
real estate investment trust, and each of the undersigned Trustees and officers
of Cabot Industrial Trust, hereby constitutes and appoints Ferdinand Colloredo-
Mansfeld, Franz Colloredo-Mansfeld, and Neil E. Waisnor its or his true and
lawful attorneys-in-fact and agents, for it or him and in its or his name,
place and stead, in any and all capacities, with full power to act alone, to
sign any and all amendments to this registration statement, and to file each
such amendment to this registration statement with all exhibits thereto, and
any and all documents in connection therewith, with the Securities and Exchange
Commission, hereby granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform any and all acts and things
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as it or he might or could do in person, hereby rati-
fying and confirming all that said attorneys-in-fact and agents, or any of
them, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
NAME AND SIGNATURE TITLE DATE
/s/ Ferdinand Colloredo-Mansfeld Chairman of the October 21,
- ---------------------------------- Board, Chief 1997
FERDINAND COLLOREDO-MANSFELD Executive
Officer, Trustee
/s/ Robert E. Patterson President, Trustee October 21,
- ---------------------------------- 1997
ROBERT E. PATTERSON
/s/ Franz Colloredo-Mansfeld Chief Financial October 21,
- ---------------------------------- Officer 1997
FRANZ COLLOREDO-MANSFELD
/s/ Neil E. Waisnor Senior Vice October 21,
- ---------------------------------- President-- 1997
NEIL E. WAISNOR Finance,
Treasurer,
Secretary
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DOCUMENT DESCRIPTION PAGE NO.
------- -------------------- ----------
<C> <S> <C>
1 Form of Underwriting Agreement between Company, the
Operating Partnership, the Operating Partnership and the
Underwriters named therein.**
3.1 Declaration of Trust, dated October 8, 1997.**
3.2 Bylaws of the Company.**
3.3 Registration Rights Agreement, dated , 1997, between
the Company and , as Rights Agent, including form of
Rights Certificate.**
3.4 Form of share certificate for Common Shares of the
Company.**
3.5 Amended and Restated Limited Partnership Agreement for
the Operating Partnership dated , 1997 by and among
.**
4.1 Contribution Agreement relating to the Capitalization of
Cabot Industrial Trust, dated as of October 10, 1997,
among the Company, the Operating Partnership, Cabot
Partners and Various Contributors and Title Holding
Entities Identified Therein.**
5.1 Opinion of Mayer, Brown & Platt as to legality of Shares
being registered.**
8.1 Opinion of Mayer, Brown & Platt as to certain tax
matters.**
10.1 Form of Indemnification Agreement entered into between
the Company and the Trustees.**
23.1 Consent of Mayer, Brown & Platt (included in the opinions
filed as Exhibits 5 and 8).
23.2 Consent of Arthur Andersen LLP.*
23.3 Consent of KPMG Peat Marwick LLP.*
23.4.1 Consent of Coopers & Lybrand L.L.P.*
23.4.2 Consent of Coopers & Lybrand L.L.P.*
23.5 Consent of Grant Thornton LLP.*
23.6 Consent of Noah T. Herndon.*
23.7 Consent of Christopher C. Milliken.*
23.8 Consent of Maurice Segall*
23.9 Consent of W. Nicholas Thorndike*
23.10 Consent of Ronald L. Skates*
24.1 Power of Attorney pursuant to which amendments to this
Registration Statement may be filed (included on the
signature page to this Registration Statement).
</TABLE>
- -------
* Filed herewith.
** To be filed by amendment.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports,
Cabot Partners Limited Partnership, dated March 20, 1997 (except with respect
to certain matters discussed in Note 6, as to which the date is October 13,
1997), Existing Investors Property Group, dated September 2, 1997, Prudential
Properties Group, dated October 13, 1997 and West Coast Industrial, LLC, dated
September 10, 1997, included in this registration statement of Cabot Industrial
Trust on Form S-11, dated October 21, 1997.
Arthur Andersen LLP
Boston, Massachusetts
October 20, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors of Cabot Industrial Trust:
We consent to the use of our report included herein dated September 29, 1997,
relating to the combined balance sheets of the Pennsylvania Public School
Employes' Retirement System Industrial Properties Portfolio as of December 31,
1996 and 1995, and the related combined statements of operations, owner's
equity, and cash flows for the year ended December 31, 1996 and the period from
July 6, 1995 (date of acquisition) to December 31, 1995, and the related
schedule as of December 31, 1996, included herein, and to the reference to our
firm under the heading "Experts" in this registration statement on Form S-11 of
Cabot Industrial Trust.
KPMG Peat Marwick LLP
Chicago, Illinois
October 20, 1997
<PAGE>
EXHIBIT 23.4.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement of Cabot Industrial
Trust on Form S-11 of our report dated October 6, 1997 on our audits of the
historical cost basis combined financial statements of Orlando Central Park and
500 Memorial Drive as of December 31, 1996 and 1995 and for the years then
ended. We also consent to the reference to our firm under the caption "Ex-
perts."
Coopers & Lybrand L.L.P.
New York, New York
October 20, 1997
<PAGE>
EXHIBIT 23.4.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this registration statement of Cabot Industrial
Trust on Form S-11 of our report dated October 6, 1997 on our audits of the
historical cost basis combined financial statements of Knickerbocker Proper-
ties, Inc. II as of December 31, 1996 and 1995 and for the years then ended. We
also consent to the reference to our firm under the caption "Experts."
Coopers & Lybrand L.L.P.
Atlanta, Georgia
October 20, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated March 5, 1997, accompanying the financial
statement of Herrod Associates contained in the Registration Statement and Pro-
spectus. We consent to the use of the aforementioned report in the Registration
Statement and Prospectus, and to the use of our name as it appears under the
caption "Experts".
GRANT THORNTON LLP
Philadelphia, Pennsylvania
October 20, 1997
1
<PAGE>
EXHIBIT 23.6
CONSENT OF PROPOSED NOMINEE
The undersigned hereby consents to the reference to the undersigned as having
agreed to become a Trustee of Cabot Industrial Trust (the "Company") in the
Company's Registration Statement on Form S-11.
/s/ Noah T. Herndon
________________________________________
Noah T. Herdon
<PAGE>
EXHIBIT 23.7
CONSENT OF PROPOSED NOMINEE
The undersigned hereby consents to the reference to the undersigned as having
agreed to become a Trustee of Cabot Industrial Trust (the "Company") in the
Company's Registration Statement on Form S-11.
/s/ Christopher C. Milliken
________________________________________
Christopher C. Milliken
<PAGE>
EXHIBIT 23.8
CONSENT OF PROPOSED NOMINEE
The undersigned hereby consents to the reference to the undersigned as having
agreed to become a Trustee of Cabot Industrial Trust (the "Company") in the
Company's Registration Statement on Form S-11.
/s/ Maurice Segall
________________________________________
Maurice Segall
<PAGE>
EXHIBIT 23.9
CONSENT OF PROPOSED NOMINEE
The undersigned hereby consents to the reference to the undersigned as having
agreed to become a Trustee of Cabot Industrial Trust (the "Company") in the
Company's Registration Statement on Form S-11.
/s/ W. Nicholas Thorndike
________________________________________
W. Nicholas Thorndike
<PAGE>
EXHIBIT 23.10
CONSENT OF PROPOSED NOMINEE
The undersigned hereby consents to the reference to the undersigned as having
agreed to become a Trustee of Cabot Industrial Trust (the "Company") in the
Company's Registration Statement on Form S-11.
/s/ Ronald L. Skates
________________________________________
Ronald L. Skates
