<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
PROSPECTUS
December 31, 1997
7,500,000 Shares
[LOGO OF CABOT INDUSTRIAL APPEARS HERE]
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. The Company will be one of the largest publicly
traded industrial real estate companies in the United States, with a portfolio
of 144 industrial buildings (the "Properties") located in 21 states and con-
taining approximately 22 million rentable square feet. The Company expects to
qualify for taxation as a real estate investment trust ("REIT") for federal
income tax purposes.
The Common Shares offered hereby are being sold by the Company and will repre-
sent approximately 17.7% of the common equity of the Company on a fully diluted
basis. Concurrently with the sale of the Common Shares offered hereby, the Com-
pany will sell $20.0 million of Common Shares at the Offering Price (as
defined), representing approximately 2.4% of the Company's fully diluted common
equity, in a private placement (the "Concurrent Placement") to Morgan Stanley
Asset Management Inc., on behalf of certain of its institutional clients (the
"Concurrent Investor"). The remaining 79.9% of the Company's fully diluted
common equity will be beneficially owned by officers and Trustees of the Com-
pany, the Contributing Investors referred to herein and certain other investors
in the form of Common Shares or limited partnership interests ("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
$.325 per Common Share, or $1.30 per Common Share on an annual basis. See "Dis-
tribution 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 $19.00
and $21.00 per Common Share. See "Underwriting" for a summary of factors that
will be considered in determining the initial public offering price. The Common
Shares have been approved for listing on the New York Stock Exchange (the
"NYSE") under the symbol "CTR," subject to official notice of issuance.
SEE "RISK FACTORS" BEGINNING ON PAGE 16 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 assets they represent;
.. The Company's expected initial level of distributions is based on assumptions
which could prove incorrect;
.. Limitation of share ownership to 9.8% of the outstanding shares of beneficial
interest, staggered elections of 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
management's lack of experience in operating the Company as a REIT;
.. The Board of Trustee's ability to change the Company's investment, financing
and conflict of interest policies without shareholder approval;
.. Industrial real estate investment risks, such as failure of tenants to make
lease payments, the effect of national and local economic and other condi-
tions on real estate values and environmental issues;
.. Conflicts of interests involving management and Contributing Investors, which
could result in decisions that do not fully reflect the interests of all
shareholders; and
.. Two Contributing Investors will own 24.2% and 14.1%, respectively, of the
Company's fully diluted common equity.
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.
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE
TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- - --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $ $ $
- - --------------------------------------------------------------------------------
Total(3) $ $ $
</TABLE>
- - --------------------------------------------------------------------------------
(1)The Company and the Operating Partnership have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the Secu-
rities Act of 1933, as amended. See "Underwriting."
(2)Before deducting expenses payable by the Company estimated at $6,500,000.
(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
1,125,000 Common Shares on the same terms as set forth above, solely to cover
over-allotments, 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
certificates representing the Common Shares will be made against payment
therefor on or about , 1998 at the offices of J.P. Morgan Securities
Inc., 60 Wall Street, New York, New York.
J.P. MORGAN & CO.
GOLDMAN, SACHS & CO.
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
, 1998
<PAGE>
[MAP SHOWING THE FIVE U.S. REGIONS
AND LOCATIONS OF PROPERTIES AND
PHOTOGRAPHS OF CERTAIN PROPERTIES]
<PAGE>
BULK DISTRIBUTION
CHICAGO, IL/ MIDWEST REGION
[Picture of Building] [Schematic of Building]
MULTI TENANT
ORLANDO, FL/SOUTH REGION
[Picture of Building] [Picture of Interior of Building]
WORKSPACE
SAN FRANCISCO, CA/WEST REGION
[Picture of Building] [Schematic of Building]
<PAGE>
[Schematic of Building] [Picture of Building] [Picture of Building]
[Picture of Building] [Picture of Building]
[Schematic of Building] [Picture of Building] [Picture of Building]
<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, the acquisition of the Properties and certain
other assets described under the heading "The Formation and Other Transactions"
(the "Formation Transactions") and the Concurrent Placement , (ii) the Under-
writers' over-allotment option is not exercised, and (iii) the initial public
offering price (the "Offering Price") is $20.00 per Common Share (the midpoint
of the range set forth on the cover page of this Prospectus). Unless the con-
text otherwise requires, all references 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 Advisors, Inc., a Delaware corporation (the "Management Company"), (ii)
"Cabot Partners" means Cabot Partners Limited Partnership, and (iii) the "Con-
tributing Investors" means those Cabot Partners advisory clients who are con-
tributing Properties (or where such clients hold title through another entity,
such title holding entity), C-M Holdings, L.P. ("C-M Holdings") and certain
affiliated partnerships (collectively, with C-M Holdings, the "C-M Property
Partnerships") and certain other investors who are contributing Properties in
the Formation Transactions. All other capitalized terms used in this Prospectus
have the meanings set forth in the Glossary.
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. The Company will be one of the largest publicly traded indus-
trial real estate companies in the United States, with a portfolio of 144 Prop-
erties located in 21 states throughout the United States, containing approxi-
mately 22 million rentable square feet. At September 30, 1997, the Properties
were approximately 93% leased to 258 tenants. As of November 18, 1997, no
single tenant accounted for more than 5.2% of the Company's total Annualized
Base Rent. Approximately 95% of the Company's Properties are located in the top
15% of the nation's 273 industrial markets as rated by Cognetics Real Estate,
Inc. ("Cognetics"), a nationally recognized real estate research firm, on the
basis of projected demand for distribution property space and flex/R&D property
space.
The Company's goal is to be the preeminent national real estate company focused
on serving a variety of industrial space users in the country's principal com-
mercial markets. The Company owns and operates a diversified portfolio 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 21 markets (17 of which the Company has
identified as principal target markets) and owning Properties with more than
one million rentable square feet in eight 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 geographic diversification and sub-
stantial presence in multiple markets is a strategic advantage that allows it
to (i) serve industrial space users with multiple 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. Cabot Partners expects to acquire a total of $275 million
of industrial properties on behalf of its clients in 1997. As of December 19,
1997, $244 million of such acquisitions had been completed and approximately
$31 million were under contract. Also, during 1997, Cabot Partners negotiated
the contribution to the Company in the Formation Transactions of approximately
$270 million of industrial properties not previously managed by Cabot Partners.
The Company has contracts to purchase 21 additional Properties for an aggregate
purchase price of approximately $142 million (the "Company Acquisitions"). The
Company Acquisitions are expected to be completed concurrently with or shortly
following the completion of the Offering.
The senior management of the Company has an average of approximately 18 years
of experience in the real estate industry and will beneficially own 4.0% of the
Company's fully diluted common equity upon the closing of the Offering. Members
of the Company's senior management have worked together since 1987 as the exec-
utive officers of Cabot Partners and, previously, 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 regis-
tered investment advisor providing industrial real estate investment and man-
agement services to public and private pension funds and others, was formed as
a separate entity in 1990 to purchase the real estate advisory management busi-
ness of Cabot Advisors.
The Company is organized as a real estate investment trust under Maryland law
and expects to qualify as a REIT for federal income tax purposes.
1
<PAGE>
RISK FACTORS
An investment in the Common Shares involves various risks. Prospective
investors should carefully consider the matters discussed under "Risk Factors"
prior to making an investment in the Company. Such risks 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
shares of the Company by a single person to 9.8% of the number of issued
and outstanding shares of beneficial interest of the Company or the total
equity value of such shares (subject to certain exceptions), staggered
elections of Trustees and certain other provisions contained in the orga-
nizational documents of the Company and the Operating Partnership, each
of which may have the effect of delaying, deferring or preventing a
change in control of the Company or other transaction that might involve
a price for the Common Shares that exceeds their then current 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.
. The Company's Board of Trustees (the "Board of Trustees") may change the
Company's investment, financing, distribution and other policies at any
time without shareholder approval.
. Investment in and operation of commercial real estate generally involves
certain risks, including the failure of tenants to make lease payments,
the inability to renew or re-lease space upon the expiration of leases
(leases accounting for 11.8% of the Company's Annualized Base Rents are
scheduled to expire in 1998), the effect of national and local economic
and other conditions on real estate values, including effects associated
with cyclical weaknesses or demographic 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 ren-
ovation and re-leasing costs, the impact on the Company's properties of
competition from other existing properties and from newly constructed
properties in future periods, environmental issues and changes in the
ability of the Company's properties to generate sufficient cash flow to
meet operating expenses (including possible future debt service require-
ments).
. The Company may constitute a "pension-held REIT" immediately after the
closing of the Offering. If this were to occur, certain types of
borrowings or other activities, if engaged in by the Company, would
result in a portion of the dividends received by any qualified pension
plan owning more than 10.0% in value of the Company's shares being tax-
able to such plan as unrelated business taxable income.
. 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. Two Contributing Investors will own
24.2% and 14.1%, respectively, of the Company's fully diluted common
equity.
. The absence of a prior market for the Common Shares, the lack of assur-
ance that an active trading market will develop or that the 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.
. One Contributing Investor has relied upon an exemption from the prohib-
ited transaction rules of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and Section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"), in contributing Properties to the Com-
pany. The applicability 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 Forma-
tion Transactions; 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 Properties, particularly newly
acquired Properties and properties 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
2
<PAGE>
financing risks, including changes from period to period in the avail-
ability 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 payments and distributions to shareholders at desired levels.
. 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 could cause such differences include, but are not limited
to, the risks described under the "Risk Factors" section of this Prospec-
tus.
. The purchasers of Common Shares in the Offering will experience immediate
dilution of $1.26 per Common Share in net tangible book value in connec-
tion with their investment in 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 properties will continue and will support
increasing rents. Nationwide, the demand for distribution and flex/R&D proper-
ties during the period from 1997 to 2002 is projected by Cognetics to increase
over existing levels by approximately 791 million square feet, or 14.8%, con-
sisting of approximately 598 million square feet for distribution properties
and approximately 193 million square feet for flex/R&D properties. Continuing
demand for well-located, modern industrial properties is expected to increase
due to (i) increasing consumption on a per capita basis, coupled with popula-
tion growth, (ii) business' increasing need for efficient inventory management,
(iii) growing international trade, and (iv) the growing significance of smaller
companies seeking efficient and flexible work space in well-located, suburban
industrial parks. According to Cognetics, companies with fewer than 100
employees now account for 47% of all existing jobs; however, they accounted for
84% of all net job creation during 1992 through 1996. Cognetics anticipates
that the majority of net job creation over the next five years will continue to
be due to small firms with less than 100 employees as this has been a consis-
tent pattern for the last decade.
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 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 activity increases the Company's visibility to prospective
tenants and enables 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 Variety of Tenants by Offering a Broad Spectrum of Industrial
Property Types
Offering a broad spectrum 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 workspace properties, in addition to distri-
bution 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 markets.
The Company believes that smaller business establishments will form an impor-
tant segment of its tenant base. Business establishments with fewer than 100
employees are projected, based on data supplied by Cognetics, to generate
approximately 67% of the projected increased demand for distribution and
flex/R&D property space during the period from 1997 to 2002.
GROWTH STRATEGIES
Acquisitions
The Company will seek to capitalize on its competitive advantages primarily by
acquiring additional modern, high-quality properties in attractive submarkets
within major industrial markets.
The Company's 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 submarkets, (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 com-
piled into a proprietary database covering each market and submarket in which
it has invested or that it has targeted. This database is updated periodically
and contains computerized profiles, keyed to Company-prepared aerial maps, of
the Company's 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 and the Concurrent Placement, the Company
expects to have approximately $13.4 million of outstanding long-term debt,
approximately $6.2 million of available cash and a Debt-to-Total Market Capi-
talization Ratio of less than 2%. 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 proper-
ties on a non-cash basis by exchanging Units in the Operating Partnership for
such properties in a tax-deferred manner, 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, 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. During the
period from January 1, 1995 to September 30, 1997, the lease renewal rates for
the Properties acquired prior to September 30, 1997 and for the Existing
Investors Property Group were 84.0% and 88.7%, respectively.
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, based on such discussions, 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 development 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 $6.2 million of the proceeds from the Offering and
the Concurrent Placement will be available for general corporate purposes,
including acquisitions and working capital, after payment of expenses of the
Offering, the Concurrent Placement and the Formation Transactions and the use
of approximately $133.7 million and $13.1 million of net proceeds to fund the
Company Acquisitions and to repay certain outstanding indebtedness, respec-
tively. The Company is currently negotiating with several financial institu-
tions the establishment of a $325 million revolving credit facility (the "Ac-
quisition Facility") to be used primarily for property acquisitions and expects
the facility to be in place upon the closing of the Offering. The Company
intends to operate with a Debt-to-Total Market Capitalization Ratio that gener-
ally will not exceed 40%, although the Company's Declaration of Trust and
Bylaws 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 144 Prop-
erties having an aggregate of approximately 22 million rentable square feet,
approximately 93% of which space was leased to 258 tenants at September 30,
1997. The Company categorizes its properties into three types: bulk distribu-
tion properties, multitenant distribution properties and workspace properties.
See "Properties--General."
The following tables provide information regarding the Properties as of Sep-
tember 30, 1997.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) ANNUALIZED
------------------------ ---------------------------------- NET EFFECTIVE
PER LEASED RENT PER
NUMBER OF SQUARE LEASED PERCENT
PROPERTY TYPE BY REGION PROPERTIES NUMBER % OF TOTAL AMOUNT % OF TOTAL FOOT SQUARE FOOT(2) LEASED
- - ----------------------- ---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BULK DISTRIBUTION
PROPERTIES:
West 13 2,739,730 12.5% $ 7,790,735 10.4% $3.22 $3.22 88.4%
Southwest 4 1,326,200 6.0 2,709,712 3.6 3.07 3.06 66.6
Midwest 16 3,872,086 17.6 11,295,226 15.0 3.01 2.89 97.0
Southeast 5 1,355,266 6.2 3,690,304 4.9 3.16 3.14 86.1
Northeast 10 2,496,262 11.3 9,291,628 12.4 3.72 3.76 100.0
---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
Subtotal/weighted
average 48 11,789,544 53.6% $34,777,605 46.3% $3.24 $3.21 91.0%
---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
MULTITENANT DISTRIBUTION
PROPERTIES:
West 4 831,626 3.8% $ 3,002,560 4.0% $3.61 $3.49 100.0%
Southwest 3 385,135 1.8 1,163,982 1.5 3.02 2.75 100.0
Midwest 13 2,159,560 9.8 7,771,102 10.3 3.93 3.91 91.7
Southeast 7 1,274,745 5.8 4,070,073 5.5 3.39 2.85 94.2
Northeast 11 2,065,503 9.3 7,998,906 10.7 3.87 3.71 100.0
---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
Subtotal/weighted
average 38 6,716,569 30.5% $24,006,623 32.0% $3.71 $3.53 96.2%
---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
WORKSPACE PROPERTIES:
West 28 1,337,123 6.1% $ 6,566,829 8.7% $4.96 $5.03 99.0%
Southwest 2 255,736 1.2 914,640 1.2 5.74 6.27 62.3
Midwest 5 345,060 1.6 1,636,516 2.2 5.65 5.37 84.0
Southeast 12 889,523 4.0 3,420,659 4.6 4.27 4.23 90.1
Northeast 11 665,892 3.0 3,790,400 5.0 5.88 5.12 96.8
---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
Subtotal/weighted
average 58 3,493,334 15.9% $16,329,044 21.7% $5.07 $4.94 92.2%
---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
Total/weighted average 144 21,999,447 100.0% $75,113,272 100.0% $3.68 $3.58 92.8%
========== ========== ========== =========== ========== ========== ============== =======
----------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) ANNUALIZED
------------------------ ---------------------------------- NET EFFECTIVE
PER LEASED RENT PER
NUMBER OF SQUARE LEASED PERCENT
PROPERTIES BY REGION PROPERTIES NUMBER % OF TOTAL AMOUNT % OF TOTAL FOOT SQUARE FOOT(2) LEASED
- - -------------------- ---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
West 45 4,908,479 22.3% $17,360,124 23.1% $3.79 $3.79 93.3%
Southwest 9 1,967,071 8.9 4,788,334 6.4 3.35 3.34 72.6
Midwest 34 6,376,706 29.0 20,702,844 27.6 3.44 3.34 94.5
Southeast 24 3,519,534 16.0 11,181,036 14.9 3.53 3.31 90.1
Northeast 32 5,227,657 23.8 21,080,934 28.0 4.05 3.91 99.6
---------- ---------- ---------- ----------- ---------- ---------- -------------- -------
Total/weighted average 144 21,999,447 100.0% $75,113,272 100.0% $3.68 $3.58 92.8%
========== ========== ========== =========== ========== ========== ============== =======
</TABLE>
- - -------
(1) "Annualized Net Rent" means annualized monthly Net Rent from leases in
effect as of September 30, 1997. "Net Rent" means contractual rent, excluding
any reimbursements for real estate taxes or operating expenses.
(2) "Annualized Net Effective Rent" means Annualized Net Rent, less amortiza-
tion of the related leasing costs, as adjusted to reflect the effect of rent
concessions and straight-lining of rent steps.
6
<PAGE>
THE FORMATION AND OTHER TRANSACTIONS
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 Cabot Partners' operating assets, other than
certain assets 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 man-
agement business relating to industrial properties that are not being contrib-
uted pursuant to the Formation Transactions will be held by, and such business
will be conducted through, the Management Company. See "Formation and Other
Transactions."
The Formation Transactions and the Company Acquisitions have been and will be
effected as follows:
.. The Company has been organized by Cabot Partners as a real estate invest-
ment trust under Maryland law.
.. The Operating Partnership has been formed as a limited partnership under
Delaware law, with the Company as its sole general partner.
.. The Properties described in this Prospectus include both Properties that
are being contributed to the Operating Partnership (or to the Company for
transfer to the Operating Partnership) by the Contributing Investors and
Properties expected to be purchased by the Operating Partnership concur-
rently with or shortly after the closing of the Offering (referred to
herein as the "Company Acquisitions"). The Contributing Investors include
certain of the existing advisory clients of Cabot Partners or their holding
entities (collectively referred to herein as the "Existing Investors") and
certain other industrial real estate investors or their holding entities.
.. The Properties that will be contributed to the Company in the Formation
Transactions include previously owned Properties of the Existing Investors
that have been managed by Cabot Partners and are referred to in the histor-
ical and pro forma financial statements included in this Prospectus as the
"Existing Investors Property Group," additional Properties recently
acquired or being acquired by Cabot Partners on behalf of Existing
Investors (the "Additional Acquisitions"), and Properties owned by the
other Contributing Investors (the "New Investors Property Group").
.. The 21 Properties that are to be purchased in the Company Acquisitions are
currently under contract to be purchased by the Operating Partnership at an
aggregate purchase price of approximately $141.8 million. Approximately
$133.7 million of the net proceeds from the Offering and the Concurrent
Placement will be used to fund such purchases. The Company also will assume
approximately $8.2 million of existing mortgage indebtedness secured by
certain of the Properties to be acquired in the Company Acquisitions. See
"Use of Proceeds," "--Financial Strategies" and "The Company--Financial
Strategies."
.. 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 Management Company or to the Oper-
ating Partnership for transfer to the Management Company concurrently with
the closing of the Offering. The Operating Partnership will own 100% of the
non-voting preferred stock of the Management Company, representing 95.0% of
the economic interest in 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 5.0% of the
economic interest in the Management 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.
.. Contemporaneously with the closing of the Offering, the Company will sell
$20.0 million of Common Shares at the Offering Price to the Concurrent
Investor in the Concurrent Placement.
.. As a result of the Formation Transactions, the Contributing Investors and
Cabot Partners will become equity investors in the Company and the Oper-
ating Partnership. The Contributing Investors will hold an aggregate of
23,068,699 Units and 8,961,714 Common Shares having a value, based on the
Offering Price, of approximately $640.6 million and Cabot Partners will
hold an aggregate of 1,819,587 Units having a value, based on the Offering
Price, of approxi mately $36.4 million. See "Principal and Management
Shareholders." Such ownership by the Contributing Investors and Cabot Part-
ners will represent approximately 75.6% and 4.3%, respectively, of the
fully diluted common equity of the Company. Of the Units that will be
received by Cabot Partners (i) Ferdinand Colloredo-Mansfeld, the Chief
7
<PAGE>
Executive Officer of the Company, will receive 875,792 Units having a value,
based on the Offering Price, of approximately $17.5 million and (ii) Robert
E. Patterson, the President of the Company, will receive 128,590 Units
having a value, based on the Offering Price, of approximately $2.6 million.
.. 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 41.2% general partnership interest (before
exchange of Units) in the Operating Partnership and will be an indirect
owner of the contributed Properties and other assets through and to the
extent of such general partnership interest.
8
<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 and the Concurrent Placement. See "Formation and Other Transactions."
THE COMPANY
<TABLE>
<CAPTION>
---------------------
PERCENT PERCENT
OF COMMON OF COMMON
SHARES SHARES
BEFORE AFTER
EXCHANGE EXCHANGE
OWNER OF UNITS OF UNITS
----- --------- ---------
<S> <C> <C>
Public Investors................................ 43.0% 17.7%
Contributing Investors, Concurrent Investor and
Others(1)...................................... 57.0% 78.3%
Management(2)................................... -- 4.0%
</TABLE>
THE OPERATING PARTNERSHIP
<TABLE>
<CAPTION>
---------------------
OWNERSHIP OWNERSHIP
INTEREST INTEREST
BEFORE AFTER
EXCHANGE EXCHANGE
OWNER OF UNITS OF UNITS
----- --------- ---------
<S> <C> <C>
Company........................................... 41.2% 100.0%
Contributing Investors and Others(1).............. 54.8% --
Management(2)..................................... 4.0% --
</TABLE>
THE MANAGEMENT COMPANY
<TABLE>
<CAPTION>
--------------------------------
VOTING NON-VOTING TOTAL
COMMON PREFERRED ECONOMIC
OWNER STOCK STOCK INTEREST
----- --------- --------- ---------
<S> <C> <C> <C>
Operating Partnership(3)............... -- 100.0% 95.0%
Ferdinand Colloredo-Mansfeld........... 100.0% -- 5.0%
</TABLE>
- - -------
(1) Includes each of the Contributing Investors other than the C-M Property
Partnerships and those holders of interests in Cabot Partners who are not offi-
cers or Trustees of the Company or the Management Company. 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. The ownership
interests in the Company attributable to the C-M Property Partnerships 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 and Other Trans-
actions."
(2) Includes certain officers and Trustees and members of their immediate fami-
lies who will receive beneficial ownership of Units in exchange for their
interests in Cabot Partners and/or the C-M Property Partnerships which are
being contributed in the Formation Transactions. See "Formation and Other
Transactions."
(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 95% of the after-tax economic benefits of the
Management Company. See "The Company--Third-Party Investment Management."
9
<PAGE>
BENEFITS TO RELATED PARTIES
Certain of the officers and Trustees of the Company and members of their imme-
diate families, which persons are collectively referred to herein as the "Cabot
Group Participants," and the Contributing Investors will realize certain bene-
fits as a result of the Offering and the Formation Transactions. These benefits
are summarized below and are described in greater detail under the captions
"Formation and Other Transactions," "Certain Relationships and Related Transac-
tions" and "Principal and Management Shareholders."
RECEIPT OF UNITS AND COMMON SHARES IN THE FORMATION TRANSACTIONS
The Cabot Group Participants will receive a total of 1,705,506 Units in the
Formation Transactions in exchange for their interests in the C-M Property
Partnerships and/or Cabot Partners. These Units (representing approximately
4.0% of the common equity of the Company on a fully diluted basis) will have a
total value of approximately $34.1 million, based on the Offering Price, com-
pared to the aggregate pro forma net tangible book value of the assets to be
contributed to the Operating Partnership by the Cabot Group Participants of
approximately $9.5 million as of September 30, 1997 (which assets had an aggre-
gate historical net book value at that date of $5.1 million). The C-M Property
Partnerships are owned by Ferdinand Colloredo-Mansfeld, the Company's Chief
Executive Officer, and members of his immediate family, including Franz
Colloredo-Mansfeld, the Company's Chief Financial Officer, with Ferdinand
Colloredo-Mansfeld owning a 97% partnership interest therein and Franz
Colloredo-Mansfeld and other family members holding 1% and 2% partnership
interests therein, respectively. Of the total number of Units that will be
received by the Cabot Group Participants in the Formation Transactions, (i)
Ferdinand Colloredo-Mansfeld will receive 1,331,657 Units having a value, based
on the Offering Price, of approximately $26.6 million in exchange for his
interests in the C-M Property Partnerships and Cabot Partners, which had a his-
torical book value and historical cost partnership equity value of approxi-
mately $1.8 million and $2.3 million, respectively, as of September 30, 1997
and (ii) Robert E. Patterson, President of the Company, will receive 128,590
Units having a value, on such basis, of approximately $2.6 million in exchange
for his interests in Cabot Partners, which had a historical cost partnership
equity value of $334,000 as of September 30, 1997.
The Contributing Investors (excluding for this purpose the C-M Property Part-
nerships) will receive a total of 22,598,735 Units and 8,961,714 Common Shares
in exchange for their interests in the Properties in connection with the Forma-
tion Transactions. These Units and Common Shares (representing approximately
74.5% of the common equity of the Company on a fully diluted basis) will have a
total value of approximately $631.2 million based on the Offering Price, com-
pared to the aggregate historical net book value as of September 30, 1997 of
the assets to be contributed to the Company by such Contributing Investors of
approximately $601.7 million.
The Units received by the Cabot Group Participants and the Contributing
Investors in the Formation Transactions may, in accordance with the Operating
Partnership Agreement, be exchanged in whole or in part for Common Shares on a
one-for-one basis or, at the election of the Company, the cash equivalent
thereof, at any time commencing one year after the Closing Date in the case of
Contributing Investors or two years after the Closing Date in the case of Cabot
Group Participants. 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 Par-
ticipants and certain of the Contributing Investors with continued deferral of
the taxable gain associated with dispositions of those assets.
Treasury regulations under Section 704(c) of the Code provide partnerships with
a choice of several methods of accounting for 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 the contribution ("Book-Tax
Differences"). The Operating Partnership and the Company have not yet deter-
mined which of the alternative methods of accounting for Book-Tax Differences
will be elected by the Partnership. Such determination could result in the
allocation of lower amounts of taxable income to the Cabot Group Participants
in certain circumstances than might otherwise occur if the Partnership elected
an alternative method. See "Federal Income Tax Consequences--Tax Aspects of the
Company's Investments in Partnerships--Tax Allocations with Respect to the
Properties."
REPAYMENT OF DEBT
Approximately $18.3 million of indebtedness secured by the Properties to be
contributed by the C-M Property Partnerships will be assumed by the Operating
Partnership and approximately $13.1 million of such indebtedness will be repaid
from the proceeds of the Offering.
10
<PAGE>
OPTIONS GRANTED
The Company will grant options to purchase at the Offering Price an aggregate
of 1,675,000 Units that will be convertible into an equal number of Common
Shares under the Company's Long Term Incentive Plan to senior executive offi-
cers of the Company, subject to certain vesting requirements. See "Management--
Long Term Incentive Plan."
THE OFFERING
<TABLE>
<S> <C>
COMMON SHARES OFFERED........................ 7,500,000 (1)
COMMON SHARES TO BE OUTSTANDING AFTER THE
OFFERING.................................... 42,350,000 (1)(2)
USE OF PROCEEDS.............................. The proceeds to the Company from the Offering
and the Concurrent Placement, after deducting
the underwriting discount of the Offering and
the estimated expenses of the Offering, the
Concurrent Placement and the Formation
Transactions, are estimated to be approximately
$153.0 million (approximately $173.9 million if
the Underwriters' over-allotment option is
exercised in full). Approximately $133.7 million
and $13.1 million of such net proceeds will be
used to fund the Company Acquisitions and to
repay indebtedness secured by certain of the
Properties, respectively, with the balance to be
used for general purposes, including
acquisitions of additional properties.
NYSE TRADING SYMBOL.......................... "CTR"
</TABLE>
- - -------
(1) Excludes 1,125,000 Common Shares issuable upon exercise of the Underwrit-
ers' over-allotment option.
(2) Includes 24,888,286 Common Shares that may be issued upon exchange of Units
and 1,000,000 Common Shares (based on the Offering Price) to be sold in the
Concurrent Placement. See "Formation and Other Transactions." Excludes
2,188,500 Common Shares reserved for issuance upon exercise of options to be
granted to officers, employees and Trustees 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 the com-
pletion of the Offering through March 31, 1998, based upon a quarterly distri-
bution of $.325 per Common Share. On an annualized basis, this would be $1.30
per Common Share (or an annual distribution rate of 6.5% based on the Offering
Price). The Company does not expect to change its estimated initial distribu-
tion per Common Share if the Underwriters' over-allotment option is exercised.
The Company intends to maintain its initial distribution rate through at least
the remainder of 1998 unless actual results of operations, economic conditions
or other factors differ materially from the assumptions used in calculating the
estimate of its cash available for distribution. Based on the Company's esti-
mated results of operations for the 12 months ending December 31, 1998, the
Company estimates that less than 1% of the anticipated initial annual distribu-
tion to shareholders will represent a return of capital for federal income tax
purposes and that the Company will be required to distribute $21.4 million or
$1.22 per Common Share with respect to such 12-month period in order to main-
tain its status as a REIT. If future taxable income increases above or
decreases below the estimated taxable income for the 12 months following the
closing of the Offering, the percentage of the anticipated initial annual dis-
tribution representing a return of capital will decrease or increase, respec-
tively. See "Distribution Policy" for the calculation of estimated pro forma
cash available for distribution 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 Consequences--Taxation
of the Company--Annual Distribution Requirements") and such other factors as
the Board of Trustees deems relevant. See "Risk Factors--Possible Changes in
Policies Without Shareholder Approval; No Limitation on Debt."
11
<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 taxable year ending
December 31, 1998. 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 organiza-
tional and operational requirements, including a requirement that it currently
distribute at least 95% of its annual taxable income (excluding net capital
gain). 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 taxation 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 corpo-
rate rates, and distributions to the Company's shareholders in any such year
would not be deductible by the Company. See "Risk Factors--Tax Risks" and "--
Antitakeover Effect of Ownership Limit, Staggered Board and Power to Issue
Additional Shares" and "Federal Income Tax Consequences--Taxation of the Compa-
ny."
12
<PAGE>
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 September 30, 1997 for the
Contributing Investors (such Contributing Investors are referred to herein as
the "Existing Investors" and such Properties (including the related assets and
liabilities) are referred to herein 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 nine months ended
September 30, 1997, in the case of the Existing Investors Property Group, and
as of and for the years ended December 31, 1996, 1995 and 1994, in the case of
both the Existing Investors Property Group and Cabot Partners, have been
derived from Existing Investors Property Group Combined financial statements
and Cabot Partners financial statements that 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 conj-
unction 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
Cabot Partners financial statements and the notes thereto not included in this
Prospectus which have been audited by Arthur Andersen LLP. The summary finan-
cial data presented below as of and for the years ended December 31, 1993 and
1992 and as of and for the nine months ended September 30, 1996 for the
Existing Investors Property Group and as of and for the nine months ended Sep-
tember 30, 1997 and 1996 for Cabot Partners have not been audited but, in the
opinion of management, include 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 nine months ended September 30, 1997
are not necessarily indicative of results for the entire year. Other Data (in-
cluding Property data) for all periods and dates presented are unaudited.
The summary pro forma financial data presented below has been derived from the
pro forma combined consolidated balance sheet as of September 30, 1997 and has
been prepared to reflect (i) the contribution to the Company of (A) the
Existing Investors Property Group, (B) the Properties owned by those Contrib-
uting Investors that were not advisory clients of Cabot Partners at or prior to
September 30, 1997 (the "New Investors Property Group") and (C) the Properties
acquired after September 30, 1997 by Cabot Partners on behalf of the Existing
Investors (the "Additional Acquisitions"), (ii) the other Formation Transac-
tions, (iii) the Company Acquisitions, (iv) the Offering and the Concurrent
Placement and the use of a portion of the net proceeds thereof to repay indebt-
edness and (v) certain other adjustments, as if each of such contributions,
transactions and adjustments had occurred on September 30, 1997. The pro forma
condensed combined operating and other data for the nine months ended September
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 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
nine months ended September 30, 1997, (ii) the other Formation Transactions,
(iii) the Company Acquisitions, (iv) the use of a portion of the net proceeds
of the Offering and the Concurrent Placement to repay indebtedness and (v) cer-
tain other adjustments, as if each of such contributions, transactions and
adjustments had occurred on January 1, 1996.
In the opinion of management, the pro forma combined consolidated financial
statements include all adjustments necessary to reflect the effects of the
foregoing transactions and adjustments. The pro forma statements are unaudited
and are not necessarily indicative of what the financial position would have
been or the combined results that would have been obtained if the transactions
and adjustments reflected therein had been consummated on the dates indicated,
or on any particular date in the future, nor do they purport to represent the
financial position, results of operations or changes in cash flows as of any
future date or for any future period.
13
<PAGE>
CABOT INDUSTRIAL TRUST
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------------- --------------------------------------------------------------
COMPANY EXISTING INVESTORS COMPANY
PRO FORMA PROPERTY GROUP (1) PRO FORMA EXISTING INVESTORS PROPERTY GROUP (1)
----------- -------------------- ------------ ------------------------------------------------
In thousands,
except per share 1997 1997 1996 1996 1996 1995 1994 1993 1992
data ----------- --------- --------- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues $ 67,918 $ 28,736 $ 26,138 $ 88,691 $ 35,180 $ 28,794 $ 28,209 $ 25,252 $ 21,904
Real estate tax
expense 7,600 4,005 3,649 9,925 5,037 3,979 3,769 5,144 2,772
Property operating
expenses 5,279 3,284 3,003 7,095 4,323 3,357 3,063 3,227 2,940
General and adminis-
trative expenses 2,655 -- -- 3,404 -- -- -- -- --
Interest expense 872 1,399 1,430 1,177 1,931 2,097 2,082 2,013 2,292
Depreciation and
amortization
expense 16,022 6,473 5,864 21,850 7,966 7,118 6,606 6,111 5,441
----------- --------- --------- ------------ -------- -------- -------- -------- --------
Operating income 35,490 13,575 12,192 45,240 15,923 12,243 12,689 8,757 8,459
Gain on sale of
properties -- -- -- -- -- -- 186 -- --
----------- --------- --------- ------------ -------- -------- -------- -------- --------
Net income before
minority interest 35,490 13,575 12,192 45,240 15,923 12,243 12,875 8,757 8,459
Minority interest (20,858) -- -- (26,588) -- -- -- -- --
----------- --------- --------- ------------ -------- -------- -------- -------- --------
Net income $ 14,632 $ 13,575 $ 12,192 $ 18,652 $ 15,923 $ 12,243 $ 12,875 $ 8,757 $ 8,459
=========== ========= ========= ============ ======== ======== ======== ======== ========
Pro forma net income
per Common Share
(2) $0.84 $1.07
=========== ============
<CAPTION>
-------------------------------------------------------------------------------------------------
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
--------------------------------- ------------------------------------------------
COMPANY EXISTING INVESTORS
PRO FORMA PROPERTY GROUP (1) EXISTING INVESTORS PROPERTY GROUP (1)
----------- -------------------- ------------------------------------------------
1997 1997 1996 1996 1995 1994 1993 1992
In thousands ----------- --------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Rental properties
(before accumulated
depreciation) $ 791,278 $ 358,498 $ 323,639 $336,836 $301,059 $250,387 $255,050 $240,358
Rental properties,
net 791,278 320,956 291,226 304,308 274,629 229,451 237,101 227,149
Total assets 807,389 334,569 308,237 318,732 289,337 241,026 247,615 236,457
Mortgage debt 13,694 18,655 19,496 19,292 20,083 20,608 20,550 20,550
Limited Partners
interest in Oper-
ating Partnership 466,449 -- -- -- -- -- -- --
Shareholders'/Owners'
equity 327,237 307,501 281,267 291,286 261,629 213,203 220,621 211,897
<CAPTION>
-------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------------------- --------------------------------------------------------------
COMPANY EXISTING INVESTORS COMPANY
In thousands, PRO FORMA PROPERTY GROUP (1) PRO FORMA EXISTING INVESTORS PROPERTY GROUP (1)
except number of ----------- -------------------- ------------ ------------------------------------------------
properties and 1997 1997 1996 1996 1996 1995 1994 1993 1992
percentages ----------- --------- --------- ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
EBITDA (3) $ 52,384 $ 21,447 $ 19,486 $ 68,267 $ 25,820 $ 21,458 $ 21,377 $ 16,881 $ 16,192
Funds From Opera-
tions (4) $ 51,512 $ 19,988 $ 18,012 $ 67,090 $ 23,809 $ 19,298 $ 19,193 $ 14,764 $ 13,855
Cash flows provided
by (used in):
Operating activi-
ties $ 49,983 $ 19,497 $ 16,525 $ 67,158 $ 25,695 $ 19,401 $ 17,552 $ 17,471 $ 14,123
Investing activi-
ties $ (24,792) $ (22,818) $ (24,825) $ (303,824) $(39,074) $(53,868) $ 2,037 $(17,393) $ (9,980)
Financing activi-
ties $ (31,488) $ 2,038 $ 7,068 $ 242,094 $ 13,204 $ 35,680 $(19,596) $ (278) $ (6,216)
Total rentable
square footage of
properties at end
of period 21,999 9,529 8,547 9,069 7,879 6,253 6,644 6,100
Number of properties
at end of period 144 72 64 67 61 53 57 53
Occupancy rate at
end of period 93% 93% 97% 92% 99% 90% 90% 86%
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
CABOT PARTNERS (5)
- - ------------------
--------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
In thousands --------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues $ 6,818 $ 5,743 $ 7,908 $ 6,516 $ 4,159 $ 4,088 $ 3,618
General and administra-
tive expenses 4,899 4,362 5,888 5,069 4,267 4,074 3,992
Depreciation and amorti-
zation expense 732 315 419 453 474 480 480
Net income (loss) 1,203 1,050 1,594 1,057 (536) (428) (806)
<CAPTION>
--------------------------------------------------------------------
AS OF SEPTEMBER
30, AS OF DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
In thousands --------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $ 5,608 $ 5,925 $ 6,075 $ 5,628 $ 4,300 $ 4,923 $ 5,412
Total liabilities 884 878 485 563 292 379 440
Total partners' capital 4,724 5,047 5,590 5,065 4,008 4,544 4,972
<CAPTION>
--------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------ ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
In thousands --------- ------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
Cash flows provided by
(used in):
Operating activities $ 1,908 $ 875 $ 1,283 $ 1,351 $ (12) $ (173) $ (269)
Investing activities 41 (37) 113 (6) 40 25 5
Financing activities (2,069) (1,069) (1,069) -- -- -- --
Assets under manage-
ment(6) 1,058,000 934,000 979,000 778,000 515,000 472,000 442,000
</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 42,350,000 issued and outstanding Common Shares (assuming the
exchange of all 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 taxes and general and admin-
istrative 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 a
REIT'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. In addition to cash flow and net income, management gener-
ally considers 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 a REIT 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. It
should not be considered as an alternative to net income as an indicator of a
REIT's operating performance or to cash flows as a measure of liquidity. Fur-
ther, 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 (the "White Paper").
(5) Represents the historical financial and other data of Cabot Partners for
periods prior to the Formation Transactions.
(6) Based on the estimated fair market value of such assets as of the dates
indicated.
15
<PAGE>
RISK FACTORS
An investment in the Common Shares involves various risks. Prospective
investors should carefully consider the following information in conjunction
with the other information contained in this Prospectus before making a deci-
sion to purchase Common Shares in the Offering.
OFFERING PRICE OF COMMON SHARES DOES 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
being contributed to the Company, although third-party estimates of derived
contribution amounts (dollar amounts assigned to each Property pursuant to cer-
tain procedures agreed upon by the Contributing Investors and Cabot Partners)
were obtained in August and September 1997 solely to assist Cabot Partners 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 nego-
tiation of the Offering Price between the Company and the Representatives of
the Underwriters has been on pro forma adjusted FFO, estimated cash available
for distribution, the Company's potential for growth, multiples of publicly
traded REITs and the other factors set forth under "Underwriting." 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 Company. Accordingly, the aggre-
gate market value of the Common Shares offered hereby may 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 1998 is based on a number
of assumptions, including assumptions relating to future operations of the Com-
pany. These assumptions concern, among other matters, continued property occu-
pancy 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 compliance 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 distribution level throughout 1998. A number of the
assumptions described above, however, relate to matters that 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.
ANTITAKEOVER EFFECTS OF OWNERSHIP LIMIT, STAGGERED BOARD AND POWER TO ISSUE
ADDITIONAL SHARES
Antitakeover 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 out-
standing shares of beneficial interest 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." For
this purpose, among others, the Company's Declaration of Trust authorizes the
Trustees, subject to certain exceptions, to take such actions as may be neces-
sary or desirable to preserve its qualification as a REIT and to limit any
person to direct or indirect ownership of no more than (i) 9.8% of the
Company's number of issued and outstanding shares of beneficial interest, or
(ii) 9.8% of the total equity value of such shares of beneficial interest (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 owner-
ship, 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 violation of the above limits may be
void under certain circumstances. See "Description of Shares of Beneficial
Interest--Restrictions on Transfer." The foregoing restrictions on transfera-
bility and ownership will continue to apply until the Board of Trustees deter-
mines 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 may have the
effect of delaying, deferring or preventing a transaction or a change in con-
trol of the Company that might involve a premium over the then prevailing
market price for the Common Shares or otherwise be in the best interest of the
shareholders. See "Description of Shares of Beneficial Interest--Restrictions
on Transfer."
16
<PAGE>
Antitakeover 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 Antitakeover and Dilutive 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 in order 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, without shareholder
approval, (ii) cause the Company to issue additional authorized but unissued
shares of beneficial interest, and (iii) classify or reclassify any unissued
Common Shares and Preferred Shares and to set the preferences, rights and other
terms of such 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. Under Maryland law, 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.
TAXATION AS A CORPORATION IF THE COMPANY FAILS TO QUALIFY AS A REIT; OTHER TAX
RISKS
Adverse Consequences of Failure to Qualify as a REIT; Lack of Management Expe-
rience 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 legal 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 Company 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 con-
cerning, 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 shareholders. 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 successfully. See "Federal Income Tax Consequences--Taxation of the Compa-
ny."
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 Consequences."
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 Consequences--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.
Borrowings May Be Required to Meet REIT Minimum Distribution Requirements; Pos-
sible 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 subject to a 4% nondeductible excise tax on the amount, if
any, by which certain distributions paid by it with respect to any calendar
year are less than
17
<PAGE>
the sum of (i) 85% of its ordinary income for that year, (ii) 95% of its cap-
ital gain net income for that year, and (iii) 100% of its undistributed taxable
income from prior years. The Company intends to make distributions 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 deductible
expenses, and (ii) the inclusion of such income and deduction of such expenses
in arriving at taxable income of the Company could require the Company to
borrow funds on a short-term (or possible long-term) basis to meet the 95% dis-
tribution requirement and to avoid the nondeductible excise tax.
Possible Taxation of Dividends Received by Pension Plans. The Company may con-
stitute a "pension-held REIT" immediately after the closing of Offering or may
become one as a result of subsequent market purchases of Common Shares by pen-
sion funds after the closing of the Offering . If the Company becomes a pen-
sion-held REIT, certain types of borrowings or other activities, if engaged in
by the Company, would result in a portion of dividends received by any quali-
fied pension plan owning more than 10% in value of the Company's shares, being
taxable to such plan as unrelated business taxable income.
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%. The organizational
documents of the Company do not contain any limitation on the amount of indebt-
edness 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 or results of operations or
the market price of the Common Shares. See "Policies with Respect to Certain
Activities."
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 Company's ability to collect all
rent from tenants on a timely basis, (v) the expense of periodically renovat-
ing, repairing and reletting spaces and (vi) increasing operating costs (in-
cluding real estate taxes and utilities) to the extent that such increased
costs cannot be passed through to tenants. Certain significant costs associated
with investments 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 custom-
arily 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. The majority of the Company's income will be
derived from rental income from its properties. The Company's distributable
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 termi-
nation of such tenant's lease and thereby cause a reduction in the Company's
cash flow and the amounts available for distribution to its shareholders. No
assurance can be given that tenants will not file for bankruptcy protection in
the future or, if any tenants file for such protection, that they will affirm
their leases and continue to make rental payments in a timely manner. In addi-
tion, a tenant from time to time may experience a downturn in its business
which may weaken its financial condition
18
<PAGE>
and result in the failure to make rental payments 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. Although the Company intends to implement
cost-saving incentive measures at 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.
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 accounting for approximately 11.8%
of the Company's Annualized Base Rent will expire in 1998. The Company has
established annual reserves for renovation and reletting expenses, which take
into consideration its views of both the current and expected business condi-
tions 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 sig-
nificantly lower than expected rates or if its reserves for these purposes
proved inadequate, 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 "--Real Estate Invest-
ment Risks--Possible Adverse Effects of Acquisition, Development and Construc-
tion Activities." Accordingly, it is possible that the Company may not be able
to meet its targeted level of property acquisitions and developments due to
such competition or other factors which may have an adverse effect on the
Company's expected growth in FFO.
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 hazardous substances,
including ACMs. As the owner of real properties, the Company may be potentially
liable for any such costs. Phase I environmental site assessment reports
("Phase I 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 September 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. The earliest of such Phase I ESAs were obtained
in 1988 and Phase I ESAs on approximately 40% of the Properties were obtained
prior to 1995. Commonly accepted standards and procedures for such Phase I ESAs
have evolved to encompass higher standards and more extensive procedures over
the period from 1988 to the present. 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.
19
<PAGE>
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 the Properties
do not reveal all environmental liabilities or that there are material environ-
mental 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 under-
ground storage tanks) or by third parties unrelated to the Company.
Adverse Effect of Possible Additional Costs of Compliance with Americans with
Disabilities Act on Cash Flow and Distributions. Under the Americans with Disa-
bilities Act of 1990 (the "ADA"), all public accommodations and commercial
facilities are required to meet certain federal requirements related to access
and use by disabled persons. Existing industrial properties generally are
exempt from the provisions of the ADA but may be subject to provisions
requiring that buildings be made accessible to people with disabilities. Com-
pliance 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 damages 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 shareholders. The
Company's properties also are subject to various federal, state and local regu-
latory requirements and to state and local fire and life-safety requirements.
Failure to comply with these requirements could result in the imposition of
fines by governmental authorities or awards of damages to private litigants.
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 Com-
pany 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 liability
insurance, standard "all-risk" property insurance, and flood and earthquake
(where appropriate) and rental loss insurance with respect to its properties
with policy terms and conditions customarily carried for similar properties. 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 operations. In addi-
tion, certain types of losses (such as from wars or from earthquakes for prop-
erties located in California) may be either uninsurable 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 mortgage indebtedness or other obligations related to the
property. With certain exceptions, the Company does not carry earthquake insur-
ance on the Properties located in California. In light of the California earth-
quake 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 assessments, to be appropriate.
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 34 Properties
located in California, 15 are 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 Properties
located in California within 12 months from date hereof. The Company currently
maintains blanket earthquake insurance coverage for all Properties located out-
side California in amounts it deems reasonable.
Possible Adverse Effects of Illiquidity of Real Estate Investments. Equity real
estate investments are relatively illiquid. Such illiquidity will tend to limit
the ability of the Company to vary its portfolio promptly in response to
changes in economic 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.
Possible Adverse Effects of 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 "The Company--Growth Strategies--Acquisi-
tions." Acquisitions of such properties entail general investment risks associ-
ated with any real estate investment, including the risk that investments will
fail to perform in accordance with
20
<PAGE>
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." Additional risks associated with such real estate devel-
opment and construction activities include the risk that the Company may
abandon development activities after expending significant resources to deter-
mine 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 (resulting in increased debt
service and construction costs). Development activities are also subject to
risks relating to inability to obtain, or delays in obtaining, necessary zon-
ing, land-use, building occupancy and other required governmental permits 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 atten-
tion.
Possible Additional Cost Resulting From Reassessment of Properties. Certain
local real property tax assessors may seek to reassess certain of the Proper-
ties as a result of the Formation Transactions and the transfer of interests to
occur in connection therewith. In jurisdictions such as California, where Prop-
osition 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 appropriate, 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 taxes resulting from any such reassessment.
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 Contributing Investors will receive certain
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 Contributing Investors will receive might have been
different if they had not participated in structuring the Formation Transac-
tions. These benefits include the following: (i) receipt by senior executive
officers of the Company of options to purchase an aggregate of 1,675,000 Common
Shares under the Company's Long Term Incentive Plan at the Offering Price, sub-
ject to certain vesting requirements, which will have an aggregate purchase
price of approximately $33.5 million based on the Offering Price, (ii) deferral
of certain tax consequences to the Cabot Group Participants from the contribu-
tion of their interests in Cabot Partners and the C-M Property Partnerships to
the Operating Partnership, and (iii) the Operating Partnership's assumption and
repayment from the proceeds of the Offering of approximately $18.3 million and
$13.1 million, respectively, in debt relating to the Properties beneficially
owned by certain of the Cabot Group Participants. In addition, certain methods
of accounting that may be selected by the Partnership for Book-Tax Differences
could result in the allocation of lower amounts of taxable income to the Cabot
Group Participants, and correspondingly higher amounts of taxable income to the
Company (with a resulting lower return of capital dividend component to share-
holders). See "Certain Relationships and Related Transactions--Benefits to
Related Parties," "Use of Proceeds" and "Management--Long Term Incentive Plan."
Immediate Dilution. The Properties and other assets to be contributed by the
Cabot Group Participants and the other Contributing Investors in exchange for
Units and Common Shares had a pro forma net tangible book value of $18.93 per
Common Share as of September 30, 1997. The pro forma net tangible book value
per Common Share of the assets of the Company after the Offering will be less
than the Offering Price per share. Accordingly, purchasers of the Common Shares
offered hereby will experience an immediate dilution of $1.26 per Common Share
in net tangible book value in connection with their investment in the Common
Shares based on the Offering Price. See "Dilution."
Limitations on Representations and Warranties Could Limit the Company's
Remedies. 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 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
Formation Transactions, their ownership of the Properties or other assets to be
contributed by them, 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
21
<PAGE>
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 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 specific 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 indemnifica-
tion 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 Com-
pany. In addition, such indemnification obligations are, with certain limited
exceptions, limited to claims for indemnification made within one year after
the consummation of the Formation Transactions. Any losses to the Company
resulting from breaches of such representations and warranties or other provi-
sions 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.
Possible Failure to Enforce Terms of Contribution and Other Agreements. The
Cabot Group Participants, 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 con-
summation of the Formation Transactions, the Company, under the agreements
relating to the contribution of the Properties and such other assets, will be
entitled to indemnification 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 relationship with the entity or individual involved, such
officers and Trustees may cause the Company to choose to enforce its rights
under any of these contribution agreements and to pursue available remedies,
such as actions for damages or injunctive relief, less vigorously than it oth-
erwise 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 to determine whether and on what terms to sell an indi-
vidual Property, 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 certain Properties even though such sales might otherwise
be financially advantageous to the Company. See "Policies With Respect to Cer-
tain Activities--Conflict of Interest Policies."
Influence of Significant Shareholders, Trustees and Executive Officers. Upon
the closing of the Offering, the IBM Retirement Plan Trust and the New York
State Teachers' Retirement System will be deemed beneficially to own approxi-
mately 24.2% and 14.1%, respectively, of the outstanding Common Shares (as-
suming the exchange of all Units for Common Shares). In addition, the senior
management of the Company will beneficially own approximately 4.0% of the out-
standing Common Shares (assuming the exchange of all Units for Common Shares).
The foregoing Contributing Investors and senior management, both as share-
holders and management, will have influence 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 inconsis-
tent with the interests of other shareholders.
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), and on
certain other matters during the first year following the closing of the
Offering 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. Such voting rights 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, will 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, how-
ever, 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 Operating Partnership, on behalf of the Limited Partners. The Limited Part-
ners have agreed that the Company is under no obligation to consider the sepa-
rate interests of the Limited Partners in deciding whether to cause the Oper-
ating Partnership to take (or decline to take) any actions which the General
Partner has taken in good faith on behalf of the Operating Partnership.
22
<PAGE>
ABSENCE OF PRIOR PUBLIC MARKET FOR COMMON SHARES COULD AFFECT MARKET PRICE OF
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 Common Shares have been approved for listing on the NYSE, subject to offi-
cial notice of issuance. 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 and Other Transactions--Contribution Amounts of the 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 regula-
tory 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.
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 for future distribu-
tions. Such an increase in the required distribution rate may adversely affect
the market price of the Common Shares.
POSSIBLE ADVERSE EFFECT ON PRICE OF COMMON SHARES OF SHARES AVAILABLE FOR
FUTURE SALE
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 an aggregate of 22,598,735 Units and
8,961,714 Common Shares to the Contributing Investors (excluding for this pur-
pose the C-M Property Partnerships), and 1,819,587 Units to Cabot Partners in
the Formation Transactions and 1,000,000 Common Shares to the Concurrent
Investor in the Concurrent Placement. See "Formation and Other Transactions."
The Contributing Investors, the Cabot Group Participants and the Concurrent
Investor will not be permitted to offer, sell, contract to sell or otherwise
dispose of the Units or Common Shares, except in certain limited circum-
stances, for six months after the closing of the Offering in the case of the
Concurrent Investor, one year thereafter in the case of the Contributing
Investors or two years thereafter in the case of the partners of Cabot Part-
ners and of the partners of the C-M Property Partnerships. See "Shares Avail-
able for Future Sale." At the conclusion of such periods, and, in the case of
Units, upon the subsequent exchange of Units for Common Shares, such Common
Shares may be sold in the public market pursuant to registration statements
which the Company is obligated to file on behalf of the Contributing Invest-
ors, the Cabot Group Participants and the Concurrent Investor or pursuant to
any available exemptions from applicable registration requirements. In addi-
tion, options to purchase a total of 2,188,500 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 price of Common 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. The applicability of such exemption in certain circumstances recently
has been questioned by the Department of Labor. If it were ultimately deter-
mined that the Formation Transactions constitute a prohibited transaction, and
also that PTE 84-14 does not apply to such plan's participation in the Forma-
tion 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 par-
ties 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; how-
ever, such opinion is not binding on the Department of Labor, the Service or
any court. See "ERISA Considerations."
23
<PAGE>
POSSIBLE UNKNOWN ADVERSE CHARACTERISTICS OF RECENTLY ACQUIRED NEW PROPERTIES;
LACK OF OPERATING HISTORY
Certain of the Properties to be acquired by the Company in the Formation Trans-
actions have not previously been, or only recently have been, under the manage-
ment of Cabot Partners. Such Properties, in addition to properties acquired in
the future, may have characteristics or deficiencies unknown to the Company
affecting their valuation or revenue potential, and the operating performance
of such Properties may therefore be less than anticipated or may 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.
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 and the Concurrent Placement, 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 mortgage payment obligations, the property or properties
subject to such mortgage indebtedness could be foreclosed upon by or otherwise
transferred to the mortgagee, with a consequent loss of income and asset value
to the Company.
Rising Interest Rates. The Acquisition Facility that the Company is currently
negotiating will bear interest at variable rates, and the Company 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 distri-
bution 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.
MANAGEMENT COMPANY RISKS
Possible Adverse Consequences of Lack of Control over the Management
Company. In order to permit the Company to share in the income of the Manage-
ment Company while maintaining its status as a REIT, the Operating Partnership
will own all of the Management Company's non-voting preferred stock (repre-
senting approximately 95% of its economic interest) and Ferdinand Colleredo-
Mansfeld, the Company's Chief Executive Officer, will own all of the Management
Company's voting common stock (representing approximately 5% of its economic
interest). Although the Company will receive substantially all of the economic
benefit of the Management Company's business through dividends from the Oper-
ating Partnership, the Company will not be able to vote on the election of the
Management Company's directors or officers and, as a result, will not have the
ability to control the Management Company's operations or require its board of
directors to declare and pay cash dividends. See "Formation and Other Transac-
tions. "
Uncertainty as to Management Company Fees. Fees earned by the Management Com-
pany will be dependent upon various factors outside the control of the Company
and the Operating Partnership, including the ability of a contracting party
generally to terminate any of the Advisory Contracts upon 30 days notice or to
refuse to consent to the assignment of such a contract to the Management Com-
pany as contemplated in the Formation Transactions.
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.
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 section of this Prospectus.
24
<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 publicly traded industrial real estate companies in the United
States, with a portfolio of 144 Properties containing approximately 22 million
rentable square feet located in 21 states throughout the country. At September
30, 1997, the Properties were approximately 93% leased to 258 tenants. As of
November 18, 1997, no single tenant accounted for more than 5.2% of the
Company's total Annualized Base Rent. Approximately 95% of the Company's Prop-
erties are located in the top 15% of the nation's 273 industrial markets as
rated by Cognetics on the basis of projected demand for distribution property
space and flex/R&D property space.
The Company's goal is to be the preeminent national real estate company focused
on serving a variety of industrial space users. The Company currently owns and
operates a diversified portfolio of properties and has a significant market
presence across the United States, owning properties in a total of 21 markets
(17 of which the Company has identified as principal targeted markets) and
owning Properties with more than one million rentable square feet in eight 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 geographic diversification
and substantial presence in multiple markets is a strategic advantage that
allows it (i) to serve industrial space users with multiple site and industrial
property type requirements, (ii) compete more effectively 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 September 30,
1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
ANNUALIZED NET
NUMBER RENTABLE SQUARE FEET ANNUALIZED NET RENT EFFECTIVE RENT
OF --------------------- ----------------------- PER LEASED
BY REGION(1) PROPERTIES NUMBER % OF TOTAL AMOUNT % OF TOTAL SQUARE FOOT(2)
- - ------------ ---------- ---------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
WESTERN REGION
San Francisco area
market 18 819,869 3.7% $ 3,773,553 5.0% $4.57
Los Angeles area market 13 2,231,522 10.1 6,927,705 9.2 3.27
Phoenix area market 6 1,028,320 4.7 2,539,697 3.4 2.92
San Diego area market 3 426,008 2.0 2,253,613 3.0 6.10
Seattle area market 5 402,760 1.8 1,865,556 2.5 4.31
--------- ---------- --------- ----------- --------- ---------
Subtotal Western Region 45 4,908,479 22.3% $17,360,124 23.1% $3.79
--------- ---------- --------- ----------- --------- ---------
SOUTHWEST REGION
Dallas area market 9 1,967,071 8.9% $ 4,788,334 6.4% $3.34
--------- ---------- --------- ----------- --------- ---------
MIDWEST REGION
Chicago area market 12 2,582,328 11.7% $ 9,208,467 12.3% $3.58
Cincinnati/Northern
Kentucky area market 10 1,586,547 7.2 5,045,767 6.7 3.25
Columbus area market 9 1,609,599 7.3 4,669,456 6.2 3.27
Other area markets 3 598,232 2.8 1,779,154 2.4 2.79
--------- ---------- --------- ----------- --------- ---------
Subtotal Midwest Region 34 6,376,706 29.0% $20,702,844 27.6% $3.34
--------- ---------- --------- ----------- --------- ---------
SOUTHEAST REGION
Orlando area market 12 1,843,907 8.4% $ 5,970,453 7.9% $3.46
Memphis area market 1 336,080 1.5 778,522 1.0 2.21
Atlanta area market 7 820,017 3.7 2,456,448 3.3 3.26
Charlotte area market 3 359,530 1.6 1,304,227 1.7 3.39
Other area markets 1 160,000 0.8 671,386 1.0 4.20
--------- ---------- --------- ----------- --------- ---------
Subtotal Southeast
Region 24 3,519,534 16.0% $11,181,036 14.9% $3.31
--------- ---------- --------- ----------- --------- ---------
NORTHEAST REGION
Boston area market 3 208,197 0.9% $ 1,059,407 1.4% $3.98
New York/New Jersey area
market 15 3,265,090 14.8 12,877,226 17.1 3.89
Baltimore/Washington,
D.C. area market 10 882,170 4.0 4,156,642 5.5 4.41
Harrisburg area market 4 872,200 4.1 2,987,659 4.0 3.46
--------- ---------- --------- ----------- --------- ---------
Subtotal Northeast
Region 32 5,227,657 23.8% $21,080,934 28.0% $3.91
--------- ---------- --------- ----------- --------- ---------
Total/weighted average 144 21,999,447 100.0% $75,113,272 100.0% $3.58
========= ========== ========= =========== ========= =========
</TABLE>
- - -------
(1) References to specific cities include suburban portions of the relevant
metropolitan areas.
(2) "Annualized Net Effective Rent" means Annualized Net Rent, less amortiza-
tion of the related leasing costs, as adjusted to reflect the effect of rent
concessions and straight-lining of rent steps.
25
<PAGE>
The Company offers a broad spectrum 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 fol-
lowing table provides information concerning the general characteristics and
the Company's holdings of each of these property types as of September 30,
1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT ANNUALIZED NET
--------------------- ----------------------------------- EFFECTIVE RENT
PER LEASED PER LEASED
PROPERTY TYPE PROPERTY CHARACTERISTICS NUMBER % OF TOTAL AMOUNT % OF TOTAL SQUARE FOOT SQUARE FOOT
- - ------------- ------------------------ ---------- ---------- ----------- ---------- ----------- --------------
<S> <C> <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) 11,789,544 54% $34,777,605 46% $3.24 $3.21
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 30 24,006,623 32 3.71 3.53
Workspace Light assembly and
flex/R&D (generally
tenant sizes of
3,000-70,000 square
feet) 3,493,334 16 16,329,044 22 5.07 4.94
---------- --------- ----------- ---------- ---------- -----------
Total/weighted average 21,999,447 100% $75,113,272 100% $3.68 $3.58
========== ========= =========== ========== ========== ===========
</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. Cabot Partners expects to acquire $275 million of indus-
trial properties on behalf of its clients in 1997, $244 million of which acqui-
sitions had been completed and approximately $31 million of which acquisitions
were under contract, as of December 19, 1997. Also during 1997, Cabot Partners
had negotiated the contribution to the Company in the Formation Transactions of
approximately $270 million of industrial properties not previously owned by its
advisory clients. The Company has contracts to purchase 21 additional proper-
ties for an aggregate purchase price of approximately $142 million in the Com-
pany Acquisitions that are expected to be completed concurrently with or
shortly following the completion of the Offering.
The senior management of the Company has an average of approximately 18 years
of experience in the real estate industry and will beneficially own 4.0% of the
Company's fully diluted common equity upon the closing of the Offering. Members
of the Company's senior management have worked together since 1987 as the exec-
utive officers of Cabot Partners and, previously, Cabot Advisors. Cabot Advi-
sors was founded as an affiliate of CC&F, a nationwide real estate development,
investment, construction and management firm established in 1904. CC&F pio-
neered the development of large-scale planned industrial parks. In 1990, Ferdi-
nand 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 and management business of Cabot Advisors. Cabot Partners
was established as a registered investment advisor to provide real estate
investment services primarily to public and private 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.
26
<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.
Real Estate Market Sector Returns
Percent
[BAR GRAPH APPEARS HERE]
- - -------
* Annual Returns are from first quarter 1978 through third quarter 1997,
except for the R&D/Office Sector which is from second quarter 1978 and the
Apartment Sector which is from fourth quarter 1984.
Source: NCREIF Classic Property Index.
Strong Demand
The Company believes that, at least for the near term, the demand for desir-
able, well-located industrial properties will continue and will 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 significance of smaller business establishments which are
increasingly looking for efficient and flexible work space in well located,
suburban industrial parks. According to Cognetics, companies with fewer than
100 employees now account for 47% of all existing jobs; however, they accounted
for 84% of all net job creation during 1992 through 1996. Cognetics anticipates
that the majority of net job creation over the next five years will continue to
be due to small firms with less than 100 employees as this has been a consis-
tent pattern for the last decade. Nationwide, the demand for distribution and
flex/R&D properties during the period from 1997 to 2002 is projected by
Cognetics to increase over existing levels by approximately 791 million square
feet, or 14.8%, consisting of approximately 598 million square feet for distri-
bution properties and approximately 193 million square feet for flex/R&D prop-
erties. The Company believes that much of the available supply of industrial
property is functionally obsolete and is at a significant competitive disadvan-
tage to modern, well-designed types of facilities. 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 logis-
tics companies. Approximately 40% of existing warehouse facilities in the
Company's 17 principal targeted markets were built prior to 1970 (excluding
Memphis and Harrisburg, for which no information was provided) and approxi-
mately 65% were built before 1980 according to CB Commercial Real Estate Group,
Inc./Torto Wheaton Research ("CB Commercial/Torto Wheaton Research") (data
through year end 1996).
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
27
<PAGE>
direct private ownership to indirect public ownership of real estate. The Com-
pany 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. These prop-
erties offer the advantages of predictable incomes, less costly management
operations and additional growth opportunities through targeted marketing of
additional sites to large national companies having space requirements in mul-
tiple 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 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
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
17 principal targeted markets across the country will be an important factor in
achieving future growth and its targeted returns on investment. These 17 mar-
kets are projected by Cognetics to capture approximately 41% of the growth in
distribution and flex/R&D property space demand projected to occur over the
period from 1997 to 2002 in the 273 markets that are tracked by Cognetics. 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, subsidiaries thereof, and major third-party logistics compa-
nies serving such companies. The Company will pursue a national tenant mar-
keting program that, in addition to the quality and attractive locations of the
Properties, will emphasize the advantages of dealing with a single source for a
company's 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 serves 13 tenants in multiple Properties (four of which tenants use
Properties in multiple markets) accounting for approximately 18% of the
Company's Annualized Net Rents as of September 30, 1997.
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 Variety of Tenants By Offering a Broad Spectrum of Industrial
Property Types
The Company believes that its broad offering strategy provides complementary
benefits in meeting the Company's growth objectives. Offering a broad spectrum
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, based on data supplied by Cognetics, to generate approxi-
mately 67% of the projected increased demand for distribution and flex/R&D
property space during the period from 1997 to 2002. The Company's strategy of
offering diverse property types also enables the Company to pursue opportuni-
ties as they arise across industry segments by responding to shifts in demand
at different stages of the economic cycle.
28
<PAGE>
GROWTH STRATEGIES
The Company intends to achieve its growth objectives through a combination of
property acquisitions, development 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 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) the 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
Company's 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 (78.3% of the Properties based on Annualized Net Rents at
September 30, 1997) have been bulk distribution and multitenant distribution
facilities 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 Com-
pany believes that workspace properties (light assembly and flex/R&D facili-
ties) 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 21.7% of its Properties
at September 30, 1997 (based on Annualized Net Rents).
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 $13.4 million of outstanding long term debt,
approximately $6.2 million of available cash and a Debt-to-Total Market Capi-
talization Ratio of less than 2%. 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 the 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
29
<PAGE>
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 its markets. The Com-
pany 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 its
leases expiring during 1998. In addition, the Company intends to work actively
to (i) maintain its historically high occupancy levels by retaining existing
tenants, 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. During the period from January 1, 1995 to
September 30, 1997, the lease renewal rates for the Properties acquired prior
to September 30, 1997 and for the Existing Investors Property Group were 84.0%
and 88.7%, respectively. 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 its leasing activi-
ties 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 sched-
uled lease expiration dates and entering into discussions with tenants well in
advance of such dates. 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
30
<PAGE>
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
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 provide investment advisory and management services
to the clients of Cabot Partners which elected not to contribute some or all of
their industrial properties to the Company. On a pro forma basis for the nine
months ended September 30, 1997, the Management Company would have generated
pro forma net income of less than 2.0% of the Company's pro forma net income.
The Management Company will not provide services relating to any industrial
real estate acquisition or development activities that would conflict with the
Company's own acquisition and development activities. The Company 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 $6.2 million of net proceeds from the Offering and
the Concurrent Placement will be available to allocate to operating capital
after payment of offering expenses and the use of approximately $133.7 million
and $13.1 million of such proceeds to fund the Company Acquisitions and to
repay certain outstanding indebtedness secured by the Properties, respectively.
See "Use of Proceeds." The Company 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 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 $325 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.
31
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the Offering and the Concurrent Placement,
after deducting the underwriting discount and the estimated expenses of the
Offering, the Concurrent Placement and the Formation Transactions, are esti-
mated to be approximately $153.0 million (approximately $173.9 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
net proceeds of approximately $133.7 million to fund the Company Acquisitions
and approximately $13.1 million to repay outstanding mortgage indebtedness
having an interest rate of 8.375% per annum. The Operating Partnership intends
to use the remaining $6.2 million of net proceeds for general purposes,
including acquisitions of additional properties. 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. None of the net cash proceeds from the Offering are being paid to
any partner of Cabot Partners, any Cabot Group Participant or any other offi-
cer, Trustee or affiliate of the Company.
32
<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 $.325 per Common Share. On an annualized basis, this would be $1.30
per Common Share (or an annual distribution rate of 6.5% based on the Offering
Price). The Company does not expect to change its estimated initial distribu-
tion 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 12 months
ending December 31, 1998. The Company's estimate of cash available for distri-
bution is based on pro forma FFO for the 12 months ended September 30, 1997,
as adjusted for the impact of the Offering, the Concurrent Placement and the
Formation Transactions as well as adjustments (a) for certain known events and
contractual commitments that either occurred subsequent to September 30, 1997
or during the 12 months ended September 30, 1997 but which were not effective
for the full 12 months, (b) which revise historical rental revenues from a
GAAP basis to amounts currently being paid or due from tenants and (c) for the
amount of cash estimated to be used for (i) investing activities consisting of
recurring tenant improvements, leasing commissions and building improvements
and (ii) for financing activities consisting of debt principal amortization.
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 FFO 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 at least
throughout 1998 unless actual results of operations, economic conditions or
other factors differ from the assumptions used in calculating 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 distributions
received from the Operating Partnership, the operating expenses of the Com-
pany, the interest expense incurred on its borrowings and unanticipated cap-
ital expenditures. No assurance can be given that the Company's estimate will
prove accurate. In addition, pro forma results of operations do not purport to
present the actual results that can be expected for future periods. See "Man-
agement's Discussion and Analysis of Financial Condition and Results of Opera-
tions--Funds from Operations."
The Company anticipates that FFO 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 shareholders 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 shareholder's basis in the Common
Shares to the extent thereof, and thereafter as capital 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 12 months ending December
31, 1998, the Company estimates that less than 1% of the anticipated initial
annual distribution to shareholders will represent a return of capital for
federal income tax purposes and that the Company will be required to dis-
tribute $21.4 million, or $1.22 per Common Share, with respect to such 12-
month period in order to maintain its status as a REIT. If actual FFO or tax-
able income vary from the Company's estimates, the percentage of distributions
which represents a return of capital may be materially 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 cap-
ital gains to shareholders. For a further discussion of the tax treatment of
distributions to holders of Common Shares, see "Federal Income Tax Conse-
quences--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 FFO. Under certain circum-
stances, the Company may be required to make distributions in excess of its
cash available for distribution in order to meet such distribution require-
ments. 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.
33
<PAGE>
Future distributions by the Company will be at the discretion of the Board of
Trustees and will depend on the actual FFO of the Company, its financial condi-
tion, capital requirements, the annual distribution requirements under the REIT
provisions of the Code (see "Federal Income Tax Consequences--Taxation of the
Company--Annual Distribution Requirements") and such other factors as the Board
of Trustees deems relevant. See "Risk Factors--Possible Changes in Policies
Without Shareholder Approval; No Limitation on Debt."
The following table illustrates the adjustments made by the Company to its pro
forma FFO for the 12 months ended September 30, 1997 in order to determine its
initial estimated distributions.
<TABLE>
<CAPTION>
---------
Dollars in thousands except per share data
<S> <C>
Pro forma net income for the 12 months ended September 30, 1997(1) $ 46,644
Adjustment:
Depreciation and amortization 21,277
---------
Pro forma funds from operations for the 12 months ended September
30, 1997 67,921
ADJUSTMENTS TO DERIVE ESTIMATED FFO FOR THE 12 MONTHS ENDING
DECEMBER 31, 1998:
Contractual increase in rental revenues(2) 5,135
Contractual increase in rental revenues from recently signed
leases(3) 1,744
Provision for leases expiring in 1998(4) (1,154)
Incremental effect of straight-line rents(5) (86)
---------
Estimated adjusted FFO for the 12 months ending December 31, 1998 73,560
ADJUSTMENTS TO DERIVE ESTIMATED CASH FLOWS FOR THE 12 MONTHS ENDING
DECEMBER 31, 1998:
Straight-line rent accrual adjustment(6) (2,103)
---------
Estimated cash flows from operating activities 71,457
---------
ESTIMATED CASH FLOWS USED IN INVESTING ACTIVITIES:
Estimated annual tenant improvements and leasing commissions to
retain revenues attributable to existing leased space(7) (2,670)
Estimated recurring non-incremental revenue-generating capital
expenditures(8) (4,400)
---------
Estimated cash used in investing activities (7,070)
---------
ESTIMATED CASH FLOWS USED IN FINANCING ACTIVITIES:
Estimated annual reserve for debt principal amortization (810)
---------
ESTIMATED CASH AVAILABLE FOR DISTRIBUTION FOR THE 12 MONTHS ENDING
DECEMBER 31, 1998 $ 63,577
=========
ESTIMATED INITIAL ANNUAL CASH DISTRIBUTIONS:
Shareholders of the Company $ 22,700
Limited partners in the Operating Partnership 32,355
---------
Total estimated initial annual cash distributions $ 55,055
=========
Expected initial annual distributions per Common Share and Unit $1.30
=========
Expected cash available for distribution payout ratio(9) 86.6%
=========
</TABLE>
- - -------
(1) Computed as pro forma income from operations before minority interests for
the nine months ended September 30, 1997 of approximately $35,490 plus pro
forma income from operations before minority interests for the three months
ended December 31, 1996 of approximately $11,154. See "Pro Forma Condensed Com-
bined Financial Statements."
(2) Represents (i) the estimated annual incremental effect on rental revenues
from leases executed prior to September 30, 1997, including contractual
increases in base rents for existing leases and contractual base rents from
leases which commenced paying from October 1, 1996 to September 30, 1997 and
(ii) the estimated annual incremental effect of rental increases for the 12
months ending December 31, 1998 compared to the 12 months ended September 30,
1997 which 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 December 31, 1998.
(3) Contractual increases in rental revenues from executed leases that com-
menced paying base rents between October 1, 1997 and November 18, 1997.
34
<PAGE>
(4) Management has assumed that 80% of the existing leases which expire during
the 12 months ending December 31, 1998 will be renewed at existing rental
rates. Given that the Company's rate of renewals over the past two years has
exceeded 80%, management believes that its assumption regarding the renewal
rate and rents at which leases renew (i.e., the current base rent) is reason-
able. These adjustments do not represent forecasts or projections of expected
future rental revenue from space not currently under lease.
(5) Represents an adjustment to reflect estimated additional straight-line
rents for the 12 months ending December 31, 1998 which has been computed as the
estimated straight-line rent adjustment for 1998 of approximately $2,103 less
the pro forma straight-line rent adjustment of $2,189 which is included in FFO
for the 12 months ended September 30, 1997.
(6) Represents the conversion of estimated rental revenues for the 12 months
ending December 31, 1998 from a straight-line accrual basis to a cash basis of
revenue recognition.
(7) Represents recurring non-revenue enhancing tenant improvements ("TI") and
leasing commissions ("LC") anticipated for the 12 months ending December 31,
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, 1996, 1995, 1994 multiplied by the average annual square feet of
space for which leases expire during the period from November 18, 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 pro-
vision for non-revenue enhancing tenant improvements and leasing commissions on
an annual basis based on lease expirations for the period November 18, 1997 to
December 31, 2000 are presented below:
<TABLE>
<CAPTION>
-------------------------------------------
TOTAL/
WEIGHTED
1996 1995 1994 AVERAGE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Total TIs and LCs $3,875,246 $2,490,707 $2,416,987 $8,782,940
Renewed or released space in
square feet 4,880,988 2,578,374 2,347,899 9,807,261
Cost per square foot $0.79 $0.97 $1.03 $0.90
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
AVERAGE
NOVEMBER 18, -- ANNUAL
DECEMBER 31, FOOTAGE
2000 1999 1998 1997 EXPIRING
--------- --------- --------- --------------- ---------
<S> <C> <C> <C> <C> <C>
Annual Square Footage
Expiring 2,426,043 3,862,277 2,724,775 258,425 2,966,886
</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 2,966,886 = $2,670,197
</TABLE>
(8) Represents estimated annual provision for recurring capital expenditures
for the 12 months ending December 31, 1998 based upon an annual cost of $.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, 1996, 1995 and 1994. The following table summarizes the recurring capital
expenditures for the Properties for the last three years.
<TABLE>
<CAPTION>
-----------------------------------------------
TOTAL/
WEIGHTED
1996 1995 1994 AVERAGE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total recurring capital
expenditures $ 2,830,780 $ 2,133,118 $ 2,076,193 $ 7,040,091
Weighted average square feet 14,449,744 11,588,260 8,959,973 34,997,977
Cost per square foot $0.20 $0.18 $0.23 $0.20
Pro forma total square feet $21,999,447
Cost per square foot $0.20
-----------
Estimated recurring capital expenditures $ 4,399,889
===========
</TABLE>
(9) Calculated by dividing the estimated initial annual cash distributions by
the estimated cash available for distribution. The Company's estimated pro
forma adjusted FFO payout ratio, which is calculated by dividing the estimated
initial annual cash dividends by the estimated pro forma adjusted FFO, is
74.8%.
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 the Concurrent Placement and avail-
able borrowing capacity under the Acquisition Facility. See "Use of Proceeds"
and "The Company--Financial Strategies."
35
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of Sep-
tember 30, 1997 on a pro forma basis to reflect the consummation of the Forma-
tion Transactions and on a pro forma basis, as adjusted to reflect the closing
of the Offering and the Concurrent Placement, the application of a portion of
the net proceeds therefrom to repay certain indebtedness and the assumption of
indebtedness in connection with the Company Acquisitions, as if each of such
transactions had occurred on September 30, 1997. See "Use of Proceeds." The
information set forth in the table should be read in conjunction with the com-
bined historical and pro forma financial statements of the Company and notes
thereto included elsewhere in this Prospectus and the discussion under "Manage-
ment's Discussion and Analysis of Financial Condition and Results of Opera-
tions."
<TABLE>
<CAPTION>
--------------------------
AS OF SEPTEMBER 30, 1997
--------------------------
PRO FORMA,
PRO FORMA AS ADJUSTED
Dollars in thousands ----------- -------------
<S> <C> <C>
Mortgage debt $ 18,655 $ 13,694
Limited Partners' interest in Operating Partnership 471,095 466,449
Shareholders' equity:
Common shares, $.01 par value; 150,000,000 shares
authorized; 8,961,714 issued and outstanding on a
pro forma basis and 17,461,714 issued and out-
standing on a pro forma, as adjusted basis(1) 90 175
Additional paid-in capital 169,501 327,062
----------- -------------
Total shareholders' equity 169,591 327,237
----------- -------------
Total capitalization $ 659,341 $ 807,380
=========== =============
</TABLE>
- - -------
(1) Does not include Common Shares reserved for issuance upon (i) possible
exchange of 24,888,286 Units issued and outstanding after the Offering (the
issuance of which would reduce Limited Partners' interest in the Operating
Partnership), (ii) 2,188,500 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 "Management--Long Term Incentive Plan") or (iii) 1,125,000
Common Shares subject to the Underwriters' over-allotment option.
36
<PAGE>
DILUTION
The 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 immedi-
ately following the closing of the Offering and the Concurrent Placement.
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 purchasers of the Common Shares in the
Offering and the Concurrent Placement will realize immediate dilution in the
net tangible book value of their shares. Pro forma net tangible book value per
share has been determined as of September 30, 1997 by subtracting 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 and the Concurrent Placement. The following table illustrates the
dilution to purchasers of Common Shares sold in the Offering and the Concurrent
Placement.
<TABLE>
<CAPTION>
----------------------
<S> <C> <C>
Initial public offering price per share (1) $20.00
Pro forma net tangible book value per Common
Share/Unit as of September 30, 1997 prior to the
Offering $18.93
Decrease in net tangible book value per share
attributable to purchasers of Common Shares in the
Offering and the Concurrent Placement (.19)
----------------------
Pro forma net tangible book value per share after the Offering 18.74
---------
Dilution per share sold in the Offering and the Concurrent Place-
ment $1.26
=========
</TABLE>
- - -------
(1) Before deducting the underwriting discount of the Offering and estimated
expenses of the Offering, the Concurrent Placement and the Formation Transac-
tions.
The following table summarizes, on a pro forma basis giving effect to the
Offering, the Concurrent Placement and the number of Common Shares and Units to
be issued to the Contributing Investors (excluding for this purpose the C-M
Property Partnerships) and to Cabot Partners and the C-M Property Partnerships
in connection with the Formation Transactions, the net tangible book value as
of September 30, 1997 of the net assets contributed by the Contributing
Investors (excluding for this purpose the C-M Property Partnerships) and to
Cabot Partners and the C-M Property Partnerships 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 COMMON
except per Share/Unit SHARES/UNITS PERCENT AMOUNT PERCENT SHARE/UNIT
amounts ------------ ------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C>
Common Shares sold in
the Offering 7,500 17.7% $ 150,000 18.5% $20.00(1)
Common Shares sold in
the Concurrent
Placement 1,000 2.4 20,000 2.5 20.00(1)
Common Shares/Units
issued to Contributing
Investors (2) 31,560 74.5 631,209(3) 77.8 20.00
Units issued to Cabot
Partners and the C-M
Property Partnerships 2,290 5.4 9,476(3) 1.2 4.14
------------ ------- ------------ ----------
Total 42,350 100.0% $ 810,685 100.0%
============ ======= ============ ==========
</TABLE>
- - -------
(1) Before deducting underwriting discount of the Offering and estimated
expenses of the Offering, the Concurrent Placement and the Formation Transac-
tions.
(2) Excludes Units issued in respect of the C-M Property Partnerships.
(3) Based on the September 30, 1997 pro forma net book value of the assets to
be contributed in connection with the Formation Transactions, net of liabili-
ties to be assumed.
37
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
The pro forma condensed combined balance sheet as of September 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) the other Formation Transactions, (iii) the
Company Acquisitions, (iv) the Offering and the Concurrent Placement and the
use of a portion of the net proceeds therefrom to repay indebtedness and (v)
certain other adjustments, as if each of such contributions, transactions and
adjustments had occurred on September 30, 1997. The pro forma condensed com-
bined statements of operations for the nine months ended September 30, 1997 and
the year ended December 31, 1996 have been prepared to reflect (i) the contri-
bution to the Company of (A) the Existing Investors Property Group, (B) the New
Investors Property Group, (C) the Additional Acquisitions and (D) the Proper-
ties acquired during the year ended December 31, 1996 and during the nine
months ended September 30, 1997, (ii) the other Formation Transactions, (iii)
the Company Acquisitions, (iv) the use of a portion of the net proceeds of the
Offering and the Concurrent Placement to repay indebtedness and (v) certain
other adjustments, as if each of such contributions, transactions and adjust-
ments had occurred on January 1, 1996.
In the opinion of management, the pro forma condensed combined financial state-
ments include all adjustments necessary to reflect the effects of the foregoing
transactions and adjustments. The pro forma statements are unaudited and are
not necessarily indicative of what the Company's financial position would have
been or the combined results of the Company's operations that would have been
obtained if the transactions and adjustments reflected therein had been consum-
mated on the dates indicated, or on any particular date in the future, nor do
they purport to represent the financial position, results of operations or
changes in cash flows as of any future date or for any future period.
38
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
EXISTING NEW
CABOT INVESTORS INVESTORS OTHER
INDUSTRIAL CABOT PROPERTY PROPERTY ADDITIONAL FORMATION
TRUST PARTNERS GROUP GROUP(A) ACQUISITIONS (B) TRANSACTIONS
---------- -------- --------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Properties, net $ -- $ -- $320,956 $243,152 $58,131 $ 27,190 (C)
Cash and cash
equivalents 1 1,589 1,140 806 -- (3,535)(F)
Rents and other
receivables -- 1,593 1,101 344 -- (3,038)(F)
Advisory fees
receivables -- 502 -- -- -- (502)(G)
Restricted cash -- -- 9 -- -- --
Deferred rent
receivable -- -- 4,414 3,907 -- (8,321)(D)
Lease
acquisition
costs, net -- -- 6,564 3,270 -- --
Other assets -- 1,924 385 586 -- (2,818)(E)(F)
----- ------ -------- -------- ------- ---------
Total Assets $ 1 $5,608 $334,569 $252,065 $58,131 $ 8,976
===== ====== ======== ======== ======= =========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Mortgage debt $ -- $ -- $ 18,655 $ -- $ -- $ --
Due to related
parties -- -- 3,703 -- -- (3,703)(H)
Accounts payable
and accrued
liabilities -- 884 3,231 1,301 -- (5,416)(F)
Advisory fees
payable -- -- 502 1,717 -- (2,219)(F)(G)
Other
liabilities -- -- 977 1,173 -- (2,141)(F)
----- ------ -------- -------- ------- ---------
Total
Liabilities -- 884 27,068 4,191 -- (13,479)
----- ------ -------- -------- ------- ---------
Limited Partners
interest in
Operating
Partnership -- -- -- -- -- 471,095 (C)
Owners' equity -- 4,724 307,501 247,874 58,131 (618,230)
Common stock -- -- -- -- -- 90 (C)
Paid in capital 1 -- -- -- -- 169,500 (C)
----- ------ -------- -------- ------- ---------
Total
Shareholders'
Equity 1 4,724 307,501 247,874 58,131 (448,640)
----- ------ -------- -------- ------- ---------
Total
Liabilities
and
Shareholders'
Equity $ 1 $5,608 $334,569 $252,065 $58,131 $ 8,976
===== ====== ======== ======== ======= =========
<CAPTION>
------------------------------------------------------------
PRE-OFFERING OFFERING CABOT
CABOT INDUSTRIAL AND INDUSTRIAL
TRUST COMPANY CONCURRENT TRUST
PRO-FORMA ACQUISITIONS(I) PLACEMENT(J)(K) PRO FORMA
---------------- --------------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Properties, net $ 649,429 $ 141,849 $ -- $791,278
Cash and cash
equivalents 1 (133,457) 139,647 6,191
Rents and other
receivables -- -- -- --
Advisory fees
receivables -- -- -- --
Restricted cash 9 -- -- 9
Deferred rent
receivable -- -- -- --
Lease
acquisition
costs, net 9,834 -- -- 9,834
Other assets 77 -- -- 77
--------- ---------- ---------- --------
Total Assets $ 659,350 $ 8,392 $ 139,647 $807,389
========= ========== ========== ========
LIABILITIES AND
SHAREHOLDERS'
EQUITY
Mortgage debt $ 18,655 $ 8,392 $ (13,353) $ 13,694
Due to related
parties -- -- -- --
Accounts payable
and accrued
liabilities -- -- -- --
Advisory fees
payable -- -- -- --
Other
liabilities 9 -- -- 9
--------- ---------- ---------- --------
Total
Liabilities 18,664 8,392 (13,353) 13,703
--------- ---------- ---------- --------
Limited Partners
interest in
Operating
Partnership 471,095 -- (4,646) 466,449
Owners' equity -- -- -- --
Common stock 90 -- 85 175
Paid in capital 169,501 -- 157,561 327,062
--------- ---------- ---------- --------
Total
Shareholders'
Equity 169,591 -- 157,646 327,237
--------- ---------- ---------- --------
Total
Liabilities
and
Shareholders'
Equity $ 659,350 $ 8,392 $ 139,647 $807,389
========= ========== ========== ========
</TABLE>
39
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
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 of the following properties after September 30,
1997 and their contribution to the Company in the Formation Transactions:
<TABLE>
<CAPTION>
----------------------
LEASABLE EXPECTED
NUMBER OF SQUARE ACQUISITION
PROPERTY LOCATION BUILDINGS BUILDING TYPE FEET COST
----------------- --------- ------------------------- --------- -----------
<S> <C> <C> <C> <C>
Herrod Boulevard, South
Brunswick, NJ 1 Bulk Distribution 418,000 $ 18,321
Blue Ash, OH 2/1 Multitenant Distribution/
Workspace 482,942 15,565
Remington Street,
Bolingbrook, IL 1 Bulk Distribution 212,333 8,625
Ambassador Road,
Naperville, IL 1 Bulk Distribution 203,500 8,106
Luna Road, Carrollton,
TX 1 Bulk Distribution 205,400 7,514
--------- --------- -----------
7 1,522,175 $ 58,131
========= ========= ===========
</TABLE>
Other Formation Transactions
(C) To record the allocation of cost of real estate properties acquired in
excess of the Properties' historical net book value based on the Common Shares
and Units issued in connection with the Formation Transactions (excludes Units
issued to the sponsor, Cabot Partners, which are recorded at Cabot Partners'
carryover basis), as follows:
<TABLE>
<CAPTION>
---------
<S> <C>
Issuance of 32,030,413 Common Shares and Units at $20.00 per
Common Share/Unit to the Contributing Investors for equity
interests in real estate assets $ 640,608
Plus: Liabilities assumed 18,655
Less: Historical net book value of Properties and other acquired
assets (632,073)
---------
Cost of assets acquired in excess of historical book value $ 27,190
=========
</TABLE>
(D) To eliminate $8,321 deferred rent receivable which arose from the histor-
ical straight-lining of rents.
(E) To write off $1,017 of intangible assets of Cabot Partners related to Advi-
sory Contracts terminated at the time of the Formation Transactions and to
eliminate $133 of unamortized deferred loan costs related to mortgage debt to
be repaid with net proceeds of the Offering.
40
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(F) To reflect the distribution of substantially all of the net non-real estate
assets 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 $3,703 due by certain of the C-M
Property Partnerships to certain affiliated entities.
The Company Acquisitions
(I) To reflect the probable acquisition of the following properties with pro-
ceeds from the Offering:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
EXPECTED
NUMBER OF SQUARE ACQUISITION
PROPERTY LOCATION BUILDINGS BUILDING TYPE FEET COST
----------------- --------- ------------------------------------ --------- -----------
<S> <C> <C> <C> <C>
Grapevine, TX 2/1 Bulk Distribution/Workspace 1,182,361 $ 52,279
Mira Loma, CA, Dacula,
GA,
Mechanicsburg, PA 3 Bulk Distribution 916,603 34,452
Mechanicsburg, PA 2 Bulk Distribution 494,400 16,730
San Diego, CA 1 Bulk Distribution 220,000 10,885
Orlando, FL 4 Workspace Properties 213,430 9,210
Tucker, GA 3 Workspace Properties 134,163 5,615
Atlanta, GA 2 Workspace Properties 128,000 5,350
Florence, KY 2 Workspace Properties 61,555 4,030
Tempe, AZ 1 Workspace Properties 81,817 3,298
--------- -----------
21 Total Acquisition Cost 141,849
Less: Debt assumed 8,392
-----------
Proceeds needed to fund acquisitions $133,457
===========
</TABLE>
The Offering and Concurrent Placement
(J) To reflect the net proceeds derived from (i) the Offering of 7.5 million
Common Shares at a price of $20.00 per share ($150,000), (ii) the Concurrent
Placement of 1.0 million Common Shares at a price of $20.00 per share
($20,000), reduced by (iii) $17,000 of estimated fees and expenses associated
with the Formation Transactions, the Offering and the Concurrent Placement.
The following table sets forth the calculation of the minority interest (Lim-
ited Partners Interest in Operating Partnership) in the Company:
<TABLE>
<S> <C>
Total equity in the Operating Partnership $793,686
Minority interest ownership percentage 58.77%
Limited Partners interest in the Operating Partnership $466,449
</TABLE>
(K) To reflect the repayment of three mortgage loans totalling $13,353, each
with a fixed interest rate of 8.375%, due February 1, 1998 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 September 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.
41
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET--(CONTINUED)
AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
Pro Forma Condensed Combined Balance Sheet Adjustment Summary:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
NOTE C NOTE D NOTE E NOTE E NOTE F NOTE G NOTE H
---------- ----------- ---------- ----------- ------------ ----------- ----------
CONVERSION
ALLOCATION DISTRIBUTION ELIMINATE OF
OF COST ELIMINATION OF ADVISOR RELATED TOTAL
IN EXCESS ELIMINATION WRITE OFF OF NON-REAL FEES PARTY OTHER
OF OF DEFERRED INTANGIBLE UNAMORTIZED ESTATE RECEIVABLE/ LOAN TO FORMATION
BOOK VALUE RENT ASSETS LOAN COSTS ASSETS PAYABLE EQUITY TRANSACTIONS
---------- ----------- ---------- ----------- ------------ ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Properties, net $ 27,190 $ $ $ $ $ $ $ 27,190
Cash and cash equiv-
alents (3,535) (3,535)
Rents and other
receivables (3,038) (3,038)
Advisory fees
receivables (502) (502)
Deferred rent
receivable (8,321) (8,321)
Other assets (1,017) (133) (1,668) (2,818)
Due to related par-
ties 3,703 3,703
Accounts payable and
accrued liabilities 5,416 5,416
Advisory fees pay-
able 1,717 502 2,219
Other liabilities 2,141 2,141
Limited Partners
Interest in Oper-
ating Company (471,095) (471,095)
Common Stock (90) (90)
Paid in capital (169,500) (169,500)
Owners' equity $ 613,495 $ 8,321 $ 1,017 $ 133 $(1,033) $ -- $(3,703) $ 618,230
</TABLE>
42
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________________________
PRE-
OFFERING
EXISTING NEW CABOT
CABOT INVESTORS INVESTORS OTHER INDUSTRIAL
INDUSTRIAL CABOT PROPERTY PROPERTY 1997 FORMATION TRUST COMPANY
TRUST PARTNERS GROUP GROUP(A) ACQUISITIONS(L) TRANSACTIONS PRO FORMA ACQUISITIONS(O)
---------- -------- --------- --------- --------------- ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental $ -- $ -- $23,968 $22,725 $ 5,174 $ 376 (U) $52,243 $ 7,416
Tenant reim-
bursements -- -- 4,343 1,138 797 -- 6,278 705
Other -- -- 331 53 39 -- 423 39
Advisory fee
income -- 5,095 -- -- -- (4,446)(N) 649 --
Advisory fee
income
associated with
the
Existing
Investors
Property Group -- 1,739 -- -- -- (1,739)(M) -- --
Interest -- -- 94 71 -- -- 165 --
----- ------ ------- ------- ------- -------- ------- -------
-- 6,834 28,736 23,987 6,010 (5,809) 59,758 8,160
----- ------ ------- ------- ------- -------- ------- -------
EXPENSES
Real estate
taxes -- -- 4,005 2,076 818 -- 6,899 701
Property
operating -- -- 1,602 1,827 558 -- 3,987 412
Management fees -- -- 609 125 102 (85)(M) 751 129
Advisory fees -- -- 1,073 2,345 -- (3,418)(M) --
General and
administrative -- 4,899 -- -- -- (2,994)(M)(N) 1,905
Interest -- -- 1,399 -- -- (218)(Q) 1,181 546
Depreciation and
amortization -- 732 6,473 5,562 1,195 (333)(R)(S)(T) 13,629 2,393
----- ------ ------- ------- ------- -------- ------- -------
-- 5,631 15,161 11,935 2,673 (7,048) 28,352 4,181
----- ------ ------- ------- ------- -------- ------- -------
Net income
before Minority
Interest -- 1,203 13,575 12,052 3,337 1,239 31,406 3,979
Minority
Interest -- -- -- -- -- (23,093) (23,093) (2,338)
----- ------ ------- ------- ------- -------- ------- -------
Net income $ -- $1,203 $13,575 $12,052 $ 3,337 $(21,854) $ 8,313 $ 1,641
===== ====== ======= ======= ======= ======== ======= =======
Net income per
common share
----------------------------------------------------------------------------------------------------------------
<CAPTION>
OFFERING CABOT
AND INDUSTRIAL
CONCURRENT TRUST
PLACEMENT PRO FORMA
------------ ----------
<S> <C> <C>
REVENUES
Rental $ -- $ 59,659
Tenant reim-
bursements -- 6,983
Other -- 462
Advisory fee
income -- 649
Advisory fee
income
associated with
the
Existing
Investors
Property Group -- --
Interest -- 165
------------ ----------
-- 67,918
------------ ----------
EXPENSES
Real estate
taxes -- 7,600
Property
operating -- 4,399
Management fees -- 880
Advisory fees -- --
General and
administrative 750 (P) 2,655
Interest (855)(Q) 872
Depreciation and
amortization -- 16,022
------------ ----------
(105) 32,428
------------ ----------
Net income
before Minority
Interest 105 35,490
Minority
Interest 4,573 (20,858)
------------ ----------
Net income $4,678 $ 14,632
============ ==========
Net income per
common share $0.84
==========
</TABLE>
43
<PAGE>
CABOT INDUSTRIAL TRUST
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
_____________________________________________________________________________________________________________________________
PRE-
OFFERING
EXISTING NEW CABOT
CABOT INVESTORS INVESTORS OTHER INDUSTRIAL
INDUSTRIAL CABOT PROPERTY PROPERTY 1996 1997 FORMATION TRUST
TRUST PARTNERS GROUP GROUP(A) ACQUISITIONS(L) ACQUISITIONS(L) TRANSACTIONS PRO-FORMA
---------- -------- --------- --------- --------------- --------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Rental $ -- $ -- $29,736 $29,335 $1,995 $7,777 $ 870 (U) $69,713
Tenant reim-
bursements -- -- 4,917 2,068 172 1,195 -- 8,352
Other -- -- 334 735 -- 33 -- 1,102
Advisory fee
income -- 5,822 -- -- -- -- (4,980)(N) 842
Advisory fee
income
associated with
the
Existing
Investors
Property Group -- 2,086 -- -- -- -- (2,086)(M) --
Interest -- -- 193 139 -- -- -- 332
----- ------ ------- ------- ------ ------ -------- -------
Total Revenues -- 7,908 35,180 32,277 2,167 9,005 (6,196) 80,341
----- ------ ------- ------- ------ ------ -------- -------
EXPENSES
Real estate
taxes -- -- 5,037 3,030 183 1,195 -- 9,445
Property
operating -- -- 2,434 2,639 97 660 -- 5,830
Management fees -- -- 645 175 58 161 (119)(M) 920
Advisory fees -- -- 1,244 1,358 77 -- (2,679)(M) --
General and
administrative -- 5,895 -- -- -- -- (3,491)(M)(N) 2,404
Interest -- -- 1,931 -- -- -- (299)(Q) 1,632
Depreciation and
amortization -- 419 7,966 7,020 400 1,725 1,130 (R)(S)(T) 18,660
----- ------ ------- ------- ------ ------ -------- -------
Total Expenses -- 6,314 19,257 14,222 815 3,741 (5,458) 38,891
----- ------ ------- ------- ------ ------ -------- -------
Net income
before minority
interest -- 1,594 15,923 18,055 1,352 5,264 (738) 41,450
Minority
interest -- -- -- -- -- -- (30,478) (30,478)
----- ------ ------- ------- ------ ------ -------- -------
Net income $ -- $1,594 $15,923 $18,055 $1,352 $5,264 $(31,216) $10,972
===== ====== ======= ======= ====== ====== ======== =======
Net income per
common share
------------------------------------------------------------------------------------------------------------------
<CAPTION>
CABOT
OFFERING AND INDUSTRIAL
COMPANY CONCURRENT TRUST
ACQUISITIONS(O) PLACEMENT PRO FORMA
---------------- ---------------- -----------
<S> <C> <C> <C>
REVENUES
Rental $7,885 $ -- $77,598
Tenant reim-
bursements 458 -- 8,810
Other 7 -- 1,109
Advisory fee
income -- -- 842
Advisory fee
income
associated with
the
Existing
Investors
Property Group -- -- --
Interest -- -- 332
---------------- ---------------- -----------
Total Revenues 8,350 -- 88,691
---------------- ---------------- -----------
EXPENSES
Real estate
taxes 480 -- 9,925
Property
operating 277 -- 6,107
Management fees 68 -- 988
Advisory fees -- -- --
General and
administrative -- 1,000 (P) 3,404
Interest 728 (1,183)(Q) 1,177
Depreciation and
amortization 3,190 -- 21,850
---------------- ---------------- -----------
Total Expenses 4,743 (183) 43,451
---------------- ---------------- -----------
Net income
before minority
interest 3,607 183 45,240
Minority
interest (2,120) 6,010 (26,588)
---------------- ---------------- -----------
Net income $1,487 $ 6,193 $18,652
================ ================ ===========
Net income per
common share $1.07
===========
</TABLE>
44
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Acquisitions
(L) To reflect the operations and the depreciation expense for the pro forma
condensed combined statement of operations for (a) the nine months ended Sep-
tember 30, 1997: for the period from January 1, 1997 through the earlier of the
date of acquisition or September 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 properties 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
ACQUIRED PROPERTY DATE ACQUIRED REFERENCE
----------------- ------------------ ---------
<S> <C> <C>
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 **
Luna Road, Carrollton, TX October 17, 1997 **
Herrod Boulevard, South Brunswick, NJ October 22, 1997 **
Blue Ash, OH December 18, 1997 **
</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 nine months ended September
30, 1997 through the date of acquisition or September 30, 1997, whichever
is earlier in the column entitled "1997 Acquisitions".
Other Formation Transactions
(M) To eliminate advisory fee revenues of Cabot Partners and the related advi-
sory fee expense of the Existing Investors Property Group arising from Advisory
Contracts which will be terminated as a part of the Formation Transactions and
to restate advisory fees paid by the New Investors Property Group to third par-
ties as general and administrative expenses of the Company using an estimate of
the cost to manage the real estate assets (see Note E).
45
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS--(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
(N) To reflect the effects of establishing the Company's investment in the Man-
agement Company by reclassifying the associated revenues, operating expenses
and amortization expense to an unconsolidated subsidiary, which management will
account for using the equity method, for the nine months ended September 30,
1997 and the year ended December 31, 1996. The pro forma operations of the Man-
agement Company and the Company's share of the Management Company's net income,
based upon its 95% economic interest, are as follows:
<TABLE>
<CAPTION>
---------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
Advisory fee revenues $ 5,095 $ 5,822
General and administrative expenses (3,310) (4,039)
Amortization expense (647) (306)
------------- ------------
Income before income taxes 1,138 1,477
Income tax (assumed effective tax rate of
40%) (455) (591)
------------- ------------
Net income 683 886
------------- ------------
Company's share of net income $ 649 $ 842
============= ============
</TABLE>
Advisory fee revenues consist of actual fees earned by Cabot Partners during
the nine months ended September 30, 1997 and the year ended December 31, 1996
from the assets not owned by the Existing Investors.
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.
The Company Acquisitions
(O) To reflect the operations and the depreciation expense for the nine months
ended September 30, 1997 and the year ended December 31, 1996 for the proper-
ties to be acquired with proceeds from the Offering and the Concurrent Place-
ment (see Note I).
The Offering
(P) 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
---------
Totals $ 1,000
=========
</TABLE>
(Q) 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
Concurrent Placement and the conversion to equity of related party indebtedness
(see Note H).
(R) To eliminate deferred loan cost amortization of $60 for the nine months
ended September 30, 1997 and $80 for the year ended December 31, 1996 histori-
cally recognized by Existing Investors Property Group (see Note E).
(S) To fully amortize the unamortized intangible assets of Cabot Partners
($1,017 in the year ended December 31, 1996); to eliminate the related histor-
ical amortization for the Advisory Contracts which have been terminated as a
result of a sale of the underlying properties or will be terminated as part of
the Formation Transactions of $85 and $113 for the nine
46
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS--(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
months ended September 30, 1997 and the year ended December 31, 1996, respec-
tively; and to reclass to the Management Company $647 and $306 for the nine
months ended September 30, 1997 and the year ended December 31, 1996, respec-
tively.
(T) The depreciation adjustment for the nine months ended September 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) $ 27,190
Less: Portion allocated to land estimated at 10% 2,719
----------
$ 24,471
==========
Depreciation expense based on a weighted average estimated
useful life of 40 years--
For the nine months ended September 30, 1997 $ 459
==========
For the year ended December 31, 1996 $ 612
==========
</TABLE>
(U) To reflect the adjustment for the straight-line effect of scheduled rent
increases, assuming the transaction closed on January 1, 1996.
47
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS--(CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
Pro Forma Condensed Combined Statement of Operations Adjustment Summary:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------------------------------------------------------
NOTE M NOTE M NOTE N NOTE R NOTE S NOTE T
-------------------- ---------------- ------------- ----------------- --------------- --------------
ESTABLISH ELIMINATE
RESTATE COMPANY'S HISTORICAL
ELIMINATE RELATED ADVISORY INVESTMENT IN ELIMINATE AMORTIZATION
ADVISORY FEE REVENUE FEES PAID BY THE MANAGEMENT DEFERRED LOAN OF ADVISORY DEPRECIATION
AND EXPENSES NEW INVESTORS COMPANY COST AMORTIZATION CONTRACTS ADJUSTMENT
-------------------- ---------------- ------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Advisory fee
income $ $ $ (4,446) $ $ $
Advisory fee
income
associated with
the Existing
Investors
Property Group (1,739)
Management fees 85
Advisory fees 1,073 2,345
General and
Administrative 367 (683) 3,310
Depreciation and
amortization 647 60 85 (459)
<CAPTION>
TOTAL
------------
<C>
Advisory fee
income $ (4,446)
Advisory fee
income
associated with
the Existing
Investors
Property Group (1,739)
Management fees 85
Advisory fees 3,418
General and
Administrative 2,994
Depreciation and
amortization 333
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------------------------------------------------------------
NOTE M NOTE M NOTE N NOTE R NOTE S NOTE S
-------------------- ---------------- ------------- ----------------- --------------- --------------
ELIMINATE RESTATE ESTABLISH ELIMINATE
RELATED ADVISORY COMPANY'S HISTORICAL FULLY AMORTIZE
ADVISORY FEE FEES PAID INVESTMENT IN ELIMINATE AMORTIZATION OF INTANGIBLE
REVENUE BY THE MANAGEMENT DEFERRED LOAN ADVISORY ASSETS OF
AND EXPENSES NEW INVESTORS COMPANY COST AMORTIZATION CONTRACTS CABOT PARTNERS
-------------------- ---------------- ------------- ----------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Advisory fee
income $ $ $ (4,980) $ $ $
Advisory fee
income
associated with
the Existing
Investors
Property Group (2,086)
Management fees 119
Advisory fees 1,244 1,435
General and
Administrative 363 (911) 4,039
Depreciation and
amortization 306 80 113 (1,017)
<CAPTION>
---------------------
NOTE T
------------
DEPRECIATION
ADJUSTMENT TOTAL
------------ -------
<C> <C>
Advisory fee
income $ $(4,980)
Advisory fee
income
associated with
the Existing
Investors
Property Group (2,086)
Management fees 119
Advisory fees 2,679
General and
Administrative 3,491
Depreciation and
amortization (612) (1,130)
</TABLE>
48
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
Set forth below are selected historical financial and other data for (i) the
Existing Investors Property Group and (ii) the real estate advisory business of
Cabot Partners. The selected financial data presented below as of and for the
nine months ended September 30, 1997, in the case of the Existing Investors
Property Group, and as of and for the years ended December 31, 1996, 1995 and
1994, in the case of both the Existing Investors Property Group and Cabot Part-
ners, have been derived from Existing Investors Property Group Combined finan-
cial statements and the Cabot Partners financial statements that 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 Part-
ners are derived from the Cabot Partners Financial 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 and as of and for the nine months ended
September 30, 1996 for the Existing Investors Property Group and as of and for
the nine months ended September 30, 1997 and 1996 for Cabot Partners have not
been audited but, in the opinion of management, include all adjustments (con-
sisting 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 nine months ended September 30, 1997 are not necessarily
indicative of results for the entire year. Other Data (including Property data)
for all periods and dates presented are unaudited and are derived from the
unaudited financial and other records of Cabot Partners and the Existing
Investors Property Group.
49
<PAGE>
CABOT INDUSTRIAL TRUST
SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>
----------------------------------------------------------------------
EXISTING INVESTORS NINE MONTHS ENDED
PROPERTY GROUP(1) SEPTEMBER 30, YEARS ENDED DECEMBER 31,
- - ------------------ -------------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
In thousands --------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues $ 28,736 $ 26,138 $ 35,180 $ 28,794 $ 28,209 $ 25,252 $ 21,904
Real estate tax expense 4,005 3,649 5,037 3,979 3,769 5,144 2,772
Property operating
expenses 3,284 3,003 4,323 3,357 3,063 3,227 2,940
General and administra-
tive expenses -- -- -- -- -- -- --
Interest expense 1,399 1,430 1,931 2,097 2,082 2,013 2,292
Depreciation and amorti-
zation expense 6,473 5,864 7,966 7,118 6,606 6,111 5,441
--------- --------- -------- -------- -------- -------- --------
Operating income 13,575 12,192 15,923 12,243 12,689 8,757 8,459
Gain on sale of proper-
ties -- -- -- -- 186 -- --
--------- --------- -------- -------- -------- -------- --------
Net income $ 13,575 $ 12,192 $ 15,923 $ 12,243 $ 12,875 $ 8,757 $ 8,459
========= ========= ======== ======== ======== ======== ========
<CAPTION>
----------------------------------------------------------------------
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
-------------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
In thousands --------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Rental Properties
(before accumulated
depreciation) $ 358,498 $ 323,639 $336,836 $301,059 $250,387 $255,050 $240,358
Rental Properties, net 320,956 291,226 304,308 274,629 229,451 237,101 227,149
Total assets 334,569 308,237 318,732 289,337 241,026 247,615 236,457
Mortgage debt 18,655 19,496 19,292 20,083 20,608 20,550 20,550
Owners' equity 307,501 281,267 291,286 261,629 213,203 220,621 211,897
<CAPTION>
----------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------- ------------------------------------------------
In thousands
except number of
properties and 1997 1996 1996 1995 1994 1993 1992
percentages --------- --------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
EBITDA (2) $ 21,447 $ 19,486 $ 25,820 $ 21,458 $ 21,377 $ 16,881 $ 16,192
Funds From Operations
(3) $ 19,988 $ 18,012 $ 23,809 $ 19,298 $ 19,193 $ 14,764 $ 13,855
Cash flows provided by
(used in):
Operating activities $ 19,497 $ 16,525 $ 25,695 $ 19,401 $ 17,552 $ 17,471 $ 14,123
Investing activities $ (22,818) $ (24,825) $(39,074) $(53,868) $ 2,037 $(17,393) $ (9,980)
Financing activities $ 2,038 $ 7,068 $ 13,204 $ 35,680 $(19,596) $ (278) $ (6,216)
Total rentable square
footage of properties
at end of period 9,529 8,547 9,069 7,879 6,253 6,644 6,100
Number of properties at
end of period 72 64 67 61 53 57 53
Occupancy rate at end of
period 93% 97% 92% 99% 90% 90% 86%
</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) 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 taxes and general and admin-
istrative 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 a
REIT's operating performance or to cash flows as a measure of liquidity.
(notes continued on next page)
50
<PAGE>
<TABLE>
<CAPTION>
CABOT PARTNERS (4) --------------------------------------------------------------------------
- - ------------------ NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
In thousands ------------ ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues $ 6,818 $ 5,743 $ 7,908 $ 6,516 $ 4,159 $ 4,088 $ 3,618
General and
administrative expenses 4,899 4,362 5,888 5,069 4,267 4,074 3,992
Depreciation and
amortization expense 732 315 419 453 474 480 480
Net income (loss) 1,203 1,050 1,594 1,057 (536) (428) (806)
<CAPTION>
--------------------------------------------------------------------------
AS OF SEPTEMBER 30, AS OF DECEMBER 31,
---------------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
In thousands ------------ ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $ 5,608 $ 5,925 $ 6,075 $ 5,628 $ 4,300 $ 4,923 $ 5,412
Total liabilities 884 878 485 563 292 379 440
Total partners' capital 4,724 5,047 5,590 5,065 4,008 4,544 4,972
<CAPTION>
--------------------------------------------------------------------------
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
---------------------- ------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
In thousands ------------ ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA
Cash flows provided by
(used in):
Operating activities $ 1,908 $ 875 $ 1,283 $ 1,351 $ (12) $ (173) $ (269)
Investing activities 41 (37) 113 (6) 40 25 5
Financing activities (2,069) (1,069) (1,069) -- -- -- --
Assets under
management (5) 1,058,000 934,000 979,000 778,000 515,000 472,000 442,000
</TABLE>
- - -------
(notes continued from preceding page)
(3) 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 and gains from the sale of properties
and FFO. In addition to cash flow and net income, management and industry ana-
lysts 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 a REIT to incur
and service debt and to fund acquisitions and other capital expenditures. How-
ever, 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. It should not be considered as an alternative to net income as an indi-
cator of a REIT's operating performance or to cash flows 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.
(4) Represents the historical financial and other data of Cabot Partners for
periods prior to the Formation Transactions.
(5) Based on the estimated fair market value of such assets as of the dates
indicated.
51
<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--
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, as well as the
operations of the Properties to be acquired in the Company Acquisitions, are
presented separately in the other financial statements included in this Pro-
spectus.
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 and purchased in the Company Acquisitions, as well as the pro forma
financial statements and related notes, for more complete information con-
cerning 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
predecessor to the Company. Its revenues have primarily consisted of asset man-
agement and acquisition fees earned under Advisory Contracts with large insti-
tutional investors. Cabot Partners' property acquisitions on the behalf of its
clients for the first nine months of 1997 and for the years ended 1995 and 1996
were approximately $168 million, $191 million and $251 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 Concurrent
Placement and the use of the net proceeds therefrom to fund the Company Acqui-
sitions and 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 nine months ended September 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.
Nine Months Ended September 30, 1997 and 1996
Revenues. Revenues include rental revenues, tenant reimbursements, interest and
other rental revenues. Revenues increased by $2.6 million for the nine months
ended September 30, 1997, or 9.9%, to $28.7 million as compared to $26.1
52
<PAGE>
million for the nine months ended September 30, 1996. Approximately $1.2 mil-
lion, or 45.4%, of the increase was attributable to eight properties acquired
during the 12 months ended September 30, 1997 which had partial operations
during the nine months ended September 30, 1997. Approximately $1.1 million, or
41.1%, of the increase was attributable to three properties acquired during the
nine months ended September 30, 1996 which had a full nine months of operations
ending September 30, 1997. The remaining $351,000 was attributable to growth in
rental revenue in the Base Line Properties primarily from leasing vacant space
and tenant expansions.
Real estate tax expense. Real estate tax expense increased by $356,000 for the
nine months ended September 30, 1997, or 9.8%, to $4.0 million as compared to
$3.6 million for the nine months ended September 30, 1996. Substantially all of
this increase was attributable to eight properties acquired during the 12
months ended September 30, 1997 and three properties acquired during the nine
months ended September 30, 1996.
Property operating expenses. Property operating expenses (excluding real estate
tax expense) increased by $281,000 for the nine months ended September 30,
1997, or 9.4%, to $3.3 million as compared to $3.0 million for the nine months
ended September 30, 1996. Substantially all of this increase was attributable
to eight properties acquired during the 12 months ended September 30, 1997 and
three properties acquired during the nine months ended September 30, 1996.
Depreciation and amortization expense. Depreciation and amortization expense
increased by $609,000 for the nine months ended September 30, 1997, or 10.4%,
to $6.5 million as compared to $5.9 million for the nine months ended September
30, 1996. Approximately $439,000, or 72.1%, of this increase was attributable
to eight properties acquired during the 12 months ended September 30, 1997 and
three properties acquired during the nine months ended September 30, 1996. The
remaining $170,000 of this increase was attributable to depreciation and amor-
tization 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 $2.7 million, or 42.1%, of the increase was attribut-
able to eight properties acquired in 1995 which had a full year of operations
in 1996 and approximately $1.4 million, or 21.7%, of the increase was attribut-
able to a partial year of ownership of six properties acquired in 1996. 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 $530,000, or 50.1%,
of the increase was attributable to eight properties acquired in 1995 which had
a full year of operations in 1996 and approximately $84,000, or 8.0%, of the
increase was attributable to six properties acquired in 1996 which had partial
operations during the year. The Base Line Properties increase of approximately
$443,000 was primarily attributable 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 $512,000, or 53.0%, 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 associated with two tenants totalling approximately
$226,000 and unusually high snow removal costs. The remainder of the increase
was attributable to eight properties acquired in 1995, and six properties
acquired in 1996.
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 $444,000, or 52.4%, of the increase was attributable to eight
properties acquired in 1995 which had a full year of operations in 1996 and
approximately $236,000, or 27.8%, of the increase was attributable to six prop-
erties acquired in 1996 which had partial operations during the year. The
increase in the Base Line Properties was related to depreciation and amortiza-
tion 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 $3.5 million of the revenue increase was attributable to eight
properties acquired in 1995 and approximately $944,000 of the revenue increase
was attributable to two properties
53
<PAGE>
acquired in 1994 which had a full year of operations in 1995. These increases
were 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 six properties sold during 1994.
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. Approximately $448,000 of this
increase was attributable to eight properties acquired in 1995 and approxi-
mately $227,000 of this increase was attributable to two properties acquired in
1994 which had a full year of operations in 1995. These increases were offset
by a decrease in Base Line Properties 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. Approximately $439,000 of this increase was a result of eight proper-
ties acquired in 1995 and approximately $132,000 of this increase was a result
of two properties acquired in 1994 which had a full year of operations in 1995.
These increases were partially offset by six properties sold in 1994 resulting
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.
Approximately $732,000 of this increase was attributable to eight properties
acquired in 1995 and approximately $125,000 of this increase was attributable
to two properties acquired in 1994 which had a full year of operations in 1995.
Properties sold in 1994 resulted in a $419,000 decrease in depreciation and
amortization expense for 1995 as compared to 1994.
Cabot Partners
Nine Months Ended September 30, 1997 and 1996
Revenues. Revenues, primarily consisting of asset management fees and acquisi-
tion fees, increased by $1.1 million for the nine months ended September 30,
1997, or 18.7%, to $6.8 million as compared to $5.7 million for the nine months
ended September 30, 1996. The increase was due to a $216 million increase in
the average assets under management for the nine months ended September 30,
1997 as compared to the nine months ended September 30, 1996 which resulted in
a $755,000 increase in asset management fees.
General and administrative expenses. General and administrative expenses
increased by $537,000 for the nine months ended September 30, 1997, or 12.3%,
to $4.9 million as compared to $4.4 million for the nine months ended September
30, 1996. Compensation expense increases resulted in $291,000, or 54.2%, of the
increase. The remainder of the increase was primarily due to higher profes-
sional services fees. General and administrative expenses as a percent of reve-
nues declined from 76.0% to 71.9% for the comparative periods.
Depreciation and amortization expense. Depreciation and amortization expense
increased by $417,000 for the nine months ended September 30, 1997, or 132%, to
$732,000 due to increased amortization of two Advisory Contracts that will ter-
minate before the end of 1997.
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 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.
54
<PAGE>
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 or renovation of properties. The Company is
currently negotiating with several financial institutions concerning the estab-
lishment of a $325 million Acquisition Facility. It is anticipated the Acquisi-
tion Facility will be available at the closing of the Offering and it will be
used to fund property acquisitions, development activities, building expan-
sions, tenant leasing costs and other general corporate purposes. The Acquisi-
tion 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.
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 September 30, 1997, after giving effect to the
Formation Transactions, the Offering, the Concurrent Placement and the Company
Acquisitions, the Operating Partnership expects to have fixed rate debt secured
by properties with an outstanding principal amount of approximately $13.7 mil-
lion and a Debt-to-Total Market Capitalization Ratio of less than 2%. See
"Cabot Industrial Trust Pro Forma Combined Condensed Financial Statements."
LIQUIDITY
Existing Investors Property Group
Nine Months Ended September 30, 1997 and 1996
Cash and cash equivalents decreased by approximately $1.3 million, to approxi-
mately $1.1 million, at September 30, 1997 compared to $2.4 million at December
31, 1996. This was the result of $19.5 million of cash generated from opera-
tions, reduced by $22.8 million of cash used for investing activities and
increased by $2.0 million provided by financing activities. Cash flow generated
by operations increased by $3.0 million, from $16.5 million to $19.5 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 $2.0 mil-
lion, from $24.8 million to $22.8 million, due to a $2.4 million decrease in
property acquisitions partially offset by increased capital expenditures and
lease acquisition cost. Net cash provided by financing activities decreased by
$5.1 million, from $7.1 million to $2.0 million, primarily due to a $4.8 mil-
lion decrease in capital contributions, net of distributions.
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. The receivables related to these fees have
increased significantly over the last three years due to the increase in acqui-
sition activity and assets under management discussed above. In addition, sev-
eral Advisory Contracts provide for quarterly, rather than monthly, fee pay-
ments in arrears, further increasing amounts receivable. The increase in
accounts receivable is not an indication of a collectibility problem.
55
<PAGE>
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.
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. 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
nine months ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
-----------------------------------------
NINE MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
----------------- -----------------------
1997 1996 1996 1995 1994
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Income before gain on sale of prop-
erties $ 13,575 $ 12,192 $15,923 $12,243 $12,689
Real estate depreciation and amorti-
zation 6,413 5,820 7,886 7,055 6,504
<CAPTION>
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
FFO(1) $ 19,988 $ 18,012 $23,809 $19,298 $19,193
<CAPTION>
======== ======== ======= ======= =======
</TABLE>
- - -------
(1) 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 performance 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 accordance with GAAP) as an indicator
of the Company's financial performance or to cash flow from operating activi-
ties (determined in accordance with GAAP) as a measure of the Company's liquid-
ity, nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions.
56
<PAGE>
PROPERTIES
GENERAL
Upon the closing of the Offering, the Company will own a geographically diver-
sified portfolio of 144 Properties having an aggregate of approximately 22 mil-
lion rentable square feet, approximately 93% of which space was leased to 258
tenants at September 30, 1997. The Properties are located in 21 states and in
each of the five principal regions of the United States and are within over-
night 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 docks on two sides), and a location with good access to regional and
interstate highways. Both types of distribution property are used predominately
for the storage and distribution of goods. Workspace properties are designed to
serve a variety 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% or
more, parking ratios of one to four spaces per 1,000 rentable square feet, and
locations 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 being responsible for paying a stated amount of real estate taxes,
operating costs and utilities costs and 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 49% (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.
Leases with respect to two of the Properties having a total of approximately
393,386 leasable square feet contain provisions granting the related tenants
(or in one case a third party) an option to purchase the related Property at a
fixed or formula based price for a specified period. Leases with respect to
seven of the Properties having a total of approximately 877,484 leasable square
feet (including approximately 204,369 leasable square feet relating to one of
the two Properties described above that has both associated option and right of
first refusal rights) contain provisions granting to the related tenant (or in
one case a third party) a right of first refusal to purchase the related Prop-
erty at the price offered by a prospective purchaser if such right is exercised
within a limited period after notice of the offer. The Company has not to date
received any indication from the holders of such rights of the intended exer-
cise of any of such rights. The Company believes the exercise of all or part of
such rights would not have a material adverse effect on its operations.
57
<PAGE>
PROPERTY OVERVIEW
The Properties are located in 21 major industrial real estate markets (17 of
which the Company has identified as principal targeted markets) and in each of
the five principal regions of the United States. Information regarding the
Properties by region as of September 30, 1997 is set forth below.
PROPERTIES BY REGION
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
ANNUALIZED
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) NET EFFECTIVE
------------------------ ------------------------------------- RENT PER
PER LEASED LEASED
PROPERTY TYPE BY NUMBER OF SQUARE SQUARE PERCENT
REGION PROPERTIES NUMBER % OF TOTAL AMOUNT % OF TOTAL FOOT FOOT(2) LEASED
- - ---------------- ---------- ---------- ---------- ----------- ---------- ---------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BULK DISTRIBUTION PROPERTIES:
West 13 2,739,730 12.5% $ 7,790,735 10.4% $ 3.22 $ 3.22 88.4%
Southwest 4 1,326,200 6.0 2,709,712 3.6 3.07 3.06 66.6
Midwest 16 3,872,086 17.6 11,295,226 15.0 3.01 2.89 97.0
Southeast 5 1,355,266 6.2 3,690,304 4.9 3.16 3.14 86.1
Northeast 10 2,496,262 11.3 9,291,628 12.4 3.72 3.76 100.0
------- ---------- ------- ----------- ------- ------- ------- -------
Subtotal/weighted
average 48 11,789,544 53.6% $34,777,605 46.3% $ 3.24 $ 3.21 91.0%
------- ---------- ------- ----------- ------- ------- ------- -------
MULTITENANT DISTRIBUTION
PROPERTIES:
West 4 831,626 3.8% $ 3,002,560 4.0% $ 3.61 $ 3.49 100.0%
Southwest 3 385,135 1.8 1,163,982 1.5 3.02 2.75 100.0
Midwest 13 2,159,560 9.8 7,771,102 10.3 3.93 3.91 91.7
Southeast 7 1,274,745 5.8 4,070,073 5.5 3.39 2.85 94.2
Northeast 11 2,065,503 9.3 7,998,906 10.7 3.87 3.71 100.0
------- ---------- ------- ----------- ------- ------- ------- -------
Subtotal/weighted
average 38 6,716,569 30.5% $24,006,623 32.0% $ 3.71 $ 3.53 96.2%
------- ---------- ------- ----------- ------- ------- ------- -------
WORKSPACE PROPERTIES:
West 28 1,337,123 6.1% $ 6,566,829 8.7% $ 4.96 $ 5.03 99.0%
Southwest 2 255,736 1.2 914,640 1.2 5.74 6.27 62.3
Midwest 5 345,060 1.6 1,636,516 2.2 5.65 5.37 84.0
Southeast 12 889,523 4.0 3,420,659 4.6 4.27 4.23 90.1
Northeast 11 665,892 3.0 3,790,400 5.0 5.88 5.12 96.8
------- ---------- ------- ----------- ------- ------- ------- -------
Subtotal/weighted
average 58 3,493,334 15.9% $16,329,044 21.7% $ 5.07 $ 4.94 92.2%
------- ---------- ------- ----------- ------- ------- ------- -------
Total/weighted average 144 21,999,447 100.0% $75,113,272 100.0% $ 3.68 $3.58 92.8%
======= ========== ======= =========== ======= ======= ======= =======
</TABLE>
- - -------
(1) "Annualized Net Rent" means annualized monthly Net Rent from leases in
effect as of September 30, 1997. "Net Rent" means contractual rent, excluding
any reimbursements for real estate taxes or operating expenses.
(2) "Annualized Net Effective Rent" means Annualized Net Rent, less amortiza-
tion of the related leasing costs, as adjusted to reflect the effect of rent
concessions and straight-lining of rent steps.
58
<PAGE>
PROPERTIES BY REGION AND MARKET
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
----------------------- ----------------------------------
ANNUALIZED NET
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 2.0% $2.91 $2.83
South Rockefeller
Avenue, Ontario, CA.... 1986 1 164,140 100 551,510 0.7 3.36 3.36
East Jurupa Street,
Ontario, CA............ 1986 1 141,132 0 0 0.0 0.00 0.00
DeForest Circle, Mira
Loma, CA(4)............ 1992 1 250,584 100 857,943 1.1 3.42 3.42
Vintage Avenue, Ontario,
CA..................... 1988 1 284,559 100 914,000 1.2 3.21 3.11
Santa Anita Avenue,
Rancho Cucamonga, CA... 1988 1 212,300 100 764,280 1.1 3.60 3.73
------ ----------- -------- ---------- ------ ------- ---------
Market Subtotal........ 7 1,573,227 91% $4,599,966 6.1% $3.21 $3.19
San Diego Market
Dornoch Court, San
Diego, CA(4)........... 1988 1 220,000 100% $ 957,709 1.3% $4.35 $4.75
------ ----------- -------- ---------- ------ ------- ---------
Phoenix Market
North 47th Avenue,
Phoenix, AZ............ 1986 1 163,200 100% $ 434,283 0.6% $2.66 $2.57
South 63rd Avenue,
Phoenix, AZ............ 1990 1 168,165 100 450,494 0.6 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 0.4 2.88 2.62
South 84th Avenue,
Tolleson, AZ........... 1989 1 236,007 100 762,468 1.0 3.23 3.16
------ ----------- -------- ---------- ------ ------- ---------
Market Subtotal........ 5 946,503 81% $2,233,060 3.0% $2.90 $2.83
------ ----------- -------- ---------- ------ ------- ---------
WEST REGION SUBTOTAL... 13 2,739,730 88% $7,790,735 10.4% $3.22 $3.22
SOUTHWEST REGION
Dallas Market
Luna Road, Carrollton,
TX(3).................. 1997 1 205,400 50% $ 346,908 0.5% $3.37 $3.56
DFW Trade Center,
Building 1, Grapevine,
TX(4). 1996 1 540,000 70 1,129,000 1.5 2.97 2.97
DFW Trade Center,
Building 2, Grapevine,
TX(4). 1997 1 440,000 59 741,000 1.0 2.85 2.85
Airline Drive, Building
2, Coppell, TX......... 1990 1 140,800 100 492,804 0.6 3.50 3.34
------ ----------- -------- ---------- ------ ------- ---------
SOUTHWEST REGION/MARKET
SUBTOTAL.............. 4 1,326,200 67% $2,709,712 3.6% $3.07 $3.06
MIDWEST REGION
Chicago Market
West 73rd Street,
Building 1, Bedford
Park, IL............... 1982 1 233,282 100% $ 671,482 0.9% $2.88 $2.67
West 73rd Street,
Building 2, Bedford
Park, IL............... 1986 1 380,269 100 1,034,331 1.4 2.72 2.52
West 73rd Street,
Building 3, Bedford
Park, IL............... 1979 1 232,000 100 720,953 1.0 3.11 2.80
Remington Street,
Bolingbrook, IL(3)..... 1996 1 212,333 100 796,925 1.1 3.75 3.75
Harvester Drive,
Chicago, IL............ 1974 1 212,922 100 798,458 1.1 3.75 3.57
Arthur Avenue, Elk
Grove, IL.............. 1978 1 230,768 100 653,076 0.9 2.83 3.04
Ambassador Road,
Naperville, IL(3)...... 1997 1 203,500 44 328,967 0.3 3.70 3.96
Mark Street, Wood Dale,
IL..................... 1985 1 234,000 100 809,992 1.0 3.46 2.91
------ ----------- -------- ---------- ------ ------- ---------
Market Subtotal........ 8 1,939,074 94% $5,814,184 7.7% $3.19 $3.03
Cincinnati/Northern Ken-
tucky Market
Holton Drive,
Independence, KY....... 1996 1 352,000 100% $ 991,952 1.3% $2.82 $3.04
International Way,
Hebron, KY............. 1990 1 192,000 100 556,800 0.7 2.90 2.81
International Road,
Building 1,
Cincinnatti, OH........ 1990 1 192,000 100 528,000 0.7 2.75 2.41
International Road,
Building 2,
Cincinnatti, OH........ 1990 1 204,800 100 720,896 1.0 3.52 3.53
------ ----------- -------- ---------- ------ ------- ---------
Market Subtotal........ 4 940,800 100% $2,797,648 3.7% $2.97 $2.97
Columbus Market
Westbelt Drive, Building
2, Columbus, OH........ 1980 1 229,200 100% $ 616,343 0.8% $2.69 $2.42
Equity Drive, Building
1, Columbus, OH........ 1980 1 227,480 100 648,318 0.9 2.85 2.85
------ ----------- -------- ---------- ------ ------- ---------
Market Subtotal........ 2 456,680 100% $1,264,661 1.7% $2.77 $2.63
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------- -----------------------------------
ANNUALIZED NET
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 1.0% $ 2.20 $ 1.83
Lakefront Drive, Earth
City, MO............... 1995 1 189,017 100 656,400 0.9 3.47 3.78
------ ------------ -------- ----------- ------ ------- ---------
Market Subtotal........ 2 535,532 100% $ 1,418,733 1.9% $ 2.65 $ 2.51
------ ------------ -------- ----------- ------ ------- ---------
MIDWEST REGION
SUBTOTAL.............. 16 3,872,086 97% $11,295,226 15.0% $ 3.01 $ 2.89
SOUTHEAST REGION
Memphis Market
Pilot Drive, Memphis,
TN..................... 1987 1 336,080 100% $ 778,522 1.0% $ 2.32 $ 2.21
Orlando Market
Landstreet Road,
Building 1, Orlando,
FL..................... 1997 1 355,732 47% $ 995,742 1.3% $ 5.95 $ 5.95
Charlotte Market
Reames Road, Charlotte,
NC..................... 1994 1 105,600 100% $ 318,227 0.5% $ 3.01 $ 3.01
Atlanta Market
Highway 316, Dacula, GA
(4).................... 1989 1 326,019 100% $ 1,041,889 1.4% $ 3.20 $ 3.20
Westgate Parkway,
Atlanta, GA............ 1988 1 231,835 100 555,924 0.7 2.40 2.45
------ ------------ -------- ----------- ------ ------- ---------
Market Subtotal........ 2 557,854 100% $ 1,597,813 2.1% $ 2.86 $ 2.89
------ ------------ -------- ----------- ------ ------- ---------
SOUTHEAST REGION
SUBTOTAL.............. 5 1,355,266 86% $ 3,690,304 4.9% $ 3.16 $ 3.14
NORTHEAST REGION
Baltimore/Washington
Market
Tar Bay Drive, Jessup,
MD..................... 1990 1 210,000 100% $ 800,527 1.1% $3.81 $3.81
Oceano Avenue, Jessup,
MD..................... 1987 1 243,500 100 998,350 1.3 4.10 4.04
------ ------------ -------- ----------- ------ ------- ---------
Market Subtotal........ 2 453,500 100% $ 1,798,877 2.4% $3.97 $3.94
New York/New Jersey
Market
Pepes Farm Road,
Milford, CT............ 1980 1 200,000 100% $ 829,998 1.1% $ 4.15 $ 4.07
South Middlesex Avenue,
Building 1,
Cranbury, NJ........... 1989 1 204,369 100 735,728 1.0 3.60 3.60
Birch Creek Road,
Bridgeport, NJ......... 1991/1997 1 203,229 100 713,204 0.9 3.51 3.76
Pierce Street, Franklin
Township, NJ........... 1984 1 182,764 100 776,748 1.0 4.25 4.25
Herrod Boulevard, South
Brunswick, NJ(3)....... 1989 1 418,000 100 1,698,384 2.4 4.06 4.06
------ ------------ -------- ----------- ------ ------- ---------
Market Subtotal........ 5 1,208,362 100% $ 4,754,062 6.4% $ 3.93 $ 3.96
------ ------------ -------- ----------- ------ ------- ---------
Harrisburg Market
Brackbill Boulevard,
Building 1, Mechanics-
burg, PA (4)........... 1984 1 259,200 100% $ 835,588 1.1% $ 3.22 $ 3.36
Brackbill Boulevard,
Building 2,
Mechanicsburg, PA
(4).................... 1985 1 235,200 100 $ 758,133 1.0 3.22 3.36
Cumberland Parkway,
Mechanicsburg, PA(4)... 1992 1 340,000 100 1,144,968 1.5 3.37 3.37
------ ------------ -------- ----------- ------ ------- ---------
Market Subtotal........ 3 834,400 100% $ 2,738,689 3.6% $ 3.28 $ 3.37
------ ------------ -------- ----------- ------ ------- ---------
NORTHEAST REGION
SUBTOTAL.............. 10 2,496,262 100% $ 9,291,628 12.4% $ 3.72 $ 3.76
------ ------------ -------- ----------- ------ ------- ---------
BULK DISTRIBUTION
PROPERTIES TOTAL..... 48 11,789,544 91% $34,777,605 46.3% $ 3.24 $ 3.21
MULTITENANT DISTRIBUTION
PROPERTIES:
WEST REGION
Los Angeles Market
East Dyer Road, Santa
Ana, CA................ 1954/1965 1 372,096 100% $ 1,301,983 1.7% $ 3.50 $ 3.29
------ ------------ -------- ----------- ------ ------- ---------
San Francisco Market
Reed Avenue, Building
1, West
Sacramento, CA......... 1988 1 103,110 100% $ 378,141 0.5% $ 3.67 $ 4.06
Reed Avenue, Building
2, West
Sacramento, CA......... 1988 1 105,600 100 423,336 0.6 4.01 4.24
------ ------------ -------- ----------- ------ ------- ---------
Market Subtotal........ 2 208,710 100% $ 801,477 1.1% $ 3.84 $ 4.15
Seattle Market
Kent West Corporate
Park, II, Kent, WA..... 1989 1 250,820 100% $ 899,100 1.2% $ 3.58 $ 3.24
------ ------------ -------- ----------- ------ ------- ---------
WEST REGION SUBTOTAL... 4 831,626 100% $ 3,002,560 4.0% $ 3.61 $ 3.49
SOUTHWEST REGION
Dallas Market
113th Street, Arling-
ton, TX................ 1979 1 79,735 100% $ 291,032 0.4% $ 3.65 $ 3.49
Airline Drive, Building
1, Coppell, TX......... 1991 1 75,000 100 262,500 0.3 3.50 3.38
North Lake Drive,
Coppell, TX............ 1982 1 230,400 100 610,450 0.8 2.65 2.30
------ ------------ -------- ----------- ------ ------- ---------
SOUTHWEST
REGION/MARKET
SUBTOTAL.............. 3 385,135 100% $ 1,163,982 1.5% $ 3.02 $ 2.75
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
ANNUALIZED NET
EFFECTIVE
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1) 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 3.5% $5.45 $ 5.45
High Grove Lane, Naper-
ville, IL............... 1994 1 95,000 100 392,549 0.5 4.13 4.13
Western Avenue, Lisle,
IL...................... 1970/1985 1 67,996 100 383,143 0.5 5.63 4.50
------ ----------- -------- ----------- ------ ------- ---------
Market Subtotal.......... 4 643,254 100% $ 3,394,283 4.5% $5.28 $ 5.16
Cincinnati/Northern Ken-
tucky Market
Lake Forest Drive,
Building 1, Blue Ash,
OH(3)................... 1978 1 239,891 98% $ 628,303 0.8% $2.67 $ 2.70
Lake Forest Drive,
Building 2, Blue Ash,
OH(3)................... 1979 1 176,956 100 398,671 0.6 2.25 2.30
------ ----------- -------- ----------- ------ ------- ---------
Market Subtotal.......... 2 416,847 99% $ 1,026,974 1.4% $2.49 $ 2.53
Columbus Market
International Street,
Columbus, OH............ 1988 1 152,800 100% $ 450,760 0.6% $2.95 $ 2.73
Port Road, Building 1,
Columbus, OH............ 1995 1 205,109 100 672,903 0.9 3.28 3.27
Port Road, Building 2,
Columbus, OH............ 1995 1 156,000 100 425,880 0.6 2.73 2.82
Westbelt Drive, Building
1, Columbus, OH......... 1979 1 202,000 100 1,010,000 1.3 5.00 5.32
Dividend Drive, Columbus,
OH...................... 1980 1 144,850 100 429,881 0.6 2.97 3.09
Twin Creek Drive, Colum-
bus, OH................. 1989 1 176,000 0 0 0.0 0.00 0.00
------ ----------- -------- ----------- ------ ------- ---------
Market Subtotal.......... 6 1,036,759 83% $ 2,989,424 4.0% $3.47 $ 3.54
Other Market
Sysco Court, Grand Rap-
ids, MI................. 1985 1 62,700 100% $ 360,421 0.4% $5.75 $ 5.17
------ ----------- -------- ----------- ------ ------- ---------
MIDWEST REGION
SUBTOTAL............... 13 2,159,560 92% $ 7,771,102 10.3% $3.93 $ 3.91
SOUTHEAST REGION
Orlando Market
Orlando Central Park,
Orlando, FL............. 1983 6 1,172,875 94% $ 3,729,932 5.0% $3.39 $ 2.81
Kingspointe Parkway,
Orlando, FL............. 1991 1 101,870 100 340,141 0.5 3.34 3.34
------ ----------- -------- ----------- ------ ------- ---------
SOUTHEAST REGION/MARKET
SUBTOTAL............... 7 1,274,745 94% $ 4,070,073 5.5% $3.39 $2.85
NORTHEAST REGION
Boston Market
First Avenue, Needham,
MA...................... 1961/1992 1 119,573 100% $ 662,892 0.9% $5.54 $ 4.19
------ ----------- -------- ----------- ------ ------- ---------
New York/ New Jersey
Market
South Middlesex Avenue,
Building 2, Cranbury,
NJ...................... 1982 1 203,404 100% $ 661,062 0.9% $3.25 $ 3.25
Colony Road, Building 1,
Jersey City, NJ......... 1976 1 262,453 100 918,438 1.2 3.50 3.41
Colony Road, Building 2,
Jersey City, NJ......... 1974 1 124,933 100 499,732 0.7 4.00 3.79
Pulaski Boulevard,
Bayonne, NJ............. 1974/1982 1 224,664 100 703,139 0.9 3.13 3.13
Port Jersey Boulevard,
Building 1, Jersey City,
NJ...................... 1974 1 425,121 100 1,802,297 2.4 4.24 4.10
Port Jersey Boulevard,
Building 2, Jersey City,
NJ...................... 1974 1 204,564 100 754,841 1.0 3.69 3.60
Industrial Drive,
Building 1,
Jersey City, NJ......... 1976 1 263,717 100 988,939 1.3 3.75 3.80
Industrial Drive,
Building 2,
Jersey City, NJ......... 1976 1 154,000 100 577,500 0.8 3.75 3.75
Industrial Drive,
Building 3,
Jersey City, NJ......... 1972 1 45,274 100 181,096 0.2 4.00 3.77
------ ----------- -------- ----------- ------ ------- ---------
Market Subtotal.......... 9 1,908,130 100% $ 7,087,044 9.4% $3.71 $ 3.65
Harrisburg Market
Ritter Road, Mechanics-
burg, PA................ 1986 1 37,800 100% $ 248,970 0.4% $6.59 $ 5.44
------ ----------- -------- ----------- ------ ------- ---------
NORTHEAST REGION
SUBTOTAL............... 11 2,065,503 100% $ 7,998,906 10.7% $3.87 $ 3.71
------ ----------- -------- ----------- ------ ------- ---------
MULTITENANT DISTRIBUTION
PROPERTIES TOTAL....... 38 6,716,569 96% $24,006,623 32.0% $3.71 $ 3.53
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------- ----------------------------------
ANNUALIZED NET
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% $ 322,641 0.4% $ 3.96 $ 4.08
East Howell Avenue,
Building 2,
Anaheim, CA............ 1991 1 25,962 100 109,040 0.1 4.20 4.20
Artesia Avenue, Building
1, Fullerton, CA....... 1991 1 55,498 100 211,749 0.3 3.82 3.82
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 62,762 95 157,382 0.3 2.63 2.63
---------- ------------- ----------- ---------- ---------- ----------- --------------
Market Subtotal........ 5 286,199 99% $1,025,756 1.4% $ 3.62 $ 3.68
San Diego Market
Avenida Encinas,
Building 1, Carlsbad,
CA..................... 1972 1 80,000 100% $ 613,193 0.8% $ 7.66 $ 9.30
Avenida Encinas,
Building 2, Carlsbad,
CA..................... 1993 1 126,008 100 682,711 0.9 5.42 6.44
---------- ------------- ----------- ---------- ---------- ----------- --------------
Market Subtotal........ 2 206,008 100% $1,295,904 1.7% $ 6.29 $ 7.55
San Francisco Market
Brisbane Industrial
Park, Brisbane, CA..... 1965 15 549,128 98% $2,525,448 3.4% $ 4.68 $ 4.43
Huntwood Avenue, Hay-
ward, CA............... 1982 1 62,031 100 446,628 0.6 7.20 7.20
---------- ------------- ----------- ---------- ---------- ----------- --------------
Market Subtotal........ 16 611,159 98% $2,972,076 4.0% $ 4.94 $ 4.72
Phoenix Market
East Encanto Drive,
Tempe, AZ(4)........... 1990 1 81,817 100% $ 306,637 0.4% $ 3.75 $ 3.75
---------- ------------- ----------- ---------- ---------- ----------- --------------
Seattle Market
Kent West Corporate Park
I, Kent, WA............ 1989 4 151,940 100% $ 966,456 1.2% $ 6.36 $ 6.08
---------- ------------- ----------- ---------- ---------- ----------- --------------
WEST REGION SUBTOTAL... 28 1,337,123 99% $6,566,829 8.7% $4.96 $5.03
SOUTHWEST REGION
Dallas Market
DFW Trade Center,
Building 3,
Grapevine, TX(4)....... 1997 1 202,361 52% $ 589,596 0.8% $ 5.57 $ 6.38
Diplomat Drive, Carroll-
ton, TX................ 1997 1 53,375 100% $ 325,044 0.4% $ 6.09 $ 6.09
---------- ------------- ----------- ---------- ---------- ----------- --------------
SOUTHWEST REGION/MARKET
SUBTOTAL.............. 2 255,736 62% $ 914,640 1.2% $5.74 $6.27
MIDWEST REGION
Cincinnati/Northern Ken-
tucky Market
Empire Drive, Florence,
KY..................... 1991 1 101,250 100% $ 318,999 0.4% $ 3.15 $ 3.15
Spiral Drive, Building
1, Florence, KY(4)..... 1988 1 26,556 100 245,846 0.3 9.26 8.89
Spiral Drive, Building
2, Florence, KY(4)..... 1989 1 34,999 93 257,442 0.3 7.93 8.02
Creek Road, Blue Ash, OH
(3).................... 1983 1 66,095 88 398,858 0.6 6.84 7.70
---------- ------------- ----------- ---------- ---------- ----------- --------------
Market Subtotal........ 4 228,900 95% $1,221,145 1.6% $ 5.59 $ 5.79
Columbus Market
Equity Drive, Building
2, Columbus, OH........ 1980 1 116,160 61% $ 415,371 0.6% $ 5.83 $ 4.08
---------- ------------- ----------- ---------- ---------- ----------- --------------
MIDWEST REGION
SUBTOTAL.............. 5 345,060 84% $1,636,516 2.2% $ 5.65 $ 5.37
SOUTHEAST REGION
Charlotte Market
Old Charlotte Highway,
Monroe, NC............. 1957/1972 2 253,930 100% $ 986,000 1.3% $ 3.88 $ 3.55
---------- ------------- ----------- ---------- ---------- ----------- --------------
Atlanta Market
Cobb International
Place, Building 1,
Atlanta, GA(4)......... 1996 1 60,000 60% $ 156,420 0.2% $ 4.35 $ 4.47
Cobb International
Place, Building 2,
Atlanta, GA(4)......... 1996 1 68,000 80 207,659 0.2 3.82 3.98
South Royal Drive,
Building 1, Tucker,
GA(4).................. 1987 1 53,402 81 199,566 0.3 4.61 4.81
South Royal Drive,
Building 2, Tucker,
GA(4).................. 1987 1 43,720 86 146,402 0.2 3.88 4.01
South Royal Drive,
Building 3, Tucker,
GA(4).................. 1989 1 37,041 100 148,588 0.2 4.01 4.11
---------- ------------- ----------- ---------- ---------- ----------- --------------
Market Subtotal........ 5 262,163 80% $ 858,635 1.1% $ 4.12 $ 4.27
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
RENTABLE SQUARE FEET ANNUALIZED NET RENT(1)
------------------------- -----------------------------------
ANNUALIZED NET
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>
Orlando Market
Boggy Creek Road,
Building 1, Orlando,
FL (4)................. 1992 1 52,500 99% $ 242,874 0.3% $4.66 $4.74
Boggy Creek Road,
Building 2, Orlando,
FL (4)................. 1996 1 55,456 100 297,949 0.4 5.37 5.54
Landstreet Road,
Building 2, Orlando,
FL (4)................. 1997 1 55,456 40 116,228 0.2 5.29 5.65
Landstreet Road,
Building 3, Orlando,
FL (4)................. 1996 1 50,018 100 247,587 0.3 4.95 5.10
---------- ------------- ----------- ----------- ---------- ----------- --------------
Market Subtotal........ 4 213,430 84% $ 904,638 1.2% $5.04 $5.20
Other Market
Industrial Drive South,
Gluckstadt, MS......... 1988 1 160,000 100% $ 671,386 1.0% $4.20 $4.20
---------- ------------- ----------- ----------- ---------- ----------- --------------
SOUTHEAST REGION
SUBTOTAL.............. 12 889,523 90% $ 3,420,659 4.6% $4.27 $4.23
NORTHEAST REGION
Baltimore/Washington
Market
The Crysen Center,
Jessup, MD............. 1985 2 151,863 100% $ 697,087 0.9% $4.59 $4.14
Oakville Industrial
Park, Alexandria, VA... 1948 6 276,807 92 1,660,678 2.2 6.50 5.42
---------- ------------- ----------- ----------- ---------- ----------- --------------
Market Subtotal........ 8 428,670 95% $ 2,357,765 3.1% $5.79 $4.94
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
---------- ------------- ----------- ----------- ---------- ----------- --------------
Market Subtotal........ 2 88,624 100% $ 396,515 0.6% $4.47 $3.71
New York/ New Jersey
Market
Memorial Drive,
Franklin Township, NJ.. 1988 1 148,598 100% $ 1,036,120 1.3% $6.97 $6.43
---------- ------------- ----------- ----------- ---------- ----------- --------------
NORTHEAST REGION
SUBTOTAL.............. 11 665,892 97% $ 3,790,400 5.0% $5.88 $5.12
---------- ------------- ----------- ----------- ---------- ----------- --------------
WORKSPACE PROPERTIES
TOTAL................ 58 3,493,334 92% $16,329,044 21.7% $5.07 $4.94
---------- ------------- ----------- ----------- ---------- ----------- --------------
GRAND TOTAL.............. 144 21,999,447 93% $75,113,272 100.0% $3.68 $3.58
========== ============= =========== =========== ========== =========== ==============
</TABLE>
- - -------
(1) "Annualized Net Rent" means annualized monthly Net Rent from leases in
effect as of September 30, 1997. "Net Rent" means contractual rent, excluding
any reimbursements for real estate taxes or operating expenses.
(2) "Annualized Net Effective Rent" means Annualized Net Rent, less amortiza-
tion of the related leasing costs, as adjusted to reflect the effect of rent
concessions and straight-lining of rent steps.
(3) Property was acquired subsequent to September 30, 1997. The Property's
Annualized Net Rent is as of September 30, 1997 and Annualized Net Effective
Rent is as of the estimated acquisition date.
(4) Property to be acquired in the Company Acquisitions.
63
<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.
<TABLE>
<CAPTION>
TOP 10 TOP 10
LEADING MARKETS FOR DISTRIBUTION SPACE MARKETS FLEX/R&D MARKETS
FORECASTED NET ABSORPTION OF FORECASTED SPACE FORECASTED SPACE
INDUSTRIAL SPACE 1997-2002 DEMAND 1997-2002 DEMAND 1997-2002
---------------------------- -------------------------- ----------------
<S> <C> <C>
1. ATLANTA 1. NEW YORK/NEW JERSEY 1. SAN FRANCISCO*
2. CHICAGO 2. LOS ANGELES 2. LOS ANGELES
3. RIVERSIDE, CA** 3. CHICAGO 3. NEW YORK/NEW JERSEY
4. Houston 4. SAN FRANCISCO* 4. DALLAS/FORTH WORTH
5. PHOENIX 5. ATLANTA 5. CHICAGO
6. WASHINGTON, D.C. 6. DALLAS/FORT WORTH 6. BOSTON
7. Oakland 7. Miami/Ft. Lauderdale 7. ATLANTA
8. Portland 8. Houston/Galveston 8. SEATTLE
9. SEATTLE 9. PHOENIX 9. Minneapolis/St. Paul
10. DALLAS 10. Detroit 10. PHOENIX
Source: CB Commercial/Torto Source: Cognetics Source: Cognetics
Wheaton Research
</TABLE>
- - -------
* San Francisco market includes Oakland, San Jose and San Francisco.
** Riverside is adjacent to Los Angeles.
The Company's 21 markets (17 of which are principal targeted markets), based on
percentage of Annualized Net Rent and percentage of rentable area, as of Sep-
tember 30, 1997, are set forth below.
<TABLE>
<CAPTION>
-----------------------------
PERCENT OF PERCENT OF
MARKET ANNUALIZED RENT RENTABLE AREA
------ --------------- -------------
<S> <C> <C>
New York/New Jersey 17.1% 14.8%
Chicago 12.3 11.7
Los Angeles, including Riverside 9.2 10.1
Orlando 7.9 8.4
Cincinnati/Northern Kentucky 6.7 7.2
Dallas 6.4 8.9
Columbus 6.2 7.3
Baltimore/Washington, D.C. 5.5 4.0
San Francisco, including San Jose 5.0 3.7
Harrisburg 4.0 4.1
Phoenix 3.4 4.7
Atlanta 3.3 3.7
San Diego 3.0 2.0
Seattle 2.5 1.8
Charlotte 1.7 1.6
Boston 1.4 0.9
Memphis 1.0 1.5
Other Markets (four markets) 3.4 3.6
------ ------
Total 100.0% 100.0%
====== ======
</TABLE>
64
<PAGE>
VACANCY RATE AND TW RENT INDEX FOR PRINCIPAL MARKETS(1)
[BAR GRAPH APPEARS HERE]
- - -------
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 15 of the
Company's 17 principal targeted markets, as identified in the Company's prin-
cipal targeted markets table on the preceding page. The Memphis and Harrisburg
markets are not covered by CB Commercial/Torto Wheaton Research. The 1997 fig-
ures are forecasts but are based upon actual information through mid-year 1997.
NET ABSORPTION, COMPLETIONS AND VACANCY RATES FOR PRINCIPAL MARKETS(1)
[BAR GRAPH APPEARS HERE]
- - -------
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 15 of
the Company's 17 principal targeted markets, as identified in the Company's
principal targeted markets table on the preceding page. The Memphis and
Harrisburg markets are not covered by CB Commercial/Torto Wheaton Research. The
1997 figures are forecasts but are based upon actual information through mid-
year 1997.
65
<PAGE>
TENANT INFORMATION
The following table sets forth the Company's 20 largest tenants based on
Annualized Base Rent as of November 18, 1997.
<TABLE>
<CAPTION>
---------------------------------------------------
WEIGHTED
AVERAGE
MONTHS
TOTAL PERCENT REMAINING
LEASED ANNUALIZED OF ANNUALIZED AFTER
SQUARE BASE BASE NOVEMBER 18,
TENANTS(1) FEET(1) RENT(1)(2) RENT(1) 1997
- - ---------- --------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
GATX Logistics, Inc. 1,296,872 $ 4,079,130 5.11% 46
Exel Logistics, Inc.
(Merchants Home Delivery) 861,848 2,836,307 3.55 78
Forrestville Industries
(guaranteed by North
American Philips
Corporation) 480,258 2,618,591 3.28 44
Goodtimes Home Video Corp. 358,564 1,332,341 1.67 27
GTE Communications Corp 96,517 1,278,850 1.60 119
National Distribution
Centers 299,567 1,168,053 1.46 87
B. Dalton Bookseller
(guaranteed by Barnes &
Noble, Inc.) 306,901 1,161,699 1.46 33
Enesco Corporation 234,000 1,064,700 1.33 18
CGM, Inc. (Tri-State Gift) 202,000 1,010,000 1.27 138
Giant of Maryland, Inc. 243,500 998,350 1.25 19
Hitachi Home Electronics 220,000 996,018 1.25 59
Menlo Logistics, Inc.
(guaranteed by Emery Air
Freight Corporation) 167,264 995,742 1.25 52
Appleton Papers, Inc. 352,000 991,952 1.24 103
CPC International, Inc. 263,717 988,939 1.24 53
Yale Security, Inc. 253,930 986,000 1.24 46
Food Warehousing Corp. 223,412 949,502 1.19 32
Port Jersey Distribution
Serivces, Inc. 262,453 918,438 1.15 53
LA Gear, Inc. 284,559 914,000 1.15 19
Reebok International Ltd. 336,080 907,416 1.14 16
Locust Industries Ltd.
Partnership 210,000 871,500 1.09 3
--------- ----------- ------------- ------------
Total 6,953,442 $27,067,528 33.92% 52
========= =========== ============= ============
</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 November 18, 1997.
<TABLE>
<CAPTION>
-------------------------------------------------------------------
PERCENT OF ANNUALIZED PERCENT
PERCENT TOTAL AGGREGATE BASE OF PORTFOLIO
SQUARE FOOTAGE NUMBER OF OF ALL LEASED LEASED RENT (IN ANNUALIZED
UNDER LEASE LEASES LEASES SQUARE FEET SQUARE FEET THOUSANDS) BASE RENT
- - -------------- --------- ------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Less than 10,001 71 24.5% 384,757 1.8% $ 2,422 3.0%
10,001-20,000 35 12.1 490,879 2.4 2,631 3.3
20,001-50,000 61 21.0 1,926,813 9.2 8,555 10.7
50,001-100,000 46 15.9 3,381,478 16.2 14,671 18.4
100,001 and over 77 26.5 14,737,929 70.4 51,543 64.6
--------- ------- ----------- ----------- ---------- ------------
Total 290 100.0% 20,921,856 100.0% $ 79,822 100.0%
========= ======= =========== =========== ========== ============
</TABLE>
66
<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 November 18, 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
YEAR OF LEASES ---------------------- EXPIRING LEASES PER EXPIRING
LEASE EXPIRATION EXPIRING SQUARE FEET % OF TOTAL LEASES(1) SQUARE FOOT(1) LEASES(1)
- - ---------------- --------- ----------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
1997(2) 12 258,425 1.2% $ 1,166,516 $4.51 1.4%
1998 45 2,724,775 13.0 9,455,991 3.47 11.8
1999 57 3,862,277 18.5 14,458,398 3.74 18.1
2000 53 2,426,043 11.6 10,025,766 4.13 12.6
2001 48 3,102,192 14.8 12,255,790 3.95 15.4
2002 32 3,314,577 15.8 11,975,652 3.61 15.0
2003 10 868,749 4.2 3,506,302 4.04 4.4
2004 6 671,265 3.2 2,213,896 3.30 2.8
2005 6 749,765 3.6 3,043,670 4.06 3.8
2006 5 764,416 3.7 2,862,928 3.75 3.6
2007 10 1,299,907 6.2 5,486,260 4.22 6.9
2008 and beyond 6 879,465 4.2 3,370,684 3.83 4.2
--------- ----------- ---------- ------------ -------------- -------------
290 20,921,856 100.0% $79,821,853 $3.82 100.0%
========= =========== ========== ============ ============== =============
</TABLE>
- - -------
(1) Based on currently payable rent.
(2) Represents lease expirations from November 18 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 November 18, 1997.
<TABLE>
<CAPTION>
---------------------
SQUARE PERCENTAGE
FOOTAGE TOTAL
---------- ----------
<S> <C> <C>
Square footage occupied by tenants 20,921,856 95.1%
Square footage vacant 1,077,591 4.9
---------- ----------
Total net rentable square footage 21,999,447 100.0%
========== ==========
</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>
RECURRING CAPITAL EXPENDITURES
The following table summarizes the recurring capital expenditures for the Prop-
erties 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 weighted/average square feet 14,449,744 11,588,260 8,959,973
Total recurring capital expenditures $2,830,780 $2,133,118 $2,076,193
</TABLE>
67
<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 34 Proper-
ties located in California, 15 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 Properties
located in California 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 Proper-
ties 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 into the air of or
exposure to hazardous substances, including ACMs. See "Risk Factors--Real
Estate Investment Risks--Possible Environmental Liabilities."
Phase I 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 September 30, 1997, and for all other Properties in connection
with their contribution to the Company in the Formation Transactions. The pur-
pose 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. The earliest of such Phase I ESAs were obtained in 1988
and Phase I ESAs on approximately 40% of the Properties were obtained prior to
1995. Commonly accepted standards and procedures for such Phase I ESAs have
evolved to encompass higher standards and more extensive procedures over the
period from 1988 to the present. 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. 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.
COMPETITION
The Company operates nationally and has no markets with a concentration of
leasable square feet in excess of 15% of its total leasable square feet.
Although the industrial real estate business is highly fragmented, with no dom-
inant competitors, the Company faces substantial competition in both its
leasing and property acquisition activities. There are numerous other indus-
trial properties located in close proximity to each of the Properties. The
amount of leasable space available in any market could have a material adverse
effect on the Company's ability to rent space and on the rents charged. Compe-
tition for acquisition of existing industrial properties from institutional
investors and other publicly traded REITs has increased substantially in the
past several years. In many of the Company's markets, institutional investors
and owners and developers of industrial facilities compete vigorously for the
acquisition, development and lease of industrial space. Many of these competi-
tors have substantial resources and experience.
68
<PAGE>
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.
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 "The Company--Business Strategies"
and "--Operations." 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 pur-
chased or sell such properties, in whole or in part, when circumstances war-
rant.
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 industrial real estate, the Company
may, in the discretion of the Board of Trustees, 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 Consequences--Taxation of the Company--Gross
Income Tests" and "--Taxation of the Company--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
69
<PAGE>
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 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 Trust and Bylaws do not, however, limit the amount or percentage
of indebtedness 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 conditions in the market for debt and equity securities, fluctuations
in the market price of its Common Shares, growth and acquisition opportunities
and other factors. Accordingly, the Company may increase its Debt-to-Total
Market Capitalization 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 dis-
tributions 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 Ratio, 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
fluctuations in the value of the Company's portfolio of properties over time,
and since any determination of the Company's Debt-to-Total Market Capitaliza-
tion Ratio is made only at the time debt is incurred, the Debt-to-Total Market
Capitalization 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--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 borrowings by the Company may be used for working capital, to refinance
existing indebtedness or to finance acquisitions, expansions or the development
of new properties, and for the payment of distributions. See "Federal Income
Tax Consequences."
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies that are intended to minimize poten-
tial conflicts of interest. However, there can be no assurance that these poli-
cies 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.
70
<PAGE>
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 individuals who are
not officers or employees of the Company ("Independent Trustees"). The fore-
going 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 matter. The Declaration of Trust also includes a provi-
sion generally permitting the Company to enter into any agreement or transac-
tion with any person, including any Trustee, officer, employee or agent of the
Company. The Company's Bylaws provide that Section 2-419 of the MGCL, relating
to transactions by interested directors, shall be available for and apply to
contracts and other transactions between the Company and any of its Trustees or
between the Company and any other trust, corporation, firm or other entity in
which any of the Company's Trustees is a trustee or director or has a material
financial interest. Under Section 2-419 of the MGCL, a contract or other trans-
action between a corporation and any of its directors and any other corpora-
tion, firm or other entity in which any of its directors 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 director at the
meeting of the board or a committee of the board that authorizes, approves or
ratifies the contract or transaction or (c) the counting of the vote of the
director for the authorization, approval or ratification of the contract or
transaction if (i) after disclosure of the interest, the transaction is autho-
rized, approved or ratified by the affirmative vote of a majority of the disin-
terested directors, or by the affirmative vote of a majority of the votes cast
by stockholders entitled to vote other than the votes of shares owned of record
or beneficially by the interested director or such corporation, firm or other
entity, or (ii) the transaction is fair and reasonable to the corporation. The
Operating Partnership Agreement provides that neither the Company nor any of
its affiliates (including its officers and Trustees) may sell, transfer or
convey any property to, or purchase any property from, the Operating Partner-
ship 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, subject to cer-
tain limited exceptions as described under "Partnership Agreement of the Oper-
ating Partnership-Management." Pursuant to the Operating Partnership Agreement,
the Limited Partners have agreed that the Company is acting on behalf of the
Operating Partnership and the Company's shareholders generally and, in its
capacity as general partner of the Operating Partnership, the Company is under
no obligation to consider the separate interests of the Limited Partners in
deciding whether to cause the Operating Partnership 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 mis-
conduct or negligence on the part of its agents, provided that such agents were
appointed in good faith.
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 a manner consistent
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 Treasury Regu-
lations), 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.
71
<PAGE>
MANAGEMENT
TRUSTEES AND EXECUTIVE OFFICERS
The following table sets forth information with respect to the Company's offi-
cers and Trustees (including those persons who have agreed to become Trustees
upon the closing of the Offering).
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TERM AS
TRUSTEE
NAME AGE POSITION EXPIRES
- - -----------------------------------------------------------------------------
<S> <C> <C> <C>
Ferdinand Colloredo- 58 Chairman of the Board and Chief
Mansfeld(1) Executive Officer, Trustee 2000
Robert E. Patterson 52 President, Trustee 2000
Noah T. Herndon (2) 64 Trustee
Christopher C. Milliken (2) 52 Trustee
Maurice Segall (2) 68 Trustee
W. Nicholas Thorndike (2) 64 Trustee
Ronald L. Skates (2) 56 Trustee
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
Gerald F. Ianetta 36 Vice President, Asset Management
Jean M. Murphy 34 Vice President, Asset Management
Brian R. Barringer 31 Vice President, Acquisitions
Mark A. Bechard 31 Vice President, Financial Planning
Andrew J. Klouse 32 Vice President, Financial Reporting
Andrew G. LeStage 27 Asset Manager
Jeffrey G. Swanson 26 Asset Manager
John F. Malloy 52 Senior Vice President, Management
Company
Peter F. Tague 58 Senior Vice President, Management
Company
</TABLE>
- - -------
(1) Messrs. 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
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 Cabot, Cabot & Forbes, a national real estate development, management
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-Mansfeld
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. Mr. Patterson began his real estate career in 1972 as a lawyer with
the firm of Gaston Snow & Ely Bartlett. 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
72
<PAGE>
real estate development, management and investment firm as Senior Vice Presi-
dent. He joined Cabot Advisors in 1987 to head its acquisitions 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 National Association of Real Estate Invest-
ment Trusts, the Society of Industrial and Office Realtors, the Urban Land
Institute and the National Association of Real Estate Investment Managers.
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 American Textile History Museum, 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 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 Field & 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 a
Trustee of Massachusetts General Hospital, Beth Israel Hospital and the Boston
Museum of Fine Arts. Mr. Segall is a graduate of McGill University, Columbia
University and the London School of Economics.
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 serves as a Director of Courier Corpora-
tion, Data General Corporation, The Providence Journal (where he is Chairman of
the Executive Committee), and Bradley Real Estate Inc. He also serves as a
Trustee of Massachusetts General Hospital, having served as Chairman of the
Board from 1987 to 1992 and President from 1992 to 1994, and serves as Trustee
of Eastern Utilities Associates, Northeastern University and The Putnam Funds.
Mr. Thorndike is a graduate of Harvard College.
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 Frankfurt, Germany in 1991. He was also an investment
banker with Merrill Lynch & Co. from 1986 through 1989 where he worked in
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 Director of Research and a
member of its acquisition department, becoming a Vice President in 1991 and a
Senior Vice President in 1995 of Cabot Partners. Mr. Ebbott is a graduate of
Dartmouth College and the University of Chicago Business School. 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, an
affiliate of Cabot, Cabot & Forbes, in 1991 as a Senior Vice President and head
73
<PAGE>
of its property management group. Mr. Hodgson is a graduate of Northeastern
University. He is a Trustee and a member of the Board of Investment of the Cam-
bridge Savings Bank. He is a member of the Building Owners and Managers Associ-
ation, 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 1995. 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 Director of Leasing and Marketing of Cabot Partners
since 1992, becoming Senior Vice President in 1996. 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.
GERALD F. IANETTA has been a Vice President, Asset Management of Cabot Partners
since 1993. He is also the Senior Regional Asset Manager and oversees the man-
agement of assets located in the Northeast and South regions. Prior thereto, he
was an asset manager at The Boston Company Real Estate Counsel, Inc. which he
joined in 1989. Mr. Ianetta began his career in real estate asset management in
1982 upon joining CC&F Asset Management Company, an affiliate of Cabot Part-
ners. Mr. Ianetta is a graduate of Bentley College.
JEAN M. MURPHY has been an Asset Manager of Cabot Partners since 1989. Ms.
Murphy is a graduate of Shiller International University in Paris, France. She
is an Insurance Institute of America Associate in Risk Management.
BRIAN R. BARRINGER has been a Regional Manager of Acquisitions at Cabot Part-
ners since 1994. Prior to joining Cabot Partners, Mr. Barringer was a leasing
agent covering retail, office, and industrial properties with Combined Proper-
ties (Washington, D.C.) between 1991 and 1992, and with the Trammell Crow Com-
pany (Washington D.C. and Cleveland, Ohio) from 1989 to 1991. Mr. Barringer is
a graduate of Harvard College and Harvard Business School.
MARK A. BECHARD served as a Senior Portfolio Accountant of Cabot Partners from
1993. Mr. Bechard served as a real estate analyst at the Codman Company between
1993 and 1990. Mr. Bechard is a graduate of Salem State College.
ANDREW J. KLOUSE served as a Manager of Portfolio Accounting at Cabot Partners
from 1994. He was an Assistance Vice President at The Boston Company Real
Estate Counsel, Inc. from 1990 to 1993 and an accountant at Liberty Real Estate
between 1988 and 1990. Mr. Klouse is a graduate of the University of Bridge-
port.
ANDREW G. LESTAGE has been an Asset Manager for Cabot Partners since 1996. He
is responsible for the Midwest and Southwest regions. From 1993 to 1996, he was
a Property Manager with John Burnham & Company in San Diego. He is a graduate
of Bucknell University.
JEFFREY G. SWANSON joined Cabot Partners as an Asset Manager in 1997. He will
manage properties for the Management Company. From 1993 to 1997, he was an
Assistant Vice President with AEW Capital Management and its predecessor compa-
nies. He is a graduate of Colgate University.
JOHN F. MALLOY has been a Senior Vice President of Cabot Partners since 1990,
having previously served in a similar position with Cabot Advisors since 1986.
He has been an institutional investment counselor for over twenty years and
began his institutional real estate experience upon joining the Equitable Life
Assurance Society in 1980. He subsequently worked with Lehndorff & Babson Real
Estate Counsel, Inc., before joining Cabot Advisors. Mr. Malloy is a graduate
of Fitchburg State College and Northeastern University. He is a Director of the
Boston Adult Literacy Fund and a member of the Association of Investment Man-
agement Sales Executives.
PETER F. TAGUE has been a Senior Vice President of Cabot Partners since 1990,
having previously served in a similar position with Cabot Advisors since 1987.
He worked with Boston Financial Real Estate Advisors from 1984 until joining
Cabot Advisors in 1987. He has been an institutional investment counselor for
over twenty-five years, beginning his
74
<PAGE>
investment career as a fixed income analyst and portfolio manager with the Bank
of Boston in 1964. Mr. Tague is a graduate of Harvard College. He is a member
of the National Association of Real Estate Investment Trusts, and the Pension
Real Estate Association.
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. In addition, each Independent Trustee will
receive an initial grant of options to purchase 10,000 Common Shares at the
Offering Price and will receive additional annual grants of options to purchase
4,000 Common Shares at the market price for Common Shares at the date of grant.
Officers of the Company who are Trustees will not receive any separate compen-
sation for their service as Trustees.
75
<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 tables set forth information concerning the base compensa-
tion proposed to be paid and the initial amounts of stock options proposed to
be granted to the Company's Chief Executive Officer and each of the other exec-
utive officers indicated (collectively, the "Named Executive Officers") during
the fiscal year ending December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
----------------------
BASE STOCK
NAME AND PRINCIPAL POSITION SALARY RATE OPTIONS
--------------------------- ----------- ---------
<S> <C> <C>
Ferdinand Colloredo-Mansfeld $265,000 350,000
Chairman of the Board and Chief Executive Officer
Robert E. Patterson 245,000 275,000
President
Franz Colloredo-Mansfeld 175,000 250,000
Chief Financial Officer
Andrew D. Ebbott 175,000 200,000
Senior Vice President
Howard B. Hodgson, Jr. 175,000 200,000
Senior Vice President
Eugene F. Reilly 175,000 200,000
Senior Vice President
Neil E. Waisnor 175,000 200,000
Senior Vice President, Treasurer and Secretary
</TABLE>
OPTION GRANTS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
POTENTIAL REALIZABLE
VALUE OF ASSUMED
ANNUAL RATE OF
NUMBER OF COMMON SHARE
SECURITIES PRICE APPRECIATION
UNDERLYING PERCENT OF TOTAL EXERCISE PRICE FOR OPTION TERM(3)
OPTIONS TO BE OPTIONS TO BE PER COMMON EXPIRATION ----------------------
NAME GRANTED(1) GRANTED SHARE(2) DATE 5% 10%
- - ---- ------------- ---------------- -------------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Ferdinand Colloredo-
Mansfeld 350,000 16.0% $20.00 1/ /2008 $4,402,262 $11,156,197
Robert E. Patterson 275,000 12.6 20.00 1/ /2008 3,458,920 8,765,584
Franz Colloredo-Mansfeld 250,000 11.4 20.00 1/ /2008 3,144,473 7,968,712
Andrew D. Ebbott 200,000 9.1 20.00 1/ /2008 2,515,579 6,374,971
Howard B. Hodgson, Jr. 200,000 9.1 20.00 1/ /2008 2,515,579 6,374,971
Eugene F. Reilly 200,000 9.1 20.00 1/ /2008 2,515,579 6,374,971
Neil E. Waisnor 200,000 9.1 20.00 1/ /2008 2,515,579 6,374,971
</TABLE>
- - -------
(1)All options are granted at the fair market value of the Common Shares at the
date of grant. Options granted are for a term of not more than 10 years from
the date of grant and vest in four equal installments (rounded to the nearest
whole share of Common Stock) over four years.
(2)Based on the assumed initial public offering price. The exercise price per
share will be the actual initial public offering price.
(3)In accordance with the rules of the Commission, these amounts are the hypo-
thetical gains or "option spreads" that would exist for the respective options
based on assumed rates of annual compound share price appreciation of 5% and
10% from the date the options are granted over the full option term. No gain to
the optionee is possible without an increase in the market price of the Common
Shares, which would benefit all shareholders.
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 bonuses may,
depending on the level of an individual's corporate responsibility and attain-
ment of specified objectives, range up to 100% of the individual's annual base
salary.
76
<PAGE>
EMPLOYMENT AGREEMENTS
Messrs. Ferdinand Colloredo-Mansfeld, Robert E. Patterson and Franz Colloredo-
Mansfeld and each of the other Named Executive Officers will enter into
employment agreements with the Company. Each of the agreements with Messrs.
Colloredo-Mansfeld and Patterson will be for an initial term of three years,
which will be automatically extended for successive one-year periods unless
otherwise terminated. The agreements with each of the other Named Executive
Officers will be for initial terms of two years, which will be automatically
extended for successive one-year periods unless otherwise terminated. The
agreements will each provide for base annual compensation in the amounts set
forth in "--Executive Compensation" above and incentive compensation to be
determined by the Board of Trustees or the Compensation Committee thereof. The
base annual compensation may be increased in subsequent years by action of the
Board of Trustees or the Compensation Committee. Each of the employment agree-
ments will provide for certain severance payments in the event of disability
or termination by the Company without cause or by the employee for good rea-
son. Each executive will be required under the terms of his employment agree-
ment to devote substantially all of his business time to the affairs of the
Company. The agreements will also prohibit each executive from engaging,
directly or indirectly, during the term of his 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
Incentive Plan (the "Long Term Incentive Plan") for the purpose of attracting
and retaining highly qualified executive officers, Trustees and employees. The
Long Term Incentive Plan will be administered by the Compensation Committee of
the Board of Trustees, provided that the Board of Directors of the Management
Company or a committee thereof will select those employees of the Management
Company who are eligible for awards under the Long Term Incentive Plan. As
used in this summary, the term "Administrator" means the applicable Board or
committee or its delegate, as appropriate. Officers and other employees of the
Company, the Operating Partnership and designated subsidiaries, including the
Management Company, and members of the Board of Trustees who are not employees
of the Company ("Non-employee Trustees") will be eligible to participate in
the Long Term Incentive Plan. Certain awards will be made to the Non-employee
Trustees automatically and the applicable Administrator will select the other
individuals who will participate in the Plan ("Participants"). No option or
other incentive award may be granted under the Long Term Incentive Plan after
December 31, 2007.
Options awarded to Participants in the Long Term Incentive Plan who are Non-
employee Trustees or employees of the Company relate to Common Shares. Options
awarded to Participants in the Plan who are employees of the Management Com-
pany relate to Units. The Long Term Incentive Plan authorizes the issuance of
up to 4,235,000 Common Shares and Units. The number of Common Shares and Units
available may increase on each January 1 to an amount equal to 10% of the
aggregate number of outstanding Common Shares and Units on such date. The
number of Common Shares or Units underlying awards made to any one individual
in any one-year period may not exceed 500,000 Common Shares or 500,000 Units
or any combination thereof. The Long Term Incentive Plan provides for the
grant of (i) Common Share options intended to qualify as incentive options
under Section 422 of the Code, (ii) Common Share options and Unit options not
intended to qualify as incentive options under Section 422 of the Code and
(iii) dividend equivalent rights and distribution equivalent rights which
entitle a Participant to be credited with additional Common Share or Unit
Rights.
In connection with the grant of options under the Long Term Incentive Plan
other than options to Non-employee Trustees, the Administrator will determine
the terms of the option, including the option exercise price and any vesting
requirements and whether a dividend equivalent right or a distribution equiva-
lent right shall be awarded in conjunction, respectively, with a Common Share
option or a Unit option. The Administrator has authority to award options at
less than fair market value (as defined in the Long Term Incentive Plan) but
at this time has no intention of doing so. At the time of a Non-employee
Trustee's initial election or appointment as a Trustee, such Trustee shall
automatically receive an option to purchase 10,000 Common Shares. Thereafter,
at the closing of the annual meeting of the Trust's shareholders, each contin-
uing Non-employee Trustee shall receive an option to purchase an additional
4,000 Common Shares. Effective as of the closing of the Offering, options for
a total of 2,188,500 Common Shares and Units will be granted to employees,
officers and Non-employee Trustees, including the officers named in "--Execu-
tive Compensation" above, with an exercise price equal to the Offering Price.
The initial options granted under the Long Term Incentive Plan will have ten-
year terms and will become exercisable in four equal annual installments com-
mencing 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 Long
Term Incentive Plan).
A Common Share option granted under the Long Term Incentive Plan may be exer-
cised for any number of whole Common Shares up to the full number of Common
Shares for which the option could be exercised. A Unit option may be exercised
77
<PAGE>
for any number of whole units up to the full number of Units for which the
option could be exercised. A holder of an option will have no rights as an
owner with respect to the Common Shares or Units, as applicable, 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 the Administrator has previously exercised its reason-
able discretion to make such option exercisable, and all vested options which
are not exercised by the expiration date described in the Long Term Incentive
Plan will be forfeited. Any Common Shares or Units subject to an option which
is forfeited (or which expires without exercise) will again be available for
grant under the Long Term Incentive Plan. Payment of the exercise price of a
Common Share option granted under the Long Term Incentive Plan may be made in
cash or by exchanging Common Shares that have been held by the Participant for
at least six months, or in any combination thereof, as determined by the Admin-
istrator. Payment of the exercise price of a Unit option shall be made in cash.
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 compensation, subject to the annual statutory limitation prescribed by Sec-
tion 402(g) of the Code, on a pre-tax basis. The Company and the Participating
Employers will make matching contributions equal to 100% of the amount
deferred, up to the lesser of 6% of compensation or $1,800. 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
The Company will enter into indemnification agreements with each of its execu-
tive officers and Trustees that will require that the Company indemnify such
persons to the fullest extent permitted by law and reimburse them for legal and
related expenses as incurred in connection with litigation to which they may
become subject as a result of their positions with the Company, subject to an
obligation to reimburse the Company if it is ultimately determined that indem-
nification is not permitted in the circumstances. Although the indemnification
agreements will provide substantially the same scope of indemnification as that
to which the Company's officers and Trustees will be entitled under the
Company's Bylaws and applicable law, such agreements may provide greater assur-
ance to Trustees and executive officers that indemnification will be available,
because, as contracts, they cannot be modified unilaterally in the future by
the Board of Trustees or the shareholders to eliminate the rights they provide.
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."
78
<PAGE>
FORMATION AND OTHER 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 and the other transactions described below, which are
designed to consolidate the ownership of the Properties and Cabot Partners'
industrial real estate business (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 taxable year ending December 31, 1998.
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 not receive advisory or
management fees with respect to such Properties. The Properties to be contrib-
uted by the Contributing Investors, including those of the C-M Property Part-
nerships, 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 Part-
ners. Each of the advisory clients of Cabot Partners was offered the opportu-
nity to participate in the Formation Transactions. Approximately 48.4% of the
Properties, based on Annualized Net Rent, were properties that were managed by
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
December 22, 1997 and the contemporaneous initial purchase by the Operating
Partnership of 100 shares of the non-voting preferred stock of the Manage-
ment Company.
(iv) Prior to or simultaneously with the closing of the Offering, the Con-
tributing Investors, including the partners of the C-M Property Partner-
ships, will contribute certain of their industrial real estate investment
properties (comprising the Properties described herein), directly or indi-
rectly, 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 Contributing Investors. The Contribution Agreement pro-
vides, among other things, that the Contributing Investors will convey to
the Operating Partnership, or in certain cases
79
<PAGE>
directly to the Company, all of their interests 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 derived contribution amounts of all of the
Properties and assets to be contributed by the Contributing Investors and
Cabot Partners in the Formation Transactions. See "--Contribution Amounts
of Properties and Cabot Partners." In the case of contributions of Proper-
ties 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 Shares 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 respective contributing entities. As a result of such con-
tributions, and after giving effect to the proposed issuance and sale of
Common Shares in the Offering and the Concurrent Placement, the Contrib-
uting Investors (excluding for this purpose the C-M Property Partnerships)
will receive a total of 22,598,735 Units and 8,961,714 Common Shares having
a value, based on the Offering Price, of approximately $631.2 million,
which will in the aggregate represent approximately 74.5% of the common
equity of the Company on a fully diluted basis. See "Principal and Manage-
ment Shareholders" for a listing of Units and Common Shares to be received
by principal Contributing Investors in the Formation Transactions.
(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 Property Partnerships, and giving effect to
the proposed issuance and sale of Common Shares in the Offering and the
Concurrent Placement, Cabot Partners and the partners of the C-M Property
Partnerships will receive a total of 2,289,551 Units which will represent
approximately 5.4% of the common equity of the Company on a fully diluted
basis. Of the Units that will be received by Cabot Partners and the part-
ners of the C-M Property Partnerships, (i) Ferdinand Colloredo-Mansfeld,
Chief Executive Officer of the Company, will receive 1,331,657 Units having
a value, based on the Offering Price, of approximately $26.6 million, (ii)
Robert E. Patterson, President of the Company, will receive 128,590 Units
having a value, on the same basis, of approximately $2.6 million and (iii)
no other individual partner of Cabot Partners will receive more than
135,515 Units having a value, on the same basis, of approximately $2.7 mil-
lion. See "Principal and Management Shareholders." 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 Man-
agement Company. The Operating Partnership will own 100% of the non-voting
preferred stock of the Management Company. The Operating Partnership, as
the holder of the non-voting preferred stock of the Management Company, is
entitled to receive quarterly cash dividends equal to 95% of the Management
Company's net operating cash flow and will be senior to the extent of the
liquidation preference thereof in a liquidation or dissolution to any class
of the Management Company's common equity. The non-voting preferred stock
is not redeemable by the Management Company or the holder thereof. Ferdi-
nand Colloredo-Mansfield will own 100% of the voting common stock of the
Management Company and will be entitled to receive quarterly cash dividends
equal to 5% of the Management Company's net operating cash flow.
(vi) The Units and Common Shares received by the Contributing Investors
(excluding the C-M Property Partnerships) in connection with the Formation
Transactions will be exchangeable for 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 autho-
rize.
(vii) The Units received by Cabot Partners and the partners of the C-M
Property Partnerships, including Messrs. Colloredo-Mansfeld and members of
their immediate families, in connection with their contributions pursuant
to the Formation Transactions will be exchangeable into Common Shares on a
one-for-one basis or the cash equivalent thereof (as determined by the Com-
pany), 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 exceptions, be disposed of until two years after the
Closing Date (or such earlier date as the Company and J.P. Morgan Securi-
ties Inc. may authorize).
(viii) The Operating Partnership will use approximately $13.1 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."
80
<PAGE>
CONCURRENT PLACEMENT
Concurrently with the sale of the Common Shares offered hereby, the Company
will sell $20 million of Common Shares to the Concurrent Investor at the ini-
tial public offering price in the Concurrent Placement. The agreements
relating to the sale of such shares provide the Concurrent Investor with cer-
tain registration rights and require that the Company reimburse the Concurrent
Investor for up to $25,000 in related legal expenses. See "Shares Available
for Future Sale." In the event the gross proceeds of the Offering are less
than $125 million, the Concurrent Investor may in its discretion elect to
reduce the amount of Common Shares it will purchase to an amount which is not
less than 15% of the gross proceeds of the Offering. In the event the regis-
tration statement for the Offering is not declared effective by the Commission
and the initial public offering price is not determined on or prior to Feb-
ruary 15, 1998, the Concurrent Investor may elect not to purchase any Common
Shares.
COMPANY ACQUISITIONS
In addition to the Properties that are being contributed by the Contributing
Investors in the Formation Transactions, the Company has agreed to purchase 21
Properties from unaffiliated third parties for an aggregate purchase price of
approximately $142 million. The purchase of such Properties is expected to be
completed concurrently with or shortly after the closing of the Offering. See
"Properties" and Note (I) to the Pro Forma Condensed Balance Sheet for a
description of the Company Acquisitions.
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 primarily to the condition and operation of 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
specific Property is limited to the contribution amount assigned to such Prop-
erty by the parties in connection with the Formation Transactions. In addi-
tion, such indemnification obligations are generally limited to claims for
indemnification made within one year after the completion of the Formation
Transactions.
EFFECTS OF THE FORMATION TRANSACTIONS AND THE OFFERING
As a result of the transactions involved in the formation of the Company,
together with the Offering and the Concurrent Placement, the Company initially
will hold an approximate 41.2% interest in the Operating Partnership. The
remaining 58.8% interest in the Operating Partnership will be held by certain
Contributing Investors and management. Immediately following the closing of
the Offering, on a fully diluted basis, purchasers of Common Shares in the
Offering will hold approximately 17.7% of the common equity of the Company,
the Cabot Group Participants will directly or indirectly hold approximately
4.0% of the common equity of the Company, the Concurrent Investor will hold
2.4% of the common equity of the Company and the Contributing Investors (ex-
cluding for this purpose the C-M Property Partnerships) will hold approxi-
mately 74.5% of the common equity of the Company. The remaining 1.4% of the
fully diluted common equity of the Company will be owned by unaffiliated
investors in Cabot Partners who will not be involved in the Company's opera-
tions, including one retired officer of Cabot Partners. The retired officer
will have the right to transfer the 135,515 Units to be received by him in
private transactions commencing six months after the Closing Date of the
Offering and the right to sell 67,758 of such Units to the Operating Partner-
ship at the Offering Price during the first 90 days after the Closing Date.
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 its 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 con-
nection with
81
<PAGE>
the Formation Transactions. Third-party estimates of the "derived contribution
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 Oper-
ating Partnership among Cabot Partners and the Contributing Investors (in-
cluding the C-M Property Partnerships) prior to the Offering.
The market capitalization of the Company at the Offering Price may not be
indicative of, and may exceed: (i) the aggregate of the derived contribution
values of the Properties and other assets to be acquired by the Company in the
Formation Transactions and the purchase prices to be paid for Properties in the
Company Acquisitions and (ii) the fair market value of the Properties and such
other assets. The Offering Price has been negotiated between the Company and
the Representatives of the Underwriters named herein based on their considera-
tion 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
6.5% 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.
82
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Formation and Other Transactions" for a summary of certain related party
transactions that will be consummated prior to or simultaneously with the
closing of the Offering.
The Cabot Group Participants will receive a total of 1,705,506 Units in the
Formation Transactions in exchange for their interests in the C-M Property
Partnerships and/or Cabot Partners, respectively. These Units (representing
approximately 4.0% of the common equity of the Company on a fully diluted
basis) will have a total value of approximately $34.1 million, based on the
Offering Price, compared to the aggregate pro forma net tangible book value of
the assets to be contributed to the Operating Partnership by the Cabot Group
Participants of approximately $9.5 million as of September 30, 1997 (which
assets had an aggregate historical net book value at that date of $5.1 mil-
lion). The C-M Property Partnerships are owned by Ferdinand Colloredo-Mansfeld,
the Company's Chief Executive Officer, and members of his immediate family,
including Franz Colloredo-Mansfeld, the Company's Chief Financial Officer, with
Ferdinand Colloredo-Mansfeld owning a 97% partnership interest therein and
Franz Colloredo-Mansfeld and other family members holding 1% and 2% partnership
interests therein, respectively. Of the total number of Units that will be
received by the Cabot Group Participants in the Formation Transactions, (i)
Ferdinand Colloredo-Mansfeld will receive 1,331,657 Units having a value, based
on the Offering Price, of approximately $26.6 million in exchange for his
interests in the C-M Property Partnerships and Cabot Partners, which had a his-
torical book value and a historical partnership value of approximately $1.8
million and $2.3 million, respectively, as of September 30, 1997 and (ii)
Robert E. Patterson, President of the Company, will receive 128,590 Units
having a value, on such basis, of approximately $2.6 million in exchange for
his interests in Cabot Partners, which had a historical partnership value of
$334,000 at September 30, 1997.
The Contributing Investors (excluding for this purpose the C-M Property Part-
nerships) will receive a total of 22,598,735 Units and 8,961,714 Common Shares
in exchange for their interests in the Properties in connection with the Forma-
tion Transactions. These Units and Common Shares (representing approximately
74.5% of the common equity of the Company on a fully diluted basis) will have a
total value of approximately $631.2 million based on the Offering Price, com-
pared to the historical net book value at September 30, 1997 of the assets to
be contributed to the Company by such Contributing Investors of approximately
$601.7 million.
The Units received by the Cabot Group Participants and the Contributing
Investors in the Formation Transactions may, in accordance with the Operating
Partnership Agreement, be exchanged in whole or in part for Common Shares on a
one-for-one basis or, at the election of the Company, the cash equivalent
thereof, at any time commencing one year after the Closing Date in the case of
Contributing Investors or two years after the Closing Date in the case of the
Cabot Group Participants. 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 associated with dispositions of those assets.
Treasury regulations under Section 704(c) of the Code provide partnerships with
a choice of several methods of accounting for 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 (the "Book-Tax
Differences"). The Operating Partnership and the Company have not yet deter-
mined which of the alternative methods of accounting for Book-Tax Differences
will be elected by the Partnership. Such determination could result in the
allocation of lower amounts of taxable income to the Cabot Group Participants
in certain circumstances than might otherwise occur if the Partnership elected
an alternative method. See "Federal Income Tax Consequences--Tax Aspects of the
Company's Investments in Partnerships--Tax Allocations with Respect to the
Properties."
REPAYMENT OF DEBT
Approximately $18.3 million of indebtedness secured by the Properties to be
contributed by the C-M Property Partnerships will be assumed by the Operating
Partnership and approximately $13.1 million of such indebtedness will be repaid
from the proceeds of the Offering.
OPTIONS GRANTED
The Company will grant options to purchase an aggregate of 1,675,000 Units that
will be convertible into an equal number of Common Shares under the Company's
Long Term Incentive Plan at the Offering Price to senior executive officers of
the Company, subject to certain vesting requirements. See "Management--Long
Term Incentive Plan."
83
<PAGE>
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
The following table sets forth the beneficial ownership of Common Shares (in-
cluding Common Shares for which Units are exchangeable) 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 Trustee nominee, (iii)
each Named Executive Officer and (iv) all Trustees, Trustee nominees and execu-
tive officers of the Company as a group, in each case after the closing of the
Offering and the Concurrent Placement and consummation of the Formation Trans-
actions. Unless otherwise indicated, all of such interests are to be owned
directly, and the indicated person or entity will have sole voting and invest-
ment power. The extent to which a person will hold Common Shares as opposed to
Units is set forth in the notes to the table below.
<TABLE>
<CAPTION>
--------------------------------------------------
NUMBER OF
COMMON
SHARES
BENEFICIALLY NUMBER OF PERCENT OF
OWNED UNITS ALL COMMON PERCENT OF
AFTER THE BENEFICIALLY SHARES ALL COMMON
NAMES AND ADDRESS OF BENEFICIAL OWNERS(1) OFFERING OWNED AND UNITS(2) SHARES(3)
- - ----------------------------------------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Ferdinand Colloredo-
Mansfeld -- 1,331,657 3.1% 7.1%
Robert E. Patterson -- 128,590 * 0.7
Franz Colloredo-Mansfeld -- 25,991 * *
Andrew D. Ebbott -- 36,499 * *
Howard B. Hodgson, Jr. -- 36,499 * *
Eugene F. Reilly -- 30,416 * *
Neil E. Waisnor -- 36,499 * *
Noah T. Herndon -- -- -- --
Christopher C. Milliken -- -- -- --
Maurice Segall -- -- -- --
W. Nicholas Thorndike -- -- -- --
Ronald L. Skates -- -- -- --
IBM Retirement Plan
Trust(4) -- 10,246,244 24.2 37.0
Pennsylvania Public School
Employes' Retirement
System(5) -- 5,502,973 13.0 24.0
New York State Teachers'
Retirement System(6) 2,186,947 3,764,579 14.1 28.0
State of Wisconsin
Investment Board(7) 2,959,534 -- 7.0 16.9
Leland Stanford Jr.
Endowment Fund(8) -- 2,367,923 5.6 11.9
The Prudential Insurance
Company of America(9) 2,228,749 -- 5.3 12.8
Argo Partnership II,
L.P.(10) 1,586,484 -- 3.7 9.1
Morgan Stanley Asset
Management Inc.(11) 1,000,000 -- 2.4 5.7
All Trustees, Trustee
nominees and executive
officers as a group (15
persons) -- 1,696,107 4.0% 8.9%
</TABLE>
- - -----------
* Less than 1%.
(1)Unless otherwise indicated, the address of each named person or title
holding entity is c/o Cabot Industrial Trust, Two Center Plaza, Suite 200, Bos-
ton, Massachusetts 02108.
(2)Assumes a total of 42,350,000 Common Shares and Units outstanding immedi-
ately following completion of the Offering. Assumes that all Units are
exchanged for Common Shares (without regard to the prohibition on exchange of
Units until one year or two years after the closing of the Offering and assumes
the Company elects to issue Common Shares rather than pay cash upon such
exchange).
(3)Assumes 17,461,714 Common Shares outstanding immediately following comple-
tion of the Offering (before giving effect to any exchange of Units benefi-
cially held by the identified person). Assumes that all Units beneficially held
by the identified person (and no other person) are exchanged for Common Shares
(without regard to the prohibition on exchange of Units until one year or two
years after the closing of the Offering and assumes the Company elects to issue
Common Shares rather than pay cash upon such exchange).
(4) Includes 10,246,244 Units held of record by CP Investment Properties, Inc.
which are beneficially owned by IBM Retirement Plan Trust.
(5) Includes 5,502,973 Units owned of record by Keystone-Illinois Property
Holding Corp., Keystone-New Jersey Property Holding Corp. and Keystone-Ohio
Property Holding Corp. which are each wholly owned by Pennsylvania Public
School Employes' Retirement System. The business address of these unitholders
is 875 North Michigan Avenue, Suite 4114, Chicago, Illinois 60611.
84
<PAGE>
(6) Includes 2,186,947 Common Shares and 3,764,579 Units held of record by
three title holding entities and six title holding entities, respectively,
which are each wholly owned by New York State Teachers' Retirement Systems.
(7) The business address of this shareholder is 121 East Wilson Street, 2nd
Floor, Madison, Wisconsin 53702.
(8) Includes 2,367,923 Units held of record by CP REPROP Corp. which is wholly
owned by Leland Stanford Jr. Endowment Fund.
(9) The business address of this shareholder is Eight Campus Drive, Parsippany,
New Jersey 07054.
(10) Includes 1,586,484 Units held of record by West Coast Industrial, L.L.C.
which are beneficially owned by its managing member, Argo Partnership II, L.P.
("Argo Fund"). The business address of this unitholder is c/o The O'Conner
Group, 399 Park Avenue, New York, New York 10022. J.P. Morgan Securities, Inc.
owns a partnership interest in the Argo Fund. See "Underwriting."
(11) Shares to be purchased in the Concurrent Placement. Morgan Stanley Asset
Management Inc. ("MSAM"), as the advisor to the Concurrent Investor, and Morgan
Stanley, Dean Witter, Discover & Co., as the owner of all of the common stock
of MSAM, are deemed beneficially to own the Common Shares beneficially owned by
the Concurrent Investor. MSAM maintains its principal office at 1221 Avenue of
the Americas, New York, New York 10020 and Morgan Stanley, Dean Witter, Dis-
cover & Co. maintains its principal office at 1585 Broadway, New York, New York
10036. MSAM disclaims beneficial ownership of such Common Shares.
85
<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 Maryland law and to the Declaration of Trust and
Bylaws of the Company, copies of which are exhibits to the Registration State-
ment of which this Prospectus 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 (the "Shares"), 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 may deter-
mine. Upon the closing of the Offering and the consummation of the Formation
Transactions, 17,461,714 Common Shares will be issued and outstanding
(18,586,714 shares if the Underwriters' overallotment option is exercised in
full) and no Preferred Shares will be issued and outstanding. As permitted by
Title 8 of the Corporations and Associations Article of the Annotated Code of
Maryland, as amended (the "Maryland REIT Law"), the Declaration of Trust con-
tains 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 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 acquisitions and in meeting other needs that might arise. The additional
shares of beneficial interest, including possibly Common Shares, will be avail-
able 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 inten-
tion 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 inter-
ests 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 will indemnify and hold each shareholder harmless against any claim or
liability to which the shareholder may become subject by reason of such share-
holder's being or having been a shareholder or former shareholder, subject to
such shareholder providing prompt notice to the Company. The Company must also
pay or reimburse each shareholder or former shareholder for all legal and other
expenses reasonably 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 negli-
gence. Inasmuch as the Company carries public liability insurance which it con-
siders 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 pursuant to this Registration Statement will be duly
authorized, fully paid and nonassessable. 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 authorized 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 liquidation, 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 of such Common Share to one
vote on all matters submitted to a vote of shareholders, including the election
of Trustees, 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.
86
<PAGE>
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 amend its declaration of trust or merge unless approved by the affirma-
tive vote of shareholders holding at least two-thirds of the shares entitled
to 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 by holders of
Common Shares entitled to vote on the matter in all situations 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 of the Company into a new entity,
consolidation 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) at any time during the last half of a taxable year (other than the first
year the election to be a REIT has been made), 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 Consequences--Taxation of the Company."
For this reason, among others, 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
87
<PAGE>
virtue of the attribution provisions of the Code, more than (i) 9.8% of the
Company's issued and outstanding Shares, or (ii) 9.8% of the total value of
such 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 persons (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 excess
shares (the "Excess Shares") and transferred automatically to a trust (the
"Share Trust") effective as of the close of business on the business day before
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 trustee of the Share Trust (the "Share Trustee") will be designated
by the Company, but will not be affiliated with the Company. The beneficiary of
the Share Trust (the "Beneficiary") will be one or more charitable organiza-
tions that are named by the Company.
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. At the direction of the Company, the Share Trustee must transfer
the Shares held in the Excess Share Trust to a person whose ownership of the
Shares will not violate the Ownership Limit. Such transfer must be made within
60 days after the latest of (i) the date of the transfer that resulted in such
Excess Shares and (ii) the date that the Board of Trustees determines in good
faith that a transfer resulting in Excess Shares has occurred, if the Company
does not receive notice of such transfer (as described below). 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
distributed 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" means the last reported sales price reported on the NYSE for a
particular class of Shares on the trading day immediately preceding the rele-
vant date, or if not then traded on the NYSE, the last reported sales price for
such class of 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 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 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 or, in the event
of a proposed or attempted transfer, must give at least 15 days prior written
notice to the Company of such event, and (ii) to provide 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 number or value of the outstanding Common and Preferred
Shares, within 30 days after January 1 of each year, to provide to the Company
a written statement 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.
88
<PAGE>
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.
89
<PAGE>
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 does not purport to be complete,
although the Company believes all material provisions thereof are described,
and is qualified in its entirety by reference to Maryland law and to the Decla-
ration of Trust and Bylaws of the Company, copies of which are exhibits to the
Registration Statement of which this Prospectus is a part. See "Additional
Information."
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 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 beneficial to the Company and its
shareholders.
VACANCIES
Any vacancy on the Board of Trustees arising for any cause other than an
increase in the number of Trustees may be filled by a majority of the remaining
Trustees, even if less than a quorum, or by a sole remaining Trustee. Any
vacancy created by an increase in the number of Trustees may be filled by a
majority of the entire Board of Trustees. Only the Independent Trustees may
nominate a replacement for a vacancy in an Independent Trustee position. Any
Trustee elected to fill a vacancy will hold office until the next annual
meeting of shareholders. A Trustee elected at an annual meeting of shareholders
to fill a vacancy will have the same remaining term as that of his or her pred-
ecessor.
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 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' power to
remove incumbent Trustees to cases in which a substantial majority of share-
holders approve such removal.
BUSINESS COMBINATIONS
Under the MGCL, as applicable to Maryland real estate investment trusts, cer-
tain "business combinations" (including mergers, consolidations, share
exchanges and asset transfers and certain issuances or reclassifications 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
90
<PAGE>
by the acquiror or in respect of which the acquiror is able to exercise or
direct the exercise of voting power (except solely by virtue of a revocable
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 vote as a result of having pre-
viously 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 Bylaws provide for an annual meeting of Share-
holders to be held upon proper 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 must 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, but is required to be delivered not less than 10
nor more than 60 days before the day of the meeting to each holder of record.
Unless requested by shareholders entitled to cast a majority of all the votes
entitled to be cast at such meeting, a special meeting need not be called to
consider any matter which is substantially the same as the matter voted on at
any meeting of the shareholders held during the preceding twelve months.
ANNUAL REPORT
Under the Maryland REIT Law, the Company is required 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, without shareholder approval, to qualify the Company as a
REIT under the Code or under the Maryland REIT Law. The Board of Trustees may
also amend the Declaration of Trust, without shareholder approval, to increase
or decrease the aggregate number of Shares that the Company has the authority
to issue. Otherwise, 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 Shares then outstanding and entitled to vote thereon, except
with respect to provisions therein relating to (i) removal of Trustees and (ii)
certain reorganization transactions of the Company. The provisions described in
clauses (i)-(ii) in the preceding sentence may be amended only by the affirma-
tive vote or, in certain instances, written consent of the holders of not less
than two-thirds of the Shares then outstanding. The Company's Bylaws may only
be amended by the Board of Trustees.
91
<PAGE>
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland REIT Law permits a Maryland real estate investment trust to
include 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 liability resulting from (i) actual receipt of an improper benefit
or profit in money, property or services or (ii) active and deliberate dishon-
esty established 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 the Maryland REIT Law.
The Declaration of Trust provides that the Company, to the fullest extent per-
mitted by Maryland law, must indemnify each Trustee, officer, employee and
agent in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person was a Trustee, officer, employee or agent of the
Company or is or was serving at the request of the Company as a director, offi-
cer, partner, employee or agent of another foreign or domestic corporation,
partnership, joint venture, trust, other enterprise or employee benefit plan,
from all claims and liabilities to which such person may become subject by
reason of service in that capacity and to pay or reimburse reasonable expenses,
as such expenses are incurred, of each Trustee, officer, employee or agent in
connection with any such action, suit or proceeding. The Bylaws of the Company
obligate it, to the fullest extent permitted by Maryland law, to indemnify and
to pay or reimburse reasonable expenses in advance of final disposition of a
proceeding to (i) each Trustee and officer from and against all claims and lia-
bilities, whether they proceed to judgment or are settled, in connection with
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative to which such Trustee or officer may
become subject by reason or such person being or having been a Trustee or offi-
cer, or by reason of any action alleged to have been taken or omitted by such
person as a Trustee or officer, and will reimburse such person for all reason-
able legal and other expenses incurred by such person in connection with such
claim or liability, including any claim or liability arising under the provi-
sions of federal or state securities laws, 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 pro-
ceeding by reason of such person's service in that capacity against any claim
or liability to which such person 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 or for a judgement of liability on the basis that per-
sonal benefit was improperly received, unless in either case a court orders
indemnification and then only for expenses. In addition, the MGCL permits a
corporation to advance reasonable expenses to a director or officer upon the
corporation's receipt of (a) a written affirmation by the director or officer
of such person's good faith belief that he or she has met the standard of con-
duct necessary for indemnification by the corporation and (b) a written under-
taking by or on behalf of such person to repay the amount paid or reimbursed by
the corporation if it shall ultimately be determined that the standard of con-
duct was not met. Insofar as indemnification for liability arising under the
Securities Act may be permitted to Trustees, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company has been informed
that in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
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. To maintain its qualification as a Maryland real
estate investment trust, the Maryland REIT Law requires that the Company hold,
either directly or indirectly, at least 75% of the value of its assets 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 using or applying land for
farming, agriculture, horticulture or similar purposes.
92
<PAGE>
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 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 or at the direction of
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 the Concurrent Placement and consummation
of the Formation Transactions, the Company will have 17,461,714 Common Shares
issued and outstanding (18,586,714 Common Shares if the Underwriter's
overallotment option is exercised in full). In addition, 24,888,286 Common
Shares will be reserved for issuance upon conversion of Units and 2,188,500
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 trade-
able 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. Each of the
Limited Partners has agreed under the Operating Partnership Agreement (and each
of the other Contributing Investors has agreed separately) that until one year
from the Closing Date (or two years in the case of any Limited Partner that is
a partner of Cabot Partners or C-M Holdings), such Limited Partner (or Contrib-
uting Investor) will not dispose of any Common Shares or Units without the
prior consent of the Company, provided that any Limited Partner or Contributing
Investor (other than a partner of Cabot Partners or C-M Holdings) may make a
private resale to a Qualified Institutional Buyer (as defined in Commission
Rule 144A) beginning nine months after the closing of the Offering. In addi-
tion, the Company has agreed not to waive or amend the foregoing restrictions
on resale without the prior written consent of J.P. Morgan Securities Inc. In
addition, the Concurrent Investor agrees that it will not dispose of any Common
Shares acquired in the Concurrent Placement until 180 days after the Closing
Date, without the consent of the Company, provided that sales may be made prior
to that date to a Qualified
93
<PAGE>
Institutional Buyer. Pursuant to the Underwriting Agreement, the Company has
also agreed not to offer for sale or sell any Common Shares (except in certain
circumstances) for a period of 12 months after the closing of the offering
without the prior written consent of J.P. Morgan Securities Inc. See
"Underwriting."
The Common Shares issued to the Contributing Investors and the Concurrent
Investor 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 registration under the Securities Act unless an
exemption from the registration requirements of the Securities Act is avail-
able, including exemptions pursuant to Rule 144. As described below, the Com-
pany has granted registration rights with respect to such Common Shares to the
holders thereof.
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 requirements 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 requirements.
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 (including Common Shares issued on
conversion of Units) issued to the Contributing Investors or, commencing on
the second anniversary of the Closing Date, Cabot Partners (or issued upon
conversion of Units issued to such persons). The Company has also agreed to
file a registration statement with the Commission 180 days after the Closing
Date for the purpose of registering the sale, subject to certain exceptions,
of the Common Shares issued to the Concurrent Investor in the Concurrent
Placement. The Company will use its best efforts to have such registration
statements declared effective as soon as practical after filing 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 state-
ment, those persons holding Common Shares upon redemption of the applicable
Units who are not Affiliates of the Company may sell such shares in the sec-
ondary market without being subject to the volume limitations or other
requirements of Rule 144. The Operating Partnership will bear expenses inci-
dent to these registration requirements, except that such expenses shall not
include any underwriting discounts or commissions, the fees and disbursements
of any counsel to a selling shareholder, 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--Possible Adverse Effect on Price of Common Shares of Shares Available
for Future Sale."
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
Operating 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 addi-
tional industrial properties in transactions that may defer such tax conse-
quences 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
94
<PAGE>
initially hold Units equal to 41.2% 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 owner-
ship of the Operating Partnership (apart from tax allocations of profits and
losses to take into account pre-contribution property appreciation). The Lim-
ited Partners will own the remaining 58.8% 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 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 pledg-
ee). 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 Limited Partner without restriction (except if
such transfer would (i) violate any securities laws, (ii) result in the Oper-
ating Partnership being treated as an association taxable as a corporation,
(iii) be effectuated through an "established 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 liability), 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 anniversary after the closing of the Offering
(or earlier with the consent of the Company in its capacity as general part-
ner), 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
95
<PAGE>
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 operating 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
Partnership 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 committed in bad faith or was the result of active and deliberate dishon-
esty; (ii) the Indemnitee actually received an improper personal benefit of
money, property or services; or (iii) in the case of any criminal proceeding,
the Indemnitee had reasonable cause to believe that the act or omission was
unlawful. The Operating Partnership Agreement further provides that the termi-
nation 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 contendere or its equivalent, or an entry of an order of proba-
tion prior to judgment, 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.
96
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
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. The information set forth below, to the extent that it constitutes mat-
ters of law, summaries of legal matters or legal conclusions, is based on the
opinion of Mayer, Brown & Platt, counsel to the Company, as to the material
Federal income tax consequences relevant to purchasers of the Common Shares.
Based upon the matters 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, 1998, and its proposed method of operation as represented by the
Company to Mayer, Brown & Platt and similarly described in this Prospectus 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 the Management Company as set forth in
this Prospectus, including that the Formation Transactions will be consummated
in accordance with the operative documents and such documents accurately
reflect the material facts of such transactions, and that the Company, the
Operating Partnership, and the Management Company will each be operated in the
manner described in their applicable organizational documents and in this Pro-
spectus, and that all terms and provisions of such documents will be complied
with by all parties thereto. This opinion is also conditioned upon certain rep-
resentations as set forth in this Prospectus made by the Company as to certain
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 compliance 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, dis-
tribution levels and diversity of share ownership, the various qualification
tests imposed under the Code discussed below. Counsel will not review compli-
ance with these tests on a continuing basis, and thus 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, 1998,
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 the numerous asset, income and distribution tests
described below, which in turn will be dependent on the Company's operating
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, financial institutions and broker-deal-
ers, foreign corporations and persons who are not the citizens or residents of
the United States) subject to special treatment under the federal income taxa-
tion 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
97
<PAGE>
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 maintain its qualification as a REIT because certain other require-
ments 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 frac-
tion intended to reflect the Company's profitability. The Company will also be
subject to a tax of 100% on net income from any "prohibited transaction" (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 cus-
tomers 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 fore-
closure 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 proportional 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. How-
ever, for purposes of this test, any shares of beneficial interest held by a
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. The Company has represented to Mayer, Brown & Platt that it will satisfy
these requirements.
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 accor-
dance 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 investments.
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"). The Company has
represented to Mayer, Brown & Platt that it will satisfy the 75% asset test,
the Value Test, and the Voting Test at the close of each quarter of its taxable
years ending 1998 and thereafter. 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 consti-
tute a security for purposes of these tests. See "--Tax Aspects of the
Company's Investments in
98
<PAGE>
Partnerships--General." Accordingly, the Company's investment in the Properties
through its interest in the Operating 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 pur-
poses 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 partner-
ship, 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 partnership. See "--Tax
Aspects of the Company's Investments in Partnerships--General" below. The two
tests are separately described below:
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 and has represented to
Mayer, Brown & Platt that it will satisfy these tests for its taxable years
ending 1998
99
<PAGE>
and thereafter. 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 and not rendered to
the occupant for his convenience. Mayer, Brown & Platt, in rendering its
opinion as to the qualification of the Company as a REIT, is relying on repre-
sentations 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 Com-
pany 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% gross income 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 satisfy 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 tests, its investment in the Properties through the Operating Partner-
ship 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 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 profit-
ability.
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 divi-
dends received deduction and the Company's net capital gain) and (ii) 95% of
the net income (after tax), if any, for foreclosure 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 payment 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 undistributed 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 and has represented to Mayer, Brown & Platt that it will so
satisfy these distribution requirements for its taxable years ending 1998 and
thereafter. In this regard, the Operating Partnership Agreement authorizes the
Company in its capacity as general partner to take such steps as may be neces-
sary to cause the Operating Partnership to distribute to its partners an amount
sufficient to permit the Company to meet the distribution requirements. It is
possible 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
100
<PAGE>
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 assur-
ance that such borrowing 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 (in-
cluding any applicable alternative minimum tax) on its taxable income at reg-
ular corporate rates. Distributions to shareholders in any year which the Com-
pany fails to qualify as a REIT will not be deductible by the Company, nor gen-
erally will they be required to be made under the Code. In such event, to the
extent of current and accumulated earnings and profits, all distributions to
shareholders will be taxable as ordinary income, and subject to certain limita-
tions in the Code, corporate distributees may be eligible for the dividends
received deduction. Unless entitled to relief under specific statutory provi-
sions, 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.
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 "--Taxation of the Company--Asset Tests"), the Company will include its
proportionate share of assets held by the Operating Partnership.
Entity Classification Based on the representations of the Company that the
Operating Partnership will satisfy certain conditions to comply with a safe
harbor from "publicly traded partnership" status 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.
101
<PAGE>
In general, certain of the Contributing 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. The Operating Partner-
ship 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 "--Taxation of the Company--General" and "--Gross Income Tests--The
95% Test." Under existing law, whether property is dealer property is a ques-
tion of fact that depends on all the facts and circumstances with respect to
the particular transaction. The Operating Partnership 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, oper-
ating and developing the Properties and other industrial properties, and to
make such occasional sales of the Properties and other properties acquired sub-
sequent to the date hereof as are consistent with the Company's investment
objectives. Based upon the Company's investment objectives, the Company
believes that overall, the Properties should not be considered dealer property
and that the amount of income from prohibited transactions, if any, will not be
material.
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 (and not designated as capital gain
dividends) generally will be taxed to such shareholders as ordinary dividend
income and will not be eligible for the dividends received deduction for corpo-
rations. 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 they do not exceed the Company's actual net capital gain for the
fiscal year) without regard to the period for which the shareholder has held
its shares of beneficial interest of the Company. However, corporate share-
holders may be required to treat up to 20% of capital gain dividends as ordi-
nary income. 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 distri-
bution (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 "Distribution Policy." 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 shareholder on
December 31 of such year, provided that the dividend is actually paid by the
Company during January of the following calendar year. Shareholders may not
include in their individual income tax returns any net operating 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 capital gain for any taxable year. Under the Taxpayer Relief Act of
1997 (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 capital gain for the taxable year, and will be deemed to have
paid such shareholder's proportionate share of the income tax paid by the Com-
pany with respect to such undistributed capital gain. Such tax would be cred-
ited against the shareholder's tax liability and subject to normal refund pro-
cedures. In addition, each shareholder's basis in such shareholder's shares of
Common Shares would be increased by the amount of undistributed capital gain
(less the tax paid by the Company) included in the shareholder's income.
102
<PAGE>
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 cap-
ital gain rate of 20%. Gain from the sale or exchange of such investments held
for 18 months or less, but for more than one-year, will be taxed at a maximum
capital gain rate of 28%. The 1997 Act also provides a maximum rate of 25% for
"unrecaptured section 1250 gain" recognized on the sale or exchange of certain
real estate assets, introduces special rules for "qualified 5-year gain," and
makes certain other changes to prior law. On November 10, 1997, the Service
issued Notice 97-64, which provides generally that the Company may classify
portions of its designated capital gain dividend as (i) a 20% rate gain dis-
tribution (which would be taxed as capital gain in the 20% group), (ii) an
unrecaptured Section 1250 gain distribution (which would be taxed as capital
gain in the 25% group), or (iii) a 28% rate gain distribution (which would be
taxed as capital gain in the 28% group). If no designation is made, the entire
designated capital gain dividend will be treated as a 28% rate capital gain
distribution. Notice 97-64 provides that a REIT must determine the maximum
amounts that it may designate as 20% and 25% rate capital gain dividends by
performing the computation required by the Code as if the REIT were an indi-
vidual whose ordinary income was subject to a marginal tax rate of at least
28%.
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 "--Taxation of the Share-
holders--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-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 por-
tion of the dividends paid to the qualified pension trust by such REIT may
constitute 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 own-
ership of shares of the REIT and (ii) as to which at least one qualified pen-
sion trust holds more than 25% by value of the interests of such REIT or one
or more qualified 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 inter-
ests in such REIT.
The Company may constitute a "pension-held REIT" immediately after the closing
of the Offering and Formation Transaction. In addition, no assurance can be
given that the Company will not become a "pension-held REIT" in the future.
Taxation of Foreign Shareholders The rules governing United States federal
income taxation of nonresident alien individuals, foreign corporations, for-
eign partnerships and other foreign shareholders (collectively, "Non-U.S.
Shareholders") 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 Company 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, part-
nerships, trusts and estates). The Company currently anticipates that it will
qualify as a domestically-controlled REIT. Under these circumstances, gain
from the sale of Common Shares by a foreign person should not be
103
<PAGE>
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 indi-
vidual 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 Company will qualify as a domesti-
cally-controlled REIT, because the Common Shares will be publicly traded no
assurance can be given that the Company will continue 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 an Internal Revenue Service 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 with-
holding 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 regula-
tions to withhold 35% of any distribution to a foreign person that could be
designated by the Company as a capital gain dividend. This amount is credit-
able 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
minimize 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 success-
ful.
The 1997 Act The 1997 Act modifies many of the provisions relating to the
requirements for qualification as, and the taxation of, a REIT. Among other
things, the 1997 Act (i) replaces the rule that disqualifies a REIT for any
year in which the REIT fails to comply with United States Treasury regulations
that are intended to enable a REIT to ascertain its ownership, with an inter-
mediate penalty for failing to do so; (ii) permits a REIT to render a de
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) repeals 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) lengthens the original
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 taxable year in which the property was acquired; (vi) treats
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 qualified 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 operation 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 subject to
state or local tax withholding requirements in various jurisdictions,
including
104
<PAGE>
those in which it or they transact business or reside. The state and local 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.
IT IS SUGGESTED THAT EACH PROSPECTIVE PURCHASER CONSULT WITH SUCH PURCHASER'S
TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH PURCHASER OF THE
PURCHASE, OWNERSHIP AND SALE OF COMMON SHARES IN AN ENTITY ELECTING TO BE TAXED
AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN
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 (collec-
tively, "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 prohibited
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 Trans-
actions would constitute a prohibited transaction with respect to such plan.
Nevertheless, such plan has informed the Company that it is relying on Prohib-
ited 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 Transactions. The applicability of such exemption in certain circum-
stances recently has been questioned by the Department of Labor. If it were
ultimately determined that the Formation Transactions constitute a prohibited
transaction, and also that PTE 84-14 does not apply to such plan's participa-
tion 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 Department of Labor, the
Service or any court.
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
105
<PAGE>
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 registered 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
development 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 "operating 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 trans-
actions 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.
106
<PAGE>
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., Goldman, Sachs &
Co., Prudential Securities Incorporated and Smith Barney Inc. 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
COMMON
SHARES
UNDERWRITERS ---------
<S> <C>
J.P. Morgan Securities Inc.........................................
Goldman, Sachs & Co. ..............................................
Prudential Securities Incorporated.................................
Smith Barney Inc...................................................
---------
Total............................................................. 7,500,000
=========
</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 Common Share. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of $ per Common 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 1,125,000 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 addi-
tional Common Shares as the number set forth next to such Underwriter's name in
the preceding table bears to the total number of Common Shares offered hereby.
The Company and Operating Partnership have agreed not to (i) issue, offer for
sale, contract to sell, sell, register the sale of, pledge or grant any option
for the sale of, or otherwise dispose of (including without limitation upon
exchange of Units), directly or indirectly, any Common Shares or Units or any
securities convertible into or exchangeable or exercisable for any Common
Shares or Units (other than (a) the Common Shares offered hereby, (b) Common
Shares issued pursuant to the Company's Long Term Incentive Plan, (c) any Units
or Common Shares that may be issued in connection with any acquisition of a
property and (d) Units or Common Shares issued at least six months after the
date of this Prospectus pursuant to certain private placements; provided that
the purchasers of such Units or Common Shares agree not to sell, offer for
sale, contract to sell, or otherwise dispose of such Units or Common Shares, or
sell or grant options, rights or warrants with respect to any such Common
Shares or Units for a period of 12 months after the date of this Prospectus),
(ii) sell or grant options, rights or warrants with respect to any Common
Shares (other than the grant of options pursuant to the Company's Long Term
Incentive Plan) or (iii) enter into any swap or other agreement that transfers,
in whole or in part, any of the economic consequences of ownership of Common
Shares or Units, whether or not such transaction is to be settled by delivery
of Common Shares, Units or otherwise, for a period of 12 months after the date
of this Prospectus, without the prior written consent of J.P. Morgan Securities
Inc. Each of the Company's officers and Trustees has entered into agreements
with the Underwriters providing that, subject to certain exceptions, such
person may not sell any Common Shares or Units prior to 24 months after the
date of this Prospectus, without the consent of the Company and J.P. Morgan
Securities Inc. In addition, the Company has agreed not to waive any of the
restrictions set forth in the registration rights agreement described under
"Shares Available for Future Sale," including the limitation of Contributing
Investors offering for sale or selling any Common Shares or Units, without the
prior written consent of J.P. Morgan Securities Inc.
107
<PAGE>
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, Common
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
concessions allowed for distributing the Common Shares in the Offering, if the
syndicate repurchases previously distributed Common Shares in syndicate cov-
ering transactions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common 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.
The Common Shares have been approved for listing on the NYSE under the symbol
"CTR," subject to official notice of issuance. In order to meet one of the
requirements for listing the Common Shares on the NYSE, the Underwriters have
undertaken to sell lots of 100 or more Common Shares to a minimum of 2,000 ben-
eficial holders.
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 FFO, multiples of comparable publicly traded REITs, the reve-
nues and earnings of the Company, including the historical revenues and earn-
ings 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, consid-
eration was given to the general status of the securities market, the market
conditions for new issues of securities and the demand for securities of compa-
rable 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 subsequent to
the Offering at or above the initial public offering price.
At the request of the Company, the Underwriters have reserved up to 375,000
Common Shares for sale at the Offering Price to Trustees, officers and
employees of the Company and its affiliates. The number of Common Shares avail-
able to the general public will be reduced to the extent such persons purchase
such reserved Common Shares. Any reserved Common Shares that are not so pur-
chased by such persons at the closing of the Offering will be offered by the
Underwriters to the general public on the same terms as the Common Shares
offered by this Prospectus.
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 for advisory services in connection with
the evaluation, analysis and structuring of the Company's formation as a REIT
in connection with the Offering. J.P. Morgan Capital Corporation, Inc., an
affiliate of J.P. Morgan, has an ownership interest in the Argo Fund, which is
one of the Contributing Investors. In addition, The Prudential Insurance Com-
pany of America, an affiliate of Prudential Securities Incorporated ("Pruden-
tial Securities"), is one of the Contributing Investors. Upon consummation of
the Formation Transactions, the Argo Fund and The Prudential Insurance Company
of America will receive less than 3.8% and 5.3%, respectively, of the ownership
interest of the Company on a fully diluted basis. In addition, Prudential Prop-
erties Group II, an affiliate of Prudential Securities, will receive, directly
or indirectly, approximately $33.3 million of the net proceeds of the Offering
as consideration for the sale of certain Properties in connection with the Com-
pany Acquisitions. J.P. Morgan and Prudential Securities will receive standard
underwriter's compensation in connection with the Offering.
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 Ballard Spahr Andrews & Ingersoll,
Baltimore, Maryland, as to certain matters of Maryland law. The description of
Federal income tax consequences contained in the Prospectus, to the extent that
it constitutes matters of law, summaries of legal matters or legal conclusions,
constitutes the opinion of Mayer, Brown & Platt as to such matters.
108
<PAGE>
EXPERTS
The audited financial statements and schedules (if applicable) of Cabot Indus-
trial Trust, Cabot Partners Limited Partnership, Existing Investors Property
Group, Prudential Properties Group, West Coast Industrial, LLC, Blue Ash Office
L.L.C. and Blue Ash Industrial L.L.C, Seefried Properties Group, Prudential
Properties Group II, DFW Trade Center I, L.P., Buildings 1, 2 and 3, 1055
Dornoch Court, San Diego, CA, Hampden I and II Properties Group, South Royal
Associates Properties Group, Joseph A. Leroy Family LP Property, Raco/Melaver,
L.L.C. and TLI/Cahill Partnership--Spiral Drive included in the Registration
Statement have been audited by Arthur Andersen LLP, independent public accoun-
tants, 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.
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, including the Com-
pany, that file electronically with the Commission can be obtained from that
site. The Registration Statement, including exhibits and financial statements
thereto, is available at such Website.
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.
109
<PAGE>
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 $325 million.
"ADA" means the Americans with Disabilities Act of 1990.
"Additional Acquisitions" means the Properties acquired or to be acquired after
September 30, 1997 by Cabot Partners on behalf of the Existing Investors.
"Administrator" means the Compensation Committee of the Board of Trustees or
its delegate, as appropriate as administrator of the Company's Long Term Incen-
tive Plan.
"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 September 30, 1997.
"Annualized Net Effective Rent" means Annualized Net Rent, less amortization of
the related leasing costs, as adjusted to reflect the effect of any rent con-
cessions and straight-lining of 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.
"Board of Trustees" means Board of Trustees of the Company.
"Bylaws" means the Company's Bylaws.
"Cabot Advisors" means Cabot, Cabot & Forbes Realty Advisors, Inc.
"Cabot Group" means Cabot Partners and certain affiliated partnerships.
"Cabot Group Participants" means Ferdinand Colloredo-Mansfeld and his wife,
Franz Colloredo-Mansfeld and his siblings, the Named Executive Officers, Gerald
F. Ianetta, John F. Malloy and Peter F. Tague.
110
<PAGE>
"Cabot Partners" means Cabot Partners Limited Partnership, a Massachusetts lim-
ited partnership.
"CB Commercial/Torto Wheaton Research" means the CB Commercial Real Estate
Group, Inc./Torto Wheaton Research.
"CC&F" means Cabot, Cabot & Forbes Company.
"Closing Date" means the date of the closing of the Offering.
"C-M Holdings" means C-M Holdings L.P.
"C-M Property Partnerships" means C-M Holdings and its affiliated partnerships,
in which Ferdinand Colloredo-Mansfeld owns 97% of the partnership interests,
Franz Colloredo-Mansfeld owns 1% of the partnership interests and members of
their immediate family own in the aggregate 2% of the partnership interests..
"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.
"Concurrent Investor" means Morgan Stanley Asset Management Inc., on behalf of
certain of its institutional clients.
"Concurrent Placement" means the Company's sale of $20 million of Common Shares
at the Offering Price to the Concurrent Investor in a private placement concur-
rently with the sale of the Common Shares in the Offering.
"Contributing Investors" means those Cabot Partners advisory clients who are
contributing Properties (or where such clients hold title through another
entity, such title holding entity), the C-M Property Partnerships and other
certain investors who are contributing Properties in the Formation Transactions
consisting of IBM Retirement Plan Trust, Pennsylvania Public School Employes'
Retirement System, New York State Teachers' Retirement System, State of Wis-
consin Investment Board, Leland Stanford Jr. Endowment Fund, The Prudential
Insurance Company of America, Argo Partnership II, L.P., C-M Property Partner-
ships, Herrod Associates and NFI Industries.
"Contribution Agreement" means the Contribution Agreement relating to the Capi-
talization of Cabot Industrial Trust, dated as of October 10, 1997, among the
Company, the Operating Partnership, Cabot Partners and various Contributing
Investors identified therein.
"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.
111
<PAGE>
"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.
"Excess Shares" means Common or Preferred Shares which are transferred automat-
ically to the Share Trust.
"Exchange Rights" means the right, which is subject to certain exceptions, of
Limited Partners to exchange all or a portion 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 September 30, 1997 con-
sisting of IBM Retirement Plan Trust, New York State Teachers' Retirement Sys-
tem, State of Wisconsin Investment Board, Leland Stanford Jr. Endowment Fund,
and C-M Property Partnerships.
"Existing Investors Property Group" means the Properties of the Contributing
Investors that were managed by Cabot Partners as of September 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 which 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 consoli-
dated joint ventures whose interests are not convertible into shares of Common
Stock. In addition to cash flow and net income, management generally considers
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 addi-
tional 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 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.
"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.
"J.P. Morgan" means J.P. Morgan Securities Inc.
"Limited Partners" means the limited partners of the Operating Partnership.
"LC" means leasing commissions.
"Long Term Incentive Plan" means the Long Term Incentive Plan of the Company.
"Management Company" means Cabot Advisors, Inc., a Delaware corporation.
112
<PAGE>
"Market Price" means the last reported sales price reported on the NYSE for a
particular class of Shares on the trading day immediately preceding the rele-
vant date, or if not then traded on the NYSE, the last reported sales price for
such class of 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 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 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.
"Named Executive Officers" means those officers named in the Summary Compensa-
tion Table in the Management-Executive Compensation section.
"NAREIT" means National Association of Real Estate Investment Trusts, Inc.
"NCREIF" means National Council of Real Estate Investment Fiduciaries.
"New Investors Property Group" means the Properties of Contributing Investors
which were not property management clients of Cabot Partners at or prior to
September 30, 1997.
"Net Rent" means contractual rent, excluding any reimbursements for real estate
taxes or operating expenses.
"Non-employee Trustees" means members of the Board of Trustees who are not
employees of the Company.
"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 $20.00 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 Delaware
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 shares of beneficial interest
or 9.8% of the total equity value of such 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.
"Party in Interest" means persons who have specified relationships with a Plan,
"Parties in Interest" under ERISA and "Disqualified Persons" under the Code.
"Phase I ESAs" means Phase I environmental site assessments.
"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 acquired by or con-
tributed to the Company or the Operating Partnership in the Formation Transac-
tions.
"Prudential Properties Group" means a combination of assets, liabilities and
operations for seven Properties that are owned by The Prudential Insurance Com-
pany of America on behalf of single client separate accounts which The Pruden-
tial Insurance Company of America has agreed to contribute to the Company in
the Formation Transactions.
"Prudential Properties Group II" means a combination of assets, liabilities and
operations for two Properties that are owned by The Prudential Insurance Com-
pany of America on behalf of single client separate accounts and one Property
owned by a title holding corporation, for which The Prudential Insurance Com-
pany of America provides advisory services.
"Prudential Securities" means Prudential Securities Incorporated.
"PTE 84-14" means Prohibited Transaction Exemption.
113
<PAGE>
"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., Goldman, Sachs & Co., Pru-
dential Securities Incorporated and Smith Barney Inc, in their capacities 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.
"Share Trustee" means the trustee of the Share Trust.
"Shares" means shares of beneficial interest of the Company.
"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
non-government 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.
114
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CABOT INDUSTRIAL TRUST
Pro Forma Condensed Combined Financial Statements (unaudited)............ 38
Pro Forma Condensed Combined Balance Sheet as of September 30, 1997.... 39
Notes to Pro Forma Condensed Combined Balance Sheet.................... 40
Pro Forma Condensed Combined Statement of Operations for the nine
months ended September 30, 1997....................................... 43
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1996..................................................... 44
Notes to Pro Forma Condensed Combined Statements of Operations......... 45
Historical:
Report of Independent Auditors......................................... F-4
Balance Sheet as of November 30, 1997.................................. F-5
Notes to Balance Sheet................................................. F-6
CABOT PARTNERS LIMITED PARTNERSHIP
Report of Independent Public Accountants................................. F-8
Balance Sheets as of September 30, 1997, (unaudited) December 31, 1996
and 1995................................................................ F-9
Statements of Operations for the nine months ended September 30, 1997
(unaudited) and 1996 (unaudited), and the years ended December 31, 1996,
1995 and 1994........................................................... F-10
Statements of Partners' Capital for the nine months ended September 30,
1997 (unaudited) and the years ended December 31, 1996, 1995 and 1994... F-11
Statements of Cash Flows for the nine months ended September 30, 1997
(unaudited) and 1996 (unaudited), and the years ended December 31, 1996,
1995 and 1994........................................................... F-12
Notes to Financial Statements............................................ F-13
EXISTING INVESTORS PROPERTY GROUP
Report of Independent Public Accountants................................. F-16
Combined Balance Sheets as of September 30, 1997, December 31, 1996 and
1995.................................................................... F-17
Combined Statements of Income for the nine months ended September 30,
1997 and September 30, 1996 (unaudited), and the years ended December
31, 1996, 1995 and 1994................................................. F-18
Combined Statements of Owners' Equity for the nine months ended September
30, 1997 and the years ended December 31, 1996, 1995 and 1994........... F-19
Combined Statements of Cash Flows for the nine months ended September 30,
1997 and September 30, 1996 (unaudited), and the years ended December
31, 1996, 1995 and 1994................................................. F-20
Notes to Combined Financial Statements................................... F-21
Schedule III -- Real Estate and Accumulated Depreciation as of December
31, 1996................................................................ F-26
NEW INVESTORS PROPERTY GROUP
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
Report of Independent Accountants........................................ F-30
Combined Statement of Assets and Liabilities as of September 30, 1997
(unaudited), December 31, 1996 and 1995................................. F-31
Combined Statements of Income for the nine months ended September 30,
1997 and 1996 (unaudited), and the years ended December 31, 1996, and
1995.................................................................... F-32
Combined Statement of Changes in Net Assets for the nine months ended
September 30, 1997 (unaudited), and the years ended December 31, 1996,
and 1995................................................................ F-33
Combined Statement of Cash Flows for the nine months ended September 30,
1997 and 1996 (unaudited), and the years ended December 31, 1996, and
1995.................................................................... F-34
Notes to Combined Financial Statements................................... F-35
</TABLE>
F-1
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
KNICKERBOCKER PROPERTIES, INC. II
Report of Independent Accountants........................................ F-38
Balance Sheets as of September 30, 1997 (unaudited), December 31, 1996
and 1995................................................................ F-39
Statements of Operations for the nine months ended September 30, 1997 and
1996 (unaudited), and the years ended December 31, 1996, and 1995....... F-40
Statements of Stockholder's Equity for the nine months ended September
30, 1997 (unaudited), and the years ended December 31, 1996, and 1995... F-41
Statements of Cash Flows for the nine months ended September 30, 1997 and
1996 (unaudited), and the years ended December 31, 1996, and 1995....... F-42
Notes to Financial Statements............................................ F-43
PENNSYLVANIA PUBLIC SCHOOL EMPLOYEES' RETIREMENT SYSTEM INDUSTRIAL
PROPERTIES PORTFOLIO
Independent Auditors' Report............................................. F-45
Combined Balance Sheets as of September 30, 1997, December 31, 1996 and
1995.................................................................... F-46
Combined Statements of Operations for the nine months ended September 30,
1997, the nine months ended September 30, 1996 (unaudited), and the
years ended December 31, 1996 and the period from July 6, 1995 (date of
Acquisition) to December 31, 1995....................................... F-47
Combined Statements of Owner's Equity for the nine months ended September
30, 1997, and the years ended December 31, 1996 and the period from July
6, 1995 (date of Acquisition) to December 31, 1995...................... F-48
Combined Statements of Cash Flows for the nine months ended September 30,
1997, the nine months ended September 30, 1996 (unaudited), and the
years ended December 31, 1996 and the period from July 6, 1995 (date of
Acquisition) to December 31, 1995....................................... F-49
Notes to Combined Financial Statements................................... F-50
Schedule III -- Combined Real Estate and Accumulated Depreciation as of
September 30, 1997...................................................... F-53
PRUDENTIAL PROPERTIES GROUP
Report of Independent Public Accountants................................. F-54
Combined Balance Sheets as of September 30, 1997, December 31, 1996 and
1995.................................................................... F-55
Combined Statements of Operations for the nine months ended September 30,
1997 and September 30, 1996 (unaudited), and the years ended December
31, 1996, and 1995...................................................... F-56
Combined Statements of Owners' Equity for the nine months ended September
30, 1997, and the years ended December 31, 1996, and 1995............... F-57
Combined Statements of Cash Flows for the nine months ended September 30,
1997 and September 30, 1996 (unaudited), and the years ended December
31, 1996, and 1995...................................................... F-58
Notes to Combined Financial Statements................................... F-59
Schedule III -- Real Estate and Accumulated Depreciation as of December
31, 1996................................................................ F-62
WEST COAST INDUSTRIAL, LLC
Report of Independent Public Accountants ................................ F-63
Statements of Revenues and Certain Expenses for the nine months ended
September 30, 1997 (unaudited), and the year ended December 31, 1996.... F-64
Notes to Statements of Revenues and Certain Expenses..................... F-65
FINANCIAL STATEMENTS FOR PROPERTY ACQUISITIONS
HERROD ASSOCIATES
Report of Independent Certified Public Accountants....................... F-66
Statement of Revenues and Certain Expenses for the nine months ended
September 30, 1997 (unaudited), and the year ended December 31, 1996.... F-67
Notes to Statement of Revenues and Certain Expenses...................... F-68
BLUE ASH OFFICE L.L.C. AND BLUE ASH INDUSTRIAL L.L.C.
Report of Independent Public Accountants................................. F-69
Combined Statements of Revenue and Certain Expenses for the nine months
ended September 30, 1997 (unaudited), and the year ended December 31,
1996.................................................................... F-70
Notes to Combined Statements of Revenue and Certain Expenses ............ F-71
</TABLE>
F-2
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SEEFRIED PROPERTIES GROUP
Report of Independent Public Accountants................................. F-72
Combined Statements of Revenues and Certain Expenses for the nine months
ended September 30, 1997 (unaudited), and the year ended December 31,
1996.................................................................... F-73
Notes to Combined Statements of Revenues and Certain Expenses............ F-74
PRUDENTIAL PROPERTIES GROUP II
Report of Independent Public Accountants................................. F-75
Combined Statements of Revenue and Certain Expenses for the nine months
ended September 30, 1997 (unaudited) and the year ended December 31,
1996.................................................................... F-76
Notes to Combined Statement of Revenues and Certain Expenses............. F-77
DFW TRADE CENTER I, L.P., BUILDINGS 1, 2 AND 3
Report of Independent Public Accountants................................. F-78
Combined Statements of Revenue and Certain Expenses for the nine months
ended September 30, 1997 (unaudited) and from the date of inception to
December 31, 1996....................................................... F-79
Notes to Combined Statement of Revenues and Certain Expenses............. F-80
1055 DORNOCH COURT, SAN DIEGO, CA
Report of Independent Public Accountants................................. F-81
Statements of Revenue and Certain Expenses for the nine months ended
September 30, 1997 (unaudited) and the year ended December 31, 1996..... F-82
Notes to Statement of Revenues and Certain Expenses...................... F-83
HAMPDEN I AND II PROPERTIES GROUP
Report of Independent Public Accountants................................. F-84
Combined Statements of Revenue and Certain Expenses for the nine months
ended September 30, 1997 (unaudited) and the year ended December 31,
1996.................................................................... F-85
Notes to Combined Statement of Revenues and Certain Expenses............. F-86
SOUTH ROYAL ASSOCIATES PROPERTIES GROUP
Report of Independent Public Accountants................................. F-87
Combined Statements of Revenue and Certain Expenses for the nine months
ended September 30, 1997 (unaudited) and the year ended December 31,
1996.................................................................... F-88
Notes to Combined Statement of Revenues and Certain Expenses............. F-89
JOSEPH A. LEROY FAMILY LP PROPERTY
Report of Independent Public Accountants................................. F-90
Statements of Revenue and Certain Expenses for the nine months ended
September 30, 1997 (unaudited) and the year ended December 31, 1996..... F-91
Notes to Statement of Revenues and Certain Expenses...................... F-92
RACO/MELAVER, L. L. C.
Report of Independent Public Accountants................................. F-93
Combined Statements of Revenue and Certain Expenses for the nine months
ended September 30, 1997 (unaudited) and the year ended December 31,
1996.................................................................... F-94
Notes to Combined Statement of Revenues and Certain Expenses............. F-95
TLI/CAHILL PARTNERSHIP--SPIRAL DRIVE
Report of Independent Public Accountants................................. F-96
Combined Statements of Revenue and Certain Expenses for the nine months
ended September 30, 1997 (unaudited) and the year ended December 31,
1996.................................................................... F-97
Notes to Combined Statement of Revenues and Certain Expenses............. F-98
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Trustees
of Cabot Industrial Trust:
We have audited the accompanying balance sheet of Cabot Industrial Trust (the
Company), a Maryland real estate investment trust, as of November 30, 1997.
This balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet 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 balance sheet is free of material mis-
statement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Cabot Industrial Trust as of
November 30, 1997, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 18, 1997
F-4
<PAGE>
CABOT INDUSTRIAL TRUST
BALANCE SHEET
<TABLE>
<CAPTION>
============
NOVEMBER 30,
1997
------------
<S> <C>
ASSETS
Cash $ 1,000
------------
$ 1,000
============
Commitments (Note 4)
SHAREHOLDERS' EQUITY
Common Shares, $0.01 par value; 150,000,000 shares authorized,
50 shares issued and outstanding $ 1
Additional Paid in Capital 999
------------
$ 1,000
============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-5
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO BALANCE SHEET
1. ORGANIZATION
Cabot Industrial Trust (the Company), a Maryland real estate investment trust,
was formed on October 10, 1997. The Company will be the managing general
partner of a newly formed limited partnership, Cabot Industrial Properties, L.
P. (the Operating Partnership) and will conduct substantially all of its busi-
ness through the Operating Partnership. The Company will be a fully integrated,
internally managed real estate company formed to continue and expand the
national real estate business of Cabot Partners Limited Partnership. The Com-
pany expects to qualify as a real estate investment trust (a REIT) for federal
income tax purposes.
The Company has had no operations to date.
2. THE FORMATION TRANSACTIONS AND THE OFFERING
The Formation Transactions
Under a Contribution Agreement executed by the Company, the Operating Partner-
ship, Cabot Partners, L.P. and various other contributors, real estate proper-
ties and other assets will be 1) contributed to the Operating Partnership in
exchange for Units in the Operating Partnership that may, subject to certain
restrictions, be exchanged for common shares of the Company or 2) in certain
cases, contributed to the Company in exchange for common shares. The properties
contributed to the Company will be contributed to the Operating Partnership in
exchange for the number of general partnership interests in the Operating Part-
nership equal to the number of common shares exchanged for the property.
The Offering
The Company has filed a registration statement on Form S-11 with the Securities
and Exchange Commission with respect to the offering of 7,500,000 common shares
(exclusive of 1,125,000 shares subject to the underwriters' over-allotment
option) at an assumed offering price of $20 per share. In addition, the Company
will sell 1,000,000 common shares to a single investor in a private offering at
the assumed offering price. The Company will contribute the net proceeds of the
offerings to the Operating Partnership in exchange for the number of general
partnership interests in the Operating Partnership equal to the number of
common shares sold in the offerings.
3. INCOME TAXES
The Company intends to make an election to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code").
As a REIT, the Company generally will not be subject to federal income tax if
it distributes at least 95% of its taxable income for each tax year to its
shareholders. REITs are subject to a number of organizational and operational
requirements. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate tax rates.
Even if the Company qualifies for taxation as a REIT, the Company may be sub-
ject to state and local income taxes and to federal income tax and excise tax
on its undistributed income.
F-6
<PAGE>
CABOT INDUSTRIAL TRUST
NOTES TO BALANCE SHEETS (CONTINUED)
4. COMMITMENTS
The Company has executed commitments to acquire the following industrial prop-
erties with proceeds from the Offering and the Concurrent Placement:
<TABLE>
<CAPTION>
-------------------------------------------------
EXPECTED
SQUARE ACQUISITION
PROPERTY LOCATION BUILDING TYPE FEET COST
----------------- ------------- ------ -----------
<S> <C> <C> <C>
Grapevine, TX Bulk Distribution/Workspace 1,182,361 $ 52,279
Mira Loma, CA, Dacula,
GA, Mechanicsburg, PA Bulk Distribution 916,603 34,452
Mechanicsburg, PA Bulk Distribution 494,400 16,730
San Diego, CA Bulk Distribution 220,000 10,885
Orlando, FL Workspace Properties 213,430 9,210
Tucker, GA Workspace Properties 134,163 5,615
Atlanta, GA Workspace Properties 128,000 5,350
Florence, KY Workspace Properties 61,555 4,030
Tempe, AZ Workspace Properties 81,817 3,298
-----------
Total acquisition cost 141,849
Less: Debt assumed 8,392
-----------
Proceeds to fund acquisitions $133,457
===========
</TABLE>
F-7
<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 Notes 3 and 6, as to which the date is November 24, 1997)
F-8
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-----------------------------------
DECEMBER 31,
SEPTEMBER 30, ---------------------
1997 1996 1995
------------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents $ 1,589 $ 1,709 $ 1,382
Accounts receivable 2,095 1,637 942
Investments 809 836 1,026
Cost of Investment Advisory Contracts
acquired, net of accumulated amortization
of $3,137, $2,425 and $2,034,
respectively 1,017 1,729 2,121
Other assets 98 164 157
---------- --------- ---------
Total Assets $ 5,608 $ 6,075 $ 5,628
========== ========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accrued compensation $ 746 $ 385 $ 457
Accrued liabilities 138 100 106
---------- --------- ---------
Total Liabilities 884 485 563
---------- --------- ---------
Commitments
Partners' Capital 4,724 5,590 5,065
---------- --------- ---------
Total Liabilities and Partners' Capital $ 5,608 $ 6,075 $ 5,628
========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
-------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- --------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Advisory fees $ 6,778 $ 5,729 $ 7,871 $ 6,482 $ 4,149
Other income 40 14 37 34 10
--------- --------- --------- --------- ---------
Total Revenues 6,818 5,743 7,908 6,516 4,159
--------- --------- --------- --------- ---------
EXPENSES
Compensation 3,138 2,847 3,887 3,416 2,553
Other general and
administrative 1,761 1,515 2,001 1,653 1,714
Depreciation and amor-
tization 732 315 419 453 474
--------- --------- --------- --------- ---------
Total Expenses 5,631 4,677 6,307 5,522 4,741
--------- --------- --------- --------- ---------
Income (loss) before
income (loss) from
unconsolidated
subsidiary 1,187 1,066 1,601 994 (582)
Equity in income (loss)
from unconsolidated
subsidiary 16 (16) (7) 63 46
--------- --------- --------- --------- ---------
Net income (loss) $ 1,203 $ 1,050 $ 1,594 $ 1,057 $ (536)
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE 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 nine
months ended September 30,
1997 (unaudited) -- 1,203 -- 1,203
Distributions (unaudited) (10) (1,669) (390) (2,069)
--------- --------- --------- ---------
Partners' Capital, September
30, 1997 (unaudited) $ -- $ 4,724 $ -- $ 4,724
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,203 $ 1,050 $ 1,594 $ 1,057 $ (536)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization 732 315 419 453 474
Unrealized equity in
(income) loss of
investment (16) 16 7 (63) (46)
(Increase) Decrease in
accounts receivable (459) (876) (695) (315) 183
Increase (Decrease) in
accrued liabilities 408 332 (70) 265 (59)
(Decrease) Increase in
accounts payable (9) (18) (9) 6 (28)
Decrease (Increase) in
other assets 49 56 37 (52) --
--------- --------- --------- --------- ---------
Net cash provided by
(used in) operating
activities 1,908 875 1,283 1,351 (12)
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Dividends received 43 33 183 77 50
Purchase of furniture,
fixtures and equipment (2) (50) (50) (63) --
Additional cost-basis
investments -- (20) (20) (20) (10)
--------- --------- --------- --------- ---------
Net cash provided by
(used in) investing
activities 41 (37) 113 (6) 40
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Distribution to
partners (2,069) (1,069) (1,069) -- --
--------- --------- --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents (120) (231) 327 1,345 28
Cash and cash equiva-
lents, beginning of
period 1,709 1,382 1,382 37 9
--------- --------- --------- --------- ---------
Cash and cash equiva-
lents, end of period $ 1,589 $ 1,151 $ 1,709 $ 1,382 $ 37
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<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-13
<PAGE>
CABOT PARTNERS LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS)
3. INVESTMENTS (CONTINUED)
The condensed unaudited historical cost balance sheets of Private Partners at
December 31, 1996 and December 31, 1995 are 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
--------- ---------
Total Assets $ 77,165 $ 105,990
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable and accrued liabilities $ 453 $ 605
Note payable -- 9,665
--------- ---------
Total Liabilities 453 10,270
--------- ---------
PARTNERS' CAPITAL
The Partnership 767 957
Other Partners 75,945 94,763
--------- ---------
Total Partners' Capital 76,712 95,720
--------- ---------
Total Liabilities and Partners' Capital $ 77,165 $ 105,990
========= =========
</TABLE>
The difference between the Partnership's share of the historical partners' cap-
ital and the investment on the balance sheets is due to stating the investment
at fair market value at the time of purchase.
The condensed unaudited historical cost income statements of Private Partners
for the years ended December 31, 1996, 1995 and 1994 are 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)
--------- --------- ---------
Net (loss) income $ (719) $ 6,295 $ 4,583
========= ========= =========
Dividends paid $ 18,292 $ 7,700 $ 5,000
========= ========= =========
The Partnership's share of:
Net (loss) income $ (7) $ 63 $ 46
========= ========= =========
Dividends paid $ 183 $ 77 $ 50
========= ========= =========
</TABLE>
On September 30, 1997, Private Partners sold real estate assets with a net
book value of $49,480 for a gross purchase price of $60,288. A distribution of
the net sales proceeds of $58,733 was paid to the partners in October, 1997,
and the Partnership received $587.
F-14
<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 $ 262
1998 295
1999 311
2000 323
2001 310
</TABLE>
The Partnership incurred rental expense of $304, $242 and $258 for the years
ended December 31, 1996, 1995 and 1994, respectively. The Partnership's only
significant lease is for its office space. The lease provides for the payment
of base rent and operating and real estate taxes over stated base amounts.
5. RELATED PARTY FEES
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. 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 from
related parties of $345 for the nine months ended September 30, 1997, and other
related party fees of $164, $153, $70 and $73 for the nine months ended Sep-
tember 30, 1997 and the years ended December 31, 1996, 1995 and 1994, respec-
tively.
6. SUBSEQUENT EVENTS
Formation Transactions
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 Properties, L.P. (the Oper-
ating Partnership), a subsidiary partnership of Cabot Industrial Trust (the
Company) and will receive Units from the Operating Partnership. The remainder
of the Partnership's net assets will be distributed to its partners. The con-
summation of these proposed transactions is subject to the completion of an
offering of Common Shares of the Company to the public and various other condi-
tions of the Contribution Agreement. The impact of these proposed transactions
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.
Sale of Assets Under Management
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.
During 1997, all the properties of three portfolios have been or are expected
to be sold. These portfolios accounted for recurring advisory fees of $2,334
for the nine months ended September 30, 1997 and $3,141, $2,632 and $2,191 for
the years ended December 31, 1996, 1995 and 1994, respectively.
F-15
<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 September 30, 1997,
December 31, 1996 and 1995, and the related combined statements of income, own-
ers' equity and cash flows for the nine months ended September 30, 1997 and
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 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 Existing
Investors Property Group at September 30, 1997, December 31, 1996 and 1995, and
the combined results of its operations and its cash flows for the nine months
ended September 30, 1997 and 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
December 13, 1997
F-16
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------
DECEMBER 31,
SEPTEMBER 30, ------------------
1997 1996 1995
------------- -------- --------
<S> <C> <C> <C>
ASSETS
Rental properties $358,498 $336,836 $301,059
Accumulated depreciation (37,542) (32,528) (26,430)
------------- -------- --------
320,956 304,308 274,629
Cash and Cash Equivalents 1,140 2,423 2,598
Rents and other receivables, net of allow-
ance for doubtful accounts of $253, $339
and $294, respectively 5,515 4,810 6,041
Restricted cash 9 71 353
Lease acquisition costs, net of accumulated
amortization of $6,982, $5,721 and $4,505,
respectively 6,564 6,808 5,307
Other assets 385 312 409
------------- -------- --------
Total Assets $334,569 $318,732 $289,337
============= ======== ========
LIABILITIES AND OWNERS' EQUITY
Mortgage debt $ 18,655 $ 19,292 $ 20,083
Due to Related Parties 3,703 3,668 3,407
Accounts payable and accrued expenses 3,733 3,608 3,606
Other liabilities 977 878 612
------------- -------- --------
Total Liabilities 27,068 27,446 27,708
------------- -------- --------
Contingencies
Owners' Equity 307,501 291,286 261,629
------------- -------- --------
Total Liabilities and Owners' Equity $334,569 $318,732 $289,337
============= ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-17
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
--------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- --------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Rental $ 23,968 $ 21,947 $ 29,736 $ 24,691 $ 22,552
Tenant reimbursements 4,343 3,776 4,917 3,759 3,473
Other rental 331 313 334 199 2,035
Interest 94 102 193 145 149
-------- -------- -------- -------- --------
Total Revenues 28,736 26,138 35,180 28,794 28,209
-------- -------- -------- -------- --------
EXPENSES
Real estate taxes 4,005 3,649 5,037 3,979 3,769
Management fees 1,682 1,380 1,889 1,522 1,306
Property operating costs 382 555 755 648 563
Maintenance and repairs 343 324 504 393 502
Grounds care 206 239 298 218 189
Professional services 259 150 214 194 158
Insurance 226 158 210 151 78
Other 186 197 453 231 267
Interest 1,399 1,430 1,931 2,097 2,082
Depreciation and amortization 6,473 5,864 7,966 7,118 6,606
-------- -------- -------- -------- --------
Total Expenses 15,161 13,946 19,257 16,551 15,520
-------- -------- -------- -------- --------
Income before gain on sale of
properties 13,575 12,192 15,923 12,243 12,689
Gain on sale of properties -- -- -- -- 186
-------- -------- -------- -------- --------
Net income $ 13,575 $ 12,192 $ 15,923 $ 12,243 $ 12,875
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-18
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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
----------
Owners' Equity, December 31, 1994 213,203
Contributions 50,326
Distributions (14,143)
Net income for the year ended December 31, 1995 12,243
----------
Owners' Equity, December 31, 1995 261,629
Contributions 35,228
Distributions (21,494)
Net income for the year ended December 31, 1996 15,923
----------
Owners' Equity, December 31, 1996 291,286
Contributions 21,880
Distributions (19,240)
Net income for the nine months ended September 30, 1997 13,575
----------
Owners' Equity, September 30, 1997 $ 307,501
==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-19
<PAGE>
EXISTING INVESTORS PROPERTY GROUP
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
---------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ---------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 13,575 $ 12,192 $ 15,923 $ 12,243 $ 12,875
Adjustments to reconcile
net income to net cash
provided by operating
activities--
Depreciation and amorti-
zation adjustments 6,473 5,864 7,966 7,118 6,606
Rent normalization
adjustments (316) (454) (519) (993) (452)
Gain on sale of real
estate -- -- -- -- (186)
Changes in assets--(in-
crease) decrease--
Rents and other receiv-
ables (389) 1,100 1,750 196 (1,071)
Restricted cash 62 285 282 265 (268)
Other assets (132) (2,102) 25 184 (83)
Changes in liabilities--
increase (decrease)--
Accounts payable and
accrued liabilities 125 (348) 2 705 260
Other liabilities 99 (12) 266 (317) (129)
--------- --------- --------- --------- ---------
Net cash provided by
operations 19,497 16,525 25,695 19,401 17,552
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Property acquisitions (19,016) (21,406) (33,485) (49,677) (9,240)
Payments for capital
expenditures and
lease acquisition costs (3,802) (3,411) (5,581) (4,038) (3,545)
Proceeds on the sale of
real estate -- -- -- -- 14,841
Deferred financing costs -- (8) (8) (153) (19)
--------- --------- --------- --------- ---------
Net cash (used in)
provided by investing
activities (22,818) (24,825) (39,074) (53,868) 2,037
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Capital contributions 21,880 24,750 35,228 50,326 10,005
Distributions (19,240) (17,304) (21,494) (14,143) (30,298)
Mortgage loan proceeds -- -- -- 10,865 14,950
Repayments of mortgage
loans (637) (587) (791) (11,390) (14,892)
Advances from (repayments
to) related
parties, net 35 209 261 22 639
--------- --------- --------- --------- ---------
Net cash provided by
(used in)
financing activities 2,038 7,068 13,204 35,680 (19,596)
--------- --------- --------- --------- ---------
Net (decrease) increase
in Cash and Cash
Equivalents (1,283) (1,232) (175) 1,213 (7)
Cash and Cash
Equivalents, Beginning
of Period 2,423 2,598 2,598 1,385 1,392
--------- --------- --------- --------- ---------
Cash and Cash Equiva-
lents, End of Period $ 1,140 $ 1,366 $ 2,423 $ 2,598 $ 1,385
========= ========= ========= ========= =========
Supplemental Information
Interest paid during the
period $ 1,220 $ 1,296 $ 1,730 $ 1,909 $ 1,927
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-20
<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 72 industrial
buildings (as of September 30, 1997) 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 agree-
ments with each owner. The accompanying 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 for the year ended December 31, 1996. A summary of EIP Group as of
September 30, 1997 is as follows:
<TABLE>
<CAPTION>
----------------------
NUMBER OF
PROPERTY OWNER BUILDINGS SQUARE FEET
- - -------------- --------- -----------
<S> <C> <C>
CP Investment Properties, Inc. 47 5,376,068
CP REPROP, Corp. 9 1,800,400
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 2 376,440
--------- -----------
Total 72 9,693,084
========= ===========
</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 for the nine months ended September 30, 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 interim period. All such adjustments are of a normal, recur-
ring nature.
F-21
<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>
-------------
ASSET CATEGORY ESTIMATED
-------------- USEFUL LIFE
-------------
<S> <C>
Buildings and improvements 10 - 40
years
Tenant improvements Life of
lease
</TABLE>
Properties consisted of the following at September 30, 1997, December 31, 1996
and 1995:
<TABLE>
<CAPTION>
---------------------------------
DECEMBER 31,
SEPTEMBER 30, -------------------
1997 1996 1995
------------- --------- ---------
<S> <C> <C> <C>
Land $ 78,231 $ 74,939 $ 69,602
Buildings and
improvements 280,267 261,897 231,457
------------- --------- ---------
Total $ 358,498 $ 336,836 $ 301,059
============= ========= =========
</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 $313, $253
and $173 as of September 30, 1997, December 31, 1996 and 1995, respectively,
were approximately $133, $194 and $266, 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 September 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 $4,414, $4,098 and $3,579,
respectively (Deferred Rent). The amounts included in rental income for the
nine months ended September 30, 1997 and 1996, and for the years ended December
31, 1996, 1995 and 1994, which are not currently due, were approximately $316,
$454, $519, $993 and $452, 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-22
<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 September 30, 1997 and
December 31, 1996 and 1995. The current value of debt was computed by dis-
counting the projected debt service payments for each loan based on the spread
between the market rate and the effective rate, including the amortization of
loan origination costs, for each year. In addition, the carrying values of cash
and cash equivalents, restricted cash, escrow deposits, rents receivable (ex-
cluding 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 September 30, 1997, December 31, 1996 and 1995, EIP Group had outstanding
fixed rate mortgage indebtedness as follows:
<TABLE>
<CAPTION>
-----------------------------------
DECEMBER 31,
SEPTEMBER 30, ---------------------
1997 1996 1995
------------- --------- ---------
<S> <C> <C> <C>
Three mortgage loans at fixed interest
rate of 8.375% due February 1, 1998 $13,353 $13,813 $14,383
Three mortgage loans at fixed interest
rates ranging from 7.95% to 8.05% due
January 1, 2003 5,302 5,479 5,700
------------- --------- ---------
Total mortgage loans payable $18,655 $19,292 $20,083
============= ========= =========
</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 Sep-
tember 30, 1997, December 31, 1996 and 1995. The mortgage loans are secured by
deeds of trust on six properties and all the 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 as of September 30, 1997 can
be summarized as follows:
<TABLE>
<CAPTION>
------
<S> <C> <C>
For the three months ended December
31, 1997 $221
1998 13,452
1999 281
2000 304
2001 329
2002 4,068
</TABLE>
F-23
<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 September 30, 1997 were as follows:
<TABLE>
<CAPTION>
-------
<S> <C> <C>
For the three months ended
December 31, 1997 $10,850
1998 30,524
1999 24,988
2000 19,196
2001 15,316
2002 11,213
Thereafter 33,059
</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 .90 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 7%) of the properties' net operating
income and property management fees are payable on certain properties based on
2.25% of gross receipts. Fees incurred under the agreements were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
--------------------- -----------------------------------
1997 1996 1996 1995 1994
---------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
FEE INCURRED
Asset management $ 1,073 $ 805 $ 1,244 $ 981 $ 769
Acquisition 214 139 360 504 100
Property management 452 340 482 437 503
</TABLE>
At September 30, 1997, December 31, 1996 and 1995, total fees payable to Cabot
Partners were $502, $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 income .
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 September 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,
respectively, and $218 and $199 for the nine months ended September 30, 1997
and 1996, respectively.
F-24
<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 September 30, 1997, EIP Group has acquired, or has executed com-
mitments to acquire, the following industrial properties:
<TABLE>
<CAPTION>
-----------------------------------------------------
EXPECTED
ACQUISITION
PROPERTY LOCATION BUILDING TYPE SQUARE FEET COST
----------------- ------------------- ----------- -----------
<S> <C> <C> <C>
Herrod
Boulevard, South Brunswick, NJ Bulk Distribution 418,000 $18,321
Blue Ash, OH Bulk Distribution
and Workspace 482,942 15,565
Remington Street, Bolingbrook,
IL Bulk Distribution 212,333 8,625
Ambassador Road, Naperville, IL Bulk Distribution 203,500 8,106
Luna Road, Carrollton, TX Bulk Distribution 205,400 7,514
----------- -----------
1,522,175 $58,131
=========== ===========
</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-25
<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(6) 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
<CAPTION> DEPRECI-
DATE ABLE
ACCUMULATED CONSTRUCTED/ DATE LIVES
PROPERTY NAME(8) LOCATION DEPRECIATION RENOVATED ACQUIRED IN YEARS(9)
- - ---------------- -------- ------------ ------------ -------- -----------
<S> <C> <C> <C> <C> <C>
South 63rd
Avenue Phoenix, AZ $ 262 1990 05/27/94 10-40
North 104th
Avenue Tolleson, AZ 15 1995 11/26/96 10-40
South 84th
Avenue Tolleson, AZ 227 1989 04/03/95 10-40
Brisbane
Industrial
Park(1) Brisbane, CA 2,781 1965 08/10/90 10-40
South Vintage
Avenue(2) Ontario, CA 3,127 1986 11/20/89 10-40
East Jurupa
Street Ontario, CA 10 1986 11/19/96 10-40
Santa Anita
Avenue Rancho Cucamonga, 95 1988 06/27/96 10-40
East Dyer Road Santa Ana, CA 2,173 1954/1965 04/24/89 10-40
Pepes Farm Road Milford, CT 1,795 1980 11/07/88 10-40
Kingspointe
Parkway Orlando, FL -- 1991 12/30/96 10-40
West 73rd
Street, Building
1 Bedford Park, IL 757 1982 09/13/90 10-40
West 73rd
Street, Building
2 Bedford Park, IL 1,296 1986 09/13/90 10-40
West 73rd
Street, Building
3 Bedford Park, IL 850 1979 09/13/90 10-40
Harvester Drive Chicago, IL 1,276 1974 07/05/88 10-40
Arthur Avenue Elk Grove, IL 1,166 1978 06/27/88 10-40
Western Avenue Lisle, IL 419 1970/1985 06/27/88 10-40
Mark Street Wood Dale, IL 1,468 1985 12/14/90 10-40
High Grove Lane Naperville, IL 166 1994 01/11/95 10-40
North State Road
#9(6) Howe, IN 1,084 1988 12/01/89 10-40
Holton Drive Independence, KY 52 1996 07/6/96 10-40
</TABLE>
F-26
<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
-------------------------------------------------------------------------------------------
<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-27
<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
======= ======== ======== ==== ====== ======== ======== ========
-------------------------------------------------------------------------------------------
<CAPTION>
DEPRECI-
DATE ABLE
ACCUMULATED CONSTRUCTED/ DATE LIVES 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-28
<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,
--------------------------
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 -- -- (16,193)
-------- -------- --------
Balance, end of year $336,836 $301,059 $250,387
======== ======== ========
</TABLE>
The changes in accumulated depreciation for the years ended December 31, 1996,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
-----------------------
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 -- -- (1,834)
------- ------- -------
Balance, end of year $32,528 $26,430 $20,936
======= ======= =======
</TABLE>
F-29
<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-30
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENT OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
---------------------------------------
DECEMBER 31,
SEPTEMBER 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 40,743,523 40,720,252 40,650,198
Accumulated depreciation (7,089,882) (6,316,118) (5,285,497)
------------- ----------- -----------
42,501,606 43,252,099 44,212,666
Cash and cash equivalents 108,716 591,653 229,262
Accounts receivable and accrued
investment income 56,046 109,938 92,105
Deferred leasing costs, net of
accumulated amortization of
$2,643,292, $2,135,209 and
$1,420,455 at September 30, 1997,
December 31, 1996 and December
31, 1995, respectively 2,860,706 3,392,025 3,331,155
Deferred rent concessions 1,074,538 838,408 985,175
Other assets 65,082 62,815 21,929
------------- ----------- -----------
Total Assets $46,666,694 $48,246,938 $48,872,292
============= =========== ===========
LIABILITIES AND NET ASSETS
Accounts payable and accrued
expenses $ 569,040 597,561 176,895
Security deposits 216,875 211,363 273,105
Unearned rental income 197,265 247,756 120,156
------------- ----------- -----------
Total Liabilities 983,180 1,056,680 570,156
------------- ----------- -----------
Net Assets 45,683,514 47,190,258 48,302,136
------------- ----------- -----------
Total Liabilities and Net Assets $46,666,694 $48,246,938 $48,872,292
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
-----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
--------------------- -------------------------------
1997 1996 1996 1995
---------- ---------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Rental income $4,563,630 $4,315,620 $ 5,521,188 $ 5,757,490
Other income 20,370 90,609 99,749 233,998
---------- ---------- --------------- ---------------
Total Revenue 4,584,000 4,406,229 5,620,937 5,991,488
OPERATING EXPENSES
Property taxes 512,787 502,653 653,797 640,810
Operating expenses 718,686 802,388 1,045,704 928,209
Depreciation and
amortization 1,360,074 1,284,250 1,745,376 1,693,022
---------- ---------- --------------- ---------------
Total Operating
Expenses 2,591,547 2,589,291 3,444,877 3,262,041
---------- ---------- --------------- ---------------
Net income $1,992,453 $1,816,938 $ 2,176,060 $ 2,729,447
========== ========== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENT OF CHANGES IN NET ASSETS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND THE 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
-----------
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
-----------
Net assets, January 1, 1997 47,190,258
Asset advisory fees paid by owner (unaudited) 240,803
Distributions (unaudited) (3,740,000)
Net income for the nine months ended September 30, 1997
(unaudited) 1,992,453
-----------
Net assets, September 30, 1997 (unaudited) $45,683,514
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ --------------------------
1997 1996 1996 1995
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 1,992,453 $ 1,816,938 $ 2,176,060 $ 2,729,447
Adjustments to reconcile
net income to net cash
provided by operating
activities-
Depreciation and
amortization 1,360,074 1,284,250 1,745,376 1,693,022
Asset advisory fee paid
by owner 240,803 206,227 275,062 281,062
Changes in operating
assets and liabilities
Accounts receivable 53,892 (23,676) (17,833) 85,920
Other assets (2,267) (58,011) (40,886) 344
Deferred rent
concessions (236,130) (28,195) 146,767 (197,855)
Accounts payable and
accrued expenses (28,521) 377,760 420,666 (73,095)
Security deposits 5,512 (49,675) (61,742) 5,919
Unearned rental income (50,491) 72,973 127,600 (3,394)
----------- ----------- ------------ ------------
Net cash provided by
operations 3,335,325 3,598,591 4,771,070 4,521,370
----------- ----------- ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Payments for capital
expenditures and
leasing commissions (78,262) (85,933) (845,679) (908,717)
----------- ----------- ------------ ------------
Net cash used in
investing activities (78,262) (85,933) (845,679) (908,717)
----------- ----------- ------------ ------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Distributions (3,740,000) (3,134,000) (3,563,000) (3,946,000)
----------- ----------- ------------ ------------
Net cash used in
financing activities (3,740,000) (3,134,000) (3,563,000) (3,946,000)
----------- ----------- ------------ ------------
Net (decrease)
increase in cash (482,937) 378,658 362,391 (333,347)
Cash and cash
equivalents, beginning
of period 591,653 229,262 229,262 562,609
----------- ----------- ------------ ------------
Cash and cash
equivalents, end of
period $ 108,716 $ 607,920 $ 591,653 $ 229,262
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<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. Clarion Part-
ners, formerly known as 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 Prop-
erties which comprise Orlando Central Park (six industrial bulk warehouse
buildings and associated land located in an industrial park in Orlando, Flor-
ida) 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
promulgated by 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. The asset management fees for the nine months ended
September 30, 1997 and 1996 were $240,803 and $206,227, respectively (unau-
dited).
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-35
<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
-----------
$19,892,000
===========
</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, and approximately
$776,000 and $831,000 for the nine month periods ended September 30, 1997 and
1996, respectively (unaudited).
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. For the years ended December 31, 1996 and 1995, fees incurred
under this agreement were $104,590 and $112,083, respectively. For the nine
month periods ended September 30, 1997 and 1996, fees incurred under this
agreement were $84,056 and $77,286, respectively (unaudited).
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.
F-36
<PAGE>
ORLANDO CENTRAL PARK AND 500 MEMORIAL DRIVE
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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. For the years ended December 31, 1996 and 1995, fees
incurred under these agreements were $38,595 and $37,259, respectively, of
which $3,194 is included in accrued expenses at December 31, 1995. For the nine
month periods ended September 30, 1997 and 1996, fees under these agreements
were $27,685 and $29,028, respectively (unaudited).
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 1997 (unaudited), 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.
5. UNAUDITED PERIODS
The unaudited combined financial statements as of September 30, 1997 and for
the nine months ended September 30, 1997 and 1996 have been prepared pursuant
to the requirements of Article 10 of Regulation S-X promulgated by the Securi-
ties and Exchange Commission. Pursuant to such rules, certain information and
disclosures required by generally accepted accounting principles has been omit-
ted. Such financial statements are unaudited, but in the opinion of the invest-
ment advisor and 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 the combined operations
for the nine months ended September 30, 1997 and 1996 are not necessarily
indicative of the future results of operations for the full year ending
December 31, 1997.
F-37
<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.
Coopers & Lybrand L.L.P.
Atlanta, Georgia
April 25, 1997
F-38
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------
DECEMBER 31,
SEPTEMBER 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 17,225,462 16,865,157 16,855,791
Accumulated depreciation (3,253,212) (2,888,428) (2,392,331)
------------- ----------- -----------
17,663,368 17,667,847 18,154,578
Cash and Cash Equivalents 74,019 80,186 66,853
Deferred rent concessions 135,627 148,959 163,944
Other assets 4,374 13,414 --
------------- ----------- -----------
Total Assets $17,877,388 $17,910,406 $18,385,375
============= =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 98,689 33,125 47,759
Security deposits 148,812 146,996 146,527
Dividend payable -- -- 25,090
Unearned rental income 64,856 58,930 17,463
------------- ----------- -----------
Total Liabilities 312,357 239,051 236,839
------------- ----------- -----------
Stockholder's Equity
Common Stock $1 par value; 500 shares
authorized, issued and outstanding 500 500 500
Additional Paid in Capital 17,564,531 17,670,855 18,148,036
Retained Earnings -- -- --
------------- ----------- -----------
17,565,031 17,671,355 18,148,536
------------- ----------- -----------
Total Liabilities and Stockholder's
Equity $17,877,388 $17,910,406 $18,385,375
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
---------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------------- -------------------------------
1997 1996 1996 1995
--------------- --------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Rental income $1,706,917 $ 1,613,475 $ 2,171,445 $ 2,250,490
Other income 5,469 1,004 1,372 1,371
--------------- --------------- --------------- ---------------
Total Revenue 1,712,386 1,614,479 2,172,817 2,251,861
OPERATING EXPENSES
Property taxes 224,106 222,147 296,291 291,804
Operating Expenses 144,363 134,860 178,487 195,505
Depreciation and
amortization 364,784 374,387 496,096 460,397
--------------- --------------- --------------- ---------------
Total Operating
Expenses 733,253 731,394 970,874 947,706
--------------- --------------- --------------- ---------------
Net income $ 979,133 $ 883,085 $ 1,201,943 $ 1,304,155
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED) 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)
------ ----------- ----------- -----------
Balance at December 31, 1995 500 18,148,036 -- 18,148,536
Net income 1,201,943 1,201,943
Capital contributions 139,904 139,904
Dividends (617,085) (1,201,943) (1,819,028)
------ ----------- ----------- -----------
Balance at December 31, 1996 500 17,670,855 -- 17,671,355
Net income (unaudited) 979,133 979,133
Capital contributions (unau-
dited) 141,718 -- 141,718
Dividends (unaudited) (248,042) (979,133) (1,227,175)
------ ----------- ----------- -----------
Balance at September 30, 1997
(unaudited) $500 $17,564,531 $ -- $17,565,031
====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-41
<PAGE>
KNICKERBOCKER PROPERTIES, INC. II
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
--------------------------------------------------
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
------------------------ ------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 979,133 $ 883,085 $ 1,201,943 $ 1,304,155
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amorti-
zation 364,784 374,387 496,096 460,397
Changes in assets--(In-
crease) Decrease:
Other assets 9,040 -- (13,414) 8,029
Deferred rent conces-
sions 13,332 (11,985) 14,985 71,580
Changes in liabilities--
Increase (Decrease):
Accounts payable and
accrued expenses 65,564 51,201 (14,634) 12,835
Unearned rental income 5,926 4,274 41,467 (42,622)
Tenant security deposits 1,816 468 469 (1,596)
----------- ----------- ----------- -----------
Net cash provided by oper-
ating activities 1,439,595 1,301,430 1,726,912 1,812,778
----------- ----------- ----------- -----------
INVESTING ACTIVITIES
Capital and tenant
improvements (360,305) (2,528) (9,365) (83,030)
----------- ----------- ----------- -----------
Net cash used for
investing activities (360,305) (2,528) (9,365) (83,030)
----------- ----------- ----------- -----------
FINANCING ACTIVITIES
Capital contributions 141,718 -- 139,904 --
Dividends (1,227,175) (1,273,610) (1,844,118) (1,750,437)
----------- ----------- ----------- -----------
Net cash used in financing
activities (1,085,457) (1,273,610) (1,704,214) (1,750,437)
----------- ----------- ----------- -----------
Net increase (decrease) in
cash (6,167) 25,292 13,333 (20,689)
Cash at beginning of
period 80,186 66,853 66,853 87,542
----------- ----------- ----------- -----------
Cash at end of period $ 74,019 $ 92,145 $ 80,186 $ 66,853
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<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
promulgated by 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-43
<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 7,194
</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 13,787
Thereafter 84,961
----------
$ 160,520
==========
</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. Total management fees for the
nine months ended September 30, 1997 and the years ended December 31, 1996 and
1995 amounted to $47,840 (unaudited), $61,832 and $63,440, respectively.
6. UNAUDITED PERIODS
The unaudited financial statements as of September 30, 1997 and for the nine
months ended September 30, 1997 and 1996 have been prepared pursuant to the
requirements of Article 10 of Regulation S-X promulgated by the Securities and
Exchange Commission. Pursuant to such rules, certain information and disclo-
sures required by generally accepted accounting principles has been omitted.
Such financial statements are unaudited, but in the opinion of the investment
advisor and management, all adjustments (consisting solely of normal recurring
adjustments) necessary for a fair presentation of such financial statements
have been included. The results of the operations for the nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the future
results of operations for the full year ending December 31, 1997.
F-44
<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 September 30,
1997, December 31, 1996 and 1995, and the related combined statements of opera-
tions, combined owner's equity, and combined cash flows for the nine months
ended September 30, 1997, 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 September 30, 1997. 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 September 30, 1997, December 31, 1996 and 1995, and the combined
results of its operations and its combined cash flows for the nine months ended
September 30, 1997, the year ended December 31, 1996 and the period from July
6, 1995 (date of acquisition) to December 31, 1995 in conformity 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
Chicago, Illinois
December 15, 1997
F-45
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
----------------------------------------
DECEMBER 31,
SEPTEMBER 30, -------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
ASSETS
Real estate:
Land $ 21,148,662 $ 21,148,662 $19,116,603
Building and improvements 84,839,709 83,748,432 77,994,039
Accumulated depreciation (6,442,309) (4,142,761) (1,304,717)
------------- ------------ -----------
99,546,062 100,754,333 95,805,925
Cash and cash equivalents 570,685 1,431,677 2,688,020
Rents and other tenant receivables,
net 232,433 462,457 299,613
Accrued rents receivable (note 3) 2,297,972 1,901,037 699,246
Deferred expenses (note 2) 465,555 331,426 1,360
Other assets 41,571 184,028 93,152
------------- ------------ -----------
Total Assets $103,154,278 $105,064,958 $99,587,316
============= ============ ===========
LIABILITIES AND OWNER'S EQUITY
Accounts payable and accrued
expenses $ 1,978,482 $ 1,255,294 $ 500,296
Tenant security deposits 364,047 327,400 303,604
Other liabilities 58,511 42,344 167,679
------------- ------------ -----------
Total Liabilities 2,401,040 1,625,038 971,579
------------- ------------ -----------
Owner's Equity 100,753,238 103,439,920 98,615,737
------------- ------------ -----------
Total Liabilities and Owner's
Equity $103,154,278 $105,064,958 $99,587,316
============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-46
<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
NINE MONTHS ENDED FOR THE YEAR PERIOD FROM
SEPTEMBER 30, ENDED JULY 6, TO
----------------------- DECEMBER 31, DECEMBER 31,
1997 1996 1996 1995
----------- ----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
INCOME
Rental income (note 3) $ 9,214,198 $ 9,187,839 $12,348,207 $5,859,691
Tenant reimbursements 784,769 905,294 1,389,320 333,724
Interest 71,277 121,544 139,190 95,901
Other 13,820 632,207 633,066 2,667
----------- ----------- ------------ ------------
Total Income 10,084,064 10,846,884 14,509,783 6,291,983
EXPENSES
Property taxes 703,198 788,772 1,234,230 271,316
Operating expenses 632,407 720,867 853,074 271,920
Advisor fees (note 4) 1,904,182 544,382 731,836 339,440
Depreciation and amortiza-
tion 2,359,949 2,148,889 2,858,119 1,304,717
----------- ----------- ------------ ------------
Total Expenses 5,599,736 4,202,910 5,677,259 2,187,393
----------- ----------- ------------ ------------
Net income $ 4,484,328 $ 6,643,974 $ 8,832,524 $4,104,590
=========== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-47
<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 NINE MONTHS ENDED SEPTEMBER 30, 1997, 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
------------
Balance at December 31, 1995 98,615,737
Contributions 7,147,878
Distributions (11,156,219)
Net income 8,832,524
------------
Balance at December 31, 1996 $103,439,920
Contributions 558,990
Distributions (7,730,000)
Net income for the nine months ended September 30, 1997 4,484,328
------------
Balance at September 30, 1997 $100,753,238
============
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-48
<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
NINE MONTHS ENDED ENDED FROM JULY 6, TO
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
------------------------ ------------ ---------------
1997 1996 1996 1995
----------- ----------- ------------ ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPER-
ATING ACTIVITIES
Net income $ 4,484,328 $ 6,643,974 $ 8,832,524 $ 4,104,590
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and amor-
tization 2,359,949 2,148,889 2,858,119 1,304,717
Accrued rents receiv-
able (396,935) (899,681) (1,201,791) (699,246)
Changes in:
Rents and other tenant
receivables, net 230,024 (3,674) (162,845) (299,613)
Other assets 142,457 (8,557) (90,876) (93,152)
Accounts payable and
accrued expenses 723,188 285,865 754,998 500,296
Tenant security
deposits 36,647 23,846 23,796 303,604
Other liabilities 16,167 (98,295) (125,335) 167,679
----------- ----------- ------------ ---------------
Net cash provided by
operating activities 7,595,825 8,092,367 10,888,590 5,288,875
----------- ----------- ------------ ---------------
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 (1,091,277) (1,302,103) (1,518,383) (1,061,591)
Payment of deferred
expenses (194,530) (108,288) (350,140) (1,360)
----------- ----------- ------------ ---------------
Net cash used in
investing activities (1,285,807) (7,678,460) (8,136,592) (97,112,002)
----------- ----------- ------------ ---------------
CASH FLOWS FROM
FINANCING ACTIVITIES
Contributions 558,990 6,962,217 7,147,878 98,561,147
Distributions (7,730,000) (8,136,219) (11,156,219) (4,050,000)
----------- ----------- ------------ ---------------
Net cash (used in) pro-
vided by financing
activities (7,171,010) (1,174,002) (4,008,341) 94,511,147
----------- ----------- ------------ ---------------
Net increase (decrease)
in cash and cash equiv-
alents (860,992) (760,095) (1,256,343) 2,688,020
Cash and cash equiva-
lents, at beginning of
period 1,431,677 2,688,020 2,688,020 --
----------- ----------- ------------ ---------------
Cash and cash equiva-
lents, at end of period $ 570,685 $ 1,927,925 $ 1,431,677 $ 2,688,020
=========== =========== ============ ===============
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-49
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 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 September 30, 1997, the Portfolio includes the following
wholly owned real estate investment properties:
<TABLE>
<CAPTION>
-----------------------
NAME OF PROPERTIES IN PORTFOLIO LOCATION
------------------------------- -----------------------
<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-50
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1997, 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 and the related footnotes for the nine months
ended September 30, 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.
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, based on a fiscal year ended September 30, (exclusive of
expense reimbursements), are as follows:
<TABLE>
<CAPTION>
-----------
AMOUNT
-----------
FISCAL
YEAR
<S> <C>
1998 $10,928,411
1999 8,923,333
2000 7,405,415
2001 4,819,145
2002 2,686,121
Thereafter 12,942,560
-----------
Total $47,704,985
===========
</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 nine months ended September 30, 1997 and
1996 of $396,935 and $899,681, respectively, represent increases to base rent
revenue.
F-51
<PAGE>
PENNSYLVANIA PUBLIC SCHOOL
EMPLOYES' RETIREMENT SYSTEM
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 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 $217,074 and $218,369 for the nine months ended
September 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 $351,528 and $94,858 for the
nine months ended September 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 $88,850 and $46,263 for the nine months ended September 30, 1997 and 1996,
respectively.
In June 1997, an estimate of the incentive fee became determinable and approxi-
mately $1,345,000 was accrued at September 30, 1997.
F-52
<PAGE>
SCHEDULE III
PENNSYLVANIA PUBLIC SCHOOL EMPLOYES' RETIREMENT
INDUSTRIAL PROPERTIES PORTFOLIO
MANAGED BY RREEF AMERICA L.L.C.
COMBINED REAL ESTATE AND ACCUMULATED DEPRECIATION
SEPTEMBER 30, 1997
<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 DATE
DESCRIPTION LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL(B) DEPRECIATION(C) ACQUIRED
- - ----------- ----------- ------------- ----------------- ----------- ------------ ------------ --------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Industrial Property:
Medinah Industrial Park $ 3,120,000 $17,668,584 $ 195,457 $ 3,120,000 $17,864,041 $ 20,984,041 $1,339,252 7/6/95
(Roselle, Illinois)
Port Jersey Industrial 15,230,059 37,593,965 1,546,093 15,230,059 39,140,058 54,370,117 2,914,728 7/6/95
Park (Jersey City,
New Jersey)
Westbelt Business Park 2,798,603 25,905,909 1,929,701 2,798,603 27,835,610 30,634,213 2,188,329 7/6/95
(Columbus, Ohio)
----------- ------------- ----------------- ----------- ------------ ------------ ---------------
$21,148,662 $81,168,458 $3,671,251 $21,148,662 $84,839,709 $105,988,371 $6,442,309
=========== ============= ================= =========== ============ ============ ===============
<CAPTION>
LIFE ON WHICH
DEPRECIATION IN
STATEMENT
OF OPERATIONS IS
DESCRIPTION COMPUTED
- - ----------- ----------------
<S> <C>
Industrial Property:
Medinah Industrial Park 30 years
(Roselle, Illinois)
Port Jersey Industrial 2-30 years
Park (Jersey City,
New Jersey)
Westbelt Business Park 2-30 years
(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>
-------------------------------------
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Balance at beginning of period $104,897,094 $ 97,110,642 --
Additions during period 1,091,277 7,786,452 $97,110,642
------------ ------------ -----------
Balance at end of period $105,988,371 $104,897,094 $97,110,642
============ ============ ===========
</TABLE>
(C) Reconciliation of accumulated depreciation:
<TABLE>
-------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $4,142,761 $1,304,717 --
Depreciation expense 2,299,548 2,838,044 $1,304,717
------------ ------------ -----------
Balance at end of period $6,442,309 $4,142,761 $1,304,717
============ ============ ===========
</TABLE>
F-53
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the
Prudential Properties Group:
We have audited the accompanying combined balance sheets of Prudential Proper-
ties Group, as defined in Note 1, as of September 30, 1997 and December 31,
1996 and 1995, and the related combined statements of operations, owners'
equity and cash flows for the nine months ended September 30, 1997, and 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 Proper-
ties Group. 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 Prudential Prop-
erties Group at September 30, 1997 and December 31, 1996 and 1995, and the com-
bined results of its operations and its cash flows for the nine months ended
September 30, 1997, and 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
combined 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
financial 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
December 15, 1997
F-54
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
---------------------------------------
DECEMBER 31,
SEPTEMBER 30, ------------------------
1997 1996 1995
------------- ----------- -----------
<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
------------- ----------- -----------
43,958,808 43,958,808 32,384,208
Accumulated depreciation (4,666,487) (3,997,931) (3,128,071)
------------- ----------- -----------
39,292,321 39,960,877 29,256,137
------------- ----------- -----------
Cash and Cash Equivalents 52,422 61,377 95,161
Accounts Receivable and Accrued
Investment Income 55,500 53,272 89,083
Deferred Leasing Costs 408,925 181,461 72,198
Deferred Rent Concessions 398,752 345,406 190,308
Other Assets 10,225 6,284 6,306
------------- ----------- -----------
Total assets $40,218,145 $40,608,677 $29,709,193
============= =========== ===========
LIABILITIES
Accounts Payable and Accrued Expenses $ 373,313 $ 557,563 $ 381,874
Other Liabilities 121,782 75,000 75,000
------------- ----------- -----------
Total liabilities 495,095 632,563 456,874
------------- ----------- -----------
OWNERS' EQUITY 39,723,050 39,976,114 29,252,319
------------- ----------- -----------
Total Liabilities and Owners' Equity $40,218,145 $40,608,677 $29,709,193
============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-55
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
-------------------------------------------
NINE MONTHS ENDED YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ---------------------
1997 1996 1996 1995
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Rental income $3,584,600 $3,374,711 $4,433,557 $3,776,468
Other income (1,182) -- 1,975 --
---------- ---------- ---------- ----------
Total revenue 3,583,418 3,374,711 4,435,532 3,776,468
OPERATING EXPENSES
Property taxes 257,842 271,071 371,771 290,962
Operating expenses 479,766 534,570 823,830 482,778
Depreciation and amortization 731,751 725,462 928,406 686,548
---------- ---------- ---------- ----------
Total operating expenses 1,469,359 1,531,103 2,124,007 1,460,288
---------- ---------- ---------- ----------
Net income $2,114,059 $1,843,608 $2,311,525 $2,316,180
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial state-
ments.
F-56
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF OWNERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 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
-----------
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
-----------
Owners' Equity, December 31, 1996 39,976,114
Net transfers to owners (2,367,123)
Net income for the nine months ended September 30, 1997 2,114,059
-----------
Owners' Equity, September 30, 1997 $39,723,050
===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-57
<PAGE>
PRUDENTIAL PROPERTIES GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
----------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------
1997 1996 1996 1995
----------- ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,114,059 $ 1,843,608 $ 2,311,525 $ 2,316,180
Adjustments to reconcile
net income to net cash
provided by operating
activities-
Depreciation and amorti-
zation 731,751 725,462 928,406 686,548
Changes in assets--(in-
crease) decrease
Accounts receivable (2,228) 40,002 35,811 (122,243)
Other assets (3,941) (7,108) 22 (1,621)
Deferred rent conces-
sions (53,346) (148,728) (155,098) (83,760)
Changes in liabilities--
increase (decrease)-
Accounts payable and
accrued expenses (184,251) (2,992) 175,689 193,561
Other liabilities 46,782 -- -- --
----------- ------------ ------------ -----------
Net cash provided by
operations 2,648,826 2,450,244 3,296,355 2,988,665
----------- ------------ ------------ -----------
INVESTING ACTIVITIES
Property acquisitions -- (11,574,600) (11,574,600) --
Payments for capital and
tenant improvements (290,658) (167,809) (167,809) --
----------- ------------ ------------ -----------
Net cash used in
investing activities (290,658) (11,742,409) (11,742,409) --
----------- ------------ ------------ -----------
FINANCING ACTIVITIES
Net transfers (to) from
owners (2,367,123) 9,286,247 8,412,270 (3,061,947)
----------- ------------ ------------ -----------
Net increase (decrease)
in cash (8,955) (5,918) (33,784) (73,282)
Cash, beginning of period 61,377 95,161 95,161 168,443
----------- ------------ ------------ -----------
Cash, end of period $ 52,422 $ 89,243 $ 61,377 $ 95,161
=========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-58
<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 some of which are owned by a title holding corporation and some of
which are owned by The Prudential Insurance Company of America on behalf of a
single client separate account. As of October 1, 1997, title to the properties
owned by the title holding corporation was transferred to The Prudential
Insurance Company of America on behalf of a single client separate account.
Prudential Group properties are managed, leased and operated by The
Prudential's Private Asset Management Group--Real Estate Division (PAMG), the
investment manager, pursuant to contracts with its pension fund clients. 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>
---------------------
BULK DISTRIBUTION NUMBER OF
PROPERTIES TENANTS SQUARE FEET
----------------- --------- -----------
<S> <C> <C>
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
--------- -----------
Total 9 1,466,343
--------- -----------
</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 for the nine months ended September 30, 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 interim period. 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-59
<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 Sep-
tember 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 $399,000,
$345,000 and $190,000, respectively (Deferred Rent). The amounts included in
rental income for the nine months ended September 30, 1997, and the years ended
December 31, 1996 and 1995, which are not currently due, were approximately
$53,000, $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 September 30, 1997 were as follows:
<TABLE>
<CAPTION>
----------
<S> <C> <C>
For the three months ended
December 31, 1997 $ 940,967
1998 4,329,812
1999 3,472,172
2000 2,942,526
2001 2,003,584
2002 1,552,436
Thereafter 2,474,062
</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-60
<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 NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
-------------------- --------------------------------
FEE INCURRED 1997 1996 1996 1995 1994
- - ------------------- ---------- --------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Asset management $ 186,102 185,000 274,410 168,796 205,836
Acquisition -- 93,000 93,000 -- --
Property management 50,648 47,126 62,835 60,302 59,969
Incentive 14,121 -- 76,514 3,400 --
</TABLE>
At September 30, 1997, December 31, 1996 and December 31, 1995, total fees pay-
able to PAMG were $106,139, $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-61
<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) LOCATION CONSTRUCTED ACQUIRED LIVES
- - --------------- ------------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Vintage Avenue Ontario CA 1988 1998 40
Westgate Parkway Fulton Co. GA 1988 1998 40
International
Way Hebron KY 1990 1992 40
International
Blvd., Building
1 Cincinnati OH 1990 1992 40
International
Blvd., Building
2 Cincinatti OH 1990 1992 40
Port Road,
Building 1 Columbus OH 1995 1996 40
Port Road,
Building 2 Columbus OH 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
The changes in the total Investment in real estate for the years ended December
31, 1996 and 1995 are as fol-lows:
<TABLE>
<CAPTION>
---------------
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of the year $32,384 $32,384
Acquisitions 11,575 --
------- -------
Balance, end of year $43,959 $32,384
======= =======
</TABLE>
The changes in accumulated depreciation for the years ended December 31, 1996
and 1995 are as follows:
<TABLE>
<CAPTION>
-------------
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Balance, beginning of the year $3,128 $2,495
Depreciation 870 633
------ ------
Balance, end of year $3,998 $3,128
====== ======
</TABLE>
F-62
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of
West Coast Industrial, LLC:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of West Coast Industrial, LLC (the Portfolio) for the year ended
December 31, 1996. The Combined Statement of Revenue and Certain Expenses is
the responsibility of the Portfolio's management. Our responsibility is to
express an opinion on the Combined 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 Combined 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
Combined 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 Combined
Statement of Revenue and Certain Expenses. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying Combined 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 Combined 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-63
<PAGE>
WEST COAST INDUSTRIAL, LLC
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $2,376,075 $3,154,050
Tenant Reimbursements 209,829 488,767
Other Income 14,646 (1,133)
------------- ------------
Total Revenues 2,600,550 3,641,684
------------- ------------
EXPENSES
Property, Operating and Maintenance 106,496 241,665
Real Estate Taxes 271,950 332,503
Management Fees 46,424 74,323
Insurance 177,862 135,953
------------- ------------
Total Expenses 602,732 784,444
------------- ------------
Revenue in Excess of Certain Expenses $1,997,818 $2,857,240
============= ============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-64
<PAGE>
WEST COAST INDUSTRIAL, LLC
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relates to
the operations 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 Combined Statements of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 operations of the Portfolio for the period presented nor indicative of
future operations 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997
is unaudited. In the opinion of management, such financial statement and infor-
mation reflect all adjustments necessary for a fair presentation of the results
of the interim period. 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 Combined Statements of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUES
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-65
<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-66
<PAGE>
HERROD ASSOCIATES
(A GENERAL PARTNERSHIP)
STATEMENT OF REVENUES AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
------------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C> <C>
REVENUES
Rental income
Affiliate $ 589,744 $ 968,530
Other 694,049 845,222
Tenant-reimbursed expenses
Affiliate 1,130 19,371
Other 171,428 191,631
------------- ------------
1,456,351 2,024,754
------------- ------------
CERTAIN EXPENSES
General operating 92,847 92,483
Real estate taxes and licenses 234,850 293,800
------------- ------------
327,697 386,283
------------- ------------
REVENUES IN EXCESS OF CERTAIN EXPENSES $1,128,654 $1,638,471
============= ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-67
<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 nine months ended Sep-
tember 30, 1997 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 period have been included.
The results for the interim period are not necessarily indicative of the
results for the full year.
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
----------
$3,188,900
==========
</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-68
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Owners of the
Blue Ash Office L.L.C. and Blue Ash Industrial L.L.C.:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of Blue Ash Office L.L.C. and Blue Ash Industrial L.L.C. (the Portfo-
lio) for the year ended December 31, 1996. The Combined Statement of Revenue
and Certain Expenses is the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on the Combined Statement of Revenue
and Certain Expenses 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 Combined Statement of Revenue and Cer-
tain Expenses is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures made in the Com-
bined Statement of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall presentation of the Combined State-
ment of Revenue and Certain Expenses. We believe that our audit provides a rea-
sonable basis for our opinion.
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 Combined 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
November 24, 1997
F-69
<PAGE>
BLUE ASH OFFICE L.L.C. AND BLUE ASH INDUSTRIAL L.L.C.
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
----------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER DECEMBER
30, 1997 31, 1996
----------- ----------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $1,246,579 $1,783,748
Tenant Reimbursements 99,873 147,842
Other Income 38,829 33,178
----------- ----------
Total Revenues 1,385,281 1,964,768
----------- ----------
EXPENSES
Property Operating Costs 197,396 194,668
Maintenance and Repairs 109,027 129,276
Real Estate Taxes 181,698 242,262
Management Fees 35,887 56,866
Professional Services 17,359 42,630
Insurance 12,811 17,317
----------- ----------
Total Expenses 554,178 683,019
----------- ----------
Revenue in Excess of Certain Expenses $ 831,103 $1,281,749
=========== ==========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-70
<PAGE>
BLUE ASH OFFICE L.L.C. AND BLUE ASH INDUSTRIAL L.L.C.
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
1. BUSINESS
The accompanying Combined Statements of Revenue and Certain Expenses relate to
the operations of Blue Ash Office L.L.C. and Blue Ash Industrial L.L.C. (the
Portfolio). The Portfolio consists of three buildings totaling approximately
482,942 rentable square feet.
These properties were acquired by the Portfolio during 1995, from an unrelated
party.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities and Exchange Commission for the inclusion in the registration statement
on Form S-11 of Cabot Industrial Trust. The statement is not representative of
the actual operations of the Portfolio for the period presented nor indicative
of future operations 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997
is unaudited. In the opinion of management, such financial statement and infor-
mation reflect all adjustments necessary for a fair presentation of the results
of the interim period. 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 Combined Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates 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 Portfolio 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 RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Portfolio as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1997 $1,775,684
1998 1,885,204
1999 1,739,235
2000 1,118,855
2001 770,296
Thereafter 134,742
----------
$7,424,016
==========
</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-71
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of the
Seefried Properties Group:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of Seefried Properties Group (the Portfolio) for the year ended
December 31, 1996. The Combined Statement of Revenue and Certain Expenses is
the responsibility of the Portfolio's management. Our responsibility is to
express an opinion on the Combined Statement of Revenue and Certain Expenses
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 Combined Statement of Revenue and Cer-
tain Expenses is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures made in the Com-
bined Statement of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall presentation of the Combined State-
ment of Revenue and Certain Expenses. We believe that our audit provides a rea-
sonable basis for our opinion.
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 Combined 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
November 24, 1997
F-72
<PAGE>
SEEFRIED PROPERTIES GROUP
COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base rent $575,751 $399,029
Tenant reimbursements 68,953 36,451
Other income 39,790 4,860
------------- ------------
Total revenues 684,494 440,340
------------- ------------
EXPENSES
Property operating costs 83,461 37,112
Maintenance and repairs 9,342 --
Real estate taxes 55,013 32,305
Management fees 53,145 14,094
Professional services 27,944 --
Insurance 4,260 4,364
------------- ------------
Total expenses 233,165 87,875
------------- ------------
Revenue in Excess of Certain Expenses $451,329 $352,465
============= ============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-73
<PAGE>
SEEFRIED PROPERTIES GROUP
NOTES TO COMBINED STATEMENTS OF REVENUES AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
Seefried Properties Group (the Portfolio) is not a legal entity but rather a
combination of the operations of four warehouse buildings that are owned by a
real estate title holding corporation. The accompanying financial statement
includes all of the direct costs of the business (as defined in Note 2) of the
Portfolio. A summary of the holdings of the Portfolio is as follows:
<TABLE>
<CAPTION>
----------------------
NUMBER OF
PROPERTY LOCATION TENANTS SQUARE FEET
----------------- --------- -----------
<S> <C> <C>
Boggy Creek - Building 1, Orlando, FL 6 52,069
Boggy Creek - Building 2, Orlando, FL 2 55,456
Landstreet - Building 2, Orlando, FL 2 55,456
Landstreet - Building 3, Orlando, FL 1 50,018
-----------
212,999
===========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 operations of the Portfolio for the period presented nor indicative of
future operations 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997
is unaudited. In the opinion of management, such financial statement and infor-
mation reflect all adjustments necessary for a fair representation of the
results of the interim period. 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 Combined Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUES
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Portfolio as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1997 $ 798,106
1998 959,052
1999 901,504
2000 770,454
2001 575,338
Thereafter 309,441
----------
$4,313,895
==========
</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-74
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of the
Prudential Properties Group II:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of Prudential Properties Group II (the Portfolio) for the year ended
December 31, 1996. The Combined Statement of Revenue and Certain Expenses is
the responsibility of the Portfolio's management. Our responsibility is to
express an opinion on the Combined Statement of Revenue and Certain Expenses
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 Combined Statement of Revenue and Cer-
tain Expenses is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures made in the Com-
bined Statement of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall presentation of the Combined State-
ment of Revenue and Certain Expenses. We believe that our audit provides a rea-
sonable basis for our opinion.
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 Combined 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
November 24, 1997
F-75
<PAGE>
PRUDENTIAL PROPERTIES GROUP II
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $2,223,205 $2,908,620
Tenant Reimbursements 183,044 209,074
---------- ----------
Total Revenues 2,406,249 3,117,694
---------- ----------
EXPENSES
Property Operating Costs 13,208 19,722
Maintenance and Repairs 39 716
Real Estate Taxes 165,606 209,074
Management Fees 9,317 14,070
Professional Services 5,076 1,068
Insurance 721 1,397
---------- ----------
Total Expenses 193,967 246,047
---------- ----------
Revenue in Excess of Certain Expenses $2,212,282 $2,871,647
========== ==========
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-76
<PAGE>
PRUDENTIAL PROPERTIES GROUP II
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
Prudential Properties Group II (the Portfolio) is not a legal entity but rather
a combination of the operations for three warehouse buildings that are owned by
a title holding corporation. As of October 1, 1997, title to two of these prop-
erties was transferred to The Prudential Insurance Company of America on behalf
of a single client separate account. Prudential Group II properties are man-
aged, leased and operated by The Prudential's Private Asset Management Group -
Real Estate Division (PAMG), the investment manager, pursuant to contracts with
its pension fund clients. The accompanying financial statements include all of
the direct costs of the business of the Portfolio (as defined in Note 2). A
summary of the holdings of the Portfolio is as follows (each location has one
building):
<TABLE>
<CAPTION>
----------------------
NUMBER OF
PROPERTY LOCATION TENANTS SQUARE FEET
----------------- --------- -----------
<S> <C> <C>
Dacula, GA 1 326,019
Mira Loma, CA 1 250,584
Mechanicsburg, PA 1 340,000
-----------
916,603
===========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 operations of Prudential Group II for the period presented nor indica-
tive of future operations as certain expenses, primarily depreciation, amorti-
zation 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997,
is unaudited. In the opinion of management, such financial statement and infor-
mation reflect all adjustments necessary for a fair presentation of the results
of the interim period. All 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 Combined Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUE
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for (the
Portfolio) as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1997 $ 2,944,067
1998 2,944,067
1999 2,854,934
2000 2,854,934
2001 2,854,934
Thereafter 1,571,221
-----------
$16,024,157
===========
</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-77
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of the
DFW Trade Center I, L.P., Buildings 1, 2 and 3:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of the DFW Trade Center I, L.P., Buildings 1, 2 and 3 (the Portfolio)
from the date of inception (July 1, 1996) to December 31, 1996. The Combined
Statement of Revenue and Certain Expenses is the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on the
Combined 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 Combined 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
Combined 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 Combined
Statement of Revenue and Certain Expenses. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying Combined 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 Combined 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 period from inception to
December 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
November 24, 1997
F-78
<PAGE>
DFW TRADE CENTER I, L.P., BUILDINGS 1, 2 AND 3
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
-------------------------------
FROM THE DATE
NINE MONTHS OF INCEPTION
ENDED (JULY 1, 1996) TO
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- -----------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $1,289,844 $315,038
Tenant Reimbursements 304,903 32,400
------------- -----------------
Total Revenues 1,594,747 347,438
------------- -----------------
EXPENSES
Property, Operating Costs 93,369 38,177
Maintenance and Repairs 20,256 4,397
Real Estate Taxes 306,802 40,993
Management Fees 44,392 10,580
Insurance 24,802 8,064
------------- -----------------
Total Expenses 489,621 102,211
------------- -----------------
Revenue in Excess of Certain Expenses $1,105,126 $245,227
============= =================
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-79
<PAGE>
DFW TRADE CENTER I, L.P., BUILDINGS 1, 2 AND 3
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
The accompanying Combined Statement of Revenue and Certain Expenses relates to
the operations of DFW Trade Center I, L.P., Buildings 1, 2 and 3 (the Portfo-
lio). The Portfolio consists of three buildings in Grapevine, Texas totaling
approximately 1,182,361 rentable square feet as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
PROPERTY TYPE # TENANTS DATE OF INCEPTION SQUARE FEET
------------- -------------- ----------------- --------------
<S> <C> <C> <C>
February 7,
Workspace Industrial 3 1997 202,361
Bulk Warehouse 2 July 1, 1996 540,000
Bulk Warehouse 2 June 30, 1997 440,000
--------------
1,182,361
==============
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 operations of the Portfolio for the period presented nor indicative of
future operations 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997,
is unaudited. In the opinion of management, such financial statement and infor-
mation reflect all adjustments necessary for a fair presentation of the results
of the interim period. All 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 Combined Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUE
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Portfolio as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1997 $ 2,113,650
1998 4,052,194
1999 4,189,944
2000 4,275,444
2001 3,906,861
Thereafter 15,741,473
-----------
$34,279,566
===========
</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-80
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of
1055 Dornoch Court, San Diego, CA:
We have audited the accompanying Statement of Revenue and Certain Expenses of
1055 Dornoch Court, San Diego, CA (the Property) for the year ended December
31, 1996. The Statement of Revenue and Certain Expenses is the responsibility
of the Property'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 stan-
dards. 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 State-
ment 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 com-
plete presentation of the Property'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 Property described in Note 2 for the year ended December 31, 1996, in con-
formity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 16, 1997
F-81
<PAGE>
1055 DORNOCH COURT, SAN DIEGO, CA
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $ 739,620 $ 986,160
------------- ------------
TOTAL REVENUES 739,620 986,160
EXPENSES (Note 2) -- --
------------- ------------
Net Income $ 739,620 $ 986,160
============= ============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-82
<PAGE>
1055 DORNOCH COURT, SAN DIEGO, CA
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
1055 Dornoch Court, San Diego, CA (the Property) is not a legal entity but
rather a single tenant, 220,000 square foot warehouse owned by a Delaware cor-
poration.
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 representative of the lease in place
which requires that all expenses be paid directly by the Tenant. The statement
is not representative of the actual operations of the Property for the periods
presented nor indicative of future operations because certain expenses, pri-
marily depreciation, amortization and interest expenses, which may not be com-
parable to the expenses expected to be incurred by Cabot Industrial Trust in
future operations of the Property, have been excluded.
The financial statement, and information included in these notes to the finan-
cial statement, for the nine months ended September 30, 1997, is unaudited. In
the opinion of management, such financial statement and information reflect all
adjustments necessary for a fair representation of the results of the interim
period. All 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. All expenses are paid by the tenant, and therefore are excluded from
the accompanying financial statement.
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. RENTAL REVENUES
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Property as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1997 $ 964,093
1998 1,002,658
1999 1,042,764
2000 1,084,476
2001 1,127,854
Thereafter 971,000
----------
$6,192,845
==========
</TABLE>
The above amounts do not include additional rental receipts that may become due
as a result of the escalation provisions in the leases. The Property is subject
to the usual business risks associated with the collection of the above sched-
uled rents.
F-83
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of the
Hampden I and II Properties Group:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of Hampden I and II Properties Group (the Portfolio) for the year
ended December 31, 1996. The Combined Statement of Revenue and Certain Expenses
is the responsibility of the Portfolio's management. Our responsibility is to
express an opinion on the Combined Statement of Revenue and Certain Expenses
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 Combined Statement of Revenue and Cer-
tain Expenses is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures made in the Com-
bined Statement of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall presentation of the Combined State-
ment of Revenue and Certain Expenses. We believe that our audit provides a rea-
sonable basis for our opinion.
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 Combined 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
December 15, 1997
F-84
<PAGE>
HAMPDEN I AND II PROPERTIES GROUP
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $1,212,044 $1,616,059
------------- ------------
TOTAL REVENUES: 1,212,044 1,616,059
EXPENSES (Note 2) -- --
------------- ------------
Net Income $1,212,044 $1,616,059
============= ============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-85
<PAGE>
HAMPDEN I AND II PROPERTIES GROUP
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
Hampden I and II Properties Group (the Portfolio) is not a legal entity but
rather a combination of the operations of two warehouse buildings that are
owned by a real estate title holding corporation. A summary of the holdings of
Hamden Group is as follows:
<TABLE>
<CAPTION>
-----------------
NUMBER OF SQUARE
PROPERTY LOCATION TENANTS FEET
----------------- --------- -------
<S> <C> <C>
Mechanicsburg, PA 1 259,200
Mechanicsburg, PA 1 235,200
-------
494,400
=======
</TABLE>
Both buildings are occupied by the same tenant.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities and Exchange Commission for inclusion in the registration statement on
Form S-11 of Cabot Industrial Trust. The statement is representative of the
leases in place which require that all expenses be paid directly by the tenant.
The statement is not representative of the actual operations of the Portfolio
for the periods presented nor indicative of future operations because 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997,
is unaudited. In the opinion of management, such financial statement and infor-
mation reflect all adjustments necessary for a fair presentation of the results
of the interim period. All 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. All expenses are paid by the tenant, and therefore are excluded from
the accompanying financial statement.
Use of Estimates
The preparation of the Combined Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUES
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Portfolio as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1997 $1,593,720
1998 1,600,077
1999 1,670,000
2000 1,670,000
2001 1,670,000
Thereafter 9,880,833
-----------
$18,084,630
===========
</TABLE>
The above amounts do not include additional rental receipts that may become due
as a result of the Consumer Price Index escalation provisions in the leases.
The Portfolio is subject to the usual business risks associated with the col-
lection of the above scheduled rents.
F-86
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of the
South Royal Associates Properties Group:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of South Royal Associates Properties Group (the Portfolio) for the
year ended December 31, 1996. The Combined Statement of Revenue and Certain
Expenses is the responsibility of the Portfolio's management. Our responsi-
bility is to express an opinion on the Combined Statement of Revenue and Cer-
tain Expenses 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 Combined Statement of Revenue and Cer-
tain Expenses is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures made in the Com-
bined Statement of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall presentation of the Combined State-
ment of Revenue and Certain Expenses. We believe that our audit provides a rea-
sonable basis for our opinion.
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 Combined 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
December 15, 1997
F-87
<PAGE>
SOUTH ROYAL ASSOCIATES PROPERTIES GROUP
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $379,474 $554,566
Tenant Reimbursements 8,302 28,290
------------- ------------
TOTAL REVENUES 387,776 582,856
------------- ------------
EXPENSES
Property Operating Costs 8,809 10,445
Maintenance and Repairs 15,978 21,982
Real Estate Taxes 41,232 64,253
Professional Fees 4,637 2,550
Management Fees 9,166 12,221
Insurance 6,403 7,663
------------- ------------
TOTAL EXPENSES 86,225 119,114
------------- ------------
REVENUE IN EXCESS OF CERTAIN
EXPENSES $301,551 $463,742
============= ============
</TABLE>
The accompanying notes are an integral part of this combined financial
statement.
F-88
<PAGE>
SOUTH ROYAL ASSOCIATES PROPERTIES GROUP
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
South Royal Associates Properties Group (the Portfolio) is not a legal entity
but rather a combination of the operations for three warehouse buildings that
are owned by a limited partnership. The accompanying financial statements
include all of the direct costs of the business (as defined in Note 2) of the
Portfolio. A summary of the holdings of the Portfolio is as follows:
<TABLE>
<CAPTION>
---------------------
PROPERTY NUMBER OF
LOCATION TENANTS SQUARE FEET
-------- --------- -----------
<S> <C> <C>
Tucker, GA 3 37,041
Tucker, GA 3 43,720
Tucker, GA 7 53,402
-----------
134,163
===========
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 operations of the Portfolio for the periods presented nor indicative of
future operations because certain expenses, primarily depreciation, amortiza-
tion 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997
is unaudited. In the opinion of management, such financial statement and
information reflect all adjustments necessary for a fair representation of the
results of the interim period. 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 Combined Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUES
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Portfolio as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1997 $ 476,895
1998 558,521
1999 413,164
2000 264,944
2001 144,726
Thereafter 21,162
-----------
$ 1,879,412
===========
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through provisions in the leases. The Port-
folio is subject to the usual business risks associated with the collection of
the above scheduled rents.
F-89
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of the
Joseph A. Leroy Family LP Property:
We have audited the accompanying Statement of Revenue and Certain Expenses of
Joseph A. Leroy Family LP Property (the Property) for the year ended December
31, 1996. The Statement of Revenue and Certain Expenses is the responsibility
of the Property'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 stan-
dards. 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 State-
ment 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 com-
plete presentation of the Property'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 Property as described in Note 2 for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 15, 1997
F-90
<PAGE>
JOSEPH A. LEROY FAMILY LP PROPERTY
STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $ 228,891 $ 305,189
Expense Reimbursements 76,949 98,800
------------- ------------
Total revenues 305,840 403,989
------------- ------------
EXPENSES
Property Operating Costs 8,532 10,074
Maintenance and Repairs 8,017 0
Real Estate Taxes 60,366 82,456
Professional Services 2,482 2,175
Insurance 2,904 3,771
------------- ------------
Total expenses 82,301 98,476
------------- ------------
REVENUE IN EXCESS OF CERTAIN EXPENSES $ 223,539 $ 305,513
============= ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-91
<PAGE>
JOSEPH A. LEROY FAMILY LP PROPERTY
NOTES TO STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
Joseph A. Leroy Family LP Property (the Property) is not a legal entity but
rather the operations for one 81,817 square foot warehouse building located in
Tempe, Arizona. The Property is leased to three tenants and is owned by a real
estate title holding corporation. The accompanying financial statements
include all of the direct costs of the Property (as defined in Note 2).
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
operations of the Property for the periods presented nor indicative of future
operations because 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 Property, have
been excluded.
The financial statement, and information included in these notes to the finan-
cial statement, for the nine months ended September 30, 1997 is unaudited. In
the opinion of management, such financial statement and information reflect
all adjustments necessary for a fair representation of the results of the
interim period. 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
estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUES
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Property as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
--------
<S> <C>
1997 $306,637
1998 250,168
1999 51,337
--------
$608,142
========
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through provisions in the leases. The
Property is subject to the usual business risks associated with the collection
of the above scheduled rents.
F-92
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of the
Raco/Melaver, L.L.C.:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of Raco/Melaver, L.L.C. (the Portfolio) for the period from the date
of inception (May 1, 1996) to December 31, 1996. The Combined Statement of Rev-
enue and Certain Expenses is the responsibility of the Portfolio's management.
Our responsibility is to express an opinion on the Combined Statement of Rev-
enue and Certain Expenses 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 Combined Statement of Revenue and Cer-
tain Expenses is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures made in the Com-
bined Statement of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall presentation of the Combined State-
ment of Revenue and Certain Expenses. We believe that our audit provides a rea-
sonable basis for our opinion.
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 Combined 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 period from inception to
December 31, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Boston, Massachusetts
December 15, 1997
F-93
<PAGE>
RACO/MELAVER, L.L.C.
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
------------------------------
FROM THE DATE OF
NINE MONTHS INCEPTION
ENDED (MAY 1, 1996) TO
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ----------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $254,983 $154,113
Tenant Reimbursements 9,395 3,762
------------- ----------------
TOTAL REVENUES 264,378 157,875
------------- ----------------
EXPENSES
Property Operating Costs 20,235 10,154
Maintenance and Repairs 607 768
Real Estate Taxes 41,524 8,542
Management Fees 7,329 4,624
Insurance 3,029 4,066
------------- ----------------
TOTAL EXPENSES 72,724 28,154
------------- ----------------
REVENUE IN EXCESS OF CERTAIN EXPENSES $191,654 $129,721
============= ================
</TABLE>
The accompanying notes are an integral part of this combined financial state-
ment.
F-94
<PAGE>
RACO/MELAVER, L.L.C.
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
Raco/Melaver, L.L.C. (the Portfolio) is not a legal entity but rather a combi-
nation of the operations of two warehouse buildings that are owned by a real
estate title holding corporation. The accompanying financial statements include
all of the direct costs of the business (as defined in Note 2) of the Portfo-
lio. A summary of the holdings of Raco/Melaver Group is as follows:
<TABLE>
<CAPTION>
-----------------
NUMBER OF SQUARE
PROPERTY LOCATION TENANTS FEET
----------------- --------- -------
<S> <C> <C>
Atlanta, GA 4 68,000
Atlanta, GA 5 60,000
-------
128,000
=======
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 operations of the Portfolio for the periods presented nor indicative of
future operations because certain expenses, primarily depreciation, amortiza-
tion 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997
is unaudited. In the opinion of management, such financial statement and infor-
mation reflect all adjustments necessary for a fair representation of the
results of the interim period. 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 Combined Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUES
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Portfolio as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
----------
<S> <C>
1997 $ 331,021
1998 493,983
1999 431,071
2000 374,453
2001 279,122
Thereafter 145,010
----------
$2,054,660
==========
</TABLE>
The above amounts do not include additional rental receipts that will become
due as a result of the expense pass-through provisions in the leases. The Port-
folio is subject to the usual business risks associated with the collection of
the above scheduled rents.
F-95
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Owners of the
TLI/Cahill Partnership - Spiral Drive:
We have audited the accompanying Combined Statement of Revenue and Certain
Expenses of TLI/Cahill Partnership- Spiral Drive (the Portfolio) for the year
ended December 31, 1996. The Combined Statement of Revenue and Certain Expenses
is the responsibility of the Portfolio's management. Our responsibility is to
express an opinion on the Combined Statement of Revenue and Certain Expenses
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 Combined Statement of Revenue and Cer-
tain Expenses is free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures made in the Com-
bined Statement of Revenue and Certain Expenses. An audit also includes
assessing the accounting principles used and significant estimates made by man-
agement, as well as evaluating the overall presentation of the Combined State-
ment of Revenue and Certain Expenses. We believe that our audit provides a rea-
sonable basis for our opinion.
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 Combined 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
December 15, 1997
F-96
<PAGE>
TLI/CAHILL PARTNERSHIP - SPIRAL DRIVE
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
<TABLE>
<CAPTION>
--------------------------
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Base Rent $394,554 $534,325
Tenant Reimbursements 53,282 49,581
------------- ------------
TOTAL REVENUES 447,836 583,906
------------- ------------
EXPENSES
Property Operating Costs 10,586 18,838
Maintenance and Repairs 35,692 51,861
Real Estate Taxes 30,931 42,599
Management Fees 13,916 17,827
Insurance 4,760 6,263
------------- ------------
TOTAL EXPENSES 95,885 137,388
------------- ------------
REVENUE IN EXCESS OF CERTAIN EXPENSES $351,951 $446,518
============= ============
</TABLE>
The accompanying notes are an integral part of this combined financial state-
ment.
F-97
<PAGE>
TLI/CAHILL PARTNERSHIP - SPIRAL DRIVE
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
DECEMBER 31, 1996
1. BUSINESS
TLI/Cahill Partnership - Spiral Drive (the Portfolio) is not a legal entity
but rather a combination of the operations of two warehouse buildings that are
owned by a real estate title holding corporation. A summary of the holdings of
the Portfolio is as follows (each location has one building):
<TABLE>
<CAPTION>
----------------
NUMBER OF SQUARE
PROPERTY LOCATION TENANTS FEET
----------------- --------- ------
<S> <C> <C>
Florence, KY 4 26,556
Florence, KY 8 34,999
------
61,555
======
</TABLE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Combined Statement of Revenue and Certain Expenses was pre-
pared for the purpose of complying with the rules and regulations of the Secu-
rities 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 operations of TLI/Cahill Group-Spiral Drive for the periods presented
nor indicative of future operations because certain expenses, primarily depre-
ciation, 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 statement, and information included in these notes to
the combined financial statement, for the nine months ended September 30, 1997
is unaudited. In the opinion of management, such financial statement and infor-
mation reflect all adjustments necessary for a fair representation of the
results of the interim period. 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 Combined Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
3. RENTAL REVENUES
All leases are classified as operating leases.
4. FUTURE MINIMUM RENTAL RECEIPTS
Future minimum rental receipts due on noncancelable operating leases for the
Portfolio as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
-----------
<S> <C>
1997 $ 536,479
1998 426,011
1999 222,743
2000 152,018
2001 44,127
-----------
$ 1,381,378
===========
</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-98
<PAGE>
PHOENIX, ARIZONA/WEST REGION
[Picture of Building]
OHIO/KENTUCKY/MIDWEST REGION
[Picture of Building]
TEXAS/SOUTHWEST REGION
[Picture of Building]
ONTARIO, CA/WEST REGION
[Picture of Building]
TEXAS/SOUTHWEST REGION
[Picture of Building]
CHICAGO, IL/MIDWEST REGION
[Picture of Building]
<PAGE>
[CABOT INDUSTRIAL LOGO APPEARS HERE]
